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Operator
Good day, everyone.
And welcome to the Estee Lauder Company's fiscal 2009 year end conference call.
Today's call is being recorded and Webcast.
For opening remarks and introductions, I would like to turn the call over to the Vice President of Investor Relations, Mr.
Dennis D'Andrea.
Please go ahead, sir.
Dennis D'Andrea - VP IR
Good morning, everyone.
On today's call are William Lauder, Executive Chairman; Fabrizio Fredo, President and Executive Chief Executive Officer; and Rick Kunes, Executive Vice President and Chief Financing Officer.
Since many of our remarks today contain forward-looking statements, let me refer you to our press release and our reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward-looking statements.
And I'll turn the call over to William now.
William Lauder - Executive Chairman
Thank you, Dennis.
Good morning and thank you for joining our fiscal 2009 year-end conference call.
In our remarks I will review last year's accomplishments.
Fabrizio will discuss the Company's outlook for the coming year and Rick will provide the financials.
I'm pleased to say that our results for fiscal 2009 were in line with expectations and we consider our performance respectable given the economic conditions.
More importantly, the global recession gave us a chance to build share and restructure the organization.
We were profitable, enjoyed a healthy balance sheet and generated strong cash flow from operations.
We took many defensive steps that made us stronger, smarter and better able to tackle competitive challenges that may come our way.
At the same time, we also played offense by investing in our brands, introducing new products and improving our competitive position in many markets.
Fiscal 2009 began strongly and our first quarter results exceeded our expectations.
But as you are well aware, the remainder of the year was extremely challenging and in fact, was one of the toughest times our Company has ever faced.
The economic downturn impacted our business in all regions and all our brands to varying degrees, which is reflected in our lower sales and earnings.
To put the economic impact in perspective, our fiscal 2009 sales fell short of our original projections by nearly $1 billion.
Going into the year, we had anticipated sales growth of 6% to 8% and instead, ended up with a 2% decrease in organic sales and an additional 5% from negative currency translation.
As a result, fiscal 2009 emerged as a year of change and a year of opportunity.
Faced with a sudden decline in consumer spending, our employees rallied together and were open to making radical adjustments.
To protect our earnings, we moved quickly to cut costs, reducing our planned spending by $250 million.
We learned how to succeed with less.
While we cope with the unexpected downturn on the one hand, we were also busy developing a long-term strategy that sets out new goals and directions.
I am proud of how the Company came together, with our employees feeling a renewed sense of purpose.
We changed our collective mindset and began to work more cooperatively toward a new and necessary course for the future.
During the year, Fabrizio and I led the effort to implement many of the important structural pieces of the four year strategy.
We are now in excellent shape to execute the strategy and navigate with a clear direction.
One of the first steps we took was to realign the organization to support the strategy.
We restructured the responsibilities and positions of senior management so that every person is in a role that best fits his or her strengths.
We established several executive leadership teams that direct the Company's goals, investments and cost saving initiatives.
We organized our brands into four clusters that will enable them to leverage their strength and knowledge.
They are grouped based on their target consumers and distribution channels.
The strategy focus is more on our regions instead of individual countries.
We expect this effort to lead to greater economies of scale and the creation of more locally relevant products and services.
As part of this regional structure, we established an affiliate for North America, where some of our customers are also redesigning their operations.
We're working together to bring greater traffic and excitement to stores.
As the largest beauty supplier in North American prestige department stores, we feel we are in an excellent position to work closely with them to create compelling shopping destinations and enhance consumer relationship efforts.
Another part of this strategy involved prioritizing our investments toward the most promising opportunities.
Our top priorities include skin care, large core and emerging markets, particularly the Asia region, department stores and high growth channels.
As you can see, we made excellent progress setting up the framework for the strategy.
For a moment, I want to discuss some of the operational successes we achieved this past year.
Overall, our international business grew in local currency due to good momentum in Asia, which didn't feel the effects of a recession nearly as much as the rest of the world.
Asia's strong local currency sales growth was fueled by significant advances in Korea, China and Hong Kong.
As a Company, we are a leader in the region and we estimate we gained share in our distribution in every Asian market, except Singapore, where we maintained our position.
In China, the world's fastest growing market, our sales rose nearly 30%.
The Estee Lauder, La Mer and Bobbi Brown brands made spectacular gains.
Estee Lauder is the number two brand of prestige retail in China and is rapidly closing the gap with its top competitor.
Our global skin care sales grew 2% in local currency.
This is our most strategically important category and was our best performing one for the year.
In US prestige stores, tracked by NPD, we gained share in skin care for the 12 months ended June 30 and our three largest brands in that category Clinique, Estee Lauder and La Mer, grew faster than competitors.
In the US, Mac gained share, while prestige makeup overall declined.
Mac is the largest makeup brand in the US prestige arena.
We had other share gains by brands and in certain regions.
Clinique gained share in US prestige department stores for the first time in several years.
Differentiating itself from competitors, Clinique developed a host of products that address specific area of concerns to consumers, such as dullness, acne, redness and uneven skin tone.
Clinique also increased share in 10 countries, including Germany and Hong Kong.
In continental Europe, retail sales of our products rose at least six percentage points faster than those of prestige beauty, indicating solid share gains.
We believe the Company gained share in Russia, Germany, France and Spain.
In the UK, we grew faster in retail than prestige beauty overall, with particularly strong momentum from our makeup artist brands.
Our online business continued to soar with nearly every brand recording double digit gains.
We launched eCommerce in Korea for Mac and in China for Estee Lauder and Clinique.
Virtually all of our brands are now sold online in the US, either through our own sites or retailer sites.
Clinique, Estee Lauder and Mac relaunched their US Websites with new features and interactive capabilities.
In online marketing, our brands made great strides, communicating with consumers through social networking sites and developed strong followings.
Mac's Facebook page is one of the most popular in the beauty industry.
Ultimately, our success rests on the quality and ingenuity of our products and innovation continued to play a key role across our brands.
To cite a few examples Mac's Hello Kitty spring color collection was the most successful collaboration in its history.
In addition, sales of Mac's mineral franchise nearly doubled, exceeding $100 million at retail worldwide.
Clinique made news with its Redness Solution's instant relief mineral powder and even better makeup.
Both were marketed as makeup but also have skin care benefits.
Estee Lauder's Time Zone line of anti-aging moisturizers, based on proprietary technology, did well.
As a Company, we successfully adapted to the new economic reality and reframed our marketing messages to emphasize value.
In their own way, each brand stressed its inherent value, including product quality and performance.
This was complemented by the personal service provided by beauty advisers or makeup artists and the average cost of use over time.
Some retailers took the unusual but successful step of posting prices for our products on their counters, while certain brands emphasized their complementary services, such as makeup lessons at Bobbi Brown and mini facials at Origins.
Operationally, we finished the year with major improvements in inventory days and the number of SKU's.
Our SMI demand planning and financial backbone functions, along with our UK manufacturing, successfully went live.
As part of our $250 million belt tightening efforts, we imposed hiring and salary freezes.
We also announced the unfortunate but necessary step of reducing the work force by 6% or roughly 2,000 people over two years.
As you can see, our Company has many strong attributes that will enable it to flourish regardless of global business conditions.
As the past year has shown, we've performed well in a difficult environment but we never lost sight of the fact that we were also building a platform for long term profitable growth.
On July 1, I became executive Chairman.
In my new role, I continue to work closely with our President and Chief Executive Officer, Fabrizio Fredo and focus on building our brand equity, maintaining our strong culture of family values, leveraging our strengths and refining our strategy.
This is the last earnings call I will lead and I've enjoyed the dialogue with all of you over the years.
I want to thank you for your support, constructive comments and insightful questions.
Fabrizio and Rick will host future calls.
At this juncture, I want to thank our thousands of employees worldwide for their hard work and their continuing passion during a challenging year.
I also want to congratulate Fabrizio on becoming Chief Executive Officer.
I have complete faith that Fabrizio has a clear vision of where the Company is headed and what it will take to strengthen our leadership in prestige beauty.
I look forward to working with him and providing insights as we blaze new trails.
Now, I will to pass it on to Fabrizio to talk about our plan for fiscal 2010.
Fabrizio Freda - President and CEO
Thank you, William for those kind words and good morning, everyone.
I am pleased to be addressing you for the first time as the Company's Chief Executive Officer.
I want to take a moment to thank William for his leadership during the past five years and acknowledge his many contributions.
I will rely upon his deep industry experience and Company knowledge as we begin our exciting journey to make the Company more competitive and generate increased sustainable profitable growth.
As we have explained, much of the Company's efforts last year were devoted to establishing the foundation for the strategic plan.
With that successfully done, the focus now is on executing this strategy with excellence.
Fiscal year 2010 is the first year of our four year strategy.
This year, we expect to show significant achievements toward our goals and we will continue to build our capabilities in many areas.
To frame my discussion, let me reiterate the goals that William and I set out in February.
They include -- gaining share by growing sales at least 1% ahead of global prestige beauty each year.
In fiscal 2010, we expect the global prestige beauty industry to be flat and our sales grow to be 0% to up 2% in constant currency.
We expect the strongest growth in Asia and emerging markets, while Western Europe, [South America] and North America will likely remain challenges.
In terms of product categories, we continue to focus on skin care to drive sales growth worldwide.
We expect Estee Lauder reformulated Advanced Night Repair to be a major contributor to this category.
The product, which recently launched, is anticipated to be the brand's biggest introduction in its history.
Our second goal is deriving more than 60% of sales outside of the United States.
We ended 2009 at 59%.
In fiscal 2010, our brands will expand into new countries, open more foreign doors and explore different distribution channels.
To cite a few examples, Mac will open more than 50 doors internationally, including a store in the world's busiest train station, Shinjuku, Japan.
Origins is slated to launch in China in March, which will be our ninth brand in the country.
Our online business will continue its international expansion, as Germany, Japan, Austria start eCommerce.
We will have more brands online in China and Korea and dramatically increase our capabilities in digital marketing across the globe.
Our third goal is striving for annual profit improvement and growing our operating margin to between 12% and 13% by fiscal year 2013.
This year, we expect to achieve the first 90 to 130 basis points.
That improvement will mainly come from realizing about one-third of the savings we have committed over the four year strategy.
This effort is being led by our program management team, which is overseeing more than two dozen initiatives.
Rick will give you details of the planned savings in a few minutes.
Increasing return on invested capital is another goal and this year, we expect to achieve over 100 basis points improvement, reflecting profit growth.
Our last goal is reducing inventory days by 15% to 20% over the four year period.
In fiscal 2010, we anticipate continuing the excellent fundamental trend in inventory reduction we have achieved the past year.
However, that progress will be offset by building inventory media as an edge for the spring SMP implementation in our North American plants.
Our strategy, through 2013, seeks to take the Company to the next level by building on our numerous strengths, while eliminating areas that are hindering our profitable growth.
In fiscal 2010, we will see many elements of the strategy impact our financial results.
The first strength in our Company is our diverse portfolio of brands, including three with annual sales between $1 billion and $2 billion globally.
In 2010, we intend to start [optimizing] the portfolio by strengthening the big [heritage] brands, cultivating tomorrow winning brands and addressing underperforming brands.
In other strengths of our long history of superior creativity innovation, which has led to scores of breakthrough products based on the latest scientific research and technology.
Our creativity spans many parts of the business, including brand development promotion, design and advertising, and (inaudible) areas where we leverage these strengths globally.
Our innovation will be focused on fewer bigger areas in high priority areas and eliminate some smaller introductions that take time and money but don't have a major impact.
We also will source ideas globally and spend more on research and development outside of North America.
We have established an innovation center in Paris for the European region and are developing one in Asia as well.
We are confident that by combining more robust consumer research with our own intuitive approach to innovation, we create the most coveted products for consumers around the world.
Our selective distribution model, aided by highly trained beauty advisers and makeup artists, creates availability and demand for our brands through education and services.
We are actively working now to strengthen service in traditional department stores, while better customizing the high fashion model in other retail environments.
In the department stores, some brands are looking at ways to provide service that takes less time and appeals to different kinds of shoppers.
That will offer experiences ranging from full skin care consultation, to express in and out service.
We also have adapted our service to other channels and recently added high-tech to high-touch.
In Japanese (inaudible), we are testing a program enabling consumers to access product information on their cell phones.
Additionally, we plan to launch eCommerce in Japan via mobile devices this year.
Japan will be our first affiliate to develop this capability.
The Company has tremendous global reach across more than 140 countries and territories but there is still room for expansion.
For example, in China, we sell in 32 cities with population greater than one million and we will continue our aggressive door opening this year.
There are more than 600 cities with this size population in China, which gives us much potential opportunity for the long term.
And as we have explained before, not all of our brands are available in every country.
In fiscal 2010 many of our brands will enter new markets such as Bobbi Brown, which plans to open in Poland.
Further, we were leveraging the Company's [strength] and improving integration.
Throughout the Company, we've started to work more cooperatively and are leveraging our strength across brands, regions and functions.
The North America affiliate, which launched July 1, is a prime example of how we are bringing our brands together under one organization to work more effectively with retailers and gain economies of scale.
And obtaining all this is our dedicated and talented work force, that has fueled this Company's astounding growth.
Our employees possess a deep knowledge of the beauty industry and entrepreneurial spirit, great creativity and passion and a strong dedication to our Company.
In fiscal 2010, they will be aligned and focused on one common strategy.
And of course, we are financially healthy.
This year, we expect to continue to have strong cash flow, which allows us to invest in the business and keep growing.
However, to best leverage our strength and rise to the next level, we must continuously improve and rethink our business.
We believe one way to lift our core competencies is by having greater consumer insights.
We have begun building this capability throughout our regions to analyze consumer research and marketing intelligence and helping to direct R&D and marketing investment decisions.
We expect that, starting this year, these added consumer insights will stimulate our creative process and provide the tools to unleash unexpected ideas and concepts.
We are digging deeper into what our consumers think about beauty products to understand their aspirations and selectively tailoring products by region.
We have identified several areas which drain resources from our investment priorities, including our underperforming brands.
For example, one of the teams farthest along, [Ysatis, Aramis] and designer fragrances, it has already made improvements in the area of performance, mix and new product development and cut the number of SKUs by more than 50% since fiscal 2007.
The division expects to improve its costs of goods by 220 basis points in fiscal year 2010.
ADS will re-emphasize classics, focus on fewer major launches and sell each fragrance only in the regions where it has the greatest opportunity.
Over time, ADS expects to transform it core portfolio and generate a sizable improvement in operating margin.
To be a leader in prestige beauty, we believe it is essential to be in fragrance because consumers love the product and it is an important component of sales, particularly in Europe and channel retail.
Another brand, which is revamping its global strategy to significantly improve profitability is Darphin.
In fiscal 2010, the brand is refocusing its product offering on skin care and its distribution to European pharmacies and wellness channels.
It's pulling out of the makeup and fragrance categories.
The Company will continue to explore new ways to express value to the customers, especially in the US.
We believe firmly the prestige products can succeed in this environment because they provide greater inherent value than beauty products for sale in other channels.
The value is attributable to high performance, continuous innovation, depth of choice, superior customization, education, service and great branding.
As of July 1, we have a new organizational design and we are implementing a compensation plan to support the strategy.
The Company is evolving its performance base compensation plan to award employees for achieving certain financial goals related to their specific area, as well as the Company's overall results.
The plan encourages employees to work for the good of the entire Company, not just their piece of it.
Bonuses will have a greater focus on profitability, return on investment, regional alignment and collaboration.
As William said, our Company has been through tremendous changes in recent months.
From external forces like economy to internal activities, including new strategy, restructuring and building new capabilities.
Our employees have managed throughout this period with a passion and determination that speaks well for their future success.
In order to build upon that momentum, we are strengthening our education and communication.
Over 1,500 employees have completed programs to hone their leadership skills.
Particularly those related to change management.
Additionally, we are working hard to maintain a dynamic dialogue with employees to make the changes transparent and ensure that everyone has a clear understanding of our goals and priorities.
I'm proud of the Estee Lauder Company's outstanding effort in 2009.
During a difficult year, our employees have responded in an exceptionally positive way.
I'm confident the organization will make good strides in this, the first year, of our strategy.
When we come out of the recession, we believe we will be fundamentally stronger.
With my newly aligned team in place and our expanded capabilities, we expect to leverage our unique assets and deliver on our fiscal 2010 goals, we shall start the journey to significantly strengthen our leadership position in global prestige beauty.
Rick will take you through the financials now.
Rick.
Rick Kunes - SVP and CFO
Thank you, Fabrizio.
This morning, I'll briefly cover our fiscal 2009 full year and then give you some guidance on the coming year and quarter.
These discussions reflect our results before restructuring and special charges, which I'll comment on separately.
Fiscal 2009 was a challenging year from a financial perspective.
Yet, we were able to react very quickly and accomplish a great deal.
We immediately took action to protect liquidity, cash flow and profit, achieving $250 million in belt tightening savings.
For fiscal 2009 full year, sales fell 2% versus last year in local currency, in the middle of our range.
The strong dollar shaved five percentage points of growth, resulting in a reported sales decline of 7% to $7.3 billion.
Net earnings for the year were $280.1 million, compared with $474.1 million last year.
Diluted EPS was $1.42, well below the $2.40 reported last year.
Looking at the regions, Asia/Pacific once again led growth, rising 14% in local currency.
Every country in the region, except for Japan, grew.
Many markets saw double digit gains.
Korea jumped over 30%, as tourists took advantage of the weak currency.
China rose nearly 30%, fueled by robust prestige beauty growth, expanded distribution and share gains.
Hong Kong, which benefited from an influx of mainland tourists, gained 19%.
Australia benefited from the purchase of a [novative] distributor and Malaysia and Thailand also recorded double digit growth.
In Europe, the Middle East and Africa, local currency sales fell 4%.
Trade destocking was broad based.
We estimate that it reduced regional sales by approximately 10% or about five weeks of retail inventory.
Our travel retail business declined 14% as international airline passenger traffic remained weak.
Retailers destocked and the Korean won devaluation drove down pricing at airports there.
Sales in the UK, our second largest market, remained a bright spot, rising mid-single digits.
Their growth was due to the success of our makeup artist brands, the launch of Ojon, and double digit growth in our developing eCommerce business.
Travel retail and the UK affiliate continued to represent about 44% of the reported sales in the region.
Among developing markets, India jumped over 40% off a very small base.
The Middle East and Russia each grew 13%.
And Turkey was up 12%.
The Americas was the region most deeply affected by the tough economic environment.
Department stores, our primary channel of distribution, were particularly hard hit as consumers avoided the temptation of shopping malls.
Destocking was also prevalent in the Americas as department stores sought to preserve cash.
Their overall sales fell nearly 12% on average for the fiscal year but declined only 6% in their beauty departments.
Retail sales of our products in the US prestige department stores also declined 6%, according to NPD, while our shipments to this channel fell about 8%.
Sales in alternative channels were mixed.
Company owned retail stores, salons and our fragrance business in broad distribution suffered from the same malaise as department stores.
Our online sales continued to grow double digits and direct response television contributed positively.
Sales in Latin America rose nearly 15%.
Gross margin contracted by 30 basis points to 74.5%.
The decrease came primarily from the following items.
Approximately 30 basis points resulted from excess overhead costs that were not recovered due to lower production levels; obsolescence charges of 40 basis points; negative currency impact of 20 basis points and increased promotional activities of 10 basis points.
These were partially offset by positive mix of business and other manufacturing variances of 50 basis points and 10 basis points respectively.
Operating and expenses, as a percent of sales, rose 300 basis points to 67.5%.
The significant decline in sales was the primary factor driving up the operating expense margin.
Asset impairment charges, which related primarily to our Darphin, Ojon and Michael Kors brands, negatively impacted the operating expense margin by about 90 basis points.
We consider these charges to be part of the normal course of business, since they were not due to any change in our fundamental business plans or accounting but were a direct result of the difficult business environment.
Reductions in selling, advertising, merchandising and sampling spending were not in line with the lower sales volume, causing operating and expense margin to increase by 60 basis points.
This was intentional, as we maintained our marketing support in critical areas to gain share.
Higher IT investment, which includes our SMI program, added about 50 basis points.
Net losses from currency translation added 40 basis points.
And charges related to the deterioration of some retail customers added 20 basis points.
However, the implementation of cost savings initiatives helped us reduce the value of operating expenses compared to the prior year.
Operating income fell 37% to $510.1 million compared to last year.
Net interest expense rose to $75.7 million this year versus $66.8 million in fiscal 2008.
The main driver of the increase is higher average set balances, partially offset by lower average interest rates on preexisting borrowings.
The effective tax rate for the year was 33.6%, lower than usual, due to a favorable settlement with the appeals division of the IRS.
During fiscal 2009, we recorded $91.7 million in restructuring and other special charges, a start on the $350 million to $450 million we expect over the next few years.
The charges primarily reflect employee related costs, asset and inventory write-offs, contract terminations and other special charges, including consulting fees.
These costs were equal to $0.29 per share for the fourth quarter and $0.31 per share for the full year.
Moving on to operating cash flow, our day sales outstanding improved to 45 days, compared to 47 days at this time last year.
We continue to monitor the financial health of our customers.
One US retailer has liquidated and we are keeping an eye on certain customers in Russia.
Despite lower sales and destocking in the quarter, our inventory days improved to 155 compared with 180 days last year.
The 25 day improvement came from the following areas.
SKU reductions and forecasting improvements of 16 days; currency of four days; and five days from the excess overhead adjustment I made to cost to goods in inventory, which I mentioned earlier.
Reflecting positive working capital trends, our net trade cycle improved significantly to 112 days from 160 days a year ago.
For the year ended June 30, 2009, operating cash flow increased to $696 million, compared with $690 million the previous year.
The increase reflects tighter management of inventory and lower accounts receivable, partially offset by lower income.
We spent $280 million for a capital expenditures in fiscal 2009; 22% below the prior year and 25% below our original plan.
This reflects continued investment behind our strategic priorities, such as SAP, while curtailing or postponing current construction and other activities.
I would also like to add that our qualified defined benefit plan is fully funded, following a $10 million contribution we made in June.
The investment environment during fiscal 2009 was difficult.
However, the plan's investment strategy of matching the duration of the plan's assets to the underlying liabilities helped mitigate the negative impact on the plan's funded status.
In the first quarter, we repurchased approximately 1.2 million shares of Class A common stock for $55 million.
However, we suspended the program to conserve cash when the credit markets collapsed.
Since the program's inception, we have repurchased 65 million shares for $2.6 billion and have 23 million shares remaining in our current authorization.
We ended the year with $865 million in cash on the balance sheet.
This is due to the issuance of $300 million of notes last November, the suspension of our share repurchase program, decreased capital spending, dramatic inventory improvements and belt tightening savings.
When we feel the financial markets have sufficiently stabilized, we will expect to continue to return cash to shareholders through share repurchases and/or dividends.
In fiscal 2009, we maintained our $0.55 per share dividend rate in a difficult environment, paying out $108 million.
Now, I'll discuss a few assumptions for the coming fiscal year.
Most economists are predicting that we will emerge from this recession in 2010.
Many are also predicting a continuation of the relatively high unemployment and a slow recovery.
Similarly, we are not expecting a radical turnaround in the economy any time soon.
For the year, we expect to grow faster than global prestige beauty by at least one percentage point, as we focus on driving our business in skin care and makeup and expanding our brands in new markets.
We are forecasting sales growth for the year to be 0% to up 2% in constant currency.
Foreign currency translation could aid our reported sales by up to one percentage point.
For the year, our assumption for the Euro is $1.40; for the yen, JPY95 to $1; and for the pound, $1.60.
If the dollar strengthens or weakens against these major currencies, it will further impact our financial results.
We expect gross margin to improve about 60 to 80 basis points for the year, driven by improved product mix, the benefits of SKU rationalization, supply chain savings and lower obsolescence.
Operating expenses as a percentage of sales, is forecasted to decrease between 30 and 60 basis points due to ongoing cost containment efforts and our savings initiatives.
Let me give you some details behind some of these.
We expect to realize $100 million in savings from the organizational restructuring and resizing.
Cost of goods activities including mix, reduced inventory related costs and supplier consolidation are forecasted at around $35 million.
The salary freeze we implemented in fiscal 2009 is expected to contribute $40 million in fiscal 2010.
We expect to save an additional $15 million in the indirect procurement area.
Savings will come, in part, from counters and displays, printed materials, packaging and advertising.
We expect the actions we are taking will result in approximately $175 million to $200 million of savings in fiscal 2010, with about $40 million to $50 million coming in the first quarter.
Our success with the SMI implementation to date has given us the confidence to accelerate our time line by seven months and launch SAP simultaneously throughout our nine manufacturing locations in North America.
This represents 50% of our global production and should allow us to realize the benefits sooner.
While we took some first steps in fiscal 2009 to implement our strategy, fiscal 2010 will be the first full year of executing our plan.
In fiscal 2010, we expect to take restructuring and other special charges of $80 million to $120 million.
We will update these estimates, if necessary, on future calls.
We are making every effort to drive growth more profitably by reducing costs and reallocating the savings back into the most promising and profitable areas of the business.
We expect 90 to 130 basis points improvement in operating margin this year, which we consider a good start towards our long range targets.
We are changing our processes to pursue ongoing improvements in costs, rather than viewing savings as a one-time effort.
We are aiming for continuous productivity improvements, by limiting the growth of overheads in any given year to a percentage of sales growth.
At this time, we estimate our effective tax rate will be approximately 36.5%.
Diluted EPS for fiscal 2010 is forecasted to be between $1.55 and $1.70.
We anticipate building inventory in our second and third quarters in advance of the North American SAP launch in the spring, while continuing to pursue inventory improvements in other areas of the business.
This should result in flat inventory days year-over-year.
Without an overall improvement in inventory levels, coupled with approximately $60 million to $80 million in cash outlays related to restructuring, we expect to generate approximately $550 million in cash flow from operations.
We plan to use approximately $300 million to $325 million of cash for capital projects.
We ended fiscal 2009 with a return on invested capital of 10.8%, excluding restructuring charges.
Limited by our current conservative cash position, we expect our ROIC to end fiscal 2010 at approximately 12%.
We continue to target return on invested capital of 19% to 20% by the end of 2013.
Our first quarter will have a tough comparison to the prior year when we generated sales and EPS growth of 11% and 30% respectively.
We expect sales for the quarter to decline 2% to 5% in local currency and adverse foreign exchange could hurt growth by another three to four percentage points.
EPS for the three months is expected to come in between $0.23 and $0.30.
Regarding restructuring plans, from fiscal 2009 to fiscal 2013, we expect to record $350 million to $450 million in restructuring and other special charges and derive $450 million to $550 million in savings.
As we've said before, we expect the benefits to be relatively linear throughout the period, with incremental savings in each year.
The guidance we have provided indicates expected restructuring costs of $170 million to $210 million from fiscal 2009 through fiscal 2010.
We estimate approximately $60 million to $80 million in additional restructuring charges in each of the next three fiscal years.
We expect savings from our initiatives in fiscal 2010 of approximately $200 million.
Each of the ensuing three years are expected to see incremental savings in the range of $75 million to $100 million per year.
In February, we told you that the major categories of savings were cost of goods, SMI, SKU reduction, distribution optimization, indirect procurement, outsourcing and regionalization.
As we have done for fiscal 2010, we plan to provide a similar level of detail in future earnings calls.
Please note that these are estimates based on our plans and information as of today.
They are subject to change as circumstances dictate.
I just want to remind you again that our guidance for fiscal 2010 for the first quarter and the full year does not include restructuring and other special charges.
And that concludes my comments for today.
And we'd be happy to take your questions.
Operator
(Operator Instructions) Our first question today comes from Alice Longley with Buckingham Research.
Alice Longley - Analyst
Good morning.
My question is about shipments in North America through fiscal 2010 after the first quarter.
And I'm asking because of the comparisons in fiscal '09.
In other words, in the December quarter, I believe your sales at retail and department stores in North America were down about 7% but your shipments were down something like 19%.
And that would lead me to think that, starting this year, even if your sales at retail were down again, your shipments could be up just against that comparison.
Without inventory restocking at retail your shipments could be up.
Is that the right way to think about it?
Should there be a disconnect in your favor starting in the December quarter in terms of shipments versus sell-through at retail?
William Lauder - Executive Chairman
I think Alice, I wouldn't necessarily make that leap on the math and the flows.
Because don't forget, the flows of inventory in December are anticipated replacement for the sell-through in the December period of time for January, February demand.
If the retailers, which are historically the lowest demand months of the 12 months, so historically, retailers might not be too aggressive in replacing a full inventory if they're not seeing aggressive sell-through.
As Rick mentioned, we are anticipating a flat fourth calendar fourth quarter holiday period of time, which would indicate that at the base bottom level and at that sell-through rate and the stocking rate, I wouldn't want to make the leap of faith to say, there's going to be some brilliant shipment numbers.
Nor would I say, they may not be.
It all depends on the general macro environment, as well as the active sell-through numbers through the fourth quarter and the retailers' confidence for consumer demand in January and February.
Alice Longley - Analyst
So, I should just assume shipments will be roughly in line with sell-through for most of the fiscal year?
William Lauder - Executive Chairman
Yes, given the way we work with our North American retailers, one should always assume that.
As an assumption and obviously, we have exceptions to those rules on either side.
Alice Longley - Analyst
Now, your press release cited something about expected further destocking through this coming year.
How do I work that into what you just said?
William Lauder - Executive Chairman
Well, we think that, Alice, in North America there will be a little bit of destocking.
And the destocking that we were referencing more concerns Europe where we think that that will go on probably through the first quarter and maybe a little beyond that in the European arena.
Because it takes longer for them to work through their inventories in many of their small perfumeries.
So, that was what that comment was referencing.
Alice Longley - Analyst
Excellent.
Thank you very much.
Operator
And your next question is from the line of Wendy Nicholson with Citi Investment.
Wendy Nicholson - Analyst
My question had to do with the $1 billion of underperforming brands that you've talked about.
And I know you gave us some color in terms of the SKU reductions going on there.
But in terms of the top line guidance for next year, it's being basically flat in local currency terms, it doesn't look like you're expecting much value or much of that $1 billion to fall away.
So, I had sort of assumed there would be more of a revenue drag maybe from that but it sounds like instead you're going to keep your revenues but just focus on the profitability.
Can you just clarify that for me?
Fabrizio Freda - President and CEO
Yes.
This is Fabrizio.
Actually, we are expected to go down in [face], on at least 2/3 of our underperforming brands.
So, specifically, we continue to estimate to be down in our designer fragrances, for example.
And the same for other underperforming brands.
There are some of the underperforming brands that will start showing some signs of life on the top line because of the actions we are taking.
And so, it's a mixed effort.
But all in all, I think you should assume that the total revenue will trend down and the total profitability of these brands will trend up.
Wendy Nicholson - Analyst
But it sounds like you're expecting enough growth from the rest of the portfolio so that the drag from that slug that's going away is not going to negatively impact the overall portfolio all that much.
Fabrizio Freda - President and CEO
Correct.
That's the key idea.
We are working the mix very carefully.
That's why this is a three year plan and not a six month thing.
And we are working -- the progress in the way that we grow year after year, despite the fact that we will take down the overall revenue of the known strategic underperforming brands.
And then the mixed assets will generate more profit and possibility aggressively growing revenues when the economy will pick up.
And specifically, there is also a combination within categories.
In fact, if you look to our guidance, we plan to grow in skin care -- to continue growing in skin care, which is, in fact, the most profitable part of our portfolio and the one that contains the least number of underperforming brands.
Wendy Nicholson - Analyst
And just as a related follow-up to that.
Something like Origins, I was surprised by your commentary, I know Origins is a relatively small brand, but the fact that you're launching Origins, for example, in China this year, if I heard that correctly.
Because I thought you had just been pulling Origins out of a bunch of the international markets.
Fabrizio Freda - President and CEO
No, that's correct, by the way, but let me clarify.
We are very committed to Origins as a brand because it's the leader of the growing natural beauty arena.
Origins is focusing its (inaudible) on this new position, of powered by nature and proven by science.
So, the brand has been really cleaning up its distribution from those countries where it cannot get to critical mass, it cannot be successfully profitable.
For example, the brand is recently exiting Australia, New Zealand, Greece and Philippines.
But on the other side, we plan to enter China and we plan to continue building the brand in the other existing countries where the brand has very high chances of success.
This brand is on a good consumer trend, so the brand has to be fixed.
That is not a brand we want not to invest on.
On the contrary, it's an important brand for us.
Operator
And your next question is from the line of Andrew Sawyer of Goldman Sachs.
Andrew Sawyer - Analyst
Thanks, guys.
I just had a quick question on the operating margin outlook as we think about fiscal '10.
You're forecasting 90 to 130 basis points.
And Rick, you mentioned that about 90 basis points of an impairment that hurt the base year.
Are we correct in thinking that most of that impairment should drop off and so basically, ex the impairment, we're looking at a flattish operating margin?
And if that's the case, should we think about it like the $250 million in belt tightening is kind of washed out by the structural $200 million of savings?
Is that kind of the right way to think about it?
Rick Kunes - SVP and CFO
You're certainly on the right track, Andrew.
And we reported an operating margin of around 7%, excluding restructuring.
And built into that, was as you correctly referenced, some belt tightening savings, about $250 million.
And we had said that most of those were temporary in nature.
And going into this fiscal year, we had to replace those savings.
So, you can't operate a company without holding sales meetings, as an example.
So, we replaced that $250 million of temporary savings with permanent savings.
So, had we not done that our operating margin this year would have been 4% to 5%.
So, we're really starting from a base, if you will, of 4% to 5% and guiding up to, as you say, somewhere 8% or north of 8% operating margin next year.
And that's why that $200 million of savings that we've identified, that's what it's supporting (inaudible) is getting up to that level.
So, we've had to make some changes in the way that we operate and systemic changes that will last in our way and our processes of running the Company to be able to build that base, if you will, up to the level that we're anticipating for next year.
And allow us to hopefully make progress towards our long term goal, which is another 100 to 225 basis points per year going through 2013.
Andrew Sawyer - Analyst
And then, maybe just kind of a quick follow up to that.
With the organic sales up 0% to 2%, how should we think about what level of sales growth you guys need for the operating leverage to really kick in?
Because that's obviously where you guys get a lot of juice on the margin side.
Does it need to be 3%, 4% sales growth before we start to see that sort of margin bump?
Rick Kunes - SVP and CFO
Well, we intend -- we have plans that say, longer term.
We're anticipating this year, as we've said, somewhat flattish and that towards the end of our strategic planning period, that the prestige marketplace would turn more to normal growth patterns, which in our terms is around 3% to 5%.
So, we see a slow but steady improvement towards that level as we go through our strategic planning period.
And that's what we've built roughly into our long range plans and so, we're going to achieve the value of those savings, absolutely, $450 million to $550 million.
And hopefully, when mixed with those growth patterns, we'll achieve our operating margin.
Andrew Sawyer - Analyst
I'm just thinking more just technically, if you think about the fixed versus variable costs components of your business.
At what level of sales growth do you really start to see a significant meaningful operating leverage?
Rick Kunes - SVP and CFO
Well, if you look at fixed expenses and you assume that they go with roughly with inflation more or less, you're talking about 3%, 3.5%.
So, once we start to go over that level, we start to really leverage that sales growth.
Andrew Sawyer - Analyst
All right.
Well, thank you very much, guys.
Operator
And your next question is from the line of Chris Ferrara with Merrill Lynch.
Chris Ferrara - Analyst
Thanks.
Just kind of following on that line of questioning.
Fabrizio, now that you have a few months under your belt since you initiated the first -- when you first communicated the long term plans.
The 8% margin or so that you're contemplating right now for fiscal '10, is that lower than what you thought you'd be working off of when you originally laid out these plans or maybe it's higher?
I just want to get a sense for what you thought the starting place was going to be for the overall targets.
Fabrizio Freda - President and CEO
I think this is pretty close to what we originally thought.
We've always been thinking of going up in a linear form over the four years.
And this is the first 1 point, 1.2 margin improvement over the four years.
And so it's pretty relevant, pretty significant.
Also, as Rick explained very well, the farther we had to substitute belt tightening with real savings, in reality, the improvement we are making is bigger than that in this fiscal year.
And not (Inaudible) may suggest.
So it's a very significant step ahead.
Obviously, the first time we started thinking of this, the recession had not really full impacted us.
So, there's been a kind of change in the thinking based on the recessionary environment.
But in terms of the year-to-year progress, this is very consistent with what we had been discussing in February with all of you.
Chris Ferrara - Analyst
And that makes sense if the year-over-year progress is in line with what you thought.
But the macro factors, it seems like maybe the macro factors are causing some of the good benefits you guys are getting from Company specific actions could be applied more toward leakage, call it, in the overall economic environment that's causing deleveraging.
And that put you at a lower base relative to where your ultimate target is.
Is that right?
Do you understand what I'm saying?
Essentially because (multiple speakers) --?
Fabrizio Freda - President and CEO
So, I don't this is right.
What happened, just to go back to the historical progress of our discussions on the strategic long term subject, is that we started believing that we could achieve our goals one year earlier.
And then, when the recession hit, we communicated that our plan would go through 2013.
So in our in February discussions with all of you, we basically added one year to the achievement of the target.
So, if something has changed because of the recessionary environment, it's not the absolute amount and not the substance of the plan, is the ability to implement it in three years versus four years -- sorry, in four years instead of three years.
Basically, we have taken one year more because of the recession.
Chris Ferrara - Analyst
Okay.
Understood.
And then, just real quickly, is there anything in Q1 that is helping you from a nonoperational perspective?
Because maybe it's my own forecasting error but I would have expected the earnings trajectory, as you go through the rest of the year, to have accelerated more than what the implication is when you guide to $0.23 to $0.30 and then $1.55 to $1.70.
In other words, you're growing in Q1 EPS despite a tough comp, yet the growth in Q2 through Q4, implied by your guidance, isn't much of an acceleration.
Certainly it is some, but not as much considering what you faced last year.
Could you just comment on that?
Rick Kunes - SVP and CFO
First and the comment that you hear from us all the time is you have to look at our fiscal year performance and the quarters can certainly be volatile.
And in this particular case, in the first quarter, we do have one very, very significant launch for the Company, which is the relaunch of Advanced Night Repair, which has really kicked in internationally, as well as here in the US.
So, that's, for instance, an example of one big factor, which can swing a quarter's results substantially.
And that's why we always try to take a look at the full year and how we're doing on a year by year basis.
Chris Ferrara - Analyst
Thank you.
That's very helpful.
Operator
And your next question is from the line of Bill Schmitz with Deutsche Bank.
Bill Schmitz - Analyst
Good morning, guys.
William Lauder - Executive Chairman
Good morning, Bill.
Bill Schmitz - Analyst
A couple of things.
So in terms of the holiday season, I know you kind of have to plan for purchases in sort of January and February.
Are you going to have adequate supply going into the season, just because the macro environment has improved a little bit since then?
And I know you've obviously planned pretty early into the season in a pretty dismal environment.
Rick Kunes - SVP and CFO
We're comfortable with our supply chain, Bill.
And we'll have inventory.
Obviously, inventory is one of the spots we're working hard to bring down.
So, we do have quite a bit of inventory.
But the key is to make sure that we have the right SKU's and we're being very protective, if you will, of our top selling SKU's in this inventory reduction project that we're underway in.
So, we're pretty comfortable.
William Lauder - Executive Chairman
Also, one of the things, Bill, you should really consider in the holiday selling period, really true success is very strong sell-through in holiday related merchandise.
So that within the last 10 days before the holiday, you're selling regular priced merchandise for those consumers looking for gifts.
That is designing it ahead, forecasting it right for the consumer demand.
Bill Schmitz - Analyst
Okay, that makes perfect sense.
Can you also give a little more granularity about the new bonus compensation structure?
I know you kind of painted it with a pretty broad brush, more of a focus on ROIC and regional alignment.
But what does that really mean in terms of numbers?
Rick Kunes - SVP and CFO
Well, traditionally, our compensation plan has been -- has had two main components.
It was based more on how an individual unit did and less on how that -- the role that they played within the total Company performance.
So, that's one change, which is happening.
Now, it's focused on not just how you do or how your business unit does but how that unit plays its role in the total performance of the Company.
So, there is a lot better integration, if you will, with the strategic plan in the overall compensation scheme.
The second part is that we've always been leaning towards or favoring sales growth, if you will.
And some might say maybe growth regardless of cost.
And now, there's an equal weighting between costs, profitability, sales growth, working capital management or the elements that make up return on invested capital.
So managing your receivables, your payables, your inventory levels, your capital investment.
There really is a balance, if you will, across the entire financial performance of the Company.
Tied in certainly with growth but as well, with managing your profitability; with managing your capital spending; managing your investment and working capital elements; and so, all four of those elements are sort of built into the new compensation plan.
Bill Schmitz - Analyst
Okay.
And then, just one last one.
I know you don't really look at the business this way but can you just say how big a percentage of sales emerging markets are?
And then, how much they grew this year?
Rick Kunes - SVP and CFO
As a percentage of sales, Bill, I can't off the top of my head unless someone else knows it.
But I can -- we did talk about the growth rates in India and China and Dennis will be able to fill you in on how big they are as a percentage of our business.
But all of those grew strong double digits.
They were between 12% and in some markets 30%.
So, we're growing pretty good in those emerging markets.
Bill Schmitz - Analyst
9% to 10% was the number I just have on the top of my head.
I just wondered if it's substantially bigger than that?
Rick Kunes - SVP and CFO
That's probably pretty close.
Fabrizio Freda - President and CEO
I had 9% in mind.
So, you are pretty close.
Bill Schmitz - Analyst
Thanks, guys.
Operator
And your next question is from the line of Neely Tamminga with Piper Jaffray.
Neely Tamminga - Analyst
Great, good morning.
I just want to go back to the looking at the $1 billion that is underperforming, 2/3 of which you still expect to underperform next year and 1/3 you hope to improve.
Just wondering, can you talk a little bit more about what's going on behind those improvements?
Maybe what brands specifically that you're doing?
Is it changing the channels that you're distributing into or just overall strategies?
Any sort of color there would probably be helpful and good insight as to what could come.
And then, related as follow-up too, on the holiday side in terms of the assortment, William, I completely agree with you on get very sharp in the price point up front and let them pay full price those 10 days prior.
Just wondering how this year's assortment might compare with last year's, either in GWP, PWP or just average price point in general?
That would be helpful.
Thanks.
Rick Kunes - SVP and CFO
Well, Neely, let me answer your comment about the holiday season and then I'll have Fabrizio talk to you about the underperforming brands.
The price points, we looked very closely last year at what the strong sell-throughs were, where the consumers seemed to be offering the least resistance on a price point and positioning and value standpoint.
And the opposite, of course, which is where they seem to be most resistant.
So, I think this year, our holiday gift programming in all of its different varieties are appropriately priced, from both a brand and value proposition.
As you know, the consumer is actively and very strongly responding to value proposition offerings, as well as very clear price pointing, which helps them to clearly understand the value of what they're getting from our brands and from the products.
So, I hesitate to say across our many very different brands, is there one magical price point?
No.
But there are magical price point levels, which we are continuing to focus on and making sure consumers have access to price points that are under $30, under $50, under $75, just as a rough statement.
And each brand has a slightly approach to how they're doing that.
We're pretty confident, both in the mix amongst the different price points and the values, as well as the products themselves, as well as working very closely with the retailers from a positioning standpoint, that each brand has the proper mix and we are anticipating we hope.
Like we said, we're anticipating flat, overall in sell-through for that period of time.
And within that mix, we're anticipating strong sell-through of the holiday merchandise, so that there will be also strong sell-through of regular price product.
Neely Tamminga - Analyst
And related to underperforming brands?
Thanks.
Fabrizio Freda - President and CEO
Yes, related to underperforming brands, is first of all, we have already explained that obviously one of our underperforming categories is ADS fragrances and I think I commented a few times on what we are doing on those.
But we don't want to communicate what are the other brands that we consider underperforming.
This is very sensitive competitive information, which is not appropriate to share in these audiences.
That's why -- let me clarify what are the kind of activities, which are going on.
First of all, we are looking at cost cutting across this brand in a very aggressive way.
We are aggressively cutting costs and change the way we operate.
And in some cases, we are considering exiting categories in which some of these brand are operating.
And some of these brands are operating multiple categories and some of these categories are very unprofitable.
In other parts of the business, in some categories, they're actually profitable.
And we're making some tough decisions to cut these categories.
Some other of these brands are operating okay in some countries and they're losing a lot of money in some other minor countries where they tried to be successful and they failed and we never took the decision just to get out.
And we're now taking some tough decisions to get out of countries where some of the brands that have no future.
In some other cases, we are relaunching the brands.
Meaning, we are giving the brands a change to be relaunched and to be reintegrated with new innovation, with new positioning and in some cases, with new channels and new channel expansion consideration.
And figuring, in other cases, where we've failed in those first three attempts, we may consider even to let some brands go.
And depending on how these discussions and learning process evolve over the next three years, we will take all these counsel and decisions.
Neely Tamminga - Analyst
Fabrizio, that's very helpful.
Thanks and good luck, you guys.
Operator
And your next question is from the line of Lauren Lieberman with Barclays Capital.
Lauren Lieberman - Analyst
Thanks, good morning.
I just wanted to follow up on the belt tightening expenses because the implication will be that nearly all of those cost savings are actually coming back in 2010.
I know there was one comment that we can't have another year without sales meetings.
But I had sort of thought that the pacing of those expenses coming back, like hiring and salary increases and things, would maybe come back more paced with a return to sales growth.
So if you can talk a little bit about what are those areas of "belt tightening" that need to come back so quickly?
Rick Kunes - SVP and CFO
Sure, Lauren.
And what we said, was I think when we announced the $250,000 that we said that about 70% to 80% of those savings were temporary in nature.
Some of those savings are around the areas of advertising, where we took some decisions to do some activities, which were maybe we could consider nice to have spending and we cut that spending.
Sales meetings, as you said.
We were very tough on travel.
We did a lot of things, which to run a global business for the long term probably were not in the best interest but we felt an obligation to do as much as we could, without really hurting our business in the short term, to try to deliver the profitability that we did for this year.
So now, going into next year, we have to replace those with permanent savings.
And as we've said, 50% of our costs in our P&L are around people costs.
In order to achieve more systemic changes, you can't just make a decision without kind of structuring your business in a way that is more efficient than it is today.
And that's one of the cornerstones, if you will, of our long term strategy is to leverage scale.
To build capabilities in certain areas.
To utilize those capabilities across brands.
And be as efficient in the way we run our business as we possibly can for the long term.
So we made a lot of structural changes and we've build a lot of progress, quite honestly, in moving in that direction.
And I think you'll see that when we talked about the savings in 2010, $100 million of those were related to resizing and restructuring.
Another $40 million of those were related to the salary freeze that we put in place last year, that is going to benefit us in 2010.
So, a large portion of our savings are all around people, which is logical but we didn't do it in a haphazard way.
We're being very strategic in the way that we go about changing our organization.
Lauren Lieberman - Analyst
Okay.
And just my expectation had been also, with some of this spending, things like you mentioned the advertising, would surely come back a little bit ahead of sales growth, sort of ahead of the expectation that people are spending money again.
So is the weighting of these costs coming back maybe back end loaded in the year because the expectation is the macro will gradually improve as we get through the fiscal year?
Rick Kunes - SVP and CFO
Certainly, our outlook for the business is exactly that.
And we know we're up against a tough comp in the first quarter and we're not really seeing, as William has said, a flattish Christmas season.
And yet for the year, we're saying between 0% and 2% sales growth.
So, obviously, we're down in the first quarter and we're roughly flat in the second quarter.
We are seeing a, if you will, a little bit of a sequential nature in the improvement of business during our fiscal year.
So, that's certainly a true statement.
Lauren Lieberman - Analyst
Okay.
Great.
Thanks so much.
Operator
And your next question is from the line of Connie Maneaty with BMO Capital Markets.
Connie Maneaty - Analyst
Hi, just a housekeeping question first.
Why is the tax rate going up?
And then secondly, I think you mentioned that a retailer liquidated, that you were watching a couple of them in Russia.
Could you tell who liquidated and in which market that occurred?
How long you would expect a drag on sales from any excess inventory in the channel?
And how big is Russia, if we need to be watching it for bankruptcies there?
Rick Kunes - SVP and CFO
Okay.
So Connie, first on the -- we're not going to mention names of people but the one retailer that liquidated is in the US and I think you probably are aware of that one.
And we have a couple of big customers in Russia where we are somewhat concerned.
I think you've seen our reserve for bad debt go up by $20 million and it was really related to those three items.
So, that's when I say that we're being cautious with that.
The other part of your question, I'm sorry, Connie, was?
Connie Maneaty - Analyst
The tax rate, why is it going up and also how big is Russia?
Rick Kunes - SVP and CFO
Sure.
And I think that regarding the tax rate, it's not really why next year it's going up so much.
It's why this year was so low.
In our fourth quarter, we received notification from the IRS that we had actually -- they had upheld a position that we were taking and we were able to release our reserve.
So, if you look at the tax rate this year, it was actually -- it went down rather dramatically in the fourth quarter.
That helped us, quite honestly.
That plus a little bit of extra sales helped us offset what came along regarding impaired assets.
So, that's how we were able to get close to our guidance number that were out there and actually, towards the high end of that guidance.
And then Russia, Russia is growing quite nicely.
It's not a huge market but it's north of $100 million now.
So, it's a pretty good market for us.
Connie Maneaty - Analyst
Thank you.
Operator
Your next question is from the line of Alec Patterson with RCM.
Alec Patterson - Analyst
Good morning.
Fabrizio, a question for you because the strategic overarching nature of the programs you've got lined up, it incorporates kind of a cultural transformation of the Company.
And I'm just trying to size that up.
You've made public the incentive comp, at least for yourself.
And I presume it reflects what is up there for others.
And there's more salary or compensation at risk, as I understand and the nature of it.
But is that line up all the things you've got set up for this coming year?
It doesn't seem like you've laid out a very aggressive set of objectives relative to the size of the potential return on comp.
And so, I just wanted to maybe hear you speak to the degree to which compensation is truly at risk here.
Is there a potential -- there is a set of goals for compensation that maybe exceeds the baseline you've laid out here because you've got sales growth that's fairly anemic with ACV growth in front of you?
You've got a destocking lap in front of you.
You've got impairment charges you're going to lap.
So, it doesn't make it sound as aggressive as the comp scheme would suggest it might should be.
Fabrizio Freda - President and CEO
First of all, I think that plan that we have laid out for 2013 and the first step is in 2010, is very aggressive for what the Company has ever achieved.
So, if you think of the level of activity, which is going on strategically, internal restructuring, internal resizing the organization.
In terms of eliminating all these costs.
In terms of taking the inventories down in a dramatic way.
In terms of refocusing the portfolio in the long term.
Those activities are really activities, which require a lot of cultural change internally, it requires an enormous amount of change.
And the goals that we set for ourselves are, in my opinion, reasonably aggressive also because at least on the front of the profitability on the cost, have never been achieved in the first.
This Company, as you know, has been a company very strong in growth and in growing.
That in terms of being able to profitably reduce the cost structure, we had to make some important changes.
So we are in the beginning of these changes, so we need to prove ourselves.
And so, I think we are reasonably aggressive with the goals we've set for ourselves.
Said this, our compensation program is very strict.
Meaning that in case the goals are not achieved or missed, decompensation goes down.
There's a lot of risk and it goes down, not only the bonus, but we can add variation also on the stock options.
So, beyond the salary, the bonus and the stock options are going to be a risk but also, there will be potential down or up.
And this is a big difference with the new compensation scheme versus the past.
Meaning, that we will -- the Board will set a compensation committee.
The Board will set the targets.
But around the targets, if we underperform as an organization, we're going to receive significantly less than the targets.
But it's also true that if we overachieve, there will be some opportunity after for the large majority of the senior management.
So, it's a pretty competitive compensation scheme and the goals are aggressive.
And anyway, the goals will be, again, set by the compensation committee.
Alec Patterson - Analyst
Okay.
Rick, just to follow up.
The impairment charge, it's been fairly sizable now.
If we get into a better operating environment or economic environment, is that expected to be reduced or come down?
How should we think about that element?
Rick Kunes - SVP and CFO
Sure.
The way it works, is you go through -- there's triggering events from an accounting perspective and also an requirement that, at least annually, we do a very thorough analysis of our goodwill asset that's on our books.
An intangible asset on our books.
So, what has happened because of the business climate unfortunately, is that the discounted cash flow, if you will, of the future streams of income from these businesses was not enough because of the recession to kind of justify the asset that's on our balance sheet.
So, to the extent that the business climate in the future gets better, we would then not incur those impairments, hopefully, going forward.
But it will come back, if you will.
Right?
Once you write it down, it's written down, the asset.
Operator
And your next question is from the line John Faucher with JPMorgan.
John Faucher - Analyst
Yes, good morning.
In taking a look at the regional local currency guidance, if we assume that Asia/Pacific will grow sort of roughly at the recent run rate.
And then look at Europe being up for the year, which I believe is your guidance from the local currency standpoint.
That implies that the Americas number is probably somewhere down in the 3% to 5% range.
And I'm just wondering, that looks like a much bigger sequential improvement in the Europe, Middle East and Africa local currency numbers.
And you talked about the retailer destocking.
So, is that correct that you are going to see a bigger sequential improvement in Europe, Middle East, Africa?
And can you talk about why that sequential improvement is so much greater than -- or at least a little bit greater than what you're seeing in the Americas?
Thanks.
Rick Kunes - SVP and CFO
Sure.
And I think that certainly we'll see sequential improvement in Europe.
I think that the regions themselves are not quite as broadly disbursed as you've seen this year.
But we're not anticipating quite as fast a growth in Asia as we had in this fiscal year but still a pretty solid number.
We are anticipating, as we said, a decline in the Americas region.
And for Europe, certainly, there is a swing because that destocking sort of goes away.
Not totally, as we mentioned earlier, but it begins to go away over the course of a year.
And so, that's kind of the guidance that we've given, John, on a regional basis.
John Faucher - Analyst
Okay, thank you.
And then, one follow up on this.
On the Asia piece, should we assume, since you say it's going to be a little bit slower, you've got that really tough comp in the first quarter; are the 2010 trends going to be more in line with what you've seen over the last three quarters or do you get a further deceleration from there?
Rick Kunes - SVP and CFO
I think it's more of a continuation of what we've seen in Europe -- I'm sorry, in Asia towards the second half of the year is probably more realistic to what we're looking for next year.
John Faucher - Analyst
Okay.
Great.
Thank you very much.
Operator
And your next question is from the line of Victoria Collin with Atlantic Equities.
Victoria Collin - Analyst
Hi, good morning.
I've just a couple questions of full year guidance.
I was wondered if you could give us a stat on what you're expecting to see from the travel retail performance during full year '10?
And secondly, if your thoughts on the Q2 holiday season have improved since last call?
I noticed you're still remaining fairly cautious by saying that it's sort of flat.
But I remember, last time, you said flat maybe to moderately up.
I just wondered what your thinking was?
Rick Kunes - SVP and CFO
Okay.
Victoria, you might have to repeat the second part.
On the first part, regarding travel retail --.
Fabrizio Freda - President and CEO
Yes, we've spent our targeted business to track really the trend in traffic.
And we had a 14% decline in fiscal 2009, while the travel industry is forecasting international costs in traffic to decline 7% to 7.8% through the rest of the calendar year.
While in 2010, it's expected to become flat.
And so, we think that more or less this will be also our trend.
That's our assumption.
Although, we are continuing growing market share, also there, particularly, in the areas of skin care and makeup.
And we will continue working on increasing the conversion of passengers into buyers, which is an area we are working on.
Obviously, there is a risk there, which is the potential arrival of the pandemic flu, is this risk we must realize, obviously, this will affect our retail in travel.
Victoria Collin - Analyst
Thank you.
That's great.
And then, the second part of the question was on the holiday Q2 quarter.
And if you expect to see a sequential improvement or if it's very more flat year-over-year?
Rick Kunes - SVP and CFO
And I think, Victoria, we're mentioned, that we're anticipating kind of a flat Christmas versus last year.
So, the holiday season, we see is relatively even with what the results we have this year on a sell-through basis.
And there will be the destocking, certainly, to the extent that we saw last year.
So, that's our outlook for the second quarter.
Victoria Collin - Analyst
Okay.
Thanks very much.
Operator
And your next question is from the line of Linda Bolton-Weiser with Caris.
Linda Bolton-Weiser
Hi, thank you.
I was just wondering if you could give some specifics about the 8-K filings that have occurred so far, where you've disclosed some severance charge amounts?
And how many in head count reduction that pertains to?
And just the timing of when all that is occurring?
And does the $100 million of organizational restructuring savings for FY '10, does that assume there will be more announcements of severance and headcount reductions?
Or does that just reflect what has already been taken?
Rick Kunes - SVP and CFO
Sure.
So, Linda, I think if we look at our program overall by the end of this calendar year, we'll be roughly through 2/3 of the savings that we had anticipated.
So, the charges that you've seen us take towards the end of last year, certainly the P&L benefit of those, mostly comes into our fiscal 2010, as well as additional initiatives that we have underway.
But as I said, by the end of this calendar year, we'll probably be roughly 2/3 through our program.
And we had said when we first started it, that it would take us about two years in total to work through all of our initiatives in that area.
But that's where we should stand by the end of calendar 2009.
Linda Bolton-Weiser
Okay, Thanks.
Operator
And your next question is from the line of Ali Dibadj with Sanford Bernstein.
Ali Dibadj - Analyst
Hi, guys, how are you.
I was wondering if you could help out a little bit on -- the question is in terms of the trajectory to get your 12% to 13% goal.
Because it seems that in this next year, it's a higher dollar amount and it's a lower dollar amount as you progress.
But from a margin perspective, you're expecting a little bit more of a hockey stick incentive just linear.
And I'm not quite getting there with the top line growth that you've described and a little bit of volume deleverage.
So, I'm trying to figure out whether the things in 2010 you're investing in, that you're not going to invest going forward?
Whether it be more goodwill impairment.
Whether it be expectations of retail exerting more pressure on you to invest.
Whether it be more emerging market kind of investments or mix or taxes.
I'm just trying to get a sense of the progression because it doesn't seem to be linear to me, at least not on the EPS growth or the margin perspective.
Rick Kunes - SVP and CFO
Well, I think, Ali, if you look at the savings numbers, they're not perfectly linear, for sure.
Because in this first year, as we mentioned, we had to make up for those temporary savings that we took in 2009, that we have to replace with permanent savings, as well as additional savings to improve 2010.
But I think if you look at our -- if you say that we're slightly, 8 percentage or roughly around those numbers, is the guidance that we have given for this fiscal year.
How much further do we have to get to get to that 12% to 13%?
It's 100 to 125 basis points a year over the next three years or slightly more than that.
And if you look at our savings anticipated numbers by year, we see it at between $75 million and $100 million per year.
And I think the math pretty much holds together that that should be enough, along with a little bit of sales leverage, so we know there's sales leverage coming towards the later end of our plan.
And along with some sales leverage, gets us to that operating margin of the 12% to 13%.
Ali Dibadj - Analyst
But there's nothing that you're anticipating investing in 2010, whether through impairment or other things you're not necessarily anticipating in the later years?
Rick Kunes - SVP and CFO
From an -- just on impairment, technically, if you know about an impairment, you book that impairment.
So, we're certainly not anticipating any impairment.
Regarding investments, yes, you'll remember that we did talk about building some capabilities to help us over the long term.
And we had mentioned that we would invest about $50 million in new capabilities around consumer insights and R&D in Asia and some other initiatives that we had laid out in our strategic plan conference call.
And we are doing almost 50% or a little bit more than 50% of that investment in 2010.
So, there is some investment to that extent, absolutely, in the early years and there will be some more in '11 but then that goes away.
Fabrizio Freda - President and CEO
Ali, I've been covering it in my prepared remarks.
You remember, we are building this consumer and size capability that will serve us for the four year plan.
Obviously, we are trying to build the majority of it in 2010.
We are investing in R&D in [Paris] and Asia and building those centers that we obviously, we are going to do in 2010.
We are investing in, and I again, I said this in my remarks, in becoming much better not only online eCommerce but also in digital marketing.
And we are doing this in 2010.
So a lot of four key building blocks of capabilities that we -- to which we have located about $50 million of the savings.
The last majority of them will need to start in the beginning of the journey.
And so, obviously, this is not going to be linear.
Ali Dibadj - Analyst
Okay.
So 2010, more for those things.
Okay.
Then, just to add to that, can you give me a sense how you guys are thinking about the North American retail growth?
In terms of splitting it up by comparables, some sense of restocking and then on the flip side, distribution gains, how should we think about those going forward?
And part of my question is just a concern for some of the retailers that you mentioned, even in North America, and understanding how you've taken account in your guidance for store closures or potential store closures or et cetera?
Rick Kunes - SVP and CFO
Well, Ali, I think we're looking at it in a number of different ways.
First and foremost, it would appear right now that our core North American retailers are seeing a certain level of stability in consumer demand.
Our performance of our brand is an indicator relative to total store performance and relative to performance across retailers, who would indicate to us that there's a certain level of stability with occasional pops up and occasionally pops down.
Perhaps it's calendarization.
Perhaps it's other factors.
Does that lead to us to have a level of confidence to say it's safe to come out now?
I'm not necessarily certain.
Does that lead us to say, we ought to be cautiously optimistic over the next 12 months?
I think that's probably a better characteristic.
Over the long term, I think we're going to see a slower, less aggressive recovery than we might imagine.
And I think what we will -- about store closures, it's very hard to estimate store closures because, as you know, our retailers appear to be managing their balance sheets effectively and are looking for positive cash flow.
And so as long as they can operate a store with a positive cash flow at whatever level they would choose to operate it and take the write-down the associated with the closure.
That's not to say they won't close stores.
We aren't in the retail business.
They're in the retail business.
But certainly I don't -- we're not anticipating significant store closures as a factor in looking at our North American business.
Nor are we anticipating aggressive recovery of consumer demand over the near term, 12 to 18 months.
Ali Dibadj - Analyst
Okay.
So more or less, it sounds like status quo.
There's no big network shifts you expect over the next little while.
Rick Kunes - SVP and CFO
No.
Ali Dibadj - Analyst
Okay.
Thanks very much.
Operator
And your next question is from the line of Mark Astrachan with Stifel Nicolaus.
Mark Astrachan - Analyst
Hi, good morning, everyone.
Just a follow up on that last line of questioning in terms of whether you can give a number about the amount of cost savings that are going to be reinvested back into the business?
And then relatedly, if you could a bit talk about your views on consumer spending and what, if anything, you need to do with terms of brand support, promotional activity, et cetera, to really entice those folks to come back and be consumers again?
Rick Kunes - SVP and CFO
Mark, regarding the investment spending, we talked about a $50 million investment for capabilities building and slightly more than 50% of that is happening in fiscal 2010.
The remainder will probably be in fiscal 2011.
And regarding building, the other piece, I'll leave that to Fabrizio or William?
William Lauder - Executive Chairman
Well, generally, Mark, what we're seeing, as I just mentioned with consumer spending and consumer responsiveness, we're seeing some caution from the consumer but certainly not the reticence she had from the late fall of 2008 through the early spring of 2009.
She is coming back but she is responding to stronger value propositions, more obvious reframing of the value propositions, if you will, to a certain extent.
Which is something that Fabrizio mentioned, which is stating more clearly to her the obvious that was always there about the value that the consumer can get from our brands that she is interested in.
And I think we're seeing response to this and we need to continue to be mindful of the fact that she is value conscience, will continue to be value conscience, appreciates the value she gets from our brands, both from a service level product performance and an environment standpoint.
And we need to be even more sensitive to those ideas that she responds to.
Is there something you want to add?
Fabrizio Freda - President and CEO
Yes, I just want to add that in order to recover the consumer, we need to, first of all, continue to push innovation in a big way.
The consumer continues to respond very positively to outstanding innovation.
And that's we are getting that.
And the other one is value, as William mentioned.
And on value, we are making a lot of new efforts, as I've covered in my opening remarks.
And driving those two things, I believe, we will be able to be very competitive in establishing the future come back on the consumer.
This will be very different by region.
In the US, the consumers are and will remain for awhile very value conscience and very prudent.
And their [place] in how they are going to buy and how much they will be sensitive to promotional efforts, will remain where it is now I think for awhile.
And it will take some time before it goes back to more normal.
In Europe and in Asia, we see very different behaviors.
And the value conscience is there but the promotional interest is not [so much].
And that's an important thing.
We don't see, in reality, trading down outside of our prestige arena.
Despite many discussions that are happening in this area.
Actually, if you look in North America numbers and take skin care, which is our most important category, the number of units are going down, both in mass and in prestige.
And we deem our portfolio in prestige, we see some trading to our entry price brands like Clinique or Mac, which are obviously growing share in a very nice way.
But when we told to our consumers, they really like to stay within the channel they are accustomed to.
And when we look internationally, actually, we are seeing if anything, particularly in Asia, some trading up, which is in a very, very big way happening, especially in China.
So, all in all, we are pretty confident about the market in all these in the US but let's not forget we have 60% of our market internationally.
Mark Astrachan - Analyst
Great, that's helpful.
And just one follow-up.
I'm assuming that it's fair to assume that your guidance is including some of that mix trade down in terms of potential value offerings.
Rick Kunes - SVP and CFO
Yes, certainly, our numbers are built on those facts.
No question about it.
Fabrizio Freda - President and CEO
Sure.
But let's go inside that.
Our entry price brands like Clinique and Mac, which is the ones which are growing market share the best and our regions where we are growing, particularly in skin care, where we are growing more aggressive, are our most profitable part of the business.
So, the direction we were taking over time will help our mix, not dilute it.
Operator
That concludes today's question and answer session.
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That concludes today's Estee Lauder conference call.
I would like to thank you all for your participation and wish you all a good day.
Dennis D'Andrea - VP IR
Thank you.