雅詩蘭黛 (EL) 2011 Q4 法說會逐字稿

Good day, everyone, and welcome to The Estee Lauder Companies' fiscal 2011 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.

Good morning, everyone.

On today's call are Fabrizio Freda, President and Chief Executive Officer, and Rick Kunes, Executive Vice President and Chief Financial Officer.

Also with us is Jane Hertzmark Hudis, Global President of the Estee Lauder brand.

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.

You can also find a reconciliation between GAAP and non-GAAP results in our press release and in the Investors' section of our website.

I'll turn the call over to Fabrizio now.

Good morning.

I'm delighted you join us for our fiscal 2011 year-end conference call.

Once again, we finished the year on a positive note with a good momentum.

We are now two years into our strategy, which is working well.

And by virtually all measures, we have made tremendous progress.

As you know, our plan has many components and we are firing on all cylinders, leading to our excellent results.

Our business grew double digits.

We exceeded our cost-saving projections and have achieved our stated operating margin goals two years in advance.

In addition, we are executing with excellence all our key strategy and the strength of our organization has been unleashed.

Specifically, we have created blockbuster launches, effective advertising, improved High Touch services, a stronger digital presence, and cost reductions.

Our international growth has been terrific and we sharply improved our North America business.

Our brands and global workforce are more collaborative, which has led to a stronger organization.

We have already achieved many of our regional fiscal 2013 goals and we are now extending the strategy for another year, through fiscal year 2014, with a new operating margin target of 14.5% to 15%.

Fiscal 2011 was a record year for many financial measurements.

Let me [relate] our recent milestones.

Our sales grew 13% to a record $8.8 billion, three times the growth of global prestige beauty.

Our largest categories, skin care and makeup, in every region climbed by double digits.

By growing faster than the industry, we gained share in many important markets and channels, including China, the UK, and travel retail.

The Company continued to manage costs, enabling us to leverage our sales growth into greater profitability.

Our net earnings were $743 million and earnings per share of $3.69, were 34% above the prior year and the highest in the Company's history.

Also hitting all-time highs were a gross margin of 78.1%, an operating margin of 13%, which increased the 140 and 180 basis points, respectively.

Our operating income and operating cash flow each topped $1 billion for the first time and we created substantial stockholder value.

We raised our dividends 36% and total shareholder return nearly doubled.

I'm especially pleased with our three largest brands, which accounts for 70% of sales, had strong momentum globally and, combined, grew at double-digit pace.

Estee Lauder resonated so well with Chinese consumers that it became the largest prestige beauty brand in our distribution in that rapidly growing market.

Clinique important skin care business rose 14% worldwide, driven by cutting edge products that filled gaps in the marketplace.

As the biggest beauty brand in the US, Clinique grew share significantly in skin care.

And MAC had double-digit gains in every region and attracted a following of more than 2 million fans on Facebook, the most of any prestige beauty brand.

An important element of our strategy is to win big with affluent consumers, and our high-end brands enjoyed double-digit growth as luxury consumer have been shopping enthusiastically again.

In a ringing endorsement, we were thrilled that two of our luxury brands had a role in one of the most newsworthy events of the year, the Royal Wedding.

Members of the bridal party used the Bobbi Brown makeup, and Westminster Abbey was scented with Jo Malone orange blossom candles.

Another key goal is to improve our turnaround brands.

And they made excellent progress with a significant gain in operating profit.

The improvement was led by Aramis and designer fragrances, which grew sales and substantially reduced its cost of goods, creating solid profit progress.

We also set out to grow through acquisition.

In fiscal '11, we added Smashbox to our portfolio and it contributed 1% to our growth.

We also finalized a licensing agreement with Ermenegildo Zegna, which is one of the fastest growing main luxury brands in Greater China.

Looking at our business geographically, our performance in North America was the strongest it has been in a decade.

The surge was led by a terrific year at US department stores, where our brands were key drivers of increasing store traffic and attracting new consumers, thanks to fantastic innovations backed by aggressive advertising.

Overall, prestige grew faster than mass.

Despite the tragic events in Japan, Asia-Pacific had another solid showing, driven by sales growth in China of 33%, even better than the 29% the previous year.

The Estee Lauder brand continued its rapid pace in China and La Mer sales skyrocketed.

We have done so well that our Company became the leading prestige player in China in our distribution, and our presence is growing.

We recently introduced Good Skin labs and Lab Series in the Chinese market, now giving us 11 brands there.

Aside from China, we saw strong growth in most markets, but some others were more challenging, due in part to natural disasters.

However, a key pillar of our strategy is to expand our skin care business in Asia, and we delivered.

The category grew 13% in constant currency.

Europe, and Middle East and Africa was our fastest growing region, led by many emerging markets.

The bigger established countries, including the UK, France, Germany, and Italy, were also strong.

In a major initiative to improve our High Touch services, we began installing informative messages in perfumery to aid consumers in proper selection.

Looking at our channels, we became the leader in skin care in travel retail, which is the fastest-growing category in the fastest-growing prestige beauty channel.

Our exceptional growth was triple the rate of the passenger-aided traffic, thanks to better, more efficient advertising behind strong innovations in our biggest brands, personalized services, and getting more people to shop and buy.

Our freestanding stores also grew nicely and now accounts for about 10% of our business.

eCommerce continued its outstanding pace, with sales up 28%, and we added 22 new brand sites globally.

Our terrific performance stems from the innate creativity shared throughout our Company and the strategic decisions to develop fewer but more impactful products.

Consumers learn about our high desirable innovation through robust TV, magazines, and digital advertising.

We advertise our newest, the biggest product also on TV in many of our largest markets, such as the UK, China, and the US.

The campaigns worked to pull consumers into stores where we leveraged our High Touch service to be loyalty and sell additional products.

The concept worked so well that our average sales per launch in the US increased by 67%.

With the digital world becoming more important to successful brand-building, we improved our capabilities and communications.

Three of our brands, Clinique, MAC, and Aveda, were among the top five beauty brands with the highest digital IQ according to a US survey.

We also successfully deployed our strategic modernization initiative into more markets and functions, and continued building capabilities in areas critical to our growth.

This includes international R&D centers, digital knowledge, consumer insights, and talent development.

Additionally, we capped $199 million in expenses for total savings to date of over $560 million, and farther aligned our organization and infrastructure to this strategic vision.

As you see, our strategy is a resounding success -- so much so, that we have already achieved most of our regional goals.

When we first laid out our strategy in fiscal 2009, we targeted an operating margin of 12% to 13% by fiscal '13.

Since we have now hit the top of the range two years early, as I said before, we are extending our strategy for another year with a more ambitious goal -- an operating margin of 14.5% to 15% by the end of fiscal '14.

This new goal reflects our ability to leverage our growth, thereby generating sustainable and increase the profitability.

Looking ahead, our strategic vision is unchanged.

However, we continuously refine our strategy to chase the biggest opportunities globally.

In deciding where to invest, we target the most promising areas and develop the capabilities we need to win.

In fiscal '12 and beyond, we believe the greatest growth engines will be emerging markets, travel retail, and the digital world.

Additionally, we will give increased focus and investment to the brand-building aspects of freestanding stores.

The emerging markets will drive much of the growth in prestige beauty, especially China.

It is the fastest-growing beauty market and holds huge untapped potential.

Our sales are climbing rapidly and it is expected to be our largest Asian affiliate this fiscal year.

Today, we sell our products in 38 cities.

And by the end of the fiscal year, we intend to be in five more.

However, our efforts goes well beyond China borders.

We target Chinese consumers wherever they live and travel.

We estimate that 1 billion of our sales in fiscal '11 came from Chinese consumers around the world.

Our retail customers are reporting a significant rise in Chinese shopper purchasing cosmetics in major cities from Paris to Los Angeles to Seoul.

Over the next three years, we plan to introduce more luxury brands in China, and open doors in additional cities, including department stores, freestanding stores, and Sephora.

This year, we plan to launch eCommerce for Origins and Bobbi Brown in China.

We are also excited about the potential of Brazil.

We will sell six brands and are accelerating our efforts.

It's the third largest global beauty market after the US and Japan, although heavily skewed toward mass.

With prestige department stores underdeveloped in Brazil, we plan to open more freestanding stores, launch eCommerce sites, and sell a new prestige retailer as they enter the market.

MAC currently has 18 freestanding stores in Brazil, and we'll open seven more this year, with further expansion plans reaching 10 more cities.

Clinique launched eCommerce in Brazil in May and MAC will start in a few months.

We are expecting brisk interest, since Brazilians are active online.

MAC is a leading prestige beauty brand and the pillar of our business in Brazil.

Although it will take time to be a formidable competitor in the market, we are building awareness and reaping the benefits from Brazilian travelers.

Brazilians visiting MAC's Times Square store in New York City accounts for the largest group of foreign shoppers.

Looking at our distribution, travel retail represents a big opportunity for beauty long-term.

In fact, its size could rival North America prestige in 2020.

In travel retail, skin care in Asia are the fastest-growing areas, which play to our strengths.

And often, consumers who buy in travel retail, are new to our brands.

To maintain our great momentum, the Company plans to increase travel retail advertising this year.

We also will offer new kinds of High Touch services to travelers and create excitement to our special events.

In fiscal '12, we plan to emphasize High Touch, as we work to strengthen our data connection with consumers, and elevate our service across channels and brands.

One way to do this is by expanding our network of more than 750 freestanding stores, which we plan to accelerate in fiscal '12.

Many of our brands are using retail stores to build brand equity, expand into new markets, develop deeper consumer engagement, and test new merchandising areas.

We are also experimenting in new store concepts.

In Buenos Aires, we took over a space in a mall and split the store -- one side is for Bobbi Brown, the other for La Mer.

MAC plans to open more global flagships, and Jo Malone is broadening its reach in key US locations, including a store in Grand Central Terminal next month.

The world of digital in all its forms is a top priority for us, because eCommerce and social media allow us to talk to consumers directly, providing another High Touch venue.

Consumers are [leading a line] blurring the lines between eCommerce, digital marketing, and social media.

To reach them, we expect to launch 50 eCommerce and mobile sites worldwide this year, with even more in the following two years.

But we can't just create the same content all over the map.

In social media, in particular, we must be locally relevant and understand our consumers' cultures and desires.

Equally important is developing unique and innovative content, including How-To videos, exclusive online offerings, video shops, consumer ratings, and radios and [diagnostic] tools.

We want to be the best company in our space in all digital things, so we are hiring community managers to receive brand content, and we will create similar roles in international markets.

Our brands have 67 Facebook pages across 27 countries, with a total of 4 million fans.

11 brands are talking to consumers on Twitter and consumers have viewed our brands content on YouTube 6 million times.

Some brands are developing mobile and [top] apps to strengthen their brand equity and seed consumer interest.

Clinique app provides weather forecast and the most appropriate products for a particular climate.

Smashbox is taking another approach, using QR codes, so a consumer can scan the code with their mobile phone for product information.

We intend to invest substantial resources to build the necessary capabilities in digital, attract the best talent, and locate our employees.

Now to focus on different aspects of our business, let me update you on our categories.

Skin care remains a key priority.

It accounts for the largest portion of sales and profits.

We have focused our resources on fewer and bigger launches in skin care, and supported them with TV, print, and digital advertising to pull consumers to our counters and websites.

This year, we will expand that approach to makeup.

Clinique is bridging the skin care and makeup categories by expanding some of its popular skin care products into foundations, such as Even Better Makeup.

In other makeup news, Tom Ford is launching a color cosmetic collection, as Smashbox will expand to additional countries.

This year, MAC is expected to become the Company-leading brand in Latin America, making it the first place where MAC will hold the top spot.

In hair care, we believe we have the right portfolio to become a driving force in salon and prestige retailers who wish to pursue the category globally.

We will expand in prestige salons to drive growth and, at the same time, pursue international retail opportunity in eCommerce.

Bumble And Bumble did so well in Sephora in the US that we plan to expand internationally.

Aveda gained share in prestige hair care since the successful pull/push promotions.

We plan to continue our pull/push strategy to support our strong innovation pipeline as well as further international expansion.

Ojon's repositioning on high-performance treatment should generate renewed excitement with consumers.

In fragrance, ADF will strive for continued profitable growth.

The division plans to continue improving its margin while pushing global growth in DKNY, Coach, and other brands in our portfolio, while incorporating the new Zegna franchise.

Elsewhere in the portfolio, we see terrific opportunity in high-end fragrances, and plan to accelerate Jo Malone and Tom Ford.

We will prioritize [selling scents] from Clinique in Push-Through, a new regional strategy at Estee Lauder that Jane will discuss.

What drives our growth across categories is our creativity and innovation, which is at the heart of everything we do.

This spring, we opened a large innovation center in Shanghai to develop beauty products for Asian consumers.

We will take successful ones developed there and distribute them worldwide.

Our top line of innovation is exciting and robust.

Once we introduce a major new product, we will continue to leverage it, using extensive advertising and High Touch to build consumer engagement and sell additional products.

Since High Touch works in concert with our innovation, we will make a big investment to improve the store experience and create ways to get closer to consumers.

Clinique customized service concept has been a huge success in flagship department stores, so we are rolling out elements of it around the world, which will vary, depending on the size of the store and the channel.

For instance, in European perfumeries, Clinique is installing new merchandising and navigation for skin care and makeup.

In North American doors, it is providing iPad, so consumers can identify skin concerns and find appropriate products.

Our strategic modernization initiative continues.

We are gearing up for our biggest year yet, actively preparing over 25 business units to implement SAP in several groups during the next two years.

While SMI is helping to transform our global processes, the full benefits won't be realized until fiscal '14, giving us even more leverage after the current saving program ends.

A critical factor underpinning our successes is our people.

The Company has always prided itself for its amazing talent, but now we are further developing our leadership, working collaboratively, and leveraging our organization's strengths.

We have accomplished this throughout an improved and redesigned organizational structure, combined with a compensation system aligned with our strategy, performance, and shareholder value creation.

The strength in the organization is a key to our future success.

Prestige beauty has rebounded strongly, and was returning to long-term growth of at least 4% annually, but recent volatility may make it harder to predict the trend in the next couple of years.

We continue to believe we can grow well ahead of prestige beauty.

And, as things stand today, we expect sales growth in the range of 6% to 8% in fiscal '12.

Of course, the recent negative economy and political trends here and in Europe create uncertainty for global economies and our Company.

It may postpone the moment when prestige beauty growth fully recovers to historical 4% to 5% levels.

The recent volatility and uncertainty in global financial markets may impact consumer confidence, demand and spending.

We cannot predict with certainty the extent or duration of these conditions, but we are better-positioned now to manage our business more effectively and efficiently, and allocate resources to the most promising opportunities.

Our business strategies are designed to strengthen the Company over the long-term and our fundamentals are solid.

That said, our first quarter is off to a strong start.

We have always been a growth company, but now we are a more disciplined growth company that is able to leverage our gains into higher sustainable profitability.

I am so proud the Company's core values, culture and long-held principles have stayed intact while we have gone throughout a rapid transformation.

This is a testament to the dedication of our global workforce and its creative talents.

Our terrific success would not have been possible without the tremendous support and dedication of all of our employees and our important retail customers.

I thank all of them for making the Estee Lauder Companies the best it can be -- the leader in global prestige beauty.

Now, I will turn the call over to Jane.

Thank you, Fabrizio.

Good morning, everyone.

I have been with The Estee Lauder Companies for 25 years, and was honored two years ago to become the Global Brand President of Estee Lauder.

The Estee Lauder brand, as many of you know, was founded by Mrs.

Estee Lauder in 1946 with just four skin care products.

Her first counter was at Saks Fifth Avenue in New York City.

Today, 65 years later, the Estee Lauder brand is one of the largest in our Company, with well over $2 billion in annual sales.

We sell prestige skin care, makeup and fragrance products in more than 150 countries and territories.

In fact, the Estee Lauder brand does almost 75% of its business outside of North America.

In fiscal '11, the Estee Lauder brand had an outstanding year.

Sales rose double-digits globally and our profits increased significantly, reaching record levels.

Due to the brand's size and its importance to the Company, coupled with its terrific performance, I am proud to say that it was one of the major contributors to the Company's overall success.

Key to this success is a brilliant global team, with a keen understanding of our global strategy as well as local consumer dynamics.

By working together, sharing knowledge, and executing with excellence, we've been able to leverage our understanding of our consumer and accelerate our growth.

Estee Lauder has a strong brand heritage.

I would like to begin by outlining how we have built on that heritage to implement an updated strategy that evolves and modernizes our brand.

As the world evolved, there was opportunity almost everywhere we looked.

The key tenets of our updated strategy are -- focusing on high-performance skin care and establishing Advanced Night Repair as our icon product; better understanding our consumers around the world, especially in Asia and China, where the brand is ripe with opportunity; broadening the appeal of our brand to a younger, more ethnically-diverse consumer; maximizing opportunities to create regionally and locally relevant products and programs tailored to local consumers; and identifying our biggest and best innovations, and leveraging our resources behind them.

We believe that with this carefully designed strategy, the brand will continue its momentum and be a significant contributor to the Company's future success.

In fiscal '11, I'm pleased to report that the brand grew in every region and in the travel retail channel.

The brand has been particularly successful in Asia-Pacific, where we grew twice as fast as prestige beauty; we became the number one prestige brand in our distribution; and Asia-Pacific became the brand's largest region, growing in the mid-teens and surpassing North America in sales.

Of particular note is China, where we are the number one brand in our distribution.

Our success with the Chinese consumer positively impacts our success in Greater China, travel retail, and other markets around the world.

We are very focused on capturing the Chinese beauty consumer wherever she lives and travels.

To this end, we are introducing products that specifically meet the needs of Chinese women.

One example is Nutritious, which was created in China, but is now sold in many markets around the globe that attract Chinese beauty consumers.

We will continue to study Asian skin and identify the needs of Asian women through our new Asia Innovation Center in Shanghai.

The brand also had strong momentum in the European region.

Our greatest growth is coming from emerging markets like Russia and the Middle East, as well as key countries including the UK, France, and Italy.

This momentum was driven by our strategy of fewer, bigger launches supported by strong TV, digital and print activities.

Overall, the Estee Lauder brand rose in the high single digits in the EMEA region for the year, excluding travel retail.

In North America, we've been successfully reengineering our business model by reducing promotions such as gift with purchase and sets, and reallocating funds into pull strategies behind major innovations and our biggest opportunities.

I am very happy to report that the Estee Lauder brand grew mid-single digits in our home market and that rate has accelerated in recent months.

The Estee Lauder brand is also doing exceptionally well in the travel retail channel, where our skin care business was up 35% and our total sales rose 28%.

Now let's turn to product categories.

With the rapid growth of Estee Lauder in Asia, skin care, our most profitable category, is now more than half of our global sales.

Makeup is about a quarter, and fragrance is less than 20%.

In line with the Company strategy, the Estee Lauder brand has focused on skin care as our number one priority.

For example, we launched and leveraged our icon product, Advanced Night Repair, in fiscal 2010, with a new technologically-advanced face serum, and again in 2011, with a new eye product, Advanced Night Repair Eye.

As a result, this 29-year-old franchise grew over 20% this year globally.

In makeup, we have elevated our style leadership with the amazing talent of Tom Pecheux, our Creative Makeup Director.

Tom has created trend-setting color collections for the Pure Color franchise, generating tremendous energy and buzz.

In addition, he has helped us create dynamic digital assets, including backstage fashion show and How-To makeup application videos.

As a global prestige player, fragrance is also an important part of our business.

Our fragrances are sold at our counters, not in fragrance bars, which increases beauty advisor productivity.

In terms of strategy, we are focusing on our key fragrances -- Beautiful, Pleasures, and Sensuous -- and also creating regionally and locally relevant fragrances for Russia and the Middle East, which will launch later this year.

This new strategy allows us to further maximize our sustainable and profitable fragrance business.

In order to broaden our appeal, we are positioning our brand around Mrs.

Lauder's original belief that every woman can be beautiful.

Today, these words are more relevant than ever, as they speak to a multi-cultural and multi-generational consumer.

We have recently added models from France, Puerto Rico, and China to represent our brand globally -- not only in advertising, but also in innovative, digital, and in-store initiatives.

In fact, we are the first Western brand to have an Asian face representing us on a global basis.

These models are featured in our new multimedia campaigns created by Aerin Lauder, for Idealist Even Skintone Illuminator that began appearing in June in North America.

Across our top distribution in the first eight weeks of the launch, we saw that almost half of consumers were new to the brand.

This new consumer is younger and more ethnically diverse, with early results showing that this launch is drawing more women age 26 to 35, and more Hispanic and African-American consumers.

This launch will roll out globally this fall.

We are focused on capturing consumers when they get to the store by increasing our High Touch elements.

We are currently rolling out a new concept called the Beautiful Skin Studio, featuring special lighting to help consumers get the right skin care and foundation fit.

We are also developing a new store design concept that invites consumers into our brand, and provides better navigation and ease of shopping.

We are testing prototypes, and over the next few years, we will roll out various concepts across department stores, perfumeries, and travel retail.

To welcome a new generation of consumers to Estee Lauder, we are also focused on expanding our scope of engagement in the digital space.

Over the past year, we have quadrupled our global Facebook fan base.

We recently launched our mobile eCommerce site, and this month, we'll go live with our interactive YouTube channel.

All of these brand initiatives reflect key elements of the Company strategy, with its focus on creativity and innovation, High Touch service, local relevance, leadership in Asian skin care, and digital.

We are excited about the changes we have implemented in the Estee Lauder brand strategy, and believe our flagship will continue to be a major contributor to the overall success of our Company.

I would like to thank the Lauder family, my team, and my global colleagues for their commitment to our iconic Estee Lauder brand, as well as all of our retail and media partners across the globe for their continuous support.

And now, I will turn the call over to Rick Kunes.

Thank you, Jane, and good morning, everyone.

This morning, I will briefly cover our fiscal '11 full year and then focus my discussion on fiscal '12.

My commentary reflects our results before restructuring and special charges, which I'll cover separately.

The second full year of our strategic plan clearly demonstrated that we are on the right path, and our organization is capable of executing with excellence.

We raised guidance three times during the year as our growth consistently exceeded our expectations.

Our fourth quarter sales, excluding currency growth, was 7%, below recent trends, due in part to the $42 million sales shift into our third quarter in anticipation of the April SMI rollout that we discussed on our last call.

Our business in Japan declined slightly less than we had anticipated, affecting sales growth by 1% to 2% and EPS by about $0.03.

Advertising, merchandising and sampling investment rose dramatically in the fourth quarter as planned.

We increased advertising behind key products in countries with good momentum.

Our marketing spending jumped 130 basis points during the quarter, on top of the strong investment in the prior-year quarter.

This helped us maintain good sales momentum to start the new fiscal year.

Partly offsetting these investments were cost savings of $45 million in the quarter.

Earnings per share was $0.25 compared to $0.29 last year.

In the prior year, a tax credit added $0.15 to EPS.

Our fiscal 2011 full-year sales rose 12% versus last year in local currency.

Favorable currency movements added more than 1 percentage point of growth, resulting in a sales gain of 13% to $8.8 billion.

Net earnings for the year were $742.5 million compared to $551.7 million last year.

Diluted EPS was $3.69, 34% higher than the $2.75 reported last year.

As Fabrizio mentioned, we achieved all-time highs in a number of key measures, including sales, margins, operating income, EPS, and operating cash flow.

Every region and product category contributed to the outstanding sales improvement this year.

Europe, the Middle East, and Africa led the growth, as local currency sales rose 14%.

Every product category in virtually every country in the region contributed.

In addition, our travel retail business recorded another year of unusually strong sales, rising 24% on top of the 27% growth the channel saw last year.

International airline passenger traffic rose nearly 8% for the year.

The growth in the Asian travelers, in particular, strengthened our position in skin care, and we continue to drive conversion and improve the in-store experience.

Sales in the UK remained robust, rising 7%.

The growth was due to good response to advertising for key product launches, strong double-digit growth in our luxury and makeup artist brands, and solid London tourism.

Asia-Pacific net sales rose 10% in local currency, reflecting growth in all product categories in nearly every country.

China, again, led the region, with growth of 33% from increased consumption and distribution.

Neighboring markets of Hong Kong and Taiwan rose 22% and 15%, respectively.

Korea rose 6%, while Malaysia, Singapore and Vietnam grew double-digits on strong consumer demand.

Japan, New Zealand, and Australia's businesses were lower, as each suffered from the effects of natural disasters that contributed to weak consumer demand.

The Americas gained 10% in fiscal '11.

High-end department stores were among the top performers in the US for the year, as luxury shoppers returned.

Our sales in department stores grew over 5%, reflecting the continued strong execution of our strategy to reinvigorate our business in this key channel.

Growth was also solid in most of our alternative channels.

Sales in our freestanding stores rose 5%; salons were up 3%; and online grew 23%.

Sales in Latin America rose 24%, the fastest growth rate of any geographic area.

And our acquisition of Smashbox last July added two percentage points of growth.

Gross margin expanded 140 basis points to a record 78.1%.

Favorable product mix added 70 basis points; lower obsolescence, 20 points; and favorable manufacturing variances and positive currency garnered 30 points each.

For the year, our [PMT] initiatives improved cost of goods by $118 million.

Operating expenses as a percentage of sales decreased 40 basis points to 65.1%.

Lower selling, shipping and administrative costs, reflecting cost savings and improved leverage, contributed about 160 basis points.

Lower impairment charges saved 20 basis points and currency contributed 10 points.

Savings were partially offset by our strategic investment in advertising, merchandising and sampling of 120 basis points, where we spent approximately $340 million more than last year; and higher stock-based compensation costs of about 30 basis points.

Our cost savings initiatives reduced expenses by $81 million.

Operating income rose 31% to $1.15 billion, the first time we exceeded the $1 billion mark; and operating margin rose 180 basis points to 13.0% compared to last year.

Net interest expense declined to $63.9 million compared to $74.3 million in fiscal '10, reflecting the full-year benefit of the retirement of $200 million of debt in May of 2010.

The effective tax rate for the year was approximately 31.3%.

We recorded $59 million in returns and restructuring charges in fiscal '11.

We have now recorded a total of $239 million of the $350 million to $450 million we expect through fiscal '13.

The charges primarily reflect employee-related costs, asset and inventory write-offs, contract terminations and other special charges.

These costs were equal to $0.21 per share for the year.

Days sales outstanding increased to 41 days compared to 36 days at this time last year, when we benefited from tightened receivables in emerging markets as well as the timing of collections in the fourth quarter.

Inventory days rose to 188 compared with 166 days last year.

We have had to reassess the pace of our inventory improvement.

We built inventory to support the rollout of SMI.

Also, early in the fiscal year, we tightened inventory too quickly without the new systems and processes in place to do so properly, causing our service level to suffer.

Inventories are likely to stay slightly higher than we had previously expected, to maintain good service levels while we finish implementing SMI.

We now expect inventory days to improve to 150 to 155 days by fiscal 2014.

We generated a record $1 billion of operating cash flow compared with $957 million the previous year.

The increase primarily reflects the substantial improvement in earnings.

We spent $351 million for capital projects this year, as we continued to invest in systems, and spending for counters and stores picked up.

We also purchased Smashbox for $250 million in July of last year.

We returned substantial cash to shareholders.

During the year, we repurchased approximately 5 million shares of our Class A common stock for $397 million, and we have purchased approximately 2.8 million more shares since July 1.

Last November, our Board increased the common stock dividend to $0.75 per share, which used $148 million of cash.

Now I'd like to discuss a few assumptions for fiscal '12.

We have accomplished a great deal in the first two years of our strategy.

In this time, with the tremendous support of the global finance team, we have ingrained in the Organization a virtuous cycle of financial discipline.

We are planning more effectively by budgeting our costs based on realistic sales targets and strict productivity guidelines.

As we execute our plans during the year, we are able to adjust by releasing more investment dollars if sales targets are overachieved, or restraining spending if they are not.

We maintain our discipline by insisting that only a portion of every dollar in overachievement is reinvested.

Finally, the incremental investments are carefully targeted to the most successful products in the fastest-growing markets and channels to drive even higher returns.

The incredible results we saw in fiscal '11 allowed us to invest substantially in the fourth quarter to build momentum into fiscal '12.

Our stated goal is to grow our top line at least 1% faster than the growth of global prestige beauty.

In fiscal '12, our sales are forecasted to grow 6% to 8%, excluding currency.

We have begun to take a more strategic view on pricing, looking across our brands, countries and the competitive landscape.

It's our goal to be more thoughtful with our pricing decisions in the future.

As we build our capabilities, our objective for this year is to increase prices at least with inflation, and our sales estimates include about 2 percentage points of growth from pricing.

Based on current exchange rates and the forecasted slight strengthening of the dollar over the course of our fiscal year, we estimate a negative FX impact of less than 1% on our full year.

We expect gross margins to improve by about 150 to 170 basis points for the fiscal year, driven by the pricing I just mentioned, a planned strategic shift of promotional spending into advertising, as well as other costs of goods improvements and favorable mix.

Operating expenses in fiscal '12 are expected to rise about 90 to 110 basis points.

We expect to benefit from improved leverage and from savings initiatives.

These positives will be more than offset by a ramp-up in certain strategic investments.

First, there is the shift of spending from promo to advertising to support our full strategies.

Second, a significant investment in SMI as we roll out the program to a peak number of affiliates this year.

Third, we are transforming the consumer's in-store experience around the world, and some costs associated with store expansion and modernization will impact our operating expenses.

Fourth, we are updating several significant systems, including those used at point of sale, human resources maintenance, consumer relations management, and lastly, equity-based compensation costs are increasing.

We expect incremental savings from our PMT initiatives this year of $100 million to $125 million.

Three-quarters are expected to come from cost of goods; the rest mainly from indirect procurement and other operating expenses.

At this time, we believe we can generate total savings from the program of between $675 million and $725 million through fiscal '13.

We expect operating margins to rise by about 50 to 70 basis points this year, bringing us closer to our long-range targets.

The tax rate is expected to be 31% to 33% and can vary by quarter.

As you know, the rate can be affected by changes in tax rates, the geographic mix of our earnings, and fluctuations in the amounts of tax reserves.

Diluted EPS for fiscal 2012 is expected to be between $4.00 and $4.20.

We expect to generate slightly more than $1.1 billion in cash flow from operations.

We plan to increase capital spending to between $400 million and $450 million.

Aside from SAP, we are investing in the systems and initiatives I mentioned a moment ago.

Our priorities for uses of cash remain the same -- first and foremost, we invest in the business.

We continue to search for strategic acquisitions with favorable return profiles.

We plan to repurchase shares against our remaining 10 million share authorization to broadly offset stock-based compensation.

And our Board routinely reviews our dividend policy.

We expect to take restructuring and other special charges in fiscal '12 of $25 million to $50 million, with about $10 million in the first quarter.

Our first quarter should reflect the momentum from our fourth quarter advertising spending and new product launches, with sales expected to grow 11% to 13% in local currency.

Foreign exchange could benefit growth by 3 to 4 percentage points.

EPS for the quarter is estimated to come in between $1.10 and $1.20.

In closing, we are clearly pleased with the progress on our strategy and with the trajectory of our business.

These sentiments are embodied in our new operating margin target of 14.5% to 15% by the end of fiscal '14.

We are confident that our strategy will enable us to achieve operating margin improvement annually over the next few years.

This level of improvement should allow us to maintain our ROIC goal of at least 21% to 22%.

And now, we'd be happy to take your questions.

(Operator Instructions).

Caroline Levy, CLSA.

As always, given the first quarter's strength, your guidance looks very, very conservative, particularly if you expect 50 basis points of margin improvement this fiscal year, and yet only expect to get to 14.5% EBIT margin further out.

Can you explain why you are cautious on the margin?

And also, if your sales come in as strong as they have been, as strongly as they have been, do you just keep ramping up that advertising no matter what, to keep accelerating the top line?

Or are you going to let some flow through, as happened this year, because you did beat your initial guidance substantially?

Yes -- now, first of all, our range includes, at the bottom of it, the assumption that the current turmoil will create a certain impact on the global markets.

We have -- today, we see the market -- we were seeing the market growing about 4% globally.

At the bottom of our range, we assume there will be one or two points of impact on the market globally.

And we assume that even in that case, we will continue making our long-term strategic investments that we have decided to do, to create not a short-term rally, but rather a 10 years' continued development of topline and bottom-line for this Company and exploit our momentum.

At the top of our range, on the contrary, we assume that the market will continue to be as we originally estimated, that the current turmoil will not have a significant impact on consumption in the following months.

Now part of your question is why this happens after the first quarter.

Because, in fact, in the first quarter to date, we do not see any impact on consumption.

Actually, we see things pretty in line with what we estimated.

And that's why we have a pretty bullish conviction that we will have a very strong first quarter, as you see from our estimate.

On the other side, we assume that if there will be an impact, this impact will be after the first quarter.

And would you spend up, if you do see rather than an impact from a global slowdown, if you see continued strength like in the first quarter, is your plan just to accelerate the rollout of your initiatives in advertising such that you just don't see the margin expanding much more than you've guided to?

Yes, first of all, let me clarify that where we are spending the money next year, some expenditure is temporary.

What I mean -- we are going to spend a lot in SMI in creating the systems that will make us [winning] for the next several years, in creating the HR system and the retail system to continue winning in emerging markets.

So some of it is not about advertising.

And we don't plan to stop this investment in our assumptions, even if the market will become softer.

Some of it is advertising.

And again, we don't plan to stop advertising behind our major initiatives in case it would be just a moderate softness of the market.

Because we see great opportunity to build market share and exploit our strong momentum.

So that is the logic behind, if you want, our guidelines and particularly, our plan.

Rick, do you want to add something?

Yes, there are two other things to consider, Caroline.

One is, there is, at least in the FX rates that we're using for the rest of the year, there is an implied negative impact from foreign exchange for the balance of the year of about 2%.

We see the dollar strengthening against some of our major currencies.

So that's one of the things that also makes that back portion of the sales growth look a little bit slower than you would think.

And also I did in my prepared remarks talk about a business model that we had built, which is based on realistic sales, and which has a level of flexibility within it that allows us to invest in opportunities if we start to do better, and also pull-backs in some areas where, if things go against us, to be able to protect our profitability.

But also, if things are in a very positive way, to be able to invest in opportunities but also let some of that money drop to the bottom line.

Thank you so much.

Nik Modi, UBS.

Just a very quick question on your emerging-markets business.

If you can just give us some perspective on the margin profile there in those markets relative to the developed world, and as well as the corporate average -- just to get a sense.

And any thoughts on how the progression of margins in those markets will develop over the next couple of years.

Yes, this is very different by market.

So we have some emerging markets like China, where margin is already pretty strong and not dilutive to the Company.

There are others where we plan to enter more aggressive, like Brazil, where we are at the beginning of the journey.

And obviously, the margin is an investment period for the next few years.

Nik, the way we enter these emerging markets is we anticipate over the medium-term that a lot of our growth will come from these markets.

So we start with a plan that says that we will reach a level of profitability which is accretive to the Company.

And then we reverse-engineer.

And that's what Fabrizio was saying -- in some markets, we're earlier on in that process.

And like a Brazil, we're investing because we see a big opportunity, but it also probably is somewhat lower in overall profitability over the shorter term.

And then a market like China, which is certainly not dilutive at all to the regional profitability and is growing very nicely, and we have great prospects for in the longer term.

And just as a follow-up, Rick, if you take China -- because it's obviously been a great success for you -- if you could just take China and help us understand how quickly it took to the investment period -- because I know you ramped pretty quickly in that market -- to it being non-margin dilutive to the overall franchise.

Yes.

In the case -- now I'm going to stretch my memory a little bit -- but we started to invest in China over probably a longer period than in some other markets because of the huge potential that's there.

So we've been investing five to seven years, and probably reached a level of profitability after about the last three or two or three years, we've been at a level which is equal to, and now we're starting to exceed the regional average.

So it depends on the opportunity.

And, for instance, Brazil is a big opportunity for us, so that one might be -- have a little bit longer glide path.

When you enter into a smaller market like a Vietnam, we want to improve the profitability there fairly quickly.

Thank you.

Very helpful.

Lauren Lieberman, Barclays Capital.

I just wanted to ask you a bit about hair care.

I thought it was interesting in the press release you guys specifically commented on hair care as being the growth leader in 2012, which is just -- I think that's the first time I can ever recall that kind of statement being made.

So is it about new product launch activity, distribution or something to think about in terms of difficult comparisons in the pipeline of skin care?

Thanks.

Sure.

I think, Lauren, first, congratulations on your marriage.

Thank you very much.

And you too.

I mean, you didn't get married, but (laughter) you know what I mean.

I know what you mean.

I think we have mentioned hair care.

Hair care is off a smaller base, so the growth rate certainly is fast.

But I think the key message that we're saying is that we believe now we have a business model in hair care, which is going to work for us.

And it's been very successful in Sephora.

And we look with Bumble and we look to expand that around the world.

And we also have what we believe is a model that's going to work for Ojon and Aveda.

So hair care is an area of optimism for us as a Company, but it is, obviously, off a very small piece of business relative to the other parts.

Yes and (multiple speakers) --

And is (multiple speakers) -- go ahead.

I'm sorry, Fabrizio.

The only thing I wanted to add is that in hair care, we have been working some time to find the right model for prestige hair care that can obviously continue to develop salon prestige hair care, but also serve the purpose of growing the retail aspect of prestige hair care for the retailers that we want to play with it.

And as you know, we have Aveda that plays in freestanding stores in that area, but now we have Bumble and Ojon that start playing a significant role with prestige retailers.

And the second big leg is the internationalization of our business.

Historically, our hair care business has been mainly in the US.

We have now started deploying plans for going in several other countries around the globe with our portfolio.

David Wu, Telsey Advisory Group.

First question -- in terms of the first quarter sales guidance, that does appear pretty robust, especially just given the tougher comparison.

Can you talk about what's driving the growth there and if there's any benefit at all from a difference in timing of launches or deliveries?

Yes, what is driving the growth is, first of all, so far, in the first quarter, we see the markets staying pretty solid, first of all.

Second, as you know, we have invested heavily in pulling on our key initiatives in the last quarter of 2011, and we see the benefit of this investment also in the first quarter of 2012.

In fact, a lot of this growth is driven by basically these initiatives.

And some of them are extremely successful.

And then, third, is the overall momentum on the business that we are having and seeing, and the continued momentum, particularly in areas like travel retail.

Excellent.

And as we look at the specialty retail channel specifically, like the Sephoras of the world, what percentage of the business is in this channel?

And can you talk about how you're looking to expand further?

You've done, obviously, a great job most recently with Bumble and bumble, and I was wondering which other brands could you introduce?

Thank you.

Again, first of all, we are actively working on specialty stores across the Group.

And we have the large majority of our portfolio in many parts of the globe.

But is very different by country, because the portfolio is, in specialty stores around the globe, depends, first of all, from the portfolio in the country, from the relative success of the brands in the country.

As far as your question on the US, we can continue to expand specialty stores; but independently from adding more brands, we can continue to expand the brands we have and making our marketing plans much more attuned to this channel to grow in this channel.

Great.

Thank you very much.

Ali Dibadj, Bernstein.

I just wanted to get your thoughts on something we noticed, which is just -- when you look through this release, it felt a lot more subdued from a market share gain commentary -- so, particularly when we listen to you on the quarter.

So, in skin care, you mentioned it [but] in certain countries; makeup, you don't really mention it; fragrance, you don't really mention it; you don't really mention it by geography except for Europe and Middle East, where you [say] in certain countries again.

Can you talk a little bit about that observation?

Is it true, why?

Where are you seeing differences?

And perhaps the broader question of linking it to the more investment you've seen and that you expect going forward in the context of what we're hearing from competitors, what you're seeing from competitors -- arguably, they're getting their act together as well --and the competitive environment getting tougher here.

So, share as it relates to how much investment you see going forward to grow the way you've been growing.

Yes.

Let me start and then let Rick add a few points.

First of all, I agree with what you just said.

I believe that competition [start being acting] together.

And in fact, we assume particularly, as of the second quarter 2012, that we will see a much tougher competitive environment.

And we know about announcement of launches and activities that our competitors are doing that, obviously, we will need to face and confront ourselves with.

So, however, we have been building market share pretty aggressively in skin care.

Skin care has been our priority, and in skin care, we have been aggressively [being market] share across many, many countries.

We have not yet been able to grow market share in hair care and fragrances at equal pace.

And in makeup is the area where we want now to further accelerate and increase more market share next fiscal year starting in 2012.

So that's our picture.

In other words, we had a terrific model behind skin care in 2011.

We want now to use more of the winning elements of this marketing model also in makeup.

And then later on, we will further expand those in the other categories.

And we are well conscious and we are reflecting in our guidelines that we will have a tougher competitive environment.

And Ali, regarding market share, as Fabrizio mentioned during his prepared remarks, we believe that we grew our share -- grew our business by about three times the overall prestige market growth in this past year.

And when you look to next year, we're looking for the prestige global market to grow 3% to 4%.

And our guidance of 6% to 8% in comparable currency says that we're going to grow double the prestige grade, so -- or rate, rather -- so, again, growing market share.

And our strategy is really about growing our business at least 1% ahead of market in a sustainable and profitable way.

And in particular, next year, we have a big opportunity to grow share in emerging markets in our travel retail business.

And then when you get into our P&L, we see one more year of really significant improvements in gross margin.

And we're using some of that money to fund a portion of very strategic initiatives around modernization and building a foundation for the future.

And it allows us to take an opportunity to invest while we're strong, quite honestly, while our business is doing pretty well.

And we think that that investment and the business model that we've built is really a formula for success, not only in fiscal '12, but also over the next several years.

Okay.

And just to tie that, if you would, with some of the commentary from earlier questions, whether it be about the deceleration that you're modeling in the back half of the year in the last three quarters of the year.

And in particular, around I think one of the first questions, which was, again, kind of an observation from the press release -- if you listened to you guys a while ago, a year ago, all of the risks sounded like this listed every possible natural disaster that would be out there, whether it be a volcano, whether it be H1N1, whether it be whatever -- possibility was out there, you kind of embed in your numbers.

And although you said something differently on the call -- and maybe some clarification here would be helpful -- on the press release, you do say the United States and certain European countries will have -- we expect a slowdown of volatility will not have a major impact on consumer spending in the business, so we're not modeling that.

But on the call, you said it kind of does fit into the low end.

So just tying all that together, is it competition that's really driving the slowdown you're expecting in the three last quarters of this fiscal year?

Is it that you actually are including some of this United States and Europe stuff for that or you're not?

I'm not sure in the press release was what you said -- just tying all that together would be helpful, because there seems to be a few disconnects, at least in my head.

Let me try to reconnect this.

First of all, what we say is that we have not assumed a major global recession.

When we had a major global recession caused by the current issues of debt in the US and Europe, if we had a global recession, we will go back to markets where we're stable as we have seen in '08 and in '09.

So we have not assumed that.

But we have assumed a certain softening of the consumption in the bottom of our guideline, which is in the range of 1 or 2 points.

So that's the first reconnect.

The second -- yes, we have assumed that after the first quarter, we will see an intensified competitive environment.

And third, the recent FX risk also that may happen in the -- after the second quarter, in our opinion.

And that's what we have taken into account.

There are no volcanoes and there are now earthquakes in our guidelines for the time being.

Okay.

Thanks a lot.

Mark Astrachan, Stifel Nicolaus.

A couple of follow-ups to some previous questions.

One on the last point -- could you parcel out the difference between volume and pricing, in terms of views of global prestige beauty categories, growth on a volume basis?

I know you talked a bit about the 6% to 8% and 3% to 4% on it, I think that was a sales number.

So, if you could give us a bit of help there, and including what the benefit of pricing in your numbers was in fiscal 2011.

And then shifting to another question on emerging markets, could you talk a bit about what percent of sales emerging markets are now?

And then in terms of what percent of those markets are you importing product basically at a lower price, essentially subsidizing what's being sold there, given that you're not producing in those markets?

And is there an opportunity over time to start producing in those markets, both for those markets as well as for other markets globally?

Okay.

Certainly, Mark, we'll try to catch all of those.

First, in our numbers -- in fiscal 2012, we have about 2% of our sales growth is related to price.

In fiscal '11, it was about 1%.

We see the global market growing about 3% to 4%, prestige beauty market, and we believe that the pricing impact on that is similar to ours, so roughly 1% to 2% in pricing is built into that number.

So unit growth of prestige beauty on a global basis in the 2% to 3% range.

Regarding emerging markets, they are about 10% of our overall business.

And it is unlikely that we would be in a situation, with some exceptions, that we would look to produce locally in many of the emerging markets in which our business is growing, just because the volumes and the marketing aspects of being produced in some of those markets would probably make us reach a decision not to do so.

And the one exception might be with Brazil, where as we look to expand our business, there may be some opportunities to do some local manufacturing there, because the duty rates are so high.

Great.

And so that includes China as well, the 10%?

Yes, it does.

Perfect.

Thank you.

Alex Fuhrman, Piper Jaffray.

Just a couple of quick ones for you here.

It seems like MAC is kind of the brand that really sort of led us into the recession.

And it was also the indicator when we were coming out of the recession.

I'm curious to see what MAC stores are telling you about the consumer right now.

And then thinking about your opportunity in China and emerging markets in general, should we think about the growth this year as being more about more locations in more cities?

Or is it more really more a distribution game of getting more brands into your existing distribution?

Okay.

I mean, what we have seen, frankly, on MAC, like on all our top brands in this moment, in that consumption in this month so far is normal, meaning it is on the recovery trend we have seen in 2011.

And MAC particularly has a lot of potential internationally, because there are a lot of markets where MAC has just launched or, as for the time being, a low level of awareness.

And so we are working to continue building this awareness and this penetration.

And when we reach a good level of awareness, a good level of penetration, MAC is normally a very successful brand in every country we are.

As far as the second part of your question is what we see in China, yes, we see in China an increase of number of cities.

But China is really particularly driven by our Estee Lauder brand, by the plans of our Estee Lauder brand, which is the biggest of our brands in China and in Greater China in general.

So I would like Jane to give you the rest of this answer.

Well, for the Estee Lauder brand, we see China as a huge opportunity for growth.

And that's growth within our existing distribution and also the opportunity to reach out to new cities and to new consumers.

And what you need to understand about our leadership in China is really that it benefits us globally, because our mission is to appeal to Chinese beauty consumers around the world -- where they travel, where they live -- and this is a very sophisticated skin care consumer.

So as we garner learnings from China, from our Asia Innovation Center in Shanghai, this benefits really across the globe.

So we see a huge opportunity not just in China itself, not just in Greater China, but also in the market and other markets, and of course, in travel retail business as well.

Great.

That's really helpful, guys.

Thanks a lot and good luck this year.

Thank you.

Alice Longley, Buckingham Research.

I have two questions.

First of all, the question is timing relative to quarters.

Oftentimes, your quarters are weighted oddly because of the timing of shipments and marketing.

Could you give us a first look at the second quarter and tell us whether the first quarter is in any way benefiting from timing of shipments or marketing at the expense of the second quarter?

Thanks.

So, Alice, we mentioned that the first quarter is certainly benefiting from our investments in the fourth quarter in marketing activities.

And that's a given.

And also, obviously, our first quarter is not affected at all by some of the turmoil that we've seen in the marketplace just most recently.

So that's the benefit for the first quarter.

Regarding the second quarter, I mean, really, we'll give you guidance on that on the first quarter and the full year.

You are right -- our quarters do move based on our marketing programs, and so we'd prefer to go just one quarter out and then give you our full-year guidance, which is obviously our focus.

Okay.

But there's nothing that you know about the first quarter is benefiting from something that could hurt the second quarter?

No.

No, the second quarter could be impacted by the things that Fabrizio mentioned earlier more so than anything we're doing in the first quarter.

Right.

Okay.

And then the second question is about the breakout of sales.

Your projection for the year is 6% to 8% for you; you've already told us that 2 percentage points of that is price.

How much of that is mix and a reduction in trade deals?

There's no reduction in trade deals, and I'm not sure what you mean --?

Well, I thought you said you have a -- you're shifting from promotional activity to advertising.

So I guess, how much is the cut in promotional activity coming off of sales?

Oh, so our promotional -- the benefiting cost of goods, so the gift programs and promotional programs are going down about 40 basis points year-over-year.

We're investing that money into advertising.

We're hopeful that that impact of pulling less promotional activity and the decrease in sales is more than offset by obviously the business-building activities of our marketing programs and advertising.

So we don't really see it as a negative on sales year-over-year.

Yes, if I can add -- what we (multiple speakers) --

Well, no, I thought that would help sales, is the reduction in the promotional activity; but you're saying no.

No.

Okay.

No.

Let me clarify -- when the promotional activity -- our promotional activity are not pricing; are things like gifts.

So the gifts are in cost of goods.

So when we reduce promotional activities, which includes gifting, you will see a reduction in cost of goods and an increase in OpEx.

Because we will move these reduced gift costs into more pulled advertising.

And that's what you will see in the P&L.

You will not see an interim growth.

Okay.

And then mix -- is that going to have an impact on sales?

No.

No, that is not our assumption.

The only impact on sales is that 2% of [prizing] -- the rest is us growing volumes ahead of the market.

Okay.

Thank you.

That's all.

Linda Bolton-Weiser, Caris.

Can you talk a little bit more about the initiatives to modify some of the selling methods in department stores?

You know, having some different -- like open stock opportunities for consumers in some stores?

We were in London, I think, at Selfridges, and we saw the different colored bracelets that consumers could wear in the Clinique area for different levels of service.

Can you just talk about what percentage of stores -- give us some numbers about how much penetration into your whole distribution you've made with these new methods?

And where we are in that process globally?

Yes.

First of all, I would say that one of the big achievements of 2011 is the great results in North America, and particularly in North American department stores.

Our department store business here in the US and globally had a tremendous year.

And we've been able to drive and to help our retail partners to drive traffic in-store and to drive our business.

Mainly, what we define the pull/push model -- meaning having very big initiatives on our big brands driven by advertising.

And this advertising brings more traffic in-store.

And then the improvement of our High Touch models, including the examples of service that you are bringing, will then make our consumer more loyal and provide even more, and create the prestige cosmetic positive circle that we are now exploiting with department stores.

So that's the big idea.

And frankly, this is working very, very well in the US and around the globe.

I would like Jane to -- then to answer more specific to your question and your example.

Well, I just think that what we need to do is modernize with our consumer.

And the way she shops today is evolving.

And there are customers who want a tremendous amount of service.

There are customers who want to just browse.

There are customers that want something in the middle.

So when you reference the bracelets in Clinique, that's a concept they've developed called Service As You Like It.

And that, I guess, is what you're referencing probably in Selfridges.

In terms of the Lauder brand, we're doing much of the same thing.

We recognize the different ways that consumers like to shop.

We are modifying our counter design and our counter experience, allowing for this.

We've established a couple of prototypes in North America, and we will be rolling this out across our distribution, across perfumeries, travel retail, and department stores.

So that we really can modernize the brand experience and provide both for better navigation, so the customers understand how to shop our brand, and understand what products are bestsellers and what products are right for them.

So it sounds like there is a lot of opportunity to come, actually, on that front.

There is.

And there's opportunity not only in the big brands but really all of our brands are working on new selling opportunities, new ways to reach new consumers.

And when you look at the transformation of the in-store experience, and you combine that with the enormous opportunity we have in the digital space, I think those are two huge modernization efforts going on across the Company.

Can I also follow-up and ask about, in terms of your SKU reduction initiatives, I think you said maybe 7% or so last fiscal year SKU reductions, is that correct?

And how did it turn out this year in terms of SKU reductions?

And how is that playing into the inventory outlook?

This year, we were at flat, also because we had the addition of Smashbox.

And next year, we plan to make another step in further reduction.

Bill Schmitz, Deutsche Bank.

Is there any way to bridge the $200 million of year-over-year increase in SG&A costs?

You know, just in terms of, like, where the additional spending come from.

Obviously, FX is probably about 5% of that, but is there a more detailed way to make that bridge work?

And Bill, are you saying from '10 to '11?

So our '11 actual results?

Yes, exactly.

I know you did it for the year, but there wasn't a lot of granularity on the quarter.

Sure.

So -- and we didn't on the quarter, so I'm sorry for that.

But our advertising, merchandising and sampling expense in the quarter went up about 130 basis points.

I think, for the most part, that was the biggest single increase.

And as we said, for the full fiscal year, that was really the only major category of expense that went up as a percentage of sales.

All the other major categories as a percentage of sales went down in spending -- the total value of which I don't have off the top of my head, but maybe Dennis can give you a little more color on that, but --.

Yes, that's more than enough; it's perfect.

And then I know it's kind of early, but what are you guys thinking on the Christmas season?

I know you set the planogram typically in January or February.

And the reason I ask the question is, it sounds like maybe you got a little bit too lean on inventory.

So, the cautious guidance for that holiday season -- is any of that, like, allocation or maybe not enough inventory to accommodate demand for the season?

No, I think that early in '11, Bill, was what I was referencing in my comments.

Our service level was hurt because I think we were a little too tight on inventory before we actually had SAP up and running, and all the processes and systems in place to help us manage that better.

So we intentionally let our inventory build to make sure that we improved our service level.

I don't know how much you could say that affected our Christmas season of last year, but we wouldn't anticipate, certainly, any impact effect from shortage of supply on this fiscal year's Christmas.

Okay.

Got it.

And then just one last one, if I could.

You say 14.5% to 15% margin by fiscal '14, is that leaving fiscal '14?

Or is that for the full year?

Well, that would be the full year margin, right?

So we would achieve, if we're successful, we would have a margin at the end of fiscal '14 which would be 14.5% to 15% of sales.

Okay.

I just wanted to clarify up because you said the end of '14, but it's for the full year?

Yes.

Like it will be a -- okay.

All right.

That's perfect.

Thanks very much.

Connie Maneaty, BMO Capital Markets.

I have a couple of questions on the gross margin.

Could you give us the big contributors to the change in fiscal '11 as well as what you expect in fiscal '12?

And then also you said the fiscal '12 would probably be your last big year for gross margin improvement; but I was under the impression that once SAP is fully implemented, you would have an opportunity to take a look at distribution and other costs of goods-related costs.

So if you could clarify that, that'd be helpful.

Then I have a follow-up.

Sure.

So the biggest movements in fiscal 2011 were related to managing our product mix at lower obsolescence provisions, because even though our inventory built a little bit, it's very fresh inventory, if you will, so it doesn't require a provision for obsolescence.

There was some foreign exchange benefit in there and some pricing, but not too much.

In fiscal '12, we have those same elements working in our favor, but with the added benefit of some of the price increases that we were talking about, so pricing is a little bit more of a factor in fiscal 2012 cost of goods and gross margin improvement.

When you -- you're absolutely correct -- that SAP will offer us the opportunity to continue to improve.

And what we were saying was during the period that we've outlined, which is through fiscal '14, that this is a big year of gross margin improvement.

It will be somewhat less, but we do see the opportunity for gross margin to continue to improve in '14, '15, and '16 as a result of the implementation of SAP.

And I'd just like to add that also as a result of SAP and what we call SMI, which are the processes that SAP will enable, we'll see also the opportunity to improve, at this point, the entire OpEx line more after 2014 to continue our overall margin progress.

Right.

The follow-up is this -- what is the difference in these two products -- Even Better Clinical and now the Idealist with Even Skintone Illuminator?

Is what you've put into Idealist the same concept as Even Better Clinical, and so you're leveraging the investments that you made in Clinique into the Estee Lauder -- this Estee Lauder product?

Or are these two different technologies?

I will say -- this is Jane -- that they are two distinctly different products with different claims and a different point of view.

The Clinique product is very focused on being a Dark Spot Corrector.

The Lauder product is focused on general evening of skintone -- discolorations, total aspect of evenness as well as radiance and glow.

The beauty of our Company is that we are able to take technologies and use them across brands, adding different ingredients, different concepts, and bringing them to consumers in different channels in different price points, et cetera.

But they are extremely different.

And if you look closely at the advertising and the push behind each of them, I think you will see that.

And that's our strength as a Company.

Thank you.

[Lee First], Wellington Shields.

I was wondering if you could comment on your strategy in Japan with respect to promotion and advertising?

It's such a large and fast-growing market.

Is it a laboratory for experimentation?

Or with respect to your costs in your profit margins?

Or would you say it's you're managing it similarly to the other countries in which you operate?

No, you're right, Japan is a market where consumers are very sophisticated and very demanding.

So it is a very important market for experimentation learning.

And we do that.

We have research centers.

We have the ability to [roll] our brands to really [told] to the Japanese consumer and develop products close to them.

And that's part of our strategy.

So, yes, we use Japan a lot as an exploration market for our innovation across brands, including Estee Lauder and Clinique and many others.

In term of what we expect from the market today in advertising and promotion, Japan will follow the same strategy of advertising and promotion that we are following in the other big developed markets, meaning we are in the process of reducing the amount of promotion and increasing the amount of pull via magazines, TV advertising, and digital activities.

Japan is particularly developing the digital area and within digital and mobile.

And so Japan is the market where we are experimenting and learning more on the digitals mobile front.

However, said this, we expect Japan to recover gradually from the earthquake.

And for the moment, the market in Japan remain relatively soft and I would say stable versus previous year.

And because of the earthquake, Japan is not yet developing at the level that we hope later on in the course of the year will happen.

Could you answer the same question with respect to China, please?

China, yes, I could say the same thing for China in terms of using China to develop products to get exploration about products.

We just opened a research center in Shanghai with that purpose.

And yes, there was a brand, we just brought the example to you of the Nutrition product that was developed in China and now is being expanded across the globe.

However, it's a very different picture in terms of the situation in China in terms of market growth.

Actually, China at this moment is the fastest-growing market and that's why it's a market where we're putting a lot of priority into more investments.

Lee First But because it's growing so quickly, do you do the same kind of gift-with-purchase (multiple speakers) that you do elsewhere?

No, actually, in all emerging markets, we are building a new model that starts avoiding the promotional gift-with-purchase development.

In fact, in developed markets where gift-with-purchase has been a habit, we are trying to reduce the input.

In emerging markets, where we are building the business from scratch, we are building it without gift-with-purchase or with a very minimal amount of promotions.

Thank you.

Our final question comes from Bill Schmitz.

Just two quick follow-ups.

Did you say what travel retail growth was in the quarter?

We didn't say in the quarter.

Travel retail for the quarter was about mid-teens.

Mid-teens.

Okay, got it.

Because if I put it in the model, I thought you said 24% for the year.

So if you average it out, it seems like it doesn't really work -- is that right, 24%, though, for the year, also?

Yes, it was 24% for the year and it was mid-teens for the quarter, yes.

Okay.

Awesome.

And then, when do you think you're going to be done rightsizing the fragrance business?

Like, when will that have the right base to grow from?

I think we have done it.

Now we have the right base to grow from.

We have rightsized, meaning we have taken out of the system the part of the fragrance business that really had no profitability, no sustainability.

And now we have a more solid base with more solid starting point in terms of profitability, and now we can start growing and leveraging the growth for even more profit.

Okay.

That's very helpful.

Thanks for letting me get back on.

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.