The Estee Lauder Companies Inc. 2008 Annual Report
[Chairman's Message]
[Chief Executive's Review]
[Fiscal 2008 Highlights]
[Multi-National Expansion]
[Multi-Channel Distribution]
[Multi-Brand Leadership]
[Portfolio of Brands]
[Board of Directors]
[Executive Officers]
[Financial Section]
[Stockholder Information]
[Environmental Profile]
[Form 10K]
Leading Change for Growth William P. Lauder photo

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Chief Executive's Review

Dear Fellow Stockholders:

The Estée Lauder Companies' achievements in fiscal 2008 were outstanding by any standard. Global sales reached an all-time record of nearly $8 billion and earnings per share rose by double digits. Our growth was broad-based, with particular strength in emerging markets and new distribution channels. These results are even more notable given the multiple economic challenges-particularly in the United States. We benefited from our ongoing strategy to build a diversified business base that is multi-national, multi-channel and multi-brand.

After a year of solid accomplishments, it is important to ask what lies ahead. How will we lead the change necessary for growth? The answer is that we must commit ourselves to delivering even greater growth in the future-not just top-line growth, but strong, sustainable and more profitable growth. And, to take our business to the next level, it is crucial that we stay keenly focused on the long term, understanding that we are managing for the next quarter century, not for the next fiscal quarter.

Long-term entrepreneurial growth is in our blood-from our founder to the front lines at the counter. Creativity is one of our outstanding competitive assets. We plan to deliver profitable growth by marrying these fundamental strengths with more sharply focused strategies. Those strengths include our ability to listen to consumers, our creative passion and our talented, dedicated employees. To capitalize on our strengths, we will align our strategies more acutely: prioritizing our investments, exercising greater financial discipline and operating in a more closely aligned manner across business units and borders.

I am delighted that Fabrizio Freda has joined us as President and Chief Operating Officer to help drive these strategies forward. Fabrizio is a highly accomplished executive with more than two decades of experience in global consumer products and luxury goods companies. His international perspective and operational and financial insight will help us better align our goals and allocate investments to those brands, regions and channels that offer exceptional growth opportunities. With an eye toward ensuring continuity and consistent superior performance over the long term, I have mapped out a succession plan that anticipates Fabrizio becoming Chief Executive Officer within two years of his hire.

With our strong foundation and sharper alignment, we will continue our efforts to diversify across regions, channels and product categories. This approach has provided numerous avenues of opportunity in the past and I am confident it will be the source of even greater profitable growth in the years ahead.

Our growth in 2008 was powered to a large extent by our international business. Nearly 60 percent of our total sales came from outside the United States this year, with our strongest gains coming from emerging markets such as China, Russia, Latin America, Eastern Europe and the Middle East. Both China and Russia, for example, exceeded $100 million in sales for the first time. We also made progress in more established markets, as the European region topped the $3 billion sales mark.

Whatever the local language, our brands speak to the aspirations of millions of global consumers. In India, where we see immense potential, Estée Lauder and Clinique both opened stores in fiscal 2008, becoming our fifth and sixth brands in the country. We purchased a stake in Forest Essentials, a prestige Indian beauty brand based on ancient naturalistic Ayurvedic principles, to gain a greater understanding of Indian beauty traditions.

We are rolling out our brands in other promising international markets at a steady pace, as our insights into consumers' desires translate into exciting new products and new markets. M·A·C has expanded to Korea and Indonesia, for example, while La Mer has opened in Russia and Dubai, and Bobbi Brown will soon be in Russia.

As consumers exercise their ability to shop when, where and how they want, new channels of distribution are becoming increasingly important to us. Our online sales grew 40 percent this past fiscal year, with particularly strong performances by La Mer, Estée Lauder, Aveda and Jo Malone. Direct response TV is another exciting shopping venue where many of our brands have been smash hits-including Clinique, Origins, Bobbi Brown and Ojon.

The growth in our travel retail business also has been robust, with sales soaring approximately 20 percent this year as our brands expanded in airport locations including Bangkok, Buenos Aires, London, Moscow, Paris, Seoul, Singapore and Tel Aviv.

Increasingly, our brands are sold in retail locations beyond traditional department stores. Our 577 single-brand, freestanding stores worldwide are showcases for brands such as M·A·C, Aveda, Origins, Jo Malone and Estée Lauder. Darphin has been a pioneer in spas in Europe and, recently, Asia. Origins' Dr. Andrew Weil integrative wellness-based products have launched in European pharmacies.

We continue to nurture our traditional department store channel by creating innovative programs designed to bring consumers to our counters. Globally, department stores still account for more than 50 percent of our net sales.

BeautyBank, our entrepreneurial think tank dedicated to developing new brands and products for consumers shopping outside the traditional department store channel, is leading the way in leveraging the power of new distribution points. Following strong sales in the U.S.-based Kohl's Department Stores, BeautyBank rolled out its top-selling Tri-Aktiline Instant Deep Wrinkle Filler internationally, with a groundbreaking, multi-channel, multi-national campaign in specialty cosmetics stores, direct response TV, the Internet and travel retail. The launch began on the Champs Elysées in Paris and traveled to Taiwan, Korea, the United Kingdom, Germany, Hawaii, Turkey, and finally Australia, with a new, highly profitable sales model.

The Estée Lauder Companies' diverse portfolio of brands is an exceptional platform for growth. The vast majority of our sales still come from brands that we created internally, or that have expanded tremendously under our stewardship, a testament to our organic brand-building strength.

Estée Lauder is the fastest-growing luxury brand in many Asian and European markets. M·A·C continues to be the leading prestige makeup line in North America and its global net sales rose by double-digits. Clinique had strong sales gains in Russia, China, Korea and the United Kingdom.

Many of our highly successful product launches are detailed throughout the following pages. Looking ahead at our established brands, Estée Lauder's new Sensuous fragrance went on sale with a fabulous ad campaign and Clinique Medical, the line of advanced, physician-dispensed skin care products created with Allergan, Inc., will be launched soon. We are expanding the portfolio with new brands, creating BeautyBank's Eyes by Design exclusively for the home shopping medium, HSN, and last year we added the wildcrafted beauty of Ojon hair and skin care. These and many other examples reflect our talent for creating and identifying products that speak to the desires of consumers worldwide.

To support profitable growth across all of our businesses, we continue to make progress in our Strategic Modernization Initiative (SMI). By uniting our global organization with common systems, functions and practices, SMI will help maximize efficiency, unlock shared innovation and enable superior quality and customer service. We expect that the majority of this transformation will be completed by the end of fiscal 2012.

It also is extremely important for us to be responsible global citizens. At a time of growing concern for the environment, among beauty companies we are one of the leaders in the installation and use of renewable energy. The equivalent of all electricity utilized by our Global Operations division is generated from green sources. Our packaging is moving towards a Cradle to Cradle philosophy to reduce waste and energy use wherever possible. Our ingredients are based on a sustainable sourcing policy wherever we do business. Our Ojon business, where we are providing economic opportunity for indigenous peoples in Central America, is a good example of our commitment to social responsibility. We also provided approximately $31 million in financial and in-kind support for organizations such as the M·A·C AIDS Fund, the Breast Cancer Research Foundation and other philanthropic programs.

We are honored that our efforts to be a socially responsible company contributed to the number two ranking in our industry on the 2008 Forbes list of "America's Most Admired Companies," and we will continue to pursue a "triple bottom line" that encompasses people and the planet, as well as profit.

Our goal at The Estée Lauder Companies is to remain the preeminent leader in global luxury cosmetics-a position we have achieved by listening and responding to our consumers. Today, more than ever, consumers are in charge, as new channels allow them to take control of their shopping experience and use interactive media to express their preferences.

To maintain our leadership, we will strengthen our efforts to understand who the consumer is, what she wants and how she shops. With this knowledge, we will focus our resources on the right products, markets and channels to excite consumers and drive profitable growth. At the same time, we will strive to be a more efficient and globally integrated organization to serve a growing worldwide marketplace. We will continue to recognize our great people and motivate them to be their best, preserving the creativity and innovation that has made our Company great.

I would like to take this opportunity to thank all of our consumers for their loyalty to our brands, our employees for their energy and entrepreneurial spirit, and our stockholders for their support. I also want to thank our Chairman, Leonard Lauder and our Board of Directors for their diligent and wise counsel. We look forward to driving sustainable profitable growth and optimizing stockholder value in the years ahead.

William P. Lauder signature
William P. Lauder
Chief Executive Officer