CONNECTING WITH THE CONSUMER

How do the brands of The Estée Lauder Companies continue to connect with the consumer in an age when the cosmetics business has changed more in the last ten years than it did in the 50 years prior? What are the challenges we face as a company in an era when consolidation in the retail sector is the order of the day, yet we are living in an almost borderless global world?

Global expansion is pushing the frontiers of countries like China and India. Yet only a few years ago these countries were without a domestic infrastructure strong enough to invite global commerce- and now, they are rich with potential for a growing number of middle-class consumers and the companies that hope to fulfill their wishes.

As the largest prestige cosmetics company devoted solely to producing beauty products for both women and men, The Estée Lauder Companies is more equipped than most companies to understand what makes hearts and eyes go "zing" and the registers at the beauty counter continue to ring.

Increasingly, the beauty business is more about lifestyles than incomes and understanding the psychology of the consumer versus the demographics. Luxury is in-when there is a waiting list for $4,000 handbags - and 50 is the new 30 today as women realize that looking great at any age is very attainable. Even men now realize that less is more when it comes to wrinkles and lines as they, too, seek to soften the edges of time. This is the perfect setting for a prestige beauty company with a full range of fragrance, makeup, skin care and hair care products and a focus on meeting the aspirations and needs of the global consumer.

Innovation is coming of age as the beauty consumer demands more and more of the products we develop. Whether it is advanced skin protection from UVA/UVB rays, or creams that smooth and soothe and almost visibly erase the furrows in our brow, or makeup products that add brilliance and shimmer without being obvious, we are continually rising to the challenges our consumers pose. The development and research of these products brings us far into the world of biological skin research with some of the leading institutions around the world. We maintain relationships with more than 25 research institutions with which we continuously search for a more profound understanding of the skin we live in. This year, we also opened a research and development center in Shanghai to bring us closer to understanding the distinct needs and desires of the diverse Asian consumers.

Our business reflects the complexities of a fluctuating global economy and the challenges facing our industry. While consumer excitement is generally up, so are the costs of doing business. We are gratified that we are able to report another year of sales growth for our Company. Our brands have stood the test of time and continue to evolve and grow on a global basis. Our largest brands, like Estée Lauder and Clinique, can be found in more than 130 countries and territories. M·A·C continues to be our fastest-growing brand on a global basis-adding China, Russia and India during the last year.

Our goal of optimizing our brand portfolio is forcing us to look hard and long at the strengths and shortcomings not only of the brands themselves but also of the distribution channels they sell through. So, while some brands are expanding into new sales points, others are rethinking and reevaluating their growth plans. In the end, this process will speak to our heritage as brand builders and strengthen our impact at retail.

In the arena of new brands, we have launched four new lines this year to much success. Sean John's fragrance, Unforgivable, left an indelible mark in sales as it climbed first to the number-one-selling men's fragrance in U.S. department stores, then finally to the top-selling fragrance in both the men's and women's categories in U.S. department stores within the first three months on-counter. This dynamic launch, together with the addition of the new Italian designer fragrance, Missoni, helped add excitement and sales to our fragrance category. BeautyBank has added Daisy Fuentes and her new fragrance, Dianoche, to the extraordinary group of brands we have developed for Kohl's Department Stores, as well as Grassroots which offers a wide range of wholesome, naturally-sourced products to the Kohl's consumer.

Tom Ford, the award-winning designer, provided an alluring vibrancy to the Estée Lauder brand by rejuvenating the iconic Youth Dew fragrance with the launch of Youth Dew Amber Nude and reinterpreting the original Azurée fragrance as a color collection. Both launches helped drive freshness and vitality at the Estée Lauder counters.

We are learning more about our consumers who want products that deliver "emotional wellness," as well as high-tech, immediately recognizable results. The launch of Dr. Weil for Origins, which focuses on a more holistic approach to beauty, and Aveda's continuing promise to create products that also mind the environment and the world around us, have resonated globally with consumers.

We connect with consumers by giving back to the world we live in-whether through Aveda's Earth Day events or the M·A·C AIDS Fund, which has raised more than $70 million since its inception in 1994. Philanthropy is as much a part of our Company culture as producing the highest quality products. In this spirit, Origins developed Project Sunshine to provide complimentary care for children with cancer through the Integrative Therapies Program for Children with Cancer at Morgan Stanley Children's Hospital of NewYork-Presbyterian. Eleven of our brands participate in the Breast Cancer Awareness campaign so that we can help fund-and find-a cure in our lifetime.

Of course, all of these accomplishments would not be possible without the enormous support, passion and commitment of our talented people. I would like to take this moment to thank our corporate leaders and all of our employees for their dedication and support, as well as our stockholders, for their continuing confidence in our abilities. I would also like to thank Leonard Lauder, our Chairman, as well as the Board of Directors, for their guidance and wisdom.

Sincerely,

William P. Lauder
President
Chief Executive Officer

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