The Estee Lauder Companies Inc 2007 Annual Report

Dear Fellow Stockholders:

Leading People. Leading Growth.

These days, being the President and CEO of an expanding international company requires the leadership skills of a conductor, the persuasive abilities of a great communicator and the street smarts of a small corner merchant. Each brings talents that are important to leading people to growth.

At The Estée Lauder Companies, our single focus is to remain the pre eminent leader in global prestige cosmetics. To do that means nurturing three key assets-great brands, great people and great ideas.

This year, sales from our international business again surpassed that of the United States. Most of our 27 brands can be found for sale in international markets, and we will continue to launch them in new markets where appropriate. To meet the demands of an evolving global marketplace, our affiliate networks must be managed by the best talent in the industry.

Like a conductor, my job is to assess the demands of the upcoming performance, match the right people to the right positions and provide the leadership that lets them perform to the best of their abilities. Half of our 35 international affiliates are led by a General Manager who has been in that position three years or less. As Benjamin Franklin once said, "To change is difficult. Not to change is fatal." It is imperative for us to continue to nurture new talent with fresh thinking to successfully engage in the dynamics of a global business.

Persuasive communication is essential to strong leadership. Com muni cating our strategy creates transparency and trust. Our five strategic imperatives:

Optimize our brand portfolio
Strengthen our product categories
Strengthen and expand our geographic presence
Diversify and strengthen our channels of distribution
Achieve operational and cost excellence

are well known to our management and our key stockholders, alike. This year, we held conferences around the world to communicate our direction for growth to the financial and supplier communities.

We have also initiated a more proactive approach to communicating with our 28,500 employees worldwide to foster high engagement in their jobs. More robust daily reporting on our corporate Intranet, more frequent personal appearances by our senior management teams and CEO Roundtables are just some of the ways we regularly communicate our values to employees.

WILLIAM P. LAUDER

A better-informed and engaged employee is a more productive employee. We strive to keep their passion alive through professional development. More than 2,000 people attended at least one of the 40-plus training courses we provide during the year for all levels of employees.

Communicating our citizenship values and the impact we have on the communities we touch is as important to us as our economic reporting. We produced our first Corporate Social Responsibility report, The Beauty of Sustainability. To view the report, please go to www.elcompanies.com. We value our reputation and are eager to share the commitment we have to Bringing the Best To Everyone We Touch on all levels. Every year, our Breast Cancer Awareness Campaign raises millions of dollars for The Breast Cancer Research Foundation. This year, 13 of our brands participated in October Breast Cancer Awareness events.

We need the sharp, keen instincts of a small merchant to stay close to our consumers. Constant listening and observing how they shop remain key touchstones. To ensure that our brands remain fresh in the consumer's mind, we pursue innovation at all levels-from new formulas to the latest technology and the most environmentally friendly packaging-keeping the new product excitement high. We have research centers in Asia, Europe, Canada and the United States that focus on the specific needs of the many faces of global beauty.

The global prestige cosmetics business is a $37 billion sector. Every year, hundreds of new brands are launched to lure shoppers and compete for their attention. The Estée Lauder Companies is built on the success of its 27 unique brands. This year, four new brands joined our portfolio-Daisy Fuentes with two fragrances at Kohl's, Tom Ford Beauty, Coach and Mustang. Each represents a new approach to reaching the consumer. Tom Ford joins La Mer, Jo Malone and Estée Lauder Re-Nutriv in defining the ultraluxe niche. Coach is our first foray into creating a fragrance exclusively for distribution in the highly successful Coach free-standing fashion stores. Mustang, a collaboration with the Ford Motor Company, interprets the iconic image of the famed Mustang car in a fragrance targeted to the mid-tier retail channel.

As has been the pattern in other years, more than one-third of our revenues come from products that have been launched in the last three years.

M·A·C and Bobbi Brown continue to color our world with outstanding launches in the makeup-artist category, like the best-selling M·A·C Plushglass and Bobbi Brown Long-Wear Cream Shadow. Clinique's consumer tells us she trusts a brand with authority and depends on the brand's expertise at counter. The newly re-vamped Clinique 3-Step Skin Care System reflects the Clinique loyalist's preferences and is a global best seller.

The just-launched Private Collection Tuberose Gardenia, designed by Aerin Lauder for Estée Lauder, focuses on the aspirational and elegant heritage that is so much a part of the brand's roots. Unforgivable by Sean John is a best seller in the men's lifestyle fragrance arena. Aveda and Bumble and bumble are leading the prestige salon business-each in its own way. As men become more interested in treatment and grooming products, Lab Series Skincare for Men and Clinique Skin Supplies for Men are both poised to capture a larger share of this growing category.

Not only do we focus on what our consumers want, but also on where they shop for prestige beauty. We operate more than 450 free-standing stores for brands including Origins, M·A·C, Jo Malone and Aveda. Sales from our online division grew by more than 25% in Fiscal 2007. In addition to our own sites, our brands are also sold on select retailer sites. Many of our brands are expanding their e-commerce to global markets as consumers around the world use the Internet for shopping.

This year, Bobbi Brown's appearance on QVC became the direct-TV shopping channel's most successful beauty launch in 20 years-selling more product in one hour than any other guest. Sales benefits overflowed from TV to retail counters and on bobbibrowncosmetics.com, as shoppers looked for more from this great brand.

We continue to support our North American department store business through the current wave of consolidations. In Fiscal 2007, Origins entered the dynamic European pharmacy channel, and Darphin has pursued the international spa channel. We are rapidly expanding in the potentially lucrative Chinese market and now have eight brands in China, with the Estée Lauder brand the most widely available in 32 cities.

Travel retail has proven to be a vital shopping venue. In spite of the potential challenges at the beginning of the year, travel for business and pleasure grew, as did the retail opportunity within airports and duty-free shops. Our travel retail business responded to the demand with exclusive product offerings that met the unique needs of travelers. We now have 11 brands available in airports and duty-free shops around the world. In Fiscal 2007, sales from our travel retail business grew 16%. Our retail strategies in this arena are setting a new standard for how some of our brands touch consumers. The beautiful Jo Malone store at Heathrow airport in London is a model for the brand's global expansion.

Finally, global growth would not be feasible without the infrastructure to support our concept-to-market product cycles. We are gaining momentum with our Strategic Modernization Initiative. We successfully launched SAP at Aveda in May 2007. We anticipate that the majority of the SAP transformation will take place through Fiscal 2010, at which point we expect to benefit from the full impact of more than $80 million in savings annually.

I would like to take this moment to thank our Board of Directors for their guidance and support; our Chairman, Leonard Lauder, for providing us with his ongoing wisdom and experience; our management for their dedication and leadership; and all of the employees of The Estée Lauder Companies for their continued passion, drive and commitment to growth.

Sincerely,

William P. Lauder
President and
Chief Executive Officer