form 10-k - the estée lauder companies inc. 10-k (mark one) ý ... registrant’s telephone number,...
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549
FORM 10-K(Mark One)
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2017
ORoTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 1-14064
The Este Lauder Companies Inc.(Exactnameofregistrantasspecifiedinitscharter)
Delaware
11-2408943(Stateorotherjurisdictionofincorporationororganization)
(I.R.S.EmployerIdentificationNo.)
767 Fifth Avenue, New York, New York
10153(Addressofprincipalexecutiveoffices)
(ZipCode)
Registrantstelephonenumber,includingareacode212-572-4200
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Name of each exchange on which registered
ClassACommonStock,$.01parvalue
NewYorkStockExchange
Securities registered pursuant to Section 12(g) of the Act: None
Indicatebycheckmarkiftheregistrantisawell-knownseasonedissuer,asdefinedinRule405oftheSecuritiesAct.YesNoo
IndicatebycheckmarkiftheregistrantisnotrequiredtofilereportspursuanttoSection13orSection15(d)oftheAct.YesoNo
Indicatebycheckmarkwhethertheregistrant(1)hasfiledallreportsrequiredtobefiledbySection13or15(d)oftheSecuritiesExchangeActof1934duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtofilesuchreports),and(2)hasbeensubjecttosuchfilingrequirementsforthepast90days.YesNoo
IndicatebycheckmarkwhethertheregistranthassubmittedelectronicallyandpostedonitscorporateWebsite,ifany,everyInteractiveDataFilerequiredtobesubmittedandpostedpursuanttoRule405ofRegulationS-T(232.405ofthischapter)duringthepreceding12months(orforsuchshorterperiodthattheregistrantwasrequiredtosubmitandpostsuchfiles).YesNoo
IndicatebycheckmarkifdisclosureofdelinquentfilerspursuanttoItem405ofRegulationS-K(229.405ofthischapter)isnotcontainedherein,andwillnotbecontained,tothebestofregistrantsknowledge,indefinitiveproxyorinformationstatementsincorporatedbyreferenceinPartIIIofthisForm10-KoranyamendmenttothisForm10-K.
Indicatebycheckmarkwhethertheregistrant is alargeacceleratedfiler, anacceleratedfiler, a non-acceleratedfiler, or asmaller reportingcompany. Seethedefinitionsoflargeacceleratedfiler,acceleratedfiler,smallerreportingcompanyandemerginggrowthcompanyinRule12b-2oftheExchangeAct.
Largeacceleratedfiler
Acceleratedfilero
Non-acceleratedfilero(Donotcheckifasmallerreportingcompany)
Smallerreportingcompanyo
Emerginggrowthcompanyo
Ifanemerginggrowthcompany,indicatebycheckmarkiftheregistranthaselectednottousetheextendedtransitionperiodforcomplyingwithanyneworrevisedfinancialaccountingstandardsprovidedpursuanttoSection13(a)oftheExchangeAct.o
Indicatebycheckmarkwhethertheregistrantisashellcompany(asdefinedinRule12b-2oftheExchangeAct).YesoNo
Theaggregatemarketvalueoftheregistrantsvotingcommonequityheldbynon-affiliatesoftheregistrantwasapproximately$17billionatDecember31,2016(thelastbusinessdayoftheregistrantsmostrecentlycompletedsecondquarter).*
AtAugust18,2017,224,193,862sharesoftheregistrantsClassACommonStock,$.01parvalue,and143,762,288sharesoftheregistrantsClassBCommonStock,$.01parvalue,wereoutstanding.
Documents Incorporated by Reference
Document
Where Incorporated
ProxyStatementforAnnualMeetingofStockholderstobeheldNovember14,2017
PartIII
*CalculatedbyexcludingallsharesheldbyexecutiveofficersanddirectorsofregistrantandcertaintrustswithoutconcedingthatallsuchpersonsareaffiliatesofregistrantforpurposesoftheFederalsecuritieslaws.
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TableofContents
THE ESTE LAUDER COMPANIES INC.
INDEX TO ANNUAL RE PORT ON FORM 10-K
Page Part I:
Item1.
Business
2 Item1A.
RiskFactors
14 Item1B.
UnresolvedStaffComments
19 Item2.
Properties
20 Item3.
LegalProceedings
20 Item4.
MineSafetyDisclosures
20 Part II:
Item5.
MarketforRegistrantsCommonEquity,RelatedStockholderMattersandIssuerPurchasesofEquitySecurities
21 Item6.
SelectedFinancialData
22 Item7.
ManagementsDiscussionandAnalysisofFinancialConditionandResultsofOperations
23 Item7A.
QuantitativeandQualitativeDisclosuresAboutMarketRisk
51 Item8.
FinancialStatementsandSupplementaryData
51 Item9.
ChangesinandDisagreementswithAccountantsonAccountingandFinancialDisclosure
52 Item9A.
ControlsandProcedures
52 Item9B.
OtherInformation
52 Part III:
Item10.
Directors,ExecutiveOfficersandCorporateGovernance
52 Item11.
ExecutiveCompensation
52 Item12.
SecurityOwnershipofCertainBeneficialOwnersandManagementandRelatedStockholderMatters
52 Item13.
CertainRelationshipsandRelatedTransactions,andDirectorIndependence
53 Item14.
PrincipalAccountingFeesandServices
53 Part IV:
Item15.
Exhibits,FinancialStatementSchedules
53 Signatures
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TableofContentsCautionary Note Regarding Forward-Looking Information and Risk FactorsThis Annual Report on Form 10-K includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Suchstatements include our expectations regarding sales, earnings or other future operations, financial performance or liquidity, our long-term strategy,restructuring and other initiatives, product introductions, geographic regions or channels, information systems initiatives and new methods of sale. Althoughwe believe that our expectations are based on reasonable assumptions within the bounds of our knowledge of our business and operations, we cannot assurethat actual results will not differ materially from our expectations. Factors that could cause actual results to differ from expectations are described herein; inparticular, see Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations Cautionary Note Regarding Forward-Looking Information. In addition, there is a discussion of risks associated with an investment in our securities, see Item 1A. Risk Factors.Unlessthecontextrequiresotherwise,referencestowe,us,ourandtheCompanyrefertoTheEsteLauderCompaniesInc.anditssubsidiaries.
PART IItem 1. Business.TheEsteLauderCompaniesInc.,foundedin1946byEsteandJosephLauder,isoneoftheworldsleadingmanufacturersandmarketersofqualityskincare,makeup,fragranceandhaircareproducts.Ourproductsaresoldinover150countriesandterritoriesunderanumberofwell-knownbrandnamesincluding:EsteLauder,Clinique,Origins,MAC,BobbiBrown,LaMer,JoMaloneLondon,AvedaandTooFaced.Wearealsothegloballicenseeforfragrancesand/orcosmeticssoldundervariousdesignerbrandnames,includingTommyHilfiger,DonnaKaranNewYork,DKNY,MichaelKorsandTomFord.Eachbrandisdistinctlypositionedwithinthemarketforcosmeticsandotherbeautyproducts.Webelievewearealeaderinthebeautyindustryduetotheglobalrecognitionofourbrandnames,ourleadershipinproductinnovation,ourstrongpositioninkeygeographicmarketsandtheconsistentlyhighqualityofourproductsandHigh-Touchservices.Wesellourprestigeproductsprincipallythroughlimiteddistributionchannelstocomplementtheimagesassociatedwithourbrands.Thesechannelsconsistprimarilyofdepartmentstores,specialtymulti-brandretailers,upscaleperfumeriesandpharmaciesandprestigesalonsandspas.Inaddition,ourproductsaresoldinourownandauthorizedfreestandingstores,ourownandauthorizedretailerwebsites,storesinairportsandoncruiseships,in-flight,andduty-freeshops.Webelievethatourstrategyofpursuingselectivedistributionstrengthensourrelationshipswithretailersandconsumers,enablesourbrandstobeamongthebestsellingproductlinesatthestoresandonline,andheightenstheaspirationalqualityofourbrands.Foradiscussionofrecentdevelopments,seeItem7.ManagementsDiscussionandAnalysisofFinancialConditionandResultsofOperationsResultsofOperationsOverview.Forsegmentandgeographicalareafinancialinformation,seeItem8.FinancialStatementsandSupplementaryDataNote21SegmentDataandRelatedInformation.WehavebeencontrolledbytheLauderfamilysincethefoundingofourCompany.MembersoftheLauderfamily,someofwhomaredirectors,executiveofficersand/oremployees,beneficiallyown,directlyorindirectly,asofAugust18,2017,sharesofClassACommonStockandClassBCommonStockhavingapproximately87%oftheoutstandingvotingpoweroftheCommonStock.
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TableofContentsProducts
Skin Care -Ourbroadrangeofskincareproductsaddressesvariousskincareneeds.Theseproductsincludemoisturizers,serums,cleansers,toners,body
care,exfoliators,acneandoilcorrectors,facialmasks,cleansingdevicesandsuncareproducts.Anumberofourproductsaredevelopedforuseonparticularareasofthebody,suchastheface,thehandsoraroundtheeyes.
Makeup -Wemanufacture,marketandsellafullarrayofmakeupproducts,includingthosefortheface,eyes,lipsandnails.Manyoftheproductsareofferedinanextensivepaletteofshadesandcolors.Wealsosellrelateditemssuchascompacts,brushesandothermakeuptools.
Fragrance -Weofferavarietyoffragranceproducts.Thefragrancesaresoldinvariousforms,includingeaudeparfumspraysandcolognes,aswellaslotions,powders,creams,bath/showerproducts,candlesandsoapsthatareinfusedwithaparticularfragrance.
Hair Care -Haircareproductsareofferedmainlyinprestigesalonsandinfreestandingstoresaswellassomedepartmentstoresandspecialtymulti-brandretailers,andincludeshampoos,conditioners,stylingproducts,treatment,finishingspraysandhaircolorproducts.
Other -Wealsosellancillaryproductsandservices.
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TableofContentsOur BrandsGiventhepersonalnatureofourproductsandthewidearrayofconsumerpreferencesandtastes,aswellascompetitionfortheattentionofconsumers,ourstrategyhasbeentomarketandpromoteourproductsthroughdistinctivebrandsseekingtoaddressbroadpreferencesandtastes.Eachbrandhasasingleglobalimagethatispromotedwithconsistentlogos,packagingandadvertisingdesignedtoenhanceitsimageanddifferentiateitfromotherbrandsinthemarket.Beautybrandsaredifferentiatedbynumerousfactors,includingquality,performance,aparticularlifestyle,wheretheyaredistributed(e.g.,prestige,mass)andpricepoint.Belowisachartshowingmostofthebrandsthatwesellandhowweviewthembasedonlifestyleandpricepoint:
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TableofContentsInadditiontothebrandsdescribedabove,wemanufactureandsellproductsunderthePrescriptives,RODINoliolussoandFLIRT!brands.WealsodevelopandsellproductsunderalicensefromKiton.OurheritagebrandsareEsteLauder,CliniqueandOrigins.OurmakeupartistbrandsareMACandBobbiBrown.OurluxurybrandsareLaMer,JoMaloneLondon,TomFord,AERIN,RODINoliolusso,LeLabo,EditionsdeParfumsFrdricMalleandByKilian.OurdesignerfragrancesaresoldundertheTommyHilfiger,DonnaKaranNewYork,DKNY,MichaelKors,Kiton,ErmenegildoZegnaandToryBurchlicensesnotedabove.DistributionWesellourproductsprimarilythroughlimiteddistributionchannelsthatcomplementtheluxuryimageandprestigestatusofourbrands.Thesechannelsconsistprimarilyofdepartmentstores,specialtymulti-brandretailers,upscaleperfumeriesandpharmaciesandprestigesalonsandspas.Inaddition,ourproductsaresoldinfreestandingstoresthatareoperatedeitherbyusorbyauthorizedthirdparties,throughourownandthird-partyoperatede-commercewebsitesandwebsitesofourauthorizedretailers,invarioustravelretaillocationssuchasstoresinairportsandoncruiseships,in-flightandduty-freeshops,andcertainfragrancesaresoldinself-selectoutlets.Asiscustomaryinthecosmeticsindustry,ourpracticeistoacceptreturnsofourproductsfromretailersifproperlyrequestedandapproved.Wehavestrategicallyopenednewfreestandingstoresgloballythatweorauthorizedthirdpartiesoperate,ledbyMAC,JoMaloneLondon,BobbiBrownandAveda.Wearealsoevaluatingopportunitiestoopenadditionalfreestandingstoresforcertainofourotherbrands.AsofJune30,2017,weoperatedapproximately1,430freestandingstores,andmorethan500freestandingstoresareoperatedaroundtheworldbyauthorizedthirdparties.Weexpectthenumberoffreestandingstorestoincreaseoverthenextseveralyears.WecurrentlysellproductsfrommostofourbrandsdirectlytoconsumersonlinethroughCompany-ownedandoperatede-commerceandm-commercesitesinapproximately35countries.WhiletodayamajorityofouronlinesalesaregeneratedintheUnitedStatesandtheUnitedKingdom,wehaveampleopportunityforexpansionofonlinesalesgrowthglobally.Additionally,ourproductsaresoldthroughvariouswebsitesoperatedbyauthorizedretailers.Wemaintaindedicatedsalesteamsthatmanageourretailaccounts.Wehavewholly-ownedoperationsinover50countries,andtwocontrollingintereststhatoperateinseveralcountries,throughwhichwemarket,sellanddistributeourproducts.Incertaincountries,wesellourproductsthroughcarefullyselecteddistributorsthatshareourcommitmenttoprotectingtheimageandpositionofourbrands.Inaddition,wesellcertainproductsinselectdomesticandinternationalU.S.militaryexchanges.Forinformationregardingournetsalesandlong-livedassetsbygeographicregion,seeItem8.FinancialStatementsandSupplementaryDataNote21SegmentDataandRelatedInformation.CustomersOurstrategyistobuildstrongrelationshipsgloballywithselectretailers,aswellaswithourconsumersdirectlythroughfreestandingstores,e-commercesitesandsocialmedia.Seniormanagementworkswithexecutivesofourmajorretailaccountsonaregularbasis,andwebelieveweareviewedasanimportantsuppliertothesecustomers.Ourlargestcustomer,MacysInc.,sellsproductsprimarilywithintheUnitedStatesandaccountedfor8%ofourconsolidatednetsalesforfiscal2017,9%forfiscal2016and10%forfiscal2015,and8%and13%ofouraccountsreceivableasofJune30,2017and2016,respectively.MarketingOurstrategytomarketandpromoteourproductsbeginswithourwell-diversifiedportfolioofmorethan25distinctivebrandsacrossfourproductcategories.Ourportfoliocanbedeployedinmultipledistributionchannelsandgeographieswhereourglobalreputationandawarenessofourbrandsbenefitus.Ourgeographicanddistributionchanneldiversityallowsustoengagelocalconsumersacrossanarrayofdevelopedandemergingmarketsbyemphasizingproductsandserviceswiththegreatestlocalrelevanceandappeal.ThisstrategyisbuiltaroundBringingtheBesttoEveryoneWeTouch.Ourfounder,Mrs.EsteLauder,formulatedthisuniquemarketingphilosophytoprovideHigh-Touchserviceandhighqualityproductsasthefoundationforasolidandloyalconsumerbase.OurHigh-Touchapproachisdemonstratedthroughourintegratedconsumerengagementmodelsthatleverageourproductspecialistsandtechnologytoprovidetheconsumerwithadistinctexperiencethatcanincludepersonalconsultationswithbeautyadvisors,inpersonoronline,whodemonstrateandeducatetheconsumeronproductusageandapplication.Weplantocontinuetoleverageourcorestrengths,includingthequalityofourproducts,ourHigh-Touchcaretoconsumersandadiversifiedportfolioofbrands,channelsandgeographies.
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TableofContentsOurmarketingstrategiesvarybybrand,localmarketanddistributionchannel.Ourdiverseportfolioofbrandsemploydifferentengagementmodelssuitedtoeachbrandsequity,distribution,productfocusandunderstandingofthecoreconsumer.Thisenablesustoelevatetheconsumerexperienceasweattractnewcustomers,buildloyalty,driveconsumeradvocacyandaddressthetransformationofconsumershoppingbehaviors.Ourmarketingplanningapproachleverageslocalinsightstooptimizeallocationofresourcesacrossdifferentmediaoutletsandretailtouchpointstoresonatewithourmostdiscerningconsumersmosteffectively.Thisincludesstrategicallydeployingourbrandsandtailoringproductassortmentsandcommunicationstofitlocaltastesandpreferencesincitiesandneighborhoods.Mostofourcreativemarketingworkisdonebyin-houseteamsthatdesignandproducethesalesmaterials,socialmediastrategies,advertisementsandpackagingforproductsineachbrand.Webuildbrandequityanddrivetraffictoretaillocationsandtoourownandauthorizedretailerswebsitesthroughdigitalandsocialmedia,magazinesandnewspapers,television,billboardsincitiesandairports,anddirectmailandemail.Inaddition,weseekeditorialcoverageforourbrandsandproductsindigitalandsocialmediaandprint,todriveinfluenceramplification.Weareincreasingourbrandawarenessandsalesbycontinuingtoelevateourdigitalpresenceencompassinge-commerceandm-commerce,aswellasdigital,socialmediaandinfluencermarketing.Wecontinuetoinnovatetobettermeetconsumeronlineshoppingpreferences(e.g.,how-tovideos,ratingsandreviewsandmobilephoneandtabletapplications),supporte-commerceandm-commercebusinessesviadigitalandsocialmarketingactivitiesdesignedtobuildbrandequityandHigh-Touchconsumerengagement,inordertocontinuetoofferunparalleledserviceandsetthestandardforprestigebeautyshoppingonline.Wealsosupportourauthorizedretailerstostrengthentheire-commercebusinessesanddrivesalesofourbrandsontheirwebsites.Wehaveopportunitiestoexpandourbrandportfolioonlinearoundtheworld,andweareinvestinginandtestingnewomnichannelconceptsintheUnitedStatesandotherestablishedmarketstoincreasebrandloyaltybybetterservingconsumersastheyshopacrosschannels.Wehavededicatedresourcestoimplementcreative,coordinated,brand-enhancingstrategiesacrossallonlineactivitiestoincreaseourdirectaccesstoconsumers.Promotionalactivitiesandin-storedisplaysaredesignedtoattractnewconsumersandintroduceexistingconsumerstootherproductofferingsfromtherespectivebrands.Ourmarketingeffortsalsobenefitfromcooperativeadvertisingprogramswithsomeretailers,someofwhicharesupportedbycoordinatedpromotions,suchassamplingprograms,includingpurchasewithpurchaseandgiftwithpurchase,andwecontinuetobelievethatthequalityandperceivedbenefitsofsampleproductshavebeeneffectiveinducementstopurchasesbynewandexistingconsumers.Suchactivitiesattractconsumerstoourcountersandwebsitesandkeepexistingconsumersengaged.Ourmarketingandsalesexecutivesspendconsiderabletimeinthefieldmeetingwithconsumers,retailers,beautyadvisorsandmakeupartistsatthepointsofsaletoenableustoofferaseamlessexperienceacrosschannelsofdistribution.Information SystemsInformationsystemssupportbusinessprocessesincludingproductdevelopment,marketing,sales,orderprocessing,production,distributionandfinance.Wecontinuetomaintainandenhancethesesystemsinalignmentwithourlong-termstrategy.Manyelementsofourglobalinformationtechnologyinfrastructurearemanagedbythird-partyprovidersundervendor-owned,cloud-basedmodelswherewepayforservicesastheyareconsumed.Thisallowsamorescalableplatformtosupportcurrentandfuturerequirementsandimprovesouragilityandflexibilitytorespondtothedemandsofthebusinessbyleveragingmoreadvancedtechnologies.Wecontinuetoupgrademanyofourlegacysystems,includingretailsystemsandretailcapabilitiesglobally.Theretailsystemupgradesareexpectedtoenhancetheeffectivenessofstoreoperations,andsupportouromnichannelobjectives.Duringfiscal2017,wesubstantiallycompletedretailsystemupgradestoourfreestandingstoresinNorthAmericaandbeganourimplementationintheAsia/Pacificregion.Overthenextfewyears,weplantocontinuetoimplementupgradedpointofsale,retailmerchandising,andretailworkforcemanagementsolutionsincertainkeymarketsglobally.MostofourlocationsarecurrentlyenabledwithSAP-basedtechnologies(SAP).WecontinuetodevelopandinvestinnewdatainsightandanalyticcapabilitiestoallowustomoreeffectivelyutilizetheinformationprovidedbySAP,aswellasstrategicsourcesofbothinternalandexternaldata.Inaddition,wearemakingcontinuousinvestmentstointegratechangestosystemsapplicationswithSAPthatweexpectwillbringvaluecreationtothebusinessandincreaseproductivity.Inparticular,weareoptimizingcertainofoursupplychaincapabilities,includinginventoryandwarehousemanagement,aswellasaddingcapabilitiestoenhancecertainfinancialprocessesandworkforcemanagementsolutions.
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TableofContentsResearch and DevelopmentWebelievethatweareanindustryleaderinthedevelopmentofnewproducts.Ourresearchanddevelopmentgroup,whichincludesscientistsandotheremployeesinvolvedinproductinnovationandpackagingdesignanddevelopment,workscloselywithourmarketingandproductdevelopmentteamsandthird-partysupplierstogenerateideas,developnewproductsandproduct-lineextensions,createnewpackagingconcepts,andimprove,redesignorreformulateexistingproducts.Inaddition,theseresearchanddevelopmentpersonnelprovideongoingtechnicalassistanceandknow-howtoqualityassuranceandmanufacturingpersonnelonaworldwidebasis,toensureconsistentglobalstandardsforourproductsandtodeliverproductsthatmeetorexceedconsumerexpectations.Theresearchanddevelopmentgrouphaslong-standingworkingrelationshipswithseveralU.S.andinternationalmedicalandeducationalfacilities,whichsupplementinternalcapabilities.Membersoftheresearchanddevelopmentgrouparealsoresponsibleforregulatorycompliancematters.
Researchanddevelopmentcostsareexpensedasincurred.AsofJune30,2017,wehadapproximately760employeesengagedinresearchanddevelopmentactivities.Wemaintainresearchanddevelopmentprogramsatcertainofourprincipalfacilitiesandfacilitiesdedicatedtoperformingresearchanddevelopment,seeItem2.Properties.Wedonotconductanimaltestingonourproductsoringredients,anddonotaskotherstotestonourbehalf,exceptwhenrequiredbylaw.Manufacturing, Warehousing and Raw MaterialsWemanufactureourproductsprimarilyintheUnitedStates,Belgium,Switzerland,theUnitedKingdomandCanada.Wecontinuetostreamlineourmanufacturingprocessesandidentifysourcingopportunitiestoimproveinnovation,increaseefficiencies,minimizeourimpactontheenvironmentandreducecosts.Ourmajormanufacturingfacilitiesoperateasfocusplantsthatprimarilymanufactureonecategoryofproduct(e.g.,makeup)formostofourprincipalbrands.Ourplantsaremodern,andourmanufacturingprocessesaresubstantiallyautomated.Whilewebelievethatournetworkofmanufacturingfacilitiesandthird-partymanufacturersissufficienttomeetcurrentandreasonablyanticipatedmanufacturingrequirements,wecontinuetoidentifyopportunitiestomakesignificantimprovementsincapacity,technology,andproductivityandalignourmanufacturingwithregionalsalesdemand.Tocapitalizeoninnovationandothersupplychainbenefits,wealsocontinuetoutilizeanetworkofthird-partymanufacturersonaglobalbasis.Wehaveestablishedaglobaldistributionnetworkdesignedtomeetthechangingdemandsofourcustomerswhilemaintainingservicelevels.Wearecontinuouslyevaluatingandadjustingthisphysicaldistributionnetwork.Wehaveestablishedregionaldistributioncenters,includingthosemaintainedbythirdparties,strategicallypositionedthroughouttheworldinordertofacilitateefficientdeliveryofourproductstoourcustomers.Theprincipalrawmaterialsusedinthemanufactureofourproductsareessentialoils,alcoholsandspecialtychemicals.Wealsopurchasepackagingcomponentsthataremanufacturedtoourdesignspecifications.ProcurementofmaterialsforallmanufacturingfacilitiesisgenerallymadeonaglobalbasisthroughourGlobalSupplierRelationsfunction.Wereviewoursupplierbaseperiodicallywiththespecificobjectivesofimprovingquality,increasinginnovationandspeed-to-marketandreducingcosts.Inaddition,wefocusonsupplysourcingwithintheregionofmanufacturetoallowforimprovedsupplychainefficiencies.Someofourproductsrelyonasingleorlimitednumberofsuppliers;however,webelievethatourportfolioofsuppliershasadequateresourcesandfacilitiestoovercomemostunforeseeninterruptionsofsupply.Inthepast,wehavebeenabletoobtainanadequatesupplyofessentialrawmaterialsandcurrentlybelievewehaveadequatesourcesofsupplyforvirtuallyallcomponentsofourproducts.
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TableofContentsWearecontinuallybenchmarkingtheperformanceofoursupplychainandwillchangesuppliersandadjustourdistributionnetworksandmanufacturingfootprintbaseduponthechangingneedsofthebusiness.Asweintegrateacquiredbrands,wecontinuallyseeknewwaystoleverageourproductionandsourcingcapabilitiestoimproveouroverallsupplychainperformance.CompetitionThereissignificantcompetitionwithineachmarketwhereourskincare,makeup,fragranceandhaircareproductsaresold.Brandrecognition,productqualityandeffectiveness,distributionchannels,accessibility,andpricepointaresomeofthefactorsthatimpactconsumerschoicesamongcompetingproductsandbrands.Marketing(includingsocialmediaactivities),merchandising,in-storeexperiencesanddemonstrations,andnewproductinnovationsalsohaveanimpactonconsumerspurchasingdecisions.Withourportfolioofdiversebrandssoldinavarietyofchannelsweareoneoftheworldsleadingmanufacturersandmarketersofskincare,makeup,fragranceandhaircareproducts.Wecompeteagainstanumberofcompanies,someofwhichhavesubstantiallygreaterresourcesthanwedo.Someofourcompetitorsarelarge,well-known,multinationalmanufacturersandmarketersofskincare,makeup,fragranceandhaircareproducts,mostofwhichmarketandselltheirproductsundermultiplebrandnames.TheyincludeLOrealS.A.;ShiseidoCompany,Ltd.;LVMHMotHennesseyLouisVuitton;Coty,Inc.;TheProcter&GambleCompany;ChanelS.A.;GroupeClarins;Amorepacific;andUnilever.Wealsofacecompetitionfromanumberofindependentbrands,someofwhicharebackedbyprivate-equityinvestors,aswellassomeretailersthathavetheirownbeautybrands.Certainofourcompetitorsalsohaveownershipinterestsinretailersthatarecustomersofours.Trademarks, Patents and CopyrightsWeownthetrademarkrightsusedinconnectionwiththemanufacturing,marketing,distributionandsaleofourproductsbothintheUnitedStatesandintheotherprincipalcountrieswheresuchproductsaresold,includingEsteLauder,Clinique,Aramis,Prescriptives,LabSeries,Origins,MAC,BobbiBrown,LaMer,Aveda,JoMaloneLondon,Bumbleandbumble,Darphin,GoodSkinLabs,Ojon,Smashbox,Osiao,LeLabo,RODINoliolusso,EditionsdeParfumsFrdricMalle,GLAMGLOW,ByKilian,BECCAandTooFacedandthenamesofmanyoftheproductssoldunderthesebrands.Wearetheexclusiveworldwidelicenseeforfragrances,cosmeticsand/orrelatedproductsforTommyHilfiger,DonnaKaranNewYork,DKNY,Kiton,MichaelKors,TomFord,Dr.AndrewWeil,ErmenegildoZegna,AERINandToryBurch.Forfurtherdiscussiononlicensearrangements,includingtheirduration,seeItem8.FinancialStatementsandSupplementaryDataNote2SummaryofSignificantAccountingPoliciesLicenseArrangements.WeprotectourtrademarksintheUnitedStatesandsignificantmarketsworldwide.Weconsidertheprotectionofourtrademarkstobeimportanttoourbusiness.Anumberofourproductsincorporatepatented,patent-pendingorproprietarytechnology.Inaddition,severalproductsandpackagingforsuchproductsarecoveredbydesignpatentsorcopyrights.Whileweconsiderthesepatentsandcopyrights,andtheprotectionthereof,tobeimportant,nosinglepatentorcopyright,orgroupofpatentsorcopyrights,isconsideredmaterialtotheconductofourbusiness.EmployeesAtJune30,2017,wehadapproximately46,000full-timeemployeesworldwide(includingdemonstratorsatpointsofsalewhoareemployedbyus).WehavenoemployeesintheUnitedStatesthatarecoveredbyacollectivebargainingagreement.AlimitednumberofemployeesoutsideoftheUnitedStatesarecoveredbyaworkscouncilagreementorothersyndicatearrangements.Government RegulationWeandourproductsaresubjecttoregulationbytheFoodandDrugAdministrationandtheFederalTradeCommissionintheUnitedStates,aswellasbyvariousotherfederal,state,localandinternationalregulatoryauthoritiesandtheregulatoryauthoritiesinthecountriesinwhichourproductsareproducedorsold.Suchregulationsprincipallyrelatetotheingredients,manufacturing,labeling,packaging,marketing,advertising,shipment,disposalandsafetyofourproducts.Webelievethatweareinsubstantialcompliancewithsuchregulations,aswellaswithapplicablefederal,state,localandinternationalandothercountriesrulesandregulationsgoverningthedischargeofmaterialshazardoustotheenvironmentorthatrelatetoclimatechange.Therearenosignificantcapitalexpendituresforenvironmentalcontrolorclimatechangematterseitherplannedinthecurrentyearorexpectedinthenearfuture.SeasonalityOurresultsofoperationsintotal,byregionandbyproductcategory,aresubjecttoseasonalfluctuations,withnetsalesinthefirsthalfofthefiscalyeartypicallybeingslightlyhigherthaninthesecondhalfofthefiscalyear.Thehighernetsalesinthefirsthalfofthefiscalyearareattributabletotheincreasedlevelsofpurchasingbyretailersfortheholidaysellingseason.Fluctuationsinnetsalesandoperatingincomeintotalandbygeographicregionandproductcategoryinanyfiscalquartermaybeattributabletothelevelandscopeofnewproductintroductionsortheparticularretailcalendarsfollowedbyourcustomersthatareretailers,whichmayimpacttheirorderplacementandreceiptofgoods.Additionally,grossmarginsandoperatingexpensesareimpactedonaquarter-by-quarterbasisbyvariationsinourlaunchcalendarandthetimingofpromotions,includingpurchasewithpurchaseandgiftwithpurchasepromotions.
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TableofContentsAvailability of ReportsWemakeavailablefinancialinformation,newsreleasesandotherinformationonourwebsiteatwww.elcompanies.com.OurannualreportonForm10-K,quarterlyreportsonForm10-Q,currentreportsonForm8-Kandotherreports,aswellasanyamendmentstothesereportsfiledorfurnishedpursuanttoSection13(a)or15(d)oftheSecuritiesExchangeActof1934,areavailablefreeofchargeviatheEDGARdatabaseatwww.sec.govorourwebsite,assoonasreasonablypracticableafterwefilesuchreportsandamendmentswith,orfurnishthemto,theSecuritiesandExchangeCommission.StockholdersmayalsocontactInvestorRelationsat767FifthAvenue,NewYork,NewYork10153orcall800-308-2334toobtainahardcopyofthesereportswithoutcharge.Corporate Governance Guidelines and Code of ConductTheBoardofDirectorshasdevelopedcorporategovernancepracticestohelpitfulfillitsresponsibilitiestostockholdersinprovidinggeneraldirectionandoversightofmanagement.ThesepracticesaresetforthinourCorporateGovernanceGuidelines.WealsohaveaCodeofConduct(Code)applicabletoallemployees,officersanddirectorsoftheCompany,includingtheChiefExecutiveOfficer,theChiefFinancialOfficerandotherseniorfinancialofficers.ThesedocumentsandanywaiverofaprovisionoftheCodegrantedtoanyseniorofficerordirectororanymaterialamendmenttotheCode,maybefoundintheInvestorssectionofourwebsite:www.elcompanies.comundertheheadingCorporateGovernance.ThechartersfortheAuditCommittee,CompensationCommitteeandNominatingandBoardAffairsCommitteemaybefoundinthesamelocationonourwebsite.StockholdersmayalsocontactInvestorRelationsat767FifthAvenue,NewYork,NewYork10153orcall800-308-2334toobtainahardcopyofthesedocumentswithoutcharge.Executive OfficersThefollowingtablesetsforthcertaininformationwithrespecttoourexecutiveofficers:Name
Age
Position(s) HeldJohnDemsey
61
ExecutiveGroupPresidentFabrizioFreda
59
President,ChiefExecutiveOfficerandaDirectorCarlHaney
54
ExecutiveVicePresident,GlobalResearchandDevelopment,CorporateProductInnovation,PackageDevelopment
LeonardA.Lauder
84
ChairmanEmeritusandaDirectorRonaldS.Lauder
73
ChairmanofCliniqueLaboratories,LLCandaDirectorWilliamP.Lauder
57
ExecutiveChairmanandaDirectorSaraE.Moss
70
ExecutiveVicePresidentandGeneralCounselMichaelOHare
49
ExecutiveVicePresidentGlobalHumanResourcesGregoryF.Polcer
62
ExecutiveVicePresidentGlobalSupplyChainCedricProuv
57
GroupPresidentInternationalTraceyT.Travis
55
ExecutiveVicePresidentandChiefFinancialOfficerAlexandraC.Trower
52
ExecutiveVicePresidentGlobalCommunications
John Demsey isExecutiveGroupPresident.Inthisrole,heisresponsiblefornumerousbrands,includingClinique,Aramis,Prescriptives,MAC,JoMaloneLondon,Smashbox,TomFord,RODINoliolusso,LeLabo,EditionsdeParfumsFrdricMalle,GLAMGLOW,ByKilian,andTooFaced.Mr.DemseyservedasGroupPresidentfromJuly2006toJanuary2016,andwasappointedExecutiveGroupPresidentinJanuary2016.HebecameGlobalBrandPresidentofEsteLauderinJanuary2005afterservingasPresidentandManagingDirectorofMACsince1998.From1991to1998,Mr.DemseyheldseveralpositionswithEsteLauder,includingSeniorVicePresidentofSalesandEducationforEsteLauderUSAandCanada.Beforejoiningus,heworkedinsalesandmarketingforRevlon,Borghese,AlexandradeMarkoffCosmetics,andLancasterCosmetics.Mr.DemseyalsoheldvariousexecutiveretailpositionsatBloomingdales,Macys,BenettonandSaksFifthAvenue.HeservesasChairmanoftheMACAIDSFundandisontheBoardofDirectorsofBaccaratS.A.
Fabrizio Freda hasbeenPresidentandChiefExecutiveOfficeroftheCompanysinceJuly2009.FromMarch2008throughJune2009,hewasPresidentandChiefOperatingOfficeroftheCompanywhereheoversawtheClinique,BobbiBrown,LaMer,JoMaloneLondon,AvedaandBumbleandbumblebrandsandtheAramisandDesignerFragrancesdivision.HealsowasresponsiblefortheCompanysInternationalDivision,aswellasGlobalOperations,ResearchandDevelopment,Packaging,QualityAssurance,MerchandiseDesign,CorporateStoreDesignandRetailStoreOperations.PriortojoiningtheCompany,Mr.FredaservedinanumberofpositionsofincreasingresponsibilityatTheProcter&GambleCompany(P&G),wherehewasresponsibleforvariousoperating,marketingandkeystrategiceffortsforover20years.From2001through2007,Mr.FredawasPresident,GlobalSnacks,atP&G.HealsospentmorethanadecadeintheHealthandBeautyCaredivisionatP&G.From1986to1988hedirectedmarketingandstrategicplanningforGucciSpA.Mr.FredaiscurrentlyamemberoftheBoardofDirectorsofBlackRock,Inc.,aglobalassetmanagementcompany.
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Carl Haney isExecutiveVicePresident,GlobalResearchandDevelopment,CorporateProductInnovation,PackageDevelopment.PriortojoiningtheCompanyin2012,Mr.HaneywasVicePresident,R&DGlobal,MaleGrooming,Gillette,BraunandDevices,leadingteamsinallaspectsofinnovation,includingproduct,packaging,processdevelopmentandengineeringatTheProcter&GambleCompany(P&G)from2007throughMay2012.Mr.HaneystartedhiscareeratP&Gin1984,andovertheyearsheldnumerousleadershippositionsinlocationsaroundtheworld.In1997,hewaspromotedtoDirector,LatinAmericaBeautyCareR&D.Mr.HaneyalsoheldR&DleadershiprolesforP&GGlobalCosmeticsandOralCareandledP&GinnovationteamsinLatinAmerica,EuropeandAsia.
Leonard A. Lauder isChairmanEmeritusandamemberoftheBoardofDirectors.HewasChairmanoftheBoardofDirectorsfrom1995throughJune2009andservedasourChiefExecutiveOfficerfrom1982through1999andPresidentfrom1972until1995.Mr.LauderhasheldvariouspositionssinceformallyjoiningtheCompanyin1958afterservingasanofficerintheUnitedStatesNavy.HeisChairmanEmeritusoftheBoardofTrusteesoftheWhitneyMuseumofAmericanArt,aCharterTrusteeofTheUniversityofPennsylvania,aTrusteeofTheAspenInstituteandtheco-founderandCo-ChairmanoftheAlzheimersDrugDiscoveryFoundation.Mr.LauderisHonoraryChairmanoftheBreastCancerResearchFoundation.HealsoservedasamemberoftheWhiteHouseAdvisoryCommitteeonTradePolicyandNegotiationsunderPresidentReagan.
Ronald S. Lauder hasservedasChairmanofCliniqueLaboratories,LLCsincereturningfromgovernmentservicein1987andwasChairmanofEsteeLauderInternational,Inc.from1987through2002.HejoinedtheCompanyin1964andhasservedinvariouscapacities.Mr.LauderwaselectedasamemberoftheBoardofDirectorsoftheCompanyin2016;previouslyhewasamemberoftheBoardofDirectorsoftheCompanyfrom1968to1986andagainfrom1988toJuly2009.From1983to1986,heservedasDeputyAssistantSecretaryofDefenseforEuropeanandNATOAffairs.From1986to1987,hewasU.S.AmbassadortoAustria.Mr.LauderisanHonoraryChairmanoftheBoardofTrusteesoftheMuseumofModernArtandPresidentoftheNeueGalerie.HeisalsoChairmanoftheBoardofGovernorsoftheJosephH.LauderInstituteofManagementandInternationalStudiesattheWhartonSchoolattheUniversityofPennsylvaniaandtheco-founderandCo-ChairmanoftheAlzheimersDrugDiscoveryFoundation.
William P. Lauder isExecutiveChairmanand,insuchrole,heisChairmanoftheBoardofDirectors.HewasChiefExecutiveOfficeroftheCompanyfromMarch2008throughJune2009andPresidentandChiefExecutiveOfficerfromJuly2004throughFebruary2008.FromJanuary2003throughJune2004,hewasChiefOperatingOfficer.FromJuly2001through2002,hewasGroupPresidentresponsiblefortheworldwidebusinessoftheCliniqueandOriginsbrandsandtheCompanysretailstoreandonlineoperations.From1998to2001,hewasPresidentofCliniqueLaboratories,LLC.Priorto1998,hewasPresidentofOriginsNaturalResourcesInc.,andhehadbeentheseniorofficerofthatdivisionsinceitsinceptionin1990.Priorthereto,heservedinvariouspositionssincejoiningtheCompanyin1986.Mr.LaudercurrentlyservesasChairmanoftheBoardoftheFreshAirFund,amemberoftheboardsoftrusteesofTheUniversityofPennsylvaniaandTheTrinitySchoolinNewYorkCity,amemberoftheboardsofdirectorsofthe92 StreetYandthePartnershipforNewYorkCity,andisontheAdvisoryBoardofZelnickMedia.HeisalsoCo-ChairmanoftheBreastCancerResearchFoundation.
Sara E. Moss isExecutiveVicePresidentandGeneralCounsel.ShejoinedusasSeniorVicePresident,GeneralCounselandSecretaryinSeptember2003andbecameExecutiveVicePresidentinNovember2004.ShewasSeniorVicePresidentandGeneralCounselofPitneyBowesInc.from1996toFebruary2003,andSeniorLitigationPartnerforHoward,Smith&Levin(nowCovington&Burling)inNewYorkfrom1984to1996.Priorto1984,Ms.MossservedasanAssistantUnitedStatesAttorneyintheCriminalDivisionintheSouthernDistrictofNewYork,wasanassociateatthelawfirmofDavis,Polk&WardwellandwasLawClerktotheHonorableConstanceBakerMotley,U.S.DistrictJudgeintheSouthernDistrictofNewYork.
Michael OHare isExecutiveVicePresident-GlobalHumanResources.PriortojoiningtheCompanyin2013,hewaswithHeinekenN.V.,aglobalbrewerbasedintheNetherlands,whereheservedsince2009asGlobalChiefHumanResourcesOfficer.Priortothat,Mr.OHarespent13yearsatPepsiCo,aglobalfoodandbeveragecompany,whereheheldavarietyofseniorrolesinHumanResources,includingChiefPersonnelOfficer/VicePresidentforAsiaPacific.
Gregory F. Polcer isExecutiveVicePresident-GlobalSupplyChain.HeisresponsibleforGlobalDirectandIndirectProcurement,Manufacturing,Logistics,QualityAssuranceandEnvironmentalAffairsandSafety.From1988to2008,whenhejoinedtheCompany,Mr.PolcerworkedforUnileverwherehedesignedandimplementedglobal,regionalandlocalinitiatives.From2006to2008,heservedastheSeniorVicePresident,SupplyChainforUnileverwhereheintegratedtheNorthandLatinAmericanSupplyChains,providedseniorleadershipforallglobalsupplymanagementandestablishedaglobaloutsourcingplan.Mr.PolcerservedasSeniorVicePresident,SupplyChain-NorthAmericafrom2005to2006andSeniorVicePresident,SupplyChain,HomeandPersonalCareNorthAmericafrom2002to2004.
Cedric Prouv isGroupPresidentInternational.HeisresponsibleforourInternationalDivision,whichincludesallmarketsoutsideoftheUnitedStatesandCanada,ourTravelRetailbusinessworldwideandalloftheactivitiesofoursalesaffiliatesanddistributorrelationships.HebecameGroupPresidentInternationalinJanuary2003.FromAugust2000throughDecember2002,hewastheGeneralManagerofourJapanesesalesaffiliate.FromJanuary1997toAugust2000,hewasVicePresident,GeneralManager,TravelRetail.Mr.Prouvstartedwithusin1994asGeneralManager,TravelRetailing-AsiaPacificRegionandwasgiventheaddedresponsibilityofGeneralManagerofourSingaporeaffiliatein1995.Previously,heworkedatLOrealinsalesandmanagementpositionsintheAmericasandAsia/Pacific.
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Tracey T. Travis isExecutiveVicePresidentandChiefFinancialOfficer.PriortojoiningtheCompanyin2012,shewasSeniorVicePresidentandChiefFinancialOfficerofRalphLaurenCorporationsince2005,responsibleforGlobalFinance,InternalAudit,Treasury,Tax,BusinessDevelopment,InvestorRelationsandGlobalInformationTechnology.Previously,Ms.TraviswasSeniorVicePresident,FinanceofIntimateBrandsforLimitedBrands,Inc.from2002to2004.ShealsospentadecadeatPepsiCoInc.andthePepsiBottlingGroup,wheresheheldoperationsmanagementandfinanceroles.ShebeganhercareerasanengineerandfinancialanalystatGeneralMotorsCompany.Ms.TravisjoinedtheBoardofDirectorsofAccentureplcinJuly2017,andsheisalsoamemberoftheBoardofDirectorsofCampbellSoupCompany.Inaddition,sheisamemberoftheBoardofOverseersatColumbiaBusinessSchool.
Alexandra C. Trower isExecutiveVicePresident-GlobalCommunications.ShedirectstheCompanysoverallcommunicationsstrategy,overseeingbrandcommunications,corporatecommunications,internalcommunicationsandphilanthropiccommunications.PriortojoiningtheCompanyin2008,Ms.TrowerwasSeniorVicePresident,MediaRelationsforBankofAmericafromJuly2003toMarch2008.From1997to2003,sheworkedatJPMorganChase,whereshewasresponsibleforcorporatecommunicationsatJPMorganFlemingAssetManagement.From1987to1997,Ms.TrowerworkedataformerdivisionofCitibank,ChancellorCapitalManagement(nowpartofInvesco),wheresheheldavarietyofcommunicationsroles.Ms.TrowerservesontheBoardofDirectorsofHollinsUniversity,andsheisco-chairofTheInternationalWomensMediaFoundation.Eachexecutiveofficerservesforaone-yeartermendingatthenextannualelectionofofficers,subjecttohisorherapplicableemploymentagreementandhisorherearlierdeath,resignationorremoval.Item 1A. Risk Factors.Therearerisksassociatedwithaninvestmentinoursecurities.PleaseconsiderthefollowingrisksandalloftheotherinformationinthisannualreportonForm10-KandinoursubsequentfilingswiththeSecuritiesandExchangeCommission(SEC).Ourbusinessmayalsobeadverselyaffectedbyrisksanduncertaintiesnotpresentlyknowntousorthatwecurrentlybelievetobeimmaterial.Ifanyoftheeventscontemplatedbythefollowingdiscussionofrisksshouldoccurorotherrisksariseordevelop,ourbusiness,prospects,financialconditionandresultsofoperations,aswellasthetradingpricesofoursecurities,maybeadverselyaffected.The beauty business is highly competitive, and if we are unable to compete effectively our results will suffer.Wefacevigorouscompetitionfromcompaniesthroughouttheworld,includingmultinationalconsumerproductcompanies.Someofthesecompetitorshavegreaterresourcesthanwedoandothersarenewercompanies(somebackedbyprivate-equityinvestors)competingindistributionchannelswherewearelessrepresented.Insomecases,ourcompetitorsmaybeabletorespondtochangingbusinessandeconomicconditionsmorequicklythanus.Competitioninthebeautybusinessisbasedonavarietyoffactorsincludingpricingofproducts,innovation,perceivedvalue,servicetotheconsumer,promotionalactivities,advertising,specialevents,newproductintroductions,e-commerceandm-commerceinitiativesandotheractivities.Itisdifficultforustopredictthetimingandscaleofourcompetitorsactionsintheseareas.Ourabilitytocompetealsodependsonthecontinuedstrengthofourbrands,ourabilitytoattractandretainkeytalentandotherpersonnel,theefficiencyofourmanufacturingfacilitiesanddistributionnetwork,andourabilitytomaintainandprotectourintellectualpropertyandthoseotherrightsusedinourbusiness.OurCompanyhasawell-recognizedandstrongreputationthatcouldbenegativelyimpactedbymanyfactors.Ifourreputationisadverselyaffected,ourabilitytoattractandretaincustomersandconsumerscouldbeimpacted.Inaddition,certainofourkeyretailersaroundtheworldmarketandsellcompetingbrandsorareownedorotherwiseaffiliatedwithcompaniesthatmarketandsellcompetingbrands.Ourinabilitytocontinuetocompeteeffectivelyinkeycountriesaroundtheworldcouldhaveanadverseimpactonourbusiness.Our inability to anticipate and respond to market trends and changes in consumer preferences could adversely affect our financial results.Ourcontinuedsuccessdependsonourabilitytoanticipate,gaugeandreactinatimelyandcost-effectivemannertochangesinconsumertastesforskincare,makeup,fragranceandhaircareproducts,attitudestowardourindustryandbrands,aswellastowhereandhowconsumersshop.Wemustcontinuallyworktodevelop,manufactureandmarketnewproducts,maintainandadaptourHigh-Touchservicestoexistingandemergingdistributionchannels,maintainandenhancetherecognitionofourbrands,achieveafavorablemixofproducts,successfullymanageourinventories,andrefineourapproachastohowandwherewemarketandsellourproducts.Whilewedevoteconsiderableeffortandresourcestoshape,analyzeandrespondtoconsumerpreferences,werecognizethatconsumertastescannotbepredictedwithcertaintyandcanchangerapidly.Theissueiscompoundedbytheincreasinguseofdigitalandsocialmediabyconsumersandthespeedbywhichinformationandopinionsareshared.Ifweareunabletoanticipateandrespondtosuddenchallengesthatwemayfaceinthemarketplace,trendsinthemarketforourproductsandchangingconsumerdemandsandsentiment,ourfinancialresultswillsuffer.Inaddition,fromtimetotime,salesgrowthorprofitabilitymaybeconcentratedinarelativelysmallnumberofourbrands,channelsorcountries.Ifsuchasituationpersistsoranumberofbrands,channelsorcountriesfailtoperformasexpected,therecouldbeamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.
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TableofContentsInkeymarkets,suchastheUnitedStates,wehaveseenadeclineinretailtrafficinourdepartmentstorecustomersandcertainofourfreestandingstores.Weareseeingtheemergenceofstronge-andm-commerceplatforms(bothinmassandprestigedistribution)thatareimpactingourbusiness.Furtherconsolidationintheretailtrade,fromtheseorotherfactors,mayresultinusbecomingincreasinglydependentonkeyretailers.Thiscouldresultinanincreasedriskrelatedtotheconcentrationofourcustomers.Asevere,adverseimpactonthebusinessoperationsofourcustomerscouldhaveacorrespondingmaterialadverseeffectonus.Ifoneormoreofourlargestcustomerschangetheirstrategies(includingpricingorpromotionalactivities)ortheyorwechangeorterminatetheirrelationshipwithus,therecouldbeamaterialadverseeffectonourbusiness.Our future success depends on our ability to achieve our long-term strategy.Achievingourlong-termstrategywillrequireinvestmentinnewcapabilities,brands,categories,distributionchannels,technologiesandemergingandmorematuregeographicmarkets.Theseinvestmentsmayresultinshort-termcostswithoutanycurrentrevenuesand,therefore,maybedilutivetoourearnings,atleastintheshortterm.Inaddition,wemaydisposeofordiscontinueselectbrandsorstreamlineoperationsandincurcostsorrestructuringandotherchargesindoingso.Althoughwebelievethatourstrategywillleadtolong-termgrowthinrevenueandprofitability,wemaynotrealize,infullorinpart,theanticipatedbenefits.Thefailuretorealizebenefits,whichmaybeduetoourinabilitytoexecuteplans,globalorlocaleconomicconditions,competition,changesinthebeautyindustryandtheotherrisksdescribedherein,couldhaveamaterialadverseeffectonourbusiness,financialconditionandresultsofoperations.Acquisitions may expose us to additional risks.Wecontinuouslyreviewacquisitionandstrategicinvestmentopportunitiesthatwouldexpandourcurrentproductofferings,ourdistributionchannels,increasethesizeandgeographicscopeofouroperationsorotherwiseoffergrowthandoperatingefficiencyopportunities.Therecanbenoassurancethatwewillbeabletoidentifysuitablecandidatesorconsummatethesetransactionsonfavorableterms.Ifrequired,thefinancingforthesetransactionscouldresultinanincreaseinourindebtedness,dilutetheinterestsofourstockholdersorboth.Thepurchasepriceforsomeacquisitionsmayincludeadditionalamountstobepaidincashinthefuture,aportionofwhichmaybecontingentontheachievementofcertainfutureoperatingresultsoftheacquiredbusiness.Iftheperformanceofanysuchacquiredbusinessexceedssuchoperatingresults,thenwemayincuradditionalchargesandberequiredtopayadditionalamounts.Acquisitionsincludingstrategicinvestmentsoralliancesentailnumerousrisks,whichmayinclude:
difficultiesinintegratingacquiredoperationsorproducts,includingthelossofkeyemployeesfrom,orcustomersof,acquiredbusinesses;diversionofmanagementsattentionfromourexistingbusinesses;adverseeffectsonexistingbusinessrelationshipswithsuppliersandcustomers;adverseimpactsofmarginandproductcoststructuresdifferentfromthoseofourcurrentmixofbusiness;andrisksofenteringdistributionchannels,categoriesormarketsinwhichwehavelimitedornopriorexperience.
Ourfailuretosuccessfullycompletetheintegrationofanyacquiredbusinessortoachievethelong-termplanforsuchbusiness,aswellasanyotheradverseconsequencesassociatedwithouracquisitionandinvestmentactivities,couldhaveamaterialadverseeffectonourbusiness,financialconditionandoperatingresults.Completedacquisitionstypicallyresultinadditionalgoodwilland/oranincreaseinotherintangibleassetsonourbalancesheet.Wearerequiredatleastannually,orasfactsandcircumstancesexist,totestgoodwillandotherintangibleassetswithindefinitelivestodetermineifimpairmenthasoccurred.Ifthetestingperformedindicatesthatimpairmenthasoccurred,wearerequiredtorecordanon-cashimpairmentchargeforthedifferencebetweenthecarryingvalueofthegoodwillorotherintangibleassetswithindefinitelivesandtheimpliedfairvalueofthegoodwillorthefairvalueofotherintangibleassetswithindefinitelivesintheperiodthedeterminationismade.Wecannotaccuratelypredicttheamountandtimingofanyimpairmentofassets.Shouldthevalueofgoodwillorotherintangibleassetsbecomeimpaired,therecouldbeamaterialadverseeffectonourfinancialconditionandresultsofoperations.A general economic downturn, or sudden disruption in business conditions may affect consumer purchases of discretionary items and/or the financial strengthof our customers that are retailers, which could adversely affect our financial results.Thegenerallevelofconsumerspendingisaffectedbyanumberoffactors,includinggeneraleconomicconditions,inflation,interestrates,energycosts,andconsumerconfidencegenerally,allofwhicharebeyondourcontrol.Consumerpurchasesofdiscretionaryitemstendtodeclineduringrecessionaryperiods,whendisposableincomeislower,andmayimpactsalesofourproducts.Adeclineinconsumerpurchasesofdiscretionaryitemsalsotendstoimpactourcustomersthatareretailers.Wegenerallyextendcredittoaretailerbasedonanevaluationofitsfinancialcondition,usuallywithoutrequiringcollateral.However,thefinancialdifficultiesofaretailercouldcauseustocurtailoreliminatebusinesswiththatcustomer.Wemayalsoassumemorecreditriskrelatingtothereceivablesfromthatretailer.Ourinabilitytocollectreceivablesfromourlargestcustomersorfromagroupofcustomerscouldhaveamaterialadverseeffectonourbusinessandourfinancialcondition.Ifaretailerwastoliquidate,wemayincuradditionalcostsifwechoosetopurchasetheretailersinventoryofourproductstoprotectbrandequity.
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TableofContentsInaddition,suddendisruptionsinbusinessconditions,forexample,fromeventssuchasapandemic,orotherlocalorglobalhealthissues,conflictsaroundtheworld,orasaresultofaterroristattack,retaliationorsimilarthreats,orasaresultofadverseweatherconditions,climatechangesorseismicevents,canhaveashort-termand,sometimes,long-termimpactonconsumerspending.Eventsthatimpactconsumerswillingnessorabilitytotraveland/orpurchaseourproductswhiletravelingmayimpactourbusiness,includingtravelretail,asignificantcontributortoouroverallresults,andourstrategytomarketandsellproductstointernationaltravelersattheirdestinations.Adownturnintheeconomiesof,orcontinuingrecessionsin,thecountrieswherewesellourproductsorasuddendisruptionofbusinessconditionsinthosecountriescouldadverselyaffectconsumerconfidence,thefinancialstrengthofourretailersandoursalesandprofitability.Wearecautiousofthecontinueddeclineinretailtrafficprimarilyrelatedtobrick-and-mortardepartmentstoresintheUnitedStatesasaresultoftheimpactofshiftsinconsumerpreferencesastowhereandhowtheyshop.Wearealsocautiousofforeigncurrencymovementsandtheirimpactontourism,whichhasparticularlyimpactedcertaintourist-drivenstoresintheUnitedStates.Additionally,wecontinuetomonitortheeffectsofthemacroeconomicenvironmentsincertaincountriessuchasBrazilandintheMiddleEast,theUnitedKingdomsanticipatedexitfromtheEuropeanUnion,geopoliticaltensionsandglobalsecurityissues.Volatilityinthefinancialmarketsandarelatedeconomicdownturninkeymarketsormarketsgenerallythroughouttheworldcouldhaveamaterialadverseeffectonourbusiness.Whilewecurrentlygeneratesignificantcashflowsfromourongoingoperationsandhaveaccesstoglobalcreditmarketsthroughourvariousfinancingactivities,creditmarketsmayexperiencesignificantdisruptions.Deteriorationinglobalfinancialmarketsoranadversechangeinourcreditratingscouldmakefuturefinancingdifficultormoreexpensive.Ifanyfinancialinstitutionsthatarepartiestoourundrawnrevolvingcreditfacilityorotherfinancingarrangements,suchasforeignexchangeorinterestratehedginginstruments,weretodeclarebankruptcyorbecomeinsolvent,theymaybeunabletoperformundertheiragreementswithus.Thiscouldleaveuswithreducedborrowingcapacityorunhedgedagainstcertainforeigncurrencyorinterestrateexposureswhichcouldhaveanadverseimpactonourfinancialconditionandresultsofoperations.Changes in laws, regulations and policies that affect our business could adversely affect our financial results.Ourbusinessissubjecttonumerouslaws,regulationsandpolicies.Changesinthelaws,regulationsandpolicies,includingtheinterpretationorenforcementthereof,thataffect,orwillaffect,ourbusiness,includingchangesinaccountingstandards,taxlawsandregulations,lawsandregulationsrelatingtodataprivacy,anti-corruption,advertising,marketing,manufacturing,distribution,productregistration,ingredients,chemicalsandpackaging,lawsinEuropeandelsewhererelatingtoselectivedistribution,environmentalorclimatechangelaws,regulationsoraccords,traderulesandcustomsregulations,andtheoutcomeandexpenseoflegalorregulatoryproceedings,andanyactionwemaytakeasaresultcouldadverselyaffectourfinancialresults.We are involved, and may become involved in the future, in disputes and other legal or regulatory proceedings that, if adversely decided or settled, couldadversely affect our financial results.Weare,andmayinthefuturebecome,partytolitigation,otherdisputesorregulatoryproceedings.Ingeneral,claimsmadebyusoragainstusinlitigation,disputesorotherproceedingscanbeexpensiveandtimeconsumingtobringordefendagainstandcouldresultinsettlements,injunctionsordamagesthatcouldsignificantlyaffectourbusinessorfinancialresults.Wearecurrentlyvigorouslycontestingcertainoftheseclaims.However,itisnotpossibletopredictthefinalresolutionofthelitigation,disputesorproceedingstowhichwecurrentlyareormayinthefuturebecomepartyto,andtheimpactofcertainofthesemattersonourbusiness,resultsofoperationsandfinancialconditioncouldbematerial.Government reviews, inquiries, investigations, and actions could harm our business or reputation.Asweoperateinvariouslocationsaroundtheworld,ouroperationsincertaincountriesaresubjecttosignificantgovernmentalscrutinyandmaybeadverselyimpactedbytheresultsofsuchscrutiny.Theregulatoryenvironmentwithregardtoourbusinessisevolving,andofficialsoftenexercisebroaddiscretionindecidinghowtointerpretandapplyapplicableregulations.Fromtimetotime,wemayreceiveformalandinformalinquiriesfromvariousgovernmentregulatoryauthorities,aswellasself-regulatoryorganizations,aboutourbusinessandcompliancewithlocallaws,regulationsorstandards.Anydeterminationthatouroperationsoractivities,ortheactivitiesofouremployees,arenotincompliancewithexistinglaws,regulationsorstandardscouldnegativelyimpactusinanumberofways,includingtheimpositionofsubstantialfines,interruptionsofbusiness,lossofsupplier,vendororotherthird-partyrelationships,terminationofnecessarylicensesandpermits,orsimilarresults,allofwhichcouldpotentiallyharmourbusinessand/orreputation.Evenifaninquirydoesnotresultinthesetypesofdeterminations,itpotentiallycouldcreatenegativepublicitywhichcouldharmourbusinessand/orreputation.
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TableofContentsOur success depends, in part, on the quality, efficacy and safety of our products.Oursuccessdepends,inpart,onthequality,efficacyandsafetyofourproducts.Ifourproductsarefoundtobedefectiveorunsafe,ourproductclaimsarefoundtobedeceptive,orourproductsotherwisefailtomeetourconsumersexpectations,ourrelationshipswithcustomersorconsumerscouldsuffer,theappealofoneormoreofourbrandscouldbediminished,andwecouldlosesalesand/orbecomesubjecttoliabilityorclaims,anyofwhichcouldresultinamaterialadverseeffectonourbusiness,resultsofoperationsandfinancialcondition.Inaddition,thirdpartiesmaysellcounterfeitversionsofsomeofourproducts.Thesecounterfeitproductsmayposesafetyrisks,mayfailtomeetconsumersexpectations,andmayhaveanegativeimpactonourreputation.Our success depends, in part, on our key personnel.Oursuccessdepends,inpart,onourabilitytoretainourkeypersonnel,includingourexecutiveofficersandseniormanagementteam.Theunexpectedlossofoneormoreofourkeyemployeescouldadverselyaffectourbusiness.Oursuccessalsodepends,inpart,onourcontinuingabilitytoidentify,hire,trainandretainotherhighlyqualifiedpersonnel.Competitionfortheseemployeescanbeintense.Wemaynotbeabletoattract,assimilateorretainqualifiedpersonnelinthefuture,andourfailuretodosocouldadverselyaffectourbusiness.Thisriskmaybeexacerbatedbythestressesassociatedwiththeimplementationofourstrategicplanandotherinitiatives.We are subject to risks related to the global scope of our operations.Weoperateonaglobalbasis,withamajorityofourfiscal2017netsalesandoperatingincomegeneratedoutsidetheUnitedStates.Weintendtoreinvesttheseearningsinourforeignoperationsindefinitely,exceptwhereweareabletorepatriatetheseearningstotheUnitedStateswithoutmaterialincrementaltaxprovision.AmajorityofourcashandcashequivalentsthatresultfromtheseearningsremainoutsidetheUnitedStates.IftheseindefinitelyreinvestedearningswererepatriatedintotheUnitedStatesasdividends,wewouldbesubjecttoadditionaltaxes.Wemaintainofficesinover50countriesandhavekeyoperationalfacilitieslocatedinsideandoutsidetheUnitedStatesthatmanufacture,warehouseordistributegoodsforsalethroughouttheworld.Ourglobaloperationsaresubjecttomanyrisksanduncertainties,including:
fluctuationsinforeigncurrencyexchangeratesandtherelativecostsofoperatingindifferentplaces,whichcanaffectourresultsofoperations,thevalueofourforeignassets,therelativepricesatwhichweandcompetitorssellproductsinthesamemarkets,thecostofcertaininventoryandnon-inventoryitemsrequiredinouroperations,andtherelativepricesatwhichwesellourproductsindifferentmarkets;
foreignorU.S.laws,regulationsandpolicies,includingrestrictionsontrade,immigrationandtravel;importandexportlicenserequirements;tariffsand
taxes;operations;andinvestments;
lackofwell-establishedorreliablelegalandadministrativesystemsincertaincountriesinwhichweoperate;and
adverseweatherconditions,currencyexchangecontrols,andsocial,economicandgeopoliticalconditions,suchasterroristattacks,warorothermilitaryaction.
Theseriskscouldhaveamaterialadverseeffectonourbusiness,prospects,reputation,resultsofoperationsandfinancialcondition.A disruption in operations or our supply chain could adversely affect our business and financial results.Asacompanyengagedinmanufacturinganddistributiononaglobalscale,wearesubjecttotherisksinherentinsuchactivities,includingindustrialaccidents,environmentalevents,strikesandotherlabordisputes,disruptionsinsupplychainorinformationsystems,lossorimpairmentofkeymanufacturingsitesorsuppliers,productqualitycontrol,safety,increaseincommoditypricesandenergycosts,licensingrequirementsandotherregulatoryissues,aswellasnaturaldisastersandotherexternalfactorsoverwhichwehavenocontrol.Ifsuchaneventweretooccur,itcouldhaveanadverseeffectonourbusinessandfinancialresults.Weuseawidevarietyofdirectandindirectsuppliersofgoodsandservicesfromaroundtheworld.Someofourproductsrelyonsingleoralimitednumberofsuppliers.Changesinthefinancialorbusinessconditionofoursupplierscouldsubjectustolossesoradverselyaffectourabilitytobringproductstomarket.Further,thefailureofoursupplierstodelivergoodsandservicesinsufficientquantities,incompliancewithapplicablestandards,andinatimelymannercouldadverselyaffectourcustomerservicelevelsandoverallbusiness.Inaddition,anyincreasesinthecostsofgoodsandservicesforourbusinessmayadverselyaffectourprofitmarginsifweareunabletopassalonganyhighercostsintheformofpriceincreasesorotherwiseachievecostefficienciesinouroperations.
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TableofContentsOur information systems and websites may be susceptible to cybersecurity breaches, outages, and other risks.Werelyoninformationsystems(outsourcedandin-house)thatsupportourbusinessprocesses,includingproductdevelopment,marketing,sales,orderprocessing,production,distribution,financeandintracompanycommunicationsthroughouttheworld.Wehavee-commerce,m-commerceandotherInternetwebsitesintheUnitedStatesandmanyothercountries.Thesesystemsmaybesusceptibletooutagesduetofire,floods,powerloss,telecommunicationsfailures,break-insandotherevents.Despitetheimplementationofnetworksecuritymeasures,oursystemsmaybevulnerabletocybersecuritybreachessuchascomputerviruses,break-insandsimilardisruptionsfromunauthorizedtampering.Theoccurrenceoftheseorothereventscoulddisruptordamageourinformationsystemsandadverselyaffectourbusinessandresultsofoperations.Failure to adequately maintain the security of our electronic and other confidential information could materially adversely affect our financial condition andresults of operations.Wearedependentuponautomatedinformationtechnologyprocesses.Aspartofournormalbusinessactivities,wecollectandstorecertaininformationthatisconfidential,proprietaryorotherwisesensitive,includingpersonalinformationwithrespecttocustomers,consumersandemployees.Wemaysharesomeofthisinformationwithvendorswhoassistuswithcertainaspectsofourbusiness.Moreover,thesuccessofoure-commerceandm-commerceoperationsdependsuponthesecuretransmissionofconfidentialandpersonaldataoverpublicnetworks,includingtheuseofcashlesspayments.Anyfailureonthepartofusorourvendorstomaintainthesecurityofourconfidentialdataandpersonalinformation,includingviathepenetrationofournetworksecurityandthemisappropriationofconfidentialandpersonalinformation,couldresultinbusinessdisruption,damagetoourreputation,financialobligationstothirdparties,fines,penalties,regulatoryproceedingsandprivatelitigationwithpotentiallylargecosts,andalsoresultindeteriorationinouremployees,consumersandcustomersconfidenceinusandothercompetitivedisadvantages,andthuscouldhaveamaterialadverseimpactonourbusiness,financialconditionandresultsofoperations.Inaddition,asecuritybreachcouldrequirethatweexpendsignificantadditionalresourcestoenhanceourinformationsecuritysystemsandcouldresultinadisruptiontoouroperations.We are subject to risks associated with our global information systems.Ourimplementationandmaintenanceofglobalinformationsystems(outsourcedandin-house),includingsupplychainandfinancesystems,humanresourcemanagementsystems,creativeassetmanagementandretailoperatingsystems,aswellasassociatedhardwareanduseofcloud-basedmodels,involverisksanduncertainties.Failuretoimplementandmaintaintheseandothersystemsasplanned,intermsoftiming,specifications,costs,orotherwise,couldhaveanadverseimpactonourbusinessandresultsofoperations.As we outsource functions, we become more dependent on the entities performing those functions.Aspartofourlong-termstrategy,wearecontinuallylookingforopportunitiestoprovideessentialbusinessservicesinamorecost-effectivemanner.Insomecases,thisrequirestheoutsourcingoffunctionsorpartsoffunctionsthatcanbeperformedmoreeffectivelybyexternalserviceproviders.Theseincludecertaininformationsystems,financeandhumanresourcefunctions.Whilewebelieveweconductappropriateduediligencebeforeenteringintoagreementswiththeoutsourcingentity,thefailureofoneormoreentitiestoprovidetheexpectedservices,providethemonatimelybasisortoprovidethematthepricesweexpectmayhaveamaterialadverseeffectonourresultsofoperationsorfinancialcondition.Inaddition,ifwetransitionsystemstooneormorenew,oramongexisting,externalserviceproviders,wemayexperiencechallengesthatcouldhaveamaterialadverseeffectonourresultsofoperationsorfinancialcondition.The trading prices of our securities periodically may rise or fall based on the accuracy of predictions of our earnings or other financial performance.Ourbusinessplanningprocessisdesignedtomaximizeourlong-termstrength,growthandprofitability,nottoachieveanearningstargetinanyparticularfiscalquarter.Webelievethatthislonger-termfocusisinthebestinterestsoftheCompanyandourstockholders.Atthesametime,however,werecognizethatitmaybehelpfultoprovideinvestorswithguidanceastoourforecastofnetsales,earningspershareandotherfinancialmetricsorprojections.Accordingly,whenweannouncedouryear-endfinancialresultsforfiscal2017,weprovidedguidanceastocertainassumptions,includingrangesforourexpectednetsalesandearningspershareforthequarterendingSeptember30,2017andthefiscalyearendingJune30,2018.Whilewegenerallyexpecttoprovideupdatestoourguidancewhenwereportourresultseachfiscalquarter,weassumenoresponsibilitytoupdateanyofourforward-lookingstatementsatsuchtimesorotherwise.Inaddition,thelonger-termguidanceweprovideisbasedongoalsthatwebelieve,atthetimeguidanceisgiven,arereasonablyattainableforgrowthandperformanceoveranumberofyears.Suchtargetsaremoredifficulttopredictthanourcurrentquarterandfiscalyearexpectations.WehistoricallyhavepaiddividendsonourcommonstockandrepurchasedsharesofourClassACommonStock.Atanytime,wecouldstoporsuspendpaymentofdividendsorstoporsuspendourstockrepurchaseprogram,andanysuchactioncouldcausethemarketpriceofourstocktodecline.
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TableofContentsInallofourpublicstatementswhenwemake,orupdate,aforward-lookingstatementaboutournetsalesand/orearningsexpectationsorexpectationsregardingrestructuringorotherinitiatives,weaccompanysuchstatementsdirectly,orbyreferencetoapublicdocument,withalistoffactorsthatcouldcauseouractualresultstodiffermateriallyfromthoseweexpect.Suchalistisincluded,amongotherplaces,inourearningspressreleaseandinourperiodicfilingswiththeSecuritiesandExchangeCommission(e.g.,inourreportsonForm10-KandForm10-Q).Theseandotherfactorsmaymakeitdifficultforusandforoutsideobservers,suchasresearchanalysts,topredictwhatourearningswillbeinanygivenfiscalquarteroryear.Outsideanalystsandinvestorshavetherighttomaketheirownpredictionsofourfinancialresultsforanyfutureperiod.Outsideanalysts,however,haveaccesstonomorematerialinformationaboutourresultsorplansthananyotherpublicinvestor,andwedonotendorsetheirpredictionsastoourfutureperformance.Nordoweassumeanyresponsibilitytocorrectthepredictionsofoutsideanalystsorotherswhentheydifferfromourowninternalexpectations.Ifandwhenweannounceactualresultsthatdifferfromthosethatoutsideanalystsorothershavebeenpredicting,themarketpriceofoursecuritiescouldbeaffected.Investorswhorelyonthepredictionsofoutsideanalystsorotherswhenmakinginvestmentdecisionswithrespecttooursecuritiesdosoattheirownrisk.Wetakenoresponsibilityforanylossessufferedasaresultofsuchchangesinthepricesofoursecurities.We are controlled by the Lauder family. As a result of their control of us, the Lauder family has the ability to prevent or cause a change in control or approve,prevent or influence certain actions by us.
AsofAugust18,2017,membersoftheLauderfamilybeneficiallyown,directlyorindirectly,sharesoftheCompanysClassACommonStock(withonevotepershare)andClassBCommonStock(with10votespershare)havingapproximately87%oftheoutstandingvotingpoweroftheCommonStock.Inaddition,therearefourmembersoftheLauderfamilywhoareemployeesandmembersofourBoardofDirectors.Anotherfamilymemberisapartytoaconsultingagreementandalicenseagreementwithus.AsaresultofthestockownershipandtheirpositionsattheCompany,theLauderfamilyhastheabilitytoexercisesignificantcontrolandinfluenceoverourbusiness,including,allmattersrequiringstockholderapproval,includingtheelectionofdirectors,amendmentstothecertificateofincorporationandsignificantcorporatetransactions,suchasamergerorothersaleofourCompanyoritsassets,fortheforeseeablefuture.We are a controlled company within the meaning of the New York Stock Exchange rules and, as a result, are relying on exemptions from certain corporategovernance requirements that are designed to provide protection to stockholders of companies that are not controlled companies.
TheLauderfamilyandtheirrelatedentitiesownmorethan50%ofthetotalvotingpowerofourcommonsharesand,asaresult,weareacontrolledcompanyundertheNewYorkStockExchangecorporategovernancestandards.Asacontrolledcompany,weareexemptundertheNewYorkStockExchangestandardsfromtheobligationtocomplywithcertainNewYorkStockExchangecorporategovernancerequirements,includingtherequirementsthat(1)amajorityofourboardofdirectorsconsistsofindependentdirectors;(2)wehaveanominatingcommitteethatiscomposedentirelyofindependentdirectorswithawrittencharteraddressingthecommitteespurposeandresponsibilities;and(3)wehaveacompensationcommitteethatiscomposedentirelyofindependentdirectorswithawrittencharteraddressingthecommitteespurposeandresponsibilities.WhilewehavevoluntarilycausedourBoardtohaveamajorityofindependentdirectorsandthewrittenchartersofourNominatingandBoardAffairsCommitteeandtheCompensationCommitteetohavetherequiredprovisions,wearenotrequiringourNominatingandBoardAffairsCommitteeandCompensationCommitteetobecomprisedsolelyofindependentdirectors.Asaresultofouruseofthecontrolledcompanyexemptions,investorswillnothavethesameprotectionaffordedtostockholdersofcompaniesthataresubjecttoalloftheNewYorkStockExchangecorporategovernancerequirements.Item 1B. Unresolved Staff Comments.
AsofthefilingofthisannualreportonForm10-K,therewerenounresolvedcommentsfromtheStaffoftheSecuritiesandExchangeCommission.
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TableofContentsItem 2. Properties .Thefollowingtablesetsforthourprincipalownedandleasedmanufacturing,assembly,researchanddevelopmentanddistributionfacilities,someofwhichincludecontiguousofficespace,asofAugust18,2017.Theleasesexpireatvarioustimesthrough2026subjecttocertainrenewaloptions.
Location
Use
Approximate Square Footage
The Americas
Blaine,Minnesota
Owned
ManufacturingandR&D
275,000
Blaine,Minnesota
Leased
Distribution
187,000
Melville,NewYork
Owned
Manufacturing
353,000
Melville,NewYork
Owned
R&D
134,000
Bristol,Pennsylvania
Leased
Manufacturing
67,000
Bristol,Pennsylvania
Leased
ManufacturingandAssembly
100,000
Bristol,Pennsylvania
Leased
Distribution
782,000
Trevose,Pennsylvania
Leased
ManufacturingandAssembly
80,000
Agincourt,Ontario,Canada
Owned
Manufacturing
96,000
Markham,Ontario,Canada
Leased
Manufacturing
137,000
Markham,Ontario,Canada
Leased
R&D
42,000
Toronto,Ontario,Canada
Leased
Distribution
186,000
Europe, the Middle East & Africa
Oevel,Belgium
Owned
Manufacturing
113,000
Oevel,Belgium
Leased
ManufacturingandR&D
81,000
Oevel,Belgium
Leased
Distribution
105,000
Kerpen,Germany
Leased
Distribution
98,000
Sandton,SouthAfrica
Leased
Distribution
65,000
Madrid,Spain
Leased
Distribution
123,000
Lachen,Switzerland
Owned
Manufacturing
29,000
Lachen,Switzerland
Owned
Distribution
125,000
Hampshire,UnitedKingdom
Leased
Distribution
229,000
Petersfield,UnitedKingdom
Owned
Manufacturing
242,000
Asia/Pacific
Alexandria,Australia
Leased
Distribution
87,000
Shanghai,China
Leased
R&D
34,000
Shanghai,China
Leased
Distribution
206,000
HongKong
Leased
Distribution
90,000
Tokyo,Japan
Leased
Distribution,R&DandManufacturing
187,000
Yongin,Korea
Leased
DistributionandManufacturing
139,000
Weown,leaseandoccupynumerousoffices,assemblyanddistributionfacilitiesandwarehousesintheUnitedStatesandabroad.Weconsiderourpropertiestobegenerallyingoodconditionandbelievethatourfacilitiesareadequateforouroperationsandprovidesufficientcapacitytomeetanticipatedrequirements.Weleaseapproximately767,000squarefeetofrentablespaceforourprincipalofficesinNewYork,NewYork.Weownabuildingofapproximately57,000squarefeetofofficespaceinMelville,NewYork.AsofJune30,2017,wedirectlyleasedandoperatedapproximately1,430freestandingstores.Item 3. Legal Proceedings .Foradiscussionoflegalproceedings,seeItem8.FinancialStatementsandSupplementaryDataNote15CommitmentsandContingencies.Item 4. Mine Safety Disclosures.Notapplicable.
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TableofContents
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.Market for Registrants Common Equity and Related Stockholder MattersOurClassACommonStockispubliclytradedontheNewYorkStockExchangeunderthesymbolEL.ThefollowingtableshowsthehighandlowpersharesalespricesasreportedontheNewYorkStockExchangeCompositeTapeandthecashdividendspersharedeclaredinfiscal2017andfiscal2016:
Fiscal 2017
Fiscal 2016
High
Low
Cash Dividends
High
Low
Cash Dividends
FirstQuarter
$ 95.38
$ 86.57
$ .30
$ 91.68
$ 73.67
$ .24
SecondQuarter
88.74
75.30
.34
89.93
79.49
.30
ThirdQuarter
87.55
76.34
.34
94.93
81.02
.30
FourthQuarter
98.40
83.34
.34
97.48
87.08
.30
FiscalYear
98.40
75.30
$ 1.32
97.48
73.67
$ 1.14
Weexpecttocontinuethepaymentofcashdividendsinthefuture,buttherecanbenoassurancethattheBoardofDirectorswillcontinuetodeclarethem.OnAugust17,2017,adividendwasdeclaredintheamountof$.34pershareonourClassAandClassBCommonStock.ThedividendispayableincashonSeptember15,2017tostockholdersofrecordatthecloseofbusinessonAugust31,2017.AsofAugust18,2017,therewere8,080recordholdersofClassACommonStockand15recordholdersofClassBCommonStock.Share Repurchase ProgramWeareauthorizedbytheBoardofDirectorstorepurchasesharesofourClassACommonStockintheopenmarketorinprivatelynegotiatedtransactions,dependingonmarketconditionsandotherfactors.ThefollowingtableprovidesinformationrelatingtoourrepurchaseofClassACommonStockduringthereferencedperiods:
Period
Total Number of Shares
Purchased
Average Price Paid Per Share
Total Number of Shares Purchased as
Part of Publicly Announced Program
Maximum Number of Shares that May Yet Be Purchased
Under the Program
April2017
3,422
$ 84.42
14,959,413
May2017
222,500
92.70
222,500
14,736,913
June2017
301,672
96.11
285,000
14,451,913
527,594
94.60
507,500
IncludessharesthatwererepurchasedbytheCompanytosatisfytaxwithholdingobligationsuponthepayoutofcertainstock-basedcompensationarrangements.
Thecurrentrepurchaseprogramforupto40.0millionshareswasauthorizedbytheBoardofDirectorsonNovember1,2012.Ourrepurchaseprogramdoesnothaveanexpirationdate.
SubsequenttoJune30,2017andasofAugust18,2017,wepurchasedapproximately0.5millionadditionalsharesofourClassACommonStockfor$45millionpursuanttooursharerepurchaseprogram.
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(1)
(2)
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TableofContentsItem 6. Selected Financial Data .Thetablebelowsummarizesselectedfinancialinformation.Forfurtherinformation,refertotheauditedconsolidatedfinancialstatementsandthenotestheretobeginningonpageF-1ofthisreport.
Year Ended or at June 30
2017
2016
2015
2014
2013
(In millions, except per share data)
Statement of Earnings Data:
Netsales
$ 11,824
$ 11,262
$ 10,780
$ 10,969
$ 10,182
NetearningsattributabletoTheEsteLauderCompaniesInc.
1,249
1,115
1,089
1,204
1,020
Per Share Data:
NetearningsattributabletoTheEsteLauderCompaniesInc.percommonshare:
Basic
$ 3.40
$ 3.01
$ 2.87
$ 3.12
$ 2.63
Diluted
3.35
2.96
2.82
3.06
2.58
Cashdividendsdeclaredpercommonshare
1.32
1.14
.92
.78
1.08
Balance Sheet Data:
Totalassets
$ 11,568
$ 9,223
$ 8,227
$ 7,860
$ 7,136
Totaldebt
3,572
2,242
1,625
1,334
1,335
Fiscal2017resultsincluded$143million,aftertax,or$.38perdilutedcommonsharerelatedtototalchargesassociatedwithrestructuringandotheractivities.Fiscal2016resultsincluded$90million,aftertax,or$.24perdilutedcommonsharerelatedtototalchargesassociatedwithrestructuringandotheractivities.Fiscal2014resultsincluded$(2)million,aftertax,relatedtototaladjustmentsassociatedwithrestructuringandotheractivities.Fiscal2013resultsincluded$12million,aftertax,or$.03perdilutedcommonsharerelatedtototalchargesassociatedwithrestructuringandotheractivities.
AsaresultofourJuly2014StrategicModernizationInitiativerollout,approximately$178millionofacceleratedorderswererecordedasnetsalesandapproximately$127millionasoperatingincomeinfiscal2014thatwouldhaveoccurredinthefiscal2015firstquarter,equaltoapproximately$.21perdilutedcommonshare.
Duringthethirdquarteroffiscal2015,werecordeda$5millioncharge,onabeforeandaftertaxbasis,relatedtotheremeasurementofnetmonetaryassetsinVenezuela,equalto$.01perdilutedcommonshare.Duringthethirdquarteroffiscal2014,werecordeda$38millioncharge,onabeforeandaftertaxbasis,relatedtotheremeasurementofnetmonetaryassetsinVenezuela,equalto$.10perdilutedcommonshare.
InFebruary2017,weissued1.80%,3.15%and4.15%SeniorNotesinapublicoffering,eachwithanaggregateprincipalamountof$500million.TheseSeniorNotesaredueinFebruary2020,March2027andMarch2047,respectively.WeusedthenetproceedsoftheofferingstoredeemtheSeniorNotesdueMay15,2017andforgeneralcorporatepurposes.InMay2016,weissued$450millionof1.70%SeniorNotesdueMay10,2021andanadditional$150millionofour4.375%SeniorNotesdueJune15,2045inapublicoffering.InJune2015,weissued$300millionof4.375%SeniorNotesdueJune15,2045inapublicoffering.InSeptember2012,weredeemedthe$230millionprincipalamountofour7.75%SeniorNotesdueNovember1,2013(2013SeniorNotes)atapriceof108%oftheprincipalamount.Werecordedapre-taxexpenseontheextinguishmentofdebtof$19million($12millionaftertax,or$.03perdilutedshare)representingthecallpremiumof$19millionandthepro-ratawrite-offoflessthan$1millionofissuancecostsanddebtdiscount.InAugust2012,weissued$250millionof2.35%SeniorNotesdueAugust15,2022and$250millionof3.70%SeniorNotesdueAugust15,2042inapublicoffering.Weusedthenetproceedsoftheofferingtoredeemthe2013SeniorNotesandforgeneralcorporatepurposes.
Fiscal2017resultsincluded$23million,aftertax,or$.06perdilutedcommonsharerelatedtogoodwillandotherintangibleassetimpairments.
Fiscal2017includeda$44milliongain,aftertax,or$.12perdilutedcommonshareandfiscal2016and2015included$8millionand$6millionofexpense,aftertax,respectively,or$.02perdilutedcommonshare,associatedwiththechangesinfairvalueofcontingentconsiderationrelatedtocertainofouracquisitions.
Fiscal2017resultsinclude$75million,or$.20perdilutedcommonshare,relatedtothereversalofadeferredtaxassetvaluationallowance.Thedeferredtaxassetandassociatedvaluationallowancerelatedtotheaccumulatedcarryforwardofexcessadvertisingandpromotionalexpenses.Inthefourthquarteroffiscal2017,afavorablechangetothetaxlawinChinawasenactedthatexpandedthecorporateincometaxdeductionallowanceforadvertisingandpromotionalexpenses,resultinginthischangeinrealizabilityoftheasset.
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(a) (b)
(a) - (g)
(a) - (g)
(a) - (g)
(g)
(d)
(a)
(b)
(c)
(d)
(e)
(f)
(g)
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TableofContentsItem 7. Managements Discussion and Analysis of Financial Condition and Results of Operations .RESULTS OF OPERATIONSWemanufacture,marketandsellbeautyproductsincludingthoseintheskincare,makeup,fragranceandhaircarecategorieswhicharedistributedinover150countriesandterritories.Thefollowingtableisacomparativesummaryofoperatingresultsforfiscal2017,2016and2015andreflectsthebasisofpresentationdescribedinItem8.FinancialStatementsandSupplementaryDataNote2SummaryofSignificantAccountingPoliciesandNote21SegmentDataandRelatedInformationforallperiodspresented.Productsandservicesthatdonotmeetourdefinitionofskincare,makeup,fragranceandhaircarehavebeenincludedintheothercategory.
Year Ended June 30
2017
2016
2015
(In millions)
NET SALES
By Product Category:
SkinCare
$ 4,527
$ 4,446
$ 4,479
Makeup
5,054
4,702
4,304
Fragrance
1,637
1,487
1,416
HairCare
539
554
531
Other
69
74
50
11,826
11,263
10,780
Returnsassociatedwithrestructuringandotheractivities
(2) (1)
NetSales
$ 11,824
$ 11,262
$ 10,780
By Region:
TheAmericas
$ 4,819
$ 4,710
$ 4,514
Europe,theMiddleEast&Africa
4,650
4,381
4,086
Asia/Pacific
2,357
2,172
2,180
11,826
11,263
10,780
Returnsassociatedwithrestructuringandotheractivities
(2) (1)
NetSales
$ 11,824
$ 11,262
$ 10,780
OPERATING INCOME (LOSS)
By Product Category:
SkinCare
$ 1,014
$ 842
$ 832
Makeup
713
758
659
Fragrance
115
87
83
HairCare
51
52
38
Other
11
5
(6)
1,904
1,744
1,606
Chargesassociatedwithrestructuringandotheractivities
(212) (134)
NetSales
$ 1,692
$ 1,610
$ 1,606
By Region:
TheAmericas
$ 284
$ 346
$ 302
Europe,theMiddleEast&Africa
1,203
1,027
943
Asia/Pacific
417
371
361
1,904
1,744
1,606
Chargesassociatedwithrestructuringandotheractivities
(212) (134)
OperatingIncome
$ 1,692
$ 1,610
$ 1,606
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TableofContentsThefollowingtablepresentscertainconsolidatedearningsdataasapercentageofnetsales:
Year Ended June 30
2017
2016
2015
Netsales
100.0% 100.0% 100.0%Costofsales
20.6
19.4
19.5
Grossprofit
79.4
80.6
80.5
Operatingexpenses:
Selling,generalandadministrative
63.3
65.1
65.6
Goodwillimpairment
0.2
Impairmentofotherintangibleassets
Restructuringandothercharges
1.6
1.2
Totaloperatingexpenses
65.1
66.3
65.6
Operatingincome
14.3
14.3
14.9
Interestexpense
0.8
0.6
0.6
Interestincomeandinvestmentincome,net
0.2
0.1
0.2
Earningsbeforeincometaxes
13.7
13.8
14.5
Provisionforincometaxes
3.1
3.9
4.4
Netearnings
10.6
9.9
10.1
Netearningsattributabletononcontrollinginterests
NetearningsattributabletoTheEsteLauderCompaniesInc.
10.6% 9.9% 10.1%Inordertomeetthedemandsofconsumers,wecontinuallyintroducenewproducts,supportnewandestablishedproductsthroughadvertising,merchandisingandsamplingandphaseoutexistingproductsthatnolongermeettheneedsofourconsumersorourobjectives.Theeconomicsofdeveloping,producing,launching,supportinganddiscontinuingproductsimpactoursalesandoperatingperformanceeachperiod.Theintroductionofnewproductsmayhavesomecannibalizingeffectonsalesofexistingproducts,whichwetakeintoaccountinourbusinessplanning.Non-GAAP Financial MeasuresWeusecertainnon-GAAPfinancialmeasures,amongotherfinancialmeasures,toevaluateouroperatingperformance,whichrepresentthemannerinwhichweconductandviewourbusiness.Managementbelievesthatexcludingcertainitemsthatarenotcomparablefromperiodtoperiodhelpsinvestorsandotherscompareoperatingperformancebetweenperiods.Whileweconsiderthenon-GAAPmeasuresusefulinanalyzingourresults,theyarenotintendedtoreplace,oractasasubstitutefor,anypresentationincludedintheconsolidatedfinancialstatementspreparedinconformitywithU.S.GAAP.SeeReconciliationsofNon-GAAPFinancialMeasuresbeginningonpage41forreconciliationsbetweennon-GAAPfinancialmeasuresandthemostdirectlycomparableU.S.GAAPmeasures.Weoperateonaglobalbasis,withthemajorityofournetsalesgeneratedoutsidetheUnitedStates.Accordingly,fluctuationsinforeigncurrencyexchangeratescanaffectourresultsofoperations.Therefore,wepresentcertainnetsales,operatingresultsanddilutednetearningspercommonshareinformationexcludingtheeffectofforeigncurrencyratefluctuationstoprovideaframeworkforassessingtheperformanceofourunderlyingbusinessoutsidetheUnitedStates.Constantcurrencyinformationcomparesresultsbetweenperiodsasifexchangerateshadremainedconstantperiod-over-period.Wecalculateconstantcurrencyinformationbytranslatingcurrentyearresultsusingprioryearweighted-averageforeigncurrencyexchangerates.OverviewWebelievethebestwaytoincreasestockholdervalueistocontinuetoprovidesuperiorproductsandservicesinthemostefficientandeffectivemannerwhilerecognizingconsumerschangingbehaviorsandshoppingpreferences.Weareguidedbyourlong-termstrategy,whichhasnumerousinitiativesacrossgeographicregions,productcategories,brands,channelsofdistributionandfunctionsthataredesignedtogrowoursales,providecostefficiencies,leverageourstrengthsandmakeusmoreproductiveandprofitable.Weplantobuilduponandleverageourhistoryofoutstandingcreativityandinnovation,highqualityproductsandservices,andengagingcommunicationswhileinvestingforlong-termsustainablegrowth.
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TableofContentsOurbalanced,diverseandhighlydesirablebrandportfoliopositionsuswelltocapitalizeonopportunitiesinfastgrowingandprofitableareasofprestigebeauty.Webelievethatourrangeofprestigeproductofferingsallowsustoincreaseourshareofaconsumersbeautyroutineandsourceconsumersfrombrandssoldinmass-marketdistribution.
OurskincareproductcategorybenefitsfromheroproductlinessuchasAdvancedNightRepairfromEsteLauderandCrmedeLaMerfromLaMer.Duringfiscal2017,wecontinuedtoexpandtheseproductlinesthroughtheintroductionoftheAdvancedNightRepairEyeConcentrateMatrixfromEsteLauderandtheRevitalizingHydratingSerumfromLaMer.GLAMGLOWalsocontributedtothesuccessinthecategorythroughtargetedexpandedconsumerreachandnewlaunchessuchasPlumprageous.Inthefourthquarteroffiscal2017,wepurchasedaminorityinterestinDECIEM,askincarebrand,whichprovidesuswithastrategicinvestmentinacompanythatattractsmillennialsandadiverseconsumerbase.
Inourmakeupcategory,wefurtherdevelopedheroproductlinessuchasDoubleWearandPureColorEnvyfromEsteLauderthroughthelaunchof
additionalproductsincludingDoubleWearNudeCushionStickRadiantMakeupandPureColorEnvyHi-LustreLightSculptingLipstick.Wecontinuouslylooktoacquirebrandsthatcomplementourexistingbusiness,havesignificantsalesgrowthpotentialandprovideopportunitiesforfutureprofitablegrowth.Duringourfiscal2017secondquarter,weexpandedourmakeupportfoliowiththeacquisitionsofTooFacedandBECCA.Bothofthesebrandsareprimarilydistributedinthefastergrowingspecialty-multiandonlinechannels.Theyareexpectedtohelpusreachnewconsumers,toincreaseoursalesinthesechannelsandtocontinuegeneratingstrongprofitablegrowth.
OurfragrancecategorycontinuestobenefitfromincreasedsalesofJoMaloneLondonandTomFordfragrances,aswellasfromourfiscal2015and
fiscal2016acquisitions.WehavealsobenefitedfromthegrowthofthefragrancecategoryintheAsia/Pacificregionandlookforfurtheropportunitiestostrengthenourbusinessinthiscategorythere.
Inourhaircarecategory,wearereachingnewconsumersasweexpandourpresencebeyondsalons,suchastheplannedSeptember2017launchof
BumbleandbumbleinUltaBeauty,aleadingspecialty-multiretailerintheUnitedStates.Ourglobalfootprintprovidesmanyavenuesofgrowth.Weleverageourregionalorganizationsandthetalentsandexpertiseofourpeopletocontinuetobelocallyrelevantthroughevolvingthewayweconnectwithourconsumersinstores,onlineandwheretheytravel.Thisincludestheexpansionofourdigitalandsocialmediapresenceandtheengagementofglobalandlocalinfluencerstoamplifybrandorproductstories.Wetailorourstrategybycountrywithourproducts,services,channels,marketingandvisualmerchandising.Wecontinuouslystrengthenourpresenceinlarge,image-buildingcoremarkets,suchastheUnitedStatesandtheUnitedKingdom,andbroadenourpresenceinemergingmarkets,includingtheMiddleEast,Russia,SouthAfricaandBrazil.
InNorthAmerica,wecontinuetodeployanumberofstrategiestoaccelerategrowth,despiteachallengingenvironmentespeciallyinbrickandmortardepartmentstores,andinLatinAmericawecontinuetolaunchnewbrands,expandtheintegrationofsocialmediaandgainshareinprestigebeautybyencouragingconsumerstotradeupfrommass-marketproducts.
InEurope,theMiddleEast&Africa,weareexpandingourdigitalandsocialmediapresenceaswellasleveragingourmakeupstrengthtogainsharein
prestigebeauty.
InAsia/Pacific,particularlyinChina,weareleveragingourdiversifiedbrandportfoliotobenefitfromthegrowthofthemakeupandfragrancecategoriesaswellascontinuingtolaunchnewskincareproductssuchastheCliniqueFreshPressedlineofproductswithVitaminC.
Weapproachdistributionstrategicallybybrand,distributionchannelandproductcategory.Weareaddingbrandstofastergrowingchannels,suchase-andm-commerceandspecialtymulti-brandretailers,andweareexpandingcertainbrandsintogeographicmarketswheretheyarenotyetsold.
Infiscal2017,weincreasedourpenetrationinthespecialty-multichannelthroughtheacquisitionsofBECCAandTooFaced,andweexpandedtherepresentationofourexistingbrands,suchasthelaunchofMACinUltaBeauty.Inaddition,wehaveopportunitiestoaccelerateourgrowthwithinspecialty-multibrandretailersastheyopennewdoors.
Internationally,weareexpandingourbusinessinfreestandingretailstoresoperatedbyusandbyauthorizedthirdparties,inEuropeanperfumeriesand
pharmacies,andindepartmentstores,particularlyintheUnitedKingdomandcertainmarketsinAsia.
Weseektooptimizedistributioninbothchannelsandgeographies,matchingeachbrandwithappropriateopportunitieswhilemaintaininghighproductivityperdoor.Wefocusonbrand-buildingretailopportunitiesthatwillexpandconsumercoverageforourbrands.Aspartofthisstrategy,wecontinuetodiversifyourbusinessinourtravelretailchannelacrossbrandsandproductcategories.Travelretailcontinuestobeanimportantchannelforbrandbuildingandprofitmarginexpansion.Atthesametimeitissusceptibletoanumberofexternalfactors,includingfluctuationsincurrencyexchangeratesandconsumerswillingnessandabilitytotravelandspend.
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Onlinenetsalescontinuetogrowstronglyonaglobalbasisandwearecontinuingtolaunche-andm-commercesitesinnewandexistingmarkets.Wearealsopartneringwithourretailersgloballytodrivesalesofourproductsontheironlinesites.Webelieveoursuccessindeliveringparticularlystrongonlinegrowthisaresultofcustomizationofourstrategytomeetlocalmarketneeds.Wealsocontinuetodevelopandimplementomnichannelconceptstodeliveranintegratedconsumerexperienceandbetterserveconsumersastheyshopacrosschannels.
Whileourbusinessisperformingwelloverall,wecontinuetofacestrongcompetitiongloballyandeconomicchallengesincertaincountries.Inparticular,wearecautiousofthecontinueddeclinei