Estee Lauder Companies Second Quarter Net Sales Climb 8%; Diluted Per

    Business Editors

    NEW YORK--(BUSINESS WIRE)--Jan. 27, 2005--The Estee Lauder Companies Inc. (NYSE:EL) today reported net sales for its second fiscal quarter ended December 31, 2004 of $1.75 billion, an 8% increase over the $1.62 billion reported in the prior year. Excluding the impact of foreign currency translation, net sales rose 5%.
    The Company reported net earnings from continuing operations for the quarter ended December 31, 2004 of $138.3 million, up 10% from $126.3 million last year. Diluted earnings per common share from continuing operations for the quarter rose 10% to $.60 from $.54 reported in the prior year. Net earnings and diluted earnings per share for the quarter increased 45% and 46%, respectively, compared with the prior year, including discontinued operations.
    William P. Lauder, President and Chief Executive Officer, said, "We are pleased to report another quarter of solid sales and earnings growth, reflecting the global appeal of the Company's products despite a mixed retail environment this holiday season. Sales grew in all major product categories and geographic regions, aided by a favorable currency environment. We continue to benefit from our global sourcing and manufacturing initiatives as well as ongoing cost containment efforts. These enable us to increase our marketing expenditures to further enhance our brands while meeting our profitability goals. Importantly, we continue to invest in new brands, new channels and new geographic distribution to fuel future growth."
    Mr. Lauder added, "In view of our results for the first half of fiscal 2005, we believe we have the programs in place to achieve our full year targets of approximately 7% constant currency sales growth and earnings per share in the range of $1.88 to $1.93."

    Results by Product Category

    Net sales of skin care products for the quarter increased 8% to $617.4 million on a reported basis and rose 4% in local currencies. The higher sales reflected recent launches from Estee Lauder of Future Perfect Anti-Wrinkle Radiance Creme SPF 15 and Nutritious Vita-Mineral Energy Lotion, as well as Clinique's Superdefense Triple Action Moisturizer SPF 25. Strong sales of The Lifting Face Serum, The Lifting Intensifier and The Concentrate from La Mer also contributed to growth.
    Makeup sales for the quarter rose a strong 12% to $592.4 million on a reported basis and increased 10% in local currencies. Solid growth was generated from the Company's makeup artist brands, M--A--C, Bobbi Brown and Stila. Recent products like M--A--C's Veluxe Pearl Eye Shadow and Zoom Lash and Bobbi Brown's Creamy Concealer and Shimmer Brick performed well during the quarter. Strong sales of Superbalanced Compact Makeup SPF 20, the Colour Surge line of products and Perfectly Real Makeup from Clinique, as well as Electric Intense LipCreme and Lash XL Maximum Length Mascara from Estee Lauder contributed to the sales increase. The makeup category also benefited from the inclusion of the Company's new American Beauty and Flirt! brands.
    Fragrance sales increased 3% to $458.6 million on a reported basis and decreased 1% in local currencies compared to the prior-year quarter. This category was up against a difficult comparison to the prior-year quarter which grew 16% reflecting several major launches. Fragrance sales benefited from the recent launches of True Star from Tommy Hilfiger, DKNY Be Delicious and Lauder Beyond Paradise Men. The continued soft fragrance business and saturation of industry launches, particularly in the United States, continues to challenge prior year launches and some existing fragrances.
    Sales of hair care products and services for the quarter rose 14% to $71.6 million on a reported basis and increased 12% in local currencies, due primarily to higher sales at Aveda and Bumble and bumble. Aveda net sales growth was due to recent product launches such as Pure Abundance, Air Control Hair Spray and new professional color products, as well as increased concept salon distribution. Bumble and bumble sales increased due to the recent launch of its hair and scalp treatment line and new salon openings.
    Operating income increased in makeup, skin care and hair care due to higher sales. Fragrance operating income was relatively flat and continued to reflect the soft fragrance business, ongoing development costs for new products and brands and sustained support spending behind existing products.

    Results by Geographic Region

    In the Americas, net sales for the quarter increased 9% to $877.7 million. The increase was due to the success of new and certain existing products, growth from virtually all brands, particularly M--A--C, higher results in Canada and the inclusion of sales of BeautyBank products. All major product categories in this region had sales growth. Operating income in the Americas increased due to the higher sales. Profitability in this region in the current-year quarter reflects more normalized levels following a decrease in the prior-year quarter.
    In Europe, the Middle East & Africa, net sales increased 7% from the prior-year period to $628.9 million, and were relatively flat in local currency. This region was up against a very difficult comparison to the prior-year quarter when net sales grew 34%. In constant currency, sales were led by the United Kingdom, offset by lower sales in Italy, Spain and Austria. Operating profitability decreased reflecting lower results from our travel retail and distributor businesses, as well as a decline in Italy.
    Asia/Pacific net sales grew 7% over the prior-year quarter to $243.7 million. On a local currency basis, this region's net sales rose 4% with Taiwan, China and Hong Kong posting the strongest double-digit growth. These increases were partially offset by lower sales in Japan and Korea. Operating profit in the region decreased reflecting lower results in Korea as well as China, where we continue to invest in new brand expansion and business opportunities.

    Six-Month Results

    For the six months ended December 31, 2004, the Company reported net sales of $3.25 billion, a 10% increase from $2.97 billion in the comparable prior-year period. Excluding the impact of foreign currency translation, net sales rose 7%. The Company reported net earnings from continuing operations of $233.3 million for the six months, up 14% from $204.0 million in the same period last year. Diluted earnings per common share from continuing operations for the six months ended December 31, 2004 were $1.01, a 15% increase from $.88 reported in the prior-year period. Net earnings and diluted earnings per share for the six months increased 35% and 36%, respectively, compared with the prior year, including discontinued operations.

    Cash Flows

    For the six months ended December 31, 2004, the Company generated $298.4 million in cash flow from operating activities compared with $382.2 million in the prior-year period. The change primarily resulted from higher net earnings from continuing operations offset by increases in certain working capital components, including significant deferred compensation and supplemental pension payments. Operating cash flow was utilized primarily for capital investments, the repurchase of shares of the Company's Class A Common Stock and dividend payments.

    Estimate of Fiscal 2005 Second Half and Full Year

    Net sales for the second half of fiscal 2005 are expected to grow approximately 9% in dollars, including a currency translation benefit of approximately two percentage points, versus fiscal 2004's second half. Geographic region net sales growth in constant currency is expected to be led by the Americas and Europe, the Middle East & Africa, followed by Asia/Pacific. On a product category basis, in constant currency, hair care and fragrance are expected to be the leading growth categories, followed by skin care and makeup. The Company expects to achieve diluted earnings per share of between $.87 and $.92 for the second half.
    For the Company's fiscal 2005 full-year results, reported net sales are expected to grow between 9% and 10% in dollars, which reflects a benefit of approximately two to three percentage points of foreign currency translation impact, versus fiscal 2004. At the same time the Company continues to expect to achieve diluted earnings per share of between $1.88 and $1.93 for the fiscal 2005 year. Geographic region net sales growth in constant currency is expected to be led by the Americas and Europe, the Middle East & Africa, followed by Asia/Pacific. On a product category basis, in constant currency, hair care and makeup are expected to be the leading sales growth categories, followed by skin care and fragrance.

    Forward-looking Statements

    The forward-looking statements in this press release, including those containing words like "believe" and "expect," those in Mr. Lauder's remarks and those in the "Estimate of Fiscal 2005 Second Half and Full Year" section involve risks and uncertainties. Factors that could cause actual results to differ materially from those forward-looking statements include the following:

    (1) increased competitive activity from companies in the skin
    care, makeup, fragrance and hair care businesses, some of
    which have greater resources than the Company does;
    (2) the Company's ability to develop, produce and market new
    products on which future operating results may depend;
    (3) consolidations, restructurings, bankruptcies and
    reorganizations in the retail industry causing a decrease in
    the number of stores that sell the Company's products, an
    increase in the ownership concentration within the retail
    industry, ownership of retailers by the Company's competitors
    and ownership of competitors by the Company's customers that
    are retailers;
    (4) shifts in the preferences of consumers as to where and how
    they shop for the types of products and services the Company
    sells;
    (5) social, political and economic risks to the Company's foreign
    or domestic manufacturing, distribution and retail operations,
    including changes in foreign investment and trade policies and
    regulations of the host countries and of the United States;
    (6) changes in the laws, regulations and policies that affect, or
    will affect, the Company's business, including changes in
    accounting standards, tax laws and regulations, trade rules
    and customs regulations, and the outcome and expense of legal
    or regulatory proceedings, and any action the Company may take
    as a result;
    (7) foreign currency fluctuations affecting the Company's results
    of operations and the value of its foreign assets, the
    relative prices at which the Company and its foreign
    competitors sell products in the same markets and the
    Company's operating and manufacturing costs outside of the
    United States;
    (8) changes in global or local economic conditions that could
    affect consumer purchasing, the willingness of consumers to
    travel, the financial strength of the Company's customers and
    suppliers, the cost and availability of capital, which the
    Company may need for new equipment, facilities or
    acquisitions, the cost and availability of raw materials and
    the assumptions underlying the Company's critical accounting
    estimates;
    (9) shipment delays, depletion of inventory and increased
    production costs resulting from disruptions of operations at
    any of the facilities which, due to consolidations in the
    Company's manufacturing operations, now manufacture nearly all
    of the Company's supply of a particular type of product (i.e.,
    focus factories);
    (10) real estate rates and availability, which may affect the
    Company's ability to increase the number of retail locations
    at which the Company sells its products and the costs
    associated with the Company's other facilities;
    (11) changes in product mix to products which are less profitable;
    (12) the Company's ability to acquire or develop new information
    and distribution technologies, on a timely basis and within
    the Company's cost estimates;
    (13) the Company's ability to capitalize on opportunities for
    improved efficiency, such as globalization, and to integrate
    acquired businesses and realize value therefrom;
    (14) consequences attributable to the events that are currently
    taking place in the Middle East, including further attacks,
    retaliation and the threat of further attacks or retaliation;
    and
    (15) the impact of repatriating, or planning to repatriate,
    certain of the Company's foreign earnings to the United
    States in connection with The American Jobs Creation Act of
    2004.

    The Estee Lauder Companies Inc. is one of the world's leading manufacturers and marketers of quality skin care, makeup, fragrance and hair care products. The Company's products are sold in over 130 countries and territories under well-recognized brand names, including Estee Lauder, Clinique, Aramis, Prescriptives, Origins, M--A--C, Bobbi Brown, Tommy Hilfiger, La Mer, Donna Karan, Aveda, Stila, Jo Malone, Bumble and bumble, kate spade beauty, Darphin, Michael Kors, Rodan + Fields, American Beauty, Flirt!, Good Skin(TM) and Donald Trump The Fragrance.
    An electronic version of this release can be found at the Company's website, www.elcompanies.com.

    - Tables Follow -

THE ESTEE LAUDER COMPANIES INC. SUMMARY OF CONSOLIDATED RESULTS (Unaudited; Dollars in millions, except per share data)

Three Months Ended Six Months Ended December 31 Percent December 31 Percent ----------- ----------- 2004 2003 Change 2004 2003 Change ---- ---- ------- ------ ------ ------

Net Sales $1,750.3 $1,619.1 8.1% $3,254.4 $2,965.7 9.7%

Cost of sales 448.0 412.7 859.3 776.8 ------ ------ ------ -------

Gross Profit 1,302.3 1,206.4 7.9% 2,395.1 2,188.9 9.4% ------- ------- ------- ------- Gross Margin 74.4% 74.5% 73.6% 73.8%

Operating expenses: Selling, general and administrative 1,071.8 980.3 2,009.3 1,828.8 Related party royalties - 7.1 - 11.4 ------- ------- ------- ------- 1,071.8 987.4 8.5% 2,009.3 1,840.2 9.2% ------- ------- ------- ------- Operating Expense Margin 61.2% 61.0% 61.7% 62.0%

Operating Income 230.5 219.0 5.3% 385.8 348.7 10.6% Operating Income Margin 13.2% 13.5% 11.9% 11.8%

Interest expense, net 3.3 7.2 7.4 14.9 ------- ------- ------- ------- Earnings before Income Taxes, Minority Interest and Discontinued Operations 227.2 211.8 7.3% 378.4 333.8 13.4%

Provision for income taxes 85.5 80.7 141.5 124.8 Minority interest, net of tax (3.4) (4.8) (3.6) (5.0) ------- ------- ------- ------- Net Earnings from Continuing Operations 138.3 126.3 9.5% 233.3 204.0 14.4%

Discontinued operations, net of tax (A) - (30.6) - (31.3) ------- ------- ------- ------- Net Earnings $ 138.3 $ 95.7 44.5% $ 233.3 $ 172.7 35.1% ======= ======= ======== ========

Basic net earnings per common share: Net earnings from continuing operations $ .61 $ .55 11.1% $ 1.03 $ .89 15.3% Discontinued operations, net of tax - (.13) - (.13) ------- ------- ------- -------

Net earnings $ .61 $ .42 46.7% $ 1.03 $ .76 36.2% ======= ======= ======== ======== Diluted net earnings per common share: Net earnings from continuing operations $ .60 $ .54 10.4% $ 1.01 $ .88 14.7% Discontinued operations, net of tax - (.13) - (.13) ------- ------- ------- ------- Net earnings $ .60 $ .41 46.0% $ 1.01 $ .75 35.6% ======= ======= ======== ========

Weighted average common shares outstanding: Basic 225.6 228.6 226.4 228.3 Diluted 229.2 231.6 230.2 231.1

(A) In February 2004, the Company sold the assets and operations of its reporting unit that sold jane brand products. Prior to the sale of the business, in December 2003, the Company committed to a plan to sell such assets and operations. At the time such decisions were made, circumstances warranted that the Company conduct an assessment of the tangible and intangible assets of this business. Based on this assessment, the Company determined that the carrying amount of these assets as reflected on the Company's consolidated balance sheets exceeded their estimated fair value. Accordingly, the Company recorded an after-tax charge to discontinued operations of $30.6 and $31.3 million for the three months and six months ended December 31, 2003, respectively. The charge represents the impairment of goodwill in the amount of $26.4 million, the reduction in value of other tangible assets held for sale of $1.2 million, net of tax, and the operating loss of $3.0 million and $3.7 million, net of tax, for the three months and six months ended December 31, 2003, respectively. Included in the operating loss of both prior-year periods were additional costs associated with the sale and discontinuation of the business.

THE ESTEE LAUDER COMPANIES INC CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited; In millions)

December 31 June 30 December 31 2004 2004 2003 ------ ------ ------ ASSETS

Current Assets Cash and cash equivalents $ 577.9 $ 611.6 $ 869.9 Accounts receivable, net 844.4 664.9 767.8 Inventory and promotional merchandise, net 699.1 653.5 574.3 Prepaid expenses and other current assets 283.1 269.2 246.7 ------- ------- -------- Total Current Assets 2,404.5 2,199.2 2,458.7 ------- ------- -------- Property, Plant and Equipment, net 683.1 647.0 621.7 Other Assets 867.2 861.9 889.8 ------- ------- -------- Total Assets $3,954.8 $ 3,708.1 $3,970.2 ======= ======= =======

LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities Short-term debt $ 80.4 $ 73.8 $ 4.9 Accounts payable 293.6 267.3 232.9 Other current liabilities 1,091.6 980.9 1,077.2 ------- ------- -------- Total Current Liabilities 1,465.6 1,322.0 1,315.0 ------- ------- --------

Noncurrent Liabilities Long-term debt 472.8 461.5 828.4 Other noncurrent liabilities and minority interest 215.1 191.1 238.6 Total Stockholders' Equity 1,801.3 1,733.5 1,588.2 ------- ------- -------- Total Liabilities and Stockholders' Equity $3,954.8 $ 3,708.1 $3,970.2 ======= ======= =======

SELECTED CASH FLOW DATA (Unaudited; In millions)

Six Months Ended December 31 ------------- 2004 2003 ------ ------ Cash Flows from Operating Activities Net earnings $ 233.3 $ 172.7 Depreciation and amortization 94.5 91.8 Deferred income taxes 22.1 (0.3) Discontinued operations - 31.3 Other items 2.8 8.5 Changes in operating assets and liabilities: Increase in accounts receivable, net (128.6) (103.5) Decrease (increase) in inventory and promotional merchandise, net (15.1) 38.8 Increase in accounts payable and other accrued liabilities 91.0 138.3 Other operating assets and liabilities, net (1.6) 4.6 ----- ----- Net cash flows provided by operating activities from continuing operations $298.4 $ 382.2 ======= =======

Capital expenditures 103.8 87.7 Payments to acquire treasury stock 187.7 19.6 Dividends paid 90.1 -

--30--JM/ny*

CONTACT: The Estee Lauder Companies Inc. Investors: Dennis D'Andrea, 212-572-4384 or Media: Sally Susman, 212-572-4430

KEYWORD: NEW YORK INDUSTRY KEYWORD: CONSUMER/HOUSEHOLD APPAREL/TEXTILES RETAIL EARNINGS SOURCE: The Estee Lauder Companies Inc.

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