Estée Lauder – 2008

Forest David: Francis Marion University

A. Case Abstract

Estée Lauder (www.elcompanies.com) is a comprehensive business policy and

strategic management case that includes the company’s fiscal year-end June 2007
financial statements, competitor information and more. The case time setting is
the year 2008. Sufficient internal and external data are provided to enable
students to evaluate current strategies and recommend a three-year strategic plan
for the company. Headquartered in New York City, Estée Lauder’s common
stock is publicly traded on the New York Stock Exchange under the ticker symbol
EL.

Estée Lauder produces a diverse line of shampoo, perfumes, lip gloss and other
skin care products. A small sampling of the brand names marketed by Estée
Lauder include: Estée Lauder, Clinique, American Beauty, and Flirt. The
products are sold through various distribution channels, including specialty stores,
department stores, pharmacies, and Web. Estée Lauder operates in the Americas,
Europe, Middle East, Asia, and Africa. The company has over 28,000 employees
and is led by CEO William Lauder whose base pay was over $3.5M in 2007.
The firm’s two major competitors are conglomerate giant Procter & Gamble and
L’Oreal.

B. Vision Statement (proposed)

Estée Lauder is committed to its name being synonymous with the best quality
skin care products in the world.

C. Mission Statement (actual)

Bringing the best to everyone we touch.

(Proposed)

Our mission is to deliver the highest quality skin care products, fragrance,
cosmetics, and hair care products (2) for men and women of all ages and
nationalities (1) around the world (3). By using the latest technology (4) in
cosmetic design, we are able to ensure our customers’ high demand for superior
and safe products will be met or exceeded in each and every product purchased
(7). Providing the best products possible to our customers will enable our
philosophy (6) of improving the sprit of our customers’ mind, body and soul to

1
 continue from generation to generation (5). By hiring the most experienced
chemists (9) to design new products that are safe and effective, we strive to
continue growing our product line. We strive to be socially conscious by
providing products that are environmentally safe and free from animal testing (8).

1. Customer
2. Products or services
3. Markets
4. Technology
5. Concern for survival, profitability, growth
6. Philosophy
7. Self-concept
8. Concern for public image
9. Concern for employees

D. External Audit

Opportunities

1. Weak US Dollar makes US based products more affordable to customers in

Canada and Europe.
2. Interest rates remain low in the US.
3. Increasing numbers of people are buying products online for convenience,
cost savings, and confidentiality.
4. Men are increasingly becoming more concerned with their looks and
stereotypes of men using skin care products are diminishing.
5. In 2006, China experienced a 15 percent growth in professional skin care
sales.
6. The Hispanic population in the US is rapidly growing.
7. Customers are demanding products not tested on animals and which are
environmentally friendly.
8. Customers are becoming more interested in herbal products that are derived
from natural sources.
9. Aging US population opens new markets for developing skin care products
for the elderly.
10. Many new start up companies with specialty products are created each year.

Threats

1. Consumer complaints and inquires into the use of animal testing for new
products.
2. FDA plans to require cosmetic corporations to add a label stating “the safety
of this product has not been determined.”
3. Many new start up companies with specialty products are created each year.

2
 4. Concerns about the use of aerosols, fluorocarbons and other chemicals in the
production of cosmetic products.
5. Top competitors in the cosmetics industry are diversified with many brand
names and a wide range of products.
6. Products can be purchased at significantly lower cost over the Internet,
harming revenues and traditional distributors.
7. Growing trend among sections of the population for a more natural look and
reduction in their use of make up and related products.
8. Customers tend to be extremely brand loyal.

CPM – Competitive Profile Matrix

* Estimates for Procter & Gamble focused on similar product lines they share with Estée Lauder not the
company as a whole.
Estée Lauder Revlon Procter & Gamble
Critical Success Weight Rating Weighted Rating Weighted Rating Weighted
Factors Score Score Score
Market Share 0.20 4 0.80 4 0.80 3 0.60
Price 0.10 2 0.20 3 0.30 4 0.40
Financial Position 0.20 3 0.60 1 0.20 4 0.80
Product Quality 0.15 4 0.60 2 0.30 2 0.30
Product Lines 0.10 4 0.40 3 0.30 4 0.40
Consumer Loyalty 0.20 4 0.80 3 0.60 2 0.40
Employees 0.05 4 0.20 4 0.20 4 0.20
TOTAL 1.00 3.60 2.70 3.10

External Factor Evaluation (EFE) Matrix

Key External Factors Weight Rating Weighted Score

Opportunities
1. Weak US Dollar makes US based 0.05 3 0.15
products more affordable to customers in
Canada and Europe.
2. Interest rates remain low in the US. 0.08 3 0.24
3. Increasing numbers of people are buying 0.12 3 0.36
products online for convenience, cost savings,
and confidentiality.
4. Men are increasing becoming more concerned 0.05 4 0.20
with their looks and the stereotypes of men using
skin care products are diminishing.
5. In 2006, China experienced a 15 percent 0.05 4 0.20
growth in professional skin care sales.
6. Hispanic population in the US is rapidly 0.05 3 0.15
growing.
7. Customers are demanding products not tested 0.03 3 0.09
on animals and which are environmentally
friendly.
8. Customers are becoming more interested in
herbal products that are derived from natural 0.03 4 0.12
sources.
9. Aging US population opens new markets for 0.05 3 0.15
developing skin care products for the elderly.

3
 10. Many new start up companies with 0.05 2 0.10
specialty products are created each year.
Threats
1. Consumer complaints and inquires into
the use of animal testing for new products. 0.03 3 0.09

2. FDA plans to enforce cosmetic

corporations to add a label stating “the safety of 0.02 1 0.02
this product has not been determined.”
3. Many new start up companies with 0.05 2 0.10
specialty products are created each year.
4. Concerns about the use of aerosols,
fluorocarbons and other chemicals in the 0.03 4 0.12
production of cosmetic products.
5. Top competitors in the cosmetics
industry are diversified with many brand names 0.10 2 0.20
and a wide range of products.
6. Products can be purchased at
significantly lower cost over the Internet cutting 0.12 1 0.12
into revenues and harming traditional
distributors.
7. Growing trend among sections of the
population for a more natural look and reduction 0.04 3 0.12
in their use of make up and related products.
8. Customers tend to be extremely brand 0.05 3 0.15
loyal.
TOTAL 1.00 2.68

E. Internal Audit

Strengths

1. Wholly owned and operated offices in 43 countries and territories and

products sold in over 135 countries.
2. Test products on animals only when required by law.
3. Estée Lauder operates under numerous brand names including Clinique,
Origins, Bobbi Brown, Flirt! among others.
4. Detailed succession plan in place for Fabrizio Freda to take over as CEO in
March of 2010.
5. The company has global rights to products sold under several name brands
including Tommy Hilfiger, Donna Karan, Missoni, and Sean John.
6. Company continues to purchase interest in start up and established companies
such as Bumble and Bumble Products LLC in June 30, 2007.
7. Revenue has increased 40 percent from $5 billion to $7 billion in the five year
period dating fiscal years 2003-2007.
8. Company specializes in mid-level and upper end cosmetics products; markets
over 9,000 products.

Weaknesses

4
 1. In 1990, 75 nameplate department stores sold Estée Lauder; today that number
is only 17.
2. Stock price has been stuck between $25 and $50 trading range since 1996.
3. Estée Lauder lacks a clear mission and vision statements.
4. Confusing organizational structure; it is unclear whether group presidents
have control over the product lines or geographic areas.
5. Net sales of fragrance products decreased 4 percent to $1.2B as the company
continues to struggle in this segment.
6. Company does not offer enough brand names tailored to lower budget
consumers.
Financial Ratio Analysis (June 2007)
Growth Rates % Estée Lauder Industry SP-500
Sales (Qtr vs. year ago qtr) 7.30 8.70 15.30
Net Income (YTD vs. YTD) -32.60 22.20 17.50
Net Income (Qtr vs. year ago qtr) -32.60 18.40 24.70
Sales (5-Year Annual Avg.) 8.36 10.99 12.35
Net Income (5-Year Annual Avg.) 18.81 13.50 21.79
Dividends (5-Year Annual Avg.) 20.11 12.66 9.47
Price Ratios
Current P/E Ratio 20.8 22.1 22.5
P/E Ratio 5-Year High NA 25.1 20.2
P/E Ratio 5-Year Low NA 15.8 4.3
Price/Sales Ratio 1.17 2.63 2.53
Price/Book Value 6.82 6.98 4.15
Price/Cash Flow Ratio 12.80 16.60 13.70
Profit Margins
Gross Margin 74.8 50.3 36.0
Pre-Tax Margin 9.5 16.7 18.3
Net Profit Margin 6.1 12.2 12.9
5Yr Gross Margin (5-Year Avg.) 74.4 51.2 34.6
5Yr PreTax Margin (5-Year Avg.) 10.2 16.1 16.2
5Yr Net Profit Margin (5-Year Avg.) 6.3 11.0 11.2
Financial Condition
Debt/Equity Ratio 1.19 0.90 1.32
Current Ratio 1.4 0.9 1.2
Quick Ratio 0.9 0.7 1.0
Interest Coverage 14.4 15.6 37.1
Leverage Ratio 3.8 2.9 4.0
Book Value/Share 6.34 16.62 20.17
Investment Returns %
Return On Equity 30.6 30.5 28.4
Return On Assets 10.2 9.3 8.4
Return On Capital 17.0 12.7 11.1
Return On Equity (5-Year Avg.) 23.9 48.9 20.7
Return On Assets (5-Year Avg.) 10.4 10.4 7.0
Return On Capital (5-Year Avg.) 16.3 13.0 9.3
Management Efficiency
Income/Employee 15,242 63,525 112,357
Revenue/Employee 251,021 495,679 954,553

5
 Receivable Turnover 7.0 10.3 14.3
Inventory Turnover 2.0 5.0 9.3
Asset Turnover 1.7 0.8 0.8
Adapted from www.moneycentral.msn.com
Date Avg. P/E Price/Sales Price/Book Net Profit Margin (%)
06/07 19.80 1.34 7.38 6.4
06/06 24.80 1.30 5.05 5.0
06/05 24.20 1.42 5.09 6.5
06/04 24.30 1.97 6.40 6.6
06/03 23.10 1.54 4.28 5.9

Date Book Value/ Share Debt/Equity ROE (%) ROA (%) Interest Coverage
06/07 $6.17 0.91 37.4 10.9 NA
06/06 $7.66 0.32 20.0 8.6 NA
06/05 $7.68 0.42 24.2 10.5 NA
06/04 $7.62 0.31 21.8 10.2 NA
06/03 $7.84 0.16 18.3 9.7 NA
Adapted from www.moneycentral.msn.com

Net Worth Analysis (June 2007 in millions)

1. Stockholders’ Equity + Goodwill = 1,200 + 0 $1,200
2. Net income x 5 = $450 x 5= $ 2,250
3. Share price = $40.00/EPS 2.11 =$18.95 x Net Income $450= $ 8,530
4. Number of Shares Outstanding x Share Price = 193 x $40.00 = $ 7,720
Method Average $4,925

Internal Factor Evaluation (IFE) Matrix

Key Internal Factors Weight Rating Weighted

Score
Strengths
1. Wholly owned and operated offices in 43 0.12 4 0.48
countries and territories and sold in over 135 countries.
2. Test products on animals only when required 0.03 4 0.12
by law.
3. Estée Lauder operates under numerous brand
names including Clinique, Origins, Bobbi Brown, Flirt! 0.10 4 0.40
among others.
4. Detailed succession plan in place for Fabrizio 0.05 4 0.20
Freda to take over as CEO in March of 2010.
5. The company as global rights to products sold
under several name brands including Tommy Hilfiger, 0.10 4 0.40
Donna Karan, Missoni, and Sean John.
6. Company continues to purchase interest in start
up and established companies such as Bumble and 0.05 4 0.20
Bumble Products LLC in June 30, 2007.
7. Revenue has increased 40 percent from $5
billion to $7 billion in the five year period dating fiscal 0.15 4 0.60
years 2003-2007.
8. Company specializes in mid level and upper 0.05 4 0.20
end cosmetics products; markets over 9,000 products.
Weaknesses

6
 1. In 1990, 75 nameplate department stores sold 0.10 2 0.20
Estée Lauder; today that number is only 17.
2. Stock price has been stuck between $25 and 0.05 1 0.05
$50 trading range since 1996.
3. Estée Lauder lacks clear mission and vision 0.05 1 0.05
statements.
4. Confusing organizational structure; it is unclear
whether group presidents have control over product lines 0.05 1 0.05
or geographic areas.
5. Net sales of fragrance products decreased 4 0.05 1 0.05
percent to $1,213B; company continues to struggle in
this segment.
6. Company does not offer enough brand names 0.05 1 0.05
tailored to lower budget consumers.
TOTAL 1.00 3.05

F. SWOT Strategies

SO Strategies
1. Expand product offerings in foreign nations (S1, S8, O1).
2. Continue to acquire interest in start up companies (S6, S7, O2, O4, O5).

WO Strategies
1. Continue to expand the respective brand name websites and offer
incentives to customers (W1, W3).
2. Introduce new fragrance products for men and boys (W5, O4).

ST Strategies
1. Offer rebates to customers to compete with black and
gray market distributors (S7, S8, T5, T6).
2. Market new soaps and skin care products that tailor to
the natural look (S7, S8, T7).

WT Strategies
1. Draft new vision and mission statements along with a new clearer corporate
structure to compete with current competition (W3, W4, T3, T5, T6).
2. Create a new line of products tailored to customers on smaller budgets (W6,
T8).

7
G. SPACE Matrix

Con

Financial Strength (FS) Environmental Stability (ES)

Return on Equity (ROE) 6 Rate of Inflation -3
Leverage 5 Technological Changes -4
Liquidity 5 Price Elasticity of Demand -3
Income/Employee 2 Competitive Pressure -6
Inventory Turnover 2 Barriers to Entry into Market -4

Financial Strength (FS) Average 4.0 Environmental Stability (ES) Average -4.0

Competitive Advantage (CA) Industry Strength (IS)

Market Share -1 Growth Potential 5
Product Quality -1 Financial Stability 3
Customer Loyalty -2 Ease of Entry into Market 4
Technological know-how -1 Resource Utilization 4
Control over Suppliers and Distributors -4 Profit Potential 6

Competitive Advantage (CA) Average -1.8 Industry Strength (IS) Average 4.4

8
x-axis: 4.4 + -1.8 = 2.6
y-axis: 4.0 + -4.0 = 0.0

H. Grand Strategy Matrix

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I. The Internal-External (IE) Matrix
The IFE Total Weighted Score

Strong Average Weak

3.0 to 4.0 2.0 to 2.99 1.0 to 1.99
High I II III
3.0 to 3.99

Medium IV V VI
The EFE Total 2.0 to 2.99
Weighted Score

Estée Lauder

Low VII VIII IX

1.0 to 1.99

Grow and Build

J. QSPM
Strategic Alternatives
Introduce new Continue to expand
products for non into new geographic
traditional markets
Key Internal Factors Weight customers
Strengths AS TAS AS TAS

10
 1. Wholly owned and operated offices in 43 0.12 2 0.24 4 0.48
countries and territories and sold in over 135
countries.
2. Test products on animals only when
required by law. 0.03 --- --- --- ---

3. Estée Lauder operates under numerous

brand names including Clinique, Origins, Bobbi 0.10 3 0.30 2 0.20
Brown, Flirt! among others.
4. Detailed succession plan in place for 0.05 --- --- --- ---
Fabrizio Freda to take over as CEO in March of
2010.
5. The company as global rights to products
sold under several name brands including Tommy 0.10 3 0.30 4 0.40
Hilfiger, Donna Karan, Missoni, and Sean John.
6. Company continues to purchase interest
in start up and established companies such as 0.05 4 0.20 3 0.15
Bumble and Bumble Products LLC in June 30,
2007.
7. Revenue has increased 40 percent from $5
billion to $7 billion in the five year period dating 0.15 3 0.45 4 0.60
fiscal years 2003-2007.
8. Company specializes in mid level and 0.05 4 0.20 3 0.15
upper end cosmetics products; markets over 9,000
products.
Weaknesses
1. In 1990, 75 nameplate department stores 0.10 2 0.20 3 0.30
sold Estée Lauder; today that number is only 17.
2. Stock price has been stuck between $25 0.05 --- --- --- ---
and $50 trading range since 1996.
3. Estée Lauder lacks a clear mission vision 0.05 --- --- --- ---
statements.
4. Confusing organizational structure where
it is unclear weather group presidents have control 0.05 --- --- --- ---
over the product lines or geographic areas.
5. Net sales of fragrance products decreased
4 percent to $1,213 million as the company 0.05 --- --- --- ---
continues to struggle in this segment.
6. Company does not offer enough brand 0.05 4 0.20 2 0.10
names tailored to lower budget consumers.
SUBTOTAL 1.00 2.09 2.38

Introduce new Continue to expand

products for non into new
traditional geographic
Key External Factors Weight customers markets
Opportunities AS TAS AS TAS
1. Weak US Dollar makes US based products 0.05 1 0.05 4 0.20
more affordable to customers in Canada and Europe.
2. Interest rates remain low in the US. 0.08 2 0.16 4 0.24
3. Increasing numbers of people are buying
products online for convenience, cost savings, and 0.12 3 0.36 1 0.12
confidentiality.
4. Men are increasing becoming more

11
 concerned with their looks and the stereotypes of 0.05 4 0.20 1 0.05
men using skin care products are diminishing.
5. In 2006, China experienced a 15 percent 0.05 2 0.10 4 0.20
growth in professional skin care sales.
6. Hispanic population in the US is rapidly 0.05 1 0.05 4 0.20
growing.
7. Customers are demanding products not 0.03 --- --- --- ---
tested on animals and which are environmentally
friendly.
8. Customers are becoming more interested in 0.03 3 0.09 1 0.03
herbal products that are derived from natural sources.
9. Aging US population opens new markets for 0.05 --- --- --- ---
developing skin care products for the elderly.
10. Many new start up companies with specialty 0.05 --- --- --- ---
products are created each year.
Threats
1. Consumer complaints and inquires into the 0.03 --- --- --- ---
use of animal testing for new products.
2. FDA plans to enforce cosmetic corporations
to add a label stating “the safety of this product has 0.02 --- --- --- ---
not been determined.”
3. Many new start up companies with specialty 0.05 --- --- --- ---
products are created each year.
4. Concerns about the use of aerosols,
fluorocarbons and other chemicals in the production 0.03 --- --- --- ---
of cosmetic products.
5. Top competitors in the cosmetics industry
are diversified with many brand names and a wide 0.10 --- --- --- ---
range of products.
6. Products are sold at significantly lower cost
over the Internet cut into revenues and harm 0.12 --- --- --- ---
traditional distributors.
7. Growing trend among sections of the
population for a more natural look and reduction in 0.04 4 0.16 1 0.04
their use of make up and related products.
8. Customers tend to be extremely brand loyal. 0.05 --- --- --- ---
SUBTOTAL 1.17 1.08
SUM TOTAL ATTRACTIVENESS SCORE 3.26 3.46

K. Recommendations

The QSPM strategies assessed further global expansion and focusing on new
nontraditional customers. The QSPM reveals that both strategies are viable
options and is inconclusive on which option is the best alternative. Several
recommendations with estimated cost figures are included below. These are not
meant to be undertaken all at once, but rather in stages over the next 5 years.
With Net Income of $450M in fiscal year 2007, these strategies are financially
feasible.

12
 1. Expand further into Eastern Europe in the former communist block nations.
These nations are rapidly growing, have prospects of joining the European Union,
and the people appreciate fashion. Cost of entry/operation is still lower than
many other more developed nations. Build two new factories at a cost of $200M
each. Also, open 25 new retail stores in shopping malls at an initial cost of $500K
each. Total cost of $400M + $12.5M = 412.5M
2. Expand further into China. By some accounts, China is growing at 3 times the
rate of the United States and has a population of over 1B. The same target plan as
for Eastern Europe with total cost of $412.5M.
3. Develop ten new products and initiate an aggressive advertising campaign to
target men in the United States. Estimated cost $200M.
4. Further develop a line of natural skin care products and exfoliaters under a new
catchy brand name. Target these products to older customers and customers who
are into the natural craze look. Estimated cost $200M

Total Cost = $1,250B

For purposes of the EPS/EBIT analysis, it will be assumed Estée Lauder builds
one factory, opens 10 new retail stores and fully implements their aggressive
campaign to market to men. Total cost = $405M.

L. EPS/EBIT Analysis
$ Amount Needed: 405M
Stock Price: $40
Tax Rate: 36%
Interest Rate: 5%
# Shares Outstanding: 193M
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13
M. Epilogue
On November 9, 2007, the Estée Lauder Companies announced an increase in its
annual dividend on its Class A and Class B Common Stock to $.55 per share. This
amount represents a 10% increase over the previous annual rate of $.50 per share.
The $.55 per share annual dividend on the Class A Common Stock and Class B
Common Stock was paid on December 27, 2007 to stockholders. Additionally, the
company began to repurchase up to another 20.0 million shares of Class A
Common Stock or about 10% of the total outstanding common stock. This
increases the total authorization to 88.0 million shares, of which about 62.5
million have been repurchased to date.

Also on November 9, 2007, the Estée Lauder Companies Inc. announced the
appointment of Fabrizio Freda as President and Chief Operating Officer, effective
March 3, 2008. With this move, Chief Executive Officer William P. Lauder has
created a succession plan that anticipates Freda becoming Chief Executive Officer
within 24 months.

On August 16, 2007, the Estée Lauder Companies Inc. announced that for first
quarter 2008, net sales should increase between 5% and 7% in constant currency
and earnings per share should be between $0.05 and $0.11. For fiscal 2008, the
Company expects net sales to grow between 7% and 9% and EPS to be between
$2.28 and $2.40. According to Reuters Estimates, analysts on average are
expecting the Company to report EPS of $0.33 on revenues of $1.7 billion for first
quarter 2008, and EPS of $2.48 on revenues of $7.4 billion for fiscal 2008.

On July 9, 2007, the Estée Lauder Companies Inc. announced that it has agreed to
acquire the Ojon Corporation, a privately-held prestige hair care company based
in Canada. Ojon markets and sells products made with ingredients collected by
the Tawira, an indigenous community living in the Central American rainforest.

14