What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-02-05 compared with 2020-11-02 · 333 added, 148 removed, 436 unchanged (52% of the section changed)

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We manufacture, market and sell beauty products including those in the skin care, makeup, fragrance and hair care categories, which are distributed in approximately 150 countries and territories.

The following table is a comparative summary of operating results for the three months ended September 30, 2020 and 2019, and reflects the basis of presentation described in Notes to Consolidated Financial Statements, Note 1 – Summary of Significant Accounting Policies for all periods presented.

The following table is a comparative summary of operating results for the three and six months ended December 31, 2020 and 2019, and reflects the basis of presentation described in Notes to Consolidated Financial Statements, Note 1 – Summary of Significant Accounting Policies for all periods presented.

Products and services that do not meet our definition of skin care, makeup, fragrance and hair care have been included in the “other” category.

Three Months Ended

December 31 Six Months Ended

(In millions) 2020 2019 2020 2019

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Hair Care 154 162 290 298

Other 15 16 22 28

Net sales $ 4,853 $ 4,624 $ 8,415 $ 8,519

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Hair Care 4 12 7 12

Other (1) 4 — 6

1,100 274 1,814 1,078

Charges associated with restructuring and other activities (37) (13) (46) (38)

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Asia/Pacific 407 298 645 550

1,100 274 1,814 1,078

Charges associated with restructuring and other activities (37) (13) (46) (38)

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Three Months Ended

December 31 Six Months Ended

2020 2019 2020 2019

Net sales 100.0 % 100.0 % 100.0 % 100.0 %

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Restructuring and other charges 0.7 0.1 0.5 0.4

Goodwill impairment 1.1 11.0 0.6 6.0

Impairment of other intangible assets 0.6 5.8 0.3 3.1

Total operating expenses 55.8 71.8 56.3 64.9

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Other components of net periodic benefit cost 0.1 — 0.1 —

Other income — 12.5 — 6.8

Earnings before income taxes 21.2 17.5 20.2 18.4

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GAAP measures.

THE ESTÉE LAUDER COMPANIES INC.

We operate on a global basis, with the majority of our net sales generated outside the United States.

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We calculate constant currency information by translating current-period results using prior-year period weighted-average foreign currency exchange rates and adjusting for the period-over-period impact of foreign currency cash flow hedging activities.

THE ESTÉE LAUDER COMPANIES INC.

COVID-19 Business Update

The COVID-19 pandemic continues to cause significant disruption to our operating environment, temporarily impacting our retail footprint and consumer preferences.

During the three months ended September 30, 2020, countries around the world continued to be challenged by the pandemic with different levels of recovery from temporary business closures and other restrictions.

The COVID-19 pandemic continues to cause significant disruption to our operating environment, temporarily impacting retail traffic and certain consumer preferences.

During the three months ended December 31, 2020, countries around the world continued to be challenged by the pandemic with different levels of recovery from temporary business closures and other restrictions.

Retail impact

Many brick-and-mortar retail stores globally that sell our products, whether operated by us or our customers, were closed for some period of time during the fiscal 2021 first quarter, and consumer traffic declined significantly.

• In The Americas, approximately 20% of the stores were closed at the beginning of July 2020, and by the end of September 2020, nearly all retail stores had re-opened.

• In Europe, the Middle East & Africa, approximately 15% of stores were closed at the beginning of July 2020, and by the end of September 2020, nearly all retail stores had re-opened.

• In Asia/Pacific, nearly all retail stores were open during the entire first quarter of fiscal 2021.

• In addition, international travel has remained largely curtailed globally due to both government restrictions and consumer health concerns, which continues to adversely impact consumer traffic in most travel retail locations.

Somewhat offsetting the significant declines in brick-and-mortar channels, net sales growth of our products online (through our own websites, third-party platforms and websites of our retailers) has remained strong in every region during the first quarter of fiscal 2021.

The resurgence of COVID-19 cases in various parts of the world, including the United Kingdom, Ireland and other countries in Europe, has caused the re-implementation of government restrictions to prevent further spread of the virus.

These restrictions include the temporary closure of businesses deemed “non-essential”, travel bans and restrictions, social distancing and quarantines.

Most brick-and-mortar retail stores globally that sell our products, whether operated by us or our customers, were open during the second quarter of fiscal 2021, although consumer traffic was significantly reduced as compared to the prior-year period and some retail stores were temporarily closed due to the resurgence of COVID-19 cases.

In addition, international travel has remained largely curtailed globally due to both government restrictions and consumer health concerns that continue to adversely impact consumer traffic in most travel retail locations.

The resurgence of COVID-19 cases in various parts of the world, including the United States, the United Kingdom and other countries in Europe, and Japan, has caused the reimplementation of government restrictions to prevent further spread of the virus.

These restrictions included the temporary closure of businesses deemed “non-essential,” travel bans and restrictions, social distancing and quarantines.

We will continue to monitor the impacts of the COVID-19 pandemic and adjust our action plans accordingly as the situation progresses.

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The COVID-19 pandemic related closures of offices, retail stores and other businesses and the significant decline in social gatherings have also influenced consumer preferences and practices.

Demand for skin care and hair care products has been more resilient than the demand for makeup and fragrance products.

Demand for skin care, fragrance and hair care products has generally been more resilient than the demand for makeup.

Manufacturing and Distribution

By the end of the fiscal 2021 first quarter, all of our manufacturing and distribution facilities were operating at sufficient levels.

By the end of the first quarter of fiscal 2021, and throughout the second quarter of fiscal 2021, all of our manufacturing and distribution facilities were operating at sufficient levels.

Cost Controls

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Areas where we took actions included advertising and promotion activities, travel, meetings, consulting, and certain employee costs, including implementing furloughs and similar unpaid temporary leaves of absence for many point of sale employees, temporary salary reductions for senior executives and other management employees, and a temporary elimination of cash retainers for the Board of Directors.

Some of these cost control actions were lifted during the second quarter of fiscal 2021.

THE ESTÉE LAUDER COMPANIES INC.

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These analytics and insights, combined with our creativity, inform our innovation to provide a broad, locally-relevant and inclusive range of prestige products allowing us to compete effectively for a greater share of a consumer's beauty routine.

Elements of our strategy are described in the Overview on pages 28-31 of our Annual Report on Form 10-K for the year ended June 30, 2020, as well as below.

During the first quarter of fiscal 2021, net sales declined 9%, reflecting the impacts of the COVID-19 pandemic, including retail store closures and reduced consumer foot traffic in brick-and mortar retail.

Declines in brick-and-mortar retail were partially offset by strong growth online and the incremental net sales from our acquisition of Dr.

Elements of our strategy are described in the Overview on pages 28-31 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020, as well as below.

During the second quarter of fiscal 2021, net sales increased 5% from the prior-year period, reflecting growth in our skin care product category and in our Asia/Pacific region, as well as strong growth online and the incremental net sales from our acquisition of Dr.

Jart+ at the end of the fiscal 2020 second quarter.

• Our skin care net sales benefited from the launch of the new Estée Lauder Advanced Night Repair Synchronized Multi-Recovery Complex and the launch of the new The Concentrate from La Mer.

Both new products support high-loyalty hero franchises.

• Our skin care net sales benefited from the launch of the new Estée Lauder Advanced Night Repair Synchronized Multi-Recovery Complex, the launch of the new The Concentrate from La Mer and strength in basic skin care from Clinique.

The new products support high-loyalty hero franchises.

Skin care net sales grew internationally, reflecting the renewed consumer focus on self-care during the COVID-19 pandemic.

• The COVID-19 pandemic limited social and business activities and consumers wore less makeup.

Demand for lipstick and foundation were most acutely impacted, contributing to lower makeup net sales from M·A·C, Estée Lauder, Clinique and Bobbi Brown.

During the first quarter of fiscal 2021, our brands generated interest in makeup through virtual marketing efforts such as classes, virtual try on technology and greater emphasis on social media platforms, as well as a focus on subcategories that continue to resonate with consumers.

• Our fragrance net sales also declined, as consumers continued to gravitate to bath, body and home fragrances.

KILIAN PARIS and Frédéric Malle launched in mainland China, aiding their growth in the first quarter of fiscal 2021.

Le Labo grew double-digits globally, primarily on the strength of its online efforts.

Most other brands reported declines in fragrance net sales.

• Our hair care net sales were flat, reflecting growth from Aveda, partially offset by declines at Bumble and bumble.

The COVID-19 pandemic related salon closures and limited capacity re-openings were offset by strong double-digit online growth at Aveda as well as its launch of Botanical Repair in August 2020.

We continue to strengthen our presence in large, image building core markets, while broadening our presence in emerging markets.

Our net sales growth by geographic region in the first quarter of fiscal 2021 reflects, in part, the cadence of post-COVID-19 pandemic re-openings around the world.

• Net sales growth declined the most in The Americas, where COVID-19 cases continue to rise across much of the region and strong online net sales were not enough to offset the decline of brick-and-mortar distribution.

• The Europe, the Middle East & Africa region net sales declined overall, while robust online net sales growth continued.

Demand for lipstick and foundation were most acutely impacted, contributing to lower makeup net sales across the portfolio.

Our brands continued to generate interest in makeup through virtual marketing efforts such as classes, virtual try on technology and greater emphasis on social media platforms, as well as a focus on subcategories that continue to resonate with consumers.

• Our fragrance net sales increased in the second quarter of fiscal 2021, reflecting holiday gifting and continued strength in bath, body and home fragrances.

Fragrance net sales growth was led by Tom Ford Beauty, Jo Malone London and Le Labo.

• Our hair care net sales declined, reflecting pandemic related salon closures and limited capacity re-openings, partially offset by strong double-digit online growth and Aveda's launch of Botanical Repair in August 2020.

Our net sales growth by geographic region in the second quarter of fiscal 2021 reflects, in part, the cadence of COVID-19 recovery and resurgence around the world.

• Net sales declined in The Americas, where COVID-19 cases continue to rise across much of the region and strong online net sales were not enough to offset the decline of brick-and-mortar distribution.

• The Europe, the Middle East & Africa region net sales declined overall, as the resurgence of COVID-19 cases led to the reimplementation of government restrictions and temporary store closures, while robust online net sales growth continued.

• The Asia/Pacific region grew, reflecting good momentum in mainland China, Korea, and several smaller markets.

While we continue to face strong competition and economic challenges globally, the COVID-19 pandemic has caused a more significant disruption to our business and the retail industry generally.

We have seen, and believe there may be more impairments, restructurings and bankruptcies in the retail industry, including among our customers;

There have been restructurings and bankruptcies in the retail industry, including among our customers;

destocking and tighter working capital management by retailers;

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and an acceleration in the shifts in consumer preferences as to where and how they shop, as well as changes in their preferences for certain products.

The severe decline in international travel is also affecting our travel retail business, which had been historically one of our most profitable channels.

We are mindful that these trends may continue to impact the pace of recovery.

The severe decline in international travel is also affecting our travel retail business in most of the world, which had been historically one of our most profitable channels.

In addition to impacting net sales and profitability, these and other challenges may impact our ability to collect receivables and our operating cash flows generally and may adversely impact the goodwill, other intangibles and long-lived assets associated with our acquired brands.

THE ESTÉE LAUDER COMPANIES INC.

We continue to monitor the geopolitical tensions between the United States and China and the uncertainties caused by the evolving trade policy dispute, which could increase our cost of sales and negatively impact our overall net sales, or otherwise have a material adverse effect on our business.

We also continue to monitor the potential implications of the ongoing economic and political uncertainties stemming from the United Kingdom’s exit and transition from the European Union (i.e.

“Brexit”) and have developed our risk mitigation strategies to address such uncertainties.

The United Kingdom reached a trade agreement and completed its transition out of the European Union (“EU”) in December 2020 (i.e.

The trade agreement is being provisionally applied from January 1, 2021 until ratification by the EU, which is expected later in 2021.

To date, there has been minimal interruption to our business relating to the end of the Brexit transition period.

We will continue to monitor the potential political and economic uncertainties from Brexit for which we have developed risk mitigation strategies.

These strategies include changes related to regulatory and legislative compliance, assessing alternatives to supply chain routing, revising customer arrangements and analyzing inventory levels.

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and global security issues.

THE ESTÉE LAUDER COMPANIES INC.

The uncertainty around the timing, speed and duration of the recovery from the adverse impacts of the COVID-19 pandemic will continue to affect our ability to grow sales profitably.

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Leading Beauty Forward Program and Post-COVID Business Acceleration Program

Information about our restructuring initiatives, the Leading Beauty Forward Program and the Post-COVID Business Acceleration Program, are described in Notes to Consolidated Financial Statements, Note 3 – Charges Associated with Restructuring and Other Activities herein, as well as, in Notes to Consolidated Financial Statements, Note 8 – Charges Associated with Restructuring and Other Activities and in the Overview on page 30 of our Annual Report on Form 10-K for the year ended June 30, 2020.

Information about our restructuring initiatives, the Leading Beauty Forward Program and the Post-COVID Business Acceleration Program, are described in Notes to Consolidated Financial Statements, Note 4 – Charges Associated with Restructuring and Other Activities herein, as well as, in Notes to Consolidated Financial Statements, Note 9 – Charges Associated with Restructuring and Other Activities and in the Overview on page 30 of our Annual Report on Form 10-K for the fiscal year ended June 30, 2020.

Goodwill and Other Intangible Asset Impairments

During November 2020, given the actual and the estimate of the potential future impacts relating to the uncertainty of the duration and severity of COVID-19 impacting us and lower than expected results from geographic expansion, we made further revisions to the internal forecasts relating to our GLAMGLOW reporting unit.

We concluded that the changes in circumstances in this reporting unit triggered the need for an interim impairment review of its trademark and goodwill.

These changes in circumstances were also an indicator that the carrying amounts of GLAMGLOW's long-lived assets, including customer lists, may not be recoverable.

Accordingly, we performed an interim impairment test for the trademark and a recoverability test for the long-lived assets as of November 30, 2020.

We concluded that the carrying value of the trademark for GLAMGLOW exceeded its estimated fair value, which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, and recorded an impairment charge of $21 million.

In addition, we concluded that the carrying value of the GLAMGLOW customer lists intangible asset was fully impaired and recorded an impairment charge of $6 million.

The fair value of all other long-lived assets of GLAMGLOW exceeded their carrying values and were not impaired as of November 30, 2020.

After adjusting the carrying values of the trademark and customer lists intangible assets, we completed an interim quantitative impairment test for goodwill and recorded a goodwill impairment charge of $54 million, reducing the carrying value of goodwill for the GLAMGLOW reporting unit to zero.

The fair value of the GLAMGLOW reporting unit was based upon an equal weighting of the income and market approaches, utilizing estimated cash flows and a terminal value, discounted at a rate of return that reflects the relative risk of the cash flows, as well as valuation multiples derived from comparable publicly traded companies that are applied to operating performance of the reporting unit.

The impairment charges for the three and six months ended December 31, 2020 were reflected in the skin care product category and in the Americas region.

As of December 31, 2020, the remaining carrying value of the trademark related to the GLAMGLOW reporting unit were $36 million.

THE ESTÉE LAUDER COMPANIES INC.

Three Months Ended

December 31 Six Months Ended

($ in millions) 2020 2019 2020 2019

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GAAP measures.

Reported net sales decreased, primarily reflecting lower net sales in all product categories, except skin care, and all geographic regions, except for Asia/Pacific, due to the continued challenges of the COVID-19 pandemic, including retail store closures and reduced consumer foot traffic in brick-and-mortar retail, the continued curtailment of international travel, and continued social distancing and quarantines.

Despite the overall decrease, net sales grew in our skin care category and in our Asia/Pacific region.

Direct-to-consumer online net sales continued to have strong growth, representing approximately 13% of fiscal 2021 first quarter net sales compared to approximately 8% in the prior-year period.

Skin care net sales increased, primarily due to the success of hero product franchises and new product launches from Estée Lauder and La Mer.

Net sales in Asia/Pacific increased, reflecting higher net sales in mainland China and Korea, as well as growth in all product categories, except makeup.

The incremental net sales from our acquisition of Dr.

Jart+ at the end of the fiscal 2020 second quarter benefited both the skin care category and Asia/Pacific.

The total net sales decrease was impacted by approximately $15 million of favorable foreign currency translation.

Reported net sales increased for the three months ended December 31, 2020, primarily reflecting higher net sales in our skin care and fragrance product categories and in our Asia/Pacific region.

The net sales increase in our skin care product category was primarily driven by Estée Lauder and La Mer, reflecting the success of hero product franchises, new product launches and successful holiday and promotional events.

Fragrance net sales increased, benefiting from higher net sales from Tom Ford Beauty and Jo Malone London.

Net sales in Asia/Pacific increased, primarily due to higher net sales in mainland China and Korea.

The incremental net sales attributable to our acquisition of Dr.

Jart+ at the end of the fiscal 2020 second quarter benefited our skin care category and Asia/Pacific.

Direct-to-consumer online net sales continued to have strong growth, representing approximately 23% of fiscal 2021 second quarter net sales compared to approximately 15% in the prior-year period and benefiting from successful holiday and promotional events.

Reported net sales decreased for the six months ended December 31, 2020, primarily reflecting lower net sales in all product categories, except skin care, and all geographic regions, except for Asia/Pacific, due to the continued challenges of the COVID-19 pandemic, including temporary retail store closures and reduced consumer foot traffic in brick-and-mortar retail locations, the continued curtailment of international travel, and continued social distancing and quarantines.

Despite the overall decrease, net sales continued to grow in our skin care category and in our Asia/Pacific region, both reflecting double-digit growth and the incremental net sales attributable to our acquisition of Dr.

Jart+ at the end of the fiscal 2020 second quarter.

Direct-to-consumer online net sales continued to have strong growth, representing approximately 19% of net sales for the six months ended December 31, 2020 compared to approximately 12% in the prior-year period.

The total net sales changes were impacted by approximately $102 million and $117 million of favorable foreign currency translation for the three and six months ended December 31, 2020, respectively.

THE ESTÉE LAUDER COMPANIES INC.

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Three Months Ended

December 31 Six Months Ended

($ in millions) 2020 2019 2020 2019

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GAAP measures.

Reported skin care net sales increased, reflecting higher net sales from Estée Lauder and La Mer of approximately $226 million, combined, and strong growth internationally, as well as incremental net sales of $109 million attributable to our acquisition of Dr.

Jart+ at the end of the fiscal 2020 second quarter.

Net sales from Estée Lauder increased, led by our travel retail business and mainland China, primarily due to the continued success of existing product franchises, such as Advanced Night Repair, Perfectionist and Micro Essence, and new product launches, such as the new Advanced Night Repair Synchronized Multi-Recovery Complex.

The increase in net sales from La Mer was primarily driven by new product launches, such as the launch of the new The Concentrate, successful holiday and promotional events in mainland China and targeted expanded consumer reach.

Partially offsetting these increases were lower net sales from Clinique and Origins of approximately $46 million, combined.

Net sales from these brands declined, reflecting lower net sales in all geographic regions, with the exception of Clinique in Asia/Pacific, due to the challenging environment as a result of the COVID-19 pandemic.

Despite the overall declines in net sales, direct-to-consumer online net sales from both of these brands increased, particularly at Clinique, which represented approximately 14% of Clinique's fiscal 2021 first quarter skin care net sales compared to approximately 7% in the prior-year period.

The skin care net sales increase was impacted by approximately $11 million of favorable foreign currency translation.

Reported skin care net sales increased for the three and six months ended December 31, 2020, reflecting higher net sales from Estée Lauder and La Mer, as well as incremental net sales attributable to our acquisition of Dr.

Jart+ at the end of the fiscal 2020 second quarter, combined, of approximately $609 million and $944 million, respectively.

For the three and six months ended December 31, 2020, net sales increased from Estée Lauder and La Mer, led by mainland China and our travel retail business (primarily in Hainan), reflecting high double-digit growth from direct-to-consumer online net sales of products from these brands primarily due to the successful holiday and promotional events.

The continued success of existing product franchises, such as Advanced Night Repair, Nutritious, Micro Essence and Perfectionist, and new product launches, such as the new Advanced Night Repair Synchronized Multi-Recovery Complex, contributed to the increase in net sales from Estée Lauder in both periods.

Net sales from La Mer increased for the three and six months ended December 31, 2020, benefiting from the continued success of existing product franchises, such as Créme de la Mer and Treatment Lotion, new product launches, such as the Genaissance de la Mer The Concentrated Night Balm and the fiscal 2021 first quarter launch of the new The Concentrate, and targeted expanded consumer reach.

The skin care net sales increases were impacted by approximately $70 million and $81 million of favorable foreign currency translation for the three and six months ended December 31, 2020, respectively.

Three Months Ended

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($ in millions) 2020 2019 2020 2019

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THE ESTÉE LAUDER COMPANIES INC.

Reported makeup net sales decreased, primarily driven by lower net sales from M·A·C, Estée Lauder and Clinique of approximately $340 million, combined.

Net sales decreased from these brands in all geographic regions, reflecting the challenging environment, especially in brick-and-mortar retail locations, and the shift in consumer preference to skin care products due to the COVID-19 pandemic.

The continued decline in prestige makeup and ongoing competitive activity in North America also contributed to the decline in net sales from these brands.

Despite the challenging environment, our direct-to-consumer online net sales from Estée Lauder and Clinique grew double digits and grew single digits from M·A·C, which represented approximately 18%, combined, of their fiscal 2021 first quarter makeup net sales compared to approximately 11% in the prior-year period.

The makeup net sales decrease was impacted by approximately $2 million of favorable foreign currency translation.

Reported makeup net sales decreased for the three and six months ended December 31, 2020, primarily driven by lower net sales from M·A·C, Estée Lauder, Bobbi Brown and Clinique, combined, of approximately $342 million and $706 million, respectively.

For the three and six months ended December 31, 2020, net sales decreased from these brands, reflecting the challenging environment, especially in brick-and-mortar retail locations, and the continued consumer preference for skin care products due to the COVID-19 pandemic.

The continued decline in prestige makeup and ongoing competitive activity in North America also contributed to the decline in net sales from these brands in both periods.

For the three and six months ended December 31, 2020, our direct-to-consumer online net sales of products from these brands grew double digits.

The makeup net sales decreases were impacted by approximately $20 million and $22 million of favorable foreign currency translation for the three and six months ended December 31, 2020, respectively.

Three Months Ended

December 31 Six Months Ended

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GAAP measures.

Reported fragrance net sales decreased, reflecting lower net sales primarily from Estée Lauder, Clinique and certain of our designer fragrances of approximately $40 million, combined.

The decrease in net sales from Estée Lauder and Clinique reflected lower net sales in all geographic regions, driven by North America, and our travel retail business, due to the challenging environment as a result of the COVID-19 pandemic.

The decline in net sales from Clinique also reflected a decrease in North America, primarily due to holiday shipments scheduled later in the fiscal year as compared to the prior-year period.

Net sales declined from certain of our designer fragrances, primarily driven by lower net sales in our travel retail business due to the curtailment of international travel and the shift in consumer preferences as a result of the COVID-19 pandemic.

The fragrance net sales decrease was impacted by approximately $2 million of favorable foreign currency translation.

Reported fragrance net sales increased for the three months ended December 31, 2020, reflecting higher net sales primarily from Tom Ford Beauty and Jo Malone London, of approximately $38 million, combined.

Net sales from Tom Ford Beauty increased, primarily due to the success of hero product franchises, such as Oud Wood and Ombre Leather, and new product launches, such as Bitter Peach.

The increase in net sales from Jo Malone London, led by mainland China, benefited from successful holiday and promotional events, the success of certain hero product franchises, and new product launches, such as Scents for the Season.

Partially offsetting these increases for the three months ended December 31, 2020, were lower net sales from certain of our designer fragrances, led by our travel retail business and the United Kingdom, primarily due to the continued challenging environment as a result of the COVID-19 pandemic, including the continued curtailment of international travel and the resurgence of COVID-19 cases that caused the reimplementation of government restrictions.

Reported fragrance net sales decreased for the six months ended December 31, 2020, reflecting lower net sales primarily from certain of our designer fragrances and Estée Lauder of approximately $41 million, combined.

Net sales declined from these brands, led by our travel retail business and the United Kingdom, primarily due to the continued challenging environment as a result of the COVID-19 pandemic, including the continued curtailment of international travel and the resurgence of COVID-19 cases that caused the reimplementation of government restrictions.

Partially offsetting these decreases for the six months ended December 31, 2020, were higher net sales from Tom Ford Beauty, primarily due to the success of hero product franchises and new product launches.

The changes in fragrance net sales were impacted by approximately $9 million and $11 million of favorable foreign currency translation for the three and six months ended December 31, 2020, respectively.

THE ESTÉE LAUDER COMPANIES INC.

Three Months Ended

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GAAP measures.

THE ESTÉE LAUDER COMPANIES INC.

Reported hair care net sales was flat to the prior year, reflecting increased net sales from Aveda, partially offset by lower net sales from Bumble and bumble.

The increase in net sales from Aveda was driven by the success of existing product franchises, such as Nutriplenish, and the launch of Botanical Repair, which led to growth in all geographic regions and very high double-digit growth from our online channel.

Direct-to-consumer online net sales of Aveda products represented approximately 24% of Aveda's fiscal 2021 first quarter hair care net sales compared to approximately 14% in the prior-year period.

Net sales declined from Bumble and bumble primarily driven by lower net sales in North America due to salon and freestanding store closures as a result of the COVID-19 pandemic.

Reported hair care net sales decreased for the three and six months ended December 31, 2020, reflecting lower net sales primarily from Bumble and bumble driven by the net sales decline in North America primarily due to temporary salon and freestanding store closures as a result of the COVID-19 pandemic and the shift in consumer preferences.

Partially offsetting the decreases in reported hair care net sales for the six months ended December 31, 2020, were higher net sales from Aveda.

The increase in net sales from Aveda was driven by the success of existing product franchises, such as Nutriplenish, the launch of Botanical Repair, and successful holiday events, which led to growth in all geographic regions.

Geographic Regions

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GAAP measures.

Reported net sales in The Americas decreased in nearly all countries, led by the United States of approximately $257 million, primarily from M·A·C, Clinique and Estée Lauder due to the challenging environment caused by the COVID-19 pandemic, including store closures, reduced consumer traffic with the gradual re-opening of brick-and-mortar stores and continued social distancing and quarantines.

Reported net sales in The Americas decreased in virtually all countries for the three and six months ended December 31, 2020, led by the United States of approximately $157 million and $415 million, respectively.

Net sales decreased in the United States for the three and six months ended December 31, 2020, reflecting lower net sales from M·A·C and Estée Lauder (primarily due to the declines in the makeup category) as a result of the continued challenging environment caused by the COVID-19 pandemic, including the resurgence of COVID-19 cases, reduced consumer traffic in brick-and-mortar retail locations, the continued consumer preference for skin care products, and continued social distancing.

The decline in North America prestige beauty, primarily makeup, and the ongoing competitive activity also contributed to the decline in net sales.

Despite the overall decrease in net sales, direct-to-consumer online net sales in The Americas grew strong double digits, with growth from virtually all brands, which represented approximately 19% of the region's fiscal 2021 first quarter net sales compared to approximately 10% in the prior-year period.

Net sales in The Americas were impacted by approximately $14 million of unfavorable foreign currency translation.

Despite the overall decrease in net sales, direct-to-consumer online net sales in The Americas grew double digits for the three and six months ended December 31, 2020, with growth from virtually all brands, and represented approximately 27% and 23% of total net sales in the region compared to approximately 18% and 14% in the prior-year periods, respectively.

Net sales in The Americas were impacted by approximately $15 million and $29 million of unfavorable foreign currency translation for the three and six months ended December 31, 2020, respectively.

THE ESTÉE LAUDER COMPANIES INC.

Europe, the Middle East & Africa

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GAAP measures.

THE ESTÉE LAUDER COMPANIES INC.

Reported net sales decreased in virtually all markets in Europe, the Middle East & Africa, primarily led by the Middle East and the United Kingdom, as well as and our travel retail business, due to the continued challenges across the region from the COVID-19 pandemic, including reduced consumer traffic with the gradual re-opening of brick-and-mortar stores, the continued curtailment of international travel, and continued social distancing and quarantines.

The adverse macroeconomic conditions also contributed to the decrease in net sales in the United Kingdom.

Net sales decreased in our travel retail business, driven by limited international travel as a result of the COVID-19 pandemic, mostly offset by an increase in net sales in China travel retail (primarily Hainan).

Despite the challenges in brick-and-mortar retail stores, direct-to-consumer online net sales more than doubled and represented approximately 3% of the region's fiscal 2021 first quarter net sales compared to approximately 1% in the prior-year period.

Net sales in Europe, the Middle East & Africa were impacted by approximately $10 million of favorable foreign currency translation.

Reported net sales for the three and six months ended December 31, 2020 decreased in most markets in Europe, the Middle East & Africa, primarily driven by the United Kingdom, France and Iberia, reflecting the continued challenges across the region from the COVID-19 pandemic, including the resurgence of COVID-19 cases that caused the reimplementation of government restrictions, such as temporary store closures and quarantines, and reduced consumer traffic in brick-and-mortar retail.

The adverse macroeconomic conditions and the liquidation of a key retailer also contributed to the decrease in net sales in the United Kingdom.

Partially offsetting these decreases for the three and six months ended December 31, 2020, were higher net sales from our travel retail business, primarily driven by the increases in net sales in China travel retail (primarily Hainan).

These increases were led by Estée Lauder and La Mer, reflecting the continued success of certain hero franchises, such as the Advanced Night Repair line of products from Estée Lauder and La Mer Treatment Lotion, and the continued consumer preference for skin care products.

For the three and six months ended December 31, 2020, despite the challenges in brick-and-mortar retail locations, direct-to-consumer online net sales in Europe, the Middle East & Africa more than doubled, representing approximately 7% and 5% of total net sales in the region compared to approximately 3% and 2% in the prior-year periods, respectively.

Net sales in Europe, the Middle East & Africa were impacted by approximately $20 million and $30 million of favorable foreign currency translation for the three and six months ended December 31, 2020, respectively.

Three Months Ended

December 31 Six Months Ended

($ in millions) 2020 2019 2020 2019

6 unchanged sentences

GAAP measures.

Reported net sales increased in Asia/Pacific, reflecting higher net sales in mainland China and Korea of approximately $182 million, combined, including incremental net sales of $105 million from our acquisition of Dr.

Jart+ at the end of the fiscal 2020 second quarter.

Net sales increased in mainland China, primarily due to the continued success of hero product franchises and new product launches from La Mer and Estée Lauder, as well as incremental net sales attributable to our acquisition of Dr.

Net sales increased in mainland China across virtually all channels.

Online net sales increased due to successful holiday events and campaigns.

The increase in net sales in Korea reflected growth from virtually all brands, as well as incremental net sales from our acquisition of Dr.

Jart+, and direct-to-consumer online net sales grew strong double digits, which represented approximately 21% of the region's fiscal 2021 first quarter net sales compared to approximately 17% in the prior-year period.

Partially offsetting these increases were lower net sales in Hong Kong and Japan of approximately $77 million, combined, primarily due to the ongoing challenges stemming from the COVID-19 pandemic, including the resurgence of COVID-19 during the period (July 2020 in Hong Kong and August 2020 in Japan) and reduced consumer traffic with the gradual re-opening of brick-and-mortar stores, as well as the continued curtailment of international travel, social distancing and quarantines and border closures in Hong Kong.

In addition, net sales in Japan decreased as a result of the unfavorable comparison to higher levels of purchasing in the prior-year period in anticipation of a value-added tax increase.

Net sales in Asia/Pacific were impacted by approximately $19 million of favorable foreign currency translation.

We strategically stagger our new product launches by geographic market, which may account for differences in regional sales growth.

THE ESTÉE LAUDER COMPANIES INC.

Gross margin increased to 76.8% for the three months ended September 30, 2020 as compared with 76.7% in the prior-year period.

Reported net sales in Asia/Pacific increased for the three and six months ended December 31, 2020, reflecting higher net sales in mainland China and Korea, which included incremental net sales from our acquisition of Dr.

Jart+ at the end of the fiscal 2020 second quarter, combined, of approximately $490 million and $672 million, respectively.

For the three and six months ended December 31, 2020, net sales in mainland China increased primarily due to growth in our skin care product category, driven by Estée Lauder, La Mer and incremental net sales attributable to our acquisition of Dr.

Jart+, and in our fragrance product category, led by Jo Malone London and Tom Ford Beauty.

The success of holiday and promotional events in mainland China contributed to growth in virtually all channels in both periods, led by third-party platforms and department stores.

For the three and six months ended December 31, 2020 net sales increased in Korea, reflecting growth in all product categories, except makeup, and benefited from the increase in net sales from Jo Malone London, Estée Lauder and La Mer, as well as incremental net sales from our acquisition of Dr.

For the three and six month ended December 31, 2020, direct-to-consumer online net sales of our products in Korea grew high double digits.

Direct-to-consumer online net sales in Asia/Pacific for the three and six months ended December 31, 2020 grew high double digits, representing approximately 41% and 33% of total net sales in the region compared to approximately 31% and 25% in the prior-year periods, respectively.

Partially offsetting these increases for the three and six months ended December 31, 2020 were lower net sales in Hong Kong and Japan, combined, of approximately $39 million and $116 million, respectively.

In both periods, the decline in net sales were primarily due to the ongoing challenges stemming from the COVID-19 pandemic, including reduced consumer traffic in brick-and-mortar retail locations, the continued curtailment of international travel, social distancing and quarantines, and border closures in Hong Kong.

Net sales in Asia/Pacific were impacted by approximately $97 million and $116 million of favorable foreign currency translation for the three and six months ended December 31, 2020, respectively.

We strategically stagger our new product launches by geographic market, which may account for differences in regional sales growth.

Gross margin increased to 77.7% and 77.3% for the three and six months ended December 31, 2020, respectively, as compared with 77.5% and 77.1% in the prior-year periods.

Favorable (Unfavorable) Basis Points

Three Months Ended September 30, 2020

December 31, 2020

Three Months Ended Six Months Ended

Mix of business 105 100

2 unchanged sentences

Foreign exchange transactions (35) (45)

Subtotal 10 20

Charges associated with restructuring and other activities 10 —

The favorable impact from our mix of business was primarily due to lower costs from product sets, the favorable change in product category mix (i.e.

a decline in our lower margin makeup category, primarily in Asia/Pacific), and lower costs of promotional items as a percentage of net sales.

These favorable impacts to our mix of business were partially offset by the impact of our acquisition of Dr.

Jart+ at the end of the fiscal 2020 second quarter.

The favorable impact from our mix of business for the three and six months ended December 31, 2020 was primarily due to lower costs of testers as a result of reduced consumer traffic in brick-and-mortar retail locations, the favorable change in channel mix (i.e.

from department stores to online), the favorable change in product category mix (i.e.

a decline in our lower margin makeup category, primarily in North America and our travel retail business, and an increase in our higher margin skin care category, primarily within Asia/Pacific and our travel retail business), and favorable changes in strategic pricing.

The favorable impact from our mix of business for the six months ended December 31, 2020 also reflected lower costs from product sets.

For the three and six months ended December 31, 2020, the factors causing favorability due to changes in our mix of business were partially offset by the impact of lower margin sales of Dr.

Jart+, which we acquired at the end of the fiscal 2020 second quarter.

THE ESTÉE LAUDER COMPANIES INC.

Partially offsetting the favorable impact from our mix of business for the three months ended December 31, 2020, were increases in obsolescence charges, driven by lower demand due to the impacts of the COVID-19 pandemic, that led to higher provisions for excess inventory.

OPERATING EXPENSES

Operating expenses as a percentage of net sales was 57.0% for the three months ended September 30, 2020 as compared with 56.7% in the prior-year period.

Operating expenses as a percentage of net sales was 55.8% and 56.3% for the three and six months ended December 31, 2020, respectively, as compared with 71.8% and 64.9% in the prior-year periods.

Favorable (Unfavorable) Basis Points

Three Months Ended September 30, 2020

Three Months Ended

December 31, 2020

Three Months Ended Six Months Ended

General and administrative expenses (60) (160)

Advertising, merchandising, sampling and product development 10 —

Selling 230 240

Stock-based compensation (50) (40)

4 unchanged sentences

Charges associated with restructuring and other activities (60) (10)

The increase in operating expense margin reflected higher general and administrative expenses, primarily due to increased employee incentive compensation, reflecting bonuses paid to non-executive employees in recognition of their ongoing resilience during the COVID-19 pandemic, incremental costs attributable to our acquisition of Dr.

Jart+ at the end of the fiscal 2020 second quarter and the decrease in net sales.

Partially offsetting this increase was a decrease in selling expense, primarily driven by the reduction in employee costs as a result of the COVID-19 pandemic.

THE ESTÉE LAUDER COMPANIES INC.

Goodwill and other intangible asset impairments 1,510 820

Changes in fair value of contingent consideration (10) (10)

Total 1,600 860

For the three and six months ended December 31, 2020, the decreases in operating expense margin were driven by the year-over-year impact of goodwill and other intangible asset impairments of $696 million and a decrease in selling expense, due to the impacts of the COVID-19 pandemic on brick-and-mortar retail locations, including the decline in consumer traffic, temporary store closures, and the continued shift in consumer preference to online.

Partially offsetting these favorable impacts were increases in general and administrative expenses, primarily due to an increase in employee incentive compensation and amortization expense relating to the acquired intangible assets of Dr.

OPERATING RESULTS

Three Months Ended

December 31 Six Months Ended

($ in millions) 2020 2019 2020 2019

4 unchanged sentences

Non-GAAP Financial Measure (1) :

% Change in operating income from the prior-year period adjusting for the impact of charges associated with restructuring and other activities (11) %

% Change in operating income from the prior-year period adjusting for the impact of charges associated with restructuring and other activities, goodwill and other intangible asset impairments and changes in fair value of contingent consideration 13 % 2 %

(1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 53 for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

GAAP measures.

The decrease in reported operating margin for the three months ended September 30, 2020 from the prior-year period was primarily driven by the decrease in net sales, partially offset by disciplined expense management throughout the business.

THE ESTÉE LAUDER COMPANIES INC.

The reported operating margin for the three and six months ended December 31, 2020 increased from the prior-year periods driven by the year-over-year impact of goodwill and other intangible asset impairments of $696 million and the decrease in selling expenses, as discussed above.

Charges associated with restructuring and other activities are not allocated to our product categories or geographic regions because they are centrally directed and controlled, are not included in internal measures of product category or geographic region performance and result from activities that are deemed Company-wide initiatives to redesign, resize and reorganize select areas of the business.

2 unchanged sentences

Three Months Ended

December 31 Six Months Ended

($ in millions) 2020 2019 2020 2019

2 unchanged sentences

% Change from prior-year period 20 % 17 %

Reported skin care operating income increased, primarily driven by higher results from Estée Lauder, Clinique and La Mer of approximately $183 million, combined.

The increases in operating income from Estée Lauder and La Mer reflected higher net sales, partially offset by increased advertising and promotional activities primarily to support new product launches.

The higher results from Clinique reflected disciplined expense management, primarily advertising and promotional activities, and the decrease in selling expense due to the reduction in employee costs as a result the COVID-19 pandemic.

Non-GAAP Financial Measure (1) :

% Change in operating income from the prior-year period adjusting for the impact of goodwill and other intangible asset impairments and changes in fair value of contingent consideration 31 % 23 %

(1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 53 for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

GAAP measures.

Reported skin care operating income increased for the three and six months ended December 31, 2020, primarily driven by higher results from Estée Lauder and La Mer, combined, of approximately $306 million and $465 million, respectively.

For the three and six month ended December 31, 2020, the increases in operating income from Estée Lauder and La Mer primarily reflected higher net sales, as well as lower selling expenses due to the impacts of the COVID-19 pandemic on brick-and-mortar retail locations, including the decline in consumer traffic, store closures, and the continued shift in consumer preference to online.

In both periods, these changes from Estée Lauder and La Mer were partially offset by increased advertising and promotional activities primarily to support holiday and promotional events and new product launches.

Partially offsetting the increases in operating income for the three and six months ended December 31, 2020 were lower results from GLAMGLOW due to the current year goodwill and other intangible asset impairment charges of $81 million, as well as increases in general and administrative expenses, including employee incentive compensation.

THE ESTÉE LAUDER COMPANIES INC.

Three Months Ended

December 31 Six Months Ended

($ in millions) 2020 2019 2020 2019

2 unchanged sentences

% Change from prior-year period 100+% 92 %

Reported makeup operating results decreased, primarily driven by lower results from M·A·C due to the decrease in net sales, partially offset by lower selling expenses and store operating costs due to the effects of the COVID-19 pandemic, including store closures.

Non-GAAP Financial Measure (1) :

% Change in operating income from the prior-year period adjusting for the impact of goodwill and other intangible asset impairments (83) % (100+)%

(1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 53 for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

GAAP measures.

Reported makeup operating results increased for the three and six months ended December 31, 2020, driven by the favorable year-over-year impact of goodwill and other intangible asset impairments related to Too Faced, BECCA and Smashbox of approximately $777 million, combined.

Partially offsetting the increases in operating income for the three and six months ended December 31, 2020, were lower results from M·A·C due to the decrease in net sales, offset by lower selling expenses, due to the impacts of the COVID-19 pandemic on brick-and-mortar retail locations, including the decline in consumer traffic, temporary store closures, and the continued shift in consumer preference to online, and disciplined expense management.

For the six months ended December 31, 2020, the higher results were also partially offset by an increase in general and administrative expenses, including employee incentive compensation.

Three Months Ended

December 31 Six Months Ended

($ in millions) 2020 2019 2020 2019

2 unchanged sentences

% Change from prior-year period 45 % 23 %

Reported fragrance operating income decreased, driven by lower net sales, as previously noted.

Partially offsetting the decrease in net sales was higher operating results from certain of our designer fragrances primarily driven by disciplined expense management and lower selling expenses due to the effects of the COVID-19 pandemic.

Reported fragrance operating income increased for the three and six months ended December 31, 2020, reflecting higher results from Tom Ford Beauty and Jo Malone London primarily driven by the increase in net sales and disciplined expense management.

Partially offsetting these increases for the three and six months ended December 31, 2020 were increases in general and administrative expenses, including employee incentive compensation.

Reported fragrance operating income for the six months ended December 31, 2020, also reflected higher results from certain of our designer fragrances due to disciplined expense management.

THE ESTÉE LAUDER COMPANIES INC.

Three Months Ended

December 31 Six Months Ended

($ in millions) 2020 2019 2020 2019

2 unchanged sentences

% Change from prior-year period (67) % (42) %

Reported hair care operating results increased, reflecting higher results from Aveda primarily due to the increase in net sales and lower selling expenses due to the reduction in employee costs as a result of the COVID-19 pandemic.

Reported hair care operating results decreased for the three and six months ended December 31, 2020, primarily driven by an increase in general and administrative expenses, including employee incentive compensation.

Partially offsetting the decreases in operating income for the three and six months ended December 31, 2020, were higher results from Aveda, primarily due to disciplined expense management.

The increase in operating income from Aveda for the six months ended December 31, 2020 also benefited from the increase in net sales driven by the success of existing product franchises, such as Nutriplenish, the launch of Botanical Repair, and successful holiday events, as discussed above.

Geographic Regions

Three Months Ended

December 31 Six Months Ended

($ in millions) 2020 2019 2020 2019

Operating income $ 65 $ 175

Operating income (loss) $ 36 $ (529) $ 101 $ (354)

$ Change from prior-year period 565 455

% Change from prior-year period 100+% 100+%

Non-GAAP Financial Measure (1) :

% Change in operating income from the prior-year period adjusting for the impact of goodwill and other intangible asset impairments and changes in fair value of contingent consideration (52) % (57) %

(1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 53 for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

GAAP measures.

Reported operating results increased in The Americas for the three and six months ended December 31, 2020, primarily due to the year-over-year impact of goodwill and other intangible asset impairments of $696 million and lower selling expenses, due to the impacts of the COVID-19 pandemic on brick-and-mortar retail locations, as discussed above.

Partially offsetting the increases in operating results for the three and six months ended December 31, 2020 were lower net sales, primarily in the United States.

THE ESTÉE LAUDER COMPANIES INC.

Reported operating results decreased in The Americas, primarily reflecting lower operating results in the United States of approximately $109 million, due to the decline in net sales, partially offset by lower selling expense due to the reduction in employee costs as a result of store closures in response to the COVID-19 pandemic.

Europe, the Middle East & Africa

Three Months Ended

December 31 Six Months Ended

($ in millions) 2020 2019 2020 2019

2 unchanged sentences

% Change from prior-year period 30 % 21 %

Reported operating income increased in Europe, the Middle East & Africa, primarily driven by higher results from our travel retail business due to lower selling expenses, as a result of limited international travel, and disciplined expense management.

Reported operating income increased in Europe, the Middle East & Africa for the three and six months ended December 31, 2020, primarily driven by higher results from our travel retail business, reflecting the increases in net sales and disciplined expense management.

Partially offsetting the increases in operating results for the three and six months ended December 31, 2020 were lower results from the United Kingdom, primarily driven by the declines in net sales.

Three Months Ended

December 31 Six Months Ended

($ in millions) 2020 2019 2020 2019

2 unchanged sentences

% Change from prior-year period 37 % 17 %

Reported operating income decreased in Asia/Pacific, led by Japan and Hong Kong of approximately $27 million, combined.

The lower operating results in both Japan and Hong Kong were primarily due to the decrease in net sales, partially offset by lower selling expenses due to the effects of the COVID-19 pandemic, including store closures, and a reduction in advertising and promotional activities.

Partially offsetting these decreases was higher operating results from mainland China, reflecting the increase in net sales, partially offset by an increase in advertising and promotional activities to support holiday events and campaigns, new product launches, and digital advertising and social media spending.

Reported operating income increased in Asia/Pacific for the three and six months ended December 31, 2020, primarily reflecting higher results from mainland China.

In both periods, the increase in operating income from mainland China was primarily driven by the increase in net sales, partially offset by the increase in advertising and promotional activities to support holiday events and campaigns, new product launches, and digital advertising and social media spending.

Partially offsetting the increases in operating income for the three and six months ended December 31, 2020 were lower results from Japan, reflecting the decrease in net sales.

INTEREST AND INVESTMENT INCOME

Three Months Ended

December 31 Six Months Ended

(In millions) 2020 2019 2020 2019

1 unchanged sentence

Interest income and investment income, net $ 17 $ 13 $ 31 $ 27

Interest expense increased from the prior-year period primarily due to the issuance of additional long-term debt in November 2019 and April 2020.

Interest expense increased for both periods, primarily due to the issuance of additional long-term debt in November 2019 and April 2020.

Interest income and investment income, net increased for both periods, reflecting higher equity method investment income from our minority investments, partially offset by decreases in investment income due to lower interest rates.

THE ESTÉE LAUDER COMPANIES INC.

On December 18, 2019, we acquired the remaining equity interest in Have&Be Co.

(“Have & Be”), the global skin care company behind Dr.

Jart+ and men’s grooming brand Do The Right Thing, for $1,268 million in cash.

Based on the final purchase price and working capital adjustments, we estimated a refund receivable of $32 million that was outstanding as of June 30, 2020 and was received in the first quarter of fiscal 2021.

We originally acquired a minority interest in Have & Be in December 2015, which included a formula-based call option for the remaining equity interest.

The original minority interest was accounted for as an equity method investment, which had a carrying value of $133 million at the acquisition date.

The acquisition of the remaining equity interest in Have & Be was considered a step acquisition, whereby we remeasured the previously held equity method investment to its fair value of $682 million, resulting in the recognition of a gain of $549 million.

The acquisition of the remaining equity interest also resulted in the recognition of a previously unrealized foreign currency gain of $4 million, which was reclassified from accumulated other comprehensive income.

The total gain on our previously held equity method investment of $553 million is included in Other income in the accompanying consolidated statements of earnings for the three and six months ended December 31, 2019.

The amount paid at closing was funded by cash on hand including the proceeds from the issuance of debt.

In anticipation of the closing, we transferred cash to a foreign subsidiary for purposes of making the closing payment.

As a result, we recognized a foreign currency gain of $23 million, which is also included in Other income in the accompanying consolidated statements of earnings for the three and six months ended December 31, 2019.

See Notes to Consolidated Financial Statements, Note 2 – Acquisition of Business for additional information.

PROVISION FOR INCOME TAXES

5 unchanged sentences

Three Months Ended

December 31 Six Months Ended

2020 2019 2020 2019

Effective rate for income taxes 14.9 % 30.8 % 17.6 % 26.2 %

Basis-point change from the prior-year period (1,590) (860)

The effective rate for income taxes was 21.8% and 21.3% for the three months ended September 30, 2020 and 2019, respectively.

The increase in the effective tax rate of 50 basis points was primarily attributable to a higher effective tax rate on our foreign operations.

The fiscal 2021 first quarter effective tax rate included a 130 basis point reduction to the current period effective tax rate due to the impact of the U.S.

government issuance of final global intangible low-taxed income (“GILTI”) tax regulations in July 2020 under the Tax Cuts and Jobs Act (the “TCJA”) that provide for a high-tax exception to the current year GILTI tax.

These newly-issued regulations are retroactive to the original enactment of the GILTI tax provision, which includes our 2019 and 2020 fiscal years.

We are currently evaluating the impact and ability to apply the GILTI regulations relating to fiscal 2019 and fiscal 2020.

The fiscal 2021 first quarter effective tax rate also included a 120 basis point increase to the current period effective tax rate due to the pending December 31, 2020 expiration of a tax law in China that expanded the corporate income tax deduction allowance for advertising and promotion expenses (“expiring China tax law”).

The favorable impact from a possible re-enactment of the expiring China tax law would be recognized in the provision for income taxes in the period that includes the date of such re-enactment.

For the three and six months ended December 31, 2020, the decrease in the effective tax rate was primarily attributable to a lower effective tax rate on our foreign operations and the impact of nondeductible goodwill charges recognized in the second quarter of fiscal 2020.

The effective tax rate for the three and six months ended December 31, 2020 included the impact of the U.S.

These regulations are retroactive to the original enactment of the GILTI tax provision, which includes our 2019 and 2020 fiscal years.

We have elected to apply the GILTI high-tax exception to fiscal 2021, 2020 and 2019.

The election for fiscal 2021 resulted in reductions of 160 basis points and 150 basis points to the effective tax rates for the three and six months ended December 31, 2020, respectively.

The impact of the elections with respect to fiscal 2020 and 2019 was recognized as a discrete item in the provision for income taxes in the second quarter of fiscal 2021 and resulted in reductions of 470 basis points and 280 basis points to the effective tax rates for the three and six months ended December 31, 2020, respectively.

THE ESTÉE LAUDER COMPANIES INC.

NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC.

Three Months Ended

December 31 Six Months Ended

($ in millions, except per share data) 2020 2019 2020 2019

Net earnings attributable to The Estée Lauder Companies Inc.

$ 873 $ 557 $ 1,396 $ 1,152

$ Change from prior-year period 316 244

3 unchanged sentences

Non-GAAP Financial Measure (1) :

% Change in diluted net earnings per common share from the prior-year period adjusting for the impact of charges associated with restructuring and other activities (14) %

(1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 45 for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

% Change in diluted net earnings per common share from the prior-year period adjusting for the impact of charges associated with restructuring and other activities, goodwill and other intangible asset impairments, other income and changes in fair value of contingent consideration 24 % 7 %

(1) See “ Reconciliations of Non-GAAP Financial Measures” below for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

GAAP measures.

THE ESTÉE LAUDER COMPANIES INC.

RECONCILIATIONS OF NON-GAAP FINANCIAL MEASURES

6 unchanged sentences

The following tables present Net sales, Operating income and Diluted net earnings per common share adjusted to exclude the impact of charges associated with restructuring and other activities;

goodwill and other intangible assets impairments;

other income;

the changes in the fair value of contingent consideration.

THE ESTÉE LAUDER COMPANIES INC.

The following tables provide reconciliations between these non-GAAP financial measures and the most directly comparable U.S.

GAAP measures.

($ in millions, except per share data) Three Months Ended

September 30 Variance % Change

Three Months Ended

December 31 Variance %

Change % Change

($ in millions, except per share data) 2020 2019

Net sales, as reported $ 4,853 $ 4,624 $ 229 5 % 3 %

Returns associated with restructuring and other activities — — —

Net sales, as adjusted $ 4,853 $ 4,624 $ 229 5 % 3 %

Operating income, as reported $ 1,063 $ 261 $ 802 100+% 100+%

Charges associated with restructuring and other activities 37 13 24

Goodwill and other intangible asset impairments 81 777 (696)

Changes in fair value of contingent consideration (2) (7) 5

Operating income, as adjusted $ 1,179 $ 1,044 $ 135 13 % 10 %

Diluted net earnings per common share, as reported $ 2.37 $ 1.52 $ .85 56 % 52 %

Charges associated with restructuring and other activities .08 .03 .05

Goodwill and other intangible asset impairments .17 1.81 (1.64)

Other income — (1.23) 1.23

Changes in fair value of contingent consideration (.01) (.02) .01

Diluted net earnings per common share, as adjusted $ 2.61 $ 2.11 $ .50 24 % 21 %

THE ESTÉE LAUDER COMPANIES INC.

($ in millions, except per share data) Six Months Ended

December 31 Variance % Change

constant currency

4 unchanged sentences

Charges associated with restructuring and other activities 46 38 8

Goodwill and other intangible asset impairments 81 777 (696)

Changes in fair value of contingent consideration (2) (7) 5

Operating income, as adjusted $ 1,893 $ 1,848 $ 45 2 % 1 %

1 unchanged sentence

Charges associated with restructuring and other activities .09 .09 —

Goodwill and other intangible asset impairments .17 1.80 (1.63)

Other income — (1.22) 1.22

Changes in fair value of contingent consideration (.01) (.02) .01

Diluted net earnings per common share, as adjusted $ 4.04 $ 3.78 $ .26 7 % 5 %

8 unchanged sentences

($ in millions) Three Months Ended

September 30, 2020 Three Months Ended

September 30, 2019 Variance

December 31, 2020 Three Months Ended

December 31, 2019 Variance

By Product Category:

13 unchanged sentences

Total $ 4,853 $ 4,624 $ 229 $ (102) $ 127 5 % 3 %

THE ESTÉE LAUDER COMPANIES INC.

As Reported Impact of foreign currency translation Variance,

in constant currency %

as reported %

constant currency

($ in millions) Six Months Ended

December 31, 2020 Six Months Ended

December 31, 2019 Variance

By Product Category:

Skin Care $ 4,854 $ 4,047 $ 807 $ (81) $ 726 20 % 18 %

Makeup 2,225 3,103 (878) (22) (900) (28) (29)

Fragrance 1,024 1,043 (19) (11) (30) (2) (3)

Hair Care 290 298 (8) (2) (10) (3) (3)

Other 22 28 (6) (1) (7) (21) (25)

8,415 8,519 (104) (117) (221) (1) (3)

Returns associated with restructuring and other activities — — — — —

Total $ 8,415 $ 8,519 $ (104) $ (117) $ (221) (1) % (3) %

The Americas $ 1,921 $ 2,386 $ (465) $ 29 $ (436) (19) % (18) %

Europe, the Middle East & Africa 3,570 3,756 (186) (30) (216) (5) (6)

Asia/Pacific 2,924 2,377 547 (116) 431 23 18

8,415 8,519 (104) (117) (221) (1) (3)

Returns associated with restructuring and other activities — — — — —

Total $ 8,415 $ 8,519 $ (104) $ (117) $ (221) (1) % (3) %

THE ESTÉE LAUDER COMPANIES INC.

The following table reconciles the change in operating results by product category and geographic region, as reported, to the change in operating income excluding the impact of goodwill and other intangible asset impairments and changes in fair value of contingent consideration:

($ in millions) Three Months Ended

December 31, 2020 Three Months Ended

December 31, 2019 Variance Add:

Goodwill and other intangible asset impairments Add:

Changes in fair value of contingent consideration Variance, as adjusted % Change, as reported % Change, as adjusted

By Product Category:

Skin Care $ 928 $ 772 $ 156 $ 81 $ 3 $ 240 20 % 31 %

Makeup 28 (611) 639 (777) — (138) 100+ (83)

Fragrance 141 97 44 — 2 46 45 49

Hair Care 4 12 (8) — — (8) (67) (67)

Other (1) 4 (5) — — (5) (100+) (100+)%

1,100 274 826 $ (696) $ 5 $ 135 100+% 13 %

Charges associated with restructuring and other activities (37) (13) (24)

Total $ 1,063 $ 261 $ 802

The Americas $ 36 $ (529) $ 565 $ (696) $ 3 $ (128) 100+% (52) %

Europe, the Middle East & Africa 657 505 152 — 2 154 30 31

Asia/Pacific 407 298 109 — — 109 37 37

1,100 274 826 $ (696) $ 5 $ 135 100+% 13 %

Charges associated with restructuring and other activities (37) (13) (24)

Total $ 1,063 $ 261 $ 802

THE ESTÉE LAUDER COMPANIES INC.

As Reported Add:

other intangible asset impairments Add:

Changes in fair value of contingent consideration Variance, as adjusted % Change, as reported % Change, as adjusted

($ in millions) Six Months Ended

December 31, 2020 Six Months Ended

December 31, 2019 Variance

By Product Category:

Skin Care $ 1,649 $ 1,404 $ 245 $ 81 $ 3 $ 329 17 % 23 %

Makeup (43) (507) 464 (777) — (313) 92 (100+)%

Fragrance 201 163 38 — 2 40 23 25

Hair Care 7 12 (5) — — (5) (42) (42)

Other — 6 (6) — — (6) (100) (100)

1,814 1,078 736 $ (696) $ 5 $ 45 68 % 2 %

Charges associated with restructuring and other activities (46) (38) (8)

Total $ 1,768 $ 1,040 $ 728

The Americas $ 101 $ (354) $ 455 $ (696) $ 3 $ (238) 100+% (57) %

Europe, the Middle East & Africa 1,068 882 186 — 2 188 21 21

Asia/Pacific 645 550 95 — — 95 17 17

1,814 1,078 736 $ (696) $ 5 $ 45 68 % 2 %

Charges associated with restructuring and other activities (46) (38) (8)

Total $ 1,768 $ 1,040 $ 728

FINANCIAL CONDITION

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Our principal sources of funds historically have been cash flows from operations, borrowings pursuant to our commercial paper program, borrowings from the issuance of long-term debt and committed and uncommitted credit lines provided by banks and other lenders in the United States and abroad.

At September 30, 2020, we had cash and cash equivalents of $4,267 million compared with $5,022 million at June 30, 2020.

At December 31, 2020, we had cash and cash equivalents of $5,545 million compared with $5,022 million at June 30, 2020.

Our cash and cash equivalents are maintained at a number of financial institutions.

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Based on past performance and current expectations, we believe that cash on hand, cash generated from operations, available credit lines and access to credit markets will be adequate to support seasonal working capital needs, currently planned business operations, information technology enhancements, capital expenditures, acquisitions, dividends, stock repurchases, restructuring initiatives, commitments and other contractual obligations on both a near-term and long-term basis.

See Overview – COVID-19 Business Update for actions taken by us, in response to the impact of the COVID-19 pandemic on our business, which helped to mitigate the then expected loss of sales and to control costs.

THE ESTÉE LAUDER COMPANIES INC.

See Overview – COVID-19 Business Update for actions taken by us, in response to the impact of the COVID-19 pandemic on our business.

The TCJA resulted in the Transition Tax on unrepatriated earnings of our foreign subsidiaries and changed the tax law in ways that present opportunities to repatriate cash without additional U.S.

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If these reinvested earnings were repatriated into the United States as dividends, we would be subject to state income taxes and applicable foreign taxes in certain jurisdictions.

THE ESTÉE LAUDER COMPANIES INC.

The effects of inflation have not been significant to our overall operating results in recent years.

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A credit rating is not a recommendation to buy, sell, or hold securities, is subject to revision or withdrawal at any time by the assigning rating organization, and should be evaluated independently of any other rating.

As of October 26, 2020, our long-term debt is rated A+ with a negative outlook by Standard & Poor’s and A1 with a stable outlook by Moody’s.

As of January 29, 2021, our long-term debt is rated A+ with a negative outlook by Standard & Poor’s and A1 with a stable outlook by Moody’s.

THE ESTÉE LAUDER COMPANIES INC.

At September 30, 2020, our outstanding borrowings were as follows:

At December 31, 2020, our outstanding borrowings were as follows:

($ in millions) Long-term

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In August 2020, we repaid the remaining $750 million borrowed under our $1,500 million revolving credit facility that was outstanding as of June 30, 2020.

Total debt as a percent of total capitalization (excluding noncontrolling interests) was 55% and 61% at September 30, 2020 and June 30, 2020, respectively.

Total debt as a percent of total capitalization (excluding noncontrolling interests) was 50% and 61% at December 31, 2020 and June 30, 2020, respectively.

THE ESTÉE LAUDER COMPANIES INC.

Three Months Ended

Six Months Ended

(In millions) 2020 2019

Net cash provided by (used for) operating activities $ 358 $ (170)

Net cash provided by operating activities $ 1,978 $ 1,255

Net cash used for investing activities $ (397) $ (1,350)

Net cash used for financing activities $ (890) $ (416)

The change in net cash flows from operations primarily reflected the favorable net change in working capital, in particular, accounts payable and accrued liabilities, including the settlement of foreign currency forward contracts.

These changes were partially offset by the unfavorable change in accounts receivable due to the timing of shipments.

The change in net cash flows used for investing activities primarily reflected the settlement of net investment hedges and purchases of investments, partially offset by the receipt of the purchase price refund relating to the fiscal 2020 second quarter acquisition of Have&Be Co.

The change in net cash flows used for financing activities primarily reflected the repayment of borrowings under our revolving credit facility, partially offset by lower treasury stock repurchases.

For a summary of quarterly cash dividends declared per share on our Class A and Class B Common Stock during the three months ended September 30, 2020, see Notes to Consolidated Financial Statements, Note 11 – Equity .

Net cash provided by (used for) financing activities $ (1,119) $ 687

The change in net cash flows from operations primarily reflected the improvement in working capital, primarily due to other accrued liabilities, including an increase in accrued employee incentive compensation and higher advertising and promotional accruals, and accounts payable, partially offset by the unfavorable change in accounts receivable due to the increase in net sales.

The change in net cash flows used for investing activities primarily reflected cash paid in fiscal 2020 relating to the second quarter acquisition of Have&Be Co.

Ltd., partially offset by the settlement of net investment hedges.

The change in net cash flows from financing activities primarily reflected proceeds in fiscal 2020 from the November 2019 issuance of long term-debt, the fiscal 2021 repayment of borrowings under our revolving credit facility, partially offset by lower treasury stock repurchases.

For a summary of quarterly cash dividends declared per share on our Class A and Class B Common Stock during the six months ended December 31, 2020, see Notes to Consolidated Financial Statements, Note 12 – Equity .

Pension and Post-retirement Plan Funding

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A hypothetical 10% weakening of the U.S.

dollar against the foreign exchange rates for the currencies in our portfolio would have resulted in a net decrease in the fair value of our portfolio of approximately $176 million and $222 million as of September 30, 2020 and June 30, 2020, respectively.

dollar against the foreign exchange rates for the currencies in our portfolio would have resulted in a net decrease in the fair value of our portfolio of approximately $184 million and $222 million as of December 31, 2020 and June 30, 2020, respectively.

This potential change does not consider our underlying foreign currency exposures.

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In addition, we enter into interest rate derivatives to manage the effects of interest rate movements on our aggregate liability portfolio, including future debt issuances.

Based on a hypothetical 100 basis point increase in interest rates, the estimated fair value of our interest rate derivatives would increase by approximately $11 million and $9 million as of September 30, 2020 and June 30, 2020, respectively.

Based on a hypothetical 100 basis point increase in interest rates, the estimated fair value of our interest rate derivatives would increase by approximately $13 million and $9 million as of December 31, 2020 and June 30, 2020, respectively.

Our sensitivity analysis represents an estimate of reasonably possible net losses that would be recognized on our portfolio of derivative financial instruments assuming hypothetical movements in future market rates and is not necessarily indicative of actual results, which may or may not occur.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis