What changed in this filing

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Item 7. Management’s Discussion and Analysis

2021-08-27 compared with 2020-08-28 · 281 added, 357 removed, 574 unchanged (53% of the section changed)

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(In millions) 2021 2020 2019

NET SALES (1)

By Product Category:

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Net sales $ 16,215 $ 14,294 $ 14,863

By Region (1) :

The Americas $ 3,797 $ 3,794 $ 4,741

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Hair Care (19) (19) 39

Other (2) 4 12

2,846 689 2,554

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Operating income $ 2,618 $ 606 $ 2,313

By Region (1) :

The Americas $ 518 $ (1,044) $ 672

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Operating income $ 2,618 $ 606 $ 2,313

(1) The net sales and operating income from our travel retail business are included in the Europe, the Middle East & Africa region, with the exception of the net sales of Dr.

Jart+ products in the travel retail channel that are reflected in Korea in the Asia/Pacific region.

(1) The net sales from our travel retail business are included in the Europe, the Middle East & Africa region, with the exception of the net sales of Dr.

Jart+ in the travel retail channel that are reflected in Korea in the Asia/Pacific region.

Operating income attributable to the travel retail sales included in Europe, the Middle East & Africa is included in that region and in The Americas.

During fiscal 2020, changes were made to reflect certain Leading Beauty Forward enhancements made to the capabilities and cost structure of our travel retail business, which are primarily centralized in The Americas region, and resulted in a change to the royalty structure of the travel retail business to reflect the value created in The Americas region.

Accordingly, the fiscal 2019 and 2018 operating income of The Americas was increased, with a corresponding decrease in Europe, the Middle East & Africa, by $866 million and $661 million, respectively, to conform with the current year methodology and presentation.

Accordingly, the fiscal 2019 operating income of The Americas was increased, with a corresponding decrease in Europe, the Middle East & Africa, by $866 million, to conform with the fiscal 2021 and 2020 methodology and presentation.

The following table presents certain consolidated earnings data as a percentage of net sales:

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Net earnings attributable to noncontrolling interests (0.1) (0.1) (0.1)

Net loss attributable to redeemable noncontrolling interest — — —

Net earnings attributable to The Estée Lauder Companies Inc.

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COVID-19 Business Update

We continue to monitor the impact of the COVID-19 pandemic, which negatively impacted the second half of fiscal 2020, on all aspects of our business.

We have taken significant actions to help protect the health and safety of our employees, beauty advisors and consumers, as well as to effectively manage our business through the rapidly evolving disruptions in our operating environment.

We believe we are well-positioned to participate in the markets' recovery.

Beginning in calendar 2020, governments in various countries implemented restrictions to prevent further spread of the virus.

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

As a result, we modified a number of our business practices, in part due to legislation, executive orders and guidance from government entities and healthcare authorities (collectively, “COVID-19 Directives”).

The COVID-19 pandemic continues to disrupt our operating environment, including impacts on retail traffic and changes in certain consumer preferences.

During fiscal 2021, the spread of COVID-19, as well as the resurgences in COVID-19 cases and the rapid spread of variants, including the Delta variant, particularly in the United Kingdom, Continental Europe, Latin America, and Asia outside of China, led to government restrictions to prevent further spread of the virus.

Restrictions in many parts of the world at various times during fiscal 2021 have included temporary business closures, curtailment of travel, mask wearing, social distancing and quarantines.

Retail Impact

Brick-and-mortar retail stores that sell our products across most countries have experienced temporary or ongoing store closures and, as they re-open, significantly reduced consumer traffic.

This impacted the brick-and-mortar retail operations of our customers, as well as our freestanding stores.

• In Asia/Pacific, nearly all retail stores have re-opened after many stores closed for most of February 2020 through April 2020.

• In Europe, the Middle East & Africa, retail stores began closing in early March 2020 and gradually reopened through June 2020.

At the end of June 2020, approximately 15% of the stores remained closed, and by mid-August most had re-opened.

• In The Americas, retail stores began closing in mid-March 2020.

By the end of June 2020, approximately 20% of the stores remained closed, and by mid-August, most stores had re-opened.

• Since mid-March 2020, air travel has been largely curtailed globally, adversely impacting the annual growth trend of our travel retail business.

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 accelerated globally.

As the pandemic continues, we are continuing to assess local conditions and when counters and our stores should re-open.

Due in large part to the challenging retail environment and, with respect to the second half of fiscal 2020, uncertainties stemming from the COVID-19 pandemic, we recognized Goodwill, other intangible asset and long-live asset impairments.

Most brick-and-mortar retail stores that sell our products, whether operated by us or our customers, were open during the fiscal 2021 second quarter in China and the United States.

There were intermittent closures throughout the rest of the world, particularly in the second half of fiscal 2021.

In most of the Asia/Pacific region (with the exception of China), the United Kingdom, Continental Europe, Canada, and much of Latin America, many retail stores were temporarily closed for some period during the fiscal 2021 fourth quarter due to the resurgence of COVID-19 cases.

In much of the United Kingdom and Continental Europe, retail locations gradually reopened during the fourth quarter but with capacity and other safety restrictions in place.

Globally, in areas where stores were open, consumer traffic has not recovered to the pre-COVID-19 pandemic levels.

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.

Conversely, domestic travel in China, especially in Hainan, and some other travel corridors in Asia/Pacific and The Americas were open.

Due in large part to the continued challenging retail environment and uncertainties stemming from the COVID-19 pandemic, we recognized Goodwill, other intangible asset and long-live asset impairments.

Financial Statements and Supplementary Data – Note 6 – Goodwill and Other Intangible Assets and Note 7 – Leases for further information.

Supply Chain impact

During the second half of fiscal 2020, a majority of our facilities continued to manufacture and distribute products globally, albeit in a much-reduced capacity in light of safety measures designed to protect our employees in response to the COVID-19 pandemic.

By the end of our fiscal year, all manufacturing and distribution facilities were operating with rapidly improving capacity.

We have, to date, been able to obtain raw materials and components.

At this time, we expect to be able to produce and distribute our products when the demand increases.

Our cost of sales was adversely impacted by the timing of expense recognition and other costs, primarily caused by the COVID-19 pandemic, including the shutdown of certain of our manufacturing facilities and the implementation of social distancing measures.

These adjustments resulted in an increase in Cost of sales for the fiscal 2020 fourth quarter and fiscal 2020 of $80 million and $83 million, respectively.

Additionally, we recorded an increase in excess and obsolete inventory, which resulted in an increase in Cost of sales for the fiscal 2020 fourth quarter and fiscal 2020 of $121 million and $166 million, respectively.

Cash Conservation

As the impacts from COVID-19 evolved, we faced various uncertainties and implemented strict cost control measures and took actions to conserve cash.

Such actions included:

• Expense reductions, including advertising and promotion activities, travel, meetings, consulting, and certain employee costs, including implementing a hiring freeze, 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.

Combined, these resulted in approximately $800 million of savings in the last five months of fiscal 2020.

• Reduced capital investments (e.g., facilities and consumer-facing counters) by approximately $275 million for fiscal 2020.

• Temporary suspension of discretionary repurchases of our Class A Common Stock.

• Not declaring a quarterly cash dividend that would have been paid in June 2020.

• Raising an additional $2,200 million of cash by issuing $700 million of Senior Unsecured Notes and borrowed the full amount under our $1,500 million revolving credit facility.

In June 2020, we repaid $750 million borrowed under our revolving credit facility, and, in August 2020, repaid the remaining $750 million.

Consumer Preferences

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

Specifically, the demand for makeup continues to be weak given fewer makeup usage occasions and ongoing mask wearing, while other categories have been more resilient.

Cost Controls

In response to the ongoing impacts from the COVID-19 pandemic, we continue to implement cost control actions in certain areas of the business to effectively manage the changing business environment.

Government Assistance

During the second half of fiscal 2020, many governments in locations where we operate announced programs to assist employers whose businesses were impacted by the COVID-19 pandemic, including programs that provide rebates to incentivize employers to maintain employees on payroll who were unable to work for their usual number of hours.

During the fourth quarter of fiscal 2020, we qualified for and recorded $99 million in government assistance, which reduced Selling, general and administrative expenses and Cost of sales by $87 million and $10 million, respectively.

The remaining $2 million was deferred and will be recognized in fiscal 2021.

Beginning in the second half of fiscal 2020, many governments in locations where we operate announced programs to assist employers whose businesses were impacted by the COVID-19 pandemic, including programs that provide rebates to incentivize employers to maintain employees on payroll who were unable to work for their usual number of hours.

During fiscal 2021 and 2020, we qualified for and recorded $84 million and $99 million, respectively, in government assistance, which reduced Selling, general and administrative expenses by $78 million and $87 million, respectively, and Cost of sales by $6 million and $10 million, respectively.

The remaining $2 million recorded in fiscal 2020 was deferred and recognized in fiscal 2021 as a reduction to Cost of sales.

We are continuing to review applicable government assistance programs globally.

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Business Update

Our business is focused on prestige beauty, which combines the repeat purchase and relative affordability of consumer goods with the high-quality products and high-touch services of luxury goods.

At the same time, we are well diversified by brand, product category, geography, channel, consumer segment and price point.

Our innovation capabilities, driven by our creativity and inspired by data analytics and consumer insights, allow us to use our brand portfolio to capitalize on opportunities in fast growing and profitable areas of prestige beauty.

We believe that our broad and inclusive range of prestige product offerings allows us to increase our share of a consumer’s beauty routine and compete for consumers of prestige or mass brands.

We are a leader in prestige beauty, which combines the repeat purchase and relative affordability of consumer goods with the high quality products and services of luxury goods.

Within prestige beauty, we are well diversified by product category, geography, brand, product sub-category, channel, consumer segment and price point.

This diversity allows us to leverage consumer analytics and insights with agility by deploying our brands to fast growing and profitable opportunities.

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.

• In fiscal 2021, global prestige skin care continued to lead product category growth.

Our skin care net sales benefited from the enduring strength of hero product lines such as Advanced Night Repair from Estée Lauder and Crème de La Mer from La Mer, as well as recent product launches, the growth in Asia and targeted expanded consumer reach.

The launches of Advanced Night Repair Intense Reset Concentrate and Perfectionist Rapid Brightening Treatment Serum from Estée Lauder and The Eye Concentrate from La Mer were particularly successful in Asia/Pacific.

During fiscal 2020, our Clinique brand introduced a new serum Even Better Clinical Dark Spot Corrector and Interrupter, which was successful in China.

Net sales of skin care products rose in international markets, led by Estée Lauder and incremental net sales of Dr.

Our skin care net sales benefited from the enduring strength of hero product lines such as Advanced Night Repair from Estée Lauder, Crème de La Mer from La Mer, and the Dramatically Different products and Even Better Clinical Radical Dark Spot Corrector + Interrupter from Clinique, as well as recent product launches, the growth in Asia and targeted expanded consumer reach.

The launches of Advanced Night Repair Synchronized Multi-Recovery Complex, Revitalizing Supreme+ Bright, and the relaunch of Perfectionist Pro from Estée Lauder, Genaissance de la Mer The Concentrated Night Balm from La Mer, and Moisture Surge 100H Auto-Replenishing Hydrator from Clinique were particularly successful in Asia/Pacific.

Net sales of skin care products in fiscal 2021 rose in every geographic region, led by Estée Lauder.

La Mer and Dr.

Jart+, which we acquired in December 2019.

• Global prestige makeup sales declined as COVID-19 limited social and business activities and consumers wore less makeup.

Some sub-categories in makeup performed better in the COVID-19 environment, including eye products and makeup with skin care benefits such as tinted moisturizers, while demand for lipstick and foundation weakened.

During fiscal 2020, our makeup net sales benefited from targeted expanded consumer reach and the continued success of existing products, such as the Double Wear franchise and Futurist line of products from Estée Lauder, as well as The Luminous Lifting Cushion Foundation from La Mer.

• Our fragrance net sales declined as consumer demand shifted from personal fragrance to bath, body and home.

The decline was offset by strong growth and targeted expanded consumer reach of Le Labo and certain new products, such as Poppy & Barley from Jo Malone London and Metallique from Tom Ford.

• Our hair care net sales declined as COVID-19-related salon and retail closures could not be offset by strong online acceleration.

During fiscal 2020, Aveda launched the hydrating Nutriplenish line of products, which contributed positively.

• Global prestige makeup sales declined as COVID-19 limited social and business activities and consumers overall wore less makeup.

Some sub-categories in makeup performed better in the COVID-19 environment, including lip gloss and makeup with skin care benefits such as tinted moisturizers, while demand for lipstick and foundation remained weak.

During fiscal 2021, our makeup net sales benefited from targeted expanded consumer reach and the continued success of existing products, such as the Futurist line of products from Estée Lauder, The Luminous Lifting Cushion Foundation from La Mer and the Lip Injection line from Too Faced.

• Our fragrance net sales growth accelerated during fiscal 2021, driven by continued resilience in luxury fragrance.

The growth was led by strength in colognes, bath, body and home subcategories at Jo Malone London, the successful launches of Bitter Peach and Rose Prick Private Blend fragrances from Tom Ford Beauty and targeted expanded consumer reach of Le Labo.

• Our hair care net sales grew as salons and retail stores reopened throughout the year and strong online growth continued.

Hero products led growth at Aveda, supported by the brand’s “100% vegan” campaign.

Our global distribution capability and operations allow us to focus on targeted expanded consumer reach wherever consumer demographics and trends are the most attractive.

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We are evolving the way we connect with our consumers in stores, online and where they travel, including by expanding our digital and social media presence and the engagement of global and local influencers to amplify brand or product stories.

We tailor our strategy by market to drive consumer engagement and embrace cultural diversity.

We tailor implementation of our strategy by market to drive consumer engagement and embrace cultural diversity.

We continuously strengthen our presence in large, image-building core markets, while broadening our presence in emerging markets.

• In North America, we deployed a number of strategies to accelerate growth, which began to deliver improvements through the first half of fiscal 2020.

However, the impact of COVID-19-related store closures in the latter half further aggravated the challenging environment in brick-and-mortar retail.

Despite the overall decline in net sales, online net sales in North America grew double digits.

In Latin America, we continue to launch new brands, expand social media outreach and encourage consumers to trade up from mass beauty products.

• In Europe, the Middle East & Africa, we are expanding the consumer reach of many of our brands and strengthening their digital and social media presences.

• In Asia/Pacific, particularly in China, we are leveraging our diversified brand portfolio and expansion on third-party online malls to benefit from the strong consumer demand for prestige beauty.

• In North America, we deployed a number of strategies to drive growth, which began to deliver improvements through the second half of fiscal 2021.

Net sales in fiscal 2021 from our specialty-multi and online channels led growth.

In Latin America, we continue to launch new brands, develop our online business, expand social media outreach and encourage consumers to trade up from mass beauty products.

• In Europe, the Middle East & Africa, we continue to expand the consumer reach of many of our brands and strengthen their digital and social media presences.

• In Asia/Pacific, particularly in China, we continue to leverage our diversified brand portfolio and expansion on third-party online malls to benefit from the strong consumer demand for prestige beauty.

In mainland China, net sales grew strong double digits reflecting growth in virtually all product categories, as well as in nearly every brand and double-digit growth in every channel, led by online.

For fiscal 2020, over 40% of mainland China's net sales was contributed by our online channels.

We approach distribution strategically by product category and location and seek to optimize distribution by matching our brands with appropriate opportunities while seeking to maintain high productivity per door.

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We also focus on brand-building retail activities, technology-driven activations and omnichannel capabilities that enhance the shopping experience for consumers.

• As part of this strategy, we have built a leadership position in the global travel retail channel, that allowed us to leverage the increase in international passenger traffic before COVID-19.

While COVID-19 has significantly curtailed international travel in the near-term, we continue to believe it is a growth opportunity for the long-term.

• As part of this strategy, we have built a leadership position in the global travel retail channel, that historically allowed us to leverage the robust and growing international passenger traffic.

While COVID-19 has significantly curtailed international travel in the near-term, we continue to believe that global travel retail is a growth opportunity for the long-term.

Travel retail continues to be an important channel for brand building due to the increase in traveling consumers, particularly those from emerging markets, who often experience our brands for the first time while traveling.

We continue to expand our strategic presence in travel retail across duty-free locations primarily in airports and downtown stores.

We continue to expand our strategic presence in travel retail across duty-free locations primarily in airports and downtown stores and increasingly through online pretail.

We engage consumers at the airport through compelling pop-up activations in non-traditional commercial areas, and we ensure we have appropriate communication and curated assortments for targeted consumer groups.

At the same time, travel retail is susceptible to a number of external factors, including fluctuations in currency exchange rates and consumers’ willingness and ability to travel and spend.

• Online net sales have accelerated strongly on a global basis, reflecting strong double digit growth for fiscal 2020, as well as growth in all product categories and from nearly every brand.

We continue to enhance and launch e- and m-commerce sites of our own in new and existing markets, collaborate with our retail customers on their e- and m-commerce sites, and sell through select third-party online malls.

• Online net sales have continued to grow strongly on a global basis, rising strong double digits for fiscal 2021.

Nearly every brand grew as we continue to enhance and launch e- and m-commerce sites of our own in new and existing markets, collaborate with our retail customers on their e- and m-commerce sites, and sell through select third-party online malls.

We believe our success in delivering particularly strong online growth is a result of adapting our strategy to meet local market and cultural needs.

We also continue to develop and implement omnichannel concepts, virtual try-on tools and compelling content to deliver an integrated consumer experience and better serve consumers as they shop across channels.

Our multiple engines of growth, which have historically enabled us to produce excellent net sales growth, are also helping to mitigate the impact of the declines caused by COVID-19.

Our multiple engines of growth, which have historically enabled us to produce excellent net sales growth, are also helping to mitigate the impact of the COVID-19 pandemic.

We also benefited from the transformation of certain operations that freed up resources to invest behind further growth opportunities.

Our Leading Beauty Forward initiative (described below) enabled us to reduce costs and invest in new capabilities such as digital marketing and data analytics as well as increased advertising.

In fiscal 2020, we continued to further integrate corporate citizenship and sustainability into our strategy and business operations.

Areas of focus include packaging, ingredient transparency, responsible sourcing, energy and emissions, waste and water, social investments and employee engagement and safety.

There are no comparable recent events that provide guidance concerning the impacts of a global pandemic like COVID-19.

Due to the uncertainty of its duration and severity, at this time we are not able to reliably estimate to the same degree as prior to COVID-19 the extent of the future adverse impact on our financial condition or results of operations for fiscal 2021.

The degree to which COVID-19 and its collateral effects impact our business, the results of operations and financial condition will depend on future developments that are highly uncertain and cannot be predicted, including how quickly and to what extent there are sustainable improvements in the retail environment and general economic conditions.

As we continue to monitor COVID-19 developments, including the impacts on our consumers, customers and suppliers, we may adjust prior actions and take further actions.

However, there is no certainty that the actions we take will be sufficient to mitigate the risks and impacts from COVID-19.

Our Leading Beauty Forward Program and Post-COVID Business Acceleration Program (described below) enabled us to reduce costs and invest in new capabilities such as digital marketing and data analytics as well as increased advertising.

In fiscal 2021, we continued to further integrate social impact and sustainability into our strategy and business operations.

Areas of differentiation include climate & energy, green chemistry, social investments, employee engagement and safety and inclusion, diversity & equity.

Other areas of focus include responsible sourcing, plastics & packaging, ingredient transparency, and animal welfare.

The COVID-19 pandemic continues to disrupt business for us, retailers and other companies with which we do business.

There have been, and are likely to continue to be, intermittent store closures, as well as restructurings and bankruptcies in the retail industry, including among our customers, and shifts in preferences as to where and how consumers shop, as well as changes in their preferences for certain products.

We are mindful that these trends, the resurgence of COVID-19 cases globally and the related government restrictions may continue to impact the pace of recovery.

The continued curtailment in international travel is also affecting our travel retail business in most of the world, which had been historically one of our fastest growth areas.

In addition to impacting net sales and profitability, these and other challenges may adversely impact the goodwill and other intangible assets associated with our brands and the long-lived assets in certain of our freestanding stores (i.e.

potentially resulting in impairments).

We believe that the best way to increase long-term stockholder value is to continue providing superior products and services in the most efficient and effective manner while recognizing shifts in consumers’ behaviors and shopping practices.

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We plan to build upon and leverage our history of outstanding creativity and innovation, high quality products and services, and engaging communications while investing for long-term sustainable growth.

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

We are seeing, and believe there will be more impairments, restructurings and bankruptcies in the retail industry, including among our customers;

destocking and tighter working capital management by retailers;

challenges for suppliers;

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 causing a significant decline in our travel retail business, 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.

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 continue developing our risk mitigation strategies to address such uncertainties.

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

We are also cautious of foreign currency movements, including their impacts on tourism dynamics that have already been adversely affected by COVID-19 and COVID-19 Directives.

Additionally, we continue to monitor the effects of the global macroeconomic environment;

We continue to monitor the effects of the global macroeconomic environment, including potential inflation;

social and political issues;

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and global security issues.

COVID-19 is proving to be the most significant challenge we have faced as a public company.

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

We believe we can, to some extent, offset the impact of more ordinary challenges by continually developing and pursuing a diversified strategy with multiple engines of growth and by accelerating initiatives focused on areas of strength, discipline and agility.

For example, we continue to monitor the geopolitical tensions between the United States and China, which could have a material adverse effect on our business.

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.

As the current situation progresses, if economic and social conditions or the degree of uncertainty or volatility worsen, or the adverse conditions previously described are further prolonged, there could be a further negative effect on consumer confidence, demand, spending and willingness or ability to travel and, as a result, on our business.

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In May 2016, we announced a multi-year initiative (“Leading Beauty Forward” or the “LBF Program”) to build on our strengths and better leverage our cost structure to free resources for investment to continue our growth momentum.

Leading Beauty Forward is designed to enhance our go-to-market capabilities, reinforce our leadership in global prestige beauty and continue creating sustainable value.

As of June 30, 2019, we concluded the approvals of all major initiatives under Leading Beauty Forward related to the optimization of select corporate functions, supply chain activities, and corporate and regional market support structures, as well as the exit of underperforming businesses, and expect to substantially complete those initiatives through fiscal 2021.

Leading Beauty Forward was designed to enhance our go-to-market capabilities, reinforce our leadership in global prestige beauty and our ability to continue creating sustainable value.

As of June 30, 2019, we concluded the approvals of all major initiatives under Leading Beauty Forward related to the optimization of select corporate functions, supply chain activities, and corporate and regional market support structures, as well as the exit of underperforming businesses, and have substantially completed those initiatives through fiscal 2021.

For additional information about restructuring and other charges, see Item 8.

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Post-COVID Business Acceleration Program

On August 20, 2020, we announced a two-year restructuring program, Post-COVID Business Acceleration Program (the “Restructuring Program”), designed to resize our business against the dramatic shifts to our distribution landscape and consumer behaviors in the wake of the COVID-19 pandemic.

The Restructuring Program will help improve efficiency and effectiveness by rebalancing resources to growth areas of prestige beauty.

It will further strengthen us by building upon the foundational capabilities in which we have invested.

The Restructuring Program’s main areas of focus include accelerating the shift to online with the realignment of our distribution network reflecting freestanding store and certain department store closures, with a focus on North America and Europe, the Middle East & Africa;

On August 20, 2020, we announced a two-year restructuring program, Post-COVID Business Acceleration Program (the “PCBA Program”), designed to realign our business to address the dramatic shifts to our distribution landscape and consumer behaviors in the wake of the COVID-19 pandemic.

The PCBA Program is designed to help improve efficiency and effectiveness by rebalancing resources to growth areas of prestige beauty.

It is expected to further strengthen us by building upon the foundational capabilities in which we have invested.

The PCBA Program’s main areas of focus include accelerating the shift to online with the realignment of our distribution network reflecting freestanding store and certain department store closures, with a focus on North America and Europe, the Middle East & Africa;

the reduction in brick-and-mortar point of sale employees and related support staff;

and the redesign of our regional branded marketing organizations, plus select opportunities in global brands and functions.

We committed to this course of action on August 18, 2020.

This program is expected to position us to better execute our long-term strategy while strengthening our financial flexibility.

In connection with the Restructuring Program, at this time we estimate a net reduction in the range of approximately 1,500 to 2,000 positions globally, which is about 3% of our current workforce including temporary and part-time employees.

We previously estimated a net reduction over the duration of the PCBA Program in the range of approximately 1,500 to 2,000 positions globally, including temporary and part-time employees.

We have revised these estimates based on the review of the PCBA Program.

At this time, we estimate a net reduction over the duration of the PCBA Program in the range of 2,000 to 2,500 positions globally, including temporary and part-time employees.

This reduction takes into account the elimination of some positions, retraining and redeployment of certain employees and investment in new positions in key areas.

We also estimate the closure of approximately 10% to 15% of our freestanding stores globally.

We plan to approve specific initiatives under the Restructuring Program through fiscal 2022 and expect to complete those initiatives through fiscal 2023.

We expect that the Restructuring Program will result in related restructuring and other charges totaling between $400 million and $500 million, before taxes, consisting of employee-related costs, contract terminations, asset write-offs and other costs to implement these initiatives.

Once fully implemented, we expect the Restructuring Program to yield annual benefits, primarily in selling, general and administrative expenses, of between $300 million and $400 million, before taxes.

We also estimate the closure over the duration of the PCBA Program of approximately 10% to 15% of our freestanding stores globally, primarily in Europe, the Middle East & Africa and in North America.

We plan to approve specific initiatives under the PCBA Program through fiscal 2022 and expect to complete those initiatives through fiscal 2023.

We expect that the PCBA Program will result in related restructuring and other charges totaling between $400 million and $500 million, before taxes, consisting of employee-related costs, contract terminations, asset write-offs and other costs to implement these initiatives.

Once fully implemented, we expect the PCBA Program to yield annual benefits, primarily in Selling, general and administrative expenses, of between $300 million and $400 million, before taxes.

We expect to reinvest a portion behind future growth initiatives.

For additional information about restructuring and other charges, see Item 8.

Financial Statements and Supplementary Data – Note 8 – Charges Associated with Restructuring and Other Activities .

Impairment Testing

We assess goodwill and other indefinite-lived intangible assets at least annually for impairment or more frequently if certain events or circumstances exist.

During December 2019, given the continuing declines in prestige makeup, generally in North America, and the ongoing competitive activity, our Too Faced, BECCA and Smashbox reporting units made revisions to their internal forecasts concurrent with our brand strategy review process.

During March 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, we made additional revisions to the internal forecasts relating to our Too Faced, BECCA, Smashbox and GLAMGLOW reporting units.

We concluded that the changes in circumstances in these reporting units triggered the need for an interim impairment review of their respective trademarks and goodwill.

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

Accordingly, we performed interim impairment tests for the trademarks and recoverability tests for the long-lived assets as of December 31, 2019 and March 31, 2020.

We concluded that the carrying amounts of the long-lived assets were recoverable.

For December 31, 2019 and March 31, 2020, we also concluded that the carrying values of the trademarks exceeded their estimated fair values and recorded impairment charges.

For December 31, 2019, we utilized the relief-from-royalty method to determine discounted projected future cash flows, and for March 31, 2020, the relief-from-royalty method was based on probability weighted cash flows.

After adjusting the carrying values of the trademarks, we completed interim quantitative impairment tests for goodwill and recorded goodwill impairment charges for each of these reporting units.

For December 31, 2019, the fair value of each 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.

For March 31, 2020, the fair value of each reporting unit was based upon an equal weighting of the income and market approaches, utilizing estimated cash flows, based on probability weighted undiscounted 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.

Based on our annual goodwill and other indefinite-lived intangible asset impairment testing as of April 1, 2020, we determined that the carrying value of the Editions de Parfums Frédéric Malle reporting unit exceeded its fair value.

This determination was made based on updated internal forecasts, finalized and approved in June 2020, that reflected lower net sales growth projections due to a softer than expected retail environment for the brand, as well as the impacts relating to the uncertainty of the duration and severity of COVID-19.

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

We concluded that the carrying value of the trademarks exceeded its estimated fair value, which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, and recorded impairment charges.

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.

Based on our annual goodwill and other indefinite-lived intangible asset impairment testing as of April 1, 2021, we determined that the carrying value of the GLAMGLOW and Smashbox trademarks exceeded their fair values.

This determination was made based on updated internal forecasts, finalized and approved in June 2021, that reflected lower net sales growth projections due to a softer than expected retail environment for these brands, as well as the continued impacts relating to the uncertainty of the duration and severity of the COVID-19 pandemic.

These changes in circumstances were also indicators that the carrying amounts of their respective long-lived assets may not be recoverable.

We concluded that the carrying values of the trademarks exceeded their estimated fair values, which were determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, and recorded impairment charges.

We concluded that the carrying amounts of the long-lived assets were recoverable.

After adjusting the carrying value of the trademarks, we completed the quantitative impairment test for goodwill and recorded a goodwill impairment charge for this reporting unit.

The fair value of this 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.

During June 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, we made further revisions to the internal forecasts relating to our BECCA and GLAMGLOW reporting units.

We concluded that the changes in circumstances in these reporting units triggered the need for an interim impairment review of their respective trademarks and goodwill.

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

Accordingly, we performed interim impairment tests for the trademarks and recoverability tests for the long-lived assets as of June 30, 2020.

We concluded that the carrying values of the trademarks for BECCA and GLAMGLOW exceeded their estimated fair values, which were determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, and recorded impairment charges.

In addition, we concluded that the carrying value of the BECCA customer lists intangible asset exceeded its estimated fair value, which was determined utilizing the multi-period excess earnings income approach by discounting the incremental after-tax cash flows over multiple periods, and recorded an impairment charge.

We concluded that the carrying amounts of the long-lived assets of GLAMGLOW were recoverable.

After adjusting the carrying values of the trademarks and the BECCA customer lists, we completed interim quantitative impairment tests for goodwill and recorded goodwill impairment charges for each of these reporting units.

The fair value of each 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 carrying values of the customer lists and goodwill relating to the GLAMGLOW and Smashbox reporting units were zero as of November 30, 2020 and June 30, 2020, respectively.

A summary of the impairment charges for the three and twelve months ended June 30, 2021 and the remaining trademark, customer lists and goodwill carrying values as of June 30, 2021, for each reporting unit, are as follows:

Impairment Charge

(In millions) Three Months Ended

June 30, 2020 Twelve Months Ended

June 30, 2020 Carrying Value

(In millions) Three Months Ended June 30, 2021 Twelve Months Ended June 30, 2021 Carrying Value as of June 30, 2021

Reporting Unit:

Product Category Trademark Customer Lists Goodwill Trademark Customer Lists Goodwill Trademark Customer Lists Goodwill

Too Faced Makeup $ — $ — $ — $ 253 $ — $ 592 $ 272 $ 217 $ 13

BECCA Makeup 24 35 15 71 35 85 27 7 13

Smashbox Makeup — — — 23 — 72 32 — —

GLAMGLOW Skin care $ 25 $ — $ — $ 46 $ 6 $ 54 $ 11 $ — $ —

Editions de Parfums Frédéric Malle Fragrance 11 — 3 11 — 3 21 2 3

Smashbox Makeup 11 — — 11 — — 21 — —

Total $ 36 $ — $ — $ 57 $ 6 $ 54 $ 32 $ — $ —

The impairment charges for the three and twelve months ended June 30, 2021 were reflected in the Americas region.

With the exception of the Editions de Parfums Frédéric Malle, BECCA, and GLAMGLOW reporting units, fair values of all reporting units, which were primarily determined based on qualitative assessments, with material goodwill were substantially in excess of their respective carrying values.

The fair values of the Editions de Parfums Frédéric Malle, BECCA, and GLAMGLOW trademarks were equal to their carrying values subsequent to the impairments charges taken as of June 30, 2020, and the fair values of the Too Faced and Smashbox trademarks exceeded their carrying values by approximately 7% and 16%, respectively.

As of June 30, 2020, the carrying values of the Too Faced and Smashbox trademarks were $272 million and $32 million, respectively.

The fair values of all reporting units, which were determined based on qualitative or quantitative assessments, with material goodwill were substantially in excess of their respective carrying values, with the exception of the DECIEM reporting unit.

The carrying values of the DECIEM reporting unit and other intangible assets as of June 30, 2021 approximated their fair values.

The fair values of the Smashbox and GLAMGLOW trademarks were equal to their carrying values subsequent to the impairment charges taken as of April 1, 2021.

The key assumptions used to determine the estimated fair value of the reporting units are primarily predicated on the estimated future impacts of COVID-19, the success of future new product launches, the achievement of distribution expansion plans, and the realization of cost reduction and other efficiency efforts.

14 unchanged sentences

GAAP measures.

The fiscal 2020 decrease in reported net sales reflected declines in virtually all product categories and geographic regions driven by the negative impacts, in the second half of the fiscal year, of the COVID-19 pandemic, including our response and the responses of others to COVID-19 Directives.

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

Skin care net sales growth primarily reflected higher 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.

The increase in net sales in mainland China and our travel retail business drove growth internationally.

In addition, sales of certain of our products online continued to accelerate.

As noted above, the impacts of COVID-19 caused significant disruptions to our business, and we expect the results of operations of our product categories and regions to continue to be adversely impacted in subsequent periods.

The fiscal 2020 reported net sales decrease was impacted by approximately $154 million of unfavorable foreign currency translation.

The fiscal 2021 increase in reported net sales mainly reflected higher net sales in the second half of the fiscal year compared to the prior-year period.

Fiscal 2020 reported net sales reflected the negative impacts of the COVID-19 pandemic that started in the second half of that fiscal year, including the temporary closing of businesses deemed “non-essential,” travel bans and restrictions, social distancing and quarantines.

Reported net sales increased in fiscal 2021, primarily due to higher net sales in skin care, fragrance and hair care, as well as growth in our Asia/Pacific and Europe, the Middle East & Africa regions.

Skin care net sales growth primarily reflected higher net sales from Estée Lauder, La Mer, Dr.

Jart+ and Clinique, as well as incremental net sales attributable to the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter.

Fragrance net sales increased, primarily benefiting from higher net sales from Jo Malone London, Tom Ford Beauty and Le Labo, and higher net sales from Aveda and Bumble and bumble drove the growth in hair care.

The increase in net sales in mainland China, our travel retail business and Korea drove growth internationally.

Our direct-to-consumer online net sales continued to have strong growth.

The fiscal 2021 reported net sales increase was impacted by approximately $357 million of favorable foreign currency translation.

Returns associated with restructuring and other activities are not allocated to our product categories or geographic regions because they result from activities that are deemed a Company-wide initiative to redesign, resize and reorganize select corporate functions and go-to-market structures.

Accordingly, the following discussions of Net sales by Product Categories and Geographic Regions exclude the fiscal 2021 impact of returns associated with restructuring and other activities of approximately $14 million.

Product Categories

Year Ended June 30

($ in millions) 2021 2020

As Reported :

Net sales $ 9,484 $ 7,382

5 unchanged sentences

GAAP measures.

Reported skin care net sales increased in fiscal 2020, due to growth internationally and reflected higher net sales from Estée Lauder and La Mer, combined, of approximately $844 million, as well as incremental net sales of $165 million attributable to our acquisition of Dr.

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

Net sales increased from Estée Lauder, reflecting the continued success of existing product franchises, such as Advanced Night Repair, Perfectionist, Re-Nutriv and Revitalizing Supreme+, and new product launches, such as Advanced Night Repair Intense Reset Concentrate.

The increase in net sales from La Mer reflected international growth, led by mainland China, as well as our travel retail business due to Chinese traveling consumers.

Net sales from La Mer also benefited from existing products, such as The Treatment Lotion, and product relaunches, such as The Regenerating Serum, as well as targeted expanded consumer reach.

Net sales increases from both Estée Lauder and La Mer drove growth in our travel retail and online channels.

Partially offsetting these increases were lower net sales from Clinique and M·A·C, combined, of approximately $191 million.

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

Despite the overall decline in net sales, Clinique online net sales grew double digits.

The skin care net sales increase was impacted by approximately $77 million of unfavorable foreign currency translation.

Reported skin care net sales increased in fiscal 2021, primarily reflecting higher net sales from Estée Lauder, La Mer, Clinique and Dr.

Jart+, combined, of approximately $1,896 million, as well as incremental net sales attributable to our acquisition of Dr.

Jart+ at the end of the fiscal 2020 second quarter and the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter, combined, of approximately $332 million.

Net sales increased from Estée Lauder and La Mer, led by our travel retail business (primarily in Hainan) and mainland China, reflecting strong growth from direct-to-consumer online net sales of products from these brands primarily due to successful holiday and promotional events.

The net sales increase from Estée Lauder reflected the continued success of hero product franchises, such as Advanced Night Repair, Nutritious, Micro Essence, Revitalizing Supreme+ and Re-Nutriv, as well as fiscal 2021 product launches, such as Advanced Night Repair Synchronized Multi-Recovery Complex and Revitalizing Supreme+ Bright.

The increase in net sales from La Mer also benefited from the continued success of hero products, such as The Treatment Lotion, Crème de la Mer, The Moisturizing Soft Cream and The Concentrate, as well as the fiscal 2021 launch of the Genaissance de la Mer The Concentrated Night Balm and targeted expanded consumer reach.

Net sales increased from Clinique, primarily due to higher net sales in our travel retail business (primarily in Hainan), and higher net sales in North America and mainland China, reflecting the continued success of existing products, such as Dramatically Different products and Even Better Clinical Radical Dark Spot Corrector + Interrupter, new product launches, such as Moisture Surge 100H Auto-Replenishing Hydrator, and strong direct-to-consumer online net sales growth.

The skin care net sales increase was impacted by approximately $225 million of favorable foreign currency translation.

Year Ended June 30

7 unchanged sentences

GAAP measures.

Reported makeup net sales decreased in fiscal 2020, primarily driven by lower net sales from M·A·C, Clinique, Too Faced and Bobbi Brown, combined, of approximately $886 million.

The decrease in net sales from these brands reflected declines in North America, due to the general decline in prestige makeup and ongoing competitive activity, as well as the challenging environment as a result of the COVID-19 pandemic.

International net sales from these brands, particularly in Europe, the Middle East & Africa, also reflected the challenging environment caused by the COVID-19 pandemic, which negatively impacted the second half of fiscal 2020.

The makeup net sales decrease was impacted by approximately $57 million of unfavorable foreign currency translation.

Reported makeup net sales decreased in fiscal 2021, primarily due to lower net sales from virtually all brands, led by M·A·C and Clinique, combined, of approximately $476 million.

The makeup product category continues to be more negatively impacted by the effects of the COVID-19 pandemic, especially the challenging environment in brick-and-mortar retail locations and fewer makeup usage occasions.

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

The makeup net sales decrease was impacted by approximately $82 million of favorable foreign currency translation.

Year Ended June 30

7 unchanged sentences

GAAP measures.

Reported fragrance net sales decreased in fiscal 2020, reflecting lower net sales from certain of our designer fragrances, Estée Lauder and Jo Malone London of approximately $188 million, combined.

The lower net sales from certain designer fragrances reflected a decline in North America, primarily due to the challenging environment as a result of the COVID-19 pandemic, an unfavorable comparison to the prior-year period as a result of the December 2019 expiration of our license agreement with Tory Burch and higher launch activity in the prior year.

The net sales decline from Estée Lauder reflected lower net sales in all geographic regions due to the challenging environment as a result of the COVID-19 pandemic, as well as an unfavorable comparison to the prior-year launch of Beautiful Belle in North America.

Net sales declined from Jo Malone London due to the fiscal 2020 fourth quarter impact of the COVID-19 pandemic, primarily in our travel retail business as a result of the curtailment of air travel that adversely impacted consumer traffic in most travel retail locations.

The fragrance net sales decrease was impacted by approximately $18 million of unfavorable foreign currency translation.

Reported fragrance net sales increased in fiscal 2021, reflecting a recovery compared to the prior-year challenges, including store closures, stemming from the COVID-19 pandemic.

The fiscal 2021 increase in fragrance net sales was led by higher net sales from Jo Malone London, Tom Ford Beauty and Le Labo, combined, of approximately $317 million.

The increase in net sales from Jo Malone London, led by mainland China and North America, benefited from successful holiday and promotional events, the success of certain hero product franchises and the new Blossoms Collection.

Net sales from Tom Ford Beauty increased, reflecting growth in all geographic regions where we continued to have success with hero products, such as Oud Wood and Black Orchid, and new product launches, such as Bitter Peach, Tubereuse Nue and Costa Azzurra.

Net sales from Le Labo grew strong double digits, reflecting higher net sales in all geographic regions driven by hero fragrances, home products and targeted expanded consumer reach.

The fragrance net sales increase was impacted by approximately $41 million of favorable foreign currency translation.

Year Ended June 30

7 unchanged sentences

GAAP measures.

Reported hair care net sales decreased in fiscal 2020, due to lower net sales from Aveda and Bumble and bumble.

The lower net sales from Aveda was primarily driven by a decline in retail traffic and salon and store closures, exacerbated by the impacts of the COVID-19 pandemic.

Net sales declined from Bumble and bumble due to the softness in North America in the salon and specialty-multi channels, as well as store closures in the second half of fiscal 2020 due to the COVID-19 pandemic.

Reported hair care net sales increased in fiscal 2021, primarily due to higher net sales from Aveda and to a lesser extent Bumble and bumble, combined, of approximately $60 million, reflecting a recovery compared to the prior-year challenges, including salon and store closures, stemming from the COVID-19 pandemic.

The increase in net sales from Aveda also benefited from the success of existing product franchises, such as Nutriplenish and Invati, and the new product launch of Botanical Repair, which led to growth in all geographic regions.

Geographic Regions

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

Year Ended June 30

7 unchanged sentences

GAAP measures.

Reported net sales in The Americas decreased in fiscal 2020, due to lower net sales in all countries, led by the United States of approximately $803 million, due to the challenging environment caused by the COVID-19 pandemic, including the temporary closing of brick-and-mortar retail stores, travel bans and restrictions, social distancing and quarantines, which significantly impacted the second half of fiscal 2020.

The decrease in net sales in the United States also reflected lower net sales from M·A·C, Clinique and Too Faced due to the decline in prestige makeup generally in North America.

Also contributing to the decline was an unfavorable comparison to prior-year launch activity from certain of our designer fragrances and Estée Lauder.

Despite the overall decline in net sales, online net sales in The Americas grew double digits.

Fiscal 2021 reported net sales in The Americas increased slightly as compared to the prior-year period.

Reported net sales in The Americas reflected higher net sales in North America, offset by the net sales decline in Latin America due to lower net sales in Brazil.

Net sales in North America increased, reflecting a recovery compared to the prior-year challenges stemming from the COVID-19 pandemic and incremental net sales from the increase in our ownership of DECIEM in the fourth quarter.

Latin America net sales declined, due to the resurgence of COVID-19 cases in Brazil that led to government restrictions.

Net sales in virtually all other markets in Latin America increased, reflecting a recovery compared to the prior-year challenges stemming from the COVID-19 pandemic.

Our direct-to-consumer online net sales in The Americas grew double digits in fiscal 2021.

The net sales increase in The Americas included approximately $39 million of unfavorable foreign currency translation.

Europe, the Middle East & Africa

8 unchanged sentences

GAAP measures.

Reported net sales in Europe, the Middle East & Africa decreased in fiscal 2020, reflecting lower net sales in virtually all markets, led by the United Kingdom and the Western European markets, combined, of approximately $335 million, due to the COVID-19 pandemic and its challenges across the region, including temporary closing of brick-and-mortar retail stores, travel bans and restrictions, social distancing and quarantines.

In Europe, the Middle East & Africa, all of our freestanding stores were closed in April 2020, and, despite the gradual door re-openings throughout the quarter, including those of our retailers, retail traffic was significantly reduced.

While net sales from brick-and-mortar retail stores were challenged, net sales from our online channels grew double digits, as our beauty advisors shifted to Social Selling.

Net sales in the United Kingdom decreased due to the challenging environment caused by the COVID-19 pandemic, as well as adverse macroeconomic conditions.

From March 2020 to mid-June 2020, our freestanding stores and those of our retailers were closed due to the COVID-19 Directives discussed above.

While gradual door re-openings began in mid-June 2020, retail traffic remained slow.

Despite the challenges in brick-and-mortar retail stores, net sales from our online channels grew strong double digits.

Partially offsetting these decreases was an increase in net sales from our travel retail business of approximately $261 million.

While challenged in the second half of fiscal 2020, due to the global airport closures and travel bans and restrictions caused by the COVID-19 pandemic, our travel retail business delivered strong results in the first half of fiscal 2020.

Net sales in travel retail increased, primarily from Estée Lauder, reflecting the strength of certain of our hero products, such as Advanced Night Repair, and the shift in consumer preferences to skin care products from other product categories, in part, as a result of the COVID-19 pandemic.

This was partially offset by decreases in net sales from M·A·C, Tom Ford and Clinique.

The net sales decrease in Europe, the Middle East & Africa included approximately $67 million of unfavorable foreign currency translation.

Reported net sales in Europe, the Middle East & Africa increased in fiscal 2021, reflecting higher net sales primarily in our travel retail business and Russia, combined, of approximately $633 million.

The increase in net sales reflected a recovery compared to the prior-year challenges stemming from the COVID-19 pandemic.

Despite the continued curtailment of international travel as a result of the COVID-19 pandemic, the increase in net sales from our travel retail business was led by the continued success of hero product franchises from Estée Lauder, La Mer and Clinique, reflecting the increase in China travel retail (primarily Hainan) due, in part, to increased duty-free purchase limits and the acceleration of new digital selling models.

Direct-to-consumer online net sales in Europe, the Middle East & Africa grew double digits in fiscal 2021.

The net sales increase in Europe, the Middle East & Africa included approximately $101 million of favorable foreign currency translation.

Year Ended June 30

7 unchanged sentences

GAAP measures.

Reported net sales in Asia/Pacific increased in fiscal 2020, reflecting higher net sales in mainland China and Korea of approximately $822 million, combined.

The higher net sales in mainland China reflected strong double-digit growth from virtually every brand, led by Estée Lauder, La Mer, Tom Ford and M·A·C;

incremental net sales attributable to our acquisition of Dr.

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

continued growth in skin care and makeup;

targeted expanded consumer reach;

and the success of new product launches, such as Estée Lauder’s Advanced Night Repair Intense Reset Concentrate and a new larger size of The Treatment Lotion from La Mer.

The net sales increase in mainland China benefited virtually all channels, led by online (due in part to successful holiday events and campaigns on Tmall) and department stores.

The net sales growth in Korea primarily reflected incremental net sales attributable to our acquisition of Dr.

Jart+ in the second quarter, including net sales of Dr.

Jart+ products in the travel retail channel.

These increases were partially offset by lower net sales in Hong Kong of approximately $203 million, due to the pre-COVID-19 protests there that negatively impacted traffic in downtown shops and the airport and also led to intermittent store closures.

Our business in the second half of the fiscal year, in Hong Kong and elsewhere in Asia/Pacific, was adversely impacted by challenges attributable to the COVID-19 pandemic discussed above.

The net sales increase in Asia/Pacific included approximately $89 million of unfavorable foreign currency translation.

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

Gross margin in fiscal 2020 decreased to 75.2% as compared with 77.2% in fiscal 2019.

Reported net sales in Asia/Pacific increased in fiscal 2021, reflecting higher net sales primarily in mainland China, Korea and Australia, combined, of approximately $1,279 million, driven by our skin care products.

Incremental net sales in Asia/Pacific attributable to our acquisition of Dr.

Jart+ at the end of the fiscal 2020 second quarter and the increase in our ownership of DECIEM in the fiscal 2021 fourth quarter, combined, was approximately $325 million.

The increase in net sales in mainland China reflected higher net sales primarily of our skin care products, led by Estée Lauder, La Mer and Dr.

Jart+, and in our third-party platform and department store channels.

Net sales increased in Korea, primarily benefiting from incremental net sales from our acquisition of Dr.

Jart+ at the end of the fiscal 2020 second quarter and higher net sales from Jo Malone London.

The increase in net sales in Australia reflected a recovery compared to the prior-year challenges stemming from the COVID-19 pandemic.

Direct-to-consumer online net sales in Asia/Pacific grew double digits in fiscal 2021.

Partially offsetting these increases in fiscal 2021, were lower net sales in Japan and Hong Kong, of approximately $71 million, combined, primarily due to the ongoing challenges stemming from the COVID-19 pandemic, including reduced consumer traffic in brick-and-mortar retail locations and the continued curtailment of international travel.

The net sales increase in Asia/Pacific included approximately $295 million of favorable foreign currency translation.

Gross margin in fiscal 2021 increased to 76.4% as compared with 75.2% in fiscal 2020.

Fiscal 2021 vs.

4 unchanged sentences

Manufacturing costs and other 20

Subtotal (220)

Charges associated with restructuring and other activities —

The decrease in gross margin for fiscal 2020 in manufacturing costs and other reflected the timing of expense recognition and costs incurred as a result of the COVID-19 pandemic, including the shutdown of certain of our manufacturing facilities and the implementation of social distancing measures, of $83 million, or approximately 60 basis points;

the increase in demand in certain Asian markets that caused an increase in freight, transportation and other manufacturing costs;

the unfavorable impacts of incremental tariffs;

and higher cost of sales related to our fiscal 2020 acquisition of Dr.

Jart+, which includes an inventory step-up adjustment of $25 million, or approximately 20 basis points.

Also reflected in the decrease in gross margin are obsolescence charges due to the increase in excess and obsolete inventory of $166 million or 115 basis points, of which $33 million, or approximately 20 basis points, was caused by the impact of the COVID-19 pandemic.

The favorable impact from our mix of business for fiscal 2021 was primarily due to the favorable change in strategic pricing, lower costs from product sets and lower costs of promotional items as a result of reduced consumer traffic in brick-and-mortar retail locations.

OPERATING EXPENSES

Operating expenses as a percentage of net sales in fiscal 2020 increased to 70.9% as compared with 61.6% in fiscal 2019.

Operating expenses as a percentage of net sales in fiscal 2021 decreased to 60.2% as compared with 70.9% in fiscal 2020.

Fiscal 2021 vs.

2 unchanged sentences

Advertising, merchandising, sampling and product development 100

Shipping (20)

Store operating costs 60

1 unchanged sentence

Foreign exchange transactions 10

Subtotal (70)

Charges associated with restructuring and other activities (80)

Changes in fair value of contingent consideration (10)

Goodwill, other intangible and long-lived asset impairments 890

The fiscal 2020 operating expenses as a percent of net sales increased compared to fiscal 2019 driven by the impact of goodwill, other intangible and long-lived asset impairments.

In addition, advertising and promotional activities increased to support new product launches, digital spending, social media and targeted expanded consumer reach, primarily in mainland China.

The increase in general and administrative expenses reflected higher professional service fees, investments in information systems and to support our sustainability initiatives, as well as amortization expense relating to the acquired intangible assets of Dr.

Partially offsetting these increases was a decrease in selling expense due to the reduction in employee costs as a result of the COVID-19 government assistance, and a decrease in general and administrative expenses due to the decrease in accrued employee incentive compensation as a result of the COVID-19 impacts on fiscal 2020.

As the impacts from COVID-19 evolved, we faced various uncertainties and implemented strict cost control measures.

They included furloughs and similar unpaid temporary leaves of absence for many point of sale employees;

temporary salary reductions for senior executives and other management employees;

a temporary elimination of cash retainers for the Board of Directors;

and expanded cost control measures (e.g., advertising and promotion activities, travel, meetings and consulting), the majority of which began in May 2020.

Changes in fair value of contingent consideration (10)

Acquisition-related stock option expense (30)

The fiscal 2021 decrease in operating expense margin was driven by the favorable year-over-year comparison of goodwill, other intangible and long-lived asset impairments of $1,238 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, store closures, and the continued shift in consumer preference to online.

The advertising, merchandising, sampling and product development favorability was driven by the increase in net sales, partially offset by the increase in advertising and promotional expense, primarily due to continued strategic investments and a difficult comparison to the prior-year period that reflected cost saving actions implemented in response to the impacts of the COVID-19 pandemic.

Partially offsetting these favorable impacts were increases in general and administrative expenses, primarily due to an increase in employee incentive compensation as compared to the prior-year period, which reflected lower accrued employee incentive compensation attributable to the impacts of the COVID-19 pandemic on performance.

OPERATING RESULTS

6 unchanged sentences

Non-GAAP Financial Measure (1) :

% Change in operating income from prior year adjusting for the impact of charges associated with restructuring and other activities, goodwill, other intangible and long-lived asset impairments and changes in fair value of contingent consideration (20) % 15 %

% Change in operating income from prior year adjusting for the impact of charges associated with restructuring and other activities, goodwill, other intangible and long-lived asset impairments, changes in fair value of contingent consideration and acquisition-related stock option expense 46 % (20) %

(1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

GAAP measures.

The reported operating margin for fiscal 2020 decreased from the prior year driven primarily by the year-over-year impact of goodwill, other intangible and long-lived asset impairments of $1,426 million, or 940 bps and the decrease in gross margin, as previously noted.

Partially offsetting these impacts were the acceleration of online net sales growth and disciplined expense management throughout the business from cost containment actions taken in response to COVID-19.

The fiscal 2020 goodwill, intangible and long-lived asset impairments and the changes in fair value of contingent consideration impacted the operating results of our product categories and geographic regions as follows:

The reported operating margin for fiscal 2021 increased from the prior year driven primarily by the year-over-year comparison of goodwill, other intangible and long-lived asset impairments of $1,238 million, or 890 bps, the decrease in operating expenses as a percentage of net sales and the increase in gross margin, as previously noted.

The fiscal 2021 and 2020 goodwill, intangible and long-lived asset impairments and the changes in fair value of contingent consideration impacted the operating results of our product categories and geographic regions as follows:

June 30, 2021

21 unchanged sentences

Total $ 2 $ (188) $ (186) $ 17 $ (1,426) $ (1,409) $ 1,223

Charges associated with restructuring and other activities are not allocated to our product categories or geographic regions because they result from activities that are deemed a Company-wide initiative to redesign, resize and reorganize select corporate functions and go-to-market structures.

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.

Accordingly, the following discussions of Operating income by Product Categories and Geographic Regions exclude the fiscal 2021 and 2020 impact of charges associated with restructuring and other activities of $228 million, or 1% of net sales and $83 million, or 1% of net sales, respectively.

6 unchanged sentences

Non-GAAP Financial Measure (1) :

% Change in operating income from prior year adjusting for the impact of goodwill, other intangible and long-lived asset impairments and changes in fair value of contingent consideration 16 % 27 %

% Change in operating income from prior year adjusting for the impact of goodwill, other intangible and long-lived asset impairments, changes in fair value of contingent consideration and acquisition-related stock option expense 44 % 16 %

(1) See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

GAAP measures.

Reported skin care operating income increased in fiscal 2020, driven by higher results from Estée Lauder and La Mer, combined, of approximately $514 million.

The increases in operating income reflected higher net sales, partially offset by strategic investments in advertising and promotional activities and targeted expanded consumer reach.

The increase in skin care operating income also reflected the decrease in accrued employee incentive compensation as a result of the COVID-19 impacts on fiscal 2020, as well as the reduction in selling expense due, in part, to the COVID-19 government assistance programs discussed above.

Partially offsetting these increases were lower results from Clinique and GLAMGLOW, combined, of approximately $179 million.

The lower results from Clinique reflected the decline in net sales.

Operating results from GLAMGLOW decreased primarily due to the impact of the current year goodwill and other intangible asset impairments and the change in fair value of contingent consideration of $83 million, combined.

Also reflected in the decrease in reported skin care operating results is the impact of freestanding store long-lived asset impairments relating to COVID-19 of $22 million, as well as the increase in cost of sales due, in part, to the timing of expense recognition and costs incurred as a result of the COVID-19 pandemic.

Reported skin care operating income increased in fiscal 2021, primarily driven by higher results from Estée Lauder, La Mer and Clinique, combined, of approximately $1,183 million.

The increases in operating income from these brands 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, discussed above.

These increases were partially offset by increased advertising and promotional activities primarily to support holiday and promotional events and new product launches.

Partially offsetting these increases in operating income were higher general and administrative expenses, primarily due to increased employee incentive compensation from the prior-year period, which reflected lower accrued employee incentive compensation attributable to the impacts of the COVID-19 pandemic on performance, as well as acquisition-related expenses, primarily related to DECIEM's stock options of $40 million.

Financial Statements and Supplementary Data – Note 18 – Stock Plans for additional information relating to DECIEM stock options.

Year Ended June 30

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Non-GAAP Financial Measure (1) :

% Change in operating income from the prior-year period adjusting for the impact of goodwill, other intangible and long-lived asset impairments (100+)% (4) %

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

(1) See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

GAAP measures.

Reported makeup operating results decreased in fiscal 2020, driven by lower results from Too Faced, M·A·C and BECCA, combined, of approximately $1,527 million.

The fiscal 2020 operating results from Too Faced and BECCA include $845 million and $191 million of goodwill and other intangible asset impairments, respectively.

The decrease in operating results from these brands also reflects the decrease in net sales due to the general decline in prestige makeup and ongoing competitive activity in North America, as well as the challenging environment as of COVID-19.

The lower results from M·A·C were driven by the decrease in net sales as discussed above.

Also reflected in the decrease in reported makeup operating results is the impact of freestanding store long-lived asset impairments relating to COVID-19 of $160 million.

Partially offsetting the decrease in operating results was the reduction in selling expense due, in part, to the COVID-19 government assistance programs discussed above and the decrease in accrued employee incentive compensation as a result of the COVID-19 impact on fiscal 2020.

Reported makeup operating results increased in fiscal 2021, driven by the favorable year-over-year comparison of goodwill and other intangible asset impairments related to Too Faced, BECCA and Smashbox, combined, of $1,120 million and freestanding store long-lived asset impairments relating to COVID-19 of approximately $108 million.

Partially offsetting the decreases in operating loss were lower results from M·A·C primarily due to the decrease in net sales, offset by lower selling expense and store operating costs, due to the impacts of the COVID-19 pandemic on brick-and-mortar retail locations, discussed above.

Year Ended June 30

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Non-GAAP Financial Measure (1) :

% Change in operating income from prior year adjusting for the impact of long-lived asset impairments and changes in fair value of contingent consideration (70) % (17) %

% Change in operating income from prior year adjusting for the impact of goodwill, other intangible and long-lived asset impairments and changes in fair value of contingent consideration 100+% (70) %

(1) See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

GAAP measures.

Reported fragrance operating income decreased in fiscal 2020, driven by lower results from Jo Malone London, certain of our designer fragrances, Editions de Parfums Frédéric Malle and Clinique of approximately $104 million, combined.

The lower results from Jo Malone London, certain of our designer fragrances and Clinique were driven by the decreases in net sales.

Operating results from Editions de Parfums Frédéric Malle decreased primarily due to the impact of the current year goodwill and other intangible asset impairments and the change in fair value of contingent consideration of $16 million, combined.

Also reflected in the decrease in reported fragrance operating results is the impact of freestanding store long-lived asset impairments relating to COVID-19 of $18 million.

Partially offsetting the decrease in net sales from certain of our designer fragrances was disciplined expense management.

Reported fragrance operating results increased in fiscal 2021, primarily driven by higher results from Tom Ford Beauty and Jo Malone London, combined, of approximately $183 million.

The increase in operating results from these brands reflected higher net sales, partially offset by increased advertising and promotional activities primarily to support holiday and promotional events and new product launches.

Year Ended June 30

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% Change from prior year — % (100+)%

Reported hair care operating results decreased in fiscal 2020, reflecting lower results from Aveda and Bumble and bumble driven primarily by the decrease in net sales.

Also reflected in the decrease in reported hair care operating results is the impact of freestanding store long-lived asset impairments relating to COVID-19 of $14 million.

Non-GAAP Financial Measure (1) :

% Change in operating income from prior year adjusting for the impact of long-lived asset impairments (100+)% (100+)%

(1) See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

GAAP measures.

Reported hair care operating results in fiscal 2021 were flat as compared to the prior-year period.

Fiscal 2021 operating results reflected higher general and administrative expenses primarily due to increased employee incentive compensation from the prior-year period, which reflected lower accrued employee incentive compensation attributable to the impacts of the COVID-19 pandemic on performance.

This decrease in operating results in fiscal 2021 is partially offset by higher operating results from Aveda, primarily driven by higher net sales, and the favorable year-over-year impact of freestanding store long-lived asset impairments relating to COVID-19 of approximately $10 million.

Geographic Regions

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Non-GAAP Financial Measure (1) :

% Change in operating income from prior year adjusting for the impact of goodwill, other intangible and long-lived asset impairments and changes in fair value of contingent consideration (64) % (13) %

(1) See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

GAAP measures.

Reported operating results in The Americas decreased in fiscal 2020, primarily due to the year-over-year impact of goodwill, other intangible and freestanding store long-lived asset impairments and the change in fair value of contingent consideration of $1,244 million, as well as lower net sales.

Partially offsetting the decrease in operating results was disciplined expense management, the decrease in accrued employee incentive compensation as a result of the COVID-19 impact on fiscal 2020 and the reduction in selling expense due, in part, to the COVID-19 government assistance programs as discussed above.

To conform with the current year methodology and presentation, reported operating income in The Americas for fiscal 2019 was adjusted to include intercompany royalty income, reflecting the value created in The Americas, given the growth of our travel retail business.

Reported operating results in The Americas increased in fiscal 2021, primarily due to the favorable year-over-year comparison of goodwill, other intangible and freestanding store long-lived asset impairments and the change in fair value of contingent consideration of $1,167 million.

The increase in operating results also reflected higher intercompany royalty income primarily from the growth in our travel retail business, as well as lower selling expenses due to the impacts of the COVID-19 pandemic on brick-and-mortar retail locations, discussed above.

Partially offsetting these increases in operating results were higher general and administrative expenses, primarily due to increased employee incentive compensation from the prior-year period, which reflected lower accrued employee incentive compensation attributable to the impacts of the COVID-19 pandemic on performance, and increased advertising and promotional activities primarily to support holiday and promotional events.

Europe, the Middle East & Africa

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GAAP measures.

Reported operating results in Europe, the Middle East & Africa decreased in fiscal 2020, primarily due to the decrease in net sales, as discussed above, and freestanding store long-lived asset impairments of $104 million.

Partially offsetting these decreases was higher results from our travel retail business, reflecting the increase in net sales as discussed above.

To conform with the current year methodology and presentation, reported operating income in Europe, the Middle East & Africa for fiscal 2019 was adjusted to include intercompany royalties to The Americas, discussed above.

Reported operating results in Europe, the Middle East & Africa increased in fiscal 2021, primarily driven by higher results from our travel retail business and France, combined, of approximately $247 million, reflecting disciplined expense management, and higher nets sales from our travel retail business.

The increase in fiscal 2021 operating results also benefited from the favorable year-over-year comparison of freestanding store long-lived asset impairments relating to COVID-19 of $56 million.

Year Ended June 30

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% Change from prior year 35 % 1 %

Reported operating income in Asia/Pacific increased slightly in fiscal 2020, reflecting higher results in mainland China of approximately $160 million driven by net sales growth.

The net sales increases in mainland China were partially offset by an increase in advertising and promotional activities to support digital advertising, social media and targeted expanded consumer reach.

The growth in operating income was partially offset by lower results in Hong Kong, Japan and Australia, combined, of approximately $140 million.

The decreases in operating income were driven by lower net sales, partially offset by disciplined expense management.

Non-GAAP Financial Measure (1) :

% Change in operating income from prior year adjusting for the impact of long-lived asset impairments 33 % 2 %

(1) See “Reconciliations of Non-GAAP Financial Measures” beginning on page 47 for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

GAAP measures.

Reported operating income in Asia/Pacific increased in fiscal 2021, primarily driven by higher results from mainland China and Korea, combined, of approximately $227 million, reflecting the increase in net sales.

The increase in net sales in mainland China was partially offset by the increase in advertising and promotional expense, primarily due to investments to support holiday events and campaigns and new product launches and a difficult comparison to the prior-year period that reflected cost saving actions implemented in response to the impacts of the COVID-19 pandemic.

Partially offsetting the increase in operating income was lower results from Japan, reflecting the decrease in net sales.

INTEREST AND INVESTMENT INCOME

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Interest income and investment income, net $ 51 $ 48

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

Interest income and investment income, net decreased in fiscal 2020, primarily due to lower interest rates.

Interest expense increased in fiscal 2021 primarily due to the issuance of additional long-term debt in November 2019, April 2020 and March 2021, partially offset by the favorable impact from interest rate swaps.

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

OTHER INCOME, NET

On May 18, 2021, we acquired additional shares in DECIEM, a Toronto-based skin care company, for $1,092 million in cash, including proceeds from the issuance of debt.

DECIEM is a multi-brand beauty company with a brand portfolio that includes The Ordinary and NIOD.

This acquisition is expected to further strengthen our leadership position in prestige skin care, expand our global consumer reach and complement our business in the online and specialty-multi channels.

We originally acquired a minority interest in DECIEM in June 2017.

The minority interest was accounted for as an equity method investment, which had a carrying value of $65 million at the acquisition date.

The acquisition of additional shares increased our fully diluted equity interest from approximately 29% to approximately 76% and was considered a step acquisition.

On a fully diluted basis, the DECIEM stock options approximated 4% of the total capital structure.

Accordingly, for purposes of determining the consideration transferred, we excluded the DECIEM stock options, which resulted in an increase in our post-acquisition undiluted equity interest from approximately 30% to approximately 78% and the post-acquisition undiluted equity interest of the remaining noncontrolling interest holders of approximately 22%.

We remeasured the previously held equity method investment to its fair value of $912 million, resulting in the recognition of a gain of $847 million.

The gain on our previously held equity method investment is included in Other income, net in the accompanying consolidated statements of earnings for the year ended June 30, 2021.

As part of the increase in our investment, we were granted the right to purchase (Call Option), and granted the remaining investors a right to sell to us (Put Option), the remaining interests after a three-year period, with a purchase price based on the future performance of DECIEM (the net Put (Call) Option).

As a result of this redemption feature, we recorded redeemable noncontrolling interest, at its acquisition‑date fair value, that is classified as mezzanine equity in the accompanying consolidated balance sheets at June 30, 2021.

Financial Statements and Supplementary Data – Note 5 – Acquisition of Businesses for additional information.

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

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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 still outstanding as of June 30, 2020, and was subsequently received in August 2020.

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.

The acquisition of the remaining equity interest also resulted in the recognition of a previously unrealized foreign currency gain, which was reclassified from accumulated OCI.

The total gain on our previously held equity method investment is reflected in Other income, net for the year ended June 30, 2020.

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 $660 million, resulting in the recognition of a gain of $530 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 $534 million is included in Other income, net in the accompanying consolidated statements of earnings for the year ended June 30, 2020.

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, which is also included in Other income, net for the year ended June 30, 2020.

A summary of the total purchase price and the total gain recognized in Other income, net in the consolidated statements of earnings is as follows:

(In millions) December 18, 2019 Measurement Period Adjustments June 30, 2020

Purchase price

Purchase price $ 1,268 $ (32) $ 1,236

Fair value of previously held equity method investment 682 (22) 660

Write-off of call option relating to previously held equity method investment 4 — 4

Total purchase price $ 1,954 $ (54) $ 1,900

For the Six Months Ended

December 31, 2019 Measurement Period Adjustments For the Year Ended June 30, 2020

Gains recognized in the consolidated statement of earnings

Gain on previously held equity method investment $ 549 $ (19) $ 530

Recognition of a previously unrealized foreign currency gain 4 — 4

Total gain on previously held equity method investment 553 (19) 534

Foreign currency gain on cash 23 — 23

Total Other income, net $ 576 $ (19) $ 557

Financial Statements and Supplementary Data – Note 5 – Acquisition of Business for additional information.

As a result, we recognized a foreign currency gain of $23 million, which is also included in Other income, net in the accompanying consolidated statements of earnings for the year ended June 30, 2020.

The Tax Cuts and Jobs Act (the “TCJA”), which was enacted on December 22, 2017, presented us with opportunities to manage cash and investments more efficiently on a global basis.

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The effective rate differs from the federal statutory rate primarily due to the effect of state and local income taxes, the tax impact of share-based compensation, the taxation of foreign income and income tax reserve adjustments, which represent changes in our net liability for unrecognized tax benefits including tax settlements and lapses of the applicable statutes of limitations.

Our effective tax rate will change from quarter to quarter based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes, tax reserve adjustments, the tax impact of share-based compensation and the interaction of various global tax strategies.

In addition, changes in judgment from the evaluation of new information resulting in the recognition, derecognition or remeasurement of a tax position taken in a prior annual period are recognized separately in the quarter of change.

Our effective tax rate will change from year-to-year based on recurring and non-recurring factors including the geographical mix of earnings, enacted tax legislation, state and local income taxes, tax reserve adjustments, the tax impact of share-based compensation, the interaction of various global tax strategies and the impact from certain acquisitions.

The TCJA included broad and complex changes to the U.S.

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Year Ended June 30

($ in millions) 2021 2020

Earnings before income taxes:

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Effective rate for income taxes 18.7 % 23.2 %

(1) The basis point changes in our effective tax rate were materially impacted by the decrease in earnings before income taxes from fiscal 2019 to fiscal 2020.

(1) For fiscal 2021 and 2020, the basis-point change in our effective tax rate was materially impacted by the increase from fiscal 2020 to fiscal 2021 and the decrease from fiscal 2019 to fiscal 2020, respectively, in earnings before income taxes.

(2) Fiscal 2021 and 2020 effective tax rates exclude the net impact on the effective tax rates of charges associated with restructuring and other activities, goodwill and other intangible asset impairments, other income, net and changes in the fair value of contingent consideration.

Fiscal 2020 also excludes the impact of long-lived asset impairments.

Fiscal 2019 was also adjusted to exclude the finalization of the TCJA provisional charges recorded in fiscal 2018.

The effective tax rate for fiscal 2020 increased approximately 1,130 basis points.

The increase was primarily attributable to a higher effective tax rate on our foreign operations of approximately 910 basis points, as well as the impact of nondeductible goodwill impairment charges associated with our Too Faced, BECCA and Smashbox reporting units of approximately 740 basis points.

Partially offsetting these increases was an increase in excess tax benefit credits related to stock-based compensation arrangements of approximately 480 basis points.

There was no tax expense associated with the fiscal 2021 other income, net adjustment (previously held equity method investment in DECIEM).

Fiscal 2021 was also adjusted to exclude the DECIEM stock option expense.

The effective tax rate for fiscal 2021 decreased approximately 1,980 basis points.

The decrease was primarily attributable to a lower effective tax rate on our foreign operations of approximately 920 basis points, which included the impact of the U.S.

government issuance of final global intangible low-taxed income (“GILTI”) tax regulations in July 2020 under the TCJA that provide for a high-tax exception to the current and applicable prior years’ GILTI tax, the impact of the gain on our previously held equity method investment in DECIEM with no associated tax expense of approximately 530 basis points, as well as the prior-year impact of nondeductible goodwill impairment charges associated with our Too Faced, BECCA and Smashbox reporting units of approximately 790 basis points.

Partially offsetting these decreases was a decrease in excess tax benefit credits related to stock-based compensation arrangements of approximately 450 basis points.

NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC.

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Non-GAAP Financial Measure (1) :

% Change in diluted net earnings per common share from prior year adjusting for the impact of charges associated with restructuring and other activities, goodwill, other intangible and long-lived asset impairments, other income, net, changes in fair value of contingent consideration, the Transition Tax, the remeasurement of U.S.

net deferred tax assets as of the TCJA enactment date and the establishment of a net deferred tax liability related to foreign withholding taxes on certain foreign earnings resulting from the TCJA (23) % 18 %

(1) See “Reconciliations of Non-GAAP Financial Measures” beginning on page 46 for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

(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.

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the changes in the fair value of contingent consideration;

the Transition Tax;

the remeasurement of U.S.

net deferred tax assets as of the TCJA enactment date;

the establishment of a net deferred tax liability related to foreign withholding taxes on certain foreign earnings resulting from the TCJA;

acquisition-related stock option expense;

and the effects of foreign currency translation.

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GAAP measures.

Year Ended June 30 %

Change % Change in

Year Ended June 30 % Change % Change in Constant Currency

($ in millions, except per share data) 2021 2020 Variance

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Changes in fair value of contingent consideration (2) (17) 15

Acquisition-related stock option expense 40 — 40

Operating income, as adjusted $ 3,072 $ 2,098 $ 974 46 % 44 %

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Changes in fair value of contingent consideration (.01) (.04) .03

Transition Tax resulting from the TCJA — (.03) .03

Remeasurement of U.S.

net deferred tax assets as of the TCJA enactment date — .02 (.02)

Net deferred tax liability related to foreign withholding taxes on certain foreign earnings resulting from the TCJA — .02 (.02)

Acquisition-related stock option expense .09 — .09

Diluted net earnings per common share, as adjusted $ 6.45 $ 4.12 $ 2.33 57 % 54 %

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The following table reconciles the change in net sales by product category and geographic region, as reported, to the change in net sales excluding the effects of foreign currency translation:

($ in millions) Year ended

June 30, 2020

June 30, 2019

Year Ended June 30

($ in millions)

Variance Impact of

translation Variance,

foreign currency translation Variance,

in constant currency % Change, as reported % Change, in constant currency

By Product Category:

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Total $ 16,215 $ 14,294 $ 1,921 $ (357) $ 1,564 13 % 11 %

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

The following table reconciles the change in operating income by product category and geographic region, as reported, to the change in operating income excluding the impact of goodwill, other intangible and long-lived asset impairments, changes in fair value of contingent consideration and acquisition-related stock option expense:

As Reported Add:

Changes in Goodwill, other intangible and long-lived asset impairments Add:

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

($ in millions) Year ended

June 30, 2020

June 30, 2019

Changes in fair value of contingent consideration Add:

Acquisition-related stock option expense Variance, as adjusted % Change, as reported % Change, as adjusted

Year Ended June 30

($ in millions) 2021

By Product Category:

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At June 30, 2021, we had cash and cash equivalents of $4,958 million compared with $5,022 million at June 30, 2020.

In response to the initial global uncertainty attributable to the COVID-19 pandemic, we issued $700 million of Senior Notes in April 2020 and borrowed the full amount under our $1,500 million revolving credit facility in March and April 2020.

By the end of June 2020, we had repaid $750 million under the revolving credit facility, and subsequently repaid the remaining $750 million in August 2020.

Overall these actions were designed to further enhance our financial flexibility and liquidity.

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 COVID-19 on our business, which helped to mitigate the then expected loss of sales and uncertainties regarding account receivables and to conserve cash.

The TCJA, which was enacted during our fiscal 2018, 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.

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.

federal income tax.

As a result, we changed our indefinite reinvestment assertion related to certain foreign earnings, and we continue to analyze the indefinite reinvestment assertion on our remaining applicable foreign earnings.

The issuance of guidance subsequent to the enactment of the TCJA has enabled us to access a substantial portion of the cash in offshore jurisdictions associated with our permanently reinvested earnings without significant cost.

We do not believe that continuing to reinvest our foreign earnings impairs our ability to meet our domestic debt or working capital obligations.

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

The effects of inflation have not been significant to our overall operating results in recent years, however we are mindful of emerging inflationary pressures.

Generally, we have been able to introduce new products at higher prices, increase prices and implement other operating efficiencies to sufficiently offset cost increases, which have been moderate.

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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 August 20, 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 August 20, 2021, our long-term debt is rated A+ with a stable outlook by Standard & Poor’s and A1 with a stable outlook by Moody’s.

Debt and Access to Liquidity

Total debt as a percent of total capitalization (excluding noncontrolling interests) increased to 61% at June 30, 2020 from 44% at June 30, 2019, primarily due to the November 2019 issuance of the 2.000% Senior Notes due December 1, 2024 (“2024 Senior Notes”), 2.375% Senior Notes due December 1, 2029 (“2029 Senior Notes”) and 3.125% Senior Notes due December 1, 2049 (“2049 Senior Notes”);

the April 2020 issuance of the 2.600% Senior Notes due April 15, 2030 (“2030 Senior Notes”);

and the $750 million outstanding under our $1,500 million revolving credit facility at June 30, 2020.

Also contributing to the increase was the decrease in total equity reflecting a decrease in net earnings, partially offset by lower treasury stock purchases.

Total debt as a percent of total capitalization (excluding noncontrolling interests) decreased to 48% at June 30, 2021 from 61% at June 30, 2020, primarily due to the increase in total equity reflecting an increase in net earnings, partially offset by a higher treasury stock balance.

Also contributing to the decrease was a decrease in total debt, primarily due to the fiscal 2021 repayments of the $750 million outstanding under our $1,500 million revolving credit facility and the $450 million aggregate principal amount of our 1.70% Senior Notes due May 10, 2021, partially offset by the March 2021 issuance of $600 million aggregate principal amount of our 1.950% Senior Notes due March 15, 2031.

For further information regarding our current and long-term debt and available financing, see Item 8.

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Net cash provided by operating activities $ 3,631 $ 2,280

Net cash provided by (used for) investing activities $ (1,698) $ 473

Net cash used for investing activities $ (1,864) $ (1,698)

Net cash provided by (used for) financing activities $ (1,892) $ 1,461

The change in net cash flows from operations primarily reflected lower net sales, partially offset by the cost actions taken in response to COVID-19.

The lower net sales also reduced working capital needs.

The change in net cash flows from investing activities primarily reflected cash paid, net of cash acquired, in connection with the fiscal 2020 second quarter acquisition of Have & Be, as well as lower proceeds from the sale of investments due to the prior-year liquidation of our foreign subsidiary that owned our available-for-sale securities.

The change in net cash flows from financing activities primarily reflected proceeds from the November 2019 and April 2020 issuance of long-term debt, changes in short-term debt, reflecting current borrowings under our existing revolving credit facility and the issuance of commercial paper, and lower treasury stock purchases, partially offset by the repayment of the 2020 Senior Notes in the current year.

The change in net cash flows from operations reflected higher earnings before taxes, excluding non-cash items, as well as the improvement in working capital.

The improvement in working capital was primarily due to other accrued liabilities, including an increase in accrued employee incentive compensation and the settlement of foreign currency forward contracts, and accounts payable, partially offset by the unfavorable change in accounts receivable due primarily to the increase in net sales.

The change in net cash flows used for investing activities primarily reflected the settlement of net investment hedges, which is offset by the improvement in other accrued liabilities discussed above.

Net cash used for investing activities in fiscal 2021 and fiscal 2020 included cash paid, net of cash acquired, in connection with the acquisition of additional shares in DECIEM and the acquisition of Have & Be, respectively.

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

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2020 for the fiscal 2020 to fiscal 2019 comparative discussions.

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Financial Statements and Supplementary Data – Note 17 – Common Stock .

As noted in Item 8.

Financial Statements and Supplementary Data – Note 17 – Common Stock, we did not declare quarterly cash dividends that would have been paid in June 2020.

Pension and Post-retirement Plan Funding

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Commitments and Contingencies

Certain of our business acquisition agreements include contingent consideration or “earn-out” provisions.

These provisions generally require that we pay to the seller or sellers of the business additional amounts based on the performance of the acquired business.

Since the size of each payment depends upon performance of the acquired business, we do not expect that such payments will have a material adverse impact on our future results of operations or financial condition.

For additional contingencies refer to Item 8.

For a discussion of our contingencies, see to Item 8.

Financial Statements and Supplementary Data – Note 16 – Commitments and Contingencies (Contractual Obligations) .

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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 increase (decrease) in the fair value of our portfolio of approximately $(222) million and $48 million as of June 30, 2020 and 2019, 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 $218 million and $222 million as of June 30, 2021 and 2020, respectively.

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

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We consider accounting estimates to be critical if both (i) the nature of the estimate or assumption is material due to the levels of subjectivity and judgment involved, and (ii) the impact within a reasonable range of outcomes of the estimate and assumption is material to the Company’s financial condition.

Our critical accounting policies relate to goodwill, other intangible assets and long-lived assets, income taxes and business combinations.

Our critical accounting policies relate to goodwill, other intangible assets and long-lived assets - impairment assessment, income taxes and business combinations.

Management of the Company has discussed the selection of critical accounting policies and the effect of estimates with the Audit Committee of the Company’s Board of Directors.

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If our assessment of the realizability of a deferred tax asset changes, an increase to a valuation allowance will result in a reduction of net earnings at that time, while the reduction of a valuation allowance will result in an increase of net earnings at that time.

We provide tax reserves for U.S.

We provide tax reserves for applicable U.S.

federal, state, local and foreign tax exposures relating to periods subject to audit.

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If actual outcomes differ materially from these estimates, they could have a material impact on our consolidated net earnings.

For further discussion of our Income Taxes accounting policy, see Item 8.

Financial Statements and Supplementary Data – Note 2 – Summary of Significant Accounting Policies .

For further discussion of Income Taxes, see Item 8.

Financial Statements and Supplementary Data – Note 2 – Summary of Significant Accounting Policies and Note 9 – Income Taxes .

Business Combinations

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Management estimates of fair value are based upon assumptions believed to be reasonable, but which are inherently uncertain and unpredictable.

During fiscal 2020, we acquired the remaining 66.66% equity interest in Have & Be.

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

The original minority interest was accounted for as an equity method investment.

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

The fair value of the previously held equity method investment was determined based upon a valuation of the acquired business, as of the date of acquisition, using 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.

We allocated the total consideration transferred, which included the cash paid at closing and the fair value of our previously held equity method investment, to the tangible and identifiable intangible assets acquired and liabilities assumed based on their fair value at the acquisition date.

During fiscal 2021, we increased our investment in Deciem Beauty Group Inc.

(“DECIEM”) on a fully diluted basis from approximately 29% to approximately 76%.

On a fully diluted basis, the DECIEM employee stock options, approximated 4% of the total capital structure and represent a liability on our consolidated balance sheet as of the acquisition date.

We originally acquired a minority interest in DECIEM in June 2017.

The original minority interest was accounted for as a cost method investment and, in June 2020, we began to apply the equity method of accounting but we did not have to remeasure our investment in DECIEM since the passage of time does not constitute an observable price change.

The acquisition of the increased equity interest in DECIEM was considered a step acquisition, whereby we remeasured the previously held equity method investment to its fair value, resulting in the recognition of a non-cash gain.

The acquisition-date fair value of the previously held equity method investment was calculated by multiplying the gross-up of the total consideration for the acquired ownership interest of $2,988 million by the related effective previously held equity interest of approximately 30.5%.

The acquisition-date fair value of the redeemable noncontrolling interest includes the acquisition-date fair value of the net Put (Call) Option of $234 million.

The remaining acquisition-date fair value of the redeemable noncontrolling interest of $647 million was calculated by multiplying the gross-up of the total consideration for the acquired ownership interest of $2,988 million by the related noncontrolling interest of approximately 21.6%.

As part of the acquisition of additional shares, DECIEM stock options were issued in replacement of and exchange for certain vested and unvested stock options previously issued by DECIEM.

The total fair value of the DECIEM stock options of $294 million was recorded as part of the total consideration transferred, comp rising of $191 m illion of Cash paid for vested options settled as of the acquisition date and $103 million reported as a stock options liability on the consolidated balance sheet as it is not an assumed liability of DECIEM and is expected to be settled in cash upon completion of the exercise of the Put (Call).

The acquisition-date fair value of the DECIEM stock options liability was calculated by multiplying the acquisition-date fair value by the number of DECIEM stock options replaced the day after the acquisition date.

The stock options replaced consist of vested and partially vested stock options.

We recorded a preliminary allocation of the total consideration transferred to the tangible and identifiable intangible assets acquired and liabilities assumed based on their fair value at the acquisition date.

The total consideration transferred includes the cash paid at closing, the fair value of its previously held equity method investment, the fair value of the redeemable noncontrolling interest , including the fair value of the net Put (Call) Option, and the fair value of the DECIEM stock options liability.

The excess of the total consideration transferred over the fair value of the net tangible and intangible assets acquired was recorded as goodwill.

For further discussion of our Business Combinations accounting policy, see Item 8.

Financial Statements and Supplementary Data – Note 2 – Summary of Significant Accounting Policies .

For further discussion of Business Combinations, see Item 8.

Financial Statements and Supplementary Data – Note 2 – Summary of Significant Accounting Policies, Note 5 – Acquisition of Businesses and Note 18 – Stock Programs .

CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION

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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-K

Item 7. Management’s Discussion and Analysis