What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-02-02 compared with 2022-11-02 · 338 added, 153 removed, 477 unchanged (51% of the section changed)

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

The following table is a comparative summary of operating results for the three months ended September 30, 2022 and 2021, and reflects the basis of presentation described in Notes to Consolidated Financial Statements, Note 1 – Summary of Significant Accounting Policies for all periods presented.

The following table is a comparative summary of operating results for the three and six months ended December 31, 2022 and 2021, and reflects the basis of presentation described in Notes to Consolidated Financial Statements, Note 1 – Summary of Significant Accounting Policies for all periods presented.

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

Three Months Ended

December 31 Six Months Ended

(In millions) 2022 2021 2022 2021

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Hair Care 182 180 340 328

Other 14 16 28 29

4,621 5,540 8,556 9,933

Returns associated with restructuring and other activities (1) (1) (6) (2)

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Asia/Pacific 1,570 1,902 2,700 3,228

4,621 5,540 8,556 9,933

Returns associated with restructuring and other activities (1) (1) (6) (2)

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Skin Care $ 421 $ 1,082 $ 951 $ 1,799

Makeup (37) 130 (21) 221

Fragrance 177 210 310 341

Hair Care 5 8 (7) 10

Other (1) 3 (1) 3

565 1,433 1,232 2,374

Charges associated with restructuring and other activities (9) (15) (15) (21)

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Asia/Pacific 241 431 449 653

565 1,433 1,232 2,374

Charges associated with restructuring and other activities (9) (15) (15) (21)

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Three Months Ended

December 31 Six Months Ended

2022 2021 2022 2021

Net sales 100.0 % 100.0 % 100.0 % 100.0 %

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Restructuring and other charges 0.2 0.3 0.1 0.2

Impairment of other intangible assets 4.5 — 2.4 —

Total operating expenses 61.6 52.3 59.5 53.3

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

Net earnings attributable to redeemable noncontrolling interest — —

Net loss (earnings) attributable to redeemable noncontrolling interest (0.1) — — —

Net earnings attributable to The Estée Lauder Companies Inc.

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Not adjusted for differences caused by rounding

Period-over-period changes in our net sales are generally attributable to the impacts from (i) pricing on our base portfolio, including changes in strategic pricing actions and mix, (ii) volume, including changes driven by the impact of new product innovation, (iii) acquisitions and/or divestitures, and/or (iv) foreign currency translation.

The net sales impact from pricing consists of changes in list prices, due to strategic pricing initiatives, and mix shifts within and among product categories, geographic regions and distribution channels.

Period-over-period changes in our net sales are generally attributable to the impacts from (i) pricing on our base portfolio, including changes in mix and those due to strategic pricing actions, (ii) volume, including changes driven by the impact of new product innovation, (iii) acquisitions and/or divestitures, and/or (iv) foreign currency translation.

The net sales impact from pricing consists of changes in list prices, due to strategic pricing actions, and mix shifts within and among product categories, geographic regions and distribution channels.

The prices at which we sell our products vary by brand, distribution channel (e.g., wholesale or direct-to-consumer) and may also vary by country.

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Prices of skin care and fragrance products are typically higher than makeup and hair care products.

New product innovation includes the introduction of new products, as well as the innovation of existing products, including reformulations, regional expansion, repackaging and sets.

New product innovation includes the introduction of new products, as well as changes related to existing products or where they are sold, including reformulations, regional expansion, repackaging and sets.

A product is considered "new innovation" for the twelve-month period following the initial shipment date.

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While we consider the non-GAAP measures useful in analyzing our results, they are not intended to replace, or act as a substitute for, any presentation included in the consolidated financial statements prepared in conformity with U.S.

See Reconciliations of Non-GAAP Financial Measures beginning on page 47 f or reconciliations between non-GAAP financial measures and the most directly comparable U.S.

See Reconciliations of Non-GAAP Financial Measures beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

GAAP measures.

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Elements of our strategy are described in the Overview on pages 30-32 of our Annual Report on Form 10-K for the year ended June 30, 2022, as well as below.

The COVID-19 pandemic continued to disrupt our operating environment through the fiscal 2023 first quarter, including COVID-related restrictions in China, affecting travel retail in Hainan as well as mainland China.

In Hainan, the ongoing restrictions led to prolonged store closures and the curtailment of travel and caused the tightening of inventory by certain of our retailers who had previously placed orders in anticipation of the return of travel that was since delayed.

The COVID-related restrictions in mainland China continued to negatively impact retail traffic.

During the fiscal 2023 first quarter, our business was also negatively impacted by inflationary pressures, and recession concerns, which caused certain of our retailers in the United States to tighten inventory.

During the first quarter of fiscal 2023, net sales decreased 11%, reflecting the impacts of the challenges noted above.

The COVID-19 pandemic continued to disrupt our operating environment through the first half of fiscal 2023, including the evolution of the COVID-19 environment, including restrictions in mainland China and the rising number of COVID cases (collectively "COVID-related impacts") affecting Asia travel retail, particularly Hainan, and retail traffic in mainland China.

In Asia travel retail, these challenges led to prolonged store closures as well as the curtailment of travel and caused the tightening of inventory by certain of our retailers who had previously placed orders in anticipation of the return of travel that was since delayed.

During the first half of fiscal 2023, our business was also negatively impacted by the strong U.S.

dollar, along with inflationary pressures and recession concerns that caused certain of our retailers in the United States to tighten inventory.

While our monthly retail trends improved sequentially during the fiscal 2023 second quarter in the United States, the pace was slower than anticipated resulting in lower replenishment orders compared to the prior-year period.

During the second quarter of fiscal 2023, net sales decreased 17%, reflecting the impacts of the challenges noted above.

• Our skin care net sales declined 25%, including the unfavorable impact of foreign currency translation of 5%.

The category continues to be pressured by COVID-19 restrictions in Hainan, including the tightening of inventory by certain of our retailers, and in mainland China.

The tightening of inventory by certain of our retailers in the United States also negatively impacted the category's growth.

Despite these pressures, net sales continued to grow from La Mer and Bobbi Brown.

The category continues to be pressured by the COVID-related impacts affecting Asia travel retail, including the tightening of inventory by certain of our retailers, retail traffic in mainland China and the Dr.Jart+ travel retail business in Korea.

Lower replenishment orders in the United States also negatively impacted the category's growth.

Despite these pressures, net sales benefited from higher net sales from The Ordinary and Bobbi Brown.

• Our makeup net sales declined 9%, including the unfavorable impact of foreign currency translation of 6%.

While we see progression towards recovery in parts of Asia/Pacific and Europe, Middle East & Africa, driven by strong activation from M·A·C, the limited social and professional activities stemming from the continued COVID-19 restrictions in China, including those impacting travel retail in Hainan and mainland China, and a difficult comparison to the prior-year period due to the timing of shipments, drove the decrease in net sales.

• Our fragrance net sales decreased due to the impact of the license terminations related to certain of our designer fragrances of 12% and the unfavorable impact of foreign currency translation of 5%.

Overall the category continues to benefit from the shift in consumer demand toward our luxury and artisanal offerings, including Tom Ford Beauty, Le Labo, Kilian Paris and Jo Malone London.

• Our hair care net sales increased 7%, benefiting from the fiscal 2022 third quarter launch of The Ordinary’s hair care products and Aveda’s distribution expansion into mainland China.

The decline in makeup net sales reflects the COVID-related impacts affecting Asia travel retail and retail traffic in mainland China, partially offset by the continued progression towards recovery in parts of Asia/Pacific and Europe, Middle East & Africa.

• Our fragrance net sales decreased 3%, primarily due to the impact of the license terminations related to certain of our designer fragrances of 9% and the unfavorable impact of foreign currency translation of 6%.

Overall the category benefited from increases in Estée Lauder and Clinique due to strong holiday performance, as well as the shift in consumer demand toward our luxury and artisanal offerings, including Le Labo and Tom Ford Beauty.

• Our hair care net sales remained virtually flat, benefiting from the fiscal 2022 third quarter launch of The Ordinary’s hair care products, offset by lower net sales from Aveda, driven by the unfavorable impact of foreign currency translation.

THE ESTÉE LAUDER COMPANIES INC.

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

• Net sales in The Americas decreased 6%, primarily reflecting unfavorable impacts in the United States due to the timing of shipments compared to the prior-year period, the license terminations related to certain of our designer fragrances and the impact of tighter inventory management by certain of our retailers.

Latin America grew double digits, reflecting growth in makeup.

• Net sales in Europe, the Middle East & Africa decreased 10%, including the unfavorable impact of foreign currency translation of 4%, primarily due to continued COVID-19 restrictions in China impacting those impacting travel retail in Hainan.

Partially offsetting this decrease was an increase in net sales from emerging markets in the region, led by India and the Middle East, driven by growth in the makeup category.

• The continued COVID-19 restrictions impacting our business in Greater China and the Dr.Jart+ travel retail business in Korea drove the net sales decline in Asia/Pacific of 15%, including the unfavorable impact of foreign currency translation of 8%.

Most of the other affiliates in the region reflected recovery from the prior-year challenges, led by growth in our fragrance and makeup product categories.

• Net sales in The Americas decreased 5%, primarily reflecting the license terminations related to certain of our designer fragrances, and the unfavorable impacts of lower replenishment orders in the United States.

Offsetting the net sales decrease in The Americas was continued growth in Latin America, primarily led by our makeup category and successful performance during holiday and key shopping moments.

• Net sales in Europe, the Middle East & Africa decreased 22%, including the unfavorable impact of foreign currency translation of 4%, primarily due to continued COVID-related impacts affecting Asia travel retail.

Partially offsetting this decrease was an increase in net sales in Turkey, driven by growth in our makeup category, and India, driven by growth in our skin care category.

Net sales in Russia declined period-over-period, and, during the fiscal 2023 second quarter, we sold a limited selection of products to a reduced number of authorized retailers and completed the closure of all of our freestanding stores.

Net sales in the United Kingdom declined period-over-period, driven by the unfavorable impact of foreign currency translation, partially offset by the continued recovery in the makeup product category.

• The continued COVID-related impacts affected our business in Greater China and the Dr.Jart+ travel retail business in Korea drove the net sales decline in Asia/Pacific of 17%, including the unfavorable impact of foreign currency translation of 9%.

Net sales in Asia/Pacific benefited from growth in southeast Asia, led by the Philippines, Malaysia, and Vietnam, driven by our makeup and fragrance product categories.

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

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We are seeing a continued and prolonged curtailment in international travel which is also affecting our travel retail business, particularly in Asia, which historically has been one of our fastest growth areas.

The rising number of COVID cases that started in December continues to negatively impact the pace of recovery.

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, as well as long-lived assets (i.e.

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As the invasion of Ukraine continues and international sanctions evolve, our business and ability to operate in Russia and Ukraine continue to be negatively impacted.

During the fiscal 2023 first quarter, we partially mitigated the negative impact by liquidating the majority of our remaining in-market inventory and not renewing leases that expired or may have been up for renewal for our freestanding stores.

We are continuously monitoring the evolving situation, including risks and opportunities that may further affect our business, and will continue to adjust our business plans accordingly.

As we responsibly scale-down our operations, we expect to sell a limited selection of products to authorized retailers in Russia.

We will continue to monitor the risks and evolving situation that may further affect our business and will adjust our plans accordingly.

In fiscal 2022, our operations in Ukraine and Russia accounted for approximately 1% of consolidated net sales.

There are uncertainties related to the future impacts on our business, including possible new sanctions that are difficult to predict due to the high level of geopolitical volatility.

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We also note that worsening conditions could exacerbate economic challenges in other countries such as inflationary pressures, energy shortages, recessions or other consequences.

In fiscal 2022, our operations in Ukraine and Russia accounted for approximately 1% of consolidated net sales.

Please refer to Risk Factors in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended June 30, 2022, for a more complete discussion of the risks we encounter in our business and industry.

The uncertainty around the timing, speed and duration of the recovery from the adverse impacts of the COVID-19 pandemic, including the impacts on our business of the ongoing restrictions in China, and the other macro challenges we are facing, will continue to affect our ability to grow sales profitably.

The uncertainty around the timing, speed and duration of the recovery from the adverse impacts of the COVID-19 pandemic, including the impacts on our business in China and the other macro challenges we are facing, 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, including continuing to execute upon and benefit from efficiencies attributable to previously approved initiatives under the Post-COVID Business Acceleration Program.

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Information about our restructuring initiative, the Post-COVID Business Acceleration Program, is described in Notes to Consolidated Financial Statements, Note 3 – Charges Associated with Restructuring and Other Activities herein, as well as, in Notes to Consolidated Financial Statements, Note 8 – Charges Associated with Restructuring and Other Activities and in the Overview on page 33 of our Annual Report on Form 10-K for the year ended June 30, 2022.

Other Intangible Asset Impairments

During the fiscal 2023 second quarter, given the lower-than-expected results in the overall business, we made revisions to the internal forecasts relating to our Smashbox reporting unit.

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

The remaining carrying value of the trademark intangible asset was not recoverable and we recorded an impairment charge of $21 million reducing the carrying value to zero.

During the fiscal 2023 second quarter, the Dr.Jart+ reporting unit experienced lower-than-expected growth within key geographic regions and channels that continue to be impacted by the spread of COVID-19 variants, resurgence in cases, and the potential future impacts relating to the uncertainty of the duration and severity of COVID-19 impacting the financial performance of the reporting unit.

In addition, due to macro-economic factors, Dr.Jart+ has experienced lower-than-expected growth within key geographic regions.

The Too Faced reporting unit experienced lower-than-expected results in key geographic regions and channels coupled with delays in future international expansion to areas that continue to be impacted by COVID-19.

As a result, we made revisions to the internal forecasts relating to our Dr.Jart+ and Too Faced reporting units.

Additionally, there were increases in the weighted average cost of capital for both reporting units as compared to the prior year annual goodwill and other indefinite-lived intangible asset impairment testing as of April 1, 2022.

THE ESTÉE LAUDER COMPANIES INC.

We concluded that the changes in circumstances in the reporting units, along with increases in the weighted average cost of capital, triggered the need for interim impairment reviews of their trademarks and goodwill.

These changes in circumstances were also an indicator that the carrying amounts of Dr.Jart+’s and Too Faced’s long-lived assets, including customer lists, may not be recoverable.

Accordingly, we performed interim impairment tests for the trademarks and a recoverability test for the long-lived assets as of November 30, 2022.

We concluded that the carrying value of the trademark intangible assets exceeded their estimated fair values, which were determined utilizing the relief-from-royalty method to determine discounted projected future cash flows and recorded an impairment charge of $100 million for Dr.Jart+ and $86 million for Too Faced.

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

After adjusting the carrying values of the trademarks, we completed interim quantitative impairment tests for goodwill.

As the estimated fair value of the Dr.Jart+ and Too Faced reporting units were in excess of their carrying values, we concluded that the carrying amounts of the goodwill were recoverable and did not record a goodwill impairment charge related to these reporting units.

The fair values of these reporting units were 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 units.

The significant assumptions used in these approaches include revenue growth rates and profit margins, terminal values, weighted average cost of capital used to discount future cash flows and royalty rates for trademarks.

The most significant unobservable input used to estimate the fair values of the Dr.Jart+ and Too Faced trademark intangible assets was the weighted-average cost of capital, which was 11% and 13%, respectively.

A summary of the impairment charges for the three and six months ended December 31, 2022 and the remaining trademark and goodwill carrying values as of December 31, 2022, for each reporting unit, are as follows:

Impairment Charge Carrying Value

(In millions) Three and Six Months Ended December 31, 2022 As of December 31, 2022

Reporting Unit:

Geographic Region Trademarks Goodwill Trademarks Goodwill

Smashbox The Americas $ 21 $ — $ — $ —

Jart+ Asia/Pacific 100 — 339 318

Too Faced The Americas 86 — 186 13

Total $ 207 $ — $ 525 $ 331

The impairment charges for the three and six months ended December 31, 2022 were reflected in the skin care product category for Dr.Jart+ and the makeup product category for Smashbox and Too Faced.

The fair value of the Dr.Jart+ and Too Faced trademarks were equal to their carrying values subsequent to the impairment charges taken as of December 31, 2022.

Additionally, the estimated fair value of the Dr.Jart+ and Too Faced reporting units exceeded their carrying value by 7% and 10%, respectively.

For the Dr.Jart+ and Too faced reporting units, if all other assumptions are held constant, a decrease of 10% in the estimated future cash flows, inclusive of the terminal value, or an increase of 100 basis points in the weighted average cost of capital, would have caused the carrying value of these reporting units to approximate their fair value.

The key assumptions used to determine the estimated fair value of the reporting units and their respective trademarks 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.

If such plans do not materialize, or if there are further challenges in the business environments in which the reporting unit operates, resulting changes in the key assumptions could have negative impacts on the estimated fair value of the reporting units, and their respective trademarks, and it is possible we could recognize additional impairment charges in the future.

THE ESTÉE LAUDER COMPANIES INC.

Three Months Ended

December 31 Six Months Ended

($ in millions) 2022 2021 2022 2021

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Non-GAAP Financial Measure (1) :

% Change from prior-year period in constant currency (6) %

% Change from prior-year period in constant currency adjusting for returns associated with restructuring and other activities (11) % (9) %

(1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

GAAP measures.

Reported net sales decreased, primarily driven by lower net sales from the skin care and makeup product categories and from all geographic regions primarily due to continued impacts of COVID-19 restrictions in China, affecting travel retail in Hainan and mainland China, as well as the impact of the license terminations related to certain of our designer fragrances effective June 30, 2022.

Partially offsetting the decrease in net sales was higher results from the hair care product category.

Skin care net sales declined, primarily driven by Estée Lauder, Dr.Jart+ and Origins, partially offset by higher net sales from La Mer and Bobbi Brown.

Makeup net sales decreased due to lower net sales from Estée Lauder and Tom Ford Beauty, partially offset by higher net sales from M·A·C.

Partially offsetting these decreases in net sales were hair care net sales increases from The Ordinary and our two hair care brands, led by Aveda.

THE ESTÉE LAUDER COMPANIES INC.

Net sales decreased in Asia/Pacific, primarily due to the continued impacts of COVID-19 restrictions in China, affecting retail traffic and travel.

Net sales in Europe, the Middle East & Africa declined, primarily due to the continued impacts of COVID-19 restrictions impacting travel retail in Hainan, as well as lower net sales in the United Kingdom.

Net sales in The Americas decreased, driven by the United States, reflecting a difficult comparison to the prior-year period due to timing of shipments, the impact of tighter inventory management by certain of our retailers, as well as the impact of the license terminations related to certain of our designer fragrances effective June 30, 2022.

The total net sales decrease was impacted by approximately $176 million of unfavorable foreign currency translation.

Reported net sales decreased for the three and six months ended December 31, 2022, driven by lower net sales from the skin care, makeup and fragrance product categories and from all geographic regions.

In both periods, the net sales decrease is primarily due to the COVID-related impacts, affecting Asia travel retail, mainland China, and the Dr.Jart+ travel retail business in Korea, as well as the impact of the license terminations related to certain of our designer fragrances effective June 30, 2022.

Skin care net sales declined for the three and six months ended December 31, 2022, primarily driven by Estée Lauder, La Mer, Dr.Jart+ and Clinique, partially offset by higher net sales from The Ordinary and Bobbi Brown.

Makeup net sales decreased in both periods due to lower net sales from Estée Lauder and Tom Ford Beauty, partially offset by an increase in net sales from M·A·C driven by the recognition of previously deferred revenue due to changes to the BACK 2 M·A·C take back program during the fiscal 2023 second quarter.

Fragrance net sales declined in both periods primarily due to the impact of the license terminations related to the Donna Karan New York, DKNY, Michael Kors, Tommy Hilfiger and Ermenegildo Zegna product lines ("certain of our designer fragrances") effective June 30, 2022 and lower net sales from Jo Malone London, partially offset by higher net sales from Estée Lauder, Le Labo, Tom Ford Beauty and Clinique.

Net sales in Europe, the Middle East & Africa declined for the three and six months ended December 31, 2022, primarily driven by the COVID-related impacts affecting Asia travel retail, as well as lower net sales from Russia, and the United Kingdom, driven by the unfavorable impact of foreign currency translation.

Net sales decreased in Asia/Pacific in both periods, primarily due to the COVID-related impacts affecting Greater China and the Dr.Jart+ travel retail business in Korea, partially offset by higher net sales from southeast Asia, led by the Philippines, Malaysia, and Vietnam.

Net sales in The Americas decreased in both periods, driven by the impact of the license terminations related to certain of our designer fragrances effective June 30, 2022, and the impact in the United States from the tightening of inventory from certain of our retailers and lower replenishment orders in the fiscal 2023 second quarter.

Partially offsetting the decrease in net sales in The Americas for the three and six months ended December 31, 2022 was an increase in net sales in Latin America.

The total net sales decrease was impacted by approximately $282 million and $458 million of unfavorable foreign currency translation for the three and six months ended December 31, 2022, respectively.

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 impact of returns associated with restructuring and other activities for the three months ended September 30, 2022 and 2021 of $5 million and $1 million, respectively.

Reported net sales decreased 10%, driven by the decrease from volume of 8%, the unfavorable impact from foreign currency translation of 4%, and the impact from the license terminations of certain of our designer fragrances of 1%.

Partially offsetting these decreases was the increase from pricing of 3%, due to the favorable impact from strategic pricing actions and changes in mix.

Accordingly, the following discussions of Net sales by Product Categories and Geographic Regions exclude the impact of returns associated with restructuring and other activities for the three and six months ended December 31, 2022 of $1 million and $6 million, respectively, and for the three and six months ended December 31, 2021 of $1 million and $2 million, respectively.

Reported net sales decreased 17% for the three months ended December 31, 2022, driven by the decrease from volume of 11%, the unfavorable impact from foreign currency translation of 5%, and the impact from the license terminations of certain of our designer fragrances of 1%.

The impact from pricing was virtually flat period-over-period, due to the favorable impact from strategic pricing actions offset by changes in mix.

THE ESTÉE LAUDER COMPANIES INC.

Reported net sales decreased 14% for the six months ended December 31, 2022, driven by the decrease from volume of 10%, the unfavorable impact from foreign currency translation of 5%, and the impact from the license terminations of certain of our designer fragrances of 1%.

Partially offsetting these decreases was the increase from pricing of 2%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix.

Product Categories

Three Months Ended

December 31 Six Months Ended

($ in millions) 2022 2021 2022 2021

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GAAP measures.

Reported skin care net sales decreased, reflecting lower net sales from Estée Lauder, Dr.Jart+ and Origins, of approximately $332 million, combined, primarily driven by continued impacts of COVID-19 restrictions in Hainan, including the tightening of inventory by certain of our retailers, and in mainland China.

Also contributing to the decrease in net sales was the tightening of inventory by certain of our retailers in the United States.

Partially offsetting these decreases in skin care net sales were higher net sales from La Mer and Bobbi Brown of approximately $25 million, combined.

The increase in net sales from La Mer reflected the continued success of hero products, as well as recent launches and targeted expanded consumer reach.

Bobbi Brown net sales increased, primarily driven by continued success of hero products and targeted expanded consumer reach.

The skin care net sales decrease was impacted by approximately $85 million of unfavorable foreign currency translation.

Reported skin care net sales decreased 14%, driven by the decrease from volume of 14% and the unfavorable impact from foreign currency translation of 3%.

Partially offsetting these decreases was the increase from pricing of 3%, due to the favorable impact from strategic pricing actions and changes in mix.

Reported skin care net sales decreased for the three and six months ended December 31, 2022, reflecting lower net sales from Estée Lauder, La Mer, Clinique and Dr.Jart+, combined, of approximately $762 million and $1,068 million, respectively, primarily driven by the COVID-related impacts affecting Asia travel retail, including the tightening of inventory by certain of our retailers, retail traffic in mainland China and the Dr.Jart+ travel retail business in Korea.

Also contributing to the decrease in net sales from Estée Lauder for the three and six months ended December 31, 2022 in the United States was the tightening of inventory from certain of our retailers and lower replenishment orders in the fiscal 2023 second quarter.

Partially offsetting these decreases in skin care net sales for the three and six months ended December 31, 2022 were higher net sales from The Ordinary and Bobbi Brown, combined, of approximately $34 million and $38 million, respectively.

The increase in net sales from The Ordinary in both periods was driven by success of hero products, new product launches and expanded distribution.

In both periods, the increase in net sales from Bobbi Brown reflected the continued success of hero products.

The skin care net sales decrease was impacted by approximately $152 million and $237 million of unfavorable foreign currency translation for the three and six months ended December 31, 2022, respectively.

Reported skin care net sales decreased 25% for the three months ended December 31, 2022, driven by the decrease from volume of 18%, the unfavorable impact from foreign currency translation of 5%, and a decrease from pricing of 2%, due to the unfavorable impact from changes in mix, partially offset from strategic pricing actions.

Reported skin care net sales decreased 20% for the six months ended December 31, 2022, driven by the decrease from volume of 16% and the unfavorable impact from foreign currency translation of 4%.

The impact from pricing was virtually flat period-over-period, due to the favorable impact from strategic pricing actions offset by changes in mix.

THE ESTÉE LAUDER COMPANIES INC.

Three Months Ended

December 31 Six Months Ended

($ in millions) 2022 2021 2022 2021

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GAAP measures.

Reported makeup net sales decreased, reflecting lower net sales from Estée Lauder and Tom Ford Beauty of approximately $114 million, combined, primarily driven by continued impacts of COVID-19 restrictions in China, impacting travel retail in Hainan and mainland China.

Partially offsetting these decreases in net sales were higher net sales from M·A·C, primarily driven by the continued success of hero products and recent launches, as well as the brick-and-mortar recovery, including increased retail traffic compared to the prior-year period.

The makeup net sales decrease was impacted by approximately $50 million of unfavorable foreign currency translation.

Reported makeup net sales decreased 10%, driven by the decrease from volume of 5%, the unfavorable impact from foreign currency translation of 4%, and a decrease from pricing of 1%, due to the unfavorable impact from changes in mix, partially offset by the favorable impact from strategic pricing actions.

Reported makeup net sales decreased for the three and six months ended December 31, 2022, reflecting lower net sales from Estée Lauder and Tom Ford Beauty, combined, of approximately $119 million and $233 million, respectively, primarily driven by COVID-related impacts, affecting Asia travel retail and retail traffic in mainland China.

Partially offsetting these decreases in net sales for the three and six months ended December 31, 2022 was an increase in net sales from M·A·C in both periods, driven by the recognition of previously deferred revenue due to changes to the BACK 2 M·A·C take back program during the fiscal 2023 second quarter.

The makeup net sales decrease was impacted by approximately $73 million and $123 million of unfavorable foreign currency translation for the three and six months ended December 31, 2022, respectively.

Reported makeup net sales decreased 9% for the three months ended December 31, 2022, driven by the decrease from volume of 9% and the unfavorable impact from foreign currency translation of 5%.

Partially offsetting these decreases was the increase from pricing of 5% due to the favorable impact from strategic pricing actions.

Reported makeup net sales decreased 9% for the six months ended December 31, 2022, driven by the decrease from volume of 6% and the unfavorable impact from foreign currency translation of 5%.

Partially offsetting these decrease was an increase from pricing of 2% due to the favorable impact from strategic pricing actions, partially offset by changes in mix.

Three Months Ended

December 31 Six Months Ended

($ in millions) 2022 2021 2022 2021

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GAAP measures.

Reported fragrance net sales remained virtually flat.

This reflected the impact of the license terminations related to the Donna Karan New York, DKNY, Michael Kors, Tommy Hilfiger and Ermenegildo Zegna product lines ("certain of our designer fragrance licenses") effective June 30, 2022 of approximately $64 million, which were largely offset by higher net sales from our luxury and artisanal offerings, led by Tom Ford Beauty and Le Labo, and by higher net sales from Clinique of approximately $56 million, combined.

The increase in net sales from Tom Ford Beauty reflected the continued success of Private Blend and Signature fragrances and new product launches.

Net sales from Le Labo increased, reflecting the continued success of hero product franchises, new product launches and targeted expanded consumer reach.

Net sales from Clinique increased, primarily reflecting growth in the Happy franchise line of products.

The fragrance net sales decrease was impacted by approximately $35 million of unfavorable foreign currency translation.

THE ESTÉE LAUDER COMPANIES INC.

Reported fragrance net sales remained virtually flat, driven by the impact from the license terminations of certain of our designer fragrances of 12% and the unfavorable impact from foreign currency translation of 5%.

Partially offsetting these decreases was the increase from volume of 13% and the increase from pricing of 4%, due to the favorable impact from strategic pricing actions and changes in mix.

Reported fragrance net sales decreased for the three and six months ended December 31, 2022, primarily reflecting the impact of the license terminations related to certain of our designer fragrances effective June 30, 2022 and lower net sales from Jo Malone London, combined, of approximately $102 million and $163 million, respectively.

The decrease in net sales from Jo Malone London for the three and six months ended December 31, 2022 primarily reflected COVID-related impacts affecting Asia travel retail and retail traffic in mainland China.

Also contributing to the net sales decline for the three months ended December 31, 2022 for Jo Malone London was an unfavorable impact relating to the timing of holiday shipments compared to the prior-year period.

Partially offsetting the decrease in fragrance net sales for the three and six months ended December 31, 2022 were higher net sales from Estée Lauder, Le Labo, Tom Ford Beauty, and Clinique, combined, of approximately $74 million and $135 million, respectively.

Net sales from Estée Lauder increased in both periods, primarily reflecting successful performance during holiday and key shopping moments driven by continued success from the Beautiful franchise line of products.

Also contributing to the increase in net sales from Estée Lauder for the three months ended December 31, 2022 was a favorable impact due to timing of holiday shipments compared to the prior-year period.

Net sales from Le Labo increased in both periods, reflecting the continued success of hero product franchises, successful performance during holiday and targeted expanded consumer reach.

The increase in net sales from Tom Ford Beauty in both periods reflected the continued success of Private Blend and Signature fragrances, new product launches and successful performance during holiday and key shopping moments.

Net sales from Clinique increased in both periods, primarily reflecting growth in the Clinique Happy franchise line of products.

The fragrance net sales decrease was impacted by approximately $49 million and $84 million of unfavorable foreign currency translation for the three and six months ended December 31, 2022, respectively.

Reported fragrance net sales decreased 3% for the three months ended December 31, 2022, driven by the impact from the license terminations of certain of our designer fragrances of 9% and the unfavorable impact from foreign currency translation of 6%.

Partially offsetting these decreases was the increase from volume of 9% and the increase from pricing of 3%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix.

Reported fragrance net sales decreased 2% for the six months ended December 31, 2022, driven by the impact from the license terminations of certain of our designer fragrances of 10% and the unfavorable impact from foreign currency translation of 6%.

Partially offsetting these decreases was the increase from volume of 10% and the increase from pricing of 4%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix.

Three Months Ended

December 31 Six Months Ended

($ in millions) 2022 2021 2022 2021

6 unchanged sentences

GAAP measures.

Reported hair care net sales increased, reflecting higher net sales from The Ordinary and our two hair care brands.

The increase was led by The Ordinary and Aveda, of approximately $7 million, combined.

Net sales from The Ordinary increased, benefiting from the fiscal 2022 third quarter launch of hair care products.

The increase in net sales from Aveda was primarily due to the continued success of existing product franchises, the fiscal 2023 first quarter launch of the Color Control franchise and the fiscal 2023 first quarter distribution expansion into mainland China.

The hair care net sales increase was impacted by approximately $6 million of unfavorable foreign currency translation.

Reported hair care net sales increased 7%, driven by the increase from pricing of 14%, due to the favorable impact from strategic pricing actions and changes in mix.

Reported hair care net sales increased for the three and six months ended December 31, 2022, led by The Ordinary, benefiting from the fiscal 2022 third quarter launch of hair care products, partially offset by a decrease in net sales from Aveda.

The decrease in net sales from Aveda in both periods reflects an unfavorable impact of foreign currency translation, partially offset by the fiscal 2023 first quarter distribution expansion into mainland China and successful performance during holiday and key shopping moments.

The hair care net sales increase was impacted by approximately $6 million and $12 million of unfavorable foreign currency translation for the three and six months ended December 31, 2022, respectively.

THE ESTÉE LAUDER COMPANIES INC.

Reported hair care net sales increased 1% for the three months ended December 31, 2022, driven by the increase from pricing of 7%, due to the favorable impact from strategic pricing actions.

Partially offsetting this increase was the decrease from volume of 3%, partially offset by new product innovation, and the unfavorable impact from foreign currency translation of 3%.

Reported hair care net sales increased 4% for the six months ended December 31, 2022, driven by the increase from pricing of 10%, due to the favorable impact from strategic pricing actions and changes in mix.

Partially offsetting this increase was the decrease from volume of 2%, partially offset by new product innovation, and the unfavorable impact from foreign currency translation of 4%.

Geographic Regions

1 unchanged sentence

Three Months Ended

December 31 Six Months Ended

($ in millions) 2022 2021 2022 2021

6 unchanged sentences

GAAP measures.

Reported net sales in The Americas decreased for the three and six months ended December 31, 2022, reflecting the impact of the license terminations related to certain of our designer fragrances effective June 30, 2022 of 2% and 3%, respectively.

In the United States, net sales decreased $66 million and $138 million for the three and six months ended December 31, 2022, respectively, driven by the tightening of inventory from certain of our retailers, lower shipments of replenishment orders in the fiscal 2023 second quarter and the aforementioned impact of the license terminations related to certain of our designer fragrances.

Partially offsetting the decrease in The Americas for the three and six months ended December 31, 2022 was an increase in net sales in Latin America of approximately $7 million and $20 million, respectively, reflecting continued recovery in makeup.

Net sales in The Americas were impacted by approximately $7 million and $14 million of favorable foreign currency translation for the three and six months ended December 31, 2022, respectively.

Reported net sales in The Americas decreased 5% for the three months ended December 31, 2022, driven by the decrease from volume of 8% and the impact from the license terminations related to certain of our designer fragrances of 2%.

Partially offsetting this decrease was the increase from pricing of 4%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix, and the favorable impact from foreign currency translation of 1%.

Reported net sales in The Americas decreased 5% for the six months ended December 31, 2022, driven by the decrease from volume of 8% and the impact from the license terminations related to certain of our designer fragrances of 3%.

Partially offsetting this decrease was the increase from pricing of 5%, due to the favorable impact from strategic pricing actions, and the favorable impact from foreign currency translation of 1%.

THE ESTÉE LAUDER COMPANIES INC.

Reported net sales in The Americas decreased, primarily driven by lower net sales in the United States of approximately $72 million.

The decrease in net sales in the United States reflected a difficult comparison to the prior-year period due to timing of holiday shipments in the prior-year period, the impact of license terminations related to certain of our designer fragrance licenses effective June 30, 2022 and the impact of tighter inventory management by certain of our retailers.

Partially offsetting the decrease was an increase in net sales in Latin America of approximately $13 million, led by recovery in makeup.

Net sales in The Americas were impacted by approximately $7 million of favorable foreign currency translation.

Reported net sales in The Americas decreased 6%, driven by the decrease from volume of 9% and the impact from the license terminations related to certain of our designer fragrances of 3%.

Partially offsetting this decrease was the increase from pricing of 5%, due to the favorable impact from strategic pricing actions and changes in mix, and the favorable impact from foreign currency translation of 1%.

Europe, the Middle East & Africa

Three Months Ended

December 31 Six Months Ended

($ in millions) 2022 2021 2022 2021

6 unchanged sentences

GAAP measures.

Reported net sales decreased in Europe, the Middle East & Africa, primarily driven by lower results from our travel retail business and the United Kingdom, combined, of approximately $166 million.

The decrease in net sales from our travel retail business reflects the continued impacts of COVID-19 restrictions impacting travel retail in Hainan.

The decrease in net sales from the United Kingdom was driven by lower net sales from Estée Lauder, M·A·C and Jo Malone London.

Partially offsetting these decreases were increases in net sales in our emerging markets, led by an increase in net sales from India and the Middle East, of approximately $11 million, combined, reflecting growth in makeup.

Net sales in Europe, the Middle East & Africa were impacted by approximately $83 million of unfavorable foreign currency translation.

Reported net sales in Europe, the Middle East & Africa decreased 10%, driven by the decrease from volume of 7%, the unfavorable impact from foreign currency translation of 4%, and the impact from the license terminations related to certain of our designer fragrances of 1%.

Partially offsetting these decreases was the increase from pricing of 2%, due to the favorable impact from strategic pricing actions and changes in mix.

Reported net sales decreased in Europe, the Middle East & Africa for the three and six months ended December 31, 2022, primarily driven by lower net sales from our travel retail business, Russia and the United Kingdom, combined, of approximately $529 million and $703 million, respectively.

The decrease in net sales from our travel retail business for the three and six months ended December 31, 2022 reflects the COVID-related impacts affecting Asia travel retail, including the tightening of inventory from certain of our retailers.

Net sales from Russia decreased for the three and six months ended December 31, 2022, as we sold a limited selection of products to a reduced number of authorized retailers and completed the closure of all of our freestanding stores.

The decrease in net sales from the United Kingdom for the three and six months ended December 31, 2022 is driven by the unfavorable impact of foreign currency translation, partially offset by the continued recovery in the makeup product category.

Partially offsetting the decreases in net sales in Europe, the Middle East & Africa for the three and six months ended December 31, 2022 were increases in net sales from Turkey and India, combined, of approximately $17 million and $31 million.

The net sales increase in Turkey in both periods was driven by growth in makeup.

Net sales in India increased for the three and six months ended December 31, 2022 led by growth in skin care and makeup, respectively.

Net sales in Europe, the Middle East & Africa were impacted by approximately $102 million and $185 million of unfavorable foreign currency translation for the three and six months ended December 31, 2022, respectively.

Reported net sales in Europe, the Middle East & Africa decreased 22% for the three months ended December 31, 2022, driven by the decrease from volume of 16%, the unfavorable impact from foreign currency translation of 4%, and the impact from the license terminations related to certain of our designer fragrances of 1%, and a decrease from pricing of 1%, due to the unfavorable impact from changes in mix, partially offset by strategic pricing actions.

Reported net sales in Europe, the Middle East & Africa decreased 17% for the six months ended December 31, 2022, driven by the decrease from volume of 12%, the unfavorable impact from foreign currency translation of 4%, and the impact from the license terminations related to certain of our designer fragrances of 1%.

The impact from pricing was virtually flat period-over-period, due to the favorable impact from strategic pricing actions offset by changes in mix.

THE ESTÉE LAUDER COMPANIES INC.

Three Months Ended

December 31 Six Months Ended

($ in millions) 2022 2021 2022 2021

6 unchanged sentences

GAAP measures.

Reported net sales decreased in Asia/Pacific, primarily driven by lower results in Greater China and the Dr.Jart+ travel retail business in Korea, of approximately $217 million, combined, due to the continued impacts of COVID-19 restrictions in China.

Partially offsetting the net sales decrease were increases in most of the other affiliates in the region, as COVID-19 restrictions eased compared to the prior-year period, led by growth in our fragrance and makeup product categories.

Net sales in Asia/Pacific were impacted by approximately $100 million of unfavorable foreign currency translation.

Reported net sales in Asia/Pacific decreased 15%, driven by the decrease from volume of 9% and the unfavorable impact from foreign currency translation of 8%.

Partially offsetting these decreases was the increase from pricing of 2%, due to the favorable impact from strategic pricing actions and changes in mix.

Gross margin decreased to 74.0% for the three months ended September 30, 2022 as compared with 75.9% in the prior-year period.

Reported net sales decreased in Asia/Pacific for the three and six months ended December 31, 2022, primarily driven by a decrease in net sales in Greater China and Korea, led by the Dr.Jart+ travel retail business in Korea, combined, of approximately $321 million and $538 million, respectively, due to the COVID-related impacts.

Partially offsetting the net sales decrease for the three and six months ended December 31, 2022 were increases across southeast Asia, led by increases in net sales from the Philippines, Malaysia and Vietnam, combined, of approximately $5 million and $30 million, respectively, driven by growth in our makeup and fragrance product categories.

Net sales in Asia/Pacific were impacted by approximately $187 million and $287 million of unfavorable foreign currency translation for the three and six months ended December 31, 2022, respectively.

Reported net sales in Asia/Pacific decreased 17% for the three months ended December 31, 2022, driven by the decrease from the unfavorable impact from foreign currency translation of 10% and the decrease from volume of 8%.

Partially offsetting these decreases was the increase from pricing of 1%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix.

Reported net sales in Asia/Pacific decreased 16% for the six months ended December 31, 2022, driven by the unfavorable impact from foreign currency translation of 9% and the decrease from volume of 8%.

Partially offsetting these decreases was the increase from pricing of 1%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix.

Gross margin decreased to 73.6% and 73.8% for the three and six months ended December 31, 2022, respectively, as compared with 77.9% and 77.0% in the prior-year periods.

Favorable (Unfavorable) Basis Points

September 30, 2022

Three Months Ended

December 31, 2022

Three Months Ended Six Months Ended

Mix of business (300) (220)

2 unchanged sentences

Foreign exchange transactions 10 5

Subtotal (190)

Charges associated with restructuring and other activities —

The decrease in gross margin reflected unfavorable impacts from our mix of business primarily due to the increase in promotional items and the unfavorable timing of promotional activity compared to the prior-year period, as well as higher manufacturing costs due to continued inflationary pressures.

Total (430) (320)

THE ESTÉE LAUDER COMPANIES INC.

The decrease in gross margin for the three and six months ended December 31, 2022 reflected unfavorable impacts from our mix of business and higher manufacturing costs due to continued inflationary pressures.

The unfavorable impact from our mix of business in both periods is primarily due to the change in geographic region and category mix, driven by the decrease in skin care net sales and higher costs associated with promotional items.

OPERATING EXPENSES

Operating expenses as a percentage of net sales was 57.2% for the three months ended September 30, 2022 as compared with 54.6% in the prior-year period.

Operating expenses as a percentage of net sales was 61.6% and 59.5% for the three and six months ended December 31, 2022, respectively, as compared with 52.3% and 53.3% in the prior-year periods.

Favorable (Unfavorable) Basis Points

September 30, 2022

Three Months Ended

December 31, 2022

Three Months Ended Six Months Ended

General and administrative expenses (50) (20)

Advertising, merchandising, sampling and product development (150) (150)

Selling (110) (70)

Stock-based compensation (40) —

1 unchanged sentence

Shipping (60) (70)

Foreign exchange transactions 10

Subtotal (500) (390)

Charges associated with restructuring and other activities 10 10

Other intangible asset impairments (450) (240)

Changes in fair value of acquisition-related stock options 10 —

The unfavorable change in operating expense margin was primarily due to an unfavorable impact from advertising, merchandising, sampling and product development expenses driven by a decrease in net sales, higher shipping rates due to continued inflationary pressures and shifts in mode of transportation, and higher store operating costs due to the brick-and-mortar recovery, including more stores being open compared to the prior-year period.

This change was partially offset by a decrease in general and administrative expenses and stock-based compensation, primarily due to lower employee incentive compensation, as compared to the prior-year period.

Total (930) (620)

The unfavorable change in operating expense margin for the three and six months ended December 31, 2022, was primarily due to the decrease in net sales and the fiscal 2023 second quarter impact of other intangible asset impairments of $207 million.

The unfavorable impact of store operating costs in both periods was due to the brick-and-mortar recovery, including more stores being open compared to the prior-year period.

Partially mitigating the unfavorable impact in both periods was disciplined expense management.

THE ESTÉE LAUDER COMPANIES INC.

OPERATING RESULTS

Three Months Ended

December 31 Six Months Ended

($ in millions) 2022 2021 2022 2021

4 unchanged sentences

Non-GAAP Financial Measure (1) :

% Change in operating income from the prior-year period adjusting for the impact of charges associated with restructuring and other activities (29) %

% Change in operating income from the prior-year period adjusting for the impact of charges associated with restructuring and other activities, other intangible asset impairments and the change in fair value of acquisition-related stock options (46) % (40) %

(1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

GAAP measures.

The decrease in reported operating margin was primarily driven by a decrease in net sales, decrease in gross margin and the increase in operating expenses, discussed above.

THE ESTÉE LAUDER COMPANIES INC.

The decrease in reported operating margin for the three and six months ended December 31, 2022 was primarily driven by a decrease in net sales, decrease in gross margin and the decrease in operating expense margin, discussed above.

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

2 unchanged sentences

Three Months Ended

December 31 Six Months Ended

($ in millions) 2022 2021 2022 2021

3 unchanged sentences

Non-GAAP Financial Measure (1) :

% Change in operating income from the prior-year period adjusting for the change in fair value of acquisition-related stock options (26) %

% Change in operating income from the prior-year period adjusting for the impact of other intangible asset impairments and the change in fair value of acquisition-related stock options (52) % (42) %

(1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

GAAP measures.

Reported skin care operating income decreased, reflecting lower results from Estée Lauder, Clinique and Origins of approximately $234 million, combined, primarily driven by decreases in net sales.

Also contributing to the decrease in operating income from Estée Lauder was an increase in cost of sales primarily due to higher costs for promotional items.

Operating income from Clinique also decreased due to higher cost of sales and shipping expenses driven by continued supply chain challenges and inflationary pressures.

Partially offsetting the decreases in operating income for Estée Lauder and Clinique was disciplined advertising and promotional expense management.

Partially offsetting the decrease in skin care operating income was lower employee incentive compensation compared to the prior-year period.

THE ESTÉE LAUDER COMPANIES INC.

Reported skin care operating income decreased for the three and six months ended December 31, 2022, reflecting lower operating results from Estée Lauder and La Mer, combined, of approximately $476 million and $641 million, respectively, primarily driven by decreases in net sales, as well as the fiscal 2023 second quarter other intangible asset impairment related to Dr.Jart+ of $100 million.

Partially offsetting the decrease in skin care operating income for the three and six months ended December 31, 2022 was higher operating results from The Ordinary, primarily driven by an increase in net sales.

Also benefiting skin care operating income in both periods was disciplined expense management.

Three Months Ended

December 31 Six Months Ended

($ in millions) 2022 2021 2022 2021

2 unchanged sentences

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

Reported makeup operating income decreased, reflecting lower results from Estée Lauder and Tom Ford Beauty of approximately $128 million, combined, primarily driven by a decrease in net sales.

The decrease in operating income from Estée Lauder also reflected higher cost of sales, as well as increased costs for advertising and promotional activities.

Partially offsetting the decrease in makeup operating income was lower corporate general and administrative expenses and employee incentive compensation compared to the prior-year period.

THE ESTÉE LAUDER COMPANIES INC.

Non-GAAP Financial Measure (1) :

% Change in operating income from the prior-year period adjusting for the impact of other intangible asset impairments (46) % (61) %

(1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

GAAP measures.

Reported makeup operating income decreased for the three and six months ended December 31, 2022, reflecting the fiscal 2023 second quarter other intangible asset impairments related to Too Faced and Smashbox of $107 million, combined, and lower results from Estée Lauder and Tom Ford Beauty, combined, of approximately $103 million and $231 million, respectively.

In both periods, the decrease in operating income from Estée Lauder and Tom Ford Beauty is driven by decreases in net sales.

Also contributing to the decrease in operating results from Estée Lauder in both periods were higher cost of sales due to impacts associated with inflationary pressures, partially offset by a decrease in advertising and promotional activities.

Partially offsetting the decrease in makeup operating income for the three and six months ended December 31, 2022 were higher results from M·A·C, primarily driven by the recognition of previously deferred revenue due to changes to the BACK 2 M·A·C take back program during the fiscal 2023 second quarter and disciplined advertising and promotional expense management.

Also benefiting makeup operating income in both periods was lower general and administrative expenses.

Three Months Ended

December 31 Six Months Ended

($ in millions) 2022 2021 2022 2021

2 unchanged sentences

% Change from prior-year period (16) % (9) %

Reported fragrance operating income remained virtually flat.

This included higher results from Tom Ford Beauty and Clinique of approximately $22 million, combined.

The higher operating income from Tom Ford Beauty was primarily driven by an increase in net sales, partially offset by higher strategic investments in advertising and promotional activities to drive hero products and support new product launches.

Clinique operating income increased, primarily due to an increase in net sales.

Operating income also increased due to lower employee incentive compensation compared to the prior-year period.

Largely offsetting the increase was the impact of license terminations related to certain of our designer fragrances effective June 30, 2022 and lower results from Jo Malone London of approximately $32 million, combined.

Operating income from Jo Malone London decreased, primarily driven by higher cost of sales and shipping costs due to increased inflationary pressures, partially offset by an increase in net sales.

Reported fragrance operating income decreased for the three and six months ended December 31, 2022, reflecting lower results from Jo Malone London and the impact of license terminations related to certain of our designer fragrances effective June 30, 2022, combined, of approximately $61 million and $93 million, respectively.

Operating income from Jo Malone London decreased in both periods, primarily driven by a decrease in net sales, higher advertising and promotional activities to support holiday and key shopping moments, and higher selling expenses due to increased staffing costs compared to the prior-year period.

THE ESTÉE LAUDER COMPANIES INC.

Partially offsetting the decrease in fragrance operating income for the three and six months ended December 31, 2022, were higher results from Estée Lauder, driven by an increase in net sales.

Also benefiting fragrance operating income for the six months ended December 31, 2022, were higher results from Tom Ford Beauty, reflecting an increase in net sales, partially offset by higher selling expenses due to increased staffing costs compared to the prior-year period, and higher advertising and promotional activities to support hero franchises and holiday and key shopping moments.

Also benefiting fragrance operating income in both periods was lower general and administrative expenses.

Three Months Ended

December 31 Six Months Ended

($ in millions) 2022 2021 2022 2021

2 unchanged sentences

% Change from prior-year period (38) % (100+)%

Reported hair care operating results decreased, primarily driven by lower results from Aveda and Bumble and bumble.

The lower results from Aveda were primarily driven by higher advertising and promotional activities to support the brand's expansion into mainland China during the fiscal 2023 first quarter, partially offset by an increase in net sales.

Operating results from Bumble and bumble decreased, primarily driven by higher strategic investments in advertising and promotional activities, partially offset by an increase in net sales.

Partially offsetting the decrease in hair care operating income was lower corporate general and administrative expenses and employee incentive compensation compared to the prior-year period.

THE ESTÉE LAUDER COMPANIES INC.

Reported hair care operating results decreased for the three and six months ended December 31, 2022, primarily driven by lower results from Aveda and Bumble and bumble, combined, of approximately $9 million and $34 million, respectively.

In both periods, the lower results from Aveda were primarily driven by a decrease in net sales, higher advertising and promotional activities to support the brand's expansion into mainland China during fiscal 2023 and holiday and key shopping moments and higher cost of sales.

Operating results from Bumble and bumble decreased for the three and six months ended December 31, 2022, primarily driven by higher cost of sales.

Partially offsetting the decrease in hair care operating income for the three and six months ended December 31, 2022 was lower general and administrative expenses.

Geographic Regions

Three Months Ended

December 31 Six Months Ended

($ in millions) 2022 2021 2022 2021

Operating income $ 125 $ 254

Operating income (loss) $ (85) $ 382 $ 40 $ 636

$ Change from prior-year period (467) (596)

1 unchanged sentence

Non-GAAP Financial Measure (1) :

% Change in operating income from the prior-year period adjusting for the change in fair value of acquisition-related stock options (50) %

% Change in operating income from the prior-year period adjusting for the impact of other intangible asset impairments and change in fair value of acquisition-related stock options (95) % (77) %

(1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

GAAP measures.

Reported operating results decreased in The Americas, primarily reflecting lower operating results from North America of approximately $134 million.

The decrease in operating results in the United States is primarily due to a decrease in net sales and increases in cost of sales and selling expenses due to the brick-and-mortar recovery, including more stores being open and increased retail traffic compared to the prior-year period.

Reported operating results decreased in The Americas for the three and six months ended December 31, 2022, primarily reflecting lower operating results from North America of approximately $468 million and $602 million, respectively.

The decrease in operating results in North America is driven by the United States, primarily due to lower intercompany royalty income driven by a decrease in net sales in our travel retail business, fiscal 2023 second quarter other intangible asset impairments relating to Too Faced and Smashbox of $107 million and a decrease in net sales.

Also contributing to the decrease in operating results in the United States for the six months ended December 31, 2022 was an increase in selling expenses due to higher staffing costs compared to the prior-year period.

THE ESTÉE LAUDER COMPANIES INC.

Europe, the Middle East & Africa

Three Months Ended

December 31 Six Months Ended

($ in millions) 2022 2021 2022 2021

2 unchanged sentences

% Change from prior-year period (34) % (32) %

Reported operating income decreased in Europe, the Middle East & Africa, primarily driven by lower results from our travel retail business of approximately $148 million.

Operating income decreased in our travel retail business reflecting the (i) decrease in net sales (ii) increase in cost of sales due to higher costs due to inflationary pressures and (iii) higher advertising and promotional activity primarily to support investments in key markets and digital media campaigns to expand consumer reach.

Reported operating income decreased in Europe, the Middle East & Africa for the three and six months ended December 31, 2022, primarily driven by lower results from our travel retail business of approximately $236 million and $384 million, respectively.

In both periods, operating income decreased in our travel retail business reflecting the decrease in net sales and higher advertising and promotional activity primarily to support investments in key markets and increased digital media campaigns.

Also contributing to the decrease in operating income in our travel retail business was an increase in cost of sales reflecting higher costs due to inflationary pressures.

Partially offsetting the decrease in operating income in our travel retail business in both periods was a decrease in intercompany royalty expense to The Americas due to the net sales decrease.

Three Months Ended

December 31 Six Months Ended

($ in millions) 2022 2021 2022 2021

2 unchanged sentences

% Change from prior-year period (44) % (31) %

Reported operating income decreased in Asia/Pacific, primarily driven by a decrease in net sales in Greater China that reflected the continued impacts of COVID-19 restrictions in China, partially offset by disciplined advertising and promotional expense management.

THE ESTÉE LAUDER COMPANIES INC.

Non-GAAP Financial Measure (1) :

% Change in operating income from the prior-year period adjusting for the impact of other intangible asset impairments (21) % (16) %

(1) See “ Reconciliations of Non-GAAP Financial Measures” beginning on page 54 for reconciliations between non-GAAP financial measures and the most directly comparable U.S.

GAAP measures.

Reported operating income decreased in Asia/Pacific for the three and six months ended December 31, 2022, primarily reflecting the fiscal 2023 second quarter other intangible asset impairment relating to Dr.

Jart+ of $100 million and a decrease in operating results in Greater China of approximately $76 million and $106 million, respectively.

The decrease in operating results in Greater China in both periods was driven by a decrease in net sales, partially offset by disciplined advertising and promotional expense management.

Partially offsetting the decrease in operating income in Asia/Pacific for the three and six months ended December 31, 2022 were higher results from southeast Asia, led by Singapore, Malaysia, and the Philippines, combined, of approximately $2 million and $23 million, respectively, primarily driven by an increase in net sales.

INTEREST AND INVESTMENT INCOME

Three Months Ended

December 31 Six Months Ended

(In millions) 2022 2021 2022 2021

1 unchanged sentence

Interest income and investment income, net $ 26 $ 10 $ 41 $ 14

Interest income and investment income, net increased, primarily reflecting higher interest rates compared to the prior-year period.

Interest expense and interest income and investment income, net, increased primarily reflecting higher interest rates compared to the prior-year period.

THE ESTÉE LAUDER COMPANIES INC.

PROVISION FOR INCOME TAXES

5 unchanged sentences

Three Months Ended

December 31 Six Months Ended

2022 2021 2022 2021

Effective rate for income taxes 25.4 % 21.5 % 23.9 % 21.9 %

Basis-point change from the prior-year period 390 200

The increase in the effective tax rate of 10 basis points was primarily attributable to a higher effective tax rate on the Company's foreign operations and a decrease in excess tax benefits associated with stock-based compensation arrangements, partially offset by a reduction in income tax reserve adjustments.

For the three and six months ended December 31, 2022, the increase in the effective tax rate was primarily attributable to a decrease in excess tax benefits associated with stock-based compensation arrangements and a higher effective tax rate on the our foreign operations, partially offset by a reduction in income tax reserve adjustments.

NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC.

Three Months Ended

December 31 Six Months Ended

($ in millions, except per share data) 2022 2021 2022 2021

Net earnings attributable to The Estée Lauder Companies Inc.

$ 394 $ 1,088 $ 883 $ 1,780

$ Change from prior-year period (694) (897)

3 unchanged sentences

Non-GAAP Financial Measure (1) :

% Change in diluted net earnings per common share from the prior-year period adjusting for the impact of charges associated with restructuring and other activities (28) %

% Change in diluted net earnings per common share from the prior-year period adjusting for the impact of charges associated with restructuring and other activities, other intangible asset impairments and the change in fair value of acquisition-related stock options (49) % (41) %

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

10 unchanged sentences

the change in fair value of acquisition-related stock options;

other intangible asset impairments;

and the effects of foreign currency translation.

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

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

GAAP measures.

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

September 30 Variance % Change

December 31 Variance % Change

constant currency

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Charges associated with restructuring and other activities 9 15 (6)

Other intangible asset impairments 207 — 207

Change in fair value of acquisition-related stock options (4) 2 (6)

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Charges associated with restructuring and other activities .02 .03 (.01)

Other intangible asset impairments .44 — .44

Change in fair value of acquisition-related stock options (less portion attributable to redeemable noncontrolling interest) (.01) .01 (.02)

Diluted net earnings per common share, as adjusted $ 1.54 $ 3.01 $ (1.47) (49) % (44) %

THE ESTÉE LAUDER COMPANIES INC.

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

December 31 Variance % Change

constant currency

Net sales, as reported $ 8,550 $ 9,931 $ (1,381) (14) % (9) %

Returns associated with restructuring and other activities 6 2 4

Net sales, as adjusted $ 8,556 $ 9,933 $ (1,377) (14) % (9) %

Operating income, as reported $ 1,217 $ 2,353 $ (1,136) (48) % (44) %

Charges associated with restructuring and other activities 15 21 (6)

Other intangible asset impairments 207 — 207

Change in fair value of acquisition-related stock options (3) 2 (5)

Operating income, as adjusted $ 1,436 $ 2,376 $ (940) (40) % (35) %

Diluted net earnings per common share, as reported $ 2.45 $ 4.85 $ (2.40) (50) % (46) %

Charges associated with restructuring and other activities .03 .05 (.02)

Other intangible asset impairments .44 — .44

Change in fair value of acquisition-related stock options (less portion attributable to redeemable noncontrolling interest) (.01) — (.01)

Diluted net earnings per common share, as adjusted $ 2.91 $ 4.90 $ (1.99) (41) % (36) %

As diluted net earnings per common share, as adjusted, is used as a measure of the Company’s performance, we consider the impact of current and deferred income taxes when calculating the per-share impact of each of the reconciling items.

THE ESTÉE LAUDER COMPANIES INC.

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:

The following tables reconcile 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:

As Reported Impact of foreign

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THE ESTÉE LAUDER COMPANIES INC.

The following table reconciles the change in operating results by product category and geographic region, as reported, to the change in operating income excluding the impact of change in fair value of acquisition-related stock options:

As Reported Impact of foreign

currency translation Variance,

in constant currency % Change,

as reported % Change,

in constant currency

Six Months Ended

($ in millions) 2022 2021 Variance

By Product Category:

Skin Care $ 4,486 $ 5,608 $ (1,122) $ 237 $ (885) (20) % (16) %

Makeup 2,320 2,560 (240) 123 (117) (9) (5)

Fragrance 1,382 1,408 (26) 84 58 (2) 4

Hair Care 340 328 12 12 24 4 7

Other 28 29 (1) 2 1 (3) 3

8,556 9,933 (1,377) 458 (919) (14) (9)

Returns associated with restructuring and other activities (6) (2) (4) — (4)

Total $ 8,550 $ 9,931 $ (1,381) $ 458 $ (923) (14) % (9) %

The Americas $ 2,358 $ 2,494 $ (136) $ (14) $ (150) (5) % (6) %

Europe, the Middle East & Africa 3,498 4,211 (713) 185 (528) (17) (13)

Asia/Pacific 2,700 3,228 (528) 287 (241) (16) (7)

8,556 9,933 (1,377) 458 (919) (14) (9)

Returns associated with restructuring and other activities (6) (2) (4) — (4)

Total $ 8,550 $ 9,931 $ (1,381) $ 458 $ (923) (14) % (9) %

THE ESTÉE LAUDER COMPANIES INC.

The following tables reconcile the change in operating results by product category and geographic region, as reported, to the change in operating income excluding the impact of other intangible asset impairments and the change in fair value of acquisition-related stock options:

As Reported Add:

Other intangible asset impairments Add:

Change in fair value of acquisition-related stock options Variance, as adjusted % Change, as reported % Change, as adjusted

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Total $ 556 $ 1,418 $ (862)

THE ESTÉE LAUDER COMPANIES INC.

As Reported Add:

Other intangible asset impairments Add:

Change in fair value of acquisition-related stock options Variance, as adjusted % Change, as reported % Change, as adjusted

Six Months Ended

($ in millions) 2022 2021 Variance

By Product Category:

Skin Care $ 951 $ 1,799 $ (848) $ 100 $ (5) $ (753) (47) % (42) %

Makeup (21) 221 (242) 107 — (135) (100+) (61)

Fragrance 310 341 (31) — — (31) (9) (9)

Hair Care (7) 10 (17) — — (17) (100+) (100+)

Other (1) 3 (4) — — (4) (100+) (100+)

1,232 2,374 (1,142) $ 207 $ (5) $ (940) (48) % (40) %

Charges associated with restructuring and other activities (15) (21) 6

Total $ 1,217 $ 2,353 $ (1,136)

The Americas $ 40 $ 636 $ (596) $ 107 $ (5) $ (494) (94) % (77) %

Europe, the Middle East & Africa 743 1,085 (342) — — (342) (32) (32)

Asia/Pacific 449 653 (204) 100 — (104) (31) (16)

1,232 2,374 (1,142) $ 207 $ (5) $ (940) (48) % (40) %

Charges associated with restructuring and other activities (15) (21) 6

Total $ 1,217 $ 2,353 $ (1,136)

FINANCIAL CONDITION

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

At September 30, 2022, we had cash and cash equivalents of $2,938 million compared with $3,957 million at June 30, 2022.

At December 31, 2022, we had cash and cash equivalents of $3,725 million compared with $3,957 million at June 30, 2022.

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

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

THE ESTÉE LAUDER COMPANIES INC.

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

THE ESTÉE LAUDER COMPANIES INC.

In November 2022, we signed an agreement to acquire the TOM FORD brand.

The amount to be paid for the acquisition is approximately $2,300 million, net of a $250 million payment to be received at closing from Marcolin S.p.A.

and expects to close in the second half of fiscal 2023.

We expect to fund this transaction through a combination of cash, debt and $300 million in deferred payments to the sellers that become due beginning in July 2025.

In addition, the acquisition will result in the elimination of the existing license royalty payments on our beauty business upon closing.

Credit Ratings

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

As of October 26, 2022, our long-term debt is rated A+ with a stable outlook by Standard & Poor’s and A1 with a stable outlook by Moody’s.

At September 30, 2022, our outstanding borrowings were as follows:

As of January 26, 2023, our long-term debt is rated A+ with a stable outlook by Standard & Poor’s and A1 with a stable outlook by Moody’s.

At December 31, 2022, our outstanding borrowings were as follows:

($ in millions) Long-term

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(12) The Senior Notes contain certain customary incurrence–based covenants, including limitations on indebtedness secured by liens.

Total debt as a percent of total capitalization was 49% at September 30, 2022 and June 30, 2022.

Total debt as a percent of total capitalization was 48% and 49% at December 31, 2022 and June 30, 2022, respectively.

THE ESTÉE LAUDER COMPANIES INC.

Three Months Ended

In January 2023, we entered into a $2,000 million senior unsecured revolving credit facility that expires on January 2, 2024 (the “New Facility”) for liquidity support for our commercial paper program and general corporate purposes, of which the entire amount is currently undrawn and available.

Interest rates on borrowings under the New Facility will be based on prevailing market interest rates in accordance with the agreement.

In January 2023, we increased our commercial paper program under which we may issue commercial paper in the United States from $2,500 million to $4,500 million.

Six Months Ended

(In millions) 2022 2021

Net cash flows used for operating activities $ (650) $ (81)

Net cash flows provided by operating activities $ 751 $ 1,846

Net cash flows used for investing activities $ (285) $ (414)

Net cash flows used for financing activities $ (685) $ (1,775)

The change in net cash flows used for operating activities primarily reflected lower earnings before tax, excluding non-cash items, and the unfavorable change in working capital, reflecting lower accounts payable due to timing of payments, higher inventory levels and lower other accrued liabilities, which includes the settlement of net investment hedges.

The change in net cash flows provided by operating activities primarily reflected lower earnings before tax, excluding non-cash items, and the unfavorable change in working capital, reflecting lower other accrued liabilities, which includes the settlement of net investment hedges, lower accounts payable due to timing of payments, partially offset by a favorable change in accounts receivable.

The change in net cash flows used for investing activities primarily reflected a favorable impact from the settlement of net investment hedges, which is offset by the unfavorable change in other accrued liabilities as discussed above, and a decrease in capital expenditures compared to the prior-year period.

The change in net cash flows used for financing activities primarily reflected a decrease relating to lower treasury stock repurchases and proceeds from the issuance of short-term commercial paper, partially offset by the repayment of the outstanding principal balance of our $250 million 2.35% senior note that matured during the fiscal 2023 first quarter.

For a summary of quarterly cash dividends declared per share on our Class A and Class B Common Stock during the three months ended September 30, 2022, see Notes to Consolidated Financial Statements, Note 11 – Equity and Redeemable Noncontrolling Interest .

The change in net cash flows used for financing activities primarily reflected a decrease relating to lower treasury stock repurchases compared to the prior-year period.

For a summary of quarterly cash dividends declared per share on our Class A and Class B Common Stock during the six months ended December 31, 2022, see Notes to Consolidated Financial Statements, Note 11 – Equity and Redeemable Noncontrolling Interest .

Pension and Post-retirement Plan Funding

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Commitments, Contractual Obligations and Contingencies

There have been no significant changes to our commitments and contractual obligations as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022.

For a discussion of contingencies, see Notes to Consolidated Financial Statements, Note 8 – Contingencies .

There have been no other significant changes to our commitments and contractual obligations as discussed in our Annual Report on Form 10-K for the fiscal year ended June 30, 2022, except as disclosed in Notes to Consolidated Financial Statements, Note 8 – Commitments and Contingencies.

For a discussion of contingencies, see Notes to Consolidated Financial Statements, Note 8 – Commitments and Contingencies .

Derivative Financial Instruments and Hedging Activities

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A hypothetical 10% weakening of the U.S.

dollar against the foreign exchange rates for the currencies in our portfolio would have resulted in a net decrease in the fair value of our portfolio of approximately $282 million and $259 million as of September 30, 2022 and June 30, 2022, 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 $267 million and $259 million as of December 31, 2022 and June 30, 2022, respectively.

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

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

Based on a hypothetical 100 basis point increase in interest rates, the estimated fair value of our interest rate derivatives would decrease by approximately $58 million and $41 million as of September 30, 2022 and June 30, 2022, respectively.

Based on a hypothetical 100 basis point increase in interest rates, the estimated fair value of our interest rate derivatives would decrease by approximately $33 million and $41 million as of December 31, 2022 and June 30, 2022, respectively.

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

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

Since June 30, 2022, there have been no significant changes to the assumptions and estimates related to our critical accounting policies.

Since June 30, 2022, there have been no significant changes to the assumptions and estimates related to our critical accounting policies, except as disclosed in Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations on pages 39-40.

RECENTLY ISSUED ACCOUNTING STANDARDS

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis