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Item 7. Management’s Discussion and Analysis

2024-08-19 compared with 2023-08-18 · 251 added, 307 removed, 519 unchanged (52% of the section changed)

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Financial Statements and Supplementary Data – Note 2 – Summary of Significant Accounting Policies and Note 24 – Segment Data and Related Information 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.

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

During the fiscal 2024 second quarter, we identified and corrected misstatements of net sales and operating income between certain of our product categories in our Management's Discussion and Analysis of Financial Condition and Results of Operations for fiscal 2023 and fiscal 2022.

See Note 24 – Segment Data and Related Information for additional details.

Year Ended June 30

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Net earnings attributable to noncontrolling interests — — —

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

Net earnings attributable to redeemable noncontrolling interest

(0.1) — (0.1)

Net earnings attributable to The Estée Lauder Companies Inc.

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

Our innovation is launched at different price points than existing products and value derived from innovation may vary from year to year.

Our innovation is often launched at different price points than existing products and value derived from innovation may vary from year to year.

We continually introduce new products, support new and established products through advertising, merchandising and sampling and phase out existing products that no longer meet the needs of our consumers or our objectives.

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

Business Update

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

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

We also leverage consumer analytics and insights with agility by deploying our brands to fast growing and profitable opportunities.

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

During the fiscal year ended June 30, 2023, the operating environment continued to be disrupted by the impact of the COVID-19 pandemic.

Most notably, the pace of recovery in Asia travel retail and mainland China was slower than anticipated.

In Hainan, prolonged store closures initially presented a headwind and, thereafter, low levels of conversion occurred when travel resumed.

This was compounded by inventory tightening by certain retailers.

In Korea, the travel retail business slowed during the transition to post-COVID-19 regulations.

In addition, the slower than anticipated resumption of international flights, granting of visas, and organized group tours further challenged the Asia travel retail recovery.

As a result, our Asia travel retail business was challenged throughout the fiscal year by the slower than anticipated recovery.

In mainland China, our performance in the first half of fiscal 2023 was hindered by low retail traffic as a result of COVID-19-related restrictions and the rise in COVID-19 cases.

Elsewhere, the recovery from the COVID-19 pandemic progressed across markets globally over the course of the fiscal year as restrictions lifted.

In the West, our recovery from the pandemic continued with net sales growth in many markets in Europe, the Middle East & Africa and in Latin America.

In Asia/Pacific, certain of our markets emerged strongly into recovery across the fiscal year, to deliver net sales growth throughout the region.

In the United States, net sales was unfavorably impacted by the slower than anticipated pace of our improvement at retail and the tightening of inventory in certain retailers in the first half of fiscal 2023 due to inflationary pressures and recession concerns.

Finally, our business was also pressured by the strong U.S dollar, inflation and recession concerns globally.

During fiscal 2023, net sales decreased 10%, reflecting the impacts noted above.

• Our skin care net sales declined 17%, including the unfavorable impact of foreign currency translation of 3%, driven by declines from Estée Lauder, La Mer and Dr.Jart+, primarily reflecting the challenges in our Asia travel retail business throughout the year, as previously discussed.

Partially offsetting these declines was growth in every geographic region from The Ordinary, reflecting the success of hero products and new product launches, and from M·A·C, driven by the launch of the Hyper Real line of products.

• Our makeup net sales decreased 3%, primarily due to the unfavorable impact of foreign currency translation of 4%.

Net sales declines from Estée Lauder, TOM FORD and La Mer, primarily reflect the challenges in Asia travel retail throughout the year and in mainland China in the first half of the fiscal year, as previously discussed, were partially offset by higher net sales from M·A·C, primarily driven by the recognition of the previously deferred revenue due to changes to the BACK-To-M·A·C take back program, and Clinique.

• Our fragrance net sales remained virtually flat as growth driven by Estée Lauder, Le Labo, TOM FORD, Clinique, and Kilian Paris was offset by the impact of the license terminations effective June 30, 2022 related to certain of our designer fragrances of 9% and the unfavorable impact of foreign currency translation of 4%.

• Our hair care net sales increased 3%, driven by higher net sales from The Ordinary reflecting the recent launch of hair care products by the brand, partially offset by the unfavorable impact of foreign currency translation of 3%.

We also leverage consumer analytics and insights by deploying our brands to grow sales and pursue profitable opportunities.

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

• Our skin care net sales declined 4% in fiscal 2024, driven by declines from Estée Lauder, Clinique and Dr.Jart+.

The decrease in net sales from Estée Lauder, Clinique and Dr.Jart+ was primarily driven by declines in mainland China and in our Asia travel retail business.

In mainland China, net sales declined, primarily driven by ongoing softness in overall prestige beauty.

Asia travel retail net sales declined, driven by a decline in the first half of fiscal 2024, primarily due to actions that we and our retailers took to reset inventory levels, in part in response to changes in government policies that began in the second half of fiscal 2023, as well as lower conversion.

The net sales decrease in Asia travel retail for Estée Lauder was partially offset by the return to growth in the second half of fiscal 2024 primarily driven by a favorable comparison to the prior-year period due to the aforementioned changes in government policies as well as higher shipments.

Also contributing to the net sales decrease from Dr.Jart+ was lower demand.

These decreases were partially offset by higher net sales from La Mer and The Ordinary.

• Our makeup net sales decreased slightly in fiscal 2024, primarily driven by lower net sales from M·A·C, reflecting the unfavorable year-over-year impact resulting from the recognition of previously deferred revenue due to changes to the BACK 2 M·A·C take-back program during fiscal 2023, and to a lesser extent, TOM FORD and La Mer, partially offset by higher net sales from Clinique.

• Our fragrance net sales increased slightly in fiscal 2024, primarily driven by growth in Le Labo and Jo Malone London, partially offset by lower net sales from Estée Lauder and the unfavorable year-over-year impact of residual net sales in fiscal 2023 related to the terminations of certain of our designer fragrance licenses effective June 30, 2022.

• Our hair care net sales decreased 4% in fiscal 2024, driven by lower net sales from Aveda due to declines in North America, primarily reflecting softness in the salon channel and our direct-to-consumer business.

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

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

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

• Net sales in The Americas decreased 2%, primarily driven by a decrease in the United States, reflecting the slower than anticipated pace of our improvement at retail, the tightening of inventory from certain of our retailers during the first half of fiscal 2023 and the impact of the license terminations related to certain of our designer fragrances.

Partially offsetting this decrease in The Americas was an increase in net sales in Latin America, led by Brazil and Mexico, driven by growth in makeup, which reflected new product launches and successful performance during key shopping moments.

• Net sales in Europe, the Middle East & Africa decreased 19%, including the unfavorable impact of foreign currency translation of 3%, driven primarily by lower net sales from our travel retail business reflecting the challenges in our Asia travel retail business as previously discussed.

• Net sales in Asia/Pacific decreased 4%, driven by the unfavorable impact of foreign currency translation of 8% and the challenges stemming from the COVID-19 pandemic, led by our Dr.Jart+ travel retail business in Korea, partially offset by the increase in net sales in Hong Kong SAR and Macau SAR and Southeast Asia, reflecting the continued COVID-19 recovery and successful brand activations and new product launches in Hong Kong SAR and Macau SAR.

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

• Net sales in The Americas increased slightly in fiscal 2024, primarily driven by higher net sales in Mexico, Brazil and, to a lesser extent, the United States.

The increase in net sales from Mexico and Brazil was primarily driven by growth in makeup, led by M·A·C, as well as growth in skin care and fragrance.

Net sales in the United States increased slightly, primarily reflecting incremental royalty revenue associated with the fiscal 2023 fourth quarter acquisition of the TOM FORD brand and higher net sales in fragrance, led by our luxury fragrances, partially offset by a decline in makeup reflecting the unfavorable year-over-year impact resulting from the recognition of previously deferred revenue due to changes to the BACK 2 M·A·C take-back program in fiscal 2023, and to a lesser extent, decreases in hair care and skin care.

• Net sales in Europe, the Middle East & Africa decreased slightly in fiscal 2024, primarily reflecting lower net sales from our Asia travel retail business.

The net sales decrease in Asia travel retail was partially offset by the return to growth in the second half of fiscal 2024 primarily driven by a favorable comparison to the prior-year period due to the aforementioned changes in government policies as well as higher shipments.

Partially offsetting the decrease in Europe, the Middle East & Africa were higher net sales in the United Kingdom, the Nordic countries and Germany.

• Net sales in Asia/Pacific decreased 6% in fiscal 2024, reflecting lower net sales from mainland China, and to a lesser extent Korea, partially offset by an increase in net sales in Hong Kong SAR.

The decrease in net sales in mainland China was primarily driven by ongoing softness in overall prestige beauty.

The lower net sales in Korea were primarily due to lower demand in the Dr.Jart+ travel retail business in Korea.

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

We are expanding our brands in online and travel retail, which we believe will be higher growth channels in the long term.

We are expanding our brands locations as we continue to seek high-growth opportunities to reach new consumers in online, freestanding stores, specialty-multi and travel retail, which we believe will be higher growth channels in the long term.

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

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

While the Asia travel retail business continued to be pressured by the slower than anticipated recovery from the COVID-19 pandemic, we realized recovery in The Americas and Europe, the Middle East & Africa and we continue to believe that global travel retail is a long-term growth opportunity.

While the Asia travel retail business continued to be pressured in fiscal 2024, we believe that global travel retail is a long-term growth opportunity.

Travel retail continues to be an important channel for brand building, particularly for those consumers who experience our brands for the first time while traveling.

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

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

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

• We continue to support e- and m-commerce sites of our own, collaborate with our retailers on their e-commerce sites, and sell through select third-party online malls.

As examples, we engage consumers at the airport through pop-up activations in non-traditional commercial areas, and we tailor communications and curated assortments for targeted consumer groups.

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

• We continue to support e-commerce sites of our own, collaborate with our retailers on their e-commerce sites, and sell through select third-party online malls.

We believe our success in the channel is a result of adapting our strategy to meet local market and cultural needs.

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

In fiscal 2023, we continued to further integrate social impact and sustainability into our strategy and business operations.

Areas of focus include climate and energy;

green chemistry and ingredient transparency;

inclusion, diversity and equity;

employee health and safety;

and social investments.

We are experiencing a more gradual and prolonged recovery from the COVID-19 pandemic, particularly in our Asia travel retail business.

In Asia travel retail, there have been, and are likely to continue to be, impacts on our business in the near-term, from the slower than anticipated depletion of elevated levels of retailer inventory and, therefore, lower replenishment orders, as well as the slower than anticipated resumption of international flights, granting of visas, and organized group tours.

Additionally, in Korea, the shipments to duty free retailers were pressured owing to the transition to post-COVID-19 regulations as traveling consumers gradually return.

In addition to impacting net sales and profitability, including any unfavorable impacts to our effective tax rate from changes to our geographical mix of earnings, 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.

potentially resulting in impairments).

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

We have experienced challenges within our business, including in our Asia travel retail business, and we expect volatility to continue.

We have experienced, and are expecting to continue to experience, ongoing declines in overall prestige beauty due to current consumer sentiment in mainland China, which is also expected to impact Asia travel retail.

In North America, we are experiencing ongoing competitive pressures along with a slowdown in prestige beauty growth.

We also expect further business disruption in Israel and other parts of the Middle East.

Net sales from Israel and the Middle East accounted for approximately 2% of consolidated net sales in each of fiscal 2023 and fiscal 2024.

These challenges are collectively expected to impact net sales and profitability, including impacts to our effective tax rate from changes to our geographical mix of earnings.

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

Accordingly, our long-term strategy has numerous initiatives across geographic regions, product categories, brands, channels of distribution and functions designed to grow our sales, provide cost efficiencies, leverage our strengths and make us more productive and profitable.

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social and political issues;

competitive pressures;

regulatory matters, including the imposition of tariffs and sanctions;

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and global security issues.

For example, the strengthening of the U.S.

dollar could negatively impact results within Europe, the Middle East & Africa due to pricing pressures on our retail customers and consumers in key international travel retail locations.

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

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

We are also mindful of inflationary pressures on our cost base and are monitoring the impact on consumer preferences.

As the invasion of Ukraine continues and international sanctions evolve, we have scaled down our operations in Russia.

We expect to continue selling a limited selection of products to 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 2023, our net sales 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.

On a broader perspective, there could be additional negative impacts to our net sales, earnings, assets and cash flows from such uncertainties.

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

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, 2023, 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 in Asia travel retail and mainland 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 some of these 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.

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

We are continuing to monitor these and other risks that may affect our business.

A decline in net sales and profitability may adversely impact the goodwill and other intangible assets associated with our brands, as well as long-lived assets, potentially resulting in impairments.

In December 2021, the Organization for Economic Cooperation and Development (“OECD”) issued "Pillar Two" Global Anti-Base Erosion model rules for countries to enact into domestic law that would establish a 15% global minimum tax applied on a country-by-country basis for multinational companies.

Certain countries have enacted or are expected to enact legislation incorporating the global minimum tax, which will be effective for us beginning in fiscal 2025.

We are continuing to evaluate the potential impact of such newly enacted legislation and we anticipate an increase to our global effective tax rate as a result of these changes.

Cybersecurity Incident Disclosed in July 2023

As previously disclosed on July 18, 2023, we identified a cybersecurity incident in which an unauthorized third party gained access to some of our systems.

After becoming aware of the incident, we proactively took down some of our systems to help secure our business operations and subsequently brought back online core systems within days.

While the response to the incident resulted in some disruptions to our business operations, most notably general corporate activities and order processing, our production and sales operations were minimally impacted.

Our investigation into the systems and the unauthorized access is substantially complete.

We determined that the unauthorized third party obtained some data from our systems.

We are continuing to work to understand the nature and scope of the data obtained, and can confirm, based on the investigation to date, that the data obtained includes some consumer data (such as names, contact information, and dates of birth).

We took steps, and continue to take steps, to enhance the security of our systems.

We are also continuing to coordinate with law enforcement authorities.

We have provided and will continue to provide notification to governmental authorities in certain jurisdictions and we also will notify affected individuals where required by law.

Based on the information available to date, we believe the incident is contained.

Based on this information, the incident is not expected to have a material impact on net sales and is expected to be dilutive approximately $.07 to earnings per share for the fiscal 2024 first quarter and full year.

Post-COVID Business Acceleration Program

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

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

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

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

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

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

We approved specific initiatives under the PCBA Program through fiscal 2022 and substantially completed those initiatives through fiscal 2023.

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

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

As initially disclosed on July 18, 2023, we identified a cybersecurity incident in which an unauthorized third party gained access to some of our systems.

Our investigation into the cybersecurity incident is complete.

We determined that the unauthorized third party obtained some data from our systems, including consumer and employee data.

We continue to take steps to enhance the security of our systems and coordinate with law enforcement authorities.

We provided notification to governmental authorities in certain jurisdictions and also notified affected individuals where required by law.

The incident did not have a material impact on net sales and was $.07 dilutive to earnings per common share for the year ended June 30, 2024, after reflecting the benefit of insurance recoveries received in fiscal 2024.

Restructuring Program Component of the Profit Recovery and Growth Plan

As previously communicated on November 1, 2023, we launched a Profit Recovery Plan, now known as the Profit Recovery and Growth Plan ("PRGP"), to help progressively rebuild our profit margins in fiscal years 2025 and 2026.

The PRGP is focused on rebuilding stronger, more sustainable profitability, supporting sales growth acceleration and increasing speed and agility.

The plan is designed to improve gross margin, lower the cost base and reduce overhead expenses, while increasing investments in key consumer-facing activities.

Upon completion of this plan, we expect to have improved our gross margin and expense base to drive greater operating leverage for the future.

As a component of the PRGP, on February 5, 2024, we announced a two-year restructuring program.

The restructuring program’s main focus includes the reorganization and rightsizing of certain areas of our business as well as simplification and acceleration of processes.

We committed to this course of action on February 1, 2024.

In connection with the restructuring program, as of June 30, 2024, we estimate a net reduction in the range of approximately 1,800 to 3,000 positions globally, which is about 3-5% of our positions including temporary and part-time employees as of June 30, 2023.

This reduction takes into account the elimination of some positions as well as retraining and redeployment of certain employees in select areas.

We plan to substantially complete specific initiatives under the restructuring program through fiscal 2026.

We expect that the restructuring program will result in restructuring and other charges totaling between $500 million and $700 million, before taxes, consisting of employee-related costs, contract terminations, asset write-offs and other costs associated with implementing these initiatives.

Once fully implemented, we expect the restructuring program to yield annual target gross benefits of between $350 million and $500 million, before taxes, a portion of which is expected to be reinvested in consumer-facing activities.

The net benefits of the PRGP, which includes the restructuring program, are expected to be between $1,100 million and $1,400 million.

Further information about the Restructuring Program Component of the Profit Recovery and Growth Plan, is described in Notes to Consolidated Financial Statements, Note 8 – Charges Associated with Restructuring and Other Activities herein.

Impairment Analysis

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

During the fiscal 2023 second quarter, given the lower-than-expected results in the overall business, we revised 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 revised 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.

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 trademark impairment charges for fiscal 2023 and the remaining carrying values as of June 30, 2023, for each reporting unit, are as follows:

Impairment Charges Carrying Value

(In millions) Year Ended

June 30, 2023 As of June 30, 2023

Reporting Unit Geographic Region Trademarks Goodwill Trademarks Goodwill

Smashbox The Americas $ 21 $ — $ — $ —

Dr.Jart+ Asia/Pacific 100 — 325 304

Too Faced The Americas 86 — 186 13

Total $ 207 $ — $ 511 $ 317

The impairment charges for fiscal 2023 were reflected in the skin care product category for Dr.Jart+ and the makeup product category for Smashbox and Too Faced.

Based on our annual goodwill impairment testing as of April 1, 2023, the fair values of all reporting units, which were determined based on qualitative or quantitative assessments, with material goodwill were substantially in excess of their respective carrying values.

Based on our annual other indefinite-lived intangible asset impairment testing as of April 1, 2023, the estimated fair value of the Dr.Jart+ and Too Faced trademarks exceeded their carrying values by 12% and 14%, respectively.

For the Dr.Jart+ and Too Faced trademarks, 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 75 basis points for Dr.Jart+ and 100 basis points for Too Faced in the weighted average cost of capital, would have caused the carrying value of these trademarks 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 anticipated recovery from the impacts of COVID-19, the success of future new product launches, ability to secure strategic price increases, 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.

Based on our annual goodwill and other indefinite-lived intangible asset impairment testing as of April 1, 2024, we determined that the carrying value of the Dr.Jart+ reporting unit and trademark exceeded their estimated fair values.

Given the lower-than-expected growth within key geographic regions, the reporting unit has made a strategic shift in its operating plan to exit the travel retail channel.

This revised strategy also includes increased direct investment in other areas of the business, including in China, to support the brand’s future growth.

As a result of these changes in strategy, we made revisions to the internal forecasts relating to the Dr.Jart+ reporting unit which were finalized and approved in the fiscal 2024 fourth quarter, and reflected in the goodwill and other indefinite-lived intangible asset impairment testing as of April 1, 2024.

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

We concluded that the carrying value of the trademark intangible asset exceeded its estimated fair value, which was determined utilizing the relief-from-royalty method to determine discounted projected future cash flows, and recorded an impairment charge of $180 million.

We then performed a recoverability analysis of the Dr.Jart+ long-lived asset group and, based on the estimated undiscounted cash flows of the asset group, concluded that the carrying amount of the long-lived assets were recoverable.

After adjusting the carrying value of the trademark, we completed a quantitative impairment test for goodwill.

As the carrying value of the reporting unit exceeded its estimated fair value, we recorded a goodwill impairment charge of $291 million.

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

The significant assumptions used in these approaches include revenue growth rates and profit margins, terminal value, weighted average cost of capital used to discount future cash flows, comparable market multiples for the reporting unit, and royalty rate for the trademark.

The most significant unobservable input used to estimate the fair value of the reporting unit and trademark intangible asset was the weighted-average cost of capital, which was 10.5%.

A summary of the impairment charges for the twelve months ended June 30, 2024 and the remaining trademark and goodwill carrying values as of June 30, 2024 are as follows:

Impairment Charges

Carrying Value

(In millions)

Twelve Months Ended

June 30, 2024

As of June 30, 2024

Reporting Unit

Geographic Region

$ 180 $ 291 $ 129 $ —

The impairment charges for the twelve months ended June 30, 2024 were reflected in the skin care product category.

Based on our annual goodwill impairment testing as of April 1, 2024, the estimated fair values of all reporting units, which were determined based on qualitative or quantitative assessments, with material goodwill were substantially in excess of their respective carrying values, with the exception of the Dr.Jart+ reporting unit, which we recorded an impairment charge of $291 million related to the Dr.Jart+ goodwill balance reducing the carrying value of goodwill to zero.

Based on our annual other indefinite-lived intangible asset impairment testing as of April 1, 2024, the estimated fair value of the Dr.Jart+ trademark was equal to its carrying value subsequent to the impairment charges taken in the fiscal 2024 fourth quarter.

The estimated fair value of the Too Faced trademark approximated its carrying value of $186 million and the estimated fair value of the TOM FORD trademark exceeded its carrying value of $2,578 million by 3%.

For the TOM FORD trademark, if all other assumptions are held constant, a decrease of 4% in the estimated future net sales, inclusive of the terminal value, or an increase of 20 basis points in the weighted average cost of capital, would have caused the carrying value of the trademark to approximate its estimated 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 success of future new product launches, the ability to secure strategic price increases, 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 where the reporting units operate, resulting changes in the key assumptions could negatively impact the estimated fair value of the reporting units and their respective trademarks.

This could potentially lead to recognizing additional impairment charges in the future.

For additional information, see Item 8.

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Fiscal 2023 as Compared with Fiscal 2022

Except as disclosed herein, see Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023 for the fiscal 2023 to fiscal 2022 comparative discussion.

9 unchanged sentences

GAAP measures.

Reported net sales decreased in fiscal 2023, driven by lower net sales from the skin care and makeup product categories, slightly offset by higher net sales in the hair care product category.

Fragrance net sales were virtually flat.

Reported net sales decreased in fiscal 2023, reflecting lower net sales from all geographic regions.

During fiscal 2023, our business was challenged by the slower than anticipated recovery from the COVID-19 pandemic, including restrictions in mainland China and the rising number of COVID-19 cases earlier in the fiscal year.

This impacted our business in Asia travel retail, including the tightening of inventory by certain of our retailers, as well as the low levels of conversion when travel resumed.

This resulted in lower product shipments, compounded by the impact of retailers continuing to reduce inventory.

In mainland China, the aforementioned restrictions earlier in the fiscal year negatively impacted our business, however, lower COVID-19 related restrictions in the second half of fiscal 2023, as compared to the second half of fiscal 2022, resulted in increased net sales in the second half of fiscal 2023.

Reported net sales decreased in fiscal 2024, primarily reflecting a decrease in skin care, and to a lesser extent, decreases in makeup and hair care, partially offset by an increase in fragrance.

The decrease in skin care net sales was primarily driven by lower net sales from Estée Lauder, Clinique and Dr.Jart+, partially offset by higher net sales from La Mer and The Ordinary.

By region, reported net sales decreased in fiscal 2024, primarily reflecting lower net sales in Asia/Pacific, and to a lesser extent, lower net sales in Europe, the Middle East & Africa, partially offset by an increase in net sales in The Americas.

The decrease in net sales in Asia/Pacific was primarily driven by lower net sales from mainland China, reflecting ongoing softness in overall prestige beauty, partially offset by higher net sales in Hong Kong SAR.

The fiscal 2024 reported net sales decrease was impacted by approximately $105 million of unfavorable foreign currency translation.

Reported net sales decreased 10% in fiscal 2023, driven by the decrease from volume of 7%, the unfavorable impact from foreign currency translation of 4% and the net impact from acquisitions, divestitures and brand closures of 1%.

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

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.

Reported net sales decreased 2% in fiscal 2024, driven by the decrease from volume of 8% and the unfavorable impact from foreign currency translation of 1%.

Partially offsetting these decreases was an increase from pricing of 7%, due to the favorable impact from strategic pricing actions and changes in mix.

Returns 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 a Company-wide initiative to redesign, resize and reorganize select areas of the business.

Accordingly, the following discussions of Net sales by Product Categories and Geographic Regions exclude the fiscal 2024 and fiscal 2023 impacts of returns associated with restructuring and other activities of approximately $1 million and $27 million, respectively.

9 unchanged sentences

GAAP measures.

Reported skin care net sales decreased in fiscal 2023, primarily driven by lower net sales from Estée Lauder, La Mer, Dr.Jart+, Clinique and Origins, combined, of approximately $1,830 million, that were mostly attributable to the aforementioned challenges in Asia travel retail.

Partially offsetting these decreases in skin care net sales in fiscal 2023 were higher net sales from The Ordinary and M·A·C, combined, of approximately $133 million.

The increase in net sales from The Ordinary was driven by growth in every geographic region, reflecting success of hero products and new product launches.

The increase in net sales from M·A·C was primarily driven by the fiscal 2023 launch of the Hyper Real line of products.

The skin care net sales decrease was impacted by approximately $337 million of unfavorable foreign currency translation.

Reported skin care net sales decreased in fiscal 2024, reflecting lower net sales from Estée Lauder, Clinique and Dr.Jart+, combined, of approximately $514 million, primarily driven by declines in mainland China and in our Asia travel retail business.

In mainland China, net sales declined, primarily driven by ongoing softness in overall prestige beauty.

Also contributing to the net sales decrease in Dr.Jart+ was lower demand.

Partially offsetting these decreases in skin care net sales for fiscal 2024 were higher net sales from La Mer and The Ordinary, combined, of approximately $267 million.

Net sales from La Mer increased, primarily driven by the success of hero products.

The increase in net sales from The Ordinary was driven by growth in every geographic region, reflecting new product launches, continued success of hero products, and targeted expanded consumer reach.

Skin care net sales were impacted by approximately $79 million of unfavorable foreign currency translation.

Reported skin care net sales decreased 4% in fiscal 2024, driven by the decrease from volume of 11% and the unfavorable impact from foreign currency translation of 1%.

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

Partially offsetting these decreases was an increase from pricing of 8%, due to the favorable impact from strategic pricing actions and changes in mix.

Year Ended June 30

7 unchanged sentences

GAAP measures.

Reported makeup net sales decreased in fiscal 2023, primarily driven by lower net sales from Estée Lauder, TOM FORD and La Mer, combined, of approximately $271 million, primarily reflecting the aforementioned challenges in Asia travel retail and mainland China, as well as the unfavorable impacts of foreign currency translation.

Partially offsetting these decreases in makeup net sales in fiscal 2023 was an increase in net sales from M·A·C and Clinique, combined, of approximately $114 million.

The increase in net sales from M·A·C was driven by the recognition of previously deferred revenue due to changes to the BACK-To-M·A·C take back program, as well as growth in the face, lip, and eye subcategories.

Net sales from Clinique increased, benefiting from solid performance in the lip, face and eye subcategories.

The makeup net sales decrease was impacted by approximately $166 million of unfavorable foreign currency translation.

Reported makeup net sales decreased 3% in fiscal 2023, driven by the unfavorable impact from foreign currency translation of 4% and the decrease from volume of 3%.

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

Reported makeup net sales decreased slightly in fiscal 2024, reflecting lower net sales primarily from M·A·C, and to a lesser extent, TOM FORD and La Mer, combined, of approximately $127 million.

Net sales from M·A·C decreased, primarily due to the unfavorable year-over-year impact resulting from the recognition of previously deferred revenue due to changes to the BACK 2 M·A·C take-back program in fiscal 2023 and the net impact of phasing out select products in preparation for new product launches in fiscal 2024.

Net sales from TOM FORD decreased, primarily driven by lower net sales from the lip subcategory.

The decrease in net sales from La Mer was primarily driven by a decline in our Asia travel retail business, reflecting actions that we and our retailers took to reset inventory levels, in part in response to changes in government policies in the second half of fiscal 2023, and lower conversion, as well as the impact of rationalizing product assortment within travel retail.

Partially offsetting the decrease in makeup net sales were higher net sales from Clinique, primarily driven by the success of hero products and targeted expanded consumer reach.

Makeup net sales were impacted by approximately $14 million of unfavorable foreign currency translation.

Reported makeup net sales decreased 1% in fiscal 2024, driven by the decrease from volume of 6%, partially offset by an increase from pricing of 5%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix.

Year Ended June 30

7 unchanged sentences

GAAP measures.

Reported fragrance net sales remained virtually flat in fiscal 2023, driven by higher net sales from Estée Lauder, Le Labo, TOM FORD, Clinique, and Kilian Paris, combined, of approximately $261 million.

Net sales from Estée Lauder increased, reflecting a successful campaign for Beautiful Magnolia and successful performance during holiday and key shopping moments.

Net sales from Le Labo increased, reflecting the continued success of hero product franchises, targeted expanded consumer reach, successful performance during holiday and key shopping moments and new product launches.

The increase in net sales from TOM FORD reflected the continued success of Signature and Private Blend fragrances, expanded distribution, new product launches and successful performance during holiday and key shopping moments.

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

Net sales from Kilian Paris increased, reflecting new product launches and expanded distribution.

Offsetting these increases in fragrance net sales was 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 $261 million.

The decrease in net sales from Jo Malone London primarily reflected the unfavorable impact of foreign currency translation.

Fragrance net sales was impacted by approximately $108 million of unfavorable foreign currency translation.

Reported fragrance net sales remained virtually flat in fiscal 2023, driven by the increase in 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.

Offsetting these increases were the impact from the license terminations of certain of our designer fragrances of 9% and the unfavorable impact from foreign currency translation of 4%.

Reported fragrance net sales increased slightly in fiscal 2024, reflecting higher net sales from Le Labo and Jo Malone London, combined, of approximately $96 million.

Net sales from Le Labo increased in every geographic region, led by Asia/Pacific and primarily reflected growth of hero products, including the successful City Exclusive collection, targeted expanded consumer reach, including the brand's launch in mainland China during the fiscal 2023 fourth quarter, and new product launches.

Net sales from Jo Malone London increased, primarily driven by new product launches and the success of hero products.

Partially offsetting the increase in fragrance net sales was lower net sales from Estée Lauder, as well as the unfavorable year-over-year impact of residual net sales in fiscal 2023 related to the transition of licenses due to the termination of certain of our designer fragrance licenses effective June 30, 2022, combined, of approximately $83 million.

The decrease in net sales from Estée Lauder was driven by softer retail sales during holiday and key shopping moments and pressure in our Asia travel retail business that led to lower shipments for replenishment orders compared to the prior year, as well as lower net sales from new product innovation.

Fragrance net sales were impacted by approximately $12 million of unfavorable foreign currency translation.

Reported fragrance net sales increased 1% in fiscal 2024, driven by an increase from pricing of 6%, due to the favorable impact from strategic pricing actions and changes in mix.

This increase was partially offset by the decrease from volume of 4%.

Year Ended June 30

7 unchanged sentences

GAAP measures.

Reported hair care net sales increased in fiscal 2023, driven by higher net sales from The Ordinary due to the recent launch of hair care products.

The hair care net sales increase was impacted by approximately $16 million of unfavorable foreign currency translation.

Reported hair care net sales increased 3% in fiscal 2023, driven by an increase from pricing of 5%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix, and the increase in volume of 1%.

Partially offsetting these increases was the unfavorable impact from foreign currency translation of 3%.

Reported hair care net sales decreased in fiscal 2024, driven by lower net sales from Aveda, due to declines in North America, primarily reflecting softness in the salon channel and our direct-to-consumer business.

Reported hair care net sales decreased 4% in fiscal 2024, driven by the decrease from volume of 11%, partially offset by an increase from pricing of 7%, due to the favorable impact from strategic pricing actions and changes in mix.

Geographic Regions

9 unchanged sentences

GAAP measures.

Reported net sales in The Americas decreased in fiscal 2023, primarily driven by a decrease in net sales in the United States of approximately $133 million, reflecting the slower than anticipated pace of our improvement at retail, the tightening of inventory from certain of our retailers in the first half of the fiscal year and the impact of the license terminations related to certain of our designer fragrances.

Partially offsetting this decrease in The Americas in fiscal 2023 was an increase in net sales in Latin America of approximately $51 million, led by Brazil and Mexico, driven by growth in makeup, which reflected new product launches and successful performance during key shopping moments.

The net sales decrease in The Americas included approximately $11 million of favorable foreign currency translation.

Reported net sales in The Americas decreased 2% in fiscal 2023, driven by the decrease from volume of 4% and the net impact from acquisitions, divestitures and brand closures of 2%.

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

Reported net sales in The Americas increased slightly in fiscal 2024, primarily reflecting higher net sales in Mexico, Brazil, and, to a lesser extent, the United States, combined, of approximately $57 million.

The increase in net sales in Mexico and Brazil was primarily driven by growth in makeup, led by M·A·C, reflecting successful performance during key shopping moments and new product launches, as well as growth in skin care and fragrance.

In the United States, net sales increased slightly, primarily driven by incremental royalty revenue associated with the fiscal 2023 fourth quarter acquisition of the TOM FORD brand and higher net sales in fragrance, led by our luxury fragrances, partially offset by a decline in makeup reflecting the unfavorable year-over-year impact resulting from the recognition of previously deferred revenue due to changes to the BACK 2 M·A·C take-back program in fiscal 2023, and to a lesser extent, decreases in hair care and skin care.

Reported net sales in The Americas included approximately $4 million of unfavorable foreign currency translation.

Reported net sales in The Americas increased 1% in fiscal 2024, driven by an increase from pricing of 2% due to the favorable impact of strategic pricing actions, partially offset by changes in mix, and the impact from the royalty revenue from the fiscal 2023 fourth quarter acquisition of the TOM FORD brand of 1%.

These increases were partially offset by the decrease from volume of 2%.

Europe, the Middle East & Africa

8 unchanged sentences

GAAP measures.

Reported net sales decreased in Europe, the Middle East & Africa in fiscal 2023, primarily driven by lower net sales from our travel retail business, and to a significantly lesser extent, Russia and the United Kingdom, combined, of approximately $1,551 million.

The decrease in net sales from our travel retail business reflects the aforementioned challenges in Asia travel retail.

Net sales from Russia decreased in fiscal 2023, as we sold a limited selection of products to certain retailers, and completed the closure of all of our freestanding stores during the first half of fiscal 2023.

The decrease in net sales from the United Kingdom in fiscal 2023 is driven by the unfavorable impact of foreign currency translation, partially offset by brick-and-mortar recovery, reflecting an increase in traffic, compared to the prior year.

Partially offsetting the decreases in net sales in Europe, the Middle East & Africa in fiscal 2023 were increases in net sales from Turkey and India, combined, of approximately $55 million.

The net sales increase in Turkey and India was driven by growth across all product categories.

The net sales decrease in Europe, the Middle East & Africa included approximately $205 million of unfavorable foreign currency translation.

Reported net sales in Europe, the Middle East & Africa decreased 19% in fiscal 2023, driven by the decrease from volume of 15%, the unfavorable impact from foreign currency translation of 3%, a decrease from pricing of 1%, due to the unfavorable impact from changes in mix, partially offset by strategic pricing actions, and the impact from the license terminations of certain of our designer fragrances of 1%.

Reported net sales decreased slightly in Europe, the Middle East & Africa in fiscal 2024, primarily reflecting lower net sales from our Asia travel retail business.

The net sales decrease in Asia travel retail was partially offset by the return to growth in the second half of fiscal 2024, primarily driven by a favorable comparison to the prior-year period due to the aforementioned changes in government policies as well as higher shipments.

Partially offsetting the decrease in Europe, the Middle East & Africa in fiscal 2024 was higher net sales in the United Kingdom, the Nordic countries and Germany, combined, of approximately $129 million.

The increase in net sales from the United Kingdom was primarily driven by the favorable impact from foreign currency translation and growth from The Ordinary, reflecting targeted expanded consumer reach.

The increase in net sales from the Nordic region was primarily driven by higher net sales across all major product categories, led by skin care.

The increase in net sales from Germany was primarily driven by higher net sales in makeup.

Reported net sales in Europe, the Middle East & Africa included approximately $54 million of favorable foreign currency translation.

Reported net sales in Europe, the Middle East & Africa decreased 1% in fiscal 2024, driven by the decrease from volume of 11%.

This decrease was partially offset by an increase from pricing of 9%, due to the favorable impact from strategic pricing actions and changes in mix, and the favorable impact from foreign currency translation of 1%.

Year Ended June 30

7 unchanged sentences

GAAP measures.

Reported net sales decreased in Asia/Pacific in fiscal 2023, primarily driven by the unfavorable impact of foreign currency of 8%.

The decrease in net sales, including the unfavorable impact of foreign currency, was primarily driven by mainland China and Korea, led by the Dr.Jart+ travel retail business in Korea, combined, of approximately $371 million.

The decrease in net sales in mainland China reflects the unfavorable impact of foreign currency translation as well as the aforementioned challenges in mainland China in the first half of the fiscal year.

The decrease in net sales in our Dr.Jart+ travel retail business in Korea reflects the aforementioned challenges in Asia travel retail.

Partially offsetting the net sales decrease in Asia/Pacific in fiscal 2023 were increases in Hong Kong SAR and Macau SAR and Southeast Asia, combined, of approximately $136 million, reflecting the continued COVID-19 recovery.

Also contributing to the net sales increase in Hong Kong SAR and Macau SAR were successful brand activations and new product launches.

Reported net sales decreased in Asia/Pacific in fiscal 2024, reflecting lower net sales from mainland China, and to a lesser extent Korea, combined, of approximately $401 million.

The decrease in net sales from mainland China was primarily driven by ongoing softness in overall prestige beauty.

The net sales decrease in Korea was led by the Dr.Jart+ travel retail business in Korea reflecting lower demand.

Partially offsetting the net sales decrease in Asia/Pacific in fiscal 2024 was an increase in net sales in Hong Kong SAR, primarily driven by the resumption of travel from mainland China to Hong Kong SAR due to the lifting of travel restrictions which began during the fiscal 2023 third quarter.

The net sales decrease in Asia/Pacific included approximately $155 million of unfavorable foreign currency translation.

Reported net sales in Asia/Pacific decreased 4% in fiscal 2023, driven by the unfavorable impact from foreign currency translation of 8%.

Partially offsetting this decrease was an increase from pricing of 2%, due to the favorable impact from strategic pricing actions, partially offset by changes in mix, and the increase in volume of 1%.

Gross margin in fiscal 2023 decreased to 71.3% as compared with 75.7% in fiscal 2022.

Reported net sales in Asia/Pacific decreased 6% in fiscal 2024, driven by the decrease from volume of 11% and the unfavorable impact from foreign currency translation of 3%.

Partially offsetting these decreases was an increase from pricing of 8%, due to the favorable impact from strategic pricing actions and changes in mix.

Gross margin in fiscal 2024 increased to 71.7% as compared with 71.3% in fiscal 2023.

Fiscal 2024 vs.

4 unchanged sentences

Foreign exchange transactions (75)

The decrease in gross margin in fiscal 2023 reflected unfavorable impacts from changes in our mix of business, higher manufacturing costs and other, and higher obsolescence charges.

The unfavorable impact from our mix of business is primarily driven by category mix, driven by the decrease in skin care net sales which typically have higher margins than other product categories, as well as higher costs associated with promotional items.

Manufacturing costs and other increased, driven by higher expenses within our inventory deferrals recognized during the current year reflecting lower production volume due to lower demand and higher costs for freight and material commodities.

The unfavorable impact from obsolescence charges is primarily due to excess inventory on hand and increased levels of inventory destruction and reserves driven by lower demand that resulted in lower product shipments.

Returns and charges associated with restructuring and other activities

As Reported Gross Margin Basis Point Variance

Non-GAAP Financial Measure Adjustments:

Returns and charges associated with restructuring and other activities

Non-GAAP Gross Margin Basis Point Variance

As reported, the increase in gross margin for fiscal 2024 reflected a favorable impact from our mix of business, reflecting the benefits of strategic pricing actions and changes in brand mix.

The increase in gross margin for fiscal 2024 was partially offset by unfavorable impacts from higher manufacturing costs and other, driven primarily by the under absorption of manufacturing variances due to lower production volumes in the second half of fiscal 2023, that was accounted for in the early part of fiscal 2024, as well as the impact from the recognition of reduced manufacturing volumes on our standard cost within cost of sales in the fiscal 2024 third quarter, partially offset by favorability in cost management, including freight and transportation costs.

OPERATING EXPENSES

4 unchanged sentences

Advertising, merchandising, sampling and product development (20)

Shipping (40)

Store operating costs (60)

1 unchanged sentence

Foreign exchange transactions 30

Subtotal (410)

Charges associated with restructuring and other activities (50)

Other intangible asset impairments 10

Changes in fair value of acquisition-related stock options (40)

The unfavorable change in operating expense margin in fiscal 2023 reflected unfavorable impacts relating to advertising, merchandising, sampling and product development, selling expenses, general and administrative expenses, and shipping expenses, driven by the decrease in net sales.

Operating expenses in total decreased $425 million in fiscal 2023, at a slower pace as compared to the decrease in net sales, as we continued to invest in our business, particularly in advertising, merchandising sampling and product development, as well as in selling, while also decreasing certain expenses through disciplined expense management.

Additionally, general and administrative expenses decreased in fiscal 2023, driven by lower employee incentive compensation.

Goodwill and other intangible asset impairments

As Reported Operating Expense Margin Basis Point Variance

Non-GAAP Financial Measure Adjustments:

Impact of restructuring and other activities

Goodwill and other intangible asset impairments

Non-GAAP Operating Expense Margin Basis Point Variance

Higher store operating costs and selling expenses in fiscal 2024 reflect our continued investments in our business including through targeted expanded consumer reach and increased demonstration expenses.

OPERATING RESULTS

6 unchanged sentences

Non-GAAP Financial Measure (1) :

% Change in operating income from the prior year 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 (48) % 14 %

% Change in operating income from the prior year adjusting for the impact of charges associated with restructuring and other activities, goodwill and other intangible asset impairments and the change in fair value of DECIEM acquisition-related stock options inclusive of payroll tax

(13) % (48) %

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

GAAP measures.

The reported operating margin for fiscal 2023 decreased from the prior year, primarily driven by the decreases in net sales, gross margin and operating expense margin, discussed above.

The reported operating margin for fiscal 2024 decreased from the prior year, primarily driven by the decreases in net sales and operating expense margin, partially offset by an increase in gross margin, as discussed above.

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

7 unchanged sentences

Non-GAAP Financial Measure (1) :

% Change in operating income from the prior year adjusting for the impact of other intangible asset impairments and the change in fair value of acquisition-related stock options (55) % (8) %

% Change in operating income from the prior year adjusting for the impact of goodwill and other intangible asset impairments and the change in fair value of DECIEM acquisition-related stock options inclusive of payroll tax

(12) % (53) %

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

GAAP measures.

Reported skin care operating income decreased in fiscal 2023 reflecting lower operating results from Estée Lauder, La Mer, Clinique and Origins, combined, of approximately $1,556 million, primarily driven by decreases in net sales, partially offset by disciplined advertising and promotional expense management, as well as an unfavorable year-over-year impact for the change in fair value of acquisition-related stock options of $75 million relating to the fiscal 2021 increase in our investment in DECIEM.

Also contributing to the decrease in skin care operating income from Estée Lauder, La Mer and Clinique was a higher cost of sales.

The increase in cost of sales from Estée Lauder was due in part to higher manufacturing costs and obsolescence charges.

The increase in cost of sales from La Mer was due in part to higher manufacturing costs and the increase in cost of sales from Clinique was due in part to higher costs for promotional items.

The decrease in operating income from Origins was also partially offset by a lower cost of sales due to the net sales decrease and lower selling expenses due to the closure of freestanding stores during fiscal 2023.

Partially offsetting the decrease in skin care operating income in fiscal 2023 was the favorable year-over-year impact of other intangible asset impairments related to Dr.Jart+ and GLAMGLOW of $141 million, combined, and lower employee incentive compensation compared to the prior year.

Reported skin care operating income decreased in fiscal 2024, reflecting lower operating results from Dr.Jart+, Estée Lauder and Clinique, combined, of approximately $580 million.

The decrease in operating income from Dr.Jart+ was primarily driven by the unfavorable year-over-year impact of goodwill and other intangible asset impairments of $371 million as well as a decrease in net sales.

Operating income from Estée Lauder and Clinique decreased, primarily driven by decreases in net sales, partially offset by disciplined advertising and promotional expense management and lower shipping expenses due to the decreases in net sales.

Partially offsetting the decrease in skin care operating income in fiscal 2024 was higher operating results from La Mer and The Ordinary, combined, of approximately $179 million.

The increase in operating income from La Mer was primarily driven by an increase in net sales and a decrease in cost of sales, partially offset by an increase in advertising and promotional expenses to support growth of the business as well as higher selling costs due to an increase in demonstration expenses compared to the prior year and targeted expanded consumer reach.

Operating income from The Ordinary increased, primarily driven by an increase in net sales and decrease in cost of sales due in part to the favorable impact from the shift of manufacturing production volume from third-party manufacturers to our own facilities, increased automation within such facilities, and lower obsolescence charges, partially offset by an increase in advertising and promotional activities and general and administrative expenses as the brand continues to invest and support the growth of the business.

Year Ended June 30

2 unchanged sentences

$ Change from prior year 114 (147)

% Change from prior year

100+% (100+)%

Non-GAAP Financial Measure (1) :

% Change in operating income from the prior year adjusting for the impact of other intangible asset impairments and the change in fair value of acquisition-related stock options (35) % 100+%

% Change in operating income from the prior year adjusting for the impact of other intangible asset impairments

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

GAAP measures.

Reported makeup operating income decreased in fiscal 2023, reflecting lower results from Estée Lauder, TOM FORD and La Mer, combined, of approximately $191 million, primarily driven by a decrease in net sales, as well as the fiscal 2023 second quarter other intangible asset impairments related to Too Faced and Smashbox of $107 million, combined.

The decrease in operating income from TOM FORD also reflected a higher cost of sales, due in part to higher manufacturing costs and higher obsolescence charges.

Also contributing to the decrease in operating income from La Mer was higher advertising and promotional activities, partially offset by a lower cost of sales due to lower net sales compared to the prior year.

Partially offsetting the decrease in operating income from Estée Lauder was disciplined advertising and promotional expense management.

Partially offsetting the decrease in makeup operating income in fiscal 2023 were higher results from M·A·C, primarily driven by the recognition of previously deferred revenue due to changes to the BACK-To-M·A·C take back program and lower store operating costs, partially offset by an increase in cost of sales, as well as lower employee incentive compensation compared to the prior year.

Reported makeup operating results increased for fiscal 2024, primarily driven by higher results from Clinique and Estée Lauder, combined, of approximately $108 million, and also reflecting the favorable year-over-year impact of other intangible asset impairments related to Too Faced and Smashbox of $107 million.

The increase in operating income from Clinique was primarily driven by an increase in net sales, partially offset by higher selling expenses due to increased demonstration costs compared to the prior year.

Operating income from Estée Lauder increased, primarily driven by disciplined advertising and promotional expense management and an increase in net sales.

Year Ended June 30

3 unchanged sentences

% Change from prior year (28) % (16) %

Reported fragrance operating income decreased in fiscal 2023, 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 $98 million.

The lower results from Jo Malone London were driven by a decrease in net sales, higher cost of sales, due, in part, to an increase in promotional items, and higher selling expenses due to increased staffing costs compared to the prior year.

Partially offsetting the decrease in fragrance operating income were higher results from Estée Lauder and Le Labo, combined, of approximately $83 million, driven by increases in net sales.

Also contributing to the increase in operating income from Estée Lauder was disciplined advertising and promotional expense management, partially offset by a higher cost of sales.

Partially offsetting the increase in operating income from Le Labo was higher advertising and promotional activities, higher selling expenses due to increased staffing costs compared to the prior year and higher store operating costs.

Also partially offsetting the decrease in fragrance operating income was lower employee incentive compensation compared to the prior year.

Reported fragrance operating income decreased in fiscal 2024, primarily driven by lower operating results from Clinique, Estée Lauder, and TOM FORD, combined, of approximately $47 million.

The decrease in operating income from Clinique was primarily driven by a decrease in net sales.

Operating income from Estée Lauder decreased, primarily driven by a decrease in net sales, partially offset by disciplined advertising and promotional expense management.

The decrease in operating income from TOM FORD was primarily driven by higher cost of sales, due in part to an increase in promotional items, higher selling expenses due to an increase in demonstration expenses compared to the prior year, higher advertising and promotional expenses and an increase in general and administrative expenses, as the brand continues to invest and support the growth of the business, partially offset by a decrease in royalty expense as a result of the fiscal 2023 fourth quarter acquisition of TOM FORD brand.

Year Ended June 30

3 unchanged sentences

% Change from prior year (44) % (29) %

Reported hair care operating results decreased in fiscal 2023, primarily driven by lower results from Aveda and Bumble and bumble, combined, of approximately $53 million.

The lower results from Aveda reflected a higher cost of sales, higher advertising and promotional activities to support the brand's expansion into mainland China during fiscal 2023 and key shopping moments and a decrease in net sales.

Operating results from Bumble and bumble decreased, primarily driven by higher cost of sales.

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

Reported hair care operating results decreased in fiscal 2024, primarily reflecting lower net sales, partially offset by disciplined advertising and promotional expense management.

Geographic Regions

5 unchanged sentences

Non-GAAP Financial Measure (1) :

% Change in operating income from the prior year adjusting for the impact of other intangible asset impairments and the change in fair value of acquisition-related stock options (95) % 60 %

% Change in operating income from the prior year adjusting for the impact of other intangible asset impairments and the change in fair value of DECIEM acquisition-related stock options inclusive of payroll tax

(14) % (95) %

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

GAAP measures.

Reported operating results decreased in The Americas in fiscal 2023, primarily reflecting lower operating results from North America of approximately $1,226 million.

The decrease in operating results in North America was primarily driven by the United States, reflecting lower intercompany royalty income of $670 million compared to the prior year, driven by a decrease in net sales in our travel retail business, higher cost of sales driven by higher manufacturing costs and obsolescence charges, a decrease in net sales, and the unfavorable year-over-year impact of other intangible asset impairments of $96 million.

Also contributing to the decrease in operating income in North America was the unfavorable year-over-year impact of the change in fair value of acquisition-related stock options of $77 million relating to the fiscal 2021 increase in our investment in DECIEM.

Reported operating results increased in The Americas in fiscal 2024, primarily reflecting higher operating results in Canada and the United States, combined, of approximately $89 million.

These operating results include the full-year true-up of charges among the Company’s geographic regions to reflect the updated value of investments in innovation centralized in The Americas region of $174 million, with a corresponding decrease in Europe, the Middle East & Africa of $131 million and Asia/Pacific of $43 million.

In Canada, the higher operating results were primarily driven by an increase in operating income from The Ordinary, reflecting the shift of the brand's manufacturing production volume from third-party manufacturers to our own facilities and increased automation.

In the United States, also contributing to the increase in operating results was the favorable year-over-year impact of other intangible asset impairments relating to Too Faced and Smashbox of $107 million during the fiscal 2023 second quarter.

Partially offsetting these increases was a decrease in intercompany royalty income of $55 million compared to the prior year, driven by a decrease in net sales in our travel retail business, an increase in stock-based compensation, primarily driven by the unfavorable year-over-year comparisons in the recognition of expenses, and adjustments related to our performance share units, as well as an increase in store operating costs and product development costs as we continue to invest in our business.

Europe, the Middle East & Africa

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% Change from prior year (1) % (38) %

Reported operating income decreased in Europe, the Middle East & Africa in fiscal 2023, primarily driven by lower results from our travel retail business, primarily driven by the decrease in net sales, partially offset by the associated decrease in intercompany royalty expense to The Americas of $670 million.

Non-GAAP Financial Measure (1) :

% Change in operating income from the prior year adjusting for the impact of the change in fair value of DECIEM acquisition-related stock options inclusive of payroll tax

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

GAAP measures.

Reported operating income in Europe, the Middle East & Africa decreased 1% in fiscal 2024, primarily reflecting lower operating results in Germany, the United Kingdom and in our travel retail business, combined, of approximately $72 million.

These operating results, as well the results for other countries in the region, include the full-year true-up of charges among the Company’s geographic regions to reflect the updated value of investments in innovation centralized in The Americas region resulting in lower operating income of $131 million, with a corresponding increase in operating income in The Americas.

In addition, the decrease in operating results from our travel retail business also reflected the decrease in net sales, partially offset by favorability in cost of sales, and a decrease in intercompany royalty expense to The Americas of $55 million driven by the decrease in net sales.

Partially offsetting these decreases in operating income in Europe, the Middle East & Africa for fiscal 2024, were higher results from the Balkans primarily driven by an increase in net sales.

Year Ended June 30

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Non-GAAP Financial Measure (1) :

% Change in operating income from the prior year adjusting for the impact of other intangible asset impairments (10) % 3 %

% Change in operating income from the prior year adjusting for the impact of goodwill and other intangible asset impairments

(25) % (10) %

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

GAAP measures.

Reported operating income increased in Asia/Pacific in fiscal 2023, primarily reflecting a favorable year-over-year impact of other intangible asset impairments of $130 million and higher results from Hong Kong SAR and Macau SAR and Southeast Asia, combined of approximately $67 million, primarily driven by an increase in net sales, partially offset by a higher cost of sales.

Partially offsetting the increase in operating income in Asia/Pacific in fiscal 2023 were lower operating results in mainland China, Korea and Japan, combined, of approximately $149 million.

The lower operating results in mainland China were driven by a decrease in net sales and an increase in cost of sales reflecting higher obsolescence charges and an increase in promotional items, partially offset by disciplined advertising and promotional expense management and lower selling costs compared to the prior year.

Operating income in Korea decreased, led by Dr.Jart+, due to decreases in net sales, partially offset by lower selling expenses and cost of sales.

Operating income in Japan decreased, driven by the decrease in net sales, partially offset by lower selling expenses.

Reported operating income decreased in Asia/Pacific in fiscal 2024, primarily driven by Korea, led by the Dr.Jart+ travel retail business in Korea, and lower results in mainland China, combined, of approximately $562 million.

The decrease in operating income from Korea, led by the Dr.Jart+ travel retail business in Korea, was primarily driven by the unfavorable year-over-year impact of goodwill and other intangible asset impairments relating to Dr.Jart+ of $371 million and an increase in cost of sales.

The decrease in operating income in mainland China was primarily driven by a decrease in net sales, partially offset by disciplined advertising and promotional expense management.

Included within the decrease for Korea above, as well as in other countries in Asia/Pacific, is the full-year true-up of charges among the Company’s geographic regions to reflect the updated value of investments in innovation centralized in The Americas region resulting in lower operating income of $43 million, with a corresponding increase in operating income in The Americas.

INTEREST AND INVESTMENT INCOME

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Interest income and investment income, net $ 167 $ 131

Interest expense increased in fiscal 2023, primarily reflecting a higher debt balance, due in part to the financing of our acquisition of the TOM FORD brand, including the issuance of commercial paper primarily in the second half of fiscal 2023, and the issuance of Senior Notes in May 2023 and higher interest rates compared to the prior year.

Interest expense increased for fiscal 2024, primarily reflecting a higher debt balance, due in part to the financing of our acquisition of the TOM FORD brand, including the issuance of Senior Notes in May 2023, as well as the issuance of Senior Notes in February 2024.

Also contributing to the increase in interest expense was higher interest rates compared to the prior year.

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

OTHER INCOME, NET

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

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

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

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

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

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

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

We remeasured the previously held equity method investment to its fair value of $913 million, resulting in the recognition of a gain of $848 million.

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

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

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

The accounting for the DECIEM business combination was finalized during the fiscal 2022 third quarter.

Financial Statements and Supplementary Data – Note 5 – Business and Asset Acquisitions for additional information.

PROVISION FOR INCOME TAXES

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federal, foreign, state and local income taxes.

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

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

The Tax Cuts and Jobs Act (the “TCJA”) included broad and complex changes to the U.S.

tax code that impacted our accounting and reporting for income taxes.

Financial Statements and Supplementary Data – Note 9 – Income Taxes for further discussion relating to the TCJA.

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

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

Year Ended June 30

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Effective rate for income taxes 31.0 % 26.5 %

(1) Excludes the net impact on the effective tax rates of charges associated with restructuring and other activities, other intangible asset impairments and changes in the fair value of acquisition-related stock options.

(1) Excludes the net impact on the effective tax rates of charges associated with restructuring and other activities, goodwill and other intangible asset impairments and changes in the fair value of DECIEM acquisition-related stock options inclusive of payroll tax.

The effective tax rate for fiscal 2024 increased approximately 1,930 basis points.

The increase was primarily attributable to a higher effective tax rate on the Company's foreign operations of approximately 720 basis points, due to the Company's geographical mix of earnings for fiscal 2023.

The increase was primarily attributable to the impact of nondeductible goodwill impairment charges associated with the our Dr.Jart+ reporting unit of approximately 790 basis points, as well as a higher effective tax rate on the our foreign operations of approximately 730 basis points, due to the our geographical mix of earnings for fiscal 2024, and an unfavorable impact associated with previously issued stock-based compensation of approximately 380 basis points.

NET EARNINGS ATTRIBUTABLE TO THE ESTÉE LAUDER COMPANIES INC.

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Non-GAAP Financial Measure (1) :

% Change in diluted net earnings per common share from the prior year 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 (52) % 12 %

% Change in diluted net earnings per common share from the prior year adjusting for the impact of charges associated with restructuring and other activities, goodwill and other intangible asset impairments and the change in fair value of DECIEM acquisition-related stock options inclusive of payroll tax.

(25) % (52) %

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

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

other intangible asset impairments;

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

goodwill and other intangible asset impairments;

the change in fair value of DECIEM acquisition-related stock options inclusive of payroll tax;

and the effects of foreign currency translation.

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Charges associated with restructuring and other activities 124 85 39

Other intangible asset impairments 207 241 (34)

Change in fair value of acquisition-related stock options 22 (55) 77

Goodwill and other intangible asset impairments

Change in fair value of DECIEM acquisition-related stock options inclusive of payroll tax

Operating income, as adjusted $ 1,588 $ 1,823 $ (235) (13) % (10) %

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Charges associated with restructuring and other activities .27 .18 .09

Other intangible asset impairments .44 .50 (.06)

Change in fair value of acquisition-related stock options (less portion attributable to redeemable noncontrolling interest) .05 (.12) .17

Goodwill and other intangible asset impairments

Change in fair value of DECIEM acquisition-related stock options inclusive of payroll tax (less portion attributable to redeemable noncontrolling interest)

Diluted net earnings per common share, as adjusted $ 2.59 $ 3.46 $ (.87) (25) % (22) %

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Total $ 15,608 $ 15,910 $ (302) $ 105 $ (197) (2) % (1) %

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:

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 goodwill and other intangible asset impairments and the change in fair value of DECIEM acquisition-related stock options inclusive of payroll tax:

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

Goodwill and other intangible asset impairments

Change in fair value of DECIEM acquisition-related stock options inclusive of payroll tax

Variance, as adjusted % Change, as reported % Change, as adjusted

Year Ended June 30

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To mitigate the risk of uninsured balances, we select financial institutions based on their credit ratings and financial strength, and we perform ongoing evaluations of these institutions to limit our concentration risk exposure.

During the fourth quarter of fiscal 2023, we temporarily reduced our holdings of bank deposits and increased our allocation of government money market funds, due to stresses in the global banking system.

During fiscal 2023, we temporarily reduced our holdings of bank deposits and increased our holdings of government money market funds, due to stresses in the global banking system.

During fiscal 2024, we have rebalanced our cash allocations, increasing our holdings of bank deposits and decreasing our holdings in government money market funds.

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

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

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

federal income tax.

As a result, we changed our indefinite reinvestment assertion related to certain foreign earnings.

As explained in further detail in Item 8.

Financial Statements and Supplementary Data – Note 9 – Income Taxes , during the fiscal 2023 fourth quarter, we changed our assertion regarding our ability and intent to indefinitely reinvest undistributed earnings from certain foreign subsidiaries.

During the fiscal 2023 fourth quarter, we changed our assertion regarding our ability and intent to indefinitely reinvest undistributed earnings from certain foreign subsidiaries.

We continue to analyze the indefinite reinvestment assertion on our remaining applicable foreign earnings.

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

As of August 11, 2023, our long-term debt is rated A+ with a negative outlook by Standard & Poor’s and A1 with a stable outlook by Moody’s.

As of August 12, 2024, our long-term debt is rated A with a negative outlook by Standard & Poor’s and A1 with a negative outlook by Moody’s.

Debt and Access to Liquidity

Total debt as a percent of total capitalization (excluding noncontrolling interests) increased to 59% at June 30, 2023 from 49% at June 30, 2022, primarily due to the increase in total debt, reflecting the financing of our acquisition of the TOM FORD brand, including the issuance of commercial paper primarily in the second half of fiscal 2023, and the issuance of Senior Notes in May 2023.

Total debt as a percent of total capitalization was 59% at June 30, 2024 and 2023.

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

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Net cash provided by (used for) financing activities $ (2,035) $ 1,590

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

The change in net cash flows used for investing activities was primarily driven by cash paid in connection with the acquisition of the TOM FORD brand during the fiscal 2023 fourth quarter and also reflects a favorable impact from the settlement of net investment hedges, which is offset by the unfavorable change in other accrued liabilities as discussed above.

The change in net cash flows provided by (used for) financing activities primarily reflected lower treasury stock purchases compared to the prior year, an increase in debt due to the issuance of Senior Notes in May 2023 and the issuance of commercial paper in the second half of fiscal 2023, due in part to finance our acquisition of the TOM FORD brand, partially offset by an increase in repayments of long-term debt.

The change in net cash flows provided by operating activities was primarily driven by a favorable change in working capital variances, reflecting a favorable change in inventory and promotional merchandise, other accrued and noncurrent liabilities, which includes the favorable impact from the settlement of foreign currency forward contracts not designated as hedging instruments compared to the prior year, and a favorable year-over-year impact in accounts payable, partially offset by lower earnings before tax, excluding non-cash items.

The change in net cash flows used for investing activities was primarily driven by a favorable year-over-year impact from the cash paid in connection with the acquisition of the TOM FORD brand during the fiscal 2023 fourth quarter, partially offset to a lesser extent, by an unfavorable impact from the settlement of net investment hedges compared to the prior year, for which there is a partially offsetting favorable impact related to foreign currency forward contracts not designated as hedging instruments that is reflected in working capital noted above.

The change in net cash flows provided by (used for) financing activities primarily reflected an unfavorable impact from the issuance and redemption of long-term debt compared to the prior year, repayments of commercial paper during fiscal 2024 as compared to the proceeds from the issuance of commercial paper in the prior year, and payments associated with the purchase of the remaining interest in DECIEM during the fiscal 2024 fourth quarter, partially offset by lower treasury stock repurchases compared to the prior year.

Management’s Discussion and Analysis of Financial Condition and Results of Operations – Financial Condition of the Company’s Annual Report on Form 10-K for the fiscal year ended June 30, 2023 for the fiscal 2023 to fiscal 2022 comparative discussions.

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Qualified Plan.

We expect to make a $50 million discretionary contribution to the U.S.

Qualified Plan in the first quarter of fiscal 2024.

As we continue to monitor the funded status, we may decide to make additional cash contributions to the U.S.

Qualified Plan or our post-retirement medical plan in the United States during fiscal 2024.

The following table summarizes actual and expected benefit payments and contributions for our other pension and post-retirement plans:

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

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

Financial Statements and Supplementary Data – Note 17 – Commitments and Contingencies .

Contractual Obligations

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For a discussion of foreign exchange risk management, see Item 8.

Financial Statements and Supplementary Data – Note 12 – Derivative Financial Instruments (Cash Flow Hedges, Net Investment Hedges) .

Financial Statements and Supplementary Data – Note 13 – Derivative Financial Instruments (Fair value hedges, Cash Flow Hedges, Net Investment Hedges) .

For a discussion of credit risk, see Item 8.

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A hypothetical 10% weakening of the U.S.

dollar against the foreign exchange rates for the currencies in our cross-currency swap contracts would have resulted in a net decrease in the fair value of our cross-currency swap contracts of approximately $49 million as of June 30, 2023.

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.

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These estimates and assumptions can be subjective and complex and, consequently, actual results could differ from those estimates.

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

Our critical accounting policies relate to Goodwill and Other Indefinite-lived Intangible Assets - Impairment Assessment, Income Taxes, and Asset Acquisition.

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

We consider accounting estimates to be critical if the accounting estimate both (i) involves a significant level of estimation uncertainty, and (ii) has had or is reasonably likely to have a material impact on the Company's financial condition or results of operations.

Our critical accounting policies relate to Goodwill and Other Indefinite-lived Intangible Assets - Impairment Assessment and Income Taxes.

Our management has discussed the selection of critical accounting policies and the effect of estimates with the Audit Committee of our Board of Directors.

Goodwill and Other Indefinite-lived Intangible Assets – Impairment Assessment

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Goodwill and other indefinite-lived intangible assets are not amortized.

When testing goodwill and other indefinite-lived intangible assets for impairment, we have the option of first performing a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test.

If necessary, we can perform a single step quantitative goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount and record an impairment charge for the amount that the carrying amount exceeds the fair value, up to the total amount of goodwill allocated to that reporting unit.

For fiscal 2023, we elected to perform the qualitative assessment for the goodwill in certain of our reporting units and other indefinite-lived intangible assets.

When testing goodwill for impairment, we have the option of first performing a qualitative assessment to determine whether it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test.

We use a single quantitative step when determining the subsequent measurement of goodwill by comparing the fair value of a reporting unit with its carrying amount and recording an impairment charge for the amount that the carrying amount exceeds the fair value, up to the total amount of goodwill allocated to that reporting unit.

When testing other indefinite-lived intangible assets for impairment, we also have the option of first performing a qualitative assessment to determine whether it is more-likely-than-not that the other indefinite-lived intangible asset is impaired as a basis for determining whether it is necessary to perform a quantitative test.

The quantitative impairment test for other indefinite-lived intangible assets encompasses calculating the fair value of an other indefinite-lived intangible asset and comparing the fair value to its carrying value.

If the carrying value exceeds the fair value, an impairment charge is recorded.

For fiscal 2024 and 2023, we elected to perform the qualitative assessment for the goodwill in certain of our reporting units and other indefinite-lived intangible assets.

This qualitative assessment included the review of certain macroeconomic factors and entity-specific qualitative factors to determine if it was more-likely-than-not that the fair values of its reporting units were below carrying value.

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In addition to these macroeconomic factors, among other things, we considered the reporting units’ current results and forecasts, any changes in the nature of the business, any significant legal, regulatory, contractual, political or other business climate factors, changes in the industry/competitive environment, changes in the composition or carrying amount of net assets and its intention to sell or dispose of a reporting unit or cease the use of a trademark.

For fiscal 2023, a quantitative assessment was performed for the goodwill in certain of our reporting units and other indefinite-lived intangible assets.

For fiscal 2024 and 2023, a quantitative assessment was performed for the goodwill in certain of our reporting units and other indefinite-lived intangible assets.

We engaged third-party valuation specialists and used industry accepted valuation models and criteria that were reviewed and approved by various levels of management.

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The significant assumptions used in this approach include revenue growth rates, terminal value, the weighted average cost of capital used to discount future cash flows and royalty rate.

For fiscal 2022, we elected to perform the quantitative assessment for the goodwill in each of its reporting units and indefinite-lived intangible assets.

We engaged a third-party valuation specialist and used industry accepted valuation models and criteria that were reviewed and approved by various levels of management.

To determine the estimated fair value of the reporting units, we used an equal weighting of the income and market approaches.

Under the income approach, we determined fair value using a discounted cash flow method, projecting future cash flows of each reporting unit, as well as a terminal value, and discounting such cash flows at a rate of return that reflected the relative risk of the cash flows.

Under the market approach, we utilized market multiples from publicly traded companies with similar operating and investment characteristics as the reporting unit.

The significant assumptions used in these two approaches include revenue growth rates and profit margins, terminal value, the weighted average cost of capital used to discount future cash flows and comparable market multiples.

To determine the estimated fair value of other indefinite-lived intangible assets, we used an income approach, specifically the relief-from-royalty method.

This method assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to obtain the rights to use the comparable asset.

The significant assumptions used in this approach include revenue growth rates, terminal value, the weighted average cost of capital used to discount future cash flows and royalty rate.

For further discussion of the methods used and factors considered in our estimates as part of the impairment testing for Goodwill and Other Indefinite-lived Intangible Assets, see Item 8.

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

Asset Acquisition

We recognize assets acquired in an asset acquisition based on the cost to the Company on a relative fair value basis, which includes transaction costs in addition to consideration transferred and liabilities assumed or issued as part of the transaction.

Neither goodwill nor bargain purchase gains are recognized in an asset acquisition;

any excess of consideration transferred over the fair value of the net assets acquired, or the opposite, is allocated to qualifying assets based on their relative fair values.

The determination of fair value, as well as the expected useful lives of certain assets acquired, requires management to make judgments and may involve the use of significant estimates, including assumptions with respect to estimated future cash flows and discount rates, among other things.

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

During fiscal 2023, we acquired 100% of the equity interests in 001 Del LLC (“001”) in exchange for $2,550 million in consideration (the “TOM FORD Acquisition”).

The TOM FORD Acquisition has been accounted for as an asset acquisition as the fair value of the gross assets acquired is concentrated in the value of the TOM FORD trademark intangible asset.

The acquisition of 001 included existing license relationships for certain uses of the brand name, which were modified, terminated or otherwise renegotiated in connection with the transaction.

The total cost of the asset acquisition is $2,578 million and was allocated to the TOM FORD trademark.

We engaged a third-party valuation specialist and used an income approach, specifically the relief-from-royalty method, to determine the fair value of the TOM FORD trademark.

This method assumes that, in lieu of ownership, a third party would be willing to pay a royalty in order to obtain the rights to use the comparable asset.

The significant assumptions used to estimate the fair value were revenue growth rates, terminal value, beauty royalty savings, the weighted average cost of capital used to discount future cash flows and royalty rates.

For further discussion of Business Combinations and Asset Acquisitions, see Item 8.

Financial Statements and Supplementary Data – Note 2 – Summary of Significant Accounting Policies , Note 5 – Business and Asset Acquisitions and Note 6 – Goodwill and Other Intangible Assets .

CAUTIONARY NOTE REGARDING FORWARD-LOOKING INFORMATION

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(10) changes in global or local conditions, including those due to volatility in the global credit and equity markets, natural or man-made disasters, real or perceived epidemics, supply chain challenges, inflation, or increased energy costs, that could affect consumer purchasing, the willingness or ability of consumers to travel and/or purchase our products while traveling, the financial strength of our customers, suppliers or other contract counterparties, our operations, the cost and availability of capital which we may need for new equipment, facilities or acquisitions, the returns that we are able to generate on our pension assets and the resulting impact on funding obligations, the cost and availability of raw materials and the assumptions underlying our critical accounting estimates;

(11) impacts attributable to the COVID-19 pandemic, including disruptions to our global business;

(11) shipment delays, commodity pricing, depletion of inventory and increased production costs resulting from disruptions of operations at any of the facilities that manufacture our products or at our distribution or inventory centers, including disruptions that may be caused by the implementation of information technology initiatives, or by restructurings;

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

What changed 10-K

Item 7. Management’s Discussion and Analysis