Estee Lauder Comments on the Impact of the May-Federated Merger

On Estee Lauder's Fiscal 4Q conference call, executives discussed the impact of the Federated-May merger on sales:

William Lauder - President and CEO

While we have had to deal with department store consolidations over the past several years the Federated May consolidation had the largest impact. This merger of our two biggest customers resulted in the closing of 75 stores and business disruptions. As you can imagine it had a significant impact on our sales. In addition, we lost business for several months early in the fiscal year in areas of the Southern United States, most particularly along the Gulf Coast, that were impacted by adverse weather conditions. We repurchased large amount of inventory from shuttered stores and took returns of damaged goods. Yet, despite these setbacks, we boosted sales for the year...

Javier Escalante - Morgan Stanley

My question is with regards to understanding better the May and Federated impact the store closures. Basically if you can go back to the 2006 and if you can split it between how much of it was product returns versus forgone sales of the stores?

Secondly going forward, you are estimating $0.08 impact in '07. So how much of that is forgone sales and what does your research show about consumption of prestige cosmetics by the shoppers of these closed stores? Where are they buying? Is it that they are not buying prestige cosmetics, or they are buying elsewhere? So if you can help us understand the impact, that would be great.

Rick Kunes-CFO

Regarding the financial numbers, Javier – these are very, very rough numbers so please understand that -- about three-quarters of the impact is lost sales and about one-quarter of the impact is related to returns. Those are rough numbers. It might be a little bit more for returns and a little bit less for lost sales, that is in fiscal '06. When you go into fiscal '07, it is a little bit more heavily weighted toward lost sales because MSNs were anniversarying all of those doors that closed in '06. We're only anticipating another 15 doors to close in '07. So the returns number is certainly going to be much lower and it's going to be much more heavily weighted toward lost sales.

Dan Brestle-COO

Just to address two parts of that, Javier, this is Dan. We were also very clear in the conversations all year long that it is just not the focus of lost sales. The May Company cosmetic business was off significantly for a lot of other factors getting through this consolidation and this merger. So it wasn't just the lost sales. In those 75 malls where we have closed doors we see anywhere from 80% to 100% pick up in the everyday business.

The critical business going forward will be those promotional activities and we are not seeing the same type of pickup in promotions. The promotions are not picking up all that business, that is the initial tick. Now for Clinique and Lauder, we're talking about September, October, are the major two months now that we have national dates. So we will know more about the pick up of the closed doors coming out of the September for Estee Lauder and October for Clinique timeframe.

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