Estee Lauder Company Case Study

1.0 Introduction

1.1 Background

This report will analyse Estee Lauder by looking at the company's annual reports with financial statements ( Balance Sheet, income statement and cash flow income)covering a period of 4 years, identify the main currency for the Multinational Company Estee Lauder and prepare a two year forecast for the possible direction of the currency. Moreover, it will also analyse the current shape of United Kingdom's yield curve and the implications for the company.

Last but not least it will look at the economic changes in the environment during this period and how the strategy of the multinational company was affected by these.

1.2 Aims and Objectives

The aim of this report is to analyse Este Lauder and its foreign currency risk exposure.

The aim will be achieved by following the objectives: Providing an insight into the company and its financial position ( including foreign currency risk exposure); identifying the main currency in which the company trades and preparing a two year forecast for the possible direction of the exchange rate of that currency; analyzing the current shape of the UK Yield curve and how Estee Lauder will be affected by it and researching how the multinational company managed their exchange rate risk and how Estee Lauder's strategies were affected by this over time.

1.3 Method

In order to achieve the aim of this report, the main resources used are International Management books, academic databases and annual reports during the relevant period taken from the official website of Estee Lauder. Official websites like the Bank of England's one were used in order to obtain the future predicted inflation rates and a copy of these can be seen in the appendices.

2.0 Company Profile

Estee Lauder was founded the Company in 1946 by Estee Lauder, a visionary business woman that had a simple premise: "every woman can be beautiful. " She started her business with four skin care products and armed with drive, imagination and passion she changed the face of beauty industry.

Over the years the company expanded in United States and in 1960 it started its first international account in Harold's store in London. In 1961 the company opened an office in Hong Kong.

Now Estee Lauder Companies Inc. headquartered in Midtown Manhattan, New York City is a manufacturer and marketer of: skin care, makeup, flagrance and hair care products. The company's products are now sold in over 150 countries all over the world under different brand names such as Estee Lauder, Clinique, M.A.C, and Bobby Brown. Moreover, Estee Lauder is seen as the cosmetic company who is able to provide for consumers all over the world generation after generation.

The company recorded revenues of $8,810 million in the financial year ended June 2011 (FY2011),

an increase of 13% over FY2010. The operating profit of Estee Lauder was $1,089.4 million in

FY2011, an increase of 37.9% over FY2010.The net profit was $700.8 million in FY2011, an increase

of 46.5% over FY2010.( Estee Lauder Companies, 2012)(see financial statements in appendix 3)

According to the Company's most recent Annual Report (for the financial year ending 30th of June, 2012), Estee Lauder's net sales were $9,713.6m with 37% of these registered in United States. This means that about 63% of their sales ($6.13 billion) were registered internationally. The decision to trade internationally results in revenue and expenses that are denominated in a different currency and with this proportion of revenue coming from international trade, Estee Lauder's decision makers should consider managing the company's foreign currency risk exposure.

3.0 Analysis

According to Estee Lauder's financial reports the main currency in which the company trades is US Dollar. Because of the company trades internationally, in many different currencies, it will be affected by movements in exchange rates. For Estee Lauder it is useful to forecast future interest rates because it will affect the decision taken regarding hedging, short-term financing decision, investing, budgeting and also the long-term financing decision. (see appendix 4)

Madura (2011) argues that the methods available for forecasting exchange rates can be grouped into four general groups. These are: technical, fundamental, market-based and mixed.

Technical forecasting is a technique that is not entirely supported by academics because "prices react to information and not past price movements." (Madura, 2011) This technique however will not be used in this report because it focuses more on the near future rather than long-term forecasting.

The second technique available for predicting future interest rates is fundamental forecasting. Madura (2011) states that fundamental forecasting is based on "relationship between economic variables and exchange rates." Corporations can develop exchange rate projections by looking at a number of variables that affect the exchange rate. There are a number of factors which can influence a currency's spot rate and these can be seen in the formula below:

e=f (∆INF, ∆INT, ∆INC, ∆GC, ∆EXP)

e = f ( ∆INF, ∆INT, ∆INC, ∆GC, ∆EXP)

where:

e= percentage change in the spot rate

∆INF= the difference between home inflation and the foreign country's inflation

∆INT= the difference between home interest rate and the foreign country's interest rate

∆INC= the difference between the home income level and the foreign country's income level

∆GC= change in Government controls

∆EXP= change in expectations of future exchange rates

The third type of forecasting is the Market Based Forecasting which uses the spot rate or the forward rate to predict future exchange rates.

No one of these techniques is known as being better than the others and because