## Product Categories 

Operating income more than doubled to $32.1 million in fragrance due primarily to improved results from our travel retail business. Operating income increased 10% to $273.2 million in skin care and 8% to $198.0 million in makeup reflecting higher net sales, partially offset by strategic spending on advertising, sampling and merchandising, particularly in the earlier portion of the current year. Operating income increased $1.1 million or 8% to $14.8 million in hair care, reflecting improvements in Aveda and Bumble and bumble, as well as higher profits in the latter portion of the year outside the United States. 

## Geographic Regions 

Operating income in the Americas increased 11% or $23.8 million to $246.7 million due to sales growth, the benefits of our prior restructurings and continued cost containment efforts. Operating income also benefited from the results of strategic efforts related to product sup- port spending in the earlier part of the year that led to increased net sales during the year. In Europe, the Middle East & Africa, operating income increased 27% or $47.8 million to $227.7 million primarily due to the improved operating results in the United Kingdom as well as increased results generated from our travel retail business. As described elsewhere, profitability in the region has been and will continue to be affected by current interna- tional uncertainties. In Asia/Pacific, operating income decreased 24% or $13.3 million to $42.7 million. This decrease reflects improved results in Korea and Thailand, which were more than offset by a decrease in Australia, which derived a benefit in the prior-year period from a change in our retailer arrangements. 

## INTEREST EXPENSE, NET 

Net interest expense was $8.1 million as compared with $9.8 million in the prior year. The decrease in net interest expense was primarily due to lower outstanding net bor- rowings and higher interest income generated by higher invested cash balances. This improvement was partially offset by a higher effective interest rate, which resulted from the increased proportion of fixed rate debt as com- pared with variable rate debt in the same period last year. In May 2003, we executed a fixed-to floating interest rate swap on our $250.0 million 6% Senior Notes due 2012. See “Liquidity and Capital Resources” for further details. 

## PROVISION FOR INCOME TAXES 

The provision for income taxes represents Federal, for- eign, state and local income taxes. The effective rate for 

income taxes for the fiscal year was 33.0% as compared with 34.5% in the prior-year period. These rates differ from statutoryrates,reflecting the effect of state and local taxes, tax rates in foreign jurisdictions and certain non- deductible expenses. The decrease in the effective tax rate was principallyattributable to ongoing tax planning initiatives, including the favorable settlement of certain tax negotiations and the reduction of the overall tax rate relat- ing to the Company’s foreign operations. In addition, the tax effect of the charge related to the pending settlement of a legal proceeding in late fiscal 2003 contributed to an effective tax rate slightly lower than previously expected. 

## FISCAL 2002 AS COMPARED WITH FISCAL 2001 

## NET SALES 

Net sales increased 2% or $76.0 million to $4.74 billion reflecting growth in the makeup, skin care and hair care categories, partially offset by a decline in fragrance net sales. Excluding the impact of foreign currency translation, net sales increased 3%. The unusual events that occurred during fiscal 2002 and their effect on the economy, particularly in the United States, adversely impacted our business. In addition, the decline in worldwide travel during most of fiscal 2002 led to a 13% reduction in our travel retail sales. Sales growth from certain newer brands and recently launched products partially offset these decreases. 

The following discussions of Net Sales by Product Categories and Geographic Regions exclude the impact of the restructurings in fiscal 2002 and fiscal 2001. Neither restructuring was material to our net sales, and we believe the following analysis of net sales better reflects the manner in which we conduct and view our business. For a discussion of the restructurings, see “Operating Expenses — Restructuring and Special Charges” in this section. The tables on page 43 reconcile these results to operating income as reported in the consolidated state- ment of earnings. 

## Product Categories 

Skin Care Net sales of skin care products increased 3% or $42.6 million to $1.70 billion. The net sales increase is primarilyattributable to recently launched products such as Total Turnaround Visible Skin Renewer, Advanced Night Repair Eye Recovery Complex, Moisture Surge Extra Thirsty Skin Relief and Moisture Surge Eye Gel, APerfect World line of products, LightSource Trans- forming Moisture Lotion and Cream, and Re-Nutriv Ultimate Lifting Creme. Partially offsetting these increases were lower net sales of certain existing products such as 

