Turnaround Cream and Resilience Lift, as well as products in Clinique’s 3-Step Skin Care System. 

Makeup Makeup net sales increased 4% or $68.9 million to $1.79 billion. Newer brands such as M . A . C, Bobbi Brown and Stila, which are primarily makeup products, contributed through growth at existing doors and increased distribution. In addition, strong sales of the Pure Color Line of products, the worldwide launch of Gentle Light Makeup and Illusionist Mascara contributed posi- tively to net sales growth. Partially offsetting the increase in net sales were lower sales of Two-in-One Eye Shadow, Lucidity Makeup, and Long Last Soft Shine Lipstick. 

Fragrance Net sales of fragrance products decreased 6% or $67.8 million to $1.02 billion. This category was impacted by the softness of the fragrance business in the United States and the decline in our travel retail business, which depends substantially on fragrance products. Lower net sales of Beautiful, Estée Lauder pleasures, DKNY for Women and certain existing Tommy Hilfiger products were partially offset by the launch of T, a fragrance in the Tommy Hilfiger line, and Intuition for Men, as well as strong sales of Donna Karan Cashmere Mist. 

Hair Care Hair care net sales increased 19% or $35.1 mil- lion to $215.8 million. This increase was primarily the result of growth from Aveda, which benefited from the launch of texture lotion products and Color Conserve Shampoo and an increase in the number of Company- owned Aveda Experience Centers. Sales of Bumble and bumble products increased due to an expanded product line and an increase in the number of points of sale. The results were partially offset by lower sales from Clinique’s Simple Hair Care System when compared with the prior- year launch. 

The introduction of new products may have some can- nibalizing effect on sales of existing products, which we take into account in our business planning. 

## Geographic Regions 

Net sales in the Americas increased 1% or $20.4 million to $2.88 billion. The increase was primarily due to the suc- cess of most newer brands, partially offset by economic weakness and uncertainty in the United States during most of the fiscal year. In Europe, the Middle East & Africa, net sales increased 3% or $39.3 million to $1.26 billion. This increase was primarily the result of higher net sales in the United Kingdom, Spain and Greece, where in fiscal 2002 we formed a joint venture, in which we own a con- trolling majority interest, with our former distributor. The increase was partially offset by lower net sales in our travel retail business, which has been adversely affected by a 

decrease in worldwide travel. Excluding the impact of our travel retail business, net sales in Europe, the Middle East & Africa increased 8% or $77.8 million. Net sales in Asia/Pacific increased 2% or $14.5 million to $610.6 mil- lion primarily due to higher net sales in Korea and Thai- land, as well as in Australia where we benefited from a change in retailer arrangements. The increased sales were partially offset by lower net sales in Japan. Japan contin- ued to be a difficult market due to local economic condi- tions and increasing competition. The challenges were made more difficult by the weakness of the Japanese yen during fiscal 2002 as compared with the U.S. dollar. Excluding the impact of foreign currency translation, Asia/Pacific net sales increased 9%. 

We strategically stagger our new product launches by geographic market,which may account for differences in regional sales growth. 

## COST OF SALES 

Cost of sales as a percentage of total net sales was 26.8% as compared with 26.3% in the prior year. The lower mar- gin can be attributed in part to production volume decreases resulting in under-absorption of overhead, as well as lower than planned raw material purchases that reduced anticipated savings from sourcing initiatives. Partially offsetting these negative factors were lower sales volumes of products with a higher cost of goods, particu- larly in travel retail and fragrance. 

## OPERATING EXPENSES 

## Operating Expenses 

Operating expenses increased to 66.0% of net sales as compared with 63.1% of net sales in the prior year. The increase in operating expenses primarily related to restructuring expenses, continued advertising and pro- motional spending and the cost to expand and operate our retail stores. The increase in operating expenses as a percentage of net sales reflects a slower growth rate in sales than operating expenses, primarily due to economic conditions in the United States as discussed above. As part of our long-term strategies, we continued to emphasize the building of “brand equities” through advertising and promotional spending and retail store expansion despite difficult economic times. Changes in advertising and promotional spending result from the type, timing and level of advertising and promotional activities related to product launches and rollouts, as well as the markets being emphasized. Excluding the impact of restructuring and special charges, operating expenses were 63.5% and 61.9% of net sales for the fiscal years ended 2002 and 2001, respectively. 

