Tracey T. Travis
Executive Vice President and Chief Financial Officer at Estée Lauder Companies
Thank you, Fabrizio, and hello, everyone. While we certainly had many successes this past fiscal year, as you just heard, we are not satisfied with our fiscal 2023 financial results and are executing on our strategy to progressively rebuild the margin-accretive areas of our business over the next few years and leverage the investments we have made in manufacturing, distribution and technology capabilities. I will further address our plans when I discuss our fiscal 2024 outlook, but first, I will cover the fiscal 2023 fourth quarter and full year results.
Our fourth quarter organic net sales increased 4% and earnings per share was $0.07. From a geographic standpoint, organic net sales grew in nearly all markets in both Asia/Pacific and EMEA. This strong performance was partially offset by the ongoing challenges in our Asia travel retail business as we expected.
Organic net sales in Asia/Pacific rose 36%, reflecting double-digit growth in most markets, led by Mainland China and Hong Kong SAR, as they continue to progress in recovery with fewer COVID-related restrictions compared to the prior year. They also benefited from our successful brand innovations, new product launches, activation consumer -- of consumers and targeted consumer reach. In Mainland China, online realized over 30% organic growth and achieved approximately 60% penetration of sales in the quarter.
In EMEA, organic net sales decreased 15%. The growth in nearly all markets and channels of distribution was more than offset by the performance of our Asia travel retail business. In Hainan, retail sales declined more than we expected in the quarter for the reasons Fabrizio mentioned. Excluding our travel retail business, net sales in both Makeup and Fragrance rose double digits in the region, benefiting from our strategic investments in advertising and promotional activities and the reestablishment of services in our stores.
Organic net sales in the Americas were flat compared to last year. The strong double-digit increase in Latin America, driven by the re-acceleration of Makeup growth in Brazil and Mexico, was offset by the decline in the United States due to the slower-than-expected pace of improvement in retail sales of several of our brands. Standout performance from The Ordinary continues to be a bright spot in the region for the many reasons that Fabrizio mentioned earlier.
From a product category perspective, Makeup organic net sales increased 13%, reflecting growth in each region, led by Asia/Pacific as recovery continued and usage occasions increased. M.A.C, Estee Lauder and TOM FORD drove growth, benefiting from investments in brand activations and increases in in-store staffing, the continued success of hero products, as well as new product launches.
Fragrance organic net sales rose 12%, led by Le Labo and TOM FORD. Strong double-digit growth from Le Labo reflected increases in every region, momentum from our City Exclusive special collection, as well as growth from both existing and new points of distribution, including its expansion into mainland China. The increase from TOM FORD was fueled by strategic investments in advertising and promotional activities to support key shopping moments and brand activations.
Organic net sales increased 6% in Hair Care and declined 3% in Skin Care. The pressures in our Asia travel retail business drove the Skin Care decline and were largely offset by the exceptional growth in the Asia/Pacific region. La Mer and Estee Lauder declined, while The Ordinary, Bobbi Brown and M.A.C grew. M.A.C's growth was driven by the launch of the Hyper Real line of skin care products.
Our gross margin declined 330 basis points compared to last year. This decline primarily reflects the under-absorption of overhead in our plants due to the pull-down of production throughout the year, given our elevated inventory levels, as well as increased obsolescence charges. Operating expenses increased 70 basis points as a percent of sales, driven largely by the increase in advertising and promotional activities to support commercial activations in the quarter. Operating income declined 66% to $71 million, and our operating margin contracted 380 basis points to 2% in the quarter.
Our effective tax rate for the quarter was a negative 17.9% compared to 14.2% last year due to a true-up in the quarter to reflect the final effective tax rate for the fiscal 2023 full year.
Diluted EPS of $0.07 decreased 82% compared to last year. The impact from foreign currency translation and foreign currency transactions in key travel retail locations negatively impacted EPS by 7% and 9%, respectively.
As we discussed in May, we completed the acquisition of the TOM FORD brand and the related intellectual property on April 28, paying approximately $2.3 billion. As a result of this acquisition, we entered into arrangements to license the TOM FORD trademark for eyewear to Marcolin and fashion to Zegna, which were the brand's prior licensees, creating a new revenue stream for the Company. This acquisition had a dilutive impact to EPS of $0.01, including interest expense on our debt financing and reflecting savings from royalties we no longer have to pay.
Shifting now to our full year results, this has certainly been a more volatile year than we anticipated. The challenges to our business in Asia travel retail and the United States, as well as in the first half in Mainland China, were partially offset by the progression of recovery everywhere else. In Mainland China, we continue to gain share in all major product categories, demonstrating the strong demand for our products, although we remain conscious of the evolving economic conditions. And overall, our investments in brand activation, increased in-store staffing, distribution expansion and online capabilities aided in the acceleration of recovery of sales, which largely occurred in brick-and-mortar channels, excluding travel retail. Net sales growth was strong in brick-and-mortar, particularly in our freestanding stores and with our specialty multi-retailers. Global travel retail represented 20% of our reported sales in fiscal 2023. And online net sales, which were flat, represented 29% of our reported sales.
Organic net sales fell 6%, primarily reflecting the challenges in our Asia travel retail business, which drove the declines in our EMEA region of 16% and in Skin Care of 14%. Nearly all other domestic markets in EMEA grew double digits. In Asia/Pacific, net sales rose 4% as markets continued to progress in recovery throughout the year and benefited from investments in advertising and promotional activities, innovation and distribution expansion. Net sales in the Americas was flat compared to last year.
Regarding categories, Fragrance net sales increased 14%, rising double digits in every geographic region and benefiting from the continued strength of hero products, successful innovation and distribution expansion, while Skin Care was more challenged in Asia travel retail and North America. Net sales grew 6% in Hair Care and was flat in Makeup.
Our gross margin declined 440 basis points compared to last year, largely due to the slower-than-expected recovery in Asia travel retail. This includes higher obsolescence charges, under-absorption of overhead in our plants due to the pull-down of production throughout the year, given our higher inventory levels, and less favorable category mix from our Skin Care mix.
Operating expenses increased 390 basis points to 59.9% of sales, driven primarily by the decline in sales. Despite the pressures to sales, we sustained our investments to support markets where recovery was evident, including in areas such as advertising, promotion, innovation and selling, which collectively increased by 280 basis points as a percent of sales. Operating income declined 48% to $1.8 billion from $3.5 billion last year, and our operating margin contracted 830 basis points to 11.4% for the full year.
In spite of the challenges that materially impacted our top line growth, we continued certain of our strategic investments important to support recovery and drive long-term sales growth and profitability. Our effective tax rate for the year was 26.5% compared to 21.3% last year, primarily reflecting the change in our geographical mix of earnings.
Net sales declined 53% to $1.2 billion, and diluted EPS of $3.46 decreased 52% compared to last year, including the dilutive impacts from foreign currency translation and foreign currency transactions in key retail -- travel retail locations of 4% each. The acquisition of the TOM FORD brand was dilutive to EPS by $0.01.
Now, turning to our cash flows for the fiscal year, we generated $1.7 billion in net cash flows from operating activities compared to $3 billion last year. The decrease reflects lower net income, partially offset by lower working capital. We invested $1 billion in capital expenditures for supply chain enhancements, including our new manufacturing facility in Japan, consumer-facing capital such as distribution expansion, investments in existing counters and online capabilities. We returned $1.2 billion in cash to stockholders through both dividends and share repurchases. Beginning in December of 2022, we suspended the repurchase of shares, given the increase in debt due to the TOM FORD acquisition.
Before I turn to our outlook for the full year, I want to take a moment to first address the recent cybersecurity incident we disclosed in July, involving an unauthorized third-party that gained access to some of our systems. After becoming aware of the incident, we proactively took down some of our systems. We began bringing our systems back online within days, which limited the incident's impact on the Company's operations. Based on the information available to date, we believe the incident is contained.
So now, let's turn to our outlook. This past year has undoubtedly been difficult, largely given the challenges we faced from increased market volatility in certain markets and the corresponding impact on our business. As we work to return to net sales growth in fiscal 2024, and over the next few years, progressively rebuild our operating margin, we remain focused on the transition of key areas of our business that have been disproportionately impacted by a slower pace of recovery, while also continuing to support growth in those areas where the recovery is more advanced.
Over the next few years, mainland China and our travel retail business are expected to remain key drivers of our long-term profitable growth, and we anticipate continued growth with other areas of our business, including emerging markets globally, our more mature markets in the West and our direct-to-consumer channels globally. Assuming an eventual return to global prestige growth of 4% to 5%, we expect to return to more consistent compounded annual sales growth within our 6% to 8% long-term growth algorithm.
Restoration of our operating margin is a top priority, though margin recovery will not happen in one year. We do, however, expect to progressively drive margin expansion as we return to profitable growth in Skin Care, improve Makeup margins and continue to drive our momentum in Fragrance, particularly our high-end artisanal fragrance brands. In addition, we plan to expand our gross margins through continuing to leverage our prestige pricing power, inclusive of driving additional accretive and compelling innovation, and improvements in operational efficiencies, including enhanced supply demand planning and inventory optimization to reduce excess inventory and discount.
We will begin to leverage the further regionalization of our manufacturing and distribution network in Asia to create greater inventory agility as demand fluctuates. Overall, beginning in fiscal 2024, we expect to recapture lost operating margin, overall -- I'm sorry, beyond fiscal 2024, we expect to recapture lost operating margin at an accelerated pace by delivering annual margin expansion that is faster than our pre-pandemic historical average. This acceleration is expected to become more evident after the first quarter of fiscal 2024.
So, turning to fiscal 2024, we expect to continue to deliver net sales gains in the areas that performed well in 2023, including Asia/Pacific, our Western and emerging European markets and Latin America, as they continue to progress in recovery from the pandemic, and benefit from the strategic actions we are taking to accelerate growth, including targeted consumer activation, compelling innovation and distribution enhancements that we drove throughout the pandemic period.
We are, however, mindful of the macroeconomic headwinds that have emerged in Chinese economy. This has also resulted in our Asia travel retail business taking a bit longer than we originally anticipated to return to growth as travel and conversion remain pressured, which has been exacerbated by the sudden reduction of sales to non-travelers relative to the return of individual travelers in Korea and in Hainan. Correspondingly, inventory levels in the trade in Asia travel retail have improved at a slower pace. This will create greater pressure on our first half as we expect to continue to both adjust our shipments and increase our retail activation but also should yield sequential quarterly improvements throughout the year in both sales and margin.
With that backdrop in mind and using June 30's spot rates of $1.087 for the euro, $1.261 for the pound, CNY7.253 for the Chinese yuan and KRW1,321 for the Korean won, the full fiscal year organic net sales are forecasted to grow 6% to 8%. Royalty revenue from the acquisition of the TOM FORD brand is not expected to be material to net sales growth and will be excluded from organic net sales until the fourth quarter. The cybersecurity incident is also not expected to have a material impact to net sales. Currency translation is expected to dilute reported sales growth for the full fiscal year by 1 percentage point. We take the majority of our pricing actions at the beginning of our fiscal year. Our strategic price increases, including new products, are expected to add approximately 5 points of growth. We expect the net benefits from strategic pricing, discount reductions and lower obsolescence to drive gross margin expansion for the full year, partially offset by manufacturing under-absorption.
We are aligning our production volumes to address a more variable demand environment with the intent to carry less inventory in our system and in the trade, while we continue to regionalize our supply base in Asia. However, we expect the lower mix of net sales from the highly margin-accretive areas of our business, including Asia travel retail and Skin Care, and the under-absorption of overhead to result in margin contraction in the first half of the year. This is expected to be more than offset by gross margin expansion in the second half of the year, given the greater mix of our travel retail business and Skin Care and less obsolescence charges compared to last year.
Our full year operating margin is forecasted to be approximately 12% to 12.5%, a 60 basis point to 110 basis point expansion from fiscal 2023. In fiscal 2024, we anticipate sequential margin expansion throughout the year, driven by improvements in gross margin, while also maintaining go-to-market initiatives where appropriate. We expect our full year effective tax rate to be approximately 27%.
Diluted EPS is expected to range between $3.50 and $3.75 before restructuring and other charges. The cybersecurity incident is expected to be approximately $0.07 dilutive to EPS. Our EPS range also includes approximately $0.11 of dilution from currency translation. In constant currency, we expect EPS to grow by approximately 4% to 12%.
Net cash flows from operating activities are forecasted between $1.7 billion and $1.8 billion. Capital expenditures are planned at approximately 6% of forecasted net sales, as we expect to fund new distribution and online capabilities, further enhance our manufacturing and distribution network, including the completion of our first manufacturing facility in Asia located in Japan to support the development of our Asia/Pacific region. We also plan to continue investing in information technology to support our business.
Our fiscal 2024 outlook also assumes flat quarterly dividend and the continued suspension of our share repurchases as we focus on deleveraging after the TOM FORD acquisition and prepare for the payment to purchase the remaining outstanding equity interest in DECIEM anticipated in May of 2024.
For our first quarter, we currently expect organic net sales to fall 12% to 10%. The cybersecurity incident is not expected to have a material impact to net sales. At this time, we expect first quarter diluted EPS of negative $0.31 to negative $0.21 before restructuring and other charges. The cybersecurity incident is expected to be approximately $0.07 dilutive to EPS. This also includes approximately $0.02 of dilution from currency translation. In constant currency, we expect EPS of negative $0.29 to negative $0.19.
I would like to close by thanking our employees for their dedication and focus during what turned out to be a challenging year. While we are not satisfied with our performance overall, we are certainly pleased by the results we were able to deliver in many recovering markets and brands. For fiscal 2024, we believe we have the right plans to navigate the environment as we gradually return to our historical cadence of long-term progressive and sustainable sales and profit growth, fueled by our highly desirable brand portfolio and our incredibly talented employees.
And that concludes our prepared remarks. We'll be happy to take your questions at this time.
