Tracey T. Travis
Executive Vice President and Chief Financial Officer at Estée Lauder Companies
Thank you, Fabrizio, and hello everyone. We navigated through another challenging year across several areas of our business and took specific actions to more sustainably improve our sales and profit results as it became apparent that the recovery that was anticipated to occur throughout the year in some of our markets was impacted by far more volatility, and while we returned to growth in the second half, primarily driven by resumed shipments in Asia travel retail, we are certainly not pleased with our overall full year results, and on top of global prestige volatility, the execution of our strategy has not met our expectations in some key areas of our business.
During the year, we also largely completed the basic design and began the implementation of our multiyear PRGP to deliver stronger results against our expectation for a more gradual rebuilding of sales growth along with an acceleration in profitability.
Before I discuss our fiscal 2025 outlook, let me first share with you the fiscal 2024 fourth quarter and full year results. Our fourth quarter organic net sales increased by 8% compared to last year, meeting our expectations, albeit with a different geographical mix than we anticipated, which reflected lower results in mainland China and North America, due notably to further softening in overall prestige beauty in both of these markets. A combination of tentative consumer sentiment in China and consumer inflationary pressures in North America are believed to have contributed to the deceleration in both markets.
Diluted EPS rose to $0.64 from $0.07 last year, exceeding our expectations, largely due to our operating performance and the reduction in our full-year effective tax rate. From a geographic standpoint, organic net sales rose 32% in EMEA, primarily driven by the increase in our Asia travel retail business given the favorable comparison to the prior year period as shipments increased over last year's extremely low level. In addition, organic net sales increased in both our developed European and priority emerging markets. Organic net sales in Asia Pacific decreased 4%, primarily driven by the ongoing softness in overall prestige, beauty and mainland China, as well as lower shipments in Hong Kong SAR, as we anniversaried the initial surge in sales with the border reopening in the prior year period. Outside of these markets, net sales rose strong double digits in Japan as a favorable currency coupled with strong in-market activation and expanded consumer reach, attracted both domestic and traveling consumers, and bolstered growth across all product categories in nearly all channels of distribution.
In the Americas, organic net sales decreased 5%, driven by the decline in North America, reflecting the ongoing, intensely competitive environment as well as an overall slowdown in growth in prestige beauty, especially in brick-and-mortar channels, which particularly impacted our skincare and makeup categories. Online sales grew mid-single digits in the region, benefiting from both retailer.com growth and the launch of select brand specialty Clinique on the U.S. Amazon Premium beauty store.
From a product category perspective, skincare organic net sales increased 15%, primarily due to the increased shipments within the Asia travel retail business referenced earlier, which drove net sales growth from both La Mer and Estee Lauder. Organic net sales from The Ordinary also increased across all geographic regions. Makeup organic net sales increased 1%. Net sales increased from Estee Lauder, benefiting from the resumption of shipments in our Asia travel retail business and the continued global success of the double wear product franchise. Clinique net sales rose strong double digits, fueled by the almost lipstick product franchise.
Partially offsetting these increases were declines from M.A.C and Tom Ford. Organic net sales increased 2% in hair care and 1% in fragrance. Regarding fragrance, net sales growth was driven by the ongoing consumer appeal of Le Labo's unique product offerings and targeted expanded consumer reach and Jo Malone partially offset by declines in Estee Lauder and Clinique.
Our gross margin expanded 380 basis points to 71.8% compared to last year. This increase primarily reflected lower obsolescence and overhead charges as well as higher skin care sales. Operating expenses decreased 340 basis points as a percent of sales to 62.7%, driven largely by the increase in net sales, improved gross margin, and lower general and administrative expenses.
During the quarter, we recorded $471 million of impairment charges related to Dr. Jart, given the continued lower than expected growth and profitability of the brand. We made the decision to exit the brand from its heavily discounted travel retail channel and prioritized direct investments in other more profitable areas of the business, including in mainland China and western markets where a broader assortment of the brand has been resonating well with consumers.
Operating income increased to $349 million and our operating margin expanded 700 basis points to 9% in the quarter. Our effective tax rate for the quarter was 22.8% compared to a negative 17.9% last year, the latter having had a larger year in true-up to reflect our final effective tax rate for the fiscal year of 2023. Our rate was better than anticipated this year, primarily due to the shift in our geographical mix of earnings.
Diluted EPS increased to $0.64 from $0.07 last year due largely to the improvement in our operating results, partially offset by an unfavorable impact from the increase in our effective tax rate. Foreign currency translation was $0.03 diluted to EPS in the quarter, and the impact from the business disruptions in Israel and other parts of the Middle East was $0.02 dilutive.
Turning now to our full year results. Although we saw growth in the second half, our full year results highlight both volatility and the impact of our own challenges in some key areas of our business. Collectively, the pressure in mainland China from the ongoing softness and overall prestige beauty. The necessary actions we took in Asia travel retail during the first half of the year to reduce high-trade inventory levels in a prolonged soft retail environment, and continued pressure from the competitive environment, particularly in North America, outweighed the solid growth we saw during the year in our EMEA and LATAM markets.
Organic net sales decreased 2%, primarily due to the ongoing softness in overall prestige beauty in mainland China, leading to a 3% decline in Asia Pacific. The challenges in Asia travel retail also pressured sales, resulting in a 2% decline in EMEA as our return to growth in Asia travel retail in the second half was not enough to offset the first half decline due in part to retail trends decelerating throughout the second half in China. Net sales in the Americas was overall flat compared to last year.
From a category perspective, skincare net sales declined 3%, largely due to the declines in mainland China and Asia travel retail, and makeup decreased 1%, also reflecting these challenges as well as a prior year benefit from changes made to take back loyalty program. Net sales fell 4% in hair care and rose 2% in fragrance. Confronted with the volatility throughout the year just discussed, our teams attempted to balance cost efficiency actions with consumer facing investments to support growth. Net sales with our specialty multi retailers and in our freestanding stores each grew double digits. Global travel Retail represented 19% of our reported sales in fiscal 2024, and online net sales represented 28%. Our gross margin improved 30 basis points to 71.7% compared to 71.4% last year, reflecting the initiatives we took throughout the year to reduce excess and obsolete inventory as well as changes in brand mix. Partially offsetting this progress was an unfavorable impact from foreign currency and the impact from the under absorption of overhead in our plants due to the necessary pulldown of production earlier in the year.
Operating expenses increased 160 basis points to 61.5% of sales, reflecting deleverage from the sales decline, including our investments to support targeted expanded consumer reach globally and to support growth where we had momentum.
Operating income declined 13% to $1.6 billion from $1.8 billion last year, and our operating margin contracted 120 basis points to 10.2% for the full year. Our effective tax rate for the year was 31% compared to 26.5% last year, reflecting a higher effective tax rate on our foreign operations due to the geographical mix of our earnings, and the unfavorable impact associated with previously issued stock-based compensation.
Net earnings was $935 million and diluted EPS was $2.59, both declining 25% compared to last year. Foreign currency translation was $0.10 dilutive to EPS, and the impact from the business disruptions in Israel and other parts of the Middle east was $0.06 diluted. We generated $2.4 billion in net cash flows from operating activities compared to $1.7 billion last year. The increase reflects improvements in working capital, which was largely due to the actions we took to reduce in house inventory levels. We utilized $919 million for capital investments and returned $947 million in cash to stockholders through dividends.
After our initial minority investment in DECIEM in 2017 and then increasing our investment to become majority owner in 2021, we are pleased to have completed, subject to finalization of the purchase price, our acquisition of the remaining equity interest in DECIEM this past May for $859 million, of which $829 million was paid as of June 30, 2024.
Looking ahead now to our outlook for fiscal 2025, while acknowledging some initial bright spots related to pivots in our strategy, we are cognizant that overall global prestige beauty growth has tempered in recent months, as reflected in the current declines in mainland China and Asia travel, retail, particularly Hainan. Prestige beauty has also moderated in some of our major markets like North America, and while we believe we have the right priorities for growth, we are also mindful of the level of variability that continues to exist in many of our markets. Accordingly, we are reflecting a more subdued recovery of growth in fiscal 2025, which you have seen in this morning's press release.
The PRGP remains a critical element in our ability to deliver margin expansion and ultimately is designed to put in place the cost structure necessary for the company to drive stronger leverage in its business on lower than our normal growth expectations this year. This should also yield even greater flow through of benefits to profit as net sales progressively return to higher growth in future years. In fiscal 2024, we had already approved actions to begin addressing overcapacity in parts of our supply chain, inclusive of streamlining manufacturing and distribution costs, where we could react more quickly and to simplify certain areas of our overhead structure.
Our PRGP initiatives are focused on three primary benefit areas for the company. First, accelerating margin expansion through both gross margin recovery and additional expense leverage, while also enabling additional cash generation for the company. Second, creating additional fuel for growth with targeted investments in consumer facing activities, and third, simplifying our processes and creating more agility and speed in execution. We have begun executing against many initiatives within these three areas of benefit for the company.
Regarding margin expansion, the significant pulldown of production we did at the beginning of last year to bring manufacturing levels well below our shipment trends in order to reduce our inventory levels has already yielded cash benefits in fiscal 2024. This has also resulted in additional benefits from reduced discounts and obsolescence costs and lower levels of expenses are expected to continue into fiscal 2025. Additionally, this year we are planning to realize greater net benefits from our strategic pricing actions through less discounts and promotion with our enhanced focus on precision marketing. These actions, along with the benefits of more accretive innovation, particularly in skin care, support the gross margin expansion we expect this year.
Additionally, regarding expense leverage, with our expectation of a slower return to growth, there is increased leverage pressure from our fixed cost. We are executing against our restructuring program and have already approved initiatives to reduce spans and layers in certain parts of our business. Furthermore, we are expanding our existing shared services capabilities to support the simplification and standardization of key processes and scale capabilities faster, as well as rationalizing the breadth of distribution choices across our existing portfolio of brands.
We have also negotiated savings across many of our spending areas and are already realizing savings in areas like transportation. Lastly, we are taking this opportunity of the PRGP to address some of the ways we work to simplify decision making and enhance our agility in go-to-market execution to be faster in this ever-changing dynamic global prestige beauty environment. More to come on this in a future earnings call.
All told, we anticipate at this point that approximately 80% of the net benefits realized from the PRGP in fiscal 2025 are targeted to improve gross profit, with the remaining 20% targeted to reduce certain operating expenses. This mix is likely to shift in fiscal 2026 as more of our expense actions contribute favorably to our overall expense structure given the expected cadence of initiatives. We also expect to take restructuring and other charges of at least approximately $100 million to $120 million in fiscal 2025 from approved initiatives, with additional charges expected during the course of the year as more initiatives are finalized and approved. However, with modest sales growth expected in fiscal 2025, as I indicated before, we will unfortunately also experience a greater amount of fixed expense deleverage in addition to the unfavorable mix pressure from softer sales performance in some of our higher margin categories and regions, and as we communicated, we are protecting a portion of the savings we generate from the PRGP to reinvest selectively in advertising and store activation to fuel growth with the brands and regions where we have momentum and support the growth we are currently experiencing with active derm, luxury fragrance and distribution expansion in faster growth channels.
We begin this fiscal year with our team fully immersed and committed to executing initiatives across all pillars of the PRGP, now that we are post the completion of our design Phase. We continue to expect to deliver approximately $1.1 billion to $1.4 billion of incremental operating profit from the full PRGP. And while we are focused on realizing slightly more than half of the net benefits in 2025, additional savings initiatives may be required as lower sales volumes are realized.
Overall, we expect to progress margin expansion at an accelerated pace as a result of the plan by delivering annual margin expansion greater than our pre-pandemic historical average, inclusive of creating additional fuel to accelerate sales growth at a faster pace as well. Accordingly, fiscal 2025 is projected to be a year of transition for the company, navigating continued macroeconomic softness and challenges in a few key areas of our business, while accelerating growth where we have momentum and executing against our real -- and realizing anticipated benefits from the PRGP. Our strategic imperatives for the year, as mentioned by Fabrizio, are focused on leveraging the inherent strengths we have across our brands, categories, regions and talented employees.
Over the next few years, western markets along with Asia Pacific markets outside of China are expected to drive a greater portion of our long-term profitable growth as we deepen our focus on fast growing channels in these markets. We have the opportunity to leverage our skincare brands with strong luxe and active derm appeal, expand the consumer reach of our luxury fragrance portfolio, capture more relevant trends with our makeup brands, and re-energize our hair care brands, all with an eye towards capturing additional consumers while retaining loyal ones. We also plan to begin leveraging our regionalized manufacturing and distribution network in Asia to create greater inventory agility as demand dictates.
With that backdrop in mind, and using August 12 spot rates of 1.092 for the euro, 1.276 for the pound, 7.167 for the Chinese yuan and 1,364 for the Korean won and full fiscal year organic net sales are forecasted to range between a decrease of 1% and an increase of 2%. Throughout this past fiscal year, to mitigate the expected pressures to our business, we accelerated the implementation of initiatives under our PRGP as I previously mentioned, which we expect combined with our sales growth range to result in most of our margin expansion for the full year to be realized in gross margin.
We expect our full year effective tax rate to be approximately 32%. Diluted EPS is expected to range between $2.75 and $2.95 before restructuring and other charges. This includes approximately t$0.03 of dilution from currency translation. In constant currency, we expect EPS to grow by approximately 7% to 15%. Net cash flows from operating activities are forecasted between $1.8 billion and $2 billion. Capital expenditures are planned at approximately 5% to 5.5% of forecasted net sales.
We expect our first quarter results to be pressured by the ongoing challenges in mainland China and Asia travel retail, we experienced as we exited fiscal 2024 mainly as subdued consumer sentiment, more experiential spending and lower conversion rates continued. We are, however, seeing some early signs of progress, particularly in North America, as Fabrizio mentioned, with our strategic pivots, and assuming the progressive return of prestige beauty sales growth in mainland China and Asia travel retail, we anticipate overall improvement over the course of the year.
With that backdrop for our first quarter, we currently expect organic net sales to fall 3% to 5%. At this time, we expect first quarter diluted EPS of $0.02 to $0.10 before restructuring and other charges. This includes approximately $0.01 of accretion from currency translation. In constant currency, we expect EPS of $0.01 to $0.09. Assuming a full year global prestige beauty performance in fiscal year 2025 of 2% to 3%, our remaining three-quarters are anticipated to meet or slightly exceed this growth, which is in line with our previous sales performance objective of exceeding the overall average of global prestige beauty growth by at least one point.
With the implementation of our PRGP initiatives, and if global prestige beauty accelerates further in fiscal 2026, the combination of additional sales momentum and margin accretion leverage from our PRGP should provide further progress toward returning to a more sustainable sales and profit growth algorithm.
In closing, while our fiscal 2024 performance was disappointing, we remain focused on navigating the current volatile global prestige beauty dynamics while leveraging the long-term strengths of our brands, and we maintain confidence in our strategic pivots and the execution of our PRGP to drive profitable growth in fiscal 2025 and beyond. I want to personally thank our teams globally for their resilience, commitment and dedication to the company through another difficult year.
Before I turn the call back over to Fabrizio for a few final comments, as most of you know, I announced my planned retirement at the end of this fiscal year. Accordingly, I want to congratulate Akhil Srivastava on his appointment as CFO effective November 1. I look forward to working with him over this transition period and appreciate his commitment to the company and its ongoing success. And now I'll turn it back to Fabrizio.
