Sales and Operating Profit

	March 2006 €m	March 2005 €m
Sales	4308	3671	+17%
Cost of sales	(1588)	(1415)	+13%
Gross profit	22720	2256	+21%
Net operating expenses	(1979)	(1695)	+17%
Selling and distribution expenses	(1000)	(893)	+12%
Communication expenses	(503)	(414)	+21%
Administration expenses	(509)	(468)	+9%
Other operating income	33	80	-59%
Operating profit	741	561	+32%

Sales increased by 17 per cent to € 4 308 million, with strong growth throughout the period in all major product areas and in all regions.

The gross margin percentage increased by some two percentage points to 63.1 per cent, reflecting changes in the product and distribution mix, as well as higher utilisation rates in manufacturing. As reported in the interim report, the gross margin percentage also increased as a consequence of inventory provision releases due to changes in estimates linked to the introduction of IFRS during the first six months of the year. The increase in sales and the improved margin percentage led to a 21 per cent increase in gross profit to € 2 720 million.

Net operating expenses increased by 17 per cent, primarily due to increases in selling and distribution expenses and communication costs. Communication costs increased by 21 per cent reflecting higher levels of investments by all the Maisons. However, as a percentage of sales, communication costs were just 0.4 percentage points higher at 11.7 per cent. Compared to the prior period, administration expenses also increased albeit to a lesser degree. Net operating expenses included stock option charges amounting to € 36 million (2005: € 31 million), reflecting the introduction of IFRS 2 Share-based Payment.

Other operating income for the year under review included the following non-recurring gains: € 11 million relating to the disposal of the Hackett subsidiary in June 2005 and € 19 million primarily relating to a Cartier asset sale-and-leaseback transaction. The total of these and other items amounted to a net gain of € 28 million. In the comparative year, the partial disposal of a 0.6 per cent interest in British American Tobacco ordinary shares gave rise to a gain of € 76 million reflected in other operating income of € 80 million.

Operating profit increased by 32 per cent to € 741 million. Excluding the net non-recurring gains described above, the underlying operating profit from the Group’s luxury businesses increased by 47 per cent to € 713 million, compared to € 485 in the prior year and the operating margin increased by 3.4 percentage points to 16.6 per cent.