MANAGEMENT’S DISCUSSION AND ANALYSIS OF  FINANCIAL CONDITION AND RESULTS OF OPERATIONS CRITICAL ACCOUNTING POLICIES  AND ESTIMATES Generally, revenues from merchandise sales are recorded at the time the product is shipped to the customer. We report our sales levels on a net sales basis, which is com- puted by deducting from gross sales the amount of actual returns received and an amount established for antici- pated returns. As is customary in the cosmetics industry, our practice is to accept returns of our products from retailers if prop- erly requested, authorized and approved. In accepting returns, we typically provide a credit to the retailer against sales and accounts receivable from that retailer on a dollar-for-dollar basis. REVENUE RECOGNITION Our sales return accrual is a subjective critical estimate that has a direct impact on reported net sales. This accrual is calculated based on a history of gross sales and actual returns by region and product category. In addition, as necessary,specific accruals may be established for future known or anticipated events. As a percentage of gross sales, sales returns were 5.2%, 4.9% and 4.9% in fiscal 2003, 2002 and 2001, respectively. An entity is more vulnerable to concentrations of credit risk if it is exposed to risk of loss greater than it would have had it mitigated its risk through diversification of cus- tomers. Such risks of loss manifest themselves differently, depending on the nature of the concentration, and vary in significance. CONCENTRATION OF CREDIT RISK We have three major customers that owned and oper- ated retail stores that in the aggregate accounted for approximately $1.24 billion, or 24%, of our consolidated net sales in fiscal 2003 and $179.8 million, or 28%, of our accounts receivable at June 30, 2003. These customers The amounts necessary to fund future payouts under these plans are subject to numerous assumptions and variables. Certain significant variables require us to  make assumptions that are within our control such as an anticipated discount rate, expected rate of return on plan THEEST{E LAUDER COMPANIES INC. 39 We offer the following benefits to some or all of our employees: a domestic trust-based noncontributory defined benefit pension plan (“U.S. Plan”); an unfunded, nonqualified domestic noncontributory pension plan to provide benefits in excess of statutory limitations; a con- tributory defined contribution plan; international pension plans, which vary by country, consisting of both defined benefit and defined contribution pension plans; deferred compensation; and certain other postretirement benefits. We also record an inventory obsolescence reserve, which represents the difference between the cost of the inventory and its estimated market value, based on vari- ous product sales projections. This reserve is calculated using an estimated obsolescence percentage applied to the inventory based on age, historical trends and require- ments to support forecasted sales. In addition, and as necessary,we may establish specific reserves for future known or anticipated events. PENSION AND OTHER POSTRETIREMENT BENEFIT COSTS INVENTORY In the ordinary course of business, we have established an allowance for doubtful accounts and customer deduc- tions in the amount of $31.8 million and $30.6 million as of June 30, 2003 and 2002, respectively. Our allowance for doubtful accounts is a subjective critical estimate that has a direct impact on reported net earnings. This reserve is based upon the evaluation of accounts receivable aging, specific exposures and historical trends. sell products primarily within North America. Although management believes that these customers are sound and creditworthy, a severe adverse impact on their busi- ness operations could have a corresponding material adverse effect on our net sales, cash flows, and/or finan- cial condition. The discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in con- formitywith accounting principles generally accepted in the United States. The preparation of these financial state- ments requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses reported in those financial statements. These judgments can be subjective and complex, and consequently actual results could differ from those esti- mates. Our most critical accounting policies relate to reve- nue recognition; concentration of credit risk; inventory; pension and other postretirement benefit costs; goodwill and other intangible assets; income taxes; and derivatives. We state our inventory at the lower of cost or fair market value, with cost being determined on the first-in, first-out (FIFO) method. We believe FIFO most closely matches the flow of our products from manufacture through sale. The reported net value of our inventory includes saleable products, promotional products, raw materials and componentry that will be sold or used in future periods. Inventory cost includes raw materials, direct labor  and overhead.