Estée Lauder Companies Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2021. The request metadata says “2020 Q3,” but the filing itself is for fiscal 2021 third quarter.
Business context and results
The company manufactures and sells prestige beauty products across skin care, makeup, fragrance and hair care in approximately 150 countries and territories. Results reflect continuing COVID-19 disruption and compare against the onset of the pandemic in the prior-year quarter, making that quarterly comparison notably easier.
| Metric | Q3 FY2021 | Q3 FY2020 | Nine months FY2021 | Nine months FY2020 |
|---|---|---|---|---|
| Net sales | $3.864 billion | $3.345 billion | $12.279 billion | $11.864 billion |
| Gross profit | $2.925 billion | $2.509 billion | $9.431 billion | $9.079 billion |
| Operating income | $616 million | $109 million | $2.384 billion | $1.149 billion |
| Net earnings attributable to Estée Lauder | $456 million | $(6) million | $1.852 billion | $1.146 billion |
| Diluted EPS | $1.24 | $(0.02) | $5.03 | $3.12 |
| Operating cash flow | Not provided for the quarter | $2.777 billion | $1.945 billion |
Quarterly sales rose 16% as reported and 13% in constant currency; nine-month sales rose 3% as reported and 2% in constant currency. Gross margin was 75.7% for the quarter and 76.8% for the nine months, versus 75.0% and 76.5%, respectively. Reported operating margin was 15.9% and 19.4%, versus 3.3% and 9.7%. Management’s adjusted, non-GAAP operating income increased 66% for the quarter and 16% year to date; adjusted diluted EPS was $1.62 versus $0.85 for the quarter and $5.68 versus $4.63 for the nine months.
Drivers and changes versus prior periods
- Category mix: Skin care sales increased 31% in the quarter and 23% year to date; fragrance rose 30% and 6%. Makeup declined 11% and 24%, respectively, reflecting reduced makeup use and continued pandemic-related disruption. Hair care increased 8% in the quarter and was essentially flat year to date.
- Geography: Quarterly sales grew 35% in Asia/Pacific, 12% in Europe, the Middle East & Africa, and 3% in the Americas. Year-to-date sales increased 26% in Asia/Pacific, were nearly flat in Europe, the Middle East & Africa, and fell 13% in the Americas.
- Digital: Direct-to-consumer online sales represented approximately 15% of total quarterly sales and 18% year to date, up from approximately 12% in both prior-year periods. International travel remained sharply curtailed, although China travel retail, particularly Hainan, was a growth contributor.
- Profit comparison: Reported earnings benefited from much lower impairment charges than the prior year: $114 million for the nine months versus $1.123 billion. The prior-year nine-month results also included $576 million of other income, principally a $553 million gain on remeasurement of the previously held Have & Be investment and a $23 million foreign-currency gain. Accordingly, reported growth is affected by unusual prior-period items; adjusted operating income and EPS provide another comparison, but are non-GAAP measures.
Cash, debt and liquidity
- At March 31, 2021, cash and cash equivalents were $6.399 billion, versus $5.022 billion at June 30, 2020. Total debt was $5.958 billion ($471 million current and $5.487 billion long term), versus $6.136 billion at fiscal year-end. Debt was 52% of total capitalization, down from 61%.
- Nine-month operating cash flow was $2.777 billion; investing cash outflow was $577 million and financing cash outflow was $862 million. Capital expenditures were $386 million, dividends paid were $561 million and treasury-stock purchases were $316 million.
- The company repaid $750 million outstanding on its revolving credit facility in August 2020 and issued $600 million of 1.950% senior notes due 2031 in March 2021. In April 2021, it repaid $450 million of 1.70% notes due May 2021.
- Management stated that cash, operating cash generation, available credit lines and access to credit markets should be adequate for planned operations, obligations and capital allocation needs. Credit ratings were A+ stable from S&P and A1 stable from Moody’s as of April 26, 2021.
Outlook, risks and notable items
- The filing gives no quantified sales, earnings or EPS forecast. Management cautioned that recovery timing and duration remain uncertain and that prolonged adverse conditions could further affect demand, profitability and cash collection.
- COVID-19 restrictions and store closures, lower store traffic, weak makeup demand, limited international travel, retailer restructuring or bankruptcies, customer credit risk, and potential impairment of brand and store assets remain important risks. The company also cited trade-policy and U.S.–China tensions, tariffs, Brexit uncertainty, foreign-exchange movements and competitive pressures.
- The two-year Post-COVID Business Acceleration Program is expected to incur $400–$500 million of pretax charges, with initiatives expected to be completed through fiscal 2023. The company estimated a net reduction of approximately 1,500–2,000 positions and closure of approximately 10%–15% of its freestanding stores globally. It had approved $230 million of program charges through March 31 and recorded $185 million.
- The company decided to exit global distribution of BECCA products and recorded related impairment, returns, contract-termination and severance costs. It also recorded $54 million of GLAMGLOW goodwill impairment and $27 million of related intangible-asset impairment during the nine months.
- In February 2021, the company agreed to increase its DECIEM ownership from approximately 29% to approximately 76% for about $1 billion, with closing expected in May 2021. It also obtained rights concerning the remaining interests after three years, with purchase price linked to future performance.
- The largest customer, selling primarily in China travel retail, represented 18% of quarterly sales and 15% of nine-month sales, and 21% of receivables at March 31, 2021. Management said current legal proceedings were not expected to have a material adverse effect; reasonably possible additional losses were described as not material.
Important facts for investors to verify
- Confirm the fiscal-period labeling: this filing covers the quarter ended March 31, 2021, not 2020 Q3.
- Assess how much sales and profit growth reflects recovery against the pandemic-affected comparison, foreign exchange, product mix, and the sharp reduction in impairment charges.
- Track the sustainability of China and travel-retail demand, the continuing weakness in makeup, and the pace of online growth as stores and travel recover.
- Monitor execution, total costs and realized savings from the Post-COVID program, including store closures, workforce changes and the BECCA exit.
- Review the cash funding and financing effects of the approximately $1 billion DECIEM transaction, as well as subsequent debt repayment and dividend commitments.
- Monitor customer concentration and receivables, especially exposure to the China travel-retail customer, alongside liquidity and debt levels.