The Estée Lauder Companies Inc. — FY2014 Form 10-K
Reporting period: Fiscal year ended June 30, 2014. Although the request refers to “2013 Q4,” this filing reports FY2014; its unaudited quarterly data includes the quarter ended June 30, 2014. Amounts are in U.S. dollars.
Business context
Estée Lauder manufactures and markets prestige skin care, makeup, fragrance and hair care products across more than 150 countries and territories. Its portfolio includes owned brands and licensed brands, sold mainly through department stores, specialty retailers, travel retail, company-operated stores and online channels. Skin care and makeup represented approximately 43% and 38% of FY2014 sales, respectively. Macy’s was the largest customer, at 10% of consolidated sales.
Financial performance
| Metric | FY2014 | FY2013 | Change |
|---|---|---|---|
| Net sales | $10,968.8 million | $10,181.7 million | Up 8% |
| Gross profit / margin | $8,810.6 million / 80.3% | $8,155.8 million / 80.1% | Margin up 0.2 percentage points |
| Operating income / margin | $1,827.6 million / 16.7% | $1,526.0 million / 15.0% | Up 20%; margin up 1.7 points |
| Net earnings attributable to Estée Lauder | $1,204.1 million | $1,019.8 million | Up 18% |
| Diluted EPS | $3.06 | $2.58 | Up 19% |
| Operating cash flow | $1,535.2 million | $1,226.3 million | Up $308.9 million |
| Capital expenditures | $510.2 million | $461.0 million | Up $49.2 million |
- FY2014 sales grew across all product categories and regions. Skin care sales rose 7%, makeup 9%, fragrance 9% and hair care 5%.
- Cash and cash equivalents were $1,629.1 million; total debt was $1,343.1 million, broadly unchanged from $1,344.3 million. Working capital was $2,768.5 million. Debt as a share of total capitalization declined to 26% from 29%.
- Cash used in financing was $856.9 million, including $667.2 million of treasury-stock purchases and $301.8 million of dividends paid. FY2014 declared dividends were $0.78 per share; the prior-year $1.08 reflected six quarterly dividends during the transition to quarterly payments.
- FY2014 fourth-quarter sales were $2,725.3 million, operating income $380.2 million, attributable net earnings $257.7 million and diluted EPS $0.66.
Material changes and unusual items
- Retailers accelerated approximately $178 million of orders into FY2014’s fourth quarter ahead of the July 2014 SAP/Strategic Modernization Initiative rollout. The orders added approximately $127 million to FY2014 operating income and $0.21 to diluted EPS. Excluding them, management reported adjusted sales growth of 6% and adjusted operating-income growth of 12%; it expected a corresponding adverse impact on FY2015 first-quarter and full-year comparisons.
- The company recorded a $38.3 million Venezuela currency remeasurement charge, without a tax benefit, after changing its rate to the SICAD II rate of 49.98 bolivars per U.S. dollar. Venezuela contributed less than 1% of sales and approximately 1% of operating income before the charge.
- Operating margin expansion reflected lower operating expenses as a share of sales, including reduced advertising, merchandising and sampling spending, as well as modest gross-margin improvement. The effective tax rate rose to 32.0% from 30.6%.
- The prior year included a $19.1 million debt-extinguishment expense and $23.1 million of other income, primarily from the amended Rodan + Fields sale agreement; FY2014 had neither item.
Outlook, commentary and risks
- Management described the business as performing well and planned to continue its long-term strategy through FY2017, emphasizing skin care, product innovation, digital capabilities, emerging markets, travel retail, freestanding stores and operational efficiency.
- Management cited softness in parts of Southern Europe and Korea, intensifying global competition, uncertain near-term U.S. retail conditions, slower growth in China, unfavorable currency movements in some emerging markets and Chinese government actions affecting Chinese travel and spending.
- The filing says FY2015 sales and EPS guidance was provided when FY2014 results were announced, but the guidance figures are not present in the supplied filing text; the filing text does not provide a clear value.
- Key risks include changing consumer preferences, retail/customer concentration and credit exposure, foreign exchange and geopolitical risks, supply-chain or systems disruption, cybersecurity and privacy incidents, product safety, regulatory and tax matters, and execution of the SAP rollout. The Lauder family held 86.7% of voting power, giving it significant control.
- Contractual obligations totaled $6,622.4 million, including $2,330.6 million of debt service, $2,010.6 million of operating leases and $2,280.1 million of unconditional purchase obligations. The company disclosed a pending appeal of a Darphin acquisition dispute; a Paris court had awarded €22.9 million plus interest, and the appeal decision was expected in September 2014. Management maintained an accrual below the court’s award.
- Approximately $1.14 billion of cash was held offshore under the permanent-reinvestment strategy; repatriation could result in additional taxes. A new undrawn $1.0 billion revolving credit facility was established in July 2014, maturing in 2019, subject to extension provisions.
Most important facts for investors to verify
- How FY2015 sales, operating income and EPS compare with reported FY2014 results after accounting for the $178 million of accelerated orders.
- Whether growth and margin trends persist by category and region, particularly in China, travel retail, Korea and Southern Europe.
- The effect of currency movements, including developments in Venezuela and the tax treatment of offshore earnings.
- Cash conversion, working-capital growth, capital spending and the pace of share repurchases relative to operating cash flow.
- Updates on the Darphin litigation, tax examinations and the remaining SAP implementation through FY2017.