The Estée Lauder Companies Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter and six months ended December 31, 2011, compared with the same periods in 2010. The company manufactures and sells prestige beauty products across skin care, makeup, fragrance and hair care in more than 150 countries. Per-share figures reflect the two-for-one stock split effected in January 2012.
Financial performance
| Metric | Three months ended Dec. 31, 2011 | Six months ended Dec. 31, 2011 |
|---|---|---|
| Net sales | $2,737.5 million; up 10% | $5,214.2 million; up 14% (12% constant currency) |
| Gross margin | 79.9%, versus 78.3% | 79.2%, versus 77.5% |
| Operating income | $597.0 million; up 15% as reported | $1,027.0 million; up 26% as reported |
| Operating margin | 21.8%, versus 20.8% | 19.7%, versus 17.8% |
| Net earnings attributable to Estee Lauder | $396.7 million; up 15% | $675.3 million; up 26% |
| Diluted EPS | $1.00, versus $0.86 | $1.70, versus $1.33 |
| Operating cash flow | Not separately reported for the quarter | $610.2 million, versus $508.0 million |
Second-quarter sales growth was led by skin care (+13%) and makeup (+11%); fragrance declined 1%. By region, Asia/Pacific grew 21%, the Americas 8%, and Europe, the Middle East and Africa 5%. For the six months, skin care and makeup sales increased 19% and 14%, respectively. Gross-margin improvement primarily reflected favorable product mix; higher strategic advertising, merchandising and sampling spending partly offset that benefit in quarterly operating expenses.
At December 31, cash and cash equivalents were $999.1 million, down from $1,253.0 million at June 30, 2011. Current assets were $3,753.3 million and current liabilities $2,022.1 million. Total debt was $1,212.5 million, including $143.8 million current debt and $1,068.7 million long-term debt; debt was 32% of total capitalization. The company had no commercial paper outstanding and no borrowings under its $1.0 billion revolving facility. Operating cash flow was offset by $189.2 million of investing outflows and $657.7 million of financing outflows, including $522.4 million for treasury-stock purchases and $204.0 million of dividends paid.
Material changes and notable items
- Sales and earnings rose year over year, with higher gross margins and strong growth in skin care, makeup and Asia/Pacific. Quarterly operating income also included approximately $23 million of benefit from retailer orders accelerated ahead of SAP implementation.
- About $30 million of second-quarter fiscal 2012 sales were accelerated from the following quarter to build retailer safety stock before SAP implementation. Management said the comparison between fiscal 2012 and fiscal 2011 third quarters would be difficult by approximately $72 million of sales and $51 million of operating income, reflecting order timing in both years.
- In November 2011, the company received $10.5 million from settling a commercial dispute; it recorded the amount as other income, outside normal operations.
- Ojon’s weaker direct-response television business prompted an interim review and a $6.7 million trademark impairment in hair care. Its $12.4 million customer-list asset was deemed recoverable, but management noted that projected marketing and product-launch plans are important to that assessment.
- The company continued its cost-savings program. It expects total program charges of $350 million to $450 million before tax and estimated savings of $675 million to $725 million, including savings relative to assumed normalized spending. Initiatives are expected to be approved through fiscal 2012 and executed through fiscal 2013.
Outlook, risks and contingencies
Management described the business as performing well but cautioned that global economic uncertainty and financial-market volatility were softening demand in some markets, particularly parts of Europe, Japan and Australia. It remains cautious about Europe and China’s macroeconomic outlook and expects continued fragrance-category challenges from competition and economic uncertainty. Management anticipated higher global advertising, merchandising and sampling investment in fiscal 2012’s third quarter. It believes cash, operating cash flow, credit access and borrowing capacity are adequate for planned needs; no specific consolidated earnings or sales guidance was provided in the filing text.
Risks identified include consumer demand and shopping-pattern changes; competition and product-launch performance; retailer destocking, consolidation and customer credit exposure; foreign-exchange movements; economic, political and regulatory developments; and operational disruption or shipment delays related to SAP migration. The company reported that disclosure controls were effective at December 31, 2011 and that no material change in internal control over financial reporting occurred during the quarter.
In a Darphin dispute, a Paris court awarded the former brand owner 22.9 million euros plus interest. The company appealed and paid 25.3 million euros in January 2012, receiving a bank guarantee securing repayment if the judgment is reversed. Its recorded accrual is below the court award. The company also disclosed $96.7 million of gross unrecognized tax benefits and said that amount could decrease by $25 million to $30 million within 12 months as examinations and limitations periods resolve. Management said other current litigation was not expected to materially affect results, financial condition or cash flows.
The $120 million principal balance of 6.00% Senior Notes due January 2012 was repaid on January 15, 2012, using operating cash. The company increased expected fiscal 2012 international pension contributions from approximately $16 million to $24 million.
Important facts for investors to verify
- How much of reported sales and operating profit reflects SAP-related order acceleration, and the resulting third-quarter comparison effect.
- Whether strong skin care, makeup and Asia/Pacific performance continues amid the economic risks identified by management.
- Progress against restructuring-program charge and savings estimates, including the timing and cash costs of remaining initiatives.
- Ojon forecast assumptions and potential impairment exposure, as well as the outcome of the Darphin appeal and tax-reserve resolutions.
- Cash and working-capital trends, particularly the increase in receivables, alongside substantial share repurchases, dividends and planned investment spending.