Business context and reporting period
The Estée Lauder Companies Inc. filed this Form 10-K for the fiscal year ended June 30, 2011. The company sells prestige skin care, makeup, fragrance and hair care products through a portfolio of owned and licensed brands in more than 150 countries and territories. The filing also reports unaudited fourth-quarter results for the quarter ended June 30, 2011; the metadata’s “2010 Q4” does not match the filing period.
Financial performance and liquidity
| Metric | FY2011 | FY2010 |
|---|---|---|
| Net sales | $8,810.0 million | $7,795.8 million |
| Gross profit / margin | $6,873.1 million / 78.0% | $5,966.4 million / 76.5% |
| Operating income / margin | $1,089.4 million / 12.4% | $789.9 million / 10.1% |
| Net earnings attributable to the company | $700.8 million | $478.3 million |
| Diluted EPS | $3.48 | $2.38 |
| Operating cash flow | $1,027.0 million | $956.7 million |
| Cash and cash equivalents at year-end | $1,253.0 million | $1,120.7 million |
| Total debt at year-end | $1,218.1 million | $1,228.4 million |
| Working capital | $1,743.2 million | $1,548.8 million |
Investing cash outflow was $606.9 million, including $256.1 million for acquisitions and intangible assets and $351.0 million of capital expenditures. Financing cash outflow was $313.1 million. Total debt was 32% of total capitalization, down from 39%. Cash included approximately $508 million held offshore under the company’s permanent-reinvestment strategy.
For the fourth quarter ended June 30, 2011, net sales were $2,060.6 million versus $1,840.1 million in the prior-year quarter; operating income was $64.6 million versus $43.6 million; company-attributable earnings were $41.1 million versus $23.9 million; and diluted EPS was $0.20 versus $0.12.
Material changes versus the prior year
- Full-year net sales rose 13% as reported and 12% in constant currency. Growth was broad-based; Asia/Pacific sales increased 17%, Europe, the Middle East and Africa 14%, and the Americas 10%.
- Skin care sales increased 15%, makeup 13%, fragrance 9% and hair care 4%. Smashbox, acquired July 1, 2010, contributed to makeup growth.
- Operating income increased 38% and attributable net earnings increased 47%. Gross margin improved by 1.5 percentage points, supported by product mix, manufacturing variances, currency and lower obsolescence charges.
- Operating expenses declined to 65.6% of sales from 66.4%; cost containment and sales growth were partly offset by higher advertising, merchandising and sampling investment.
- Net interest expense declined to $63.9 million from $74.3 million. FY2010 included a $27.3 million pre-tax debt-extinguishment charge, absent in FY2011.
Outlook, management commentary, risks and unusual items
- Management said it did not expect fiscal 2011’s year-over-year improvement to continue at the same rate. It described the balance sheet, cash flows and gross margin as strong, while noting a challenging environment. Specific fiscal 2012 sales and EPS guidance figures are not clear in the supplied filing text.
- Priorities include investment in skin care, emerging markets and digital channels; expansion of “High-Touch” service and distribution; continued information-system modernization; and shifting some spending from gift-with-purchase promotions toward advertising, merchandising and sampling. Management expected this mix to improve cost-of-sales margin but increase operating-expense margin in fiscal 2012.
- The cost-savings program is expected to generate total pre-tax restructuring and other special charges of $350–$450 million. Cumulative program charges recorded through June 30, 2011 were $239.4 million; management estimated savings of $675–$725 million over the program’s course, including approximately $560 million through fiscal 2011. Initiatives may continue to be approved through fiscal 2012 and executed through fiscal 2013.
- FY2011 included $59.4 million of pre-tax returns and charges associated with restructuring activities; these reduced earnings by $41.7 million after tax, or $0.21 per diluted share. The company recorded $29.3 million of Ojon goodwill impairment, $7.0 million of Ojon trademark impairment and $1.7 million of other trademark impairments.
- Key risks include intense competition, changing consumer preferences and retail-channel concentration; Macy’s represented 11% of sales. Foreign-exchange exposure, economic and geopolitical disruption, travel-retail demand, supply-chain interruptions, product safety, and execution and cost risks from the SAP modernization program are also noted. The Lauder family held approximately 86.8% of voting power, giving it significant control.
- Management reported that litigation was not expected to have a material adverse effect and that reasonably possible additional losses were not material. A Spanish tax appeal was denied after year-end; the company expected to record a $4.0 million after-tax tax provision in fiscal 2012, while appealing to Spain’s Supreme Court.
Important facts for investors to verify
- Reconcile reported and constant-currency sales growth, including the effect of foreign exchange and the prior-year perfumery returns charge.
- Assess whether gross-margin gains and restructuring savings can persist as strategic advertising and digital investments increase.
- Review Ojon’s turnaround assumptions and the potential for further impairment, as its trademark fair value equaled carrying value at year-end.
- Monitor the near-term $119.4 million 6% Senior Notes maturity in January 2012 and the company’s planned refinancing or repayment.
- Evaluate working-capital changes, particularly higher receivables and inventory, and the execution risks and costs of the SAP rollout.
- Check subsequent repurchases: after year-end, the company bought approximately 2.8 million shares for $280.1 million. Also consider the associated capital allocation and family-control implications.