E.L.F. Beauty, Inc. — Transition Report Summary
Business context and reporting period
This Form 10-QT covers the three months from January 1 to March 31, 2019, following the company’s change of fiscal year-end from December 31 to March 31. The comparable period is the three months ended March 31, 2018; comparative figures were not restated for the fiscal-year change. E.L.F. sells prestige-inspired cosmetics and skin-care products through retailers, e-commerce and international distribution.
Financial performance and position
| Metric | Three months ended March 31, 2019 | Prior-year period |
|---|---|---|
| Net sales | $66.1 million | $65.9 million |
| Gross profit / margin | $40.5 million / 61% | $40.2 million / 61% |
| SG&A | $37.3 million; 56% of sales | $36.2 million; 55% of sales |
| Restructuring expense | $22.2 million | None |
| Operating income (loss) | $(19.0) million | $4.0 million |
| Net income (loss) | $(17.9) million; $(0.37) per diluted share | $0.7 million; $0.01 per diluted share |
| Operating cash flow | $8.6 million | $5.0 million |
| Capital expenditures | $3.8 million | $2.7 million |
Cash increased to $53.9 million from $51.2 million at December 31, 2018. Gross debt, including finance leases, was $148.6 million, including a $144.8 million term loan; $49.5 million was available under the $50 million revolving facility. The term-loan rate was approximately 4.6%, and the company reported compliance with its financial covenants. Total assets were $431.7 million and stockholders’ equity was $215.2 million at March 31, 2019. The filing does not provide a clear standalone EBITDA value.
Material changes versus the prior comparable period
- Sales rose $0.2 million, or less than 1%. U.S. sales declined to $59.8 million from $62.1 million, while international sales increased to $6.3 million from $3.8 million.
- Management attributed sales growth to additional shelf space at existing retailers, new accounts and lower sales adjustments, partly offset by pipeline-shipment timing and store closures.
- Gross margin held at 61%. Lower sales adjustments and margin-accretive innovation were offset by China tariffs and inventory-related adjustments.
- The company closed all 22 stand-alone stores in February. Store sales were $1.9 million versus $3.3 million in the prior-year period.
Outlook, commentary, risks and unusual items
- The $22.2 million restructuring charge included $14.2 million of accelerated rent expense, $5.4 million of accelerated depreciation, $0.6 million of severance and $2.0 million of other costs. Most was non-cash. The company did not expect additional material restructuring costs apart from possible lease settlements; related cash disbursements were expected by March 31, 2020.
- Management said cash on hand, operating cash flow and available revolver capacity should meet operating, investing and financing needs for the next 12 months. No quantified earnings or revenue guidance is provided.
- Management cited tariffs on China-sourced goods as a risk to future costs and margins. Mitigation efforts include supplier negotiations and selective price increases, with no assurance of success.
- Seasonality, retailer ordering patterns and reliance on a limited number of large retailers may cause quarterly sales and liquidity fluctuations. Substantially all products are sourced or manufactured in China, creating supply-chain, labor, trade and tariff exposure.
- Effective January 1, 2019, the company adopted ASC 842. At adoption it recognized approximately $21.2 million of operating-lease right-of-use assets and $23.5 million of lease liabilities; store closures subsequently reduced related balances. Adoption did not affect beginning retained earnings, operating results or cash flows.
- In April 2019, the board authorized a share-repurchase program of up to $25 million; purchases are discretionary and may be suspended or discontinued. The credit agreement restricts repurchases subject to its terms.
- Management said ordinary-course legal matters were not expected to have a material adverse effect. Disclosure controls were assessed as effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether retailer expansion, international growth and digital sales can sustain revenue growth after the store closures.
- How tariffs, supplier negotiations and any price changes affect gross margin and consumer demand.
- The final cash cost of store closures and lease settlements, including any additional gains or losses at settlement.
- Liquidity and covenant headroom as seasonal working-capital needs rise, and the company’s capacity to service variable-rate debt.
- Whether the announced repurchase proceeds, and how any purchases interact with credit-agreement restrictions and other capital needs.