E.L.F. Beauty, Inc. — Form 10-Q Summary
Reporting period: Third quarter of fiscal 2020, October 1–December 31, 2019; year-to-date figures cover the nine months ended December 31, 2019. Comparisons are with the corresponding 2018 periods. Amounts are in U.S. dollars; financial statement amounts below are in millions unless stated otherwise.
Business context
e.l.f. Beauty sells vegan, cruelty-free beauty products through national retailers, e-commerce and international distributors. It operates as one reportable segment. The company closed all 22 stand-alone e.l.f. stores in February 2019 and is prioritizing national retail and digital channels.
Financial performance
| Metric | Three months ended Dec. 31, 2019 | Year-over-year change | Nine months ended Dec. 31, 2019 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $80.8 | +3% | $208.1 | +3% |
| Gross profit / margin | $52.5 / 65% | +$5.6 / +5 percentage points | $133.1 / 64% | +$10.5 / +3 percentage points |
| SG&A | $39.6 | +17% | $110.1 | +10% |
| Operating income | $12.9 | $13.0 prior year | $28.9 | $22.2 prior year |
| Net income | $8.0 | $9.7 prior year | $18.2 | $14.8 prior year |
| Diluted EPS | $0.16 | $0.20 prior year | $0.36 | $0.30 prior year |
Quarterly U.S. sales increased to $74.3 million from $68.8 million, while international sales fell to $6.5 million from $9.8 million. Management attributed quarterly sales growth to channel productivity and shipment timing, partly offset by store closures. Gross-margin gains reflected selective price increases, margin-accretive innovation, cost savings, favorable foreign exchange and a lower inventory reserve; tariffs on China-sourced goods were a partial offset. SG&A rose chiefly from marketing and digital investment and bonus accruals. The quarter’s higher tax provision—$3.0 million versus $1.0 million—reflected fewer discrete tax benefits, primarily those related to share-based compensation in 2018.
For the nine-month period, operating results included a $6.0 million restructuring benefit, principally a $7.7 million gain from extinguishing store lease liabilities, partly offset by other restructuring costs. Without this unusual benefit, reported operating-income growth would be lower.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $37.8 million, down from $50.6 million. Investing cash outflow was $7.1 million, mainly property and equipment; financing cash outflow was $9.9 million, including term-loan repayments and share repurchases.
- Cash and cash equivalents were $74.7 million at December 31, 2019, up from $53.9 million at March 31, 2019. The company reported $49.8 million of available capacity under its $50 million revolving facility.
- Working capital excluding cash was $30.2 million; excluding cash and debt, it was $42.2 million. Management said cash on hand, operating cash flow and facility availability should meet operating, investing and financing needs for the next 12 months.
- Total debt and finance lease obligations were $141.4 million, including $138.2 million of term loans; the balance-sheet carrying amount, net of issuance costs, was $141.2 million. The term-loan rate was approximately 3.9%, and maturities for the facilities are August 2022. The company reported compliance with applicable financial covenants.
- The company repurchased $3.6 million of shares in the first nine months under a $25 million authorization; $21.4 million remained available at December 31, 2019.
Outlook, commentary and risks
The filing provides no numerical financial guidance. Management said it expects to fund capital expenditures from cash on hand and operating cash flow, with facility borrowings available if needed. It highlighted investment in digital capabilities, marketing, retailer productivity, innovation and cost savings as strategic priorities, while cautioning that these efforts may not deliver expected benefits.
- Tariffs and sourcing: Most products are sourced and manufactured in China, and the majority remained subject to increased U.S. tariffs despite the Phase One trade agreement. Price increases and supplier diversification are mitigation efforts, but management gave no assurance they will be effective.
- Coronavirus exposure: The filing warns that the outbreak reported in China could disrupt suppliers, manufacturing, the company’s China office, exports and shipping. It notes Shanghai authorities had extended the office closure through February 10, 2020; the ultimate impact was uncertain.
- Customer concentration and seasonality: A limited number of retailers account for a large share of sales, and retailer order timing can materially affect quarterly results and liquidity. Walmart and Target represented 30% and 21% of calendar-year 2018 net sales, respectively.
- Other risks: Competition and product-launch execution, supply-chain and inventory management, variable-rate debt and covenant restrictions, and privacy, cybersecurity and regulatory risks could affect performance. The company said it was not party to legal matters expected to have a material adverse effect. It reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether revenue growth and improved gross margins persist after accounting for shipment timing, retailer ordering patterns, price increases and China tariffs.
- How the coronavirus outbreak affected supplier operations, product availability, shipping and subsequent-period results.
- Whether increased marketing and digital spending can support growth while SG&A rises faster than quarterly sales.
- The sustainability of cash generation given working-capital needs, store-closure payments, debt service and planned capital expenditures.
- The effect of the $6.0 million restructuring benefit on year-to-date operating-income comparability, and progress on repurchases and remaining facility capacity.