E.L.F. Beauty, Inc. — Q1 2017 Form 10-Q
Reporting period: Three months ended March 31, 2017; unaudited. E.L.F. sells cosmetics through retail customers, its stores and e-commerce. The company reports one operating and reportable segment. Unless noted, amounts below are in U.S. dollars.
Financial performance
| Metric | Q1 2017 | Q1 2016 | Change |
|---|---|---|---|
| Net sales | $60.6 million | $52.7 million | Up 15% |
| Gross profit / margin | $38.2 million / 63% | $29.3 million / 56% | Margin up 7 percentage points |
| SG&A | $33.0 million; 54% of sales | $23.1 million; 44% of sales | Up 43% |
| Operating income / margin | $5.2 million / 9% | $6.2 million / 12% | Down 16% |
| Interest expense, net | $2.2 million | $3.1 million | Down 30% |
| Net income | $2.2 million | $3.8 million | Down 43% |
| Net income per share | $0.05 basic; $0.04 diluted | $(69.57) basic and diluted | Prior-period EPS reflects $37.9 million preferred-stock accretion |
| Cash from operating activities | $(22.0) million | $11.3 million | Cash flow declined |
| Capital expenditures | $0.7 million | $1.9 million | Down |
Financial position and liquidity
- Cash was $5.4 million at March 31, down from $15.3 million at year-end. Total assets were $401.4 million and stockholders’ equity was $149.6 million.
- Total debt and capital lease obligations were $178.4 million gross ($177.8 million net of debt issuance costs), versus $165.4 million gross at December 31. The balance included a $15.0 million revolving-credit draw and a $160.7 million term loan. The term loan and revolver carried a 4.5% interest rate at quarter-end.
- The $35.0 million revolver had $19.5 million available at March 31. The credit facility matures in December 2021 and is secured by substantially all company assets; the company reported compliance with financial covenants.
- Management said operating cash flow and cash on hand, with revolver capacity if needed, should cover operating, investing and financing needs for the next 12 months. It also noted future financing may not be available on favorable terms or at all.
Material changes and management commentary
- Sales growth was attributed mainly to increased shelf space and productivity at leading national retailers, plus expansion of direct channels.
- Gross margin improved due to margin-accretive innovation, lower freight costs and favorable foreign-exchange movements, as well as volume growth.
- SG&A growth reflected higher stock-based compensation, greater sales and marketing investment, additional e.l.f. store costs, IT infrastructure spending and expenses related to a secondary stock offering.
- Operating cash outflow primarily reflected a $31.4 million reduction in accounts payable and accrued expenses, largely from payments for inventory ordered at year-end, and a $7.5 million inventory build. Lower receivables partly offset these uses of cash.
- Interest expense fell after the December 2016 refinancing, partly offset by additional borrowing. Other income of $3.6 million in the prior-year quarter turned to a $0.8 million expense, primarily reflecting RMB movements and legacy forward-contract effects in 2016.
- The company says sales are typically higher in the third and fourth quarters due to holiday retail buying; working-capital needs generally rise in the second and third quarters. It also cited retailer order timing and concentration among a limited number of retail customers as sources of quarterly variability.
Outlook, risks and unusual items
- No specific financial guidance or quantified full-year outlook is provided. Management’s liquidity statement covers the next 12 months, and it cautions that interim results are not necessarily indicative of full-year results.
- Key disclosed risks include dependence on a limited number of retailers; intense competition and the need for successful product launches; inventory forecasting and seasonal working-capital demands; substantial debt and variable-rate exposure; and reliance on China-based suppliers and manufacturers and third-party logistics providers.
- Other cited risks include product quality and regulatory compliance, cybersecurity and IT upgrades, foreign-exchange and trade-policy changes, and the company’s ability to manage growth and retain key personnel.
- No material legal matter expected to adversely affect the company was identified by management. The filing reports no material off-balance-sheet arrangements and no material change in contractual obligations.
- On April 14, 2017, after quarter-end, the company invested $3.0 million for approximately 15% of an unnamed social-media analytics company. This is a subsequent event, not a Q1-period cash outflow.
- The company expects to adopt revenue-recognition guidance on January 1, 2018 and said it may affect the timing of revenue recognition through changes to reserves for discounts, refunds and customer incentives. It was evaluating the effect of lease-accounting guidance expected to be adopted January 1, 2019.
Most important facts for investors to verify
- Whether sales growth and shelf-space gains continue, and how much depends on a small number of retail customers.
- Whether the sharp working-capital cash outflow and inventory build reverse as planned, and whether available revolver capacity remains adequate through seasonal peaks.
- Whether improved gross margin can be sustained while SG&A investment, stock compensation and store expansion weigh on operating margin.
- Debt levels, variable interest rates, required amortization, covenant headroom and the company’s ability to generate cash for debt service.
- The precise effect of the secondary offering-related expenses and the post-quarter $3.0 million investment on future reported results and liquidity.