The Estée Lauder Companies Inc. — Fiscal 2021 First Quarter 10-Q
Business context and period: The filing reports the three months ended September 30, 2020, compared with the three months ended September 30, 2019. The company manufactures and sells prestige beauty products globally. Results were significantly affected by COVID-19 disruptions, including reduced store traffic and international travel; strong online sales partly offset those effects.
Key financial results
| Metric | Q1 FY2021 | Q1 FY2020 |
|---|---|---|
| Net sales | $3.562 billion | $3.895 billion |
| Gross profit / margin | $2.737 billion / 76.8% | $2.987 billion / 76.7% |
| Operating income / margin | $705 million / 19.8% | $779 million / 20.0% |
| Net earnings attributable to Estée Lauder | $523 million | $595 million |
| Diluted EPS | $1.42 | $1.61 |
| Operating cash flow | $358 million | $(170) million |
| Capital expenditures | $116 million | $125 million |
Gross margin increased 0.1 percentage point, while operating margin declined 0.2 percentage point and net margin declined from 15.4% to 14.7%. On a basis excluding restructuring and other charges, operating income decreased 11% and diluted EPS decreased 14%.
- Revenue mix: Skin care sales rose 10% to $2.035 billion; makeup fell 32% to $978 million; fragrance fell 12% to $406 million; hair care was flat at $136 million. By region, the Americas declined 25% to $873 million, Europe/Middle East/Africa declined 8% to $1.540 billion, and Asia/Pacific grew 9% to $1.149 billion.
- Cash and liquidity: Cash and equivalents were $4.267 billion at September 30, versus $5.022 billion at June 30, 2020. Current assets were $8.795 billion and current liabilities $4.744 billion. Cash decreased $755 million during the quarter.
- Debt: Total debt was $5.386 billion, compared with $6.136 billion at June 30. The company repaid the remaining $750 million drawn on its revolving credit facility in August. Debt was 55% of total capitalization, down from 61% at June 30.
- Cash flow: Operating cash flow improved from an outflow of $170 million to an inflow of $358 million, mainly reflecting working-capital movements, including higher accrued liabilities and accounts payable, partly offset by a larger increase in receivables. Investing cash outflow was $242 million; financing cash outflow was $890 million, primarily reflecting revolving-credit repayment and dividends.
Material changes and management commentary
- COVID-19 continued to weigh on in-store retail and travel retail. Nearly all stores in the Americas and EMEA had reopened by quarter-end, while international travel remained severely curtailed. Online sales grew strongly in every region and represented approximately 13% of quarterly sales, versus 8% a year earlier.
- Skin care growth reflected Estée Lauder and La Mer franchises and launches, as well as incremental Dr. Jart+ sales following its acquisition. Makeup was particularly weak as consumers wore less makeup; makeup category operating results moved from $104 million of income to a $71 million loss.
- Management said uncertainty over the pandemic’s duration and recovery could further affect sales, profitability, receivables, cash flow, and acquired-brand goodwill and intangible assets. Other cited risks include retail customer distress, retailer destocking, travel weakness, changing consumer preferences, U.S.-China trade tensions, Brexit, foreign exchange, and tariffs.
- The two-year Post-COVID Business Acceleration Program is intended to adapt the business to shifts in distribution and consumer behavior, including accelerating online and reshaping the store network. The company estimates a net workforce reduction of 1,500–2,000 positions and closure of approximately 10%–15% of freestanding stores globally. Estimated pretax charges are $400–$500 million; initiatives are expected to be completed through fiscal 2023. $12 million of charges had been recorded by quarter-end.
- The existing Leading Beauty Forward program recorded net charges of $(3) million in the quarter, including an $8 million restructuring-cost adjustment. Management expects approximately $81 million of related accrued restructuring costs to be paid over time.
- No numerical full-year sales or earnings guidance is provided in the supplied filing text. Management said cash, operating cash generation, credit lines, and market access were expected to support planned operations and commitments.
Risks, contingencies, and unusual items
- Management stated that current litigation and legal proceedings, and reasonably possible additional losses beyond accrued amounts, were not expected to have a material adverse effect; outcomes could differ as proceedings develop.
- The company adopted expected-credit-loss accounting in the quarter without a material overall financial-statement impact; the adoption reduced opening retained earnings by approximately $3 million after tax.
- The effective tax rate was 21.8%, versus 21.3%. The current-quarter rate reflected a 130-basis-point benefit from final GILTI regulations and a 120-basis-point cost related to the expected expiration of a China tax provision.
- Credit ratings were A+ with a negative outlook from S&P and A1 with a stable outlook from Moody’s as of October 26, 2020. The filing also describes foreign-exchange and interest-rate exposure and use of derivatives to manage it.
- The board declared a subsequent quarterly dividend of $0.53 per share on October 30, 2020, payable December 15, 2020.
Important facts for investors to verify
- Whether online and Asia/Pacific growth can offset continued pressure in makeup, the Americas, and travel retail.
- How pandemic developments, store closures, travel restrictions, and retailer financial health affect sales, collections, and cash flow.
- The actual costs, timing, savings, workforce effects, and store closures under the Post-COVID Business Acceleration Program.
- Working-capital trends—especially receivables, inventory, and accrued liabilities—and the sustainability of positive operating cash flow.
- Debt maturity and refinancing needs, borrowing costs, and the company’s ability to maintain liquidity and dividends.
- Tax outcomes related to GILTI regulations and the China tax provision, along with any material changes in litigation or impairment assessments.