E.L.F. Beauty, Inc. — Form 10-Q Summary
Period: Quarter and nine months ended September 30, 2016. The company sells cosmetics through retail customers, e.l.f. stores and e-commerce. The quarter included its September 27 IPO and conversion of all convertible preferred stock into common stock.
Financial performance
| Metric | Q3 2016 | Q3 2015 | Nine months 2016 | Nine months 2015 |
|---|---|---|---|---|
| Net sales | $56.3 million | $50.8 million | $153.1 million | $126.0 million |
| Gross profit / margin | $32.5 million / 58% | $26.0 million / 51% | $86.9 million / 57% | $65.3 million / 52% |
| Operating income | $1.5 million | $6.5 million | $8.1 million | $14.6 million |
| Net income (loss) | $(2.4) million | $(0.7) million | $(1.3) million | $1.9 million |
| Operating cash flow | Not stated for quarter | Not stated for quarter | $2.5 million | $3.4 million |
Sales grew 11% in Q3 and 22% year to date. Management attributed growth mainly to more shelf space and improved productivity at major retailers. Gross margin gains were primarily attributed to margin-accretive innovation. SG&A rose 59% in Q3 and 56% year to date, outpacing sales growth; it included IPO-related stock compensation, distribution-center transition costs, increased sales and marketing, IT investments and IPO preparation expenses. The filing identifies $6.8 million of Q3 and $12.9 million of nine-month SG&A costs as noncash or not reflective of ongoing operations.
Reported net loss per share was $(73.13) for Q3 and $(234.34) for the first nine months of 2016. These figures were substantially affected by preferred-stock accretion before the IPO; the preferred shares converted at the IPO, and the filing says those accretion charges will not recur. Per-share comparisons are also affected by the IPO and share-count changes.
Liquidity, debt and capital
- At September 30, cash was $21.1 million; working capital excluding cash was $24.0 million. The company had $24.5 million available under its $25 million revolving facility, with no revolving balance outstanding.
- Total debt and capital lease obligations were $163.4 million, including a $160.5 million term loan and $2.9 million of capital leases. The term loan bears interest at 6.25% as of quarter-end and matures January 2019. The company repaid its $40 million second-lien loan using IPO proceeds.
- The company completed an IPO in September. It received $54.9 million in net proceeds after offering costs; $40.4 million was used to repay debt, including a prepayment penalty, with the remainder intended for working capital and general corporate purposes. The filing also reports $162.9 million of aggregate gross proceeds for shares sold by the company and selling stockholders.
- Nine-month investing cash outflow was $5.5 million, mainly for property and equipment. Financing cash inflow was $10.0 million, including IPO and debt proceeds, offset by the $68.0 million cash dividend and debt repayments.
- The company reported compliance with financial covenants at September 30. Management believes cash on hand and operating cash flow will meet operating, investing and financing needs for the next 12 months, with the revolver available if needed.
Outlook, risks and notable items
- No specific revenue or earnings guidance is provided. Management notes that sales are typically higher in the third and fourth quarters due to holiday demand, while working-capital needs are generally greater in the second and third quarters. Retailer ordering patterns can cause significant fluctuations.
- Key risks include dependence on a limited number of retailers, intense cosmetics competition, demand and product-trend uncertainty, inventory management and supply-chain disruption. All products are sourced and manufactured in China, and the company relies on third parties for manufacturing, distribution and important technology services.
- Management cited currency movements as a factor in other income; the company uses foreign-exchange forwards for certain China supplier purchases. Forward contracts had a $2.4 million net liability at quarter-end.
- The company paid a $72.0 million special dividend in June, funded in part by additional term debt, increasing leverage. It also modified stock options in connection with the dividend and recorded related compensation expense.
- Management said it knew of no legal proceedings expected to have a material adverse effect. Disclosure controls were assessed as effective; the filing also describes a prior material weakness in financial reporting controls that management said it remediated during 2015.
Investor verification priorities
- Track whether sales growth and gross-margin improvement continue, and whether retailer shelf-space gains translate into sustained consumer demand.
- Separate recurring SG&A from IPO, stock-compensation, distribution-transition and other identified costs; assess the continuing impact of public-company expenses and equity awards.
- Monitor debt service, leverage and covenant headroom, including the effect of variable interest rates and seasonal working-capital demands.
- Review retailer concentration, inventory growth, supplier dependence on China and execution of the California distribution-center transition.
- Confirm the post-IPO share count, future equity-award dilution and the timing of restricted-share lockup expirations; assess reported EPS in light of preferred-stock accretion and conversion.