Estée Lauder Companies Inc. — Q2 FY2024 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2023. The company manufactures and sells prestige beauty products across skin care, makeup, fragrance and hair care, in approximately 150 countries and territories.
Financial performance
| Metric | Three months ended Dec. 31, 2023 | Six months ended Dec. 31, 2023 |
|---|---|---|
| Net sales | $4.279 billion, down 7% reported (8% constant currency) | $7.797 billion, down 9% |
| Gross margin | 73.0%, versus 73.6% | 71.5%, versus 73.8% |
| Operating income / margin | $574 million / 13.4%, versus $556 million / 12.0% | $672 million / 8.6%, versus $1.217 billion / 14.2% |
| Net earnings attributable to Estée Lauder | $313 million; diluted EPS $0.87 | $344 million; diluted EPS $0.95 |
| Effective tax rate | 37.6%, versus 25.4% | 36.3%, versus 23.9% |
Quarterly reported operating income rose partly because the prior-year quarter included $207 million of intangible-asset impairment charges. Excluding specified items, operating income fell 25% for the quarter and 52% for the six-month period; adjusted diluted EPS declined 43% and 66%, respectively. The company’s non-GAAP measures are not substitutes for GAAP results.
For the six months, operating cash flow was $937 million, versus $751 million. Capital expenditures were $527 million, versus $419 million; operating cash flow less capital expenditures was $410 million, compared with $332 million. Cash and equivalents were $3.939 billion at December 31, down from $4.029 billion at June 30.
Total debt was $8.140 billion ($1.500 billion current and $6.640 billion long-term), versus $8.114 billion at June 30. Cash exceeded current debt by $2.439 billion; debt less cash was approximately $4.201 billion. The current ratio was approximately 1.36. Dividends paid in the first half were $474 million. The company reported total debt at 59% of total capitalization.
Material changes and business drivers
- Sales weakness was concentrated in Asia travel retail and mainland China, reflecting retailer inventory resets, lower traveler-to-consumer conversion and softness in prestige beauty. EMEA sales declined 13% in the quarter and 19% for the half; Asia/Pacific declined 8% and 7%.
- Quarterly sales by category: skin care fell 10%, makeup fell 8%, fragrance was flat and hair care fell 5%. The Ordinary, Le Labo and Jo Malone London were among the areas of growth. For the six-month period, skin care declined 16%, while fragrance grew 3%.
- Quarterly sales volume declined 12%, partly offset by 4% pricing. Six-month volume declined 13%, partly offset by 3% pricing.
- Gross margin pressure reflected foreign exchange, manufacturing under-absorption at lower production volumes and higher obsolescence charges, particularly associated with excess inventory and weaker demand in travel retail and mainland China. SG&A was 59.5% of sales in the quarter and 62.8% for the half.
- Interest expense nearly doubled year over year for the half to $193 million, reflecting higher debt and interest rates; the TOM FORD acquisition was among the factors increasing borrowing needs.
Outlook, risks and unusual items
- Management expects continued challenges in Asia travel retail and mainland China, disruption in Israel and other parts of the Middle East, and manufacturing under-absorption. Reduced production volumes are expected to affect cost of sales in FY2024 Q3. Further inventory-reduction actions could result in additional charges. The filing does not provide a clear updated numerical full-year sales or EPS forecast.
- The Profit Recovery Plan aims to rebuild margins in fiscal 2025 and 2026. A two-year restructuring program announced February 5, 2024 is expected to reduce positions by approximately 1,800–3,000, incur $500–$700 million of pretax charges, and generate $350–$500 million in annual pretax gross benefits when fully implemented. The company expects to substantially complete initiatives through fiscal 2026; some benefits will be reinvested. These benefits are stated in addition to previously announced Profit Recovery Plan benefits of $800–$1,000 million.
- The July 2023 cybersecurity incident investigation is complete; the company says data, including consumer and employee data, was obtained. It estimates the incident reduced EPS by $0.01 in the quarter and $0.07 for the half, and expects approximately $0.07 dilution for FY2024.
- Two securities class-action complaints and a shareholder derivative action allege misleading statements concerning the company’s prior conduct. The company intends to defend the actions; management states reasonably possible losses beyond accrued amounts are not material.
- The company corrected prior-period product-category sales and operating-income misclassifications. It says the corrections did not affect consolidated statements and were not material to the financial statements. Management concluded disclosure controls were effective as of December 31, 2023.
- Management believes cash, operating cash flow and available financing will support planned needs. It anticipates purchasing the remaining DECIEM interest in FY2024 Q4, with price based on DECIEM’s performance; the transaction is expected to settle related stock-option and redeemable noncontrolling-interest balances.
Investor items to verify
- Whether Asia travel-retail inventory normalization and mainland China demand improve, and how these affect sales and obsolescence charges.
- Progress on gross-margin recovery, production-volume absorption and the stated restructuring costs, timing and realized net benefits.
- Debt, interest expense and liquidity following the planned DECIEM transaction and upcoming debt maturities.
- Developments in the securities and derivative litigation, and any further costs or effects from the cybersecurity incident.
- How reported results compare with any subsequent company guidance, and whether category-level comparisons reflect the disclosed reclassifications.