Business context and reporting period
The Estée Lauder Companies Inc. filed this unaudited Form 10-Q for the quarter and six months ended December 31, 2022, its fiscal 2023 second quarter. The company 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, 2022 | Six months ended Dec. 31, 2022 |
|---|---|---|
| Net sales | $4.620 billion, down 17% | $8.550 billion, down 14% |
| Gross margin | 73.6%, versus 77.9% | 73.8%, versus 77.0% |
| Operating income | $556 million, down 61% | $1.217 billion, down 48% |
| Operating margin | 12.0%, versus 25.6% | 14.2%, versus 23.7% |
| Net earnings attributable to Estée Lauder | $394 million; diluted EPS $1.09 | $883 million; diluted EPS $2.45 |
| Adjusted operating income change | Down 46% | Down 40% |
| Adjusted diluted EPS | $1.54, down 49% | $2.91, down 41% |
Adjusted measures exclude restructuring and other charges, intangible asset impairments and changes in fair value of acquisition-related stock options; sales constant-currency comparisons also adjust for restructuring-related returns. They are non-GAAP measures.
- Sales drivers: For the quarter, constant-currency sales declined 11%. Management attributed the decline mainly to lower volume, COVID-related disruption in China and Asia travel retail, retailer inventory tightening and lower U.S. replenishment orders. Foreign currency translation reduced quarterly sales by approximately $282 million.
- Categories: Quarterly skin care sales fell 25%, makeup fell 9%, fragrance fell 3% as reported (up 3% in constant currency), and hair care rose 1%. Skin care weakness was concentrated in Estée Lauder, La Mer, Clinique and Dr.Jart+; The Ordinary and Bobbi Brown provided offsets.
- Regions: Quarterly reported sales declined 5% in the Americas, 22% in Europe, the Middle East & Africa, and 17% in Asia/Pacific. Asia travel retail, Greater China and the Dr.Jart+ Korea travel retail business were significant sources of pressure.
- Cash flow: Six-month operating cash flow was $751 million, versus $1.846 billion a year earlier. Capital expenditures were $419 million, implying operating cash flow less capital expenditures of approximately $332 million, versus $1.387 billion. Cash declined $232 million to $3.725 billion.
- Debt and liquidity: Total debt was $5.371 billion, including $260 million current debt; cash exceeded debt by approximately $1.646 billion. The current ratio was approximately 1.7 (current assets $9.367 billion; current liabilities $5.655 billion). In January 2023, the company established an undrawn $2.0 billion revolving facility and increased its U.S. commercial paper program limit from $2.5 billion to $4.5 billion.
Material changes, outlook and risks
- Gross margin contracted 4.3 percentage points for the quarter, primarily from unfavorable product, geographic and category mix, higher manufacturing costs and obsolescence charges. Operating results also included $207 million of trademark impairment charges: $100 million for Dr.Jart+, $86 million for Too Faced and $21 million for Smashbox. No goodwill impairment was recorded, but Dr.Jart+ and Too Faced fair values exceeded carrying values by only 7% and 10%, respectively.
- Management reported continued disruption from COVID-related restrictions and cases, reduced international travel, retailer destocking, inflation, recession concerns, supply-chain challenges and currency volatility. It warned that prolonged or worsening conditions could further affect demand, profitability and asset values. Russia and Ukraine accounted for about 1% of fiscal 2022 sales; operations there remain affected by the invasion and sanctions.
- The company did not provide a quantified near-term sales or earnings forecast in the supplied filing text. Management emphasized its long-term growth strategy and ongoing efficiency initiatives, while cautioning that the pace and duration of recovery remain uncertain.
- The Post-COVID Business Acceleration Program is expected to reduce headcount by 2,500–3,000 positions and close approximately 10%–15% of freestanding stores over its duration. Cumulative charges were $362 million at December 31, 2022; approved program charges were estimated at $500–$515 million before tax.
- The planned TOM FORD brand acquisition is expected to cost approximately $2.3 billion net of a $250 million payment from Marcolin and close in the second half of fiscal 2023. Funding is expected from cash, debt and $300 million of deferred payments beginning in July 2025. The acquisition will end existing beauty-business license royalty payments upon closing.
- Management said current litigation is not expected to have a material adverse effect, while noting outcomes could differ from its assessment. Disclosure controls were reported effective as of December 31, 2022.
Important facts for investors to verify
- Whether travel retail, Greater China and U.S. retailer replenishment recover, and how much sales growth depends on that recovery.
- Whether further trademark or goodwill impairments arise, particularly given the limited fair-value headroom at Dr.Jart+ and Too Faced and sensitivity to forecasts and discount rates.
- The final TOM FORD purchase funding, closing timing, integration effects and expected benefit from eliminating royalty payments.
- Cash conversion and working-capital trends: operating cash flow fell substantially, with lower earnings and changes in payables and accrued liabilities contributing to the decline.
- Actual restructuring costs, store closures and workforce reductions compared with management’s stated program estimates.