Business context and reporting period
The Estée Lauder Companies Inc. filed this unaudited Form 10-Q for the quarter ended December 31, 2021, the second quarter of fiscal 2022. It manufactures and sells prestige skin care, makeup, fragrance and hair care products in approximately 150 countries and territories. Comparisons below are with the corresponding fiscal 2021 periods unless stated otherwise.
Financial performance
| Metric | Three months ended Dec. 31, 2021 | Six months ended Dec. 31, 2021 |
|---|---|---|
| Net sales | $5.539 billion; up 14% reported and in constant currency | $9.931 billion; up 18% reported and 17% in constant currency |
| Gross profit / margin | $4.316 billion / 77.9%, versus 77.7% | $7.651 billion / 77.0%, versus 77.3% |
| Operating income / margin | $1.418 billion / 25.6%, up 33%; prior margin 21.9% | $2.353 billion / 23.7%, up 33%; prior margin 21.0% |
| Net earnings attributable to Estée Lauder | $1.088 billion, up 25%; diluted EPS $2.97, up 25% | $1.780 billion, up 28%; diluted EPS $4.85, up 28% |
| Operating cash flow | $1.846 billion for six months, versus $1.978 billion | |
| Capital expenditures | $459 million for six months, versus $250 million |
For the quarter, sales rose across all product categories and regions. Fragrance grew 29%, skin care 12%, makeup 11% and hair care 17%. The Americas grew 24%, Europe, the Middle East & Africa 15%, and Asia/Pacific 7%. Results benefited from holiday performance, product launches, hero brands and recovering store and travel activity; skin care sales also included incremental DECIEM sales following the prior-year increase in ownership.
Liquidity, debt and capital allocation
At December 31, 2021, cash and equivalents were $4.603 billion, down from $4.958 billion at June 30, 2021. Total debt was $5.531 billion, compared with $5.569 billion; $272 million was current, versus $32 million at fiscal year-end. Total debt was 47% of total capitalization, versus 48%. Management said cash, operating cash flow, credit lines and capital-market access should be adequate for anticipated needs.
Six-month operating cash flow declined year over year, primarily because of working-capital changes as needs normalized and the company took steps to address supply-chain challenges. Investing cash outflow was $414 million; financing cash outflow was $1.775 billion, including $1.428 billion of treasury-stock purchases and $409 million of dividends paid. The company repurchased approximately 4.3 million Class A shares for $1.428 billion during the six months.
Material changes and unusual items
- Operating margin improved despite higher sales-related expenses. Quarterly gross margin edged up, but six-month gross margin declined 0.3 percentage points, reflecting product and category mix, including lower-margin DECIEM products, and higher product-set costs; foreign exchange and pricing provided offsets.
- Net earnings benefited from the absence of $81 million of prior-year goodwill and intangible-asset impairment charges. Reported diluted EPS growth was 25% for the quarter and 28% year to date; adjusted growth, excluding specified items, was 15% and 21%, respectively.
- The effective tax rate rose to 21.5% for the quarter and 21.9% year to date, from 14.9% and 17.6%. The filing attributes the increases mainly to higher tax rates on foreign operations and fewer stock-compensation tax benefits; the prior-year rates included favorable discrete GILTI-related adjustments.
- The DECIEM acquisition accounting remained provisional. The company reported $840 million of redeemable noncontrolling interest and described a put/call arrangement tied to future DECIEM performance.
Outlook, risks and contingencies
The filing provides no specific numerical sales or earnings guidance. Management expects COVID-related restrictions, intermittent store closures, curtailed international travel and supply-chain disruptions to continue affecting the recovery. It expects higher supply-chain costs to pressure cost of sales and operating expenses for the rest of fiscal 2022, with partial offsets from pricing, product mix, shipment timing and cost savings. The company also flagged inflation, geopolitical tensions—including U.S.-China relations—currency movements, retail and consumer shifts, and potential impairment of goodwill or other assets.
The Post-COVID Business Acceleration Program is expected to incur $400 million to $500 million of pretax charges. As of December 31, 2021, estimated reductions over the program were 2,000–2,500 positions and approximately 10%–15% of freestanding stores. Initiatives are expected to be approved through fiscal 2022 and completed through fiscal 2023. Management said reasonably possible legal losses beyond accrued amounts were not material and did not expect current litigation to have a material adverse effect. Disclosure controls were assessed as effective.
Important facts for investors to verify
- How much sales growth and operating improvement is attributable to underlying demand versus recovery comparisons, DECIEM consolidation, currency and temporary holiday effects.
- Whether supply-chain costs, shipping rates, inflation and product mix will erode gross margin or be offset by pricing and efficiencies.
- Whether travel retail and brick-and-mortar recovery, especially in China and other Asia-Pacific markets, can withstand renewed restrictions and travel weakness.
- Progress and eventual cash costs of the restructuring program, store closures and planned workforce reductions.
- DECIEM’s final purchase accounting, performance-based put/call valuation and related noncontrolling interest obligations.
- Customer concentration: the largest customer represented 11% of quarterly and six-month sales and 21% of accounts receivable at December 31, 2021.