The Estée Lauder Companies Inc. — Q2 FY2021 Form 10-Q
Reporting period: Quarter and six months ended December 31, 2020. The quarter is the company’s second quarter of fiscal 2021. Amounts are U.S. dollars; financial statements are unaudited.
Financial performance
| Metric | Three months ended Dec. 31, 2020 | Prior-year quarter | Six months ended Dec. 31, 2020 | Prior-year period |
|---|---|---|---|---|
| Net sales | $4.853 billion (+5%; +3% constant currency) | $4.624 billion | $8.415 billion (-1%; -3% constant currency) | $8.519 billion |
| Gross margin | 77.7% | 77.5% | 77.3% | 77.1% |
| Operating income | $1.063 billion | $261 million | $1.768 billion | $1.040 billion |
| Net earnings attributable to Estée Lauder | $873 million | $557 million | $1.396 billion | $1.152 billion |
| Diluted EPS | $2.37 | $1.52 | $3.79 | $3.13 |
| Operating cash flow | Not provided for quarter alone | $1.978 billion | $1.255 billion |
Reported operating margin was 21.9% for the quarter and 21.0% for the six months, versus 5.6% and 12.2%, respectively, a year earlier. Comparisons are heavily affected by prior-year impairment charges: goodwill and intangible impairments were $81 million in the current six-month period versus $777 million a year earlier. On the company’s adjusted basis, operating income rose 13% in the quarter and 2% for the six months; adjusted diluted EPS rose 24% and 7%, respectively.
Business mix and material changes
- Quarterly sales growth was led by skin care (+28%) and Asia/Pacific (+35%); makeup fell 25%. For the six months, skin care grew 20% and Asia/Pacific 23%, while makeup declined 28%.
- Online direct-to-consumer sales represented about 23% of quarterly sales, versus 15% a year earlier; for the six months, the share was about 19%, versus 12%.
- Reported quarterly sales included approximately $102 million of favorable foreign-currency translation; the six-month period included approximately $117 million.
- Quarterly GAAP earnings comparisons also reflect $576 million of prior-year other income, principally a $553 million gain from remeasuring the previously held Have & Be investment and a $23 million currency gain. These items did not recur in the current period.
Liquidity, debt and capital
- Cash and cash equivalents were $5.545 billion at December 31, 2020, up from $5.022 billion at June 30, 2020. Total debt was $5.383 billion, down from $6.136 billion; cash exceeded debt by approximately $162 million.
- Current assets were $10.291 billion and current liabilities $5.420 billion at quarter-end. In August 2020, the company repaid the remaining $750 million drawn on its revolving credit facility.
- Six-month operating cash flow was $1.978 billion; capital expenditures were $250 million. Investing cash outflow was $397 million and financing cash outflow was $1.119 billion. Cash dividends paid were $368 million.
- Class A share repurchases remained suspended; repurchases during the period were limited to shares withheld for tax obligations. The company declared a $0.53-per-share dividend in February 2021.
Outlook, commentary and risks
- The filing provides no quantified sales or earnings guidance. Management said recovery timing and the pandemic’s duration remain uncertain.
- COVID-19 continued to reduce store traffic, cause temporary closures and constrain international travel, particularly affecting travel retail. Online growth partly offset brick-and-mortar declines. Management described skin care demand as more resilient than makeup demand.
- The Post-COVID Business Acceleration Program is expected to incur $400–$500 million of pre-tax restructuring and other charges. The company estimated a net reduction of 1,500–2,000 positions and closure of approximately 10%–15% of freestanding stores, with initiatives expected to be completed through fiscal 2023.
- The company recorded $81 million of GLAMGLOW impairment charges: $54 million of goodwill, $21 million for a trademark and $6 million for customer lists. GLAMGLOW goodwill was reduced to zero.
- Risks highlighted include further pandemic disruption, weak travel retail, retailer financial distress and collection risk, changing consumer preferences, U.S.–China trade tensions, foreign-exchange movements and potential impairment of acquired-brand assets. One China travel-retail customer represented 13% of quarterly sales and 20% of receivables at December 31, 2020.
- Management said available cash, operating cash flow, credit lines and capital-market access should support planned needs. It also reported that disclosure controls were effective as of December 31, 2020 and that no material change in internal control over financial reporting occurred during the quarter.
Investor verification priorities
- Separate underlying growth from foreign exchange, acquisition contributions and the large prior-year impairment and acquisition-gain comparisons; review the company’s non-GAAP reconciliations.
- Track online sales growth against store traffic recovery, makeup trends and the pace of international travel and travel-retail recovery.
- Monitor the China travel-retail customer’s share of sales and receivables, collections, and the effect of retailer liquidity or destocking.
- Compare realized restructuring charges, cash costs, store closures and workforce reductions with the PCBA program’s estimates and timeline.
- Assess whether operating cash flow remains strong as working-capital movements normalize, and monitor debt maturities and liquidity.