Business context and reporting period
The Estée Lauder Companies Inc. manufactures and sells prestige beauty products across skin care, makeup, fragrance and hair care in more than 150 countries and territories. This Form 10-Q covers the quarter and nine months ended March 31, 2016. Although the request metadata says “2015 Q3,” the filing itself is for fiscal 2016 Q3.
Key financial results
Amounts are in millions, except per-share data. Comparisons are with the corresponding 2015 periods.
| Metric | Three months | Nine months |
|---|---|---|
| Net sales | $2,656.5, up 3% (6% excluding currency effects) | $8,616.0, up 4% (10% excluding currency effects) |
| Gross profit / margin | $2,152.3 / 81.0%, versus 80.5% | $6,945.6 / 80.6%, versus 80.5% |
| Operating income / margin | $384.0 / 14.5%, versus $397.2 / 15.4% | $1,466.6 / 17.0%, versus $1,378.0 / 16.7% |
| Net earnings attributable to Estée Lauder | $265.6, down 2% | $1,021.1, up 9% |
| Diluted EPS | $0.71, unchanged | $2.71, up 12% |
- Quarterly operating income included $15.2 of restructuring charges and was adversely affected by approximately $15 of foreign-currency translation. Excluding restructuring charges, operating income increased less than 1%, while margin declined 40 basis points.
- Nine-month operating income included $33.7 of restructuring charges and was affected by approximately $131 of unfavorable currency translation. The prior-year comparison benefited from approximately $127 of operating income related to retailer orders accelerated ahead of the July 2014 systems rollout. Excluding those orders and restructuring charges, operating income was approximately flat and margin declined 40 basis points.
- For the quarter, makeup sales rose 7% and fragrance 5%; skin care declined 3%. For the nine months, makeup rose 9%, fragrance 7% and hair care 5%, while skin care declined 2%. Currency and the prior-year accelerated orders materially affect comparisons.
- Effective tax rates were 28.0% for both the quarter and nine-month period, down from 29.2% and 30.0%, respectively, primarily due to lower tax rates on foreign operations; the nine-month comparison also reflected a reduced impact from tax reserves.
Cash flow, liquidity and debt
- Nine-month operating cash flow was $1,316.2, versus $1,385.0. Investing activities used $1,096.9, including net investment purchases and capital expenditures of $334.4; financing activities used $665.3, including $703.1 of treasury-stock purchases and $311.9 of dividends paid.
- Cash and cash equivalents were $556.3 at March 31, 2016, down from $1,021.4 at June 30, 2015. Management attributed the decrease primarily to purchases of short- and long-term investments. Short-term investments were $517.5 and long-term investments were $1,075.3.
- Total debt was $1,925.3, including $312.8 current debt and $1,612.5 long-term debt; debt was 34% of total capitalization, versus 31% at June 30, 2015. Commercial paper outstanding at March 31 was $285.3 and was being refinanced as it matured. No borrowings were outstanding under the $1.0 billion revolving credit facility.
- Management said cash, operating cash flows, credit lines and access to credit markets should be adequate for planned operations and obligations. Some cash and investments are held offshore under a permanent-reinvestment strategy; repatriation could result in additional taxes.
Outlook, management commentary and risks
- The filing does not provide specific near-term sales or earnings guidance. Management emphasized long-term growth through product innovation, emerging markets, digital and e-commerce, travel retail, and expansion of prestige brands and distribution.
- Management cited slow prestige skin-care growth, weak retail traffic in some department stores, soft conditions in Hong Kong, the strong U.S. dollar and Brazil’s macroeconomic environment. It also warned that worsening economic conditions could weaken consumer confidence, demand and spending.
- The GTI restructuring, approved in October 2015, is expected to generate $40–$50 of charges through calendar 2016, including non-cash asset write-offs, employee costs and implementation costs. The company expects future operating efficiencies and lower IT service and infrastructure costs.
- On May 3, 2016, after quarter-end, the company announced Leading Beauty Forward: expected pre-tax charges of $600–$700 through fiscal 2021, an estimated global net workforce reduction of 900–1,200 positions, and anticipated annual pre-tax benefits of $200–$300 after full implementation. A portion of benefits is expected to be reinvested in growth.
- Other matters to monitor include foreign-exchange and interest-rate exposure, retail-channel and travel trends, competition, product-launch execution, technology implementation, and tax positions. Unrecognized tax benefits were $73.8; the company said $5–$10 could reasonably possibly be resolved within twelve months. Management believed current legal proceedings would not materially affect results, financial condition or cash flows.
- The company acquired By Kilian during the period and invested in Have & Be Co. Ltd., owner of Dr. Jart+ and Do The Right Thing. The filing also reports a $30.0 discretionary pension contribution made in April 2016.
Important facts for investors to verify
- Confirm the reporting period: the filing is for the quarter ended March 31, 2016, not 2015 Q3.
- Assess underlying growth using the company’s currency-adjusted figures and adjustments for 2015 accelerated orders; reported comparisons alone are not directly comparable.
- Track whether Leading Beauty Forward achieves its stated $200–$300 annual pre-tax benefits and how its $600–$700 expected charges and workforce actions progress.
- Monitor cash conversion, investment balances, commercial-paper refinancing and the increase in debt and debt capitalization.
- Evaluate whether weakness in skin care, Hong Kong and department-store traffic is offset by makeup, luxury brands, digital channels and travel retail.