Business context and reporting period
The Estée Lauder Companies Inc. manufactures and markets prestige skin care, makeup, fragrance and hair care products in more than 150 countries and territories. This is the Form 10-K for the fiscal year ended June 30, 2018—not a standalone fourth-quarter filing. Fiscal 2017 is the primary comparable period. All financial figures below are in U.S. dollars.
Financial results and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $13.683 billion | $11.824 billion |
| Gross profit / margin | $10.839 billion / 79.2% | $9.387 billion / 79.4% |
| Operating income / margin | $2.052 billion / 15.0% | $1.692 billion / 14.3% |
| Net earnings attributable to the Company | $1.108 billion | $1.249 billion |
| Diluted EPS | $2.95 | $3.35 |
| Operating cash flow | $2.573 billion | $1.800 billion |
- Sales increased 16% as reported and 13% in constant currency; favorable foreign-currency translation contributed $325 million. Skin care grew 24% and makeup 11% as reported.
- Operating income rose 21%. Operating expenses improved as a share of sales, more than offsetting the slight decline in gross margin.
- Reported net earnings fell 11%, principally reflecting $450 million of net TCJA-related tax charges: the $351 million Transition Tax, $53 million from remeasuring U.S. deferred tax assets and $46 million for foreign withholding taxes. The effective tax rate was 43.6%, versus 22.3%.
- Excluding specified items—including restructuring, contingent-consideration changes and TCJA effects—diluted EPS was $4.51, up 30% from adjusted FY2017 EPS of $3.47. These are non-GAAP measures.
- Cash and cash equivalents were $2.181 billion, and available-for-sale investments totaled $1.222 billion. Total debt was $3.544 billion, including $183 million current and $3.361 billion long-term. The $1.5 billion revolving credit facility was undrawn at year-end. Debt was 43% of total capitalization, down from 45%.
- Cash from investing activities was a use of $369 million, including $629 million of capital expenditures; financing activities used $1.172 billion, including $759 million for treasury stock and $546 million of dividends paid.
Material changes versus the prior comparable period
- Growth was strongest in Asia/Pacific, where sales rose 29% reported (25% constant currency), and Europe, the Middle East and Africa, up 21% reported (16% constant currency). The Americas increased 4%.
- Skin care operating income rose to $1.511 billion from $1.014 billion; makeup operating income declined to $549 million from $713 million. The Company cited higher investment spending and store costs among the factors weighing on makeup results.
- Operating cash flow increased by $773 million, partly due to higher earnings, increased accounts payable from extended supplier payment terms, and tax-related working-capital changes.
- The Company repurchased $759 million of its shares in FY2018, versus $413 million in FY2017, and declared dividends of $1.48 per share, up from $1.32.
Outlook, commentary, risks and unusual items
- Management described prestige skin care, online sales, travel retail, China and luxury fragrance as growth drivers. It also noted slower prestige makeup growth and continued weakness in some U.S. and U.K. brick-and-mortar retail locations.
- Under Leading Beauty Forward, estimated total restructuring and other charges were increased to $900–$950 million before tax, from the previous $600–$700 million estimate. After full implementation, management expects annual net benefits of $350–$450 million before tax; initiatives are expected to be completed through FY2021. The estimated workforce reduction was revised to 1,800–2,000 positions.
- The filing says FY2019 guidance was provided with the year-end results, but the guidance ranges are not clearly stated in the supplied filing text.
- The TCJA accounting was provisional at June 30, 2018; the Company expected to complete its analysis by December 22, 2018. It also estimated the new revenue standard would reduce FY2019 sales by about 1%, diluted EPS by about $0.10, and opening retained earnings by $200–$250 million.
- The Company disclosed that testing supporting certain advertising claims did not meet its standards; it was modifying claims, said the matter was not a product-safety or product-quality issue, and did not expect it to be material. No accrual was recorded.
- FY2018 impairment testing recorded no impairment, but the Editions de Parfums Frédéric Malle trademark’s fair value equaled carrying value and Too Faced’s exceeded carrying value by about 14%. Future impairment remains possible if performance or projections weaken.
- Key risks include competition and changing shopping preferences, retailer concentration and store traffic, foreign exchange and travel exposure, macroeconomic and geopolitical conditions, supply-chain or cybersecurity disruption, and execution of restructuring and acquisitions. Management said current litigation was not expected to have a material adverse effect; reasonably possible additional losses were not material.
Important facts for investors to verify
- Reconcile reported FY2018 earnings and EPS with the significant provisional TCJA charges and the Company’s non-GAAP adjustments.
- Track whether Leading Beauty Forward delivers its revised $350–$450 million annual benefit target, alongside remaining charges, timing and workforce actions.
- Assess the durability and concentration of growth in China, travel retail, skin care and online channels, against continued weakness in some brick-and-mortar markets and makeup profitability.
- Review subsequent disclosures on the advertising-claims validation and any changes to the provisional tax accounting.
- Consider contractual commitments: $3.320 billion of future minimum operating lease commitments and $5.514 billion of unconditional purchase obligations were disclosed at year-end. The filing says adoption of the new lease standard was expected to significantly affect the balance sheet.