Business context and reporting period
The Estée Lauder Companies Inc. filed this unaudited Form 10-Q for the three months ended September 30, 2022, its first quarter of fiscal 2023. The company manufactures and sells prestige beauty products across skin care, makeup, fragrance and hair care in approximately 150 countries and territories.
Financial results and liquidity
| Metric | Q1 FY2023 | Q1 FY2022 |
|---|---|---|
| Net sales | $3.930 billion | $4.392 billion |
| Gross profit / margin | $2.907 billion / 74.0% | $3.335 billion / 75.9% |
| Operating income / margin | $661 million / 16.8% | $935 million / 21.3% |
| Net earnings attributable to Estée Lauder | $489 million | $692 million |
| Diluted EPS | $1.35 | $1.88 |
| Cash from operating activities | $(650) million | $(81) million |
Reported sales fell 11%; sales declined 7% in constant currency. The company cited approximately $176 million of unfavorable currency translation. Operating cash use reflected lower earnings and working-capital pressure, including higher inventory and lower accounts payable. Investing cash use was $14 million (prior year: $153 million); financing cash use was $304 million (prior year: $714 million). Capital expenditures were $152 million.
At September 30, cash and equivalents were $2.938 billion, down from $3.957 billion at June 30. Total debt was $5.373 billion, including $266 million current debt and $249 million of commercial paper. Current assets were $8.866 billion and current liabilities $5.271 billion. Debt was 49% of total capitalization. Management said cash, operating cash generation, credit lines and capital-market access should be adequate for expected needs.
Material changes versus the prior comparable period
- Sales fell across skin care (14%), makeup (10%) and Asia/Pacific (15%); hair care sales rose 7%. Fragrance sales were nearly flat, as growth in luxury and artisanal offerings largely offset the end of certain designer fragrance licenses.
- Skin care operating income fell 26%; makeup fell 82%; fragrance rose 2%; hair care moved to a $12 million operating loss from $2 million income.
- Gross margin contracted 1.9 percentage points. Management attributed pressure chiefly to business mix and promotional activity, plus higher manufacturing costs.
- Operating expenses rose to 57.2% of sales from 54.6%, with advertising and promotional spending, shipping rates and store operating costs among the pressures. Lower general and administrative costs and employee incentive compensation partly offset them.
- Foreign-currency translation losses drove a $351 million total other comprehensive loss for the quarter; accumulated other comprehensive loss increased to $1.078 billion.
Outlook, commentary, risks and unusual items
The filing provides no specific numerical sales or earnings forecast. Management described continued uncertainty from COVID-related restrictions in China, weak travel retail, retailer inventory tightening, inflation, recession concerns, supply-chain challenges and currency volatility. It also highlighted geopolitical risks, including the continuing impact of the Russia-Ukraine conflict; those markets represented about 1% of fiscal 2022 sales. Management warned prolonged or worsening conditions could further affect demand, profitability, travel and asset valuations.
The Post-COVID Business Acceleration Program recorded $6 million of charges in the quarter; cumulative charges recorded were $354 million, against estimated total program charges of $500–$515 million before tax. The program anticipates a net reduction of 2,500–3,000 positions and closure of approximately 10%–15% of freestanding stores globally. The company reported no material expected adverse effect from current legal proceedings and no material off-balance-sheet arrangements. Disclosure controls were deemed effective.
Other notable items: the company repurchased approximately 0.4 million Class A shares for $110 million and paid a $0.60 per-share dividend; after quarter-end it declared a $0.66 dividend per share. The Inflation Reduction Act’s share-repurchase excise tax is expected to apply beginning in fiscal Q3 2023; the company was evaluating the law’s effects.
Important facts for investors to verify
- Whether China restrictions, travel-retail weakness and retailer inventory actions continue to constrain sales and cash conversion.
- Whether gross margin and operating expenses recover as promotional mix, inflation, shipping costs and store activity change.
- Inventory growth, operating cash use and cash levels relative to debt, dividends, buybacks and restructuring payments.
- Progress and remaining costs of the restructuring program, including store closures and workforce reductions.
- Currency exposure, the effect of designer-license exits, and any further Russia-Ukraine or geopolitical impacts.
- Management’s forthcoming outlook and the potential effects of new tax provisions.