Estee Lauder Companies Inc. — Form 10-Q Summary
Reporting period: First quarter of fiscal 2012, the three months ended September 30, 2011. Comparisons are with the three months ended September 30, 2010 unless otherwise noted. Dollar amounts are in millions except per-share data.
Business context and results
The company manufactures and sells prestige skin care, makeup, fragrance and hair care products in more than 150 countries and territories. It reported strong growth across regions and product categories, supported by product launches, travel retail and improved retail conditions in some markets.
| Metric | Q1 FY2012 | Q1 FY2011 |
|---|---|---|
| Net sales | $2,476.7 | $2,091.7 |
| Gross profit / margin | $1,942.4 / 78.4% | $1,603.6 / 76.7% |
| Operating income / margin | $430.0 / 17.4% | $298.0 / 14.2% |
| Net earnings attributable to Estee Lauder | $278.6 | $191.1 |
| Diluted EPS | $1.40 | $0.95 |
| Net interest expense | $16.0 | $16.1 |
| Effective tax rate | 32.7% | 32.7% |
Sales rose 18% as reported and 14% excluding foreign currency effects. Skin care sales grew 25%, makeup 17%, fragrance 7% and hair care 10%. By region, sales increased 11% in the Americas, 26% in Europe, the Middle East and Africa, and 24% in Asia/Pacific. Operating income growth was led by skin care and makeup; fragrance operating income declined 4%.
Gross margin improved mainly from business mix, favorable exchange rates and manufacturing variances. Operating expenses fell as a share of sales, reflecting lower general and administrative, selling and shipping costs relative to revenue; higher foreign-exchange transaction costs, stock compensation and strategic advertising spending partly offset this.
Cash flow, balance sheet and liquidity
- Operating cash flow was an outflow of $36.2, versus an outflow of $39.1. Increased receivables as sales grew remained a significant use of cash.
- Investing cash outflow was $88.5, including $80.8 of capital expenditures; the prior-year outflow of $316.2 included the Smashbox Cosmetics acquisition.
- Financing cash outflow was $390.9, primarily reflecting $402.9 of treasury-stock purchases. Cash declined $533.5 to $719.5 from June 30, 2011.
- At September 30, 2011, total debt was $1,214.6, comprising $141.8 current and $1,072.8 long-term debt. Debt was 33% of total capitalization, versus 32% at June 30.
- Current assets were $3,562.1 and current liabilities $1,969.6. Management said available cash, operating cash flow, credit lines and capital-market access should adequately support planned operations and obligations.
- The company had no commercial paper outstanding and had a $1.0 billion revolving credit facility expiring July 2015. It reported compliance with debt covenants.
Material changes and management commentary
Sales increased $385.0 and operating income increased $132.0 year over year; attributable net earnings rose 46%. The company continued its strategy of prioritizing skin care, expanding digital and online activity, developing emerging markets and travel retail, and adapting its department-store business. Management said economic uncertainty and financial-market volatility had not significantly affected results to date, but a worsening or prolonged downturn could weaken consumer confidence, demand and spending.
The restructuring and cost-savings program is expected to generate total savings of approximately $675–$725 through its completion, including $660–$690 through fiscal 2012; these estimates include avoided costs against an assumed normalized spending pattern and are net of strategic reinvestments in the long-range operating-margin forecast. Expected total program charges are $350–$450 before tax; cumulative charges recorded through September 30, 2011 were $243.5. The company planned to approve initiatives through fiscal 2012 and execute them through fiscal 2013.
No specific near-term sales or earnings guidance is provided in the filing. Management’s outlook remains subject to competition, product-launch execution, retailer inventory and credit conditions, consumer-channel shifts, foreign-exchange movements, economic and geopolitical events, supply or systems disruptions, and the ability to deliver restructuring and efficiency benefits.
Risks, contingencies and unusual items
- Foreign-currency transaction losses were $9.8, compared with a gain of $2.8 a year earlier; translation adjustments also reduced accumulated other comprehensive income during the quarter. The company had $1,580.1 of foreign-currency forward contracts outstanding.
- The company reserved $4.1, net of tax, for a Spanish tax dispute after an appeal was denied by the National Appellate Court; it appealed to Spain’s Supreme Court. It also paid a $3.7 advance deposit to the Spanish tax authority. Management said unrecognized tax benefits could decrease by $15–$25 within 12 months, subject to examination resolutions and statute expirations.
- Management reported no material adverse expected effect from current litigation and said reasonably possible additional legal losses were not material. The filing identifies possible future impairment of the Darphin and Ojon trademarks if business plans or market assumptions do not hold.
- After quarter-end, the board declared a two-for-one stock split, effective as a stock dividend in January 2012, and a $1.05-per-share cash dividend payable December 14, 2011. The company also repurchased approximately 926,900 additional shares for $80.8 after quarter-end.
- Disclosure controls were assessed as effective at September 30, 2011. Management reported no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales and margin growth persist, particularly in skin care, makeup, travel retail and emerging markets, and whether fragrance remains challenged.
- Receivables and working-capital trends, given the quarter’s large receivables-related cash outflow and the largest customer’s 13% share of sales and 15% of receivables at September 30.
- The pace and realized net benefits of the restructuring program relative to its remaining charges and projected savings.
- Cash, debt and capital returns after substantial share repurchases, including the declared dividend and stock split.
- Developments in the Spanish tax appeal, other tax examinations, and the assumptions supporting Darphin and Ojon trademark values.