E.L.F. Beauty, Inc. — Q2 FY2023 Form 10-Q
Reporting period: Three and six months ended September 30, 2022; fiscal year ends March 31. The company sells cosmetics and skincare through retail and e-commerce under e.l.f. Cosmetics, e.l.f. SKIN, Well People, and Keys Soulcare. Figures below are unaudited.
Key financial results
| Metric | Q2 FY2023 | Q2 FY2022 | Six months FY2023 | Six months FY2022 |
|---|---|---|---|---|
| Net sales | $122.3 million | $91.9 million | $245.0 million | $188.9 million |
| Gross profit / margin | $79.6 million / 65% | $58.0 million / 63% | $162.5 million / 66% | $119.9 million / 63% |
| Operating income | $15.4 million | $7.4 million | $36.8 million | $18.6 million |
| Net income | $11.7 million | $5.7 million | $26.2 million | $14.0 million |
| Diluted EPS | $0.21 | $0.11 | $0.48 | $0.26 |
- Q2 sales rose 33%; six-month sales rose 30%. Growth came from retailer and e-commerce channels. In Q2, retailer sales increased 31% and e-commerce sales 62%; for the six months, they increased 28% and 42%, respectively.
- Management attributed most of the sales increase to higher average item prices: $23.6 million of the Q2 increase and $38.4 million of the six-month increase, versus $6.9 million and $17.6 million, respectively, from higher unit volume.
- Gross margin expanded by 2 percentage points in Q2 and 3 points for the six months. Price increases, cost savings, and product mix helped; inventory adjustments and higher transportation costs partially offset the improvement.
- SG&A rose 27% to $64.2 million in Q2 and 24% to $125.7 million for the six months, while declining as a share of sales to 52% and 51%, respectively. Higher compensation, marketing and digital spending, and operations costs drove the increases.
Cash flow, balance sheet, and debt
- Six-month operating cash flow was $43.0 million, versus $0.8 million in the prior-year period. Investing used $0.7 million and financing used $0.4 million; cash increased $42.0 million to $85.3 million.
- At September 30, cash was $85.3 million; current assets were $247.4 million and current liabilities $71.9 million. Total assets were $542.1 million and stockholders’ equity $357.0 million.
- Total debt and finance lease obligations were $94.8 million gross ($94.1 million net of debt issuance costs), including a $93.75 million term loan. The $100 million revolving facility was undrawn and available. The term-loan rate was approximately 4.9%; the company reported compliance with financial covenants.
- The company repaid $2.5 million of term debt during the six months. No shares were repurchased in the quarter; $17.1 million remained under the repurchase authorization.
Outlook, risks, and notable items
- No numerical sales or earnings guidance is provided in the filing. Management said cash, operating cash flow, and the available revolver should meet planned needs for the next 12 months; additional long-term financing may be needed and may not be available on favorable terms.
- Management reported continuing supply-chain delays and elevated transportation costs, and said it raised prices on some products in March 2022 to mitigate cost pressure. Further cost increases or disruption could hurt margins, product availability, or sales.
- Results are seasonal: the third and fourth fiscal quarters typically have higher sales, with working capital investment needed to support demand. Orders from a limited number of major retailers can materially affect quarterly results and liquidity.
- Other expense was $1.3 million in Q2 and $2.9 million for the six months, primarily due to unfavorable foreign-exchange movements affecting cash and receivables. Interest expense also increased, mainly reflecting higher rates on debt.
- Key disclosed risks include competition and product-launch execution, dependence on major retailers and third-party suppliers, substantial sourcing and manufacturing exposure to China, supply-chain disruption, inflation and weaker consumer spending, variable-rate debt, cybersecurity and regulatory exposure. Management did not expect current legal proceedings to materially affect the company.
- Management stated disclosure controls were effective as of September 30, 2022, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether sales momentum and the contribution from higher pricing can be sustained, and how unit volumes develop.
- Whether margin improvement persists as transportation costs, inventory adjustments, and other supply-chain pressures evolve.
- Retailer ordering patterns and seasonal working-capital needs, including inventory and receivables trends.
- Debt-service exposure to variable interest rates, covenant compliance, and the continued availability of the undrawn revolver.
- Potential impacts of China-related sourcing, COVID-related disruption, foreign exchange, and regulatory or consumer-spending changes.