E.L.F. Beauty, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and first nine months ended December 31, 2021. The statements are unaudited. Dollar amounts are in millions unless stated otherwise.
Business context
e.l.f. Beauty sells cosmetics and skincare through retail partners and its e-commerce channel. Its brands include e.l.f. Cosmetics, e.l.f. Skin, Well People and Keys Soulcare. The company reports one operating and reportable segment.
Financial performance
| Metric | Three months ended Dec. 31 | Nine months ended Dec. 31 |
|---|---|---|
| Net sales | $98.1 vs. $88.6; up 11% | $287.0 vs. $225.4; up 27% |
| Gross profit / margin | $64.3 vs. $57.1; 66% vs. 64% | $184.2 vs. $147.6; 64% vs. 65% |
| Operating income / margin | $9.0 vs. $6.3; 9% vs. 7% | $27.6 vs. $11.3; 10% vs. 5% |
| Net income | $6.2 vs. $4.3 | $20.2 vs. $6.3 |
| Diluted EPS | $0.12 vs. $0.08 | $0.38 vs. $0.12 |
Quarterly sales growth reflected strength in retail and international retailers: retail-channel sales rose 10% and e-commerce sales 16%. For the nine-month period, retailer sales rose 31%, while e-commerce sales increased 1%. U.S. sales were $87.4 million in the quarter and $254.7 million year to date; international sales were $10.8 million and $32.3 million, respectively.
Quarterly gross-margin improvement was attributed to product mix, price increases and cost savings, partly offset by foreign exchange and higher transportation costs. Nine-month gross margin declined one percentage point, primarily due to unfavorable foreign exchange and elevated transportation costs. SG&A rose 9% in the quarter and 15% year to date, while falling as a share of sales in both periods.
Cash flow, balance sheet and debt
- Nine-month operating cash flow was $7.8 million, versus $2.0 million a year earlier. Working capital absorbed $48.2 million, including a $28.4 million inventory increase and a $7.2 million accounts-receivable increase.
- Investing cash outflow was $4.6 million, mainly for capital expenditures and customer fixtures. Financing cash outflow was $28.1 million, primarily reflecting debt repayments. Cash decreased $24.9 million to $32.9 million.
- At December 31, 2021, total assets were $491.0 million, current assets $185.1 million and current liabilities $62.5 million. Inventory was $85.2 million, compared with $56.8 million at March 31, 2021.
- Total debt and finance lease obligations were $99.1 million gross ($98.3 million net of issuance costs); the balance-sheet long-term portion was $92.5 million. The company had $100.0 million available under its revolving facility and stated it was compliant with its credit covenants.
- The April 2021 amended credit agreement provides a $100 million term loan and a $100 million revolver, both with five-year terms. The term-loan rate was approximately 1.6% at December 31, 2021. Debt refinancing resulted in a $0.5 million extinguishment loss during the nine months.
Outlook, commentary and risks
Management provided no specific numerical guidance in the supplied filing text. It said cash, operating cash flow and available revolver capacity should be sufficient for planned needs over the next 12 months, subject to customary borrowing conditions. It noted that longer-term funding, if needed, could come from additional debt or equity, which may not be available on favorable terms.
Management cited global vessel and container shortages, higher freight costs and possible delays to inventory receipts as ongoing risks to product availability, sales and margins. Other key exposures include reliance on third-party suppliers and manufacturing substantially in China, retailer concentration and order variability, seasonal working-capital needs, competition and product-launch execution, COVID-19 disruption, and foreign-exchange and regulatory risks. The company said it was not involved in legal matters expected to have a material adverse financial effect. No material changes to contractual obligations or market-risk exposures were reported.
Unusual items included the $0.5 million debt-extinguishment loss and $0.1 million net restructuring expense for the nine months; the quarter included $14,000 of restructuring income. The company made no share repurchases during the quarter; $17.1 million remained under its authorization.
Most important facts for investors to verify
- Whether inventory growth and working-capital investment convert into sales and operating cash flow, particularly amid shipping delays and seasonal demand.
- Whether transportation, foreign-exchange and other cost pressures continue to affect gross margins.
- Whether retailer-channel growth is sustained and e-commerce performance improves from its modest nine-month increase.
- Debt repayment, variable-rate exposure, covenant compliance and continued availability of the $100 million revolver.
- Any developments involving China sourcing, supply-chain disruption, product quality or regulation, and concentration among major retail customers.