E.L.F. Beauty, Inc. — Form 10-Q Summary
Reporting period: Fiscal second quarter ended September 30, 2020 (July 1–September 30); six-month results cover April 1–September 30, 2020. All amounts below are in U.S. dollars. Interim statements are unaudited.
Business context
The company sells beauty and skincare products through retailers and e-commerce under e.l.f. Cosmetics and W3LL PEOPLE; it planned to launch Keys Soulcare in early 2021. It reports one operating and reportable segment. W3LL PEOPLE, acquired in February 2020 for approximately $25.9 million in cash, is included in results from the acquisition date.
Financial results and liquidity
| Metric | Three months ended September 30 | Six months ended September 30 |
|---|---|---|
| Net sales | 2020: $72.4 million; 2019: $67.6 million (+7%) | 2020: $136.9 million; 2019: $127.4 million (+7%) |
| Gross profit / margin | $47.1 million / 65%; prior year $43.3 million / 64% | $90.5 million / 66%; prior year $80.5 million / 63% |
| SG&A | $45.2 million, up 17%; 62% of sales versus 57% | $85.5 million, up 21%; 62% of sales versus 55% |
| Operating income | $2.0 million versus $9.1 million | $5.0 million versus $16.0 million |
| Net income / diluted EPS | $0.4 million / $0.01 versus $6.5 million / $0.13 | $2.0 million / $0.04 versus $10.2 million / $0.20 |
For the six months, operating cash flow was $3.4 million versus $17.0 million; investing cash flow was negative $2.7 million versus negative $5.5 million; and financing cash flow was negative $5.8 million versus negative $6.6 million. Cash fell $5.1 million to $41.0 million. Inventory increased $18.3 million and contributed to working-capital use.
At September 30, cash was $41.0 million, current assets $151.8 million, and current liabilities $61.0 million. Total debt and finance lease obligations were $133.1 million gross ($132.8 million net of debt issuance costs), including $14.2 million current; long-term debt and finance lease obligations were $118.6 million. The $50 million revolver had $49.8 million unused. The company reported compliance with credit-facility financial covenants.
Changes and management commentary
- Sales growth was attributed primarily to digital strength, international growth, and growth with Nielsen-tracked channel customers. U.S. sales were $63.7 million and international sales $8.7 million in the quarter.
- Gross-margin improvement reflected favorable product mix, cost savings and foreign exchange, plus a greater e-commerce sales mix; tariffs and certain space-expansion and retailer-reset costs partly offset gains.
- Higher SG&A reflected increased compensation as marketing, digital and innovation teams were built out, marketing and digital investment, e-commerce operating costs, and retailer merchandising/reset support. Six-month expense also included proxy-contest costs.
- Prior-year comparisons benefited from restructuring income of $4.2 million in the quarter and $6.0 million in the six-month period, largely gains from extinguishing store lease liabilities. The company reported no 2020 restructuring costs and expected no additional material costs under that plan.
- Other expense in 2020, compared with prior-year other income, was primarily attributed to foreign-exchange movements. Lower interest expense reflected reduced debt and interest rates. The quarter included a $0.2 million income-tax benefit.
Outlook, risks and contingencies
The filing provides no specific revenue, earnings, or margin guidance. Management said COVID-19 may continue to affect sales until consumer shopping patterns normalize. Its priorities included employee and community safety, supply-chain continuity, and maintaining liquidity and credit-facility flexibility. Management believed cash, operating cash flow and available revolver capacity would meet planned needs for the next 12 months, while noting future financing may not be available on acceptable terms.
Key exposures include COVID-19-related disruption and changes in shopping behavior; dependence on a limited number of retailers; inventory and seasonal working-capital needs; reliance on third-party suppliers and manufacturers, substantially all products being sourced and manufactured in China; tariffs; competition and product-launch execution; and variable-rate debt. The company amended its credit agreement in April 2020 to modify financial covenants and related interest-rate provisions. It reported no legal matters expected to have a material adverse effect. Disclosure controls were considered effective, and no material changes in internal control were reported.
Important facts for investors to verify
- Whether digital and international sales growth continues and how much is attributable to the W3LL PEOPLE acquisition.
- Whether sales growth can outpace SG&A growth and support recovery in operating and net margins.
- Inventory levels, seasonal cash requirements, and operating cash conversion after the six-month inventory build.
- Debt repayment and covenant headroom under the amended credit agreement, including the August 2022 maturity.
- The ongoing effects of COVID-19, China sourcing and tariffs, and execution of the planned Keys Soulcare launch.