E.L.F. Beauty, Inc. — Q2 FY2022 Form 10-Q
Reporting period: Fiscal second quarter and six months ended September 30, 2021; comparisons are to the corresponding 2020 periods. Amounts are in U.S. dollars; financial statement amounts are in millions unless stated otherwise.
Business context
e.l.f. Beauty sells cosmetics and skin-care products through retailers and e-commerce under e.l.f. Cosmetics, e.l.f. Skin, W3LL PEOPLE and Keys Soulcare. The company reports one operating and reportable segment. Management attributed sales growth primarily to strength at national and international retailers.
Financial performance
| Metric | Three months ended September 30, 2021 | Three months ended September 30, 2020 | Six months ended September 30, 2021 | Six months ended September 30, 2020 |
|---|---|---|---|---|
| Net sales | $91.9 | $72.4 | $188.9 | $136.9 |
| Gross profit | $58.0 | $47.1 | $119.9 | $90.5 |
| Gross margin | 63% | 65% | 63% | 66% |
| Operating income | $7.4 | $2.0 | $18.6 | $5.0 |
| Net income | $5.7 | $0.4 | $14.0 | $2.0 |
| Diluted earnings per share | $0.11 | $0.01 | $0.26 | $0.04 |
| Operating cash flow | Not presented by quarter | $0.8 | $3.4 |
- Q2 sales increased 27% year over year; six-month sales increased 38%. Retail-channel sales rose 31% in Q2 and 45% for the six months, while e-commerce sales declined 3% and 6%, respectively.
- SG&A rose 12% in Q2 to $50.4 million and 18% for the six months to $101.2 million. As a share of sales, it fell to 55% from 62% in Q2 and to 54% from 62% for the six months.
- Management cited higher marketing and digital spending as the primary SG&A driver. Gross margin fell mainly due to unfavorable foreign exchange and elevated freight and shipping costs; Q2 also reflected higher inventory adjustments.
- Six-month operating cash flow was $0.8 million despite $14.0 million net income, as working capital increased by $38.6 million, including a $20.0 million inventory increase. Investing cash outflow was $3.6 million, primarily for customer fixtures; financing cash outflow was $13.2 million. Cash declined $16.1 million to $41.7 million.
Financial position, debt and liquidity
At September 30, 2021, cash was $41.7 million, current assets were $181.3 million and current liabilities were $71.2 million. Total debt, including finance lease obligations and before debt issuance costs, was $114.0 million; the balance-sheet carrying amount was $113.1 million. Long-term debt and finance lease obligations were $93.9 million. The company had $86.5 million of unused capacity under its revolving facility and reported compliance with applicable credit covenants.
An April 2021 amended credit agreement refinanced prior facilities and provides a five-year $100 million revolving facility and $100 million term loan facility, maturing April 30, 2026. Both facilities had an approximately 1.5% interest rate at quarter-end. The amendment resulted in a $0.5 million loss on debt extinguishment in the six-month period. Management said cash, operating cash flow and available borrowing capacity should meet planned needs for the next 12 months, subject to customary borrowing conditions.
Outlook, risks and unusual items
- The filing provides no numerical revenue or earnings guidance. Management noted that sales are typically higher in fiscal Q3 and Q4 due to holiday purchasing and retailer shelf resets, and that seasonal demand requires investment in working capital.
- Global vessel and container shortages were increasing freight costs and could delay inventory receipts, retailer deliveries and e-commerce product availability, potentially reducing sales and raising costs.
- Key disclosed risks include dependence on a limited number of retailers and third-party suppliers, substantial sourcing and manufacturing in China, competition and product-launch execution, foreign exchange exposure, COVID-19-related disruption, and cybersecurity and regulatory risks.
- The company recorded $0.1 million of Q2 restructuring expense related to closing its California manufacturing plant. Six-month restructuring expense was $0.1 million net, including a gain on sale of plant assets. No material legal proceedings were expected by management to adversely affect financial position, results or cash flows.
- No shares were repurchased during the quarter; $17.1 million remained available under the repurchase authorization, subject to credit-agreement restrictions.
Important facts for investors to verify
- Whether retailer-channel momentum can persist and e-commerce sales can stabilize or recover.
- Whether shipping, freight and foreign-exchange pressures continue to erode gross margin, and whether pricing and cost savings offset them.
- Whether inventory growth converts into sales and cash; operating cash flow was modest relative to net income during the six-month period.
- Debt levels, variable-rate exposure, covenant compliance and the availability of revolving-credit capacity.
- How seasonality, retailer ordering patterns and supply-chain disruptions affect second-half sales, working capital and liquidity.