E.L.F. Beauty, Inc. — Form 10-Q Summary
Reporting period: Fiscal first quarter ended June 30, 2021 (three months), compared with the three months ended June 30, 2020. Figures are unaudited and 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 direct-to-consumer e-commerce. Its brand portfolio includes e.l.f. Cosmetics, e.l.f. Skin, W3LL PEOPLE and Keys Soulcare. The company reports one operating and reportable segment.
Financial performance
| Metric | Q1 FY2022 | Q1 FY2021 | Change / context |
|---|---|---|---|
| Net sales | $97.0 | $64.5 | Up 50%; retailer-channel sales rose 63%, while e-commerce sales fell 8%. |
| Gross profit / margin | $61.9 / 64% | $43.3 / 67% | Profit increased 43%; margin declined 3 percentage points. |
| SG&A | $50.7 / 52% of sales | $40.3 / 63% of sales | Expense rose 26%, but declined as a share of sales. |
| Operating income / margin | $11.2 / 12% | $3.0 / 5% | Improved substantially year over year. |
| Net income / diluted EPS | $8.3 / $0.15 | $1.5 / $0.03 | Higher operating income, partly offset by a $0.5 debt-extinguishment loss and $1.5 income tax provision. |
| Operating cash flow | $7.5 | $11.8 | Lower year over year, principally reflecting working-capital outflows. |
| Capital expenditures | $2.3 | $1.2 | Primarily related to customer fixture programs. |
Cash from operations less capital expenditures was approximately $5.2 million, compared with $10.7 million in the prior-year quarter; this is a simple calculation, not a company-reported free-cash-flow measure. Management attributed the gross-margin decline mainly to foreign exchange, higher freight and shipping costs amid container shortages, and increased inventory adjustments. Marketing and digital spending increased $8.3 million.
Liquidity and debt
At June 30, 2021, cash and cash equivalents were $63.4 million, total assets were $498.4 million, and total liabilities were $215.8 million. Total debt and finance lease obligations were $128.5 million before debt issuance costs, including a $26.5 million revolving-facility balance and a $100.0 million term loan. The company reported $73.3 million of unused revolving capacity.
On April 30, 2021, the company refinanced its prior facilities with a five-year agreement comprising a $100 million revolver and a $100 million term loan, maturing April 30, 2026. The term-loan interest rate was approximately 1.6% at quarter-end. The facilities are secured by substantially all company assets and include financial covenants and other restrictions. The company reported compliance with applicable covenants. Financing cash flow was $0.5 million, reflecting new borrowings and term-loan repayments, among other items.
Management stated that cash, operating cash flow and available revolver capacity should be adequate for planned needs over the next 12 months. Working capital excluding cash was $36.4 million at quarter-end.
Material changes, outlook and risks
- Sales mix: Retailer growth drove the sales increase; e-commerce sales declined year over year.
- Supply chain: Global vessel and container shortages could delay inventory and deliveries, reduce sales, and raise freight and inventory costs.
- Debt and refinancing: The April refinancing produced a $0.5 million debt-extinguishment loss and $1.1 million of new debt issuance costs.
- Restructuring: The company was closing its Rancho Cucamonga, California manufacturing plant under a plan approved in March 2021. It recorded a net restructuring gain of $14,000 for the quarter; related liabilities were not material.
- Seasonality and customers: Sales are typically higher in the third and fourth fiscal quarters. A limited number of retailers account for a large share of sales, and retailer ordering patterns can affect quarterly results and liquidity.
- Other principal exposures: Competition and product-launch execution; reliance on third-party suppliers and manufacturers, primarily in China; product quality and regulatory compliance; foreign exchange; cybersecurity and privacy; and COVID-19-related operating and consumer-demand uncertainty.
- Guidance: The filing provides no specific numerical earnings or revenue guidance. Management’s liquidity statement is not a full-year performance forecast.
- Contingencies: The company reported ordinary-course legal matters but said none were expected to have a material adverse effect on its financial position, results or cash flows. It reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether freight, shipping and foreign-exchange pressures continue to weigh on gross margin, and whether retailer growth offsets the e-commerce decline.
- Inventory availability, shipping timelines and the effect of supply-chain disruption on sales, costs and seasonal working-capital needs.
- Debt-service requirements, variable-rate exposure, covenant headroom and continued access to the revolving facility.
- The pace and cost of the California plant closure and the execution of marketing, digital and product-launch investments.
- The share-count figures: the filing text presents differing outstanding-share figures in the balance-sheet, equity rollforward and cover-page disclosures; reconcile these to the filed financial statements and subsequent share data.