E.L.F. Beauty, Inc. — FY2018 Form 10-K
Business context and reporting period. The filing covers the year ended December 31, 2018, including fourth-quarter results; it is an annual report, not a standalone quarterly filing. E.L.F. sells value-priced cosmetics and skin care through retailers, e-commerce and company-operated stores. Retailers accounted for 87% of sales, direct channels for 13%; the United States represented 90% of sales. Walmart and Target generated 30% and 21% of annual sales, respectively. The company changed its fiscal year-end to March 31 and planned a January–March 2019 transition quarter.
Financial performance and liquidity
| Metric | FY2018 | FY2017 |
|---|---|---|
| Net sales | $267.4 million | $269.9 million |
| Gross profit / margin | $162.7 million / 61% | $164.7 million / 61% |
| SG&A | $136.6 million (51% of sales) | $131.4 million (49%) |
| Operating income | $26.2 million (10% margin) | $33.3 million (12% margin) |
| Net income | $15.5 million; diluted EPS $0.32 | $33.5 million; diluted EPS $0.68 |
| Operating cash flow | $55.6 million | $12.4 million |
| Capital expenditures | $8.9 million | $7.5 million |
Fourth-quarter 2018 net sales were $78.6 million and net income was $9.7 million, compared with $81.6 million and $21.5 million in Q4 2017. The filing attributes much of the annual net-income decline to the absence of FY2017’s tax benefit from tax reform and stock-based compensation tax benefits; FY2018 income tax expense was $2.4 million versus a $11.0 million benefit in FY2017.
At December 31, 2018, cash and cash equivalents were $51.2 million, working capital excluding cash was $47.5 million, and total debt and capital lease obligations were $150.7 million, including $146.7 million of term-loan principal. The revolving facility had $49.5 million of availability. The term loan’s stated rate was approximately 4.8%; debt is variable-rate and secured by substantially all assets. The company reported compliance with its financial covenants. Management said cash, operating cash flow and available revolver capacity were expected to cover needs for the next 12 months.
Material changes versus the prior comparable period
- Annual sales declined 1%, primarily due to weaker trends at select national retailers and a $4.9 million decline in discount-channel sales, partly offset by added shelf space and new accounts.
- Gross margin held at 61%; lower volume and unfavorable foreign exchange reduced gross profit, partly offset by customer mix and margin-accretive innovation.
- SG&A rose 4%, reflecting stock-based compensation, depreciation and amortization, sales and marketing investment, and a full year of store operating costs. Operating income fell 21%.
- Operating cash flow increased substantially, with lower inventory and receivables contributing cash, partly offset by lower accounts payable and accrued expenses.
- Debt and capital lease obligations declined from $156.8 million to $150.7 million. Interest expense fell 11% to $7.8 million.
Outlook, commentary, risks and unusual items
- Store closures: On February 26, 2019, the company announced closure of all 22 e.l.f. stores and a reduction of approximately 193 retail and corporate employees. It estimated $23–$25 million of one-time pretax charges in the January–March 2019 transition period, including approximately $16 million of accelerated rent expense and $5–$6 million of asset write-offs. Store sales were $13.5 million in 2018. Final charges could vary.
- Tariffs and sourcing: Tariffs on certain China imports had increased inventory but did not significantly affect 2018 gross profit. Management was evaluating supplier negotiations and selective price increases; it gave no assurance these measures would offset future costs. Substantially all products are sourced or manufactured in China.
- Foreign exchange and rates: The company had no active currency hedging program. It estimated a hypothetical 10% adverse RMB movement could reduce cost of sales and net income by approximately $10.9 million. A 1% interest-rate change would alter annualized interest expense by approximately $1.5 million.
- Business risks: Key exposures include retailer concentration and discretionary ordering, competition and product-trend risk, supply-chain disruption, inventory forecasting, cyber and privacy risks, regulation, and seasonal working-capital needs. Walmart and Target represented 51% of FY2018 sales.
- Outlook: No quantified FY2019 revenue or earnings guidance is provided. Management cited continued investment in brand and infrastructure and expected operating cash flow, cash on hand and revolver availability to meet near-term needs.
- Accounting and controls: Adoption of the revenue standard reduced opening retained earnings by $0.1 million; FY2018 sales would have been $0.3 million higher under the prior standard. Management concluded disclosure controls and internal control over financial reporting were effective; the auditor did not provide an internal-control attestation because the company was an emerging growth company.
Important facts for investors to verify
- Whether sales trends at major retailers stabilize, and how Walmart and Target ordering and shelf-space decisions evolve.
- The realized closure costs, cash outflow, lease obligations and asset write-offs following the store exit.
- Whether tariff mitigation, pricing and sourcing actions protect gross margin, and the company’s continuing China and RMB exposure.
- Cash conversion and working-capital requirements, alongside scheduled term-loan payments, variable-rate interest and covenant headroom.
- The impact of the fiscal-year change and transition quarter on comparisons and reported results.