E.L.F. Beauty, Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended September 30, 2017. Unaudited consolidated statements; amounts below are in U.S. dollars unless stated otherwise. The company sells cosmetics through retail customers, e.l.f. stores, and e-commerce. Management notes that sales and working-capital needs are seasonal, with higher sales typically in the third and fourth quarters.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net sales | $71.9 million | $56.3 million | $188.3 million | $153.1 million |
| Gross profit / margin | $42.9 million / 60% | $32.5 million / 58% | $117.0 million / 62% | $86.9 million / 57% |
| Operating income | $9.8 million | $1.5 million | $18.2 million | $8.1 million |
| Net income (loss) | $5.9 million | $(2.4) million | $12.0 million | $(1.3) million |
| Net cash from (used in) operating activities | Not presented by quarter | $(6.2) million | $2.5 million |
- Q3 sales increased 28%; nine-month sales increased 23%. Management attributed growth primarily to greater retail shelf space and productivity, new retail accounts, and expansion of direct channels.
- Gross margin improved in both comparisons. Management cited margin-accretive innovation and improved customer terms, freight costs, and foreign-exchange movements, partly offset by customer mix.
- Q3 SG&A increased 7% to $33.1 million, while falling to 46% of sales from 55%. For nine months, SG&A rose 25% to $98.8 million and was 52% of sales versus 51%. Higher marketing, personnel, store, technology, and stock-compensation costs contributed to the nine-month increase.
- Net interest expense declined to $2.3 million in Q3 and $6.8 million for nine months, versus $5.2 million and $11.6 million, respectively, mainly reflecting prior debt repayment and refinancing at lower rates.
- Q3 diluted EPS was $0.12 and nine-month diluted EPS was $0.24. Prior-year EPS comparisons are not directly meaningful: preferred-stock dividend and accretion adjustments resulted in reported 2016 common-stockholder losses of $373.6 million for Q3 and $504.1 million for nine months, despite net losses of $2.4 million and $1.3 million, respectively.
Liquidity, debt, and cash flows
- At September 30, cash was $5.7 million, down from $15.3 million at December 31, 2016. Current assets were $113.2 million and current liabilities $52.1 million. Management reported working capital excluding cash of $55.4 million, versus $29.3 million at year-end.
- Nine-month operating cash use of $6.2 million reflected $39.6 million of unfavorable working-capital movements, including a $34.1 million decrease in accounts payable and accrued expenses and a $13.0 million increase in prepaid expenses and other assets. These were partly offset by lower receivables and inventory.
- Nine-month investing cash use was $7.2 million, including $4.4 million in property and equipment and a $2.9 million equity investment. Financing provided $3.8 million, including a net $9.5 million revolving-credit draw, partly offset by $6.2 million of term-loan principal repayments.
- Total debt and capital lease obligations were $168.3 million gross ($167.8 million net of issuance costs), compared with $165.4 million gross at December 31, 2016. The company had $149.7 million of long-term debt and lease obligations and $18.1 million classified as current.
- An August 2017 credit amendment increased the revolving facility from $35 million to $50 million and extended facility maturities to August 25, 2022. At quarter-end, $9.5 million was drawn and $40.0 million remained available. The term loan was $156.3 million; interest rates were approximately 4.0%. The company reported compliance with financial covenants.
Changes, outlook, and notable items
- Management said operating cash flow, cash on hand, and available revolving capacity should be adequate for operating, investing, and financing needs over the next 12 months. It expects capital expenditures to be funded through cash, operating cash flow, and, if needed, revolving borrowings. No numerical earnings or revenue guidance is provided.
- The company invested $2.9 million for approximately 15% of a private social-media analytics company; the investment is carried at cost.
- The nine-month 2017 income-tax benefit was $2.0 million, including a $4.9 million benefit from stock-option exercises. Management cautions that effective tax rates can be volatile.
- A new e.l.f. store lease entered after quarter-end carries a minimum commitment of $1.4 million plus contingent rent. Operating leases had $30.9 million of future minimum payments disclosed at quarter-end.
- Management identified no legal matter expected to have a material adverse effect and reported no off-balance-sheet arrangements. Disclosure controls were assessed as effective; no material changes to internal control over financial reporting were reported.
- Key disclosed risks include dependence on a limited number of retail customers, competition and changing beauty trends, reliance on China-based suppliers and manufacturing, inventory and seasonal liquidity demands, execution of store and technology expansion, variable-rate debt, and product safety, regulatory, cybersecurity, and foreign-exchange risks.
Important facts for investors to verify
- Whether sales growth and gross-margin gains persist, and how much reflects shelf-space expansion, product innovation, freight, customer terms, and foreign exchange.
- Whether working-capital use reverses after seasonal inventory and payment cycles; operating cash flow was negative despite reported net income.
- Retail-customer concentration, order patterns, inventory levels, and the company’s ability to maintain or expand shelf space.
- Debt-service capacity, variable-rate exposure, covenant headroom, and availability of the revolving facility as seasonal needs rise.
- The eventual revenue-recognition impact of Topic 606, which the company expected to adopt in 2018 and said could affect reserves for discounts, refunds, and customer incentives.