Business context and reporting period
The Estée Lauder Companies Inc. filed this unaudited Form 10-Q for its fiscal first quarter ended September 30, 2021, comparing results with the quarter ended September 30, 2020. The company sells prestige beauty products across skin care, makeup, fragrance and hair care in approximately 150 countries and territories. Results remained affected by COVID-19 disruptions and included incremental sales following the increase in the company’s ownership of DECIEM in the prior fiscal year’s fourth quarter.
Key financial metrics
| Metric | Q1 FY2022 | Q1 FY2021 |
|---|---|---|
| Net sales | $4,392 million | $3,562 million |
| Gross profit / margin | $3,335 million / 75.9% | $2,737 million / 76.8% |
| Operating income / margin | $935 million / 21.3% | $705 million / 19.8% |
| Net earnings attributable to the company | $692 million | $523 million |
| Diluted earnings per share | $1.88 | $1.42 |
| Cash from operations | $(81) million | $358 million |
| Capital expenditures | $205 million | $116 million |
Revenue increased 23% as reported and 21% in constant currency. Fragrance sales rose 50%; skin care and makeup each rose 20%; hair care rose 9%. Sales grew 37% in the Americas, 22% in Europe, the Middle East and Africa, and 15% in Asia/Pacific. The effective tax rate was 22.5%, versus 21.8%.
At September 30, 2021, cash and cash equivalents were $3,995 million, current assets $9,486 million and current liabilities $5,319 million. Total debt was $5,548 million ($281 million current and $5,267 million long-term). The company reported total equity of $6,115 million and debt equal to 48% of total capitalization, excluding noncontrolling interests. Cash declined $963 million during the quarter.
Material changes versus the prior comparable period
- Sales rose across all product categories and regions, reflecting store reopenings and improving travel and retail conditions versus the prior-year period, as well as hero products, launches and expanded consumer reach. DECIEM ownership also contributed to sales growth.
- Operating income increased 33%; diluted EPS rose 32%. Operating margin improved 1.5 percentage points, while gross margin declined 0.9 percentage points, primarily due to business mix and higher obsolescence charges, partly offset by foreign exchange and strategic pricing.
- Operating cash flow shifted to an $81 million outflow from $358 million of inflow. Management attributed the change primarily to working-capital movements as needs returned toward more normal levels, including changes in accrued liabilities and accounts payable.
- Cash used in financing was $714 million, including $557 million spent to acquire treasury shares and $192 million of dividends paid. Investing cash outflow was $153 million, including $205 million of capital expenditures.
Outlook, management commentary and risks
- The filing provides no specific quarterly or full-year revenue or earnings guidance. Management said COVID-19, intermittent store closures, subdued retail traffic and curtailed international travel could continue to affect recovery and travel retail.
- Supply-chain delays, port congestion, labor and container shortages, and higher logistics costs are expected to pressure cost of sales and operating expenses for the remainder of fiscal 2022. Management expects to mitigate much of the impact through pricing, product mix, shipment timing, freight and cost measures.
- The Post-COVID Business Acceleration Program is expected to incur $400–$500 million of pretax charges. The company estimated a net reduction of 2,000–2,500 positions and closure of approximately 10%–15% of freestanding stores over the program. It expects to approve initiatives through fiscal 2022 and complete them through fiscal 2023.
- The company will not renew five designer fragrance licenses—Donna Karan New York, DKNY, Michael Kors, Tommy Hilfiger and Ermenegildo Zegna—when they expire in June 2023; sales under the licenses are expected to continue through June 30, 2022.
- Management cited inflation, supply-chain disruption, geopolitical tensions, potential U.S.–China tensions, foreign exchange, consumer demand and travel recovery as risks. A 10% weakening of the U.S. dollar in the currencies in the company’s portfolio would reduce derivative portfolio fair value by an estimated $210 million; a 100-basis-point rise in interest rates would reduce interest-rate derivative fair value by an estimated $79 million. These sensitivities do not represent expected losses and do not include underlying exposures.
- On October 22, 2021, the company replaced its $1.5 billion revolving credit facility with a $2.5 billion facility expiring in 2026, subject to possible extensions. No borrowings were outstanding under the prior facility through the replacement date.
- DECIEM’s acquisition accounting remained provisional at quarter-end. The filing reports no material effect from current legal proceedings, but outcomes could differ from management’s assessment. The company also recorded a $121 million increase to opening retained earnings upon adoption of a tax accounting standard.
Important facts for investors to verify
- How much of sales growth and future performance reflects underlying demand versus DECIEM ownership, currency, shipment timing and recovery against the pandemic-affected comparison period.
- Whether working-capital outflows, particularly receivables and inventory, reverse and operating cash flow converts to earnings over subsequent quarters.
- Whether freight, supply constraints and product mix continue to pressure gross margin, and whether pricing and cost actions offset those pressures.
- Progress and realized costs of the restructuring program, including store closures, workforce changes and the projected $400–$500 million pretax charge range.
- Developments in travel retail and the major China travel-retail customer, which represented 10% of quarterly sales and 13% of receivables at September 30, 2021.
- Final DECIEM purchase accounting, including provisional asset valuations and the redeemable noncontrolling interest.