Estee Lauder Companies Inc. — Q1 Fiscal 2020 10-Q
Reporting period: Three months ended September 30, 2019; comparisons are with the three months ended September 30, 2018 unless stated otherwise. The company manufactures and sells prestige beauty products in approximately 150 countries and territories. Financial statements are unaudited and prepared under U.S. GAAP.
Key financial results
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $3.895 billion | $3.524 billion | +11% reported; +12% constant currency |
| Gross profit / margin | $2.987 billion / 76.7% | $2.701 billion / 76.6% | Margin +0.1 percentage point |
| Operating income / margin | $779 million / 20.0% | $652 million / 18.5% | Income +19% |
| Net earnings attributable to Estee Lauder | $595 million | $500 million | +19% |
| Diluted EPS | $1.61 | $1.34 | +21%; adjusted EPS growth was 19% |
| Cash from operating activities | $(170) million | $(119) million | Cash use increased |
Cost of sales was $908 million; selling, general and administrative expense was $2.185 billion; and restructuring and other charges in the earnings statement were $23 million. The effective tax rate rose to 21.3% from 20.7%. The filing reports approximately $40 million of unfavorable foreign-currency translation on sales.
Sales and operating performance
- Skin care was the principal growth driver: sales rose 24% to $1.842 billion, with strong contributions from Estee Lauder, La Mer and Clinique.
- Makeup sales increased 3% to $1.443 billion, while fragrance declined 2% to $462 million and hair care declined 5% to $136 million.
- Asia/Pacific sales increased 24% to $1.058 billion, and Europe, the Middle East and Africa increased 17% to $1.677 billion, led in part by travel retail. Americas sales fell 6% to $1.160 billion, reflecting weakness in the United States.
- Management attributed improved operating margin to sales growth, a favorable product and business mix, and lower selling expense as a share of sales. Higher digital advertising, promotions and product-development spending partly offset those benefits.
- Reported operating income grew 19%; operating income adjusted for restructuring and other activities and contingent-consideration fair-value changes grew 17%.
Cash, debt and liquidity
- Cash and cash equivalents were $2.259 billion at September 30, 2019, down from $2.987 billion at June 30, 2019.
- Operating activities used $170 million; investing activities used $128 million, including $125 million of capital expenditures; financing activities used $416 million. Working-capital outflows, especially lower accounts payable, contributed to operating cash use.
- Current and long-term debt totaled $3.415 billion, including $520 million current and $2.895 billion long term. Debt was 43% of total capitalization, compared with 44% at June 30, 2019.
- The company reported $2.681 billion of operating lease liabilities at quarter-end. These are separate from the debt total above. It adopted the new lease standard on July 1, 2019, recognizing operating lease right-of-use assets and liabilities; the adoption reduced opening retained earnings by $29 million, net of tax.
- Management said cash, operating cash generation, available credit lines and access to credit markets should be adequate for planned operations and obligations. Commercial paper and long-term debt were rated A-1 and A+, respectively, by S&P, and P-1 and A2 by Moody’s, with stable outlooks for long-term debt.
Outlook, risks and unusual items
- The filing provides no specific quantitative sales or earnings guidance for future periods. Management described continued sales momentum but noted competition and economic challenges.
- Risks highlighted include weaker retail traffic in parts of the United States and United Kingdom; Hong Kong disruptions affecting store and airport traffic; U.S.–China trade-policy uncertainty and possible tariffs; Brexit-related uncertainty; foreign-exchange and tourism movements; and broader macroeconomic, political and regulatory risks.
- The multi-year Leading Beauty Forward restructuring initiative is expected to be substantially completed through fiscal 2021. Accrued restructuring charges of $174 million were expected to be paid primarily during the remainder of fiscal 2020 and fiscal 2021.
- The company repurchased $313 million of shares and paid $156 million in dividends during the quarter. A $0.48-per-share dividend was declared October 30, 2019, payable December 16, 2019.
- Management said current litigation is not expected to have a material adverse effect. The company is reviewing certain product advertising claims after testing did not meet its standards; it said this is not a product-safety issue, does not concern product ingredients or manufacturing, and is not expected to be material. No accrual was recorded.
- Regional operating-income comparisons were recast for a travel-retail royalty-structure change: prior-year Americas operating income increased by $201 million, with a corresponding decrease in Europe, the Middle East and Africa. The filing says the change had no material year-over-year effect on either region’s current-period operating results.
Important facts for investors to verify
- Whether growth in skin care, China and travel retail continues, and whether weaker U.S. makeup and Hong Kong conditions persist.
- Whether operating cash flow improves as working-capital outflows normalize, given the quarter’s cash use and continued shareholder returns.
- The effects of currency, tariffs, Brexit, tourism and retail-traffic changes on sales, costs and margins.
- The expected cash costs and completion timing of Leading Beauty Forward, and the company’s obligations under operating leases.
- Whether the advertising-claims review, legal matters or other contingencies develop beyond management’s current assessment.