Business Context and Reporting Period
The Estée Lauder Companies Inc. filed this Form 10-K for the fiscal year ended June 30, 2013; it is not a quarterly report for “2012 Q4.” The company sells prestige skin care, makeup, fragrance and hair care products across more than 150 countries and territories through a portfolio of owned and licensed brands.
Financial Results and Key Metrics
Unless otherwise indicated, amounts are in millions of U.S. dollars. Fiscal 2013 comparisons are with fiscal 2012.
| Metric | FY2013 | FY2012 | Change |
|---|---|---|---|
| Net sales | $10,181.7 | $9,713.6 | +5%; +6% excluding currency |
| Gross profit / margin | $8,155.8 / 80.1% | $7,717.8 / 79.5% | Margin +0.6 percentage points |
| Operating income / margin | $1,526.0 / 15.0% | $1,311.7 / 13.5% | +16%; margin +1.5 points |
| Net earnings attributable to Estée Lauder | $1,019.8 | $856.9 | +19% |
| Diluted EPS | $2.58 | $2.16 | +20% |
| Operating cash flow | $1,226.3 | $1,126.7 | +$99.6 |
| Capital expenditures | $461.0 | $420.7 | +$40.3 |
| Cash and cash equivalents | $1,495.7 | $1,347.7 | +$148.0 |
| Total debt | $1,344.3 | $1,288.1 | +$56.2 |
Operating cash flow less capital expenditures was approximately $765 million, calculated from the reported figures. Working capital was $2,362.6 million, up from $1,729.3 million. Total debt was 29% of total capitalization, versus 32% a year earlier. The company reported no commercial paper or revolving-credit-facility borrowings at year-end and had $1.0 billion available under its revolving facility. Approximately $871 million of cash was held offshore under its permanent-reinvestment strategy.
Revenue Mix
- By product: skin care $4,465.3 million (+6%); makeup $3,876.9 million (+5%); fragrance $1,310.8 million (+3%); hair care $488.9 million (+6%).
- By region: Americas $4,302.9 million (+5%); Europe, Middle East & Africa $3,758.7 million (+4% reported; +6% constant currency); Asia/Pacific $2,121.6 million (+5% reported; +6% constant currency).
- Skin care was the largest product category and the company’s stated most profitable category. Macy’s accounted for 11% of consolidated sales, unchanged from the prior two years.
Material Changes Versus the Prior Period
- Gross margin improved mainly from business mix, pricing, manufacturing efficiencies and currency effects. Operating expense fell to 65.1% of sales from 66.0%, supporting operating-margin expansion.
- Regional operating income increased in the Americas and EMEA, but declined 10% in Asia/Pacific, with weakness in Korea, Hong Kong and Japan.
- Restructuring-related charges fell to $17.8 million from $63.2 million. The company closed its 2009 cost-savings program and reported approximately $780 million of cumulative savings through fiscal 2013.
- Operating cash flow increased, while investing cash use rose to $465.5 million, mainly reflecting higher capital spending. Financing cash use was $611.5 million, including dividends and share repurchases.
- The company issued $500 million of long-dated notes and redeemed $230.1 million of 7.75% notes, recording a $19.1 million debt-extinguishment expense. Net interest expense declined to $54.8 million from $61.1 million.
Outlook, Management Commentary, Risks and Unusual Items
- Management described the business as performing well and prioritized innovation, skin care, luxury consumers, digital and e-commerce capabilities, emerging markets, travel retail and selective store expansion. Management expected travel-retail growth to continue into fiscal 2014 and anticipated longer-term profitability benefits from modernization and efficiency initiatives.
- The filing discusses fiscal 2014 sales and EPS guidance, but the supplied filing text does not provide a clear quantified value for that guidance.
- Management cited challenging conditions in Southern Europe and Korea, competitive pressure in Korea, caution about near-term U.S. retail conditions and the possibility that slower Chinese growth could moderate sales, including travel retail. Foreign-exchange movements, retailer destocking, consumer demand, competition, supply interruptions and execution of strategic programs are key risks.
- The Strategic Modernization Initiative’s supply-planning rollout caused some customer-service delays and out-of-stocks in fiscal 2013. The company reported improvement after resolving the issues and delayed a subsequent implementation by six months; the majority of locations were expected to migrate to SAP through calendar 2014.
- Fiscal 2013 included $17.7 million of Darphin goodwill and trademark impairment charges and $23.1 million of other income, primarily from amending the Rodan + Fields sale agreement. Net income also included a $19.1 million debt-extinguishment charge.
- Out-of-period adjustments relating to fiscal 2008–2012 increased fiscal 2013 pretax earnings by $7.7 million and net earnings by $1.7 million, with no diluted EPS impact for the year. The filing says these adjustments were not material to fiscal 2013 or prior financial statements.
- A former Darphin owner’s claim remains under appeal in France. The company paid €25.3 million under the lower-court judgment, received a bank guarantee for repayment if the judgment is reversed, and maintained an accrual below the court’s award based on its assessment of the appeal.
- The Lauder family held 86% of voting power, giving it significant influence; the company relied on NYSE controlled-company exemptions. The auditor issued unqualified opinions on the financial statements and internal control over financial reporting.
Important Facts for Investors to Verify
- Confirm the correct reporting period: fiscal year ended June 30, 2013, despite the request metadata’s “2012 Q4” label.
- Review the full fiscal 2014 guidance and subsequent results; the supplied text does not show the guidance figures.
- Assess whether the fiscal 2013 margin improvement and reported earnings growth are repeatable, considering special income, debt-extinguishment costs, impairment and restructuring items.
- Monitor Asia/Pacific operating performance, retailer inventory and travel-retail trends, particularly in Korea, China and other exposed markets.
- Track SAP implementation progress and related inventory, service levels and capital spending.
- Review the Darphin appeal, foreign tax exposures, and the company’s substantial offshore cash and contractual obligations.