Business context and reporting period
The Estée Lauder Companies Inc. manufactures and sells prestige skin care, makeup, fragrance and hair care products in more than 150 countries and territories. This is a Form 10-Q for the quarter ended March 31, 2012 (fiscal 2012 third quarter), with nine-month results for the period then ended. The request metadata identifies “2011 Q3,” which does not match the filing period.
Key financial results
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $2,248.2 million vs. $2,165.7 million; up 4% | $7,462.4 million vs. $6,749.4 million; up 11% |
| Gross profit / margin | $1,778.9 million; 79.1% vs. 77.7% | $5,907.8 million; 79.2% vs. 77.6% |
| Operating income / margin | $211.5 million vs. $209.1 million; 9.4% vs. 9.6% | $1,238.5 million vs. $1,024.8 million; 16.6% vs. 15.2% |
| Net earnings attributable to Estée Lauder | $130.4 million vs. $124.7 million | $805.7 million vs. $659.7 million |
| Diluted EPS | $0.33 vs. $0.31 | $2.03 vs. $1.64 |
| Operating cash flow | Not presented separately for the quarter | $869.7 million vs. $727.6 million |
For the quarter, cost of sales fell to 20.9% of sales from 22.3%, while operating expenses rose to 69.7% from 68.1%. Nine-month effective tax rate was 32.7% versus 32.4%; the quarterly rate was 33.4% versus 35.3%.
Financial position and liquidity
- At March 31, 2012, cash and cash equivalents were $1,192.8 million, down from $1,253.0 million at June 30, 2011. Current assets were $3,899.9 million and current liabilities $2,058.2 million.
- Total debt was $1,209.9 million, compared with $1,218.1 million at June 30, 2011; debt was 30% of total capitalization, down from 32%. The company had $120 million of commercial paper outstanding at quarter-end and no borrowings under its $1.0 billion revolving credit facility.
- Nine-month investing cash outflow was $279.5 million, including $271.9 million of capital expenditures. Financing cash outflow was $640.7 million, including $550.0 million of treasury-stock purchases and $204.0 million of dividends paid. Cash declined by $60.2 million over the nine-month period.
- Management said cash, operating cash generation, available credit and access to capital markets should cover planned operations and obligations in the near and long term. The company reported compliance with debt covenants.
Changes and operating drivers
- Quarterly sales growth was led by skin care, up 9%; makeup and fragrance were nearly flat, and hair care was nearly flat. Nine-month sales grew across all major categories, led by skin care, up 16%, and makeup, up 9%.
- Nine-month sales increased in all regions: the Americas 8%, Europe/Middle East/Africa 10%, and Asia/Pacific 16%. Management cited travel retail and growth in China and other Asian markets, while noting weakness in some European countries, Japan and Australia.
- Nine-month operating income growth reflected higher gross margin, favorable category mix and stronger results in skin care. Quarterly operating margin nevertheless declined as higher advertising, merchandising and sampling, selling and shipping, and other costs outweighed gross-margin improvement.
- Share repurchases and dividends increased cash returned to shareholders: the company repurchased approximately 11.2 million Class A shares for $550 million and paid $204 million in dividends during the nine months. A two-for-one stock split took effect in January 2012; per-share figures are presented on a post-split basis.
Outlook, risks and unusual items
- No specific sales or earnings guidance is provided. Management expected higher advertising, merchandising and sampling investment for the remainder of fiscal 2012 and described its strategy through fiscal 2014, including investment in skin care, digital channels, travel retail and emerging markets.
- The restructuring program is expected to generate total pre-tax charges of $350 million to $450 million. Recorded cumulative charges were $278.4 million through March 31, 2012. Management estimated program-related savings of $700 million to $750 million through the program, including $700 million to $720 million through fiscal 2012, relative to an assumed normalized spending pattern.
- SAP implementation shifted retailer orders between quarters: approximately $30 million of orders moved into fiscal 2012’s second quarter from the third, while approximately $42 million had moved into fiscal 2011’s third quarter from its fourth. Management estimated the combined comparison reduced fiscal 2012 third-quarter sales by about $72 million and operating results by about $54 million versus the prior-year quarter.
- A provision for anticipated returns and related inventory write-offs totaling approximately $17 million affected the quarter, following changes in U.S. sunscreen-product regulations. Ojon softness in direct-response television led to a $6.7 million trademark impairment during the nine months.
- The company received $10.5 million from settlement of a commercial dispute, recorded as other income. In the Darphin dispute, a Paris court awarded the former owner €22.9 million plus interest; the company appealed, paid €25.3 million under the judgment and received a bank guarantee. It maintained an accrual it believes reflects the probable outcome; that accrual is below the court award.
- Management cited global economic uncertainty, competitive pressures, consumer and retailer behavior, foreign exchange, product-launch execution, and potential disruption from SAP implementation among risks. It cautioned that prolonged economic weakness could further affect consumer confidence, demand and spending.
Important facts for investors to verify
- Confirm the applicable period: the filing covers fiscal 2012 third quarter, not 2011 third quarter.
- Assess underlying quarterly sales and margin trends after accounting for SAP-related order timing and the sunscreen-related returns and inventory charges.
- Track the remaining restructuring charges, cash payments and whether projected savings are realized as planned.
- Review the outcome and potential financial impact of the Darphin appeal and the company’s recorded accrual.
- Monitor cash conversion, working-capital movements, share repurchases, dividend payments and the use or refinancing of commercial paper.