E.L.F. Beauty, Inc. — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2018; filed August 9, 2018. Unaudited results. The company sells cosmetics and skin-care products through retailers, e-commerce and e.l.f. stores, and reports one operating and reportable segment.
Financial performance
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Net sales | $59.1 million | $55.9 million | $125.0 million | $116.4 million |
| Gross profit / margin | $36.6 million / 62% | $35.9 million / 64% | $76.9 million / 61% | $74.1 million / 64% |
| Operating income / margin | $2.9 million / 5% | $3.2 million / 6% | $6.8 million / 5% | $8.4 million / 7% |
| Net income | $1.2 million | $4.0 million | $1.9 million | $6.1 million |
| Diluted EPS | $0.03 | $0.08 | $0.04 | $0.12 |
| Operating cash flow | Not provided for the quarter | $16.4 million | $(17.9) million |
- Sales and margin: Q2 sales grew 6%; first-half sales grew 7%. Management attributed growth mainly to national retailer expansion, additional store locations and, for the first half, shelf space gained in 2017. U.S. sales were $53.0 million in Q2 and $115.1 million for the half; international sales were $6.0 million and $9.8 million, respectively.
- Profitability: Gross margin declined 2 percentage points in Q2 and 3 points for the first half. Management cited unfavorable foreign exchange in both periods, with customer mix and freight also weighing on the first half; margin-accretive innovation partly offset these pressures. SG&A rose 3% in Q2 and 7% for the half, including higher stock compensation, depreciation and amortization, store costs and, for the half, sales and marketing investment.
- Cash flow: First-half operating cash flow was positive versus an outflow in 2017, primarily reflecting a smaller working-capital outflow. Collections reduced accounts receivable by $16.9 million, partly offset by an $18.9 million decrease in accounts payable and accrued expenses. Investing outflow was $5.2 million, mainly for the e-commerce platform and new stores. Financing outflow was $3.8 million, including $4.1 million in term-loan repayments.
- Balance sheet and liquidity: At June 30, cash was $17.4 million, current assets $115.3 million and current liabilities $32.2 million. Working capital excluding cash was $65.7 million, versus $62.2 million at December 31, 2017. Total debt and capital lease obligations were $152.8 million gross ($152.4 million net of debt issuance costs); the company had $49.5 million available on its $50 million revolver. Term-loan interest was approximately 4.0%; the company reported compliance with applicable debt covenants.
Material changes, outlook and risks
- Net income fell despite sales growth. The main year-over-year comparison factor was the sharp reduction in excess tax benefits from stock awards: $0.3 million in Q2 2018 versus $3.7 million in Q2 2017, and $0.2 million versus $4.4 million for the first half. The prior-year tax benefit materially lifted comparative earnings. 2018 tax expense also reflected the reduction in the U.S. federal statutory rate to 21%.
- Interest expense declined following the August 2017 refinancing and lower revolver borrowings. Other income in Q2 2018, versus expense in Q2 2017, was primarily due to favorable foreign-exchange movements.
- The company adopted ASC 606 on January 1, 2018, using the modified retrospective method. Adoption reduced opening retained earnings by $0.1 million, net of tax; 2018 net sales would have been $0.2 million higher for Q2 and $0.7 million higher for the half under the previous standard. Comparative periods were not restated.
- No specific earnings or sales guidance is provided in the filing. Management said cash on hand, operating cash flow and revolver availability should meet operating, investing and financing needs for the next 12 months; additional long-term financing may be needed and may not be available on favorable terms.
- Seasonality typically makes third- and fourth-quarter sales higher and requires working-capital investment in the second and third quarters. Key disclosed risks include reliance on a limited number of retailers, intense beauty-industry competition, product and trend execution, China-based sourcing and manufacturing, supply-chain disruption, potential tariffs, variable-rate debt, and cybersecurity and privacy exposure. The filing says existing U.S. tariffs did not then affect the company’s imported products, but proposed additional tariffs could raise costs or reduce margins.
- Management said it was not party to legal matters expected to materially adversely affect the company. No material changes to contractual obligations or market-risk exposures were reported; no off-balance-sheet arrangements were disclosed.
Important facts for investors to verify
- Whether retailer expansion and shelf-space gains continue to support sales, and whether customer concentration or ordering patterns affect quarterly results.
- Whether gross-margin pressure from foreign exchange, mix and freight eases, and whether innovation offsets these costs.
- Whether operating cash generation remains adequate through seasonal working-capital needs, planned store and technology investment, and scheduled debt repayments.
- How future tax benefits, stock-based compensation and the ASC 606 accounting change affect reported earnings and comparability.
- Whether the $49.5 million revolver availability, covenant compliance and management’s 12-month liquidity assessment remain intact amid the disclosed operating and trade risks.