Business context and reporting period
The Estée Lauder Companies Inc. manufactures and sells prestige beauty products across skin care, makeup, fragrance and hair care in approximately 150 countries and territories. This 10-Q covers the quarter and nine months ended March 31, 2022. The request metadata labels the period “2021 Q3,” but the filing itself is for fiscal 2022 third quarter.
Financial performance
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $4.245 billion, up 10% reported and 11% in constant currency | $14.176 billion, up 15% reported and in constant currency |
| Gross margin | 76.6%, versus 75.7% | 76.9%, versus 76.8% |
| Operating income / margin | $738 million / 17.4%, versus $616 million / 15.9% | $3.091 billion / 21.8%, versus $2.384 billion / 19.4% |
| Net earnings attributable to Estée Lauder | $558 million, versus $456 million | $2.338 billion, versus $1.852 billion |
| Diluted EPS | $1.53, up 24%; adjusted EPS $1.90, up 17% | $6.39, up 27%; adjusted EPS $6.80, up 20% |
| Operating cash flow | Not presented separately for the quarter | $1.969 billion, versus $2.777 billion |
Quarterly sales increased across all major product categories except the small “other” category. Fragrance rose 28%, hair care 15%, makeup 9% and skin care 6%. By region, Europe, the Middle East & Africa increased 17% and the Americas 15%; Asia/Pacific declined 4%, mainly because of renewed COVID-19 restrictions in China. For the nine months, all major categories and regions reported sales growth.
Quarterly operating results included $216 million of intangible-asset impairment charges, principally a $205 million Dr.Jart+ trademark impairment and an $11 million GLAMGLOW impairment. Excluding specified items, quarterly operating income increased 15% and diluted EPS increased 17%, according to the company’s non-GAAP reconciliations.
Liquidity, debt and capital allocation
At March 31, 2022, cash and cash equivalents were $3.836 billion, down from $4.958 billion at June 30, 2021. Current assets were $9.500 billion and current liabilities $5.414 billion. Total debt was $5.457 billion ($269 million current and $5.188 billion long-term), compared with $5.569 billion at June 30, 2021. Cash less total debt was approximately $1.621 billion, versus approximately $611 million at June 30, 2021. Debt was 47% of total capitalization, excluding noncontrolling interests.
Nine-month operating cash flow was $1.969 billion; investing cash outflow was $563 million, including $658 million of capital expenditures; financing cash outflow was $2.516 billion. The company repurchased $1.998 billion of stock and paid $624 million in dividends. Management said cash, operating cash flow, credit lines and capital-market access should be adequate for expected needs.
Changes, outlook and risks
- Sales and earnings grew year over year, supported by reopening and travel recovery in the Americas and EMEA, product launches and strong fragrance demand. The quarter’s recovery was uneven: China restrictions weighed on Asia/Pacific sales and operations.
- Operating cash flow fell year over year as working-capital requirements and tax payments increased. Inventory rose to $2.830 billion from $2.505 billion at June 30, 2021.
- Management expects higher supply-chain costs to pressure cost of sales and operating expenses for the remainder of fiscal 2022. Planned mitigations include price increases, product mix, shipment timing and cost savings. The filing provides no specific full-year sales or EPS guidance.
- The two-year Post-COVID Business Acceleration Program is expected to incur $400–$500 million of pretax charges overall; $311 million of initiatives had been approved through March 31. The program targets a net reduction of 2,000–2,500 positions and closure of approximately 10%–15% of freestanding stores. Initiatives approved after quarter-end were expected to generate about $50 million of additional pretax charges.
- The company suspended commercial activity and business investments in Russia and Ukraine in early March. Those operations were not material to the reported quarter or nine-month results; Russia and Ukraine together represented about 1% of fiscal 2021 sales. Further effects remain uncertain.
- Other significant risks include COVID-related store and supply disruptions, inflation, geopolitical and trade tensions, travel-retail weakness, currency movements and possible further brand-asset impairments. The largest customer, primarily in China travel retail, represented 17% of quarterly sales and 20% of receivables at March 31.
- Management said current litigation is not expected to have a material adverse effect, while noting outcomes could differ from its assessment. The company reported effective disclosure controls as of March 31, 2022.
Important facts for investors to verify
- Whether China’s restrictions and Shanghai distribution constraints ease, and how they affect sales, receivables and inventory.
- Whether supply-chain, shipping and inflation costs are offset by pricing and other actions, and whether margins remain resilient.
- The assumptions supporting Dr.Jart+ and other brand valuations; Too Faced and DECIEM trademark fair values had only 13% and 3% headroom, respectively, and could be impaired after modest discount-rate increases.
- The cash-flow impact of working-capital needs, planned capital spending, share repurchases and the remaining restructuring program.
- The evolving financial and commercial consequences of the Russia-Ukraine conflict and broader geopolitical risks.