Estée Lauder Companies Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended March 31, 2020, compared with the same periods in 2019. The filing covers fiscal 2020 Q3, notwithstanding the “2019 Q3” request metadata. The company manufactures and sells skin care, makeup, fragrance and hair care products in approximately 150 countries and territories.
Financial performance
Amounts are in millions except per-share data. Quarterly and year-to-date figures are shown separately.
| Metric | Three months ended March 31 | Nine months ended March 31 |
|---|---|---|
| Net sales | $3,345 vs. $3,744; down 11% reported, 10% constant currency | $11,864 vs. $11,273; up 5% reported, 6% constant currency |
| Gross profit / margin | $2,509; 75.0% vs. 78.1% | $9,079; 76.5% vs. 77.4% |
| Operating income / margin | $109 vs. $674; 3.3% vs. 18.0% | $1,149 vs. $2,097; 9.7% vs. 18.6% |
| Net earnings attributable to Estée Lauder | Loss of $6 vs. earnings of $555; diluted EPS $(0.02) vs. $1.51 | $1,146 vs. $1,628; diluted EPS $3.12 vs. $4.39 |
| Operating cash flow | Not presented for the quarter | $1,945 vs. $1,756 |
- Adjusted results: Excluding specified restructuring, impairment and other items, Q3 operating income was $478 million, down 36%, and diluted EPS was $0.85 vs. $1.55, down 45%. For nine months, adjusted operating income was $2,326 million, up 2%, and adjusted diluted EPS was $4.63 vs. $4.70, down 1%. These are company-defined non-GAAP measures.
- Cash and liquidity: Cash and equivalents were $4,876 million at March 31, 2020, compared with $2,987 million at June 30, 2019. Nine-month capital expenditures were $468 million. Cash used for the Have & Be acquisition was included in investing activities.
- Debt: Total debt was $6,201 million, including $1,527 million current debt, versus $3,412 million at June 30, 2019. Debt represented 59% of total capitalization, compared with 44%. April 2020 actions included issuing $700 million of 2.600% notes due 2030, repaying $200 million of commercial paper and drawing the remaining $200 million available under the revolving facility.
Material changes and unusual items
- COVID-19-related closures, travel restrictions and reduced consumer activity drove Q3 sales declines across all product categories and regions. Makeup was particularly weak; skin care was more resilient. Online sales accelerated but did not offset declines in other channels. The Americas reported a 23% Q3 sales decline; Europe, the Middle East & Africa declined 6%, and Asia/Pacific declined 4%.
- Gross margin declined 3.1 percentage points in Q3. The company cited unfavorable business and channel mix, manufacturing costs, product-set costs, obsolescence and acquisition-related costs, including an $11 million inventory step-up adjustment related to Have & Be.
- Impairment charges were $346 million in Q3 and $1,123 million for the nine months, including goodwill, trademarks and long-lived assets. Nine-month goodwill impairment was $786 million and other intangible and long-lived asset impairment was $337 million. Charges primarily involved Too Faced, BECCA, Smashbox and GLAMGLOW amid makeup-category weakness and COVID-19 uncertainty.
- Nine-month results included $576 million of other income, principally a $553 million gain from remeasuring the previously held Have & Be investment and a $23 million foreign-currency gain connected with funding the acquisition. The prior-year comparison included a $71 million gain from liquidation of a foreign investment.
- The company acquired the remaining 66.66% of Have & Be in December 2019 for $1,268 million in cash. The purchase accounting remained provisional at March 31. The acquired business contributed approximately $67 million of sales and $11 million net loss, including acquisition-related costs, in the nine-month period.
Outlook, management commentary and risks
- Management said it could not reasonably estimate the pandemic’s full financial impact. It expected global prestige beauty to remain adversely affected at least over the next few months and expected adverse effects on results through the remainder of fiscal 2020 and subsequent periods.
- Q3 cost controls produced approximately $250 million of savings. Management estimated that Q3 actions plus additional measures announced April 15—including temporary furloughs and salary reductions—would reduce Q4 operating expenses by approximately $500 million to $600 million. It also expected fiscal 2020 capital investment reductions of approximately $250 million to $300 million.
- The company temporarily suspended share repurchases and the quarterly cash dividend that otherwise would have been paid in June 2020. It said manufacturing and distribution continued at reduced capacity, supply-chain disruption had been minimal to date, and higher excess and obsolescence charges were likely for the rest of fiscal 2020.
- Key risks include the duration and severity of COVID-19; further store closures and weak travel retail; retailer distress, destocking and collection risk; consumer preference shifts; foreign exchange and tariffs; and potential additional brand impairments if forecasts or recovery assumptions worsen. S&P rated long-term debt A+ with a negative outlook as of April 24, 2020; Moody’s rated it A1 with a stable outlook.
- Management reported no material expected adverse effect from current litigation. It also disclosed an ongoing review of certain product advertising claims; it said the matter was not a product safety or ingredient-quality issue, did not believe it would be material, and recorded no accrual.
Important facts for investors to verify
- Whether store reopenings, online growth and travel retail recovery offset continuing declines, and whether the stated Q4 cost savings are achieved.
- Whether the cash balance and expanded borrowing capacity remain adequate as operating cash flows and customer collections respond to the pandemic; monitor debt levels and credit ratings.
- Whether assumptions supporting the carrying values of acquired and legacy brands hold, particularly for Too Faced, BECCA, Smashbox and GLAMGLOW, and whether further impairments arise.
- Final Have & Be purchase accounting and the acquisition’s contribution to sales, earnings and cash generation.
- Effects of the temporary dividend and buyback suspensions, and any subsequent changes in capital-allocation policy.