The Estée Lauder Companies Inc. — Form 10-Q Summary
Business and period: The company manufactures, markets and distributes skin care, makeup, fragrance and hair care products in more than 150 countries and territories. This unaudited filing covers the three months ended September 30, 2014, the first quarter of fiscal 2015; comparisons are with the three months ended September 30, 2013. Amounts are in U.S. dollars.
Financial performance
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Net sales | $2,631.0 million | $2,675.0 million | Down 2%; down 1% in constant currency |
| Gross profit / margin | $2,094.4 million / 79.6% | $2,130.9 million / 79.7% | Margin down 0.1 percentage point |
| Operating income / margin | $348.0 million / 13.2% | $449.5 million / 16.8% | Down 23%; margin down 3.6 points |
| Net earnings attributable to the company | $228.1 million | $300.7 million | Down 24% |
| Diluted EPS | $0.59 | $0.76 | Down 23% |
| Operating cash flow | $127.7 million | $29.9 million | Improved $97.8 million |
| Capital expenditures | $78.7 million | $85.7 million | Down $7.0 million |
SG&A was $1,746.4 million, up from $1,680.2 million. Net interest expense was $13.2 million versus $13.5 million; the effective tax rate was 31.5% versus 30.8%. The company declared a quarterly dividend of $0.20 per share during the quarter, compared with $0.18 a year earlier.
Liquidity, debt and cash flow
- Cash and cash equivalents were $1,395.4 million at September 30, 2014, down from $1,629.1 million at June 30, 2014. Current assets were $4,727.9 million and current liabilities were $1,941.7 million.
- Total debt was $1,333.0 million, comprising $14.0 million current debt and $1,319.0 million long-term debt. Debt was 26% of total capitalization. No commercial paper or revolving-credit-facility borrowings were outstanding; the company had a $1.0 billion commercial paper program and a $1.0 billion revolving facility.
- Operating cash flow was higher year over year mainly because of favorable accounts-receivable timing and collections, partly reflecting the prior-year order timing related to the Strategic Modernization Initiative (SMI). Investing activities used $80.3 million; financing activities used $272.6 million, including $207.0 million for treasury-stock purchases and $77.5 million in dividends paid.
- Management said cash on hand, operating cash generation, available credit and capital-market access were expected to be adequate for planned operations and obligations. Approximately $500 million of cash was invested in short- and long-term investments in October 2014.
Changes and operating drivers
- SMI order timing materially distorted comparisons. Retailers accelerated approximately $178 million of orders into fiscal 2014’s fourth quarter ahead of the July 2014 SAP rollout. Management estimated this reduced Q1 FY2015 reported sales by comparison and operating results by approximately $127 million. Excluding the accelerated orders, management’s non-GAAP measures showed sales up 5%, operating income up 6%, and diluted EPS of $0.80, up 5% from $0.76. These are company-adjusted figures, not GAAP results.
- Reported sales declined in skin care (down 7%) and increased in makeup (up 2%), fragrance (up 3%) and hair care (up 3%). By region, sales fell 7% in the Americas and 1% in Asia/Pacific, while rising 6% in Europe, the Middle East and Africa. SMI timing affected each region.
- Operating expenses increased to 66.4% of sales from 62.9%, reflecting higher selling and shipping, general and administrative, and store operating costs, as well as foreign-exchange transaction and stock-compensation effects. Gross margin edged down; higher obsolescence charges were partly offset by favorable exchange rates.
- Other comprehensive loss was $105.4 million, including $129.9 million of translation adjustments, compared with comprehensive income of $61.8 million in the prior-year quarter.
Outlook, risks and unusual items
- No specific near-term revenue or earnings guidance is provided in the supplied filing text. Management described a long-term strategy through fiscal 2017, emphasizing brand and product innovation, skin care, luxury offerings, digital commerce, travel retail, geographic expansion and operating efficiency.
- Management cited competitive pressure, softer retail conditions in some U.S. channels, a strong U.S. dollar, reduced luxury gift giving in China, slower growth in Hong Kong and among Chinese travelers, political instability in Hong Kong, and increased sanctions in Russia as concerns. It warned that prolonged or worsening conditions could reduce consumer confidence, demand and spending.
- The SMI rollout was extended to certain remaining locations in July 2014; locations representing approximately 93% of consolidated sales were SAP-enabled. The company planned to continue implementation through fiscal 2017 and identified potential disruption to shipments, inventory and operations as a risk.
- Foreign-currency transaction losses were $9.9 million, versus a $0.1 million gain a year earlier. The company had $1,786.6 million of foreign-currency forward contracts outstanding and said its cash-flow hedges were highly effective in all material respects.
- In the Darphin dispute, a September 2014 Paris Court of Appeal decision found the company liable for €7.4 million plus interest and costs, consistent with the amount previously accrued. The company received €16.8 million back in October 2014 from funds paid under the earlier ruling. Management said other reasonably possible litigation losses beyond accrued amounts were not material.
- After quarter-end, the board declared a $0.24-per-share dividend payable December 15, 2014. The company also repurchased approximately 1.6 million additional shares for $120.0 million through October 28, 2014. Management reported disclosure controls were effective at quarter-end.
Important facts for investors to verify
- How much of subsequent sales and earnings trends reflects underlying demand versus the $178 million SMI-related order shift, and whether the company’s adjusted comparisons remain useful.
- Whether pressure on skin care, the Americas, Hong Kong and China persists, and the extent of foreign-exchange impacts.
- Whether higher operating expenses and store expansion costs are offset by growth, pricing, mix and efficiency initiatives.
- Cash conversion and working-capital trends, including receivables and seasonal funding needs, alongside share repurchases and dividend growth.
- Progress and execution risks in the SAP rollout, and developments in the Darphin matter, tax exposures and other contingencies.