Business context and reporting period
The Estée Lauder Companies Inc. filed this unaudited Form 10-Q for the quarter and six months ended December 31, 2015 (fiscal 2016). The company manufactures and sells prestige skin care, makeup, fragrance and hair care products in more than 150 countries and territories. Comparisons below are with the corresponding fiscal 2015 periods; amounts are in U.S. dollars.
Key financial results
| Metric | Three months ended Dec. 31, 2015 | Six months ended Dec. 31, 2015 |
|---|---|---|
| Net sales | $3,124.8 million; up 3% reported and 8% excluding currency effects | $5,959.5 million; up 5% reported |
| Gross profit / margin | $2,535.8 million / 81.2%; margin unchanged | $4,793.3 million / 80.4%; margin unchanged |
| Operating income / margin | $629.4 million / 20.2%; down 1% and 60 basis points | $1,082.6 million / 18.2%; up 10% and 90 basis points |
| Net earnings attributable to Estée Lauder | $446.2 million; up 2%; diluted EPS $1.19, up 5% | $755.5 million; up 14%; diluted EPS $2.00, up 17% |
| Effective tax rate | 27.2%, versus 29.6% | 28.0%, versus 30.3% |
| Operating cash flow | Not presented separately for the quarter | $962.3 million, versus $993.7 million |
Quarterly operating income included $18.5 million of restructuring and other charges. Excluding those charges, management said operating income would have increased 2%, while operating margin would still have declined 10 basis points. For the six-month period, management reported that operating income, adjusted for prior-year accelerated orders and current restructuring charges, decreased 1%; adjusted diluted EPS was $2.03 versus $1.93, up 6% (reported figures are not adjusted).
Balance sheet, debt and cash flow
At December 31, 2015, cash and cash equivalents were $868.1 million, short-term investments $546.1 million, and current assets $4,475.8 million against current liabilities of $2,479.4 million. Total debt was $1,981.7 million, including $340.2 million of commercial paper classified as current debt; long-term debt was $1,607.3 million. Cash plus short-term investments totaled $1,414.2 million. The company had no borrowings under its $1.0 billion revolving credit facility.
For the six months, investing activities used $644.2 million, including $223.4 million of capital expenditures; financing activities used $453.3 million. Cash declined $153.3 million to $868.1 million. The company repurchased $627.8 million of shares and paid $201.2 million in dividends. Management said cash, operating cash flow, available credit and capital-market access should be adequate for planned needs.
Material changes versus the prior comparable period
- Reported sales growth was substantially affected by currency translation: unfavorable impacts were approximately $168 million for the quarter and $366 million for the six months. Six-month sales growth also benefited from a $178 million comparison effect: retailers had accelerated orders into the prior-year period before the company’s systems implementation. Excluding both currency and the order timing effect, six-month sales increased 8%.
- Makeup, fragrance and hair care sales grew in both reported periods; skin care declined. In the quarter, makeup rose 6%, fragrance 7% and hair care 9%, while skin care fell 3%. For six months, makeup rose 10%, fragrance 8% and hair care 7%, while skin care fell 1%.
- Quarterly operating margin fell despite higher sales, reflecting currency pressure, store and administrative costs, and restructuring charges. Six-month reported margin improved, but the comparison benefited from the prior-year order timing; excluding that effect and restructuring, management said adjusted operating margin declined 40 basis points.
- Six-month operating cash flow was lower year over year, with management citing working-capital effects, shipment and collection timing for receivables, and payment timing for accounts payable.
Outlook, management commentary and risks
No specific full-year sales or earnings guidance is provided in the supplied filing text. Management reiterated its strategy through fiscal 2018: prioritize innovation, digital and omnichannel capabilities, store expansion, emerging markets, luxury brands, and productivity and cost efficiencies. It expects the global technology infrastructure restructuring to generate efficiencies and a positive return on investment.
The restructuring, approved in October 2015, moves IT infrastructure toward a primarily vendor-owned, services-based model. Expected total charges are approximately $40 million to $50 million, funded from operating cash; $18.5 million was recorded through December 31, 2015, and implementation and related charges were expected to continue through calendar 2016. Savings may be partly reinvested.
Management cited challenging retail conditions in China and Hong Kong, reduced travel and spending by Russian and Brazilian travelers, a strong U.S. dollar, economic instability in Russia, Greece and Brazil, department-store traffic weakness, competition and travel-retail volatility. It warned that prolonged or worsening economic uncertainty could weaken consumer confidence and spending. The January 2016 Macy’s store closures were not expected to materially affect sales. The company also noted that repatriating offshore earnings could trigger additional U.S. taxes.
Management stated that current litigation and other legal proceedings are not expected to have a material adverse effect; reasonably possible losses beyond accrued amounts were described as not material. The company reported effective disclosure controls as of December 31, 2015 and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Underlying growth after separating currency impacts and the prior-year accelerated-order comparison, especially in skin care and Asia/Pacific.
- Whether pressure in China, Hong Kong, travel retail and department-store channels persists, and how much sales growth comes from newer brands, launches and expanded distribution.
- The final cost, timing, cash requirements and realized savings from the $40 million to $50 million technology restructuring.
- Commercial-paper refinancing and liquidity: $340.2 million was outstanding at quarter-end and management said it refinances maturities periodically at prevailing rates.
- Working-capital trends and the sustainability of cash generation alongside substantial share repurchases and dividends.
- Foreign-exchange exposure, including the effectiveness of hedges, and potential tax implications if offshore funds are repatriated.