E.L.F. Beauty, Inc. — Form 10-Q Summary
Reporting period: Fiscal third quarter and nine months ended December 31, 2020; comparative periods ended December 31, 2019. The company sells e.l.f. Cosmetics, W3LL PEOPLE and Keys Soulcare products through retailers and e-commerce. Results are unaudited.
Financial performance
| Metric | Three months ended Dec. 31, 2020 | Prior-year quarter | Nine months ended Dec. 31, 2020 | Prior-year nine months |
|---|---|---|---|---|
| Net sales | $88.6 million | $80.8 million | $225.4 million | $208.1 million |
| Gross profit / margin | $57.1 million / 64% | $52.5 million / 65% | $147.6 million / 65% | $133.1 million / 64% |
| Operating income | $6.3 million | $12.9 million | $11.3 million | $28.9 million |
| Net income | $4.3 million | $8.0 million | $6.3 million | $18.2 million |
| Diluted EPS | $0.08 | $0.16 | $0.12 | $0.36 |
| Operating cash flow | Not presented by quarter | $2.0 million | $37.8 million |
Liquidity and debt at December 31, 2020: Cash was $35.4 million; current assets $160.3 million and current liabilities $66.7 million. Total debt and finance lease obligations were $130.0 million gross ($129.7 million net of issuance costs), including $15.3 million current. The revolving facility had $49.8 million unused capacity. The company reported compliance with credit-agreement financial covenants. Nine-month investing cash outflow was $4.0 million, financing cash outflow $8.7 million, and cash declined $10.7 million to $35.4 million.
Changes and management commentary
- Quarterly sales rose 10%; management attributed growth to e-commerce, international markets and national retailers. Nine-month sales increased 8%. U.S. sales for the quarter were $79.5 million and international sales $9.1 million.
- Quarterly gross margin declined 50 basis points to 64%, despite benefits from product mix, cost savings and e-commerce mix; retailer activity and space-expansion costs partly offset those benefits. Nine-month margin improved to 65% from 64%, with price increases and favorable mix and foreign exchange among the cited drivers; tariffs and retailer costs were offsets.
- SG&A rose 28% in the quarter to $50.8 million and 24% for nine months to $136.3 million. Management cited marketing and digital investment, capability-building headcount, e-commerce operating costs and, for the nine-month period, proxy-contest costs. SG&A reached 57% of quarterly sales and 60% of nine-month sales.
- Operating income and net income fell year over year in both periods. Nine-month comparison is affected by $6.0 million of restructuring income in the prior year, largely a lease-extinguishment gain; no restructuring costs were recorded in the current nine-month period.
- Nine-month operating cash flow fell to $2.0 million, principally reflecting higher working capital: inventory increased $22.4 million and accounts receivable increased $14.9 million. The company said operating cash flow, cash on hand and available revolving credit should cover planned needs for the next twelve months.
- W3LL PEOPLE was acquired for approximately $25.9 million in cash in February 2020. The company reported no goodwill or intangible-asset impairment. It also launched Keys Soulcare, a lifestyle beauty brand created with Alicia Keys.
Outlook, risks and unusual items
The filing provides no specific financial guidance or quantified outlook. Management said COVID-19-related disruption and changes in consumer shopping patterns may continue to affect sales, and described efforts to protect employees, limit supply-chain disruption and maintain liquidity. The business is seasonal, with typically higher sales in the third and fourth fiscal quarters and associated working-capital needs.
Key disclosed risks include reliance on a limited number of retail customers and third-party suppliers, sourcing and manufacturing substantially all products in China, tariffs, supply-chain and inventory disruption, COVID-19 uncertainty, competition and product-launch execution, cybersecurity and privacy obligations, and variable-rate debt. The term loan and revolving facility mature August 25, 2022; substantially all company assets secure the facilities. The company stated that it expects to become a large accelerated filer and cease to qualify as an emerging growth company beginning April 1, 2021, increasing compliance requirements.
Management reported no pending legal matters expected to have a material adverse effect and no material change in market-risk exposures. Disclosure controls were considered effective as of December 31, 2020; no material change in internal control over financial reporting was reported.
Investor verification priorities
- Assess whether sales growth can translate into improved operating profit as marketing, digital, headcount and e-commerce costs increase.
- Track inventory, receivables and operating cash conversion, particularly given the seasonal working-capital build.
- Review debt repayment and refinancing needs before the August 2022 maturities, covenant headroom and exposure to variable interest rates.
- Evaluate continued effects of COVID-19, retailer ordering and shelf-space changes, China sourcing and tariffs on sales, costs and product availability.
- Monitor W3LL PEOPLE and Keys Soulcare performance, integration and related investment; the filing does not provide revenue by brand.
- Consider equity dilution: stock-based compensation expense was $15.0 million for nine months, and unrecognized compensation cost for restricted awards and units was $29.7 million at period-end.