The Estée Lauder Companies Inc. — Form 10-K Summary
Reporting period: Fiscal year ended June 30, 2020, compared primarily with fiscal 2019. Although the request metadata says “2019 Q4,” this filing is the annual report for fiscal 2020; the filing also provides fourth-quarter results. Amounts are in U.S. dollars.
Business context
The company sells prestige skin care, makeup, fragrance and hair care products in approximately 150 countries and territories through a global portfolio of brands and multiple channels. COVID-19 disrupted stores, travel retail, customer operations and consumer demand, particularly in the second half of fiscal 2020. Online sales accelerated, while mainland China remained a strong growth market.
Financial performance and liquidity
| Metric | Fiscal 2020 | Fiscal 2019 |
|---|---|---|
| Net sales | $14.294 billion | $14.863 billion |
| Gross margin | 75.2% | 77.2% |
| Operating income | $606 million | $2.313 billion |
| Operating margin | 4.2% | 15.6% |
| Net earnings attributable to Estée Lauder | $684 million | $1.785 billion |
| Diluted EPS | $1.86 | $4.82 |
| Cash from operating activities | $2.280 billion | $2.517 billion |
- Sales declined 4% as reported and 3% in constant currency. Skin care sales rose 13% to $7.382 billion; makeup fell 18% to $4.794 billion, fragrance fell 13% to $1.563 billion and hair care fell 12% to $515 million.
- By region, sales declined 20% in the Americas and 3% in Europe, the Middle East and Africa, while Asia/Pacific grew 15%. Mainland China represented approximately 24% of consolidated sales, up from 17% in fiscal 2019.
- Impairment charges of $1.426 billion—$812 million for goodwill and $614 million for other intangible and long-lived assets—were a major drag on reported operating results. Management’s adjusted operating income was $2.098 billion, down 20%; adjusted diluted EPS was $4.12, down 23%. These are non-GAAP measures and exclude specified items.
- Reported results also included $557 million of other income, primarily a $534 million gain from remeasuring the previously held investment in Have & Be, acquired fully in December 2019. The acquisition contributed approximately $165 million in fiscal 2020 sales.
- Cash and cash equivalents were $5.022 billion at year-end, versus $2.987 billion a year earlier. Total debt increased to $6.136 billion from $3.412 billion; debt as a percentage of total capitalization rose to 61% from 44%. The company had $750 million outstanding on its revolving facility at year-end and repaid it in August 2020.
- Investing cash outflow was $1.698 billion, including $1.047 billion paid for acquired businesses, net of cash acquired. Financing cash inflow was $1.461 billion. Capital expenditures were $623 million, down from $744 million.
- Fiscal 2020 fourth-quarter sales were $2.430 billion versus $3.590 billion a year earlier; operating loss was $543 million and net loss attributable to the company was $462 million, or $1.28 per diluted share.
Material changes and unusual items
- COVID-19-related store closures, reduced traffic and curtailed international travel weighed on sales, especially in the Americas and travel retail. Makeup demand weakened as social and business activities declined. Online sales grew strongly, including double-digit growth in several regions.
- Gross margin fell 200 basis points. The filing cites inventory obsolescence charges of $166 million, pandemic-related manufacturing costs, freight and transportation costs, tariffs, and a $25 million inventory step-up related to Dr. Jart+.
- The company recorded $99 million of government assistance in the fourth quarter, reducing selling, general and administrative expenses and cost of sales by $87 million and $10 million, respectively; $2 million was deferred to fiscal 2021.
- In response to the pandemic, management reported approximately $800 million of cost savings over the final five months of fiscal 2020 and reduced fiscal 2020 capital investment by approximately $275 million. It suspended discretionary share repurchases and skipped the dividend otherwise payable in June; a $0.48-per-share dividend was declared in August 2020.
- In August 2020, after year-end, the company announced a two-year restructuring program. It expects $400–$500 million in pretax charges, annual pretax benefits of $300–$400 million once fully implemented, a net reduction of approximately 1,500–2,000 positions and closure of approximately 10%–15% of freestanding stores. Initiatives are expected to be completed through fiscal 2023.
- The filing notes that prior-year comparisons reflect changes in revenue accounting, and fiscal 2020 adopted the new lease accounting standard without restating fiscal 2019. Refer to the filing’s reconciliations and notes when comparing periods.
Outlook, commentary and key risks
Management said it could not reliably estimate the financial impact of COVID-19 on fiscal 2021 because the pandemic’s duration, severity and effects on retail and economic conditions remained uncertain. It expects continued pressure from retail disruption, reduced travel, customer financial stress, retailer destocking and changing shopping and product preferences. Management emphasized online, social selling, digital engagement and a diversified portfolio as strategic priorities; it expressed confidence in the company’s ability to participate in a market recovery but did not provide a reliable fiscal 2021 sales or earnings forecast in this filing.
Other identified risks include intense competition and changing consumer preferences; dependence on major retailers and customer collections; foreign exchange and geopolitical or trade-policy exposure; supply-chain and cybersecurity disruptions; and additional impairment risk if brand forecasts or recovery assumptions are not achieved. Lauder family members held approximately 86% of voting power as of August 20, 2020, giving the family significant control.
Important facts for investors to verify
- How much of the reported earnings decline reflects impairment and other unusual items, versus deterioration in underlying operations; review the non-GAAP reconciliations and assumptions.
- Whether makeup, the Americas and travel retail recover, and whether online and mainland China growth can offset weakness elsewhere.
- Whether the announced restructuring delivers its projected $300–$400 million of annual benefits, and the timing and cash cost of its $400–$500 million charges.
- Debt, liquidity and cash-flow trends after repayment of the revolving facility, including the effect of ongoing pandemic disruption and planned spending.
- Potential further impairments in Too Faced, BECCA, Smashbox, GLAMGLOW and Editions de Parfums Frédéric Malle; valuations depend on future sales, product launches and cost efficiencies.