The Estée Lauder Companies Inc. — Form 10-Q Summary
Reporting period: Quarter and nine months ended March 31, 2015. The request metadata says “2014 Q3,” but the filing covers fiscal 2015 Q3 and compares results with the periods ended March 31, 2014. Amounts are in U.S. dollars.
Business context and reporting period
The company manufactures, markets and distributes prestige beauty products across skin care, makeup, fragrance and hair care in more than 150 countries and territories. It reports one business segment and also discusses results by product category and region.
Financial performance
| Metric | Three months ended March 31, 2015 | Nine months ended March 31, 2015 |
|---|---|---|
| Net sales | $2,580.5 million; up 1% | $8,256.0 million; up less than 1% |
| Gross profit / margin | $2,077.6 million / 80.5% | $6,643.4 million / 80.5% |
| Operating income / margin | $397.2 million / 15.4% | $1,378.0 million / 16.7% |
| Net earnings attributable to Estée Lauder | $272.1 million | $935.9 million |
| Diluted EPS | $0.71 | $2.42 |
| Effective tax rate | 29.2% | 30.0% |
Quarterly diluted EPS increased 30% from $0.54; nine-month diluted EPS increased 1% from $2.40. Nine-month operating cash flow was $1,385.0 million, versus $1,169.4 million. Investing cash outflow was $1,032.2 million and financing cash outflow was $654.4 million. Cash and cash equivalents were $1,288.3 million at March 31, with $524.4 million of available-for-sale investments.
At March 31, current assets were $4,429.2 million and current liabilities were $2,097.4 million. Total debt was $1,452.8 million ($135.3 million current and $1,317.5 million long-term). No borrowings were outstanding under the $1.0 billion revolving credit facility. Debt was 27% of total capitalization, compared with 26% at June 30, 2014.
Material changes versus the prior comparable period
- For the quarter, operating income rose 16% and attributable net earnings rose 28%. Operating margin increased to 15.4% from 13.4%, with lower operating expense as a share of sales and a modestly higher gross margin.
- For the nine-month period, operating income fell 5% and operating margin declined to 16.7% from 17.6%. Attributable net earnings fell 1%, although diluted EPS rose 1%.
- Foreign currency translation reduced quarterly sales by approximately $184 million and nine-month sales by approximately $326 million. Excluding currency, sales grew 8% for the quarter and 4% year to date.
- Quarterly sales gains in makeup and hair care were partly offset by declines in skin care and fragrance. Year-to-date makeup and hair care growth was offset by declines in skin care and fragrance.
- The nine-month comparison was affected by approximately $178 million of retailer orders shifted into fiscal 2014 Q4 ahead of the July 2014 Strategic Modernization Initiative rollout. Management estimated this timing reduced the current-period comparison by about $127 million in operating results. Excluding the shift, management reported nine-month sales growth of 2%, operating income growth of 4%, and diluted EPS of $2.65 versus $2.50 on an adjusted basis.
- Operating cash flow improved, primarily reflecting lower inventory, improved collections and the prior-year accelerated orders. Investing outflows increased substantially, mainly because of the new investment strategy and acquisitions.
Outlook, management commentary, risks and unusual items
- No specific sales or earnings forecast for the remainder of fiscal 2015 is provided in the supplied filing text. Management says its long-term strategy through fiscal 2017 focuses on brand growth, innovation, digital and omnichannel capabilities, expansion of distribution and productivity.
- Management cites caution about slower retail growth in Hong Kong and China, reduced spending by Russian and Brazilian travelers, Hong Kong protests, Russian economic instability and the stronger U.S. dollar. It warns that prolonged or worsening conditions could weaken consumer confidence, demand and spending.
- The company acquired Le Labo, RODIN olio lusso, Editions de Parfums Frédéric Malle and GLAMGLOW. The aggregate acquisition-date fair value was approximately $445 million; amounts paid at closing were $237.2 million, with additional payments, some contingent, expected mainly in fiscal 2018–2020. Purchase accounting remained provisional.
- Venezuela remeasurement charges were $5.3 million in the nine months, versus $38.3 million in the prior-year period. The current-year charge followed the move to the SIMADI exchange rate; the subsidiary’s net monetary assets were not material at quarter-end.
- Foreign currency translation losses materially reduced comprehensive income: nine-month translation adjustments were $(374.1) million. Unrecognized tax benefits totaled $75.1 million; management did not expect significant changes to that balance within 12 months.
- Management says current litigation is not expected to have a material adverse effect, and reasonably possible losses beyond amounts accrued are not material. The filing reports no material off-balance-sheet arrangements other than operating leases and no significant changes to contractual obligations.
- The company made a discretionary $25.0 million contribution to its U.S. qualified pension plan in April 2015. A quarterly dividend of $0.24 per share was declared May 4, 2015.
Important facts for investors to verify
- Confirm the correct period: this is fiscal 2015 Q3, not 2014 Q3.
- Assess underlying sales and earnings after separating currency effects and the $178 million SMI-related order timing shift; adjusted figures are non-GAAP measures.
- Track foreign-exchange exposure, especially the strong U.S. dollar and Venezuela’s exchange-rate changes.
- Review acquisition valuations, contingent consideration ($160.7 million fair value at March 31) and integration progress.
- Monitor cash deployment, share repurchases, debt and liquidity: the company spent $626.1 million buying treasury stock during the nine months and reported $115.0 million of commercial paper outstanding at quarter-end.