E.L.F. Beauty, Inc. — Form 10-Q Summary
Reporting period: Three months ended June 30, 2019 (the company’s first quarter of fiscal 2020; April 1–June 30, 2019). The filing compares results with the three months ended June 30, 2018. Amounts below are U.S. dollars.
Business context and financial performance
e.l.f. Beauty sells vegan, cruelty-free beauty products through national retailers, e-commerce and international distribution. Following the February 2019 closure of all 22 stand-alone stores, the company is prioritizing national retail and digital channels.
| Metric | Q1 FY2020 | Q1 FY2019 | Change |
|---|---|---|---|
| Net sales | $59.8 million | $59.1 million | Up 1% |
| Gross profit / gross margin | $37.2 million / 62% | $36.6 million / 62% | Gross profit up 1%; margin flat |
| SG&A | $32.1 million | $33.8 million | Down 5%; 54% vs. 57% of sales |
| Operating income | $6.9 million | $2.9 million | Up from prior year |
| Net income | $3.7 million | $1.2 million | Up from prior year |
| Diluted EPS | $0.07 | $0.03 | Up $0.04 |
| Operating cash flow | $12.9 million | $11.3 million | Up $1.5 million |
| Capital expenditures | $2.9 million | $2.5 million | Cash outflow |
Net sales growth reflected increased productivity at leading national retailers, partly offset by the absence of store sales; the closed stores generated $3.2 million in sales in the prior-year quarter. U.S. sales were $53.8 million and international sales were $6.0 million. Gross margin was unchanged: favorable foreign exchange and margin-accretive innovation were offset by higher sales adjustments and China tariffs. SG&A fell mainly because of store closures, partly offset by higher marketing and digital spending.
Cash, debt and liquidity
- Cash and cash equivalents were $60.7 million at June 30, 2019, versus $53.9 million at March 31, 2019.
- Total debt and finance lease obligations were $146.5 million gross ($146.2 million net of debt issuance costs), including $142.9 million of term loans and $3.6 million of finance leases. The current portion was $10.7 million.
- The company reported $49.5 million of unused capacity under its $50 million revolving credit facility. It was in compliance with applicable financial covenants; the term-loan interest rate was approximately 4.3% at quarter-end.
- Cash provided by operations was $12.9 million; investing activities used $2.9 million and financing activities used $3.1 million. Cash increased by $6.9 million.
- Management said cash on hand, operating cash flow and available revolving credit should meet operating, investing and financing needs for the next 12 months. Working capital excluding cash was $34.5 million.
Material changes, outlook and risks
- Store closure and restructuring: Restructuring generated $1.8 million of income, including a $2.6 million gain from extinguishing store lease liabilities, partly offset by $0.8 million of other costs. The company did not expect additional material restructuring costs apart from potential settlements of remaining lease liabilities, which could produce further gains or losses.
- Tariffs: Tariffs on certain China imports pressured margins. The company selectively raised prices in July 2019 and was pursuing supplier negotiations and alternative sourcing, but gave no assurance those measures would succeed.
- Share repurchases: The board authorized a program of up to $25 million. The company repurchased 89,610 shares for $1.1 million at an average $12.06 during the quarter; $23.9 million remained available.
- Leases and accounting: The company adopted ASC 842 on January 1, 2019. Adoption recognized operating lease right-of-use assets of approximately $21.2 million and lease liabilities of approximately $23.5 million, with no impact on beginning retained earnings, operating results or cash flows. Quarter-end total lease liabilities were $20.9 million.
- Outlook: The filing provides no numerical revenue or earnings guidance. Management noted seasonal sales patterns, with the second and third fiscal quarters typically stronger due to holiday purchasing, and working-capital needs ahead of those periods.
- Key risks: Dependence on a limited number of retailers, including Walmart and Target; competition and product-launch execution; substantial sourcing and manufacturing exposure to China, including tariffs and supply-chain risks; variable-rate debt and covenant restrictions; seasonality and inventory management; and execution of digital and national-retailer growth priorities. The filing also identifies cybersecurity, privacy, product safety and regulatory risks.
- The company reported no legal matters expected by management to have a material adverse effect and no material changes to contractual obligations or market-risk exposures. It reported no off-balance-sheet arrangements.
Important facts for investors to verify
- Whether retailer productivity and digital-channel growth can offset the loss of store sales and sustain revenue growth.
- How tariff exposure, July price increases and sourcing initiatives affect subsequent gross margins and demand.
- Whether operating cash flow and available credit remain adequate as seasonal inventory and working-capital requirements rise.
- Debt amortization, variable interest costs, covenant compliance and the remaining lease-settlement obligations.
- The earnings effect of the one-time lease-extinguishment gain and whether further restructuring gains or losses arise.
- Actual repurchases under the authorized program and the balance remaining available.