Business context and reporting period
The Estée Lauder Companies Inc. filed this unaudited Form 10-Q for the three months ended September 30, 2023, the first quarter of fiscal 2024. The company sells prestige beauty products in skin care, makeup, fragrance and hair care across approximately 150 countries and territories.
Financial performance
| Metric | Q1 FY2024 | Q1 FY2023 |
|---|---|---|
| Net sales | $3.518 billion | $3.930 billion |
| Gross profit / margin | $2.448 billion / 69.6% | $2.907 billion / 74.0% |
| Operating income / margin | $98 million / 2.8% | $661 million / 16.8% |
| Net earnings attributable to Estée Lauder | $31 million | $489 million |
| Diluted EPS | $0.09 | $1.35 |
| Operating cash flow | $(408) million | $(650) million |
| Capital expenditures | $295 million | $152 million |
- Sales fell 10% reported and 10% in constant currency. Volume declined 13%, partly offset by 2% growth from pricing.
- Gross margin contracted 440 basis points. Management cited manufacturing under-absorption, inventory obsolescence and business mix, including promotional items.
- Operating expenses rose to 66.8% of sales from 57.2%; lower sales and increased investment and employee-related costs weighed on operating leverage.
- Interest expense was $95 million, up from $46 million, reflecting higher debt and interest rates. Interest and investment income was $41 million, versus $15 million.
- Cash and cash equivalents were $3.090 billion at September 30, down from $4.029 billion at June 30, 2023. Total debt was $8.093 billion ($1.005 billion current and $7.088 billion long-term); debt was 60% of total capitalization, versus 59% at June 30.
- Current assets were $8.585 billion and current liabilities $5.914 billion. Cash flows used in investing and financing were $295 million and $219 million, respectively. Dividends paid were $236 million.
Material changes and operating drivers
- Skin care sales declined 22%, chiefly from Estée Lauder and La Mer, with weaker Asia travel retail shipments and a slower-than-expected prestige beauty recovery in mainland China. The Ordinary grew across regions.
- Makeup sales increased 1%; fragrance grew 5%, led by Le Labo; hair care declined 6%, primarily due to Aveda.
- Regional sales were up 8% in the Americas, down 26% in Europe, the Middle East & Africa, and down 6% in Asia/Pacific. The EMEA decline largely reflected Asia travel retail; mainland China weakness affected Asia/Pacific.
- The quarter included $17 million of incremental TOM FORD trademark royalty revenue following the fiscal 2023 acquisition.
- Operating cash use improved year over year, mainly from more favorable working-capital movements, though earnings before tax were lower. Capital spending increased, including investment in a new manufacturing facility in Japan.
Outlook, risks and unusual items
- The filing provides no specific quantified full-year sales or earnings guidance in the supplied text. Management expects continuing challenges in Asia travel retail and mainland China, with pressure on sales, profitability and the effective tax rate.
- Management said cash, operating cash generation, available credit lines and access to credit markets should be adequate for planned needs. It expects pricing, new products and operating efficiencies to offset some inflationary cost pressures.
- A July 2023 cybersecurity incident disrupted some corporate activities and order processing; production and sales were minimally affected. Data taken included some consumer and employee information. The company said the incident was contained, had no material sales impact, reduced first-quarter EPS by $0.08 and was expected to dilute full-year fiscal 2024 EPS by approximately $0.08.
- Other risks highlighted include macroeconomic and currency volatility, inflation, supply-chain issues, geopolitical tensions, potential disruption in Israel and the Middle East, and possible asset impairments if sales and profitability weaken. Israel and the Middle East represented approximately 2% of sales in fiscal 2023 and Q1 FY2024.
- Management said current litigation is not expected to have a material adverse effect; reasonably possible losses beyond amounts accrued were not material. The company reported effective disclosure controls as of September 30, 2023.
- Class A share repurchases remained temporarily suspended; the company paid a $0.66-per-share quarterly dividend and declared another $0.66 dividend payable in December 2023.
Important facts for investors to verify
- Whether Asia travel retail inventory resets and the mainland China recovery improve, and how those trends affect sales and margins.
- Whether the gross-margin pressures—particularly obsolescence and manufacturing under-absorption—persist or ease.
- Whether the cybersecurity incident’s data scope, remediation costs or business effects change, including the estimated full-year EPS impact.
- Cash generation, working-capital trends, capital spending and the company’s ability to manage its $8.093 billion of debt.
- Management’s subsequent quantified fiscal 2024 outlook and any changes to risks from foreign exchange, geopolitics, inflation or consumer demand.