E.L.F. Beauty, Inc. — Q3 Fiscal 2024 Form 10-Q
Reporting period: Quarter and nine months ended December 31, 2023; filed February 7, 2024. The company operates one reportable segment across e.l.f. Cosmetics, e.l.f. SKIN, Naturium, Well People and Keys Soulcare.
Financial performance
Dollar amounts are in millions, except per-share data. Quarter comparisons are year over year; nine-month comparisons are for the corresponding prior-year periods.
| Metric | Quarter | Nine months |
|---|---|---|
| Net sales | $270.9; +85% from $146.5 | $702.8; +80% from $391.5 |
| Gross profit / gross margin | $192.0 / 71%, versus $98.7 / 67% | $496.9 / 71%, versus $261.3 / 67% |
| SG&A | $160.1; 59% of sales, versus $75.4; 51% | $364.2; 52% of sales, versus $201.2; 51% |
| Operating income / margin | $31.8 / 12%, versus $23.3 / 16% | $132.6 / 19%, versus $60.1 / 15% |
| Net income | $26.9, versus $19.1 | $113.1, versus $45.3 |
| Diluted earnings per share | $0.46, versus $0.34 | $1.97, versus $0.82 |
- Quarter sales growth reflected strength in both retail and e-commerce: retail sales rose 67% and e-commerce sales rose 216%. Higher unit volume contributed $81.9 million of the increase; higher average item price contributed $42.5 million.
- For the nine months, retail sales rose 72% and e-commerce sales rose 142%; higher unit volume contributed $220.2 million of sales growth and higher average item price contributed $91.1 million.
- Management attributed improved gross margin primarily to favorable foreign exchange, lower transportation costs, cost savings and mix. SG&A growth included higher marketing and digital spending—up $44.0 million for the quarter and $84.6 million for the nine months—along with compensation, operations and retail merchandising costs.
- Quarter operating margin declined despite higher operating income, as SG&A grew faster than sales. The nine-month operating margin improved year over year.
Cash, liquidity and debt
- At December 31, 2023, cash and cash equivalents were $72.7 million, with $2.3 million of restricted cash; working capital excluding cash and cash equivalents and restricted cash was $77.0 million.
- Nine-month operating cash flow was $34.1 million, down from $69.0 million. The filing cites working-capital investment, including a $106.9 million inventory increase, as a major factor. Inventory also reflected sales-growth preparation, Naturium inventory and a change in when the company takes ownership of certain goods shipped from China.
- Nine-month investing cash outflow was $281.0 million, chiefly $275.0 million paid for Naturium; capital expenditures were $6.0 million. Financing cash inflow was $201.1 million, largely from $115.0 million of incremental term borrowing and $89.5 million drawn on the revolving facility.
- Total debt and finance lease obligations were $265.7 million gross ($264.8 million net of issuance costs), versus $66.9 million gross at March 31, 2023. The current portion was $100.4 million. Interest rates at December 31 were approximately 6.7% on the existing facilities and 6.9% on the incremental term loan.
- Revolver availability was $10.5 million. The company reported compliance with its credit agreement covenants and said existing cash, operating cash flow and available financing should meet planned needs for the next 12 months.
Material changes, outlook and risks
- Naturium acquisition: Completed October 4, 2023, for approximately $333.0 million in cash and stock, including $57.8 million of common stock. Naturium contributed $22.5 million of net sales from acquisition through December 31. Purchase-price allocation is preliminary; recorded goodwill was $168.5 million and acquired intangible assets were $162.8 million. The filing does not present pro forma earnings, stating the acquisition’s effect on combined earnings was not material.
- Acquisition funding increased debt and interest expense. The company also recorded $3.1 million of acquisition transaction costs in SG&A for the nine months and assumed $10.5 million of seller expenses, reflected as an operating cash-flow adjustment.
- The filing gives no specific revenue, earnings or margin guidance. Management describes continued investment in working capital, marketing, digital capabilities, retail displays and distribution expansion, and expects liquidity to be adequate for the next 12 months. It notes that additional long-term financing, if needed, may not be available on favorable terms or at all.
- Business risks include intense beauty-industry competition, dependence on a limited number of retailers, seasonal order patterns, inventory and supply-chain management, and reliance on suppliers and manufacturers primarily in China. The company also identifies acquisition-integration risks, variable-rate debt exposure, regulatory and product-safety requirements, cybersecurity and privacy risks, and macroeconomic uncertainty.
- Gross margin benefited from foreign exchange and cost factors; foreign-currency movements also contributed to reported other income. A $1.7 million impairment of an equity investment was recorded in the first six months. The nine-month effective tax rate was 12.8%, versus 18.9%, primarily reflecting discrete stock-compensation-related tax benefits. No material adverse effect from current legal proceedings was expected by management.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Investor verification priorities
- Separate underlying e.l.f. brand growth from Naturium’s post-acquisition contribution; assess the acquisition’s integration, performance and final purchase-price allocation.
- Monitor inventory, receivables and operating cash conversion, including the effect of the China shipping ownership change and seasonal working-capital needs.
- Track gross-margin durability against marketing, digital, retail expansion and other SG&A growth, particularly given the quarter’s lower operating margin.
- Review debt maturities, scheduled amortization, variable interest costs, covenant headroom and limited remaining revolver availability.
- Assess concentration in major retailers and China-based sourcing, and monitor product regulation, supply-chain, cybersecurity and consumer-demand risks.