01—Abstract
Summary
Summary of the 10-K filed August 28, 2020. Cited figures are marked; the original filing is the authoritative source.
The Estée Lauder Companies Inc. reported fiscal 2020 (year ended June 30, 2020) net sales of $14.29 billiona, down from $14.86 billion in fiscal 2019, with the decline driven in the second half of the year by the COVID-19 pandemic.
Net earnings attributable to the company fell to $684 millionb ($1.86 diluted EPS) from $1.785 billion ($4.82 diluted EPS), largely reflecting $1.426 billion of goodwill, other intangible and long-lived asset impairments, including $812 million of goodwill impairment and $614 million of other intangible impairments, concentrated in the Too Faced, BECCA, Smashbox, GLAMGLOW and Editions de Parfums Frédéric Malle reporting units. Operating income declined to $606 million from $2.313 billion, and the operating margin fell to 4.2% from 15.6%. Skin care was the only category to grow meaningfully, with net sales of $7.38 billion, while makeup fell to $4.79 billion.
The company took cost and cash-conservation measures, including suspending share repurchases, skipping the June 2020 dividend, and drawing its $1.5 billionc revolver fully before repaying $750 million in June 2020 and the remaining $750 million in August 2020. Total debt rose to $6.14 billion from $3.41 billion, and cash rose to $5.02 billion from $2.99 billion. The Have & Be (Dr. Jart+) acquisition for $1.268 billion in cash was completed in December 2019.
On August 20, 2020, the company announced a two-year Post-COVID Business Acceleration Program with estimated charges of $400 million to $500 milliond and annual benefits of $300 million to $400 million. Management said it cannot reliably estimate the fiscal 2021 impact of COVID-19 with the precision it had before the pandemic.
For investors, the key issues are the sharp earnings decline from impairments and COVID-related disruption, the higher leverage (total debt to capitalization rose to 61% from 44%), and whether the restructuring program and recovery in travel retail and China can restore profitability. Control by the Lauder family, with about 86% of voting power, remains a structural consideration.
02—Key points
Key Highlights
- Net sales fell 4% to $14.29 billion in fiscal 2020, with declines in virtually all product categories and regions in the second half of the year due to COVID-19.
- Goodwill and other intangible/long-lived asset impairments totaled $1.426 billion, which drove net earnings down to $684 million from $1.785 billion and diluted EPS to $1.86 from $4.82.
- Operating margin fell to 4.2% from 15.6%; gross margin declined to 75.2% from 77.2%.
- Skin care net sales rose 13% to $7.38 billion, led by Estée Lauder and La Mer, while makeup net sales fell 18% to $4.79 billion.
- Total debt increased to $6.14 billion from $3.41 billion, and cash and equivalents rose to $5.02 billion from $2.99 billion; the company repaid $1.5 billion of revolver borrowings by August 2020.
- The company suspended share repurchases and did not declare the June 2020 quarterly dividend; a $.48 per share dividend was declared on August 19, 2020.
- The Post-COVID Business Acceleration Program, announced August 20, 2020, targets $400 million to $500 million in charges and $300 million to $400 million in annual savings and includes an estimated 1,500 to 2,000 position reduction and 10% to 15% freestanding store closures.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in FY2020, Estée Lauder Companies kept $0.05.
- Revenue$14.29B100.0%
- Cost of revenue−$3.55B24.8%
- Gross profit$10.74B75.2%
- Operating costs−$10.14B70.9%
- Operating income$606.0M4.2%
- Interest, other & tax$78.0M0.5%
- Net income$684.0M4.8%
Where FY2020 revenue went
$14.29B- SG&A: $8.64B, 60% of revenue
- Cost of revenue: $3.55B, 25% of revenue
- Operating income: $606.0M, 4.2% of revenue
- Other operating costs: $1.50B, 10% of revenue
Kept 4.2% as operating incomeOperating income $606.0M · 4.2%
Full revenue history →04—Financials
Financial Highlights
Figures from 10-KFY2020filed August 28, 2020Financial Statements
FY2020 against FY2019
| Line item | FY2020FY2019 | Change |
|---|---|---|
| Revenue | $14.29B$14.86B | −3.8% |
| Cost of Revenue | $3.55B$3.39B | +4.9% |
| Gross Profit | $10.74B$11.48B | −6.4% |
| SG&A Expenses | $8.64B$8.86B | −2.5% |
| Operating Expenses | $10.14B$9.16B | +10.6% |
| Operating Income | $606.00M$2.31B | −73.8% |
| Interest Expense | $161.00M$133.00M | +21.1% |
| Net Income | $684.00M$1.78B | −61.7% |
| EPS (Basic) | $1.90$4.91 | −61.3% |
| EPS (Diluted) | $1.86$4.82 | −61.4% |
| Shares Outstanding (Basic) | 360.60M363.50M | −0.8% |
| Shares Outstanding (Diluted) | 366.90M370.40M | −0.9% |
05—Questions
Frequently Asked Questions
Why did earnings fall so sharply in fiscal 2020?
Net earnings attributable to the company declined to $684 million from $1.785 billion, mainly because of $1.426 billion in goodwill, intangible and long-lived asset impairments, including $812 million of goodwill impairment. Lower net sales from COVID-19 and a gross margin decline to 75.2% from 77.2% also contributed. Partly offsetting this was a $534 million gain on the previously held Have & Be equity investment, recorded in other income, net.
How is the company managing its liquidity during the pandemic?
The company issued $700 million of 2.60% Senior Notes due 2030 in April 2020, fully drew its $1.5 billion revolving credit facility, and reduced costs by about $800 million over the last five months of fiscal 2020. It cut capital expenditures by about $275 million, suspended share repurchases and skipped the June 2020 dividend. It repaid $750 million of the revolver by June 2020 and the remaining $750 million in August 2020. Cash and cash equivalents were $5.02 billion at June 30, 2020.
Which brands and categories drove results, and which were weaker?
Skin care was the strongest category, with net sales up 13% to $7.38 billion, driven by Estée Lauder and La Mer, plus incremental sales from Dr. Jart+. Makeup declined 18% to $4.79 billion, with lower sales from M·A·C, Clinique, Too Faced and Bobbi Brown. Makeup operating income turned to a loss of $1.438 billion, largely from impairments at Too Faced and BECCA. Fragrance and hair care also declined.
What is the outlook and what is the new restructuring program?
The company said it could not reliably estimate the fiscal 2021 impact of COVID-19 to the same degree as before the pandemic. On August 20, 2020, it announced the Post-COVID Business Acceleration Program, a two-year plan with restructuring and other charges of $400 million to $500 million before taxes and expected annual benefits of $300 million to $400 million, primarily in selling, general and administrative expenses. The plan includes closing about 10% to 15% of freestanding stores globally and reducing about 1,500 to 2,000 positions.
What governance factors should investors consider?
The Lauder family beneficially owns shares with approximately 86% of the outstanding voting power as of August 20, 2020, and the company is a controlled company under New York Stock Exchange rules. Class B common stock carries ten votes per share, and the family can significantly influence matters requiring stockholder approval, including mergers and director elections.
06—Continue