01—Abstract
Summary
Summary of the 10-Q filed February 5, 2024. Cited figures are marked; the original filing is the authoritative source.
The Estée Lauder Companies Inc. reported net sales of $4,279 milliona for the three months ended December 31, 2023, down from $4,620 million a year earlier, with the filing stating a 7% decrease as reported and an 8% decrease in constant currency.
For the six months, net sales were $7,797 millionb versus $8,550 million, a 9% decrease. The decline was driven primarily by its Asia travel retail business, which the company attributes to retailer inventory resets and lower traveler conversion, along with ongoing softness in prestige beauty in mainland China. Operating income was $574 million for the quarter (13.4% operating margin) versus $556 million a year earlier, while six-month operating income fell to $672 million from $1,217 million, reflecting lower net sales, a lower gross margin and higher operating expense margin.
Net earnings attributable to the company were $313 millionc for the quarter ($.87 diluted EPS) versus $394 million ($1.09), and $344 million for six months ($.95 diluted EPS) versus $883 million ($2.45). Prior-year results included a $207 million impairment of other intangible assets, which is why the quarterly operating income comparison improved. The company launched a Profit Recovery Plan and, on February 5, 2024, announced a two-year restructuring program expected to produce restructuring and other charges of $500 million to $700 million before taxes, with a net reduction of approximately 1,800 to 3,000 positions and targeted annual gross benefits of $350 million to $500 million.
Management expects continued challenges in Asia travel retail and mainland China, and expects to recognize the impact of reduced manufacturing volumes on standard cost in the fiscal 2024 third quarter. Cash flows from operating activities were $937 milliond for the six months, versus $751 million a year earlier, while cash and cash equivalents stood at $3,939 million at December 31, 2023. Total debt was $8,140 million, and the filing notes that share repurchases have been temporarily suspended since December 2022.
The filing also discloses a cybersecurity incident identified in July 2023, which management says did not have a material impact on net sales and was $.07 dilutive to earnings per share for the six months. Two securities class action complaints and a shareholder derivative action were filed in the Southern District of New York, and management believes the outcome of current litigation will not have a material adverse effect.
02—Key points
Key Highlights
- Net sales fell 7% to $4,279 million in the fiscal 2024 second quarter and 9% to $7,797 million for the six months, driven by volume declines of 12% and 13%, respectively, partly offset by pricing.
- Asia travel retail weakness, retailer inventory resets, and softness in mainland China prestige beauty were the primary drags on sales across skin care, makeup and Europe, the Middle East & Africa.
- Quarterly operating income rose to $574 million from $556 million, but the comparison benefits from the prior-year $207 million other intangible asset impairment; six-month operating income declined 45% to $672 million.
- Gross margin contracted to 73.0% for the quarter and 71.5% for the six months, pressured by obsolescence charges and under-absorption of manufacturing variances.
- Diluted EPS was $.87 for the quarter versus $1.09 a year earlier, and $.95 for the six months versus $2.45.
- A two-year restructuring program announced February 5, 2024 is expected to bring charges of $500 million to $700 million and reduce approximately 1,800 to 3,000 positions, with target annual gross benefits of $350 million to $500 million.
- Operating cash flow rose to $937 million for the six months from $751 million, with cash of $3,939 million and total debt of $8,140 million at December 31, 2023.
03—One dollar
Follow one dollar
Of each $1.00 of revenue in Q2 FY2024, Estée Lauder Companies kept $0.07.
- Revenue$4.28B100.0%
- Cost of revenue−$1.15B27.0%
- Gross profit$3.13B73.0%
- Operating costs−$2.55B59.6%
- Operating income$574.0M13.4%
- Interest, other & tax−$261.0M6.1%
- Net income$313.0M7.3%
04—Financials
Financial Highlights
Figures from 10-QQ2 FY2024filed February 5, 2024Financial Statements
Q2 FY2024 against Q2 FY2023
| Line item | Q2 FY2024Q2 FY2023 | Change |
|---|---|---|
| Revenue | $4.28B$4.62B | −7.4% |
| Cost of Revenue | $1.15B$1.22B | −5.3% |
| Gross Profit | $3.13B$3.40B | −8.1% |
| SG&A Expenses | $2.54B$2.63B | −3.3% |
| Operating Expenses | $2.55B$2.85B | −10.3% |
| Operating Income | $574.00M$556.00M | +3.2% |
| Interest Expense | $98.00M$52.00M | +88.5% |
| Net Income | $313.00M$394.00M | −20.6% |
| EPS (Basic) | $0.87$1.10 | −20.9% |
| EPS (Diluted) | $0.87$1.09 | −20.2% |
| Shares Outstanding (Basic) | 358.70M357.70M | +0.3% |
| Shares Outstanding (Diluted) | 360.00M360.40M | −0.1% |
05—Questions
Frequently Asked Questions
Why did net sales decline so sharply this quarter?
The filing attributes the 7% reported decline for the three months primarily to lower Asia travel retail sales, reflecting retailer inventory resets and lower conversion of travelers to consumers, along with ongoing softness in prestige beauty in mainland China. Volume fell 12% while pricing added 4%.
Is the operating income improvement a sign of recovery?
Not necessarily. Quarterly operating income rose 3% to $574 million, but the prior-year quarter included a $207 million other intangible asset impairment. For the six months, operating income fell 45% to $672 million, and gross margin and operating expense margins both weakened.
What is the restructuring program and what will it cost?
Announced February 5, 2024 as part of the Profit Recovery Plan, the two-year program is expected to result in restructuring and other charges of $500 million to $700 million before taxes, with a net reduction of approximately 1,800 to 3,000 positions and targeted annual gross benefits of $350 million to $500 million, part of which will be reinvested in consumer-facing activities.
How is the company's balance sheet and liquidity position?
At December 31, 2023, cash and cash equivalents were $3,939 million and total debt was $8,140 million, with total debt at 59% of total capitalization. Six-month operating cash flow was $937 million, and capital expenditures were $527 million, including investments in a new manufacturing facility in Japan.
Are there material legal or security issues investors should know about?
The company was named in securities class action complaints filed in December 2023 and January 2024, and a shareholder derivative action was filed in February 2024, all in the Southern District of New York. Management believes the outcome of current litigation will not have a material adverse effect. A July 2023 cybersecurity incident was not material to net sales and was $.07 dilutive to six-month earnings per share.
06—Continue