E.L.F. BEAUTY, INC.
Management's discussion and analysis of financial condition and results of
operations ("MD&A") should be read together with the MD&A presented in the
Annual Report on Form 10-K for the year ended March 31, 2021 (the "Annual
Report"), and the unaudited condensed consolidated financial statements and
accompanying notes included in Part I, Item 1 of this Quarterly Report on Form
10-Q (this "Quarterly Report"), which include additional information about our
accounting policies, practices and the transactions underlying our financial
results.
Overview and Business Trends
We are a multi-brand beauty company that offers inclusive, accessible,
cruelty-free cosmetics and skin-care products. Our mission is to make the best
of beauty accessible to every eye, lip and face.
We believe our ability to deliver 100% cruelty-free, premium-quality products at
accessible prices with broad appeal differentiates us in the beauty industry. We
believe the combination of our fundamental value equation, digitally-led
strategy, as well as our world-class team's ability to execute with speed, has
positioned us well to navigate a rapidly changing landscape in beauty.
Our family of brands includes e.l.f. Cosmetics , e.l.f. Skin, W3LL PEOPLE and
Keys Soulcare. Our brands are available online and across leading beauty,
mass-market, and clean-beauty specialty retailers. We have strong relationships
with our retail partners such as Walmart, Target, Ulta Beauty and other leading
retailers that have enabled us to expand distribution both domestically and
internationally.
Global Supply Chain Disruptions
We have experienced an increase in freight and shipping costs due to the shortage of shipping containers. An ongoing vessel and container shortage globally would further delay future inventory receipts and, in turn, would delay deliveries to our retailers and availability of products in our direct-to-consumer e-commerce channel and increase our shipping costs. Such delays and shipping disruptions could negatively impact our results of operations through higher inventory costs, reduced sales and higher transportation costs.
Seasonality
Our results of operations are subject to seasonal fluctuations, with net sales
in the third and fourth fiscal quarters typically being higher than in the first
and second fiscal quarters. The higher net sales in our third and fourth fiscal
quarters are largely attributable to the increased levels of purchasing by
retailers for the holiday season and customer shelf reset activities,
respectively. Lower holiday purchases or shifts in customer shelf reset activity
could have a disproportionate effect on our results of operations for the entire
fiscal year. To support anticipated higher sales during the third and fourth
fiscal quarters, we make investments in working capital to ensure inventory
levels can support demand. Fluctuations throughout the year are also driven by
the timing of product restocking or rearrangement by our major retail customers
as well as expansion into new retail customers. Because a limited number of our
retail customers account for a large percentage of our net sales, a change in
the order pattern of one or more of our large retail customers could cause a
significant fluctuation of our quarterly results or impact our liquidity.
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Results of operations
The following table sets forth our consolidated statements of operations data in
dollars and as a percentage of net sales for the periods presented:
Three months ended September
30, Six months ended September 30,
(in thousands) 2021 2020 2021 2020
Net sales $ 91,855 $ 72,350 $ 188,902 $ 136,877
Cost of sales 33,870 25,212 69,011 46,398
Gross profit 57,985 47,138 119,891 90,479
Selling, general and administrative expenses 50,447 45,170 101,196 85,502
Restructuring expense 96 - 82 -
Operating income 7,442 1,968 18,613 4,977
Other expense, net (646) (859) (808) (889)
Interest expense, net (597) (905) (1,342) (2,373)
Loss on extinguishment of debt - - (460) -
Income before provision for income taxes 6,199 204 16,003 1,715
Income tax (provision) benefit (475) 243 (2,003) 244
Net income $ 5,724 $ 447 $ 14,000 $ 1,959
Comprehensive income $ 5,724 $ 447 $ 14,000 $ 1,959
Three months ended September 30, Six months ended September 30,
(percentage of net sales) 2021 2020 2021 2020
Net sales 100 % 100 % 100 % 100 %
Cost of sales 37 % 35 % 37 % 34 %
Gross margin 63 % 65 % 63 % 66 %
Selling, general and administrative expenses 55 % 62 % 54 % 62 %
Restructuring expense - % - % - % - %
Operating income 8 % 3 % 10 % 4 %
Other expense, net (1) % (1) % - % (1) %
Interest expense, net (1) % (1) % (1) % (2) %
Loss on extinguishment of debt - % - % - % - %
Income before provision for income taxes 7 % - % 8 % 1 %
Income tax (provision) benefit (1) % - % (1) % - %
Net income 6 % 1 % 7 % 1 %
Comprehensive income 6 % 1 % 7 % 1 %
Comparison of the three months ended September 30, 2021 to the three months
ended September 30, 2020
Net sales
Net sales increased 27%, or $19.5 million , to $91.9 million for the three months
ended September 30, 2021 , from $72.4 million for the three months ended
September 30, 2020 . The increase was driven by strength in our national and
international retailers. Net sales increased $19.8 million , or 31% in our
retailer channels and decreased $0.3 million , or 3% in our e-commerce channels.
Gross profit
Gross profit increased $10.8 million , or 23%, to $58.0 million for the three
months ended September 30, 2021 , compared to $47.1 million for the three months
ended September 30, 2020 . Gross margin decreased to 63% from 65%, when compared
to the three months ended September 30, 2020 . Increased volume accounted for
approximately $12.7 million of the increase in gross profit with an offset of
$1.9 million driven by a decrease in gross margin rate. The decrease in gross
margin rate was
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primarily driven by unfavorable foreign exchange rates, an increase in freight
and shipping costs and an increase in inventory adjustments, partially mitigated
by price increases, cost savings and mix in the three months ended September 30,
2021 .
Selling, general and administrative expenses
Selling, general and administrative expenses ("SG&A") were $50.4 million for the
three months ended September 30, 2021 , an increase of $5.3 million , or 12%, from
$45.2 million for the three months ended September 30, 2020 . SG&A expenses as a
percentage of net sales decreased to 55% for the three months ended September
30, 2021 from 62% for the three months ended September 30, 2020 . The $5.3
million increase was primarily related to an increase in marketing and digital
spend of $4.0 million . Additionally, we experienced increased operational costs
(including outbound freight and shipping costs) of $1.3 million , increased
amortization and depreciation cost of $0.6 million and increased software
subscription costs of $0.4 million . These increases were partially offset by a
$0.9 million decrease in professional fees.
Restructuring expense
Restructuring expense was $0.1 million in the three months ended September 30,
2021 , related to the closure of our manufacturing facility in California . See
Note 9 Restructuring and other related costs to condensed consolidated financial
statements for further details.
Other expense, net
Other expense totaled $0.6 million for the three months ended September 30,
2021 , as compared to other expense of $0.9 million for the three months ended
September 30, 2020 . The year-over-year variance was primarily related to
unfavorable foreign exchange rate movements.
Interest expense, net
Interest expense, net decreased $0.3 million , or 34%, to $0.6 million for the
three months ended September 30, 2021 , as compared to $0.9 million for the three
months ended September 30, 2020 . This decrease was due to reduction in our
long-term debt as well as a decline in interest rates.
Income tax provision
The provision for income taxes was $0.5 million , or an effective rate of 7.6%,
for the three months ended September 30, 2021 , as compared to a benefit of $0.2
million , or an effective rate of (119.1)%, for the three months ended September
30, 2020 . The change was primarily driven by an increase in income before taxes
of $6.0 million , partially offset by an increase in discrete tax benefit of
$0.8 million , primarily related to stock-based compensation.
Comparison of the six months ended September 30, 2021 to the six months ended
September 30, 2020
Net sales
Net sales increased $52.0 million , or 38%, to $188.9 million for the six months
ended September 30, 2021 , from $136.9 million for the six months ended September
30, 2020 . The increase was driven by strength in our national and international
retailers. Net sales increased $53.2 million , or 45% in our retailer channels
and decreased $1.2 million , or 6% in our e-commerce channels.
Gross profit
Gross profit increased $29.4 million , or 33%, to $119.9 million for the six
months ended September 30, 2021 , compared to $90.5 million for the six months
ended September 30, 2020 . Gross margin decreased to 63% from 66%, when compared
to the six months ended September 30, 2020 . Increased volume accounted for
approximately $34.4 million of the increase in gross profit with offset of the
remaining $5.0 million driven by a decrease in gross margin rate. The decrease
in gross margin rate was primarily driven by unfavorable foreign exchange rates
and elevated transportation costs in the six months ended September 30, 2021 .
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Selling, general and administrative expenses
SG&A expenses were $101.2 million for the six months ended September 30, 2021 ,
an increase of $15.7 million , or 18%, from $85.5 million for the six months
ended September 30, 2020 . SG&A expenses as a percentage of net sales decreased
to 54% for the six months ended September 30, 2021 from 62% for the six months
ended September 30, 2020 . The $15.7 million increase was primarily related to an
increase in marketing and digital spend of $12.3 million . Additionally, we
experienced increased operational costs (including outbound freight and shipping
costs) of $3.1 million , increased software subscription costs of $1.2 million
and increased retail fixturing and visual merchandising costs of $0.8 million .
These increases were partially offset by a decrease in professional fees of $2.6
million , including $1.6 million related to proxy contest costs in the prior
year.
Restructuring expense
Restructuring expense was $0.1 million in the six months ended September 30,
2021 , related to the closure of our manufacturing facility in California . See
Note 9 Restructuring and other related costs to condensed consolidated financial
statements for further details.
Other expense, net
Other expense totaled $0.8 million for the six months ended September 30, 2021 ,
as compared to other expense of $0.9 million for the six months ended September
30, 2020 . The year-over-year variance was primarily related to unfavorable
foreign exchange rate movements.
Interest expense, net
Interest expense, net decreased $1.0 million , or 43%, to $1.3 million for the
six months ended September 30, 2021 , as compared to $2.4 million for the six
months ended September 30, 2020 . This decrease was due to reduction in our
long-term debt as well as a decline in interest rates.
Loss on extinguishment of debt
Loss on extinguishment of debt was $0.5 million for the six months ended
September 30, 2021 . See Note 6, Debt to condensed consolidated financial
statements for further details.
Income tax provision
The provision for income taxes was $2.0 million , or an effective rate of 12.5%
for the six months ended September 30, 2021 , as compared to a benefit of $0.2
million , or an effective rate of (14.2)% for the six months ended September 30,
2020 . The change was primarily driven by an increase in income before taxes of
$14.3 million , partially offset by an increase in discrete tax benefit of
$1.6 million , primarily related to stock-based compensation.
Financial condition, liquidity and capital resources
Overview
As of September 30, 2021 , we had $41.7 million of cash and cash equivalents. In
addition, as of September 30, 2021 , we had borrowing capacity of $86.5 million
under our Amended Revolving Credit Facility.
Our primary cash needs are for capital expenditures, retail product displays and
working capital. Capital expenditures typically vary depending on strategic
initiatives selected for the fiscal year, including investments in
infrastructure, digital capabilities and expansion within or to additional
retailer store locations. We expect to fund ongoing capital expenditures from
existing cash on hand, cash generated from operations and, if necessary, draws
on our Amended Revolving Credit Facility.
Our primary working capital requirements are for product and product-related
costs, payroll, rent, distribution costs and advertising and marketing.
Fluctuations in working capital are primarily driven by the timing of when a
retailer rearranges or restocks its products, expansion of space within our
existing retailer base and the general seasonality of our business. As of
September 30, 2021 , we had working capital, excluding cash, of $68.4 million ,
compared to $39.0 million as of March 31, 2021 . Working capital, excluding cash
and debt, was $87.6 million and $55.3 million as of September 30, 2021 and
March 31, 2021 , respectively.
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We believe that our operating cash flow, existing cash and cash equivalents and
available financing under the Amended Revolving Credit Facility will be adequate
to meet our planned operating, investing and financing needs for the next twelve
months. If necessary, we can borrow funds under the Amended Revolving Credit
Facility to finance our liquidity requirements, subject to customary borrowing
conditions. To the extent additional funds are necessary to meet our long-term
liquidity needs as we continue to execute our business strategy, we anticipate
that they will be obtained through the incurrence of additional indebtedness,
additional equity financings or a combination of these potential sources of
funds; however, such financing may not be available on favorable terms, or at
all. Our ability to meet our operating, investing and financing needs depends to
a significant extent on our future financial performance, which will be subject
in part to general economic, competitive, financial, regulatory and other
factors that are beyond our control, including those described elsewhere in Part
II, Item 1A "Risk factors". In addition to these general economic and industry
factors, the principal factors in determining whether our cash flows will be
sufficient to meet our liquidity requirements will be based on our ability to
provide innovative products to our customers, manage production and our supply
chain.
Cash flows
Six months ended September 30,
(in thousands) 2021 2020
Net cash provided by (used in):
Operating activities $ 774 $ 3,413
Investing activities (3,649) (2,746)
Financing activities (13,199) (5,793)
Net decrease in cash: $ (16,074) $ (5,126)
Cash provided by operating activities
For the six months ended September 30, 2021 , net cash provided by operating
activities was $0.8 million . This included net income before adding
depreciation, amortization and other non-cash items of $39.4 million and an
increase in net working capital of $38.6 million . The increase in net working
capital was driven by a $4.4 million increase in accounts receivable, a $20.0
million increase of inventory, a $6.4 million increase of prepaid expense and
other assets, a $5.9 million decrease of accounts payable and accrued expenses
and a $2.0 million decrease of other liabilities.
For the six months ended September 30, 2020 , net cash provided by operating
activities was $3.4 million . This included net income before adding
depreciation, amortization and other non-cash items of $22.5 million and an
increase in net working capital of $19.1 million .
Cash used in investing activities
For the six months ended September 30, 2021 , net cash used in investing
activities was $3.6 million . The increase was primarily driven by capital
expenditures related to customer fixture programs during the six months ended
September 30, 2021 .
For the six months ended September 30, 2020 , net cash used in investing
activities was $2.7 million .
Cash used in financing activities
For the six months ended September 30, 2021 , net cash used in financing
activities was $13.2 million and was primarily related to proceeds from the
amended revolving line of credit and the Amended term loan facility, net of
repayment of the revolving line of credit and the term loan facility, and cash
received from the exercise of stock options.
For the six months ended September 30, 2020 , net cash used in financing
activities was $5.8 million and was primarily related to mandatory principal
payments under the Prior Term Loan Facility (as defined below under "Description
of indebtedness").
Description of indebtedness
Amended credit agreement
On
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The Amended Credit Agreement has a five year term and consists of (i) a $100
million revolving credit facility (the "Amended Revolving Credit Facility") and
(ii) a $100 million term loan facility (the "Amended Term Loan Facility").
All amounts under the Amended Revolving Credit Facility are available for draw
until the maturity date on April 30, 2026 . The Amended Revolving Credit Facility
is collateralized by substantially all of our assets and requires payment of an
unused fee ranging from 0.10% to 0.30% (based on our consolidated total net
leverage ratio (as defined in the Amended Credit Agreement)) times the average
daily amount of unutilized commitments under the Amended Revolving Credit
Facility. The Amended Revolving Credit Facility also provides for sub-facilities
in the form of a $7 million letter of credit and a $5 million swing line loan;
however, all amounts under the Amended Revolving Credit Facility cannot exceed
$100 million . The unused balance of the Amended Revolving Credit Facility as of
September 30, 2021 was $86.5 million .
Both the Amended Revolving Credit Facility and the Amended Term Loan Facility
bear interest, at borrowers' option, at either (i) a rate per annum equal to an
adjusted LIBOR rate determined by reference to the cost of funds for the U.S.
dollar deposits for the applicable interest period (subject to a minimum floor
of 0%) plus an applicable margin ranging from 1.25% to 2.125% based on our
consolidated total net leverage ratio or (ii) a floating base rate plus an
applicable margin ranging from 0.25% to 1.125% based on our consolidated total
net leverage ratio. The interest rate as of September 30, 2021 for both the
Amended Term Loan Facility and the Amended Revolving Credit Facility were
approximately 1.5%.
The Amended Credit Agreement contains a number of covenants that, among other
things, restrict our ability to (subject to certain exceptions) pay dividends
and distributions or repurchase our capital stock, incur additional
indebtedness, create liens on assets, engage in mergers or consolidations and
sell or otherwise dispose of assets. The Amended Credit Agreement also includes
reporting, financial and maintenance covenants that require us to, among other
things, comply with certain consolidated total net leverage ratios and
consolidated fixed charge coverage ratios. As of September 30, 2021 , we were in
compliance with all financial covenants under the Amended Credit Agreement.
Contractual obligations and commitments
There have been no material changes to our contractual obligations and
commitments as included in the Annual Report.
Off-balance sheet arrangements
We are not party to any off-balance sheet arrangements.
Critical accounting policies and estimates
The MD&A is based upon our condensed consolidated financial statements, which
have been prepared in accordance with U.S. generally accepted accounting
principles. The preparation of these condensed consolidated financial statements
required the use of estimates and judgments that affect the reported amounts of
our assets, liabilities, revenues and expenses. Management bases estimates on
historical experience and other assumptions it believes to be reasonable under
the circumstances and evaluates these estimates on an on-going basis. Actual
results may differ from these estimates. There have been no significant changes
to the critical accounting policies and estimates included in the Annual Report.
Recent accounting pronouncements
Recent accounting pronouncements are disclosed in Note 2 to the condensed
consolidated financial statements.
Item 3. Quantitative and qualitative disclosures about market risk.
There have been no material changes to our primary risk exposures or management
of market risks from those disclosed in the Annual Report.
Item 4. Controls and procedures.
Evaluation of disclosure controls and procedures over financial reporting
As of September 30, 2021 , our management conducted an evaluation, under the
supervision and with the participation of our Chief Executive Officer and Chief
Financial Officer, of the effectiveness of the design and operation of our
disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e)
under the Securities Exchange Act of 1934 (the "Exchange Act").
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Based upon that evaluation, our Chief Executive Officer and Chief Financial
Officer concluded that, as of September 30, 2021 , our disclosure controls and
procedures were effective to provide reasonable assurance that the information
required to be disclosed by the Company in the reports that it files or submits
under the Exchange Act is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms and that such information is
accumulated and communicated to the officers who certify our financial reports
and to the members of the Company's senior management and board of directors as
appropriate to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting
We have assessed the impact on changes to our internal controls over financial
reporting and conclude that there have been no changes to our internal control
over financial reporting that occurred during the quarter ended September 30,
2021 that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. We have not experienced
any material impact to our internal controls over financial reporting despite
the fact that most of our employees are working remotely due to the COVID-19
pandemic. We continue to monitor and assess impacts of the COVID-19 pandemic on
our controls in order to minimize the impact on the design and operating
effectiveness of our controls.
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