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, 2022 (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, clean and
cruelty-free cosmetics and skincare 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, clean, premium-quality
products at accessible prices with broad appeal differentiates us in the beauty
industry. We believe the combination of our innovation engine, core value
proposition, 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, Well 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
Since the start of the COVID-19 pandemic there has been disruption to the global supply chain, including manufacturing and transportation delays due to port closures and congestion, labor and container shortages, and shipment delays. As a result, we've seen higher transportation costs. In response to these higher costs, we increased prices on a portion of our products in March of 2022 to help mitigate the impact on our business. If we see further increases in transportation costs those could have an unfavorable impact on our results. Additionally, delays or further disruption to the global supply chain could cause out of stocks or unfavorably impact our ability to service demand.
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.
19
--------------------------------------------------------------------------------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 June 30,
(in thousands) 2022 2021
Net sales $ 122,601 $ 97,047
Cost of sales 39,616 35,141
Gross profit 82,985 61,906
Selling, general and administrative expenses 61,555 50,749
Restructuring income - (14)
Operating income 21,430 11,171
Other expense, net (1,663) (162)
Interest expense, net (663) (745)
Loss on extinguishment of debt - (460)
Income before provision for income taxes 19,104 9,804
Income tax provision (4,635) (1,528)
Net income $ 14,469 $ 8,276
Comprehensive income $ 14,469 $ 8,276
Three months ended June 30,
(percentage of net sales) 2022 2021
Net sales 100 % 100 %
Cost of sales 32 % 36 %
Gross margin 68 % 64 %
Selling, general and administrative expenses 50 % 52 %
Restructuring income - % - %
Operating income 17 % 12 %
Other expense, net (1) % - %
Interest expense, net (1) % (1) %
Loss on extinguishment of debt - % - %
Income before provision for income taxes 16 % 10 %
Income tax provision (4) % (2) %
Net income 12 % 9 %
Comprehensive income 12 % 9 %
Comparison of the three months ended
Net sales Net sales increased$25.6 million , or 26%, to$122.6 million for the three months endedJune 30, 2022 , compared to$97.0 million for the three months endedJune 30, 2021 . The increase was driven primarily by strength in our national and international retailers. Net sales increased$22.6 million , or 26%, in our retailer channels and increased$3.0 million , or 28%, in our e-commerce channels. From a price and volume perspective, a higher volume of units sold drove$10.9 million of the increase in net sales and a higher average item price within retailer and e-commerce orders drove the remaining$14.7 million increase in net sales as compared to the three months endedJune 30, 2021 .
Gross profit
Gross profit increased$21.1 million , or 34%, to$83.0 million for the three months endedJune 30, 2022 , compared to$61.9 million for the three months endedJune 30, 2021 . Gross margin increased to 68% from 64%, when compared to the 20 -------------------------------------------------------------------------------- three months endedJune 30, 2021 . From a rate and volume perspective, increased volume accounted for approximately$16.3 million of the increase in gross profit and a higher gross margin rate accounted for approximately$4.8 million of the increase in gross profit. The increase in gross margin rate in the three months endedJune 30, 2022 was primarily driven by price increases, cost savings, and product mix, which helped to mitigate the impact of higher transportation costs in the quarter.
Selling, general and administrative expenses
Selling, general and administrative ("SG&A") expenses were $61.6 million for the
three months ended June 30, 2022 , an increase of $10.8 million , or 21%, from
$50.7 million for the three months ended June 30, 2021 . SG&A expenses as a
percentage of net sales decreased to 50% for the three months ended June 30,
2022 from 52% for the three months ended June 30, 2021 . The $10.8 million
increase was primarily related to an increase in compensation and benefits of
$5.5 million and marketing and digital spend of $3.6 million .
Other expense, net
Other expense totaled$1.7 million for the three months endedJune 30, 2022 , as compared to other expense of$0.2 million for the three months endedJune 30, 2021 . The year-over-year variance was primarily related to unfavorable foreign exchange rate movements in the Euro and British pound on our cash balances held abroad, driving an unrealized loss in the quarter.
Interest expense, net
Interest expense, net decreased$0.1 million , or 11%, to$0.7 million for the three months endedJune 30, 2022 , as compared to$0.7 million for the three months endedJune 30, 2021 . This decrease was mainly due to a reduction in our long-term debt, partially offset by the increased interest rate on outstanding debt. Income tax provision The provision for income taxes was$4.6 million , or an effective rate of 24.3% for the three months endedJune 30, 2022 , as compared to a provision of$1.5 million , or an effective rate of 15.6% for the three months endedJune 30, 2021 . The change was primarily driven by an increase in income before taxes of$9.3 million and a decrease in discrete tax benefit of$0.2 million , primarily related to stock-based compensation.
Financial condition, liquidity and capital resources
Overview
As of
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 and cash equivalents, 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, compensation and benefits, rent, distribution costs, 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 ofJune 30, 2022 , we had working capital, excluding cash, of$82.7 million , compared to$84.7 million as ofMarch 31, 2022 . Working capital, excluding cash and debt, was$88.5 million and$90.4 million as ofJune 30, 2022 andMarch 31, 2022 , respectively. 21 -------------------------------------------------------------------------------- We believe that our operating cash flow, existing cash and cash equivalents and available financing under the Amended Revolving Credit Facility will be adequate to meet our planned operating, investing and financing needs for the next twelve months. If necessary, we can borrow funds under the Amended Revolving Credit Facility to finance our liquidity requirements, subject to customary borrowing conditions. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds; however, such financing may not be available on favorable terms, or at all. Our ability to meet our operating, investing and financing needs depends to a significant extent on our future financial performance, which will be subject in part to general economic, competitive, financial, regulatory and other factors that are beyond our control, including those described elsewhere in Part II, Item 1A "Risk factors". In addition to these general economic and industry factors, the principal factors in determining whether our cash flows will be sufficient to meet our liquidity requirements will be based on our ability to provide innovative products to our customers, manage production and our supply chain. Cash flows Three months ended June 30, (in thousands) 2022 2021 Net cash provided by (used in): Operating activities$ 30,578 $ 7,492 Investing activities (241) (2,336) Financing activities (1,442) 478 Net increase in cash:$ 28,895 $ 5,634
Cash provided by operating activities
For the three months endedJune 30, 2022 , net cash provided by operating activities was$30.6 million . This included net income as adjusted for depreciation, amortization and other non-cash items of$30.8 million and an increase in operating assets and liabilities as shown on the statement of cash flows of$0.2 million . The increase was primarily driven by a$6.7 million increase in accounts receivable, a$3.3 million increase of prepaid expense and other assets, a$3.4 million decrease of accounts payable and accrued expenses, and a$0.9 million decrease of other liabilities. This was partially offset by a$14.2 million decrease related to inventory.
For the three months ended
Cash used in investing activities
For the three months endedJune 30, 2022 , net cash used in investing activities was$0.2 million . The change was primarily driven by a decrease in capital expenditures related to machinery, equipment and software during the three months endedJune 30, 2022 , as compared to net cash used in investing activities of$2.3 million during the three months endedJune 30, 2021 .
Cash (used in) provided by financing activities
For the three months ended
For the three months ended
22
--------------------------------------------------------------------------------Description of indebtedness
Amended credit agreement
On
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 onApril 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 ofJune 30, 2022 was$100.0 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 forthe United States 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 ofJune 30, 2022 for the Amended Term Loan Facility was approximately 3.5%. 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 ofJune 30, 2022 , 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 withU.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 our condensed consolidated financial statements.
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