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 (the "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
A vessel and container shortage globally could delay future inventory receipts
and, in turn, could delay deliveries to our retailers and availability of
products in our direct-to-consumer e-commerce channel and increase our shipping
costs. Such potential 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.
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) 2021 2020
Net sales $ 97,047 $ 64,527
Cost of sales 35,141 21,186
Gross profit 61,906 43,341
Selling, general and administrative expenses 50,749 40,332
Restructuring income (14) -
Operating income 11,171 3,009
Other expense, net (162) (30)
Interest expense, net (745) (1,468)
Loss on extinguishment of debt (460) -
Income before provision for income taxes 9,804 1,511
Income tax (provision) benefit (1,528) 1
Net income $ 8,276 $ 1,512
Comprehensive income $ 8,276 $ 1,512
Three months ended June
30,
(percentage of net sales) 2021 2020
Net sales 100 % 100 %
Cost of sales 36 % 33 %
Gross margin 64 % 67 %
Selling, general and administrative expenses 52 % 63 %
Restructuring income - % - %
Operating income 12 % 5 %
Other expense, net - % - %
Interest expense, net (1) % (2) %
Loss on extinguishment of debt - % - %
Income before provision for income taxes 10 % 2 %
Income tax (provision) benefit (2) % 0 %
Net income 9 % 2 %
Comprehensive income 9 % 2 %
Comparison of the three months ended June 30, 2021 to the three months ended
June 30, 2020
Net sales
Net sales increased $32.5 million , or 50%, to $97.0 million for the three months
ended June 30, 2021 , from $64.5 million for the three months ended June 30,
2020 . The increase was driven by strength in our national and international
retailers. Net sales increased $33.5 million , or 63% in our retailer channels
and decreased $1.0 million , or 8% in our e-commerce channels.
Gross profit
Gross profit increased $18.6 million , or 43%, to $61.9 million for the three
months ended June 30, 2021 , compared to $43.3 million for the three months ended
June 30, 2020 . Gross margin decreased to 64% from 67%, when compared to the
three months ended June 30, 2020 . Increased volume accounted for approximately
$21.8 million of the increase in gross profit with offset of the remaining $3.3
million driven by a decrease in gross margin rate. The decrease in gross margin
rate
20
--------------------------------------------------------------------------------
was primarily driven by unfavorable foreign exchange rates, an increase in
freight and shipping costs due to the shortage of shipping containers and an
increase in inventory adjustments in the three months ended
Selling, general and administrative expenses SG&A expenses were$50.7 million for the three months endedJune 30, 2021 , an increase of$10.4 million , or 26%, from$40.3 million for the three months endedJune 30, 2020 . SG&A expenses as a percentage of net sales decreased to 52% for the three months endedJune 30, 2021 from 63% for the three months endedJune 30, 2020 . The$10.4 million increase was primarily related to an increase in marketing and digital spend of$8.3 million . Additionally, we experienced increased operational costs (including outbound freight and shipping costs) of$1.1 million , increased retail fixturing and visual merchandising costs of$1.2 million , and increased software subscription costs of$1.2 million . These increases were partially offset by a decrease of professional fees of$1.6 million related to proxy contest costs in the prior year. Restructuring income Restructuring income was$14.0 thousand dollars in the three months endedJune 30, 2021 , consisting of a net gain related to the closure of our manufacturing facility inCalifornia . See Note 9 Restructuring and other related costs to condensed consolidated financial statements for further details. Other expense, net Other expense totaled$162.0 thousand dollars for the three months endedJune 30, 2021 , as compared to other expense of$30.0 thousand dollars for the three months endedJune 30, 2020 . The year-over-year variance was primarily related to unfavorable foreign exchange rate movements. Interest expense, net Interest expense, net decreased$0.7 million , or 49%, to$0.7 million for the three months endedJune 30, 2021 , as compared to$1.5 million for the three months endedJune 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 three months endedJune 30, 2021 . See Note 6, Debt to condensed consolidated financial statements for further details. Income tax provision The provision for income taxes was$1.5 million , or an effective rate of 15.6% for the three months endedJune 30, 2021 , as compared to a tax benefit of$1 thousand , or an effective rate of 0.0% for the three months endedJune 30, 2020 . The change was primarily driven by an increase in income before taxes of$8.3 million , partially offset by an increase in discrete tax benefit of$0.7 million , primarily related to stock-based compensation. Financial condition, liquidity and capital resources Overview As ofJune 30, 2021 , we held$63.4 million of cash and cash equivalents. In addition, as ofJune 30, 2021 , we had borrowing capacity of$73.3 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 ofJune 30, 2021 , we had working capital, excluding cash, of$36.4 million , compared to$39.0 million as ofMarch 31, 2021 . Working capital, excluding cash and debt, was$68.6 million and$55.3 million as ofJune 30, 2021 andMarch 31, 2021 , respectively. 21 -------------------------------------------------------------------------------- We believe that our operating cash flow, cash on hand and available financing under the Amended Revolving Credit Facility will be adequate to meet our planned operating, investing and financing needs for the next twelve months. If necessary, we can borrow funds under the Amended Revolving Credit Facility to finance our liquidity requirements, subject to customary borrowing conditions. To the extent additional funds are necessary to meet our long-term liquidity needs as we continue to execute our business strategy, we anticipate that they will be obtained through the incurrence of additional indebtedness, additional equity financings or a combination of these potential sources of funds; however, such financing may not be available on favorable terms, or at all. Our ability to meet our operating, investing and financing needs depends to a significant extent on our future financial performance, which will be subject in part to general economic, competitive, financial, regulatory and other factors that are beyond our control, including those described elsewhere in Part II, Item 1A "Risk Factors". In addition to these general economic and industry factors, the principal factors in determining whether our cash flows will be sufficient to meet our liquidity requirements will be based on our ability to provide innovative products to our customers, manage production and our supply chain. Cash flows Three months ended June 30, (in thousands) 2021 2020 Net cash provided by (used in): Operating activities$ 7,492 $ 11,823 Investing activities (2,336) (1,155) Financing activities 478 (2,611) Net increase in cash:$ 5,634 $ 8,057 Cash provided by operating activities For the three months endedJune 30, 2021 , net cash provided by operating activities was$7.5 million . This included net income before adding depreciation, amortization and other non-cash items of$23.7 million and an increase in net working capital of$16.2 million . The increase in net working capital was driven by a$3.0 million increase in accounts receivable, a$7.1 million increase of prepaid expense and other assets, a$7.4 million decrease of accounts payable and accrued expenses, a$1.0 million decrease of other liabilities, partially offset by an$2.3 million decrease of inventory. Cash used in investing activities For the three months endedJune 30, 2021 , net cash used in investing activities was$2.3 million . The increase was primarily driven by capital expenditures related to customer fixture programs in the three months endedJune 30, 2021 . Cash provided by financing activities For the three months endedJune 30, 2021 , net cash provided by financing activities was$0.5 million and was primarily related to proceeds from the amended revolving line of credit, net of term loan facility repayments, and cash received from the exercise of stock options. 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 22 --------------------------------------------------------------------------------
swing line loan; however, all amounts under the Amended Revolving Credit
Facility cannot exceed
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 theU.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 ofJune 30, 2021 for the Amended Term Loan Facility was approximately 1.6%. 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, 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 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 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 ofJune 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"). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that, as ofJune 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 inSEC 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. 23 -------------------------------------------------------------------------------- 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 endedJune 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. 24
--------------------------------------------------------------------------------
© Edgar Online, source
