Estée Lauder Cos. Inc. (NYSE:EL)

The period under review demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) and invested capital both experienced increases initially, followed by substantial declines and a subsequent rise in invested capital in the most recent year. The cost of capital remained relatively stable throughout the period, with a slight increase in the earlier years before decreasing in the final year.

Economic Profit Trend

Economic profit exhibited a volatile pattern. A loss of US$129 million was recorded in 2018, followed by a profit of US$72 million in 2019. A substantial loss of US$1,580 million occurred in 2020, which was then followed by a profit of US$380 million in 2021. Profitability decreased to US$47 million in 2022, and then declined again to a loss of US$1,351 million in 2023.

NOPAT Analysis

Net operating profit after taxes increased from US$1,482 million in 2018 to US$1,921 million in 2019, representing a growth of approximately 29.6%. However, NOPAT then decreased significantly to US$591 million in 2020, likely contributing to the substantial economic loss that year. A strong recovery was observed in 2021, with NOPAT reaching US$2,923 million. This was followed by a decrease to US$2,408 million in 2022 and a further decline to US$1,239 million in 2023.

Cost of Capital and Invested Capital Relationship

Invested capital generally increased over the period, rising from US$10,334 million in 2018 to US$17,123 million in 2023. The cost of capital fluctuated between 15.13% and 16.29% during the period. The combination of increasing invested capital and a relatively stable cost of capital suggests that a larger capital base was employed to generate returns, but the returns were not consistently sufficient to cover the cost of that capital, as evidenced by the fluctuating economic profit.

The significant swings in economic profit suggest the business is sensitive to changes in NOPAT. The substantial losses in 2020 and 2023 indicate periods where the return on invested capital was insufficient to cover the cost of capital. The increase in invested capital in 2023, coupled with a decrease in NOPAT, likely contributed to the largest economic loss observed during the period.

Net Earnings Attributable to The Estée Lauder Companies Inc.

The net earnings exhibit significant volatility over the analyzed period. Starting at $1,108 million in mid-2018, the figure rose notably to $1,785 million in mid-2019. A sharp decline occurred in mid-2020, with earnings dropping to $684 million, likely reflecting impacts from external economic conditions or extraordinary events during that year. This was followed by a robust recovery to $2,870 million in mid-2021, marking the peak in the period under review. Subsequent years saw a decrease to $2,390 million in mid-2022 and further down to $1,006 million by mid-2023, indicating a downward trend after the substantial recovery.

Net Operating Profit After Taxes (NOPAT)

NOPAT trends closely mirror those of net earnings, suggesting consistent operational profitability dynamics. The value increased from $1,482 million in mid-2018 to $1,921 million in mid-2019, indicating improved operational efficiency or profitability. It then sharply contracted to $591 million in mid-2020, consistent with the net earnings downturn during that year. A strong rebound occurred in mid-2021, with NOPAT peaking at $2,923 million. This was followed by a decline to $2,408 million in mid-2022 and a further reduction to $1,239 million in mid-2023, aligning with the observed decrease in net earnings.

Summary of Trends and Insights

Both net earnings and NOPAT display considerable fluctuations over the six-year period, characterized by a sharp downturn in 2020 and a pronounced recovery in 2021. The subsequent declining trend in 2022 and 2023 suggests emerging challenges or changes in the company's operating environment impacting profitability. The correlation between net earnings and NOPAT indicates that operating performance significantly influences net profitability. Monitoring external factors and internal operational efficiencies will be critical to understanding and addressing the causes of recent declines.

Provision for Income Taxes

The provision for income taxes exhibited a generally decreasing trend from June 30, 2018, through June 30, 2023. Starting at 863 million US dollars in 2018, it sharply declined to 513 million in 2019 and further to 350 million in 2020. A moderate increase was observed in 2021 and 2022, reaching 456 million and 628 million respectively, followed by a decline again in 2023 to 387 million. This fluctuation suggests variability in taxable income or changes in tax rates and accounting policies during the period.

Cash Operating Taxes

Cash operating taxes showed a different pattern, with an initial increase from 750 million in 2018 to 629 million in 2019, then a decrease to 541 million in 2020. After that, there was a rising trend, peaking at 823 million in 2022 before decreasing again to 637 million in 2023. This indicates some volatility in actual tax payments, possibly reflecting timing differences between tax provisions and cash payments or changes in the company's cash tax obligations.

Total reported debt & leases

The total reported debt and leases exhibit a fluctuating upward trend across the periods analyzed. Initially, the debt remained relatively stable between 2018 and 2019, slightly decreasing from 6,321 million USD to 6,238 million USD. However, a significant increase occurred in 2020, rising sharply to 8,789 million USD. This figure decreased somewhat in 2021 and 2022, dropping to 8,099 million USD and 7,645 million USD respectively. In 2023, the debt surged again, reaching the highest recorded level of 10,169 million USD, indicating a possible strategy involving greater leverage or increased financing needs.

Stockholders’ equity

The stockholders’ equity shows an overall decline from 2018 through 2020, falling from 4,688 million USD to 3,935 million USD. This decreasing equity trend reversed in 2021, with a considerable rise to 6,057 million USD, potentially reflecting improvements in retained earnings or capital injections. In 2022 and 2023, the equity slightly decreased and then stabilized around the 5,590 million USD to 5,585 million USD range, suggesting a plateau in equity growth during the most recent periods.

Invested capital

Invested capital consistently increased over the six-year period. Starting at 10,334 million USD in 2018, the figure rose steadily each year reaching 17,123 million USD in 2023. This upward trajectory denotes ongoing investments in company assets or operations, supporting business expansion or restructuring activities. The steady growth reflects an accumulation of both debt and equity used to finance the company's strategic initiatives.

The economic spread ratio exhibits considerable fluctuation over the observed period. Initially negative in 2018, it became positive in 2019 before experiencing a substantial decline in 2020. Subsequent years show a recovery in 2021, followed by a decrease in 2022, and a significant negative shift in 2023.

Economic Spread Ratio Trend

The economic spread ratio began at -1.24% in 2018, indicating that the company’s return on invested capital was less than its cost of capital. A positive shift occurred in 2019, reaching 0.62%, suggesting the company generated returns exceeding its cost of capital. However, this positive trend was reversed dramatically in 2020, with the ratio plummeting to -11.43%. A partial recovery was seen in 2021, with the ratio increasing to 2.44%, but this was not sustained, falling to 0.32% in 2022. The most recent year, 2023, shows a substantial decline to -7.89%, representing the lowest value in the period and a significant underperformance relative to the cost of capital.

The economic spread ratio’s volatility suggests inconsistent profitability relative to the capital employed. The large negative values in 2020 and 2023 are particularly noteworthy, indicating substantial value destruction during those periods. The positive values in 2019 and 2021, while positive, were relatively short-lived in the context of the overall trend.

Relationship to Economic Profit

The economic spread ratio’s movements correlate with the economic profit figures. Negative economic profit values in 2018, 2020, and 2023 align with negative economic spread ratios, while positive economic profit in 2019 and 2021 correspond with positive ratios. The magnitude of the economic spread ratio appears to reflect the scale of the economic profit or loss. For example, the largest negative economic profit in 2020 is associated with the most negative economic spread ratio.

Invested capital generally increased throughout the period, from US$10,334 million in 2018 to US$17,123 million in 2023. However, this increase in capital employed did not consistently translate into improved economic performance, as evidenced by the fluctuating and ultimately negative economic spread ratio in the latest year.

The economic profit margin exhibited considerable fluctuation over the observed period. Initial values were negative, followed by positive results, then a significant decline, and concluding with a substantial negative margin. This suggests inconsistent profitability when considering the cost of capital.

Economic Profit Margin Trend

In fiscal year 2018, the economic profit margin was -0.94%. This improved significantly to 0.48% in 2019, indicating increased value creation relative to capital employed. However, 2020 saw a dramatic decrease to -11.12%, representing a substantial shortfall in returns compared to the cost of capital. A recovery occurred in 2021, with the margin reaching 2.33%, but this was short-lived. The margin decreased to 0.26% in 2022 and experienced a sharp decline to -8.38% in 2023.

The economic profit margin’s volatility appears correlated with the fluctuations in economic profit. The largest negative economic profit in 2020 directly resulted in the lowest economic profit margin during the period. Conversely, the positive economic profit in 2019 and 2021 corresponded with positive, albeit smaller, economic profit margins.

Relationship to Adjusted Net Sales

Adjusted net sales generally increased from 2018 to 2022, peaking at US$17,728 million. However, sales decreased in 2023 to US$16,120 million. Despite the overall sales growth trend, the economic profit margin did not consistently benefit, suggesting that increased sales alone were insufficient to generate economic profit. The significant decline in the economic profit margin in 2023 occurred alongside a decrease in adjusted net sales, reinforcing the impact of both factors on value creation.

The consistent oscillation between positive and negative economic profit margins highlights a potential challenge in consistently generating returns exceeding the cost of capital. The pronounced negative margins in 2020 and 2023 warrant further investigation to identify the underlying causes and implement strategies for improvement.