Estée Lauder Cos. Inc. (NYSE:EL)

The period between June 30, 2018, and June 30, 2023, demonstrates significant fluctuations in economic profit. Net operating profit after taxes (NOPAT) and invested capital both generally increased over the period, but the cost of capital remained relatively stable, resulting in a volatile economic profit performance.

Economic Profit Trend

Economic profit exhibited an initial increase from US$76 million in 2018 to US$307 million in 2019. However, a substantial decline occurred in 2020, with economic profit falling to a loss of US$1,304 million. A recovery was observed in 2021, reaching US$706 million, followed by a decrease to US$349 million in 2022. The most recent year, 2023, saw another significant decline, resulting in an economic loss of US$1,025 million.

NOPAT Analysis

NOPAT increased from US$1,482 million in 2018 to US$1,921 million in 2019, indicating improved operational profitability. A sharp decrease to US$591 million occurred in 2020, likely due to external factors impacting operations. NOPAT rebounded strongly in 2021 to US$2,923 million, before decreasing to US$2,408 million in 2022 and further declining to US$1,239 million in 2023.

Cost of Capital

The cost of capital remained relatively consistent throughout the period, fluctuating between 13.61% and 14.20%. A slight decrease to 13.22% was observed in 2023. This relative stability suggests that changes in economic profit were primarily driven by variations in NOPAT rather than shifts in the required rate of return on invested capital.

Invested Capital

Invested capital generally trended upward, increasing from US$10,334 million in 2018 to US$17,123 million in 2023. The largest increase occurred between 2020 and 2023. This growth in invested capital, coupled with the fluctuations in NOPAT, significantly influenced the observed economic profit volatility.

The negative economic profit reported in 2020 and 2023 indicates that the company’s returns on invested capital were below the cost of capital in those years. While invested capital increased consistently, the ability to generate sufficient NOPAT to cover the cost of that capital varied considerably, resulting in the observed fluctuations in economic profit.

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 exhibited considerable fluctuation over the observed period. Initially positive, it experienced a significant decline, followed by recovery, and then a substantial decrease again. This pattern mirrors the volatility in economic profit, though the invested capital demonstrates a generally increasing trend.

Economic Spread Ratio Trend

The economic spread ratio began at 0.73% in 2018 and rose substantially to 2.67% in 2019, indicating an improved ability to generate returns exceeding the cost of capital. However, a dramatic downturn occurred in 2020, with the ratio falling to -9.43%, signifying that returns were significantly below the cost of capital. A recovery was observed in 2021, with the ratio reaching 4.52%, but this was short-lived. The ratio declined sharply again in 2023 to -5.99%, representing a renewed underperformance relative to the cost of capital.

Relationship to Economic Profit

The economic spread ratio closely follows the trend of economic profit. Positive economic profit values in 2018, 2019, 2021, and 2022 correlate with positive economic spread ratios. Conversely, negative economic profit in 2020 and 2023 corresponds with negative economic spread ratios. This suggests a strong link between the company’s absolute profit generation and its ability to exceed its cost of capital.

Invested Capital Trend

Invested capital consistently increased over the period, rising from US$10,334 million in 2018 to US$17,123 million in 2023. Despite this growth in invested capital, the economic spread ratio did not consistently improve, indicating that the increased investment did not always translate into proportionally higher returns. The dip in invested capital in 2022 may have temporarily supported the ratio, but this effect was not sustained into 2023.

The observed fluctuations in the economic spread ratio warrant further investigation to understand the underlying drivers of profitability and capital efficiency. The negative ratios in 2020 and 2023 suggest potential issues with either operational performance or capital allocation strategies during those periods.

The economic profit margin exhibited considerable fluctuation over the observed period. Initial values indicated positive economic profit, followed by a period of negative economic profit, and then a return to positive values before concluding with a substantial negative margin.

Economic Profit Margin Trend

The economic profit margin began at 0.55% in 2018, increasing significantly to 2.07% in 2019. A dramatic decline occurred in 2020, resulting in a negative margin of -9.18%. The margin recovered to 4.33% in 2021, but decreased to 1.97% in 2022. The most recent year, 2023, shows a substantial negative margin of -6.36%, representing the second-largest negative value in the period.

The economic profit margin’s movement appears correlated with changes in economic profit. The largest increase in margin occurred between 2018 and 2019, coinciding with a substantial increase in economic profit. Conversely, the largest decline in margin in 2020 aligns with a significant negative economic profit. The 2023 decline in margin is also associated with a negative economic profit.

Relationship to Adjusted Net Sales

Adjusted net sales generally increased from 2018 to 2022, moving from US$13,683 million to US$17,728 million. However, in 2023, adjusted net sales decreased to US$16,120 million. Despite the overall sales growth trend, the economic profit margin did not consistently benefit, as evidenced by the negative margins in 2020 and 2023. This suggests that increases in sales alone do not guarantee positive economic profit or margin.

The volatility in the economic profit margin suggests potential challenges in maintaining profitability relative to the cost of capital. The negative margins in 2020 and 2023 indicate that the company’s returns did not cover its cost of capital in those years. Further investigation into the factors driving these fluctuations, such as cost of capital changes or operational inefficiencies, would be warranted.