e.l.f. Beauty: Taking To “Hold” After Huge Run (Downgrade) (NYSE:ELF)

I upgraded e.l.f. Beauty (NYSE:ELF) to “Buy” back in December, saying that estimates were too low for the company. I originally placed a “Buy” rating on the stock in February 2023, before taking it “Hold” after a strong run-up in the stock price. With the stock up over 50% since my last upgrade, let’s take a closer look at its most recent earnings report. The stock is up over 170% since my initial bullish write-up.

Company Profile

As a refresher, ELF is a beauty company that sells its cosmetics, skincare, and other beauty products under the e.l.f. Cosmetics, e.l.f. SKIN, Naturium, Well People, and Keys Soulcare brands. It sells its products through both the mass retail and specialty beauty channels, as well as its own e-commerce platform.

What sets the company apart is its fast-follower strategy, where it models its products off popular prestige cosmetic and skincare products and then sells them at much lower prices. This has been a successful strategy long used in the fashion industry with companies like Zara. Meanwhile, the company has done a great job resonating with younger audiences by relying on influencers and social media. However, the company is looking to expand its reach to older audiences, and has increased its marketing budget, including running a national Super Bowl ad.

Fiscal Q3 Results

For its fiscal Q3 reported in early February, ELF cruised past analyst estimates, with quarterly sales soaring 85% to $279.9 million, easily topping the consensus of $238.9 million. International sales were up 119%, with strength in the U.K. and Canada.

Adjusted EPS, meanwhile, jumped from 48 cents a year ago to 74 cents, topping the 56-cent analyst estimate.

Adjusted EBITDA, meanwhile, surged 61% to $59.1 million. The company’s operating cash flow was -$17.2 million, as it ramped up inventory.

Gross margins improved by 350 basis points to 70.9%. The company credited improved transport costs, mix, cost savings, and lower favorable Fx rates.

The company saw strong momentum in skincare, with 89% growth in tracked channels versus 9% growth for the category. The company still only has a 1.4% share in the category with e.l.f. SKIN, while the top brand holding a 14% share. Its recent acquisition of Naturium will give it increased share moving forward.

In color cosmetics, the company is the #3 brand in the country, with a 10.1% market share. It saw tracked channel sales climb 46% compared to category growth of 2%. It grew its overall market share by 305 basis points in the quarter. The company said it is the #1 selling cosmetic brand at Target (TGT) with a 19% share.

Looking ahead, ELF updated its full-year guidance. The company forecast fiscal 2024 sales to grow 69-71% to $980-990 million.

That compares to a prior outlook calling for revenue growth of 55-57% to $896-906 million and an original outlook of revenue growth of 22-24% to between $705-$720 million.

It guided for adjusted EBITDA of between $218-220 million and adjusted EPS of $2.84-2.87.

That compares to a prior outlook of $197-200 million and adjusted EPS of $2.47-2.50. Its original outlook was for $144.5-$147.5 million in adjusted EBITDA and adjusted EPS in the range of $1.73-$1.76.

It is looking for its gross margins to increase by 280 basis points, up from prior guidance of a 225 basis points increase.

For fiscal Q4, it is expecting 48-53% sales growth.

Discussing its marketing and shelf space gains on its FQ3 call, CEO Tarang Amin said:

“Over the past 4 years, we’ve increased our marketing investment from 7% of net sales to 22%. Our marketing investment is working, driving ROI multiples above industry benchmarks and helping us reach new audiences. Since 2020, our unaided awareness in the U.S. has doubled from 13% to 26%. That 26% unaided awareness today compares to a leading U.S. mass cosmetics brand at 52%, illustrating significant runway for growth. Our results continue to fuel progress with national retailers. e.l.f. is the most productive cosmetics brand at our top 3 customers in the U.S., Target, Walmart and Ulta Beauty. We’re also the most productive brand at our top 2 customers in the U.K., Superdrug and Boots, giving us conviction that we can replicate our productivity model as we expand internationally. We continue to increase productivity even as we expand space. We’re pleased to announce that we’ll be expanding space for e.l.f. in spring 2024 with CVS and in summer 2024 with Walmart. In addition to the space gains, we previously announced with Shoppers Drug Mart in Canada and Boots in the U.K. We’re also pleased to announce that we’ll be expanding space for Naturium in spring 2024 with Shoppers Drug Mart, marking the brand’s entry into Canada.”

Back in December, I projected ELF would sail past the consensus revenue number that was $230 million at the time and report sales closer to $250-255 million. Well, the company even blew past my much higher than street estimates to once again post another spectacular quarter. ELF just continues to exponentially outgrow the industry and take share.

Moving forward, the company is set to gain even more shelf space in FY25, which should bode well for continued strong growth. When the company started to gain shelf space is really when its sales started to take-off. Meanwhile, with Naturium likely to contribute about $20-25 million in sales in FQ4, I think current FQ4 estimates also look too low and that the company should push past $300 million in sales this current quarter.

The only slight negative in the quarter was the big jump in inventory. However, part of that was how it accounts for inventory when shipped ($28 million) and taking on Naturium’s inventory ($25 million). Sales outpaced inventory growth otherwise, so it likely isn’t a yellow flag, but it is still just something to keep on eye on.

The biggest takeaways from the quarterly update, though, is that ELF continues to take share and gain shelf space. Both of these will drive growth moving forward.

Valuation

ELF stock trades around 38x the FY2025 (ending March 2025) consensus EBITDA of $300.9 million and 31x the FY2026 consensus of $369.0 million.

It trades at a forward P/E of 57x the FY25 consensus of $3.55. Based on 2025 analyst estimates of $4.39, it trades at 46x.

ELF is projected to see revenue growth of nearly 27% in FY25 and 16.6% in FY26.

ELF is one of the most expensive beauty stocks, but it is also growing much faster than its peers.

Given its growth, I’d place about a 30-35x multiple on FY26 EBITDA on the stock. That would value the stock between $193-$226.

Conclusion

ELF has been one of the best growth stocks out there, consistently surpassing results and raising guidance. The company is gaining a lot of market share and taking shelf space, which bodes well for continued growth.

That said, given the tremendous run since my most recent upgrade to “Buy,” I think it is time to take a bit of a breather and take the stock back to “Hold.” My target price is $220, up from $165 earlier, as the company has exceeded even my above-consensus expectations and the focus turns to FY26 numbers.

The biggest risk to ELF on the downside would be if growth slows, as expectations are already high given its valuation. The company has done a great job capturing a large share of the market with teens and young adults, so it must continue to keep these consumers engaged and expand into some older demographics as well. The biggest catalysts for the stock moving forward are continued shelf space gains; taking more market share, particularly in skin care; and continued international growth, which are all things the company reports on a quarterly basis, while Nielsen also tracks market share in certain channels.