e.l.f. Beauty Is Riding Some Powerful Trends

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e.l.f. Beauty (NYSE:ELF) is riding beardown momentum, and history says moreover a recession won’t slow it down. Shelf gains, value increases, and caller merchandise introductions each bode good for nan institution moving forward.

Company Profile

ELF offers a assortment of beauty and skincare products nether its e.l.f. Cosmetics, e.l.f. SKIN, Well People, and Keys Soulcare brands. The institution touts that its products are 100% cruelty free pinch cleanable ingredients

The institution sells its products successful nan U.S. chiefly done nan mass, supplier store, nutrient and specialty unit channels. Walmart (WMT), Target (TGT), and Ulta Beauty (ULTA) accounted for 26%, 23%, and 12% of its sales, respectively, successful fiscal 2022. It besides sells its products done its ain e-commerce website

In addition, ELF sells its beauty products successful respective world markets, including nan U.K., Germany, Canada, and Australia.

ELF does not do accepted TV aliases people advertising. Instead it relies heavy connected societal media and influencers. The institution claims it was 1 of nan first beauty brands connected TikTok, and it besides has galore advocates connected different societal media sites including Twitter, Instagram, YouTube, and Facebook.

Its brands person historically overindexed pinch younger demographics and minorities.

The institution sources and manufactures its products successful China done various third-party manufacturers.

Opportunity

Distribution and invention stay 2 cardinal focuses for nan company. ELF has done a awesome occupation getting into unit giants WMT and TGT, and it’s been gaining abstraction wrong these retailers arsenic well. Nonetheless, it still has room to some grow its support abstraction pinch some these retailers, particularly WMT, arsenic good arsenic get into others.

On its FYQ2 telephone successful November, CEO Tarang Amin discussed nan support gains and opportunity ahead, saying:

“So I'd opportunity connected abstraction description , we've had a bully way grounds complete nan years. If I backmost up 9 years ago, we astir apt person astir 11,000 linear feet of abstraction successful nan U.S. We person complete 130,000 linear feet now. And if you look year-over-year, location were a mates of years early successful our life wherever you had, I'd telephone it, a monolithic measurement change. There was 1 twelvemonth wherever I consciousness Target gave america 50% much abstraction crossed each their doors. But different than that, it's really been a beautiful methodical subset of a retailer's concatenation doors that will springiness america immoderate incremental abstraction with. So we for illustration that cadence.

“Our superior attraction is ever going to beryllium connected productivity being capable to thrust beardown comp shop maturation sloppy whether retailer gives america immoderate space. So I would say, yes, decidedly significant, peculiarly Targets, our astir longest-standing nationalist unit partner past making a further connection connected e.l.f. e.l.f is besides now, I deliberation they're apical marque crossed each of cosmetics and facial skincare. So it decidedly goes manus successful manus pinch our growth. Walmart, we person a monolithic opportunity. And I'd opportunity still person rather a spot of achromatic abstraction moreover pinch nan abstraction they're astir to springiness us.

“But really crossed nan board, I consciousness there’s abstraction opportunities everyplace we look. But having this attack of a beautiful disciplined rollout and being capable to build that connected apical of our wide productivity exemplary is beautiful patient and a beautiful accordant approach.”

Innovation besides remains a cardinal for nan company. The institution uses a fast-follower exemplary wherever it often will transcript celebrated products from prestige brands, past connection them astatine a fraction of nan price. This has been a highly successful strategy it has utilized for years.

On nan ELF’s Q3 call, Amin gave an illustration of this strategy successful action, saying:

“I'll commencement pinch primers. A fewer years ago, a prestige marque introduced a caller primer format astatine a $52 value constituent that quickly became a apical primer successful prestige. We took inspiration from this item, added our ain unsocial e.l.f. Twist and launched Poreless Putty Primer. Our value constituent of $8 invited a overmuch wider scope of consumers into nan space, importantly expanding nan full Putty Primer category. In fact, looking astatine information complete nan past year, we've sold complete 9x nan units of nan prestige primer. And some e.l.f. and nan prestige point person continued to turn units astatine a double-digit pace.”

The institution is looking to innovate successful a fewer areas wherever it presently under-index, including mascara, articulator color, and tegument care. These are each ample markets wherever nan institution tin present caller products to summation share.

ELF besides has an opportunity to grow its demographic to older customers. Its brands person awesome marque nickname among Gen Z consumers, but lags a spot pinch Millennials and Gen-X. International is different underpenetrated opportunity arsenic well.

Company Presentation

Risks

The macroenvironment could beryllium a consequence arsenic nan system weakens. However, cosmetic companies typically execute very good during periods of economical weakness aliases moreover recessions. This phenomena has go known arsenic nan "lipstick index." That said, we’d person to spot really ELF’s income clasp up successful specified an situation fixed its young-leaning customer base.

Competition is ever different imaginable risk. This is much apt to travel from a caller and upcoming brand, for illustration Drunk Elephant but cheaper, than an older established brand. It’s besides an manufacture that seems to tie a batch of celebrities into it, pinch Kylie Jenner and Kim Kardashian successfully launching and trading beauty businesses successful caller years.

Finally, immoderate harm to its marque estimation could beryllium a large blow. The institution really plays up nan cleanable ingredients and cruelty-free quality of its products. However, it sources everything from China and sells its products astatine inexpensive prices, truthful location is ever nan anticipation location could beryllium immoderate break down on nan way.

Valuation

ELF banal trades astir 29x nan FY2024 (ending March) statement EBITDA of $133.2 cardinal and 26x nan FY2025 statement of $150 million.

It trades astatine a guardant P/E of 47x nan FY24 statement of $1.56. Based connected 2025 expert estimates of $1.81, it trades astatine 40x.

Comparatively, Estee Lauder (EL) is weighted astatine ~21x fiscal ’24 EBITDA (ending June). Fragrance institution Inter Parfums (IPAR) has a aggregate of ~19.5x ’23 EBITDA, while cosmetic retailer Ulta Beauty (ULTA) is weighted astatine ~15x FY’24 EBITDA (ending January).

Conclusion

ELF has been connected occurrence and you surely can’t reason pinch its results. Its gross maturation this fiscal twelvemonth has been astounding. It’s been capable to raise prices, but besides return marketplace share.

Company Presentation

Company Presentation

The institution besides has plentifulness of opportunities up pinch store-shelf increases, further merchandise categories, world description and improved marque consciousness among Millennial and Gen-X consumers.

ELF is intelligibly a momentum banal successful a marketplace mostly lacking momentum. However, cosmetic companies thin to execute good during anemic economical periods, truthful if you’re a momentum investor, this is simply a train to hop connected board.

If you for illustration turnarounds instead, I’d return a look astatine my initial write-up connected rival Coty (COTY) and my post-earnings follow-up.

Former Senior Equity Analyst astatine $600M long-short hedge money Raging Capital.