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At the start of the year, I called shares of e.l.f. Beauty, Inc. (NYSE:ELF) is an interesting name to follow. Eyes, lips, and face have been one of the great growth darlings within the affordable cosmetics industry and frankly the overall market.
The adoption of these affordable beauty products, certainly among millennials, has ignited real momentum in the business and its shares. This momentum has even lasted into 2024, perfectly explainable by strong topline momentum, although that (realistic) earnings multiples get quite elevated here, too elevated for me.
A Massive Run
E.l.f. went public back in 2016, trading at levels in the mid-twenties, targeting younger customer cohorts with beauty products at affordable and accessible prices. The company posted sales of just around $200 million at the time while posting operating margins in the mid-teens.
Revenues grew towards $300 million by 2019 as the real advancements were achieved post-pandemic. As margins were trailing topline sales growth, shares were down compared to the public offering price. In fact, shares traded below the $25 mark until the summer of 2022 as a real growth acceleration was witnessed.
Shares even ended 2022 around the $50 mark ahead of a 47% increase in fiscal 2023 sales reported at $579 million, while operating earnings doubled to $68 million.
Picking Up The Pace
The company originally guided for fiscal 2024 sales to come in between $705-$720 million, with adjusted earnings seen around $1.75 per share. When this guidance was issued in the middle of 2023, shares had risen to the $100 mark already. Arguably, this resulted in higher earnings multiples, but momentum was strong, and arguably, the outlook was very conservative.
That quickly showed after the first quarter of fiscal 2024, sales rose by 76% to $216 million, while adjusted earnings were posted at $1.10 per share. The company hiked the guidance further, but it still looked conservative, with the company announcing a $355 million acquisition of skincare business Naturium over the summer as well, adding another $90 million in annual sales.
Second quarter sales rose by a similar 76% to $215 million, although adjusted earnings of $0.82 per share fell on a sequential basis on a similar revenue number. The company subsequently hiked the full year sales guidance to $900 million, now seeing earnings around $2.50 per share.
With shares trading at $140 at the start of the year, I was performing a balancing act. Based on the earnings guidance of $2.50 per share, the multiples were demanding, but moreover, there was some uncertainty after adjusted earnings already totaled $1.92 per share in the first half of the year. This suggested relatively minimal profitability in the second half of the year.
Deeply impressed with the performance, I was susceptible to fads, as I did not feel that it was time to get involved early into the year following a spectacular recovery from the October lows.
Doing Fine
Since the start of the year, shares of e.l.f. have traded in a $150-$220 range, now exchanging hands around the $170 mark, marking solid returns for investors.
This was driven by a strong third quarter earnings report, with sales up 85% to $271 million, with the growth acceleration supported by the purchase of Naturium. The adjusted earnings number of $0.74 per share was softer than the first half of the year, but it meant that the full-year outlook was hiked again. By now, sales were seen at a midpoint of $985 million, with earnings seen at around $2.85 per share.
The company concluded the fiscal year with another strong quarter, as fourth quarter sales were up 71% to $321 million, making that full-year sales topped the billion mark at $1.02 billion. Quarterly adjusted earnings came in at $0.53 per share, essentially having doubled to $3.18 per share for the year. However, there are some notes to make, as adjusted earnings for the quarter were up just 11 cents, trailing top-line sales growth.
The reality is that e.l.f. is unable, or perhaps unwilling, to grow operating margins here, as full year operating income of $150 million yields margins just below 15%. This comes despite spectacular sales growth, but this is also, in part, a deliberate pricing strategy to continue to gain market share.
There are some issues, however, as the $3.18 earnings per share number is quite adjusted. It excludes a pre-tax stock-based compensation expense of $40 million, equal to $0.70 per share, which after taxes suggests that realistic earnings trend around $2.50 per share.
The company outlined a fiscal 2025 sales guidance between $1.23-$1.25 billion, which looks solid and traditionally conservative. Somewhat worrying in this respect is that adjusted earnings are seen dead flat at $3.20-$3.25 per share. This suggests margin pressure whilst sales are set to slow down.
What Now?
Commanding a roughly $10 billion equity valuation here, amidst a flattish net debt load (with much of the Naturium deal paid for in stock, while retained earnings have paid for the cash component in the meantime), valuation is demanding. In terms of sales multiples, the stock trades at around 8 times.
The issue is that with a realistic earnings power of $2.50 per share, the company trades at effectively 70 times forward earnings. This is for a business not set to grow this year’s earnings, but this is in part due to the choice to grow market share over near-term profits.
Given this discussion above, and my belief that operating margins can only in a modest fashion be increased if e.l.f. Beauty, Inc. targets doing so, I am taking a conservative stance here. I like management and the conservative guidance practices, but find the valuation too demanding to be able to commit here.
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