A Member of Pat McKeough’s Inner Circle recently asked for his advice on a cosmetics company that differentiates itself with low prices and quick responses to changing markets.
Pat likes the firm’s track record for growing revenues as it appeals successfully to younger consumers. However, he notes the company is operating in a very competitive market impacted by inflation.
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E.L.F. Beauty Inc. (Symbol ELF on New York; www.elfbeauty.com), sells cosmetics at below department-stores prices and those of specialty shops like Sephora. E.L.F. stands for eyes, lips and face.
The company’s products are sold in its own E.L.F. stores, online, and at large retailers such as Target, Walmart, and Ulta Beauty. The company aims to develop its products more quickly than bigger mass-market brands, allowing it to rapidly respond to shifting consumer tastes. E.L.F. started selling online in 2004, but now generates most of its sales from major retail chains.
Its products are generally priced at $4, $6, and $10 (versus $30, $50 or more for prestigious brands). Items include bath and skincare products, mineral-based makeup, professional tools, eyeliners, lipstick, glosses, blushes, bronzers, brushes and mascara.
E.L.F.’s revenue rose 45.3% over the last five years, from $269.9 million in 2017 to $392.1 million in 2021. Excluding one-time items, earnings rose 42.6%, from $31.7 million, or $0.64 a share, in 2017 to $45.2 million, or $0.84 a share, in 2021.
Inner Circle: Inflation hits earnings but sales-boosting measures look sound
The company operates in a very competitive market. However, it has undertaken a number of successful measures to boost sales. E.L.F. continues to gain the attention of GenZ and Millennial consumers through social media platforms such as YouTube, Instagram and TikTok.
Meanwhile its Project Unicorn (meant to upgrade product appearance and optimize shelf space at retailers) is also proceeding smoothly.
In fact, Walmart and Ulta Beauty both continue to expand E.L.F.’s shelf space. That’s helping the company’s sales and profits, especially as consumers return to normal shopping and work patterns on easing of COVID-19.
E.L.F.’s shares are now hitting all-time highs, and the stock trades at a high 50.6 times its forecast 2023 earnings.
Recommendation in Pat’s Inner Circle: E.L.F. Beauty Inc. is a hold.
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