Buy the Dip in e.l.f. Beauty: Analysts Point to a New High

Key Points

• e.l.f. Beauty had a good quarter and raised guidance but failed to impress investors. 
• Worries of slowing growth overshadow robust gains, improved market share, and a 50% increase in equity, causing the market to discount share prices in premarket trading.
• However, analysts are raising price targets and leading the market to a new all-time high. A rebound is expected soon.

Valuation concerns and slowing growth led e.l.f Beauty NYSE: ELF shares to fall following its Q1 release, but this is a buy-the-dip opportunity. The results were better than expected, including increased market share and improved leverage, leading to improved guidance and positive analyst revisions. 

Among the takeaways for investors is the bullish sentiment trend. Analysts' revisions in the first half lifted sentiment to Strong Buy from Moderate Buy and the price target by nearly 100%, putting the stock on MarketBeat’s list of Top Rated Stocks. The Top Rated stocks are the 100 stocks with the highest average analyst rating over the last 12 months; ELF is ranked 24th. The consensus price target implies a move back to the top of the range, but most recent targets, including the fresh targets issued since the release, are well above it, suggesting a new all-time will be reached soon. 

e.l.f. Beauty Has Beat and Raise Quarter; Shares Fall

e.l.f. Beauty had a good quarter, growing by 50% with the addition of Naturium in the mix. The company reports 250 basis points of share gains with more expected, and strength was driven by retail and eCommerce channels. 

The company shows mounting leverage among cosmetic consumers, with consumption of its cosmetic products up 26% compared to a decline in the overall category. Market share was gained versus all the legacy cosmetic companies, and Revlon lost the most. The company also shows increased leverage in Skincare, with consumption up 45% compared to 1% for the category, aided by share gains. e.l.f. is now the #9 leading skincare brand, rising three positions compared to last year. Naturium grew by 16%, and International grew by 90%. 

Margin is another area of strength, with the gross margin improving by 80 basis points to 71% and the operating margin outperforming. SG&A costs rose compared to last year but far less than expected, leaving the adjusted earnings at $1.10 or 3000 basis points above the consensus.

Guidance for the year is good, but it is weighing on the market for shares. The company raised its forecast for revenue and earnings, putting the low end of the expected EPS range above the prior high end, but it is still shy of the consensus. Guidance may be cautious in light of the Q1 strengths, but there is concern that tariffs on Chinese imports will impact results as the year progresses. The caveat is that tariffs have yet to be passed, and there is potential for reaccelerated growth in 2025. The FOMC is expected to cut interest rates soon, a move expected to reinvigorate economic activity and consumer strength globally. 

e.l.f Beauty Builds Value for Shareholders

The critical details for investors are in the balance sheet. The balance sheet shows reduced cash and increased liabilities due partly to the Naturium acquisition, but increased receivables, inventory, property, intangibles, and goodwill offset those details. The net result is a 50% increase in shareholder equity, and the balance sheet is still a fortress. Long-term debt and finance lease obligations are only about 1.5x the remaining cash balance, the cash flow is positive, and total liabilities run at less than 0.75x assets. This company can continue to invest in its profitable growth through acquisitions and other means.

The institutions support the price action in e.l.f. in 2024, and this trend will likely continue. The stock price is down following the release, in the range where buying was strongest in Q1 and early Q3, which will likely spark another round of inflows. The risk is that early, pre-market price action is below critical support and potentially strong resistance at the $180 level. If this market can’t get back above there quickly, it could become range-bound between $150 and $180.