Although the brand is expanding its share of the cosmetics market, the sluggish sales environment has created uncertainty about the next financial report.
Cosmetics retailer Elf Beauty (ELF -0.29%) has been one of the fastest-growing consumer brands in recent years. The company’s rapid expansion in the growing cosmetics market has seen its stock price triple in the past three years. However, persistently high inflation and other macroeconomic headwinds negatively impacted consumer spending, making 2024 a difficult year for many retailers.
Investors were caught off guard as Elf’s quarterly sales growth slowed sharply over the past two quarters. Management expects full-year sales growth of 25% to 27%, a significant departure from the 50% year-over-year pace reported last quarter. The stock is currently down 25% since the beginning of the year.
The company is scheduled to release another earnings report on November 6th, and the company could once again disappoint investors with its outlook and send the stock to new lows. On the other hand, if the company’s performance exceeds expectations, the stock’s valuation may decline and earnings may recover.
Let’s consider the pros and cons of buying stocks before the report, starting with why investors should wait.
It could get worse before it gets better.
Some analysts are concerned that demand will weaken heading into the fall. For example, Bank of America and Piper Sandler analysts say a weak retail spending environment, along with weak back-to-school shopping trends, could make it more difficult for the company to meet investors’ growth expectations. It is pointed out that there is a sex.
Another issue is margin performance. The company reported a slight increase in gross profit last quarter, reflecting favorable exchange rates, lower transportation costs, cost savings and higher prices in international markets. However, management plans to maintain high marketing spend in the short term, which could impact margins and earnings growth.
For the full year, Elf’s profits are expected to rise just 10% from a year ago, according to analyst consensus estimates. In addition to slowing sales growth, low-double-digit profit growth could weigh on the company’s results heading into next year.
Why should you buy this stock for the long term?
Despite short-term headwinds, Elf Beauty stock is a tough sell at this low price, as it has attractive long-term growth prospects.
Major cosmetic brands are generating repeat sales from customers, and the market is expected to grow steadily. Statista predicts that the beauty and personal care market will grow 3% annually to reach $756 billion by 2029. Elf Beauty stock could soar as soon as Wall Street sees the first signs of a recovery in the cosmetics market.
elf’s market share has doubled in recent years, making it the second largest consumer brand in dollar terms. The company has just begun its international expansion, with international sales increasing 91% year over year last quarter.
The company’s stock trades at a forward price-to-earnings ratio (PER) of 30 times this year’s earnings forecast, which seems to be a reasonable level for a company expected to see double-digit growth over the long term. The brand’s appeal is focused on selling quality products at affordable prices, which clearly resonates with consumers in multiple regions.
It’s possible that stocks will reach new lows before they move higher, but patient investors could reap impressive returns from these stocks over the next five years.
Bank of America is an advertising partner of The Motley Fool’s Ascent. John Ballard has no position in any stocks mentioned. The Motley Fool has a position in and recommends Bank of America and Elf Beauty. The Motley Fool has a disclosure policy.
