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We previously covered elf Beauty, Inc. (NYSE:ELF) in May 2024, discussing the company’s strong growth in financial numbers and market share gains thanks to its popular and strategically marketed/priced beauty products.
Nevertheless, as a relatively new player in the beauty industry with untapped international markets and significant growth potential, the stock was clearly overvalued at the time and offered only minimal margin of safety to interested investors, which is why we rated it “Hold (Neutral)” at the time.
Since then, ELF has hit new highs and then fallen as the overall market shifts away from high growth stocks, resulting in a typically tough August driven by a 1-year outperformance of +92% compared to +24% for SPY prior to the recent correction.
While the beauty retailer reported better-than-expected results twice as much in its fourth-quarter 2024 earnings report, its fiscal 2025 guidance fell short of expectations, exacerbated by a slowdown in the domestic market, and it remains to be seen whether management can continue to deliver high double-digit growth.
As a result of near-term uncertainty and still-high share prices/valuations, we reiterate our Hold (Neutral) rating here.
ELF Investment Thesis Remains Speculative After 1Q25 Earnings Release
ELF recently celebrated its 20th anniversary and delivered impressive net sales of over $1 billion for the first time in fiscal year 2024 (up 76.9% year-over-year), adjusted EBITDA margin of 22.9% (up 2.7 percentage points year-over-year) and adjusted EPS of $3.18 (up 91.5% year-over-year).
The company is scheduled to report its first-quarter fiscal 2025 results on August 8, 2024, and here are some metrics readers should keep an eye on as they highlight the health of its business and its near-term outlook.
1. ELF’s disappointing FY2025 guidance represents either over-caution or macroeconomic headwinds.
Consensus Forecast
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Unfortunately, ELF issued midpoint guidance for fiscal 2025 revenue of $1.24 billion (up 21.5% year-over-year) and adjusted EPS of $3.225 (up 1.4% year-over-year), which are below the consensus estimates of $1.27 billion (up 24.5% year-over-year) and $3.56 (up 11.9% year-over-year), respectively.
When compared to five-year sales/profit growth CAGRs of +30.8% and +37%, respectively, it appears that the beauty retailer’s high growth trend is finally showing signs of slowing, further highlighting why we believe the above consensus forecasts are overly aggressive.
It remains to be seen whether ELF’s guidance was cautious given its historically better than expected performance and earnings growth trends, or whether it signals a worsening profitability growth slowdown ahead, but what is certain is that the macroeconomic outlook remains uncertain.
While the June 2024 CPI remains elevated and well above the Fed’s target rate of 2%, the situation has been exacerbated by the recent market rotation out of high growth stocks, which has sent ripples throughout the stock market over the past week.
ELF 5 Year Stock Price
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This may also be the reason why ELF shares have fallen since their 2024 peak, effectively reducing their market cap by 16.1%, or $1.58 billion, since their July 2024 peak, mitigating many of the gains recorded following their impressive FY24 earnings report in May 2024.
Management expects Q1 2025 results to be “above net sales guidance range of +20% to +22%” year-over-year, but historical trends suggest that the company may need to deliver significant better-than-expected results and quarterly gains to bottom out in the current $180 range.
If not, the market correction may not be over yet and could trigger a further correction towards the May 2024 support level of $150, which would imply a -13% drop from current levels.
2. ELF focuses on international and skincare growth prospects
Over the years, ELF has repeatedly touted its next growth opportunity in international markets, yet international markets will account for just 15% of sales in fiscal 2024, compared with over 70% for the overall beauty market.
Much of management’s strategy lies in its value proposition, which is based on the average price of its products being $6.50, compared with $9.50 for traditional mass-market beauty brands and $20-plus for premium brands. This is on top of its continued expansion into skin care, boosted significantly by its recent acquisition of Naturium, valued at $355 million.
For now, growth in the international market remains strong, growing +25.7% sequentially and +115% year-on-year in Q4 2024, driven by accelerating growth in Canada and the UK, which are also driving overall ELF sales.
Still, readers should note that management’s disappointing FY2025 guidance suggests slowing international expansion, compounded by slowing domestic growth to +17.2% QoQ and +64.8% YoY from +27.8% and +75.5% YoY.
While these numbers remain strong, it remains to be seen whether ELF’s partnership with Sephora in Mexico beyond Q3 2024 will be able to successfully offset the slowing growth observed in the domestic market.
As such, readers may want to keep an eye on any Q2 2025 guidance provided by management in upcoming earnings calls.
3. ELF is inherently expensive here
ELF Evaluation
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Readers should note that ELF’s elevated P/E valuation comes with high expectations, which are only tied to its ability to deliver sustained double-digit growth in the future.
Still, looking at the chart above, it’s hard to deny that stocks have become overly priced relative to historical levels, especially when you consider the possibility of slowing growth.
At the same time, compared to its peers in the beauty/personal care industry, including:
Ulta Beauty (ULTA) has a FWD P/E valuation of 14.14x with forecast adjusted EPS growth of +6.1% CAGR, L’Oréal SA (OTCPK:LRLCF) at 29.67x/ +8.3% and Estée Lauder (EL) at 27.47x/ +14.6%.
There is no denying that ELF remains expensive at 50.03x/+17.4% respectively.
While we appreciate the strong performance metrics reported by management, including financial numbers, unit sales, digital initiatives/channel expansion, membership growth and retail partnerships, the margin of safety remains minimal despite the recent corrections.
So, should you buy, sell, or hold ELF stock?
ELF 2Y Stock Price
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For now, ELF has fallen dramatically over the past few weeks and is finding ample support within the previous support range of the $170 to $180 range.
For reference, in our previous article, we estimated fair value at $120.80, based on management’s 2024 adjusted EPS guidance of $2.85 and a five-year average P/E ratio of 42.41 (close to the P/E ratios of mature peers).
Despite the share price decline, it’s clear that ELF remains expensive when compared to management’s midpoint of FY2025 adjusted EPS guidance of $3.225 and our most recent fair value estimate of $136.70 based on the same five-year P/E ratio.
With a stable fiscal 2026 adjusted EPS forecast of $4.31 and a minimal margin of safety relative to our reiterated long-term target price of $182.70, we believe current levels are unattractive for those looking to buy on the dip.
As ELF’s fiscal 2025 will likely be more difficult to compare year-over-year, we remain of the opinion that market enthusiasm around future earnings may ease going forward, as seen in the double-top pattern seen in the stock’s past.
As a result of the potential capital losses, we wish to maintain our Hold (Neutral) rating here.
