2023-09-05 04:20:54 ET
Summary
- e.l.f. has experienced significant growth and share gains over the past three years, driven by strong fundamental performance and momentum.
- The company focuses on selling beauty products at accessible prices and has successfully targeted millennial customers through e-commerce and retail channels.
- e.l.f. recently acquired skincare brand Naturium for $355 million, aiming to expand its presence in the skincare market.
In the spring of 2020, I believed that beauty was seen in the eye of the beholder in the case of e.l.f. Beauty (ELF) . As the business ended on a strong (growth) note, I liked the growth and positioning, yet feared the elevated valuations and pending impact of the pandemic.
On the back of these developments, I sold out a small speculative position at the time, with the benefit of hindsight far too early as shares have 7-folded in the three years that followed. Truth be told that most of these share gains were only seen over the past year, as momentum might have carried away a little bit here, albeit on the back of a very strong fundamental performance.
A Recap
e.l.f. went public in the fall of 2016, as there was quite a buzz around the new beauty brand, as shares traded around the $25-$30 mark directly after the public offering. The business focuses on eyes, lips, & face, hence its name, with a goal to sell beauty products at accessible prices, creating strong traction with key millennials customer cohorts.
Originally a pure e-commerce play, the company moved into retail as well, with growth driven by innovation and savvy usage of social media as well. The business generated $191 million in sales in 2015, albeit accompanied by >30% growth, as the business was highly profitable already, with operating profits posted equal to 13% of sales.
With shares down to the $10 mark in 2018 and the business showing solid growth in the meantime, I saw appeal emerging, as the valuations were quite demanding around the time of the offering. By 2019, the company had grown sales to $283 million on which adjusted net earnings of $32 million, or $0.63 per share were reported. Note, however, that the earnings number excludes $15 million stock-based compensation expense, making that realistic earnings came in roughly half that number.
With shares trading in the high teens in the spring of 2020, with the pandemic having a huge impact on the business, valuations were demanding with realistic earnings reported around $0.30 per share, as I took profits at the time.
A Huge Run
Since the spring of 2020, shares of e.l.f. have risen to the $30 mark by year-end 2021, before selling off to the mid-twenties in the summer of 2022. Ever since, shares have seen a huge rally, ending 2022 around the $50 mark, and by now, shares have seen huge returns in 2023, as they trade at $139 per share, within imminent reach of all-time highs.
As it turned out, the business had seen huge growth. By the fiscal year 2022 (which ended in March of that year), the company had posted sales of $392 million, some hundred million ahead of 2019, on which GAAP operating profit of $30 million was reported.
By spring of this year, full-year sales for 2023 were reported up more than 47% to $579 million, with GAAP operating profits reported at $68 million, on which GAAP earnings of $61 million, equal to $1.11 per share were reported.
The acceleration in momentum was evident, certainly as fourth quarter sales rose as much as 78%, providing the foundation for a solid 2024 outlook, which looked conservative with sales seen at $705-$720 million. Adjusted earnings were seen at $1.73-$1.76 per share, a very modest improvement from a $1.66 per share adjusted earnings number in 2023, with most of the discrepancy relating to stock-based compensation expenses. Amidst the strong cash flow generation, the company ended the year with a net cash position of around $60 million.
In August, e.l.f. posted a 76% increase in first quarter sales to $216 million, on which a very strong GAAP operating profit number of $60 million was reported. This resulted in very strong earnings of $53 million, equal to $0.93 per share, all while net cash improved to $83 million. On the back of the strong quarter, the company hiked the full-year sales guidance to $792-$802 million, with adjusted earnings now seen at $2.19-$2.22 per share, after first quarter adjusted earnings already came in at $1.10 per share!
The 57 million shares now trade at $138, granting the business a $7.9 billion equity valuation, or $7.8 billion enterprise valuation. This values the business at roughly 10 times sales, and likely a bit lower given the huge momentum, although those valuations are very demanding with realistic earnings around $2 per share based on the outlook, even if this looks highly conservative.
A Deal
On top of the operating momentum, shares of e.l.f. announced an interesting deal towards the end of August, as it reached a $355 million deal to acquire Naturium. The acquisition of the skincare brand is designed to grow its presence in this skincare area.
Naturium was only founded in 2019 and has seen incredible traction, set to generate $90 million in sales this year, implying that a 4 times sales multiple has been paid, while the two-year revenue CAGR of 80% is in line, or even better than e.l.f. With 70 million for the deal tag paid for with the issuance of stock, a pro forma net debt load around $200 million remains manageable, at just over 1 times EBITDA seen this year.
With the purchase price being equal to 21 times EBITDA, that implies that the business generates $17 million in EBITDA, for margins of nearly 20%, which is largely in line with margins reported by e.l.f.
The margin and growth profile is quite similar to e.l.f.'s but the acquisition takes place at a roughly 50-60% revenue discount compared to e.l.f.'s own valuation, with the deal adding about 10% to reported sales. This looks quite good, but the overall valuation has run away quite a bit, as in absolute terms, the multiples look quite fair.
Caution
The huge performance, with shares doubling in 2022 on top of which shares nearly tripled year to date, the valuations are very demanding with realistic earnings seen at $2, perhaps $3 per share in 2023, translating into 50-70 times earnings multiple.
These valuations and certainly share price momentum make it very hard for me to get involved and upbeat here, although I slap myself for not tracking the operating performance during recent years. Subsequently, I have missed out on this rally in its entirety.
Given the momentum, I see no need to get involved right here, but do promise myself to keep a closer eye on the developments from here onward.
For further details see:
e.l.f.: A Beautiful Run