2023-08-31 12:27:50 ET
Summary
- e.l.f. Beauty continues to be firing on all cylinders.
- The company significantly raised its full-year guidance, but estimates still remain too low.
- The acquisition of Naturium only improves the company's growth story and helps its continued move into skincare.
With e.l.f. Beauty (ELF) reporting results and later making an acquisition since my last write-up on the stock, I wanted to catch up on the name. The stock is up about 85% since my initial write-up in February and over 25% since I took it to "Hold."
Fiscal Q1 Results
Ahead of its FQ1 earnings report, I wrote: "The company is easily set up for a fiscal Q1 beat and full-year raise," noting that analyst fiscal Q2 and Q3 estimates were also too low given shelf space gains, as well as skincare and international momentum.
For fiscal Q1, ELF crushed analyst estimates, with quarterly sales soaring 76% to $216.3 million , easily topping the consensus of $184.5 million. International sales were up 79%, with strength in the U.K. and Canada.
EPS, meanwhile, jumped from 27 cents a year ago to 93 cents, which was more than double the 45-cent analyst estimate.
Adjusted EBITDA, meanwhile, surged 135% to $74.3 million. The company generated $23.4 million in operating cash flow, down from $30.6 million.
Gross margins improved 280 basis points to 71%. The company credited improved transport costs, mix, cost savings, and lower inventory adjustments.
The company saw strong momentum in skincare, with 127% growth in tracked channels versus 10% growth for the category. The company still only has a 1.5% share in the category.
In color cosmetics, the company is the #3 brand in the country, with a 9.5% market share. It saw tracked channel sales climb 48% compared to category growth of 6%.
This was a blowout quarter from ELF on almost all fronts. Skincare is surging, while international sales have been strong. The company continues to take share, and margins are expanding.
Outlook
Looking ahead, ELF significantly raised its full-year guidance.
The company forecast fiscal 2024 sales to grow 37-39% to $798-802 million. That compares to a prior outlook calling for revenue growth of 22-24% to between $705-$720 million.
It guided for adjusted EBITDA of between $171-174 million and adjusted EPS of $2.19-2.22. That compared to a prior outlook of $144.5-$147.5 million in adjusted EBITDA and adjusted EPS in the range of $1.73-$1.76.
Discussing its outlook on its fiscal Q1 earnings call , CFO Mandy Fields said:
"So we feel that we're in a great position to raise guidance. As the first quarter out of the year, raising the top end of our guidance to 39% on the full year and 49% from an adjusted EBITDA standpoint. So really underpinned by the momentum that we continue to see in the business, the fundamentals remain strong. And really, we talked the key drivers of our business, our value proposition powerhouse innovation and our ability to engage our consumers that continues to drive our business forward. And so we feel really great about our full year guidance and our ability to continue to see that momentum move forward. In terms of Q2 specifically and framing around that. So if I look at our Nielsen tracked channel data, and I know you all get that information. Over the last 12 weeks, we have tracked about 60% growth. And so I would say that's probably a fair place to anchor for Q2, if we were going to kind of try to frame that a little bit for you. …Yes, we do have space expansion coming in the fall, particularly with Ulta ( ULTA ), CVS ( CVS ) and Walgreens ( WBA ) that we have talked about previously. And so really excited to see how that materializes. ... And then if I just think about space gains versus the productivity that we're able to drive, productivity is still the main driver of the results that we're seeing. Space gains are a great complement to that. But with our marketing and digital spend and the innovation that we've launched, that's really helping to drive productivity itself."
While management said it continues to monitor the macro environment, it noted the average price for its color cosmetics is just over $6 versus $9 for legacy brands and $20 for prestige. As such, it thinks it is well-positioned, even if the macro environment becomes more difficult.
As good as the quarter was, guidance was equally as impressive. That said, with tracked channel sales around 60% to start the quarter and shelf gains still ahead for the fall, there still appears room for the company to continue to beat and raise in upcoming quarters.
Skincare Acquisition
Earlier this week, ELF announced that it will acquire skincare brand Naturium for $355 million in cash and stock.
Naturium is projected to generate $90 million in revenue and adjusted EBITDA of $17 million for its fiscal year ending March 31st. The company has seen revenue grow at an 80% CAGR over the past two years. The deal is expected to add $48 million in net sales and $9 million in adjusted EBITDA for ELF this fiscal year.
On a call to discuss the acquisition, CEO Trang Amin said:
"We believe we're well positioned to accelerate Naturium's brand awareness. For context, Naturium's aided awareness is only about 5% today as compared to 60% or more for the leading skin care brands. We plan to lean on our disruptive marketing engine to accelerate awareness and reach new audiences as we've done with e.l.f. We also see opportunities to build on our retailer relationships to open distribution points for Naturium. In the U.S., Naturium is currently available in Target, Amazon and on Naturium. Given e.l.f.'s position as the #1 brand across Target's combined cosmetics and skin care categories, we see opportunity to further accelerate Naturium's business with this key retailer."
Naturium's average unit price is $18, versus $8 for the mass category and $31 for prestige. ELF's skincare average price is about $9, so the brand will be a bit more upscale than its current offerings. The brand is also about 80% millennial and 40% male, while ELF's core consumer has been more Gen Z and female.
ELF is a growth company, and adding another growth brand in skincare looks like a nice move, as this is a category the company is really looking to grow and take share. Putting the company's products into its marketing machine and increasing distribution should only help accelerate Naturium's strong growth, while giving its overall skincare line more scale. Meanwhile, the 21x EBITDA multiple it is paying seems reasonable, especially as its own stock trades at a much higher valuation.
Valuation
ELF stock trades around 40.4x the FY2024 (ending March) consensus EBITDA of $182.7 million and 34.6x the FY2025 consensus of $213.3 million.
It trades at a forward P/E of 57.4x the FY24 consensus of $2.38. Based on FY2025 analyst estimates of $2.70, it trades at 50.6x.
Analysts are projecting revenue to grow 36% this fiscal year and 14.5% next year.
Comparatively, Estee Lauder (EL) is valued at ~23x fiscal '24 EBITDA (ending June). Fragrance and cosmetics company Coty (COTY) has a multiple of ~12.3x '24 EBITDA (ending June), while cosmetic retailer ULTA is valued at ~11.8x FY'24 EBITDA (ending January).
Conclusion
Having recommended ELF at a much lower price earlier, I want to continue to hold the name. This is a recommendation to hold onto the stock, which I consider different from a neutral rating, which is more a stay on the sidelines recommendation.
While ELF is pretty highly valued, current estimates appear to remain low, and riding consumer product names during periods on distribution gains is usually a pretty good trade. Fiscal Q3 quarterly revenue estimates in particular need to move higher. Meanwhile, I like the Naturium acquisition, which can add additional growth and comes at an attractive price.
For further details see:
e.l.f. Beauty: Growth Momentum Set To Continue