2023-11-06 17:04:32 ET
Summary
- e.l.f. has seen strong growth in 2023, as shares have seen a correction after being overextended in September.
- The company's focus on millennials and affordable beauty products has driven adoption of the brand.
- Continued growth and an interesting deal look compelling, but expectations are still somewhat elevated here.
Early in September, I believed that shares of e.l.f. Beauty, Inc. ( ELF ) had seen a beautiful run higher. The beauty company successfully targets (millennials) customers through e-commerce and retail channels via the savvy usage of social media, with additional traction being driven by its beauty products being available at accessible prices.
The business has seen a strong growth acceleration so far in 2023, albeit accompanied by even stronger share price gains, and arguably momentum and confidence among management. Over the past couple of weeks, shares have fallen some 30% while the business continues to grow at an impressive pace, pushing down earnings yields a great deal, although I still find it a bit too early to get involved here.
Eyes, Lips & Face
The paragraph header tells you what e.l.f. stands for, as the new beauty brand created a buzz when it went public in the fall of 2016. The focus on younger customer cohorts and beauty at accessible prices drove adoption of the brand.
When the business went public, e.l.f. was already profitable, in fact it posted GAAP operating profit margins of 13% on a near $200 million sales base in 2015. The buzz meant that shares traded in the twenties around the time of the IPO, but shares fell soon thereafter, in fact shares mostly traded in their teens until the onset of the pandemic. This came while 2019 sales had risen to $283 million, but margins were trailing the top line growth.
The pandemic unleashed strong momentum, both in the business and its shares. Fiscal 2022 sales (ending in March that year) showed that revenues grew to $392 million, on which operating profits of $30 million were reported.
2023 sales rose 47% to $579 million as GAAP operating profits more than doubled to $68 million, with realistic earnings posted around a dollar. Momentum was evident towards the end of the year, with fourth quarter sales up 78% on the year, providing the foundation for a solid 2024 outlook.
The company originally guided for 2024 sales at $705-$720 million, with adjusted earnings seen at $1.73-$1.76 per share, up modestly from a $1.66 per share number in 2023. Arguably, this looked quite conservative given the growth reported in the final quarter of 2023.
2023 - Very Strong
e.l.f. Beauty, Inc. already was a $50 stock at the start of 2023, and shares have seen huge momentum ever since. Shares rose to the $100 mark by June after the company posted its fiscal 2023 results , even as the 2024 outlook looked conservative. Needless to say, with adjusted earnings seen around $1.75 per share, and realistic earnings coming in lower, multiples have expanded a great deal.
In August, e.l.f. posted a 76% increase in first quarter sales to $216 million as GAAP operating profits were reported at $60 million, yielding a GAAP earnings number of $0.93 per share. In fact, after first quarter adjusted earnings already came in at $1.10 per share, the company hiked the full year earnings guidance to about $2.20 per share (as there is a cyclical element in these numbers), while full year sales were now seen at a midpoint of $797 million.
Shares peaked at $138, around the time I wrote the article in September, with 57 million shares granting the business a $7.8 billion enterprise valuation, factoring in an $83 million net cash position. This was equal to about 10 time sales and a very demanding multiple based on earnings power of around $2 per share, albeit that these are adjusted earnings, and albeit potentially based on a conservative outlook.
In fact, momentum drove e.l.f. into signing a $355 million deal to acquire skincare brand Naturium, a business founded as recent as 2019, on track to generate $90 million in revenues this year. With some $70 million of the purchase price to be paid in stock, pro forma net debt of around $200 million remained very manageable.
Despite the relative compelling sales multiple, after buying a rapidly growing business at just 4 times sales, while paying (in part) with stock of a business valued around 10 times sales, it was the overall valuation which became far too demanding to see any reasonable appeal.
Resilient Growth
On the first day of November, e.l.f. announced a 76% increase in second quarter sales to $215 million and despite the fact that top line numbers were in line with the first quarter, adjusted earnings fell on a sequential basis to $0.82 per share, with GAAP earnings reported at $0.58 per share, albeit that both metrics were up in a huge fashion compared to the same period last year.
Net cash balances rose to $110 million for the quarter ending on September 30, as the deal with Naturium closed on the 4th of November, making that pro forma leverage is seen around $185 million, and that is after adjusted EBITDA totaled $135 million in the first half of the year already.
The company raised the full year sales guidance by $104 million to $896-$906 million, with EBITDA seen near $200 million. Full year adjusted earnings are now seen twenty-eight cents higher, expected to come in between $2.47 and $2.50 per share based on a share count of 58 million shares.
Part of the big guidance hike comes from the acquisition of Naturium. For the remainder of the fiscal year (or about 5 months in this case) the business is set to add $48 million in sales, $9 million in EBITDA and contribute four cents to adjusted earnings per share. This reveals that the bigger part of the guidance hike seems from the cautious guidance in the first place and the continued momentum of the core business.
What Now?
Since September, we have seen quite some advancements in terms of appeal. Shares are down 30% to levels below the $100 mark, as this reduction in expectations has come alongside a strong second quarter earnings report, and a convincing hike in the full year guidance.
Given this appeal has definitely improved a great deal, but with realistic earnings likely trending around $2 per share, it is needless to say that multiples are demanding at multiples in their $40s.
On the positive side, there appears to be room to the upside in terms of the full year earnings guidance which is comforting, after a strong second quarter. That again, I am mindful of the pressure on discretionary spending at large, and the fact that e.l.f. is an established player which has seen huge momentum this year, certainly its stock, leaving shares perhaps susceptible to a reversal of (demand) trends as well here.
While appeal has increased a great deal, I look forward to further stock price declines and continuation of growth to potentially get involved with e.l.f. Beauty, Inc. shares at more interesting levels.
For further details see:
e.l.f. Beauty: Looking Prettier Already