There is no denying the market did not like e.l.f. Beauty's (ELF) fiscal third-quarter earnings report. Despite reporting higher sales and growing market share, ELF stock plunged as profits missed expectations and management lowered guidance for the coming year.
Sales were solid for e.l.f Beauty. Net sales surged 31% from the year-ago period to $355 million as both the retail and e-commerce channels delivered in the U.S. and abroad.
Gross margins also widened 40 basis points to 71%, while higher selling, general, and administrative expenses sapped operating profits. It caused operating margins to drop from almost 12% to below 10%.
Coupled with a bigger tax bill and it hit the beauty company's bottom line hard. Net income fell 36% on a GAAP basis, but only rose 0.3% on an adjusted basis. It left adjusted earnings of 40.74 per share unchanged from last year, but $0.02 per share short of analyst expectations.
Arguably more damaging was management's guidance for the full fiscal year.
CFO Mandy Fields said that given the weak January it just experienced, e.l.f. Beauty was now expecting revenue to rise 27% to 28% for the full year compared to the 28% to 30% it previously expected.
Earnings were also recast lower as a result. EPS of $3.47 per share to $3.53 per share was substantially revised lower to a range of $3.27 to $3.32 per share. It implies the fourth quarter will be exceptionally weak
The stock market was not forgiving and savaged ELF stock. It is down 20% in midday trading.
Despite the somewhat dour results and outlook, e.l.f. Beauty is still a stock to buy for patient, long-term investors.
The cosmetics stock is still a high-growth company as its rapidly rising sales performance indicates. Even during the recent, historically high inflation era, e.l.f.'s business was robust.
There are still plenty of levers it can pull to accelerate.
Color cosmetics -- things like eyeshadow, eyeliner, and blush -- it has rocketed to the No. 1 position with a 14% share of the market. e.l.f. also handily outperformed the segment. Where the category fell by 5%, e.l.f.'s business was up 16%, increasing its market share by 220 basis points. It now holds double the market share it held three years ago.
In the digital space, the beauty company's strength is showing, with consumption trends rising 30% in the current quarter on top of triple-digit gains last year. Digital channels also drove 24% of e.l.f.'s consumption in Q3.
Then there is its presence in Ulta Beauty (ULTA). It launched its Naturium brand in Ulta as well as an exclusive launch of lip oil. Both have already been resounding successes with the business expanding week-over-week. e.l.f. looks forward to expanding its presence there.
It is also seeing good growth on Amazon (AMZN) and says its introduction into Walmart (WMT) is off to a strong start.
There are going to be headwinds for the immediate future, to be sure. It blamed its performance in Q3 in part on the wildfires in California as well as the proposed ban of the TikTok app. Social media is a big part of how cosmetics trend.
Cosmetics are a resilient business, even during economic recessions. The so-called Lipstick Effect explains how beauty products are seen as an affordable luxury in tough times.
ELF stock has crashed 60% over the past year, but at such discounted prices where it is revisiting levels not seen in two years, e.l.f. Beauty has much more to offer if you're an investor with the patience to wait for the turnaround.
