Investment Thesis

e.l.f. Beauty (NYSE: ELF) has completely conquered the pandemic. They have had excellent revenue growth as well as astounding margins. They have reinvigorated excitement in drugstore makeup with exceptional quality and have branched out relatively well into skincare. At the current price point of $22, the stock looks expensive having gone up nearly 18% since November 6th. With the P/E ratio being exceptionally high at 118, the stock could be overvalued despite the generous sales numbers. At this point, it could be best to hold off and wait for a nice dip, but overall the stock is an incredible one to own.


e.l.f. Beauty has been a drugstore mainstream phenomenon. Oftentimes being accused of making dupes for more expensive products such as e.l.f.’s bestselling Poreless Putty Primer, a supposed counterfeit of the Tatcha The Silk Canvas primer. But what e.l.f. has done cannot be understated. e.l.f. Beauty has out-marketed and generated excitement for lower-priced makeup, a feat few brands have been able to do in recent years. This is not to say that consumers are not enjoying higher-priced makeup as illustrated by Estée Lauder (NYSE: EL), but e.l.f. was able to increase market share and thrive during a time when makeup companies were stalled.



International Beauty Reexamined

I previously talked about the rise of international beauty (mainly skincare) when discussing Estée Lauder and the drawbacks they will face. However, e.l.f. is in a slightly better position when it comes to competition. With international beauty products, especially Korean and Japanese products, entering the mainstream market at low costs and with good quality formulations, it has brought an increased spotlight on skincare ingredients and results obtained. The difference between Estée Lauder and e.l.f. Beauty is that e.l.f. has price points comparable to the new products available.

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Also, for the time being, international beauty products are mainly competing for older audiences. e.l.f. remains unbothered with competing for mature audiences and in that way they have actually enraptured them. e.l.f. Beauty has a fairly diverse customer base which is more easily gathered when you sell at low prices, but also they have makeup products that appeal more to older audiences while having skincare products that compete more for younger audiences. They have a wide variety of packaging styles that ranges from minimalist to youthful, allowing for wider marketing campaigns. This is a great advantage as e.l.f. is not tied down with labels that other cosmetic companies face whether M.A.C. Cosmetics is designated for older customers or Clean and Clear is meant for younger customers. In this case, e.l.f. has managed to be associated with all groups of people, creating a wider market for them.


Keys Soulcare

The big question mark for the company at the moment happens to be Keys Soulcare, a partnership with singer Alicia Keys. The company’s argument tends to be that Keys Soulcare is higher priced indicating bigger margins, but also that they target a unique corner of the wellness space. Product releases are slated for early December, with big launches in January 2021, the core focus being skincare. Obviously, skincare is a really large industry, but in order to gain market share, Keys Soulcare needs to really innovate. That’s what brought international beauty such as K-Beauty to the forefront as they really changed the game and strived to create new, exciting products at low price points. However, Keys Soulcare based on marketing seems more inclined to compete with the likes of Bath & Body Works of L Brands (NYSE: LB) which is a smart strategy to take. But Bath & Body Works is notorious for low pricing and they have indicated that the brand will be on the higher price point side. Wellness as a whole has usually been a more luxury category, but with brands like Bath & Body Works branching out with their Aromatherapy line (while not more expensive, but has a more luxury feel), it may be difficult for Keys Soulcare to penetrate the market. At the very least, e.l.f. is making an effort to penetrate the specialty care business in an industry dominated by celebrity endorsements.

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Numbers + Valuation

Despite being an inexpensive cosmetics retailer, e.l.f. Beauty has incredibly high margins with a gross profit margin of nearly 65%.

ChartData by YCharts

Compared to competitors, e.l.f. delivers significantly lower returns on equity; however, comparatively, e.l.f. was the only one able to deliver positive revenue growth in 2020.

ChartData by YCharts
ChartData by YCharts

e.l.f Beauty was well-positioned to take advantage of the accelerating skincare trend with affordable skincare options and were also already proponents of the natural makeup movement.

In terms of P/E ratio, they are significantly higher than some competitors at 118.32 and are valued almost 3x higher than Ulta Beauty (NASDAQ: ULTA). Considering the size and dominance of Ulta, this is especially surprising.

ChartData by YCharts

At this point in time, cosmetics retailers have hit some of their highest valuations. While e.l.f. Beauty is delivering incredible revenue growth and high margins, the price is still very expensive. e.l.f. is also the highest-ranked in terms of price to free cash flow.

ChartData by YCharts

But e.l.f. also has the lowest price-to-book value at 4.

ChartData by YCharts

The consensus, although fairly overvalued, e.l.f. cosmetics is a fairly good stock to have. The 52-week low is $7.58, and while it is dubious it will reach that level again, the current price is around $22. This stock has run up nearly 18% since November 6th. And the possibility of it reaching $19 again is very much still in play, especially with very little information and results obtained from Keys Soulcare. e.l.f. Beauty is a great stock to have in your portfolio; however, at the moment, it is a bit on the pricier side. I would hold off for a short period of time and aim for that pre-run up phase of near $18 to $19.

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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.


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