e.l.f. Beauty Inc. Grabs Market Share as Sales Rise 27%

Cosmetics specialist e.l.f. Beauty (ELF -6.43%) posted second-quarter results this week. The company enjoyed strong sales growth and generated profits in just its third quarterly report since going public last September.

Here's how the headline numbers stacked up against the prior-year period:

Data source: e.l.f. financial filings.

What happened this quarter?

The company's sales growth picked up to 27% from the prior quarter's 15% mark. That accelerating growth was paired with significant profitability gains despite ramped up spending aimed at helping the company expand its young business. The company said e.l.f.'s cosmetics market share was 4.4%, up from 3.8%. 

Image source: Getty Images.

Highlights of the quarter included:

• e.l.f. bucked weak overall industry trends, with sales spiking to $56 million due to increases both at its core retailing partners and in its online segment.
• Gross profit margin jumped to 64% of sales from 57% a year ago as cosmetics customers snapped up many of its new products.
• Expense growth outpaced revenue gains, and so the improvement in operating margin wasn't as strong as the 7-percentage-point jump in gross margin. Instead, operating margin ticked up to 6% from 1%.
• Operating cash amounted to an $18 million outflow over the past six months thanks to rising payouts in stock-based compensation, taxes, and accounts payable.
• Adjusted earnings, which strips out the effect of last year's initial public offering, rose to $10.5 million, or $0.21 per share, from $4.3 million, or $0.09 per share.

What management had to say

Executives focused their comments on e.l.f.'s spiking sales and improving profitability. "We are pleased with our strong progress in Q2," CEO Tarang Amin said in a press release, "highlighted by a 27% increase in net sales and over 700 basis point expansion in gross margin."

"Our performance continues to demonstrate the successful execution of our mission to make luxurious beauty accessible for all," Amin continued.

Looking forward

Amin and his executive team affirmed their full-year outlook on both the top and bottom lines. Management still sees revenue ranging from $285 million to $295 million for sales growth of 24% to 28% over 2016.

Meanwhile, e.l.f. plans to continue spending aggressively on long-term growth initiatives like a brand-building effort that's focused on social media and digital content. These investments will keep a lid on earnings while the company prioritizes market share gains. Yet net income is set to rise slightly in 2017, to between $21 million and $23 million.

The healthy gross profit trends support the idea that e.l.f. can generate improving operating results despite its focus on the value segment of the market. Most of its cosmetic products retail for $6 or less, which helps promote trials and experimentation by its young customer base. These results suggest there's plenty of room in that figure for healthy profit margins.

As long as the company's rapidly changing portfolio continues delivering products that resonate with customers, it should keep stealing market share from higher-priced rivals as it seeks to build scale in the industry. With sales up 20% through the first six months of the year, though, a lot is riding on e.l.f.'s performance leading up to -- and including -- the upcoming holiday shopping season.