Cosmetics specialist e.l.f. Beauty (NYSE:ELF) announced solid sales growth, improving profitability, and rising market share in third-quarter earnings results this week. However, the company tempered that good news by sharply reducing its full-year outlook as competition heats up in the beauty industry.

More on that updated 2017 forecast in a moment. First, here's how the latest headline numbers stacked up against the prior year:

 Metric

Q3 2017

Q3 2016

Year-Over-Year Change

Revenue

$72 million

$56 million

28%

Net income

$5.9 million

($2.4 million)

N/A

Earnings per share

$0.12

($73.13)

N/A

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

What happened this quarter?

The 28% sales spike represents the second straight acceleration in revenue growth for the beauty products retailer, and it was paired with healthy market share and profitability trends that pushed the company into the black for the quarter.

A woman applying face cream.

Image source: Getty Images.

Highlights of the quarter include:

  • e.l.f. outpaced industry growth thanks to strong gains in both its retailing and online sales channels.
  • Gross profit margin improved to 60% of sales from 58% a year ago, yet profitability fell from the prior quarter's 64% mark.
  • Adjusted expenses dipped to 40% of sales from 43%, which helped adjusted earnings rise to $17.3 million from $11.7 million.
  • Cash on hand fell to $5.7 million from $21 million, in part due to a large increase in inventory.
  • The company reached net profitability thanks mainly to rising gross profits and a decrease in interest payments.

What management had to say

"We are pleased with our third quarter results highlighted by a 28% increase in net sales and strong earnings growth," CEO Tarang Amin said in a press release. These improvements were impressive given the recent slowdown in the industry, Amin said. "In a category currently experiencing headwinds, we continue to gain market share driven by the successful execution of our strategy, and mission to make luxurious beauty accessible for all."

Looking forward

e.l.f.'s updated forecast implies a far weaker holiday season than executives had been targeting. Rather than rising by between 24% and 28% for the full year, sales are now projected to increase by 17% to $270 million. That translates into $82 million of sales over the holiday period, which would represent 7% growth, well below the rate that the company has achieved in each of the last four quarters.

Executives said the downgrade reflected weaker industry demand trends, along with delays associated with new product launches and expanded distribution deals.

On the bright side, the company raised its adjusted profit forecast to $28 million, or $0.55 per share, from the prior target of between $21 million and $23 million, or a range of $0.40 per share to $0.43 per share. A focus on improving profitability should help the company shore up its finances even through what is shaping up to be a brutally competitive holiday shopping season.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends e.l.f. Beauty, Inc. The Motley Fool has a disclosure policy.