e.l.f. Beauty Slashes Its Outlook as Retailing Demand Worsens

An industrywide contraction has made things more challenging for cosmetics specialist e.l.f. Beauty (ELF 0.38%) lately. Yet in recent earnings reports, the management team has expressed confidence that the business can keep posting robust sales gains through the market slump.

That outlook shifted dramatically this past week after the company announced a growth slowdown that forced executives to lower their full-year outlook.

More on that new forecast in a moment. First, let's take a closer look at the fiscal second-quarter numbers:

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

What happened this quarter?

Sales growth slowed as compared with the prior quarter and profitability slipped as well.

Image source: Getty Images.

Highlights of the quarter include:

• Revenue growth took a surprising step backward, falling to 6% from 9% in the prior quarter.
• Gross profit margin slipped to 64% of sales from 62%, which management blamed on foreign currency shifts that were only partially offset by new innovative product releases.
• Selling costs dropped as a percentage of sales, which helped protect operating income despite the weaker gross profit margin.
• The company's sharp drop in net income was mainly powered by a swing in tax liabilities.

What management had to say

In a conference call with Wall Street analysts, executives listed several drivers behind the sales growth slowdown that is on track to accelerate over the next few months. These include a lack of marketing support for the brand and poor execution around balancing the mix of new and staple products in its portfolio. The stumbles opened the door for better-positioned rivals to steal market share from the upstart. "e.l.f. is a 15-year-old brand," CEO Tarang Amin said, "compared to legacy players that are over 100 years old."

Management expressed optimism about the bigger picture, though. "We are still young in our brand-building journey," Amin continued, "and believe we have tremendous whitespace ahead of us."

Looking forward

Executives outlined a rebound plan that they hope will spark faster sales to its key retailing customers including Walmart, Target, and Ulta Beauty. However, these moves, which include elevated marketing spending and a more aggressive innovation pace, will take time before they start lifting results.

Meanwhile, weak retailing trends convinced e.l.f. Beauty to forecast lower sales in the third quarter and only slight gains in the fourth quarter. Overall, revenue is now predicted to rise in the low single digits in 2018 rather than the 6% and 8% range management had predicted back in May. Earnings should come in slightly lower, too, they said.

While cautioning that a lot could change between now and next year, executives again stressed that its rebound initiatives aren't likely to have a quick impact. "As a result," CFO John Bailey said in the earnings call, "we would expect low growth in 2019."

Amin backed up his bullish long-run comments by announcing a plan to personally buy $500,000 of e.l.f. Beauty stock and push his ownership level above its current 12%. Yet investors didn't share that enthusiasm and instead chose to focus on the cloudier picture for sales growth over the next few quarters. That pessimism contributed to an over-20% decline in the stock immediately following the earnings release.