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Why e.l.f. Beauty Stock Dropped 23% Wednesday

By Rich Smith – Updated Apr 21, 2019 at 9:47PM

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e.l.f. retells an old story -- and, unfortunately, it's no fairy tale.

What happened

One year ago, cosmetics manufacturer e.l.f. Beauty (ELF 1.07%) reported a big earnings beat to end 2017, yet saw its stock drop precipitously in response to a warning from management that 2018 wouldn't be nearly as magical for e.l.f.

One year later, e.l.f. just did almost exactly the same thing.

e.l.f. may not have earned a GAAP profit in the fourth quarter, but it reported "adjusted earnings" of $0.30 per share, well ahead of the $0.21 that Wall Street had been looking for. Sales missed estimates, but even worse for e.l.f., management warned that its next set of sales will come in between $55 million and $58 million, and thus below the Wall Street consensus.

Woman reading storybook to child

Image source: Getty Images.

So what

All this bad news has e.l.f. shares trading down 23.3% as of 1 p.m. EST. Do they deserve to be?

I think so.

Sales for the final quarter of fiscal 2018 declined 4%, steepening a slide that saw sales for the full year decline only 1%. Gross margins improved to 60% in Q4, but still didn't measure up to the 61% margin e.l.f. had for the year as a whole. Earnings were cut more than in half in both periods -- $0.20 for the quarter and $0.32 for the year.

Check out the latest e.l.f.earnings call transcript.

Now what

e.l.f. did itself no favors by then proceeding to announce that its first-quarter 2019 sales will fall about 16% short of the $67 million that Wall Street is expecting, that earnings will be only $0.04 to $0.06 per diluted share, also well below the $0.11 Wall Street consensus -- and that these will be pro forma earnings.

Oh, and CFO John Bailey is stepping down at the end of next month, as well. As fairy tales go, I fear e.l.f.'s is one where no one ends up living particularly happily ever after.

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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