The economy has all the earmarks of heading toward recession, and the stock market indices that had been going up in recent days are turning down once more. Both the S&P 500 and Nasdaq Composite indexes sit firmly in bear market territory, down 20% or more, but many individual stocks have fallen even harder, having lost half or more of their value.
Many, but not all. In fact, some stocks are soaring, seemingly finding the secret elixir to hitting new 52-week highs. Those winners are few and far between, and while some will likely crash and burn once again, others will continue running higher. Discount cosmetics stock e.l.f. Beauty (ELF 9.62%) is landing firmly in the latter camp, so let's see why this stock is not one that's just putting lipstick on a pig.
Image source: Getty Images.
Bucking the trend
Makeup and beauty care is often seen as recession-resistant, but cosmetics companies are not enjoying the benefits of the so-called Lipstick Effect, or the idea that consumers who are unable to buy upscale products because of an economic downturn still purchase smaller indulgences like lipstick.
The stocks of Coty, Estee Lauder, and Ulta Beauty are all trading lower year to date and over the past 12 months, and Olaplex Holdings is crashing hard and losing half its value after revising its sales forecast lower for the year.
Yet e.l.f. Beauty continues to race higher. It just hit a new all-time high of over $43 a share, and there's no reason to think it can't go higher still, because it brings something different to the table and has many pathways to growth.
Becoming the trendsetter
Since going public in 2016, e.l.f.'s business has expanded at a 10% compounded annual rate, even through the pandemic when others saw sales sag. There are a few factors that have it resonating with consumers, most notably its prices, which tend to be much cheaper than its competitors, but also its innovative marketing.
When people stopped going out during lockdowns, many of e.l.f.'s rivals used the opportunity to conserve cash and stopped reaching out to them. Why try to get people to buy if they're not wearing makeup? On the other hand, e.l.f. Beauty doubled down on its marketing efforts.
Mandatory masking, for example, created opportunities to offer soothing moisturizers and concealers to offset and hide the marks made by the face covering's straps. And because people were buying everything online at that point, e.l.f. invested not only in its platform, but in its loyalty program, It discovered that 60% of website visitors were customers new to the brand.
An unstoppable force
The result was that in the first quarter after the COVID-19 outbreak, as competitors' sales fell, e.l.f. Beauty posted its seventh consecutive quarter of growth. That has continued until today. In fact, e.l.f. reported fiscal first-quarter earnings in August that were its 14th straight quarter of net sales growth, up 26% year over year.
The company's products are also perfect for the current environment. Inflation and rising costs are affecting everyone, including the cosmetics company. But rather than raise its prices across the board as many businesses have done, the low-cost beauty care company left prices on many of its most popular products unchanged.
In an interview with The Wall Street Journal, CEO Tarang Amin said he made a conscious decision to buck the trend of passing along the costs. "We didn't touch a third of our items," he said. By leaving the prices untouched on some of its cheapest items, Amin said, "We wanted to be sure there was an entry into e.l.f. if someone was on a budget constraint."
The low-cost leader
One benefit e.l.f. has over companies like Ulta Beauty or Olaplex is that it doesn't have a capital-intensive salon business attached to its cosmetics (even as its products are sold in stores like Ulta).
As inflation pinches consumer wallets hard, trips to the salon are one of those things that can be cut out to save money, while those who do go are likely to spend less on extra services or take-home products. Particularly when there are low-price alternatives like e.l.f. Beauty products available at the salon or even the local pharmacy, it's clear which choice is more likely to come out on top.
Inflation pressure will continue to hound rivals and push consumers to e.l.f. And though e.l.f. Beauty's stock is not cheap on most traditional metrics such as price-to-earnings, price-to-sales, or even what it trades at compared to the free cash flow it produces, the cosmetics company is expanding so fast that it's likely to grow into the premium its stock presents.
The cosmetics company hit a new 52-week high, and that might not be the last one investors see.
