Cosmetics retailer e.l.f. Beauty (ELF 1.37%) has been one of the fastest-growing consumer brands in recent years. The stock has tripled over the past three years following the company's rapid expansion in a growing cosmetics market. But 2024 has been challenging for many retailers, as stubbornly high inflation and other macroeconomic headwinds hurt consumer spending.
Investors were caught off guard after e.l.f.'s quarterly revenue growth decelerated sharply over the last two quarters. Management expects full-year sales growth between 25% to 27%, which is well off the pace of the 50% year-over-year increase reported last quarter. The stock is currently down 25% year to date.
With another earnings report coming on Nov. 6, the company could disappoint investors again with its outlook, which could send the share price to new lows. On the other hand, the stock's lower valuation could set up a post-earnings rebound if the company's results are better than expected.
Let's consider the positives and negatives of buying the stock before the report, starting with reasons why investors should wait.
It could get worse before it gets better
Some analysts are concerned about weakening demand heading into the fall. For example, analysts at Bank of America and Piper Sandler have noted weak back-to-school shopping trends on top of a soft retail spending environment, which could make it more challenging for the company to meet investors' growth expectations.
Another problem is margin performance. The company reported a slightly higher gross margin last quarter, reflecting favorable currency exchange rates, lower transportation costs, cost savings, and price increases in international markets. However, management is planning to maintain high marketing spending in the near term that could impact margins and earnings growth.
For the full year, the consensus analyst estimate has e.l.f.'s earnings up just 10% year over year. On top of weakening revenue growth, the low double-digit earnings growth may weigh on the stock's performance heading into next year.
Why the stock is a long-term buy
Despite near-term headwinds, it's difficult to pass on e.l.f. Beauty stock at these lower share prices due to attractive growth prospects over the long term.
Leading cosmetics brands generate repeat sales from customers, and the market offers solid growth prospects. Statista projects the beauty and personal care market to grow 3% per year to reach $756 billion by 2029. As soon as Wall Street sees the first sign of a recovery in the cosmetics market, e.l.f. Beauty stock could soar.
e.l.f.'s market share doubled over the last few years, making it the No. 2 mass brand on a dollar basis. The company is just getting started on international expansion, where international sales grew 91% year over year last quarter.
The stock is trading at a forward price-to-earnings ratio of 30 on this year's earnings estimate, which seems fair for a business with double-digit growth prospects over the long term. The brand's appeal is centered around selling quality products at value price points, which is clearly resonating with consumers across multiple geographies.
It's possible the stock may hit new lows before it heads higher, but patient investors can earn excellent returns over the next five years from these share prices.
