Artwork by Jon Krause
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Covid-19 vaccines are rolling out slowly but surely across the United States, and many people fantasize about what they will do first after taking a hit. Will it be an exotic vacation or just dining out? Yet there is one simple, inexpensive habit that many will pick up even faster: applying lipstick. This is good news for
elf beauty
.
Stay-at-home orders have reduced demand for makeup during the pandemic. Cosmetics haven’t completely gone out of fashion; people should always look good in video calls and social media selfies. But sales are down about half from peak levels in fall 2020, according to McKinsey.
Now with an imminent economic reopening, the picture is brightening for cosmetics companies and their stocks. elf Beauty, based in Oakland, California (ticker: ELF), a value-priced brand sold in stores such as
Target
(TGT) and
Ultimate beauty
(ULTA), is uniquely positioned to benefit from the return to work and play, and the next round of stimulus checks hitting bank accounts. Elf, which trades at nearly $28 and has a market capitalization of $1.4 billion, is also expected to benefit from a growing fanbase and continued product innovation.
“There’s a big beauty awakening,” says Piper Sandler analyst Erinn Murphy, who upgraded their rating on the stock this month to Overweight and raised its price target to $30. “Elf led the charge, despite a difficult environment, adding little moments of joy to his collection.”
Elf is mainly known for its cheap but elegant products. About half of its sales, which totaled $283 million in the fiscal year ended March 2020, came from basic offerings, such as sponges and makeup brushes, and basic cosmetics such as face primers and concealers. The company has also made progress in selling premium products under brands such as W3LL People, acquired last year, and Keys Soulcare, a line developed with singer/songwriter/musician Alicia Keys that launched in January.
Note: The fiscal year ends in March. E=Estimate
Source: FactSet
“Not only do we think it helps insulate the business long-term in the event of one category or price point lagging another, we also think it can take best practice and everyone’s learnings to apply to their other brands,” writes Truist Securities. analyst Bill Chappell. He’s particularly optimistic about Keys Soulcare because it has the potential to “generate extremely strong brand loyalty and consumer engagement beyond just products.”
Even during the lockdown, consumers logged into elf, whose loyalty program recently had 2.3 million members, up 40% year-over-year. These buyers represent the bulk of the company’s digital sales, which generated 16% of December quarter revenue, and underscore elf’s success on social media like Twitch. “Consumers are responding well to how we’ve created a new category of beauty products, Soulcare,” says Mandy Fields, Chief Financial Officer. “We are seeing great reviews and ratings for our product. We are also seeing strong engagement on platforms like Instagram.
This online success is what attracted Wayne Ferbert, who leads the actively managed company
AdvisorShares Alpha DNA Equity Sentiment
listed index fund (SENT). “This space is very digitally traceable, and we’re seeing a digital trajectory that Wall Street has yet to catch up to,” he says. “That’s why we own it. It’s a good growth story.
Ferbert highlights elf’s third fiscal quarter: the stock fell more than 6% in after-hours trading on Feb. 3 after the company reported earnings of 22 cents per share, missing analysts’ forecasts . But elf raised its revenue outlook for the full year; it now expects sales to rise 7% to 9%, to $304 million to $308 million, ahead of consensus estimates. “That’s a pretty bold indication of a quarter you’re missing,” Ferbert says. But the digital [data] absolutely supports this direction.
Analysts agree with that view, as earnings per share estimates for the March quarter more than doubled on the bottom to seven cents. Even so, at 40 times forward earnings, elf stocks are trading at a discount to peers such as
Quoted
(COTY) and
Estee Lauder
(EL). This is despite projected EBIT (earnings before interest and tax) margins of 14.2% in FY2021 and 14.8% in FY22. Similarly, elf could see a return on assets of 6 .9% in the current fiscal year and 7% next year. Both metrics are well ahead of their five-year averages.
Earnings could rise about 10% in fiscal 2022, to 70 cents per share, on revenue growth of 7.6%, to a record $331 million. Fields says she sees “significant potential” as vaccines roll out and “consumers begin to return to more normal social activities.” Elf has a history of beating the estimates; the third fiscal quarter was the first time since its initial public offering in 2016 that earnings did not beat consensus by a double-digit margin. If FY2022 earnings are 10% better than estimates, applying Estée Lauder’s price-earnings ratio of just over 43x would put the stock above $33, down from $27, $75 at Thursday’s close.
We’d call it a makeover if the elf didn’t already look so good.
Write to Teresa Rivas at [email protected]
