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Stunning results from one of my ‘must-own’ shares

August 3, 2023

This is a wonderful chart, just a blazing uptrend that still looks to be at an early stage. The company is growing explosively, has a sensational story, loads of magic and a massive ‘something new’. All this combined make it a must-own and not a bad share for a bold investor to play the Kamikaze game.

ELF is disrupting the US and the world’s beauty market. It reminds me a little bit of what Dell did to the personal computer market in the 1990s when a direct sales model and aggressive pricing led to dramatic growth in sales and market share.

I am not a big buyer of beauty products but I have noticed that they are often very expensive, presented to the world in a haze of scientific mumbo-jumbo and to my mind prey on the endless gullibility of the female sex. (Apologies to the woke crowd for that one but I could not resist it).

ELF seems to do the whole thing in much the same way but at dramatically more affordable prices and is growing sales and market share at an incredible rate as a result. And just for the record I am not denying that a well made up woman is not a thing of wonder and being married to a woman who had many sisters I know they have tremendous fun getting ready to go out and spend almost as long on that as they do at whatever event they are attending. Whatever turns you on but obviously this is a fantastic situation for a company which sells beauty products with a carefully nurtured brand more cheaply than anyone else in town.

The latest results for ELF were sensational.

We’re off to an incredibly strong start this fiscal year, delivering Q1 results well ahead of expectations.

Q1 marked our 18th consecutive quarter of net sales growth, putting e.l.f. Beauty in a select group of consistent, high-growth consumer companies. We are one of only five public consumer companies out of 274 total that has grown for 18 straight quarters and averaged at least 20pc sales growth per quarter. In Q1, we grew net sales by 76pc, increased gross margin by 280 basis points and delivered $74m in adjusted EBITDA, up 135pc.

Tarang Amin, CEO, E.L.F. Beauty, Q1 2024, 1 August 2023

The group is roaring ahead on all fronts.

Last quarter, we spoke about the three areas with significant runway for growth in color cosmetics, skincare and internationally. Let me update you on our progress in Q1. In color cosmetics, we continue to outperform category trends. In Q1, e.l.f. grew 48pc in tracked channels, well above category growth of 6pc. We increased our market share by 260 basis points. Out of nearly 800 cosmetics brands tracked by Nielsen, e.l.f. is the only brand to gain share for 18 consecutive quarters. As great as the share growth has been, we see an opportunity to double our market share over the next few years. Nationally, e.l.f. is the number three brand today with approximately 9.5pc share.

In Target, our longest-standing national retail customer, we are already the number one brand with nearly 18pc share. We are focused on replicating our success at Target across other key retailers. In skincare, we also continued to outperform the category. In Q1, e.l.f. SKIN grew 127pc in tracked channels, well above category growth of 10pc and was the fastest growing among the top 20 skincare brands. We grew our market share by 75 basis points. e.l.f. SKIN is the number 14 brand today with a 1.5pc share and a significant runway with the number one brand holding over 15pc share.

Looking outside the U.S., we grew our international net sales 79pc in Q1, fueled by strength in both the UK and Canada. e.l.f paced category growth by nearly 10x in the UK and by over 3x in Canada, fueling market share gains in each. e.l.f. is the number six brand in each of these markets with about a 5pc share as compared to the number one brand which has over 17pc share. We continue to build our international team as we aim to expand our brands globally. Across categories and geographies, the three fundamental drivers of our business remain the same. Our value proposition, powerhouse innovation and disruptive marketing engine.

Tarang Amin, CEO, E.L.F. Beauty, Q1 2024, 1 August 2023

The products are very good value.

The average price point for e.l.f. is a little over $6 today as compared to over $9 for the legacy mass cosmetics brands and over $20 for prestige brands. Unlike these higher priced brands, our pricing strategy focuses on everyday value instead of broad-based promotions. We believe our value proposition creates accessibility in the category. Allowing more consumers to enjoy the best of beauty. 

Tarang Amin, CEO, E.L.F. Beauty, Q1 2024, 1 August 2023

But Elf is not just a distributor, it is also an innovator and this makes it hard for rivals to compete.

The second driver of our performance is our powerhouse innovation. e.l.f. has the number one or two position across 16 segments of color cosmetics, which collectively make up over 75pc of e.l.f. Cosmetics sales. We delivered the strongest sales growth and share gains in these segments in Q1.

Our innovation approach is to build growing product franchises instead of one-and-done launches. Our four largest franchises, Camo, Putty, Halo Glow and Power Grip, have grown year-after-year. As we launch new innovations within each, the entire franchise has grown. In Q1, we continue to fuel the Putty franchise with the launch of our Liquid Poreless Putty Primer price at an incredible value of $10 compared to a prestige item at $54.

Tarang Amin, CEO, E.L.F. Beauty, Q1 2024, 1 August 2023

I am such an innocent. What are these products? But it is obvious there is an army of females out there who want them. Vive la difference as Maurice Chevalier noted so wisely.

And they are still blazing away.

We also launched our Putty Color-Correcting Eye Brightener, extending the Putty franchise into the eye category for the first time. We’re using this approach to disrupt the skincare category as well. Our latest Suntouchable franchise is a great example. In January, we launched Suntouchable! Whoa Glow SPF 30 priced at an incredible value of $14 compared to the prestige item at $38. Whoa Glow quickly rose to be one of our best selling skincare SKUs [stock keeping units]. We expanded this Suntouchable franchise further in Q1 with the launch of our Invisible Sunscreen SPF 35 and are All Set for Sun SPF 45.

Tarang Amin, CEO, E.L.F. Beauty, Q1 2024, 1 August 2023

Last but not least these guys are brilliant at marketing.

The third driver of our performance is our ability to attract and engage consumers with our disruptive marketing engine. We continue to generate buzzworthy moments for our community and reach new audiences with our collaborations.

In June, we launched limited edition collaborations with beauty content creator Mikayla Nogueira in honor of her wedding. With over 17m followers across her social platforms, Mikayla has been named one of the top beauty influencers. Our limited edition Lip Duo Collaboration sold out in 18 minutes on elfcosmetics.com, our fastest ever sellout of a collection.

We also saw our highest ever spike in site traffic during the launch hour, and nearly 75pc of purchasers are new to e.l.f., our highest new purchaser rate on an innovation product in the last two years. This quarter, we leaned further into entertainment and short form digital content with a release of two new series across her social channels, Makeup Over Makeup and Vanity Table Talk. The first episode of Vanity Table Talk featured cultural icon and award-winning actress, Jennifer Coolidge, who inspired this series with her comedic quips while filming our chart topping commercial for the big game earlier this year.

Tarang Amin, CEO, E.L.F. Beauty, Q1 2024, 1 August 2023

Amin even has something to say about ELF’s competitive moat.

While beauty is a category of comparatively low barriers of entry, very few brands have been able to scale. For context, of over 1,800 cosmetics and skincare brands tracked by Nielsen, only 58 have surpassed $25m in annual retail sales over the past three years, and only 28 are greater than $100m.

e.l.f. has been one of the few brands able to scale through the areas of advantage we bring to the table. With e.l.f., consumers can have premium quality beauty products at accessible price points with broad appeal that are vegan, cruelty free, clean, and fair trade certified. These superpowers are underpinned by several other areas of competitive advantage. Our supply chain offers the best combination of cost, quality and speed in our industry and is well integrated with our innovation engine to launch franchise building Holy Grails.

Our engagement model gives us the ability to activate millions of consumers against this innovation. And perhaps most importantly, we have a talented high performance team and culture. While other beauty brands can try to replicate some of these, we believe the unique combination of our areas of advantage form our competitive mode and fuel our ability to win in fiscal 2024 and beyond.

Tarang Amin, CEO, E.L.F. Beauty, Q1 2024, 1 August 2023

They are understandably optimistic.

As great as these results have been, we are even more excited for the future. The significant white space we see across color cosmetics, skincare and internationally gives us confidence that we are still in the early innings of unlocking the full potential for our brands.

Mandy Fields, CFO, E.L.F. Beauty, Q1 2024, 1 August 2023

Strategy – you must own this one

Decades ago I read a thesis on what makes growth stocks successful year after year. The not astonishing conclusion was that companies get into a virtuous circle of growth and this can persist for a surprisingly long time.

ELF feels to me like an early stage winner and the chart is compatible with that interpretation. It seems to be well managed and it is noticeable that rival companies like Estes Lauder have charts that are almost as weak as ELF is strong.

The company has an impressive mastery of digital marketing.

Our digitally led strategy continues to serve us well. Q1 digital consumption trends were up triple digits year-over-year. Digital channels drove 18pc of our total consumption in Q1 as compared to 14pc a year ago. We see opportunity to increase our digital penetration, particularly as we further enhance our Beauty Squad Loyalty Program. Beauty Squad now has over 3.9m members with enrollment growing over 25pc year-over-year. Our loyalty members drive almost 80pc of our sales on elfcosmetics.com and continue to have higher average order values, purchase more frequently, have stronger retention rates and are a rich source of first party data.

Mandy Fields, CFO, E.L.F. Beauty, Q1 2024, 1 August 2023

ELF is a master of outsourcing. Its products are made in China, 60pc of sales are made through three retailers, Target, Walmart and Ulta Beauty with another large chunk of sales online at their own e-commerce sites and through third part its such as Amazon.

This makes them an asset light brand building, innovation and marketing operation much like Coca-Cola or Apple. It is a spectacular formula for those who get it right. The company has surprisingly few employees, 339 at last count, which makes it both flexible and profitable and a very exciting company to work for.

Share Recommendations

E.L.F. Beauty. ELF Buy @ $133

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