ELF Q1 2024 earnings

Investment Analysis Clubs Saul’s Investing Discussions
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ELF reported fiscal year Q4 2024 earnings for the calendar year Q1 2024 on May 22.

They had guided for full year guidance on the previous Q3 call so all of the Q4 numbers had to be implied.

Guides vs Actuals,
Full year 2024 net sales 69 - 71% → actual 77% (1024M)
Full year 2024 adj EBITDA 218 - 200M → actual 235M
Full year 2024 adj net income 164 - 166 → actual 184M
Full year 2024 adj EPS 2.84 - 2.87 → actual $3.18
Q4 sales 48 - 53% → actual 71% (321M)
Robinhood analysts consensus Q4 EPS 0.32 → actual 0.52

Fiscal year 2025 outlook
Net sales 1.23B - 1.25B (20-22% yoy)
Adj EBITDA 285 - 289M
Adj net income 187 - 191M
Adj EPS 3.20 - 3.25

Obviously all the analysts were wondering about the revenue guide which seemed extremely low and implies sequential declines in quarterly growth. It turns out that this is actually their standard playbook as they said, and this did this for the prior year. This past fiscal 2024 year had been guided as follows

Full year revenue 22 - 24% → actual 77%
Adj EBITDA 144M - 148M → actual 235M
Adj net income 98.5 M- 100.5M → actual 184M
Adj EPS 1.73 - 1.76 → 3.18

The quarter where they made the above guide was one year ago where they had 78% revenue growth in that quarter, and then guided the full year for 22-24%. So the story of this report is really trying to parse why management is lowballing so significantly, and a majority of the analyst questions were on this topic of the guidance.

ELF reported other metrics in the Investor Presentation,

  • 10.5% market share in color cosmetics, 12.8% share in latest Q
  • 1.6% market share in skin care
  • Number one teen favorite cosmetic brand 5th consecutive season
  • Target at 19.3% share, 70%+ yoy
  • Elf international is 15% of sales, competitors are greater than 70% international
  • Spring 2024 launches - CVS, Boots, Shoppers Drug Market
  • Summer 2024 - Walmart
  • Fall 2024 - SuperDrug, Sephora Mexico
  • 71% of yearly revenue came from 50 points of Units sold, and 21 points of average until retail (prices are going up)
  • Digital “consumption”, 70% growth (not sure what this measures)
  • 71% gross margin, +180 bps
  • Gross margin drivers: favorable FX rates, international price increases, lower retailer activity costs, inventory adjustments, improved transportation costs
  • Adjusted SG&A 61% last year, same 61% this year
  • Market & Digital Investments 33% last year, 34% this year
  • 41M adj EBITDA in Q, 93% yoy
  • 13% adj EBITDA margin
  • Adj net income last year 24M → 31M (probably one off issues if EBITDA grew at 93%)
  • Adj EPS last year 0.42, 0.53 this year
  • 191M in inventory
  • Projecting 20-22% revenue growth for the next year with “~20%” tracked channel growth
  • 50/50 mix of tracked channels vs untracked
  • Marketing and digital outlook for 2025 is 24 - 26% of sales

Here’s some graphics from the Investor presentation which stood out to me,

ELF Cosmetics Consumption
ELF Cosmetics Consumption1628×1334 106 KB

ELF Peer Share Growth
ELF Peer Share Growth2530×1586 181 KB

ELF Skin Care Growth
ELF Skin Care Growth1898×1596 154 KB

ELF Unit Volume Growth
ELF Unit Volume Growth2500×1604 199 KB

ELF Marketing Investment
ELF Marketing Investment2612×1410 195 KB

Notes from the conference call,

CEO - Tarang Amin

  • Full year, net sales grew +77%, gross margin +330 bps, adj EBITDA +101%, market share grew 305 bps
  • Q4 net sales +71%, gross margin +180 bps, adj EBITDA +93%
  • Prioritize three areas: color cosmetics, skin care, international
  • Cosmetics grew 30% while category was down 3%, share grew 325 basis points
  • Cosmetics lapped a period last year where whole category grew 18%
  • SKIN grew 38% in tracked channels, 19x category growth of 2%
  • Naturium 17 points of net sales growth in Q4
  • International grew 16% compared to 13%
  • Fundamental drivers of business: value prop, powerhouse innovation, marketing engine
  • Average price point of ELF today $6.50 compared to legacy mass market of $9.50 and over $20 for prestige
  • Only top 5 brand to grow units this past year
  • Have the #1 or #2 position across 18 segments of color cosmetics
  • Power Grip is new popular makeup mist product selling for $10 compared to $38 prestige item
  • Bronzing drops was the best selling skin product on the site in Q4
  • Grew mind share by 16 percentage points versus last year with 38% mind share
  • Growing audience beyond Gen Z, ranked #2 in mind share amongst millennials, and #1 in mind share among Gen Alpha - multigenerational brand
  • Q4 partnered with Liquid Death (Canned water product)
  • Over past five years have increased marketing investment from 7% of sales to 25%, driving ROIs
  • Since 2020 have doubled unaided awareness from 13% to 26%
  • Partnered with Billy Jean King, tennis player
  • Color cosmetics ended fiscal 24 with 10.5% market share at 12.8% in Q4
  • Target number one brand with 19% market share, 23% in Q4, growing business in Target over 70%
  • CVS partnership, Walmart in summer 2024
  • Launching Naturium in Ulta Beauty for summer 2024
  • “See significant white space internationally”
  • Officially opened our first European office in London
  • Canada #3 brand, UK #4 brand
  • SuperDrug partnership in UK, spring 2024 with Boots and Shoppers Drug Mart in Canada
  • Since launching in Douglas in Italy last fall ELF has been number one brand across mass and prestige
  • Launched in Netherlands with Etos, ELF becoming their #1 brand
  • Launching ELF with Sephora Mexico in Fall, ELF’s first partnership with Sephora

Mandy Fields - CFO

  • Q4 digital consumption trends were up 70% yoy
  • Digital channels drove 22% of consumption in Q4 compared to 18% year ago
  • Beauty Squad Loyalty Program 4.8M subscribers, grew 30% yoy
  • Terrific engagement with the ELF mobile app
  • Q4 gross margin 71%, approximately 180 basis points
  • Price increases in international markets
  • Improved transportation costs
  • During Q stepped up marketing costs given better than expected top line trends
  • Full year marketing spend was 25%, above estimate of 22 - 24% they had given before
  • 108M cash, inventory 191M
  • Switch to taking ownership of inventory when it ships from China, rather then when it enters distribution center in US (Not sure why they are changing this?)
  • Full year guide, revenue 20-22%, adj EBITDA 285 - 289M, net income 187 - 191M, adj EPS $3.20 - $3.25
  • Q1 expect net sales growth to come in well above the full year 20-22% guidance, reflecting ongoing strong consumption trends and increased contribution from Naturium
  • Mindful of macro uncertainty, and believe it’s prudent to take it one quarter at a time
  • Planning for marketing spend of 24 - 26%
  • Full year EBITDA guide implies 21 - 23% EBITDA growth, after last year was 101% growth (This guide makes no sense to me)

Q&A

  • Analyst “I appreciate you have always been very conservative”
  • CFO says “we feel incredible” about guiding to 20-22%, “we actually feel great about our guidance”
  • Number one share brand in Nielsen data, data here is very strong
  • Feel great about what were seeing in Q1
  • International grew 115% primarily from Canada and UK
  • First entry into to LatAm with Sephora Mexico, hope to open up other Sephora markets
  • Analyst notes guide assumes “a slowdown in the balance of the year post Q1 on macros”
  • CEO: Q4 mass color market was down 3% yoy, but people don’t recognize it was up 18% year ago
  • CFO “Back to last year, last year, we started our guidance at 22 - 24% and ended the year at 77%”
  • Guidance strategy “has worked well for us over the last 5 years, taking it one quarter at a time”
  • CEO “So we’re not implying any slowdown. It’s just not passing that through until we see Q1 come in”
  • We tend to take up our guidance depending how it comes out
  • Guidance does include space gains and Walmart addition
  • Disciplined and patient on acquisitions, wait for highest quality
  • Analyst question on shipping, Red Sea closures, don’t ship from China to Europe direct, has to go through US
  • Naturium at Ulta, feel great about it
  • Analyst “It seems like digital is having good momentum, but the guidance implies a pretty significant slowdown”
  • Reply by CFO that feel great about digital and international with digital up 90% and international 116% but “our guidance implies kind of taking it one quarter at a time”
  • CFO guiding 23% EBITDA growth even though last year was 101% growth, expect EBITDA to outpace sales
  • CEO, we are gaining share in every retailer we are in
  • There’s been talk of international tariffs but more likely a next year question
  • Have been increasing inventory to support the demand

Pretty strange report. They absolutely crushed the quarters expectations but then gave full year guidance which made zero sense given the current numbers and tone of the call. This really calls into question the judgement of the CFO to keep giving these bizarre full year guides which imply quarterly declarations and to not have the awareness to understand that.

Overall I like this business a lot and there seems to be so much to like here on international, EBITDA growth > revenue, market share, amongst other metrics. The CFO is really doing the company a disfavor by low balling the guidance this strongly because over half the analysts questions were on parsing the guidance, and the market reacted poorly to the headline guide. They got called out so many times about how the guidance doesn’t make sense, and the CFO seemed very defensive about how much they “feel incredible” about this guide.

Overall, I’m still confident in this company, just not the CFO anymore because they don’t seem to understand the purpose of guidance. A full year guide isn’t supposed to be about “kind of taking it one quarter at a time”.

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Hi wpr,

Thank for the detailed review, it is much appreciated.

Just wanted to chim in on the guidance: from my experience, working at, and consulting for many companies, start-up, scale-up and large corporations, the game of financial expectations can be a deadly one.

The market often asks, even requires them sometimes, but they are terrible for a company.

Here’s why:

  • To give good guidance, that you can reliably beat by a reliable %, you have to have excellent forecasting practices in place. That is a skill that most company do not have, or work on until they are at really large run-rates.
  • Guidance often has internal implications: if you set a high guidance and it’s missed, then employees regularly pay the price. If this guidance was made to satisfy market wanting to peak into the future, imagine how that feels for the people working there?

All-in-all, while I feel like guiding in the 20% when you’re growing in the 70% is a hell of a gap, I’d much rather see that in one of my holdings, then a company guiding in the 60% and struggling to get there, because of the MANY, MANY factors of uncertainty in business.

One could argue that maybe they shouldn’t give guidance then. That would be fine with me as well.

But, as you pointed out clearly yourself, they are telling us something with this:
“We did it last year, and look where we landed. You can expect us to do better. We don’t know how much better, we sell physical products and we want to focus on what matters to us, which is our execution”

I am fine with that, personally. Does it mean they have no chance to miss the 20% guide? No, but they are also not going to have to restructure, cut R&D budgets because they missed on a missinformed guidance.

Of course, that means more uncertainty for us as investors. If they grow in the 30%, the multiple will re-rate. But they are not artifically trying to remove uncertainty; they acknowledge it.

Let them focus on delivering, rather than guiding. They seem to be doing that pretty well, aren’t they?

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Mexico does not seem to be the only Sephore partnership they have as the Sephora UK website has 132 ELF products available to purchase.

Douglas and Sephora are all over Europe so it’d be nice to see the partnerships extend beyond Italy and UK

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I just finished reading the ELF conference call, and I have to say that it was an incredible quarter, an incredible year, and their enthusiasm and outlook for the future is incredible too. That’s where they give their real future estimates. Don’t pay any attention to the ridiculously low number estimates.
Just my humble opinion.
Best,
Saul

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This is reprinted from my KnowledgeBase :

On the Estimates Game. I exaggerate a little for the clarity of the message, but what I am saying is essentially all true. I hope you find these ideas useful:

The earnings and revenues estimate game that the analysts play has put the company CFO’s, who give the outlooks, in a no-win situation. Here’s how it has come to work over time: It doesn’t seem to make any difference how good or bad the actual results are, whether they are up 3%, or 30%, or 70%, or more. The only thing that the headlines pick up is whether the earnings beat or missed analysts’ estimates. (Who cares???)

For example, a company whose earnings are up just 3%, but beats estimates by a nickel, will get screaming headlines. The headlines won’t say “ABC earnings only up 3%!” No, the headlines will say “ABC beats estimates!” The price will undoubtedly rise.

On the other hand, a company whose earnings are up 70%, but misses estimates by three cents, will get equally screaming headlines, not saying “DEF earnings up an amazing 70%”, but saying “DEF misses estimates!!!” The price will undoubtedly fall.

The whole estimates game is only about whether the earnings and revenue beat or miss a number that some analysts have picked. It totally ignores the question of how well the company is actually doing, and how good (or bad) the revenues and earnings really are.

However, the companies aren’t stupid. They have figured this out. And they have started to give lower and lower estimates for their next quarter, picking numbers that they are almost certain to beat (by a lot). They don’t want the bad publicity of missing analyst estimates. (Again, who cares!!!)

So what happens? The companies give low estimates and the analysts say “Good earnings, but disappointing estimates for the next quarter. We’re downgrading them from a buy to a hold.”

Thus the companies are screwed whatever they do. If they estimate high, where they think they will be, and miss, they get the “missed estimates” headlines, and if they estimate low, to let themselves beat estimates handily, they get the “disappointing estimates” headline. They lose either way.

How do we as investors deal with this puzzle? Think “How is this company doing? How much are earnings and revenues actually up?” What matters to me is that the company is growing revenue at 50%, and if the company sells off because of a “revenue miss” (which is a ridiculous term for a company increasing revenue by 50% if you think about it), I might take advantage of it by adding to my position.

I base my purchase decisions on how well the company is doing, and my evaluation of how it will do in the future, and how well its price matches its prospects, rather than whether the company came in two cents above, or two cents below, what the analysts predicted.

Saul

You have to now say the same thing about a company that tries to beat the game by guiding so low that it will always beat estimates. What counts is how the company is doing, not how low the fake estimates are.

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wpr101,
Thanks for your nice write up on elf’s earnings. This was quite interesting against Target’s earnings. elf is Target’s number one cosmetics brand with 23% of the skin care and 19% of the color cosmetics businesses. Target has reported that the COVID relief money has been spent, and consumers are tightening their spending. People are concerned about this, but I think that it’s a driver to move away from luxury cosmetics and towards value brands. Getting people to trial new brands can be difficult. People are creatures of habit. I think people will likely have their needs met, and the luxury brands will have a HARD time luring consumers back once their economic situations stabilize.

I’m glad to hear that elf is expanding to CVS this spring and Walmart this summer.

One thing that I’m trying to figure out is why EBIDTA as a percent of sale plummets in Q4. This pattern repeated itselft in 24, 23, and 22. Maybe this is an effect of shelf resets and inventory adjustments for cosmetics. I’m still looking into this.

By my calculations, the PEG ratio is 0.62, for a 71% grower makes this a growth and value stock.

I think the stock price being this low is from worries about TickTock being banned or sold. Regardless of what happens with TickTock, I think elf has figured out how to communicate to and satisfy the needs of the younger generations.

elf is one of my favorite stocks. I increased my holdings prior to the earnings call, and I plan to continue adding.

Best,
bulwnkl
Long elf 12.3%

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Even more, if internal guidance is low, then the company may not be ready to handle higher sales. For a product-producing company like ELF, this could lead to them not being able to produce enough product for demand, which would limit what the growth in sales could have been.

I’m not yet worried about ELF, but I do agree that the CFO needs to be more realistic with guidance. It’s fine and dandy to sandbag a bit, but throwing a whole beach in isn’t great, either.

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@wpr101 thanks for the excellent and detailed summary. I don’t have a lot to add, but I do have a couple of observations.

Enlisting Billy Jean King as a representative is an interesting choice in that she’s 80 years old and they primarily appeal to a youthful demo. I think the primary reason would be due to the fact that she has been openly lesbian her entire professional career and an advocate of LGBGTQ+ rights long before there was an acronym describing this demo.

Also, you were puzzled about declaring product as inventory when shipped from China rather than the prior practice of recognition when it entered an US warehouse. I speculate there’s a couple of reasons for this bookkeeping policy change. They stated that product for the EU market is shipped from the US rather than directly from China. That might be true today, but if they change this and ship directly to the EU from China, they will have a recognition problem with respect to an FX situation. With inventory being recognized in USD when it ships the destination doesn’t make any difference. Further, recognizing the inventory as it ships would be pre-tariff. So far as I know, there are no current tariffs on cosmetics, but should that policy change, they won’t incur a discontinuity in their recognition of inventory value under this new policy.

I would just add that their guidance showed up in the change in stock price when they declared earnings last evening. At first, the stock price dropped something like 3% - 4%. I’m sure this was an initial response to the guide. A bit later, after the actual earnings report was digested the stock price moved higher.

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Probably they pay bonuses in 4th quarter.

Saul

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Bonuses should be accrued throughout the year, so it won’t impact EBITDA when they are paid. The bonuses are reducing the Earnings in EBITDA every month/quarter. The cash will be reduced when paid, but that is independent of an EBITDA calculation.

It could be that the company is taking write-downs in Q4, although those should be spread out through the year as well. Write-downs can be inventory, bad debt, market value of assets, or a few other things.

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Yes correct…but also, if the company finished the year very strong and surpassed their previous estimates significantly, there would be a bit of a true up in the bonuses that had been accrued throughout the year.

Given how strong elf did this year, they were likely bumping up their accruals throughout the year but still could have had a significant adjustment at the end when finalizing their bonuses.

I took a look at what they say about seasonality in the 10-K, but it doesn’t say much beyond that sales are higher in Q3/Q4 due to the holiday season, but not much that easily explains why costs would rise such that EBITDA would be lower in Q4. You would think it would go the other way since revenues spike up that quarter but at least some of their indirect administrative costs would be more consistent with other quarters of the year

Seasonality

Our results of operations are subject to seasonal fluctuations, with net sales in the third and fourth fiscal quarters typically being higher than in the first and second fiscal quarters. The higher net sales in our third and fourth fiscal quarters are largely attributable to the increased levels of purchasing by retailers for the holiday season and customer shelf reset activity, respectively. Lower holiday season purchases or shifts in customer shelf reset activity could have a disproportionate effect on our results of operations for the entire fiscal year. To support anticipated higher sales during the third and fourth fiscal quarters, we make investments in working capital to ensure inventory levels can support demand. Fluctuations throughout the year are also driven by the timing of product restocking or rearrangement by our major retail customers as well as expansion into new retail customers. Because a limited number of our retail customers account for a large percentage of our net sales, a change in the order pattern of one or more of our large retail customers could cause a significant fluctuation of our quarterly results or impact our liquidity.

-mekong

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Excellent point. Saul says follow the numbers, not the guidance. On that note, inventory may reflect internal expectations better than guidance. ELF has ramped inventory a lot as they’ve grown but this quarter’s ramp is striking:

image

I realize that they’ve had an accounting change on inventory recognition, but 130% YoY and 60% sequential pop in inventory is not something you’d expect to see from a company anticipating 20% revenue growth. It’s also an outlier in their history. Their internal bar is obviously much higher than their guide.

Peter

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Adjusted EBITDA is down every Q4 mainly because they spend disproportionally in Q4 of each year on what they call “Marketing and Digital Investment”.

The average for this category of expense over the year in:

  • 2024 was 25% of sales; in Q4 it was 34% of sales.
  • 2023 was 22% of sales; in Q4 it was 33% of sales.

From the Q4 ER:

On an adjusted basis, SG&A as a percentage of sales was 61% in Q4 compared to 61% last year. Marketing and digital investment for the quarter was approximately 34% of net sales as compared to 33% last year.

During the quarter, we opportunistically stepped up our marketing investment given our better-than-expected top line trends. As a result, we ended the full year with marketing and digital investment at 25% of net sales, above the high end of our 22% to 24% range that we had outlooked.

In Q3 they told us this category of spend was was 26% of sales and in Q4 it was 34%. So 8%pts of the 9%pts decline from Q3 to Q4 in adj EBITDA was due to this.

That, in turn is due to seasonality, from the latest 10-Q:

Our results of operations are subject to seasonal fluctuations, with net sales in the third and fourth fiscal quarters typically being higher than in the first and second fiscal quarters.

-wsm

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@JustMee01 - I think your Q3 2024 inventory number, and consequently your sequential growth is wrong. I have Q3 2024 inventory as $204.5m (not $121.1m as you have) - which makes sense as that was the quarter that they added Naturium. There is therefore no sequential “pop” to Q4 but rather a sequential decline of 6% in stock levels.

Also, their stock turnover has been steadily declining (i.e. stock levels relative to cost of sales) and ticked up a notch in Q4 vs Q3, but the Q4 numbers is still below all quarters in 2023.

They specifically addressed the yoy growth in stock in the ER:

Our ending inventory balance was $191 million, in line with our expectations and up from $81 million a year ago. The difference is primarily a combination of three things. First, as we’ve said the past few quarters, we continue to build back our inventory levels to support strong consumer demand.

Second, our consolidated results now include Naturium, which added approximately $26 million of inventory; lastly, an additional $8 million of the increase is the result of taking ownership of inventory from China when it ships versus when it enters our distribution center here in the U.S.

-wsm

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wsm,

That’s embarrassing! You are correct. Looking at the 10Q, I mistakenly transposed the $value above inventory on the balance sheet. That certainly changes the picture. Thank you for the correction and apologies to the board for the error.

Peter

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This is anecdotal, however, I’ve been walking by the elf retail display in walmart near me.

I’ve passed it several times over the last couple months.

It’s picked over and empty. The problem is, when I ask the cosmetics stockers, they never have any replacement product.

I’ve asked 3 times. They check stock. Zero in stock. Try again later. Maybe a truck will come in on Tuesday.

This is just one channel (and a single store!), but are they having supply chain problems? Perhaps this was a test.

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I asked my well-connected cosmetics industry consultant (teen age girl) about GDavenport’s post. I asked her if she or her friends have any problems finding ELF products at Walmart or Target. She said almost word for word what GDavenport said about being picked over and missing products.

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@GDavenport @ibuildthings I’m curious for your take if there is indeed a widespread shortage of ELF products in physical stores if this is a good or bad signal for the company’s stock price?

On one hand demand could be very high and sales are ramping up significantly. On the other hand a supply shortage could hurt results. A side effect could be more sales are going online. I’m not sure the impact supply shortages could have for online sales as well.

On an unrelated note I picked up on something interesting from the conference call on another read through with regards to international.

The CEO said,

  • There’s a tremendous amount of pent-up demand for the brand. It comes from much of our social feed and social strength in the US which is consumed outside of the US. So when we launch Douglas Italy, not only were lines down the block for when we opened, but we quickly rose to the #1 brand in Italy, not only in mass, but across prestige. We recently found the same thing when we went into Etos in Netherlands where we are not complete with the rollout, but already the #1 brand in cosmetics. We’re finding consumers internationally are waiting for ELF and when we enter the market “you see this tremendous excitement”.

It seems like their social media campaigns and marketing are paying off huge when they go international. Basically there’s a side effect of all the marketing they did in the US where it goes viral globally, and consumers outside the US are waiting to get access to the brand.

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Another anecdotal take - I often encounter the near barren shelves at Target/Kroger/CVS/Walgreens - the interesting part is that with each passing week, more outlets are being added. I can also state unequivocally that every online order I place is quickly and correctly processed.
I can’t really say whether the empty shelves are good or bad so I will look to revenues and inventory for that info.

Vince

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the interesting part is that with each passing week, more outlets are being added. I can also state unequivocally that every online order I place is quickly and correctly processed.

Are you referring to ELF products specifically? Or online transactions in other products that are missing from retail stores like Target/Kroger/etc?