Why the e.l.f. Beauty stock drop?

I think the stock market drop this week is due to the combination of higher interest rates in the near term and profit taking by traders. However, the 10.4% drop in ELF is way outside the drops with other growth stocks today. I checked the news and could not find anything that would explain this. Did anyone else find anything?

Best,
bulwnkl

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It looks like it’s down in sympathy with ULTA Beauty

Apparently ULTA presented at a JP Morgan conference and said their sales trend is slowing

ULTA is down a little over -13%

-mekong

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Thanks. That would stand to reason.

Best,

bulwnkl

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Could be a good thing is some of Ulta’s drop is due to increased elf sales. Have to wait and see.
b

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The second half of this podcast has an interview with ELF’s CEO. Obviously, to be taken with a grain of salt, but informative nonetheless.

The question is whether their approach makes them a disruptor or is it just them selling stuff cheap.

Vince

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From seeking alpha on the Ulta presentation: "… Ulta beauty warned that consumers are seeing pressure from too much credit card debt at high interest rates. ULTA also said that there are mixed data points around the economic situation for the majority of consumers. The company noted that it has seen a slowdown in demand across beauty categories. In terms of guidance, Ulta Beauty sees Q1 comparable sales landing at the lower end of that first half guidance for low single-digit "

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ELF is a lower-cost brand that competes hard with the expensive brands. They find popular high-end products and figure out how to duplicate or get “close enough” and undercut hard on price. This is according to my highly compensated beauty industry consultant (teen age girl). Notice that ELF share price is down harder than its high end and higher PE competitor Estee Lauder (EL).

However, ELF is very trendy right now with the younger set. They buy in in ULTA, Walmart, Target, others at a lower price point than the expensive brands in expensive stores.

Serena Williams just announced a new line of cosmetics Wyn Beauty. It starts retailing in ULTA April 3. I would be more concerned about the “trendy” Tik-Tok influencers jumping on Wyn and telling their viewers to try Wyn. That may take lots of teenager business away for at least a while.

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Even with this drop, Elf is still trading at the high end of it’s range. I would expect it to be volatile. For those who haven’t bought any I would be hoping for a bigger drop, but with this market, that could be hard to find.

Andy

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Can’t fault the market reaction to $ELF, since a good majority of its sales is from physical stores.

However, zooming out, let’s not forget the success and acceleration of their digital sales.

From their most-recent CC:

" Q3 digital consumption trends were up over a 100% year-over-year. Digital channels drove 24% of our total consumption in Q3 as compared to 18% a year ago. The momentum we’re seeing is supported by enhancements across our loyalty program and our app as well as digital and social platforms. Our beauty squad loyalty program now has over 4.5 million members with enrollment growing 30% year-over-year. Our loyalty members continue to be a key part of our digital ecosystem, driving almost 80% of our sales on elfcosmetics.com.

We’re seeing terrific engagement on our e.l.f. mobile app, which now boasts a 4.8 star rating and over 1.8 million downloads since launch. We’re also enjoying strength across third-party digital and social platforms. We were amongst the fastest growing beauty brands on Amazon in Q3 and we’re the first major beauty brand that launched on TikTok shop."

It’ll be interesting to learn:

  1. How in-store ULTA sales slowdown shows up in $ELF in-store sales numbers
  2. If/how in-store sales slowdown affects $ELF digital sales

–intjudo, long $ELF, medium (…for me) position

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Perhaps the slowdown at ULTA is a win for ELF. Lost sales on high end cosmetics may translate into sales gains on lower end priced products such as ELF. I don’t see Gen Z slowing purchases. Perhaps older customers on high end products will drop down and give ELF a try.

-zane

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Here’s the passage from Ulta’s David Kimbell which drove the market reaction, that the stories on Yahoo and others cite,

What we’re seeing right now as we’re 2 months into our fiscal year, we have seen a slowdown in the total category. The category has grown – we came into the year and we talked about this on our call a few weeks ago with – expecting the category to moderate it, as I said, several years of very strong growth. We did not anticipate that it would continue at the rate that it’s been growing. So we have planned for moderation in total category growth to kind of the mid-single-digit range.

What we’ve seen so far is a slowdown in the total category across price points and segments. That’s a bit earlier and a bit bigger than we thought. Still growing, still a lot of engagement, all those things that I’ve had, but we’ve seen this growth rate come down probably faster than we anticipated.

The company has also revealed in this conference that they are losing market share to competition rapidly. A new competitor has emerged placing 1,000 stores near them and Ulta only has 900 stores total!

We haven’t been in an environment where there’s been essentially 1,000 new points of a key competitor of ours that have come in, and then many of them are in close proximity to our existing store.

Other stand outs to me from this JP Morgan conference,

  • Struggled with prestige makeup
  • Still so many positive indicators overall
  • Loyalty program grew 8% last year, so still a lot of positive dynamics on the business
  • We have had some more competitive pressure
  • Exclusive Serena Williams brand WYN launched today
  • Overall category is slowing down more than we originally anticipated
  • Seen both segments, mass and prestige, moderate meaningfully since Q4
  • Brands like e.l.f. has been real a growth driver for the total category and for us and add more accessible price points
  • Does not seem like customers are fleeing higher price points
  • Strength in low price products is driven by newness, marketing, and innovation, not price
  • Claim to have vetted industry wide slowdown via Circana
  • Competitors include Sephora, Kohl’s, Walmart, Macy’s, and Nordstrom, plus online competitors
  • We’re up to 900 locations, so we don’t have experience at this scale, so the collective impact and how we cycle through that, I mean, again, I think, I’m confident we will over time (Sounds like the executive is stumbling over his words here)
  • Category moderation as well as the competitive environment
  • With Covid, backed out of Canadian market, now entering Mexico through a joint venture (Interesting they are having this much difficulty setting up shops in Canada)
  • ERP/SAP 20 year old tool they use, in need of a modern tool, 3 year upgrade almost complete
  • Supply chain is a journey that have been on for a few years, update, upgrade and elevate capabilities are all necessary
  • In the final phases of digital platform upgrade, the core infrastructure which the app and website live on
  • There’s more competitive engagement. We’re watching it carefully. We will react. We have already reacted in focused, targeted ways
  • Redesigning the stores, “we’re not going to go in and retrofit every store”, need to remodel stores but it will have a cost, newer stores will start with newest layout
  • We anticipated moderation going into the year
  • Talked about moderation in guidance, overall growth falling back into middle single digit range which is somewhat higher than the historical growth rate, but lower than the last three years
  • The competitive environment is intense
  • We’ve lost share in prestige makeup, we’ve been challenged in hair
  • We gained share in mass, so there’s real strength there (ELF is considered in the mass category)
  • Analyst asked about cannibalization… planning a partnership with target to have stores, they track cannibalization, excited by partnership with Target

Now a couple of my own thoughts,

  • Ulta sounds like a dying business that is looking for excuses on their results
  • A competitor opened up more stores than they have in total, and mostly located right next to them! They are getting their lunch eaten. Curious if anybody on the board knows who their new competitor is?
  • It’s possible customers are buying off of ELF and other online retailors, or buying direct from shops in Instagram and TikTok.
  • 10% seems like a big drop for ELF based on this conference, down 25% from their highs the price looks attractive
  • I doubt the CEO meant to crater his company 15% on a investor conference, usually these are softball questions
  • Sounds like they have 20 year ancient tech systems, outdated floor plans, competition, supply chain issues, amongst other problems
  • Ulta’s revenue is growing 10% a year and probably going down from here, overall take is this is a company thrashing about as they lose market share
  • An analogy of Ulta as Blockbuster and Elf as Netflix may be a good way to think about this
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I am thinking it is Sephora, they have a little over 1400 stores.

Andy

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In my mind this validates the decision $ELF made a while back to sell their physical stores. Who knows, maybe they’ll sell their stuff in this new competitor’s stores.

From evidence available at the moment, $ELF is in hypergrowth and $ULTA is seeing growth declining from an already-low rate. And yet the market has painted them with the same brush today :smiley:

I think it’s likely this will pass in short order. Holding my position.

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Sephora does not list elf among its products.

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ELF is sold everywhere, not just Ulta. My highly-paid cosmetics consultant (teen-age girl) says you can get it at Walmart, Target, Ulta and Dollar Tree. Their business model is to find popular high-end products and duplicate them at a lower price point for the mass market. It surprises me that Ulta retailer problems and them saying the industry has troubles would tank ELF shares 12% on 3x volume but Estee Lauder (EL) only 4% on 1.2x volume. EL has higher PE and lower growth rate, but ELF was hit much harder. The only other relevant news of the day is Serena Williams unveiling a new line of cosmetics WYN.

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Not much sense to link so closely an asset-lite, rapidly growing company like ELF with a brick and mortar make-up store that probably would be doing a lot worse if it weren’t selling this hot brand. I know they depend on Ulta for like 15% of their sales, but still, Ulta was attributing their troubles to competition and problems with upscale products, something ELF definitely is not. I added.

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I am not in ELF; but it sounds like ELF and Ulta are two different categories, with Ulta being high-end and ELF being “mass.” If that’s the case; and if Sephora is popping up stores and doesn’t sell ELF products, it’s likely another high-end company eating Ulta’s lunch.

Sephora does carry Il Makiage. Il Makiage is a high-end cosmetics company, and is now one of two (soon to be 3 brands) from Oddity Tech ($ODD), which IPO’d last summer.

With some trepidation, I refer you back to what I posted about Oddity when I took a position in them last month. Il Makiage was their first acquisition.

When I made the other post, I was focused on the strange language of the Oddity CEO in talking about their growth being too high, but in the Q4 call transcript in the CEO’s prepared remarks, he went on to talk about the strength of Il Makiage (Note: Spoiled Child is their second brand):

In my view, there is no good reason to grow 50% at our scale, but due to both SpoiledChild’s ability to blitzscale and IL MAKIAGE’s stronger than expected repeat rate, we landed at a 57% growth rate in 2023 full year. Drilling down to the brands. IL MAKIAGE delivered a very strong year in both color and skin.

Skin grew to around 20% of IL MAKIAGE’s sales in 2023, which is very high rate of category expansion for any beauty brand. It is a testament to our data-driven platform, to the strength of the brand, its enormous potential reach, and the quality of its products. IL MAKIAGE is well on its way to achieving my target of $1 billion of sales within the next five years.

And this:

Both IL MAKIAGE and SpoiledChild are off to a strong start in 2024. Based on our performance in just the first two months of 2024, combined with our outlier repeat rates, we have visibility into delivering our goals for 2024.

This from the CFO:

IL MAKIAGE delivered double-digit profitable growth in 2023 across cosmetics and skin. And as Oran mentioned, IL MAKIAGE Skin is now 20% of the brand sales.

And in the Q&A:

Sure. I will start with international and then, Lindsay, you can refer to the guidance. We see a massive opportunity in international. As I said before, for other competitors, it is two-thirds of their business.

But we have not finished growing in North America yet, either. We are building out very strong localized experience for each market we enter, which gives us strong and profitable performance from day one when we launch new markets.

Oddity began as Il Makiage and first entered the scene by popping up stores across Europe. As they have expanded from one brand to two (Spoiled Child is the second) and have become Oddity Tech, their focus has become D2C and online. But they still do sell Il Makiage in stores. I think they grab people in stores and then try to move them online.

And since they peppered Europe with stores after buying Il Makiage, they may well have a similar strategy in North America, using the Sephora partnership. The Serena Williams launch announcement today no doubt had an impact across the sector, but it wouldn’t have had a chance yet to become the competitor described in the Ulta presentation.

It may be something else entirely, and I still have questions about Oddity, but they’re growing. Fast. And their profitable.

JabbokRiver
Long Oddity Tech ($ODD) 7.35%

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