Global Expansion And Innovative Beauty Products Propelling Robust Sales Growth

Key Takeaways

• Focusing on color cosmetics, skin care, and international expansion is substantially growing e.l.f. Beauty's sales and market share.
  
• Innovations in product development and unique marketing campaigns are enhancing brand awareness and sales, suggesting potential for higher future revenue and earnings growth.
  
• Expanding into new markets and increasing marketing investments pose significant execution and cost risks, potentially affecting revenue growth and net margins.

Catalysts

Provides cosmetic and skin care products under the e.l.f.

• e.l.f. Beauty's strategy of focusing on color cosmetics, skin care, and international expansion is driving substantial growth, with net sales growing 50% and an increase in gross margin by approximately 80 basis points in Q1, indicating a strong impact on revenue, gross profit margin, and potentially net margins.
  
• The company's successful penetration into the mass cosmetics and skin market, outperforming the category growth significantly (e.g., e.l.f. SKIN grew 45% in tracked channels, 32x the category growth), suggests an ongoing increase in market share and revenue from these sectors.
  
• e.l.f. Beauty's international sales grew 91% in Q1, driven by expansion into new markets and growth in existing ones, pointing towards future revenue growth opportunities as the company continues to expand globally.
  
• Innovations in product development and marketing, such as the launch of successful products like the Soft Glam Satin Foundation and unique marketing campaigns, suggest a positive impact on brand awareness, customer acquisition, and sales, potentially leading to higher revenue and earnings growth.
  
• Increased distribution and retail presence, including gaining more shelf space in major retailers like Walmart and expanding internationally into markets like Germany with significant launch plans, indicate potential for increased sales volume and revenue, leveraging the company's productivity model for growth.

Assumptions

• Analysts are assuming e.l.f. Beauty's revenue will grow by 19.0% annually over the next 3 years.
• Analysts assume that profit margins will shrink from 10.8% today to 0.2% in 3 years time.
• Analysts expect earnings to reach $342.7 million (and earnings per share of $6.31) by about August 2027, up from $122.2 million today. However, there is a considerable amount of disagreement amongst the analysts with the most bullish expecting $431.4 million in earnings, and the most bearish expecting $249.3 million.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 48.8x on those 2027 earnings, down from 78.9x today. This future PE is greater than the current PE for the US Personal Products industry at 21.9x.
• Analysts expect the number of shares outstanding to grow by 3.55% per year for the next 3 years.
• To value all of this in today's dollars, we will use a discount rate of 6.72%, as per the Simply Wall St company report.

Risks

• The reliance on new markets for continued growth implies a significant execution risk, particularly if consumer demand in these markets does not meet expectations, impacting potential revenue and market share expansion.
  
• Increased marketing and digital investment, as indicated, could strain operational costs and impact net margins if the boost in sales does not offset the higher spending.
  
• The aggressive growth plans in international markets, such as the expansion into Germany and Mexico, may face unforeseen challenges, including regulatory issues and competition, potentially affecting revenue growth.
  
• Fluctuations in foreign exchange rates could impact the cost structure and margins, especially with the company's heavy investment in international expansion.
  
• As the company continues to build back its inventory levels to support strong consumer demand and with the inclusion of Naturium, there's a risk of overestimating demand, leading to excess inventory and potential write-downs, impacting gross margins.

Valuation

• The analysts have a consensus price target of $221.92 for e.l.f. Beauty based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $260.0, and the most bearish reporting a price target of just $161.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be $1.9 billion, earnings will come to $342.7 million, and it would be trading on a PE ratio of 48.8x, assuming you use a discount rate of 6.7%.
  
• Given the current share price of $170.95, the analyst's price target of $221.92 is 23.0% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.