e.l.f Beauty (ELF) is a name we wanted to flag for investors because the sentiment around it has been one of frustration for people who have owned the stock. However, with the stock having received some recent sell side analyst upgrades, it's becoming clear that the analyst community is slowly warming up to some changes being made at the company.
After pricing its IPO at $17 in September 2016, above the expected range of $14-16, the stock quickly traded above $30 by late 2016. However, it soon after fell into a prolonged downturn that led it to trade below $7 in early 2019, following a series of disappointing earnings results.
In September 2018, an activist hedge fund, Marathon Partners, wrote a letter to the company urging management to consider several courses of action. The first option 1) asked the company to refocus on core operations by ceasing evaluation of acquisition targets and to reduce and optimize its high-cost structure (including executive compensation) to fund brand investment, boost margins, and grow profits. In the firm's view as stated in that letter, the e.l.f. brand is burdened by all of the overhead of a platform designed to support multiple brands as well as an extremely generous compensation plan for senior executives. Alternatively, the fund encouraged the company to 2) consider a sale of the company.
So far, ELF has been telling them thanks, but no thanks. ELF does have a plan to turn the business around. Its first focus was to invest more behind the brand. ELF had been spending around 3% of sales on marketing, but that spend is getting an increase to help the brand break through in a noisy marketplace. The second pillar is ELF's plan to put greater focus on key items. For example, in late 2018, ELF put an integrated effort behind its Beauty Shield Magnetic Mask. This $24 product, said the company, is a great example of ELF's distinct union of high-quality merchandise with good value proposition; the only other thing like it in the market is a $75 prestige product.
The final pillar of the turnaround is achieving optimal retail assortment. A major 2019 initiative that should help improve productivity at retail is Project Unicorn. This is a "major product, package and shelf initiative" that, the company says, "elevates brand presentation and improves navigation," in part by eliminating or changing the outer packaging on select SKUs to better display their components and colors and thus to make them more eye-catching for shoppers. ELF has been planning this initiative since 2017.
Another change, announced in February 2019, is ELF's plan to close its 22 e.l.f. stores, which contributed 5% of sales in 2018. Following these closures, ELF will focus more on its national retailer (Target, Walmart, etc.) and digital channels. Expect ELF to report an accounting charge for these closings when it reports Q4 (Mar) results. (Note: ELF recently changed its fiscal year end to March 31 from December 31.) ELF also recently named Mandy Fields as its new CFO. She most recently served as CFO of BevMo!, a retailer of alcoholic beverages on the West Coast.
There has been a notable improvement in the sentiment of the sell side analyst community. Over just the past three weeks, we count three analyst upgrades. DA Davidson upgraded the stock this morning while Jefferies and JP Morgan upgraded the stock in early April. Many analysts have been negative on ELF, but it seems like the tide is turning.