Amid this quiet, holiday-shortened week, we wanted to highlight a name that has been on the upswing and that seems to finally be getting its act together: e.l.f Beauty (ELF). This is a stock that we have been following since its IPO debut in September 2016.
We were excited about the ELF story when it first came public. It seemed to fill a niche: it offers high-quality, prestige-inspired beauty products for eyes, lips, and face (hence the name "e.l.f.") at an attractive value, with the majority of its items retailing for $6 or less. There is a gap between high-priced prestige beauty products and less innovative mass products. ELF feels that it threads this needle.
However, the company reported a series of poor earnings results after going public, sending its stock down from the $30 area in late 2016 to as low as $6.70 in February 2019. And that's about the exact time that ELF announced some major changes. Its first updated focus has been to boost its marketing spend, which had been kept low, in the 3% of sales range. The goal is to increase brand awareness in a competitive and noisy marketplace. A key part of this is using more online influencers, particularly makeup artist Jeffree Star; ELF says that this strategy is creating a surge in demand for several of its first-to-mass products.
Another major 2019 initiative is known as 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 making them more eye-catching for shoppers.
Finally, ELF closed its 22 e.l.f. retail stores this year. Running retail operations is not a core competency for the company. ELF does much better selling through third parties. Most of its sales come from retailers like TGT, WMT, and ULTA as well as various online vendors. We like the changes that TGT and WMT have made to combat online competitors like AMZN, and ELF is an indirect beneficiary from these changes.
It's still early, but the stock is starting to trade like investors finally believe ELF can turn its brand around. The stock had been mired in a trading range in the $8-14 area for much of the past year. However, it has finally broken above the $14 level in recent days. It will take a strong quarter or two before we are convinced that all these changes will have an impact, but ELF seems to be on the right track.