Story Stocks^®

Cosmetics and skin care company e.l.f. Beauty (ELF) delivered some attractive quarterly results once again, easily topping 1Q25 EPS and revenue estimates as it continues to significantly outperform a beauty market that's experiencing slower growth. ELF also raised its FY25 guidance, but not by enough to match analysts' top and bottom-line expectations, creating plenty of disappointment and sending shares spiraling lower.

• Rewinding to ELF's Q4 earnings report on May 22, the company issued its initial guidance for FY25, forecasting EPS of $3.20-$3.25 and revenue of $1.23-$1.25 bln. Both of those projections fell short of estimates, but ELF's blowout Q4 results and management's upbeat commentary regarding market share gains led participants to believe that the company was simply taking a cautious approach with its outlook.
• That assumption was not necessarily wrong as ELF raised its EPS guidance to $3.36-$3.41 and its revenue forecast to $1.28-$1.30 bln. The problem, though, is that ELF didn't even raise its EPS and revenue guidance by the amount that it beat Q1 estimates by. In other words, the company is essentially guiding down for the remainder of FY25. 
• On that note, during the earnings call, ELF said that it expects Q2 net sales growth to be slightly above its 25-27% annual growth outlook, which is materially below what analysts were modeling. Compounding the issue, the company also stated that Q2 adjusted EBITDA margin could be in the low-teens in Q2 as it annualizes its acquisition of skin care company Naturium from last October. In Q1, adjusted EBITDA margin came in at 24%.
• ELF is certainly not alone as some of its closest competitors are also experiencing softer demand. For instance, in late June, L'Oreal (LRLCY) CEO Nicolas Hieronimus stated that his company expects slower growth overall for the beauty market this year. Prior to that, Estee Lauder (EL) issued a disappointing Q3 earnings report on May 1 that included downside EPS and revenue guidance for Q4 and FY24.
• However, ELF is still vastly outperforming the competition. This is illustrated by the substantial share gains that it continues to accumulate. In Q1, ELF's cosmetics business grew by 26% in tracked channels, compared to a decline of 1% for the broader category. On a dollar basis, the company said that it's now the #2 brand in the U.S. with approximately 12% share, more than double the level it was at three years ago. Meanwhile, in skin care, ELF grew by 45% in tracked channels, a whopping 32x greater than the category growth of 1.4%
• The company attributes these huge share gains to the value proposition that it offers. Many of its products sell for under $10 -- the average price point is $6.50 -- compared to over $20 for high end brands. EFL believes that the quality it offers is also on par with the prestige brands.

Overall, ELF's upside Q1 results were solid, featuring 50% revenue growth (+91% internationally) and an 80-bps bump in gross margin to 71%, but its guidance for slower top-line growth and lower margins next quarter are too much to cover up.