e.l.f. Beauty’s Outlook Underwhelms. Should Investors Worry or Buy the Dip?

Shares of e.l.f. Beauty (ELF -2.16%) sank after the cosmetic company’s guidance failed to excite investors. The stock is still up by over 40% in the past year even after the recent pullback.

Let’s go beyond the surface and see if see if the pullback in the stock is a good opportunity to buy shares.

Strong fiscal Q1 revenue growth

For its fiscal first quarter, e.l.f. soared past analyst estimates, with quarterly sales jumping 50% to $324.5 million in the period ended June 30, easily topping the consensus of $305 million. It saw strength in both the retail channel as well as through its e-commerce site.

Adjusted earnings per share (EPS), meanwhile, was unchanged from a year ago at $1.10, but easily surpassed the $0.84 analyst estimate. Adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) rose 4% to $77.4 million.

The company’s profitability growth was not nearly as impressive as its revenue growth as it ramped up marketing and other costs to support its business.

E.l.f. greatly outpaced the mass-market color cosmetics category in the quarter, growing consumption by 26% while the overall market slumped 1%. According to Nielsen, it increased its market share by an impressive 260 points to 12.3%.

In the mass skincare category, the company grew consumption by 45% and became the No. 9 mass skincare brand in the U.S. However, it still only has 2% share in the category.

The company is also growing rapidly internationally, with revenue up 91% year over year. It is now the No. 4 mass cosmetic brand in both the U.K. and Canada and the No. 1 mass cosmetic brand in Italy and the Netherlands.

Increased guidance

E.l.f. increased its full-year guidance, now projecting sales to increase by 25% to 27%.

Data source: E.l.f. Beauty.

It also increased its profitability forecasts. It is now projecting adjusted EBITDA of between $297 million to $301 million and adjusted EPS to range from $3.36 to $3.41.

The revenue guidance was disappointing to investors as the midpoint was below the $1.3 billion analyst consensus. Notably, last year, the company originally forecasted revenue growth to be between 22% and 24%. It continually increased the forecast throughout the year and ended up producing 77% sales growth.

However, last year’s upward guidance revision after the first quarter was much larger compared to this year. A year ago, the company raised the top end of its guidance from $720 million to $802 million, an increase of $82 million, or over 11%. This year’s increase was a more modest revision of $50 million, or 4%.

Should investors buy the dip in the stock?

What e.l.f. has accomplished over the past few years is quite remarkable, as the company has just come in and taken tremendous share in the mass-market cosmetics category in the U.S. Its fast-follower strategy of replicating popular prestige brand offerings and using influencers has resonated with younger customers. Together with gaining distribution and shelf space, the company has seen incredible growth.

The company still has a lot of opportunity to take share in the skincare category, where it is a newer player. The playbook should be the same as it was for color cosmetics, so the path for growth looks promising. Meanwhile, the company is already showing strong signs of success expanding into international markets. This is another large opportunity for the company in the years ahead. Down the line, the company could also enter other adjacent markets such as fragrance.

E.l.f.’s forward price-to-earnings ratio (P/E) of 46 times is not cheap in isolation, but the company has a price/earnings-to-growth ratio (PEG ratio) of only 0.8 times. Given its growth and history of increasing guidance, the valuation of the stock looks attractive after its recent sell-off.

ELF PE Ratio (Forward) data by YCharts

Given the growth prospects still ahead of it and impressive execution, I’d be a buyer of this growth stock on the dip.