Hispanicist
Cosmetics and other beauty products are incredibly important in modern society. This is especially true for women. These products affect how people look and, in turn, can have an impact on how they feel and how they are perceived by others. Not only that, also have a significant impact on the health of our skin, hair, etc. A company dedicated to meeting the needs in this space is elf beauty (New York Stock Exchange: ELF). Lately, the fundamental performance of the business has been incredibly strong. That has been instrumental in driving stocks higher, but that doesn’t mean it makes sense to buy stocks right now. Given how things look from a stock price perspective, the company now looks incredibly lofty. And in the absence of an increase in profitability, any move higher could result in the stock overpricing. For these reasons, I have decided to maintain my ‘hold’ rating on the company, but am about to downgrade it to ‘sell’.
A work of beauty that is growing very well.
The last time I wrote an article about Elf Beauty was on June 1st of this year. In that article, I acknowledged that the company’s fundamental condition was improving. I said the stock didn’t look bad from a forward pricing perspective, but ultimately concluded that the company seems more or less fair value based on its historical financial performance and pricing. As a result, I rated the company ‘hold’, reflecting my belief that it would likely achieve a bullish or bearish share price that would more or less match the market for the foreseeable future. However, things have not gone exactly as expected. While the S&P 500 is up 4.5%, shares of elf Beauty are up 38.7%.
Although some of this upward movement is likely due to the broader rally in the market, it is certain that the biggest contributor was the fundamental performance that the company reported for its last fiscal quarter. You see, the last time I wrote about the company, we had data that covered up to the end of its 2022 fiscal year. But since then, we’ve seen data released for the first quarter of its 2023 fiscal year. So far, the picture looks pretty right.
Author – SEC EDGAR Data
According to management, the company’s revenue amounted to $122.6 million in the first quarter of 2023. That represents an increase of 26.4% from the $97 million generated in the same quarter of the previous year. Management attributed this advantage primarily to the strength of its domestic and international retailers. In the retail channel category, sales grew 26%, or $22.6 million in total. For the eCommerce part of the business, the growth was $3 million, which works out to about 28% year over year. The company benefited to the tune of $10.9 million from increased sales associated with higher volume. Meanwhile, higher prices added $14.7 million to the company’s top line.
This strength also affected the company’s results. Net income for the quarter was solid at $14.5 million. That represents a 74.7% increase over the $8.3 million generated a year earlier. There were two key contributors to this. The biggest of these was a reduction in the company’s cost of sales relative to revenue. This number decreased from 36% to 32% year over year. According to management, this improvement was driven by two different factors. The first of these, which represented an improvement of $16.3 million, was an increase in volume. This makes sense if you consider that the company can effectively generate more product volume with the same asset value. Meanwhile, price increases help add $4.8 million to the company’s bottom line. In addition to this, the company also saw its selling, general and administrative expenses fall from 52% of sales to 50% of sales, driven by cost increases associated with compensation, benefits, marketing and digital spending activities, which were lower than the increase in revenue experienced by the company. Other profitability metrics followed suit. Operating cash flow increased from $7.5 million to $30.6 million. Adjusting for changes in working capital, the increase would have been less than $23.7 million to $30.8 million. Meanwhile, the company’s EBITDA expanded from $21.7 million to $31.7 million.
For fiscal 2022 as a whole, management expects revenue of between $448 million and $456 million. This compares to previous guidance of between $432 million and $440 million. Clearly, that played a role in driving up the company’s stock price. EBITDA should also be higher, between $83.5 million and $85 million. Previously, management expected this to be between $80.5 million and $82 million. Management is also asking for adjusted net income of between $47 million and $48.5 million. That beats the previous expected range of between $43.5 million and $45.5 million. No guidance was provided regarding operating cash flow. But if that rises at the same rate as EBITDA should, we should anticipate a reading of $109.4 million on an adjusted basis.
Author – SEC EDGAR Data
Using this data, we can calculate that the company is trading at a forward price with an adjusted operating cash flow multiple of 17.6. Using 2021 figures, it was 29. Meanwhile, EV to EBITDA multiples should fall from 38.1 using last year’s results to 23.1 using projected results for this year. To put this in perspective, I compared the company to five similar companies. On a future operating cash flow basis, these companies ranged from a low of 7.1 to a high of 31. In this case, elf Beauty is more expensive than all but one of the companies. Meanwhile, using the EV to EBITDA approach, the range is between 7.6 and 20.1. This would make our prospect the most expensive of the bunch.
Company Price / Operating Cash Flow EV / EBITDA elf beauty 17.6 23.1 USANA Health Sciences (USNA) 13.7 8.1 Olaplex (OLPX) 31.0 20.2 Edgewell Personal Care Company (EPC) 15.1 10.3 Medifast (MED) 15.7 7.9 Herbalife Nutrition (HLF) 7.1 7.6 click to enlarge
Put off
Based on the data provided, I find elf Beauty to be an interesting prospect. But at the same time, the growth the company is achieving still makes it seem a bit expensive. Given how fast the company is expanding and how well its growth is adding to its bottom line in the form of earnings and cash flow, I would hesitate to downgrade the company. But given how high stocks are, I think the upside is severely limited. In the event that the stock goes much higher, I could go full bearish. But for now, I think it still deserves a ‘hold’ rating.
Source: seekingalpha.com