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This article first appeared in the Telegraph’s Quester section.
elf beauty Rated AAA by Citywire Elite Companies (US:ELF) has emerged as one of America’s most sensational consumer brands over the past decade. This cosmetics group has experienced tremendous growth, is very profitable and looks like it can offer more of the same.
The success of Elf’s products depends on its requisite appeal to Gen Z, based on expert marketing and product innovation. The brand is inclusive and promises products that are cruelty-free, clean, vegan, high quality and affordable to a primarily young customer. This ethos is reflected in our board of directors and employees, who are young, diverse and more than two-thirds women.
Elf has achieved compound annual growth of 27% and adjusted earnings per share (EPS) of 34% over the past five calendar years. Gross margin (before operating costs) for the last reported fiscal year ended March 31, 2023 was 71% and return on capital employed was 20%. The balance sheet is also healthy, with net debt at the end of 2023 being 0.9 times that of Evida.
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Elf, which stands for eyes, lips and face, was founded in 2004 as an online-only brand. This is a move necessitated by a beauty magazine’s insistence on distributing the products it features nationwide.
The company’s rapid growth attracted private equity backing before listing on the New York Stock Exchange in 2016. Since then, the company has attracted investment from some of the world’s top performing fund managers.
Twelve of these professional investors are in the top 3% of more than 10,000 equity fund managers tracked by financial publisher Citywire and own Elf shares. As a result, we received the highest AAA rating from Citywire Elite Companies.
Source: Citywire/Morningstar, latest holdings data.
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“The company is phenomenal at creating brand value around its products,” said Fred Stansk, manager of the top-performing Flutterer Behavioral Small Cap Growth Fund, which counts Elf among its top 10 holdings. ” he says.
Supporting their success is the fact that elves are very smart operators. Combining high profit margins, high quality and low prices is not easy. The key to the Elf’s ability is the asset-poor “Hybrid His Supply His Chain.” In practice, this means developing flexible relationships with many Chinese suppliers, including those on standby.
We have very close relationships with these suppliers. At the end of the previous fiscal year, about a quarter of its employees were based in China, which now has a total of 420 employees. This closeness allows us to work closely with our suppliers on product innovation.
This is also something Elf is good at. We use social media to stay on top of trends and launch new products incredibly quickly.
The average delivery time for new products is just 20 weeks, and some products can be brought to market in as little as 13 weeks. Meanwhile, Elf’s unique digital marketing for these products is further expanded as customers tease their products online.
Read more: Smart money stocks that have been big hits this earnings season
In the year to the end of March 2023, 22% of net sales, or $126m (£99m), was spent on marketing. Its effectiveness is evidenced by Elf’s share of the U.S. market for color cosmetics (eyeshadows, foundations, lipsticks, etc.) growing from 4.1% to 9.8% in five years. This took him from the 5th place company in the mass market to the 3rd place.
The company is currently increasing brand awareness beyond Gen Z through a national television campaign. In addition, overseas sales are increasing, and currently account for 14% of total sales, compared to around 70% for long-established competitors.
Skin care is also a huge growth opportunity. Last year’s $355 million acquisition of Naturium doubled the product category’s share of group sales to 18%. The U.S. skin care market is only slightly smaller than cosmetics, at an estimated $6 billion versus $7 billion, but it is growing faster, at 6% versus 1.5% annually. Therefore, elves have plenty of room to grow.
Despite its online roots, much of the group’s sales are now derived through large retail chains. In the previous fiscal year, the top three customers generated his 60% of revenue. This concentration of sales is a risk, but Elf is a brand that retailers have good reason to stock, as products fly off the shelves.
Another risk for shareholders is valuation. At 57 times expected earnings for the next 12 months, this rating is in nosebleed territory after the stock’s 782% rise over the past two years.
However, some of the world’s top fund managers consider the high return on capital, exemplary track record and continued growth forecast to see earnings per share more than double last year’s by 2025. So I believe this stock has value.
| important facts | |||
|---|---|---|---|
| Market-first orientation | $11.5 billion | price | $207 |
| 52 week high/low price | $222 / $68 | return to capital employed | 15.6% |
| Best price for revenue | 58.9 | F’cst dividend yield | – |
| Aim for EPS growth rate | 22.3% | 12 month stock price | 187.2% |
Source: FactSet. Forecasts based on the next 12 months.
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