e.l.f. Beauty (ELF)

Cosmetics company e.l.f. Beauty (NYSE:ELF) beat Wall Street’s revenue expectations in Q1 CY2025, with sales up 3.6% year on year to $332.6 million. Its non-GAAP profit of $0.78 per share was 8.3% above analysts’ consensus estimates.

Company Overview

Short for "eyes, lips, face", e.l.f. Beauty (NYSE:ELF) is a developer of high-quality beauty products at accessible price points.

While personal care products products may seem more discretionary than food, consumers tend to maintain or even boost their spending on the category during tough times. This phenomenon is known as "the lipstick effect" by economists, which states that consumers still want some semblance of affordable luxuries like beauty and wellness when the economy is sputtering. Consumer tastes are constantly changing, and personal care companies are currently responding to the public’s increased desire for ethically produced goods by featuring natural ingredients in their products.

Competitors that offer beauty or cosmetics products include Coty (NYSE:COTY), Estee Lauder (NYSE:EL), and L’Oreal (ENXTPA:OR).

Reviewing a company’s long-term sales performance reveals insights into its quality. Any business can experience short-term success, but top-performing ones enjoy sustained growth for years.

With $1.31 billion in revenue over the past 12 months, e.l.f. Beauty is a small consumer staples company, which sometimes brings disadvantages compared to larger competitors benefiting from economies of scale and negotiating leverage with retailers. On the bright side, it can grow faster because it has a longer list of untapped store chains to sell into.

As you can see below, e.l.f. Beauty’s sales grew at an incredible 49.6% compounded annual growth rate over the last three years. This is an encouraging starting point for our analysis because it shows e.l.f. Beauty’s demand was higher than many consumer staples companies.

This quarter, e.l.f. Beauty reported modest year-on-year revenue growth of 3.6% but beat Wall Street’s estimates by 2%.

Looking ahead, sell-side analysts expect revenue to grow 9.5% over the next 12 months, a deceleration versus the last three years. Still, this projection is healthy and indicates the market sees success for its products.

All else equal, we prefer higher gross margins because they usually indicate that a company sells more differentiated products, has a stronger brand, and commands pricing power.

e.l.f. Beauty has best-in-class unit economics for a consumer staples company, enabling it to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an elite 71% gross margin over the last two years. That means for every $100 in revenue, only $28.99 went towards paying for raw materials, production of goods, transportation, and distribution.

In Q1, e.l.f. Beauty produced a 71.3% gross profit margin, in line with the same quarter last year and analysts’ estimates. Zooming out, the company’s full-year margin has remained steady over the past 12 months, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

e.l.f. Beauty has managed its cost base well over the last two years. It demonstrated solid profitability for a consumer staples business, producing an average operating margin of 13.2%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Analyzing the trend in its profitability, e.l.f. Beauty’s operating margin decreased by 2.6 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, e.l.f. Beauty generated an operating profit margin of 13.3%, up 8 percentage points year on year. The increase was solid, and because its operating margin rose more than its gross margin, we can infer it was more efficient with expenses such as marketing, and administrative overhead.

We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

e.l.f. Beauty’s EPS grew at an astounding 58.6% compounded annual growth rate over the last three years, higher than its 49.6% annualized revenue growth. This tells us the company became more profitable on a per-share basis as it expanded.

In Q1, e.l.f. Beauty reported EPS at $0.78, up from $0.53 in the same quarter last year. This print beat analysts’ estimates by 8.3%. Over the next 12 months, Wall Street expects e.l.f. Beauty’s full-year EPS of $3.39 to grow 5.8%.

Free cash flow isn't a prominently featured metric in company financials and earnings releases, but we think it's telling because it accounts for all operating and capital expenses, making it tough to manipulate. Cash is king.

e.l.f. Beauty has shown impressive cash profitability, driven by its attractive business model that gives it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 7.2% over the last two years, better than the broader consumer staples sector.

Taking a step back, we can see that e.l.f. Beauty’s margin expanded by 1.9 percentage points over the last year. This shows the company is heading in the right direction, and we can see it became a less capital-intensive business because its free cash flow profitability rose while its operating profitability fell.

e.l.f. Beauty’s free cash flow clocked in at $115.3 million in Q1, equivalent to a 34.7% margin. This result was good as its margin was 24 percentage points higher than in the same quarter last year, building on its favorable historical trend.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

e.l.f. Beauty’s management team makes decent investment decisions and generates value for shareholders. Its five-year average ROIC was 11.8%, slightly better than typical consumer staples business.

e.l.f. Beauty reported $148.7 million of cash and $256.7 million of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $296.8 million of EBITDA over the last 12 months, we view e.l.f. Beauty’s 0.4× net-debt-to-EBITDA ratio as safe. We also see its $13.81 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

We were impressed by how significantly e.l.f. Beauty blew past analysts’ revenue, EPS, and EBITDA expectations this quarter. On the other hand, it pulled its full-year guidance due to tariff uncertainty. Overall, we think this was a good quarter, but the tariff commentary likely spooked investors. Shares traded down 13.5% to $78.25 immediately after reporting.

Updated: June 16, 2025 at 10:45 PM EDT

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in e.l.f. Beauty.

e.l.f. Beauty is a fine business. First off, its revenue growth was exceptional over the last three years. And while its brand caters to a niche market, its admirable gross margins are a wonderful starting point for the overall profitability of the business. On top of that, its EPS growth over the last three years has been fantastic.

e.l.f. Beauty’s P/E ratio based on the next 12 months is 35.2x. This multiple tells us that a lot of good news is priced in. e.l.f. Beauty is a good one to add to your watchlist - there are better investment opportunities out there at the moment.

Wall Street analysts have a consensus one-year price target of $124.82 on the company (compared to the current share price of $125.53).