E.l.f. Beauty Maintains Low Prices, High Aspirations Following IPO Debut

The firm, which positions its offerings as premium-quality but sells them at value price points, is on track to book roughly 19% growth for fiscal 2016, following a smash public debut in September. The brand counts Millennials and Hispanic consumers among its most avid fans and is comfortable in every retail setting, “a true multi-channel brand.”

Newly public E.l.f. Beauty, Inc. is expanding its national retail presence and strengthening ties with a diverse base of beauty enthusiasts as it closes out fiscal 2016 on a growth track that continues to turn investor heads.

An acronym standing for “eyes, lips, face,” e.l.f. seeks to enable all women to “play beautifully” by marketing what it touts as innovative, high-quality cosmetics at value pricing. Most of the brand’s products sell for $6 or less.

The Oakland, Calif.-based company saw its shares soar 56% from an offering price of $17 in their first day of trading Sept. 22, closing at $26.50. Shares now hover at around $29 apiece.

E.l.f. went into the IPO billing itself as “one of the most disruptive brands in the cosmetics industry.” (Also see "E.l.f. Cosmetics Files For IPO, Citing ‘Disruptive’ Prestige-Value Model" - HBW Insight, 7 Sep, 2016.)

The firm has since reported its first quarterly results as a public entity, booking $56.3m in sales for the fiscal 2016 third quarter, an increase of 11% compared with the prior-year period, according to a Nov. 10 release.

The performance came against a challenging comparison base, given that e.l.f. rolled out to 6,900 CVS doors in last year’s third quarter.

“Given the cleanliness of our business model, we are ambivalent whether someone buys e.l.f. cosmetics at elfcosmetics.com or at Walmart, or Target, or at Amazon. It is a brand where we have very good and consistent pricing across channels, and one where we can grow.” – CEO Tarang Amin

According to company leadership, e.l.f.’s sales for the nine months ended Sept. 30 were up 22%, and the firm is projecting sales of $227m for the full year, representing a roughly 19% gain over fiscal 2015.

E.l.f. has a four-pronged strategy for driving growth going forward.

In the firm’s Q3 call with analysts, Chairman and CEO Tarang Amin addressed the first piece, brand building, noting that e.l.f. already is a favorite among Millennials and Hispanics in particular.

The company is working to deepen those connections through digital outreach and social activations such as Beautyscape, a program that most recently brought together 50 beauty influencers for a weekend in San Francisco.

“We shared some of our latest innovations, inspired participants with make-up education and tips, and enabled strong connections and community building,” Amin explained.

According to the exec, the resulting surge in online posts from attendees led to a 25% increase in Instagram followers, and the company reached a combined total of 53m consumers across social media platforms.

Since its inception as a direct-to-consumer business in 2004, e.l.f. has relied on digital communications and word of mouth – as opposed to high-budget advertising in traditional channels – to fuel awareness and attract new customers, a tactic that has helped to keep its products uniquely affordable.

Innovation is another pillar in e.l.f.’s growth plan, and the brand’s influencer engagement is helping to draw eyes to new offerings that emerge.

For example, e.l.f. recently launched a Beautifully Precise brush collection, comprising items priced at $5 to $12. The line’s reception by Beautyscape influencers drove more than 200m impressions online, according to President and CFO John Bailey.

Consumers’ response to the brushes has been “outstanding,” he said, citing an average online customer rating of 4.8 out of five stars.

Bailey noted that e.l.f. is equipped to introduce new items “from idea to online” in as few as 20 weeks. In the third quarter, the brand debuted 20 new offerings across its makeup, skin-care and beauty tools segments, he said.

The company also launched its Beauty Squad loyalty program during the quarter, enrolling 80,000 consumers in the first six weeks, according to Amin.

The program rewards members for purchases and friend referrals and enables them to shop new items first, among other incentives. It also provides further opportunity for e.l.f. fans to help steer the company’s innovation, building on a collaborative spirit that has long been part of the brand’s DNA, he suggested.

Increased Brand Penetration

The firm aims to improve its brand penetration, another leading priority for growth. “A true multi-channel brand,” e.l.f. has national distribution partnerships with Target, Walmart and CVS and recently launched at Ulta.com.

“Our young, diverse makeup enthusiasts match up well with [Ulta’s] core target, and we love what we are seeing there,” Amin remarked.

While some leading beauty players, including The Estee Lauder Companies, Inc., face questions about possible brand dilution as they expand beyond traditional retail doors to meet younger consumers where they shop, e.l.f. is comfortable with its ubiquitous presence. (Also see "Lauder Evolution: Distribution Shift All About Consumer Reach" - HBW Insight, 25 Aug, 2016.)

“Given the cleanliness of our business model, we are ambivalent whether someone buys e.l.f. cosmetics at elfcosmetics.com or at Walmart, or Target, or at Amazon. It is a brand where we have very good and consistent pricing across channels, and one where we can grow,” Amin said.

Bailey noted that in the brand’s core accounts, “the case for incremental shelf space is fairly compelling.”

“We have found that our consumer comes in at an accessible point in the range and often travels with us throughout the price spectrum,” CFO Bailey noted.

E.l.f. products also are available through close to 20 standalone stores, seven of which opened in the third quarter, including two locations in the Los Angeles metropolitan area.

In addition to its expanding business in the states, e.l.f.’s international footprint is growing, if still relatively small, the CFO said. During the third quarter, the brand extended its reach to all Walmart doors in Canada for example.

“We do see tremendous opportunity [internationally], and we are obviously going to be prioritized and strategically sequenced as we think about growing that side of the business over time,” Bailey said.

The fourth element of the company’s growth strategy is driving “world-class” operations, which has primarily consisted of strengthening its management team of late, the e.l.f. execs indicated.

In response to an analyst question, Bailey suggested that the firm will experiment with pricing on an ongoing basis as it seeks to balance its value proposition, innovation goals and other factors.

“We have found that our consumer comes in at an accessible point in the range and often travels with us throughout the price spectrum,” he said.

E.l.f. prices have begun trending higher in certain categories, such as skin care, compared with the brand’s foundational single-digit price tags. But Bailey stressed that the company is “very focused on making sure that we maintain that [value] equation” for its enthusiasts.

In a Dec. 15 report, BMO Capital Markets analyst Shannon Coyne takes a bullish view on e.l.f.’s stock and growth prospects, citing the “highly attractive color cosmetics industry” and rising trends “that e.l.f. is at the epicenter of,” in terms of its digital focus and over-indexing with both Millennials and multi-cultural consumers.

“E.l.f. is on the forefront of communicating directly with the consumer in a digital world, coupled with an asset-light hybrid supply chain that fosters flexibility and speed-to-market,” she says, while noting the brand’s “unmatched strong value proposition” and considerable white space in existing and new retail doors.

She also predicts expanded e-commerce and international business for the company down the line. Currently, those facets account for 11% and 6% of overall sales at e.l.f., according to the analyst.