Many investors may be familiar with the "lipstick index" theory, which correlates increased cosmetics spending with economic downturns. To no such surprise, then, e.l.f. Beauty (ELF) has been catching the eye of many investors in recent months.
Shares of the Oakland, Calif.-based affordable cosmetics brand are up nearly 90% since the start of 2023 while, on June 8, it was selected as the Zacks Equity Research Bull of the Day.
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As Chief Financial Officer Mandy Fields told TheStreet in an exclusive interview, the value proposition of a $3 lipstick or a $7 concealer is very hard to beat when consumers are watching spending more closely but still want those small mood-lifters.
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"People like to enjoy these little luxuries along the way and e.l.f. is very well positioned for that," Fields said. This interview has been edited for length and clarity.
TheStreet: You come to this interview armed with an extremely strong earnings report released on May 24. Is this something you expected to see in this environment?
Fields: We had a tremendous Q4. Net sales are up 78% and net sales growth is up 48%. As with the rest of beauty, we continue to outperform and our performance is really driven by three things: a value proposition which really stands out to our community in a high inflationary environment, our powerhouse innovation which sent some new products off the shelves and our marketing activation. We continue to put the surround sound around innovation and that has really set our performance apart.
There are statistics showing that, during difficult economic times, spending on makeup increases because these "small luxuries" can help lift morale when larger purchases are out of reach. Is the "Lipstick Index" what you think is happening with e.l.f.?
Fields: In past recessionary cycles, we've seen mass beauty outperform. It's not growing off the charts but it does continue to do better than what you see in prestige beauty. People like to enjoy these little luxuries along the way and e.l.f. is very well positioned for that. Our average price point is $6. We have high quality, fantastic innovation that compares to prestige items like the Halo Glow Liquid Filter that we sell $14 while the prestige equivalent is something like $39 and the price keeps going up. We're not in a recession right now but people are still making the choice to choose e.l.f. because of the quality and what we're able to deliver to them. We're not seeing full wholesale tradedown from prestige to mass at this point but we do have those pinpointed examples of consumers choosing to purchase e.l.f. because of the accessibility of it.
Is the goal to beat out competitors with price?
I would say that we're here for everyone. So if you're trying to stretch your wallet and want to buy something that's less expensive, you can do that do that but know that you're still going to get high quality. There's a lot of other things that you can buy out there but the product still appeals to prestige people who love Chanel and are savvy [about beauty trends and products] but do not want to spend $40 on on a face primer.
When we think about competition, we most often we think about other mass players. Brands that have been around for tens and tens and maybe even hundreds of years. Maybelline and L'Oreal (LRLCF) and all of those brands have been around forever. We certainly view them as competitors but we actually want them all to do well because as these competitors do well they bring more traffic into the beauty aisle and e.l.f. benefits from that as well.
Where, in your opinion, is e.l.f. and the rest of the beauty industry headed? What specific trends and products do you foresee taking off?
We just gave our full year fiscal '24 guidance and we are projecting 22% to 24% net sales growth in fiscal '24. Adjusted EBITDA margin expansion of about 30 basis points so adjusted EBITDA growing about 26% on top of the 56% we just grew in fiscal '23.
I think the category will continue to be strong as well [because] all areas of cosmetics are growing right now. There's been talk of lipstick growth after the pandemic and people taking off their masks so we just launched our "O Face" lipstick line that has been fantastic and I'm wearing today. I like to think I inspired our innovation team with lipstick growing during the pandemic but we're subcategory in about 15 segments and all of those segments continue to show growth. Brows, lips, face, primers... All of those things are growing right now and this just shows the enthusiasm behind the [beauty] category.
