Elf and Beauty plans to roll back another tax-motivated price hike that began less than a year ago after the retailer saw a drop in demand that had risen in recent months as consumers grappled with higher gas prices.
“Anytime you take that much of a price increase, you’re going to see a decline in units, but I would say we’ve seen units decline a little bit over the last few months as consumers are suffering more from higher costs,” CEO Tarang Amin told CNBC in an interview. “So that’s one of the reasons why we want to strengthen the value proposition that we have.”
Recently, Elf tested a $4 price cut on its $18 Halo Glow skin tint and saw a nearly 40% lift in business, which showed the company how “sensitive” consumers are to prices right now, Amin said.
As a result, it plans to test further price reductions in certain product families to see if that will boost unit growth. Last August, it raised prices by $1 across its Elf assortment.
“There will be additional items that we will test lower prices on so that we can strengthen our value proposition at a time when the consumer is suffering,” said Amin.
Elf unveiled plans to cut prices as the company announced fourth-quarter earnings on Wednesday that beat Wall Street’s expectations on the top and bottom lines but issued guidance that failed to surprise.
Here’s how the beauty retailer performed during the quarter compared to Wall Street’s expectations, based on a survey of analysts by LSEG:
- Earnings per share: 32 cents adjusted compared to the 29 cents expected
- Net worth: $449 million vs. $423 million expected
Elf stock rose nearly 7% in after-hours trading on Wednesday.
For the three months ended March 31, Elf posted a loss of $49.4 million, or 82 cents per share, compared with revenue of $28.3 million, or 49 cents per share, a year earlier.
Elf’s loss was primarily due to $57.6 million in costs related to its acquisition of Rhodes that the company made under the terms of the agreement following better-than-expected product performance. Excluding that charge and other one-time charges, Elf saw net income of $19.4 million, or 32 cents per share.
Sales rose to $449 million, up nearly 35% from $332.6 million last year.
During the quarter, Elf saw its gross margin grow by 1.4 percentage points to 73% – thanks in large part to higher prices the company is now in the process of going back for more products. When asked what the reduction would mean for margins going forward, Amin said the company expects a $55 million tax refund, which will offset the impact on profits.
However, the company’s financial guidance for 2027 came in weaker than expected. Elf said it expects sales of between $1.84 billion and $1.87 billion, well below expectations of $1.87 billion, according to analysts polled by LSEG.
The profit picture looks bleak. The company said it expects adjusted earnings per share to be between $3.27 and $3.32, well below expectations of $3.61 per share.
“I’m very proud of the profit we recently delivered that was facing 55% taxes, so the team did a great job navigating a very expensive tax environment,” said Amin. “Next year, we aim for the gross margins to be flat, which we also think is very strong in the area we work in. We still have taxes at the level of 35%, which is our model for the year, and then we continued with the expansion of Rhode stores.”
Since Rhode’s acquisition, which was announced over a year ago, the celebrity beauty brand has been the main engine driving Elf’s growth. Last year, sales grew by 80 percent, driven by expansion in Sephora North America, Sephora UK and Mecca. Rhode now has the No. 1 brand status. 1 for all three sellers.
This fall, Rhode is expected to be launched in 19 European countries through Sephora so there is still a lot of “white space” for the brand, Amin said.
Over the years, Elf’s growth was primarily driven by the launch of popular products. As Rhode grows now, it’s unclear how much runway the product has and what that will mean for the company. Amin said “balanced growth” will define the story going forward across its product portfolio, which he said he is open to expanding.
“Our first priority is to realize the organic growth we have with our existing portfolio. We have a very high bar when it comes to M&A,” said Amin. “But the good news is that we are a destination for the strongest founders in the industry, as long as we look at our way of supporting the founder’s vision and being able to lend our skills and continue to accelerate growth. So I would say that M&A is definitely part of our future.”
