ELF Beauty Inc. shares soared nearly 19% in early Tuesday trading after the cosmetics company got a little help from big-box retailer Target Corp., which drove better-than-expected third-quarter sales results.
Elf Beauty ELF, +15.03% reported sales of $63.9 million, a decline from $71.9 million last year, but ahead of the $60.1 million FactSet consensus.
Earnings of 8 cents per share fell from 12 cents per share last year. Adjusted EPS was 17 cents. The FactSet consensus was for 8 cents per share.
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One factor impacting the results was “the earlier timing of the holiday shipments at Target,” Chief Executive Tarang Amin said on the post-earnings call, according to the FactSet transcript.
John Bailey, the company’s chief financial officer, said the Target TGT, +0.25% bump was “a few million dollars.”
“[O]bviously implicit in the low-single-digit guidance, I think you will obviously assume that some of what we would have assumed coming in in the fourth quarter moved into Q3,” he said.
Stifel analysts aren’t as upbeat about the results as investors are.
“Adjusting for the sales pull-forward, Elf’s 3Q18 sales declined [about]16%, or in line with consensus, while full-year guidance for low single-digit sales growth was maintained, implying lower 4Q18 growth,” analysts led by Mark Astrachan wrote in a note.
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“Despite the 3Q18 beat, we continue to believe visibility is lacking, with uncertainty increasingly related to whether measures including increased investment in the brand (though still anticipated to remain below beauty peers), focus on key items, and optimizing Elf’s assortment at retail improve near- and longer-term performance.”
Stifel rates Elf shares hold with an $11 price target.
Elf also discussed the impact that Chinese tariffs will have on the business. The Trump administration has imposed a 10% tariff on the majority of cosmetics imported from China, which could go up to 25% in 2019.
“As discussed we expect to mitigate the impact of the tariffs through a combination of [foreign exchange] benefits, vendor concessions and selective pricing actions on a subset of our assortment,” Elf CFO Bailey said. “These pricing actions have already been communicated to our retailer partners.”
Wells Fargo analysts emphasized that Elf is “highly exposed” to the tariffs since nearly all of its products come from China.
“While pricing introduces uncertainty and we worry about the perception to Elf’s deep value proposition, we note that the large gap in retail prices between Elf’s products and competitors should give Elf sufficient room to raise prices,” analysts led by Bonnie Herzog wrote.
Wells Fargo rates Elf shares market perform with an $11 price target.
J.P. Morgan analysts aren’t so sure those price increases will cover the cost of tariffs.
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“We highlight a key variable to these plans is price elasticity with consumers given the significant declines in volumes in response to higher pricing,” the analysts wrote in a note. “Over the last 12 weeks, Nielsen data indicates Elf’s unit sales have declined 15.9% year-over-year in response to price/mix +11.0%, which does not bode well for Elf’s ability to preserve profitability on higher pricing next year.”
J.P. Morgan rates Elf shares underweight with an $11 price target, up from $9.
Elf shares have plummeted more than 50% for the year to date while the S&P 500 index SPX, +0.41% has gained 2.4% for the period.
