Executive Summary / Key Takeaways

• e.l.f. Beauty is a disruptive multi-brand beauty company demonstrating consistent, category-leading growth driven by its accessible value proposition, powerhouse innovation, and digitally-focused marketing engine, evidenced by 25 consecutive quarters of net sales growth and market share gains.
• The company's strategic expansion into skincare (Naturium acquisition) and international markets, coupled with significant retail space gains, provides substantial white space for continued growth, diversifying its revenue streams beyond core mass cosmetics.
• Fiscal Year 2025 saw robust financial performance with net sales increasing 28% to $1.31 billion and adjusted EBITDA growing 26%, although profitability margins saw some pressure from increased investments and mix shifts, and Q4 experienced a temporary slowdown attributed to category dynamics and launch timing.
• The proposed acquisition of rhode for up to $1 billion marks a significant strategic move into the high-growth lifestyle beauty space, expected to be accretive to growth and earnings, leveraging ELF's operational expertise for retail expansion and brand building while diversifying the portfolio.
• Key risks include uncertainty surrounding potential future tariffs on China-sourced products (estimated $50M annual impact at current incremental rate), execution risks related to the SAP ERP transition and integrating acquisitions like rhode, and maintaining growth momentum in a competitive and sometimes volatile consumer discretionary market.

The ELF Advantage: Pillars of Disruption

e.l.f. Beauty, Inc. has carved out a unique and highly successful niche in the competitive global beauty industry. Since its origins with the e.l.f. Cosmetics brand in 2004, the company has positioned itself as a bold disruptor, committed to making high-quality, inclusive, clean, vegan, and cruelty-free beauty accessible to everyone. This mission is brought to life through an omni-channel distribution strategy that spans major national and international retailers, as well as a robust direct-to-consumer e-commerce presence.

The company's sustained success, marked by an impressive 25 consecutive quarters of both net sales growth and market share gains, is underpinned by five core strategic pillars: a passionate team culture, a compelling value proposition, powerhouse innovation, a disruptive marketing engine, and a unique productivity model. This integrated approach forms a competitive moat that has allowed ELF to consistently outperform the market, even against larger, more established players like L'Oréal (OR), Estée Lauder (EL), and Coty (COTY), who possess greater financial and marketing resources. While these competitors often rely on traditional advertising and distribution models, ELF's digital-first roots and agile operations provide distinct advantages.

Technological Edge & Innovation Engine

Technology is not merely a support function at ELF; it is deeply embedded in its strategic DNA and serves as a critical enabler of its competitive advantages. The company leverages digital and social platforms not just for marketing, but as a vital source of consumer insights. Insights gleaned from its direct-to-consumer site and the 5.6 million-member Beauty Squad loyalty program directly inform product development and retail assortment decisions, allowing ELF to proactively refresh up to 20% of its retail offerings annually. This data-driven approach contributes significantly to ELF being the most productive mass cosmetics brand on a dollar per linear foot basis with its largest global retail partners.

ELF's "Powerhouse Innovation" pillar is fueled by this technological connection to its community and market trends. The company is recognized for its speed and ability to bring "Holy Grail" products – prestige-inspired, high-quality items at extraordinary value – to the mass market rapidly. This capability is a key differentiator against competitors who may have longer product development cycles. In 2024, ELF held six of the top ten new product launches in mass cosmetics and four of the top ten SKUs across both mass and prestige, demonstrating the effectiveness of this innovation engine.

Beyond consumer-facing technology, ELF is increasingly integrating advanced tools into its operations. The company utilizes AI, including machine learning and generative AI, to collect, aggregate, and analyze data for product development and internal operations. While specific quantitative benefits of AI are not detailed, the stated goal is for these applications to become increasingly integral, supporting functions from product formulation insights to operational efficiency. The company acknowledges the inherent risks of AI, such as potential inaccuracies or biases, and is actively developing governance frameworks and investing in infrastructure, talent, and monitoring to mitigate these risks.

A significant technological investment underway is the implementation of SAP software to upgrade global platforms and systems. This transition, expected to go live in spring 2025 (shifted from a fall timeline to allow for more testing), is critical for scaling operations and enhancing financial and management systems to support continued growth. Management is prioritizing preparedness and testing to minimize execution risks associated with this complex undertaking.

The "so what" for investors is that ELF's strategic use of technology, from consumer insights to operational tools and emerging AI applications, underpins its ability to innovate rapidly, market effectively, maintain operational efficiency, and drive high retail productivity. This technological foundation strengthens its competitive moat, enabling it to capture market share and pursue ambitious growth targets more effectively than rivals relying on more traditional models.

Competitive Landscape & Positioning

The beauty industry is characterized by intense competition from large multinational conglomerates like L'Oréal, Estée Lauder, Coty, and Unilever (UL), which boast extensive resources, long histories, and established brand recognition, as well as a continuous influx of smaller independent, celebrity, and indie brands. ELF competes across eye, lip, and face makeup, beauty tools, and skincare, primarily in the mass and specialty retail channels where it faces off directly against the mass-market portfolios of these giants.

ELF's core competitive positioning is built on its disruptive value proposition: offering premium-quality, prestige-inspired products at accessible price points. With an average U.S. product price of approximately $6.50, significantly lower than mass competitors (>$9.50) and prestige brands (>$20), ELF attracts a broad consumer base, including Gen Z, Millennials, and Gen Alpha, where it holds leading positions in brand preference and purchase frequency. This value is coupled with a commitment to clean, vegan, and cruelty-free formulations, resonating with increasingly conscious consumers.

Quantitatively, ELF's competitive strength is evident in its market share gains. It is the number one brand in the U.S. by unit share and number two by dollar share in mass cosmetics, and the fastest-growing among the top 20 brands across both mass and prestige. This contrasts with the slower, single-digit growth rates often seen from larger, more mature competitors like Estée Lauder (5-7% revenue growth in FY24) or Coty (5-7% revenue growth in FY24), although these companies often operate at higher profitability margins (EL net margin 6-8%, L'Oréal net margin 10-12%, ULTA (ULTA) net margin 10-12%) than ELF's TTM net margin of 13.62%. While ELF's operating margin (TTM 12.03%) is competitive with some larger players, its net margin can be impacted by investments and other expenses.

ELF's strategic focus on digital engagement and rapid innovation allows it to stay ahead of trends and quickly bring relevant products to market, a key advantage over competitors with slower, more traditional development cycles. Its high productivity per linear foot in retail has earned it increased shelf space at major partners like Target (TGT) (where it's the #1 brand with over 20% share) and Walmart (WMT) (where it's risen to the #2 rank from #4), directly challenging the dominance of legacy brands in physical retail space.

The acquisition of Naturium bolstered ELF's position in the competitive skincare market, giving it two of the fastest-growing mass skincare brands (e.l.f. SKIN and Naturium) that are complementary in their positioning. The planned acquisition of rhode is a significant move into the prestige-adjacent lifestyle beauty space, bringing a brand with exceptional growth ($212 million LTM net sales DTC only) and a powerful engagement model, particularly strong in earned media value. This acquisition positions ELF to expand its presence in specialty retail channels like Sephora globally, where rhode is planned to launch, further diversifying its competitive footprint beyond mass retailers.

While larger competitors benefit from scale, extensive R&D budgets, and established global infrastructure, ELF's agility, value proposition, and disruptive marketing allow it to capture market share by appealing directly to modern consumers through relevant channels and product offerings. The challenge lies in maintaining this momentum and profitability as it scales and integrates new businesses, while navigating external pressures and potential competitive responses.

Financial Performance: A Story of Growth and Investment

Fiscal Year 2025 was another period of significant growth for e.l.f. Beauty. Net sales increased by a robust 28% to $1.31 billion, building on the extraordinary 77% growth achieved in FY2024. This growth was broad-based, with retailer channels increasing 26% and e-commerce channels growing an impressive 42%. The primary driver of this top-line expansion was higher unit volume, contributing $246.1 million to the increase, while a favorable mix and higher average item prices added $43.5 million.

Gross profit kept pace, increasing 29% to $935.7 million, resulting in a gross margin of 71.2%, a 50 basis point improvement year-over-year. This margin expansion was primarily driven by favorable foreign exchange impacts on goods sourced from China and cost savings initiatives, partially offset by shifts in product mix and higher transportation costs experienced throughout the year, including those related to Red Sea disruptions.

Selling, general and administrative (SGA) expenses saw a larger percentage increase than net sales, rising 35% to $777.7 million. This led to SGA expenses increasing to 59% of net sales, up from 56% in FY2024. The increase in dollar terms was primarily attributable to significant investments in marketing and digital ($62.8 million increase), increased compensation and benefits ($60.3 million increase), higher operations costs ($23.2 million increase), and increased spending on retail fixturing and visual merchandising ($23.1 million increase) to support retail expansion.

Operating income grew 5.6% to $158.0 million, reflecting the impact of the higher SGA spending relative to sales growth. Net income, however, decreased to $112.1 million in FY2025 from $127.7 million in FY2024. This decline was primarily driven by a significantly higher income tax provision ($33.4 million in FY2025 vs. $13.3 million in FY2024), largely due to a decrease in discrete tax benefits related to executive compensation deductions, and higher interest expense ($13.8 million vs. $7.0 million) resulting from increased borrowings. Adjusted EBITDA, a key profitability metric for management, grew 26% in FY2025, demonstrating strong underlying operational performance before certain non-cash and one-time items.

Looking at quarterly performance within FY2025, the year started strong with Q1 net sales up 50% and Q2 up 40%. Q3 saw net sales growth of 31%, but Q4 growth moderated significantly to 4%. Management attributed the Q4 slowdown to a combination of factors, including a broader decline in the mass cosmetics category in January (down 5%), the challenging comparison against the viral launch of Glow Reviver Lip Oil in the prior year's Q4, slower initial performance of some new spring 2025 product launches, and the timing of pipeline shipments which favored Q3 over Q4.

From a liquidity standpoint, ELF maintains a strong balance sheet. As of March 31, 2025, the company held $148.7 million in cash and cash equivalents and had $243.3 million available under its refinanced Amended Revolving Credit Facility. The company generated $133.8 million in cash from operating activities in FY2025, up from $71.2 million in FY2024, and produced approximately $115 million in free cash flow, up from $62 million. Capital expenditures in FY2025 were $18.5 million, primarily for fixturing, equipment, and software. The company's debt position stood at $256.7 million as of March 31, 2025, primarily from the revolving credit facility, and it ended the year with less than 1x net debt to adjusted EBITDA leverage, indicating a healthy financial position.

Strategic Expansion: White Space Opportunities

ELF's growth story is far from over, with significant white space identified across key strategic areas: color cosmetics, skincare, and international markets.

In color cosmetics, despite being the #1 unit share and #2 dollar share brand nationally, ELF sees an opportunity to double its market share in the coming years. Its performance in key retailers highlights this potential: it holds over 20% share and the #1 rank at Target, but has substantial room to grow share at Walmart (where it recently reached the #2 rank from #4) and other national drug and grocery chains, including its recent expansion into Dollar General (DG) stores. The company is also focused on gaining share in specific segments like lip (11% share, #4 rank) and eye (8% share, #4 rank), where its share lags its overall cosmetics position (12% dollar share), leveraging its innovation engine to launch products that resonate in these categories.

The skincare category represents a massive growth opportunity. With the acquisition of Naturium in October 2023, ELF now has two distinct yet complementary brands in this space. e.l.f. SKIN has rapidly ascended to a top ten skincare brand (#9 rank) with approximately 2% share, while Naturium, known for clinically effective formulas, is also one of the fastest-growing mass skincare brands. The successful launch of Naturium into all Ulta Beauty stores provides a significant new distribution channel, and further expansion opportunities exist for both brands domestically and internationally.

International expansion is a key driver of future growth, with international net sales growing 60% in FY2025 and representing 19% of total sales. This is significantly lower than the over 70% average international contribution for global beauty peers, highlighting the vast runway. ELF's strategy of partnering with leading retailers in new markets has proven successful, achieving top three brand rankings quickly in recent launches like Rossmann in Germany (its biggest international launch to date), Sephora Mexico (its first partnership with Sephora, already #1 in cosmetics), Etos in the Netherlands, and Douglas (DOU) in Italy. Planned launches in Kruidvat (Netherlands/Belgium) and Rossmann in Poland signal continued geographic expansion, leveraging its disruptive marketing engine to build brand awareness and demand ahead of entry.

The recently announced definitive agreement to acquire rhode, a fast-growing lifestyle beauty brand founded by Hailey Bieber, for up to $1 billion, is a transformative strategic move. Rhode generated $212 million in net sales in the last 12 months solely through DTC, demonstrating exceptional brand power and community engagement. This acquisition brings a complementary brand with a higher average price point (high $20s vs. ELF's core $6.50), attracting a potentially different consumer set while leveraging ELF's expertise in retail expansion (rhode is planned to launch in all Sephora US/Canada/UK stores this fall) and brand building. The deal is expected to be accretive to ELF's growth profile, adjusted EBITDA margins, and earnings, further diversifying the portfolio and accelerating global presence, particularly with Sephora.

Outlook and the Road Ahead

e.l.f. Beauty concluded Fiscal Year 2025 with net sales growth of 28% and adjusted EBITDA growth of 26%, reflecting another year of industry-leading performance despite some moderation in Q4. The company's updated outlook for FY2025, provided in February 2025, projected net sales growth of 27% to 28% and adjusted EBITDA between $289 million and $293 million, reflecting the Q3 beat, Q4 softness, and an unanticipated foreign currency loss.

Looking ahead to Fiscal Year 2026, management has opted not to provide initial full-year guidance due to the significant uncertainty surrounding potential future tariffs on goods imported from China. With approximately 75% of global production currently sourced from China, the imposition of an incremental 30% U.S. tariff since May 14, 2025 (on top of the existing 25%), is estimated to have a gross impact of approximately $50 million on an annualized basis if it remains at that level. The company has a "tariff playbook" involving a planned $1 global price increase effective August 1, 2025, supply chain diversification outside of China, cost savings, supplier concessions, and leveraging its growing international sales base to mitigate this impact. However, the broad range of potential outcomes prevents specific financial forecasting at this time.

Despite the tariff uncertainty, management remains confident in the underlying strength of the business and its ability to continue driving market share gains in the U.S. and expanding internationally. Consumption trends in Q1 FY2026 are noted as being better than Q4 FY2025 and trending well ahead of the category. The company plans to maintain marketing and digital spend at approximately 24% to 26% of net sales in FY2026, consistent with FY2025 levels, and expects dollar growth in non-marketing SGA due to ongoing investments in its team, infrastructure, SAP rollout, and international expansion.

The proposed acquisition of rhode, expected to close in Q2 FY2026, is anticipated to be accretive to ELF's growth and earnings profile. Management plans to issue updated guidance inclusive of rhode's contribution once there is more clarity on the tariff situation. The integration approach for rhode involves retaining key personnel, operating from its LA headquarters, and leveraging ELF's expertise for retail expansion and brand development, particularly the planned launch into Sephora globally.

Risks and Challenges

While e.l.f. Beauty has demonstrated exceptional growth and strategic execution, several risks and challenges could impact its future performance and the investment thesis.

The most immediate and significant uncertainty is the potential impact of tariffs on products sourced from China. The recent increase in U.S. tariffs creates a direct cost headwind that, while partially mitigated by planned price increases and other strategies, could pressure gross margins if tariff rates remain high or increase further. Dependence on a supply chain primarily based in China also exposes the company to broader supply chain disruptions from geopolitical events, natural disasters, or logistics issues.

Maintaining growth momentum in the highly competitive beauty industry requires continuous innovation and effective marketing. While ELF has a strong track record, the success of new product introductions is never guaranteed, and slower-than-expected performance, as seen with some spring 2025 launches, can impact results. Larger competitors have greater resources to invest in R&D and marketing, and the emergence of new indie and celebrity brands constantly challenges the landscape.

Customer concentration is a risk, with a limited number of major retailers accounting for a large portion of net sales. The loss of a key retailer or significant changes in their purchasing patterns could materially impact results. The economic environment also poses a risk, as beauty products are often discretionary purchases, and adverse conditions like inflation or recession could lead to decreased consumer spending.

Operational challenges include the successful implementation of the SAP ERP system and the effective integration of acquired businesses like Naturium and the planned rhode acquisition. These transitions require significant resources and carry execution risks that could temporarily disrupt operations or fail to deliver anticipated synergies.

Furthermore, the company is subject to evolving regulatory landscapes related to product ingredients, safety, labeling, advertising, and data privacy (e.g., MoCRA, GDPR, CCPA). Compliance with these regulations can increase costs and restrict business practices. Reliance on social media and influencers for marketing, while a strength, also carries risks related to negative commentary, platform changes (e.g., TikTok uncertainty), and compliance with advertising regulations.

Conclusion

e.l.f. Beauty has established itself as a formidable force in the beauty industry, consistently disrupting norms and capturing market share through a compelling value proposition, innovative products, and a digitally-savvy approach. The company's track record of growth, strategic expansion into skincare and international markets, and proven ability to drive retail productivity underscore its strong competitive positioning.

While the recent moderation in Q4 FY2025 and the uncertainty surrounding future tariffs present near-term challenges, ELF's core strategic pillars remain robust. The planned acquisition of rhode offers a significant opportunity to further diversify the portfolio, tap into the high-growth lifestyle beauty segment, and accelerate global retail presence. For investors, the story remains one of a dynamic, growing company with substantial white space ahead, balanced against execution risks related to integration and operational transitions, and external macroeconomic and trade policy uncertainties. The ability to navigate these factors while continuing to leverage its unique competitive advantages will be key to sustaining its industry-leading trajectory.