The Ratings Game: E.L.F. Beauty says it’s putting the $13.7 million it used to spend on stores to better use

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E.L.F. Beauty Inc. says it’s putting the $13.7 million it used to spend annually to run its stores to better use in other parts of the company.

E.L.F. ELF, -0.11%   announced in February that it would shutter all of its 22 stores.

“I’m happy to report that we successfully exited our 22 store leases for well below what we expected at the onset of this transition,” said Tarang Amin, E.L.F.’s chief executive, on the earnings call, according to a FactSet transcript.

“Redeploying the $13.7 million in annual spend that we used to invest in stores is driving greater momentum in our national retailer and businesses.”

E.L.F. reported fiscal second-quarter earnings and revenue that beat expectations.

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“E.L.F. remains the most productive brand on a dollar-per-foot basis at both Walmart and Target, with growing productivity at Ulta, the company’s third-largest customer,” wrote D.A. Davidson analysts led by Linda Bolton Weiser.

D.A. Davidson rates E.L.F. stock buy with a $24.50 price target up from $21. Analysts there also note the growing share of the color cosmetics market that E.L.F. is snapping up.

Amin noted on the call that Nielsen data shows the company’s share of color cosmetics has reached 4.7%, up 70 basis points.

Armed with that data, E.L.F. raised its fiscal 2020 guidance to $265 million to $272 million from $246 million to $256 million. It also lifted its adjusted earnings per share guidance to 44 cents to 48 cents from 37 cents to 41 cents. FactSet is forecasting sales of $271.6 million and EPS of 48 cents.

“E.L.F. is encouragingly taking share and bucking weak color cosmetics trends through superior innovation and connectivity with its customer base through creative mediums,” wrote Cowen analysts led by Oliver Chen.

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E.L.F. launched a TikTok video challenge that drove 1.5 million videos and 3.2 billion views. The company also reached 5 million Instagram followers during the quarter.

“E.L.F.’s customers are highly engaged, powerful spenders: millennial beauty enthusiasts,” said Cowen. Driving engagement through digital marketing will be important for selling to this group.

Cowen rates E.L.F. outperform with a $22 price target, up from $20.

Though E.L.F. raised its guidance because it was gaining market share in color cosmetics, Stifel analysts are still concerned about the trend for the category.

“We believe E.L.F. Beauty has considerable white space in the U.S. beauty market and longer-term potential internationally, particularly given its strong value proposition for national retailers, which make up over 80% of revenue,” analysts wrote.

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“However, we believe slowing mass makeup category growth in the U.S. is a watchpoint for the company given the majority of its sales comes from cosmetics.”

Stifel rates E.L.F. hold with an $18 target price, up from $16.

E.L.F. stock has skyrocketed nearly 108% for 2019 so far while the S&P 500 index SPX, +0.53%   is up 23.5% for the period.