Why e.l.f Beauty Inc. Stock Fell 10% in February

MarketsMotley Fool

What happened

Shares of cosmetics specialist e.l.f. Beauty (NYSE: ELF) trailed the market last month, dropping 10% compared with a 4% decrease in the S&P 500, according to data from S&P Global Market Intelligence.

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The slump put the young company about 30% below its initial public offering price from late 2016.

So what

The retailer announced holiday quarter results late in the month that showed clear signs of a difficult sales environment in the industry. Revenue growth fell to a 7% rate from 28% in the prior quarter, and gross profit margin dropped to 58.5% of sales from 59.3% a year ago.

Now what

Those holiday figures tracked closely with management's latest guidance, but it was the company's outlook that had investors feeling jittery. Specifically, CEO Tarang Amin and his team see revenue inching higher, by between 6% and 8% in 2018, while net income holds steady at roughly $31 million. That growth figure had been closer to 20% in each of the past two years, and so investors understandably scaled back their valuation projections in response to the slower expansion pace.

e.l.f. can't do anything about the weak industry trends, but while waiting for dynamics to improve, management is focused on ramping up the pace of new product releases while expanding the sales footprint with new retailing partnerships, such as the recently announced deal with Ulta Beauty.

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Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool recommends e.l.f. Beauty, Inc. and Ulta Beauty. The Motley Fool has a disclosure policy.