The elf’s perspective Beauty reveals. Should investors worry or buy the dip?

Actions of elf Beauty (ELF -2.16%) sank after the cosmetics company’s guidance failed to excite investors. The stock is still up more than 40% over the past year, even after the recent pullback.

Let’s go beyond the surface and see if the stock pullback is a good opportunity to buy stocks.

Strong fiscal first quarter revenue growth

For its fiscal first quarter, elf beat analysts’ estimates, with quarterly sales rising 50% to $324.5 million in the period ended June 30, easily beating the $305 million consensus. It has seen strength in both the retail channel and through its e-commerce site.

Adjusted earnings per share (EPS), meanwhile, was unchanged from a year ago at $1.10, but easily beat the analyst estimate of $0.84. Adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) rose 4% to $77.4 million.

The company’s profitability growth has not been as impressive as its revenue growth as it has increased marketing and other costs to support its business.

Elf far outperformed the mass market color cosmetics category this quarter, growing consumption by 26%, while the overall market fell by 1%. Conformable Nielsenincreased its market share by 260 points to 12.3%.

In the mass skincare category, the company grew consumption by 45% and became the no. 9 mass skincare in the US. However, it still only has a 2% share in the category.

The company is also growing rapidly internationally, with revenue up 91% year-over-year. It is now the No. 1 mass cosmetic brand. 4 in both the UK and Canada and the #1 mainstream cosmetics brand in Italy and the Netherlands.

Increased guidance

Elf raised its guidance for the full year, now projecting sales to rise 25% to 27%.

Data source: Elf Beauty.

It also raised its profitability forecasts. It now projects adjusted EBITDA between $297 million and $301 million and adjusted EPS between $3.36 and $3.41.

The revenue guidance disappointed investors as the midpoint was below the analyst consensus of $1.3 billion. Notably, last year the company initially estimated revenue growth to be between 22% and 24%. Continuously increased the forecast throughout the year and ended up producing a 77% sales increase.

However, last year’s upward guidance revision after the first quarter was much higher compared to this year. A year ago, the company raised its guidance peak from $720 million to $802 million, an increase of $82 million, or more than 11%. This year’s increase was a more modest revision of $50 million, or 4 percent.

Should investors buy the stock dip?

What elf has accomplished in the past few years is quite remarkable, as the company has just entered and taken a huge share of the US mainstream cosmetics category. His fast-track strategy of replicating popular offerings from prestige brands and using influencers resonated. with younger customers. Along with gaining distribution and shelf space, the company experienced incredible growth.

The company still has a long way to go in the skin care category, where it is a newer player. The playbook should be the same as for color cosmetics, so the growth path looks promising. Meanwhile, the company is already showing strong signs of success in expanding into international markets. This is another big opportunity for the company in the coming years. Next, the company could enter other adjacent markets such as fragrances.

Elf’s forward price-to-earnings (P/E) ratio of 46 times isn’t cheap in isolation, but the company has a price-to-earnings-growth ratio (PEG ratio) of just 0.8 times. Given its growth and bullish track record, the stock’s valuation looks attractive after its recent selloff.

ELF PE Ratio data (before) by YCharts

Given the growth prospects still ahead and the impressive execution, I would be a buyer of this growth stock on the decline.