Why e.l.f. Beauty Stock Was Falling Today

Investors don't like the look of e.l.f. Beauty (NYSE: ELF) because, while the fast-growing cosmetics brand smashed estimates in its fiscal first-quarter earnings report, the market disliked its guidance for the second quarter, which includes sharply lower profit margins as it steps up marketing spending.

As of 10:13 a.m. ET, the stock was down 14.5% on the news.

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e.l.f. delivered strong growth

For the period ending June 30, e.l.f., which stands for "eyes, lips, face," posted a jump in revenue of 50% to $324.5 million, with strong growth in both the retail and e-commerce channels. That was well ahead of the consensus at $304.7 million.

Gross margin improved by 80 basis points to 71%, benefiting from price increases, lower transportation costs, and better currency exchange rates. It also increased marketing and digital spend and other overhead costs sharply, leading to a 104% jump in selling, general, and administrative expenses to $164.4 million.

As a result, adjusted earnings before interest, taxes, depreciation, and amortization ( EBITDA ) increased just 4% to $77.4 million. On the bottom line, adjusted earnings per share were flat at $1.10, but that topped the consensus of $0.84.

CEO Tarang Amin called the performance a "strong start" to the year and said the company gained 260 basis points of market share in the quarter.

But investors want to see less spending

E.l.f. raised its guidance for the full year: It now sees revenue of $1.28 billion-$1.3 billion, which would equal a sales increase of 25%-27%, up from $1.23 billion-$1.25 billion, and it lifted adjusted EPS guidance from $3.20-$3.25 to $3.36-$3.41.

However, consensus estimates are at the high end of those numbers, meaning investors expected more of an increase in guidance. The company also called for adjusted EBITDA margin to come down substantially in the second quarter from 28% a year ago to the low teens.

Today's sell-off seems more like a reset in valuation after the run-up than a reflection of weakness in the business. With a planned expansion into Germany, there's plenty of room for growth as well. Buying the dip on e.l.f. stock could pay off down the road.

Jeremy Bowman has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends e.l.f. Beauty. The Motley Fool has a disclosure policy .