e.l.f. has returned an incredible 651% in the past 2 years with its share price rising from $27 to $200.
The stock has risen 1,567% over the past 5 years making it the #1 top performing stock on the NYSE in that time period.
And their 2024 guidance is that their growth and returns will continue.
So ELF is an impressive stock. But what can you as a leader of smaller, private brand learn from them? I think ELF has provided a masterclass in three areas which founders can study and emulate.
- Positioning
- Landing and Expanding
- Betting Big
#1 Positioning
The cosmetics and personal care industry is close to a $500 billion market. While industry pros will have further nuance, the industry breaks down into 5 categories: skincare, haircare, make-up, fragrances and toiletries. The industry further segments around pricing (luxury, prestige, ‘masstige’, mass and value), distribution (e.g. Target, Ulta, department stores, small retail, DTC, Amazon etc) and geography. Obviously brands move and overlap between all these segments.
So, in a multi-dimension, rapidly changing and highly competitive market, how do you position?
Let’s look at e.l.f.’s two segments. Cosmetics and skincare comprise 1,800 brands. And we see a very steep brand pyramid with only 28 brands with sales over $100 million and only 5 brands with sales > $700 million.
Color cosmetics was e.l.f.’s initial segment and when we look there we see that the top 4 largest brands by sales volume, Maybelline, L’Oreal, Revlon, and CoverGirl are familiar names because they have spent multiple decades and hundreds of millions in advertising. In color cosmetics, the path to scale is volume.
I think e.l.f. seized a really interesting opportunity to counter position. The segment was (and still is) dominated by old and legacy mass brands. L’Oreal is 115 years old, Maybelline is 107, Revlon is 92 and the youngest of the legacies is the sprightly Covergirl at 63 years old. e.l.f. understood they could disrupt the status quo by focusing on younger women and thus become the choice of a new generation - ‘we are not your Mom’s Maybelline.’ Younger women haven’t been subjected to decades of advertising and are more open to sampling.
Of course there’s the issue of money - younger women don’t have as much as older women. So e.l.f. focused on a super high value to price proposition which would resonate with younger consumers with less disposable income and a higher propensity to sample. They achieved this high value to price by dramatically lowering COGS through production in China.
The AUR (Average Unit Retail) for e.l.f is around $6 as compared to $9 for mass brands and $20 for prestige. When standing in the cosmetics aisle, the choice to put e.l.f. in the basket is easy. In fact, in critical product lines, e.l.f. is achieving 2.5X to 5X better price points than prestige.
The success of this positioning masterstroke is shown by the fact that in the past 5 years, e.l.f. is the only top 5 brand in color cosmetics to expand share (+565%) at the expense of Maybelline (-20%), L’Oreal (-70%), Covergirl (-300%) and Revlon (-205%).
#2 Land and Expand
We commonly think of land and expand in regards to a market beachhead (like in Crossing the Chasm) or within an account, but e.l.f. has expanded the concept across more of its activities, including:
- Distribution
- Product Offerings
- Customers
- Geography
- Marketing
In distribution, e.l.f. is focused on expanding shelf feet inside their current distribution partners like Target, Ulta and Wal-Mart and they do this by focusing on being the most productive brand in the category meaning they drive high sales per SKU.
They also expand within distribution channels such as rolling out to new retail partners in the US like CVS and growing DTC through their site, popular app (1.8 million downloads) and loyalty program (4.5 million members growing 30% per year).
In product offerings, e.l.f. has expanded relentlessly not only within subsegments of color cosmetics, but also into skincare through the e.l.f. brand as well as through acquisitions. They recently completed the acquisition of Naturium for $333 million which brings an instant boost to their skincare market share.
e.l.f.’s dominant customer base is Gen Z and Millenial women. But here again they are actively expanding their core by specifically targeting young Latin women who spend on average 77% more on cosmetics than the general population. They are also expanding younger (see their Roblox experience) as well as older (their TV ads for example featured Jennifer Coolidge last year and the cast of Suits this year). The move towards older is a nice bit of jujitsu. Consumers in fashion and beauty are heavily influenced by younger consumers so e.l.f. can leverage its strength with younger women to signal to older women about the brand. Lastly, they are even expanding to men (Naturium’s focus on skincare has a significant male customer base).
While the US is currently 85% of sales, international is becoming a bigger part of their growth story with focused efforts in Canada, UK and Italy.
Lastly, Marketing at e.l.f. may be the best job experience in brand. Not only do they land in lots of channels and mediums, they back up efforts with serious budget to expand. Their willingness to experiment and take risks on channels and programs is a marketer’s dream. In the past year, they bought a Super Bowl ad, launched on Roblox, commissioned a song from Latin pop star Manuel Turizo and made a mockumentary.
Experimentation is backed by a huge commitment in ad budget. In 2024, ELF is guiding to Sales & Marketing being around 24% of Net Sales. If they can grow sales 70% (2024 guidance) meaning $1.5 billion in sales, that would equate to a Sales & Marketing budget of around $360 million.
#3 Betting Big
e.l.f. doesn’t play it safe. They are placing two big bets in 2024.
One, they have dramatically expanded inventory and ended 2023 with $205 million in inventory. This compares to a year ago when they ended with $81 million in inventory. A small part of this increase is a change in when they take ownership of inventory (in China now as opposed to when it arrives at 3PL previously) and absorbing the inventory from the Naturium acquisition. But the large majority of the increase is to support increasing volume in current retail partners and the roll out of new partners like CVS. This change has increased their Days Outstanding Inventory to 205 days in the current quarter from 197 days for LTM.
To pay for this increase in inventory and to close the Naturium transaction, they have maxed out their leverage using all of their term loan facility ($115 million) and 90% of their $100 million revolver. They ended the the year with $75 million cash on hand.
Two, e.l.f. is ramping up marketing spend. Their guidance is 22% - 24% of Net Sales which if they achieve their sales targets would result in S&M being ~ $360 million. This is a MASSIVE increase over their LTM S&M of $134 million.
ELF converts revenue to cash at about 7% based on last 12 months. So it is here that we see how big a bet they are making. Their debt service is going to increase dramatically and the increase in S&M spend can further depress margins. If they can achieve the sales growth they are planning for, the bet pays off. But if sales are not as strong and their marketing is not as productive, their ability to generate Free Cash Flow will be impaired by the higher debt service and lower margins.
Conclusions
For the smaller, private and scaling brand leader, e.l.f. provides 3 lessons. The most important is positioning. e.l.f. did this masterfully by counter positioning to the big, old and legacy brands in mass color cosmetics. I have to imagine that once e.l.f. had their positioning set, everything else fell into place. They knew what they had to achieve in terms of price to value, distribution, customer segments, marketing and product expansion.
The ethos of land and expand simplified management and decision making. If you weren’t sure what to do, a good bet was keep expanding and find new places to land.
- Get into Target? Expand shelf space by becoming their most productive SKU’s. Go get CVS!
- Selling DTC? Increase loyalty! Make and app and sell through that!
- Selling to young women? Be where they are! Are we on Roblox and YouTube?
Some additional resources:
https://investor.elfbeauty.com/news-and-events/events-and-presentations
https://staticcontents.investis.com/media/e/elfcosmetics/elf-cagny-2024.pdf