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3 Takeaways From e.l.f. Beauty's Q2 Earnings Report

Last week, e.l.f. Beauty (NYSE: ELF) reported fiscal 2021 second-quarter earnings per share of $0.16 on revenue of $72.4 million, topping above consensus estimates of $0.13 on $68.5 million. Revenue in the quarter increased 7% year over year, boosted by digital and international growth. The cosmetics company is seeing success around brand-building, and its upcoming December launch of new lifestyle beauty brand Keys Soulcare is expected to contribute to future growth.

Those top-level numbers suggest e.l.f. Beauty is maintaining its growth trajectory, even in what has been a rough year for retail. But, digging further into the numbers reveals some additional indicators of where the company is headed. Let's take a deeper dive into three important takeaways from e.l.f. Beauty's latest earnings release.

Numerous shades of lipstick are lined up in rows.

Image source: Getty Images.

1. The digital segment was strong

e.l.f. Beauty's digital segment remained strong during the second quarter, growing to 13% of total revenue in the quarter, compared with 7% a year ago. Digital revenue grew by triple digits year over year during the second quarter.

"Elfcosmetics.com, the No. 1 mass cosmetics e-commerce site, powers our digital ecosystem," CEO Tarang Amin said on the earnings call. "We also saw strength in our retailer dot-coms, and on Amazon, in particular, as we launched our new beauty store. Our digital channels expanded to 13% of our total business this quarter, up from 7% a year ago."

Customer acquisition is expected to drive e-commerce revenue. The number of new customers rose 60% year over year in the quarter, with many making repeat purchases. e.l.f. Beauty is seeing high participation in its Beauty Squad loyalty program, which added nearly 40% new members year over year to reach 2.1 million. Growth in the loyalty program has been crucial to the success of the website since loyalty members make up almost 70% of all sales on elfcosmetics.com.

2. The brand and growth story is still intact

Q2 2021 marked e.l.f. Beauty's seventh consecutive quarter of net sales growth. Of the top five U.S. color cosmetics brands, e.l.f. was the only one to show growth in the quarter and expand market share, according to research group Nielsen.

e.l.f. Beauty's brand-building efforts are strong, coming in as the No. 2 preferred makeup brand for all teens in Piper Sandler's semiannual Taking Stock With Teens Survey. That's up from fourth place last year, and it's the company's highest ranking ever in the survey. The brand is resonating with teens on social media, with over 9 million followers across various social media platforms.

One way the consumer discretionary company invests in its brand is with events and influencers. For example, e.l.f. Beauty recently held its fifth annual Beautyscape, and this year's virtual event saw a 90% leap in participation. Another example of e.l.f.'s success in building community and branding is the launch of Keys Soulcare, its lifestyle beauty brand partnering with musician Alicia Keys. While the launch is scheduled for Dec. 3, the brand has already received more than 6.5 million press impressions. Instagram engagement for Keys Soulcare has engagement metrics "well above platform averages."

Future growth for the cosmetics company will see a boost from recent space expansion in the beauty aisles at Ulta Beauty and Walmart. In spring 2021, there will be new distribution with Ulta Beauty and Shoppers Drug Mart in Canada. These factors should boost revenue results in the second half of fiscal 2021. The digital segment is expected to remain strong, and Keys Soulcare revenue should also begin contributing to top-line revenue.

3. Guidance on the lower end of expectations

Guidance for all of fiscal 2021 came in on the lower end of consensus projections, with forecasts of adjusted earnings per share of $0.59-$0.63 on net revenue growth of 5%-7% year over year, or $297 million to $302 million. Analysts are projecting earnings per share of $0.63 on $301.6 million.

Part of the reason for the lighter guidance was a systems migration issue at the main distribution center during the latter part of the second quarter. This incident caused "a backlog in customer orders and higher out-of-stocks with some of our key customers," Amin said. However, she also noted that the company is now shipping at higher rates and will be able to meet customer demand.

The takeaway

Overall, e.l.f. Beauty's second-quarter earnings report showed that the company is still on a growth trajectory, supported by effective brand-building investments and expansion of space at key retailers. While short-term results may be affected by the distribution-center issue, the situation has already been fixed and won't have a long-term impact.

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