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e.l.f. Beauty, Inc. ELF has experienced notable volatility in its stock performance. Over the past three months, the stock has declined 24.7%, underperforming the Zacks Consumer Staples sector’s drop of 4.5% and the S&P 500's growth of 5%. This downward trend reflects a combination of market-wide headwinds and company-specific challenges, raising questions about its near-term outlook.

ELF Three-Month Price Performance vs. Sector & S&P 500

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However, the stock has rebounded recently, jumping 8% in the past month, buoyed by the company’s second-quarter fiscal 2025 results released on Nov. 6. This underscores the dual narrative surrounding e.l.f. Beauty, while the company’s strategic growth initiatives and market leadership position offer significant long-term potential, the near-term challenges demand a close watch.

ELF One-Month Price Performance vs. Sector & S&P 500

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Challenges Hindering e.l.f. Beauty’s Momentum

The beauty and cosmetics industry has been navigating a complex macroeconomic environment marked by shifting consumer behaviors and heightened economic pressures. Inflation, cautious discretionary spending and evolving preferences have created headwinds for many companies in the sector. These challenges are particularly pronounced in the U.S. market, where a contraction in core categories like color cosmetics signals broader demand volatility.

The broader U.S. color cosmetics market contracted by 5% in the second quarter of fiscal 2025, a sharper decline compared to the 1% contraction in the preceding quarter. This reflects increasing consumer caution amid economic pressures, particularly in discretionary categories. While e.l.f. Beauty managed to achieve 16% growth in U.S. tracked channels, it fell short of management’s 20% expectation, signaling vulnerability to broader market trends.

e.l.f. Beauty faces intensifying competition from legacy players such as The Estee Lauder Companies EL, and emerging indie brands, each vying for consumer attention in the highly fragmented beauty space. Legacy brands benefit from extensive distribution networks and deep marketing budgets, while indie brands often leverage niche positioning and viral digital campaigns to capture market share. The rise of clean beauty and premiumization trends has encouraged consumers to explore alternatives, adding pressure on e.l.f. Beauty to continuously innovate and differentiate.

In the pursuit of growth, companies like e.l.f. Beauty are increasingly investing in marketing, talent and strategic acquisitions to bolster their competitive positioning. However, these growth-oriented expenditures come at a cost, particularly in a challenging macroeconomic environment. e.l.f. Beauty’s SG&A expenses surged to 53% of net sales in the second quarter compared with 45% in the year-ago period, driven by increased marketing spending, team expansion and Naturium integration costs. Rising operational expenses can weigh heavily on profitability, especially when paired with slowing sales growth in key markets.

Balancing the need to invest in growth while protecting profit margins remains a key challenge for e.l.f. Beauty as it adapts to a changing and competitive industry.

Is ELF Stock Still Overpriced?

e.l.f. Beauty's valuation remains a matter of debate. Despite the pullback in the stock price, ELF is trading at a premium relative to industry peers, which seems difficult to justify given the present concerns. The company is currently trading at a forward 12-month P/E of 37.24, much higher than the industry’s 24.13 and the sector’s 17.27. e.l.f. Beauty's Value Score of F further reinforces these concerns.

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Growth Drivers Supporting e.l.f. Beauty’s Outlook

e.l.f. Beauty's growth trajectory is fueled by a combination of strong financial performance, consistent market share gains, and a relentless focus on innovation. The company delivered remarkable second-quarter fiscal 2025 net sales growth of 40% year over year, attributed to international growth, digital channels and increased domestic distribution.

e.l.f. Beauty has achieved 23 consecutive quarters of market share gains, distinguishing itself as a leader in the cosmetics industry. In the second quarter, the company added 195 basis points (bps) of U.S. market share, building on the 330 bps gained in the year-ago period. This sustained outperformance demonstrates the strength of its value proposition, innovative product portfolio and marketing effectiveness.

e.l.f. Beauty’s powerhouse innovation strategy is a cornerstone of its growth. Its innovation pipeline focuses on leveraging consumer insights and trends to develop high-quality products with competitive pricing, continuously refreshing its portfolio with products that maintain customer interest and drive category growth and enhancing core franchises such as Power Grip Primer and Halo Glow, which remain industry-leading performers.

e.l.f. Beauty has been strategically expanding its retail presence to increase brand visibility and accessibility, ensuring its products reach a broader consumer base. The company has made significant strides in securing expanded shelf space with key retail partners, such as Target TGT and Dollar General DG. This enhanced presence at high-traffic retailers not only boosts e.l.f. Beauty’s visibility in both urban and underserved rural markets but also reinforces its mission to make premium beauty products more accessible.

Capitalizing on the surge in online shopping, e.l.f. Beauty has made significant investments to strengthen its digital and e-commerce platforms. In the second quarter, digital consumption grew 40% year over year, with digital channels representing 20% of total sales, up from 17% last year.

This growth is driven by the success of e.l.f. Beauty's Beauty Squad Loyalty Program, which has expanded to 5.3 million members, growing 30% annually. Initiatives like early access to product launches and deeper digital partnerships are accelerating e.l.f. Beauty's e-commerce performance.

These upsides position the company for continued success in the competitive cosmetics industry. On its second-quarterearnings call management raised its fiscal 2025 net sales growth guidance to 28-30%, up from 25-27% expected before, and its adjusted EBITDA outlook to $304-$308 million from the earlier view of $297-$301 million. This reflects management’s confidence in its ability to sustain strong performance across its diversified portfolio.

Navigating ELF Stock: A Guide for Investors

e.l.f. Beauty has faced stock volatility, with recent declines overshadowing its strong growth potential. The company has demonstrated impressive market share gains, consistent innovation and significant expansion in digital and international markets.

However, rising operational expenses and competition from both legacy and emerging brands pose hurdles. While concerns about its high valuation persist, the company’s growth trajectory and strategic investments support a cautiously optimistic outlook.

For now, maintaining positions in e.l.f. Beauty appears prudent. The company currently carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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