U.S. Markets closed

Why e.l.f. Beauty Stock Dropped 10%

Rich Smith, The Motley Fool

What happened

It's May, three months after cosmetics seller e.l.f. Beauty (NYSE: ELF) last reported earnings, and you know what that means: It's time for e.l.f. stock to go down again.

Yesterday after close of trading, e.l.f. Beauty reported the results of its "transition period ended March 31, 2019" -- a quarter that marks both "Q1 2019" for e.l.f. and, because the company is switching fiscal calendars, also the end of "fiscal 2019" as a whole. Whatever you call it, though, the numbers e.l.f. reported for this just-ended quarter were not great.

e.l.f. stock dropped as much as 19% in response to the news earlier today and remains down 9.8% as of 1:45 p.m. EDT.

Frowning child wearing Santa elf hat.

Image source: Getty Images.

So what

Sales in the quarter ending in March increased a bare fraction of 1%, to $66.1 million. Profits on those sales, however -- well, there were none. Profitable by a penny a share in Q1 2018, this year e.l.f. lost $0.37 per diluted share.

Granted, e.l.f. management tried to put a brave face on the news, arguing that sales actually increased something closer to 3% "after excluding the impact of [closing 22 retail ] e.l.f. stores." But even so, gross margins were flat at 61%, while operating costs grew to 56% of sales, eating deep into profits. After accounting for restructuring costs, this left e.l.f. with a loss on the bottom line.

Now what

With its "transition period" now behind it, e.l.f. says its results for the period it's now designating "fiscal 2019" were $268 million in sales, resulting in $0.66 per share in earnings. The next 12 months, which will henceforth be known as "fiscal 2020," should see between $235 million and $245 million in sales (so a decline of about 10%) and earnings of between $0.35 and $0.39 per share.

Taken at the midpoint, therefore, e.l.f. is saying investors can expect earnings to decline by a steep 44% over the course of the coming year -- which sounds to me like a great reason to sell e.l.f. stock.

More From The Motley Fool

Rich Smith has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.