Distribution positive aspects with Rhode ought to assist energy outcomes transferring ahead.
One among my finest investments this 12 months will undoubtedly be e.l.f. Magnificence (ELF -4.49%). An enormous cause for that is that I used to be shopping for the inventory this 12 months on its dip into the $60s.
On the time, buyers had been panicking after the corporate issued weak fiscal This fall gross sales steerage. The cosmetics trade as an entire was feeling some strain, whereas uncertainty over TikTok, the place the corporate has an enormous advertising presence, precipitated some headwinds.
Nonetheless, the slowdown did not take away from the truth that e.l.f. has taken huge market share within the mass cosmetics class over the previous a number of years. Its merchandise and advertising have resonated with youthful shoppers, whereas it is gained huge shelf house at retailers.
Whereas the impression of tariffs continued to weigh on the inventory, the corporate was capable of proactively change its fortunes when it agreed to amass high-end magnificence upstart Rhode in a $1 billion deal. The inventory has greater than doubled from my buys earlier this 12 months, however the very best could but to return.
Picture supply: Getty Photos.
The Rhode to redemption
E.l.f.’s acquisition of Rhode, which closed in August, is a big recreation changer for the corporate. Backed by superstar Hailey Bieber, the model was capable of generate gross sales of $212 million in lower than three years since its launch. Whereas that’s spectacular by itself, what’s much more spectacular is that was completed by solely promoting a handful of merchandise on its web site with little paid advertising.
Whereas e.l.f. has made its mark within the mass cosmetics house, Rhode provides it an upscale skincare and wonder model with larger worth factors and higher gross margins. Importantly, Bieber will keep on as chief inventive officer and head of innovation and stay the face of the model.
The great thing about the acquisition for e.l.f. is how nascent the Rhode model is. It solely offered about 10 merchandise, so there’s a large alternative to broaden its product line. As well as, one in all e.l.f.’s largest strengths has been its influencer advertising machine, which it can plug the Rhode model proper into.
Nonetheless, the largest development driver for shopper merchandise is distribution positive aspects. If you wish to discover a shopper inventory with plenty of upside potential, search for one that’s entering into extra shops and gaining shelf house. E.l.f. has been doing that over the previous a number of years with its namesake model, however now it will get to do the identical factor with Rhode.
Even earlier than the acquisition, Rhode was set to enter Sephora shops this fall, and it efficiently launched its merchandise in any respect Sephora shops and on-line within the U.S. and Canada earlier this month. It would enter U.Okay. Sephora shops later this fall. Sephora has greater than 3,200 shops all over the world, so it is a large alternative for the model transferring ahead. It is also price noting that Sephora will likely be carrying 16 Rhode merchandise at launch, so it is already began to broaden its product lineup.
Sephora can also be seemingly simply the beginning. Ulta Magnificence is the following logical retail associate for the Rhode model, on condition that e.l.f. already has a stable relationship with the corporate, which sells each status and mass market cosmetics and skincare merchandise. Goal is one other potential possibility down the street, as e.l.f. has gained plenty of shelf house on the retailer and it nonetheless provides a extra upscale vibe than different mass market retailers.
Is the inventory nonetheless a purchase?
I firmly consider that probably the greatest trades an investor could make is shopping for a shopper inventory forward of distribution positive aspects. It would not matter if the product is pet food, power drinks, or magnificence merchandise. Elevated distribution typically results in outsized income development, which the market then rewards. E.l.f. used this playbook as soon as, and now it could actually now run it again with Rhode.
In the meantime, the inventory nonetheless has a comparatively engaging valuation given the expansion in entrance of it. Whereas it at the moment trades at a ahead price-to-earnings (P/E) ratio of 42 (based mostly on analysts’ estimates for fiscal 2026), its worth/earnings-to-growth (PEG) ratio is just 0.5. A inventory with a constructive PEG ratio of lower than 1 is usually seen as undervalued.
Between its distribution alternative and valuation, this development inventory appears to be like prefer it has loads of upside forward.
Geoffrey Seiler has positions in e.l.f. Magnificence. The Motley Idiot has positions in and recommends Goal, Ulta Magnificence, and e.l.f. Magnificence. The Motley Idiot has a disclosure coverage.
