e.l.f. Beauty's Q2 Sales Growth Highlights Ongoing Profitability and Leverage Risks

What happened

e.l.f. Beauty reported 14% sales growth in Q2 FY26, driven by brand-led innovation including the Rhode acquisition and Power Grip products, beating mass beauty peers and gaining market share. This aligns with the DeepValue report's recognition of e.l.f.'s strong revenue momentum and share gains over 23 consecutive quarters. However, the report cautions that despite top-line strength, net income declined in FY 2025 due to rising SG&A expenses and higher interest costs from acquisitions. Margins face pressure from tariffs on Chinese-sourced goods and increased marketing spend, with gross margin slipping in recent quarters. The nearly $900 million Rhode deal has significantly increased leverage, adding financial risk to an already execution-sensitive story.

Implication

The 14% sales growth reinforces e.l.f.'s competitive edge and share gains, but it does not resolve the profitability concerns highlighted in the DeepValue report, such as margin compression and SG&A inflation. With net income declining despite revenue growth, the company must demonstrate an ability to translate top-line success into earnings improvement, especially amid tariff headwinds and acquisition integration. Increased leverage from the Rhode acquisition raises financial risk, requiring disciplined cash flow management and successful brand scaling to avoid strain on balance sheet health. Valuation at ~40x trailing earnings and only ~4% upside to DCF fair value offers limited downside protection, making execution on cost control and debt reduction critical. Until clear evidence of stabilized margins and earnings growth emerges, the investment thesis remains precarious, favoring a cautious approach.

Thesis delta

The Q2 sales growth supports e.l.f.'s growth narrative and moat durability, confirming its ability to outperform in a sluggish mass beauty category. However, this does not address the core weaknesses of declining profitability, margin pressures, and elevated leverage that underpinned the 'WAIT' judgment. Thus, the thesis remains unchanged, emphasizing that future quarters must show tangible progress on earnings and cash flow to justify a more bullish stance.