Despite broader economic challenges, beauty products thrive due to the “lipstick effect,” as consumers hold on to small, affordable luxuries that boost confidence and routine. 

e.l.f. Beauty (ELF) stands out by offering quality products at accessible prices, leveraging viral social media campaigns to target a loyal, digitally engaged audience. 

Its adaptability in pricing, e-commerce, and supply chain management has driven strong growth and high returns. 

While potential tariffs and a TikTok ban pose risks, e.l.f. remains well positioned with resilient strategies.

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Over the years, personal care products have evolved into must-haves for many consumers, with small indulgences like lipsticks and face masks offering a sense of comfort and joy.

This pattern holds even in tougher economic times, when many cut back on big-ticket expenses but still reach for their favorite moisturizer or highlighter.

Experts refer to this as the “lipstick effect,” where customers hold on to affordable luxuries that elevate their mood, boost confidence, and provide a sense of normalcy.

Despite broader market volatility, data consistently shows that personal care and beauty lines remain steady.

Retailers like Kohl’s and Target report beauty sales holding strong while other categories lag.

Whether it’s to maintain a familiar routine, combat everyday stress, or simply enjoy a small treat, people continue to invest in products that help them look and feel good.

e.l.f. Beauty (ELF) is becoming a consumer staples brand that has demonstrated resilience and growth in a changing economic environment.

What sets the company apart is its ability to deliver high-quality cosmetics at accessible price points.

With 35% of Americans unwilling to cut beauty budgets even in downturns, e.l.f. targets a loyal base of Millennials and Gen Z shoppers who spend hours daily on social media.

The company’s usage of platforms like TikTok and Instagram, through influencer partnerships and viral campaigns, keeps it top-of-mind.

With millions of followers across social media platforms, the brand quickly responds to emerging trends and channels this insight into frequent, successful product launches.

During the 2020 pandemic, when competitors like Estée Lauder and Ulta saw sales decline, e.l.f. grew 6% by doubling down on e-commerce and affordability.

In 2022’s inflationary environment, it grew 32% as shoppers traded down. Even amid tariff scares in 2018 and 2019, e.l.f.’s losses were minimal compared to peers, thanks to agile pricing and supply chain adjustments.

International expansion is another key driver of e.l.f.’s growth. Currently present in 15 countries, the company has seen international revenues climb faster than domestic sales in recent years.

All these factors combined enabled the company to achieve 70% Uniform return on assets ”ROA”.

Despite this strong performance, the market has concerns over weakening consumer health, reflected by e.l.f.’s stock trading at a modest 24x Uniform P/E.

We can see what the market thinks through our Embedded Expectations Analysis (“EEA”) framework.

The EEA starts by looking at a company’s current stock price. From there, we can calculate what the market expects from the company’s future cash flows. We then compare that with our own cash-flow projections.

In short, it tells us how well a company has to perform in the future to be worth what the market is paying for it today.

At the current stock price, the market expects the company’s Uniform ROA to decline to around 55%.

The company faces a few challenges. Tariffs on Chinese imports pose the largest threat, as 80% of production remains overseas.

However, e.l.f. has navigated this before via supplier negotiations and diversifying manufacturing.

A TikTok ban could disrupt its digital strategy, but with only 16% of sales direct-to-consumer, physical retail partnerships provide a buffer.

With continuous product innovation and effective digital marketing, e.l.f. Beauty is well positioned to capitalize on shifting consumer preferences toward affordable, quality beauty products, suggesting robust upside potential if the firm can continue to capitalize on its strategy.

Best regards,

Joel Litman & Rob Spivey
Chief Investment Officer &
Director of Research
at Valens Research