Analysts are bullish on E.l.f. Beauty after takeover of Hailey Bieber's Rhode

CNBC

5 days ago

Wall Street is thrilled with E.l.f. Beauty's latest acquisition, viewing it as a multi-pronged deal that strengthens the company's international footprint and customer appeal. Shares of E.l.f. popped nearly 25% on Thursday after the company acquired Hailey Bieber's skincare brand Rhode in a deal worth up to $1 billion. The deal, which is E.l.f.'s biggest to date, is expected to close later this year. Separate from E.l.f.'s huge bet on Rhode, the beauty products retailer on Wednesday also reported fiscal fourth-quarter results that exceeded analysts' expectations on top and bottom lines. The company's adjusted earnings per share of 78 cents on revenue of $333 million beat the 72 cents and $328 million expected from analysts polled by LSEG. Analysts view the deal as a value-added proposition to the company's efforts to expand into skincare and to attract higher-end consumers. It's also positive news for E.l.f. amid tariff woes given that Rhode sources primarily from Europe and Asia, which should help diversify E.l.f. away from its significant sourcing footprint in China. Goldman Sachs analyst Bonnie Herzog on Thursday reiterated her buy rating and $120 price target on shares. That target implies roughly 32.6% potential upside for E.l.f. from its latest close. The stock traded above $110 per share Thursday, up 21% -- putting it on pace for its best day ever. E.l.f.'s shares have soared a whopping 79% this year. "The company's results were overshadowed by the company's announced plan to acquire rhode, a prestige beauty brand," Herzog wrote in a note to clients. "We view this acquisition as a strategic positive as it further expands ELF into skincare with a prestige brand, and diversifies its customer base. While rhode is a DTC brand, it's expected to be rolled out into retail, including into Sephora, which we believe will further support growth ahead." The Rhode acquisition will further strengthen E.l.f's foray into skincare and hybrid makeup categories, Herzog said. E.l.f. plans to leverage Rhode's strong digital community engagement and its upcoming in-store partnership with Sephora to drive global growth and help further its retail distribution, the analyst added. E.l.f.'s deal with Rhode comes after the company bought skincare brand Naturium in August 2023, which became one of E.l.f.'s fastest growing brands. That followed E.l.f. acquisition of beauty brand W3LL PEOPLE for $27 million in February 2020 ELF 1Y mountain E.l.f. Beauty stock performance over the past year. Bank of America analyst Anna Lizzul is similarly bullish on shares, maintaining her buy rating and raising her price target by $18 to $113 upon the news. To be sure, that's only around $3 per share above where the stock traded at on Thursday. Like Herzog, Lizzul anticipates the Rhode acquisition to benefit E.l.f. in various ways, including expanding the company's direct-to-consumer footprint and tightening its relationship with Gen Z consumers. These younger consumers are looking for "prestige level products," she said, noting that the price of Rhode's 10 products are in a higher range compared to E.l.f's. "Rhode is expected to be accretive to gross margin, EBITDA margin, and earnings, suggesting room for deeper investments in marketing," Lizzul said. On the tariff front, E.l.f. sources roughly 75% of its products from China, but is working to reduce this by the end of fiscal year 2026 and scale its international presence, which is pleasing to analysts. Herzog expects E.l.f. products to "remain competitive owing to its strong value proposition and relative price gaps to the broader beauty industry," even as E.l.f. is raising prices on its products by $1 to offset the impact of tariffs. Herzog also expects the company's growing international business to outpace its U.S. business, which should eventually ease tariff pressures tied to the U.S.