Why E.L.F. Beauty's Inventory Build In Q4 Is A Good Thing

Higher inventory is always considered as a negative for any company, but e.l.f. Beauty Inc (NYSE: ELF)’s heavier than expected inventory at the end of its fourth quarter is good.

The cosmetics firm said it was a calculated move to increase supply of its fastest moving items, and should help with out-of-stocks at retailers, which has led to lost sales in the past.

e.l.f. Beauty delivered a strong fourth quarter EPS print, beating consensus by $0.06 driven by higher-than-expected top-line growth and gross margin expansion.

“We remain Outperform rated based on ELF's unmatched 20% sales growth algorithm, value proposition (retail for <$6), loyal and attractive consumer base, and considerable white space in existing and new account,” analyst BMO Capital analyst Shannon Coyne wrote in a note.

Coyne is also positive on the expanded shelf space at Target Corporation (NYSE: TGT) at over 50 percent as it sets the stage for further sales growth. The company also expanded its international presence in the fourth quarter, adding 150 new Wal-Mart Stores Inc (NYSE: WMT) locations in Mexico, as well as opened four new retail stores, including its first LA store.

Meanwhile, e.l.f. Beauty provided initial guidance for FY2017 ahead of consensus expectations, with a top line of $285-$295 million (vs. $281 million consensus estimate), and adj. EPS of $0.40-0.43 (vs. $0.36 consensus).

“After introducing 90 new products in FY2016, innovation should remain key to further GM expansion, with a strong product pipeline projected in FY2017,” Coyne added.

At last check, shares of e.l.f. Beauty climbed 14.23 percent to $28.90. Coyne raised the price target by $2 to $38.

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