Tariffs Have Rocked e.l.f. Beauty Shares. Why the Fundamentals Still Look Alluring.

Tarang Amin, CEO of e.l.f. Beauty, discusses the discount cosmetics seller’s winning formula. (Michael M. Santiago/Getty Images)

Forget what you’ve heard about lipstick as an economic indicator. There is scant evidence that women buy more of it as an affordable comfort when budget pressure mounts, as a cosmetics tycoon famously claimed. In developed markets like the U.S., lipstick sales appear more closely tied to the number of lips, plus the inflation rate, with some brand-switching and trading up or down in price.

But there is an interesting lip-onomics case study playing out at the moment. What happens when a company known for $7 knock-offs of $50 lipstick brands raises its prices by $1?

On one hand, that is a hefty percentage hike. On the other hand, the result is still relatively cheap. Investors aren’t quite sure where that leaves what economists call the price elasticity of demand—the tendency of customers to buy less of a good as prices rise. In this case, the uncertainty is leading to swings in the stock that would scare off a memecoin trader.

The company is e.l.f. Beauty —the acronym stands for eyes, lips, face. Just over two decades ago, a father-son duo launched an online store selling a handful of cosmetics for $1 apiece. Growth since then has been mostly rapturous. Today there are many more products and higher prices, but still a focus on undercutting prestige brands. “$19 for a lip balm? get e.l.f.ing real. only $5,” touts the company’s website. Customers can buy direct or at Target, Walmart, CVS, Ulta Beauty, and many other stores.

Tarang Amin, 60, has been e.l.f.’s chief executive since 2014 and describes his personal social-media game as “probably woefully inadequate.” But he has built a workforce that is 74% female, 76% Gen Z and millennial, and at home online, from Instagram and YouTube to Roblox and Twitch. That drives marketing, and often product development.

“My [chief marketing officer] sometimes terrorizes me by dragging me on TikTok live,” says Amin. “There was a time I went on last year and she said, ‘Alright, you got the big boss now. Tell him what you want.’ ” The chat field lit up with mentions of $38 bronzing drops from a posh brand, and demands for a cheaper alternative right away. Amin cut the development time from three years to six months, with a price of $9. “We do that over and over again,” he says. “Our community’s not shy.”

Amin sees more rapid growth ahead. At Target, e.l.f.’s first store partner, it leads rivals with a 21% share of its category. “The only difference between Target and everyone is that Target had a five-year head start,” says Amin. Overseas markets are only 20% of e.l.f. sales versus more than half for some competitors.

Two years ago, when e.l.f. expanded into Italy through retailer Douglas Cosmetics, there were “lines all the way down the block,” says Amin. Douglas had recommended only one change to the product assortment: dropping the Power Grip Primer. “They told us, ‘Hey, primers isn’t really a category here.’ ” says Amin. Eyeing clues on local social media, Amin left the product in as a test. Today it’s the store’s top-selling product. “So apparently the Italians do use primer,” says Amin. “[Douglas] just didn’t know.”

Long-term e.l.f. shareholders have profited but are perhaps frazzled from the experience. The stock debuted at $17 in 2016 and ended its first day of trading above $26. Two years later, it had been cut in half by the company’s first big sales stumble. Amin closed company stores and got marketing on track. The high point last summer was over $200 a share. Recently, the stock fetched $120, following a 9% tumble on earnings day, followed by a 10% jump on a Morgan Stanley upgrade.

This year’s stock drama is traceable to tariffs. President Donald Trump has threatened China with tariff rates as high as 145%, but has settled on 30% until at least Nov. 10, under a recently announced trade truce extension.

Since e.l.f. does most of its manufacturing in China and collects most of its sales in the U.S., its costs are up. The company raised prices on most products starting on Aug. 1, and declined in its Aug. 6 quarterly report to give full-year financial guidance, citing uncertainty over where tariffs will end up.

Raymond James analyst Olivia Tong, who rates e.l.f. at Strong Buy, expects fast overseas sales growth and continued expansion in new categories. “Most of the categories where they have the highest share are not necessarily the biggest categories,” she says. She also points out that there aren’t many brands that can sell well in both Sephora and Dollar General.

Dara Mohsenian at Morgan Stanley, who upgraded e.l.f after earnings to Overweight from Equal Weight, reckons that consensus estimates are far too low. A recent purchase of fast-growing beauty brand Rhode for $1 billion fills gaps in higher-price skin care, and brings opportunities for broader distribution and higher earnings. And worries about demand elasticity following the price increases at e.l.f. look overblown. When the company raised prices by 6% to 7% in 2022, sales growth in subsequent quarters accelerated. It helps that low starting prices leave limited options for trading down.

Shares aren’t obviously cheap, at 34 times projected earnings for e.l.f.’s current fiscal year through March 2026. The Rhode deal and expansion costs will cut into earnings growth this year, but next year Wall Street predicts a return to 25% earnings growth. Blink and you might miss the stock’s next 10% move higher or lower.

Amin points out that e.l.f.’s market share has grown for 26 straight quarters and says he aims to reach $3 billion in sales in coming years from $1.3 billion last year. He tells new hires that they’re joining at just the right time: “We’re just getting started.”

Write to Jack Hough at jack.hough@barrons.com. Follow him on X and subscribe to his Barron’s Streetwise podcast.