Why e.l.f. Beauty Stock Dropped13% in May

E.l.f. Beauty (NYSE: ELF) stock fell 13% in May, according to data provided by S&P Global Market Intelligence. The stock began to fall as it got closer to earnings, and although it did get a lift from earnings that beat expectations, it wasn't enough to recover what it had already lost.

More than mass cosmetics

E.l.f. has made a name for itself by offering mass beauty products customers love at some of the lowest prices on the market. It started with $1 products, and although that's no longer its model, it still aims to offer high value on its makeup while speaking to the values of its users.

It's a winning model, and the company continues to grab market share in cosmetics and skin care. Fiscal 2026 (ended March 31) was the seventh consecutive year of market share growth, and the fourth quarter was the 29th in a row with sales growth.

Image source: Getty Images.

For all intents and purposes, the fourth quarter was fantastic. Revenue inreased 35% year over year, and gross margin expanded 1.4 percentage points to 73%. Earnings per share (EPS) of $0.32 beat Wall Street expectations for $0.29.

The standout recently has been the company's Rhode brand, which it acquired from celebrity model Hailey Bieber. This is e.l.f.'s first foray into luxury brands, and it's been an incredible hit. It was the biggest launch in Sephora history in North America and the U.K., and it's launching at Sephora online and most of Europe in September.

Managing through pressure

Profitability has been down since the new tariff system went into effect, and management is expecting some relief in 2027. The average tariff rate for fiscal 2026 was 55%, and it's expected to be 35% for 2027. Now that there are tariff refunds on the table, the company is aiming to get $58.5 million back from tariffs. That has not been factored into guidance, so any refund will be on top of management's outlook.

The changing tariff situation is affecting many decisions. E.l.f. increased all products by $1 to offset the impact of higher tariffs, but unit sales have declined. After management lowered the price of e.l.f. Halo Glow Skin Tint to $14 from $18, and there was a dramatic increase in unit sales: 38% on Amazon, 36% across retailers, and a triple-digit increase in the TikTok shop. E.l.f is going to experiment to see how it could replicate similar success with other products, dancing the delicate dance between boosting sales and keeping costs down.

While the report was predominantly positive, the situation remains in flux, which is why the stock didn't go even higher. E.l.f. stock remains down 32% this year, but it trades at only 14 times foward, 1-year sales. It could be a great entry point for investors who can hold for a long time and handle short-term volatility.

Jennifer Saibil has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Amazon and e.l.f. Beauty. The Motley Fool has a disclosure policy.