Beauty industry snapshot: ELF Beauty and Ashland talk strategic moves in fiscal overviews

06 Nov 2023 --- In beauty industry financial news updates, ELF Beauty and Ashland have released their second quarter results and preliminary outlook for fiscal fourth-quarter performance, respectively. Among strategic moves to narrow focus on high-growth segments, Ashland is offloading its nutraceuticals arm to pivot focus on personal care, while ELF forecasted fiscal impacts resulting from its plans to acquire skin care brand Naturium.

For the six months ended September 30, 2023, compared to the same period of last year, ELF Beauty’s net sales were reported to have increased 76% to US$215.5 million, primarily driven by strength in both retailer and e-commerce channels.

Net income for ELF Beauty in this period was US$86.2 million on a GAAP basis. Adjusted net income was US$110 million. Adjusted EBITDA was US$134.7 million, or 31% of net sales, up 129% year-over-year.

“In Q2, we grew net sales by 76% and category share by 330 basis points, marking our 19th consecutive quarter of growth in each,” comments Tarang Amin, ELF Beauty’s chairman and CEO.

“As we look ahead, the significant whitespace we see across color cosmetics, skin care and international [businesses] gives us confidence that we are in the early innings of unlocking the full potential we see for ELF Beauty.”

ELF Beauty expects Naturium to contribute approximately US$48 million in net sales in fiscal 2024 (Image credit: Naturium).ELF Beauty to acquire Naturium
Elf Beauty’s gross margin increased approximately 425 basis points to 71%, primarily driven by cost savings and mix, lower inventory adjustments, favorable foreign exchange impacts and improved transportation costs, partially offset by costs associated with retailer activity and space expansion. 

Selling, general and administrative (SG&A) expenses increased US$78.4 million to US$204.1 million, or 47% of net sales. Adjusted SG&A increased US$71.0 million to US$182.2 million, or 42% of net sales. 

The increase in SG&A dollars was primarily due to an increase in marketing and digital spend, compensation and benefits, operations costs, retail fixturing and visual merchandising costs and professional fees. 

On October 4, 2023, the company closed on the acquisition of the skin care brand Naturium for US$355 million in a combination of cash and company stock.

ELF Beauty expects Naturium to contribute approximately US$48 million in net sales, approximately US$9 million in adjusted EBITDA on a fully diluted basis in fiscal 2024. This reflects Naturium’s contribution for approximately half of ELF Beauty’s fiscal year.

Ashland’s preliminary fiscal outlook
Ashland issued an update for its preliminary fiscal 2023 fourth-quarter results, full-year sales and adjusted EBITDA. Fiscal fourth-quarter and full-year sales were listed at US$518 million and US$2.19 billion, respectively.

“Customer demand was generally consistent with our expectations in the fourth quarter,” says Guillermo Novo, chair and chief executive officer at Ashland. “While we are seeing certain signs of stabilizing demand and reduced destocking actions by customers, there continues to be limited visibility regarding the timing of demand normalization.”

“As a result, we proactively took additional inventory-control actions to manage production, reduce inventory levels and drive stronger free cash flow generation.”

For the six months ended September 30, 2023, compared to the same period of last year, ELF Beauty’s net sales were reported to have increased 76% to US$215.5 million (Image credit: ELF Beauty).Ashland’s earnings for the fourth quarter of the fiscal year are anticipated to be most directly impacted by these inventory-reduction actions put in place to prepare for more conservative demand scenarios.

Including discontinued operations, net loss is forecasted at US$4 million for the quarter, while net income is positioned at US$178 million for the full year.

Adjusted EBITDA is positioned at US$74 million for the quarter and US$459 million for the full year. This includes approximately US$58 million of inventory-control actions during the fiscal fourth quarter; inventory reduction of US$86 million compared to June 30, 2023; and ongoing free cash flow of US$104 million in the quarter.

Meanwhile, sales in the quarter are valued at approximately US$518 million. Pricing remained favorable for all segments other than Intermediates. Volumes during the quarter are expected to be negatively impacted by customer inventory destocking across most end markets. Foreign currency is expected to favorably impact sales by approximately 2%.

“Although these actions will better position Ashland to operate in an uncertain and potentially lower demand environment, they resulted in Adjusted EBITDA for the quarter and full year that were below our original expectations. To drive improved performance, we will be taking additional portfolio and investment actions during fiscal year 2024,” remarks Novo.

Ashland’s reorganization plans
Ashland announced a host of “portfolio-optimization” actions, which notably include a divestiture process for the company’s nutraceuticals business, alongside optimizing and consolidating its carboxymethyl cellulose and methylcellulose industrial businesses and related capacity to improve productivity and mix.

The company also plans to further optimize its global hydroxyethyl cellulose manufacturing network for greater efficiency.

“We are pleased with the progress our Nutraceuticals team has made to strengthen and grow the business,” states Novo. “However, we have determined that it is not core to Ashland’s business model or longer-term strategy.”

Ashland announced it is consolidating its carboxymethyl cellulose and methylcellulose industrial businesses and related capacity to improve productivity and mix.“As we saw with the sale of our Adhesive business, we believe Nutraceuticals will be better positioned to thrive as part of an organization where Nutraceuticals is a core to their model and future investment strategy.”

When completed, these portfolio actions are expected to result in improved Adjusted EBITDA margins of approximately 200 basis-points and returns on net assets of 150 to 200 basis-points. 

These actions are also expected to reduce volatility, improve focus and decrease working capital and maintenance capital expenditures. The impact of these portfolio actions is expected to reduce annual sales by approximately US$200 million to US$225 million. 

Approximately US$100 million of stranded costs and lost gross profit is expected to result from these actions.

During fiscal year 2024 the company plans to deploy an incremental US$4–6 million in commercial and technical resources, consistent with its ambition to increase its investments and resources for the “core” growth businesses, which include its personal care segment.

Ashland plans to issue its fourth-quarter earnings release at 5 p.m. ET on Wednesday, November 8, 2023.

By Benjamin Ferrer