E.L.F. rebukes falsifying revenue accusations from Muddy Waters
Muddy Waters’ founder and CEO, Carson Block, has accused E.L.F. Beauty of overstating its revenue over the past three years by as much as US$190 million at a conference in London, UK. The investment firm investigates public companies to expose fraud.
E.L.F. calls the statement an attempt to negatively influence its share price for “its own benefit” and at the expense of all other E.L.F. shareholders. Shares in the beauty brand fell 10% on the day after Block alleged the false reporting.
Muddy Waters says it would sell down its short position in E.L.F. upon publishing its report about the company, citing risk management as the reasoning. The cosmetics company says that Muddy Waters’ allegations are without merit and inaccurate.
Back and forth
Muddy Waters said it found that E.L.F.’s imports from China — the bulk of its resources — crashed by two-thirds starting three quarters ago, but the brand’s sales maintained and inventory was building. Block says this pattern continued for three quarters.
The investment firm’s CEO suspects sales “hit a wall” in Q2 FY24, and E.L.F. decreased imports to use up existing inventory. He continues that crashed imports with rising inventory raised alarm bells and claims that he could make a case for why the estimated revenue discrepancy is a “conservative” assessment.
Muddy Waters spoke to E.L.F.’s Chinese suppliers and a former manager in China and concluded that the way these inventory numbers had been accounted for was “categorically false.” It alleged that E.L.F. overstated its inventory numbers to cover for insufficient sales.
E.L.F. fires back after allegations of lying about revenue.
However, E.L.F. calls the data “incomplete” and based on flawed assumptions, omitting “critical context” and presenting speculation as fact. E.L.F.’s stock price rose following the release of its statement. At the time of this publication, the stock is up 2.92%.
The company cites that in early 2024, for competitive reasons, it filed a request for confidentiality with US Customs and Border Protection regarding its customs import data. Therefore, import data available to the public after February 6, 2024, does not include a substantial majority of its US imports.
E.L.F. adds that Muddy Waters’ assertions do not align with data published by Nielsen and Circana. Nielsen is a media company covering audience measurement, data and analytics, while Circana is a market researcher.
“We have rigorous inventory control procedures, including regular physical and cycle counts across our global distribution network. Similarly, we have rigorous controls and procedures around revenue recognition. We are fully confident in our financial statements,” writes the company.
“Our recently announced second quarter fiscal 2025 financial results — marking our 23rd consecutive quarter of both net sales growth and market share gains — demonstrate our strong momentum and underscore our confidence in our business model and strategy.”
E.L.F. previously reported net sales worth just over US$1 billion in the fiscal year ended March 31, 2024. Earlier this month, its net sales increased 40% to US$301.1 million, which it attributed to strength in its retailer and e-commerce channels for the three months ending on September 30 this year, compared to the three months ended September 30, 2023.
