Stern IAG March 1, 2019 Sruthi Boddu, Cody Fang, Caleb Nuttle, Niti Parekh
Price Target: $9.01 (~20.2% upside) Agenda
1 Industry Overview
2 Company Overview
3 Investment Thesis
4 Catalyst and Risks
5 Valuation
1 Industry Overview Global beauty is a multi-faceted, quickly growing industry. Industry Breakdown Prestige vs. Mass Makeup
Fragrances 21% Prestige 39% Skincare 52% Mass 61% Makeup 27%
Competitive Landscape
Drivers of Growth: Mass Brands: Prestige Brands: Increased importance of makeup L'Oréal Estee Lauder Resurgence in demand from Coty L'Oréal emerging markets Revlon LVMH Mary Kay Shiseido Premiumization Avon Chanel
2 Industry Overview US Millennials are redefining “self ” and makeup
86% “the biggest change in culture today is freedom to express yourself however you want”
81% “beauty isn’t just about products, it’s about cultural expression”
Niche and indie brands have benefited from the structural shift to specialty and online
eCommerce and specialty stores allow new brands to engage with customers and scale up in an asset-light fashion
25%
20%
15%
10%
5%
0%
2015 2017
3 Company Overview e.l.f. Beauty, Inc. is an international beauty company based in the United States. Driven by their mission to make luxurious beauty accessible for all, e.l.f. offers high-quality, prestige-inspired beauty products at extraordinary value. Their price points encourage trial and experimentation, while their commitment to quality and a differentiated consumer engagement model engenders loyalty among a passionate and vocal group of consumers.
Sales by Segment Financial Summary
100.0% 90.0% . Eyes 80.0% 70.0% . Lips 60.0% . Face 50.0% 40.0% . Brushes & 30.0% Tools 20.0% 10.0% . Skin Care 0.0% US International Stock Performance
35 First-to-mass 30 25
20
Core Expansion 15
10 Adjacencies 5 0 9/22/2016 1/22/2017 5/22/2017 9/22/2017 1/22/2018 5/22/2018 9/22/2018 1/22/2019
4 Management
Tarang P. Amin John P. Bailey Gayitri Budhraja CEO CFO Vice President, Brand Served as CEO since 2015. Has Served as CFO since 2015. Served at Vice President of over 25 years of consumer Several years of experience in Brand since July 2018. and product experience, serving as consumer product finance. served as Vice President of president at Schiff Nutrition Previously, from 2010-2015, Sales for e.l.f. since 2016. from 2011-2013, and vice lead the consumer sector for Responsible for significantly president at the Clorox TPG Growth LLC. Prior to that expanding the brand’s footprint. Company. Received his BA and was involved with North Castle, Lead e.l.f.’s retail partnerships MBA from Duke a consumer PE firm. with Walmart and Target
5 Opportunity
“Beauty is a momentum business, and ELF has lost it.” – Wells Fargo Securities
6 Investment Thesis
1 Refocusing on core competency
2 Rethinking multi-channel retail
3 Activist involvement
7 1. Refocusing on Core Competency
Digital Marketing Between Mass and Prestige Supply Chain Efficiency . e.l.f. was the one of the . There are shifting . e.l.f. is focused on first makeup companies customer preferences as a maximizing the efficiency to start off as an result of specialty stores of their supply chain ecommerce company, and . Consumers will buy a . Asset-light supply chain they saw tremendous variety of brands from . Use 3rd party growth because of it prestige to mass manufacturing . More entrants into digital . e.l.f. is well positioned . Can produce small makeup space . e.l.f. is publicly thought of quantities of product . e.l.f. is refocusing and as a quality, low-cost in as short as 13 partnering with key alternative to higher end weeks from concept influencers makeup products . Zara is a case study to understand this model
8 1. Refocusing on Core Competency ZARA as a Case Study
Produce small Ship bare Monitor in Keep 85% Design quantities of minimum to real time reserve for Product product stores performance adjustments
~1 Week
Just in Time Production Lean Inventory Management Central Order Fulfillment
. ZARA’s success relies on . In all supply chains, lean . “The secret to Zara’s making sure its factories inventories are the key to success has been reserve 85% for in-season efficient production centralized” adjustments . Inventory optimization . Relies on centralized order . Store communication models are used to help fulfillment allows the allows real-time demand estimate the minimum company to maintain data on products quantity to go to stores efficient workflows . Complex demand . The batches shipped are . Allows the company to forecasting is instantly sent small delivered twice a deliver goods to its to ZARA designers week to limit unsold items European stores in under 24 hours . Vertically integrated supply chain
9 2. Rethinking “Multi-Channel Retail”
e.l.f. Brick and Mortar Stores
E.L.F. STORES . e.l.f. is closing all 22 of its stores . Company is looking to focus on its national retail and digital distribution channels . Walmart represents 29% of Net Sales in 2018 . Target represents 33% of Net Sales in 2018 E.L.F. % NET . Brick and mortar stores represented only 5% of e.l.f.’s net sales SALES . Wall Street analysts have commented how the brick and mortar “helped a brand that was already widely available for a consumer with limited brand loyalty” . The closures will generate $23 million to help marketing and product development Walmart Target Other Retail E-Commerce e.l.f. Store 29% 25% 33% 8% 5%
10 2. Rethinking “Multi-Channel Retail” Project Unicorn “Project Unicorn is aimed at elevating the brand presentation and improving the consumer's ability to navigate our sets. Project Unicorn really impacts all of our retail customers in one way or the other, so pretty much 100% of our distribution. ” – Q4 Management
Phase 1 Phase 2
. Make all brushes in the Unicorn design with sleeker packaging . Allows e.l.f to fit more brushes and more kits onto shelves . Start drawing other customers in a more efficient design . To be implemented in Fall 2019
. New product packaging . Better placement in much more efficient sets . To be implemented by the end of March 2019
11 3. Activist Involvement Corporate Governance: TPG
Performance Since IPO: -61.11% 35
30
25
20
15
10
5
John P. Bailey Willian E McGlashan Jr. 0 President and CFO Board of Directors 9/22/2016 3/22/2017 9/22/2017 3/22/2018 9/22/2018 Partner with TPG Founding and Managing Partner of TPG Growth TPG e.l.f IPOs TPG owns Acquires September approximately 60% stake 22, 2016 30% stake
Share price: N/A Share price: $25 Share price: $9.85
2014 2015 2016 2017 2018
12 3. Activist Involvement Activist Story: Marathon Capital Partners
Refocus on Core Competencies
1 Cease evaluation of acquisition targets
2 Reduce and optimize high-cost structure, focusing on executive compensation
“We believe the brand, the platform, and the team at e.l.f. are unique, valuable, and underappreciated by the investing marketplace. However, even with our admiration, we are certain Mario Cibelli that sticking to the status quo will do more harm than good, and Managing Director at Marathon that significant change at e.l.f. is required immediately” Partners
Operating Margin Compensation as a % of EBITDA in 2017 16.00% 35.00% 13.40% 30.00% 14.00% 12.30% 30.00% 12.00% 10.10% 10.30% 25.00% 10.00% 20.00% 8.00% 6.80% 15.00% 6.00% 10.00% 4.00% 2.00% 5.00% 1.62% 0.70% 0.00% 0.00% e.l.f Estee Lauder Coty 2014 2015 2016 2017 2018
135 3. Activist Involvement Marathon Partners Track Record: Shutterfly
Main initiatives: Mario Cibelli and 1) Fix Executive Compensation Associate Appointed 2) Growth Targets are Inadequate and Unappealing to Board 3) Replace Existing Management 120 Exit Position 107.29% increase in share price at peak Chris North Named as 100 Shutterfly CEO, Cibelli Steps Down 80 Initiate Position
60
40
20
0 9/29/2006 9/29/2007 9/29/2008 9/29/2009 9/29/2010 9/29/2011 9/29/2012 9/29/2013 9/29/2014 9/29/2015 9/29/2016 9/29/2017 9/29/2018
145 3. Activist Involvement Marathon Partners Track Record: OnDeck & J. Alexander’s Key Points
1 Fully rationalize costs and improve margins
2 “Disappointed” with corporate governance and executive compensation
3 Seek the sale of OnDeck to a stable partner
4 Block the acquisition of 99 Restaurant
155 Recent Developments: Q4 Earnings
New Chief Marketing Officer
. More than 20 years of beauty experience . Previously served as Senior Vice President of Shiseido U.S.A.'s bareMinerals division, and led digital transformation . Also held marketing and sales roles at LVMH
Kory Marchisotto Chief Marketing Officer
Other Notable Developments
. Hired new Head of Integrated Marketing from Too Faced . Announced the closing of 22 e.l.f stores . Executives will receive $0 bonus for 2018 . CFO/President John P. Bailey (TPG) will leave the company
16 Catalysts and Risks
Catalysts
Further involvement by Marathon Partners
Appointment of new CFO
Appointment of new board members
Risks
Ties to China
Failure of Marathon Partners to execute their strategy
Decreased relevance of e.l.f.’s brand
17 Valuation
18 Valuation
19