0001600033-25-000058
SEC filinge.l.f. Beauty's Q2 FY26 revenue grew 14% but operating income fell due to tariff-driven gross margin compression and higher SG&A.
For the three months ended September 30, 2025, e.l.f. Beauty reported net sales of $343.9 million, a 14% increase from $301.1 million in the prior-year quarter. Growth was driven by a 9% increase in retailer channels and a 39% surge in e-commerce. Higher average item price and favorable mix added $62.2 million, partially offset by a $19.4 million decline from lower unit volume. Gross profit rose 12% to $238.9 million, but gross margin contracted 165 basis points to 69% due to tariffs, only partly mitigated by pricing and mix improvements. Selling, general and administrative expenses increased 24% to $231.1 million, or 67% of sales (vs. 62% last year), led by a $23.0 million rise in marketing, merchandising, and distribution costs, $10.4 million more in compensation, $7.9 million in higher depreciation and amortization, and $2.8 million in professional fees. As a result, operating income plummeted 72% to $7.7 million from $27.9 million. Other income swung to a $1.9 million expense (vs. $3.8 million income) due to foreign exchange losses, and interest expense more than doubled to $9.2 million after the new term loan. A $0.7 million loss on debt extinguishment further depressed pre-tax income to a loss of $4.0 million. However, a $7.0 million income tax benefit produced net income of $3.0 million, down 84% from $19.0 million.
e.l.f. Beauty operates as a single reporting segment; thus, no segment-level breakdown is provided in the MD&A. The company's results reflect the combined performance of its brand portfolio including e.l.f. Cosmetics, e.l.f. SKIN, Naturium, and the recently acquired rhode (consolidated from August 5, 2025).
Management highlighted ongoing tariff exposure, with the majority of products sourced from China subject to a 25% tariff since May 2019 and additional tariffs announced in 2025. To mitigate risk, e.l.f. raised prices globally effective August 1, 2025, and is exploring production shifts outside China. The rhode acquisition positions the company for future growth but adds integration risk and higher leverage. The company expects to fund ongoing needs from cash flow and its $243.3 million unused revolver. No formal quantitative guidance was provided, but the seasonal pattern anticipates higher net sales in the third and fourth fiscal quarters.
As of September 30, 2025, the company held $194.4M in cash and cash equivalents (Note 3). Total debt stood at $854.1M net of issuance costs, comprising a $600M term loan and $256.7M drawn on the revolving credit facility (Note 7). The debt increase was largely due to the rhode acquisition funded in August 2025. The revolving facility has $243.3M unused capacity. Lease liabilities total $63.8M, with operating lease assets of $52.5M (Note 13).
Operating lease commitments amount to $86.0M in undiscounted payments, with $4.5M due in the remainder of fiscal 2026 (Note 13). There are no material purchase commitments disclosed beyond leases. Legal contingencies are noted but not estimable (Note 8).
No share repurchases occurred in the current quarter; $450M remains under the $500M authorization from August 2024 (Note 11). No dividends are paid. Debt activity: $600M term loan was drawn for the rhode acquisition, and the revolver was briefly tapped and repaid. Capital expenditures are not separately disclosed in the notes but appear in the cash flow statement ($13.9M for six months).
The company operates as a single segment. For Q3 FY2025, net sales were $343.9M, with operating income of $7.7M (2.2% margin). Revenue grew 14.2% YoY. Geographic split: US $278.2M (80.9%) and International $65.7M (19.1%). The segment expense breakdown includes $128.3M marketing/merchandising, $57.3M compensation, and $45.6M other operating costs (Note 14).
Operating cash flow (CFO) of $50.6M significantly exceeded net income of $36.3M, reflecting strong cash generation quality. The divergence is primarily due to non-cash items: depreciation and amortization ($31.5M), stock-based compensation ($39.3M), and a large non-cash acquisition-related seller expense reversal of $47.1M. Working capital was a net source of cash, with accounts receivable improvement and increased payables partially offset by inventory build and prepaid expenses.
Capital expenditure (capex) of $13.9M represented 27% of CFO, indicating moderate reinvestment. The major investing outflow of $580.6M for the rhode acquisition drove a negative cash flow from investing activities of $595M. Free cash flow (not explicitly stated) would be approximately $36.7M (CFO minus capex), but is not reported.
Capital returns to shareholders were minimal, with no share repurchases or dividends during the period. Financing activities were the primary source of cash, with $600M in long-term debt proceeds (net of $6.9M issuance costs) offset by $50M in revolving credit facility repayments. The resulting cash balance increased by $50.7M to $199.4M.
Anomalies include the $47.1M acquisition-related expense reversal and a $18.7M deferred tax benefit, both non-cash items that boosted CFO but do not reflect recurring operations. Working capital swings were mixed: accounts receivable declined $3M (versus a $21M increase last year), while inventory increased $19.2M (compared to $45.1M last year). Prepaid expenses and other assets consumed $48.8M, similar to last year.
Overall, CFO quality is high due to non-cash add-backs, but recurring cash generation excluding one-time items and working capital volatility is lower. The acquisition and associated debt financing significantly altered the company's cash profile.