Consumers will soon be able to pick up both shares and makeup from E.l.f. Cosmetics.
The mass-market makeup and skin-care company filed an S-1 with the U.S. Securities and Exchange Commission on Friday to list its shares on the public market.
The business, which stands for eyes, lips, face, was founded by Alan and Joseph Shamah in 2004, who saw a fast-fashion opportunity in cosmetics “where the traditional beauty model of high prices, long product cycles and traditional advertising was out of touch with changing consumer behavior,” according to the filing.
The business makes cosmetics for eyes, lips and face, but has also branched into skin-care and beauty tools. E.l.f. Cosmetics products range from $1 for brightening eyeliner to about $30 for brush sets.
The business has been majority-owned by private equity firm TPG Growth, the middle-market investment arm of TPG, since 2014. Before that, private equity firm TSG Consumer Partners invested in 2011. TSG no longer owns a stake in the business, according to a source.
E.l.f. listed $96.8 million in sales for the first half of the year, up from $75.2 million in the prior-year period. The business has $191.4 million in sales for 2015, up from $144.9 million in sales for 2014 and $135.1 million for 2014, the documents show. Sales at Target Corp. accounted for 28 percent of E.l.f.’s net sales for 2015, while Wal-Mart Stores Inc. sales brought in 23 percent of the total.
For the first half of the year, the company posted a $1.1 million net income, compared to $2.7 million for the prior-year period. For the first half of the year, E.l.f. had earnings before interest, taxes, depreciation and amortization of $14.8 million, compared to almost $16 million in the prior-year period. The 2016 numbers were impacted in part from costs associated with preparing for the initial public offering.
The business is planning to use proceeds from the offering to repay existing debt, and for working capital and general corporate purposes.
The business is led by chairman and chief executive officer Tarang P. Amin, who joined in 2014. John Bailey is president and chief financial officer.
J.P. Morgan Chase & Co., Morgan Stanley, Piper Jaffray and Wells Fargo Securities are among the book runners for the move, according to the SEC filing. William Blair, Cowen & Co., BMO Capital Markets, Stifel and SunTrust Robinson Humphrey are also listed.
Industry sources said the valuation E.l.f. could get from the public markets is likely higher than it would have gotten from another type of transaction.
“There is a double benefit here,” said Martin Okner, managing director at SHM Corporate Navigators. “They file for the IPO, that signals to the market they are looking at doing a public offering and public offerings tend to be valued a bit more favorably assuming the market conditions hold. We’ve seen a rally in the past four months in the market.”
“I think it would be a very, very short float on the shares because what would happen, at least in my view…it would be something similar to what happened with Annie’s Organic. It would IPO, it would sit in the public markets for a year, 18 months, two years max[imum] — then you’d have a strategic [buyer] come in and buy the company,” Okner said.
“I think TPG is likely to retain a healthy percentage of the ownership and then get two bites of the apple,” Okner said.
According to the filing, E.l.f.’s growth strategy includes attracting new customers, using innovation to drive sales and margin, expanding into relevant adjacent categories, expanding brand penetration by gaining space in its existing national retail doors, growing its direct-to-consumer business online and through more retail outposts in high-traffic areas and expanding internationally. For 2015, international sales made up 7 percent of E.l.f.’s total net sales.
“They ventured into retail doors and they’ve done a beautiful job,” Okner said. “You almost feel like you’re walking into a MAC store when you’re walking into an E.l.f. store.”
At their current distribution points, E.l.f. is selling well.
According to IRI data for the 52-week period ended May 15, in multiunit doors, E.l.f. is churning out double-digit sales gains in almost all of its categories where it competes.
Blush sales rose 24.5 percent, outstripping the growth of giants such as Procter & Gamble, Maybelline and Revlon. E.l.f.’s bronzer business skyrocketed almost 50 percent in a category that actually declined 2 percent. Then there’s the foundation category, where E.l.f. chalked up 85 percent increases and powder where gains clocked in at 100 percent. Lip treatment expanded about 35 percent and lipstick 57.4 percent.
E.l.f. posted a 4 percent quarter-over-quarter increase in earned media value for the second quarter of 2016, according to data from Tribe Dynamics.
Retailers acknowledged that some of the soaring sales are attributed to added distribution as the brand gets into more stores. However, they expressed concern about the business going public, maintaining that E.l.f. is growing at a breakneck clip because customers appreciate the value and other major brands have been quiet. Coty Inc., for example, is in the middle of transitioning the P&G brands, while Revlon assimilates Elizabeth Arden.
Mergers and acquisitions have been the primary driver of deal activity in the beauty space in recent years. Some companies, including the Estée Lauder Cos. Inc., and more recently Coty Inc., have gone on acquisition sprees following their public offerings. IT Cosmetics, which a handful of industry sources said ran a dual-track process, considering an M&A transaction and public offering, wound up selling to L’Oréal for $1.2 billion. Jessica Alba’s The Honest Co. has also been said to be in the middle of a dual-track process, industry sources have said.
Aside from L’Oréal’s deal for IT Cosmetics, the company also inked deals for Société des Thermes de Saint-Gervais-les-Bains, the license to use the San-Gervais Mont-Blanc beauty brand and Atelier Cologne. Shiseido has also been making acquisitions lately, adding Laura Mercier, ReVive and the Dolce & Gabbana fragrance license.