e.l.f. Beauty shares temporarily fell after a short seller alleged the company had overstated its revenues over the past three quarters.
A 48-page report issued by investment research firm Muddy Waters stated that the US beauty giant had “inflated” its revenue and profits during the financial period.
It claimed this was the result of inventory being “materially inflated” to “account for cash that has not really come in”.
“In Q2 FY24, as e.l.f.’s reported inventory was growing, e.l.f. announced that a recent change to its sourcing practices was responsible for the sudden appearance of an additional US$36.9m of inventory,” the report read.
“e.l.f. claimed that it had just begun taking ownership of product on the China side, whereas previously its practice had been to take possession only upon delivery to its Ontario, California warehouse.”
Shares in e.l.f. Beauty dropped by more than 15% in early trading following the report’s release, before recovering on 21 November when the brand hit back at the allegations.
The drugstore beauty company called the move an attempt to “negatively impact e.l.f. Beauty’s share price” for Muddy Waters’ “own benefit”.
“Muddy Waters has made numerous inaccurate statements about e.l.f. Beauty and our business by relying upon incomplete data and flawed assumptions, omitting critical context and presenting speculation as fact,” e.l.f. Beauty stated.
“In particular, in early 2024, for competitive reasons and as permitted by applicable regulations, we filed a request for confidentiality with US Customs and Border Protection with respect to our customs import data.
“Therefore, import data available to the public after 6 February 2024, does not include a substantial majority of our actual US imports.”
e.l.f. Beauty also added that Muddy Waters’ “assertions do not align with the strong consumption data published by Nielsen and Circana”.
“We have rigorous inventory control procedures, including regular physical and cycle counts across our global distribution network,” e.l.f. Beauty’s statement continued.
“Similarly, we have rigorous controls and procedures around revenue recognition. We are fully confident in our financial statements.”
e.l.f. Beauty sales jumped by 40% to US$301.1m during the second quarter of fiscal year 2025, marking its 23rd consecutive quarter of growth.
The brand said the boost for the three months ended 30 September 2024 was “driven by strength” in its retailer and e-commerce channels in the US and internationally.
Short sellers are investors who profit from a decline in a company’s value by borrowing and selling shares before buying them back at a lower price.
Oddity, the owner of Il Makiage, was also targeted with a short seller report in May this year, which accused the company of misleading its investors.
A 50-page report released by Ningi Research claimed the consumer tech company was inflating its worth by concealing a large bricks-and-mortar business based in Israel.
The document alleged that this stood in contrast to Oddity’s claim that it is a “pure-play digitally branded platform”.
Oddity hit back at the claims in the report, calling them “demonstrable factual inaccuracies, incorrect assumptions and unfounded and malicious speculation”.