e.l.f. Beauty’s Rhode Acquisition Can’t Hide a Core Business Cooldown

e.l.f. Beauty’s Core Business Cooldown

For years, e.l.f. Beauty has been the darling of the consumer sector, a rare public company that seemed to have cracked the code. It delivered hit after hit, dominated social media, and posted growth numbers that looked more like a tech startup’s than a cosmetics brand’s. And just this May, they announced their splashiest move yet: the acquisition of Rhode, Hailey Bieber’s white-hot, high-growth beauty brand, perhaps driving the continuation of that growth story.

So why, then, did the market react with sheer terror, sending the stock plummeting by 35% after the earnings call?

The answer is a complex story hidden beneath a glittering surface. While the newly acquired Rhode brand(which closed in August so is partially reflected in these earnings) is performing well, e.l.f.’s core heritage business is facing an abrupt and severe slowdown—at least on paper. The Q2 2026 earnings call revealed a company grappling with shipment disruptions, brutal tariff headwinds, and a growth narrative that just got very, very complicated.

The e.l.f. Glow: What’s Going Right

Before diving into the bad news, it’s important to understand why e.l.f. has been such a high-flyer. The company’s core strategy is firing on all cylinders.

• Consecutive Growth Streak: Q2 marked e.l.f.’s 27th consecutive quarter of net sales growth. This puts them in a rarefied group: out of 546 public companies, e.l.f. is one of only six to achieve this streak going all the way back to 2018. 
• Growing Market Share: This isn’t just sales; it’s market share. The company also celebrated its 27th consecutive quarter of market share gains , making it the only brand out of nearly 1,000 tracked by Nielsen to do so.
• The Gen Z Pipeline: The brand’s connection with young consumers is absolute. In Piper Sandler’s “Taking Stock With Teens” survey, e.l.f. Cosmetics was ranked the #1 favorite teen makeup brand for a record 8th consecutive survey. Its “mind share” of 36% is 4.5 times larger than the #2 brand. This appeal is also broadening to Millennials, Gen X, and even Gen Alpha.
• Viral Innovation: e.l.f. continues to create “holy grail” products. Its Power Grip Primer is the #1 single product (SKU) across the entire U.S. cosmetics category. When it launched a limited-edition “Mega” version (50x the size), it sold out in just three minutes on its TikTok Shop.

This is a brand at the peak of its powers, which makes the market’s reaction all the more shocking.

Rhode : A Smart Acquisition

The undisputed bright spot of the report was the August acquisition of Rhode. Founded by Hailey Bieber, the brand was already a massive DTC (direct-to-consumer) success, achieving $212 million in net sales with just 10 products.

e.l.f. is now strapping a rocket to it.

The brand’s immediate impact was big. In Q2, Rhode contributed $52 million in net sales, accounting for 17 percentage points of e.l.f.’s total growth. Without it, the quarter would have looked vastly different and much much worse.

The company’s first move was to launch Rhode into Sephora North America in September. The result? It was the biggest launch in Sephora North America’s history, beating the previous record by 2.5 times.

The outlook is just as strong. Management expects Rhode to contribute $200 million in net sales for the remaining eight months of the fiscal year and to be on an annualized run-rate of approximately $300 million, representing 40% year-over-year growth. With 74% of the brand’s social followers living outside the U.S., a planned launch in Sephora U.K. is just the beginning of its global expansion.

This acquisition is a home run. It gives e.l.f. a powerful, high-margin asset in the prestige beauty space, diversifying it beyond its mass-market roots and giving them a growth engine when the other parts of the business seem to be stalling.

The Crack in the Foundation: Why the Market Panicked

If Rhode is so good, what went so wrong?

Investors looked past the flashy acquisition and zeroed in on the core, organic e.l.f. business. What they saw was pretty scary.

1. A Negative Core Business: On an organic basis, excluding the $52 million from Rhode, e.l.f.’s net sales were down approximately 3% this quarter. For a stock prized for its 20%+ average growth in the past few years, a negative number is unthinkable.
2. A Devastating Full-Year Guide: The real killer was the outlook. For the full fiscal year 2026, e.l.f. guided for total net sales growth of 18-20%. But again, that’s almost all Rhode. The guidance for organic net sales—the core e.l.f. brand—is projected to be up only 3% to 4%.

This is a catastrophic deceleration. This same business grew 28% last year and an amazing 76% the year before. The market immediately priced in the end of the magic streak. If the Rhode acquisition wasn’t there, these earnings would have been ugly.

Management on the Defensive: The Analyst Q&A

The analyst Q&A session was tense, with analysts trying to understand the disconnect. “I’m struggling with the expected slowdown on your core business,” one analyst stated flatly.

Management’s response was consistent, technical, and crucial: You are confusing shipments with consumer demand.

Here is the company’s two-part defense for the disastrous organic numbers:

Defense 1: The Q2 Price Fight

The 3% organic decline in Q2, management explained, was a self-inflicted, temporary issue. On August 1, e.l.f. implemented a global $1 price increase to offset tariff costs. A few retailers were slower to execute this price increase.

e.l.f. played hardball. “As soon as we don’t see the right price on the PO, we don’t fill that order,” explained CEO Tarang Amin. The company temporarily stopped shipments to those retailers. This created a one-time “disconnect” between what consumers were buying (consumption) and what e.l.f. was shipping to stores (net sales). Management assured analysts this is “now resolved”. Although with Q4 guidance being relatively poor on organic sales, it still seems like there’s more of an issues than just this temporary shipment blip.

Defense 2: The Growth Hangover

The 3-4% organic guide for the full year, management argued, is also not a consumer problem. In fact, they stated that underlying consumer demand (consumption) remains strong, up 10% fiscal year-to-date.

The real issue is that the company is lapping (i.e., comparing against) a period of massive, one-time distribution gains from last year. In the second half of fiscal 2025(last year), e.l.f. had huge pipeline fill shipments as it expanded into 11,000 Dollar General stores and increased its Target space by over 50%.

You only get to stock those new shelves once. This year, shipments will normalize to match what consumers are actually buying, making the year-over-year shipment comparison look anemic, even while consumption remains healthy. While that certainly makes sense, it makes future growth questionable unless they can find more shelf space to get those shipments(net sales) growing again at a reasonable pace.

The Margin Squeeze: Tariffs and Reinvestment

The slowdown in the core business wasn’t the only problem. Profits are also getting squeezed.

• Brutal Tariffs: Management revealed that about 75% of its production comes from China and that it is facing a 35% tariff headwind this year. The average tariff rate it’s paying this year is approximately 60%, compared to 25% last year. This is a massive, external blow to gross margins even with price increases. Any news that would reduce those costs would be huge to the company and its stock.
• Reinvesting in Rhode: Analysts also asked why the high-profit Rhode business wasn’t leading to a huge jump in total company profit. The answer: e.l.f. is immediately reinvesting those profits back into the brand, primarily in building out the team and funding a larger marketing budget. It does seem like the right move given that that is likely going to be the primary growth driver for the company in the near term.
• Marketing Timing: Finally, marketing spend is being shifted. After a lighter Q2 (23% of sales) , the company is planning a major increase in the second half, guiding to 27-29% of sales in marketing spend.

Valuation and the 35% Drop

This brings us to the 35% stock collapse. Wall Street is not a patient place. e.l.f. Beauty’s stock was priced for perfection, trading at a high valuation that assumed its high growth streak would continue for a while.

What the market heard on this call was not a story of 27 quarters of growth. It heard:

1. Core business growth is slowing from 28% to 3-4%.
2. Margins are compressing significantly due to tariffs and reinvestment with an uncertain timeline of margin expansion. 

Management’s explanation—that the core business slowdown is just a shipment technicality, not a consumer problem —is complex. On a chaotic earnings call, nuance is lost. All the market hears is guidance miss and massive deceleration.

For a high-growth, high-multiple stock, a trust us story is not enough. The stock’s valuation had no floor to absorb such a shocking guide-down for the core business, even if the reason, as management claims, is temporary. The stock is expected to have a GAAP EPS of $1.49 this fiscal year which gives them a 50x multiple even after the 35% drop. On a non-GAAP basis, that multiple is closer to 27x but there they exclude all stock-based compensation and various non-recurring expenses(which seem to recur every year) so I’m not hanging my hat on that number too much.

Still, the question becomes whether or not the market over-reacted to this news. The margin pressure is real but if it turns out to be temporary, then you could see a return to the margins we saw in 2024 which saw an EPS that was 30% higher, layer some growth on top of that and you suddenly have a stock that’s trading at a reasonable forward multiple that’s closer to the 30-35x range depending on the assumptions you make. However, that does require you to have faith in that occurring within the next year or two.

Ultimately, the acquisition of Rhode looks like an excellent play that will hopefully power the company for years. But in the short term, its glittering results are being used to mask a messy, complicated, and—for investors—painful transition in its core business. For me, that transition is too uncertain right now and the stock is still a bit too expensive. Call me maybe if it’s back in the 50s and I may take another look.

Disclosure : This not investment advice. Please do your own due diligence and talk to a qualified investment professional before making any investment decisions.