E.l.f Beauty Shares Drop Following Short Seller Report

Short seller Carson Block said he’s shorting the shares of cosmetics brand Elf Beauty Inc.

Speaking at the Sohn conference in London on Wednesday, the chief executive officer of Muddy Waters Capital said he is shorting the stock because he has concerns linked to the Oakland, California-based firm’s revenue.

A representative for the beauty company did not immediately respond to a request for comment.

Block said he suspects Elf Beauty has overstated revenue in recent quarters and that a build up in the beauty company’s inventory was due to lacklustre sales. The company has previously said the increase in inventory was a conscious choice in order “to support strong consumer demand” and also partly due to changes in its supply chain practices.

Founded in 2004, E.l.f. Beauty reported $301 million in net sales for the quarter through September and adjusted net income of $45 million, both exceeding Wall Street projections. In August, chief financial officer Mandy Fields said that about 80 percent of the company’s supply chain is located in China, with the average product price at roughly $6.50.

Shares of the company had already tumbled 44 percent from their peak reached in June through the close of trading on Tuesday. The stock dropped as much as 16 percent on Wednesday after Block’s announcement.

Block, 47, has built a formidable reputation over the years as a short seller. He has bet against companies including Sino-Forest Corp, which he accused of exaggerating its assets. The Chinese company filed for bankruptcy protection 10 months after his report was published.

Including E.l.f. Beauty, Muddy Waters has built up at least four new short positions in the past 12 months, according to publicly available statements and research on its website.

A scorecard of the money manager’s bets since 2019 shows many of its targets drop after the short position is unveiled. Shares on average lost about 13 percent in the first day, and were down 16 percent up to one year later, according to calculations by Bloomberg News.

Bets against Blackstone Mortgage Trust and Eurofins Scientifc SE did well for the short seller with shares of both companies down more than 10 percent since their respective announcements.

Activist shorting is a strategy that involves betting against a company and publishing research reports intended to convince the market that the target’s publicly-traded instruments are overvalued. While some accusations by short sellers have held up and prompted regulatory or legal action in recent years, others have proved unfounded and tainted by ulterior motives.

By Leonard Kehnscherper, Nishant Kumar and Jan-Patrick Barnert

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