Elf Beauty selloff on ‘flawed’ short report an opportunity, says JPMorgan

JPMorgan says Elf Beauty (ELF) issued a press release this morning debunking allegations made by short seller Muddy Waters yesterday. The short seller asserted that the perfect correlation broke between Elf’s U.S. sales and its own imports from China based on publicly available data in Q3, with Muddy Waters using the “flawed data” to conclude that Elf has been inflating its revenues, profits and also inventory for the past three fiscal quarters in an attempt to hide its own inventory build-up due to a slump in demand, the analyst tells investors in a research note. JPMorgan sees inconsistencies in the Muddy Waters report. The conspiracy made by Muddy that Elf was using a change in accounting to conceal inventory trends “seems exaggerated to us,” JPMorgan contends. It also thinks Elf’s decision to request confidentiality for import data is valid for competitive reasons. It does not see a problem with not having data from suppliers in China. As such, JPMorgan sees a buying opportunity. The fact that the company came on record to deny any accounting or import data inconsistency should give investors more confidence, it writes.