Elf Beauty slides after Muddy Waters goes short, questions revenue

Muddy Waters is short e.l.f. Beauty because the firm believes the company has “materially overstated revenue over the past three quarters – possibly by ~$135 million to ~$190 million.” Carson Block’s firm added: “We believe that in Q2 FY24, ELF management realized its growth narrative was in trouble as its inventory built. It appears that ELF then began reporting inflated revenue and profits. Its reported inventory also appears materially inflated as a result – i.e., to account for cash that has not really come in.” The firm added in its short report: “ELF’s claim it changed sourcing practices strikes us as categorically false. From speaking with a former China-side manager and three of ELF’s largest suppliers, we understand that ELF’s longstanding general practice was to take title to goods on the China side. Therefore, ELF’s reported inventory build was seemingly due to insufficient sales – not a change in buying practices. This also strongly indicates that ELF was deceiving its auditor at that point (if not earlier), which is a major red flag.” In late morning trading, Elf shares have fallen about 8% to $112.49.