By Ananya Mariam Rajesh
(Reuters) - Elf Beauty, a maker of affordable cosmetics, is betting on rural markets and a tie-up with Dollar General (NYSE:DG) to fuel its expansion as it hedges against a slowdown in the U.S. cosmetic industry where shoppers have shied away from pricey makeup.
The company raised its forecasts for annual sales and profit on Wednesday, in contrast to legacy cosmetics brands like Estee Lauder (NYSE:EL) and L'Oreal that have been facing weak demand.
Shares in Oakland, California-based Elf rose 10% in pre-market trading on Thursday. The high-flying stock has taken a hit in recent months as its sales growth eases off record levels.
The company said the partnership with Dollar General would allow it to sell cosmetics such as lip oil and liquid blush at some of the retailer's stores.
Elf - short for eyes, lips and face - sells its products, some as low as $2, at U.S. retailers including Walmart (NYSE:WMT), Ulta Beauty (NASDAQ:ULTA) and Target (NYSE:TGT).
With Dollar General, Elf is trying to find a bigger foothold with lower-income customers. The dollar store largely serves families with an annual income less than $35,000, according to the company, and has its largest concentration of stores in suburban Texas, Georgia and North Carolina.
Dollar General currently offers L'Oreal's Maybelline and Coty (NYSE:COTY)'s CoverGirl products.
"Our mission is to make the best of beauty accessible to every eye, lip and face and the accessibility is quite important to U.S. Dollar General's stated strategy of serving the underserved fits perfectly," CEO Tarang Amin said on Wednesday.
"If you think about 80% of their stores are in rural areas with less than 20,000 consumers. Previously, those consumers only had access to some of the legacy mass brands."
Elf did not say how many Dollar General stores would stock its products but added that it would take a call on expansion based on the initial feedback.
Global cosmetics giants L'Oreal and Estee Lauder have been facing an uphill battle to regain cost-conscious customers. While Maybelline's Washable Mascara sells for $10.50 on Dollar General's website, Elf's Lash it Loud Mascara is priced at $6, according to its own website.
The partnership with Dollar General is a "good symbiotic relationship," said Brian Mulberry, client portfolio manager at Zacks Investment Management, which owns a stake in Elf.
For the cosmetic maker, it offers an entry into an untapped market and for Dollar General it could mean more foot traffic because of the positive reputation of Elf's products, he said.
Dollar General has been battling stiff competition and has come under pressure from deep-pocketed rivals including Walmart that have doubled down on low-priced daily essentials and from the rise of China's Temu.
Elf started in 2004 by selling affordable dupes of products from Charlotte Tilbury and Dior. But it has since sought to move away from that image, introducing products that it developed itself such as Halo Liquid Filter and Glow Reviver Lip Oil.
Its stock took off after the pandemic, surging nearly four-fold from 2023 to hit a peak in March. Since then, however, it has more than halved to $104.16.
Last year, the company overtook Revlon to be ranked No. 6 in the mass color cosmetics category in the U.S., according to data firm Euromonitor.
The company, which sells its products in 14 countries, recently forayed into Germany and is re-entering Mexico through premium beauty retailer Sephora.