Muddy Waters Research founder Carson Block announced a new short position in E.l.f. Beauty, Inc (NYSE:ELF) at the Sohn conference on Wednesday, which sent shares of the cosmetics company tumbling. Here’s a look at why the short seller is betting against E.L.F.

What To Know: Short seller Muddy Waters released a report Wednesday alleging that E.L.F. has overstated its revenue over the last three quarters by approximately $135 million to $190 million.

“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,” the short seller said.

Benzinga has reached out to E.L.F. Beauty for comment on the Muddy Waters report.

Muddy Waters’ thesis is centered on import data that it received from U.S. Customs and Border Protection that appears to show that E.L.F’s imports are down significantly in recent quarters.

Despite significant declines in imports and broader weakness across the cosmetics industry, E.L.F. continues to report strong growth, the short seller said.

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E.L.F. reported second-quarter results about two weeks ago. The company delivered 40% sales growth driven by 91% growth internationally. The company also said it gained 195 basis points of U.S. market share during the period.

Muddy Waters said the numbers are inflated. The short seller highlighted a change in sourcing practices from last year in which E.L.F. claimed inventory build was driven by a change of where it takes ownership of imports from Canada to China.

“This purported change supposedly blew out inventory because ELF was now including product on the water. We disagree. ELF's claim it changed sourcing practices strikes us as categorically false,” Muddy Waters said.

The short seller said it spoke with a former China-side manager for E.L.F., as well as three of the company’s largest suppliers, and determined that E.L.F’s longstanding practice has been to take title of 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,” Muddy Waters said.

The short seller also noted that CEO Tarang Amin’s average monthly share sales were $4.3 million from January 2023 through June 2023, just before the company reported the inventory accounting adjustment. From July 2023 through September 2024, Amin’s average monthly share sales climbed to $7.5 million, according to Muddy Waters.

ELF Price Action: E.L.F. Beauty shares were down 9.14% at $110.58 at the time of publication Wednesday, according to Benzinga Pro.

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