Is e.l.f. Beauty's Gross Margin Poised to Rebound in 2H26?

Gross margin recovery is emerging as a key focus for e.l.f. Beauty, Inc. ELF as the company navigates elevated tariff pressures while continuing to invest in growth in fiscal 2026. Although the fiscal second quarter reflected notable cost headwinds, management’s guidance points to improving profitability in the back half of the year.

In the fiscal second quarter, e.l.f. Beauty reported a gross margin of 69%, down roughly 165 basis points year over year due to higher tariffs on China-based production. Approximately 75% of ELF’s global sourcing comes from China, leaving margins sensitive to trade policy volatility.

Management noted that tariff rates moderated meaningfully as of November after peaking earlier in the year. The fiscal 2026 guidance assumes the current tariff environment remains in place. ELF estimates that every 10-percentage-point change in tariffs impacts annualized costs by $17 million, making tariff relief a meaningful profitability tailwind.

Pricing and mix further support margin recovery. The $1 portfolio-wide price increase implemented on Aug. 1 has helped offset higher costs, with limited impact on demand, as consumption for the core e.l.f. brand grew about 7% in the fiscal second quarter. In addition, the Rhode acquisition provides a favorable mix benefit, with management noting the brand is gross-margin accretive despite increased wholesale exposure.

e.l.f. Beauty expects gross margin to improve year over year to 71% in the second half of fiscal 2026, indicating a 200-basis-point sequential increase from the first half. For the fiscal year, the gross margin is projected to decline 100 basis points, with most pressure concentrated in the first half as tariffs peaked. Overall, easing tariffs, disciplined pricing and favorable mix trends position e.l.f. Beauty for a gross margin rebound in the second half of fiscal 2026.

NUS & ULTA’s Margin Picture as ELF Expects to Rebound

Nu Skin Enterprises NUS sustainably grew gross margin by optimizing its product portfolio, managing selling expenses and driving profitability across global business segments. Nu Skin’s gross margin for the third quarter 2025 was 70.5%, up from 70.1% last year due to the revenue mix between Rhyz entities and the Nu Skin core business.

Within the core business, the gross margin increased 120 basis points to 77.7%, reflecting the benefits of strategic portfolio optimization and product mix improvements. This marks the fifth consecutive quarter of adjusted gross margin growth, with disciplined expense management.

Ulta Beauty’s ULTA gross margin for the third quarter fiscal 2025 rose 70 basis points to 40.4%, driven by lower inventory shrink and higher merchandise margin, partially offset by an adverse channel mix from strong digital growth. Ulta Beauty’s focus on inventory management and guest experience continues to deliver results.

For fiscal 2025, the gross margin is expected to remain flat, with lower shrink and higher merchandise margin, offset by deleverage from other revenues, store occupancy costs and channel mix. For the fiscal fourth quarter, margin pressure from store fixed costs and other revenues is expected, partially offset by Ulta Beauty’s supply-chain efficiencies.

e.l.f. Beauty’s Price Performance, Valuation & Estimates

ELF has seen its shares decline 37.3% in the past six months against the industry’s growth of 7.8%.

e.l.f. Beauty’s forward 12-month price-to-earnings ratio of 23.51 reflects a lower valuation than the industry’s average of 29.00.

The Zacks Consensus Estimate for ELF’s fiscal 2026 earnings implies a year-over-year decline of 15.9%, while the same for fiscal 2027 indicates growth of 25%. Earnings estimates for fiscal 2026 and 2027 have been southbound by 8 cents and 17 cents, respectively, in the past 30 days.

e.l.f. Beauty currently carries a Zacks Rank #5 (Strong Sell).

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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This article originally published on Zacks Investment Research (zacks.com).

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