(Bloomberg) -- Short seller Carson Block said he’s shorting the shares of cosmetics brand Elf Beauty Inc.
Speaking at the Sohn conference in London on Wednesday, the chief executive officer of Muddy Waters Capital said the reason for the short is that he suspects Elf Beauty has overstated revenue in recent quarters and that a build-up in the Oakland, California-based beauty company’s inventory was due to lackluster sales.
Elf Beauty issued a statement Thursday saying Muddy Waters had made “numerous inaccurate statements” and its allegations are “without merit.” It added that it has rigorous procedures for inventory control and revenue recognition, and it was confident in its financial results. Previously, the company had said the increase in inventory was a conscious choice in order “to support strong consumer demand” and also partly due to changes in its supply chain practices.
Shares of Elf Beauty tumbled as much as 16% on Wednesday after Block’s announcement before paring the losses to 2.2% at the end of the trading day. They have declined more than 40% from their peak reached in June. In a Bloomberg Television interview with Francine Lacqua on Thursday, Block declined to give a price target for the stock.
Founded in 2004, Elf Beauty reported $301 million in net sales for the quarter through September and adjusted net income of $45 million, both exceeding Wall Street projections. In August, Chief Financial Officer Mandy Fields said that about 80% of the company’s supply chain is located in China, with the average product price at roughly $6.50. The quarterly numbers “underscore our confidence in our business model and strategy,” Elf Beauty said in its statement.
Block, 47, has built a formidable reputation over the years as a short seller. He has bet against companies including Sino-Forest Corp, which he accused of exaggerating its assets. The Chinese company filed for bankruptcy protection 10 months after his report was published.
Including Elf Beauty, Muddy Waters has built up at least four new short positions in the past 12 months, according to publicly available statements and research on its website.
A scorecard of the money manager’s bets since 2019 shows many of its targets drop after the short position is unveiled. Shares on average lost about 13% in the first day, and were down 16% up to one year later, according to calculations by Bloomberg News.
Bets against Blackstone Mortgage Trust and Eurofins Scientifc SE did well for the short seller with shares of both companies down more than 10% since their respective announcements.
Activist shorting is a strategy that involves betting against a company and publishing research reports intended to convince the market that the target’s publicly-traded instruments are overvalued. While some accusations by short sellers have held up and prompted regulatory or legal action in recent years, others have proved unfounded and tainted by ulterior motives.
--With assistance from Marion Dakers.
(Updates with Elf Beauty’s response in the third paragraph.)
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