Q3 2020 Earnings Call
Greetings and welcome to the Health Beauty incorporated third quarter fiscal 2020 earnings conference call.
This time, all participants are anyway.
Question answer session will follow the formal presentation, if anyone should require operator systems. During the conference. Please press star zero in the telephone keypad. Please note. This conference is being recorded I will now turn converts over to your host well make men.
VP of Investor Relations and corporate communications.
Mcmenamin you may begin.
Good afternoon, everyone. Thank you for joining us today to discuss Ltd third quarter fiscal 2020 earnings results.
As a reminder, this call contains forward looking statements that are based on management's assumptions expectations estimates and projections. These statements, including those relating to the company's fiscal 2020 outlook and long term model are subject to known and unknown risks and uncertainties and therefore actual results may differ.
Materially important factors that may cause actual results to differ from those expressed or implied by such forward. Looking statements are detailed in today's press release and the company's FCC filings. In addition, the company's presentation. Today includes information presented on a non-GAAP basis.
I refer you to today's press release for a reconciliation of the differences between the non-GAAP presentation and the most directly comparable GAAP measures with me from management today arch right, I mean, chairman and Chief Executive Officer, and maybe fields Senior Vice President and Chief Financial Officer Trang will begin the call.
Thank you will and good afternoon, everyone. We're pleased with that third quarter results with net sales of $81 million in adjusted EBITDA of $21 million, excluding all stores net sales were up 8% versus year ago.
The 12 weeks ended December 28, 2019, our dollar share of the color cosmetics category was 5% up 40 basis points versus year ago.
Even with the short term impact of a smaller holiday program.
For calendar year 2019 of the top five mass color cosmetics brands Nielsen we grew the most market share.
Reflecting our strong results, we're again raising guidance.
We've driven these results relentless focus on five strategic imperatives that we've discussed with you over the past year.
Let me give you a brief overview of each imperative, how our strategy works together and why I'm encouraged about our long term potential.
Our first strategic imperative driving demand in the brand continues to exceed our expectations with success across platforms.
Marketing in E commerce spend for the quarter was approximately 11 in half percent of revenue versus 7% year adult.
This rate was about 150 basis points below our objectives due to the timing some of this bad which was pushed into the fourth quarter.
We're measuring the success of our investments primarily by looking at the top line growth alongside internal metrics on reach conversion engagement as well as extra metrics like Google search and our immediate value all of which exceeded our expectations.
Last quarter, we discussed are helping amazing campaign.
Based on its success. This month, we are launching the second phase of our awareness campaign, which will further amplify our else mission of making the best of beauty accessible to every I lip and face.
We previously shared the early results of our eyes, the space tick Tock challenge. The challenges now garnered over 4.4 billion views on take talk with over 3 million user created videos a record for any brand challenge. While these numbers are impressive by any measure it's our ability to seize on social momentum that we want to underscore.
We started the campaign by creating an original 15 second ISO to say song as a backdrop to user generated video.
By the campaigns close this evolve until full length eyes of face music video in conjunction with Billboards 2019 label the year Republic Records.
Throughout this tick tock journey, we learned the importance of being nimble and opened two new approaches connect with our consumers. It also showed us that strong partners aren't imperative in this new digital landscape.
Among many awards and accolades add we called eyes ups face the most influential campaign and take talk and we were also featured by Forbes as one of the 14 social campaigns that rock 2090.
With a similar I to innovation and partnership in November we proudly hosted else fourth annual beauty scape that which reflects our brand values of empowerment and paying at Ford.
This year's beauty scape built on prior years events within Amped up division, including two and a half times entrance compared to 2018.
Finalist joined us in the Bahamas to connect with beauty industry leaders, including keynote speaker entrepreneur and celebrity hair stylus Gen asking.
Attendees, who are handpick for their vision and love of beauty attended Masterclasses electricity take their careers to the next level.
Ultimately they competed in teams to present their best original color cosmetics capsule.
The winning team received a cash prize and together, we'll introduce or else collection. This summer exclusively through our national retailer partner target, who also attended beauty scape.
As you continue to explore new ways to tell our story, where humbled at the recognition our branding efforts are receiving.
We recently won three creative Media awards, including best in show.
We've also been nominated for three Webby Awards and two Reggie Awards in January alone.
Our efforts continue to result in more social followers as well with our Instagram followers, reaching over 5 million up 27% versus year ago.
Our second strategic imperatives, a major step up in digital goes hand in hand with driving demand in the brand.
Our digital efforts center on seamlessly tying together our channels to offer a consistent else experience.
As part of this effort our tech stack integration is becoming increasingly more sophisticated.
Elfas front and center at Salesforce is Dreamforce conference as the only beauty company utilizing the entire Salesforce cloud platform across commerce marketing and customer service.
To highlight a few these digital initiatives in the third quarter, we launched LC, our customer service engine to serve our E commerce consumers 24 seven.
We made progress enhancing personalization to make the consumer journey more engaging for our one point Sixmillion beauty squad members, who account for over 65% of our E Commerce sales.
Our personalization efforts offers a single view of the consumer a long list incorporate pass purchases views and likes to customize what's being served to them online.
In conjunction with this we saw solid results in the early phase the receipt scanning.
Connecting us to even more data to enhance the beauty squad experience.
To make purchasing L easier we've implemented after playing Google 360, so I'll consumers can pay in the way the best suits them.
Perhaps most exciting is the launch of our new mobile App on Apple and Google, which will further enable receipt scanning and personalization.
Our third imperative for providing first to mass prestige quality products continues to drive competitive advantage.
We've mentioned the success of our wholly hydration skin cream 16 hour Camel Concealer imports. This party primer all of which we introduced around this time last year.
We're building on these proven Holy Grail products with extensions, including wholly hydration fragrance free hydrating, Camel, concealer, and luminous and Matt Party primaries.
These extensions were created in response to else consumer requests.
Additionally, we are introducing new Holy Grail products like our liquid glitter, eyeshadow, which is $5 compared to its $24 prestige equivalents.
These products are bringing new consumers into the brand with 65% of liquid glitter eyeshadow purchases on else cosmetics dot com coming from new customers.
Beyond liquid glitter eye Shadow, we're encouraged to five of our top 10, skews and else cosmetics Dot com, our recently introduced items.
Our ability to deliver a stream of new products that deliver the best of beauty, an extraordinary value continues to fuel our strategic imperatives.
One of our key areas of focus is expanding our skin care offerings, we're seeing success with core products like wholly hydration cream and hydrating booster drops. We also continue to push into new areas such as our cannabis. The T. The line, which has maintained a steady pace in our top five sellers on else cosmetics dot com since its introduction in November.
Our overall skin care business continues to show strong growth of 35% untracked channels in Q3.
Unicorn the project the guides, our four strategic imperatives, improving national retailer productivity is entering its third phase centered on better visual merchandising at shelf.
Going into spring resets, we're implementing over 100 different plan O grams across our retailers each featuring new visual merchandising.
In terms of shelf space, we've confirmed some additional space in grocery and have boots in the UK.
We expect further space decisions from other retail partners later in the year.
Unicorn is also driving better merchandising results as we continue to see strong productivity across our national retail partners.
Perhaps the Best example of this is our target flex towers, which provides us both incremental space and a vehicle to showcase our new products.
The next wave of these target flex hours shipped in the third quarter, which partially offset the impact of a smaller 2019 holiday program.
Performance that other national retailers was strong with one highlight being skincare momentum across the full chain at Ulta beauty.
Our overall international business was down in Q3 as reduced reliance on international distributors.
We made the shift in the UK several years ago, and it's paying off today.
In the third quarter growth within our key UK retail partners boots in Superdrug was particularly strong.
We expect that momentum to continue as we look to more than double our presence that boots over the next 12 months and expands base incrementally at superdrug.
In the third quarter, we held our first ever large scale consumer event in the UK and Glamour Beauty festival with nearly 5000 attendees.
Then Suzy has and we saw there was reflected in UK Beauty awards from Cosmos, glamour and gloss and a five fold increase in our earned media value in the UK.
We were also honored to receive a supplier award from Superdrug for best New cosmetics launch in 2019 far pull this party primer.
In other markets are most significant activity for the quarter was bringing our China ecommerce business in house from a distributor, which will allow us to better control pricing marketing and the pace of new product launches.
This was an important moved to begin penetrating the China market in a more meaningful way.
In terms of China, we're closely monitoring developments regarding the Corona virus.
We would note that or else offices labs, and key suppliers or at least 500 miles from move on.
We have a deep and geographically diverse supply chain within China.
It is too soon to know the impact to our operations I was in the later startup post Chinese new year.
We have an amazing else team in Shanghai and strong network of suppliers, who we just saw during our annual supplier summit and we're working closely with them, our thoughts or with our colleagues and those impacted by recent events.
Turning to our fifth strategic imperative of generating cost savings to help fuel brand investments I'll reiterate that our most important cost savings initiatives was closing R 22 else branded stores last February.
We redeployed the $13.7 million, an annual spend on stores to our strategic imperatives, particularly driving demand in the brand.
We're also seeing benefits from the automation of our warehouse facilities.
Our new liquid filled manufacturing facility in southern California should start operations in the next six weeks.
And you will discuss what we're seeing in terms of price increases and tariffs dynamics, but in summary, they remain favorable and a driver of our gross margin progress.
Make no mistake our execution. These five strategic imperatives has led to growth in a down category.
We will provide f. why 21 guidance during our Q4 call.
Meanwhile, I'd like to step back and touch on our longer term model for the company.
Over almost 16 year history, we grew in every year, except calendar 2018.
This year it was critical for us to reestablish growth.
Having done so I'd like to share what we're seeing in the model over the next three years.
With the momentum we're building the brand we believe we can continue to grow share.
We also believe we have an opportunity to grow shelf space significantly at our current national retailers and in new markets internationally.
Space gains are episodic and even when we get that space. It often takes time to optimize shelf productivity.
That's why our focus has been on executing our strategic imperatives.
With growth innovation at a brand that consumers love, we believe will earn more space overtime.
Over the next three years without major additional space or strategic extensions, we expect compounded annual topline growth and the low to mid single digits.
As we layer in potential space gains and strategic extensions. We believe this is a business that should grow in the mid to high single digits in both cases, we see leverage that comes with sales growth.
We expect adjusted EBITDA growth outpace net sales growth. We believed that this model of balanced growth in both the top and Bottomline makes what an attractive long term business.
One other things that gives me confidence in our model is our success in growing gross margin from 42% just a few years ago to over 63%.
There was concern earlier this year on the impact of terrorists, which we have so far successfully navigated with a slight expansion in gross margin.
We've taken much of this historical margin expansion and reinvested in the business first in the form of team in infrastructure and more recently in brand support.
We believe that the team and capabilities that we have built can be leveraged for additional growth opportunities.
Our strong cash position of almost $75 million at the end of Q3 gives us the opportunity pursue strategic extensions that can further leverage our capabilities and differentiate our brand portfolio.
We believe good uses of cash include small tuck in acquisitions in adjacent categories are spaces, as well as creating their own brands.
We believe such strategic extensions in combination with our strategic imperatives provide further confidence in the short term as well as longer term growth potential.
With that I'll turn the call over to Mandy.
Thank you for covering the Q3 highlights during it was another strong quarter and another quarter or that we're able to raise guidance. Let me now discuss the third quarter financial update guidance and our longer term model.
Excluding outdoors net sales of 81 million were up 8% from year ago are in line performance remained strong throughout December despite the seller holiday program, which impacted tracked channel data.
You may have already seen a bounce back in yesterday's Nielsen rate, which was partially aided by unicorn merchandising, particularly at target.
Gross margin of 65% was up 500 basis points compared to prior year, primarily driven by the price increases we implemented in the second quarter, along with other factors discussed including margin accretive innovation cost savings and favorable FX rates.
Year to date FX has contributed a onetime benefit of roughly 200 basis points to our gross margin.
It also note.
On tariffs that although the phase one deal the sign 70% of our product remains care at the 25% level.
Very small portion mainly lashes also remains under the 7.5% care.
On an adjusted basis S. DNA as a percentage of sales was 44% up from 37% last year, primarily driven by increased investment in our marketing and digital initiatives and bonus accrual, partially offset by the closure of R 22 else stores.
And the third quarter marketing and ecommerce thing, but 11 at a half percent of net sales compared to 7% in a year ago quarter.
During the third quarter, some marketing E commerce been shifted to Q4, therefore, we expect marketing spend as a percentage of net revenue to be higher next quarter.
Given topline results, we still expect to see marketing in E commerce spend at 12% to 14% for fiscal 2020.
Q3, adjusted EBITDA of 21 million was driven by the sustained performance in gross margin rate for the quarter gross margin and the shift in marketing spend to Q4 drove our adjusted EBITDA margin to 27% for the quarter. We expect adjusted EBITDA margin will normalize as those marketing expenses are incurred in Q4 and as we continue to.
See the impact of tariffs materialize.
Adjusted net income was 12.2 million or 24 cents per diluted share compared to 14.6 million or 30 cents per diluted share a year ago.
Last year, we had a five cents benefit TPS driven by discrete tax benefits related to stock compensation that we did not have this year.
For the nine months ending December 2019, we generated 37.8 million in cash left from operations, enabling us to find our capital investments and debt service, bringing our cash balance to 74.7 million compared to a cash balance of 51.2 million a year ago. The improvement was primarily driven by stronger operating myself.
[music].
And the third quarter, we repurchased approximately 1 million of stock, bringing our total through December 31st to three and a half million dollars.
Our investment priorities remain focused on our five strategic imperatives.
Drank discussed we continue to explore strategic extensions that can enable us to leveraging that we've made in our platform and fuel long term growth.
Now turning to our fiscal 2020 guidance, we expect to enter fiscal year with net sales up 7% to 8% versus fiscal 2019, excluding the impact of L. stores.
We expect adjusted EBITDA between 58, and $60 million adjusted net income between 28 and $30 million and adjusted EPS of 55 to 59 cents per share on a fully diluted basis, well the share count at 52, and a half million our tax rate is expected to be 28% for the year.
As we look to the fourth quarter, we're optimistic about our position in the market and the progress, we're making against our strategic imperative.
However, we want to remind you that comps become a bit tougher as we start to cycle positive sales growth related to the pool, it's pretty primer and 16 hour camel can see or launch as in Q4 last year.
These launches Joe strong organic influencer activity and a halo effect on sales across our product line.
Additionally, we expect gross margin to moderate as we continue to see the impact of parents materialize.
From an adjusted EBITDA margin perspective, we're expecting 21% to 22% margins for the year up from the 19% to 20% range provided last quarter as we've continued to see stronger than expected gross margin as I stated earlier Q3, adjusted EBITDA margin of 27% was driven higher by the shifting marketing into Q4, therefore, you should.
We expect a lower adjusted EBIT margin in Q4, as these expenses materialize, putting the full year and the 21% to 22% range.
Before I turn the call over for questions. Let me discuss a high level view on our long range model.
That's rang said over the next three years, we expect to continue delivering sales and profit growth driven by our five strategic imperatives.
Assuming we don't add significant shelf space or strategic extension.
Our sales growth CAGR is expected to be in the low to mid single digits.
If were successful in gaining significant shelf space or integrating strategic extensions overtime, we anticipate those could add additional points of growth to the algorithm.
In both cases, we anticipate adjusted EBITDA leverage will be achieved through a mix of topline growth and annual cost savings in Cogs and or S. DNA.
Accordingly, if we execute across all that are our motto could reflect a mid to high single digit sales cagar, we'll provide more detail each year, when we give annual guidance, but when I could give you perspective on our longer term performance.
We believe we're well positioned to drive sustained growth and look forward to updating you on our overall progress in the coming months with that operator, you may open the call to questions.
At this time, we will be conducting a question answer session. If you would like to ask your question. Please press star one under telephone keypad, a confirmation told one King. Your line is in the question Q You May Press Star too if you would like to move your question from the Q4 participant using speaker equipment, and maybe not sort of pick up your handset before pressing the star keys.
Please while we pull for questions.
Our first question is from Rupesh Parikh.
Oppenheimer <unk> company. Please proceed with your question.
Good afternoon, and thanks for taking my question and Graziano nice quarter.
So I guess I you started out just just sounds like I on the call. It there's been more commentary towards east a strategic extensions. So if you look at capital allocation I just wanted to get a sense of how you're thinking about M&A versus share buybacks and as you look at and I is there a preference at all between you know I guess on the make up cibers of skin care. So just any thoughts there.
Hi, refresh it's me Andy I'm going to take that question. So as we look at strategic extensions are we really look at a couple of things. So we are looking for a you know either small tuck in brands or we've talked about even potentially creating brand on our own but really we're looking for a strong growth profile on it.
Top and bottom line I also looking for something that builds on our capabilities either in adjacent category or at a different price points and also some next to leverage the capabilities that we built over the past 16 years, so operationally and through our distribution network would also be something that we look at but overall, we're looking for something that's it.
Creative or has a clear path to accretion overtime I think we've been highly disciplined as we've looked at these overtime I know terrain has mentioned that at one point in time, we looked at next but we aren't going to outfit l'oreal for that asset and so our heads are really around those smaller tuck ins at this point.
Okay, Great and then maybe just one follow up I was just on just on a gross margin obviously, a strong performance in Q3 and it sounds like the tariffs will start out more of an impact on Q on Q4, Oh. So if you look at your gross margin performance wrap our 19 is it was 63% level I guess, the right way to think about.
Mike I guess sustainable gross margin level going forward.
Well I'll speak Yeah, I'll speak on fiscal 20, and what tech, but we expect for that so its drainage and you know we've grown our margin try to over 63% year to date. It's at a 64. So I would expect the year to end somewhere in that range in the 63% to 64% range or we did see the acceleration of tariff.
Into Q3 about 100 basis points, but with those levers that we discussed we're able to continued off that.
And FX was a 200 basis points a onetime impact. So passes he think of 65. This exceeds three is probably the right number insight into what we should have done.
Okay, great. Thank you very much.
Thank you.
Our next question from Andrea Teixeira.
Casey Morgan. Please proceed with your question.
Hi, good afternoon. Thank your for taking my question and congrats on the quarter. So I understand your suppliers are loyal and I guess around do you disclose that the same it I mean does that this that's from so you have on a and but I wanted to understand.
If you believe the factors are still close the if there's still operating and I'm more concerned about the supply chain. If the raw materials are causing any disruption and if you're embedding the risks that stockouts, probably not in the fourth quarter. So your fiscal 20 likely safe, but its fiscal 21 and an update.
How long a this products would come in and and again just to.
Hi, Fi that point and all that said they side and I know, it's something just to the second point is the the percent that it's still quite elevated as a percentage of sales. So wonder when we should think of that leveraging more as you put all the topline. Thank you.
Hi, Andrew This I'll take the first one and give me. The second question. So in terms of China for F. Why 21, I'd tell you it's too early to tell.
Our thoughts obviously with her colleagues in our suppliers, who are working very closely with.
I think the best thing is we're extremely vigilant on our health and hygiene protocols I'm very proud that.
None of our employees or the immediate families have been infected as we checked with all of our suppliers. They have reported none of their their employees have had any issues either part of that is the distance from move on but I think part of is also the protocols we've put in place.
In terms of our overall approach with our supply chain in China. It is one of the main advantages we have.
I'd say from a supply disruption our continuity standpoint first of all every one of our items is a dual source were not single source on anything. So if there was an issue we have the ability of move volume around say the second thing is going into Chinese new year every year, we go in with elevated.
Inventory levels really because some of these facilities, we shut for a month, how we have our resets that happened here in the spring time. So yeah, we're sitting about six months worth of inventory right now and that does not include what our customers are sitting on so right now certainly for the short term I think where we're feeling pretty good.
But obviously this is a evolving situation I will continue to monitor it we have very good track record in terms of our ability to be able to kind of supplier customers and worked very closely with them.
That's helpful and then Andrea that S. DNA point, so s. DNA. This quarter was really driven by two things that we called out the incremental marketing expense. So this quarter, where we're at 11.5% versus last year. At this time, we were at 7% and then also a bonus accrual included in this quarter versus.
It's not having that as you recall last year, we did not pay any executive bonuses and so now lapping that with with that bonus accrual.
And our longer term algorithm, we do have some combination of s., DNA and or Cogs savings baked into that and so overtime over the next three years is as we talked a lot you should expect some savings there.
[noise] right and if I am ended think if somebody to one of them things that you also discussed is like very mindful of the phasing of the Peerless argued primer like and now and that came all consider is that is that a consideration obviously now into fourth quarter and then I know you've been re launching its.
Oh, so like variations of it so I was just wondering.
It's just the massive call because has done so well and if you can kind of like tell is like what would the impact embedded in your guide.
If that Oh lapping that.
Yeah, So a that guidance right now the 7% to 8% really reflects kind of what we've seen what we've seen as a trend on a two year stack basis. So if you look at the low in the high end of the guidance range.
Puts you about a 5% on a two year stack for Q4 on the low end and about eight on the higher end. So really in line with the trends that we're seeing a just calling out that you know well it's funny prime we do have to cycle that but we're encouraged by.
The trend that we're seeing so far.
And our new product program is off to a really good start as I mentioned I think five of our top 10 items right on else cosmetics dotcom alright them as we just introduced in the last month or two so.
While we have a big comp to overcome with wireless putting primer chemokines sealer, our wholly Gil grilled products like our our new hydration Chemokines sealer, our liquid glitter I Shadows, a number of other new products were encouraged by the the fast start on those.
Perfect I'll pass it on thank you.
Our next question from Erinn Murphy Piper Sandler. Please proceed with your question.
Great. Thank you and <unk> my congratulations I guess I have a couple of questions maybe turning first for you a little bit bigger picture question. As you think about just the beauty industry right now in its obviously a map and for several years now I mean as you go forward into 2020 2021, how do you feel like target Wal Mart near break it out or just thinking about.
Allocating safe for that category.
We are that you guys are gaining share, but just overall I'm just curious on what's being allocated to the Indian how that may shift versus prior season or prior years.
Hi, Aaron what I'd tell you is beauty is still incredibly attractive sector for any of our retailers Felica, obviously ulta beauty. That's been the case that same with target in Walmart they've allocated more space for beauty overall within beauty you can have shifts between some of the subcategories. So we've talked to them.
The last few years mass color cosmetics, having a poor trends than skincare for example, but the overall footprint at least for all the customers we deal with where beauty is a major strategic priority, we don't foresee kind of shrinking of that footprint in terms of allocation decisions within that footprint. He can.
Just a growth rate productivity, what's the level of innovation you have and what are your consumer profile is an all four of those we score extremely well so long term on highly cost. It is our ability to continue to pick up more space. The reason why we provided a long term model in two different dimensions is space is episodic.
And so we wanted to be able to give a perspective us without major space gain or strategic extensions what level of growth do we see and then when you layer that on what that looks like some both encouraged long term in terms our ability to get space and then short term I'd say, you know often for retail or they have a number of other decision. Besides a fundamental performance of.
And I think one headwind there is a number of them are had been focused on exclusive brands and testing new brands as they go through a lot of those will kind of come and go.
I think we're well positioned regardless of that for legacy players.
Okay. That's helpful. And then just maybe just a follow up trying on my first thought and into next year kind of the long range plan at the lower end about low to mid single you within the category stays relatively similar apart. We're at today or is there any improvement in the category.
We made the long term model inclusive of the current category trends. So we assumed a Dallas category in there. That's why we believe it's pretty good growth without space without strategic census, in a down category to be able to deliver that level of growth.
Okay. That's helpful. And then just my my second question is really a third man he and we think about marketing I think you guys habit like 12% to 14% of sales that near <unk> and you go into next year. The general right level to think about or was this kind of the shot in the arm three you know kind of rejiggered the brand momentum and that.
Sorry to come down just curious on how you're thinking about that within the framework at the three year plan. Thank you yeah. So so everything about the 12% to 14% I think we said that's the area that we feel comfortable with right now we haven't really given guidance beyond that but to say that 12 to 14 as where we see it at least for critical 20.
Okay, great. Thank you guys and all that.
Thank you Aaron.
Our next question from Linda Bolton Weiser D.A. Davidson. Please proceed with your question.
[noise], Hi, could you elaborate a little bit more on your decision to use fewer international distributors and what your plan would be then for other international markets. They do you plan to go in the direct markets or it can you just talk about the regions or countries that that you are thinking about.
Penetrating further thanks.
Hi, Linda so our strategy, which began probably more than a year ago was to really go direct with our key international accounts, where we could similar to our strategy in the U.S. way of direct headquarter coverage at target Wal Mart Ulta beauty.
Our drug channel and other key customers as any of the company you know we go through a flow where you start with a lot of international distributors, you figure out which ones you want to be able to keep.
As we made that shift for example in the UK a few years ago. We just saw much better results of being able to go directly to superdrug indirectly to boots terms of other international markets, where testing the brand we have in for a while in Germany and other countries within Western Europe, Our big focus within Asia is really from an ecommerce standpoint with China.
Yeah, and making them move of actually taking over that business directly from a distributor was an important move for us and you'll continue to see us kind of sequentially go country after country never.
We'll be a big Bang, but more how we go and really make sure we're executing each country right way.
Thank you and then can I just follow up on the Corona virus issue isn't your understanding that plants will reopen after the extended holiday period or do you have any further information on that and then I think you said your facilities or 500 miles away.
Would that be in the Guangdong region or there was like another manufacturing region slightly more north can you just give us a little more specificity on where your facilities are or maybe they are in different locations. Thanks.
Sure Linda so our our supply network as opposed to deep and very broadly distributed.
So we're in different parts of the country, particularly around the Shanghai area, but we have suppliers in various other regions, but I tell you in terms of production plans.
We are scheduled next week to.
Be in production and have shipments we had shipments ready to go that we did right before Chinese new year's and we're seeing very close it's a quick dynamic.
Leave and very evolving kind of situation so.
Very proud of our team and just how how well everyone's working together, including support from the U.S.
So I hope that answers the question, we haven't disclosed where all of our facilities are other than not.
And Oh, we have talked in the past being closer to Shanghai and in other regions.
Thank you that's very helpful.
Our next question from Steph Wissink Jefferies. Please proceed with your question.
Thank you train first question is for you just to remind US where are you looking at shelf space out your three biggest account target Wal Mart all thought can you give us a quick diagnostic update on how much space at each retailer you are currently.
Sure. So our most developed customers target, where we've been in business. The longest on average and think we have a body and 11 foot footprint at target.
Then after that would probably be Walmart in terms of walmarts footprint is on average I think about five feet and Ulta right now would be in some combination of six what sets and and four foot that someone averaged about five feet as well. So in most retailers, we find that we have less than.
On a half the footprint that we have at target, which gives us that confidence longer term in terms of the footprint of the brand.
I should also mentioning the drug channel were predominantly I thinking around a three three foot set so we still have room to grow pretty much in every channel that were out.
Including at target I talked about kind of the benefit of Unicorn and our new merchandising vehicles with these flex towers has been terrific for us in terms of really.
Highlighting our new products and our team.
A key Holy Grail.
Innovations and those flex towers form a additional space there as well so so quite a bit of room to grow.
Okay. That's great and then my question for you on skin care I know you talked about strategic extension, but what about strategic adjacent seeds in skin <unk> body Sun care, it's remind us how big that skin care businesses today as a percentage of sales and if you see that fill up the growth opportunity.
In care, yes, so stuff this is mandy.
Skincare, we still see as on a big opportunity for us as we mentioned skin care with oppressed, 35% in a quarter.
And when we think about strategic extensions definitely think about adjacent fees as I mentioned, a and skin care would be one of those that we would definitely consider.
And part of it as you know even in color cosmetics for almost 16 years skincare is still only two to three years in given the momentum we see given kind of the strength of the pipeline, we see a lot of growth there. Although it is still quite small and our overall range.
Thank you.
Our next question is from Oliver Chen Cowen and company. Please proceed with your question.
Thanks Congratulations.
Regarding project Unicorn that was a big focus its you've had a lot of great success. So what what inning are UN wouldn't unicorn and how does that interplay with the opportunity for space opportunities.
Related to that is a is pricing in elasticities I'm one of what are your thoughts on what you've been seeing in the marketplace with the unit response relative to price increases it sounds all very encouraging thank you.
Thanks, Oliver I'll take the first question I mean, a corner last mandate to take the one on pricing Unicorn has done a great success for us in terms of really elevating our position in each of our national retailers on shelf and with merchandising. We're currently entering the third phase of Unicorn, which is really focused on vision better visual emerged.
Dicing, particularly bait, bringing consumers, Turkey, Holy Grail innovation being able to navigate the shelves better for that.
Shows are currently being set.
We'll have a better read of those really over the next 46 weeks one of the reasons why last year, we changed our fiscal year to be able to get that read and then in terms of where unicorn goes from here I mean, I think you're going to continue to hear us talk about unicorn a different phases. We believe this much more we can do from visual merchandising standpoint.
And as that visual merchandising as well as the other improvements we've made him help us increase productivity. We believe that makes for a very good case for space.
[noise] have been Oliver on the pricing side, we continue to be pleased with what we see there, saying last quarter, we talked about having a 200 basis point impact some pricing and we feel it's continuing to hold so what we saw in Q2 continues to hold true and Oh, Yeah continues to give us some benefit from having that.
Pricing.
And today and you Nick talked.
Yeah.
Go ahead of others.
So the other question and would love your thoughts on on units and then dynamic that you've done a remarkable job would tick tock. Congratulations how do you see that platform evolving and as.
As we digest the evolution of these platforms like how much marketing as a percentage ourselves you know will be allocated the two emerging platforms like tick tock versus some of the other expenditures.
Yeah. So let me just finished up on the elasticity piece on the unit side. So we do continue to see units down on items that we price, but better than what we initially model. So that also gives us some comfort.
And then on take talk I mean, it's been an incredible campaign I'd say, it's part of our overall brand recharge than I think one of the great things about her brand recharges getting back to our roots in terms of constantly kind of experimenting and really finding ways of engaging with our core consumer and so you take talk in particular really going there.
Strength that tick tock has amongst gensix, we're definitely seeing I mean, our campaign was 4.4 billion views over 3 million user generated videos, we see much more we can do not only I take talk but other emerging platforms as well and in fact, it's not only what we do but what our community does in the last couple of weeks one of things I'm really encouraged by.
Is there are two viral videos.
That were posted we had nothing to do with them one was for our bite size shadows whenever a new items.
Soon is that video went on we saw almost a fivex increase of sales of bite size Shadows enough cosmetics dot com over the last couple of weeks. Similarly, we saw another viral video go up on our live Exfoliate or is this is a product we've had for quite some time one of.
Our core products out there and again I think we saw at one major retailer almost a success increase in terms of Olympics full year sales. So not only are these platforms, great wasting gauge our consumers, particularly gen season, millennials, but we see the translation of what they can do to us from a business standpoint, and you'll finish.
Continue to see us experiment kind of Blazingly grounds.
Mhm and lastly, the aspect of creating brands the ill, let bren seems pretty versatile. So what are your inclinations in terms of opportunities as you think about either pricing or line extensions or why why wouldn't creating another brand b a being opportunity.
We certainly believe the biggest potential we have is continue to grow else, we have tremendous potential Nelson great belief and not as you say not only in continuing to get more consumers and the franchise broaden our footprint continues you bring out amazing new innovations, that's almost a 100% of our focus is it.
Himself, having said that most of us all to come with multi brand experience, what we've seen the benefit of being able to take the investments we've made in team and our capabilities and leverage that across other other brands, whether it be in a higher price point, given the quality of our products that could be applied to a different price points.
For a different adjacent see your space, we can see the benefit potentially putting a new brand through as part of one of the examples of a strategic extension.
Thank you best regards.
Thanks.
Our next question from Jon Andersen of William Blair. Please proceed with your question.
Good afternoon everybody.
Good afternoon on John.
Question.
Maybe portraying on on space.
Shelf space in 2020, I think it was mentioned that.
There were some some wins that you've already booked I believe in grocery.
And perhaps a boots in the UK.
It is number one did I hear that accurately number two.
Are there some other concrete.
Shelf space opportunities with maybe the big three Nash national retail accounts.
That that where decisions could be made during 2020 as well.
Sure John So you heard that right. We did pick up in confirmed additional space in grocery as well as boots, where we're going to be doubling our footprint over the next 12 months.
We have opportunities everywhere, there isn't one place where at where I don't believe we have opportunities and so.
I think our biggest opportunity remains more space at Walmart for severely under space. There there our largest customer and we still have a long way to go there.
But same with Delta were relatively recent in our experience with Delta they've already this past year started taking space up from four four to six foot sets.
And then finally, even target I mentioned earlier and drugs as well so those decisions. We would expect to come later in 2020, and so it will be ready for our 2021 guidance fiscal year 21 guidance. It will be in a better positioned to talk about what are we seeing and where there will be.
If those decisions were made are made in 2020, what what's kind of the way to think about timing for shelf implementation.
[noise] yeah, the timing for shelf implementation really is two ways to think about it one is the spring sectors, which are done and we've talked about kind of the level of space. We have right now, which is really just grocery and boots for additional space. It varies by retailer, but you'd be but if there was gonna be space.
I would be a in the fall of this year as we went through and again a lot of it depends on each retailer strategies in terms of when they're making their final space decisions.
Very helpful. At a question on pricing just to circle back around on air permit. It is all of the pricing that you plan to implement is that now you know in market on shelf.
And the volume response that you've seen.
It sounds like better than expected, but still you know volume response.
How long does it typically take in.
And your experience for consumers to.
You know going to absorb that that increase and you get back the ability to kind of you know inflect volumes to positively.
Yes, so I just don't break your question down, yes pricing is implemented across all retailers and L. cosmetics dotcom.
And as we spoke about that started in Q2, so fully reflected in fact channel data you can see the response and the elevated you ours and all that data in terms of when you expect units to come back around I mean, I think that you know as I said units are better than we model, but still negative.
But you probably need some time to cycle through that price increase before you see the unit inflection again.
How about or.
We have other mass color cosmetics brand had to make similar price increases or are you in a different situation given the nature of your supply chain.
Yeah. So we lead the value segment, a pretty much every value player to followed our lead into pricing.
The way the nature of which they just pricing was off in different sums up many of them peanut buttered kind of a certain approach a certain percentage across all of their skews we tend to target.
Skews, where we felt we had a much better value proposition or where we felt a competitor might have to take pricing and I think that's one of the reasons why we're seeing better execution than what we modeled.
But the good news is in a number of our competitors have taken pricing.
Great just one quick one on the liquid filled facility in California, It sounds like you're close to two starting production there.
How much capacity how quickly will you be able to bring on that capacity or what are you looking for I guess out out of this facility.
In terms of meeting overall demand thanks.
Yeah. So we've not disclose what level of capacity, we have other than that facility has quite a bit of capacity I would say in any of our startups, there's a certain curve, which he startups over the next six weeks, we would fully expected startup that facility.
If he sometime before it accounted for a big portion of our volume. So we continue to see it he's pretty small China will remain probably the main source of our volume, but it has potential we scope get out well before tariffs really from a standpoint as if we're going to automate certain unit operations he'd be done.
To do that closer to our distribution center and so that's what we're we have a lot of lot further to go so you'll hear us talk about that facility for quite some time and then the other thing I would mention is we're seeing really good results with our lean initiatives in China.
Lean techniques that we've been applying there with our various suppliers and number of as just came back from our annual supplier summit and heard some great cases of the continued efficiency gains and savings that we can generate there.
Thanks, Thanks, a lot and congratulations.
Thanks, Thanks, John.
Our next question is from Bill Chappell Suntrust Robinson Humphrey. Please proceed with your question.
Thanks, Good afternoon.
Good afternoon I, though.
Thank you know we in your longer term guidance the comment was because.
Low to mid single digit growth, but when you get shelf space gains or potential for mid to high and I only ask about that because as we all remember two years ago, when you've got meaningful shelf space. It.
Both targeting and Walmart or sales started to actually decelerate as it seemed that the company kind of wasn't quite ready for that much more space and it took longer to kind of get used to and grow into that so is the <unk> I was looking for should we expect continued kind of a lag you know as you add these spinners it.
Walmart or I mean, a target or good shelf space at boots, or other places or do you feel like you've kind of re cracked the code and Kim can grow into that space a lot faster.
Thanks, Bill what I'd say is one we.
We're further along as a company in terms of our ability to kind of optimize the space. Even indeed are footprints as we see now with target in Walmart, but you are correct that even when we get space. It does take awhile before we start to improve the productivity of that space and so our long term model contemplates really.
Both scenarios without the absence of major space or strategic extensions low to mid single digits in a down category and then with.
Major space as well as strategic extensions and I think it's really the combination of the two that gives us confidence in that mid to high single digits from a growth standpoint, and it's a CAGR over three years. So you can see some lumpiness in that cagar, but overall, we felt feel much more comfortable.
Comfortable in terms of that range given those circumstances.
Got it and then just another a term that used to hear a lot more than a didn't don't remember hearing on this call was sweeten. The mix. So is that still you know our there's still opportunities there on a gross margin or with the tariffs and pricing and everything you know going on right now there's it's kind of put on the back.
Uh huh.
No sweeten the mix is always to be part of this company. It's how we got from 42% gross margins to over 63% gross margins and as a reminder, for those who who don't know what sweeten. The mix is it's a combination of margin accretive innovation.
Cost savings and our ability to really drive kind of.
Our margins up.
I would see the balance on sweeten the mix, how we believe there's still many opportunities I mentioned a couple of them. Both in terms of our liquid filled facility in southern California, as well as a lean manufacturing improvements were making in China. We believe this opportunity improved gross margin. Further however, we also want to be careful to.
John's earlier question on unit velocity is in unit volumes that we don't get too greedy from a gross margin standpoint, where we lose the extraordinary value to consumers know and believe in us for so we very well could take some of the progression that we would make on a cost basis, either it takes more to the bottom line or.
Sure to continue to reinforce our high quality an extraordinary value. So we're as Mandy said earlier, we're satisfied with kind of where margins are right. Now we don't have a concerted effort to say, we want to get to some really high gross margin level for the sake of it I think we took our 65% this quarter and does the one time for FX.
It's kind of gets you know margin level, we're pretty comfortable with.
Got it thanks, so much.
Thanks, though.
Our next question is from Wendy Nicholson Citi. Please proceed with your question.
Hi, I'm most of my questions have been answered, but I just had one.
With regard to sort of online sales and I know else Elf cosmetics Dot Com has has been a strong channel for you in the past can you remind us how much that that website represent as a percentage of your sales and specifically on Amazon. It was interesting because co he called out Amazon as a particular.
Area of strength.
In their current corner and I'm wondering if that's something across beauty in general and what you what trends you're seeing on Amazon. Thanks.
Yeah, so on that on a piece of the pie how much is it Wendy we haven't really disclose that we will consider that when we talk about RK I think the last thing we disclose what is the combination of Oh cosmetics dot com and our stores.
So more to come on that when we issue our K, a and then on Amazon outlet terrain talk about that yes. So I'd say overall digital business has been an area of strength for us throughout the year and that's across customers, both El cosmetics dotcom as well as the retailer Dot coms. So most recently we've seen some good trends at AMAK.
But we've also seen very strong trends the ultra dot com target dot com and Walmart Dot com Weve for US. We believe all of them are benefiting from the double down on digital initiatives that I talked about earlier and what we're able to do there now for the third quarter I would say, we had really strong growth at the retailer Dot coms L. cosmetics dot com.
<unk> was not as strong in the third quarter as it has been so far this year, mainly because we did not repeat 60% off promotion, we did a year ago, we feel much more confident in terms of our ability to grow our el cosmetics dotcom another retailer dot com businesses through the efforts I talked about in terms of data and.
Personalization and we feel really great about where those efforts are and what those efforts are yielding us.
So, but that's still the helped us get cosmetic dot com is still a priority kind of over the long term. It's it's not like you've changed your strategy.
Big picture to walk away from direct to consumer.
No I mean, we were digitally native brand I mean, the only see I had was cosmetics dot com. We started so it's always going to be our top focus and in fact, our second strategic imperatives of double down on digital all the initiatives I talked about benefit ALS cosmetics dot com as to kind of our full focus on our beauty squad program and everything we can do there.
I know that's it's absolutely.
The engine that drives everything else, it's a major part of our consumer engagement as well.
Fantastic. Thank you so much.
Our next question from Mark Asher Sean.
Stifel. Please proceed with your question.
Thanks, and good afternoon, everyone.
I I guess I wanted to start with the long term model and.
Just thinking about the grocery extension or thinking about boots here through here, where the quarter. So to go to next year.
Would you consider those.
Major shelf space gains I mean are we looking toward high in next year. I guess, you don't have to get into guidance, but I guess, we're just I'm curious kind of how you would think about those two things with major minor and then more holistic we on it so you're talking about fiscal year growth you talked about shelf resets largely coming in the fall so.
From a dynamic standpoint, how do we think about that is it more of a calendar you know kind of when the fall reset to happen to be doesn't next year in terms of growth as opposed to flowing through and each fiscal year somebody's some commentary there could be helpful.
Yes, hi markets Mandy so.
On the long term model, you're right, we're not giving specific guidance on fiscal 21 at this time that will come in may, but I think the differentiator between major space gains and minor when we say major we're really talking about the top three retailers that we would consider come up from a major space like we're talking to incur major incremental space.
Ah So that's how I would differentiate those and then in terms of shelf resets and the timing and went to think about that from a growth standpoint, again terrain talked about fall as being the reset you know and then there could also be spring.
Calendar 21, as well and so those really it just depends on when we get that space when the reset happens and then how quickly we can optimize that space is when you start to see the growth associated with those and part of that is some of the retailers themselves are evolving in terms of how they are handling space.
Historically, if you recall Walmart did not have set time for their space decisions. They kind of took it as they did modules of stores and when they touch the store we picked up more space.
Its target historically, there's more in the spring and then also you saw some combination to big one in the spring and then depending on what the end up doing the department and so that's why it's no longer we used to really anchor people on the spring resets. We're just seeing more kind of dynamic in terms of how their handling space and how they're handling.
Segments of their stores.
On the overall space, but on the long term model just little bit more perspective there.
Part of the reason why we want to provide long term model as our investors have been asking us for it.
Putting the context of our growth are strong growth the year that we didn't grow and now we're growing again, how should we think about it. So we try to frame. It in a way that you could see without space or state major space or strategic extensions, what it would be and then with that would it would be in terms of grocery and boots I wouldn't I would not can.
What are the major space extensions.
That's helpful. Thank you and just lastly told the 14%.
Instead of sales from marketing spread.
How do we think about kind of puts and takes as to whether that's the right level or not I guess, how do you think about it is whether it's the right level or not like why would it go higher why would it stay the same why would it potentially go lower.
Yes, so for the 12% to 14% we've talked about net sales growth really being that major metric that we're looking at in terms of that effectiveness of our marketing and so with the 12% to 14%. We've continued to see that level of success and so that's where we've put it for now now we've gotten the question before how do we know that's the right level.
So it's just a level that we feel comfortable that given where Brad and somebody other internal metrics. We look at both in terms of reach conversion as well as engagement and then externally on Google search and earned media value.
We're always looking at the effectiveness and what the ROI of that spend is where comp comfortable particularly given the delta gene that 12% to 14% to where we were so right now we're very comfortable with that level and again, we give guidance for to fly 21, we can update you.
Thank you.
We have reached the end of the question answer session and I will now turn the call back over tooth Harangue Amin for closing remarks.
Thank you everyone for joining us we look forward to speaking with you in May when we'll discuss our full fiscal 2020 results as well as our fiscal 21 outlook, Thanks and have a great day.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.