Q2 2021 e.l.f. Beauty Inc Earnings Call
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Good day and welcome to the old Beauty second quarter fiscal 2020 earnings conference call.
All participants will be in listen only mode judging.
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After todays presentation, there will be an opportunity to ask questions. Please.
Please note this event is being recorded.
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Thank you for joining us today to discuss health Beauties second quarter fiscal 2021, Russell I'm KC Cannon, Vice President of Investor Relations with me today are terrain, I mean, chairman and Chief Executive Officer, and Mandy fields, Senior Vice President and Chief Financial Officer, we encourage.
Due to tune in to our webcast presentation for the best viewing experience on the content, we're presenting which you can access on our website at Investor Dot <unk> cosmetics dotcom. Please.
Please note after the presentation there is a separate dial in for the Q and a session also noted in the press release.
Since many of our remarks today contain forward looking statements. Please refer to our earnings release and reports filed with the FCC, where you'll find factors that could cause actual results to differ materially from these forward looking statements. In addition, the company's presentation. Today includes information presented on a non-GAAP basis, we refer.
Are you to today's press release for a reconciliation of the differences between the non-GAAP presentation and the most directly comparable GAAP measure with that let me turn the webcast over to touring.
Thank you Casey and good afternoon, everyone I hope that you are staying safe and well.
Today, I will talk about the fundamental drivers behind our second quarter results, our growth opportunities and the overall strategic framework for our company.
I'm, so proud of Ralph beauty team for delivering strong results in the second quarter as we continue to navigate major category headwinds as a result of code 19.
This is our seventh consecutive quarter of net sales growth was Q2 net sales of $72 million up 7% versus year ago.
We expanded gross margin to 65% up approximately a 100 basis points versus last year and delivered adjusted EBITDA of $14 million, while increasing our investment in marketing and digital.
We continue to grow share in the quarter with 5.5% of the color cosmetics market up 100 basis points versus year ago.
We also took important next steps in our transformation to a multi brand portfolio with the unveiling of key cell care, our groundbreaking new lifestyle beauty brand with Felicia keys, and the launch of our recharge well people plant powered clean beauty brand.
Before him and he goes into more detail on our results I want to share the key pillars underpinning our performance and talk about why im optimistic about the future of our brand portfolio.
Our strategy is working we came into this volatile period from a position of strength.
Our Super powers that center on our ability to deliver 100% cruelty free premium quality beauty products at accessible price points with Universal appeal are more important than ever before.
The focus work behind our five strategic imperatives as continue to drive our outperformance relative to the category trends.
We believe the strength of our platform gives us the ability to drive even greater value through strategic extensions like us key silk here and well people brands.
Let me provide a few highlights from the quarter.
Our first strategic imperative is to drive brand demand, we're driving greater brand relevance and expanding our consumer reach our press impressions soared over 160% versus prior year.
Biggest Alf was named one of the beauties most powerful brands in 2020 by women's wear daily we.
We also increased our rank in Piper Sandlers 40, its semi annual teen survey from fourth favorite cosmetics brand amongst teens last year to second this year, reflecting strong appeal to Gen Z.
Health social audience continues to grow double digits, reaching over 9 million followers to date across our digital ecosystem.
We are expanding our existing footprint with deeper engagement on key platforms like tick Tock, Instagram Youtube Snapchat and interest well continue to test and learn a new frontiers.
Tick tock continues to be a great way for us to galvanize Gen Z and build awareness among other growing cohorts on the platform.
The record breaking viral success of our eyes ups face hashtag challenge, coupled with our Alf Magic Act hashtag challenge harrowing or $8 Parlous Party primer collectively garnered nearly 10 billion views and 6 million user generated videos.
Tick Tock is taking note how else is changing the game.
And we're continuing to make history with the release of eyes of famous the first ever tick Tock reality show.
Alongside other innovative activations engagement, our LCR channel continues to outpace top beauty brands and our products continue to go viral organically on the platform, resulting in sales surges.
Looking across our digital ecosystem, we recently hosted our fifth annual and first ever fully virtual beauty scape.
This event helps foster ongoing relationships with the influence or community and empowers beauties rising stars with the opportunity to build a cosmetics and skin care collection that will be sold through a national retailer.
This year's event called beauty scape the remix infuse the power of makeup in music featuring three musical artist, including Grammy nominated Global Superstar toes low.
Even the new virtual format, we sell participation grow over 90% year over year.
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I couldn't talk about a big brand moments without recognizing Corey March Sodo, Chief marketing officer of Health beauty and President of key silk here, who was honored as one of the AD weeks 2020 brand geniuses, recognizing the principal leaders behind the boldest and most imaginative marketing efforts core.
Corey is one of 10 brand geniuses, putting elfa, an admirable company with leaders from Nike Walmart Apple Verizon PNG Pepsico in Disney plus.
Congrats Corey and our entire marketing team.
Even with the success of our brand building activities, we still see a significant opportunity, bringing new consumers.
In fact, our latest attitude in usage study shows that there is almost a 30 percentage point gap in our unaided consumer awareness as compared to some of the legacy color cosmetics brands.
Were the fastest growing among the top five color cosmetics brands in the U.S. and we see a lot of runway ahead.
This quarter, we took an important next step in our transformation to a multi brand portfolio with the unveiling of key silk here, our groundbreaking new lifestyle beauty brand with Alicia keys.
This is not another celebrity beauty line, we see key silk here as a brand with long term potential.
Alicia is truly an inspiration is so many and we believe her passion for bringing light into the world will resonate with a broad set of consumers across the globe.
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The brand has already captured Hearts and minds well ahead of our scheduled first product launch in December Threerd with over 6.5 billion press impressions to date.
The key cell care community is growing nicely with Instagram engagement metrics trending well above platform averages, it's clear now more than ever the world is craving a brand with so.
Last month, we also launched the Recharger well people are plant powered clean beauty brand utilizing learnings from last year's Ehealth brand recharge.
At the core of this recharges or brand vision, because all people can be well people as we strive to make clean beauty accessible.
While people Dot com now reflects the brand's new vision of clean beauty with much more vibrant colors and messaging along with updated content that really brings well people's plant powered beauty to life.
The 360 degree marketing plan in place, we aim to broaden consumer awareness for this brand.
Our second strategic imperative is a major step up in digital we continue to execute a digitally led strategy that is benefiting both ALS cosmetics dot com as well as our retail partner sites.
Q2, digital consumption grew nearly triple digits versus year ago, even as major brick and mortar location started to reopen around the globe.
Ill cosmetics dot com the number one mass cosmetics E Commerce site power is our digital ecosystem.
We also saw strength and our retailer dot coms and on Amazon in particular, as we launch our new beauty store.
Our digital channels expanded to 13% of our total business this quarter up from 7% a year ago.
The number of new consumers acquired in the quarter and of cosmetics Dot com was up nearly 60% year over year and we're encouraged by the retention and repeat purchase rates we're seeing.
Well the demographics of these new consumers look similar to our existing consumers, we're starting to see some differences.
For example, our new consumers over index on skincare and a greater percentage of these consumers are signing up for our beauty squad loyalty program.
Beauty squad now has 2.1 million members up almost 40% year over year.
Our loyalty members purchase more frequently have higher order values in our non loyalty members and collectively drive almost 70% of our sales and of cosmetics Dot com. We're.
We're continuing to test and iterate and believe beauty squad has even greater potential to drive our business going forward look.
Looking at key sold care, our launch of T cell care Dot Com is a start of an exciting journey that aims to transform the way the world engages with beauty.
T cell care shares a soul of beauty with a focus on content conversation and community.
To this end were building a digital community well before consumers see product launch.
On September 29th Kiesel care Dot Com went live with rich editorial and a weekly email newsletter.
The site features original and co created content, including inspirational story from malicious community of light workers people collectively user voices and platforms to spread lighten positivity.
It's clear that kiesel care communities active vocal and passion about Alicia and the brand and we're pleased with the strong engagement and open rates, we're seeing with a weekly newsletters.
Our third strategic imperative centers on innovation across our brand portfolio, we pride ourselves on delivering a 100% cruelty free premium quality beauty products at accessible price points with Universal appeal.
With our Alf brand. We saw continued success this quarter and our core segments brushes primers can sealers browse and sponges, which make up approximately half our track channel sales.
We have the number one or two position in all five segments and continue to drive market share gains in each.
Our camel concealer pull as Patty prime or franchises in particular continue be sources of strength supporting ongoing share gains in their respective categories.
Looking beyond our core offerings, we're humbled at the recognition our innovation efforts are receiving.
In the highly coveted annual Elure best of Beauty awards else liquid Glitter I showed it was highlighted as one of the best beauty steals and well People's expression is volume Izing Mascara was highlighted as one of the best clean beauty products.
Influenced or is six annual reviewers choice awards determined by the products with the most buzz based on millions of Influencer reviews else quotas, potty primer and lock online or Brylcreem. We're both recognize amongst the best in makeup.
Skin care remains a major focus in our innovation pipeline and we're encouraged by the results that we're seeing occur.
Across our business our skin care consumption continues to outpace our color cosmetics trends with particularly strong skincare results on L. cosmetics Dot com.
We're continuing to see growth behind else best selling wholly hydration franchise, both in stores and online and we're also seeing strong results behind our cannabis utiba full spectrum CBD and supers collections we.
We see a lot of runway in this category.
For perspective year to date skin care represents just 8% of our track channel consumption, but drives nearly 25% of our business and Alf cosmetics Dot com.
We have additional l. skincare launches slated for the balance of this fiscal year that we expect to propel our momentum in the category.
We expect our innovation efforts will be shining, even brighter in the months to come with the launch of key silk here. Our first three products are scheduled to launch online on December Threerd and will include a signature sage and oatmeal candle and two yet to be revealed skincare products.
We're planning on a global skincare collection launch in early 2021 on key sold care Dot com and with our retail partners, both online and in stores.
We have a multi category multi your pipeline of innovation to drive the brand beyond the initial launch.
Our fourth strategic imperative is driving productivity with our national retail partners. We remain focused on our relative performance to key competition of the top five color cosmetics brands in the U.S. Elf was the only one to post growth with our track channel color cosmetic sales up 3% year over year as compared to declines of almost 20% or more for each of the remaining Brad.
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We're also the only branded grow share in the quarter with 5.5% of the market up 100 basis points year over year.
Project Unicorn, our ongoing issue and drive productivity with our national retail partners by improving assortment presentation and navigation at shelf continues to impress retailers do.
During the quarter, our visual merchandising team developed stunning in store signage and graphics with some of our largest customers elevating our skin care collections and highlighting our best selling products like Korlym Party primer camel concealer and Brown pencils.
We're also finding innovative ways to translate our success on tech talk to stores in September we had an incredibly successful display program at superdrug stores in the UK dedicated to whats trending on tick Tock, if feature most viral and training products on the platform and sold out quickly.
Given the strength of our productivity innovation and consumer engagement, Walmart and Ulta beauty expanded shelf space for Alf towards the end of the quarter in a subset of their doors.
For context target is our most developed and longest standing national retailer and our store footprint as of EPS. Why 20 was approximately 11 feet on average.
Our footprint in Walmart Ulta stores is about half of that.
While our fall shelf space expansion help narrow that gap somewhat we see plenty of runway ahead. In fact, we're pleased to report that Ulta beauty plans to expand space, even further for the Alf brand in spring 2021.
Internationally, where we continue to have a lot of white space. We're also excited to launch in spring 2021, it shoppers drug Mart, a leading beauty retailer in Canada.
Early 2021, Kiesel care will light up in a much bigger way with the planned global launch of our full skincare collection on key Silkier dot com and with our retail partners, both online and in store.
For the U.S., specifically, our exclusive national retail partners Ulta beauty, we look forward to sharing much more in our plans a filter beauty closer to launch what I can say is a share our enthusiasm for the long term potential of the brand in.
In the coming months, we plan to unveil our international distribution partners as well.
We're also excited that six of well People's best selling SK use and now featured in all Ulta beauty stores as part of all just conscious beauty program and initiative to provide consumers greater choices and transparency and clean beauty.
Well people, who has already sold and Ulta Dot com and this marks the brand's entry into stores.
While people continues to raise the standard for high performance plant powered clean beauty.
Our fifth strategic imperatives, delivering cost savings to help fuel brand investments.
Our operations team continues to generate cost savings by lean manufacturing techniques that have contributed to our strong gross margin rates.
As just one example, our team's collective cost saving efforts have driven a 15% reduction in cost per unit for our best selling camera concealer franchise since its initial product launch.
With the integration of well people into our supply chain now complete we're also encouraged by the significant Cogs savings we're seeing.
These savings in turn allow us to invest in the well people brand recharge and sharpen our retail pricing for select products in line with the brands vision to make clean beauty accessible.
On the operations front, we did have a systems migration issued our main distribution center during the latter part of the quarter, which has caused a backlog and customer orders and higher oddest stocks with some of our key customers.
That said, we are confident in our ability to meet customer demand and are already starting to ship at higher rates. The progress in our five strategic imperatives has been terrific and we believe we have further opportunity with each.
Before I turn the call over to Mandy, let me provide a bit more perspective on the overall strategic framework of the company and our brands.
Our company was founded 16 years ago with a mission to make the best of beauty accessible to every eye lip and face under.
Underpinned by the foundational work behind our five strategic imperatives, the strength of our platform allows us to expand our portfolio with strategic extensions that support our purpose and values.
Our shared value system in deep commitment to diversity and inclusion or what connect us and fuel our actions.
As we evolved from a single brand company into diversified multi brand portfolio. We strongly believe there is opportunity for significant value creation leveraging the investments we've made in our world class team and capabilities each.
Each of our brands is positioned to touched diverse consumer cohorts at different price points.
Alf cosmetics is trend driven beauty of extraordinary value in the mass segment with average unit retails were approximately $5.
Well people is plant powered clean beauty in the master each segment with average unit retails for approximately $20.
He still cares lifestyle beauty and entry level prestige with initial unit retails between 20 and $40.
All three brands are accessible relative to their competitive set.
Importantly, all three brands are complementary and incremental to the health beauty platform.
Looking ahead, we believe the color cosmetics category will return to growth given the major role cosmetics play and consumer self expression.
We remain focused on continuing to grow share regardless of category trends.
We were strong entering the pandemic and with our digital strength core value proposition and ability to adapt at El speed have continue to fuel our performance in this uncertain economy.
With the strength of our more diversified brand portfolio. We believe we are positioned for an even brighter future.
I'll now turn the call over to Mandy.
Thank you to rang and thank you all for joining US. This afternoon today I'll cover our Q2 financial results and fiscal 2021 guidance.
We are quite pleased with our Q2 results, we delivered net sales of $72 million up 7% from year ago.
This growth was mainly fueled by ongoing strength in ecommerce and international as well as growth in tracked channels.
We also saw sequential improvement in our performance at Ulta relative to Q1 EPS stores reopened come.
From a cadence standpoint tracked channel sales growth moderated during the quarter as expected as stimulus dollars dried up and we cycled the price increase implemented last year.
Gross margin of 65% was up approximately a 100 basis points compared to prior year similar to the last several quarters. We saw gross margin benefits from margin accretive product mix and cost savings.
Favourable FX impact and a mix shift to Alf cosmetics dotcom.
These benefits were partially offset by the impact of tariffs and certain costs associated with space expansion.
Additionally, our year over year gross margin improvement moderate at relative to last quarter as expected, but cycling the price increases we took last year.
On an adjusted basis SGN as a percentage of sales for the 51% or approximately flat compared to last year at 51%.
Marketing and digital investment for the quarter was approximately 15% of net sales versus 14% a year ago.
The first half marketing and digital spend as a percentage of sales was 14% inline with our expectations.
Q2, adjusted EBITDA was 14 million down 4% to last year and adjusted EBITDA margin was approximately 20% of net sales I.
Adjusted net income was $8 million or 16 cents per diluted share compared to 8 million or 15 cents per diluted share a year ago.
Our liquidity remains strong, but the combination of our cash balance and access to our revolving credit facility sitting at over $90 million.
The six months ended September Thirtyth, we generated $3 million in cash flow from operations and reduce our capital expenditures by $3 million versus prior year we.
We ended the quarter with $41 million and cash on hand, compared to a cash balance of $59 million a year ago.
This was driven by increased investment in inventory to support space expansion and new distribution for spring 2021 rig.
We expect our cash priorities for the balance of this year have focused on investing behind our five strategic imperatives supporting the launch of key sole care and are well people brand recharge.
As we mentioned last quarter, we expect five to 7 million in inventory and Capex investments behind key sole care and while people in fiscal 2021.
In addition to certain costs that we're treating as one time expenses related to integration and brand development.
Now, let's turn to our outlook for the remainder of fiscal 2021.
There are still many uncertainties around the duration and impact of COVID-19, as what the general economic environment. However, we believe our visibility is improving.
As a result of our strong performance in the first half of the year and confident in our ability to continue to execute our long term strategy. We are now providing guidance for fiscal 2021.
For the full year fiscal 2021, we expect net sales growth of approximately 5% to 7% versus fiscal 2020.
We expect adjusted EBITDA between 57 million and 60 million adjusted net income between 31 million and 33 million and adjusted EPS of 59 to 63 cents per share on a fully diluted basis.
It's important to note that our guidance assumes no significant disruption to our consumers customers or supply chain for the remainder of fiscal 2021.
Let me provide you with a little more color on our planning assumptions for the remainder of the year.
Let's start with the top line.
We expect consumer behavior to remain impacted by COVID-19 through the rest of our fiscal year, which will likely continue to pressure both in store shopping levels and cosmetics category trends specific.
Specific to track channels, we anticipate Nielsen trends turnpike negative in the coming weeks as we resolve the out of stocks turning mentioned related to the system migration at our main distribution center.
That said, we are confident in our ability to meet customer demand and are already starting to ship at higher rates importantly, we expect to deliver top line growth in the second half as reflected in our guidance. Let me step you through a few of the building blocks.
First we remain focused on our relative performance to the mass color cosmetics category and are optimistic around our ability to continue to grow share.
Second we expect our second half trends will benefit from the recent space expansion in Walmart and Ulta beauty as well as pipeline related to new distribution in spring 2021, what's shoppers drug Mart in Canada, and Ulta beauty.
Third we believe our digitally led strategy will result in strong ecommerce trends throughout the year, although likely moderating from the levels. We saw in the first half.
Lastly, we anticipate a modest net sales contribution from the launch of key solar care and fiscal 2021. These top line drivers will be partially offset by tougher year over year comparisons in Q4, as we anniversary the strong 16% net sales growth, we saw last year as well as less incremental merchandising on a year over year basis and target.
Starting in Q4.
Turning now to adjusted EBITDA we.
We expect several of our underlying gross margin drivers to remain intact, including margin accretive product mix and a favorable mix shift to EPS cosmetics dotcom.
We continue to focus on reducing expenses, where we can while still investing in our long term growth.
That said, we do have two specific factors that will pressure, our adjusted EBITDA margins in the second half relative to the first half.
First on FX.
We purchased almost all of our product in China in RMB and favorable FX rates have driven a gross margin benefit of approximately 100 to 200 basis points on average over the last several quarters.
Based on current exchange rates, we expect that FX benefit to moderate through the year and will likely inflect to a gross margin headwind starting in Q4.
Second on key cell care.
I mentioned key sold care is expected to contribute a modest amount to our top line this fiscal year.
We expect gross margin for the brand can be relatively neutral to our overall gross margin.
In addition, we expect to have an incremental $5 million to $6 million and marketing spend in the second half, which has an outsized impact as we invest ahead of the brand launch this will take our marketing spend as a percentage of sales up to approximately 14% to 16% on a full year basis from a cadence standpoint, we expect top line growth to be more weighted.
Q3 than Q4, largely due to the timing of our planned distribution expansion as well as much tougher compares as we anniversary the 16% net sales growth. We saw in Q4 last year, we expect adjusted EBITDA margins will be more pressured in Q4 than Q3, given the dynamics. We just discussed on the top line anticipated FX headwind.
And incremental keys sold care marketing spend that is largely concentrated to Q4.
Let me now take a step back to talk about our long term economic model and why were optimistic about the future.
With fiscal 2021 is the base as we look out over the next three years. We believe we can achieve compounded annual topline growth in the mid to high single digits from the combination of Elf brand growth and shelf space gains along with contributions from our strategic extensions by key sole care and while people brands.
We anticipate adjusted EBITDA leverage will be achieved through a mix of top line growth and leverage on Cogs and or SDMA over that three year horizon.
Our brand portfolio reflects our deep commitment to inclusive accessible and cruelty free beauty.
We believe that our digital strength core value proposition and ability to adapt at El speed will continue to fuel our performance import.
Importantly, we believe key sole care and while people are both distinctive and complimentary to our portfolio and allow us to leverage the cost structure, we have in place as we scale them up.
But there are still many uncertainties in the operating environment in the short term I'm confident in our ability to deliver our performance over the last seven quarters, both on an absolute basis and relative to the category give us confidence in our ability to continue to execute our long term strategy with that operator, you may open the call to question.
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It does not asking questions can you hear the question answer session through the webcast.
We will pause a few minutes for those seeking to ask questions to queue up on that island mine.
Okay.
Yes.
We will now begin the question and answer session.
You ask a question you May press Star then one on your Touchtone phone.
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We ask that you. Please limit yourself to one question. So that we can respond to all of you within the time scheduled for this call.
At this time, we will pause momentarily to assemble our roster.
Our first question comes from Erinn Murphy with Piper Sandler. Please go ahead.
Great. Thanks, and good afternoon. My question is around inventory the balance with that you know kind of 26% I believe at the end of the quarter could you just maybe walk through some of the components around how much was self pay scale.
Okay.
Personal hiccup excuse me that you saw in the quarter and then maybe the build for Keith sole care and then where do you expect inventory to be by the end of the third quarter.
Hi, Aaron So let me first say that we feel great about our inventory levels.
As you look at the cash flow statement March was particularly low as we are managing through the initial onset of cold it and so as you look at our inventory today, we've talked about pipeline that is related to space gains. We also talked about the system migration issue that shifted inventories from Q2 into Q3.
And so and also you mentioned, yes space gains picked up within the quarter all of those things are playing a role into our current inventory balance and we feel like were in a much healthier place right now.
Okay, and then if I could ask a separate question on keys adult care could you just maybe walk through the broader launch plan as we think about 2021, just given the price point positioning are there is there an opportunity to work with new retailers that maybe you don't work with currently with you know both while people and Alf and just help us think about the cadence as they look to.
The end or at next year excuse me. Thank you.
Hi, Aaron we're really excited about our launch on keys. So Karen So as you know the site is already up and running Kiesel care Dotcom, we led with content community and conversation and the response has been terrific. So far in terms of how people are responding to this new DT lifestyle brand.
In December December Threerd, we start our commerce with our first three items.
Sage milk candle as well as to other skincare products that will go on sale on kiesel care Dot com as well as Ulta beauty.
In ultra Dot com in.
Early 2021, we'll expand that range to a full line of skin care products sold both online on Kiesel care Dotcom slows Ulta Dot Com and then later in Ulta beauty stores. So we're quite excited about the full range that will be going out the door by the end of this fiscal year.
And have plans beyond that to enter other categories and new other products is our normal cadences.
Great as well is that yes, yes. Thank you and I should have decided our initial the only customer that weve disclosed. So far is ulta beauty will be exclusively in the U.S. in the coming months. We will also discuss some of our global retail partners as this will be a global brand in 2021.
Excellent thank you tearing and Andy.
As a reminder, please limit yourself to one question. Our next question will come from Linda Bolton Weiser with D.A. Davidson. Please go ahead.
Hi.
I guess I can do the math on this but if you were to exclude the incremental spending on the keys sold care Alliance I think you said it was $5 million to $6 million would EBITDA be up year over year in the second half.
Thanks.
Hi, Linda yes, so as we look at the full year five.
Five to 6 million were laying on for Kiesel care do you take that out we would be $5 million to $6 million higher on the year from an EBITDA standpoint, so that would put you ahead of last year. If you look at the guidance range we provided.
And then can I just fit in.
Longer term you know you're you're very committed I think to growing your EBITDA faster than your revenue growth as a long term objective is that the case even in years, where you may have future launches or is there an exception in a year when you have a alliance.
So Linda the long term economic model that we've outlined at the three year model and it's based on a three year CAGR. So as you look over on a three year timeframe. We do expect adjusted EBITDA to outpace net sales growth and so that you are really looking at that beginning and ending point for your measurement.
Okay. Thanks very much.
Our next question comes from Darren, Let's Anderson with Morgan Stanley. Please go ahead.
Hey, guys.
So I.
A couple of questions around the sole care business throw you. So excited about it can you give us some type of thought process for the ultimate size of where that business could be longer curve.
Maybe what the best brand comps are in the market place just as we think about the revenue size of the brand or is there some type of order of magnitude or how you think about it relative to your existing business and then incrementality of that brand relative to your existing business and then just second on the spend you mentioned in the back half of the year.
As we look at the spend for that brand going forward is it more incremental to what you would typically be spending at the company could it be handled more within the existing budget in terms of a reallocation. How do you think about that longer term head of obviously some upfront spending in the back half of the year. This year. Thanks.
Yeah, well there are we are tremendously excited about kiesel care, because we are creating something we believe is completely new in the category lifestyle beauty brand really aimed at nourishing your soul and so starting with content and then going into product in terms of business size. We're building this for the long term.
So he said they do have a modest sales contribution this fiscal year.
But yeah, you and we will maybe later disclose kind of what size range you would be will starting in skincare. So you can usually use comps in terms of other skincare brands as a starting point, but it's even beyond skin care. Because this will go into multiple categories. I think one of the things that gives us great heart beyond our own excitement for the brand is just how.
So excited Ulta beauty is and will be partnering with them to launch this brand and the level of support that have been put behind the brand and in terms of what they really believe for the long term and then in terms of spend we would put the spend in the context of the overall percentage of the company. So each brand that we have routine while people.
Hi, Keith So Karen I'll cosmetics really have their own but on spend levels that we used to support the brand and so the overall, 14% to 16% that me Andy gave is a comfortable level for US right now in terms of being able to support all three brands.
Again, we'll update on that as we get into the launch here.
Our next question comes from Steph Wissink with Jefferies. Please go ahead.
Thank you good afternoon, everyone. Our many I have a clarification question on the system migration. It sounds like that was detrimental to your sales growth in the quarter. Im wondering if you can help us quantify what that holds map back might have been.
And then train for you just a question following up on key so Karen the gross margin structure being net neutral to the company was a bit below what we would see typically for a prestige skin care business and maybe talk a little bit about the gross margin neutrality does that include a royalty or something unique that would benchmark you different.
Lean and what we see in the broader marketplace. Thank you.
Hi, Steph, Okay I'll take the first question and then I'll pass it to trying on Keystone Kiesel care up on the system migration, we did have that shipment.
Shipments shift out of Q2 into Q3, we have not put a dollar amount on that you know publicly but I will say that you know it did contribute to the higher inventory levels, we did have coming into the quarter and.
We'll also be kind of a building block if you think about it for how our second half forecast will come together and is already.
Imply there in the guidance.
And then maybe just a building to that with the system migration issue was related to our Ontario, California distribution Center, which is our largest distribution center, we have a third party logistics provider that at a long planned migration in their warehouse management system ran into a hiccup. It's one of the reasons we.
Ships less than where we have some higher out of stocks right now the good news is we're already past that issue, we're shipping at much higher rates and quickly catching up in terms of our in stock positions with our customers and then on your second question regarding Kiesel care the product margin is actually higher than the overall health of our average.
<unk> gross margin, but it does include to get to the gross margin you do have a royalty in the form of both cash as well as elf equity, we like that structure quite a bit because it really ties into our long term longer term vision.
For the brand and really aligning our interests with Felicia keys terms, what we're building here for the long term and that's why the overall gross margins in line with the company.
Thank you.
Our next question comes from Andrea Teixeira with JP Morgan. Please go ahead.
Hi, Thank you and congrats on the numbers question is how we should be thinking this segment to have topline growth in particular, our Q4 income.
In terms of the new distribution I'm, assuming you're assuming I guess some of that benefit so walmarts and and also ulta.
And second of all the clothes people some of them the comments that Mandy and just now also plug you made on on the acute care a profitability should we be thinking in the five to 6 million marketing allowance.
Expenditure to be recurring and then you're going to build up to that Mark Green.
And to get the leverage throughout the Cisco. So when you want them just like thinking also like the data lock six whats going outside fiscal 22 through 24, because you're doing about in your long term algorithm that your margin is going to expand more but I'm just thinking would likely there will be more gradual month. So me the fence will depend on the top line.
We accelerating is that a is that a person show.
Right, Okay, Yes, Andrea let me start with your first question on the second half topline growth and the assumptions around there. So as we talked on our prepared remarks. We won do you believe that theres going to continue to be.
Volatility within the color cosmetic category, but we are confident that we will continue to gain share in the category. So I would say our second half trends that will benefit from the base expansion that we've had recently in Walmart and Ulta beauty I that was in the fall. Additionally will also benefit from new distribution that we're picking up.
In the spring with shoppers in Canada, and then also additional phase expansion that we will get in spring 2021, with Ulta beauty as well.
Third we believe that E commerce will continue to be a driving force in our net sales performance, though likely moderating from the levels that we've seen earlier in this year at consumer behavior and it starts to stabilize or shift back to the brick and mortar side. So I would say those things plus the modest contribution that were expecting from Keystone.
There are really that topline drivers that we're looking at for the second half.
And then on a key sole care the $5 million to $6 million that is really related to the launch of Keystone will care.
Too early to tell you know, we haven't given fiscal 22 guidance, yet and how to think about that.
That marketing spend on a longer term horizon, but I would say that that five to 6 million that were talking about for now is really in preparation for the launch of the brand.
Here in the next in the next quarter or so.
Thank you and Super helpful. And then just just to E. Commerce represents how much again I'm sorry, if I missed during the quarter from your sales.
I don't think we provided the percentage of E Commerce, how do we did 13% sorry of the total net.
Net sales that we had in the quarter.
Okay. Thank you.
Our next question comes from Oliver Chen with Cowen. Please go ahead.
Thanks, very much congrats on the expansion at Walmart and Ulta as that happens and what should we know about product.
Changes or the products that will be incremental and are there thoughts around mix were curious about skin care as that continues to really succeed how are you thinking about breadth versus depth and skin care.
Indoor indoor mix and innovation happening there with the assortment.
I would also just love your thoughts on community and keeps all care seems like it's a core tenet of what you're doing there and how you might contrast that against the community you built Ella Thank you.
Hi, Oliver So I'll tell you first of all in terms of our expansion one of the reasons works excited about space expansion is other than target, which is our longest standing national retail accounts, where we had about 11 feet of linear space at the end of that's why 20 really every other customer has that less than half.
That space, so getting more space at Wal Mart, and Ulta beauty were import in our journey to get the right footprint on Elk and as we pick up space one of the real strengths. We have is our innovation program and the new items, we have across our entire line. It's one of the reasons, we've been able to sustain growth in a challenged category across face.
Hi, slips tools and skin care in particular, the space gives us an opportunity to get more scale.
Skin care items international retailers, if you take a look at our business overall skincare is about 8% of our track channel sales, but almost 25% of our sales on L. cosmetics Dot com and if you look at the difference a big part of that difference is the assortment our ability to put more of our ranges international retailers and put focus against that.
So we believe skincare has quite a bit of white space just based on the success that we have enough cosmetics dot com and as we get larger footprints. It gives us the opportunity to put a richer mix of skin care. In addition to some of our other key Holy Grail innovation.
And then on the second question on community community, such an important part and has been for our entire 16 years and if you think about L. Cosmetics. It really was built behind his passionate community that knew about the brand and help build it up and continues the void by that and so communities really core to our DNA and our digital roots key.
Silke here is no different from the standpoint of starting digitally starting with content conversation and community and as I mentioned earlier. The response has been incredibly positive to that and so I'd say, it's a it's a really rich community it will be a different community than the elf cosmetics community and in many respects partly because.
Kiesel care will be in the entry level prestige area. So with unit retails between 20 and $40 for the initial range, that's quite a bit different than the average $5 average unit retail with health and then also within primary skin focus in the beginning.
Going though the categories and so I think you'll continue to see in the great News is just like cosmetics. All you have to do is go on the website kiesel care Dot com and you can see the rich content and and then even on the social channels I mean, the level of consumer reaction were getting.
And how meaningful this brand is really gives us a great deal of hard in terms of its future potential.
Thank you very much best regards.
Our next question comes from Bill Chappelle with two Securities. Please go ahead.
Thanks, Good afternoon.
Good afternoon.
First I guess housekeeping how much.
How much was the kind of marketing startup cost for key folks here in the <unk> into Q.
So bill in our when there is not really marketing startup costs. There are certain launch costs related to key sole care included in our adjusted EPS DNA and adjusted EBITDA numbers, you can see that called out in the footnotes in the non-GAAP schedules.
In our press release.
Got it okay I'll double check and then second I guess strength can you give us an update just come on the health of.
Of color cosmetics, it's been mass side, where you said you are the only one of the five major players to grow.
Trying to understand how much of that is category. So recovering you know in later stages of the pandemic, how we recovered at all from the you know the the latest as a pandemic or is it just more.
Your your competition isn't isn't kind of rising decision.
Well I'd say first of all the categories definitely been impacted by the pandemic everyone has been restricted cooped up haven't been able to get about their normal routines and that's certainly impacted the category on the whole so while not quite at the bottom that it was going to be started the pandemic, particularly through different ways is causing you definitely see an impact on.
The category I think we've been not only fortunate that we've executed really well in terms of being able to buck that trend across every one of the categories in which we compete and I think it's the fundamental value equation. We have invested PD made accessible to every I live in phase as well as the execution against the five strategic imperatives, you've been talking about.
Now for about two years and so I think we bucked the trend we feel confident in our ability to continue to build share even in a challenged category. What I will tell you longer term is I'm quite bullish on the category. I think is consumer behavior returns to normal is such a central category to consumer self expression and importance I believe the category.
We'll come back quite strongly and a lot of that in terms of the timing will really depend on when people are able to get back to normal behavior, regardless of whether the categories challenged or does better I like our position within the category, we had strength going into the pandemic, we've executed well during the pandemic and we're building a profit brand Paul.
Full year that I think will make us even stronger as a category recovers.
Got it thank you.
Our next question comes from Jon Andersen with William Blair. Please go ahead.
Good afternoon, thanks, everybody.
Just two quick ones, if you could talk a little bit about the key so pure sourcing model.
Sourcing model.
Lineup with the model you use for the rest of your business and whether there will be any ties between the.
Oh cosmetics.
Dot com websites and the key sole care site and then the second question is you are now managing three brands.
As you move forward as opposed to one historically are there any changes that you've made or you feel you need to make to people process systems approaches internally.
To manage the added complexity. Thanks.
Sure Hey, John So I'd say first of all on key social care. It's one of the real basis of our strategic extensions is being able to leverage the chassis, we still with health beauty, particularly the investments we have in our team and infrastructure. So the sourcing model on kiesel care as a fully leverages innovation model we have on.
Ill as well as our overall operating platform gives us great combination of cost quality and speed going.
Going forward as well as the ability to get in other categories. We supplemented that really through by the acquisition that we had on well people one of the key developers of the product range is dr. Rene Snyder one of the core co founders so unwell people a board certified dermatologist.
Co founders of well people. She has been part of our innovation team working very closely with Alicia keys to really develop a phenomenal product range and so its really leveraging both those investments and capabilities, we have and you'll continue to see that.
Terms of ties between the brands that see the ties really are on the backend and our overall infrastructure and chassis. We have so our ability to stand up the site much faster really came from our our strength in digital a lot of what we're doing from a content standpoint, but from a consumer facing standpoint, all three are distinct brands with distinct.
Consumer segments and complementary to each other so you won't necessarily see a strong tie between the brands as much as our ability to leverage the company and then in terms of managing three brands versus one I'd say a couple of things first and foremost.
Most of us come with multi brand experience varies the company's full of very strong backgrounds in both consumer and beauty that if managed portfolios of brands and so we definitely have that expertise within the company but.
Well, we have also brought on incremental resources. So if I think of the additional personnel that we brought on in anticipation of.
Kiesel care I feel really good about the balance of leveraging the core chassis and then having some dedicated resource and some of those dedicated resources by each of the brands is how we are able to manage the consumer facing aspects of them while at the same time leveraging all the investments we've made in the company.
Thank you.
Our next question comes from Rupesh Parikh with.
Oh, Hi, Mike. Please go ahead.
Good afternoon, and thanks for taking my question. So I just had a related question just related to the longer term guidance. So first on Cobra <unk> as we think about your I guess I've watched 2023 to 24 hours. The assumption that will now be past the Cobra headwinds and then factor in regards to the sales guidance I was just curious if there is any granularity you can provide in terms.
Is that how you guys are thinking about the growth for the brand versus some of the newer brands you have.
So rupesh I'll start with the with the long term economic model and any impacts from coal bed and I would say that you know, we're just really focused on driving growth through that long term economic model and I think that our track record over the last seven quarters of delivering strong sales growth.
Gives us confidence that we can continue to do that and deliver on our long term economic model in terms of sales guidance on else versus.
The other brands I would say that you know we that I just talked about some of the things and the drivers that will impact our second half net sales, which included a modest contribution from that Keystone care brand.
But beyond that we have not broken that down Pat.
Just yet really keeping the focus on an EPS beauty as a total.
Yeah, great one more and just.
If I could for just one more question and just you know just given all of a sudden with Bristol, we're seeing in the U.S. right now.
Are you guys seeing I guess, if you looked at your dollar weak are you starting to see an impact on your business related to certain ways quite often in different markets.
Well, we we track that pretty closely and we certainly can see a correlation depending on restrictions in different areas in terms of both traffic to retail stores and consumer behavior seem to feel that we feel more confident about is our ability to execute even in the face of that we did that through the first wave of.
Because it really the second wave we may be on the third right now depending on where you're at and our ability to continue to drive growth in a down category and given the drivers that we have coming both in terms of space gains the space. We already gained space, we're about to gain as well as the new brand launch we feel good about where we stand relative to the category.
Great. Thank you all possible.
Our next question is a follow up from Oliver Chen with Cowen. Please go ahead.
Hi, Thanks again.
Made a really amazing success with tick Tock, just would love your thoughts on return on AD spend in relation to how how you're analyzing the metrics there and the impressions and what that may imply for your thoughts around marketing spend whether that'd be dollar or rate in relation to the success you had on tick tock.
And with also just love your take on live streaming and how that's manifesting in different aspects of your business and what you see ahead. Thank you.
Sure. So Oliver I'd say you know we have had tremendous success on tick tock, but we've also had success across platforms and tick tock, specifically I think we're now between our various grand challenges up to 10 billion views six and a half million user generated videos and it's really helping drive relevancy on the brand, particularly amongst gen Z onto.
Terms of marketing spend and how we evaluate it we really evaluate in two different ways. One is overall ROI, where are we talked last quarter getting the Nielsen marketing mix analysis done we showed very strong returns in our spending in total and then across various vehicles and then the second is really kind of by what's really causing does.
And having l. stay top of mind, particularly amongst key demographics like we just talked about tick tock engine C.. So we really look at both of those together and then live streaming.
I would say, we'll continue to have an important impact on the business going forward as other initiatives have for the consumer so including our kind of virtual try on feature on else cosmetics dot com as well as different ways to kind of engaging consumers I think you'll continue to see us do more there.
Thanks, a lot I appreciate that.
Our next question comes from Mark Astrachan with Stifel. Please go ahead.
Hey, guys, it's actually Peter on for Mark Thanks for taking our question.
Can you provide more color on where you see promotional activity.
Can be category wide and also if we're seeing any sort of return to normal there right.
So I'd say on the promotional activity.
We haven't seen any major spike at least on the mass side on the consumer promotional side. This number so number of brands. It's been highly promotional in the category and I think we continue to see them be highly promotional I'd say as far as L. Three is concerned that's never really been our strategy. Our strategy has been to provide the best of beauty at Ics.
Sure ordinary values everyday and we like that strategy because it allows us to kind of stay true to not only who we are and what our consumers expect but also gives a certain level.
Stability and not having to to play in all the nonsense of of high level. So overall I'd say, we haven't seen that much of a change in the category, even though some players have been highly promotional and then to our strategy remains intact as its its winning in the marketplace.
Great. Thank you.
This concludes our question and answer session I.
I would like to turn the conference back over to Chief Executive Officer training for any closing remarks.
Great well. Thank you everyone for joining us today I'm, so grateful for our incredible team at Ehealth beauty shown tremendous talent meeting challenges of the pandemic and building market share I believe our future is bright and remain confident in our long term strategy, we hope everyone's happy and healthy this holiday season. Thank you Andy will.
Thanks, everyone.
The conference is now concluded. Thank you for attending today's presentation you may now disconnect.