Q3 2021 e.l.f. Beauty Inc Earnings Call
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Thank you for joining us today to discuss all of these third quarter fiscal 2020 months of results and Casey Cotton Vice President of Investor Relations with me today are touring Amin, Chairman and Chief Executive Officer, and Mandy fields, Senior Vice President and Chief Financial Officer, We encourage you.
The tune into our webcast presentation for the best viewing experience, which you can access on our website and investor Dot Elf beauty Dot com.
Since many of our remarks today contain forward looking statements. Please refer to our earnings release and reports filed with the SEC, 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, our earnings release contains.
Issuance of the differences between the non-GAAP presentation, and the most directly comparable GAAP measure with that let me turn the webcast over to Turing.
Thank you Casey and good afternoon, everyone.
I hope that you're staying safe and well.
Today, I will discuss the drivers behind our Q3 results are.
Our growth opportunities.
And our overall strategic framework.
I am proud of our team for delivering our eighth consecutive quarter of net sales growth as we continue to navigate major category headwinds as a result of COVID-19.
We delivered Q3 net sales of $89 million up 10% versus year ago, and adjusted EBITDA of $18 million.
We continue to gain market share, while advancing our transformation to a multi brand portfolio.
We're also raising our full year guidance, reflecting a shift and some orders from Q3, the Q4 and continued business momentum.
Before me Andy details our results I want to share the key pillars underpinning our performance.
Our strategy is working we came into this volatile period from the position of strength.
Our superpowers that center on our ability to deliver 100% cruelty free premium quality beauty products at accessible price points with Universal appeal and continue to resonate with consumers.
Our outperformance relative to the category reflects the strength of our business model and our relentless focus and our five strategic imperatives.
Let me provide a few highlights from the quarter.
Our first strategic imperative is to drive brand demand.
We continue to leverage our digital first marketing engine to drive greater brand relevance and expand our consumer reach.
And our brand building efforts are working as we continue to significantly outperform our competition.
Elf grew the most share and the quarter with five 9% of the market up 100 basis points year over year.
Our social audience continues to grow double digits with over 9 million followers across our digital ecosystem.
And our earned media value was up 16% compared to the prior year and were the only brand growing and our competitive set.
We're continuing to disrupt the beauty space as we test and learn on new frontiers.
We're proud to be one of the first beauty companies to establish a presence on twitch, the world's leading live streaming gaming platform.
In November we announced the collaboration with looser fruit also known as <unk>, who has the second largest twitch following four of female Gamer loose.
<unk> is providing her audience, both female and male with engaging platform native content, the promote self care and self expression, while integrating her favorite elfa products.
And yet another beauty industry milestone and we were the first beauty brand and to launch a campaign and trailer and emerging music video making platform.
We created of five track holiday album called Elf, the halls, which featured up and coming artists Remixing holiday classics.
We made beauty and music industry history with four of our songs, making the U S and global Billboards trailer top 20 list.
Our brand building efforts continue to win awards.
This quarter women's wear daily recognized us as the newsmaker of the year.
And at age named US one of the top 10 marketers of the year. We're the only beauty brand on the AD age list, putting elf and admirable company with Tic Toc, Mcdonald's and Lego among others.
This quarter, we took an important step and our transformation to a multi brand portfolio with the launch of our first ritual for key cell care, our groundbreaking new lifestyle of beauty brand with Alicia keys.
In December we launched the goddess ritual on Keith's, so care dot com and the ultra Dot com, which included three product offerings of <unk>.
Age and oat milk candle skin transformation cream and obsidian facial roller.
We expanded the collection in January to include six dermatologists developed clean skincare offerings.
T cell care is off to a great start and we're encouraged by the recognition of the brand is receiving with over 10 billion Global press impressions since launch.
The brand has been further amplified by the leashes, almost 100 million social media followers and.
She is truly and inspiration of so many and we believe her passion for bringing light into the world will resonate with a broad set of global consumers.
Looking to well people are plant power of clean beauty brands, we are continuing to execute our brand recharge to broaden consumer awareness.
We're bringing the recharge of life at shelf with new visual merchandising across our key retail partners are.
Our second strategic imperative is a major step up and digital.
Digital consumption remains strong up nearly triple digits year to date with strength across Elf cosmetics dot com retailer dot coms and Amazon.
Digital channels expanded to 16% of our total business this quarter up from 10% a year ago.
And of cosmetics dot com approximately 60% of our shoppers were new consumers. We're encouraged to see these consumers over indexing on skincare and signing up for our beauty squad loyalty program.
Beauty squad now has almost $2 3 million members up 40% year over year.
Our loyalty members collectively drive almost 70% of our sales an elf cosmetics dot com.
This quarter, we offered our beauty squad loyalty members exclusive early access to our holiday kits and new product innovation, which helped drive sign ups for the program.
Building from the Elf playbook Kiesow care of utilizes the digital first strategy with our initial product rituals launching online.
He sold care aims to transform the way the world engages with beauty with the focus on content conversation and community.
T cell care Dot Com features rich editorial content and of weekly email newsletter with inspirational story from Alicia community of light workers.
The brand's communities active vocal and passionate about Alicia our philosophy and our product offerings instead.
Instagram engagement metrics are trending well above platform averages and we're pleased with the strong open rates for a weekly newsletters.
Our third strategic imperative centers on innovation with our Elf brand. We saw continued success this quarter in our core segments brushes primers.
Sealers browse and sponges, which make up approximately half of our sales.
We of the number one or two position and all five segments and continue to drive market share gains and each.
Looking beyond our core segments, our innovation engine and flow of new products continues to resonate with consumers.
Building on the success of our Camo Concealer franchise, we launched Campbell's cc cream last month, the broaden our offerings and foundation.
Which is almost three times larger than the concealer category.
Our Cam OCC cream at $14 offers and incredible value for consumers, especially.
And as compared to of prestige equivalent at $40.
We believe Campbell C C will be our next Holy Grail product.
We also launched a new limited edition Mint milk collection.
And this refreshing line of five new cosmetics products and three skincare products is just one example of how we're driving differentiation with our retail partners.
The collection is available and Elf cosmetics, dotcom and exclusively with Walmart and the U S and with Superdrug in the U K skincare remains.
Remains a major focus.
Consumption for the quarter was up 17% and tracked channels versus the category that was down 5%.
We see a lot of runway in this category.
For perspective, skincare represents 8% of our tracked channel consumption you drives nearly 25 per cent of our business on Elf cosmetics dot com and Amazon.
Recent skin care innovation includes the makeup melting cleansing bomb daily cleanser and eye cream all building on the success of of Holy Hydration franchise.
Key so care launch it skincare collection in January and further fuels, our momentum and this category.
The collection includes nine product offerings with dermatologists developed clean formulas skilled nursing ingredients and soul nurturing rituals early consumer favorites include the harmony mask and comforting bomb.
Our fourth strategic imperative is driving productivity with the national retail partners.
Project Unicorn, our ongoing initiatives to drive productivity by improving assortment presentation and navigation at shelf continues to impress and we're also excited about the sustainability milestone we achieved project Unicorn reduced and estimated 650000 pounds of excess packaging across over 200 F. Skus.
We're just getting started on our sustainability journey, and we'll continue to push to reduce our packaging footprint.
Given the strength of our productivity innovation and consumer engagement, we've earned space expansion for the Elf brand.
And fall 'twenty 'twenty, we expanded shelf space in a subset of Walmart and the Ulta beauty doors.
And spring 'twenty 'twenty, one we're expanding even further at Ulta.
Internationally, where we have a lot of white space. We recently launched at shoppers drug Mart, a leading beauty retailer in Canada.
And NYCHA of leading beauty retailer and India looking to keep so care, our global retail strategy will light up and a much bigger way in the coming months.
The spring our product offerings will be available and 29 countries on Keystone care Dot com.
In the U S stores at Ulta beauty in the U K a cult beauty.
And in eight countries across the EU and do glass.
Our fifth strategic imperative is delivering cost savings to help fuel brand investments over the last six years, we've expanded gross margins from 47% to approximately 64%, while navigating 25% tariffs on the majority of our products.
This has enabled us to fund incremental investments behind our brand and infrastructure.
Mandy spoke last quarter about the FX headwinds to our gross margin that we expect starting in Q4.
We are pulling levers to help mitigate a portion of the impact of FX, including through pricing and supply of concessions.
We also have an increased focus and SG&A leverage as we move into fiscal 'twenty and 'twenty two and other operational matters. We successfully resolved the systems migration issue at our distribution center that we spoke about last quarter.
We're now operating under a new warehouse management system and have improved both our throughput and shipments to our retail partners the progress and our five strategic imperatives has been terrific and we believe we're still in the early innings with each.
Before I turn the call over to Mandy, let me provide a bit more perspective on our strategic framework and why I'm optimistic about the future of our brand portfolio. Each of our brands is positioned to touch diverse consumer cohorts at different price points.
All three brands are accessible relative to their competitive set and fulfill our mission of making the best of beauty accessible to every eye lip and face.
Importantly, all three brands are complementary and highly incremental to the Elf 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 growing share regardless of category trends.
We were strong entering the pandemic and our digital strength core value proposition and the ability to adapt at El speed have continued to fuel our performance.
Today with a more diversified brand portfolio. We believe we are positioned for an even brighter future and.
And now I'll turn the call over to Mandy.
Thank you terrain.
Day, I'll cover our Q3 financial results and rate fiscal 2021 outlook.
We delivered Q3 net sales of $89 million up 10% from year ago. This growth was mainly fueled by ongoing strength across E Commerce international and national retailers.
We also experienced a shift and order timing from December into January while timing shifts happen and the ordinary course this in sensors all of it and lower net sales and thus lower adjusted EBITDA than we originally expected in Q3 as you will note by our increased guidance we.
Back to recapture those orders and enjoy further strength in Q4.
Gross margin of 64% was down approximately 50 basis points compared to prior year similar to the last several quarters.
We saw growth margin benefits from margin accretive product mix and cost savings and a mix shift of cosmetics dot com.
We also benefited from FX, although less so relative to prior quarters as we started to feel the impact of changing the FX rates offsetting these benefits were certain costs related to retailer activity and space expansion.
On an adjusted basis SG&A as a percentage of sales was 49% compared to 44% last year, primarily driven by increased investment behind the marketing and digital head count costs related to the build out of our marketing digital and innovation capabilities and incur.
<unk> operational costs related to higher E Commerce volume.
Marketing and digital investments for the quarter was approximately 15% of net sales versus 12% a year ago.
Q3, adjusted EBITDA was $18 million down 14% to last year and adjusted EBITDA margin was approximately 21% of net sales.
Adjusted net income was $12 million or 22 per diluted share compared to $12 million or 24 cents per diluted share a year ago.
Our liquidity remains strong with the combination of our cash balance and access to our revolving credit facility sitting at approximately $85 million.
We ended the quarter with $35 million and cash on hand, compared to a cash balance of $75 million a year ago, our ending inventory balance was higher on a year over year basis as planned and is expected to remain at higher levels through March.
And this is largely due to the addition of key cell care and while people planned space expansion and new distribution for Elk and higher product costs as a result of mix and changing FX rates.
The timing shift and orders and mentioned earlier also added to our inventory levels at quarter, and we are comfortable with our inventory level and believe we have what we need to support our ongoing business momentum, we expect our cash priorities for the balance of the year to remain focused on investing behind our five.
The strategic imperatives, and supporting the launch of Keystone care and are well people brand and recharge.
Now, let's turn to our outlook for fiscal 2021.
We are raising guidance for full year fiscal 'twenty and 'twenty. One we now expect net sales growth of approximately 7% to 9% versus fiscal 2020 up from 5% to 7% previously we expect adjusted EBITDA between 59 and $60 million as compared to.
<unk> $57 million to $60 million previously adjusted net income between 33 and $34 million as compared to 31 to 33 million previously.
And adjusted EPS of <unk> 63 to 64 cents per diluted share as compared to 59 to 63 cents per diluted share previously.
Let me provide you with the little more color on our planning assumptions for the remainder of our fiscal year, starting with the topline our raised top line outlook reflects our continued business momentum and the potential benefits from stimulus related spending.
And the timing shift and orders from Q3.
We still anticipate a modest net sales contribution in fiscal 'twenty and 'twenty one from the launch of Keystone care.
We continue to be mindful of the ongoing uncertainty around COVID-19, and the general economic environment. As a reminder, and Q4, we also faced tougher year over year comparisons as we anniversary of 16% sales growth last year as well as less incremental <unk>.
And diving on a year over year basis and target.
Turning now to adjusted EBITDA, our guidance implies adjusted EBITDA margin and the 19% to 20 per cent range for the year approximately in line with our prior outlook.
Within that we.
We expect several of our underlying gross margin drivers to remain intact and.
Including margin accretive product mix, and a favorable mix shift to elf cosmetics dotcom and <unk>.
Offsetting those factors is a combination of unfavorable FX rate trends as well as an incremental $5 million to $6 million and Keystone care related marketing spend that is largely concentrated in Q4.
S terrain mentioned, we're pulling levers to help partially mitigate the impact of FX into fiscal 2022 and.
Including select price increases and cost savings. We also have an increased focus on SG&A leverage as we move into fiscal 'twenty and 'twenty two.
Let me now take a step back to talk about our long term economic model.
With fiscal 2021 of the base.
And as we look out over the next three years.
We continue to believe and our long term economic model targeting compounded annual top line growth and the mid to high single digits with adjusted EBITDA growth outpacing net sales growth over that horizon.
Our performance over the last eight quarters.
On an absolute basis and relative to the category demonstrates how our five strategic imperatives are driving results and gives me confidence for the future.
With that operator, you may open the call to questions.
Ill begin the question and answer session.
And you ask a question you May Press Star then one on your Touchtone phone.
Withdraw your question. Please press Star then two.
I ask that you. Please limit yourself to one question and one follow up question if necessary. So that we can hear from as many issuers free care.
And my first question today will come from Andrea Teixeira with Jpmorgan. Please go ahead.
Hey, guys, it's actually co Joe on for Andrea.
Hi, Kevin.
Hey, Hey, guys can we just wanted to dig a little bit deeper on distribution. So we're just wondering if you guys could update us a little bit about the distribution gains that you guys had seen recently and if they're coming in.
And as expected and then if possible if you could describe sort of your expectation of what those distribution game and should have all year of sales group.
Yeah.
Sure. So we're pleased with our distribution progress, we mentioned last fall and picking up more space at Walmart and Ulta beauty in our spring sets, we've picked up additional space for the <unk> brand at Ulta Beauty. We've also picked up distribution at shoppers drug Mart in Canada, as well as NYCHA in India online.
Those of the primary beneficiaries and else. In addition, we picked up space related to well people and Ulta beauty as part of their conscious beauty initiatives and key sole care. While the launch has been online and digital first both on Keystone care Dot Com and <unk> Dot com is starting to see us expand distribution on that brand is.
Well earlier this month, we started up global ship, which allows us to serve 29 countries with key sole care.
We also talked about being at Ulta I'm sorry, Ed.
And our beauty and the U K.
For that distribution and we announced on this call that will also be entering the glass in Europe, and Asia and countries and European market as well. So we feel pleased about our distribution progress. It's also one of the things that.
Raised our guidance and the confidence that we have and in terms of the continued momentum that we have.
And our next question will come from the merger.
And Ian with Morgan Stanley. Please go ahead.
Okay.
Hey, guys.
Hi, Joe.
And you've had very strong market share performance for a couple of years now and the U S. Just given the unique nature of Covid and as we come out of this COVID-19 and cycle easier comparisons from a category perspective and calendar 2021.
Can you discuss if you think the key market share drivers are still in place and you should see continued robust share expansion going forward post COVID-19, just any sort of key differences post COVID-19 might compromise your ability to continue to gain share at the at the levels, we've been seeing recently.
Sure.
We entered the pandemic from a position of strength, we were already gaining share through executing our five strategic imperatives shoe of the pandemic. We've continued to execute those five strategic imperatives, and I think our overall value proposition clearly shine through.
We feel even coming out of the pandemic.
We're going to be even stronger we have a more robust brand portfolio not only the momentum that we have announced beauty, but also well people and key so care. So we feel we're even better positioned coming out of the pandemic and the one thing that we feel will really aid US is we've been doing all of this even our 10% net sales growth this quarter in the construct of.
A category of this down 20%. So we believe as a category comes back and which I absolutely believe it will give and people's restrictions right now and being able to kind of get out and express themselves that headwind that we've had from the category standpoint becomes a tailwind. So our intent is to continue to gain share regardless of where the market is and continuing.
Executing not only our strategic imperatives for this grand portfolio that we have.
Great.
And then and the scanner data and the U S and December we saw a bit of a slowdown sequentially versus the prior of couple of months was that more just the track channel phenomenon and maybe the untracked channels picked up so the total results were still solid.
Just trying to sort of understand the performance, particularly with the.
Pick up post December so far of January.
So perhaps from commentary on overall trends and and if youre seeing any shift of contract during that period.
And sure Hi, Dara, So I would say that Nielsen tracked channel data overall has been quite volatile and little bit net up and down as we exited we've seen over the weeks and so what you saw in December I think we're just kind of out of normal what youre seeing and physical retail a little bit of a pullback we continued to see.
Frank and.
E Commerce.
And which is why you see us delivering a positive 10% for Q3 inclusive of the month of December and.
And I'd say as we looked into January.
And that lift that we saw definitely included a little bit of and impact from the stimulus that was rolled out and so if you recall last summer when stimulus thrown out and we did see a few weeks of six to eight weeks I would call it of upside there.
You saw a little bit of that in January but also I think you are seeing just our business momentum core business momentum reflected as we've gotten into January.
Great. Thank you.
Yeah.
And our next question will come from Steph Wissink with Jefferies. Please go ahead.
Thank you good afternoon, everyone trying to want to come back to the comment you made in your prepared remarks about SG&A leverage in fiscal 'twenty two I think.
That would mark maybe the first year of leverage and a number of years, so maybe share with us a little bit what's behind that comment is that the fact that multiyear investments are coming to completion or something that youre seeing within your business mix that is giving your conviction and the ability to lever that line item. Thank you.
Sure. So I think it speaks a lot to our long term economic model. So we've long had a series of investments both in terms of marketing as well as the team and our infrastructure with the vision of we'd be able to leverage those investments over time. So our approach is going to be continue to stay strong on of marketing standpoint, we believe those marketing investments we're making.
Definitely are bearing fruit in terms of the market share gains that you see and our continued business momentum, but if I take a look at the rest of our cost structure. The SG&A outside of marketing is definitely the ability to leverage that particularly as we pick up more sales and that very much has been our intent as we laid out that three year algo economic model.
And we're mid to high single digit sales growth, we see leverage through those fixed costs to be able to drive EBIT growth faster than that and really from the FY 'twenty two period over the next three years as the CAGR.
Thanks, Craig and then just really quickly Mandi could I ask on the inventory step up I know you mentioned space expansion and the keys launch.
The help think through the FX component of higher costing I think you mentioned youll see some had been through the fourth quarter, but how should we think about the forward year at the higher cost of goods kind of feature of the overall model.
Yeah. So as we talked in our prepared remarks, FX is a headwind for us.
<unk> talked in the past about how it's been a benefit and that is now with the weaker U S. Dollar it's turned into a headwind and we are plan to help mitigate the impact of FX as we laid out really it starts with pricing and so we will be taking from select price increases to help offset that impact.
Continuing to work with our suppliers on cost savings and then to your earlier point on SG&A leverage and really having that as a focus to help.
Deliver on our long term economic model of driving that EBITDA leverage over the next three years.
Thank you.
Mhm.
And our next question will come from Linda Bolton Weiser with D. A Davidson. Please go ahead.
Okay.
Hi, Yes, maybe you could help me understand kind of the cadence of EBITDA progression and the third and fourth quarter. I think originally you had said there would be more EBITDA margin pressure and the fourth quarter because of the Alicia keys Cos and now the way it's modeled out.
And your EBITDA quite frankly was lower than expected in the third quarter, and it's kind of higher than expected and the fourth quarter. So can you kind of help us understand like did you have some incremental expenses and the third quarter that were unexpected and maybe you could give a little color on the gross margin impact you mentioned.
And there was retailer activity and space expansion costs related to the gross margin impact in the quarter, maybe you could give us some color on that thank you.
Sure So let's start with the <unk>.
EBITDA progression question.
And I've talked about a shift in order timing from Q3 into Q4 and so really.
If you think about those sales moving over into Q4 and that would imply better than.
Previous EBITDA margin for Q4, and so that's what you're seeing happen there.
And so in total we recapture those sales and that's reflected in Q4, so and just a little bit of a shift there from an order timing standpoint.
On the gross margin impact and and the retailer costs that we talked about there are certain costs that are related to.
Expanding space are and getting on shelf with retailers that do impact the gross margin and so as we do as we pick up space and as we get our brands onto the shelf.
There are costs associated with that and and so that's what that was what was implied by that comment.
Okay. Thank you.
Mhm.
And our next question will come from Oliver Chen with Cowen. Please go ahead.
Hi, as you think about marketing and your updated outlook whats happening with marketing as a percentage of sales and then as you and.
Undergo a lot of innovation and these new platforms and.
Experimentation of was really great success marketing as the percentage of sales how do you how do you see that trending on a longer term basis.
I would also love any context of Volta and target partner of what that May.
Implied in terms of your business and different planning that's happening. Thank you.
Sure. So first of all we feel great about our marketing and digital investments as a reminder.
<unk> talked about taking our marketing and digital investments, including Kiesow care up to the 14% to 16% range for this year. That's unchanged, we still assume that for this year, which is a pretty big step up from last year, we're comfortable with those levels right now when we provide FY 'twenty two guidance next quarter, we'll update the entire outlook as we take a look.
But we like what we're seeing from those investments and how well we're able to do at those levels and a big part of those investments is also really supporting two things one us continuing to blaze new territory, whether it be our partnership with the neutral and Twitch, whether it be our work on trailer as well as the other platforms, we're seeing real resonates with consumers.
Tumors on all of our different marketing activities and and in particular with our innovation program and we have a number of epic. Unlike a number of other brands. We remain strong in terms of our new product launches throughout the pandemic and I'm, particularly pleased with the new products that we have slated for this upcoming year.
Spring resets are getting set right now the early indication we have from our online sales is quite strong things like our cc cream, which I believe is going to be our next big Holy Grail product building off of our Camo Concealer franchise, our mint milk collection with Walmart.
Our Holy Hydration makeup cleansing bar all of those are doing extremely well as our some of our other innovations. So feel really good about that combination of our marketing and digital investments.
Really getting behind some of these key new products and only else can deliver.
And then in terms of Alta and target, we see huge opportunity both with the partnership and then with each customer so at target.
This last quarter, we actually surpassed l'oreal for the number two position at target and that's still with the footprint of significantly less and maybelline and l'oreal and so we have a long way to grow even within our most established retail customer and mentioned in the prepared remarks of Alto is continuing to reward the brand with more space not only of the.
The space they gave us last fall, but in the spring resets as well so we see real momentum there and then depending on how that partnership between Alt and target.
Progresses, we also see opportunity, particularly with our key cell care brand, which is going to start exclusively at Ulta, but I think there's an opportunity down the line to also take a look at some of those boutiques within target as well.
Thank you and our final question is just awareness growth as you think about the wellness awareness growth of what all people and acute care and what would you highlight of the building blocks for joining that the.
Different kind of a special brands and in different ways, but would love thoughts on the awareness roadmap of those newer brands. Thanks.
Sure. So on a macro level. We're following the same approach as Elf is the digital first strategy. So you see all of our spending really primarily digitally related and building that awareness. So we did of brand recharge on well people. We're pleased with the results. We're seeing on that so far in terms of our ability to engage consumers really through digital and.
And as we expand distribution on that brand key sole care, we're using a similar strategy, but somewhat different and that we also have Alicia keys, and 100 million followers and the community and we're building with key settled here. So the ability to amplify that brand is even greater just given the power of the Alicia keys, and what we've done by really creating a lifestyle Butte.
The brand and really starting with content conversation and community and particularly as we expand distribution on that brand and that will be a true global brand I think we have a real big opportunity to really accelerate the awareness on that one as well.
Thank you best regards.
And our next question will come from Jon Andersen with William Blair. Please go ahead.
Good afternoon.
I apologize if this has already been asked but unsold care Keith.
So could you talk.
About where you are today in terms of the number of products and market and it wasn't totally clear.
When you plan to be available.
Yeah.
Brick and mortar retail.
When do you plan to have that brand available of brick and mortar retail and.
With which which retailers it will be initially merchandize.
Sure John So we expanded the key sole care range to nine different skincare products and rituals.
Really earlier kind of in January and so we're pleased with the initial results of those products. Those have primarily been online both key cell care dot com and <unk> Dot com.
And we're now and cult beauty in the U K online and in terms of brick and mortar youll start seeing the expansion of that brand. The first customer that we have announced is ulta beauty.
The it enter the retail and Ulta beauty over the next quarter or so and then following that you will see expansion and do glass across Western Europe and that's all in addition to the 2009 countries at global ship is available and that is already live. So youll continue to see of progression, but brick and mortar will come a bit later in the year.
Okay. Thanks.
And then on well people.
I know you've talked about the brand recharge a couple of times could you give us a little bit more color on.
You know the program, there and what's changed and.
Also and update on the progress, you're making or maybe the the opportunity to expand distribution leverage your national retail relationships and the progress you've made there so far.
Sure. So the real focus on the brand recharge was really amplifying what will people stands for one of the things that really appeal to us when we made the acquisition is while peoples of real pioneer and clean beauty almost 40, EWC verify products of the highest standard of clean of real great heritage and the clean beauty space of pioneer.
And are there and so the focus of the brand recharged, it's really making the those superpowers come to life really our clean beauty approach and products that really work of this products of phenomenal on well people and so you see if you can go on well people dot com just more vibrant.
Presentation of the brand core brand proposition and as we take that to customers, including better visual merchandising. So the current distribution footprint well people and the primary customers target and theyre not in all doors at target. So we see a huge opportunity leveraging our strength of target to expand distribution. There I mentioned earlier that we're part of ultra is conscious of.
Judy program, we see that as an opportunity as well and other retailers that really consider clean of key consumer segment, which increasingly is becoming more and more retailers and as you go through so we feel good about our our journey ahead and particularly the progress we've made on the brand.
That's really helpful. Thank you if I could squeeze one more in.
Just if you could comment on the supply chain and some of the changes you've made.
Oh, and manufacturing et cetera that kind of the.
Status of.
Some of the optimization and your work work Youre doing and the supply chain and thank you.
Sure. So the our supply chain is one of our key advantages. We have is unique hybrid model, where we work with luck likeminded suppliers and have a great deal of control in terms of our entire supply chain. We continue to see really great progress from our China supply chain first and foremost.
The manufacturing generating savings even better operating results, we were able over the last six months to be able to tech transfer all of the world people products to our China supply chain, realizing significant Cogs savings and key sole care is being manufactured through that same supply chain basis, which also gives us that advantage and <unk>.
Cost quality and speed and.
And you continue to see us enhance it the one place we have not made as much progress on is our U S. Manufacturing. If you recall last quarter I talked about some of the COVID-19 restrictions getting and the way for us to be able to do our engineering work for that facility. That's still very much true. The good news is we've been able to overcome that by the strength that we're seeing and our China supply.
The chain and look forward to providing greater updates on that and the future, but it really is one of the strength of helping drive the overall business.
And our next question will come from Erinn Murphy with Piper Sandler. Please go ahead.
Great. Thanks, and good afternoon. The one follow up first on pricing and is the higher pricing that you're taking right. Now are we going to see that here on the shelf and Q4 or is that really wrapping into next year and then just trying to understand really the net of the fourth quarter kind of growth margin pressure and then.
Currently you guys have done a great job just keeping a finger on the pulse on what's the kind of next from of social media perspective could you just share a little bit more about what you're seeing from the response of you know about the threat.
And in Chiller and.
Is it bringing in the new customer as you kind of experiment on some pretty unique platforms for beauty. Thank you.
Yep.
So Aaron I'll take that first question and non passenger train on the on the social update so from a pricing standpoint that will not impact Q4, youll see that in early fiscal 'twenty two.
In terms of.
The offsetting FX pressure.
And of our program as we head into fiscal 'twenty two of the focusing on the select price increases negotiating cost savings and then net increased focus on SG&A leverage as an offset to the headwinds.
Okay, and so its growth margin I mean, it was if you think about the puts and takes there for the fourth quarter and I may have missed this in the prepared remarks is that down to a similar level at the Q3 or is it worse just given the FX starts to flip and the fourth quarter, yes.
And that's right so and the FX starts to flip and the first and the fourth quarter. So what we saw in Q3 was just less of a benefit and in fact, it turns into a headwind in Q4, and so you should expect to see that materialize.
And then and on your question of here yet on that.
Yeah, So I mean, I'm really proud of our marketing and digital team. They continue to kind of blaze, new frontiers, and you saw that on our Activations on Tictoc, which continue to do quite well with over 10 billion views I think over 7 million user generated videos.
Also going into new platforms, and the one I'm, particularly excited about is our partnership with Lulu and.
And what were the things that we're doing on Twitch and so.
Access is an entirely new audience and <unk>.
Some of the current audience in terms of her ability to really activate amongst female as well as mail gamers and the work that she is doing because of video right now which are and our global makeup artists Antivitamin, who is also an avid gamer herself and kind of their ability to kind of educate a whole new <unk>.
Net of consumers on everything Thats wonderful, the elf and helping them express themselves gain confidence very much plays into our core brand values and then on trailer as we mentioned we're also excited about the work we did there.
And frankly quite surprised that we could put of holiday out of them on and have it hit Billboards top 24 of our tracks hit the Billboard Top 20, both in the U S and globally, which definitely shows I think we've had some strength in terms of the brand and our connection to music up and coming artists and he definitely saw that play out and trailer and you're going to <unk>.
And to see us blaze other new territories and I'm excited about some of the upcoming <unk>.
Collaborations and partnerships, we have that you're going to have to wait until our next call to hear about them.
Sounds great. Thank you both.
Mhm.
And our next question will come from Bill Chapell with true Securities. Please go ahead.
Okay.
Thanks, Good afternoon.
Hey, good afternoon.
And so the question.
Going back to pricing I mean.
As the company thought or any change in terms of pricing beyond FX and maybe if we go back to the basketball years.
We're able to the pretty meaningful price increase the off the offset the tariffs and really had no.
And last decision no real issue on volumes and so yeah.
It seems the.
I know your products are extraordinarily.
Attractively price.
Is there an opportunity to take even further over the next year or two and actually improve margins with them.
Well, we definitely saw that be the case and our last round of pricing. So if you recall of lot of people were worried about the 25% tariffs and China goods, which really impacted most of our lineup and we're able to use this approach of selective pricing to overcome those tariffs and actually do really well on gross.
And so we know the brand has pricing power of based on our prior execution and how we do that execution was equally important we didn't just peanut butter. The pricing is a general percentage across everything we really pick the items, where we have the biggest value halo or opportunity to take pricing and so I would say that is very much the design and construct of our pricing upcoming it won't be.
In the U S quite as broad as it was last time I think we impacted about a third of our Skus last time, but internationally. We did not take pricing last time, so I think particularly with the FX. We have the opportunity to go further internationally and then with select items and the U S and so definitely we see pricing as a lever at our disposal our preferred method.
And of driving gross margin of though is through margin accretive innovation. So I mentioned, our cc cream, which I believe is going to be our next Holy Grail product, it's an incredible value relative to the $40 press.
Prestige equivalents, but it's retails at $14. So it's a significant premium relative to the rest of our lineup. So it's going to be that combination and bill as we go forward, which is primarily through margin accretive innovation and some the other things that Mandy talked about in terms of our gross margin progression, but also we will look at pricing is always a healthy tenths.
And being extraordinary value brand and not getting ahead of ourselves we did see of unit.
The decline when we did pricing last time and so there's always a balance there now I feel good about post that pricing, how we built back units and of which again tells me we have that pricing power and ability to get that through but we want to be choice full in that pricing and execute it similarly to the way we did last time.
Great. Thank you and I appreciate that and Mandy.
And I realize you're not giving fiscal 'twenty two guidance, but trying to understand.
The key so care the.
The spend.
And you're expecting in the fourth quarter I mean is that will you be up too.
The kind of the I don't know if its normalized levels of marketing and advertising spend.
By the time, we get to the end of March or is that do you expect it to.
We'll continue the kind of ramp throughout the year until we get to the kind of a peak level.
Yes, So I think the best way to think about that bill is each of our brands will have dedicated marketing against them and we do that as the percentage of net sales and so if you think about elf, we've talked about the 14% to 16% broadly for <unk> beauty that incorporates the marketing spend that we're putting behind Keystone.
Care as Brian mentioned earlier as we get into fiscal 'twenty, two will come back with kind of where we see everything as we move forward, but just think about each brand will have their own marketing plans as a percentage of net sales to support each of those brands as we move forward.
So it's not and outside of kind of a big splash over the next few months, it's kind of the slow and steady build.
Well like we said, we have the $5 million to $6 million baked in for this year for Q4 behind the launch of of the brand, especially as we get.
And further along and our distribution plan, but again as we think about it for the for the long term, it's really going to be focused on a percentage of sales by for each brand and then just maybe adding some perspective to that the $5 million to $6 million for this year is definitely outsized relative to the modest sales contribution of Huntsville care would have.
And we thought that was a prudent spend to really launch something that is completely new and beauty ongoing mandates point at least for this fiscal year were really comfortable and that 14% to 16% inclusive of all three of our brands and when we put FY 'twenty two guidance out there part of that guidance will include what we expect to spend from a marketing standpoint and total.
And so people don't have to guess how does the 5% to six translate ongoing it will be part of the overall percentage. We have is the company.
Perfect. Thanks, so much I appreciate it.
Yes.
Your next question will come from refresh per week with Oppenheimer. Please go ahead.
Right.
Good afternoon, and thanks for taking my questions. So try and just going back to your positive commentary, so far and the cheese filled care launch I was just curious if theres anything thus far that surprised me with the launch and it sounds like you guys have already gotten very good pause.
Yes.
I would say I don't know if it surprises, but im still in all of the 10 billion press impressions, we've picked up since and and we're not even and retail yet. So I think it definitely shows if theres something of this brand Thats resonating broadly and then as we look at the community the depth of engagement of that community I think in the prepared remarks, we talked about instant granting.
The <unk> metrics being well beyond what we were expecting and so I think it's.
Still early days, but it's quite encouraging in terms of the level of consumer response and engagement, we have to that brand.
And we'll be able to provide more metrics I think once we are out and retail and be able to see what that looks like.
Okay, Great and then just one follow up question per Mandy just just on.
Just on your operating cash flow, so I get the commentary just on inventory.
Inventories are elevated and a good way and your cash generation.
But even I guess the crude inventories some of the other working capital and Theres. Some other working capital headwinds during the quarter. So just curious how are you thinking about cash flow and Q4.
Yeah, So yes, but if you look at inventory that was a portion of our cash used on a year to date basis.
The receivables would be the other area as you look through and.
I just think of it just timing.
And in terms of our free cash flow expectations for the year I would expect SMB positive free cash flow for the year.
And as we enter into Q4 shouldn't have a pull on additional from an inventory standpoint or things like that so it should have some cash flow there and Q4.
Okay, great. Thank you.
And our next question will come from Mark Astrachan with Stifel. Please go ahead.
Yes, Thanks and afternoon everybody.
I wanted to ask about thoughts on where you think of online sales.
And the percentage of sales I mean, you heard from some of the retailers boat that they're surprised at how well beauty has done and online standpoint, but also the and perhaps some of that settled back into time and so you touched on the 16% of sales where you are now.
Think forward, how do you think about that number.
And in the broader context.
The the category.
Yes, I think we will have more thoughts on that mark when we get into providing FY 'twenty two guidance and where.
Obviously pleased as everyone else is and I think we have triple digit growth on our online business patina of cosmetics dot com and our retailer Dot coms.
Similar to some of the commentary you've heard from others. We are seeing we continue to see a good proportion of new consumers, particularly in Elf cosmetics Dot com I think 60% of purchases were from new consumers, who are also signing up for our beauty squad loyalty program. So it's really going to come down to how many of those consumers will be able to retain that will dictate what.
Percent of our total business, we are but we're definitely seeing the momentum I don't think we have of percentage in mind right now in terms of what we see that as the future, but we're pleased with the 16% versus 10 last year and more importantly, some of the underlying metrics, which definitely show of migration online.
Got it Okay and then the second question and just thoughts on on the correlation between the increasing marketing and investment spend and sales growth and yes.
Do you think about.
And that factoring and not specific to what your sales guidance will look like for next year, but just any of the broad correlation and how do you think about those growing and time with each other of decoupling to some extent.
Yes, one of the things that caused us to increase our marketing spend was the rois, we're seeing off that marketing spend so we use a combination of both Nielsen and <unk> marketing mix, where we can get a measure of growth sales per dollar of marketing invested we see very strong returns on that as well as some of the sub metrics, we have by platform and.
In terms of the core engagement levels. So we definitely know it is a key driver of both of our market share gains and business momentum and we're comfortable at the levels that we're currently at to be able to generate that and.
Obviously, we feel has a longer term impact so when we're able to give.
2022 guidance, we'll be able to talk that a little bit more in terms of some of the drivers of that FY 'twenty guidance.
Okay. Thank you.
And our next question will come from Wendy Nicholson with Citi. Please go ahead.
Thanks, Hi.
Questions first for Mandy I know your long term target is to grow EBITDA faster.
And then revenues the can you talk about just the gross margin generally.
What your outlook is do you think the sort of $65 56 type range is where youll be long term and can you I assume sole care is gross margin accretive, but can you give us some directional guidance is it.
500 basis points, better and that was basis points better just just directionally, how much of a lift Ken that skincare higher price skincare help your overall gross margin and you had a question the terrain for you if I can.
And you guys are so well positioned in the clean beauty space and that's obviously such a hot place right now within <unk>.
But do you think that your I mean, you're obviously gaining share.
Do you think you're gaining share within clean beauty and I'm just wondering.
And beauty seems to be getting so much more competitive do you worry about having to defend your space your market share within that segment or or how do you. How do you manage around what's getting to be a very very crowded segment of beauty if that makes sense.
Sure and got it so I'll start Wendy on the long term economic model and your questions around gross margin, so and the long term economic model to your point, we talked about.
The EBITDA outpacing sales growth, thus, yielding adjusted EBITDA margin expansion.
We have not gone into depth on how much gross margin will play into that versus how much of adjusted SG&A will play into that and we Additionally don't give specific guidance around gross margin.
Can say that the trend.
And earlier point product accretive gross margin products and innovation that has really been our path forward on gross margin.
And so as we get into the out years of fiscal 'twenty, two and beyond well start to talk more about what to expect from an adjusted EBITDA standpoint.
And it may not give the specifics around the gross margin versus adjusted EBITDA as we move forward.
On Keystone care, specifically, so we talked last quarter about Keystone care product margin, certainly being accretive to our overall <unk>.
Product gross margin, but when you get down to the net gross margin because of the royalty that we do pay to Alicia keys that does become relatively neutral at the.
The total company level.
And then one of your second question on clean beauty part of our thesis is.
And it's becoming mainstream clean beauty used to be of niche within overall beauty, obviously, a very fast growing segment within overall beauty, but.
Part of our push and clean beauty is really goes back to the consumers and as the parallel ill say, we are one of the first cruelty free brands and from a mass standpoint in terms of being the 100% cruelty free you've now seen other brands really embrace cruelty free as as consumers have we feel the same thing is going to happen with clean beauty.
And that is no longer and be relegated to one sub segment and so the what brands that are going to win and clean beauty of the ones that bodes really stands for and can live up to those standards, but also offer more than just clean beauty. So the superpower as I mentioned before about our ability to have premium quality.
At these extraordinary values crude.
Cruelty free increasingly clean and on the clean portfolio of the gold standard. We have is certainly well people with therefore, the EWC verify products key sole care came out of the gates as of 100% clean beauty brand, but even elf on Elf. We're now up to I think 1600 ingredients that we do not formulate with where.
A very close to every clean beauty standard that's there on <unk> and so I think that really becomes the game changer. When you can offer the consumer prestige quality at great values that cruelty free clean and it has universal appeal.
It's like what's not to like the Elf and our overall proposition. So we very much of looking at it as not only certainly to the segment opportunity, but where we're going to win long term is by being able to put the combination of benefits together.
Got it and on and on the key sole care I know, you've obviously got a great relationship there with Alta.
And historically you haven't had much of a relationship with <unk>, which makes sense given your price points, but given the full current it's a little bit more premium price and feels like it would fit well, particularly with before going into more cold stores of cold starts initially whatever.
And if that is that something are you are you restricted to being and ultra or if you wanted to go into sephora in the cold storage could you.
And not initially with key cell care our relationship with the Altra is they do have exclusivity for a time period, we haven't disclosed what that exclusivity period is but there is a great deal of partnership I mean, <unk> itself is going to be putting pretty good investment behind really amplifying the key cell care brand the things that we're going to do I can't wait for you to go into their stores.
And as they ramp the brand up even online theres quite a bit of things that we're going to be doing together, they're talking though on the sephora Kohl's partnership we think theres opportunity there for us and we look at potentially well people. We look at some of the other brands that we're looking at both either incubating or tuck in acquisitions and future day.
And we think Theres an opportunity and then also globally and we think there is an opportunity with sephora as well so but initially here our focus is really on all of the duty and the partnership we have there.
Terrific. Thanks, so much.
And our next question or actually I apologies. This will conclude the question and answer session and I'd like to turn the conference back over to Karen Amin for any closing remarks.
Hello, and thank everyone for joining us today I'm incredibly grateful for the great team, we have at health beauty and the talent that each person brings every day, particularly at this difficult time during the pandemic and how well we've executed.
To continue to build market share.
As you can tell from our comments today, we are highly confident about the future and our long term per <unk>.
<unk> of this business and look forward to speaking G&A, when we'll be able to talk our full fiscal 'twenty one results as well as provide guidance for FY 'twenty two.
And thanks, everyone and be well.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines of this time.
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