Q4 2021 e.l.f. Beauty Inc Earnings Call
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Thank you for joining us today to discuss <unk> fourth quarter and fiscal 2020, 1 results I'm KC cotton and 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 to tune into our webcast presentation for the best viewing experience, which you can access on our website and investor Dot Elf beauty dotcom.
Since many of our remarks today contain forward looking statements. Please refer to our earnings release and our reports filed with the SEC for you all.
Find and 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 reconciliations 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 you're well.
Today, we will discuss our results and the fourth quarter full year fiscal 2021.
And outlook for fiscal 2022.
I want to start by recognizing our Elf beauty team.
We have much to be proud of and fiscal 'twenty 1.
Q4 marked our ninth consecutive quarter of net sales growth.
While the color cosmetics category was negatively affected by the COVID-19 pandemic, our outperformance throughout the year underscore the strength of our business model and.
In fiscal 'twenty, 1 elf cosmetics was the only top 5 color cosmetics brand to post growth.
And the only top 5 brand gained share with 5.7% of the market up 100 basis points year over year.
And we advanced our transformation to a multi brand portfolio with the recharge and well people and launch of key soak here.
We also continue to lead with purpose.
Elf beauty stance with every eye lip face and PA since our founding we've had a deep commitment to diversity and inclusion.
We are 1 of only 5 public companies and the U S. With the board of directors that has over 55% women and over 20% black representation.
We're proud that our employee base, which is over 75% women over 40% diverse and over 60% and millennial and Gen. Z is representative of the young diverse consumers we serve.
We achieved a significant milestone on our sustainability journey this year, reducing and estimated 650000 pounds of excess packaging to project Unicorn.
We accomplished all of this with an unwavering focus on executing our 5 strategic imperatives.
Let me provide a few highlights from the year, our first strategic imperative is to drive brand demand.
<unk> cosmetics now has nearly 12 million followers across our digital ecosystem growing double digits year over year.
Our earned media value was up 29% compared to prior year, and we were the only brand growing and our competitive set.
We continue to find innovative ways to engage and entertain a community moving far beyond traditional beauty boundaries.
And.
Nick we became a global sensation with our first Tictoc hashtag challenge featuring our original eyes Lips face song, which remains 1 of the most viral campaigns and Tic Toc history.
We were the first beauty brand to drop a holiday album.
<unk> launched a campaign on trailer and half for songs make the U S and global Billboards trailer top 20 list.
This year's beauty scape event the remix infused the power of makeup and music and featured 3 musical artists, including Grammy nominated Global Superstar tow flow.
We've entered into gaming, which resonate strongly with our young diverse community.
We were the first major beauty brand and to launch a branded channel and Twitch named L for you.
Our Twitch channel Champion's female empowerment, and gamers and features new streams every week.
Our first livestream generated nearly 1 million views.
We also teamed up with looser fruit also known as <unk>, 1 of the world's top female gamers.
The response to our collaboration has been overwhelming with over 37000 hours of Elf content watched.
We also ventured into original content creation and with the release of eyes lips famous the first ever Tictoc reality show the show generated 38 million views over 3000, and submissions and even the TV industry took note. We also explored unexpected brand on brand partnerships with like minded disruptors.
In March we launched a limited edition product collaboration with Chipotle.
The collaboration generated 4 billion press impressions and sold out in record time across multiple online channels.
Tapping into elf superpowers of being vegan and cruelty free.
Chipotle offered and limited edition is chips face Bowl.
Beauty inspired all vegan entre.
The ball Mark the first time Chipotle introduced a menu item and collaboration with another consumer brand.
Our brand building efforts continue to win awards.
And this year were recognized as 1 of beauty is most powerful brands.
Newsmaker of the year and 1 of the top 10 marketers of the year among many other awards.
We increased our rank and Piper Sandler Semiannual Teen survey from fourth favorite cosmetics brand last year to second this year.
And just 8 votes away from the number 1 spot, reflecting our growing appeal with Gen Z.
We took an important step and our transformation to a multi brand portfolio with the launch of Keystone care, our groundbreaking lifestyle beauty brand with Alicia keys focused on holistic wellness Kiesow care cars out a new category and beauty called so care going beyond skin care to care for the body mind and spirit.
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Care is paying attention and that part inside of you and you can't see but you can feel and new.
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Key sole care is off to a great start we're encouraged by the global recognition of the brand is receiving with over 15 billion press impressions as well as numerous brand and product awards, all and just few months since launch.
Leases and inspiration as so many.
The brand is resonating with a broad set of global consumers with the healthy mix of both men and women.
Instagram engagement metrics are trending well above platform averages we're particularly.
Excited about the level of engagement, we're seeing with consumers on key so care dot com.
Our weekly email newsletter subscriptions are growing and our SMS text messages are proving to be 1 of our strongest conversion driving channels.
Looking to well people. This was our first full year operating this plant powered clean beauty brand and the key theme. This year was recharge as we transform many aspects of the brand including price points imagery.
Website.
Social channels media strategy and the in store experience.
In the coming months, we're excited to fees and new packaging that provides a fresh expression of the brand we.
We feel great about well people and are encouraged by the momentum we're starting to see.
Our second strategic imperative is a major step up in digital and.
Digital consumption remained strong throughout fiscal 'twenty, 1 up triple digits year over year with strength across Elf cosmetics, dotcom retailer dot coms, and Amazon and digital channels expanded to 17% of our total business up from 9% a year ago and cosmetics dot com approximately 75 per <unk>.
Net of our shoppers this year with new consumers.
These consumers are over indexing on skincare and sign ups for our beauty squad loyalty program.
Beauty squad now has over 2.4 million members up 40% year over year.
Our loyalty members have higher average order values purchase more frequently have stronger retention rates and drive almost 70% of our sales on elf cosmetics dot com.
Our third strategic imperative centers on leading innovation and.
Our cosmetic saw continued success in fiscal 'twenty 'twenty, 1 in our core segments brushes primers can sealers browse and sponges, which make up approximately half of our sales.
We have the number 1 or 2 position and all 5 segments and continue to drive market share gains in each.
Looking beyond our core segments, we continue to leverage our unique ability to create prestige quality products and extraordinary prices.
2 of our biggest launches where camels cc cream and lash it loud mascara.
Which are helping to drive momentum and foundation and mascara, the 2 largest categories within color cosmetics.
And Q4 camera Cc cream was our top selling product.
Skincare remains a major focus of our brand portfolio.
Skin care consumption for the year was up 22% and tracked channels versus the category that was down 3%.
Keith So care further fuels, our momentum and overall product range and this category.
The brands initial skincare collection includes 9 product offerings with dermatologists developed clean formulas skilled nursing ingredients and soul nurturing rituals.
The consumer response has been incredible with average product ratings of 4.9 out of 5 stars on key Silkier Dot com.
Our fourth strategic imperative is driving productivity with our national retail partners.
Elf cosmetics maintained its industry, leading productivity on a sales per foot basis at both Walmart and target. Our 2 largest customers. We're also pleased with the space expansion, we earned with both Walmart and Ulta beauty.
For context target is our most developed and longest standing national retailer and our store footprint today, its about 11 feet on average.
This is significantly less than many of the legacy color cosmetics brands, yet alpha achieve the number 2 dollar share position up from number 3 last year, our average footprint and ultra is now about 8 feet and and Walmart is about 6 feet.
Even with the space expansion, we earned this past year, we see shelf space opportunity with all of our key retailers.
We achieved new milestones internationally, which make up approximately 11% of our business Elf now ranks number 8 and mass cosmetics and the U K up from number 12 last year and was the only top 10 brand to post growth.
In fiscal 'twenty 'twenty, 1 we launched Elf cosmetics with new international customers like shoppers drug Mart, and Canada, and expanding into new geographies like India, and Italy, our fifth strategic imperative is delivering cost savings to help fuel brand investments.
We're pleased with the 80 basis points of gross margin expansion and we saw this year against tariff related pressure and growing FX headwinds.
Our operations team continues to generate cost savings by lean manufacturing techniques that have contributed to our strong gross margin rates.
Additionally, this year, we successfully transferred all well people products for operations platform unlocking significant Cogs savings, which we redeployed into more accessible pricing.
We believe our scalable asset light supply chain and China is a competitive advantage that enables us to deliver the best combination of cost quality and speed across our brands.
Like many companies, we're seeing global imbalance and containers, which is slowing some of our shipments and increasing our transportation costs.
And Andy will speak more about this shortly.
In other operational matters, we're no longer pursuing our liquid fill manufacturing facility in California.
The plant and faced a number of COVID-19 related delays.
As we got deeper into the engineering work and revised business case, we made the decision to stop further investment and instead focus on the competitive advantage, we have with our existing supply chain.
We plan to continue to look for ways to both strengthen and diversify our supply chain over time.
To that and in fiscal 'twenty, 1 we started operations with new suppliers, and both Thailand, and Taiwan, They can leverage and chassis and multi functional team, we have and China the progress and our 5 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, and why I'm optimistic.
Stick that we can continue our momentum into fiscal 2020.2.
First we plan to continue being L thing disruptive pushing even further and a new digital frontiers like gaming to bring new consumers to our brands.
We recently announced a partnership with Tic Toc and enthusiast gaming the largest gaming media platform and North America to launch Tictoc gamers got talent.
This 7 week life series fall as contestants as a showcase their talent and compete in front of millions of fans for a chance to win and $25000 and of course Elf products.
The tick tock gamers got talent hashtag generated over 5 billion views in the first 3 days and is now for 13 billion views and just a few weeks.
We also plan to continue unexpected partnerships with like minded disruptors.
And as just 1 example in April we announced a collaboration with beauty entrepreneur Gen Atkins and the founder of way hair care and main Alex.
I am obsessed with creating quality beauty products that are accessible to everyone and no..1 has mastered that more than al and they create potash for every eye lip and face 1 of the main reasons and I wanted to collaborate and they understand the importance and now more than ever and giving back to the community. So we were able to come up with girls, Inc, and help young.
Entrepreneurs and their ideas and dreams. The second thing that gives me confidence is that we still see a significant amount of white space across categories geographies and our expanding brand portfolio.
We plan to push further and they're larger categories like foundation Mascara and skincare.
And skincare for example, we're pivoting our marketing strategy to treat Elf skin is our fourth brand and our portfolio.
While color cosmetics purchases are often driven by inspiration and impulse skincare purchases are generally driven by efficacy and education.
And require a different way to engage with consumers.
We're excited about both the marketing strategy and innovation, we have planned for elf skin and fiscal 'twenty 2.
From a geographical perspective key sole carrier is accelerating our global retail strategy in the U S. T cell care represented altice first ever entire store takeover and both sight and sound Kiesow cares also opening new doors internationally like do glass.
We're excited about the execution, you'll see in the coming months as we launch in 8 countries across the EU.
Looking ahead, we believe we're still in the early stages of realizing the full potential of our business and see significant opportunity in fiscal 'twenty 2 and beyond.
Our business results were strong entering the pandemic and our digital strength core value proposition and ability to adapt and I'll speed have continue to fuel our performance.
Today with a more diversified brand portfolio. We believe we are positioned for an even brighter future.
I'll now turn the call over to Mandy.
And can you rank.
I am pleased to share the highlights of our outstanding fourth quarter and full year fiscal 2020.1 result.
We ended the year strong.
And the fourth quarter net sales grew 24% versus prior year, driven by ongoing momentum for our cosmetics brand benefit from stimulus related spending and the launch of Keith's all care.
We also delivered 14% growth and adjusted EBITDA with ongoing investment and marketing and digital as well as increasing FX headwinds to our gross margin.
Let's now turn to our full year fiscal 2021 results. We delivered net sales growth of 12% with broad based strength for Elf cosmetics across E Commerce International and our national retailers and we also benefited from the launch of Keystone care and are full.
Year of well people.
Gross margin of 65% was up approximately 80 basis points compared to prior year, we saw gross margin benefits from margin accretive innovation and cost savings and a mix shift to our cosmetics dot com.
We also benefited from FX.
Although much less though relative to prior years as we started to feel the impact of changing FX rates.
Partially offsetting these benefits were costs related to retailer activity.
This expansion inventory adjustments as well as the impact of tariffs.
On an adjusted basis SG&A as a percentage of sales was 52% compared to 49% last year.
Primarily driven by increased investment behind marketing and digital <unk>.
Head count costs related to the build out of our marketing digital and innovation capabilities.
And increased operational costs related to higher E Commerce volume.
Marketing and digital investment for the year was approximately 16% of net sales versus 13% a year ago.
Fiscal 2021, adjusted EBITDA was $61 million down 2% to last year and.
And adjusted EBITDA margin was approximately 19% of net sales.
Adjusted net income was $37 million or 71 cents per diluted share compared to $32 million or 63 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 over 130.
Dollars.
We ended the year with $58 million and cash on hand, compared to a cash balance of $46 million a year ago.
And April we refinanced our existing credit facility and to a 200 million dollar facility with 100 million of term loan and $100 million of revolver.
We were able to improve terms across the board, including better pricing, taking advantage of favorable market conditions and the opportunity to further bolster our balance sheet flexibility.
Our ending inventory balance was higher on a year over year basis, as planned and 12 million lower than where we exited the December quarter.
We expect our cash priorities for the coming year to remain focused on investing behind our 5 strategic imperatives and supporting our strategic extensions.
Now, let's turn to our outlook for fiscal 2020.2.
As a reminder, fiscal 2022 will be the first year within our 3 year long term economic model, which targets compounded annual top line growth and the mid to high single digits with adjusted EBITDA growth outpacing net sales growth over that horizon for the full year, we expect net.
Sales growth of approximately 8% to 10% tracking at or ahead of our long term economic model.
We expect adjusted EBITDA to grow slightly faster than net sales, resulting in adjusted EBITDA margin expansion of approximately 5 to 10 basis points year over year.
And adjusted EBITDA between 66, and 67 and a half million dollars.
We expect adjusted net income between 35, and $36.8 million and adjusted EPS of <unk> 64 to 67 cents per diluted share.
We expect a fully diluted share count of approximately 55 million shares and our fiscal 2022 tax rate to be approximately 24% to 25%. Let me provide you with a little more color on our planning assumptions for fiscal 2022.
Starting with the top line.
Our top line outlook reflects continued momentum for the Elf cosmetics brand.
We also expect net sales to benefit from a full year contribution of T cell care and an increase year over year from well people.
There are 2 key factors balancing that momentum.
First we have not assumed any major space gains for Elf cosmetics, and our fiscal 2022 outlook.
And as compared to significant retailer space expansion, we enjoyed and fiscal 2021.
Retailer space decisions typically come later and a year and we don't have confirmation of any major space gains as of the date of this call.
Second as terrain mentioned, we have recently experienced delays in shipments from China as a result of our container shortages and port congestion that many other companies have spoken about this is resulting in shipment delays and elevated transportation costs as we work to meet <unk>.
Tumor demand.
We will closely monitor these impacts as we move through fiscal 2022.
Turning now to adjusted EBITDA.
We are planning for adjusted EBITDA margin expansion of approximately 5 to 10 basis points year over year.
We expect gross margin will be down year over year, as we faced growing FX headwinds and rising material and transportation costs.
We are pulling levers, where we can to help offset a portion of these gross margin impacts, including through select price increases and cost savings initiatives.
As a result, we expect SG&A leverage to drive our expected adjusted EBITDA margin expansion this year.
Both as we take a sharper look at our key non marketing areas of spend and.
And as we start to scale, the Keystone care and while people brands.
Of note, we're planning for marketing and digital spend to continue at approximately 14% to 16% of sales and fiscal 2022 from a cadence standpoint, we expect top line growth to be strongest in Q1, as we benefit from stimulus related spending on top of our ongoing.
And <unk> portfolio momentum.
Conversely.
We expect adjusted EBITDA margin will be most pressured on a year over year basis in Q1.
This is largely a result of the gross margin pressures. We just spoke about coupled with the planned step up and marketing spend as a percentage of sales as we lap lower marketing levels and Q1 last year during the initial months of the pandemic.
In summary.
We're pleased with our outstanding results and fiscal 2020, 1 and excited about the opportunities ahead and fiscal 2022.
Our performance over the last 9 quarters, both on an absolute basis and relative to the category demonstrates how our 5 strategic imperatives are driving results and gives me confidence for the future.
With that operator, you may now open the call for questions.
And I'll begin the question and answer session.
Note this call is being recorded.
A question you May Press Star then 1 on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
To withdraw your question. Please press Star then 2.
Additionally, please limit yourself to 1 question. So we can respond to all of you and the time scheduled for this call. If you have any additional questions. You are welcome to rejoin the queue.
Our first question today and will come from Dara <unk> with Morgan Stanley.
Hey, guys I'm.
So I just wanted to touch on the revenue side, obviously you came in above your.
And your expectations and Q4 can you just help us understand what drove that upside how sustainable some of those items, maybe as youre looking out over the next few quarters and.
And then in terms of the U S cosmetics category.
Youre seeing so far and fiscal Q1 and given your 2 months into the quarter.
And as the recovery progressing all day.
Year over year basis are looking back to 2019, so a bit of color on for category rebound here and what Youre seeing and the last couple of months, maybe post the quarter. Thanks.
No problem alright, so I will I will start with Q4 and the key drivers that drove that 24% growth and.
I'll start off by saying, we're very pleased with the 24% growth that we saw in Q4 really that was driven by for a key factors..1 is just the ongoing momentum we have with the Elf brand.
We saw that continue into Q into Q4.
Secondly is the impact of stimulus and the third round was by far the largest impact that we've seen out of the 3 stimulus round. So that also had an impact and.
I would also say that Keystone care and.
And pipeline related to that launch added to our sales in the quarter and then lastly, we also spoke last quarter about orders shifting out of Q3 into Q4 that also had an impact for the quarter. So I would say overall pleased with the underlying momentum that we saw in the quarter, but certainly and also some stimulus related things at <unk>.
And we think will kind of roll off we talked about Q1 being stronger behind stimulus as well and and so you'll see that continue on into Q1.
Alright, and then on your question on the category, we're definitely seeing a resurgence in color cosmetics, I think and the last 4 weeks and scanner data. The category is up 32%. We were up 52 per century that same time period. So we're seeing even stronger results on elf.
From a perspective of a broader view I would say the category is still not back to where it was in 2019, I think it's down 3% relative to where it was in 2019. So we're seeing a recovery is filled we have further to go and we're encouraged by as people get more vaccines as restrictions are lifted as people get back into retail we're quite bullish on that.
Category going forward, certainly stimulus was a benefit and could even as we start lapping some of the stimulus spending and looking at last year's stimulus around this time, we're still encouraged by what we're seeing overall.
Okay, and if I could just follow up on the interest.
Shipment issues with containers et cetera.
Is that more of a short term issue and the next.
Few weeks here or is that something that could linger as you look out going forward and how do you think about if there is potential upside for the year your ability to actually supply product and in terms of incremental retail demand versus what you're expecting.
Sure. So like many other companies, we're facing that imbalance and global containers and I would say that's going to impact us for at least for next few months.
And what I would tell you is imbalances tend to balance out even in our history, we've had periods, where you've had ports.
Port strikes and other disruptions and supply we feel confident in terms of our overall capacity and ability to manufacture products and our guidance is reflective of the imbalance that we're seeing so the 8% to 10% revenue growth takes into consideration any of the supply and balance that we're seeing currently.
Great. Thanks.
Okay.
Our next question comes from Erinn Murphy with Piper Sandler.
Great. Thanks, Good afternoon, and my question is around the Keystone care brand I was curious if you could speak a little bit more about the response, thus far particularly internationally and then as you think through that guidance for the year I'm not sure. If your mandate for breaking out kind of what <unk> could contribute but if you could just help us shape, how like the pipeline.
And Phil will look as we move throughout the year, if there's any specific quarter to call out and you kind of roll out and additional retailers and abroad and.
And I have a quick follow up thank you.
Okay. So and we're really pleased with the launch of T cell care as I mentioned in the prepared remarks, since we announced the brand we've had over 15 billion press impressions or Instagram engagement rates are higher and we're particularly pleased with what we're seeing in terms of support from our key customers. So in our Ulta beauty launch he was the first time ever that they dare.
Vacated the entire store takeover to our brand launch we were at the front of the store for 12 weeks as you've moved onto an end cap and their prestige section.
We're really pleased with kind of what they are doing behind the brand. We're equally pleased with the plans that do glasshouse against the brands. So internationally key cell care will definitely accelerate our move internationally as a global brand and what I'd tell you internationally right now as you know much of Europe has been shut down and so some of our launches did move out a few months.
Particularly in Germany, which is still closed but we're encouraged as markets start to open up his vaccination rates get better there you'll.
You'll hear us talk more about key's internationally and I'm excited for you to see what that looks like as Douglas because huh.
And then Aaron just on your question on and debt.
Impact to the quarter's and what are we seeing so we're not breaking out the impact of revenue for each of the brands and but I can say that pipeline and new product launches all of those things that is embedded within our 8 to 10 per cent guidance that we've provided.
Okay, great. Thanks, Mandy and and just a quick follow up for Ya man. He on pricing for the Elf brand. I think you were taking some pricing has any of that gone and what percent of the SKU base have you taken Python and just curious if theres been any consumer response as you think about mitigating factors to some of that gross margin pressure and you called out. Thanks, so much.
Yes, and so we did talk about at using pricing as a lever and we talked about that last quarter and I can say that that pricing has is in effect now and may we took that pricing at <unk>.
I'll take some time for that to show up at shelf just similar to our.
And July of 2019 price increase that we took and at that time recall, we took pricing on about a third of our Skus I can say for this round and the U S. It is much smaller and internationally, we did not take a price increase in 2019. So this is a larger price increase I would say internationally.
Versus what we took and the U S. Here and May so that is definitely a lever we're looking to to help offset some of the FX headwinds we've spoken about and we'll have more to say on that and the coming months.
Great. Thank you.
Yeah.
Our next question comes from Andrea Teixeira with Jpmorgan.
Thank you and congrats on the quarter and I appreciate your commentary about the disruptions but.
But I think it would be helpful. If you could.
Give us how much you're baking and is that 100 bps for 200, and mid February outlook, and and and trying to and I think we all understand will eventually come back right. So I'm, assuming you're not thinking it will come back in fiscal 'twenty 2.
And then related to that I understand and then do you don't want to break down.
By brand, but if you can give us an idea.
If you're looking at underlying with the impact from the disruptions that you have and the supply chain to be around mid single digits for organic and then divesting your contribution from both for Q for care and well people.
And then I have a follow up.
On the dilutive and Berkshares.
Yeah. Okay. So let me take that that underlying impact question first on just trying to understand the trends that we're seeing by brand I would say that like I said and our prepared remarks, we're really pleased with the underlying momentum that we have on the Elf brand and I think debt.
And a lot of the analysts and investors look to Nielsen data to kind of get a pulse on where we're seeing trends Amin <unk> brand I will say that.
Looking at Nielsen, we do expect that to be a little bit volatile right because we're cycling.
Stimulus and the base and a lot of moving parts as we go through we have stimulus now on top of stimulus so and there we do.
That said, we just feel strong about where we're positioned from an outstand point.
Cheese, and while people while people and this will be.
Kind of a growth year for well people I would describe it.
With the recharge and packaging and that showing up at shelf, we certainly expect that to have an impact and then with Keystone care and.
It will also be incremental that you're thinking about how you build that up and.
As we launch more broadly internationally and and build momentum behind that brand. So that's the additional color I can give you behind each of our brands and then on the container and on the container and balance what I'd tell you is it's definitely impacting our fulfillment rates right now for 1 of the benefits. We have is each of our and retailers carry a significantly.
And out of inventory. So we haven't seen a major impact yet in terms of in stock levels. Those are still pretty healthy and so as we manage through that we've embedded in our guidance in terms of what we see particularly through the front half of the year and.
And we'll learn more and will report on that as we go forward hopeful that at that imbalance will balance out and we will be able to get more containers and.
Yeah and that I mean is that critical for your summer launches right.
You will like late summer launches, where youre, saying, you feel confident that the second quarter.
Calendar would be and not as bad from what you just said about the beginning it sounds as if youre very confident with as it sounds like you.
For your rates for.
The initial summer, which is obviously the June quarter, and then we have to monitor whats going to happen to the fall and instead the way we should be thinking and then hopefully by the December quarter, youre going to be in a better rate and much better position again.
That's what we hope I mean, it's still a dynamic situation. So we'll monitor it what I would tell you is the fall reset which is a key part, which we usually ship during summer we are supplementing our shipments with some air freight to be able to make sure that we can set those shelves properly and on time and that's reflected in some of the cost pressures that Mandy talked about.
And 1 less day, no that's helpful and and 1 last thing Taronga and LNG for the diluted number of shares was a little bit higher and I think obviously last year, maybe not the device fiscal year and theyre not be representative of what your compensation SBC and all of those moving parts can you help us understand what are the.
And puts and takes there.
Yes Andrea.
Just on the on the share count and we provided if you look at our Q4 for.
Diluted share count was around 53 million shares and if you recall and our evergreen we talked about.
The share count.
And the burn rate going down to 2%. So you can add that on to the 53 million, where we where we exited Q4 and then additionally, we have had and appreciation and the share price. So many and anti dilutive shares have turned into our diluted share count and so that's also being added in.
And so that's how we're getting to that and kind of that $55 million range for fiscal 'twenty of June.
Also for the reasons, okay perfect. Thank you so much gross background.
Yes.
Our next question comes from Linda Bolton Weiser with D. A Davidson.
Yes, hi. Thank you. So can you just talk a little bit about your comment about treating skin care as a fourth brand.
And that's sort of sounds to me like maybe needing more marketing investment behind it and does that mean, you get less kind of Halo effect is the overall brand kind of boosting both I mean, what can you just give more color on what you mean by treating it as a fourth brand. Thanks.
Surely net we've seen great momentum in skincare and in fact, if you take a look at the tracked channel sales Elf skin was up 22%. This last fiscal year and a category that was down 3%. So we've been having momentum for quite some time executing on our strategy. This just reflects the.
Growing strategic importance of skincare as part of overall portfolio, obviously key sole care was launched skincare first as a category.
And on <unk>, we have high hopes and plans for skincare. So it doesn't necessarily impact our marketing levels, we're staying consistent in that 14% to 16% overall for marketing as a percent marketing and digital as a percentage of sales and you just reflects the rift.
Reflection that skin care the approach to skincare is different and color cosmetics, while color cosmetics purchases are often driven by impulse and trend skincare, we're finding through our own history is really driven by efficacy and education, and so really taking that approach of really treating skin care differently than color cosmetics.
It really builds on the success that we've been having.
Great. Thank you and then.
Just on the keys, so Caroline and <unk>.
You've talked about further expansion geographically coming up and the next year is there any time.
Time frame for launch of additional Skus for the line.
There is Linda we have.
So care is different in its approach in 2 ways..1 is a true lifestyle beauty brand focused on content community and conversation of and in addition to that its multi category and scope. So we started and skincare I think theres a piece, where we announced today that our next category will be body that we're coming out with 3 new products and the body.
<unk> and you'll see that follow up with additional other categories and skus with a robust innovation pipeline that you'll continue to see a stream of new product news and key cell care throughout the year.
Great and then I.
And I guess and just a question on your and your cash.
Cash flow in the fourth quarter was actually a little bit better than we had projected and you've got a nice healthy cash balance and <unk>.
Are there any thoughts of returning to share repurchase and kind of what are your thoughts on additional acquisitions now that you've kind of relaunch the well people and gotten the Alicia keys off the off the ground what are your thoughts there.
Hi, Linda so on the share repurchase front.
We are just backing up to just cash overall and our priorities our cash priorities are.
As we look for it I really focused on our strategic imperatives and strategic extensions and <unk>.
Importing Keystone care and also supporting well people.
From an acquisition standpoint.
We have been very thoughtful on that front with well people being our first acquisition last year.
It's something that you know kind of on our priority list, but feel that we are our hands are full at this point with with keys and while people and the only other thing I would add Linda is when you think of strategic extensions, it's not only potential tuck in acquisitions. It's also incubating new brands I think the success, we have with key sold per shows the capability.
We have our team of kind of I think we stood up that brand and about a year's time. So we're definitely interested and enhancing kind of our product portfolio brand portfolio with other brands that we either acquire or build in house.
Okay, great. Thank you very much.
Our next question comes from Steph Wissink with Jefferies.
Thank you good afternoon, everyone I have a question that's on the sales and EBITDA gross tracking together, even with the gross margin pressure I think Randy you mentioned this is the first in a 3 year.
Target period to grow EBITDA faster than sales. If you were to see gross margin be less pressured than what your guidance and beds is that where the source of upside likely comes from or do you expect to spend that back to try to drive upside to the sales line.
Hi, Thanks for the question Steph.
Always a balance and we do feel like the gross margin pressures are real and so that's why we have pulled other levers within our toolkit to help offset some of those gross margin pressure. So the pricing that we just chuck focusing on the non marketing expenses within SG&A to help deliver that 5 to 10 basis points of EBITDA leverage.
And now as we look out and think about our long term economic model. What we talked about was a 3 year view on that so with EBITDA outpacing over that 3 year period and so that's what that's what we continue to be focused on and so I feel great that even in a year with great cost pressures, we are still talking about delivering leverage and.
<unk> EBITDA growth and we'll just take it 1 quarter at a time as we see how things materialized.
And if I could I think you gave some specificity around Q1 mentioning that marketing was going to be up year over year, just given that it was down below your threshold last year can you remind us kind of what that step function could look like year over year just for modeling purposes.
Sure So let's see here so last year.
If you recall Q1 of last year, there was kind of in the beginning of Covid and we've had really pulled back on our marketing investment and so you're going to see some step up there last year, our marketing investment was only 11% of sales in Q1, and so we've talked about 14% to 16% for the year. So certainly expect to see a step up.
There in Q1 of this year.
Thank you very much.
Net.
Yeah.
Our next question comes from Bill Chappell with true with security.
Thanks, Good afternoon.
Good afternoon.
And can you talk a little bit more about the decision to walk away from the domestic manufacturing.
Are you, giving up anything in terms of potential gross margin expansion are you did you find but cost savings elsewhere.
Does that mean, you're permanently going to stake and out of the domestic manufacturing and just.
I know this project is at least a year into the end of the process. So it's a little surprised that youre pulling the plug now.
Yes, well Bill I'd say first and foremost, we're really happy with our overall supply chain and operations advantage we have.
In terms of our combination of cost quality and speed. We originally done the business case and the U S plant in southern California, and really based on 3 things 1 was cost savings to a supplier diversification and a third with lead time reduction.
Now that plant had faced a number of delays related to COVID-19 COVID-19 related delays. So by the time, we're able to actually get into the engineering work, we really evaluated the cost profile of that facility relative to what we get from the rest of our supply chain and determined that it was going to take a lot more money to be able to realize its full potential now having said.
So that was an easy decision from a business standpoint of saying, let's not pursue let's not put more money into that facility relative to the advantage. We have from the rest of our supply chain, we remain interested though in diversification and lead time reduction and so and the diversification front as I mentioned at the same time that we faced COVID-19 related delays on the southern.
For new facility, we did start up new suppliers, and both Thailand, and Taiwan that gives us diversification, but still leverages. The power that we have and our multi functional team and China and I would say in terms of domestic manufacturing or other sources of manufacturing will remain open as long as the business case pans out so I'd say, we're always looking.
See how we can further strengthen the advantage, we have and our operations and it just wasn't the case and that particular facility.
And and just make sure that Theres no.
Write down or charge off for that that I saw.
Yeah, Bill we do have a restructuring charge that we took in Q4 of $2.6 million related to that closure.
And that was the entirety.
That's right.
Got it and then just switching gears on <unk>.
As I look at the shelf space gain for Andy You said your guidance doesn't include any shelf space gains.
I think a.
A big and right in saying that the spring is more of a it's a bigger time for shelf space gains in the fall but.
If you're going to get ones and the fall would that we would know that over the next couple of months is this what you are and the process of and it.
Is there a chance that you get shelf space gains or are we kind of past that where you're not expecting a whole lot new and in the fall and you're more just velocity of existing space.
Yes so.
Like I said and our prepared remarks, no indication of shelf space gains at this point.
But we remain hopeful and I believe we have a track record of getting shelf space gains are each year, we just haven't baked that into our guidance because we usually will do that and once we do have confirmation of such gains and the decisions Bill for this spring really have made a little bit later this summer and so.
As Mandy says, we're quite hopeful given the momentum that we have not only and the amount of share. We grew last year, our overall productivity, our innovation pipeline and consumer appeal. So we stand I think stronger than we've ever stood in terms of our ability to get more shelf space. We just didn't want to cloud guidance with expectations on shelf space. So it's clean from it.
And I appoint and those space and if we did get confirmation on more space, we would update the guidance throughout the year.
Got it thanks, so much.
Yeah.
Our next question comes from Jon Andersen with William Blair.
Hey, good afternoon, everybody I just have 1 quick 1 on well people. If you could talk a little bit more about your plans for well people to share it sounds like theres been a restage, that's going on but if you could describe.
If you'll be gaining new distribution as well I think at the time of the acquisition..1 of the thesis was that you could leverage sugar trade relationships, particularly with national retailers and perhaps.
And the distribution for that brand. So just some more color around your plans for well people this year and what kind of underpins the growth as you see it.
Sure John So on well people were highly encouraged with the plans that we have they really for key focus areas first is recharging the brand similar to what we did with Elf and you see an entirely new brand expression on well people.
Everything from its positioning to packaging that youll start seeing rollout over the next few months. The second is innovation really leveraging our strength and innovation and building out the product assortment on wall people that youll start seeing some of those new products coming coming out.
I'd say the third is putting it on our operating platform. So we were able to basically re formulate every single product and the wall people range moving onto our operating platform realize significant cost savings that we've put into sharper pricing and that brand recharge and and the fourth element is distribution and our key focus on distribution I would say.
<unk> is target and Ulta.
Target is where the brand historically was most developed feel like we have further to go with target Ulta, we were already part of our conscious beauty initiative at Ulta, and we'll be looking to leverage that to more space within Ulta and then other customers. So we feel great and we're really pleased with the momentum that we're seeing right now and while people and and.
And the last thing I'd say is well people also dramatically accelerated our own plans across elf in the clean beauty space Kiesow care came out the door fully clean.
1 of the founders of well people Dr. Rene Snyder Dermatologists really was instrumental with the development of that brand.
Elf is well on its way in terms of our own clean journey I think.
And the next few months Youll see <unk> 100 per cent clean as well. So there are other benefits well people got gate.
Got to the company beyond kind of the growth momentum, we see and that brand.
Great point, thanks for the thanks for the help.
Yeah.
Our next question comes from <unk> Parikh with Oppenheimer.
Okay.
Hey, Thanks for taking my question. So I just wanted to go back to your comments on the reopening.
Various if youre seeing anything surprising as you look at consumer behavior out there and if you look at <unk> Dot Dot com.
Are you seeing stickiness for maybe the skin care business as now consumers and maybe also by makeup as well.
Sure. So I'd say on the reopening it's consistent with what wed expect we've long talked about as things open back up as there's more vaccines out there people go about their normal behavior you'd see a resurgence in color cosmetics and we very much are seeing that and category trends, but especially on <unk>, where we were strong before.
During the pandemic and now kind of coming out of it.
So hopeful on the category as I said the category is still not where it was 2 years ago, but we like the trends, we're seeing not only on elf, but I'd say also and some of our key competitors and a lot of thats driven not only by consumers coming back but the level of innovation. That's out there really pleased seeing kind of maybelline, Skyhigh mascara l'oreal and valve.
And foundation and makes US a few new items, so we like seeing that activity and the broader category. We definitely believe it will bring more consumers into the category, which is always a great thing for elf.
And then in terms of our online business, we had real strength there all throughout the year.
It was up triple digits for.
For our last fiscal year, and and 1 of the big drivers of it was quite a few new consumers I think almost 70% new consumers since our real focus has been on retaining those consumers. So I'm, particularly pleased with the progress we've had on our beauty squad loyalty program up almost 40% year over year and the terms of total beauty squad loyalty members and as I mentioned and to prepare.
Remarks beauty squad loyalty members as well as the new consumers are definitely having a stronger affinity to skincare, which has been great for our overall basket building as well.
Okay, great. Thank you I'll pass it on.
Our next question comes from Mark a star Trek with Stifel.
Yes, Thanks and afternoon everyone.
Yes.
Couple directional follow ups, 1 on and this.
This whole idea of skincare and does that ultimately.
And over time lead to more shelf space for that and maybe even specifically.
Within.
And that category in terms of the placement of it sort of separation from.
Some of the makeup products here and Directionally kind of how do you Holistically think about that.
And then Seth.
And separately on the investment spend or marketing spend for this year. So I think you said, 14% to 16% I guess.
What what fastest drive where.
A&P spend finishes the year.
Keeping in mind that you're going to be up a lot in the first quarter, so that would imply down a bit and <unk> and how do you think about that and.
As I said and what factors influenced that and how quickly can you change it if you need to.
Sure so and all skin, we definitely see expansion potential not only and shelf space for the number of new items I think I've cited and prior calls that L skin and skin care as a percentage of our portfolio and tracked channels is single digits overall, I think but 9% 8 and 9% yet on El cosmetics Dot com and am.
<unk>, it's close to 25% of our sales so and the biggest difference if you take a look at what's going on online versus in retail is a number of our skincare items on shelf. So we already had a strategy even with the fall resets coming up of getting more of our skin care assortment onto retailer shelves. In addition, as we earn more space, we use that as an opportunity to increase our.
Footprint on skincare, both and sets where skincare is housed within the overall elf set similar to what we do with target or places like Ulta beauty, where skincare is housed in the skincare.
Department, you see opportunity in both areas, both getting more assortment in as well as the increasing our space.
And then on the marketing side alone kind of Mandy add into that but I'd say, we're comfortable with the momentum we've been able to drive at that 14% to 16% and so we the way we approach marketing is we really said it is the rate.
And by brand each brand has a different per cent that were targeting for that brand and it goes pretty much hand in hand with the sales as we go through yeah, and and I would just add to that mark debt in terms of turning it off are turning out on.
Because we have a completely 100% digital spend and.
We are able to move pretty quickly.
The ebbs and flows of the business, so feel great about how and how we're managing that percentage over the course of the year.
Great. Thank you.
Our next question is a follow up from Andrea Teixeira with JP Morgan.
Thank you for taking my follow up I, just want to confirm what you said mainly on the pricing. So I understand you don't want to quantify.
But you said that pricing and do you asked will be a little bit less and international and you alluded to 2019, when you took pricing and about a third of the skus. So how should we be thinking and obviously starting now in may and so part of your.
First quarter is not going to be possibly impacted so how can we think about magnitude of price increases Inc.
In fiscal 'twenty, 2 that is embedded in your guide.
And.
And and also if you just another follow up on E. Commerce. So I think understood correct me, if I'm wrong and fab, 25%, but can you quantify.
And you did give us the number of beauty squad member growth, but if you can quantify the growth and E. Commerce that would be helpful. For break then and your dot com.
I'm sorry, both saw retail dot com and you're on your own.
<unk> Dot com.
Yeah, Okay. So I will take the pricing question. So in terms of impact. So we have talked about again, it's small and the U S. But broader internationally. If you think about international is roughly 11% of our business.
And you could assume debt.
Roughly the same playbook that we took when we took in 2019, we've now applied that internationally as well. So it will have some impact to the business Andrea but.
Not as large of an impact and we saw when we did this pricing in 2019 and again, we're not going we're not pulling that lever as heavily because we still want to be sure that we're providing that value for our consumers and so we're just not going to take pricing all the way up and so that we maintain that balance out with.
Wanting to ask.
Some of these FX headwinds would also delivering that value to our consumers. So.
We will be able to report out on that potential impact next quarter. When we report earnings.
And that you know, that's how I'm thinking about it right now.
And then on your question on our E Commerce business online our total ecommerce business, where we finished the year was about 17% of our total business and it was up triple digits, I think and a year before E. Commerce is only about <unk>.
Roughly 9% in FY 'twenty. It's finished the year in FY 'twenty, 1 at 17% of our business. So we saw definitely great growth rates, there and that growth was well balanced between cosmetics dot com retailer dot com and Amazon. So we saw growth across all 3 of the major areas that we look at our online business zone.
Thank you that's helpful.
Yes.
This concludes our question and answer session I'd like to turn the call back over to terrain Amin for any closing remark.
Well, thanks for joining us today, so grateful for our incredible team and Elf beauty, who collaborated to navigate the challenges of the pandemic and build our market share I believe our future is bright and we remain confident and our long term strategy. We look forward to seeing some of you at the upcoming William Blair and Piper Sandler conferences, and speaking with you and <unk>.
Just when we will discuss our first quarter results.
Thank you and be well.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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