Q1 2022 elf Beauty Inc Earnings Call
Let me turn the webcast over to Turing.
Thank you Casey and good afternoon, everyone.
Today, we will discuss the drivers of our Q1 results as well as our raised outlook for fiscal 2022.
I want to start by recognizing our Elf beauty team. We delivered Q1 results well ahead of our expectations with Q1 net sales of $97 million up 50% versus year ago.
Q1 marked our 10th consecutive quarter of net sales growth and our largest net sales quarter ever we delivered adjusted EBITDA of $22 million up 40% versus a year ago.
Color cosmetics category trends are inflicting positively fueled by pent up demand stimulus money and easing COVID-19 restrictions.
The category grew in June above 2019, pre pandemic levels for the first time this year.
We're outperforming our competitors in this backdrop underscoring the strength of the Elf business model.
Our products are resonating in our digitally led strategy core value proposition and ability to adapt at El speed continue to fuel our performance.
In Q1 Elf was the only top 5 color cosmetics brand posted retail sales growth above 2019 levels.
I'll continue to gain market share with 5.5% of the category up 20 basis points year over year Elf was the only top 5 color cosmetics brand to grow share above pre pandemic levels by a wide margin.
We are progressing to our multi brand portfolio in Q1, recharge packaging for well people hit shelves and we expanded our product offerings for T cell care.
We feel great about the progress, we're making across the portfolio and particularly the early wins, we're seeing with well people in key sole care as we build awareness behind these brands.
With the momentum across our portfolio, we're raising our full year guidance, which Mandy will discuss shortly.
Our relentless focus on our 5 strategic imperatives is driving results let.
Let me provide a few highlights from the quarter on.
Our first strategic imperative is to drive brand demand.
Elf cosmetics has nearly 12 million followers across our digital ecosystem growing double digits year over year.
We recently completed our annual Nielsen marketing mix analysis, and again saw strong ROI results for our marketing investments.
Giving us further confidence that our marketing and digital initiatives are driving profitable sales.
We see this as a time to lean into our strength and we've decided to strategically invest more behind our brand momentum at an expected rate of 15% to 17% of net sales.
We continue to find innovative ways to engage and entertain a community moving far beyond traditional beauty boundaries.
We're pushing further into gaming, which resonates strongly with our young diverse community in a social survey over 70% of our fans responded that they play video games and 65% like to watch gamers play on platforms like Twitch and Youtube.
We were the first major beauty company to launch on branded channel on Twitch named L. Few centered around the concept of game up or the intersection between gaming and makeup.
We also partner with Tic Toc and enthusiast gaming to launch the Tictoc gamers got talent contest, we far exceeded the challenge that's marks that we set in terms of engagement rates video creation and average watch time per person.
The tick tock gamers got talent hashtag generate nearly 17 billion views.
We're disrupting the digital space as we continue to test and learn on new frontiers.
We create a crypto cosmetics and launch a series of non fungible tokens or as we call them an elf Ts.
3 of else beloved Holy Grail products, our Polish putty primer 16 hour camo, concealer and ride or die lip balm, where dipped in digital gold and when 100% crypto.
Ensure speed our 9 limited edition Elf Tees sold out in just 9 minutes.
Elf was the first beauty brand on what pad, the world's largest social storytelling platform or.
Our hashtag eyes lips fierce riders on challenge as uses of share original stories of women and their lives who inspire them to be strong smart and fierce.
Our challenge generated the largest number of entries of any female targeted campaign to date on the platform. We teamed up with Snapchat to test the platforms, new augmented reality lenses there.
These new lenses provide consumers with unique makeup try on experiences for nearly 800 of our skus.
We're already seeing snap chatters engage with our products in new and meaningful ways. Our brand building efforts continue to win awards and cures recent Gen Z State of Beauty report Elf cosmetics ranked as the number 2 favorite beauty brand in 2021 up from number 9 in 2019, reflecting our growing appeal with Gen Z.
We went to cans alliance the global benchmark for creative excellence in recognition of our hashtag eyes lips face campaign, and our Elf Chipotle collaboration.
Business insider named Cori market Soto and Elf Board member Kenny Mitchell as 2 of the most innovative Cmos in the world, putting elf, an admirable company with leaders from Chipotle, Tictoc Sephora and Lego.
Congratulations corie, Kenny and our entire marketing team.
Keith So kerr our groundbreaking lifestyle beauty brand with Alicia keys is already being recognized as both timely and timeless.
We garnered 6 billion global press impressions in the last quarter alone.
Alicia as proud passionate and committed.
She was featured on on the cover of 5 highly coveted publications around the globe promoting kiesow care and our product offerings with in depth multi page features.
In addition, Alicia supports kiesow care across our social channels.
Her posts about a new body care offerings generated over 11 million views.
Turning to well people are pioneering clean beauty brand known for its dermatologists developed plant powered and high performance products.
The brand turned 13 in June and we're thrilled to celebrate with a new look new and improved formulas and new products.
This quarter, we rolled out new packaging, which is resulting in improved click through rates on our paid media.
The brand is shining across top tier media outlets ranking number 1 in share of voice of press impressions against its competitive set.
We feel great about well people and we are encouraged by the stronger sales trends we're seeing.
Our second strategic imperative is a major step up in digital.
Our digitally led strategy continues to serve us well with our digital consumption trends up triple digits on a 2 year stacked basis relative to 2019 were pre pandemic levels.
We did see a channel shift between digital and brick and mortar in Q1 in line with our expectations as consumers gain comfort returning to stores and as we lap periods last year, where certain retailer doors were closed.
Digital channels drove 13% of our total business in Q1, as compared to 19% a year ago and 8% 2 years ago.
On F cosmetics dot com over 50% of our shoppers in Q1 were new consumers are.
Our new consumers continue to over index on skincare and sign ups for our beauty squad loyalty program.
Beauty squad now has nearly $2.6 million members up over 30% year over year.
Our loyalty members are highly valuable part of our digital ecosystem. They have higher order values purchase more frequently have stronger retention rates and drive almost 70% of our sales on F cosmetics dot com.
We're excited to announce that we launched our global key so care loyalty program in May called sole care rewards our rewards pages already 1 of the top click pages on our mobile site and reward members are making up an increasing percentage of our sales on key cell care Dot com.
Our third strategic imperative is to lead innovation.
Our superpowers that center on our ability to deliver 100% cruelty free premium quality beauty products at accessible price points with broad appeal continue to resonate with consumers.
Elf cosmetics on ongoing success this quarter on our core segments brushes primers can sealers browse and sponges, which make up approximately half of our sales. We are the number 1 or 2 position in all 5 segments and continue to drive market share gains in each.
Importantly, we're innovating to build upon our core franchises and deliver newness for consumers.
In Q1, we launched our Acme fighting putty primer and our putty Bronzer building on the success of our putty primer franchise.
The consumer response has been phenomenal our acne fighting putty primer is our best selling SKU on F cosmetics dotcom since launch and our putty Bronzer is getting rave reviews on tictoc in its first few weeks.
We also launched a limited edition electric mood collection, which we developed with our annual beauty scape can competition winners.
Inspired by 3 musical artists, including Grammy nominated Global Superstar told low our electric mood collection is exclusively available at Elf cosmetics dot com and with target.
Skincare remains a major focus across our brand portfolio and we're encouraged by the marketing strategy and innovation pipeline, we have planned for elf skin.
In Q1, we launched our Holy hydration face cream with S. P. F 30, adding SPF protection to our best selling face cream.
This project is clearly resonating with consumers and is our best selling skin care skus since its launch.
Keith So care further fuels, our momentum and overall product range in this category.
Consumers are highlighting the quality of the brands initial skincare collection with admirable product ratings of 4.9 out of 5 on key cell care Dot com.
We also recently launched new key Silkier starter sets to encourage trial for new consumers.
Looking beyond skincare, we remain excited about the multi year multi category innovation pipeline, we have planned for this brand.
In Q1, we expanded our product offerings into a new category body care with 3 new offerings that align with the brand's commitment to restorative rituals.
The new body care offering celebrate the strength and beauty of the body, while reinforcing body positivity. The campaign includes individuals' a varied shapes sizes interest and points of view and asset light workers to share their views on how they let go of labels and make time for self celebrations appraise mind body and really respects issue.
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Thank you Randy.
Our fourth strategic imperative is driving productivity and space expansion with our retail partners.
With health cosmetics, we continue to see shelf space opportunity with our key retailers.
To that end, we're pleased to announce that we've earned space expansion with Cvs for fall 2021 and Walmart for spring 'twenty 'twenty 2 in a subset of each of their doors.
Internationally, which represents major white space. We're also pleased to announce that we're expanding our shelf space with boots in the UK for spring 2022 keys. So curious elevating accelerating our global retail strategy. We've launched the brand in 10 countries to date with 3 major retail partners.
In the U S with Ulta beauty.
In the U K with cult beauty.
And in 8 countries across Western Europe with do glass.
We recently launched with our fourth major retail partner Harrods in the U K T cell care launch online at Harrods Dot Com in June.
And in H beauty retail stores in July.
He sold care continues to open new doors for our brand portfolio internationally and we remain excited about the global potential we see for this brand.
We're also pleased to announce space expansion, we secure for well people by leveraging our strong relationships with our retail partners.
Ulta beauty will be featuring the brand by inline space on a subset of their doors starting in spring 2022.
This marks the brand's first inline placement at Ulta beauty stores after being featured on our limited edition and cap is part of Altice conscious beauty program.
Well people continues to raise the standard for high performance plant powered clean beauty.
Our fifth strategic imperative is delivering cost savings to help fuel brand investments.
As we spoke about last quarter and like many companies, we're seeing a global imbalance of containers, which is slowing some of our shipments and increasing our transportation costs.
I'm incredibly proud of the Elf beauty team for how we've navigated these logistics.
Even with the container capacity issues, we're seeing we've been able to maintain approximately 95% in stock levels with our key retail partners.
As we look forward and to ensure we're prioritizing our core business and meeting the ongoing strength in consumer demand, we've decided to forgo our 2021holiday program a limited edition collection of gift sets.
The impact is embedded in our raised guidance and further reflects our core business strength.
We remain confident in our ability to navigate these global supply chain challenges and believe that our supply chain is a competitive advantage that enables us to deliver the best combination of cost quality and speed.
Before I turn the call over to Mandy, let me provide a bit more perspective on the overall strategic framework of our company and brands.
We lead with purpose by standing with every eye lip face in PA, we are committed to operating in a sustainable manner and being a responsible corporate citizen for the benefit of our consumers our investors our team the environment and the communities in which we live and work.
In fact fortunate recently named Elf beauty is 1 of the best workplaces in 2021.
In Q1, we launched a new social impacts section of our Elf beauty website to enhance our ESG policies and disclosures with enthusiastic support from business leaders throughout the company as well as our board of directors.
We look forward to continuing to share our progress on our ESG journey.
Our company was founded 17 years ago with a mission to make the best of beauty accessible to every eye lip and face.
Underpinned by the foundational work behind our 5 strategic imperatives, the strength of the Elf cosmetics brand has allowed us to expand our portfolio with strategic extensions that support our purpose and values.
Today, we have a portfolio of complementary but distinct brands with each positioned to touch diverse consumer cohorts at different price points.
Looking ahead, we believe were still on the early stages of realizing the full potential of our business and see significant opportunity in fiscal 'twenty, 2 and beyond I believe we're well positioned to drive growth in both the top and bottom line as reflected in our raised guidance.
I'll now turn the call over to Mandy. Thank you terrain.
I am pleased to share the highlights of our outstanding first quarter results and our raised fiscal 'twenty 'twenty 2 outlook.
We delivered Q1 net sales growth of 50% versus prior year, driven by ongoing momentum across our brand portfolio.
Fulfillment rates than we expected and benefits from stimulus related spending.
We also saw an improvement in our performance at Ulta and internationally, particularly as we lap periods of store closures from a year ago.
Gross margin at 64% was down approximately 340 basis points compared to prior year.
We saw gross margin benefits from margin accretive innovation and cost savings.
We also implemented price increases on a subset of our Skus this quarter mainly internationally.
Gross margin benefits were more than offset by changing FX rates and elevated transportation costs as we worked to navigate the global container imbalance.
The year over year change in channel mix also impacted gross margin as consumers shifted from e-commerce to brick and mortar.
On an adjusted basis SG&A as a percentage of sales was 47% compared to 51% last year.
Our increased investment behind marketing and digital was more than offset by leverage in our non marketing related spend from the combination of better than expected top line trends and taking a sharper look at our expenses.
Marketing and digital investments for the quarter was approximately 16% of net sales versus 11% a year ago Q1, adjusted EBITDA was $22 million up 40% versus last year and adjusted EBITDA margin was approximately 22% Avnet sales.
Adjusted net income was $14 million or 27 cents per diluted share compared to 9 million or <unk> 17 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 on over $130 million.
We ended the quarter with $63 million in cash on hand, compared to a cash balance of $54 million a year ago.
Our ending inventory balance was relatively in line with last year and will build as we approach September.
We expect to increase our inventory levels to approximately $75 million to $80 million driven by longer lead times.
Higher transportation cost.
The addition of Keystone care, and well people and continued business momentum.
We expect our cash priorities for the coming year to remain focused on investing behind our 5 strategic imperatives and supporting our strategic extension.
Now, let's turn to our outlook for fiscal 2022.
As Terry discussed our investments are working and our momentum and category outperformance is strong as demonstrated by the 50% net sales growth. We delivered in Q1, our recently completed annual Nielsen marketing mix analysis again showed strong ROI, giving.
Giving us further confidence that our marketing and digital initiatives are driving profitable sales and indicating an opportunity to invest more behind our brands.
As a result, we made a proactive decision to invest behind our strength and take our marketing spend up to approximately 15% to 17% of net sales for fiscal 2022.
As compared to our expectation for 14% to 16% previously this increased investment coupled with modest pipeline from space gains as well as our expectations for continued business momentum is supporting our significantly increased top line outlook.
We now expect net sales growth of approximately 12% to 14% versus fiscal 2021.
Up from 8% to 10% previously.
We expect adjusted EBITDA between 66, and a half to $68 million up from 66 to 67 and a half million previously.
Adjusted net income between 36 to 37.5 million up from 35 to $36.8 million previously.
And adjusted EPS of <unk> 65 to 68 cents per diluted share up from 64 to 67 previously.
We still 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.
First on our decision to forgo our 2021 holiday program.
As Suri mentioned, we made this decision to ensure we're prioritizing container space for our core business.
This is expected to result in an approximately $6 million reduction to net sales largely in Q3.
The elimination of our holiday program will impact our Nielsen results during the Thanksgiving through new year's timeframe.
The good news is that we still plan to have some holiday themed deluxe kits, although in smaller quantities than our traditional holiday program and.
And we plan to have creative marketing around holiday to keep up our consumer engagement.
We remain confident in our ability to navigate these global supply chain challenges and meet our ongoing strength in consumer demand as reflected in our raised guidance.
Second on adjusted EBITDA.
Our guidance now implies 9% to 11% year over year growth in adjusted EBITDA realm.
Relative to our previous guidance, we do expect some incremental margin pressure from the combination of increased marketing spend as well as costs associated with the space expansion we spoke about.
Outside of these factors our underlying assumptions are largely unchanged. We continue to expect gross margin to be down year over year every face growing FX headwinds and rising material and transportation costs.
As we've discussed previously we are pulling levers to help mitigate a portion of these gross margin impacts, including through select price increases and cost savings initiatives.
Within SG&A, we continue to expect to leverage on our non marketing SG&A spend both as we take a sharper look at our key areas of spend and as we start to scale that he saw Kerr and <unk> people brand.
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 in the mid to high single digits.
With adjusted EBITDA growth outpacing net sales growth over that horizon.
We're pleased to be targeting topline growth well above that range. This year.
Against the backdrop of global cost pressures and our desire to invest more in marketing, we still anticipate healthy adjusted EBITDA growth in fiscal 2022 and remain focused on expanding our adjusted EBITDA margin over the next 3 years.
In summary, we're pleased with our outstanding Q1 results and are excited about the opportunities ahead in fiscal 2022.
Our performance over the last 10 quarter, 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 open the call to questions.
Great.
Yes.
Hum.
Yeah.
We will now begin the question and answer session to ask a question Press Star then 1 on a cash standpoint.
If youre using a speakerphone please pick up your handset before pressing the key.
To withdraw your question Press Star then 2.
This time, we will pause momentarily to assemble our roster.
Yeah.
On the first question comes from Erinn Murphy with Piper Sandler. Please go ahead.
Great. Thanks, good afternoon, and congratulations on a very solid quarter.
My first question touring is for you on the color cosmetics category broadly it seems like it's had a little bit of traction of late can you just share how you're thinking about the sustainability of the category as we move forward and have you seen any thing.
As it relates to the Delta variance on other concerns domestically certain market starting to wear masks again has that impacted any of the recovery in this category.
Hi, Erin well, where we remain quite bullish on the color cosmetics category. As we talk June was the first months interact data that we saw the category above 2019 levels. So we've seen a pretty good inflection and I think that's reflective of consumers pent up demand for this category stimulus easing of restrict.
<unk> and so I'd say overall, we're quite bullish on the category going forward in terms of the Delta variant and any other additional restrictions it's hard for us to tease that out I think in the backdrop of higher consumer demand as well as stepped up innovation not only from us but also from some of our competitors. We're liking the trends that we're seeing across.
Ross each of the core categories within color cosmetics.
Yeah.
Okay.
Operator Walsh.
Okay. The next question is from Andrea Teixeira with Jpmorgan. Please go ahead.
Yes. Thank you good afternoon, I'm going to echo the congratulations for the quarter and also to Corey for you know I'm not I'm not surprised but I'm still impressed with.
Her awards.
Just want to go back to the guide and I think Jay you mentioned August day accelerating.
But that means that after this 50% growth out of your hand in the first quarter.
Can you walk us through what is informing arena to the deceleration of course, I understand that you're still facing a lot of supply chain issues and I think we all understood.
Very well through the CPG earnings season that is this a real end, but is that anything else that you want to highlight that.
That you're seeing in terms of I think your or your answer to Aaron's question is no you're not seeing any deceleration and I think the momentum that is building and increasing I was just checking on I think your greatest cars 100 basis points as a percentage of sales in your marketing investments year over year, and you're building into a 100 basis points higher.
Than you had before so what is what is inform you and then in the same on the same metric 1 we're taking more pricing to defend profitability on that and flow a little bit more into the bottom line.
Okay, Alright, Andrea and nice to hear from you and Theres a quite a few questions in there. So let me just start with with where we are in Q1. So Q1 was a fantastic quarter for us at 50% net sales growth and a lot of the drivers that we saw in Q1, 1 core momentum behind the Elf.
Brand.
We continue to see strong trends on the brands that was fantastic. We also had better fulfillment rates this quarter than we originally expected, which helped us to get to that 50% net sales growth. We also had the impact of stimulus. So if you recall, we talked about in Q4, and we saw that trickle over into Q1.
This third round of stimulus was by far the largest that we've seen from an impact standpoint, and then we also had improved trends at Ulta and internationally, especially as we lapped those periods of store closures last year. So that's really Q1 overall in terms of top line and the outlook, we really expect those trend.
And to continue on the Elf business topline momentum we continue to see.
We are increasing our marketing investment to your point and we have seen strong ROI associated with that so that also implied in that guidance and as well as pipeline associated with the space gains that we called out so all of those things are impacting the top line from an EBITDA standpoint.
We are seeing.
Margin, a little bit of compression there and it's because we are investing behind our marketing and digital so we took our marketing and digital range up to 15% to 17% from 14% to 16% previously.
And as you mentioned that the cost pressures that we see with ocean Coffman and the supply chain that also is embedded within our guidance as well as well as cost associated with some of those space gains that we mentioned.
And then on your question on pricing Andrea This is a brand that does have pricing power. So we successfully executed our largest price increase ever in 2019, we followed that up with another round of more modest price increases more recently in the U S and on a pretty big price increase internationally that was implemented really in the may timeframe.
And so we feel good about our ability to price. The reason why we don't want to price right. Now any further is we see some of the cost headwinds that we're seeing is temporal in nature. The imbalance of containers, we feel will balance out over time, we saw a good increase in the availability of containers as the quarter progressed and overtime, we would expect.
Those costs towards a moderate so we don't know necessarily want to get ahead of us on pricing, but if we saw that some of these costs will be more permanent in nature than we certainly could use pricing as a lever.
Thank you I'll pass it on.
The next question comes from Steph Wissink with Jefferies. Please go ahead.
Hi, This is grace 9 converse Steph thanks for taking my question.
I wanted to kind of double click on the key is total care.
I'm kind of strength that you're seeing could you talk a little bit about the contribution in the period and then how we should think about it as we look out over the fiscal year.
Sure. So high we were not breaking a key so curious we're not bringing on any of our individual brands, where what I can tell you is we're quite pleased with the progress we're making on keith's OKE here, particularly in the areas of consumer engagement and Alicia on engagement in the brand we talked about every time. She posts every time she does something we see really great consumer response.
Launch. In addition, we're really pleased with the execution, we had amongst our retail partners. The total store takeover, we had at Ulta beauty.
As a brand it started rolling out into glass across 8 countries in the in Europe.
That rollout was delayed somewhat by some of the COVID-19 restrictions in Europe, but we're feeling good now that it's starting to rollout and then our latest execution inherits with H H beauty brand is really showing up really well and really proud of the execution. So I would say the last thing on Keystone care to way to think about it is we.
We're building a brand for the long term here. So this quarter was our first expansion in adjacent category with the launch of our body care line. The first 3 items in our body care line that very much tie into the brand ethos on self.
Plus rituals cobalt body positivity very much builds on what we started with key so cure and we have a great pipeline really for the next few years across multiple other category. So quite encouraged by what we're seeing right now and look forward to updating you more on that as we continue to make progress.
Thank you that's helpful. And then just my follow up on on inventory levels are you seeing that is kind of amusing inventory that was maybe earmarked for later in the year.
And <unk>.
Is there a way to kind of you know you've mentioned some of the measures that you're taking can you like news domestic suppliers or explore other alternative approaches as well just a little bit more detail there would be great.
Sure. So overall, we feel great about kind of the outlook on inventory and our supply chain overall I would say that Q1 inventory ended a little bit lower than we would have expected given that we had a 50% net sales growth quarter and so we're talking we talked about the build into the September ending quarter as in inventory at the 75 to 80.
Million and really at retail that is at what we wherever you want to be to support our business reflective of the longer lead times. We are seeing some of the higher transportation costs. We're seeing and then like I said their continued business momentum and the addition of our brand of keys and well embedded into that number so and.
To your question, Yes, we are seeing some longer lead times and starting to rebuild our inventory position as we get into the September quarter, and then for the second part of your question on the supply chain, we feel great about our supply chain in terms of the combination of cost quality and speed that we're able to deliver which is primarily as a transportation issue we have plenty of capacity from.
Manufacturing standpoint, and our ability to really flex to meet the business needs. So as transportation situation gets better I think we'll be in great shape as we go forward.
That makes sense thanks, guys.
The next question comes from Dara <unk> with Morgan Stanley. Please go ahead.
Hey, guys.
2 questions.
First on the on the transportation issues.
I guess, it really didn't seem to impact fiscal Q1, all that much given you were up 50% year over year and as you mentioned the flow rates were healthy in the 95% range. So I just wanted to understand is are things getting worse potentially post the June quarter do you think things are better in.
In general the tone sounded more constructive.
But just given the growth we saw year over year in Q1, and it didn't seem to be a big issue for you guys. So just wanted to get a little bit of update in terms of which we should expect going forward on that front.
Yeah, Hi, Dara, what I'd say is I'm really proud of the way the team navigated the container imbalance. So this stat, we users were able to maintain 95% customer in stock levels, our fulfillment rates were lower than that but our team was able to make sure through our penetration in our customer supply chains that they have the right inventory by <unk>.
Adam level to be able to maintain strong in stocks, we have seen more container availability. So we hope to get those fulfillment rates up even further.
There will be a temporary hit to our customer in stocks as we work through that but overall pretty confident in terms of our ability to meet the consumer demand as we as we navigate through this situation.
Okay, and then just a follow up on Andrea's question.
The balance of year revenue guidance is.
It's only about 3 years to 4% on your mid point.
If you add back the holiday program it'd be more like mid single digits, but.
Obviously, it's a pretty big slowdown from what we saw on fiscal Q1, as well as fiscal Q4 and EBIT EBIT.
Given last year's full fiscal year during COVID-19. So.
On your generally sounded pretty positive about most of the underlying dynamics from the business.
Obviously transportation is a limiting factor, but it doesn't sound like it's prohibited at this point. So I'm just trying to better understand that revenue guidance for the balance from here.
And if there's anything significant.
A significant percentage of holiday program that.
You know would really limit.
The revenue growth a lot more than what you've already seen recently.
No. So their holiday program is.
The key factor in that we called out $6 million related to that that we are pulling out of our forecast and as well as you know we do as I mentioned earlier stimulus in the base as well as we get into the back half of the year Q4 net recycling through so outside of that we feel confident of our.
Our core business momentum and expect to see that growth continue for the balance of the year.
Okay, great. Thank you.
The next question comes from Linda Bolton Weiser with D. A Davidson. Please go ahead.
Yes. Thank you.
So you talked about the impact on sales of not doing the holiday program, what would be the effect on net and gross margin are the gifts that actually a little bit lower gross margin.
So we haven't given specifics on on the holiday program on the gross margin impact and but I would say just.
From a mixed standpoint, the Luxe kids vs is that what you're asking Lucky kids versus our traditional holiday program I would say, there's not not a major difference in net.
Yes.
Just adding a little bit more color to that Linda the decision of foregoing holiday, we like our annual holiday program, It's a great way of engaging consumers, but holiday kits have a very high cubes. So it takes about 4 containers to get the same amount of product as we can get on 1 container and so given the strength in our consumer demand really prioritizing our core skus.
The Luxe kids help us make up for part of that GAAP, but in addition, we will have.
Pretty strong consumer engagement efforts as we've had in stepped up not really throughout each of the quarters. So we feel we can navigate through it will be a temporary piece and definitely feel good about the decision to prioritize our base business.
Thank you and then so it's great to hear you talk about getting some additional shelf space on in the international markets. So how does that as you grow internationally, how does that affect kind of your margin overtime as you get bigger internationally and how does mix.
A factor at all for working capital.
So on the on the margin side of things anything we've talked about this before we are we really look at our business from a margin agnostic standpoint, so whether that volume is coming from the U S or internationally as relatively in line with 1 another.
From a cost of capital on a cash flow perspective, there's also not much outside of inventories that we have that's required behind that and it's very similar to our U S business in terms of shelf space expansion and you know at fixed string and things like that it's just normal course of what we do.
Even here in our domestic business.
And part of the reason why Linda is our approach a couple of years ago, where we shifted from distributors to direct selling chicky headquarter.
Sales is a very efficient model that where our team can cover each of these core accounts as you've seen the progress we've made at superdrug boots now at 2 glass, we feel really good of our ability to be able to service them in an efficient way and quite similar to the way, we service Ulta beauty target Walmart and others.
Okay, Thanks, and just finally.
You know again, great Great news about your expanded shelf space in the U S.
What are some of the challenges as you continue to add more and more based on some of the retailers like Ulta and Walmart in terms of how do you maintain the high productivity of the shelf shelf space as it grows over time.
Yes, that's inherent in our model our model is based on the data that we get off of our E. Commerce site. Most of our innovation goes online first we get really great data not only in sales, but also because customer reviews level of engagement behind those so we have a good model really stemming back all the way back to 17 years ago starting.
As in.
Digital business, where we're able to take those insights work with our customers and really proactively decide which items, we're going to lead and replace them with net productivity model has served us well over the years and I would say we are we have tremendous space opportunity really at every single retailer we deal with so while I'm pleased with the.
Space gains we have we have a lot further to go and I think the 1 benefit of <unk>.
Stepping into space sequentially is we're able to optimize that space better there are years in the past where he picked up massive amounts of space at a particular customer in a given year and we found it took us a couple of cycles to really grow into that space I think the types of increments, we're getting now on space, it's quite manageable given the extent of on.
Our innovation and our or our pipeline of product.
The Best example, being if you go into some targets stores you will have 16 to 20.
Foot sets in some of their doors and we do extremely well with those so highly confident of our ability to continue to optimize the space that we continue to gain.
Great. Thank you very much.
The next question comes from Olivia Tong with Raymond James. Please go ahead.
Great. Thanks.
First congrats on the quarter.
I wanted to talk a little bit about sort of the key driver recruiting drivers on that dramatic top on television was it particular retailers because it sounded like all brands are better than you expected was it brick and mortar versus online particular subcategories, just a little bit more detail there would be great and then just thinking about the guide.
And I guess I understand the supply chain challenges I understand or going through the holiday plans that you're also seeing some very nice retail space expansion wins that should help you.
Later in the year, so or just trying to understand sort of the puts and takes there on the.
The rest of the year on why are you sort of net out where you do thank you.
Sure Hi, Olivia.
And thanks for joining us so I would say our Q1 net sales growth drivers again are really driven by the core momentum net we're seeing behind the Elf cosmetics brand, we had better fulfillment rates than we initially expected. We also had the impact trickle over impact of stimulus into Q1 and then we.
We also saw better results at Alta and internationally, especially as we cycle those store closures in the base.
Also from a shift from brick and mortar over on to E. R e-commerce over to brick and mortar as we have seen the U S. Reopen it we have seen that shift as we expected our consumers going back into the stores.
But we're very pleased with our ecommerce performance up triple digits on a 2 year basis.
On to answer your question on balance of your guidance that the space expansion. So we did mention that we do have some pipeline associated with the space expansion in there.
But since these are spring 2022, you will really see the impact of that as we get into our next fiscal year.
You just really have the pipeline this year.
Right right.
The price of the pipeline isn't that dramatic true.
So maybe to add a little bit there, but then my other question is around.
On the marketing spend on the decision to increase that by a higher price point more than you had originally anticipated so first.
Trying to understand.
Why you decided to do that especially after a 50% growth quarter as Eric.
Gary really want of course sure.
Obviously more marketing is great, but just kind of understanding the genesis of interest to increase that.
And then is it sort of just do quick back of the envelope math it looks like your.
Your your your.
Our EPS guide on your EBITDA margin guide would suggest about like.
Hundred basis points of incremental margin pressure for the rest of the year. So on.
Obviously cost pressures are much higher than that so if you're increasing your marketing back into breaking points cost pressures are significantly higher versus your calling on expectations, what's the offset.
On there.
I'm not quite sure yet.
Hi, Olivia so I'll take the first part and I'll have Andy answer the second so on marketing, we're just seeing real momentum in the business and that's been driven by our marketing investments and we feel great about them. In fact, we recently got our annual Nielsen marketing mix results showed extremely strong ROI behind our marketing so we're leaning into our strengths with.
See plenty of opportunities for us to continue to drive consumer engagement and fueled the momentum we have and so that was a real core driver between that we just see more opportunities than frankly, we can invest in and so we want to make sure that we keep those levels strong and in the first quarter, our marketing and digital investments were about 16% of net sales.
Our guidance for the year is 15% to 17%. So we're comfortable within that range in terms of our ability to continue to drive very strong consumer engagement.
Yeah, and then on the on net Delta Olivia on the non marketing SG&A is really helping to offset the gross margin headwinds that we're seeing as well as a portion of the additional marketing investment that we're putting in.
And really that's driven by topline momentum driven out of Q1, and then also as taking a sharper look at expenses outside of marketing as we go through so that's also helping on a year.
Great. Thanks, so much.
The next question comes from Oliver Chen with Cowen. Please go ahead.
Hi, Thank you on the skincare category. What are you focused on in terms of innovation on what Youre seeing in the marketplace as we look forward and consumer preferences continue to shift rapidly.
Also on regarding marketing where will the incremental dollars go in terms of what mediums and as you think about.
The incremental marketing spend where where do you see the most opportunity in.
In terms of Kpis from consumers.
As you engage in additional marketing spending thank you.
Hi, Oliver so on skin care I would say, we have a very broad focus on skincare and it really is across our brand portfolio. So on L. Skin. We just recently launched our Holy hydration cream with SPF 30, it's quickly become our top selling skincare skus. So continue to hit the key segments within skin care.
<unk> under the same thesis of Elf the best of beauty made accessible so you'll continue to see really high.
Our high quality products with these extraordinary values on else when we have a long way to go on that pipeline Kiesow care, starting with the skincare focus so the clean skincare products events Kiesow care, we feel great about the average product ratings of our initial 9 products are 4.9 out of 5 stars on on key Silkier Dot com and we have a rich pipeline behind that.
We also see opportunity on well people longer term in terms of skin care. So we see opportunity across all 3 of our brands into each brand is distinct and complementary in nature, you'll see each 1 take a little bit of a different focus on skincare.
And so feel really good about what we're doing on skin and continue to see low momentum there.
And then on your second question on in terms of marketing, where the incremental dollars will go I would say, it's a combination of highly proven ROI vehicles like many of our campaign vehicles in terms of our media and awareness driving where we've seen great results as well as continuing to lead the way and test and learn on new platform.
Arms.
Credibly pleased obviously with the work that we've done on Tictoc over the years, our Tictoc gamers got talent.
Hashtag challenge I think raised with now over 17 billion views our foray into gaming has proven to be really great.
Live stream on Twitch and level of engagement, we're getting there. The attribution. We're getting there is is really actually also quite strong and then new platforms. As you heard us talk about on this call. So we think theres an opportunity. So the way I think about the marketing dollars over time is a.
A combination of well proven vehicles, where we have very strong ROI data on as well as continuing to disrupt the category and really get consumer engagement, including many of the partnerships. We do on the collaborations we do.
Thank you and our final question on there's been a lot of ingredients innovation and R&D in the industry at large.
Or your thoughts on on how that will apply to your platform and also maintaining R&D innovation.
Innovation.
Are they all up as well thank you.
Yeah. So innovation has long been a key strength of ours and I would say our biggest focus on innovation beyond having great new products that consumers love is our continued journey on clean beauty and so it's very strong in a ingredient focus on that if you think of wall people, a pioneering clean beauty brand with plant powered beauty.
If that works.
That really is at the gold standard and acquiring well people brought a lot of capability into the company in terms of our clean journey. We reformulated every 1 of those products as we did our tech transfer on our operating platform are realizing even better product performance with significant Cogs savings and in turn getting learnings that really helped us launch keys sold care.
Through 1 of the Cofounders of while people are Dr. Rene Snyder working with our innovation team of really.
So highest standard in skincare and has a very strong ingredient focus asked as well people and then even elf, we're making great progress on Elf on clean if you take a look at our formulations is over 1600 ingredients, we do not formulate with and our continued progress and create so that's really 1 of the primary focus areas beyond having really great products.
Is.
Increasingly consumers care about what the ingredients are in their products and I feel great about the progress we've made there.
Thank you best regards.
The next question comes from Mark Aster, then with Stifel. Please go ahead.
Yes, Thanks and afternoon everyone.
2 questions.
If you could quantify.
Any sort of benefit that you saw from the stimulus. This go round in terms of just impact 2 to sales any sort of direction would be helpful. There.
And then secondly, just a series of broader questions related to skincare relative.
A relatively small percentage of the portfolio today, yeah anything you could sort of frame as to how.
How it can progress in terms of the mix on a go forward basis could you also talk a bit about where you're sourcing consumers are they new to skin care or are you sourcing share from other brands.
Yes at mass Masstige.
And then also just any sort of.
Seasonality to the business that you've observed so far.
And then just 2 other pieces shelf space in terms of what you have today relative to the number of skincare skus. So presumably that would expand as you add more incremental space as you referenced and then also can you just remind me on the margin impact for skincare versus the legacy portfolio. Thank you.
Alright, Mike well I'll take your first question on quantifying the impact of stimulus like I said as this last round of stimulus is by far the largest impacts that we've seen we've not quantified that specifically on on a building block.
And our net sales other than to say it did have an impact to our net sales.
In Q4 as well as what we saw here in Q1 and.
And on your questions on skincare I think 1 of the ways I like framing. It is if you look at skincare overall, it's less than 10% of our total total sales you had online both elf cosmetics dot com and Amazon, it's 25% of our sales and the big Delta there primarily relates to the level of assortment. We have in skincare. So I feel we have a great pipeline.
On skincare, great items, and so as we continue as you said as we continue to pick up more space. Our strategy is to put more of our skincare and because we see a tremendous opportunity to continue to drive that percentage up over time from a margin standpoint, it's it's not that different from a margin standpoint.
From our overall cosmetics line the price points are higher so just on Elf alone. If you think about our average unit retails on cosmetics at or about $5 on skincare that around $9 and then of course Kiesow care is significantly higher than that in the.
2030, 20 to $40 range. So we do see I think from a margin standpoint, not not that much of a difference mainly because of our strategy of making sure that we're having the highest quality skincare accessible is 1 of the ways that we really win.
But definitely generates more gross profit dollars.
Okay.
Great. Thank you.
The next question comes from refresh party with Oppenheimer. Please go ahead.
Good afternoon, and thanks for taking my question. So I have 2 questions on gross margins I was first curious if you can provide any more specificity in terms of how youre thinking about gross margins for the full year and I wanted to get a sense of it maybe Q1 is a low point and then as we look out you know I know it's already towards next year, what do you expect to recover any of that gross margin decline.
Going forward.
Futures.
Cash and so I will answer your question on gross margin. So for Q1, we saw gross margin down about 340 basis points year over year.
So as we look out on the balance of the year, we expect.
Gross margin is not to be down as much as what we saw in Q1. So.
Improving as we get throughout the year and on.
On a fine some stability here from a from some of these transportation costs that we're seeing in terms of recovery.
We do it we do see this as a transitory issue on the ocean cost add that container imbalance, we expect all of that to balance out over time, and so do expect to get some recovery in gross margin as we go through and timing of that obviously, we're not talking about fiscal 'twenty 3 just yet so.
Have to wait and see there yeah, and just to add to that route fashion I think we're highly confident of our ability to drive strong gross margins overtime.
Think of the last couple of years the amount of costs were carrying between the 25% China tariffs the transportation costs, we talked about FX turning against US, it's a pretty high level of costs and our ability to continue to deliver on even in this year's guidance 90, 11% EBIT growth, we feel really great about that so I think longer term, we're quite bullish in terms of our ability.
To manage kind of the cost environment around us and still deliver strong.
Profit progress.
Okay, great. Thank you.
Again, if you would like to ask a question on Starz and wanted to join the queue.
The next question comes again from Erinn Murphy with Piper Sandler. Please go ahead.
Great. Thanks for Slotting me back in I had a couple of follow ups Bill.
1 was just on your approach carrying and I guess to the team on collaborations you've done such a great job with the Alf brand over the last few years, how are you viewing product collaborations for both well people and Keith all care is there an opportunity there and then just secondly on Keith's all care with the author target partnership I believe Keith of the 1 brand heat.
<unk> currently selling at target when should we expect or do you like should we expect that to be on the brand lift over time. Thanks. So much.
Sure. So erinn on the team has done a remarkable job in terms of these collaborations and doing things in unexpected ways. If I go back to the Elf Chipotle collaboration even the most recent 1 we did with our electric mood collection partnering with 3 global music music artist.
Can it continue to see more I think tomorrow, you're going to see our launch of Big news, which builds on the success we've been having in the eye category. We've always had strength in brow, we feel great about lash, it loud or mascara before a big nude and I feel as good or best net of Mascara, yet that we've launched and you'll hear a collaboration we are doing on that.
Tomorrow, and so youll continue to see a midstream and theres absolutely possibilities on both well people as well as Keystone care and in fact on keys. So care. The way that brand has been built is through strong collaboration if we think of our light workers all of the content that we're putting out the different voices that youre hearing from Keystone care. There is an entire universe of Likeminded.
People that were going to continue to partner with to bring that message out and then well people. Similarly, we feel there's lots of potential you think well people into.
As a real gem in terms of not only its heritage as a real pioneer in clean beauty, but this broader view of clean beauty and wellness. We think there did partnerships there as well so stay tuned you'll continue to see a lot more with US there and then on Keystone care I would say that.
Ultra at targets presents us an opportunity certainly for the future. We're still in the exclusivity period with Alta and so I think the focus for them was really making the most of T cell care in altar, but in the future I'm quite hopeful that.
That becomes another area of opportunity, but youll continue to see us.
Expand the Prez <unk>.
Since a keystroke here.
Not only globally, but also eventually in the U S.
Great. Thank you.
Okay.
This concludes our question and answer session I will now turn the conference back over to management for closing remarks.
Great well. Thank you everyone for joining us I'm incredibly proud of the Elf beauty team not only in how we've navigated this pandemic delivering our 10th consecutive quarter of net sales growth with the tremendous momentum we have across our entire brand portfolio. So we look forward to talking to you next quarter and updating you on our progress but Meanwhile, thank you for joining us.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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