Q2 2022 elf Beauty Inc Earnings Call
<unk>, let's focus on our five strategic imperatives is driving results across our brand portfolio.
Let me provide a few highlights from the quarter, our first strategic imperative is to drive brand demand.
We continue to find innovative ways to engage and entertain a community moving beyond traditional beauty boundaries.
We joined forces with recording artist here whack to launch our new Big mood Mascara Mascara is the largest segment within cosmetics and a significant white space opportunity for Elf with the launch of big mood, we're offering big bold and beautiful lashes at an incredible price point Big Moody's price of just $7 compared to higher priced top five mascara.
We're encouraged by the early results, we're seeing with big mood Big mood is the number one selling I product on F cosmetics dot com since launch.
And it also won the coveted allure best of Beauty 2021 award for best Mascara beauty steal.
Also during the quarter, we enjoyed a pop culture moment with our brand debut on the game show Jeopardy Acronyms 800.
As a daily level.
What would you like to April 2000 halls.
8000, here's the clue.
Cosmetics brand Elf is an acronym for these three areas where its products are used.
What.
Errors lips face.
No eyes lips face.
Take it down to zero, while Matt Ahmadiyya. His answer was wrong a rarity for would be at 38 time winner we quickly capitalize on the moment in social media.
Our team made fast friends with Matt and our social channels went live the next morning with years lips face branding.
Our digital community and the media took notice with engagements soaring in the days that followed.
In the end, we donated the $8000 Matt loss on its wrong answer to dress for success proving we can have some fun and advance our purpose.
Our recently launched El value campaign is yet. Another example of how our team translate social listening and consumer insights into action.
According to our internal studies, 66% of consumers believe that value is the most important factor when buying makeup.
Leveraging this insight we launched the value campaign to underscore our unbeatable value using a platform native user generated content production style, we set out to show the world that looking good doesn't need to cost extra.
Okay Moms, what's your most expensive makeup products are expensive.
I shop, Alphaville I can save the money.
Look like money.
Feel like money.
As a fan.
And get my Money's worth because I love to.
And then can I loved my Kid.
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I think his analysis.
Okay.
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Yes.
The consumer response has been phenomenal with yuzu rates significantly exceeding benchmarks across multiple social platforms.
Our off value campaign aligns with our mission to make the best of beauty accessible to every eye lip and face.
Our brand building efforts continue to gain recognition in.
In Piper Sandler Semiannual Teen survey Alf ranked as the number two overall preferred makeup brand for teens and the number one brand among average income teens, reflecting our growing appeal with Gen Z Women's wear daily recently awarded else beauty as the best performing beauty company in 2020 one.
Putting us an admirable company with Nike and target who were recognized as the best performers in the fashion and retail categories.
Looking at keys, So Kerr, our groundbreaking lifestyle beauty brand with Alicia keys, we continue to build industry Buzz.
We garnered 6 billion global press impressions in the last quarter.
Key cell care product offerings were prominently featured as Alicia got ready for the <unk> 2021 met gala.
Helping or achieve a radiant glow underneath the bold red lip that turn heads all night long.
The met gala moment increased traffic to our site by 45% that week.
The brand continues to win awards in our Lor as best of Beauty <unk> 2021 awards keys, so care sacred body oil one best body oil.
We're also encouraged by the results we saw in our first consumer insight study for keys silk here.
It's clear that brand appeal is high and consumers are responding to the brands clean high quality ingredients unique sense and sleek packaging.
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 two year stacked basis relative to 2019 or pre pandemic levels.
We continue to see a channel shift between digital and brick and mortar in Q2 in line with our expectations.
Digital channels drove 12% of our business in Q2, as compared to 14% a year ago, and 8% two years ago, and <unk> cosmetics dot com approximately 50% of our shoppers in Q2 were new consumers.
Our new consumers continue to over index on skincare and sign ups for our beauty squad loyalty program beauty squad now has over $2 6 million members up nearly 30% year over year.
Our loyalty members are highly valuable part of our digital ecosystem.
They have higher average order values purchase more frequently and have stronger retention rates and drive almost 70% of our sales on F cosmetics dot com.
We recently launched beauty squad to point out a recharge loyalty program, featuring new branding point structure incentives to move up to top tier status and dozens of new ways to engage and earn points.
Our loyalty program is an integral source of first party data and we'll continue to look for ways to enhance our beauty squad experience.
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 prices with broad appeal continue to resonate with consumers.
Alf cosmetics, our ongoing success this quarter in our core segments brushes primers, concealer, browse and sponges, which make up approximately half of our sales. We are the number one or two position in all five segments and continue to drive sales growth in each.
Skin care remains a major focus across our brand portfolio.
In Q2 F skincare consumption was up 22% in tracked channels compared to a category that was up 7%.
In Piper Sandler Semiannual Teen survey, all skin moved up four spots to be the number 13 favorite skincare brand for teens as we continue to build awareness with Gen Z.
Our recently launched skincare collection for well people fuels our expansion in this category.
Fans of well people have long hoped for skincare and we're thrilled to offer this new plant powered collection to our community.
While people skincare offers five new products with dermatologists developed formulas that support long term skin health.
And are infused with rich plant powered ingredients like snow mushroom allergies and broccoli seed oil.
With a decade long heritage of creating cutting edge Super clean products. While people continues to raise the standard for high performance plant powered clean beauty.
Our acquisition of well people significantly accelerated our efforts in clean beauty across our brand portfolio.
While people brought us an in house Board certified dermatologist, Dr. Rene Snyder, who was instrumental in developing keys silk here as 100% clean from day one.
The acquisition also accelerated our clean journey on the Alf brand and we're excited to announce that Els product formulations will be 100% clean by year end.
Over the past several months our team really formulated over 350 S. Skus.
There are now over 650 ingredients, we do not use.
While it take a number of months for these new formulations for rollout.
We're excited to add to our existing superpowers with elf consumers can have premium quality beauty products at accessible price points that are clean vegan and cruelty free.
Our fourth strategic imperative is driving productivity and space expansion with our retail partners.
We continue to see shelf space opportunity.
As we've previously reported we're pleased with the space expansion, we've secured with Cvs in fall 2021, and Walmart in spring 2022, and a subset of each of their doors.
Internationally, we're also expanding our shelf space with boots and superdrug in the U K in spring 2022.
<unk> represents major white space at just 11% of our business today.
Our performance in the U K shows that our focused international strategy is working.
The latest Nielsen data shows <unk> now ranks number eight in mass cosmetics in the U K up from number 12 last year and continues to be the only top 10 brand to post growth.
T cell cares elevating and accelerating our global retail strategy.
We've launched the brand in 10 countries to date with four major retail partners.
In the U S with Ulta beauty in.
In the U K with cult beauty inherits an.
And in eight countries across Western Europe with Degloss.
We remain excited about the global potential we see for this brand.
We're also pleased that while people were again its first inline placement in a subset of Ulta beauty stores in spring 2022.
Progressing from a limited edition and cap is part of Ultra's conscious beauty program.
Our fifth strategic imperative is delivering cost savings to help fuel brand investments.
As we spoke about in recent quarters and like many other companies we are facing a global container imbalance and port congestion, which are slowing shipments and increasing our transportation costs.
I'm incredibly proud of the health beauty team for how we've navigated these challenges.
In fact, Walmart recently asked us to share our key supply chain learnings with your vendor partners as we are early in making strategic supply chain decisions.
Back in August we spoke about foregoing, our 2021 holiday program and increasing our inventory levels to balance a strong consumer demand, we're seeing with the longer lead times industry is facing.
As a result of making these early decisions, we've been able to maintain approximately 95% in stock levels with our key retail partners.
While the environment remains dynamic we're pleased with how we've managed these global supply chain challenges.
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.
Our mission is to make the best of beauty accessible to every eye lip and face.
Underpinned by the foundational work behind our five strategic imperatives, the strength of the Alf cosmetics brand has allowed us to expand our portfolio with strategic extensions that support our purpose and values.
Today, we build brands designed to disrupt industry norms shape culture, and connect communities with positivity inclusivity and accessibility.
We believe our brand portfolio and the continued execution of our five strategic imperatives will fuel our ability to win.
I'll now turn the call over to Mandy.
Thank you terrain I'm pleased to share the highlights of our strong second quarter results and our fiscal 2022 outlook.
We delivered Q2 net sales of $92 million up 27% versus prior year.
And by broad based strength in our national and international retailers.
Gross margin of 63% was down approximately 200 basis points compared to prior year.
With our gross margin benefits from cost savings and margin accretive next we also benefited from the price increases we implemented on a subset of our Skus and may mainly internationally.
These gross margin benefits were more than offset by changing FX rates and elevated transportation costs as we worked to navigate the global container imbalance.
Overall.
Our gross margin rate came in a bit better than expected this quarter due to the timing of when the higher transportation costs flow through our P&L.
That said given these headwinds we continue to expect gross margin to end the year below fiscal 2021.
On an adjusted basis SG&A as a percentage of sales was 49% compared to 51% last year.
Our increased investment behind marketing and digital was more than offset by leverage in our non marketing related spend.
Marketing and digital investment for the quarter was approximately 16% of net sales versus 15% a year ago.
Q2, adjusted EBITDA was $18 million up 29% versus last year and.
And adjusted EBITDA margin was approximately 20% of net sales.
Adjusted net income was $11 million or 21 cents per diluted share compared to $8 million or 16 cents per diluted share a year ago.
Our liquidity remains strong with a combination of our cash balance and access to our revolving credit facility sitting at approximately $130 million.
We ended the quarter with $42 million in cash on hand, compared to a cash balance of 41 million a year ago.
Our current cash balance reflects paying down our revolving credit facility, reducing our overall debt by $13 million in the quarter.
Our ending inventory balance was 77 million in line with our expectations as compared to $64 million a year ago.
As a reminder, last quarter, we spoke about anticipating higher inventory levels in September from the combination of longer lead times higher transportation costs. The addition of Keith's all care and while people and our continued business momentum, we expect our cash priorities to remain on investing behind our five star.
T <expletive> imperatives and supporting strategic extensions.
Now, let's turn to our outlook for fiscal 2022, we now expect net sales growth of approximately 14% to 16% versus fiscal 2021 up from 12% to 14% previously we continue to expect adjusted EBITDA between 66, and a half to 68 million adjusted net income between 36 and <unk>.
Seven and a half million dollars and adjusted EPS of <unk> 65 to 68 cents per diluted share. We expect our fully diluted share count of approximately 55 million shares and our fiscal 2022 tax rate to be approximately 23% to 24%. Let me provide you with more color on our planning assumptions for fiscal 2020.
Two.
Our race topline guidance largely reflects our outperformance in Q2 relative to our expectations.
Looking to the second half we remain.
Mindful of the industry wide container imbalance and the continued elevation in costs as a result.
As Terry mentioned, we're proud of how our team has navigated these logistics to date.
However, it remains a dynamic environment.
And we believe it's prudent to continue to plan for supply chain constraints and elevated costs to impact us into the second half.
As a result.
Even on the higher net sales growth outlook, we are holding our adjusted EBITDA expectations between 66, and a half to $68 million.
In line with last quarter's outlook.
Against this backdrop of global cost pressures, we still expect to deliver healthy growth in adjusted EBITDA up 9% to 11% year over year.
We remain focused on what we can control.
As we've discussed previously we're taking actions to mitigate the impact of some of these costs on our financial performance.
Including through cost savings initiatives and a sharper focus on key areas of our non marketing SG&A spend.
From a cadence standpoint, we expect top line growth to be stronger in Q3 than in Q4.
As a reminder, in Q4, we will be laughing at 24% net sales growth quarter, which was helped in part by stimulus related spending and pipeline sales associate it with the launch of keys sole cure.
As discussed in August while we expect topline growth to continue in Q3, we expect Nielsen tracked channel data to likely show some periods of share losses, given volatility in the base and the lack of our annual holiday program.
As a reminder, we made the decision to forgo our holiday program to prioritize core assortment in the face of the industry wide container imbalance.
Overall, we're quite pleased with our Q2 results and are excited about the opportunities ahead in fiscal 2022.
Our performance over the last 11 quarters, both on an absolute basis and relative to the category demonstrates how our five strategic imperatives are driving results and we remain confident in the long term growth potential for our portfolio of brands.
With that operator, you may open the call to questions.
Yeah.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone if youre using a speakerphone. Please pick up your handset before pressing the keys.
If at any time. Your question has been addressed and you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
And the first question comes from Steph Wissink with Jefferies. Please go ahead.
Thank you good afternoon, everyone. We have two more tactical questions. The first is Mandy if you could just help us on the holiday program can you help us square that up on what might've represented last year. So just from a comparability perspective, and then as you took that out of the plan for the back half or are you.
Putting back in something else that allowed you to kind of keep the sales targets as you had planned them or was that already in the base when you guided initially.
Yes, so I'll take that question Steph for the holiday program just as a reminder, we said last quarter that was about a $6 million net sales impact for us and so if you think about how that translates to retail or what you might see in Nielsen, that's roughly at $12 million impact out there.
It was embedded in our guidance last time around when we mentioned it. So that's why you're not seeing any kind of material change from that perspective.
Okay, Great and then as a follow up we're getting asked just to help quantify shipping and some of the container cost inflation that you're seeing as a percentage of your cost of sales can you give us some scope around how how much of the cost of sales is tied to shipping and logistics.
Yes, so I'll start with a with a more macro view of the cost headwinds that are being carried in our gross margin and so as you know, we're carrying 25% level tariffs and that's been with US now for a couple of years.
We also have the FX impact and we have previously.
Quantify that is up to 200 basis point impact and then we have the ocean.
Right and mixture of airfreight and Theyre all those costs that we're carrying this year overall, if you take into account all of those things that are roughly about 1000 basis point impact of cost headwinds that we're carrying in our gross margin line.
What I feel great about is that even with that that amount of headwind, we're still delivering adjusted EBITDA of 9% to 11% expecting to deliver adjusted EBITDA of 9% to 11% for this year. So.
Alright.
Ah. Thank you. So I wanted to just go back to the bridge of the growth and it says that you had can you break down how much was I know usually you don't but just to give us a perspective of four items and pricing and maybe mix given that you have obviously more of the brands are they carry a higher E. S. P.
As well as if you had any pull forward I would've seen companies like having and retailers demeaning for faster shipment I had of the holidays. So I'm wondering if and I know that your holiday program is relatively small, but I was wondering if there is anything related to that or innovation or distribution that we should be.
Aware of.
Yeah, Hi, Andrea so the sales growth in queue to really pleased with 27% sales growth ahead of our expectations and that was really driven by core momentum behind our portfolio of brands I would say the second thing that drove that is that in September we were able to start to improve upon our.
Fill rates so as that inventory came into our D. C and we were able to get that back out the customers that did also help us in September so I would say, it's really those two factors that drove that grows for us in queue too.
And then and then I think going back to the first question in terms of the pricing how much you realize so far and it's embedded in there and I'm assuming from what are you you have discussed in terms of the tough comparisons in the fourth quarter that the balance of what we've seen the second half will be most mean the.
Third can you kind of give us the an idea if if again you're gonna see this carryover our fulfillment cause you just discuss plus the pricing timing hitting the third quarter and helping the momentum and then potentially having.
Ah Stipp deceleration, but just on the four four is that the way to think.
Yes, that's right as as we mentioned in our prepared remarks, we do expect you three to be a stronger quarter than Q4 and on the pricing front. We said, it's about 100 basis points of benefit to us in the second quarter.
And you know as we look out where we're being prudent on our expectations on the back half given the dynamic environment that we're operating in from a supply chain standpoint, we talked about holidays that is going to impact our Q3 and Q4 to your point Andria, we will be cycling that two.
84% in the base, which was driven by stimulus that were accounting for as well.
Mhm and one last one I'm, sorry, too to squeeze in mangy, but this is super helping keys you have more demand. So obviously, you're prudent because of the moving pieces that we have ahead of us, but if you do have demand do you have the supply do you have the products I remember you having contracted a lot of containers ahead of time.
So was wondering how much of can flax in terms of supply to keep fulfillment. If you know you continue to be a successful as they have been with with sales.
[noise] Hi, Andrea this is trying I'll take that one I would feel great about the work that our operations team has done in terms of ensuring containers about four or five months ago. When made the decision on holiday wearing if we're having a tough time securing containers were worried about our ability to we're able to get all the containers. We want right now is Mandy said the Ark.
Coming in an elevated cost and that has been embedded in our guidance, but overall, we feel good about our ability to meet consumer demand.
Perfect. Thank you very much so personal.
The next question comes from Dara most scene with Morgan Stanley. Please go ahead.
Hey, guys.
I had.
So I'm just looking to follow up on that sort of revenue guidance for the back Yeah. I mean, you guys are swimming.
Flattish tried for trends year over year, obviously, there's a holiday program.
Right, there's there's some risk around.
Shipping in general and product availability that does sound like go roots go further intraquarter.
Got how your inventory levels here, so just you're in order to get a sense. If there's anything else. Besides the holiday program and the potential supply environment. That's really limiting you as you look at the back half of the year, obviously, the Coca Cola for Q4.
But you know, giving you overdeliver substantially in each of the last couple of quarters, but you haven't actually raise back have guidance and I'm. Just wondering if there are other issues that have come up or it's just those discreet factors that we talked about and then secondly on the pricing Commons you know it Sir.
Sounds like you're you're sort of waiting to see if these costs. They hired you know any thoughts on audio please call us or more temporary or or if they sustain as you look out is it more through the holiday season whenever essentially these calls pressures and things should get better after that any thoughts around that would be helpful.
Thanks [laughter].
Perfect. So I'll take the first question just on our revenue growth you know as I look overall on the year. So our physical twenty-two guidance for this year is up 14% to 16% on the net sales standpoint, when I look at that on a two year stack base it's up.
29%, so well above kind of competitors in the industry and something that we feel great about how that checks out across the quarters as you've noted Dara. We do have the absence of the holiday program. This year in Q3, and we will be cycling harder compared to if we get into the queue for outside of that feel great about where our business is in the momentum that we have.
Have behind our brands.
And on your second questions are the on the pricing comments I would say, we're we've embedded into our guidance elevated costs through the balance of this fiscal year.
We'll be taking a look over the next several months to say do we forecast to be to continue past this fiscal year and that'll be part of our evaluation on whether we take additional pricing usually the best time for us to prices during our spring recess. So we're actually evaluating that as we speak but overall, we feel <unk>, Kentucky.
Container imbalances overtime balance so I wanted to take a look containment container costs longterm they tend to come down and if we see something different will certainly factor that into our pricing discussions, but overall I'd say, we've already embedded the cost into the balance of this year.
Great that's very helpful. Thanks.
The next question comes from Erinn Murphy with Piper Sandler. Please go ahead.
Great. Thanks. Good afternoon, just a couple of questions for me personally I need for you on the 27 per cent growth in the quarter could you talk a little bit more about how that broke down south through birth felon and are you already starting to see some of the benefits of the C. B S incremental shop faith, and then secondly, just bigger picture if we took a look.
At both the cosmetic to spell it the skin care category, you mentioned, a little bit more <unk> cosmetic do you see that reverse any time soon is b C kind of accelerated going out again trends and then maybe share a little bit more about what you're seeing and skin care. Thanks. So much.
Alright, Hi, Erin so on the 27% growth in the quarter I would say that was ahead of what you all would have seen from a Nielsen tracked channel standpoint.
And that just really speaks to some of the strength that we're seeing out of international as well as in some of our untracked customers. So we felt great about instead of what we were seeing from a sell through N Q too as well as what we were able to sell in like I mentioned, our ability to kind of impact bill rates in September helped us as well.
So overall feel great about how the quarter came in and.
And we're also seeing some benefit from the Cvs distribution, but that's much smaller on our overall base and so we would expect that to build overtime.
In terms of the category perspective, I'd say on cosmetics and Q2, we've seen a couple of months, where it cosmetics was the overall cosmetics category was above 2019 levels and then through the balance of the quarter and we believe there is some COVID-19 related volatility there whether it be the delta variant or something else that really got in the way of the momentum we were seeing in the <unk>.
Category overall, we're still quite bullish on the cosmetics category, it's an important category for self expression.
The level of innovation, we're putting out as well as what we're seeing from competitors gives us hope that the category trends will improve we'll have to see at what pace. They do improve but overall I think overall.
Very bullish on the category and skin care.
Just as bullish as if not even more so we've seen skiing here hold up quite well throughout the pandemic, which team you see good growth rates the categories of 7% and tracked channels in queue to our businesses up 22% for elephant track channels, and we have great momentum across our entire brand portfolio not only in terms of the efforts were.
Doing on <unk> skin to their educate consumers or innovation, such as a whole rehydration SPF 30 products are doing quite well.
But also on Kiesow care, which went out of 100% skincare as well as well people well people as a pioneer in Queen Beauty was limited previously just to cover cosmetics. We've now entered the biggest segment of clean beauty in skin care. So I feel great about our fans across the portfolio to continue take capital.
Lies on the momentum, we're seeing skincare as well.
Great to hear thanks, so much.
The next question comes from Olivia tall with Raymond James. Please go ahead.
Hi, I'm, sorry, I had a little bit of trouble. So I apologize I got on the call late but I just wanted to understand the guide a little bit better because it seems like the makeup category continues to come back and want to see if you're seeing any time to.
[noise] slowdown necessity with adult ovarian.
We've already seen proceed prestige darker games and some momentum. So is that are impacting your your demand in any way and if so what are you doing to combat that if not.
I guess I'd like to better understand why you assume that the growth momentum slowest so material in the second half of the fiscal year, if you're seeing anything on the horizon that does give me pause.
Or a it has become more challenging to get product complanate appoint b. Thanks.
Yeah, Hi.
Hi, Olivia so I'll take the first part of that question I'll pass it over to trying to give them more color on on the category side, but from pure guidance standpoint, we feel great about the core business momentum that we have as I mentioned earlier, just really on Q3 is going to be the absence of our holiday program that.
We typically have that will be an impact to us in Q3, we talked about 6 million in a net sales impact translating to about 12 million of what you might be from a chat channel standpoint, and then as we go into the queue for starting to cycle stimulus. So in queue for last year, we had a 24% net sales growth quarter.
And that was driven by stimulus and as recycle that.
Yeah, we are expecting to see that.
That pulled back a little bit so.
Otherwise color and the category outlook up at the terrain, Yeah, and I'd say on the color category similar approach, we've taken with just being prudent in terms of not counting on a massive rebound right away. So certainly the category really started taking off base on the innovation in consumer interest then.
That would be a potential upside for us, but we feel our strategies work pretty well if not getting ahead of ourselves and let the consumer momentum carries forward and we'll see if we get some help from the category as well.
Got it and then.
Just on on well people in Kiesow care Uhm, just talk about if you could talk a little bit about the long term opportunity there cause it sounds like you're getting a little bit more distribution.
What what do you think they can can become as a percentage of sales and and sort of the legs that though too you know brands could have going forward.
Sure So I'll I'll take that Olivia.
We feel there is great potential in both brands were still very much in the early innings of growth on both of them and as a reminder, even though well people had been around for over a decade as a pioneer clean beauty part of our thesis in acquiring that brand as we could expand the distribution improve the innovation output and really drive greater consumer relevance to the brand and we.
Very much on that path I think we did a brand recharge last year that we felt really good about in terms of getting more awareness on well people I feel especially great about innovation pipeline, we have particularly our entry into skin care and we are expanding distribution. So the primary distribution where people who previously was target our ability to get into a subset of ultra doors I think is an important.
Sept, there, but again very early days still in terms of what we feel that brand is really capable of as a pioneer in Queen beauty Kiesow care ICM, even more bullish on for the long term and part of that has to do with the level of engagement, we're seeing from Alicia keys herself the level of engagement of the community and again very much early days will only nine months into.
The launch of Kiesow care and feel great about our partnerships with all the beauty with Degloss. The other areas that were at but still I.
I think the other thing that gives me a great deal of confidence on keys sold here is the consumer study that we fielded which showed incredibly high ratings on the quality of the products. The ingredients the packaging incense and really our biggest opportunity and keys sold here is to continue to drive the awareness and trial of the brand and we feel good.
It's kind of the retention once we're able to do that.
Thank you very much I appreciate it best of luck.
Okay.
The next question comes from Linda Bolton Wiser with da Davidson. Please go ahead.
[noise] hi, so you've talked a lot about the pricing already but I was just curious if in terms of the pricing you've already taken.
Was the volume response in terms of volume declines was it pretty much as expected or are there any kind of difference is.
To the pricing versus maybe previously when you had done pricing can you give us a little bit more color on that.
Shortly I will take that so just as background on our pricing our biggest pricing action to date in the U S was in 2019, we took almost a third of our skews.
Significantly and we saw great response on that pricing action, we didn't see nearly the level of unit declines that we had modeled we actually build gross margin in the process. This year, we took us more limited set of skews in the U S. So I'd say, it's pretty modest impact from a pricing standpoint again, we like what we've seen in terms of our unit movement International was where we took a much be.
<unk> level of price increase it almost match the type of price increase we took in the US in 2019 and again, we saw a better than expected unit movement than what we had modeled and it was one of the reasons why the pricing action help deliver 100 basis points of benefit to the gross margin in queue too.
So to the earlier point I feel we do have pricing power, we're always going to balance out with having extraordinary value and over the next couple of months you will evaluate if we need to take additional pricing or not.
Great. Thank you and then.
Just in terms of your category exposures I know that fragrance is not really part of Islip space, but fragrance has been a really big growth area kind of during the pandemic and with the self care trend is that something that you would consider adding to one of your product lines in terms of.
Migrants.
Well I won't talk specific plans, but what I will tell you is our vision for keys. So care is very much a lifestyle of beauty brand in many respects transcend institutional categories of beauty and so our start was in skin care in the last quarter U sauce.
Launch into body care as well and I'll tell you one of the things that consumers are really responding to on keys. So care is just a phenomenal sense that we have on that brand and so definitely has an opportunity longer term I feel to enter the same category the form of which will take we're not revealing this point, but definitely could see something there and then longer term.
Say, probably further out relative to some of the category Adjacencies, we're looking at but certainly for keys. So here I can see it part part of our overall vision.
Great. Thank you very much.
The next question comes from Oliver Chen with Cowan. Please go ahead.
Hi, This is John on for Oliver. Thanks for taking my question just curious about your marketing strategy around the holiday in the fourth quarter. Obviously, you increase marketing at the percentage of failed this year with a glossy or just maybe talk about areas and you're allocating yet then and sort of how your checking your Roy and also just curious if your T N E K.
And marketing spend this year. Thank you.
Sure. It's Joseph so on our marketing strategy Amazing that's one of the things that's really working for us on the last call. We talked about the way we measure the ROI of our marketing Youssou Nielsen's marketing mix, the multi very regression that can really isolate by vehicle. The gross sales per dollar invested that we're seeing and we see very strong re.
Turns through that analysis. In addition, we have platform specific metrics, we take a look at whether it be the total number of user created videos on tick tock. The number of the billions of views or on Twitch and our channel there. The number of followers that we have and how we take a look at what we're doing there. So I feel good about the overall.
All progress that we have in marketing it was one of the reasons and bold enough to take up our marketing levels in our prior guidance and so we feel that.
That.
We're on the right trajectory as we talk to you in the quarter, our marketing as a percent of sales and Q2 or 16% versus 15, the year before well within kind of our range that we provided within our guidance and then in terms of specific strategy for the holiday I'd say you to see a continuation of how do we do unexpected things that really drives greater consumer engagement.
Even things like we talking are prepared remarks, and jumping on that cultural moment with jeopardy, when Matt Aledo got the answer wrong, creating friends with him the level of Buzz, we got and continuing to do that so I would say.
Less holidays specific even though if you go on Elf cosmetics dot com <unk> Dot com right now you can see some of our holiday efforts, there and more about our overall success that we've had a really driving strong consumer engagement.
Alright, thank you so much.
The next question comes from Wendy Nicholson with Citigroup. Please go ahead.
Hi can you go back did you say how much your uhm e-commerce business or your online business direct to consumer business grew in the quarter.
We didn't we didn't give a specific number but we did say it's up triple digits on a two year sat basis.
Okay, and and my question has to do with I. If I go on al cosmetics Dot com. It does look like there is a fair amount of holiday promotion on the website and that's great, but I'm wondering if any of your retailers kind of look at that and say gosh, you're not throw in a holiday promotion with us, but youre doing it direct.
Consumer is there any any conflict there obviously, you're marketshare, so great in brick and mortar store I can't believe they're not upset but I'm just wondering the choice to do holiday promotions direct to consumer but not in store if you will.
So when you there is a limited amount of holiday that we have.
Online and with select retailers. If you went into a target store right now you'll see as part of their corporate program.
Alpha represented in their holiday program so.
So there is some holiday what we refer to as our main holiday and caps that we used to do we forego them. When we made our decision on supply constraints. So, but we did want to continue maybe to the.
For prior question, we still want to engage consumers. During this time and so my advice would be if you see of holiday kit hurry up and buy it soon visit will sell out before the end of end of the season here and but and then from a retail standpoint, we have great relationships I think one of the things the retailers really appreciated where we were one of the first one.
<unk> sat foresaw the container imbalance and proactively make those decisions and a time that allowed them to react versus what they're facing right now with a number of other players.
Maybe falling short in terms of expectations and so we have had no conflict. There are retailers understand that elf cosmetics dot com and our digital efforts are what she will the overall business model and so driving strong consumer engagement from there and then some limited presence in some of their stores.
Proven to be a winning formula fair.
Fair enough Okay. It sounds great and then and then on the international strategy. It's interesting to me that you called that out as sort of a massive amount of white space and it's interesting that keys soul care looks like it's really playing a big part in that bond between two class and I think it's harrods.
And I'm wondering kind of do you still think that the Elf brand has huge wide space internationally or is it really much more just keys, all care and what's that how do you think about trying maybe pacing that growth I agreed huge amount of white space just not sure when you get torn inflection point, where it becomes really meaning.
Paul part of the business for Ya.
Yeah, So we absolutely see.
International is meaningful white space for the else brand not only keys sold care and eventually well people, but al specifically in our strategy has really been to take a delivered approach and make sure that we nurtured the right market in the right way. So the UK being our primary example, we're starting online than into superdrug into.
Boots now both customers are expanding the grand even further.
Is a good success model for us to take to other countries and we feel the same model can work to move seen the same thing that we did when we went into Canada originally as target before the shut down their operations. There then to Walmart and now with Superdrug.
Superdrug in in in Canada, we've seen great momentum. So I think we would follow a similar approach and other countries, which is established with the leading retailer and online and then rolled out from there.
Terrific sounds great. Thanks.
Okay.
The next question.
<unk> comes from Mark is Strachan with Stifel. Please go ahead.
Okay, Thanks and afternoon everyone.
Oh.
Guess just going back to.
One of the other questions and some some previous commentary about the stimulus effect on the category cause I'm curious any sort of thoughts on her.
How beneficial it was I'm thinking more broader beauty, but.
With ever in whatever categories could be makeup.
<unk> whatever that had a broader bigger.
Impact on U S beauty category trends, so how do you think about.
A what it was if you have any thoughts on that B.
How then do you think about its impact on your business here, you obviously gave guidance around.
Four Q, but you've been sort of a bigger picture, okay. Your fiscal year, and and Ah March not asking for guidance, but just directionally any sort of impact or how do we think about that on the business and the next kind of an X 12 months.
Sure. So mark we track what we feel the impact of stimulus was and if you take a look at our.
Last couple of quarters, we talked about Q4 of last fiscal year being up 24% Q1 of this year was up 50% those numbers would definitely aided by stimulus we could see kind of wind those levels came in how it impacted our business for the category overall, we definitely think stimulus helped but it was offset by.
Some of the restrictions related to the pandemic and so it might not be as clear to see from the overall category standpoint, but we definitely know for US. It was was one of the major drivers of those two quarters in terms of what we are able to see.
And then as we go forward I think we're just being careful of you had.
Particularly that third wave of stimulus was by far the biggest increase in disposable income for a lot of consumers and so just being cautious to say those dollars are not going to be there. So let's not get ahead of ourselves, even though we feel really great about the business and the momentum that we're seeing.
Got it Okay. That's that's helpful. And then just lastly, thinking about the skin care business.
Broadly.
How how.
How much distribution does that.
Product have on shelf, how much of that is.
Separate from the core Elf business and.
Maybe thinking about it in a different way as well is the market your bigger.
As a percentage of your online business for the brand versus the brick and mortar I assume it is but then maybe that helps us kind of get a sense of where it could go at least near to medium term.
Sure. So I would say on skin care the market share is definitely bigger online. So if I take a look at El cosmetic stuff online Amazon skin care represents almost 25% of our business on both those sites.
In national retailers or overall business, it's around 10% a little bit less than 10%. So we have a long way to go and a lot of it is related to as we continue to pick up more shelf space, our ability to put more of our skin care assortment in to do more with skin care and again across all three brands. So one.
One of the things that gives me confidence in our skincare strategies, just the level of off tape, we've seen online behind skincare and being able to get more distribution and.
And just to follow up on that do you think then that evolved so maybe it doesn't quite get the 25% of.
Brick and mortar distribution, but but does that get bigger than where we are today and is that one of the arguments that you can make to the retailers about adding shelf space.
It's very much part of our conversation with retailers. They see the momentum that we have in skin care, even if the last quarter of 22% versus a category that was up seven and then along with the innovation that we have coming on skin care, it's definitely part of our our discussions in terms of getting more shelf space not only for.
Cosmetics, but also for health skin and then in terms of the nature of that shelf space. It varies by retailer at target, where we have our largest sets were able to integrate skin here into our overall set and we like that approach quite a bit and allows the cross shopping across categories of consumer and ultra beauty, we have a few shelves within their skincare set.
And and.
I think at some point when we are able to take sufficient space at all to beauty will probably make the play to kind of integrate that as well, but right now it's in both spots.
Got it thank you.
The next question comes from Roop S. Perique with Oppenheimer. Please go ahead.
Good afternoon, and thanks for taking my question. Most of my questions are answered, but I just wanted to go back me I need your comments on gross margins. So you did indicate that you expect them to be down versus the prior. So are just curious if you can just talk about side of Brooklyn. It takes for the balance of your on the gross margin from.
Yeah. So as I mentioned in my prepared remarks gross margin for Q2 with a little bit better than we expected and add largely thing that comes down to the timing of when we're going to see some of these costs hit our P&L. So.
For the first half of the year gross margin was down roughly $2 50 to 60 basis points I think we expect to see that on the year still targeting a tech see that type of decrease as we look out onto the balance of the year. So.
Again, it's going to be driven by those higher ocean freight costs.
The FX impact as we've talked with some slight offset with pricing as we talked about that still stand that 250 basis points kind of persist for the balance of the year.
Okay, great, but maybe just one follow up or just just just going up from March prior questions. So you. What's your first <unk> first off a beer sales were up almost 50 per cent onto your basis. So it sounds like Jimmy with was clearly had a positive impact at least on it was on the first half of the year. If you look at your your delivery and is there anything else you know what I call cause for concern.
Maybe locked out.
These quarters next year, whether pent up demand or anything else and not be so concerned you. When you go to the office next year.
No I mean as I mentioned earlier, we felt great about our core business momentum that we're seeing across all of our brands and so.
Save for cycling those large numbers as we get up against the queue for or into a queue. One next year I mean, our core business fundamentals still remain intact and quite strong.
Okay, great. Thank you.
This concludes our question and answer session I would like to turn the conference back over to the chairman and CEO touring I mean for any closing remarks.
Well, thank you for joining us today, so grateful for our incredible team at Elf for again delivering outstanding results are products are resonating or brown momentum and category outperformance is strong and we believe continued execution of our five strategic imperatives will continue to fuel our ability to when we look forward to seeing some of you at our upcoming investor meetings and <unk>.
<unk> with you in February well discuss our third 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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