Q3 2022 elf Beauty Inc Earnings Call
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Good afternoon, and welcome to the <unk> beauty third quarter fiscal 2022 earnings conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the star key followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad to withdraw your question. Please press Star then two.
Please note this event is being recorded.
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Thank you for joining us to discuss <unk> third quarter fiscal 2022 results.
Melinda freight head of corporate communications with me, a terrain amine chairman and Chief Executive Officer, and Mandy fields, Senior Vice President and Chief Financial Officer.
We encourage you to tune into our webcast presentation for the best viewing experience, which you can access on our website at investor kind of beauty dotcom since many of our remarks contain forward looking statements. Please refer to our earnings release and reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward.
Statements.
In addition, the company's presentation today includes information presented on a non-GAAP basis.
Our earnings release contains reconciliations of the differences between the non-GAAP presentation and the most directly comparable GAAP measure with that let me turn the webcast over to Trey.
Thank you Melinda and good afternoon, everyone.
Today, we will discuss the drivers of our Q3 results and our rates fiscal 2022 guidance.
I am proud of the F beauty team for achieving our 12th consecutive quarter of net sales growth.
We delivered Q3 net sales of $98 million up 11% versus a year ago and 20% on a two year stack basis.
Adjusted EBITDA of $22 million was up 18% versus prior year.
We delivered these results with a significantly smaller holiday program.
As a reminder, we proactively scaled back our holiday program to prioritize container capacity for our core products, which continue to be in high demand.
With our continued momentum we are raising our full year guidance, which Mandy will discuss.
Our innovation.
Digitally led strategy core value proposition and ability to adapt at El speed continue to fuel our performance.
In Q3, Alf had five 7% market share up 86 basis points on a two year stack.
For calendar year 2021, we were the only top five color cosmetics brand to grow share above pre pandemic levels by a wide margin.
Our relentless 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.
This approach has driven strong ROI and business momentum.
This quarter, we created our first ever Tictoc native movie to celebrate the holiday season.
Big mood big helping city recap some of the biggest tictoc trends of the year with an innovative twist.
The movie garnered 400 million press impressions over 32 million campaign views and built upon our many firsts on the platform.
We also joined forces with enthusiast gaming to find the next gaming superstar the competition called rising stars seeks up and coming creators from colleges across North America, and it's the first brand to co create the series. This builds upon our track record of first while also supporting our mission of empowering others to reach for the stars.
Our brand building efforts continued to gain recognition Tictoc recently named <unk> to their culture drivers list for 2021 for a game or it's got talent campaign.
We are among 14 other brands that Tictoc highlights is doing the best most engaging and entertaining work on the platform building upon our entertainment chops. We recently teamed up with Tic Toc and American Idol creator Simon Fuller to find the next Big Music group together, we launched a search culminating in the <unk>.
One of the first of its kind pop group called the future X. We're working side by side with Tic Toc vibrant creator universe by a hashtag challenge of search for makeup artists to work with the group.
This collaboration represents another moment, where else is leading to bring together two things our community loves beauty and music.
Key sole care, our groundbreaking lifestyle beauty brand with Alicia Keys garnered 7 billion Global press impressions this quarter.
In November Alicia dropped a much anticipated eighth album Keys.
T cell care product offerings were prominently featured as Alicia promoted the album and held special one night only concert events.
We also celebrated the album by having it available to download on Keystone care Dot com.
The buzzwords timely as we recently celebrated the one year anniversary of key cell care Dot com.
We are incredibly proud of what we're building with this brand which has been recognized across the industry with over 20 awards this past year.
Our second strategic imperative is a major step up in digital are digitally led strategy continues to serve us well with our digital consumption trends up triple digits on a two year stack.
We continue to see a channel shift between digital and brick and mortar in Q3 in line with our expectations digital channels drove 14% of our business in Q3 as compared to 16% a year ago and 10% two years ago, our follower base across social and digital platforms is now over 12 million, helping to fuel our growth.
Cosmetics dot com approximately 50% of our shoppers in Q3 were new consumers.
Our beauty squad loyalty program now has over $2 7 million members up over 20% year over year.
Beauty squad is an integral source of first party data and we'll continue to look for ways to enhance the consumer experience.
Our T cell care loyalty program called sole care rewards continues to grow.
The loyalty members made up 45% of sales this quarter on key Silkier Dot com.
We also developed a new first in beauty digital gifting experience on the site for the holidays gift givers, who are able to create and send a personalized video to their loved ones, while gifting them kiesel care offerings.
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Our third strategic imperative is to lead innovation.
Our superpowers centered on our ability to deliver 100% cruelty free premium quality beauty products at accessible price points with broad appeal.
You need to resonate with consumers.
L cosmetics, our ongoing success in our core segments brushes primers.
Sealers 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.
We are proud of our newest Holy Grail innovations, which launched online at the end of Q3, and we will be hitting retail shelves in the coming weeks are power grip primary builds upon our strength in the primary category.
It's jawdropping value of $10 versus the prestige equivalent at $34 already propelled it to become the number one selling product on health cosmetics dot com and a viral sensation across social media.
Noel power grid, Brian actually better than the award winning milk eggs or grid I'm going to let you know $10 compared to the Wap and $34 for this bad Boy and is already has five star rating. We continue to build upon the success of our Camel franchise. We recently launched the Camel powder Foundation.
30 shades pack.
Packaging asleep compact with the mirror and sponge.
And price at $11 versus prestige equivalent at $38. The powder Foundation is on its way to become a top selling Holy Grail. So this is the fact that they basically and it comes with us and the bank alright.
Thanks, Brian .
Building upon our strength and browse and tools, we recently launched brow lift in an accompanying brow lift applicator priced at $6 versus the prestige equivalent at $23. The browser features an extreme hold clear lacks formula that lifts and sculpts browse for our feathered effect. This item quickly sold out online in over 15.
<unk> thousand and <unk> signed up for notify me anxiously awaiting its return. So some of you have noticed that I changed my brows up and let me tell you. This product is a literal game changer and this is last sponsored I truly loved this product.
This productivity a few days ago I visit one once and I am obsessed is the Alf brow lift out and it is only $6 $6, Okay, and I'm talking I'm going to review this for you guys.
So they also came out with rod lift applicator to go along with it and I'm going to be using this as well I feel like it's a Duke for the answer Jay Brown Jo Ann just talk cheaper our newest lip products are attracting consumers looking for a color moment.
Our new glossy lips stains are there to meet the call price at just $6 versus the prestige equivalent at $38. A feature a unique glossy disdain finish that is long wearing and won't transfer business at target when icl's, just once that a glossy lipstein and.
And let's go home and try this itself is just laying the game baby. They have they do lift fill a liner came out with that before I got the lips hilla, but whatever and then the new glass you live stage lets do it we remain bullish on the color category.
These four Holy Grail launches are generating incredible buzz across social platforms evenly for being widely available at our retailers.
Skincare remains a major focus across our brand portfolio in Q3 F skin consumption was up 29% compared to a category that was up 9% propelling L skin into the top 20 for the first time ever our recently launched pure skin line is a three part regimen designed to meet our consumers' daily needs.
<unk> developed clean vegan and cruelty free.
Pure skin nurses are skin with ingredients like oat milk and nice minimized the pure skin line initially sold out on El cosmetics Dot com.
We also launched our well people skincare collection online this quarter.
Skincare is the largest category in clean beauty and we're excited to start with five plant powered germ developed clean skincare products.
The line will also be available in Ulta beauty and target stores. This spring.
We're proud of the progress, we're making with well people in color as well with our top selling products now available in more inclusive shade ranges, our biotech moisturizers and bio stick foundations, both extended to <unk> 14 shades.
In our bio <unk> sealers available in 'twenty shapes.
We plan to further extend the well people shade ranges to bring plant powered high performance clean products to a wider audience.
Turning to Keystone care, we innovated further in the body category three new offerings to appraise your body.
Melting body bomb mine clearing body, Polish and energizing dry body brush our core body care products continue to be named to coveted Beauty Award list. This quarter, we recognized by pop sugar and refinery 29 awards, including best in celebrity beauty for a rich nourishing body cream and beauty Innovator award for a secret body oil.
Our fourth strategic imperative is driving productivity and space expansion with our retail partners productivity.
<unk> was strong this quarter with consumption ahead of our expectations consumers bought more of our core products. During the holiday season in lieu of our traditional holiday kits were also quite pleased with our spring resets, which will be rolling out in the coming weeks. We believe our innovation is strong and our visual merchandising is more impactful than ever.
We continue to see shelf space opportunities as previously reported were pleased with the space expansion, we secured with Cvs in fall of 2021, and Walmart in spring 2022, and a subset of their doors internationally, we're expanding our shelf space of boots and superdrug in the U K. This spring.
International represents major white space that just 11% of our business today, our performance in the U K gives us confidence in further geographic expansion.
The latest Nielsen data ranked <unk> number eight up from number 12 last year and continues to be the only top 10 brand to post growth.
We continue to drive differentiation with our retail partners inspired by the success of last year's meant milk collection and after pulling our community for what they wanted next we launched cookies and dreams. This is a indulgent limited edition 13 piece collection, featuring cosmetics and skincare products cookies and dreams will be available exclusively at Walmart in the U S.
At Superdrug in the U K and in selected glass markets in Europe .
T cell carriers, elevating 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 the U K with cult beauty, and H beauty and in eight countries across Western Europe with do glass.
We're excited to announce our newest retail partner Sephora, we'll be launching kiesel carats for Canada online and in stores. This spring. This marks F. Beauty's first brand entry into Sephora. We're also pleased that while people will gain its first in line placement in a subset of Ulta beauty stores in spring 2022.
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're facing a global container imbalance in port congestion, which are slowing shipments and increasing our transportation costs I'm proud of the health beauty team for how we've navigated these challenges our op.
<unk> team is executing with excellence managing skus at the store level to sustaining stock right around 95%.
Given the uncertainty around how long the supply chain challenges will persist and the inflationary environment.
We made the decision to increase prices on the majority of our portfolio effective mid March.
These price increases will impact approximately two thirds of the F cosmetics S skus as well as certain items within key so care and well people.
We balanced our approach between offsetting elevated costs.
And maintaining our value proposition with consumers.
While this round of pricing is broader than previous rounds are opening price points and Alf remain unchanged, enabling us to continue to deliver high quality products at an extraordinary value.
Before I turn the call over to Mandy.
I want to give an update on our clean and sustainability efforts.
Both well people in key Socal launched is clean and sustainably minded brands over the past several months our team reformulated over 350 Skus on the health brand.
There are now over 650 ingredients on our do not use list.
While it take a number of months for these new formulations to rollout, we're excited to add clean to our existing superpowers.
With Alf consumers can have premium quality beauty products at accessible price points that are clean vegan and cruelty free.
On the sustainability front, we reached another milestone this quarter with project Unicorn, eliminating more than 1 million pounds of packaging materials since launch.
Project Unicorn streamline packaging for 500 skus across multiple categories.
We are evolving project Unicorn to project Green Unicorn with a focused eliminate even more packaging adopt friendlier environmental practices and explore sustainable materials.
Project Greening of corn as a long term initiative.
Our clean and sustainable practices will continue to rise and importance and I'm glad that we're positioning F beauty to excel in this area.
I'll now turn the call over to Mandy.
Thank you to ring.
I'm pleased to share the highlights of our strong third quarter results and raised fiscal 2022 guidance.
We delivered Q3 net sales of $98 million up 11% versus prior year and up 20% on a two year stack driven by strength in our national and international retailers.
Consumption was strong this quarter as well up 17% year over year and up 15% on a two year stack basis.
This exceeded our expectations and is an encouraging trend as we head into the fourth quarter.
Gross margin of 66% was up approximately 100 basis points compared to prior year, we saw gross margin benefits from cost savings and margin accretive mix, specifically from consumers switching away from holiday kits into higher margin core products.
We also benefited from the price increases we implemented on a subset of our Skus in May. These gross margin benefits were partially offset by FX and elevated transportation costs, which flowed through the P&L at a lesser rate than previously expected given the rate of flow through on these freight costs and overall favorable mix we now.
Gross margin for the back half to come in flat to last year on an adjusted basis SG&A as a percentage of sales was 50% up approximately 70 basis points versus prior year. The increase was mainly driven by investments in marketing and digital marketing and digital investment for the quarter was approximately 15% of net sales.
<unk> slightly ahead of Q3 last year.
We continue to expect marketing and digital to come in at 15% to 17% of net sales for the year.
Q3, adjusted EBITDA was $22 million and adjusted EBITDA margin was approximately 22% of net sales.
Net income was $13 million or 24 cents per diluted share compared to $12 million or 22 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 $33 million in cash on hand, compared to a cash balance of $35 million a year ago.
Our current cash balance reflects our complete pay down of our revolving credit facility, reducing our overall debt by $13 million in the quarter.
Our ending inventory balance was $85 million.
In line with our expectations as compared to $69 million a year ago.
As a reminder, last quarter, we spoke about carrying higher inventory levels due to the combination of longer lead times.
Transportation costs.
The addition of Keystone care and well people <unk>.
And our continued business momentum.
We expect our cash priorities to remain on investing behind our five strategic imperatives and supporting strategic extensions.
Now, let's turn to our fiscal 2022 guidance. We now expect net sales growth of approximately 17% to 19% versus fiscal 2021 up from 14% to 16% previously we expect adjusted EBITDA between 70 and $72 million.
Net income between 40 and $42 million and adjusted EPS of <unk> 73 to 76 cents per diluted share.
We still expect a fully diluted share count of approximately 55 million shares.
And our fiscal 2022 adjusted tax rate to be approximately 22% to 23%.
Our raised topline guidance largely reflects our outperformance in Q3 relative to our expectations and an improved outlook for Q4.
<unk> mentioned, our business momentum remained strong throughout Q3 up 20% on a two year stack basis, despite not having most of our holiday program.
We expect Q4 to look similar to Q3 on a two year stack basis at approximately 23% growth.
As a reminder, in Q4 and into Q1 of next fiscal year, we will be lapping the largest round of stimulus related spending we've seen to date. This has implications on our net sales as I just noted as well as what Youll see in the Nielsen data in the four weeks ending March and April of 2020.
One we posted 40%.
52% growth respectively in tracked channels and we expect cycling these numbers to cause volatility in Nielsen data during those periods. Therefore, we're anchoring on a two year stack comparison to better capture trends, we remain mindful of the industry wide container imbalance and the continued elevation in <unk>.
As a result.
We're proud of how our team has navigated these logistics to date and it remains a dynamic environment.
That said given our sales momentum we are raising our adjusted EBITDA expectations to $70 million to $72 million up 15% to 18% year over year.
As we discussed earlier in the call, we're taking pricing actions next month to mitigate the impact of elevated shipping cost and inflationary pressures on our financial performance.
Which we believe will help us as we enter fiscal 2023.
We plan to provide more color on the expected impact of these pricing actions when we provide our fiscal 2023 guidance in may they should allow time for us to better assess consumer response as it will take a few weeks for our retailers to reflect pricing in the market.
Overall, we're very pleased with our Q3 results and are excited about the opportunities ahead in fiscal 2023.
Our performance over the last 12 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.
To begin the question and answer session.
To ask a question you May press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble our roster.
Our first question is from Andrea Teixeira with Jpmorgan. Please go ahead.
Thank you and good afternoon, and congrats on your quarter.
On innovation and distribution.
Have a question to Taronga and another one two mindy first to rank them.
On the queue, so care entrancing support our Canada again, congrats on that is that a plan.
To expand into the U S and Europe forgiven, obviously air Lease's strong internationally falling and informing the it's obviously great to see you raised guidance.
Oh for the top line, but it doesn't flow enjoyed the dining pass and of course, we all appreciate what's happening in the cost pressures in labor and distribution.
Is this a function of these costs are a timing of marketing or just being more conservative given the moving pieces I had for you. Thank you.
Good afternoon, Andrea on your question on key so care, we're really pleased with the progress on the brand, including entering Sephora, Canada, we have high hopes for our launch in Sephora, Canada, and we definitely see Sephora U S. As a potential future partner, we're still as a reminder, we are still in the exclusivity period with Ulta beauty in the U S. So we're starting with.
So for Canada, and I think the prospects of additional distribution on keys are quite bright, particularly given the level of engagement, we're seeing with that brand.
Yeah, and then to answer your question Andre did you have a follow up there Andrea and Keith No no no. It's just I was just saying that the I would just follow up on him.
If I may thank you Randy.
And shrunk the they're well people entrance on on Alt a is that a separate.
Shelf film Pro-morals I'm, assuming it is because it's mostly skin and it's going to be the side by side 12 itself or it's going to be a separate display.
Yes.
Ultra distribution on well people is incremental to els and in a different part of their store.
Well people has been part of the conscious beauty program within Ulta as a separate kind of dedicated merchandising vehicles. This is our first in line placement within a subset of the Ulta doors and again, we're quite excited about that as well given the momentum that we have on well people after our brand our rebranding as well as innovation.
Graham we have on that brand.
Perfect. Thank you.
And then your question on the raised guidance and the flow through on EBIT down EPS. So essentially we've taken our guidance up from 14% to 16% on the top line up to 17% to 19% and that's roughly $9 million incremental on the top line and on EBITDA, we have raised our guidance from 66.
5% to 68 up to 70 to 72, so $4 million on the top and EBITDA as well our Q3 beat by roughly four and a half 5 million and so we are flowing through most of that.
To the full year, so we feel really great about our EBITDA guidance actually translates to 15% to 18% growth on the year, even with the cost headwinds that we're seeing so I'm really proud of that EBITDA expectation.
Mhm and then the older exclusive when it runs out for you I'm just sorry for going back to that is that an exclusivity that may run out anytime.
It will run out at a certain point, obviously, we continue to just Gus Kiesow care with Alta they've been a terrific partner and supporter as we launched the brand in the U S with Ulta beauty and so I think that'll be an ongoing conversation, but at some point that exclusivity will run out and we will evaluate whether we extend it or whether we continue to expand distribution.
<unk>.
Okay. That's perfect. Thank you both I'll pass it on.
The next question is from Steph Wissink with Jefferies. Please go ahead.
Thank you good afternoon, everyone. We had two follow up questions as well the first maybe trying as best for you. This is on pricing just curious your comments on price gaps to prestige kind of being maintained even with your plan mid March price update can you just share a little bit about how you're thinking about that gap to prestige pricing and then also on space gains I'm wondering if.
You can quantify or help us think through what the gains in the domestic market with Cvs and Walmart and internationally any quantification around how the how much those might benefit 2022 calendar year. Thank you.
Hi, Steph so on the pricing actions, we are using a very similar approach that we used in 2019, which proved quite successful where we've really gone SKU by SKU and really taken a look at the Skus that we have the most pricing power on and when you take a look at a lot of our range comparable product is a prestige product so.
I'll give you. An example of a couple of examples of things, we just launched our power grid primer, which I talked on the call is already our top selling new item, we're actually top selling item period, Enel cosmetics dot com that's priced at $10. The comparable prestige item is $34 is still quite a big gap there as our.
Many of our other core Holy Grail. So our approach is taking many of those products up $1. Each in price equally important we are not taking pricing up on many of our opening price point items. So the ones that we have the most extraordinary value on many of our $2. Three dollar for dollar items remain at that price point. So we feel that's.
Strategy is much better than I would call. It a peanut butter approach into a general price increase and it allows us really focused on where we feel we have pricing power, while maintaining that strong value equation and we saw great things after our 2019 pricing, even though more limited pricing we took back.
Back in 2021 in the U S with broader pricing in international also did quite well aiding our gross margins. So.
We always are cautious with pricing given the extraordinary value. We have we feel we are well positioned for the pricing we're going to take in mid March.
And then on your second one on the space gains, we're not we're not quantifying the percent space gains, but what I will tell you to give you a little bit more color on their Cvs space gain that we had in a subset of their doors, we went from a three foot and cap gondola.
Six and 10 fluid of in line space, So a pretty sizable increase in space and we've been really pleased with the productivity of that space gains. So I think it bodes well for future gains within Cvs Walmart is currently being set right now in a subset of their doors as part of their spring resets and again many of those sets went to eight feet of space within.
Walmart and then superdrug in boots Bose it had a pretty good continual increase in space and so I think beyond kind of.
Building out full chain.
We're also seeing pretty sizable space gains there as well so we haven't quantified the percent of our sales will perhaps give more color on that when we give FY 'twenty three guidance in may, but what I will tell you. Our first focus is always going to be on our productivity. The space that we currently have making that work harder and we've got a really good track.
Quickly with product with project now Green Unicorn being able to add that I'm, particularly excited about our spring sets that are being set right now.
Yes.
Thank you very helpful.
Yeah.
The next question is from Derek most most N N from Morgan Stanley . Please go ahead.
Hey, guys good afternoon.
Good afternoon.
Can you spend some time discussing cosmetics category growth trends in calendar Q4, and then perhaps just a bit of update on category growth. So far this fiscal year.
Any thoughts around if there is any risk to category growth.
From weaker consumer spending perhaps is that fiscal support and stimulus benefits fade.
And also beyond the category, maybe potential impact on <unk>, if we do see weaker consumer spending here.
So Dara I remain very bullish on the category I would say in Q4, we saw mixed results on the category. We had six weeks, where the category was above pre pandemic levels six weeks, where it was below <unk> levels, but the overall trajectory in terms of the category is definitely more positive and we've seen that in consumer.
Behavior, even when you look at the sub category level.
ZIP is having a moment right now as consumers seek more color for Els, specifically, we're seeing strength across all of our core segment. So I talked about the five segments, where we have the number one or two position, we're growing sales and share in all five of those segments as well as within skin care as I mentioned, our skin care consumption for El skin for the quarter was up.
29% versus a category that was plus nine so I like what I'm seeing from a category standpoint in terms of the relationship of consumer spending, particularly kind of inflationary environment I feel we're well positioned within that I mean, I think we've proven that over the last three years growing 12 consecutive quarters, regardless of where the category was.
And I'm, feeling really quite bullish on our business even relative to the category, particularly given I think we have a much richer portfolio now.
With not only Els Els skin, well people key sole care and then even better presence between color cosmetics, and skincare, which continues to be a major white space opportunity for us.
Great and then on supply chain can you give us a bit of update there. If you were able to fully service demand in the quarter, and where you stand and any forward thoughts.
We continue to see strong consumer demand going forward in terms of your ability to supply that demand.
Yes, I feel great about what we were able to do in the quarter and as we look forward I mean, we were able to maintain 95% in stocks.
A lot of that had to do with the proactive decisions. We made earlier in the year kind of foregoing a lot of our holiday kits for our core items proved to be a very good decision. We saw migration from kits to our core products, which also aided gross margins, we've talked before taking up our inventory levels, which really gave us that installation on the longer lead times.
What we're seeing so I feel better about our supply situation now than I have at any time during our fiscal year and I feel it will continue to get better now we're still seeing longer lead times and normal volatility that I think others are experiencing right now, but a great deal of confidence of our ability to continue to meet the demand that we have which has been quite strong.
<unk>.
Great. Thanks.
The next question is from Olivia Tong with Raymond James. Please go ahead.
Great. Thank you.
First question is just around helping US understand you know if you could give a finer point on what drove the revenue upside this quarter and the sustainability of that over the next few quarters maybe.
Maybe if you could give us a range of an idea on the range of price increases Youre planning to take and if you've seen any impact from omicron, whether the January sales or costs and your ability to drive efficiencies.
So I'll tell I'll start Olivia so on the revenue upside in the quarter as we talked.
Really Q3 exceeded our expectations on on the consumption side of the equation and really solid consumer shifting from our holiday kits, which we had a very scaled back program this year into our core product.
That that core business momentum has really improved our expectations for Q4 as well so implied in our guidance is a better outlook on Q4 as well.
Still both quarters, you know second half is going to be very strong for us we expect from a two year stack basis as well. So we do think that those that trend is sustainable.
Evidenced by taking our guidance up to 19% on the top end for the year.
In terms of the price increases so.
This round of price increases that we're taking in March it covers about two thirds of our portfolio.
And it also includes a portion of keys and while people are in that as well so it's a.
Pretty broad price increase, but as Ray mentioned earlier really balanced that with wanting to maintain the value proposition for our consumers. So we're not touching our opening price points and really want to make sure that we say.
<unk> continued to deliver that value proposition for our consumers in terms of omicron I would say that's hard to parse out from the data given all the moving parts I think we saw more of an impact from Delta earlier on versus what we're seeing now on the ground.
And then I would say one of the other things that gives us a lot of confidence in the business is a strength of our spring innovation.
It bodes well for what Youre going to continue to see from a consumption trend standpoint, I mentioned the power grid primer, particularly excited about our building on our camel franchise with our camera foundations, even as lip is having a moment right now our glossy lips stains all of them are phenomenal values relative to prestige equivalent.
As well as our pure skin line and so we've seen really good results on our own website and are really hopeful as a hit spring sets now you will see some volatility in the Nielsen data as we said the stimulus driven kind of consumption that we saw in March and April was quite high.
So there might be some noise in the Nielsen data, but overall consumption trends are actually stronger than what we expected for Q3, and I think bode well for the rest of our fiscal year.
Thanks, that's helpful.
And then.
Quite frankly, given how strong the December quarter was does this in any way change your view longer term on how to run holiday in future years, how to run promotions the.
Magnitude or extent that you have to do or that you want to do kits and other promotion type.
Products, just on a longer term basis.
Yes, I'd say longer term, we're really pleased with what we saw in Q3. This year and I think we will carry forward those learnings into future holiday programs and the nature of that is we will still have some holiday kits. They definitely have a role and there is consumer excitement, particularly as we're able to engage them online and with some of our key retailers but.
A much bigger focus on our core products those products come at a better gross margin, we see consumers really gravitated towards them and so I think that will be our or at least for the time being our plan for the future is much more focused on our core with some limited holiday kits to drive excitement.
Great. Thank you.
The next question is from Bill Chapell, which was securities. Please go ahead.
Thanks, Good afternoon.
Good afternoon Bill.
Just first.
First question on <unk>, maybe a little girl we people.
We're two years into that that deal and just trying to understand.
<unk>.
What you've learned with whats expanded from here and how it looks in terms of future M&A would you continue to look for stuff that size or would you like a bigger platform just kind of kind of learnings 24 months and I think that's right.
Yeah, well. Thanks, Bill, we're really pleased with our acquisition of well people. We acquired the brand really the thesis there was it was a real pioneer in plant powered clean beauty and we felt we could add a lot of value to that brand both with the innovation platform, we have certainly our distribution footprint and our ability.
And from a marketing standpoint, and we very much are kind of executed against that plan. We did a rebranding of well people, it's almost a completely new brands from a consumer presentation standpoint, we really.
Energize the innovation program getting well people into skincare and we're seeing really good momentum and in addition, well people brought to US was real capability in clean beauty.
<unk> people came one of the co founders of all people with Dr. Rene Snyder a board certified dermatologist. She was instrumental with our innovation team to launch <unk> as a clean brand re platforming well people gave us a lot of knowledge where in the last six months, we reformulate over 350 Skus on the <unk> brand, where it's all about.
Our formulations are now clean.
So you will take a few months rollout, but we feel great progress we got both in terms of what we could do for well people and the knowledge. We learned in terms of future M&A I would say we continue to be interested in <unk>.
They are brands that we can bring onto the platform under a similar construct of being able to bring capabilities into the company that we don't have as well as leverage the incredible platform we've created here.
As a scale I would say well people was intentionally small when we did it is our first acquisition. We're highly disciplined we wanted to make sure. We can do the integration and get the plan going I'd say future.
<unk>, we would look.
Two for them to be a bit larger, but we're highly disciplined youll see in the notes as you take a look at some of the adjustments there were some M&A costs in Q3.
It was a target we looked at but we did not submit a final bids. So we remain highly disciplined in terms of what we look at and I'd say, the things that appeal to us or other high growth brands not only on the top line, but also on the bottom line, we have a great profile as a company in terms of being able to deliver both top and bottom line.
So any potential acquisition target to have that and then again something that would complement our existing portfolio. We feel great about our portfolio. That's our first priority, but either in an adjacent category or something they are bringing a different capability of the company I would say we remain open to that but we will remain disciplined and taking a look at potential targets.
No. Thanks for that color and then just back on supply chain I mean, now that we're through the holidays and seeing that you get shipped most from Asia do you feel like most of the supply chain risk is behind you.
Are you in terms of getting containers getting supplies.
And moving forward or is there still some bumping this over the next few months that you've just kind of.
That cross your fingers, but you just don't worry about.
No I would say, we're feeling good about the supply chain from a risk standpoint, I'd say over the last few months, we've been able to get all the containers. We want it now they are coming at an elevated cost. It was one of the emphasis for us and decided to take pricing is we expect some of those elevated costs will be with us for some time so.
And that's one of the reasons, we price, but in terms of overall availability or capacity or ability to get product. We're highly confident of our ability to do that and meet the demand that we're seeing.
Great. Thanks, so much.
The next question.
<unk> is from Linda Bolton Weiser with D. A Davidson. Please go ahead.
Yeah.
Yes, hi.
I missed that.
Running a little bit more detail or quantification on the gross margin because it was really a spectacular performance even accounting for the holiday mix.
Issue that you talked about is there any way of explaining our quantifying what came out so much better than you expected that drove the gross margin because you had expected it to be down sequentially and it was up and it was up very strongly and is this new level kind of something going forward or is it still going to fluctuate, but you're taking more price. So it.
Seems to me that that gross margin has even higher can go. Thank you.
Hi, Linda I'll take that question. So gross margin as we talked in the quarter I think what came in better than we expected at two things one I would say that the shift into our core product from not having that holiday mixed.
Holiday product is at a lower margin so people shifting into our core product actually drove a benefit for us on a year over year basis. So that was great to see the other part is I think generally we're mixing out a little bit better even with the higher freight costs, we're not seeing that impact the P&L in a way that we expected.
And so that's why for the second half now called out that we expect gross margin to be flat.
That to last year, so that implies coming down a little bit versus last year in Q4.
So not just because we won't have that holiday benefit in those numbers, but.
I think that our outlook has improved from that standpoint, just based on what we're seeing from a mix perspective in terms of pricing and how that's going to impact gross margin I think we will have more color to give on that once we give our fiscal 'twenty three guidance in may.
We really want to allow time for our retailers to reflect the pricing in the market and get a real feel for how consumers are responding before we go any further on given color there.
Great and can I just ask.
About the topline performance.
According to the guidance, you're still kind of guiding cut down a little bit year over year in the fourth quarter against the kind of hard comparison, but their prior year comp gets even harder in the first half of <unk> for the next for the first half of FY 'twenty three so just in a very qualitative way how should we think about that because that comparison.
Get harder, even though you've got a lot of drivers maybe expanding keys, all care and other things going on so how how should we just generally think about that in terms of the growth in the first half of fiscal 'twenty three.
Yeah. So let me start with Q4, because that's what we've given guidance for so Q4, we're really anchoring on a two year stack number so to your point, even the guidance implies a little bit negative for Q4, but on a two year stack basis still very strong up 23%. That's what's implied and then when I look at the full year of.
Fiscal 'twenty, 219% on the top end is still north of 30% on a two year stack basis. So a very strong overall performance in terms of what to expect when we get into the first half of next year.
Again, we're just gonna have to wait until we give guidance for fiscal 'twenty three.
What I can say and to <unk> earlier points, we do feel very confident on our spring innovation.
Signals that we're seeing is that that will continue to be strong even before it's in broad distribution.
Our power grid.
<unk> is the number one item on our F cosmetics dot com, so really seeing some positive signals there and things may be volatile as we talked about March and April very strong consumption results in Nielsen data and so we expect some volatility there, but I don't think that's reflective at all of our core business momentum.
We feel that that is still remains very strong.
Okay. Thank you very much.
Thanks Linda.
The next question is from Oliver Chen with Cowen. Please go ahead.
Hi, Thank you for taking our questions and as Joe now on for Oliver just curious it looks like al Skincare is really gaining a lot of momentum how do you balance the shelf space with your skincare and cosmetics at different retailer and another question is I know, you're expecting 15% to 17% range for marketing spend.
T cell care.
Starting this year, but going forward do you think that's sort of the right level to think about especially as you're sort of lapping.
T Bill Carroll lunch. Thank you so much.
Thanks, I'll take the first part of that question in terms of skin care, we are seeing great momentum.
<unk> our consumption trends for the quarter. It was also the first quarter that L. Skin became a top 20 skincare brand. So that was a pretty good milestone for us in terms of how we manage shelf space I would say we are dramatically under spaced at pretty much every retailer we do business with so the way we manage it as basically seek greater shelf space and get them.
More of our skin care assortment in and that varies customer by customer I'd say, our most developed skincare business, probably a target where he's been the longest and we have the biggest footprint, we're able to shelf skin L skin within our existing sets and its target over time has given us more space has given us greater opportunity to get more skin skincare in as.
Well as many of our other products at Ulta beauty.
They've given us incremental space for skincare in their skincare set and so we will be taking a look there depending on what happens with space over time, whether we integrated in within our existing L set where we do keep it in a separate spot. So I think we're going to continue to learn our way there but.
Unifying theme is.
As we pick up more space it gives us even more opportunity to get more skin in more of our other innovation into retailers and that's what our real focus is.
And then on your question on marketing spend and we feel great about that 15% to 17% range. We have a number of high ROI activations that really support that level of investment and I think what youll see from US is continuing to balance investing in marketing and digital with our desire to grow EBITDA just as you've seen us do this year.
And so that 15% to 17% feels right to us right now.
Got it thank you.
The next question is from Jon Andersen with William Blair. Please go ahead.
Thanks, Hi, <unk>, Hi, Mandy congrats on the quarter.
My first question is about the.
The cosmetics Dot Com business you mentioned.
Uh huh.
Judy squad membership is up I think 20% year over year.
You're approaching 3 million members.
And trying you talked to the importance of first party data.
That.
That that provides.
Are you using that for.
Party data to kind of support or enhance your targeting and conversion efforts just in a kind of a big picture way trying to understand what that's helping you do maybe <unk>.
<unk> faster.
Thing you've done in the past thanks.
Hi, John well, Judy Scott is a critical program for US we are proud of the $2 7 million members, we have the 20% growth year over year, but also the experience that program is generating for our core users. He says these are the consumers that make up 70% of our sales on Elf cosmetics Dot com. They also are the source of core.
Insight and inspiration for all of our various activities. So we've often talked about many of our.
Our unique collaborations that we do whether it be the of Chipotle collaboration or one I'm, particularly excited about right now is the partnering that we've done with Simon Fuller and.
Finding the next big pop Groupon Tictoc, the future acts our latest hashtag challenge there.
<unk> else it up.
A week after placing that hashtag challenge I think is up to 7 billion views a lot of the inspiration for the things we do come from that beauty squad loyalty program and what we're hearing our core user base wanting so it's not just the behavior that we're seeing them from a shopping standpoint, but we also engage them part of how they earn points is the level of engagement with the brand.
Including insights on our new products, including some of the things that they're most interested in so youll continue to see us nurture that program build in additional functionality in it and enhance the dataset that we get because it really drives well beyond F cosmetics dot com it really drives all of our activities, including with our national retailers.
That's helpful.
With respect to the digital shift you mentioned earlier.
The digital portion of the business has come down a little bit I think to 14% in the current quarter versus 16, a year ago, not unexpected I guess, given the kind of consumer behavior changes, but does that help remind me.
What are the.
Margin implications or are there margin implications in that channel mix shift.
Is that kind of plays out.
Yeah. So we've talked before about a shift in digital it really is a benefit from a gross margin standpoint, but by the time you add in our marketing and some of the warehousing and things like that it's pretty neutral impact to operating margin. So.
And it would be a benefit as we shift more into digital on the gross margin line. That's how we think about that.
Great. That's helpful last one for me is.
On portfolio management and Mandy.
Mandy you pointed out.
The balance of the strength of the balance sheet.
The strong liquidity position you're in.
How do you think about.
Using capital for.
Supporting the extensions.
Adding brands.
Versus reinvestment in kind of the five strategic initiatives around the three brands you own I mean, what.
What should we expect is it purely kind of opportunistic on the M&A side.
Or are there some very targeted things youre looking to fill within.
The portfolio just trying to get a sense for how that liquidity or capital may be applied going forward. Thanks.
Yeah, So you're absolutely right John it will be focused on our strategic imperatives and continuing to support those and then also on the strategic extension side, and so Esther and gave a little bit of color around.
We have looked at targets more recently and we will continue to do so I think that anything that expands.
Our capability our brings us new capability like we picked up with the well people or allows us to go into a different category Adjacencies would be interesting to us I think the great thing is that where we have such strong organic growth across our current portfolio of brands. We're not in a rush to add to our portfolio, we will be very choice.
I'm very disciplined.
For whatever brand, we decided to go after and so I think that you'll continue to see that from us.
We're going to be looking.
Looking at things, but only where it makes sense cultural fit and things of that nature are super important to us and we don't want to move too quickly on something and take a look back and not love it. So.
We are very disciplined in this area and.
As <unk> mentioned well people was intentionally small as we look forward. We may look at things that are a little bit bigger than that something with more scale and really looking to kind of expand our topline and bottomline with with any other acquisition that we kind of bring into the portfolio.
Yes, well said the strength of the core business of <unk>.
Our ability to be patient. So thank you very much I appreciate it congrats again.
Thanks, John .
Your next question is from Wendy Nicholson with Citi. Please go ahead.
Hi, I just wanted to follow up on that sort of line of questioning on the M&A front I mean, I think discipline is great. But just for me can you talk about sort of the managerial bandwidth. If you will I mean, the acquisitions youre, making it's not like you're bringing in brands that then you're just incubating. They operate independently I mean training and maybe it feels like you've got your fingers and tentacles.
In each of these brands and I think well people has taken a little while to really ramp up so just in terms of you know.
How important it is to you because I don't I don't think of you as a serial acquirer is that a bigger part of the story going forward I think it would be helpful to just clarify how much of a priority that is or is not.
Because I think there's a risk obviously that you get to broad and you expand yourself.
Too far a field and you've got too much going on and you lose focus on the core if you will okay. Can you just clarify kind of how important M&A is to you right now.
Yes.
So I'll take this one I would say look our.
Predominant focus is on our core business and <unk>.
Els Els.
<unk> pays all the bills Elf is the thing that we have a tremendous amount of white space on both health cosmetics is all skin. So I'd say the vast majority of our company managerial attention is on those in terms of our strategic extensions the way, we manage them as very similar to other consumer environments have been.
Most of us have multi brand.
Experience.
Our portfolio of brands and we make sure that the consumer facing part of those brands. We have resource for they have distinct kind of brand managers distinct kind of innovation talent associated with it but then leveraging the rest of the chassis that we have we have an incredible operations chassis same with kind of our innovation platform, where we feel we could take on a few more <unk>.
<unk> without any serious issues from a managerial standpoint, but from a focus standpoint, you obviously see the momentum over the last three years on the <unk> brand and that becomes our biggest area of focus, but we like what we've seen in terms of the strategic extensions. We've done we've been able to manage them well be able to leverage the chassis, where it makes sense.
And then let them live on their own on the other hand in terms of.
How do they go to market and what we're able to do.
Fair enough fair enough that's reasonable certainly.
But the other question I had just in terms of that that that statement you know L. Pays the bill just a question on the pricing I mean, I remember the days I think once upon a time you guys you know price everything out of the off brand of $3.
Obviously, the brand has just exploded in terms of consumer awareness and relevance and you've done a phenomenal job on the innovation side.
In contemplating the pricing that you're taking on the Alf brands specifically.
How much flexibility do you have I know that it's cost driven but how much flexibility do you have to pull back on pricing or step up promotion.
What's your visibility that gosh, if you're raising the prices just a little bit too much and you start to see some market share erosion.
How quickly can you react or or are you willing to cede some share to protect margins.
Yeah, well like everything at Els Els, we move at El speed. So we can react quite fast and I'll take you back to our 2019 price increases I mentioned was quite successful. This is a brand that definitely has pricing power.
We in that price increase we had some items, we had taken up $2 and quickly concluded that was too big a price increase and we quickly rolled those back down and we did not actually lose market share in that process, we gained market share throughout that and so if we found that we overextended ourselves on certain items, it's very easy for us to adjust those items.
<unk> back to where they need to be and we can move we're not afraid to kind of say well.
Based on what the consumer experiences now our hope is the way we've approached this which is really looking item by item relative to its key competitor and where we can go $1 off on each of these we'll see we'll see how they do but if we found that there is a segment of our portfolio. We went too far on its easy enough for us to roll it back but.
Our intention is to continue to gain market share we've been able to prove that even in a bad market, we're going to want to do that in a good market as a category improves and so.
We feel done right pricing can be a good tool in the.
Terrific. Thank you so much.
The next question is from Mark Astrachan with Stifel. Please go ahead.
Yes, thanks, good afternoon, everyone.
Yes.
Questions.
One could you help us a bit and trying to.
Understand the reported sales in the context of tracked versus untracked growth I think if you look at the last couple of quarters before the December quarter. Your growth was decently in excess of what we saw in the scanner data this quarter.
Hello, you've been taking into account the holidays that so could you just kind of talk to.
How to think about that what sort of dynamics ROE a bit.
Relatively slower growth in the overall numbers versus.
The scanner data versus on traffic is probably a better way.
Think about it in the December quarter.
Yeah. So the the difference this quarter is really a function of what we saw in the base last year for both net sales and consumption. So in Q3 last year, we posted a positive 10% net sales growth with consumption down 2% and that's why I anchored on the two year stack in our prepared remarks. So when you take Q3 on a two year stack.
<unk>, we were up 20% and up 15% of consumption. So sales pacing a bit ahead ahead of consumption, which I think is more in line with what folks expect to see them.
Over the long term shipments and consumption will balance out, but sometimes there are they are those nuances between quarters.
Got it and so just following up on that anything to point out from an international standpoint, I know you've called it out in the press release, but as relative growth kind of similar to what you saw last quarter.
Yes International growth is still remained strong for Q3.
And and we continue to see fee growth in those markets with those customers.
Got it and one more before the dog Barks at me again.
Do you expect any pull forward of sales for the pricing that you just announced was that contemplated in the guidance for the next quarter.
You know, we don't typically see anything like that I got bored by or anything like that from our customers. So no. We don't really expect to see anything like that.
Great. Thanks Al.
Yes.
Our next question is from Corinne Wolfberry with Piper Sandler. Please go ahead.
Hi, Thanks for taking the question and congrats on the quarter. So I wanted to dig a little bit.
Pipeline and R&D investments beyond what you have going on in the spring is where do you think you'll be focusing the bulk of that spending going for like which brands, which products and then how should we be thinking about the cadence of new product introductions going forward.
Yeah, So hi, Corinne R. Our innovation program is one of the key strengths of our company and part of the strength of that innovation beyond being able to have prestige quality. The extraordinary prices is we innovate pretty broadly as I mentioned, we innovate across each of our core segments and skincare, while people and Keystone.
Care.
The so I would say the cadence of that innovation you typically see.
It's really continuous throughout the year, the big seasons or spring season, when spring resets happen, but were launching new products. All the time on <unk> cosmetics dot com <unk> dot com will people dot com and that in turn gives us the data from which to make a lot of our core assortment decisions for the date resets between the spring and fall So I would say our.
Innovation program has never been stronger I take a look at the pipeline across.
Really all four of our brands and they are quite robust. It gives me a lot of confidence not only for this innovation. We just launched in the spring, but I mentioned on a couple of other brands well people are first century into skin care with the first five plant powered products, we have additional products behind that key so carriers continues to do a phenomenal job on innovation.
Standpoint, we launch more innovation in the body category there'll be other categories that youll see come out.
Later this year and so I feel it's an area, we've really focused on over the years and I would say, particularly in the loss.
Three years really strengthened the innovation capabilities not only in skincare, but our ability to.
Have the breadth of innovation that we do have.
As we go forward.
Got it. Thank you that's really helpful. And then just one more quick one.
With the rebound in color cosmetics is there any specific products or group of products that have surprised you in terms of bouncing back or seem to have come back sooner than others.
I would say, it's a long my expectations, we knew loop would have a moment right now as people took off their masks and could express more color, but at least for our business, we're seeing strength across each of our core segments and so.
The trajectory I talked about earlier when I take a look at the category beyond just kind of trends relative to pre pandemic. What is the slope of what we're seeing and we're seeing pretty good things across the category certainly I think we're well positioned we have strength in the face category, particularly with our latest innovation on power grip and our camera foundations.
I like what we're doing on our brow lift is off to an incredible start and and even in lip gloss ellipse scenes I think again, a phenomenal value of $6 versus the prestige equivalent at $38.
And Youll continue to see us make.
Sure that we can also jump on any emerging trends that we see out there we're starting to see some.
Some good things on contouring, we have a very good business from our contouring pallets and a number of things there. So we'll stay close to the trends, but overall I feel great about the portfolio of items we have.
Thank you.
The next question is from <unk> <unk> with Oppenheimer. Please go ahead.
Afternoon. Thanks for taking my questions. So two questions on the pricing front. So first in the mass category or have you seen others starting to take pricing and then second secondly, just on the philosophy in terms of I guess on the gross margin front in rate and raising prices is it goal to maintain the gross margin rate and then other initiatives can help to drive expansion or could it be similar to last time, where you are.
Took pricing and you ended up having very strong gross margin expansion as other initiatives also helped to drive the margin improvement.
Yeah, So refresh similar to what happened in 2019, we led pricing and so I don't think that many people follow us in 2019, we've heard more discussions at least in our retailer.
Discussions of <unk>.
A number of people taking pricing side I don't have specifics on who else is potentially taking pricing, but we were not.
First.
And nor I believe will be the last but but the way we do our analysis is not really dependent on others, having to take pricing. It really is on that relative value that we see in the marketplace. Even if no one took their pricing and then on the second question I'll turn it over to Mandy and on the gross margin point, so as we talked in our prepared remarks and <unk>.
And I'll take it back actually to 2019, when we take pricing. It is usually in reaction to something a macro event. So in 2019, when we decided to take pricing. It was in response to tariffs and May 2021, when we decided to take pricing that was in response to some of the FX headwinds that we were feeling.
This time around it has been driven by those elevated freight costs that we're seeing and overall cost inflation.
That we anticipate will be with us for a little while longer and so that was the driver behind us taking pricing. So our goal really is to help to offset some of those costs that we're seeing how that builds an overall gross margin again I think we'll have more color on that when we come back in may with our fiscal 'twenty three guidance.
Okay, great. Thank you.
Thanks Kash.
Okay.
This concludes our question and answer session I would like to turn the conference back over to rank I mean for any closing remarks.
Well. Thank you everyone for joining us today I again, I'm, so grateful to the incredible team we have at health beauty for again delivering outstanding results. We look forward to seeing some of you had some of the upcoming investor meetings and speaking with you in May when we'll talk our fourth quarter results in fiscal 'twenty three outlook, thanks, everyone and be well.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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