Q1 2023 elf Beauty Inc Earnings Call
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Thank you for joining us today to discuss <unk> first quarter fiscal 'twenty three results M. Casey Catlin, Vice President of corporate development and Investor Relations with me today are <unk>, 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 Dot Health beauty Dot com.
Since many of our remarks today contain forward looking statements. Please refer to our earnings release and our reports filed with the SEC, where youll find factors that could cause actual results to differ materially from these forward looking statements in.
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 Casey and good afternoon, everyone.
Today, we will discuss the drivers of our Q1 results and our raised outlook for fiscal 'twenty three.
I wanted to start by recognizing the health beauty team.
We're off to a strong start in our new fiscal year, delivering Q1 results well ahead of expectations.
Q1 marked our 14th consecutive quarter of net sales growth.
We grew net sales by 26% increased gross margin by 390 basis points and delivered $32 million and adjusted EBITDA up 46%.
Given our momentum we are raising our full year guidance.
Color cosmetics category trends remained positive in Q1 up 4% year over year fueled by an increase in usage occasions and innovation.
Q1 was the first full quarter of growth above pre pandemic levels.
Health cosmetic consumption in Q1 was even stronger up 27%.
Well above category growth rates.
We were the fastest growing top five brand by a wide margin growing our market share by 120 basis points.
Looking ahead, the environment continues to be dynamic.
While it's difficult to forecast, how inflation or recession may impact consumer behavior. We believe cosmetics continues to be an important category for self expression.
Mass cosmetics in particular has performed better than prestige in past recessionary times.
More importantly, we're confident in our business model and ability to continue to gain share.
Let me take a few minutes to talk through the key drivers of our Q1 performance.
First we're known for our core value proposition, we make the best of beauty accessible to every eye lip and face.
We have a unique ability to deliver a holy Grail products, taking inspiration from our community and the best products in prestige and bringing them to the market at extraordinary value.
Some of our best selling Holy Grails include our poorest putty primer $10 versus the prestige comparison at $52.
Our camo concealer $7 versus the prestige comparison at $30 and.
And our camo cc cream at $15 versus a prestige comparison at $42.
We see the current backdrop as a time to reinforce our unique value proposition.
The average price point for <unk> is a little over $5 today.
As compared to nearly $9 for the legacy mass cosmetics brands.
And unlike these higher priced products or pricing strategy focuses on everyday value instead of broad based promotions.
In the coming months, we will launch another consumer facing campaign that highlights the extraordinary value of our products.
The second driver of our performance is that we're an innovation powerhouse.
Our superpower center on our ability to deliver 100% cruelty free clean premium quality beauty products at accessible price points with broad appeal.
Our proven innovation engine has built leadership across five core segments.
Brushes primers can sealers browse and sponges make up approximately half of Elf cosmetic sales.
With the number one or two position in all five segments and gained share in each segment in Q1.
We believe our innovation pipeline has never been stronger.
We continue to focus on fewer bigger bolder innovation.
And try to have one or two new wholly grill each season.
We're pleased to see four of our newer products resonating with consumers.
Our power grip primer big mood, Mascara, glossy lipstein and Camel powder Foundation, where four of our top five drivers of incremental unit consumption in Q1.
With our product success, we see a significant opportunity to build share.
Looking at Nielsen tracked channel data for Q1 with a number five cosmetics brand with a six 6% share.
The number one brand has 17% share.
We see a lot of runway for growth.
Third we know how to attract and engage consumers with our disruptive digital first marketing.
Over the past three years, we've increased our marketing investment from 7% of net sales to 16%.
Our marketing investment is working.
Driving ROI multiples above industry benchmarks.
Our marketing initiatives help us reach new audiences penetrate new platforms and test and learn in new frontiers.
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We're pushing further into gaming and the med averse, which resonates strongly with our young diverse community.
In July we launched game up a limited edition cosmetics and skincare collection that sits at the intersection of gaming and beauty.
Each game up product contains a secret code that can be redeemed for beauty squad bonus points gift cards and more.
Incentivizing sign ups for our beauty squad loyalty program.
Beauty squad now has over 3 million members with enrollment growing nearly 20% year over year.
We still see a significant opportunity to bring new consumers to the health brand.
Our most recent attitude and usage study shows a double digit gap in our unaided consumer awareness compare to some of the legacy mass cosmetics brands.
We've galvanized a strong following among gen Z and see a particular opportunity to continue to build awareness with millennials and Gen X.
We are taking these three key drivers of our performance our core value proposition innovation engine and ability to attract and engage consumers and applying them to our other brands key silk here well people NL skin.
Let me take a few moments to highlight how are we doing this without skin.
Mass skin care is a $4 9 billion dollar category growing mid single digits year over year.
We became a top 20 skincare brand for the first time in Q3 of last year. We continue to see strong results in Q1 L. Skin consumption was up 17% compared to a category that was up 5%.
We have reasons to believe we can win in skin.
85% of consumers are aware of <unk> cosmetics are open to purchasing L skin.
<unk> skincare brand rankings are already higher among teens.
And skincare drive 8% of our consumption in Nielsen tracked channels versus nearly 20% of our consumption on Alf cosmetics dot com and Amazon.
A little over a year ago, we spoke about launching <unk> as a fourth brand in our portfolio.
We've now crystallized the brand positioning for all skin leaning.
Leaning into our clean ingredients and dermatologists develop formulations for every eye lip face and skin concern.
We streamlined our assortment and product architecture to address top skincare concerns.
We accelerated our focus on Holy Grail innovation leaning on our unique ability to take the best of beauty and make it accessible.
Our Holy Hydration makeup melting cleansing bonds priced at $11 versus a prestige comparison at $36 was our top selling off skin product in Q1.
We also improved our packaging with a greater focus on education and effective ingredients.
We're also putting marketing muscle behind L skin.
In July we launched our first ever skincare campaign to build consumer awareness.
Al skin is setting out to show our consumers that skincare can be effective straightforward and affordable.
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Before me Andy details our results and outlook I want to briefly touch on a few other topics that are likely top of mind.
On price increases.
In response to rising transportation costs, we increased prices on two thirds of our Skus in mid March across Ehealth brand reps.
Representing a high single digit percentage increase to our AUR.
While this round of pricing was broader than previous rounds, many of our opening $2 $3 price points remain unchanged.
Pricing is now reflected all of our retail customers and volume elasticity has trended better than expected in the quarter.
On space expansion.
With <unk> cosmetics, we continue to see significant shelf space opportunity.
We're pleased to announce space expansion, we've earned with Cvs and both fall 2022, and spring 2023 in a subset of doors.
Internationally, which represents major white space, we're expanding our shelf space with superdrug in the U K for fall 2022.
On supply chain.
As we spoke about in our last call like many companies we've had to navigate COVID-19 restrictions in China.
We feel great about how our team has risen to the challenge.
Our overall in stock rates held at approximately 95% in Q1.
We're actively working to replenish out of stocks on a few wholly grill products.
Given our stronger than expected consumption, we ended the quarter, a little lighter on inventory, but expect to recover throughout Q2.
Lastly on tariffs.
As a reminder, the majority of our products are subject to list three tariffs at the 25% level.
We've talked about carrying approximately 1000 basis points of cost pressure on our gross margin and tariffs drive nearly half of that.
We have not embedded any tariff relief in our outlook. Therefore, any rollback in tariffs will be a significant tailwind to our gross margin over time.
In summary, our core value proposition innovation engine and ability to attract and engage consumers continues to fuel our performance.
While the environment remains dynamic I believe we're well positioned to continue to drive share gains and growth in both the top and bottom lines as reflected in our raised guidance.
I'll now turn the call over to Mandy.
Thank you to rang.
I am pleased to share the highlights of our first quarter results as well as our raised outlook for fiscal 'twenty three.
We started our fiscal year significantly outperforming the category.
Our first quarter net sales grew 26% year over year, primarily driven by broad based strength across our national and international retailers.
<unk> spoke about we saw better than expected elasticity from a recent price increase in the quarter.
In fact, our consumption growth in Q1 was balanced between increases in both AUR and units.
Importantly, our ongoing consumption trends continue to be well balanced supported by strength in both our core products and recent innovation.
Our digitally led strategy continues to serve us well.
Q1, digital consumption trends were up over 30% year over year.
Digital channels drove 14% of our total consumption in Q1 as compared to 13% a year ago.
Gross margin of 68% was up approximately 390 basis points compared to prior year.
We saw gross margin benefits from price increases cost savings and margin accretive mix.
Gross margin benefits more than offset the impact of elevated transportation costs, we experienced in the quarter.
On an adjusted basis SG&A as a percentage of sales was 45% compared to 47% last year.
Marketing and digital investment for the quarter was approximately 16% of net sales flat to a year ago and was lower than expected due to a timing shift in spend out of Q1 and into Q2.
We continue to expect marketing and digital investment to be approximately 17% to 19% of net sales in fiscal 'twenty three.
Q1, adjusted EBITDA was $32 million up 46% versus last year and adjusted EBITDA margin was approximately 26% of net sales.
Adjusted net income was $21 million or <unk> 39 cents per diluted share.
Compared to $14 million or 27 cents per diluted share a year ago.
The increase across the profitability metrics was driven by our strong sales growth improved gross margin and a shift in timing for marketing and digital investments.
Our liquidity remains strong with a combination of our cash balance and access to our revolving credit facility sitting at approximately $172 million we.
We ended the quarter with $72 million in cash on hand, compared to a cash balance of $63 million a year ago.
Our ending inventory balance was $70 million down from $85 million in March <unk>.
<unk> mentioned, our ending inventory levels in Q1 were a bit lighter than expected given our strong sell through rates.
We expect inventory levels to build back in Q2 as is typical with our quarterly seasonality.
Importantly, we remain confident in our ability to meet consumer demand.
We expect our cash priorities for the coming year to remain on investing behind our five strategic imperatives and supporting strategic extensions.
Now, let's turn to our raised outlook for fiscal 'twenty three.
For the full year, we now expect net sales growth of approximately 14% to 16% versus prior year.
From 10% to 12% previously.
We expect adjusted EBITDA between 83, and a half to $85 million up from 80, and a half to $82 million previously.
We expect adjusted net income between 47 and $48 $5 million.
Up from 43, and a half to 45 and a half million dollars previously.
And adjusted EPS of <unk> 84 to 87 cents per diluted share up from 78 to 81 previously.
We expect our fiscal 'twenty, three adjusted tax rate to be approximately 25% to 26%.
As compared to 27% to 28% previously.
Lastly, we continue to expect our fully diluted share count of approximately 56 million shares.
Let me provide you with additional color on our planning assumptions for fiscal 'twenty three.
Starting with top line.
Our raised outlook reflects the outperformance in Q1 relative to our expectations. In addition to pipeline related to the incremental space gains touring discussed.
We continue to expect double digit top line growth in each quarter of fiscal 'twenty three.
Turning to gross margin.
We now expect our gross margin to be up approximately 100 basis points year over year.
As compared to our expectation for flat to slightly up previously.
This is largely a result of our outperformance in Q1.
We expect the combination of price increases margin accretive mix and cost savings to offset elevated transportation costs.
Turning now to adjusted EBITDA.
Our outlook now implies adjusted EBITDA growth of approximately 12% to 14% versus prior year.
Up from approximately 8% to 10% previously.
And on top of the strong 22% growth in fiscal 'twenty two.
Overall, we are quite pleased to be in a position to raise our profitability outlook and a dynamic macro environment. This early in our fiscal year.
Like many companies, we do expect cost pressures to weigh on adjusted EBITDA margin this year.
Our outlook, therefore continues to bacon cost inflation with a non marketing SG&A, including higher outbound fuel and logistics costs.
In addition to the higher inbound transportation costs captured in gross margin.
From a cadence perspective, we expect balance of year adjusted EBITDA margins to be in the mid teens.
Largely due to our normal quarterly seasonality.
We expect Q2 to be lower than that due to the shift in marketing spend out of Q1 and into Q2.
In summary, we're pleased with our outstanding Q1 results and remain confident in our ability to grow market share for the balance of the fiscal year.
Our performance both on an absolute basis and relative to the category demonstrates how our competitive advantages are driving results.
With that operator, you may open the call to questions.
Okay.
Thank you.
We'll now begin the question and answer session.
Quick question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys.
Any guy in your questions, let's see niches that you would like to withdraw your question. Please press Star then two.
At this time, we will pause momentarily to assemble logos Sir.
Yeah.
Our first question comes from Dara <unk>.
<unk> with Morgan Stanley . Please go ahead.
Hey, guys.
Hi, obviously.
Very strong results in fiscal Q1, just given the consumer environment out there with a tenuous state of the consumer.
Variability can you give us a bit of an update on what youre seeing for the mass color category in the U S. In general in July as well as for your business.
The update will be helpful. Thanks.
Hi, Dara is touring overall, we're quite bullish on the category.
Q1 was the first full quarter, where the category was above pre pandemic levels, we're particularly well positioned within that category. I think we built a 120 basis points of market share had very strong consumption.
I'd say, it's still volatile month to month, we started.
In the quarter very strong we saw few lighter weeks ended June .
June beginning of July and now we're seeing strong consumption rates again, so I think while you might see some bouncing around overall, we're quite bullish on the category going forward and as we said in our prepared remarks mass color cosmetics tends to perform better even in recessionary environments in prestige. So we're still pretty bullish on the category, but especially <unk>.
So on our prospects.
Great. That's helpful. And then could you just update us on the competitive environment in two respects.
Have you seen competitors take price increases.
It would be your view of shelf space opportunities obviously the market share results have been very strong for your portfolio and as you mentioned you've got a portfolio that offers a lot of value in that $5 range. So.
I would think you'd be front and center for retailers worried about trade down. So maybe just talk about shelf space opportunity versus a typical for obviously you mentioned a couple of specific opportunities in terms of the Cvs and superdrug, but just overall pet shelf space in perspective versus your.
And that again.
Pricing environment you are seeing.
Thanks.
Sure. So first of on your question on pricing, we have seen average unit retails increase it's hard for us to tease out how much of that is pricing versus innovation mix with new items, but we definitely have seen an increase in average unit retails as you say, we are positioned extremely well our average unit retails around $5 compared to many of our competitors.
Around $9.
Superior value proposition, but that value proposition isn't only relative to mass competitors. We are seeing some trade down from prestige, we have a number of Holy Grail products, what we uniquely can do in terms of bringing prestige quality extraordinary price points. An example, being our power grid primer, which is our top selling item right now at $10.
Compares to prestige item at $34. So we feel we are benefiting from both trade down as well as trade into the brand from the mass side.
And then in terms of shelf space opportunities I think we're extremely well positioned we talked about the space that we're gaining at Cvs. Both this fall and in the spring as well as superdrug and the currency that which retailers look by to make space decisions. We're well positioned we are the most productive brand Walmart and target carry our innovation pipeline.
It's never been stronger as well as the consumer profile, we bring in so I think we've had a pretty good track record over the years of picking up space and I would expect that to continue.
Great. Thanks.
Our next question comes from Olivia Tong with <unk>. Please go ahead.
Nope.
Great. Thanks, good afternoon.
Congratulations on some great results.
Wanted to ask you a little bit about your product initiative plans for this year, obviously innovation, particularly at the more premium end for you, but a great value for consumers has really driven some nice AUR improvement. So just wanted to understand a little bit more about your product initiatives for this year to keep that momentum going.
And then your view on holiday, we obviously have a bit of a volatile consumer environment right now.
It seems like you are you know quite.
Quite frankly benefiting to some extent from the volatile environment as Youre seeing some trade down from from them from prestige side. So just your view on the issue would be great. Thank you.
Sure So hi, Olivia on the innovation pipeline I feel extremely good about our innovation.
You mentioned our ability to have these holy Grail.
Products that comparative prestige, but are much better values I think is serving us well we've had a number of really good hits. This year. The most recent being just a couple of weeks ago, we launched a.
Halo glow liquid filter, which is price of $14. So higher on the <unk> price range, but it compares to iconic prestige product at $44 and we've seen incredible response to that item. In fact four of the shades are currently out of stock and where we're getting more stock on those and so I feel really good about our overall.
Product pipeline as well as our plans to continue to have these holy Grail is going forward.
And then in terms of holiday I would say our strategy on holiday is very similar to last year last year because of the container imbalance. We made the choice to have a much smaller holiday program to prioritize our core items that strategy served us well, we saw really strong consumption amongst our core everyday great value items also.
Picked up margin in the process and we're going to continue that strategy. This year. The focus really is continuing to meet the consumer demand we have against the core <unk> cosmetics as well as our skin brands.
Great. Thanks, and then.
Just a follow up do you have a sense of.
How much of your customer base on some of the sort of double digit price point product.
Items is your existing consumers trading up and finding great value because.
In sum.
And as far as your products and.
Not being able to reach sort of the more premium price points as opposed to maybe some of the prestige.
Customers now trading into your product finding some some really interesting value there.
Yeah, we have a combination of both so I think even in our pricing strategy. While we took prices up on two thirds of various skus given the transportation costs, we kept prices unchanged on our opening price point items $2 $3 items. So it gives a good entry point for anyone entering into the franchise, we do see once the consumer interest in the franchise.
We are trying a broad assortment of our <unk> products and then from a prestige side, we're definitely seeing new users being attracted to the brand that perhaps normally would not look at lower priced products.
The Halo glow liquid filter is a prime example of that immediately consumers made the comparison to the prestige equivalent at $44 and brought in quite a few new users on F cosmetics dot com into the franchise. So I think we're benefiting from both as consumers come into the franchise being able to go across the basket not only in cosmetics, but also enel skin.
And then attracting those prestige consumers, who see the tremendous value that we can offer at the quality.
Great. Thanks, so much.
Our next question comes from Stephanie Wissink with Jefferies. Please go ahead.
Thank you a question.
Thank you your line is open.
At this time.
Thank you Oh, sorry.
Sorry.
You're cutting out a little bit on us I don't know if its your line.
Let me try that again can you hear me better now.
Yeah much better.
Okay. My question for you is on <unk>, just talk a little bit about the learnings that you've had graduating in the brand into a new category. I think you mentioned some of the changes in merchandising and packaging, but what you envisioned for the opportunity set for scan over the course of the next couple of years.
Randy My question for you is just on the marketing expense in the second fiscal quarter could you help us to square up that amount that shifted from Q1 into Q2.
Sure.
Hi, Stefan <unk> skin, we see a huge opportunity as you know global skincare is bigger than global color cosmetics, and we're winning in skin in tracked channels our consumption in the quarter in skin was up 17% versus a category that was up 5% in terms of where we're seeing the growth. It really comes from two two sources.
The first is our current <unk> cosmetics consumers, 85% of them are interested in triangle skin. We are definitely seeing baskets being built on <unk> skin, but the second is really attracting new consumers to the franchise, we have Holy Grails Enel skin, just like we do on <unk> color cosmetics in fact, our top selling skincare.
For the quarter was one of our Holy Grails are Holy hydration, cleansing bomb, which retails for $11 compares to a prestige equivalent at $36. So we very much see the same model working in skin that we've had working in color cosmetics. The difference I would say is what I'm, particularly excited about is the level of education. We can do we have.
Clean formulations that are dermatologists developed.
And our ability for the first time this quarter to put on awareness building.
Digital advertising on <unk> Skincare I think has me excited about the future prospects of that along with the continued pipeline of Holy Grails I think is a pretty good formula for us for the future and then in terms of how big it can get I don't think we've disclosed that I think the best proxy. We have is in track channels <unk> skin's about 8% of our consumption yet on.
<unk> Adolf cosmetics dot com and Amazon is closer to 20%. So we still have a lot of runway before we.
Before we run out of steam on that by any means.
And then to answer your question on marketing. So we continue to target of 17% to 19% range on the year from a marketing and digital perspective, obviously in Q1 were a little bit.
Lower than that range, but I would say that the guidance I gave is for the year.
To still target that 17% to 19%.
Okay. Thank you.
Yes.
Our next question comes from Tom Nash with Cowen. Please go ahead.
Hi, Tom <unk> on for Oliver Chen Thanks for taking my call or my question and congrats on a strong quarter.
One question on retail execution going into the back to school season could you speak to the promotional environment and your strategy within the category.
Sure. So our strategy is quite different than many of our competitors. We are an everyday great value on shelf. So we do not rely on the level of promotions at many of our competitors do in fact, we do not even have the trade funds that many of them have we feel like we offer a great value every single day and even when retailers.
Promote our brand we ask them to do so at full retail. So the model is fundamentally different and I think has served us well through 2014 consecutive quarters of net sales growth in terms of back to school I think where we are seeing good results on back to school I haven't necessarily seen a higher level of promotion for this year's back to school, but okay.
As I said promotion doesn't really matter as much to us as our presentation in store and that everyday value that we offer.
Great. Thank you for the additional color.
Our next question comes from Linda Bolton Weiser with D. A Davidson. Please go ahead.
Yes, hi.
I think I know the answer to this question, but I just wanted to check on that we're hearing about inventory reduction by.
Walmart target many retailers quite frankly.
Is this affecting you at all or are you just having so much momentum in your consumption growth that youre not really seeing any issues with that so just what are you seeing on that front.
Hi, Linda our consumption has been strong for a very long time. So the biggest challenge we have is making sure that we're staying in stock. So much of what we've heard in terms of inventory reductions et cetera haven't played as much into our business just given the strong momentum, we have and making sure that we stay in stock.
Okay and then.
When you talk about the.
Disparity the difference in consumption the percentage of your consumption.
In store versus online the 8% versus the 20% is that the case for the overall skin versus color categories as well. So therefore, it's not really that you are different from the category or is there. Some anomaly that does stand out just for your brand. Thanks.
Yes.
I'm not as familiar with the overall category numbers I think those would be more in line, but I don't have that data I just know for us.
As we map, where we stand from a retail distribution standpoint versus having our full assortment online. That's really the difference will be the anomaly for us. We just don't have as much of our skincare in retail as we do online and when we have it available consumers are naturally migrating to it.
Great and then finally when you talk about these five core categories that are more than 50% of your sale I'm. Just wondering strategically would you like to have a six in that list or do you think that focusing kind of with your spending.
Strategies on those five core is the best return that you got on your investment. Thanks.
While we'd love to have as many categories as possible to have the number one or two position in I would say the strategy.
We followed is to really build these holy Grail products in these in each of the segments and then followed those up with continued innovation. So primers as one of the categories, we have clear market leadership in.
We started that journey many years ago with our six dollar Polish.
<unk> primer that comparator prestige item that was $36. We could have rested on our laurels with that that was such an incredible product, but we followed that up with additional innovation. So our <unk> putty primer continue to build share in primers, we followed up our cordless putty primer is with our power group primers and so you've had this continual innovation in those core categories.
Very same factor was true in our other key leadership categories of brushes browse concealer in sponges.
Our prospecting other bigger category some of our more recent moves is making a bigger push into mascara.
And foundations the top two categories within color cosmetics, and we're making progress there our share position is still small, but we feel we can apply that same model to other categories, just as we're doing to skincare.
Okay. Thanks very much.
Our next question comes from those Chappell with <unk> Securities.
Please go ahead.
Thanks, Good afternoon.
Good afternoon.
I apologize if I missed this but.
When you're looking at your kind of expanded retail distribution over the next year.
Didn't know if you know bankruptcy or financial troubles.
Well certain players that have <unk>.
A large swath of space opens up more space quickly or if it's more methodical and then also as you're expanding.
You said, it's it's it's multiple retailers, but I didn't know if it.
If it's kind of an expansion at the traditional or not the core target Walmart ulta or if you're really starting to push some space into new and different retailers did club or alternative channels.
Sure.
So I would say bill that.
The financial troubles of other players often open up opportunities for us. So the extent of retailers worried about a particular brand I think it certainly is an opportunity on the other hand to the extent that they get better financially, perhaps it can be a good competitor, which we'd welcome we'd like every every core competitor do well because as it brings in.
More consumer interest in the category our value equation comes shining through historically I would say our space is probably less dependent on whether another competitor's struggling or not but more in terms of what we're delivering retailer and thats actually been the better formula for us and so right now we stand at really strong position, both with our productivity.
Innovation in consumer profile that is opening up the door for more space and then in terms of the nature of where that space is coming from you know it varies each year and so I think this particular im particularly excited right now about the expansion that we have going on at Cvs and Superdrug historically, we were.
<unk> are much stronger in target Walmart, even ulta beauty and had relatively low penetration within drug so to the extent that we start <unk>.
Expanding better within drug that's a massive opportunity for us just given the number of the door counts that they have.
And.
And then I think Kiesow care gives us an opportunity with other alternate retailers as well. So we talked last quarter. Our first century into Sephora, Canada was <unk> care as we look to continue to expand that brand as well and then similarly with wall people. All people gives us an opening within retailers that want the highest standard of clean beauty.
And we're making progress expanding distribution on that brand, we talked about taking into a subset of ulta doors, we feel theres a lot of opportunity at target and other retailers I care about clean beauty health to expand that brand.
No that's helpful and then one just.
Can you just go back and remind us and again I'm sorry, if you've covered this but kind of the impact of tariffs on your gross margin and what.
What may happen if any.
If there is any relief down the road.
Sure Bill I'll take that.
So we have talked about carrying about 1000 basis points of cost headwinds in our gross margin and tariffs as roughly half of that.
Rest of it sits in FX and transportation costs.
And so we.
If tariffs were to roll back.
We would certainly flow a portion of that through to our.
Our adjusted EBITDA margins as we talked about it would be a tailwind for us from a gross margin and an EBITDA margin standpoint.
I might add too.
Early to tell what's going to happen there still waiting to hear it.
If that's going to roll back or not.
No that's great. Thanks, so much the color.
Yes.
Our next question comes from <unk> Parikh with Oppenheimer. Please go ahead.
Good afternoon. Thanks for taking my question. So first first on gross margins. So I know you raised your gross margin outlook versus prior expectations, but I was just curious why why would gross margin gains decelerate versus what you saw in Q1.
I think you had also got some more FX benefit sometime later this year.
Yeah. So gross margin we are really pleased to have taken our outlook up for the year up 100 basis points versus where we were previously at flat to slightly up.
In the quarter, we did get benefits from pricing I would say it was the largest and helped our gross margin, but we still saw cost pressure from ocean freight transportation cost things of that nature and so given that it's this early in the year.
We want to take.
No.
Prudent approach to our gross margin.
Wait and see how things shape out for the year, but really pleased to see the performance that we had in Q1.
Great and then maybe just one follow up question. So as you look at your U S. Retailers I was just curious if youre seeing any changes in trends at your at your different retailers were versus what you've seen in recent quarters.
No. Our consulting continues to be quite strong and I think I know some of the retailers have reported on the overall performance, but even in the context of that beauty has been a bright spot for them. So I feel beauty is a bright spot for them and we're particularly well positioned within each of those retailers.
Okay, great. Thank you.
Our next question comes from Mark Astrachan.
Please go please go ahead.
Yeah, great. Thank you afternoon, everyone.
I wanted to just first quickly ask a follow up Mandy to the last question. So are there costs that.
You are anticipating to be.
Worse in fiscal <unk> than in fiscal <unk>.
Yes, so again as we think about the cost pressures that we're facing from a transportation standpoint.
We continue to expect those to be elevated for the balance of the year, which is why the balance of the year.
Gross margin forecast is projected to be flat to prior year, we want to see how those continue to come in at up one quarter and too early to call.
That's going to materialize for the year. So that's why we've taken that approach.
Got it Okay and then.
Secondly, more broadly just asking about skin care sales. So if I look at this.
Scanner data getting that's not obviously the entire business.
In dollars were roughly flat sequentially in.
The June quarter versus the March quarter up a little bit versus the December quarter, I get some seasonality but.
I'm curious.
These constraints.
Potentially or hurting that and.
And how much of the incremental space that Youre talking about is anticipated to go to skin care versus the overall business, meaning that.
If you had an opportunity would you be allocating more of it to skincare skincare going to be incremental in the skincare section versus in the makeup section so any sort of color there would be helpful.
Sure so mark our overall consumption trends in skin care actually.
Quite strong there is some seasonality quarter to quarter, if I take a look at the June quarter, typically isn't as big as some of the other quarters in skincare.
So I would say we feel great about the consumption as I mentioned in tracked channels up 17% versus a category up 5% certainly space has been a constraint we would like to get more of our assortment on skincare more of our innovation more broadly distributed so as we pick up more space. It's always a balance between what we're putting behind color in where we're putting behind <unk>.
And I think we have been doing a pretty good job of putting more skin care assortment in but we have a lot further to go and I think that will be somewhat dependent on how fast we can accelerate our space expansion.
Okay. Thank you.
Okay.
Our next question from Chen clothing will mirror.
Excuse me Piper Sandler. Please go ahead.
Hi, good afternoon.
Afternoon, Thanks for taking the questions and congrats on the quarter.
So I'd like to just push you a little bit more on the market share gains that you've been mentioning and can you just provide any further thoughts on where these are coming from how much is really coming from people trading down from the riskiest category versus people coming over from other mass brands.
Do you have any color on it you know is it coming from certain age groups or income levels, just any color here would be helpful. Thank you.
Yes, so first of all core and the market share gains are in the mass Nielsen tracked universe. So it would not include any of the trade down from prestige the market share gains from our other competitors in the mass cosmetics.
Category that are tracked by Nielsen and then in terms of where those share gains are I mean, I think you can take a look at Nielsen yourself in terms of who's losing share and who's gaining share, but it's a pretty broad array of brands that were taking share from and thats pretty consistent with what <unk> seen over the last three years.
A pretty good track record of gaining share I think the only brand I am aware of in the top five of this gain share three years in a row to the magnitude that we have and so there's quite a few players where were trading in from into the franchise from.
And then the point on prestige youre not going to see that in the track channel data, but we can see it in terms of when we bring in new consumers, where they buy before on F. Cosmetics Dot com and certainly we're also an ulta beauty, which is not part of the tracked channel universe that has both prestige and mass and so we get some insights there both in.
Of our own consumer data as well as what we see from some of the retailers. So I think the great news for US is our value proposition plays in both arenas in the mass arena, where continued to pick up share from mass competitors and then from the prestige side, our Holy Grail is really to allow us to to be able to offer a much better value equation.
Then when someone can get in prestige.
Yes.
That's helpful. Thank you and then lastly on international I know, it's still a fairly small part of the business, but a big part of the growth story here. So I'm, just curious with everything going on overseas and in the macro environment. How are you thinking about growth in the international part of the business. This year should we expect a similar level to what we saw.
All last year, and then over the coming years, how should we be thinking about the geographic mix between U S and O U S.
Over the next couple of years. Thank you.
So our growth has been really strong in international in Q1, our international business grew 40% so above our overall growth rates and that primarily has been on the backs of two main countries, Canada, where we're now the number seven position brand and the U K, which I mentioned, we are continuing to pick up more space. So I see a lot more growth both within <unk>.
And the U K the primary two countries in international International in Q1 represented about 13% of our sales that's up from about 11% last year. So we are picking up a greater percentage, but I think we have a long way to go Western Europe is still mainly opened to us our main presence in western Europe as it relates to key cell carrier to <unk>.
So I think we have a great deal of opportunity in other markets and then the approach is going to be the same disciplined rollout approach to finding the right retail partner combining with our strength digitally just as we've done both in Canada, and the U K and I think there are many more countries. We can do is probably the first focus being western Europe .
Yes.
Thank you.
This concludes our question and answer session.
I'd like to turn the conference back over to.
For any closing remarks.
Well, thank you for joining us today everyone.
Grateful for our incredible team at health beauty for again, delivering outstanding results to start fiscal 'twenty three.
We look forward to seeing some of you at our upcoming Investor meetings and speaking with you in November when we discuss our second quarter results, Thank you and be well.
Yeah.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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