Q4 2022 elf Beauty Inc Earnings Call
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Thank you for joining us today to discuss Ulta Beauty's fourth quarter as fiscal 'twenty two results M. P. C. CASM 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 investor Dod health beauty Dot com.
Since many of our remarks today 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 looking statements.
In addition, the company's presentation today includes information presented on a non-GAAP basis. Our earnings release contains reconciliations of the differences between the non-GAAP presentation and the most directly comparable GAAP measure.
With that let me turn the webcast over to Terry.
Thank you Casey and good afternoon, everyone.
Today, we will discuss the drivers of our Q4 results and outlook for fiscal 'twenty three.
I want to start by recognizing the F beauty team, we've much to be proud of in fiscal 'twenty two.
Our innovation digitally led strategy core value proposition and ability to adapt at El speed continue to fuel our performance.
Our results speak for themselves Q4 marked our 13th consecutive quarter of net sales growth.
In fiscal 'twenty, two we grew net sales by 23% and adjusted EBITDA by 22% well.
Well above our original expectations for the year.
We also continue to gain market share with five 9% of the mass cosmetics category up 25 basis points.
We were the only top five brand to grow share above pre pandemic levels by a wide margin.
Before I detail, our recent accomplishments I want to briefly touch on a few topics that are likely top of mind.
First on category outlook in our guidance.
We remain bullish on the mass cosmetics category.
Overall trends have improved and in recent weeks are positive on both a one and two year basis as consumer usage occasions increase.
More importantly, we remain optimistic about our ability to continue to gain share.
Our consumption trends are strong, giving us confidence issue initial guidance at the 10% to 12% net sales growth for the year.
With double digit growth expected in each quarter.
Second on price increases we.
We increased prices in a majority of our Skus and select key so Karen well people products in mid March.
While still early price elasticity is better than expected underscoring the power of our brands.
Third on supply chain like.
Like many companies, we faced additional COVID-19 restrictions in China, where our products are manufactured.
While the situation remains dynamic.
I feel great about how our team has responded.
We continue to ship product despite the recent lockdowns.
We successfully navigated a variety of supply chain challenges throughout the years and expect to do so in fiscal 'twenty three.
Over the past three years I've provided proof points on the relentless execution of our five strategic imperatives and the growth it has driven.
Today, I want to take a step back and talk through our strategic framework and key areas of competitive advantage.
<unk> was born to disrupt it's in our DNA.
We were founded 17 years ago with the idea of selling premium quality cosmetics.
For one dollar.
Over the Internet.
We are known for our core value proposition, we make the best of beauty accessible to every eye lip and face.
The superpowers that consumers can't get enough of our 100% cruelty free.
Clean <unk>.
Inclusive.
Premium quality beauty products at accessible price points.
Our seven key areas of competitive advantage gives me confidence that we can continue to grow sales EBITDA and market share.
First we have the right team we.
We have a deep commitment to diversity and inclusion.
Our employee base, which is over 80% women over 40% diverse and over 60% millennial and Gen. Z is representative of the communities we serve.
And it's not just our overall employee base, our executive officers and board of Directors is majority women and nearly 40% diverse.
We have a high performance team culture that fosters employee engagement.
Our most recent employee engagement scores are 15 points higher than the consumer goods and services industry benchmark.
Importantly, all 300 of our employees, our shareholders and health beauty with a total employee ownership at nearly 15% of shares outstanding.
Issuing equity to all employees is rare among public consumer products companies.
Aligns our team with a long term interest of our shareholders and incentivize our employees to deliver enterprise value.
Our second area of advantages that we know how to attract and engage consumers.
Our disruptive digital first marketing engine moves at the speed of culture.
Over the past three years, we've increased.
So marketing investment from 7% of net sales to 16%.
Our marketing investment is working driving high ROI and strong levels of consumer engagement.
We are now a four time tictoc billionaire with our latest Alfred up hashtag challenge generating nearly 14 billion views.
We are a pioneer in music gaming and collaborating with Likeminded cultural Disruptors.
Following our award winning makeup collaboration with Chipotle that generated 4 billion earned media impressions.
Our recent collaboration with Duncan once again generated buzz garnering almost 5 billion impressions.
Alf is the Gen Z favorite.
In Q4, <unk> jumped to the number one favorite cosmetics brand among teens up from number two last year and number four two years ago.
We still see significant opportunity to bring in new consumers.
We're encouraged that our annual attitude and usage study showed considerable improvement in our overall consumer awareness levels with millennials and Gen X in particular.
That said, we continue to have significant opportunity with unaided awareness compared to some of the legacy color cosmetics brands.
Looking at Nielsen tracked channel data, where the number five cosmetics brand today with five 9% share.
The number one brand has 17% share we see a lot of runway to grow.
Our third area of advantages that we are an innovation powerhouse.
Our innovation engine is built leadership across time across five key segments.
Brushes primers can sealers, browse and sponges, which make up approximately half of F cosmetics sales.
We have the number one or two position in all five segments and drove double digit sales growth in each last year.
Our innovation focus remains on delivering Holy grails with staying power.
<unk> Putty primer camo families are great examples of how multiyear innovation has driven our share leadership in key segments.
Our recently launched power grip primer builds upon our strength in the primary category.
It's John dropping value of $10 versus the prestige equivalent at $34 propelled us to become the number one selling product and <unk> cosmetics dot com in Q4.
And a viral sensation across social media.
Looking ahead, we believe our innovation pipeline has never been stronger.
Skincare remains a major focus of our brand portfolio in.
In fiscal 'twenty two L scheme consumption was up 19% compared to a category that was up 8%.
New product launches such as our pure skin line help propel us in the top 20 skincare brand rankings for the first time ever in both Q3 and Q4.
Amongst teams our skincare rankings are even higher.
We're particularly excited about key sole cares latest skincare offering the let me glow illuminating serum.
This complexion and makeup priming serum is a first in a series of color skincare hybrids.
This product offering quickly became a viral sensation across social media selling auto in recent weeks of both key sole care dot com and ultra dot com.
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Our fourth area of advantages that we are digital first FAO.
Founded as a digitally native brand Elf remains the only top five mass cosmetics brand with a direct to consumer site.
In April we launched a new mobile App also becoming the only top five mass cosmetics brand with a native mobile app.
Our digitally led strategy powers, our entire business and continues to serve us well.
Fiscal 'twenty two digital consumption trends were up triple digits on a two year stack basis.
Digital channels drove 14% of our total consumption in fiscal 'twenty, two as compared to 17% a year ago and 9% two years ago.
We see opportunity to increase our digital penetration, particularly.
Particularly as we're able to grow our beauty squad loyalty members and enhance our loyalty experience.
In fiscal 'twenty, two we grew beauty squad membership by 20% versus prior year.
Our $2 9 million loyalty members are highly valuable part of our digital ecosystem and an integral source of first party data.
Our fifth area advantages that we have world class operations.
We believe we have the best combination of cost quality and speed in our industry.
Our hybrid supply chain model combines outsourced asset light manufacturing in China with the depth of expertise of our newly 80 employees in Shanghai across R&D quality sourcing logistics and lean manufacturing.
I am proud of the health beauty team for how we've leveraged this competitive advantage to navigate external challenges over the years.
In 2019, we overcame 25% China tariffs on the majority of our products.
In early 2020, we were the first beauty company to come out of COVID-19 restrictions in China fully operational.
Our suppliers are back in business in the first week and we were running at full capacity after just five weeks.
In 2021, we faced a global container imbalanced and port congestion.
Our operations team again executed with excellence managing Skus at the store level sustained in stock rates around 95%.
To help mitigate the financial impact of increased transportation costs, we leaned on our pricing power early in 2022 and are pleased with the initial consumer response.
More recently and like many other companies, we faced additional COVID-19 restrictions on our supply chain in China.
We feel great about how our team has risen to the challenge.
Our key suppliers are producing goods and we've manage the logistics to continue shipping our products.
We've also proactively taken up our inventory levels.
Looking ahead, we believe the challenges in China are transitory and will normalize as restrictions ease.
Our six series of advantages, we know how to win in the market.
Over the past eight years, we've expanded our retail footprint from 11000 linear feet of space to over 130000 linear feet.
Even with this growth, we see opportunity to gain space with each of our retailers.
What gives me even more confidence for the year ahead is how we've continued to drive best in class productivity with our retail partners.
Target is a great example.
Target is our most developed and longest standing national retailer.
Our average store footprint today is about 11 feet and we grew our target business by over 20% in fiscal 'twenty, two without incremental space gains.
We're quite pleased with the early results from our recent spring resets.
We continued to deliver strong consumption trends in March and Q1 to date, even as we lapped weeks of stimulus related spending.
Looking beyond the U S International represents major white space at just 11% of our business today.
We grew our international business by over 20% in fiscal 'twenty, two as we strengthen our position in both Canada and the U K.
Canada is a great example of our disciplined international expansion in.
In the past seven years, we went from having no sales in the country to Alf now the number seven cosmetics brand.
Up from number eight last year and the second fastest growing brand.
We expanded our retail presence last year with the launch of Alf and shoppers drug Mart.
Adding to our business with Walmart, Canada, and our local health cosmetics Dot Com site.
Q4 marked another big milestone in Canada.
Our first brand entry into Sephora with the law.
Launch of Kiesow care in for Canada.
Key Silkier continues to elevate our global retail strategy and opened doors to new retail partners.
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Our seventh year of advantage is our commitment to building a different kind of beauty company.
Our mission is to build brands that disrupt industry norms shape culture and connect communities through positivity inclusivity and accessibility.
Our deep commitment to clean cruelty free beauty with exceptional quality for the price has fueled the success of our flagship <unk> cosmetics brands since 2004.
And allowed us to strategically expand our portfolio of brands that support our purpose and values.
With our acquisition of well people the launch of T cell care and the unveiling of the skin, we have built a portfolio of distinct yet complementary brands.
Looking ahead, we see potential to add fast growing brands to our portfolio to expand our capabilities into adjacent categories or different consumer segments, while leveraging our multiple areas of advantage.
In summary, as we look ahead, we believe we are still in the early stages of realizing the full potential of our business.
We believe our seven areas of competitive advantage and differentiated brand portfolio will fuel our ability to win in fiscal 2023 and beyond.
I'll now turn the call over to Mandy Thank you to rank.
I am pleased to share the highlights of our fourth quarter and full year fiscal 'twenty two results as well as our outlook for fiscal 'twenty three.
We ended the year strong.
Our fourth quarter net sales grew 13% year over year.
Driven by broad based strength across our national and international retailers.
We continued to deliver positive consumption trends in the quarter, even as we lapped weeks of significant stimulus related spending.
This exceeded our expectations and importantly was supported by strength in both our core products and spring innovation.
Q4 gross margin of 64% was up approximately 100 basis points compared to prior year.
We saw gross margin benefits from cost savings and margin accretive mix, including benefits from the launch of recent innovation.
We also benefited from the price increases we implemented in May 2021, and in March 2022.
These gross margin benefits more than offset the impact of FX and elevated transportation costs.
On an adjusted basis SG&A as a percentage of sales was 57% up approximately 220 basis points versus last year.
The increase was primarily related to compensation benefits and marketing investments.
For the full year adjusted SG&A was 51% down approximately 90 basis points versus last year.
Marketing and digital investment for the quarter was approximately 17% of net sales as compared to 20% in Q4 last year.
For the year marketing and digital investments was approximately 16% of net sales in line with our expectations.
Q4, adjusted EBITDA was $13 million.
Adjusted net income was $7 million or <unk> 13 per diluted share compared to $9 million or <unk> 16 per diluted share a year ago.
Let's now turn to our full year fiscal 'twenty two results in short our results were exceptional.
As our team navigated a dynamic environment.
For the year, we grew net sales by 23% and adjusted EBITDA by 22%.
Our liquidity remains strong with the combination of our cash balance and access to our revolving credit facility sitting at approximately $140 million.
We ended the quarter with $43 million in cash on hand, compared to a cash balance of $58 million a year ago.
Our ending inventory balance was $85 million in line with our expectations as compared to $57 million a year ago.
As a reminder, we plan to carry higher inventory levels due to the combination of longer lead times.
Higher transportation cost and our continued business momentum.
We have benefited from this proactive inventory strategy during the recent COVID-19 related disruptions in China.
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 fiscal 'twenty three guidance.
For the full year, we expect net sales growth of approximately 10% to 12%.
Adjusted EBITDA between $85 million to $82 million.
Adjusted net income between 43, and a half to $45 5 million and.
And adjusted EPS of <unk> 78, two.
<unk> 81 per diluted share.
We expect a fully diluted share count of approximately 56 million shares and our fiscal 'twenty three adjusted tax rate to be approximately 27% to 28%.
Let me provide you with additional color on our planning assumptions for fiscal 'twenty three.
Starting with top line.
We expect to post double digit top line growth in each quarter of fiscal 2003.
<unk> discussed we are bullish on the cosmetics category and our ability to gain share.
Our consumption trends remain strong.
After significant variability and consumption trend over the past year from the combination of Covid and stimulus related spending we believe our weekly sales levels have rebased to higher and more normalized go forward rates.
Turning to gross margin.
We expect gross margin to be flat to slightly up year over year with benefits from pricing.
Margin accretive mix and cost savings, helping to offset elevated transportation costs.
As we discussed last quarter, we increased prices mid March to help offset the elevated cost environment, we're seeing.
These price increases impacted approximately two thirds of health cosmetics, skus as well as certain items within key sole care and well people.
While this round of pricing with broader than previous rounds, our opening price point on <unk> remain unchanged.
Enabling us to continue to deliver high quality products at an extraordinary value.
It's still early days, but we are encouraged that initial volume elasticities are trending better than our expectations.
Turning now to adjusted EBITDA.
We expect adjusted EBITDA to grow approximately 8% to 10% year over year.
While we expect cost pressures to weigh on adjusted EBITDA margin. This year like many companies, we still anticipate healthy adjusted EBITDA growth on top of the 22% growth in fiscal 2022.
Our outlook bakes in anticipated cost pressures and our non marketing SG&A related to outbound fuel and logistics costs.
In addition to the inbound transportation costs captured in our gross margin.
From a marketing perspective, we're planning to step up marketing and digital investments to approximately 17% to 19% of net sales.
Up from 16% in fiscal 'twenty two.
As Terry discussed our marketing investments are driving strong ROI and high levels of consumer engagement.
We're investing from a position of strength and believe these increased marketing investments will fuel long term growth.
Overall, we're energized by our fiscal 'twenty, two results and optimistic about fiscal 'twenty three.
Our performance both on an absolute basis and relative to the category demonstrates how our competitive advantages are driving results.
We remain confident in the long term potential for our portfolio of brands.
With that operator, you may open the call to questions.
And before we dive into questions.
Actually I want to acknowledge the devastating events that took place in Texas yesterday.
Another tragedy in an unsettling trend of mass shootings targeted at innocent defenseless people. Our hearts are deeply saddened and our thoughts are with all of the families who have been impacted by these recent strategy tragedies.
We may now open up to questions.
Thank you.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad.
You are 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 Argos.
Our first question comes from Dara <unk> with Morgan Stanley . Please go ahead.
Hey, guys good afternoon.
Good afternoon.
I just wanted to start on topline youre expecting double digit growth in fiscal Q1, despite the toughest comp for on a one or two year basis, and then for the full year, you're expecting 11% revenue growth, so really not much more in the balance of the year.
So I just wanted to get a sense of.
How you guys are thinking about that what's sort of built into the full year revenue guidance.
I know you guys typically start conservative and don't assume everything goes right and you've got a great job heading up sort of beating those initial numbers, but.
With another year of strong growth on top of strong growth last year, maybe you can talk about if you assume sort of some wiggle room or some areas adult go right given the external volatility so clarity on balance a year versus Q1 revenue and then sort of what's built in given some of the external volatility would be helpful.
Yeah. So I'll go ahead and take that.
One I'll just start by saying that I'm very pleased with our fiscal 'twenty net sales guidance range of 10% to 12%.
Additionally, the.
The momentum that we're seeing behind our brand is being tracked channel.
Data as well.
That gave us confidence to come out with a trained in this dynamic environment now.
I mentioned on the call that we're expecting double digit growth in each quarter of fiscal 2003, even as we cycle through Daniela.
Your point on Q1.
Double digit growth in Q1.
I think it's prudent for us to take a balanced approach as I always have with guidance, especially in this dynamic environment. So that's where we see initial guidance to 12% and <unk> and we will take it.
Okay that makes sense and then just two quick follow ups.
As you think about the level of macro risks potentially on your business, maybe you can take us through some thoughts both from a category perspective.
And then more so from an <unk> perspective, particularly given in theory, there could be trade down that could benefit you from a macro perspective. So just how you think through the macro environment and consumer spending and potential impact to both the category.
And then on the supply chain.
Just given there is so much occurring in China and a lot of companies have struggled with supply chain. How do you think about the level of risk this year to your business, particularly with very robust topline guidance and maybe sort of mitigating plans.
If you do see issues emerge in terms of the supply chain.
Thanks, Dara as far as the macro environment I would say there are more positives than risks for <unk> beauty I'll start first with the category I'm quite bullish on the color cosmetics category, we've seen it particularly over the last couple of months strong consumer response and growth rates above pre pandemic levels within the category is particularly.
Well positioned or a combination of providing the best of beauty accessible price points I think sets us apart.
And it's been one of the reasons, we've been able to grow share still robustly in this environment and fully expect to continue to grow share.
In terms of the other things I would say from a macro environment I know everyone has fears right now in inflation and what happens if there's a recession I think mass cosmetics has been pretty resilient in that environment and particularly so again it comes back to our fundamental value proposition of being able to give the best that these incredible price.
Points, and we're clearly seeing that strategy work in the marketplace on supply chain I'm incredibly proud of our team our entire operations team, but particularly our team in China and our suppliers on how we've navigated the lockdowns all of our key suppliers have remained in production have been shipping product.
Yet another indication of how resilient our supply chain is in terms of our overall performance and how we factor that in I think our guidance Embeds, a pretty balanced view of what we'd expect from a fulfillment standpoint, how that will play out through the year, but I don't know I don't have any worries right now in terms of our ability.
To be able to meet consumer demand and particularly given the trends that we're seeing so overall I'm feeling.
Confident in the category, even more so in Els and I'd say this.
Latest test over the last two months of the Lockdowns in China. Once again show just how resilient our supply chain is.
Great. Thanks very much.
Our next question comes from Andrea Teixeira with Jpmorgan. Please go ahead.
Thank you and good afternoon, congrats on the numbers.
I wanted to ask the topline growth.
Algorithm, a little bit of a different angle in.
And between the pricing and the volume.
If I'm doing my math.
For me, you're still increasing prices on a retail level like a buck.
So that keeps the price points like easy to understand and I understand also that the entry level ones were not changed which is great but on average you're probably getting into your algorithm at the low end or just a price increase or call. It 800 basis points coming from pricing.
Wanted to ask if that's that.
That makes sense and if so you are assuming a low single digit volume growth. Despite your you're gazing in shelf and Thats. What gives you confidence that you can get there is that is that the way to think.
So hi, Andrea how are you.
So.
A price volume standpoint.
I'm not quite getting to those numbers that you quoted there.
But youre right, we did take pricing and one dollar increments, we did keep our entry level price point. The same so we left those unchanged and what I can tell you on the pricing front is that we're pleased with what we're seeing thus far from an elasticity standpoint, So I think thats, great I think that we want to have a couple more.
<unk> to read the data before we take.
Take all of that and say this is what it's going to be and so probably by the August call, we'll be able to give more clarity around what we're expecting to see from a pricing standpoint, but your initial thoughts on $1 and maintaining of entry price points are correct.
Great if I can follow up on that.
So in terms of like I'm, assuming your shoe have gains in distribution from what you've called out in some of the day.
And your footage that you've gained some.
International gains you've called out Canada.
Before and in other places of the World. So if you think about that algorithm like that 10 to 12.
And then you have the pricing if and if my math isn't cry like if youre getting to a mid single benefit you.
You are saying like your volume can you give can you give us like a little bit of a color in terms of distribution gains against what can be of course, a headwind in terms of price elasticity.
Yes, so youre right distribution gains we did secure.
Yes, great expansion, we've talked previously.
At Cvs and internationally.
Fusin superdrug in different ones that we've mentioned previously.
That is giving us some momentum into fiscal 'twenty three.
I'd say and you can even see that in the Nielsen.
<unk> data and our volume has remained pretty strong unit volume growth has remained pretty strong even with the price increases and so like I said, we want I want to give it a little bit more time.
In the market to see full consumer reaction, but.
But yes, we do have distribution gains in that but I can tell you our core business momentum even outside of those gains just as we mentioned with target delivering over 20% growth for us last year in the absence of distribution gains was strong for us so.
Activity remains strong for us we do have distribution gains and then we do have the pricing as well as a component helping to drive that topline and Andrea. This is trying what I'd add to that is the confidence we have in our initial guidance of 10% to 12% is based on that balance we see pricing benefited unit benefits distribution and the most cigna.
They can be productivity just one note on the productivity numbers since Mandy did mentioned targeting our growth there.
In the last six months, if you combine both cosmetics and facial skincare Alf just surpassed neutrogena D. The second biggest brand at target carries amongst their color cosmetics and facial skincare brands.
Past L'oreal think a year or so ago to be the number three position I'm very pleased that we just passed neutrogena.
According to Nielsen.
Nielsen tracked channels, and so feel really great about our momentum including in environments, where we have been without incremental space and the <unk>.
Productivity model, we have.
Thank you.
Congratulations and best of luck.
Okay.
Our next question comes from Linda Bolton Weiser with D. A Davidson. Please go ahead.
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Yes Hello.
<unk>.
So can you make.
Kind of on the pricing front.
Obviously competitors are facing the same cost pressures you are can you make any comments about what movements, you've seen competitors, making as well have you seen pricing go up there as well.
Anything unusual that you that you've seen on the competitive front. Thanks.
Yes, so I'd say, it's still difficult for us we don't tend to track competitor pricing moves or announcements, but what I would tell you. It's a little difficult right now just because.
Doing spring resets you see AUR often go up through innovation mix. So we haven't been able to tease apart how much of this is choose straight price increases versus the normal spring innovation makes it as Mandy said come August we'll have a much clearer picture of who followed us on pricing, what what that looks like and again.
We're pleased with our initial elasticities.
That holds.
Okay and then.
Can you do.
I've heard some questions from investors just on the kind of absolute like door performance of Alicia Keys, I guess theres. Some doubters out there that the brand is performing well, but your verbiage is certainly very positive and it's gaining space among retailers, but is there any way you can convey like sort of the growth of Alicia.
Kind of on a like door basis. Thank you.
We haven't broken out Alicia keys or any of our brands as a single reporting unit what I will tell you, though is a couple of things. One is we continue to see sequential improvement at Ulta, which is a one customer but we've been in the longest.
It would be to glass is the second customer we entered into so we liked the builds that we're seeing at both customers in particular in the quarter we had.
A viral hit with our illuminating serum that product quickly sold out we just recently got some more it sells out again, so it's great to see that momentum in our first color scheme and hybrid product and so again, we feel good about where we are at least with Quito care.
And including our recent entry into Sephora, Canada.
Okay. Thank you very much.
Our next question comes from Steph Wissink with Jefferies. Please go ahead.
Alright. Thank you everyone and we have a question about marketing and maybe this is a two part question shrink for you just a philosophical question.
16% was kind of a targeted level that you had.
Modelled us to over several years now you're taking it up again in 2017 to 19, maybe talk a little bit about what you think the right level of marketing is for the brand and I think historically you were powering that marketing spend for gross margin advancement, but you're guiding to flat to up slightly this year. So youre effectively borrowing from EBITDA growth So talk.
Little bit about that philosophically and then Andy if you could just share with us.
2% more at the midpoint is there AD rate revenue or excuse me add rate cost that's going up that's a part of that inflation or is it truly kind of like for like more marketing.
More impact thank you.
Hi, Steph what I'd tell you on our marketing and our philosophy is it's working I take a look at our strong ROI, what we've been able to deliver in topline and we like the momentum that we're seeing and so our approach over time as we have stair stepped it sometimes we stair stepped it within our fiscal year. So we said, let's start with <unk>.
Our strategy just come out and say, what we expect the range to be this year and feel good about that range relative to our plans. So.
So I'd say, the 17% to 19% is reflective of both the strong ROI, what we're seeing from a topline and engagement standpoint, and we feel great about it.
One of the proof points are feeling great about it is if you just look at our fiscal 'twenty two relative to where we started our guidance to where we ended up not only do we have 23% top line growth that we had 22% adjusted EBIT growth. So we feel that that model works really well the second thing I would tell you. It is.
I don't think its borrowing from EBITDA growth. If you recall, we are still carrying a thousand basis points of cost headwinds and so we do not expect all of them to persist over time. So we do see this tremendous leverage in this business not only the leverage we got in the non marketing parts of SG&A in fiscal 'twenty two.
But also as we take a look at the cost environment going forward, we feel we've done a pretty good job of capturing the knowns costs or the costs that we know and depending on what ends up happening with the tariff environment with some of these other transportation costs over time, we think there's tremendous leverage in the business, but we like the formula that we've been having over the last three years I think we're the.
Only company in our only brand in our space that's grown share all three years, that's had 13 consecutive quarters of net sales growth and is now starting to see pretty strong profit growth. In addition, and that profit growth potentially could get higher depending on what happens on the cost front.
And then to answer your question Stefan that two points more at the mid point there is a portion related to inflation.
Cost inflation from an advertising standpoint, but the majority of that is just putting further investment of <unk> behind those high ROI.
Marketing investments.
Okay. That's very helpful. Thank you trying for that color, especially.
Okay.
Our next question comes from Olivia Tong with Raymond James. Please go ahead.
Great. Thank you.
First one is just around obviously you sound very bullish with the double digit growth every quarter.
<unk> coming in nicely.
And and shelf space gains could you just talk a little bit about perf.
Performance during prior downturns, you know, obviously, the great recession, being one period and weather.
Whether you've seen them.
Some trade into your brands or how you think about the impact to you from.
What could potentially be.
A more pins to consumer.
And then in the near future. Thank you.
Hi, Olivia this is <unk>. So what I would tell you is as we've taken a look at some of our data in past Recessionary times mass cosmetics has actually held up pretty well I think it's been pretty resilient I think.
In recessions prestige cosmetics tends to take a much bigger hit.
And then within mass color cosmetics Alpha has done well now I'll caveat that by saying we were a much smaller business. The last recession that we saw versus where we are right now, but I feel good in terms of the fundamentals of the business, particularly our consumption trends post taking pricing.
We've seen a real strength in terms of our consistent track consumption over the last couple of months, which gives me confidence as we head into this now we're always very.
And balanced and cautious as we take a look at the consumer sentiment and nobody really knows where it's going to go but I would say part of what I liked about our pricing approaches as Mandy said, we took prices up on two thirds of items, we kept a third of our items, which were our best price points, our opening price points to $3 unchanged. So I think it gives us.
Tumor really two different options to fine <unk> beauty first is where our unique capability of bringing prestige quality products and making them more accessible so like our $10 power group primer, which is our number one item still compares to prestige item that's over $34.
And two if you are pinched because of the inflationary environment you still have a wealth of 234 dollar items that you can get from <unk>. So we like that approach in terms of being able to bring the best of beauty make it accessible and have extraordinary value and even in difficult times.
Great. Thank you that's helpful. And then in terms of marketing in that 100 to 300 basis point acceleration that you're planning for this year.
You talked about how there.
Some incremental cost associated with just higher cost of marketing, but is there a particular area, where you are focusing more spend or is it pretty ratable across the various buckets of social versus other areas.
Yeah, we've seen strength across the various vehicles from a marketing standpoint, so our spending overall is 100% digital we've seen really good results in terms of our digital advertising or direct response, particularly strong results in our PR and Influencer program. So it really is feeding that I had.
From a consumer standpoint, we made major gains in our latest attitude and usage study not only in unaided awareness, but amongst other targets advances. In addition to the strengths we already have in Gen Z amongst millennials and Gen <unk>.
And so we feel having a bit more on that marketing and being able to reach some of those other audiences is good for our long term success as well, but I'd say overall, we see strength across vehicles.
Got it and then just one sort of housekeeping question the tax rate being guided to 2017 to 28 for next year, that's fair bit higher than it has been for quite a number of years. So is this just a function of starting the year and not knowing what kind of credits you could potentially get or is there. Some change in terms of either tax legislation that you're embedding.
During or.
Geographic mix or anything like that that's that's driving that that rate higher.
Yes, So hi, Olivia it's Mandy.
27 to 28 is kind of our baseline tax rate in the years past, we've gotten discrete benefits.
Related to stock based comp and so we have just not baked any of those discrete benefit in at this point and we'll see how that tracks throughout the year.
Great. Thank you so much.
Our next question comes from Oliver Chen with Cowen. Please go ahead.
Hi, Mandy what we're also seeing here at Cowen is definitely a growing up cycle would love your thoughts on color cosmetics, and where we are within that innovation period is it Ted.
In the past.
Second there are parts of Walmart and target them or is that are over inventoried, the beauty and personal care is still doing great.
Are there do you have any thoughts on how they are planning inventories and how that impacted your guidance with sell in and sell out.
Yeah.
Alright, so in terms of that going out cycle I definitely feel that we are seeing the same thing. If you think about our glossy let's say for example that is I'll, let Spain and.
Really speaks to taking off your math getting that back out theyre going to different events being social traveling all of those things and so we really are pleased with how our innovation is resonating.
Right now.
And I would say that we remain bullish on color cosmetics category generally I think we're at a unique stage, where we do have this reopening two years people have been kind of put away and this summer I think people are coming out they are traveling they're doing all kinds of things. So I do think that beauty will continue to be a positive recipient of.
That behavior and in terms of Walmart and target in terms of how they are planning inventory really no change for us I mean target talked about how beauty continues to be a growth category for them.
We continue to be able to service both of Walmart and target as well as our other retailers during this time and so we're.
Feeling great about our ability to kind of fulfill their.
Their needs at this point.
Okay and your loyalty program would love an update on using data or artificial intelligence any engagement tools. As you look ahead two priorities.
That could be an important engagement tool and innovation tool.
Also ahead of the curve often so on the topic of another person that is would love any thoughts.
Hi, Oliver this is <unk>, so what I would tell you our loyalty program is absolutely essential not only for our cosmetics dot com, where our royalty members make up the vast majority of our sales.
But also in terms of feeding the rest of our digital ecosystem. This first party data that we get from our $2 9 million loyalty members, which we grew membership 20%. This past year is absolutely invaluable for all of our efforts from a targeting digital marketing standpoint, so you'll continue to see greater and greater emphasis on our beauty squad.
Loyalty program as we continue to enhance the experience continue to recruit more members and how that drives the rest of our business.
Our team is always at the forefront.
Digitally in terms of blazing new ground in territories in many respects I would say we already are in the meta versus if you take a look at our efforts on Twitch and both in gaming as well as what we're doing throughout a number of our platforms and Youll continue to see more from us in that regard.
The year, so look forward to sharing some of our initiatives there.
Okay final question on marketing as you increase the rate as a percentage of sales.
What are your priorities here, whether it be top of the funnel.
Thing about zero, and first party data collection and or how.
How you should think about this across your portfolio. Thank you.
So I'd say on our marketing hub.
Already talked on vehicles, we see opportunity in every one of our vehicles, whether it be overall awareness building, whether it be our PR and influencer programs.
Even direct response, we there is a good approach we have in terms of taking a look at the rois as well as holding some of the money to continually.
Test and learn in new territory. So thats, how we got into tick tock, that's how we got into Twitch, even our most recent.
Collaboration we do with Dunkin' that had over $5 billion press impressions generated a lot of buzz brought in a number of new users. We have a good approach of kind of allocating those dollars between things that we know will drive higher ROI and things that really keep the brand top of mind and bringing in new users.
Feel feel really good about the approach that we have there.
Okay.
Thank you best regards.
Your next question comes from Bill <unk> with <unk> Securities. Please go ahead.
Hey, Thanks, good afternoon.
Good afternoon.
Hey, maybe a little more color on elasticity in your comment of.
We're pleased with with where it's gone so far I mean stronger what youre thinking for elasticity are you viewing that as a consumers are going to trade down.
From higher products within your portfolio to opening price point, which doesn't normally happen do you think that you benefit from other cosmetics, Matt even mass cosmetics at or higher price trading to U.
Just trying to understand what youre expectations are because you have a very unique kind of price positioning and price proposition.
And you would think that theres, probably more benefit than offset but I'm not even sure if there's that much of a.
Trade down within your portfolio or Youre expecting that.
That's right Bill we don't we do not expect to trade down within our portfolio. When we talk about elasticity as we're talking about the items that we took pricing up a dollar on the approach. We used was we modeled it after the pricing that we did the successful pricing we did in 2019 and put some more conservative assumptions on just given the magnitude of our price.
Increased this time and the overall inflationary environment. We're in so when we talk about elasticity specifically those elasticities on the items. We took up we're seeing less of a unit loss and in some instances of unit gains on those items, which is highly encouraging as Mandy said, we want more time to go by to just make sure that yes.
Rice's are fully reflected we continue to see that but that's that's one the main elasticity, we're talking about in terms of the second part of your question.
We do believe we're a beneficiary not only in terms of taking share from other mass brands, but from.
Gaining volume from some of the prestige players as well, particularly given the type of innovation, we have and the strength of that innovation. We believe that we are actually benefiting both from share gains as well as pulling from the prestige buyers as well.
Okay. That's helpful. And then maybe you have a pretty tight range I know you always do in terms of EBITDA for the full year is that a kind of application that you have a pretty good.
Horizon to see the costs and I guess within that.
Thoughts on currency impacting for the full year this year.
Yeah. So yeah, we do typically always have a tight EBITDA range and as I spoke to the cost pressures that we baked in for this fiscal year are really more around transportation logistics container costs things of that nature from an FX standpoint, we don't anticipate FX to be a decrement to.
Gross margin as we have as we've talked in the past.
And so that will be less in the narrative more focused on the impact that we're seeing from pricing the cost savings that our team in China continues to work on every year, helping to offset some of those cost pressures that we're seeing.
Got it and then one last one sneak in on the distribution gains I know you don't talk about individual brands as much but it does seem like well people has gotten some meaningful national distribution at target.
I'm not sure was always there is that part of the gains there or is it just.
I missed it before.
Yes, I'd say well peoples had a good presence with target one of our focus areas as we believe well people can be one of the key lead brands as part of target's clean beauty initiative.
I don't think we've disclosed anything on that front, yet, but certainly it's a focus of ours, we see a lot of potential at target with well people.
And in addition to alter where we are in a subset of their doors well people remains the gold standard of plant powered clean beauty that works and we see a lot of potential for that brand, particularly at those two customers within others that have an interest in clean beauty.
Great. Thanks.
Our next question comes from <unk>.
Correct.
Oppenheimer. Please go ahead.
Afternoon. Thanks for taking my question. So two financial questions. So first just on the adjusted EBITDA line is there any more color you can just give in terms of the quarterly cadence as you think about it for the upcoming year.
So we gave some color on topline of expecting double digit growth.
Each quarter, we have not given any color on what to expect from an adjusted EBITDA standpoint on each quarter and I think that if you're asking just from a modeling standpoint, you could probably just take what that EBITDA margin rate is kind of peanut buttered across the quarters and then you can kind of true that up as the quarters come in.
Okay, Great. That's helpful. And then second just just on the operating cash flows. This year. There is a heavy investment in inventory just given some of the supply chain challenges out there I think I believe also we should use within that number as well.
Any color on your expectations for operating cash flow this year, and whether you expect inventory to be another investment in the upcoming fiscal year.
Yes, we do expect our operating cash flows to be stronger this year to your point refresh we did have a big build up in inventory. It was a planned build up as we have talked for several quarters just navigate through the supply chain environment. So we don't anticipate having to make that same level of investment behind inventory on a year over year basis, So should see.
Some improvement in operating cash flows this year.
Okay, great. Thank you.
Yes.
Your next question comes from Jon Andersen with William Blair. Please go ahead.
Hi, Good afternoon, everybody two quick ones for me one.
On the common comments in the prepared remarks around Willy.
Willingness to add additional brands to the portfolio.
I know.
You've been talking about this for a while and we've actually executed on this through acquisitions and internal brand development.
Can you talk about.
Balancing your desire to let's say see.
Key brands like <unk> sole care and well people ramp.
Achieve some kind of critical mass.
Before going out and adding maybe through acquisition of another brand and then if.
If you were to add another brand, what what kind of categories or technologies would you be kind of looking would be high on the priority list I guess.
Okay.
So John this is trying I'll tell you our first priority is really realizing the full potential of our current brand portfolio, we see a lot of growth in cosmetics.
Well people in Keystone care.
<unk> is a great example, I mean, we grew in tracked channels I think are consumption up 18% last year relative to category that was up nine you're about to see increased support on our scan our first campaign on all scanned.
Technology pipeline and innovation pipeline that continues to be extremely strong. So we have high hopes and our current brand portfolio, that's where all our focus is and so I'd say most of the companies that's where the focus is in terms of M&A. We do think there is a role for it and I would say, it's not dependent on what's the level of scale, we get we <unk>.
<unk> acquired while people almost sub scaled a big driver of well people for us was getting the capabilities.
Clean beauty.
Gave us the confidence to reformulate 350, <unk> Skus last year and get off to a clean standard also gave us the capability of kind of ticking well people into other distribution and be able to go there, but it was a pretty small brand when we acquired it key sale. So care is still a new brand we feel good about its trajectory, but it's still in the early days. So they are at.
Long way to go in the Meanwhile, if we do see a brand that can bring and can complement our existing brand portfolio either leverage the capabilities, we have will bring us other capabilities, including in potentially adjacent categories within beauty.
Open to that but because we have the strong growth organic growth within our current portfolio. We have the luxury of being highly disciplined there. So we've looked at a number of different things decided that we didn't think the valuation was right for us and it's passed on it you've seen us kind of disclose some of the costs related to that so I feel good about where we stand main focus being in our current brand portfolio.
Are you being open to potential M&A.
Particularly given the strength of our balance sheet, but there is no gun to our heads in terms of timeframe or whether we even have to do an acquisition.
Okay that makes sense.
And then maybe one for Mandy.
Maybe you mentioned I think that the outlook for gross margin in 2003 was.
Flattish to slightly higher.
Is there anything from a quarterly progression perspective that we should be aware of.
I'm thinking the incurrence of certain costs or.
Benefit of price adjustments or cost savings programs I guess, it's just a question around the cadence of gross margin through the year.
Yeah, So I think from a modeling standpoint, John it's probably safe to assume.
The annual gross margin on across each quarter I would say that there's probably some variance in the second half. If you recall last Q3, we had a really high gross margin because we didnt have that holiday program, there, but from a year over year growth standpoint, probably done some variance there but.
I would say just since this is the beginning of the year and we're just kind of resetting everything out or just kind of use that annual across the quarter and then we'll and we'll update as we go.
Great. Thanks, so much.
Our next question comes from Mark.
Jerry <unk> with Stifel. Please go ahead.
Yes, thanks, good afternoon, everyone.
I guess two quick questions. One could you help just reconcile your reported sales results with the scanner data in terms of perhaps just what the untracked channels are doing obviously would imply that there.
A little bit slower growing so any sort of directional color there would be helpful. And then just second question.
On AD spend over time your peers.
On average, we're spending a bit more than where you are projecting even for for this year up obviously from from prior years.
How do you think about it kind of holistically longer term.
If you get this.
Potential for.
Some of those thousand basis points of cost that you've been incurring start to come back how much gets reinvested in the form of.
That line over time, and you kind of what in your minds drives that.
Alright, Thanks for the question Mark.
In terms of reconciling sales results versus scanner data I think I mentioned this in our prepared remarks, but there has been a lot of just volatility between what you see on the scanner data from a week to week basis kind of how our shipments have flowed just given kind of the things that we're cycling stimulus and then before stimulus there were historic closures at Ulta and internationally.
We're kind of in the base, so I would say that.
I would take the scanner data as a sign of strength certainly is a sign of strength for us right now, but I would not necessarily correlate that to a weakness in other parts of our business. If our net sales doesn't materialize in that way.
We have been really focused on making sure inventory levels are right at retailers and different things like that those can kind of shift things around versus what you'd see from a consumption standpoint.
So I would I would kind of look to our guidance as you know that's where we expect to see things for the year and then we'll take it from there and then if you look on a fiscal year basis, the scanner data would.
Basically indicate youre growing faster in non tracked channels and you are in tracked channels and so obviously some noise in the more recent but if you took on an annual basis I think we feel good about growth across our enterprise.
And then on your second question in terms of.
The spending in our approach there I think there's a healthy tension there I've mentioned before the marketing Rois are quite strong and thats, what really drives us to be able to invest more.
What we're seeing from an engagement standpoint from a topline growth standpoint, but we also believe in good profit progression I'm really proud even with the cost environment, we faced in fiscal 'twenty, two 'twenty, 3% topline growth and 22% adjusted EBITDA growth.
The cost environment, we're in I think thats phenomenal performance as we look at FY 'twenty three we continue to have these cost headwinds. So we're hoping that some of those abate, we're able to flow more of them to the bottom line.
There will always be a debate of how much do we want within marketing versus the bottom line, but I would say.
We definitely see the leverage potential of the business given the outsized cost that we've been carrying and so.
Very long way of saying I think you might see a little bit of both but probably a little bit more to the profit.
Our next question comes from current Meyer with Piper Sandler. Please go ahead.
Hi, good afternoon, and thanks for taking the questions. So first I just wanted to push you a little bit more on the commentary around the.
Trade down reps consumers from prestige to more math.
So as that's happening just how are you thinking about the resiliency of the Keystone care brands in the world people brands.
These maybe recessionary times there are some prestige consumers that are trading down.
Yes, I'd say our strategy overall as a company is best of beauty made accessible and that includes on well people in prestige. So care. If you take a look at the quality of well people as a gold standard.
Clean beauty.
Its price points average I think price points around $18 on well people is significantly better value than some of the other alternatives. They are seeing with Keystone care I think it's about $23 average unit retail relative to the quality of that brand compared to the prestige brand. So we think they fit well now we will have to see I would say I'm, particularly bullish on al.
Color of skin given my previous commentary is on mass versus prestige, but particularly given that both well people and he's still care still kind of in the early days, we see plenty of growth regardless of the broader economic environment.
Helpful. Thank you and then last one for me is I know you don't break out sales in the various brands and you've said keys is doing well and while people are obviously growing pretty well, but can you give us any color on how the mix of brands has changed over the past year, and where you think that mix is going to go.
Okay. So.
Right Corinne, we don't break it out by brand but.
Think that you've heard our commentary.
The strength that you see and track channel really speaks to the strength <unk> seen behind the elf cosmetics and skin brands.
And the Nielsen data and I would say that keys, and well are contributors to that as well and we feel great about the mix of our brands and having diversified really.
A single brand color cosmetics brand to now a portfolio of four distinct brands and <unk>.
Great about how how that sets us up for the longer term.
Thank you.
This concludes our question and answer session I would like to turn the conference barcode recurring Amit for any closing remarks.
Well. Thank you everyone for joining us I'm, so grateful for our incredible team at <unk>.
For again, delivering an outstanding results to close out fiscal 'twenty two.
We look forward to seeing some of you at our upcoming Investor meetings and speaking with you in August when we'll discuss our first quarter results. Thank you and be well.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.