Q3 2023 elf Beauty Inc Earnings Call
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Back in stock.
The Halo glow liquid filter and now with special Radian to point and Alpenglow Storm High and yes, you heard that right. We are officially on storms was.
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And find out.
Thank you for joining us today to discuss <unk> third quarter fiscal 'twenty three results I'm KC cotton, Vice President of corporate development and Investor Relations with me today are touring Amin, 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 Ulta beauty dotcom.
Since many of our remarks today contain forward looking statements. Please refer to our earnings release and our 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 are.
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 Turing.
Thank you Casey and good afternoon, everyone.
Today, we will discuss the drivers of our Q3 results and our raised outlook for fiscal 'twenty three.
We delivered Q3 results well ahead of our expectations.
We grew net sales by 49%.
Increased gross margin by 180 basis points and delivered $37 million and adjusted EBITDA up 69%.
Q3 marked our 16th consecutive quarter of net sales growth.
Given our momentum we're raising our full year guidance.
Yeah.
We are encouraged by the continued strength, we're seeing across the color cosmetics category.
In Q3 category trends grew 8% versus a year ago.
F cosmetics continued to significantly outperform the category growing 36% in tracked channels.
We grew our market share by 150 basis points and increased our ranked as the number four brand as compared to number five a year ago.
We continue to be the fastest growing top five brand by a wide margin.
In skincare Q3 category trends grew 6% versus a year ago.
<unk> also significantly outperformed the category growing 34% in tracked channels.
Yeah.
Before diving into our key growth drivers I want to share a few highlights.
In the last year Alpha has been celebrated for the power of our company.
Brands and disruptive marketing engine.
We are humbled by the recognition we continue to receive.
In Q3, we were named beauty brand of the year in the mass category by women's wear daily.
And recognized on Forbes annual list of America's Best Midsized companies.
We continue to be recognized for our purpose and values as we strive to create a different kind of beauty company.
One that is both purpose led and results driven.
With the appointment of <unk> to our board of directors. We are proud to be one of only four public companies out of nearly 4200 with a board that's at least two thirds women and one third diverse underscoring our commitment to diversity and inclusion.
Three fundamental drivers of our business continued to fuel our results are.
Our value proposition.
Powerhouse innovation and disruptive marketing engine.
Let me explain how each of these drivers underpinned our strength in Q3.
First we are known for our value proposition, we make the best of beauty accessible to every eye lip face and skin concern.
We take inspiration from our community and the best products in prestige to deliver high quality, Holy Grails and extraordinary prices.
We often get questions, whether our growth can be attributed to trade down from prestige or trade within from mass.
While we see benefits of each we believe the more fundamental point is that our value proposition creates accessibility driving category expansion.
We have many examples where the accessibility of our Holy Grail innovation significantly expanded the number of consumers who participate in a particular category.
I'll start with primers.
A few years ago, our prestige brand introduced a new prime a format at a $52 price point that quickly became a top primary in prestige.
We took inspiration from this item.
Added our own unique twist and launched cordless putty primer.
Our price point of $8 invited a much wider range of consumers into this space significantly expanding the entire putty primer category.
In fact looking at data over the last year, we've sold over nine times the units of the prestige primer.
And both <unk> and the prestige item have continued to grow units at a double digit pace.
It's not just in primary so we see the benefits of eligibility to make the best of beauty accessible.
We also expanded the concealer category with the launch of our Camo Concealer is $7 compared to the prestige comparison at $31.
Over the last year, we've sold nearly double the units of the prestige comparison with both our camo concealer and the prestige product growing units at a double digit pace.
In both cases also expanded the category by attracting new consumers, who are looking for high quality products at a great value.
We're making the best of beauty accessible we're both expanding our share of the category and making the whole category bigger.
The second driver of our performance is that we're an innovation powerhouse.
Our innovation engine is built category leadership over time.
Our largest segments brushes primers setting sprays browse eyeshadow can sealers and sponges.
Collectively make up over half of our cosmetic sales.
We continue to gain share in all seven segments, while maintaining the number one or two position within each.
We know how to build winning franchises across categories.
Our growing putty primer camo franchises are great examples of how our multiyear innovation is driving our share leadership in key segments.
Our power franchises a more recent example.
We launched our original power grid primary in late 2021 at an incredible value of $10 compared to the prestige item at $36.
In 2022 power group was our top selling skus.
And then number two SKU across the entire U S mass cosmetics market According to Nielsen.
F cosmetics power group was also the number one face primer SKU across the entire U S prestige beauty markets. According to the NPD group, coupled with our multi year innovation in primers Alf now holds the number one position in the face primer category in both the mass and prestige markets.
We're building upon the success with our recent launch of our power group primer with 4% Niacinamide.
At the same $10 price point this hybrid product delivers on our community's desire for makeup with skin care benefits.
The sticky texture grips makeup for a long lasting wear.
While 4% Niacinamide helps even out and brightened skin <unk>.
This item has proven to be highly incremental further expanding our power group franchise.
We are also innovating in areas, we currently under index on share.
Our spring 2023 launches include a few great examples.
In Mascara, we launched lashing rural Mascara.
Mega currently mascara with unique double sided in curve silicone brush to lift and separate lashes for an eye opening effect.
In lip we launched our <unk> sat lipstick.
That delivers a bold satiny color with a creamy long lasting finished and is infused with hydrating squalene and jojoba esters for a super comfortable next to nothing field.
Skin care, we launched our youth boosting advanced night retinoid serum.
Powerful retinoid that reduces the appearance of fine lines, and wrinkles overtime to reveal rejuvenated smooth and radiant skin.
In skincare, we also launched our son Touchable, we'll grow SPF 30.
Our lightweight faced some screen that doubles the makeup primer and leaves skin with a growing finish.
As compared to the approximately 7% share we have across the cosmetics category, we have a 1% share in mascara lip and skincare.
For context, Mascara has a $900 million category and the largest segment within cosmetics.
Lip color is nearly a half a billion dollar category.
And skincare is over a $5 billion category within mass.
Yeah.
We have significant white space in these large segments of beauty and the innovation engine to conquest them.
The third driver of our performance is our ability to attract and engage consumers with our disruptive marketing.
We kicked off the holidays with a first of its kind digital campaign informed by the insights from the weather channel and brought to life with Grammy Award, winning Meghan Trainor Meghan delivered a special radiance report across social channels to break the news of an LC growth storm.
Celebrating the restock of a viral sensation halo glow liquid filter.
The trifecta of Els, the weather channel and Meghan Trainor helped us reach new audience and entertain our community.
The campaign generated over 5 billion press impressions exceeding last year's holiday campaign by a wide margin.
Over the past three years, we've increased our marketing investment from 7% of net sales to 16% and continue to expect marketing near the high end of our 17% to 19% range for fiscal 'twenty three.
We recently completed our annual Nielsen marketing mix analysis, and again saw exceptional ROI results.
Giving us further confidence that our marketing and digital initiatives are driving brand demand and delivering profitable growth.
We expect these three drivers of our performance our value proposition.
Power House innovation and disruptive marketing engine to continue to fuel our results.
Looking beyond fiscal 'twenty three we believe we're still in the early innings of unlocking the full potential we see for the <unk> brand.
Taking category shares <unk> API, we see a lot of runway for growth.
Nationally with a number for cosmetics brand with a 7% share.
In target, our longest standing national retail partner.
We're the number two brand with a 13% share.
The significance of our position and share at target is that we entered target in 2008, a number of years ahead of our other national retailers.
We believe that our position at other major retailers could mirror that of target over time.
And even at target.
We believe we still have opportunities to continue to take share and become the number one brand.
On our Q2 call we discussed the space expansion, we've earned with target for spring 2023.
As we continue to drive productivity and expand our footprint across customers, we see a significant opportunity for growth.
We also see considerable white space internationally with.
We've recently expanded space at shoppers drug Mart in Canada, and Superdrug in the U K.
And they're still has more room to grow.
International represented approximately 13% of our health beauty sales in Q3 with the business growing nearly 80% year over year.
We're seeing strong results behind our disciplined expansion strategy in Canada, and the U K.
As compared to a number four position in the U S.
We the number seven brand in Canada, and the number eight brand in the U K.
We recently hired a new GM of international and plan to build out that team to further penetrate international markets.
Before I turn the call over to Mandy I wanted to discuss our brands superpowers, which set the foundation for overall competitive advantage.
With Elf consumers can have premium quality beauty products at accessible price points with broad appeal that our cruelty free vegan clean and fair trade certified.
While other beauty brands can try to replicate any one of these we believe the unique combination of our expanding superpowers forms our competitive moat and fuels our ability to win in fiscal 'twenty three and beyond.
I'll now turn the call over to Mandy.
Thank you Jerome.
Our third quarter results were outstanding.
Q3, net sales grew 49% year over year, driven by broad based strength across national and international retailers as well as digital commerce.
Shipments exceeded consumption trends this quarter due to pipeline shipments related to our spring 2023 states gains and Walmart.
Margaret Cvs and shoppers drug Mart as well as increased shipments for the restart of our viral sensation Halo glow liquid filter.
Our digitally led strategy continues to serve us well.
Q3, digital consumption trends were up over 75% year over year.
Digital channels drove 17% of our total consumption in Q3 as compared to 14% a year ago.
We see opportunity to increase our digital penetration, particularly as we're able to further enhance our beauty squad loyalty program.
Beauty squad now has nearly $3 5 million members with enrollment growing over 25% year over year.
Our loyalty members drive almost 70% of our sales on our cosmetics dot com have higher average order values purchase more frequently have stronger retention rates and are a rich source of first party data.
Gross margin of 67% was up approximately 180 basis points compared to prior year.
We saw gross margin benefit from the price increases implemented last March.
Margin accretive mix and cost savings.
These gross margin benefits more than offset the impact of costs associated with space expansion and inventory adjustments realized in the quarter.
On an adjusted basis SG&A as a percentage of sales was 47% compared to 50% last year.
We drove leverage in our non marketing SG&A expenses as a result of our better than expected top line trends.
Marketing and digital investment for the quarter was approximately 17% of net sales as compared to 15% in Q3 last year.
We continue to expect marketing and digital investments for the full year to be at the high end of our 17% to 19% range with Q4 expected well above that range.
Q3, adjusted EBITDA was $37 million.
Up 69% versus last year, and adjusted EBITDA margin was approximately 25% of net sales.
Adjusted net income was $27 million or <unk> 48 per diluted share compared to $13 million or 24 cents per diluted share a year ago.
Moving to the balance sheet and cash flow.
Our balance sheet remains strong and we believe positions us well to execute our long term growth plans.
We ended the quarter with $87 million in cash on hand, compared to a cash balance of $33 million a year ago.
Our ending inventory balance was $81 million compared to $85 million a year ago.
Our average customer in stock rates were over 95% in Q3, and we remain confident in our ability to meet the strong consumer demand we're seeing.
I'm also pleased with the strong free cash flow generation, we've seen year to date of approximately $67 million.
As we previewed last quarter, we paid down approximately $25 million of our outstanding debt in Q3 and response to the rising interest rate environment.
Given our strong cash position.
We ended the quarter with less than one times leverage on a net debt basis.
We expect our cash priorities for the year to remain on investing behind our growth initiatives 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 38% to 39% versus prior year.
Up from 22% to 24% previously.
We expect adjusted EBITDA between $110 5 million to $112 million up from $93 5 million to $95 million previously.
We expect adjusted net income between $75 5 million to $77 million up from $59 million to $65 million previously.
And adjusted EPS of $1 37 to $1 40 per diluted share up from $1 seven to $1 10 previously.
We expect our fiscal 'twenty three adjusted tax rate to be approximately 19% as compared to 22% to 23% previously.
Lastly, we continue to expect a fully diluted share count of approximately 56 million shares at year end.
Let me provide you with additional color on our planning assumptions for fiscal 'twenty three.
Starting with top line.
Our raised outlook reflects our strong Q3 performance and ongoing business momentum.
In Q4, our outlook implies approximately 42% to 46% net sales growth, reflecting the strong consumption trends we're seeing.
Turning to gross margin.
We now expect our gross margin to be up approximately 200 basis points year over year as compared to our previous expectation for up 175 basis points.
This is largely a result of our outperformance in Q3.
In terms of the key puts and takes for the year.
We expect gross margin improvement from the price increases implemented in March of last year.
Margin accretive mix and cost savings to more than offset the impact of higher transportation costs.
And costs associated with space gains relative to prior year.
Turning now to adjusted EBITDA.
Our outlook implies adjusted EBITDA growth of approximately 48% to 50% versus prior year.
Up from approximately 25% to 27% previously.
And on top of the strong 22% growth in fiscal 'twenty two.
We expect our marketing and digital spend to be at the top end of our 17% to 19% range.
Up from 16% a year ago.
Even with that increased investment our outlook implies adjusted EBITDA margin leverage of approximately 150 basis points year over year.
As compared to approximately 50 basis points previously.
The improved outlook is supported by the combination of our strong sales growth gross margin expansion and leverage in our non marketing SG&A expenses.
Overall, we are quite pleased to be in a position to meaningfully raise both our sales and profitability outlook and what continues to be a dynamic environment.
In summary, we're pleased with our outstanding Q3 results and remain upbeat on our long term growth potential.
As <unk> discussed we continue to see significant white space across cosmetics and skincare, both domestically and internationally to support our expected top line growth.
The easing cost environment gives me further confidence in our ability to continue to expand our adjusted EBITDA margins.
Finally.
We believe our solid balance sheet low leverage and strong cash flow generation can continue to drive shareholder returns and support our overall growth.
With that operator, you may open the call to questions.
Thank you.
We will now begin the question and answer session.
Ask a question you May press Star then one on your Touchtone phone.
If you're using a speakerphone please pick up your handset before pressing the key.
Withdrawn from the question queue. Please press Star then two.
At this time, we will pause momentarily to assemble.
Our first question comes from Dara <unk> with Morgan Stanley . Please go ahead.
Hey, guys good afternoon.
Good afternoon.
So clearly very strong topline growth in the quarter, which accelerated sequentially your implied <unk>.
Fiscal Q4 revenue growth guidance is also very robust even though you are normally very conservative with forward guidance. So I guess can you just give us an update on what's driving the confidence and the much higher revenue growth range.
Short term and then longer term similar question, obviously very strong market share results can you just run through what you think the key drivers are there and how sustainable they are or as you look out the next year or two maybe particularly focusing on E comm, which was obviously very strong in the quarter.
Thanks.
Okay.
Alright, so I'll start with your first question on the strong topline growth and what gives us confidence there.
As we have gotten into now giving an outlook for the last quarter of the year certainly want to reflect the momentum that we're seeing and as we talked on the call.
That category has performed better our innovation continues to resonate with our consumers.
And then just our ability to really engage our consumers.
We talked about the activation that we did with Meghan Trainor and Halo glow and it's really that combination of our innovation and marketing give us confidence as we head into Q4, and then on the longer term what gives us confidence.
Talk about a number of white space opportunities ahead of us I'll start with the example that terrain Gabe with comparing our market share today broadly versus that where we have a target and the opportunity that we have with our existing retailers to get them to that level. We also talked about international being a big one.
Space opportunity for us it was 13% of our sales in this quarter.
But we know that there's much more potential than that on the road ahead, and then I would say across the sub categories that we called out mascara lip skin care as a big opportunity as we talk about <unk> on the road ahead. So theres a number of things that give us confidence on the road ahead.
And I would add to that to your question on digital Dara.
Seeing real momentum in our digital business. It was up over 75% for the quarter now, 17% penetration relative to 14% last year and a lot of the investments we've been making our digital business are definitely paying off our investment in beauty squad loyalty program now with $3 5 million members over 20% year over year really drew.
Drives a lot of our e-commerce results as have a lot of our investments penetrating other digital channels, we have a very strong business with Amazon, we see real strikes a retailer dot coms and so our hope is to continue to drive that digital penetration even further.
Okay.
Great. Thanks.
Our next question comes from Olivia Tong with Raymond James. Please go ahead.
Great. Thanks.
Congrats on a great quarter and outlook.
You've obviously had a significant number of distribution wins of late so my question is around how you have to run the business differently. The support that you know does it require more lead time to what extent the stocking the shelves help you this quarter.
Maybe if you could help us bridge the gap between yourselves and scanner and then any early insights you have on you know discussions around incremental shelf space later this year and if I could just sneak one more in you know given the torrid pace of growth.
My question is around production and our ability to keep up.
Especially since much of your production is based in China, and obviously you know the COVID-19 infection rates that we're seeing just have.
You have to be somewhat of a challenge so what youre doing to sort of stay ahead of that as well. Thanks. So much.
Hi, Olivia.
Shrank. So what I'd say is we've had a pretty good and consistent track record of being able to pick up more space. If I take a look at the contribution of space gains over the last few years, it's been pretty consistent so I'm highly confident of our ability to continue to not only pick up more space, but also optimize that space are first and foremost focus is always going to be on the <unk>.
Activity by Theres somebody gives us more space or not that's been the key driver of our business and I think we have really good cadence in terms of how we're being able to do that we have quite a few customers taking up space in the spring reset those are just starting now so we'll have a better view of how those resets are doing when we have our may call, but between target Walmart.
Cvs shoppers drug there's a lot that our team is executing right now I've got a lot of confidence in our team's ability to execute that and then in terms of incremental space opportunities and I think given the productivity of our brands. The innovation, we have consumer profile I think there'll be other opportunities, we'll highlight those as we were able to achieve them.
Into the future, but again I feel really good about our track record over time, particularly in more recent years, our ability to optimize that space as we get it and then in terms of your production question. That's one area I'm, particularly proud of the team our operations team has done a phenomenal job if I go back all the way to the pandemic all of the supply chain disruptions.
Even lockdowns in China, we've been able to meet the strong consumer demand we've seen in the last quarter. Our in stock levels remained above 95%, which I think speaks to even a 49% growth quarter, our ability to meet that demand and so I feel really good about our overall production and capacity.
Now there will be some out of stocks on certain viral sensations. We spent a lot of time. This last year kind of chasing the success of Halo glow. It seemed like every time, we took that forecast up we saw even greater sales.
<unk> talked about our power grid primer, which is not only our number one SKU, but the number two SKU across the entire category and then important to note. It's not only the number one primary mask, but its also the number one primer.
And prestige. So that's an item that I think we're going to also be chasing so they will have some periodic new items that we will be looking to chase, but overall, we remain highly confident in terms of our ability to meet the demand that we're seeing.
Okay.
Okay.
Our next question comes from Andrea to Sheryl with Jpmorgan. Please go ahead.
Thank you.
My question is exactly why do you just described and how you were able to keep up with power grip and hey look low end and even partly excuse me a primer.
In the past.
So in terms of like just perhaps giving us a little bit more.
Details on how the execution and your ability to have in stocks going forward and then related to that you have a lot of white space not only as you pointed out the three subcategories lip and mascara and.
And the skin, so wondering like the cadence of that.
Of that set up can you give us an idea if most of those new.
Shelf resets will carry those new products and how the cadence as we go into fiscal 'twenty four.
Thank you and congrats again on the numbers.
Thanks, Andrea I'd say on the first one in terms of a bit more detail on how we are able to maintain such high in stock levels again, it's a credit to our team and the penetration we have with each of our national retailers supply chain, our ability to plan with them to highlight items that we feel are going to be taking off and then be able to take.
Stronger inventory position on those items. It was a couple of years ago that we did take our inventory levels up in anticipation of some of the container imbalances in that strategy served us well.
Quite a bit of credibility with our customers in terms of when they place orders for us to tell them really almost down to the store level SKU level, what they should be carrying so I feel good about our ability to manage that as I said, there will always be periods, where we have given the viral nature of this brand.
Adams that we're chasing but overall I feel good about and overall production plans feel really great about our ability to continue to execute upon those and then in terms of the white space I would say I feel really good about the innovation we have in each of those white space categories. We mentioned in Mascara <unk> Mascara.
Which is off to a great start and lip or old face heightened lipstick is just phenomenal product at a great value and then in skincare already our son Touchable would grow SPF 30, I think its already our second best selling skincare SKU just a few months out of the gate and as I look forward I also see quite a.
And our pipeline against not only our leadership segments, but also those categories. We're conquesting. So very high hopes about our innovation continue to be able to not only drive leadership in the segments, we have but also conquest seasonal categories.
And if I can explore this is super helpful.
And in some of the data that you have in the beauty squad in particular, because I understand that those would be 70% growth I think I understood from your presentation.
Is there any metric you can say this.
And we are not only recruiting and keeping those those consumers really engage in I think Corey had said that many times, but also recruiting new new customers right and especially with this new premium products. You just immediately we recruit people who are not even in the al.
Categories. So is there any metric you can help us.
Understand if there is a new cohort that youre getting with the beauty squad or even your them direct to consumer.
E Commerce platform that can inform us on the potential for additional customers and you are in Europe and your base.
Sure. So on beauty squad, we continue to expand the base on beauty squad I talked about the 20% growth in beauty squad members and we see that growth coming obviously from new consumers, but probably the biggest magna we have to attract new consumers is a combination of our innovation and our marketing engine on our innovation all of those core innovation.
I, just talked about Halo glow liquid filter power grip.
All of the new ones that I, just talked about all attract a significant number of new consumers to the franchise I think they see the viral buzz I see other people talking about this prestige quality of these great prices and particularly these days with platforms like Tic Toc, we get consumers kind of doing their own demonstrations and comparisons and so it's been a.
Great source symmetrically, specifically look at there is what percent.
Behind each product are we pulling in new users and it's often more than 50% and then the composition of those consumers. It's a combination of our strength amongst gen Z, but increasingly also amongst millennials and Gen X as well so I think the quality of these products at the prices, we have and our ability to engage them really are attracting even more.
<unk> to our franchise.
Thank you I'll pass it on.
Our next question comes from Linda Bolton Weiser with D. A Davidson. Please go ahead.
Hi, Thank you.
Can you maybe just talk about your other brands Alicia keys, and the world people and how they are share progress is coming in their respective areas.
Sure Hi, Linda So we feel good about our progress on both well people and key sole care as a reminder, they are both relatively new in our portfolio Kiesow care. We only created two years ago, while people, we acquired a little less than four years ago and our main focus is really building up the awareness and trial of both of these brands.
During the quarter, we had a great hit on key so care with a multi benefit tied serum it's actually already out of stock.
Another item that we're chasing to get get more stock in and so our consistent focus is building. These brands for the long term and I feel good about the progress there.
Thanks, and then can I just ask.
I was a little surprised to hear that transportation costs are still up year over year can.
Can you just talk about kind of the cadence of how those comparisons flow in the next few quarters and when we'll start to see roughly the transportation cost being down year over year.
Sure Surinder, we did start to see transportation cost is within the quarter.
And we're really pleased with that and I'm sure hoping that that holds so as you know it takes some time for our inventory to turn through those lower cost since we capitalize the freight with the inventory and so as we think about the coming quarters. It certainly should be a tailwind for us as we and as we think about costs in gross margin.
Okay. Thank you very much.
Okay.
Our next question comes from Andrew Boone.
Bank of America. Please go ahead.
Hi, Thank you and congratulations on the great results.
I am just given our benefits driven by price increases and product mix I was wondering if you could share how much of the growth was driven by the expansion of all skin with your added shelf space at major retailers and then are you seeing an increase in older demographics.
Just saying I'll scan outside of your more typical kind of Cuba, and the millennial and Gen Z cohort.
And just overall in terms of the growth that you're seeing how much of a benefit would you allocate to innovation and your product.
Yeah, So hi, Anna.
First on the price increases and mix.
We have talked about the price increases that we took last March and the benefit that that tie to our overall top line. It's about high single digit impact. So that's kind of how you can size up the specific price increases that we took mix is playing a role in that right. We've launched some innovation. This year that is at that $10 $12 range debt.
<unk> is also playing a role so you'll see in our commentary in the Q, how price and volume price mix and volume breakout across.
Both net sales and gross margin I would say this quarter pretty healthy mix of both which were very pleased to see.
From a skin care standpoint, we talked on the call about skincare being up 34% for us in Q3 skincare consumption versus the category up 6% and on the color side seeing cosmetics at 36% versus the category up eight so very pleased with how our skin care is performing as well and <unk>.
Certainly an opportunity for growth at turning just talked about our <unk> that will be a part of our shelf resets and our continued focus on making sure that skin care is a part of that shelf expansion as we go in.
So we're very pleased with that and then if I think about innovation overall.
Innovation is a healthy contributor to our sales growth and has been pretty consistent over these last several years. So are we.
We feel great about the innovation, that's coming we highlighted that innovation mascara and led and in skincare that we're really excited about and so as.
As we think about balance of growth really seeing it across all vectors add from a channel standpoint, we talked about digital we talked about international and really pleased with the balance that we're seeing as well across kind of core products and innovation.
Great. Thanks very much.
Our next question comes from Susan Anderson with Canaccord Genuity. Please go ahead.
Hi, Thanks for taking my question and great job on the quarter.
I wanted to ask a little bit about marketing I'm curious if there's any thoughts or color you can give around just the increase in marketing and how much you think that has helped to drive the accelerated sales growth and then also I'm curious if you had any early thoughts about how you're thinking about marketing for 2023. If this is going to be the new base left.
Or do you think you will increase it again thanks.
Hi, Susan this is training, we're not ready yet to give FY 'twenty for guidance on marketing, but what I would tell you is we're highly comfortable with the 17% to 19% range. We have this year and what gives US comfort. There is we recently got our Nielsen annual marketing.
Roy analysis back in it shows exceptionally high marketing ROI I've been in the consumer space for 30 years typically when do you increase your marketing levels you see a diminished returns in our case, we've now had three consecutive years, where we've taken our marketing levels up and have actually seen the marketing ROI go up and I think it really speaks to the.
Strength of the marketing engine that we do have the support we have does is not only effective but it allows us to broaden the audiences by which we go after and test new platforms and new things like the collaboration we talked about between the weather channel Meghan Trainor on us So I feel really great about where we are marketing and it's definitely draw.
Rivaling profitable sales for us.
Analyses and what gives us confidence for this year.
Great and then if I could maybe just ask about the inventory it looks pretty lean at the end of the quarter down five I guess.
How are you thinking about just replenishing as we go throughout the quarter and then would you expect that to be up higher at the end of the year. Thanks.
Susan so inventory for this quarter, a little bit lighter than we probably would've wanted just given the outperformance that we saw but we feel great about our ability to service our customers. So we talked about having over 95% in stock levels, even with that inventory and as we get towards year end, we do.
We expect that inventory level to go up and be higher as we seek to support the growth that we're seeing so.
Feeling great about where we are right now to <unk> point, we may have one onesie twosies out of stocks on those items that really take off on innovation, but also on the other hand.
Lead times have improved and we are able to get behind and get product to your faster than we have previously so.
Again, feeling great about where we are on an inventory standpoint.
Great that sounds good thanks for the color.
Yes.
Our next question comes from Jon Andersen with William Blair. Please go ahead.
Hi, good afternoon everybody.
Uh huh.
Congrats on the terrific quarter.
Thank you all of you.
Couple of quick quick ones.
The guidance I think implies.
Yes.
Sequential.
And gross margin in the fourth quarter.
Two or 300 basis points, perhaps with that thinking.
Thinking about that the right way and.
It might be some of the drivers of that.
So I'm really pleased with how our gross margin is positioned overall, we are out looking at the gross margin up 200 basis points.
Year over year are in a rising cost environment, which is really fantastic to see as we look out to Q4, what youre observing is a little bit of natural seasonality that we see from Q3 into Q4 of a lower gross margin and then I would say the other thing layered on there are cost related one time cost.
It's really related to space gains.
That will flow through in Q4, as well, we picked up a little bit of that in Q3, but we will have some in Q4 as well until that also is impacting gross margin, but overall I feel great about where gross margin is positioned even in Q4, it's still above last year.
Is what's implied in our outlook and again 200 basis points higher on a year.
That makes sense, that's very helpful. Thanks Sandy.
Again, I'm going to take a shot at this I know youre not ready to talk about 2020 fiscal 2020 for guidance, but I'm just kind of thinking.
Back to the.
Long term algorithm, you've kind of communicated in the past mid to upper single digit revenue growth.
That's going to be different from premier to year, but when you put it all together and you think about the color category tailwind from the share gains for the <unk> brand in what seems like significant new shelf space.
Spring, a very robust innovation pipeline.
It.
Digital marketing spending.
Any thoughts on <unk>.
Maybe kind of.
Triangulating.
The 24 kind of.
Drivers relative to kind of that long term algorithm. It just feels like it could be another very strong year above kind of algorithm growth.
Yeah, So youre right, John we're not given fiscal 'twenty for a guidance today.
Stay tuned for me for that but.
Feel great about the white space ahead of us and the opportunities that still lie before you called out a number of them.
And.
Certainly would love to see growth continue at this level, but you know I've always taken a balanced approach with guidance as you know I feel like that has served us well and so you'll have to wait until may, but where we're feeling pretty good about where we're at right now.
Thanks, so much I appreciate it congrats again thank.
Thank you.
Our next question comes from Ashley Hogan with Jefferies. Please go ahead.
Hi, This is <unk> on for Ashley.
Congrats on the quarter and thank you for taking my question. So I just wanted to ask first about that kind of higher priced tier of products are you seeing any difference in customer demographic between those who are shopping more entry level lower price point or versus like the higher price point products in your mix.
Hi, Sidney this is trying we do see some difference I would say and our strength is gen Z and millennials and Gen X and so we certainly do pick up more consumers from different age cohorts.
But the biggest thing because I often get asked this question are you seeing trade down or are you seeing trade within mass as we talked in our prepared remarks, I think the real secret sauce of <unk> is with these Holy Grail products. Some of these higher priced tier products, we're able to expand the entire category. So I gave the example on <unk> putty primer.
And inspiration of our prestige item that was $52 by introducing parlous putty primer. We've grown I think we saw nine times more units in that prestige item and that prestige item is still growing.
The same thing when it comes to our <unk> business, where we've more than doubled the units on a pretty iconic set of prestige consumers. So we definitely do pick up more new consumers and because of that you will see a broader range in terms of ages and demographics.
Demographics, but I think the bigger concept and what really propels us is our ability to expand that entire category, where it's no longer accessible just a few who could afford or $50 item, but you can really bring anyone in when it's eight or 10 Bucks.
Yeah. That's helpful. And then my next question was a bit more long term and actually kind of about that next upcoming generation from Gen Z Gen Alpha.
It feels like they're kind of beginning to rise as the newpage regeneration and because of your price point and the high level of innovation and you're always on trend I think it seems like you guys make a great entry skincare or color cosmetics brand. So I was just curious if you're beginning to see any of those younger shoppers or if you have any thoughts on kind of beginning to consider them.
And your and your marketing approach.
Okay.
So Sidney absolutely we're definitely seeing early signs of residents with Gen. Alpha there's a lot of our marketing activities are frankly appeal to Gen Alpha just as much as they do to Gen Z.
If you look at the different platforms that we're on and the types of things that we're doing so more to come on that but youll continue to see us be at the forefront on some of these new consumer demographics, and there and introducing them to the best of beauty and making it accessible.
Got it and then just one last one just to dig in a little bit more on that marketing ROI, it's great to hear that that keeps expanding and where you invest so I'm curious are there any new channels or platforms that youre seeing especially strong traction on.
We that's the great thing about our marketing Rois, we see strengths across vehicles and channels. So certainly we tend to look at our paid media are owned and then also our earned media, we're seeing strength across all three of them and then buy vehicle, we see very strong rois on our digital.
Rising we see strong rois on our Influencer work on our PR is really off the charts. It's really almost every one of those buckets and I'd say the other thing about US is we're not afraid to test and learn a new platform. So when we were one of the first PD brands on Tictoc in the early days it was hard to get attribution ticked up we now can see.
Almost immediately when something goes viral and tic Toc the impact it has on our business and our ability to be able to track that so you'll continue to see that good balance between things that we have that are definitely proven and other things that we are testing for the future and we've got a great cadence going there.
That's great. Thank you so much.
Our next question comes from refresh parent.
Please go ahead.
Afternoon, and thanks for taking my question and also congrats on a great quarter.
So I guess I wanted to ask just on the trends. So anything you can share in terms of the cadence of trends during the quarter and then maybe if there's one I'll provide some color into January .
Yeah. So you know really strong trends throughout the quarter I would say that we had a really strong cyber Monday with our E Commerce business and we saw trends really strengthened as we got closer to the holiday period that was great to see right now what we're seeing in tracked channels.
A continuation of acceleration of that year over year growth and I think from about.
End of December through mid February you will see those indices continue to be really strong given that in the base there is that <unk>.
That we're cycling in the base and so that suppressed some of our numbers last year.
And it really accelerated what youre seeing in tracked channels right now now that doesn't diminish our bullishness on our performance.
I'd take you back to our guidance of 46% on the top end for the quarter really demonstrates how strongly we believe our business can perform right now.
Okay, Great and then gross margins. This year, you expect to expand around 200 basis points, what are the bigger opportunities that you see going forward to further expand margins in the coming years.
Yeah, So we talked a little bit about transportation cost easing and that if those should sustain would be a tailwind for us as we head into fiscal 'twenty four.
The other thing that we're looking at is on the FX side.
The majority of our product from China, and as we've seen favorability there that could be a tailwind for us as well from a gross margin standpoint.
Great and maybe one last question.
As we look at look to the next fiscal year and I know, you're not providing much guidance today, but is there anything you guys would caution us in terms of modeling for next year just from a comparison perspective.
I mean, it's hard for us to say right now because we're not providing FY 'twenty for guidance I think you have seen from this call a general bullishness on the business.
Andy said it well she always takes a very balanced view and so I think we'd better be able to talk about that but I don't see any big Red flags at this moment in terms of the things that we're particularly worried about but we will always can be balanced and I think again, it's served us well in terms of taking into consideration all factors.
Okay, great. Thank you.
Our next question comes from Oliver Chen with Cowen and company. Please go ahead.
Hi, Thanks for taking my call, it's Tom on for Oliver.
On pricing, how should we think about the potential for price increases.
Going forward this year the demand elasticity in that regard and additionally have you seen any slowdown in demand and so where might those pressure points.
Yeah. So I'll take the question on pricing and we have used pricing.
Very judiciously over the last several years that we really have only taken two major price increases one back in 2019 related to tariffs.
We touch about a third of our portfolio from a pricing standpoint, and then last March in response to the inflationary environment that we're all operating in and where we could pricing on about two thirds of our portfolio.
Right now pricing is not on the docket for us to take again, we take very seriously.
Our ability to provide our consumers with an extraordinary value.
With exceptional quality and we will and we will continue to do that so right now pricing not on the docket and bucket correct.
And on your second question on the slowdown.
Right Yeah, no we've not seen any slowdown in demand I know, there's a lot of concerns out there on recessionary environment.
I would tell you is historically Matt.
<unk> color cosmetics mass skincare, as Fay fared really well in inflationary environments.
Or recessionary environments.
But even more importantly.
Long been bullish on the category and this is a category that really did suffer during the pandemic when people are restricted from the normal behavior. So of long felt there is a lot of pent up consumer demand for the categories in which we compete and we very much youre seeing that I mean for the cabinet for the quarter as we said overall mass color cosmetics is up eight.
In tracked channels mass skincare was up 6% and our gross even stronger so we're seeing an acceleration of consumer demand not any slowdown and I feel again very bullish in terms of how the category shapes up as we continue to go forward.
Great. Thanks, and a quick follow up on skin care.
Can you just added some color on the main drivers of the recent success, there and where you might be taking share.
Yeah.
We're still small in skin care, so I think less about where we're taking share and more about the fundamental drivers in the fundamental drivers are very similar to the fundamental drivers. We have on the color business, we have an incredible value proposition prestige quality at accessible price points, we have meaningful innovation that is resonating with the consumer if I look at our Halo Holy hydration.
<unk> franchise I look at our recent will launch and we know how to engage and attract consumers is only a couple of quarters ago that we've put our first dedicated support on skincare. We've seen good returns from there. So we're going to follow a similar formula in a different category with more education and more dedicated focus there, but but I like.
The momentum we have in there and that momentum now.
Sustained for a number of quarters here and I feel like we have a huge opportunity there.
Our next question comes from Mark Australia with Stifel.
Stifel. Please go ahead.
Yes, Thanks and afternoon everyone.
Sure.
One one.
Just a follow up question, one more broad question and thinking about how to model the top line.
If you back away International back way digital sales are sort of Directionally in line with with the scanner data. So so obviously been a lot of what we're not seeing is what you referenced in terms of the strong digital and international growth anything.
They're from.
Not just a quarter standpoint, because you've obviously given given us fourth quarter, but anything that we should be thinking about both both positive.
Negative there in terms of how the business has fared over the last couple of quarters here.
That we should be modeling or thinking about as we model.
Well you hit on it marketing, our digital and international growth and growth in our untracked channels has been very strong this year and so I think that if you.
Parse out what you're seeing in tracked channel and then it kind of take forward. What you are saying from an <unk> standpoint, you'll probably get to the right place from a modeling view.
Got it so basically keep the trend in <unk> and that's sort of how we bridge the gap okay.
And then more just category related.
Following last question any thoughts.
Not specific to your guidance and how you think about category performance talking more broad beauty trends.
You have thoughts on 2023, and even just on the cycle turning your comments on coming out of the pandemic and the last time. The beauty category had a cycle makeup in particular at last I think five plus years are we kind of year or two in a longer term cycle. How are you thinking about all of that.
Yes, I mean, we're always going to be balanced I'm hopeful that we're in the start of a really good cycle here, both with the comments I made on the broader economy more importantly, consumers wanting to express themselves and then we're also seeing good things from a competitive standpoint of long been a believer that I actually wish really well for <unk>.
Larger global competitors, because the more they do too.
Bring interest to the category either through innovation or their own investment levels. I think it's good for the category, which in turn is really good for <unk>, because our value proposition comes shining through so I have been bullish for maybe times when I should've been bullish on the category.
Our sense of certainly bullish now in terms of how the category continues to gain momentum.
And any thoughts about performance.
Nearer term versus longer term in the category.
Well I mean, I think if you look longer term when I look at long arcs of this category looking over the last 30 40 years is the category that in the mass side was a consistent grower in kind of call. It low to mid single digits. We're obviously seeing outsize growth right now in Q3, I would expect to see outsized growth part of it.
In Q4 will be related to the compares to omicron and suppress volume we saw there but.
<unk> four.
At least back to historical ranges, if not a little bit higher in the coming year.
Great. Thank you.
Perfect question as a follow up from Olivia Tong with Raymond James. Please go ahead.
I apologize my question has been answered thank you so much.
This concludes our question and answer session I would like to turn the conference back over to Terry I'm being pretty closing remarks.
Well. Thank you for joining us today as you can tell I'm. So proud of our incredible team of beauty for delivering yet another quarter of outstanding results and we look forward to seeing some of your upcoming investor meetings and speaking with you in May when we'll discuss our fourth quarter and guidance for FY 'twenty four thank you and be well.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
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