Q1 2024 elf Beauty Inc Earnings Call
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Thank you for joining us today to discuss <unk> first quarter fiscal 'twenty four results I'm KC Cat Vice President of corporate development and Investor Relations with me today are touring the mean, chairman and Chief Executive Officer, and Mandy fields, Senior Vice President and Chief financial.
Officer.
We encourage you to tune in to our webcast presentation for the best viewing experience, which you can access on our website at Investor Dod Health 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. 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 Q1 results.
And our raised outlook for fiscal 'twenty four.
I want to start by recognizing the health beauty team.
We're off to an incredibly strong start this fiscal year, delivering Q1 results well ahead of expectations.
Q1 marked our 18th consecutive quarter of net sales growth.
Putting else beauty in a select group of consistent high growth consumer companies.
We are one of only five public consumer companies out of 274 total that has grown for 18 straight quarters and averaged at least 20% sales growth per quarter.
In Q1, we grew net sales by 76%.
Increased gross margin by 280 basis points and delivered $74 million and adjusted EBITDA up 135%.
Last quarter, we spoke about the three areas with significant runway for growth.
In color cosmetics.
Skincare and internationally.
Let me update you on our progress in Q1.
In color cosmetics, we continue to outperform category trends.
In Q1, <unk> grew 48% in tracked channels well above category growth of 6%, we increased our market share by 260 basis points.
Out of nearly 800 cosmetics brands tracked by Nielsen LCC only brand to gain share for 18 consecutive quarters.
As great as this share growth has been we see an opportunity to double our market share over the next few years.
Nationally health is the number three brand today with approximately nine 5% share.
In target our longest standing national retail customer we are already the number one brand with nearly 18% share.
We're focused on replicating our success at target across other key retailers.
In skincare, we also continued to outperform the category.
In Q1 L skin grew 127% in tracked channels, well above category growth of 10%.
And was the fastest growing among the top 20 skincare brands.
We grew our market share by 75 basis points.
L skins, the number 14 brand today with a one 5% share and has significant runway with the number one brand holding over 15% share.
Looking outside the U S. We grew our international net sales 79% in Q1.
Fueled by strength in both the UK and Canada.
Alpha piece category growth by nearly 10 X in the U K and by over three X in Canada.
Fueling market share gains in each.
Alpha is a number six brand in each of these markets with about a 5% share as compared to the number one brand which has over 17% share.
We continue to build our international team as we aim to expand our brands globally.
Across categories and geographies the three fundamental drivers of our business remain the same.
Our value proposition.
Powerhouse innovation and disruptive marketing engine.
Let me walk through how each underpinned our strength in Q1.
First we're known for our value proposition.
We make the best of beauty accessible to every eye lip face and skin concern.
We have a unique ability to deliver a holy Grail products, taking inspiration from our community and the best products in prestige and bring them to market delivering high quality at an extraordinary value.
The average price point for <unk> is a little over $6 today as.
As compared to over $9 for the legacy mass cosmetics brands and over $20 for prestige brands.
Unlike these higher priced brands, our pricing strategy focuses on everyday value instead of broad based promotions, we believe our value proposition creates accessibility in the category, allowing more consumers to enjoy the best of beauty.
The second driver of our performance is our powerhouse innovation.
Alex has the number one or two position across 16 segments of color cosmetics.
Which collectively make up over 75% of our cosmetic sales.
We delivered the strongest sales growth and share gains in these segments in Q1.
Our innovation approach is to build growing product franchises instead of one and done launches.
Our four largest franchises camo putty Halo go and power grid have grown year after year.
As we launch new innovation within each the entire franchise has grown.
In Q1, we continue to fuel the putty franchise with the launch of our liquid pour list putty primer.
Priced at an incredible value of $10 compared to a prestige item at $54. This is the liquid toilet plenty of primary from al. This has been the key to getting that makeup on all summer while still looking Laurie. It gives you the most.
Keith grass looking skin finish it's incredible.
We also launched our putty coloured correcting I brightener, extending the putty franchise into the eye category for the first time.
We're using this approach to disrupt the skincare category as well.
Our latest untouchable franchise is a great example.
In January we launched Sun Touchable would grow SPF 30.
Priced at an incredible value of $14 compared to the prestige item at $38 would grow quickly rose to one of our best selling skin care Skus.
We expanded this untouchable franchise further in Q1 with the launch of our Invisible Sunscreen S. P. F 30, fives and are all set for Sun SPF 45.
Put a figure down if youre looking for affordable invisible gel like Formula phone screen, that's not great thats, great. Because this sometimes you're more invisible sounds great. SPF 35 was only $14. Let me show you got how awesome. It is sort of invisible sounds great and when you rub it in a kind of have a velvety soft feel to it can you see that it really reminds me of the popular high ends.
Im screens out there. Therefore also double doesn't make a primer tusa. It blends beautifully underwent pacemaker what do you think worth a try I personally love is that I think there so where the money. If you are trying to sounds great I'll listen linking my biotech ear headphones on before it's all about.
We're excited about how our community is responding with the Sun Touchable franchise quickly rising to our skincare best sellers.
The third driver of our performance is our ability to attract and engage consumers with our disruptive marketing engine.
We continue to generate buzzworthy moments for our community and reach new audiences with our collaborations.
In June we launched a limited edition collaboration with beauty content creator Makayla Machimura in honor of her wedding.
With over 17 million followers across social platforms Makayla has been named one of the top beauty influencers.
Our limited edition lip duo collaboration sold out in 18 minutes on <unk> cosmetics Dot com.
Our fastest ever sellout of the collection.
We also saw our highest ever spike in site traffic joined the launch hour.
And nearly 75% of purchasers were new to <unk>, our highest new purchase of rate on an innovation product in the last two years.
This quarter, we lean further into entertainment and short form digital content with the release of two new series across our social channels.
Makeup over makeup and Vanity tabletop.
The first episode of Vanity table Dock feature cultural icon and award winning actress Jennifer Coolidge.
Inspired this series with a comedic quips, while filming our chart topping commercial for the Big game earlier this year.
The beautiful lipsticks.
I Love this one.
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Dirty to us.
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We had celebrity media buzzing and viewers captivated collectively.
Collectively, earning over 20 billion impressions from our two new digital content series.
I'm proud of how we continue to lead with purpose as we strive to create a different kind of beauty company.
We recently launched a new purpose driven series named show yourself featuring role models, who have overcome adversity to bring more positivity inclusivity and accessibility to the world.
The series kicked off with anesthesia for bonus a 19 year old blind Paralympic swimmer and world record holder.
Who proves that anything is else impossible, even in the face of the toughest obstacles.
I want to be that person in the kind of <unk>.
So people what why do you say to that that other people don't have to deal with the negative.
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To support as stages hope to help lift others, we don't need to one of our favorite organizations.
Hidden opponent.
A nonprofit that raises awareness with student athlete mental health.
This is part of <unk> commitment to donate annually, 2% of our prior year profit to drive positive impact in our communities.
Before I turn the call over to Mandy.
I'll now spend a moment to talk about our competitive moat.
While beauty as a category is comparatively low barriers of entry very few brands have been able to scale.
For context of over 800, cosmetics and skincare brands tracked by Nielsen.
Only 58 have surpassed $25 million in annual retail sales over the past three years, and only 28 are greater than $100 million.
L. A has been one of the few brands able to scale to the areas of advantage, we bring to the table.
We help consumers can have premium quality beauty products at accessible price points with broad appeal.
That are vegan cruelty free.
Clean and fair trade certified.
The superpowers are underpinned by several other areas of competitive advantage.
Our supply chain offers the best combination of cost quality and speed in our industry.
And as well integrated with our innovation engine to launch franchise building Holy Grails.
Our engagement model gives us the ability to activate millions of consumers against this innovation.
And perhaps most importantly, we have a talented high performance team and culture.
While other beauty brands can try to replicate some of these we believe the unique combination of our areas of advantaged form our competitive moat.
And fuel our ability to win in fiscal 2024 and beyond.
I'll now turn the call over to Mandy.
Thank you <unk>.
I am pleased to share the highlights of our first quarter results as well as our raised outlook for fiscal 'twenty four.
Our first quarter results were outstanding.
Q1, net sales grew 76% year over year, driven by broad based strength across national and international retailers as well as digital commerce.
Higher unit volume contributed approximately 56 percentage points to net sales growth with mix, adding approximately 20 percentage points to growth.
We saw better than expected unit velocities in Q1.
Supported by robust consumer response to both our spring innovation and core products.
Shipments exceeded consumption this quarter as we started to recover on some out of stock items.
Our digitally led strategy continues to serve us well.
Q1, digital consumption trends were up triple digits year over year.
Digital channels drove 18% of our total consumption in Q1 as compared to 14% a year ago.
We see opportunity to increase our digital penetration, particularly as we further enhance our beauty squad loyalty program.
Beauty squad now has over $3 9 million members with enrollment growing over 25% year over year.
Our loyalty members drive almost 80% of our sales on F cosmetics dot com and continue to have higher average order values.
Purchase more frequently.
Have stronger retention rates and our rich source of first party data.
Q1 gross margin of 71% was up approximately 280 basis points compared to prior year.
We saw gross margin benefits from favorable FX rates.
Margin accretive mix and cost savings.
Lower inventory adjustments and improved transportation costs, which more than offset costs related to retailer activity and space expansion.
On an adjusted basis SG&A as a percentage of sales was 39% in Q1 compared to 45% last year.
We drove significant leverage and non marketing SG&A expenses, primarily as a result of our strong topline trends.
Marketing and digital investment for the quarter was 16% of net sales and in line with last year.
This was lower than expected on a percentage basis, given our significant topline outperformance.
We continue to expect marketing and digital investment to be approximately 22% to 24% of net sales in fiscal 'twenty four.
Q1, adjusted EBITDA was $74 million up 135% versus last year.
And adjusted EBITDA margin was approximately 34% of net sales.
Adjusted net income was $63 million or $1 10 per diluted share compared to $21 million or 39 cents per diluted share a year ago.
The increase across profitability metrics was driven by our strong net sales growth gross margin expansion and leverage in our non marketing SG&A expenses.
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 approximately $143 million in cash on hand, compared to a cash balance of $72 million a year ago.
Our ending inventory balance was $98 million in line with our expectations and up from $70 million a year ago.
As a reminder.
Last quarter, we spoke about plans to build back our inventory levels through fiscal 'twenty four to support the strong consumer demand we're seeing.
I'm also pleased with the approximately $23 million and free cash flow generated in Q1.
We ended the quarter with a net cash position and less than one times leverage in terms of total debt to adjusted EBITDA.
We expect our cash priorities for the year to remain on investing behind our growth initiatives and supporting strategic extensions.
Some of the initiatives we're focused on this year include investing in our people and infrastructure.
Our ERP transition to S P.
As well as increased working capital and distribution capacity to support strong consumer demand.
Now, let's turn to our raised outlook for fiscal 'twenty four.
For the full year, we now expect net sales growth of approximately 37% to 39% up from 22% to 24% previously.
Adjusted EBITDA between $171 million to $174 million up from 144, and a half to 147 and a half million dollars previously.
Adjusted net income between $125 million to $127 million up from 98, and a half to 100 and a half million dollars previously.
And adjusted EPS of $2 19.
To $2.22 per diluted share up from $1 73 to $1.76 previously.
We expect our fiscal 'twenty four adjusted tax rate to be approximately 17% to 18% and our fully diluted average share count of approximately 57 million shares.
Let me provide you with additional color on our planning assumptions for fiscal 'twenty four.
Starting with the top line.
Our raised outlook reflects the outperformance in Q1 relative to our expectations as well as an improved outlook for the balance of the year as our consumption remained strong both in tracked and untracked channels.
Turning to gross margin in fiscal 'twenty four we now expect our gross margin to be up approximately 150 basis points year over year as compared to our expectation for up 100 basis points previously.
The improved outlook is largely a result of our outperformance in Q1 aided by lower inventory adjustments in the quarter and favorable mix.
In terms of the key puts and takes for the year. We continue to expect gross margin to benefit from lower transportation costs.
Favorable FX rates.
Margin accretive mix and cost savings, which are expected to more than offset costs related to retailer activity and space expansion.
Turning now to adjusted EBITDA.
Our outlook now implies adjusted EBITDA growth of approximately 46% to 49% versus prior year.
From 24% to 26% previously.
And on top of the strong 56% growth we delivered in fiscal 'twenty three.
Our outlook also implies adjusted EBITDA margin leverage of approximately 150 basis points year over year as compared to approximately 30 basis points previously the.
The improved outlook is based on expected strong net sales growth gross margin expansion and leverage in our non marketing SG&A expenses.
We are quite pleased to be in a position to meaningfully raise both our sales and profitability outlook. This early in our fiscal year.
In summary, we are off to a strong start in fiscal 'twenty four.
Our performance over the last 18 quarters, both on an absolute basis and relative to the category demonstrates that we have a winning strategy.
As great as these results have been we're even more excited for the future the significant white space, we see across color cosmetics skincare and internationally gives us confidence that we are still in the early innings of unlocking the full potential for our brands.
With that operator, you may now open the call to questions.
Yeah.
We will now begin the question and answer session.
To ask a question you May Press Star then one on your Touchtone phone.
If youre using a speakerphone please pick up your handset before pressing the keys.
We also ask that you. Please limit yourself to one question on today's call and to withdraw. Your question. Please press Star then two at this time, we will pause momentarily to assemble our roster.
And our first question here will come from Dara <unk> with Morgan Stanley . Please go ahead.
Hey, good afternoon guys.
Good afternoon.
So obviously, another really strong quarter in terms of revenue growth in Q1.
Meet your soft guidance, our consensus by about $30 million, but you're raising the full year by an even greater $85 million. So can you just give us a bit more detail on your confidence and underlying momentum in the business coming out of Q1, and what that portends in the balance of the year I know Mandy touched on it but a bit more detail would be helpful. There.
And then specifically maybe just given the shrink in Q1 can you help frame how we should think about fiscal Q2 relative to fiscal Q1. Thanks.
Alright. Thank you so much so let's start with your first question on raising the full year guidance and our confidence in that.
Feel that we're in a great position to raise guidance as the first quarter out of the year raising the top end of our guidance for 39% on the full year.
And on 49% from an adjusted EBITDA standpoint, so really underpinned by the momentum that we continue to see in the business the fundamentals remain strong.
And really we talk to the key drivers of our business our value proposition powerhouse innovation and our ability to engage our consumers that continues to drive our business forward and so we feel really great about our full year guidance and our ability to continue to see that momentum forward.
In terms of Q2, specifically and framing around that so you know if I look at our Nielsen tracked channel data and I know you all get that information.
The last 12 weeks, we have tracked about 60% growth and so I would say, that's probably a fair place to anchor for Q2 and.
If we were going to kind of try to frame that a little bit for you.
And our next question today will come from Olivia Tong with Raymond James. Please go ahead.
Great. Thanks, Congrats as well.
I wanted to talk a little bit about some of the newer categories that you're you're entering and expanding in like iron lift versus the pace can.
Can you talk about the margin structure in those and then also just the HCV that you have in the newer categories versus what you have as we think about the opportunity to unlock.
Even more incremental shelf space.
Yeah, So hi, Olivia.
We're seeing strength across our entire business. So theres 16 segments, where we have the number one or two position those continue to grow extremely strongly and we also feel good about some of the areas that we're expanding and you talked about our lip innovation, our skincare business in the quarter I think in tracked channels was up 120.
7% relative to the category was up 6%. So all of this leads to the strong share gains we talked about I think year over year, we picked up 260 basis points of share.
And then in terms of the margin structure, we target all of our innovation.
To be margin accretive to our overall margin structure of the company and there isn't really much of a difference between some of those categories and it's actually been one of the ways. We have both improved.
We improved our margins, but also raised our average unit retails with primarily done that through innovation mix.
Like in our would grow some touchable at $14 still an incredible value relative to the prestige item at $38 certainly mixes up the brand.
And our next question here will come from Linda Bolton Weiser with D. A Davidson. Please go ahead.
Yes, Hi, I was just curious about your marketing ROI as you get bigger you continue to spend more and so I'm curious.
Curious are you seeing that play a tolling or is the ROI still going up.
And.
Secondly, I was wondering if you would adopt the notion of spending ahead of sales growth because you keep beating so much on sales expectations that you never really reach your intended ratio, but would you consider spending ahead.
Dissipating the growth.
If your Rois are still really strong thank you.
Yeah, Hi, Linda this is training, we continue to see exceptional rois on our marketing investment.
One of the big drivers of our business along with our innovation and we feel really great about it and then in terms of the spending rate.
First quarter.
Marketing rate came in lighter than what we would've wanted it was 16% of net sales and that really just has to do with the over delivery of the topline in the first quarter. So we plan to catch that up for the balance of the year, we're still guiding towards 20% to 24% of net sales and marketing primarily because it's working and we see plenty of all.
Opportunity.
And our next question will come from Andrea Teixeira with Jpmorgan. Please go ahead.
Thank you good afternoon, and congrats throw and mens.
You just called about you know the second quarter being.
Roughly by my math around 195, so touching $200 million a quarter, that's the new run rate. It seems like you just did 216.
So just thinking of the second half. So you get you to the you know the.
100, and the 800 million that it's the top of your range guidance. So I'm thinking more as we as we look forward to the fall youre getting additional shelf space.
Should we be thinking of in and on top of what you. Just described on your prepared remarks, both from both the U K and Canada being a very relevant player now so should we be thinking of.
That type of growth continued to build even if you lap the fourth quarter I think the fourth quarter is where you'll get closer to that level of runway. So.
So how we should be thinking of the progression for the quarter. It seems like again your guidance in the second half, even though you added.
To a previous question you were adding 80 million more than you added in the quarter, but obviously the run rate still has room to grow. Thank you. If you can elaborate on that.
Thank you Andrea for the question so as I think about our guidance again at 39% on the top end for the year is extremely strong and how that breaks out across the quarter and as you know we don't provide quarterly guidance, but we did want to give you some flavor for what we might see for Q2 and we'd like to take it a quarter at a time as you know.
As I mentioned earlier, the fundamentals of the business remain strong and to your point, yes, we do have a space expansion coming in the fall, particularly with Alta Cvs and Walgreens that we have talked about previously and so really excited to see how that materializes, but if I think about building blocks and.
And just what that looks like we've seen really strong unit growth and we talk about 56 points of unit growth in Q1, and so we continue to believe that our our volume will lead our sales growth with mix coming in through AUR and then if I just think about space gains versus the productivity that we're able to drive productivity.
Activity is still that main driver of the results that we're seeing space gains are a great complement to that but with our marketing and digital spend and the innovation that we've launched that's really helping to drive productivity at shelf and we can we expect that momentum to continue as indicated by our raised guidance.
And our next question here will come from Susan Anderson with Canaccord Genuity. Please go ahead.
Hi, good evening nice job on the quarter again.
I was just looking at the digital growth once again triple digits, I guess I'm curious.
Now the second quarter around what's driving that acceleration I guess, what your what are you doing different now is that all the marketing and then also are you seeing new consumers online or are these consumers shopping more online now than they were in stores or both.
Hi, Susan this is trying we're really pleased with our digital business and the progress as you mentioned, we grew it again by triple digits or digital penetration now is 18% relative to 14% last year and I'd say, there's two main drivers one is most of our marketing is digitally oriented.
It's a very social platforms getting people to our site and that certainly is working through the rois that we're seeing there, but the second big driver of our digital businesses. Our beauty squad loyalty program. Our beauty squad loyalty members now account for I think over $3 9 million.
Members growing about 25% a year and as Mandy highlighted they are the key driver of our digital business. So we're seeing really great results. There and then the last thing I'd say is we have really good strength not only on elf cosmetics dot com, but our business with Amazon as well as retailer Dot coms and so we see a halo benefit of a lot of our digital effort.
It's also helping propel our retail results.
Uh huh.
Our next question will come from Bill Chapell with tourists Securities. Please go ahead.
Thanks, Good afternoon, and congratulations on the on the momentum.
Just trying to understand.
Again, as we all are and kind of what's driving the growth in terms of maybe more color on is there a specific channel be it in here target is doing better or color or and also kind of.
Is there a way to break out how much of this is coming from the kind of beauty squad existing customer having a bigger basket versus is there a way to attract new consumers coming into the market and just trying to understand the breakdown.
How we should look at it going forward. Thanks.
Hi, Bill so I can try to break that down a little bit for you. So from a growth driver standpoint, we're really seeing growth across the entire business. When we think about channels and trying just spoke to our retailers are strong our digital channels are strong.
We talked about the tracked channel results that we're seeing right now fixed up 60% in the latest 12 weeks. So that indicates here the retailer channel continues to be strong.
From a color standpoint, we talked about both our growth in color and skin outpacing the category.
And even internationally, where we're seeing growth in Canada, and the U K outpacing the cosmetics category in those areas as well so when we look across the board. We are seeing growth in nearly every segment of the business across channels across segments and so we're really pleased with that.
Terms of new consumers. We also highlighted as an example of what we're seeing from our new consumer standpoint, the collaboration that we did with Makayla gara and bringing in 75% new consumers into that collaboration which was the most that we've seen out of any launch that we've done recently, so it's really a fantastic trend.
<unk> that we're seeing here and really excited to see the growth not just coming from one place, but really across the business.
And our next question here will come from Ana <unk> with Bank of America. Please go ahead.
Hi, good afternoon, thanks, very much for the question and congratulations on the results very impressive as we think about your shelf space gains and the increase in demand for your products do you still feel comfortable with your current model of third party manufacturing in China. This has been very successful in the past, but I'm wondering if you're looking to diversify the model or working to expand your manufacturer.
Network. Thanks.
Hi, Anna we feel great about our supply chain and the advantage we have as we talked in terms of the best combination of cost quality and speed and that supply chain has been highly resilient through the pandemic coming out of the pandemic meeting the very strong consumer demand we have but we also have been doing diversification efforts are really taking that same <unk>.
Vantage, we have is likeminded suppliers with a high degree of control that we have over the supplier as we started up additional operations in Thailand, we're looking at other geographies as well so over time really from a business continuity standpoint, we want to be in a position where if anything happened in China, we have the vast majority.
For production that could also be sourced elsewhere, but we love what we continue to see in terms of operating advantage and the investments, we're also making to improve our distribution capability.
And infrastructure.
Our next question will come from Korean Wharf Meyer with Piper Sandler. Please go ahead.
Hey, all good afternoon. Thanks for taking the question and congrats on an awesome quarter I'd like to dive a bit more into the gross margin outlook for the remainder of the year and kind of the puts and takes of what's really driving the expansion you saw in Q1 and why in that expansion is really sustainable versus maybe.
More one time or may be more front end loaded in the year versus backend and then thinking about EBIT for the remainder of the year and marketing spend how should we be thinking about the cadence of the increased marketing spend throughout the year as I can I would probably pick up towards.
The back half or is it going to be more equal across the quarters. Thank you.
Yep.
So on the gross margin outlook, we are really pleased to the outlook and gross margin at 150 basis points of improvement year over year. That's on top of the 320 basis points of improvement in gross margin, we delivered in fiscal 'twenty three and so when you think about the puts and takes we.
We talked about for Q1, FX being a driver or a favorable driver to our gross margin mix and cost savings as we spoke to earlier today you know our innovation as we do introduce that we have higher margin rates and so we're getting a benefit from that as well lower transportation cost as we've talked for the past couple of quarters.
We are starting to flow through we start to see that in Q4.
And then we also had lower inventory adjustments this quarter as we look at reserves that we take on a quarterly basis. It came in lower this quarter and so and I think about what's one time versus not in in that sequence.
The inventory adjustments that will ebb and flow from quarter to quarter as I think about that as more onetime in nature.
I think on the longer arc FX.
Also will ebb and flow and so we've been really pleased to see that we can continue to push our gross margin Ford and happy to take our outlook.
250 basis points.
This quarter from an EBITDA standpoint, and from a marketing spend and the cadence of how that looks.
Over the balance of the year, and we are still targeting that 22% to 24% range from a marketing standpoint, and so I would expect to see ramped up spend Q2 through Q4, how that comes in by quarter may vary, but we will be targeting higher spend to get to that 20% to 24%.
<unk> by the end of the year.
Our next question will come from Ashley Hogan with Jefferies. Please go ahead.
Good afternoon, and thank you for taking our questions and congrats on the quarter. So we're starting to see Duke becomes super popular in the fragrance category and you know being the leader in Duke I'm curious, if you'd ever explore adjacent categories like fragrance and hair care.
Hi, Ashley.
Our approach is more than dupes, we always put our own else twist on whatever we take inspiration from either prestige or our community they're solving meaningful differences between what we go after and I think that formula is working really being able to bring that prestige quality. These extraordinary prices.
In terms of category Adjacencies, we're open to looking at other categories, but I'd say, our primary focus right now is color cosmetics and skincare with so much white space in both of those and from our perspective and color cosmetics.
I'm really bullish about the share gains that we've been able to sustain.
Philip nationally in the last year, we passed both covergirl and Revlon for the number to reposition in color cosmetics at nine 5% share but.
But if I look at our longest standing national retailer target, where the clear number one brand there with an 18% share. So I feel over the next few years, we have an opportunity to double our market share in color cosmetics skincare or perhaps even more white space. We're now the number 14 brand in skincare I talked about our growth rates there a while ago.
But we still only have one and a 5% share relative to the market leader, 15%. So while we're open to other Adjacencies I think yeah, we have plenty to to tackle both from color cosmetics and skincare.
Our next question will come from Mark Strachan with Stifel. Please go ahead.
Yeah, Thanks, and good afternoon, everyone.
Wanted to ask about skincare, and just sort of learnings so far as the category becomes a bigger percentage of mix.
What's the overlap of the skincare consumers, whose biennial skincare product with the legacy business how much of your new users. How do you think about that in terms of being.
In terms of both.
User bases, if there are what's driving the growth going forward and sort of related to that how do you think about the trade into the skin care franchise versus the trade into the legacy business.
Okay.
So Marc if I look at our skin care business I'd say historically that our skincare consumers are primarily our <unk> cosmetics consumers, particularly at places like target, where skincare is housed with color cosmetics and the same set and so I think that has been a really good basket builder as I think of our productivity model and kind of getting scheme in.
They are buying additional items.
More recently, we've seen a lot more new users come in primarily through the innovation. So we talked about our son Touchable would grow the three items, we launched there a big portion of the volume for those who've been entirely new consumers to the franchise. So I think youre going to see a mix as we go forward and particularly it was very good pipeline on skincare.
I think we can use it to attract more new consumers to to the overall franchise.
Yeah.
Our next question will come from Jon Andersen with William Blair. Please go ahead.
Hey, good afternoon, everybody congrats on a great quarter.
Quick question on gross margin follow up I'm, just wondering if the transportation costs and the currency benefits, which had been aiding gross margin.
Are there additional or incremental.
Incremental benefits.
On that front going forward or have we reached kind of a run rate.
Level for transportation costs Ocean freight and N. The FX helper.
Yeah.
Thanks, John So from a transportation standpoint, there's still benefit to flow through as you know, we capitalize those transportation costs and it takes time to flow through the P&L. So I would expect those to continue for the balance of the year on FX I also expect that to be a benefit to us from a year over year standpoint through fiscal 'twenty four.
And as we are looking.
Looking at that that has been favorable for us and remained so on a year over year standpoint.
Our next question will come from <unk> Parikh with Oppenheimer. Please go ahead. Good afternoon. This is actually Erica eiler on for <unk>. Thanks for taking our question. So I actually have sort of a two part longer term question here. So I mean, you guys are obviously exceeding you know that that longer term top line.
Growth algorithm that you would want to set out for mid to high single digit top line growth.
First curious if any new thoughts on what the steady state topline growth could look like for your business and then second as we think longer term I mean, your gross margins are now at 70% I mean, how are you thinking about the ceiling on gross margins here and is there still opportunity for expansion over the longer term just any thoughts you could share there would be helpful.
Yeah.
Okay.
So in terms of the long term algorithm.
You know, we have not revisited that oh.
We feel great about the momentum that we've seen recently, we talked about 18 consecutive quarters of growth and we are one of five out of 274, our consumer companies that have delivered that consistency of growth and at that level.
Tightens over 20% Roes on average per quarter over that time, and so we feel great about our growth and what we have on the road ahead, we've talked about the white space opportunities along our crop color skin and in international that we believe can be a growth driver for us over the long term.
And in terms of gross margin and any feeling that we see there.
Haven't given our long term gross margin target other than to say that we believe you know as we launched innovation and core to what we do.
I believe that we can mix favorably from a gross margin standpoint, the levels to what that looks like year to year will vary.
And the only thing I would add to that is there's a healthy tension between gross margin and ensure we're delivering superior value equation. So I think that would be while there is plenty of opportunity from gross margin standpoint, as Mandy said through innovation makes said our cost savings programs. We also want to make sure we're living in a really great value and so we always keep an eye.
Ideal versus.
Gross margins.
And our next question will come from Oliver Chen with TD Cowen. Please go ahead.
Thank you Susan Jonna on for Oliver just curious as sort of the student loans come back.
Payment comes back and lower income consumers remain under pressure, how do you think about your positioning and sort of your pricing point at this point and also just curious on your international growth strategy, which markets are you prioritizing now and how your strategy of products might differ.
In international markets versus the U S. Thank you.
So we're keeping an eye on the consumer environment and the overall macroeconomic environment, we feel we're very well positioned of that superior value equation. Our average unit retails in color cosmetics are a little bit over $6 compared to $9 for legacy.
Brands and almost over $20 for prestige, we feel sets us up well, particularly given as we've continued to take our quality ratings up year. After year. After year, we feel really good about that but we'll be paying close attention to and then on the pricing point, we've decided not to take additional pricing in the U S.
We may take around internationally to catch up to the pricing. We did in March of 2022, but we feel that also will keep us well positioned we're hearing some rumors of competitors, perhaps taking some pricing right now so we feel our value equation will get perhaps even stronger as we take the stance that we have and then in.
Terms of our international expansion, we are quite bullish in terms of our prospects internationally you talked about the strength, we have in Canada and the U K. The team that we're building out in the U K has identified a number of other countries that we can enter we tend to make those announcements quarter by quarter, depending on kind of where we're entering but I'd say, our first focus would be.
Western Europe .
Kind of proof of concept in the UK and the momentum we have in the U K. We feel there are other countries. We can enter in western Europe . We also feel good about we have a.
Business in India with Nikon online beauty retailer that's done extremely well so we feel there'll be additional markets that we can enter but first order of business will probably be of fill out western Europe in a disciplined way and then go to the markets from there.
Okay.
And this concludes our question and answer session I would like to turn the conference back over to the chairman and CEO touring I mean for any closing remarks.
Well. Thank you for joining us today I am so proud of our incredible team of health beauty for again delivering outstanding results to start fiscal 'twenty four we look forward to seeing some of you at our upcoming investor meetings and speaking with you in November when we will discuss our second quarter results.
And be well.
The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines.
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