Q2 2025 elf Beauty Inc Earnings Call
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Speaker Change: Thank you for joining us today to discuss L.V.B. II. Quarter fiscal 25 results. I'm Casey Katten, Vice President of Corporate Development and Investor Relations.
With me today are Tarang 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.ofbudy.com.
Speaker Change: Since many of our remarks today contain forward looking statements, please refer to our earnings release and reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward looking statements.
Speaker Change: Thank you, Casey, and good afternoon, everyone. Today, we'll discuss the drivers of our second quarter results and our raised outlook for fiscal 25.
Speaker Change: I want to start by recognizing the e.l.f. Beauty team. Q2 marked yet another quarter of consistent category-leading growth. In Q2, we grew net sales 40%, delivered $69 million in adjusted EBITDA, and increased our U.S. market share by 195 basis points.
Speaker Change: Q2 marked our 23rd consecutive quarter of both net sales growth and market share gains.
Speaker Change: putting e.l.f. beauty in a rarefied group of high-growth companies.
Speaker Change: Elf is the only brand of the nearly 1,000 cosmetics brands tracked by Nielsen to gain share for 23 consecutive quarters.
Speaker Change: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: International drove 21% of our net sales in Q2, up from 16% a year ago. We continue to see significant runway for growth in our largest existing markets.
Speaker Change: Elf Out pays category growth by more than 20 times in Canada and more than seven times in the UK, fueling share gains in each.
Speaker Change: As we look to new international markets, we've seen success with our engagement model across social platforms, driving consumer demand well before we enter a country.
Speaker Change: We saw this play out in Q2 with the launch of ELF in 1600 Rossmann stores in Germany, our biggest international launch to date.
Speaker Change: Elf quickly ascended to Rossman's number one cosmetics brand in the stores we entered.
Speaker Change: Our expansion in Rossman continues into November.
Speaker Change: We're also pleased to maintain our number one brand rankings since the launch in both Atos in the Netherlands and Douglas in Italy.
Speaker Change: Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Turning to digital, Q2 digital consumption trends were up nearly 40% year-over-year, on top of more than 75% growth in Q2 of last year.
Speaker Change: Digital channels drove 20 percent of our consumption in Q2 as compared to 17 percent a year ago. The momentum we're seeing is supported by enhancements to our loyalty program within our app and on our digital and social platforms.
Speaker Change: Our Beauty Squad loyalty program now has 5.3 million members with enrollment consistently growing about 30% year-over-year.
Speaker Change: Our Beauty Squad Loyalists are a key part of our digital ecosystem. With higher average order values, higher purchase frequency, stronger retention rates, and our rich source of first party data.
Speaker Change: We're continuing to fuel new member enrollments with exclusive early access to new product launches and unique integrations with our digital partners.
Speaker Change: Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Turning to the U.S. Looking at Nielsen Track Channel Trends, which represent about half our business, our consumption trends in Q2 were softer than expected, coming in at plus 16% versus our plus 20% expectation.
Speaker Change: We attribute this to two factors.
Speaker Change: First, we've seen a larger than expected moderation in the overall color cosmetics category trends to minus 5% in Q2 as compared to minus 1% in Q1.
Speaker Change: We believe consumers are being more choiceful with their spending.
Speaker Change: It's evident in our significant outperformance in market share gains that those more choiceful consumers are choosing ELF.
Speaker Change: In Q2, we gained 195 basis points of market share, on top of 330 basis points in Q2 last year.
Speaker Change: For context, e.l.f. is the number one U.S. color cosmetics brand in unit share, number two brand in dollar share, and is driving the category as the fastest growing brand in both units and dollars among the top 20 brands across both mass and prestige.
Speaker Change: Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Secondly, from a product perspective, we are cycling significant strength in our Halo, Glow and PowerGrip franchises last year that was driven by product newness and substantial marketing support.
Speaker Change: Looking ahead, we see an opportunity to better balance reanimating our core franchises and supporting our innovation.
Speaker Change: At the same time, we're pleased that our 2024 innovation is exceptional. e.l.f. holds six of the top ten new product launches this year in mass cosmetics and holds three of the top ten SKUs across both mass and prestige.
Speaker Change: Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Looking ahead, we remain confident in our ability to continue to gain share and deliver category driving growth, as reflected in our raised FY25 guidance at 28 to 30% net sales growth.
Speaker Change: While beauty has comparatively low barriers to entry, very few brands have been able to scale.
Speaker Change: Let me take a moment to walk you through each.
Speaker Change: Our first area of advantage is our passionate team of owners and high performance team culture.
Speaker Change: Excluding our executive officers, we've granted more than $180 million in equity in a stock that's gone up more than six-fold.
Speaker Change: Our unique compensation model and high performance team culture has led to exceptionally high employee engagement of 90%, 18 points above the consumer industry benchmark.
Speaker Change: and 97% of our employees recommend Elf as a great place to work.
Speaker Change: This high level of engagement fuels our ability to move at elf speed.
Speaker Change: It shows how acting with purpose to further our positive impact drives more successful business outcomes. We are now the only U.S. publicly traded company out of approximately 4,100 with a board of directors at 78% women and 44% diverse.
Speaker Change: With our Change the Board Game initiative, we aim to champion diversifying boardroom representation with a goal to double the annual growth rate of women and diverse candidates added to corporate boards.
Speaker Change: The average price point for e.l.f. is about $6.50 today, as compared to nearly $9.50 for legacy mass cosmetics brands, and over $20 for prestige brands.
Speaker Change: Switching to just four of Elf's Holy Grails from Prestige Brands can save consumers over a hundred and twenty dollars.
Speaker Change: Importantly with ELF, our consumers don't have to compromise. We continue to hear from consumers that we deliver quality that's often better than prestige.
Speaker Change: Our value proposition is evidenced in our strong unit growth. ELF was again the only top 5 cosmetics brand to grow units in Q2.
Speaker Change: We complement our accessible price points with a retail distribution strategy to offer e.l.f. wherever consumers shop for beauty.
Speaker Change: To that end, we're pleased to announce we'll be expanding ELF to a subset of Dollar General stores in November.
Speaker Change: With this launch we hold true to our mission to democratize access for consumers who otherwise wouldn't have the best of beauty, particularly in rural areas which have traditionally been served by only the major legacy brands.
Speaker Change: Our third area of advantage is our powerhouse innovation. We have a unique ability to deliver a steady stream of holy grails, taking inspiration from our community and the best products in prestige, adding our elf twist and bringing them to market at an extraordinary value.
Speaker Change: Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: In face makeup, for example, our largest segment, we now hold 22% share, maintaining our number one rank and gaining 180 basis points of share in Q2.
Speaker Change: Our innovation is also driving share gains in some of the industry's top segments where we under-index and share.
Speaker Change: Our focused innovation drove 700 basis points of share gains in LIP and 170 basis points of share gains in I.
Speaker Change: Our fourth area of advantage is our disruptive marketing engine. We believe our marketing engine is best in class in creating culturally relevant output, finding unique ways to entertain and engage our community through disruptive brand partnerships, sports, music, and movies.
Speaker Change: In Q2, we launched our biggest e.l.f. skin awareness campaign to date, Divine Skintervention.
Speaker Change: Fueled by insights, we transformed our community's real-life skin care confessions into a 360-degree campaign across social media, television, and out of home.
Speaker Change: Hey, just keep in your makeup. You're so tired. Sorry, I'm here.
Speaker Change: I should have asked. Who are you? Uh, I'm this influencer girlie. Yeah. The sloth queen. The duchess of dirt. The princess of dryness. I'm the one that tends to commit skin sins like... Washing with whatever. Yes, that's it, you dirty guy that likes the dirty soap. Or overpaying for trendy products. This is so much better than paying your rent. And the girlies swear by it. Ha ha ha ha ha ha! So, sleep in your makeup. Silky smooth skin is stupid! No skin! No! So easy! So effective! So affordable! Why?
Speaker Change: Don't be tempted by skin sins. Holy Hydration. Your Skin Salvation.
Speaker Change: Unknown Speaker 00.00.00.00
Speaker Change: In Q2, we push further into entertainment with the release of Get Ready With Music, the album.
Speaker Change: Featuring 13 original songs by emerging global artists, highlighting the synergies between music and makeup.
Speaker Change: The album puts the elf twist on the Get Ready With Me beauty videos, which are in heavy rotation among our social communities.
Speaker Change: The first single Hairpin became the number one video ever on Elf's YouTube channel with more than 10 million views.
Speaker Change: We have a unique ability to combine the best of beauty, culture and entertainment to attract and engage generations of consumers across a variety of platforms.
Speaker Change: ALF remains a Gen Z favorite.
Speaker Change: In Piper Sandler's latest Taking Stock with Teens survey, E.L.F. Cosmetics ranked the number one teen brand for the sixth consecutive season.
Speaker Change: We grew our mindshare by six points versus last year with our 35% mindshare now three and a half times the level of the number two brand.
Speaker Change: We're also growing our audience beyond Gen Z. Recent surveys show e.l.f. Cosmetics ranks number one in purchases amongst millennials and Gen Alpha.
Speaker Change: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Our marketing is working, delivering ROIs multiples above benchmarks and expanding our unaided brand awareness from 13% in 2020 to 33% in 2024.
Speaker Change: As great as that is, the leading U.S. mask cosmetics brand has 55% unaided awareness, gaining us confidence in our runway for growth.
Speaker Change: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Our fifth area of advantage is our productivity model.
Speaker Change: Founded as a digitally native brand, E.L.F. remains the only top 5 mass cosmetics brand with their own direct-to-consumer site.
Speaker Change: We leverage insights from our Site and BeautySquad Loyalty Program to proactively change out up to 20 percent of our retail assortment each year.
Speaker Change: In addition to driving strong productivity, we are benefiting our global retail partners and the beauty industry at large by driving more traffic, stronger category growth, and greater penetration among younger consumers.
Speaker Change: Our productivity and growth has earned us more space with our global retail partners.
Speaker Change: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Internationally, we continue to grow our footprint in the existing markets like the UK and Canada.
Speaker Change: We're also in the early innings of our multi-year new market expansion strategy.
Speaker Change: As I discussed earlier, in Q2 we executed our biggest international launch to date, bringing ELF to 1600 Rossmann stores in Germany, and are pleased by the exceptional consumer demand we're seeing.
Speaker Change: As previously announced, we launched ELF in Sephora, Mexico in October, marking the ELF brand's first partnership with Sephora.
Speaker Change: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: While we're still in the early days, we're pleased that we're already the number one cosmetics brand in Sephora, Mexico.
Speaker Change: In summary, we have five areas of advantage that have enabled us to deliver consistent category-leading growth and market share gains.
Speaker Change: As we look ahead, we remain confident in our ability to continue driving market share gains in color cosmetics and skin care, both domestically and internationally, in the near and long term.
Speaker Change: I'll now turn the call over to Mandy. Thank you, Tarang. I'll now cover the highlights of our second quarter results, as well as our raised outlook for fiscal 25.
Mandy Fields: Q2 net sales grew 40% year-over-year, on top of 76% growth in Q2 of last year, fueled by growth across international retailers, digital commerce, and our national retailers.
Mandy Fields: I'm pleased that our sales growth has been underpinned by continued category outperformance and market share gains in the U.S., as well as planned diversification outside of the U.S.
Speaker Change: This is partially offset by mix related to noturium further penetrating the wholesale channel and higher transportation costs.
Speaker Change: On an adjusted basis, SG&A as a percentage of sales was 53% in Q2, compared to 45% last year.
Speaker Change: The year-over-year increase was partially driven by a planned step up in marketing and digital investment.
Speaker Change: Marketing and digital investment for the quarter was 24% of net sales as compared to 21% last year.
Speaker Change: The remaining increase in adjusted SG&A was driven primarily by the inclusion of Noturium in our consolidated financials, given we acquired the business in October of last year, as well as ongoing investments in our team and infrastructure.
Speaker Change: Q2 adjusted EBITDA was $69 million, up 15% versus last year, and adjusted EBITDA margin was 23% of net sales.
Speaker Change: Even with that shift, we continue to expect adjusted EBITDA growth to be stronger in the second half of fiscal 25 as we cycle the inclusion of noturium in our financials and see more normalized rates of marketing investment year over year.
Speaker Change: Moving to the balance sheet and cash flow.
Speaker Change: Our balance sheet remains strong and we believe positions us well to execute our long-term growth plans.
Speaker Change: We ended the quarter with $97 million in cash on hand compared to a cash balance of $108 million at the end of fiscal 2024.
Speaker Change: Our ending inventory balance was $239 million, in line with our expectations and up from $147 million a year ago.
Speaker Change: Consistent with the last few quarters, the increase was driven by timing of when we take ownership of inventory from China.
Speaker Change: Our liquidity position remains strong. We ended the quarter with less than one times leverage in terms of net debt to adjusted EBITDA.
Speaker Change: We expect our cash priorities for the year to remain on investing behind our growth initiatives and supporting strategic extensions.
Speaker Change: Our ERP transition to SAP as well as increased distribution capacity to support strong global consumer demand.
Speaker Change: Additionally, we recently announced the authorization of a new $500 million share repurchase program, which provides another avenue for us to continue to drive long-term value creation for our shareholders.
Speaker Change: Now let's turn to our Raised Outlook for Fiscal 25.
Speaker Change: We are pleased to be in a position to raise our outlook across both the top and bottom line.
Speaker Change: Our raised outlook reflects the outperformance in Q2 relative to our expectations.
Speaker Change: Pipeline related to the space games we talked about with Target, Dollar General, and Walgreens, as well as ongoing international momentum.
Speaker Change: Moving forward, our guidance approach will prioritize consistency of delivery versus the magnitude of top line beats and raises.
Speaker Change: As a reminder, I'm Kristina Katten. I'm Mandy Fields.
Speaker Change: We start to cycle the Noturium acquisition in Q3, and its contribution to net sales growth becomes more modest versus the 16 points of top-line contribution in the first half. Additionally, we do not plan to give an outlook for track channel trends in the U.S., given our increasingly diversified portfolio of brands with the addition of Noturium.
Speaker Change: Our Expanded International Penetration, and the Changing Definition of Track Channels with several differing data sources across Nielsen and Cercana.
Speaker Change: Turning to Gross Margin.
Speaker Change: In fiscal 25, we now expect our gross margin to be up approximately 30 basis points year over year, as compared to approximately 20 basis points previously.
Speaker Change: The improved outlook is largely a result of our outperformance in Q2.
Speaker Change: Favorable FX Rates
Speaker Change: and international price increases implemented in the second half of Fiscal 24 to be partially offset by mixed and higher transportation costs.
Speaker Change: Our outlook now implies adjusted EBITDA growth of approximately 29 to 31 percent versus prior year, up from 26 to 28 percent previously.
Speaker Change: We still expect marketing and digital investment at approximately 24-26% of net sales in FY25, as compared to 25% in FY24.
Speaker Change: From a cadence standpoint, we continue to plan for a more balanced pace of marketing and digital spend throughout FY 25.
Speaker Change: That implies some leverage in our marketing on a year-over-year basis, particularly in Q4, as marketing spend was approximately 34% of net sales in Q4 last year.
Speaker Change: In summary, our second quarter results underscore our ability to drive consistent, category-leading sales and market share growth.
Speaker Change: We believe we have a winning strategy, as reflected in our raised outlook for the full year, and continue to believe we are in the early innings of unlocking the full potential for our brands.
Speaker Change: With that, Operator, you may open the call to questions.
Speaker Change: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Thank you. We will now begin the question and answer session.
Speaker Change: To ask a question, you may press star then 1 on your telethon keypad.
Speaker Change: If you are using a speakerphone, we ask that you please pick up your handset before pressing the keys.
Speaker Change: To withdraw your question, please press star then 2.
Speaker Change: Today's first question comes from Ashley Hogan's with Jeffries. Please go ahead.
Speaker Change: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Ashley Hogan: Hi, thanks for taking our question and congrats on the quarter. As makeup or mask cosmetics has slowed, have you guys reconsidered marketing spend as a percentage of sales? And then a few of your competitors have called out some challenges in the drug channel. So just anything you can tell us about drug would be helpful. Thanks.
Ashley Hogan: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: We continue to see ROIs well above industry benchmarks, and certainly you're seeing the growth in the top line. So we feel great about our raised outlook and the cadence of our marketing spend. And then in terms of the drug channel, you know, our business is probably a little bit different than some of the legacy.
Speaker Change: Mass Cosmetics brands who are highly distributed in drug. We're still expanding in drug just in the last couple years We've gone from a two to three foot and cap presentation to now We're expanding in CVS and six to ten feet of inline space
Speaker Change: and Walgreens were also expanding as we mentioned and they're about to expand us even further in the spring so I'd say that is more than offset any of the channel dynamics within drug we continue to see the ability to pick up share in drug just as we have in in our all of our other channels
Speaker Change: Alright, thanks so much and congrats again.
Speaker Change: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Thank you. Our next question today comes from Olivia Tong with Raymond James. Please go ahead.
Olivia Tong: Thanks. Congrats on the quarter. Terang, I'd love your view on the, you know, the growth of mass beauty and your ability to stay materially ahead of a slowing category. Maybe can you talk about key drivers of the market share gains, key categories, retailers?
Olivia Tong: Transcription by CastingWords
Speaker Change: Hi, Olivia. So we feel great about our ability to not only deliver the exceptional growth we've seen, but also to stay ahead of the category. And I would say the drivers are highly consistent with what's driven 23 consecutive quarters of net sales growth. First and foremost is our value proposition of making the best of beauty accessible to every eye, lip and face. Second is our power with innovation, our unique ability to get inspiration from our community and the best products and prestige, put our elf twist on and bring them an incredible value. In our innovation, you know, this year's innovation, we have six of the top 10.
Speaker Change: New item launches in all of color cosmetics. It talks about the power of that innovation and finally our disruptive marketing engine our unique ability to engage and entertain our community We feel great about that particularly given the white space We continue to see from a market share standpoint in color cosmetics Not only we proud of the hundred ninety-five basis points of share We grew in this last quarter on top of the 330 basis points in Q2 of last year
Olivia Tong: Well, we have still significant opportunity. I feel, you know, at Target, we are their number one brand with more than 20% of their category. As you heard, Target's not standing still, rewarding us with more space. We have major opportunity across all of our retail customers. We have two of the fastest growing skincare brands. And then international has been particularly exciting as we start to roll out the brand in different markets. So I feel great about continuing to follow this core playbook in terms of our ability.
Olivia Tong: to continue to disrupt the market and continue to build share.
Speaker Change: Unknown Speaker 1. Okay.
Speaker Change: Well, I think first of all on the strategy, our mission is to make the best of beauty accessible to every eye, lip and face and accessibility is quite important to us. Dollar General's stated strategy of serving the underserved fits perfectly. If you think about 80% of their stores are in rural areas with less than 20,000 consumers.
Speaker Change: Previously, those consumers only had access to some of the legacy mass brands, and so our ability to bring them access to the best of beauty, we think works really well. And so I would say, you know, in terms of who we're displacing.
Speaker Change: There are a couple different brands that we're displacing, and I'm particularly excited about the presentation Dollar General is giving us. Instead of being on the normal wall with pegs, we have this great end presentation that really highlights the best of UV, and we're excited about the first set of doors that we get into, and we'll see where we go from there.
Speaker Change: Thank you. And our next question today comes from Bill Chappell with Truist Securities.
Speaker Change: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Bill Chappell: Thanks. Good afternoon and congratulations.
Kristina Katten: The question of the day obviously would be tariffs.
Bill Chappell: So maybe I'll get you to just kind of remind us and Mandy, you know, how you dealt with tariffs in the past Administration and kind of how you're thinking about it or if you're even starting to think about it You know and prepare for it if there's another round as we move into 25
Bill Chappell: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Mandy Fields: Tariffs. So to address what we've done previously with tariffs, so to take you back to 2019, we were, we did experience tariffs at the 25% level.
Bill Chappell: And in order to offset those tariffs, we had a number of levers at our disposal. We had cost savings with our suppliers, cost concessions with our suppliers, foreign exchange moved into our favor, and we also took pricing on about a third of our portfolio at that time.
Bill Chappell: As we think about where we are today, I would say back in those days we were about 99% of our products was coming out of China. Today we are about 80% coming out of China.
Bill Chappell: And I would say that's an additional lever that we have in our back pocket to continue to diversify. But also if you think about our international growth and penetration, we just talked about seeing international growth 91% and represent 21% of our business this quarter. That also will help to offset the impact of tariffs as we import into countries that are not subject to tariff. And so we certainly have run a number of scenarios for potential tariffs and I think it's still too early to tell what level those may come in, but we have a playbook and we have a number of levers at our disposal.
Speaker Change: And I'll just add to that bill that tariffs will have no impact in FY25, it's when the new administration comes into power, we'll see what they enact and, you know, given the length of our supply chain, this is something that would
Bill Chappell: potentially hit us later in 2026. And to Mandy's plan, we have a well balanced plan with a combination of select pricing, cost savings, FX, supplier concessions, and further diversification. So highly confident of our team's ability to navigate tariffs or no tariffs.
Bill Chappell: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Kristina Katten: Thank you. And our next question today comes from Peter Graham at UBS. Please go ahead.
Peter Graham: Thanks, Operator. Good afternoon, everyone. Hope you're doing well. So, Mandy, I think you mentioned something around a shift in the guidance approach, I think specifically
Mandy Fields: Absolutely. Hi Peter.
Mandy Fields: So, I would say that largely our guidance strategy remains consistent as it has for the last 23 quarters and has served us well.
Bill Chappell: We're anchoring on annual guidance.
Bill Chappell: We are taking it a quarter at a time. And so that is consistent. And that's what I mean by consistency. As we grow into a larger company, it's just a law of big numbers, magnitude of beats and raises will be smaller. And so that's really a little bit of a shift for us. But in terms of consistent delivery, I think we've done that for the last 23 quarters and believe that we have the right recipe to continue to do so.
Bill Chappell: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Thank you. And our next question today comes from Andrea Teixeira with J.P. Morgan. Please go ahead.
Bill Chappell: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Bill Chappell: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Bill Chappell: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Bill Chappell: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Bill Chappell: All right, looks like we lost your connection. Our next question comes from Dara Lusenian with Morgan Stanley. Please go ahead.
Dara Lusenian: Thanks, Operator.
Dara Lusenian: So two things for me, just a follow up, Terang.
Dara Lusenian: We move more aggressively in the lower price channels and then on the fiscal back half revenue guidance
Dara Lusenian: Can you just detail what you expect for category growth?
Speaker Change: I'm assuming...
Dara Lusenian: Things perhaps get better as the comparisons get easier, but what have you embedded in your guidance?
Speaker Change: And just, Tarang, any perspective as you take a step back? It's been a pretty consistent category over time. So maybe just some perspective on the weakness we've seen in the category more recently and what you think is driving that and how you think about the category performance going forward. Thanks.
Speaker Change: So Dara, in terms of our distribution on dollar, we do a lot of our distribution plans well in advance. So these conversations started more than a year in advance and again it was a reliance on strategy. They want to make a bigger presence in beauty, they particularly want e.l.f. and as we take a look at it, it resulted in a much better presentation than you receive from other brands. So from an overall brand equity standpoint, what we find is e.l.f. is highly elastic. We can play in value, we can also play in prestige and I mentioned during our prepared remarks, we also entered Sephora Mexico just a few weeks ago and we're their number one brand on both units and dollars and if you take a look at the presentation at Sephora, it's I think better than most of the prestige brands they cater to.
Speaker Change: Elf is a brand that has that elasticity. The most important thing, though, for us is to make sure that we're serving our community.
Speaker Change: we go through. And then in terms of the
Dara Lusenian: category growth. You know, I take a longer term arc. I remain bullish on the color cosmetics and skincare categories. We have seen different cycles where it's slowed and sometimes we haven't been able to find exactly what's going on in terms of we've seen an overall pullback across a number of consumer categories. You know, we've experienced this before. We bought the company in 2014. In the summer, fall of that year, we saw a little bit of a dip only for it to roar back for the next couple of years. We certainly saw it in 2018, certainly when the pandemic hit. In every one of those instances, we saw the category bounce back quite strongly. Even after the pandemic, we saw that last year, really last couple of years. Category has been pretty strong. So I remain bullish on the category overall.
Speaker Change: Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: The market share, we know that we can continue to build the pipeline of the space expansions we talked about and the continued international expansion, so we feel highly confident in terms of our ability to continue to drive outsize growth, regardless of where the category bounces around.
Speaker Change: Thank you. And our next question today comes from Oliver Chen at TD College. Please go ahead.
Speaker Change: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Kristina Katten, Mandy Fields, Kristina Katten, Mandy Fields, Kristina Katten, Mandy Fields,
Speaker Change: TAMS that would be good for investors to focus on as they look to model that as well. Thank you.
Speaker Change: Hi, Oliver. Thanks so much for the questions.
Speaker Change: So from a track channel perspective, I mean, we really, as we said on the call, not giving any color really around track channels. What I would love to anchor you to is what our guidance implies for the second half of the year. And that's really the 16 to 20 percent growth. And as I said on the call, the 20 percent, really a continuation of what we saw out of Q2 on an organic basis. And so we feel great about our outlook as we look into the second half. And again, those drivers, building market share in the U.S., the pipeline associated with the space expansions that we just talked about with Target, Walgreens, and Dollar, and then also continued international momentum. And so those are really the building blocks that we see in the second half of the year.
Speaker Change: On the ERP side, just to give you all an update on that. We are expecting to go live on SAP later in the spring of 2025. But we also have aligned as a team here to say that if we do not feel like we're prepared, we're not going to flip the switch.
Speaker Change: on the ERP. So we want to minimize risk through that way, Oliver, we're doing a lot of testing, a lot of preparation and a lot of training of the team here before we go live. And so trying to learn from mistakes of others that have gone through these types of transitions and want to make sure we have it 100% right before we flip the switch there.
Speaker Change: And then on your question on international, I feel great about the investments we're making to continue to fuel and our ability to supply the global demand that we're seeing.
Speaker Change: As we mentioned a few calls ago, we have built a team in the UK, in London, we're also putting
Speaker Change: People in different markets around the world and that's been a continual investment. We're also Adding to other members of the team to make sure that we can support the international growth and it's well planned and it's not Just the team, but it's also the infrastructure. We've added distribution capacity
Speaker Change: over the last 18 months for the growth that we know that we're going to be getting within international and so I feel good about our ability to continue to map it and I think it's also aided by our strategy.
Speaker Change: We're not in a hurry to get into 30 countries all at once. We like this disciplined, sequential approach to find a leading beauty retailer, partner with them, establish ourselves in a market, and then look to expand from there. So it's well within our control in terms of the pacing and how we make sure that we follow that.
Speaker Change: Thank you. And our next question today comes from Shobana Chowdhury with JP Morgan. Please go ahead.
Speaker Change: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Hi, I don't know if you can hear me. I have a question.
Speaker Change: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Okay, I have a question on sell-in and sell-out and a clarification. If you can comment on the sell-in growth.
Speaker Change: In the U.S., ex-Naturion, it seems like to be around mid-single digits.
Speaker Change: And then a clarification on Dollar General, I mean, again, congrats on entering. It seems like a very complimentary retailer, as you said.
Speaker Change: How many doors are you planning and when should we see obviously the impact on the numbers if it's included more into the back end of the fiscal or even fiscal 26? Thank you for both.
Speaker Change: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: is the most productive brand carried by our retailers. And so they really do need to kind of reorder to keep up with the demand that we're seeing there. I would say from a category bounce back and the volatility, the category and the track channels piece is going to continue to be volatile as we look out. And that's why we're kind of just focusing more so on our overall guidance, our annual guidance of 28 to 30% for the year. Very strong and kind of focused on those building blocks that I talked about, the continuing to build market share, the pipeline that we have in place, and then the international momentum that we're seeing.
Speaker Change: Thank you. And our next question today comes from Susan Anderson at Canaccord Genuity. Please go ahead.
Susan Anderson: Hi, good evening. Nice job on the quarter. I guess maybe I was wondering a little bit more on the innovation front. You talked about maybe having a little bit less this quarter. I guess what franchises or categories do you think there's opportunities still to roll out new innovation and then
Speaker Change: Hi, Susan. So in our remarks, what we're really commenting on is our track channel growth came in at slightly below the 20% we were outlooking. It came in at about 16%. So still 16% growth. It still was strong. We still picked up a ton of share. We cited two factors. One was we did see a little bit of a pullback in consumer in terms of the category being down 5%. The other thing we had is we had a perfect storm last year in terms of a couple of our core franchises, Power Grip Primer and Halo Gold Liquid Filter. We're getting back in stock on Power Grip Primer. We had a ton of support on it coming off the Super Bowl and continue to run those spots. On Halo Gold Liquid Filter, we had basically launched our Halo Gold Blondes, which went viral, basically got that whole franchise going and the level
Speaker Change: So we feel great. So the indicated action for us is just making sure we better balance
Speaker Change: It further accelerates the franchise. So I feel again, great about the business overall, even in our core franchises, the strength that we have there, and then the ability to continue to reanimate them and come out with newness on them. And that will be by spring, we've got a very full slate of innovation coming up.
Speaker Change: And then, Susan, on your question on inventory, we feel great about our inventory position and feel that we have the inventory that we need to continue to support the demand that we're seeing. In terms of build-up, we haven't given an outlook, but I can't, I do feel comfortable saying that, you know, as we go into kind of this third quarter, typically there's a build-up as we're kind of looking at our spring innovation and there's pipeline and things like that that need to go out, and then you should see it come down a bit more as we get into Q4 and exit this year.
Speaker Change: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Kristina Katten: Thank you. And our next question today comes from Anna Lozul with Bank of America. Please go ahead.
Anna Lozul: Hi, good afternoon. Thank you so much for the question. I was wondering if you could talk a bit more about the sales that you're seeing between channels and retailers and any shift here in purchasing habits that you're seeing between different retailers themselves and also versus online. And then in terms of the dollar general expansion, I was wondering what the product assortment is that you're planning to feature there. Thank you.
Anna Lozul: Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: And then on Dollar General, you know, as we said, we are bringing making the best of beauty accessible. And so we have not modified our assortment. We're bringing our best products, our holy grails to the Dollar Channel. And we feel great about the assortment, about the presentation, the merchandising that we'll have as we enter the Dollar General stores.
Speaker Change: Thank you. And our next question today comes from Linda Bolton-Weiser with D.A. Davidson. Please go ahead.
Linda Bolton-Weiser: Hi, yes, thank you. My first question had to do with mix. You said the mix effect on growth margin was negative in the quarter because of noturium.
Anna Lozul: Moving into Wholesale Channels. I was curious if you exclude the Notarium effect.
Anna Lozul: was next a negative or positive effect on growth margin and then related to that is the international growth a negative or positive for the mixed effect on growth margin
Anna Lozul: And then my second question was around growth.
Anna Lozul: I'm wondering if you've thought about defining a long-term growth algorithm that helps investors understand how rapidly you can expand into these various areas that you're expanding internationally, new brands, etc. And if you think a growth algorithm long-term might help.
Speaker Change: Hi Linda, I'll take the question on gross margin. So I would say I'm very pleased with our gross margin progression Our gross margin was up 40 basis points this quarter We raised our outlook on gross margin from 20 basis points previously up to 30 basis points on the year So we feel great about our gross margin The reason we called out the mix piece is because notarium did start to go into wholesale That was planned and expected and so we feel great about our gross margins overall International gross margins as you can as I kind of may have talked to earlier is
Anna Lozul: And then in terms of long-term growth algorithm, Linda, we've heard mixed things from investors. Some have said, you know, hey, the last time you put out a long-term growth algorithm, it was woefully inadequate. I think we had said we're going to grow mid to high single digits since you've seen the growth we've delivered over the last five years. So there's some part of it does it box us in. Now, having said that, we also think it's
Anna Lozul: A Fool's Errand to go pay attention to weekly Nielsen data, which I think some investors have been a little bit too preoccupied with. I think they're missing the entire point. Periodically, we will go and refresh what correlates most closely with our long-term share performance.
Anna Lozul: number, we certainly have our long range plans, really great visibility to our business, including the three areas of white space and color cosmetics, skincare and international. But we'll, I think, continue to debate that. But right now, I think what you can continue to expect is industry leading growth and market share gains.
Anna Lozul: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Thank you. And our next question comes from Corinne Wolfmeyer with Piper Sandoval. Please go ahead.
Corinne Wolfmeyer: Hey, good afternoon. Thanks for taking the question. I'd like to touch a little bit on the EBITDA number you put up. I mean, last quarter, you were kind of talking down the EBITDA margin. I believe you were kind of targeting low teens. And obviously, you came in well ahead of that. It does seem like there was a little bit of spend that was pushed into Q3. So maybe you could help us quantify how much was pushed into the Q3 in the back half and how we should be thinking about the cadence of the margin between Q3 and Q4. Thanks.
Speaker Change: Hi, Corinne. Thank you. Thank you. Thank you.
Speaker Change: So, our EBITDA did come in a little bit better than we expected for the quarter. And as I talked in our prepared remarks, that really comes down to expense timing shifts out to Q3. We saw expenses both in marketing and in non-marketing SG&A shift out to Q3. And so, when you look at the second half, our guidance roughly implies a 23-ish percent EBITDA margin.
Speaker Change: You can envision that the Q3 margin would be a little bit lower because of those expenses that we just talked about shifting and then Q4 a little bit higher than that 23% that we're out looking for the second half.
Speaker Change: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Thank you. And our next question comes from Mark Altschwager with Barrett. Please go ahead.
Mark Altschwager: Thank you, good afternoon. On to international, great to see them both.
Mark Altschwager: Unknown Executive, Kristina Katten, Mandy Fields
Mark Altschwager: And then just any other considerations as we contemplate the international growth in the back half of this year. And then just more broadly on the revenue guide, 16 to 20% for the back half, just any help there on how to model the cadence Q3 versus Q4. Thank you.
Mark Altschwager: Hi, Mark. This is Tarang. So, I'd say international is largely consistent. If you look at the growth we had in Q1, I think that was above 90% as well, 91% we feel good about. There will be different timing in terms of when pipeline goes in to a particular launch for a particular launch customer. But overall, I think what we're most pleased by is the overall consumption that we're seeing in terms of really being able to go out the gate at number one with Sephora Mexico, with Rossman Germany, Atos.
Mark Altschwager: Douglas Italy as well as a strength we're seeing in our existing market. So we feel it's pretty solid We have an outlook what the international growth would be in the back half other than we expect it to continue to be strong
Mark Altschwager: Right. And then for the second half, really not providing any quarterly color, other than to say we've outlook 16 to 20% for the second half, and we feel great about the building blocks that we have in place to achieve that.
Mark Altschwager: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Thank you. And our next question today comes from Mark Astrachan with Ski Pool. Please go ahead.
Mark Astrachan: I guess, you know, it still seems like it's a bit higher than maybe I would have expected given, you know, your expectations for decelerating growth, and I look at it on
Speaker Change: a year-on-year basis, you know, it was up more sequentially, 1Q24 to 2Q24 in year-on-year then, but the growth was also much greater. So I guess trying to figure out, you know,
Speaker Change: is there something going on? Is it too much inventory? Like what what would be the timing of how long?
Speaker Change: Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: The other sort of question is, is part of this related to what you talked about in terms of timing of when you're taking ownership from China and maybe just explain that a little bit more in terms of what specifically is going on and why you'd want to hold more inventory. Thank you.
Speaker Change: Hi, Mark. Yeah, so let me just maybe take you back a couple quarters on our inventory. So last year around this time is when we started talking about the change with taking ownership earlier. So we're taking ownership when product leaves China instead of when it arrives here. So that had an impact on inventory. That has been for the last couple quarters that we've been talking about that. So that's not a new thing or a new addition to our inventory narrative here. And I want to address your question on obsolescence as well. There is no risk of obsolescence overall for our portfolio, color cosmetics, anything like that. And what you're seeing in the build on inventory, as we've talked about, is really building for that global footprint. So we've talked about
Speaker Change: is setting up distribution centers across the world in Asia, in Germany, in the UK, here with the second DC here in the US.
Speaker Change: Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields
Speaker Change: Thank you. And our next question comes from Rupesh Parikh with Oppenheimer. Please go ahead. Good afternoon. Thanks for taking my question. So just going back to Notorium, I was curious how it's performing at Alta and then how you guys are thinking about further distribution opportunities from here.
Speaker Change: Hi, Rupesh. This is Tarang. We feel great about Notorium. As a reminder, we acquired it about a year ago, and the brands continue to see very strong growth. We're very pleased with the launch at Ulta Beauty. We have a full assortment, not only in facial skin care, but also in body, and I think really good presentation there as well. So, Notorium will continue to look at other...
Speaker Change: Thank you. This concludes our question and answer session. I'd like to turn the conference back over to Tarang Amin for closing the mark.
Speaker Change: Thank you for joining us. I'm so proud of the incredible team at Elf Beauty for delivering another quarter of industry-leading growth.
Speaker Change: Thank you to every elf and every elf partner for your passion and dedication to our vision of creating a different kind of beauty company. We look forward to seeing some of you at our upcoming investor meetings and speaking to you in February when we'll discuss our third quarter results. Thank you and be well.
Speaker Change: Funk and Double M Blues, I wanna have fun and OPA too Have you met my dude? DJ, you should play my tune I like jazz, funk and Double M Blues, I wanna have fun and OPA too Sitting in the DJ booth, I ain't even ask him if he played my tune I wanna know his style, gaze down at the juice on the ground and consider as a concrete dude Sitting in the DJ booth, I ain't even ask him if he played my tune I wanna know his style, gaze down at the juice on the ground and consider as a concrete dude Have you met my dude? DJ, you should play my tune I like jazz, funk and Double M Blues, I wanna have fun and OPA too Have you met my dude? DJ, you should play my tune
Speaker Change: You should play my tune. I like jazz, funk, and double M blues. I wanna have fun and OVA too. Have you met my dude? DJ, you should play my tune.
Unknown Executive: Kristina Katten, Unknown Executive, Kristina Katten, Mandy Fields