Q3 2025 elf Beauty Inc Earnings Call
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KC cotton: Thank you for joining us today to discuss Ulta Beauty's third quarter fiscal 25 results I'm KC Cotton, Vice President of corporate development and Investor Relations with me today are touring and mean, chairman and Chief Executive Officer, and Mandy fields, Senior Vice President and Chief Financial Officer.
KC cotton: We encourage you to tune into our webcast presentation for the best viewing experience, which you can access on our website at Investor Dot Health beauty Dot com.
KC cotton: 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.
KC cotton: In addition, the company's presentation today includes information presented on a non-GAAP basis.
KC cotton: Our earnings release contains reconciliations of the differences between the non-GAAP presentation and the most directly comparable GAAP measure.
Ray: With that let me turn the webcast over to Ray <unk>.
Speaker Change: Casey and good afternoon, everyone. Today, we will discuss the drivers of our third quarter results and our updated outlook for fiscal 'twenty five.
Speaker Change: In Q3, we delivered another quarter of consistent category leading growth.
Speaker Change: We grew net sales, 31% delivered $69 million and adjusted EBITDA and increased our U S market share by 220 basis points.
Speaker Change: Q3 marked our 24th consecutive quarter of both net sales growth and market share gains.
Speaker Change: Putting else beauty in a rarefied group of high growth companies.
Speaker Change: We're one of only six public consumer companies out of 546 that has grown for 24 straight quarters and average at least 20% sales growth per quarter.
Speaker Change: <unk> is the only brand of the nearly 1000 cosmetics brands tracked by Nielsen to gain share for 24 consecutive quarters.
Speaker Change: Our fiscal 2025 year to date results have been exceptional with our team delivering 40% net sales growth.
Speaker Change: We remain confident in our strategy, our ability to take market share and capitalize on the white space ahead of us.
Speaker Change: At the same time, our consumption trends to start calendar 2025 have been softer than we expected.
Speaker Change: We see three factors.
Speaker Change: First the category continued to decline in January we.
Speaker Change: We believe this decline is reflective of consumer stocking up and a highly promotional December and lower social conversation around beauty.
Speaker Change: Consumer mindshare was focused elsewhere, including wildfires in L, a and uncertainty around the Tic Toc platform.
Speaker Change: Second in Q4 were lapping the global launch of our viral glow Revivor lip oil, which was our biggest launch in calendar 2024.
Speaker Change: In addition, we had higher shipments in Q4 last year as retailers build inventory ahead of the big game.
Speaker Change: Third initial reads for a couple of our new product launches for spring 2025 have started off slower than we expected.
Speaker Change: We're still in the early days of marketing Activations for these launches and our spring resets.
Speaker Change: Over the next few weeks, our retailers will add spring innovation to shelf.
Speaker Change: And refresh our shelf sets, including.
Speaker Change: Expanded space and targets and Walgreens.
Speaker Change: These results are still in progress and we will not be complete until the end of February.
Speaker Change: Balancing these factors, we're lowering our net sales outlook for the final quarter of the fiscal year to minus 1% to plus 2%.
Speaker Change: Given the dynamics between Q3 and Q4, we've not believe Q4 is indicative of the underlying run rate of our business.
Speaker Change: And we remain confident in our ability to deliver market leading growth.
Speaker Change: As updated our outlook contemplates, 14% to 16% net sales growth in the second half of 2025 on top of the 77% growth we delivered in the second half of last year.
Speaker Change: As we look ahead, we remain focused on four areas with significant runway for growth.
Speaker Change: Digital.
Speaker Change: Color cosmetics skincare and international.
Speaker Change: Let me update you on our progress in each in Q3.
Speaker Change: Starting with digital.
Speaker Change: Foundry is a digitally native brand health remains the only top five mass cosmetics brand with our own direct to consumer site.
Speaker Change: Q3 digital consumption trends were up nearly 30% year over year on top of triple digit growth in Q3 of last year.
Speaker Change: Digital channels drove 24% of our consumption in Q3 in line with last year. We're pleased with these results as Q3 was highly promotional across mass beauty. Instead, we held to our approach of delivering outstanding value everyday foregoing promotional activity on our cosmetics dot com during the holidays.
Speaker Change: We're seeing continued momentum across our digital and social platforms with strength on Amazon and supported by our ongoing enhancements to our loyalty program and mobile App.
Speaker Change: Our beauty squad loyalty program recently surpassed $5 6 million members with enrolment consistently growing over 20% year over year.
Speaker Change: Our mobile App now has over 3 million downloads, making the most downloaded single brand cosmetics and skincare app in the U S and holds a 4.9 rating out of five.
Speaker Change: In color cosmetics, we continue to significantly outperform the category.
Speaker Change: In Q3 F cosmetics grew 16% in tracked channels as compared to a category that was down 5%.
Speaker Change: Increasing our market share by 220 basis points.
Speaker Change: Nationally Elsa is the number one brand on a unit basis with approximately 14% share and then number two mass spread on a dollar basis was approximately 12% share more than double the level, we had three years ago.
Speaker Change: We remain focused on the opportunity to double our market share in the coming years.
Speaker Change: In target our longest standing national retail customer, we're the number one brand with over 20% share delivering consistent growth over time.
Speaker Change: In Q3, we grew our cosmetic share target by 170 basis points and believe we can fuel further growth with space expansion. This spring.
Speaker Change: We believe we're making great progress on replicating our success at target with other key retailers.
Speaker Change: In Q3, we reached the number two brand rank at Walmart for the first time.
Speaker Change: Up from number four a year ago.
Speaker Change: We're also find success with newer retailers like dollar general, where we launched <unk> in a subset of doors. Our initial results have exceeded our expectations in this new channel and we will continue to expand into additional dollar general doors. This spring we shared dollar General's mission to serve the underserved and democratize access to the best of beauty, particularly in rural areas, which are true.
Speaker Change: Additionally, only been served by legacy brands.
Speaker Change: We are pleased with our continued retail expansion opportunities unlocked by our focus on driving productivity.
Speaker Change: Health remains the most productive cosmetics brand on a dollar per linear foot basis, with our largest retail customers globally.
Speaker Change: Our 24 consecutive quarters of share gains are a testament to the effectiveness of our productivity model and we believe our continued focus on productivity will aid in further space expansion in the years to come.
Speaker Change: Looking to skincare and just five years L. Skin has become a top 10 skincare brand in a category dominated by legacy brands built over decades.
Speaker Change: For context, the average age of the other top 10 skincare brands is 63 years old.
In Q3 L skin continue meaningfully outperformed the category and grow market share.
Speaker Change: As we look ahead, we see significant runway for growth.
Speaker Change: <unk> skin today holds about a 2% share as compared to the number one brand holding nearly 14% share.
Speaker Change: With the acquisition of editorial we've doubled our skincare penetration to 18% of our retail sales.
Speaker Change: We now have two of the fastest growing mass skincare brands that are distinct yet complementary in their price points positioning and audiences.
Speaker Change: The launch of Victorian into Ulta beauty continues to perform well and we see further expansion opportunities ahead.
Speaker Change: Turning to international our net sales grew 66% in Q3 fueled by growth in our existing markets as well as our expansion into new markets.
Speaker Change: International drove 20% of our net sales in Q3 up from 15% a year ago.
Speaker Change: We see significant white space ahead, with our global peers, having over 70% of their sales outside the U S.
Speaker Change: We've seen success with our engagement model across social platforms, driving global consumer demand well before we enter a particular country.
Speaker Change: Today, Alf as retail presence in 15 countries with launches over the last year, including Rosman, Germany.
Netherlands, do glass, Italy, and so for Mexico.
Speaker Change: We've achieved a top three ranking in each of these new markets, we've launched in reflecting our strength in driving global brand demand.
Speaker Change: We're also excited to bring our disruptive marketing to new markets using our universal brand superpowers with local cultural relevance.
Speaker Change: In Germany, Alf translates to the number of 11 <unk>.
Speaker Change: All funds earn the title of our latest campaign means 11 out of 10.
Speaker Change: Our wink and a nod to the insertion in Germany with quality ratings.
Speaker Change: Thank you.
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Speaker Change: Volume there.
Speaker Change: In Mexico, we're tapping into the love of Telenovelas with to SKU Bray L sector.
Speaker Change: Discover the Alpha effect this campaign, which is launching over the next few weeks is rooted in <unk> core value proposition.
Speaker Change: The engagement with a global audience and success, we're seeing across geographies gives us confidence in the global opportunity. We see ahead for our brands.
Speaker Change: Alpha has been one of the few brands able to scale through our five unique areas of advantage.
Speaker Change: Our passionate team of owners with a high performance culture.
Speaker Change: Our value proposition powered by an asset light supply chain delivering the best combination of quality cost and speed.
Speaker Change: Our powerhouse innovation delivering premium Holy Grail products at accessible price points.
Speaker Change: Our disruptive marketing engine activating millions of consumers around the world and our unique productivity model bring this to life at retail globally.
Speaker Change: Other brands may seek to imitate parts of our strategy is how each of these areas of advantage reinforce each other that forms our competitive moat.
Speaker Change: This quarter I'd like to spotlight, our powerhouse innovation and how that's integrated with our disruptive marketing engine to fuel our industry leading growth.
Speaker Change: We have a unique ability to deliver a steady stream of Holy Grails, taking inspiration from our community and the best products in prestige and bring them to market and extraordinary value.
Speaker Change: Our Holy Grail innovation approach is working and driving share gains across segments.
Speaker Change: In 2020 for Alf Helge six of the top 10, new product launches and mass cosmetics. The most of any year and we held four of the top 10 S skus across both mass and prestige.
Speaker Change: In Q3, our focused innovation strategy drove triple digit share gains across face lip and eye makeup we've more than doubled our share in each of these segments over the last five years and see significant opportunity ahead as compared to over 20% share and number one ranking we have in face we have an 11% share and the number four ranking in live.
Speaker Change: And an 8% share of the number four ranking and I, we have significant white space in these large segments and believe we have the innovation engine to Congress for them.
Speaker Change: We have a track record of building growing product franchises that endure instead of the one and done launches many of our product launches for spring 2025 expand our largest franchises. As one example, we recently launched power grip Mat primer, a modified version of our original power grip primer, which continues to be the number one cosmetics S. Ku in both mass.
Speaker Change: And prestige, we spoke last quarter about better balancing support between innovation in our core franchises.
Speaker Change: To that end in Q3, we created a campaign called eyes lips face fandom.
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Speaker Change: Our spot made it's USD view on Thanksgiving day, and continue to have multiple high visibility placements during the playoffs season.
Speaker Change: We saw strong community engagement with 95% positive sentiment a lift in our site traffic and an increase in power group sales.
Speaker Change: Our most recent campaign with Meghan Trainor.
Speaker Change: A longtime fan of the brand spotlights, our expanding Halo Guo franchise.
Speaker Change: We believe our marketing engine is best in class in finding unique ways to entertain and engage our community through a disruptive brand partnerships sports.
Speaker Change: Music and movies.
Speaker Change: As the number one favorite brand amongst Gen Z and ranks number one in purchases amongst millennials and Gen Alpha.
Speaker Change: Our increased marketing investment has helped expand our unaided brand awareness and 13% in 2020% to 33% in 2024.
Speaker Change: I've been in the consumer space over 30 years and never seen a 20 point jump in unaided awareness in just a few years.
Speaker Change: As great as that is the leading U S. Mass cosmetics brand has 55% unaided awareness gives us confidence in our runway for growth.
Speaker Change: In summary, we believe our five key areas of advantage will continue fueling our ability to win in fiscal 'twenty five and beyond.
Speaker Change: As we look ahead, we remain confident in our ability to continue to gain share and deliver best in class growth in beauty I will now turn the call over to Mandy. Thank you terrain I'll now cover the highlights of our third quarter results and our updated outlook for fiscal 'twenty. Five Q3, net sales grew 31% year over year on top of 85%.
Mandy: Growth in Q3 of last year.
Mandy Terrain: We experienced growth across international retailer digital commerce, and our national retailers and benefited from pipeline shipping earlier than it did last year, our sales growth throughout fiscal 'twenty five has been underpinned by continued category outperformance and market share gains both in the U S and globally higher unit.
Mandy Terrain: Volume contributed approximately 30 points to growth in Q3 with mix, adding an additional point Q3 gross margin of 71% was up approximately 40 basis points compared to prior year gross margin benefits were primarily driven by favorable foreign exchange impact on goods purchased from China cough.
Savings and inventory adjustments. This was partially offset by mix related to material wholesale expansion and higher transportation costs.
Mandy Terrain: On an adjusted basis SG&A as a percentage of sales was 54% in Q3 in line with last year.
Mandy Terrain: Marketing and digital investment for the quarter was 27% of net sales in line with our expectation and as compared to 26% last year Q3, adjusted EBITDA was $69 million up 16% versus last year.
Mandy Terrain: Adjusted net income was $43 million or 74 cents per diluted share compared to $43 million or 74 cents per diluted share a year ago.
Mandy Terrain: Both adjusted EBITDA and net income this quarter were impacted by an unanticipated foreign currency loss of approximately $7 million that was driven by quarter over quarter fluctuations between the British pound and U S dollar moving to the balance sheet and cash flow our balance sheet remains strong and we believe positions us well to execute.
Mandy Terrain: Our long term growth plans.
Mandy Terrain: We ended the quarter with $74 million in cash on hand, compared to a cash balance of approximately $73 million a year ago, our ending inventory balance was $215 million in line with our expectations and up from $205 million a year ago.
Mandy Terrain: Liquidity position remains strong we ended the quarter with less than one times leverage in terms of net debt to adjusted EBITDA, We expect our cash priorities for the year to remain on investing behind our growth initiatives and supporting strategic extension.
Mandy Terrain: The specific growth initiatives, we're focused on this year include investing in our people and infrastructure.
Mandy Terrain: Our ERP transition to S P.
Mandy Terrain: As well as increased distribution capacity to support strong global consumer demand.
Mandy Terrain: Now, let's turn to our updated outlook for fiscal 'twenty five.
Mandy Terrain: For the full year, we now expect net sales growth of approximately 27% to 28% as compared to 28% to 30% previously.
Mandy Terrain: Our Q3 net sales growth came in better than expected largely driven by the timing of pipeline shipments.
Mandy Terrain: In Q4, our consumption trends are starting off softer than we expected.
Mandy Terrain: Driven by the factors trying discussed earlier in the call.
Mandy Terrain: As we look to the second half overall, our updated guidance range implies 14% to 16% net sales growth in the backdrop of a challenged mass cosmetics category and on top of the 77% growth we delivered in the back half of last fiscal year.
As we look forward, we remain confident in our ability to deliver share gains in the U S and expand our business internationally.
Mandy Terrain: Turning to gross margin.
Mandy Terrain: In fiscal 'twenty five we now expect our gross margin to be up approximately 40 basis points year over year as compared to approximately 30 basis points previously.
Mandy Terrain: This outlook does not include any impact from the recently announced tariffs at an incremental 10% on goods imported from China.
Mandy Terrain: As a reminder.
Mandy Terrain: Tariff hikes will not impact our current fiscal year results.
Mandy Terrain: We plan to address our response to the incremental tariffs and our fiscal 2026 outlook in may.
Mandy Terrain: We believe we have a successful playbook to leverage from 2019, when tariffs moved to the 25% level.
Mandy Terrain: This included supplier concession cost savings and select price increases.
Mandy Terrain: We also had FX move in our favor at that time, which further mitigate the impact.
Mandy Terrain: This time around with our increased supplier diversification outside of China, and our growing international sales base. We believe we have multiple levers to address the impacts of these tariffs.
Mandy Terrain: We continue to expect marketing and digital investments at approximately 24% to 26% of net sales in fiscal 'twenty five as compared to 25% in fiscal 'twenty four.
Mandy Terrain: From a cadence standpoint that implies significant expected leverage in our marketing in Q4 on a year over year basis.
Mandy Terrain: As marketing spend was approximately 34% of net sales in Q4 of last year.
Mandy Terrain: Turning now to adjusted EBITDA.
Mandy Terrain: For the year, we now expect adjusted EBITDA between 289 million to $293 million as compared to 304 million to $308 million previously.
Mandy Terrain: The change is due to the incremental $7 million FX loss that I discussed earlier as well as our lowered top line outlook.
Mandy Terrain: Our outlook for fiscal 'twenty, five now implies adjusted EBITDA growth of approximately 23% to 25% on top of the strong 101% growth we delivered in fiscal 'twenty four.
Mandy Terrain: In summary, our third quarter results underscore our ability to drive category, leading sales growth and market share growth.
Mandy Terrain: We believe we have a winning strategy and are in the early innings of unlocking the full potential for our brands.
Mandy Terrain: With that operator, you may open the call to questions.
Mandy Terrain: Thank you we will now begin the question and answer session.
Speaker Change: It's a good question the reverse Star then one on your telephone keypad.
Mandy Terrain: Your question. Please press Star then two.
Speaker Change: Today's first question comes from Bill Chappell with <unk> Securities. Please go ahead.
Bill Chappell: Thanks, Good afternoon.
Speaker Change: Good afternoon.
Hey, Duane maybe just I guess the key question is.
Speaker Change: With the guidance with kind of what you saw in January just trying to understand how long you see this lasting.
Speaker Change: I think as you walk through the different aspects like the tougher comp on the lip oil it was kind of understood going into it. So it's the other two areas. We're just trying to understand.
Speaker Change: In terms of where the comps get better suited to February March April do you think this is part of a longer slowdown just give any more color kind of on that would be great.
Bill Chappell: Hey, Bill why don't I start.
Bill Chappell: I would say.
Bill Chappell: Our approach is to be.
Bill Chappell: More cautious or prudent when we see a slow month and in January the three factors of the category being down 5% the.
Bill Chappell: The lip oil that we're lapping while we knew about it is by far our biggest launch in 2024, and I think one of the things that would happen and look boilers. We gave it exclusively to alter it to start in December and then it went pretty broad right away in January so we're growing across pretty Big Hill on that and then a couple of our new items are off to a slower start and is still.
Bill Chappell: Early as we go through as we go through each of those elements starting with the category I think two things on the category that gives us a bit more confidence going forward. One we feel the consumers that are a bit of a hangover from the highly promotional period in December.
Bill Chappell: While we didn't promote the industry promoted quite a bit and you often see a trough right after that promotional loan area.
Bill Chappell: Second in January.
Bill Chappell: Social conversation was way down over 20%, we attribute that to two things one the wildfires in L. A I don't think brands wanted to be tone deaf during that devastation and then the uncertainty around tick tock. It seemed for a while the only thing people are posting on tick tock with whether it's going to stay open or shut down. So we do see those potentially be.
Bill Chappell: Better as time goes on as I mentioned, particularly this is the fifth city on what happened in the category what happened in the social.
Bill Chappell: Conversations and that in turn also relates to some of the softness we saw initially in some of our spring new items, we count on that social conversation to really like those items virally and so with our marketing activations coming up with resets when we're able to get that spring innovation on shelf.
Bill Chappell: It's particularly with expanded space, we have coming at target.
Bill Chappell: Walgreens, we're hoping for better trends as we go forward, but we just took a more cautious stance and said, okay. Let's assume it doesn't get better for a couple of months and Thats why you see us adjust our Q4.
Speaker Change: Got it and then maybe just a little more update on that.
Speaker Change: Our international is trending did you go into any new countries. This quarter and are you are you seeing any of the same in terms of color category or something like that.
Speaker Change: Slowdown internationally or is it still kind of full steam ahead.
Speaker Change: We were really pleased with the progress we're making in international for Q3, we grew our international business, 66% also from a category standpoint, we're not seeing quite the same level of headwinds internationally. So I think the categories, a little bit better, but more importantly, it's our execution as we launched in the back half of last year into Rosman chair.
Speaker Change: Many at Tusa, Netherlands, even argue glass, Italy, we've maintained the top three rank in all three of those customers and we continue to see a tremendous amount of pent up consumer demand.
Speaker Change: We're currently in conversations with pretty much every retailer and a retailer out there that doesn't one else given our growth profile. The innovation, we pay the consumer profile. We bring so you'll continue to see is full steam ahead on international will continue to hear additional countries separately expanding into and so we feel great about our progress there.
Speaker Change: Great. Thanks for the color.
Andrea Teixeira: Thank you and our next question comes from Andrea Teixeira with Jpmorgan. Please go ahead.
Andrea Teixeira: Thank you operator, and good afternoon, everyone.
Speaker Change: I was hoping if you can try and talk about that.
Speaker Change: Hey, Mark to tell you about the U S. What is the consumption.
Speaker Change: And then Wes as you exited the quarter and currently I mean, you did stick a glut.
Speaker Change: What amount of.
Speaker Change: How the innovation is coming for the spring season, and how we can form deal on this guidance and also what I think I heard from the.
Speaker Change: Mainly that there was some pull forward in this quarter. So we're just hoping to see what is consumption in the U S and now we should be seen because obviously, if you have a 7% ish at the midpoint growth in top line in the fourth quarter it implies a pretty negative.
Speaker Change: Number in the U S.
Speaker Change: So if you are assuming that obviously.
Speaker Change: The European and international continues to do well.
So just wanted to see what is embedded in each of the assumptions. Thank you.
Andrea Teixeira: Hi, Andrea if you take a look at Q3 consumption. We still finished Q3 consumption double digits I think about 12% in tracked channels. So it was pretty strong.
Andrea Teixeira: In January we did see that come.
Speaker Change: Come down you saw actually a week.
Speaker Change: Couple of weeks of negative scanner data. So that was a slowdown that I talked about we're hoping that gets better but we're basically embedding in our guidance what if it doesn't get better in the course of the quarter and then in terms of the pull forward or not that really relates to our pipeline. We had much more pipeline go out the door in Q3 than in Q4, that's a little.
Speaker Change: Why when we really think of kind of what is the growth in the second half that 14% to 16%, which our new guidance implies in the down category, we feel really good about it and continue to grow share in fact January which was a soft month for us from a consumption standpoint, we still built 90 basis points of share we're the only ones.
Speaker Change: Is growing out of any of the brands in that period I mean, it was pretty modest growth from a consumption standpoint, I think in the tracked channels is probably up 1% but that.
Speaker Change: Gives you an indication of how much better were doing within the category.
Speaker Change: Yeah.
Speaker Change: And is there any any difference between.
Speaker Change: The channels or like any any any any kind of like on the ground.
Speaker Change: You. Besides what you discussed a tick tock and all those things that you know kind of shake shack.
Speaker Change: Snaked everyone's opinion consumer sentiment.
Speaker Change: You might say regarding newness of the category it seems like with the newness kind of.
Speaker Change: It's not as strong and this is some something that.
Speaker Change: The industry needs time to time.
Speaker Change: Anything you can say as we look forward that may change that in terms of the newness or the cadence of.
Speaker Change: Of.
Speaker Change: If your execution in the trade.
Speaker Change: Yeah, So what I'd say on our newness is we still feel good about our screen new items, we saw softness in January some of it related to the less social conversations as I mentioned, it's still early part of what we're doing about it is we always have marketing activations against our new items, and so youre going to see those marketing Activations hit the other thing that helps with new.
Speaker Change: <unk> is when we were able to get them on the spring resets. The spring resets will not be complete until end of February so that always helps our new items as well and so and then I'd say between channels for us going back to Q3, we saw strength across pretty much most of our channels. We were a little worried about ultra given they had the loop oils <unk>.
Speaker Change: So really during that period and actually was pleased with how we were able to comp that massive amount of whip oil in Alta.
Speaker Change: In that month as we get into January as I look across retailers in our digital business in January we continue to see Amazon do extremely well Walmart is off to a pretty good start in terms of their comps we are a little bit of softness in ulta and target as we take a look but again, that's before we often see that.
Speaker Change: Before resets, particularly at target, where we shut off a number of items as we get ready for the space expansion that we see so no warning signs as I look across retailers more from the macro is where we're putting that guidance on.
Karen: Thank you Karen in your personal life.
Gautam: Thank you and our next question comes from Gautam.
Speaker Change: With Morgan Stanley. Please go ahead.
Speaker Change: Hey, good afternoon guys.
Speaker Change: Sure.
Gautam: Correct.
Speaker Change: The detail you gave us around the drivers of the January softness was helpful. Can you just spend a little more time on maybe how you plan to adjust your strategies. Your tweak your efforts in light of a new environment. You just mentioned with some of the innovation the marketing Activations et cetera.
Speaker Change: And the plans, there, but maybe a bit more detail on tweaks across the portfolio.
Speaker Change: And also from a marketing perspective, just as you think about the level of spend necessary for the business and how you manage that in a softer industry environment that'd be helpful. Thanks.
Speaker Change: Yes, so I'll start with for this quarter as I mentioned the key to our innovation is really the marketing Activations, we do against that we feel social conversation will normalize as we go forward in the in the quarter now that the wildfires over some of the tick tock kind of uncertainty is gone back and forth. So we definitely are starting to see.
Speaker Change: <unk>, a little bit of a pickup in the social conversations which will also help with our newness.
Speaker Change: The Activations and then they set the resets we have.
Speaker Change: Really good resets coming across customers as clear as we've seen those plans and what's going to rollout that will help along those lines in terms of our marketing strategy standpoint, I would say, there's not a big shift last quarter or a quarter before we talked about better balancing support behind our new items as well as our core franchises.
Speaker Change: And that spot that we shared on our webcast. The eyes lips face fandom, we saw would have an immediate impact on our power grid business.
Speaker Change: Branded and Thanksgiving throughout the playoffs, and so we're going to keep that balanced teen at call. It our core franchises and our new items one of the other things I like about a lot of our new items.
Speaker Change: Season is they are on our core franchises. So if I look at power grip mat that builds on our power group franchise power grid original was the number one SKU across mass and prestige.
Speaker Change: Hey, Luke will powder builds on our Halo grow franchise, we didn't show this Bob with Meghan Trainor, but we've got good creative on each of those core new items, which also we believe will benefit the core franchise.
Speaker Change: We debated whether we spend more money, but what we decided is in the face of kind of the consumer macro where consumers get more cautious. So we didn't think it made sense necessarily to invest more money behind that we feel good about the allies with currently achieving and so we will continue to disrupt I mean, I think youll see.
Speaker Change: <unk>.
Speaker Change: Some of these tomorrow other things that we're doing to.
Speaker Change: Continue to get attention on it.
Speaker Change: Okay.
Speaker Change: Great. Thanks, guys.
Speaker Change: Thank you and our next question comes from Ashley Hogan with Jefferies. Please go ahead.
Ashley Hogan: Hi, Thanks for taking our question. So trying you gave some good color on the slowdown in January and mass beauty, but if we look back at kind of the mass cosmetics industry over the last six months I mean, it's definitely slowed you guys have been outperforming but maybe any more color on just what's going on with that math.
Ashley Hogan: Cosmetics consumer if we look back a little further.
Ashley Hogan: Yeah.
Speaker Change: Hi, So if I look back on the mass cosmetics.
Speaker Change: Over the last six months I'd say, there's two primary factors that I would say result in a weaker category. One there was a lot of consumer uncertainty we saw that across a number of consumer categories, whether it was the uncertainty leading up to the elections, a little bit of the post I think theres still worries out there in terms of what's going to happen with inflation, what's the state of the economy.
Speaker Change: <unk>, so that definitely did weigh on the mask category I would say the second thing is sometimes we felt like we were the only ones are growing in the right direction in terms of the level of our marketing spend level of engagement are innovation and so we definitely look for more of that to see kind of a rebound in the category. The last thing I would say.
Speaker Change: If you go back actually quite a long period.
Speaker Change: I've been cycles with the mass category has been soft each one of those cycles, we've seen it come back at a pretty strong level I'll go on to the Doctor.
Speaker Change: Back in 2016 to 2017, we saw very strong category a soft period in 2018, obviously the pandemic is really soft saw it come back really strong so I still remain bullish on the category longer term, but I do think there is this macro on the consumer right now that is weighing on the category.
Speaker Change: Again our approach.
Speaker Change: To the last question from Dara I Should've said Theyre not no huge shifts in our approach and there is a reason we've delivered 24 consecutive quarters of net sales growth averaging over 20% our strategy's working the tweaks, we're making are really in response to what we're seeing in the marketplace that balance between core franchises in our new items.
Speaker Change: Really making sure that we're activating those properly and having the right visual merchandising on shelf to bring them to life, we feel confident with that approach even in a challenged category.
Speaker Change: Okay. Thank so much.
Speaker Change: Thank you and our next question today comes from Olivia Tong with Raymond James. Please go ahead.
Olivia Tong: Great. Thanks, good afternoon.
I wanted to talk a little bit more about Q4, you know recognizing of course some of the distractions that you talked about in the last several weeks.
Olivia Tong: But you've typically outperformed what scanner shows whether because of e-commerce, our international so why isn't that the case this quarter.
Olivia Tong: And what's your view on that and then of course, realizing youre not immune when category slowdown, but can you talk about your ability to capitalize on consumer trade down.
Olivia Tong: Perhaps there's some some greater focus on on the the value messaging.
Olivia Tong: Okay.
Olivia Tong: Alright, Hi, Olivia thank.
Olivia Tong: Thank you so much for the question. So Q4 overall, we feel great about.
Olivia Tong: Because we are looking at our second half overall, 14% to 16% growth is what we're looking at for the second half and again some of those pipeline shipments pulled up into Q3. So I think you've got to look at the second half overall and when you talk about outperformance at scanner trends, we do still have.
Olivia Tong: On business on digital and internationally that is stronger.
Olivia Tong: Outside of the U S scanner trends that Youre seeing and so this is why we're looking at Q4, our second half overall at the 14% to 16% and we're feeling pretty good about that.
Olivia Tong: And just to add to that I mentioned earlier, we're just taking a more cautionary stance given the consumer macro and the soft start to January I think our approach has always been a great deal of transparency with our investors, where we don't get ahead of ourselves if we see something we'll call it out and hopefully we'll do better than that.
Olivia Tong: Our track record over time, and then in terms of how we capitalize in this current environment, we see it as a great opportunity to continue those share as I mentioned, even in January which was a weak month for us we still built 90 basis points of share. The most share anybody built so that's how we're going to continue to capitalize and as you mentioned, we have an incredible.
Olivia Tong: <unk> value proposition prestige quality at incredible prices youre going to see us continue to shine a light on that particularly some of our lower priced items.
Olivia Tong: That are available for those who are really worried about kind of the overall economy, we have a great assortment on those and you'll see more messaging on that as well.
Olivia Tong: Opportunity to continue to build share.
Olivia Tong: Thank you.
Patti: Thank you and our next question comes from Patti <unk> with Goldman Sachs. Please go ahead.
Speaker Change: Hi, Thank you for the question just one on Amazon and digital in terms of your digital channels could you maybe talk more about the momentum you're seeing online and specifically with Amazon and I guess, one maybe some detail on what that partnership is brought to you for example, bringing in new consumers.
Speaker Change: Or reaching new demographics, and then two how do you think about cannibalization risk.
Speaker Change: Is this something you are seeing relative to your in store presence.
Speaker Change: So high I would say our digital business is strong in the quarter Q3, our digital business overall was up 30% Amazons growth rate was even higher than that we've continued to see really strong results with Amazon Amazon plays is a great deal of discovery happens on Amazon.
Speaker Change: A great deal of search happens on Amazon, obviously, those consumers, who want the convenience of the speed of being able to get their product.
Speaker Change: C. A long growth trajectory ahead with Amazon that partnership is extremely strong with one of their top performing brands on the entire platform and we see continued opportunity not only in the U S. But also internationally as we started expanding in Amazon and other markets.
Speaker Change: The UK, Germany, Italy, and a number of other markets we serve.
Speaker Change: We see that as being one of our key customers and then in terms of new consumer profile, we definitely see that on Amazon as I talked about discovery and search capability that they have or strength that you have there.
Speaker Change: And then cannibalization.
Speaker Change: There is some cannibalization I think.
Speaker Change: With some of our retail customers, but because of our model in terms of being agnostic in terms of where a consumer buys the way we've done our terms where kind of our net margins are pretty comparable across customers. We have always taken the stance that we want to make the best of beauty accessible to every consumer wherever they want to shop.
Speaker Change: So.
Speaker Change: If there is some cannibalization in the Amazon, we do think net it's additive to our overall portfolio just given the strength and we love having consumers have that choice of where they get it.
Speaker Change: Alright, thank you.
Speaker Change: And our next question comes from crude roofline or with Piper Sandler. Please go ahead.
Speaker Change: Hey, good afternoon. Thanks for the question.
Speaker Change: First one is a quick one I just wanted to see if there's any way to quantify that.
Speaker Change: The pipes all that happened in Q3 to help us better understand how much of a lift that you provided and then can you give us any more color on how you're expecting international to trend for fiscal Q4 I mean.
Speaker Change: You can definitely say that.
Speaker Change: International outperformed that they've seen the number that's been doing exceptionally well the guidance does imply a pretty meaningful slowdown versus what we've been seeing so maybe you could help us understand the puts and takes there of why youre anticipating such a float after the quarter. Thank you.
Speaker Change: Hi, Corinne so far the pipeline. So we have not quantified that but we did have a much more pipeline go out in Q3 than we did in Q3 of last year and that's why again, we're really looking at the second half on a whole because that helps to kind of make that story Paul.
Speaker Change: And then on international we continue to see momentum on international what I'd tell you in Q4 in international as we had in the pipeline go out in a number of our launches as of I think of that dose in the Netherlands.
Speaker Change: Can't remember, which other countries might have been due to us, but we had some more there. So the overall run rate and the absence of kind of launching a new retailer in the quarter.
Speaker Change: We will come down a little bit, but it's not something we worry about a lot of that has to do with the cadence of our launches the overall growth rate within our existing markets continues to be pretty strong.
Speaker Change: Great. Thank you and then if I could just touch quickly on the gross margin I think with the expansion in wholesale the margin is coming down a little bit how should we be thinking about the proper run rate for gross margin going forward with more wholesale penetration. Thanks.
Speaker Change: And so we're really pleased with what we're seeing on material and our ability to expand distribution on the brand overall from a gross margin standpoint, and this is something that we had planned for and as you can see in our raise gross margin guidance actually we're taking our gross margin up from 30 basis points previously to 40 basis points.
Speaker Change: And our outlook on the year and so still see strength from a gross margin standpoint, even with materials mix.
Speaker Change: Thank you.
Peter Arment: Thank you and our next question comes from Peter Arment.
Speaker Change: Yes. Please go ahead.
Speaker Change: Thanks, operator, good afternoon, how are you doing well so it's Ryan.
Speaker Change: You mentioned that you don't think the <unk> run rate is indicative of the growth profile of that business.
Speaker Change: I know where it will be a few months before we get into fiscal 'twenty six guidance, but I would love some perspective on what you think is a reasonable run rate for growth just given what youre seeing today, and then maybe within that totally understand wanting to keep a conservative.
Speaker Change: Look in the near term just given the many moving pieces, but should a weaker category environment persists like how are you thinking about your market share performance.
Speaker Change: Still solid 90 basis points in January but it is a bit of a step down versus the 220 basis points, you're referencing for three years. So just would be curious if you can kind of see that market share trying to improving from here.
Speaker Change: Hi, Peter I would say in terms of the run rate probably going have to wait until may for us to give the guidance for FY 'twenty six for us to kind of tell you what that run rate is I would tell you somewhere between what we had in Q4 than what we had in Q3 as run rates. It doesn't give you that much color other than.
Speaker Change: In Q4, we see as anomaly in otherwise what's been highly consistent growth.
Speaker Change: Also the fact that we are lapping if I look at that 14% to 16% growth. We have in the back half I think we are lapping 77% growth the year before so and achieved.
Speaker Change: Really great. The other thing that gives me confidence on why the run rate will be much better than Q4 is a significant wide space. We still have I mean, not only number one in units and number two in dollars in the U S. A clear line of sight to clear market leadership in color cosmetics, we continue to pick up share in both health.
Speaker Change: <unk> skin <unk> see very strong growth rates, there I just talked about digital and international So we have quite a bit of white space that gives me greater confidence in terms of our ability to sustain category leading growth in terms of market share actually was pleasantly surprised that we built 90 basis.
Speaker Change: Points of share and probably our weakest months that we've seen in January just tells you. The strength. We have so we're highly confident of our ability to continue to build market share for perspective, if I look at target, we have over 20% share at target versus closer to a 12% share nationally with other customers we're seeing green.
Speaker Change: Progress across other retail customers, we saw great progress even at target. We grew 170 basis points of share in target, even with a strong share position. So charter is not standing still I'm, particularly pleased that we went from the number four position to the number two position at Walmart and again really strong growth. There we continue to pick up ranking.
Speaker Change: Other customers. So I look at the bogey from a market share standpoint long term is something that we haven't told you what timeframe, but I don't understand why we wouldn't be able to get to the types of shares we havent targeted other retail customers overtime skincare is even a bigger opportunity I think they are sitting on a 2% share in skincare enel skin Mark.
Speaker Change: We just got 14% we have a long way to go there.
Speaker Change: The cadence of that share growth will very part of it will be what are you lapping I think what sometimes.
Speaker Change: Investors Miss is just how much share we've grown on top of very strong share growth rate. So you'll see that bounce around a little bit, but we're still very confident in terms of being able to lead the category and our share growth.
Speaker Change: That's super helpful. And then maybe if I could just squeeze one in for you just the fourth quarter implied guidance. It seems to imply a lot of SG&A leverage. So could you maybe just how much of that is the marketing and digital versus maybe other buckets within SG&A.
Speaker Change: Okay.
Speaker Change: So Q4, it does imply leverage in our SG&A as we talked about a significant leverage really from marketing and digital which was 34% in Q4 of last year and as our outlook implies 24% to 26% for it.
Speaker Change: For the year, which applies to Q4 as well so a lot of that leverage is coming from marketing and digital as we have continued to invest behind our people and infrastructure.
Speaker Change: And importantly, I would say on the SG&A point, we continue to invest in the business not only in our brands, but we mentioned the investments, we're making to get onto SAP.
Speaker Change: Later this year our continued expansion internationally the investments we've made in our distribution centers.
Speaker Change: To support that growth that we're seeing both in the U S as well as globally. So I feel good about the balance of being able to get leverage but also continue to be able to invest in the things we're going to need to be able to continue to drive strong growth.
Speaker Change: Thanks, So much I'll pass it on.
Speaker Change: Thank you and our next question comes from Linda Bolton Weiser with D. A Davidson. Please go ahead.
Speaker Change: Yes, hi.
The question of your product launches and innovation.
Speaker Change: You know it seems like there is some pretty good innovation in the prestige sector of the market that you could be copying.
Speaker Change: Yes, Theres a company out there that has gelatin and then in the primers Theres a cloud glo product. That's just like a foam primer. So theres definitely innovation out there it does seems like.
Speaker Change: Maybe it slowed down in terms of your car.
Speaker Change: Copying.
Speaker Change: So maybe you can talk about that and then talk about also the progress you're making in those categories, where your market share is very low.
Speaker Change: Like foundations and Mascara, and maybe you could talk about what progress you're making there. Thanks.
Speaker Change: Okay, Hi, Linda So first of all I would tell you we have an incredibly strong innovation pipeline. So what I talked about was a little bit of a slower start in January on a couple of items, but if you take a look at our Taylor grow powder. It has an incredible prestige equivalent target Matt is a unique innovation for us, but overall power grid.
Speaker Change: Really continues to follow that Holy Grail approach taking inspiration.
Speaker Change: Our community the best of prestige and Youll continue to see that we have a great cadence of innovation coming for the fall as well spring of next year. We go out three years a lot of it comes to what the sequence for cadence in those some of that innovation is so we not only studied the market. The one thing I'll probably correct. You on is we never copy.
Speaker Change: It always has a twist, we always quarter of twist, I mean, probably the biggest one being being able to have that prestige quality of incredible price points, we can but we always make a twist on within the products and so I would say our innovation team does a terrific job of getting inspiration not only from our community with those products from prestige and you'll continue to see a very strong.
Innovation cadence and pipeline from us.
Speaker Change: Yeah, and I would just add on Linda on your question on the progress in some of our what we call conquest categories. I think is a great example of that a few years ago, even last year, we had maybe a three 4% share in lift and we have seen that grown over 800 basis points.
Speaker Change: We've come into this year and so when we do have those innovations to <unk> point. It really allows us to continue to pick up share and we're doing that across slip Mascara Foundation does complex categories, where we do have a lower share but has so much potential.
Okay. Thank you very much.
Speaker Change: Thank you and our next question today comes from Susan Anderson I can't record Genuity. Please go ahead.
Speaker Change: Hi, good evening, Thanks for taking my question.
Speaker Change: Wanted to maybe follow up on nature and I'm not sure. If you could give some more color on how that performed in the quarter in terms of the growth rate. There and then also on the rollout to all Tad curious, if you're seeing new customers or existing customers buy the brand. There and then also if you have any color just on.
Speaker Change: Kind of more you know the space that you're taking.
Speaker Change: In the U S and globally.
Speaker Change: Yeah.
Speaker Change: We're very pleased with our performance overall with material, Susan and especially in Q3, they continued to show growth.
Speaker Change: And Ulta, where we launch we continue to see that business build week over week and so we're very pleased with the expanded distribution and growth that we're seeing on Ontario, and as a reminder, you know it.
Has tremendous white space opportunity as well daily only two retailers or target and Ulta overall physical retail they do sell on Amazon and have their own dot com, but really the rest of the world is white space opportunity for that.
Speaker Change: Pleased as well with the progress that we've seen in food they did launch in.
Speaker Change: A few a few hundred.
Speaker Change: Skincare Dork top performing skincare to Oregon, we continue to see great progress there as well so very.
Speaker Change: Very excited for the prospects vegetarian ethylene at Ford.
Speaker Change: Yes, Youll continue here, but are there other distribution expansion on Victoria.
Speaker Change: It's performed extremely well clinically effective biocompatible skincare incredible formulations with really great resonance with consumers. So we're very excited about continuing to build that up.
Speaker Change: Okay, Great and then maybe if I could just add a follow up.
Speaker Change: In general on the competitive landscape I mean, it sounds like you guys don't think that other brands are.
Speaker Change: Early April that coffee kind of your differentiated strategy I guess is it seemed like though maybe some of the legacy brands.
Speaker Change: Kind of starting to learn how you guys operate in copy you guys a little bit in terms of rolling out these do than others.
Speaker Change: Other products and then also do you feel like there is more new brands coming into the landscape that making it a little bit more competitive such as maybe some K beauty brands.
Speaker Change: They're smaller in pop up brand.
Speaker Change: Okay.
Speaker Change: So what I'd tell you is this category has always been competitive.
Speaker Change: Nielsen alone I think Theres 1900, cosmetics and skincare brands tracked by Nielsen the big differences, which ones are able to scale and very few are able to I mean, I think <unk> is one of only four with more than $850 million retail sales, but even if you look at who has more than $100 million of retail sales I think it's only 26, so you're going to see a lot.
Speaker Change: Brands come and go or sustained at a very small level from a competitive position I feel like we're stronger than we've ever been if you take a look at our unique areas of competitive advantage.
Speaker Change: While some people will try to copy elements of this I mean, often people though.
Speaker Change: A copy elements of our marketing, but we've already pivoted and moved on and conquest platforms by the time, they're figuring out the first one our ability of how we engage and entertain our community I think in the last year alone. We have two unique campaigns because we look at any of our competitors by brand. They are lucky to do one or two so there is just a different.
Speaker Change: Kind of for notices and level at which we're operating on those elements and then probably the most important thing we have not seen anyone come.
Speaker Change: Anywhere close to this ability of having prestige quality at the price points. We have is that is a unique competitive advantage, we have and so even on the.
Speaker Change: Duke as I look at the legacy players.
Speaker Change: If they are lucky they might have one or two in a couple of year period.
Speaker Change: Nowhere near.
Speaker Change: We have basically reached four five wholly grill that we just launched will be able to follow that up with more in the fall. So I feel great from that competitive position I think the best indication of that frankly is the market share.
Speaker Change: We've more than doubled our market share in the last three years shows kind of the momentum in <unk>.
Speaker Change: Others have not been able to replicate the success.
Speaker Change: Okay, great. Thanks, so much good luck the SCR.
Speaker Change: Thank you and our next question comes from Anna <unk> with Bank of America. Please go ahead.
Anna: Hi, good afternoon, and thank you so much for the question.
Speaker Change: I just wanted to see if you could give us more detail on a breakdown maybe by category in the quarter as well as in January on which parts underperformed versus performed well I think lift continued to perform well for part of that timeframe and then if you can comment on you know just skin care outside of color cosmetics, the trends youre seeing there and.
Speaker Change: Now I'll scan is performing versus and carry them. Thank you.
Speaker Change: So and I'll do it in two parts I would say in Q3, we saw pretty broad strength across every one of our segments in color cosmetics as well as in skincare and you saw a pretty massive share gains in each one of our core segments in January I would say the strongest sub category.
Speaker Change: With slip we continue to see good momentum in lip.
Speaker Change: Back to this point I think complexion was a little bit more challenged but again, we don't see anything any indicators for the long term on that and then skincare continues to grow at a faster clip in January but overall our strategy with the innovation, we have our approach of how we engage consumers as we see an opportunity continue to grow.
Speaker Change: Share across each of our segments and skincare.
Speaker Change: Great. Thank you so much.
Speaker Change: Thank you and our next question comes from Mark <unk> with Baird. Please go ahead.
Mark: Good afternoon, and thank you for taking my question.
Speaker Change: Does your updated guidance incorporate expectations for retailer Destocking and are any of your major retailer partners talking about this given the softer consumption trends.
Speaker Change: Hi, Mark Lee, we have not heard that from our retailers at this point and.
Speaker Change: Even without.
Speaker Change: Even with that consumption being down we feel are the most productive brand that our retailers carry and so we typically will see continued order.
Speaker Change: Our product and so we have just not seen anything like that yet.
Speaker Change: Thank you and then separately understanding you don't want to get too specific on your expectations for revenue run rates in fiscal 'twenty six but could you just frame up the level of flexibility. There is in our cost structure should this softer demand backdrop persists.
Speaker Change: Yes, so we have.
Speaker Change: As you can see in Q4, our SG&A is leveraging.
Speaker Change: Again, I talked about that being driven largely by our marketing investment, but as we think about kind of where there is flexibility in our P&L, we certainly have the flexibility to reduce cost.
Speaker Change: Certain areas, we have cost savings programs that we're running with our suppliers every year.
Speaker Change: But really our focus has been on investing behind the business and making sure that we have the people and the infrastructure that we need to capitalize on those white space areas that drain just spoke about and so that's really more so of our focus as we move ahead, it's really making sure that we continue to make progress against those growth areas.
Speaker Change: Thank you.
Thank you and this concludes our question and answer session I would like to turn the conference back over to bring a minimum for closing remarks.
Well. Thank you everyone for joining us today I want to close by saying how proud I am of the incredible <unk> team for delivering another quarter of industry leading results.
Speaker Change: I think every elf and every of partner for their passion and dedication to our vision of creating a different kind of beauty company. We look forward to seeing some of you at Cagny in a few weeks and speaking with you in May when we'll discuss our fourth quarter results and FY 'twenty six outlook, thank you and be well.
Speaker Change: Thank you. This concludes today's conference call. Thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful evening.
Speaker Change: Okay.
Speaker Change: [music].
Speaker Change: Yes.
Speaker Change: [music].