e.l.f. Beauty, Inc. (NYSE:ELF) Q2 2024 Earnings Call Transcript

e.l.f. Beauty, Inc. (NYSE:ELF) Q2 2024 Earnings Call Transcript November 1, 2023

Kristina Katten: Thank you for joining us today to discuss e.l.f. Beauty’s Second Quarter Fiscal ’24 Results. I’m KC 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.elfbeauty.com. Since many of our remarks today contain forward-looking statements, please refer to our earnings release and reports filed with the SEC, where you’ll find factors that could cause actual results to differ materially from these forward-looking statements. In addition, the company’s presentation today includes information presented on a non-GAAP basis.

Our earnings release contains reconciliations of the differences between the non-GAAP presentation and the most directly comparable GAAP measure. With that, let me turn the webcast over to Tarang.

Tarang Amin: Thank you, KC, and good afternoon, everyone. Today, we will discuss the drivers of our Q2 results and our raised outlook for fiscal ’24. I want to start by recognizing the e.l.f. Beauty team for delivering another phenomenal quarter. In Q2, we grew net sales by 76%, increased gross margin by 570 basis points and delivered $60 million in adjusted EBITDA, up 122% versus prior year. Q2 marked our 19th consecutive quarter of net sales growth, putting e.l.f. Beauty in a select group of consistent, high-growth consumer companies. We’re 1 of only 5 public consumer companies out of 274 that has grown for 19 straight quarters and average at least 20% sales growth per quarter. We’ve continued to highlight 3 areas with significant runway for growth in color cosmetics, skin care and international.

Let me update you on our progress in Q2. In color cosmetics, we continue to significantly outperform category trends. In Q2, e.l.f. Cosmetics grew 51% in tracked channels, nearly 17x category growth of 3%. We increased our share by 330 basis points. Out of nearly 800 cosmetics brands tracked by Nielsen, e.l.f. is the only brand to gain share for 19 consecutive quarters. We have more than doubled our market share since 2019 from about 4.5% to 10%. We are building strength upon strength with our 330 basis points of share gains in Q2 on top of our share gains last year and the year before. Given our momentum, we see an opportunity to double our share over the next few years. In Q2, e.l.f. was the #3 brand nationally with approximately 10% share.

In Target, our longest-standing national retail customer, we’re the #1 brand with approximately 19% share, nearly double the level of share we had in Target just 2 years ago. We are focused on replicating our partnership and success at Target across other key retailers and are making great progress towards that ambition. In skin care, we continue to outperform the category. In Q2, e.l.f. SKIN grew 129% in tracked channels, about 13x category growth of 10% and was the fastest-growing among the top 20 skin care brands. We grew our share by 80 basis points, increasing our rank to the #14 brand as compared to the #19 brand a year ago. e.l.f. SKIN today holds a 1.6% share and a significant runway with the #1 brand holding nearly 15% share. E.l.f. remains Gen Z favorite, helping drive the share growth we’ve seen in these last 19 quarters.

In Piper Sandler’s recent taking stock with teens fall survey, e.l.f. Cosmetics remained the #1 teen favorite cosmetics brand for the fourth consecutive season. We grew our share by 13 percentage points versus a year ago to 29%. We believe this is a great indicator of brand strength. For perspective, no other cosmetics brand has surpassed even 20% in the past 5 years. e.l.f. SKIN ranked in the top 10 favorite skin care brands for the second time. elfcosmetics.com was a top 10 beauty shopping destination for teens for the third consecutive survey and was the only brand site on the list. Looking outside the U.S. We grew our international net sales 157% in Q2, fueled by strength in Canada and the U.K. e.l.f. outpaced category growth by more than 10x in Canada, and more than 7x in the U.K., fueling share gains in each.

e.l.f. today is the #4 brand in Canada with a 7% share and the #6 brand in the U.K. with 5% share. We see significant runway to expand our brands globally. Our relentless focus on our 5 strategic imperatives continues to drive results across our brand portfolio. Let me walk through how each of these strategic imperatives underpinned our strength in Q2. Our first strategic imperative is to build brand demand. Our disruptive marketing engine continues to redefine what’s possible in beauty. In Q2, we continue to break boundaries in gaming, entertaining short-form content and record-setting collaborations. We leaned into gaming with the launch of a limited edition makeup collaboration in August with [indiscernible] fruit, also known as LuFu, 1 of the world’s top female gamers.

We go further into entertainment and short-form digital content with Georgia Sue Icon Snooki. Leaning into the nostalgof the moment to underscore the importance of SPF and our suntouchable franchise. We launched another record-setting collaboration in September. As part of our strategy to continue building awareness and reach new audiences, we reunited with cultural icon and award-winning actress Jennifer Coolidge, to launch dirty pillows. This limited edition lift collection and campaign was inspired by an outtake from our big game commercial shoot. We took an unscripted moment and created a premium lip collection that launched on elfcosmetics.com at e.l.f. Speed. Our dirty pillars campaign explores a world where one’s lips always come first.

The response from our community has been incredible. Our dirty pillars campaign earned over 11 billion media impressions in 48 hours, our highest ever for a product collaboration. The initial drop of dirty pillow lip kit sold out within 2 hours with over 40% of purchasers new to e.l.f. Over the past 4 years, we’ve increased our marketing investment from 7% of net sales to 22%. Our marketing investment is working, driving ROI multiples above industry benchmarks and helping us reach new audiences. Our most recent attitude and usage study underscores the broad-based improvement we’ve seen since 2020. Our brand satisfaction jumped 16 points to 80%, the highest among our competitive set. Our unaided awareness in the U.S. has doubled from 13% to 26% that 26% unaided awareness today compares to the leading U.S. mass cosmetics brand at 52%, illustrating an opportunity to double again as we move forward.

Building upon our success in the U.S., we took steps to accelerate brand awareness in the U.K. with our first-ever community-led brand campaign. When we asked our growing community in the U.K., what e.l.f. means to them, it sparked a campaign that fueled a movement. In September, the U.K. lit up with our first 32nd U.K. advertising spot across social channels, tube stations, digital screens and experiential pop-ups encouraging everyone to get involved and hash tag express your e.l.f. Our second strategic imperative is to power digital. Founded is a digitally native brand. e.l.f. remains the only top 5 mass cosmetics brand with our own direct-to-consumer site. Our digitally led strategy continues to serve us well. Q2 digital consumption trends were up over 75% year-over-year.

Digital channels drove 17% of our total consumption in Q2 on a much bigger business as compared to 16% a year ago. We’re seeing terrific engagement on our e.l.f. Cosmetics mobile app, which now boasts a 4.8-star rating and over 1.6 million downloads. Our monthly active user growth is outpacing that of traditional beauty retailers. And over 90% of our transactions on the app are driven by our most loyal Beauty Squad loyalty members. Beauty Squad now has over 4.1 million members with enrollment growing over 25% year-over-year. Our loyalty members are a key part of our digital ecosystem, driving almost 80% of our sales on elfcosmetics.com. Our third strategic imperative is to lead innovation. We have a unique ability to deliver Holy Grails taking inspiration from our community and the best products in prestige and bringing them to market at extraordinary value.

Our innovation continues to receive industry recognition. In the highly coveted Allure Best of Beauty Awards, 4 of our products garnered Best of awards, the largest number of awards we received in a single year and marking the 11th consecutive year e.l.f. Beauty has won a Best of Beauty award. Our innovation engine has built category leadership over time. e.l.f. has the #1 or 2 position across 16 segments of the color cosmetics category, which collectively make up over 75% of e.l.f. Cosmetics sales. We continue to deliver strong sales growth and share gains in each. Our fourth strategic imperative is to drive productivity with our retail partners. e.l.f. continues to drive best-in-class productivity on a sales per linear foot basis with both Target and Walmart, our 2 largest customers.

This productivity is earning us additional space with our retail partners. As a reminder, in spring 2023, we expanded space in Target, Walmart, CVS and Shoppers Drug Mart. And in fall 2023, we expanded space in Ulta Beauty, CVS and Walgreens. We are pleased to announce that we’ll be expanding our space in spring 2024 with Shoppers Drug Mart in Canada and with boots in the U.K. Last month, we also launched e.l.f. in Italy with De Glass, furthering our international expansion. Our fifth strategic imperative is to deliver profitable growth. Since 2019, we’ve been focused on the flywheel of investing behind our high ROI marketing and digital initiatives to drive top line growth, while also expanding our adjusted EBITDA margin. We again delivered on this winning formula in Q2 with both strong top line growth and adjusted EBITDA margin expansion.

Supported by a combination of our strong sales growth, gross margin expansion and leverage in our non-marketing SG&A expenses. As we’ve grown, we continue to make investments in our infrastructure. Our supply chain offers the best combination of cost, quality and speed in our industry and has been able to keep pace with the strong consumer demand we’re seeing. This year, we’ll begin implementation of SAP to continue to optimize our operations and core processes. We’re also planning to make investments to increase our distribution capacity to support our growth. Even with this ongoing investment, we expect to continue to deliver adjusted EBITDA margin expansion in fiscal 2024. We believe these ongoing investments in our team and infrastructure position us well to continue to drive profitable growth.

In early October, we officially closed on the acquisition of Nutrium and welcomed its passionate team of employees to the e.l.f. Beauty family. Nutrium is a fast-growing disruptive brand on a mission to make high-performance skin care accessible to all. The acquisition doubles our skin care presence to approximately 18% of retail sales from approximately 9% on a stand-alone basis. [Indiscernible] has seen exceptional growth with net sales growing at approximately 80% CAGR over the last 2 years. We’re still in the early days post-closing and look forward to realizing the significant opportunities we see ahead for the brand. Our unwavering focus on executing our 5 strategic imperatives is driving our results. At the same time, I’m proud that we continue to lead with purpose as we strive to create a different kind of beauty company, one that is both purpose-led and results driven.

Our second annual impact report launched in September demonstrates how these go hand-in-hand. It shows how acting with purpose to further our positive impact drives more successful business outcomes. Our commitment to our culture and people was recently spotlighted by U.S. News & World Report, who named e.l.f. Beauty to its annual list of Best Companies to work For. We were also recognized by Newsweek as 1 of America’s greenest companies, recognizing our progress in sustainability. In summary, we believe the white space in color cosmetics, skin care and international, coupled with our relentless focus on our 5 strategic imperatives, we’ll continue to fuel our ability to win in fiscal ’24 and beyond. I’ll now turn the call over to Mandy.

Mandy Fields: Thank you, Tarang. I’m pleased to share the highlights of our second quarter results as well as our raised outlook for fiscal ’24. Our second quarter results were outstanding. Q2 net sales grew 76% year-over-year, driven by broad-based strength across national and international retailers as well as digital commerce. Our net sales growth was led by higher unit volume, which contributed approximately 56 percentage points to growth, with mix adding approximately 20 percentage points. e.l.f. was the only top 5 cosmetics brand to grow units according to track channel data. Q2 gross margin of 71% was up approximately 570 basis points compared to prior year. We saw gross margin benefits from lower inventory adjustments, favorable FX rates, improved transportation costs margin accretive mix and cost savings, which more than offset costs related to retailer activity and space expansion.

On an adjusted basis, SG&A as a percentage of sales was 45% in Q2 compared to 46% last year. We drove significant leverage and non-marketing SG&A expenses primarily as a result of our strong top line trends. Marketing and digital investment for the quarter was 21% of net sales, up from 16% in Q2 last year. We continue to expect marketing and digital investment in the 22% to 24% range for the full year of fiscal ’24. Given first half spending at 18% of net sales, we expect to see spending above our annual range in the back half. Q2 adjusted EBITDA was $60 million, up 122% versus last year and adjusted EBITDA margin was approximately 28% of net sales. Adjusted net income was $47 million or $0.82 per diluted share compared to $20 million or $0.36 per diluted share a year ago.

The increase across profitability metrics was driven by our strong net sales growth, gross margin expansion and leverage in our non-marketing SG&A expenses. Moving to the balance sheet and cash flow. Our balance sheet remains strong, and we believe positions us well to execute our long-term growth plans. Our ending inventory balance was $147 million, in line with our expectations and up from $81 million a year ago. The difference is a combination of 2 things. As we said last quarter, we plan to build back our inventory levels through fiscal ’24 to support the strong consumer demand we’re seeing. In addition, approximately $37 million of the increase is the result of taking ownership of inventory from China when it ships versus when it enters our distribution center here in the U.S. We ended the quarter with approximately $168 million in cash on hand compared to a cash balance of $85 million a year ago.

I’m also pleased with the approximately $27 million in free cash flow we generated in Q2. We ended the quarter with a net cash position and less than 1x leverage in terms of total debt to adjusted EBITDA. Subsequent to the quarter end, in early October, we closed the Naturium acquisition. We funded the $355 million acquisition, largely using cash on hand and access to our existing credit facility as well as $72 million of e.l.f. Beauty stock issued directly to founders and key management, which represented approximately 600,000 shares. We expect our liquidity position to remain strong with relatively low leverage post the transaction with net leverage expected to be less than 1.5x adjusted EBITDA. We expect our cash priorities for the year to remain on investing behind our growth initiatives and supporting strategic extensions.

The initiatives we’re focused on this year across our brand portfolio include continuing to invest in our people and infrastructure. Our ERP transition to SAP as well as increased working capital and distribution capacity to support the strong consumer demand we’re seeing. Now let’s turn to our updated outlook for fiscal ’24. As we look to the second half of fiscal ’24, we are well positioned to deliver another industry-leading year. We are raising our full year outlook to reflect ongoing momentum in our underlying business as well as the addition of Naturium. For the full year, we now expect net sales growth of approximately 55% to 57%, up from 37% to 39% previously. Adjusted EBITDA between $197 million to $200 million, up from $171 million to $174 million previously; adjusted net income between $144 million to $146 million, up from $125 million to $127 million previously.

And adjusted EPS of $2.47 to $2.50 per diluted share, up from $2.19 to $2.22 previously. We continue to expect our fiscal ’24 adjusted tax rate to be approximately 17% to 18%. Lastly, we now expect a fully diluted average share count of approximately 58 million shares, up from 57 million shares previously. As a reminder, Naturium is expected to generate approximately $90 million of net sales and $17 million in adjusted EBITDA in the 12 months ending March 31, 2024. The acquisition of Naturium closed in early October, and Naterium will start to contribute to our results in fiscal Q3. We continue to expect Naturium to contribute approximately $48 million in net sales $9 million in adjusted EBITDA and $0.04 in adjusted EPS on a fully diluted basis in our fiscal 2024.

Let me provide you with additional color on our planning assumptions for fiscal ’24, starting with top line. On an organic basis, excluding the acquisition of Naturium, our raised outlook implies organic net sales growth of approximately 46% to 48%, up from 37% to 39% previously. Our raised outlook reflects the outperformance in Q2 we saw relative to our expectations as well as expected strength for the balance of the year in our underlying business. Let me spend a moment on Nielsen tracked channel trends. As a reminder, tracked channels only represent a portion of our sales. When accounting for the acquisition of Naturium, tracked channel data covers about 50% of our sales. Let me provide some context for what we’ve seen recently in tracked channels and set the stage for what you could see for the balance of the year.

For context, our Q2 results were exceptional with e.l.f. growth in tracked channels, accelerating relative to Q1 on both a 1-year and 2-year basis. As we look to Q3 and Q4, we believe our tracked channel growth for e.l.f. could range between 20% to 50% growth. In Q3, we could be at the higher end of that range and in Q4, we can be towards the lower end of that range given the compares and the base we are cycling. In both quarters, we could see tracked channel trends on a 2-year basis remain at or above the 90% level we’ve seen in the latest 12 weeks. Across quarterly, 1-year and 2-year track channel data, we continue to drive exceptional consistent category-leading sales growth. Turning to gross margin. In fiscal ’24, we now expect our consolidated gross margin to be up approximately 225 basis points year-over-year as compared to our expectation for up 150 basis points previously.

The improved outlook is largely a result of our outperformance in Q2, aided by lower inventory adjustments in the quarter and favorable mix. In terms of the key puts and takes for the rest of the year, we continue to expect gross margin to benefit from lower transportation costs, favorable FX rates, margin accretive mix and cost savings, which are expected to more than offset costs related to retailer activity and space expansion. Now turning to adjusted EBITDA. Our outlook now implies adjusted EBITDA growth of approximately 69% to 71% versus prior year, up from 46% to 49% previously and adjusted EBITDA margin leverage of approximately 190 basis points year-over-year as compared to approximately 150 basis points previously. The improved outlook is based on expected strong net sales growth, gross margin expansion, and leverage in our non-marketing SG&A expenses.

We are quite pleased to be again in this position to meaningfully raise both our net sales growth and profitability outlook. In summary, we delivered a phenomenal second quarter. Our disciplined execution behind our 5 strategic imperatives has driven category-leading results over the last 19 quarters. The significant white space we see across color cosmetics, skin care and internationally, gives us confidence that we are still in the early innings of unlocking the full potential behind our brands. With that, operator, you may open the call to questions.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from Olivia Tong with Raymond James.

Olivia Tong: Congrats on a great quarter. So my first question, similar to previous quarters, you’re raising the guide by more than the beat on sales up if we adjust the base Naturium up $56 million, and you beat the September quarter, at least by consensus by $18 million. So can you just talk about trends you’re seeing so far this month? You referenced the Nielsen data. Maybe could you talk a little bit about performance in non-tracked channels versus the track channels and just catch us up to date on what you’re seeing this month?

Mandy Fields: Olivia, thank you so much for the question. So again, we feel great about the business overall. As you noted, we did raise our guidance up to 57% on the top end, and that’s inclusive of adding Naturium to our numbers as well. And why did we feel good about raising that guidance. Again, based on the trends that we’re seeing, the momentum and the demand behind our brand, really encouraged us, and we see a lot of white space ahead when we think about untracked channels, we have international, digital and Ulta that fall into that untracked channels and some of our strongest performance is coming from that side of the house. And so we really feel great all around on both sides of the business on the track piece of the business as well as the untracked piece, which encouraged us to take that guidance up to 57% on the top line.

Operator: Our next question comes from Dara Mohsenian with Morgan Stanley.

Dara Mohsenian: So you talked about the track channel momentum continuing in Q3, Q4 and to your averages remaining pretty similar to recent trends. But arguably, you’ve had a ton of momentum and things naturally sort of slow over time. Pricing contribution drops off a bit. So just give us a sense of your level of confidence that you can continue relatively in line with 2-year average trends and what’s driving that? And maybe part of that is updating us on shelf space expectations and how that changes sequentially and the innovation pipeline you have in place over the next few quarters?

Tarang Amin: This is Tarang. As Mandy said, we feel great about the fundamentals behind our business and the trends that we’re seeing, particularly the delivery between our value equation, powerhouse innovation and marketing engine. Nielsen is naturally going to bounce around a little bit given that in the back half, we’re comping 50% to 80% growth in Nielsen. So we could see Nielsen range anywhere from 20% to 50% depending on what’s going on in the base period. As Mandy said, the 2-year stacks are still incredibly strong. In terms of the fundamentals, as I step back, there are really 3 things that most strongly correlate with our share price. That’s market share, adjust net sales growth and adjusted EBITDA growth. And if I look at all 3 of those, we’ve never been stronger.

On market share, it’s pretty astounding that we picked up 330 basis points of share growth. And while we’ve doubled our share over the last few years, we see an opportunity, again, double our share over the next few years. And we point just as closely to target our longest-standing national retail customer where we’re their #1 brand close to a 19% share. So I feel really great in terms of what we continue to do from a market share standpoint. Net sales growth, Mandy told you our top end of our range now is 57% net sales growth and adjusted EBITDA growth is even higher at 71% growth. So the core fundamentals we’re focused on, I feel will continue to stay strong, and we continue to see great momentum. And then in terms of shelf space and innovation, again, we feel great on those fronts.