e.l.f. Beauty, Inc. (NYSE:ELF) Q3 2024 Earnings Call Transcript

e.l.f. Beauty, Inc. (NYSE:ELF) Q3 2024 Earnings Call Transcript February 6, 2024

e.l.f. Beauty, Inc. isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

Operator: Thank you for joining us today to discuss e.l.f. Beauty’s Third 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 Q3 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 Q3, we grew net sales by 85%, increased gross margin by nearly 350 basis points, and delivered $59 million in adjusted EBITDA, up 61% versus prior year. Our vision is to create a different kind of beauty company by building brands that disrupt norms, shape culture, and connect communities through positivity, inclusivity, and accessibility. We’ve executed against this vision and delivered exceptional, consistent category leading growth. Q3 marked our 20th consecutive quarter of net sales growth, putting e.l.f. Beauty in a rarefied group of consistent, high growth consumer companies.

We’re one of only five public consumer companies out of 274, that has grown for 20 straight quarters and averaged at least 20% sales growth per quarter. Across our business, we’ve continued to prioritize three areas with significant runway for growth, color cosmetics, skincare and international. Let me update you on our progress in Q3. In color cosmetics, we continue to significantly outperform the category. In Q3, e.l.f. Cosmetics grew 46% in tracked channels, 23 times category growth of 2%. We increased our share by 305 basis points. Out of nearly 800 cosmetics brands tracked by Nielsen, e.l.f. is the only brand to gain share for 20 consecutive quarters. We’ve more than doubled our market share from about 4.5% in 2019 to 10% in 2023, placing us as a number three brand nationally.

Given our momentum, we see an opportunity to double our share again over the next few years. In Target, our longest-standing national retail customer, we’re the number one brand with about a 19% share, nearly double the share we had in Target just a few years ago. We’re focused on replicating our success at Target across other key retailers and are making great progress towards that ambition. In skincare, we also continue to outperform the category. In Q3, e.l.f. SKIN grew 89% in tracked channels, 10 times category growth of 9%. We grew our share by 60 basis points and gained six rank positions, increasing our rank to the number 14 brand as compared to the number 20 brand a year ago, e.l.f. SKIN today holds a 1.4% share and a significant runway with the number one brand holding 14% share.

We’re also making progress with Naturium, the clinically effective biocompatible skincare brand we acquired in October. Naturium has doubled our skincare penetration to 18% of retail sales and gives us a fast growing complementary brand to further our aspirations in the category. Naturium has seen exceptional growth with net sales growing at an 80% CAGR over the last two years. We’re pleased by the strong growth that Naturium continued to deliver in Q3. Turning to international, our net sales grew a 119% in Q3 and drove approximately 15% of our business as compared to 13% a year ago. We saw terrific growth in the U.K. and Canada, our largest global markets, and we’re enjoying success in our expansion to other countries as well. As compared to our number three position in the U.S., e.l.f. is the number four cosmetics brand in Canada and the number six brand in the U.K. In Italy, where we just launched this fall, e.l.f. is already the number one brand in Douglas across both mass and prestige.

We see significant runway to expand our brands globally. Across categories and geographies, the three fundamental drivers of our business remain the same, our value proposition, powerhouse innovation, and disruptive marketing engine. Let me walk you through how each underpinned our strength in Q3 and how they collectively fuel our vision to be a different kind of company. First, we’re known for our value proposition. Our mission is to make the best of beauty accessible to every eye, lip, face and skin concern. We have a unique ability to deliver high quality holy grails at an extraordinary value, created with inspiration from our community, the best products in prestige, and our distinctive e.l.f. Twist. The average price point for e.l.f. is a little over $6 today as compared to over $9 for legacy mass cosmetics brands and over $20 for prestige brands.

We believe our core value proposition expands the category, allowing more consumers to access the best of beauty. The second drive of our performance is our powerhouse innovation. Our innovation engine has built category leadership over time. e.l.f. has a number one or two 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. We have a track record of building growing product franchises in both cosmetics and skin care that endure instead of typical one and done launches. Our five largest franchises, Halo Glow, Camo, Power Grip, Holy Hydration, and Putty have grown year-after-year. As we launch new innovation within each, the entire franchise grows.

In Q3, we extended our Camo franchise into the blush category for the first time with the launch of our Camo liquid blush, priced at an incredible value of $7 compared to a prestige item at $23. We’re also innovating in the industry’s top segments where we under index on share, like lip and mascara. In Q3, we launched our Glow Reviver lip oil, one of the most requested products from our community, price at an incredible value of $8 compared to a Prestige item at $40. We also launched our Lash XTNDR mascara, our fourth mascara launch in the last four years, and our first ever mascara with lengthening tubing technology. With our focused innovation in these areas, we’ve nearly doubled our lip and mascara share over the last three years, and are still significantly underpenetrated today.

For context, as compared to the 10% share we have across the cosmetics category, we have a 3% share in lip, a $1.2 billion category, and a 2% share in mascara, a nearly $1 billion category. We have significant white space in these large segments of beauty and the innovation engine to conquest them. The third driver of our performance is our disruptive marketing engine. We have a track record of attracting and engaging existing and new audiences with buzz worthy activations, unexpected creativity, and coveted collaborations. Our advantage lies in our ability to deliver real-time entertainment with emotionally resonant and culturally relevant content. Our unique content is customized with precision and delivered with impact across a wide range of platforms.

Building upon our learnings and success with our elfyeah channel on TikTok and our elfyou channel on Twitch, we widened the aperture in Q3 with the launch of e.l.f. UP!, our first ever experience on Roblox, one of the world’s most popular virtual playgrounds and immersive platforms. True to our purpose, e.l.f. UP! isn’t just another game. It empowers entrepreneurs and cultural change makers to bring passion projects to life. The experience focuses on social impact and skill building for e.l.f. community and provides a digital sandbox for fostering creativity and entrepreneurship. Launched less than three months ago, e.l.f. UP! is already the number one rated brand experience on the Roblox platform, receiving a 96% rating and amassing over 4 million plays.

Looking at new cohorts, the Latinx community represents some of the most passionate makeup consumers with 77% higher average spend in the category. e.l.f. over indexes among Latinx community and is a significant opportunity to build upon this affinity. In Q3, we teamed up with rising Latin Music Sensation Manuel Turizo to launch a new original Spanish language song titled, Ojo, Labio and Cara, which translates in English to eyes, lips, face. This anthem is written to empower the Latin community, celebrating their beauty and pride in their Latin roots. Ojo, Labio and Cara achieved over 2 billion media impressions, garnered over 304 million cross platform views and plays, and reached the number one spot on Spotify in three categories. On the big screen, we released Cosmetic Criminals, a true crime parody documentary capturing the widespread phenomenon of household intergenerational cosmetic crime.

Stemming from reports about widespread e.l.f. pinching when family and friends borrow e.l.f. holy grails with no intention of returning them, the main character represents their universal truth. The spot debuted on YouTube, Amazon Freevee and ahead of the new Mean Girls movie at select AMC Theatres nationwide. Our 15 minute film was the longest branded content spot to ever run on the big screen. Since its launch on January 9, Cosmetics Criminals garnered over 7 billion media impressions, amassed over 2 million views on YouTube alone and garnered a 4.5 star rating on Amazon. Speaking of big audiences, e.l.f. returns to the big game on February 11 with our first ever national TV spot. Last year’s spot featuring Jennifer Coolidge and Power Grip Primer affirmed our hypothesis that women were underserved despite being nearly 50% of Big Game viewers.

The overwhelming success of the campaign by every metric fueled our return with a national presence this year versus a regional spot the year prior. Securing a national spot increases our household impressions by a factor of 3x. We believe this reach provides the best opportunity to springboard viral moment across a wide spectrum of platforms and increases our ability to boost brand impact. The entertaining spot features our Halo Glow liquid filter, the star of our bestselling franchise in 2023. Over the past four 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. Since 2020, 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 significant runway for growth. Our results continue to fuel progress with national retailers. e.l.f. is the most productive cosmetics brand at our top three customers in the U.S., Target, Walmart, and Ulta Beauty. We’re also the most productive brand at our top two customers in the U.K., Superdrug and Boots, giving us conviction that we can replicate our productivity model as we expand internationally. We continue to increase productivity even as we expand space. We’re pleased to announce that we’ll be expanding space for e.l.f. in spring 2024 with CVS and in summer 2024 with Walmart. In addition to the space gains we previously announced with Shoppers Drug Mart in Canada and Boots in the U.K. We’re also pleased to announce that we’ll be expanding space for Naturium in spring 2024 with Shoppers Drug Mart, marking the brand’s entry into Canada.

In summary, as we enter our 20th year as a company, we continue to deliver exceptional results. What gives me confidence for the future is a significant white space we see in color cosmetics, skin care, and international. We continue to believe we are still in the early innings of unlocking the full potential for our brands. I’ll now turn the call over to, Mandy.

Mandy Fields: Thank you, Tarang. I’m pleased to share the highlights of our third quarter results as well as our raised outlook for fiscal ‘24. Our third quarter results were outstanding. Q3 net sales grew 85% 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 29 percentage points. Q3 digital consumption trends were up over a 100% year-over-year. Digital channels drove 24% of our total consumption in Q3 as compared to 18% a year ago. The momentum we’re seeing is supported by enhancements across our loyalty program and our app as well as digital and social platforms.

Our beauty squad loyalty program now has over 4.5 million members with enrollment growing 30% year-over-year. Our loyalty members continue to be a key part of our digital ecosystem, driving almost 80% of our sales on elfcosmetics.com. We’re seeing terrific engagement on our e.l.f. mobile app, which now boasts a 4.8 star rating and over 1.8 million downloads since launch. We’re also enjoying strength across third-party digital and social platforms. We were amongst the fastest growing beauty brands on Amazon in Q3 and we’re the first major beauty brand that launched on TikTok shop. Q3 gross margin of 71% was up approximately 350 basis points compared to prior year. We continue to see gross margin benefits from favorable FX rates, improved transportation costs, margin accretive mix and cost savings.

On an adjusted basis, SG&A as a percentage of sales was 54% in Q3 compared to 47% last year. The increase was primarily due to higher marketing and digital spend. Marketing and digital investment for the quarter was 26% of net sales, up from 17% in Q3 last year. We continue to expect marketing and digital investment in the 22% to 24% range for full year fiscal ‘24. Q3 adjusted EBITDA was $59 million, up 61% versus last year, and adjusted EBITDA margin was approximately 22% of net sales. Adjusted net income was $43 million or $0.74 per diluted share compared to $27 million or $0.48 per diluted share a year ago. Moving to the balance sheet and cash flow. Our balance sheet remains strong and we believe positions us well to execute our long-term growth plans.

We ended the quarter with approximately $72 million in cash on hand compared to a cash balance of $87 million a year ago. Our ending inventory balance was $205 million in-line with our expectations and up from $81 million a year ago. The difference is primarily a combination of three things. First, as we said last quarter, we continued to build back our inventory levels through fiscal ‘24 to support strong consumer demand. Second, approximately 28 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. Lastly, our consolidated results include Naturium for the first time, which added approximately $25 million of inventory. We believe we have the appropriate levels of inventory across the business to service our customers and support the demand we’re seeing.

In early October, we closed the Naturium acquisition. It was funded largely using cash on hand and access to our existing credit facility as well as approximately 600,000 shares of e.l.f. Beauty stock issued directly to founders and key management. Our liquidity position remains strong below leverage post the transaction. 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 extensions. The initiatives we’re focused on this year 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 strong consumer demand.

Now, let’s turn to our updated outlook for fiscal ‘24. For the full year, we expect net sales growth of approximately 69% to 71%, up from 55% to 57% previously. Adjusted EBITDA between $218 million to $220 million, up from a $197 million to $200 million previously. Adjusted net income between a $164 million to a $166 million, up from a $144 million a $146 million previously, and adjusted EPS of $2.84 to $2.87 per diluted share, up from $2.47 to $2.50 previously. We expect our fiscal ‘24 adjusted tax rate to be approximately 14% as compared to 17% to 18% previously. Lastly, we continue to expect a fully diluted average share count of approximately 58 million shares. Let me provide you with additional color on our planning assumptions as we close out fiscal ‘24.

Starting with the topline. We believe we are well-positioned to deliver another industry leading year. Our raised outlook reflects the outperformance in Q3 we saw relative to our expectations as well as an improved outlook for the balance of the year. Our guidance implies approximately 48% to 53% net sales growth in Q4. Turning to gross margin. In fiscal ‘24, we expect our gross margin to be up approximately 280 basis points year-over-year, as compared to our expectations for up 225 basis points previously. The improved outlook is largely a result of our outperformance in Q3. In terms of the key puts and takes for the year, we continue to expect gross margin to benefit from lower transportation costs, favorable FX rates, margin accretive mix and cost savings, which are expected to more than offset costs related to retailer activity and space expansion.

Turning to adjusted EBITDA. Our outlook implies adjusted EBITDA growth of approximately 87% to 88% versus prior year, up from 69% to 71% previously. We expect adjusted EBITDA margin leverage of approximately 200 basis points year-over-year, up from a 190 basis points previously, supported by the combination of our strong net sales growth, gross margin expansion, and leverage in our non-marketing SG&A expenses. Our flywheel approach of investing in marketing to drive topline while expanding adjusted EBITDA margins gives me confidence in our ability to continue to drive profitable growth. In summary, our third quarter results underscore our ability to drive exceptional, consistent, category leading growth. We have a significant white space opportunity in front of us as we continue our vision of creating a different kind of beauty company, one, that is purpose led and results driven.

With that operator, you may open the call to questions.

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Q&A Session

Operator: We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Andrea Teixeira with JP Morgan. Please go ahead.

Andrea Teixeira: Good afternoon, everyone. Obviously, congrats on this numbers again. I just wanted to kind of [parse] (ph) like your raise guidance between Naturium and the base business. Obviously looking at your comparison it gets tougher by around 300 basis points in the fourth quarter of last year. So, I understand even with the ways you decelerate a bit in the fourth quarter. So, just wanted to figure how much would be your expectation for organic and your expectation for Naturium? And then part of that as well, you did an amazing job separating and breaking down unit growth, to mix. I wonder if you still have a lot of mix effects that you’re planning given your skincare, given, the innovation that is, value accretive into your numbers. So, how that factor going forward? Should we see some deceleration or should see some accretion on that? Thank you.

Mandy Fields: Hi, Andrea. Good to hear from you. So, I’ll start with your first question. If we look at our raised guidance, we have not changed any of our outlook on Naturium. So, we previously talked about Naturium contributing about $48 million for the year, and we expect that to be consistent. So, our raised guidance really is reflective of the momentum that we continue to see behind e.l.f. Beauty, overall. So, really pleased with our ability to, not only raise for Q3, pass through the Q3, but also raised for Q4. Your question then is on mix impacts as we go forward. So, yes, very pleased with how Q3 came together and very consistent really with what we’ve seen all year with volume being the main driver of our growth. But on the mix side, because we have not had any pricing this year that’s impacting that, so it’s purely mix.

Introducing innovation at higher price points has had a benefit to this year and as we look forward and think about our future innovation, we could see some impact from that as well, especially as we think about gross margins, innovation mix has been one of the key drivers to that over time.

Unidentified Participant: That’s super helpful, Mandy. And if I can, squeeze in terms of, like, how you’re getting new shelf space, but it will be mostly into fiscal ‘25. So, how can we, look at that component within your guide and how Nielsen you gave us in the past, like, some guide guideposts within Nielsen as we look at compounded. How we should be thinking from now? You exceeded that margin. How we should be thinking attract channels as we go forward?

Mandy Fields: Yes. So, why don’t I start with the Nielsen question. So, last quarter, we had talked about seeing tracked channels range from 20% growth up to 50% growth. And we said for Q3, it was going to be closer to that higher end of the range, which is what we saw, as we exited Q3, closer to that 50% range. As we get into Q4, we do expect that we’ll be closer towards the lower part of that range, closer to the 20% out of track channel. But I will remind you that track channel only represents about half of our business. We are continuing to see great momentum in other parts of our business. And I’ll just point you back to our guidance for Q4, really points to over 50% growth from a net sales standpoint. So, we’re feeling great about, how the business is coming together, we believe, for the quarter.

In terms of shelf space, we did talk about picking up space in Walmart that will impact fiscal ‘25. That’s going to be summer of ‘25. The other gains that we spoke about in Shoppers and Boots and CVS, that’s going to be part of fiscal ‘24. And yes, you’ll see the larger benefit in fiscal ‘25 as you move forward, but we will have some pipeline, things like that here in the quarter.

Unidentified Participant: Thank you very much. I’ll pass it on. Congrats again.

Mandy Fields: Thank you.

Operator: The next question comes from Ashley Helgans with Jefferies. Please go ahead.

Ashley Helgans: Hi, thanks for taking our question and congrats on the quarter. I’d just wanted to ask if you could just give us a little bit more color on the store penetration and average footage, you’ll have at both CVS and Walmart after this next round of expansion. And then also if you could just one other question about tariffs, we’re starting to get a lot of questions on tariffs as [Trump] (ph) was elected again. Can you just remind us of some of the mitigation efforts you have in place? Thanks so much.

Tarang Amin: So, hi, Ashley. In terms of our, penetration, we’re really pleased with the space we’re going to pick up at Walmart. It’s one of our single biggest opportunities from a space standpoint. The average self-set at Walmart right now is about eight feet. That compares to about 13 feet at Target, 12 feet at Ulta Beauty and Walmart really has bigger sets than both those customers. So, we don’t disclose a specific amount of space other than they are leaning in on e.l.f. I think we’re the only brand they’re making a pretty major move on space with. And we’re looking forward to that in summer. As Mandy said, that will really impact us in fiscal ‘25. The other thing I would say is, we had a pretty consistent track record of picking up space year-after-year, but the biggest drive of our business is our productivity, our ability to grow dollars per linear foot of space year-after-year regardless of whether we’ve picked up space or not.

So, we’re pretty confident in terms of how that profile continues to shape up with space being kind of the cherry on top, but really pleased, not only with Walmart, but CVS continue to make major moves in terms of space, a continuation of what they started over a year ago. And so, and we definitely in drug have a lot more room to grow our space. So, feel really good about that, in addition to the Shoppers and Boots.

Mandy Fields: And then your question on tariffs, Ashley. Since 2019, we’ve been dealing with tariffs that was put on our products, majority of our products at the 25% level. And so, if we were to think of additional tariffs being layered on, we have reserved pricing for macro issues such as tariffs. We did again in 2022 in response to the inflationary environment. So, we know that that’s a lever that we could pull, if we were subject to additional tariffs, but something that we’re keeping an eye on and certainly something that we’re very mindful of, especially of pulling that pricing lever, just given the cost consciousness of the consumer right now.

Tarang Amin: And we do have pricing power. I think one of the things many of our competitors took pricing over the last few months. We chose not to take pricing to that point of keeping a superior value equation and also keeping in our back pocket if we needed to take pricing for any external factors. So, we feel good in terms of how we’re situated in our ability to continue to navigate a dynamic environment. The only other thing I would add is, we have a pretty big initiative on supplier diversification. So, while most of our footprint today is in China, we have started up additional operations in Thailand, in Western Europe, and we’ll continue on that journey. For the foreseeable future, a lot will come out of China, but also with the addition of Naturium, which is a 100% manufactured in the U.S., we feel good about how our supply chain is evolving in the future and being more diversified.

Operator: The next question comes from Olivia Tong with Raymond James. Please go ahead.

Olivia Tong: Great. Thanks. Good afternoon, and congrats. I wanted to ask you about a new shelf space, CVS Walmart. Can you talk about what the assortment look like? Is it more times of your hero products? Are you getting traction in some of the new areas like lip, eye and skin?