e.l.f. Beauty, Inc.

joining us today to discuss Elf Beauty's third quarter fiscal 2021 results. I'm Casey Catton, Vice President of Investor Relations. With me today are Tareng 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 Terang.

Thank you, Casey, and good afternoon, everyone. I hope that you're staying safe and well. Today, I will discuss the drivers behind our Q3 results, our growth opportunities, and our overall strategic framework. I am proud of our team for delivering our eighth consecutive quarter of net sales growth as we continue to navigate major category headwinds as a result of COVID-19. We delivered Q3 net sales of $89 million, up 10% versus a year ago, and adjusted EBITDA of $18 million. We continue to gain market share while advancing our transformation to a multi-brand portfolio. We're also raising our full year guidance, reflecting a shift in some orders from Q3 to Q4, and continued business momentum. Before Mandy details our results, I want to share the key pillars underpinning our performance. Our strategy is working. We came into this volatile period from a position of strength. Our superpowers that center on our ability to deliver 100% cruelty-free premium quality beauty products at accessible price points with universal appeal continue to resonate with consumers. Our outperformance relative to the category reflects a strength of our business model and a relentless focus on our five strategic imperatives. Let me provide a few highlights from the quarter. Our first strategic imperative is to drive brand demand. We continue to leverage our digital first marketing engine to drive greater brand relevance and expand our consumer reach. Our brand building efforts are working as we continue to significantly outperform our competition. Elf grew the most share in the quarter with 5.9% of the market up 100 basis points year over year. Elf's social audience continues to grow double digits, with over 9 million followers across our digital ecosystem. Our earned media value is up 16% compared to the prior year, and we're the only brand growing in our competitive set. We're continuing to disrupt the beauty space as we test and learn on new frontiers. We're proud to be one of the first beauty companies to establish a presence on Twitch, the world's leading live streaming gaming platform. In November, we announced a collaboration with Loserfruit, also known as Lufu, who has the second largest Twitch following for a female gamer. Lufu is providing her audience, both female and male, with engaging platform-native content that promotes self-care and self-expression while integrating her favorite elf products. In yet another beauty industry milestone, we were the first beauty brand to launch a campaign on Triller, an emerging music video making platform. We created a five track holiday album called Elf the Halls, which featured up and coming artists remixing holiday classics. We made beauty and music industry history with four of our songs making the US and global billboards Triller top 20 list. Our brand building efforts continue to win awards. This quarter, Women's Wear Daily recognized us as Newsmaker of the Year. Ad Age named us one of the top 10 marketers of the year. We're the only beauty brand on the Ad Age list, putting e.l.f. in admirable company with TikTok, McDonald's, and Lego, among others. This quarter, we took an important step in our transformation to a multi-brand portfolio with the launch of our first ritual for Keys Soul Care, our groundbreaking new lifestyle beauty brand with Alicia Keys. In December, we launched the Goddess Ritual on keysoulcare.com and ulta.com, which included three product offerings, a sage and oat milk candle, skin transformation cream, and obsidian facial roller. We expanded the collection in January to include six dermatologists developed clean skincare offerings. Key Soul Care is off to a great start and we're encouraged by the recognition the brand is receiving with over 10 billion global press impressions since launch. The brand has been further amplified by Alicia's almost 100 million social media followers. Alicia is truly an inspiration to so many, and we believe her passion for bringing light into the world will resonate with a broad set of global consumers. Looking to Well People, our plant-powered clean beauty brand, we are continuing to execute our brand recharge to broaden consumer awareness. We are bringing the recharge to life at shelf with new visual merchandising across our key retail partners. Our second strategic imperative is a major step up in digital. Digital consumption remains strong, up nearly triple digits year-to-date, with strength across elfcosmetics.com, retailer.coms, and Amazon. Digital channels expanded to 16% of our total business this quarter, up from 10% a year ago. On allthecosmetics.com, approximately 60% of our shoppers were new consumers. We're encouraged to see these consumers over-indexing on skincare and signing up for our Beauty Squad loyalty program. Beauty Squad now has almost 2.3 million members, up 40% year over year. Our loyalty members collectively drive almost 70% of our sales on elfcosmetics.com. This quarter, we offered our Beauty Squad loyalty members exclusive early access to our holiday kits and new product innovation, which helped drive sign-ups for the program. Building from the elf playbook, Key Soul Care utilizes a digital first strategy with our initial product rituals launching online. Key Soul Care aims to transform the way the world engages with beauty with a focus on content, conversation, and community. Keysoulcare.com features rich editorial content and a weekly email newsletter with inspirational story from Alicia's community of lightworkers. The brand's community is active, vocal, and passionate about Alicia, our philosophy, and our product offerings. Instagram engagement metrics are trending well above platform averages, and we're pleased with the strong open rates for our weekly newsletters. Our third strategic imperative centers on innovation. With our ELF brand, we saw continued success this quarter in our core segments, brushes, primers, concealers, brows, and sponges, which make up approximately half of our sales. We have the number one or two position in all five segments and continue to drive market share gains in each. Looking beyond our core segments, our innovation engine and flow of new products continues to resonate with consumers. Building on the success of our Camo Concealer franchise, we launched Camo CC Cream last month to broaden our offerings in foundation, which is almost three times larger than the concealer category. Our Camo CC Cream at $14 offers an incredible value for consumers, especially as compared to a prestige equivalent at $40. We believe Camo CC will be our next holy grail product. We also launched a new limited edition mint milk collection. This refreshing line of five new cosmetics products and three skincare products is just one example of how we're driving differentiation with our retail partners. The collection is available on elfcosmetics.com and exclusively with Walmart in the U.S. and with Superdrug in the U.K. Skincare remains a major focus. Consumption for the quarter was up 17% in tracked channels versus a category that was down 5%. We see a lot of runway in this category. For perspective, skincare represents 8% of our tracked channel consumption, yet drives nearly 25% of our business on elfcosmetics.com and Amazon. Recent skincare innovation includes a makeup-melting cleansing balm, daily cleanser, and eye cream, all building on the success of our Holy Hydration franchise. Key Soul Care launched its skincare collection in January and further fuels our momentum in this category. The collection includes nine product offerings with dermatologists-developed clean formulas, skin-nourishing ingredients, and soul-nurturing rituals. Early consumer favorites include the Harmony Mask and Comforting Balm. Our fourth strategic imperative is driving productivity with our national retail partners. Project Unicorn, our ongoing initiative to drive productivity by improving assortment, presentation, and navigation at shelf, continues to impress. We're also excited about the sustainability milestone we achieved. Project Unicorn reduced an estimated 650,000 pounds of excess packaging across over 200 SKUs. We're just getting started on our sustainability journey and will continue to push to reduce our packaging footprint. Given the strength of our productivity, innovation, and consumer engagement, we've earned space expansion for the ELF brand. In fall 2020, we expanded shelf space in a subset of Walmart and Ulta Beauty doors. In spring 2021, we're expanding even further at Ulta. Internationally, where we have a lot of white space, we recently launched at Shoppers Drug Mart, a leading beauty retailer in Canada, and Nika, a leading beauty retailer in India. Looking to Key Soul Care, our global retail strategy will light up in a much bigger way in the coming months. This spring, our product offerings will be available in 29 countries on keysoulcare.com, in U.S. stores at Ulta Beauty, in the U.K. at Cult Beauty, and in eight countries across the EU at Duglas. Our fifth strategic imperative is delivering cost savings to help fuel brand investments. Over the last six years, we've expanded gross margins from 47% to approximately 64% while navigating 25% tariffs on the majority of our products. This has enabled us to fund incremental investments behind our brand and infrastructure. Mandy spoke last quarter about the FX headwinds to our gross margin that we expect starting in Q4. We are pulling levers to help mitigate a portion of the impact of FX, including through pricing and supplier concessions. We also have an increased focus on SG&A leverage as we move into fiscal 2022. In other operational matters, we successfully resolved the systems migration issue at our distribution center that we spoke about last quarter. We're now operating under a new warehouse management system and have improved both our throughput and shipments to our retail partners. The progress in our five strategic imperatives has been terrific and we believe we're still in the early innings with each. Before I turn the call over to Mandy, let me provide a bit more perspective on our strategic framework and why I'm optimistic about the future of our brand portfolio. Each of our brands is positioned to touch diverse consumer cohorts at different price points. All three brands are accessible relative to their competitive set and fulfill our mission of making the best of beauty accessible to every eye, lip, and face. Importantly, all three brands are complementary and highly incremental to the e.l.f. Beauty platform. Looking ahead, we believe the color cosmetics category will return to growth, given the major role cosmetics play in consumer self-expression. We remain focused on growing share, regardless of category trends. We were strong entering the pandemic, and our digital strength, core value proposition, and ability to adapt at elf speed have continued to fuel our performance. Today, with a more diversified brand portfolio, we believe we are positioned for an even brighter future. I'll now turn the call over to Mandy.

Thank you, Terang. Today, I'll cover our Q3 financial results and raised fiscal 2021 outlook. We delivered Q3 net sales of $89 million, up 10% from a year ago. This growth was mainly fueled by ongoing strength across e-commerce, international, and national retailers. We also experienced a shift in order timing from December into January. While timing shifts happen in the ordinary course, this instance resulted in lower net sales and thus lower adjusted EBITDA than we originally expected in Q3. As you will note by our increased guidance, we expect to recapture those orders and enjoy further strength in Q4. Gross margin of 64% was down approximately 50 basis points compared to prior year. Similar to the last several quarters, we saw gross margin benefits from margin accretive product mix, cost savings, and a mix shift to elfcosmetics.com. We also benefited from FX, although less so relative to prior quarters as we started to feel the impact of changing FX rates. Offsetting these benefits were certain costs related to retailer activity and space expansion. On an adjusted basis, SG&A as a percentage of sales was 49%, compared to 44% last year, primarily driven by increased investment behind marketing and digital, headcount costs related to the build-out of our marketing, digital, and innovation capabilities, and increased operational costs related to higher e-commerce volume. Marketing and digital investment for the quarter was approximately 15% of net sales versus 12% a year ago. Q3 adjusted EBITDA was $18 million, down 14% to last year, and adjusted EBITDA margin was approximately 21% of net sales. Adjusted net income was $12 million or $0.22 per diluted share compared to $12 million or $0.24 per diluted share a year ago. Our liquidity remains strong with the combination of our cash balance and access to our revolving credit facility sitting at approximately $85 million. We ended the quarter with $35 million in cash on hand compared to a cash balance of $75 million a year ago. Our ending inventory balance was higher on a year-over-year basis as planned and is expected to remain at higher levels through March. This is largely due to the addition of key soil care and well people, planned space expansion and new distribution for ELF, and higher product costs as a result of mixed and changing FX rates. The timing shift in orders I mentioned earlier also added to our inventory levels at quarter end. We are comfortable with our inventory levels and believe we have what we need to support our ongoing business momentum. We expect our cash priorities for the balance of the year to remain focused on investing behind our five strategic imperatives, supporting the launch of Key Soul Care and our Well People brand recharge. Now let's turn to our outlook for fiscal 2021. We are raising guidance for full year fiscal 2021. We now expect net sales growth of approximately 7% to 9% versus fiscal 2020, up from 5% to 7% previously. We expect adjusted EBITDA between 59 and 60 million as compared to 57 to 60 million previously. Adjusted net income between 33 and 34 million as compared to 31 to 33 million previously. And adjusted EPS of 63 to 64 cents per diluted share as compared to 59 to 63 cents per diluted share previously. Let me provide you with a little more color on our planning assumptions for the remainder of our fiscal year. Starting with the top line, our raised top line outlook reflects our continued business momentum, the potential benefits from stimulus-related spending, and the timing shift in orders from Q3. We still anticipate a modest net sales contribution in fiscal 2021 from the launch of Key SoulCare. We continue to be mindful of the ongoing uncertainty around COVID-19 and the general economic environment. As a reminder, in Q4, we also faced tougher year-over-year comparisons as we anniversary 16% sales growth last year, as well as less incremental merchandising on a year-over-year basis in Target. Turning now to adjusted EBITDA. Our guidance implies adjusted EBITDA margin in the 19 to 20% range for the year, approximately in line with our prior outlook. Within that, we expect several of our underlying gross margin drivers to remain intact, including margin-accretive product mix and a favorable mix shift to elfcosmetics.com. Partially offsetting those factors is a combination of unfavorable FX rate trends as well as an incremental $5 to $6 million in key soul care-related marketing spend that is largely concentrated in Q4. As Terang mentioned, we are pulling levers to help partially mitigate the impact of FX into fiscal 2022, including select price increases and cost savings. We also have an increased focus on SG&A leverage as we move into fiscal 2022. Let me now take a step back to talk about our long-term economic model. With fiscal 2021 as the base, as we look out over the next three years, we continue to believe in our long-term economic model targeting compounded annual top-line growth in the mid to high single digits with adjusted EBITDA growth outpacing net sales growth over that horizon. Our performance over the last eight quarters, both on an absolute basis and relative to the category, demonstrates how our five strategic imperatives are driving results and gives me confidence for the future. With that, operator, you may open the call to questions.