e.l.f. Beauty, Inc.

When Elf Cosmetics and Chipotle became two of the hottest brands on TikTok, we thought, why the Elf not? And created the most unexpected brand collab of the year.

You guys know what the Chipotle looks like when you go in, right? There's like a steel on the counter. Well, the palette actually looks just like the inside of a Chipotle.

Yeah! lettuce, guac, corn salsa, mild salsa. Wow.

Elf X Chipotle.

Today we're going to be talking all about the Chipotle eyeshadow palette.

I'm sure you guys have seen this going around all over YouTube and social media. This is definitely a collab that I never saw coming.

Wait, they launched a makeup brand?

Okay, let's back up. The Chipotle line is one of the most iconic parts of the brand. More than a few Gen Z customers have compared it to a makeup palette. So we launched a collaboration that Gen Z couldn't stop talking about. And people went OMG.

Thank you for joining us today to discuss Elf Beauty's fourth quarter and fiscal 2021 results. I'm Casey Catton, Vice President of 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 Terang.

Thank you, Casey, and good afternoon, everyone. I hope that you're well. Today, we'll discuss our results in the fourth quarter, full year fiscal 2021, and outlook for fiscal 2022. I want to start by recognizing our e.l.f. Beauty team. We have much to be proud of in fiscal 21. Q4 marked our ninth consecutive quarter of net sales growth. While the color cosmetics category was negatively affected by the COVID-19 pandemic, our outperformance throughout the year underscored the strength of our business model. In fiscal 21, e.l.f. Cosmetics was the only top five color cosmetics brand to post growth, and the only top five brand to gain share, with 5.7% of the market, up 100 basis points year over year. We advanced our transformation to a multi-brand portfolio with the recharge of well people and launch of key soul care. We also continue to lead with purpose. Elf Beauty stands with every eye, lip, face, and paw. Since our founding, we've had a deep commitment to diversity and inclusion. We're one of only five public companies in the U.S. with a board of directors that has over 55% women and over 20% black representation. We're proud that our employee base, which is over 75% women, over 40% diverse, and over 60% millennial and Gen Z, is representative of the young, diverse consumers we serve. We achieved a significant milestone on our sustainability journey this year, reducing an estimated 650,000 pounds of excess packaging through Project Unicorn. We accomplished all of this with an unwavering focus on executing our five strategic imperatives. Let me provide a few highlights from the year. Our first strategic imperative is to drive brand demand. e.l.f. Cosmetics now has nearly 12 million followers across our digital ecosystem, growing double digits year over year. Our earned media value is up 29% compared to prior year, and we're the only brand growing in our competitive set. We continue to find innovative ways to engage and entertain our community, moving far beyond traditional beauty boundaries. In music, we became a global sensation with our first TikTok hashtag challenge featuring our original Eyes, Lips, Face song, which remains one of the most viral campaigns in TikTok history. We are the first beauty brand to drop a holiday album, launch a campaign on Triller, and have four songs make the U.S. and global billboards Triller Top 20 list. This year's Beautyscape event, the remix, infused the power of makeup and music and featured three musical artists, including Grammy-nominated global superstar Tove Lo. We ventured into gaming, which resonates strongly with our young, diverse community. We are the first major beauty brand to launch a branded channel on Twitch named Elf U. Our Twitch channel champions female empowerment in gamers and features new streams every week. Our first live stream generated nearly 1 million views. We also teamed up with Loserfruit, also known as Lufu, one of the world's top female gamers. The response to our collaboration has been overwhelming, with over 37,000 hours of Elf content watched. We also ventured into original content creation with the release of Eyes Lips Famous, the first ever TikTok reality show. The show generated 38 million views, over 3,000 submissions, and even the TV industry took note. We also explored unexpected brand-on-brand partnerships with like-minded disruptors. In March, we launched a limited-edition product collaboration with Chipotle. The collaboration generated 4 billion press impressions and sold out in record time across multiple online channels. Tapping into Elf's superpowers of being vegan and cruelty-free, Chipotle offered a limited edition Eyes, Chips, Face bowl, a beauty-inspired all-vegan entree. The bowl marked the first time Chipotle introduced a menu item in collaboration with another consumer brand. our brand building efforts continue to win awards. This year, we're recognized as one of beauty's most powerful brands, newsmaker of the year, and one of the top 10 marketers of the year, among many other awards. We increased our rank in Piper Sandler's semi-annual teen survey from fourth favorite cosmetics brand last year to second this year, and just eight votes away from the number one spot, reflecting our growing appeal with Gen Z. We took an important step in our transformation to a multi-brand portfolio with the launch of Key Soul Care, our groundbreaking lifestyle beauty brand with Alicia Keys focused on holistic wellness. Key Soul Care carves out a new category in beauty called Soul Care, going beyond skincare to care for the body, mind, and spirit.

I look for the light. I follow the light.

Some mornings I wake up and I'm just like energized and ecstatic to dance.

A lot of times you hear how to care for yourself from like the outside in, you know?

I feel like sometimes you have to kind of just be alone and be in the quiet for a little bit by yourself.

Soul care to me is a journey to self-improvement.

Soul Care is paying attention to that part inside of you that you can't see, but you can feel. And nourishing it, fulfilling it, spoiling it, and loving it. That's Soul Care.

Key Soul Care is off to a great start. We're encouraged by the global recognition the brand is receiving with over 15 billion press impressions, as well as numerous brand and product awards, all in just a few months since launch. Alicia is an inspiration to so many. The brand is resonating with a broad set of global consumers with a healthy mix of both men and women. Instagram engagement metrics are trending well above platform averages. We're particularly excited about the level of engagement we're seeing with consumers on keysoulcare.com. Our weekly email newsletter subscriptions are growing and our SMS text messages are proving to be one of our strongest conversion-driving channels. Looking to well people, this was our first full year operating this plant-powered clean beauty brand. The key theme this year was recharge, as we transformed many aspects of the brand, including price points, imagery, website, social channels, media strategy, and the in-store experience. In the coming months, we're excited to phase in new packaging that provides a fresh expression of the brand. We feel great about well people and are encouraged by the momentum we're starting to see. Our second strategic imperative is a major step up in digital. Digital consumption remains strong throughout fiscal 21, up triple digits year over year, with strength across elfcosmetics.com, retailer.coms, and Amazon. Digital channels expanded to 17% of our total business, up from 9% a year ago. On elfcosmetics.com, approximately 75% of our shoppers this year were new consumers. These consumers are over-indexing on skincare and sign-ups for our Beauty Squad loyalty program. Beauty Squad now has over 2.4 million members, up 40% year-over-year. Our loyalty members have higher average order values, purchase more frequently, have stronger retention rates, and drive almost 70% of our sales on elfcosmetics.com. Our third strategic imperative centers on leading innovation. Elf Cosmetics saw continued success in fiscal 2021 in our core segments, brushes, primers, concealers, brows, and sponges, which make up approximately half 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, we continue to leverage our unique ability to create prestige quality products at extraordinary prices. Two of our biggest launches were Camo CC Cream and Lash It Loud Mascara, which are helping to drive momentum in foundation and mascara, the two largest categories within color cosmetics. In Q4, Camo CC Cream was our top selling product. Skin care remains a major focus of our brand portfolio. Elf Skin Care consumption for the year was up 22% in tracked channels versus a category that was down 3%. Key Soul Care further fuels our momentum and overall product range in this category. The brand's initial skincare collection includes nine product offerings with dermatologists-developed, clean formulas, skin-nourishing ingredients, and soul-nurturing rituals. The consumer response has been incredible, with average product ratings of 4.9 out of 5 stars on keysoulcare.com. Our fourth strategic imperative is driving productivity with our national retail partners. elf cosmetics maintained its industry leading productivity on a sales per foot basis at both walmart and target our two largest customers were also pleased with the space expansion, we earned with both walmart and ultra beauty. For context, Target is our most developed and longest-standing national retailer, and our store footprint today is about 11 feet on average. This is significantly less than many of the legacy color cosmetics brands, yet e.l.f. achieved the number two dollar share position, up from number three last year. Our average footprint in Ulta is now about 8 feet, and in Walmart is about 6 feet. Even with the space expansion we earned this past year, we see shelf space opportunity with all of our key retailers. We achieved new milestones internationally, which make up approximately 11% of our business. e.l.f. now ranks number 8 in mass cosmetics in the UK, up from number 12 last year, and was the only top 10 brand to post growth. In fiscal 2021, we launched e.l.f. Cosmetics with new international customers like Shoppers Drug Mart in Canada and expanded to new geographies like India and Italy. Our fifth strategic imperative is delivering cost savings to help fuel brand investments. We're pleased with the 80 basis points of gross margin expansion we saw this year against tariff-related pressure and growing FX headwinds. Our operations team continues to generate cost savings via lean manufacturing techniques that have contributed to our strong gross margin rates. Additionally, this year we successfully transferred all Well People products to our operations platform, unlocking significant COG savings, which we redeployed into more accessible pricing. We believe our scalable asset-light supply chain in China is a competitive advantage that enables us to deliver the best combination of cost, quality, and speed across our brands. Like many companies, we're seeing global imbalance in containers, which is slowing some of our shipments and increasing our transportation costs. Mandy will speak more about this shortly. In other operational matters, we are no longer pursuing our liquid fill manufacturing facility in California. The plant had faced a number of COVID-related delays. As we got deeper into the engineering work and revised business case, we made the decision to stop further investment and instead focus on the competitive advantage we have with our existing supply chain. We plan to continue to look for ways to both strengthen and diversify our supply chain over time. To that end, in fiscal 21, we started operations with new suppliers in both Thailand and Taiwan that can leverage a chassis and multifunctional team we have in China. The progress on 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 why I'm optimistic that we can continue our momentum into fiscal 2022. First, we plan to continue being elthing disruptive, pushing even further into new digital frontiers like gaming to bring new consumers to our brands. We recently announced a partnership with TikTok and Enthusiast Gaming, the largest gaming media platform in North America, to launch TikTok Gamers Got Talent. This seven-week live series follows contestants as they showcase their talent and compete in front of millions of fans for a chance to win $25,000 and, of course, elf products. The TikTok Gamers Got Talent hashtag generated over 5 billion views in the first three days and is now worth 13 billion views in just a few weeks. We also plan to continue unexpected partnerships with like-minded disruptors. As just one example, in April, we announced a collaboration with beauty entrepreneur Jen Atkin, the founder of Way Hair Care and Main Addicts.

I am obsessed with creating quality beauty products that are accessible to everyone. And no one has mastered that more than e.l.f. They create products for every eye, lip, and face. One of the main reasons I wanted to collab with e.l.f. is they understand the importance of now more than ever giving back to the community. So we were able to team up with Girls Inc. and help young budding entrepreneurs with their ideas and dreams.

The second thing that gives me confidence is that we still see a significant amount of white space across categories, geographies, and our expanding brand portfolio. We plan to push further into larger categories like foundation, mascara, and skincare. In skincare, for example, we're pivoting our marketing strategy to treat e.l.f. Skin as our fourth brand in our portfolio. While color cosmetics purchases are often driven by inspiration and impulse, skincare purchases are generally driven by efficacy and education and require a different way to engage with consumers. We're excited about both the marketing strategy and innovation we've planned for Elfskin in fiscal 22. From a geographical perspective, Key Soulcare is accelerating our global retail strategy. In the U.S., Key Soulcare represented Ulta's first-ever entire store takeover in both sight and sound. Key Soulcare is also opening new doors internationally, like Douglas. We're excited about the execution you'll see in the coming months as we launch in eight countries across the EU. Looking ahead, we believe we're still in the early stages of realizing the full potential of our business and see significant opportunity in fiscal 22 and beyond. Our business results 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're positioned for an even brighter future. I'll now turn the call over to Mandy.

Thank you, Terang. I am pleased to share the highlights of our outstanding fourth quarter and full year fiscal 2021 results. We ended the year strong. In the fourth quarter, net sales grew 24% versus prior year, driven by ongoing momentum for the e.l.f. Cosmetics brand, benefits from stimulus-related spending, and the launch of Key Soul Care. We also delivered 14% growth in adjusted EBITDA with ongoing investment in marketing and digital, as well as increasing FX headwinds to our gross margin. Let's now turn to our full year fiscal 2021 results. We delivered net sales growth of 12% with broad-based strength for e.l.f. Cosmetics across e-commerce, international, and our national retailers. We also benefited from the launch of Key Soul Care and a full year of Well People. Gross margin of 65% was up approximately 80 basis points compared to prior year. We saw gross margin benefits from margin accretive innovation, cost savings, and a mixed shift to elfcosmetics.com. We also benefited from FX, although much less so relative to prior years as we started to feel the impact of changing FX rates. Partially offsetting these benefits were costs related to retailer activity, space expansion, inventory adjustments, as well as the impact of tariffs. On an adjusted basis, SG&A as a percentage of sales was 52%, compared to 49% 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 year was approximately 16% of net sales versus 13% a year ago. Fiscal 2021 adjusted EBITDA was $61 million, down 2% to last year. and adjusted EBITDA margin was approximately 19% of net sales. Adjusted net income was $37 million, or $0.71 per diluted share, compared to $32 million, or $0.63 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 over $130 million. We ended the year with $58 million in cash on hand compared to a cash balance of $46 million a year ago. In April, we refinanced our existing credit facility into a $200 million facility with $100 million of term loan and $100 million of revolver. We were able to improve terms across the board, including better pricing, taking advantage of favorable market conditions, and the opportunity to further bolster our balance sheet flexibility. Our ending inventory balance was higher on a year-over-year basis, as planned, and $12 million lower than where we exited the December quarter. we expect our cash priorities for the coming year to remain focused on investing behind our five strategic imperatives and supporting our strategic extensions. Now let's turn to our outlook for fiscal 2022. As a reminder, Fiscal 2022 will be the first year within our three-year long-term economic model, which targets compounded annual top-line growth in the mid to high single digits, with adjusted EBITDA growth outpacing net sales growth over that horizon. For the full year, we expect net sales growth of approximately 8% to 10%, tracking at or ahead of our long-term economic model. We expect adjusted EBITDA to grow slightly faster than net sales, resulting in adjusted EBITDA margin expansion of approximately 5 to 10 basis points year-over-year and adjusted EBITDA between 66 and 67.5 million. We expect adjusted net income between 35 and 36.8 million and adjusted EPS of 64 to 67 cents per diluted share. We expect a fully diluted share count of approximately 55 million shares and our fiscal 2022 tax rate to be approximately 24 to 25%. Let me provide you with a little more color on our planning assumptions for fiscal 2022, starting with the top line. Our top line outlook reflects continued momentum for the e.l.f. Cosmetics brand. We also expect net sales to benefit from a full year contribution of key soul care and an increase year over year from well people. There are two key factors balancing that momentum. First, we have not assumed any major space gains for e.l.f. Cosmetics in our fiscal 2022 outlook. as compared to significant retailer space expansion we enjoyed in fiscal 2021. Retailer space decisions typically come later in the year, and we don't have confirmation of any major space gains as of the date of this call. Second, as Terang mentioned, we have recently experienced delays in shipments from China as a result of the container shortages and port congestion that many other companies have spoken about. This is resulting in shipment delays and elevated transportation costs as we work to meet consumer demand. We'll closely monitor these impacts as we move through fiscal 2022. Turning now to adjusted EBITDA. We are planning for adjusted EBITDA margin expansion of approximately 5 to 10 basis points year over year. We expect gross margin will be down year over year as we face growing FX headwinds and rising material and transportation costs. We are pulling levers where we can to help offset a portion of these gross margin impacts, including through select price increases and cost savings initiatives. As a result, we expect SG&A leverage to drive our expected adjusted EBITDA margin expansion this year, both as we take a sharper look at our key non-marketing areas of spend and as we start to scale the key soul care and well-people brands. Of note, we're planning for marketing and digital spend to continue at approximately 14% to 16% of sales in fiscal 2022. From a cadence standpoint, we expect top-line growth to be strongest in Q1 as we benefit from stimulus-related spending on top of our ongoing portfolio momentum. Conversely, we expect adjusted EBITDA margins will be most pressured on a year-over-year basis in Q1. This is largely a result of the gross margin pressures we just spoke about, coupled with a planned step-up in marketing spend as a percentage of sales, as we lapped lower marketing levels in Q1 last year during the initial months of the pandemic. In summary, we're pleased with our outstanding results in fiscal 2021 and excited about the opportunities ahead in fiscal 2022. Our performance over the last nine 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 now open the call to questions.

We will now begin the question and answer session. Please note this call is being recorded. To ask a question, you may press star, then one on your touchtone phone. If you are using a speakerphone, please pick up your hands up before pressing the keys. To withdraw your question, please press star, then two. Additionally, please limit yourself to one question so we can respond to all of you in the time scheduled for this call. If you have any additional questions, you are welcome to rejoin the queue. Our first question today will come from Dara Mosinian with Morgan Stanley.

Hey, guys. So I just wanted to touch on the revenue side. Obviously you came in above your expectations in Q4. Can you just help us understand what drove that upside, how sustainable some of those items may be as you're looking out over the next few quarters? And then in terms of the U.S. cosmetics category, You know, what you're seeing so far in fiscal Q1, given you're two months into the quarter, how's the recovery progressing on a year-over-year basis or looking back to 2019? So a bit of color on the category rebound here and what you're seeing in the last couple of months, maybe post the quarter. Thanks.

Yeah, no problem. All right, so I will start with Q4 and the key drivers that drove that 24% growth. I'll start off by saying we're very pleased with the 24% growth that we saw in Q4. Really, that was driven by four key factors. One is just the ongoing momentum we have with the ELF brand. We saw that continue into Q4. Secondly is the impact of stimulus. This third round was by far the largest impact that we've seen out of the three stimulus rounds, so that also had an impact. I would also say that Key Soul Care And pipeline related to that launch added to our sales in the quarter. And then lastly, we also spoke last quarter about order shifting out of Q3 into Q4. That also had an impact to the quarter. So I would say overall, pleased with the underlying momentum that we saw in the quarter, but certainly also some stimulus-related things that we think will kind of roll off. We talked about Q1 being stronger behind stimulus as well. And so you'll see that. continue on into Q1. Great.

And then on your question on the category, we're definitely seeing a resurgence in color cosmetics. I think in the last four weeks in scanner data, the category is up 32%. We were up 52% during that same time period, so we're seeing even stronger results on ELF. But from a perspective of a broader view, I would say the category is still not back to where it was in 2019. I think it's down 3% relative to where it was in 2019. So seeing a recovery, I feel we have further to go. We're encouraged by, as people get more vaccines, as restrictions are lifted, as people get back into retail, we're quite bullish on the category going forward. Certainly stimulus was a benefit, but even as we start lapping some of the stimulus spending and looking at last year's stimulus around this time, we're still encouraged by what we're seeing overall.

Okay, and if I could just follow up on the... shipment issues with containers, et cetera. Is that more of a short-term issue in the next few weeks here, or is that something that could linger as you look out going forward? And how do you think about if there is potential upside for the year, your ability to actually supply product in terms of incremental retail demand versus what you're expecting? Thanks.

Sure. So like many other companies, we're facing that imbalance in global containers And I will say that's going to impact us for at least the next few months. What I would tell you is imbalances tend to balance out. Even in our history, we've had periods where you've had port strikes, other disruptions in supply. We feel confident in terms of our overall capacity and ability to manufacture products. And our guidance is reflective of the imbalance that we're seeing. So the 8% to 10% revenue growth takes into consideration any of the supply imbalance that we're seeing currently.

Great. Thanks.

Our next question comes from Erin Murphy with Piper Sandler.

Great. Thanks. Good afternoon. My question is around the key soul care brand. I was curious if you could speak a little bit more about the response thus far, particularly internationally. And then as you think through the guidance for the year, I'm not sure if you're, Mandy, if you're breaking out kind of what keys could contribute, but if you could just help us shape how, like, the pipeline fill will look as we move throughout the year, if there's any specific quarter to call out as you kind of roll out in additional retailers abroad. And then I have a quick follow-up, but thank you.

Great. So, Erin, we're really pleased with the launch of key fill care. As I mentioned in the prepared remarks, Since we announced the brand, we've had over 15 billion press impressions. Our Instagram engagement rates are higher. And we're particularly pleased with what we're seeing in terms of support from our key customers. So in our Ulta Beauty launch, it was the first time ever that they dedicated the entire store takeover to a brand launch. We were at the front of the store for 12 weeks. As we've moved on to an end cap in their prestige section, we're really pleased with kind of what they're doing behind the brand. We're equally pleased with the plans that Duglas has against the brand. So internationally, Key Soul Care will definitely accelerate our move internationally as a global brand. What I tell you internationally right now is, you know, much of Europe has been shut down. So some of our launches did move out a few months. particularly in Germany, which is still closed. But we're encouraged as markets start to open up, as vaccination rates get better there, you'll hear us talk more about keys internationally. I'm excited for you to see what that looks like as Douglas goes up.

Yep. And then, Aaron, just on your question on the impact to the quarters and what are we seeing. So we're not breaking out the impact of revenue for each of the brands. But I can say that pipeline or a new product launches, all of those things, that is embedded within our 8% to 10% guidance that we've provided.

Okay, great. Thanks, Mandy. And then just a quick follow-up for you, Mandy. On pricing for the ELF brand, I think you were taking some pricing. Has any of that gone in? What percent of the SKU base have you taken price on? And just curious if there's been any consumer response as you think about mitigating factors to some of the gross margin pressures you called out. Thanks so much.

Yes, and so we did talk about using pricing as a lever. We talked about that last quarter, and I can say that that pricing is in effect now. In May, we took that pricing. We'll take some time for that to show up at shelf, just similar to our July of 2019 price increase that we took. And at that time, recall, we took pricing on about a third of our SKUs. I can say for this round in the U.S., it is much smaller. And internationally, we did not take a price increase in 2019. So this is a larger price increase, I would say, internationally versus what we took in the U.S. here in May. So that is definitely a lever we're looking to to help offset some of the FX headwinds we've spoken about, and we'll have more to say on that in the coming months.

Great. Thank you.

Yeah.

Our next question comes from Andrea Texera with JPMorgan.

Thank you, and congrats on the quarter. I appreciate your commentary about the disruptions, but I think it would be helpful if you could give us how much you're baking in. Is that 100 bps or 200 bps of the outlook? And I think we all understand it will eventually come back, right? So I'm assuming you're not thinking It will come back in fiscal 22. And then related to that, I understand, Mindy, you don't want to break down by brand, but if you can give us an idea if you're looking at underlying with the impact from, you know, the disruptions that you have in the supply chain to be around single digits for organic and then the rest being your contribution from both QSO Care and Well People. And then I have a follow-up on the diluted number of shares.

Okay. So let me take the underlying impact question first on just trying to understand the trends that we're seeing by brand. I would say that, like I said in our prepared remarks, we're really pleased with the underlying momentum that we have on the ELF brand. And I think that, you know, a lot of the analysts and investors look to Nielsen data to kind of get a pulse on where we're seeing trends on the ELF brand. I will say that looking at Nielsen, we do expect that to be a little bit volatile, right? Because we're cycling stimulus in the base and a lot of moving parts as we go through. We have stimulus now on top of stimulus. So that said, we just feel strong about where we're positioned from an ELF standpoint. Keys and Well People. Well People, this will be kind of a growth year for Well People, I would describe it. With the recharge and packaging and that showing up at shelf, we certainly expect that to have an impact. And then with Key Soul Care, it will also be incremental, if you're thinking about how you build that up as we launch more broadly internationally and build momentum behind that brand. So that's the additional color I can give you behind each of our brands.

Yeah, and then on the container imbalance, what I tell you is it's definitely impacting our fulfillment rates right now. But one of the benefits we have is each of our retailers carry a significant amount of inventory. So we haven't seen a major impact yet in terms of in-stock levels. Those are still pretty healthy. And so as we manage through that, we've embedded it in our guidance in terms of what we'd see, particularly through the front half of the year. And we'll learn more and we'll report on that as we go forward, hopeful that that imbalance will balance out and we'll be able to get more containers in.

Yeah, on that, I mean, is that critical for your summer launches, right? If you will, like late summer launches, but you're saying you feel confident that the second quarter calendar would be not as bad. From what you just said about the beginning, it sounds as if you're very confident with, as you said, like your high fuel rates for the initial summer, which is obviously the June quarter, and then we have to monitor what's going to happen to the fall. Is that the way we should be thinking? And then hopefully by the December quarter, you're going to be in a much better position again.

That's what we hope. I mean, it's still a dynamic situation, so we'll monitor it. What I will tell you is the fall resets, which is a key part, which we usually shift during summer, We are supplementing our shipments with some air freight to be able to make sure that we can set those shelves properly and on time, and that's reflected in some of the cost pressures that Mandy talked about.

And one last thing, Taranga and Mindy, for the diluted number of shares was a little bit higher, and I think obviously the last fiscal year may not be representative of what your compensation, SBC, and all of those moving parts. Can you help us understand what are the puts and takes there?

Yes, Andrea. Just on the share count that we provided, if you look at our Q4 fully diluted share count was around 53 million shares. If you recall in our evergreen, we talked about the share count, the burn rate going down to 2%. So you can add that on to the 53 million where we exited Q4. And then additionally, you know, we have had an appreciation in the share price. So many anti-dilutive shares have turned into our dilutive share count. And so that's also being added in. And so that's how we're getting to that kind of that $55 million range for fiscal 22.

For awful good reasons. Okay, perfect. Thank you so much. I'll pass it on.

Yeah.

Our next question comes from Linda Bolton-Weiser with DA Davidson.

Yes, hi, thank you. So can you just talk a little bit about your comment about treating skin care as a fourth brand? That sort of sounds to me like maybe needing more marketing investment behind it, and does that mean you get less kind of halo effect as the overall brand kind of boosting both? I mean, can you just give more color on what you mean by treating it as a fourth brand? Thanks.

Sure, Linda, we've seen great momentum in skincare. In fact, if you take a look at track channel sales, e.l.f. Skin was up 22% this last fiscal year in a category that was down 3%. So we've been having momentum for quite some time executing on our strategy. This just reflects the growing strategic importance of skincare as part of our overall portfolio. Obviously, Key Soul Care was launched skincare first as a category. On e.l.f., we have high hopes and plans for skincare. So it doesn't necessarily impact our marketing levels. We're staying consistent in that 14% to 16% overall for marketing and digital as a percent of sales. It just reflects the reflection that skincare, the approach to skincare is different than color cosmetics. While color cosmetics purchases are often driven by impulse and trend, skincare we're finding through our own history is really driven by efficacy and education. And so really taking that approach of really treating skincare differently than color cosmetics, I think really builds on the success that we've been having.

Great. Thank you. And then just on the Keys Soul Care line, you've talked about further expansion geographically coming up in the next year. Is there any... timeframe for launch of additional SKUs to the line?

There is, Linda. We have Key Soul Care, you know, is different in its approach in two ways. One is a true lifestyle beauty brand focused on content, community, and conversation. But in addition to that, it's multi-category in scope. So we started in skincare and I think there's a piece where we announced today that our next category will be body. They'll be coming out with three new products in the body range. And you'll see that follow-up with additional other categories and SKUs. We have a robust innovation pipeline that you'll continue to see a stream of new product news on Key Cell Care throughout the year.

Great. And then I guess just a question on your – I mean, your cash flow in the fourth quarter was actually a little bit better than we had projected, and you've got a nice, healthy cash balance. Is there any thought to returning to share repurchase and kind of what are your thoughts on additional acquisitions now that you've kind of relaunched the well people and gotten the Alicia Keys off the ground? What are your thoughts there?

Hi, Linda. So on the share repurchase front, you know, we are just, Backing up to just cash overall and our priorities, our cash priorities as we look forward are really focused on our strategic imperatives and strategic extensions. supporting Key Soul Care and also supporting Well People. From an acquisition standpoint, you know, we have been very thoughtful on that front with Well People being our first acquisition last year. It's something that, you know, kind of is on our priority list, but feel that we are, our hands are full at this point with Keys and Well People.

And the only other thing I would add, Linda, is when you think of strategic extensions, it's not only potential tuck-in acquisitions. It's also incubating new brands. I think the success we have with Key Soul Care shows the capability of our team of kind of I think we stood up that brand in about a year's time. So we're definitely interested in enhancing kind of our product portfolio, brand portfolio with other brands that we either acquire or build in-house.

Okay, great. Thank you very much.

Our next question comes from Steph Wissink with Jefferies.

Thank you. Good afternoon, everyone. I have a question just on the sales and EBITDA growth tracking together, even with the gross margin pressure. I think, Mandy, you mentioned this is the first in a three-year target period to grow EBITDA faster than sales. If you were to see gross margins be less pressured than what your guidance embeds, is that where the source of upside likely comes from, or do you expect to spend that back to try to drive upside to the sales line?

Thanks for the question, Steph. You know, it's always a balance. We do feel like the gross margin pressures are real, and so that's why we have pulled other levers within our toolkit to help offset some of those gross margin pressures, so the pricing that we just took. focusing on the non-marketing expenses within SG&A to help deliver that 5 to 10 basis points of EBITDA leverage. Now, as we look out and think about our long-term economic model, what we talked about was a three-year view on that, so with EBITDA outpacing over that three-year period. And so that's what we continue to be focused on. So I feel great that even in a year with great cost pressures, we are still talking about delivering leverage and demonstrating EBITDA growth. And we'll just take it kind of one quarter at a time as we see how things materialize.

Mandy, if I could, I think you gave some specificity around Q1, mentioning that marketing was going to be up year over year, just given that it was down below your threshold last year. Can you remind us kind of what that step function could look like year over year, just for modeling purposes? Sure. So let's see here. So last year,

If you recall, Q1 of last year, it was kind of in the beginning of COVID, and we had really pulled back on our marketing investment. So you're going to see some step up there. Last year, our marketing investment was only 11% of sales in Q1. So, you know, we've talked about 14% to 16% for the year. So certainly expect to see a step up there in Q1 of this year.

Thank you very much.

Yep.

Our next question comes from Bill Chappell with Truist Securities.

Thanks. Good afternoon. Hey, Teran, can you talk a little bit more about the decision to walk away from the domestic manufacturing? Are you giving up anything in terms of potential gross margin expansion? Did you find cost savings elsewhere? Does that mean you're permanently going to stay out of the domestic manufacturing and just I know this project is at least a year into the process, so I'm just a little surprised that you're pulling the plug now.

Yeah, well, Bill, I'd say first and foremost, we're really happy with our overall supply chain and operations advantage we have in terms of our combination of cost, quality, and speed. We had originally done the business case on the U.S. plant in Southern California really based on three things. One was cost savings, two was supplier diversification, and the third was lead time reduction. Now that plant had faced a number of delays related to COVID related delays. So by the time we're able to actually get into the engineering work, we really evaluated the cost profile of that facility relative to what we get from the rest of our supply chain and determined that it was going to take a lot more money to be able to realize its full potential. Now, having said that, so that was an easy decision from a business standpoint of saying, let's not pursue, let's not put more money into that facility relative to the advantage we have in the rest of our supply chain. We remain interested, though, in diversification and lead time reduction. And so on the diversification front, as I mentioned earlier, At the same time that we face COVID-related delays on the Southern California facility, we did start up new suppliers in both Thailand and Taiwan. That gives us diversification but still leverages the power that we have in our multifunctional team in China. And I would say in terms of domestic manufacturing or other sources of manufacturing, we remain open as long as the business case pans out. So I'd say we're always looking to see how we can further strengthen the advantage we have in our operations. and it just wasn't the case in that particular facility.

And just to make sure, there's no write-down or charge-off for that that I saw?

Yeah, no, Bill, we do have a restructuring charge that we took in Q4 of $2.6 million related to that closure.

And that was the entirety?

That's right.

Got it. And then just switching gears on... as I look at the shelf space gains, Mandy, you said, you know, your, your guidance doesn't include any shelf space gains. I think, I think I'm right in saying that the spring is more, is a bigger time for shelf space gains than the fall. But if you're going to get ones in the fall, would that we know that over the next couple of months, is this what you're in the process of? And, you know, is there a chance that you get shelf space gains or are we kind of past that where you're not expecting a whole lot new in, in, in the fall and you're more of just velocity of existing space?

Yeah. So, you know, we've, Like I said in our prepared remarks, no indication of shelf-based gains at this point, but we remain hopeful, and I believe we have a track record of getting shelf-based gains each year. We just haven't baked that into our guidance because we usually will do that once we do have confirmation of such gains.

And the decisions, Bill, for the spring really are made a little bit later this summer? And so, you know, as Mandy says, we're quite hopeful given the momentum that we have, not only the amount of share we grew last year, our overall productivity, our innovation pipeline and consumer appeal. So we stand, I think, stronger than we've ever stood in terms of our ability to get more shelf space. We just didn't want to cloud guidance with expectations on shelf space. So it's clean from a standpoint of no space. And if we did get confirmation on more space, we'd update the guidance throughout the year. Got it. Thanks so much.

Our next question comes from John Anderson with William Blair.

Hey, good afternoon, everybody. I just have one quick one on Well People. If you could talk a little bit more about your plans for Well People this year. It sounds like there's been a restage that's going on. But if you could describe if you'll be gaining new distribution as well. I think at the time of the acquisition, one of the theses was that You could leverage your trade relationships, particularly with national retailers, to perhaps expand the distribution for that brand. So just some more color around your plans for Well People this year and what kind of underpins the growth as you see it. Thanks.

Sure, John. So on Well People, we're highly encouraged with the plans that we have, the really four key focus areas. First is recharging the brand, similar to what we did with ELF, and you see an entirely new brand expression on Well People, everything from its positioning to packaging that you'll start seeing roll out over the next few months. The second is innovation, really leveraging our strength in innovation and building out the product assortment on Well People that you'll start seeing some of those new products coming out. I'd say the third is putting it on our operating platform. So we're able to basically reformulate every single product in the Well People range, move it on to our operating platform, realize significant cost savings that we put into sharper pricing and that brand recharge. And then the fourth element is distribution. And our key focus on distribution, I would say, is Target and Ulta. Target is where the brand historically was most developed. I feel like we have further to go with Target Alta, we were already part of the conscious beauty initiative at Alta. We'll be looking to leverage that to more space within Alta and then other customers. So we feel great and we're really pleased with the momentum that we're seeing right now in Well People. And the last thing I would say is Well People also dramatically accelerated our own plans across ELF in the clean beauty space. Key Soul Care came out the door fully clean. One of the founders of Well People, Dr. Renee Snyder, a dermatologist, really was instrumental with the development of that brand. ELF is well on its way in terms of our own clean journey. I think in the next few months you'll see ELF be 100% clean as well. So there are other benefits Well People got to the company beyond kind of the growth momentum we see in that brand.

Great point. Thanks for the help.

Our next question comes from Rupesh Parikh with Oppenheimer.

Thanks for taking my question. So I just want to go back to your comments on the reopening. I was just curious if you're seeing anything surprising as you look at consumer behavior out there. And as you look at elf.com, are you seeing stickiness with maybe the skincare business as now consumers may be also buying makeup as well?

Sure. So, yeah, I'd say on the reopening, it's consistent with what we'd expect. We've long talked about as things open back up, as there's more vaccines out there, people go about their normal behavior, you'd see a resurgence in color cosmetics. And we very much are seeing that in category trends, but especially on ELF, where we were strong before during the pandemic and now kind of coming out of it. So hopeful on the category. As I said, the category is still not where it was two years ago, but we like the trends we're seeing. not only on ELF, but I'd say also in some of our key competitors. And a lot of that's driven not only by consumers coming back, but the level of innovation that's out there. We're really pleased seeing kind of Maybelline, Sky High Mascara, L'Oreal's Infallible Foundation, NYX has a few new items. So we like seeing that activity in the broader category. We definitely believe they'll bring more consumers into the category, which is always a great thing for ELF. And then in terms of our online business, you know, we had real strength there all throughout the year. It was up triple digits for our last fiscal year. And one of the big drivers of it was quite a few new consumers, I think almost 70% new consumers. And so our real focus has been on retaining those consumers. I'm particularly pleased with the progress we've had on our Beauty Squad loyalty program, up almost 40% year over year in terms of total Beauty Squad loyalty members. And as I mentioned in the prepared remarks, beauty squad loyalty members, as well as the new consumers, are definitely having a stronger affinity to skin care, which has been great for our overall basket building as well.

Okay, great. Thank you. I'll pass it on.

Our next question comes from Mark Astartan with Stifel.

Yeah, thanks, and afternoon, everyone. I guess a couple directional follow-ups. One on just this whole idea of health skin care. Does that ultimately, and over time, lead to more shelf space for that, maybe even specifically within that category in terms of the placement of it, sort of separation from some of the makeup products and directionally kind of how do you holistically think about that? And then separately on the investment spend or marketing spend for this year. So I think you had said 14% to 16%. I guess what factors drive where A&P spend finishes the year, sort of keeping in mind that you're going to be up a lot in the first quarter, so that would imply down a bit in 2Q, 3Q, 4Q, and how do you think about that? And as I said, what factors influence that, and how quickly can you change it if you need to?

Sure. So on Elf Skin, we definitely see expansion potential, not only in shelf space, but the number of new items. I think I've cited in prior calls that Elf Skin, skincare as a percentage of our portfolio in track channels is single digits overall, I think about 9%, 8%, 9%. Yet on elfcosmetics.com and Amazon, it's close to 25% of our sales. And the biggest difference, if you take a look at what's going on online versus in retail, is the number of our skincare items on shelf. So we've already had a strategy, even with the fall resets coming up, of getting more of our skincare assortment onto retailer shelves. In addition, as we earn more space, we use that as an opportunity to increase our footprint on skincare, both in sets where skincare is housed within the overall ELF set, similar to what we do at Target, or places like Ulta Beauty where skincare is housed in the skincare department. You see opportunity in both areas, both getting more assortment in as well as increasing our space. And then on the marketing side, I'll let Mandy add into that, but I'd say we're comfortable with the momentum we've been able to drive at that 14% to 16%. And so the way we approach marketing is we really set it as a rate by brand. Each brand has a different percent that we're targeting for that brand. And it goes pretty much hand in hand with the sales as we go through.

Yeah. And I would just add to that, Mark, that in terms of turning it off or turning it on, because we have a completely 100% digital spend, we are able to move pretty quickly with the ebbs and flows of the business. So feel great about how we're managing that percentage over the course of the year.

Thank you.

Our next question is a follow-up from Andrea Texera with JP Morgan.

Thank you for taking my follow-up. I just want to confirm like what you said, Mindy, on the pricing. So I understand you don't want to quantify But you said that pricing in the U.S. will be a little bit less international. And you alluded to 2019 when you took pricing about a third of the SKUs. So how should we be thinking? And obviously starting now in May, so part of your first quarter is not going to be positively impacted. So how can we think about magnitude of price increases in fiscal 22 that is embedded in your guide? And also, just another follow-up on e-commerce. So I think I understood, correct me if I'm wrong, you said 25%, but can you quantify? You did give us the number of British Quad member growth, but if you can quantify the growth in e-commerce, that would be helpful, both Bricks and your .com. I'm sorry, both Retail.com and your own Health.com.

Yep. Okay, so I will take the pricing question. So in terms of impact, so we have talked about, again, it's small in the U.S., but broader internationally. If you think about international, it's roughly 11% of our business. You could assume that it's roughly the same playbook that we took when we took in 2019. We've now applied that internationally as well. So it will have some impact to the business, Andrea, but generally, not as large of an impact as we saw when we did this pricing in 2019. And again, we're not going, you know, we're not pulling that lever as heavily because we still want to be sure that we're providing that value for our consumers. And so we're just not going to take pricing all the way up so that we maintain that balance with, you know, wanting to offset some of these FX headwinds with also delivering that value to our consumers. So, you know, we'll be able to report out on the potential impact next quarter when we report earnings. But, you know, that's how I'm thinking about it right now.

And then on your question on our e-commerce business online, our total e-commerce business where we finished the year was about 17% of our total business online. And it was up triple digits. I think in the year before, e-commerce was only about roughly 9% in FY20. It finished the year in FY21 at 17% of our business. So we saw definitely great growth rates there. And that growth was well balanced between elfcosmetics.com, retailer.com, and Amazon. So we saw growth across all three of the major areas that we look at our online business on.

Thank you. That's helpful.

This concludes our question and answer session. I'd like to turn the call back over to Tarang Amin for any closing remarks.

Well, thanks for joining us today. I'm so grateful for our incredible team at Elf Beauty who've collaborated to navigate the challenges of the pandemic and build our market share. I believe our future is bright and remain confident in our long-term strategy. We look forward to seeing some of you at the upcoming William Blair and Piper Sandler conferences and speaking with you in August when we'll discuss our first quarter results. Thank you and be well.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.