e.l.f. Beauty, Inc.

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Thank you for joining us today to discuss Elf Beauty's fourth quarter and fiscal 22 results. I'm Casey Catton, 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 Turing.

Thank you, Casey, and good afternoon, everyone. Today, we will discuss the drivers of our Q4 results and outlook for fiscal 23. I want to start by recognizing the Elf Beauty team. We have much to be proud of in fiscal 22. Our innovation, digitally-led strategy, core value proposition, and ability to adapt at Elf's speed continue to fuel our performance. Our results speak for themselves. Q4 marked our 13th consecutive quarter of net sales growth. In fiscal 22, we grew net sales by 23% and adjusted EBITDA by 22%, well above our original expectations for the year. We also continue to gain market share with 5.9% of the mass cosmetics category up 25 basis points. We're the only top five brand to grow share above pre-pandemic levels by a wide margin. Before I detail our recent accomplishments, I want to briefly touch on a few topics that are likely top of mind. First, on category outlook and our guidance. We remain bullish on the mass cosmetics category. Overall, trends have improved and in recent weeks are positive on both a one and two year basis as consumer usage occasions increase. More importantly, we remain optimistic about our ability to continue to gain share. Our consumption trends are strong, giving us the confidence to issue initial guidance at the 10-12% net sales growth for the year, with double-digit growth expected in each quarter. Second, on price increases. We increased prices on a majority of e.l.f. SKUs and select Key Soul Care and Well People products in mid-March. While still early, price elasticity is better than expected, underscoring the power of our brands. Third, on supply chain. Like many companies, we've faced additional COVID restrictions in China where our products are manufactured. While the situation remains dynamic, I feel great about how our team has responded. We continue to ship product despite the recent lockdowns. We've successfully navigated a variety of supply chain challenges throughout the years and expect to do so in fiscal 23. Over the past three years, I've provided proof points on the relentless execution of our five strategic imperatives and the growth it has driven. Today, I want to take a step back and talk through our strategic framework and key areas of competitive advantage. e.l.f. was born to disrupt. It's in our DNA. We were founded 17 years ago with the idea of selling premium quality cosmetics, for one dollar over the internet we are known for our core value proposition we make the best of beauty accessible to every eye lip and face the superpowers our consumers can't get enough of are 100 cruelty free clean inclusive premium quality beauty products at accessible price points Our seven key areas of competitive advantage give me confidence that we can continue to grow sales, EBITDA, and market share. First, we have the right team. We have a deep commitment to diversity and inclusion. Our employee base, which is over 80% women, over 40% diverse, and over 60% millennial and Gen Z, is representative of the communities we serve. And it's not just our overall employee base. Our executive officers and board of directors is majority women and nearly 40% diverse. We have a high performance team culture that fosters employee engagement Our most recent employee engagement scores were 15 points higher than the Consumer Goods and Services Industry Benchmark. Importantly, all 300 of our employees are shareholders in Elf Beauty, with the total employee ownership at nearly 15% of shares outstanding. Issuing equity to all employees is rare among public consumer products companies, aligns our team with the long-term interests of our shareholders, and incentivizes our employees to deliver enterprise value. Our second area of advantage is that we know how to attract and engage consumers. Our disruptive, digital-first marketing engine moves at the speed of culture. Over the past three years, we've increased our marketing investment from 7% of net sales to 16%. Our marketing investment is working, driving high ROI and strong levels of consumer engagement. We are now a four-time TikTok billionaire with our latest outfit up hashtag challenge generating nearly 14 billion views. We're a pioneer in music, gaming, and collaborating with like-minded cultural disruptors. Following our award-winning makeup collaboration with Chipotle that generated 4 billion earned media impressions, our recent collaboration with Dunkin' once again generated buzz, garnering almost 5 billion impressions. Elf is a Gen Z favorite. In Q4, Elf jumped to the number one favorite cosmetics brand among teens, up from number two last year and number four two years ago. we still see significant opportunity to bring in new consumers. We're encouraged that our annual attitude and usage study showed considerable improvement in our overall consumer awareness levels, with millennials and Gen X in particular. That said, we continue to have significant opportunity with unaided awareness compared to some of the legacy color cosmetics brands. Looking at Nielsen Track Channel data, we're the number 5 cosmetics brand today with 5.9% share. The number 1 brand has 17% share. We see a lot of runway to grow. Our third area of advantage is that we're an innovation powerhouse. Our innovation engine has built leadership across time across five key segments. Brushes, primers, concealers, brows, and sponges, which make up approximately half of Elf Cosmetics' sales. We have the number one or two position in all five segments and drove double-digit sales growth in each last year. Our innovation focus remains on delivering holy grails with staying power. Our putty primer and camo families are great examples of how multi-year innovation has driven our share leadership in key segments. Our recently launched power grip primer builds upon our strength in the primer category. Its jaw-dropping value of $10 versus a prestige equivalent at $34 propelled it to become the number one selling product on elfcosmetics.com in Q4 and a viral sensation across social media. Looking ahead, we believe our innovation pipeline has never been stronger. skincare remains a major focus of our brand portfolio in fiscal 22 elf skin consumption was up 19 percent compared to a category that was up eight percent new product launches such as our pure skin line helped propel us in the top 20 skincare brand rankings for the first time ever in both q3 and q4 amongst teens our skincare rankings are even higher We're particularly excited about Keysoulcare's latest skincare offering, the Let Me Glow Illuminating Serum. This complexion and makeup priming serum is the first in a series of color skincare hybrids. This product offering quickly became a viral sensation across social media, selling out in recent weeks at both Keysoulcare.com and Ulta.com.

This on your face, it has a very light but nice scent, by the way. Isn't the scent so good? Sage and oat milk. Look at you! You look amazing! Oh my freaking god! It is so beautiful!

It is gorgeous.

I can't get over this product. You look amazing. It's underneath makeup. This is incredible. It is very like that. You know all the secrets? I wanted you to try this. It's freaking phenomenal. I just could stare at myself all day. You should. You should. Let me put makeup on top so you can really see. Let me see. This is not a joke. You killed it!

Our fourth area of advantage is that we're digital first. Founded as a digitally native brand, e.l.f. remains the only top five mass cosmetics brand with a direct-to-consumer site. In April, we launched a new mobile app, also becoming the only top five mass cosmetics brand with a native mobile app. Our digitally-led strategy powers our entire business and continues to serve us well. Fiscal 22 digital consumption trends were up triple digits on a two-year stack basis. Digital channels drove 14% of our total consumption in Fiscal 22, as compared to 17% a year ago and 9% two years ago. We see opportunity increase our digital penetration, particularly as we're able to grow our beauty squad loyalty members and enhance our loyalty experience. In fiscal 22, we grew beauty squad membership by 20% versus prior year. Our 2.9 million loyalty members are a highly valuable part of our digital ecosystem and an integral source of first party data. Our fifth area advantage is that we have world-class operations. We believe we have the best combination of cost, quality, and speed in our industry. Our hybrid supply chain model combines outsourced asset light manufacturing in China with the depth of expertise of our nearly 80 employees in Shanghai across R&D, quality, sourcing, logistics, and lean manufacturing. I am proud of the Elf Beauty team for how we've leveraged this competitive advantage to navigate external challenges over the years. In 2019, we overcame 25% China tariffs on the majority of our products. In early 2020, we were the first beauty company to come out of COVID-19 restrictions in China fully operational. Our suppliers were back in business in the first week, and we were running at full capacity after just five weeks. In 2021, we faced a global container imbalance and port congestion. Our operations team again executed with excellence, managing SKUs at the store level to sustain in-stock rates around 95%. To help mitigate the financial impact of increased transportation costs, we leaned on our pricing power early in 2022 and are pleased with the initial consumer response. More recently, and like many other companies, we faced additional COVID restrictions on our supply chain in China. We feel great about how our team has risen to the challenge. Our key suppliers are producing goods, and we've managed logistics to continue shipping our products. We've also proactively taken up our inventory levels. Looking ahead, we believe the challenges in China are transitory and will normalize as restrictions ease. Our sixth area of advantage is we know how to win in the market. Over the past eight years, we've expanded our retail footprint from 11,000 linear feet of space to over 130,000 linear feet. Even with this growth, we see opportunity to gain space with each of our retailers. What gives me even more confidence for the year ahead is how we've continued to drive best-in-class productivity with our retail partners. Target is a great example. Target is our most developed and longest-standing national retailer. Our average store footprint today is about 11 feet, and we grew our Target business by over 20% in fiscal 22 without incremental space gains. We're quite pleased with the early results from our recent spring resets. We continue to deliver strong consumption trends in March and Q1 to date, even as we lapped weeks of stimulus-related spending. Looking beyond the US, international represents major white space at just 11% of our business today. We grew our international business by over 20% in fiscal 22, as we strengthened our position in both Canada and the UK. Canada is a great example of our disciplined international expansion. In the past seven years, we went from having no sales in the country to Elf now the number seven cosmetics brand, up from number eight last year, and the second fastest growing brand. We expanded our retail presence last year with the launch of Elf in Shoppers Drug Mart, adding to our business with Walmart Canada and our local elfcosmetics.com site. Q4 marked another big milestone in Canada. Our first brand entry into Sephora with the launch of Key Soul Care in Sephora Canada. Key Soul Care continues to elevate our global retail strategy and open doors to new retail partners. Our seventh area of advantage is our commitment to building a different kind of beauty company. Our mission is to build brands that disrupt industry norms, shape culture, and connect communities through positivity, inclusivity, and accessibility. Our deep commitment to clean, cruelty-free beauty with exceptional quality for the price has fueled the success of our flagship e.l.f. cosmetics brand since 2004 and allowed us to strategically expand our portfolio with brands that support our purpose and values. With our acquisition of Well People, the launch of Key Soul Care, and the unveiling of e.l.f. Skin, we have built a portfolio of distinct yet complementary brands. Looking ahead, we see potential to add fast-growing brands to our portfolio to expand our capabilities into adjacent categories or different consumer segments while leveraging our multiple areas of advantage. In summary, as we look ahead, we believe we are still in the early stages of realizing the full potential of our business. We believe our seven areas of competitive advantage and differentiated brand portfolio will fuel our ability to win in fiscal 2023 and beyond. I'll now turn the call over to Mandy.

Thank you, Terang. I'm pleased to share the highlights of our fourth quarter and full year fiscal 22 results, as well as our outlook for fiscal 23. We ended the year strong. Our fourth quarter net sales grew 13% year-over-year, driven by broad-based strength across our national and international retailers. We continued to deliver positive consumption trends in the quarter, even as we lapped weeks of significant stimulus-related spending. This exceeded our expectations and, importantly, was supported by strength in both our core products and spring innovation. Q4 gross margin of 64% was up approximately 100 basis points compared to prior year. We saw gross margin benefits from cost savings and margin accretive mix, including benefits from the launch of recent innovation. We also benefited from the price increases we implemented in May 2021 and in March 2022. These gross margin benefits more than offset the impact of FX and elevated transportation costs. On an adjusted basis, SG&A as a percentage of sales was 57%, up approximately 220 basis points versus last year. The increase was primarily related to compensation, benefits, and marketing investments. For the full year, adjusted SG&A was 51%, down approximately 90 basis points versus last year. Marketing and digital investment for the quarter was approximately 17% of net sales, as compared to 20% in Q4 last year. For the year, marketing and digital investment was approximately 16% of net sales, in line with our expectations. Q4 adjusted EBITDA was $13 million. Adjusted net income was $7 million, or 13 cents per diluted share, compared to $9 million, or 16 cents per diluted share, a year ago. Let's now turn to our full-year fiscal 22 results. In short, our results were exceptional, as our team navigated a dynamic environment. For the year, we grew net sales by 23% and adjusted EBITDA by 22%. Our liquidity remains strong, with the combination of our cash balance and access to our revolving credit facility sitting at approximately $140 million. We ended the quarter with $43 million in cash on hand compared to a cash balance of $58 million a year ago. Our ending inventory balance was $85 million, in line with our expectations, as compared to $57 million a year ago. As a reminder, we plan to carry higher inventory levels due to the combination of longer lead times, higher transportation costs, and our continued business momentum. We have benefited from this proactive inventory strategy during the recent COVID-related disruptions in China. We expect our cash priorities for the coming year to remain on investing behind our five strategic imperatives and supporting strategic extensions. Now let's turn to Fiscal 23 Guidance. For the full year, we expect net sales growth of approximately 10 to 12 percent, adjusted EBITDA between $80.5 to $82 million, adjusted net income between $43.5 to $45.5 million, and adjusted EPS of 78 cents to 81 cents per diluted share. we expect a fully diluted share count of approximately 56 million shares and our fiscal 23 adjusted tax rate to be approximately 27 to 28%. Let me provide you with additional color on our planning assumptions for fiscal 23, starting with top line. We expect to post double-digit top-line growth in each quarter of fiscal 23. As Terang discussed, we are bullish on the cosmetics category and our ability to gain share. our consumption trends remain strong. After significant variability in consumption trends over the past year from the combination of COVID and stimulus-related spending, we believe our weekly sales levels have rebased to higher and more normalized go-forward rates. Turning to gross margin. We expect gross margin to be flat to slightly up year over year, with benefits from pricing, margin accretive mix, and cost savings helping to offset elevated transportation costs. As we discussed last quarter, we increased prices mid-March to help offset the elevated cost environment we're seeing. These price increases impacted approximately two-thirds of e.l.f. cosmetic SKUs, as well as certain items within Key Soul Care and Well People. While this round of pricing was broader than previous rounds, our opening price points on e.l.f. remain unchanged, enabling us to continue to deliver high-quality products at an extraordinary value. It's still early days, but we are encouraged that initial volume elasticities are trending better than our expectations. Turning now to adjusted EBITDA. We expect adjusted EBITDA to grow approximately eight to 10% year over year. While we expect cost pressures to weigh on adjusted EBITDA margin this year, like many companies, we still anticipate healthy adjusted EBITDA growth on top of the 22% growth in fiscal 2022. Our outlook bakes in anticipated cost pressures in our non-marketing SG&A related to outbound fuel and logistics costs, in addition to the inbound transportation costs captured in our gross margin. From a marketing perspective, we're planning to step up marketing and digital investment to approximately 17 to 19% of net sales, up from 16% in fiscal 22. As Terang discussed, our marketing investments are driving strong ROI and high levels of consumer engagement. We're investing from a position of strength and believe these increased marketing investments will fuel long-term growth. Overall, we're energized by our Fiscal 22 results and optimistic about Fiscal 23. Our performance, both on an absolute basis and relative to the category, demonstrates how our competitive advantages are driving results. We remain confident in the long-term potential for our portfolio of brands. With that, operator, you may open the call to questions.

And before we dive into questions, we actually want to acknowledge the devastating events that took place in Texas yesterday. It's another tragedy and an unsettling trend of mass shootings targeted at innocent and defenseless people. Our hearts are deeply saddened and our thoughts are with all of the families who have been impacted by these recent tragedies. We may now open it to questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star, then one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then two. At this time, we will pause momentarily to assemble our roster. The first question comes from with Morgan Stanley. Please go ahead.

Hey, guys. Good afternoon. Good afternoon. I just wanted to start on top line. You're expecting double-digit growth in fiscal Q1 despite the toughest comp by far on a one- or two-year basis. And for the full year, you're expecting 11% revenue growth, so really not much more in the balance of the year. So I just wanted to get a sense of, you know, how you guys are thinking about that. What's sort of built into the full year revenue guidance. And I know you guys typically start conservative and don't assume everything goes right. And you've done a great job ending up sort of beating those initial numbers. But, you know, with another year of strong growth on top of strong growth last year, maybe you can talk about if you assume sort of some wiggle room or some areas that don't go right, given the external volatility. So, clarity on balance a year versus Q1 revenue, and then sort of what's built in given some of the external volatility would be helpful.

Yeah, so I'll go ahead and take that. So one, I'll just start by saying that I'm very pleased with our fiscal 23 net sales guidance range of 10% to 12%. And additionally, the momentum that we're seeing behind our brand, as you see in Track Channel, data as well. You know, that gave us confidence to come out with this range in this dynamic environment. Now, you know, I mentioned on the call that we are expecting double-digit growth in each quarter of fiscal 23, even as we cycle through stimulus, to your point on Q1, still expect double-digit growth in Q1. You know, I think it's prudent for us to take a balanced approach, as I always have with guidance, especially in this dynamic environment. So that's where we see initial guidance to the 12%, and we'll take it from there.

Okay, that makes sense. And then just two quick follow-ups. Karang, as you think about the level of macro risk potentially on your business, maybe you can take us through some thoughts, both from a category perspective and then more so from an ELF perspective. Um, particularly given in theory, there could be trade down that could benefit you from a macro perspective. So just how you think through the macro environment and consumer spending and potential impact to both the category and elf. And then on supply chain, you know, just given there's so much occurring in China and a lot of companies have struggled with supply chain. How do you think about the level of risk this year to your business, particularly with very robust top line guidance and maybe sort of mitigating plans, uh, if you do see issues emerge in terms of supply chain. Thanks.

Thanks, Dara. As far as the macro environment, I would say they're more positive than risk for health beauty. I'll start first with the category. I'm quite bullish on the color cosmetics category. We've seen it, particularly over the last couple months, strong consumer response and growth rates above pre-pandemic levels Within the category, ELF is particularly well positioned. Our combination of providing the best of beauty at accessible price points, I think, sets us apart. And it's been one of the reasons we've been able to grow share so robustly in this environment and fully expect to continue to grow share. In terms of the other things I'd say from a macro environment, I know everyone has fears right now on inflation and what happens if there's a recession. I think Mass Cosmetics has been pretty resilient in that environment, and Elf particularly so. Again, it comes back to our fundamental value proposition of being able to give the best at these incredible price points, and we're clearly seeing that strategy work in the marketplace. On supply chain, I'm incredibly proud of our team, our entire operations team, but particularly our team in China and our suppliers on how we've navigated the lockdowns. All of our key suppliers have remained in production, have been shipping products, I think it's just yet another indication of how resilient our supply chain is. In terms of our overall performance and how we factor that in, I think our guidance embeds a pretty balanced view of what we'd expect from a fulfillment standpoint, how that will play out through the year. But I don't have any worries right now in terms of our ability to be able to meet consumer demand and particularly given the trends that we're seeing. So overall, I'm feeling good. confident in the category, even more so in ELF. And I'd say, you know, this latest test over the last two months of the lockdowns in China once again showed just how resilient our supply chain is.

Great. Thanks very much.

Our next question comes from Andrea Teixeira with J.P. Morgan. Please go ahead.

Thank you and good afternoon. Congrats on the numbers. I wanted to ask the top line growth algorithm a little bit of a different angle in between the pricing and the volume. If I'm doing my math, I'm assuming you're still increasing prices on the retail level like a buck. So that keeps the price points easy to understand. And I understand also that entry level ones were not changed, which is great. But on average, you're probably getting into your algorithm at the low end with just the price increase, or call it 800 basis points coming from pricing. I just want to test if that makes sense. And if so, you're assuming a low single digit volume growth, despite your gains in shelf. And that's what gives you confidence that you can get there? Is that the way to think?

So hi, Andrea. How are you? So, from a price volume standpoint, you know, I'm not quite getting to those numbers that you quoted there. But you're right. We did take pricing in a dollar increments. We did keep our entry-level price points the same. So, we left those unchanged. And what I can tell you on the pricing front is that we're pleased with what we're seeing thus far from an elasticity standpoint. So I think that's great. I think that we want to have a couple more weeks here to read the data before we, you know, take all of that and say this is what it's going to be. And so probably by the August call we'll be able to give more clarity around what we're expecting to see from a pricing standpoint. But your initial thoughts on $1 and maintaining those entry price points are correct.

Great. If I can follow up, Mandy, on that. So in terms of, like, I'm assuming you still have gains in distribution from what you called out in some of the linear footage that you've gained and some international gains you called out, Canada. Yeah. before and other places of the world. So if you think about that algorithm, like the 10 to 12, and then you have the pricing, even if my math isn't correct, like, you know, if you're getting like to meet single benefit, you're saying like your volume, can you give us like a little bit of a color in terms of distribution gains against what can be, of course, a headwind in terms of price elasticity?

Yeah, so you're right. Distribution gains, we did secure space expansion. We've talked previously about CVS and internationally with Boots and Superdrug and different ones that we've mentioned previously. So that is giving us some momentum into fiscal 23. But I would say, and you can even see this in the Nielsen data, our volume has remained pretty strong. Unit volume growth has remained pretty strong even with the price increases. And so Like I said, we want to give it a little bit more time in the market to see full consumer reaction. But, yes, we do have distribution gains in that. But I can tell you our core business momentum, even outside of those gains, just as we mentioned with Target, delivering over 20% growth for us last year in the absence of distribution gains was strong for us. So productivity remains strong for us. We do have distribution gains, and then we do have the pricing improved. as well as the component helping to drive that top line.

And Andrea, this is Tarang. What I'd add to that is the confidence we have in our initial guidance of 10% to 12% is based on that balance. We see pricing benefit, unit benefits, distribution, and the most significant would be productivity. Just one note on the productivity numbers, since Mandy did mention Target and our growth there. Just in the last six months, if you combine both cosmetics and facial skin care, e.l.f. just surpassed Neutrogena to be the second biggest brand that Target carries amongst their color cosmetics and facial skincare brands. We passed L'Oreal, I think, a year or so ago to be the number three position. I'm very pleased that we just passed Neutrogena, according to Nielsen and Nielsen Track Channels, and so feel really great about our momentum, including in environments where we've been without incremental space and the productivity model we have.

Thank you. Congratulations and best of luck.

Our next question comes from Linda Bolton-Weiser with BA Davidson. Please go ahead.

Yes, hello. So can you make, kind of on the pricing front, obviously competitors are facing the same cost pressures you are. Can you make any comments about what movements you've seen competitors making as well? Have you seen pricing go up there as well? Anything unusual that you've seen on the competitive front? Thanks.

Yeah, so I'd say it's still difficult for us. We don't tend to track competitor pricing moves or announcements. But what I tell you, it's a little difficult right now just because during spring resets, you see AUR often go up through innovation mix. So we haven't been able to tease apart how much of this is true straight price increases versus the normal spring innovation mix. As Mandy said, come August, we'll have a much clearer picture of who followed us on pricing, what that looks like, and again, are pleased with our initial elasticities and hope that holds.

Okay. And then can you just, you know, I've heard some questions from investors just on the kind of absolute like-door performance of Alicia Keys. I guess there's some doubters out there that the brand is performing well, but your verbiage is certainly very positive and it's gaining space among retailers. But is there any way you can convey like sort of the growth of Alicia Keys kind of on a like-door basis? Thank you.

You know, we haven't broken out Alicia Keys or any of our brands as a single reporting unit. What I will tell you, though, is a couple things. One is we continue to see sequential improvement at Ulta, which is the one customer we've been in the longest. And the second would be Duglas. It was the second customer we entered into. So we like the builds that we're seeing at both customers. In particular, in the quarter, we had a viral hit with our illuminating serum. That product quickly sold out. We just recently got some more. I bet you it sells out again. So it's great to see that momentum in our first quarter. color skin hybrid product. And so, again, we feel good about where we are with the key cell care and including our recent entry into Sephora Canada.

Okay. Thank you very much.

Our next question comes from Steph with Jefferies. Please go ahead.

Hi, thank you, everyone. We have a question about marketing, and maybe this is a two-part question. Tarang, for you, just a philosophical question. I think 16% was kind of a targeted level that you had modeled us to over several years. Now you're taking it up again, 17 to 19. Maybe talk a little bit about what you think the right level of marketing is for the brands. And I think historically you were powering that marketing spend through growth margin advancement, but you're guiding the flat to up slightly this year. So you're effectively borrowing from EBITDA growth. So talk a little bit about that philosophically. And then Mandy, if you could just share with us the 2% more at the midpoint, is there ad rate revenue or excuse me, ad rate costs that's going up that's a part of that inflation or is it truly kind of like for like more marketing, more impact? Thank you.

Hi, Steph. So what I tell you on our marketing and our philosophy is it's working. I take a look at our strong ROI, what we've been able to deliver in top line, and we like the momentum that we're seeing. And so our approach over time is we have stair-stepped it. Sometimes we've stair-stepped it within a fiscal year. So we said let's start in terms of our strategy, just come out and say what we expect the range to be this year and feel good about that range relative to our plans. I'd say the 17% and 19% is reflective of both the strong ROI, what we're seeing from a top-line and engagement standpoint. We feel great about it. One of the proof points of feeling great about it is if you just look at our fiscal 22 relative to where we started our guidance to where we ended up, not only did we have 23% top-line growth, but we had 22% adjusted EBITDA growth. So we feel like that model works really well. The second thing I would tell you is I don't think it's borrowing from EBITDA growth. If you recall... We're still carrying 1,000 basis points of cost headwinds, and so we do not expect all of them to persist over time. So we do see this tremendous leverage in this business, not only the leverage we got in the non-marketing parts of SG&A in fiscal 22, but also as we take a look at the cost environment going forward. We feel we've done a pretty good job of capturing the known costs or the costs that we know, and depending on what ends up happening next, With the tariff environment, with some of these other transportation costs over time, we think there's tremendous leverage in the business, but we like the formula we've been having over the last three years. I think we're the only company and our only brand in our space that's grown share all three years, that's had 13 consecutive quarters in net sales growth, and is now starting to see pretty strong profit growth in addition, and that profit growth potentially could get higher depending on what happens on the cost front.

And then to answer your question, Steph, on the two points more at the midpoint, there is a portion related to inflation, just cost inflation from an advertisement standpoint. But the majority of that is just putting further investment, as Turing spoke to, behind those high ROI marketing investments.

Okay, that's very helpful. Thank you, Turing, for that color, especially.

Our next question comes from Olivia Tong with Raymond James. Please go ahead.

Great, thank you. First one is just around, you know, obviously you sound very bullish with double-digit growth every quarter, pricing coming in nicely, and shelf space gained. Could you just talk a little bit about performance during prior downturns, you know, obviously the Great Recession being one period, and whether you've seen some trade into your brand or how you think about the impact to you from what could potentially be a more pinched consumer in the near future. Thank you.

Hi, Olivia. This is Terang. So what I tell you is as we've taken a look at some of our data in past recessionary times, mass cosmetics has actually held up pretty well. I think it's been pretty resilient. I think in recessions, prestige cosmetics tends to take a much bigger hit. And then within mass color cosmetics, e.l.f. has done well. Now, I'll caveat that by saying we were a much smaller business the last recession that we saw versus where we are right now. but I feel good in terms of the fundamentals of the business, particularly our consumption trends post-taking pricing. We've seen a real strength in terms of our track consumption over the last couple of months, which gives me confidence as we head into this. Now, we're always very balanced and cautious as we take a look at the consumer sentiment. Nobody really knows where it's going to go, but I'd say part of what I liked about our pricing approach is, as Mandy said previously, Well, we took prices up on two-thirds of items. We kept a third of our items, which were our best price points, our opening price points, $2, $3 unchanged. So I think it gives the consumer really two different options to find Elf Beauty. First is our unique capability of bringing prestige quality products and making them more accessible. So like our $10 Power Grip Primer, which is our number one item, still compares to a prestige item that's over $34.00. And then two, if you are pinched because of the inflationary environment, you still have a wealth of $2, $3, $4 items that you can get from ELF. So we like that approach in terms of being able to bring the best beauty, make it accessible, and have extraordinary value in even difficult times.

Great. Thank you. That's helpful. And then in terms of marking that 100 to 300 basis point acceleration that you're planning for this year, You talked about how some incremental cost associated with just higher cost of marketing. But is there a particular area where you are focusing more spend, or is it pretty rateable across the various buckets of social versus other areas?

Yes.

We've seen strength across the various vehicles from a marketing standpoint. So our spending overall is 100% digital. We've seen really good results in terms of our digital advertising, our direct response, particularly strong results in our PR and influencer programs. So it really is feeding that. I mentioned from a consumer standpoint, we made major gains in our latest attitude and usage study, not only in uneated awareness, but amongst consumers. other targets, advances in addition to the strength we already have in Gen Z amongst millennials, Gen X. And so we feel having a bit more on that marketing and being able to reach some of those other audiences is good for our long-term success as well. But I'd say overall, we see strength across vehicles.

Got it. And then just one sort of housekeeping question, the tax rate being to 27 to 28 for next year. That's a fair bit higher than it has been for quite a number of years. So is this just a function of starting the year and not knowing what kind of credits you could potentially get, or is there some change in terms of either tax legislation that you're embedding or a geographic mix or anything like that that's driving that rate higher?

Hi, Olivia. It's Mandy. The 27 to 28 is kind of our baseline tax rate. In the years past, we've gotten discrete benefits related to stock-based comp, and so we have just not baked any of those discrete benefits in at this point, and we'll see how that tracks throughout the year.

Great. Thank you so much.

Our next question comes from Oliver Chen with Cowan. Please go ahead.

Hi, Turing and Mandy. What we're also seeing here at Cowan is definitely a going out cycle. Would love your thoughts on color and cosmetics and where we are within that innovation period as it's had some in the past. Second, there are parts of Walmart and Target's inventories that are over-inventoried, yet beauty and personal care is still doing great. Do you have any thoughts on how they're planning inventories and how that impacted your guidance with sell in and sell out. Thank you.

All right. So in terms of the going out cycle, I definitely feel like we're seeing the same thing. If you think about our glossy lip stains, for example, that is a lip stain and really speaks to taking off your mask, getting back out there, going to different events, being social, traveling, all of those things. And so we really are pleased with how our innovation is resonating right now. And I would say that we remain bullish on color cosmetics category generally. I think we're at a unique stage where we do have this reopening. Two years, people have been kind of put away. And this summer, I think people are coming out. They're traveling. They're doing all kinds of things. So I do think that beauty will continue to be a positive recipient of that behavior. And in terms of Walmart and Target, in terms of how they're planning inventory, really no change for us. I mean, Target talked about how beauty continues to be a growth category for them. You know, we've continued to be able to service both of Walmart and Target as well as our other retailers during this time. And so we're feeling great about our ability to kind of fulfill their needs at this point.

Okay, and your loyalty program would love an update on using data or artificial intelligence and any engagement tools as you look ahead, key priorities, as that could be an important engagement tool and innovation tool. You're also ahead of the curve often, so on the topic of metaverse and NFTs, would love any thoughts.

Hi Oliver, this is Cherang. So what I tell you, our loyalty program is absolutely essential, not only for elfcosmetics.com, where our loyalty members make up the vast majority of our sales, but also in terms of feeding the rest of our digital ecosystem. The first party data that we get from our 2.9 million loyalty members which we grew membership 20% this past year, is absolutely invaluable for all of our efforts from a targeting digital marketing standpoint. So you'll continue to see greater and greater emphasis in our Beauty Squad loyalty program as we continue to enhance the experience, continue to recruit more members, and how that drives the rest of our business. I'd say our team is always at the forefront digitally in terms of blazing new ground and territories. In many respects, I'd say we already are in the metaverse. If you take a look at our efforts on Twitch and both in gaming as well as what we're doing throughout a number of our platforms, you'll continue to see more from us in that regard throughout the year. So I look forward to sharing some of our initiatives there.

Okay. final question on marketing as you increase the rate as a percentage of sales what are your priorities here whether it be top of the funnel thinking about zero and first party data collection and or how you should think about this across your portfolio thank you so today on our marketing um

I've already talked on vehicles. We see opportunity in every one of our vehicles, whether it be overall awareness building, whether it be our PR and influencer programs, even direct response. There's a good approach we have in terms of taking a look at the ROIs, as well as holding some of the money to continually test and learn in new territories. That's how we got into TikTok. That's how we got into Twitch. Even our most recent project, collaboration we did with Duncan that had over 5 billion press impressions, generated a lot of buzz, brought in a number of new users. We have a good approach of kind of allocating those dollars between things that we know will drive high ROI and things that really keep the brand top of mind and bring in new users.

So I feel really good about the approach that we have there. Thank you. Best regards.

Our next question comes from Bill Chappelle with True Security. Please go ahead.

Hey, thanks. Good afternoon. Good afternoon. Hey, just maybe a little more color on elasticity in your comment of, you know, we're pleased with where it's gone so far. I mean, just trying to understand what you're thinking for elasticity. I mean, are you viewing that as consumers are going to trade down from higher prices products within your portfolio to opening price point, which doesn't normally happen? Do you think that you benefit from other cosmetics, even mass cosmetics that are higher price trading to you? You know, I just try to understand what your even expectations are because you have a very unique kind of price positioning and price proposition. And you would think that there's probably more benefit than offset, but I'm not even sure if there's that much of a trade down within your portfolio or you're expecting that.

That's right, Bill. We do not expect a trade down within our portfolio. When we talk about elasticities, we're talking about the items that we took pricing up a dollar on. The approach we used was we modeled it after the successful pricing we did in 2019 and put some more conservative assumptions on just given the magnitude of our price increase this time and the overall inflationary environment we're in. So when we talk about elasticities, specifically those elasticities on the items we took up, we're seeing less of a unit loss and in some instances unit gains on those items, which is highly encouraging. As Mandy said, we want more time to go by just to make sure that as prices are fully reflected, we continue to see that. But that's one, the main elasticity we're talking about. In terms of the second part of your question, we do believe we're a beneficiary not only in terms of taking share from other mass brands, but from getting volume from some of the prestige players as well, particularly given the type of innovation we have and the strength of that innovation. We believe that we are actually benefiting both from share gains as well as pulling from the prestige buyers as well.

Okay, that's helpful. And then, Mandy, you have a pretty tight range. I know you always do in terms of EBITDA for the full year. Is that a kind of implication that you have a pretty good horizon to see the costs? And I guess within that, kind of thoughts on currency impacting for the full year this year?

Yeah. So yeah, we do typically always have a tight EBITDA range. And as I spoke to you know, the cost pressures that we baked in for this fiscal year are really more around transportation, logistics, container costs, things of that nature. From an FX standpoint, we don't anticipate FX to be a decrement to gross margin as we've talked in the past. And so that will be less in the narrative, more focused on the impact that we're seeing from pricing and the cost savings that our team in China continues to work on every year, helping to offset some of those cost pressures that we're seeing.

Got it. And then one last one, sneak in on the distribution gains. I know you don't talk about individual brands as much, but it does seem like, well, people's gotten some meaningful national distribution at target that I'm not sure was always there. Is that part of the gains there or is, am I just had missed it before?

Yeah, I'd say Well People has had a good presence at Target. One of our focus areas is we believe Well People can be one of the key lead brands as part of Target's clean beauty initiatives. I don't think we've disclosed anything on that front yet, but certainly it's a focus of ours. We see a lot of potential at Target with Well People. And in addition to Ulta, where we're in a subset of their doors, Well People remains the gold standard of plant-powered clean beauty that works, and we see a lot of potential for that brand, particularly those two customers, but then others that have an interest in clean beauty.

Great. Thanks.

Our next question comes from Rupesh Parikh with Oppenheimer. Please go ahead.

Good afternoon. Thanks for taking my question. So I have two financial questions. So first, just on the adjusted EBITDA line, is there any more color you can just give in terms of the quarterly cadence as you think about it for the upcoming year?

So, you know, we gave some color on top line of expecting double-digit growth each quarter. We have not given any color on what to expect from an adjusted EBITDA standpoint on each quarter. I think that if you're asking just from a modeling standpoint, you could probably just take what that EBITDA margin rate is, kind of peanut butter it across the quarters, and then you can kind of true that up as the quarters come in.

Okay, great. That's helpful. And then second, just on operating capsules, I know this year there's a heavy investment in inventory just given some of the supply chain challenges out there. I think I believe also Alicia Keyes within that number as well. Any color on your expectations for operating cash flows this year and whether you expect inventory to be another investment in the upcoming fiscal year?

Yeah, we do expect our operating cash flows to be stronger this year. To your point, Rupesh, we did have a big build-up in inventory. It was a planned build-up, as we have talked for several quarters, just to navigate through the supply chain environment. So we don't anticipate having to make that same level of investment behind inventory on a year-over-year basis, so should see some improvement in operating cash flows this year.

Okay, great. Thank you.

Our next question comes from John Anderson with William Blair. Please go ahead.

Hi, good afternoon, everybody. Two quick ones for me. One, on the comments and the prepared remarks around willingness to add additional brands to the portfolio. I know you've been talking about this for a while and have actually executed on this through acquisitions and internal brand development. Can you talk about balancing your desire to, let's say, seek, keep, Brands like Keys, Soul Care, and Well People ramp and achieve some kind of critical mass before going out and adding, maybe through acquisition, another brand. And then, you know, if you were to add another brand, what kind of categories or technologies would you be kind of looking, would be high on the priority list, I guess.

Okay. So, John, I'll tell you our first priority is really realizing the full potential of our current brand portfolio. We see a lot of growth in e.l.f. Cosmetics, e.l.f. Skin, Well People, and Key Soul Care. e.l.f. Skin is a great example. I mean, we grew in track channels. I think our consumption up 18% last year relative to the category that was up 9%. You're about to see increased support on e.l.f. Skin, our first campaign on e.l.f. Skin, the technology pipeline and innovation pipeline on that continues to be extremely strong. So we have high hopes in our current brand portfolio. That's where all our focus is. And so I'd say most of the companies, that's where their focus is. In terms of M&A, we do think there's a role for it. And I would say it's not dependent on what's the level of scale we get. We intentionally acquired well people almost subscaled. A big driver of well people for us was getting the capabilities of clean beauty gave us the confidence to reformulate 350 ELF skis last year and get ELF to a clean standard. Also gave us the capability of kind of taking well people into other distribution and be able to go there. But it was a pretty small brand when we acquired it. Key Soul Care is still a new brand. We feel good about its trajectory, but it's still in the early days. So they have a long way to go. In the meanwhile, if we do see a brand that can bring and can complement our existing brand portfolio, either leverage the capabilities we have or bring us other capabilities, including in potentially adjacent categories within beauty, we're open to that. But because we have the strong growth, organic growth within our current portfolio, we have the luxury of being highly disciplined there. So we've looked at a number of different things, decided that we didn't think the valuation was right for us, and it's passed on it. You've seen us kind of disclose some of the costs related to that. So I feel good about where we stand, main focus being in our current brand portfolio, being open to potential M&A, particularly given the strength of our balance sheet. But there's no gun to our heads in terms of timeframe or whether we even have to do an acquisition.

That makes sense. And then maybe one for Mandy. Mandy, you mentioned, I think that the outlook for gross margin in 23 was flattish to slightly higher. Is there anything from a quarterly progression perspective that we should be aware of? I'm thinking the incurrence of certain costs or the benefit of price adjustments or cost savings programs. I guess it's just a question around the cadence of gross margin through the year.

Yeah. So I think from a modeling standpoint, John, it's probably safe to just assume the annual gross margin across each quarter. I would say that there's probably some variance in the second half. If you recall, last Q3, we had a really high gross margin because we didn't have that holiday program there. So from a year-over-year growth standpoint, probably some variance there. But I would say just since this is the beginning of the year and we're just kind of resetting everything, I would just kind of use the annual across the quarters, and then we'll update as we go.

Great. Thanks so much.

Our next question comes from Mark. I'll share him with people. Please go ahead.

Yeah, thanks. Afternoon, everyone. I guess two quick questions. One, could you help just reconcile your reported sales results with the scanner data in terms of perhaps just what the untracked channels are doing? Obviously, it would imply that they're a little bit slower growing. So any sort of directional color there would be helpful. And then just Second question, on ad spend over time, your peers on average are spending a bit more than where you're projecting even for this year, up obviously from prior years. I guess, how do you think about it kind of holistically longer term? If you get this potential for some of those thousand basis points of cost that you've been incurring to come back, how much gets reinvested in the form of that line over time and kind of what in your mind drives that.

All right. Thanks for the question, Mark. In terms of reconciling sales results versus scanner data, mentioned this in our prepared remarks, but there has been a lot of just volatility between what you see on the scanner data from a week-to-week basis, kind of how our shipments have flowed, just given kind of the things that we're cycling, stimulus, and then before stimulus, there were store closures at Ulta and internationally that were kind of in the base. So I would say that, you know, I would take the scanner data as a sign of strength. It certainly is a sign of strength for us right now, but I would not necessarily correlate that to a weakness in other parts of our business if our net sales doesn't materialize in that way. You know, we have been really focused on making sure inventory levels are right at retailers and different things like that. Those can kind of shift things around versus what you see from a consumption standpoint. So I would kind of look to our guidance as, you know, that's where we expect to see things for the year, and then we'll take it from there.

Yes, and then if you look on a fiscal year basis, the scanner data would would basically indicate you're growing faster in non-track channels than you are in track channels. And so obviously some noise in the more recent, but if you took that on an annual basis, I think we feel good about growth across our enterprise. And then on your second question in terms of the spending and our approach there, Yeah, I think there's a healthy tension there. I've mentioned before the marketing ROIs are quite strong, and that's what really drives us to be able to invest more, what we're seeing from an engagement standpoint, from a top-line growth standpoint. But we also believe in good profit progression. I'm really proud, even with the cost environment we faced in fiscal 22, to be able to do 23% top-line growth and 22% adjusted EBITDA growth. In the cost environment we're in, I think that's phenomenal performance. As we look at FY23, we continue to have these cost headwinds. So we're hoping if some of those abate, we're able to flow more of them to the bottom line. But there will always be a debate of how much do we want within marketing versus the bottom line. But I'd say we definitely see the leverage potential of the business given the outsized costs that we've been carrying. And so it's a very long way of saying I think you see a little bit of both but probably a little bit more to the profits.

Our next question comes from Corinne Wolfmeyer with Piper Sandler. Please go ahead.

Hi, good afternoon, and thanks for taking the questions. So first, I just want to push you a little bit more on the commentary around the trade-down of consumers from prestige to more mass. So as that's happening, just how are you thinking about the resiliency of the key soul care brands and the well-people brands? throughout these maybe recessionary times if there are some, you know, prestige consumers that are trading down.

Yeah, I think our strategy overall as a company is best of beauty made accessible, and that includes on well people and prestige soul care. If you take a look at the quality of well people as a gold standard of plant-powered clean beauty, Its price points, average, I think, price points around $18 on Well People is significantly a better value than some of the other alternatives there. Same with Key Soul Care, where I think it's about a $23 average unit retail relative to the quality of that brand compared to other prestige brands. So we think they sit well. Now, we'll have to see. I'd say I'm particularly bullish on Elf color, Elf skin, given my previous commentaries on mass versus prestige. But particularly given that both well people and key sole care are still kind of in their early days. We see there's plenty of growth regardless of the broader economic environment.

Helpful. Thank you. And then last one for me is I know you don't break out, you know, sales of the various brands, and you've said Keys is doing well and Well People is obviously growing pretty well. But can you give us any color on how the mix of brands has changed over the past year and where you think that mix is going to go?

So you're right, Corrine, we don't break it out by brand. But I think that you've heard our commentary. The strength that you see in Track Channel really speaks to the strength that you're seeing behind the e.l.f. cosmetics and e.l.f. skin brands. in the Nielsen data, and I would say that Keys and Well are contributors to that as well, and we feel great about the mix of our brands and having diversified really from a single brand color cosmetics brand to now a portfolio of four distinct brands and feel great about how that sets us up for the longer term. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Rang Amit for any closing remarks.

Well, thank you, everyone, for joining us. I'm so grateful for our incredible team at ELF for, again, delivering outstanding results to close out fiscal 22. We look forward to seeing some of you at our upcoming investor meetings and speaking with you in August when we'll discuss our first quarter results. Thank you and be well.

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