e.l.f. Beauty, Inc.

Thank you for joining us today to discuss Elf Beauty's second quarter fiscal 24 results. I'm Casey Katton, 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 Tareng.

Thank you, Casey, and good afternoon, everyone. Today, we will discuss the drivers of our Q2 results and our raised outlook for fiscal 24. I want to start by recognizing the Elf Beauty team for delivering another phenomenal quarter. In Q2, we grew net sales by 76%, increased gross margin by 570 basis points, and delivered $60 million in adjusted EBITDA, up 122% versus prior year. Q2 marked our 19th consecutive quarter of net sales growth, putting Elf Beauty in a select group of consistent high growth consumer companies. We're one of only five public consumer companies out of 274 that has grown for 19 straight quarters and average at least 20% sales growth per quarter. We've continued to highlight three areas with significant runway for growth in color cosmetics, skincare, and international. Let me update you on our progress in Q2. In color cosmetics, we continue to significantly outperform category trends. In Q2, e.l.f. Cosmetics grew 51% in tracked channels, nearly 17 times category growth of 3%. We increased our share by 330 basis points. Out of nearly 800 cosmetics brands tracked by Nielsen, e.l.f. is the only brand to gain share for 19 consecutive quarters. We have more than doubled our market share since 2019 from about 4.5% to 10%. We are building strength upon strength with our 330 basis points of share gains in Q2 on top of our share gains last year and the year before. Given our momentum, we see an opportunity to double our share over the next few years. In Q2, e.l.f. was the number three brand nationally with approximately 10% share. In Target, our longest standing national retail customer. We're the number one brand with approximately 19% share, nearly double the level of share we had in Target just two years ago. We're focused on replicating our partnership and success at Target across other key retailers and are making great progress towards that ambition. In skincare, we continue to outperform the category. In Q2, e.l.f. Skin grew 129% in tracked channels, about 13 times category growth of 10%, and was the fastest growing among the top 20 skincare brands. We grew our share by 80 basis points, increasing our rank to the number 14 brand as compared to the number 19 brand a year ago. e.l.f. Skin today holds a 1.6% share and a significant runway with the number one brand holding nearly 15% share. e.l.f. remains a Gen Z favorite, helping drive the share growth we've seen these last 19 quarters. In Piper Sandler's recent Taking Stock with Teens Fall survey, e.l.f. Cosmetics remained the number one teen favorite cosmetics brand for the fourth consecutive season. We grew our share by 13 percentage points versus a year ago to 29%. We believe this is a great indicator of brand strength. For perspective, no other cosmetics brand has surpassed even 20% in the past five years. e.l.f. Skin ranked in the top 10 favorite skincare brands for the second time. e.l.fcosmetics.com was a top 10 beauty shopping destination for teens for the third consecutive survey and was the only brand site on the list. Looking outside the US, we grew our international net sales 157% in Q2. fueled by strength in Canada and the UK. e.l.f. outpaced category growth by more than 10 times in Canada and more than seven times in the UK, fueling share gains in each. e.l.f. today is the number four brand in Canada with a 7% share and the number six brand in the UK with 5% share. We see significant runway to expand our brands globally. Our relentless focus on our five strategic imperatives continues to drive results across our brand portfolio. Let me walk through how each of these strategic imperatives underpinned our strength in Q2. Our first strategic imperative is to build brand demand. Our disruptive marketing engine continues to redefine what's possible in beauty. In Q2, we continue to break boundaries in gaming, entertaining short-form content, and record-setting collaborations. We leaned into gaming with the launch of a limited edition makeup collaboration in August with Luzerfruit, also known as Lufu, one of the world's top female gamers. We dove further into entertainment and short-form digital content with Georgia Shore icon Snooki, leaning into the nostalgia of the moment to underscore the importance of SPF and our sun-touchable franchise.

I'm Snooki, and I have an important message. The sun's a two-faced... I know you look back and think, but Snooki, you had a really healthy natural glow. Well, I got news for you, . I tanned irresponsibly. Luckily, change is possible. The new sun-touchable sunscreens from Elf Skin can help protect you from the sun's drama, like the sunburns, early aging, and other messed up stuff. So please tan responsibly. No one likes a burnt meatball.

All right, everybody, let's cut.

So you sure you got everything for me? You sure you got it all? Because I got a lot to say. The sun's up. It even burns here when it's cloudy out. Can I also steal this? Because I would love to have this at my show house.

We launched another record-setting collaboration in September. As part of our strategy to continue building awareness and reach new audiences, we reunited with cultural icon and award-winning actress Jennifer Coolidge to launch Dirty Pillows. This limited edition lip collection and campaign was inspired by an outtake from our big game commercial shoot.

I would come up with a shade very similar to this, a little bit lighter, and I'd call it Dirty Pillows.

We took an unscripted moment and created a premium lip collection that launched on elfcosmetics.com at elf speed. Our Dirty Pillows campaign explores a world where one's lips always come first. Here's your latte, Jennifer.

I love you. What's going on?

What are you doing?

I was having a terrible nightmare. I came across a bowl of marshmallows. I was starving to death, so I kissed each marshmallow before I ate it. Huh? I didn't like it. I'm really tired. It sounded like you liked it. You're going to get lip gloss all over the bed again. Yes.

The response from our community has been incredible. Our Dirty Pillows campaign earned over 11 billion media impressions in 48 hours, our highest ever for a product collaboration. The initial drop of Dirty Pillow Lip Kit sold out within two hours, with over 40% of purchasers new to e.l.f. Over the past four years, we've increased our marketing investment from 7% of net sales to 22%. Our marketing investment is working, driving ROI multiples above industry benchmarks and helping us reach new audiences. Our most recent attitude and usage study underscores the broad base improvement we've seen since 2020. Our brand satisfaction jumped 16 points to 80%, the highest among our competitive set. Our unaided awareness in the U.S. has doubled from 13% to 26%. That 26% unaided awareness today compares to the leading U.S. mass cosmetics brand at 52%, illustrating an opportunity to double again as we move forward. Building upon our success in the U.S., we took steps to accelerate brand awareness in the U.K. with our first-ever community-led brand campaign. When we asked our growing community in the U.K. what ELF means to them, it sparked a campaign that fueled a movement. In September, the UK lit up with our first 32nd UK advertising spot across social channels, tube stations, digital screens, and experiential pop-ups, encouraging everyone to get involved and hashtag express your elf.

What does elf stand for? I live space.

Every layer.

Fresh.

Every life. Free. Everyday luxury. Finally. Eyes like... Fit. Echoing little... Feelings. Enter looking fabulous. Exit looking famous.

Earthlings.

Our second strategic imperative is to power digital.

Founded as a digitally native brand, e.l.f. remains the only top five mass cosmetics brand with our own direct-to-consumer site. Our digitally led strategy continues to serve us well. Q2 digital consumption trends were up over 75% year over year. Digital channels drove 17% of our total consumption in Q2 on a much bigger business as compared to 16% a year ago. We're seeing terrific engagement on our e.l.f. Cosmetics mobile app, which now boasts a 4.8 star rating and over 1.6 million downloads. Our monthly active user growth is outpacing that of traditional beauty retailers, and over 90% of our transactions on the app are driven by our most loyal Beauty Squad loyalty members. Beauty Squad now has over 4.1 million members, with enrollment growing over 25% year over year. Our loyalty members are a key part of our digital ecosystem, driving almost 80% of our sales on elfcosmetics.com. Our third strategic imperative is to lead innovation. We have a unique ability to deliver holy grails, taking inspiration from our community and the best products in prestige and bringing them to market at extraordinary value. Our innovation continues to receive industry recognition. In the highly coveted Allure Best of Beauty Awards, four of our products garnered Best of Awards, the largest number of awards we've received in a single year, and marking the 11th consecutive year e.l.f. Beauty has won a Best of Beauty Award. Our innovation engine has built category leadership over time. e.l.f. has the number one or two position across 16 segments of the color cosmetics category, which collectively make up over 75% of e.l.f. cosmetics sales. We continue to deliver strong sales growth and share gains in each. Our fourth strategic imperative is to drive productivity with our retail partners. Elf continues to drive best in class productivity on a sales per linear foot basis with both Target and Walmart, our two largest customers. This productivity is earning us additional space with our retail partners. As a reminder, In spring 2023, we expanded space in Target, Walmart, CVS, and Shoppers Drug Mart. And in fall 2023, we expanded space in Ulta Beauty, CVS, and Walgreens. We're pleased to announce that we'll be expanding our space in spring 2024 with Shoppers Drug Mart in Canada and with Boots in the UK. Last month, we also launched ELF in Italy with Douglas, furthering our international expansion.

Our fifth strategic imperative is to deliver profitable growth.

Since 2019, we've been focused on the flywheel of investing behind our high ROI marketing and digital initiatives to drive top line growth while also expanding our adjusted EBITDA margin. We again delivered on this winning formula in Q2 with both strong top line growth and adjusted EBITDA margin expansion. Supported by a combination of our strong sales growth, gross margin expansion, and leverage in our non-marketing SG&A expenses, As we've grown, we continue to make investments in our infrastructure. Our supply chain offers the best combination of cost, quality, and speed in our industry, and has been able to keep pace with the strong consumer demand we're seeing. This year, we'll begin implementation of SAP to continue to optimize our operations and core processes. We're also planning to make investments to increase our distribution capacity to support our growth. Even with this ongoing investment, we expect to continue to deliver adjusted EBITDA margin expansion in fiscal 2024. We believe these ongoing investments in our team and infrastructure position us well to continue to drive profitable growth. In early October, we officially closed on the acquisition of Notorium and welcomed its passionate team of employees to the Elf Beauty family. Notorium is a fast-growing, disruptive brand on a mission to make high-performance skincare accessible to all. The acquisition doubles our skincare presence to approximately 18% of retail sales from approximately 9% on a standalone basis. Notorium has seen exceptional growth, with net sales growing at approximately 80% CAGR over the last two years. We're still in the early days post-closing and look forward to realizing the significant opportunities we see ahead for the brand. Our unwavering focus on executing our five strategic imperatives is driving our results. At the same time, I'm proud that we continue to lead with purpose as we strive to create a different kind of beauty company, one that is both purpose-led and results-driven. Our second annual impact report launched in September demonstrates how these go hand in hand. It shows how acting with purpose to further our positive impact drives more successful business outcomes. Our commitment to our culture and people was recently spotlighted by US News and World Report, who named Elf Beauty to its annual list of best companies to work for. We were also recognized by Newsweek as one of America's greenest companies, recognizing our progress in sustainability. In summary, we believe the white space in color cosmetics, skincare, and international, coupled with our relentless focus on our five strategic imperatives, will continue to fuel our ability to win in fiscal 24 and beyond. I'll now turn the call over to Mandy.

Thank you, Terang. I'm pleased to share the highlights of our second quarter results, as well as our raised outlook for fiscal 24. Our second quarter results were outstanding. Q2 net sales grew 76% year-over-year, driven by broad-based strength across national and international retailers, as well as digital commerce. Our net sales growth was led by higher unit volume, which contributed approximately 56 percentage points to growth, with Mix adding approximately 20 percentage points. e.l.f. was the only top five cosmetics brand to grow units according to track channel data. Q2 gross margin of 71% was up approximately 570 basis points compared to prior year. We saw gross margin benefits from lower inventory adjustments, favorable FX rates, improved transportation costs, margin accretive mix and cost savings, which more than offset costs related to retailer activity and space expansion. On an adjusted basis, SG&A as a percentage of sales was 45% in Q2 compared to 46% last year. We drove significant leverage in non-marketing SG&A expenses primarily as a result of our strong top-line trends. Marketing and digital investment for the quarter was 21 percent of net sales, up from 16 percent in Q2 last year. We continue to expect marketing and digital investment in the 22 to 24 percent range for the full year of fiscal 24. Given first half spending at 18 percent of net sales, we expect to see spending above our annual range in the back half. Q2 adjusted EBITDA was $60 million, up 122% versus last year, and adjusted EBITDA margin was approximately 28% of net sales. Adjusted net income was $47 million or 82 cents per diluted share compared to $20 million or 36 cents per diluted share a year ago. The increase across profitability metrics was driven by our strong net sales growth, gross margin expansion, and leverage in our non-marketing SG&A expenses. Moving to the balance sheet and cash flow. Our balance sheet remains strong and we believe positions us well to execute our long-term growth plans. Our ending inventory balance was $147 million, in line with our expectations and up from $81 million a year ago. The difference is a combination of two things. As we said last quarter, we plan to build back our inventory levels through fiscal 24 to support the strong consumer demand we're seeing. In addition, approximately $37 million of the increase is the result of taking ownership of inventory from China when it ships versus when it enters our distribution center here in the U.S. We ended the quarter with approximately $168 million in cash on hand compared to a cash balance of $85 million a year ago. I'm also pleased with the approximately $27 million in free cash flow we generated in Q2. We ended the quarter with a net cash position and less than one times leverage in terms of total debt to adjusted EBITDA. Subsequent to the quarter end, in early October, we closed the Naturium acquisition. We funded the $355 million acquisition, largely using cash on hand and access to our existing credit facility, as well as $72 million of Elf Beauty stock issued directly to founders and key management, which represented approximately 600,000 shares. We expect our liquidity position to remain strong with relatively low leverage post a transaction, with net leverage expected to be less than 1.5x adjusted EBITDA. We expect our cash priorities for the year to remain on investing behind our growth initiatives and supporting strategic extensions. The initiatives we're focused on this year across our brand portfolio include continuing to invest in our people and infrastructure, our ERP transition to SAP, as well as increased working capital and distribution capacity to support the strong consumer demand we're seeing. Now let's turn to our updated outlook for Fiscal 24. As we look to the second half of Fiscal 24, we are well positioned to deliver another industry-leading year. We are raising our full-year outlook to reflect ongoing momentum in our underlying business, as well as the addition of Noturium. For the full year, we now expect net sales growth of approximately 55% to 57%, up from 37% to 39% previously. Adjusted EBITDA between $197 to $200 million, up from $171 to $174 million previously Adjusted Net Income between $144 million to $146 million, up from $125 to $127 million previously and adjusted EPS of $2.47 to $2.50 per diluted share, up from $2.19 to $2.22 previously. We continue to expect our fiscal 24 adjusted tax rate to be approximately 17 to 18%. Lastly, we now expect a fully diluted average share count of approximately 58 million shares, up from 57 million shares previously. As a reminder, Noturium is expected to generate approximately $90 million of net sales and $17 million in adjusted EBITDA in the 12 months ending March 31, 2024. The acquisition of Noturium closed in early October and Noturium will start to contribute to our results in fiscal Q3. We continue to expect Noturium to contribute approximately $48 million in net sales. $9 million in adjusted EBITDA, and $0.04 in adjusted EPS on a fully diluted basis in our fiscal 2024. Let me provide you with additional color on our planning assumptions for fiscal 2024, starting with top line. On an organic basis, excluding the acquisition of Noturium, our raised outlook implies organic net sales growth of approximately 46 to 48 percent, up from 37 to 39 percent previously. Our raised outlook reflects the outperformance in Q2 we saw relative to our expectations, as well as expected strength for the balance of the year in our underlying business. Let me spend a moment on Nielsen track channel trends. As a reminder, track channels only represent a portion of our sales. When accounting for the acquisition of Naturium, track channel data covers about 50% of our sales. Let me provide some context for what we've seen recently in track channels and set the stage for what you could see for the balance of the year. For context, our Q2 results were exceptional, with ELF growth in track channels accelerating relative to Q1 on both a one-year and two-year basis. As we look to Q3 and Q4, we believe our track channel growth for ELF could range between 20% to 50% growth. In Q3, we could be at the higher end of that range and in Q4, we could be toward the lower end of that range given the compares and the base we are cycling. In both quarters, we could see track channel trends on a two-year basis remain at or above the 90% level we've seen in the latest 12 weeks. Across quarterly, one-year and two-year track channel data, we continue to drive exceptional, consistent, category-leading sales growth. Turning to gross margin. In fiscal 24, we now expect our consolidated gross margin to be up approximately 225 basis points year-over-year, as compared to our expectation for up 150 basis points previously. The improved outlook is largely a result of our outperformance in Q2, aided by lower inventory adjustments in the quarter and favorable mix. In terms of the key puts and takes for the rest of the year, we continue to expect gross margin to benefit from lower transportation costs, favorable FX rates, margin accretive mix and cost savings, which are expected to more than offset costs related to retailer activity and space expansion. now turning to adjusted EBITDA. Our outlook now implies adjusted EBITDA growth of approximately 69% to 71% versus prior year, up from 46% to 49% previously, and adjusted EBITDA margin leverage of approximately 190 basis points year over year, as compared to approximately 150 basis points previously. The improved outlook is based on expected strong net sales growth, gross margin expansion, and leverage in our non-marketing SG&A expenses. We are quite pleased to be again in this position to meaningfully raise both our net sales growth and profitability outlook. In summary, we delivered a phenomenal second quarter. Our disciplined execution behind our five strategic imperatives has driven category-leading results over the last 19 quarters. The significant white space we see across color cosmetics, skin care, and internationally gives us confidence that we are still in the early innings of unlocking the full potential behind our brands. With that, operator, you may open the call to questions.

Thank you. We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the key. To withdraw your question, please press star then two. Please limit yourself to one question. At this time, we will pause momentarily to assemble our roster. Our first question comes from Olivia Tong with Raymond James. Please go ahead.

Great. Thanks. Good afternoon, and congrats on a great quarter.

Thanks.

My first question, you know, similar to previous queries, you're raising the guide by more than the beat on sales up. if we adjust the base renditorium up 56 million and you beat September quarter, at least by consensus, by 18 million. So can you just talk about trends you're seeing so far this month? You referenced the Nielsen data. Maybe could you talk a little bit about performance in non-track channels versus the track channels and just catch us up to date on what you've seen this month? Thank you.

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

Our next question comes from Dara Mastanian with Morgan Stanley. Please go ahead.

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

This is Terang. As Mandy said, we feel great about the fundamentals behind our business and the trends that we're seeing, particularly the delivery between our value equation, powerhouse innovation, and marketing engine. Nielsen's naturally going to bounce around a little bit, given that in the back half we're comping 50% to 80% growth in Nielsen. So we could see Nielsen range anywhere from 20% to 50%, depending on what's going on in the base period. As Mandy said, the two-year stacks are still incredibly strong. In terms of the fundamentals, as I step back, there are really three things that most strongly correlate with our share price. That's market share, net sales growth, and adjusted EBITDA growth. And if I look at all three of those, we've never been stronger. On market share, it's pretty astounding that we picked up 330 basis points of share growth. And while we've doubled our share over the last few years, we see an opportunity, again, double our share over the next few years. And we point just as closely to Target, our longest-standing national retail customer, where we're their number one brand, close to a 19 share. So I feel really great in terms of what we continue to do from a market share standpoint. Net sales growth, Mandy told you, our top end of our range now is 57% net sales growth, and adjusted EBITDA growth is even higher at 71% growth. So the core fundamentals we're focused on, Our field will continue to stay strong, and we continue to see great momentum. And then in terms of shelf space and innovation, again, we feel great on those fronts. We picked up a ton of space this fiscal year. We're continuing that momentum with additional space both at Superdrug and Boots. And in subsequent quarters, you'll hear us talk about other retailers in terms of the space we pick up, noting that the most important thing is the productivity drive, being the most productive brand at Target, Walmart, and other retailers. and our innovation pipeline has never been stronger. We continue to have these holy grails that consumers can't seem to get enough of, and our ability to shine a light on those holy grails through our marketing has been a winning formula that continues to propel the top line and our adjusted EBITDA margins.

Our next question comes from Anna Lazul with Bank of America. Please go ahead.

Hi, good afternoon, and thanks very much for the question. I was wondering if you're seeing any trade-down benefits in your results and whether this is aiding market share growth in addition to shelf-based gains. And just regarding the strength in Elfskin, how are you splitting that incremental shelf-based gains to this brand versus Elf Cosmetics? Thanks.

Yeah, so I would say, hi, Anna. I would say overall we're not seeing a wholesale trade down from prestige into mass. Both sides of the pie continue to do well from a beauty standpoint. And so I think really what is driving our performance, you know, one thing we pointed to for this quarter is the increase in awareness that we're seeing behind the Elf brand. We've doubled our awareness over the past few years. And that has really allowed us to bring more Gen X, millennial into the brand and continue to penetrate with Gen Z as well. And so I do think more folks coming into the franchise has really served us well. You can also see that in our unit growth. As I quoted, 56 points of our sales growth is really driven by unit volume, which is really encouraging to see. And so we are feeling great on that side. from Elfskin certainly continues to be a focus for us. We called out skin care, one of our priorities and areas of white space that we're going after. And how we think about skin care on the shelf sets, depending on the retailer, it's either housed with our color cosmetics or separately. And as we get shelf space gains, especially in those areas where we do have it housed with color cosmetics, we're making sure that we have the best of our skin care available on those sets as well. We have talked in the past about seeing skin care represent almost 20% of our sales on elfcosmetics.com. So we know that there is a big opportunity for us to continue to penetrate skin care within our retailers as well.

And the only other thing I would add is we're tremendously excited now with the acquisition of Notorium. It doubles our presence in skin care to about 18% of our business. We have two incredible growth assets in skin care to continue to realize that potential.

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

Yes, hi. You've talked a couple of times on the call about your increase in brand awareness in recent years, and I was wondering, what do you need to do to kind of fuel the next stage of jump up in awareness? Is it just more of the same actions, or are there something different or new in the next stage? Do you need to add TV advertising, maybe in the international markets? Can you just comment on that? Thank you.

Hi, Linda. This is Terang. First of all, I'd say part of the reason why we've taken our marketing levels up over time is because it's working. We have exceptionally strong ROIs, multiples above industry benchmarks, and so that's led us to continue to invest more. And that has, in turn, brought greater awareness to the brand, as we talked, doubling that awareness from 13% to 26%. We still see a massive opportunity from an awareness standpoint. As we said, the market leader is sitting at about 52% on native awareness. And so the strategy we're following going forward is a combination of what's worked for us, our digital approach, which not only has led to leadership amongst Gen Z, but bringing in more millennials than Gen X. as well as new tactics. One of the reasons why we did a spot on the big game this past year was being able to cast a much broader net to consumers that may not know of ELF. And we find both those strategies to be effective and continue to increase our awareness, not only in the U.S., but our recently launched awareness campaign in the U.K. we feel really great about. So you're going to continue to see us do and continue to disrupt the market, entertain our community, in a way that resonates with them and continues to bring more people into the franchise.

Our next question comes from Andrea Teixeira with JPMorgan. Please go ahead.

Good afternoon. Thank you for taking my question. So, Tarang, you spoke about the innovations, especially in the white space, using skin. as well as in lipsticks and mascaras, which you under-skill relative to what your potential power can be in your market share. Can you comment a little bit on how you progressed towards the objective of having a similar market share? And interesting, in my channel checks, I've been seeing some stock outs in lip, especially your lip oil. So I wonder if embedded in your guidance you have that improving or is that anything you can share in terms of getting more, I would say, capacity to execute the plan. And obviously you have a very fast response to market, but just curious if you were able to most recently improve that. And then just related to that, I know KISO Care also has been very, that has been increasing awareness and in the past we were able to get into Sephora Canada. Just wondering if part of the opportunity for taking Naturion and for taking, of course, your hero products everywhere, is that any chance you can see also KISO Care expanding even further into other areas or it's going to be mostly on the on the, you know, the core products in e.l.f. Thank you.

Hi, Andrea. So I would say we're making tremendous progress across every category. We're competing again. We talked about our leadership in 16 subsegments of color cosmetics. We're also conquesting some of these bigger other categories. So if I look at skin care, you know, I feel great. e.l.f. skin was up 129%, almost 10 times where the category was for the quarter. really driven by the innovation that we have in that category and awareness building we're doing there. You mentioned Basquera, where we've also had good share progress, as well as Lip. On Lip, I think a lot of this has to do with our approach to innovation, where we're constantly listening to our community and taking inspiration from them and prestige. Our community a while ago had seen a prestige Lip Oil product that they really liked, but it was priced at $40. So just in this past quarter, a few weeks ago, we launched our lip oil priced at $8 versus that prestige item at $40, and we've just seen incredible response. As you mentioned, I mean, I think it sold out the first time we put it out. We have gotten more inventory on that product, and you'll continue to see it do extremely well, and it's significantly building our presence in lip. So we feel good about our two-pronged innovation strategy, really focusing on these franchises that continue to build year after year. as well as conquesting some of these other bigger categories and are making great progress there. And then in terms of Key Soul Care, we feel great about our efforts to increase awareness on Key Soul Care. We had a pretty big innovation in the last few months in It's Like Skin. Saw tremendous response to that. And you will be hearing about additional distribution points in the future on Key Soul Care as we continue to build awareness on that brand and certainly couldn't be more excited about Notorium and what we could do with Notorium as a reminder Notorium did close to $80 million in net sales, or $90 million in net sales, actually, really with a pretty limited distribution footprint, primarily at Target, Amazon, and their own site. So we feel that we can increase its presence with current distribution as well as in the future take it to new distribution points. So multiple vectors of being able to address the white space we have, both in skincare as well as some of these other categories.

Next question comes from Bill Chappell with Truist Securities. Please go ahead.

Thanks. Good afternoon. Good afternoon. I just wanted to, I mean, this is kind of a recurring theme of you beat the quarter, especially on gross margin, and step up the sales and marketing even further than we would rent and repeat. And I get that. Now, are you continuing to reinvest back in core U.S. business, or are you looking to maybe accelerate Deuterium, accelerate U.K., accelerate some of the international opportunities and reinvest more there, or is it still there's just so much opportunity in the U.S. that it's going back primarily there? Thanks.

So, Bill, we see opportunity in both areas. We've obviously continued to reinvest in our core business in the U.S. We're seeing great results, as we talked about, not only in awareness, but the brand satisfaction scores jumping all the way up to 80% satisfaction, the highest in our competitive set. We know that marketing is working, and so you'll continue to see us build awareness and our equity in the U.S., But because we have a much bigger base and a bigger percentage in terms of marketing and digital, we're also able to pursue some of the key growth vectors. We talked about our investment in skincare in addition to color cosmetics as well as international. Part of how we drove 157% growth in international is we are investing behind awareness in the UK and our efforts in Canada as well. as well as expanding in other countries. Just a couple weeks ago, we entered Italy with Douglas in Italy. Douglas told us it was probably the best launch they've ever seen for a brand, and we see tremendous response from consumers. So I think the money that we have within the range that we've talked gives us enough money to pursue both continued focus on our core as well as expanding to some of these new areas.

Our next question comes from Peter Graham with UBS. Please go ahead.

Thanks, operator, and good afternoon, everyone. So, you know, really strong international growth in the quarter in your two core markets, and you called out the initial expansion into Italy. You know, I know it took you kind of several years to kind of get to this 5%, 6% share level that you're currently at in those markets, but can you maybe just talk about the opportunity for Italy specifically? And then maybe as you think about other markets and kind of the timeline around that, is there anything you can share? Are you looking at additional markets in the near term? So, yeah, just any color on the international strategy would be helpful. Thanks.

So, Peter, on international, we're seeing real strength, primarily in Canada and the U.K., the first two countries we expanded in. And we mentioned in the call, but our Canadian business, is up 10 times where the category growth rate is. Our UK business is up seven times where the category growth rate is. So the primary area of growth so far is coming from those first two markets that we really focused on, and we see a tremendous potential to be, over time, a top three brand in both those markets. In addition, you're going to see us take the same disciplined rollout strategy that we followed in the U.S. to other markets. We're super excited about what we're going to be able to do in Italy and the response of the brand there you will hear about additional countries in the coming quarters. I don't think you'll ever hear us talk about going into 30 countries all at once. We like this approach of both with our own website as well as following kind of a leading retailer in a particular country to be able to really penetrate that and grow from there. So I see a ton of growth potential both in Canada and the U.K., excited about Italy, and you'll hear about additional markets in the coming quarters.

Our next question comes from Susan Anderson with Canaccord Genuity. Please go ahead.

Hi. Good evening. Nice job on the quarter again. I was wondering, I guess just to follow up on the international market, can you maybe just talk about the margin structure versus where you're at in the U.S.? I guess is it similar to the U.S. business? And then also just on Naturium, I'm curious if you think there's some learnings there you can take and maybe apply to ElfScan to drive new product introduction and growth? Thanks.

Hi, Susan. Thanks for the question. So from a margin standpoint, pretty similar margins internationally in the U.S. I would say the one key difference is the tariff, right? As we ship product into the U.S., those products are tariffed into our international markets. As they ship directly, we do not see those same level of tariffs. And so that would be one advantage to the international markets overall.

And then on Notorium, one of the things that led us to that acquisition was not only the tremendous growth rate and potential we saw in Notorium, but the team. They have an entire team with real skin care expertise. So we definitely feel we're going to learn things from Notorium that can be applied to elf skin and vice versa. And so I think that was one of the real benefits of Notorium acquisition is it's highly complementary to elf skin. They have tremendous expertise in formulation, in education, their engagement model, which we definitely see has relevance to health skin. And then, in turn, our capabilities from both the distribution and being able to ramp up their marketing efforts we think will benefit Notarium as well. So it's a perfect marriage that way.

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

Hey, good afternoon, team, and thanks for taking the question, and congrats on a really awesome quarter. I'd like to touch a little bit on the investments you briefly touched on in the prepared remarks with some SAP spend and adding more distribution capacity. Thought it's going to add a little bit of pressure in the back half. I know you're not guiding to the next fiscal year, but how should we be thinking about those investments as we head, you know, beyond the next couple quarters and the impact to the margin profile there? Thank you.

Thanks for the question. So in terms of the SAP and our distribution capacity, all of that is already baked into our guidance overall. And so as we think about kind of how we raised our top line and our adjusted EBITDA, those are already reflected into our guidance. And especially on the SAP side, and as we think about some of those capacity build-outs from a distribution standpoint, a lot of that is going to be capital that you'll see throughout. And so we'll eventually flow through from a DNA standpoint, but again, not looking out into fiscal 25 just yet, but know that whatever we've gotten in there, it's already embedded in our guidance.

And the only other thing I would add is this has been a continual investment story. So this is not one where we've robbed certain areas for years and now have to make a huge investment. We've invested every single year in terms of our technology stack, in terms of our infrastructure. And so we don't see it as outsized other than you'll see a little bit more capital. But other than that, we feel pretty good about both those investments as well as the ability to continue to meet the demand that we're seeing.

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

Good afternoon. Thanks for taking my question, and also congrats on a really strong quarter. I wanted to see if you could provide any more commentary on the Q3, Q4 cadence. I don't know if anything you share on sales or EBITDA just to help us from a modeling perspective.

Yes, so in our prepared remarks, I did indicate that Nielsen could be anywhere between 20% and 50% for the back half, and Q3 could be at the higher end of that. Q4 could be towards the lower end of that as we start to cycle higher compares in the base. As you know, we don't give quarterly guidance, so that's kind of the color that we're given specifically. for the second half and you know our guidance approach is to be very balanced and that that has worked quite well for us and we're just going to take it one quarter at a time but really pleased with our overall raise to 57 percent on the top end our next question comes from john anderson with william blair please go ahead hey good afternoon everybody and congratulations on the quarter

Um, I have a quick, quick two part question. Uh, first on pricing, pricing has been a pretty consistent contributor to the business. Uh, it was about 20% or so in fiscal 23. Uh, it's running about 20% through the first half of fiscal 24. Do you think price mix continues at that kind of level? Uh, and, and what is driving that? Is it, is it a big mix element? Is it list price increases? Just trying to get a sense for how much room you have for that to continue. And then the second question is on the marketing and digital. The full year outlook implies, I guess, that you'd be spending in the second half at kind of a high 20s rate, you know, 28% of sales or so. And I think that would be kind of a record level for the company. You know, do you have the plans in place already, you know, on how that will be spent? And can you talk a little bit about whether it's more of kind of the same type of vehicles or whether there is, you know, Kind of another big game consideration in there as well. Thanks.

All right. Thanks, John. So from a pricing standpoint, I'll just give you a little bit of history on how we've approached pricing. We've really only taken two price increases in our history. The first was in 2019 in response to tariffs. And the last one was in 2022 in response to the inflationary environment. So largely what you're seeing from a price standpoint, when I talk about 56 points driven by volume and the remainder driven by price, that's largely mixed. And that really speaks to the innovation that we've introduced more recently. We have items like our Power Grip Primer and our Portless Putty Primer and our Halo Glow ranging from $10 to $14 worldwide. but still very much resonating with our consumers. And so that is really what's influencing that pricing piece, more so on the mixed side. We actually did not take any pricing here in the U.S. in fiscal 24, and so the mix is really what's driving that increase that you're seeing.

And on the marketing front, John, we feel great about what we're going to invest that money in. It's a combination of the strategies that have worked, particularly in our digital advertising, our broader awareness efforts. Many of these game-changing collaborations, the one we just did this last quarter with Jennifer Coolidge on Dirty Pillows, I think we got something like 11 billion impressions on. sold out of the product right away. We're going to have to get more for the holiday time. So you're going to continue to see that, and we feel good about where we're going to put that money against, and including in some of the new areas I talked about in terms of continue to ramp up skin care awareness, Notorium International. So we have plenty of good places to put that money and continue to see exceptionally strong ROIs.

Sorry, I want to circle back on the pricing piece as well, on the international piece. I said we did not take pricing in fiscal 24 here in the U.S., but there was a small one that we did take internationally that actually is kicking off here in October.

And that pricing internationally is just really to align prices between the U.S. and international. We had taken pricing here early last year, in early 22. We did not take pricing then in international, just given when we had taken the last international price increase. So it's really just to harmonize our pricing structure globally.

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

Hi there. You've had a really great result. Congrats. On the cosmetic side, what do you think it will take for you to get to number one market share? What are the bigger opportunities as you think about product or channel as you scope it out in your strat plans? Second, on skin care, how are you thinking about hero products and contrasting that with what you've done in cosmetics or not, given that it's a category with efficacy and different kinds of dynamics. Third and finally, international has been a big opportunity in the past as well, like earlier in your development. What's different now about how you're approaching it? It seems to be really working. Just would love some thoughts on that too. Thank you.

Yeah. So, hi, Oliver. In terms of your first question, what will it take to get to number one market share, it's really replicating what we've been able to do at Target. And if you look at our Target business, you know, we mentioned we're close to a 19 share there, almost 600 basis points ahead of number two, maybe in that market or in that channel. That number one position, we basically have done over the last few years here, and it's been a combination of three things. One, they've dedicated much more space to Elf. than we see in other retailers, and we're in the process of replicating some of those space gains in other retailers to the level of disruption that ELF has in their stores. I mean, at any given point, I think we're in about four or five different spots within a target store, and then third is the way we partner from a marketing and overall multifunctional standpoint. And really, I have a lot of confidence that we can do those same things in other retailers. If I take a look at the progress we've made just in a few years within Ulta Beauty, we're already one of their top cosmetics brands, and that was even before they expanded the space that they most recently did in the fall. Walmart remains a huge opportunity. I see progress there as well. And then Drug. Drug is still rolling out the brand. So I think over the next few years, as we get better presence in these retailers, as we partner the way we have partnered with Target, I can see us get to that number one share position over time. And then, by the way, Target's not standing still. Target's one of our best retail partners and customers, and the level of collaboration we have. They recently held a meeting at Target. They instigated, which is how could Elf become their first billion-dollar retail brand in Target? And for perspective, we're going to do about $400 million in of retail sales in Target this year. So I think it's a really encouraging sign when even your top customer is coming to you and figuring, you know, how can you more than double even within there. So a great deal of bullishness in terms of our market share. And then in terms of skin care, you know, I think we're seeing some of the same parallels that we saw with Elf Color. If I take a look at our skin care, we do have some real hero franchises. I take a look at our Halo Holy Hydration franchise. And what we've been able to do there, consistently build that franchise year after year. Our most recent franchise, Untouchables, is off to an incredible start. The first three items in that franchise, we're just seeing real resonance in. So we'll continue to map out the innovation that we have in both Elfskin as well as the Pipeline and Nectarium. It's really quite rich, so I feel great about the products we have there. And then finally, in terms of international, I'd say what's different from the past is we have real proof points in both Canada and the U.K. and that consistent approach that I talked about in terms of how we were able to penetrate both those markets with leading retailers. In addition, we're building out a very strong international team. So we opened up Entity in the U.K. I think it was last year. We have a team there. It's already over 30 people. That's really focused on our international expansion, as I mentioned, Italy being one of the most best recent examples there. So feel great on all three fronts in terms of our ability to continue to build market share and color. Obviously, the pipeline we have in skincare with really all three of our brands, Elf Skin, Notorium, and Kiesel Care. And then internationally, just tons of white space there relative to our global peers.

Our next question comes from Marcus Drostjan with Spiegel. Please go ahead.

Thanks, and good afternoon, everyone. I'm curious. Scanner data seems to be showing a little bit of a slowdown in cosmetics or makeup. Thoughts about what's driving that? What do you think influences that specific sector of the beauty category going forward? And then secondly, Please just remind us, as Elfskin grows above overall growth, where is that product placed today, and where do you think you can go over time? Meaning, can you move that away from the typical sets, put that with the other skincare products, and does that make a difference as you do that? Thanks.

So, overall, Mark, I'd say I'm quite bullish and have been for some time on the color cosmetics and skincare category. And that's definitely what you saw. You saw a great resurgence after the pandemic. You know, you're going to have some bouncing around in terms of some scanner data, different periods. Overall, we're seeing good activity in the category. And by that, I mean very strong consumer resonance in terms of wanting to get out there and express themselves, good innovation, good levels of investment. So I actually... and quite bullish on the category going forward as you go through. And then do you want to take this?

Yes. And then on Elk Skin, as I spoke to earlier, Mark, really depends by retailer where we're housed today. In Target, as an example, we're in line with Color Cosmetics. At Ulta, we are actually in the skin care set. And so we see an opportunity to continue to test and learn from both of those sets to see what is, you know, most, you know, going to drive the most sales in each of those retailers. But eventually we could see Elfskin potentially on its own in the skincare set. One of the things we really loved about Naturium, actually, they are in skincare within the skincare set and have done a phenomenal job. So a lot of things that we can learn from that brand as well.

This concludes our question and answer session. I would like to turn the conference back over to Turing Amin, Chairman and CEO, for any closing remarks.

Well, thank you for joining us today. I'm so proud of our incredible team at Alpha Beauty for delivering an outstanding first half of fiscal 24. We look forward to seeing some of you at our upcoming investor meetings and speaking with you in February when we'll discuss our third quarter results. Thank you and be well.

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

Thank you.