e.l.f. Beauty, Inc.

So plump, you ain't never miss. Lip gloss, lipstick, lip stain, lip tint, yeah. Nobody else doing it like this. And you draw that line so clean, so perfect. Run those shades, baby. You know how to work it. Purse those lips, because

you

know you the hottest. Lips

on VK. Boom, boom. Eyes, lips, face, wait.

Wait, wait, wait. Ooh. Wait, wait, wait. Give a long face.

Lips, lips, face, face. Wait, wait, wait. Thank you for joining us today to discuss Elf Beauty's first quarter fiscal 25 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 .elfbeauty.com. Since many of our remarks today contain forward-looking statements, please refer to our earnings release and reports filed with the SEC where you'll find factors that could cause actual results to differ materially from these forward-looking statements. In addition, the company's presentation today includes information presented on a non-GAAP basis. Our earnings release contains reconciliations of the differences between the non-GAAP presentation and the most directly comparable GAAP measure. With that, let me turn the webcast over to Tarang.

Thank you, Casey, and good afternoon, everyone. Today, we will discuss the drivers of our first quarter results and our raised outlook for fiscal 25. I want to start by recognizing the Elf Beauty team. We're off to a strong start this fiscal year, delivering Q1 results ahead of our expectations. In Q1, we grew net sales 50%, increased gross margin by approximately 80 basis points, and delivered $77 million in adjusted EBITDA. Q1 marked our 22nd consecutive quarter of both net sales growth and market share gains, putting Elf Beauty in a rarefied group of high-growth companies. We're one of only five public consumer companies out of 274 that has grown for 22 straight quarters and averaged at least 20% sales growth per quarter. We've continued to prioritize three areas with significant runway for growth, color cosmetics, skincare, and international. Let me update you on our progress in Q1. In color cosmetics, we continue to significantly outperform the category. In Q1, Elf Cosmetics grew 26% in tracked channels as compared to a category that was down 1%, increasing our market share by 260 basis points. Nationally, Elf is the number two mass brand on a dollar basis with approximately 12% share, more than double the level we had three years ago. As great as this share growth has been, we see an opportunity to double our market share over the next few years. In Target, our longest-standing national retail customer, we've been the number one brand for six consecutive quarters, with our share increasing from nearly 13% to over 20% today. We're focused on replicating our success at Target across other key retailers and believe we're making great progress towards that ambition. In skincare, we also continue to meaningfully outperform the category. In Q1, Elf Skin grew 45% tracked channels, 32 times category growth of 1.4%. We grew our share of 60 basis points, driving Elf Skin to be a top 10 brand for the first time. We achieved the number nine rank as compared to the number 13 rank a year ago. Elf Skin today holds about a 2% share and has significant runway, with the number one brand holding a 14% share. With the acquisition of Notarium last October, we now have two of the fastest growing mass skincare brands that are complimentary in their price points, positioning, and audiences. Notarium contributed approximately 16 points to our net sales growth in Q1. Turning to international, our net sales grew 91% in Q1, fueled by growth in our existing markets as well as our expansion into new markets. Our international expansion strategy is anchored in partnering with leading beauty retailers to bring our brands to life in each country we pursue. We continue to see significant runway to grow our footprint in our largest existing markets. The UK, where we are now the number four brand as compared to the number eight a year ago, and in Canada, where we're now the number four brand as compared to number six a year ago. As we look to new markets, we've seen success with our engagement model across social platforms, driving consumer demand well before we enter a particular country. We're pleased that we've maintained our number one brand ranking since launch with both Etos in the Netherlands and Douglas in Italy. International drove 16% of our total sales in Q1, up from 13% a year ago, and with significant runway to grow as compared to our global peers at over 70% on average. Let me put the strength of our results in the context of the broader beauty industry. While beauty has comparatively low barriers of entry, very few brands have been able to scale. Of the over 1,900 cosmetics and skincare brands tracked by Nielsen, only 61 have surpassed $25 million in annual retail sales. Only 26 have surpassed $100 million in retail sales, and .F.E. is one of only five brands to achieve over $700 million in retail sales. .F.E. has been one of the few brands able to scale through our five unique areas of advantage that form our competitive moat. Let me take a moment to walk you through each. Our first area of advantage is our passionate team of owners and high performance team culture. We have just over 500 employees and have intentionally sought out people with diverse experiences who are humble and hungry and thrive at .F.E. speed. We believe we are the only public consumer company that grants every employee equity every year. This aligns our employees' interests with that of our shareholders and provides wealth creation opportunities across the entire team. Since our IPO, excluding our executive officers, we've granted approximately $180 million in equity in a stock that has gone up more than tenfold. Our unique one team, one dream compensation model and high performance team culture has led to exceptionally high employee engagement of 90%, 18 points above the consumer industry benchmark. The strength, curiosity and resilience of our team has allowed us to execute at an exceptionally high level over the last five plus years. The second area of advantage is our value proposition. The average price point for .F.E. is about $6.50 today as compared to nearly $9.50 for legacy mass cosmetics brands and over $20 for prestige brands. While there are other brands with low price points, our real advantage is the ability to deliver prestige quality at those price points. We have a unique asset light supply chain model that delivers the best combination of quality, cost and speed in our industry. Our quality scores have gone up every year over the past five years. We have a closed feedback loop that allows us to make ongoing improvements across our portfolio. We're hearing from consumers that we're not only delivering an incredible price point but also deliver quality that is often better than prestige. Our value proposition is evidenced in our strong unit growth. .F.E. was again the only top five cosmetics brand to grow units in Q1. Our third area of advantage is our powerhouse innovation. Our innovation approach is focused on building franchises behind our holy grails, taking inspiration from our community and the best products in prestige, adding our .F.E. twist and bringing them to market at an extraordinary value. This holy grail innovation approach has built category leadership over time. Five years ago, .F.E. had the number one or two position across eight segments of the color cosmetics category. Today, .F.E. has a number one or two position across 18 segments, which collectively make up over 80% of .F.E. cosmetic sales. We continue to deliver strong sales growth and share gains across these segments. We're also innovating in the industry's top segments where we under index on share, like foundation. For context, as compared to the 12% share we have across cosmetics, we have less than 2% share in foundation, a $675 million category in the U.S. In Q1, we launched our soft glam satin foundation, priced at an incredible value of $8 compared to a prestige item at $39.

When was the last time we saw a good foundation under $10? In this economy where everybody's raising prices, I feel like it's been ages since I've seen a foundation under 10 bucks. This is the new .F.E. soft glam satin foundation. I feel like it's all everybody's been talking about and just saying that they absolutely love it. I just put it on, I already love it.

Soft glam satin foundation was amongst the best selling products on our site in Q1. We're also excited about the innovation we've launched under Notorium. The brand recently celebrated one million bottles sold of the best selling Glowgetter body wash, its first product to hit the one million unit mark. We're extending our franchise approach to Notorium with the launch of the Glowgetter body oil. The launch sold out in just 10 days on Notorium.com and was recently restocked on our site. Our fourth area of advantage is our disruptive marketing engine. Our marketing organization is structured to encompass all consumer touch points from product concept through consumer purchase. This -to-end breath gives us the agility to go from insight to action with speed and fosters increasing emotional resonance as our community becomes a stakeholder, essentially co-creating the brand with us. Our recently launched product, we launched Bronzing Drops as a terrific example. Bronzing Drops, which had been the number one product requested from our community, turned into our best product launch ever on ElfCosmetics.com. We turned our consumers' passionate pleas for Bronzing Drops into action with the debut of peculiar behavior to accompany the product launch.

Unless you've been living under a rock, and perhaps you have, I don't know your life, you'd know that Elf Skin Bronzing Drops have dropped. But access to these newfound drops has created some peculiar behavior amongst homo sapiens. Come, let us observe them in their natural habitat. After it appears her own supply has run dry, the brave hunter begins her mission, and it is surely

a perilous one.

Grab your popcorn. This just got exciting. Oh, no! Migration, what a marvelous phenomenon. Our radiant jet setters have just taken flight for nearly 10 hours and still have a magnificent glow. The others, unfortunately, are a striking resemblance to zombies. Good grief. How scary. Really fucking tired. Oh, we're in luck. The disorientated work from home professional emerges from hibernation. But that's no match for her bronzing drops. She hasn't seen the sun in five days.

Rude, it's only been four days.

Remarkably, this single bottle can enhance the natural glow and vitality of all homo sapiens. G

-S-L, bronzing drops! Bronzing drops!

We believe our marketing engine is best in class in creating culturally relevant output. In the seven months since calendar 2024 began, we've executed 15 unique campaigns, from a 14-minute documentary parody, to a big game commercial, to a record-breaking collaboration with Liquid Death. Our approach transcends product and deepens brand love through purpose. Earlier this year, we released our So Many Dicks campaign, which instantly went viral, garnering a billion organic media impressions and almost 100% positive sentiment. Our research found that there are more men named Richard, Rick or Dick serving on public company boards than entire groups of underrepresented people. Consistent with our brand values, our call to action was not to single out leaders with these names, but rather inspire companies to give a bigger voice to everyone else to drive positive business results so that everyone wins. We practice what we preach. ELF is one of only four publicly traded U.S. companies with a board of directors that is at least two-thirds women and one-third diverse. We've solidified our reputation as a purpose-led, results-driven brand across product, purpose and pioneering platforms. On Roblox, one of the world's most popular virtual playgrounds among Gen Z and Alpha, since the launch of our ELF Up experience last year, we have the number one branded experience with a 95% positivity rating and almost 14 million plays. In Q1, ELF became the first beauty brand to test real-world commerce on Roblox, adding credibility and visibility among key audiences. Our marketing is working, delivering ROIs multiples above benchmarks and expanding our unaided brand awareness from 13% in 2020 to 33% in 2024. I've been in the consumer space over 30 years and have never seen a 20-point jump in unaided awareness in just a few years. As great as that is, the leading U.S. mass cosmetics brand has 55% unaided awareness, demonstrating significant runway for growth. Our fifth area of advantage is our productivity model. Founded as a digitally native brand, ELF remains the only top five mass cosmetics brand with their own -to-consumer site. We leverage insights from our site and Beauty Squad loyalty program to proactively change out up to 20% of our retail assortment each year. Looking at the last five years, our SKU count has remained relatively consistent and we've doubled our average sales per SKU. This approach has led us to be the most productive brand on a -per-foot basis with our largest retail customers in both the U.S. and U.K. Our strong productivity has been rewarded by more space with our global retail partners. In the U.S., as previously announced, the ELF brand gained space in spring with CVS and in summer with Walmart, and we'll be gaining additional space this fall with CVS. We're also excited about the recent launch of Notarium in Ulta Beauty, marking the brand's first retailer expansion in the U.S. outside of Target. Notarium is now available in all 1,400 Ulta Beauty stores with a full assortment across skin, body, and lip care. Internationally, we continue to grow our footprint in existing markets. As we previously announced, we gained space this spring with Boots in the U.K. and with Shoppers Drug Mart in Canada, and we'll be gaining space this fall with Superdrug in the U.K. We're also expanding our international reach into newer markets. We recently expanded our existing distributed relationship in Australia with the launch of ELF in Coles, marking ELF's first introduction into the grocery channel in Australia. As previously announced, we'll be bringing ELF to Sephora, Mexico this fall, marking the ELF brand's first partnership with Sephora. We're also excited to announce that we'll be launching ELF in Germany this fall with Rossmann. Germany is the largest cosmetics market in Europe, and we expect our launch with Rossmann to be our biggest international launch to date. In summary, we have five areas of advantage that have enabled us to consistently drive sales and share in cosmetics and skin care. Our passionate people, a team of owners with a high-performance culture, our value proposition, powered by an asset-light supply chain, delivering the best combination of quality, cost, and speed in our industry, our powerhouse innovation, delivering premium Holy Grail products at accessible price points, our disruptive marketing engine, activating millions of consumers around the world, and our unique productivity model, bringing this to life at retail globally. While other brands may seek to imitate parts of our strategy, it's how each of these areas of advantage reinforce each other that forms our competitive moat, and we expect they will continue to fuel our industry-leading growth. I'll now turn the call over to Mandy.

Thank you, Turing. I'll now cover the highlights of our first quarter results, as well as our raised outlook for fiscal 25. Our first quarter results were outstanding. Q1 net sales grew 50% year over year, on top of 76% growth in Q1 of last year, driven by broad base strength across national and international retailers, as well as digital commerce. Our net sales growth continues to be led by higher unit volume, which contributed approximately 34 points to growth, with mix adding approximately 16 points. Q1 digital consumption trends were up over 40% year over year, on top of triple digit trends in Q1 of last year. Digital channels drove 21% of our consumption in Q1, as compared to 18% a year ago. The momentum we're seeing is supported by enhancements across our loyalty program within our app and on digital and social platforms. Our Beauty Squad loyalty program hit a milestone this quarter, reaching over 5 million members, with enrollment growing 30% year over year. Recall, our Beauty Squad loyalists have higher average order values, purchase more frequently, have stronger retention rates, and are a rich source of first party data. We're fueling new member enrollment with exclusive early access to product launches and unique integrations with our digital partners. In Q1, we ran our first ever Beauty Squad challenge within Roblox, allowing our ELF Up players to connect their Beauty Squad and Roblox accounts. Nearly 100% of those Roblox connections were new Beauty Squad members. We also expanded Beauty Squad to Amazon, to continue to fuel new member signups and reward our community for their ELF purchases on Amazon. Q1 gross margin of 71% was up approximately 80 basis points compared to prior year. We saw gross margin benefits from favorable foreign exchange impacts, lower transportation costs, price increases in our international markets, cost savings in mix, partially offset by inventory adjustments. Q1 gross margin was better than we expected, in part due to slower flow through of higher transportation costs. As a reminder, we experienced higher container costs related to the Red Sea disruption at the end of last year, and those costs have continued to rise more recently. We expect these transportation costs headwinds to partially offset the gross margin benefit we're projecting throughout fiscal 25. On an adjusted basis, SG&A as a percentage of sales was 51% in Q1 compared to 39% last year. The primary driver of the year over year increase was a plan to step up in marketing and digital investment. Marketing and digital investment for the quarter was approximately 23% of net sales as compared to 16% last year. The remaining increase in adjusted SG&A was driven primarily by the inclusion of Notarium in our consolidated financials, an impact that will continue through Q2 of fiscal 25, as well as ongoing investments in our team and infrastructure. Given those planned investments, Q1 adjusted EBITDA was $77 million, up 4% versus last year, and adjusted EBITDA margin was 24% of net sales. We expect adjusted EBITDA growth to accelerate into the back half of fiscal 25 as we cycle the inclusion of Notarium in our financials and see more normalized rates of marketing investment year over year. Adjusted net income was $64 million or $1.10 per diluted share, compared to $63 million or $1.10 per diluted share a year ago. Moving to the balance sheet and cash flow. Our balance sheet remains strong and we believe positions us well to execute our long-term growth plans. We ended the quarter with $109 million in cash on hand compared to a cash balance of $143 million a year ago. Our ending inventory balance was $200 million, in line with our expectations and up from $98 million a year ago. The difference is primarily a combination of three things. First, as we've said in the past few quarters, we continue to build back our inventory levels to support strong consumer demand. Second, our consolidated results now include Notarium, which added approximately $26 million of inventory. Lastly, an additional $23 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 US. Our liquidity position remains strong. We ended the quarter with less than one times leverage in terms of net debt to adjust an EBITDA. We expect our cash priorities for the year to remain on investing behind our growth initiatives and supporting our strategic extensions. The specific initiatives we're focused on this year include investing in our people and infrastructure, our ERP transition to SAP, as well as increased distribution capacity to support strong consumer demand. Now let's turn to our raised outlook for fiscal 25. For the full year, we now expect net sales growth of approximately 25 to 27%, up from 20 to 22% previously. Adjusted EBITDA between $297 million to $301 million, up from $285 million to $289 million previously. Adjusted net income between $198 million to $201 million, up from $187 million to $191 million previously. And adjusted EPS of $3.36 to $3.41 per diluted share, up from $3.20 to $3.25 previously. Let me provide you with additional color on our planning assumptions for fiscal 25. Starting with the top line, our raised outlook reflects the outperformance in Q1 relative to our expectations, as well as an improved outlook for the balance of the year. In Q2, we expect our net sales growth to be slightly above our 25 to 27% annual growth outlook. As we look at track channels, we would expect trends for ELF to be in the 20% range throughout Q2 as we continue to cycle strong compares in the base. Recall, track channels represent approximately half of our net sales. Turning to gross margin. In fiscal 25, we now expect our gross margin to be up approximately 20 basis points year over year, as compared to approximately 10 basis points previously. The improved outlook is largely a result of our outperformance in Q1. In terms of the key puts and takes for the year, we expect gross margin benefits from favorable FX rates, marginal creative mix, and cost savings to be partially offset by higher transportation costs and costs related to retailer activity and space expansion. From a cadence standpoint, we expect gross margin to be flat year over year in Q2, largely due to the timing of retailer activity and space expansion costs. Turning now to adjusted EBITDA. For the full year, our outlook now implies adjusted EBITDA growth of approximately 26 to 28% versus prior year, up from 21 to 23% previously, and on top of the strong 101% growth we delivered in fiscal 24. We continue to expect adjusted EBITDA margin leverage of approximately 20 basis points year over year. We still expect marketing and digital investment at approximately 24 to 26% of net sales in fiscal 25, as compared to 25% in fiscal 24. From a cadence standpoint, we are planning for a more balanced pace of marketing and digital spend throughout fiscal 25. Looking to Q2, that implies a step up in our marketing on a year over year basis, as marketing spend was approximately 21% of net sales in Q2 last year. In addition, we are still annualizing the acquisition of Notarium and continue to invest in our team. As a result, we expect our adjusted EBITDA margin could be in the low teens range in Q2 with more meaningful adjusted EBITDA margin expansion to be realized in the second half of fiscal 25 as marketing compares normalized, and as we anniversary the acquisition of Notarium starting in October. In summary, our first quarter results underscore our ability to drive exceptional, consistent category leading growth. We believe we have a winning strategy as reflected in our raised outlook for the full year and continue to believe we are in the early innings of unlocking the full potential for our brands. With that operator, you may open the call to questions. You may open the call to questions.

Thank you. We will now begin the question and answer session. To ask the 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 keys. If at any time your question has been addressed and you would like to withdraw it, please press star, then two. At this time, we will pause momentarily to assemble our roster. And today's first question comes from Olivia Tong with Raymond James. Please proceed.

Great. Good afternoon and congrats on the great quarter. Thanks. If you could break it down a little bit more, both the quarter and the guide. First, if you could give us a sense of how much of the growth was driven by new distribution versus your existing distribution. We obviously know Walmart was a part of that this quarter and how that compares to second half when you have some new distribution internationally like the plans in Mexico. As you mentioned, there are trademarks in Germany. And then bigger picture with, we're seeing challenges with the consumers, slower growth and behavior. Give us what you're seeing, whether your analytics show any signs of slowdown or particularly amongst your different cohorts, perhaps, and how does that influence your Q2 guide? Thank you.

Hi, Olivia. Thanks for the question. So in terms of growth that we saw in the quarter one, I'm super proud of the 50% net sales growth that we just delivered, really incredible. I'm also proud of the fact that we were able to raise our guidance on the top line, up to 25 to 27% for the full year. We are having some growth driven by new distribution, as we talked about, we had a number of face expansions in the spring, this summer, and are certainly outlooking more as we look into the fall. So that is included in our guidance, but we're also seeing strength in our existing distribution. And so really pleased with that as well. And international will continue to play a role in that. You saw international growth at 91% for the quarter. I certainly expect international to continue to drive growth for us as we look out into the second half of the year as

well. Hi, Olivia. This is Trang. On your second question on consumer, any consumer slowdown or sentiment, overall, I would say we are seeing some commentary of consumers being more choosy, but they're choosing else. I would say that we're particularly well positioned. We saw growth across all of our channels, digital, all of our national retailers, and international customers. So we remain quite bullish in our ability to continue to drive market share, both in color, as well as skincare, and our continued expansion nationally.

Great, thanks. And then if I could follow up on the international growth, which obviously continues to be pretty phenomenal. Can you talk about the opportunities going forward? How you go about deciding which markets, whether any of these are exclusive relationships, particularly with Douglas and a few others. And if they are exclusive, are they by regions or specific countries, just helping us understand that. Thank you.

Yeah, so our strategy for international, when it comes to retailers, is to partner with a leading retailer in a market to help build the brand. We thought Douglas, Italy did a great job really establishing us as number one in that customer. Same with Aptos in the Netherlands. And we're extremely excited about the launch with Rossmann in Germany. Germany is the largest market for color cosmetics in Europe. Rossmann has, I believe, over 1,500 doors that we'll be in. So we feel really great in terms of how that looks.

Thank you.

And the next question comes from Andrea Teixeira with JP Morgan. Please proceed.

Thank you, operator, and good afternoon, everybody. I was hoping to see, to hear from a little bit more on the 20% growth in Q2, understand that you historically have been extremely conservative and you don't flow through all the beat to the guide. But knowing that you will find that you're going to be faster both internationally and off-track channels. And track channels are growing, I believe, consumption-wise, 22% according to Nielsen in July. So I was trying to see if there is anything in terms of shipments and timing of consumption and shipments, anything that we should be aware of, and that would inform that deceleration. And then on top of that, if you can explain, there's a lot of noise on the tariffs, potential tariff increase, just to explain that your strategy to increase prices is usually $1. And you've been, historically, you only increase prices in -inter-level price points, and how you should be able, given your large gross margin, explain to investors how a 60-cent impact would be diluted, if anything, across your price points, to keep your price points at a very attractive level. So if you can help me, help the investors on those two points, thank you.

Absolutely. Hi, Andrea. So I'll take the first question. On Q2, we actually said on our prepared remarks that we expect Q2 to be slightly above the 26 to 28% range that we outlook for the year. So we do expect Q2 to be better than our annual outlook, which we feel great about. And you know that we typically take a balanced approach when it comes to our guidance. So we always wanna put something out there that we feel great about, very balanced in our approach. And we are pleased with what we're seeing out of our retailers, digitally, internationally, all of those that we mentioned on the call. So continue to think that we have momentum there, expect Q2 to be a little bit above our annualized range, and we'll take it from there.

Hi, Andrea. I'll take your second question on tariffs, or potential tariffs. First of all, if there were tariffs, it would not impact FY25, just given how long it takes for inventory to flow through. So this is really an FY26 issue, potentially. And so our approach is very similar to what we did in 2019. If you recall, in 2019, we faced 25% tariffs. We used a combination of select price increases, help from FX and supplier concessions to be able to address that tariff issue. As we look forward, we've heard rumors as high as 60% tariffs. So if we look to how would we solve for that additional 35 points of tariff, we feel pretty confident in terms of that same balanced approach. Certainly, we'd take selective pricing on ELF. In addition, we would expect additional FX help and additional supplier concessions. And then the fourth thing that we didn't have back in 2019 is continued diversification. And back in 2019, almost 100% of our production came out of China. As of today, it's a little less than 80%. By next year, it'd be even lower than that. And so that continued diversification will be yet another lever we'll have to be able to decide what level of pricing we're gonna take versus how much we're gonna rely on some of these other levers. Again, it's premature right now. Nothing's happened from an election standpoint. We don't know what the level of tariffs are, but we've already gone through a number of different scenario planning and feel confident we can continue to use that balanced approach to address any tariff that we might face.

Yeah, that's super helpful. And just to clarify, and I appreciate, Mindy, you correct me on the range. Is it fair to assume that when you move guidance, you move guidance mostly and partially just for the beat of the first quarter? And in a way, you kind of left a second and a half untouched from what it was before, just because you don't have visibility. And I think we've seen most companies do that when they beat guidance these days, because there's very limited visibility how the consumer will be at that point. But given your, basically what you just described as being like a lot of new places you're coming to, obviously in the fall, you're coming to Mexico, and now Germany and the other countries that you're still growing, is that any way you can kind of help investors frame the way, the ones that are relatively new when it became a large cap to the story and haven't seen you guide for all these years very conservatively? So if you can kind of like explain how your guiding process works.

Yes, so for this quarter, we actually did flow through more than the Q1 beat as we continue to feel confident about where the year is headed for ELF. But we do take it a quarter at a time, to your point, Andrea. So we will stay very balanced in our approach for the current quarter, and actually don't give specific quarterly guidance, but we do try to help give some color around what we're seeing and what we expect. But again, have flowed through, at least for this quarter, more than that beat out of Q1, as we have increased confidence on the year.

Okay, perfect. Thank you, I'll press it on. Congrats again. Thank you.

And our next question is from Anna Lizzle with Bank of America. Please proceed.

Hi, good afternoon, and thank you so much for the question. I was wondering if you could comment on any benefits you're seeing so far from trade down in both color cosmetics and mass skincare. And separately, I was wondering if you can comment on the ROI of your increased marketing spend in the quarter, and where exactly you're allocating those dollars, whether it's to support new product launches, international expansions, or to increase demographic awareness of your brands. Thank you.

Hi, Anna, this is Tarang. In terms of if we're seeing any consumer trade down, we don't believe we're seeing trade down. I think the prestige category is still strong. We're seeing our ability to expand the category as we have done in terms of each, every time we launch a Holy Grail, it gives millions of consumers greater access to a particular category. You may not be participating in it. Great example being our bronzing drops, one of the most requested items we had. Our bronzing drops at $12 versus a prestige item at 38, or even our soft glam satin foundation at $8 versus a prestige item at $40. We believe gives more consumers the opportunity to participate in the category, and we feel that's really the main driver of our sales. We certainly are continuing to pick up quite a bit of share. The 260 basis points in color cosmetics of share that we picked up obviously comes across different mass players. We're the only brand that we've seen out of 800 that are tracked by Nielsen in color cosmetics that have grown share for 22 consecutive quarters, and are quite bullish in our ability to continue to drive share, not only in color cosmetics, but also skincare. This quarter, we hit an important milestone of Elf Skin, not only growing 60 basis points of share, but being a top 10 brand for the first time coming in at number nine. The reason why that's significant is most of the brands in the top 10 have been there for decades. So for us to do that just in a few years with the momentum we have both on Elf Skin and Nectarium gives us a lot of confidence there. And then in terms of the ROIs, what we see on our increase in marketing, we continue to see exceptional ROIs, many multiples above the industry benchmarks. And that is in turn driving the strong top line momentum. What our marketing is also doing is really driving our unaided awareness. So if you take a look in the last few years, we've grown an unaided awareness from 13% to 33%. I've been in the consumer space for over 30 years and I've never seen a 20 point increase in unaided awareness, yet the market leader still has 55%. So the strategy you'll see is continue to fall from a marketing standpoint is to continue to disrupt, continue to test on new platforms. We said in our prepared remarks, since the beginning of this year, we've launched 15 unique campaigns and those campaigns go across product, purpose, our overall awareness build. And we feel really good about kind of both the pace as well as our capabilities in that area to be able to continue to branch and bring in new users. We're not only the number one brand amongst Gen Z and Gen Alpha, but we're increasingly picking up many more millennials and Gen X as well. So we love what our marketing is doing, both in the top line from awareness standpoint, equity and new audiences, and you'll continue to see us be quite strong there.

Great, very helpful, thanks so much.

The next question is from Ashley Helgens with Jefferies. Please proceed.

Hey, thanks for taking our questions and congrats on the nice quarter. So it was great to see Walmart go to 12 feet from eight feet. Just looking out over the next couple of years, do you see more kind of shelf space opportunities like this for the else brand in the US? And then Mandy, just a clarification on guidance. I think last we spoke, she said you don't include countries that have not yet been announced. So I just wanna confirm that Germany and Australia are both new to the guide, thanks.

So Ashley, I'll take the first part of it. We are also pleased with the space gains that we got at Walmart. You're right, it's about a 50% increase from a predominant eight foot set to a 12 foot set predominantly. And we're seeing great results right off the bat. It usually takes us a couple seasons to fully optimize productivity, but we like the trajectory we're seeing. We already passed CoverGirl for the number three position at Walmart within striking distance of L'Oreal Paris at number two. And we continue to see more space opportunities even in the US for all of the space that we've picked up, we're still dramatically under space. Walmart being a great example. While 12 feet is a good increase in the space we have, many of the legacy players out there can have 16 to 20 foot runs if not more. So just given our rankings, our productivity, we would foresee more space gains in the future, not only at Walmart, but even Target, we're the number one brand with over a 21% share at Target. And we have had that now, I think six consecutive quarters. If you take a look, we have nowhere near 21% of the space, nor do we need it, we have, but we do feel there's opportunities at Target, Alta, Walmart, and then especially in drug. Drug has been on a good path in terms of giving more space. You heard about the space increases at CVS, Walgreens last year, but our footprint's still quite small in drug and certain grocery. And so we just see lots of opportunity there. And then the last thing I'll say is, as great as space gains are, what gives me the greatest confidence in our business is our ability to drive productivity. The productivity model we have of proactively changing out up to 20% of the SKUs based on the data, the insights we get from Beauty Squad and our digital business, that's driven the vast majority of our growth. And space has been nice kind of topper on that.

And then to answer your question, Ashley, on Germany and Australia, yes, those are new to the guide. And so that has already now been reflected in

the

guidance we just provided.

Great, thanks so much.

And the next question is from Oliver Chen with Cali. Please proceed.

Hi, Thring and Mandy. The quarter was outstanding. What drove the nice beat in terms of the quarter? On your guidance, do you expect units to outpace mix? Will that complexion remain the same? You do a really agile job with inventory management. Just so how did you have enough inventory this quarter to drive such an outstanding performance? And going forward, I assume that you have an inventory of positions that can beat in the event that things trend better. Also, Mandy, you mentioned ERP and distribution capacity. I would love your take on what's happening there and ways in which you're managing for risk, and those can be changes that can cause disruption, and I'm sure you have a lot of contingencies. And lastly, Thring, the Holy Grail strategy, it's been a compelling approach to thinking about your product assortment and also growing incrementally. How does that apply to skincare? And what do you see as your hero products within skincare and also placement? It's been in different parts of the store. I know you've been innovating constantly in skincare. Thank you.

Thanks for the question, Oliver. So first on the quarter, thank you so much. 50%, we do believe, was a pretty tremendous quarter. And what came in better than our expectations, I mean, really, it starts with our value proposition, continues to stand out in this environment. You couple that with our Holy Grail innovation. We talked about bronzing drops this quarter. We continue to see momentum behind our lip oils, which we launched not too long ago. And so that innovation then amplified by our marketing and digital engine, which Thring just walked through, really helped to drive results for the quarter. The great thing about our results is that they continue to be unit led. We were amongst the only ones in the top five able to grow units this quarter. And so we continue to expect that to be a key driver of our growth as we move forward. In fact, when we broke down the units versus mix component, that mix portion largely was driven by the inclusion of Notarium in our financials as ELF mix has pretty much stayed in low single digits as we've started the year. In terms of inventory management, we feel great about our inventory position. As we've talked for the last several quarters, we've proactively taken our inventory levels up to support the demand that we're seeing and additionally added in Notarium and changed some terms with our vendors to take possession of that inventory earlier. So we feel great about being able to service the demand that we're seeing on the inventory that we have. I'm sorry, on the second question, cause you had three questions in there, Oliver. Second question on ERP and distribution. So on the ERP, we are continuing to move forward on our ERP transition. We're continuing to test that. We have shifted our timelines a bit more to out to the spring. We were originally looking to launch in the fall. We've shifted that out to the spring just to allow for enough testing cycles as we go through. So we're feeling great about that. And then from a distribution standpoint, we're continuing to expand our distribution footprint, getting additional capacity in the UK, also in Asia, looking to set up a warehouse in Asia as well to start to service some future distribution. We're laying the groundwork now so that we have the capacity in place as we look out longer term.

Yeah, and then your last question on terms of our holy grail approach, not only in color cosmetics, but we're using that same approach on skincare. Bronzing drops is probably our best latest example of an absolute holy grail product at $12 versus the prestige inspiration at $38. And in terms of not only the holy grail approach we're replicating on Elf Skin, but also the franchise approach. If I look at our current skincare franchises, our main franchises of holy hydration and sun touchables have both been doing extremely well. We'll see if bronzing drops becomes a third franchise or not, but we're continuing that. Not only in Elf Skin, but also on Notarium. You heard about us expanding our Glow Getter body wash into the body oil category as well. And so you'll continue to see those two consistent themes of holy grails and franchises that can grow year after year.

Okay, one quick follow up, international margins. How should investors think about that? It looks like you're really investing in a nice infrastructure in London and you have a capital light approach to approaching the best of class partners. What's the evolution? There's a big opportunity in all these countries. Thank you.

Yeah, I would say from a margin perspective, as we scale internationally, there is an opportunity for those margins to be accretive overall. If you think about we are not tariffed as we import into those countries. And so that's a big piece of the pie that we don't have to incur as we spread out across the globe. And so something to keep in mind, but again, international is a smaller part of our business and something that we're watching as we continue to scale.

That's your words.

Our next question is from Peter Grom with UBS. Please proceed.

Thanks operator, good afternoon everyone. Hope you are doing well. I wanted to just go back to the two queue sales guidance. So slightly above the full year range, but when you consider UBS track channels growth of at least 20%, which isn't really all that different from what you saw in one queue, you still get a benefit from the atrium. It really seems to imply for any big step down and maybe non-track channels or maybe a weaker contribution from international despite kind of expanding doors and markets. Can you maybe just unpack that a bit? Are you just simply being conservative or is there something you're seeing that that's really driving that view?

Hi, Peter. So I would say we're being very consistent in our guidance approach. We again, always take a balanced approach as we come into a quarter. We don't give hard and fast guidance, but we try to provide some color as to what to expect. We talked about track channels. Yes, we expect that to be in the 20% range over the course of the quarter. Might see some ebbs and flows there as you go through, but feeling good about that. Notarium will continue to be a contributor as you pointed out. And we also continue to feel good about international and our untracked channels. And so as we see it today, we feel great about indicating that the total sales growth for Q2 could be slightly above that range that we've provided for the year. And we'll take it, like I said, one quarter at a time.

Great. And then just maybe following up on the profit guidance, I think you said flattish gross margin for the second quarter. So can you maybe just bridge us from the 28% adjusted EBITDA margin last year to the low teens you mentioned? Just seems like a lot of SG&AD leverage. You totally get your reinvesting and setting up marketing and kind of the non-marketing piece around Notarium, but it just seems like you almost need 1,500 basis points of SG&AD leverage to hit this number. So just, I think any color would be helpful on just kind of drivers of that.

Yeah, so it's really more of a first half, second half story when you think about the EBITDA margins. EBITDA margin in the first half, we outlook would be lower, one driven by the marketing investment that we're making. So in Q1, you saw that up 700 basis points. Last year in Q2, marketing was 21% of net sales. We're targeting that higher end of the range, closer to the 26 for the second quarter. And so you're gonna continue to see investment there. And then as we walk through, we talked about Notarium, annualizing that spend and continuing to invest in people and infrastructure of which once we get to the second half, we will have a more normalized level of spend. So you're gonna start cycling marketing in the 25, 26% range already in that base. And so you don't have that as an incremental. And then we start to have Notarium in the base again. So you get to a little bit normalized place. So we do expect better, much better EBITDA margin growth as we get into the second half of the year, better EBITDA, I would say adjusted EBITDA growth overall and margin expansion as we get into the second half of the year. So it's just a little bit of a rebalancing of how we're spending this year to get to that 20 basis points of expansion on the full year.

Great,

I'll pass it on. Thank you so much. The next question is from Linda Bolton-Wiser with DA Davidson, please proceed.

Yes, hi, I have two questions. I guess the first one is just a check on Notarium. It seemed like it contributed a little less to the growth in the quarter than I thought. At one point you had given a revenue projection for the year for Notarium. Maybe you could update that for us. So we've got that modeling correct. And then secondly, just to kind of, dig in some more on the growth projection for the second quarter, the prior year track channel comparisons do become easier. And in September, they're even in the 50% range in prior year. So it seems that if you're projecting only 20% POS growth, it's quite a deceleration on a two year stack basis. And I know these are crazy numbers to think you can even grow 20 against 50%. But that's a deceleration on a two year stack from 100% to 70%. So again, I think growth investors just kind of want to understand, like what is causing you to think that you can only do 20% POS when the prior year comps actually get quite a bit easier. Thank

you. Hi, Linda. So I'll go ahead and take this question. And so on Notarium, so Notarium contributed 16 percentage points to our net sales growth for this quarter. We had not provided any revenue projections for Notarium on the year. So Notarium continues to track right in line, maybe even slightly better than where we saw it for the year. And so that is really on track and very proud to see them having launched in Ulta and really pleased with what we're seeing there. On the growth projections for Q2, I hear you on the deceleration, but we're actually seeing this as strength upon strength, even a 50% in the base or 76% in the base. To continue to build upon that shows the strength of our brand. It shows that we are continuing to build market share in this environment and lead the growth for the category. And so we feel great about how we're positioned and the growth that we're driving overall.

And our next question comes from Mark Altschwager with Baird, please proceed.

Good afternoon. Thank you for taking my question. First, just wanted to follow up on the price mix contribution. I think you said ALF tracking, upload single digits in the first quarter, below what we've seen in some recent periods. And I believe because some of the recent innovations are coming in at lower price points. Is that a good point? Is that right? And then how should we be thinking about that price mix contribution moving forward here, both Q2 and then back half as you start to cycle the Noturian?

Yep, so on the price mix contribution, yes, you're right. This year we did introduce some lower priced innovation. Again, staying true to our value proposition, I wanted to make sure that we had some well priced items out there in the market and they're continuing to perform very well. That has taken down some of our price mix. But again, with Noturian coming into the fold, that price mix, it was about 16 percentage points for the quarter overall. So feeling great about that. The thing that's even better is that our growth continues to be led by unit volume. And that's what we want to continue to see on the road ahead, speaks to the demand that we're seeing for the brand.

Thank you. And then with some of the sluggish growth you're seeing in the mass cosmetics industry wide, obviously you're taking a lot of share here, but what are you seeing or what are you expecting on the promotional front?

Hi, Mark, I'll take that. I would say first of all, on the mass color cosmetic side, the low single digit decline that you're seeing is also up against a much higher period. So on a two year stack basis, the category is still up. From a promotional standpoint on the mass side, we're not seeing increased promotion on the mass side. I think you are a little bit on the prestige or in specialty channel, but overall I would say we're not really seeing much. And it hasn't really bothered us in the past, mainly because of our superior value proposition. We're a great value every single day. So a lot of, I think the promotions and the high-low players really, they end up trading amongst themselves more than us. We've been able to continue to pick up market share and pretty confident in terms of our ability to continue to do so.

The next question comes from Susan Anderson with Canaccord Genuity. Please proceed.

Hi, good evening. Thanks for fitting me in here. I guess maybe just a little bit of color on Naetrium and the rollout at Ulta. It sounds like it's going pretty well. I guess I'm curious, are you seeing a similar customer uptick that you see at Target and probably not there yet, but how does the productivity on the shelf compare? And then also, do you have plans this year or in the next year to roll Naetrium out to further retailers?

Thanks. Hi, Susan. We're really pleased with what we're seeing in Naetrium. It's too early to tell in terms of the productivity where we set facial skincare just a couple of weeks ago. We're in the process right now of finishing our body and lip resets. And so it'll take a little while for us to see it, but so far both we and Ulta are pleased and there's a lot of excitement for Naetrium at Ulta Beauty and not only Ulta Beauty, but also at Target. Target, we're up against a big period last year where we had expanded distribution and yet Target is also leaning in. So we feel great about the momentum that we're seeing with Naetrium and continue to do. It's ahead of our own expectations when we made the acquisition in terms of our acquisition model. So continue to be really, really excited. And then in terms of further rollout, I'd say our focus right now, it's all 1,400 Ulta Beauty stores. We also have a track record on alpha when you expand, making sure your existing customers remain happy and well-supported. So I'd say near term focus in the US will be Target, Amazon, Ulta Beauty. We feel like that's plenty for the team to execute and continue to go on. There are opportunities internationally on Naetrium. Right now we're mainly in space NK in the UK. So I think in subsequent quarters, you'll hear a little bit more about our plans in terms of how we take Naetrium into other markets as well.

And this concludes our question and answer session for today's conference. I would now like to turn the conference back over to Tarang Amin for any closing remarks.

Well, thanks for joining us today. I'm so proud of our incredible team for delivering another quarter of industry leading growth. Thank you to every ELF and ELF partner for your passion and dedication to our vision of creating a different kind of beauty company. We look forward to seeing some of you at our upcoming investor meetings and speaking with you in November when we'll discuss our second quarter results. Thank you and be well.

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

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