e.l.f. Beauty - Q1 2024

Transcript

Kacey Catton (VP of Corporate Development and Investor Relations)

Thank you for joining us today to discuss e.l.f. Beauty's First Quarter Fiscal 2024 Results. I'm Kacey Catton, Vice President of Corporate Development and Investor Relations. With me today are Tarang Amin, Chairman and Chief Executive Officer, and Mandy Fields, Senior Vice President and Chief Financial Officer. We encourage you to tune into our webcast presentation for the best viewing experience, which you can access on our website at investor.elfbeauty.com. Since many of our remarks today contain forward-looking statements, please refer to our earnings release and reports filed with the SEC, where you will 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.

Tarang Amin (Chairman and CEO)

Thank you, Kacey. Good afternoon, everyone. Today, we will discuss the drivers of our Q1 results and our raised outlook for fiscal 2024. I want to start by recognizing the e.l.f. Beauty team. We're off to an incredibly strong start this fiscal year, delivering Q1 results well ahead of expectations. Q1 marked our 18th consecutive quarter of net sales growth, putting e.l.f. Beauty in a select group of consistent, high-growth consumer companies. We are one of only five public consumer companies out of 274 total, that has grown for 18 straight quarters and averaged at least 20% sales growth per quarter. In Q1, we grew net sales by 76%, increased gross margin by 280 basis points, and delivered $74 million in adjusted EBITDA, up 135%.

Last quarter, we spoke about the three areas with significant runway for growth: in color cosmetics, skincare, and internationally. Let me update you on our progress in Q1. In color cosmetics, we continue to outperform category trends. In Q1, e.l.f. grew 48% in tracked channels, well above category growth of 6%. We increased our market share by 260 basis points. Out of nearly 800 cosmetics brands tracked by Nielsen, e.l.f. is the only brand to gain share for 18 consecutive quarters. As great as the share growth has been, we see an opportunity to double our market share over the next few years. Nationally, e.l.f. is the number three brand today with approximately 9.5% share. In Target, our longest-standing national retail customer, we are already the number one brand with nearly 18% share.

We're focused on replicating our success at Target across other key retailers. In skincare, we also continue to outperform the category. In Q1, e.l.f. Skin grew 127% in tracked channels, well above category growth of 10%, and was the fastest growing among the top 20 skincare brands. We grew our market share by 75 basis points. e.l.f. Skin is the number 14 brand today, with a 1.5% share and a significant runway, with the number one brand holding over 15% share. Looking outside the U.S., we grew our international net sales 79% in Q1, fueled by strength in both the U.K. and Canada. e.l.f. outpaced category growth by nearly 10x in the U.K. and by over 3x in Canada, fueling market share gains in each.

e.l.f. is the number six brand in each of these markets, with about a 5% share, as compared to the number one brand, which has over 17% share. We continue to build our international team as we aim to expand our brands globally. Across categories and geographies, the three fundamental drivers of our business remain the same: our value proposition, powerhouse innovation, and disruptive marketing engine. Let me walk through how each underpinned our strength in Q1. First, we're known for our value proposition. We make the best of beauty accessible to every eye, lip, face, and skin concern. We have a unique ability to deliver Holy Grail products, taking inspiration from our community and the best products in prestige and bringing them to market, delivering high quality at an extraordinary value.

The average price point for e.l.f. is a little over $6 today, as compared to over $9 for the legacy mass cosmetics brands and over $20 for prestige brands. Unlike these higher priced brands, our pricing strategy focuses on everyday value instead of broad-based promotions. We believe our value proposition creates accessibility in the category, allowing more consumers to enjoy the best of beauty. The second driver of our performance is our powerhouse innovation. e.l.f. has a number one or two position across 16 segments of color cosmetics, which collectively make up over 75% of e.l.f. Cosmetics sales. We delivered the strongest sales growth and share gains in these segments in Q1. Our innovation approach is to build growing product franchises instead of one and done launches. Our four largest franchises, Camo, Putty, Halo Glow, and Power Grip, have grown year after year.

As we launch new innovation within each, the entire franchise has grown. In Q1, we continued to fuel the Putty franchise with the launch of our Liquid Poreless Putty Primer, priced at an incredible value of $10 compared to a prestige item at $54.

Speaker 17

This is the Liquid Poreless Putty Primer from e.l.f. This has been the key to keeping my makeup on all summer while still looking glowy. It gives the most silky, glass-looking skin finish. It's incredible!

Tarang Amin (Chairman and CEO)

We also launched our Putty Color-Correcting Eye Brightener, extending the Putty franchise into the eye category for the first time. We're using this approach to disrupt the skincare category as well. Our latest Suntouchable franchise is a great example. In January, we launched Suntouchable Whoa Glow SPF 30, priced at an incredible value of $14 compared to the prestige item at $38. Whoa Glow quickly rose to one of our best-selling skincare SKUs. We expanded the Suntouchable franchise further in Q1 with the launch of our Invisible Sunscreen SPF 35 and our All Set for Sun SPF 45.

Speaker 17

Put a finger down if you're looking for an affordable, invisible, gel-like formula sunscreen that's not greasy. Great, because this Suntouchable Invisible Sunscreen SPF 35 is only $14. Let me show you guys how awesome it is. It's an invisible sunscreen, and when you rub it in, it kind of has this velvety, soft feel to it. Can you see that? It really reminds me of the popular high-end sunscreens out there. This one also doubles as a makeup primer, too, so it blends beautifully under my base makeup. What do you think? Worth a try? I personally love these, and I think they're so worth the money. If you want to try this sunscreen out, visit the link in my bio to get your hands on some before it sells out.

Tarang Amin (Chairman and CEO)

We're excited by how our community is responding, with the Suntouchable franchise quickly rising to our skincare bestsellers. The third driver of our performance is our ability to attract and engage consumers with our disruptive marketing engine. We continue to generate buzz-worthy moments for our community and reach new audiences with our collaborations. In June, we launched a limited-edition collaboration with beauty content creator Mikayla Nogueira in honor of her wedding. With over 17 million followers across her social platforms, Mikayla has been named one of the top beauty influencers. Our limited-edition lip duo collaboration sold out in 18 minutes on elfcosmetics.com, our fastest-ever sellout of a collection. We also saw our highest-ever spike in site traffic during the launch hour, and nearly 75% of purchasers were new to e.l.f., our highest new purchaser rate on an innovation product in the last two years.

This quarter, we leaned further into entertainment and short-form digital content with the release of two new series across our social channels, Make Up Over Makeup and Vanity Table Talk. The first episode of Vanity Table Talk featured cultural icon and award-winning actress Jennifer Coolidge, who inspired the series with her comedic quips while filming our chart-topping commercial for the big game earlier this year.

Speaker 17

This is a beautiful lipstick. I really love this one. This one is called Dirty Talk. I would come up with a shade very similar to this, a little bit lighter, and I'd call it Dirty Pillows. People always think they need to name a lipstick, you know, like a noun, a noun, but I think just adjectives like swollen.

Tarang Amin (Chairman and CEO)

We had celebrity media buzzing and viewers captivated, collectively earning over 20 billion impressions from our two new digital content series. I'm proud how we continue to lead with purpose as we strive to create a different kind of beauty company. We recently launched a new purpose-driven series named Show Your(s)e.l.f., featuring role models who have overcome adversity to bring more positivity, inclusivity, and accessibility to the world. The series kicked off with Anastasia Pagonis, a 19-year-old blind Paralympic swimmer and world record holder, who proves that anything is elfing possible, even in the face of the toughest obstacles.

Speaker 17

I want to be that person to kind of show people what blindness is, so that the other people don't have to deal with the negativity.

Tarang Amin (Chairman and CEO)

To support [Anastasia Pagonis's] hope to help lift others, we donated to one of her favorite organizations, The Hidden Opponent, a nonprofit that raises awareness for student-athlete mental health. This is part of e.l.f. Beauty's commitment to donate annually 2% of our prior year profits to drive positive impact in our communities. Before I turn the call over to Mandy, I want to spend a moment to talk about our competitive moat. While beauty is a category of comparatively low barriers of entry, very few brands have been able to scale. For context, of over 1,800 cosmetics and skincare brands tracked by Nielsen, only 58 have surpassed $25 million in annual retail sales over the past three years, and only 28 are greater than $100 million.

e.l.f. has been one of the few brands able to scale through the areas of advantage we bring to the table....With e.l.f., consumers can have premium quality beauty products at accessible price points with broad appeal that are vegan, cruelty-free, clean, and Fair Trade Certified. These superpowers are underpinned by several other areas of competitive advantage. Our supply chain offers the best combination of cost, quality, and speed in our industry, and is well integrated with our innovation engine to launch franchise-building Holy Grails. Our engagement model gives us the ability to activate millions of consumers against this innovation. Perhaps most importantly, we have a talented, high-performance team and culture. While other beauty brands can try to replicate some of these, we believe the unique combination of our areas of advantage form our competitive moat and fuel our ability to win in fiscal 2024 and beyond.

I'll now turn the call over to Mandy.

Mandy Fields (SVP and CFO)

Thank you, Tarang. I am pleased to share the highlights of our first quarter results, as well as our raised outlook for fiscal 2024. Our first quarter results were outstanding. Q1 net sales grew 76% year-over-year, driven by broad-based strength across national and international retailers, as well as digital commerce. Higher unit volume contributed approximately 56 percentage points to net sales growth, with mix adding approximately 20 percentage points to growth. We saw better-than-expected unit velocities in Q1, supported by robust consumer response to both our spring innovation and core products. Shipments exceeded consumption this quarter as we started to recover on some out-of-stock items. Our digitally-led strategy continues to serve us well. Q1 digital consumption trends were up triple digits year-over-year. Digital channels drove 18% of our total consumption in Q1, as compared to 14% a year ago.

We see opportunity to increase our digital penetration, particularly as we further enhance our Beauty Squad loyalty program. Beauty Squad now has over 3.9 million members, with enrollment growing over 25% year-over-year. Our loyalty members drive almost 80% of our sales on elfcosmetics.com and continue to have higher average order values, purchase more frequently, have stronger retention rates, and are a rich source of first-party data. Q1 gross margin of 71% was up approximately 280 basis points compared to prior year. We saw gross margin benefits from favorable FX rates, margin accretive mix and cost savings, lower inventory adjustments, and improved transportation costs, which more than offset costs related to retailer activity and space expansion. On an adjusted basis, SG&A, as a percentage of sales, was 39% in Q1, compared to 45% 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 16% of net sales and in line with last year. This was lower than expected on a percentage basis, given our significant top-line outperformance. We continue to expect marketing and digital investment to be approximately 22%-24% of net sales in fiscal 2024. Q1 adjusted EBITDA was $74 million, up 135% versus last year, and adjusted EBITDA margin was approximately 34% of net sales. Adjusted net income was $63 million, or $1.10 per diluted share, compared to $21 million, or $0.39 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. We ended the quarter with approximately $143 million in cash on hand, compared to a cash balance of $72 million a year ago. Our ending inventory balance was $98 million, in line with our expectations and up from $70 million a year ago. As a reminder, last quarter, we spoke about plans to build back our inventory levels through fiscal 2024 to support the strong consumer demand we're seeing. I'm also pleased with the approximately $23 million in free cash flow generated in Q1. We ended the quarter with a net cash position and less than 1x leverage in terms of total debt to adjusted EBITDA.

We expect our cash priorities for the year to remain on investing behind our growth initiatives and supporting strategic extensions. Some of the initiatives we're focused on this year include investing in our people and infrastructure, our ERP transition to SAP, as well as increased working capital and distribution capacity to support strong consumer demand. Now let's turn to our raised outlook for fiscal 2024. For the full year, we now expect net sales growth of approximately 37%-39%, up from 22%-24% previously. Adjusted EBITDA between $171 million-$174 million, up from $144.5 million-$147.5 million previously.

Adjusted net income between $125 million-$127 million, up from $98.5 million-$100.5 million previously. An adjusted EPS of $2.19-$2.22 per diluted share, up from $1.73-$1.76 previously. We expect our fiscal 2024 adjusted tax rate to be approximately 17%-18% and a fully diluted average share count of approximately 57 million shares. Let me provide you with additional color on our planning assumptions for fiscal 2024. 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, as our consumption remains strong, both in tracked and untracked channels. Turning to gross margin.

In fiscal 2024, we now expect our gross margin to be up approximately 150 basis points year-over-year, as compared to our expectation for up 100 basis points previously. The improved outlook is largely a result of our outperformance in Q1, aided by lower inventory adjustments in the quarter and favorable mix. In terms of the key puts and takes for 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. Turning now to adjusted EBITDA. Our outlook now implies adjusted EBITDA growth of approximately 46%-49% versus prior year, up from 24%-26% previously, and on top of the strong 56% growth we delivered in fiscal 2023.

Our outlook also implies adjusted EBITDA margin leverage of approximately 150 basis points year-over-year, as compared to approximately 30 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 in a position to meaningfully raise both our sales and profitability outlook this early in our fiscal year. In summary, we are off to a strong start in fiscal 2024. Our performance over the last 18 quarters, both on an absolute basis and relative to the category, demonstrates that we have a winning strategy. As great as these results have been, we're even more excited for the future.

The significant white space we see across color cosmetics, skincare, and internationally gives us confidence that we are still in the early innings of unlocking the full potential for our brands. With that, operator, you may now open the call to questions.

Operator (participant)

We will now begin the question-and-answer session. To ask a question, you may press star, then one on your touch-tone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. We also ask that you please limit yourself to one question on today's call. To withdraw a question, please press star then two. At this time, we will pause just momentarily to assemble our roster. Our first question here will come from Dara Mohsenian with Morgan Stanley. Please go ahead.

Dara Mohsenian (Managing Director and Senior Equity Research Analyst)

Yeah, good afternoon, guys.

Tarang Amin (Chairman and CEO)

Good afternoon.

Dara Mohsenian (Managing Director and Senior Equity Research Analyst)

Obviously, another really strong quarter in terms of revenue growth. In, in Q1, you beat your soft guidance or consensus by about $30 million, but you're raising the full year by an even greater $85 million. Can you just give us a bit more detail on your confidence in underlying momentum in the business coming out of Q1 and what that portends in the balance of the year? I know Mandy touched on it, but a bit more detail would be helpful there. Specifically, maybe just given the strength in Q1, can you help frame how we should think about fiscal Q2 relative to fiscal Q1? Thanks.

Mandy Fields (SVP and CFO)

All right. Thank you so much. Let's start with your first question on raising the full-year guidance and our confidence in that. We feel that we're in a great position to raise guidance as the first quarter out of the year, raising the top end of our guidance to 39% on the full year, and on 49% from an adjusted EBITDA standpoint. Really underpinned by the momentum that we continue to see in the business. The fundamentals remain strong, really, we talked the key drivers of our business, our value proposition, powerhouse innovation, and our ability to engage our consumers. That continues to drive our business forward. We feel really great about our full-year guidance and our ability to continue to see that momentum move forward.

In terms of Q2 specifically and framing around that, so, you know, if I look at our Nielsen Tracked Channel data, and I know you all get that information, over the last 12 weeks, we have tracked about 60% growth. I would say that's probably a, a fair place to anchor for Q2, if we were going to kind of try to frame that a little bit for you.

Operator (participant)

Our next question today will come from Olivia Tong with Raymond James. Please go ahead.

Olivia Tong (Managing Director)

Great, thanks. Congrats as well. I want to talk a little bit about some of the newer categories that you're, you're entering, and expanding in, like eye and lip versus the face. Can you talk about the margin structure in those? Also, just the ACV that you have in the newer categories versus what you have as we think about the opportunity to unlock, potentially even more incremental shelf space.

Tarang Amin (Chairman and CEO)

Hi, Olivia. We're seeing strength across our entire business. There's 16 segments where we have the number one or two position. Those continue to grow extremely strongly, and we also feel good about some of the areas that we're expanding in. You talked about our lip innovation, our skincare business in the quarter, I think in track channels, was up 127% relative to the category. It was up 6%. All of this leads to the strong share gains we talked about. I think year-over-year, we picked up 260 basis points of share. Then in terms of the margin structure, you know, we target all of our innovation, to be margin accretive to our overall margin structure as a company.

There isn't really much of a difference between some of those categories, and it's actually been one of the ways we've both improved our margins, but also raised our average unit retails. We've primarily done that through innovation mix, you know, products like in our Whoa Glow, Suntouchable at $14, still an incredible value relative to the prestige item at $38. That certainly mixes up the brand.

Operator (participant)

Our next question here will come from Linda Bolton Weiser with D.A. Davidson. Please go ahead.

Linda Bolton Weiser (Managing Director and Senior Equity Research Analyst)

Yes, hi. I was just curious about your marketing ROI. As you get bigger, you continue to spend more. I'm curious, are you seeing that plateauing or is the ROI still going up? Secondly, I was wondering if you would adopt the notion of spending ahead of sales growth, because you keep beating so much on sales expectations, but you never really reach your intended ratio. Would you consider spending ahead, anticipating the growth, you know, if your ROIs are still really strong? Thank you.

Tarang Amin (Chairman and CEO)

Yeah. Hi, Linda, this is Tarang. We continue to see exceptional ROIs on our marketing investment. It's one of the big drivers of our business, along with our innovation, and we feel really great about it. Then in terms of the spending rate, you know, first quarter marketing rate came in lighter than what we would have wanted. It was a 16% of net sales, and that really just has to do with the over delivery of the top line in the first quarter. We plan to catch that up for the balance of the year. We're still guiding towards 22%-24% of net sales and marketing, primarily because it's working. We see plenty of opportunity.

Operator (participant)

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

Andrea Teixeira (Managing Director and Senior Equity Research Analyst)

Thank you. Good afternoon, and congrats. Tarang, Mandy, I think you just called about, you know, the second quarter being roughly by my math, around $195 million, so touching $200 million a quarter. That's the new run rate. It seems like you just did $216 million. Just thinking at the second half, so it gets you to the, you know, the $800 million, that it's the top of your range guidance. I'm thinking more as we as we look forward to the fall, you're getting additional shelf space. Should we be thinking of, and on top of what you just described on your prepared remarks, both the U.K. and Canada being a very relevant player now?

Should we be thinking of that type of growth, continue to build, even if you lap the fourth quarter? I think the fourth quarter is where you'll get closer to that level of runway. How we should be thinking of the progression for the quarter, it seems like, again, your guidance in the second half, even though you added, to a previous question, you were adding $80 million more than you added in the quarter, but obviously the run rate still has room to grow. Thank you. If you can elaborate on that.

Mandy Fields (SVP and CFO)

Thank you, Andrea, for the question. As I think about our guidance, again, at 39% on the top end for the year is extremely strong. How that breaks out across the quarters, as you know, we don't provide quarterly guidance, but we did want to give you some flavor for what we might see for Q2, and we'd like to take it a quarter at a time, as you know. As I mentioned earlier, the fundamentals of the business remain strong. To your point, yes, we do have space expansion coming in the fall, particularly with Ulta, CVS and Walgreens, that we have talked about previously, and so really excited to see how that materializes.

If I think about building blocks and, just what that looks like, you know, we've seen really strong unit growth, and we talked about 56 points of unit growth in Q1. So we continue to believe that our, our volume, will lead our sales growth, with mix coming in through AUR. If I just think about space gains versus the productivity that we're able to drive, productivity is still the main driver of the results that we're seeing. Space gains are a great complement to that, but with our marketing, and digital spend and the innovation that we've launched, that's really helping to drive productivity at shelf. We can, we expect that momentum to continue, as indicated by our race guidance.

Operator (participant)

Our next question here will come from Susan Anderson with Canaccord Genuity. Please go ahead.

Susan Anderson (Managing Director and Senior Equity Research Analyst)

Hi, good evening. Nice job on the quarter again. I was just looking at the digital growth, once again, triple digits. I guess I'm curious, you know, now the second quarter in a row, what's driving that acceleration? I guess, what are you doing different now? Is it all the marketing? Then also, are you seeing new consumers online, or are these consumers shopping more online now than they were in stores, or both? Thanks.

Tarang Amin (Chairman and CEO)

Hi, Susan, this is Tarang. We're really pleased with our digital business and the progress. As you mentioned, we grew it again by triple digits. Our digital penetration now is 18%, relative to 14% last year. I'd say there's two main drivers. One is most of our marketing is digitally oriented, through our various social platforms, getting people to our site, and that certainly is working through the ROIs that we're seeing there. The second big driver of our digital business is our Beauty Squad loyalty program. Beauty Squad loyalty members now account for, I think, over 3.9 million members, growing about 25% a year. As Mandy highlighted, they are the key driver for our digital business. We're seeing really great results there.

The last thing I'd say is we have really good strength, not only on elfcosmetics.com, but our business with Amazon as well as retailer.coms. We see a halo benefit of a lot of our digital efforts also helping propel our retail results.

Operator (participant)

Our next question will come from Bill Chappell with Truist Securities. Please go ahead.

Bill Chappell (Managing Director and Senior Equity Research Analyst)

Thanks. Good afternoon, and congratulations on the momentum. Just trying to understand, you know, again, as we all are, kind of what's driving the growth in terms of maybe more color on, is there a specific channel? You know, be it skincare at Target that's doing better, or color or... Also, kind of, is there a way to break out how much is this coming from the kind of Beauty Squad existing customer having a bigger basket, versus is there a way to track new consumers coming into the, to the market? Just try to understand the breakdown of, you know, how we should look at it going forward. Thanks.

Mandy Fields (SVP and CFO)

Hi, Bill. I can try to break that down a little bit for you. From a growth driver standpoint, we're really seeing growth across the entire business. When we think about channels, as Tarang just spoke to, our retailers are strong, our digital channels are strong. We talked about the track channel results that we're seeing right now, up 60% in the latest 12 weeks. That indicates to you the retailer channel continues to be strong. From a color standpoint, we talked about both our growth in color and skin outpacing the category. Even internationally, where we're seeing growth in Canada and the U.K., outpacing the cosmetics category in those areas as well.

When we look across the board, we are seeing growth in nearly every segment of the business, across channels, across segments, and so we're really pleased with that. In terms of new consumers, we also highlighted as an example of what we're seeing from a new consumer standpoint, the collaboration that we did with Mikayla Nogueira, and bringing in 75% new consumers into that collaboration, which was the most that we've seen out of any launch that we've done recently. It's really a fantastic trend that we're seeing here, and really excited to see the growth, not just coming from one place, but really across the business.

Operator (participant)

Our next question here will come from Anna Lizzul with Bank of America. Please go ahead.

Anna Lizzul (VP and Equity Research Analyst)

Hi, good afternoon. Thanks very much for the question, and congratulations on the results. Very impressive. As we think about your shelf space gains and the increase in demand for your products, do you still feel comfortable with your current model of third-party manufacturing in China? This has been very successful in the past, but I'm wondering if you're looking to diversify the model or working to expand your manufacturing network. Thanks.

Tarang Amin (Chairman and CEO)

Hi, Anna. We feel great about our supply chain and the advantage we have as we talked, in terms of the best combination of cost, quality, and speed. That supply chain has been highly resilient through the pandemic, coming out of the pandemic, meeting the very strong consumer demand we have. We also have been doing diversification efforts, really taking that same advantage we have with like-minded suppliers, with a high degree of control that we have over those suppliers. We started up additional operations in Thailand. We're looking at other geographies as well. Over time, really from a business continuity standpoint, we want to be in a position where if anything happened in China, we have the vast majority of our production that could also be sourced elsewhere.

We love what we continue to see in terms of our operating advantage and the investments we're also making to improve our distribution capability and infrastructure.

Operator (participant)

Our next question will come from Korinne Wolfmeyer with Piper Sandler. Please go ahead.

Korinne Wolfmeyer (Senior Research Analyst)

Hey, all. Good afternoon. Thanks for taking the question, and congrats on an awesome quarter. I'd like to dive a bit more into the, the growth margin outlook for the remainder of the year and kind of the puts and takes of, you know, what's really driving the expansion you saw in Q1, and what in that, you know, expansion is really sustainable versus maybe more one-time or maybe more front-end loaded in the year versus back end. Then thinking about, you know, EBITDA for the remainder of the year and marketing spend, how should we be thinking about the cadence of this increased marketing spend throughout the year? Is it going to probably pick up towards, towards the back half, or is it going to be more equal across the quarters? Thank you.

Mandy Fields (SVP and CFO)

Yep. On the gross margin outlook, we are really pleased to be outlooking gross margin at 150 basis points of improvement year-over-year. That's on top of the 320 basis points of improvement in gross margin we delivered in fiscal 2023. When you think about the puts and takes, we talked about for Q1, FX being a driver, a favorable driver to our gross margin. Mix and cost savings, as we spoke to earlier today, you know, our innovation as we do introduce that, we have higher margin rates, we're getting a benefit from that as well. Lower transportation costs, as we've talked for the past couple of quarters, are starting to flow through. We started to see that in Q4.

We also had lower inventory adjustments this quarter, as we look at reserves that we take on a quarterly basis, came in lower this quarter. If I think about what's one time versus not in, in that sequence, the inventory adjustments, that will ebb and flow from quarter to quarter. I think about that as more one time in nature. If I think on the longer arc, FX also will ebb and flow. We've been really pleased to see that we can continue to push our growth margin forward, and happy to take our outlook up to 150 basis points this, this quarter.

From an EBITDA standpoint and from a marketing spend and the cadence of how that looks over the balance of the year, we are still targeting that 22%-24% range from a marketing standpoint. So I would expect to see a ramped-up spend Q2 through Q4. How that comes in by quarter may vary. We will be targeting higher spend to get to that 22%-24% range by the end of the year.

Operator (participant)

Our next question will come from Ashley Helgans with Jefferies. Please go ahead.

Ashley Helgans (SVP and Equity Research Analyst)

Good afternoon, and thank you for taking our questions. Congrats on the quarter. We're starting to see dupes become super popular in the fragrance category, and, you know, being the leader in dupes, curious if you'd ever explore adjacent categories like fragrance and hair care?

Tarang Amin (Chairman and CEO)

Hi, Ashley. Well, you know, I think our approach is more than dupes. We always put our own e.l.f. twist on whatever we take inspiration from, either prestige or our community. There's often meaningful differences between what we go after, and I think that formula is working, really being able to bring that prestige quality at these extraordinary prices. In terms of category adjacencies, we're open to looking at other categories, but I'd say our primary focus right now is color cosmetics and skincare. We have so much white space in both of those. For perspective and color cosmetics, I'm really bullish about the share gains that we've been able to sustain. If you look nationally, in the last year, we passed both CoverGirl and Revlon for the number 3 position in color cosmetics at 9.5% share.

If I look at our longest-standing national retailer, Target, we're the clear number 1 brand there with an 18% share. I feel over the next few years, we have an opportunity to double our market share in color cosmetics. Skincare, perhaps even more white space. We're now the number 14 brand in skincare. I talked about our growth rates there a little while ago, but we still only have a 1.5% share relative to the market leader at 15%. While we're open to other adjacencies, I think, you know, we have plenty to, to tackle, both in color cosmetics and skincare.

Operator (participant)

Our next question will come from Mark Astrachan with Stifel. Please go ahead.

Mark Astrachan (Managing Director and Senior Equity Research Analyst)

Yeah, thanks, and afternoon, everyone. wanted to ask about skincare and just sort of learning so far as the category becomes a bigger % of mix. you know, what's the overlap of the skincare consumers who's buying the e.l.f. Skin product with the legacy business? How much are new users, and how do you think about that in terms of being a, in terms of both, user bases, if, if there are, with driving the growth going forward? Sort of related to that, you know, how do you think about the trade into the e.l.f. Skin franchise versus the trade into of the legacy business?

Tarang Amin (Chairman and CEO)

Mark, if I look at our skincare business, I'd say historically, our skincare consumers are primarily our e.l.f. Cosmetics consumers, particularly at places like Target, where skincare is housed with our color cosmetics in the same set. I think that has been a really good basket builder as I think of our productivity model in kind of getting skin in, they're buying additional items. More recently, we've seen a lot more new users come in, primarily through the innovation. We talked about our Suntouchable Whoa Glow, the three items we launched there. A big portion of the volume of those have been entirely new consumers to the e.l.f. franchise.

I think you're going to see a mix as we go forward, and particularly, you know, we have a very good pipeline on skincare, and I think we can use it to attract more new consumers to, to the overall franchise.

Operator (participant)

Our next question will come from Jon Andersen with William Blair. Please go ahead.

Jon Andersen (Partner and Senior Equity Research Analyst)

Hey, good afternoon, everybody. Congrats on the great quarter. Quick question on gross margin, a follow-up. I'm just wondering if the transportation costs and the currency benefits, which have been aiding gross margin, are there additional or incremental, incremental benefits on that front going forward? Have we reached kind of a run rate level for transportation costs, ocean freight, and the FX helper? Thanks.

Mandy Fields (SVP and CFO)

Yeah. Thanks, Jon. From a transportation standpoint, there's still benefit to flow through. As you know, we capitalize, those transportation costs and takes time for, to flow through the PNL, so I would expect those to continue for the balance of the year. On FX, I also expect that to be a benefit to us from a year-over-year standpoint through fiscal 2024. As we are looking at that, that has been favorable for us and remains so on a year-over-year standpoint.

Operator (participant)

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

Erica Eiler (Equity Research Analyst)

Good afternoon. This is actually Erica Eiler on for Rupesh. Thanks for taking our question. I actually have sort of a two-part longer-term question here. I mean, you guys are obviously exceeding, you know, that longer-term top line growth algorithm that you had once set out for mid to high single digit top line growth. First, curious, any new thoughts on what the steady state top line growth could look like for your business? Then second, as we think longer term, I mean, your gross margins are now at 70%. I mean, how are you thinking about the ceiling on gross margins here? Is there still opportunity for expansion over the longer term? You know, any thoughts you could share there would be helpful.

Mandy Fields (SVP and CFO)

In terms of the long-term algorithm, you know, we have not revisited that, but we feel great about the momentum that we've seen recently. We talked about 18 consecutive quarters of growth, and we are one of five out of 274 consumer companies that have delivered that consistency of growth and at that level, over time. Over 20% growth on average per quarter over that time. We feel great about our growth and what we have on the road ahead. We've talked about the white space opportunities along, across color, skin, and in international, that we believe can be growth drivers for us over the long term.

In terms of gross margin and any ceiling that we see there, you know, we haven't given a long-term growth margin target other than to say that we believe, you know, as we launch innovation and core to what we do, believe that we can mix favorably from a gross margin standpoint. The levels to what that looks like year to year will vary.

Tarang Amin (Chairman and CEO)

Yeah, and the only thing I would add to that is there's a healthy tension between gross margin and ensuring we're delivering a superior value equation. I think that would be, while there's plenty of opportunity from a gross margin standpoint, as Mandy said, through innovation mix and our cost savings programs, we also want to make sure we're delivering a really great value, and so we always keep an eye there versus taking our gross margins up too high.

Operator (participant)

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

Speaker 16

Thank you. This is Jonah on for Oliver. Just curious, as sort of the student loans come back, the payment comes back and lower-income consumers remain, remain under pressure, how do you think about your positioning and sort of, your pricing point at this point? Also just curious on your international growth strategy, which markets are you prioritizing now, and how your strategy of products might differ in international markets versus the U.S.? Thank you.

Tarang Amin (Chairman and CEO)

We're keeping an eye on the consumer environment and the overall macroeconomic environment. We feel we're very well positioned. Of that superior value equation, our average unit retails and color cosmetics are a little bit over $6, compared to $9 for legacy brands and almost over $20 for prestige. We feel sets us up well, particularly given as we've continued to take our quality ratings up year after year after year. We feel really good about that, but we'll be paying close attention, too. On the pricing point, you know, we've decided not to take additional pricing in the U.S. We may take a round internationally to catch up to the pricing we did in March of 2022, but we feel that also will keep us well positioned.

We're hearing some rumors of competitors perhaps taking some pricing right now. We feel our value equation will get perhaps even stronger as we take the stance that we have. In terms of our international expansion, we're quite bullish in terms of our prospects internationally. We talked about the strength we have in Canada and the U.K. The team that we're building out in the U.K. has identified a number of other countries that we can enter. We tend to make those announcements quarter by quarter, depending on kind of where we're entering. I'd say our first focus would be Western Europe. We've got kind of proof of concept in the U.K. and the momentum we have in the U.K. We feel there are other countries we can enter in Western Europe.

We also feel good about we have a business in India with Nykaa, an online beauty retailer, that's done extremely well. We feel there'll be additional markets that we can enter, but, you know, first order of business will probably be fill out Western Europe in a disciplined way and then go to other markets from there.

Operator (participant)

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

Tarang Amin (Chairman and CEO)

Well, thank you for joining us today. I'm so proud of our incredible team at e.l.f. Beauty for again, delivering outstanding results to start fiscal 2024. 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.

Operator (participant)

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