e.l.f. Beauty, Inc. (ELF) Earnings Call Transcript

Thank you for joining us today to discuss e.l.f. Beauty's Second Quarter Fiscal '27 results. I'm Ashley Helgans newly appointed Vice President of Investor Relations, and I look forward to working with many of you on this call. 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 that factors 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 these differences between the non-GAAP presentation and the most directly comparable GAAP measures. With that, let me turn the webcast over to Tarang.

Welcome, Ashley, and good afternoon, everyone. I'm proud of the e.l.f. Beauty team for achieving another quarter of industry-leading results. In Q2, we grew net sales 51% and adjusted EBITDA 86%. This marks our 31st consecutive quarter of net sales growth. That's almost 8 continuous years of growth. We're one of only 6 public consumer companies out of 516 that has grown for 31 straight quarters and average at least 20% net sales growth per quarter. With the momentum we're seeing, we're raising our fiscal '27 outlook to 22% to 24% net sales growth as compared to 18% to 20% previously. Our consistent category-leading growth is a testament to the strength of our team, strategy and portfolio of brands. e.l.f. Cosmetics reignited unit momentum this quarter and gained 30 basis points of market share. Road continues to break records with every launch, including most recently in Sephora Europe, marking the biggest launch in Sephora's history and Naturium remains one of the fastest-growing skin care brands, more than doubling since our acquisition just 3 years ago. The strength of our portfolio is powered by leading engagement with our community, especially the next generation of consumers. In Piper Sandler's annual taking stock with teen survey we made history with 2 unprecedented achievements. Health Cosmetics was named the #1 favorite teen cosmetics brand for a record ninth consecutive survey with mindshare nearly 5x the next closest brand and Rod and e.l.f. were the only 2 brands in the top 10 for both skin care and cosmetics. No other portfolio and beauty can claim this level of strength amongst teens. Our mission is to make the best of beauty accessible to every eye, lip and face. We recently refreshed our business strategy to unlock the full potential of our portfolio of brands. This new strategy is powered by 5 integrated pillars, cultivate a passionate team of owners, co-create with our community, win with winners expand our portfolio and accelerate global expansion. Together, we believe these strengthen our competitive moat and give us confidence addressing the tremendous white space we see ahead. Let me walk through how each pillar powered our results in Q2. First, cultivating a passionate team of owners in a high-performance culture. I believe that our people are our greatest competitive advantage, and our results are a direct reflection of their tremendous talent and teamwork. We're the only public beauty company that grants equity annually to every employee, strongly aligning our interest with the long-term interest of our shareholders. We nurture our high-performance team culture that delivers exceptional employee engagement. In our latest engagement survey, 93% of our employees stated they are proud to work at e.l.f. Beauty. This engagement helps fuel our productivity. On a sales and profit per employee basis, we outperformed the average of 516 public consumer companies by 3 and 8x, respectively. Second, core with our community through value, innovation and marketing. We listen closely to our community and quickly translate the request into premium quality products at extraordinary prices. In Q2, we had an incredible fall innovation class across e.l.f. Beauty exceeding our expectations. With e.l.f. Cosmetics, our continuous stream of innovation has led us to holding the #1 or #2 position in 22 segments up from [indiscernible] years ago. This fall was no exception, e.l.f. Cosmetics holds the #1 position in mass for fall innovation launches with 5 of the top 10 products in both dollars and units. We're building on this strength by fast-tracking additional innovation our community has been asking for ahead of the holidays. With Rhode, each launch continues to exceed our expectations. Our recent limited edition collection with influencer Alexandria Leclerc, had over a 200,000-person waitlist sold out of most items within the first hour and marked our largest limited edition launch to date. And it's not just launch success. Rhode has amongst the highest repeat rates in beauty, a testament to the quality and durability of our products. Our third strategic pillar is to win with the winners across channels and platforms. We have a long track record of winning with the retailers at priority Beauty. This quarter, we strengthened our position in connected commerce and elevate our partnership with Sephora. As a digitally native company, we continue to lean into connect e-commerce to launch newness fuel discovery and scale across geographies. In Q2, connected commerce drove 31% of our consumption. We're seeing particular strength on Amazon and TikTok shop. In the U.S., e.l.f. was both the #1 cosmetics brand on Amazon and the most search cosmetics brand on the platform, on TikTok shop the momentum is equally strong. In Q2, e.l.f. Cosmetics climbed to the #2 rank in cosmetics. Consumers continue to choose e.l.f. wherever they shop for beauty. We're seeing the same momentum with our physical retail partners. This quarter, we strengthened our relationship with Sephora, the leading global specialty beauty retailer with our launch of Rhode in Europe, e.l.f. in Brazil and Iterum in Canada and Mexico. Starting with Rhode. In the last year, we executed record-breaking launches with Sephora in North America and the U.K., achieving the #1 beauty ranking in both geographies. Building on that success, this quarter, we broke our own records with the expansion into Europe across 19 countries, exceeding what we achieved in North America and marking Sephora's largest launch ever. But it's not just excitement from our launches that's unprecedented. Rhode ranks #1 or 2 in 12 of the 13 segments we compete in, with exceptionally high repeat rates. This speaks to both the momentum and durability of this exceptional brand. With Health Cosmetics, our #1 ranking in Sephora, Mexico built the foundation for us to launch in Sephora Brazil this September. Brazil is our most requested country and the third largest beauty market in the world. To amplify the launch, we leverage our disruptive marketing engine with our e.l.f. Fofoka campaign, inspired by the Portuguese word Fofoka, the art of sharing news and spilling the tea. [Presentation]

In the first few weeks of launch, we achieved the #1 rank in both dollars and units. Naturium is also expanding our footprint with Sephora. Adding to the success we have seen from our expansion into Sephora, Australia and New Zealand last year. We launched in Sephora Mexico and Canada in September where we quickly broke into the top 10 brands in body. Turning to our fourth strategic pillar, expanding our portfolio of discipline across complementary yet distinct brands and categories. The e.l.f. brand is incredibly elastic and our consumers continue to ask for us in multiple categories. We listen, we learn, and we lean in. We took this approach with e.l.f. SKIN expanding from a test in target back in 2019 to a business that's now over $200 million in retail sales. We're taking the same thoughtful approach with hair care, bringing prestige-inspired products to our consumers at an extraordinary value. Our community wants e.l.f. in hair care. We launched e.l.f. Hair in July with a curated 6 product assortment each with a clear prestige frame of reference, all priced at $10 or less. Within the first 3 months of our exclusive launch with Target, e.l.f. has already broken into their top 20 hair care brands and top 7 in styling. We're taking this test and learn approach to fragrance. Fragrance is an $11 billion category in the U.S. and the fastest-growing in beauty. In October, we launched e.l.f. Pop exclusively on Amazon and TikTok Shop. e.l.f. Pop is a new fragrance and body collection that transports our community to sensorial destinations around the world. The full Pop lineup featuring additional cents will be released later this fiscal year. Finally, our fifth strategic pillar of accelerating global expansion by activating our full in-market growth engine. We're still in the early days of international expansion. On a trailing 12-month basis, International accounted for approximately 25% of our net sales compared to approximately 70% for our legacy peers. We believe this gap represents one of our biggest opportunities and the demand is already there. About 65% of e.l.f. Cosmetics and 75% of Rhode's social following is outside the U.S. Even after Rhode's launch in Europe, the brand is still only in 40% of Sephora's global doors. Our 5 integrated strategic pillars drive competitive advantage and industry-leading growth. I'm also proud of the work the team has done to further diversify our business. What started as a single brand in a single category in a single country is now a house of brands, each growing across categories and geographies. Over the past 3 years, non-e.l.f. brand sales have grown from a few million dollars to 30% of our net sales. Skin care has increased from 9% to 23%. And manufacturing outside of China has grown from 1% to nearly 70%. In summary, I'm proud of our results and excited by the momentum across our portfolio. We continue to demonstrate exceptional consistent category-leading growth driven by a passionate team of owners in a high-performance culture. Every one of our brands is growing. We're co-creating with the most desirable consumers in beauty. We're winning with the winners to expand our brands globally, and we're just getting started. I'll now turn the call over to Mandy to discuss our second quarter results and raised outlook for fiscal '27.

Thank you, Tarang. I'll now cover the highlights of our second quarter results and our raised outlook for fiscal '27. Q2 net sales grew 51% year-over-year. Rhode contributed approximately 16 percentage points to net sales growth in the 1-month period prior to annualizing the acquisition on August 5. Organic net sales grew approximately 35% year-over-year. This better-than-expected performance was supported by growth across all of our brands, along with pipeline shipments for Rhode's launch in Sephora Europe. U.S. net sales grew 25% in Q2, while international net sales grew 165%. In addition to Rhode's record-breaking launch in Europe, we saw a meaningful improvement in trends for e.l.f. in our largest international markets, Canada, the U.K. and Germany. Pricing and product mix added approximately 20 percentage points to net sales in Q2, while unit volumes added 31 percentage points. Q2 gross margin of 71% increased approximately 160 basis points compared to the prior year, 30 basis points were driven by incremental tariff refunds flowing through COGS in the quarter. The remaining increase was driven by lower year-over-year tariffs and a more favorable than planned mix benefit, partially offset by price investments. On an adjusted basis, SG&A as a percentage of sales was 53% in Q2 as compared to 56% in Q2 last year. Marketing and digital investment for the quarter was 21% of net sales, below our expectations due to timing shifts in spending and compared to 23% last year. Q2 adjusted EBITDA was $123 million, up 86% as compared to $66 million in Q2 last year. Q2 adjusted net income was $73 million or $1.21 per diluted share compared to $41 million or $0.68 per diluted share a year ago. Moving to the balance sheet. We believe our balance sheet continues to position us well to execute our long-term strategic plans and invest in the growth of our business. Our liquidity position remains strong, with net leverage at approximately 1x adjusted EBITDA. We ended Q2 with $351 million in cash on hand, compared to a cash balance of $194 million a year ago. We expect our cash priorities to support the growth of all of our brands, technology investment, including AI and automation, as well as investment in infrastructure to ensure our brands show up their very best in our retailers across the globe. Following the end of the quarter, we used a portion of our cash to satisfy the first payment of the road earnout given the brand's exceptional performance. Now let's turn to our raised outlook for fiscal '27. We are raising our outlook on both the top and bottom line. For the full year, we expect net sales growth of approximately 22% to 24%, up from 18% to 20% previously. Adjusted EBITDA of $421 million to $427 million, up from $401 million to $407 million, adjusted net income of $231 million to $233 million, up from $212 million to $215 million and adjusted EPS of $3.82 to $3.86 per diluted share, up from $3.50 to $3.55. We continue to expect an adjusted tax rate of approximately 25% to 26% and approximately 60.5 million fully diluted shares. Starting with the top line. For the full year, we expect to deliver 22% to 24% net sales growth, reflecting the strong results from Q2 and an improved second half outlook. Our raised outlook translates to organic net sales growth on the full year of 9% to 11%, up from 6% to 7% previously. Looking to the second half, we expect net sales growth of approximately 7% to 10%, up from the implied 6% to 9% previously with each of our brands expected to contribute to growth for the balance of the year. From a cadence perspective, we expect Q3 net sales growth above that range and Q4 below that range, primarily due to the timing of launch activity in the year ago period. Recall, in Q4 last year, e.l.f. expanded space with Ulta Beauty and launch with DM in Germany. Rhode launched in Mecca in Australia and New Zealand and Naturium expanded into Walmart for the first time. Turning to gross margin. We now expect an increase of approximately 250 basis points year-over-year as compared to 200 basis points previously, driven by the upside we saw in Q2, excluding tariff refunds, our fiscal '27 outlook remains unchanged at approximately flat gross margin versus prior year. Looking to the second half, we continue to expect gross margin to be lower year-over-year as Rhode expands its retail presence. From a spend perspective, we continue to expect marketing and digital investment at the higher end of our 23% to 25% of net sales range for the full year. From a profitability perspective, our outlook implies adjusted EBITDA growth of approximately 26% to 27%, up from 20% to 21% previously with adjusted EBITDA margin expanding approximately 50 basis points year-over-year versus 20 basis points previously. As a reminder, our outlook assumes we fully reinvest the $52 million of tariff refunds received in the first half through lower prices on a subset of our portfolio and increased marketing investments across our brands for a neutral impact on full year adjusted EBITDA. With marketing spend shifting from Q2 into the back half, we now expect second half adjusted EBITDA margin in the low teens, reflecting both the reinvestments and the timing shift in spend. In summary, Q2 marked our 31st consecutive quarter of net sales growth, a testament to the durability of our model and the power of our brand portfolio. We believe we have a winning strategy and are in the early innings of unlocking our full portfolio potential. With that, operator, you may open the call to questions.

[Operator Instructions] And today's first question comes from Sydney Wagner at Jefferies.

[indiscernible] standard the e.l.f. brand into hair, body and fragrance, how are you thinking about the opportunity for each adjacency to create incremental shelf space at retailers over time? And then maybe just talk through kind of the proof points that you would need to see for a broader expansion of body and fragrance and then just on the portfolio of brands overall, e.l.f. Rhode and Naturium are all expanding across categories and geographies. So how are you prioritizing marketing, innovation and investments across the portfolio? And are there any constraints that could affect that pace of expansion?

This is Trang. I'll take your first question. On here, we're extremely excited about the momentum we're seeing on e.l.f. Hair. This is a category consumers have been asking for some time. And we're using the same approach we use when we expanded from elf cosmetic cell skin, taking inspiration from the best products in prestige, putting our twist on it and introducing a great value. Our e.l.f. Hair line is a curated line of 6 products, each with a clear frame of reference to prestige, all at $10 or less. And we have seen great success initially in the first 3 months our exclusive launch with Target. e.l.f. Hair is already in the top 20 brands in hair care, top 7 in styling. And in terms of our expansion plans, we're currently in exclusivity with Target. We will eventually expand distribution of e.l.f. Hair similar to what we've done with e.l.f. SKIN and that will come with incremental space here right now is [indiscernible] Hair care aisle. We'll continue to expand space with e.l.f. hair would be our strategy, just like we're expanding space with e.l.f. SKIN. And then in terms of body and fragrance, the proof points that really consumer response and we see it's off -- lop is off to a great start. We're starting with Amazon and TikTok shop, for instance, transporting consumers to different sensorial destinations around the world and we're really pleased with what we're initially seeing there. And so I would say, in summary, e.l.f. is a really elastic brand. There's a number of categories consumers want to see us in, and we have a good disciplined approach in terms of how we expand. And then in terms of your question on portfolio, one of the great things about e.l.f. Beauty is every single one of our brands is growing. We see strength across the portfolio. All of our brands contributed to growth, in Q2, and we foresee that growth continuing through the balance of the year. The way we manage our brand though is individually. We have a CEO of e.l.f. for Rhode, President for Naturium, President for e.l.f. Brands, each have their own P&L each have kind of their own levels of investment relative to our ability to invest in the brands. We use a rate-based approach in terms of our investments. And so we feel good about the focus we have against each brand with their ability to be able to pursue the white space that they see for themselves. And then just one clarification. It's less about P&Ls by brand. It's more about focus by brand. We have overall one P&L for the overall company.

Our next question today comes from Andrea Teixeira with JPMorgan.

I was just like trying Trang and Mandy to get to the fourth quarter, of course, you have a lot of tough comps for the base brand for else and then also for Rhode. Can you talk to what you see from a sellout perspective in terms of like the exit of the quarter for both brands and in particular, as you expand. So on on a U.S. basis, if that's possible to talk about Rhode or the U.S. has been lapping the introduction last year into retail and how we should be thinking as a run rate for both health base business and growth.

Thanks for the question, Andrea. So in terms of our back half that we talked on the call, we said that we're outlooking 7% to 10% growth. And that growth is well ahead of where the category is tracking right now. Category is kind of low single digits. We're planning to deliver multiples above that. We have a track record of consistent category-leading growth, and I think that's what is reflected in our second half into the fourth quarter. To your point, we do have some launches that we're cycling in the fourth quarter with Ulta Beauty expansion on e.l.f. on our DM launch on e.l.f. Rhode going into Cameka, Naturium launching in Walmart. So that will have -- on the call, I said Q3 a little bit higher than that 7% to 10% range, Q4 a little bit lower than that range. But still, we see it as strength across the board just given again where the category is. And then you also asked about Rhode here in the in the U.S., even after cycling the launch -- the U.S. launch last year, they're still delivering growth on a year-over-year basis here in the U.S.

What I'd add, Andrea, on that on Rhode, the strength that we continue to see on Rhode and the momentum in the U.S. alone in Canada, where we did lap the launch, Rhode is by far Sephora's #1 brand. And not only is the #1 brand, it has most of the highest rates they've seen that talks about the durability. And we're doing all of that mainly in One Bay. So we still have further expansion opportunity here even in North America as we continue to expand around the world.

Our next question today comes from Olivia Tong at Raymond James.

On Rhode, happy anniversary, can you talk about the sellout trends, both in the U.S. and existing markets? And then the uptake in Continental Europe? And then second, what's the biggest unlock you've seen since acquisition for Rhode and then third, what do you think is the right pace for further geographic expansion there, as you mentioned at the vast majority of the Rhode social followship is still overseas.

Thanks, Olivia. So on the sellout trends, as I just mentioned, U.S. continues to be strong. Europe was a record launch for Rhode in the European markets. It's the largest launched the for as ever seen only the second best to our U.S. launch that we had last year. And so we feel great about the trends that we're continuing to see on road. It's just got a ton of momentum behind it.

And then to your second question on the biggest unlock on road, the great news on Rhode is we have momentum across multiple dimensions. And so we've been able to, as you see, very strong innovation cadence on road, still sticking to the overall vision of 1 of everything really good, but we have real strength across the portfolio, not only in skin where we started, but in hybrid color and in lip -- in fact, in Sephora, we're #1 or 2 in 12 of the 13 segments we compete in. So real strength across the board, really driven by innovation, our overall engagement efforts. We are investing more in the brand and still having the brand be accretive on an adjusted EBITDA margin basis. So we've got a great approach on Rhode. That team has done an exceptional job, and we see continued white space ahead as we continue to expand. I would say the distribution expansion strategy will be the same disciplined strategy we've used. As we've launched now with Sephora in North America, Mecca in Australia and New Zealand, 19 countries and Sephora in Europe, even after all of those expansions, Rhode is still in only about 40% of the 4 stores globally. So we still have a lot further to go. There is in a market in the world that doesn't want Rhode right now.

Next question today comes from Anna Lizzul with Bank of America.

I was wondering if you could talk about the road business and the Sephora Europe expansion. How do you see the split of business evolving now between retail and DTC? And should we ultimately view this split as becoming similar to retail and DTC and the e.l.f. brand? And then as you're expanding into retail, how should we expect gross margin to evolve? Is there any opportunity the cushion with the retail expansion kind of pressuring gross margin a little bit to cushion this with incremental pricing or mix benefits for Rhode.

So Anna, on Rhode, we're seeing momentum across both retail and DTC. One of the things I've been really pleased with the team's been able to do is have a series of exclusive launches on DTC, which has continued to propel that business even as we've expanded our retail distribution. I already talked about the #1 position we have within Sephora in every market therein as well as with Mecca in terms of where road is, but DTC is also extremely strong. We talked in our prepared remarks, our overall digital penetration for is 31% of our consumption. It's a very strong digital presence. We continue to lead in on the leading digital platforms. Same is true, obviously, with our site on road. And so I would say you're going to continue to see emphasis on both our DTC business as well as our retail expansion.

And then on the gross margin piece, we have outlooked that as Rhode goes further into retail, we will see some compression on the gross margin front. But as I mentioned earlier, from an adjusted EBITDA margin standpoint, even with that gross margin compression and the investments that we want to make from a marketing standpoint still are seeing strong EBITDA margins on Rhode.

Our next question today comes from Susan Anderson at Canaccord Genuity.

I guess I'm curious just on the e.l.f. Hair, it sounds like it's really off to a strong start. I'm curious if you have any information on what overlap there is with existing loyal customers that are now buying e.l.f. Hair? And then also, I'm just curious on your thoughts on hair versus fragrance and which one you think could be bigger longer term?

So e.l.f. Hair is indeed after an extremely strong start. I talked about our rankings within Target, what we're seeing from a consumer standpoint. One of the great things about e.l.f. Hair is, it's also brought significant new consumers to the franchise. I'd say about half of the consumers we have in e.l.f. Hair are new to the e.l.f. brand. So it's a combination of our current health consumers buying into the new category, but also being able to attract new consumers. And a lot of that has to do with the overall strategy of having clear frames of reference to prestige at all $10 or less, terrific value for people who otherwise couldn't get access to those products. And then in terms of hair and fragrance, we're bullish on both, we see both as really big categories. We mentioned the size of hair in the U.S. alone, $17 billion, fragrances $11 billion as you extend globally. They're quite sizable, but we'll use the same disciplined strategy we use on e.l.f. SKIN. We will pursue that kind of 1 step at a time. I would say, e.l.f. Hair is main focus right now, fragrance and we're getting great signals on. We'll continue that expansion as well as we go forward. But we see big opportunity on both those categories.

And our next question today comes from Peter Grom at UBS.

Great. I wanted to ask specifically on the top line performance in the quarter. And just maybe some clarification on the path from here. So first, just on the U.S., I'm curious how organic sales came in relative to your expectations. And I asked just because if I were to back out the road M&A benefit, and I understand we don't know the exact split of U.S. versus international but it would imply high single-digit organic sales growth despite having pretty easy shipment comparisons from a year ago. So I was just hoping to unpack that a bit more. And then just on the second half, and I understand there was a pipeline fill benefit that helped drive the strong 2Q internationally, but the mix of international really steps up. So just curious how you would characterize growth in U.S. versus international as we look ahead.

Peter, so from an organic sales standpoint in the quarter, like we said, growth with road being a part of that as a contributor, but all brands growing in that number. And so I would say that, that was consistent with what we had expected, maybe even a little bit better as we saw the quarter come in. when I think about how we've raised our guidance to 22% to 24%, a portion of that is driven by the Q2 outperformance, but also being incrementally more positive on the second half as well. even as we look between U.S. and international, we talked about else our top countries, U.K., Germany and Canada, all doing much better into Q2. And so have momentum not just on road from an international perspective but also on the core e.l.f. brands. And so that is encouraging.