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Edited Transcript of ELF.N earnings conference call or presentation 7-Aug-19 8:30pm GMT

Q1 2020 e.l.f. Beauty Inc Earnings Call

OAKLAND Aug 12, 2019 (Thomson StreetEvents) -- Edited Transcript of e.l.f. Beauty Inc earnings conference call or presentation Wednesday, August 7, 2019 at 8:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Mandy J. Fields

e.l.f. Beauty, Inc. - Senior VP & CFO

* Tarang P. Amin

e.l.f. Beauty, Inc. - Chairman, CEO & President

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Conference Call Participants

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* Andrea Faria Teixeira

JP Morgan Chase & Co, Research Division - MD

* Bonnie Lee Herzog

Wells Fargo Securities, LLC, Research Division - MD and Senior Beverage & Tobacco Analyst

* Erica A Eiler

Oppenheimer & Co. Inc., Research Division - Equity Research Associate

* Erinn Elisabeth Murphy

Piper Jaffray Companies, Research Division - MD & Senior Research Analyst

* Kimberly Alexandra Butt

Stifel, Nicolaus & Company, Incorporated, Research Division - Associate

* Linda Ann Bolton-Weiser

D.A. Davidson & Co., Research Division - Senior Research Analyst

* Oliver Chen

Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst

* Stephanie Marie Schiller Wissink

Jefferies LLC, Research Division - Equity Analyst

* William Bates Chappell

SunTrust Robinson Humphrey, Inc., Research Division - MD

* Willa Mcmanmon

Ellipsis Ir - MD of Silicon Valley

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Presentation

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Operator [1]

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Greetings and welcome to e.l.f. Beauty's First Quarter Fiscal 2020 Earnings Results. (Operator Instructions)

As a reminder, this conference is being recorded. I would now like to turn the conference over to you, Willa Mcmanmon. Thank you. Please begin.

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Willa Mcmanmon, Ellipsis Ir - MD of Silicon Valley [2]

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Good afternoon, everyone. Thank you for joining us today to discuss e.l.f. Beauty's first quarter fiscal 2020 earnings results. A copy of today's press release is available in the Investor Relations section of elfcosmetics.com. A recording of the call will also be available for 90 days on elfcosmetics.com.

As a reminder, this call contains forward-looking statements that are based on management's beliefs and assumptions, expectations, estimates and projections. These statements, including those relating to the company's fiscal 2020 outlook, are subject to known and unknown risks and uncertainties, and therefore, actual results may differ materially. Important factors that may cause actual results to differ from those expressed or implied by such forward-looking statements are detailed in today's press release and the company's SEC filings. In addition, the company's presentation today includes information presented on a non-GAAP basis. We refer you to today's press release for a reconciliation of the differences between the non-GAAP presentation in the most directly comparable GAAP measures.

With me from management today are Tarang Amin, Chairman and Chief Executive Officer; and Mandy Fields, Senior Vice President and Chief Financial Officer. With that, I'll turn the call over to Tarang.

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Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [3]

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Good afternoon and thank you for joining us. We're encouraged by our first quarter results with net sales of $60 million and adjusted EBITDA of $14.5 million. Excluding e.l.f. stores, net sales were up 7% versus year ago. We're pleased with the initial progress we're making on each of our strategic imperatives. We're in the early days of our brand recharge, and we like what we see so far. In turn, we are raising our fiscal 2020 guidance.

Let me update you on progress we've made during the quarter across each imperatives. Our first 2 imperatives of driving demand in the brand and a major step-up in digital are off to a fast start.

In June, we launched our #elfingamazing amazing digital campaign, which showcases the unique attributes of the e.l.f. brand. The digital assets support our mission to make the best of beauty accessible for every eye, lip and face. Since the campaign started, the impressions and video completion rates are double our initial goals. These metrics indicate our message is resonating with consumers as they are choosing to watch our content to completion versus opting out.

Since January, we've seen double-digit improvements in our Google search and EMV trends relative to our cosmetics category that saw soft trends in these measures. Collectively, these efforts drove share gains with Nielsen reporting e.l.f dollar share in the last 12 weeks of 4.3%, up 50 basis points. Our brand has been highly responsive to our marketing efforts and the lift in brand awareness is bringing new consumers to our retailers and to elfcosmetics.com.

For the quarter, our e-commerce site saw a double-digit increase in traffic, conversion and revenue growth versus last year.

In addition to bringing more people to the brand, we are transforming the e.l.f. consumer journey through digital technology. This will enable a better consumer experience including the revamped Beauty Squad Loyalty Program.

Beauty Squad, which has 1.3 million members ,now features receipt scanning, allowing members to earn points for in-store purchases made at national retailers such as Walmart, Target, Ulta Beauty and drug stores. This, along with other technology enhancements, will allow us to connect our consumer data to enable better personalization.

In the first quarter, we continue to ramp up our target outreach to influencers with box mailings and launch events featuring hero products like our new limited edition Jelly Pop Collection.

The Jelly Pop launch was supported with 500 influencers receiving a custom mini e.l.f. Jelly Pop refrigerator to keep this playful collection cool during the hot summer months. Mega influencers posted positive reviews and content to over 58 million of their combined followers on Instagram. Jelly Pop engagement on Instagram has been 7x greater than our average post. In addition to influencer outreach, we have a steady calendar of monthly giveaways and collaborations supported with new digital content. All of this has helped grow our Instagram followers to over 4.7 million.

We're leveraging our unique combination of cost, quality and speed to drive our third imperative: A focus on first-to-mass by providing prestige quality products at an extraordinary value. We are focused on supporting our hero products like Poreless Putty Primer, which the U.K. Daily Mail recently called the best primer ever.

In June, Poreless Putty Primer was the #1 e.l.f item at Target, Ulta, Walmart and elfcosmetics.com. We're also leveraging the strength of our 16Hr Camo Concealer, which compares favorably to the leading concealer in Prestige. We launch new Camo displays in 1,500 Walmart stores and Camo plus e.l.f sponge flex towers in 1,500 Target locations. We continue to amplify these products through our digital marketing to truly make this a 360-degree activation.

Our fourth imperative, improving productivity at national retailers, is on track with Phase I of Project Unicorn completed across our largest national retailer partners. During the quarter, we saw improvements in productivity within our track channels, which include Target and Walmart as well as our untracked channels such as Ulta. With the packaging and merchandising enhancements from Unicorn, we've seen growth across product segments.

Phase 2 of Project Unicorn, which mostly covers brushes starts this month in all channels.

Phase 3 of Unicorn is planned for the spring 2020 set. We will introduce more new items and better visual merchandising across retailers.

Our fifth strategic imperative is generating cost savings to help offset our increased marketing spend. As a reminder, our most significant initiative was closing our 22 e.l.f. stores in February. We expect to redeploy the $13.7 million in savings from this to our marketing and digital initiatives. In addition, we have started our Ontario, California distribution center automation and expected to be fully running by the end of September. Our U.S. liquid fill facility is on schedule and expected to be operational by the end of the fiscal year. We also continue to strengthen our China operations using lean-manufacturing techniques. Combined, we expect these supply chain efforts to provide around $3 million in cost savings this year.

With that update, I'll now turn the call over to Mandy to discuss our results and guidance in more detail.

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Mandy J. Fields, e.l.f. Beauty, Inc. - Senior VP & CFO [4]

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Thank you, Tarang. I'll now discuss the results for the first quarter of fiscal 2020 as compared to the 3 months ended June 30, 2018.

Net sales of $60 million were up 7% from year ago, excluding e.l.f. stores, driven by increased productivity across key retailers and strength on elfcosmetics.com.

As Tarang discussed, we are pleased with the progress of our strategic imperatives, the sales momentum we are seeing behind our marketing and digital investment and the continued success of Project Unicorn.

Gross margin of 62% was flat to prior year with margin accretive innovation, vendor concessions and favorable foreign exchange rates, offsetting the impact of 10% tariffs on Chinese goods and the closure of our retail stores. Note that in Q1, our gross margins were not yet impacted by tariffs at the 25% level, which cover most of our goods. On August 1, additional tariffs of 10% were announced effective September 1, which would impact our brushes and tools. We expect to offset the margin rate impact of tariffs through selective price increases, FX and cost savings initiatives.

On an adjusted basis, SG&A as a percentage of sales was 47% compared to 49% of net sales in the same period of 2018, mainly driven by cost savings from the closure of our 22 e.l.f. stores, partially offset by increased investment in our marketing and digital initiatives.

As discussed last quarter, we expect marketing plus e-commerce spend to be 10% to 12% of net sales on the year. In Q1, marketing and e-commerce spend was 11% of net sales compared to 6% in the year ago quarter.

Adjusted EBITDA was up 12% at $14.5 million versus $13 million a year ago. Adjusted net income was $6.9 million or $0.14 per diluted share compared to $6.5 million or $0.13 per diluted share a year ago.

We generated $12.9 million of cash flows from operations in the quarter, bringing our cash balance to $60.7 million as of June 30, 2019 compared to a cash balance of $17.4 million last year. The improvement was primarily driven by disciplined working capital management across inventory and receivables, coupled with improved operating results.

Last quarter, we announced a share repurchase program of up to $25 million. In Q1, we repurchased approximately 90,000 shares. As we evaluate our excess cash position, our capital allocation strategy remains unchanged. We plan to prioritize investment behind our key strategic initiatives to increase consumer awareness and build brand relevancy. We will also continue to evaluate strategic extensions to leverage the investments we've made in our platform and to fuel long-term growth. We believe we are well positioned to fund our initiatives through free cash flow and return excess cash to shareholders through our repurchase program.

Now turning to our fiscal 2020 guidance. Based on our strong Q1 results, an initial progress from our marketing and digital investments, we are raising our fiscal 2020 outlook.

We expect net sales to be flat to down 4% versus fiscal 2019, excluding the impact of e.l.f. stores. This is up from the negative 4% to negative 8% range previously guided, from net post the upward revisions to our adjusted EBITDA, net income and EPS ranges.

We expect adjusted EBITDA between $47 million and $50 million, adjusted net income between $19 million and $22 million and adjusted EPS of $0.37 to $0.41 per share on a fully diluted basis with the share count of 52.5 million.

Many of you are monitoring track channel data very closely and are encouraged by our recent trends. Our improved top line guidance balances the strength with recent price increases and lower pipeline and seasonal shipments.

Let me provide some perspective on this.

In late July, for the first time in e.l.f. history, we initiated a price increase impacting approximately 1/3 of our SKUs to help mitigate the impact of 25% tariffs. We have yet to see how this will affect our volume in the long term and should have a better understanding coming out of the second quarter when we have more elasticity data. Additionally, in Q2 and Q3 of fiscal 2020, we will be cycling $10 million in pipeline and seasonal volume from 2018 that we do not anticipate having this year.

Therefore, while we are encouraged with the recent strength in the business, we are taking a balanced approach to the outlook.

As I round up my first full quarter with the company, I can't tell you how proud I am to be a part of the amazing team behind this extraordinary brand. I look forward to updating you on our continued progress in the coming quarters.

With that, operator, you may open the call to questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question comes from the line of Steph Wissink with Jefferies.

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Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst [2]

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Mandy, this question is for you. If I look at the first quarter and I annualize your EBITDA run rate, it would put the number close to the kind of $58 million versus your guidance, which at the midpoint is about $48 million. So could you just help us bridge that $10 million of whether it's conservatism or some spending that you haven't done that you plan to do? How should we think about the delta versus the run rate?

And then Tarang, if I could just throw one in for you as well. Just contextually, if we look at track channel data, and we look at what your guidance would imply, how comfortable are you that you'll have enough inventory in the channel to keep the momentum going with respect to takeaway and consumption?

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Mandy J. Fields, e.l.f. Beauty, Inc. - Senior VP & CFO [3]

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All right, Steph. So I'll take the first part of that question. So when looking at Q1, we really had some good mix from the store closures and marketing. As we have said previously, those 2 for the year will offset one another. We didn't quite get to that 12% level in Q1 with marketing. So I would say that would be a piece that you'd have to peel back, if you're trying to run-rate some things forward.

Additionally, our margin rate, if you recall, with the closure of our stores, we said that our margin rate on the year will naturally be about 100 basis points lower. Well, in fact, this quarter, we had margin rates flat to last year. So we were able to recoup some gains through FX and the vendor concessions and things like that, that helped to keep margin rate in line.

So I would say as you go back into your model, I would still say the 100 basis points from the store closures, you should keep in there as a downside on the margin rate. And then also, I would say that on the year, we do plan to spend closer to that 12% on the marketing just given the early success that we've seen.

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Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [4]

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And then on your second question, Steph, we are pleased with the strength that we're seeing in track channel data and picking up share and are very comfortable in terms of our ability to having enough inventory to meet demand that we've always had an approach where we carry enough inventory and have enough of a planning horizon where we can bring that inventory in. And our customers are very efficient in that manner as well. So we feel good right now in terms of our ability to continue to meet demand.

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Operator [5]

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Our next question comes from the line of Oliver Chen with Cowen and Company.

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Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [6]

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Regarding price increases, your -- what was your approach to just trying to optimize the 1/3 of the SKUs that you picked? And what are your thoughts in terms of how price increases may interplay with the level of in-stocks that you have? And how satisfied are you with in-stock levels? Has that also relates to Project Unicorn? Would love your thoughts.

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Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [7]

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Sure. Oliver, this is Tarang. So our approach on pricing was really go SKU by SKU and really analyze each SKU to see kind of where competitive set manufacturer and who else might face pricing pressure, in addition to taking a look at where do we have the best value equation. So we really took a pretty -- and we've had a long time kind of to look at this robust approach of kind of going by each SKU in seeing where do we have to make most room, and we took pricing on those SKUs.

In terms of the in-stock levels, I feel pretty good about kind of where we're trending so far this year in terms of our ability to meet in-stocks. Certainly, pricing will result in averaging at retails going up offset by units, and so I wouldn't expect it to have a major impact on in-stock levels. I think those will stay healthy. And then the last thing I would tell you is it's a balanced approach. So we did -- we're not pricing fully to the tariffs mainly because we also have FX as well as the cost savings that we outlined on our call in terms of being able to balance that approach to not always pass through.

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Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [8]

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Okay. And just to follow up regarding Beauty Squad. It was interesting in terms of your thoughts about making tweaks to that program as well as capturing more data from the wholesale purchases through the -- your partners. So what kind of changes needed to be made? And where do you see that program heading to drive more engagement, et cetera?

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Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [9]

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This is Tarang again. We've been really pleased with Beauty Squad. I mean the 1.3 million members we have, I think we've shared previously, come to our site more often, spend more and are more loyal to the brand. And so being able to enhance that program and kind of go from kind of a point and dollar system that many of our members wanted as well as the ability to connect their purchases. We believe it really takes us to a new level on Beauty Squad, and we look forward to continue to tell you kind of how we're able to better personalize their consumer experience and share perhaps more stats in terms of what it's doing for us. But it is a pretty big milestone in our loyalty program and one that we're very excited about given our presence in large national retailers as well as our key site.

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Operator [10]

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Our next question comes from the line of Bill Chappell with SunTrust Robinson Humphrey.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [11]

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Tarang, can you give us just a sense of where Project Unicorn is? I mean do you feel like we're seeing 50%, 75% of the benefits? Is it -- are there meaningful chunks to up stores still kind of convert? And are you planning on doing that in the back half of the year?

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Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [12]

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Bill, yes, we feel great about Project Unicorn and where we stand. So Project Unicorn is our major shelf packaging and product initiative that has multiple phases. So the first phase has been executed with the majority of our volume at national retail customers where we were able to get new items, better packaging, better navigation particularly to our market-leading segments. We feel good about that, and we're obviously seeing that in track numbers that you're able to track.

On Phase 2, which is currently being implemented, we're applying Project Unicorn to our brush and tools business, which is a pretty big segment for us.

And then Phase 3 really impacts the spring of 2020 sets, where we'll get even more new products on and continue to make enhancements to our visual merchandising approach, particularly in regards of making sure consumers are able to find our key product that are first-to-mass products. So I think you're going to continue to hear us talk about Unicorn for quite some time mainly because of the results we're seeing in the market.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [13]

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Got it. And then Mandy, just the Chinese yuan obviously has gone favorable even -- and more so in the past just couple of weeks. Didn't know what you're expecting or what your modeling in terms of how to fix your cost of goods sold through the remainder of the year.

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Mandy J. Fields, e.l.f. Beauty, Inc. - Senior VP & CFO [14]

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Yes. So you're right, it had some upside there and we're using that as an offset to the tariffs. And so that's a part of our whole toolkit to help us offset the tariffs.

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William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [15]

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Got it. But I mean you put the price increases through before some of this move. So I could maybe read that it's a little bit of a benefit or cushion?

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Mandy J. Fields, e.l.f. Beauty, Inc. - Senior VP & CFO [16]

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No. Because when we implemented the price increases before, that additional 10% came out on brushes and tools. So I would say that we're all -- we're using it as a part of our toolkit and -- as we address tariffs.

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Operator [17]

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Our next question comes from the line of Andrea Teixeira with JPMorgan.

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Andrea Faria Teixeira, JP Morgan Chase & Co, Research Division - MD [18]

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So if you can just elaborate a little bit more on the 2020 guide. I guess in history, you've based your guidance with no additional shelf or no additional display. So I was wondering if that's the same practice you're embedding here? Any particular for the new -- I understand there's obviously puts and takes on the timing of Project Unicorn and some of this innovation, but the Poreless Primer and Jelly Pop as you called out in the prepared remarks, so it seems to me it's too conservative using -- assuming some of the elasticity that Mandy discussed. So I was wondering if you can elaborate more on packets, the guide. And also if you can squeeze a little bit of the international trends, if you can tell us?

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Mandy J. Fields, e.l.f. Beauty, Inc. - Senior VP & CFO [19]

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Andrea, okay, so I'll go ahead and take the first part of that, and I'll pass it to Tarang to talk the international piece. So in terms of if the guide is conservative or not, so I would say that my original guidance was down 4% to down 8% last quarter when we came out and had our call and from that, we've taken it up to flat to down 4%. So certainly, reflecting some of the momentum that we're seeing in the business.

But as I think about the price increases that we've just taken, we do need time to see how that plays out and how that impacts volume. So we're taking a balanced approach with the guidance. I would call it, more balanced than I would, conservative.

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Andrea Faria Teixeira, JP Morgan Chase & Co, Research Division - MD [20]

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And no shelf space increases, right? No additional shelf?

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Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [21]

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No shelf space other than what we've already previously disclosed in terms of we have been picking up space at Ulta in a subset of their doors. We have been rolling out the brand in Walgreens and Boots in the U.K.

And so just those are the 2 things that we've previously disclosed. We're, right now, in this time and year, in conversations with our retailers for what 2020 -- calendar 2020 shelf sets look like and we usually talk about that on one of the future calls in terms of how and particularly when we set our guidance on terms of, well, how that's progressing. But obviously, we're in a very strong position right now both in terms of our business momentum relative to the category, the level of innovation we have and how we're engaging consumers.

That maybe relates to your last question, which is how we're doing internationally. We continue to be pleased with what we're seeing internationally. I would say our probably core focus country right now is the U.K.

You heard me talk about kind of the U.K. Daily Mail calling our Poreless Putty Primer the best primer ever. We also have great momentum, if I think about our longest-standing retail customer there is Superdrug. We have very strong comps at Superdrug. Boots is rolling up the brand as I mentioned previously. And our own site in the U.K., our elfcosmetics.com site is exhibiting very strong growth. So it gives us great hope in terms of our continued rollout internationally. But we are taking a similar disciplined approach as we did in the U.S. So we are currently testing the brand in a number of retailers in Germany and also we're very excited about our early days in China e-commerce and in our ability to kind of sell there and maintain our cruelty-free status.

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Operator [22]

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Our next question comes from the line of Mark Astrachan with Stifel.

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Kimberly Alexandra Butt, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [23]

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This is Kimberly on for Mark. We had a quick question just on price increases. Are those already on the shelf? And can we see those in the most recent 2-week scanner data? Or is that later to come? And then also are the price increases consistent with what your competitors have done?

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Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [24]

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Kimberly, this is Tarang. Let me take that. So what we've reflected right now in pricing is we led on elfcosmetics.com. So if you go on elfcosmetics.com, you will see higher prices than even some of the retailers. We're in current implementation with a number of our retailers. So at some retailers you'll see price already reflected, others you won't. What I can tell you is we will not ship product at unless it's at the higher price, SPOs come into us. And so we're in an implementation phase. And I would say related to this scanner question, I don't think you're going to see that much of it in the scanner quite yet. But over the next couple of months certainly, you'll see the pricing reflected. And as I mentioned earlier, we would expect and you will see average unit retails go up and units go down related to that.

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Kimberly Alexandra Butt, Stifel, Nicolaus & Company, Incorporated, Research Division - Associate [25]

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Great. And then just one more if I can. In the scanner data, we've seen that year-to-date skin care sales are -- it's almost as big as full year for 2018. So do you have any insights on how big that can get in time? What's driving it? Is it all really trial and discovery with the brand? Or do you have any insights around like repeat purchases and loyalty of the brand?

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Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [26]

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Sure. We're really pleased with skin care. It's a major strategic kind of imperative of ours in terms of kind of within our overall portfolio. As you know, global skin care is bigger than global color cosmetics, the category trends in skin care at least over the last couple of years have been stronger. We're no exception in terms of being able to kind of ride the strength of the category but maybe even more so given the level of innovation we have. So what's really driving our skin care is the -- our unique ability to bring prestige quality at extraordinary value. And while skin care is higher or in averaging at retail basis in our color cosmetics are, they still come into tremendous value relative to some of the key prestige and mass players in the category. I'm particularly excited with the success we've had this year on Hello Hydration! is our first entry into kind of our hydration creams, and that's done extremely well. And so I think you're going to continue to see momentum on skin care, particularly as we expand distribution. Skin care started with the Target. As I'd mentioned on the call last quarter, Ulta has now taken skin care full chain off of a successful task, and we continue to roll out skin care to more customers. So I personally am very bullish on skin care for the future, but we look forward to continue to talk about it.

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Operator [27]

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Our next question comes from the line of Erinn Murphy with Piper Jaffray.

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Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [28]

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I guess my question is around the digital business that was up really nice double-digit growth. Can you just talk about what you think is really driving some of the improvements there? And then is the double-digit pace kind of how we should see that business kind of folding to the balance of the year?

And then, I guess, Mandy, for you, just going back to the Q1 beat versus the guide, just looking at the top line $5 million beat, $11 million lift to the full year. I recognize you're not looking at incremental shelf space, but should we just assume the slightly second half weighted that's just based on the Walmart -- or excuse me, the Ulta as well as the Boots kind of business that you're transacting with and kind of rolling out there, just trying to understand that.

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Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [29]

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Erinn, this is Tarang. I'll take your first question, and then Mandy will take the second. So on our digital business, what's -- we're also really pleased with the double-digit growth we're seeing in traffic conversion and sales. And what I tell you is driving there are the strategic imperatives I described earlier, specifically kind of our step-up in marketing and digital support, engaging more consumers and influencers and bringing attention to the brand.

I would say equally important is the focus of that spend also being on our key first-to-mass products. So I highlighted a couple of them, whether it be the Poreless Putty Primer or our Camo Concealers or even some of our limited-edition exclusives like our Jelly Pop. Those are driving real consumer interest in the brand, and we're amplifying that kind of, I've called it, through our surround sound approach, which basically brings more consumers to the site. And then lastly, although it's not as sexy to talk about, I've seen many of the improvements we've made from a technology standpoint digitally. I talked about kind of some of the technology underpinning kind of our revamp Beauty Squad program. Other things that we're doing there is also helping us with our conversion and some of the personalization initiatives. So there's quite a bit going on digitally. I mean obviously the digitally native brand, that's always been important to us, and it's great to step it up even to a different level.

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Mandy J. Fields, e.l.f. Beauty, Inc. - Senior VP & CFO [30]

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And on the second part of your question, Erinn, on how to think about the balance of the year. So I think I mentioned this earlier, but as you think about Q2, Q3, Q4, we do have the pricing that just rolled out at the end of July. So we are waiting to see how that impacts volume, certainly the space gains that Tarang mentioned will help to offset some of that and as well as that seasonal pipeline that we mentioned that we were cycling. So that's kind of how the balance of the year should frame up within our guidance.

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Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD & Senior Research Analyst [31]

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Okay. And then if I could just add one on Jelly Pop. I mean it feels like that's been a really successful launch out of the gate. Can you just talk about if it's attracting new consumer to the e.l.f. line?

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Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [32]

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Sure. So we love what we've seen on Jelly Pop. I talked about some of the engagement numbers on Jelly Pop, both in terms of that surround sound kind of approach to our marketing and digital, how it's attracted a number of attention from a number of influencers, who, in turn, kind of I think reached over 58 million just on Instagram alone as well as the level of engagement. I'd see it's just another example of the strength we have in our innovation pipeline and being able to amplify that pipeline.

And to your specific question on new users, we've seen with all of these big new launches, whether it be Poreless Putty Primer, Jelly Pop, Camo Concealers. They bring significantly more new users to the franchise. I think the percentage that we've talked previously on Poreless Putty Primer and pushing a similar trend on Jelly Pop is, I think, 70% of the traffic we're getting on the site related to those products are new consumers, so we feel really good about that as well.

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Operator [33]

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Our next question comes from the line of Rupesh Parikh with Oppenheimer & Co.

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Erica A Eiler, Oppenheimer & Co. Inc., Research Division - Equity Research Associate [34]

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This is actually Erica Eiler on for Rupesh. So I was wondering if you could comment on what you're seeing in the mass category lately in terms of overall category growth rates?

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Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [35]

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Yes. This is Tarang. So I'd say the mass category continues to be soft in color cosmetics and quite strong in skin care. And that's a continuation for a trend we've now seen for quite some time.

I'll be honest with you, I'm surprised how long mass color cosmetics has been soft. So our point of view is we continue to take share or hope to continue to take share kind of in that market based on the strategic imperatives I outlined.

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Erica A Eiler, Oppenheimer & Co. Inc., Research Division - Equity Research Associate [36]

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Okay. Great. And then we're seeing more and more personalization popping up across the beauty space and with beauty brands. You talked a little bit about the scanner receipts, how that enable you to leverage more personalization. Can you maybe talk about how you're capitalizing on this trend as we sit here today?

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Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [37]

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Sure. So if I look at our own migration on personalization, it first came from some of the technology I talked about that had better algorithms and better approach is particularly as we re-platformed our site, and we're able to tap into other capabilities, be able to just get better product recommendations and better learning algorithms to figure out kind of ways than what you bought [what all consumers] might like. Going from there to actually getting much better consumer profiles to be able to customize recommendations to what the behavior of that particular consumer is, I am especially excited now that we're able to tie that consumer data together with their purchases at large national retailers as well that will be even that much better in terms of being able to understand our consumers, and really just be able to make better -- not only recommendations but also curate better products in terms of what would meet their needs as well as the overall experience. I mean this is a connective consumer journey, so it also goes to kind of what messages are we serving up based on what we are needed, and we've had some experience even in our current campaign where the content were just providing much greater digital content. Where if you love animals, we can get one of our cruelty-free messages if you really care. A lot about our value, our ability, to be able to customize some of the core brand attributes. So we're -- I would say we still have a long way to go but I'm pleased with our initial progress.

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Operator [38]

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Our next question comes from the line of Linda Bolton-Weiser with D.A. Davidson.

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Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [39]

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We noticed your product on shelves at Kohl's. Can you comment on during the entire chain, and also this is interesting because it's a mass-seized retail rather than MAP. So can you like give some color on how your assortments differ than Kohl's versus at the mass retailers?

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Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [40]

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Linda, this is Tarang. So we've been in Kohl's starting last year, we entered. And it was really being approached by them as they did a survey of brands that their consumers wanted to see, e.l.f. popped in that assessment. And so we've been in Kohl's, we are in full chain, and we're pleased with our business and our partnership together. It's part of our -- as I look from -- channel by channel, it's part of what I would describe as a specialty channel.

Obviously, our biggest specialty channel player is Ulta Beauty. But we have been historically in Old Navy and other specialty players. And I would say what we ask every retailer to do regardless of channel is carry some of our core items.

So a majority of the items that Kohl's would carry would be similar to other retailers. And then each retailer likes to have some that they uniquely carry or be able to kind of merchandise and drive, and Kohl's is no different than that. But again, it's still relatively early, we're still in our first year at Kohl's, and we're pleased with what we see.

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Operator [41]

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Our next question comes from the line of Bonnie Herzog with Wells Fargo.

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Bonnie Lee Herzog, Wells Fargo Securities, LLC, Research Division - MD and Senior Beverage & Tobacco Analyst [42]

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I had a quick follow-on question on your guidance. I guess I'm wondering if there's any upside to your top line guidance. Would you guys consider reinvesting it? Or let it flow through to the bottom line?

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Mandy J. Fields, e.l.f. Beauty, Inc. - Senior VP & CFO [43]

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Yes. So the guidance, Bonnie, I would say again we've increased from down 4% to 8% up to the flat to negative 4%, and that's kind of where we see the world today. Certainly, if there's upside to sales, if things start to outpace, we are making those decisions as we see momentum in the business and would say that our guidance is as we see the world today.

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Bonnie Lee Herzog, Wells Fargo Securities, LLC, Research Division - MD and Senior Beverage & Tobacco Analyst [44]

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Okay. And then I had a question circling back on tariffs. I just was wondering if you guys could talk a little bit further on the pricing that you took, and I guess what I'm trying to understand is the magnitude, the actual percentage price increase that you mentioned that you've taken to offset the increase in tariffs. And I'm thinking about the contracts because I think it's the most you've ever taken. You haven't taken a lot of pricing historically, so I guess I'm trying to understand what could be the elasticity, how you think this will stick. I know you mentioned it's early but any color on that or confidence of why you think it will be absorbed will be helpful. And then wondering if you've been successful in getting any vendor concessions. And then finally, what's your ability or maybe willingness to move manufacturing out of China?

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Mandy J. Fields, e.l.f. Beauty, Inc. - Senior VP & CFO [45]

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Okay. So I'll take the first one and then we'll pass it over to Tarang. So on the pricing piece. So in regards to tariffs, we really have the 3 levers that we have to pull. We have vendor concessions or cost savings, FX and then pricing. And so we're not going to give the percentage increase that we took on pricing for competitive reasons but I will echo what Tarang said earlier is that we did not recoup the full impact of the tariff through pricing. So we took pricing on about 1/3 of our SKUs and that is one of the leverage within the toolkit to help us offset the tariff impact.

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Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [46]

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Yes. And to your point in terms of their ability to stick amid -- I think we're hearing already a number of competitors also announcing kind of pricing and having [bedding] consumer for a very long time, having done dozens of price increases. This is about as straightforward as it goes from a pricing standpoint. There is a known kind of external kind of tariff or tax, most people will pass us through. I like our approach of being quite balanced in how we're doing it. We're not putting it 100% on pricing. We are relying on FX as well as our cost savings to do it. So I like the approach but as Mandy says, it's also one of the things that's balancing our guidance, the strength that you're currently seeing along with kind of the pricing and [move the] $10 million of pipeline and see some of that were cycling next year.

And then last, in terms of our supply chain, it's one of the things we take great pride in over 15 years. We've built, I believe, the best combination of cost quality and speed in our industry. And a lot of that advantage comes from what we've been able to build in China, tariff or no tariff. And we continue to make progress and improvements in terms of our core operations there as I mentioned our lean manufacturing techniques. But in addition to that, we've always looked more globally in terms of where should we manufacture and how do we want to operate and so that includes a number of initiatives that we initiated prior to any tariff. So if I think of our automation of our distribution centers, that was done well before staying with our U.S. liquid fill plant that we're building and should have an operation by the end of our fiscal year, that was done well in advance.

And it really is a matter of just us continuing to get more efficient, being able to take those -- take our cost savings and make sure that we're investing in the best value equation for the consumer and the marketing that we'd like to do.

So I feel good about our approach, feel good about kind of where we currently stand, and then I think we'll certainly be updating people over the next couple of quarters in terms of what we see in the overall market.

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Operator [47]

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(Operator Instructions) We have no further questions in queue at this time. Allow me to hand the floor back over to Tarang Amin for closing remarks.

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Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [48]

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Great. Well thanks again, everyone, for joining us. While we're still in the early days of our brand recharge, we're encouraged by the consumer and customer response and look forward to updating you on our next call. Thanks, everyone.

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Operator [49]

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Thank you. This concludes today's conference. You may disconnect your lines at this time, and thank you for your participation.