U.S. Markets closed

Edited Transcript of ELF.N earnings conference call or presentation 26-Feb-19 9:30pm GMT

Q4 2018 e.l.f. Beauty Inc Earnings Call

OAKLAND Mar 2, 2019 (Thomson StreetEvents) -- Edited Transcript of e.l.f. Beauty Inc earnings conference call or presentation Tuesday, February 26, 2019 at 9:30:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* John P. Bailey

e.l.f. Beauty, Inc. - President & CFO

* Tarang P. Amin

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

================================================================================

Conference Call Participants

================================================================================

* 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

* Erinn Elisabeth Murphy

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

* Oliver Chen

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

* Shannon Elizabeth Coyne

BMO Capital Markets 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

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Greetings, and welcome to e.l.f. Beauty's Fourth Quarter Fiscal 2018 Earnings Call. (Operator Instructions) As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Willa Mcmanmon. Please, go ahead.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Good afternoon, everyone. Thank you for joining us today to discuss e.l.f. Beauty's Fourth Quarter and Full Year 2018 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 transition period 2019 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 and the most directly comparable GAAP measures.

With us from management today are Tarang Amin, Chairman and Chief Executive Officer; and John Bailey, President and Chief Financial Officer. For today's call, Tarang will discuss the business context and actions. John will then discuss our financial performance and guidance. It is now my pleasure to turn the call over to Tarang.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Thanks, Willa, and good afternoon, everyone. Fiscal 2018 was a challenging year for us, with net sales of $267 million, slightly down versus a year ago; and adjusted EBITDA of $62 million, slightly above a year ago. Despite top line weakness, we improved our margin profile, delivered adjusted EPS of $0.71 per share and delivered strong operating cash flow with a year-end cash balance of $51 million.

The year closed with the second half that reflected significant deceleration across our track channels. We expect that the March 2019 quarter will also face headwinds from track channels in addition to difficult year-over-year comps, particularly at Walmart. Though we are disappointed in our top line, we are keenly focused on reasserting our position in the market. Today, I will discuss how we intend to do that.

Clearly, the mass beauty market has undergone a competitive transformation in the last 18 months, with new entrants and mega-influencers changing the way consumers are interacting with brands. In response to the changing market, we are leveraging e.l.f.'s core advantage, our ability to delight beauty enthusiasts with Prestige quality cosmetics and skin care at an extraordinary value. We plan to do this through initiatives of driving demand in our brand, focusing on our key first-to-mass products, getting optimal assortment and placement on shelf and online and generating the cost savings to help pay for these investments.

To drive demand in our brand, we are doubling down on our digital awareness. We are improving the curation of our social media content, beefing up our influencer programs, focusing on fewer and bigger product stories and putting a strong social push behind new item launches.

Three months ago, we brought in a new Head of Integrated Marketing, who joined us from Too Faced and is already making a meaningful impact within the team. We are seeing early indications of success from our digital efforts.

In January, our earned media value was up almost 60% year-over-year. We had over 9 million weekly Instagram social followers versus 3.5 million in January of 2018. And we added almost 47,000 Beauty Squad loyalty members, an increase of 37% compared to January of 2018. This brings our total Beauty Squad membership to over 1.4 million.

Let me share what's driving these numbers. First is an emphasis on the core e.l.f. value proposition that I just discussed. Second is the way we're mobilizing behind our value proposition, which is a dramatic change from the past. Two recent first-to-mass product stories illustrate this.

In December, we launched our $8 putty primer that compares to a similar Prestige product priced at $52. We included this product in sample boxes that we sent to a wide variety of carefully targeted influencers. We also coordinated a social campaign around the product launch. Product feedback on social media was so positive that a major beauty influencer, Jeffree Star, who has a reach of 26 million followers, produced a video comparing our putty primer to the Prestige brand. His video resulted in putty primer becoming a Jeffree Star approved product, which in turn resulted in 6 million YouTube views. In total, putty primer has generated 87 million impressions. We're encouraged by the trends. 60% of putty primer e-commerce orders have come from new customers, of which 50% have joined our Beauty Squad loyalty program.

We are seeing similar response to another one of our key first-to-mass products for 2019, 16HR Camo Concealer, which we launched this month. While it's still early, Camo has generated huge excitement. Shortly after the product's launch, ELLE UK published an article entitled, The Internet Has Voted This is the Best Concealer Ever, And It's Less Than GBP 10. And in fact, it's only GBP 5. Taking a page from the putty primer campaign, we sent out press and influencer boxes prior to the launch. And last week, we hosted a Camo event for 160 U.K. influencers and guests, the largest event we've ever held in the U.K.

These recent launches demonstrate our brand advantage that we'll continue to leverage and message. e.l.f. brings high-quality, buzzworthy products to market that hold their own against Prestige leaders for a fraction of the price. Our increased focus around our key first-to-mass products is helping to bring new consumers into the franchise and build relevancy around the e.l.f. brand.

To support these efforts, as I said previously, we plan to increase marketing spend gradually. We ended the year with marketing spend of 4% of net sales, and we expect to be in the mid- to high single-digit range this quarter. Leading the charge on these marketing efforts will be our new CMO, Kory Marchisotto, who will oversee brand, creative, innovation and digital. She'll lead the team in building on e.l.f.'s unique position while exploring innovative ways to increase consumer engagement and further differentiate the e.l.f. brand. Kory has more than 20 years of beauty experience, most recently as Senior Vice President of Shiseido U.S.A.'s bareMinerals division, where she led its digital transformation. Prior to that, Kory spent 16 years as part of Shiseido Beauty Prestige group and also held marketing and sales roles at LVMH. We're extremely excited to have her on our team.

In terms of innovation, one of our historical strengths has been our new products engine, where we introduce products across eyes, lips, face, tools and skin care in as quickly as 13 weeks. e.l.f.'s important differentiator is that we innovate rapidly and can do so with true Prestige quality. Looking at the success of products like putty primer, Camo Concealer and our recently launched Hello Hydration! skin cream, we know that highlighting our key products changes the game for us. It is our responsibility to make sure consumers are aware of our best-in-class products, and we are refocusing our brand messaging to make sure this is coming through loud and clear. As such, we plan to put more multichannel marketing dollars and attention behind our key first-to-mass products both at launch and beyond.

From an execution standpoint, getting the product right is just part of the equation. It's equally important to make sure e.l.f. is placed efficiently and attractively on the shelf. We've talked previously about Project Unicorn, which is aimed at elevating the brand presentation and improving the consumer's ability to navigate our sets. The first phase of this initiative, which includes over 350 SKUs affecting more than 50% of e.l.f. retail dollars, should be fully implemented by the end of March. We expect to have an update on its impact by our next call.

In terms of our retail partners, in calendar 2019, we expect to pick up overall shelf space including at Ulta Beauty, where we'll gain additional space in a subset of their stores. At our major national retail partners, Project Unicorn is underway, and as a result, we are seeing resets take slightly longer than typical due to the magnitude of product assortment, packaging and placement improvements. As we execute on these changes, we're getting a lot of support from our national retailer partners. For example, Target is giving us additional merchandising space for primers and brushes. And Walmart is working with us to improve in-stocks in our 4-way innovation centers, where we experienced replenishment challenges last year.

As I step back and think about our channel strategy, we have put effort behind national retailers, e-commerce and e.l.f. stores. We opened the majority of our e.l.f. stores in 2016 with the intent to expand our direct reach. However, today, e.l.f. stores are not profitable and collectively bring in less than 1/10 of the traffic that we see in our leading mass e-commerce site, elfcosmetics.com. We've also found e.l.f. stores require resources that we believe can be better deployed to other brand-building initiatives. Therefore, we've made the decision to close our 22 e.l.f. stores.

This has been a difficult decision for us given the talent, passion and dedication of our stores associates. Despite their hard work, we've been unable to operate the stores in a way that makes financial sense. During 2018, with traffic pressure and rising wages, our store expenses have exceeded store gross margins by over $1.5 million. We don't see this situation improving without significant ongoing investment and believe the right answer is to swiftly redeploy those dollars against our national retailer and digital platforms.

Our stores will be closed effective today. Employees have been notified and will be paid through March 9, at which time we'll provide above market severance benefit for all of our store associates and begin transitioning planning with our retail landlords. We thank our stores' associates for their hard work and for being champions of the e.l.f. brand. Again, this was a tough decision but one that supports our mission of investing in our leading national retailer and digital business while continuing to strategically reduce our cost structure.

Another area of cost savings centers around our automation initiatives in both our distribution and manufacturing centers. Our Columbus e-commerce warehouse is up and running and is already providing cost savings while enabling 1- to 3-day delivery time across the country. We're currently on time and budget in automating our Ontario, California line for Walmart fulfillment and our U.S. liquid fill manufacturing line, which we expect to be complete in Q2 and Q4 of calendar 2019, respectively.

We are also making changes to executive compensation. As background, we have always had a pay-for-performance program. Given our poor performance in 2018, executives will receive 0 bonus for the year. Personally, as the company's second largest shareholder who's purchased approximately 90% of my holdings, my interests are highly aligned with our stockholders to drive meaningful long-term value. For the upcoming calendar year, my total targeted compensation will be significantly less than it was in 2018, which itself was lower than 2017. As part of this, I will receive substantially less equity and half of my awards will be performance-based with price targets well above our current trading price. Net, our team is highly aligned with stockholders in long-term value creation.

I'd also like to update you on initiatives at the board level. We have a strong, experienced public company board with 8 independent members plus myself. In January, we announced new committee assignments, with each independent director holding one committee seat that best aligns with his or her expertise. Additionally, we have appointed Beth Pritchard as Lead Independent Director. Beth is a highly experienced public company board member with strong governance experience, and I'm excited to work alongside her in this new expanded role.

Before I turn the call over to John, as we announced earlier today, it's with mixed feelings I'd tell you he'll be leaving e.l.f to return to the investment world. As you may recall, John was partner of our consumer, TPG Growth, and led the acquisition of e.l.f. in 2014. John is more than a colleague. He's a trusted and valued friend. I asked him to come to e.l.f. to help take the company public, and he's been a terrific strategic partner to me and the entire executive team. I thank him for his service and wish him the very best in his next role. We're working with Russell Reynolds on the CFO search. John's responsibilities as President will be absorbed by me and other members of the executive team.

In closing, we're aggressively focused on initiatives to reignite growth across the business. While many of these initiatives will take time to play out, we are confident in our strategy and ability to execute for long-term success.

I'll now turn the call over to John.

--------------------------------------------------------------------------------

John P. Bailey, e.l.f. Beauty, Inc. - President & CFO [4]

--------------------------------------------------------------------------------

Thanks, Tarang. Before I jump into our results and guidance, I want to echo Tarang's sentiments. I'm also grateful for our partnership and the relationship we've built over the years. While it's a bittersweet decision to be leaving e.l.f., as the brand transitions, I'm comforted by the strong talent that exists in and continues to be added to the company. I look forward to working closely with Tarang and the team to ensure an orderly transition.

I'll now turn to our financial results for the full year 2018. Net sales decreased 1% to $267 million, primarily due to declining trends at select national retailers, a decrease in sales to our discount channel customers and a decline in holiday program sales. These impacts were partially mitigated by new distribution at Ulta, Walgreens and additional new accounts such as Rite Aid. As expected, gross margins were in line with prior year at 61%.

We remain highly focused on expense management amidst the broader business trend. On an adjusted basis, SG&A was $118 million or 44% of net sales compared to $116 million or 43% of net sales in 2017. Adjusted EBITDA was up 1% to $62.4 million versus $61.6 million a year ago. Adjusted net income was $35 million or $0.71 per share, down from $36 million or $0.73 per share a year ago.

Note that our effective tax rate for the year was 14% or $2.4 million compared to a tax benefit of $11 million in 2017. Our effective rate was lower than guided, primarily due to a benefit of approximately $2 million from the vesting and exercise of equity instruments during the period.

With disciplined working capital management, we generated over $55 million in cash flow from operations in 2018, bringing our cash balance to $51 million as of December 31, 2018 and compared to $10 million last year. Part of this was driven by our continued management of inventories throughout the period, ending the year with an inventory balance of $46 million, which was down from a balance of $63 million last year. In addition to our typical operational needs, we expect to use our cash balance to pay down debt and are currently evaluating other opportunities to allocate capital to drive value for shareholders.

In December, we announced that we are changing our fiscal year to the 12 months beginning April 1 and ending March 31. This move has been under consideration for some time. As discussed with many of you, the primary driver is to align our reporting periods with our business cadence as annual shelf resets by national retailer partners that drives the bulk of our business occur in February or March each year. Adjusting our fiscal year to begin after these resets puts us in a much better position to budget and plan for our fiscal year. This in turn should enable better informed annual guidance for the financial community. Therefore, today, we will be giving guidance only on the period from January 1, 2019 to March 31, 2019, which we are calling the transition period. e.l.f.'s fiscal year 2020 will begin on April 1, 2019 and end March 31, 2020. The company will provide fiscal 2020 guidance on our next quarterly call in May.

Before I provide context for our transition period, I share Tarang's sentiments on the decision to close our e.l.f. stores. Our e.l.f. store employees have brought their passion to the brand, worked hard and deserve our gratitude. That said, with the traffic pressure on expense trends, our store expenses exceeded store gross margins by over $1.5 million in 2018. We believe we must take action to properly allocate resources to our key growth initiatives.

Turning to the impact of the closures. We currently expect to incur onetime accounting charges of approximately $23 million to $25 million in total, which will be taken in the transition period ended March 31, 2019. Approximately $16 million relates to assets and liabilities that will be recorded in the transition period upon the adoption of a new lease accounting standard. The remaining costs are expected to include noncash asset write-offs of approximately $5 million to $6 million, employee severance payments of approximately $0.5 million and other costs of approximately $1.5 million to $2.5 million. Most of these figures are noncash, and we expect the eventual cash outlay associated with the shutdowns to be substantially lower. Our guidance going forward will be provided on a pro forma basis to exclude the impact of our stores. In other words, all metrics provided will exclude our stores business.

Now for our outlook for the transition period ending March 31, 2019. We expect net sales of $55 million to $58 million, adjusted EBITDA between $8 million to $9.5 million and adjusted net income between $2 million and $3 million or $0.04 to $0.06 per share based on a fully diluted share count of 49.3 million. Again, this outlook excludes e.l.f. stores, which in the prior year period generated $3.3 million in net sales.

Also, as noted, this is a transition quarter as we have yet to fully assess the impact of our shelf resets and Project Unicorn. As such, current trends within our Nielsen universe are expected to largely persist until the resets firmly take shape.

Finally, we had approximately $3 million of national retailer pipeline in the comparable quarter last year that is impacting the overall comparison. We plan to update you on the impact of the shelf resets and the outlook for fiscal 2020 during our upcoming call in May.

On the bottom line, you will see that the declines implicit in our forecast result in negative operating leverage for the quarter. While deleveraging is expected with top line declines, I would note that the company has not yet begun to benefit from the number of cost-savings initiatives Tarang referenced earlier in his commentary. We plan to update you on these initiatives in May.

In summary, 2018 was a challenging year, and though it will take time, we believe the right initiatives are in place to reassert our position as the leader in providing high-quality cosmetics and skin care at an extraordinary value.

With that, operator, you may now open the call for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Bill Chappell with SunTrust.

--------------------------------------------------------------------------------

William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [2]

--------------------------------------------------------------------------------

I understand with the change in fiscal year and resets still in the mix. But can you give us any more color as we look to kind of apples-to-apples for '19 versus calendar '18? I mean, do you expect tills to grow? Do you expect EBITDA to grow? Anything you can kind of give there. And then when I'm saying that, I mean, as you're looking at resets and shelf space, are you losing any shelf space? Are you -- was there anything that would lead us to believe that things should get meaningfully worse over the next 12 months?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure. Bill, this is Tarang. Why don't I start with the second half of your question in terms of overall kind of momentum, and particularly as you've asked specifically on shelf space. As I mentioned in the script, we will -- our expectation is that we will pick up shelf space in 2019. We called out in particular e.l.f. -- Ulta Beauty, where we'll get increased shelf space in subset of their doors. For competitive reasons, they've asked us not to disclose how many of the doors those will be, but what I can tell you overall is we're really happy with both the partnership and what we see. But I'd tell you broadly from a retailer standpoint, e.l.f.'s retail proposition in terms of our productivity, consumer profile, innovation, particularly on these first-to-mass items, and our ability to partner with these retailers, put us in good steps. So we overall expect to pick up shelf space. And then on top of that, I think our partnerships, particularly with Ulta, Target and Walmart, are quite strong. Target is rewarding us right now with incremental merchandising space. Walmart is working very closely with us on our 4-way innovation centers, kind of improving in-stocks on those. So feel good from a overall retailer partnership standpoint and our overall position in terms of space.

--------------------------------------------------------------------------------

John P. Bailey, e.l.f. Beauty, Inc. - President & CFO [4]

--------------------------------------------------------------------------------

And then, Bill, on your broader question around the trend line on the business and how that plays forward on an apples-to-apples basis, we recognize the difficult moment we're in relative to clarity ahead of the resets, and that was obviously a big driver of the fiscal year change. I think if you take a look at our transition period, you'll obviously see sort of a negative trend implicit in our guidance. Important to note that, that does not fully benefit from the impact of our shelf resets, Project Unicorn or the marketing initiatives that we have in play. But the company will be in a better position to quantify that in May. So we'll try and help you a bit off-line, but recognize that we're in a little bit of a moment right now.

--------------------------------------------------------------------------------

William Bates Chappell, SunTrust Robinson Humphrey, Inc., Research Division - MD [5]

--------------------------------------------------------------------------------

Okay. And then in terms of -- on the cost front, I mean, certainly, that was better in the quarter than I would have expected, even excluding kind of the onetime stuff. I mean, can you just help us understand how well or how you're offsetting tariffs and kind of the outlook if tariffs roll back, if that changes anything or -- in your outlook over the next few months?

--------------------------------------------------------------------------------

John P. Bailey, e.l.f. Beauty, Inc. - President & CFO [6]

--------------------------------------------------------------------------------

Yes. I would say, in many ways, no new messages there. And it seems like tariffs continue to be a bit of a moving target relative to news coming out of Washington. As you know, we already have been subject to the 10% tariff, which was in our plan, and we talked about a couple of the mitigating factors between concessions that we got from our vendor partners as well as what happened with the prevailing exchange rate on the U.S. dollar to the RMB. Right now, our plans and obviously our transition period guidance does not include the impact of a 25% tariff given that, that has been delayed. But as you've heard in prior calls, a few different mitigating items that we would have if and when those actions went through.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

And specifically, on that point, Bill, if 25% did go through, we already have worked kind of what we would take in terms of selective pricing, and we did that by analyzing every one of our SKUs, where competitive items were manufactured. And what we have to do, we've already communicated that with our customers. We obviously held off pending kind of what ends up happening with trade negotiations, but feel well positioned on the 10% and are prepared if there's a 25%.

--------------------------------------------------------------------------------

Operator [8]

--------------------------------------------------------------------------------

Our next question comes from the line of Shannon Coyne with BMO Capital Markets.

--------------------------------------------------------------------------------

Shannon Elizabeth Coyne, BMO Capital Markets Equity Research - Analyst [9]

--------------------------------------------------------------------------------

Can you talk about just the competitive landscape? I know you talked about it being a lot different today than it was 1.5 years ago. Can you just talk about your biggest, I guess, surprises are? Where you think that you went wrong, maybe reasons why you haven't been able to keep pace and then what you expect kind of going forward?

--------------------------------------------------------------------------------

Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman & CEO [10]

--------------------------------------------------------------------------------

Sure. Shannon, this is Tarang. So I'd say on the macro, if I take a look at 2018 as a year, there were pretty big shifts from a competitive landscape standpoint in terms of the number of new entrants and particularly the impact of many of these mega-influencer-driven brands. And what ended up happening for us is that it ended up having e.l.f. message get lost in all the noise that was out there. Our biggest learning coming off of that is really we need to make sure that we're reasserting kind of our position as really a unique player in terms of our ability to give high-quality cosmetics and skin care and extraordinary value. I talked about a couple of the examples, initiatives that we're doing, in particular this integration behind our biggest first-to-mass items. And just to back up a bit, historically, while we always had a great pipeline of innovation, we usually would only market that innovation when it went into our own direct channels, particularly elfcosmetics.com. By the time resets happened and the distribution was brought into Walmart, Target, Ulta Beauty, there was very little we said behind those products. So one of the biggest changes we've made, and again I gave you a couple of examples on the call, is to say when we have a first-to-mass item, particularly one of those that we believe actually beats the Prestige inspiration, let's make sure we're fully integrating behind that. And you've seen that in terms of how we stepped up our efforts both with influencers, on social and in digital. And we like the preliminary results of what we're seeing so far. And so I'd say, it goes hand in hand with some of the things we talked in terms of investing more behind the brand, finding the cost savings to help pay for that investment but, most importantly, integrating behind our first-to-mass products.

--------------------------------------------------------------------------------

Shannon Elizabeth Coyne, BMO Capital Markets Equity Research - Analyst [11]

--------------------------------------------------------------------------------

Okay. And then just another follow-up. Can you talk about the international business? Just wondering if anything is changing there with your change in focus on the U.S. or if you continue to expect to grow internationally.

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure. We'll give full guidance in May, but what I can tell you in international overall is we're really pleased with what we're seeing, particularly in our direct international relationships. So I mentioned the example on our Camo concealer in the U.K. being called by ELLE UK the best concealer ever and at this incredible price point of GBP 5. That concealer right now we've partnered very closely with Superdrug in the U.K. And the amount of awareness, amount of sales that, that has driven has been incredible. And so we continue to see in these direct relationships really strong growth and growth potential, whether it be Superdrug, Boots in the U.K. as we started expanding the brand in other retailers directly. At the -- last year, we did have kind of -- continuing to kind of pull back on some of the distributors that we use. We have a number of good distributor relationships but are really prioritizing combination of kind of our direct relationships and see a great deal of whitespace ahead.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Unidentified Analyst, [14]

--------------------------------------------------------------------------------

This is [Kimberly] on for Mark. We had a question just about your incremental spending going forward and how that will be like allocated to product development versus marketing versus promotions and then how you're sort of balancing that with your cost-saving initiatives. So like how much of the savings are actually being reinvested into the business?

--------------------------------------------------------------------------------

Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman & CEO [15]

--------------------------------------------------------------------------------

Sure. So we will give, again, guidance in May for the 2020 period, but broadly speaking, what I'll tell you is the vast majority of the incremental spend is going into marketing behind our first-to-mass products. The actual R&D program and the new products engine that we have, we feel very good about. There is little bit more investment there, but most of the investment is really on how we activate behind these innovations and really make sure our consumers are aware of them, and we're speaking loudly and clearly. The cost savings would be reinvested back in that marketing investment. We'll give you a better picture of kind of how those go hand-in-hand kind of on our next call. I'd tell you in the first quarter or this transition quarter, as we mentioned, we've got marketing spend kind of in the mid- to high single digits. We do not have some of the cost-savings initiatives that I talked about. Many of those sequencing kind of Q2 to Q4 as we go throughout the year. And again, we'll be able to give you specific numbers as we put the full fiscal year picture together but very much have the intention of finding cost savings to help pay for those investments.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

Our next question comes from the line of Stephanie Wissink with Jefferies.

--------------------------------------------------------------------------------

Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst [17]

--------------------------------------------------------------------------------

Just a couple of follow-ups, and one is on Project Unicorn. If you could just give us an update on how widespread that distribution initiative is, across how many accounts, across how many doors, how we should think about the rollout of that in 2019. And then I just wanted to follow up, Tarang, on the decision to close the retail stores and how you're thinking about the consumer insight of your business. I know retail and online, your enthusiast community was an area where you would test new products and then ultimately bring those products to wholesales. Maybe give us an update on how you're thinking about the ecosystem of insights as it relates to some of the innovation we should expect over the course of the next year or 2 years.

--------------------------------------------------------------------------------

Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman & CEO [18]

--------------------------------------------------------------------------------

Sure. So first on Project Unicorn. Project Unicorn really impacts all of our retail customers in one way or the other, so pretty much 100% of our distribution. There's 2 distinct phases kind of the Unicorn. What's currently taking place right now in Walmart, Ulta Beauty and Target is we're putting Unicorn product in, which is new product packaging, better placement, in much more efficient sets, which allow us to put more items on each of those sets. That's kind of Phase 1. A balance of customers will get the Unicorn product, but may not be drawn as efficiently as Walmart, Target and Ulta. In the fall, we'll come back and kind of go to Phase 2 of Unicorn, where we will then move kind of across the board all of our brushes into the Unicorn design. They will still be in packaging but more sleeker packaging that allows us to fit more brushes and more kits onto shelves as well as start drawing other customers in a more efficient design. So you'll hear me talk about Project Unicorn pretty much throughout the year in the multiple phases of rollout. As we go through the first phase, we expect to kind of have implemented by the end of March in the main planograms that we're currently doing. And then on your second question in terms of the role of stores. We love the insights that we got from our stores and particularly the passion of our store associates. Yet, when we took a look at the resources that required relative to other sources of getting those insights, we deemed we're better off putting resources against some of these other vehicles. So for example, elfcosmetics.com is the #1 mass e-commerce site in color cosmetics. It's a rich area of insights. And we looked at the insights there relative to our stores, we're getting many of these cores' same insights. Particularly, once we started creating Beauty Squad, our loyalty program, we now are able to do -- our innovation team is able to seed some of our newest products with our most loyal Beauty Squad members, and we've gotten a rich level of feedback that prior to creating Beauty Squad, which we really started after we started our first store, we didn't have another vehicle for. Lastly, I would say, we've gotten much better in terms of the partnership with some of our national retailers on the innovation front. Ulta Beauty, in particular, has kind of expressed kind of their desire to go even faster on some of our big innovations, as have Target and Walmart. And there's a number of different things we're doing by retailer in terms of being able to get innovation insights. So at Ulta Beauty, they are wanting to put some of our new products online faster than we ever would have before, and in return, will give us insights in terms of what they're learning. At Walmart, I mentioned the 4-way innovation centers, their ability to get more unique items into each of their doors that than what can fit on a typical kind of 4-foot shelf set. In Target, our longest-standing strategic partner, we're constantly looking at ways that we partner on innovation including kind of exclusive items. So as I step back, while the store has certainly played an important role in terms of getting insights, particularly from our associates and what they're learning and hearing from consumers on new items, we have other ways of getting those insights in a more efficient manner.

--------------------------------------------------------------------------------

Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst [19]

--------------------------------------------------------------------------------

Tarang, if I could just throw in one more. I just want to understand a little bit about scanner this year. If you could just help remind us, as we look at comparability March quarter, June, September, December progressing through the year, are there any things we need to be mindful of that were occurring last year that affected scanner that we should be considering in the comparables this year? I know there's a lot of noise in scanner as the year progresses. So just want to make sure we account for those things.

--------------------------------------------------------------------------------

Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman & CEO [20]

--------------------------------------------------------------------------------

Yes. So I think the macro is, look, we still see headwinds in our track channels. If I think of the first quarter in particular, we're going through a bigger conversion than we normally do with Unicorn. As I mentioned, that kind of transition is taking a little bit longer just given the magnitude of the number of SKUs that we're talking about that are converting over. The biggest change, though, relative to Unicorn and scanner year-over-year is you're going to see a bit more volatility. So I saw a bunch of notes after last month's Nielsen of, wow, things look like they're getting a lot better. The next read that you see, maybe worse or better. And part of it depends on one of the things Unicorn allowed us to do, is during the changeover, put less items on clearance. And so typically, what happens when resets happen is retailers for those items that we're deleting to allow space for the new items to come in will kind of put on markdown or clearance, the items that we're deleting. Because Unicorn allows us to put more items on the shelf, we do not have to delete as much. So that actually has a negative impact in the scanner because the clearance items, while discounted, kind of do drive a lot of sales. So you'll have that bouncing around between kind of how much clearance did you have in the prior period versus the current period and where are we. But the overall trend, I'd say, is you're going to see scanner bounce around a bit this month, kind of month-to-month. The best read that we're going to start to get, frankly, I'd say, is after kind of this March period once it's set, where we actually have a clean base to be able to really compare off of.

--------------------------------------------------------------------------------

Operator [21]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [22]

--------------------------------------------------------------------------------

So maybe, Tarang, just to kind of follow on, on that thought. If I just think about the tough quarter guidance, even if I back up the retail business at this time last year, it seems like the guide is still down 8% to 11% from a sales perspective. So is that -- I mean, I recognize there are some changes that's kind of reset, but is that really a reflection of what you're seeing kind of for this quarter? Are there any other major retailer shift because Easter is later this year that would have impacted Q1 optically?

--------------------------------------------------------------------------------

Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman & CEO [23]

--------------------------------------------------------------------------------

Sure, Erinn. It's a little better than that or a lot better than that in some respects because we did call out about $3 million of pipeline we had in the comparable period last year that we don't have this year. And so it's not only the retail stores that around $3 million -- $3.3 million, but the $3 million in pipeline. I would tell you overall, we'll be in a much better position coming out of these resets to really set kind of the guidance in May if where we really see kind of the year and then more importantly the progression of when you're going to expect different trends.

--------------------------------------------------------------------------------

Erinn Elisabeth Murphy, Piper Jaffray Companies, Research Division - MD and Senior Research Analyst [24]

--------------------------------------------------------------------------------

Okay. And then maybe just on the marketing front. And I guess, 2 questions. I mean, you've made some interesting hires between CMO, Kory, and I think you hired a Head of Integrated Marketing recently. Are you pretty pleased with how the team has now assembled? Are there any other roles that are open, that you are still looking to fill on that front? And then one of the stats, I guess, related to what you're seeing in the Beauty Squad, I think you said there was 50% of the growth you saw was from your new consumers. I'm just curious what you're seeing in terms of similarities or characteristics of that consumer, anything that -- on the demographic side that is compelling to you.

--------------------------------------------------------------------------------

Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman & CEO [25]

--------------------------------------------------------------------------------

Sure. So first in terms of our hires, I think one of the great advantages that we've had is the strength of the team we have kind of across the board. So I'm overall very pleased and proud of kind of our team and on the whole. There are 3 areas in particular as we got in last year and we said, as we said like, hey, the brand is getting lost. Our message is getting lost in kind of the noise that I talked about. We really prioritized 3 core areas as I looked at kind of overall stepping up kind of our marketing and bringing in more talent in marketing, I'd say, on the whole and, in particular, in this area of social influencer activation as well as our overall digital kind of footprint. And so we've made a tremendous amount of progress, some of which we've announced, others that we haven't. For example, when I look at our digital business, we did talk about replatforming our site last year. We've also started bringing in a lot of the development kind of in-house. It both saves us money and gives us much better capability as we go forward on our personalization and other core key initiatives digitally. Marketing talent, we have a great marketing team before, and we continue to strengthen it kind of across the board and certainly under Kory's leadership. And an important point on that talent piece is not just the talent that we're enhancing, but also the way that we're integrating those functions. So Kory's role is quite broad, where she will have brand, creative, innovation and digital, being able to really tie together that in total kind of end-to-end consumer experience. And I think that's probably one of the big changes. We always were happy with the talent that we had, but how do we bring that talent together and to bear on these key first-to-mass innovations? And then on the second part of your question, yes, on the Beauty Squad. The specific stat we cited was what we're seeing by the activations, when we activate against one of these first-to-mass products. And I think in that particular case, I think I was talking about the putty primer. I can't -- putty primer. When we activated against putty primer, what we found was not only it was hugely appealing kind of the influencer and kind of in the social sphere, but it brought new users to our website. And then as new users came to our website, half of them signed up for Beauty Squad. So we're continuing kind of build Beauty Squad as a core platform for us for kind of growth in the future. And a lot of it is focused on how do we bring new consumers into the franchise through many of the marketing tactics I just talked about as integrating behind these key first-to-mass innovations. So we continue to see what we like there. I'd say the next frontier on that as we go forward is as we put some of our personalization initiatives kind of out there in terms of further being able to -- including testing this quarter for the first time, our first version of kind of receipt scanning that would allow us to tie together our national retailer sales and some of that data to our own online sales. So there's a lot we're doing on that front that will further build out Beauty Squad.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Bonnie Lee Herzog, Wells Fargo Securities, LLC, Research Division - MD and Senior Beverage & Tobacco Analyst [27]

--------------------------------------------------------------------------------

I wanted to circle back to your business and where things are at right now. I guess, as I think about your business, you're entering a transition or a turnaround period, making a lot of changes that you discussed today. So how long realistically do you expect this transition to take? Should we think about this in the context of more than a year, for instance? And then on your Q1 guidance, I guess, you do have some read into what the retailers want or need given a lot of the resets have happened. So I'm trying to reconcile this with the pretty decent deceleration in the business. And then doesn't this suggest that this weakness will carry forward for the year? So I guess, I'm just trying to think through this and just trying to think through expectations that things really might not get better for a few quarters, especially given there's always a lag from some of the changes you're making, especially when I think about advertising. So just wanted to hear your thoughts on really how long things could take to turn.

--------------------------------------------------------------------------------

Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman & CEO [28]

--------------------------------------------------------------------------------

Sure, Bonnie. So maybe I'll start with the second part of your piece in terms of kind of the read and when resets happen. We're actually right in the middle of it. So no reset that I know of is fully complete yet. But I mean, across each of our customers, Ulta's time line is end of March. We're still in the middle of kind of Target and Walmart. So some of our key resets, to be honest with you, have not been completed yet. So we're not finished yet with the resets, and therefore, we don't have the full visibility of kind of the time line of how long is it going to take. And that's why we're setting the whole point of changing the fiscal year to the kind of April time frame. It was to be able to get the visibility so we can give you a much more accurate sense. I would say, yes, it will take some time on some of these initiatives as I should take a look at kind of where it goes, but I'm not yet ready to be able to tell you what specific quarter do you see that inflection point. I'll have much better sense on that once I get out of these resets.

--------------------------------------------------------------------------------

Bonnie Lee Herzog, Wells Fargo Securities, LLC, Research Division - MD and Senior Beverage & Tobacco Analyst [29]

--------------------------------------------------------------------------------

Okay. And then just to ask again on that. So as you talked to that, the resets, you're in the middle of it. But from what you know right now, Tarang, things do seem to be a lot weaker in terms of your guidance. Or are you just trying to be ultraconservative as you lay out your Q1 expectations?

--------------------------------------------------------------------------------

Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman & CEO [30]

--------------------------------------------------------------------------------

Yes. So look, we put out -- if I think about our top line guidance and you take a look at that range, I think one of the earlier questions talked about, once you put the stores, the right comparable on the stores, and then if you take that pipeline, it would imply kind of a 3% to 8% decline in this transition quarter. So if you just do that math, 3% to 8%. For perspective, kind of Q3 was minus 9%. We had pipeline things going on there. Q4 is minus 4%. So it's in the range of what we've seen kind of in the last couple of quarters. So I don't want to tell you like, hey, I look at 3% to 8% and project that out or not. I'm just giving the transition. The transition, as I mentioned, is a funny period just given kind of all of the reset that we have going on with Unicorn and kind of lot of puts and calls, including the stores. But that's 3% to 8% once you add kind of the pipeline and take a look at the stores. It isn't that far off with kind of the trend we've been on.

--------------------------------------------------------------------------------

Bonnie Lee Herzog, Wells Fargo Securities, LLC, Research Division - MD and Senior Beverage & Tobacco Analyst [31]

--------------------------------------------------------------------------------

Okay. That's fair enough. And then just one final quick question for me on the advertising spend. You said as a percentage of sales, I think you said it was 4% in 2018 and that you're expecting to be around mid- to high-single digits in Q1. So just maybe confirm that. And then how do you think about the right level of spending going forward? Like what are you guys targeting for this business? And then maybe drill down a little bit on your expected returns on some of this advertising. You touched on this, but are you seeing the lift that you think is required for the spending levels?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure. So backing up, I would say, very little of our spend is kind of traditional advertising. Almost none of it is. A lot of it is kind of core activation that we're doing on social with influencers and in our digital channels. But you had the numbers right. We did finish 2018 at 4%. First quarter is mid- to high-single digits. I like that level from what we're seeing in this quarter, and part of where I like it is back to the ROI question. Some of the activations we've done, particularly against these first-to-mass products, have really great return profiles. So I described the putty primer example, where by sending out influencer kits, doing integrated marketing on social, we are able to get incredible pickup from some pretty big influencers out there, pretty big word of mouth. In fact, putty primer is now out of stock. We're getting more kind of in-stock but every time you get another wave in, you see this big surge kind of online in terms of what else consumers are buying, the new consumers I talked about, et cetera. And so we will give you a much better sense, specifically, of the full range of kind of like here's where marketing is. I'd say I'm comfortable with the current levels of kind of mid- to high single digits. But again, want to put that picture together with you, with the cost savings that we'll have and the overall kind of business profile.

--------------------------------------------------------------------------------

Operator [33]

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Andrea Faria Teixeira, JP Morgan Chase & Co, Research Division - MD [34]

--------------------------------------------------------------------------------

I just wanted to just make sure I understood some of the -- just a clarification, and then I will ask more of a cash flow question. So on Bonnie's question, pretty much you implied that the 4% to be mid- to high-single digits, and the shelf space resets are still like in the making. And so what we're seeing, the 10% in the middle of the range decline on an adjusted basis for revenues are still not fully incorporating all the shelf resets. So we should be seeing potentially some -- I mean, potentially a lot of more impact instead of the -- more in the middle of the range, the 10%. But I think Tarang had said something in between 3% to 8%. So I'm just trying to reconcile the 2 numbers to see if that's more of a pipeline number that we're not necessarily seeing, if that's a net from the shelf space? And then the second question is on cash flow. If I just -- I don't know if you want to answer the first question first and then I'll go...

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure. Why don't I take the first question? So Andrea, if you take a look at the transition period guidance on the top line, we said $55 million to $58 million. If you add in the $3.3 million for stores and you add the $3 million of pipeline we had last year that we do not have this year for national retailers, that's what gets you to the 3 -- minus 3% to minus 8% range on the top line. So that's my 3% to 8% versus kind of the 10%, is you have to take a look at kind of the pipeline we had the year before. On -- related to that, it is a messy period just given that you do have all of the transitions taking place from a shelf standpoint. And when I'll be able to -- the reason why I know it's frustrating to not be able to tell you exactly what kind of like the future view will be, but the future view will be informed once I get a clean rate coming off of these shelf resets. There's a lot going on in the shelves right now. We'll be able to provide a much clearer picture kind of come May of kind of where do we see that top line and marry that up with both the marketing spend, including ROI as well as the cost savings.

--------------------------------------------------------------------------------

Andrea Faria Teixeira, JP Morgan Chase & Co, Research Division - MD [36]

--------------------------------------------------------------------------------

Okay. And then -- that's helpful. The other question that I had is like, obviously, you've done a tremendous work in terms of getting your supply chain together. You've invested in a couple of facilities in the U.S. So can you kind of like guide us into the cash flow, how we should be seeing cash flow, potentially like you need to also give more support to that initiative given that you're going to be focusing more on e-commerce? Like how should we be thinking of the other side of the business, which is the online business, now that it gets probably more investments vis-à-vis the stores?

--------------------------------------------------------------------------------

John P. Bailey, e.l.f. Beauty, Inc. - President & CFO [37]

--------------------------------------------------------------------------------

Yes. Andrea, it's John. We obviously feel very good about the cash flow generation in 2018, a lot of proactive management on the working capital side. And in particular, I know a theme that we talked about a year or so ago was our overall inventory position. And as you've seen throughout the year, really been able to bring those into -- that balance rather into a good place. So feel really strong overall in terms of the balance sheet, finishing the year with over $51 million in cash and a completely undrawn revolver. To your core question around kind of investments on the capital side and particularly as that relates to both e-commerce and some of the capital initiatives that we mentioned that'll drive cost savings, a lot of that capital investment has actually already been made in 2018. So feeling very good about obviously our operation in Ontario and some of the automation initiatives we have there. Feeling good about the Columbus warehouse and what that's doing for us not only from an efficiency perspective but also in terms of customer experience and the speed in overall delivery. And as we also mentioned, right now in the process of exploring domestic manufacturing, which should be online sometime near the end of 20 -- calendar 2019. So I think a lot of those investments have been made and feeling very good about the condition of our balance sheet sitting here today.

--------------------------------------------------------------------------------

Operator [38]

--------------------------------------------------------------------------------

Your next question comes from the line of Oliver Chen with Cowen.

--------------------------------------------------------------------------------

Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [39]

--------------------------------------------------------------------------------

I think the rise of the influencer brands is led by one person like Kylie and Rihanna. What are your thoughts on your core competitive advantages and how it may or may not inform you in terms of pivoting, how you can make sure to drive your fair share of awareness and also get credit for the innovation you're doing? And the second question is just about the future in terms of your relationships with key wholesale accounts. Is there a way to enhance like the frequency of drops in order to make sure that the newness is what you want that's present just given that there's change ahead in how you're innovating and making sure that your customers are buying the product that customers want to buy?

--------------------------------------------------------------------------------

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

--------------------------------------------------------------------------------

Sure. Thanks, Oliver. So on the first, on kind of the impact of the rise of the influencer brands and how do we -- kind of what is our core competitive advantage and how do we get credit for that innovation, I would say that was probably one of the biggest learnings we had last year, was we allowed ourselves kind of get lost in all of the noise. And so the best -- in the end of the day, like there's no question and nothing has changed almost from the inception of kind of the company from the early roots. The core competitive advantage we have is this Prestige quality, cosmetics and skin care and extraordinary value. That's what really differentiates our proposition from any other. There are some that have pretty decent quality. There are some propositions that have good price points. Our unique ability to bring that Prestige quality at these phenomenal price points, for example on the putty primer, being able to compare to a $52 Prestige product and be able to do that at $8 and have some of the leading influencers out there saying like, "This is amazing. I can't believe this." We're even more proud, frankly, of our Camo concealer, our 16HR Camo concealer that compares to a Prestige product that normally prices at $28, and ours is at $5. That really is kind of the core competitive advantage we have. And I think what ended up happening last year is we allowed that to get diffused or lost, right? We had kind of this great track record of just put some of these items on shelf, consumers would figure it out, and we would be able to maintain kind of our productivity. Our ability -- and what we're finding is it doesn't take that much effort to really be able to shine the light on some of these key innovations and stay focused on that versus, I would say, all the different items that we will launch throughout the year. So I feel good long term about our competitive positioning and competitive advantage. Because to be honest, and I'm not going to single out any one brand, but as we take a look at reviews in the marketplace, we see plenty of -- some people have very high reach and are able to get that initial trial only to have the review say, "Gosh, I tried this, and that was $24, and it's not very good," right? And at the same time, when you take a look at e.l.f., one of the things that really sustains for us is not only that overall value rating, but that we have amongst the highest retention ratings in the category given the quality of the proposition in addition to the great price point. And then in terms of our future with our retail partners, national retailer partners, one of the biggest areas that we're in discussions with them is all of them look to e.l.f. as one of the key kind of innovation engines within their categories, their new product engines. They love the -- both the scope of our innovation as well as the speed of it. And the biggest opportunity, frankly, for quite some time has been how do they better take advantage of that innovation just given some of the structural limitations they have of when they bring product in or not. And to that end, we are testing a number of different things. So we've now tested both at Ulta Beauty being able to bring their -- our leading -- kind of some of our new products online on ulta.com at the same time we do on elfcosmetics.com. That's something we've never done before, and Ulta is willing to take the risk on kind of taking that inventory and making sure they do that. With Walmart, I talked about an entirely different approach on kind of our display space at Walmart, where it is unique to the items they have on their shelves. And our ability -- and we'll talk next in terms of our ability to sell through innovation there further. And I'd say the third thing is we have the ability to actually drive exclusive items with each of our core retail partners for them to be able to really drive kind of their own uniqueness and ability to bring news to customers and we can do more there -- there's a lot we're doing on that front while admitting that there are some structural barriers in terms of how fast can they take. Frankly, no one can move as fast as we can in the market, and so we're trying to help kind of our partners to be able to take advantage of that speed.

--------------------------------------------------------------------------------

Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [41]

--------------------------------------------------------------------------------

Okay. And last question on Beauty Squad. What's your perspective on the broadening and the future of this program? In the space, we're just seeing a lot of really powerful partnerships across different retailers or health and wellness, one concern with Beauty Squad is that it's a specialist program and some of the -- some of what we're seeing is just the big getting bigger with apps and loyalty. So would love your thoughts on what that program might look like on a longer-term basis.

--------------------------------------------------------------------------------

Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman & CEO [42]

--------------------------------------------------------------------------------

Yes. So we see great potential in Beauty Squad. And to your point, I think part of where the potential comes from really is broadening the approach on Beauty Squad. So when we first started Beauty Squad, it was a loyalty program just for elfcosmetics.com. We expended to our store. The next frontier is how do we take advantage when somebody buys something in a Target or a Walmart, an Ulta Beauty of being able to tie together that dataset. I'd say the ultimate vision, though, similar to many other people, is to have a truly delightful consumer experience that's highly personalized to each of our core users. And there's a lot of work that we're doing from a technology standpoint to enable much greater personalization across our platform, and Beauty Squad is a key component of that. So you'll hear more about that as we go forward because it is the nature of a lot of the investments that we're making on how do we really get the most delightful experience for our core users.

--------------------------------------------------------------------------------

Operator [43]

--------------------------------------------------------------------------------

(Operator Instructions) At this time, we have no further questions. Thank you for joining us today. This does conclude today's conference and you may disconnect your lines at this time.