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Edited Transcript of ELF.N earnings conference call or presentation 3-Feb-21 9:30pm GMT

·53 min read

Q3 2021 e.l.f. Beauty Inc Earnings Call OAKLAND Feb 4, 2021 (Thomson StreetEvents) -- Edited Transcript of e.l.f. Beauty Inc earnings conference call or presentation Wednesday, February 3, 2021 at 9:30:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Kristina Casey Katten e.l.f. Beauty, Inc. - VP of IR * Mandy J. Fields e.l.f. Beauty, Inc. - Senior VP & CFO * Tarang P. Amin e.l.f. Beauty, Inc. - Chairman, CEO & President ================================================================================ Conference Call Participants ================================================================================ * Dara Warren Mohsenian Morgan Stanley, Research Division - MD * Erinn Elisabeth Murphy Piper Sandler & Co., Research Division - MD & Senior Research Analyst * Jon Robert Andersen William Blair & Company L.L.C., Research Division - Partner * Kojo Boateng Achiampong JPMorgan Chase & Co, Research Division - Associate * Linda Ann Bolton-Weiser D.A. Davidson & Co., Research Division - Senior Research Analyst * Mark Stiefel Astrachan Stifel, Nicolaus & Company, Incorporated, Research Division - MD * Oliver Chen Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst * Rupesh Dhinoj Parikh Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst * Stephanie Marie Schiller Wissink Jefferies LLC, Research Division - Equity Analyst and MD * Wendy Caroline Nicholson Citigroup Inc., Research Division - MD & Head of Global Consumer Staples Research * William Bates Chappell Truist Securities, Inc., Research Division - MD ================================================================================ Presentation -------------------------------------------------------------------------------- Kristina Casey Katten, e.l.f. Beauty, Inc. - VP of IR [1] -------------------------------------------------------------------------------- Thank you for joining us today to discuss e.l.f. Beauty's Third Quarter Fiscal 2021 results. I'm KC Katten, Vice President of Investor Relations. With me today are Tarang Amin, Chairman and Chief Executive Officer; and Mandy Fields, Senior Vice President and Chief Financial Officer. We encourage you to tune into our webcast presentation for the best-viewing experience, which you can access on our website at investor.elfbeauty.com. Since many of our remarks today contain forward-looking statements, please refer to our earnings release and reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward-looking statements. In addition, the company's presentation today includes information presented on a non-GAAP basis. Our earnings release contains reconciliations of the differences between the non-GAAP presentation and the most directly comparable GAAP measure. With that, let me turn the webcast over to Tarang. -------------------------------------------------------------------------------- Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [2] -------------------------------------------------------------------------------- Thank you, KC, and good afternoon, everyone. I hope that you're staying safe and well. Today, I will discuss the drivers behind our Q3 results, our growth opportunities and our overall strategic framework. I am proud of our team for delivering our eighth consecutive quarter of net sales growth as we continue to navigate major category headwinds as a result of COVID-19. We delivered Q3 net sales of $89 million, up 10% versus a year ago, and adjusted EBITDA of $18 million. We continue to gain market share while advancing our transformation to a multi-brand portfolio. We're also raising our full year guidance, reflecting a shift in some orders from Q3 to Q4 and continued business momentum. Before Mandy details our results, I want to share the key pillars underpinning our performance. Our strategy is working. We came into this volatile period from a position of strength. Our superpowers that center on our ability to deliver 100% cruelty-free, premium quality beauty products at accessible price points with universal appeal continue to resonate with consumers. Our outperformance relative to the category reflects the strength of our business model and a relentless focus on our 5 strategic imperatives. Let me provide a few highlights from the quarter. Our first strategic imperative is to drive brand demand. We continue to leverage our digital-first marketing engine to drive greater brand relevance and expand our consumer reach. Our brand-building efforts are working as we continue to significantly outperform our competition. e.l.f. grew the most share in the quarter, with 5.9% of the market, up 100 basis points year-over-year. e.l.f.'s social audience continues to grow double digits, with over 9 million followers across our digital ecosystem. Our earned media value was up 16% compared to the prior year, and we're the only brand growing in our competitive set. We're continuing to disrupt the beauty space as we test and learn on new frontiers. We are proud to be one of the first beauty companies to establish a presence on Twitch, the world's leading live streaming gaming platform. In November, we announced a collaboration with Loserfruit, also known as Lufu, who has the second largest Twitch following for a female gamer. Lufu is providing her audience, both female and male, with engaging platform-native content that promotes self-care and self-expression while integrating her favorite e.l.f. products. In yet another beauty industry milestone, we were the first beauty brand to launch a campaign on Triller, an emerging music video-making platform. We created a 5-track holiday album called e.l.f. the Hauls, which featured up and coming artists remixing holiday classics. We made beauty and music industry history, with 4 of our songs making the U.S. and Global Billboard's Triller Top 20 list. Our brand-building efforts continue to win awards. This quarter, Women's Wear Daily recognized us as a newsmaker of the year. Ad Age named us one of the top 10 marketers of the year. We're the only beauty brand on the Ad Age list, putting e.l.f. in admirable company with TikTok, McDonald's and LEGO, among others. This quarter, we took an important step in our transformation to a multi-brand portfolio with the launch of our first ritual for Keys Soulcare, our groundbreaking new lifestyle beauty brand with Alicia Keys. In December, we launched The Goddess Ritual on keyssoulcare.com and ulta.com, which included 3 product offerings: a Sage + Oat Milk Candle, Skin Transformation Cream and Obsidian Facial Roller. We expanded the collection in January to include 6 dermatologist-developed clean skincare offerings. Keys Soulcare is off to a great start, and we're encouraged by the recognition the brand is receiving with over 10 billion global press impressions since launch. The brand has been further amplified by Alicia's almost 100 million social media followers. Alicia is truly an inspiration to so many, and we believe her passion for bringing light into the world will resonate with a broad set of global consumers. Looking to W3LL PEOPLE, our plant-powered clean beauty brand, we are continuing to execute our brand recharge to broaden consumer awareness. We are bringing the recharge to life at shelf with new visual merchandising across our key retail partners. Our second strategic imperative is a major step-up in digital. Digital consumption remains strong, up nearly triple digits year-to-date, with strength across elfcosmetics.com, retailer dot-coms and Amazon. Digital channels expanded to 16% of our total business this quarter, up from 10% a year ago. On elfcosmetics.com, approximately 60% of our shoppers were new consumers. We're encouraged to see these consumers over-indexing on skincare and signing up for our Beauty Squad Loyalty Program. Beauty Squad now has almost 2.3 million members, up 40% year-over-year. Our loyalty members collectively drive almost 70% of our sales on elfcosmetics.com. This quarter, we offered our Beauty Squad loyalty members exclusive early access to our holiday kits and new product innovation, which helped drive sign-ups for the program. Building from the e.l.f. playbook, Keys Soulcare utilizes a digital-first strategy with our initial product rituals launching online. Keys Soulcare aims to transform the way the world engages with beauty with a focus on content, conversation and community. Keyssoulcare.com features rich editorial content and a weekly e-mail newsletter with inspirational story from Alicia's community of lightworkers. The brand's community is active, vocal and passionate about Alicia, our philosophy and our product offerings. Instagram engagement metrics are trending well above platform averages, and we're pleased with the strong open rates for our weekly newsletters. Our third strategic imperative centers on innovation. With our e.l.f. brand, we saw continued success this quarter in our core segments: brushes, primers, concealers, brows and sponges, which make up approximately half of our sales. We have the #1 or 2 position in all 5 segments and continue to drive market share gains in each. Looking beyond our core segments, our innovation engine and flow of new products continues to resonate with consumers. Building on the success of our camo concealer franchise, we launched Camo CC Cream last month to broaden our offerings in foundation, which is almost 3x larger than the concealer category. Our Camo CC Cream at $14 offers an incredible value for consumers, especially as compared to a prestige equivalent at $40. We believe Camo CC will be our next holy grail product. We also launched a new limited edition Mint Melt collection. This refreshing line of 5 new cosmetics products and 3 skincare products is just one example of how we're driving differentiation with our retail partners. The collection is available on elfcosmetics.com and exclusively with Walmart in the U.S. and with Superdrug in the U.K. Skincare remains a major focus. Consumption for the quarter was up 17% in tracked channels versus a category that was down 5%. We see a lot of runway in this category. For perspective, skincare represents 8% of our tracked channel consumption, yet drives nearly 25% of our business on elfcosmetics.com and Amazon. Recent skincare innovation includes a makeup melting cleansing balm, daily cleanser and eye cream, all building on the success of our Holy Hydration franchise. Keys Soulcare launched its skincare collection in January and further fuels our momentum in this category. The collection includes 9 product offerings with dermatologist-developed clean formulas, skin-nourishing ingredients and soul-nurturing rituals. Early consumer favorites include the Harmony Mask and Comforting Balm. Our fourth strategic imperative is driving productivity with our national retail partners. Project Unicorn, our ongoing initiative to drive productivity by improving assortment, presentation and navigation at shelf, continues to impress. We're also excited about the sustainability milestone we achieved. Project Unicorn reduced an estimated 650,000 pounds of excess packaging across over 200 SKUs. We're just getting started on our sustainability journey, and we'll continue to push to reduce our packaging footprint. Given the strength of our productivity, innovation and consumer engagement, we've earned space expansion for the e.l.f. brand. In fall 2020, we expanded shelf space in a subset of Walmart and Ulta Beauty doors. In spring 2021, we're expanding even further at Ulta. Internationally, where we have a lot of white space, we recently launched at Shoppers Drug Mart, a leading beauty retailer in Canada; and Nykaa, a leading beauty retailer in India. Looking to Keys Soulcare, our global retail strategy will light up in a much bigger way in the coming months. This spring, our product offerings will be available in 29 countries on keyssoulcare.com, in U.S. stores at Ulta Beauty, in the U.K. at Cult Beauty and in 8 countries across the EU at Douglas. Our fifth strategic imperative is delivering cost savings to help fuel brand investments. Over the last 6 years, we've expanded gross margins from 47% to approximately 64% while navigating 25% tariffs on the majority of our products. This has enabled us to fund incremental investments behind our brand and infrastructure. Mandy spoke last quarter about the FX headwinds to our gross margin that we expect starting in Q4. We are pulling levers to help mitigate a portion of the impact of FX, including through pricing and supplier concessions. We also have an increased focus on SG&A leverage as we move into fiscal 2022. In other operational matters, we successfully resolved the systems migration issue at our distribution center that we spoke about last quarter. We're now operating under a new warehouse management system and have improved both our throughput and shipments to our retail partners. The progress in our 5 strategic imperatives has been terrific, and we believe we're still in the early innings with each. Before I turn the call over to Mandy, let me provide a bit more perspective on our strategic framework and why I'm optimistic about the future of our brand portfolio. Each of our brands is positioned to touch diverse consumer cohorts at different price points. All 3 brands are accessible relative to their competitive set and fulfill our mission of making the best of beauty accessible to every eye, lip and face. Importantly, all 3 brands are complementary and highly incremental to the e.l.f. Beauty platform. Looking ahead, we believe the color cosmetics category will return to growth given the major role cosmetics play in consumer self-expression. We remain focused on growing share regardless of category trends. We were strong entering the pandemic. And our digital strength, core value proposition and ability to adapt at e.l.f. speed have continued to fuel our performance. Today, with a more diversified brand portfolio, we believe we are positioned for an even brighter future. I'll now turn the call over to Mandy. -------------------------------------------------------------------------------- Mandy J. Fields, e.l.f. Beauty, Inc. - Senior VP & CFO [3] -------------------------------------------------------------------------------- Thank you, Tarang. Today, I'll cover our Q3 financial results and raised fiscal 2021 outlook. We delivered Q3 net sales of $89 million, up 10% from a year ago. This growth was mainly fueled by ongoing strength across e-commerce, international and national retailers. We also experienced a shift in order timing from December into January. While timing shifts happen in the ordinary course, this instance resulted in lower net sales, and thus, lower adjusted EBITDA than we originally expected in Q3. As you will note by our increased guidance, we expect to recapture those orders and enjoy further strength in Q4. Gross margin of 64% was down approximately 50 basis points compared to prior year. Similar to the last several quarters, we saw gross margin benefits from margin accretive product mix, cost savings and a mix shift to elfcosmetics.com. We also benefited from FX, although less so relative to prior quarters as we started to feel the impact of changing FX rates. Offsetting these benefits were certain costs related to retailer activity and space expansion. On an adjusted basis, SG&A as a percentage of sales was 49% compared to 44% last year, primarily driven by increased investment behind marketing and digital, headcount costs related to the build-out of our marketing, digital and innovation capabilities, and increased operational costs related to higher e-commerce volume. Marketing and digital investment for the quarter was approximately 15% of net sales versus 12% a year ago. Q3 adjusted EBITDA was $18 million, down 14% to last year. And adjusted EBITDA margin was approximately 21% of net sales. Adjusted net income was $12 million or $0.22 per diluted share compared to $12 million or $0.24 per diluted share a year ago. Our liquidity remains strong with the combination of our cash balance and access to our revolving credit facility sitting at approximately $85 million. We ended the quarter with $35 million in cash on hand compared to a cash balance of $75 million a year ago. Our ending inventory balance was higher on a year-over-year basis, as planned, and is expected to remain at higher levels through March. This is largely due to the addition of Keys Soulcare and W3LL PEOPLE, planned space expansion and new distribution for e.l.f. and higher product costs as a result of mix and changing FX rates. The timing shift in orders I mentioned earlier also added to our inventory levels at quarter end. We are comfortable with our inventory levels and believe we have what we need to support our ongoing business momentum. We expect our cash priorities for the balance of the year to remain focused on investing behind our 5 strategic imperatives, supporting the launch of Keys Soulcare and our W3LL PEOPLE brand recharge. Now let's turn to our outlook for fiscal 2021. We are raising guidance for full year fiscal 2021. We now expect net sales growth of approximately 7% to 9% versus fiscal 2020, up from 5% to 7% previously. We expect adjusted EBITDA between $59 million and $60 million as compared to $57 million to $60 million previously, adjusted net income between $33 million and $34 million as compared to $31 million to $33 million previously, and adjusted EPS of $0.63 to $0.64 per diluted share as compared to $0.59 to $0.63 per diluted share previously. Let me provide you with a little more color on our planning assumptions for the remainder of our fiscal year, starting with the top line. Our raised top line outlook reflects our continued business momentum, the potential benefits from stimulus-related spending and the timing shift in orders from Q3. We still anticipate a modest net sales contribution in fiscal 2021 from the launch of Keys Soulcare. We continue to be mindful of the ongoing uncertainty around COVID-19 and the general economic environment. As a reminder, in Q4, we also faced tougher year-over-year comparisons as we anniversary 16% sales growth last year as well as less incremental merchandising on a year-over-year basis in Target. Turning now to adjusted EBITDA. Our guidance implies adjusted EBITDA margin in the 19% to 20% range for the year, approximately in line with our prior outlook. Within that, we expect several of our underlying gross margin drivers to remain intact, including margin accretive product mix and a favorable mix shift to elfcosmetics.com. Partially offsetting those factors is a combination of unfavorable FX rate trends as well as an incremental $5 million to $6 million in Keys Soulcare-related marketing spend that is largely concentrated in Q4. As Tarang mentioned, we are pulling levers to help partially mitigate the impact of FX into fiscal 2022, including select price increases and cost savings. We also have an increased focus on SG&A leverage as we move into fiscal 2022. Let me now take a step back to talk about our long-term economic model. With fiscal 2021 as the base, as we look out over the next 3 years, we continue to believe in our long-term economic model, targeting compounded annual top line growth in the mid to high single digits, with adjusted EBITDA growth outpacing net sales growth over that horizon. Our performance over the last 8 quarters both on an absolute basis and relative to the category demonstrates how our 5 strategic imperatives are driving results and gives me confidence for the future. With that, operator, you may open the call to questions. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) And our first question today will come from Andrea Teixeira with JPMorgan. -------------------------------------------------------------------------------- Kojo Boateng Achiampong, JPMorgan Chase & Co, Research Division - Associate [2] -------------------------------------------------------------------------------- It's actually Kojo on for Andrea. We just want to dig a little bit deeper -- so we just want to dig a little bit deeper on distribution. So we're just wondering if you guys could update us a little bit about the distribution gains that you guys have seen recently and if they came in as expected. And then if possible, if you could describe sort of your expectation of what those distribution gains should have on your sales growth. -------------------------------------------------------------------------------- Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [3] -------------------------------------------------------------------------------- Sure. So we're pleased with our distribution progress. We mentioned last fall picking up more space at Walmart and Ulta Beauty. In our spring sets, we've picked up additional space for the e.l.f. brand at Ulta Beauty. We've also picked up distribution at Shoppers Drug Mart in Canada as well as Nykaa in India online. Those are the primary beneficiaries on e.l.f. In addition, we picked up space related to W3LL PEOPLE in Ulta Beauty as part of their Conscious Beauty initiative. And Keys Soulcare, while the launch has been online and digital first, both on keyssoulcare.com and ulta.com, you're starting to see us expand distribution on that brand as well. Earlier this month, we started up global ship, which allows us to serve 29 countries with Keys Soulcare. We also talked about being at Cult Beauty in the U.K. for that distribution. And we announced on this call that we'll also be entering Douglas in Europe in 8 different countries and European market as well. So we feel pleased of our distribution progress. It's also one of the things that raised our guidance and the confidence that we have in it in terms of the continued momentum that we have. -------------------------------------------------------------------------------- Operator [4] -------------------------------------------------------------------------------- And our next question will come from Dara Mohsenian with Morgan Stanley. -------------------------------------------------------------------------------- Dara Warren Mohsenian, Morgan Stanley, Research Division - MD [5] -------------------------------------------------------------------------------- So you've had very strong market share performance for a couple of years now in the U.S. Just given the unique nature of COVID and as we come out of this COVID and cycle easier comparisons from a category perspective in calendar 2021, can you discuss if you think the key market share drivers are still in place and you should see continued robust share expansion going forward post-COVID? Just any sort of key differences post-COVID that might compromise your ability to continue to gain share at the levels we've been seeing recently. -------------------------------------------------------------------------------- Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [6] -------------------------------------------------------------------------------- Sure. So we entered the pandemic from a position of strength. We were already gaining share through executing the 5 strategic imperatives. Through the pandemic, we've continued to execute those 5 strategic imperatives, and I think our overall value proposition clearly shined through. We feel even coming out of the pandemic, we are going to be even stronger. We have a more robust brand portfolio, not only the momentum that we have in e.l.f. Beauty, but also W3LL PEOPLE and Keys Soulcare. So we feel we're even better positioned coming out of the pandemic. And the one thing that we feel will really aid us is, we've been doing all of this, even our 10% net sales growth this quarter, in the construct of a category that's down 20%. So we believe as the category comes back, which I absolutely believe it will given people's restrictions right now in being able to kind of get out and express themselves, that headwind that we've had from a category standpoint becomes a tailwind. So our intent is to continue to gain share regardless of where the market is and continue by executing not only our strategic imperatives, but this brand portfolio that we have. -------------------------------------------------------------------------------- Dara Warren Mohsenian, Morgan Stanley, Research Division - MD [7] -------------------------------------------------------------------------------- Great. And then in the scanner data in the U.S., in December, we saw a bit of a slowdown sequentially versus the prior couple of months. Was that more just a tracked channel phenomenon and maybe the untracked channels picked up, so the total results were still solid? Just trying to sort of understand that performance, particularly with a pickup post-December so far in January. So perhaps some commentary on overall trends and if you were seeing any shift to untracked during that period. -------------------------------------------------------------------------------- Mandy J. Fields, e.l.f. Beauty, Inc. - Senior VP & CFO [8] -------------------------------------------------------------------------------- Sure. So I would say that Nielsen tracked channel data overall has been quite volatile, a little bit up and down as we've seen over the weeks. And so what you saw in December, I think, was just kind of a normal, what you're seeing in physical retail, a little bit of a pullback. We continue to see strength in e-commerce, and which is why you see us delivering a positive 10% for Q3, inclusive of the month of December. I would say as we looked into January, that lift that we saw definitely included a little bit of an impact from the stimulus that was rolled out. And so if you recall, last summer, when stimulus rolled out, we did see a few weeks of -- 6 to 8 weeks, I would call it, of upside there. I think you saw a little bit of that in January. But also, I think you're seeing just our business momentum, core business momentum reflected as we've gotten into January. -------------------------------------------------------------------------------- Operator [9] -------------------------------------------------------------------------------- And our next question will come from Steph Wissink with Jefferies. -------------------------------------------------------------------------------- Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst and MD [10] -------------------------------------------------------------------------------- Tarang, I want to come back to a comment you made in your prepared remarks about SG&A leverage in fiscal '22. I think that would mark maybe the first year of leverage in a number of years. So maybe share with us a little bit what's behind that comment. Is it the fact that multiyear investments are coming to completion or something that you're seeing within your business mix that is giving you conviction in the ability to lever that line item? -------------------------------------------------------------------------------- Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [11] -------------------------------------------------------------------------------- Sure. So I think it speaks a lot to our long-term economic model. So we've long had a series of investments, both in terms of marketing as well as the team and our infrastructure with the vision of we'd be able to leverage those investments over time. So our approach is going to be continue to stay strong on a marketing standpoint. We believe those marketing investments we're making definitely are bearing fruit in terms of the market share gains that you see and our continued business momentum. But if I take a look at the rest of our cost structure, the SG&A outside of marketing, there's definitely ability to leverage that, particularly as we pick up more sales. And that very much has been our intent as we laid out that 3-year economic model where mid to high single-digit sales growth, we see leverage through those fixed costs to be able to drive EBITDA growth faster than that and really from that FY '22 period over the next 3 years as a CAGR. -------------------------------------------------------------------------------- Stephanie Marie Schiller Wissink, Jefferies LLC, Research Division - Equity Analyst and MD [12] -------------------------------------------------------------------------------- And then just really quickly, Mandy, could I ask on the inventory step-up? I know you mentioned space expansion and the Keys launch, but help us think through the FX component of higher costing. I think you mentioned that you'll see some headwinds through the fourth quarter, but how should we think about the forward year as those higher cost of goods kind of feed through the overall model? -------------------------------------------------------------------------------- Mandy J. Fields, e.l.f. Beauty, Inc. - Senior VP & CFO [13] -------------------------------------------------------------------------------- Yes. So as we talked in our prepared remarks, FX is a headwind for us. I've talked in the past about how it's been a benefit, and that is now with a weaker U.S. dollar, it's turned into a headwind. And our plan to help mitigate the impact of FX as we laid out really starts with pricing. And so we will be taking some select price increases to help offset that impact, continuing to work with our suppliers on cost savings, and then to your earlier point on SG&A leverage, really having that as a focus to help deliver on our long-term economic model of driving that EBITDA leverage over the next 3 years. -------------------------------------------------------------------------------- Operator [14] -------------------------------------------------------------------------------- And our next question will come from Linda Bolton-Weiser with D.A. Davidson. -------------------------------------------------------------------------------- Linda Ann Bolton-Weiser, D.A. Davidson & Co., Research Division - Senior Research Analyst [15] -------------------------------------------------------------------------------- Maybe you could help me understand kind of the cadence of the EBITDA progression in the third and fourth quarter. I think, originally, you had said there would be more EBITDA margin pressure in the fourth quarter because of the Alicia Keys costs. And now the way it's modeled out, your EBITDA, quite frankly, was lower than expected in the third quarter and it's kind of higher than expected in the fourth quarter. So can you kind of help us understand, like did you have some incremental expenses in the third quarter that were unexpected? And maybe you could give a little color on the gross margin impact. You mentioned there was retailer activity and space expansion costs related to the gross margin impact in the quarter. Maybe you could give some color on that. -------------------------------------------------------------------------------- Mandy J. Fields, e.l.f. Beauty, Inc. - Senior VP & CFO [16] -------------------------------------------------------------------------------- Sure. So let's start with the EBITDA progression question. So I talked about a shift in order timing from Q3 into Q4. And so really, if you think about those sales moving over into Q4, that would imply better than previous EBITDA margins for Q4. And so that's what you're seeing happen there. So in total, we recaptured those sales, and that's reflected in Q4. So just a little bit of a shift there from an order timing standpoint. On the gross margin impact and the retailer cost that we talked about, there are certain costs that are related to expanding space or getting on shelf with retailers that do impact gross margin. And so as we pick up space and as we get our brands on to shelf, there are costs associated with that. And so that was what was implied by that comment. -------------------------------------------------------------------------------- Operator [17] -------------------------------------------------------------------------------- And our next question will come from Oliver Chen with Cowen. -------------------------------------------------------------------------------- Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [18] -------------------------------------------------------------------------------- As you think about marketing and your updated outlook, what's happening with marketing as a percentage of sales? And then as you undergo a lot of innovation in these new platforms and experimentation as well as really great success, marketing as a percentage of sales, how do you see that trending on a longer-term basis? Would also love any context as Ulta and Target partner, what that may imply in terms of your business and different planning that's happening? -------------------------------------------------------------------------------- Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [19] -------------------------------------------------------------------------------- Sure. So first of all, we feel great about our marketing and digital investments. As a reminder, we talked about taking our marketing and digital investments, including Keys Soulcare, up to the 14% to 16% range for this year. That's unchanged. We still assume that for this year, which is a pretty big step-up from last year. We're comfortable with those levels right now. When we provide FY '22 guidance next quarter, we'll update the entire outlook as we take a look, but we like what we're seeing from those investments and how we're able to do at those levels. And a big part of those investments is also really supporting 2 things: one, us continuing to blaze new territory, whether it be our partnership with Lufu on Twitch, whether it be our work on Triller as well as the other platforms. We're seeing real resonance with consumers on all of our different marketing activities. And then in particular, with our innovation program, we have a number. I mean, I think, unlike a number of other brands, we remain strong in terms of our new product launches throughout the pandemic, and I'm particularly pleased with the new products that we have slated for this upcoming year. Our spring resets are getting set right now. The early indication we have from our online sales is quite strong. Things like our CC Cream, which I believe is going to be our next big holy grail product, building off our camo concealer franchise, our Mint Melt collection with Walmart, our Holy Hydration makeup cleansing balm, all of those are doing extremely well as are some of our other innovations. So feel really good about that combination of our marketing, digital investment really getting behind some of these key new products that only e.l.f. can deliver. And then in terms of Ulta and Target, we see huge opportunity both with the partnership and then with each customer. So at Target this last quarter, we actually surpassed L'Oréal for the #2 position at Target, and that's still with a footprint that's significantly less than Maybelline and L'Oréal. So we have a long way to grow even within our most established retail customer. I mentioned in the prepared remarks that Ulta is continuing to reward the brand with more space, not only the space they gave us last fall, but in their spring resets as well. So we see real momentum there. And then depending on how that partnership between Ulta and Target progresses, we also see opportunity, particularly with our Keys Soulcare brand, which is going to start exclusively at Ulta, but I think there's an opportunity down the line to also take a look at some of those boutiques within Target as well. -------------------------------------------------------------------------------- Oliver Chen, Cowen and Company, LLC, Research Division - MD & Senior Equity Research Analyst [20] -------------------------------------------------------------------------------- And our final question is just awareness growth. As you think about awareness growth at W3LL PEOPLE and Keys Soulcare, what would you highlight as the building blocks for doing that? They're different kind of special brands in different ways, but would love thoughts on the awareness road map at those newer brands. -------------------------------------------------------------------------------- Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [21] -------------------------------------------------------------------------------- Sure. So on a macro level, we're following the same approach as e.l.f. It's a digital-first strategy. So you see all of our spending really primarily digitally related in building that awareness. So we did a brand recharge on W3LL PEOPLE. We're pleased with the results we're seeing on that so far in terms of our ability to engage consumers really through digital and as we expand distribution on that brand. Keys Soulcare, we're using a similar strategy but somewhat different in that we also have Alicia Keys' 100 million followers and the community that we're building with Keys Soulcare. So the ability to amplify that brand is even greater just given the power of Alicia Keys and what we've done by really creating a lifestyle beauty brand and really starting with content, conversation and community. And particularly as we expand distribution on that brand, and that will be a true global brand, I think we have a real big opportunity to really accelerate awareness on that one as well. -------------------------------------------------------------------------------- Operator [22] -------------------------------------------------------------------------------- And our next question will come from Jon Andersen with William Blair. -------------------------------------------------------------------------------- Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [23] -------------------------------------------------------------------------------- I apologize if this has already been asked. But on Soulcare, Keys Soulcare, could you talk about where you are today in terms of the number of products in market? And I wasn't totally clear when you plan to be available at brick-and-mortar retail or when you plan to have that brand available at brick-and-mortar retail and with which retailers it will be initially merchandised? -------------------------------------------------------------------------------- Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [24] -------------------------------------------------------------------------------- Sure, Jon. So we expanded the Keys Soulcare range to 9 different skincare products and rituals really earlier kind of in January. And so we're pleased with the initial results of those products. Those have primarily been online, both keyssoulcare.com and at ulta.com. We're now in Cult Beauty in the U.K. online. And in terms of brick-and-mortar, you'll start seeing the expansion of that brand. The first customer that we have announced is Ulta Beauty. You'll see it enter retail in Ulta Beauty over the next quarter or so. And then following that, you'll see expansion in Douglas across Western Europe. And that's all in addition to the 29 countries that global ship is available in. That's already live. So you'll continue to see a progression, but brick-and-mortar will come a bit later in the year. -------------------------------------------------------------------------------- Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [25] -------------------------------------------------------------------------------- Okay. And then on W3LL PEOPLE, I know you've talked about the brand recharge a couple of times. Could you give us a little bit more color on the program there? What's changed? And also an update on the progress you're making or maybe the opportunity to expand distribution, leverage your national retail relationships and the progress you've made there so far. -------------------------------------------------------------------------------- Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [26] -------------------------------------------------------------------------------- Sure. So the real focus on the brand recharge was really amplifying what W3LL PEOPLE stands for. One of the things that really appealed to us when we made the acquisition is W3LL PEOPLE is a real pioneer in clean beauty, almost 40 EWG VERIFIED products, the highest standard of clean, a real great heritage in the clean beauty space, is a pioneer there. And so the focus of the brand recharge is really making those superpowers come to life, really our clean beauty approach and products that really work. The products are phenomenal on W3LL PEOPLE. And so you see if you go on W3LLPEOPLE.com a just more vibrant presentation of the brand, core brand proposition. And as we take that to customers, including better visual merchandising. So the current distribution footprint of W3LL PEOPLE, the primary customer is Target, and they're not in all doors at Target. So we see a huge opportunity, leveraging our strength at Target, to expand distribution there. I mentioned earlier that we're part of Ulta's Conscious Beauty program. We see that as an opportunity as well and other retailers that really consider clean a key consumer segment, which increasingly is coming to more and more retailers as we go through. So we feel good about our journey ahead and particularly the progress we've made on the brand. -------------------------------------------------------------------------------- Jon Robert Andersen, William Blair & Company L.L.C., Research Division - Partner [27] -------------------------------------------------------------------------------- That's really helpful. If I could squeeze one more in. Just if you could comment on the supply chain, some of the changes you've made with own manufacturing, et cetera, kind of the status of some of the optimization work you're doing in the supply chain. -------------------------------------------------------------------------------- Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [28] -------------------------------------------------------------------------------- Sure. So our supply chain is one of our key advantages. We have a unique hybrid model where we work with like-minded suppliers and have a great deal of control in terms of our entire supply chain. We continue to see really great progress from our China supply chain, first and foremost, through lean manufacturing, generating savings, even better operating results. We were able, over the last 6 months, to be able to tech transfer all of the W3LL PEOPLE products to our China supply chain, realizing significant COGS savings. Keys Soulcare is being manufactured through that same supply chain basis, which also gives us that advantage in cost, quality and speed. And so you continue to see us enhance it. The one place we have not made as much progress on is our U.S. manufacturing. If you recall last quarter, I talked about some of the COVID restrictions getting in the way for us to be able to do our engineering work for that facility. That's still very much true. The good news is, we've been able to overcome that by the strength that we're seeing in our China supply chain and look forward to providing greater updates on that in the future, but it really is one of the strengths that's helping drive the overall business. -------------------------------------------------------------------------------- Operator [29] -------------------------------------------------------------------------------- And our next question will come from Erinn Murphy with Piper Sandler. -------------------------------------------------------------------------------- Erinn Elisabeth Murphy, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [30] -------------------------------------------------------------------------------- So one follow-up first on pricing. Is the higher pricing that you're taking right now, are we going to see that here on the shelf in Q4 or is that really wrapping into next year? And then just trying to understand really the net of the fourth quarter kind of gross margin pressure. And then secondly, you guys have done a great job just keeping your finger on the pulse on what's kind of next from a social media perspective. Could you just share a little bit more about what you're seeing from a response of both Twitch and then Triller? Is it bringing in a new customer as you kind of experiment on some pretty unique platforms for beauty? -------------------------------------------------------------------------------- Mandy J. Fields, e.l.f. Beauty, Inc. - Senior VP & CFO [31] -------------------------------------------------------------------------------- Yes. So Erinn, I'll take the first question, and I'll pass it to Tarang on the social update. So from a pricing standpoint, that will not impact Q4. You'll see that in early fiscal '22 in terms of offsetting FX pressure. That's kind of our program as we head into fiscal '22 of focusing on the select price increases, negotiating cost savings and then that increased focus on SG&A leverage as an offset to the headwinds. -------------------------------------------------------------------------------- Erinn Elisabeth Murphy, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [32] -------------------------------------------------------------------------------- Okay. And so is gross margin -- I mean, as we think about the puts and takes there for the fourth quarter, and I may have missed this in the prepared remarks, is that down to a similar level to Q3 or is it worse just given the FX starts to flip in the fourth quarter? -------------------------------------------------------------------------------- Mandy J. Fields, e.l.f. Beauty, Inc. - Senior VP & CFO [33] -------------------------------------------------------------------------------- Yes. That's right. So the FX starts to flip in the fourth quarter. So what we saw in Q3 was just less of a benefit. In fact, it turns into a headwind in Q4. And so you should expect to see that materialize. -------------------------------------------------------------------------------- Erinn Elisabeth Murphy, Piper Sandler & Co., Research Division - MD & Senior Research Analyst [34] -------------------------------------------------------------------------------- Okay. And then, yes, Tarang, I'd love to hear your thoughts on that. -------------------------------------------------------------------------------- Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [35] -------------------------------------------------------------------------------- Yes. So I mean, I'm really proud of our marketing and digital team. They continue to kind of blaze new frontiers. And you saw that on our activations on TikTok, which continue to do quite well with over 10 billion views, I think over 7 million user-generated videos, but also going into new platforms. The one I'm particularly excited about is our partnership with Lufu and the things that we're doing on Twitch. So it accesses an entirely new audience and some of the current audience in terms of her ability to really activate amongst female as well as male gamers. And the work that she's doing, there's a video right now with her and our global makeup artist, Anna Bynum, who's also an avid gamer herself, and kind of their ability to kind of educate a whole new set of consumers on everything that's wonderful about e.l.f. and helping them express themselves, gain confidence, very much plays into our core brand values. And then on Triller, as we mentioned, we're also excited about the work we did there. I mean, I was frankly quite surprised that we could put a holiday album on and have it hit Billboard's Top 20. Four of our tracks hit the Billboard Top 20, both in the U.S. and globally, which definitely shows, I think we've had some strength in terms of the brand and our connection to music, up and coming artists, and you definitely saw that play out on Triller. And you're going to continue to see us blaze other new territories. I'm excited about some of the upcoming collaborations and partnerships we have, but you're going to have to wait until our next call to hear about them. -------------------------------------------------------------------------------- Operator [36] -------------------------------------------------------------------------------- And our next question will come from Bill Chappell with Truist Securities. -------------------------------------------------------------------------------- William Bates Chappell, Truist Securities, Inc., Research Division - MD [37] -------------------------------------------------------------------------------- Tarang, just a question going back to pricing. I mean, has the company thought of any change in terms of pricing beyond FX? And I mean, if we go back to the past couple of years, you're able to take pretty meaningful price increase to offset the tariffs and really had no elasticity, no real issue on volumes. And so it seems to -- I know your products are extraordinarily attractively priced, but I mean, is there an opportunity to take even further over the next year or 2 and actually improve margins with them? -------------------------------------------------------------------------------- Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [38] -------------------------------------------------------------------------------- Well, we definitely saw that be the case in our last round of pricing. So if you recall, a lot of people were worried about the 25% tariffs on China goods, which really impacted most of our lineup. And we were able to use this approach of selective pricing to overcome those tariffs and actually do really well on gross margin. So we know the brand has pricing power based on our prior execution. And how we did that execution was equally important. We didn't just peanut butter the pricing as a general percentage across everything. We really picked the items where we have the biggest value halo or opportunity to take pricing. And so I'd say that is very much the design and construct of our pricing upcoming. It won't be in the U.S. quite as broad as it was last time. I think we impacted about 1/3 of our SKUs last time. But internationally, we did not take pricing the last time. So I think particularly with FX, we have the opportunity to go further internationally and then with select items in the U.S. And so definitely, we see pricing as a lever at our disposal. Our preferred method of driving gross margin though is through margin accretive innovation. So I mentioned our CC Cream, which I believe is going to be our next holy grail product. It's an incredible value relative to the $40 prestige equivalent, but it retails at $14. So it's a significant premium relative to the rest of our lineup. So it's going to be that combination, Bill, as we go forward, which is primarily through margin accretive innovation and some of the other things that Mandy talked about in terms of our gross margin progression. But also, we will look at pricing. There's always a healthy tension being an extraordinary value brand of not getting ahead of ourselves. We did see a unit decline when we did pricing last time. And so there's always a balance there. Now I feel good about post that pricing how we've built back units, which, again, tells me we have that pricing power and ability to get that through, but we want to be choiceful in that pricing and execute it similarly to the way we did last time. -------------------------------------------------------------------------------- William Bates Chappell, Truist Securities, Inc., Research Division - MD [39] -------------------------------------------------------------------------------- Great. I appreciate that. And Mandy, I realize you're not giving fiscal '22 guidance, but trying to understand Keys Soulcare, the spend you're expecting in the fourth quarter. I mean, will you be up to kind of the, I don't know if it's normalized levels of marketing and advertising spend by the time we get to the end of March or is that expected to continue to kind of ramp throughout the year until we get to kind of a peak level? -------------------------------------------------------------------------------- Mandy J. Fields, e.l.f. Beauty, Inc. - Senior VP & CFO [40] -------------------------------------------------------------------------------- Yes. So I think the best way to think about that, Bill, is each of our brands will have dedicated marketing against them. And we do that as a percentage of net sales. And so if you think about e.l.f., we've talked about the 14% to 16% broadly for e.l.f. Beauty. That incorporates the marketing spend that we're putting behind Keys Soulcare. As Tarang mentioned earlier, as we get into fiscal '22, we'll come back with kind of where we see everything as we move forward. But just think about each brand will have their own marketing plans as a percentage of net sales to support each of those brands as we move forward. -------------------------------------------------------------------------------- William Bates Chappell, Truist Securities, Inc., Research Division - MD [41] -------------------------------------------------------------------------------- So then outside kind of big splash over the next few months, it's kind of a slow and steady build? -------------------------------------------------------------------------------- Mandy J. Fields, e.l.f. Beauty, Inc. - Senior VP & CFO [42] -------------------------------------------------------------------------------- Well, like we said, we have the $5 million to $6 million baked in for this year for Q4 behind the launch of the brand, especially as we get further along in our distribution plan. But again, as we think about it for the long term, it's really going to be focused on a percentage of sales for each brand. -------------------------------------------------------------------------------- Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [43] -------------------------------------------------------------------------------- Yes. And then just maybe adding some perspective to that. The $5 million to $6 million for this year is definitely outsized relative to the modest sales contribution Keys Soulcare would have. We thought that was a prudent spend to really launch something that's completely new in beauty. Ongoing to Mandy's point, at least for this fiscal year, we're really comfortable in that 14% to 16%, inclusive of all 3 of our brands. And when we put FY '22 guidance out there, part of that guidance will include what we expect to spend from a marketing standpoint in total so people don't have to guess how does the $5 million to $6 million translate ongoing. It will be part of the overall percentage we have as a company. -------------------------------------------------------------------------------- Operator [44] -------------------------------------------------------------------------------- Our next question will come from Rupesh Parikh with Oppenheimer. -------------------------------------------------------------------------------- Rupesh Dhinoj Parikh, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [45] -------------------------------------------------------------------------------- So Tarang, just going back to your positive commentary so far in the Keys Soulcare launch. I was just curious if there's anything thus far that surprised you with the launch. It sounds like you guys have already gotten very good buzz. -------------------------------------------------------------------------------- Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [46] -------------------------------------------------------------------------------- Yes. Well, I would say, I don't know if it surprised us, but I'm still in awe of the 10 billion press impressions we've picked up since, and we're not even in retail yet. So I think it definitely shows that there's something in this brand that's resonating broadly. And then as we look at the community, the depth of engagement of that community, I think in the prepared remarks we talked about Instagram engagement metrics being well beyond what we're expecting. And so I think it's still early days, but it's quite encouraging in terms of the level of consumer response and engagement we have to that brand. We'll be able to provide more metrics, I think, once we are out in retail and be able to see what that looks like. -------------------------------------------------------------------------------- Rupesh Dhinoj Parikh, Oppenheimer & Co. Inc., Research Division - MD & Senior Analyst [47] -------------------------------------------------------------------------------- Okay. Great. And then just one follow-up question for Mandy just on your operating cash flow. So I get the commentary just on inventory that the inventories are elevated and that did weigh in your cash generation. But even, I guess, excluding inventories, some of the other working capital, there's some other working capital headwinds during the quarter. So just curious how you're thinking about cash flow in Q4. -------------------------------------------------------------------------------- Mandy J. Fields, e.l.f. Beauty, Inc. - Senior VP & CFO [48] -------------------------------------------------------------------------------- Yes. So yes, if you look at inventory, that was a portion of our cash use on a year-to-date basis. Our receivables would be the other areas you look through. And that all I just think of as just timing. In terms of our free cash flow expectations for the year, I would expect us to be positive free cash flow for the year. As we enter into Q4, shouldn't have a pull on additional from an inventory standpoint or things like that so should have some cash flow there in Q4. -------------------------------------------------------------------------------- Operator [49] -------------------------------------------------------------------------------- And our next question will come from Mark Astrachan with Stifel. -------------------------------------------------------------------------------- Mark Stiefel Astrachan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [50] -------------------------------------------------------------------------------- Wanted to ask about thoughts on where you think online sales settle as a percentage of sales. I mean, we heard from some of the retailers both that they're surprised at how well beauty has done from an online standpoint, but also that perhaps some of that settles back into time. So you touched on the 16% of sales where you are now. And as you think forward, how do you think about that number in the broader context of the category? -------------------------------------------------------------------------------- Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [51] -------------------------------------------------------------------------------- Yes. I think we'll have more thoughts on that, Mark, when we get into providing FY '22 guidance. I mean, we're obviously pleased as everyone else is. I mean, I think we have triple-digit growth on our online business between elfcosmetics.com and our retailer dot-coms. Similar to some of the commentary you've heard from others, we continue to see a good proportion of new consumers, particularly on elfcosmetics.com. I think 60% of purchases were from new consumers who are also signing up for our Beauty Squad Loyalty Program. So it's really going to come down to how many of those consumers are we able to retain. That will dictate what percent of our total business we are, but we're definitely seeing the momentum. I don't think we have a percentage in mind right now in terms of where we see that in the future, but we're pleased with the 16% versus 10% last year. And more importantly, some of the underlying metrics, which definitely show a migration online. -------------------------------------------------------------------------------- Mark Stiefel Astrachan, Stifel, Nicolaus & Company, Incorporated, Research Division - MD [52] -------------------------------------------------------------------------------- Got it. Okay. And then second question, just thoughts on the correlation between the increasing marketing and investment spend and sales growth. And how do you think about that factoring in? Not specific to what your sales guidance will look like for next year, but just the broad correlation and how do you think about those growing in time with each other or decoupling to some extent? -------------------------------------------------------------------------------- Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [53] -------------------------------------------------------------------------------- Yes. One of the things that caused us to increase our marketing spend was the ROIs we're seeing off that marketing spend. So we use a combination of both Nielsen's Marketing Mix where we can get a measure of gross sales per dollar of marketing invested. We see very strong returns on that as well as some of the submetrics we have by platform in terms of the core engagement level. So we definitely know it's a key driver of both our market share gains and business momentum. And we're comfortable at the levels that we're currently at to be able to generate that and obviously, we feel has a longer term impact. So when we're able to give FY '22 guidance, we'll be able to talk to that a little bit more in terms of some of the drivers of that FY '22 guidance. -------------------------------------------------------------------------------- Operator [54] -------------------------------------------------------------------------------- And our next question will come from Wendy Nicholson with Citi. -------------------------------------------------------------------------------- Wendy Caroline Nicholson, Citigroup Inc., Research Division - MD & Head of Global Consumer Staples Research [55] -------------------------------------------------------------------------------- Two questions. First, for Mandy, I know your long-term target is to grow EBITDA faster than revenues, but can you talk about just gross margin generally, what your outlook is. Do you think the sort of 65%, 66% type range is where you'll be long term? And can you -- I assume Soulcare is gross margin accretive, but can you give us some directional guidance? Is it 500 basis points better, 1,000 basis points better? Just directionally how much of a lift can that skincare, higher priced skincare help your overall gross margin. And then I had a question, Tarang, for you if I can. I mean, you guys are so well positioned in the clean beauty space. And that's obviously such a hot place right now within beauty. But do you think that your, I mean, you're obviously gaining share, do you think you're gaining share within clean beauty? And I'm just wondering, clean beauty seems to be getting so much more competitive. Do you worry about having to defend your space, your market share within that segment or how do you manage around what's getting to be a very, very crowded segment of beauty, if that makes sense? -------------------------------------------------------------------------------- Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [56] -------------------------------------------------------------------------------- Sure. -------------------------------------------------------------------------------- Mandy J. Fields, e.l.f. Beauty, Inc. - Senior VP & CFO [57] -------------------------------------------------------------------------------- Got it. So I'll start, Wendy, on the long-term economic model and your questions around gross margin. So in the long-term economic model, to your point, we talked about adjusted EBITDA outpacing sales growth, thus yielding adjusted EBITDA margin expansion. We have not gone into depth on, well, how much gross margin will play into that versus how much adjusted SG&A will play into that, and we additionally don't give specific guidance around gross margin. I can say that, to Tarang's earlier point, product accretive gross margin products and innovation, that has really been our path forward on gross margin. And so as we get into the out-years of fiscal '22 and beyond, we'll start to talk more about what to expect from an adjusted EBITDA standpoint, but may not give the specifics around the gross margin versus adjusted EBITDA as we move forward. On Keys Soulcare, specifically. So we talked last quarter about Keys Soulcare product margin certainly being accretive to our overall product gross margins. But when you get down to the net gross margin, because of the royalty that we do pay to Alicia Keys, that does become relatively neutral at the total company level. -------------------------------------------------------------------------------- Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [58] -------------------------------------------------------------------------------- And then on your second question on clean beauty, part of our thesis is it's becoming mainstream. Clean beauty used to be a niche within overall beauty. Obviously, a very fast-growing segment within overall beauty. But part of our push in clean beauty really goes back to the consumers. And as a parallel, I'll say we were one of the first cruelty-free brands and from a mass standpoint in terms of being 100% cruelty-free. You've now seen other brands really embrace cruelty-free as consumers have. We feel the same thing is going to happen with clean beauty. That it's no longer going to be relegated to one subsegment. And so the brands that are going to win in clean beauty are the ones that both really stand for and can live up to those standards but also offer more than just clean beauty. So the superpower, as I mentioned before, about our ability to have premium quality at these extraordinary values, cruelty-free, increasingly clean. And on the clean portfolio, the gold standard we have is certainly W3LL PEOPLE with their 40 EWG VERIFIED products. Keys Soulcare came out of the gates as a 100% clean beauty brand. But even e.l.f., I mean, on e.l.f., we are now up to, I think, 1,600 ingredients that we do not formulate with. We're very close to every clean beauty standard that's there on e.l.f. And so I think that really becomes the game changer when you can offer the consumer prestige quality at great values, that's cruelty-free, clean and has universal appeal. It's like what's not to like about e.l.f. and our overall proposition. So we very much are looking at it not only, certainly, there's a segment opportunity, but where we're going to win long term is by being able to put that combination of benefits together. -------------------------------------------------------------------------------- Wendy Caroline Nicholson, Citigroup Inc., Research Division - MD & Head of Global Consumer Staples Research [59] -------------------------------------------------------------------------------- Got it. And on the Keys Soulcare, I know you've obviously got a great relationship there with Ulta. And historically, you haven't had much of a relationship with Sephora, which makes sense given your price points. But given that Soulcare is a little bit more premium price, it feels like it would fit well, particularly with Sephora, going into more Kohl's stores or Kohl's stores initially, whatever. Is that something -- are you restricted to being in Ulta or if you wanted to go into Sephora in those Kohl's stores, could you? -------------------------------------------------------------------------------- Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [60] -------------------------------------------------------------------------------- Not initially with Keys Soulcare. Our relationship with Ulta is they do have exclusivity for a time period. We haven't disclosed what that exclusivity period is, but there's a great deal of partnership. I mean, Ulta itself is going to be putting pretty good investment behind really amplifying the Keys Soulcare brand. The things that we're going to do, I can't wait for you to go into their stores. And as they ramp the brand up even online, there's quite a bit of things that we're going to be doing together there. Talking, though, on the Sephora-Kohl's partnership, we think there's opportunity there for us. And we look at potentially W3LL PEOPLE. We look at some of the other brands that we're looking at, both either incubating or tuck-in acquisitions in future dates. We think there's an opportunity. And then also globally, we think there's an opportunity with Sephora as well. But initially here, our focus is really on Ulta Beauty and the partnership we have there. -------------------------------------------------------------------------------- Operator [61] -------------------------------------------------------------------------------- And our next question, actually, apologies. This will conclude the question-and-answer session. I'd like to turn the conference back over to Tarang Amin for any closing remarks. -------------------------------------------------------------------------------- Tarang P. Amin, e.l.f. Beauty, Inc. - Chairman, CEO & President [62] -------------------------------------------------------------------------------- Well, I want to thank everyone for joining us today. I'm incredibly grateful for the great team we have at e.l.f. Beauty and the talent that each person brings every day, particularly at this difficult time during the pandemic and how well we've executed to continue to build market share. As you can tell from our comments today, we're highly confident about the future and the long-term prospects of this business and look forward to speaking to you in May when we'll be able to talk our full fiscal '21 results as well as provide guidance for FY '22. So thanks, everyone, and be well. -------------------------------------------------------------------------------- Operator [63] -------------------------------------------------------------------------------- The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.