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e.l.f. Beauty CEO on ‘pent-up demand’, digital growth and trends

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e.l.f. Beauty CEO Tarang Amin joins Yahoo Finance Live to discuss the company’s mixed results for third quarter fiscal 2021, including how the cosmetic company’s investment in digital are paying off as well as its partnership with Target.

Video Transcript

BRIAN SOZZI: e.l.f. Beauty shares a scene from [INAUDIBLE] trading this morning after the company missed analyst earnings estimates last night. But sales did rise 10% from a year ago, and e.l.f. lifted its full year outlook. Let's bring in e.l.f. Beauty CEO Tarang Amin.

Tarang, always good to speak with you. So the sales in the quarter, up 10%. Now the category was down, what, by about 20% or so. What happened in margins? Because your gross margins were down 50 basis points. What's going on there?

TARANG AMIN: Sure, so first of all, I'm really pleased with our results of 10% growth in a category that's down 20%. And so, in terms of the actual margins, it really reflects our continued investment in the business. So if I take a look at kind of our business, we were able to invest 15% of our net sales in marketing and digital.

That's having a huge impact, relative to our 12% spending last year, and continuing to make the investments to also shape our portfolio for the future with our upcoming-- with our recent launch, actually, of our Keys Soulcare brand with Alicia Keys, as well as the acquisition we did last year of W3ll People. So we're giving these brands up for a brighter future.

BRIAN SOZZI: Is this going to be the new pace of spending? And where are you putting that? I was going through the earnings call transcript. And you've always been a big spender on digital marketing, on social media marketing. But it does appear now you're taking it up a notch there.

TARANG AMIN: Well, we have. And we have been doing it for the last year, really. We saw great results behind our marketing and digital initiatives. I mean, you take a look at our share growth. We picked up more share than any other brand in this quarter. And really, that's been the case throughout the year in terms of the top five brands. I think we picked up 100 basis points a share. So we know those investments are really making a difference.

And then the nature of that spending is still 100% digital. We're very strong on all the key platforms out there. We're seeing great ROI results behind them. And we continue to blaze new frontiers and new territories.

JULIE HYMAN: Tarang, it's Julie here. It's good to see you again. The spending that you've been doing did cause the company to miss analysts' estimates in terms of the bottom line for the first time since you guys went public back in 2016. And so, I'm curious what's now going to happen going forward, if you expect margins to continue to be a little bit compressed, or as maybe things open up again, do you expect kind of a surge in growth as a result of these investments that you're making?

TARANG AMIN: Well, we have a great deal of confidence, both in the short and long term. So for the short term, we actually raised our fiscal year guidance. It reflects our confidence in terms of the momentum we're gaining in the marketplace, in terms of our share gains, in terms of our sales progression.

And then, longer term, I very much share the sentiment that the color cosmetics category, which has been really under pressure during the pandemic, as everyone's had to stay in and be on Zoom, as things start to return to normal, I think people will have this pent-up desire to express themselves, to get out there. So I'm quite bullish on the category outlook for the long term. And if you think about our results being 10% in a category, that we really face pretty significant headwinds. Having that become a tailwind, I feel bodes well for the future.

MYLES UDLAND: And, Tarang, you kind of answered it there, but I wanted to ask because I've asked almost every CEO we've had on the program in the last couple of months, is, do you think the changes in behavior that you saw from your customers during the pandemic is going-- are those going to stick around necessarily? It sounds like you think the trajectory that the space was on maybe two or three years ago is likely to return once we kind of finally can get past the pandemic.

TARANG AMIN: Yeah, no. So I definitely think the trajectory of the category will change as people are able to get back to normalcy. There are a few things, though, that I think will stay. So we've seen tremendous success as a digitally native brand on online sales. Our online sales are up triple digits, both elfcosmetics.com, as well as the retailer dot coms. In fact, digital is now 16% of our total business, up from 10% last year.

And what we're seeing is a lot of the consumers that are coming to us are a new consumer. So our ability to retain those consumers, I think, bodes well for our future digital aspirations. And so, that definitely is, I think, a change that's here to stay.

BRIAN SOZZI: Tarang, Target is your longest national account. I know it's a key partner for you. How is e.l.f. going to play in those new Target Ulta Beauty shops that are going to start opening later this year?

TARANG AMIN: Well, I think it gives us a terrific opportunity. I mean, our strength at Target this last quarter, we supplanted L'Oreal for the number two position in Target in all of color cosmetics. And we're doing that in a footprint that's significantly less than a Maybelline or a L'Oreal or any of the legacy players you have there. So we have incredible momentum with Target.

But we also have great momentum with Ulta Beauty. We've been rewarded with more space last fall. They're, again, rewarding us with more space this spring. We have great momentum there. And so, I think the partnership between Ulta and Target gives us a really great opportunity. Our Keys Soulcare brand, which is going to be launched exclusively with Ulta Beauty in the US, certainly as we do Ulta boutiques and Target, I think there's a future opportunity to get that brand in there.

And then I think the most important thing is the importance that these retailers are placing on beauty. And I think they realize beauty is such an important area that consumers have great affinity to. And so, the more people do against beauty I think definitely benefits us as well.

JULIE HYMAN: Tarang, it's funny. We kind of have had an inadvertent beauty hour. We talked to the Align Technology CEO earlier, and I'm going to steal a line from Myles when he said the sort of shoulders up aesthetic has become more important now-- or let's say torso up, I guess, depending on where your Zoom camera hits you. What are sort of the emerging beauty trends that you're watching? Or what has changed in terms of how people want to look, in terms of their makeup palette or in terms of any other emerging beauty trends that you're watching as a result of all of this?

TARANG AMIN: Well, if you look at our strength, I think it really comes down to being able to bring the best of beauty and making it accessible to all consumers. And a couple of the core trends that are really driving our business is this merging between color cosmetics and skincare. So we have real strength in our complexion franchise, whether it be our concealers, our primers, many of these products that are in color cosmetics that also have skin benefits.

In addition, our skincare business has been on fire. Our skincare business now on elfcosmetics.com represents 25% of our sales versus 8% overall. So we're seeing real momentum there. In fact, we're driving even faster growth in skincare than color cosmetics. So I think these are a couple of things that are here to stay, where I think skincare will remain strong, but so will, as color cosmetics comes back, consumers looking for that merge between both categories.

BRIAN SOZZI: All right, we'll leave it there. e.l.f. Beauty CEO Tarang Amin, always good to see you. We'll talk to you soon.

TARANG AMIN: Thanks. Good to see you.