e.l.f. Beauty, Inc. Price & Performance (ELF)

Me, I try late. This may come as a surprise. No. I'm not the perfect guy. [indiscernible] We don't have to be on the My body is your spiritual guy. [indiscernible] Wait. Thank you for joining us today to discuss U. L. F. Beauty's third quarter Corporate Development and 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 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 Terrain.

Thank you, Casey, and good afternoon, everyone.

Today, we will discuss the drivers of our third quarter results and our updated outlook for fiscal twenty twenty five.

In Q3, we delivered another quarter of consistent category leading growth. We grew net sales 31% delivered $69,000,000 in adjusted EBITDA and increased our U. S. Market share by two twenty basis points. Q3 marked our twenty fourth consecutive quarter of both net sales growth putting e. L. F. Beauty in a rarefied group of high growth companies. We're one of only six public consumer companies out of five forty six and averaged at least 20% sales growth per quarter. E. L. F. Is the only brand of the nearly 1,000 cosmetics brands tracked by Nielsen to gain share for 24 consecutive quarters. Our fiscal twenty twenty five year to date results have been exceptional. With our team delivering 40% net sales growth, We remain confident in our strategy ability to take market share and capitalize on the white space ahead of us. At the same time, our consumption trends to start calendar 2025 have been softer than we expected it. We see three factors. First, the category continued to decline in January. We believe this decline is reflective of consumer stocking up in a highly promotional December and lower social conversation around beauty. Consumer mind share is focused elsewhere.

Including wildfires in LA and uncertainty around the TikTok platform. Second, in Q4, we're lapping the global launch of our Viral Glow Reviver Lip Oil, which was our biggest launch in calendar 2024. In addition, we had higher shipments in Q4 last year as retailers built inventory ahead of the big game. Third, initial reads for a couple of our new product launches for spring twenty twenty five start off slower than we expected We're still in the early days of marketing activations for these launches. And our spring resets. Over the next few weeks, our retailers will add spring innovation to shelf, and refresh our shelf sets. Including expanded space in Targets and Walgreens. These results are still in progress and will not be Balancing these factors we're lowering our net sales outlook for the final quarter of the fiscal year to minus 1% to plus 2%. Given the dynamics between Q3 and Q4, we do not believe Q4 is indicative of the underlying run rate of our business. And remain confident in our ability to deliver market leading growth As updated, our outlook contemplates 14% to 16% net sales growth in the delivered in the second half of last year.

As we look ahead, we remain focused on four areas with significant runway for growth: digital, Color Cosmetics skincare and international. Let me update you on our progress in each in Q3. Starting with digital, Foundry is a digitally native brand. E. L. F. Remains the only top five mass cosmetics brand with our own direct to consumer site. Q3 digital consumption trends were up nearly 30% year over year, on top of triple digit growth in Q3 of last year. Digital channels drove 24% of our consumption in Q3. In line with last year. We're pleased with these results as Q3 was highly promotional across mass beauty. Instead, we held to our approach of delivering outstanding value every day, foregoing promotional activity on elfcosmetics.com during the holidays. We're seeing continued momentum across our digital and social platforms. With strength on Amazon, and supported by our ongoing enhancements to our loyalty program and mobile app, Our Beauty Squad loyalty program recently surpassed 5,600,000 members. With enrollment consistently growing over 20% year over year. Our mobile app now has over 3,000,000 downloads. Making the most downloaded single brand cosmetics and skincare app in The U. S. And holds a 4.9 rating out of five.

In Color Cosmetics, we continue to significantly outperform the category. In Q3, elf cosmetics grew 16% in tracked channels as compared to a category that was down 5%. Increasing our market share by two twenty basis points. Nationally, e. L. F. Is a number one brand on a unit basis with approximately 14% share and the number two mass brand on a dollar basis with approximately 12% share. More than double the level we had three years ago. We remain focused on the opportunity to double our market share in the coming years. In Target, our longest standing national retail customer, we're the number one brand with over 20% share delivering consistent growth over time. In Q3, we grew our Cosmetics share at target [indiscernible] We believe we're making great progress on replicating our success at Target with other key retailers. In Q3, we reached the number two brand rank at Walmart for the first time up from number four a year ago. We're also finding success with newer retailers like Dollar General, where we launched e. L. F. In a subset of doors. Our initial results have exceeded our expectations in this new channel. And will continue to expand into additional Dollar General doors this spring.

We share Dollar General's mission to serve the underserved and democratize access to the best of beauty. Particularly in rural areas which have traditionally only been served by legacy brands, We are pleased with our continued retail expansion opportunities. Unlocked by our focus on driving productivity. ALF remains the most productive cosmetics brand on a dollar per linear foot basis with our largest retail customers globally. Our twenty four consecutive quarters of share gains are a test [indiscernible] and we believe our continued focus on productivity will aid in further space expansion the years to come. Looking to skincare, In just five years, e. L. F. Skin has become a top 10 skincare brand in a category dominated by legacy brands built over decades. For context, the average age of the other top 10 skincare brands is three years old. In Q3, Elf skin continued to meaningfully outperform the category and grow market share. As we look ahead, we see significant runway for growth. E. L. F. Skin today holds about a 2% share as compared to the number one brand holding nearly 14% share. With the acquisition of Auditorium, we've doubled our skincare penetration to 18% of our retail sales.

We now have two of the fastest growing mass skincare brands, that are distinct yet complementary in their price points, positioning and audiences. The launch of Notoreum into Ulta Beauty continues to perform well and we see further expansion opportunities ahead. Turning to international. Our net sales grew 66% in Q3 fueled by growth in our existing markets as well as our expansion into new markets. International drove 20% of our net sales in Q3, up from 15% a year ago. We see significant white space. Ahead with our global peers having over 70% of their sales outside The U. S. We've seen success with our engagement model across social platforms. Driving global consumer demand, well before we enter a particular country. Today, Elfa's retail presence in 15 countries with launches over the last year including Rossmann, Germany, Atos Netherlands, Duques, Italy, and Sephora, Mexico. We've achieved a top three ranking in each of these new markets we've launched in. Reflecting our strength in driving global brand demand.

We're also excited to bring our fusing our universal brand superpowers with local cultural relevance. In Germany, E. L. F. Translates to the number 11. E. L. F. On Zen, the title of our latest campaign means 11 out of 10. A wink and a nod to an obsession in Germany with quality ratings. [indiscernible] In their In Mexico, we're tapping into the love of telenovelas, Discover the Elf Effect.

This campaign, which is launching over the next few weeks, is rooted in L. F. Core value proposition. The engagement with our global audience and success we're seeing across geographies gives us confidence in the global opportunity we see ahead for our brands. Elf has been one of the few brands able to scale through our five unique areas of advantage. Our passionate team of owners with a high performance culture, our value proposition powered by an asset light supply chain, delivering the best combination of quality, cost and speed Our powerhouse innovation delivering premium Holy Grail products at accessible price points. Our disruptive marketing engine activating millions of consumers around the world, and our unique productivity model. Bring this to life at retail globally. While other brands may seek to imitate parts of our strategy, it's how each of these areas have advantage, reinforce each other that forms our competitive moat. This quarter, I'd like to spotlight our powerhouse innovation and how that's integrated with our disruptive marketing engine to fuel our industry leading growth. We have a unique ability to deliver a steady stream of holy grails, taking inspiration from our community and the best products in Prestige, and bringing to the market an extraordinary value.

Our Holy Grail innovation approach is working and driving share gains across segments. In 2024, e. L. F. Held six of the top 10 new product launches in mass cosmetics. The most of any year. And we held four of the top 10 SKUs across both mass and prestige. In Q3, our focused innovation strategy drove triple digit share gains across face, Lip eye makeup. We've more than doubled our share in each of these segments over the last five years. And see significant opportunity ahead. As compared to our over 20% share and number one ranking we have in face, have an 11% share and the number four ranking in lip an 8% share in the number four ranking in eye. We have significant white space in these large segments and believe we have the innovation engine conquist them. We have a track record of building growing product franchises that endure instead of the one and done launches. Many of our product launches for spring twenty twenty five expand our largest franchises. As one example, we recently launched Power Grip Matte Primer, a mattifying version of our original Power Grip Primer, which continues to be the number one We spoke last quarter about better balancing support between innovation and our core franchise, To that end, in Q3, we created a campaign called Eyes, Lips, Face, [indiscernible] You feel good about this.

Right?

Yeah. I feel great about it.

So You're a football fan too?

Oh, yeah. Kind of.

Yeah. She's just a bit superstitious.

So you never take it off?

No, sir.

Use this.

Right. And what's your record this season?

Undefeated.

Our spot made its US debut Thanksgiving Day I continue to have multiple high visibility placements during the playoff season. We saw strong community engagement with 95% positive sentiment a lift in our site traffic and an increase in Power Grip sales. Our most recent campaign with Megan Trainer a longtime fan of the brand, spotlights are expanding Halo Glow franchise. We believe our marketing engine is best in class in finding unique ways to entertain and engage our community. Through disruptive brand partnerships, sports, music and movies. Alpha is the number one favorite brand amongst Gen Z ranks number one in purchases amongst Millennials and Gen Alpha. Our increased marketing investment has helped to expand our unneeded brand awareness from 13% in 2020 to 33% in 2024. I've been in the consumer space over thirty years and never seen a 20 jump in unneeded awareness in just a few years. As great as that is, the leading U. S. Mass cosmetics brand has 55% on aided awareness, gaining us confidence in our runway for growth. In summary, we believe our five key areas of advantage will continue to fuel our ability to win in fiscal twenty twenty five and beyond.

As we look ahead, we remain confident in our ability to continue to gain share and deliver best in class growth in beauty. I'll now turn the call over to Mandy.

Thank you, Tarang. I'll now cover the highlights of our third quarter results and our updated outlook for fiscal twenty twenty five. Q3 net sales grew 31% year over year on top of 85% growth in Q3 of last year.

We experienced growth across international retailers. Digital commerce and our national retailers, and benefited from pipeline shipping earlier than it did last year. Our sales growth throughout fiscal twenty twenty five has been underpinned by continued category outperformance and market share gains both in The U. S. And globally. Higher unit volume contributed approximately 30 points to growth in Q3 with mix adding an additional point. Q3 gross margin of 71% was up approximately 40 basis points compared to prior year. Gross margin benefits were primarily driven by favorable foreign exchange impacts on goods purchased from China, cost savings and inventory adjustments. This was partially offset by mix related to Naturium's wholesale expansion and higher transportation costs. On an adjusted basis, SG and A as a percentage of sales was 54% in Q3 in line with last year. Marketing and digital investment for the quarter was 27% of net sales in line with our expectations and as compared to 26% last year. Q3 adjusted EBITDA was $69,000,000 up 16% versus last year. Adjusted net income was $43,000,000 or $0.74 per diluted share compared to $43,000,000 or $0.74 per diluted share a year ago. Both adjusted EBITDA and net income this quarter were impacted by an unanticipated foreign currency loss of approximately $7,000,000 that was driven by quarter over quarter fluctuations between the British pound and U. S. Dollar.

Moving to the balance sheet and cash flow. And we believe positions us well to execute our long term growth plans. We ended the quarter with $74,000,000 in cash on hand compared to a cash balance of approximately $73,000,000 a year ago. Our ending inventory balance was $215,000,000 in line with our expectations and up from $2.00 $5,000,000 a year ago. Our liquidity position remains strong We ended the quarter with less than one times leverage in terms of net debt to adjusted EBITDA. We expect our cash priorities for the year to remain on The specific growth initiatives we're focused on this year include investing in our people and infrastructure, our ERP transition to SAP, as well as increased distribution capacity to support strong global consumer demand. Now let's turn to our updated outlook for fiscal twenty twenty five. For the full year, we now expect net sales growth of approximately 27% to 28% as compared to 28% to 30% previously Our Q3 net sales growth came in better than expected largely driven by the timing of pipeline shipments. In Q4, our consumption trends are starting off softer than we expected.

Driven by the factors Terrain discussed earlier in the call. As we look to the second half overall, our updated guidance range implies 14% to 16% net sales the backdrop of a challenged mass cosmetics category, And on top of the 77% growth we delivered in the back half of last fiscal year. As we look forward, we remain confident in our ability to deliver share gains in The U. S. And expand our business internationally. [indiscernible] In fiscal twenty twenty five, now expect our gross margin to be up approximately 40 basis points year over year. As compared to approximately 30 basis points previously. This outlook does not include any impact from the recently announced tariffs at an incremental 10% on goods imported from China. As a reminder, Tariff hikes will not impact our current fiscal year results. We plan to address our response to the incremental tariffs and our fiscal twenty twenty six outlook in May. We believe we have a successful playbook to leverage from 2019 when tariffs move to the 25% level. This included supplier concessions, cost savings and select price increases. We also had FX move in our favor at that time which further mitigated the impact.

This time around, our increased supplier diversification outside of China, and our growing international sales base, we believe have multiple levers to address the impacts of these tariffs. We continue to expect marketing and digital investment at approximately 24% to 26% of net sales in fiscal twenty twenty five. Compared to 25% in fiscal twenty twenty four. From a cadence standpoint, that implies significant expected leverage in our marketing in Q4 on a year over year basis. As marketing spend was approximately 34% Turning now to adjusted EBITDA. For the year, we now expect adjusted EBITDA between $289,000,000 to $293,000,000 as compared to $3.00 4,000,000 to $3.00 $8,000,000 previously.

The change is due to the incremental $7,000,000 FX loss that I discussed earlier as well as our lowered top line outlook. Our outlook for fiscal twenty twenty five now implies adjusted EBITDA growth of approximately 23% to 25% on top of the strong 101% growth we delivered in fiscal twenty twenty four, [indiscernible] In summary, our third quarter results underscore our ability to drive category leading sales growth and market share growth We believe we have a winning strategy and are in the early innings of unlocking the full potential for our brands. With that operator, you may open the call. To questions.

Thank you.

We will now begin the question and answer session. Today's first question comes from Bill Chappell with Truist Securities. Please go ahead.

Thanks. Good afternoon. [indiscernible] Just I guess to the key question is with the guidance, with kind of what you saw in January, just trying to understand how long you see this lasting? Think as you walk through the different aspects like the tougher comp on the lip oil was kind of understood going into it. So it's the other two areas we're just trying to understand in terms of will the comps get better as we move to February, March, April? Do you think this is part of a longer slowdown? Just any more color kind of on that would be great.

Hi, Bill. Why don't I start?

I'd say on our approach is to be more cautious or prudent when we see a slow month. And in January, the three factors of the category being down 5% The lip oil that we're overlapping, while we knew about it, is by far our biggest launch in 2024.

And I think one of the things that happened in lip boil is we gave it exclusively to Ulta start in December and then it went pretty broad right away in January. So we're going across pretty big hill on that.

And then a couple of our new items are off to a slower start and it's still early as we go through. As we go through each of those elements, starting with the category, I think two things on the category that give us a bit more confidence going forward. One, we feel consumers had a little of a hangover from the highly promotional period in December.

While we didn't promote the industry promoted quite a bit, you often see a trough right after that promotional area. Second, in January, social conversation was way down, over 20%. We attribute it to two things. One, the wildfires in LA think brands wanted to be tone deaf during that devastation. And then the uncertainty around TikTok, it seems for a while the only thing people were posting on TikTok was whether it's going to stay open or shut down. So we do see those potentially being better as time goes on. As I mentioned, particularly this specificity on what happened in the category, what happened with social costs, conversations. And that in turn also relates to some of the softness we saw initially in some of our spring new items. We count on that social conversation. To really like those items virally. And so with our marketing activations coming up, with resets when we're able to get that spring innovation on shelf, particularly with the expanded space we have coming at Target. And Walgreens. We're hoping for better trends as we go forward, but We just took the more cautious stance and said, okay, let's assume doesn't get better for a couple of months and that's why you see us adjust our Q4.

Got it. And then maybe just a little more update on how international is trending. Did you go into any new countries this quarter? And are you seeing any of the same in terms of color categories like that? Any slowdown internationally or is it still kind of full steam ahead?

We're really pleased with the progress we're making in international. For Q3, we grew our international business 66% Also from a category standpoint, we're not seeing quite the same level of headwinds international [indiscernible] As we launched in the back half of last year into Rossmann, Germany at those The Netherlands, even our de Glasse Italy. We've maintained a top three rank in all three of those customers and we continue to see a tremendous amount of pent up consumer demand We're currently in conversations with pretty much every retailer and the retailer out that doesn't want Elf given our growth profile, the innovation we bring, the consumer profile we bring, So you'll continue to see us full steam ahead on international We continue to hear additional countries that we're going to be expanding into And so we feel great about our progress there. [indiscernible] Thank you. And our next question today comes from Andrea Teixeira with JPMorgan.

Please go ahead. Thank you, operator, and good afternoon, everyone.

I was hoping if you can sort of talk about in more detail about The U. S. What is the consumption in The U. S. As you exited the quarter and currently? I mean, you did speak a good good amount of how the innovation is coming for the spring. Season and how we've informed you on this guidance. And also what I think I heard from from Angie that there was some pull forward in this quarter. So we are just hoping to see what is consumption in The U. S. And how we should be seeing because obviously if you have a 7% -ish at the midpoint growth in any in top line in the fourth quarter, it implies a pretty negative number in The U. S. So if you are assuming that obviously the zero European and international continues to do well, So just wanted to see what is embedded in each of the assumptions Hi, Andrea. If you take a look at Q3 consumption, we still finished Q3 consumption double digits, I think about 12% in track channels. So it's pretty strong. In January, we did see that come down. You saw actually a week, couple of weeks of negative scanner data.

So that was a slowdown that I talked about. We're hoping that gets better, but we're basically embedding guidance what if it doesn't get better in the course of the quarter. And then in terms of the pull forward or not, that really relates to our pipeline. We had a much more pipeline go out the door in Q3 than in Q4. That's a little bit why when we really think of kind of what is the growth in the second half, that 14% to 16%, which our new guidance implies, in a down category, we feel really good about. We continue to grow share. In fact, January, which was a soft month for us from a consumption standpoint, we we still built 90 basis points a share. We're the only ones growing out of any of the brands in that period. I mean, it was pretty modest growth from a consumption standpoint. I think in the track channels, it was probably up 1%, but that gives you an indication of how much better we're doing than the category.

And is there any difference between the channels or like any any kind of like on the ground view besides what you discussed TikTok and all those things that kind of shaped everyone's opinion consumer sentiment, Anything you might say regarding newness of the category? It seems like the newness kind of is not as strong and this is something that the industry needs. Time to time. Anything you can say as we look forward that may change that in terms of the newness or the cadence of of your execution on the trade?

Yes. So what I'd say on our newness is we still feel good about our spring new items. We saw softness in January, some of it related to less social conversations as I mentioned. It's still early. Part of what we're doing about it is we always have marketing activations against our new items. And so you're going to see those marketing activations hit The other thing that helps with newness is when we're able to get them on the spring reset The spring resets will not be complete till February, but that always helps our new items as well. And so and then I'd say between channels, for us, going back to Q3, we saw strength across pretty much most of our channels. We were a little worried about Ulta given they had the lip oils exclusively during that period and actually was pleased with how we were able to comp that massive amount of whip oil in Ulta in that month. As we get into January, as I look across the retailers and our digital business, January, we continue to see Amazon do extremely well. Walmart is off to a pretty good start in terms of their comps.

We have a little bit of soft [indiscernible] that's before we often see that before resets. Particularly at Target where we shut off a number of items as we get ready for these space expansion that we see. So no warning signs as I look across retailers, more from a macro is what we're pinning that guidance on.

Thank you, Tharon. Your question on.

Thank you. And our next question comes from Dara Berenian with Morgan Stanley. Please go ahead. Hey, good afternoon, guys. The detail you gave us around the drivers of the January softness was helpful. Could you just spend a little more time on maybe how you plan to adjust your strategies here, tweak your efforts light of a new environment? You just mentioned with some of the innovation, the marketing activations, etcetera, and the plans there, but maybe a bit more detail on tweaks across the portfolio and also from a marketing perspective, just as you think about the level of spend environment? That'd be helpful. Thanks.

So I'll start with for this quarter, as I mentioned, the key to our innovation is really the marketing activations we do against that. We feel social conversation will normalize as we go forward in the in the quarter now that the wildfires are over, some of the TikTok kind of uncertainty has gone back and forth. So we definitely are starting to see a little bit of a pickup in the social conversations, which will also help with our newness the activations. And then the reset, the resets we have really good resets coming across customers as we've seen those plans and what's going to roll out. That will help along those lines. In terms of our marketing strategy standpoint, I would say there's not a big shift last quarter or a quarter before we talked about better balance And that spot that we shared on our webcast, the Eyes of the Space fandom, we saw it have an immediate impact on our Power Grid business. We ran it in Thanksgiving throughout the playoffs. And so we're going to keep that balance between call it, our core franchises and our new items. One of the other things I like about a lot of our new items this season is they are on our core franchises.

So if I look at Power Grip Matt that builds on our Power Grip franchise, Power Grip Original is the number one SKU across mass and prestige. Halo Glow powder builds on our Halo Glow franchise. We didn't show this spot with Megan Trainer, but we've got good creative on each of those core new items, which also we believe will benefit the core franchise We debated whether we spend more money but what we decided is in the face of the consumer macro where consumers are a little bit more cautious. We didn't think it made sense necessarily to invest more money behind that. We feel good about the ROIs currently achieving. And so what and we'll continue to disrupt I mean, I think you'll see some news tomorrow, other things that we're doing. To continue to get [indiscernible] Thank you. And our next question today comes from Ashley Helgans with Jefferies. Hi.

Thanks for taking our question.

So, Trane, you gave some good color on the slowdown in January in mass beauty. But if we look back the mass cosmetics industry over the last six months. I mean, it's definitely slowed. You guys have been been outperforming. But maybe any more color on just what's going on with that mass cosmetics consumer, if we look back a little farther.

Thanks.

Hi. So if I look back on the mass cosmetics industry over the last six months, I'd say there's two primary factors that I would [indiscernible] results in a weaker category. One, there was a lot of consumer uncertainty. We saw that across a number of consumer categories, whether it was the uncertainty reading up to the elections, a little bit of the post. I think there's still worries there in terms of what's going to happen with inflation, what's the state of the economy. So that definitely did weigh on the mass category. I'd say the second thing is sometimes we felt like we're the only ones going in the right direction in terms of the level of our marketing spend, level of engagement, our innovation. And so we definitely look for more of that to see kind of a rebound in the category. The last thing I would say, if you go back actually quite a long period, there have been cycles where the mass category has been soft. Each one of those cycles we've seen it come back at a pretty strong level. I'll go all the way back to back in 2016 through 2017, we saw a very strong category soft period in 2018.

Obviously, the pandemic was really soft, saw it come back really strong. So I still remain bullish on the category longer term. But I do think there is this macro on the consumer right now. That is weighing on the category. And again, our approach to the last question from Dara I should have said there are no huge shifts in our approach and there's a reason we've delivered twenty four consecutive quarters of net sales growth averaging over 20%. Our strategy is working The tweaks we're making are really in response to what we're seeing in the marketplace. That balance between core franchises and our new items really making sure that we're activating those properly and having the right visual merchandising on shelf to bring them to life feel confident with that approach, even in a challenge category.

Okay. Thanks so much.

Thank you. And our next question today comes from Olivia Tong with Raymond James. Please go ahead.

Great. Thanks. Good afternoon.

Want to talk a little bit more about Q4, recognizing course some of the distractions that you talked about in the last several weeks. But you've typically outperformed what Scanner shows whether because of e commerce or international. So why isn't that the case this quarter? And what's your view on that? And then, of course, realizing you're not immune in one category, slowdown, but can you talk about your ability to capitalize in consumer trade down? Perhaps some greater focus on the the value messaging? Thank you.

All right. Hi, Olivia. Thank you so much for the question.

So Q4, overall, we feel great.

About, is because we are looking at our second half overall 14% to 16% growth is what we're looking at for the second half. And again, some of those pipeline shipments pulled up into Q3. So I think you got to look at the second half overall.

And when you talk about outperformance of scanner trends, we do still have business on digital and internationally that is stronger. Outside of those U. S. Scanner trends that you're seeing. And so is why we're looking at second half overall at the 14% to 16% and we're feeling pretty good about that.

And just to add to that, I mentioned earlier just taking a more cautionary stance given the consumer macro and the softer start to January. I think our approach has always been a great deal of [indiscernible] If we see something, we'll call it out and hopefully deliver better than that. It's been our track record over time. And in terms of how we capitalize in this current environment, we see it as a great opportunity to continue to build share. I mentioned, even in January, which was a weak month for us, we've still built 90 basis points a share, the most share anybody built So that's how we're going to continue to capitalize. And as you mentioned, we have an incredible value proposition, prestige quality, incredible prices. You're going to see us continue to shine a light on that, particularly some of our lower priced items that are available for those who are really worried about kind of the overall economy. We have a great assortment on those and you'll see more messaging on that as well. Is an opportunity to continue to build share. Thank you. And our next question comes from Patty Cannata with Goldman Sachs.

Please go ahead.

Hi.

Thank you for the question.

Just one on Amazon and digital.

In terms of your digital channels, could you maybe talk more about the momentum [indiscernible] I guess, one, maybe some detail on what that partnership has brought to you, for example, bringing in new consumers or reaching new demographics?

And then two, how do you think about cannibalization risk Is this something you're seeing relative to your in store presence? Thanks.

So, hi. I would say our digital business is strong. In the quarter, Q3, our digital business overall was up 30%.

Amazon's growth rate was even higher than that. We continue to see really strong results with Amazon. The role Amazon plays is a great deal of discovery happens on Amazon, a great deal of search happens on Amazon. Obviously, those consumers who want the convenience of the speed of being able to get their product So we see a long growth trajectory ahead with Amazon. That partnership is extremely strong. One of the top performing brands on the entire platform and we see continued opportunity not only in The U. S. But also internationally. As we started expanding in Amazon and other markets. The UK, Germany, Italy and a number of other markets, We see that being one of our key customers. And then in terms of new consumer profile, we definitely see that on Amazon, as I talked about discovery and search capability that they have or strength they have there. And then cannibalization, really some cannibalization, I think, with some of our retail customers, but because of our model in terms of being agnostic in terms of where consumer buys the way we've done our terms where kind of our net margins are pretty comparable across customers. We all have always taken the stance that we want to make the best of beauty accessible to every consumer wherever they want to shop.

And so if there is some cannibalization in Amazon, we do think net it's additive to our overall portfolio. Just given the strength. And we love having consumers have that choice of where they get their product.

Great. Thank you.

Thank you. And our next question comes from Karin Wolfmeyer with Piper Sandler.

Hey, good afternoon. Thanks for the question. My first one is a quick one. I just wanted to see if there's any way to quantify the kind of the pipe fill that happened in Q3 to help us better understand how much of a lift that provided? And then can you give us any more color on how you're expecting international to trend for fiscal Q4? I mean, you typically say that international outperforms as we've seen the numbers, been doing exceptionally well. The guidance does imply it pretty meaningful slowdown versus what we've been seeing. So maybe you could help us understand the puts and takes there of why you're anticipating such a slowdown for the quarter? Thank you.

Hi, Corine. So for the pipeline, Bill, we have not quantified that, but we did have much more pipeline go out in Q3 than we did in Q3 of last year. That's why, again, we're really looking at the second half on a whole because that helps to kind of make that story.

And then on international, we continue to see momentum on international What I'd tell you in Q4 in international is we had a pipeline go out in a number of our launches as I think of Etos in The Netherlands, I can't remember which other countries might have been Douglas. But we had some more there. So the overall run rate in the absence of kind of launching a new retailer in the quarter will come down a little bit, but it's not something we're worried about. A lot of that has to do the cadence of our launches, the overall growth rate within our existing markets continues to be pretty strong.

Great.

Thank you. And then if I could just touch quickly on the gross margin. I think with the expansion Determ and wholesale, the margin is coming down a little bit. How should we be thinking about the proper run rate for gross margin going forward with more wholesale for Nutrien? Thanks.

So we're really pleased with what we're seeing on Naturium and our ability to expand distribution on the brand. [indiscernible] From a gross margin standpoint, this is something that we had planned for. And as you can see in our raised gross margin guidance, that's we're taking our gross margin up from 30 basis points previously to 40 basis points in our outlook on the year. And so still see strength from a gross margin standpoint even with Naturium's mix. Thank you. Thank you. And our next question comes from Peter Gramer at UBS e.l.f.. Thanks, operator. Good afternoon. Hope you're doing well. So, Tarang, you mentioned that you don't think the 4Q run rate indicative of the growth profile of this business. But I know it will be a few months before we get into fiscal twenty six guidance, but I would love some perspective on what you think is a reasonable run rate for growth just given what you're seeing today? And then maybe within that totally understand wanting to keep a conservative outlook in the near term just given the many moving pieces. But should a weaker category environment persist, like how are you thinking about your market share Still solid 90 basis points in January, but it is a bit of a step down versus two twenty basis points you referenced in for 3Q.

So just curious if you kind of see that market share trend improving from here? Hi, Peter.

I would say, in terms of the run rate probably going to have to wait till May for us to give the guidance for FY 'twenty six for us to kind of tell you what that run rate is. I'll tell you somewhere between what we have in Q4 and what we had in Q3 is run rate. So it doesn't give you that much color other than Q4 we see as an anomaly and otherwise, it's been highly consistent growth. Also the fact that we're lapping, if I look at that 14% to 16% growth we have in the back half, I think we're lapping 77% growth the year before. So on a two year basis, it's still really great.

The other thing that gives me confidence on why the run rate will be much better than Q4 is a significant white space we still have. I mean, not only number one in units and number two in dollars in The U. S, but clear line of sight to clear market leadership in color cosmetics.

We continue to pick up share in both e. L. F. E. L. F. Skin and theatorium see very strong growth rates there. I just talked about digital and international. So we have quite a bit of white space that gives me greater confidence in terms of our ability to kind of sustain category leading growth. In terms of market share, I actually was pleasantly surprised that we built 90 basis points a share in probably our weakest month that we've seen in January. It just tells you the strength we have. So we're highly confident of our ability to continue to market share. For perspective, if I look at Target, we have over 20% share.

At target versus closer to 12% share nationally with other customers, we're seeing great progress across other retail customers We saw great progress even at Target. We grew 170 basis points of share in Target even with a strong share position. So Target is not standing still. I'm particularly pleased that we went from the number four position to the number two position at Walmart. Again, really strong growth there. We continue to pick up ranking. In our other customers. So I look at the BOLGI from a market share standpoint long term is I don't understand, I mean, we haven't told you what timeframe, but I don't understand why we wouldn't be able to get to types of shares we have at Target at other retail customers. Over time. Skincare is even a bigger opportunity. I think we're sitting on a 2% share in skincare on e. L. F. Skin market. We just got 14%.

We have a long way to go there. The cadence of that share growth will vary. Part of it will be what do you love I think what sometimes investors miss is just how much share we've grown on top of very strong share growth rate. So see that bounce around a little bit, but we're still very confident in terms of being able to lead lead the category in our share growth.

That's super helpful. And then maybe if I could just squeeze one in for you. Just the fourth quarter implied guidance, it seems to imply a lot of SG and leverage. So can you maybe just unpack how much of that is the marketing and digital versus maybe other buckets within [indiscernible] So Q4 does imply leverage in our SG and A. And as we talked about, significant leverage really from marketing and digital, which was 34% in Q4 of last year.

And as our outlook implies, 24% to 26% for the year, which applies to Q4 as well. So a lot of that leverage is coming from marketing and digital as we have continued to invest behind our people and infrastructure.

And importantly, I would say on the S and A point, we continue to invest in the business, not only in our brands, but we mentioned the investments we're making to get on to SAP later this year, continued expansion internationally the investments we've made in our distribution centers to be able to to support that growth that we're seeing.

Both in The U. S. As well as globally. So I feel good about the balance of being able to get leverage, but also continue to be able to invest the things we're going to need to be able to continue to drive strong growth.

Thanks so much. I'll pass it on. Thank you. And our next question comes from Linda Bolton Weiser with D. A. Davidson. Please go ahead.

Yes, hi.

Just on the question of your product launches and innovation, It seems like there is some pretty good innovation in the prestige sector of the market that you could be copying There's a company out there that has jelly tints And then in the primers, there's a Cloud Glow product This is like a foam primer. So there's definitely innovation out there. It just seems like maybe you've slowed down in terms of your copying. So maybe you could talk about that. And then talk about also the progress you're making in those categories where your market share is very low.

Like foundations and mascara? And maybe you could talk about what progress you're making there? Thanks.

Hi, Linda. So first of all, I would tell you we have an incredibly strong innovation pipeline. So what I talked about was a little bit of a slower start in January on a couple of our our items. But if you take a look at our Halo Glow Powder, it has an incredible [indiscernible] but overall Power Grip really continues to follow that Holy Grail approach of flat taking inspiration from our community and the best of prestige. And you'll continue to that. We have a great cadence of innovation coming for the fall as well spring of next year. We go out three years. A lot of it comes to what the sequence or cadencing of some of that innovation is. So we not only study the market. The one thing I'll probably correct you on is we never copy a product. It always has our e. L. F. Twist. We always put our e. F. Twist. I mean, probably the biggest one being being able to have that prestige quality of incredible price points we can. But we always make a twist on within the products. And so I would say our innovation team does terrific job of getting inspiration not only from our community, but those products from Prestige and you'll continue to see a very strong innovation cadence and pipeline from us.

Yes.

And I would just add on, Linda, on your question on the progress in some of our what we call conquest categories. I think Lyft is a great example of that. A few years ago, even last year, we had maybe a 3%, 4% share in Lyft and we had seen that grown over 800 basis points, as we've come into this year. And so when we do have those innovations to Turing's point, it really allows us to continue to pick up share and we're doing that across Lyft mascara, foundation, those conquest categories where we do have a lower share but have so Okay. Thank you very much.

Thank you. And our next question today comes from Susan Anderson Canaccord Genuity. Please go ahead.

Hi, good evening. Thanks for taking my question.

I wanted to maybe follow-up on Materium Not sure if you could give some more color on how that performed in the quarter in terms of the growth rate there. And then also, on the rollout to Ulta, curious if you're seeing new customers or existing customers buy the brand there? And then also if you have any color just on kind of more space that you could gain in The U. S. And globally.

We're very pleased with our performance overall with Naturium, Susan, and especially in Q3 Great.

Continue to show growth particularly in Ulta, where we've launched, we continue to see that business build week over week in Ulta. And so we're very pleased with the expanded distribution and the growth that we're seeing on Naturium. And as a reminder, it has tremendous white space opportunity as well. Really, only two retailers are Target and Ulta overall. Physical retail. They do sell on Amazon and have their own .com. But really the rest of the world is white space.

Opportunity for them. We're pleased as well with the progress that we've seen in Boots. They did launch in a few hundred of Boots skincare doors. Top performing skin care doors and we continue to see great progress there as well. So very excited for the prospects for Naturium as we look forward Yes, Nick. We continue to hear about other distribution expansion on Naturium.

I feel that it's performed extremely well clinically effective, bio compatible skin care, incredible formulations. We really great resonance with consumers. So we're very excited about continuing to build that up.

Okay, great. And then maybe if I could just add a follow-up, just on general on the competitive landscape. I mean, it sounds like you guys don't think that other brands are necessarily able to copy kind of your differentiated strategy. I guess Is it seem like though maybe some of these legacy brands are kind of starting to learn how you guys operate and copy you guys a little bit and in terms of rolling out these dupes and other hot products? And then also do you feel like there's more new brands coming into the landscape that's making it a little bit more competitive, such as maybe some K Beauty brands or other smaller pop up brands.

So what I'd tell you is this category has always been competitive. In Nielsen alone, I think there's 1,900 cosmetics and skincare brands. Tracked by Nielsen. The big difference is which ones are able to scale and very few are able to. I mean, I think e. L. F. Is one of only four with more than $850,000,000 retail sales. But even if you look at who has more than $100,000,000 in retail sales, I think it's only 26 So you're going to see a lot of brands come and go or sustain at a very small level. From a competitive position, I feel like we're stronger than we've ever been. If you take a look at our unique areas of competitive advantage, While some people will try to copy elements of this, I mean often people will go and try to copy elements of our market, but we've already pivoted and moved on and conquested on other platforms by the time they're figuring out the first one. Our ability of how we engage and entertain our community. I think in the last year alone, we had 20 unique campaigns as we look at any of our competitors by brand.

They're lucky to do one or two. So there's just a different freneticism and level at which we're operating. On those elements. And then probably the most important thing we have not seen anyone come anywhere close to this ability of having prestige quality at the price points we have. That is a unique competitive advantage we have. And so even on the Jukes, as I look at the legacy players, If they're lucky, they might have one or two in a couple of year period. It's nowhere near. I mean, we we have basically, I don't know, at least four or five holy grails that we just launched. We'll have able to follow that up with more in the fall. So I feel great from that competitive position. I think the best indication of that frankly is the market share. And we've more than doubled our market share in the last three years. Shows kind of the momentum and how others have not been able to replicate success that we Okay, great. Thanks so much. Good luck the rest of the year.

Thank you. And I Hi, good afternoon and thank you so much for the question. I just wanted to see if you could give us more detail on a breakdown maybe by category in the quarter as well as in January on on which parts underperformed versus performed well. I think Lipps continued to perform well for part of that timeframe. And then if you can comment on just skincare outside of color cosmetics, the trends you're seeing there and how e. L. F. Skin is performing versus Enterium? Thank you.

So, Ann, I'll do it in two parts. I'd say in Q3, we saw pretty broad strength across every one of our segments in color cosmetics as well as in skin care. You saw pretty massive share gains in each one of our core segments. In January, I'd say the strongest subcategory was lip continue to see good momentum in lip, back to this point. I think complexion was a little bit more challenged. But again, we don't see anything any indicators for the long term on that. And then skincare, continue to grow at a faster clip in January. But overall, our strategy with the innovation we have, our approach of how we engage consumers is we see an opportunity to continue to grow share across each of our segments and skincare.

Great. Thank you so much.

Thank you. And our next question comes from Mark Altschwager with Baird.

Good afternoon. Thank you for taking my question. Does your updated guidance incorporate expectations for retailer destocking And are any of your major retailer partners talking about this given the softer consumption trends?

Hi, Mark. We have not heard that from our retailers at this [indiscernible] Even without brand that our retailers carry. And so we typically will see continued orders on on our product. And so we have just not seen anything like that yet.

Thank you. And then separately, under [indiscernible] for revenue run rates in fiscal twenty twenty six, but you just frame up the level of flexibility there is on the cost structure should this softer demand backdrop persist?

Yes. So we have As you can see in Q4, our SG and A is leveraging Again, I talked about that being driven largely by our marketing investment. But as we think about where there's flexibility in our P and L, we certainly have the flexibility to reduce costs on certain areas. We have cost savings programs that we are running with our suppliers every year. But really, our focus has been on investing behind the business and making sure that we have the people and the infrastructure that we need to capitalize on those white space areas that Terrain just spoke about and self that's really more so of our focus as we move ahead. Just really making sure that we continue to make progress against those growth areas in the business.

Thank you.

Thank you. And this concludes our question and answer session. Like to turn the conference back over to Tarang Amin for closing remarks.

Well, thank you everyone for joining us today. I want to close by saying how proud I am of the incredible e. L. F. Beauty team for delivering another quarter of industry leading results I want to thank every e. L. F. And every e. F. Partner for your passion and dedication to our vision of creating a different kind of beauty company. We look forward to seeing some of you at CAGNY in a few weeks and speaking with you in May when we'll discuss our fourth quarter results and FY 'twenty six outlook.

Thank you and be well.

Thank you. This concludes today's conference call.

We thank you all for attending today's presentation. You may now disconnect your lines and have a wonderful evening.