elf Beauty Inc

NYSE:ELF

Earnings Call Analysis

e.l.f. Beauty's Q1 Success and Raised Fiscal '25 Outlook

e.l.f. Beauty had a stellar start to fiscal '25, with Q1 net sales up 50% year-over-year, driven by strong growth across both national and international retailers as well as digital commerce. The company also achieved an 80 basis point increase in gross margin to 71%. Adjusted EBITDA was $77 million, up 4%. They raised their fiscal '25 outlook, now expecting 25-27% net sales growth, up from 20-22%, and adjusted EBITDA of $297-301 million, up from $285-289 million previously. Their focus areas include color cosmetics, skin care, and international expansion, with substantial market share gains in key categories and regions .

Introduction and Overview

The earnings call for e.l.f. Beauty's first quarter of fiscal year 2025 highlighted a remarkable performance. The company experienced a 50% increase in net sales year-over-year, marking their 22nd consecutive quarter of growth and market share gains【4:1†source】.

Key Performance Indicators

e.l.f. Beauty's outstanding results were driven by several factors, including a notable 80 basis point increase in gross margin to 71%, and an adjusted EBITDA of $77 million. Digital channels saw a 40% year-over-year growth, contributing 21% to total consumption【4:1†source】. Their Beauty Squad Loyalty Program also reached over 5 million members, growing 30% year-over-year【4:0†source】.

Sales Growth and Market Share Expansion

The company's growth was particularly strong in color cosmetics and skin care. e.l.f. Cosmetics grew 26% in tracked channels, compared to a category decline of 1%, which boosted their market share by 260 basis points【4:2†source】. e.l.f. SKIN also saw an impressive growth of 45% in tracked channels. Furthermore, international sales grew by 91% in Q1, demonstrating e.l.f. Beauty's expanding footprint in markets such as the U.K., Canada, the Netherlands, and Italy【4:1†source】【4:2†source】.

Financial Health and Investments

The company's balance sheet remains robust with $109 million in cash on hand, despite an increase in inventory levels to support strong consumer demand. Noteworthy investments include transitioning their ERP system to SAP and expanding distribution capacity. These initiatives were designed to sustain growth and enhance operational efficiency【4:3†source】.

Raised Outlook and Guidance for Fiscal '25

Due to the strong performance in Q1, e.l.f. Beauty has raised its outlook for fiscal '25. The company now expects net sales growth of 25% to 27%, up from the previous 20% to 22%, and adjusted EBITDA between $297 million to $301 million, up from $285 million to $289 million【4:0†source】. Adjusted net income is projected to be between $198 million to $201 million, with adjusted EPS of $3.36 to $3.41 per diluted share【4:0†source】.

Strategic Initiatives

e.l.f. Beauty's strategic focus includes further enhancing their color cosmetics and skin care categories, boosting their digital and social media presence through innovative marketing campaigns, and solidifying their loyalty program. The company also emphasized the significance of maintaining flexibility and resilience in their supply chain, especially amidst potential tariff uncertainties【4:2†source】【4:8†source】.

Challenges and Considerations

Despite the positive outlook, the company anticipates higher transportation costs and the need for continued investment in marketing and digital channels. These factors could put some pressure on margins in the short term. However, the management remains confident in their strategies and ability to manage these challenges effectively【4:0†source】.

Conclusion

e.l.f. Beauty's Q1 performance and raised outlook for fiscal '25 reflect their dominance in the beauty industry and robust growth strategies. With continued focus on innovation, expanding market presence, and strategic investments, the company is well-positioned to drive long-term growth and value for shareholders【4:0†source】【4:1†source】.

Earnings Call Transcript 2025-Q1

[Kristina Casey Katten, executive]

Thank you for joining us today to discuss e.l.f. Beauty's First Quarter Fiscal '25 Results. I'm KC Katten, Vice President of 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, 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 Amin, executive]

Thank you, KC, and good afternoon, everyone. Today, we will discuss the drivers of our first quarter results and our raised outlook for fiscal '25. I want to start by recognizing the e.l.f. Beauty team. We're off to a strong start this fiscal year, delivering Q1 results ahead of our expectations. In Q1, we grew net sales 50%, increased gross margin by approximately 80 basis points and delivered $77 million in adjusted EBITDA. Q1 marked our 22nd consecutive quarter of both net sales growth and market share gains, putting e.l.f. Beauty in a rarefied group of high-growth companies.

We're 1 of only 5 public consumer companies out of 274 that has grown for 22 straight quarters and averaged at least 20% sales growth per quarter. We've continued to prioritize 3 areas with significant runway for growth: color cosmetics; skin care; and international. Let me update you on our progress in Q1. In color cosmetics, we continue to significantly outperform the category. In Q1, e.l.f. Cosmetics grew 26% in tracked channels as compared to a category that was down 1%, increasing our market share by 260 basis points.

Nationally, e.l.f. is the #2 mass brand on a dollar basis with approximately 12% share, more than double the level we had 3 years ago. As great as this share growth has been, we see an opportunity to double our market share over the next few years. In Target, our longest-standing national retail customer, we've been the #1 brand for 6 consecutive quarters, with our share increasing from nearly 13% to over 20% today. We're focused on replicating our success at Target across other key retailers and believe we are making great progress towards that ambition.

In skin care, we also continue to meaningfully outperform the category. In Q1, e.l.f. SKIN grew 45% tracked channels, 32x category growth of 1.4%. We grew our share of 60 basis points, driving e.l.f. SKIN to be a top 10 brand for the first time. We achieved the #9 rank as compared to the #13 rank a year ago. e.l.f. SKIN today holds about a 2% share and has significant runway with the #1 brand holding a 14% share. With the acquisition of Naturium last October, we now have 2 of the fastest-growing mass skin care brands that are complementary in their price points, positioning and audiences. Naturium contributed approximately 16 points to our net sales growth in Q1.

Turning to international. Our net sales grew 91% in Q1, fueled by growth in our existing markets as well as our expansion into new markets. Our international expansion strategy is anchored in partnering with leading beauty retailers to bring our brands to life in each country we pursue. We continue to see significant runway to grow our footprint in our largest existing markets. The U.K., where we're now the #4 brand as compared to the #8 a year ago. And in Canada, we're now the #4 brand as compared to #6 a year ago.

As we look to new markets, we've seen success with our engagement model across social platforms, driving consumer demand well before we enter a particular country. We're pleased that we've maintained our #1 brand ranking since launch with both Etos in Netherlands and Douglas in Italy. International drove 16% of our total sales in Q1, up from 13% a year ago and with significant runway to grow as compared to our global peers at over 70% on average.

Let me put the strength of our results in the context of the broader beauty industry. While beauty has comparatively low barriers of entry, very few brands have been able to scale. Of the over 1,900 cosmetics and skin care brands tracked by Nielsen, only 61 has surpassed $25 million in annual retail sales. Only 26 has surpassed $100 million in retail sales, and e.l.f. is 1 of only 5 brands to achieve over $700 million in retail sales. e.l.f. has been one of the few brands able to scale through our 5 unique areas of advantage that form our competitive moat.

Let me take a moment to walk you through each. Our first area of advantage is our passion team of owners and high-performance team culture. We have just over 500 employees and have intentionally sought out people with diverse experiences who are humble and hungry and thrive at e.l.f. speed. We believe we are the only public consumer company that grants every employee equity every year. This aligns our employees' interest with that of our shareholders and provides wealth creation opportunities across the entire team.

Since our IPO, excluding our executive officers, we've granted approximately $180 million in equity in a stock that has gone up more than tenfold. Our unique One Team, One Dream [ compensation ] model and high-performance team culture has led to exceptionally high employee engagement of 90%, 18 points above the consumer industry benchmark. The strength, curiosity and resilience of our team has allowed us to execute at an exceptionally high level over the last 5-plus years.

The second area of advantage is our value proposition. The average price point for e.l.f. is about $6.50 today as compared to nearly $9.50 for legacy mass cosmetics brands and over $20 for prestige brands. While there are other brands with low price points, our real advantage is the ability to deliver prestige quality at those price points. We have a unique asset-light supply chain model that delivers the best combination of quality, cost and speed in our industry.

Our quality scores have gone up every year over the past 5 years. We have a closed feedback loop that allows us to make ongoing improvements across our portfolio. We're hearing from consumers that we're not only delivering an incredible price point but also deliver quality that is often better than prestige. Our value proposition is evidenced in our strong unit growth. e.l.f. was again the only top 5 cosmetics brand to grow units in Q1. Our third area of advantage is our powerhouse innovation. Our innovation approach is focused on building franchises behind our Holy Grails, taking inspiration from our community and the best products in prestige, adding our e.l.f. twist and bringing them to market at an extraordinary value.

This Holy Grail innovation approach has built category leadership over time. 5 years ago, e.l.f. had the #1 or #2 position across 8 segments of the color cosmetics category. Today, e.l.f. has the #1 or #2 position across 18 segments, which collectively make up over 80% of e.l.f. Cosmetics sales. We continue to deliver strong sales growth and share gains across these segments. We're also innovating in the industry's top segments where we under-index on share, like foundation.

For context, as compared to the 12% share we have across cosmetics, we have less than 2% share in foundation, a $675 million category in the U.S. In Q1, we launched a Soft Glam Satin Foundation, priced at an incredible value of $8 compared to a prestige item of $39.

[Presentation]

[Tarang Amin, executive]

Soft Glam Satin Foundation was amongst the best selling products on our site in Q1. We're also excited about the innovation we've launched under Naturium. The brand recently celebrated 1 million bottles sold of the best-selling Glow Getter body wash. It's first product to hit the 1 million unit mark. We're extending our franchise approach to Naturium with the launch of the Glow Getter body oil. The launch sold out in just 10 days on naturium.com and was recently restocked on our site.

Our fourth area of advantage is our disruptive marketing engine. Our marketing organization is structured to encompass all consumer touch points from product concept through consumer purchase. This end-to-end breadth gives us the agility to go from insight to action with speed and fosters increasing emotional resonance as our community becomes a stakeholder, essentially co-creating the brand with us.

Our recently launched bronzing drops is a terrific example. Bronzing drops, which have been the #1 product requested from our community. Turning to our best product launch ever on elfcosmetics.com. We turned our consumers passionate please for bronzing drops into action with the debut of peculiar behavior to accompany the product launch.

[Presentation]

[Tarang Amin, executive]

We believe our marketing engine is best-in-class in creating culturally relevant output. In the 7 months since calendar 2024 began, we've executed 15 unique campaigns from a 14-minute documentary parity to a big game commercial to a record-breaking collaboration with Liquid Death. Our approach transcends product and deepens brand love to purpose. Earlier this year, we released our so many DICK'S campaign, which in [indiscernible], garnering 1 billion organic media impressions and almost 100% positive sentiment.

Our research found that they are more man named Richard, Rick or Dick serving on public company boards than entire groups of underrepresented people. Consistent with our brand values, our call to action is not to single out leaders with these names, but rather inspire companies to give a bigger voice to everyone else to drive positive business results so that everyone wins. We practice what we preach. e.l.f. is 1 of only 4 publicly traded U.S. companies with the Board of Directors that is at least 2/3 women and 1/3 diverse.

We've solidified our reputation as a purpose-led results-driven brand across product, purpose and pioneering platforms. On Roblox, one of the world's most popular virtual playgrounds among Gen Z and Alpha. Since the launch of our e.l.f. UP!. experience last year, we have the #1 branded experience with a 95% positivity rating and almost 14 million plays. In Q1, e.l.f. became the first beauty brand to test real-world commerce on Roblox, adding credibility and visibility among key audiences.

Our marketing is working, delivering ROIs multiples above benchmarks and expanding our unaided brand awareness from 13% in 2020 to 33% in 2024. I've been in the consumer space over 30 years and have never seen a 20-point jump in unaided awareness in just a few years. As great as that is, the leading U.S. mass cosmetics brand has 55% unaided awareness, demonstrating significant runway for growth.

Our fifth area of advantage is our productivity model. [ Founder ] is a digitally native brand. E.l.f. remains the only top 5 mass cosmetics brand with their own direct-to-consumer site. We leverage insights from our site and Beauty Squad Loyalty Program to proactively change out up to 20% of our retail assortment each year. Looking at the last 5 years, our SKU count has remained relatively consistent, and we have doubled our average sales per SKU. This approach has led us to be the most productive brand on a dollar per foot basis with our largest retail customers in both the U.S. and U.K.

Our strong productivity has been rewarded by more space with our global retail partners. In the U.S., as previously announced, the e.l.f. brand game space in spring with CVS and in summer with Walmart, and we'll be gaining additional spaces fall with CVS. We're also excited about the recent launch of Naturium in Ulta Beauty, marking the brand's first retailer expansion in the U.S. outside of Target. Naturium is now available in all 1,400 Ulta Beauty stores with a full assortment across skin, body and lip care.

Internationally, we continue to grow our footprint in existing markets. As we previously announced, we gained space this spring with Boots in the U.K. and with Shoppers Drug Mart in Canada, and we'll be gaining space this fall with Superdrug in the U.K. We're also expanding our international reach into newer markets. We recently expanded our existing distributor relationship in Australia with the launch of e.l.f. in Kohl's, marking e.l.f.'s first introduction into the grocery channel in Australia.

As previously announced, we'll be bringing e.l.f. to Sephora Mexico this fall, marking the e.l.f. brands first partnership with Sephora. We're also excited to announce that we'll be launching e.l.f. in Germany this fall with Rossmann. Germany is the largest cosmetics market in Europe, and we expect our launch with Rossmann to be our biggest international launch to date.

In summary, we have 5 areas of advantage that have enabled us to consistently drive sales and share in cosmetics and skin care: our passionate people, a 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 in our industry; 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 of advantage reinforce each other that forms our competitive moat, and we expect they will continue to fuel our industry-leading growth. I'll now turn the call over to Mandy.

[Mandy Fields, executive]

Thank you, Tarang. I'll now cover the highlights of our first quarter results as well as our raised outlook for fiscal '25. Our first quarter results were outstanding. Q1 net sales grew 50% year-over-year on top of 76% growth in Q1 of last year, driven by broad-based strength across national and international retailers as well as digital commerce. Our net sales growth continues to be led by higher unit volume, which contributed approximately 34 points to growth, with mix adding approximately 16 points.

Q1 digital consumption trends were up over 40% year-over-year on top of triple-digit trends in Q1 of last year. Digital channels drove 21% of our consumption in Q1 as compared to 18% a year ago. The momentum we're seeing is supported by enhancements across our loyalty program within our app and on digital and social platforms. Our Beauty Squad Loyalty Program hit a milestone this quarter, reaching over 5 million members with enrollment growing 30% year-over-year. Recall, our Beauty Squad loyalists have higher average order values, purchased more frequently, have stronger retention rates and our rich source of first-party data.

We're fueling new member enrollment with exclusive early access to product launches and unique integrations with our digital partners. In Q1, we ran our first ever Beauty Squad challenge within Roblox, allowing our e.l.f. players to connect their beauty squad and Roblox accounts. Nearly 100% of those Roblox connections were new Beauty Squad members. We also expanded Beauty Squad to Amazon to continue to fuel new member sign-ups and reward our community for their e.l.f. purchases on Amazon.

Q1 gross margin of 71%, was up approximately 80 basis points compared to prior year. We saw gross margin benefits from favorable foreign exchange impacts, lower transportation costs, price increases in our international markets, cost savings and mix, partially offset by inventory adjustments. Q1 gross margin was better than we expected, in part due to slower flow-through of higher transportation costs.

As a reminder, we experienced higher container costs related to the Red Sea disruption at the end of last year. And those costs have continued to rise more recently. We expect these transportation cost headwinds to partially offset the gross margin benefit we're projecting throughout fiscal '25. On an adjusted basis, SG&A as a percentage of sales was 51% in Q1 compared to 39% last year. The primary driver of the year-over-year increase was a plan to step up in marketing and digital investment.

Marketing and digital investment for the quarter was approximately 23% of net sales as compared to 16% last year. The remaining increase in adjusted SG&A was driven primarily by the inclusion of Naturium in our consolidated financials and impact that will continue through Q2 of fiscal '25 as well as ongoing investments in our team and infrastructure. Given those planned investments, Q1 adjusted EBITDA was $77 million, up 4% versus last year, and adjusted EBITDA margin was 24% of net sales.

We expect adjusted EBITDA growth to accelerate into the back half of fiscal '25 as we cycle the inclusion of Naturium in our financials and see more normalized rates of marketing investment year-over-year. Adjusted net income was $64 million or $1.10 per diluted share compared to $63 million or $1.10 per diluted share a year ago. Moving to the balance sheet and cash flow. Our balance sheet remains strong, and we believe positions us well to execute our long-term growth plans. We ended the quarter with $109 million in cash on hand compared to a cash balance of $143 million a year ago.

Our ending inventory balance was $200 million, in line with our expectations and up from $98 million a year ago. The difference is primarily a combination of three things: first, as we've said in the past few quarters, we continue to build back our inventory levels to support strong consumer demand; second, our consolidated results now include Naturium, which added approximately $26 million of inventory; lastly, an additional $23 million of the increase is the result of taking ownership of inventory from China when it ships versus when it enters our distribution center here in the U.S.

Our liquidity position remains strong. We ended the quarter with less than 1x leverage in terms of net debt to adjusted EBITDA. We expect our cash priorities for the year to remain on investing behind our growth initiatives and supporting our strategic extensions. The specific 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 consumer demand.

Now let's turn to our raised outlook for fiscal '25. For the full year, we now expect net sales growth of approximately 25% to 27%, up from 20% to 22% previously. Adjusted EBITDA between $297 million to $301 million, up from $285 million to $289 million previously. Adjusted net income between $198 million to $201 million, up from $187 million to $191 million previously. And adjusted EPS of $3.36 to $3.41 per diluted share, up from $3.20 to $3.25 previously.

Let me provide you with additional color on our planning assumptions for fiscal '25. Starting with the top line. Our raised outlook reflects the outperformance in Q1 relative to our expectations as well as an improved outlook for the balance of the year. In Q2, we expect our net sales growth to be slightly above our 25% to 27% annual growth outlook. As we look at tracked channels, we would expect transfer e.l.f. to be in the 20% range throughout Q2 as we continue to cycle strong compares in the base. Recall, tracked channels represent approximately half of our net sales.

Turning to gross margin. In fiscal '25, we now expect our gross margin to be up approximately 20 basis points year-over-year as compared to approximately 10 basis points previously. The improved outlook is largely a result of our outperformance in Q1. In terms of the key puts and takes for the year, we expect gross margin benefits from favorable FX rates, margin accretive mix and cost savings to be partially offset by higher transportation costs and costs related to retailer activity and space expansion.

From a cadence standpoint, we expect gross margin to be flat year-over-year in Q2, largely due to the timing of retailer activity and space expansion costs. Turning now to adjusted EBITDA. For the full year, our outlook now implies adjusted EBITDA growth of approximately 26% to 28% versus prior year, up from 21% to 23% previously. And on top of the strong 101% growth we delivered in fiscal '24. We continue to expect adjusted EBITDA margin leverage of approximately 20 basis points year-over-year. We still expect marketing and digital investment at approximately 24% to 26% of net sales in fiscal '25 as compared to 25% in fiscal '24.

From a cadence standpoint, we are planning for a more balanced pace of marketing and digital spend throughout fiscal '25. Looking to Q2, that implies a step-up in our marketing on a year-over-year basis as marketing spend was approximately 21% of net sales in Q2 last year. In addition, we are still annualizing the acquisition of Naturium and continue to invest in our team. As a result, we expect our adjusted EBITDA margin could be in the low teens range in Q2, with more meaningful adjusted EBITDA margin expansion to be realized in the second half of fiscal '25 as marketing compares normalize and as we anniversary the acquisition of Naturium starting in October.

In summary, our first quarter results underscore our ability to drive exceptional, consistent category-leading growth. We believe we have a winning strategy as reflected in our raised outlook for the full year and continue to believe we are in the early innings of unlocking the full potential for our brands. With that, operator, you may open the call to questions.

[Operator]

[Operator Instructions] And today's first question comes from Olivia Tong with Raymond James.

[Olivia Tong Cheang, analyst]

Congrats on the great quarter. I wondering if you could down a little bit more, both the quarter and the guide. First, if you could give us a sense of how much of the growth was driven by new distribution versus your existing distribution? We obviously know Walmart was a part of that this quarter. And how that compares into second half when you have some new distribution internationally like the plant in Mexico and as you mentioned during the prepared remarks in Germany?

And then bigger picture, with -- we're seeing challenges with the consumer, slower growth in [indiscernible] what you're seeing, whether your analytics show any signs of slowdown or amongst -- particularly amongst your different cohorts, perhaps? And how -- and perhaps how does that influence your Q2 guide?

[Mandy Fields, executive]

Olivia, thanks for the question. So in terms of growth that we saw in the quarter 1, I'm super proud of the 50% net sales growth that we just delivered really incredible. I'm also proud of the fact that we were able to raise our guidance on the top line, up to 25% to 27% for the full year. We are having some growth driven by new distribution, as we talked about. We had a number of space expansions in the spring this summer and are certainly out looking more as we look into the fall. So that is included in our guidance.

But we're also seeing strength in our existing distribution. And so really pleased with that as well. And international will continue to play a role in that. You saw international growth at 91% for the quarter. I certainly expect international to continue to drive growth for us as we look out into the second half of the year as well.

[Tarang Amin, executive]

Olivia, this is Tarang. On your second question on consumer -- any consumer slowdown or sentiment. Overall, I would say we are seeing some commentary of consumers being more choosy, but they're choosing e.l.f. I would say that we're particularly well positioned. We saw growth across all of our channels, digital, all our national retailers and international customers. So we remain quite bullish in our ability to continue to drive market share, both in color as well as skin care and our continued expansion internationally.

[Olivia Tong Cheang, analyst]

Great. And then if I could follow up on the international growth, which obviously continues to be pretty phenomenal. Can you talk about the opportunities going forward? How you go about designing which markets? Whether any of these are exclusive relationships, particularly with Douglas and a few others? And if they are exclusive, are they by regions or specific countries? Just helping us understand that.

[Tarang Amin, executive]

Yes. So our strategy for international when it comes to retailers is to partner with a leading retailer in a market to help build the brand. We thought Douglas Italy did a great job, really establishing this is #1 in that customer, same with Etos in the Netherlands. And we're extremely excited about the launch with Rossmann in Germany. Germany is the largest market for color cosmetics in Europe. Rossmann has over 1,500 doors that we'll be in. So we feel really great in terms of how that looks.

[Operator]

And the next question comes from Andrea Teixeira with JPMorgan.

[Andrea Teixeira, analyst]

I was hoping to see -- to hear from a little bit more on the 20% growth in Q2. I understand that you've historically been extremely conservative and you don't flow through all the to the guide. But knowing that you grow faster, both internationally and of tracked channels and tracked channels are growing at least consumption-wise, 22%, according to Nielsen in July.

So I was trying to see if there is anything in terms of shipments and timing of consumption and shipments, anything that we should be aware of and that would inform that deceleration? And then on top of that, if you can explain, there is a lot of noise on the tariff -- potential tariff increase, just to explain that your strategy to increase prices is usually $1. And you've been -- historically, you only increased prices in [indiscernible] price points and how you should be able given your large gross margin, explain to investors how like a $0.60 impact would be diluted, if anything, across your price points and you still keep your price points at a very attractive level? So if you can help me -- help the investors on those two points.

[Mandy Fields, executive]

Absolutely. Andrea, so I'll take the first question. On Q2, we actually said on our prepared remarks that we expect Q2 to be slightly above the 26% to 28% range that we outlooked for the year. So we do expect Q2 to be better than our annual outlook, which we feel great about. And you know that we typically take a balanced approach when it comes to our guidance. So we always want to put something out there that we feel great about, very balanced in our approach. And we are pleased with what we're seeing out of our retailers digitally, internationally, all of those that we mentioned on the call. So continue to think that we have momentum there, expect Q2 to be a little bit above our annualized range, and we'll take it from there.

[Tarang Amin, executive]

Andrea, I'll take your second question on tariffs or potential tariffs. First of all, if there were tariffs, it would not impact FY '25, just given how long it takes for inventory to flow through. So this is really an FY '26 issue potentially. And so our approach is very similar to what we did in 2019. If you recall, in 2019, we faced 25% tariffs. We use a combination of select price increases, help from FX and supplier concessions to be able to address that tariff issue. As we look forward, we've heard rumors as high as 60% tariffs. So if we look to how would we solve for that additional 35 points of tariff, we feel pretty confident in terms of that same balanced approach.

Certainly, we take selective pricing on e.l.f. In addition, we would expect additional FX help and additional supplier concessions. And then the fourth thing that we didn't have back in 2019 is continued diversification. And back in 2019, almost 100% of our production came out of China. As of today, it's a little less than 80%. By next year, it'd be even lower than that. And so that continued diversification will be yet another lever. We'll have to be able to decide what level of pricing going to take versus how much we can rely on some of these other levers.

Again, it's premature right now. Nothing's happened from an election standpoint. We don't know what the level of tariffs are, but we've already gone through a number of different scenario planning and feel confident we can continue to use that balanced approach to address any tariffs that we might face.

[Andrea Teixeira, analyst]

Yes, that's super helpful. And just to clarify, and I appreciate Mandy you correct me on the range. Is it fair to assume that when you move guidance, you move guidance mostly and partially just for the beat of the first quarter? And in a way, you kind of left the second half untouched from what it was before just because you don't have visibility. And I think we've seen most companies do that when they beat guidance these days because there is very limited visibility to how the consumer will be at that point.

But given you are basically what you just described as being like a lot of new places you're coming through. Obviously, in the fall, you're coming to Mexico and now Germany and the other countries that you're still growing. Is that any way you can kind of help investors frame the way the ones that are relatively new when it became a large cap to the story and haven't seen you guide for all these years very conservatively? So if you can kind of like explain how your guiding process works?

[Mandy Fields, executive]

Yes. So for this quarter, we actually did flow through more than the Q1 beat as we continue to feel confident about where the year is headed for e.l.f. But we do take it a quarter at a time, to your point, Andreas. So we will stay very balanced in our approach for the current quarter and actually don't give specific quarterly guidance, but we do try to help give some color around what we're seeing and what we expect. But again, have flowed through, at least for this quarter, more than that beat out of Q1 as we have increased confidence on the year.

[Operator]

And our next question is from Anna Lizzul with Bank of America.

[Anna Lizzul, analyst]

I was wondering if you could comment on any benefits you're seeing so far from trade down in both color cosmetics and mass skin care. And separately, I was wondering if you can comment on the ROI of your increased marketing spend in the quarter. And where exactly you're allocating those dollars, whether it's to support new product launches, international expansions, or to increase demographic awareness of your brands?

[Tarang Amin, executive]

Anna, this is Tarang. In terms of if we're seeing any consumer trade down, we don't believe we're seeing trade down. I think the prestige category is still strong. We're seeing our ability to expand the category as we have done in terms of each -- every time we launch a Holy Grail, it gives millions of consumers greater access to a particular category who may not be participating in it. Great example being our bronzing drops, one of the most requested items we had. Our bronzing drops at $12 versus a prestige item at $38 or even our Soft Glam Satin Foundation at $8 versus a prestige item at $40, we believe gives more consumers the opportunity to participate in the category, and we feel that's really the main driver of our sales.

We certainly are continuing to pick up quite a bit of share of the 260 basis points in color cosmetics of share that we picked up obviously comes across different mass players. We're the only brand that we've seen out of 800 that are tracked by Nielsen in color cosmetics that have grown share for 22 consecutive quarters and are quite bullish in our ability to continue to drive share, not only in color cosmetics, but also skin care.

This quarter, we hit an important milestone of e.l.f. SKIN, not only growing 60 basis points of share, but being a top 10 brand for the first time coming in at #9. The reason why that significant is most of the brands in the top 10 have been there for decades. So for us to do that just in a few years with the momentum we have, both on e.l.f. SKIN and Natrium, gives us a lot of confidence there.

And then in terms of the ROIs, what we see on our increase in marketing, we continue to see exceptional ROIs, many multiples above the industry benchmarks. And that is, in turn, driving the strong top line momentum. What a market is also doing is really driving our unaided awareness. So if you take a look in the last few years, we've grown an unaided awareness of 13% [indiscernible] 3%. I've been in the consumer space for over 30 years and have never seen a 20-point increase in unaided awareness, yet the market leader still has 55%.

So the strategy that you'll see us continue to fall from a marketing standpoint is to continue to disrupt, continue to test on new platforms. We said in our prepared remarks, since the beginning of this year, we've launched 15 unique campaigns, and those campaigns go across product, purpose, our overall awareness build, and we feel really good about kind of both the pace as well as our capabilities in that area to be able to continue to branch and bring in new users.

We're not only the #1 brand amongst Gen Z and Gen Alpha, but we're increasingly picking up many more millennials and Gen X as well. So we love what our marketing is doing both in the top line from an awareness standpoint, equity and new audiences and you'll continue to see us be quite strong there.

[Operator]

The next question is from Ashley Helgans with Jefferies.

[Ashley Helgans, analyst]

[indiscernible] from a nice quarter. It was great to see Walmart go to 8 -- to 12 feet from 8 feet. Just looking out over the next couple of years, do you see more kind of shelf opportunities like this for the Ulta brand in the U.S.? And then, Mandy, just a clarification on guidance. I think lastly spoke, you don't include countries that have not yet been announced. So I just want to confirm that Germany and Australia are new to the guide?

[Tarang Amin, executive]

So Ashley, I'll take the first part of it. We are also pleased with the space gains that we got at Walmart. You're right, it's about a 50% increase from a predominant 8-foot set to a 12-foot set predominantly. And we're seeing great results right after that. It usually takes us a couple of seasons to fully optimize productivity, but we like the trajectory we're seeing. We already passed CoverGirl for the #3 position at Walmart within striking distance of L'Oreal Paris at #2. And we continue to see more space opportunities even in the U.S. for all of the space that we've picked up.

We're still dramatically under space. Walmart being a great example. While 12 feet is a good increase in the space we have, many of the legacy players out there can have 16- to 20-foot runs, if not more. So just given our rankings, our productivity, we would foresee more space gains in the future, not only at Walmart, but even Target, we're the #1 brand with over 21% share at Target, and we have had that now, I think, 6 consecutive quarters.

If you take a look, we have nowhere near 21% of space. Nor do we need it? We have. But we do feel there's opportunities at Target, Ulta, Walmart. And then especially in drug, drug has been on a good path in terms of giving more space. You heard about the space increases at CVS, Walgreens last year, but our footprint is still quite small in drug and certain grocery. And so we just see lots of opportunity there.

And then the last thing I'll say is as greater space gains are, what gives me the greatest confidence in our business is our ability to drive productivity, the productivity model we have of proactively changing out up to 20% of the SKUs based on the data and the insights we get from Beauty Squad and our digital business. That's driven the vast majority of our growth, and space has been a nice kind of top on that.

[Mandy Fields, executive]

And then to answer your question, Ashley, on Germany and Australia, yes, those are new to the guide. And so that has already now been reflected [indiscernible] guidance we just provided.

[Operator]

And the next question is from Oliver Chen with Cowen.

[Oliver Chen, analyst]

Mandy, the quarter was outstanding. What drove the nice beat in terms of the quarter? And on your guidance, do you expect to outpace mix? Will that complexion remain the same? You do a really agile job with inventory management. Just so how did you have enough inventory this quarter to drive such an outstanding performance? And going forward, I assume that you have an inventory position to beat in the event that things trend better.

Also, Mandy, you mentioned ERP and distribution capacity. I would love your take on what's happening there and ways in which you're managing for risk as those can be changes that can cause disruption? And I'm sure you have a lot of contingencies. And lastly, Tarang, the Holy Grail strategy, it's been a compelling approach to thinking about your product assortment and also growing incrementally. How does that apply to skin care? And what do you see as your hero products in skin care and also placement? It's been in different parts of the store. I know you've been innovating constantly in skin care.

[Mandy Fields, executive]

Thanks for the question, Oliver. So first on the quarter, thank you so much. 50%, we do believe was a pretty tremendous quarter. And what came in better than our expectations? I mean, really, it starts with our value proposition continues to stand out in this environment. You couple that with our Holy Grail innovation. We talked about bronzing drops quarter. We continue to see momentum behind our lip oils, which we launched not too long ago. And so that innovation been amplified by our marketing and digital engine, which Tarang just walked through, really helped to drive results for the quarter.

The great thing about our results is that they continue to be unit led. We were amongst the only ones in the top 5 able to grow units this quarter. And so we continue to expect that to be a key driver of our growth as we move forward. In fact, when we broke down the units versus mix component, that mix portion largely was driven by the inclusion of Naturium in our financials as e.l.f. mix has pretty much stayed in low single digits as we've started the year.

In terms of inventory management, we feel great about our inventory position. As we've talked for the last several quarters, we've proactively taken our inventory levels up to support the demand that we're seeing and additionally added Naturium and changed some terms with our vendors to take possession of that inventory earlier. So we feel great about being able to service the demand that we're seeing on the inventory that we have.

On the second question -- you have 3 questions in there, Oliver. Second question on ERP and distribution. So on the ERP, we are continuing to move forward on our ERP transition. We're continuing to test that. We have shifted our time lines a bit more to -- out to the spring. We were originally looking to launch in the fall. We've shifted that out to the spring, just to allow for enough testing cycles as we go through. So we're feeling great about that.

And then from a distribution standpoint, we are continuing to expand our distribution footprint, getting additional capacity in the U.K. Also in Asia, looking to set up a warehouse in Asia as well to start to service future distribution. We're laying the groundwork now so that we have the capacity in place as we look out longer term.

[Tarang Amin, executive]

Yes. And then your last question in terms of our Holy Grail approach, not only in color cosmetics, but we're using that same approach on skin care. Bronzing drops is probably our best latest example of absolute Holy Grail product at $12 versus the prestige inspiration at $38. And in terms of not only the Holy Grail approach we're replicating on e.l.f. SKIN, but also the franchise approach. If I look at our current skin care franchises, our main franchises of Holy Hydration, Suntouchables have both been doing extremely well. We'll see if bronzing drops becomes a third franchise or not. But we're continuing that, not only in e.l.f. SKIN, but also on Natrium. You heard about us expanding our Glow Getter body wash into the body oil category as well. And so you'll continue to see those 2 consistent beams of Holy Grails and franchises that can grow year after year.

[Oliver Chen, analyst]

Okay. One quick follow-up. International margins. How should investors think about that? You've -- it looks like you're really investing in a nice infrastructure in London and you have a capital light approach to -- approaching the best-of-class partners. But what's the evolution? There's a big opportunity in all these countries.

[Mandy Fields, executive]

Yes. I would say from a margin perspective, as we scale internationally, there is an opportunity for those margins to be accretive overall. If you think about we are not tariffed as we import into those countries. And so that's a big piece of the pie that we don't have to incur as we spread out across the globe. And so something to keep in mind, again, international is a smaller part of our business and something that we're watching as we continue to scale.

[Operator]

Our next question is from Peter Grom with UBS.

[Peter Grom, analyst]

I wanted to just go back to the 2Q sales guidance. So slightly above the full year range. But when you consider because your U.S. top channels growth of at least 20%, is it really all that different from what you saw in the Q? You still get a benefit for Naturium. It really seems to imply a pretty big step down in maybe nontracked channels or maybe a weaker contribution from international despite kind of expanding stores and markets. Can you maybe just unpack that a bit? Are you just simply being conservative? Or is there something you're seeing that that's really driving that view?

[Mandy Fields, executive]

Peter, so I would say we're being very consistent in our guidance approach. We, again, always take a balanced approach as we come into a quarter. We don't give hard and vast guidance, but we try to provide some color as to what to expect. We talked about tracked channels. Yes, we expect that to be in the 20% range over the course of the quarter. You might see some ebbs and flows there as you go through, but feeling good about that. Natrium will continue to be a contributor as you pointed out. And we also continue to feel good about international and our untracked channels.

And so as we see it today, we feel great about indicating that the total sales growth for Q2 could be slightly above that range that we've provided for the year. And we'll take it, like I said, 1 quarter at a time.

[Peter Grom, analyst]

Great. And then just maybe following up on the profit guidance. I think you said flattish gross margin for the second quarter. So can you maybe just bridge us from the 28% adjusted EBITDA margin last year to the low teens you mentioned. Just it seems like a lot of SG&A deleverage. You totally get your reinvesting and setting at marketing and kind of the non-marketing piece around Naturium. But it just seems like you almost need 1,500 basis points of SG&A deleverage to hit this number. So just I think any color would be helpful on just kind of the drivers of that.

[Mandy Fields, executive]

Yes. So it's really more of a first half, second half story when you think about the EBITDA margins. EBITDA margin in the first half we outlooked would be lower one, driven by the marketing investment that we're making. So in Q1, you saw that up 700 basis points. Last year, in Q2, marketing was 21% of net sales. We're targeting that higher end of the range, closer to the 26% for the second quarter. And so you're going to continue to see investment there.

And then as we walk through, we talked about Naturium annualizing that spend and continuing to invest in people and infrastructure. Of which once we get to the second half, we will have a more normalized level of spend. So you're going to start cycling marketing in the 25%, 26% range, already in that base. And so you don't have that as an incremental and then we start to have Naturium in the base again. So you get to a little bit normalized place.

So we do expect better -- much better EBITDA margin growth as we get into the second half of the year, better EBITDA -- I would say, adjusted EBITDA growth overall and margin expansion as we get into the second half of the year. So it's just a little bit of a rebalancing of how we're spending this year to get to that 20 basis points of expansion on the full year.

[Operator]

The next question is from Linda Bolton-Weiser with D.A. Davidson.

[Linda Bolton-Weiser, analyst]

I have two questions. I guess the first one is just a check on Naturium. I guess it seemed like it contributed a little less to the growth in the quarter than I thought. At one point, you had given a revenue projection for the year for Naturium. Maybe you could update that for us. So we've got that modeling correct. And then secondly, just to kind of dig in some more on the growth projection for the second quarter. The prior year tracked channel comparisons do become easier. And in September, they're even in the 50% range in prior year.

So it seems that if you're projecting only 20% POS growth, it's quite a deceleration on a 2-year stack basis. And I know these are crazy numbers. So think you can even grow 20% against 50%, but that's a deceleration on a 2-year stack from 100% to 70%. So again, I think growth investors just kind of want to understand like what is causing you to think that you can only do 20% POS when prior year comp actually get quite a bit easier?

[Mandy Fields, executive]

Linda, I'll go ahead and take this question. So on Naturium, so Naturium contributed 16 percentage points to our net sales growth for this quarter. We had not provided any revenue projections for Naturium on the year. So Naturium continues to track right in line, maybe even slightly better than where we saw it for the year. And so that is really on track and very proud to see them having launched in Ulta and really pleased with what we're seeing there.

On the growth projections for Q2, I hear you on the deceleration, but we're actually seeing this as strength upon strength, even a 50% on the base or a 76% on the base. To continue to build upon that shows the strength of our brand, it shows that we are continuing to build market share in this environment and lead the growth for the category. And so we feel great about how we're positioned and the growth that we're driving overall.

[Operator]

And our next question comes from Mark Altschwager with Baird.

[Mark Altschwager, analyst]

First, I just wanted to follow up on the price mix contribution. I think you said e.l.f. tracking up low single digits in the first quarter below what we've seen in some recent periods. And I believe because some of the recent innovations are coming in at lower price points, I guess. Is that right? And then how should we be thinking about that price mix contribution moving forward here, both Q2 and then back half as you start to cycle the Naturium?

[Mandy Fields, executive]

Yes. So on the price mix contribution, yes, you're right. This year, we did introduce some lower-priced innovation. Again, staying true to our value proposition, I wanted to make sure that we had some well-priced items out there in the market, and they're continuing to perform very well. That has taken down some of our price mix. But again, Natrium coming into the fold, that price mix was about 16 percentage points for the quarter overall. So feeling great about that. The thing that's even better is that our growth continues to be led by unit volume. And that's what we want to continue to see on the road ahead, speaks to the demand that we're seeing for the brand.

[Mark Altschwager, analyst]

And then with some of the sluggish growth you're seeing in the mass cosmetics industry-wide, obviously, you're taking a lot of share here. But what are you seeing and what are you expecting on the promotional front?

[Tarang Amin, executive]

Mark, I'll take that. I would say, first of all, on the mass color cosmetics side, the low single-digit decline that you're seeing is also up again so much higher period. So on a 2-year stack basis, the category is still up. From a promotional standpoint, on the mass side, we're not seeing increased promotion on the mass side. I think you are a little bit on the prestige or in specialty channel. But overall, I would say we're not really seeing much and it hasn't really bothered us in the past, mainly because of our superior value proposition.

We're at great value every single day. So a lot of -- I think the promotions on the high-low players really the end of trading amongst themselves more than us. We've been able to continue to pick up market share and pretty confident in terms of our ability to continue to do so.

[Operator]

And the next question comes from Susan Anderson with Canaccord Genuity.

[Susan Anderson, analyst]

I guess maybe just a little bit of color on Naturium and the rollout at Ulta. It sounds like it's going pretty well. I guess, I'm curious are you seeing a similar customer uptick that you see at Target and probably not there yet, but how does the productivity on the shelf compare? And also, do you have plans this year or in the next year to roll Naturium to further retailers?

[Tarang Amin, executive]

Susan, we're really pleased with what we're seeing in Naturium. It's too early to tell in terms of the productivity where we set facial skin care just a couple of weeks ago. We're in the process right now of finishing our body roll -- body and lip resets. And so it will take a little while for us to see it. But so far, both we and Ulta are pleased, and there's a lot of excitement for Naturium at Ulta Beauty. And not only Ulta Beauty, but also at Target. At Target, we're up against a big period last year where we had expanded distribution and yet, Target is also leaning in.

So we feel great about the momentum that we're seeing with Naturium and continue to do. It's ahead of our own expectations when we made the acquisition in terms of our acquisition model. So continue to be really, really excited. And then in terms of further rollout, I'd say our focus right now, I mean it's all 1,400 Ulta Beauty stores. We also have a [indiscernible] on e.l.f. when you expand, making sure your existing customers remain happy and well supported. So I'd say near-term focus in the U.S. will be Target, Amazon, Ulta Beauty. We feel like that's plenty for the team to execute and continue to go on.

There are opportunities internationally on Naturium. Right now, we're mainly in Space NK in the U.K. So I think in subsequent quarters, you'll hear a little bit more about our plans in terms of how we take Naturium into other markets as well.

[Operator]

This concludes our question-and-answer session for today's conference. I would now like to turn the conference back over to Tarang Amin for any closing remarks.

[Tarang Amin, executive]

Well, thanks for joining us today. I'm so proud of our incredible team for delivering another quarter of industry-leading growth. Thank you to every e.l.f. and e.l.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 our upcoming investor meetings and speaking with you in November when we'll discuss our second quarter results. Thank you, and be well.

[Operator]

The conference has now concluded. Thank you for attending today's presentation, and you may now disconnect.