elf Beauty Inc

NYSE:ELF

Earnings Call Analysis

Outstanding Growth and Raised Outlook for e.l.f. Beauty

e.l.f. Beauty reported outstanding Q2 results with 76% net sales growth year-over-year, marking considerable top line growth driven by increased unit volume and mix. The brand saw strong growth through retail and digital commerce, impressively being the only top 5 brand to grow units. Gross margin increased by 570 basis points to 71%, with a shift in SG&A leading to 122% adjusted EBITDA growth at $60 million. The net cash position and balance sheet remain strong after the Naturium acquisition. For fiscal '24, they raised their full year outlook with net sales now expected to grow 55% to 57%, and adjusted EBITDA set between $197 million to $200 million.

Thriving Amidst Economic Uncertainty: e.l.f. Beauty's High-Flying Fiscal '24 Q2 Results

E.l.f. Beauty's Q2 results for fiscal '24 display a compelling story of extraordinary growth and strategic prowess. Led by Chairman and CEO Tarang Amin and CFO Mandy Fields, the company celebrated its 19th consecutive quarter of net sales growth, a remarkable feat achieved by only 5 out of 274 public consumer companies. Net sales soared by 76%, gross margin surged by 570 basis points, and adjusted EBITDA climbed a striking 122%, reaching $60 million. Notably, e.l.f. Cosmetics outshined the cosmetics category by growing 51% in tracked channels, while e.l.f. SKIN and international sales exhibited significant gains, underscoring the brand's global ambition and product innovation.

Innovative Marketing & Strategic Retail Expansion Fuels Growth

The company's success is pinned on its five strategic imperatives, with brand demand at the forefront — highlighted by impactful collaborations and marketing initiatives. Amin proudly cited their disruptive campaigns and the continued push in digital channels that drive ROI multiples above industry benchmarks. Retail partnerships have flourished, with e.l.f. gaining additional shelf space in key retailers such as Target, Walmart, CVS, and international expansion moves, including a market entry into Italy. The focus on driving productive partnerships and efficiently scaling their operations has been a cornerstone of their strategy, enabling sustained expansion in fiscal 2024.

Investing in Growth: Operational Upgrades and Acquisition Synergies

E.l.f. Beauty's investment in infrastructure, such as the implementation of SAP and expansions in distribution capacity, indicates a commitment to refining operations in tandem with scaling growth. The exciting closure of the Naturium acquisition magnifies e.l.f.'s skin care presence, setting the stage for potential growth in a burgeoning segment. Despite these substantial investments, e.l.f. maintains an unwavering commitment to profitability, expecting continued adjusted EBITDA margin expansion in FY 2024.

Robust Q2 Financials Spearhead Revised Fiscal '24 Projections

CFO Mandy Fields outlined a robust financial picture, with Q2 adjusted net income increasing to $47 million (or $0.82 per diluted share) from $20 million (or $0.36 per diluted share). The balance sheet fortified by a net cash position and less than 1x leverage provides e.l.f with substantial liquidity to navigate its growth trajectory. With the Naturium acquisition, e.l.f. strengthens its FY '24 projections, now anticipating a net sales growth of about 55% to 57% and adjusted net income between $144 million to $146 million. Investors can take comfort in the company's prudent financial management and optimistic outlook, backed by Naturium's expected contribution of $48 million in net sales and $9 million in EBITDA.

Consistently Outperforming: An Earnings Call Narrative of Success

The narrative that emerges from e.l.f. Beauty's earnings call is one of success against market pressures. The discussed growth drivers—comprising of leading innovations in product and digital realms, expanding retail footprint, and delivering profitable growth—coalesce into a robust strategy that has continually outperformed industry trends. Against a backdrop of challenging economic conditions, e.l.f. Beauty stands out as a company that has successfully turned potential headwinds into tailwinds, positioning itself for success in FY '24 and beyond.

Earnings Call Transcript 2024-Q2

[Kristina Casey Katten, executive]

Thank you for joining us today to discuss e.l.f. Beauty's Second Quarter Fiscal '24 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 Q2 results and our raised outlook for fiscal '24. I want to start by recognizing the e.l.f. Beauty team for delivering another phenomenal quarter. In Q2, we grew net sales by 76%, increased gross margin by 570 basis points and delivered $60 million in adjusted EBITDA, up 122% versus prior year.

Q2 marked our 19th consecutive quarter of net sales growth, putting e.l.f. Beauty in a select group of consistent, high-growth consumer companies. We're 1 of only 5 public consumer companies out of 274 that has grown for 19 straight quarters and average at least 20% sales growth per quarter.

We've continued to highlight 3 areas with significant runway for growth in color cosmetics, skin care and international. Let me update you on our progress in Q2. In color cosmetics, we continue to significantly outperform category trends. In Q2, e.l.f. Cosmetics grew 51% in tracked channels, nearly 17x category growth of 3%. We increased our share by 330 basis points. Out of nearly 800 cosmetics brands tracked by Nielsen, e.l.f. is the only brand to gain share for 19 consecutive quarters. We have more than doubled our market share since 2019 from about 4.5% to 10%.

We are building strength upon strength with our 330 basis points of share gains in Q2 on top of our share gains last year and the year before. Given our momentum, we see an opportunity to double our share over the next few years. In Q2, e.l.f. was the #3 brand nationally with approximately 10% share. In Target, our longest-standing national retail customer, we're the #1 brand with approximately 19% share, nearly double the level of share we had in Target just 2 years ago. We are focused on replicating our partnership and success at Target across other key retailers and are making great progress towards that ambition.

In skin care, we continue to outperform the category. In Q2, e.l.f. SKIN grew 129% in tracked channels, about 13x category growth of 10% and was the fastest-growing among the top 20 skin care brands. We grew our share by 80 basis points, increasing our rank to the #14 brand as compared to the #19 brand a year ago.

e.l.f. SKIN today holds a 1.6% share and a significant runway with the #1 brand holding nearly 15% share. E.l.f. remains Gen Z favorite, helping drive the share growth we've seen in these last 19 quarters. In Piper Sandler's recent taking stock with teens fall survey, e.l.f. Cosmetics remained the #1 teen favorite cosmetics brand for the fourth consecutive season. We grew our share by 13 percentage points versus a year ago to 29%. We believe this is a great indicator of brand strength.

For perspective, no other cosmetics brand has surpassed even 20% in the past 5 years. e.l.f. SKIN ranked in the top 10 favorite skin care brands for the second time. elfcosmetics.com was a top 10 beauty shopping destination for teens for the third consecutive survey and was the only brand site on the list. Looking outside the U.S. We grew our international net sales 157% in Q2, fueled by strength in Canada and the U.K. e.l.f. outpaced category growth by more than 10x in Canada, and more than 7x in the U.K., fueling share gains in each.

e.l.f. today is the #4 brand in Canada with a 7% share and the #6 brand in the U.K. with 5% share. We see significant runway to expand our brands globally. Our relentless focus on our 5 strategic imperatives continues to drive results across our brand portfolio. Let me walk through how each of these strategic imperatives underpinned our strength in Q2.

Our first strategic imperative is to build brand demand. Our disruptive marketing engine continues to redefine what's possible in beauty. In Q2, we continue to break boundaries in gaming, entertaining short-form content and record-setting collaborations. We leaned into gaming with the launch of a limited edition makeup collaboration in August with [indiscernible] fruit, also known as LuFu, 1 of the world's top female gamers. We go further into entertainment and short-form digital content with Georgia Sue Icon Snooki. Leaning into the nostalgof the moment to underscore the importance of SPF and our suntouchable franchise.

[Presentation]

[Tarang Amin, executive]

We launched another record-setting collaboration in September. As part of our strategy to continue building awareness and reach new audiences, we reunited with cultural icon and award-winning actress Jennifer Coolidge, to launch dirty pillows. This limited edition lift collection and campaign was inspired by an outtake from our big game commercial shoot.

[Presentation]

[Tarang Amin, executive]

We took an unscripted moment and created a premium lip collection that launched on elfcosmetics.com at e.l.f. Speed. Our dirty pillars campaign explores a world where one's lips always come first.

[Presentation]

[Tarang Amin, executive]

The response from our community has been incredible. Our dirty pillars campaign earned over 11 billion media impressions in 48 hours, our highest ever for a product collaboration. The initial drop of dirty pillow lip kit sold out within 2 hours with over 40% of purchasers new to e.l.f. Over the past 4 years, we've increased our marketing investment from 7% of net sales to 22%. Our marketing investment is working, driving ROI multiples above industry benchmarks and helping us reach new audiences. Our most recent attitude and usage study underscores the broad-based improvement we've seen since 2020. Our brand satisfaction jumped 16 points to 80%, the highest among our competitive set.

Our unaided awareness in the U.S. has doubled from 13% to 26% that 26% unaided awareness today compares to the leading U.S. mass cosmetics brand at 52%, illustrating an opportunity to double again as we move forward. Building upon our success in the U.S., we took steps to accelerate brand awareness in the U.K. with our first-ever community-led brand campaign. When we asked our growing community in the U.K., what e.l.f. means to them, it sparked a campaign that fueled a movement.

In September, the U.K. lit up with our first 32nd U.K. advertising spot across social channels, tube stations, digital screens and experiential pop-ups encouraging everyone to get involved and hash tag express your e.l.f.

[Presentation]

[Tarang Amin, executive]

Our second strategic imperative is to power digital. Founded is a digitally native brand. e.l.f. remains the only top 5 mass cosmetics brand with our own direct-to-consumer site. Our digitally led strategy continues to serve us well. Q2 digital consumption trends were up over 75% year-over-year. Digital channels drove 17% of our total consumption in Q2 on a much bigger business as compared to 16% a year ago. We're seeing terrific engagement on our e.l.f. Cosmetics mobile app, which now boasts a 4.8-star rating and over 1.6 million downloads.

Our monthly active user growth is outpacing that of traditional beauty retailers. And over 90% of our transactions on the app are driven by our most loyal Beauty Squad loyalty members. Beauty Squad now has over 4.1 million members with enrollment growing over 25% year-over-year. Our loyalty members are a key part of our digital ecosystem, driving almost 80% of our sales on elfcosmetics.com.

Our third strategic imperative is to lead innovation. We have a unique ability to deliver Holy Grails taking inspiration from our community and the best products in prestige and bringing them to market at extraordinary value. Our innovation continues to receive industry recognition. In the highly coveted Allure Best of Beauty Awards, 4 of our products garnered Best of awards, the largest number of awards we received in a single year and marking the 11th consecutive year e.l.f. Beauty has won a Best of Beauty award.

Our innovation engine has built category leadership over time. e.l.f. has the #1 or 2 position across 16 segments of the color cosmetics category, which collectively make up over 75% of e.l.f. Cosmetics sales. We continue to deliver strong sales growth and share gains in each. Our fourth strategic imperative is to drive productivity with our retail partners. e.l.f. continues to drive best-in-class productivity on a sales per linear foot basis with both Target and Walmart, our 2 largest customers. This productivity is earning us additional space with our retail partners.

As a reminder, in spring 2023, we expanded space in Target, Walmart, CVS and Shoppers Drug Mart. And in fall 2023, we expanded space in Ulta Beauty, CVS and Walgreens. We are pleased to announce that we'll be expanding our space in spring 2024 with Shoppers Drug Mart in Canada and with boots in the U.K. Last month, we also launched e.l.f. in Italy with De Glass, furthering our international expansion.

[Presentation]

[Tarang Amin, executive]

Our fifth strategic imperative is to deliver profitable growth. Since 2019, we've been focused on the flywheel of investing behind our high ROI marketing and digital initiatives to drive top line growth, while also expanding our adjusted EBITDA margin. We again delivered on this winning formula in Q2 with both strong top line growth and adjusted EBITDA margin expansion. Supported by a combination of our strong sales growth, gross margin expansion and leverage in our non-marketing SG&A expenses.

As we've grown, we continue to make investments in our infrastructure. Our supply chain offers the best combination of cost, quality and speed in our industry and has been able to keep pace with the strong consumer demand we're seeing. This year, we'll begin implementation of SAP to continue to optimize our operations and core processes. We're also planning to make investments to increase our distribution capacity to support our growth. Even with this ongoing investment, we expect to continue to deliver adjusted EBITDA margin expansion in fiscal 2024. We believe these ongoing investments in our team and infrastructure position us well to continue to drive profitable growth.

In early October, we officially closed on the acquisition of Nutrium and welcomed its passionate team of employees to the e.l.f. Beauty family. Nutrium is a fast-growing disruptive brand on a mission to make high-performance skin care accessible to all. The acquisition doubles our skin care presence to approximately 18% of retail sales from approximately 9% on a stand-alone basis.

[indiscernible] has seen exceptional growth with net sales growing at approximately 80% CAGR over the last 2 years. We're still in the early days post-closing and look forward to realizing the significant opportunities we see ahead for the brand. Our unwavering focus on executing our 5 strategic imperatives is driving our results. At the same time, I'm proud that we continue to lead with purpose as we strive to create a different kind of beauty company, one that is both purpose-led and results driven.

Our second annual impact report launched in September demonstrates how these go hand-in-hand. It shows how acting with purpose to further our positive impact drives more successful business outcomes. Our commitment to our culture and people was recently spotlighted by U.S. News & World Report, who named e.l.f. Beauty to its annual list of Best Companies to work For. We were also recognized by Newsweek as 1 of America's greenest companies, recognizing our progress in sustainability.

In summary, we believe the white space in color cosmetics, skin care and international, coupled with our relentless focus on our 5 strategic imperatives, we'll continue to fuel our ability to win in fiscal '24 and beyond.

I'll now turn the call over to Mandy.

[Mandy Fields, executive]

Thank you, Tarang. I'm pleased to share the highlights of our second quarter results as well as our raised outlook for fiscal '24. Our second quarter results were outstanding. Q2 net sales grew 76% year-over-year, driven by broad-based strength across national and international retailers as well as digital commerce. Our net sales growth was led by higher unit volume, which contributed approximately 56 percentage points to growth, with mix adding approximately 20 percentage points. e.l.f. was the only top 5 cosmetics brand to grow units according to track channel data.

Q2 gross margin of 71% was up approximately 570 basis points compared to prior year. We saw gross margin benefits from lower inventory adjustments, favorable FX rates, improved transportation costs margin accretive mix and cost savings, which more than offset costs related to retailer activity and space expansion.

On an adjusted basis, SG&A as a percentage of sales was 45% in Q2 compared to 46% last year. We drove significant leverage and non-marketing SG&A expenses primarily as a result of our strong top line trends. Marketing and digital investment for the quarter was 21% of net sales, up from 16% in Q2 last year. We continue to expect marketing and digital investment in the 22% to 24% range for the full year of fiscal '24.

Given first half spending at 18% of net sales, we expect to see spending above our annual range in the back half. Q2 adjusted EBITDA was $60 million, up 122% versus last year and adjusted EBITDA margin was approximately 28% of net sales. Adjusted net income was $47 million or $0.82 per diluted share compared to $20 million or $0.36 per diluted share a year ago. The increase across profitability metrics was driven by our strong net sales growth, gross margin expansion and leverage in our non-marketing SG&A expenses.

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. Our ending inventory balance was $147 million, in line with our expectations and up from $81 million a year ago. The difference is a combination of 2 things. As we said last quarter, we plan to build back our inventory levels through fiscal '24 to support the strong consumer demand we're seeing.

In addition, approximately $37 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. We ended the quarter with approximately $168 million in cash on hand compared to a cash balance of $85 million a year ago. I'm also pleased with the approximately $27 million in free cash flow we generated in Q2. We ended the quarter with a net cash position and less than 1x leverage in terms of total debt to adjusted EBITDA.

Subsequent to the quarter end, in early October, we closed the Naturium acquisition. We funded the $355 million acquisition, largely using cash on hand and access to our existing credit facility as well as $72 million of e.l.f. Beauty stock issued directly to founders and key management, which represented approximately 600,000 shares. We expect our liquidity position to remain strong with relatively low leverage post the transaction with net leverage expected to be less than 1.5x adjusted EBITDA.

We expect our cash priorities for the year to remain on investing behind our growth initiatives and supporting strategic extensions. The initiatives we're focused on this year across our brand portfolio include continuing to invest in our people and infrastructure. Our ERP transition to SAP as well as increased working capital and distribution capacity to support the strong consumer demand we're seeing.

Now let's turn to our updated outlook for fiscal '24. As we look to the second half of fiscal '24, we are well positioned to deliver another industry-leading year. We are raising our full year outlook to reflect ongoing momentum in our underlying business as well as the addition of Naturium. For the full year, we now expect net sales growth of approximately 55% to 57%, up from 37% to 39% previously. Adjusted EBITDA between $197 million to $200 million, up from $171 million to $174 million previously; adjusted net income between $144 million to $146 million, up from $125 million to $127 million previously. And adjusted EPS of $2.47 to $2.50 per diluted share, up from $2.19 to $2.22 previously.

We continue to expect our fiscal '24 adjusted tax rate to be approximately 17% to 18%. Lastly, we now expect a fully diluted average share count of approximately 58 million shares, up from 57 million shares previously. As a reminder, Naturium is expected to generate approximately $90 million of net sales and $17 million in adjusted EBITDA in the 12 months ending March 31, 2024. The acquisition of Naturium closed in early October, and Naterium will start to contribute to our results in fiscal Q3. We continue to expect Naturium to contribute approximately $48 million in net sales $9 million in adjusted EBITDA and $0.04 in adjusted EPS on a fully diluted basis in our fiscal 2024.

Let me provide you with additional color on our planning assumptions for fiscal '24, starting with top line. On an organic basis, excluding the acquisition of Naturium, our raised outlook implies organic net sales growth of approximately 46% to 48%, up from 37% to 39% previously. Our raised outlook reflects the outperformance in Q2 we saw relative to our expectations as well as expected strength for the balance of the year in our underlying business. Let me spend a moment on Nielsen tracked channel trends.

As a reminder, tracked channels only represent a portion of our sales. When accounting for the acquisition of Naturium, tracked channel data covers about 50% of our sales. Let me provide some context for what we've seen recently in tracked channels and set the stage for what you could see for the balance of the year. For context, our Q2 results were exceptional with e.l.f. growth in tracked channels, accelerating relative to Q1 on both a 1-year and 2-year basis. As we look to Q3 and Q4, we believe our tracked channel growth for e.l.f. could range between 20% to 50% growth.

In Q3, we could be at the higher end of that range and in Q4, we can be towards the lower end of that range given the compares and the base we are cycling. In both quarters, we could see tracked channel trends on a 2-year basis remain at or above the 90% level we've seen in the latest 12 weeks. Across quarterly, 1-year and 2-year track channel data, we continue to drive exceptional consistent category-leading sales growth.

Turning to gross margin. In fiscal '24, we now expect our consolidated gross margin to be up approximately 225 basis points year-over-year as compared to our expectation for up 150 basis points previously. The improved outlook is largely a result of our outperformance in Q2, aided by lower inventory adjustments in the quarter and favorable mix. In terms of the key puts and takes for the rest of the year, we continue to expect gross margin to benefit from lower transportation costs, favorable FX rates, margin accretive mix and cost savings, which are expected to more than offset costs related to retailer activity and space expansion.

Now turning to adjusted EBITDA. Our outlook now implies adjusted EBITDA growth of approximately 69% to 71% versus prior year, up from 46% to 49% previously and adjusted EBITDA margin leverage of approximately 190 basis points year-over-year as compared to approximately 150 basis points previously. The improved outlook is based on expected strong net sales growth, gross margin expansion, and leverage in our non-marketing SG&A expenses.

We are quite pleased to be again in this position to meaningfully raise both our net sales growth and profitability outlook. In summary, we delivered a phenomenal second quarter. Our disciplined execution behind our 5 strategic imperatives has driven category-leading results over the last 19 quarters. The significant white space we see across color cosmetics, skin care and internationally, gives us confidence that we are still in the early innings of unlocking the full potential behind our brands.

With that, operator, you may open the call to questions.

[Operator]

[Operator Instructions] Our first question comes from Olivia Tong with Raymond James.

[Olivia Tong Cheang, analyst]

Congrats on a great quarter. So my first question, similar to previous quarters, you're raising the guide by more than the beat on sales up if we adjust the base Naturium up $56 million, and you beat the September quarter, at least by consensus by $18 million. So can you just talk about trends you're seeing so far this month? You referenced the Nielsen data. Maybe could you talk a little bit about performance in non-tracked channels versus the track channels and just catch us up to date on what you're seeing this month?

[Mandy Fields, executive]

Olivia, thank you so much for the question. So again, we feel great about the business overall. As you noted, we did raise our guidance up to 57% on the top end, and that's inclusive of adding Naturium to our numbers as well. And why did we feel good about raising that guidance. Again, based on the trends that we're seeing, the momentum and the demand behind our brand, really encouraged us, and we see a lot of white space ahead when we think about untracked channels, we have international, digital and Ulta that fall into that untracked channels and some of our strongest performance is coming from that side of the house. And so we really feel great all around on both sides of the business on the track piece of the business as well as the untracked piece, which encouraged us to take that guidance up to 57% on the top line.

[Operator]

Our next question comes from Dara Mohsenian with Morgan Stanley.

[Dara Mohsenian, analyst]

So you talked about the track channel momentum continuing in Q3, Q4 and to your averages remaining pretty similar to recent trends. But arguably, you've had a ton of momentum and things naturally sort of slow over time. Pricing contribution drops off a bit. So just give us a sense of your level of confidence that you can continue relatively in line with 2-year average trends and what's driving that? And maybe part of that is updating us on shelf space expectations and how that changes sequentially and the innovation pipeline you have in place over the next few quarters?

[Tarang Amin, executive]

This is Tarang. As Mandy said, we feel great about the fundamentals behind our business and the trends that we're seeing, particularly the delivery between our value equation, powerhouse innovation and marketing engine. Nielsen is naturally going to bounce around a little bit given that in the back half, we're comping 50% to 80% growth in Nielsen. So we could see Nielsen range anywhere from 20% to 50% depending on what's going on in the base period. As Mandy said, the 2-year stacks are still incredibly strong.

In terms of the fundamentals, as I step back, there are really 3 things that most strongly correlate with our share price. That's market share, adjust net sales growth and adjusted EBITDA growth. And if I look at all 3 of those, we've never been stronger. On market share, it's pretty astounding that we picked up 330 basis points of share growth. And while we've doubled our share over the last few years, we see an opportunity, again, double our share over the next few years. And we point just as closely to target our longest-standing national retail customer where we're their #1 brand close to a 19% share. So I feel really great in terms of what we continue to do from a market share standpoint.

Net sales growth, Mandy told you our top end of our range now is 57% net sales growth and adjusted EBITDA growth is even higher at 71% growth. So the core fundamentals we're focused on, I feel will continue to stay strong, and we continue to see great momentum. And then in terms of shelf space and innovation, again, we feel great on those fronts. We picked up a ton of space. This fiscal year, we're continuing that momentum with additional space, both at Superdrug and Boots. And in subsequent quarters, you'll hear us talk about other retailers in terms of the space we pick up noting that the most important thing is the productivity we drive -- be the most productive brand at Target, Walmart and other retailers, and our innovation pipeline has never been stronger. We continue to have these holy grails that consumers can't seem to get enough of and our ability to shine the light on those holy grails through our marketing has been a winning formula that continues to propel the top line and our adjusted EBITDA margins.

[Operator]

Our next question comes from Anna Lizzul with Bank of America.

[Anna Lizzul, analyst]

I was wondering if you're seeing any trade down benefits in your results and whether this is gaining market share growth in addition to shelf-space gains. And just regarding the strength in e.l.f. SKIN, how are you splitting that incremental shelf space gains to this brand versus all cosmetics?

[Mandy Fields, executive]

Yes. So I would say hi, Anna, I would say, overall, we're not seeing a wholesale trade down from Prestige into mass both sides of the pie continue to do well from a beauty standpoint. And so I think really what is driving our performance, 1 thing we pointed to for this quarter is the increase in awareness that we're seeing behind e.l.f. brand. We've doubled our awareness over the past few years. And that has really allowed us to bring more Gen-X, millennial into the brand and continue to penetrate Gen Z as well. And so I do think more folks coming into the franchise has really served us well. You can also see that in our unit growth, as I quoted 56 points of our sales growth is really driven by unit volume, which is really encouraging to see. And so we are feeling great on that side. From e.l.f. SKIN, it certainly continues to be a focus for us. We've called out skin care, 1 of our priorities and areas of white space that we're going after. And how we think about skin care on the shelf sets depending on the retailer. It's either housed with our color cosmetics or separately. And as we get shelf space gains, especially in those areas where we do have a house with color cosmetics, we're making sure that we have the best of our skin care available on those sets as well. We have talked in the past about seeing skin care represent almost 20% of our sales on elfcosmetics.com. So we know that there is a big opportunity for us to continue to penetrate skincare within our retailers as well.

[Tarang Amin, executive]

And the only other thing I would add is we're tremendously excited now with the acquisition of Naturium. It doubles our presence in skin care to about 18% of our business. We have 2 incredible growth assets in skin care to continue to realize that potential.

[Operator]

Our next question comes from Linda Bolton-Weiser with D.A. Davidson.

[Linda Bolton-Weiser, analyst]

You've talked a couple of times on the call about your increase in brand awareness in recent years. And I was wondering, what do you need to do to kind of fuel the next stage of jump-up in awareness? Is it just more of the same actions? Or are there something different or new in the next stage? Do you need to add TV advertising maybe in the international markets. Can you just comment on that?

[Tarang Amin, executive]

Linda, this is Tarang. First of all, I'd say part of the reason why we've taken our marketing levels up over time is because it's working. We have exceptionally strong ROIs multiples above industry benchmarks. And so that's led us to continue to invest more. And that has, in turn, brought greater awareness to the brand as we talk, doubling that awareness of 13% to 26%. We still see a massive opportunity from an awareness standpoint. As we said, the market leaders sitting at about 52% unaided awareness. And so the strategy we're following going forward is a combination of what's worked for us, our digital approach, which not only has led to leadership amongst Gen Z but bringing in more millennials and Gen X as well as new tactics. One of the reasons why we did a spot on the big game this past year was being able to cast a much broader net to consumers that may not know of e.l.f.

And we find both those strategies to be effective and continue to increase our awareness not only in the U.S. our recently launched awareness campaign in the U.K., we feel really great about. So you're going to continue to see us do and continue to disrupt the market and retain our community in a way that resonates with them and continue to bring more people into the franchise.

[Operator]

Our next question comes from Andrea Teixeira from JPMorgan.

[Andrea Teixeira, analyst]

So Tarang, you spoke about the innovations, especially in the white spaces in skin as well as in lipsticks and mascaras, which you wonder SKU relative to what your potential power can be in your market share. Can you comment a little bit on how you progress towards the objective of having a similar market share. And interesting, in my channel checks I've been seeing some stockouts in lip especially our lip oil. So I wonder if embedded in your guidance, do you have that improving? Or is there anything you can share in terms of getting more, I would say, capacity to execute the plan. And obviously, you have a very fast response to market. But just curious if you were able to most recently improve that.

And then just related to that, I know [indiscernible] also has been very -- there has been increasing awareness. And in the past, we were able to get into Sephora Canada. Just wondering if part of the opportunity for taking Naturium and protein of course, your hero products everywhere. Is there any chance you can see also so care expanding even further into other areas? Or it's going to be mostly on the the core products in health?

[Tarang Amin, executive]

Andrea. So I would say we're making tremendous progress across every category. We're competing again. We talked about our leadership in 16 subsegments of color cosmetics. We're also conquesting some of these bigger other categories. So if I look at skin care, I feel great e.l.f. SKIN was up 129%, almost 10x where the category was for the quarter, really driven by the innovation that we have in that category and the awareness building we're doing there. You mentioned [indiscernible], where we've also had good share progress as well as lip. On lip, I think a lot of this has to do with our approach to innovation, but we're constantly listening to our community and taking inspiration from them in prestige, our community a while ago had seen a prestige [indiscernible] product that they really liked, but it was priced at $40. So just in this past quarter a few weeks ago, we launched our loop oil priced at $8 versus that prestige at $40. And we've just seen incredible risk as you mentioned, I mean, I think it's sold out the first time we put it out. We have gotten more inventory on that product, and you'll continue to see it do extremely well, and it's significantly building our presence in lip.

So we feel good about our two-pronged innovation strategy, really focusing on these franchises continue to build year after year as well as conquesting some of these other bigger categories and are making great progress there. And then in terms of Keys Soulcare, we feel great about our efforts to increase awareness on Keys Soulcare. We had a pretty big innovation in the last few months, and it's like skin, saw tremendous response to that and you will be hearing about additional distribution points in the future on Keys Soulcare as we continue to build awareness on that brand and certainly couldn't be more excited about Natorium and what we could do with Naturium. As a reminder, Naturium did close to $80 million of net sales or $90 million of net sales actually really was a pretty limited distribution footprint, primarily a Target, Amazon and their own site. So we feel that we can increase its presence in distribution as well as in the future, take it to new distribution points. So multiple vectors of being able to address the white space we have, both in skin care as well as some of these other categories.

[Operator]

Our next question comes from Bill Chappell with Truist Securities.

[William Chappell, analyst]

I mean this is kind of a recurring theme of you beat the quarter, especially on gross margin and step up the sales and marketing even further than we would have rents and repeat. And I get that now as we're -- are you continuing to reinvest back in kind of core U.S. business? Or are you looking to maybe accelerate Naturium, accelerate U.K. accelerate some of the international opportunities and reinvest more there? Or is it still -- there's just so much opportunity in the U.S. it's going back primarily there?

[Tarang Amin, executive]

So Bill, we see opportunity in both areas. We've obviously continued to reinvest in our core business in the U.S. We're seeing great results, as we talked about, not only in awareness, but the brand satisfaction scores jumping all the way up to 80% satisfaction, the highest in our competitive set. We know that marketing is working. And so you'll continue to see us awareness and our equity in the U.S. But because we have a much bigger base, add a bigger percentage in terms of marketing and digital. We're also able to pursue some of the key growth vectors. We talked about our investment in skin care in addition to color cosmetics as well as international, part of how we drove 157% growth in international is we are investing behind awareness in the U.K. and our efforts in Canada as well. As well as expanding in other countries. Just a couple of weeks ago, we entered Italy with [indiscernible] in Italy. Douglas told us it was probably the best launch they've ever seen for a brand, and we see tremendous response from consumers. So I think of money that we have within the range that we've talked gives us enough money to pursue both continue to focus on our core as well as expand into some of these new areas.

[Operator]

Our next question comes from Peter Grom with UBS.

[Peter Grom, analyst]

So really strong international growth in the quarter in your 2 core markets. And you called out the initial expansion into Italy. I know it took you kind of several years to kind of get in the 5%, 6% share loan that you're currently out of those markets. But can you maybe just talk about the opportunity for Italy, specifically, and then maybe as you think about other markets and kind of the time line around that, is there anything you can share? Are you looking at additional markets in the near term. So yes, just any color on the international strategy would be helpful.

[Tarang Amin, executive]

So Peter, on international, we're seeing real strength primarily in Canada and the U.K., the first 2 countries we expanded in. And we mentioned in the call, but our Canadian business is 10x where the category growth rate is. Our U.K. business is up 7x where the category growth rate is. So the primary area of growth so far is coming from those first 2 markets that we're really focused on, and we see a tremendous potential to be, over time, a top 3 brand in both of those markets.

In addition, you're going to see us take the same disciplined rollout strategy that we followed in the U.S. to other markets. We're super excited about what we're going to be able to do in Italy and the response of the brand there. you will hear about additional countries in the coming quarters. I don't think you'll ever hear us talk about going into 30 countries all at once. We like this approach of both with our own website as well as following kind of a leading retailer in a particular country to be able to really penetrate that and grow from there.

So I see a ton of growth potential both in Canada and the U.K., excited about Italy and you'll hear about additional markets in the coming quarters.

[Operator]

Our next question comes from Susan Anderson with Canaccord Genuity.

[Susan Anderson, analyst]

Nice job on the quarter again. I was in -- I guess just a follow-up on the international market. Can you maybe just talk about the margin structure versus where you're at in the U.S.? I guess, is it similar to the U.S. business? And then also just on Naturium, I'm curious if you think there's some learnings there you can take and maybe apply to e.l.f. SKIN to drive new product introduction and growth?

[Mandy Fields, executive]

Susan, thanks for the question. So from a margin standpoint, its pretty similar margins internationally in the U.S. I would say the 1 key difference is the tariff, right? As we ship product into the U.S., those products are tariffed our international markets as they ship directly, we do not see those same level of tariffs. And so that would be 1 advantage to the international markets overall.

[Tarang Amin, executive]

And then on Natorium, 1 of the things that led us to that acquisition was not only the tremendous growth rate and potentially saw Naturium but the team, they have an entire team with real skin care expertise. So we definitely feel we're going to learn things from Naturium that can be applied to skin and vice versa. And so I think that was 1 of the real benefits of Naturium acquisition is it's highly complementary to e.l.f. SKIN where they have tremendous expertise in formulation in education, their engagement model, which we definitely see has relevance to e.l.f. SKIN. And then in turn, our capabilities from both the distribution and being able to ramp up their marketing efforts, we think will benefit Naturium as well. So it's a perfect marriage that way.

[Operator]

Our next question comes from Korinne Wolfmeyer with Piper Sandler.

[Korinne Wolfmeyer, analyst]

Congrats on a really awesome quarter. I'd like to touch a little bit on the investments you briefly touched about -- touched on in the prepared remarks with some SAP spend and adding more distribution capacity, but it's going to add a little bit of pressure in the back half I know you're not guiding to the next fiscal year, but how should we be thinking about those investments as we head beyond the next couple of quarters and the impact to the margin profile there?

[Mandy Fields, executive]

Thanks for the question. So in terms of the SAP and our distribution capacity, all of that is already baked into our guidance overall. And so as we think about kind of how we raised our top line and our adjusted EBITDA, those are already reflected into our guidance. And so -- and especially on the SAP side and as we think about some of those capacity build out from a distribution standpoint, a lot of that is going to be capital that you'll see throughout. And so we'll eventually flow through from a D&A standpoint, but again, not looking out into fiscal '25 just yet, but know that whatever we've gotten in there that's already embedded in our guidance.

[Tarang Amin, executive]

And the only other thing I would add is, this has been a continual investment story. So this is not 1 where we've logged certain areas for years and now have to make a huge investment. We invested every single year in terms of our technology stack in terms of our infrastructure. And so we don't see it as outsized other than you'll see a little bit more capital. But other than that, we feel pretty good about both those investments as well as the ability to continue to meet the demand that we're seeing.

[Operator]

Our next question comes from Rupesh Parikh with Oppenheimer.

[Rupesh Parikh, analyst]

Also congrats on a really strong quarter. I wanted to see if you could provide any more commentary on the Q3, Q4 cadence. I don't know if anything you share on sales or EBITDA just to help us from a modeling perspective?

[Mandy Fields, executive]

Yes. So in our prepared remarks, I did indicate that Nielsen could be anywhere between 20% and 50% for the back half and Q3 could be at the higher end of that Q4 could be towards the lower end of that as we start to cycle higher compares in the base. As you know, we don't give quarterly guidance. So that's kind of the color that we're giving for the second half. And now our guidance approach is to be very balanced and that has worked quite well for us. And we're just going to take it 1 quarter at a time. But really pleased with our overall raise to 57% on the top end.

[Operator]

Our next question comes from Jon Anderson with William Blair.

[Jon Andersen, analyst]

Congratulations on the quarter. I have a quick 2-part question. First on pricing, pricing has been a pretty consistent contributor to the business of about 20% or so in fiscal '23. It's running about 20% through the first half of fiscal '24. Do you think price mix continues at that kind of level? And what is driving that? Is it a big mix element? Is it list price increases? Just trying to get a sense for how much room you have for that to continue? And then the second question is on the marketing and digital. The full year outlook implies, I guess, that you'd be spending in the second half at kind of a high 20s rate, 28% of sales or so. And I think that would be kind of a record level for the company. Do you have the plans in place already on how that will be spent? And can you talk a little bit about whether it's more of kind of the same type of vehicles or whether there is kind of another big game consideration in there as well?

[Mandy Fields, executive]

Right. All right. Jon. So from a pricing standpoint, I'd just give you a little bit of history on how we've approached pricing. We've really only taken to price increases in our history. The first was in 2019 in response to tariffs. And the last 1 was in 2022 in response to the inflationary environment. So largely, what you're seeing from price standpoint, when I talk about 56 points driven by volume and the remainder driven by price, that's largely mix. And that really speaks to the innovation that we've introduced more recently. We have items like our Power Group Primer and our Cordless [indiscernible] Primer and our Halo Glow ranging from $10 to $14 but still very much resonating with our consumers. And so that is really what's influencing that pricing piece. More so on the mix side, we actually did not take any pricing here in the U.S. in fiscal '24. And so that the mix is really what's driving that increase that you're seeing.

[Tarang Amin, executive]

And on the marketing front, Jon, we feel great about what we're going to invest that money in. It's a combination of that have worked, particularly in our digital advertising, our broader awareness efforts. Many of these game-changing collaborations, the 1 we just did this last quarter with Jennifer Coolidge on dirty pillows, I think we got something like 11 billion impressions on sold out of the product right away. We're going to have to get more the holiday time. So you're going to continue to see that, and we feel good about where we're going to put that money against and including in some of the new areas I talked about in terms of continue to ramp up skin care awareness, Naturium, international. So we have plenty of good places to put that money and continue to see exceptionally strong ROIs.

[Mandy Fields, executive]

Sorry, just circle back. Sorry, just I want to circle back on the pricing piece as well on the international piece. I said we did not take in fiscal '24 here in the U.S., but there was a small 1 that we did take internationally that actually is kicking off here in October.

[Tarang Amin, executive]

And that pricing internationally is just really to align prices between the U.S. and International. We have taken pricing here early last year and early '22. We had not take pricing down in international just given when we take the last international price increase. So it's really just to harmonize our pricing structure globally.

[Operator]

Our next question comes from Oliver Chen with PB Callen.

[Oliver Chen, analyst]

You've had really great results. Congrats. On the cosmetic side, what do you think it will take for you to get to #1 market share? What are the bigger opportunities as you think about product or channel as you scope it out in your strat plans? Second, on skin care, how are you thinking about Hero products and and contrasting that with what you've done in cosmetics or not, given that it's a category with efficacy and different kinds of dynamics? Third and finally, international has been a big opportunity in the past as well, like earlier and your development. What's different now about how you're approaching it. It seems to be really working. Just would love some thoughts on that, too.

[Tarang Amin, executive]

Yes. Oliver, in terms of your first question, what will it take to get to #1 market share? It's really replicating what we've been able to do at target. And if you look at our target business, we mentioned we're close to a 19 share there, almost 600 basis points ahead of #2 maybe [indiscernible] in that market or in that channel that #1 position, we basically have done over the last few years here, and it's been a combination of 3 things. One, they have dedicated much more space to e.l.f. than we see in other retailers. And we're in the process of replicating some of those space gains and other retailers [ 2 ] the level of disruption that ELF has in their stores. I mean, at any given point, I think we're in about 4 or 5 different spots within a Target store.

And then third is the way we partner with -- from a marketing and overall multifunctional point. And really, I have a lot of confidence that we can do those same things in other retailers. If I take a look at the progress we've made just in a few years within Ulta Beauty we're already 1 of their top cosmetics brands. And that was even before they expanded the space that they most recently did in the fall. Walmart remains a huge opportunity, see progress there as well. And then drug, drug is still rolling out the brand. So I think over the next few years, as we get better presence in these retailers as we partner the way we have partnered with Target. I can see us get to that #1 share position over time. And then, by the way, Target is not standing still Target is 1 of our best retail and customers and the level of collaboration we have, they recently held a meeting at Target they instigated, which is how could e.l.f. become their first billion retail brand in Target. And for perspective, we're going to do about $400 million of retail sales and target this year. So I think it's really encouraging sign when even your top customer is coming to you and figuring how could you more than double even within there. So a great deal of bullishness in terms of our market share.

And then in terms of skin care, I think we're seeing some of the same parallels that we saw with e.l.f. color. If I take a look at our skin care, we do have some real hero franchises. I take a look at our [indiscernible] Hydration franchise. And what we've been able to do there consistently build that franchise year after year. Our most recent franchise and touchables is off to an incredible start. The first 3 items in that franchise, we're just seeing real resonance in. So we'll continue to map out the innovation that we have in both e.l.f. SKIN as well as the pipeline of Naturium is really quite rich. So I feel great about the products we have there.

And then finally, in terms of international, I'd say what's different from the past is, we have real proof points in both Canada and the U.K. and that consistent approach that I talked about in terms of how we were able to penetrate both those markets with leading retailers. In addition, we're building out a very strong international team. So we opened up entity in the U.K. I think it was last year. We have a team there authority over 30 people that's really focused on our international expansion. As I mentioned, Italy being 1 of the most best recent examples there. So feel great on all 3 fronts in terms of our ability to continue to build market share and color. Obviously, the pipeline we have in skin care with really all 3 of our brands, e.l.f. SKIN, Naturium and Keys Soulcare. And then internationally, just tons of white space there relative to our global peers.

[Operator]

Our next question comes from Mark Astrachan with Stifel.

[Mark Astrachan, analyst]

Thanks, and good afternoon, everyone. I'm Curious, scanner data seems to be showing a little bit of a slowdown in cosmetics or makeup thoughts about what's driving that? What do you think influences that specific sector of the beauty category going forward? And then secondly, please just remind us as e.l.f. SKIN grows above overall growth. Where is that product placed today? And where do you think you can go over time, meaning can you move that away from the typical set to put that with the other skin care products and does that make a difference as you do that?

[Tarang Amin, executive]

So overall, Mark, I'd say I'm quite bullish and have been for some time on the color cosmetics and skin care category. And that's definitely what you saw. You saw a great resurgence after the pandemic. You're going to have some bouncing around in terms of scanner data different periods. Overall, we're seeing good activity in the category. And by that, I mean very strong consumer resonance in terms of wanting to get out there and express themselves, good innovation, good levels of investment. So I actually am quite bullish on the category going forward as we go through. And then do you want to take this?

[Mandy Fields, executive]

Yes. And then on e.l.f. SKIN, as I spoke to earlier, Mark, really depends by retailer where we're housed today. And Target as an example, we're in line with color cosmetics at Ulta, we are actually in the skincare set. And so we see an opportunity to continue to test and learn from both of those sets to see what is most going to -- drive the most sales in each of those retailers. But eventually, we could see aas potentially on its own in the skincare set. One of the things we really loved about Naturium, actually. They are in skin care within the skin care set and have done a phenomenal job. So a lot of things that we can learn from that brand as well.

[Operator]

This concludes our question-and-answer session. I would like to turn the conference back over to Tarang Amin, Chairman and CEO, for any closing remarks.

[Tarang Amin, executive]

Well, thank you for joining us today. I'm so proud of our incredible team at e.l.f. Beauty for delivering an outstanding first half of fiscal '24. We look forward to seeing some of you at our upcoming investor meetings and speaking with you in February when we'll discuss our third quarter results. Thank you, and be well.

[Operator]

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