elf Beauty Inc

NYSE:ELF

Earnings Call Analysis

e.l.f. Beauty Q3 Results Surpass Expectations

In its third quarter, e.l.f. Beauty delivered stellar performance with an 85% surge in net sales and a gross margin increase of nearly 350 basis points, achieving $59 million in adjusted EBITDA, marking a 61% year-over-year growth. This quarter represents an impressive milestone, marking the company's 20th consecutive quarter of net sales growth, placing e.l.f. Beauty among a select group of five consumer companies with comparable sustained growth. e.l.f. Cosmetics significantly outperformed, with sales growth of 46% in tracked channels and an increase in market share of 305 basis points, bringing the company to a strong #3 national ranking in the cosmetic industry. The company is optimistic about doubling this market share in the coming years. Moreover, e.l.f. SKIN also posted an outstanding performance, growing 89% in tracked channels and moving up the ranks to the 14th position in the market. The acquisition and growth of Naturium enhanced the company's position in skincare, with Naturium net sales rapidly increasing and a CAGR of 80% over the past two years. International sales also expanded, growing by 119% in Q3 and now comprising approximately 15% of total business, up from 13% in the prior year. The company has also highlighted a significant opportunity to connect with the Latinx community, engaging in inclusive marketing initiatives that celebrate Latin beauty and culture.

Rejoicing Over Record Results and Raised Fiscal '24 Outlook

E.l.f. Beauty has delivered a striking performance in Q3, taking the spotlight with 85% net sales growth, a significant 350-basis point gross margin increase, and an adjusted EBITDA of $59 million, marking a 61% uptick from the prior year. Their 20th continuous quarter of net sales growth positions the company alongside an elite circle of consistent high-growth consumer brands, with an average sales growth of at least 20% per quarter. This exceptional streak places e.l.f. as only one of five public consumer companies to accomplish this out of 274 surveyed. Focused investments in three key growth areas - color cosmetics, skincare, and international expansion - have proven successful, with market share doubling and surpassing the competition .

Expanding Dominance in Beauty Segments

E.l.f. Beauty has not only maintained but also amplified its market dominance. In color cosmetics, the company surged ahead with a 46% growth rate, vastly outshining the category's 2% and solidifying itself as the nation's third-largest brand. With ambitions to double this share in the coming years, e.l.f. has been replicating its success across other key retailers, replicating a nearly doubled share at Target. Their skincare line also saw explosive growth, leaping by 89%, which was tenfold the category's growth rate, and has worked wonders for their market positioning. With Naturium in tow, e.l.f. has effectively doubled its skincare penetration to 18% of retail sales, carving out a significant position in the beauty landscape .

Innovative Marketing Driving Unparalleled Engagement

E.l.f. Beauty's marketing prowess is nothing short of transformative, creating brand experiences that resonate across generations and digital platforms. Their unique approach blends real-time entertainment with culturally poignant content. Expansion efforts in marketing are evidenced by their presence on Roblox and strategic appeals to Latinx communities through original music collaborations, amassing billions in media impressions and views. This inventive marketing strategy has effectively doubled US unaided brand awareness since 2020, positioning e.l.f. for further growth .

Raised Financial Forecast and Strategic Investments

With such robust results, management has raised the outlook for fiscal '24, now expecting adjusted EPS to range between $2.84 and $2.87 per diluted share. Gross margins are also expected to improve by approximately 280 basis points more than previously anticipated, and the company foresees net sales growth of 48-53% in Q4. E.l.f.'s investment in marketing and digital is reaping rewards, with planned investment levels maintained at 22-24% for the full year. This strategic allocation is underpinned by a strong balance sheet, a fortified inventory to satisfy rising consumer demand, and the successful integration of Naturium, thus affirming e.l.f.'s confident stance in its long-term growth trajectory .

Competitive Edge Sustained with Innovation and Global Expansion

E.l.f. Beauty remains unruffled by competition, crediting their ongoing success to continuous innovation and pioneering marketing strategies. Strengthening their position requires adapting to consumer demographics, from Gen Z and millennials to the promising Gen Alpha cohort. Corporate resilience is also evident in their logistical maneuvers amid increased European demand, showcasing a versatile and proactive approach to global supply chain challenges. Integrating Naturium has seamlessly enhanced e.l.f.'s capabilities in manufacture, regulatory compliance, marketing, and distribution, providing a fortified stance as they navigate future retail partnerships and expansions across international frontiers .

Earnings Call Transcript 2024-Q3

[Kristina Casey Katten, executive]

Thank you for joining us today to discuss e.l.f. Beauty's third quarter fiscal '24 results. I'm Kristina 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.elfbeuty.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, Casey, and good afternoon, everyone. Today, we will discuss the drivers of our Q3 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 Q3, we grew net sales by 85%, increased gross margin by nearly 350 basis points and delivered $59 million in adjusted EBITDA, up 61% versus prior year. Our vision is to create a different kind of beauty company by building brands that disrupt norms, shape culture and connect communities through positivity, inclusivity and accessibility.

We have executed against this vision and delivered exceptional consistent category-leading growth. Q3 marked our 20th consecutive quarter of net sales growth, putting e.l.f. Beauty in a rarefied group of consistent, high-growth consumer companies. We're 1 of only 5 public consumer companies out of 274 that has grown for 20 straight quarters and averaged at least 20% sales growth per quarter. Across our business, 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 Q3. In Color Cosmetics, we continue to significantly outperform the category. In Q3, e.l.f. Cosmetics grew 46% in tracked channels, 23x category growth of 2%. We increased our share by 305 basis points. Out of nearly 800 cosmetics brands tracked by Nielsen, e.l.f. is the only brand to gain share for 20 consecutive quarters. We have more than doubled our market share from about 4.5% in 2019 to 10% in 2023, placing us as a #3 brand nationally.

Given our momentum, we see an opportunity to double our share again over the next few years. In Target, our longest-standing national retail customer, we're the #1 brand with about a 19% share, nearly double the year we had in target just a few years ago. We're focused on replicating our success at Target across other key retailers and are making great progress towards that ambition. In skin care, we also continued to outperform the category. In Q3, e.l.f. SKIN grew 89% in tracked channels, 10x category growth of 9%. We grew our share by 60 basis points and gained 6 ranked positions, increasing our rank to the #14 brand as compared to the #20 brand a year ago. e.l.f. SKIN today holds a 1.4% share and a significant runway with the #1 brand holding 14% share. We are also making progress with Naturium, the clinically effective biocompatible skin care brand we acquired in October. Naturium has doubled our skin care penetration to 18% of retail sales and gives us a fast-growing complementary brand to further aspirations in the category. Naturium has seen exceptional growth with net sales growing at an 80% CAGR over the last 2 years. We're pleased by the strong growth that Natrium continued to deliver in Q3. Turning to International.

Our net sales grew 119% in Q3 and drove approximately 15% of our business as compared to 13% a year ago. We saw terrific growth in the U.K. and Canada, our largest global markets, and we're enjoying success in our expansion to other countries as well. As compared to our #3 position in the U.S., e.l.f. is the #4 cosmetics brand in Canada and the #6 brand in the U.K. In Italy, where we just launched this fall, e.l.f. is already the #1 brand in due [indiscernible] across both mass and prestige. We see significant runway to expand our brands globally. Across categories and geographies, the 3 fundamental drivers of our business remain the same. Our value proposition, powerhouse innovation and disruptive marketing engine. Let me walk you through how each underpinned our strength in Q3 and how they collectively fuel our vision to be a different condo company. First, we're known for our value proposition. Our mission is to make the best of beauty accessible to every eye, lip, face and skin concern. We have a unique ability to deliver high-quality holy grails at an extraordinary value created with inspiration from our community, the best products in prestige and our distinctive e.l.f. Twist. The average price point for e.l.f. is a little over $6 today as compared to over $9 for the legacy mass cosmetics brands and over $20 for prestige brands. We believe our core value proposition expands the category, allowing more consumers to access the best of beauty.

The second driver of our performance is our powerhouse innovation. 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. We have a track record of building growing product franchises in both cosmetics and skin care that endure instead of typical one-and-done launches. Our 5 largest franchises, [indiscernible], [ Camo, Power Grip, Holy Hydration and Putty ] have grown year after year as we launch new innovation within each, the entire franchise grows. In Q3, we extended our Camel franchise into the blush category for the first time with the launch of our Camel liquid blush, priced at an incredible value of $7 compared to a prestige item at $23.

We're also innovating in the industry's top segments where we under-index on share, like Lip and Mascara. In Q3, we launched our [indiscernible], lip oil, one of the most requested products from our community priced at an incredible value of $8 compared to a prestige item at $40.

[Video Presentation]

We also launched our last extender Maskara, our fourth mascara launch in the last 4 years and our first ever mascara with lengthening tubing technology. With our focused innovation in these areas, we've nearly doubled our lip and Mascara share over the last 3 years and are still significantly underpenetrated today. For context, as compared to the 10% share we have across the cosmetics category. We have a 3% share in lip, a $1.2 billion category and a 2% share in Mascara, a nearly $1 billion category. We have significant white space in these large segments of beauty and the innovation engine to conquest them. The third driver of our performance is our disruptive marketing engine. We have a track record of attracting and engaging existing and new audiences with buzzworthy activations, unexpected creativity and coveted collaborations. Our advantage lies in our ability to deliver real-time entertainment with emotionally resonant and culturally relevant content. Our unique content is customized with precision and delivered with impact across a wide range of platforms. Building upon our learnings and success with our Elfa channel on TikTok and our LEU channel on Twitch, we widened the aperture in Q3 with the launch of Elfa, our first-ever experience on road blocks, one of the world's most popular virtual playgrounds and immersive platforms. True to our purpose, LFP isn't just another game. It empowers entrepreneurs and cultural change makers to bring passion projects to life. The experience focuses on social impact and skill building for e.l.f. community and provides a digital sandbox for fostering creativity and entrepreneurship. -- launched less than 3 months ago, Elfa is already the #1 rated brand experience on the road blocks platform, receiving a 96% rating and amassing over 4 million plays. Looking at new cohorts, the Latinx community represents some of the most passionate makeup consumers with 77% higher average spend in the category. -- lover Index is among Latin -- next community and has a significant opportunity to build upon this affinity. In Q3, we teamed up with rising Latin music sensation, Manuel Teresa to launch a new original Spanish language SON, titled OS Laboscera, which translates in English to eyes, lips face. This Anthem is written to empower the Latin community, celebrating their beauty and pride in their Latin roots.

[Video Presentation]

We also launched our last extender Maskara, our fourth mascara launch in the last 4 years and our first ever mascara with lengthening tubing technology. With our focused innovation in these areas, we've nearly doubled our lip and Mascara share over the last 3 years and are still significantly underpenetrated today. For context, as compared to the 10% share we have across the cosmetics category. We have a 3% share in lip, a $1.2 billion category and a 2% share in Mascara, a nearly $1 billion category. We have significant white space in these large segments of beauty and the innovation engine to conquest them. The third driver of our performance is our disruptive marketing engine.

We have a track record of attracting and engaging existing and new audiences with buzzworthy activations, unexpected creativity and coveted collaborations. Our advantage lies in our ability to deliver real-time entertainment with emotionally resonant and culturally relevant content. Our unique content is customized with precision and delivered with impact across a wide range of platforms. Building upon our learnings and success with our Elfa channel on TikTok and our LEU channel on Twitch, we widened the aperture in Q3 with the launch of Elfa, our first-ever experience on road blocks, one of the world's most popular virtual playgrounds and immersive platforms.

True to our purpose, LFP isn't just another game. It empowers entrepreneurs and cultural change makers to bring passion projects to life. The experience focuses on social impact and skill building for e.l.f. community and provides a digital sandbox for fostering creativity and entrepreneurship. -- launched less than 3 months ago, Elfa is already the #1 rated brand experience on the road blocks platform, receiving a 96% rating and amassing over 4 million plays. Looking at new cohorts, the Latin x community represents some of the most passionate makeup consumers with 77% higher average spend in the category, lover Index is among Latin. Next community and has a significant opportunity to build upon this affinity. In Q3, we teamed up with rising Latin music sensation, [ Manuel Teresa ] to launch a new original Spanish language song, titled [indiscernible], which translates in English to eyes, lips face.

This Anthem is written to empower the Latin community celebrating their beauty and pride in their Latin roots.

[Video Presentation]

Okay. [indiscernible] achieved over 2 billion media impressions. Garnered over 304 million cross-platform views in place and reached the #1 spot on Spotify in 3 categories. On the big screen, we released Cosmetic Criminals a true crime parity documentary capturing the widespread phenomena of household intergenerational cosmetic crime. Stemming from reports about widespread elf pinching when family and friends borrow e.l.f. holy grails with no intention of returning them, the main character represents their universal truth.

[Video Presentation]

[Unknown Executive]

The spot debuted on YouTube, Amazon Freeze and ahead of the new "Mean Girls" that select AMC theaters nationwide. Our 15-minute film was the longest branded content spot to ever run on the big screen. Since its launch on January 9, Cosmetic Criminals garnered over 7 billion media impressions amassed over 2 million views on YouTube alone and garnered a 4.5 star rating on Amazon. Speaking of big audiences, e.l.f. returns to the big game on February 11. with our first-ever national TV spot. Last year's spot featuring [ Jennifer College ] and Power Grid Primer affirmed our hypothesis that women were underserved despite being nearly 50% of big game viewers. The overwhelming success of the campaign by every metric fueled a return with a national presence this year versus the regional spot the year prior.

Securing a national spot increases our household impressions by a factor of 3x. We believe this reach provides the best opportunity to springboard viral moment across a wide spectrum of platforms and increases our ability to boost brand impact. The entertaining spot features our Halo Glow liquid filter, the star of our best-selling franchise in 2023.

[Video Presentation]

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. Since 2020, our unaided awareness in the U.S. has doubled from 13% to 26%. That 26% unaided awareness today compares to a leading U.S. mass cosmetics brand at 52%, illustrating significant runway for growth. Our results continue to fuel progress with national retailers. e.l.f. is the most productive cosmetics brand at our top 3 customers in the U.S., Target, Walmart and Ulta Beauty.

We're also the most productive brand at our top 2 customers in the U.K. Super Drug & Boots, giving us conviction that we can replicate our productivity model as we expand internationally. We continue to increase productivity even as we expand space. We're pleased to announce that we'll be expanding space for e.l.f. in spring 2024 with CVS and in summer 2024 with Walmart. In addition to the space gains, we previously announced with Shoppers Drug Mart in Canada and Boots in the U.K. We're also pleased to announce that we'll be expanding space for Naturium in spring 2024 with Shoppers Drug Mart, marking the brand's entry into Canada. In summary, as we enter our 20th year as a company, we continue to deliver exceptional results. What gives me confidence for the future is a significant white space we see in color cosmetics skin care and international.

We continue to believe we are still in the early innings of unlocking the full potential for our brands. I'll now turn the call over to Mandy.

[Mandy Fields, executive]

Thank you, Tarang. I'm pleased to share the highlights of our third quarter results as well as our raised outlook for fiscal '24. Our third quarter results were outstanding. Q3 net sales grew 85% 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 29 percentage points. Q3 digital consumption trends were up over 100% year-over-year.

Digital channels drove 24% of our total consumption in Q3 and as compared to 18% a year ago. The momentum we're seeing is supported by enhancements across our Loyalty Program and our App as well as digital and social platforms. Our Beauty Squad Loyalty Program now has over 4.5 million members with enrollment growing 30% year-over-year. Our Loyalty Members continue to be a key part of our digital ecosystem, driving almost 80% of our sales on elfcosmetics.com. We're seeing terrific engagement on our e.l.f. mobile app, which now boasts a 4.8-star rating and over 1.8 million downloads since launch. We're also enjoying strength across third-party digital and social platforms. We were amongst the fastest-growing beauty brands on Amazon in Q3 and we're the first major beauty brand that launched on TikTok shop.

Q3 gross margin of 71% was up approximately 350 basis points compared to prior year. We continue to see gross margin benefits from favorable FX rates, improved transportation costs, margin accretive mix and cost savings. On an adjusted basis, SG&A as a percentage of sales was 54% in Q3 compared to 47% last year. The increase was primarily due to higher marketing and digital spend. Marketing and digital investment for the quarter was 26% of net sales, up from 17% in Q3 last year. We continue to expect marketing and digital investment in the 22% to 24% range for full year fiscal '24. Q3 adjusted EBITDA was $59 million, up 61% versus last year. And adjusted EBITDA margin was approximately 22% of net sales. Adjusted net income was $43 million or $0.74 per diluted share compared to $27 million or $0.48 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 approximately $72 million in cash on hand compared to a cash balance of $87 million a year ago. Our ending inventory balance was $205 million, in line with our expectations and up from $81 million a year ago. The difference is primarily a combination of 3 things. First, as we said last quarter, we continue to build back our inventory levels through fiscal '24 to support strong consumer demand. Second, approximately $28 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. Lastly, our consolidated results include Naturium for the first time, which added approximately $25 million of inventory.

We believe we have the appropriate levels of inventory across the business to service our customers and support the demand we're seeing. In early October, we closed the Naturium acquisition. It was funded largely using cash on hand and access to our existing credit facility, as well as approximately 600,000 shares of e.l.f. Beauty stock issued directly to founders and key management. Our liquidity position remains strong with relatively low leverage post the transaction. 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 strategic extensions. The initiatives we're focused on this year 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 strong consumer demand.

Now let's turn to our updated outlook for fiscal '24. For the full year, we expect net sales growth of approximately 69% to 71%, up from 55% to 57% previously. Adjusted EBITDA between $218 million to $220 million, up from $197 million to $200 million previously. Adjusted net income between $164 million to $166 million, up from $144 million to $146 million previously. And adjusted EPS of $2.84 to $2.87 per diluted share, up from $2.47 to $2.50 previously. We expect our fiscal '24 adjusted tax rate to be approximately 14% as compared to 17% to 18% previously. Lastly, we continue to expect a fully diluted average share count of approximately 58 million shares. Let me provide you with additional color on our planning assumptions as we close out fiscal '24.

Starting with the top line. We believe we are well positioned to deliver another industry-leading year. Our raised outlook reflects the outperformance in Q3 we saw relative to our expectations as well as an improved outlook for the balance of the year. Our guidance implies approximately 48% to 53% net sales growth in Q4. Turning to gross margin. In fiscal '24, we expect our gross margin to be up approximately 280 basis points year-over-year, as compared to our expectation for up 225 basis points previously. The improved outlook is largely a result of our outperformance in Q3. In terms of the key puts and takes for 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. Turning to adjusted EBITDA.

Our outlook implies adjusted EBITDA growth of approximately 87% to 88% versus prior year, up from 69% to 71% previously. We expect adjusted EBITDA margin leverage of approximately 200 basis points year-over-year, up from 190 basis points previously supported by the combination of our strong net sales growth, gross margin expansion and leverage in our non-marketing SG&A expenses. Our flywheel approach of investing in marketing to drive top line while expanding adjusted EBITDA margins gives me confidence in our ability to continue to drive profitable growth. In summary, our third quarter results underscore our ability to drive exceptional, consistent category-leading growth.

We have a significant white space opportunity in front of us as we continue our vision of creating a different kind of beauty company, one that is purpose-led and results driven. With that, operator, you may open the call to questions.[Audio Gap]

[Unknown Analyst]

Part of that as well, you did an amazing job separating and breaking down unit growth to mix. I wonder if you still have a lot of mix effects that you're planning given your Skin Care, given the innovation that is value accretive into the numbers. So how that factor going forward, should we see some deceleration? Or do you see some accretion on that?

[Mandy Fields, executive]

Andrea, good to hear from you. So I'll start with your first question. If we look at our raised guidance, we have not changed any of our outlook on Naturium. So we previously talked about Naturium contributing about $48 million for the year. and we expect that to be consistent. So our raised guidance really is reflective of the momentum that we continue to see behind e.l.f. Beauty overall. So really pleased with our ability to not only raise for Q3, pass through the Q3 beat, but also raise for Q4. Your question then is on mix impacts as we go forward.

So yes, very pleased with how Q3 came together and very consistent really with what we've seen all year. With volume being the main driver of our growth. But on the mix side, because we have not had any pricing this year that's impacting that. So it's purely mix, introducing innovation at higher price points has had a benefit to this year. And as we look forward and think about our future innovation, we could see some impact from that as well, especially as we think about gross margins, innovation mix has been one of the key drivers to that over time.

[Andrea Teixeira, analyst]

Super helpful, Mandy. And if I can squeeze -- in terms of like how you're getting new shelf space, but it will be mostly into fiscal '25. So how can we look at that component within your guide? And how Nielsen you gave us in the past some guide post within Nielsen as we look at compounded. How we should be thinking from now you exceeded that margin? How we should be thinking of track channels as we go forward?

[Mandy Fields, executive]

So why don't I start with the Nielsen question. So last quarter, we had talked about track channels range from 20% growth up to 50% growth. And we said for Q3, it was going to be closer to that higher end of the range, which is what we saw as we exited Q3, closer to that 50% range. As we get into Q4, we do expect that we'll be closer towards the lower part of that range, closer to the 20% out of track channel, but I will remind you that track channel only represents about half of our business, that we are continuing to see great momentum in other parts of our business, and I'll just point you back to our guidance for Q4 really points to over 50% growth from a net sales standpoint.

So we're feeling great about how the business is coming together, we believe, for the quarter. In terms of shelf space, we did talk about picking up space in Walmart that will impact fiscal '25, that's going to be summer of '25. The other gains that we spoke about in shoppers and boots and CVS, that's going to be part of fiscal '24. And yes, you'll see the larger benefit in fiscal '25 as you move forward, but we will have some pipeline, things like that here in the quarter.

[Operator]

The next question comes from Ashley Helgans with Jefferies.

[Ashley Helgans, analyst]

I just wanted to ask if you could just give us a little bit more color on the store penetration and average [indiscernible] you'll have about both CVS and Walmart after this next round of expansion. And then also if we could just one other question about tariffs. We're starting to get a lot of questions on tariffs as Trump were elected again. Can you just remind us of some of the mitigation efforts you have in place?

[Tarang Amin, executive]

So Ashley, in terms of our penetration, we're really pleased with the space we're going to pick up at Walmart. It's one of our single biggest opportunities from a space standpoint. The average shelf set at Walmart right now is about 8 feet, that compares to about 13 feet at Target, 12 feet at Ulta Beauty, and Walmart really has bigger sets than both those customers. So we don't disclose a specific amount of space other than they are leaning in on e.l.f. I think we're the only brand they're making a pretty major move on space with, and we're looking forward to that in the summer. As Mandy said, [ sales really ] impact us in fiscal '25. The other thing I would say is we had a pretty consistent track record of picking up space year after year, but the biggest driver of our business is our productivity, our ability to grow dollars per linear foot of space year after year regardless of whether we've picked up space or not.

So we're pretty confident in terms of how that profile continues to shape up with space being kind of the cherry on top, but really pleased not only with Walmart, but CVS continue to make major moves in terms of space, a continuation of what they started over a year ago. And so, and we definitely, in Drug have a lot more room to grow our space. So we feel really good about that in addition to the shoppers and boots.

[Mandy Fields, executive]

And then your question on tariffs, Ashley, since 2019, we've been dealing with tariffs that was put on our products, majority of our products at the 25% level. And so if we were to think of additional tariffs being layered on, we have reserved pricing for macro issues such as tariffs. We did again in 2022 in response to the inflationary environment. So we know that's a lever that we could pull if we were subject to additional tariffs, but something that we're keeping an eye on and certainly something that we're very mindful of, especially pulling that pricing lever just given the cost consciousness of the consumer right now.

[Tarang Amin, executive]

And we do have pricing power. I think one of the things many of our competitors took pricing over the last few months. We chose not to take pricing that point of keeping a superior value equation and also keeping in our back pocket if we needed to take pricing for any external factors. So we feel good in terms of how we're situated in our ability to continue to navigate a dynamic environment. The only other thing I would add is we have a pretty big initiative on supplier diversification. So while most of our footprint today is in China we have started up additional operations in Thailand and Western Europe, and we'll continue on that journey. For the foreseeable [indiscernible] a lot will come out of China, but also with the addition of Naturium, which is 100% manufactured in the U.S., we feel good about how our supply chain is evolving in the future and being more diversified.

[Operator]

The next question comes from Olivia Tong with Raymond James.

[Olivia Tong Cheang, analyst]

Wanted to ask you about the new shelf space, CBS, Walmart. Can you talk about what the assortment looks like? Is it more [indiscernible] hero products? Or are you getting traction in some of the new areas like lip eyes and skin?

[Tarang Amin, executive]

Sure. So for context, Olivia, historically at CBS, we were in a 3-foot gondola [ NCAP ]. It allowed for very little amounts of assortment in those sets. CBS is moving to 6 and 10-foot sets in line as they expand space. So it gives us a lot more room to get more of our assortment. And certainly, all of our holy grails many of our new items, each of our core items. Similarly, Walmart, while they're at 8 feet, they have significantly more capacity to take more of our innovation more skin care in many of our other items. So we feel really good about what that's going to enable similar to what we saw with both Target and Ulta, as the expanded assortment. Those are probably pretty good guides in terms of the space and we were able to pick up.

[Olivia Tong Cheang, analyst]

Got it. And then how should we be thinking about volume versus price mix in the next 12 months? Obviously, you've seen very strong benefit from volume and price mix, but more from volume and that obviously now creates tougher comps. The price mix is starting to, or the mix is picking up with Naturium sort of super driving that. So just kind of curious how you think about the contribution from those 2 pieces? And then just if I could sneak one other one in, just around advertising spending from here now that you're at 24% of sales. Just thanks for confirming that you're planning a Super Bowl add again this year.

As you think about sort of getting the best ROI as you continue to increase your spend, we also saw that [indiscernible] is planning to roll out as well. So competition is clearly trying to kind of catch up to you and run your playbook as well. So can you talk about some of the actions you're taking to just continue to stay ahead of your peers and keep that ROI as high as you have?

[Mandy Fields, executive]

Olivia, I'll take the question on volume versus price mix. Again we're very pleased that the majority of our growth has been driven by volume. I think speaks to the health of the brand. I think that speaks to the engagement that we have with our community and something that we certainly expect to see on the road ahead. To what level price mix plays into it, we'll have to see as we go through. But we feel pretty confident that volume will continue to lead our growth as we go forward.

[Tarang Amin, executive]

And then on your question on advertising, we feel great about the 24% that we're guiding this year. And that's really based on the tremendous ROIs we're seeing on our marketing investment in terms of gross sales per dollar invested. I've been in the consumer space for over 30 years. It's the first brand of seeing where you take up your marketing levels and actually get better ROIs. So we feel really good about what we continue to see from a marketing ROI standpoint, even as we take our levels up. And then in terms of competition and competition catching up, I think what you'll see is us continue to innovate, continue to be leaders and trailblazers on different platforms. We talked this time in terms of taking the strength we have in Gen Z, we have been picking up by opening up that aperture more millennials, more Gen X. You heard about our efforts this last quarter with the [ Latin x community ] where we already are overdeveloped with the partnership we did with [indiscernible] in terms of the engagement that created.

Even with GenAlpha, you see us our branded experience on Roblox #1 branded experience on Roblox, 96% rating, I think, over 5 million plays so far. So I think competition can try to try to catch up, but we feel really great about our unique ability to entertain and engage our community and you're going to continue to see that. Including staying tuned for February 11, and what we have in store on the Super Bowl this year, where we're actually doing the national buy versus the regional buy we had last year. triples our reach. And I think just in even the teasers we've done starting last week, we were already up to, I think, 11 billion impressions on those teasers and we haven't even started the activation yet.

[Operator]

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

[Linda Bolton-Weiser, analyst]

Yes. I was just curious with your expansion activities in Europe, are you shipping from Asia to Europe to fulfill those orders? And if so, are you experiencing any issues with shipping through the Suez Canal area? Are you seeing any spikes in freight rates that are affecting your costs?

[Tarang Amin, executive]

Linda. So we do ship from China to Europe for our European business. We use a combination of both shipping as well as rail over Asia, and we found the rail to be a good solution for us. The shipping situation, we're keeping our eyes on it has minimal impact in this fiscal year. We're keeping an eye for the future, as we've seen some rates temporarily go up. We think that it's a temporary thing, but we'll keep our eye on it. And right now, not much of an impact.

[Linda Bolton-Weiser, analyst]

And can I just ask also for Naturium, it was interesting what you said about expanding that brand already into another retailer. I thought my understanding was that you were going to take some time to kind of [Audio Gap]

strategize and figure out how to go about it. Have you changed with regard to your plan for the pace of expansion of that brand as you've gotten to know it better?

[Tarang Amin, executive]

I would say our plans are relatively consistent. So Naturium was already in discussions with Shopper Drug Mart. We knew about that when we made the acquisition. We're actually quite excited about that, the first entry into Canada for that brand. When we bought the brand, we thought there were 3 areas where we could really give help to Naturium. It's a team that's doing extremely well. That entire team came on board. They've been on as part of the e.l.f. umbrella now for 3 months. They continue to run business extremely well. The 3 areas where we could add value is, number one, to the team to help enhance and expand the team for the types of things they need, whether it be regulatory, quality, manufacturing, there's a lot of capabilities we have in a number of these different areas.

The second is to continue to enhance their marketing model. They have an incredibly effective engagement model with consumers, our ability to bring even more to that. And the third, in distribution, the distribution ability really came to play with Shoppers Drug Mart. We already have a very good business there. So our ability to help them navigate through shoppers to make sure that we're getting both the best terms as well as the best levels of support. So I'd say it's more consistent than not. We're extremely pleased with our first few months of Naturium, continues to be a very strong growing brand with a great deal of potential.

[Operator]

Next question comes from Bill Chappell with Truist Securities.

[William Chappell, analyst]

Maybe just help us understand the outperformance in the quarter. And I understand you have a solid track record of conservative expectations or forecasts. But I mean, this seems to be outstanding in terms of the beat and all across the board. So what drove, or was there any, a couple of factors that drove the upside? Especially as I think we were all looking at kind of tougher comps as we entered December, but you seem to kind of surpass that and keep on moving even as we see the candidate today. So what, has anything changed? Anything stepped up? Was there something different? Or were you just really conservative on your guidance?

[Tarang Amin, executive]

Well, I would say, Bill, when we talk about exceptional consistent category-leading growth, that's exactly what we've seen for us for 20 quarters in a row. We cite the stat if we're 1 of only 5 public consumer companies that are 274 that have grown 20 consecutive quarters at over 20%. So I think it's more consistent than not. In terms of the quarter, the quarter did come in better than we were expecting, and it really is all 3 of our key drivers concept. If I look at our value equation, our powerhouse innovation and our marketing engine, we continue to see great strength and great fundamentals in each of them during the period is also during the holiday period, we had a number of our latest Holy Grail launches do exceptionally well. We talked about our lip oils that we launched.

This was an idea that really came from our community. They saw a prestige item that they really liked at $40. And it's basically like e.l.f. we love that, but we can't afford $40. So we developed or with our own e.l.f., our lip oils, [indiscernible], have a better dose in terms of applications. Formulations are incredible. And right when we launched them, we saw them take off fire right away with consumers making a direct comparison of it's actually better than the prestige product. We've seen similar results as we think about our Camel Liquid Blush at $7 versus a prestige item at $23. So we continue to build upon these growing franchises, that along with our increased marketing levels and what we're able to do from a value creation standpoint, I think, is continuing to propel our business.

But as Mandy said, we do expect Nielsen to be in that lower range, but we still feel really good, even with Nielsen comping very strong numbers. For example, this time last year, I think our target business was up over 100%. And we still continue to see really strong numbers on top of those strong numbers. We feel really good about the 53% growth that's implied in Q4, even though we're comping a quarter that's closer to 80%.

[William Chappell, analyst]

That's fantastic. And then just sneaking one in e.l.f. Skin Care. I mean I know we're talking about Naturium doing well, but I think you had planned on bringing some of across cross-pollinating Natrium and e.l.f. skin care in terms of their skill-specific abilities? And any update there and just kind of how e.l.f. skincare is doing?

[Tarang Amin, executive]

Yes. So e.l.f. SKIN is doing exceptionally well. We talked during the call in tracked channels, e.l.f. SKIN Care was up 89%. And versus a category that was up 9%. So we continue to see great momentum on e.l.f. SKIN. Recall, it was a couple of years ago that we really dedicated that as its own brand with its own level of focus. And we're seeing great things both from an innovation pipeline as well as kind of our awareness build. So you feel really good. I mean, I think just in the last year, we increased 6 ranked positions in skin care from #20 to #14, and we have aspirations over time to be a top 10 brand in skin care, and I feel really good about both the momentum and the plans we have against it.

[Operator]

Next question comes from Dara Mohsenian with Morgan Stanley.

[Dara Mohsenian, analyst]

So obviously, incredibly strong growth in the quarter again. Tarang, maybe can you just give us a brief review on, as you think about the long-term market share opportunity where do you see the opportunity dimensionalizing it out 3 to 5 years? How does the recent growth and market share expansion you've seen maybe change that view? And just how would you think about it conceptually as we think through where the business could be longer term?

[Tarang Amin, executive]

Thanks, Dara. I feel incredibly well about our ability to continue to gain market share. I feel great about the 305 basis points of market share we grew in this past quarter. And really, if I think about the longer-term view, it was just a few years ago that we're a 4.5% share in color cosmetics. We're now a 10% share nationally. We've often cited target as kind of the beacon. We're #1 at target. We've doubled our market share there over just the last few years, and we're almost a 19% share. So our sites are set on clear market leadership over time. As I look at the longer track record within color cosmetics.

And I feel we're making great progress there. You can see our current share momentum, but particularly as you get more space at Walmart in Drug as we continue to expand, we feel there's a tremendous opportunity to do what we've done in Target. And I think we're making great progress there. Skin Care perhaps is even a bigger opportunity. If I take a look at all the growth we had in Skin Care, the 89% I just talked about in terms of tracked channel e.l.f. SKIN growing we're still only a 1.4% share in Skin Care on e.l.f. SKIN compared to a market leader that's 14 shares. So even more head space on skin care. And now we've got 2 incredible assets to be able to drive that aspiration with both e.l.f. SKIN and Naturium.

So feel really good there. And then the last area, upside to kind of market share, we often cite is the U.S. Nielsen market share. We are also making great progress in the international markets we're in. If I look at our rank improvement in Canada and the U.K. just in the last couple of years, it's pretty phenomenal. And with increased space at both shoppers. I mean Super Drug and Boots, Super Drug in this past year and Boots coming up, I feel even more confident with what we're doing there with our international team in the U.K. and a stat we cited in our call was we just entered [indiscernible] Italy about a quarter ago. And we're already the #1 brand, not only on the mass side, but also across prestige #1 overall. So it really tells me that this model can replicate not only in the U.S. but the amount of growth we have international.

[Operator]

The next question comes from Peter Grom with UBS.

[Peter Grom, analyst]

So I wanted to ask a couple of questions on margins. Maybe first, just on the fourth quarter. I apologize if I missed this, but the implied EBITDA margin of 4Q and kind of earnings as well, does embed a bit of a step down. Can you maybe just outline the drivers of that, the year-to-date performance and gross margin and marketing guidance would suggest it's not really either of those buckets. So just maybe help us understand the puts and takes from a margin and earnings perspective, specifically for the fourth quarter? And then just bigger picture, the gross margin performance has been impressive. The guidance implies north of 70% this year. Can you maybe just help us frame the opportunity from here? Is there room for further expansion? Is more of the EBITDA level is really going to come from OpEx?

[Mandy Fields, executive]

Peter. So yes, overall, I'm very pleased with the margin progression that we've made over this year. Our outlook implies a 200 basis points expansion in EBITDA margin for this year. Our gross margins have also been very strong for this year. Our outlook is implying over 200 basis point, 280 basis points is what's implied from a guidance standpoint on the gross margin line. So the quarters can ebb and flow. In terms of the spin that you'll see in each quarter, we are stepping up our marketing spend in Q4. So, we are targeting that higher end of the range of 24% for the year. In the first half of the year, we were closer to an 18% level. And so you'll see marketing ramped up even from the 26% that we delivered in Q3. You'll see that step up even higher into Q4. So that will have an impact overall on our spend, and we continue to invest in our people and infrastructure. You'll see that in our non-marketing SG&A as well.

But in terms of the split on the quarters, nothing really to call out other than we are going to be stepping up our marketing for Q4.

[Operator]

The next question comes from Susan Anderson with Canaccord Genuity.

[Susan Anderson, analyst]

Nice job on the quarter. I guess just really quick to follow up on that margin question. So I guess on the gross margin front for the fourth quarter, it looks like the full year guide, maybe it just implies slightly up for the fourth quarter, so a little bit below what you guys did in the first 3 quarters. So just curious driver of that lower gross margin there? And then also on Naturium, it sounds like it's performing well and in line with your expectations. I'm curious if there's been, I know it's early, but any learnings so far that you've taken from the brand that you think is applicable to e.l.f. SKIN?

[Mandy Fields, executive]

So to unpack margin a little bit for Q3 and Q4. So Q3, we had the benefits we called out exchange, transportation cost savings mix, all of those continue on into Q4. The main difference is, though, in Q4. Q4 last year, we started to see the transportation savings impact that. So if I look at Q3 last year, we were about a 67% margin Q4 last year, we were 69%. So it's already a 200 basis point step-up into Q4. Also, I would say on Q4 historically, again, last year was an outlier, but historically, we do see a step down seasonally in our gross margins for Q4 as we're exiting certain products off the shelf, getting our new product on to shelf. So that also is impacting. But I feel great about the gross margin that we're outlooking that's implied in our our outlook for Q4, roughly around 69%, which is really strong and again, looking at ending the year with 280 basis points of margin expansion.

[Tarang Amin, executive]

And then in terms of learnings from Natrium, I'd say there's probably 2 main ones. One is reinforcement of just how great a team came along with Natrium and how well they fit the e.l.f. culture and integrate in. So far, that integration has gone extremely well. in terms of being able to help them realize the growth potential behind Naturium and also bring learnings into the company. I think the second thing is we picked up over 35 people on Naturium, including Co-Founder, Susan Yara. And so I think the learning for us on e.l.f. SKIN is we started this journey a couple of years ago. How do we get even more dedicated resource and e.l.f. SKIN to fully realize the potential there. That fits within our existing people plan in terms of what we hire every year, additional people. And so I think that's probably the biggest learning back on the e.l.f. SKIN side is getting that level of dedication and expertise on e.l.f. SKIN.

[Operator]

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

[Anna Lizzul, analyst]

I wanted to ask bigger picture on e.l.f. SKIN and Naturium. How are you thinking about the longer-term potential for these 2 brands, given their different price points? And ultimately, where do you see these brands fitting in with certain retailers and different customer demographics. And then for e.l.f. SKIN specifically, are you beginning to see customers come in through skin care? Or are sales still primarily from customers who are already users of e.l.f. cosmetics migrating to e.l.f. SKIN?

[Tarang Amin, executive]

So the bigger picture, Anna, for both these brands is we see tremendous growth in both of them. e.l.f. SKIN as the average unit retail is around $9 primary audience, female. Gen Z has a ton of potential, particularly as more Gen Z and the younger cohorts really migrate to Skin Care. We see it continue to expand both its presence in retail in terms of its innovation pipeline we see a great potential there. Naturium, one of the reasons we really like the brand is just how well it complements e.l.f. SKIN at an $18 average retail higher price point that masstige point, it also attracts a different audience, including over 1/3 of its user base, almost 40% of its user base being [indiscernible], both have tremendous growth potential. In terms of where we could continue to see both brands.

We think there's expansion potential for both brands. Naturium probably opens itself up to other more premium retail locations over time, but we feel really really great about the business we have a target, Amazon, torium.com, very excited about Shoppers Drug Mart. So you'll see some overlap in terms of distribution with some differences that we haven't disclosed yet. And then from a demographic standpoint on e.l.f. SKIN, the last part of your question, we are seeing us pick up more consumers directly from skin care. I see in the early days of e.l.f. SKIN, the e.l.f. SKIN buyer was primarily an e.l.f. cosmetic buyer. [indiscernible cosmetics. You definitely got people building their baskets on e.l.f. cosmetics, particularly with some of the latest innovations, if I take a look at our Suntouchables Line, our SPF line, both [indiscernible] some Touchables Invisible or spray. We're picking up people directly from Prestige Skin in that business. And so I feel really good about the strategy, particularly on an innovation standpoint, where we'll continue to get help consumers, but we're increasingly [indiscernible].

[Anna Lizzul, analyst]

Touch on in terms of your marketing spend, how much are you allocating toward international versus domestic, and looking forward over the next couple of years, will that mix shift more towards international? Or how are you thinking about that going forward?

[Tarang Amin, executive]

Yes. So the supply chain is still primarily in China, Karen. I'd say over 80% is still in China even with the inclusion of Natrium. That's one of the things I think over time, you'll see a shift given our diversification plans, and part of that diversifation plans is also relying on some of our main suppliers in China. To also look at other geographies. So we are able to leverage the tremendous both relationship expertise they have, our ability to work with them as well as bring on new suppliers. So I feel really good about the progress that's been made under that.

[Mandy Fields, executive]

In terms of marketing spend, [indiscernible], our approach is very consistent with looking at marketing spend as a percentage of net sales. And so that's how we have approached how we allocate our spend across the different businesses. Would we lean in a little bit more to international or skin care, some of the other growth vectors perhaps. But we also want to make sure that we stay balanced in our approach and make sure that we're putting a lot of the fuel behind e.l.f. Cosmetics.

[Operator]

The next question comes from Mark Astrahan with Stifel.

[Mark Astrachan, analyst]

Thanks, after I guess as the business continues to grow. I'm really thinking more on the non-skin side. How much of the growth is sort of existing users, you touched a little bit on the loyalty program? How much is new users? And I guess as you increase marketing spend, how does that dynamic play out, meaning are existing users increasing basket are you attracting new users? And maybe to sort of trying to get at just how somebody enters into the e.l.f. family? how the life cycle plays out. They buy more products over time. I presume that means that the beauty cabinet bag, makeup kits, so to speak, is increasing in terms of what e.l.f. products are in there versus other categories? I presume some of those share gains are coming from [indiscernible], some are coming from Prestige. But maybe just sort of holistically kind of think about the life cycle here and who you're going after and how they stay in the ecosystem?

[Tarang Amin, executive]

Yes, Mark. So I'll talk about the evolution. I'd say in the early days, we really relied a lot on existing users to build their basket, particularly as we expand into additional product categories, expanded into skin. I think that was the early strategy really in the last few years, particularly as we've been able to take up our marketing levels in it additional targets, we're seeing many more new users. And the great profile that we're getting on the new users, we can measure this [indiscernible] Squad Loyalty Program is they're demonstrating much of the same behavior [indiscernible] users once they get into the franchise, they start buying more and you continue to build the overall basket and overall lifetime value on both the existing as well as new users.

So we feel really good about that profile, particularly being able to bring in both new users as we go through. The other big characteristics, I would say, is the market share we report is really based on Nielsen. So that's just on the mass side in terms of like who we're taking share from and how we continue to build. But one the great characteristics of the business over the last few years is, particularly as we've doubled down on our Holy Grail innovation, the big innovation franchises that grow year after year is we're starting to source a lot more also not only from Prestige but give access to consumers who previously didn't have access to these categories before. We've used the example on our Putty Primer, there was an inspiration from a Prestige item. We continue to track that prestige item. It's grown double digits, but we sell 9x the number of units on our Putty Primer.

So we basically brought in millions of consumers who couldn't afford a $56 Putty Primer, but certainly can afford our $10 one. And so I'd say that's the other big dynamic. We're going to continue to pick up share just given the momentum we have, the way our strategy is working. But perhaps even the bigger long-term opportunity is giving consumers access to categories that didn't previously have access to.

[Operator]

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

[Tarang Amin, executive]

Well, thank you for joining us today, everyone. I'm so proud of our incredible team at e.l.f. Beauty for delivering another phenomenal quarter. Thank you every e.l.f. and e.l.f. partner for your passion and dedication of our vision of creating a different kind of beauty company. We look forward to seeing some of you at CAGNY in a few weeks, where we'll be presenting for the first time and speaking to you in May, when we'll discuss our fourth quarter results and FY '25 outlook. Thank you, and be well.

[Operator]

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