OC Oerlikon Corporation AG Pfaeffikon

SIX:OERL

Thank you for joining us today to discuss e.l.f. Beauty's Third Quarter Fiscal '25 results. I'm KC Katten, Vice President of Corporate Development and Investor Relations. With me today are Tarang Amin, Chairman and Chief Executive Officer; and Mandy Fields, Senior Vice President and Chief Financial Officer.

We encourage you to tune into our webcast presentation for the best viewing experience, which you can access on our website at investor.elfbeauty.com. Since many of our remarks today contain forward-looking statements please refer to our earnings release and reports filed with the SEC, where you'll find factors that could cause actual rules 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.

Thank you, KC, and good afternoon, everyone. Today, we will discuss the drivers of our Third Quarter Results and our updated outlook for Fiscal '25. In Q3, we delivered another quarter of consistent category-leading growth. We grew net sales 31%, delivered $69 million in adjusted EBITDA and increased our U.S. market share by 220 basis points. Q3 marked our 24th consecutive quarter of both net sales growth and market share gains, putting e.l.f. in a rarefied group of high-growth companies. We're 1 of only 6 public consumer companies out of 546 that has grown for 24 straight quarters and averaged at least 20% sales growth per quarter. E.l.f. is the only brand of the nearly 1,000 cosmetics brands tracked by Nielsen to gain share for 24 consecutive quarters.

Our fiscal 2025 year-to-date results have been exceptional with our team delivering 40% net sales growth. We remain confident in our strategy, ability to take market share and capitalize on the white space ahead of us. At the same time, our consumption trends to start calendar 2025 have been softer than we expected.

We see 3 factors: First, the category continued to decline in January. We believe this decline is reflective of consumer stocking up in a highly promotional December and lower social conversation around Beauty. Consumer mind shows focused elsewhere, including wildfires in L.A. and uncertainty around the TikTok platform. Second, in Q4, we're letting the global launch of our viral [ globe reviver lip oil ] which was our biggest launch in [ calendar '24 ]. In addition, we had higher shipments in Q4 last year as retailers built inventory ahead of the big game. Third, Initial reads for a couple of our new product launches for Spring 2025 have started off slower than we expected. We're still in the early days of marketing activations for these launches and our spring resets. Over the next few weeks, our retailers will add spring innovation to shelf and refresh our shelf sets, including expanded space in Targets and Walgreens. These results are still in progress and will not be complete until the end of February.

Balancing these factors, we're lowering our net sales outlook for the final quarter of the fiscal year to minus 1% to plus 2%. Given the dynamic between Q3 and Q4, we do not believe Q4 is indicative of the underlying run rate of our business and we remain confident in our ability to deliver market-leading growth.

As updated, our outlook contemplates 14% to 16% net sales growth in the second half of 2025. On top of the 77% growth we delivered in the second half of last year. As we look ahead, we remain focused on 4 areas with significant runway for growth. Digital, Color Cosmetics, Skin Care and International. Let me update you on our progress in each in Q3.

Starting with Digital. [ Founder ] is a digitally native brand, e.l.f. remains the only top 5 Mass Cosmetic brand with our own direct-to-consumer site. Q3 digital consumption trends were up nearly 30% year-over-year on top of triple-digit growth in Q3 of last year. Digital channels drove 24% of our consumption in Q3 in line with last year. We're pleased with these results as Q3 was highly promotional across Mass Beauty. Instead, we held to our approach of delivering outstanding value every day, foregoing promotional activity on elfcosmetics.com during the holidays. We're seeing continued momentum across our digital and social platforms with strength on Amazon and supported by our ongoing enhancements to our loyal program and mobile app.

Our Beauty Squad loyalty program recently surpassed 5.6 million members, with enrollment consistently growing over 20% year-over-year. Our mobile app now has over 3 million downloads, making the most downloaded single-brand cosmetics and skin care app in the U.S. and holds a 4.9 rating out of 5.

In Color Cosmetics, we continue to significantly outperform the category. In Q3, e.l.f. Cosmetics grew 16% in tracked channels as compared to a category that was down 5%, increasing our market share of 220 basis points. Nationally, e.l.f. is the #1 brand on [ a unit ] basis with approximately 14% share and the #2 mass brand on a dollar basis with approximately 12% share, more than double the level we had 3 years ago. We remain focused on the opportunity to double our market share in the coming years.

In Target, our longest-standing international retail customer, we're the #1 brand with over 20% share, delivering consistent growth over time. In Q3, we grew our cosmetic share at Target by 170 basis points and believe we can fuel further growth with space experience this spring. We believe we're making great progress on replicating our success at Target with other key retailers. Q3, we reached the #2 brand rank at Walmart for the first time, up from #4 a year ago. We're also finding success with newer retail at Dollar General where we launched e.l.f. in a subset of doors. Our initial results have exceeded our expectations in this new channel, and we'll continue to expand into additional Dollar General doors this spring. We share Dollar General's mission to serve the underserved and democratize access to the best of Beauty, particularly in rural areas, which have traditionally only been served by legacy brands.

We are pleased with our continued retail expansion opportunities unlocked by our focus on driving productivity. e.l.f. remains the most productive cosmetics brand on a dollar per linear foot basis with our largest retail customers globally. Our 24 consecutive quarters of share gains are a testament to the effectiveness of our productivity model and we believe our continued focus on productivity will aid in further space expansion in the years to come.

Looking at Skincare. [indiscernible] years, e.l.f. skin has become a top 10 skin care brand in a category dominated by legacy brands built over decades. For context, the average age of the other top 10 skin care brands 63 years old. In Q3, e.l.f. skin continued to meaningfully outperform the category and grow market share. As we look ahead, we see significant runway for growth. e.l.f. skin today holds about a 2% share as compared to the #1 brand holding nearly 14% share.

With the acquisition of Naturium, we've doubled our Skin Care penetration to 18% of our retail sales. We now have 2 of the fastest-growing mass skin care brands that are distinct yet complementary in their price points, positioning in audiences. The launch of Naturium into Ulta Beauty continues to perform well, and we see further expansion opportunities ahead.

Turning to International. Our net sales grew 66% in Q3, fueled by growth in our existing markets as well as our expansion into new markets. International drove 20% of our net sales in Q3, up from 15% a year ago. We see significant white space ahead with our global peers having over 70% of their sales outside the U.S. We've seen success with our engagement model across social platforms, driving global consumer demand well before we enter a particular country. Today, e.l.f. has retail presence in 15 countries with launches over the last year, including Rossman, Germany, Etos Netherlands, Douglas Italy and Sephora, Mexico.

We've achieved a top 3 ranking in each of these new markets we've launched in, reflecting our strength in driving global brand demand. We're also excited to bring our disruptive marketing to new markets using our universal brand superpowers with local cultural relevance. In Germany, e.l.f. translates number11, [indiscernible] the title of our latest campaign means [ He led Out of 10 ]. A wink in an odd to an obsession in Germany with quality ratings.

[Presentation]

In Mexico, we're tapping into the love of telenovelas with Descubre el efecto, discover the e.l.f. effect. This campaign, which is launching over the next few weeks is [ Rutile's ] core value proposition. The engagement with our global audience and success we're seeing across geographies gives us confidence in the global opportunity we see ahead for our brands. e.l.f. has been one of the few brands able to scale through our 5 unique areas of advantage. Our passionate team of owners with a performance culture, our value proposition powered by an asset-light supply delivering the best combination of quality, cost and speed. Our powerhouse innovation delivering premium holy grail products at accessible price points, our disruptive marketing antigen, activating millions of consumers around the world and our unique productivity model, bring this to life at retail globally. Blood brands may seek to imitate parts of our strategy. It's how each of these areas of advantage reinforce each other that forms our competitive moat.

This quarter, I'd like to spotlight our powerhouse innovation and how that's integrated with our disruptive marketing engine to fuel our industry-leading growth. We have a unique ability to deliver a steady stream of Holy Grails taking inspiration from our community and the best products in prestige and bringing to market an extraordinary value. Our Holy Grail innovation approach is working and driving share gains across segments.

In 2024, e.l.f. held 6 top 10 new product launches in Mass Cosmetics, the most of any year, and we held 4 of the top 10 SKUs across both mass and prestige. In Q3, our focused innovation strategy drove triple-digit share gain across face, lip and eye makeup. We've more than doubled our share in each of these segments over the last 5 years and see significant opportunity ahead. As compared to our over 20% share and #1 ranking we have in face, we have an 11% share, and a #4 ranking in lip, and an 8% share of the #4 ranking in eye. With significant white space in these large segments and believe we have the innovation engine to conquest them. We have a track record of building rural product franchises that endure instead of the one-and-done launches. Many of our product launches for Spring 2025 expand our largest franchises.

As one example, we recently launched Power Grip Matte Primer, a mattifying version of our original Power Grip Primer, which continues to be the #1 cosmetics SKU in both Mass and Prestige. We spell last quarter about better balancing support between innovation and our core franchises. To that end, in Q3, we created a campaign called eyes, lips, face fandom.

[Presentation]

Our spot made its U.S. debut on Thanksgiving Day and continue to have multiple high visible placements during the playoff season. We saw strong community engagement with 95% positive sentiment, a lift in our site traffic and an increase in power group sales. Our most recent campaign with Megan Trainer, a longtime fan of the brand. Spotlights are expanding Halo Glow franchise. We believe our marketing engine is best-in-class in finding unique ways to entertain and engage our community through disruptive brand partnerships, sports, music and movies. e.l.f. is the #1 favorite brand amongst Gen Z and ranks #1 in purchases amongst Millennials and Gen Alpha.

Our increased marketing investment has helped to expand our unaided brand awareness from 13% in 2020 to 33% in 2024. I've been in the consumer space over 30 years and never seen a 20-point jump in unaided awareness in just a few years. As great as that is, the leading U.S. mass [ Kazakhs ] brand has 55% unaided awareness, giving us confidence in our runway for growth.

In summary, we believe our 5 key areas of advantage will continue to fuel our ability to win in fiscal '25 and beyond. As we look ahead, we remain confident in our ability to continue to gain share and deliver best-in-class growth in beauty.

I'll now turn the call over to Mandy.

Thank you, Tarang. I'll now cover the highlights of our third quarter results and our updated outlook for fiscal '25. Q3 net sales grew 31% year-over-year on top of 85% growth in Q3 of last year. We experienced growth of international retailers, digital commerce and our national retailers and benefited from pipeline shipping earlier than it did last year. Our sales growth throughout fiscal '25 has been underpinned by continued category outperformance and market chains, both in the U.S. and globally.

Higher unit volume contributed approximately 30 points to growth in Q3 with mix adding an additional point. Q3 gross margin of 71% was up approximately 40 basis points compared to prior year. Gross margin benefits were primarily driven by favorable foreign exchange impacts on goods purchased from China, cost savings and inventory adjustments. This was partially offset by mix related to Naturium's wholesale expansion and higher transportation costs.

On an adjusted basis, SG&A as a percentage of sales was 54% in Q3, in line with last year. Marketing and Digital investment for the quarter, 27% of net sales, in line with our expectations and as compared to 26% last year. Q3 adjusted EBITDA was $69 million, up 16% versus last year. Adjusted net income was $43 million or $0.74 per diluted share compared to $43 million or $0.74 per diluted share a year ago. Both adjusted EBITDA and net income this quarter were impacted by an unanticipated foreign currency loss of approximately $7 million that was driven by quarter-over-quarter fluctuations between the British pound and U.S. dollar.

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 $74 million in cash on hand compared to a cash balance of approximately $73 million a year ago. Our ending inventory balance was $215 million, in line with our expectations and up from $205 million a year ago. Our liquidity position remained strong. We ended the quarter with less than 1x leverage in terms of net debt to adjusted EBITDA. We expect our cash priorities for the year to remain on investing behind our growth initiatives and supporting strategic extensions. The specific growth initiatives we're focused on this year include investing in our people and infrastructure, our ERP transition to SAP as well as increased distribution capacity to support strong global consumer demand.

Let's turn to our updated outlook for fiscal '25. For the full year, we now expect net sales growth of approximately 27 to [ 2% ] as compared 28% to 30% previously. Our Q3 net sales growth have been better than expected, largely driven by the timing of pipeline shipments. In Q4, our consumption trends are starting off softer than we expected, driven by the factors Tarang discussed earlier in the call. As we look to the second half overall, our updated guidance range implies 14% to 16% net sales growth and the backdrop of a challenged mass cosmetics category. And on top of the 77% growth we delivered in the back half of last fiscal year. As we look forward, we remain confident in our ability to deliver share gains in the U.S. and expand our business internationally.

Turning to gross margin. In fiscal '25, we now expect our gross margin to be up approximately 40 basis points year-over-year as compared to approximately 30 basis points previously. This outlook does not include any impact from the recently announced tariffs at an incremental 10% on goods imported from China. As a reminder, tariff hikes will not impact our fiscal year results. We plan to address our response to the incremental tariffs and our fiscal 2026 outlook in May. We believe we have a successful playbook to leverage from 2019 tariffs move to the 25% level. This included supplier concessions, cost savings and select price increases.

We also had FX move in our favor at that time, which further mitigated the impact. This time around, with our increased supplier diversification outside of China and our growing international sales base, we believe we have mobile levers to address the impacts of these tariffs. We continue to expect marketing and digital investment at approximately 24% to 26% of net sales in fiscal '25 as compared to 25% in fiscal '24. From a cadence standpoint, that implies significant expected leverage in our marketing in Q4 on a year-over-year basis as marketing spend was approximately 34% of net sales in Q4 last year.

Turning now to adjusted EBITDA. For the year, we now expect adjusted EBITDA between $289 million to $293 million as compared to $304 million to $308 million previously. The change is due to the incremental $7 million FX loss that I discussed earlier as well as our lowered top line outlook. Our outlook for fiscal '25 now implies adjusted EBITDA growth of approximately 23% to 25% on top of the strong 101% growth we delivered in fiscal '24.

In summary, our third quarter results underscore our ability to drive category-leading sales growth and market share growth. We believe we have a winning strategy and are in the early innings of unlocking the full potential for our brands.

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

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. Today's first question comes from Bill Chappell with Truist Securities.

Tarang, maybe just I guess the key question is with the guidance with kind of what you saw in January, just trying to understand how long you see this lasting? I think if you walk through the different aspects like the tougher comp on the lip oil was kind of understood going into it. So it's the other 2 areas we're just trying to understand in terms of will the comps get better as we move to February, March, April? Do you think this is part of a longer slowdown. Just any more color on that would be great.

Hi Bill, why don't I start? I'd say on our approach is to be more cautious or prudent when we see a slow month. And in January, the 3 factors of the category being down 5%, the loop oil that we're lapping will by far our biggest launch in 2024. And I think one of the things that happened in lip oils we gave it exclusively to Ulta to start in December. And then it went pretty broad right away in January. So we're going across a pretty big hill on that.

And then a couple of our new items are off to a slower start, and it's still early as we go through. As we go through each of those elements, starting with the category. I think 2 things on the category that gives us a bit more confidence going forward. One, we feel the consumers have a little bit a hangover from the highly promotional period in December. While we didn't promote, the industry promoted quite a bit, and you often see a trough right after that promotional area. Second, in January, social conversation was way down over 20%. We attribute to two things. One, the wildfires in L.A., I don't think brands wanted to be tone deaf during that devastation. And then the uncertainty around TikTok, seen for a while, the only thing people are posting on TikTok is whether it's going to stay open or shut down.

So we do see those potentially being better as time goes on. As I mentioned, particularly, this is specificity on what happened in the category, what happened with social conversations. And that in turn also relates to some of the softness we saw initially in some of our spring new items. We count on that social conversation to really light those items virally. And so with our marketing activations coming up with resets when we're able to get that spring innovation on shelf is particularly with the expanded space we have coming at Target and Walgreens. We're hoping for better trends as we go forward, but we just took the more cautious stance and said, okay, let's assume it doesn't get better for a couple of months, and that's why you see us adjust our Q4.

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

We're really pleased with the progress we're making in International. For Q3, we grew our International business 66%. Also from a category standpoint, we're not seeing quite the same level of headwinds internationally. So the category is a little bit better, but more importantly, it's our execution. As we launched in the back half of last year into Rossman, Germany, Etos, Netherlands, even our Douglas, Italy, we've maintained a top 3 rank in all 3 of those customers, and we continue to see a tremendous amount of pent-up consumer demand.

We're currently in conversations with pretty much every retailer and a retailer out there that doesn't want e.l.f. given our growth profile, the innovation we band the consumer profile. So you'll continue to see us full steam ahead on international. We continue to hear additional countries that we're going to be expanding into. And so we feel great about our progress there.

And our next question from Andrea Teixeira with JPMorgan.

Thank you, operator, and good afternoon, everyone. I was hoping if you can talk about more detail about the U.S., what is the consumption in the U.S. as you exit the quarter and currently? I mean you did speak about a good amount of how the innovation is coming for the spring season and how it informed you on this guidance?

And also, what I think I heard from Mandy that there was some pull forward in this quarter. So we are just hoping to see what is consumption in the U.S. and how we should be seeing because, obviously, if you have a 7%-ish at the midpoint, growth in top line, in the fourth quarter, it implies a pretty negative number in the U.S. So if you're assuming that, obviously, the European and International continues to do well. So just wanted to see what is embedded in each of the functions.

Andrea, if you take a look at Q3 consumption, we still finished Q3 consumption double digits, I think, about 12% in tracked channels. So it was pretty strong. In January, we did see that come down. You saw actually a week -- a couple of weeks of negative scanner data so that was a slowdown that I talked about. We're hoping that gets better, but we're basically embedding in our guidance, what if it doesn't get better in the course of the quarter.

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

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

So what I'd say on our newness is we still feel good about our spring new items. We saw softness in January, some of it related to less social conversations mentioned, it's still early. Part of what we're doing about it is we always have marketing activations against our new items. And so you're going to see those market activations hit.

The other thing that helps with newness is when we're able to get them on the spring resets. The spring resets will not be complete until end of February, but that always helps our new items as well. And so -- and then I'd say between channels, for us, going back to Q3, we saw strength across pretty much most of our channels. We were a little worried about Ulta than they had, the lip oils exclusively during that period, and I actually was pleased with how we were able to comp that massive amount of lip oil in Ulta in that month.

As we get into January, as I look across some tailors in our digital business in January, you can see Amazon do extremely well. Walmart is off to a pretty good start in terms of their comps. We have a little bit of softness in Ulta and Target as we take a look. But again, that's before we often see that before resets, particularly target where we shut off a number of items as we get ready for the space expansion that we see. So no warning signs as I look across the retailers from a macro is what we're pinning that guidance on.

And our next question comes from Dara Mohsenian with Morgan Stanley.

The detail you gave us around the drivers of the January softness was helpful. Can you just spend a little more time on maybe how you plan to adjust your strategies here, tweak your efforts in the new environment? You just mentioned with some of the innovation, the marketing activations, et cetera, and the plans there, but maybe more detail on tweaks across the portfolio. And also from a marketing perspective, just as you think about the level of spend necessary for the business and how you manage that in a softer [indiscernible] environment that would be helpful.

So I'll start with for this quarter, as I mentioned, the key to our innovation is really the marketing activations we do against that. We feel social conversation will normalize as we go forward in the quarter now that the wildfire is over, some of the TikTok kind of uncertainties gone back and forth. So we definitely are starting to see a little bit of a pickup in the social conversations, which will also help with our [indiscernible] the activations. And then the resets, we have really good resets across customers as we've seen those plans and what's going to roll out. That will help along those lines.

In terms of our marketing strategy standpoint, I would say there's not a big shift last quarter or a quarter before we talked about better balancing support behind our new items as well as our core franchises and that spot that we shared on our webcast, the eyes, lips, face fandom we saw it have an immediate impact on our Power Grip business. We ran it in Thanksgiving throughout the playoffs. And so we're going to keep that balanced team, I'd call it, our core franchises and our new items.

One of the other things I like about a lot of our new items this season is they are on our core franchises. So if I look at Power Grip Matte, that builds on our power group franchise, Power Grip original is the #1 SKU across Mass and Prestige. Halo Glow, powder builds on our Halo Glow franchise. We didn't show the spot with Megan Trainer, but we've got good creative on each of those core new items, which also we believe will benefit the core franchise.

We debated whether we spend more money. But what we decided is in the face of kind of the consumer macro where consumers are a little bit more cautious. We didn't think it made sense necessarily to invest more money behind that. We feel good about the ROIs we're currently achieving. And so -- and we'll continue to disrupt. I mean I think you'll see some news tomorrow, other things that we're doing to continue attention [indiscernible].

Thank you. And our next question then comes from Ashley Helgans with Jefferies.

So Tarang, you gave some good color on the slowdown in January in Mass Beauty. But if we look back at kind of the Mass cosmetics industry over the last 6 months, I mean it's definitely slowed. You guys have been outperforming. But maybe any more color on just what's going on with that Mass cosmetics consumer if we look back a little further?

So if I look back on the Mass Cosmetics industry over the last 6 months, I'd say there's 2 primary factors that I would say results in a weaker category. One, there was a lot of consumer uncertainty. We saw that across a number of consumer categories, whether it was the [ insert ] leading up to the elections, a little bit of the post. I think there's still worries out there in terms of what's going to happen with inflation, what's the state of the economy. So that definitely did weigh on the Mass category.

I would say the second thing is sometimes we felt like we're the only ones going in the right direction in terms of the level of our marketing spend, level of engagement, our innovation. And so we definitely look for more of that to see kind of a rebound in the category.

The last thing I would say, if you go back actually quite a long period, they have been cycles where the Mass Category has been soft. Each one of those cycles, we've seen it come back at a pretty strong level. I'll go all the way back to -- back in 2016 to 2017, we saw a very strong category, soft period in 2018. Obviously, the pandemic was released soft, so it come back really strong. So I still remain bullish on the category longer term. But I do think there is a macro on the consumer right now that is weighing on the category. And again, our approach to the last question from Dara, I should have said there are no huge shifts in our approach. And there's a reason we've delivered 24 decades quarters of net sales growth averaging over 20%. Our strategy is working.

The tweaks we're making are really in response to what we're seeing in the marketplace, that balance between core franchises and our new items, really making sure that we're activating those properly and having the right visual merchandising on shelf to bring them to life, we feel confident with that approach even in a challenged category.

Our next question today comes from Olivia Tong with Raymond James.

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

Hi, Olivia. Thank you so much for the question. So Q4, overall, we feel great about because we are looking at our second half overall, 14% to 16% growth is what we're looking at for the second half. And again, some of those pipeline shipments pulled up into Q3. So I think you got to look at the second half overall. And when you talk about outperformance of scanner trends, we do still have business on digital and internationally that is stronger outside of those U.S. scanner trends that you're seeing. And so this is why we're looking at our second half overall at the 14% to 16%, and we're feeling pretty good about that.

And just to add to that, I mentioned earlier, we're just taking a more cautionary standard in the consumer macro and the softer start to January, I think our approach has always been a [indiscernible] of transparency with our investors, where we don't get ahead of ourselves. If we see something, we'll call it out. And hopefully, it's a little better than that in our track record over time.

And then in terms of how we capitalize in this current environment, we see it as a great opportunity to continue to build share. As I mentioned, even in January, which was a weak month for us, we've still built 90 basis points a share, the most share anybody built. So that's how we're going to continue to capitalize. And as you mentioned, we have an incredible value proposition, Prestige quality, incredible prices. You're going to see us continue to shine a light on that, particularly some of our lower-priced items that are available for those who are really worried about kind of the overall economy. We have a good assortment on those, and you'll see more messaging on that as well as an opportunity to continue to build share.

And our next question comes from Patty Kanada with Goldman Sachs.

Just one on Amazon and digital. In terms of your digital channels, could you maybe talk more about the momentum you're seeing online and specifically with Amazon. And I guess, one, maybe some detail on what that partnership has brought to you, for example, bringing in new consumers or reaching new demographics? And then two, how do you think about cannibalization risk? Is this something you're seeing relative to your in-store presence?

So I would say our digital business is strong in the quarter, Q3. Our digital business overall was up 30%, Amazon's growth rate was even higher than that. We've continued to see really strong results with Amazon. The low Amazon plays is a great deal of discovery happens on Amazon. A great deal of search happens on Amazon. Obviously, those movers who want the convenience of the speed of being able to get their product. So we see a long growth trajectory ahead with Amazon. That partnership is extremely strong. We're one of their top-performing brands on the entire platform, and we continue the opportunity not only in the U.S., but also internationally as we started expanding in Amazon and other markets, the U.K., Germany, Italy and a number of other markets. We see that being one of our key customers.

And then in terms of new consumer profile, we definitely see that on Amazon, as I talked about discovery and search capability that they have or strength they have there. And then cannibalization, really some cannibalization, I think, with some of our retail customers. But because of our model in terms of being agnostic in terms of where consumer buys the way we've done our terms, where kind of our net margins are pretty comparable across customers. We have always taken the stance that we want to make the best of Beauty accessible to every consumer wherever they shop. And so if there is some cannibalization on Amazon, we do think net it's additive to our overall portfolio just given the strength, and we love having consumers have that choice of where they get applied.

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

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

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

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

Great. And then if I could just touch quickly on the gross margin. I think with the expansion in Naturium and wholesale, the margin is coming down a little bit. how should we be thinking about the proper run rate for gross margin going forward with more wholesale for Naturium?

Yes. So we're really pleased with what we're seeing on Naturium and our ability to expand distribution on the brand overall. From a gross margin standpoint, this is something that we had planned for. And as you can see in our raised margin guidance, actually, we're taking our gross margin up from 30 basis points previously to 40 basis points in our outlook on the year. So still see strength from a gross margin standpoint, even with Naturium's mix.

Thank you. And our next question comes from Peter Grom from UBS.

Thanks, operator. Good afternoon, hope you're doing well. So Tarang you mentioned that you don't think the 4Q run rate is indicative of the growth profile of this business. And I know it will be a few months before we get '26 guidance. But I would love some perspective on what you think is a reasonable run rate for growth just given what you're seeing today?

And then maybe within that, totally understand wanting to be conservative note. Outlook in the near term, just given the many moving pieces but should a weaker category environment persist like, how are you thinking about your market share performance? Still solid 90 basis points in January, but it is a bit of a step down versus the 220 basis points you referenced for 3Q. So just a curious if you kind of see that market share trend improving from here.

Hi Peter, I would say in terms of the run rate, probably going to have to wait until May for us to give the guidance for FY '26 for us to kind of tell you what that run rate is, I'll tell you more between what we have in Q4 and what we had in Q3 is run rate. So it doesn't give you that much color other than Q4, we see this as an anomaly. And otherwise, it's been a highly consistent growth. Also the fact that we're lapping, if I look at that 14% to 16% growth we have in the back half, think we're lapping 77% growth the year before. So on a 2-year basis, it's still really great.

The other thing that gives me confidence on why the run rate will be much better than Q4 is a significant white space we still have. I mean not only #1 in units and #2 in dollars in the U.S. a clear line of sight to clear market leadership in Color Cosmetics. We continue to pick up share in both e.l.f. skin and Naturium, see very strong growth rates there. I just talked about digital and international. So we have quite a bit of white space that gives me greater confidence in terms of our ability to kind of sustain category-leading growth.

In terms of market share. I actually was pleasantly surprised that we built 90 basis points of share in probably our weakest month that we've seen in January, which just tells you the strength we have. So we're highly confident of our ability to continue to build market share.

For perspective, if I look at Target, we have over 20% share at target versus closer to a 12% share nationally with other customers, we're seeing great progress across other retail customers. We saw great progress even at Target. We grew 170 basis points of share in Target even with a strong share position. So Targets not standing still. I'm particularly pleased that we went from the #4 position to the #2 position at Walmart. And again, really strong growth there. We continue to pick up ranking in our other customers.

So I look at the bogey from a market share standpoint long term is I don't -- I mean, we haven't told you that time frame, but I don't understand why we wouldn't be able to get to the types of shares. We have a Target of other retail customers over time. Skincare is even a bigger opportunity. I think we're sitting on a 2% share in Skin Care on e.l.f. skin market. We just got 14%, we have a long way to go there.

The cadence of that share growth will vary part of what are you lapping? I think what sometimes investors miss is just how much share we've grown on top of very strong share growth rate. So you'll see that bounce around a little bit, but we're still very confident in terms of being able to lead the category and our share growth.

That's super helpful. And then maybe if I could just squeeze one in for you. Just the fourth quarter implied guidance, it seems to imply a lot of SG&A leverage. So can you maybe just unpack how much of that is the marketing and digital versus maybe other buckets within SG&A?

So Q4, [indiscernible] leverage in our SG&A. And as we talked about, a significant leverage, really, from putting Digital, which was 34% in Q4 of last year. And as our outlook implies 24% to 26% for the year, which applies to Q4 as well. So a lot of that leverage is coming from marketing and digital as we have continued to invest behind our people and infrastructure.

And importantly, I would say on the SG&A point, we continue to invest in the business, not only in our brands, but we mentioned the investments we're making to get on to SAP later this year, our continued expansion internationally. The investments we've made in our distribution centers to be able to support that growth that we're seeing both in the U.S. as well as globally. So I feel good about the balance of being able to get leverage but also continue to be able to invest in the things we're going to need to be able to continue to drive strong growth.

Thank you. And our next question comes from Linda Bolton-Weiser with D.A. Davidson.

Just on the question of your product launches and innovation. It seems like there is some pretty good innovation in the Prestige sector of the market that you could be copying, there's a company out there that has jelly tints. And then in the primers, there's a [ cloud Globe ] product, this is like a foam primer. So there's definitely innovation out there. It just seems like maybe slow down in terms of your copying. So maybe you could talk about that. And then talk about also the progress you're making in those categories where your market share is very low, like foundations, and Mascara. And maybe talk about what progress you're making there.

Hi Linda. So first of all, I would tell you, we have an incredibly strong innovation pipeline. So what I talked about was a little bit of a slower start in January. We're going to cover our items. But if you take a look at our Halo Glow Powder, it has an incredible prestige equivalent. Power Grip Matte is a unique innovation for us, but overall Power Grip really continues to follow that Holy Grail [indiscernible] taking inspiration. From our community [indiscernible] Prestige, and you'll continue to see that. We have a great cadence of innovation coming for the fall as well, spring of next year, we go out 3 years.

A lot of it comes to what the sequence or cadencing of some of that innovation is. So we not only study the market. The one thing I'll probably correct you on is, we never copy a product. It always has our e.l.f. twist. We always put our e.l.f. twist. I mean the biggest one being able to have that Prestige quality of the incredible price points, we can, but we always make a twist within the products. And so I would say our innovation team does a terrific job of getting inspiration not only from our community with those products from Prestige, and you'll continue to see a very strong innovation is and pipeline from us.

Yes. And I would just add on, Linda, on your question on the progress in some of our what we call Conquest categories. I think Lip is a great example of that. A few years ago, even last year, we had maybe a 3%, 4% share in lips, and we have seen that grown over 800 basis points as we've come into this year. And so when we do have those innovations to Tarang's point, it really allows us to continue to pick up share, and we're doing that across Lip, Mascara, Foundation, those Conquest categories. So we do have a lot to share but have so much potential.

Thank you. And our next question today comes from Susan Anderson at Canaccord Genuity.

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

We're very pleased with our performance overall with Naturium, Susan and especially in Q3. They continue to show growth, particularly in Ulta, where we've launched, we continue to see that business build week over week in Ulta. So we're very pleased with the expanded distribution and the growth that we're seeing on Naturium. And as a reminder, it has tremendous white space opportunity as well.

Really only 2 retailers are Target and Ulta, overall [indiscernible] retail. They do sell on Amazon and have their own dot-com, but really the rest of the world is white space. opportunity for them. We're pleased as well with the progress that we've seen in boots. They did launch in a few hundred of boot skin care doors, top-performing skincare doors, and we continue to see great progress there as well.

So very excited for the prospects for Naturium as we look forward.

Yes, you'll continue to hear other distribution expansion on Naturium. It's performed extremely well, clinically effective, biocompatible skin care, incredible formulations with really great resonance with consumers. So we're very excited about continuing to build that out.

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

So what I'd tell you is this category has always been competitive. Nielsen alone, I think there's 1,900 cosmetics and skin care brands tracked by Nielsen. The big difference is which ones are you able to scale and very few are able to. I mean I think e.l.f.'s 1 of only 4 with more than $850 million retail sales. But even if you look at who has more than $100 million in retail sales, I think it's only 26. So you're going to see a lot of brands come and go or sustain at a very small level.

From a competitive position, I feel like we're stronger than we've ever been. If you take a look at our areas of competitive advantage. While some people will try to copy elements of this, I mean, often, people will go and try to copy elements to our market, but we've already pivoted and moved on and [indiscernible] other platforms by the time they're figuring out the first one, our ability of how we engage and entertain our community, I think, in the last one we have 20 unique campaigns as we look at any of our competitors by brand, they are lucky to do 1 or 2. So it's just a different kind of for [indiscernible] and bubble at which we're operating on those elements.

And then probably the most important thing we have not seen anyone come anywhere close to this ability of having prestige quality at the price points we have. That is a unique competitive advantage we have. And so even on the dupes as I look at the legacy players, if they're lucky, they might have 1 or 2 in a couple of year period, it's nowhere near. I mean we just -- we have basically, I don't know, at least 4, 5 Holy Grails that we just launched. We'll be able to follow that up with more in the fall. So I feel great from that competitive position. I think the best indication of that, frankly, is the market share. And we've more than doubled our market share in the last 3 years shows kind of the momentum on how others have not been able to replicate the success that we have.

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

Thank you so much for the question. I just wanted to see if you could give us more detail on a breakdown maybe by category in the quarter as well as in January on which parts underperformed versus performed well? I think lip continued to perform well for part of that time frame. And then if you can comment on just skin care outside of Color Cosmetics, the trends you're seeing there and how e.l.f. skin is performing versus Naturium?

So I'll do it in 2 parts. I'd say, in Q3, we saw pretty broad strength across every one of our segments in Color Cosmetics as well as in skin care. And you saw a pretty massive share gains in each one of our core segments. In January, I'd say the strongest subcategory with lip. We continue to see good momentum in Lip back to this point. I think collection was a little bit more challenged. But again, we don't see anything any indicators for the long term on that.

And then skin care continue to grow at a faster clip in January. But overall, our strategy with the innovation we have, our approach of how we engage consumers is the least opportunity to continue to grow share across each of our segments and skin care.

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

Does your updated guidance incorporate expectations for retailer destocking? And are any of your major retailer partners talking about this given the softer consumption trends?

Hi Mark, we have not heard that from our retailers at this point. With e.l.f.'s, even with our consumption being down, we still are the most productive brand that our retailers carry. And so we typically will see continued orders on our product. And so we have just not seen anything like that.

And then separately, understanding, I don't want to get too specific on your expectations for revenue run rates in fiscal '26. But could you just frame up the level of flexibility there is in the cost structure should this softer demand backdrop persist?

Yes. So we have as you can see in Q4, our SG&A is leveraging. Again, I talked about that being driven largely by our marketing investment, but as we think about kind of where there is flexibility in our P&L, we certainly have the flexibility to reduce costs on certain areas. We have cost savings programs that we are running with our suppliers every year.

Really, our focus has been on investing behind the business and making sure that we have the people and the infrastructure that we need capitalize on those white space areas, Tarang just spoke about. And so that's really more so of our focus as we move ahead, just really make sure that we continue to make progress against those growth areas in the business.

Thank you. And this concludes our question-and-answer session. I'd like to turn the conference back over to Tarang Amin for closing remarks.

Well, thank you, everyone, for joining us today. I want to close by saying how proud I am of the incredible e.l.f. Beauty team for delivering another quarter of industry-leading results. I want to thank every e.l.f. and every e.l.f. partner for your passion and dedication to our vision of creating a different kind of Beauty company. We look forward to seeing some of you at CAGNY in a few weeks and speaking with you in May, who will discuss our fourth quarter results and FY '26 outlook.

Thank you, and be well.

Thank you. This concludes today's conference call. We thank you all for attending today's presentation. You may now disconnect your lines, and have a wonderful evening.