elf Beauty Inc (ELF) 2023 Q1 法說會逐字稿

Thank you for joining us today to discuss e.l.f. Beauty's First Quarter Fiscal '23 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 our 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.

Thank you, KC, and good afternoon, everyone. Today, we will discuss the drivers of our Q1 results and our raised outlook for fiscal '23. I want to start by recognizing the e.l.f. Beauty team. We're off to a strong start in our new fiscal year, delivering Q1 results well ahead of expectations. Q1 marked our 14th consecutive quarter of net sales growth. We grew net sales by 26%; increased gross margin by 390 basis points; and delivered $32 million in adjusted EBITDA, up 46%. Given our momentum, we're raising our full year guidance.

Color cosmetics category trends remained positive in Q1, up 4% year-over-year, fueled by an increase in usage occasions and innovation. Q1 was the first full quarter of growth above pre-pandemic levels. e.l.f. Cosmetics consumption in Q1 was even stronger, up 27%, well above category growth rates. We were the fastest-growing top 5 brand by a wide margin, growing our market share by 120 basis points.

Looking ahead, the environment continues to be dynamic. While it's difficult to forecast how inflation or recession may impact consumer behavior, we believe cosmetics continues to be an important category for self-expression. Mass cosmetics, in particular, has performed better than prestige in past recessionary times. More importantly, we're confident in our business model and ability to continue to gain share.

Let me take a few minutes to talk through the key drivers of our Q1 performance. First, we're known for our core value proposition. We make the best of beauty accessible to every eye, lip and face. We have a unique ability to deliver holy grail products, taking inspiration from our community and the best products in prestige and bringing them to the market at extraordinary value. Some of our best-selling holy grails include our Poreless Putty Primer at $10 versus a prestige comparison at $52, our Camo Concealer at $7 versus a prestige comparison at $30 and our Camo CC Cream at $15 versus a prestige comparison at $42.

We see the current backdrop as a time to reinforce our unique value proposition. The average price point for e.l.f. is a little over $5 today as compared to nearly $9 for the legacy mass cosmetics brands. And unlike these higher-priced products, our pricing strategy focuses on everyday value instead of broad-based promotions. In the coming months, we'll launch another consumer-facing campaign that highlights the extraordinary value of our products.

The second driver of our performance is that we're an innovation powerhouse. Our superpower is centered on our ability to deliver 100% cruelty-free, clean, premium quality beauty products at accessible price points with broad appeal. Our proven innovation engine has built leadership across 5 core segments. Brushes, primers, concealers, brows and sponges make up approximately half of e.l.f. Cosmetics' sales. We have the #1 or 2 position in all 5 segments and gained share in each segment in Q1.

We believe our innovation pipeline has never been stronger. We continue to focus on fewer, bigger, bolder innovation and try to have 1 or 2 new holy grails each season. We're pleased to see 4 of our newer products resonating with consumers. Our Power Grip Primer, Big Mood mascara, Glossy Lip Stain and Camo Powder Foundation were 4 of our top 5 drivers of incremental unit consumption in Q1. With our product success, we see a significant opportunity to build share. Looking at Nielsen tracked channel data for Q1, we're the #5 cosmetics brand with a 6.6% share. The #1 brand has 17% share. We see a lot of runway for growth.

Third, we know how to attract and engage consumers with our disruptive digital-first marketing. Over the past 3 years, we've increased our marketing investment from 7% of net sales to 16%. Our marketing investment is working, driving ROI multiples above industry benchmarks. Our marketing initiatives help us reach new audiences, penetrate new platforms and test and learn in new frontiers.

(presentation)

We're pushing further into gaming and the metaverse, which resonates strongly with our young, diverse community. In July, we launched Game Up, a limited-edition cosmetics and skin care collection that sits at the intersection of gaming and beauty. Each Game Up product contains a secret code that can be redeemed for Beauty Squad bonus points, gift cards and more, incentivizing sign-ups for our Beauty Squad Loyalty Program. Beauty Squad now has over 3 million members with enrollment growing nearly 20% year-over-year.

We still see a significant opportunity to bring new consumers to the e.l.f. brand. Our most recent attitude and usage study shows a double-digit gap in our unaided consumer awareness compared to some of the legacy mass cosmetics brands. We've galvanized a strong following among Gen Z and see a particular opportunity to continue to build awareness with millennials and Gen X.

We are taking these 3 key drivers of our performance -- our core value proposition, innovation engine and ability to attract and engage consumers -- and applying them to other brands: Keys Soulcare, Well People and e.l.f. SKIN. Let me take a few moments to highlight how we're doing this with e.l.f. SKIN.

Mass skin care is a $4.9 billion category, growing mid-single digits year-over-year. We became a top 20 skin care brand for the first time in Q3 of last year. We continue to see strong results. In Q1, e.l.f. SKIN consumption was up 17% compared to a category that was up 5%. We have reasons to believe we can win in skin. 85% of consumers aware of e.l.f. Cosmetics are open to purchasing e.l.f. SKIN. Our skin care brand rankings are already higher among teens, and skin care drives 8% of our consumption in Nielsen tracked channels versus nearly 20% of our consumption on elfcosmetics.com. and Amazon.

A little over a year ago, we spoke about launching e.l.f. SKIN as the fourth brand in our portfolio. We've now crystallized the brand positioning for e.l.f. SKIN, leaning into our clean ingredients and dermatologist-developed formulations for every eye, lip, face and skin concern. We streamlined our assortment and product architecture to address top skin care concerns. We accelerated our focus on holy grail innovation, leaning on our unique ability to take the best of beauty and make it accessible. Our Holy Hydration! Makeup Melting Cleansing Balm, priced at $11 versus a prestige comparison at $36, was our top-selling e.l.f. SKIN product in Q1. We also improved our packaging with a greater focus on education and effective ingredients.

We're also putting marketing muscle behind e.l.f. SKIN. In July, we launched our first-ever skin care campaign to build consumer awareness. e.l.f. SKIN is setting out to show our consumers that skin care can be effective, straightforward and affordable.

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Before Mandy details our results and outlook, I want to briefly touch on a few other topics that are likely top of mind.

On price increases. In response to rising transportation costs, we increased prices on 2/3 of our SKUs in mid-March across the e.l.f. brand, representing a high single-digit percentage increase to our AUR. While this round of pricing was broader than previous rounds, many of our opening $2 or $3 price points remain unchanged. Pricing is now reflected at all of our retail customers, and volume elasticities trended better than expected in the quarter.

On space expansion. With e.l.f. Cosmetics, we continue to see significant shelf space opportunity. We're pleased to announce space expansion we've earned with CVS in both fall 2022 and spring 2023 in a subset of doors. Internationally, which represents major white space, we're expanding our shelf space with Superdrug in the U.K. for fall of 2022.

On supply chain. As we spoke about on our last call, like many companies, we've had to navigate COVID restrictions in China. We feel great about how our team has risen to the challenge. Our overall in-stock rates held at approximately 95% in Q1. We're actively working to replenish out of stocks on a few holy grail products. Given our stronger-than-expected consumption, we ended the quarter a little lighter on inventory, but expect to recover throughout Q2.

Lastly, on tariffs. As a reminder, the majority of our products are subject to List 3 tariffs at the 25% level. We've talked about carrying approximately 1,000 basis points of cost pressure in our gross margin, and tariffs drive nearly half of that. We've not embedded any tariff relief in our outlook. Therefore, any rollback in tariffs will be a significant tailwind to our gross margin over time.

In summary, our core value proposition, innovation engine and ability to attract and engage consumers continues to fuel our performance. While the environment remains dynamic, I believe we're well positioned to continue to drive share gains and growth in both the top and bottom lines, as reflected in our raised guidance.

I'll now turn the call over to Mandy.

Thank you, Tarang. I am pleased to share the highlights of our first quarter results as well as our raised outlook for fiscal '23.

We started our fiscal year significantly outperforming the category. Our first quarter net sales grew 26% year-over-year, primarily driven by broad-based strength across our national and international retailers. As Tarang spoke about, we saw better-than-expected elasticities from our recent price increase in the quarter. In fact, our consumption growth in Q1 was balanced between increases in both AUR and units. Importantly, our ongoing consumption trends continue to be well balanced, supported by strength in both our core products and recent innovation.

Our digitally led strategy continues to serve us well. Q1 digital consumption trends were up over 30% year-over-year. Digital channels drove 14% of our total consumption in Q1 as compared to 13% a year ago. Gross margin of 68% was up approximately 390 basis points compared to prior year. We saw gross margin benefits from price increases, cost savings and margin accretive mix. These gross margin benefits more than offset the impact of elevated transportation costs we experienced in the quarter.

On an adjusted basis, SG&A as a percentage of sales was 45% compared to 47% last year. Marketing and digital investment for the quarter was approximately 16% of net sales, flat to a year ago and was lower than expected due to a timing shift in spend out of Q1 and into Q2. We continue to expect marketing and digital investment to be approximately 17% to 19% of net sales in fiscal '23.

Q1 adjusted EBITDA was $32 million, up 46% versus last year, and adjusted EBITDA margin was approximately 26% of net sales. Adjusted net income was $21 million or $0.39 per diluted share compared to $14 million or $0.27 per diluted share a year ago. The increase across profitability metrics was driven by our strong sales growth, improved gross margin and a shift in timing for marketing and digital investments. Our liquidity remains strong with the combination of our cash balance and access to our revolving credit facility sitting at approximately $172 million.

We ended the quarter with $72 million in cash on hand compared to a cash balance of $63 million a year ago. Our ending inventory balance was $70 million, down from $85 million in March. As Tarang mentioned, our ending inventory levels in Q1 were a bit lighter than expected given our strong sell-through rates. We expect inventory levels to build back in Q2 as is typical with our quarterly seasonality. Importantly, we remain confident in our ability to meet consumer demand. We expect our cash priorities for the coming year to remain on investing behind our 5 strategic imperatives and supporting strategic extensions.

Now let's turn to our raised outlook for fiscal '23. For the full year, we now expect net sales growth of approximately 14% to 16% versus prior year, up from 10% to 12% previously. We expect adjusted EBITDA between $83.5 million to $85 million, up from $80.5 million to $82 million previously. We expect adjusted net income between $47 million and $48.5 million, up from $43.5 million to $45.5 million previously; and adjusted EPS of $0.84 to $0.87 per diluted share, up from $0.78 to $0.81 previously. We expect our fiscal '23 adjusted tax rate to be approximately 25% to 26% as compared to 27% to 28% previously. Lastly, we continue to expect a fully diluted share count of approximately 56 million shares.

Let me provide you with additional color on our planning assumptions for fiscal '23. Starting with top line. Our raised outlook reflects the outperformance in Q1 relative to our expectations in addition to pipeline related to the incremental space gains Tarang discussed. We continue to expect double-digit top line growth in each quarter of fiscal '23.

Turning to gross margin. We now expect our gross margin to be up approximately 100 basis points year-over-year as compared to our expectation for flat to slightly up previously. This is largely a result of our outperformance in Q1. We expect the combination of price increase, margin-accretive mix and cost savings to offset elevated transportation costs.

Turning now to adjusted EBITDA. Our outlook now implies adjusted EBITDA growth of approximately 12% to 14% versus prior year, up from approximately 8% to 10% previously and on top of the strong 22% growth in fiscal '22. Overall, we are quite pleased to be in a position to raise our profitability outlook in a dynamic macro environment this early in our fiscal year. Like many companies, we do expect cost pressures to weigh on adjusted EBITDA margin this year. Our outlook, therefore, continues to bake in cost inflation within non-marketing SG&A, including higher outbound fuel and logistics costs in addition to the higher inbound transportation costs captured in gross margin. From a cadence perspective, we expect balance of year adjusted EBITDA margins to be in the mid-teens largely due to our normal quarterly seasonality. We expect Q2 to be lower than that due to the shift in marketing spend out of Q1 and into Q2.

In summary, we're pleased with our outstanding Q1 results and remain confident in our ability to grow market share for the balance of the fiscal year. Our performance both on an absolute basis and relative to the category demonstrates how our competitive advantages are driving results.

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

(Operator Instructions) Our first question comes from Dara Mohsenian with Morgan Stanley.

Obviously, very strong results in fiscal Q1. Just given the consumer environment out there, the tenuous state of the consumer and variability, can you give us a bit of an update on what you're seeing for the mass color category in the U.S. in general in July as well as for your business? An update would be helpful.

Dara, it's Tarang. Overall, we're quite bullish on the category. Q1 was the first full quarter where the category was above pre-pandemic levels. We're particularly well positioned within that category. I think we've built 120 basis points of market share and had very strong consumption. I'd say it's still volatile month-to-month. We started, say, the quarter very strong. We saw a few lighter weeks end of June, beginning of July. And now we're seeing strong consumption rates again. So I think while you might see some bouncing around, overall, we're quite bullish on the category going forward. And as we said in our prepared remarks, mass color cosmetics tends to perform better even in recessionary environments than prestige. So we're still pretty bullish on the category but especially so on our prospects.

Great. That's helpful. And then could you just update us on the competitive environment in 2 respects: a, have you seen competitors take price increases; and b, your view of shelf space opportunities? Obviously, the market share results have been very strong for your portfolio. And as you mentioned, you've got a portfolio that offers a lot of value in that $5 range. So I would think you'd be front and center for retailers worried about trade down. So maybe just talk about shelf space opportunity versus a typical

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Obviously, you mentioned a couple of specific opportunities in terms of CVS and Superdrug. But just overall, put shelf space in perspective versus

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and then again, pricing environment you're seeing?

Sure. So first of all, your question on pricing, we have seen average unit retails increase. It's hard for us to tease out how much of that is pricing versus innovation mix with new items, but we definitely have seen an increase in average unit retails. As you say, we are positioned extremely well. Our average unit retail is around $5 compared to many of our competitors around $9 and gives us superior value proposition. But that value proposition isn't only relative to mass competitors. We are seeing some trade down from prestige. We have a number of holy grail products [what we uniquely] can do in terms of bringing prestige-quality, extraordinary price points. An example being our Power Grip Primer, which is our top-selling item right now, at $10 compared to a prestige item at $34. So we feel we're benefiting from both trade down as well as trade in to the brand from the mass side.

And then in terms of shelf space opportunities, I think we're extremely well positioned. We talked about the space that we're gaining at CVS both this fall and in the spring as well as Superdrug. And the currency at which retailers look by to make space decisions, we're well positioned. We are the most productive brand Walmart and Target carry. Our innovation pipeline, it's never been stronger, as well as the consumer profile we bring in. So I think we've had a pretty good track record over the years of picking up space, and I would expect that to continue.

Our next question comes from Olivia Tong with Raymond James.

Congratulations on some great results. I wanted to ask you a little bit about your product initiative plans for this year. Obviously, innovation, particularly at the more premium end for you, but a great value for your consumers has really driven some nice AUR improvement. So I just wanted to understand a little bit more about your product initiatives for this year to keep that momentum going and then your view on holiday. We obviously have a bit of a volatile consumer environment right now. It seems like you are, quite frankly, benefiting to some extent from the volatile environment as you're seeing some trade down from the prestige side. So just your view on those 2 would be great.

Sure. So Olivia, on the innovation pipeline, I feel extremely good about our innovation. As you mentioned, our ability to have these holy grail products that compare to prestige but have much better value, I think, is serving us well. We've had a number of really good hits this year, the most recent being just a couple of weeks ago. We launched a Halo Glow Liquid Filter, which is priced at $14. So higher on the e.l.f. price range, but it compares to iconic prestige product at $44. And we've seen incredible response to that item. In fact, 4 of the shades are currently out of stock, and we're getting more stock on those. And so I feel really good about our overall product pipeline as well as the plans to continue to have these holy grails going forward.

And then in terms of holiday, I would say our strategy on holiday is very similar to last year. Last year, because of the container imbalance, we made the choice to have a much smaller holiday program to prioritize our core items. That strategy served us well. We saw really strong consumption amongst our core everyday great value items, also picked up margin in the process, and we're going to continue that strategy this year. The focus really is continuing to meet the consumer demand we have against the core e.l.f. Cosmetics as well as e.l.f. SKIN brands.

Great. And then just to follow up, do you have a sense of how much of your customer base on some of the sort of double-digit price point product items is your existing consumers trading up and finding great value because in some -- as far as your products not being able to reach sort of the more premium price points as opposed to maybe some of the prestige customers now trading into your product, finding some really interesting value there?

Yes, we have a combination of both. So I think even in our pricing strategy, while we took prices up on 2/3 of our SKUs given the transportation costs, we kept prices unchanged on our opening price point items, $2, $3 items. So it gives a good entry point for anyone entering into the e.l.f. franchise. We do see once a consumer enters into the franchise, they are trying a broad assortment of our e.l.f. products.

And then from a prestige side, we're definitely seeing new users being attracted to the brand that perhaps normally would not look at lower-priced products. The Halo Glow Liquid Filter is a prime example of that. Immediately, consumers made the comparison to the prestige equivalent at $44, and it brought in quite a few new users on elfcosmetics.com and to the franchise. So I think we're benefiting from both as consumers come into the franchise, being able to go across the basket not only in cosmetics but also in e.l.f. SKIN, and then attracting those prestige consumers that see the tremendous value that we can offer at the quality.

Our next question comes from Stephanie Wissink with Jefferies.

Just a question, first, Tarang, for you on e.l.f. SKIN. [Can you maybe just] talk a little bit about the learnings that you've had...

Sorry, Steph. You're cutting out a little bit on us. I don't know if it's your line.

Let me try that again. Can you hear me better now?

Yes, much better.

Okay. My question for you is on e.l.f. SKIN. So just talk a little bit about the learnings that you've had graduating your brand into a new category. I think you mentioned some of the changes in merchandising and packaging, but what you envision for the opportunity set for SKIN over the course of the next couple of years. And Mandy, my question for you is just on the marketing expense in the second fiscal quarter. Could you help us to square up that amount that shifted from Q1 into Q2?

Sure. Steph, on e.l.f. SKIN, we see a huge opportunity. As you know, global skin care is bigger than global color cosmetics, and we're winning in skin. In tracked channels, our consumption in the quarter in skin was up 17% versus a category that was up 5%. In terms of where we're seeing the growth, it really comes from 2 sources. The first is our current e.l.f. Cosmetics consumers. 85% of them are interested in trying e.l.f. SKIN, and we're definitely seeing baskets being built on e.l.f. SKIN. But the second is really attracting new consumers to the franchise. We have holy grails on e.l.f. SKIN just like we do on e.l.f. color cosmetics. In fact, our top-selling skin care item for the quarter was one of our holy grails, our Holy Hydration! Cleansing Balm, which retails for $11 compares to a prestige equivalent at $36. So we very much see the same model working in skin that we've had working in color cosmetics.

The difference, I would say, is what I'm particularly excited about is the level of education we can do. We have clean formulations that our dermatologists developed. And our ability for the first time this quarter to put on awareness building, digital advertising on e.l.f. skin care, I think, has me excited about future prospects. So that, along with the continual pipeline of holy grails, I think is a pretty good formula for us for the future. And then in terms of how big it can get, I don't think we've disclosed that. I think the best proxy we have is in tracked channels. e.l.f. SKIN is about 8% of our consumption, yet online at elfcosmetics.com and Amazon is closer to 20%. So we still have a lot of runway before we run out of steam on that by any means.

And then to answer your question on marketing, so we continue to target the 17% to 19% range on the year from a marketing and digital perspective. Obviously, in Q1, we're a little bit lower than that range. But I would say that -- the guidance I would give is for the year to still target that 17% to 19%.

Our next question comes from Tom Nass with Cowen.

Tom Nass on for Oliver Chen. Congrats on a strong quarter. One question on retail execution going into the back-to-school season. Could you speak to the promotional environment and your strategy within the category?

Sure. So our strategy is quite different than many of our competitors. We are an everyday great value on shelf. So we do not rely on the level of promotions that many of our competitors do. In fact, we do not even have the trade funds that many of them have. We feel like we offer great value every single day. And even when retailers promote our brand, we ask them to do so at full retail. So the model is fundamentally different. I think it has served us well through 14 consecutive quarters of net sales growth. In terms of back to school, I think we're seeing good results on back to school. I haven't necessarily seen a higher level of promotion for this year on back to school. But like I said, promotion doesn't really matter as much to us as our presentation in store and that everyday value that we offer.

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

I think I know the answer to this question, but I just want to check on -- and being that we're hearing about inventory reductions by Walmart, Target and many retailers, quite frankly. Is this affecting you at all? Or are you just having so much momentum in your consumption growth that you're not really seeing any issues with this? Just what are you seeing on that front?

Linda, our consumption has been strong for a very long time. So the biggest challenge we have is making sure that we're staying in stock. So much of what we've heard in terms of inventory reductions, et cetera, haven't played as much into our business just given the strong momentum we have and making sure that we stay in stock.

Okay. And then when you talk about the disparity, the difference in consumption, the percentage of your consumption in-store versus online, the 8% versus the 20%, is that the case for the overall skin versus color categories as well? So therefore, it's not really that you're different from the category. Or is there some anomaly that does stand out just for your brand?

Yes. I'm not as familiar with the overall category numbers. I think those would be more in line, but I don't have that data. I just know for us, as we map where we stand from a retail distribution standpoint versus having our full assortment online, that's really the difference would be the anomaly for us. We just don't have as much of our skin care in retail as we do online. And when we have it available, consumers are naturally migrating to it.

Great. And then finally, when you talk about these 5 core categories that are more than 50% of your sales, I'm just wondering, strategically, do you -- would you like to have a sixth in that list? Or do you think that focusing kind of with your spending and strategies on those 5 core is the best return that you'd get on your investment?

Well, we'd love to have as many categories as possible to have the #1 or 2 position in. I would say the strategy that we followed is to really build these holy grail products in each of the segments, and then follow those up with continued innovation. So primers is one of the categories we have clear market leadership in. We started that journey many years ago with our $6 poreless primer that compared to a prestige item that was $36. We could have rested on our laurels with that. That was such an incredible product, but we followed that up with additional innovation. So our Poreless Putty Primers continue to build share in primers. We followed up our Poreless Putty Primers with our Power Grip Primers. And so you've had this continual innovation in those core categories.

This very same factor was true in our other key leadership categories of brushes, brows, concealers and sponges. We are prospecting other bigger categories. So some of our more recent moves is making a bigger push into mascaras and foundations, the top 2 categories within color cosmetics, and we're making progress there. Our share position is still small, but we feel we can apply that same model to other categories, just as we're doing to skin care.

Our next question comes from Bill Chappell with Truist Securities.

I apologize if I missed this, but when you're looking at kind of expanded retail distribution over the next year, didn't know if bankruptcy or financial troubles of certain players that have large swath of space opens up more space quickly or if it's more methodical. And then also as you're expanding, I mean, I think you've said it's multiple retailers. But I didn't know if it's kind of an expansion at the traditional -- or not, the core Target, Walmart, Ulta or if you're really starting to push some space into new and different retailers, be it club or be it alternative channels.

Sure. So I would say, Bill, that the financial troubles of other players often open up opportunities for us. So to the extent a retailer is worried about a particular brand, I think it certainly is an opportunity. On the other hand, to the extent that they get better financially, perhaps they can be a good competitor, which we welcome. We'd like every core competitor do well because as it brings in more consumer interest into the category, our value equation comes shining through.

Historically, I'd say our space is probably less dependent on whether another competitor is struggling or not, but more in terms of what we're delivering a retailer. And that's actually been the better formula for us. And so right now, we stand in really strong position, both with our productivity, innovation and consumer profile that is opening up the door for more space. And then in terms of the nature of where that space is coming from, it varies each year. And so I think this particular -- I'm particularly excited right now about the expansion that we have going on at CVS and Superdrug. Historically, we were stronger -- much stronger in Target, Walmart, even Ulta Beauty and had a relatively low penetration within drug. So to the extent that we start expanding better within drug, that's a massive opportunity for us just given the number of the door counts that they have.

And then I think Keys Soulcare gives us an opportunity with other alternate retailers as well. So we talked last quarter, our first entry into Sephora Canada was through Keys Soulcare as we look to continue to expand that brand as well. And then similarly with Well People. Well People gives us an opening within retailers that want the highest standard of clean beauty, and we're making progress, expanding distribution on that brand. We talked about taking into a subset of Ulta doors. We feel there's a lot of opportunity at Target and other retailers that care about clean beauty to also expand that brand.

No, that's helpful. And then one -- can you just go back and remind us -- and again, I'm sorry if you've covered this, but kind of the impact of tariffs on your gross margin and what may happen if there's any relief down the road?

Sure, Bill. I'll take that. So we have talked about carrying about 1,000 basis points of cost headwinds in our gross margin, and tariffs is roughly half of that. The rest of it is in FX and transportation costs. And so we -- if the tariffs were to roll back, we would certainly flow a portion of that through to our adjusted EBITDA margins. As we talked about, it would a tailwind for us from a gross margin and an EBITDA margin standpoint. But too early to tell what's going to happen there. Still waiting to hear if that's going to roll back or not.

Our next question comes from Rupesh Parikh with Oppenheimer.

So first on gross margins. So I know you raised your gross margin outlook versus the prior expectations. But I was just curious, why would gross margin gains decelerate versus what you saw in Q1? Because I would think you'd also get some more FX benefits sometime later this year.

Yes. So gross margin, we are really pleased to have taken our outlook up for the year, up 100 basis points versus where we were previously at flat to slightly up. In the quarter, we did get benefits from pricing. I would say it was the largest help to gross margin. But we still saw cost pressure from ocean freight, transportation costs, things of that nature. And so given that it's this early in the year, we want to take a prudent approach to our gross margin, wait and see how things shape out for the year, but really pleased to see the performance that we had in Q1.

Great. And then maybe just one follow-up question. So as you look at your U.S. retailers, I was just curious if you're seeing any change in trends at your different retailers versus what you've seen in recent quarters.

No, our consumption continues to be quite strong. And I think -- I know some of the retailers have reported on their overall performance. But even in the context of that, beauty has been a bright spot for them. So I feel beauty is a bright spot for them, and we're particularly well positioned within each of those retailers.

Our next question comes from Mark Astrachan with Stifel.

I wanted just to, first, quickly ask a follow-up, Mandy, to the last question. So are there costs that you're anticipating to be worse in fiscal 2Q than in fiscal 1Q?

Yes. So again, as we think about the cost pressures that we're facing from a transportation standpoint, we continue to expect those to be elevated for the balance of the year, which is why the balance of the year gross margin forecast is projected to be flat to prior year. We want to see how those continue to come in, felt one quarter in, too early to call how that's going to materialize for the year. So that's why we've taken that approach.

Got it. Okay. And then secondly, more broadly, just asking about skin care sales. So I look at the [skin care] data, getting that that's not obviously the entire business. Dollars were roughly flat sequentially in the June quarter versus the March quarter, up a little bit versus the December quarter. I guess some seasonality. But I'm curious if space constraints potentially are hurting that. And how much of like the incremental space that you're talking about is anticipated to go to skin care versus the overall business? Meaning that if you have an opportunity, would you be allocating more of it to skin care, skin care going to be incremental in the skin care section versus in the makeup section? So any sort of color there would be helpful.

Sure. So Mark, our overall consumption trends in skin care are actually quite strong. There is some seasonality quarter-to-quarter. If I take a look at June quarter, typically isn't as big as some of the other quarters in skin care. So I would say we feel great about the consumption. As I mentioned, in tracked channels, it's up 17% versus the category, up 5%. Certainly, space has been a constraint. We would like to get more of our assortment on skin care, more of our innovation more broadly distributed. So as we pick up more space, it's always a balance between what we're putting behind color and what we're putting behind skin. And I think we have been doing a pretty good job of putting more skin care assortment in, but we have a lot further to go. And I think that will be somewhat dependent on how fast we can accelerate our space expansion.

Our next question comes from Korinne Wolfmeyer with Piper Sandler.

Congrats on the quarter. So I'd like to just push you a little bit more on the market share gains that you've been mentioning. And can you just provide any further thoughts on where these are coming from? How much is really coming from people trading down from the prestige category versus people coming over from other mass brands? Do you have any color on is it coming from certain age groups or income levels? Just any color here would be helpful.

Yes. So first of all, Korinne, the market share gains are in the mass Nielsen tracked universe. So it would not include any of the trade down from prestige. The market share gains are from other competitors in the mass cosmetics category that are tracked by Nielsen. And then in terms of where those share gains are, I mean -- and I think you can take a look at Nielsen yourself in terms of who's losing share and who's gaining share, but we're -- it's pretty broad array of brands that we're taking share from, and that's pretty consistent with what you've seen over the last 3 years. We've got a pretty good track record of gaining share. I think the only brand I'm aware of is in the top 5 that has gained share 3 years in a row to the magnitude that we have. And so there's quite a few players where we're trading in from, into the franchise from.

And then the point on prestige, you're not going to see that in the tracked channel data. But we can see it in terms of when we bring in new consumers, what were they buying before on elfcosmetics.com. And certainly, we're also in Ulta Beauty, which is not part of the tracked channel universe that has both prestige and mass. And so we get some insights there both in terms of our own consumer data as well as what we see from some of the retailers. So I think the great news for us is our value proposition plays in both arenas. In the mass arena, we're continuing to pick up share from mass competitors. And then from the prestige side, our holy grails really do allow us to be able to offer a much better value equation than what someone can get in prestige.

That's helpful. And then lastly, on international, I know it's still a fairly small part of the business, but a big part of the growth story here. So I'm just curious with everything going on overseas and the macro environment, how are you thinking about growth in the international part of the business this year? Should we expect a similar level to what we saw last year? And then over the coming years, how should we be thinking about the geographic mix between U.S. and OUS over the next couple of years?

So our growth has been really strong in international. In Q1, our international business grew 40%, so above our overall growth rates. And that primarily has been on the backs of 2 main countries: Canada, where we're now the #7 position brand; and the U.K., which I mentioned, we're continuing to pick up more space. So I see a lot more growth both within Canada and the U.K., the primary 2 countries in international. International in Q1 represented about 13% of our sales. That's up from about 11% last year. So we are picking up a greater percentage, but I think we have a long way to go.

Western Europe is still mainly open to us. Our main presence in Western Europe is really through Keys Soulcare and through Gloss. I think we have a great deal of opportunity in other markets. And then the approach is going to be the same disciplined rollout approach of finding the right retail partner, combining with our strength digitally, just as we've done both in Canada and in the U.K. And I think there are many more countries we can do with probably the first focus being Western Europe.

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

Well, thank you for joining us today, everyone. I'm so grateful for our incredible team at e.l.f. Beauty for again delivering an outstanding results to start fiscal '23. We look forward to seeing some of you at our upcoming investor meetings and speaking with you in November when we discuss our second quarter results. Thank you, and be well.

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