elf Beauty Inc (ELF) 2023 Q2 法說會逐字稿

Thank you for joining us today to discuss e.l.f. Beauty's Second 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 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, Casey, and good afternoon, everyone. Today, we will discuss the drivers of our Q2 results and our raised outlook for fiscal '23. We delivered another quarter well ahead of our expectations. We grew net sales by 33%, increased gross margin by 190 basis points and delivered $27 million in adjusted EBITDA, up 47%. Q2 marked our 15th consecutive quarter of net sales growth. Given our momentum, we're raising our full-year guidance. We're encouraged by the growth we're seeing across the color cosmetics category. In Q2, category trends grew 5% versus a year ago and were above pre-pandemic levels. e.l.f. cosmetics consumption was even stronger, up 27% in tracked channels. Our market share grew by 115 basis points, overtaking Revlon for the #4 position for the first time.

We were the fastest-growing top 5 brand by a wide margin. Looking at skincare, Q2 category trends were also strong, up 15% versus a year ago. e.l.f. Skin consumption was up 44% tracked channels, well above category growth rates. Before diving into our growth drivers, I want to share a few Q2 highlights. In September, we launched our first-ever impact report to highlight how the company is making a positive impact on people, the planet and our furry friends. The report showcases how we are creating a different beauty company by building brands designed to disrupt industry norms, shape culture, and connect communities through positivity, inclusivity, and accessibility. Our commitment to our culture and people was recently spotlighted by Newsweek, who named e.l.f. Beauty to its annual list of the top 100 most loved workplaces. e.l.f. is a Gen Z favorite. In Piper Sandler's semiannual team survey, e.l.f. remained the #1 favorite cosmetics brand among teens. We grew our share by 500 basis points versus a year ago and attained the #1 rank across all income groups. e.l.f. cosmetics.com became a top 10 shopping destination for teams for the first time, the only single-brand site among major retailers. Our value proposition, innovation engine, and ability to attract and engage consumers are driving strong results with teens and across our entire business. Let me take a few minutes to talk through how each of these drivers enabled our results in Q2.

First, we are known for our value proposition. We make the best of beauty accessible to every eye, lip, face, and skin concern. We take inspiration from our community and the best products in prestige and deliver high-quality holy grail products at extraordinary prices. We see evidence of consumers looking for value, both in absolute price point and relative to prestige. We believe we are benefiting from trade down as consumers choose our holy grails and the value they provide versus the prestige comparison and trade within mass as evidenced by our strong share gains. The average price point for e.l.f. is a little over $5 today as compared to around $9 for legacy mass cosmetics brands and over $22 for prestige brands. Unlike many of these higher-priced brands, our pricing strategy focuses on everyday value instead of broad-based promotions.

The second driver of our performance is that we're in an innovation powerhouse. Our innovation engine has built leadership over time across multiple segments. Our 7 largest segments, brushes, primers, setting sprays, eyeshadows, concealers, browse, sponges, collectively make up over half of e.l.f. cosmetic sales. We have the #1 or 2 position in all 7 segments and saw share gains in each in Q2. Our innovation continues to receive industry recognition. In the highly coveted Allure Best of Beauty Awards, 3 of our products garnered Best of awards, marking the 10th consecutive year e.l.f. Beauty has won this owner. Our new products are resonating with our community. Power Grid primer builds upon our strength in the primary category and it's a jaw-dropping value at $10 versus a prestige equivalent at $34. Power Group was our top-selling SKU in Q2. We're seeing viral success with our recently launched Halo Glow liquid filter. It's incredible value of $14 versus the prestige equivalent at $46, propelled to be the #1 selling product on elfcosmetics.com in Q2.

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Our most popular shades are sold out multiple times, both online and with our retail partners. Halo Glow also helped to drive significant increase in sign-ups for our Beauty Squad loyalty program as consumers are eager to get early access to this viral sensation. Beauty Squad now has 3.2 million members, with enrollment growing over 20% year-over-year. Our loyalty members have higher average order values, purchase more frequently, has stronger retention rates, drive almost 70% of our sales on elfcosmetics.com and our rich source of first-party data. Let me take a step back to talk about the role that innovation plays in our business. As I often say, it is the linchpin of our entire strategy. We have a track record of driving share leadership through innovation and building our franchises year after year. Primers are a great example. In Q2, we remained the #1 brand across primers, growing our share over 1,000 basis points to 46%. e.l.f. holds all of the top 5 primer SKUs and 14 of the top 20 SKUs. Importantly, our primer families are growing and building upon each other. We launched our original mineral-infused face primer as a holy grail in 2009. Priced at $6 compared to an iconic prestige primer at $36. That initial product family quickly built out our leadership in primers. We followed that success a few years later with the launch of the Poreless Face Primer. Then Poreless Putty Primer in 2019, Maton Luminus Putty Primers in 2020, Acne-Fighting Putty Primer in 2021 and Power Grid primer this past year. We continue to innovate behind successful new items and also find that the newest holy grails return attention to our predecessor launches.

As a result, we're enjoying balanced growth between both our new and existing items with each of our primary families growing share. In addition to building share in key segments, we focus our innovation efforts to create sustaining franchises across categories. A good example is the franchise equity we've built in putty to extend our innovation success beyond primers. Our putty blush and putty bronzers were our best-selling products in the blush and bronzer segments in Q2. I'm excited to leverage this innovation approach as we seek to build share in existing categories and conquest new areas. The third driver of our performance is our ability to attract and engage consumers with disruptive digital-first marketing. We have built strength across multiple social platforms and continue to penetrate new frontiers. We were a pioneer on TikTok and are now a 4-time TikTok Billionaire with our latest tag challenge garnering over 14 billion views. We were the first major beauty company to launch a branded channel on Twitch, [e.l.f.u.], aimed at empowering rising women gamers and content creators. In August, we became the first major beauty brand on BeReal, a reality-based photo-sharing platform that's rising in popularity among Gen Z. We recently pushed further into Snapchat, launching a new power grip augmented reality lens to creatively engage with our consumers and build awareness for one of our newest holy grails. We continue to engage with our community on platforms they find most meaningful.

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 are helping us reach new audiences, penetrate new platforms, and test and learn in new frontiers. With the combination of our top-line momentum and the ongoing strong ROI, we now expect marketing to be at the high end of our 17% to 19% range for fiscal '23. These 3 drivers of our performance, our value proposition, innovation engine, and ability to attract and engage consumers are helping us gain more retail space. We are pleased to announce space expansion we've earned in a subset of doors with several of our retail partners. We will be expanding space with both Walmart and Target in spring 2023. In addition to the space gains we previously announced with CVS in fall 2022 and spring 2023.

Internationally, which represents major white space, we're expanding space with Shoppers Drug Mart in Canada for spring 2023. In addition to the space gains, we previously announced with Superdrug in the U.K. for fall 2022. Before Mandy details our results and raised outlook, I want to take a moment to discuss our brand superpowers, which set the foundation for our overall competitive advantage. Since inception, e.l.f. has delivered premium quality at accessible price points. We've built upon these superpowers with cruelty-free and our commitment to e.l.f. Clean. Our most recent addition is that we are the first beauty company to have a third-party manufacturing facility Fair Trade Certified. A Fair Trade Certified CEO on a product signifies that it was made according to rigorous standards that promote sustainable livelihoods and safe working conditions for factory employees, protect the environment and require transparent supply chains. With e.l.f., consumers can have premium quality beauty products at accessible price points with broad appeal that are cruelty-free, vegan, clean and Fair Trade Certified. While other beauty brands can try to replicate any one of these, we believe the unique combination of our expanding superpowers forms our competitive moat and fuels our ability to win in fiscal 2023 and beyond.

I'll now turn the call over to Mandy.

Thank you, Tarang. Our second quarter results were outstanding. Q2 net sales grew 33% year-over-year, driven by broad-based strength across national and international retailers as well as digital commerce. Our consumption trends continue to be well balanced between increases in both AUR and units and between strength in both our core products as well as recent innovation. Our digitally-led strategy continues to serve us well. In Q2, digital consumption trends were up over 75% year-over-year. Digital channels drove 15% of our total consumption in Q2 as compared to 12% a year ago. Gross margin of 65% was up approximately 190 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 inventory adjustments and higher transportation costs in the quarter.

On an adjusted basis, SG&A as a percentage of sales was 46% compared to 49% last year. We drove leverage in our non-marketing SG&A expenses as a result of our better-than-expected top-line trends. Marketing and digital investment for the quarter was approximately 16% of net sales, in line versus a year ago, and was lower than expected on a percentage basis given our significant top-line outperformance. As Tarang mentioned, with the combination of our top-line momentum and strong ROI, we now expect marketing and digital investment for the full year to be approximately 19% of net sales at the high end of our 17% to 19% range. Q2 adjusted EBITDA was $27 million, up 47% versus last year. And adjusted EBITDA margin was approximately 22% of net sales. Adjusted net income was $20 million or $0.36 per diluted share compared to $11 million or $0.21 per diluted share a year ago.

Moving to the balance sheet and cash flow. Our balance sheet remains strong, and we believe this positions us well to execute our long-term growth plans. We ended the quarter with $85 million in cash on hand compared to a cash balance of $42 million a year ago. Our ending inventory balance was $81 million, up from $70 million in June as expected. We remain confident in our ability to meet the strong consumer demand we're seeing. I'm also pleased with the strong free cash flow generation we've seen year-to-date of approximately $42 million. Given our cash position, we ended the quarter with less than 1x leverage on a net debt basis. We expect our cash priorities for the year to remain on investing behind our growth initiatives and supporting strategic extensions. In this rising interest rate environment, we are also exploring retiring a portion of our debt, given our strong cash flow.

Now let's turn to our raised outlook for fiscal '23. For the full year, we now expect net sales growth of approximately 22% to 24% versus prior year, up from 14% to 16% previously. We expect adjusted EBITDA between $93.5 million to $95 million, up from $83.5 million to $85 million previously. We expect adjusted net income between $59 million to $60.5 million, up from $47 million to $48.5 million previously. And adjusted EPS of $1.07 to $1.10 per diluted share, up from $0.84 to $0.87 previously. We expect our fiscal '23 adjusted tax rate to be approximately 22% to 23% as compared to 25% to 26% previously. Lastly, we expect a fully diluted share count of approximately 56 million shares at year-end.

Let me provide you with additional color on our planning assumptions for fiscal '23. Starting with the top line. Our raised outlook reflects our outperformance in Q2 relative to our expectations, pipeline related to the incremental space gains Tarang spoke about with Walmart, Target, and Shoppers Drug Mart as well as our ongoing business momentum. Turning to gross margin. We now expect our gross margin to be up approximately 175 basis points year-over-year as compared to our previous expectation for up 100 basis points. This is largely a result of our outperformance in Q2 and an improved outlook on transportation costs. In terms of the key drivers for the year, we expect the combination of price increases, margin accretive mix and cost savings to support our gross margin improvement. Now turning to adjusted EBITDA. Our outlook implies adjusted EBITDA growth of approximately 25% to 27% versus prior year, up from approximately 12% to 14% previously and on top of the strong 22% growth in fiscal '22. This embeds our marketing and digital spend expectations at the top end of our 17% to 19% range. Even with that increased investment, our outlook now implies adjusted EBITDA margin leverage of approximately 50 basis points year-over-year. The improved outlook is supported by the combination of our strong sales growth, gross margin expansion and leverage in our non-marketing SG&A expenses. Overall, we are quite pleased to be in a position to meaningfully raise both our sales and profitability outlook and what continues to be a dynamic environment.

In summary, we're pleased with our outstanding Q2 results and remain upbeat on our long-term growth potential. Significant white space remains across cosmetics and skincare, both domestically and internationally to support our expected top-line growth. We also continue to expect to deliver leverage in our adjusted EBITDA margin. Finally, we believe our solid balance sheet, low leverage and strong cash flow generation can continue to drive shareholder returns and support our overall growth.

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

(Operator Instructions). Today's first question comes from Olivia Tong with Raymond James.

Great. First, congratulations and obviously, a very strong quarter. We're obviously hearing a lot about inventory and [consumer slowdown], what have you here. And just curious if you could talk about how sales were out of the quarter. Clearly, you raised the guide by the beat, but a little bit less in terms of flow-through on the profitability. I assume some of that is marketing. But if you could just talk a little bit about that, that would be fantastic.

Sure. Olivia, as you mentioned, we're really pleased with our Q2 results. Net sales up 33%, adjusted EBITDA, up 47%. So really strong results. Also pleased with our ability to raise guidance on both the top line and bottom line in this environment. And so our guidance implies for the second half, up 19% from a net sales standpoint, which is continued strength. And so we feel great about our ability to deliver in Q2 and then also the outlook that we've provided. In terms of inventory slowing down, and I think you are indicating at retailers, you're hearing that inventory is slowing down. Is that the question?

Right. Exactly how they're pulling back a little bit on how much inventory they want to hold, [less so in] beauty of course, but just given the backdrop, just curious how you're thinking about it.

Yes. So we're quite pleased with our own inventory position. In fact, you saw our inventory build from $70 million in June, up to 81 million here in the September ending quarter. And from a retailer standpoint, to your point, in beauty, we have not felt that from our retailers. In fact, I think we have a little bit of the opposite problem of just making sure that we're supplying our retailers and keeping up with the demand that we're seeing, what we have been able to do in stocks remain 95%. So very pleased with our position.

Great. And then a little bit more detail in terms of who it is that you think you're gaining share from? Is it other mass players? Are you seeing any trade down potentially from [the speed], whether a function of your innovation or the environment that we're in? And any incremental detail you can give in terms of the makeup of the new consumers that you're secular bookers?

Yes. Olivia, this is Tarang. So I would say we're seeing strength across our business, all price points, all channels, national retailers, our digital business internationally. And if we take a look at that strength, the 3 main drivers are our value proposition, our innovation engine, and the ability to attract and engage consumers. As for the trade-down, I think we're seeing 2 different things here. One, on some of our higher price point items we're seeing trade down from prestige. So items like our $14 Halo Glow liquid filter is still a phenomenal value relative to the $46 prestige equivalent. So we're seeing that across our holy grails where consumers are making that comparison, and we're seeing great growth there. And then we're also seeing trade within mass. The 115 basis points of share we picked up is consumers coming to us from other brands. And again, I think that value equation really holds up strong as well as our innovation and ability to engage consumers. So we're seeing it pretty broad-based strength and across a variety of different players.

The next question comes from Andrea Teixeira with JPMorgan.

Thank you and congratulations also to the strong results. I don't want to take any credit from underperformance and especially in sales. So I think it will be dismissive I don't ask in terms of the current backdrop. Can you talk about consumer behavior? I think, Tarang, you mentioned just now that even post pricing, it seems that consumers are still eager to premiumize, but have you seen within families of products, any sign of down trade within comparable products? And if you can comment on that move that you made, not only in pricing, but I guess your average price in terms of premiumization and more skincare within the portfolio? And then I have a follow-up on the sales front.

Sure, Andrea. So maybe I'll step back and start with the category. We're -- we've long been bullish on the color cosmetics category on the mass side and mass skincare. And we very much saw that strength this quarter. While the category grew 5% for the quarter in the last 4 weeks, it was up 10%. And then within the category, we're even well better positioned. Our consumption, I think, in tracked channels was up 27%. Similarly, on the skincare side, category was up 15%, e.l.f. Skin grew 44%. So the strength that we're seeing is really across the board. We are getting trade down from prestige, but we're also getting trade from within other mass brands. Our average unit retails on the color side are $5 relative to legacy mass brands that are $9 and prestige brands that are $22. So we have a superior value proposition really for any consumer across almost any price point in our range. And the same holds true in skincare. I think our ability to bring prestige quality skincare at these accessible price points is also helping us win within skin. So we feel great about that. And then in terms of the consumer profile, we've long had strength amongst Gen Z. As you heard in the call, we strengthened our position against teens, the #1 brand amongst teens across all income groups. But beyond teens, we've also been picking up more consumers from both millennials and Gen X. And I think it really speaks to both the combination of our innovation as well as our activities attracting and engaging consumers. So we feel really great about the fundamental health of the business and the core fundamentals behind it.

That's super helpful. And then on the breakdown of the 22% to 24%, I know there's a lot of moving pieces in terms of premiumization, new distribution. Is that fair to say for this specific fiscal, you're still benefiting, call it like 1/3 of your growth into new distribution, and how we should be thinking of additional shelf space within [seen doors] or new doors?

Andrea, it's Mandy. So the 22% to 24% growth that we're seeing largely driven by the momentum that we've had year-to-date. And just with a continued outlook for that momentum to be strong as we go into the second half. From a distribution standpoint, we did talk about the space gains that we're picking up in Walmart and in Target as well as shoppers. Those have been baked in from a pipeline perspective to our outlook as well. And so that's really the way to think about how we built up our sales guidance that we provided.

The next question comes from Ashley Helgans with Jefferies.

Congrats on the quarter. As you mentioned on the call and also we continue to see stockouts of your Halo Glow products. We're just wondering, is this purely a function of the viral nature of the product? Or have you had any supply constraints? And then on holiday, curious about your plans to give that.

Okay, Ashley. So first of all, on stock-outs, I'll back up a little bit and feel really great about our ability to meet consumer demand. We've had -- you saw the consumption for the quarter and yet our customer in-stocks were over 95%. So we feel great about regardless of the disruption that's out there, our ability to continue to meet that demand. And in terms of the specific item, Halo Glow will liquid filter that was a viral sensation. It's a phenomenal product that compares to $46 prestige item, and we're priced only at 14. So this was just a matter of, I think, the demand on that item was probably 10x what we initially forecasted. We've brought it back in stock and it keeps selling out. So I think this -- we have good plans to bring in more Halo Glow. We don't see any issues from a supply chain standpoint. But we will, from time to time, have these items that just really take off and are hard to chase down.

But I feel that situation should improve as we get into our fourth quarter and bodes well for the future because that item continues to have real strength, as does our Power Grid Primer. The other thing I will say is each of these innovations, particularly as we're building these long and sustaining franchises, brings attention back to the core part of our business. And so we're seeing strength not only in our new items but really our core items, some of these items we've had for years as they're certainly resonating with consumers. And then on your holiday kits, if you recall last year, we were, I think, one of the first companies that really saw the impending container imbalance. And we made a strategic shift at that time to really forgo a lot of the big holiday kits and prioritize our core business. And that strategy worked exceptionally well. We saw really strong sales during the holiday period and expansion of gross margins. And really, the core insight is e.l.f. is a terrific brand to gift, whether we put it in a box or the consumer puts it in a box. And so we're following forward with that strategy this year as well. Primary focus is on our core items. There will be some limited holiday kits similar to what we did last year on elfcosmetics.com and a few of our retailers. But the focus really is on these everyday items that consumers really love.

The next question comes from Bill Chappell with Truist Securities.

I guess, first, on the marketing [sales] and the high end of the guidance, is that -- just to make sure I understand, is that just you're running ahead of schedule and so had additional to reinvest, and this was timely? Was there a bigger slate of new products that you just want to support? And do you see this as a new -- the higher end is a new norm? Just a little more color around that decision would be great.

Sure. So our decision to invest more in marketing or go to the top end of our range, the 17% to 19% range really just has to do with the returns we're seeing on that marketing investment. Our ROIs are well above any industry benchmark in terms of gross sales per dollar invested. You're seeing the momentum in terms of what it's doing, both in terms of attracting new consumers as well as propelling our sales growth. So it really is going and realizing what we're seeing there. The other thing I feel really great about is we're able to invest in our brands for the long term, and we're also having EBITDA leverage. So being able to grow our EBITDA margin 50 basis points, I think, is a terrific position to be in. So we love that combo of being able to invest more in our business and increase our profitability.

And is it something that you expect to be at the high end for the foreseeable future? Is that -- do you just see that momentum?

Well, certainly for this year, I think we definitely see it -- we'll have to wait until May when we give our fiscal '24 guidance in terms of where we see the ranges then. But what I'd tell you is our objective is going to be continued strong investment behind our brands and delivering the EBITDA margin that we talked about, and I'm glad to be able to do so this year.

No, that's great. And Mandy, real quick, just on freight rates. Is that the biggest bucket that you're seeing some tailwinds in terms of year-over-year costs? And could they go even further? Or are you fairly locked in for the remainder of this year?

Yes. So the freight rates are on the inbound container costs that we're seeing. So I know that you know last year, rates were exceptionally high, and we have seen some stabilization in the last few months, which is great to see. Something that we continue to watch, but feeling good about right now. And I do think that will be a little bit of a tailwind for us here and into fiscal '24.

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

Yes. So I was just trying to work out the math here with the gross margin. Do you have any guidance or comments about the cadence of gross margin? I think it's usually down sequentially in the fourth quarter. Would that type of seasonality exist again this fiscal year?

Linda, it's Mandy. Yes. So when we look at the gross margin implied for the second half, I would say that we do -- last year, we had a higher gross margin, if you recall, in Q3 because we walked away from the holiday program. And we do usually see it step down into Q4. So I think that's a fine seasonality to assume as you think about your modeling.

Okay. And then I was just curious if you all had any theories as to why the skincare category is growing faster than color at math, where in prestige color is growing faster than skincare. Do you have any insight on that?

So Linda, I don't think we have that much insight other than I think consumers are particularly attuned to value right now and mass skincare, I think, offers really great product set a much better value. That would be my hypothesis. But what I'd tell you is skincare has been strong actually now for quite a few years. And so we continue to see that trend with consumers caring about their skincare needs. We see it even amongst our Gen Z audience in terms of their interest in skincare and color. So we're bullish on both categories on the mass side.

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

I was wondering if you can comment on the expansion of e.l.f. Skin as a stand-alone brand and how it's performing among your demographics. Just given the e.l.f. Skin sits on the shelf next to e.l.f. Cosmetics. Do you think that the growth is mostly driven by consumers who were already buying e.l.f. Cosmetics or moving into e.l.f. Skin or are you seeing new entrants into the brand through skincare as a category?

So we're really pleased with our progress on e.l.f. skin. As you mentioned, we did pull it apart as a stand-alone brand. I think a couple of quarters ago or last quarter was the first time we put its own awareness-building campaign. We have a terrific pipeline of innovation on e.l.f. Skin. So I think all of those things are working for us and you can definitely see in the outsized growth that we have in e.l.f. Skin. In terms of longer-term where the current user base is, I would say, primarily right now, it is a lot of core e.l.f. consumers particularly places like Target, where we have it shelved within the main e.l.f. Set. We know e.l.f. consumers are highly open to waning e.l.f. Skin, and it was really more of an awareness problem of do they understand that we have e.l.f. Skin. So I'd say that's most of our sales right now. But longer term, particularly in some retailers, we're also testing the brand in the skincare set, I think you're going to see a nice balance between e.l.f. consumers and new consumers to the brand, particularly given the innovation that we have on e.l.f. Skin.

Great. And just as a follow-up, in terms of the increase in shelf space at Walmart and Target, how are you expecting to balance this between distribution of e.l.f. cosmetics and e.l.f. Skin?

Well, I think anytime we get more space, it gives us an opportunity to put more e.l.f. Skin into a retailer, and that very much will be the case here. I'd say the majority of that space will still be against e.l.f. Color Cosmetics, just given the amount of innovation we have there as well, and that's most of our business. But we definitely will take that opportunity to get more e.l.f. skin in. I think during the quarter, skincare still represented 20% of our sales on elfcosmetics.com and at Amazon. And we believe the biggest difference between that and our overall share of skin is probably closer to 8% or 9%. It has to do with having the assortment available. So every opportunity we get, particularly when we get more space, we'll be to get more skincare into the sets.

The next question comes from Rupesh Parikh with Oppenheimer.

So just on digital consumption, there was a strong acceleration this quarter versus what you guys saw in Q1 year-over-year. Just any more color in terms of what's driving that strong increase in digital penetration.

Rupesh, I'd say on digital consumption, it really is the plans we've put behind our business there. Starts first and foremost, of much of our marketing efforts are digital in nature, and the level of engagement we have there. But the other thing I'd point to, I'd say 2 other things I'd point to is, one, Beauty Squad loyalty program now having 3.2 million members. That program was up 20% year-over-year. And there -- those members purchased more frequently, have higher lifetime value. And most significantly our rich source of first-party data. So it actually makes our marketing more effective, being able to have look-alike targets, and you have that first-party data that fuels everything. But we've also seen real strength, as I mentioned, across our different digital properties. So not only elfosmetics.com where we're seeing good growth, but our retailer.coms, ulta.com, target.com, I think they've made a number of investments to improve their digital business. And Amazon continues to be quite strong for us and a great source of growth. So we're seeing it across the way it starts first and foremost with our overall approach as a digitally native brand to start with digital and let that fuel everything else.

Okay. Great. And then just on the distribution front, it seems pretty significant between Walmart, Target and some of the other retailers you named. Is there anything qualitatively and quantitatively, you can just talk about like how significant these additions are going to be in the spring?

Yes. So I'd say on space expansion, we've had a good track record over the years. If I back up 9 years ago, we probably have about 11,000 linear feet of space in the U.S. We have over 130,000 linear feet now. And if you look year-over-year, there were a couple of years early in our life where you had, I'd call it, a massive step change. There was 1 year where I feel Target gave us 50% more space across all their doors. But other than that, it's really been a pretty methodical subset of a retailer's chain doors that will give us some incremental space with. So we like that cadence. Our primary focus is always going to be on productivity being able to drive strong comp store growth regardless whether retailer gives us some space. So I would say, yes, definitely significant, particularly Targets, our most longest-standing national retail partner then making a further statement on e.l.f. e.l.f is also now, I think they're top brand across all of cosmetics and facial skincare. So it definitely goes hand in hand with our growth. Walmart, we have a massive opportunity. And I'd say still have quite a bit of white space even with the space they're about to give us. But really across the board, I feel there’s space opportunities everywhere we look. But having this approach of a pretty disciplined rollout and being able to build that on top of our overall productivity model is pretty healthy and a pretty consistent approach.

The next question comes from David Shakno with William Blair.

This is David Shakno stepping on for Jon Anderson. Congrats guys on a great quarter. My question is about the sales and EBITDA guidance and why it implies it would be weighted so heavily towards the front half of the year? The reason I ask first on sales, as you said in one of the earlier questions, your sales guidance at the high end of the range implies high teens for the second half, but that's compared to nearly 30% year-to-date and the scanner data has been running even higher than that? And then second on EBITDA, you're implying low single-digit growth for EBITDA in the second half, and that compares to roughly 46% year-to-date. So I imagine the marketing investments are the main reason on the EBITDA piece. But for modeling purposes, if you could provide some color on that and the implied slowdown on the top line, that would be great.

David, thanks for the question. So from an overall guidance standpoint, again, we feel great about our guidance range, 22% to 24% on the top line, 25% to 27% growth in adjusted EBITDA in this environment is really something that we're quite proud of. In terms of first half versus second half, we always take a balanced approach when it comes to our guidance. And so never want to get too far ahead of ourselves. We're encouraged with the tracked channel data that we're seeing right now, seeing 40% growth phenomenal. Given that, we do think that our net sales guidance, will wait a little bit more towards Q3 versus Q4, if I were modeling that. But I think it's prudent for us not to assume a 40% run rate continues for the balance of the year. And so I'd love to see it. But at this point, we're taking a balanced approach with our guidance. On the EBITDA side of things, you're right. From a marketing standpoint, we've been at 16% for the first half of the year and to get to the 19% for the full year will require a little bit more investment in Q3 and Q4. And so that's why you see the EBITDA margin down on a year-over-year basis versus being up in the first half.

Great. That's very helpful. And then one follow-up question. Considering you utilize a hybrid supply chain model in China, could you provide any color on if there's been an impact from COVID shutdowns with that ramping up again in China?

Yes. So David, this is Tarang. I'm exceptionally proud of our operations team and team in China. Obviously, our biggest test came last quarter with lockdowns in Shanghai, where a lot of our team are for 2 months and yet we continue to produce and ship product. More recently, we have not seen any major impact, the rolling shutdowns. I think our supply chain there is pretty well distributed throughout the country. And so I don't think any of our facilities have directly been impacted in any meaningful way. And so we feel great about our ability to continue to meet the strong consumer demand that we see.

Next question comes from Korinne Wolfmeyer of Piper Sandler.

Congrats on a great quarter. So first, I'd just like to ask a little bit more on the DTC channel and what you're seeing within e-commerce. Obviously, that's had a lot of really good momentum recently. Can you just speak to like how far down the road do you think this momentum is going to continue? And what are you baking into expectations in terms of the strength in the DTC channel?

We're quite pleased with our e-commerce performance. As Tarang mentioned, it's pretty broad-based, not only our owned .com but also retailer.com and what we're seeing on Amazon. I would say that this quarter as well, we did get a little bit of a bump as well from the Halo Glow launch. We really saw consumers over to elfcosmetics.com. In fact, we still have a waiting list for consumers anticipating when that's going to be back in stock so that they can get their hands on Halo Glow. So I would say our outlook bakes in that we see continued growth in the e-commerce channel, not at the tune of 75%, but still solid growth for the outlook. That's very helpful. And then just explaining a bit on some of your marketing efforts. Can you just talk a little bit about what all of this extra spending is going to entail? Is it going to continue to be like online, digital, social media and marketing? Are you going to do more to target maybe the older generations beyond Gen V, maybe some of the upper income groups. Can you just talk kind of talk through some of your efforts with this extra marketing spend?

Sure. Korinne, I would say on our marketing efforts, it really is a continuation of the strategy we successfully deployed over the last few years. And it's a combination of digital advertising that we see really good returns against in terms of building up our core awareness and prospecting on new frontiers. We were one of the first beauty brands on TikTok. We're now, I think, a 4x TikTok billionaire with our latest challenge, I think having over 14 billion views. We're the first major beauty brand on Twitch, and we're seeing great results on our LCV channel on Twitch. We're the first beauty brand, major beauty brand on BeReal. And we're encouraged by the initial response there as well. So the additional marketing spend will be to continue our efforts to build awareness behind our brands. There's a lot further we can go there as well as be able to prospect both new platforms and new collaborations. And so you'll have to wait and see what our team has in store, but I feel really great about what they're doing, particularly when I look at the ROIs and the momentum it's driving.

The next question comes from Mark Astrachan with Stifel.

Yes. Thanks, and afternoon, everyone. I guess just to start to follow-up on that last question. In terms of the incremental marketing spend, can you maybe give some directional color about where it's going by category, legacy business, else skincare, key solar, et cetera.

Sure. So I'd say, look, just by the nature of our business, the vast majority will go against half color. That is the biggest part of our business, but it also gives us the opportunity to double down on the success we're seeing in e.l.f. Skin and continue to build trial and awareness in both well people and key cell care. But in terms of the app without breaking out the total dollars, I would say it probably follows in line with the size of our business and that opportunity. So I'd say primarily elf-color followed by e.l.f. Skin, and then the remaining amount would be on key silcare and well people.

Got it. And then following up on one of the earlier questions, trying to think about the recruitment of new consumers to the business. Anything that you can help us walk through in terms of how somebody enters the brand from a presumably lower-priced help makeup color offering moves into a higher-priced offering? Do they then move over to skincare? And I guess you stopped there, but is there any way even to move them into well people or into keys going forward. But I think I'm more interested in the first part of trading up within the color business and kind of horizontally moving into skincare.

Sure. So historically, I would have -- if I answered this question a few years ago, I would have said the primary way in is somebody to try one of our absolutely extraordinary value products and usually one of our lower priced products, they'd be delighted by the performance of that product and then would move up the range. I would say today, we're seeing new user acquisition across different price points. So certainly, those who come in at an entry point, perhaps a younger consumer who wants his first experimenting and trying with makeup try some of our lower-priced items as a great entry in. But we're picking up many more consumers to this strategy on our holy grails when we can create a product inspired by our community or prestige and introduce it at an incredible value, we're seeing tremendous new user acquisition. Mandy just talked a moment ago in terms of elfcosmetics.com and how many consumers we brought in through our Halo Glow launch.

We saw similar results with our Power Grid Primer, which is our #1 item right now. And actually, the latest I looked at it, I think it's the #3 item in all of color cosmetics. So we have some phenomenal items that are getting regardless of price point, new users interested with all the buzz that they see behind them. And then skincare is very similar. I'd say the primary way, if I look back last year that we got a skincare use it was an existing e.l.f. consumer who then built their basket because they already love e.l.f. and wanted to try else skincare. Again, our holy hydration franchise, which is our biggest franchise in skincare, we're seeing not only e.l.f. consumers but other consumers who recognize the quality of that product at the prices that we have. So I think our model is much more robust today than even a number of years ago, particularly with this emphasis on a holy grail products and the attention they bring to the rest of our line.

The next question comes from Oliver Chen with Cowen and Company.

Great quarter. You've had -- you offered an exceptional value just on the price increases ahead and what's happening there, could you speak to consumer appetite and plans and also any mix dynamics as you continue to really innovate nicely in skincare? And then secondly, Tarang, our research highlights to be real as well in terms of that being an exciting/interesting and novel platform. What are your thoughts ahead for Metaverse and Web3? And how you're thinking about that in terms of your loyalty program or how material it could be to customer acquisition trends?

Oliver. I'll go ahead and take the first question on pricing. And so if you recall, we took pricing in March on about 2/3 of our portfolio. And we have seen consumers respond pretty well to that. If you think about our sales growth more recently, very balanced between pricing and unit growth, which is great to see. We do not have an additional price increase on the horizon. We are very judicious when we take pricing and really have only taken it in response to broad macro factors because we do want to make sure that we're maintaining that value proposition for our consumers. And so that's where we sit on pricing right now.

And on your second question, Oliver, I'd say, yes, we're excited about BeReal and the various other platforms that we're going to try. And then in terms of your question on the Metaverse and Web3, I'd say we're already starting to experiment there. If you take a look at our channel on Twitch, it does combine this core virtual experience with physical reality. We have efforts that our team is doing in terms of going even deeper in that, just given our leadership over digital and the various platforms we look at. So more to come on there. I'd say we're exploring it. The primary focus right now really is in the platforms that we're seeing success and our strong digital advertising, which is having results, but we definitely have our eyes on it, and I think we have some exciting plans coming up.

Okay. And Tarang, on Project Unicorn. It seems like your in-stock levels you're really happy with. But where are you in that journey? Are you pleased with the nature of the placement and the assortment. I mean, you keep on evolving with the product architecture. So did Unicorn change or evolve, would love some thoughts.

Yes, sure, Oliver. We're really pleased with Project Unicorn. In fact, last year, we had the next chapter of Project Unicorn since we went through a number of phases really designed to get better presentation on shelf, greater productivity. I think we saved over 1 million pounds of packaging. We're pleased with all of that. Last year, we rebranded Unicorn to Project Green Unicorn because we feel that even further, we can go both in terms of waste elimination, being more sustainable. I'm particularly proud of being the first beauty brand that got Fair Trade Certified really ties into the superpowers that we have. So we have much further to go on Project Green Unicorn. And I think you'll see it every time you see Shell's reset. There's a continual improvement in progress. I just recently saw what we're going to have come out in the spring of next year, and I think it's a further advancement in terms of our overall shelf sets and what we're able to do.

Last question, the recharge packaging, it looks better, but what was the rationale for that in terms of what you saw as that opportunity? And have you been pleased with that on the skincare?

Yes. We have -- we've really been pleased with what we're doing across skincare, including packaging. And I think the -- when we declare that e.l.f. Skin was its own brand, we really looked at every aspect of that business and said, was it absolutely clear that this is the e.l.f. Skin brand. And so I think the primary purpose of that package redesign was really to make sure e.l.f. Skin screened first and foremost. But the second is also the realization of the communication task on skincare is different than color cosmetics. Color cosmetics tends to move more on trended impulse. Skincare tends to move much more on education. And so really making sure that we're communicating even better with consumers in terms of what were the ingredients in the skincare products, what were their core benefits. I feel the new packaging does a great job with it. And I think if you take a look at our track channel results of up 44% versus the category of 15, I'd say it's working along with our other efforts.

This concludes our 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. I'm so proud of our incredible team at e.l.f. Beauty for delivering another outstanding quarter of results. We look forward to seeing some of you at our upcoming investor meetings and speaking with you in February when we'll discuss our third-quarter results. Thank you, and be well.

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