ELF - NYSE

Thank you for joining us today to discuss e.l.f. Beauty's Fourth Quarter and Fiscal '24 Results. I'm KC Katten, Vice President of Corporate Development and Investor Relations. With me today are Tarang Amin, Chairman and Chief Executive Officer; and Mandy Fields, Senior Vice President and Chief Financial Officer. We encourage you to tune into our webcast presentation for the best viewing experience, which you can access on our website at investor.elfbeautycom. 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-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 exceptional fourth quarter and fiscal '24 performance and our initial outlook for fiscal '25. I want to start by recognizing the e.l.f. Beauty team, we hit a major milestone this year, achieving over $1 billion in net sales. In fiscal '24, we grew net sales by 77%, increased gross margin by approximately 330 basis points, grew adjusted EBITDA by 101% and increased market share of 305 basis points, well above our original expectations. We recently rang the opening bell at the New York Stock Exchange to commemorate our 20th anniversary as a company and celebrate the exceptional, consistent, category-leading growth we've delivered over the last two decades. Q4 marked our 21st consecutive quarter of both net sales growth and market share gains, putting e.l.f. Beauty in a rarified group of high-growth companies. We are one of only five public consumer companies out of 274 that has grown for 21 straight quarters and average at least 20% sales growth per quarter. In Q4, we grew net sales by 71%, increased gross margin by approximately 180 basis points and grew adjusted EBITDA 93%. We've continued to prioritize three areas with significant runway for growth: color cosmetics, skin care and international. Let me update you on our progress in Q4. In color cosmetics, we continue to significantly outperform the category. In Q4, e.l.f. Cosmetics grew 30% in tracked channels as compared to a category that was down 3%. We grew our share 325 basis points, driving our brand rankings to new highs. On a dollar share basis, we achieved the number two rank for the first time as compared to the number three brand a year ago. And on a unit basis, we achieved the number one rank for the first time as compared to the number two brand a year ago. We remain bullish on the color cosmetics category. In Q4, the category lapped a period last year when trends were up 18%. When looked at on a two-year stack basis, category trends accelerated relative to last quarter. We remain confident in our ability to significantly outpace category growth rates and take share. In skin care, we similarly continue to meaningfully outperform the category. In Q4, e.l.f. SKIN grew 38% tracked channels, 19x category growth of 2%. We grew our share of 45 basis points, increasing three ranked positions to the number 11 brand as compared to the number 14 a year ago. We're also pleased with the growth we see for Naturium, the clinically effective biocompatible skincare brand we acquired this past October. Naturium contributed approximately 17 points to our net sales growth in Q4. Turning to international. Our net sales grew 115% in Q4, fueled by strength in Canada and the U.K. e.l.f. was the fastest-growing among the top 10 cosmetics brands in both Canada and the U.K., driving significant share gains in each. In Canada, we increased our rank to the number three brand as compared to the number six brand a year ago. In the U.K., we increased our rank to the number four brand as compared to the number seven brand a year ago. International drove 16% of our sales in Q4 on a much bigger total business as compared to 13% a year ago. Across categories and geographies, the three fundamental drivers of our business remain the same: our value proposition, powerhouse innovation and disruptive marketing engine. Let me walk through how each underpinned our strength in Q4. First, we're known for our value proposition. Our mission is to make the best of beauty accessible to every eye, lip, face and skin concern. We have a unique ability to deliver high-quality holy grails, taking inspiration from our community and the best products in prestige and bring them to market at an extraordinary value. The average price point for e.l.f. is about $6.50 today, as compared to the $9.50 for legacy mass cosmetics brands and over $20 for prestige brands. Our value proposition underpins our strong unit growth. We're the only top five brand to grow units this past year. The second driver of our performance is our powerhouse innovation. Our innovation engine has built category leadership over time. Five years ago, e.l.f. had the number one or two position across eight segments of the color cosmetics category. Today, e.l.f. has the number one or two position across 18 segments which collectively make up almost 80% of e.l.f. Cosmetics sales. We continue to deliver strong sales growth and share gains across these segments. We have a track record of building growing product franchises, in both cosmetics and skin care that endure instead of the typical one-and-done launches. Our powerhouse franchise are growing year after year, as we launch innovation within each, the entire franchise grows. In Q4, we extended our Power Grip franchise into the setting spray category with the launch of our Power Grip Dewy setting spray priced at an incredible value of $10 compared to a prestige item at $38. [Presentation]

With the initial launch, we're seeing a double-digit lift in sales of our original Power Grip Primer that launched over two years ago. We're also innovating in the industry's top segments where we under-index on share, like skin care. While we've tripled our market share over the last five years, we remain significantly underpenetrated today. For context, as compared to the 10.5% share we have in cosmetics, we have less than 2% share in skin care. We are continuing to drive growth in skin with holy grail innovation. In Q4, e.l.f. SKIN launched bronzing drops, one of the most requested products from our community, priced at an incredible value of $12 compared to a prestige item at $38. [Presentation]

Bronzing drops was the best-selling skin care product on our site in Q4. The third driver of our performance is our disruptive marketing engine. We have a unique ability to combine the best of beauty, culture and entertainment to attract and engage generations of consumers across a variety of platforms. e.l.f. remains Gen

The response from our community was phenomenal. Our campaign drove over 12 billion press impressions, propelled a triple-digit lift in visits to elfcosmetics.com and selling out the collection in 45 minutes, with 68% of purchasers new to e.l.f. In our e.l.f. UP! experience, the digital replication of the collab in a Roblox-native way resulted in record UGC redemptions. Over the past five years, we've increased our marketing investment from 7% of net sales to 25%. Our marketing investment is working, driving ROI multiples above industry benchmarks even as we've taken our spending up. Since 2020, we've doubled our unaided awareness in the U.S. from 13% to 26%. That 26% unaided awareness today compares to the leading U.S. mass cosmetics brand at 52%, illustrating significant runway for growth. Complementing our financial performance over the past two decades, I'm proud that we continue to lead with purpose as we strive to create a different kind of beauty company, one that is purpose-led and results driven. Out of nearly 4,200 public companies in the U.S., we're one of only four with a Board that's at least 2/3 women and 1/3 diverse. A few weeks ago, we launched our biggest purpose-led initiative yet, Change The Board Game, encouraging companies to diversify their Boards. [Presentation]

We partnered with legendary tennis star and equality champion, Billie Jean King, and created a series of video shorts to spread awareness in a humorous way of the inequality on corporate boards. [Presentation]

With our Change the Board Game initiative, we aim to champion diversifying boardroom representation, with a goal to double the annual growth rate of women and diverse candidates added to corporate boards. Turning now to fiscal '25. Let me touch on some of the initiatives we have planned to capitalize on the white space we see in color cosmetics, scheme care and international. First, in Color Cosmetics, we ended fiscal '24 with about a 10.5% market share, more than double the level we had four years ago and reached the number two brand rank in Q4 with 12.8% share. In Target, our longest-standing national retail customer, we are already the number one brand with over 19% share. We see an opportunity to double our share again over the next few years as we replicate our success at Target across other key retailers. And Target isn't standing still. In fact, we expanded our market share at target to 23% in Q4, growing our business by over 70% for the year. We expect our productivity-led model to help us earn additional space with our retail partners in fiscal '25. We're pleased to announce that we'll be expanding space for e.l.f. in fall 2024 with CVS in addition to previously announced space gains in spring 2024 with CVS and in summer 2024 with Walmart. The second key area of white space we see is in skin care. e.l.f. skin today holds a 1.6% share and has significant runway with the number one brand holding over 14% share. We're excited about the innovation pipeline we have for e.l.f. SKIN, starting with the in-store launch of bronzing drops this summer. With the acquisition of Naturium, we now have two of the fastest-growing masking care brands that are complementary in their price points, positioning and audiences. From a distribution standpoint, in the U.S., Naturium is currently available in Target, Amazon, and naturium.com. We're pleased to announce that we'll be launching Naturium in Ulta Beauty for the first time in summer 2024. Third, we see significant white space internationally. Our international expansion strategy is anchored in partnering with leading beauty retailers, to bring our brands to life in each country we pursue. International accounted for 15% of our sales in fiscal 2024 as compared to our global peers at over 70% on average. In Q4, we officially opened our first European office in London, furthering our commitment to grow our international business. As we look to the year ahead, we see a significant runway to continue to grow in our largest global markets: Canada, where we're the number three brand and the U.K. where we're the number four brand. We're pleased to announce that we'll be expanding space for e.l.f. in fall 2024 with Superdrug in the U.K., ,in addition to the previously announced space gains in spring 2024 with Boots and with Shoppers Drug Mart in Canada. As we look to new geographies, we've seen success with our engagement model across social platforms, driving consumer demand well before we enter a particular country. Since we launched in Douglas Italy last fall, e.l.f. has been the number one brand across both mass and prestige. We saw this again in April when we launched in the Netherlands with Etos, with e.l.f. becoming their number one brand. We're also pleased to announce we'll be launching e.l.f. with Sephora Mexico this fall, marking the e.l.f. brands' first partnership with Sephora. In summary, it's truly an exciting time at e.l.f. Beauty. We've evolved over our 20-year history from a digitally-native indie brand to an industry leader, reaching the number two rank in color cosmetics and rapidly growing in skin care. Our value proposition, powerhouse innovation and disruptive marketing engine has allowed us to drive exceptional consistent category-leading growth. And with the significant white space we see in color cosmetics, skin care and international, we believe we're in the early innings of unlocking the full potential for our brands. I'll now turn the call over to Mandy.

Thank you, Tarang. I'm pleased to touch on the highlights of our fourth quarter and full year fiscal '24 results as well as our initial outlook for fiscal '25. Our fourth quarter results were outstanding. Q4 net sales grew 71% year-over-year, driven by broad-based strength across national and international retailers as well as digital commerce. Our net sales growth was led by higher unit volume which contributed approximately 50 points to growth, with mix adding approximately 21 points. Q4 digital consumption trends were up nearly 70% year-over-year. Digital channels drove 22% of our consumption in Q4 as compared to 18% a year ago. The momentum we're seeing is supported by enhancements across our loyalty program, our app, as well as digital and social platforms. Our Beauty Squad Loyalty Program now has over 4.8 million members with enrollment growing 30% year-over-year. Our loyalty members continue to be a key part of our digital ecosystem, driving almost 80% of our sales on elfcosmetics.com. We're seeing terrific engagement on our e.l.f. mobile app, which now boasts a 4.8-star rating and recently surpassed over 2 million downloads. We're also enjoying strength across third-party digital and social platforms. Q4 gross margin of 71% was up approximately 180 basis points compared to prior year. We saw gross margin benefits from favorable foreign exchange impacts, price increases in our international markets, lower costs from retailer activity, cost savings and mix, partially offset by inventory adjustments. We also saw a benefit from improved transportation costs, albeit to a much lesser extent than the prior three quarters, as we began to annualize some of the benefits that flow through in Q4 last year. On an adjusted basis, SG&A as a percentage of sales was 61% in Q4 compared to 61% last year. Marketing and digital investment for the quarter was approximately 34% of net sales as compared to 33% last year. During the quarter, we opportunistically stepped up our marketing investment given our better-than-expected top line trends. As a result, we ended the full year with marketing and digital investment at 25% of net sales, above the high end of our 22% to 24% range that we had outlooked. Q4 adjusted EBITDA was $41 million, up 93% versus last year, and adjusted EBITDA margin was 13% of net sales. Adjusted net income was $31 million, or $0.53 per diluted share, compared to $24 million or $0.42 per diluted share a year ago. The increase in adjusted net income was attributable to an increase in pretax income as well as discrete tax benefits in the quarter related to stock-based compensation. Let's now turn to our full year results. In fiscal '24, we grew net sales by 77% and adjusted EBITDA by 101%, our strongest growth year ever. We invested behind our high ROI marketing and digital initiatives and delivered approximately 280 basis points of adjusted EBITDA margin expansion, supported by the combination of our strong sales growth, gross margin expansion and leverage in our non-marketing SG&A expenses. Moving to the balance sheet and cash flow. Our balance sheet remains strong, and we believe positions us well to execute our long-term growth plans. We ended the quarter with $108 million in cash on hand compared to a cash balance of $121 million a year ago. Our ending inventory balance was $191 million, in line with our expectations and up from $81 million a year ago. The difference is primarily a combination of three things. First, as we've said the past few quarters, we continue to build back our inventory levels to support strong consumer demand. Second, our consolidated results now include Naturium, which added approximately $26 million of inventory; lastly, an additional $8 million of the increase is the result of taking ownership of inventory from China when it ships versus when it enters our distribution center here in the U.S. Our liquidity position remains strong. We ended the quarter with less than 1x leverage in terms of net debt-to-adjusted EBITDA. We expect our cash priorities for fiscal '25 and to remain on investing behind our growth initiatives and supporting strategic extensions. The initiatives we're focused on this year include continuing to invest in our people and infrastructure, our ERP transition to SAP as well as increased distribution capacity to support strong consumer demand. Now let's turn to our initial outlook for fiscal '25. For the full year, we expect net sales growth of approximately 20% to 22%. Adjusted EBITDA between $285 million to $289 million. Adjusted net income between $187 million to $191 million, and adjusted EPS of $3.20 to $3.25 per diluted share. We expect our fiscal '25 adjusted tax rate to be approximately 20% to 21% and a fully diluted average share count of approximately 59 million shares. Let me provide you with additional color on our planning assumptions for fiscal '25. Starting with the top line. We ended the fiscal year with significant momentum and believe we are well positioned to deliver another year of volume-led, category-leading growth. In Q1, we expect our net sales growth to come in well ahead of our 20% to 22% annual growth, reflecting the ongoing strong consumption trends we are seeing and the incremental contribution from the acquisition of Naturium. As we look at tracked channels, we would expect trends for the e.l.f. brand to continue in the 20% range throughout the summer as we cycle strong compares in the base. Recall, tracked channels represent approximately half of our net sales after accounting for the acquisition of Naturium. As we look out to the remainder of the year, we remain bullish on the cosmetics category and our ability to gain share. At the same time, we are mindful of macroeconomic uncertainty and believe it's prudent to take it a quarter at a time. Our guidance approach remains consistent, serving us well as we've navigated a dynamic operating environment to deliver 21 consecutive quarters of net sales growth. Turning to gross margin. In fiscal '25, we expect our gross margin to be up approximately 10 basis points year-over-year. We expect the first half to be relatively flat to prior year as we flow through higher transportation costs experienced with the Red Sea disruption at the end of last year. We expect those costs to recover in the back half of the year. In terms of the key puts and takes for the year, we expect gross margin benefits from favorable FX rates, margin accretive mix and cost savings to be partially offset by the transportation costs I just noted and costs related to retailer activity and space expansion. With the combination of our top line momentum and ongoing strong ROI we're seeing, we're planning for marketing and digital investment at approximately 24% to 26% of net sales in fiscal '25 as compared to 25% in fiscal '24. We're investing from a position of strength and believe these marketing investments will continue to fuel our growth. From a cadence standpoint, we are planning a more balanced pace of marketing and digital spend throughout fiscal '25. As a result, we expect our year-over-year adjusted EBITDA growth could be in the low to mid-single-digit range in the first half of our fiscal year, with more material growth and adjusted EBITDA margin expansion to be realized in the second half of the year. Recall, last year, we spent only 18% of sales behind marketing in the first half of the year versus 30% of net sales in the second half. For the full year, our outlook implies adjusted EBITDA growth of approximately 21% to 23% versus prior year, on top of the strong 101% growth we delivered in fiscal '24. Our outlook also implies adjusted EBITDA margin leverage of approximately 20 basis points year-over-year. Our flywheel approach of investing in marketing to drive top line while expanding adjusted EBITDA margins gives me confidence in our ability to continue to drive profitable growth. In summary, our fourth quarter and fiscal '24 results evidence our ability to drive exceptional, consistent, category-leading growth. We believe we have a winning strategy and remain excited about the significant white space opportunities in front of us. With that, operator, you may open the call to questions.

We will now begin the question-and-answer session. [Operator Instructions] Our first question comes from Andrea Teixeira with JPMorgan. Please go ahead.

So, I wanted to just decompose a bit the guide, and I appreciate that you always have been very conservative. You just delivered 3x the growth that you were expecting with amazing campaigns and engagement by consumers as you highlighted. So, I was trying to see how much the 21% at the midpoint would represent? I understand that, Mandy, you discussed about half of your growth is coming from the fact that you were having -- adding Naturium to the base. So, can you talk about a bit of how the pro forma should we expect the pro forma to behave? If my math is correct, is about half of it, is about 10%. And how we should be thinking the same as you did in the last few quarters where we think about the Nielsen data. Understandably, the Nielsen data is becoming less and less important for your growth, less than 50% going forward, but just to think in how investors should interpret those numbers.

Thank you so much, Andrea. So, in terms of our guidance on the net sales side, we are guiding 20% to 22% net sales growth, and we feel incredible about that. That is building strength on strength on top of the 77% net sales growth year we just delivered in fiscal '24. So we actually feel great about our guidance. And how that breaks down, I would say that this guidance implies that our growth is going to continue to be unit led. We talked about being the number one-unit share growth -- or number one unit share brand in Nielsen data. Our Nielsen data continues to go very strong. We've outlooked that Nielsen should continue to perform in the 20s range as we've seen. And additionally, for Q1, we've also indicated that we expect to be above that 20% to 22% net sales guidance range. And so feel really great about what we're seeing in the near term. And as you mentioned on the guidance strategy, we have been very consistent in our guidance strategy. And that approach has worked very well for us. So, we like to take it a quarter at a time. And I can tell you, what we're seeing for Q1, we really are pleased with. And again, we'll take it one quarter at a time. And to answer your question on Naturium. Naturium will be incremental for the first half of the year as they were not in our base period. And so, when you take the Nielsen data plus Naturium and what we have outside of untracked, that's where we get to a rate that is above that 20% to 22% as we look at Q1.

And then, if I can just add to that. So that implies that the second half of the fiscal year would then be kind of running in the high single digits? Is that how we should be thinking to get to that number?

When we look out on the year, again, we feel great about the full year performance that we're outlooking. We don't give quarter-to-quarter guidance, but as I mentioned earlier, our guidance approach is to take it a quarter at a time. So right now, we feel great about what we're seeing for Q1. And again, expect that to be above our full year guidance range, and we'll take it a quarter at a time.

The next question comes from Ashley Helgans with Jefferies. Please go ahead.

With respect to kind of the international markets has been very impressive. Maybe you can talk a little bit about the brand awareness you're seeing in international markets that you currently don't sell product in. how much of your social contact is consumed outside your core markets and then remind us of the pacing of international expansion that we should kind of expect in the medium term.

Ashley, this is Tarang. We're extremely pleased with the progress we're making in international. I think for the quarter, we grew international 115%, primarily off of our first two countries, Canada and the U.K., where we continue to increase rank. One of the things we found as we started expanding the brand is there's a tremendous amount of pent-up demand for the brand. And it really comes from much of our social feed and social strength in the U.S. is consumed outside of the U.S. So a few months ago, when we launched Douglas Italy, not only were lines down the block for when we opened, but we quickly rose to the number one brand in Italy, not only in mass, but across prestige. We recently found the same thing when we went into Etos in the Netherlands, we're not even complete with our rollout there. I think the rollout gets completed in July, but we're already the number one brand in cosmetics. So, what we're finding is consumers internationally are waiting for e.l.f. when we enter the market, you see this tremendous excitement. And so -- and then in terms of cadence, I feel like each quarter, you're going to hear about us talk about another country. We're very pleased to talk about us partnering with Sephora to enter Sephora Mexico. It's our first entry in Lat Am, and we're really excited of what that can open up for us in other Sephora markets around the world, and we continue to have really great conversations with other retailers as we map up that strategy. So, I think you can expect the same disciplined sequential rollout strategy, as you saw within the U.S., as you see us approach with Canada and U.K., where we start with a leading retailer and then go deeper in the market.

Next question comes from Dara Mohsenian with Morgan Stanley. Please go ahead.

So just wanted to get a bit more detail on the top line guidance for fiscal '25. You mentioned you're still optimistic on category growth and the momentum in Q1, but assume a slowdown in the balance of the year post Q1 on macros. So can you just give us a bit more detail on what you're seeing near term in the category so far in fiscal Q1, given the Ulta comments and some of the worries out there. And then the balance of your slowdown, is that just macros? And how do you think about that relative to what you're seeing so far in Q1?

Dara, this is Tarang. I'll take the first part -- or I'll take the category view and then let Mandy talk about the cadence on the guidance. Overall, on the category, I would tell you that remain bullish on the color cosmetics category. I know there's been conversation recently on mass color slowing down. But even if you look at the -- our Q4, mass color was down 3%. But what people don't recognize is that a year ago period was up 18%. So, the category actually on a two-year stack basis is doing quite well. Even in the quarter we're currently in, the two-year stack is plus 5% on mass color. So, the category itself, we still feel really great about. And then in terms of some of -- and then within the category, we are particularly well positioned. If you take a look at our history over the last 21 quarters, regardless of the pandemic, container balances, wherever the category was, we've proven the ability to grow our net sales and market share quarter after quarter, even with some of the commentary recently by some of the retailers. I know some of the Ulta commentary, I can't talk about their overall commentary. What I can tell you is in fiscal '24, we grew our Ulta business 80%, well above the overall growth rates were. Even Target, which Target did call out today, beauty being a bright spot. Our target business was up 70% last year. So, we feel really great in terms of where we're positioned and the strength. We're seeing across every one of our channels, including digital.

Yes. And then I'll take the second part, Dara, on the -- just the guidance philosophy. And so if I take you back to last year, last year, we started our guidance at 22% to 24% range, ended the year at 77%. And I'm not saying that we're promising 77% this year for sure. But what I will say is that it gives you a little bit of insight into our guidance philosophy and what -- has worked well for us over these last five years, taking it one quarter at a time, which is why we indicated that we do love the momentum that we're seeing out of Q1 and feel great about our overall guidance range at this point.

Okay. And just to follow up, I guess, a similar question around your market share specifically. It sounds like you don't necessarily want to assume the momentum continues going forward, given you've had such a strong level of momentum, you can't sort of assume that continues quarter after quarter. Is that more the right way to think about implied market share slowdown after Q1? Or are there some specific points maybe that would impact your market share just as we think about the quarterly cadence?

Yes, Dara. On market share, we remain very bullish. Similar to what Mandy just said on our guidance strategy overall, we take it a quarter at a time. So, we're not implying any slowdown. It's -- we're just not passing that through until we see Q1 come in. And at that time, similar to what we did last year, actually the last number of years, we tend to take up our guidance depending on how it came out and then kind of continue to carry that forward. Same on market share. I'm pleased with the over 300 basis points of market share we grew this past year. First time that we passed L'Oreal Paris, the number two spot with a 12.8% market share. First time we passed Maybelline for the number oneunit share. And then at Target, which we always call out, our longest-standing national retail customer, not only are we the number one brand but we accounted for, in our Q4, 23% of their entire category growth. So, we remain very confident in our ability to continue to grow market share over time, doubling our market share in color cosmetics, skin care perhaps is even a bigger opportunity given the white space we see there. So, I would take a look at kind of our current trends on market share, we don't see anything that would indicate that would slow down in terms of our ability to continue to take share.

The next question comes from Olivia Tong with Raymond James. Please go ahead.

And congrats on the growth you’ve achieved this year, pretty phenomenal. You mentioned a number of upcoming shelf-space expansion, the launch of Naturium in Ulta and then Sephora in Mexico for e.l.f. Can you give us a sense of the shelf-space that you'll get for that? And then whether -- it sounds like the launches and shelf-space gains in existing retailers isn't embedded in the outlook beyond Q1. So, if you could just give a little bit of color behind that, you mentioned a couple of times, obviously, that you'll take them one quarter at a time. So does that also not assume in that 20% to 22% growth, the additions of the retail shelf-space that you'll be getting.

Olivia, this is Tarang. So, we feel great about the cadence of space that we're gaining with customers. I'll remind you most of our growth comes from our productivity model, the strong productivity we deliver with every customer being the number one most productive brand, most of our major retailers carry, that in turn rewards us with more space. So our guidance right now, if I think the space gains, really incorporates in the Walmart space that we will pick up in the summer in the U.S. And then outside the U.S., obviously, we talked about Superdrug expanding space in addition to the Boots and then Sephora Mexico as well as Naturium here with Ulta Beauty, which we're very excited about, our first time with Naturium in that customer. Certainly, for future space gains, we will announce those in subsequent quarters. So, the 20% to 22% does not incorporate what we may expect in terms of future space gains. And again, we stand in a really strong spot, just given the overall strength of our productivity model.

Got it. And I don't know if you want to talk anything about the magnitude of space gains that you're getting at Ulta with Naturium more -- in Sephora Mexico. But if you can give any color on that. And then just in terms of follow-up, it sounds like Naturium is going great. And I just wanted to get a view on -- your view on the long-term opportunity for potentially other retailers, international. And how the success in Naturium influences how you think about M&A overall going forward?

So, I'd say the magnitude of space gains, we feel really good about. We haven't been disclosing exactly what the space gains look like so you're going to have to wait until you see Walmart and Sephora and some of these other customers. But we've made continual improvements in our presentation, visual merchandising in stores, and we feel really good about what those sets look like. And then in terms of Naturium specifically, we feel great with the progress. we're making with Naturium. The team is doing an incredible job not only in terms of mapping out distribution gains, but also the overall consumer engagement model and a terrific pipeline of innovation. So we're quite bullish on Naturium and its future. Certainly, when you look at a distribution footprint standpoint, I would say we continue to be performing extremely well at Target, Naturium's main customer and taking from the e.l.f. playbook as we expanded to other customers, we continue to strengthen our business at Target. We plan to do the exact same thing here, same -- we have strength in Amazon. But Ulta is particularly excited about the launch for Naturium. And then, if I look internationally, really wide open outside of Shoppers Drug Mart and Space NK, where we can leverage a lot of the momentum, we're seeing internationally on Naturium as well.

And then from an M&A standpoint, Olivia, we're really focused on the brands that we have in our portfolio today. And we love -- as Tarang mentioned, love what we're seeing on Naturium and are very excited about the white space opportunity that we continue to have there. And so,, as we have been, we've been very choiceful and very disciplined on the M&A front and feel great about the growth opportunities we have across our brands that we have in the portfolio.

And I've said it before, but our primary focus, as Mandy said, is on our existing brands and all the white space we have. We also have a very strong balance sheet. I think even after Naturium, our net debt to EBITDA is less than 1x. So, if we saw another Naturium, we would grab it. But we're -- as she says, we're quite disciplined and we can be patient.

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

Yes. I was wondering if you could comment on your margin expansion algorithm. I know longer term, you have been talking about 100 basis points annually from mix enhancement. And I was curious if that is still applicable? Are you expecting to see that embedded in the next fiscal year? If you could comment on that. And then related on the cost side, the Red Sea situation, you don't ship a ton from China to Europe. So, I'm assuming the Red Sea situation is escalating your cost of shipping to the U.S., is that correct? Are we understanding that correctly?

Yes. Linda, great to hear from you. So let me first start with gross margin and the mix impact. Over the past many years of e.l.f's. history, we have benefited from mixing our margin higher over time. The 10 basis points of gross margin expansion that we talked about this -- for this guidance continues to have that in the background. And we continue to see opportunity for that to do better over time, but we, again, don't want to get too far ahead of ourselves. So, we certainly hope to see mix play a bigger role in fiscal '25, but again, are taking it a little bit lower here, especially because as we cycle the benefits that we had in the base. So, we had transportation cost benefits and FX benefits in the base last year. With the Red Sea disruption that we saw, you're right, we're not shipping a ton to Europe. But overall, we saw costs rise. And because we have not -- we weren't contracted on really any rates. We were subject to market volatility. So, we have to close some of those higher costs through. We'll expect to see that in the first half of the year, and we should see some recovery as we get into the second half of the year.

The next question comes from Susan Anderson with Canaccord Genuity. Please go ahead.

I guess I wanted to ask about the Naturium rollout in Ulta this summer. I guess how should we think about that shelf, is it going to be the full product offering that we see similar to Target, from skin care to body care? And then also is it in all the doors? And then I was just curious kind of how you think about marketing dollar allocation towards Naturium brand versus e.l.f. I assume a good portion of that is going more towards the e.l.f. brand. So just curious how much you're spending there versus e.l.f.

Susan, Tarang. Naturium at Ulta, we feel extremely great about. It will have the full assortment. So, you will have both facial skin care as well as body care, both segments are doing extremely well for Naturium, and it's good to have the entire lineup there. and it will be in all stores. So, we feel good about both of those things. And then in terms of the marketing rate, we usually -- we approach marketing as a percent of sales. And so, we have rates assigned by each brand that then roll up to the overall guidance that we've given of 24% to 26%. So, we haven't disclosed individual brand rates, but the Naturium rates are not that far off from the overall e.l.f. rates. And so that's a little bit of way to think about that as the business grows, there will be more marketing -- absolute marketing dollars, but it's set on a rate of percent of sales.

The next question comes from Korinne Wolfmeyer with Piper Sandler. Please go ahead.

I'd like to get a little bit more color on how you're thinking about both the digital and international businesses this fiscal year. I mean both of these categories or both these segments have been growing high double to triple digits for you, and it seems like you're gaining shelf-space, it seems like digital is having good momentum, but the guidance implies a pretty significant slowdown. So, can you just talk a little bit about how you're thinking about the trajectory for both digital and international this year?

Yes. We feel great about our digital and international businesses. In fact, digital was up 90% for the full year in fiscal -- or fiscal '24 and international was up 116% for the year. So, both had incredible momentum behind them. As we said, our guidance implies kind of taking it a quarter at a time, and we do believe that we should continue to see benefit from both of those as growth drivers for us on the road ahead. So really excited about what's to come. We talked about all the space expansion that we have from an international standpoint. Reaching the number one brand in Etos and Douglas as we rolled out, and so a lot of momentum there on the international side.

Got it. And then can you just touch a little bit on your hiring plans for this year? I know you've been building out a team in Europe. I believe that's about complete, but can you just expand a little bit on how we should be thinking about head count cost for SG&A this year?

Yes, Korinne, if you look at our history, 10 years ago, when I started as CEO, we had about 100 employees. We have close to about 500 now. And it's been pretty consistent in terms of how we built the team. Each year, we invest in our team and our infrastructure. This year is no different. You'll continue to see us continue to hire in the areas we need, even in international, while we've built out the team there, there's still further opportunity internationally. We've continued to make investments in our digital business and our integrated marketing really across the board, to make sure that we have the right team that can continue to scale the brand. One of the other things that we've done in our approach is if you take a look at our -- any metric, sales or profit per employee, market cap per employee, we're many factors ahead of many of our legacy players. And it's just our approach of making sure we have a strong team, but that we don't get ahead of ourselves from a team standpoint such that everyone has really full jobs, plenty of opportunities and our ability to collaborate well in our high-performance team culture and really be able to drive both the speed and the quality of execution you've seen. So, there's no change there. You have additional hires. I don't think we've rolled out count what those hires are other than we've all along the way, investing in the team, and that's paid huge dividends in terms of the results you see.

Next question comes from Peter Grom with UBS. Please go ahead.

Two quick ones from me. Mandy, you kind of mentioned sales in 1Q above the full year range. And I apologize if I missed this, but is there any way you can provide some guardrails on what that might look like, totally getting the Naturium benefits. But just -- I think it would be helpful to get some color on how much above you would expect to be. And then the second question is just on the EBITDA guidance. I'm just trying to understand while we may not see better leverage this year, totally understand the GM commentary and I think marketing and digital is kind of flat year-over-year as a percentage of sales, at least based on the guidance at the midpoint. So those two alone would kind of get you to your margin guidance. But historically, you've seen some really nice leverage on the non-marketing SG&A and the guidance doesn't necessarily embed a lot of that this year. So just -- am I thinking about that right? And if so, can you provide any color as to what may be driving that?

Sure. So let me start with your first question, Peter, and good to hear from you, by the way. Sales in Q1 and how we're thinking about that, I guess, from a building block standpoint, we've given some breadcrumbs on Nielsen and what to kind of expect there in terms of that being in the 20% range as we go through the summer. We also, as you mentioned, Naturium would be an additional impact. And then you would have to assume some further impact from international and digital as well to get to a number. Now, we don't provide quarterly guidance, so I can't give you a number specifically but that gives you a little bit of flavor as to what to expect for Q1 sales. In terms of EBITDA guidance, I feel great about our EBITDA guidance. We're guiding 23% on the top end, on top of 101% growth in adjusted EBITDA last year. It's really incredible performance. And we've said for many years now is that we expect adjusted EBITDA to outpace our net sales growth and have that leverage year after year. The degree to which that leverage comes through will vary from year to year. And so, for the past couple of years, we have really had incredible leverage in our adjusted EBITDA. Certainly, believe there's opportunity for us to see further leverage on the non-marketing side as we go through. But again, don't want to get too far ahead of ourselves. We want to make sure that we're being balanced in the approach that we're taking, and again, taking it one quarter at a time.

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

Just wanted to follow up on the shelf-space expansion. I guess as we think about the landscape of where beauty is outperforming, you are more exposed to Target than to Walmart, but at least this quarter, there was greater outperformance in overall beauty at Walmart versus Target according to those retailers. So how do you think about the opportunity for shelf-space gains continuing in the long term versus the shelf-space that peers have at those retailers? And then as we think about the launch of Ulta, Sephora in Mexico, do you have any specific plans on which brands or products you might be bringing to this market?

Anna, so we feel great about the prospects of shelf-space gains in the future. We are gaining share every single retailer we're in. Our growth rates are well in excess of their categories, and we're seen as a key growth brand. So, as you take a look, as I mentioned, at Target even, first quarter, we were 23% of their entire category sales. You will not find our space anywhere near that. So even a huge opportunity within Target, we feel pleased about the shelf-space that we're going to be gaining in Walmart. I don't think we'll be done there either with this summer. We still have a massive opportunity. So, I feel very confident about our ability to continue to get space into the long term, just like we've proven over the last 10 years. We've got a pretty good consistent cadence of being able to pick up space given the growth that we have and the innovation and the consumer profile we bring to market. And then in Sephora Mexico, we're starting with the e.l.f. brand in Sephora Mexico. That will be our primary focus, e.l.f. color, e.l.f. skin in that market, and then we'll look at the rest of our brand portfolio over time, but we're at least starting with those two brands.

Next question comes from Oliver Chen with TD Cowen. Please go ahead.

Tarang and Mandy, regarding international and skin care, what should we know about the margin profile there as you continue to scale and make lots of great progress there. Also, as we think about TikTok and the geopolitical environment, you've been very agile thinking about marketing spend, but what are your thoughts in terms of changes that may happen there? And then more broadly on pricing, how should we think about what you're doing in terms of like-for-like relative to innovation? I know you stick to keeping really clear, awesome value generally speaking, and give that back to the customer.

Thanks, Oliver. I'll take the first question. So, from an international perspective, over time, we believe international as it scales, can have greater margin progress. And just remember that the tariffs that we experienced here in the U.S., we do not have in the international market. So, because of that, we do believe that, that could be a margin expansion opportunity as we continue to expand internationally, whether that be in skin care or color cosmetics because as we've talked in the past, really no difference in margin profile between those categories for us.

And then on your second question regarding TikTok, you're right, we're highly agile. We go -- we live where our community lives. So, if anything happens to TikTok, we have such strength across social platforms, if I think about our own channel on Twitch, our strength on Instagram, on Instagram Reels, YouTube, Roblox, you name it. We were highly confident that the consumer is not going anywhere, and we'll be there in a way that's native to that consumer to continue to engage them. And then from a pricing standpoint, our philosophy on pricing is our margin progression has primarily been driven by innovation mix. we feel good about that strategy, bringing these holy grails to market that allow us higher margin profile, mixing up the business that way. A number of our competitors over the last few months did take pricing, we chose not to take pricing, both ensuring a phenomenal value proposition. But more importantly, we like holding pricing in our back pocket, there's been talk potentially of incremental tariffs as we approach that challenge. That's not an FY '25 issue, that's more for FY '26. We'll use the same balanced approach we did in 2019 when we're faced with tariff for 2022 when we had inflationary pressures. We want to keep pricing in our back pocket along with some of the other mechanisms we use to be able to help mitigate any external threat to the business.

Okay. And your inventory, you're a very agile company. So as you think about upside potential, how do you feel about the inventory position and being able to test, read and react to potential upside. And holy grail, Tarang, has always been a hallmark strategy. What do you think the next families are in terms of more emerging holy grail opportunities as you look forward?

So, I feel good about our -- sorry, Oliver. All right. I'm going to go ahead and answer the question on inventory. We feel great about our inventory position. As we talked, we have been increasing that inventory position to support the demand that we're seeing and certainly have room to support even further demand and upside potential should that come to fruition in our inventory. So, we're feeling great about that.

And on the holy grail strategy, we feel great. We have a rich pipeline that goes out three years. And then the agility to move things up as our community demands. A great example is a launch we're about to have here in our bronzing drops. It's the most requested item from our community and our ability to pull that up in our own innovation pipeline and bring that to markets soon. Extremely excited about that. So, I think you'll just have to stay posted, but we have a rich slate of continued innovation and feel really good about the strength of that innovation across both color cosmetics as well as skin care.

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 industry-leading year results. Thank you for every e.l.f. and 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 our upcoming investor meetings and speaking with you in August when we'll discuss our first quarter results. Thank you, and be well.