ELF - NYSE

Thank you for joining us today to discuss e.l.f. Beauty, Inc.'s third quarter fiscal 2025 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. I encourage you to tune into our webcast presentation for the best viewing experience, which you can access on our website at investors.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, KC, and good afternoon, everyone. Today, we will discuss the drivers of our third quarter results and our updated outlook for fiscal 2025. In Q3, we delivered another quarter of consistent category-leading growth. We grew net sales 31%, delivered $69 million in adjusted EBITDA, and increased our US market share by 220 basis points. Q3 marked our 24th consecutive quarter of both net sales growth and market share gains, putting e.l.f. Beauty, Inc. in a rarefied group of high-growth companies. We are one of only six public consumer companies out of 546 that has grown for 24 straight quarters and averaged at least 20% sales growth per quarter. e.l.f. is the only brand of the nearly 1,000 cosmetics brands tracked by Nielsen to gain share for 24 consecutive quarters. Our fiscal 2025 year-to-date results have been exceptional, with our team delivering 40% net sales growth. We remain confident in our strategy, ability to take market share, and capitalize on the white space ahead of us. At the same time, our consumption trends to start calendar 2025 have been softer than we expected. We see three factors. First, the category continued to decline in January. We believe this decline is reflective of consumers stocking up in a highly promotional December and lower social conversation around beauty. Consumer mindshare was focused elsewhere, including wildfires in LA and uncertainty around the TikTok platform. Second, in Q4, we are lapping the global launch of our viral Glow Reviver Lip Oil, which was our biggest launch in calendar 2024. In addition, we had higher shipments in Q4 last year as retailers built inventory ahead of the big game. Third, initial reads for a couple of our new product launches for spring 2025 have started off slower than we expected. We are still in the early days of marketing activations for these launches and our spring resets. Over the next few weeks, our retailers will add spring innovation to the shelf and refresh our shelf sets, including expanded space in Target and Walgreens. These results are still in progress and will not be complete until the end of February. Balancing these factors, we are lowering our net sales outlook for the final quarter of the fiscal year to minus 1% to plus 2%. Given the dynamics between Q3 and Q4, we do not believe Q4 is indicative of the underlying run rate of our business and remain confident in our ability to deliver market-leading growth. As updated, our outlook contemplates 14% to 16% net sales growth in the second half of 2025 on top of the 77% growth we delivered in the second half of last year. As we look ahead, we remain focused on four areas with significant runway for growth: digital, color cosmetics, skincare, and international. Let me update you on our progress in each in Q3. Starting with digital, e.l.f. is a digitally native brand. e.l.f. remains the only top five mass cosmetics brand with our own direct-to-consumer site. Q3 digital consumption trends were up nearly 30% year-over-year, on top of triple-digit growth in Q3 of last year. Digital channels drove 24% of our consumption in Q3, in line with last year. We are pleased with these results as Q3 was highly promotional across mass beauty. Instead, we held to our approach of delivering outstanding value every day, foregoing promotional activity on elfcosmetics.com during the holidays. We are seeing continued momentum across our digital and social platforms, with strength on Amazon, and supported by our ongoing enhancements to our loyalty program and mobile app. Our Beauty Squad loyalty program recently surpassed 5.6 million members, with enrollment consistently growing over 20% year-over-year. Our mobile app now has over 3 million downloads, making it the most downloaded single-brand cosmetics and skincare app in the US, and holds a 4.9 rating out of 5. In color cosmetics, we continue to significantly outperform the category. In Q3, e.l.f. Cosmetics grew 16% in tracked channels, as compared to a category that was down 5%, increasing our market share by 220 basis points. Nationally, e.l.f. is the number one brand on a unit basis with approximately 14% share and the number two mass brand on a dollar basis with approximately 12% share, more than double the level we had three years ago. We remain focused on the opportunity to double our market share in the coming years. In Target, our longest-standing national retail customer, we are the number one brand with over 20% share, delivering consistent growth over time. In Q3, we grew our cosmetics share at Target by 170 basis points. We believe we can fuel further growth with space expansion this spring. We believe we are making great progress on replicating our success at Target with other key retailers. In Q3, we reached the number two brand rank at Walmart for the first time, up from number four a year ago. We are also finding success with newer retailers like Dollar General, where we launched e.l.f. in a subset of doors. Our initial results have exceeded our expectations in this new channel, and we will continue to expand into additional Dollar General doors this spring. We share Dollar General's mission to serve the underserved and democratize access to the best of beauty, particularly in rural areas, which have traditionally only been served by legacy brands. We are pleased with our continued retail expansion opportunities, unlocked by our focus on driving productivity. e.l.f. remains the most productive cosmetics brand on a dollar per linear foot basis with our largest retail customers globally. Our 24 consecutive quarters of share gains are a testament to the effectiveness of our productivity model, and we believe our continued focus on productivity will aid in further space expansion in the years to come. Looking into skincare, in just five years, e.l.f. Skin has become a top ten skincare brand in a category dominated by legacy brands built over decades. For context, the average age of the other top ten skincare brands is 63 years old. In Q3, e.l.f. Skin continued to meaningfully outperform the category and grow market share. As we look ahead, we see significant runway for growth. e.l.f. Skin today holds about a 2% share as compared to the number one brand holding nearly 14% share. With the acquisition of Naturium, we have doubled our skincare penetration to 18% of our retail sales. We now have two of the fastest-growing mass skincare brands that are distinct yet complementary in their price points, positioning, and audiences. The launch of Naturium into Ulta Beauty continues to perform well, and we see further expansion opportunities ahead. Turning to international, our net sales grew 66% in Q3, fueled by growth in our existing markets as well as our expansion into new markets. International drove 20% of our net sales in Q3, up from 15% a year ago. We see significant white space ahead with our global peers having over 70% of their sales outside the US. We have seen success with our engagement model across social platforms, driving global consumer demand well before we enter a particular country. Today, e.l.f. has a retail presence in 15 countries with launches over the last year, including Rossmann, Germany, Etos, Netherlands, Du Gloss, Italy, and Sephora, Mexico. We have achieved a top three ranking in each of these new markets we have launched in, reflecting our strength in driving global brand demand. We are also excited to bring our disruptive marketing to new markets, fusing our universal brand superpowers with local cultural relevance. In Germany, e.l.f. translates to the number eleven, e.l.f. von

Thank you, Tarang. I'll now cover the highlights of our third quarter results and our updated outlook for fiscal 2025. Q3 net sales grew 31% year-over-year on top of 85% growth in Q3 of last year. We experienced growth across international retailers, digital commerce, and our national retailers, and benefited from pipeline shipping earlier than it did last year. Our sales growth throughout fiscal 2025 has been underpinned by continued category outperformance and market share gains both in the US and globally. Higher unit volume contributed approximately 30 points to growth in Q3, with mix adding an additional point. Q3 gross margin of 71% was up approximately 40 basis points compared to the prior year. Gross margin benefits were primarily driven by favorable foreign exchange impacts on goods purchased from China, cost savings, and inventory adjustments. This was partially offset by mix related to Naturium's wholesale expansion and higher transportation costs. On an adjusted basis, SG&A as a percentage of sales was 54% in Q3, in line with last year. Marketing and digital investment for the quarter was 27% of net sales, in line with our expectations and as compared to 26% last year. Q3 adjusted EBITDA was $69 million, up 16% versus last year. Adjusted net income was $43 million or $0.74 per diluted share, compared to $43 million or $0.74 per diluted share a year ago. Both adjusted EBITDA and net income this quarter were impacted by an unanticipated foreign currency loss of approximately $7 million that was driven by quarter-over-quarter fluctuations between the British pound and US dollar. Moving to the balance sheet and cash flow, our balance sheet remains strong, and we believe positions us well to execute our long-term growth plans. We ended the quarter with $74 million in cash on hand, compared to a cash balance of approximately $73 million a year ago. Our ending inventory balance was $215 million, in line with our expectations and up from $205 million a year ago. Our liquidity position remains strong, ending the quarter with less than one times leverage in terms of net debt to adjusted EBITDA. We expect our cash priorities for the year to remain on the specific growth initiatives we're focused on this year, including investing in our people and infrastructure, our ERP transition to SAP, as well as increased distribution capacity to support strong global consumer demand. Now let's turn to our updated outlook for fiscal 2025. For the full year, we now expect net sales growth of approximately 27% to 28% as compared to 28% to 30% previously. Our Q3 net sales growth came in better than expected, largely driven by the timing of pipeline shipments. In Q4, our consumption trends are starting off softer than we expected, driven by the factors Tarang discussed earlier in the call. As we look to the second half overall, our updated guidance range implies 14% to 16% net sales growth in the backdrop of a challenged mass cosmetics category, and on top of the 77% growth we delivered in the back half of last fiscal year. As we look forward, we remain confident in our ability to deliver share gains in the US and expand our business internationally. Turning to gross margin, in fiscal 2025, we now expect our gross margin to be up approximately 40 basis points year-over-year, as compared to approximately 30 basis points previously. This outlook does not include any impact from the recently announced tariffs at an incremental 10% on goods imported from China. As a reminder, tariff hikes will not impact our current fiscal year results. We plan to address our response to the incremental tariffs and our fiscal 2026 outlook in May. We believe we have a successful playbook to leverage from 2019 when tariffs moved to the 25% level. This included supplier concessions, cost savings, and select price increases. We also had FX move in our favor at that time, which further mitigated the impact. This time around, with our increased supplier diversification outside of China and our growing international sales base, we believe we have multiple levers to address the impacts of these tariffs. We continue to expect marketing and digital investment at approximately 24% to 26% of net sales in fiscal 2025, as compared to 25% in fiscal 2024. From a cadence standpoint, that implies significant expected leverage in our marketing in Q4 on a year-over-year basis, as marketing spend was approximately 34% of net sales in Q4 last year. Turning now to adjusted EBITDA, for the year, we now expect adjusted EBITDA between $289 million to $293 million, as compared to $304 million to $308 million previously. The change is due to the incremental $7 million FX loss that I discussed earlier, as well as our lowered top-line outlook. Our outlook for fiscal 2025 now implies adjusted EBITDA growth of approximately 23% to 25% on top of the strong 101% growth we delivered in fiscal 2024. In summary, our third quarter results underscore our ability to drive category-leading sales growth and market share growth. We believe we have a winning strategy and are in the early innings of unlocking the full potential for our brands. With that, operator, you may open the call to questions.

Thank you. We will now begin the question and answer session. Today's first question comes from Bill Chappell with Credit Suisse. Go ahead.

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

Hi, Bill. Why don't I start? I'd say our approach is to be more cautious or prudent when we see a slow month. And in January, the three factors of the category being down 5%, the lip oil that we're overlapping, while we knew about it, it was by far our biggest launch in 2024. I think one of the things that happened on Lip Oil is we gave it exclusively to Ulta to start in December, and then it went pretty broad right away in January. So we're going across a pretty big hill on that. And then a couple of our new items are off to a slower start, and it's still early. As we go through each of those elements, starting with the category, I think two things on the category that give us a bit more confidence going forward. One, we feel the consumers had a little of a hangover from the highly promotional period in December. While we didn't promote, the industry promoted quite a bit, and you often see a trough right after that promotional area. Second, in January, social conversation was way down, over 20%. We attribute two things. One, the wildfires in LA. I don't think brands wanted to be tone-deaf during that devastation. And then the uncertainty around TikTok seemed for a while the only thing people were posting on TikTok was whether it's gonna stay open or shut down. So we do see those potentially being better as time goes on. As I mentioned, particularly, this is specificity on what happened in the category, what happened with social conversations. And that, in turn, also relates to some of the softness we saw initially in some of our spring new items. We count on that social conversation to really like those items virally. And so with our marketing activations coming up, with resets, when we're able to get that spring innovation on the shelf, particularly with the expanded space we have coming at Target and Walgreens, we're hoping for better trends as we go forward, but we just took the more cautious stance and said, okay. Let's assume it doesn't get better for a couple of months and that's why you see us adjust our Q4.

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

We're really pleased with the progress we're making internationally. For Q3, we grew our international business 66%. Also, from a category standpoint, we're not seeing quite the same level of headwinds internationally. So I think the category is a little bit better, but more importantly, it's our growth profile. As we launched in the back half of last year into Rossmann, Germany, Etos, the Netherlands, even our Du Gloss, Italy. We've maintained a top three rank in all three of those customers, and we continue to see a tremendous amount of pent-up consumer demand. We're currently in conversations with pretty much every retailer out there that doesn't want to miss out on our growth profile, the innovation we bring, the consumer profile we bring. So you'll continue to see us full steam ahead on international. We'll continue to hear additional countries that we're gonna be expanding into, and so we feel great about our progress there.

Great. Thanks, Tarang.

Thank you. And our next question today comes from Andrea Teixeira with JPMorgan. Please go ahead.

Thank you, operator, and good afternoon, everyone. I was hoping if you can sort of talk about, like, in more detail about the US, what is the consumption in the US as you exit the quarter and currently? I mean, you did speak a good amount of how the notation is coming for the spring season. And how we've informed you on this guidance. And, also, what I think, I heard some from Mandy that there was some pull forward in this quarter. So we are just hoping to see what is consumption in the US and how should be seeing because, obviously, if you have a 7% at the midpoint growth in the top line in the fourth quarter, it implies a pretty negative number in the US. So if you are assuming that obviously the European and the international continues to do well. So just wanted to see what is embedded in each of the assumptions. Thank you.

Hi, Andrea. If you take a look at Q3 consumption, we still finished Q3 consumption double digits, I think about 12% in tracked channels. So it's pretty strong. In January, we did see that come down. You saw it actually, you know, a week couple weeks of negative scanner data. So that was a slowdown that I talked about. We're hoping that gets better, but we're basically embedding our guidance. What if it doesn't get better? In the course of the quarter? And then in terms of a pull forward or not, that really relates to our pipeline. We had a much more pipeline go out the door in Q3 than in Q4. That's a little bit why when we really think of kind of what is the growth in the second half, that 14% to 16%, which our new guidance implies in a down category, we feel really good about it. Continue to grow share. In fact, January, which was a soft month for us from a consumption standpoint, we still built 90 basis points a share. We're the only ones growing out of any of the brands in that period. I mean, it was pretty modest growth from a consumption standpoint. I think in the tracked channels, it's probably up 1%. But that gives you an indication of how much better we're doing than the category.

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

Yeah. So what I'd say on our newness is we still feel good about our spring new items. We saw softness in January, some of it related to less social conversations that I mentioned. It's still early. What we're doing about it is we always have marketing activations against our new items. And so you're gonna see those marketing activations hit. The other thing that helps with newness is when we're able to get them on the spring resets. The spring resets will not be complete till the end of February, but that always helps our new items as well. And then I'd say between channels, you know, for us, going back to Q3, we saw strength across pretty much most of our channels. We were a little worried about Ulta given they had the lip oils exclusively during that period, and I actually was pleased with how we were able to comp that massive amount of lip oil in Ulta in that month. As we get into January, as I look across the retailers and our digital business, January, we continue to see Amazon do extremely well. Walmart is off to a pretty good start in terms of their comps. We have a little bit of softness in Ulta and Target as we take a look. But, again, that's before we often see that before resets, particularly at Target where we shut off a number of items as we get ready for the space expansion that we see. So no warning signs as I look across retailers. More from a macro is what we're pinning that guidance on.

Thank you. And our next question comes from Dara Mohsenian with Morgan Stanley. Please go ahead.

Hey. Good afternoon, guys.

Good afternoon.

The detail you gave us around the drivers of the January softness was helpful. Could you just spend a little more time on maybe how you plan to adjust your strategies here, tweak your efforts? In light of the new environment. You just mentioned with some of the innovation, the marketing activations, etcetera. And the plans there, but maybe a bit more detail on tweaks across the portfolio, and also from a marketing perspective, just as you think about the level of spend, that'd be helpful.

Thanks. So I'll start with, for this quarter, as I mentioned, the key to our innovation is really the marketing activations we do against that. We feel social conversation will normalize as we go forward in the quarter. Now that the wildfires are over, some of the TikTok kind of uncertainty's gone. Back and forth. So we definitely are starting to see a little bit of a pickup in the social conversations, which will also help with our newness the activations. And then the sets, the resets, we have really good resets coming across customers as we've seen those plans and what's gonna roll out. That will help along those lines. In terms of a marketing strategy standpoint, I would say there's not a big shift last quarter or quarter before we talked about better balancing support behind our new items as well as our core franchises. And that spot that we shared on our webcast, the eyes with the face fandom, we saw it have an immediate impact on our power grid business. We ran it in Thanksgiving throughout the playoffs. And so we're gonna keep that balance between our core franchises and our new items. One of the other things I like about a lot of our new items this season is they are on our core franchises. So if I look at Power Grip Matte, that builds on our Power Grip franchise. Power Grip original was the number one SKU across mass and prestige. Halo Glow powder builds on our Halo Glow franchise. We didn't show the spot with Meghan Trainor, but we've got good creative on each of those core new items, which also we believe will benefit the core franchise. You know, we debated whether we spend more money, but what we decided is in the face of kind of the consumer macro where consumers are a little bit more cautious. We didn't think it made sense necessarily to invest more money behind that. We feel good about the ROI as currently achieving. And so what and we'll continue to just wrap I mean, I think you'll see, you know, some news tomorrow, other things that we're doing to continue to get attention.

Great. Thanks, guys.

Thank you. And our next question today comes from Ashley Helgans with Jefferies. Please go ahead.

Hi. Thanks for taking our question. So, Tarang, you gave some good color on the slowdown in January in mass beauty. But if we look back at the mass cosmetics industry over the last six months, I mean, it's definitely slowed. You guys have been outperforming. But maybe any more color on just what's going on with that mass cosmetics consumer if we look back a little farther. Thanks.

Hi. So if I look back on the mass cosmetics industry over the last six months, I'd say there's two primary factors that I would say result in a weaker category. One, there was a lot of consumer uncertainty. We saw that across a number of consumer categories, whether it was the uncertainty leading up to the elections, a little bit of the post. I think there's still worries out there in terms of what's gonna happen with inflation, what's the state of the economy. So that definitely did weigh on the mass category. I'd say the second thing is, you know, sometimes we felt like we're the only ones going in the right direction. In terms of the level of our marketing spend, level of engagement, our innovation. And so we definitely look for more of that to see kind of a rebound in the category. The last thing I would say, if you go back actually quite a long period, there have been cycles where the mass category has been soft. Each one of those cycles, we've seen it come back at a pretty strong level. I'll go all the way back to back in 2016 to 2017, we saw a very strong category soft period in 2018. Obviously, the pandemic was really soft, so it came back really strong. So I still remain bullish on the category longer term, but I do think there is this macro on the consumer right now that is weighing on the category. And, again, our approach, you know, to the last question from Dara, I should have said there are not no huge shifts in our approach, and there's a reason we've delivered 24 consecutive quarters of net sales growth averaging over 20%. Our strategy is working. The tweaks we're making are really in response to what we're seeing in the marketplace. That balance between core franchises and our new items. Really making sure that we're activating those properly and having the right visual merchandising on the shelf to bring them to life. We feel confident with that approach even in a challenged category.

Okay. Thanks so much.

Thank you. And our next question today comes from Olivia Tong with Raymond James. Please go ahead.

Great. Thanks. Good afternoon. I wanna talk a little bit more about Q4, recognizing, of course, some of the distractions that you talked about in the last several weeks. But you've typically outperformed what scanners show, whether it be because of e-commerce or international. So why isn't that the case this quarter? And, you know, and what's your view on that? And then, of course, realizing you're not immune to one category slowdown, but can you talk about your ability to capitalize on consumer trade down? Perhaps some greater focus on the value messaging. Thank you.

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

And just to add to that, you know, I mentioned earlier we're just taking a more cautionary stance given the consumer macro and the softer start to January. I think our approach has always been a great deal of transparency. If we see something, we'll call it out. And hopefully, a little better than that, has been our track record over time. And in terms of how we capitalize in this current environment, we see it as a great opportunity to continue to build share. I mentioned, even in January, which was a weak month for us, we've still built 90 basis points a share, the most share anybody built. So that's how we're gonna continue to capitalize. And as you mentioned, we have an incredible value proposition, prestige quality, incredible prices. You're gonna see us continue to shine a light on that, particularly some of our lower-priced items that are available for those who are really worried about kind of the overall economy. We have a great assortment on those, and you'll see more messaging on that as well. It's an opportunity to continue to build share.

Thank you.

Thank you. And our next question comes from Patty Cannato with Goldman Sachs. Please go ahead.

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

So, hi. I would say our digital business is strong. In the quarter, Q3, our digital business overall was up 30%. Amazon's growth rate was even higher than that. We continue to see really strong results with Amazon. The role Amazon plays is a great deal of discovery happens on Amazon. A great deal of search happens on Amazon. Obviously, those consumers who want the convenience of the speed of being able to get their product. So we see a long growth trajectory ahead with Amazon. That partnership is extremely strong. We're one of their top-performing brands on the entire platform, and we see continued opportunity, not only in the US but also internationally. As we started expanding in Amazon and other markets, UK, Germany, Italy, and a number of other markets, we see that being one of our key customers. And then in terms of new consumer profile, we definitely see that on Amazon. They talked about discovery and search capability that they have or strength they have there. And then cannibalization, really, some cannibalization, I think, you know, with some of our retail customers. But because of our model in terms of being agnostic, in terms of where a consumer buys, the way we've done our terms where kind of our net margins are pretty comparable across customers. We all have always taken the stance that we wanna make the best of beauty accessible to every consumer wherever they wanna shop. And so if there is some cannibalization in Amazon, we do think net, it's additive to our overall portfolio, just given the strength, and we love having consumers have that choice of where they get their product.

Great. Thank you.

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

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

Hi, Korinne. So for the pipeline, we have not quantified that, but we did have much more pipeline go out in Q3 than we did in Q3 of last year. That's why, again, we're really looking at the second half on a whole because that helps to kind of make that story. And then on international, we continue to see momentum on international. What I'd tell you in Q4 in international is we had a pipeline go out in a number of our launch I can't remember which other country might have been Du Gloss. But we had some more there. So the overall run rate in the absence of kind of launching a new retailer in the quarter will come down a little bit, but it's not something we're worried about. A lot of that has to do with the cadence of our launch. The overall growth rate within our existing markets continues to be pretty strong.

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

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

Thank you.

Thank you. And our next question comes from Peter Grom at UBS. Please go ahead.

Thanks, operator. Good afternoon. Hope you're doing well. So Tarang, you mentioned that you don't think the Q4 run rate is indicative of the growth profile of the business, but I know it will be a few months before we get fiscal 2026 guidance but I would love some perspective on what you think is a reasonable run rate for growth just given what you're seeing today. And then maybe within that, totally understand wanting to keep a conservative, you know, outlook in the near term just given, you know, the many moving pieces. But, you know, should a weaker category environment persist, like, how are you thinking about your market share? Still solid 90 basis points in January, but it is a bit of a step down versus 220 basis points you referenced in Q3. So just curious if you kinda see that market share trend improving from here.

Hi, Peter. I would say in terms of the run rate probably going to have to wait till May for us to give the guidance for FY 2026 for us to kinda tell you what that run rate is. I'll tell you somewhere between what we have in Q4 and what we had in Q3 is the run rate. So it doesn't give you that much color other than Q4, we see as an anomaly. And otherwise, it's been highly consistent growth. Also, the fact that we're lapping if I look at that 14% to 16% growth we have in the back half, I think we're lapping 77% growth the year before, so on a two-year basis. Still really great. The other thing that gives me confidence on why the run rate will be much better than Q4 is the significant white space we still have. I mean, not only number one in units and number two in dollars in the US, clear line of sight to clear market leadership in color cosmetics. Continue to pick up share in both e.l.f. Skin and Naturium, see very strong run growth rates there. I just talked about digital and international. So we have quite a bit of white space that gives me greater confidence in terms of our ability to sustain category-leading growth. In terms of market share, I actually was pleasantly surprised that we built 90 basis points of share in probably our weakest month that we've seen in January. It just tells you that strength we have. So we're highly confident of our ability to continue to build market share. For perspective, if I look at Target, we have over 20% share at Target versus closer to 12% share nationally with other customers. We're seeing great progress across other retail customers. We saw great progress even at Target. We grew 170 basis points of share in Target even with a strong share position. So Target's not standing still. I'm particularly pleased that we went from the number four position to the number two position at Walmart. Again, really strong growth there. We continue to pick up ranking in our other customers. So I look at the BOLGIE from a market share standpoint long term is I don't understand I mean, we haven't told you what time frame, but I don't understand why we wouldn't be able to get to types of shares we haven't targeted other retail customers. Over time, skincare is even a bigger opportunity. I think we're sitting on a 2% share in skincare on e.l.f. skin market. We just got 4%. We have a long way to go there. The cadence of that share goes will vary. Part of it will be what are you lapping. I think what sometimes investors miss is just how much share we've grown on top of very strong share growth rate. So see that bounce around a little bit, but we're still very confident in terms of being able to lead the category in our share rep.

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

Yes. So Q4 does imply leverage in our SG&A. And as we talk about, significant leverage really from marketing and digital, which was 34% in Q4 of last year. And as our outlook implies, 24% to 26% for the year, which applies to Q4 as well. So a lot of that leverage is coming from marketing and digital as we have continued to invest behind our people and capture.

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

Thanks so much. I'll pass it on.

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

Yes. Hi. Just on the question of your product launches and innovation, you know, it seems like there is some pretty good innovation in the prestige sector of the market that you could be copying. You know, there's a company out there that has jelly tints and then in the primers, there's a CloudGlow product. This is like a foam primer. So there's definitely innovation out there. It just seems like maybe you've slowed down in terms of your, you know, copying. Maybe you could talk about that. And then talk about also the progress you're making in those categories where your market share is very low, like foundations and mascara, and maybe you could talk about what progress you're making there. Thanks.

Hi, Linda. So first of all, I would tell you, we have an incredibly strong innovation pipeline. So what I talked about was a little bit of a slower start in January on a couple of our items. But if you take a look at our Halo Glow powder, it has an incredible prestige equivalent. Power Grip Matte is a unique innovation for us, but, overall, Power Grip really continues to follow that holy grail approach of taking inspiration from our community and the best of prestige. And you'll continue to see that we have a great cadence of innovation coming for the fall as well. Spring of next year. We go out three years. A lot of it comes to what the sequence or cadencing of some of that innovation is. So we not only study the market. The one thing I'll probably correct you on is we never copy a product. It always has our e.l.f. twist. We always put our e.l.f. twist. I mean, probably the biggest one being being able to have that prestige quality of incredible price points. But we always make a twist on within the products. And so I would say our innovation team does a terrific job of getting inspiration, not only from our community with those products from Prestige and you'll continue to see a very strong innovation cadence and pipeline from us.

Yeah. And I would just add on, Linda, on your question on the progress in some of our what we call conquest categories. I think lip is a great example of that. A few years ago, even last year, we had maybe a 3%, 4% share in lip, and we have seen that grow over 800 basis points as we've come into this year. And so when we do have those innovations to Tarang's point, it really allows us to continue to pick up share, and we're doing that across lip, mascara, foundation, those conquest categories where we do have a lower share but have so much opportunity.

Okay. Thank you very much.

Thank you. And our next question today comes from Susan Anderson with Canaccord Genuity. Please go ahead.

Hi. Good evening. Thanks for taking my question. I wanted to maybe follow-up on Naturium. Not sure if you could give some more color on how that performed in the quarter in terms of the growth rate there. And then also, on the rollout to Ulta, curious if you're seeing new customers or existing customers buy the brand there. And then also if you have any color just on kind of more, you know, space that you could gain in the US and globally. Thanks.

We're very pleased with our performance overall with Naturium, Susan, and especially in Q3, they continue to show growth particularly in Ulta, where we've launched. We continue to see that business build week over week in Ulta. And so we're very pleased with the expanded distribution and the growth that we're seeing on Naturium. And as a reminder, you know, it has a tremendous white space opportunity as well. Really, only two retailers are Target and Ulta. Overall physical retail. They do sell on Amazon and have their own dot com. But, really, the rest of the world is white space. Opportunity for them. We're pleased as well with the progress that we've seen in Boots. They did launch in a few hundred of Boots' top-performing skincare doors, and we're continuing to see great progress there as well. So very excited for the prospects for Naturium as we look forward.

Yeah. You can continue to hear about other distribution expansion on Naturium. Feel that. It's performed extremely well clinically effective, bio-compatible skincare, incredible formulations. With really great resonance with consumers. So we're very excited about continuing to build that up.

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

What I'd tell you is this category has always been competitive. You know, in Nielsen alone, I think there's 1,900 cosmetics and skincare brands tracked by Nielsen. The big difference is which ones are able to scale, and very few are able. I mean, I think e.l.f. is one of only four with more than $850 million in retail sales. But even if you look at who has more than $100 million in retail sales, I think it's only 26. So you're gonna see a lot of brands come and go or sustain at a very small level. From a competitive position, I feel like we're stronger than we've ever been. If you take a look at our unique areas of competitive advantage, while some people will try to copy elements of this. I mean, often people will go and try to copy elements for our market, but we've already pivoted and moved on and conquered it on other platforms by the time they're figuring out the first one. Our ability of how we engage and entertain our community, I think, in the last year alone, we had 20 unique campaigns since we look at any of our competitors, by brand, they're lucky to do one or two. So there's just a different kind of freneticism and level at which we're operating on those elements. And then probably the most important thing we have not seen anyone come anywhere close to this ability of having prestige quality at the price points we have. That is a unique competitive advantage we have. And so even on the dupes, as I look at the legacy players, if they're lucky, they might have one or two in a couple of year period. Nowhere near. I mean, we just we have basically, I don't know, at least four or five, holy grails, that we just launched. Well, able to follow that up with more in the fall. So I feel great. From that competitive position. I think the best indication of that, frankly, is the market share. And, you know, we've more than doubled our market share in the last three years. Shows kind of the momentum and how others have not been able to replicate the success that we have.

Okay. Great. Thanks so much. Good luck the rest of the year.

Thank you. And our next question comes from Anna Lizzul with Bank of America. Please go ahead.

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

So and I'll do it in two parts. I'd say in Q3 we saw pretty broad strength across every one of our segments. In color cosmetics as well as in skincare. You saw pretty massive share gains in each one of our core segments. In January, I'd say the strongest subcategory was lip. We continue to see good momentum in lip. Back to this point, I think complexion was a little bit more challenged. But, again, we don't see any indicators for the long term on that. And then skincare, continue to go at a faster clip in January. But overall, you know, our strategy with the innovation we have, our approach of how we engage consumers, is we see an opportunity to continue to grow share across each of our segments and skincare.

Great. Thank you so much.

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

Good afternoon. Thank you for taking my question. Does your updated guidance incorporate expectations for retailer destocking and are any of your major retailer partners talking about this given the softer consumption trends?

Hi, Mark. We have not heard that from our retailers at this point. You know, even with our consumption being down, we still are the most productive brand that our retailers carry. And so we typically will see continued orders on our product, and so we have we've just not seen anything like that yet.

Thank you. And then separately, you know, understanding you don't wanna get too specific on your expectations for revenue run rates in fiscal 2026, but could you just frame up the level of flexibility there is on the cost structure should this softer demand backdrop persist?

Yes. So we have, as you can see in Q4, our SG&A is leveraging. Again, I talked about that being driven largely by our marketing investment. But as we think about kind of where there's flexibility in our P&L, we certainly have the flexibility to reduce costs on certain areas. We have cost-taking programs that we are running with our suppliers every year. But really, our focus has been on investing behind the business and making sure that we have the people and the infrastructure that we need to capitalize on those white space areas that Tarang just spoke about. And so that's really more so of our focus as we move ahead. Just really making sure that we continue to make progress against those growth areas in the business.

Thank you.

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

Well, thank you everyone for joining us today. I want to close by saying how proud I am of the incredible e.l.f. Beauty, Inc. team for delivering another quarter of industry-leading results. I want to thank every e.l.f. and every e.l.f. partner for your passion and dedication. Our vision of creating a different kind of beauty company. We look forward to seeing some of you at CAGNY in a few weeks. And speaking with you in May, where we'll discuss our fourth quarter results and FY 2026 outlook. Thank you, and be well.