Greetings, and welcome to the e.l.f. Beauty Third Quarter Fiscal 2017 Earnings Call. At this time, all participations are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Allison Malkin. Thank you. You may begin.

Thank you. Good afternoon, everyone. Thank you for joining us to discuss e.l.f.'s third quarter 2017 earnings results. A copy of today's press release is available in the Investor Relations section of elfcosmetics.com. A recording of the call will also be available for 90 days on elfcosmetics.com. As a reminder, this call contains forward-looking statements that are based on management's beliefs and assumptions, expectations, estimates and projections. These statements, including those related to the company's fiscal year 2017 outlook, are subject to known and unknown risks and uncertainties, and therefore, actual results may differ materially. Important factors that may cause actual results to differ from those expressed or implied by such forward-looking statements are detailed in today's press release and the company's SEC filings. In addition, the company's presentation today includes information presented on a non-GAAP basis. We refer you to today's press release for a reconciliation of the differences between a non-GAAP presentation and the most directly comparable GAAP measures. With us from management today are Tarang Amin, Chairman and Chief Executive Officer; and John Bailey, President and Chief Financial Officer. For today's call, Tarang will begin with an overview of our results and as typical for us, John and Tarang will then alternate sharing the progress we made against our growth strategies, and providing additional details related to our financial performance and guidance. This will be followed by a Q&A session. It is now my pleasure to turn the call over to Tarang.

Thanks, Allison, and hello, everyone. We're pleased to report Q3 results with net sales increasing 28% and adjusted earnings per share up 94% versus a year ago. In a category currently experiencing headwinds, we continue to exhibit strong growth and take share. According to Nielsen, in the 52 weeks ended October 7, e.l.f.'s market share of the color cosmetics category was 4.5%, up from 4% last year. We also continue to see strong growth in non-track channels. For the full year, we're increasing our adjusted earnings per share guidance to $0.55, growth of over 50% versus year ago. We're revising our net sales growth to approximately $270 million. This reflects timing of pipeline and new distribution as well as current category trends. We remain focused on the execution of our 4 growth strategies. Our first strategy is to build a great brand. E.l.f. is a brand that beauty enthusiasts love. In Q3, we expanded our Beautyscape program during New York Fashion Week. We reached a combined audience of 210 million with a message of inclusiveness that fits well with our mission to make luxurious beauty accessible for all. We also continue to build our loyalty program, Beauty Squad, which now has over 600,000 members. I'll turn it over to John to discuss progress on innovation and brand penetration.

Thanks, Tarang. Our second strategy is to lead innovation. We believe our depth and breadth of high-quality innovation at an extraordinary value sets us apart from other brands. In Q3, we launched 49 items, including 16 first-to-mass products. During the month of September, we had a new launch each and every day, highlighting our robust innovation capability. We also continue to innovate at opening price points with the introduction of our $1.

[Operator Instructions] Our first question comes from Steph Wissink with Jefferies.

Just a point of clarification, John, on the timing shipment. Could you give us in more detail on what was at play in the third and fourth quarter, and then how you're thinking about the opportunity into Q1. And then my question is just related to your comment on customer mix being a gross margin headwind. Could you talk a little bit about how we should think about the mix of business evolving and whether you expect that to eventually become a tailwind?

So two parts to that question, the first is just timing of overall sales, I think you noted in the revision of our guidance, we did talk about the shift in timing of our reset pipeline. So Steph, as you'd be familiar in Q4 or Q1 of each year, depending on the retailer and depending on the year, we do have a pipeline that goes out relative to those shelf resets. We've seen the majority of our retailers actually want to do those resets later into the first part of 2018, and therefore, take that pipeline later, so that was one piece of it. The other piece I think you heard us talk to, which was more of a, both the Q3 and Q4 impact frankly, was the timing of our holiday program. And if you took a look last year as well as this year, we shipped holiday in each of Q3 and Q4. Our program was roughly similar in terms of overall size. We ended up shipping more in Q3 than we did prior year, and therefore, will ship less in Q4 than we did prior-year, which is a little bit the converse of what we would have expected and what we were hearing on the last call. In terms of the overall margin, we're quite happy with the continued expansion of our gross margin and not only in the quarter, but certainly, in the year-to-date period, and at its core, the drivers really remain the same. So innovation's the biggest piece, and to a lesser extent, some of the other items that I mentioned, FX, freight and customer terms. We also saw some offsetting impact from customer mix in the quarter and just a little bit more context on that. In each and every year of the company's history, we've had some portion of our sales that go through discounters, as we move through discontinued product that's coming off the wall as we put new items onto the wall. If you look at the last couple of years, that's been less than 5% of our business and this year will be no different. It just so happens that we saw a greater weighting of those sales in the third quarter.

Our next question comes from Oliver Chen of Cowen & Company.

Regarding your comments about categories experiencing headwinds, what are your thoughts about what you're seeing in the market and how you juxtapose that against what you're focused on in terms of innovation, and as you build out the different kinds of breadth and depth within what products you're choosing to emphasize and innovate. And then, just a modeling question. Inventories, they grew at a faster rate than sales. Should we expect that trend to continue? And any details on that going forward would be great.

Oliver, this is Tarang. I'll take the first part of the question on the category and then turn it over to John on the inventory question. Overall, in the category, in terms of what's tracked, if you take a look in 2016, the category grew about 3%. In the latest Nielsen period, it was down close to 3%. Now we believe we're better positioned than many as you can tell by us taking share, and our overall growth rates, but there are some headwinds in the category. What we would expect is, given the resiliency and the importance of this category to consumers over time, we'd expect it would eventually bounce back, but until then, we're taking a more conservative stance. On what makes us better positioned, you talked about one of the core elements, which is our innovation. So far this year, I think year-to-date, we've launched over 95 new items, and that's up from about 62 last year, and we're also getting faster in terms of the speed of that innovation. Like innovations against both color cosmetics as well as skin care, and so we're very well positioned in terms of the items that consumers are responding to as we look forward. We also have a very strong business in non-track channels, whether I look at elfcosmetics.com, our own stores, our customer.coms as well as international. We do quite well in those channels as well, and we'll continue to see that regardless what you're seeing in the overall category.

And then Oliver, on your inventory question, I'd say just generally, we feel great about our overall position, including what it's allowed us to do in terms of fulfillment rates with our key customers. You heard Tarang mentioned, over 99% fulfillment in the quarter. I would continue to caution the group on using 2016 as a baseline, given that it was artificially low with our warehouse move that we had last year and in Q4, we will have pipeline that's still on our books, related to those shelf resets. So I'd sort of guide everybody to 2018 as a cleaner year, if you will, to start doing some of those calculations.

And Tarang just on the -- my first question about the category. When you step back, why do you think the category slowed down on the factors outside of e.l.f.? Just to help characterize it for investors, in terms of what was happening and is your sense of that -- this is temporary versus permanent, it sounds like it, from what you were saying.

My sense is it is temporary, and I base that on when you look at over a long period of time within color cosmetics, it's been one of the best consumer categories, and again, it goes back to the importance the consumer has in the category and particularly, when you look at some brands like us, our makeup enthusiasts, for whom this isn't really a discretionary purchase. We have seen previous periods where you did have a few quarters where the category's soft. I mentioned last time we saw this was in 2014 and the category came roaring back, so we would expect it to bounce back at some point, but there are certainly current headwinds as we take a look, and I don't have to get in to brands that might be suffering out there. We just have to be well positioned, but the category is what it is.

Our next question comes from Jon Andersen of William Blair.

I guess I'll try a two parter here as well. So I think the latest scanner data has been up kind of high single digits for the brand and the implied Q4 growth is I think a bit below that. If you can just talk about again, a little bit more clarity around some of the puts and takes because I would think with the scanner data trending above the implied growth plus some of the shelf space expansion, I think you talked about in mass and shipping that in Q4, the number feels kind of conservative first blush. And then if I could talk -- ask you, just comment broadly on competition and some of the rapidly growing brands from social media influencers like Kylie cosmetics. Are these part of the slowdown in the color cosmetics category mass? Or do you not consider that a factor?

Yes, Jon. I'll take the first and then let Tarang take the second part of the question. Just generally speaking, we go back to the difficulty in our business of looking at any single quarter and trying to tie that back to the broader Nielsen trend. I go back to some of the dynamics that we touched on mainly that timing of pipeline and what we saw on the comparable quarter in Q4 of '16 versus what we're seeing in Q4 of '17 as well as the holiday sales that we're anniversary-ing, which were a benefit to Q3 over prior year, but end up hurting that optical growth rate in Q4.

And then on the question regarding competition. I believe what you're seeing overall in the marketplace is a trend we've been seeing for some time, which is there are certain brands that are resonating strongly with these core makeup enthusiasts, including e.l.f. and they're better positioned frankly, than some of the legacy brands in the marketplace. The other thing I'd tell you from a consumer standpoint in terms of where are these brands are winning, is there's a real blurring of the lines between traditional, kind of definitions of prestige or mass. When we look at our own users and look at kind of in their makeup bags, you'll often find prestige products in addition to e.l.f. and some other brands that resonate with them so our consumers incredibly savvy in understanding which brands work for her, which brands speak to her and you'll see brands like ours continue to be well positioned.

Our next question comes from Bill Chappell of SunTrust Robinson Humphrey. Please proceed with your question.

Can you just talk a little bit more just, I understand there's some pull forward of shipments into the third quarter. Is there any way to quantify that of kind of what percentage of sales you saw that were pulled into the September quarter? Did it add 5%, 10% to the top line growth?

Yes, Bill, we're not going to be able to break that down that way for you, but again, it is just a shift between Q3 and Q4 on that holiday timing.

I guess, was it meaningful and a meaningful change from the retailers from that? Or it just got -- it happens to fall sometime in September versus October?

Yes, it's more of the latter. I mean as you think about traditional holiday periods for those retailers that it can vary by a week and have an impact year-over-year in terms of where they take it.

And I think just adding to that, this year, obviously, they wanted to get to a faster start on their own holiday and you're starting to see some of that holiday product show up in some of our leading retailers and we feel really great about kind of both the presentation as well as the overall program and we're happy to support them being to get off to a faster start on holiday.

And then on the SG&A side, just to make sure I understand it, it was certainly lower than expected and obviously from prior quarters where you've been spending a lot of money back in behind the brands and was that on purpose with just the timing? Should I expect an acceleration as we move forward? Or I'm just trying to understand that had to do with kind of timing of orders or this was always in the plan?

Yes. So I would say we were consistent with our own expectations. And if you take a look at SG&A spend over each of the last three quarters, it's been roughly consistent and obviously, the levels that we're talking about on a year-over-year basis represents significant investment back into the business namely in the areas that we discussed on brand, people and infrastructure. And so we continued investing in the third quarter. What I'd tell you on a go-forward basis is you will see some elevation of that SG&A line just given the higher volumes that you do see in Q4, but overall, very consistent with what we expected.

Our next question comes from Shannon Coyne with BMO Capital Markets. Please proceed with your question.

So the mass channel including Target and Walmart, are they making big bucks in beauty rolling out -- to about roll out new store formats, bumping up staffing and technology. Can you give us your thoughts on whether or not you think they're on the right path to regain market share? What are you most excited about? And what do you think they need to look at, that they haven't looked at already in order to gain some share back?

Yes, I mean, I think beauty, first and foremost, for many of these retailers is the core destination category. I mean, I'd say long treated as a very important category within the overall box, and we continue to see them invest and position themselves that way. We talked on the last quarterly call, Walmart's investment in their kind of light wall initiative and really creating a better presentation of beauty. Target is long seen beauty as the destination and you continue to see players like Ulta Beauty really be well positioned amongst these core beauty enthusiasts. So what I'll tell you is everyone is going after this category given the importance to them overall and again, where we are a key partner to each one of our customers we're in to be able to help grow.

And can you talk about the amount of shelf space you're getting in Ulta when you roll out in the first half of '18? And then I guess, just lastly, do you think you're getting a new customer there? Or is this just [indiscernible] mass channel?

Yes, so what I'd tell you is we can't talk about the space for 2018, but you can already see the brand in a subset of Ulta stores, and we're really, really happy with the presentation in those stores and what they do. And then in terms of customer, I think one of the reasons why we're excited about Ulta is what we saw with in ulta.com as well as in the subset of their stores. And since it's a really strong overlap with this core beauty enthusiast customer and so I think both e.l.f. as well as Ulta Beauty resonates very strongly with that enthusiast and that's what made it a natural fit.

Our next question comes from Linda Bolton-Weiser of D.A. Davidson. Please proceed with your question.

Can you comment a little bit on the Walmart linear footage expansion? And I think you had originally said that was going to benefit the second and fourth quarter growth rates? So can you just comment, is that still the case? And if so, excluding the incremental Walmart space and shipments related to that, it looks like your revenue would probably be down year-over-year in the fourth quarter given your new guidance so maybe you could comment on that. And then related to that, the 20% increase at Walmart looked to us equivalent to now your Target space. So is that accurate? And if so, would the next jump up in footage at those retailers be harder to get to? In other words, going from like AC to significantly more, that would be like the Cover Girl or the Maybelline space. So would that take longer for you to achieve? Or are there still increments that you could make at Walmart and Target above what you have already?

Yes. So why don't I take the one on space and then have John talk a little bit more about the sales question on what quarter. So what I'd tell you overall in terms of space, we have seen a variety of in terms of where increments come in terms of space, so it is not always kind of you have to do it in 4 feet chunks, you'll see a variety of planograms at Walmart, at Target so there's an ability for us to continue to earn more space based on what those customers see and we'll talk about that space gain as time goes on, but we're quite satisfied in terms of how the brand performs and what that results in. And then on the Walmart space expansion, I think just a point of nuance, what we did say is that we would see an expansion of linear footage both in Q2 as well as in Q4 with the majority of that actually setting in Q4. Important to note that the impact of space, whether it's Walmart or any other retailer, is we actually land this space, and then we work to leverage our data to optimize assortment and merchandising within that space. So I'm not sure that you would actually see a material benefit to sales until we got into next year, Linda.

Our next question comes from Andrea Teixeira of JP Morgan. Please proceed with your question.

It's Christina for Andrea. I’m just going back to the sales trends for fiscal '17, just how much of the cut was related to timing and distribution versus the category softness over all like any kind of parsing out in color will be helpful. And then for the Ulta rollout, how is your performance versus your expectations especially as you're kind of seeing an implied slow down and in terms of like productivity through the Nielsen data, so how does that compare in Ulta stores, are you seeing better productivity there? And how should we be thinking about the timing of the sell-in period for incremental Ulta doors into next year?

Yes, so overall, in terms of the guidance and the revision that we've made, obviously the category has been a reality throughout the last few quarters so certainly, we're incredibly well positioned against that broader context, and that's evidenced in the share that we've been able to take, but whenever you have a category that goes from up a few points to down a few points, we're not immune from seeing some impact of that. A bigger part was really the timing that we saw in terms of these pipeline shipments as well as some assumptions for new distribution that we had, which we see as good long-term opportunities into '18 and '19, but ones that we strategically decided to pause on and obviously, really happy about our distribution progress including the announcement of our full chain partnership with Ulta into 2018.

[Operator Instructions] Our next question comes from Erinn Murphy of Piper Jaffray. Please proceed with your question.

I guess I have a couple of questions. First on the full year guidance, I think you'll end up from a sales perspective around 17%. How confident are you guys that this can reaccelerate to that 20% growth rate beyond this year? Do you need to see the category reaccelerate or is there enough newness in that kind of pipeline to kind of get you back there beyond this year? And then secondly, could you just talk a little bit more about how your own stores performed in the third quarter? Did it follow a similar shape from a sellout perspective as you saw on wholesale?

Yes, so overall on the guidance, I think the latest figures that we just provided imply an 18% growth rates for the year. But, obviously, a lot of good growth for us into 2017, Erinn. In terms of future period, we are not in a position to talk about 2018 until we are together on the next call. All I'd say from that 20% figure that you referenced is that, that figure is a CAGR from 2016 to '19 and that obviously it's early.

Got it. And then just on your stores?

Yes, so stores are doing incredibly well. I think you heard in the commentary to open the call that we continue to invest behind our stores, including our most recent store in Time Square. We continue to see incredible results off of those locations, including the engagement that we see from consumers, the passion of our associates and importantly, the insights that we continue to get. Growth continues to be quite attractive in our stores. And there's one other question, I think from before, there was a second part question asking about our performance versus expectations and productivity. I can't talk to specific numbers for competitive reasons, but, obviously, we and Ulta Beauty were very happy with our performance, otherwise, I don't believe they would expanded us into all of their stores in 2018. And then, in terms of our overall productivity, I think probably the most important thing is what the relative productivity of us is, relative to many of the brands that actually have more space than us and we feel really good about that as well.

Our next question comes from Mark Astrachan of Stifel.

This is Claire on for Mark. Just wanted to ask about one other comment on the category. So makeup is slowing, and if that continues into next year, can you give some comments on what the offset might be and how you might, or if you might need to refocus on any different categories like beef up the focus on skin care.

So we feel -- first of all, as I mentioned earlier on the category, we don't believe, as we look at long history of color cosmetics and the importance it has for consumers, we believe it's a great category for the long term. We are very well positioned when it comes to our own skin care line, and we are seeing more and more consumers kind of respond to the insight that you need good skin to have good makeup coverage, and we're particularly excited about our recent launches with e.l.f. Beauty Shield as well as Ulta Active, and kind of how that positions us as well as the overall pipeline we have in skin care. Again, I can't talk about the specific products that we're most excited about for 2018, but you'll hear more about that in future calls, but again, we're well positioned, given the amount of innovation we have across both color cosmetics as well as skin care.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would like to turn the call back to Mr. Tarang Amin for closing remarks.

Well, thanks for joining us. We hope that you have a wonderful holiday season, and we look forward to seeing you at the ICR Conference in January. We also look forward to discussing our full year 2017 results and 2018 outlook with you in February. Thanks, everyone.

Thanks, all.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.