e.l.f. Beauty, Inc. (ELF) Q1 2019 Earnings Report, Transcript and Summary

Greetings. And welcome to the e.l.f. Beauty’s Transition Period Ended March 31, 2019 Conference Call. At this time, all participants 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. It is now my pleasure to introduce your host, Willa McManmon, Investor Relations. Thank you. You may begin.

Thank you, Operator, and good afternoon, everyone. Thank you for joining us today to discuss e.l.f. Beauty’s transition period 2019 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 relating to the company’s fiscal 2020 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 the non-GAAP presentation and the most directly comparable GAAP measures. With me from management today are Tarang Amin, Chairman and Chief Executive Officer; and Mandy Fields, Senior Vice President and Chief Financial Officer. With that, I will turn the call over to Tarang.

Thanks, Willa, and good afternoon, everyone. Our transition period results exceeded our expectations with net sales of $66 million and adjusted EBITDA of $12 million. Excluding the impact of e.l.f. stores net sales were up 3% versus a year ago. These results reflect the benefit of Project Unicorn and increased marketing activations behind our new first-to-mass products. We are making progress on our strategic repositioning and have defined five key initiatives that together form an integrated strategy designed to reinvigorate the e.l.f. brand and raise consumer awareness. We are seeing initial progress as we began to execute against these initiatives. We believe the investments we are making in the brand will take time to fully realize, which is reflected in our fiscal 2020 guidance. Let me provide greater context on each of these initiatives. Two of our key initiatives go hand-in-hand, driving demand in the brand and a major step up in digital. As you know, in February, our Chief Marketing Officer, Kory Marchisotto joined us from Shiseido. Kory has hit the ground running in redefining our marketing strategy and bringing more consumers into the brand. e.l.f.’s core value proposition making the best of beauty accessible to every eye live and face still resonates with consumers. What’s changing is the way we are telling our story. Kory and the team are crystallizing a campaign to reinvigorate what we have coined e.l.f.’s super powers. These are unique brand tenets that e.l.f. users love, our premium quality, unbelievable value, universal appeal, first-to-mass capabilities, and of course, the fact that we are vegan and cruelty free. We plan to activate these core tenets by integrating behind fewer bolder products stories, driving a constant drumbeat of influencers and events and transforming our approach in digital and social. To measure our progress we are looking at metrics such as, our year-over-year search on Google, which we see as a proxy for consumer awareness and interest in the brand was up double-digits when compared to the same period in fiscal 2018. Our earned media value or EMV, which reflects bug by tracking organic influencer mentions was up close to 18% compared to the prior year and our reach on Instagram, which passed 4.5 million followers, was up about 30% year-over-year. These metrics reflect our move to double down on digital, which is already making a difference. In our last earnings call we shared that social media postings from influencers particularly Jeffrey Star were creating a surge in demand for several of our first-to-mass products and driving awareness across the brand. We saw a halo effect from this social media enthusiasm and success in our own proactive influencer outreach including our recent collaboration with Jkissa. The impact of these efforts was reflected in our overall results and particularly on elfcosmetics.com, where we had one of our strongest quarter’s to-date. We plan to expand our reach in the coming months through a new digital awareness campaign and we look forward to updating you periodically on our progress. We have talked a lot about a third key initiative which is improving productivity in our national retailers. The primary driver behind this is Project Unicorn, which is aimed at shrinking our packaging footprint, elevating our brand presentation and improving the consumer’s abilities to navigate our sets. During the transition period, we implemented the first phase of Project Unicorn, which impacted 350 SKUs or are over half of our volume. Our productivity trend improved during the period due to Project Unicorn and our marketing activations. You can see our retailers are incorporating Project Unicorn when you walk the stores. At Target, in addition to better shelf sets, we have flex towers elevating our position as number one in brushes and primers. Also beauty has increased our space in a number of your stores as has Walgreens. At Walmart, we are seeing better in-stock results on our four-way innovation centers. Phase 2 of Project Unicorn will roll out in the fall and converts our market-leading brushes to new designs. Along with the impact of Unicorn, our new integrated marketing approach is reflected at Superdrug in the U.K., where we are seeing strong comp growth behind the marketing and merchandising of our 16 hour Camo Concealer. We are also seeing traction at boots as we began to roll out in stores across the U.K. Our fourth key initiative is to focus on first-to-mass by providing prestige quality products at an extraordinary value. This initiative is less about pivoting and more about focus. We are quite proud of our ability to innovate in as fast as 13 weeks. Going forward we plan to use our innovation capabilities to reinforce our strength in key product categories such as brushes, primers and browse. We are also making sure that each of our products regardless of price point is meeting our core value proposition of prestige quality at an extraordinary value. In the past we primarily marketed our new products when they went on elfcosmetics.com. We are shifting our go to market approach by also supporting these products integrated marketing campaigns as they are rolled out into our national retail partners. Recent examples include Poreless Putty Primer, which has over 70,000 NotifyMe sign-ups in elfcosmetics.com, Camo Concealer which is helping build our leadership in complection at a $5 price point and Hello Hydration which offers a prestige quality skincare cream at just $12. We plan to support these key first-to-mass products throughout the year. To measure how we are doing on this initiative we will track relative rankings by product segment. Proudly despite a challenging 2018, we ended the year with market leadership in brushes, primers, setting spray and eyelash curlers as measured by Nielsen. Our last key initiative is cost savings, where the strategic move to close our e.l.f. stores reduced our headcount by around 50% and is expected to provide G&A savings on an ongoing basis that should help us fund our marketing and digital investments. Additionally, our tariff mitigation strategy, with the help of vendor concessions and improvements in our China operations will help to offset the 10% tariff impact. If tariffs rise to 25%, we look to a mix of further operational savings, selective price increases and FX offsets to mitigate the higher tariff rate. Our other ongoing projects to improve operational efficiencies include our Columbus and Ontario California warehouse automation and U.S. liquid fuel manufacturing, which we expect to generate $3 million in cost savings in fiscal 2020. Before I turn the call over to Mandy Fields to our CFO to cover the results and guidance, let me share a little bit about her. Mandy has a consumer focus background with deep financial planning and analysis experience from her start in FP&A at the Gap to her tenure as Vice President of Finance and Analytics of Albertsons $10 million private brands portfolio to her most recent role as CFO of BevMo!, which has 163 stores and is the number one specialty beverage retailer on the West Coast. Mandy was awarded Best Non-public Company’s CFO by San Francisco Business Times last year and we are delighted she has joined the e.l.f. team. She’s been in role for only three weeks and is already making a difference in the way we approach our key initiatives. With that, I will turn the call over to Mandy.

Thank you, Tarang. I am excited to be a part of the e.l.f. team. Before I dive into the numbers, I’d like to share a bit about my journey to e.l.f. As Tarang mentioned, I have been immersed in the consumer world since the start of my career and I admire the core values of the e.l.f. brand and its focus on accessible beauty for everyone. After my first meeting with Tarang, I left impressed with the energy and honesty with which the team is approaching recent challenges and equally impressed with the incredible culture of commitment to the e.l.f. consumer. It is clear to me that e.l.f. has a truly differentiated core value proposition and is a brand poised for revitalization. I look forward to working with the e.l.f. team and all of you, as we move forward. Now I will discuss our results for the transition period as compared to the same period in 2018. Net sales increased to $66.1 million, primarily due to Project Unicorn and our marketing activations within the period. This is partially offset by the timing of pipeline shipments and the closing of our 22 e.l.f. stores, excluding e.l.f. stores, net sales increased 3%. Gross margin of 61% was in line with the prior year, excluding e.l.f. stores gross margin would have been about 100 basis points lower than the 61% reported, as our stores yielded higher margins versus volume through other channels. On an adjusted basis, SG&A was $33.6 million or 51% of net sales, compared to $31.7 million or 48% of net sales in the same period of 2018, mainly driven by increased investment behind our marketing and digital efforts. Adjusted EBITDA was up 1% at $12 million versus $11.9 million a year ago. Adjusted net income was $3.2 million or $0.06 per diluted share, down from $5.5 million or $0.11 per diluted share a year ago. We continued our disciplined working capital management in the transition period generating over $8.5 million of cash flow from operations, bringing our cash balance to $53.9 million as of March 31, 2019, compared to $10.5 million last year. The improvement was primarily driven by the timing of receivables and continued progress on inventory management. We are prioritizing investment behind our key initiatives to increase consumer awareness and build brand relevancy. Given the $54 million of cash on our balance sheet, we assessed our target in excess cash levels. As a result, in our earnings release today, we announced that our Board approved a share repurchase program up to $25 million. We are pleased that we can fund our strategic initiatives with cash from operations and also be in a position to return excess cash to shareholders through this program. Turning to the financial impact of the February 2019 e.l.f. store closures, we incurred one-time accounting charges of approximately $22.2 million, which represented and in restructuring expenses. The majority of this expense is non-cash in the period, including $16.1 million in accelerated rent and $5.4 million in accelerate depreciation expense, while closing the stores was a difficult decision, we believe it was the right choice to support our focus on national retailers and digital. Now let me discuss our 2020 guidance. Excluding stores, we expect fiscal 2020 net sales to be down 4% to 8% or $235 million to $245 million, adjusted EBITDA between $45 million and $48 million and adjusted net income between $18 million and $21 million or $0.35 to $0.39 per share on a fully diluted basis, with the share count of 52.5 million. Recall that gross margin without stores is roughly 100 basis points lower than with stores because direct retail margins are higher than wholesale margins. I’d like to explain our thinking behind the ranges, particularly on our net sales. As Tarang mentioned, I come from an FT&A background and believe that it’s prudent to take a moderated approach in forecasting, particularly given our recent trends. We are seeing improvements in the business, but an improved quarter does not make the year. e.l.f. is heavily dependent upon track channels, which account for more than half of our revenue and as you know can be volatile. We are also in the initial days of our strategic repositioning. While we have seen early progress, we expect these initiatives will take some time to fully realize and our guidance reflects this. The decline in adjusted EBITDA guidance year-over-year is primarily the result of two main factors, forecasted sales declines as I have just discussed, and the additional marketing and e-commerce expenditures. I should note that in the past we have discussed marketing spend discreetly from the spend for user acquisition on elfcosmetics.com. As we double down on digital, we believe it makes sense to discuss the two together. In fiscal 2019 marketing plus e-commerce expenses were 7% of net sales. We expect these to increase to approximately 10% to 12% of net sales in fiscal 2020. We expect the additional investments to cost deleverage in the short-term as in many cases the ROI on the top of funnel marketing activity lack spend. We will provide commentary on how marketing ROIs trending on future calls. Before we turn to the question-and-answer portion of the call, let me turn the call back to Tarang to summarize.

Thank you, Mandy. Looking at fiscal 2020, I believe we are on the right path as our strategically positioning supported with a clear set of initiatives. One of the things that gives me confidence is the quality of the team, including the addition of Cory and Mandy. I strongly believe long-term looks promising, yet remain cautious in the short-term. We look for engaging with you over the coming quarters to discuss our progress. Operator, you may now open the call for questions.

Thank you. [Operator Instructions] Our first question comes from the line of Oliver Chen with Cowen & Company. Please proceed with your questions.

Hi. Thank you, Tarang and Mandy. Regarding strategic repositioning, what are your thoughts on the timing of the positioning relative to how some of your most important wholesale partners think about the beauty category and the choices they make for the beauty buyers in sense, because I am just curious about the sequencing of sell-ins versus sell-outs and with the change happening, how would that work in terms of consumer reception and demand versus selling and planning? Related to that, I am also just curious about the UPT versus average unit retail and how those are trending relative to in-stock and strategy on managing good in-stock levels and the AURs that you want? Thank you.

Sure. Hi, Oliver. This is Tarang. Why don’t I take the first stab at your questions. In terms of the strategic repositioning, really is the five initiatives we talked about working in concert with each other. We feel we are well-positioned when it comes to the actual assortment that we have in stores as part of our spring resets Project Unicorn really gave us a major kind of leg up and we feel good about the progress we have on Project Unicorn of having the right items in the stores presented the right way, you can see that just as you walk these different stores. In particular our focus on first-to-mass has really coming through both the Poreless Putty Primer, as well as Camo Concealer after very fast starts behind the marketing that we are putting behind them. So the strategic repositioning is well underway, and we see some promising signs. In terms of the units per transaction versus average unit retail, if you looked at the first quarter our average unit retails are up anywhere between 5% to 10% that’s less than what we have traditionally done, where our average unit retails were up often in the 20% plus range and that is a strategic focus of us making sure that we are better balancing both units, as well as average unit retail and reinforcing our overall value equation. A great example of that is Camo Concealer, which compares to a $28 prestige item, yet, we have priced it at $5, I mean, it really is a screaming value. So we feel good in terms of our initial progress particularly with the acceptance of our major customers on Project Unicorn and how it’s doing at the gates.

Okay. And then last question is as you engage in the changes and also think about simplify to amplify on some of your Euro products and new ideas. What should roughly happen to the cosmetics versus non-cosmetic composition of your product mix over time or is there story of evolution there what we should be aware of?

Well, we always, I mean, certainly, one of our key hallmarks is our ability to innovate and both in terms of the speed, as well as the breadth of innovation across eyes with face tools and skin care. You are seeing a concerted effort to focus in particular on those key first-to-mass items and so when I take a look at our assortment on shelf, I don’t see massive shifts in terms of the number of items on shelf, we always have had a good rhythm of kind of what I call reading and feeding to every year going approaching our planograms. And taking kind of what we believe will be some of the best items and taking other items off the shelves, I feel that way, probably, the biggest shift that you are seeing is just much greater focus on these first-to-mass items more than where we would be prioritizing a particular category. You will see us talk less about the total number of items we are launching. You will hear us talk a lot more about kind of the scale of kind of the integrations we have on the ones that we deem the most important.

Okay. Thank you. Best regards.

Thanks.

Thank you. Our next question comes from the line of Bill Chappell with SunTrust. Please proceed with your question.

Thanks. Good afternoon.

Good afternoon.

Just want to see if I can maybe translate some of the message from me, in terms of in the past you would talked about your marketing and advertising was mid-single digits at best and you would never thought you would kind of go to the full double digits as a percentage of sales, just because that’s not really how you ran your business and you felt like the sales would come back. Is it fair to say that I guess one you had a new Chief Marketing Officer who said look if we are really going to change the trajectory we need to make a meaningful step up? And then, two we had a new CFO in place and welcome Mandy thought of that’s not how we are going to run our guidance. We need to set the -- reset the bar here, so that we can rebuild some investor trust. Is that the right way to look at it?

Sure. Bill, this is Tarang. Why don’t I answer the first part of the question then turn over to Mandy, so she can directly talk about kind of the guidance. On the first on the marketing, first, if definitional, we use to always just talk about the SEC definition that you see on marketing, which for us was around you know 3% to 4% of net sales. So if you take a look from the marketing only kind of investment you know we had I think in FY19 about 3% of net sales was roughly 3.2% of net sales. As we step forward particularly with Cory coming in and taking a more holistic view of our consumer engagement and marketing activities. She’s saying, if even though the SEC doesn’t require us to break out the e-commerce spending or the spending we have to get people to our site, given that our approach is very digital and viral in nature, we are better in a more accurate measure for us, as well as investors is to combine the spending that we have in marketing, as well as our e-commerce. And if you combine that spending, what we are really talking about in FY19 that combined spend was about 7% of net sales and in the transition period, it was about 8% of net sales and as you heard in our guidance 10% to 12%. The 10% to 12%, so it’s not as big a step-up as you see mainly because we are combining both those metrics together. That is one the first part of it. The second is a tremendous amount of confidence in terms of really bringing more consumers into the franchise. And it’s -- on the macro if you take a look, the strategic move we need to close down our stores really the SGA that was -- SG&A that was involved in our stores and now being redeployed turnover our marketing and e-commerce activities together. So we feel is a better way to kind of go for the long-term of the business to give you perspective of the marketing. What I turned to Mandy to talk to you about a little bit about the guidance.

Hi, Bill. So in terms of guidance…

Hi.

I just want to talk a little bit about my philosophy and approach. So I’d like to take a moderate approach with forecasting and while we are encouraged about the things that we saw in the transition period, if we just take a step back and look at where we have been historically, so if we look at the back half coming out of calendar ‘18 we would have been kind of on a negative 7% trend. If I take the transition quarter plus what we saw in the back half gives me a negative 4% trend. So that kind of bookings the guidance range from a net sales standpoint. And then, again, we are seeing positive traction we are encouraged by that, but I want a chance to see progress on a sustained basis before we get too far ahead of ourselves.

Okay. I think that that translates with what I was thinking. Second just maybe a little more color around Project Unicorn, I mean, we are now largely through the spring resets, is there anything you can give us to kind of quantify how that’s making a difference and will it be expanded more this year to other retailers to other SKUs or is it kind of set in place right now?

Sure. Well, we are feeling really good about Project Unicorn. So the first phase has been implemented. So particularly if I look at our kind of Walmart, Target and Ulta, we have I think about 350 Unicorn’s SKUs that have been kind of put in the Unicorn packaging. The shelves have been redrawn in a more efficient design and what we see in terms of results that all three of those customers is an improvement in our productivity trend line. So we are feeling really good about it. For balance of customers, they do get the Unicorn packaging, but it will be later that they are able to draw them more efficiently. So that’s a little bit about Phase 1. Phase 2 of Unicorn, as I mentioned is, involves our brushes we have market leadership in brushes in the U.S. and those SKUs start to self-convert similar to how we did Phase 1 of Unicorn and they will be in kind of position back I will call the fall of this year. There will be a Phase 3 as we take a look at broader elements of our lineup and other SKUs that we do on Unicorn, but I’d say the main parts of Unicorn in terms of the SKUs that were converted to better self presentation and our ability to kind of really call up some of our core segments in terms of helping consumers navigate. We are encouraged by the early signs and you will continue to hear more about it.

Okay. And then last one for me just, I get the kind of trend line of negative 4% going forward similar to your historical trend. What does that imply versus the overall -- your expectations for the overall category, are you going to be in line or do you think you will grow faster or slower than the category?

Right. Right now it’s relatively in line. If I look at the first quarter of the year, the color cosmetics category in the mass that was down 3%, we will see, obviously, our intention is to do better, but we wanted to kind of at least to Mandy’s point kind of moderator expectations.

Got it. Thank you.

Thank you. The next question comes from the line of Steph Wissink with Jefferies. Please proceed with your question.

Thanks. Good afternoon, everyone. I want to follow-up on Bill’s question and just digest there decompose with a little bit further. Tarang, if we were to hypothetically say the March quarter pattern continues. Can you help us bridge with the potential leverages in the business given the increased digital spend, meaning, if the business does deliver a flat or better growth rate, do we start to see some incremental margins return to the business over the course of the year?

Hi, Steph. What I would tell you is certainly, if you are seeing some deleverage with kind of the sales decline, you will have leverage as if instead of seeing minus 48%, if you did see a flattening or growth in the business, there is leverage to be had there.

So your plan wouldn’t be to spend back any upside, but rather to see the benefits flow through to the bottom line?

That’s right. I mean, our current assumption, I mean, part of it depends on both Mandy and Cory both want to see is, how these investments pan out and based on how they are panning out, we will come back and kind of update it if the -- obviously if the return comes faster, I think, we like that, but we also want to kind of reserve the ability if we are seeing really good results to kind of further accelerate our topline.

All right. That’s great. And then just the last one is on the Project Unicorn strategy. I am wondering if you can give us some quantitative measures around the performance of those stores that have been fully converted versus a control group or an average, just to help us understand the degree of productivity enhancement that that strategy is starting to show at retail?

Yeah. So maybe the best way I can do because Unicorn SKUs show up in all sorts of retailers and so the places you can see it probably the best target Walmart and Ulta. And so as we isolate kind of post Unicorn versus pre Unicorn you can see it, frankly, lease target at Walmart are covered in kind of the track universe. The change in trajectory saw in kind of our track data over the last, call it, two months to three months, gives you an indication of Unicorn plus our marketing activities. And important to say both go hand in hand, it’s kind of the chicken and egg thing. The marketing would not be nearly as effective unless we had the right assortment on those shelves. The assortment wouldn’t do as well unless we are amplifying and amplifying that. And so both if you really take a look at kind of the fourth quarter of last year calendar 2018, we will remain at four versus kind of the plus three that you see in the transition period quarter, base -- there’s only two things you can really attribute that to, to just kind of Project Unicorn and the marketing activations that we talked about.

Okay. Last question, just really quickly is on the conditional retail level inventory. You feel like you have enough inventory in the channel to keep the consumption momentum going?

Yeah. We feel good about our retail inventory. If anything we are a little tight particularly on a couple of these first-to-mass items we have had, out-of-stock issues on Poreless Putty Primer and Camo Concealer. So we are working to be able to get those back in better position in our kind of first quarter of our new fiscal year. But overall we have made great strides, we continue to partner well with our retail partners, last year for example we saw some serious kind of out-of-stocks in our four way innovation centers at Walmart. As I mentioned earlier, we are doing much better on our in-stocks there, our in stocks kind of overall look pretty good, but it’s something that given our unit movement is always something that we are focused and working on.

Thank you.

Thank you. Our next question comes from the line of Rupesh Parikh with Oppenheimer & Co. Please proceed with your question.

Good afternoon and thanks for taking my questions. So I had a few modern questions, I was hoping you can provide a little more granularity. So first on the gross margin line, I was curious if there’s any more specifics you can provide there and just the key puts and takes as you look at this year? And then also I was wondering if you could provide any clarity in terms of how you see the phasing of earnings growth this year?

Okay. So I will start with the gross margin. Really not a lot of change in gross margin, so as I stated without the stores we would have been 100 basis points lower and so you can just trend that forward in your modeling. Currently, the gross margin rate assumes the 10% tariff rate. As Tarang spoke to there are some mitigation strategies we have if it goes to the 25% rate. But as for now we have assumed the 10% on the go forward. In terms of phasing of earnings, as you know, we don’t give quarterly guidance. But I would say that there’s some seasonality in our business Q2 and Q3 are going to be the most important quarters for us with the Q4 and Q1 having lesser impact, so that’s what I would give you on the quarters.

Great. And then a question -- I guess, a question for Tarang, just on category, although, it seems like at least we all the beauty players have called out a weak beauty category, it sounds like color cosmetics is still challenging. Just curious if you have any thoughts in terms of why you continue see challenges out there I think both on the mass side and procedures even slowed recently?

Yeah. I will be honest. It’s a little perplexing how long kind of the softness has been there. We have taken a look at the category over a long period of time. We are a little surprised by kind of how long the category has been soft. What I would tell you is the core dimensions of kind of the category always come back to kind of how strong or kind of in totality are the new products there. We feel -- we are really encouraged that we have a couple what look like to be pretty big hitters. I don’t know if the category in total has that level of innovation that we have. So I feel well positioned particularly if we can continue the momentum that we saw in the transition period. But that would be one. And then two, there’s always some question for me on measurement. We see so much that’s moving kind of online that we often when we just even look at our own business wonder if the measure categories are picking all of that up.

Great. Thank you.

Thank you. Our next question comes from the line of Erinn Murphy with Piper Jaffray. Please proceed with your question.

Great. Thanks. Good afternoon, and welcome, Mandy.

Thanks.

I think just a couple of questions for me. First on the e-commerce you talk about it being a strategic initiative. Can you just remind us what percent of sales that is today and then what are you seeing in terms of the growth of that channel currently and maybe where that could go over time?

Sure. So Erinn this is Tarang. We don’t break out e-commerce right now separately, in the past you kind of broke out our direct channel versus national retailers and kind of the end of the year I think we will again kind of you see that break but in-between quarters we don’t. In terms of where e-commerce stands for us, it is critically important, it was obviously a digitally native brand that was our entire business for a few years, it is one of our main vehicles in which we engage our consumers, put our new innovation on first. And so when I think about the growth rates there, what I did mention in the prepared remarks is, we saw one of our strongest growth quarters on e-commerce elfcosmetics.com that we have in quite some time and it’s a reflection of the initiatives, strategic initiatives that I discussed earlier in terms of driving more people more demand in the brand, more in terms of our digital strategies. But in particular the focus the days were out of stock right now on Poreless Putty Primer, but when we have that in stock I mentioned I think this 70,000 notified new request on getting that product back in stock. I think you see many of the strategies work best on elfcosmetics.com, but really our digital efforts go well beyond e-commerce.

Sure. Okay. And then maybe just sticking on the similar theme as you think about the marketing e-com spend collectively moving towards that low-double digits. Has there been a change of philosophy of kind of the mix of that spend and what channels maybe you are starting to over index socially you have talked a lot about on this call. But just curious on what that could look going forward in terms of the mix versus where it was historically?

Sure. I mean, I think, our marketing spend or e-commerce spend is always on primarily kind of digital in nature. Yet, we -- in the past sometimes siloed both types of spending. Our e-commerce spending was very much kind of direct response related whether it be search, affiliates, other things to bring people to our website, whereas to some of our other marketing spending you know whether it be on a beauty scale or some other influencer programs some are social programs that you don’t really go together and I think one of the things that Corey market soda is really bringing in is a more holistic view of kind of how we are engaging our consumer particularly in putting forward what she coins some of our superpowers and making sure our will consumers understand that. So you will continue to see us, probably, if I think of our marketing kind of from a funnel from an awareness standpoint lower funnel activities, as well as upper funnel activities. You continue to see us do a lot and be able to attribute quite a bit on the lower funnel activities to bring people to our site. But increasingly you will see more on the upper level -- upper funnel activities. We haven’t done nearly as much there and if you take a look a lot of the incremental spend in fact if you even look at the transition period really stepping up on social, really stepping up in terms of our ability of driving digital awareness and number of more platforms that we have in the past we are encouraged by site. I think you have being able to leverage the entire kind of full funnel activities from an awareness standpoint, we believe we be more effective in it very much it ties into the vision that Corey and the team have in terms of how we engage our consumers.

Got it. And then just one clarification, Mandy for you, you think you talked in the former response on kind of the shaping of the guidance for the year and you don’t typically break it out, but when you talk about Q1 and Q3 being the most important and one in 4Q being a little bit less relevant. Are you implying that 1Q and 4Q should be below that of the average growth rate of down four to down eight and then the others above or just any help on the kind of sales cadence? And then just the other clarification in the guide you guide 52.5 million share count. Should we assume that that’s no buyback then and that’s just the dilution from options? Thank you.

Yeah. Okay. So first let me answer the question on the quarterly importance. No, my reference to Q2 and Q3 are simply because it’s pre-holiday and holiday, which are typically…

Okay.

…larger quarters for us. So no implication there that Q1 and Q4 will be upsize of the range to the negative. On the share count 52.5 million, yes, you are right. It’s just the diluted share count.

Okay. Perfect. So no buyback that would be incremental?

Correct.

Thank you.

Our next question comes from the line of Andrea Teixeira with JPMorgan. Please proceed with your question.

Hi. Thank you. Hi, Tarang, and welcome Mandy and Cory. I was just hoping if you can bridge the approach to your guidance, more like how if you are just trying to making a more conservative, when you think about the 7% to 10% to 12% of sales going to marketing is that both above the line and below the line? And how can kind of like your par so that investment, is that a broader advertisement to increase awareness of the e.l.f. brand or is it more R&D or is it more working on getting more distribution and some of the non-strike channels or new doors? If you can help us elaborate that. And on the EBITDA margin, so it’s part of the first question on how you separate those components, like if you take out marketing, so I am just trying to see if you can -- there is some deleverage from revenues, the impact of the revenue of the doors that you are closing or your existing and company operated stores. But also if you are seeing some deleverage there or you can now finally start to leverage your productivity, as Tarang discussed, with Project Unicorn to productivity per store. If you can start leveraging on that and more like the no media or known marketing overhead expenses how we should be thinking of those? Thank you.

Okay. Hi, Andrea. This is Tarang. I will take the question and have Mandy to add.

Okay. Yeah.

So, on the first, in terms of the marketing, our marketing plus e-commerce spending going from 7% in FY 2019 to the range that we provided 10% to 12%, the nature of that spend is highly digital awareness related. So it’s not to drive distribution, it’s not to drive other activities, it’s the range of activities everything from bringing people to our site to driving greater awareness with our new campaign primarily digitally and via social very much what you saw in the transition period quarter. So we feel good about that spend and kind of the nature of that spend that’s authentic to kind of e.l.f.’s history just in a much bigger stage. And then in terms of kind of the leverage question on productivity, maybe, I will ask Mandy talk about that.

Yeah. And Andrea, so as we think about the marketing, we said if you take a look at EBITDA as marketing, as there are any, any leverage there. And so I guess the way that I think about it is, we are investing in marketing and e-commerce in 2020 and so you should put that in the 10% to 12% range as we mentioned. But the sales right -- the sales down 4% to 8% obviously makes for some deleverage there. So, I think, there was an earlier point of -- if we start to see sales come back around would that moderate a bit and it would. So I think what you are seeing is we are kind of putting and laying the foundation for our marketing and e-commerce platforms going forward, our initiatives going forward, and then that the sales will come you know subsequently.

Okay. But in terms of like what are you, sorry, just to follow-up, what your activists have been trying to push in terms of your overhead expenses, is there anything we should think about in terms of savings going forward or are that’s going to be like a second process?

Sure. So, one, I would say, if you take a step back you know we closed all of our e.l.f. stores, 22 e.l.f. stores is a big move in order to generate some cost saving that we have repurposed over into our marketing and e-commerce initiatives. So I think we have taken some steps to generate cost savings. As we think about our ability to have mitigated the 10% tariff we have taken steps there as well and we are not feeling that impact on the P&L. Secondly, I would say that there’s $3 million that we called out in cost savings and so that you should see impact 2020 as well and that’s tied to our manufacturing facility, our warehouses as we discussed in our prepared remarks.

And just building on that Andrea, we are always looking at abilities to kind of take a look at our cost structure. I think we have made some pretty bold moves in closing the stores the automation initiatives we talked about how we are mitigating tariff impact, and well, we will continue to look, but what we want to make sure people were clear and all of our investors are clear is our number one priority is making sure we are investing in the brand to help kind of revitalize our growth.

That’s helpful. Thank you both.

Thank you.

Thank you. Our next question comes from the line of Mark Astrachan with Stifel. Please proceed with your question.

Thanks, and afternoon, everyone. I just wanted to follow quickly on the last question on these productivity initiatives, maybe just broadly could you help us with percent of sales would be fixed versus variable costs?

Sorry. Can you be a little bit more specific in what you are asking?

Well, I guess, just in general, so if you look at your cost to goods how much of that is variable versus fixed and within SG&A I guess we come back out to $10 million to $12 million for the year to get a sense of how much may be this G&A piece. But effectively just trying to get a sense of what can be flex and what is fixed to try to get sense of what the leverage can be if sales is better or worse than what you are guiding to?

So I would say from, let’s just talk about the marketing piece I think. We have set aside funds to be invested behind our marketing and e-commerce initiatives. And so if you think about that as our fixed investment as sales materialize behind that you would start to see leverage in the business. In terms of other flexibility that we have, as Tarang mentioned, we are always looking at different opportunities to save in our cost across the P&L…

Yeah. And I would just add there, Mark, I get you where you are coming from in terms of like, hey, how much, can you help quantify how much leverage there is in this business to your point. We haven’t disclosed that before, so let me -- let us kind of huddle and think about whether that’s something, I understand the reason why that would be important and let us come back and decide how we want to kind of address and if we want to start disclosing kind of exactly how much leverage is there.

Okay. Great. And then just switching gears from a business standpoint. So I get that scanning it is kind of the end all be all of the business, but it certainly seems like in some categories like skin started to do a bit better in recent months, I guess, I am curious how much of a focus maybe that can be especially given what you have talked about in terms of just overall makeup category trends?

Yeah. No. We are highly encouraged by kind of, I call it, overall scanner trends across the board both in Makeup, as well as Skincare for us, if you take a look at the trajectories we were on last year to kind of this transition period and what we are seeing. Skincare, as I mentioned, I think, for a long time it’s highly strategic for us, mainly because we can bring the same model that we have used on color cosmetics, which is prestige quality and extraordinary value and there is a real need for that. And so what you are seeing on Skincare is the momentum behind many of our new items and that focus, and Stark has been our main customer for skincare for a while. We are highly encouraged that as Ulta Beauty tested skincare they decided to take it entire kind of food chain given how well it’s done. So skincare all along has been one of those categories that we are highly interested in and all everything for us always comes back to the consumer. The reason we are interested in is this overall insight if you need good skin to have good color cosmetics coverage and both go hand in hand and we believe we have an advantage of our ability to come up with meaningful innovation.

Okay. Thank you.

Thank you. Our next question comes from the line of Linda Bolton Weiser with D.A. Davidson. Please proceed with your question.

Hi. So in the past you had talked about strategically in terms of your marketing that you specifically or went toward influencers that are less well-known, but were up and coming, has your strategy changed it all such that some of the increase marketing spending is going toward paying more influential influencers? And then, secondly, in terms of the calendar year in the beginning of the year reset at retail. Can you come in and if there has been any differences in performance among the retailers, I mean without naming names are there some retailers where the resets are performing better than others or is it pretty uniform across your retailer base? Thanks.

Sure. Hi, Linda. Well, I am going to take this one. The -- on our strategy with influencers, you are right that in the past we primarily focused on micro or kind of macro influencers, and the voice in mega influencers. \What I would tell you is our strategy is not change from when it comes to a sponsorship or paying standpoint. So I mentioned kind of in the transition period quarter we saw quite a bit of interest from a number of influencers, including one of the mega influencers Jeffree Star. I think one of his videos is up to 10 million views, the other one is I think close to 7 million views on different e.l.f. products and he started with e.l.f. Poreless Primer and then moved on to kind of doing entire full face of e.l.f. We did not pay for either of those video postings. It really came more from our strategy of how we are reaching out. I think in the past we almost avoided the mega influencers and many of them actually really love e.l.f. because of what it does for their brand and with their communities and followers. And so Jeffree had seen based on some of our other outreach efforts a lot of buzz on our Poreless Putty Primer try that was amaze with how well it compared to one of his favorite prestige products that was priced at $52 and then decided to go do a full face. So I think it talks more about our strategy and our breadth of outreach than it does in terms of actually paying for inflow or endorsements, which we still haven’t done outside of our normal product collaborations where we will collaborate with someone. And then on the retailers I think one of the things that is encouraging for us is it’s pretty uniform in terms of where we have seen the Project Unicorn sets go in, we saw that change in trajectory across the customers that kind of to beat you to see it right after kind of post resets, which I think is encouraging. You will always have some variation and for competitive reason our customers won’t let us -- won’t want us to call out who’s doing better or worse, but we at least are encouraged that we wasn’t in one place where we saw a change in trajectory side pretty uniformly across the Board.

Thank you.

Thank you. Our next question comes from the line of Bonnie Herzog with Wells Fargo. Please proceed with your question

All right. Thank you. Hi, everyone. I actually was hoping to maybe circle back and then have you guys possibly drawdown just a little bit further on the expected slowdown in FY20 in terms of your net sales. I guess, if I think back a key reason you guys changed your fiscal year was because you would have better visibility, from the retailers, so hoping to hear just a little bit more color on what you are hearing from them regarding space, especially given the category softness that you mentioned and some of the resets that you have seen that, I guess, makes you guys think that your sales are going to decline 4% to 8% in FY20?

Yeah. Sure. So, first of all on your first question, in terms of the change of fiscal year, we believe that was a good move because it did allow us to see kind of how these resets are performing. If we had given full year guidance back in kind of February and if you look at the trend -- the quarterly guidance we gave in February was down 8% to 12%. So this is an improvement relative to that and that improvement was aided by our ability to see kind of how we are coming out of each shelf sets. The second thing I would tell you is kind of separating out kind of our guidance approach particularly with Mandy coming on and her approach to kind of how she wants to do guidance and we will make sure that we see the proof versus what we are seeing kind of in that first transition period. We are well-positioned relative to any of our core competitors in our key customers. So if you would just take what I just mentioned from the track channel data of the first quarter track channels were down 3% and we are plus 3%, we are obviously doing better than where the rest of the category was or has is right now and a lot of that reflects promising early signs we are seeing both Project Unicorn as well as our marketing activations. I try to separate out kind of initial signs. I am glad we changed the fiscal year. We have a much better position in terms of where we are relative to where we would have been and then I’d say guidance is more both philosophical, as well as really one we see the proof in it and not get ahead of ourselves.

Okay. But like you mentioned Tarang, you are seeing some signs of improvement because I am also trying to understand with the stepped up spending and some of the changes you are putting into place obviously there’s a lag and I am just trying to kind of understand how -- many quarters it will take before you see further improvements and really how much of a lift you are expecting to see from some of the stepped up spending, any color there on from some of the what you have implemented so far?

Sure. So what I will tell you is there’s a pretty responsive business and we did see really good lift and response in the transition period quarter. It exceeded our expectations in terms of how we did now. Part of that was aided by I mentioned the Jeffree Star videos and the massive amount of kind of activation we had against that. So that’s a little bit where, I say, I don’t want to get too ahead of ourselves in terms of…

Okay.

… how much we attribute to that versus marketing. Your second point is absolutely right. I mean what you see embedded in this guidance is the assumption that marketing and e-commerce and stepping that investment up in a noisy categories absolutely the right thing to do. But let’s not forget that there is a lag within that and we are hoping over the next couple of quarters we can see kind of where is that response. Again, I don’t want to get ahead of ourselves, we could have…

Okay.

… gone for, but we are seeing both, both is true, we are seeing promising signs, and at the same time, want to be cautious in terms of how we approach the year.

Okay. That makes sense. And just a couple of other questions for me if that’s okay. Just wanted to ask if you guys are expecting to gain shelve space in FY20. Is that embedded into your guidance, just to clarify that or not?

So what’s embedded in our guidance right now is the shelve space that we have announced before. So we talked last quarter Ulta giving us more space, as well as kind of where we are at Walgreens and somewhere internationally. It doesn’t assume more than that. So if it was an additional space or doors that came up that would be in addition to what we put out.

Okay. That’s helpful. And then final question is I’d be curious to hear from some of the store closing that you did a few months, were you guys able to recapture any of the lost sales either through online or any of the national retailers or is there a way for you guys to quantify that at all?

It’s hard for us to quantify rather than when we close the stores we did do some incentive offers for people to come on elfcosmetics.com. I mentioned earlier it was one of the best quarters in elfcosmetics.com and some of that was due to people kind of coming from kind of stores onto elfcosmetics.com. The other thing I would tell you is one of the reasons why strategically we decided to kind of close our stores beyond the focus and making the difficult choice and really making sure that we took that as she and put it against the brand and e-commerce spend that I talked about earlier was our consumer is a multichannel consumer and we felt pretty confident that they would migrate to kind of national retailers and dotcom…

Yeah.

… and so far our experience even just from a reaction from a consumer reaction standpoint given how small that footprint was. We feel pretty confident they are getting your e.l.f. in one of those other channels.

All right. Thank you.

Thank you. It appears we have no further questions at this time. So I’d like to pass the floor back over to Tarang Amin for any additional concluding comments.

Great. Well, thank you, everyone. Really appreciate the time and we look forward to seeing some of you at the William Blair and Jefferies conferences in June and look forward to speaking to all of you on our first quarter call in August. Thanks, everyone.

Ladies and gentlemen, this does conclude today’s teleconference. Again, we thank you for your participation and you may disconnect your lines at this time.