e.l.f. Beauty, Inc. (ELF) Q4 2020 Earnings Report, Transcript and Summary

Good day and welcome to the e.l.f. Cosmetics Fourth Quarter and Full Year Fiscal 2020 Conference Call. [Operator Instructions] Please note this event is being recorded. I would now like to turn the conference over to Willa McManmon, Vice President of Investor Relations with e.l.f. Cosmetics. Please go ahead.

Thank you for joining us today to discuss e.l.f. Beauty's fourth quarter and fiscal 2020 results. As a reminder, this call contains forward looking statements that are based on management's expectations including those relating to the company's efforts to navigate the COVID-19 pandemic, category trends and longer-term outlook and 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 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. All comparative net sales figures exclude e.l.f. stores. Please note after the presentation there is a separate dial-in for the QA session, also noted in the press release. With me from management today are Tarang Amin, Chairman and Chief Executive Officer; and Mandy Fields, Senior Vice President and Chief Financial Officer. Let me turn the webcast over to Tarang.

Thank you, Willa, and good afternoon everyone. I hope that you're safe and healthy during these challenging times. Today, we will talk about our fiscal 2020 results, our response to COVID-19 challenges and our long term investment thesis. Fiscal 2020 was a terrific year for e.l.f. Beauty. We saw four quarters of net sales expansion culminating in a 16% increase in year-over-year sales in the fourth quarter. For the full year, net sales of $283 million were up 11%. We expanded gross margin to 64%, up 300 basis points over last year and up 1,700 basis points since 2014. We also delivered adjusted EBITDA of $63 million while almost doubling our investment in marketing and digital. Our consumption was strong all year and outpaced the category. Of the top five color cosmetics brand in the U.S., we grew the most market share in FY 2020 with 4.8% of the market up 50 basis points. We also increased our rank in Piper Sandler's teen survey from sixth favorite brand amongst teens last year to fourth this year reflecting our growing relevance with Gen Z. As I reflect on these results, I believe FY 2020 was an important year to reassert our multiple areas of competitive advantage. We did so by investing in our brand recharge and executing on our five strategic imperatives. We exceeded our key performance indicators and entered COVID-19 headwinds with strengths relative to the category. Our mission to make the best of beauty accessible to every eye, lip and face is more important than ever. We believe that our fundamental value equation and digital engagement as well as our world class team's ability to adapt at e.l.f. speed positions us well to weather the COVID-19 storm and continue to gain market share. Let me provide you a few highlights of the year. Our first strategic imperative is to drive brand demand. e.l.f.'s core advantage centers around the emotional charge generated by our combination of affordability, excellence and accessibility. In 2020, we kicked off a bold campaign to bring e.l.f. Superpowers to the forefront of the beauty conversation. Our pride in being 100% vegan and cruelty free, our unique ability to deliver first to mass Holy Grail products that have premium quality at unbelievable prices and of course our universal appeal. We rolled out our #elfingamazing campaign across key social platforms highlighting e.l.f.'s accessible optimistic and inclusive brand values in a fresh, energetic and modern way. The results of the campaign far exceeded our benchmarks bringing new consumers to e.l.f. and accelerating brand efficacy within our existing community. [Video Presentation] Riding this momentum, in October we launched our groundbreaking #eyeslipsface TikTok hashtag challenge, which started out with an original music track and quickly became the most viral campaign in TikTok U.S. history with over 5.3 billion views and over 3.5 million user-generated videos. e.l.f. became a global music sensation as the song generated over 16 million streams outside of TikTok and a number four spot on Spotify's global viral 50 list. Fans desired more, so we partnered with Republic record to produce a full-length Eyes. Lips. Face. music video which garnered over 2.3 million views on YouTube. In March, to further amplify our presence on TikTok, we launched the @elfyeah channel, a destination for Gen Z. @elfyeah delivers customized daily content featuring personalities, products and premium entertainment designed to engage TikTok’s rapidly growing audience. @elfyeah has already amassed over 80,000 followers and 1.5 million likes. Our effort to drive brand demand delivered impressive results. And just this week, our #eyeslipsface TikTok campaign won two prestigious Webby Awards including the People's Voice award that honor the best content on the Internet. The year over year Google search trends were up 6%. Our Instagram follower growth was up 22% and our earned media value was up over 60% for the year. [Video Presentation] We also saw sales spikes in product that went viral on TikTok including our Bite Sized eye shadow palettes and existing lip exfoliator and gentle peeling exfoliant. Our second strategic imperative is a major step-up in digital. True to our digitally native roots, we continue to lead with a digital-first strategy. Elfcosmetics.com, the number one mass cosmetics e commerce site powers our digital ecosystem. In FY 2020, we drove double digit growth in traffic and new consumers to elfcosmetics.com. Our Beauty Squad loyalty program grew to 1.8 million members. We also enabled social shopping to connect consumers through unified social storefront across retailer dot-coms. Consumption in our retailer dot-coms and Amazon was up over 50%. We're also delivering wow moments, transforming social and further bridging the physical and digital realms. Last quarter, we discussed the launch of our new e.l.f. mobile app which already has over 60,000 downloads. The app incorporates features such as augmented reality, receipt scanning and access to our recently introduced e.l.f. Discovery and e.l.f. Cares content hubs. These initiatives are timely. In the past few weeks, we have seen triple digit growth in sales on elfcosmetics.com and a number of our retailer dot-coms. Our third imperative of providing first to mass prestige quality products also delivered strong results. During the year, we further strengthened our leading position in primers, brushes and brow gaining significant market share in these core hero segments. Our Poreless Putty Primer and Camo Concealers also helped drive our share in complexion. Our $8 Poreless Putty Primer is the best selling primer in the U.S. and the number one SKU in the face category. We recently extended these into franchises with the introduction of our Mattifying and Luminous Poreless putty primers and hydrating Camo Concealers and ended the year with share increases in both the primer and concealer categories. Our liquid Glitter and Bite Sized eyeshadows were also well received first-to-mass introductions later in the year. We continue to focus on skin care as a strategically important category. Skin care exemplifies our ability to deliver prestige quality at great value. Our Holy Hydration!, Cannabis Sativa and Supers lines fuelled growth in skin care with sales up 27% in FY 2020. We launched the first full-spectrum CBD line in mass this month and have a strong product pipeline in skin care for this fall. Our fourth strategic imperative is driving national retailer productivity and centers around Project Unicorn, our initiative to improve assortment and navigation at shelf. We received three patents during the year for our Unicorn designs which allow us to better display our products while fitting more items on shelf. Unicorn has enabled us to elevate our brand presentation and expand our position as the most productive brand in color cosmetics at Target and Walmart. Our consumption at Ulta beauty and at the retailers was also strong for the year. In terms of space expansion, given the strength of our productivity, innovation and consumer engagement, Walmart and Ulta Beauty plan to expand e.l.f. space this fall in a subset of their doors. In our international business, we had mixed results. We have been winding down business with certain distributors in favor of shifting to a more direct relationship with key beauty accounts. This weighed on our results with overall International down 4%. We remain confident that International represents major whitespace and that our brand resonates. We had a great year in the U.K. with strong growth on elfcosmetics.com, Superdrug and Boots. We're also excited about expanding our global digital footprint with a particular focus on China and the EEU. Our fifth imperative is cost savings to help fuel brand investments. Our biggest cost savings initiative to date was closing our 22 e.l.f. stores in February of 2019. We successfully redeployed the $13.7 million of savings from e.l.f. stores to our digital and national retailer business. In FY 2020, we also took pricing up on approximately one third of our SKUs which along with cost savings and favorable FX more than offset tariffs on China goods. We're particularly pleased with our pricing execution. Recall, this was the biggest pricing action that we have taken in our 16 year history. Our approach worked well. We targeted SKUs that we believed offered the strongest value over the leading competitor’s SKU would likely also face tariffs. Not only did many competitors follow our price increases but we were able to maintain our value which is more important than ever in an uncertain economy. Our new liquid fill manufacturing plant in California is set to start up in July. This is delayed by one quarter due to the impact of COVID-19. Our new U.S. plan provides us further supply diversification while also significantly reducing lead times. We also continue to strengthen our China operations advantage using lean techniques. I am particularly proud of our China team. We were one of the first beauty companies to be fully operational in China when COVID-19 restrictions were lifted. Thanks to the strict health protocols and dedication of our team and suppliers, our team has remained healthy. The progress in our five strategic imperatives has been terrific and we have further opportunity with each. We're equally excited about our progress in strategic extensions. We strongly believe there is an opportunity for significant value creation leveraging the investments we have made in our team and infrastructure for other brands, both acquisitions and brands that we create. Our first strategic extension was the acquisition three months ago of the pioneering clean beauty brand, W3ll People. This acquisition was strategically important as consumers are becoming increasingly conscious of the ingredients in their products and clean is one of the fastest growing segments within beauty. Our thesis is that we can benefit from the 12 year history W3ll People has as a pioneering clean beauty with 40 EWG verified products and in turn leverage the investments we have made in our team and infrastructure to scale W3ll People. We have fully integrated this acquisition onto the e.l.f. platform realizing synergies and making progress in growth initiatives. We're receiving incredibly positive feedback from our national retail partners where W3ll People is more productive than any other clean beauty brands. Additionally, we have identified supply chain synergies and are working with vendors for efficiencies. In the coming months, we plan to launch a W3ll People brand recharge as we did for e.l.f. In addition to acquisitions, our team has been working to create a new brand for calendar year 2021 that I look forward to discussing during our August call. We believe strategic extensions are key to our long term growth as we evolve from a single brand to a multibrand beauty company. As I will outline later, we have a number of competitive advantages that we plan to leverage to scale fast growing emerging brands in consumer segments. Though we're in the early days of this journey, the W3ll People integration and the progress developing a new brand gives me confidence that we have the right road map for growth. Before I turn the call over to Mandy, let me update you on our response to COVID-19. Similar to other companies in our space, we have seen COVID-19 negatively impact consumer behavior and significantly reduce cosmetics and skincare category sales. So far, while our business is down, we're faring better than the categories in which we compete and are taking market share. We believe we're better positioned than other brands come out of this given our value proposition and digital strength. Our team has taken a number of decisive actions in response to COVID-19. Our first priority is the safety and well-being of our employees and consumer community. I am proud of our employees and the resilience they're showing as we navigate this crisis. I already mentioned the incredible efforts of our China team and suppliers to be one of the first beauty companies fully operational coming out of COVID-19 in China. We have taken many of the same protocols we used in China for our U.S. employees. We sent safety kits with gloves, hand sanitizers and disinfectant wipes to all employees and provided assistance with other needs. We have an extremely talented team and we're determined to protect as many jobs as possible during this time. e.l.f. is also caring for the consumer community. We reached out to our community through donations to food banks, mental health organizations and healthcare workers. Drawing on the success of our original TikTok hashtag challenge, we remixed Eyes. Lips. Face into a new Eyes. Lips. Face public service announcement to raise awareness of basic preventive measures we can all take to help stop this spread of the virus. Nearly 10,000 videos were created using Eyes. Lips. Face safe, garnering close to 4 million likes and over 23,000 shares in TikTok alone. We also manufactured the hand sanitizer that we have shared with her team and partners are shipping for a limited time with every order on elfcosmetics.com. Our focus will always be on our community and I'm proud of our efforts to get through this to together. We know that strong financial discipline is needed to whether this challenging period. We amended operating agreement to provide greater flexibility and access $20 million of our $50 million revolver giving us $65 million in cash on hand. We're also tightly managing inventory receivables in capital expenditures. We're reducing expenses and scaling back marketing digital investments in proportion to net sales. Similarly, we have gone after cost in short term merchandising operational savings. At the same time, we are keeping the long term in mind investing in our digital footprint across the European Union and China. We're also continuing to develop W3ll People and a new brand to ensure that we have a healthy portfolio of brands for the future. In summary, we're moving at e.l.f. speed to respond to the current retail environment and position ourselves to continue to gain market share. I believe that our digital strength and core value proposition will enable us to outpace the category in this uncertain economy. I'll now turn the call over to Mandy to discuss the financials.

Thank you, Tarang, and thank you for joining us this afternoon. Today I'll cover our strong fiscal 2020 results, discuss in more detail the financial actions we're taking in the COVID-19 environment and share what we're currently seeing in our longer-term perspective. I'm quite pleased with our Q4 and overall fiscal 2020 results. As Tarang mentioned earlier, we drove positive net sales growth in every quarter wrapping up the year with a positive 16% in Q4. The focus on our strategic imperatives allowed us to invest significantly behind our brands, drive top-line growth and deliver adjusted EBITDA slightly ahead of prior year. We delivered net sales of $283 million in fiscal 2020 up 11% from year ago. This growth outpaced the large legacy brands in our space and was fueled by disciplined execution against our strategic imperatives. Gross margin of 64% was up 300 basis points compared to prior year. I am particularly proud of the progress we made here. Recall this time last year there was concern over gross margin given 25% tariffs being implemented on the majority of our COGS. Not only did we overcome tariff advance but we continued our gross margin progression through a combination of cost savings margin accretive mix, the price increases we implemented last July and the one-time benefit of favorable FX rates. On an adjusted basis SG&A as a percentage of sales was 49% compared to 45% last year primarily driven by increased investment in our marketing and digital initiatives which increased from 7% in fiscal 2019 to 13% in fiscal 2020. The increase in rate was also driven by funding bonus accrual and investments in merchandising programs. This was partially offset by not operating our stores in fiscal 2020. Recall, closing our stores was a strategic move to allow us to invest more behind the plan via marketing and digital. Fiscal 2020 adjusted EBITDA of $63 million came in at 22% of net sales and slightly ahead of last year even after funding the investments we've made throughout the year. Adjusted net income was $32 million or $0.63 per diluted share, compared to $33 million or $0.66 per diluted share a year ago. The change in adjusted net income was driven by higher depreciation in fiscal 2020 and a change in adjusted EPS was further driven by increased share count. In fiscal 2020, we generated $44 million in cash flow from operations driven by our strong operating results. The increased cash flow enabled us to fund that $26 million acquisition of W3ll People and approximately $8 million in share repurchases. Even with these investments our March 31 cash balance was $46 million compared to a cash balance of $54 million a year ago. Fiscal 2020 was a fantastic year overall and provided us with momentum for fiscal 2021 until COVID-19 impacted all aspects of our lives, consumer behavior and category trends. Let me talk a bit about what we've seen so far and how we're navigating the COVID environment. Going in to the COVID-19 crisis our consumption was strong with e.l.f. track channel sales up 13% for the four weeks ending February 22. Nielsen data for the initial COVID period for the four weeks ending April 18 showed our consumption decline 29%. More recently the four-week period through May 2nd showed e.l.f. track channel sales down 9%. We believe the improvement in recent weeks has been driven by the one-time impact of government stimulus checks. Net consumption data has been all over the map. Outside of track channels, we're seeing stronger results on elfcosmetics.com and to our retailer dot coms. Also Beauty store closures and softness internationally has however almost fully offset the e commerce benefit. Over the next several months we believe there will be volatility in the category and in our sales performance. Given this volatility we will not provide fiscal 2021 guidance today. It is simply too challenging to predict the entire year with the overhang of COVID-19. Tarang already outlined the principles guiding our COVID-19 response plans. I will touch on each of these and the work we've done over the last few weeks. Protecting our people is at the top of our list. As we believe we have built the strongest team in Beauty. We plan to protect as many jobs as possible and are looking at other areas of cost savings which I will outline shortly. In caring for our consumers, we found it most of these efforts out of our fiscal 2020 marketing budgets. We are proud of the charitable donations we were able to make to help our communities during this unprecedented time. On the liquidity front, we have worked with our banks to ensure we have additional financial flexibility. We have a strong liquidity position with approximately $65 million in cash on hand and access to an additional $30 million undrawn on our revolving credit facility. In April, we amended our credit agreement, modifying our covenant levels to reduce the minimum fixed charge coverage ratio and increase the maximum permitted total net leverage ratio through June of 2021. This allows us to weather significant declines in adjusted EBITDA without triggering covenants. Details of our credit agreement amendment can be found in the 8 K filed on April 9. Also as Tarang mentioned, we are tightly managing inventory, receivables and capital expenditures to further fortify our balance sheet. We’ve reduced our planned inventory levels by $10 million and our planned capital expenditures by over $1 million through September. On the expense front, we're taking steps to reduce where we can while still investing in our long-term growth. In the short-term we're reducing marketing expenses to better match spend with the sales decline pushing on operation savings, holding head count open and skewering the balance of the P&L for nonessential spend. This has been a significant effort with the team cutting over $15 million in expenses from our operating plan for the first half of the year. While this does not translate directly to reductions on a year-over-year basis, it does demonstrate the major effort organization has paid to ensure we're containing cost in this environment. Given the decline in sales, we're anticipating for the next several months, we expect adjusted SG&A to de-lever versus prior year. In summary, as we face the headwinds of COVID-19, we expect net sales trends to be volatile, similar to what you may see in track channels over the next several months. While we're actively cutting expenses from our operating plan, given the timing of COVID-19 restrictions and plans already in motion, most of our year-over-year expense reductions will not begin to take shape until Q2. We expect our liquidity to remain strong even in this declining sales environment. Last quarter, prior to COVID-19, I discussed our three-year outlook with the expectation for growth. Recall, we had presented two scenarios, the first reflects our low to mid-single-digit net sales CAGR, which assumes no significant shelf space or strategic extensions. The second scenario reflects our mid-to-high single-digit net sales CAGR that is inclusive of significant shelf space and integrating strategic extensions over time. In both cases, we anticipate adjusted EBITDA leverage will be achieved through a mix of top-line growth and annual cost savings and COGS and/or SG&A. While the short-term is uncertain and requires us to push the model out, we still believe in our long-term algorithm once the retail environment returns to normalcy. We believe our value proposition, positions the e.l.f. brand for growth and with the addition of W3ll People and the new brand we're developing we anticipate that growth can be further accelerated. With that, I'll turn the presentation back to Tarang.

Thank you Mandy. Before I open up the call to questions, I would like to underscore that e.l.f. delivered outstanding FY 2020 results and we believe is better positioned than many of our competitors to navigate this challenging time given our strength is digital and strong value equation. Our confidence in the long-term growth and investment thesis is based on our unique advantages. We have the right team with an employee base of 70% female, 55% millennial and 45% diverse, and represents consumers that we serve. We hire from blue-chip academy beauty and consumer companies with people want to move at e.l.f. speed. We're one of only 10 public companies and with the board that is over 60% female. Our board is highly experienced in public company governance. We know our consumers and how to engage them with our number one mass e commerce site and reach on key digital platforms. We know how to make products people want, with a unique ability to launch Holy Grail first-to-mass products. We move at e.l.f. speed with the ability to bring new products to market in as few as 13 weeks. We have world-class operations providing us the best combination of cost, quality and speed. We know how to go-to-market and grow through strong relationships with our national retail partners. We have expanded our shelf space from 11,000 to 110,000 linear feet in the last five years. We have significant opportunities in both additional space and geographies. We know how to build brands as we move from a single brand company to a house of brands. While these are difficult times, we're optimistic in the long-term potential of this company. We believe our digital strength and core value proposition will enable us to gain market share in the short-term. We continue to have a great deal of white space and are confident to be able to return to our long-term economic model once this crisis is over. In summary we're optimistic in the long-term potential of this company. Not only do we deliver an outstanding FY 2020, I believe we’re better positioned than most companies in our space to navigate these challenging times. Our mission to make the best of beauty accessible to every eye, lip and face is more important than ever. I am so grateful to our team, our partners and the consumers that we serve. We look forward to seeing you virtually at the upcoming William Blair, Jefferies Piper and Cowen conferences, where various members of our executive team will provide further color on how we are navigating these times and plan to build upon the advantages that made FY 2020 such a success. We continue to have a great deal of white space and are confident to be able to return to our long-term economic model once this crisis is over. Thank you. With that operator, you may open the call to questions. For those who would like to ask a question please do so through a separate dial-in line at 866-807-9684 or 412-317-5415 internationally. Those not asking questions can hear the question-and-answer session through the webcast. With that, we'll pause for five minutes for those seeking to ask questions to queue-up on the dial-in line.

[Operator Instructions] The first question comes from Andrea Teixeira of JPMorgan. Please go ahead.

Tarang and team congrats on the results and the new presentation format and the visuals. If you can help us understand what's happened in quarter-to-date, you were relatively doing better and obviously I appreciate Mandy's analysis of the Nielsen data. But my first question is the shipments are now shaping, how they are shaping up now quarter-to-date, if they are like negative in May than in April and if you will see the inventory levels at the bricks-and-mortar now, that's some space are reopening how you are seeing receiving those inventory levels. And my second question is just a clarification on Mandy's point about the deleveraging - operation deleveraging. Is that a commentary just for the first off of the year, that despite their efforts to reduce $15 million I believe was the commentary SG&A that we're still going to see SG&A the operating deleverage on the EBIT level. Thank you very much.

So on the quarter-to-date what we have going on as I disclosed on the Nielsen data, we have seen things tick up a bit, since the 4/18 read. So in the 4/18 read of Nielsen, we were down 29% and the latest four weeks ending 5/2 we were down 9%. And we really feel that that has been driven by the impact of government stimulus checks hitting those consumers and they’re out there spending. And so, I would say is that I can’t give you any color on our shipments quarter-to-date, but I can anchor you back to the Nielsen data we’re seeing. And again that, the latest four weeks ending 5/2 we do think we go onetime event, related to consumers and government stimulus checks. In terms of the deleveraging so, the way that I am approaching this year given the volatility that we're seeing as I'm really focused on the first half of the year and so the $15 million in cost reductions that I spoke about that was versus our operating plan, I would say on a year-over-year basis we're still expecting SG&A, adjusted SG&A to deleverage versus the year ago given the magnitude of the sales declines that we're seeing.

The next question comes from Dara Mohsenian of Morgan Stanley. Please go ahead.

So Tarang obviously significant cosmetics category weakest in the U.S. channels recently, can you just give us a bit of a conceptual overview of when you might expect to see a more sustained rebounds in the U.S. mask, cosmetics trends and what's the driver behind that? Is it you know more people returning to work or feeling comfortable shopping the shelves or is it more consumers comfort with their financial situation? I would assume it's more the latter but you did mention the temporary boost of the stimulus checks so just curious for what might be the drivers behind that. And then secondly, can you just discuss the potential of your consumers to trade down into the mass Beauty category for more premium products with macro weakness and e.l.f.’s ability to potentially capitalize on that? Thanks.

I would say on the first question in terms of what the outlook would be to one of the reasons we suspended 2021 guidance, things are just too volatile right now. As Mandy said the four weeks ending April 18 we saw a pretty significant declines in the category and in e.l.f. and so one of the things we're really paying close attention to is what we're seeing from a consumer behavior standpoint. Certainly in the last few weeks we have seen a major uptick, again we believe that's due to stimulus checks, and as well as some parts of the country starting to open up. So I would say these things we're focused on is when do we return to some levels of normalcy, whether that’s people coming back to work, ability to go into retail stores, once we're done with and I think we're starting to see their initial hoarding on essential products particular to stimulus checks I think we saw Walmart and Target talk about their discretionary spending going up. So we're paying close attention to what happens with that consumer behavior but I do believe it will factor into both a normalcy of getting people back to the normal lives, as well as the amount of unemployment that is out there. In terms of us and we're seeing in the category we believe we're well positioned so even in that period in mid April where the category is particularly soft, we picked up pretty significant share, our share in that four weeks ending for 18 was a 5.2 share, up 60 basis points versus a year ago, continue to see good share results and it’s one of the things that we're really focused on is our relative performance to the category. And I would tell you that we're well positioned not only the strength that we have in digital but our overall value proposition. We know over the last few years as the economy was booming, there certainly was trade up in prestige. We believe our ability to provide prestige quality products with these extraordinary values, positions us really well so we're looking forward to continue to take share as we go forward.

The next question today comes from Oliver Chen of Cowen. Please go ahead.

Our question is about, thinking about the crisis and what are permanent changes and/or surprises that you see as you approach marketing and your product development? And we would also love your take on how you are going to prioritize thinking about being multi brand and there is a lot of opportunity ahead so what are some of the thoughts around frameworks about what you should focus on next as you embark on that part of your strategy as well? Thank you.

I would say in terms of core changes we're seeing our first focus is always on people and I'm incredibly proud of our team and our ability to navigate so far this crisis. It starts with our China team, we have been dealing this since January as they were impacted by COVID-19 in China. I'm proud we're one of the first beauty companies to come out of the crisis there I think within a week all of our suppliers were up and running within five weeks we were at 100% capacity. And that really went through the regiment that our team talk from a health and hygiene standpoint level of coordination we have really talks about our advantages. We're taking many of those same tactics here in the U.S. to take care of our employees and our communities for first and foremost. In terms of within particular categories that we take a look at, we had strings really for very long time for primers we saw that can even stronger in this past year with our Poreless Putty Primer which is made a franchise with the introduction of our Luminous and not defined Putty Primers, Poreless Putty Primer is now not only the number one primer in the U.S. but the number one face product. And we have also gotten some anecdotal notes that have been great to see came from a number of nurses who said the only thing they could kind of put on their faces as they wear all of the masks and didn't want a soil on was there Poreless Putty Primer really helped, save their face and so we continue to see strength there, we see strength in Concealers and in particularly in skin care. Skin care were strong all the year, the consumption data was plus 27% for FY '20 and that doesn't even include Ulta Beauty which expanded skin care full chain. So we’ll continue to see a focus on skin care, I’m particularly pleased with some of the most recent introductions both of our Cannabis Sativa line as well as our full spectrum CBD line that we launched just a couple of weeks ago and there is a real desire from consumers for wellness and we're positioned well again with our skin care offering prestige, quality at these extraordinary prices. And I see the third thing that we're really focused on is digital. We have longed as a digitally native brand has have been key focus of price everything that we do from a consumer engagement standpoint as I mentioned, in the last few weeks seen triple digit increases in elfcosmetics.com as well as many of our retailer dot coms. I believe we'll continue to see increasing emphasis on digital. And then on the second question regarding multi-brand, we’ve long believed that the investments we have made in the team and infrastructure and the capabilities we have could be applied to other brands and a significant leverage in being able to do that. I'm really pleased with the integration that we’ve had with our W3ll People acquisition, within three months we fully integrated into all of our systems operationally as well as starting to map out the growth path on the W3ll People to great example of being able to take something that has a lot of potential that can leverage the e.l.f. chassis that we have. I'm equally excited about a new brand that we have been developing for some time that we will be able to talk about more in the August timeframe, similar type of approach of being able to leverage the chassis that we’ve built whether being in adjacent category or different price points that again can leverage the investments that we have made in team and infrastructure.

Thanks Tarang. Our last question is Target and Walmart have done a great job with curbside pickup and the drive of curbside experiencing as well as rethinking stores in the age of social distancing is becoming a big topic, does that have implications for how you're thinking about planning and/or where you or with Project Unicorn, Project Unicorn sounds like it's been really successful and you had a lot of momentum there?

Yes, we have been really pleased with what we're seeing at both Target and Walmart on their buy online pickup curbside, those businesses in particularly strong for us and I believe other brands as well. And I think what it relates to is also our efforts on the retailer.com front, we have seen pretty strong growth all year, not only on the retailer.com but also Amazon so I think it's a continuation of a trend we've been seeing which is more comfort online and being able to leverage the physical spaces that retailers have. And then as I relate to Unicorn, you're going to hear me talk about Unicorn for many quarters to come because it's got multiple phases and we continue to drive improvements in productivity through Unicorn. And that includes our ability to do better visual merchandising and how we do that both online and then when it comes into the stores as well as what we think about a new reality of when they are navigating even the websites of our customers is also another dimension that will be looking at Unicorn

Next question today comes from Stephanie Wissink of Jefferies. Please go ahead.

We have a two part question on skin care, Tarang we just heard you talking about in the response to the prior question but I'm curious if you can just contextualize perhaps a bit more how big is skin as a percentage of your total business and can you help us think about how big a retail versus some of your more advance channels like your own.com or maybe even also as a special department?

Sure, hi Steph. So skin care has been pretty big strategic focus of ours for some time going back. I would say at least 18 months part of that reflects what we have seen from a category standpoint and the ability for it to really drive incremental sales. But more importantly it follows our model really well where we see some of the best products on the prestige side and our ability to make those more accessible to consumers. So it's still a small part of our business, it’s still less than 10% of our total business but it’s one of the fastest growing parts of our business and I think you will continue to see it grow fast mainly because of the innovation pipeline that we can bring. The example I gave on a full spectrum Cannabis Sativa line - full spectrums CBD line that we just introduced is a good indication of our capabilities in terms of bringing real innovation and use in skin care and having it being more accessible. And then in terms of footprint, I would say skin care has tremendous whitespace. The most developed customer that we have from a skin care standpoint is Target. Ulta only started rolling it out full chain last year. And we have seen great results with both customers on our skin care, they making up an increasingly large portion of our business there, our larger portion of our business is still a small portion of our overall business. And then I would say the thing that gives me the greatest heart for a skin care and what its potential is, is it’s significantly larger portion of our online sales. So we were able to have the full assortment, which tells me that over time it's more retailers taking skin care from e.l.f. and allocate more space to skin care, it can be a much bigger part of our business.

And then just one follow up on your marketing strategy as we progress into the back half of this year and you think about in potentially more of a recessionary environment I know you have not leaned very heavily into price as an agent for driving awareness and utilization but is that an opportunity level that you see to really press into your value proposition in addition to your other advantages? Thank you.

Absolutely. I think our value proposition is one of our core superpowers and in this environment in particular we're seeing consumers really respond to those messages so we're already, we're not staying quiet during this time we think it's a great opportunity for us to build share. We have taken marketing down relative to our original plans but it’s still proportionate to net sales and that's because we want to keep the fuel on in terms of our engagement efforts which has been quite successful and as part of those engagement efforts we are constantly testing and learning different approaches, what we have seen over the past number of weeks is some of our value messaging that we have done digitally, have been, consumers have been quite responsive to and done really well. So you're, I think you are going to continue to see us really hone that area of our advantage and find different ways of communicating it. And you won’t have to wait till back half.

The next question today comes from Erin Murphy of Piper Sandler. Please go ahead.

Just my first question is for you Tarang, I'm curious you talked about kind of face skin secured for Walmart and Target in a portion of their doors, can you just kind of elaborate a little bit more about when we should be expecting those, maybe what percent of we effectively are getting them, is it kind of a preholiday or kind of spring reset plan?

So we're really pleased that with the strength that we saw throughout FY20 particularly on the productivity front, the strength of our innovation program and our consumer profile, retailers continue to reward us with more space so as I mentioned our prepared remarks both Walmart and Ulta would be expanding e.l.f. space in a subsidiary doors, it will be, time in the fall so it won't past away till next spring’s planograms and that’s the current time and that they are on. For competitive reasons neither customer likes us to reveal what, what that footprint will look like so you have to unfortunately wait till the fall to see it in their stores. We believe there is still a plenty of white space, even in our most established customer Target last year as part of Unicorn us developing these flex towers with them that allows us to highlight some of our key innovations and most productive items proved to be almost say mini space gain within Target we are taking those merchandising vehicles that we are seeing across customers and particularly in this environment may be related to the previous question on really highlighting our price value equation and the price statements we can make really looking at that as an opportunity with the additional space to really make those statements.

Okay, that's helpful. And then I guess I recognize retailers have been prioritizing, particularly look at Walmart and Target kind of the essential in this initial phase of the pandemic. But as we sit now and you are seeing more retail open, how are your key retailers talking about replenishment, are they starting to look at replenishment yet and the reason I ask is as we walk towards it definitely feels like for brands and for several of the cosmetic brands as there is lot of stock out right now so I'm just curious on when you kind of expect that to potentially change?

Well, as you say for sure the retailers were prioritizing essentials, particularly in that the initial period we had such unprecedented demand for essential products. We have always run fairly lean when it comes to an inventory standpoint with our retailers. We're in very close contact with them, we have penetrated the supply chains pretty well with each of our retailers and are working closely with them to make sure that we have better in stock positions going forward and pretty confident of our ability to do that given our history.

And just to clarify the retailer starting to replenish their - the category.

They have always replenished it. I think part of it has to do with our relative performance as I mentioned while the category was way down and we were too particularly during this point with stimulus checks we performed extremely well relative to the category. So it's what we've seen in the past because e.l.f. moves must faster because we have this great value equation. Consumers are buying more of it which creates the need for replenishment, but we have been replenishing, we ship every week to each of our major customers and so I would expect that to catch up in short over.

And then Mandy sorry I do have one more for you. You guys have done a nice job seeing a strong gross margin acceleration figure this last year at 64% level, can you just kind of share with us what are some of the key, kind of puts and takes from here, particularly as you think about the next 12 months? Thank you.

We are not giving guidance today and that would pertain to gross margin as well, but what I can tell you is that we have done a great job of offsetting the impact of tariffs through a mix of pricing, our margin accretive innovation, cost savings and of course the one time benefits that we're seeing with foreign exchange. And that's what I can tell you. We've made great progress there and we have been able to not only maintain but improve our gross margin in fiscal 2020 and we're really proud of that.

The next question comes from Rupesh Parikh of Oppenheimer. Please go ahead.

I guess my question is for you Tarang, just want to get a sense of in terms of how you think about demand for makeup in this environment, especially more people working from home than people going out less in public areas.

Well we certainly particularly in the initial periods saw the category decline, consumer behavior change where you did not need to wear makeup as much when you are to stay at home, and so certainly there was a disruption from a demand standpoint in the initial periods. More recently, we have seen an uptick. I think it will be sometime before we know whether how much of that was due to the stimulus checks that were out there versus consumers frankly being maybe a little pent up and wanting to get back to their lives and normalcy. We also are with each of our retailers pulling data for different regions of the country of when people are able to kind of get back and restrictions are lifted and we do see that results in those markets where restrictions have been lifted, but again the long term impact of this I think we're going to have to continue to monitor over time.

Great. And then I guess just one more question. As you look at the competitive backdrop out there some of these smaller brands have definitely made tractions in makeup the past two years, like how are you thinking of the backdrop coming out this, like if they get less competitive, maybe there is less money going into some of these smaller brands, just any thoughts there would be helpful.

Yes I started my career in beauty almost 30 years ago and I used to tell people then it is a highly competitive category and I haven't seen anything change other than the competitive rivalry increasing, particularly when brands go direct to consumer online including the genesis and the formation of e.l.f. that way. What I will also tell you though is very few brands have scaled above that $100 million mark, and so you constantly see a flow of brands coming in and out. In that context, I feel we're very well positioned, I think not only did we grow the most share of the top five brands last year in FY 2020 but even this initial period in COVID-19 I think we're the only brand growing share out of those top brands, and so I believe as long as we continue to execute our strategic imperatives and we put real focus on our leveraging we call our superpowers I think we're well situated in the market.

The next question comes from Bill Chappell of SunTrust. Please go ahead.

Two questions. One, how good a visibility do you have into the pantries of your customers and when I say that have sales tracked kind of usage or it hard to tell and when I say that I assume a fair amount of your consumers have stayed at home they have used less cosmetics, they are not going out, they are not going to the store, they're not doing whatever, and as things open back up they will, but I don't know if your sales over the past two-three months have tracked that or if there has been pantry loading and then de-loading. How do you look those past few months and then as things open up?

Yes, so I would tell you first of all though that we don't have great visibility in terms of the pantries and part of that has to do with our loyal cosmetics consumer will have a number of different brands and many products, particularly the core enthusiast does know this thing has enough makeup. And so while in the short term we have seen behavior change because she has been sheltered at home, we believe when people are able to return to more normal lifestyle we'll see good consumption there. I think the other things that we pay really close attention where we do have really good data is on elfcosmetics.com and with all the initiatives we had there and what we’re seeing is very strong response right now. And so I think this will be a matter of when does retail fully really open up to change kind of the overall dynamic, but we're seeing quite a bit on elfcosmetics.com, and if anything all of the metrics are higher. The number of new users coming to our site, the level of not only the traffic but our conversion, even our average or values are really quite something right now and using help in terms of what we will see later.

But I guess just a follow up into that, do you expect a pickup as states – or are you seeing some states that are further along as you know I'm in Georgia that is opening little bit faster than people would like. Do you see faster sales as people are getting back out in those states or is it hard to tell?

We are. We do track stores where restrictions have been lifted and the sales are better in those. Now what the long term impact is, is there another wave that comes, what happens there is also one of the reasons we're not prepared to give guidance at this point, but what I would tell you is you definitely can see once restrictions are lifted, you do see a pretty significant uptick.

Got it and then just one follow up and Mandy you may not answer this, but you have the two plans in any given year, one with shelf space gains, one with less shelf space gains, can you tell us what you were thinking the plan was going to be pre COVID based on what you have said about Walmart and Ulta and shelf space gains?

Yes. So I'll just - Bill I will answer that question. So we were - we were before we got into COVID if you recall, the chart that we just showed here we were up 13% for the four weeks ending February 22, so we had a lot of momentum coming into fiscal 2021. And so I tell you we probably would have been at that higher end scenario with the shelf space gains with the strategic extension of W3ll People and that we just announced a new brand but that will be more so in calendar 2021. But we had a lot of momentum as we came in and so we were feeling good about that second scenario.

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

Can you talk about a little bit more about Target and they have redone their beauty section and reorganized it and kind of come up with a new format, can you talk about whether all their stores have converted yet to the new format and also what it means for you, like does they literally convert over to the same amount of the linear footage or does that modify things, just by the format or can you talk a little bit more about that? Thanks.

As far as Target goes it is about 1800 doors, and I would say we probably drop north of 30 different planograms for them depending on the different format. So, they don't have any one standard. They do have a, I think and I always get the names wrong, but I think it's called Beauty Blowout concept which is their best expression of beauty. We tend to have more space in those Beauty Blowout stores and as they convert more of those stores to Beauty Blowout we tend to pick up more space. We just have a bigger amount of this footprint dedicated to beauty and those stores with elevated presentation and so we have been in those Beauty Blowout stores and they continue to roll those out we get enhanced presence in those stores. And then I think the balance in our Target is not only a longest standing partner but it is where we have the greatest presence and so even if is not a beauty blow up store our brand is quite well because they have been able to supplement the space they have whether it be things like our flex towers or other merchandising that we do with e.l.f. So we have a pretty strong presence chain wide regardless of the format

Thanks, and then also, can I ask you about your viewpoint toward M&A currently because it seems like you're going ahead of with a launch of a new brand organically. So does that mean you would also consider doing this time frame, additional M&A, and do you think opportunities are being created during the crisis? Thanks.

Sure, I think our first focus is the e.l.f. brand and the tremendous we have on e.l.f. and best evidenced by the facts strategic imperatives we have executed against, and we'll continue to see us do that particularly in the short-term at their second priority is the other brands we already have. So the integration of W3ll People now that's been integrated, really the growth pieces that we had at the time of acquisition, it's a great deal of white space on W3ll People and I'm really excited and hope to be able to talk to you in August about the new brand that we have organically created and at that is also really exciting. So I would say for short-term we have our hands full and are fully dedicated to realizing the potential of all three of those brands with our team. At the longer term this certainly going to be opportunities in this market place. That is going to be some brands that can benefit from the platform that were created that we can also see a strong growth pieces too. Of course it's premature to talk about that given our current focus, but I'm hoping both valuations come down, and more reasonably, and that there are good opportunities in the future.

The next question comes from Jon Andersen of William Blair. Please go ahead.

I wanted to follow up on kind of the last question, you talked a lot about building a multibrand platform, and I don't want to ask about any specific M&A or internal efforts obviously there is more news to come on that but Tarang if you look out three years or five years whatever the horizon, and you think about the business there is a multi-brand platform. How many business or brands are we talking about? Are they some guardrails in terms of the sheer number of categories, the brand that you feel can be optimally managed by the company, and then is there some size criteria as well. Are you committed to fewer brands perhaps with more size and scale to support investments and innovation, marketing or you are open to kind of a portfolio with a longer tail. I know there is a lot there, but just kind of a bigger picture, some guardrails around this? Thanks.

Sure, so Jon maybe building on my last point, the best opportunity we have is with e.l.f. brand and continued realized its full potential and so that will clearly be our main focus. Having said that, we have incredibly talented team and a set of capabilities that can be applied to other brands, and so we look forward to proving that out both with W3ll People, as well as a brand that we're currently in development on. I would say we do not have any magic number of how many brands do we want in the portfolio. In terms of guardrails, we'll continue to be highly disciplined from a financial standpoint. If you think that we had this pursue strategic extensions as part of our strategy for a few years and it wasn't - there was only three months ago that we did our first strategic extension, and we feel really great about the brand that we're developing organically from a financial perspective that's much more attractive, but also in terms of what it's looking at. I think the second point for me would be the criteria, is seeing second both leverage our platforms, as well as exhibit really strong. And so that is probably the bigger value guidepost in any particular size of what you're looking for or number of brands that we're looking for. And so believe what you will see us do over the next least couple of quarters it further flush out. Let me tell me about our plans on the W3ll People. Let me tell you about this new brand and we're why we're really excited in calendar 2021, that's not to say we want to look at or pursue other M&A if it made sense particularly in this environment, there may be things that look attractive, but that's really our current focus

That's really helpful, thanks. Last one from me international, it sounds like in the U.K. was quite strong may be other international markets less so. What's happening there may be in some of the markets that aren't - haven't been quite as strong and what are you doing to kind of return that business to growth?

Sure, so international still represents a major whitespace for us, and I would say, we have been on this journey, probably longer than a year now, probably last couple of years, where you looked at our international footprint two years ago. It was primarily comprised of distributor relationships and a variety of different markets around the world. And what we have realized is the number of the distributors either couldn’t scale to the extent that we needed in this scale or we didn't have the level of control that we wanted to have in that market, and so we tried something very different with the U.K. that has proven to be quite successful, which is direct headquarter coverage. So we started by taking away the distributor that had our website in the U.K. and basically brought in-house elfcosmetics.com in the U.K., direct relationship with both Superdrug and Boots we have seen incredibly strong growth in the U.K. So that's our model going forward, but that's not to say we won't have some distributors in certain markets but what you saw in international was us continue this journey of pulling business away from distributors in favor of rolling direct coverage, and probably the two best countries of that are - representative will be Canada which is where our first start was, where we go direct to Walmart and meeting retailers there and the U.K. and you will see this take that model to other countries. We have been talking about testing the brand in Germany, as we go forward. We talked last call in terms of our potential in China particularly on e-commerce and on this call, I just mentioned our focused area of the EU from an e-commerce standpoint. So getting that direct coverage, and direct control, both in our own website, as well as key leading Beauty retailer is really the focus going forward and I feel really great about the strategy, because that's what we have actually used here in the U.S. and it's also more profitable model as you cut the distributor margin. You can also have a better value equation in any of those particular markets

The next question comes from Mark Astrachan of Stifel. Please go ahead.

I guess first question on online. I'm curious to the extent if you want to talk about it, what percentage of sales were at right now in terms of your website, other retailer.com et cetera just all sales coming from that channel given obviously what's going on in the world and prudently a permanent shift to more online and buy online pickup and store et cetera. If you can remind us or update us on kind of where your market share is online versus offline, please?

Yes, so I will take that one Mark. So overall our digital business is approximately 11% of our total sales and that was for fiscal 2020. As we talked about seeing in recent weeks, our own e-commerce, our retailer dot-coms really ramp up, that percentage has accelerated but 11% is where we were for fiscal 2020.

And how you think about market share online versus offline?

It's really hard to measure where we do get some indication is through some of our retail partners, but they don't share all of their category data. We certainly know what we are doing in cosmetics.com, I would say the summary point there is it is going to be continued area of focus and we believe we have a set of capabilities that make us a great partner, with even retailer dot-coms, as well as Amazon. So I think it's - portion of our business and our hope would be our digital business would go higher. And I would say, other thing I would tell you. It is even less than the commerce part of it is the engine that drives everything else. Our entire consumer engagement model are 100% digitally oriented, elfcosmetic.com and a lot of the investments we made behind it, it is a central hub of our consumer engagement activities, and if particular if you go on our new app which already has 60,000 downloads. I think it gives you a good indication of where we're going both in terms of how the virtual makeup try-ons, the receipt scanning, which allows us to combine all of our customer data in one place our loyalty program, and there are more recent content hubs whether it be the e.l.f discovery or the e.l.f. care's hub gives you a good view of how we are using that to not only driver our e-commerce sales, but more importantly our overall sales as a company

And then just lastly, I am not trying to steal thunder from more commentary about the new brand launch upcoming, but maybe just talk a bit about how you think about where this is put on shelf, is it existing retailers something, for example, that those existing retailers may have come to you and servicing opportunity more upmarket, as you kind of alluded to and therefore there is kind of an ease of ability to get shelf space and just guess how you're thinking about it being potentially complementary to what you're already doing with your existing retail assortment?

Yes, so we see it highly complementary. Certainly our approach will be to leverage our strong relationships with our existing retailers, our capabilities online. And the rest of the charts here I talked about particularly on our strength operationally as the best combination of cost, quality and speed. But it is going to be complementary to e.l.f. So most likely start in a different category, start with different price points and when we're able to announce, I think it will be a lot clear than my hypothetical discussions right now, and so look forward hopefully in the August call, where we can give you much greater color on that, but it's something that we're tremendously excited about. And part of that excitement comes from being able to leverage the tremendous talent we have as our team and our capabilities and really be able to apply to make something special.

This concludes our question-and-answer session. I would like to turn the conference back over to Tarang Amin for any closing remarks.

Great, well thank you everyone, I really appreciate the time today. I hope everyone stay safe and healthy and navigates these challenging times we're in. I remain confident in our ability to continue to gain market share. Thanks to the talent we have as a team, our digital strength, as well as overall new proposition, and look forward to updating you hopefully when things return more to normal. Thanks everyone.

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