e.l.f. Beauty, Inc. (ELF) Earnings Call Transcript & Summary

Greetings. Welcome to the e.l.f. Beauty, Inc. Third Quarter Fiscal 2020 Earnings Conference Call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Willa Mcmanmon, VP of Investor Relations and Corporate Communications. Ms. McManmon, you may begin.

Good afternoon. Thank you for joining us today to discuss e.l.f. Beauty's third quarter fiscal 2020 earnings results. As a reminder, this call contains forward-looking statements that are based on management's assumptions, expectations, estimates and projections. These statements, including those relating to the company's fiscal 2020 outlook and long-term model, 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. Tarang will begin the call.

Thank you, Willa, and good afternoon, everyone. We're pleased with our third quarter results with net sales of $81 million and adjusted EBITDA of $21 million. Excluding e.l.f. stores, net sales were up 8% versus a year ago. In the 12 weeks ended December 28, 2019, our dollar share of the color cosmetics category was 5%, up 40 basis points versus a year ago, even with the short-term impact of a smaller holiday program. For calendar year 2019, of the top 5 mass color cosmetics brands in Nielsen, we grew the most market share. Reflecting our strong results, we are again raising guidance. We've driven these results through relentless focus on 5 strategic imperatives that we've discussed with you over the past year. Let me give you a brief overview of each imperative, how our strategy works together, and why I'm encouraged about our long-term potential. Our first strategic imperative, driving demand in the brand continues to exceed our expectations with success across platforms. Marketing and e-commerce spend for the quarter was approximately 11.5% of revenue versus 7% a year ago. This rate was about 150 basis points below our objectives due to the timing of some of the spend, which was pushed into the fourth quarter. We are measuring the success of our investments, primarily by looking at top line growth alongside internal metrics on REIT, conversion and engagement as well as external metrics like Google Search and earned media value, all of which exceeded our expectations. Last quarter, we discussed our elfingamazing campaign. Based on its success, this month, we are launching the second phase of our awareness campaign, which will further amplify our e.l.f. mission of making the best of beauty accessible to every eye, lip and face. We previously shared the early results of our EyesLipsFace TikTok challenge. The challenge has now garnered over 4.4 billion views on TikTok with over 3 million user-created videos, a record for any brand challenge. While these numbers are impressive by any measure, it's our ability to seize on social momentum that we want to underscore. We started the campaign by creating an original 15-second eyes.lips.face. song as a backdrop to user-generated videos. By the campaign's close, this evolved into a full-length eyes.lips.face. music video in conjunction with billboard's 2019 label of the year Republic Records. Throughout this TikTok journey, we learned the importance of being nimble and open to new approaches to connect with our consumers. It also showed us that strong partners are an imperative in this new digital landscape. Among many awards and accolades, Adweek called eyes.lips.face. the most influential campaign on TikTok, and we were also featured by Forbes as one of the 14 social campaigns that rocked 2019. With a similar eye to innovation and partnership, in November, we proudly hosted e.l.f's. fourth annual Beautyscape event, which reflects our brand values of empowerment and paying it forward. This year's Beautyscape built on prior year's events with an amped up vision, including 2.5x entrants compared to 2018. Finalists joined us in the Bahamas to connect with beauty industry leaders, including keynote speaker, entrepreneur and celebrity hairstylist, Jen Atkin. Attendees who are handpicked for their vision and love of beauty, attended master classes and lectures to take their careers to the next level. Ultimately, they competed in teams to present their best original color cosmetics capsule. The winning team received a cash prize, and together, will introduce their e.l.f. collection this summer, exclusively through our national retailer partner Target who also attended Beautyscape. As we continue to explore new ways to tell our story, we are humbled that the recognition our branding efforts are receiving. We recently won 3 creative media awards, including Best in Show. We've also been nominated for 3 Webby awards and 2 REGGIE awards in January alone. Our efforts continue to result in more social followers as well with our Instagram followers reaching over 5 million, up 27% versus a year ago. Our second strategic imperative, a major step-up in digital goes hand-in-hand with driving demand in the brand. Our digital efforts center on seamlessly tying together our channels to offer a consistent e.l.f. experience. As part of this effort, our tech stack integration is becoming increasingly more sophisticated. e.l.f. was front and center at Salesforce's Dreamforce conference as the only beauty company utilizing the entire Salesforce cloud platform across commerce, marketing and customer service. To highlight a few of these digital initiatives. In the third quarter, we launched [ e.l.f. e ], our customer service engine to serve our e-commerce consumers 24/7. We made progress enhancing personalization to make the consumer journey more engaging for our 1.6 million Beauty Squad members, who account for over 65% of our e-commerce sales. Our personalization efforts offers a single view of the consumer allowing us to incorporate past purchases, views and likes to customize what's being served to them online. In conjunction with this, we saw solid results in the early phase of receipt scanning. Connecting us to even more data to enhance the Beauty Squad experience. To make purchasing e.l.f. easier, we've implemented Afterpay in Google 360 so e.l.f. consumers can pay in the way that best suits them. Perhaps the most exciting is the launch of our new mobile app on Apple and Google, which will further enable receipt scanning and personalization. Our third imperative of providing first to mass prestige quality products continues to drive competitive advantage. We've mentioned the success of our Holy Hydration skin cream, 16-hour Camo Concealer and Poreless Putty Primer, all of which were introduced around this time last year. We are building on these proven holy grail products with extensions, including Holy Hydration! Fragrance Free, hydrating Camo Concealer and luminous and matte Putty Primers. These extensions were created in response to e.l.f. consumer requests. Additionally, we are introducing new holy grail products like our liquid glitter eye shadow, which is $5 compared to the $24 Prestige equivalent. These products are bringing new consumers into the brand, with 65% of Liquid Glitter Eyeshadow purchases on elfcosmetics.com coming from new customers. Beyond Liquid Glitter Eyeshadow, we're encouraged that 5 of our top 10 SKUs on elfcosmetics.com, our recently introduced items. Our ability to deliver a stream of new products that deliver the best of beauty at extraordinary value, continues to fuel our strategic imperatives. One of our key areas of focus is expanding our skin care offerings. We are seeing success with core products like Holy Hydration cream and hydrating Booster Drops. We also continue to push into new areas, such as our Cannabis Sativa line, which has maintained a steady pace in our top 5 sellers on elfcosmetics.com, since its introduction in November. Our overall skin care business continues to show strong growth, up 35% in track channels in Q3. Unicorn, the project that guides our fourth strategic imperative of improving national retailer productivity is entering its third phase centered on better visual merchandising at shelf. Going into spring resets, we're implementing over 100 different planograms across our retailers, each featuring new visual merchandising. In terms of shelf space, we've confirmed some additional space in grocery and at Boots in the U.K. We expect further space decisions from other retail partners later in the year. Unicorn is also driving better merchandising results as we continue to see strong productivity across our national retail partners. Perhaps the best example of this is our Target flex towers, which provides us both incremental space and a vehicle to showcase our new products. The next wave of these Target flex towers shipped in the third quarter, which partially offset the impact of a smaller 2019 holiday program. Performance at other national retailers was strong with 1 highlight being skincare momentum across the full chain at Ulta Beauty. Our overall international business was down in Q3 as we reduce reliance on international distributors. We made the shift in the U.K. several years ago, and it's paying off today. In the third quarter, growth within our key U.K. retail partners, Boots and Superdrug was particularly strong. We expect that momentum to continue as we look to more than double our presence at Boots over the next 12 months and expand space incrementally at Superdrug. In the third quarter, we held our first ever large-scale consumer event in the U.K. at GLAMOUR Beauty Festival with nearly 5,000 attendees. The enthusiasm we saw there was reflected in U.K. Beauty Awards from Cosmo, Glamor and Gloss. A fivefold increase in our earned media value in the U.K. We were also honored to receive a supplier award from Superdrug for best new cosmetics launch in 2019 for our Poreless Putty Primer. In other markets, our most significant activity for the quarter was bringing our China e-commerce business in-house from a distributor, which will allow us to better control pricing, marketing and the pace of new product launches. This is an important move to begin penetrating the China market in a more meaningful way. In terms of China, we are closely monitoring developments regarding the coronavirus. We would note that our e.l.f. offices, labs and key suppliers are at least 500 miles from Wuhan. We have a deep and geographically diverse supply chain within China. It is too soon to know the impact to our operations other than the later start-up post Chinese New Year. We have an amazing e.l.f. team in Shanghai and strong network of suppliers, who we just saw during our annual supplier summit, and we're working closely with them. Our thoughts are with our colleagues and those impacted by recent events. Turning to our fifth strategic imperative of generating cost savings to help fuel brand investments. I'll reiterate that our most important cost savings initiative was closing our 22 e.l.f. branded stores last February. We redeployed the $13.7 million in annual spend on stores through our strategic imperatives, particularly driving demand in the brand. We're also seeing benefits from the automation of our warehouse facilities. Our new liquid fill manufacturing facility in Southern California should start operations in the next 6 weeks. Mandy will discuss what we're seeing in terms of price increases and tariff dynamics. But in summary, they remain favorable and a driver of our gross margin progress. Make no mistake, our execution of these 5 strategic imperatives has led to growth in a down category. We will provide FY '21 guidance during our Q4 call. Meanwhile, I'd like to step back and touch on our longer-term model for the company. Over almost 16-year history, we grew in every year except calendar 2018. This year, it was critical for us to reestablish growth. Having done so, I'd like to share what we're seeing in the model over the next 3 years. With the momentum we're building in the brand, we believe we can continue to grow share. We also believe we have an opportunity to grow shelf space significantly at our current national retailers and in new markets internationally. Space gains are episodic, and even when we get that space, it often takes time to optimize shelf productivity. That's why our focus has been on executing our strategic imperatives. With growth, innovation and a brand that consumers love, we believe we'll earn more space over time. Over the next 3 years, without major additional space or strategic extensions, we expect compounded annual top line growth in the low to mid-single digits. As we layer in potential space gains and strategic extensions, we believe this is a business that should grow in the mid- to high single digits. In both cases, we see leverage that comes with sales growth. We expect adjusted EBITDA growth to outpace net sales growth. We believe that this model of balanced growth in both the top and bottom line makes for an attractive long-term business. One of the things that gives me confidence in our model is our success in growing gross margin from 42%, just a few years ago, to over 63%. There was concern earlier this year on the impact of tariffs, which we have so far successfully navigated with a slight expansion in gross margin. We've taken much of this historical margin expansion and reinvested it in the business. First, in the form of team and infrastructure and more recently in brand support. We believe that the team and capability that we have built can be leveraged for additional growth opportunities. Our strong cash position of almost $75 million at the end of Q3 gives us the opportunity to pursue strategic extensions that can further leverage our capabilities and differentiate our brand portfolio. We believe good uses of cash include small tuck-in acquisitions in adjacent categories or spaces as well as creating our own brands. We believe such strategic extensions in combination with our strategic imperatives, provide further confidence in the short-term as well as longer-term growth potential. With that, I'll turn the call over to Mandy.

Thank you for covering the Q3 highlights Tarang. It was another strong quarter and another quarter that we're able to raise guidance. Let me now discuss the third quarter financials, updated guidance and our longer term model. Excluding e.l.f. stores, net sales of $81 million were up 8% from a year ago. Our in-line performance remained strong throughout December despite the smaller holiday program, which impacted track channel data. You may have already seen a bounce back in yesterday's Nielsen read, which was partially aided by Unicorn merchandising, particularly at Target. Gross margin of 65% was up 500 basis points compared to prior year, primarily driven by the price increases we implemented in the second quarter, along with other factors we've discussed, including margin-accretive innovation, cost savings and favorable FX rates. Year-to-date, FX has contributed a onetime benefit of roughly 200 basis points to our gross margin. I should also note, on tariffs, that although the Phase I deal was signed, 70% of our product remains tariffed at the 25% level. A very small portion, mainly lashes, also remains under the 7.5% tariff. On an adjusted basis, SG&A as a percentage of sales was 44%, up from 37% last year, primarily driven by increased investment in our marketing and digital initiatives and bonus accrual, partially offset by the closure of our 22 e.l.f. stores. In the third quarter, marketing and e-commerce spend was 11.5% of net sales compared to 7% in the year-ago quarter. During the third quarter, some marketing e-commerce spend shifted to Q4. Therefore, we expect marketing spend as a percentage of net revenue to be higher next quarter. Given top line results, we still expect to see marketing and e-commerce spend at 12% to 14% for fiscal 2020. Q3 adjusted EBITDA of $21 million was driven by the sustained performance in gross margin rate for the quarter. Gross margin and the shift in marketing spend to Q4 drove our adjusted EBITDA margin to 27% for the quarter. We expect adjusted EBITDA margin will normalize as those marketing expenses are incurred in Q4 and as we continue to see the impact of tariffs materialize. Adjusted net income was $12.2 million or $0.24 per diluted share compared to $14.6 million or $0.30 per diluted share a year ago. Last year, we had a $0.05 benefit to EPS driven by discrete tax benefits related to stock compensation that we did not have this year. For the 9 months ending December 2019, we generated $37.8 million in cash flow from operations, enabling us to fund our capital investments and debt service, bringing our cash balance to $74.7 million compared to a cash balance of $51.2 million a year ago. The improvement was primarily driven by stronger operating results. In the third quarter, we repurchased approximately $1 million of stock, bringing our total through December 31 to $3.5 million. Our investment priorities remain focused on our 5 strategic imperatives. As Tarang discussed, we continue to explore strategic extensions that could enable us to leverage the investments we've made in our platform and fuel long-term growth. Now turning to our fiscal 2020 guidance. We expect to end the fiscal year with net sales up 7% to 8% versus fiscal 2019, excluding the impact of e.l.f. stores. We expect adjusted EBITDA between $58 million and $60 million, adjusted net income between $28 million and $30 million and adjusted EPS of $0.55 to $0.59 per share on a fully diluted basis, with a share count of 52.5 million. Our tax rate is expected to be 28% for the year. As we look to the fourth quarter, we are optimistic about our position in the market and the progress we're making against our strategic imperatives. However, we want to remind you that comps become a bit tougher as we start to cycle positive sales growth related to the Poreless Putty Primer and 16-hour Camo Concealer launches in Q4 last year. These launches drove strong organic influencer activity and a halo effect on sales across our product line. Additionally, we expect gross margin to moderate as we continue to see the impact of tariffs materialize. From an adjusted EBITDA margin perspective, we are expecting 21% to 22% margins for the year, up from the 19% to 20% range provided last quarter as we've continued to see stronger-than-expected gross margins. As I stated earlier, Q3 adjusted EBITDA margin of 27% was driven higher by the shift in marketing into Q4. Therefore, you should expect a lower adjusted EBITDA margin in Q4 as these expenses materialize, putting the full year in the 21% to 22% range. Before I turn the call over for questions, let me discuss a high-level view on our long-range model. As Tarang said, over the next 3 years, we expect to continue delivering sales and profit growth, driven by our 5 strategic imperatives. Assuming we don't add significant shelf space or strategic extensions, our sales growth CAGR is expected to be in the low to mid-single digits. If we're successful in gaining significant shelf base or integrating strategic extensions over time, we anticipate those could add additional points of growth to the algorithm. In both cases, we anticipate adjusted EBITDA leverage will be achieved through a mix of top line growth and annual cost savings in COGS and/or SG&A. Accordingly, if we execute across all vectors, our model could reflect a mid- to high single-digit sales CAGR. We will provide more detail each year when we give annual guidance but wanted to give you a perspective on our longer term performance. We believe we are well positioned to drive sustained growth and look forward to updating you on our overall progress in the coming months. With that, operator, you may open the call to questions.

[Operator Instructions] Our first question is from Rupesh Parikh, Oppenheimer & Company.

So I guess, to start out, just -- it sounds like on the call, there's been more commentary towards these strategic extension. So as you look at capital allocation, just want to get a sense of how you're thinking about M&A versus share buybacks. And as you look at M&A, is there a preference at all between, I guess, on the makeup side versus skin care. So just any thoughts there?

Rupesh, it's Mandy. I'll go ahead and take that question. So as we look at strategic extensions, we really look at a couple of things. So we are looking for either small tuck-in brands, or we've talked about even potentially creating brands on our own. But really, we're looking for a strong growth profile on the top and bottom line. Also looking for something that builds on our capabilities, either in an adjacent category or at a different price point, and also something that can leverage the capabilities that we've built over the past 16 years. So operationally and through our distribution network, would also be something that we look at. But overall, we're looking for something that's accretive or has a clear path to accretion over time. I think we've been highly disciplined as we've looked at these over time. I know Tarang had mentioned that at one point in time, we looked at NYX, but we weren't going to outbid L'Oreal for that asset. And so our heads are really around those smaller tuck-ins at this point.

Okay, great. And then maybe just 1 follow-up question. Just on the gross margin line. Obviously, a strong performance in Q3, and it sounds like the tariffs will start to have more of an impact on -- in Q4. So if you look at your gross margin performance for FY '19, is at 63% level, I guess, the right way to think about, like, I guess, a sustainable gross margin level going forward for the full year?

Well, I'll speak -- Yes. I'll speak on fiscal '20 and what we expect for that. So as Tarang mentioned, we've grown our margin, tried over 63% year-to-date, it's at 64%. So I would expect the year to end somewhere in that range in the 63% to 64% range. We did see the acceleration of tariffs into Q3, about 100 basis points. But with those levers that we discussed, we're able to continue to offset.

And FX was a 200 basis point onetime impact. So Rupesh, as you think of 65% to 63%, it's probably the right number in terms of what we should have done.

Our next question is from Andrea Teixeira, JPMorgan.

So I understand your suppliers are loyal, and I guess, Tarang, you disclosed that -- I mean, the distance from -- to Wuhan. And -- but I wanted to understand if you believe these factories are still closed or if they're still operating? And I'm more concerned about the supply chain. If the raw materials are causing any disruption? And if you're embedding the risk of stock outs, probably not in the fourth quarter. So your fiscal '20 is likely safe but into fiscal '21. An update as on how long this products would come in. And again, just to clarify that point. And on the SG&A side, and I know it's something just to -- the second point is the percentage is still quite elevated as a percentage of sales. So I wonder when we should think of that leveraging more as you grow the top line.

Andrea, I'll take the first one and give Mandy the second question. So in terms of China, for FY '21, I'll tell you, it's too early to tell. Our thoughts are obviously with our colleagues and our suppliers, who we are working very closely with -- I think the best thing is we're extremely vigilant on our health and hygiene protocols. I'm very proud of that. None of our employees or their immediate families have been affected. As we've checked with all of our suppliers, they've reported none of their employees have had any issues either. Part of that is the distance from Wuhan. But I think part of it is also the protocols we've put in place. In terms of our overall approach with our supply chain in China. It is one of the main advantages we have. I would say, from a supply disruption or continuity standpoint, first of all, every one of our items is dual sourced; we're not single source on anything. So if there was an issue, we have the ability to move volume around. See, the second thing is going into Chinese New Year every year, we go in with elevated inventory levels, really, because some of these facilities will be shut for month. We have our resets that happen here in the spring time. So yes, we're sitting about 6 months worth of inventory right now. And that does not include what our customers are sitting on. So right now, certainly, for the short term, I think we're feeling pretty good. But obviously, this is evolving situation, and we'll continue to monitor it. We have a very good track record in terms of our ability to be able to supply our customers and work very closely with them.

And then, Andrea, on the SG&A point. So SG&A this quarter was really driven by 2 things that we called out. The incremental marketing expense. So this quarter, we're at 11.5% versus last year at this time, we were at 7%. And then also, bonus accrual included in this quarter versus not having that. As you recall, last year, we did not pay any executive bonuses and so now lapping that with that bonus accrual. In our longer term algorithm, we do have some combination of SG&A and/or COG savings baked into that. And so over time, over the next 3 years, as we talked, you should expect some savings there.

Right. And if I -- and thank you so much, one of the things that you also discussed is like bear in mind of the phasing of the Poreless Putty Primer and the Camo Concealer. Is that a consideration, obviously, now in the fourth quarter? And then I know you've been relaunching it also like variations of it. I was just wondering, it's just a massive comp because it has done so well. And if you can kind of like tell us like what would be the impact embedded in your guide of that -- of lapping that?

Yes. So the guidance right now is the 7% to 8% really reflects kind of what we've seen as a trend on a 2-year stack basis. So if you look at the low and the high end of the guidance range, puts you about a 5% on a 2-year stack for Q4 on the low end and about 8% on the higher end. So really in line with the trends that we're seeing. Just calling out that Poreless Putty Primer, we do have to cycle that, but we're encouraged by the trends that we're seeing so far.

And our new product program is off to a really good start. As I mentioned, I think, 5 of our top 10 items right now on elfcosmetics.com are items we just introduced in the last month or 2. So while we have a big comp to overcome with Poreless Putty Primer and Camo Concealer. Our holy grail products like our new Hydration Camo Concealer, our Liquid Glitter Eyeshadows, a number of other new products. We're encouraged by the fast start on those.

Our next question is from Erinn Murphy, Piper Sandler.

I guess I have a couple of questions. Maybe Tarang, first for you, a little bit bigger-picture question. As we think about just the beauty industry right now. I mean, it's obviously -- particularly mass has been tough for several years now. I mean, as you go forward into 2020, 2021, how do you feel like Target, Walmart, some of your big accounts are just thinking about allocating space for that category. And it's clear that you guys are gaining share. But just overall, I'm just curious on what's being allocated to Beauty and how that may shift versus prior seasons or prior years?

What I'll tell you is Beauty is still an incredibly attractive sector for any of our retailers. If I look, obviously, Ulta Beauty, that's been the case, but same with Target and Walmart. They've allocated more space for Beauty overall. Within Beauty, you can have shifts between some of the subcategories. So we've talked over the last few years, mass color cosmetics, having poorer trends than skin care, for example, the overall footprint, at least for all the customers we deal with, where Beauty is a major strategic priority. We don't foresee kind of shrinking of that footprint. In terms of allocation decisions within that footprint, it comes to growth rate, productivity, what's the level of innovation you have and what your consumer profile is. And all 4 of those, we score extremely well. So long term, I'm highly confident of our ability to continue to pick up more space. The reason why we provided a long-term model in 2 different dimensions is base is episodic. And so we wanted to be able to give a perspective of without major space gain or strategic extensions, what level of growth do we see? And then when you layer that on, what that looks like? So I'm both encouraged long-term in terms of our ability to get space. And then short term, I'd say, often for a retailer, they have a number of other decisions besides the fundamental performance of a brand. I think one headwind, there is a number of them are-have been focused on exclusive brands and testing new brands as they go through. A lot of those will kind of come and go. I think we're well positioned regardless of that or legacy players.

Okay, that's helpful. And then just maybe just a follow-up, Tarang, on that growth side. Into next year, kind of the long-term range plan at the lower end of that low to mid-single. Do you assume the category stays relatively similar to where we're at today? Or is there any gains improvement in the category?

We made the long-term model inclusive of the current category trends. We assumed a down category in there, and that's why we believe it's pretty good growth without space, without strategic extensions in a down category to be able to deliver that level of growth.

Okay. That's helpful. And then just my second question is really for Mandy. As we think about marketing, I think you guys have it at like 12% to 14% of sales this year and you go into next year. I mean, is that the general right level to think about, or was this kind of a shot in the arm to kind of rejigger the brand momentum and that starts to come down? Just curious on how you're thinking about that within the framework of the 3-year plan?

Yes. So as we think about the 12% to 14%, I think we've said that's the area that we feel comfortable with. Right now, we haven't really given guidance beyond that. But to say that 12 to 14% is where we see it, at least for fiscal '20.

Our next question is from Linda Bolton-Weiser, D.A. Davidson.

Could you elaborate a little bit more on your decision to use fewer international distributors and what your plan would be then for other international markets. Do you plan to go in direct markets? Or -- and can you just talk about the regions or countries that you are thinking about penetrating further?

Linda. So our strategy, which began probably more than a year ago, was to really go direct with our key international accounts where we could, similar to our strategy in the U.S., where we have direct headquarter coverage at Target, Walmart, Ulta Beauty and our drug channel and other key customers. As any other company, we go through a flow where you start with a lot of international distributors. You figure out which ones you want to be able to keep. But as we made that shift, for example, in the U.K. a few years ago, we just saw much better results of being able to go directly to Superdrug and directly to Boots. In terms of other international markets, we're testing the brand and we have been for a while in Germany and other countries within Western Europe. Our big focus within Asia is really from an e-commerce standpoint with China making the move of actually taking over that business directly from a distributor was an important move for us. And you'll continue to see us kind of sequentially go country after country, never will be a big bang, but more how we go and really make sure we're executing each country the right way.

And then can I just follow-up on the coronavirus issue? Is it your understanding that plants will reopen after the extended holiday period, or do you have any further information on that? And then I think you said your facilities are 500 miles away. Would that be in the Guangdong region? Or there's like another manufacturing region, slightly more north? Can you just give us a little more specificity on where your facilities are or maybe they're in different locations?

Sure, Linda. So our supply network is both deep and very broadly distributed. So we're in different parts of the country, particularly around the Shanghai area, but we have suppliers in various other regions. I'll tell you in terms of production plans, we are scheduled next week to have -- be in production and have shipments. We had shipments ready to go that we did right before Chinese New Year, and we were staying very close, it's a quick dynamic. We -- and very evolving kind of situation. So very proud of our team and just how well everyone is working together, including support from the U.S. So I hope that answers the question. We haven't disclosed where all of our facilities are other than not near Wuhan, and we have talked in the past being closer to Shanghai and in other regions.

Our next question is from Steph Wissink, Jefferies.

Tarang, the first question is for you. Just to remind us where are you with your shelf space at your 3 biggest accounts Target, Walmart, Ulta. Can you give us just a quick diagnostic update on how much space at each retailer you are -- you have currently?

Sure. So our most developed customer is Target, where we've been in business the longest. On average, I think we have about an 11-foot footprint at Target. Then after that would probably be Walmart. In terms of Walmart's footprint is on average, I think, about 5 feet. And Ulta right now would be in some combination of 6-foot sets and 4-foot sets, on average, about 5 feet as well. So in most retailers, we find that we have less than kind of half the footprint that we have at Target. Gives us that confidence longer-term in terms of the footprint of the brand. I should also mention, in the drug channel, we're predominantly, I think, in around a 3-foot set. So we still have room to grow pretty much in every channel that we're at, including at Target. I talked about kind of the benefit of Unicorn and our new merchandising vehicles with these flex towers have been terrific for us in terms of really highlighting our new products and our key holy grail innovations, and those flex towers form a additional space there as well. So still quite a bit of room to grow.

Okay, that's great. And then my question for you on skin care. I know you talked about strategic extensions. But what about strategic adjacencies skin, body, sun care? Just remind us how big the skincare business is today as a percentage of sales? And do you see that still as a growth opportunity?

Skincare. Yes. So Steph, this is Mandy. Skincare, we still see as a big opportunity for us. As we mentioned, skin care was up for us 35% in the quarter. And when we think about strategic extensions, definitely think about adjacencies. As I mentioned, and skin care would be one of those that we would definitely consider.

And part of this, we've been in color cosmetics for almost 16 years. Skin care is still only 2 to 3 years in, given the momentum we see, given kind of the strength of the pipeline, we see a lot of growth there, although it is still quite small in our overall range.

Our next question is from Oliver Chen, Cowen and Company.

Regarding Project Unicorn, that was a big focus. You've had a lot of great success. So what inning are you in with Unicorn? And how does that interplay with the opportunity -- floor space opportunities. Related to that is pricing and elasticity? And what are your thoughts on what you've been seeing in the marketplace with the unit response relative to price increases, it sounds all very encouraging.

Thanks, Oliver. I'll take the first question on Unicorn. And I'll ask Mandy to take the one on pricing. Unicorn has been a great success for us in terms of really elevating our position in each of our national retailers on shelf and with merchandising. We're currently entering the third phase of Unicorn, which is really focused on better visual merchandising, particularly bringing consumers to our key holy grail innovations, being able to navigate the shelves better for that. Shelves are currently being set, we'll have a better read of those really over the next 4 to 6 weeks. It's one of the reasons why last year, we changed our fiscal year to be able to get that read. And then in terms of where Unicorn goes from here, I mean, I think you're going to continue to hear us talk about Unicorn in different phases. We believe there's much more we can do from a visual merchandising standpoint. And as that visual merchandising as well as the other improvements we've made help us increase productivity, we believe that makes for a very good case for space.

Yes. And Oliver, on the pricing side, we continue to be pleased with what we see there. I think last quarter, we talked about having a 200 basis point impact from pricing, and we feel that's continuing to hold. So what we saw in Q2 continues to hold true and continues to give us some benefit from having that elevated pricing.