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

Good afternoon, everyone. I'm Dara Mohsenian, Morgan Stanley's household products, beverage and food analyst. I'm very pleased to welcome e.l.f. to Morgan Stanley's Global Consumer and Retail Conference. Just before we get started, I do have to note there's important disclosures at Morgan Stanley's website at www.morganstanley.com/researchdisclosures. If you have any questions, you can also reach out to your Morgan Stanley sales representative. So, with that, I'm very pleased to welcome e.l.f. here today. They have a very strong track record of growth since implementing a number of strategic changes over the last couple of years and a longer-term track record of growth going back years before that. And the recent growth has come despite the weakness we've seen in the cosmetics category and beauty category in general with pressure from the COVID pandemic. So, a great time to have them here today. I'd like to welcome to Tarang Amin, Chairman and CEO of e.l.f. Tarang, thank you so much for joining us today.

Thank you for having me, Dara.

So, to start with, Tarang, maybe we can start with that recent top line performance. As I mentioned, even with the large drop we've seen in cosmetics category growth post-COVID and, to a lesser extent, the total beauty category, e.l.f. has really sustained its sales growth, and market share gains have been pronounced during this period. So, can you talk a little bit about some of the key drivers behind those market share gains? How sustainable those drivers are as you look going forward from here?

Sure. So, what I'd tell you is that e.l.f. was strong even before the pandemic. I think we just reported our seventh consecutive quarter of net sales growth and share growth. So, that strength we had going in, which really ties to our fundamental value equation and executing on the 5 strategic imperatives you mentioned has really carried us through the pandemic. I'm really proud of our team and how we've executed, and we've been able to continue to sustain that. I'm actually even more confident for the future given we have a lot of white space in every one of those strategic imperatives and feel that we'll be even stronger coming out of the pandemic given the strength we have during it as well as a more robust brand portfolio not only with e.l.f. Cosmetics, but with W3LL People and Keys Soulcare, which we'll launch tomorrow.

And can you talk about some of those key drivers in more detail, maybe just sort of rank order their importance? Obviously, higher ad spend, innovation, you've improved shelf space with improved presentation. But maybe what have been the biggest drivers in your mind behind this market share gains? And how do you think about those individual drivers going forward?

Yes. So, I'd say the first is really driving brand demand. We realized a couple of years ago that we wanted to take our marketing spend up to really get awareness up on this brand. And we've had a tremendous track record of really engaging, particularly Gen Z and millennials. I mean I think our work on TikTok, our various challenges are up to 10 billion views, almost 6.5 million user-generated videos. So, we're seeing really strong ROI results behind our marketing investments. We've always been known for our innovation, and we continue to lead our category in terms of innovation that's relevant. And I think importantly, during the pandemic, unlike others, we didn't hold back. We kept launching new products, and those have been resonating with our consumers. We've always had strength in digital. We're a digitally native brand, elfcosmetics.com is the number one e-commerce site in color cosmetics. So, really many of the investments we've been making in that site really panned out during the pandemic, and we see lots of white space for that. And then when it comes to our national retail partners, our top 3 customers are Walmart, Target and Ulta Beauty. We've had good results with all 3 of them. We are the most productive brand that Walmart and Target carry. We're quickly rising in Ulta, and that's been generating us being rewarded with incremental shelf space. So, all of that's really working together, underpinned by overall value equation of bringing the best of beauty and making it accessible.

Right. Okay. And have you sort of realized the benefits from a lot of those changes? Is it early stage, late stage? How do you think about the growth yield going forward in these different areas?

Yes. I'm encouraged that we're still in the early innings of our growth trajectory. So, if I start on all 4 of those vectors, from a consumer standpoint, we have a pretty big gap in unaided awareness between us and the large legacy players in our categories. So, there's still a huge opportunity to bring more consumers to our franchise. Innovation will always sustain us, and we have a rich pipeline for the years ahead. Digital, I feel we're just getting started, even though we've almost been at triple-digit growth through the pandemic, both on elfcosmetics.com and our retailer.coms. And then most significantly from a national retailer and international standpoint, I'd say we have a lot more room to grow, particularly in shelf space as well as new distribution.

Okay. And let's talk about shelf space. So, obviously, some significant market share gains recently. Over time, you've been able to expand your shelf space. But in this environment, the strong share gains really stand out versus declines we've seen at some of particularly your larger competitors. So, as we think about shelf space, both near term in the spring of 2021 but also longer term, is the recent performance giving you a lot of incremental opportunity? Where do you see the most opportunity going forward? Is it expanding shelf in existing customers? I would think that's the biggest opportunity or maybe they're new customers or new doors you can expand into. How do you think about that longer term?

Yes. So, we've had a great track record of picking up shelf space. Six years ago, we probably had 10,000 linear feet of shelf space in the U.S. We're now over 110,000 linear feet of shelf space, but we still have a lot further to go. And certainly, our momentum with our share gains and overall business have done well. But the formula that retailers look at, we really do well against all 3 of the key metrics they look at. The most important is productivity. As I mentioned, we're the most productive brand at Target and Walmart. Even Target our most longest-standing national retail customer, we're now their number two share position brand, second only to Maybelline. We have much less space than many of the legacy players. So, even our most developed customer, we have a long way to go. Walmart and Ulta are even further behind in terms of their space. So, we have a lot more space to be able to gain. The second thing retailers look for is differentiation, our ability through our innovation to bring retailers meaningful new innovation that helps them differentiate versus their competitors, but also, our strength amongst Gen Z and millennials. e.l.f. is a brand they cannot afford not having in their retail sets. And then lastly and most importantly, in many respects, is innovation. We have more innovation. Our retailers tell us all the time than any other competitor and a pretty good cadence of that over time. So, given that formula, given the strength we have in all 3 of those areas, we're quite bullish in terms of our ability to continue to pick up shelf space. And then in terms of the relative mix, I'd say our first focus is always the customers we're already in, really making sure that we continue to kind of drive strong productivity that will help enable us to gain even more shelf space. And then we do have incremental opportunity in terms of new distribution. So, we announced on our last call that Shoppers Drug in Canada will be expanding the brand into their outlet. We've been growing our business in the U.K. with Shoppers -- with Superdrug and Boots. And we have major white space when it comes to other international markets as well. But I'd say the primary focus is going to be the existing customers continue to pick up space there and then opening up other outlets that makes sense for us.

Okay. And you reinstated full year top line and EBITDA guidance for the fiscal year last quarter. You're implying roughly about mid-single-digit top line growth in the back half of the year and you give an EBITDA guidance. Maybe just discuss some of the key puts and takes from a top line and EBITDA perspective this year. It's obviously a pretty unique year. And also, secondarily, I've been sort of hearing your view of tracked versus untracked channels. There's a question of if consumers shift back to brick-and-mortar during the holiday season or not, and seasonally, that may be a little different than it's been in past years. So, how do you think about sort of online versus the rest of the business? And if there is some weakness in brick-and-mortar, if you can offset that elsewhere?

Sure. So, the guidance that we reinstated was top line growth this fiscal year of 5% to 7%, which we did 7% in the front half of the year, so it'd imply anywhere from 3% to 7% for the back half of the year. And so, at the top end of that range is we continue to execute as we've been executing. There aren't any big surprises from a category standpoint and we reached kind of the top end. The reason why you have the lower end of the range is obviously we're in a highly volatile time right now, particularly with the second surge of COVID and we wanted to give ourselves some room in terms of things that could happen in the category as we go forward. So, we feel quite confident in terms of our guidance is one of the reasons for reinstating it in terms of being able to have visibility to our business and how we're executing against that. And the range only reflects kind of the external reality that we're all facing right now in terms of the environment around us. And then in terms of EBITDA, I'd say the biggest driver there is we are also launching a new brand in Keys Soulcare. So, we do have some additional expenses related to the start-up of that brand. So, that is the reason why EBITDA isn't following pace with net sales growth in the year. But overall, particularly in a category that's been down as much as 20-plus percent, we feel really great about those numbers.

Right. Okay. And just thinking about the holiday season this year from a category perspective, just any thoughts on how it may be different than a typical year. And also, maybe the level of competitive intensity that you guys are expecting within the category.

Yes. As part of our guidance, we did tell -- did signal that our Q3 would be a strong quarter, and part of that confidence we had in Q3 was not only pipeline associated with new distribution we're going to be picking up in the spring but also, confidence in our holiday program. So, one of the things we have to do this year, knowing the pandemic was here was we started earlier. So, on elfcosmetics.com, we started putting our holiday kits on really in September, and we've seen really good results from there. Target, which is our main customer for holiday during this time of year, actually has a dedicated endcap for e.l.f. in that presentation. And then maybe relating to your earlier question on tracked versus untracked, I think we're going to continue to see some lumpiness in both the Nielsen data as well as kind of a shift to nontracked as well. I mean, obviously, the incremental space we've picked up at Ulta, what we're doing online, not only on elfcosmetics.com, but on retailer.coms. We have great visibility in terms of how that business is looking and it was also one of the things that gave us strength. I'd say on the Nielsen front, you're going to see some weeks that are up, some weeks that are down. Some of it just reflects, for example, last week, we had both Walmart and Target, which were closed for Thanksgiving versus last year where they were open. So, that was going to have an impact kind of on the last week's data, but we're seeing it bounce around a bit. Our overall confidence in the quarter remains in terms of kind of what we've talked in our earnings call and in terms of our overall guidance, and we feel really good about that.

Right. Okay. And then from a medium-term perspective, you talked about a mid- to high-single-digit CAGR on the last conference call from a 3-year outlook perspective in terms of top line growth. You've delivered the high-end of that the last couple of quarters. You're expecting at the midpoint of your guidance to deliver the lower end of it the next couple of quarters. And as I look out, I think it's pretty reasonable to expect the cosmetics category and beauty in general to rebound post-COVID from a category perspective. You obviously have Soulcare coming in with a small amount of revenue contribution this year, but that should really build over the next couple of years. So, to be blunt, it seems somewhat conservative. So, are there sort of negative factors I'm not thinking about that could be a risk point over the next couple of years? Or is some of it that it's just -- it's very hard to predict the category at this point? And you don't want to sort of get ahead of yourself in terms of the category rebound post-COVID?

I think it's more of the latter. As we look in an environment that's highly volatile with pandemic and everything else, we did not want to get ahead of ourselves. And it is our long-term economic model is really a 3-year CAGR. So, we felt mid to high single digits is a really respectable number for a 3-year period. And certainly, some years may be higher, hoping that we are higher, but we also didn't want -- we wanted to be balanced. I think one of the great things that Mandy Fields, who's our CFO, has brought kind of to the company is a real great sense of balance. As bullish as all of us are in terms of the future on e.l.f., she also takes a look and says, okay, what's the external environment, what could go wrong and really incorporates that into our longer-term view. And I think it's served us well, particularly over the last couple of years.

Okay. That's helpful. And then maybe we can shift to the Keys Soulcare brand. Obviously, an important launch for you guys. You've talked about launching a few products late this year and then a bigger launch next year. Maybe first, just let's take a step back. What drove you to establish this brand? What drives your excitement around it? And maybe also, who do you see as the key consumer for this brand? And how does that -- how is that maybe similar or different to the existing business?

Well, we're really excited to be launching Keys Soulcare with Alicia Keys. And really, we're doing something that hasn't been done in our category before, which is a true lifestyle beauty brand. You've often had kind of subcategory focus -- people focused on certain categories, whether it be hair care, nail care, skin care. No one's actually ever taken care of your soul. And so, this is a lot what Alicia brings partnering with us is a much more expansive view of beauty about content and community. In fact, we launched Keys Soulcare, the site, well before we're selling any product. The first product doesn't get go on sale until tomorrow, the first 3 items. And so, we're really creating kind of a multi-category kind of multiyear journey here in terms of really being something unique to this category. And it's backed in terms of Target, really with Alicia Keys as our partner who's been intimately involved in every aspect of this brand's creation. She has 92 million followers. I haven't found a person yet who doesn't like her or doesn't follow her in some respect, age demographics are very broad. Diversity is quite broad. Probably the biggest distinction point relative to e.l.f. is it is an entry-level Prestige launch. So, e.l.f.'s average unit retails are about $5. Keys Soulcare's initial skin care range that we'll be coming out with will be priced somewhere between $20 and $40. So, it does have a higher price point. And so, that certainly will go after slightly different consumer from an ability of kind of affluence standpoint, but we do see it very broadly appealing similar to e.l.f. We also see a following great in the hallmark of our company, which is accessibility. So, while the price points are $20 to $40, the products are phenomenal and really compare with products that are way more expensive than that and in the development. So, as you can tell, I'm very excited about the launch, and we look forward to building a great brand together.

Okay. Great. And as you think about sort of benchmarking this brand versus some of the other brands out there or versus a number of followers or whatever it may be, how do you think about benchmarking the brand longer term and the longer-term potential of this brand?

Sure. So, the first category we're starting with is skin care. So, one way to benchmark it is take a look at other skin care brands kind of in their first year. We haven't disclosed numbers yet for Keys Soulcare, mainly because it's a new brand. And I think we're going to go through the discovery process of kind of how -- and I have launched a number of new brands in my career. You always learn along the way of which parts of the brand resonate, which categories resonate. We've talked about entering kind of with skin care, talked body care, there'll be other categories as well. And so, I think the ultimate size of Keys Soulcare is yet to be determined, but we feel it could be a meaningful contributor to our company.

That's -- that is helpful. And the retail footprint for this brand, the ultimate vision or ultimate plan here, can you talk a little bit about that longer term? And maybe give us a little bit of path to the way you think about the rollout from a product category and retailer footprint standpoint over the next 12 to 18 months?

Sure. So, like everything with e.l.f., we start first digitally. So, keyssoulcare.com, that site is up and running. The product -- the first 3 products will go for sale really tomorrow. And then in early 2021, you'll see a rollout of other skin care items coming on to that site. So, a very strong kind of focus online, not only with us, but the first strategic partner we've announced for this brand is Ulta Beauty. So, ulta.com will also have the product range. They will be in all Ulta stores in 2021. And they're actually an important validator, because Ulta gets to see most of what's in beauty and couldn't be more excited about what we can create on Keys Soulcare and how much they're fully behind it. And so, the strategy we're going to take with Keys Soulcare is very much that, which is start with a specific retail partner that has really invested in the brand to really help bring it to life in particular geography. And in the coming months, we will announce other retail partners that we have on Keys Soulcare. But meanwhile, you don't have to wait for them. You can go straight on keyssoulcare.com and get the brand. And then from a category standpoint, as I mentioned, it's a lifestyle beauty brand. So, it's not going to be wed to any one category. We're going to start with skin care, because Alicia was very clear about kind of the issues she had with her skin growing up. It's a great example of us bringing other capabilities. One of the people in our innovation team is Dr. Renee Snyder, who's one of the co-founders of W3LL People, clinical board-certified dermatologists, member of the faculty of the University of Texas, has her own practice. She was absolutely essential in the formulations of these products. They are incredible products. But we do have a vision of going into other categories. The only one we disclosed so far is body care. Certainly, as part of the first ritual, we'll have a Sage + Oat Milk Candle. So, we see the range being very broad, and you'll see a continued stream of innovation like you do on e.l.f. every few months. You'll see something else come up.

Right. Great. And with investments behind the launch of the Soulcare brand, you increased your A&P as a percent of sales target to the 14% to 16% range this year from the prior 12% to 14% range. Longer term, should we think about this brand as moving you to a higher level of ad spend as a percent of sales? Or is this more just over the long period, there are some incremental costs? And as the brand gains scales over time, it fits within that longer-term ad spend as a percent of sales ratio pre the recent adjustment that you made? How should we think about that longer term?

So, the only thing we've provided guidance on is this fiscal year. We're 14% to 16%. We're very comfortable within this year that we can support all 3 of our brands at that level to support. We have not provided future years yet. We will do that when we start providing FY '22 guidance. What I will tell you is our long-term economic model has mid to high single digits from a top line growth standpoint, from a CAGR. And what we have said is EBITDA will grow faster than that. And so, implied in that EBITDA growth is regardless of what the marketing level is, there's leverage in our system, bringing more sales in, whether it be in other areas of G&A, whether it be in COGS. And so, we're confident about being able to do both, put good levels of support behind these brands to really make sure we're driving the awareness and the returns that we're seeing on that investment as well as find leverage in other areas of our P&L to really be able to deliver EBITDA ahead of where net sales are in the -- as a CAGR over that 3-year period.

Okay. And then e-commerce sales have obviously been very strong recently, triple digits during some periods of COVID, e.l.f. Cosmetics, new customers has been up 60% year-over-year. As we think about this higher contribution from e-commerce, how sticky do you think this is longer term? Might there be a near-term step back post-COVID? And also at a -- from an operating margin perspective, can you talk about the e-commerce business versus the rest of the business and where that could trend over time?

Sure. So, I'd say we've certainly seen a surge during the pandemic in terms of more people going online. We do believe there's -- part of that is sticky. We're seeing that in terms of once you have a great consumer experience in elfcosmetics.com or retailer.com. We do believe people have changed some of their behavior, and we're looking forward to continuing to fuel that. And one of the ways we're going to fuel that is through our Beauty Squad Loyalty Program. We've got 2.1 million Beauty Squad Loyalty members. They account for 70% of the sales on elfcosmetics.com, and we continue to have a focus of growing that loyalty base as a real driver of our online business going forward as well as a lot of the other investments we've made in personalization and a better consumer experience as we go through. So, I do see a certain stickiness that will go regardless of whether we're able to maintain. I don't think we have any thoughts of being able to maintain the triple-digit growth that we've been seeing over the last couple of quarters, but we do believe e-commerce will continue and digital will continue to be an important area and have greater consumer shift into that. And then from a margin standpoint, certainly, our gross margins on elfcosmetics.com are much higher than our margins with national retailers. But we also have other expenses related to that. So, our operating margins on the whole are pretty much in line, whether it be on e-commerce or whether it be with our national retailers, mainly because we allocate a lot of our marketing dollars against our e-commerce business as well as the cost to fulfill.

Okay. And do you think that changes significantly over time, the gap between the 2 of them are relatively in line levels today?

Well, I think it could change over time. Certainly, as we build more scale on our e-commerce business, it's about 13% of our sales right now. As that becomes a bigger proportion of our sales potentially in the future, there's opportunity from an operating margin standpoint. But one of the things I like about our business model is we're also highly efficient in the national retail partners that we've picked between Walmart, Ulta, Target as well as the ones we're starting in the U.K. Our direct approach is a pretty efficient model relative to sometimes other models that require a lot of embedded costs in terms of servicing a particular account chain, particularly if you're in department stores or other places. So, our cost structure is fundamentally different, which is advantaged in terms of when you take a look at our EBITDA margins.

Okay. And then you touched on the Beauty Squad program. I think you're up to 2.1 million members as of last quarter. A, can you talk about how you can continue to convert people in that program? B, how valuable that customer is versus a typical customer and maybe some metrics around that?

Sure. So, I think we've been really encouraged even during the pandemic, as we've brought in a lot of new consumers, we -- you mentioned one of the stats of 60% of the people coming to elfcosmetics.com are new consumers. We've had a good track record of being able to convert a number of them onto our Beauty Squad Loyalty Program. And that's quite important to us because Beauty Squad Loyalty members, as I mentioned, drive 70% of our sales on elfcosmetics.com. They come more often to our site. They buy more. So, it's an incredibly valuable consumer, and we continue to incent more people to come on to Beauty Squad. So, even during the holiday time, we took advantage of the strength that we have on e-commerce to be less promotional than we usually are usually around this time of year. Us and every core competitor runs price off sales to take advantage of Black Friday and Cyber Monday. In the past, we've ran sales as high as 50% or 60% off for every consumer. This year, we did something very different. We basically said, if you're a Beauty Squad Loyalty member, you get 40% off. So, not quite as deep a discount. If you're a non-Beauty Squad Loyalty member, you get 25% off. And so, it really kind of encouraged sign-ups on Beauty Squad. We have a number of other things planned to really continue to grow that Beauty Squad, because we actually see it similar to what we've seen with Ulta Beauty and Sephora and others could be a real driver of our business, not only online but overall.

Okay. And what are you seeing in terms of repeat rates on those new customers on elfcosmetics.com and your ability to retain them going forward?

Yes. So, we have -- like the latest quarter, we don't have as much data on but prior quarter, we've had a pretty good track record of looking at repeat and basically having similar repeat rates that we've seen across the entire business. So, we feel good about the profile of consumers. Demographics are similar to the e.l.f. consumers. The main difference in those consumers is they're buying more skin care than we typically would see a new consumer buy. It might be a factor of this time or it might be a factor of just their discovery of e.l.f. skin care, and we're encouraged by those stats as well.

Okay. Can you talk about your experience in Ulta so far as you've launched brands there? And if that's been an entirely incremental sort of retail partner for e.l.f. or has it been somewhat cannibalistic? How do you think about that? And how do you think about your portfolio expanding there over time?

Sure. So, our experience with Ulta Beauty has been terrific. We've had a great partnership. We entered Ulta just a couple of years ago, started with an online test. The brand did extremely well online. They took it in a series of stores and then went chain-wide. And since that time, to give you an indication of how well we've done, they took up space on e.l.f. in this fall period, and they've announced that they're taking e.l.f. space up again in the spring. So, we're obviously doing well with Ulta. And we found those sales to be highly incremental relative to other accounts as we can track particularly some of our e.l.f. consumers between accounts. And so, we feel it's an important customer for us, particularly their emphasis on beauty. And we've seen it to be incremental to our Target and Walmart business. And we obviously have a lot more in store as Keys Soulcare will be exclusive to Ulta Beauty. Ulta also most recently included W3LL People as part of their Conscious Beauty, so we continue to, say, expand our partnership with Ulta Beauty and like what we see.

Right. Okay. And a topical point here would be the partnership between Target and Ulta, called Sephora now also. What are the implications for e.l.f. from those partnerships for your business longer term?

So, I'd say, first of all, I think it's smart on the retailers behalf. I think it gives Target and Kohl's brands, say, some otherwise may not have had access to. It gives Ulta and Sephora incremental kind of core access points to consumers that may not be near another Ulta store or Sephora store. So, I think strategically, they make a lot of sense. I think there's great opportunity in e.l.f., particularly with the Target-Ulta partnership. I think it opens up the door potentially for us to have conversations on Keys Soulcare in the future. Both customers really like that brand and what we're creating there. And so, while it's an exclusive launch with Ulta, I think having Ulta stores within Target gives us an opportunity to have that conversation. The other thing that I think is even more meaningful is what it says about retailers and their view of the beauty category, being a core destination for them being able to drive traffic and track consumers and the strategic importance of beauty. And that's a great thing for e.l.f. because what it basically allows is more we've seen time and time again as retailers are able to bring more traffic into their stores, e.l.f. is a prime beneficiary just given kind of our quality and extraordinary value. So, I'm excited for both those elements. And then on the Kohl's Sephora, we'll have to see. I think that was just announced yesterday, so we'll see kind of if there's opportunities there. We have not been a vendor in the past to Sephora if that opens up potential opportunities there or not. I would say, we're mainly focused on the Ulta Target given that they're 2 of our key customers. And I think it will be a good net positive in both ways, both for e.l.f. Cosmetics as well as our new brands.

Right. Okay. And then looking at innovation, you guys have had a phenomenal track record over the last few years. You mentioned that's what you're known for with your retail partners. Could you just give us a sense of the future innovation pipeline and how it compares to the past few years? [indiscernible] big hits the last couple of years, right? So, is there sort of a sustained innovation pipeline as we look out over the next couple of years that you can cycle up against that theoretically pretty large innovation-driven revenue base from the last couple of years?

Yes. So, I think one of our key superpowers has been able to take things that previously only existed in Prestige or didn't exist at all and really be able to bring them and make them more accessible. So, a great example of the innovation we did almost 2 years ago was our Poreless Putty Primer. We introduced it at $8. So, it was a premium relative to many of our other primers. But the only other thing that that compared to it was Tatcha Silk Canvas at $52. So, it's really the best of e.l.f., where we can bring that level of innovation at incredible values, we've seen us do well. In fact, that's been a hallmark for the company over a long period of time. If you look at our 5 core segments of primers, concealers, brushes, sponges and brow, all 5 of them were built on being able to take something that was in Prestige and really bring it and make it more accessible. And the way we sustained share gain, because we're gaining share in all 5 of those segments, is through a continued stream of innovation. So, I mentioned Poreless Putty Primer we introduced 2 years ago, almost 2 years ago. We since followed it up with Matte, Luminous, eye Poreless Putty Primer, really building a franchise around it, and then we can see that sustained. So, I feel more confident about our innovation pipeline than I ever have. We have innovation across eyes, lips, face, toes and skin care. We have a rich pipeline validated by many of our customers in terms of what they see, what we're coming out with but also with our introduction and what we're going to be able to do with W3LL People, real pioneer in Clean Beauty and what we can do there from an innovation standpoint as well as Keys Soulcare. So, we feel that that's one of the things that gives me the greatest confidence in our long-term economic model, is our ability to sustain that innovation pace.

Okay. Great. Skin care is another growth opportunity for your company. You launched a few years back, the mass category itself is almost double what cosmetics is. And as you mentioned, there are some opportunities potentially in Prestige with Soulcare or other brands. So, maybe just take us through your thought process on skin care longer term? How big it can be? Expansion plans over the next few years? And sort of your core competencies in this area versus your traditional cosmetics business where you've had a lot of success over time?

Sure. So, skin care is a major opportunity for us. A few years ago, we identified the opportunity in the marketplace where we had incredible skin care products on the Prestige side and really taking that e.l.f. model taking that Prestige quality and making it more accessible. We started our skin care line really with Target and elfcosmetics.com. We saw really good results, and we started expanding it. As I sit today, our overall skin care business in tracked channels is about 8% to 9% of our business. Yet on elfcosmetics.com, it's 25% of our business. And the only difference between elfcosmetics.com and retail is really the breadth of the assortment we have in elfcosmetics.com, where we have our entire skin care range, our ability to kind of really discover and understand it. So, a key part of our strategy is as we continue to pick up more space, put more of our skin care range in key customers, the space gains we got at Walmart and Ulta in the fall allowed us to put more of our skin care items in. So, longer term, I see great potential with skin care. And a lot of that's underpinned with our capabilities on innovation. We've seen talking about kind of our new product strength, our Cannabis Sativa lines, our CBD collection, our Supers collections, our Holy Hydration cream, have all been really, really good winners for us. And so, we definitely have kind of, I call it, the pipeline as well as kind of future items available to be able to continue to expand skin care.

And how do you think about skin care margins longer term relative to your cosmetics businesses?

Yes. So, skin care is slightly accretive to our cosmetics margins, and they do come with a higher average unit retail. I would say we always are playing this balance in e.l.f. between kind of we've had a great track record in terms of margin progression but also want to maintain an extraordinary value. So, I think there's margin potential on skin care, but I think our first priority is just get greater presence and scale in retail. And I think one of the things that's going to enable that is our launch of Keys Soulcare, which is really focused on skin care to begin with, at much higher average unit retail. So, I think over time, you'll see skin care mix in as a bigger percentage of our business and drive overall average unit retail stuff as well.

And then on the international side of the business, that's another key growth area, and it's about 10% of sales. You've mentioned a focus on a few key focus markets. Longer term, what type of growth potential do you see internationally? And where do you think it could be as a percent of your sales mix 5, 10 years out? And can you talk to us about the international expansion plans over the next couple of years here?

Sure. So, I mean, as you know, global color cosmetics is bigger than the U.S. color cosmetics market, yet it's only 10% of our business. So, there's major opportunity there. Our strategy has been really a focused, disciplined strategy of really proving the brand in a particular country and then expanding there, and it always starts with us digitally first. So, our 2 top international markets are Canada and the U.K. In both of them, we established the market with elfcosmetics.com and then picked a key retailer. In Canada, it's case, we started with Target. When they shut their stores down, pivoted to Walmart. We then are now excited that Shoppers Drug, a key beauty retailer, is going to be taking the branded. In the U.K., again, we started on elfcosmetics.com, started with Superdrug in the U.K. The brand did so well that Boots requested the brand, and we're now expanding in both. So, both of those countries give us a pretty good road map of how we want to approach other international opportunities. And I would say Western Europe is still wide open to us in terms of our ability to kind of enter key markets there. We're also quite excited about our e-commerce initiative in China, which we started up really last year in earnest and see a great deal of potential there. So, you're going to continue to see that focused strategy, but we believe international will be a lot -- a much bigger portion of our business.

Okay. And is that something that scales pretty quickly in the next few years? How do you think about it from a scaling perspective over the next few years here?

We have a good model that can scale pretty quickly. And I mentioned the U.K. where we were -- we started with Superdrug, we very quickly got into Boots. Now we're expanding both of them. We've had great progress. In fact, during the pandemic, as you track the top 15 mass color brands in the U.K., e.l.f. was the only one that grew. So, you can tell kind of our success and our track record there, and we feel we can take that model to other countries and key countries in Europe, and you'll continue to see that approach. But we still have plenty of opportunity here in the U.S. as well.

Okay. And I mentioned earlier, you've seen very strong market share trends this year. That's in the face of this COVID-related category weakness. As you think forward over the next year or 2, how much visibility do you have that the strong market share gains can continue in light of some of this category volatility we're seeing?

What we've been able to achieve what we're doing in the category, as I said, been down over 20% at times because of the pandemic. Pandemic has not been good to color cosmetics as people have been kind of restricted in their behavior. And so, we absolutely believe as people are able to get back to normalcy, there will be kind of a headwind to a tailwind from the category. And that always suits us well up in the consumer space for 30 years between P&G and Clorox and other core, having managed a number of different brands. In every single case you've seen, if you can pick up share in a down market and continue to have your strategy execute, it makes you stronger coming out of that. In our particular case, as I mentioned earlier, we have a great deal of potential in all 5 of our strategic imperatives. We also have a richer and more -- and a better brand portfolio coming out of the pandemic. And I think being able to take advantage of that tailwind in the category with W3LL People, which is real pioneering Clean Beauty, Keys Soulcare and continued momentum on e.l.f. Cosmetics, I feel can make us even stronger coming out. So, I've got a lot of confidence, as you can tell, in terms of our ability to continue to execute on this strategy and continue to pick up share.

Okay. And you're moving from a one brand-focused company now to have 3 key brands. As you look going forward, obviously some exciting opportunities on those other 2 brands. But just in terms of managing these different brands from a talent perspective internally, execution-wise, what's your level of comfort around being able to manage them? How do you think about the incrementality of the business of W3LL People and Soulcare? If there is significant growth in those brands, is it all incremental? Or is some of that cannibalistic?

Sure. So, most of us come in our company with multi-brand experience. They're a very strong consumer and beauty backgrounds. So, we're used to managing multiple brands. And I think it was a key part of our strategy when we looked at the series of investments we made in our team and our capabilities. And we have some capabilities no one else has, being able to leverage them against other brands. So, from that standpoint, I feel highly confident. A lot of the investments we made were with these brands in mind. So, we do have some incremental resources on W3LL People, on Keys Soulcare that allow us to manage the brands distinctly while still taking advantage of the chassis that we've built. And a great example is as we acquired W3LL People, we're seeing significant COGS savings by putting that on to the e.l.f. operating platform. Obviously, our distribution reach, our digital prowess and our innovation can benefit W3LL People and in turn, W3LL People can benefit the overall e.l.f. brand in terms of kind of its -- everything it's learned about Clean. So, I feel there's great ability to both manage the 3 brands, but more importantly, the key part of the thesis and one of the things why our long-term economic model called for higher EBITDA growth is we feel there's leverage in there by bringing more sales through our chassis and the capabilities we've already built. And Keys Soulcare is another great example where we've been able to use a lot of what we've been able to already build on e.l.f. and apply it to a different price tier. And then in terms of how -- we see all 3 brands as highly complementary. I mean, e.l.f. as best of beauty made accessible at $5 average unit retail is quite different than W3LL People as a pioneering Clean Beauty that works at an average unit retail of $20. And as I mentioned earlier, Keys Soulcare is a lifestyle beauty brand between $20 and $40 right now. We see them as filling different price tiers and also different consumer segments. And, so we see them as incremental to each other.

Right. Okay. That's helpful. We touched earlier on a bit of EBITDA margin expansion opportunity over time. Can you talk about gross margins? In particular, you're at pretty high absolute levels. It's been an area of also expansion for you over the last few years. You've talked about some of that dissipates in the back half of the year short term. But looking out over the next few years, is there room for continued gross margin expansion? What are the key drivers there? Or given you've already moved up to pretty high levels, is it more about leveraging the SG&A line?

Yes. So, I'd say it's probably more on leveraging on the SG&A line in terms of, I think, about our EBITDA margins going forward. There's always opportunity on gross margin, but there is also some headwinds we're going to face. So, the last couple of years, we've been a beneficiary of FX. It's been 100, 200 basis points. We see that turning into a headwind, particularly as we get to our Q4. I'd say the levers we have, first and foremost, is margin-accretive innovation. That's how we've driven our gross margins over the years from about 47% to the 64% we have right now. Most of that gross margin progression has really come through our innovation. And so, we have a great deal of confidence in our innovation capability. I'd say the second key lever for us is pricing. We overcame 25% China tariffs last year really through being able to price, and we did extremely well with that, which tells us we have pricing power on this brand. We're going to be careful how we use that just to make sure we keep our value equation as we go forward. And then third is cost savings. We always have opportunities on cost savings. So, I think we'll come back with what we see gross margin in future periods when we talk our FY '22 guidance, but we certainly have a headwind with FX coming up that we're going to be looking to mitigate through some of those other factors. And then as I mentioned earlier, as we get more sales, there's leverage possibility throughout the rest of the P&L.

Right. Okay. And you mentioned the price increases. Obviously, they were necessitated by sort of an outside shock in terms of the tariffs. So, it was unusual circumstances. But they also went incredibly well, especially given a lot of your competition didn't follow right away or at all, and you didn't see much demand elasticity. As you think about your business longer term, historically, mix has really been the driver of price and you've had a lot of success there. A, are there further mix opportunities left as you think about from here? Are you sort of later stage from a lot of that? Or I would think there's still a lot of opportunity left, especially given some of the innovation you've had recently? And then second, just in terms of list price increases, can that be a bigger piece of your strategy longer term in light of the recent success you had? Or was that more just sort of extenuating circumstances?

Well, I'd say certainly, the bigger driver will be mix. We definitely see more opportunity in mix, particularly as I mentioned, skin care and other potentially adjacent categories and the potential we have there with our innovation. Some of that mix will be offsetting kind of headwinds we find in kind of tariffs. Pricing, we want to use selectively. I think one of the things that's really driving momentum well before the pandemic, but certainly during the pandemic has been our extraordinary value equation, our accessibility. And we're going to be really careful with how we look at that. So, it's still a lever. And I'd say we'll look at that lever when we need to. But the other thing that let's not forget about, we're still living with 25% tariffs on China goods. So, depending on what happens with the new administration and trade policy, that could be a major windfall that gives us the opportunity to really both offset potential FX headwinds as well as really look to both between investing in the business and bringing to the bottom line. But we're not factoring any of that in right now. We'll have to see what happens there, but we have a number of levers that we will be looking at.

Okay. Great. Well, with that, we're a minute over time here. So, we'll end things there. We really appreciate your time. This was a great chance to catch up and, obviously, a very exciting time for you guys.

Great. Well, thanks for having us.

Thanks.