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

Good afternoon, everyone. I'm Bonnie Herzog, Goldman Sachs Beverage Household and Personal Care, Nicotine and Cestar analysts. Joining us today is e.l.f. management team, including Chairman and CEO, Tarang Amin; and CFO, Mandy Fields. Now before we get started, I'm required to make certain disclosures in public appearances about Goldman Sachs relationships with companies that we discuss. The disclosure relates to investment banking relationships, compensation received or 1% or more ownership. We're prepared to read out aloud disclosures for any issuer on request. However, these disclosures are available in our most recent reports available on our firm portals. Disclosures and updates are also available on the firm's public website. Now with that out of the way, it's my pleasure to welcome everyone to today's meeting. Thank you again, Tarang and Mandy, for your time.

So I wanted to kick things off, Tarang, first with you just in terms of your results last week and the market's reaction. I was hoping maybe you could talk about the pullback we saw in your stock price? And did you expect such a strong reaction to your Q2 results?

Well, it was a surprise, I would tell you the fundamentals of our business are good. And so we do feel it was an overreaction. In fact, it was such the overreaction that we did tap into our authorization and repurchased $50 million of shares on Monday. This shows our confidence in the business and more importantly, the future and the white space we have ahead of us.

No, that's good to hear. And I did see that. So -- that should help. And then in general, Tarang, e.l.f. really has experienced robust growth as you touched on and you've been a market share gainer for quite some time. So could you discuss the broader U.S. mass beauty market trends? And what do you see in terms of market growth, competition and then your growth drivers in the context of that?

Well, look, we feel great. We've long been bullish on duty, both color cosmetics and skin care. We saw in the last quarter the category up 2%, which is consistent with the trend of the last decade. And so while the consumer is under pressure, what we find is they're choosing the brands that mean something to them. And so I'm very pleased with the strong consumption we continue to see on e.l.f. Color, e.l.f. SKIN, certainly Natrium and then obviously the breakout performance of Rhode. So I feel really, really good about the overall performance and how the consumer continues to vote for e.l.f. Even in the last 4 weeks, we picked up another 160 basis points of market share. So we continue in only 27 consecutive quarters of market share gains, which I think people missed the significance of. We're now the #1 unit share brand, #2 dollar share brand. Clear line of sight of total market leadership. And as good as that is, what I feel even more bullish about is the potential we have ahead of us. We've often talked we're the #1 brand at Target with over 20% of their category. We see other kind of -- the only difference between target and others because they had almost a 6-year head start. So we see the trajectories of our other customers also going and trying to replicate what Target is done. And so we're now the #2 brand at Walmart with the most productive brand, our retailers will carry on a dollar per foot basis. And so we still have a ton of potential for both market share gains here in the U.S. as well as expanding internationally.

Okay. That's helpful. And I guess that brings me to my next question. So I kind of want to drill down on your results on your F Q2 results. So in the context of your organic sales did decline 3% in the quarter and shipments were below consumption, the consumption trends that you just mentioned. And it sounds like primarily due to your decision, I guess, to temporarily stop some shipments to retailers who, I guess, were slower to execute the price increase you took back on August 1. So I guess for me, first, why were some of the retailers unwilling to pass through the price increase, especially given that you did advertise that you were going to be taking pricing that had been public for a little bit. And then did it have anything to do with already high inventory levels at their end or possible concerns about elasticities?

No, this is totally our call. We've long had great price sanctity where everyday low price, we ask retailers even when they merchandise the brand to do so at full retail. e.l.f. is such a phenomenal value that it sells really well without discounting. And so this was the case, and we've seen this in the past and some other price increases where a particular retailer might be slower to reflect the right pricing on their purchase orders. Now that we have SAP, it automatically cuts cut those orders. And so -- and what we found is it's a good strategy to get that everyone and get the entire market to the right price, and that strategy worked. We're in normal shipments now, but that did certainly impact the shipments that we had in Q2.

So you're already seeing the shipments recover post Q2 results. And then during that period, did -- were there any out of stock situations as a result of what you just described and that maybe contributed also to some of the volume declines. Just trying to think through it further.

I mean there would definitely be out of stock depending on how long someone will shut off on what SKUs are shut off on. But I would say it wasn't widespread. I mean, retail is carry enough inventory to be able to carry for a while even if we're cutting orders. And so I would say there were some, but I wouldn't say that was not a contributor. The contributor was 100% us, not shipping customers. .

And then Tarang, what was it that you needed to do, if anything, to eventually convince some of these retailers to accept or pass through this pricing or are you facing pushback currently or everybody?

We're not facing pushback. We are -- like I said, where normal shipments have resumed, and it's the most effective tactic if someone doesn't reflect the right price retailers pricing the sole discretion of retailers, who we send product to is our discretion. And so we're fine. It always works. And from time to time, on a lesser basis, we will face this if someone starts discounting the brand or doesn't reflect the right price, we'll turn it off. And it's also one of the mechanisms by which sometimes retailers have their pricing algorithms where they'll pick up a low price on a marketplace or something else. And we'll just help that SKU off until everyone resets. So it's a way that we kind of enforce making sure people have the right pricing on e.l.f.

Okay. And then maybe switching to you, Mandy. As we're talking through all this, the results, your F Q2 results suggest, I mean it was a 10-point impact from this dynamic as I think about bridging the 7% consumption with the minus 3% organic sales. So first, is that the right way to think about the impact of these disruptions? And then second, when were these issues resolved? Was it towards the end of FQ2, like Tarang suggested that, that's been resolved, we should assume that, that's all been resolved? I guess I'm ultimately trying to understand how big this issue was at its peak and maybe how it's evolved over the past few months? And should we or could we see any lingering impact in Q3 as well?

Yes. So on the bridge that you're doing, I think that is -- it's fine to do that way. We haven't attributed 100% to the stop shipment. There's always going to be a little bit of a disconnect between shipments and consumption in a quarter. Over time, we know those two will marry up over time. And so I would say the stop ship issue was the majority of that disconnect, which is why we highlighted that. . In terms of when resolution happened, I mean this was going on throughout the quarter. But like Tarang said, as we exited the quarter, shipments have started to resume normal course. And so we're in a good spot there. In terms of anything lingering? No, nothing lingering into this quarter, pertaining to stop shipments like I said, as we exited Q2, we were back in a good spot.

Can you touch on what might have been some of the other impacts on shipments in the quarter if it wasn't necessarily this?

Yes. The other thing that we talked about in the quarter was our international growth was 2% in the quarter. We were cycling the launch at Rosman. And so I think that certainly had an impact as well on what folks may have been expecting versus what came through for Q2.

Okay. And then thinking about the shipments versus consumption, guidance still implies that they will continue to like shipments will continue to lag consumption in the second half. So maybe help us understand the drivers of that. I mean I have to ask, but did you simply shift too much inventory last year? Or are there any other factors that are going to drive the shipment deceleration, as I can even though Tarang just mentioned shipments are resuming. I'm just trying to understand why they will decelerate in the second half?

Yes. So we really called out two things in the second half that we'll be cycling through. One is our space expansion in Dollar General. That was 11,000 doors type went in -- during the second half of last year, and also the space expansion that we had in Target. So those are some big expansions that we had in the base period that we're cycling this year. And so those will have an impact from a shipment standpoint. But again, I'd just point back to consumption. Our consumption remained strong. It was up 7% in the quarter, and we feel great about what we're seeing from how the consumer is choosing -- continuing to choose e.l.f.

You touched on like you mentioned last year, gaining all those doors distribution. Is there a way to quantify the benefit that you saw last year as a result of the expansion, whether it's Dollar General, Target. And I kind of want to get to ultimately how conservative your guidance is this year in spite of all this?

So we didn't quantify the shipment impact or what those were in the base. I can say from a -- if I take a step back and look at the guidance that we provided, 18% to 20% growth on the year. We still believe it's fantastic in the backdrop of broader consumer. I mean you have beauty, HPC kind of flat to up 1, high-growth consumer up 13%. And so we're coming in at 18% to 20%. Now Granite Rhode is a big part of that, but we think that's fantastic that we were able to find a company growing at such a rapid clip to bring into our e.l.f. portfolio. And so we're quite pleased with that. And then on the organic front, like I said, it's really kind of -- you look at Q2, that was our decision to stop shipments. You look into the second half, we're really cycling those big pipes in the base.

And I'd say the more important thing is consumption continues to be strong. We've actually seen a pickup in pace. So as we come out of the price increase and the initial kind of trough you always see with pricing, we're seeing much stronger consumption trends through the third quarter so far.

All right. And is this more -- is this indicative of anything else we're seeing at broader industry? Is this really just more your company and then -- or you think about the industry at large. And then do you expect to exit even your FQ4 more in line with consumption trends? Or will it be more of an F '21 -- or '27 story? Just thinking about this in the context of volumes and when we can expect to see volume return to growth?

Yes. So we haven't given kind of an outlook on when the shipments and consumptions We know that over time, like I said, shipments and consumption will start to get closer to one another. What we did say is that in Q3, again, with some of the stop ships that we had in Q2, Q3 is likely going to be a little bit stronger than Q4 as we go through, just given that you're going to pick some of that back up. And so I think that's really the way to think about it just from a shaping standpoint.

And I'd also say that the pipeline effect was more concentrated in Q4. So that's also one of the reasons why in terms of what we're lapping, you're going to see Q3 stronger than Q4.

Okay. And yes, I kind of wanted to get into that next just maybe taking a step back because I know we're drilling down on this dynamic. But just thinking about the full year guidance, you're guiding 3% to 4% organic sales for the year. Can you maybe -- what that implies for the back half is, I believe, 2% to 5%. That's QH '26. So -- and obviously, that represents a step-up from the minus 3% decline in Q2. So can you walk us through maybe the other key drivers of growth in the back half? And then ultimately, how should we think about the 300 bps spread in your OSG guidance in the back half? What are the key puts and takes there to consider? And then honestly, I'd love to understand what could possibly put you at the high end of that range versus the low end because it's a decent range.

Yes. So on the 2% to 5% in the second half, we are -- it is a step up from what we delivered in Q2, but I would say Q2 is not representative of kind of a run rate anyway, just given our decision to stop those shipments. So you will get some benefit from picking up some of those shipments that shifted out of Q2 into Q3. We talked about some of the opportunities that we have internationally. We would expect international growth to pick back up into the second half. Again, the 2% that we delivered in Q2, also not representative of the run rate that we would expect from an international standpoint. And really, I think what determines kind of low end to high end is our spring innovation and how quickly we see things take off there. If you recall last spring, we had to cycle the lip oil launch in the base. And so that did not give us the growth earlier on that we expected. And so as we turn to Spring '26, we're very excited about what we're planning to launch. And so we'll be watching how spring performance comes in to kind of determine where we come in within that range.

So speaking of that, I don't think you've shared any of the innovation with us yet. But you feel pretty optimistic, confident that what you're bringing out this spring is going to be enough to lap, like you said, the success that you had last year with some of the innovation.

Yes. Yes, I think so. I mean we -- also, just to note, spring '25 was not a disappointment. It was still the rate of what we had in prior years. It just was not enough to comp that lip oil launch, which was an exceptional launch for us.

Okay. All right. I want to switch gears just a little and talk about some of the distribution expansion. You talked about sizable shelf space gains across retailers in the U.S., including Target and Walmart, and then I think more to come within Ulta in the spring of next year. So can you help maybe contextualize how meaningful these shelf space gains are, I guess, with respect to the 3% to 4% organic sales growth expectations that you have this fiscal year? And how significant these can be in FY '27 and beyond?

Yes. So the space expansion, we are always excited when our retailers are expanding our footprint. That's a great thing, and we've consistently picked up space each year with a subset of our retailers. So it's just a continuation of that. I would say the magnitude of the space that we have in the base is much greater. i was just talking about 11,000 doors expansion versus an expansion in Ulta, it's just not as large from a magnitude standpoint. So still very pleased with Ulta expansion, the Rossmann, Poland, the GCC countries with Sephora, DM in Germany, those will all be things that help to expand our footprint. But again, just thinking about the large space expansion that we have in the base, you're not going to see as great of a year-over-year lift because of that.

And that mainly affects the pipeline if we think about it in terms of what we're lapping and the disconnect between shipments and consumption. We feel great about the progress we're making. The other thing that I would say is as much as everyone is enamored with space, the biggest driver of our business over time has been our productivity, our dollar per linear feet productivity. And we always -- it always takes us a couple of cycles once we pick up a big swath of space to optimize that space. So we're really please, the target is now up to 20 feet of space on e.l.f. This spin gives us another ability to further optimize that space and drive greater productivity. I just had top-to-tops this week with Ulta and Walmart. They're extremely excited about what we have coming both from an innovation standpoint, but also in terms of Ulta picking up space. Walmart has been testing a highest vision set that has seen very good results. And so it will be up to them at what pace they roll those sets out, but that's a pretty meaningful difference in terms of what our presence at Ulta -- I mean Walmart will look like. And so we continue to make progress really across every one of our key customers.

No, that's a good point. And then just like you mentioned, the productivity. So some of the space that you took earlier, are we starting to see some of that productivity improvement then? Is that slowing in this fiscal year, again, more next fiscal year as I think about the continued expansion of distribution?

We should see some of that productivity improvement, but that may be a little bit of the range that Mandy talked about is it's always dependent on spring innovation and the resets and the timing of those resets of when you're able to see that optimization.

Right? And then Tarang, maybe taking a step back, what is the right long-term organic growth for e.l.f.? Is it the 3% to 4% that you're guiding this year? Or is there a path to reaccelerate growth?

Yes. No, we -- I would say, while we haven't given a long-term range, it's definitely higher than 3% to 4%. 3% to 4% is not anywhere near what the rate is. As we said, shipments match consumption over time. We're seeing double-digit consumption. So we'd expect double-digit overall growth and particularly given the white space we have. And similarly, with international, our launch is a 0 more back half loaded. So as we get into Rossman, Poland -- I'm headed to the GCC next week as we launch in Sephora and then the DM launch. DM is the largest retailer in Germany. And so we would expect definitely a pickup as we continue to see.

Yes. And I guess that's what as I'm listing and I've been processing all this. That's why I think I keep maybe struggling with trying to understand why shipments won't catch up to consumption sooner. And I mean would you be shocked if we get to the end of your fiscal year and they're still not closer to each other? Is it really just this timing that you kind of highlighted between the tough comps in Q4 and everything happening?

Yes. I mean, look, we're already seeing shipments pick up both with -- after our stop ship but also given the strong consumption that we see. So I think it's going to be a tale of like Q3 should come in strong, just given the momentum we're seeing both in consumption and resumption of shipments. Q4, we're not giving particular specific, but that's where a lot of the pipe effect would happen. So I think we'll be in a better position when we -- as we close out this quarter to be able to kind of absolutely show kind of how shipments and consumptions -- consumption matches up. And then you'll have a little bit of what you're lapping in Q4, but then over a long arc -- I've been CEO 12 years. I'd say shipments always match consumption for this business, just given how fast we move on shelf if someone does it take or cuts down on their inventory levels, they have to come back and replenish at a higher rate, just given how much faster we move than the rest of the category.

So if I -- yes, and that honestly makes sense. And if I'm hearing you correctly, it sounds too we should maybe assume that Q3 shipments will be stronger than consumption, just given what happened during Q2 and like you said, as they've resumed, is that fair to...

I think it's fair. We never know like when with order patterns, how fast shipments equal consumption we just know over a longer period, they always do. And so our assumption would be that I would expect shipments to be pretty strong here in Q3.

All right. Let's pivot to international. It's another area. I know that you see significant growth potential going forward. So maybe talk through for us what are some of your priority markets in that regard, how we should think about further growth potential in those markets versus maybe just expanding into new markets?

Yes. If you look at our history on international, if I just step back and take a multiyear view, as good as expansion has been and picking up new retailers in different countries, the majority of the growth has come from our first 2 international markets, Canada and the U.K. And so I would say the priority markets for us are the large existing markets where we have significant ACV coverage. So certainly, Canada, the U.K. and soon to be Germany. Once we pick up DM, we'll have, I think, over 70% ACV in Germany as well. And so I'd say, that will remain the core priority of continuing to build our position. Even in the U.K., we're now the #2 brand at Superdrug, the #3 branded Boots. But we're not in Tesco, Sainsbury a number of other kind of retailers. And so our first priority is Superdrug and Boots in the U.K., obviously, our own site in Amazon, and then -- and then certainly with Germany. And then these other markets, it's the same approach we've used, which has established the beachhead for e.l.f. by partnering with a leading retailer and then expanding from there. So we still have plenty of expansion ahead of us.

Okay. And then I know you touched on this earlier, international growth slowed down pretty significantly to low single digits in FQ2. So I know you lapped the Ross on launch from last year. But were there any other factors that impacted your performance in the quarter as well?

Yes, there are two -- I'd say there are two factors. The most important was lapping the Ross when it was 1,800 doors in Germany that we shipped in pipe that you're lapping. So it was quite a big expansion into Rossman. The second thing is we did see a slowdown in our U.K. business. The U.K. consumer is under threat, just like the U.S., perhaps even more so. So we saw a higher level of promotional activity from our competitors. I mean we saw things we've never seen before, like competitors introducing newness at 3 for 2, high levels of discounting, and that's certainly hurt us. Now for the year, we've continued to pick up share in the U.K. I think we picked up 80 basis points of share in a 52-week basis. But the last 12 to 24 weeks have been weaker given the promotional activity. Now the good news with that is we have strong plans for the U.K., both with Superdrug and Boots. And we also, I'd say, promotional activity, these past patterns in the U.K. is you usually see a trough as soon as a promotion dies down from our competitors. And so we don't feel the current levels of promotion are sustainable for anyone at the level. So I think that will help us going forward, but we certainly did see a hit in the U.K.

Were you already seeing things improve in October? And how do we think about F Q3? Should we expect a pickup in growth? I'm thinking about also, I think, year-over-year compares' ease?

Yes. You will see a pickup in growth. We are already seeing sequential improvement in the U.K. We obviously have -- our launches are back half loaded. So you'll have the results from both Poland, the GCC, and then getting into Q4, you'll start getting into DM -- SDM sets too. So we have a better cadence, I would say, back half, definitely more back half loaded this year versus last year as more front half loaded.

And then I do want to just check in on trying to understand the impact from your launch in Sephora Mexico in October of last year. How do we think about that and lapping that?

We feel great about lapping Sephora Mexico. In fact, Sephora Mexico is going to be taking in e.l.f. SKIN as addition, they've loved the momentum they've seen with e.l.f. We also announced we're entering Ulta in Mexico, obviously, there -- they have an expansion plan within Mexico as well. So we see really good momentum within Mexico in terms of our plans, both with Sephora as well as entry with Ulta.

And so to your point, Ulta Mexico will be pretty incremental? Or do we think about some cannibalization, just giving...

No, it's pretty incremental. I mean the footprint, I mean, Ulta just started with Mexico. I think had like the first store first few stores that they have Sephora, very small footprint. So combined, the retailer have a huge portion of the market. So we absolutely see it as being incremental.

Right. I want to ask a little bit about gross margin. So your second half gross margin guidance of 200 bps sequential expansion versus the first half. It does embed some mixed tailwinds from your acquisition of Rhode along with pricing benefits. So could you maybe just talk about, I guess, Rhode's margin profile, how significant the mix tailwind is to gross margins as a result help frame that for us?

Sure. So we are expecting sequential improvement, as you said, 200 basis points better than where we exited the first half. So around a 71% margin into the second half, which is roughly flat to prior year. just given the tariff headwinds that we have faced this year coming in or expecting a year where your gross margin is only down 100 basis points is pretty incredible. Our average tariff rate out of China has been 60% this year versus 25% in the base. And so being able to nearly overcome that is pretty incredible. I'm very proud of the team for doing that. Now I will say pricing is going to be a benefit for us in the second half. As we've talked, pricing just went into effect on August 1. So the first half did not get a big impact from pricing some, but not a full benefit. And then Rhode, as many folks saw Rhode's gross margins are strong as they have gone into Sephora, that is going to mix a little bit differently. But what we've said on Rhode is, overall, we still expect them to be accretive to our overall EBITDA margin as we go through. And so still going to be better from a gross margin standpoint, better than total company from an EBITDA margin standpoint as well.

Yes. I wanted to kind of drill down on that a little bit because I want to make sure I understand how much of a gross margin drag should expect for Rhode just relative to its current gross margin profile? And ultimately, what does it mean for e.l.f.'s overall gross margin trajectory? I mean maybe said 11:32 PM another way, like how do you expect Rhode to impact your overall margins, I guess this fiscal year and then definitely beyond?

We expect them to positively impact our margins, both in this fiscal year and beyond.

You haven't quantified that. Have you?

Did not quantify that, no.

You don't want to now? All right. But that's a positive? So it's...

That is a positive. I mean Rhode, they have a beautiful business strong top line growth as well as strong margins. And so we expect that to continue even with the investments that we want to make behind that brand.

All right. So in terms of EBITDA, your guidance for, I guess, 17% EBITDA margin in the second half, it does imply, again, a significant compression relative to what you guys delivered in the first half. So -- you just kind of touched on this. You talked about ramping marketing spend in the back half of the year, a primary driver, I think, of that. But how conservative is this guidance ultimately. How should we think about, again, the trajectory of your G&A expense, especially as you build your presence internationally?

Yes. So maybe let me start with the marketing side. We have -- since we started this year, outlook marketing at 24% to 26% on the year. In the first half, we only spent about 23% behind marketing. And so that's why we expect to see a higher rate into the second half as we seek to be within that 24% to 26% on the year. So that is causing some compression from an adjusted EBITDA margin standpoint into the second half. And so we continue to feel great about marketing the ROIs that we're seeing, and that's definitely an area that we want to invest. I know I've gotten questions on where is that investment going. It is primarily behind e.l.f. We will do some on Rhode as well, but e.l.f. is the primary driver of that shift in spend into the second half. . And then from overall SG&A, I would say, non-marketing SG&A, for several years, we had leverage in non-marketing SG&A. We want to continue to invest behind the growth vectors. We're very much still in growth mode. So international skin care, team infrastructure, all of those things that we've talked about, those will continue to be areas of investment for us. But over time, I do believe there's an opportunity for us to get more leverage out of our non-marketing SG&A.

Yes. And I actually wanted to better understand that. Where do you expect some of the efficiencies to come from? Ultimately, what should we think about a stable underlying EBITDA margin over time for your business?

Yes. So we haven't given a target exactly on EBITDA margins. But what I can say is just even as we think about the things that impacted us this year, tariffs at an average of 60%. That certainly had an impact on our gross margins. And so now that we're in an environment where we're around the 45% level, that should help to be some relief, a tailwind for us as we move forward. So that's a good thing from a gross margin standpoint. And then from an EBITDA margin or SG&A leverage standpoint, I think as we continue to grow as a company, as we continue to mature and scale, there are opportunities to get some efficiencies out of our supply chain out of the infrastructure that we've built. I think technology has been a big area of investment for us this year. Now that we get into a more stable place, I think we can start to get leverage there as well.

And remind me, thinking as you mentioned, technology, where are you at with AI? And how much will you leverage AI potentially?

Yes. AI is the talking point in every room that I go into. We are just getting our foundation in place. We implemented SAP this past summer, which was very successful. We're really focused on -- before you can get on a full AI journey, you have to make sure that the data is in the right place and accessible and that you can build on top of that. And that's really the stage that we're in, but certainly, AI will play a role in terms of efficiency and automation for us over time. We're already leveraging it across our marketing team. And I think that's the one thing about AI is that it's not just finance, accounting, IT initiative. It's really an enterprise-wide initiative that can unlock efficiencies overall.

And possibly with the consumer as well?

Absolutely. Yes, that's the one thing that's both a cost savings tool and a potential revenue driver if you think about where AI can go.

Yes. One small example is we're known for our strength on social. And for the longest time, we weren't able to answer every DM we got or every consumer message we got that's 100% driven by AI now, and we've got 100% coverage on DM and ability to engage with consumers that way. So it's just one small example, there is multiple workflows throughout the company that we're using AI for and we'll continue to ramp that up as time goes. And as Mandy says, I think I'm actually -- there will be efficiencies, but even more excited about the capabilities that we'll have.

Okay. That's helpful. And I wanted to maybe kind of circle back a little bit on the price increase. I just want to close the loop and make sure it's rolled out. I want to maybe understand from your perspective, the elasticities. You had a little bit more time. Did the elasticities come in as you expected? Do you think it's still too early maybe to get a proper read on that just in terms of the volume impact? And then I'd be curious to hear how competitors have reacted to pricing? It seems maybe they've been more surgical in their approach. Were you surprised by their response in certain areas? Or was it more or less what you would have expected?

Yes. So first of all, we're pleased with what we're seeing in the pricing. We had modeled internally unit declines. I mean, there's a 15% price increase, so we would expect some unit declines. But overall, if you take a look at our dollar and our consumption, we're pleased with what we're seeing. The pricing came in as we modeled. And so pleased with that. And then in terms of competitive reaction, we haven't seen that much competitive reaction yet, but that's not atypical. If I go back to 2019 and 2022, we led pricing. We again led pricing this round. Over time, we're unique in that our primary mode of growth has been through unit movement. Our competitors, that's not the primary mode of growth, primary growth -- area of growth is AUR improvement through price increases. So we would expect -- we never know when they're going to introduce pricing, but usually we see a round of it usually almost every spring -- as spring resets come and we see bigger movements then. So we would expect our competitors to have some pricing just because that's their known way of growing. And so we feel good about where we are right now from an elasticity standpoint, and we believe we'll get better over time.

And then, Tarang, you touched on this earlier, just a lot of your growth, it's really the driver in your mind is the innovation, holy grail approach to innovation. You mentioned, I believe it's on track to be a step up this fall, the innovation, while I guess we could describe it being sort of lagging in the spring. So is there anything more you could touch on in terms of subcategories where some of your upcoming innovation is focused on, ultimately, where do you see opportunity to build market share by subcategory?

Yes. So I'll step back. From an innovation cadence standpoint, we already talked, spring of '25 was lower than spring of '24. Spring of '24, as mx mentioned, it's not only the lipo launch, we just had way outsized level of innovation that way. And so while spring of '25 was our second biggest spring ever from an innovation standpoint. It was about half of what we saw in Spring of '24. The good news is fall of '25 is actually bigger than fall of '24. And then we are expecting spring of '26 to weaker than spring of '25. And I would say the good news is we're growing share in every segment. I think we grew 320 basis points share in Lip. We grew over 100 basis points of share, both in face and eye. And so you'll continue to see a very balanced innovation plan. We have innovation coming. And you don't have to wait too long because we start previewing some of that innovation. Really by the end of December, you'll start seeing it set on some of the newness end caps that some of our retailers have, you certainly see it online. But we have innovation across every one of those segments and subsegments, both in our strength categories, is '19 subsegments where we have #1 or #2 position as well as the concust categories. We've been building our kind of suite of mascaras. You've continued to see great momentum on lip and we have a number of new products. And I just wish I could tell you what they were right now, but they're strong. And they're not -- there's strong multiple dimensions, including given the state of the consumer right now, also making some pretty meaningful value statements with the consumer. And we know that's one of the core strengths of our business. Obviously, value took a hit with a 15% price increase. So we're very much interested in making sure we deliver what consumers know us best for. I mean 75% of our portfolio is still $10 or less. We still have a meaningful advantage when it comes to value, not just the price point, but the level of quality that we can deliver for that price is well recognized by consumers.

Okay. That's helpful. All right. Let's switch gears again. Let's talk about Rhode, which you acquired, I guess, in August. For those who are not as familiar, can you just maybe talk again about the rationale behind the acquisition? How prestige cosmetic and skin care brand using fits within your portfolio that as you kind of just touched on, has been primarily focused in the mass beauty category?

Yes. No. So we -- Rhode has been a phenomenal acquisition. I couldn't be more excited to welcome Rhode into the e.l.f. Beauty family. The approach we take is we take a look at the category, we've used this stat before, there are 1,900 cosmetics and skin care brands tracked by Nielsen, Yet very few have been able to scale. There are only 26 that have more than $100 million of retail sales. So we've had our eyes on Rhode for a while because, I mean, they went basically from 0 to $212 million of net sales in less than 3 years with DTC only with 10 products. So we saw the residents it was having with consumers. And the rationale for Rhode is it very much fits our vision. Our vision is to be a different kind of beauty company by building brands that disrupt norms, shape culture and connect communities, and Rhode absolutely does not. I mean, I've never seen a brand where people are willing to wait camp out overnight, wait 14 hours for an event that Haley is not even at. So we saw the level of consumer interest. There are so many parallels with e.l.f. in terms of our engagement model, their engagement model, how we entertain and delight our communities. And so a massive opportunity in terms of white space ahead of it. We launched the brand in Sephora just in September, it was by far the biggest launch to 4s ever seen in North America, 2.5x their previous record holder. This week, we launched the brand with Sephora in the U.K. Again, we saw the launch. I mean it's obviously only 5 days, but in the first 5 days. we've done 3x what the previous record holder had U.K. And so the brand has tremendous momentum and very much fits our spirit of disruption.

All right. That's helpful. And then I believe you've talked about just the runway of growth, maybe about 40%, I think, this year for Rhode. How should we think about ultimately normalized growth once we lap like you just touch on some of these Sephora games?

Well, we see plenty of growth ahead. I mean the core fundamentals from a consumer standpoint are really strong. We talked about wanting to invest more in Rhode like they have never done any awareness building on Rhode. There's obviously strength, but the runway from a customer standpoint, I think some investors were confused. They were using, I think, Fenty numbers. Fenty was a global launch in all 18 countries with Sephora. So the strength that we have with Sephora certainly opens us up for future potential of Sephora globally as well. And so I think you're going to see -- we're going to -- obviously, the focus right now is continue to execute with excellence in Sephora North America and the U.K, but we do have further way more distribution opportunity going forward. And so we haven't given a long-term run rate, but we do expect it to continue to be a faster growth rate than the balance of the portfolio, just given the early days of entering into retail.

And maybe sticking with this, as you touch upon how successful the launches were Sephora here and the U.K. How incremental has that been? I assume it obviously is cannibalizing just some of the DTC customers? Like how many new customers are you seeing it bring in? Or is it too early to tell?

It's done. We haven't given the specific cannibalization rate for the DTC part of the business, but we're pleased with what we're seeing. It's below what we had modeled in our acquisition models, and so we feel really good. We continue to see strength. And part of that strength is driven by their strategy. And just this week, we had the biggest -- we do something exclusively online for Haley's birthday. It's always a big event in November. And I just saw the numbers coming off of that event, that some of these exclusives we're using for the Road site have actually helped it do better than the cannibalization we had expected. We had -- particularly on innovation, where we give it a lead on our own site before we bring it into Sephora or into retail has been really successful. The birthday event that we had has really surpassed our expectations. So it's been one of those things where we're seeing strength both in Sephora, but also on our side.

Yes. I mean -- okay. So then thinking about Rhode and the brand's awareness, how would you describe it relative to the awareness behind your own e.l.f. brand? I mean, -- do you think there's still a lot more opportunity...

It's a fraction. I mean, if you look at the progress we've made on e.l.f., we went from -- just in the last few years, we went from 13% on ad awareness to 45%, unaided awareness. Just phenomena being consumer 34 years. I've never seen a brand pick up that much awareness and new consumers. We're not only #1 amongst Gen Z, but most purchased amongst Gen alpha and millennials. We picked up a ton of Gen X as well in our latest usage study. And so we know our marketing is working, both in terms of driving unaided awareness and in terms of having ROIs above the multiple. Rhode has an even bigger opportunity. It's I don't know if we've disclosed on an awareness. I think we talked about aided awareness, it's still a fraction of what other prestige skin care brands have. And given Rhode is also while it's in prestige, I would call it accessible prestige, right? It's not luxury. It's not on the higher end. It's very much accessible to consumers. And so we believe there's a huge opportunity with rate. Certainly, the Sephora launches are helping with that in terms of bringing many more consumers into the franchise if we take a look at the number of new consumers that are coming in, but we still have a massive way to go on both Rhode as well as Naturium. Naturium, we did our first awareness build. We continue to see very strong consumption trends on Naturium, and we liked what we saw in terms of the campaign that we just did.

Yes, and I definitely want to touch on the term next, but I want to ask really quickly on Rhode and just thinking about the launch in Sephora. Remind us how that impacted, whether it was of FQ2 or will it be FQ3, shipments in -- how do we think about that?

Yes, I've got that question quite a bit. So the pipeline into Sephora is not a part of our fiscal '26 results. That happened prior to the August 5 acquisition close. And so when we look forward into fiscal '27, that will not be something that we'll have to cycle in our reported financials. Now some folks are looking at it as, hey, if Rhode is a $300 million business on an annualized basis, they actually will -- if you're using that number, that does include the Sephora pipeline, right? We talked about $200 million contribution to our fiscal about $300 million on an annualized basis. And so if you're looking at things on an annualized basis, obviously, that pipe is a part of that. But on our reported numbers next year, we will not have to cycle that pipeline.

Yet you'll still be having this larger base and grow from that?

Correct.

Okay. That's -- I want to move to Naturium another brand you acquired. I think it was 2 years ago, and you launched recently, I think its first-ever awareness campaign. So maybe walk through us for -- or walk through all of that for us and the brand's performance so far, any initial response from your campaign? And have your growth expectations since you acquired the brand? Have they evolved and changed?

We're pleased with Naturium as well. Again, it was another one of these brands that went from 0 to over $100 million of net sales in less than 2 years. Definitely resonated with consumers. It complements e.l.f. SKIN. e.l.f. SKIN is a very similar model to e.l.f. Cosmetics. We take inspiration from our community, best products in Prestige, bringing a great value. Rhodes at a higher price point, around $18 a clinically effective biocompatible skincare, also very strong in the body category, almost 40% of its user base is men. So distinct and complementary brand to e.l.f. SKIN. And the performance has been really good, including of the awareness campaign I just talked about. In the quarter, we talked about launching or recently launching the brand with Sephora in Australia. We've picked up more space and doors with Boots in the U.K. And in the U.S., it's original distribution was only at Target, Amazon in its own site. We successfully launched the brand into Ulta Beauty. We're seeing very strong trends with Ulta Beauty even as we've lapped the launch years. And so we're seeing great momentum. And I'd say from an overall expectation standpoint, it's ahead of what we modeled. It still is strong growth on Naturium that's continued, and we still have a ton of white space on it during from both a distribution standpoint as well as continued awareness building.

I want to circle back to tariffs. We have to, I think. Maybe talk a little bit more about that. I know you've diversified your business over the past several years. But I think you still have about 75% exposure to China. Obviously, we've seen a lot of volatility related to cross-border tariffs, et cetera. So first, are you looking to further diversify your production away from China, such as your international business grows in the mix? And second, your guidance, it's predicated on tariff rates being the 45%. So is that inclusive of any tariff impact at Rhode as well as -- or is it purely e.l.f.? And then how should we think about the impact for tariffs in Q3 versus Q2?

Yes. So the tariff certainly has been a journey this year. If I go all the way back to the beginning of this year, we were at 170% tariffs at one point. Certainly, it was welcome relief on that came down to the 55% level. And now here we are, just a few weeks ago, announced or actually just went into effect on Monday, the 45% level. And so that's what's baked into our forecast for our guidance for the balance of this year, and that's a total company number. So that's inclusive of any other tariffs from other countries and Rhode and things like that. So that is an included in our outlook. . Now to go back to your question on diversification, that is something that we continue to make progress on. If you rewound the clock 5, 6 years ago, 99% of our product was coming out of China. Today, we're closer to 75%, and I certainly would expect that to be even less as we exited this year. And we really think about diversification 2 ways, and I think you touched on them. One is supply chain diversification, which is finding like-minded suppliers in other areas outside of China to work with, which we've made progress on, and also working with our Chinese suppliers on setting up operations outside of China as well, another tactic that we've taken in terms of supply chain diversification. And then the other side of that is business diversification. As more of our business is conducted outside of the U.S., that also is more profitable for us. We avoid the tariff, and that's a good thing. So those are really the two things outside of pricing, which we talked a lot about the two ways that we're trying to offset the impact of tariffs this year.

And the only other thing I would add to that is if you look at Rhode and Naturium, which are growing at a very fast clip, Naturium's produced 100% of the U.S. componentry comes from China, but the actual feeling is in the U.S. Rhode, similarly, while they may have some componentry coming from China, their manufacturing is in Italy and South Korea primarily. So as those businesses continue to grow, that will also bring down the percentage that's done in China beyond our own diversification efforts of working with our Chinese suppliers to set up operations in other countries.

Yes, that's a good point. I was aware of that. So that's helpful. And then lastly, maybe just quick on tariffs. I don't know, but depending on what the Supreme Court decides if we see lower rates or things move lower, how should we think about that flowing through the P&L? How quickly potentially could we see, that's the first question. And could we also see price rollbacks would you consider that? Or do you think your price gaps are still at healthy levels?

Well, like Tarang said, on the pricing front, the elasticities that we're seeing are very reasonable, given a 15% price increase and seeing low single-digit declines in units, I do not think that we'd be looking at a price rollback. We have found that -- we have pretty solid pricing power. We still have good gaps versus competition as we go through to Tarang's point, this category has grown through pricing, and so certainly expect our competitors to take pricing at some point. We've really not seen a window where there's an opportunity to take price where we didn't see folks move on price. And so don't expect to roll back pricing. It should a windfall come from the Supreme Court decision. And then we'll have to see from a P&L standpoint. I don't know the timing of when that's going to happen and how we might flow that through, if we take it back through inventory or if we just immediately flow it through EBITDA. So I think that's something we'll look into should we ever see a refund of those tariffs.

I think we're running close on time. So maybe I want to finish on just capital allocation. How should we think about your priorities in the near term? I mean do you think there are parts of your portfolio that can benefit from M&A? And then as you think about future M&A targets, what do you look for in a target? And should we assume that you're continuing to pursue potential M&A?

Yes. go ahead, Tarang.

Yes. I'd say, look, our clear priority is investing in our brands and our business. And particularly the recency of the Rhode acquisition, I would say we're really focused on the growth portfolio we currently have. And then in terms of your question, what do we look for in M&A? I would say we're looking for disruptive brands that fit our vision that have a strong profile both in terms of top line growth as well as margin profile and that complement the existing portfolio. And so over time, we've looked at a lot of things. We've been quite choiceful in terms of what we got, and we had 2 terrific acquisitions in Naturium in Rhode. And so I'd say that's our near-term focus as we go forward. The good news is we have a strong balance sheet. So even after the acquisition of Rhode, our net debt-to-EBITDA ratio is still under 2 turns. So we have capacity, but I'd say the focus right now is our current portfolio.

Okay. Well -- maybe what I want to do before I finish is go back to maybe the first question and thinking about the stock reaction, what do you think train and Mandy is being missed right now and you want to stress what do you think is being underestimated with your business or story?

I think, look, there's obviously a lot of noise. We did not have guidance out there. Consensus got away from us. So you have the shock there, you have the added complexity of us stopping shipping and maybe we should message better the pipeline that we had in the back half. And so I get it, people got confused, they got panicked. But I think the thing that's being missed is the consistency of category-leading growth. 27 quarters of net sales averaging over 20%, 27 quarters of market share gains, never seen that done in our space before and still tremendous white space ahead of us. in so short-term focus they totally missed the whole significance of share growth and sustained share growth over time. They totally missed how much of the world is still open to us and the success we have as we enter in with different retailers. And they're totally missing the strength of the dollar per linear foot of productivity in the U.S. and us continuing to get rewarded by our lead retailers in terms of what we're doing. And then they absolutely miss the strength from a consumer standpoint of our brands. It's almost like they've taken for granted. There's no other brand that's #1 amongst Gen Z, Gen Alpha, millennials, and even picking up Gen X as we're going through and how much still white space we have, both from awareness standpoint, we had a stat on the call, which is pretty -- on the one hand, pretty special, where the e.l.f. brand is purchased by 1 of every 3 females in the U.S., which means 2 out of every 3 don't purchase it. So we still have a tremendous amount of runway and then the underlying strength from across our brands when we look at the core brand equity measures, overall strength is, I think all that is being missed right now for the short term. And probably the biggest is just how much how much wind we have ahead of us in terms of growth and how bullish we are with the prospect across our portfolio.

All right. Well, that's a good way to end things, and I really appreciate your time, Tarang and Mandy. Thanks for joining, and thanks, everyone, for listening in today.