W3ll People, Inc. (ELF) Earnings Call Transcript & Summary

Greetings. Welcome to the e.l.f. Beauty, Inc. acquisition of W3LL PEOPLE conference call. [Operator Instructions] Please note, this conference is being recorded. I will now turn the conference over to your host, Willa Mcmanmon, Vice President of Investor Relations and Corporate Communications. Ms. Mcmanmon, you may begin.

Good afternoon, everyone. Thank you for joining us today to discuss e.l.f. Beauty's acquisition of W3LL PEOPLE. As a reminder, this call contains forward-looking statements that are based on management's assumptions, expectations, estimates and projections. These statements, including those relating to e.l.f.'s ability to achieve the anticipated benefits of the W3LL PEOPLE acquisition, e.l.f.'s ability to successfully integrate W3LL PEOPLE's operations and the anticipated financial impact of this transaction are subject to known and unknown risks and uncertainties and therefore, actual results may differ materially. Important factors that may cause actual results to differ from those expressed or implied by such forward-looking statements are detailed in today's press release and the company's SEC filings. With me from management today are Tarang Amin, Chairman and Chief Executive Officer; and Mandy Fields, Senior Vice President and Chief Financial Officer. Tarang will begin the call.

Thank you, Willa, and good afternoon, everyone. We're pleased to announce our first strategic extension, the acquisition of W3LL PEOPLE, a company that has over a decade of expertise and credibility in clean beauty that works. Clean beauty is a strategically important segment given consumer sentiment and strong growth rates. According to market research firm, Mintel, clean beauty is a multibillion-dollar market globally and one of the fastest-growing segments in beauty. Clean beauty started with natural and plant-derived ingredients with a strong sense of responsibility for what's in each product. Consumers are increasingly knowledgeable about the ingredients that are in their products and are using this lens to inform purchase decisions. We've been observing this consumer trend for some time. In fact, over the past 6 years at e.l.f., we've reformulated our products to move away from parabens, fillets and other ingredients consumers do not want to see in their cosmetics and skin care. The acquisition of W3LL PEOPLE dramatically advances our capabilities in clean beauty and gives us a brand that is both the real authority in the segment and has major white space. W3LL PEOPLE is a pioneer in clean beauty. It was launched in 2008 by 3 friends who originally met at the University of Texas. James Walker has over 20 years as a marketing strategist and developed the original W3LL PEOPLE concept. Shirley Pinkson has over 20 years of artistry and product development experience at top beauty brands, including MAC and NARS. Dr. Reneé Snyder is a board-certified dermatologist and associate professor at the Dell Medical School, with extensive scientific knowledge on skin health and ingredients. They each bring something different to help develop high-quality clean cosmetics that work. W3LL PEOPLE's 3 founders will be joining e.l.f. as part of the acquisition. The company is cruelty-free and its plant-based product line, which contains no fillers, propylene glycol, petrochemicals or petroleum byproducts includes 40 EWG VERIFIED products. EWG has rigorous verification standards in the clean beauty space, focused on ensuring non-toxicity and transparency of ingredients. W3LL PEOPLE started with its own boutique in Austin, Texas and has an emerging presence at leading national retailers. They are a major part of Target's clean beauty initiative shelved with other clean beauty brands, Burt's Bees and Pacifica. W3LL PEOPLE also has strong presence at Whole Foods and through natural specialty retailers, such as Credo Beauty and The Detox Market. Their online business includes Amazon.com, ulta.com and W3LLPEOPLE.com. We believe we can leverage our digital routes and customer relationships to further expand W3LLPEOPLE's footprint. What differentiates W3LL PEOPLE from many other clean beauty brands is their product performance and accessibility, both of which tie well to the e.l.f. mission of making the best of beauty accessible to every eye, lip and face. We love the exceptional quality and performance of the W3LL PEOPLE products. The product line has 81 SKUs across eyes, lips and face. One of its hero products, the Expressionist Mascara Pro, has a finish that is comparable to the top prestige mascaras without using harmful chemicals. It garners high reviews from consumers, including nearly 22,000 reviews on Birchbox alone. A recent article on elle.com calls W3LL PEOPLE, 1 of the 10 natural and organic makeup brands you need to know and says about its Optimist Lipstick, "It doesn't get any better than this plant-based lipstick, which drives down semimatte and looks universally flattering on all skin tones." We look forward to leveraging our marketing capabilities to drive further awareness around these amazing products and the overall W3LL PEOPLE brand. Not only does W3LL PEOPLE deliver clean beauty that works, but it does so at more accessible price points than many other clean beauty brands. The average unit retails for W3LL PEOPLE are around $21, much less than other brands in the space. The combination of real authority in clean beauty, product performance and accessibility makes W3LL PEOPLE attractive to e.l.f. We've been transparent about our desire to pursue strategic extensions that can leverage our strengths while bringing new capabilities to e.l.f., and we've been disciplined in this process. We believe that W3LL PEOPLE's 12 years of clean beauty experience and high-quality product line, in combination with e.l.f.'s multiple strengths from operations to marketing, will be attractive to our retail partners, including Target, our longest-standing customer. We also see potential for the brand internationally as we expand our own presence. In summary, we're excited to enter the clean beauty space with a terrific brand that has a great deal of potential. We also look forward to what we can learn from W3LL PEOPLE to further strengthen the e.l.f. brand. With that, I'll turn the call to Mandy to discuss financial details.

Thank you, Tarang. We purchased W3LL PEOPLE for $27 million in cash, leveraging our available cash balance. Recall, at the end of Q3, we had approximately $75 million in cash on the balance sheet. W3LL PEOPLE is a great example of what we're looking for in strategic extensions with its strong revenue growth, room for expansion and its unique set of products and capabilities. We expect e.l.f. to benefit from the depth of expertise W3LL PEOPLE has in clean beauty, and in turn, W3LL PEOPLE to benefit from the chassis that we have developed over the past 16 years in operations, marketing and distribution. We believe there are a number of synergies to be realized on both the cost and distribution fronts, which we will discuss in more detail as we move forward with the integration. We expect W3LL PEOPLE to contribute approximately $7 million in net sales and $0.01 to adjusted earnings per share on a fully diluted basis in fiscal 2021. At a 3.8x forward sales multiple, we think the transaction economics are quite attractive relative to other recent deals in our space. I'm especially encouraged by the potential to expand store count, increase awareness and drive productivity for the W3LL PEOPLE brand. With that, operator, you may open the call to questions.

[Operator Instructions] Our first question is from Bill Chappell, SunTrust.

Tarang, just kind of looking at articles online, one of the things that -- I mean, obviously, the price points are significantly higher than e.l.f. But also, I think they said their target audience is a little bit older, kind of an average of more like 35-year-old versus kind of your 25-year-old. Is that part of the plan? Or would you like to migrate the product down, more kind of color of where the product is going? Or if that was part of the plan to kind of age up a little bit?

Well, Bill, one of the things we really like is that they are 2 distinct brands. So the user base right now on W3LL PEOPLE is different than the user base on e.l.f. So it'd be incremental to us as a company. As you said, with average unit retails around $21, it's at a significant premium relative to e.l.f., which is closer to $4.50, but quite accessible when you compare it to some clean beauty brands that can sell for as much as $100 an item. So we like the fact that it's more accessible than those brands, a premium to e.l.f., a different user base. And then what I would tell you is we plan to use the capabilities we have as a company from both a marketing and operations and distribution standpoint to help expand W3LL PEOPLE and in turn able to learn from them things that we can do on e.l.f. So I think both these brands complement each other well in a very distinct, different space. It's something that we can also apply our strengths to.

And in terms of the revenue base. I think I read that the company, W3LL PEOPLE, has been around for 10, 12 years, but it's got about an $8 million, $9 million revenue base. Has there been some recent breakthrough because that seems fairly small for the distribution they have that -- where they've gotten into Target or into Ulta recently and that growth rates kind of accelerated recently?

That's right, Bill. They started with a boutique in Austin, Texas. So the first few years of their life, it really was that one boutique. It's just been that past few years that they started, particularly with Target being a major part of their clean beauty initiative. And so they're in about 1/3 of Target doors, still quite a bit of room to grow within Target as Target continues to expand, over time, their own clean beauty initiative. The other key customers they have, they've been in Whole Foods for a number of years, but again, only a subset of the entire chain. And then, finally, on Ulta Beauty, they're only on ulta.com and only recently got on ulta.com. So I'd say the distribution path ahead is one of the things we really liked where there's quite a bit of white space, even in their large customer, Target, where we have great relationships.

Our next question is from Ashley Helgans, Jefferies.

What made this the right time to make the acquisition? And then also, where do you think you can grow, like where -- what strength do you have that you can grow for W3LL Beauty?

So the right -- this made the right time for the acquisition based on our approach of looking at strategic extensions for quite some time and being disciplined. So we wanted to make sure what we acquired was the right fit, both strategically as well as its growth trajectory. In terms of our capabilities, we have a number of capabilities that can be a benefit to W3LL PEOPLE. I just talked on the distribution front, the relationships we have with our customers, particularly Target, really give us the ability to help further expand the footprint of W3LL PEOPLE. And it's not just from a sales standpoint, it's also our capabilities in terms of how we penetrate the supply chains of our customers, for one example. I talked about our marketing capability and our ability to bring more consumers into the W3LL PEOPLE franchise. And then, finally, I'd say our overall operating platform that we have, whether it be in operations, looking at COGS opportunities, whether it be in terms of the infrastructure that we have, we see quite a bit of synergies. So it's a combination of growth that we see this bringing as well as the ability to drive some pretty significant synergies going forward. And then the last thing, I'll go back to the capabilities that W3LL PEOPLE bring us. I think, recently, one of the legacy beauty brands talked about working 18 months with EWG to get one SKU verified. Overnight, we just picked up 40 EWG VERIFIED items in clean beauty. And so what we can learn from the W3LL PEOPLE founders who are going to be joining the company, as well as their 12 years at in this space, I think, is one of those things that I'm also really looking forward to.

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

We were curious about your take on some of the main revenue synergies. And with respect to W3LL Beauty, how do you see the revenue evolution in terms of retail versus wholesale and direct-to-consumer? I would love your thoughts there. As well as, Mandy, the margin structure for W3LL Beauty over time, given the higher average unit retail, and there's likely some cost synergy opportunities, I would love your thoughts.

Yes. So Oliver, I would say, from a revenue standpoint, certainly, opportunity with this brand. As we mentioned, we expect it to be about $7 million in fiscal '21, and there's certainly a lot of white space. Tarang just spoke to the opportunity at Target, opportunities at Ulta and things of that nature to continue to expand that brand from a wholesale standpoint. They do have W3LLPEOPLE.com as their e-commerce site and certainly an opportunity to bring that onto our platform and improve that as well. And then I think from a margin standpoint, I think e.l.f. has shown a track record of being able to improve margins over time. So if you think about where e.l.f. started, at 42% gross margin up to now at 63% gross margin and just really leveraging our relationships that we have in China and then also our operations, certainly, there's an opportunity from a margin standpoint and one of the synergy areas that we've identified.

Okay. And also from a supply chain perspective, are they at -- how is their production and working capital and innovation pipeline versus yours? And what do you see as the major opportunity there, and what you can learn from them as well as vice versa?

Yes. Oliver, they complement our supply chain. They're currently manufactured in the U.S. in really small batches. We know their co-packers and have an ability there, particularly within clean beauty that we like and will be evaluating as part of our integration effort. In addition, from an innovation standpoint, I think they have a terrific track record, particularly on very high-quality clean beauty that they'll be bringing to us. We, in turn, have kind of the overall innovation engine and operational engine that we've created over the last 16 years that we believe can benefit both in terms of the pace of new products as well as overall COGS opportunities.

Okay. And lastly, you mentioned stores, Tarang. So what are your thoughts on their physical distribution footprint over time? You've had stores in the past, but you've moved away from that strategy within your e.l.f. brand. Would love your thoughts.

Yes. And I'd say, they only have one store right now. It's a boutique they've had from the beginning in Austin, Texas, which really serves as a proving ground for them. As they've begun to expand distribution, I would say, bigger priorities that they've been able to pursue have been both digitally as well as leading national retailers. So very similar to the e.l.f. strategy from a standpoint of Target, it's their biggest customer, Whole Foods is their second. On online, they have a good presence with Amazon.com, ulta.com and W3LLPEOPLE.com. So I'd say that would be the primary focus. Like everything we'll do in integration, we'll evaluate the overall distribution strategy and talk about that in the future.