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01/11 16:09
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Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
The earnings call reveals mixed signals: strong net sales growth due to the Rhode acquisition but a decline in organic sales and adjusted EBITDA. Tariff impacts and increased SG&A expenses weigh on margins. Despite optimistic guidance and strategic international expansion, unresolved pricing issues and unclear management responses raise concerns. The Q&A provided some reassurance about future growth, but the lack of clarity on core business deceleration tempers optimism. The neutral sentiment reflects these balanced positive and negative factors.
Net Sales $344 million in Q2, grew 14% year-over-year. The acquisition of Rhode contributed $52 million or approximately 17 percentage points to the results. Organic net sales, excluding Rhode, were down approximately 3% due to a temporary halt in shipments to certain retailers.
Adjusted EBITDA $66 million in Q2, down 4% year-over-year. The decline was attributed to increased SG&A expenses and investments in team and infrastructure.
Gross Margin 69% in Q2, down approximately 165 basis points year-over-year. The decline was largely driven by incremental tariff costs, partially offset by benefits from price increases and mix.
Adjusted Net Income $41 million or $0.68 per diluted share in Q2, compared to $45 million or $0.77 per diluted share a year ago. The decrease was due to higher SG&A expenses and tariff costs.
Cash Balance $194 million at the end of Q2, compared to $97 million a year ago. The increase reflects strong cash flow and liquidity management.
Acquisition of Rhode: e.l.f. Beauty acquired Rhode, a high-growth beauty brand founded by Hailey Bieber, contributing $52 million to Q2 net sales. Rhode is expected to generate $300 million in annualized net sales by March 2026, growing 40% year-over-year.
Product Innovation: e.l.f. launched the Mega Power Grip Primer, which sold out in 3 minutes on TikTok Shop. The Bright Icon Vitamin C + E + Ferulic Serum was highlighted for its value at $17 compared to a prestige item at $185.
Market Share Growth: e.l.f. achieved its 27th consecutive quarter of market share gains, growing its share by 140 basis points in Q2. It is the only brand among nearly 1,000 tracked by Nielsen to achieve this.
Global Expansion: e.l.f. is expanding into Rossmann in Poland, Sephora in the Gulf Cooperation Council countries, and DM in Germany in spring 2026. Rhode launched in Sephora North America and will expand to Sephora U.K.
Price Increase: A $1 global price increase was implemented on August 1, with 75% of the portfolio priced at $10 or less. Consumption trends remain strong despite the increase.
Tariff Management: e.l.f. adjusted to varying tariff rates, with the current rate at 45%. Each 10% tariff increment impacts costs by $17 million annually.
Strategic Acquisitions: The acquisition of Rhode and Naturium positions e.l.f. with four brands surpassing $100 million in annual retail sales, enhancing its long-term growth potential.
Marketing Investments: Marketing spend is targeted at 24%-26% of net sales for fiscal '26, with a focus on digital and global brand awareness.
Tariffs and Supply Chain Costs: The company faces significant risks from high tariffs on products imported from China, which constitute 75% of its global production. Tariff rates have been volatile, ranging from 170% to 45%, and every 10 percentage points of incremental tariffs result in a $17 million gross impact to cost of goods sold annually.
Organic Sales Decline: Excluding the acquisition of Rhode, organic net sales were down approximately 3% in Q2, driven by a temporary halt in shipments to retailers who delayed implementing price increases.
Dependence on U.S. Market: Approximately 80% of the company's net sales come from the U.S., indicating a heavy reliance on a single market. This poses risks if domestic market conditions deteriorate.
High Marketing and Digital Spend: The company plans to increase marketing and digital spend to 27%-29% of net sales in the second half of fiscal '26, which could pressure adjusted EBITDA margins.
International Expansion Challenges: While international sales account for only 20% of net sales, the company is in the early stages of global expansion, which may involve execution risks and higher costs.
Integration of Acquisitions: The company has recently acquired Rhode and Naturium, and the integration of these brands poses operational and strategic risks, including achieving projected sales and maintaining brand identity.
Fiscal 2026 Net Sales Growth: The company expects net sales growth of 18% to 20% year-over-year, building on the 28% growth achieved in fiscal 2025. Organic net sales, excluding the Rhode acquisition, are projected to grow approximately 3% to 4%.
Rhode Contribution to Sales: Rhode is expected to contribute approximately $200 million in net sales for fiscal 2026, with an annualized projection of $300 million in net sales for the 12 months ending March 31, 2026, representing a 40% year-over-year growth.
Second Half Fiscal 2026 Net Sales Growth: Guidance implies net sales growth of 24% to 27% year-over-year in the second half, with Rhode contributing 22 percentage points to this growth. Organic growth is expected to range between 2% to 5%.
Adjusted EBITDA for Fiscal 2026: The company projects adjusted EBITDA between $302 million and $306 million, reflecting a 2% to 3% year-over-year increase. Adjusted EBITDA margins are expected to be approximately 17% in the second half, compared to 22% in the first half.
Marketing and Digital Spend: Marketing and digital spend is targeted at 24% to 26% of net sales for the full year, with second-half spending expected to increase to 27% to 29% of net sales.
Gross Margin Improvements: Gross margin in the second half is expected to improve to approximately 71%, up 200 basis points sequentially from the first half, driven by price increases and favorable business mix from the Rhode acquisition.
International Expansion: The company plans to expand its international presence, including launching e.l.f. products with Rossmann in Poland, Sephora in six Gulf Cooperation Council countries, and DM in Germany by spring 2026.
Tariff Impact: The company assumes a 45% tariff rate for the remainder of fiscal 2026, with every 10 percentage points of incremental tariffs estimated to impact cost of goods sold by $17 million annually.
The selected topic was not discussed during the call.
The earnings call reveals mixed signals: strong net sales growth due to the Rhode acquisition but a decline in organic sales and adjusted EBITDA. Tariff impacts and increased SG&A expenses weigh on margins. Despite optimistic guidance and strategic international expansion, unresolved pricing issues and unclear management responses raise concerns. The Q&A provided some reassurance about future growth, but the lack of clarity on core business deceleration tempers optimism. The neutral sentiment reflects these balanced positive and negative factors.
The earnings call reveals strong financial performance, market share gains, and expansion plans. The acquisition of Rhode is expected to be accretive, with significant growth potential. Despite uncertainties around tariffs, the company's strategic initiatives, including price increases, supply chain diversification, and international expansion, are positive. The management's cautious optimism and focus on innovation, along with the robust digital sales growth, suggest a positive stock price reaction over the next two weeks.
The earnings call presents a mixed picture. Financial performance shows growth in net sales and EBITDA, but the lack of guidance due to tariff uncertainties and no share repurchase plan are concerns. The Rhode acquisition offers potential, but its integration and tariff impacts remain uncertain. The Q&A highlights management's confidence in certain areas, like Dollar General's performance, but also reveals avoidance of detailed guidance. Overall, the positive financials are counterbalanced by uncertainties, leading to a neutral sentiment.
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