Thank you for joining us today to discuss e.l.f. Beauty's Second Quarter Fiscal 2021 Results. I'm KC Katten, Vice President of Investor Relations. With me today are Tarang Amin, Chairman and Chief Executive Officer; and Mandy Fields, Senior Vice President and Chief Financial Officer. We encourage you to tune into our webcast presentation for the best viewing experience on the content we're presenting which you can access on our website at investor.elfcosmetics.com. Please note after the presentation, there's a separate dial-in for the Q&A session also noted in the press release. Since many of our remarks today contain forward-looking statements, please refer to our earnings release and reports filed with the SEC where you'll find factors that could cause actual results to differ materially from these forward-looking statements. In addition the company's presentation today includes information presented on a non-GAAP basis. We refer you to today's press release for a reconciliation of the differences between the non-GAAP presentation and the most directly comparable GAAP measure. With that, let me turn the webcast over to Tarang.

Thank you, KC, and good afternoon everyone. I hope that you're staying safe and well. Today, I will talk about the fundamental drivers behind our second quarter results, our growth opportunities, and the overall strategic framework for our company. I am so proud of our e.l.f. Beauty team for delivering strong results in the second quarter as we continue to navigate major category headwinds as a result of COVID-19. This is our seventh consecutive quarter of net sales growth with Q2 net sales of $72 million, up 7% versus a year ago. We expanded gross margin to 65%, up approximately 100 basis points versus last year and delivered adjusted EBITDA of $14 million, while increasing our investment in marketing and digital. We continue to grow share in the quarter with 5.5% of the color cosmetics market, up 100 basis points versus a year ago. We also took important next steps in our transformation to a multi-brand portfolio with the unveiling of Keys Soulcare, our groundbreaking new lifestyle beauty brand with Alicia Keys and the launch of our recharged W3ll PEOPLE plant-powered Clean Beauty brand. Before Mandy goes into more detail on our results, I want to share the key pillars underpinning our performance and talk about why I'm optimistic about the future of our brand portfolio. Our strategy is working. We came into this volatile period from a position of strength. Our superpowers that center on our ability to deliver 100% cruelty-free premium quality beauty products at accessible price points with universal appeal are more important than ever before. The focus work behind our five strategic imperatives has continued to drive our outperformance relative to the category trends. We believe the strength of our platform gives us the ability to drive even greater value through strategic extensions like the Keys Soulcare and W3ll PEOPLE brands. Let me provide a few highlights from the quarter. Our first strategic imperative is to drive brand demand. We are driving greater brand relevance and expanding our consumer reach. Our press impressions soared over 160% versus prior year. In August, e.l.f. was named one of Beauty's most powerful brands in 2020 by Womenswear Daily. We also increased our rank in Piper Sandler's 40th Semiannual Teen Survey from fourth favorite cosmetics brand amongst teens last year to second this year, reflecting strong appeal with Gen Z. e.l.f.'s social audience continues to grow double digits, reaching over 9 million followers to date across our digital ecosystem. We're expanding our existing footprint with deeper engagement on key platforms like TikTok, Instagram, YouTube, Snapchat, and Pinterest, while continuing to test and learn our new frontiers. TikTok continues to be a great way for us to galvanize Gen Z and build awareness among other growing cohorts on the platform. The record-breaking viral success of our eyeslipsface hashtag challenge coupled with our elfmagicact hashtag challenge heroing our $8 Poreless Putty Primer collectively garnered nearly 10 billion views and 6 million user-generated videos. TikTok is taking note of how e.l.f. is changing the game. And we're continuing to make history with the release of Eyes. Lips. Famous, the first ever TikTok Reality Show. Alongside other innovative activations, the engagement in our elfyeah channel continues to outpace top beauty brands and our products continue to go viral organically on the platform resulting in sales surges. Looking across our digital ecosystem, we recently hosted our fifth annual and first ever fully virtual Beautyscape. This event helps foster ongoing relationships with the influencer community and empowers Beauty's rising stars with the opportunity to build a cosmetics and skin care collection that will be sold through a national retailer. This year's event called Beautyscape The Remix infuses the power of makeup and music featuring three musical artists including Grammy nominated global superstar Tove Lo. Even in the new virtual format, we saw participation grow over 90% year-over-year. I couldn't talk about our big brand moments without recognizing Kory Marchisotto, Chief Marketing Officer of e.l.f. Beauty and President of Keys Soulcare who is honored as one of Adweek's 2020 brand geniuses recognizing the principal leaders behind the boldest and most imaginative marketing efforts. Kory is one of 10 brand geniuses putting e.l.f. in admirable company with leaders from Nike, Walmart, Apple, Verizon, P&G, Pepsico, and Disney Plus. Congrats Kory and our entire marketing team. Even with the success of our brand building activities, we still see a significant opportunity to bring in new consumers. In fact, our latest attitude and usage study shows that there is almost a 30 percentage point gap in our unedited consumer awareness as compared to some of the legacy color cosmetics brands. We're the fastest-growing among the top five color cosmetics brands in the U.S. and we see a lot of runway ahead. This quarter, we took an important next step in our transformation to a multi-brand portfolio with the unveiling of Keys Soulcare, our groundbreaking new lifestyle beauty brand with Alicia Keys. This is not another celebrity beauty line. We see Keys Soulcare as a brand with long-term potential. Alicia is truly an inspiration to so many and we believe her passion for bringing light into the world will resonate with a broad set of consumers across the globe. The brand has already captured hearts and minds well ahead of our scheduled first product launch on December 3rd, with over 6.5 billion press impressions to date. The Keys Soulcare community is growing nicely with Instagram engagement metrics trending well above platform averages. It's clear now more than ever the world is craving a brand with soul. Last month, we also launched the recharge of W3ll PEOPLE. Our plant-powered Clean Beauty brand utilizing learnings from last year's e.l.f. brand recharge. At the core of this recharge is our brand vision because all people can be W3ll PEOPLE. As we strive to make clean beauty accessible. W3llpeople.com now reflects the brand's new vision of clean beauty with much more vibrant colors and messaging along with updated content that really brings W3ll PEOPLE's plant-powered beauty to life. With the 360-degree marketing plan in place, we aim to broaden consumer awareness for this brand. Our second strategic imperative is a major step-up in digital. We continue to execute a digitally led strategy that is benefiting both elfcosmetics.com as well as our retail partner sites. Q2 digital consumption grew nearly triple digits versus a year ago even as major brick-and-mortar locations started to reopen around the globe. Elfcosmetics.com is the number one mass cosmetics e-commerce site powering our digital ecosystem. We also saw strength in our retailer.com and on Amazon in particular, as we launched our new beauty store. Our digital channels expanded to 13% of our total business this quarter, up from 7% a year ago. The number of new consumers acquired in the quarter on elfcosmetics.com was up nearly 60% year-over-year and we're encouraged by the retention and repeat purchase rates we're seeing. While the demographics of these new consumers look similar to our existing consumers, we're starting to see some differences. For example, our new consumers over-index on skin care and a greater percentage of these consumers are signing up for our Beauty Squad loyalty program. Beauty Squad now has 2.1 million members, up almost 40% year-over-year. Our loyalty members purchase more frequently and have higher order values than our non-loyalty members and collectively drive almost 70% of our sales on elfcosmetics.com. We're continuing to test and iterate and believe Beauty Squad has even greater potential to drive our business going forward. Looking at Keys Soulcare, our launch of keyssoulcare.com is a start of an exciting journey that aims to transform the way the world engages with beauty. Keys Soulcare shares a solar beauty with a focus on content, conversation, and community. To this end, we're building a digital community well before consumers see the product launch. On September 29, keyssoulcare.com went live with rich editorial and a weekly email newsletter. The site features original and co-created content including inspirational stories from Alicia's community of lightworkers, people who collectively use their voices and platforms to spread light and positivity. It's clear that the Keys Soulcare community is active, vocal, and passionate about Alicia and the brand, and we're pleased with the strong engagement and open rates we're seeing with our weekly newsletters. Our third strategic imperative centers on innovation. Across our brand portfolio, we pride ourselves on delivering 100% cruelty-free premium quality beauty products at accessible price points with universal appeal. With our e.l.f. brand, we saw continued success this quarter in our core segments: brushes, primers, concealers, brows, and sponges, which make up approximately half our tracked channel sales. We have the number one or number two position in all five segments and continue to drive market share gains in each. Our Camo Concealer and Poreless Putty Primer franchises, in particular, continue to be sources of strength supporting ongoing share gains in their respective categories. Looking beyond our core offerings, we're humbled at the recognition our innovation efforts are receiving. In the highly coveted annual Allure Best of Beauty Awards, e.l.f.'s glitter eyeshadow was highlighted as one of the best beauty steals, and W3ll People's expression is volumizing mascara was highlighted as one of the best clean beauty products. The Influencer's 6th Annual Reviewers Choice Awards determined by the products with the most buzz based on millions of influence reviews, e.l.f.'s Poreless Putty Primer and Lock On Liner Brow Cream were both recognized amongst the best in makeup. Skin care remains a major focus in our innovation pipeline and we're encouraged by the results that we're seeing. Across our business, our skin care consumption continues to outpace our color cosmetics trends with particularly strong skin care results on elfcosmetics.com. We're continuing to see growth behind e.l.f.'s best-selling wholly hydrated franchise both in stores and online, and we're also seeing strong results behind our Cannabis Ativa, full spectrum CBD and Supers collections. We see a lot of runway in this category. For perspective, year-to-date skin care represents just 8% of our tracked channel consumption but drives nearly 25% of our business on elfcosmetics.com. We have additional e.l.f. skin care launches slated for the balance of this fiscal year that we expect to propel our momentum in the category. We expect our innovation efforts will be shining even brighter in the months to come with the launch of Keys Soulcare. Our first three products are scheduled to launch online on December 3 and will include a signature sage and oat milk candle and two yet-to-be-revealed skincare products. We're planning on a global skin care collection launch in early 2021 on keyssoulcare.com and with our retail partners both online and in stores. We have a multi-category, multi-year pipeline of innovation to drive the brand beyond the initial launch. Our fourth strategic imperative is driving productivity with our national retail partners. We remain focused on our relative performance to key competition. Of the top five color cosmetics brands in the U.S., e.l.f. was the only one to post growth, with our tracked channel color cosmetic sales up 3% year-over-year as compared to declines of almost 20% or more for each of the remaining brands. We were also the only brand to grow share in the quarter with 5.5% of the market, up 100 basis points year-over-year. Project Unicorn, our ongoing initiative to drive productivity with our national retail partners by improving assortment, presentation, and navigation at shelf continues to impress retailers. During the quarter, our visual merchandising team developed stunning in-store signage and graphics with some of our largest customers, elevating our skin care collections and highlighting our best-selling products like Poreless Putty Primer, Camo Concealer, and brow pencils. We're also finding innovative ways to translate our success on TikTok to stores. In September, we had an incredibly successful display program at Superdrug Stores in the U.K. dedicated to what's trending on TikTok. It featured our most viral and trending products from the platform and sold out quickly. Given the strength of our productivity, innovation, and consumer engagement, Walmart and Ulta Beauty expanded shelf space for e.l.f. towards the end of the quarter in a subset of their doors. For context, targeted our most developed and longest-standing national retailer and our store footprint as of FY 2020 was approximately 11 feet on average. Our footprint in Walmart and Ulta stores is about half of that. While our fall shelf space expansion helped narrow that gap somewhat, we see plenty of runway ahead. In fact, we're pleased to report that Ulta Beauty plans to expand space even further for the e.l.f. brand in spring 2021. Internationally, where we continue to have a lot of white space, we are also excited to launch in Spring 2021 at Shoppers Drug Mart, a leading beauty retailer in Canada. In early 2021, Keys Soulcare will light up in a much bigger way with the planned global launch of our full skin care collection on keyssoulcare.com and with our retail partners both online and in store. For the U.S. specifically, our exclusive national retail partner is Ulta Beauty. We look forward to sharing much more on our plans with Ulta Beauty closer to launch, but what I can say is they share our enthusiasm for the long-term potential of the brand. In the coming months, we plan to unveil our international distribution partners as well. We're also excited that six of W3ll People's best-selling SKUs are now featured in all Ulta Beauty stores as part of Ulta's conscious beauty program, an initiative to provide consumers greater choices and transparency in clean beauty. While W3ll People was already sold on ulta.com, this marks the brand's entry in Ulta stores. W3ll People continues to raise the standard for high-performance plant-powered clean beauty. Our fifth strategic imperative is delivering cost savings to help fuel brand investments. Our operations team continues to generate cost savings via lean manufacturing techniques that have contributed to our strong gross margin rates. As just one example, our team's collective cost-saving efforts have driven a 15% reduction in cost per unit for our best-selling Camo Concealer franchise since its initial product launch. With the integration of W3ll People into our supply chain now complete, we're also encouraged by the significant COGS savings we're seeing. These savings, in turn, allow us to invest in the W3LL PEOPLE brand recharge and sharpen our retail pricing for select products, in line with the brand's vision to make clean beauty accessible. On the operations front, we did have a systems migration issue at our main distribution center during the latter part of the quarter, which caused a backlog in customer orders and higher out-of-stocks with some of our key customers. That said, we are confident in our ability to meet customer demand and are already starting to ship at higher rates. The progress on our five strategic imperatives has been terrific and we believe we have further opportunity with each. Before I turn the call over to Mandy, let me provide a bit more perspective on the overall strategic framework of the company and our brands. Our company was founded 16 years ago with a mission to make the best of beauty accessible to every eye, lip, and face. Underpinned by the foundational work behind our five strategic imperatives, the strength of our platform allows us to expand our portfolio with strategic extensions that support our purpose and values. Our shared value system and deep commitment to diversity and inclusion are what connect us and fuel our actions. As we evolve from a single brand company into a diversified multi-brand portfolio, we strongly believe there's opportunity for significant value creation leveraging the investments we've made in our world-class team and capabilities. Each of our brands is positioned to touch diverse consumer cohorts at different price points. e.l.f. Cosmetics is trend-driven beauty of extraordinary value in the mass segment, with average unit retails of approximately $5. W3LL PEOPLE is plant-powered clean beauty in the masstige segment with average unit retails of approximately $20. Keys Soulcare’s lifestyle beauty and entry-level prestige, with initial unit retails between $20 and $40. All three brands are accessible relative to their competitive set. Importantly, all three brands are complementary and incremental to the e.l.f. Beauty platform. Looking ahead, we believe the color cosmetics category will return to growth, given the major role cosmetics play in consumer self-expression. We remain focused on continuing to grow share regardless of category trends. We were strong entering the pandemic. And with our digital strength, core value proposition, and ability to adapt at e.l.f.'s speed have continued to fuel our performance in this uncertain economy. With the strength of our more diversified brand portfolio, we believe we are positioned for an even brighter future. I'll now turn the call over to Mandy.

Thank you, Tarang, and thank you all for joining us this afternoon. Today, I'll cover our Q2 financial results and fiscal 2021 guidance. We are quite pleased with our Q2 results. We delivered net sales of $72 million, up 7% from a year ago. This growth was mainly fueled by ongoing strength in e-commerce and international, as well as growth in tracked channels. We also saw sequential improvement in our performance at Ulta relative to Q1, as stores reopened. From a cadence standpoint, tracked channel sales growth moderated through the quarter, as expected, as stimulus dollars dried up and we cycled the price increase implemented last year. Gross margin of 65% was up approximately 100 basis points compared to the prior year. Similar to the last several quarters, we saw gross margin benefits from a margin accretive product mix and cost savings, a favorable FX impact, and a mix shift to elfcosmetics.com. These benefits were partially offset by the impact of tariffs and certain costs associated with space expansion. Additionally, our year-over-year gross margin improvement moderated relative to last quarter, as expected with cycling the price increases we took last year. On an adjusted basis, SG&A as a percentage of sales was 51% or approximately flat compared to last year at 51%. The marketing and digital investment for the quarter was approximately 15% of net sales versus 14% a year ago. For the first half, marketing and digital spend as a percentage of sales was 14%, in line with our expectations. Q2 adjusted EBITDA was $14 million, down 4% to last year and adjusted EBITDA margin was approximately 20% of net sales. Adjusted net income was $8 million or $0.16 per diluted share compared to $8 million or $0.15 per diluted share a year ago. Our liquidity remains strong with the combination of our cash balance and access to our revolving credit facility sitting at over $90 million. For the six months ended September 30, we generated $3 million in cash flow from operations and reduced our capital expenditures by $3 million versus the prior year. We ended the quarter with $41 million in cash on hand compared to a cash balance of $59 million a year ago. This was driven by increased investment in inventory to support space expansion and new distribution for spring 2021. We expect our cash priorities for the balance of this year to focus on investing behind our five strategic imperatives supporting the launch of Keys Soulcare and our W3ll PEOPLE brand recharge. As we mentioned last quarter, we expect $5 million to $7 million in inventory and CapEx investments behind Keys Soulcare and W3ll PEOPLE in fiscal 2021. In addition to certain costs that we are treating as one-time expenses related to integration and brand development. Now let's turn to our outlook for the remainder of fiscal 2021. There are still many uncertainties around the duration and impact of COVID-19, as well as the general economic environment. However, we believe our visibility is improving. As a result of our strong performance in the first half of the year and confidence in our ability to continue to execute our long-term strategy, we are now providing guidance for fiscal 2021. For the full year fiscal 2021, we expect net sales growth of approximately 5% to 7% versus fiscal 2020. We expect adjusted EBITDA between $57 million and $60 million, adjusted net income between $31 million and $33 million, and adjusted EPS of $0.59 to $0.63 per share on a fully diluted basis. It's important to note that our guidance assumes no significant disruption to our consumers, customers, or supply chain for the remainder of fiscal 2021. Let me provide you with a little more color on our planning assumptions for the remainder of the year. Let's start with the top line. We expect consumer behavior to remain impacted by COVID-19 through the rest of our fiscal year, which will likely continue to pressure both in-store shopping levels and cosmetics category trends. Specific to tracked channels, we anticipate Nielsen trends to inflect negatively in the coming weeks as we resolve the out-of-stocks Tarang mentioned related to the system migration at our main distribution center. That said, we are confident in our ability to meet customer demand and are already starting to ship at higher rates. Importantly, we expect to deliver top line growth in the second half as reflected in our guidance. Let me step you through a few of the building blocks. First, we remain focused on our relative performance to the mass color cosmetics category and are optimistic around our ability to continue to grow share. Second, we expect our second half trends will benefit from the recent space expansion in Walmart and Ulta Beauty as well as pipeline related to new distribution in spring 2021 with Shoppers Drug Mart in Canada and Ulta Beauty. Third, we believe our digitally led strategy will result in strong e-commerce trends throughout the year, although likely moderating from the levels we saw in the first half. Lastly, we anticipate a modest net sales contribution from the launch of Keys Soulcare in fiscal 2021. These top line drivers will be partially offset by tougher year-over-year comparisons in Q4 and as we anniversary the strong 16% net sales growth we saw last year as well as less incremental merchandising on a year-over-year basis and target starting in Q4. Turning now to adjusted EBITDA. We expect several of our underlying gross margin drivers to remain intact, including margin accretive product mix and a favorable mix shift to elfcosmetics.com. We continue to focus on reducing expenses where we can while still investing in our long-term growth. That said, we do have two specific factors that will pressure our adjusted EBITDA margins in the second half relative to the first half. First on FX. We purchased almost all of our products in China in RMB and favorable FX rates have driven a gross margin benefit of approximately 100 to 200 basis points on average over the last several quarters. Based on current exchange rates, we expect that FX benefit to moderate through the year and will likely inflect to a gross margin headwind starting in Q4. Second on Keys Soulcare. As I mentioned, Keys Soulcare is expected to contribute a modest amount to our top line this fiscal year. We expect gross margin for the brand to be relatively neutral to our overall gross margin. In addition, we expect to have an incremental $5 million to $6 million in marketing spend in the second half, which has an outsized impact as we invest ahead of the brand launch. This will take our marketing spend as a percentage of sales up to approximately 14% to 16% on a full year basis. From a cadence standpoint, we expect top line growth to be more weighted to Q3 than Q4, largely due to the timing of our planned distribution expansion, as well as much tougher compares as we anniversary the 16% net sales growth we saw in Q4 last year. We expect adjusted EBITDA margins will be more pressured in Q4 than Q3, given the dynamics we just discussed on the top line, anticipated FX headwinds, and incremental Keys Soulcare marketing spend that is largely concentrated to Q4. Let me now take a step back to talk about our long-term economic model and why we're optimistic about the future. With fiscal 2021 as the base, as we look out over the next three years, we believe we can achieve compounded annual top line growth in the mid- to high single digits from the combination of e.l.f. brand growth and shelf space gains along with contributions from our strategic extensions by Keys Soulcare and W3ll PEOPLE brands. We anticipate adjusted EBITDA leverage will be achieved through a mix of top line growth and leverage on COGS and or SG&A over that three-year horizon. Our brand portfolio reflects our deep commitment to inclusive, accessible, and cruelty-free beauty. We believe that our digital strength, core value proposition, and ability to adapt at e.l.f. speed will continue to fuel our performance. Importantly, we believe Keys Soulcare and W3ll PEOPLE are both distinctive and complementary to our portfolio and allow us to leverage the cost structure we have in place as we scale them up. While there are still many uncertainties in the operating environment in the short term, I am confident in our ability to deliver. Our performance over the last seven quarters both on an absolute basis and relative to the category gives us confidence in our ability to continue to execute our long-term strategy. With that, operator, you may open the call to questions. For those who’d like to ask a question, please do so through a separate dial-in line noted on this screen. Those not asking questions can hear the question-and-answer session through the webcast. We’ll pause a few minutes for those seeking to ask questions to queue up on the dial-in line.

We will now start the question-and-answer session. Our first question comes from Erinn Murphy with Piper Sandler. Please go ahead.

Great. Thanks and good afternoon. My question is around inventory. The balance was up kind of 26% I believe at the end of the quarter. Could you just maybe walk through some of the components around, how much were shelf space gains, maybe the operational hiccups that you saw in the quarter? And then maybe the build for Keys Soulcare? And then where do you expect inventory to be by the end of the third quarter?

Hi, Erinn. So let me first say that we feel great about our inventory levels. As you look at the cash flow statement, March was particularly low as we were managing through the initial onset of COVID. And so as you look at our inventory today, we've talked about pipeline that is related to space gains. We also talked about the system migration issue that shifted inventory from Q2 into Q3. And so – and also you mentioned space gains picked up within the quarter. All of those things are playing a role in our current inventory balance. And we feel like we're in a much healthier place right now.

Okay. And then, if I could ask a separate question on Keys Soulcare. Could you just maybe walk through the broader launch plan as we think about 2021? Just given the price point positioning, is there an opportunity to work with new retailers that maybe you don't work with currently with both W3ll PEOPLE and e.l.f. and just help us think about the cadence as we look to next year? Thank you.

Hi, Erinn. We're really excited about our launch on Keys Soulcare. So as you know, the site is already up and running keyssoulcare.com. We led with content, community, and conversation, and the response has been terrific so far in terms of how people are responding to this new beauty lifestyle brand. In December, December 3rd, we started our commerce with our first three items: Sage, Oat Milk Candle, as well as two other skin care products that will go on sale on keyssoulcare.com, as well as Ulta Beauty, in ulta.com. In early 2021, we'll expand that range to a full line of skin care products, so both online on keyssoulcare.com, as well as ulta.com, and then later in Ulta Beauty stores. So we're quite excited about the full range that will be going out the door by the end of this fiscal year and have plans beyond that to enter other categories and new products as our normal cadences.

Great.

As well as – yeah, thank you. And I should just add our initial – the only customer that we've disclosed so far is Ulta Beauty, where we'll be exclusively in the U.S. In the coming months, we will also discuss some of our global retail partners as this will be a global brand in 2021.

Our next question will come from Linda Bolton-Weiser with D.A. Davidson. Please go ahead.

Hi. I guess, I can do the math on this, but if you were to exclude the incremental spending on the Keys Soulcare launch, I think you said it was $5 million to $6 million. Would EBITDA be up year-over-year in the second half? Thanks.

Hi, Linda, yes. So as we look at the full year, the $5 million to $6 million we're layering on for Keys Soulcare, if you take that out, we would be $5 million to $6 million higher on the year from an EBITDA standpoint. So that would put you ahead of last year if you look at the guidance range we provided.

And then can I just fit in longer term, you're very committed I think to growing your EBITDA faster than your revenue growth, as a long-term objective. Is that the case, even in years where you may have future launches? Or is there an exception in a year when you have a launch?

The long-term economic model we've outlined is a three-year model and it's based on a three-year compound annual growth rate. Over this three-year time frame, we do expect adjusted EBITDA to grow faster than net sales, so you should focus on the starting and ending points for your measurement.

Our next question comes from Dara Mohsenian with Morgan Stanley. Please go ahead.

Hi, guys. So a couple of questions around the Soulcare business. Tarang, you sound excited about it. Can you give us some type of thought process for the ultimate size of where that business could be longer term, maybe what the best brand comps are in the marketplace just as we think about the revenue size of the brand or some type of order of magnitude? Or how you think about it relative to your existing business? And then incrementality of that brand relative to your existing business? And then just second on the spend you mentioned in the back half of the year. As we look at the spend for that brand going forward, is it more incremental to what you typically be spending at the company? Can it be handled more within the existing budget in terms of reallocation? How do you think about that longer term ahead of obviously some upfront spending in the back half of the year this year? Thanks.

We are extremely enthusiastic about Keys Soulcare as we are creating something truly innovative within its category. It is a lifestyle beauty brand focused on nourishing the soul, beginning with content and expanding into products. We are developing this for the long term, and while we anticipate a modest sales contribution this fiscal year, we may later disclose the expected size range, starting with skincare. It's important to note that this brand will extend beyond skincare into multiple categories. We are also encouraged by the strong support from Ulta Beauty, with whom we will partner to launch this brand. Their belief in the long-term potential of Keys Soulcare is significant. Regarding our spending, we assess it as a percentage of the overall company budget. Each of our brands—W3ll PEOPLE, Keys Soulcare, and e.l.f. cosmetics—has its own spending levels that we utilize to support them. The overall spending range of 14% to 16% that Mandy mentioned is a comfortable level for us at this time to support all three brands, and we will provide updates as we approach the launch.

Our next question comes from Steph Wissink with Jefferies. Please go ahead.

Mandy, I have a clarification question on the system migration. It sounds like that was detrimental to your sales growth in the quarter. I'm wondering if you can help us quantify what that holdback might have been. And then Tarang for you just a question following up on Keys Soulcare: the gross margin structure being net neutral to the company was a bit below what we would see typically for a prestige skin care business? And maybe talk a little bit about the gross margin neutrality, does that include a royalty or something unique that would benchmark you differently than what we see in the broader marketplace? Thank you.

Hi, Steph. Okay. I'll take the first question and then I'll pass it to Tarang on Keys Soulcare. On the system migration, we did have shipments shift out of Q2 into Q3. We have not put a dollar amount on that publicly, but I will say that it did contribute to the higher inventory levels we did have coming into the quarter. And we'll also be kind of a building block if you think about it for how our second half forecast will come together and is already implied there in the guidance.

And then maybe just building to that, the system migration issue was related to Ontario, California distribution center which is our largest distribution center. We have a third-party logistics provider that had a long-planned migration in their warehouse management system ran into a hiccup. It's one of the reasons we shipped less and why you have some higher out of stocks right now. The good news is we're already past that issue. We're shipping at much higher rates and quickly catching up in terms of our in-stock positions with our customers. And then on your second question regarding Keys Soulcare. The product margin is actually higher than the overall e.l.f. average gross margin, but it does include to get to the gross margin you do have a royalty in the form of both cash as well as e.l.f. equity. We like that structure quite a bit because it really ties into our longer-term vision for the brand and really aligns our interest with Alicia Keys. In terms of what we're building here for the long term and that's why the overall gross margins are in line with the company.

Thank you.

Our next question comes from Andrea Teixeira with JPMorgan. Please go ahead.

Hi. Thank you, and congratulations on the numbers. My question is about how we should view top line growth in the second half, particularly in Q4, regarding the new distribution. I assume you will still see some benefits from Walmart and Ulta. Additionally, I would like clarification on the comments made earlier regarding the profitability of Keys Soulcare. Should we consider the $5 million to $6 million marketing launch expenditure as recurring? Are you planning to build up to that margin to gain leverage throughout fiscal 2021? I'm concerned about the longer-term algorithm and whether the margin expansion will be gradual, depending on the rate of top line acceleration. Is that a reasonable assumption?

Right. Okay. Yes. Andrea, let me start with your first question on the second half top line growth and the assumptions around there. So as we talked on our prepared remarks, we do believe that there's going to continue to be volatility within the color cosmetic category, but we are confident that we will continue to gain share in the category. So I would say our second half trends will benefit from the space expansion that we've had recently in Walmart and Ulta Beauty. That was in the fall. Additionally, we'll also benefit from new distribution that we're picking up in the spring with Shoppers in Canada and then also additional space expansion that we will get in spring 2021 with Ulta Beauty as well. Third, we believe that e-commerce will continue to be a driving force in our net sales performance though likely moderating from the levels we saw in the first half. So I would say those things plus the modest contribution that we're expecting from Keys Soulcare are really the top line drivers that we're looking at for the second half. And then on Keys Soulcare, the $5 million to $6 million that is really related to the launch of Keys Soulcare. Too early to tell you, we haven't given fiscal '22 guidance yet and how to think about that marketing spend on a longer-term horizon. But I would say that that $5 million to $6 million that we're talking about for now is really in preparation for the launch of the brand here in the next quarter or so.

Super and helpful. And then just to, e-commerce represented how much again, if I'm sorry if I missed during the quarter from your sales?

I don't think we've provided the percentage of e-commerce. Do we did, 13% sorry of the total net sales that we had in the quarter.

Our next question comes from Oliver Chen with Cowen. Please go ahead.

Thanks very much. Congrats on the expansion at Walmart and Ulta. As that happens, what should we know about product changes or the products that will be incremental? And are there thoughts around mix? We're curious about skincare. As that continues to really succeed, how are you thinking about breadth versus depth in skincare, indoor mix, and innovation happening there with the assortment? I would also just love your thoughts on community and Keys Soulcare. It seems like it's a core tenet of what you're doing there. And how you might contrast that against the community you've built at e.l.f.? Thank you.

Oliver. First of all, we're really excited about our space expansion. Aside from Target, where we have about 11 feet of linear space, most of our other customers have significantly less. So it's crucial for us to gain more space at Walmart and Ulta Beauty as we work toward the right presence for e.l.f. One of our strengths is our innovation program and the diverse new items available in our range, which has helped us maintain growth even in a challenging market across various categories like face, eyes, lips, tools, and skincare. Specifically, gaining more space allows us to introduce more skincare items in international retailers. Currently, skincare represents around 8% of our sales in tracked channels, but nearly 25% of sales on elfcosmetics.com, largely due to our broader assortment. We believe there is significant opportunity in skincare based on our success online. As we increase our retail footprint, we can offer a wider mix of skincare products along with our other key innovations. Regarding community, it has always been central to our brand for the past 16 years. e.l.f. Cosmetics was built on a passionate community that has supported and elevated the brand over time. This community focus is deeply embedded in our identity and digital beginnings. Keys Soulcare shares this foundation, starting with a strong digital approach centered on content, conversation, and community engagement. The positive response has been remarkable, and we believe we are cultivating a vibrant community, although it will differ from the e.l.f. community, mainly because Keys Soulcare targets the entry-level prestige market with products priced between $20 and $40, which contrasts with e.l.f.’s average price of $5. Initially, Keys Soulcare will focus on skincare before branching out to other categories. You can see rich content on our website keyssoulcare.com and across social media, reflecting the enthusiastic consumer response and the brand's high potential for the future.

Thank you very much. Best regards.

Our next question comes from Bill Chappell with Truist Securities. Please go ahead.

Thanks. Good afternoon.

Good afternoon.

First, could you please tell me how much the marketing start-up cost for Keys Soulcare was in the second quarter?

So, Bill, there aren't really any marketing start-up costs. There are certain launch costs related to Keys Soulcare included in our adjusted SG&A and adjusted EBITDA numbers. You can see that detailed in the footnotes of the non-GAAP schedules in our press release.

Got it. Okay. I was double checking. Can you provide an update on the health of the color cosmetics market on the mass side? You mentioned that you are the only one among the five major players to show growth. I'm interested in understanding how much of that growth is due to the category still recovering in the later stages of the pandemic. Have we made any recovery from the latest phase of the pandemic, or is it simply that your competition is not catching up?

The category has certainly been affected by the pandemic, with everyone being restricted and unable to maintain their normal routines, which impacted the entire sector. While it's not at the lowest point it reached at the beginning of the pandemic, particularly during the different waves of COVID, there is definitely an effect on the category. However, we have been proactive and executed well in overcoming that trend across all our competitive categories. Our core value proposition is providing the best beauty products that are accessible to everyone, and we've effectively implemented our five strategic goals over the past two years. We believe we have the momentum to continue gaining market share, even in a challenging environment. Looking ahead, I am optimistic about the category. As consumer behavior stabilizes, this category is crucial for self-expression and will likely rebound robustly. The timing of this recovery will depend on when people can return to their normal activities. Regardless of the current challenges or performance, I am confident in our position within the category. We entered the pandemic strong, navigated it well, and are developing a brand portfolio that will enhance our strength as the category recovers.

Got it. Thank you.

Our next question comes from Jon Anderson with William Blair. Please go ahead.

Good afternoon. Thanks everybody. Just two quick ones. If you could talk a little bit about the Keys Soulcare sourcing model. The sourcing model lineup with the model you use for the rest of your business and whether there'll be any ties between the elfcosmetics.com website and the Keys Soulcare site? And then the second question is, you're now managing three brands as you move forward as opposed to one historically, are there any changes that you've made or you feel you need to make to people, process, systems, and approaches internally to manage the added complexity? Thanks.

Sure. First of all, regarding Keys Soulcare, it is fundamentally part of our strategic extensions, allowing us to utilize the foundation we've established with e.l.f. Beauty, especially the investments in our team and infrastructure. The sourcing model for Keys Soulcare fully implements the innovation framework we have in e.l.f. and integrates with our overall operations. This approach provides an excellent combination of cost, quality, and speed, and it also enables us to explore other categories. We enhanced this with our acquisition of W3ll People, where Dr. Renee Snyder, one of the co-founders, is a key product developer. She has been closely collaborating with Alicia Keys to create an exceptional product line. Therefore, we are leveraging our existing investments and capabilities, and you will see this continued connection between the brands primarily on the backend, reinforced by our infrastructure. Our efficiency in launching the site was largely due to our strengths in digital capabilities and content strategy. However, from a consumer perspective, each brand operates distinctly, serving different customer segments while complementing each other. Thus, you may not observe a strong connection between the brands, but rather our ability to optimize the company. In terms of managing three brands instead of one, we have a wealth of multi-brand experience within the company, with many team members having strong backgrounds in both consumer goods and beauty, capable of managing brand portfolios. Additionally, we have recruited extra resources in preparation for Keys Soulcare, creating a beneficial balance between utilizing our core strengths and having dedicated personnel for each brand. This structure allows us to manage the consumer-facing elements effectively while maximizing the investments we have made in the company.

Thank you.

Our next question comes from Rupesh Parikh with Oppenheimer. Please go ahead.

Good afternoon and thanks for taking my questions. So, I just had a related question just related to longer-term guidance. So, first on COVID, as we think about, I guess, fiscal year 2022 to 2024, is the assumption that will now be past the COVID headwinds? And then second in regards to the sales guidance, I was just curious if there's any granularity you can provide in terms of how you guys are thinking about the growth for the e.l.f. brand versus some of the newer brands you have?

So, Rupesh, I'll start with the long-term economic model and any impacts from COVID. We are focused on driving growth through that long-term economic model. Our track record over the last seven quarters of strong sales growth gives us confidence that we can continue to meet our long-term economic goals. Regarding sales guidance for e.l.f. versus other brands, I previously mentioned some factors that will affect our second half net sales, including a modest contribution from the Keys Soulcare brand. However, we have not provided detailed breakdowns yet and are concentrating on beauty as a whole.

If I could ask one more question, with the second wave risks we're currently seeing in the U.S., are you noticing any impact on your business due to the spikes in different markets?

Well, we track that pretty closely and we certainly can see a correlation depending on restrictions in different areas in terms of both traffic to retail stores and consumer behavior. I think we feel that we feel more confident about is our ability to execute even in the face of that. We did that through the first wave of COVID, really the second wave, maybe on a third right now depending on where you're at, and our ability to continue to drive growth in a down category. And given the drivers that we have coming both in terms of space gains, the space we already gained, space we're about to gain as well as a new brand launch. We feel good about where we stand relative to the category.

Great. Thank you. I’ll pass it on.

Our next question is a follow-up from Oliver Chen with Cowen. Please go ahead.

Hi. Thanks, again. You've made a really amazing success with TikTok. Just would love your thoughts on return on ad spend in relation to how you're analyzing the metrics there and the impressions and what that may imply for your thoughts around marketing spend, whether that be dollar or rate in relation to the success you had on TikTok? And I would also just love your take on live streaming and how that's manifesting in different aspects of your business and what you see ahead? Thank you.

Sure. So all I'd say, we have had tremendous success on TikTok but we've also had success across platforms and TikTok, specifically I think we're now between our various brand challenges up to 10 billion views, 6.5 million user-generated videos and it's really helping drive relevancy on the brand, particularly amongst Gen Z. In terms of marketing spend and how we evaluate it, we really evaluate in two different ways. One is overall ROI, where we talked last quarter getting the Nielsen marketing mix analysis done. We showed very strong returns on our spending in total. And then across various vehicles. And then the second is really kind of by what's really causing buzz and having stay top of mind, particularly among key demographics like we just talked about TikTok and Gen Z. So we really look at both those together. And then live streaming, I would say, will continue to have an important impact on the business going forward as other initiatives have for the consumer, so including our kind of virtual try-on feature on elfcosmetics.com as well as different ways of kind of engaging consumers. I think you'll continue to see us do more there.

Thanks a lot. Appreciate that.

Our next question comes from Mark Astrachan with Stifel.

Hey, guys. This is actually Peter on for Mark. Thanks for taking the question. Can you provide more color on where you see promotional activity can be category wise? And also, if we're seeing any sort of return to normal there? Thank you.

So I'd say on the promotional activity, we haven't seen any major spike at least on the mass side on the promotional side. Some number of brands have been highly promotional in the category and we continue to see them be highly promotional. I'd say as far as e.l.f. is concerned, that's never really been our strategy. Our strategy has been to provide the best of beauty at extraordinary values every day. And we like that strategy because it allows us to kind of stay true to who we are and what our consumers expect but also gives us a certain level stability in not having to play in all the nonsense of high-low. So overall, I'd say we haven't seen that much of a change in the category even though some players have been highly promotional. And then two, our strategy remains intact as it's winning in the marketplace.

Great. Thank you.

This concludes our question-and-answer session. I would like to turn the conference back over to Chief Executive Officer, Tarang Amin, for any closing remarks.

Great. Well, thank you everyone for joining us today. I'm so grateful for our incredible team at e.l.f. Beauty. Shown tremendous talent, meeting the challenges of the pandemic and building market share. I believe our future is bright and remain confident in our long-term strategy. We hope everyone is happy and healthy this holiday season. Thank you and be well. Thanks, everyone.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.