Earnings Call Transcript - ELF Q1 2026

Kristina Casey Katten, Vice President of Corporate Development and Investor Relations

Thank you for joining us today to discuss e.l.f. Beauty's First Quarter Fiscal '26 results. I'm KC Katten, Vice President of Corporate Development and 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, which you can access on our website at investor.elfbeauty.com. 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. Our earnings release contains reconciliations 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.

Tarang P. Amin, Chairman and Chief Executive Officer

Thank you, KC, and good afternoon, everyone. Today, we will discuss our first quarter results and our approach to fiscal 2026. I'm proud of our incredible e.l.f. Beauty team for delivering another quarter of industry-leading results. In Q1, we grew net sales 9% on top of 50% growth in Q1 of last year, delivered adjusted EBITDA of $87 million, up 12% and gained 210 basis points of market share. Q1 marked our 26th consecutive quarter of both net sales growth and market share gains. E.l.f. is the only brand of the nearly 1,000 cosmetics brands tracked by Nielsen to gain share for 26 consecutive quarters. As we look ahead, we see the potential to more than double our business over the coming years given the significant white space we see in color cosmetics, skin care and international. We believe the acquisition of Rhode, which closed yesterday, enhances our position as a leading player in accessible beauty. Let me update you on our progress in Q1. First, in color cosmetics. Nationally, e.l.f. is the #1 unit share brand with approximately 15% share and the #2 dollar share brand with approximately 13% share, more than double where we were just 3 years ago. The combination of our value proposition, powerhouse innovation and disruptive marketing engine continue to fuel our market share gains. Looking to our value proposition. The average price point for e.l.f. Cosmetics is about $6.50 today as compared to nearly $9.50 for legacy mass cosmetics brands and over $20 for prestige brands. As we spoke about last quarter, to help mitigate the impact from tariffs, we took a dollar increase on our entire product assortment effective August 1. This is only the third price increase we've taken in our 21-year history. With 75% of e.l.f.'s product portfolio remaining under $10 post increase, our community continues to praise our commitment of making the best of beauty accessible to every eye, lip, and face. In Target, our longest-standing national retail customer, we're the #1 cosmetics brand with approximately 21% share, growing by 190 basis points in Q1. We're making great progress on replicating our success at Target with other key retailers. We posted triple-digit share gains with all of our major tracked channel retail partners in Q1. We're also finding success with newer retailers like Dollar General. Dollar General has a stated strategy of serving the underserved with 80% of stores serving rural markets. Their partnership has been a win-win. E.l.f. is attracting new buyers into the channel with 60% of e.l.f. purchases at Dollar General coming from shoppers who never bought cosmetics at Dollar General, and 53% of these shoppers are new to the e.l.f. brand. We're excited to expand our footprint to additional Dollar General stores this fall. Looking to innovation. We have a unique ability to deliver a steady stream of holy grails, taking inspiration from our community and the best products in prestige and bringing them to market in an extraordinary value. As consumers continue to seek multi-benefit products and skin-forward cosmetics, we're answering the call with our Halo Glow Skin Tint mineral SPF 50 priced at an incredible value of $18 compared to prestige items at $48 or more. Halo Glow Skin Tint was our top-selling cosmetics product in Q1 on elfcosmetics.com. Our Holy Grail innovation approach is driving share gains across segments. In Q1, we delivered triple-digit share gains across face, lip and eye makeup. We've more than doubled our share in each of these segments over the last 5 years. As compared to the 22% share and #1 ranking we have in face, we have a 13% share in the #3 ranking in lip and a 9% share in the #4 ranking in eye. We believe we have the innovation engine to grow share in these large segments. We're also leaning into our disruptive marketing engine to fuel brand awareness. e.l.f.'s unified marketing engine fuses insights, innovation and entertainment and elevates e.l.f. as one of the most talked about beauty brands in the world. We move at the speed of our community. Sparked by the insight that 7 of the top 10 most viewed lip gloss videos on TikTok featured TikTokers customizing their own jumbo Halo Glow lip gloss. We turned fandom into innovation at e.l.f. speed. From insight to action in under 4 weeks, we launched a DIY Halo Gloss Kit exclusively on TikTok Shop that sold out in under 24 hours. Turning to skin care. Skin care today drives nearly 20% of our global consumption, more than double the level we had a few years ago, and we continue to see significant runway for growth. We have 2 of the fastest-growing mass skin care brands with e.l.f. SKIN and Naturium that are distinct yet complementary in price points, positioning and audiences. We're leaning into our value proposition and powerhouse innovation with our latest e.l.f. SKIN product launch. Our Bright Icon Vitamin C + E + Ferulic Serum priced at an incredible value of $16 compared to a prestige item at $185. This serum was a best-selling skincare product on elfcosmetics.com in Q1. e.l.f. skin is cultivating cultural relevance with a premiere of Sunhinged. We reimagine SPF education with a comedy roast to the sun at the intersection of humor and health to drive awareness. Consumer research finds that 91% of people prefer brands that are funny and 90% are more likely to recall a brand that uses humor. Looking to international. Our international net sales grew 30% in Q1, fueled by growth in our existing markets as well as expansion into new markets. In the U.K., our largest market outside the U.S., e.l.f. Cosmetics outpaced category growth by 3x in Q1, increasing our rank from the #4 brand to the #3 brand. As we look to new international markets, we've seen success with our engagement model across social platforms, driving consumer demand well before we enter a country. We saw this play out in Q1 with the launch of e.l.f. in over 1,200 stores of Kruidvat, the #1 beauty retailer in the Netherlands and Belgium. e.l.f. quickly ascended to the #1 brand in Belgium and the #2 brand in the Netherlands. We're excited for the international expansion we have planned this fall. e.l.f. is launching with Rossmann in Poland and Sephora in the 6 countries of the Gulf Cooperation Council. Naturium is also expanding into additional boots stores in the U.K. and launching with Sephora in Australia. For context, 6 years ago, we sold $28 million internationally or about 10% of our sales. Today, we sell $266 million internationally, representing 20% of our sales. We expect that mix to continue to grow as we gain share in existing markets and expand into new markets. As we look ahead, we remain confident in our ability to continue to gain share and capture the significant white space ahead of us. We believe that opportunity is further accelerated with our acquisition of Rhode, a breakthrough high-growth beauty brand founded by Hailey Rhode Bieber. The acquisition closed yesterday, and we're thrilled to officially welcome the talented Rhode team to the e.l.f. Beauty family. I've been in the consumer space for 34 years and have been blown away by what Hailey and her team are building. In just under 3 years since its founding, Rhode has seen exceptional growth, achieving $212 million of net sales in the 12 months ended March 31, 2025, DTC only with just 10 products. We believe the acquisition of Rhode brings together two like-minded disruptors who are best-in-class in creating highly desirable brands that deliver high-quality innovation to highly engaged communities. As we combine, our initial focus will be to help in 2 areas. First, to accelerate Rhode's brand awareness. For context, Rhode's aided awareness is 20% today in the U.S., half the level of other premium skin care brands with average 40% or more awareness. Second, we plan to leverage our deep retail expertise and help Rhode expand their distribution footprint. The team is focused on executing its launch with Sephora, the world's leading global beauty retailer. Sephora's standard approach is to test the brand in a subset of stores before scaling. Given Rhode's breakthrough DTC success and Sephora's belief in the potential of the brand, Rhode is launching in all Sephora stores across the U.S. and Canada in September, and the U.K. by the end of the year. We're excited to accelerate e.l.f. Beauty's global presence with Sephora, building upon the successful partnership we've had since launching e.l.f. in Sephora, Mexico last year. We've been disrupting and driving industry-leading growth for 21 years in service to our growing communities around the world. As we look ahead and now further fueled by Rhode, we see an opportunity to more than double our business over the coming years with significant white space we see in color cosmetics, skin care and international across our portfolio of brands. I'll now turn the call over to Mandy to talk more about our first quarter results and our approach to fiscal '26.

Mandy J. Fields, Senior Vice President and Chief Financial Officer

Thank you, Tarang. Q1 net sales of $354 million grew 9% year-over-year on top of 50% growth in Q1 of last year, primarily driven by continued growth in unit volume. Our net sales in the U.S. grew 5% year-over-year in Q1, while international net sales grew 30%. We are pleased to see continued momentum in consumption with our growth outpacing category trends, leading to 210 basis points of market share gains in the quarter. Q1 gross margin of 69% was down approximately 215 basis points compared to the prior year. The year-over-year decline was driven by incremental tariff costs, partially offset by favorable foreign exchange impacts on goods purchased from China and mix. On an adjusted basis, SG&A as a percentage of sales was 50% in Q1 as compared to 51% in Q1 last year. Marketing and digital investment for the quarter was 22% of net sales as compared to 23% in Q1 last year. Marketing spend for the quarter was lower than planned as campaign spend shifted into Q2. We continue to expect marketing and digital spend at approximately 24% to 26% of net sales in fiscal '26, in line with the range we targeted in fiscal '25. Q1 adjusted EBITDA was $87 million, up 12% versus last year. Approximately 7 points of that year-over-year growth was driven by an unanticipated foreign currency gain of approximately $5 million due to quarter-over-quarter fluctuations between the British pound and the U.S. dollar. Adjusted net income was $51 million or $0.89 per diluted share compared to $64 million or $1.10 per diluted share a year ago. The decrease in adjusted net income and EPS metrics was primarily driven by a more normalized tax rate as compared to Q1 last year, which included discrete tax benefits related to stock-based compensation. Moving to the balance sheet and cash flow. Our balance sheet remains strong, and we believe positions us well to execute our long-term growth plans. We ended the quarter with $170 million in cash on hand compared to a cash balance of $109 million a year ago. I'm also pleased with the $20 million in free cash flow we generated in Q1, up from $0.5 million a year ago. Subsequent to quarter end, we closed on our acquisition of Rhode. As a reminder, we financed the $800 million upfront transaction with an incremental term loan of approximately $600 million as well as $200 million or approximately 2.6 million shares of e.l.f. Beauty common stock issued directly to the equity holders of Rhode. Our liquidity position remains strong with relatively low leverage post the transaction. We expect our cash priorities for the year to remain on investing behind our growth initiatives and supporting strategic extensions. The specific initiatives we're focused on this year include investing in our people and infrastructure, our ERP transition to SAP and our international expansion. In July, we officially went live on SAP. While it is still early days, I'm pleased to report that our go-live was successful and our business is transacting. As you all know, these are significant undertakings. Our smooth go-live is a testament to the exceptional talent and dedication of our e.l.f. Beauty team members and partners. Now let's turn to fiscal '26. As we spoke about last quarter, we are planning to provide a full year fiscal '26 outlook once we have greater certainty on tariffs. Unfortunately, there continues to be a broad range of potential outcomes. To set the foundation, about 75% of our global production today comes from China. Between April 9 and May 13, we were subject to tariffs at the 170% level. As of May 14, product imports to the U.S. are subject to tariffs at the 55% level. 25% of that was put into place in 2019, plus an incremental 30% that is now in place through mid-August. Beyond this date, the tariff rate remains subject to ongoing negotiations. For these reasons, we are waiting for greater clarity to issue a full year fiscal '26 outlook. For context, if tariffs were to remain at this incremental 30% level, we estimate the gross impact to our cost of goods sold to be approximately $50 million on an annualized basis. And as we spoke about last quarter, our tariff mitigation plans are already underway through 3 key vectors: pricing, supply chain optimization and business diversification. With that said, we do have better visibility into how we expect the first half of the year to shape up, and I'd like to provide some color on our approach. From a top line perspective, we expect to deliver net sales growth in the first half of the year above the 9% growth that we delivered in Q1, primarily given the incremental contribution from Rhode for about 2 months of Q2. Note, we are not benefiting from the Rhode sell-in to Sephora as that occurred prior to closing. From a profitability standpoint, we expect adjusted EBITDA margins to be approximately 20% in the first half of the year, which we believe is quite strong in this macroeconomic environment. On a quarterly basis versus Q1, this accounts for flowing through more of our higher tariff COGS, the timing shift in marketing campaign spend and the inclusion of Rhode in our consolidated financials. In summary, we're pleased to have delivered another quarter of industry-leading sales and market share growth. We believe we have a winning strategy and are in the early innings of unlocking the full potential we see as we welcome Rhode to our growing portfolio of disruptive brands. With that, operator, you may open the call to questions.

Operator, Operator

The first question today comes from Susan Anderson with Canaccord.

Alec Edward Legg, Analyst

Alec Legg on for Susan. Question on the tariffs. Can you talk about how much inventory might be trapped at the 170% rate versus the 50% rate? And if there's any way to talk about the potential timing of it flowing through the P&L?

Mandy J. Fields, Senior Vice President and Chief Financial Officer

This is Mandy. So on the tariffs, we talked a little bit about this last quarter. There was a period of time that we were purchasing at that 170% level. And so right now, what we have in inventory is a mixture of that 170 and the 55, plus some that is even at the 25% level that we were previously subject to. What we expect for Q2 is more of that 170% to flow through. And so that's why we called that out on the call, just expecting more of that flow through in Q2. So I would expect to see kind of a lower gross margin quarter-over-quarter as we go through.

Alec Edward Legg, Analyst

In the first half EBITDA margin guidance, it suggests a decrease in EBITDA margins of 500 to 600 basis points for the second quarter. How should we break down the impact between gross margin and SG&A, considering the various factors at play, including tariffs, the Rhode acquisition, and possibly some additional investments?

Mandy J. Fields, Senior Vice President and Chief Financial Officer

Yes. So that first half EBITDA margin that we called out, the implications on Q2 is really driven by 3 factors. One is the gross margin, as we just talked to, flowing through more of those tariffs in Q2. Secondly is the shift in marketing spend. So we did have some campaign spend shift from Q1 into Q2. And then lastly is the addition of Rhode into our SG&A, again, without that benefit of the sell-in to Sephora from a top line standpoint. Overall, still quite strong, I would say, from an EBITDA margin standpoint at approximately 20% just given kind of the macro that we're operating in.

Operator, Operator

The next question comes from Dara Mohsenian with Morgan Stanley.

Dara Warren Mohsenian, Analyst

I was just hoping, Mandy or Tarang, you could expand a bit on the greater than the 9% sales growth that was posted in fiscal Q1 comment for the first half. A, does that comment hold without Rhode? I think, Mandy, you mentioned that Rhode was in there. So just a clarification there. And maybe through some of the key puts and takes as you think about fiscal Q2 versus fiscal Q1, just conceptually how you're thinking about the business? I know we won't get quantification, but a lot of moving pieces with pricing, the consumer demand reaction to pricing, the retailer ordering patterns, the base business volatility. So just any conceptual thoughts around those areas would be helpful just as you think about the underlying business sequentially fiscal Q2 relative to fiscal Q1?

Mandy J. Fields, Senior Vice President and Chief Financial Officer

Thanks for the question, Dara. In response to your first question, we have not separated out what's e.l.f. versus Rhode. We want to highlight that for Q2, we will be including Rhode in our financials, which will likely drive Q2 results higher than those in Q1. We're very satisfied with the performance of the e.l.f. business. Our fall innovation continues to do well. We mentioned that we moved up the launch of our melting lip balms in response to community demand. As we compare that performance while cycling last year's fall metrics, we're still experiencing a positive outcome for our fall '25 innovation. We're optimistic about it. Our goal is to keep increasing our market share, just as we did in Q1 where we gained 210 basis points of share across all three segments: eyes, lips, and face. We're pleased with the ongoing performance of the e.l.f. business as we progress. Regarding pricing, we're monitoring how consumers will react to that. When we discussed implementing a price increase in May, consumer sentiment was favorable, so we will be closely observing the elasticity and response to the changes.

Dara Warren Mohsenian, Analyst

Okay. Great. And then just as a follow-up, Rhode EPS accretion as we think about this fiscal year separate from the base business. It looks like the acquisition will be significantly accretive. Just give us a sense for how you're managing that? Is there a lot of spend back behind the business near term there, given the expansion in Sephora? And maybe just touch on the underlying level of revenue growth for the business versus how it existed last year just with the Sephora launch coming up and obviously, the strong base business growth trends on top of that.

Mandy J. Fields, Senior Vice President and Chief Financial Officer

Yes. So we're quite excited about the Rhode launch into Sephora. And as we talked last quarter, even with the investments that we want to make back into the business, we still expect this to be accretive overall. So very pleased with that. And we're pleased with what we're seeing out of Rhode. They had their Lemonini launch of their Lip Peptide, and that went really well for them. We're just so excited about all the signals that we're seeing on Rhode. And from a financial standpoint, we'll be back to you next quarter, hopefully, in a position to give guidance once we have more clarity on tariffs to really give you a more fulsome picture on what we're seeing.

Operator, Operator

The next question comes from Olivia Tong with Raymond James.

Olivia Tong Cheang, Analyst

I wanted to explore the U.S. core business further and discuss your expectations for top line growth there, especially in light of the recent deceleration in scanner performance. Additionally, what is your perspective on the 9% plus target for the first half? While anything above 9% has no upper threshold, starting from the 9% end suggests that excluding Rhode results could show a year-over-year decline. Can you share whether you believe that’s a possibility for Q2?

Mandy J. Fields, Senior Vice President and Chief Financial Officer

Yes. As I mentioned, Olivia, we are still very optimistic about the e.l.f. business, which includes our core operations in the U.S. The slowdown reflected in Nielsen data is primarily because we are now comparing against a full fall season last year. Earlier, we benefited from launching our melting lip balms ahead of schedule, and we are still seeing positive trends overall for the fall. This is fantastic for us. I want to emphasize that, excluding the Rhode impact, we do not foresee any scenario where the e.l.f. business would decline year-over-year, given our discussion in Q1 where our U.S. business grew by 5%, our international business increased by 30%, and we gained 210 basis points of market share in the quarter. We truly see significant strength in the e.l.f. business.

Olivia Tong Cheang, Analyst

Great. That's super helpful. Can we discuss the further expansion into Sephora, including Mexico and now the Middle East with Naturium? Could you elaborate on your discussions with Sephora as you continue to grow in international markets? Please provide insight into the product lineup entering those markets. Are they primarily the hero products, or is it a broader range? It would be great to understand the opportunity that exists there for you.

Tarang P. Amin, Chairman and Chief Executive Officer

Hi, Olivia, this is Tarang. We're very excited about our growing partnership with Sephora. To provide some background, we began our collaboration with the e.l.f. brand in Sephora Mexico last year, and it was one of our most successful launches. We've managed to stay in the top three positions within Sephora in Mexico. One aspect they appreciated about our launch was how we attracted a new demographic, particularly younger and more diverse consumers. We’ve been in discussions about various markets, and we’re particularly thrilled about the upcoming launch of Rhode in all U.S. and Canadian Sephora locations in September, followed by our entrance into the U.K. later in the year. Additionally, we are excited to introduce e.l.f. to the six Gulf Cooperation Council countries, offering our full assortment, similar to our approach in Mexico, anticipating a significant launch there as well. Lastly, we are optimistic about Naturium's debut in Sephora Australia. We foresee potential for more Sephora markets in the future, and we will share updates as our plans materialize. Overall, I feel very positive about our expansion with Sephora.

Operator, Operator

The next question comes from Andrea Teixeira with JPMorgan.

Andrea Faria Teixeira, Analyst

I wanted to follow up on the answer regarding the U.S.-based business. Mandy, you mentioned that it's been growing about 5%. I was curious about the exit rate in the quarter. With the price increase, the $1 over your average price of $6.50 represents a mid-teens price increase. I understand you're factoring in some elasticity. However, you will still benefit from this in August and September. I'm wondering if you see the 5% growth accelerating due to the price increases and the innovation you discussed, or if that might be too optimistic considering consumer behavior.

Mandy J. Fields, Senior Vice President and Chief Financial Officer

Andrea, it's great to hear from you. So on the U.S. business and taking into account the price increases, as you know, our approach is to always take a balanced approach. And in this instance, we're being a bit conservative on how we're modeling that internally. In our past price increases, we have done better than we've modeled from an elasticity standpoint. But with these increases just going in on August 1, we're still reading how the consumer will respond to that. It will take a couple of weeks for that to fully roll out within retail. And so that is something that we're watching for. And I also acknowledge the consumer overall sentiment right now. As you've heard from several consumer companies, they're continuing to be choiceful with how they're spending. I think from our perspective, the great thing is even with this price increase, 75% of our portfolio will be at $10 or below. So still very much a value for our community, and we're feeling great about that.

Operator, Operator

The next question comes from Mark Altschwager with Baird.

Mark R. Altschwager, Analyst

Just another question regarding the price increases. I'm curious how your retail partners have reacted to that? What's the feedback you've received? And as they're placing their orders, are you seeing them temper unit orders in anticipation for some consumer elasticity?

Tarang P. Amin, Chairman and Chief Executive Officer

Hi Mark, this is Tarang. Overall, retailer acceptance has been good for our price increases. I think part of the reason why is we're very choiceful when we take price increases. We've only taken 3 increases in our 21-year history and have had a really good track record in terms of how that's executed. We take quite seriously our responsibility to deliver an extraordinary value to our community. And so even the way we've taken pricing of first, letting our community know being transparent has been well received by our community, well received by our customers. The other thing I will tell you is we are hearing of a number of brands that are going to be taking pricing. So I think just in that environment right now with the uncertainty of tariffs and the tariff impact that you will probably see more companies take pricing, we tend to lead, and then we will see how many more kind of follow us.

Mark R. Altschwager, Analyst

And then I understand, Mandy, there's a lot of noise in Q2 on gross margin, given there's some goods flowing through at the much higher rates. But as we think kind of moving forward, if the 30% were to stay in place, is the enough to neutralize the margin impact?

Mandy J. Fields, Senior Vice President and Chief Financial Officer

So we haven't given any color into that, Mark, because as I just talked about earlier on the pricing piece, we're looking to see how that elasticity plays out in order to be able to more fully answer that question. And again, with the wide range of outcomes on tariffs, we're watching to what happens on August 12 next week when there is supposed to be further talks on China tariffs. And so I think we're just going to have to wait and see how things play out there.

Operator, Operator

The next question comes from Oliver Chen with Cowen.

Oliver Chen, Analyst

In the U.S. market, which channels or partners have performed better or worse in relation to the e.l.f. brand and the discerning U.S. consumer? Additionally, regarding Rhode, which is very exciting, what are your thoughts on international and global expansion, as well as potential exclusive products for Sephora? What categories do you find most promising? There seems to be a lot of opportunities for you to explore with Rhode.

Mandy J. Fields, Senior Vice President and Chief Financial Officer

So Oliver, great to hear from you. On the U.S. e.l.f. brand, from a channel standpoint, we had growth in our brick-and-mortar channels, our core retailers as well as in e-commerce. And so very pleased with what we're seeing there. Like I said earlier, from a net sales standpoint in the U.S. had 5% growth in Q1 overall.

Oliver Chen, Analyst

Are there any channels that were weaker or less positive, and could you share that information with us?

Mandy J. Fields, Senior Vice President and Chief Financial Officer

Yes. We've just not broken out that level of detail other than to say we continue to make progress in Q1 in the U.S., again, picking up share 210 basis points in the quarter across all segments. And so really pleased with our performance.

Tarang P. Amin, Chairman and Chief Executive Officer

And then Oliver, to your second question on Rhode, our near-term focus is really to execute with excellence, the launch into Sephora in all U.S. and Canadian doors followed by the U.K. There certainly will be other opportunities for further international expansion. I think we mentioned last time on the call that the vast majority of Hailey's followers are outside the U.S., but that business still only has about 20% outside the U.S. So we have massive runway for growth for Rhode similar to the pent-up demand that we see for e.l.f. every time we go into a new country.

Operator, Operator

The next question comes from Peter Grom with UBS.

Peter K. Grom, Analyst

So I wanted to just ask on Rhode, clearly, a lot of growth for the brand in the last few years, but you touched on this in response to Dara's question that the brand is performing well. But we've seen some pretty exponential growth over the last few years. So as we think about modeling the brand, getting the sell-in into the results. But maybe just could you help us understand bigger picture, the level of growth that you're seeing or that we should expect? And then you mentioned that you would expect the brand to double over the next few years. Is that a broad-based comment? Or do you kind of have a clear target in mind in terms of when you would expect that to happen?

Tarang P. Amin, Chairman and Chief Executive Officer

Yes. Peter, we haven’t provided a specific growth rate for Rhode, but it increased from zero to $212 million in three years, solely through direct-to-consumer sales with just ten products. This indicates significant potential, especially with the Sephora launch. We plan to continue increasing growth similarly to how we did with Naturium, expanding its availability in Ulta Beauty, Boots, and Shoppers. Additionally, we will reinvest in marketing for Rhode since it has proven to be quite profitable. Currently, aided brand awareness is at 20%, which is impressive for a three-year-old brand but still less than half of what some established prestige skincare brands achieve. I'm also focusing on our execution with Sephora and their strong innovation program. Overall, I’m very optimistic about Rhode and its future. When discussing the goal of doubling the business, we are referring to the entire e.l.f. company. With opportunities in color cosmetics, skincare, and international markets, we believe we can significantly grow our business in the coming years.

Peter K. Grom, Analyst

Okay. And Mandy, I just want to ask around margins. Just in the context of the weaker second quarter, and I get tariffs and elasticities remain a wildcard here. But can you maybe just help us understand how you would anticipate margins performing in the back half of the year? I guess when you look at the second quarter, what costs could be transitory, what could stay? And I guess it just seems like it would be a pretty big step-up from mid-teens to kind of get back to 20% plus on the surface sequentially. So just if you could help us understand that, that would be great.

Mandy J. Fields, Senior Vice President and Chief Financial Officer

For the first half of the year, we are dealing with substantial tariffs that we did not adjust our pricing for until August 1. We're actively working on mitigating these tariffs through improving our supply chain and business diversification, and expanding internationally. In Q1 and Q2, we are facing higher tariff rates without significant mitigation measures in place. In terms of the second half of the year, we will provide comprehensive guidance later, but for now, it appears that we are experiencing gross margin pressure in Q2 primarily due to these tariffs not being offset effectively.

Operator, Operator

The next question comes from Ashley Helgans with Jefferies.

Sydney A. Wagner, Analyst

This is Sydney on for Ashley. Just wondering, we've seen a bit of a gap with unit sales outperforming dollar sales in the scanner data. Wondering if you can speak to kind of what's driving the gap in that trend, possibly connected, what are you seeing in terms of promotion in the channel? And then if you can share expectations for innovation in Q2 and how that will compare to what we saw last year?

Mandy J. Fields, Senior Vice President and Chief Financial Officer

Yes, we are very pleased with the volume growth we’ve experienced across our entire business. During the call, we mentioned that volume has significantly contributed to our net sales growth in Q1, and this trend continues from a scanner perspective, which is encouraging. Regarding category promotions, I wouldn’t say we’ve noticed a significant increase in promotional activities. Some retailers or categories have promotions here and there, but it’s not significantly higher than what we usually observe in this category. From an innovation perspective, we’re very happy with our fall lineup. While we’ve discussed the melting lip balm, we also have our skin tint with SPF 50, which has been described as the best product we’ve ever launched. Additionally, our Sheer For It Blush, priced at $6, is resonating well in the market. Overall, we’re very pleased with our innovation efforts.

Operator, Operator

The next question comes from Bill Chappell with Truist Securities.

William Bates Chappell, Analyst

Just kind of as we look at 1Q versus 4Q, we were back several months so the thought was kind of January, February, there was a little bit of slowdown of the overall category in the U.S. Your Holy Grails weren't, I guess, performing as well as the prior year ones were. And there was just a obviously tougher comps. As you look at the acceleration these past 3 months in the U.S., maybe you give a little color on what changed? Did the new batch of Holy Grails start to pick up? Did the existing ones start to gain traction? Did the comps just get easier? Did the category get better? Any thoughts on kind of why we feel the progress over these past 3, 4 months?

Mandy J. Fields, Senior Vice President and Chief Financial Officer

Bill, you are correct. In Q4, we faced several challenges. We noted that social conversations about beauty had decreased, there were wildfires in L.A., and the potential disappearance of TikTok posed concerns. Our spring innovation, while promising, performed at about half the rate compared to the previous year. Moving to Q1, I believe the category gained some stability. Our fall innovation is improved, as I mentioned earlier, and the early launch of our melting lip balm contributed positively. We feel that e.l.f. is in a stronger position. As you can see, we continue to gain market share for the 26th consecutive quarter. Our focus remains on delivering value to our community. Despite a price increase, 75% of our portfolio is still priced at $10 or less. We're committed to launching strong innovations, receiving positive feedback on our fall releases. We're also investing in high ROI marketing, emphasizing humor to enhance brand recall. We'll keep doing what works well for us as we aim to grow our share in the U.S. and international markets.

William Bates Chappell, Analyst

Got it. Well, then just got followed up on innovation. I mean, do you feel like the spring innovation just took a little bit longer and now is taking off? Or we just moved to the summer innovation and fall innovation and those were bigger wins?

Mandy J. Fields, Senior Vice President and Chief Financial Officer

So for spring innovation, it was still at around the same performance as it had been. Remember, the prior year's innovation was exceptional. It was the best class of innovation that we've ever launched as a company. And so the spring innovation is still great, second best of the year that we've had from a spring innovation, but just not as much. And that prior year innovation was really driven by the lip oils, which has been one of our most successful launches that we've had.

Operator, Operator

The next question comes from Rupesh Parikh with Oppenheimer.

Rupesh Dhinoj Parikh, Analyst

I'm going to ask two questions, and I'm not sure if you will answer them. I'll give it a try since I've been getting emails about it. For Q2, could you help us understand the revenue contribution from Rhode? Additionally, I know that EBITDA margins are expected to decline in Q2, but will Rhode affect your Q2 margins negatively?

Mandy J. Fields, Senior Vice President and Chief Financial Officer

Rupesh, great questions, but detail that we have not provided overall. Other than to say that we feel great about Rhode, we believe over the longer term, as we talk about a full year and thinking about how Rhode comes in and will it be accretive? We have said that we believe it will still be accretive overall. As we think about bringing in that SG&A in Q2, I think we called that out specifically because we don't have the sell-in to Sephora to match with those expenses. And so I wanted to be clear on calling those out. That's why we included those in the prepared remarks.

Rupesh Dhinoj Parikh, Analyst

Okay. That's helpful color. And then just on international, strong momentum this quarter. Is there any way to help us frame some of the puts and takes as we think about Q2 in your international business and your ability to sustain that momentum?

Mandy J. Fields, Senior Vice President and Chief Financial Officer

Yes. In the first half of last year, we had significantly more international sell-in activity than we are experiencing this year. This pattern appears to remain consistent as we consider Q2, particularly regarding our first half versus second half dynamics. Additionally, we are pleased with our international progress. We have upcoming launches with Sephora for both e.l.f. and Naturium, along with further expansions at Boots for Naturium and continued growth in Poland with Rossmann. We are very satisfied with our international performance.

Operator, Operator

The next question comes from Steve Powers with Deutsche Bank.

Stephen Robert R. Powers, Analyst

Maybe I just wanted to circle back on 2Q gross margins, if I could. I understand the tariff flow through. But on the other hand, you mentioned not that many offsets. I just want to press on that a little bit because you will have effectively 2 months of pricing benefits this quarter that you didn't have in the first quarter. And even without the sell-in to Sephora, I would assume that kind of 2 months of Rhode sales also gross margin accretive. So just maybe a little bit more context on the puts and takes in 2Q gross margin, if I could.

Mandy J. Fields, Senior Vice President and Chief Financial Officer

Sure. So I think you've got it right, Steve. We are taking the approach that we will see more of that higher tariff flow through and want to make sure we're being balanced in that expectation. You're right, we will have the pricing benefits in Q2, and then we also will have Rhode coming in to the fold as well. And so those are 2 good aspects in this scenario, but I also want to be mindful that we do have those higher tariffs yet to flow through and also considering what happens next week with tariffs, do we maintain at this 55%? Or does that move to a different number? And so again, just keeping in mind the number of scenarios that can happen from a tariff standpoint.

Operator, Operator

The next question comes from Anna Lizzul with Bank of America.

Anna Jeanne Lizzul, Analyst

I was wondering how you're thinking about the longer-term strategy here with Rhode. There's a limited number of products across cosmetics, skin care, accessories. There is also a privately held cosmetics competitor, which recently launched a fragrance line. So I was wondering how you're thinking about the products here and the categories where you compete.

Tarang P. Amin, Chairman and Chief Executive Officer

One of the things, Anna, that we love about Rhode is just how curated the product assortment is. It's incredibly thoughtful and it has a beautiful aesthetic. And certainly, you're seeing that in terms of the response from consumers and just how much they can't get enough of Rhode. And so the way we'll approach it is that same thoughtful approach Hailey has taken and the team has taken on innovation, we'll continue to do that. You saw a couple of recent launches from Rhode. There'll be additional launches as we go forward, but continue to make sure that it matches the focus of the brand. So I think we have a lot of confidence in what we've seen in terms of the innovation pipeline as well as other ideas that we're talking. So I think similar to e.l.f. Beauty, you're going to continue to see game-changing innovation on Rhode, and we feel really great about it.

Operator, Operator

The next question comes from Jon Andersen with William Blair.

Jon Robert Andersen, Analyst

I apologize if I missed it, but did you share any insights on the digital sales growth for the quarter? I would appreciate an update on that and how much digital sales represent as a percentage of the total business right now. Regarding international sales, you mentioned it makes up about 20% of sales currently. As you aim to double the business in the coming years, do you have a target for the overall contribution from international sales? Lastly, on the topic of innovation, you advanced some innovation earlier in the year at customer request. Does that result in any potential gaps in the pipeline for the second half of the year, or how do you view that situation?

Mandy J. Fields, Senior Vice President and Chief Financial Officer

Yes. So I'll take the first question on the digital sales growth. Overall, in our e-commerce channels, we saw close to a 20% growth rate overall, and it represents about 20% of our business. And so fairly consistent with what we've seen over the last several quarters. Digital continues to be very strong, especially with the Amazon business, which in our 10-K, you saw crept into one of our top customers. And so very pleased with that performance.

Tarang P. Amin, Chairman and Chief Executive Officer

And I'll take the next 2. In terms of the international business, we have very high aspirations for international. And part of where those aspirations come from beyond just only 20% of our business outside the U.S. is the success we're seeing retail after retail and country after country. The launches we've had in the past year, I think we debuted in the top 3 spot in every single retailer we've entered. And so you do see plenty of pent-up consumer demand for e.l.f. And so as we continue to roll out into more countries, we see that 20% being much higher over time. I don't think we've disclosed an overall aspiration other than we expect our international business to more than double in the coming years as well as we talked about in terms of the opportunity we have in color and skin. And then from an innovation standpoint, we have that ability, and you've seen us do this in the past, whether it be our lip oils, whether it be our bronzing drops, where we'll take signals from the community, and we will pull something up faster. Like our original timing for bronzing drops was not when it was going to launch, but we got so many requests from our community of wanting that incredible formulation at a great value that we moved it up. We did the same with the melting lip balms, where we're just getting so much consumer for that item that we moved it up. But it did not cause a hole in our fall innovation calendar. As Mandy said, our fall innovation is stronger than our fall innovation last year. Some of the other items that we talked about are off to a great start. And so we feel great about the overall innovation cadence, including that ability to be able to respond to what our community wants.

Operator, Operator

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

Tarang P. Amin, Chairman and Chief Executive Officer

Well, thank you for joining us today. I'm so proud of our incredible team at e.l.f. Beauty for delivering another quarter of industry-leading results, and I'm thrilled to officially welcome Rhode to the e.l.f. Beauty family. We look forward to seeing some of you at our upcoming investor meetings and speaking to you in November when we'll discuss our second quarter results. Thank you, and be well.

Operator, Operator

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