Earnings Call Transcript - ELF Q4 2024

KC Katten, Vice President of Corporate Development and Investor Relations

Thank you for joining us today to discuss e.l.f. Beauty's Fourth Quarter and Fiscal '24 Results. 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. 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-presentation and the most directly comparable GAAP measure. With that, let me turn the webcast over to Tarang.

Tarang Amin, Chairman and Chief Executive Officer

Thank you, KC, and good afternoon, everyone. Today, we will discuss the drivers of our exceptional fourth quarter and fiscal '24 performance and our initial outlook for fiscal '25. I want to start by recognizing the e.l.f. Beauty team; we hit a major milestone this year, achieving over $1 billion in net sales. In fiscal '24, we grew net sales by 77%, increased gross margin by approximately 330 basis points, grew adjusted EBITDA by 101% and increased market share by 305 basis points, well above our original expectations. We recently rang the opening bell at the New York Stock Exchange to commemorate our 20th anniversary as a company and celebrate the exceptional, consistent, category-leading growth we've delivered over the last two decades. Q4 marked our 21st consecutive quarter of both net sales growth and market share gains, putting e.l.f. Beauty in a rarified group of high-growth companies. We are one of only five public consumer companies out of 274 that has grown for 21 straight quarters and averaged at least 20% sales growth per quarter. In Q4, we grew net sales by 71%, increased gross margin by approximately 180 basis points and grew adjusted EBITDA 93%. We've continued to prioritize three areas with significant runway for growth: color cosmetics, skin care and international. Let me update you on our progress in Q4. In color cosmetics, we continue to significantly outperform the category. In Q4, e.l.f. Cosmetics grew 30% in tracked channels as compared to a category that was down 3%. We grew our share by 325 basis points, driving our brand rankings to new highs. On a dollar share basis, we achieved the number two rank for the first time compared to the number three brand a year ago. And on a unit basis, we achieved the number one rank for the first time compared to the number two brand a year ago. We remain bullish on the color cosmetics category. In Q4, the category lapped a period last year when trends were up 18%. When looked at on a two-year stack basis, category trends accelerated relative to last quarter. We remain confident in our ability to significantly outpace category growth rates and take share. In skin care, we similarly continue to meaningfully outperform the category. In Q4, e.l.f. SKIN grew 38% in tracked channels, 19 times category growth of 2%. We grew our share by 45 basis points, increasing three ranked positions to the number 11 brand compared to the number 14 a year ago. We're also pleased with the growth we see for Naturium, the clinically effective biocompatible skincare brand we acquired this past October. Naturium contributed approximately 17 points to our net sales growth in Q4. Turning to international. Our net sales grew 115% in Q4, fueled by strength in Canada and the U.K. e.l.f. was the fastest-growing among the top 10 cosmetics brands in both Canada and the U.K., driving significant share gains in each. In Canada, we increased our rank to the number three brand compared to the number six brand a year ago. In the U.K., we increased our rank to the number four brand compared to the number seven brand a year ago. International drove 16% of our sales in Q4 on a much bigger total business compared to 13% a year ago. Across categories and geographies, the three fundamental drivers of our business remain the same: our value proposition, powerhouse innovation and disruptive marketing engine. Our mission is to make the best of beauty accessible to every eye, lip, face and skin concern. Our innovation engine has built category leadership over time. Five years ago, e.l.f. had the number one or two position across eight segments of the color cosmetics category. Today, e.l.f. has the number one or two position across 18 segments which collectively make up almost 80% of e.l.f. Cosmetics sales. In Q4, we extended our Power Grip franchise into the setting spray category with the launch of our Power Grip Dewy setting spray priced at an incredible value of $10 compared to a prestige item at $38. With the initial launch, we're seeing a double-digit lift in sales of our original Power Grip Primer that launched over two years ago. We're also innovating in the industry's top segments where we under-index on share, like skin care. While we've tripled our market share over the last five years, we remain significantly underpenetrated today. For context, as compared to the 10.5% share we have in cosmetics, we have less than 2% share in skin care. We are continuing to drive growth in skin with innovative products. In Q4, e.l.f. SKIN launched bronzing drops, one of the most requested products from our community, priced at an incredible value of $12 compared to a prestige item at $38. Bronzing drops were the best-selling skin care product on our site in Q4. The third driver of our performance is our disruptive marketing engine. We have a unique ability to combine the best of beauty, culture and entertainment to attract and engage generations of consumers across various platforms. e.l.f. remains a favorite among Gen Z. In Piper Sandler's latest Taking Stock With Teens survey, e.l.f. Cosmetics ranked the number one teen brand for the fifth consecutive season. We grew our mind share by 16 points versus last year, with our 38% mind share now over 4 times the level of the number two brand. e.l.f. SKIN and elfcosmetics.com also ranked in the top 10 teen favorites in their respective areas. We're expanding our audience beyond Gen Z. Recent surveys show e.l.f. Cosmetics ranked number two in mind share among millennials and number one in mind share among Gen Alpha. This progress in penetrating mind share across different demographics shows that e.l.f. is becoming a multigenerational brand driven by positivity, inclusivity and accessibility. We are also reaching new audiences through unique brand-on-brand partnerships with like-minded disruptors. In Q4, we partnered with Liquid Death, one of the fastest-growing beverage brands to launch Corpse Paint. The response from our community was phenomenal. Our campaign drove over 12 billion press impressions, propelled a triple-digit lift in visits to elfcosmetics.com and sold out the collection in 45 minutes, with 68% of purchasers new to e.l.f. Over the past five years, we've increased our marketing investment from 7% of net sales to 25%. Our marketing investment is working, driving ROI multiples above industry benchmarks even as we've increased our spending. Since 2020, we've doubled our unaided awareness in the U.S. from 13% to 26%. That 26% unaided awareness today compares to the leading U.S. mass cosmetics brand at 52%, illustrating significant runway for growth. Complementing our financial performance over the past two decades, I'm proud that we continue to lead with purpose as we strive to create a different kind of beauty company, one that is purpose-led and results-driven. Out of nearly 4,200 public companies in the U.S., we're one of only four with a Board that's at least 2/3 women and 1/3 diverse. A few weeks ago, we launched our biggest purpose-led initiative yet, Change The Board Game, encouraging companies to diversify their Boards. We partnered with legendary tennis star and equality champion, Billie Jean King, and created a series of video shorts to spread awareness humorously about the inequality on corporate boards. With our Change the Board Game initiative, we aim to champion diversifying boardroom representation, with a goal to double the annual growth rate of women and diverse candidates added to corporate boards. Turning now to fiscal '25. Let me touch on some of the initiatives we have planned to capitalize on the white space we see in color cosmetics, skin care and international. In Color Cosmetics, we ended fiscal '24 with about a 10.5% market share, more than double the level we had four years ago and reached the number two brand rank in Q4 with 12.8% share. In Target, our longest-standing national retail customer, we are already the number one brand with over 19% share. We see an opportunity to double our share again over the next few years as we replicate our success at Target across other key retailers. And Target isn't standing still. In fact, we expanded our market share at Target to 23% in Q4, growing our business by over 70% for the year. We're pleased to announce that we'll be expanding space for e.l.f. in fall 2024 with CVS in addition to previously announced space gains in spring 2024 with CVS and in summer 2024 with Walmart. The second key area of white space we see is in skin care. e.l.f. Skin today holds a 1.6% share and has significant runway with the number one brand holding over 14% share. We're excited about the innovation pipeline we have for e.l.f. SKIN, starting with the in-store launch of bronzing drops this summer. With the acquisition of Naturium, we now have two of the fastest-growing skin care brands that are complementary in their price points, positioning and audiences. From a distribution standpoint, in the U.S., Naturium is currently available in Target, Amazon, and naturium.com. We're pleased to announce that we'll be launching Naturium in Ulta Beauty for the first time in summer 2024. Third, we see significant white space internationally. Our international expansion strategy is anchored in partnering with leading beauty retailers to bring our brands to life in each country we pursue. International accounted for 15% of our sales in fiscal 2024 compared to our global peers at over 70% on average. In Q4, we officially opened our first European office in London, furthering our commitment to grow our international business. As we look to the year ahead, we see a significant runway to continue to grow in our largest global markets: Canada, where we're the number three brand and the U.K. where we're the number four brand. We're pleased to announce that we'll be expanding space for e.l.f. in fall 2024 with Superdrug in the U.K., in addition to the previously announced space gains in spring 2024 with Boots and with Shoppers Drug Mart in Canada. As we look to new geographies, we've seen success with our engagement model across social platforms, driving consumer demand well before we enter a particular country. Since we launched in Douglas Italy last fall, e.l.f. has been the number one brand across both mass and prestige. We saw this again in April when we launched in the Netherlands with Etos, with e.l.f. becoming their number one brand. We're also pleased to announce we'll be launching e.l.f. with Sephora Mexico this fall, marking the e.l.f. brand's first partnership with Sephora. In summary, it's truly an exciting time at e.l.f. Beauty. We've evolved over our 20-year history from a digitally-native indie brand to an industry leader, reaching the number two rank in color cosmetics and rapidly growing in skin care. Our value proposition, powerhouse innovation and disruptive marketing engine has allowed us to drive exceptional consistent category-leading growth. And with the significant white space we see in color cosmetics, skin care and international, we believe we're in the early innings of unlocking the full potential for our brands. I'll now turn the call over to Mandy.

Mandy Fields, Senior Vice President and Chief Financial Officer

Thank you, Tarang. I'm pleased to touch on the highlights of our fourth quarter and full year fiscal '24 results as well as our initial outlook for fiscal '25. Our fourth quarter results were outstanding. Q4 net sales grew 71% year-over-year, driven by broad-based strength across national and international retailers as well as digital commerce. Our net sales growth was led by higher unit volume, which contributed approximately 50 points to growth, with mix adding approximately 21 points. Q4 digital consumption trends were up nearly 70% year-over-year. Digital channels drove 22% of our consumption in Q4 as compared to 18% a year ago. The momentum we're seeing is supported by enhancements across our loyalty program, our app, as well as digital and social platforms. Our Beauty Squad Loyalty Program now has over 4.8 million members with enrollment growing 30% year-over-year. Our loyalty members continue to be a key part of our digital ecosystem, driving almost 80% of our sales on elfcosmetics.com. We're seeing terrific engagement on our e.l.f. mobile app, which now boasts a 4.8-star rating and recently surpassed over 2 million downloads. We're also enjoying strength across third-party digital and social platforms. Q4 gross margin of 71% was up approximately 180 basis points compared to the prior year. We saw gross margin benefits from favorable foreign exchange impacts, price increases in our international markets, lower costs from retailer activity, cost savings and mix, partially offset by inventory adjustments. We also saw a benefit from improved transportation costs, albeit to a much lesser extent than the prior three quarters, as we began to annualize some of the benefits that flowed through in Q4 last year. On an adjusted basis, SG&A as a percentage of sales was 61% in Q4 compared to 61% last year. Marketing and digital investment for the quarter was approximately 34% of net sales as compared to 33% last year. During the quarter, we opportunistically stepped up our marketing investment given our better-than-expected top line trends. As a result, we ended the full year with marketing and digital investment at 25% of net sales, above the high end of our 22% to 24% range that we had outlooked. Q4 adjusted EBITDA was $41 million, up 93% versus last year, and adjusted EBITDA margin was 13% of net sales. Adjusted net income was $31 million, or $0.53 per diluted share, compared to $24 million or $0.42 per diluted share a year ago. The increase in adjusted net income was attributable to an increase in pretax income as well as discrete tax benefits in the quarter related to stock-based compensation. Let's now turn to our full year results. In fiscal '24, we grew net sales by 77% and adjusted EBITDA by 101%, our strongest growth year ever. We invested behind our high ROI marketing and digital initiatives and delivered approximately 280 basis points of adjusted EBITDA margin expansion, supported by the combination of our strong sales growth, gross margin expansion and leverage in our non-marketing SG&A expenses. 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 $108 million in cash on hand compared to a cash balance of $121 million a year ago. Our ending inventory balance was $191 million, in line with our expectations and up from $81 million a year ago. The difference is primarily a combination of three things. First, as we've said the past few quarters, we continue to build back our inventory levels to support strong consumer demand. Second, our consolidated results now include Naturium, which added approximately $26 million of inventory; lastly, an additional $8 million of the increase is the result of taking ownership of inventory from China when it ships versus when it enters our distribution center here in the U.S. Our liquidity position remains strong. We ended the quarter with less than 1x leverage in terms of net debt-to-adjusted EBITDA. We expect our cash priorities for fiscal '25 to remain on investing behind our growth initiatives and supporting strategic extensions. Our initiatives focused this year include continuing to invest in our people and infrastructure, our ERP transition to SAP as well as increased distribution capacity to support strong consumer demand. Now let's turn to our initial outlook for fiscal '25. For the full year, we expect net sales growth of approximately 20% to 22%. Adjusted EBITDA between $285 million to $289 million. Adjusted net income between $187 million to $191 million, and adjusted EPS of $3.20 to $3.25 per diluted share. We expect our fiscal '25 adjusted tax rate to be approximately 20% to 21% and a fully diluted average share count of approximately 59 million shares. Let me provide you with additional color on our planning assumptions for fiscal '25. Starting with the top line. We ended the fiscal year with significant momentum and believe we are well positioned to deliver another year of volume-led, category-leading growth. In Q1, we expect our net sales growth to come in well ahead of our 20% to 22% annual growth, reflecting the ongoing strong consumption trends we are seeing and the incremental contribution from the acquisition of Naturium. As we look at tracked channels, we would expect trends for the e.l.f. brand to continue in the 20% range throughout the summer as we cycle strong compares in the base. Recall, tracked channels represent approximately half of our net sales after accounting for the acquisition of Naturium. As we look out to the remainder of the year, we remain bullish on the cosmetics category and our ability to gain share. At the same time, we are mindful of macroeconomic uncertainty and believe it's prudent to take it a quarter at a time. Our guidance approach remains consistent, serving us well as we've navigated a dynamic operating environment to deliver 21 consecutive quarters of net sales growth. Turning to gross margin. In fiscal '25, we expect our gross margin to be up approximately 10 basis points year-over-year. We expect the first half to be relatively flat to prior year as we flow through higher transportation costs experienced with the Red Sea disruption at the end of last year. We expect those costs to recover in the back half of the year. In terms of the key puts and takes for the year, we expect gross margin benefits from favorable FX rates, margin accretive mix and cost savings to be partially offset by the transportation costs I just noted and costs related to retailer activity and space expansion. With the combination of our top line momentum and ongoing strong ROI we're seeing, we're planning for marketing and digital investment at approximately 24% to 26% of net sales in fiscal '25, compared to 25% in fiscal '24. We're investing from a position of strength and believe these marketing investments will continue to fuel our growth. From a cadence standpoint, we are planning a more balanced pace of marketing and digital spend throughout fiscal '25. As a result, we expect our year-over-year adjusted EBITDA growth could be in the low to mid-single-digit range in the first half of our fiscal year, with more material growth and adjusted EBITDA margin expansion to be realized in the second half of the year. Recall, last year, we spent only 18% of sales behind marketing in the first half of the year versus 30% of net sales in the second half. For the full year, our outlook implies adjusted EBITDA growth of approximately 21% to 23% versus prior year, on top of the strong 101% growth we delivered in fiscal '24. Our outlook also implies adjusted EBITDA margin leverage of approximately 20 basis points year-over-year. Our flywheel approach of investing in marketing to drive top line while expanding adjusted EBITDA margins gives me confidence in our ability to continue to drive profitable growth. In summary, our fourth quarter and fiscal '24 results evidence our ability to drive exceptional, consistent, category-leading growth. We believe we have a winning strategy and remain excited about the significant white space opportunities in front of us. With that, operator, you may open the call to questions.

Operator, Operator

We will now begin the question-and-answer session. Our first question comes from Andrea Teixeira with JPMorgan. Please go ahead.

Andrea Teixeira, Analyst

I wanted to break down the guidance a bit and appreciate your consistently conservative approach. You achieved three times the expected growth with impressive campaigns and consumer engagement, as you mentioned. I was curious about what the 21% at the midpoint signifies. Mandy, you noted that around half of your growth is due to adding Naturium to the base. Can you elaborate on how we should expect the pro forma to behave? If my calculations are correct, that means about half of it, or roughly 10%. How should we consider this in relation to the Nielsen data as you did in the previous quarters?

Mandy Fields, Senior Vice President and Chief Financial Officer

Thank you, Andrea. Regarding our sales guidance, we are projecting a net sales growth of 20% to 22%, and we are very optimistic about this. This builds upon the 77% net sales growth we achieved in fiscal '24, making us confident in our outlook. This growth is expected to be driven by unit sales, as we have established ourselves as the leading brand in unit share according to Nielsen data, which remains strong. We anticipate that Nielsen performance will remain in the 20% range. Furthermore, for Q1, we expect our sales to exceed the 20% to 22% growth range, which reinforces our positive outlook for the near term. Our guidance strategy has been consistent and effective, and we prefer to evaluate our progress one quarter at a time. Currently, we are pleased with what we are observing for Q1. Regarding Naturium, it will contribute incremental growth in the first half of the year since it was not part of our prior base period. When considering Nielsen data along with Naturium and other factors, we expect a growth rate above the 20% to 22% range for Q1.

Andrea Teixeira, Analyst

And then, if I can just add to that. So that implies that the second half of the fiscal year would then be kind of running in the high single digits? Is that how we should be thinking to get to that number?

Mandy Fields, Senior Vice President and Chief Financial Officer

When we look out on the year, again, we feel great about the full year performance that we're outlooking. We don't give quarter-to-quarter guidance, but as I mentioned earlier, our guidance approach is to take it a quarter at a time. So right now, we feel great about what we're seeing for Q1. And again, expect that to be above our full year guidance range, and we'll take it a quarter at a time.

Operator, Operator

The next question comes from Ashley Helgans with Jefferies. Please go ahead.

Ashley Helgans, Analyst

With respect to the international markets has been very impressive. Maybe you can talk a little bit about the brand awareness you're seeing in international markets that you currently don't sell product in. how much of your social contact is consumed outside your core markets and then remind us of the pacing of international expansion that we should kind of expect in the medium term.

Tarang Amin, Chairman and Chief Executive Officer

Ashley, this is Tarang. We're extremely pleased with the progress we're making in international. I think for the quarter, we grew international 115%, primarily off of our first two countries, Canada and the U.K., where we continue to increase rank. One of the things we found as we started expanding the brand is there's a tremendous amount of pent-up demand for the brand. And it really comes from much of our social feed and social strength in the U.S. being consumed outside the U.S. When we launched Douglas Italy, not only were lines down the block for our opening, but we quickly rose to the number one brand in Italy, not only in mass but across prestige. We found the same thing when we went into Etos in the Netherlands; we're not even complete with our rollout there. I think the rollout gets completed in July, but we're already the number one brand in cosmetics. What we're discovering is that consumers around the world are eagerly anticipating our entry into new markets, generating significant excitement. Each quarter, we plan to announce our expansion into another country. We're thrilled to share our partnership with Sephora to enter Sephora Mexico, marking our first foray into Latin America, and we believe this will lead to further opportunities in other Sephora markets globally. Our discussions with various retailers are progressing well as we outline our strategy. You can expect a consistent and methodical rollout strategy similar to what we executed in the U.S. as we consider our approach to Canada and the U.K., starting with a major retailer and then expanding further in those markets.

Operator, Operator

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

Dara Mohsenian, Analyst

So just wanted to get a bit more detail on the top line guidance for fiscal '25. You mentioned you're still optimistic about category growth and the momentum in Q1, but assume a slowdown in the balance of the year post Q1 on macros. So can you just give us a bit more detail on what you're seeing near term in the category so far in fiscal Q1, given the Ulta comments and some of the worries out there. And then the balance of your slowdown, is that just macros? And how do you think about that relative to what you're seeing so far in Q1?

Tarang Amin, Chairman and Chief Executive Officer

I appreciate the opportunity, Tarang. I’ll address the category outlook first, and then Mandy can discuss the guidance timing. Overall, I remain optimistic about the color cosmetics category. There's been some discussion about a slowdown in mass color. However, looking at our Q4 performance, mass color was down 3%, but it’s important to note that the same period last year saw an 18% increase. Thus, when considering a two-year perspective, the category is performing well. Even in the current quarter, the two-year comparison shows a 5% increase in mass color. We feel very positive about the category. Regarding the feedback from retailers, while I can’t share Ulta's overall insights, I can say that in fiscal '24, our business with Ulta increased by 80%, significantly exceeding overall growth rates. Even Target, which Target did call out today, beauty being a bright spot. Our target business was up 70% last year. So, we feel great in terms of where we're positioned and the strength we're seeing across every one of our channels, including digital.

Mandy Fields, Senior Vice President and Chief Financial Officer

Yes. And then I'll take the second part, Dara, on the guidance philosophy. And so if I take you back to last year, last year we started our guidance at a 22% to 24% range and ended the year at 77%. And I'm not saying that we're promising 77% this year for sure. But what I will say is that it gives you a little bit of insight into our guidance philosophy and what has worked well for us over these last five years, taking it one quarter at a time, which is why we indicated that we do love the momentum that we're seeing out of Q1 and feel great about our overall guidance range at this point.

Dara Mohsenian, Analyst

Okay. And just to follow up, I guess, a similar question around your market share specifically. It sounds like you don't necessarily want to assume the momentum continues going forward, given you've had such a strong level of momentum, you can't sort of assume that continues quarter after quarter. Is that more the right way to think about implied market share slowdown after Q1? Or are there some specific points maybe that would impact your market share just as we think about the quarterly cadence?

Tarang Amin, Chairman and Chief Executive Officer

Yes, Dara. We are very optimistic about our market share. As Mandy mentioned regarding our overall guidance strategy, we approach it one quarter at a time. This means we are not suggesting any slowdown; we are just waiting to see the results from Q1. At that point, like we have done in recent years, we will adjust our guidance based on the outcomes and continue moving forward from there. Same on market share. I'm pleased with the over 300 basis points of market share we grew this past year. First time that we passed L'Oreal Paris, the number two spot with a 12.8% market share. First time we passed Maybelline for the number one unit share. And then at Target, our longest-standing national retail customer, we not only are we the number one brand, but we accounted for, in our Q4, 23% of their entire category growth. So, we remain very confident in our ability to continue to grow market share over time, doubling our market share in color cosmetics. Skin care perhaps is even a bigger opportunity given the white space we see there. So, I would take a look at kind of our current trends on market share; we don't see anything that would indicate that would slow down in terms of our ability to continue to take share.

Operator, Operator

The next question comes from Olivia Tong with Raymond James. Please go ahead.

Olivia Tong, Analyst

Congratulations on the incredible growth you've achieved this year. You mentioned multiple upcoming expansions in shelf space, including the launch of Naturium at Ulta and Sephora in Mexico for e.l.f. Can you provide some details on the shelf space you expect to gain from that? Additionally, it seems that the launches and shelf space increases with existing retailers are not included in the outlook beyond the first quarter. If you could elaborate on that, as you've indicated that you'll approach this on a quarterly basis. Does the projected growth of 20% to 22% not account for the new retail shelf space you'll be acquiring?

Tarang Amin, Chairman and Chief Executive Officer

Olivia, this is Tarang. So, we feel great about the cadence of space that we're gaining with customers. I'll remind you that most of our growth comes from our productivity model; the strong productivity we deliver with every customer makes us the most productive brand that most of our major retailers carry, and that in turn rewards us with more space. So our guidance right now, if I think about space gains, really incorporates in the Walmart space that we will pick up in the summer in the U.S. And then outside the U.S., obviously, we talked about Superdrug expanding space in addition to the Boots and the Sephora Mexico launch as well. Certainly, for future space gains, we will announce those in subsequent quarters. So, the 20% to 22% does not incorporate what we may expect in terms of future space gains.

Olivia Tong, Analyst

Got it. I’m curious if you can discuss the extent of space gains at Ulta with Naturium, particularly in Sephora Mexico. Additionally, it seems like Naturium is performing very well, and I’d like your perspective on the long-term opportunities for other international retailers. How does the success of Naturium shape your thoughts on mergers and acquisitions moving forward?

Tarang Amin, Chairman and Chief Executive Officer

So, I'd say the magnitude of space gains, we feel really good about. We haven't been disclosing exactly what the space gains look like so you're going to have to wait until you see what we do with Walmart and Sephora and some of these other customers. But we've made continual improvements in our presentation, visual merchandising in stores, and we feel really good about what those sets look like. And then in terms of Naturium specifically, we feel great with the progress. We're making with Naturium. The team is doing an incredible job not only in terms of mapping out distribution gains, but also the overall consumer engagement model and a terrific pipeline of innovation. So we're quite bullish on Naturium and its future. Certainly, when you look at a distribution standpoint, I would say we continue to perform extremely well at Target, Naturium's main customer and taking from the e.l.f. playbook as we expanded to other customers, we continue to strengthen our business at Target. We plan to do the exact same thing here; we have strength in Amazon. But Ulta is particularly excited about the launch for Naturium. And then if I look internationally, really wide open outside of Shoppers Drug Mart and Space NK, where we can leverage a lot of the momentum we're seeing internationally on Naturium as well.

Mandy Fields, Senior Vice President and Chief Financial Officer

From a mergers and acquisitions perspective, we are primarily concentrating on the brands within our current portfolio. We are very enthusiastic about what we are observing with Naturium and the significant opportunities that we still have there. Therefore, we have been very selective and strategic regarding M&A activities and are confident about the growth prospects across our brand portfolio.

Tarang Amin, Chairman and Chief Executive Officer

Our primary focus, as Mandy mentioned, is on our existing brands and the significant opportunities available to us. We have a strong balance sheet, and even after our acquisition of Naturium, our net debt to EBITDA is still below 1x. If we encounter another opportunity similar to Naturium, we would pursue it. However, we are also quite disciplined and can afford to be patient.

Operator, Operator

The next question comes from Linda Bolton-Weiser with D.A. Davidson. Please go ahead.

Linda Bolton-Weiser, Analyst

Yes. I was wondering if you could comment on your margin expansion algorithm. I know longer term, you have been talking about 100 basis points annually from mix enhancement. And I was curious if that is still applicable? Are you expecting to see that embedded in the next fiscal year? If you could comment on that. And then related on the cost side, the Red Sea situation, you don't ship a ton from China to Europe. So, I'm assuming the Red Sea situation is escalating your cost of shipping to the U.S., is that correct? Are we understanding that correctly?

Mandy Fields, Senior Vice President and Chief Financial Officer

Yes. Linda, great to hear from you. So let me first start with gross margin and the mix impact. Over the past many years of e.l.f's. history, we have benefited from mixing our margin higher over time. The 10 basis points of gross margin expansion that we talked about for this guidance continues to factor that in. We continue to see an opportunity for that to do better over time, but we, again, don't want to get too far ahead of ourselves. So, we certainly hope to see mix play a bigger role in fiscal '25, but again, are taking it a little bit lower here, especially because as we cycle the benefits that we had in the base. So, we had transportation cost benefits and FX benefits in the base last year. With the Red Sea disruption that we saw, you're right, we're not shipping a ton to Europe. But overall, we saw costs rise.

Operator, Operator

The next question comes from Susan Anderson with Canaccord Genuity. Please go ahead.

Susan Anderson, Analyst

I guess I wanted to ask about the Naturium rollout in Ulta this summer. I guess how should we think about that shelf, is it going to be the full product offering that we see similar to Target, from skin care to body care? And then also is it in all the doors? And then I was just curious kind of how you think about marketing dollar allocation towards Naturium brand versus e.l.f. I assume a good portion of that is going more towards the e.l.f. brand. So just curious how much you're spending there versus e.l.f.

Tarang Amin, Chairman and Chief Executive Officer

Susan, Tarang. Naturium at Ulta, we feel extremely great about. It will have the full assortment. So, you will have both facial skin care as well as body care; both segments are doing extremely well for Naturium, and it's good to have the entire lineup there. It will be in all stores. So, we feel good about both of those things. And then in terms of the marketing rate, we usually approach marketing as a percentage of sales. And so, we have rates assigned by each brand that then roll up to the overall guidance that we've given of 24% to 26%. So, we haven't disclosed individual brand rates, but the Naturium rates are not that far off from the overall e.l.f. rates. And so that's a little bit of way to think about that as the business grows; there will be more marketing dollars, but it's set on a rate of percent of sales.

Operator, Operator

The next question comes from Korinne Wolfmeyer with Piper Sandler. Please go ahead.

Korinne Wolfmeyer, Analyst

I'd like to get a little bit more color on how you're thinking about both the digital and international businesses this fiscal year. I mean both of these categories or both these segments have been growing high double to triple digits for you, and it seems like you're gaining shelf-space; it seems like digital is having good momentum, but the guidance implies a pretty significant slowdown. So, can you just talk a little bit about how you're thinking about the trajectory for both digital and international this year?

Mandy Fields, Senior Vice President and Chief Financial Officer

Yes. We feel great about our digital and international businesses. In fact, digital was up 90% for the full year in fiscal '24 and international was up 116% for the year. So, both had incredible momentum behind them. As we said, our guidance implies kind of taking it a quarter at a time, and we do believe that we should continue to see benefit from both of those as growth drivers for us on the road ahead. So really excited about what's to come. We talked about all the space expansion that we have from an international standpoint. Reaching the number one brand in Etos and Douglas as we rolled out, and so a lot of momentum there on the international side.

Korinne Wolfmeyer, Analyst

Got it. And then can you just touch a little bit on your hiring plans for this year? I know you've been building out a team in Europe. I believe that's about complete, but can you just expand a little bit on how we should be thinking about headcount costs for SG&A this year?

Tarang Amin, Chairman and Chief Executive Officer

Yes, Korinne, if you look at our history, ten years ago, when I started as CEO, we had about 100 employees. We have close to about 500 now. And it's been pretty consistent in terms of how we built the team. Each year, we invest in our team and our infrastructure. This year is no different. You'll continue to see us continue to hire in the areas we need, even internationally; while we've built out the team there, there's still further opportunity. We have been investing in our digital business and integrated marketing to ensure we have a strong team capable of scaling the brand. When we evaluate any metrics like sales or profit per employee and market cap per employee, we significantly outperform many of our legacy competitors. Our strategy focuses on building a robust team without overextending ourselves, ensuring that everyone has meaningful roles and opportunities to collaborate effectively in our high-performance culture, which enhances both the speed and quality of our execution. There will be additional hires, and while we haven’t disclosed the exact number, we have consistently invested in our team, which has yielded substantial results.

Operator, Operator

Next question comes from Peter Grom with UBS. Please go ahead.

Peter Grom, Analyst

I have two quick questions. Mandy, you mentioned that sales in Q1 are expected to be above the full year range. I apologize if I missed this, but could you provide some guidance on how much above that might be? I understand the benefits from Naturium, but it would be helpful to have more clarity on your expectations. My second question is regarding the EBITDA guidance. I'm trying to understand why we might not see better leverage this year. I fully grasp the comments on gross margin, and I see that marketing and digital are projected to remain flat year-over-year as a percentage of sales based on the midpoint guidance. These factors alone seem to lead to your margin guidance. However, historically, you have achieved considerable leverage on non-marketing SG&A, and this year's guidance doesn't appear to account for much of that. Am I understanding this correctly? If so, could you share any insights on what might be influencing this?

Mandy Fields, Senior Vice President and Chief Financial Officer

Sure. So let me start with your first question, Peter, and good to hear from you, by the way. Sales in Q1 and how we're thinking about that, I guess, from a building block standpoint, we've given some breadcrumbs on Nielsen and what to kind of expect there in terms of that being in the 20% range as we go through the summer. We also, as you mentioned, Naturium would be an additional impact. And then you would have to assume some further impact from international and digital as well to get to a number. Now, we don't provide quarterly guidance, so I can't give you a number specifically but that gives you a little bit of flavor as to what to expect for Q1 sales. In terms of EBITDA guidance, I feel great about our EBITDA guidance. We're guiding 23% on the top end, on top of 101% growth in adjusted EBITDA last year. It's really incredible performance. And we've said for many years now that we expect adjusted EBITDA to outpace our net sales growth and have that leverage year after year. The degree to which that leverage comes through will vary from year to year. And so, for the past couple of years, we have really had incredible leverage in our adjusted EBITDA.

Operator, Operator

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

Anna Lizzul, Analyst

Just wanted to follow up on the shelf-space expansion. I guess as we think about the landscape of where beauty is outperforming, you are more exposed to Target than to Walmart, but at least this quarter, there was greater outperformance in overall beauty at Walmart versus Target according to those retailers. So how do you think about the opportunity for shelf-space gains continuing in the long term versus the shelf-space that peers have at those retailers? And then as we think about the launch of Ulta, Sephora in Mexico, do you have any specific plans on which brands or products you might be bringing to this market?

Tarang Amin, Chairman and Chief Executive Officer

Anna, so we feel great about the prospects of shelf-space gains in the future. We are gaining share at every retailer we're in. Our growth rates are well in excess of their categories, and we're seen as a key growth brand. So, as you take a look, as I mentioned, at Target, in the first quarter, we were 23% of their entire category sales. You will not find our space anywhere near that. So, even a huge opportunity within Target, we feel pleased about the shelf-space that we're going to be gaining in Walmart. I don't think we'll be done there either with this summer. We still have a massive opportunity. So, I feel very confident about our ability to continue to get space in the long term, just like we've proven over the last 10 years. We've got a pretty good consistent cadence of being able to pick up space given the growth that we have and the innovation and the consumer profile we bring to market. And then in Sephora Mexico, we're starting with the e.l.f. brand in Sephora Mexico. That will be our primary focus, e.l.f. color, e.l.f. skin in that market, and then we'll look at the rest of our brand portfolio over time, but we're at least starting with those two brands.

Operator, Operator

Next question comes from Oliver Chen with TD Cowen. Please go ahead.

Oliver Chen, Analyst

Tarang and Mandy, regarding international and skin care, what should we know about the margin profile there as you continue to scale and make lots of great progress there? Also, as we think about TikTok and the geopolitical environment, you've been very agile thinking about marketing spend, but what are your thoughts in terms of changes that may happen there? And then more broadly on pricing, how should we think about what you're doing in terms of like-for-like relative to innovation? I know you stick to keeping really clear, awesome value generally speaking, and give that back to the customer.

Mandy Fields, Senior Vice President and Chief Financial Officer

Thanks, Oliver. I'll take the first question. So, from an international perspective, over time, we believe international as it scales can have greater margin progress. And just remember that the tariffs that we experienced here in the U.S. we do not have in the international market. So, because of that, we do believe that could be a margin expansion opportunity as we continue to expand internationally, whether that is in skin care or color cosmetics, because, as we've talked in the past, there's really no difference in margin profile between those categories for us.

Tarang Amin, Chairman and Chief Executive Officer

Regarding your second question about TikTok, you're correct; we are very adaptable. We engage where our community is present. If anything were to happen with TikTok, we have a solid presence across social platforms. For instance, our channels on Twitch, Instagram, Instagram Reels, YouTube, and Roblox demonstrate our strength. We are confident that consumers will remain engaged, and we will connect with them in ways that resonate. From a pricing perspective, our margin growth has mainly resulted from our innovation mix. We are optimistic about this approach, as bringing new innovations to market enables us to achieve a better margin profile and diversify our business. A number of our competitors over the last few months did take pricing, but we chose not to take pricing, ensuring a phenomenal value proposition. But more importantly, we like holding pricing in our back pocket, as there's been talk potentially of incremental tariffs as we approach that challenge. That's not an FY '25 issue; that's more for FY '26. We'll use the same balanced approach we did in 2019 when faced with a tariff for 2022 when we had inflationary pressures. We want to keep pricing in our back pocket along with some of the other mechanisms we use to help mitigate any external threat to the business.

Mandy Fields, Senior Vice President and Chief Financial Officer

I feel confident about our inventory position. We have been increasing our inventory to meet the demand we are experiencing, and we certainly have the capacity to support additional demand and potential growth if it arises. Overall, we are optimistic about our inventory.

Tarang Amin, Chairman and Chief Executive Officer

And on the holy grail strategy, we feel great. We have a rich pipeline that goes out three years and then the agility to move things up as our community demands. A great example is a launch we're about to have here in our bronzing drops, which is the most requested item from our community, and our ability to pull that up in our own innovation pipeline and bring that to market soon. Extremely excited about that. So, I think you'll just have to stay posted, but we have a rich slate of continued innovation and feel really good about the strength of that innovation across both color cosmetics as well as skin care.

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 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 industry-leading year of results. Thank you for every e.l.f. and e.l.f. partner for your passion and dedication to our vision of creating a different kind of beauty company. We look forward to seeing some of you at our upcoming investor meetings and speaking with you in August when we'll discuss our first 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.