Thank you for joining us today to discuss e.l.f. Beauty's Third Quarter Fiscal 2021 Results. I'm KC Katten, Vice President of Investor Relations. With me today are Tarang Amin, Chairman and Chief Executive Officer; and Mandy Fields, Senior Vice President and Chief Financial Officer. We encourage you to tune into our webcast presentation for the best viewing experience which you can access on our website at investor.elfcosmetics.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.

Thank you, KC and good afternoon everyone. I hope that you are staying safe and well. Today, I will discuss the drivers behind our Q3 results, our growth opportunities and our overall strategic framework. I am proud of our team for delivering our eight consecutive quarter of net sales growth as we continue to navigate major category headwinds as a result of COVID-19. We delivered Q3 net sales of $89 million, up 10% versus a year ago and adjusted EBITDA of $18 million. We continue to gain market share while advancing our transformation to a multi-brand portfolio. We are also raising our full year guidance reflecting a shift in some orders from Q3 to Q4 and continued business momentum. Before Mandy details our results, I want to share the key pillars underpinning our performance. Our strategy is working. We came into the is volatile period from a position of strength. Our super powers that’s center on our ability to deliver 100% cruelty-free premium quality beauty products at accessible price points with universal appeal continue to resonate with consumers. Our out-performance relative to the category reflects the strength of our business model and a relentless focus on our five strategic imperatives. Let me provide a few highlights from the quarter. Our first strategic imperative is to drive brand demand. We continue to leverage our digital first marketing engine to drive greater brand relevance and expand our consumer reach. Our brand building efforts are working as we continue to significantly outperform our competition. e.l.f. grew the most share in the quarter with 5.9% of the market up 100 basis points year-over-year. e.l.f.’s social audience continues to grow double-digits with over 9 million followers across our digital ecosystem. Our earned media value is up 16% compared to the prior year and we’re the…

Thank you, Tarang. Today I'll cover our Q3 financial results and raised fiscal 2021 outlook. We delivered Q3 net sales of $89 million up 10% from a year ago. This growth was mainly fuelled by on-going strength across e-commerce, international and national retailers. We also experienced a shift in order timing from December into January. While timing shifts happen in the ordinary course, this instance resulted in lower net sales and thus lower adjusted EBITDA than we originally expected in Q3. As you will note by our increased guidance, we expect to recapture those orders and enjoy further strength in Q4. Gross Margin of 64% was down approximately 50 basis points compared to prior year. Similar to the last several quarters, we saw gross margin benefits from margin accretive product mix, cost savings and a mix shift to e.l.f. cosmetics.com. We also benefited from FX, although less so relative to prior quarters as we started to feel the impact of changing FX rates. Offsetting these benefits were certain costs related to retailer activity and space expansion. On an adjusted basis, SG&A as a percentage of sales was 49% compared to 44% last year, primarily driven by increased investment behind marketing and digital headcount costs related to the build out of our marketing, digital and innovation and increased operational costs related to higher e-commerce volume. Marketing and digital investment for the quarter was approximately 15% of net sales versus 12% a year ago. Q3 adjusted EBITDA was $18 million down 14% to last year, and adjusted EBITDA margin was approximately 21% of net sales. Adjusted net income was $12 million or $0.22 per diluted share, compared to $12 million or $0.24 per diluted share a year ago. Our liquidity remains strong with the combination of our cash balance and access to…

We will now begin the question-and-answer session [Operator Instructions] And our first question today will come from Andrea Teixeira with JPMorgan. Please go ahead.

Hey, guys, it's actually [Indiscernible] for Andrea.

Hi.

Dig a little deeper. Hey, hey, guys. So we just wanted to dig a little bit deeper on distribution. So we're just wondering if you guys could update us a little bit about the distribution game that you guys have seen recently, and if they're coming in, or if they came in as expected. And then if possible, if you could describe sort of your expectation of what those distribution games would have on your sales group? Thank you.

Sure. So we're pleased with our distribution progress. We mentioned last fall, picking up more space at Walmart and Ulta Beauty. In our spring sets, we've picked up additional space for the e.l.f. brand at Ulta Beauty. We've also picked up distribution at Shoppers Drug Mart in Canada, as well as Nykaa in India online. Those are the primary beneficiaries on e.l.f. In addition, we picked up space related to W3LL PEOPLE and Ulta Beauty as part of their conscious beauty initiatives. And Key Soulcare, while the launch has been online and digital first, both on Key soulcare.com and ulta.com you are starting to see us expand distribution on that brand as well. Earlier this month, we started a global shift, which allows us to serve 29 countries with Key Soulcare. We also talked about being at Ulta, I'm sorry, at Cult Beauty in the U.K. for that distribution. And we announced on this call that we'll also be entering Dugas in Europe in eight different countries and European market as well. So we feel pleased about our distribution progress. It's also one of the things that raised our guidance and the confidence that we have in terms of the continued momentum that we have.

And our next question will come from Dara Mohsenian with Morgan Stanley. Please go ahead.

Hey guys.

Hey Dara.

You've had very strong markets for your performance for a couple years now in the U.S., just given the unique nature of COVID. And as we come out of this COVID and cycle easier comparisons from a category perspective in calendar 2021. Can you discuss if you think the key market share drivers are still in place. And you should see continued robust share expansion going forward post COVID, just any sort of key differences post COVID that might compromise your ability to continue to gain share at the levels we've been seeing recently? Thanks.

So we entered the pandemic, from a position of strength. We were already gaining share through executing a five strategic imperatives through the pandemic. We've continued to execute those five strategic imperatives and I think our overall value proposition clearly shine through. We feel even coming out of the pandemic; we're going to be even stronger. We have a more robust brand portfolio, not only the momentum that we have an e.l.f. beauty, but also W3LL PEOPLE and Key Soulcare. So we feel we're even better positioned coming out of the pandemic. And the one thing that we feel will really aid us is we've been doing all of this even our 10% net sales growth this quarter in the construct of a category that's down 20%. So we believe as the category comes back, and which I absolutely believe it will, given people's restrictions right now and being able to kind of get out and express themselves. That headwind that we've had from a category standpoint becomes a tailwind. So our intent is to continue to gain share, regardless of where the market is and continue by executing not only our strategic imperatives for this brand portfolio that we have.

Great. And then in the scanner data in the U.S. in December, we saw a bit of a slowdown sequentially versus the prior couple of months, was that more just a track channel phenomenon and maybe the untracked channels picked out so the total results were still solid, just trying to sort of understand that performance, particularly with a pickup post December so far in January. So perhaps some commentary on overall trends and if you were seeing any shift on track during that period?

Sure. Hi, Dara. So I would say that Nielsen track channel data overall has been quite volatile, a little bit up and down as we've, seen over the weeks. And so what you saw in December, I think was just kind of a normal, what you're seeing in physical retail, a little bit of a pullback, we continue to see strength in e-commerce, and which is why you see us delivering a positive 10% for Q3 inclusive of the month of December. I would say as we looked into January, those that lift that we saw, definitely included a little bit of an impact from the stimulus that was rolled out. And so if you recall last summer, when stimulus rolled out, we did see a few weeks of six to eight weeks, I would call it upside there. I think you saw a little bit of that in January. But also, I think you're seeing just our business momentum, core business momentum reflected as we've gotten into January.

Great, thank you.

And our next question will come from Steph Wissink with Jefferies. Please go ahead.

Thank you. Good afternoon, everyone. Tarang, I want to come back to a comment you made in your prepared remarks about SG&A leverage in fiscal 2022. I think that was Mark maybe the first year of leverage in a number of years. So maybe share with us a little bit what's behind that comment? Is it the fact that multi-year investments are coming to completion or something that you're seeing within your business mix that is giving you conviction and the ability to lever that line item? Thank you.

Sure. So I think it speaks a lot to our long term economic model. So we've long had a series of investments, both in terms of marketing, as well as the team in our infrastructure, with a vision of we'll be able to leverage those investments over time. So our approach is going to be continued to stay strong. On a marketing standpoint, we believe those marketing investments we're making definitely are bearing fruit in terms of the market share gains that you see in our continued business momentum. But if I take a look at the rest of our cost structure, the SG&A outside of marketing is definitely the ability to leverage that, particularly as we pick up more sales. And that very much has been our intent, as we laid out that three year economic model where mid-to-high single digit sales growth, we see leverage through those fixed costs to be able to drive EBITDA grow faster than that. And really from that, FY-2022 period of the next three years as a CAGR.

Thanks, Tarang. And I just really quickly Mandy, could I ask on the inventory step up. I know you mentioned space expansion and the Keys launch. But help us think through the FX component of higher costing. I think you mentioned that you'll see some had been through the fourth quarter, but how should we think about the forward year? So higher cost of goods kind of feed through the overall model?

Yes, so as we talked in our prepared remarks, FX is a headwind for us. I've talked in the past about how it's been a benefit. And that is, now with a weaker U.S. dollar. That's turned into a headwind, and we are planning to help mitigate the impact of FX as we laid out, really starts with pricing. And so we will be taking some select price increases to help offset that impact, continuing to work with our suppliers on cost savings, and then to your earlier point on SG&A leverage, really having that as a focus to help deliver on our long term economic model of driving that EBITDA leverage over the next three years.

Thank you.

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

Hi, yes, maybe you could help me understand kind of the cadence of EBITDA progression in the third and fourth quarter. I think originally you had said, there would be more EBITDA margin pressure in the fourth quarter because of the Alicia Keys costs. And now the way it's modeled out, your EBITDA quite frankly was lower than expected in the third quarter, and it's kind of higher than expected in the fourth quarter. So can you kind of help us understand like, did you have some incremental expenses in the third quarter that were unexpected? And maybe you could give a little color on the gross margin impact? You mentioned there was retailer activity and space expansion costs related to the gross margin impact in the quarter? Maybe you could give some color on that? Thank you.

Sure. So let's start with the EBITDA progression question. So I've talked about a shift in order timing from Q3 into Q4. And so really, if you think about those sales, moving over into Q4, that would imply better than previous EBITDA margins for Q4. And so that's what you're seeing happen there. So in total, we recaptured those sales and that's reflected in Q4. So just a little bit of a shift there from an order timing standpoint. On the gross margin impact and the retailer cost that we talked about, there are certain costs that are related to expanding space or getting on shelf with retailers that do impact gross margin. And so as we do as we pick up space, and as we get our brands onto shelf, there are costs associated with that. And so that's what that was what was implied by that comment.

Okay. Thank you.

And our next question will come from Oliver Chen with Cowen. Please go ahead.

Hi, as you think about marketing, and your updated outlook, what's happening with marketing as a percentage of sales? And then as you undergo a lot of innovation in these new platforms and experimentation, as well as really great success, marketing as a percentage of sales, how do you -- how do you see that trending on a longer term basis. I would also love any context as Ulta and target partner, what that may imply in terms of your business and different planning that's happening? Thank you.

Sure, so first of all, we feel great about our marketing and digital investments. As a reminder, we talked about taking our marketing digital investments, including Key Soulcare, up to the 14% to 16% range for this year. That's unchanged. We still assume that for this year, which is a pretty big step up from last year. We're comfortable with those levels right now, when we provide FY 2022 guidance. Next quarter, we'll update the entire outlook as we take a look what we like what we're seeing from those investments and how we're able to do at those levels. And a big part of those investments is also really supporting two things. One, us continuing to blaze new territory, whether it be our partnership with Loserfruit on Twitch, whether it be our work on trailer, as well as the other platforms, we're seeing real resonance with consumers on all of our different marketing activities. And then in particular, with our innovation program, we have a number. I mean, I think unlike a number of other brands, we remain strong in terms of our new product launches throughout the pandemic. And I'm particularly pleased with new products that we have slated for this upcoming year, our spring resets are getting set right now. The early indication we have from our online sales is quite strong. Things like our CC cream, which I believe is going to be our next big holy grail product building off our Camo Concealer franchise, our mint melt collection with Walmart, our holy hydration, makeup cleansing balm, all of those are doing extremely well as are some of our other innovations. So feel really good about that combination of our marketing, digital investment, really getting behind some of these key new products that only ELF can deliver. And then in terms of Ulta and Target, we see huge opportunity, both with the partnership and then with each customer. So at Target, this last quarter, we actually surpassed L'Oreal for the number two position at Target. And that's still with a footprint that's significantly less than Maybelline and L'Oreal. So we have a long way to grow even within our most established retail customer. I mentioned in the prepared remarks that Ulta is continuing to award the brand with more space, not only the space they gave us last fall, but in their spring resets as well. So we see real momentum there. And then, depending on how that partnership between Ulta and Target progresses, we also see opportunity, particularly with our Key Soulcare brand, which is going to start exclusively at Ulta. But I there's an opportunity down the line to also take a look at some of those boutiques within Target as well.

Thank you. And our final question, which is awareness growth. As you think about awareness growth at W3LL PEOPLE and Key Soulcare. And what would you highlight as the building blocks for joining that there are different kinds of special brands in different ways, but would love thoughts on the awareness roadmap at those newer brands? Thanks.

Sure. So on a macro level, we're following the same approach as e.l.f. It's a digital first strategy. So you see all of our spending really primarily digitally related, and building that awareness. So we did a brand recharge on W3LL PEOPLE. We’re pleased with the results we're seeing on that so far in terms of our ability to engage consumers, really through digital. And as we expand distribution on that brand. Key Soulcare, we're using a similar strategy but somewhat different in that we also have Alicia Keys 100 million followers and the community that we're building with Key Soulcare. So the ability to amplify that brand is even greater just given the power of Alicia Keys and what we've done by really creating a lifestyle beauty brand, and really starting with content conversation and community and particularly as we expand distribution on that brand and that will be a true global brand I think we have a real big opportunity to really accelerate awareness on that one as well.

Thank you. Best regards.

And our next question will come from Jon Andersen with William Blair. Please go ahead.

Good afternoon. I apologize that this is already been asked. But on Soulcare, Key Soulcare, could you talk about where you are today in terms of the number of products in market. And I wasn't totally clear, when you plan to be available at brick and mortar retail, or when you plan to have that brand available at brick and mortar retail? And with which retailers will be initially merchandise? Thanks.

Sure, Jon. So we expanded the Key Soulcare range to nine different skincare products and rituals, really earlier kind of in January. And so, we're pleased with the initial results of those products. Those are primarily been online, both keysoulcare.com and ulta.com. We're now in Cult Beauty in the UK online. And in terms of brick and mortar, you'll start seeing the expansion of that brand. The first customer that we have announced is Ulta Beauty. You'll see it enter retail and Ulta Beauty over the next quarter or so. And then following that you'll see expansion into gloss across Western Europe. And that's all in addition to the 29 countries that global ship is available and that's already live. So you'll continue to see a progression. But brick and mortar will come a bit later in the year.

Okay. Thanks. And then on W3ll PEOPLE, I know you've talked about brand recharge a couple of times. Could you give us a little bit more color on the program there? What's changed? And also an update on the progress you're making, or maybe the opportunity to expand distribution, leverage your National Retail relationships and the progress you've made there so far?

Sure. So the real focus on the brand recharge was really amplifying W3ll PEOPLE stands for. One of the things that really appealed to us when we made the acquisition is W3ll PEOPLE's a real pioneer in Clean Beauty. Almost 40 EWG verified products, the highest standard of clean, a real great heritage in the Clean Beauty space is pioneer there. And so the focus of the brand recharge is really making those superpowers come to life, really our Clean Beauty approach and products that really work. These products are phenomenal on W3ll PEOPLE. And so you see if you go on W3ll PEOPLE.com, they're just more vibrant presentation of the brand, core brand proposition. And as we take that to customers, including better visual merchandising. So the current distribution footprint of W3ll PEOPLE, the primary customers target and they're not in all doors at Target. So we see a huge opportunity, leveraging our strength at Target to expand distribution there. I mentioned earlier that we're part of Ulta's conscious beauty program, we see that as an opportunity as well. And other retailers that really consider clean, a key consumer segment, which increasingly becoming more and more retailers as you go through. So we feel good about our journey ahead, and particularly the progress we've made on the brand.

That's really helpful. Thanks. If I could squeeze one more in. Just if you could comment on the supply chain, some of the changes you've made with own manufacturing, et cetera, kind of the status of some of the optimization work you're doing in the supply chain? Thank you.

Sure. So, our supply chain is one of our key advantages. We have a unique hybrid model where we work with likeminded suppliers and have a great deal of control in terms of our entire supply chain. We continue to see really great progress from our China's supply chain first and foremost through lean manufacturing, generating savings, even better operating results. We were able over the last six months to be able to tech transfer all of the W3ll PEOPLE's products to our China supply chain realizing significant COG savings. Key Soulcare is being manufactured through that same supply chain basis, which also gives us that advantage in cost quality and speed. And so you continue to see us enhance it. The one place we have not made as much progress on is our U.S. manufacturing. If you recall last quarter, I talked about some of the COVID restrictions getting in the way for us to be able to do our engineering work for that facility. That's still very much true. The good news is we've been able to overcome that by the strength that we're seeing in our China supply chain and look forward to providing greater updates on that in the future. But it really is one of the strengths that's helping drive the overall business.

And our next question will come from Erinn Murphy with Piper Sandler. Please go ahead.

Great. Thanks. Good afternoon. So one follow-up first on pricing. Is the higher pricing that you're taking right now, are we going to see that here on a shelf in Q4? Or is that really wrapping into next year? And then, just trying to understand really the net of the fourth quarter kind of gross margin pressure? And then secondly, you guys have done a great job, just keeping a finger on the pulse on what's coming next from a social media perspective. Could you just share a little bit more about what you're seeing from a response of both Twitch and then Triller? Is it bringing in a new customer as you kind of experiment on some pretty unique platforms for Beauty? Thank you.

Yes. So, Erinn, I'll take the first question. And then I'll pass it to Tarang on the social update. So from a pricing standpoint, that will not impact Q4. You'll see that in early fiscal 2022. In terms of offsetting FX pressure, though, that's kind of our program as we head into fiscal 2022, focusing on the select price increases, negotiating cost savings, and then that increased focus on SG&A leverage as an offset to the headwinds.

Okay. And so, if gross margin, I mean, so you think about the puts and takes there for the fourth quarter, and I may have missed this in the prepared remarks. Is that down to a similar level to Q3? Or is it worse given the FX starts to flip in the fourth quarter?

Yes. That's right. So the FX starts to flip in the first -- in the fourth quarter. So what we saw in Q3 was just less of a benefit. In fact, it turns into a headwind in Q4. And so, you should expect to see that materialize.

Okay. And then, yes, Tarang, love to hear your thoughts on that.

Yes. So, I mean, I'm really proud of our marketing and digital team. They continue to kind of blaze new frontiers. And you saw that on our activations on TikTok, which continue to do quite well with over 10 billion views, I think over 7 million user generated videos, but also going into new platforms. The one I'm particularly excited about is our partnership with Lufu. And what were the things that we're doing on Twitch. So it accesses an entirely new audience and some of the current audience in terms of her ability to really activate amongst female as well as male gamers. And the work that she's doing, there's a video right now with her and our global makeup artists, Anna Bynum, who's also an avid gamer herself, and kind of their ability to kind of educate a whole new set of consumers on everything that's wonderful about e.l.f. and helping them express themselves, gain confidence very much plays into our core brand values. And then on Triller, as we mentioned, we're also excited about the work we did there. I mean, I was, frankly quite surprised that we could put a holiday album on and have it hit Billboard's Top 20. Four of our tracks hit the Billboard Top 20 both in the U.S. and globally, which definitely shows -- I think we've had some strengths in terms of the brand and our connection to music up and coming artists. And you definitely saw that play out on Triller. And you're going to continue to see us blaze other new territories. I'm excited about some of the upcoming collaborations and partnerships we have, but you're going to have to wait till our next call to hear about them.

Sounds great. Thank you both.

And our next question will come from Bill Chappell with Truist Securities. Please go ahead.

Thanks. Good afternoon.

Good afternoon.

Tarnag, just to the question on -- going back to pricing. I mean, as the company thought or any change in terms of pricing beyond FX. And I mean, if we go back to the past couple years, you're able to take pretty meaningful price increase to offset the tariffs, and really had no elasticity, no, no real issue on volumes. And so, it seems -- I know your products are extraordinarily attractively priced. But is there an opportunity to take even further over the next year or two and actually improve margins with them?

Well, we definitely saw that be the case in our last round of pricing. So if you recall, a lot of people were worried about the 25% tariffs on China goods which really impacted most of our lineup. And we're able to use this approach of selective pricing to overcome those tariffs and actually do really well on gross margin. So we know the brand has pricing power based on our prior execution. And how we did that execution was equally important. We didn't just peanut butter, the pricing as a general percentage across everything, we really pick the items where we have the biggest value halo or opportunity to take pricing. And so I'd say that is very much the design and construct of our pricing upcoming. It won't be in the U.S. quite as broad as it was last time. I think we impacted about a third of our SKUs last time. But internationally we did not take pricing last time. So I think particularly with FX we have the opportunity to go further internationally and then with select items in the U.S. And so, definitely we see pricing as a lever at our disposal. Our preferred method of driving gross margin though, is through margin accretive innovation. So I mentioned our CC Cream, which I believe is going to be our next holy grail product. It's an incredible value relative to the $40 Prestige equivalent, but it's retailed at $14. So it's a significant premium relative to the rest of our lineup. So it's going to be that combination, Bill as we go forward, which is primarily through margin accretive innovation and some of the other things that Mandy talked about in terms of our gross margin progression, but also, we will look at pricing. It’s always a healthy tension being extraordinary value brand that's not getting ahead of ourselves. We did see a unit decline when we did pricing last time. And so there's always a balance there. Now, I feel good about post pricing, how we've built back units, which again, tells me we have that pricing power and ability to get that through. But we want to be choiceful in that pricing and executed similarly to the way we did last time.

Great. Thank you. I appreciate that. Mandy, I realized you're not giving fiscal 2022 guidance. But trying to understand Key Soulcare, the spin you're expecting in the fourth quarter? I mean, is that -- will you be up to kind of -- I don't know if it's normalized levels of marketing and advertising spend by the time we get to the end of March? Or is that expected to continue to kind of ramp throughout the year till we get to kind of a peak level?

Yes. So I think the best way to think about that, Bill, is each of our brands will have dedicated marketing against them. And we do that as a percentage of net sales. And so, if you think about e.l.f., we've talked about the 14% to 16%, broadly for e.l.f. Beauty that incorporates the marketing spin that we're putting behind Key Soulcare. As Tarang mentioned earlier, as we get into fiscal 2022, we'll come back with kind of where we see everything as we move forward. But just think about each brand will have their own marketing plans as a percentage of net sales to support each of those brands as we move forward.

So, it's not an outside kind of big splash over the next few months. It's kind of a slow and steady build?

Well, like we said, we have the $5 million to $6 million baked in for this year for Q4 behind the launch of the brand, especially as we get further along in our distribution plan. But again, as we think about it for the long term, it's really going to be focused on a percentage of sales by for each brand.

Yes. And then just maybe adding some perspective to that. The $5 million to $6 million for this year is definitely outsized relative to the modest sales contribution of Key Soulcare we'd have. We thought that was a prudent spend to really launch something that's completely new in Beauty. Ongoing to Mandy's point, at least for this fiscal year, we're really comfortable in that 14% to 16%, inclusive of all three of our brands. And when we put FY 2022 guidance out there, part of that guidance will include what we expect to spend from a marketing standpoint in total. So people don't have to guess, how does the five to six translate ongoing, it'll be part of the overall percentage we have as a company.

Perfect. Thanks so much. I appreciate it.

Yes.

Your next question will come from Rupesh Parikh with Oppenheimer. Please go ahead.

Good afternoon. Thanks for taking my questions. So Tarang, just going back to your positive commentary so far on the Keys Soulcare launch. I was just curious if there's anything thus far that surprised you with the launch? It sounds like you guys have already gotten very good buzz.

Yes. Well, I would say, I don't know if it surprises, but I'm still of the $10 billion price impressions we've picked up since and we're not even in retail yet. So I think it definitely shows that there's something this brand that's resonating broadly. And then as we look at the community, the depth of engagement of that community, I think in the prepared remarks, we talked about Instagram engagement, metrics being well beyond what we were expecting. And so I think it's still early days, but it's quite encouraging in terms of the level of consumer response and engagement we have to that brand. We'll be able to provide more metrics, I think once we are out in retail, and be able to see what that looks like.

Okay, great. And then just one follow-up question for Mandy. Just on your operating cash flow. So, I get the commentary just on inventory, that the inventories are elevated in a good way your cash generation. But even I guess including inventories, some of the other working capital, there's some other working capital headwinds during the quarter. So just curious how are you thinking about cash flow in Q4?

Yes. So yes. If you look at inventory that was a portion of our cash use on a year to date basis. Our receivables would be the other areas you look through. And that all I just think of is just timing. In terms of our free cash flow expectations for the year, I would expect us to be positive free cash flow for the year, as we enter into Q4 shouldn't have a pull on additional from an inventory standpoint or things like that. So should have some cash flow there in Q4.

Okay, great. Thank you.

And our next question will come from Mark Astrachan with Stifel. Please go ahead.

Yes. Thanks. And afternoon, everybody. Wanted to ask about thoughts on where you think online sales settle as a percentage of sales. I mean, we heard from some of the retailers both in there, they're surprised at how well Beauty has done from an online standpoint, but also that perhaps some of that settles back into time. So you touched on the 16% of sales where you are now. And as you think forward, how do you think about that number in the broader context of the category?

Yes. I think we'll have more thoughts on that Mark, when we get into providing FY 2022 guidance. I mean, we're obviously pleased as everyone else is. I mean, I think we have triple digit growth on our online business between elfcosmetics.com and a retailer.com. Similar to some of the commentary you've heard from others, we are seeing -- we continue to see a good proportion of new consumers, particularly elfcosmetics.com, I think 60% of purchases were from new consumers who are also signing up for a B Squad Loyalty Program. So it's really going to come down to how many of those consumers will be able to retain. That will dictate what percent of our total business. But we're definitely seeing the momentum. I don't think we have a percentage in mind right now in terms of what we see that as a future, but we're pleased with 16% versus 10% last year, and more importantly, some of the underlying metrics, which definitely show a migration online.

Got it. Okay. And then second question, just thoughts on the correlation between the increasing marketing and investment spend in sales growth? And how do you think about that factoring in and you're specific to what your sales guidance will look like for next year. But just the broad correlation, and how do you think about those growing in time with each other or decoupling to some extent?

Yes. One of the things that caused us to increase our marketing spend was ROIs we're seeing off that marketing spend. So we use a combination of both Nielsen's marketing mix, where we can get a measure of gross sales per dollar of marketing invested. We see very strong returns on that, as well as some of the sub-metrics we have by platform in terms of the core engagement levels. So we definitely know it's a key driver of both our market share gains and business momentum. And we're comfortable at the levels that we're currently at to be able to generate that. And obviously, we feel has a longer term impact. So when we're able to give FY 2022 guidance. We'll be able to talk that a little bit more in terms of some of the drivers of that FY 2022 guidance.

Thank you.

And our next question will come from Wendy Nicholson with Citi. Please go ahead.

Thanks. Hi. Two questions. First, for Mandy, I know your long term target is to grow EBITDA faster than revenues. But can you talk about just gross margin generally, what your outlook is? Do you think this sort of 65, 66 type range is where you'll be long term? And can you -- I assume, Soulcare is gross margin accretive. But can you give us some directional guidance? Is it 500 basis points better? 1000 basis points better? Just directionally, how much of a lift can that skincare -- higher price skincare help your overall gross margin? And then I had a question, Tarang for you if I can. I mean, you guys are so well positioned in the Clean Beauty space. And that's obviously such a hot place right now within Beauty. But do you think that you're -- I mean, you're obviously gaining share? Do you think you're gaining share within Clean Beauty? And I'm just wondering, Clean Beauty seems to be getting so much more competitive. Do you worry about having to defend your space, your market share within that segment? Or how do you manage around what's getting to be a very, very crowded segment of Beauty, if that makes sense?

Got it. So I'll start Wendy on the long term economic model and your questions around gross margin. So, in the long term economic model to your point, we talked about adjusted EBITDA outpacing sales growth, thus yielding adjusted EBITDA margin expansion. We have not gone into depth on how much gross margin will play into that. versus how much adjusted SG&A will play into that. And we additionally don't give specific guidance around gross margin. I can say that to Tarang's earlier point product accretive, gross margin products and innovation, that has really been our path forward on gross margin. And so, as we get into the out years of fiscal 2022 and beyond, we'll start to talk more about what to expect from an adjusted EBITDA standpoint. But it may not give the specifics around the gross margin versus adjusted EBITDA as we move forward. On Key Soulcare specifically. So we talked last quarter about Key Soulcare product margins certainly being accretive to our overall product gross margins. But when you get down to the net gross margin, because of the royalty that we do pay to Alicia Keys, that does become relatively neutral at the total company level.

And then, on your second question on Clean Beauty, part of our thesis is, it's becoming mainstream. Clean Beauty used to be a niche within overall Beauty. Obviously a very fast growing segment within overall Beauty. But part of our push in Clean Beauty is really goes back to a consumer. And as a parallel, say we were one of the first cruelty-free brands and from a math standpoint terms being 100%, cruelty-free. You've now seen other brands really embrace cruelty-free as consumers have. We feel the same thing is going to happen with Clean Beauty. That is no longer be relegated to one sub segment. And so, what brands that are going to win in Clean Beauty? The ones that both really stand for it and can live up to those standards, but also offer more than just clean beauty. So the superpowers I mentioned before about our ability to have premium quality at these extraordinary values, cruelty-free increasingly clean. And on the clean portfolio, the gold standard we have is certainly W3ll PEOPLE with their 40 EWG verified products. Key Soulcare came out of the gates as 100% Clean Beauty brand. But even e.l.f. -- on e.l.f. we're now up to I think 1600 ingredients that we do not formulate. We're very close to every Clean Beauty standard that they are an e.l.f.. And so, I think that really becomes a game changer when you can offer the consumer Prestige quality, great values, that's cruelty-free, clean, and has universal appeal is like what's not to like about e.l.f. and overall proposition. So we very much are looking at it. It’s not only -- certainly is a main opportunity, but we're going to win long term is by being able to put that combination of benefits together.

Got it. And on the Key Soulcare, I know you've obviously got a great relationship there with Ulta. And historically, you haven't had much of a relationship with Sephora, which makes sense given your price points. But given that Soulcare is a little bit more premium price. It feels like it would fit well particularly with Sephora going into more Kohl's stores or Kohl's stores initially, whatever. Is that something are you restricted to being in Ulta. Or if you wanted to go into Sephora in those Kohl's stores, could you?

Not initially with Key Soulcare. Our relationship with Ulta is they do have exclusivity for a time period. We haven't disclosed what that exclusivity period is. But there is a great deal of partnership. I mean, Ulta itself is going to be putting pretty good investment behind really amplifying the Key Soulcare brand. The things that we're going to do, I can't wait for you to go into their stores. And as they ramp the brand up even online, there's quite a bit of things that we're going to be doing together there. Talking though, on the Sephora Kohl's partnership, we think there's opportunity there for us. And we look at potentially W3ll PEOPLE. We look at some of the other brands that we're looking at both either incubating or tuck-in acquisitions in future dates. We think there's an opportunity. And then also globally, we think there's an opportunity to Sephora as well. So but initially here, our focus is really on Ulta Beauty and the partnership we have there.

Terrific. Thanks so much.

And our next question. Actually apologies. This will conclude the question and answer session. I'd like to turn the conference back over to Tarang Amin for any closing remarks.

Well, I want to thank everyone for joining us today. I'm incredibly grateful for the great team we have at e.l.f. Beauty and the talent that each person brings every day particularly at this difficult time during the pandemic and how well we've executed to continue to build market share. As you can tell from our comments today, we're highly confident about the future and long term prospects of this business. And look forward to speaking to you in May when we'll be able to talk our full fiscal 2021 results as well as provide guidance for FY 2022. So thanks everyone and be well.

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect your lines at this time.