Thank you for joining us today to discuss e.l.f. Beauty's First Quarter Fiscal 2022 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 reconciliation of the differences between the non-GAAP presentation and the most directly comparable GAAP measure. With that, let me turn the webcast over to Tarang.

Thank you, KC, and good afternoon, everyone. Today, we will discuss the drivers of our Q1 results, as well as our raised outlook for fiscal 2022. I want to start by recognizing our e.l.f. Beauty team. We delivered Q1 results well ahead of our expectations with Q1 net sales of $97 million, up 50% versus year ago. Q1 marked our 10th consecutive quarter of net sales growth and our largest net sales quarter ever. We delivered adjusted EBITDA of $22 million, up 40% versus year ago. Color cosmetics category trends are inflecting positively fueled by pent-up demand, stimulus, money, and ease in COVID restrictions. The category grew in June above 2019 pre-pandemic levels for the first time this year. We're outperforming our competitors in this backdrop underscoring the strength of the e.l.f. business model. Our products are resonating and our digitally led strategy, core value proposition, and ability to adapt at e.l.f. speed continue to fuel our performance. In Q1 e.l.f. was the only Top 5 color cosmetics brand to post retail sales growth above 2019 levels. e.l.f. continued to gain market share with 5.5% of the category up 20 basis points year-over-year. e.l.f. was the only Top 5 color cosmetics brand to grow share above pre-pandemic levels by a wide margin. We are progressing to a multi-brand portfolio. In Q1, recharged packaging for W3LL PEOPLE hit shelves and we expanded our product offerings for Keys Soulcare. We feel great about the progress we're making across the portfolio and particularly the early wins we're seeing with W3LL PEOPLE and Keys Soulcare as we build awareness behind these brands. With the momentum across our portfolio, we're raising our full-year guidance which Mandy will discuss shortly. Our relentless focus on our five strategic imperatives is driving results. Let me provide a few…

Thank you, Tarang. I am pleased to share the highlights of our outstanding first quarter results and our raised fiscal 2022 outlook. We delivered Q1 net sales growth of 50% versus prior year, driven by ongoing momentum across our brand portfolio, better fulfillment rates than we expected and benefits from stimulus related spending. We also saw an improvement in our performance at Ulta and internationally, particularly as we left periods of store closures from a year ago. Gross margin of 64% was down approximately 340 basis points, compared to prior year. We saw gross margin benefits from margin accretive innovation and cost savings. We also implemented price increases on a subset of our SKUs this quarter, mainly internationally. Gross margin benefits were more than offset by changing FX rates and elevated transportation costs as we worked to navigate the global container imbalance. The year-over-year change in channel mix also impacted gross margin as consumers shifted from e-commerce to brick and mortar. On an adjusted basis, SG&A as a percentage of sales was 47%, compared to 51% last year. Our increased investment behind marketing and digital was more than offset by leverage in our non-marketing related spend from the combination of better than expected top line trends and taking a sharper look at our expenses. Marketing and digital investment for the quarter was approximately 16% of net sales versus 11% a year ago. Q1 adjusted EBITDA was 22 million, up 40% versus last year, and adjusted EBITDA margin was approximately 22% of net sales. Adjusted net income was 14 million or $0.27 per diluted share, compared to 9 million or $0.17 per diluted share a year ago. Our liquidity remained strong with the combination of our cash balance and access to our revolving credit facility sitting at over $130 million. We…

[Operator Instructions] The first question comes from Erinn Murphy with Piper Sandler. Please go ahead.

Great, thanks. Good afternoon and congratulations on a very solid quarter. I guess my first question Tarang it’s for you, on the color cosmetics category broadly, it seems like it's had a little bit of traction of late, can you just share how you're thinking about the sustainability of the category as we move forward? And have you seen anything as it relates to the Delta variant and some of the concerns domestically certain markets starting to wear masks again, has that impacted any of the recovery in this category?

Hi, Erinn. Well, we remain quite bullish on the color cosmetics category. As we talk, June was the first month in track data that we saw the category above 2019 levels. So, we've seen a pretty good inflection. And I think that's reflective of consumers pent-up demand for this category, stimulus, easing of restrictions. And so, I'd say overall, we're quite bullish on the category going forward. In terms of the Delta variant and any additional restrictions, it's hard for us to tease that out. I think in the backdrop of higher consumer demand, as well as stepped up innovation, not only from us, but also from some of our competitors, we're liking the trends that we're seeing across each of the core categories within color cosmetics.

The next question is from Andrea Teixeira with JPMorgan. Please go ahead.

Yes, thank you. Good afternoon. I'm going to echo the congratulations for the quarter and also to Kory for, you know, I'm not surprised, but I'm still impressed with, you know, her awards. I just want to go back to the guide. And I think, Mandy, you mentioned obviously you’re accelerating, but that means that, you know, after this 50% growth that you had in the first quarter, can you walk us through what is informing you into the deceleration? Of course, I understand that you’re still facing a lot of supply chain issues. And I think we all understood very well through the TPG earnings season, that this is real. And – but is that anything else that you want to highlight that you're seeing in terms of, I think your answer to Erinn’s question is, you know, no, you're not seeing any deceleration, and I think the momentum that you built in increasing. I was just checking, I think you squeezed 500 basis points as a percentage of sales in your marketing investment year-over-year, and you're building into 100 basis points higher than you had before. So, what is [indiscernible] and then on the same metric, why not taking more pricing to defend profitability have added flow a little bit more into the bottom line?

Okay. All right. Andrea, nice to hear from you, and there was quite a few questions in there. So, let me just start with where we are in Q1. So, Q1 was a fantastic quarter for us, up 50% net sales growth, and a lot of the drivers that we saw in Q1. One, core momentum behind the e.l.f. brand. You know, we continue to see strong trends on the brand. So that was fantastic. We also had better fulfillment rates this quarter than we originally expected, which helped us to get to that 50% net sales growth. We also had the impact of stimulus. So, if you recall, we talked about in Q4, and we saw that trickle over into Q1. This third round of stimulus was by far the largest that we've seen from an impact standpoint. And then we also had, you know, improved transit at Ulta and internationally, especially as we left those periods of store closures last year. So, that's really Q1 overall. In terms of top line and the outlook, we really expect those trends to continue on the e.l.f. business. Top line momentum, we continue to see. We are increasing our marketing investment to your point. And we have seen strong ROI associated with that. So, that's also implied in that guidance, and as well as pipeline associated with the space games that we called out. So, all of those things are impacting the top line. From an EBITDA standpoint, we are seeing, you know, the margins of little bit of compression there. And it's because we are investing behind our marketing and digital. So, we took our marketing and digital range, up to 15% to 17% from 14% to 16% previously, and as you mentioned, the cost pressures that we see with ocean costs and in the supply chain that also is embedded within our guidance as well, as well as cost associated with some of those space games that we mentioned.

And then on your question on pricing, Andrea, this is a brand that does have pricing power. So, we successfully executed our largest price increase ever in 2019. We followed that up with another round of more modest price increases more recently in the U.S., but a pretty big price increase internationally. That was implemented really in the May timeframe. And so, we feel good about our ability to price. The reason why we don't want to price right now any further is, we see some of the cost headwinds that we're seeing is temporal in nature. The imbalance of containers, we feel will balance out over time, we saw a good increase in the availability of containers as the quarter progressed. And over time, we would expect those costs to also moderate. So, we don't necessarily want to get ahead of us on pricing, but if we saw that some of these costs would be more permanent in nature, then we certainly could use pricing as a lever.

Thank you. I’ll pass it on.

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

Hi, this is Grace Menk on for Steph. Thanks for taking my question. I wanted to, kind of double click on the Keys Soulcare, kind of strength that you're seeing, could you talk a little bit about the contribution in the period? And then how we should think about it as we look out over the fiscal year?

Sure. So, hi, we're not breaking our Keys Soulcare’s. We're not bringing out any of our individual brands, but what I can tell you is, we're quite pleased with the progress we're making on Keys Soulcare, particularly in the areas of consumer engagement and Alicia's own engagement in the brand. We talked about every time she posts, every time she does something we see really great consumer response. In addition, we're really pleased with the execution we've had amongst our retail partners. The total store takeover we had at Ulta Beauty, as a brand it started rolling out in [indiscernible] across eight countries in Europe. That that roll-up was delayed somewhat by some of the COVID restrictions in Europe. But we're feeling good now that it's starting to roll out. And then our latest execution inherits with H Beauty. The brand is really showing up really well and really proud of the execution. So, I would say the last thing on Keys Soulcare, the way to think about it is, we're building a brand for the long-term here. So, this quarter was our first expansion in an adjacent category, with the launch of our body care line, the first three items in our body care line, that very much tie into the brand Ethos on self love, rituals, body positivity, very much builds on what we started with Keys Soulcare, and we have a great pipeline, really for the next few years across multiple other categories. So, quite encouraged by what we're seeing right now and look forward to updating you more on that as we continue to make progress.

Thank you. That's helpful. And then just want to follow up on inventory levels, are you seeing that you've, kind of been using inventory that was maybe earmarked for later in the year? And is there a way to, kind of, you know, you've mentioned some of the measures that you're taking, can you like use domestic suppliers or explore other alternative approaches, I’d just love – more detail there would be great.

Sure. So, overall, we feel great about, kind of the outlook on inventory and our supply chain overall. I would say that Q1 inventory ended a little bit lower than we would have expected, given that we had a 50% net sales growth quarter. And so, we talked about the build into the September ending quarter seeing inventory at the 75 million to 80 million. And really, we feel that is what we – where we want to be to support our business, reflective of the longer lead times we are seeing some of the higher transportation costs we're seeing. And then like I said, the continued business momentum and the addition of our brands of Keys and W3LL embedded into that number. So, to your question, yes, we are seeing some longer lead times and, you know, starting to rebuild our inventory position as we get into the September quarter.

And then for the second part of your question on supply chain, we feel great about our supply chain in terms of the combination of cost, quality, and speed that we're able to deliver. We see this primarily as a transportation issue. We have plenty of capacity from a manufacturing standpoint and our ability to really flex to meet the business need. So, as transportation situation gets better, I think we'll be in great shape as we go forward.

That makes sense. Thanks, guys.

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

Hey, guys. Two questions, just, first on the transportation issues, I guess it really didn't seem to impact fiscal Q1 all that much given you were up 50% year-over-year and as you mentioned, the fall rates were healthy in the 95% range. So, I just want to understand is, are things getting worse potentially, post the June quarter? Do you think things are better, in general, the tone sounded more constructive? But just given the growth we saw year-over-year in Q1, it didn't seem to be a big issue for you guys. So, just wanted to get a little bit of update in terms of what we should expect going forward on that front?

Yeah, hi Dara. What I'd say is, I'm really proud of the way the team navigated the container imbalance. So, this stat we use is, we're able to maintain 95% customer in stock levels. Our fulfillment rates were lower than that, but our team was able to make sure through our penetration and our customer supply chains, that they had the right inventory by item level to be able to maintain strong and sucks. We have seen more container availability. So, we hope to get those filament rates up even further. And there'll be a temporary hit to our customer in stocks as we work through that, but overall, pretty confident in terms of our ability to meet the consumer demand as we navigate through this situation.

Okay. And then, just to follow-up on Andrea's question, you know, the balance a year revenue guidance is, it's only about 3% to 4% of your midpoint, I guess if you add back the holiday program, it'd be more like mid-single-digits, but obviously, it's a pretty big slowdown from what we saw in fiscal Q1, as well as fiscal Q4, and even last year's full fiscal year during COVID. So, you generally sounded pretty positive about most of the underlying dynamics in the business. And obviously transportation is a limiting factor, but it doesn't sound like it's prohibitive at this point. So, I'm just trying to better understand that revenue guidance in the balance of the year. And if there's anything, you know, significant besides the holiday program that, you know, would really limit revenue growth a lot more than what you've already seen recently?

No. So the holiday program is the key factor in that. We called out $6 million related to that, that we are pulling out of our forecast, as well as, you know, we do, as I mentioned earlier, stimulus in the base, as well as we get into the back half of the year, Q4 that we're cycling through. So, outside of that, you know, we feel confident of our core business momentum and expect to see that growth continue for the balance of the year.

Okay, great. Thank you.

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

Yes, thank you. So, you talked about the impact on sales of not doing the holiday program, what would be the effect on mix and gross margin? Are the [gift set] actually a little bit lower gross margin?

So, we haven't given a specifics on the holiday program and the gross margin impact. But I would say, just from a mix standpoint, the Luxe Kits versus, if that’s what you're asking, Luxe Kits versus our traditional holiday program? I would say there's not a major difference in that.

Yeah, you know, just adding a little bit more color to that, Linda, the decision of forgoing holiday, we like our annual holiday program, it's great way of engaging consumers. But holiday kits have a very high cube. So, it takes about four containers to get the same amount of product as we can get on one container, and so given the strength and our consumer demand, really prioritizing our core skews. The Luxe Kits help us make up for part of that gap, but in addition, we will have pretty strong consumer engagement efforts as we've had and stepped up really throughout each of the quarters. So, we feel we can navigate through and it will be a temporary piece and definitely feel good about the decision to prioritize our base business.

Thank you. And then, so it's great to hear you talk about getting some additional shelf space in the international markets. So, how does that, as you grow internationally, how does that affect, kind of your margin over time as you get bigger internationally? And how does this affect your need for working capital?

So, on the margin side of things, I think we've talked about this before. We really look at our business from a margin agnostic standpoint. So, whether that volume is coming from the U.S. or internationally, it's relatively in line with one another. From a cost of capital and cash flow perspective, there's also not much outside of inventories that we have that's required behind that. And it's very similar to our U.S. business in terms of shelf space expansion, and you know, fixturing and things like that. It's just normal course of what we see even here in our domestic business.

And part of the reason why Linda is, our approach a couple years ago, where we shifted from distributors to direct selling to key headquarter sales is very efficient model that our team can cover each of these core accounts, as you’ve seen the progress is made at Superdrug foods. Now, at Dugas, we feel really good about our ability to be able to service them in an efficient way and quite similar to the way we service Ulta Beauty, Target, Walmart, and others.

Okay, thanks. And just finally, you know, again, great news about your expanded shelf space in the U.S. what are some of the challenges as you continue to add more and more space at some of the retailers like [indiscernible] Walmart, in terms of how do you maintain the high productivity of the shelf space as it grows over time?

Yeah, that's inherent in our model. Our model is based on the data that we get off of our ecommerce site. Most of our innovation goes online first. We get really great data not only in sales, but also customer reviews level of engagement behind those. So, we have a good model, really stemming back, all the way back to 17 years ago, starting as a digital business where we were able to take those insights, work with our customers, and really proactively decide which items we're going to delete and replace them with, and that productivity model has served us well over the years. And I would say, you know, we have tremendous space opportunity, really at every single retailer we deal with. So, well I’m pleased with the space gains we have, we have a lot further to go. And I think, you know, the one benefit of stepping into space sequentially is, we're able to optimize that space better. There are years in the past where you picked up massive amounts of space at a particular customer in a given year. And we found it took us a couple cycles to really grow into that space. I think the types of increments we're getting now in space, it's quite manageable, given the extent of our innovation, and our pipeline of product. Probably the best example being, you know, if you go into some Target’s stores, you will have, you know, 16 to 20 foot sets in some of their doors, and we do extremely well with those. So, highly confident of our ability to continue to optimize the space that we continue to gain.

Great, thank you very much.

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

Thanks. First, congrats on the quarter. I wanted to talk a little bit about, sort of the key drivers of that dramatic top line acceleration, was it particularly retailers, because it sounded like all brands were better than you expected? Was it brick and mortar versus online, particularly subcategories just a little bit more detail there would be great? And then just thinking about the guide, you know, I guess I understand the supply chain challenges. I understand we're going through the holiday plans, but you're also seeing some very nice retail space expansion wins that should help you later in the year. So, are – you know, just trying to understand, sort of the puts and takes there for the rest of the year and why you, sort of net out where you do? Thank you.

Sure. Hi, Olivia, and thanks for joining us. So, I would say, our Q1 net sales growth drivers again are really driven by the core momentum that we're seeing behind the e.l.f. Cosmetics brand. We had better fulfillment rates than we initially expected. We also have the impact, trickle over impact of stimulus into Q1. And then we also saw better results at Ulta and internationally, especially as we cycle those store closures in the base, also from a shift from brick and mortar over into – or e-commerce over to brick and mortar, as we have seen the U.S. reopen, we have seen that shift as we expected, consumers going back into the stores, but we're still very pleased with our e-commerce performance up triple digits on a two-year basis. To answer your question on balance of your guidance, the space expansion, so we did mention that we do have some pipeline associated with a space expansion in there, but since these are spring 2022, you will really see the impact of that as we get into our next fiscal year. You'll just really have the pipeline this year.

Right, right. I'm surprised the pipeline isn't that dramatic too. So, maybe to add a little bit there, but then my other question is around the marketing spending and the decision to increase that by 100 basis point more than you had originally anticipated? So, first, trying to understand why you decided to do that? I mean, especially after a 50% growth quarter, is there a specific area you really want to push or, you know, obviously, more marketing is great, but just kind of understanding the genesis of the decision to increase that. And then as you sort of just do quick back of the [indiscernible] math, it looks like your EPS guide, or your EBITDA margin guide would suggest about like 100 basis points of incremental margin pressure for the rest of the year. So, obviously, cost pressures are much higher than that. So, if you're increasing your marketing by 100 basis points, cost prices are significantly higher, versus you're going in expectations, what's the offset there? I'm not quite sure. Thanks.

Hi, Olivia. So, I'll take the first part, I’ll have Mandy answer the second. So, on marketing, we're just seeing real momentum in the business, and that's been driven by our marketing investments. And we feel great about them. In fact, we recently got our annual Nielsen marketing mix results showed extremely strong ROI behind our marketing. So, we're leaning into our strengths. We see plenty of opportunities for us to continue to drive consumer engagement and feel the momentum we have. And so that was a real core driver between that. We just see more opportunities than, frankly, we can invest in. And so, we want to make sure that we keep those levels strong. And in the first quarter, our marketing and digital investments were about 16% of net sales. Our guidance for the year is 15% to 17%. So, we're comfortable within that range in terms of our ability to continue to drive very strong consumer engagement.

Yeah. And then on the Delta, Olivia, the non-marketing SG&A is really helping to offset the gross margin headwinds that we're seeing, as well as a portion of the additional marketing investment that we're putting in. And really, that's driven by top line momentum driven out of Q1, and then also us taking a sharper look at expenses outside of marketing as we go through. So, that's also helping on the year.

Great. Thanks so much.

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

Hi, thank you. On the skincare category, what do you focus on in terms of innovation and what you're seeing in the marketplace, as we look forward and consumer preferences continue to shift rapidly? Also on – regarding marketing, where will the incremental dollars go in terms of what mediums and as you think about the incremental marketing spend, where do you see the most opportunity in terms of KPIs from consumers as you engage in additional marketing spending? Thank you.

Hi, Oliver. So, on skincare, I would say, we have a very broad focus on skincare and it really is across our brand portfolio. So, on e.l.f. skin, we just recently launched our holy hydration cream with SPF 30 it's quickly become our top selling skincare SKU. So, continue to hit the key segments within skincare under the same thesis of e.l.f., the best and beauty made accessible. So, you'll continue to see really high quality products with these extraordinary values on e.l.f. and we have a long way to go on that pipeline. Keys Soulcare started with a skincare focus. So, the clean skincare products we have in Keys Soulcare, we feel great about the average product ratings of our initial nine products are 4.9 out of 5 stars on keyssoulcare.com and we have a rich pipeline behind that. We also see opportunity on W3LL PEOPLE longer-term in terms of skincare. So, we see opportunity across all three of our brands. And since each brand is distinct and complimentary in nature, you'll see each one take a little bit of a different focus on skincare. And so, we feel really good about what we're doing on skin and continue to see a lot of momentum there. And then on your second question on terms of marketing, where the incremental dollars will go? I would say, it's a combination of highly proven ROI vehicles like many of our campaign vehicles, in terms of our media and awareness driving where we've seen great results, as well as continuing to lead the way and test and learn on new platforms. We're incredibly pleased, obviously, with the work that we've done on TikTok over the years, our TikTok gamers got talent, #challenge, I think raised is now over 17 billion views. Our foray in the gaming has proven to be really great. Our live stream on Twitch, the level of engagement we're getting there, the attribution we're getting there is really, actually also quite strong. And then new platforms, as you heard us talk about on this call, said we think there's an opportunity. So, the way I think about the marketing dollars over time is, you know, a combination of well proven vehicles where we have very strong ROI data on, as well as continuing to disrupt the category and really get consumer engagement, including many of the partnerships we do and the collaborations we do.

Thank you. And a final question. And there's been a lot of ingredients, innovation, and R&D in the industry at large, what are your thoughts on how that will apply to your platform and also maintaining, you know, R&D innovation, you know, at e.l.f. as well? Thank you.

Yeah. So, innovation has long been a key strength of ours. And I would say our biggest focus on innovation beyond having great new products that consumers love is our continued journey on clean beauty. And so, it's very strong ingredient focused on that. You think of W3LL PEOPLE are pioneering clean beauty brand with plant powered beauty that works. That really is at the gold standard and acquiring W3LL PEOPLE brought a lot of capability into the company in terms of our clean journey. We had reformulated every one of those products as we did our tech transfer on to our operating platform, realizing even better product performance and significant COGS savings, and in turn getting learning’s that really helped us launch Keys Soulcare through one of the cofounders of W3LL PEOPLE Dr. Renee Snyder, working with our innovation team have really so high standard in skincare and has a very strong ingredient focus as does W3LL PEOPLE. And then even e.l.f., we're making great progress on e.l.f. on clean. If you take a look at our formulations there’s over 1,600 ingredients we do not formulate with and our continued progress in clean. So, that's really one of the primary focus areas beyond having really great products is increasingly consumers care about what the ingredients are and their products. And I feel great about the progress we've made there.

Thank you, best regards.

The next question comes from Mark Astrachan with Stifel. Please go ahead.

Yeah, thanks and afternoon, everyone. Two questions. First, if you could quantify, any sort of benefits that you saw from the stimulus, this go around terms of just impact to sales, any sort of direction would be helpful there. And then, secondly, just a series of broader questions related to skincare, you know, relatively small percentage of the portfolio today. Anything you could, sort of frame as to how it can progress in terms of the mix on a go forward basis? Could you also talk a bit about where you're sourcing consumers? Are they new to skincare? Are you sourcing share from other brands? Is it [indiscernible] and then also just any sort of seasonality to the business that you've observed so far. And then just two other pieces of shelf space, in terms of what you have today, relative to the number of skincare SKUs so, presumably that would expand as you add more incremental space, as you referenced? And then also, can you just remind them the margin impact for skincare versus the legacy portfolio? Thank you.

All right, Mark. Well, I'll take your first question on quantifying the impact of stimulus. Like I said, as this last round of stimulus is by far the largest impacts that we've seen, we've not quantified that specifically on a building block in our net sales, other than to say it did have an impact to our net sales in Q4, as well as what we saw here in Q1.

And on your questions on skincare, I think, you know, one of the ways I like framing it is, if you look at skincare overall, it's less than 10% of our total sales. Yet online both e.l.f. cosmetics.com and Amazon is 25% of our sales and the big delta there primarily relates to the level of assortment we have in skincare. So, I feel we have a great pipeline in skincare great items. And so as we continue, as you said, as we continue to pick up more space, our strategy is to put more of our skincare, because we see a tremendous opportunity to continue to drive that percentage up over time. From a margin standpoint, it's not that different from a margin standpoint, from our overall cosmetics line, the price points are higher. So, just on e.l.f. alone, if you think about our average unit retails on cosmetics there were about $5, on skincare they're around $9. And then of course, Keys Soulcare is significantly higher than that and 20, 30 – $20 to $40 range. So, we do see, I think, from a margin standpoint, not that much of a difference, mainly because of our strategy of making sure that we're having the highest quality skincare accessible is one of the ways that we really win, but definitely generates more gross profit dollars.

Great. Thank you.

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

Good afternoon and thanks for taking my questions. So, two questions on gross margins. I was first curious if you can provide any more specificity in terms of how you think about gross margins for the full-year? And I wanted to get a sense of maybe Q1 is a low point, and then as we look out, you know, I know it's totally towards next year, would you expect to recover any of the gross margin decline going forward in the future years?

Hi, Rupesh. So, I will answer your question on gross margin. So, for Q1, we saw gross margin down about 340 basis points year-over-year. So, as we look out on the balance of the year, we expect gross margins not to be down as much as what we saw in q1. So improving as we get throughout the year, and we kind of find some stability here from these transportation costs that we're seeing. In terms of recovery, you know, we do see this as a transitory issue. The ocean costs, the container imbalance, we expect all of that to balance out over time. And so, do expect to get some recovery in gross margin as we go through. Timing of that, obviously, we're not talking about fiscal 2023, just yet. So, have to wait to see that.

Yeah. And just say add to that Rupesh, I think we're highly confident of our ability to drive strong gross margins over time. If you just think of the last couple of years, the amount of cost we're carrying between the 25% China tariffs, the transportation costs, we talked about FX turning against us, it's a pretty high level of costs and our ability to continue to deliver even in this year's guidance, 9% to 11% EBITDA growth. We feel really great about that. So, I think longer-term, we're quite bullish in terms of our ability to manage, kind of the cost environment around us and still deliver strong profit progress.

Okay, great. Thank you.

[Operator Instructions] The next question comes again from Erinn Murphy with Piper Sandler. Please go ahead.

Great. Thanks for slotting me back in. I had a couple follow up still. One was just on your approach Tarang, and I guess to the team on collaborations, you've done such a great job with the e.l.f. brand over the last few years. How are you viewing product collaborations for both? W3LL PEOPLE and Keys Soulcare, is there an opportunity there? And then just secondly, on Keys Soulcare with the Ulta, Target partnership, I believe Keys is the one brand you aren't currently selling at Target. When should we expect or should we expect that to be on the brand list over time? Thanks so much.

Sure. So Erinn, the team's done a remarkable job in terms of these collaborations and doing things in unexpected ways. I go back to the e.l.f. to pull a collaboration, even the most recent one we did with our electric mood collection, partnering with three global music artists, you're going to continue to see more. I think tomorrow, you're going to see our launch of big mood, which builds on the success we've been having in the eye category. We've always had strength in brow, we feel great about Lash it Loud, Mascara before a [big mood], and I feel it's our best mascara yet that we've launched. And you'll hear a collaboration we're doing on that tomorrow. And so, you'll continue to see a good stream and there's absolutely possibilities on both W3LL PEOPLE, as well as Keys Soulcare. And in fact, on Keys Soulcare the way that brand has been built is through strong collaboration. If we think of our lightworkers, all the content that we're putting out, the different voices that you're hearing from Keys Soulcare, there's an entire universe of like-minded people that we're going to continue to partner with to bring that message out. And then W3LL PEOPLE, similarly we feel there's lots of potential. We think W3LL PEOPLE is a real gem in terms of not only its heritage as a real pioneer in clean beauty, but this broader view of clean beauty and wellness. We think there are good partnerships there as well. So, you stay tuned, you'll continue to see a lot more with us there. And then on Keys Soulcare, I would say that Ulta at Target presents us an opportunity, certainly for the future. We're still in the exclusivity period with Ulta, and so, I think the focus for them was really making the most of Keys Soulcare in Ulta, but in the future, I'm quite hopeful that that becomes another area of opportunity, but you'll continue to see us expand the presence of Keys Soulcare, not only globally, but also eventually in the U.S.

Great, thank you.

This concludes our question-and-answer session. I will now turn the conference back over to management for closing remarks.

Well, thank you everyone for joining us. I'm incredibly proud of the e.l.f. Beauty team, knowing how we've navigated this pandemic delivering our 10th consecutive quarter of net sales growth with the tremendous momentum we have across our entire brand portfolio. So, we look forward to talking to you next quarter and updating you on our progress, but meanwhile, thank you for joining us.

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