e.l.f. Beauty, Inc. (ELF) Q2 2021 Earnings Call Transcript

e.l.f. Beauty, Inc. (ELF -6.43%)
Q2 2021 Earnings Call
Nov 04, 2020, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the e.l.f. Beauty second-quarter fiscal 2020 earnings conference call. [Operator instructions] Please note this event is being recorded.[Presentation]

KC Katten -- Vice President of Investor Relations

Thank you for joining us today to discuss e.l.f. Beauty's second-quarter fiscal 2021 results. I'm KC Katten, vice president of investor relations. With me today are Tarang Amin, chairman and chief executive officer; and Mandy Fields, senior vice president and chief financial officer.

We encourage you to tune into our webcast presentation for the best viewing experience on the content we're presenting, which you can access on our website at investor.elfcosmetics.com. Please note after the presentation, there's a separate dial-in for the Q&A session also noted in the press release. Since many of our remarks today contain forward-looking statements, please refer to our earnings release and reports filed with the SEC where you'll find factors that could cause actual results to differ materially from these forward-looking statements. In addition, the company's presentation today includes information presented on a non-GAAP basis.

We refer you to today's press release for a reconciliation of the differences between the non-GAAP presentation and the most directly comparable GAAP measure. With that, let me turn the webcast over to Tarang.

Tarang Amin -- Chairman and Chief Executive Officer

Thank you, KC, and good afternoon, everyone. I hope that you're staying safe and well. Today, I will talk about the fundamental drivers behind our second-quarter results, our growth opportunities, and the overall strategic framework for our company. I am so proud of our e.l.f.

Beauty team for delivering strong results in the second quarter as we continue to navigate major category headwinds as a result of COVID-19. This is our seventh consecutive quarter of net sales growth, with Q2 net sales of $72 million, up 7% versus a year ago. We expanded gross margin to 65%, up approximately 100 basis points versus last year, and delivered adjusted EBITDA of $14 million while increasing our investment in marketing and digital. We continue to grow share in the quarter with 5.5% of the color cosmetics market, up 100 basis points versus a year ago.

We also took important next steps in our transformation to a multi-brand portfolio with the unveiling of Keys Soulcare, our groundbreaking new lifestyle beauty brand with Alicia Keys, and the launch of our recharged W3LL PEOPLE plant-powered Clean Beauty brand. Before Mandy goes into more detail on our results, I want to share the key pillars underpinning our performance and talk about why I'm optimistic about the future of our brand portfolio. Our strategy is working. We came into this volatile period from a position of strength.

Our superpowers that center on our ability to deliver 100% cruelty-free, premium quality beauty products at accessible price points with universal appeal are more important than ever before. The focus work behind our five strategic imperatives has continued to drive our outperformance relative to the category trends. We believe the strength of our platform gives us the ability to drive even greater value through strategic extensions like of Keys Soulcare and W3LL PEOPLE brands. Let me provide a few highlights from the quarter.

Our first strategic imperative is to drive brand demand. We are driving greater brand relevance and expanding our consumer reach. Our press impressions soared over 160% versus prior year. In August, e.l.f.

was named one of Beauty's Most Powerful Brands in 2020 by Women's Wear Daily. We also increased our rank in Piper Sandler's 40th semiannual teen survey from fourth favorite cosmetics brand among teens last year to second this year, reflecting strong appeal with Gen Z. e.l.f.'s social audience continues to grow double digits, reaching over 9 million followers to date across our digital ecosystem. We're expanding our existing footprint with deeper engagement on key platforms like TikTok, Instagram, YouTube, Snapchat, and Pinterest while continuing to test and learn our new frontiers.

TikTok continues to be a great way for us to galvanize Gen Z and build awareness among other growing cohorts on the platform. The record-breaking viral success of our #eyelipsface hashtag challenge coupled with our #elfMagicAct hashtag challenge, hero-ing our $8 Poreless Putty Primer, collectively garnered nearly 10 billion views and 6 million user-generated videos. TikTok is taking note how e.l.f. is changing the game.

And we're continuing to make history with the release of Eyes. Lips. Famous., the first-ever TikTok reality show. Alongside other innovative activations, the engagement in our @elfyeah channel continues to outpace top beauty brands, and our products continue to go viral organically on the platform, resulting in sales surges.

Looking across our digital ecosystem, we recently hosted our fifth annual and first-ever fully virtual Beautyscape. This event helps foster ongoing relationships with the influencer community and empowers beauty's rising stars with the opportunity to build a cosmetics and skincare collection that will be sold through a national retailer. This year's event called Beautyscape The Remix infuse the power of makeup and music, featuring three musical artists, including Grammy-nominated global superstar, Tove Lo. Even the new virtual format, we saw participation grow over 90% year over year. [Presentation]

I couldn't talk about our big brand moments without recognizing Kory Marchisotto, chief marketing officer of e.l.f. Beauty and president of Keys Soulcare, who is honored as one of Adweek's 2020 Brand Geniuses, recognizing the principal leaders behind the boldest and most imaginative marketing efforts. Kory is one of 10 brand geniuses, putting e.l.f. in an admirable company with leaders from Nike, Walmart, Apple, Verizon, P&G, PepsiCo, and Disney Plus.

Congrats Kory and our entire marketing team. Even with the success of our brand-building activities, we still see a significant opportunity to bring in new consumers. In fact, our latest attitude and usage study shows that there is almost a 30-percentage-point gap in our unedited consumer awareness as compared to some of the legacy color cosmetics brands. We're the fastest-growing among the top five color cosmetics brands in the U.S.

and we see a lot of runway ahead. This quarter, we took an important next step in our transformation to a multi-brand portfolio with the unveiling of Keys Soulcare, our groundbreaking new lifestyle beauty brand with Alicia Keys. This is not another celebrity beauty line. We see Keys Soulcare as a brand with long-term potential.

Alicia is truly an inspiration to so many, and we believe her passion for bringing light into the world will resonate with a broad set of consumers across the globe.[Presentation]

The brand has already captured hearts and minds well ahead of our scheduled first product launch on December 3 with over 6.5 billion press impressions to date. The Keys Soulcare community is growing nicely with Instagram engagement metrics trending well above platform averages. It's clear now more than ever, the world is craving a brand with soul. Last month, we also launched the recharge of W3LL PEOPLE, our plant-powered clean beauty brand, utilizing learnings from last year's e.l.f.

brand recharge. At the core of this recharge is our brand vision because all people can be W3LL PEOPLE. As we strive to make clean beauty accessible. W3llpeople.com now reflects the brand's new vision of clean beauty with much more vibrant colors and messaging, along with updated content that really brings W3LL PEOPLE's plant-powered beauty to life.

With a 360-degree marketing plan in place, we aim to broaden consumer awareness for this brand. Our second strategic imperative is a major step-up in digital. We continue to execute a digitally led strategy that is benefiting both elfcosmetics.com, as well as our retail partner sites. Q2 digital consumption grew nearly triple digits versus a year ago, even as major brick-and-mortar location started to reopen around the globe.

Elfcosmetics.com, the No. 1 mass cosmetics e-commerce site powers our digital ecosystem. We also saw strength in our retailer dot coms, and on Amazon, in particular, as we launched our new beauty store. Our digital channels expanded to 13% of our total business this quarter, up from 7% a year ago.

The number of new consumers acquired in the quarter on elfcosmetics.com was up nearly 60% year over year, and we're encouraged by the retention and repeat purchase rates we're seeing. While the demographics of these new consumers look similar to our existing consumers, we're starting to see some differences. For example, our new consumers over-index on skincare, and a greater percentage of these consumers are signing up for our Beauty Squad Loyalty Program. Beauty Squad now has 2.1 million members, up almost 40% year over year.

Our loyalty members purchase more frequently, have higher order values than our non-loyalty members, and collectively drive almost 70% of our sales on elfcosmetics.com. We're continuing to test and iterate and believe Beauty Squad has even greater potential to drive our business going forward. Looking at Keys Soulcare. Our launch of keyssoulcare.com is a start of an exciting journey that aims to transform the way the world engages with beauty.

Keys Soulcare shares the soul of beauty with a focus on content, conversation, and community. To this end, we're building a digital community well before consumers see product launch. On September 29, keyssoulcare.com went live with rich editorial and a weekly email newsletter. The site features original and co-created content, including inspirational story from Alicia's community of lightworkers, people who collectively use their voices and platforms to spread light and positivity.

It's clear that Keys Soulcare community is active, vocal, and passionate about Alicia and the brand, and we're pleased with the strong engagement and open rates we're seeing with our weekly newsletters. Our third strategic comparative center's on innovation. Across our brand portfolio, we pride ourselves on delivering 100% cruelty-free, premium quality beauty products at accessible price points with universal appeal. With our e.l.f.

brand, we saw continued success this quarter in our core segments. Brushes, primers, concealers, brows, and sponges, which make up approximately half our track channel sales. We have the No. 1 or No.

2 position in all five segments and continue to drive market share gains in each. Our Camo Concealer and Poreless Putty Primer franchises, in particular, continue to be sources of strength, supporting ongoing share gains in their respective categories. Looking beyond our core offerings, we're humbled at the recognition our innovation efforts are receiving. In the highly coveted Annual Allure Best of Beauty Awards, e.l.f.'s Liquid Glitter Eyeshadow was highlighted as one of the best beauty steals.

And W3LL PEOPLE's Expressionist Volumizing Mascara was highlighted as one of the best clean beauty products. In Influenster's 6th annual Reviewers' Choice Awards, determined by the products with the most buzz based on millions of influencer reviews. e.l.f.'s Poreless Putty Primer and Lock On Liner & Brow Cream were both recognized among the best in makeup. Skincare remains a major focus in our innovation pipeline, and we're encouraged by the results that we're seeing.

Across our business, our skincare consumption continues to outpace our color cosmetics trends with particularly strong skincare results on elfcosmetics.com. We're continuing to see growth behind e.l.f.'s best-selling Holy Hydration! franchise, both in stores and online, and we're also seeing strong results behind our Cannabis sativa, Full Spectrum CBD and Supers collections. We see a lot of runway in this category. For perspective, year-to-date skincare represents just 8% of our tracked channel consumption but drives nearly 25% of our business on elfcosmetics.com.

We have additional e.l.f. skincare launches slated for the balance of this fiscal year that we expect to propel our momentum in the category. We expect our innovation efforts will be shining even brighter in the months to come with the launch of Keys Soulcare. Our first three products are scheduled to launch online on December 3 and will include a signature, sage, and oat milk candle and two yet-to-be-revealed skincare products.

We're planning on a global skincare collection launch in early 2021 on keyssoulcare.com and with our retail partners, both online and in stores. We have a multi-category, multi-year pipeline of innovation to drive the brand beyond the initial launch. Our fourth strategic imperative is driving productivity with our national retail partners. We remain focused on our relative performance to key competition.

Of the top five color cosmetics brands in the U.S., e.l.f. was the only one to post growth with our track channel color cosmetic sales up 3% year over year as compared to declines of almost 20% or more for each of the remaining brands. We were also the only brand to grow share in the quarter with 5.5% of the market, up 100 basis points year over year. Project Unicorn, our ongoing initiative to drive productivity with our national retail partners by improving assortment, presentation, and navigation at shelf continues to impress retailers.

During the quarter, our visual merchandising team developed stunning in-store signage and graphics with some of our largest customers, elevating our skincare collections and highlighting our best-selling products like Poreless Putty Primer, Camo Concealer, and brow pencils. We're also finding innovative ways to translate our success on TikTok to stores. In September, we had an incredibly successful display program at Superdrug stores in the U.K. dedicated to what's trending on TikTok.

It featured our most viral and trending products from the platform and sold out quickly. Given the strength of our productivity, innovation, and consumer engagement, Walmart and Ulta Beauty expanded shelf space for e.l.f. toward the end of the quarter in a subset of their doors. For context, Target our most developed and longest-standing national retailer, and our store footprint as of FY '20 was approximately 11 feet on average.

Our footprint in Walmart and Ulta stores is about half of that. While our fall shelf space expansion helped narrow that gap somewhat, we see plenty of runway ahead. In fact, we're pleased to report that Ulta Beauty plans to expand space even further for the e.l.f. brand in spring 2021.

Internationally, where we continue to have a lot of white space. We are also excited to launch in Spring 2021 at Shoppers Drug Mart, a leading beauty retailer in Canada. In early 2021, Keys Soulcare will light up in a much bigger way with a planned global launch of our full skincare collection on keyssoulcare.com and with our retail partners, both online and in-store. For the U.S.

specifically, our exclusive national retail partner is Ulta Beauty. We look forward to sharing much more on our plans with Ulta Beauty closer to launch. But what I can say is they share our enthusiasm for the long-term potential of the brand. In the coming months, we plan to unveil our international distribution partners as well.

We're also excited that six of W3LL PEOPLE's best-selling SKUs are now featured in all Ulta Beauty stores as part of Ulta's Conscious Beauty program. An initiative to provide consumers greater choices and transparency in clean beauty. W3LL PEOPLE was already sold on ulta.com, and this marks the brand's entry in Ulta stores. W3LL PEOPLE continues to raise the standard for high-performance plant-powered clean beauty.

Our fifth strategic imperative is delivering cost savings to help fuel brand investments. Our operations team continues to generate cost savings via lean manufacturing techniques that have contributed to our strong gross margin rates. As just one example, our team's collective cost-saving efforts have driven a 15% reduction in cost per unit for our best-selling Camo Concealer franchise since its initial product launch. With the integration of W3LL PEOPLE into our supply chain now complete, we're also encouraged by the significant COGS savings we're seeing.

These savings, in turn, allow us to invest in the W3LL PEOPLE brand recharge and sharpen our retail pricing for select products in line with the brand's vision to make clean beauty accessible. On the operations front, we did have a systems migration issue at our main distribution center during the latter part of the quarter, which has caused a backlog in customer orders and higher out of stocks with some of our key customers. That said, we are confident in our ability to meet customer demand and are already starting to ship at higher rates. The progress on our five strategic imperatives has been terrific, and we believe we have further opportunity with each.

Before I turn the call over to Mandy, let me provide a bit more perspective on the overall strategic framework of the company and our brands. Our company was founded 16 years ago with a mission to make the best of beauty accessible to every eye, lip, and face. Underpinned by the foundational work behind our five strategic imperatives, the strength of our platform allows us to expand our portfolio with strategic extensions that support our purpose and values. Our shared value system and deep commitment to diversity and inclusion are what connect us and fuel our actions.

As we evolve from a single brand company into a diversified multi-brand portfolio, we strongly believe there's opportunity for significant value creation, leveraging the investments we've made in our world-class team and capabilities. Each of our brands is positioned to touch diverse consumer cohorts at different price points. e.l.f. Cosmetics is trend-driven beauty of extraordinary value in the mass segment, with average unit retails of approximately $5.

W3LL PEOPLE is plant-powered clean beauty in the masstige segment with average unit retails for approximately $20. Keys Soulcare is lifestyle beauty and entry-level prestige with initial unit retails between $20 and $40. All three brands are accessible relative to their competitive set. Importantly, all three brands are complementary and incremental to the e.l.f.

Beauty platform. Looking ahead, we believe the color cosmetics category will return to growth given the major role cosmetics play in consumer self-expression. We remain focused on continuing to grow share regardless of category trends. We were strong entering the pandemic.

And with our digital strength, core value proposition, and ability to adapt at e.l.f. speed have continued to fuel our performance in this uncertain economy. With the strength of our more diversified brand portfolio, we believe we are positioned for an even brighter future. I'll now turn the call over to Mandy.

Mandy Fields -- Senior Vice President and Chief Financial Officer

Thank you, Tarang, and thank you all for joining us this afternoon. Today, I'll cover our Q2 financial results and fiscal 2021 guidance. We are quite pleased with our Q2 results. We delivered net sales of $72 million, up 7% from a year ago.

This growth was mainly fueled by ongoing strength in e-commerce and international, as well as growth in tracked channels. We also saw sequential improvement in our performance at Ulta relative to Q1 as stores reopened. From a cadence standpoint, tracked channel sales growth moderated through the quarter as expected, as stimulus dollars dried up, and we cycled the price increase implemented last year. Gross margin of 65% was up approximately 100 basis points compared to prior year.

Similar to the last several quarters, we saw gross margin benefits from margin accretive product mix and cost savings, a favorable FX impact, and a mix shift to elfcosmetics.com. These benefits were partially offset by the impact of tariffs and certain costs associated with space expansion. Additionally, our year-over-year gross margin improvement moderated relative to last quarter as expected, with cycling the price increases we took last year. On an adjusted basis, SG&A as a percentage of sales was 51% or approximately flat compared to last year at 51%.

The marketing and digital investment for the quarter was approximately 15% of net sales versus 14% a year ago. For the first half, marketing and digital spend as a percentage of sales was 14%, in line with our expectations. Q2 adjusted EBITDA was $14 million, down 4% to last year, and adjusted EBITDA margin was approximately 20% of net sales. Adjusted net income was $8 million or $0.16 per diluted share, compared to $8 million or $0.15 per diluted share a year ago.

Our liquidity remains strong with a combination of our cash balance and access to our revolving credit facility sitting at over $90 million. For the six months ended September 30, we generated $3 million in cash flow from operations and reduced our capital expenditures by $3 million versus prior year. We ended the quarter with $41 million in cash on hand compared to a cash balance of $59 million a year ago. This was driven by increased investment in inventory to support space expansion and new distribution for spring 2021.

We expect our cash priorities for the balance of this year to focus on investing behind our five strategic imperatives, supporting the launch of Keys Soulcare and our W3LL PEOPLE brand recharge. As we mentioned the last quarter, we expect $5 million to $7 million in inventory and capex investments behind Keys Soulcare and W3LL PEOPLE in fiscal 2021, in addition to certain costs that we are treating as one-time expenses related to integration and brand development. Now, let's turn to our outlook for the remainder of fiscal 2021. There are still many uncertainties around the duration and impact of COVID-19, as well as the general economic environment.

However, we believe our visibility is improving. As a result of our strong performance in the first half of the year and confidence in our ability to continue to execute our long-term strategy, we are now providing guidance for fiscal 2021. For the full-year fiscal 2021, we expect net sales growth of approximately 5% to 7% versus fiscal 2020. We expect adjusted EBITDA between $57 million and $60 million, adjusted net income between $31 million and $33 million, and adjusted EPS of $0.59 to $0.63 per share on a fully diluted basis.

It's important to note that our guidance assumes no significant disruption to our consumers, customers, or supply chain for the remainder of fiscal 2021. Let me provide you with a little more color on our planning assumptions for the remainder of the year. Let's start with the top line. We expect consumer behavior to remain impacted by COVID-19 through the rest of our fiscal year, which will likely continue to pressure both in-store shopping levels and cosmetics category trends.

Specific to tracked channels, we anticipate Nielsen trends to inflect negative in the coming weeks as we resolve the out of stocks, Tarang mentioned, related to the system migration at our main distribution center. That said, we are confident in our ability to meet customer demand and are already starting to ship at higher rates. Importantly, we expect to deliver top-line growth in the second half, as reflected in our guidance. Let me step you through a few of the building blocks.

First, we remain focused on our relative performance to the mass color cosmetics category and are optimistic around our ability to continue to grow share. Second, we expect our second-half trends will benefit from the recent space expansion in Walmart and Ulta Beauty, as well as pipeline related to new distribution in spring 2021 with Shoppers Drug Mart in Canada and Ulta Beauty. Third, we believe our digitally led strategy will result in strong e-commerce trends throughout the year, although likely moderating from the levels we saw in the first half. Lastly, we anticipate a modest net sales contribution from the launch of Keys Soulcare in fiscal 2021.

These top-line drivers will be partially offset by tougher year-over-year comparisons in Q4 and as we anniversary the strong 16% net sales growth we saw last year, as well as less incremental merchandising on a year-over-year basis in Target starting in Q4. Turning now to adjusted EBITDA. We expect several of our underlying gross margin drivers to remain intact, including margin accretive product mix and a favorable mix shift to elfcosmetics.com. We continue to focus on reducing expenses where we can while still investing in our long-term growth.

That said, we do have two specific factors that will pressure our adjusted EBITDA margins in the second half relative to the first half. First, on FX, we purchase almost all of our product in China in RMB, and favorable FX rates have driven a gross margin benefit of approximately 100 to 200 basis points on average over the last several quarters. Based on current exchange rates, we expect that FX benefit to moderate through the year and will likely inflect to a gross margin headwind starting in Q4. Second, on Keys Soulcare.

As I mentioned, Keys Soulcare is expected to contribute a modest amount to our top line this fiscal year. So we expect gross margin for the brand to be relatively neutral to our overall gross margin. In addition, we expect to have an incremental $5 million to $6 million in marketing spend in the second half, which has an outsized impact as we invest ahead of the brand launch. This will take our marketing spend as a percentage of sales up to approximately 14% to 16% on a full-year basis.

From a cadence standpoint, we expect top-line growth to be more weighted to Q3 than Q4 largely due to the timing of our planned distribution expansion, as well as much tougher compares as we anniversary the 16% net sales growth we saw in Q4 last year. We expect adjusted EBITDA margins will be more pressured in Q4 than Q3, given the dynamics we just discussed on the top line, anticipated FX headwinds and incremental Keys Soulcare marketing spend that is largely concentrated to Q4. Let me now take a step back to talk about our long-term economic model and why we're optimistic about the future. With fiscal 2021 as the base, as we look out over the next three years, we believe we can achieve compounded annual top-line growth in the mid- to high single digits from the combination of e.l.f.

brand growth and shelf space gains along with contributions from our strategic extensions by Keys Soulcare and W3LL PEOPLE brands. We anticipate adjusted EBITDA leverage will be achieved through a mix of top-line growth and leverage on COGS and/or SG&A over that three-year horizon. Our brand portfolio reflects our deep commitment to inclusive, accessible, and cruelty-free beauty. We believe that our digital strength, core value proposition, and ability to adapt at e.l.f.

speed will continue to fuel our performance. Importantly, we believe Keys Soulcare and W3LL PEOPLE are both distinctive and complementary to our portfolio and allow us to leverage the cost structure we have in place as we scale them up. While there are still many uncertainties in the operating environment in the short term, I am confident in our ability to deliver. Our performance over the last seven quarters, both on an absolute basis and relative to the category, give us confidence in our ability to continue to execute our long-term strategy.

With that, operator, you may open the call to questions. For those who'd like to ask a question, please do so through a separate dial-in line noted on this screen. Those not asking questions can hear the question-and-answer session through the webcast. We'll pause a few minutes for those seeking to ask questions to queue up on the dial-in line.

Questions & Answers:

Operator

We will now begin the question-and-answer session. [Operator instructions] Our first question comes from Erinn Murphy with Piper Sandler. Please go ahead.

Erinn Murphy -- Piper Sandler -- Analyst

Great. Thanks and good afternoon. My question is around inventory. The balance was up kind of 26%, I believe, at the end of the quarter.

Could you just maybe walk through some of the components around how much was shelf space gains, maybe the operational hiccups, excuse me, that you saw in the quarter? And then maybe the build for Keys Soulcare? And then where do you expect inventory to be by the end of the third quarter?

Mandy Fields -- Senior Vice President and Chief Financial Officer

Hi, Erinn. So let me first say that we feel great about our inventory levels. As you look at the cash flow statement, March was particularly low as we were managing through the initial onset of COVID. And so as you look at our inventory today, we've talked about pipeline that is related to space gains.

We also talked about the system migration issue that shifted inventory from Q2 into Q3. And also, you mentioned, yes, space gains picked up within the quarter. All of those things are playing a role into our current inventory balance, and we feel like we're in a much healthier place right now.

Erinn Murphy -- Piper Sandler -- Analyst

OK. And then if I could ask a separate question on Keys Soulcare. Could you just maybe walk through the broader launch plan? As we think about 2021 just given the price point positioning, is there an opportunity to work with new retailers that maybe you don't work with currently with both W3LL PEOPLE and e.l.f. and just help us think about the cadence as we look to the end -- or next year, excuse me.

Thank you.

Tarang Amin -- Chairman and Chief Executive Officer

Hi, Erinn. We're really excited about our launch on Keys Soulcare. So, as you know, the site is already up and running, keyssoulcare.com. We led with content, community, and conversation, and the response has been terrific so far in terms of how people are responding to this new beauty lifestyle brand.

In December, December 3, we start our commerce with our first three items, sage oat milk candle, as well as two other skincare products that will go on sale on keyssoulcare.com, as well as Ulta Beauty in ulta.com. In early 2021, we'll expand that range to a full line of skincare products, so both online on keyssoulcare.com, as well as ulta.com and then layer in Ulta Beauty stores. So we're quite excited about the full range that will be going out the door by the end of this fiscal year and have plans beyond that to enter other categories and new other products as our normal cadences.

Erinn Murphy -- Piper Sandler -- Analyst

Great.

Tarang Amin -- Chairman and Chief Executive Officer

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

Erinn Murphy -- Piper Sandler -- Analyst

Excellent. Thank you, Tarang and Mandy.

Operator

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

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

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

Mandy Fields -- Senior Vice President and Chief Financial Officer

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

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

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

Mandy Fields -- Senior Vice President and Chief Financial Officer

So, Linda, the long-term economic model that we've outlined is a three-year model, and it's based on a three-year CAGR. As you look over -- in a three-year time frame, we do expect adjusted EBITDA to outpace net sales growth. And so that you're really looking at that beginning and ending point for your measurement.

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

OK. Thanks very much.

Operator

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

Dara Mohsenian -- Morgan Stanley -- Analyst

Hi, guys. So a couple of questions around the Soulcare business. Tarang, you sound excited about it. Can you give us some type of thought process for the ultimate size of where that business could be longer-term maybe what the best brand comps are in the marketplace, just as we think about the revenue size of the brand or some type of order of magnitude or how you think about it relative to your existing business and then incrementality of that brand relative to your existing business? And then just second, on the spend you mentioned in the back half of the year.

As we look at the spend for that brand going forward, is it more incremental to what you typically would be spending at the company? Can it be handled more within the existing budget in terms of a reallocation? How do you think about that longer-term ahead of, obviously, some upfront spending in the back half of the year this year? Thanks.

Tarang Amin -- Chairman and Chief Executive Officer

Well, Dara, we are tremendously excited about Keys Soulcare because we are creating something we believe is completely new in the category. Lifestyle Beauty brand really aimed at nourishing your soul and so starting with content and then going into product. In terms of the business size, we're building this for the long term. So we said that it will have a modest sales contribution this fiscal year, and we'll maybe later disclose kind of what size range it would be.

We're starting in skincare, so you can usually use comps in terms of other skincare brands as a starting point. But it's even beyond skincare because this will go into multiple categories. I think one of the things that gives us heart beyond our own excitement for the brand is just how excited Ulta Beauty is, and we'll be partnering with them to launch this brand and the level of support they're going to put behind the brand in terms of what they really believe for the long term. And then in terms of spend, we would put the spend in the context of the overall percentage of the company.

So each brand that we have between W3LL PEOPLE, Keys Soulcare, and e.l.f. Cosmetics really have their own spend levels that we use to support the brand. And so the overall 14% to 16% that Mandy gave is a comfortable level for us right now in terms of being able to support all three brands. And again, we'll update on that as we get into the launch here.

Operator

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

Steph Wissink -- Jefferies -- Analyst

Thank you. Good afternoon, everyone. Mandy, I have a clarification question on the system migration. It sounds like that was detrimental to your sales growth in the quarter.

I'm wondering if you can help us quantify what that holdback might have been. And then, Tarang, for you, just a question following up on Keys Soulcare. The gross margin structure being net neutral for the company was a bit below what we would see typically for a prestige skincare business. And maybe talk a little bit about the gross margin neutrality.

Does that include a royalty or something unique that would benchmark you differently than what we see in the broader marketplace? Thank you.

Mandy Fields -- Senior Vice President and Chief Financial Officer

Steph, OK. I'll take the first question, and then I'll pass it to Tarang on Keys Soulcare. On the system migration, we did have shipments shift out of Q2 into Q3. We have not put a dollar amount on that publicly, but I will say that it did contribute to the higher inventory levels we did have coming into the quarter.

And we'll also be kind of a building block if you think about it for how our second-half forecast will come together and is already implied there in the guidance.

Tarang Amin -- Chairman and Chief Executive Officer

And then maybe just building to that the system migration issue was related to our Ontario, California distribution center, which is our largest distribution center. We have a third-party logistics provider that had a long-planned migration in their warehouse management system and ran into a hiccup. It's one of the reasons we shipped less and why you have some higher out of stocks right now. The good news is we're already past that issue.

We're shipping at much higher rates and quickly catching up in terms of our in-stock positions with our customers. And then on your second question regarding Keys Soulcare, the product margin is actually higher than the overall e.l.f. average gross margin, but it does include, to get to the gross margin, you do have a royalty in the form of both cash, as well as e.l.f. equity.

We like that structure quite a bit because it really ties into our longer-term vision for the brand and really aligning our interest with Alicia Keys. In terms of what we're building here for the long term. And that's why the overall gross margin is in line with the company.

Steph Wissink -- Jefferies -- Analyst

Thank you.

Operator

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

Andrea Teixeira -- J.P. Morgan -- Analyst

Hi. Thank you and congrats on the numbers. My question is how we should be thinking the second-half top-line growth, in particular Q4 in terms of the new distribution. I'm assuming you're still going to get some of that benefit from Walmart and also Ulta.

And second, on the clarification on the comment that Mandy and just now also, Tarang, you made on the Keys Soulcare profitability. Should we be thinking of the $5 million to $6 million marketing launch expenditure to be recurring, and then you're going to build up to that margin and to get the leverage throughout the fiscal '21? I'm just like thinking of like the international -- sorry, fiscal '22 through '24 because you're doing bad in your long-term algorithm that your margin is going to expand more. But I'm just thinking like it will be more gradual, assuming it will depend on the top line we are accelerating. Is that a fair assumption?

Mandy Fields -- Senior Vice President and Chief Financial Officer

Right. OK. Yes. Andrea, let me start with your first question on the second-half top-line growth and the assumptions around there.

So as we talked on our prepared remarks, we, one, do believe that there's going to continue to be volatility within the color cosmetic category, but we are confident that we will continue to gain share in the category. So I would say our second-half trends will benefit from the space expansion that we've had recently in Walmart and Ulta Beauty. That was in the fall. Additionally, we'll also benefit from new distribution that we're picking up in the spring with Shoppers in Canada and then also additional space expansion that we will get in spring 2021 with Ulta Beauty as well.

Third, we believe that e-commerce will continue to be a driving force in our net sales performance, though likely moderating from the levels that we've seen earlier in this year as consumer behavior kind of starts to stabilize or shift back to the brick-and-mortar side. So I would say those things, plus the modest contribution that we're expecting from Keys Soulcare are really the top-line drivers that we're looking at for the second half. And then on Keys Soulcare, the $5 million to $6 million, that is really related to the launch of Keys Soulcare. It's too early to tell.

We haven't given fiscal '22 guidance yet and how to think about that marketing spend on a longer-term horizon. But I would say that that $5 million to $6 million that we're talking about for now is really in preparation for the launch of the brand here in the next quarter or so.

Andrea Teixeira -- J.P. Morgan -- Analyst

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

Mandy Fields -- Senior Vice President and Chief Financial Officer

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

Andrea Teixeira -- J.P. Morgan -- Analyst

OK. Thank you.

Operator

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

Oliver Chen -- Cowen and Company -- Analyst

Thanks very much. Congrats on the expansion at Walmart and Ulta. As that happens, what should we know about product changes or the products that will be incremental? And are there thoughts around mix? We're curious about skincare. As that continues to really succeed, how are you thinking about breadth versus depth in skincare indoor mix and innovation happening there with the assortment? I would also just love your thoughts on community and Keys Soulcare.

It seems like it's a core tenet of what you're doing there and how you might contrast that against the community you've built at e.l.f. Thank you.

Tarang Amin -- Chairman and Chief Executive Officer

Oliver, so I'll tell you, first of all, in terms of our expansion, one of the reasons we're excited about space expansion is other than Target, which is our longest-standing national retail account, where we had about 11 feet of linear space at the end of FY '20. Really, every other customer has about less than half that space. So getting more space at Walmart and Ulta Beauty were important in our journey to get the right footprint on e.l.f. And as we pick up space, one of the real strengths we have is our innovation program and the new items we have across our entire line.

It's one of the reasons we've been able to sustain growth in a challenged category across face, eyes, lips, tools, and skincare. In particular, the space gives us an opportunity to get more skincare items into national retailers. If you take a look at our business overall, skincare is about 8% of our tracked channel sales, but almost 25% of our sales on elfcosmetics.com. And if you look at the difference, a big part of that difference is the assortment, our ability to put more of our ranges into national retailers and put focus against that.

So we believe skincare has quite a bit of white space just based on the success that we have on elfcosmetics.com. And as we get larger footprints, it gives us the opportunity to put a richer mix of skincare in addition to some of other key holy grail innovation. And then on the second question on community. Community is such an important part and has been for our entire 16 years.

I mean, if you think about e.l.f. Cosmetics, it really was built behind this passionate community that knew about the brand and helped build it up and continues to be buoyed by that. And so community is really core to our DNA and our digital routes. Keys Soulcare is no different from the standpoint of starting digitally, starting with content, conversation, and community.

And as I mentioned earlier, the response has been incredibly positive to that. And so I'd say it's a really rich community. It will be a different community than the e.l.f. Cosmetics community in many respects.

Partly because Keys Soulcare will be in the entry-level prestige area. So if unit retails between $20 and $40 for the initial range, that's quite a bit different than the average $5 average unit retail with e.l.f. and then also with primarily skin focus in the beginning going into other categories. And so I think you'll continue to see -- and the great news is just like e.l.f.

Cosmetics all you have to do is go on the website, keyssoulcare.com, and you can see the rich content and then even on the social channels. I mean, the level of consumer reaction we're getting. And how meaningful this brand is really gives us a great deal of heart in terms of its future potential.

Oliver Chen -- Cowen and Company -- Analyst

Thank you very much. Best regards.

Operator

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

Bill Chappell -- Truist Securities -- Analyst

Thanks. Good afternoon.

Tarang Amin -- Chairman and Chief Executive Officer

Good afternoon.

Bill Chappell -- Truist Securities -- Analyst

Well, first, I guess, housekeeping. How much was the kind of marketing start-up cost for Keys Soulcare in 2Q?

Mandy Fields -- Senior Vice President and Chief Financial Officer

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

Bill Chappell -- Truist Securities -- Analyst

Got it. OK. I will double-check. And then second, I guess, Tarang, can you give us an update just kind of the health of color cosmetics in the mass side? I mean, you said you're the only one of the five major players to grow.

And I'm trying to understand how much of that is category still recovering in later stages of the pandemic. Have we recovered at all from the later stage of the pandemic? Or is it just your competition isn't kind of rising to the occasion?

Tarang Amin -- Chairman and Chief Executive Officer

Well, I'd say, first of all, the category has definitely been impacted by the pandemic. Everyone has been restricted and cooped up, hasn't been able to get about their normal routines, and that's certainly impacted the category on the whole. So while not quite at the bottom that it was the start of the pandemic, particularly through different waves of COVID, you definitely see an impact on the category. I think we've been not only fortunate, but we've executed really well in terms of being able to buck that trend across every one of the categories in which we compete.

And I think it's the fundamental value equation we have of the best of beauty made accessible to every eye, lip, and face, as well as the execution against the five strategic imperatives we've been talking about now for about two years. And so I think we've bucked the trend. We feel confident in our ability to continue to build share even in a challenged category. What I will tell you longer-term is I'm quite bullish on the category.

I think as consumer behavior returns to normal, this is such a central category to consumer self-expression and importance. I believe the category will come back quite strongly. And a lot of that in terms of the timing will really depend on when people are able to get back to normal behavior. Regardless of whether the category is challenged or does better.

I like our position within the category. We had strength going into the pandemic, we've executed well during the pandemic, and we're building a brand portfolio that I think will make us even stronger as the category recovers.

Bill Chappell -- Truist Securities -- Analyst

Got it. Thank you.

Operator

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

Jon Andersen -- William Blair and Company -- Analyst

Good afternoon. Thanks, everybody. Just two quick ones. If you could talk a little bit about the Keys Soulcare sourcing model -- the sourcing model lineup with the model you use for the rest of your business and whether there'll be any ties between the elfcosmetics.com website and the Keys Soulcare site.

And then the second question is you're now managing three brands. As you move forward as opposed to, one, historically, are there any changes that you've made or you feel you need to make to people, process, systems, approaches internally to manage the added complexity? Thanks.

Tarang Amin -- Chairman and Chief Executive Officer

Sure. Hey, Jon. So I'd say, first of all, on Keys Soulcare, it's one of the real basis of our strategic extensions is being able to leverage the chassis we've built with e.l.f. Beauty particularly the investments we have in our team and infrastructure.

So the sourcing model in Keys Soulcare as it fully leverages the innovation model we have on e.l.f., as well as our overall operating platform, it gives us that great combination of cost, quality, and speed going forward, as well as the ability to get into other categories. We supplemented that really through by the acquisition that we had on W3LL PEOPLE. One of the key developers of the product range is Dr. Renee Snyder, one of the core co-founders, so on W3LL PEOPLE board-certified dermatologists, one of the co-founders of W3LL PEOPLE.

She's been part of our innovation team, working very closely with Alicia Keys to really develop a phenomenal product range. And so it's really leveraging both those investments and capabilities we have, and you'll continue to see that. In terms of ties between the brands, I'd say the ties really are on the back end, in our overall infrastructure and chassis we have. So our ability to stand up the site much faster really came from our strength in digital, a lot of what we're doing from a content standpoint.

But from a consumer-facing standpoint, all three are distinct brands with distinct consumer segments and complementary to each other. So you won't necessarily see a strong tie between the brands as much as our ability to leverage the company. And then in terms of managing three brands versus one, I'd say a couple of things. First and foremost, most of us come with multi-brand experience, the company is full of very strong backgrounds in both consumer and beauty that have managed portfolios of brands.

And so we definitely have that expertise within the company. But we have also brought on incremental resources. So if I think of the additional personnel that we brought on in anticipation of Keys Soulcare. I feel really good about the balance of leveraging the core chassis and then having some dedicated resource.

And some of those dedicated resources by each of the brands is how we're able to manage the consumer-facing aspects, while at the same time, leveraging all the investments we've made in the company.

Jon Andersen -- William Blair and Company -- Analyst

Thank you.

Operator

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

Rupesh Parikh -- Oppenheimer and Company -- Analyst

Good afternoon and thanks for taking my questions. So I just had a related question just related to longer-term guidance. So first on COVID, as we think about, I guess, FY 2022 to '24, is the assumption that we'll now be past the COVID headwinds? And then second, in regards to the sales guidance, I was just curious if there's any granularity you can provide in terms of how you guys are thinking about the growth for the e.l.f. brand versus some of the newer brands you have.

Mandy Fields -- Senior Vice President and Chief Financial Officer

So, Rupesh, I'll start with the long-term economic model and any impacts from COVID. I would say that we're just really focused on driving growth through that long-term economic model. And I think that our track record over the last seven quarters of delivering strong sales growth gives us confidence that we can continue to do that and deliver on our long-term economic model. In terms of sales guidance on e.l.f.

versus the other brands, I would say that we -- I just talked about some of the things and the drivers that will impact our second-half net sales, which included a modest contribution from the Keys Soulcare brand. But beyond that, we have not broken that down just yet, really keeping the focus on e.l.f. Beauty as a total.

Rupesh Parikh -- Oppenheimer and Company -- Analyst

Great. If I can just get one more in. OK. If I could speak just one more question.

Just given all the second wave risks we're seeing in the U.S. right now, are you guys seeing -- I guess as you look at your drivers, are you starting to see an impact on your business related to the second wave spikes in different markets?

Tarang Amin -- Chairman and Chief Executive Officer

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

Rupesh Parikh -- Oppenheimer and Company -- Analyst

Great. Thank you. I'll pass it on.

Operator

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

Oliver Chen -- Cowen and Company -- Analyst

Hi. Thanks again. You've made a really amazing success with TikTok. Just would love your thoughts on return on ad spend in relation to how you're analyzing the metrics there and the impressions and what that may imply for your thoughts around marketing spend, whether that be dollar or rate in relation to the success you had on TikTok.

And would also just love your take on live streaming and how that's manifesting in different aspects of your business and what you see ahead. Thank you.

Tarang Amin -- Chairman and Chief Executive Officer

Sure. So, Oliver, I'd say we have had tremendous success on TikTok, but we've also had success across platforms. And TikTok, specifically, I think we're now between our various brand challenges up to 10 billion views, 6.5 million user-generated videos, and it's really helping drive relevancy on the brand, particularly among Gen Z. In terms of marketing spend and how we evaluate it, we really evaluate in two different ways.

One is overall ROI, where we talked last quarter, getting the Nielsen marketing mix analysis done, which showed very strong returns and our spending in total. And then across various vehicles. And then the second is really kind of by what's really causing buzz and having e.l.f. stay top-of-mind, particularly among key demographics like we just talked about, TikTok and Gen Z.

So we really look at both those together. And then live streaming, I would say we'll continue to have an important impact on the business going forward as other initiatives have for the consumer, so including our kind of virtual try-on feature on elfcosmetics.com, as well as different ways of kind of engaging consumers. And I think you'll continue to see us do more there.

Oliver Chen -- Cowen and Company -- Analyst

Thanks a lot. Appreciate that.

Operator

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

Unknown speaker

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

Tarang Amin -- Chairman and Chief Executive Officer

So I'd say on the promotional activity, we haven't seen any major spike at least on the mass side on the promotional side, because the number of brands have been highly promotional in the category, and we continue to see them be highly promotional. I'd say as far as e.l.f. is concerned, that's never really been our strategy. Our strategy has been to provide the best of beauty at extraordinary values every day.

And we like that strategy because it allows us to kind of stay true to not only who we are and what our consumers expect but also gives us a certain level of stability in not having to play in all the nonsense of high, low. So overall, I'd say we haven't seen that much of a change in the category, even though some players have been highly promotional. And then, two, our strategy remains intact as it's winning in the marketplace.

Unknown speaker

Great. Thank you.

Operator

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

Tarang Amin -- Chairman and Chief Executive Officer

Great. Well, thank you, everyone, for joining us today. I'm so grateful for our incredible team at e.l.f. Beauty who have shown tremendous talent, meeting the challenges of the pandemic and building market share.

I believe our future is bright and remain confident in our long-term strategy. We hope everyone is happy and healthy this holiday season. Thank you and be well. Thanks, everyone.

Operator

[Operator signoff]

Duration: 65 minutes

Call participants:

KC Katten -- Vice President of Investor Relations

Tarang Amin -- Chairman and Chief Executive Officer

Mandy Fields -- Senior Vice President and Chief Financial Officer

Erinn Murphy -- Piper Sandler -- Analyst

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

Dara Mohsenian -- Morgan Stanley -- Analyst

Steph Wissink -- Jefferies -- Analyst

Andrea Teixeira -- J.P. Morgan -- Analyst

Oliver Chen -- Cowen and Company -- Analyst

Bill Chappell -- Truist Securities -- Analyst

Jon Andersen -- William Blair and Company -- Analyst

Rupesh Parikh -- Oppenheimer and Company -- Analyst

Unknown speaker

More ELF analysis

All earnings call transcripts