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e.l.f. Beauty, Inc. (NYSE:ELF)
Q3 2021 Earnings Call
Feb 03, 2021, 4:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:


KC Katten

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

We encourage you to tune in to our webcast presentation for the best viewing experience, which you can access on our website at investor.elfbeauty.com. Since many of our remarks today contain forward-looking statements, please refer to our earnings release and reports filed with the SEC where you'll find factors that could cause actual results to differ materially from these forward-looking statements. In addition, the company's presentation today includes information presented on a non-GAAP basis. Our earnings release contains reconciliations of the differences between the non-GAAP presentation and the most directly comparable GAAP measure.

With that, let me turn the webcast over to Tarang.

Tarang 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 discuss the drivers behind our Q3 results, our growth opportunities, and our overall strategic framework. I am proud of our team for delivering our eighth consecutive quarter of net sales growth as we continue to navigate major category headwinds as a result of COVID-19.

We delivered Q3 net sales of $89 million, up 10% versus a year ago, and adjusted EBITDA of $18 million. We continue to gain market share while advancing our transformation to a multi-brand portfolio. We're also raising our full-year guidance, reflecting a shift in some orders from Q3 to Q4 and continued business momentum. Before Mandy details our results, I want to share the key pillars underpinning our performance.

Our strategy is working. We came into this volatile period from a position of strength. Our superpowers that's center on our ability to deliver 100% cruelty-free, premium-quality beauty products at accessible price points with universal appeal continue to resonate with consumers. Our outperformance relative to the category reflects the strength of our business model and a relentless focus on our five strategic imperatives.

Let me provide a few highlights from the quarter. Our first strategic imperative is to drive brand demand. We continue to leverage our digital-first marketing engine to drive greater brand relevance and expand our consumer reach. Our brand-building efforts are working as we continue to significantly outperform our competition.

E.l.f. grew the most share in the quarter with 5.9% of the market, up 100 basis points year over year. E.l.f.'s social audience continues to grow double digits with over 9 million followers across our digital ecosystem. Our earned media value is up 16% compared to the prior year, and we're the only brand growing in our competitive set.

We're continuing to disrupt the beauty space as we test and learn on new frontiers. We're proud to be one of the first beauty companies to establish a presence on Twitch, the world's leading live streaming gaming platform. In November, we announced a collaboration with Loserfruit, also known as Lufu, who has the second-largest Twitch following for a female gamer. Lufu is providing her audience, both female and male, with engaging platform-native content that promotes self-care and self-expression while integrating her favorite e.l.f.

products. In yet another beauty industry milestone, we were the first beauty brand to launch a campaign on Triller, an emerging music video making platform. We created a five-track holiday album called e.l.f. the Hauls, which featured up and coming artists remixing holiday classics.

We made beauty and music industry history with four of our songs making the U.S. and Global Billboard's Triller Top 20 list. Our brand-building efforts continue to win awards. This quarter, Women's Wear Daily recognized us as Newsmaker of the Year.

Ad Age named us one of the Top 10 Marketers of the Year. We're the only beauty brand on the Ad Age list, putting e.l.f. in admirable company with TikTok, McDonald's, and Lego among others. This quarter, we took an important step in our transformation to a multi-brand portfolio with the launch of our first ritual for Keys Soulcare, our groundbreaking new lifestyle beauty brand with Alicia Keys.

In December, we launched the Goddess Ritual on keyssoulcare.com and ulta.com, which included three product offerings: a sage and oat milk candle, Skin Transformation Cream, and Obsidian Facial Roller. We expanded the collection in January to include six dermatologist-developed clean skincare offerings. Keys Soulcare is off to a great start and we're encouraged by the recognition the brand is receiving with over 10 billion global press impressions since launch. The brand has been further amplified by Alicia's almost 100 million social media followers.

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 global consumers. Looking to W3LL PEOPLE, our plant-powered clean beauty brand. We are continuing to execute our brand recharge to broaden consumer awareness. We are bringing the recharge to life at shelf with new visual merchandising across our key retail partners.

Our second strategic imperative is a major step up in digital. Digital consumption remains strong, up nearly triple digits year to date, with strength across elfcosmetics.com, and retailers.com, and Amazon. Digital channels expanded to 16% of our total business this quarter, up from 10% a year ago. On elfcosmetics.com, approximately 60% of our shoppers were new consumers.

We're encouraged to see these consumers over-indexing on skincare and signing up for our Beauty Squad Loyalty Program. Beauty Squad now has almost 2.3 million members, up 40% year over year. Our loyalty members collectively drive almost 70% of our sales on elfcosmetics.com. This quarter, we offered our Beauty Squad Loyalty members exclusive early access to our holiday kits and new product innovation, which helped drive sign-ups for the program.

Building from the e.l.f. playbook, Keys Soulcare utilizes a digital-first strategy with our initial product rituals launching online. Keys Soulcare aims to transform the way the world engages with beauty, with a focus on content, conversation, and community. Keyssoulcare.com features rich editorial content and a weekly email newsletter, with inspirational story from Alicia's community of lightworkers.

The brand's community is active, vocal, and passionate about Alicia, our philosophy, and our product offerings. Instagram engagement metrics are trending well above platform averages, and we're pleased with the strong open rates for our weekly newsletters. Our third strategic imperative centers on innovation. 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 of our sales. We have the No. 1 or 2 position in all five segments and continue to drive market share gains in each. Looking beyond our core segments, our innovation engine and flow of new products continues to resonate with consumers.

Building on the success of our Camo Concealer franchise, we launched Camo CC Cream last month to broaden our offerings in foundation, which is almost three times larger than the concealer category. Our Camo CC Cream at $14 offers an incredible value for consumers, especially as compared to a prestige equivalent at $40. We believe Camo CC will be our next holy grail product. We also launched a new limited edition Mint Melt Collection.

This refreshing line of five new cosmetics products and three skincare products is just one example of how we're driving differentiation with our retail partners. The collection is available on elfcosmetics.com, and exclusively with Walmart in the U.S., and with Superdrug in the U.K. Skincare remains a major focus. Consumption for the quarter was up 17% in tracked channels versus a category that was down 5%.

We see a lot of runway in this category. For perspective, skincare represents 8% of our tracked channel consumption, yet drives nearly 25% of our business on elfcosmetics.com and Amazon. Recent skincare innovation includes a makeup melting cleansing balm, daily cleanser, and eye cream, all building on the success of our Holy Hydration franchise. Keys Soulcare launched its skincare collection in January and further fuels our momentum in this category.

The collection includes nine product offerings with dermatologist-developed clean formulas, skin-nourishing ingredients, and soul-nurturing rituals. Early consumer favorites include the Harmony Mask and Comforting Balm. Our fourth strategic imperative is driving productivity with our national retail partners. Project Unicorn, our ongoing initiative to drive productivity by improving assortment, presentation, and navigation at shelf continues to impress.

We're also excited about the sustainability milestone we achieved. Project Unicorn reduced an estimated 650,000 pounds of excess packaging across over 200 SKUs. We're just getting started on our sustainability journey and we'll continue to push to reduce our packaging footprint. Given the strength of our productivity, innovation, and consumer engagement, we've earned space expansion for the e.l.f.

brand. In fall 2020, we expanded shelf space in a subset of Walmart and Ulta Beauty doors. In spring 2021, we're expanding even further at Ulta. Internationally, where we have a lot of whitespace, we recently launch at Shoppers Drug Mart, a leading beauty retailer in Canada; and Nykaa, a leading beauty retailer in India.

Looking to Keys Soulcare, our global retail strategy will light up in a much bigger way in the coming months. This spring, our product offerings will be available in 29 countries on keyssoulcare.com, in U.S. stores at Ulta Beauty, in the U.K. at Cult Beauty, and in eight countries across the EU at Douglas.

Our fifth strategic imperative is delivering cost savings to help fuel brand investments. Over the last six years, we've expanded gross margins from 47% to approximately 64% while navigating 25% tariffs on the majority of our products. This has enabled us to fund incremental investments behind our brand and infrastructure. Mandy spoke last quarter about the FX headwinds to our gross margin that we expect starting in Q4.

We are pulling levers to help mitigate a portion of the impact of FX, including through pricing and supplier concessions. We also have an increased focus on SG&A leverage as we move into fiscal 2022. In other operational matters, we successfully resolved the system's migration issue at our distribution center that we spoke about last quarter. We're now operating under a new warehouse management system and have improved both our throughput and shipments to our retail partners.

The progress in our five strategic imperatives has been terrific, and we believe we're still in the early innings with each. Before I turn the call over to Mandy, let me provide a bit more perspective on our strategic framework and why I'm optimistic about the future of our brand portfolio. Each of our brands is positioned to touch diverse consumer cohorts at different price points. All three brands are accessible relative to their competitive set and fulfill our mission of making the best of beauty accessible to every eye, lip, and face.

Importantly, all three brands are complementary and highly 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 growing share regardless of category trends.

We were strong entering the pandemic, and our digital strength core value proposition and ability to adapt at e.l.f. speed have continued to fuel our performance. Today, with a more diversified brand portfolio, we believe we're 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. Today, I'll cover our Q3 financial results and raise fiscal 2021 outlook. We delivered Q3 net sales of $89 million, up 10% from year ago. This growth was mainly fueled by ongoing strength across e-commerce, international and national retailers.

We also experienced a shift in order timing from December into January. While timing shifts happen in the ordinary course, this instance resulted in lower net sales, and thus lower adjusted EBITDA than we originally expected in Q3. As you will note by our increased guidance, we expect to recapture those orders and enjoy further strength in Q4. Gross margin of 64% was down approximately 50 basis points compared to prior year.

Similar to the last several quarters, we saw gross margin benefits from margin accretive product mix, cost savings, and a mix shift to elfcosmetics.com. We also benefited from FX, although less so relative to prior quarters as we started to feel the impact of changing FX rates. Offsetting these benefits were certain costs related to retailer activity and space expansion. On an adjusted basis, SG&A, as a percentage of sales, was 49%, compared to 44% last year, primarily driven by increased investment behind marketing and digital; headcount costs related to the build-out of our marketing, digital, and innovation capabilities; and increased operational costs related to higher e-commerce volume.

Marketing and digital investment for the quarter was approximately 15% of net sales, versus 12% a year ago. Q3 adjusted EBITDA was $18 million, down 14% to last year. And adjusted EBITDA margin was approximately 21% of net sales. Adjusted net income was $12 million, or $0.22 per diluted share, compared to $12 million, or $0.24 per diluted share, a year ago.

Our liquidity remains strong with the combination of our cash balance and access to our revolving credit facility sitting at approximately $85 million. We ended the quarter with $35 million in cash on hand, compared to a cash balance of $75 million a year ago. Our ending inventory balance was higher on a year-over-year basis as planned and is expected to remain at higher levels through March. This is largely due to the addition of Keys Soulcare and W3LL PEOPLE, planned space expansion, and new distribution for e.l.f., and higher product costs as a result of mix and changing FX rates.

The timing shift in orders I mentioned earlier also added to our inventory levels at quarter-end. We are comfortable with our inventory levels and believe we have what we need to support our ongoing business momentum. We expect our cash priorities for the balance of the year to remain focused on investing behind our five strategic imperatives, supporting the launch of Keys Soulcare, and our W3LL PEOPLE brand recharge. Now, let's turn to our outlook for fiscal 2021.

We are raising guidance for full-year fiscal 2021. We now expect net sales growth of approximately 7% to 9% versus fiscal 2020, up from 5% to 7% previously. We expect adjusted EBITDA between $59 million and $60 million, as compared to $57 million to $60 million previously. Adjusted net income between $33 million and $34 million, as compared to $31 million to $33 million previously.

And adjusted EPS of $0.63 to $0.64 per diluted share, as compared to $0.59 to $0.63 per diluted share previously. Let me provide you with a little more color on our planning assumptions for the remainder of our fiscal year starting with the top line. Our raised top-line outlook reflects our continued business momentum, the potential benefits from stimulus-related spending, and the timing shift in orders from Q3. We still anticipate a modest net sales contribution in fiscal 2021 from the launch of Keys Soulcare.

We continue to be mindful of the ongoing uncertainty around COVID-19 and the general economic environment. As a reminder, in Q4, we also faced tougher year-over-year comparisons as we anniversary 16% sales growth last year, as well as less incremental merchandising on a year-over-year basis in Target. Turning now to adjusted EBITDA. Our guidance implies adjusted EBITDA margin in the 19% to 20% range for the year, approximately in line with our prior outlook.

Within that, 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. Partially offsetting those factors is a combination of unfavorable FX rate trends, as well as an incremental $5 million to $6 million in Keys Soulcare-related marketing spend that is largely concentrated in Q4. As Tarang mentioned, we are pulling levers to help partially mitigate the impact of FX into fiscal 2022, including select price increases and cost savings. We also have an increased focus on SG&A leverage as we move into fiscal 2022.

Let me now take a step back to talk about our long-term economic model. With fiscal 2021 as the base, as we look out over the next three years, we continue to believe in our long-term economic model, targeting compounded annual top-line growth in the mid to high single-digits with adjusted EBITDA growth outpacing net sales growth over that horizon. Our performance over the last eight quarters, both on an absolute basis and relative to the category, demonstrates how our five strategic imperatives are driving results and gives me confidence for the future. With that, Operator, you may open the call to questions.

Questions & Answers:


Operator

I'll begin the question-and-answer session. [Operator instructions] And our first question today will come from Andrea Teixeira with J.P. Morgan. Please go ahead.

Kojo Achiampong -- J.P. Morgan -- Analyst

Hey, guys. It's actually Kojo on for Andrea.

Tarang Amin -- Chairman and Chief Executive Officer

Hi.

Kojo Achiampong -- J.P. Morgan -- Analyst

Let me dig a little bit deeper -- hey -- hey, guys. So we just wanted to dig a little bit deeper on distribution. So we're just want to give you guys could you update us a little bit about the distribution gains that you guys had seen recently and if they're coming in or if they came in as expected? And then if possible, if you could describe sort of your expectation of what those distribution gains would have on your sales growth? Thank you.

Tarang Amin -- Chairman and Chief Executive Officer

Sure. So we're pleased with our distribution progress. We mentioned last fall, picking up more space at Walmart and Ulta Beauty. In our spring sets, we've picked up additional space for the e.l.f.

brand at Ulta Beauty. We've also picked up distribution at Shoppers Drug Mart in Canada, as well as Nykaa in India online. Those are the primary beneficiaries on e.l.f. In addition, we picked up space related to W3LL PEOPLE in Ulta Beauty as part of their Conscious Beauty initiative.

In Keys Soulcare, while the launch has been online and digital-first, both on keyssoulcare.com and ulta.com, you're starting to see us expand distribution on that brand as well. Earlier this month, we started a global ship, which allows us to serve 29 countries with Keys Soulcare. We also talked about being at Ulta, I'm sorry, at Cult Beauty in the U.K. for that distribution, and we announced on this call that we'll also be entering Douglas in Europe in eight different countries and European markets as well.

So we feel pleased of our distribution progress. It's also one of the things that raised our guidance and the confidence that we have in it in terms of the continued momentum that we have.

Operator

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

Dara Mohsenian -- Morgan Stanley -- Analyst

Hey, guys.

Mandy Fields -- Senior Vice President and Chief Financial Officer

Hey, Dara.

Dara Mohsenian -- Morgan Stanley -- Analyst

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

Tarang Amin -- Chairman and Chief Executive Officer

Sure. So we entered the pandemic from a position of strength. We were already gaining share through executing our five strategic imperatives. Through the pandemic, we've continued to execute those five strategic imperatives, and I think our overall value proposition clearly shined through.

We feel even coming out of the pandemic, we're going to be even stronger. We have a more robust brand portfolio, not only the momentum that we have on e.l.f. Beauty, but also W3LL PEOPLE and Keys Soulcare. So we feel we're even better positioned coming out of the pandemic.

And the one thing that we feel will really aid us is we've been doing all of this, even our 10% net sales growth this quarter, in the construct of a category that's down 20%. So we believe as the category comes back, which I absolutely believe it will, given people's restrictions right now and being able to kind of get out and express themselves, that headwind that we've had from a category standpoint becomes a tailwind. So our intent is to continue to gain share regardless of where the market is and continue by executing not only our strategic imperatives but this brand portfolio that we have.

Dara Mohsenian -- Morgan Stanley -- Analyst

Great. And then in -- in this [Inaudible] in the U.S. in December, we saw a bit of a slowdown sequentially versus the prior couple months. Was that more just that tracked channel phenomenon and -- and maybe the untracked channels picked up, so the total results were still solid? Just trying to sort of understand that performance, particularly with a pickup post-December so far in January.

So perhaps some commentary on overall trends and -- and if you were seeing any shift to -- to untracked during that period?

Mandy Fields -- Senior Vice President and Chief Financial Officer

Sure. Hi, Dara. So I would say that Nielsen tracked channel data overall has been quite volatile, a little bit up and down as we've -- as we've seen over the weeks. And so what you saw in December I think was just kind of a normal -- what you're seeing in physical retail, a little bit of a pullback.

We continue to see -- see strength in e-commerce, and which is why you see us delivering a positive 10% for Q3 inclusive of the month of December. I would say is as we looked into January, those -- that lift that we saw definitely included a little bit of an impact from the stimulus that was rolled out. And so if you recall last summer when stimulus rolled out, we did see a few weeks of -- six to eight weeks I would call it of upside there. I think you saw a little bit of that in January.

But also, I think you're seeing just our business momentum -- core business momentum reflected as we've gotten into January.

Dara Mohsenian -- Morgan Stanley -- Analyst

Great. Thank you.

Operator

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

Steph Wissink -- Jefferies -- Analyst

Thank you. Good afternoon, everyone. Tarang, I want to come back to a comment you made in your prepared remarks about SG&A leverage in fiscal '22. I think that would mark maybe the first year of leverage in a number of years.

So maybe share with us a little bit what's behind that comment. Is it the fact that multi-year investments are coming to completion or something that you're seeing within your business mix that is giving you conviction and the ability to lever that line item? Thank you.

Tarang Amin -- Chairman and Chief Executive Officer

Sure. So I think it speaks a lot to our long-term economic model. So we've long had a series of investments both in terms of marketing, as well as a team in our infrastructure, with a vision that we'd be able to leverage those investments over time. So our approach is going to be continue to stay strong on a marketing standpoint.

We believe those marketing investments we were making definitely are bearing fruit in terms of the market share gains that you see in our continued business momentum. But if I take a look at the rest of our cost structure, the SG&A outside of marketing, there's definitely the ability to leverage that particularly as we pick up more sales, and that very much has been our intent as we laid out that three-year alg -- economic model. We're mid to high single-digit sales growth. We see leverage through those fixed costs to be able to drive EBITDA growth faster than that.

And really, from that FY '22 period over the next three years as a CAGR.

Steph Wissink -- Jefferies -- Analyst

Thanks, Tarang. And then just really quickly. Mandy, could I ask on the inventory step up. I know you mentioned space expansion and the Keys launch.

But help -- let's think through the FX component of higher costing. I think you mentioned that you'll see some headwind through the fourth quarter, but how should we think about the forward year as those higher costs of goods kind of feed through the overall model?

Mandy Fields -- Senior Vice President and Chief Financial Officer

Yes. So as we talked in our prepared remarks, FX is a headwind for us. I've talked in the past about how it's been a benefit, and that is -- now with a weaker U.S. dollar, it's turned into a headwind, and we are planned to help mitigate the impact of FX as we laid out, really, it starts with pricing.

And so we will be taking some select price increases to help offset that impact. Continuing to work with our suppliers on cost savings. And then to your earlier point on SG&A leverage, really having that as a focus to help deliver on our long-term economic model of driving that EBITDA leverage over the next three years.

Steph Wissink -- Jefferies -- Analyst

Thank you.

Operator

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

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

Hi. Yes. Maybe you could help me understand kind of the cadence of EBITDA progression in the third and fourth quarter. I think originally you had said there would be more EBITDA margin pressure in the fourth quarter because of the Alicia Keys costs.

And now, the way it's modeled out, your EBITDA quite frankly was lower than expected in the third quarter, and it's kind of higher than expected in the fourth quarter. So can you kind of help us understand? Like did you have some incremental expenses in the third quarter that were unexpected? And maybe you could give a little color on the gross margin impact. You mentioned there was retailer activity and space expansion costs related to the gross margin impact in the quarter. Maybe you could give some color on that.

Thank you.

Mandy Fields -- Senior Vice President and Chief Financial Officer

Sure. So let's start with the EBITDA progression question. So I -- I talked about a shift in order timing from Q3 into Q4. And so really, if you think about those sales moving over into Q4, that would imply better than previous EBITDA margins for Q4.

And so that's what you're seeing happen there. So in total, we recaptured those sales and that's reflected in Q4. So just a little bit of a shift there from an order timing standpoint. On the gross margin impact and -- and the retailer cost that we talked about, there are certain costs that are related to expanding space or getting on shelf with retailers that do impact gross margin.

And so as we do -- as we pick up space and as we get our brands onto shelf, there -- there are costs associated with that. And so that's what -- that was what was implied by that comment.

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

OK. Thank you.

Operator

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

Oliver Chen -- Cowen and Company -- Analyst

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

Tarang Amin -- Chairman and Chief Executive Officer

Sure. So first of all, we feel great about our marketing and digital investments. As a reminder, we -- we talked about taking our marketing and digital investments, including Keys Soulcare, up to the 14% to 16% range for this year. That's unchanged.

We -- we still assume that for this year, which is a pretty big step up from last year. We're comfortable with those levels right now. When we provide FY '22 guidance next quarter, we'll update the entire outlook as we take a look, but we like what we're seeing from those investments and how well we're able to do at those levels. And a big part of those investments is also really supporting two things.

One, us continuing to blaze new territory, whether it be our partnership with Lufu on Twitch, whether it be our work on Triller, as well as the other platforms. We're seeing real resonance with consumers on all of our different marketing activities. And then in particular, with our innovation program. We have a number -- I mean I think unlike a number of other brands, we remain strong in terms of our new product launches throughout the pandemic.

I'm particularly pleased with the new products that we have slated for this upcoming year. Our spring resets are getting set right now. The early indication we have from our online sales is quite strong. Things like our CC cream, which I believe is going to be our next big holy grail product, building off our Camo Concealer franchise, our Mint Melt Collection with Walmart, our Holy Hydration Makeup Cleansing Balm, all of those are doing extremely well as are some of our other innovations.

So feel really good about that combination of our marketing and digital investment and really getting behind some of these key new products that only e.l.f. can deliver. And then in terms of Ulta and Target, we see huge opportunity, both with the partnership and then with each customer. So at Target, this last quarter, we actually surpassed L'Oreal for the No.

2 position at Target, and that's still with a footprint that's significantly less than Maybelline and L'Oreal. So we have a long way to grow even within our most established retail customers. I mentioned in the prepared remarks that Ulta is continuing to reward the brand with more space, not only the space they gave us last fall but in their spring resets as well. So we see real momentum there.

And then depending on how that partnership between Ulta and Target progresses, we also see opportunity particularly with our Keys Soulcare brand, which is going to start exclusively at Ulta. But I think there's an opportunity down the line to also take a look at some of those boutiques within Target as well.

Oliver Chen -- Cowen and Company -- Analyst

Thank you. And my final question is just awareness growth. As you think about awellne --awareness growth at W3LL PEOPLE and Keys Soulcare, what would you highlight as the building blocks for doing that -- the different kind of special brands in -- in different ways, but would love on thoughts on -- on the awareness roadmap at those newer brands? Thanks.

Tarang Amin -- Chairman and Chief Executive Officer

Sure. So on a macro level, we're following the same approach as e.l.f. It's a digital-first strategy. So you see all of our spending really primarily digitally related in building that awareness.

So we did a brand recharge on W3LL PEOPLE. We're pleased with the results we're seeing on that so far in terms of our ability to engage consumers really through digital and as we expand distribution on that brand. Keys Soulcare, we're using a similar strategy but somewhat different in that we also have Alicia Keys' 100 million followers and the community that we're building with Keys Soulcare. So the ability to amplify that brand is even greater just given the power of Alicia Keys and what we've done by really creating a lifestyle beauty brand and really starting with content, conversation, and community.

And particularly, as we expand distribution on that brand and that will be a true global brand, I think we have a real big opportunity to really accelerate awareness on that one as well.

Oliver Chen -- Cowen and Company -- Analyst

Thank you. Best regards.

Operator

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

Jon Andersen -- William Blair -- Analyst

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

Tarang Amin -- Chairman and Chief Executive Officer

Sure, Jon. So we expanded the Keys Soulcare range to nine different skincare products and rituals really earlier kind of in January. And so we're pleased with the initial results of those products. Those are primarily done online, both keyssoulcare.com and at ulta.com.

We're now in Cult Beauty in the U.K. online. And in terms of brick and mortar, you'll start seeing the expansion of that brand. The first customer that we've announced is Ulta Beauty.

You'll see it enter retail in Ulta Beauty over the next quarter or so. And then following that, you'll see expansion in Douglas across Western Europe. And that's all in addition to the 29 countries that global ship is available in that's already live. So you'll continue to see a progression, but brick and mortar will come a bit later in the year.

Jon Andersen -- William Blair -- Analyst

OK. Thanks. And then on -- on W3LL PEOPLE. I -- I know you -- you've talked about the brand recharge a couple of times.

Could you give us a little bit more color on -- on the program there? What -- what's changed? And also an update on the progress you're making or maybe the -- the opportunity to expand distribution, leverage your national retail relationships, and the progress you've made there so far?

Tarang Amin -- Chairman and Chief Executive Officer

Sure. So the real focus on the brand recharge was really amplifying what W3LL PEOPLE stands for. One of the things that really appealed to us when we made the acquisition is W3LL PEOPLE's a real pioneer in clearing -- clean beauty, almost 40 EWG-verified products, the highest standard of clean. A real great heritage in the clean beauty space is pioneer there.

And so the focus of the brand recharge is really making tho -- those superpowers come to life. Really, our -- our clean beauty approach and products that really work. These products are phenomenal on W3LL PEOPLE. And so you see, if you can go on w3llpeople.com, they're just more vibrant presentation of the brand, core brand proposition.

And as we take that to customers, including better visual merchandising. So the current distribution footprint of W3LL PEOPLE, the primary customer is Target and they're not in all doors at Target. So we see a huge opportunity leveraging our strength at Target to expand distribution there. I mentioned earlier that we're part of Ulta's Conscious Beauty program.

We see that as an opportunity as well. And other retailers that really consider clean a key consumer segment, which increasingly becoming more and more retailers as you go through. So we feel good about our -- our journey ahead, and particularly the progress we've made on the brand.

Jon Andersen -- William Blair -- Analyst

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

Thank you.

Tarang Amin -- Chairman and Chief Executive Officer

Sure. So the -- our supply chain is one of our key advantages. We have a unique hybrid model where we work with like -- like-minded suppliers and have a great deal of control in terms of our entire supply chain. We continue to see really great progress from our to Chi -- China supply chain, first and foremost, through lean manufacturing, generating savings, even better operating results.

We were able, over the last six months, to be able to tech transfer all of the W3LL PEOPLE products to our China supply chain, realizing significant COGS savings. Keys Soulcare is being manufactured through that same supply chain basis, which also gives us that advantage in cost, quality, and speed. And so you continue to see us enhance it. The one place we have not made as much progress on is our U.S.

manufacturing. If you recall last quarter, I talked about some of the COVID restrictions getting in the way for us to be able to do our engineering work for that facility, that's still very much true. The good news is we've been able to overcome that by the strength that we're seeing in our China supply chain and look forward to providing greater updates on that in the future. But it really is one of the strengths that's helping drive the overall business.

Operator

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

Erinn Murphy -- Piper Sandler -- Analyst

Great, thanks. Good afternoon. So one follow-up first on pricing. Is the higher pricing that you're taking right now, are we going to see that here on a shelf in Q4 or is that really wrapping into next year? And then just trying to understand really the net of the fourth quarter kind of gross margin pressure.

And then secondly, you guys have done a great job just keeping a finger on the pulse on what's coming next from a social media perspective. Could you just share a little bit more about what you're seeing from a response of both Twitch and then Triller, is it bringing in a new customer as you kind of experiment on some pretty unique platforms for beauty? Thank you.

Mandy Fields -- Senior Vice President and Chief Financial Officer

Yup, So, Erinn, I'll take that first question and I'll pass it to Tarang on the -- on the social update. So from a pricing standpoint, that will not impact Q4. You'll see that in early fiscal '22 in terms of offsetting FX pressure. Those -- that's kind of our program as we head into fiscal '22, focusing on those select price increases, negotiating cost savings, and then that increased focus on SG&A leverage as an offset to the headwinds.

Erinn Murphy -- Piper Sandler -- Analyst

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

Mandy Fields -- Senior Vice President and Chief Financial Officer

Yeah, and that's right. So the -- the FX starts of flip in the first -- in the fourth quarter. So what we saw in Q3 was just less of a benefit. In fact, it turns into a headwind in Q4.

And so you -- you should expect to see that materialize.

Erinn Murphy -- Piper Sandler -- Analyst

OK. And then, yeah, Tarang, I'd love to hear your thought on that. Yeah.

Tarang Amin -- Chairman and Chief Executive Officer

Yeah. So I mean, look, I'm really proud of our marketing and digital team. They continue to kind of blaze new frontiers, and you saw that on our activations on TikTok, which continue to do quite well with over 10 billion views. I think over 7 million user-generated videos.

But also going into new platforms. The one I'm particularly excited about is our partnership with Lufu and what were the things that we're doing on Twitch. And so it -- it accesses an entirely new audience and some of the current audience in terms of her ability to really activate among female, as well as male gamers. And the work that she's doing, there's a video right now with her and our global makeup artist, Anna Bynum, who's also an avid gamer herself, and kind of their ability to kind of educate a whole new set of consumers on everything that's wonderful about e.l.f., and helping them express themselves, gain confidence very much plays into our core brand values.

And then on Triller, as we mentioned, we're also excited about the work we did there. I mean I was frankly quite surprised that we could put a holiday album on and have it hit Billboard's Top 20. Four of our tracks hit the Billboard Top 20, both in the U.S. and globally, which definitely shows I think we've had some strength in terms of the brand and our connection to music, up and coming artists.

And you definitely saw that play out on Triller. And you're going to continue to see us blaze other new territories. I'm excited about some of the upcoming collaborations and partnerships we have. But you're going to have to wait till our next call to hear about them.

Erinn Murphy -- Piper Sandler -- Analyst

Sounds great. Thank you both.

Operator

And our next question will come 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

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

Tarang Amin -- Chairman and Chief Executive Officer

Well, we -- we definitely saw that be the case in our last round of pricing. So if you recall, a lot of people were worried about the 25% tariffs on China goods, which really impacted most of our lineup. And we're able to use this approach of selective pricing to overcome those tariffs and actually do really well on gross margin. So we know the brand has pricing power based on our prior execution, and how we did that execution was equally important.

We didn't just peanut butter the pricing as a general percentage across everything. We really picked the items where we had the biggest value halo or opportunity to take pricing. And so I'd say that is very much the design and construct of our pricing upcoming. It won't be in the U.S.

quite as broad as it was last time. I think we impacted about a third of our SKUs last time. But internationally, we did not take pricing last time. So I think particularly with FX, we have the opportunity to go further internationally and then with select items in the U.S.

And so definitely, we see pricing as a lever at our disposal. Our preferred method of driving gross margin though is through margin accretive innovation. So I mentioned our CC cream, which I believe is going to be our next holy grail product. It's an incredible value relative to the $40 prestige equivalent.

But it's retails at $14. So it's a significant premium relative to the rest of our lineup. So it's going to be that combination, Bill, as we go forward, which is primarily through margin accretive innovation and some of the other things that Mandy talked about in terms of our gross margin pro -- progression. But also, we will look at pricing.

It's always a healthy tension being an extraordinary value brand that's not getting ahead of ourselves. We did see a unit decline when we did pricing last time. And so there's always a balance there. Now, I feel good about post of that pricing, how we've built back units, which again tells me we have that pricing power and ability ha -- to get that through.

But we want to be choiceful in our pricing and -- and execute it similarly to the way we did last time.

Bill Chappell -- Truist Securities -- Analyst

Great. Now, thank you and I appreciate that. And Mandy, just -- I -- I realize you're not giving fiscal '22 guidance, but trying to understand Keys Soulcare, the spend you're -- you're expecting in -- in the fourth quarter. I mean is that -- will you be up to -- to kind of -- I don't know if it's normalized levels of marketing and advertising spend by -- by the time we get to the end of March or is that expected to continue their kind of ramp throughout the year ti -- till we get to kind of a peak level?

Mandy Fields -- Senior Vice President and Chief Financial Officer

Yeah. So I think the best way to think about that, Bill, is each of our brands will have dedicated marketing against them. And we do that as a percentage of net sales. And so if you think about e.l.f., we've talked about the 14% to 16% broadly for e.l.f.

Beauty, that incorporates the marketing spend that we're putting behind Keys Soulcare. As Tarang mentioned earlier, as we get into fiscal '22, we'll come back with kind of where we see everything as we move forward. But just think about each brand will have their own marketing plans as a percentage of net sales to support each of those brands as we move forward.

Bill Chappell -- Truist Securities -- Analyst

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

Mandy Fields -- Senior Vice President and Chief Financial Officer

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

Tarang Amin -- Chairman and Chief Executive Officer

Yeah. And then just maybe adding some perspective to that. The $5 million to $6 million for this year is definitely outsized relative to the modest sales contribution Keys Soulcare would have. We --we thought that was a prudent spend to really launch something that's completely new in beauty.

Ongoing to Mandy's point, at least for this fiscal year, we're really comfortable in that 14% to 16% inclusive of all three of our brands. And when we put FY '22 guidance out there, part of that guidance will include what we expect to spend from a marketing standpoint in total. So people don't have to guess how does the five to six translate ongoing, it'll be part of the overall percentage we have as a company.

Bill Chappell -- Truist Securities -- Analyst

Perfect. Thanks so much. I appreciate it.

Mandy Fields -- Senior Vice President and Chief Financial Officer

Yeah.

Operator

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

Rupesh Parikh -- Oppenheimer & Co. -- Analyst

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

Tarang Amin -- Chairman and Chief Executive Officer

Yeah. Well, I -- I would say, I -- I don't know if it surprises. But I'm still in awe of the 10 billion press impressions we've picked up since and -- and we're not even in retail yet. So I think it definitely shows that there's something this brand that's resonating broadly.

And then as we look at the community, the depth of engagement of that community. I think in the prepared remarks, we talked about Instagram engagement metrics being well beyond what we were expecting. And so I think we're -- it's still early days, but it's quite encouraging in terms of the level of consumer response and engagement we have to that brand. And we'll be able to provide more metrics I think once we are out in retail, we'll be able to see what that looks like.

Rupesh Parikh -- Oppenheimer & Co. -- Analyst

OK, great. And then just one follow-up question for Mandy. Just -- just on -- just on your operating cash flow. So -- so I get the commentary just on inventory that the inventories are elevated and that they've weighed your cash generation.

But -- but even I guess including inventories, some of the other working capital -- there's some other working capital headwinds during the quarter. So just curious how are you thinking about cash flow in -- in Q4?

Mandy Fields -- Senior Vice President and Chief Financial Officer

Yeah. So yes, well, if you look at inventory, that was a portion of -- of our cash used on a year-to-date basis. Our -- our receivables would be the other area as you look through. And that all I just think of is just timing.

In terms of our free cash flow expectations for the year, I would expect us to be positive free cash flow for the year as we enter into Q4, shouldn't have a pool on additional from an inventory standpoint or things like that. So should have some cash flow there in Q4.

Rupesh Parikh -- Oppenheimer & Co. -- Analyst

OK, great. Thank you.

Operator

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

Mark Astrachan -- Stifel Financial Corp. -- Analyst

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

Tarang Amin -- Chairman and Chief Executive Officer

Yeah, I think we'll have more thoughts on that, Mark, when we get into providing FY '22 guidance. I mean we're -- we're obviously pleased as everyone else is. I mean I think we have triple-digit growth on our online business for elfcosmetics.com and at retailers.com. Similar to some of the commentary you've heard from others, we are seeing -- we continue to see a good proportion of new consumers, particularly in elfcosmetics.com.

I think 60% of purchases were from new consumers who are also signing up for our Beauty Squad Loyalty Program. So it's really going to come down to how many of those consumers we'll be able to retain. That will dictate what percent of our total business we are, but we're -- we're definitely seeing the momentum. I don't think we have a percentage in mind right now in terms of what we see that as the future, but we're pleased with the 16% versus 10% last year.

And more importantly, some of the underlying metrics which definitely show a migration online.

Mark Astrachan -- Stifel Financial Corp. -- Analyst

Got it. OK. And then the second question, just thoughts on -- on the correlation between the increasing marketing and investment spend and sales growth, and how do you think about that factoring in not specific to what your sales guidance will look like for next year, but just the broad correlation, how do you think about those growing in time with each other or decoupling to some extent?

Tarang Amin -- Chairman and Chief Executive Officer

Yeah, one of the things that caused us to increase our marketing spend was the ROIs were seeing off that marketing spend. So we use a combination of both Nielsen's marketing mix where we can get a measure of gross sales per dollar of marketing invested. We see very strong returns on that. As well as some of the sub metrics we have by platform in terms of the core engagement level.

So we definitely know it's a key driver of both our market share gains and business momentum, and we're comfortable at the levels that we're currently at to be able to generate that, and obviously, we feel has a longer-term impact. So when we're able to give FY '22 guidance, we'll be able to talk about that a little bit more in terms of some of the drivers of that FY '22 guidance.

Mark Astrachan -- Stifel Financial Corp. -- Analyst

Thank you.

Operator

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

Wendy Nicholson -- Citi -- Analyst

Thanks. Hi. Two questions. First for Mandy.

I know your long-term target is to grow EBITDA faster than revenues. But can you talk about just gross margin generally, what your outlook is? Do you think the sort of 65, 66 type range is where you'll be long term? And can you -- I assume Soulcare is gross margin accretive, but can you give us some directional guidance? Is it 500 basis points better, 1,000 basis points better? Just -- just directionally how -- how -- how -- how -- how much of a lift can that skincare -- higher-priced skincare help your overall gross margin? And then I had a question, Tarang, for you if I can. I mean you guys are so well-positioned in the clean beauty space, and that's obviously such a hot place right now within beauty. But -- but do you think that you're -- I mean you're obviously gaining share.

Do you think you're gaining share within clean beauty? And I'm just wondering, clean beauty seems to be getting so much more competitive. Do you worry about having to defend your space, your market share within that segment or -- or how do you -- how do you manage around what's getting to be a very, very crowded segment of beauty if that makes sense?

Tarang Amin -- Chairman and Chief Executive Officer

Sure.

Mandy Fields -- Senior Vice President and Chief Financial Officer

Got it. So I'll start, Wendy, on the long-term economic model and your questions around gross margin. So in the long-term economic model, to your point, we talked about adjusted EBITDA outpacing sales growth, thus yielding adjusted EBITDA margin expansion. We have not gone into depth on, well, how much gross margin will play into that versus how much adjusted SG&A will play into that.

And we additionally don't give specific guidance around gross margin. I can say that to Tarang's earlier point, product accretive, gross margin products, and innovation, that has really been our path forward on gross margin. And so as we get into the out years of fiscal '22 and beyond, we'll start to talk more about what to expect from an adjusted EBITDA standpoint. But it may not give the specifics around the gross margin versus adjusted EBITDA as we move forward.

On Keys Soulcare specifically, so we talked last quarter about Keys Soulcare product margins certainly being accretive to our overall product gross margins. But when you get down to the net gross margin, because of the royalty that we do pay to Alicia Keys, that does become relatively neutral at the total company level.

Tarang Amin -- Chairman and Chief Executive Officer

And then on to your second question on clean beauty. Part of our thesis is it's becoming mainstream. Clean beauty used to be a niche within overall beauty. Obviously, a very fast-growing segment within overall beauty.

But part of our push in clean beauty is really goes back to the consumers. And as a parallel, say we were one of the first cruelty-free brands in -- from a mass standpoint in terms of being 100% cruelty-free. You've now seen other brands really embrace cruelty-free as -- as consumers have. We feel the same thing's going to happen with clean beauty, that it's no longer in being relegated to one subsegment.

And so the what brands that are going to win in clean beauty are the ones that both really stand for and can live up to those standards, but also offer more than just clean beauty. So the superpower, as I mentioned before, about our ability to have premium quality at these extraordinary values, cruelty-free, increasingly clean. And on the clean portfolio, the gold standard we have is certainly W3LL PEOPLE with their 40 EWG-verified products. Keys Soulcare came out of the gates as a 100% clean beauty brand.

But even e.l.f. made it. On e.l.f., we're now up to I think 1,600 ingredients that we do not formulate with. We're very close to every clean beauty standard that's zero on e.l.f.

And so I think that really becomes a game-changer when you can offer the consumer prestige quality at great values, that's cruelty-free, clean, and has universal appeal. It's like what's not to like about e.l.f and our overall proposition. So we very much are looking at it. It's not only certainly there's an opportunity, but what we're going to win long term is by being able to put that combination of benefits together.

Wendy Nicholson -- Citi -- Analyst

Got it. And on the Key Soulcare, I know you've obviously got a great relationship there with Ulta. But -- and historically, you haven't had much of a relationship with Sephora, which makes sense given your price points. But given that Soulcare is -- is a little bit more premium priced, it feels like it would fit well particularly with Sephora, going into more Kohl's stores or Kohl's stores initially, whatever.

Is that -- is that something -- are you -- are you restricted to being in Ulta or if you wanted to go into Sephora, in those Kohl's stores, could you?

Tarang Amin -- Chairman and Chief Executive Officer

Not initially with Keys Soulcare. Our -- our relationship with Ulta is they do have exclusivity for a time period. We haven't disclosed what that exclusivity period is, but there is a great deal of partnership. I mean Ulta, itself, is going to be putting pretty good investment behind really amplifying the Keys Soulcare brand, the things that we're going to do.

I can't wait for you to go into their stores. And as they ramp the brand up even online, there's quite a bit of things that we're going to be doing together there. Talking though on that Sephora-Kohl's partnership, we think there's an opportunity there for us, and we look at potentially W3LL PEOPLE. We look at some of the other brands that we're looking at, both either incubating or tuck-in acquisitions in future dates, we think there is an opportunity.

And then also globally, we think there's an opportunity with Sephora as well. So -- but initially, here our focus is really on Ulta Beauty and the partnership we have there.

Wendy Nicholson -- Citi -- Analyst

Terrific. Thanks so much.

Operator

Our next question -- or actually, apologies. This will conclude the question-and-answer session. I'd like to turn the conference back over to Tarang Amin for any closing remarks.

Tarang Amin -- Chairman and Chief Executive Officer

Well, I want to thank everyone for joining us today. I'm incredibly grateful for the great team we have at e.l.f. Beauty and the talent that each person brings every day, particularly at this difficult time during the pandemic, and how well we've executed to continue to build market share. As you can tell from our comments today, we're highly confident about the future and long-term pro -- prospects of this business, and look forward to speaking to you in May when we'll be able to talk our full fiscal '21 results, as well as provide guidance for FY '22.

So thanks, everyone, and be well.

Operator

[Operator signoff]

Duration: 71 minutes

Call participants:

KC Katten

Tarang Amin -- Chairman and Chief Executive Officer

Mandy Fields -- Senior Vice President and Chief Financial Officer

Kojo Achiampong -- J.P. Morgan -- Analyst

Dara Mohsenian -- Morgan Stanley -- Analyst

Steph Wissink -- Jefferies -- Analyst

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

Oliver Chen -- Cowen and Company -- Analyst

Jon Andersen -- William Blair -- Analyst

Erinn Murphy -- Piper Sandler -- Analyst

Bill Chappell -- Truist Securities -- Analyst

Rupesh Parikh -- Oppenheimer & Co. -- Analyst

Mark Astrachan -- Stifel Financial Corp. -- Analyst

Wendy Nicholson -- Citi -- Analyst

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