e.l.f. Beauty, Inc. (ELF) Q4 2023 Earnings Call Transcript

e.l.f. Beauty, Inc. (NYSE:ELF) Q4 2023 Earnings Conference Call May 24, 2023 4:30 PM ET

Company Participants

KC Katten - Investor Relations

Tarang Amin - Chairman and Chief Executive Officer

Mandy Fields - Senior Vice President and Chief Financial Officer

Conference Call Participants

Olivia Tong - Raymond James

Dara Mohsenian - Morgan Stanley

Bill Chappell - Truist Securities

Linda Bolton-Weiser - D.A. Davidson

Anna Lizzul - Bank of America

Andrea Teixeira - JPMorgan

Susan Anderson - Canaccord Genuity

Korinne Wolfmeyer - Piper Sandler

Ashley Helgans - Jefferies

Oliver Chen - TD Cowen

Rupesh Parikh - Oppenheimer

Jon Andersen - William Blair

KC Katten

Thank you for joining us today to discuss e.l.f. Beauty’s Fourth Quarter and Fiscal ‘23 results. I am KC Katten, Vice President of Corporate Development and Investor Relations. With me today are Tarang Amin, Chairman and Chief Executive Officer; and Mandy Fields, Senior Vice President and Chief Financial Officer.

We encourage you to tune into our webcast presentation for the best viewing experience, which you can access on our website at investor.elfbeauty.com. Since many of our remarks today contain forward-looking statements, please refer to our earnings release and reports filed with the SEC where you will 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

Thank you, KC and good afternoon everyone. Today, we will discuss the drivers of our exceptional fiscal ‘23 performance and outlook for fiscal ‘24. I want to start by recognizing the e.l.f. Beauty team. We have so much to be proud of in fiscal ‘23. Our value proposition, powerhouse innovation and disruptive marketing engine continue to fuel our performance. Our results speak for themselves.

In fiscal ‘23, we grew net sales by 48% and adjusted EBITDA by 56%, well above our original expectations and hitting major milestones by reaching over $500 million in net sales and over $100 million in adjusted EBITDA for the first time. Q4 marked our 17th consecutive quarter of net sales growth.

In Q4, we grew net sales by 78%, increased gross margin by approximately 470 basis points and delivered $21 million in adjusted EBITDA, up 66%. We are encouraged by the continued strength we are seeing across the color cosmetics category. In Q4, the category grew 18% versus a year ago. e.l.f. continue to significantly outperform the category, growing 64% in tracked channels. We grew our market share by 270 basis points, increasing our rank from number five a year ago to the number three brand for the first time. We continue to be the fastest growing top five brand by a wide margin.

Looking to skin care. Q4 category trends were also strong, up 12% versus a year ago. e.l.f. SKIN consumption was up 55% in tracked channels, well above category growth rates. In the last year, e.l.f. has been celebrated for the power of our company, brands and disruptive marketing engine. We are humbled by the recognition we continue to receive. In Q4, Fast Company named us to their annual Top 50 World’s Most Innovative Companies. We are the only beauty company on the list, putting e.l.f. with well-recognized game changers such as NASA, Microsoft and OpenAI. We continue to be recognized for our purpose and values as we strive to create a different kind of beauty company, one that is both purpose-led and results driven. We are proud that out of nearly 4,200 public companies, we are only one of four with a Board that’s at least two-thirds women and one-third diverse, underscoring our commitment to diversity and inclusion.

e.l.f. continues to be a Gen Z favorite. In Piper Sandler’s latest semiannual teen survey, e.l.f. remained the number one favorite cosmetics brands amongst teams for the third time in a row. We grew our share by 900 basis points versus a year ago and again held the number one rank across all income groups.

e.l.f. SKIN moved into the top 10 favorite skin care brands for the first time. Elfcosmetics.com was again a top 10 shopping destination for teens and one of the only single brand sites among major retailers. Over the past 4 years, I have provided proof points on how we have executed our five strategic imperatives and the growth that is driven. Let me explain how each of these strategic imperatives underpinned our strength in fiscal ‘23.

Our first strategic imperative is to build brand demand. Our disruptive digital-first marketing engine has built strength across multiple social platforms. We are a pioneer on TikTok and are now a 4-time TikTok billionaire with our last hashtag challenge garnering nearly 15 billion views. We were the first major beauty company to launch a branded channel on Twitch and the first beauty brand on BeReal.

As part of our strategy continue building awareness and reach new audiences. February marked our first ever TV commercial that debuted at the big game. The spot featured our Power Grip Primer, our top-selling SKU in fiscal ‘23 and the number one SKU across the entire U.S. mass cosmetics category. Power Group is praised by our community for its ability to grip makeup and the entertainment value of its stickiness.

We teamed up with cultural icon and award-winning actress Jennifer Coolidge to dramatize the sticky grippy power of Power Grip. We aired this spot during the big game, and worked at e.l.f. speed, going from initial concept to delivery in only 3 weeks.

[Video Presentation]

Tarang Amin

The response from our community has been phenomenal. Our campaign earned an astonishing 57 billion impressions. Our ad ranked #1 in consumer sentiment among all 103 ads at the big game. We saw a 64% increase in our purchase consideration and a lift in Power Grip sales, and we continue to keep the buzz going. In the weeks following, we aired the 32nd spot across 78 national TV networks, and lit up our social channels with additional exclusive content featuring Jennifer Coolidge.

[Video Presentation]

Tarang Amin

Disrupting norms and doing the unexpected is part of our DNA. We continue to generate buzz-worthy moments for our community through our brand-on-brand partnerships with like-minded disruptors. Two years ago, our makeup collaboration with Chipotle generated 4 billion earned media impressions. Last year’s collaboration with Dunkin’ generated 5 billion impressions.

We broke records once again in March with our collaboration with American Eagle that generated over 7 billion impressions. Our internal studies show that our unaided awareness is less than 20% today, a double-digit gap in awareness relative to some of the legacy mass cosmetics brands. We are leaning on our disruptive marketing initiatives to build our awareness and reach new audiences, including Millennials and Gen X.

Our latest Nielsen marketing mix analysis shows that our marketing investment continues to deliver, driving ROI multiples above the industry benchmarks. During Q4, we invested further in marketing, given our better-than-expected top line trends. As a result, we ended the full year with marketing and digital investment at 22% of net sales, above the high end of our 17% to 19% outlook.

Our second strategic imperative is to power digital. Founded is a digitally native brand, e.l.f. remains the only top 5 mass cosmetics brand with a direct-to-consumer site. In fiscal ‘23, our digital consumption was up over 75%. Digital channels drove 17% of our total consumption as compared to 14% a year ago. We see opportunity to increase our digital penetration, particularly as we further enhance our Beauty Squad Loyalty Program.

Beauty Squad now has nearly 3.7 million members, with enrollment growing over 25% year-over-year. Our loyalty members drive almost 80% of our sales on elfcosmetics.com, have higher average order values, purchased more frequently, have stronger retention rates and are a rich source of first-party data.

Our third strategic imperative is to lead innovation. We have a unique ability to deliver holy grails, taking inspiration from our community and the best products in Prestige and bringing them to the market at extraordinary value. Our innovation has built category leadership over time. e.l.f. now has the number one or number two position across 16 segments of the color cosmetics category. Collectively, these segments make up over 75% of e.l.f. Cosmetics sales. We delivered the strongest sales growth and share gains in each of these segments in fiscal ‘23.

Our innovation approach is to build growing and sustaining product franchises instead of one-and-done launches. Our 4 largest franchises, Camo, Putty, Halo Glow and Power Grip, have all grown year-after-year. As we launch new innovation within each franchise, the entire franchise grows. We believe this is a source of competitive advantage as we are not dependent on proliferating SKUs to anniversary prior year launches.

Let me provide an example with our Halo Glow franchise. In 2020, we launched Halo Glow setting powder. In 2022, we launched Halo Glow liquid filter, which quickly became a viral sensation in one of our best-selling products. In April of this year, we built on that success with the launch of 3 Halo Glow Beauty Ones, a contour, blush and highlight trio, with each price at an incredible value of $9, compared to the Prestige item at $42, Halo Glow Beauty Wands have been one of our best launches ever.

Our most popular shades are sold out multiple times and drove record numbers of visitors to elfcosmetics.com. Halo Glow Beauty Wands are a viral hit with our community. And more importantly, are providing a lift in sales to the rest of the Halo Glow franchise. Since we launched Beauty Wands, we have seen nearly triple-digit sales lift across our Halo Glow franchise, with all our Halo Glow products in the top 10 best sellers on elfcosmetics.com, including the Halo glow Setting Powder that we launched over 3-years ago. Our strategy of using our new products and marketing engine to shine a light on our existing products within the franchise has proven successful and fueled growth year-after-year.

Our fourth strategic imperative is to drive productivity with our retail partners. In fiscal ‘23, e.l.f. increased its best-in-class productivity on a sales per linear foot basis with both Target and Walmart, our 2 largest customers. Ulta Beauty is another great example of our focus on productivity. We grew our Ulta business by over 70% in fiscal ‘23 without incremental space gains. This productivity is helping us to earn additional space with our retail partners. As a reminder, as part of our spring resets earlier this year, we expanded space in Target, Walmart, CVS and Shoppers Drug Mart.

Looking at our average store footprint today in our largest customers, we have about 12 feet in Target, 8 feet in Ulta Beauty and 7 feet in Walmart. Even with this increased footprint, we still trail legacy cosmetics brands, which can have 20 feet of space on average at these national retailers. We continue to drive productivity and expand our footprint across customers; we see a significant runway for growth. To that end, we are pleased that we have earned additional space in Ulta Beauty, CVS and Walgreens in fall ‘23.

Our fifth strategic imperative is to deliver profitable growth. We had a winning formula in fiscal ‘23. We invested strongly behind our high ROI marketing and digital initiatives, and delivered over 100 basis points of adjusted EBITDA margin expansion, supported by the combination of our strong sales growth, gross margin expansion and leverage in our non-marketing SG&A expenses. The investments we have continued to make in our people and infrastructure year-after-year are fueling our growth. Our people investment reflects our unique One Team, One Dream approach. We are the only public company in beauty that grants equity on an annual basis to every single employee, strongly aligning our team with the long-term interest of our shareholders.

Even as we have grown our headcount by 60% over the past 4-years, our world-class team continues to drive strong productivity, outperforming other public beauty companies by roughly 3x to 5x on a sales and profit per employee basis. Our team is also highly engaged. Our most recent employee engagement scores were 19 points higher than consumer goods and services industry benchmark.

As we have grown, we have continued to make investments in our infrastructure. This year, we will begin implementation of SAP to continue to optimize our operations and core processes. We are also planning to make investments to increase our distribution capacity to support our growth. Even with this ongoing investment, we expect to continue to deliver adjusted EBITDA margin expansion in fiscal ‘24. We believe these ongoing investments in our team and infrastructure position us well to continue to drive profitable growth. The progress on our five strategic imperatives has been terrific, and we believe we are still in the early innings with each. Before I turn the call over to Mandy, I want to underscore the three key areas where we see significant runway for additional growth in cosmetics, skin care and internationally.

First, we believe we can grow share in our core mass cosmetics category. This is a $7 billion category in the U.S. We are the #3 brand today with a 9.5% share. At Target, our longest-standing national retail partner, we are already the #1 brand with an 18% share. We believe that our position at other major retailers could mirror that at Target over time. Second, we see significant white space and skin care. This is a $5 billion category in the U.S. We are the #19 brand today with a little over 1% share. We believe we have the right-to-win in skin. Amongst teams, we are already a top 10 brand. Skin care represents 8% of our consumption in Nielsen track channels. It drives nearly 20% of our business on elfcosmetics.com where consumers see the full strength of our assortment. Our focus in skin care is bringing new consumers into the fold as we go after segments like makeup removal, sun care and anti-aging. Our top three best sellers on elfskin.com in Q4 were some of our latest innovations in these areas. Similar to our strategy in cosmetics, we plan to lean on our value proposition, powerhouse innovation and disruptive marketing engine to accelerate awareness for e.l.f. SKIN.

Third, we see considerable white space internationally. International represented approximately 12% of e.l.f. Beauty sales in fiscal ‘23, with the business growing over 60% year-over-year. We are seeing strong results behind our disciplined expansion strategy in Canada and the UK. As compared to our #3 position in the U.S., we are the #7 brand in both Canada and the UK. We were the fastest growing top 10 brand in both of these countries, and still see a lot of runway ahead. We recently began building out our team in the UK. this past year, and are excited about enhancing our focus to further penetrate existing international markets while expanding into new ones.

In summary, as we look ahead, we believe we are still in the early innings of unlocking the full potential of our brands. We believe our relentless focus on our 5 strategic imperatives will continue to fuel our ability to win in fiscal ‘24 and beyond.

I will now turn the call over to Mandy.

Mandy Fields

Thank you, Tarang. Our fourth quarter results were outstanding. Q4 net sales grew 78% year-over-year, driven by broad-based strength across national and international retailers as well as digital commerce. We saw much better-than-expected unit velocities in the quarter, supported by strong early results from our spring resets and robust consumer response to both our spring innovation and core products. Higher unit volume contributed approximately 50 percentage points to net sales growth, with pricing and mix adding approximately 28 percentage points to growth.

Q4 gross margin of 69% was up approximately 470 basis points compared to prior year. We saw gross margin benefits from the price increases implemented in March of 2022, lower transportation costs, margin accretive mix and cost savings. On an adjusted basis, SG&A as a percentage of sales was 61% in Q4 compared to 57% last year, largely due to a step-up in marketing and digital investment. We drove significant leverage in non-marketing SG&A expenses, primarily as a result of our better-than-expected top line trends.

Marketing and digital investment for the quarter was approximately 33% of net sales as compared to 17% in Q4 last year. As Tarang discussed, during the quarter, we opportunistically stepped up our marketing investment given our better-than-expected top line trends. As a result, we ended the full year with marketing and digital investment at 22% of net sales, above the high end of our 17% to 19% range we had outlooked.

Q4 adjusted EBITDA was $21 million, up 66% versus last year, and adjusted EBITDA margin was approximately 11% of net sales. Adjusted net income was $24 million or $0.42 per diluted share, compared to $7 million or $0.13 per diluted share a year ago. The increase in adjusted net income was attributable to a significant increase in pretax income as well as discrete tax benefits in the quarter related to stock-based compensation.

Let’s now turn to our full year fiscal ‘23 results. In short, our results were exceptional. For the year, we grew net sales by 48% and adjusted EBITDA by 56%. We invested behind our high ROI marketing and digital initiatives and delivered over 100 basis points of adjusted EBITDA margin expansion, supported by the combination of our strong sales growth, gross margin expansion and leverage in our non-marketing SG&A expenses.

Moving to the balance sheet and cash flow. Our balance sheet remains strong, and we believe positions us well to execute our long-term growth plans. We ended the year with $121 million in cash on hand compared to a cash balance of $43 million a year ago. Our ending inventory balance was $81 million compared to $84 million a year ago. Given our stronger-than-expected consumption in Q4, our ending inventory was lighter than expected. We expect to recover in Q1 and build inventory through fiscal ‘24 to support our holy grail launches and core franchises.

I’m also pleased with the strong free cash flow we generated of approximately $100 million in fiscal ‘23. Given our cash position, and the early repayment of approximately $25 million of our outstanding debt last fall, we ended fiscal ‘23 with a net cash position and less than 1x leverage in terms of total debt to adjusted EBITDA. We expect to continue our free cash flow generation in fiscal ‘24. Looking at our cash priorities. First and foremost, we plan to continue to invest in our people and infrastructure to fuel our growth. As Tarang discussed, this year, we plan to invest behind our ERP transition to SAP, working capital to support the strong demand we continue to see, and increasing our distribution capacity.

Now let’s turn to our initial outlook for fiscal ‘24. For the full year, we expect net sales growth of approximately 22% to 24%, adjusted EBITDA between $144.5 million to $147.5 million, adjusted net income between $98.5 million to $100.5 million, and adjusted EPS of $1.73 to $1.76 per diluted share. We expect a fully diluted average share count of approximately 57 million shares and our fiscal ‘24 adjusted tax rate to be approximately 21% to 22%.

Let me provide you with additional color on our planning assumptions for fiscal ‘24. Starting with the top line. We ended the fiscal year with significant momentum and believe we have the right strategy in place to support our growth in the year ahead. In Q1, we expect our net sales growth to come in well ahead of our 22% to 24% annual growth, reflecting the ongoing strong consumption trends we are seeing. As we look out to the remainder of the year, we remain bullish on the cosmetics category and our ability to gain share. At the same time, we are mindful of macroeconomic uncertainty and potential recessionary risks. We believe our outlook appropriately balances these elements, and our approach has been consistent, serving us well as we’ve navigated a dynamic operating environment to deliver 17 consecutive quarters of net sales growth.

Turning to gross margin. In fiscal ‘24, we expect our gross margin to be up approximately 100 basis points year-over-year. We expect gross margin benefits from lower transportation costs, favorable FX rates, margin accretive mix and cost savings to offset costs related to retailer activity and space expansion.

Turning now to adjusted EBITDA. Our outlook implies adjusted EBITDA growth of approximately 24% to 26% versus prior year, on top of the strong 56% growth we delivered in fiscal ‘23. With the combination of our top line momentum and strong marketing ROI, we’re planning to increase marketing and digital investment to approximately 22% to 24% of net sales in fiscal ‘24 as compared to 22% in fiscal ‘23. We’re investing from a position of strength and believe these increased marketing investments will continue to fuel our growth.

Our outlook implies adjusted EBITDA margin leverage of approximately 30 basis points year-over-year. This margin expansion is supported by the combination of our strong sales growth and gross margin expansion. In summary, we’re pleased with our outstanding fiscal ‘23 results and remain optimistic about our long-term growth potential. As Tarang discussed, we see significant white space across cosmetics and skin care, both domestically and internationally. Our flywheel approach of investing in marketing to drive top line while expanding adjusted EBITDA margins gives me confidence in our ability to drive profitable growth.

Finally, we believe our solid balance sheet, low [Technical Difficulty].

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] The first question comes from Olivia Tong with Raymond James. Please go ahead.

Olivia Tong

Great. Thanks, and good afternoon. And congrats on a pretty remarkable year.

Mandy Fields

Thank you.

Olivia Tong

My first question is more around the guide and just understanding sort of how you’re thinking about it, clearly coming off of 78% top line growth in Q4. And then looking for something still very, very strong, but decelerating pretty dramatically, relatively speaking. So if you could just give us a little bit in terms of sort of the building blocks, how you’re thinking about maybe first half versus second half? And sort of phasing of some of the launches and the incremental shelf space that you’re getting, help us understand that a little bit, that would be helpful. And then I have a follow-up. Thank you.

Mandy Fields

Hi, Olivia, thank you so much for the question. So overall, we feel great about our guidance, 22% to 24% net sales growth on top of the 48% net sales growth that we just delivered, I think, is tremendous. And as we look out, the fundamental drivers of our business remain intact. Our value proposition, our innovation and our ability to engage our community with our marketing engine remains intact. And in fact, the white space opportunity, as Tarang spoke to, is also still ahead of us. So a lot of goodness on the road ahead. I would say that if I think about breaking it down between innovation and units or the building blocks of the business, I would say we have a healthy mix of both units and AUR as we look forward. We just talked about in Q4, seeing 50 points of our growth being driven by unit volume with the 28% driven by AUR. I think that type of split will continue and that unit growth will be quite healthy implied in our guidance.

And then if I think about productivity. Productivity at shelf, Tarang also spoke to on the call, that continues to be the key driver of our growth. And really, that’s reflective of that innovation that we’re launching that’s really resonating with our consumers and our community and the marketing that we put, the surround sound around that with. So we feel great about our outlook. And as we talked about Q1, we expect to come in ahead of that 22% to 24% just given the consumption levels we’re seeing. And my approach has been very balanced over these last 17 quarters. We see the momentum that we have in this quarter, but also want to make sure that we’re cognizant of any macro things that are going on. And so we remain balanced with the outlook that we’re providing. So I feel great about what we’re seeing from a consumption standpoint. And as you know, we will take it one quarter at a time.

Operator

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

Dara Mohsenian

Hey, good afternoon, guys.

Tarang Amin

Good afternoon.

Dara Mohsenian

So two-part question. First, obviously, your business has grown at a really strong top line growth rate for a number of years. But if you look at the year-over-year revenue growth or the CAGR versus the pre-COVID level, it really accelerated this quarter. So you obviously mentioned a lot of drivers behind that on a year-over-year basis. But just curious if you can give us a little more detail on the sequential ramp up in fiscal Q4? What do you think drove that? How sustainable is that? And then on Olivia’s question on the full year, just – I guess can you give us a little more detail on Q1? Obviously, the scanner data pace looks like it’s continuing at a pretty robust level. So just maybe conceptually, how you sort of think about fiscal Q1 given we’re 2 months into the quarter? I understand above the full year pace, but maybe put it in context relative to Q4, and any extra help there would be helpful. Thanks.

Tarang Amin

Hi, Dara, I’ll take the first part of the question and give the second to Mandy. So in terms of the business growth, you’re right, we saw this acceleration through the year, particularly in Q4. And I would say it’s really a continuation of the fundamental strategy we talked about, the resonance of our value proposition, innovation and marketing. A couple of particular drivers within Q4 that I’d point to. One is we continue to build these franchises our innovation franchises. We had an incredible launch in Q4 with our new Halo Glow Beauty Wands. We’re a viral sensation. We couldn’t keep them in stock. We actually have quite a few out of stocks just given the strength of the innovation that we’ve had that builds upon itself.

We also opportunistically took up our marketing levels in Q4. It was our opportunity given our opportunity to build awareness, to introduce TV for the first time. Most of our spend is digitally driven, but we saw an opportunity to enter TV and broaden that aperture. And we did it in typical e.l.f fashion. We went all in. We ended up creating a spot that aired on the big game, saw terrific results from that, and that also fueled our results. So as Mandy said earlier, we feel we have real great momentum. Fundamental drivers of our business remain intact. And we’re feeling really bullish about the business, but always take a pretty balanced look, but I’ll let Mandy talk about that.

Mandy Fields

Yes. And to answer your question on Q1, we are seeing scanner data close to 50% growth right now. And so I think it’s safe to assume for Q1 that the quarter – we don’t give quarterly guidance, but I think to just give you some color, the 50% that you’re seeing out of scanner data right now, or better, could be where Q1 comes in overall just given what we’re seeing on the untracked side of the business right now as well. .

Operator

The next question comes from Bill Chappell with Truist Securities. Please go ahead.

Bill Chappell

Hi, thanks. Good afternoon.

Tarang Amin

Good afternoon.

Bill Chappell

A little bit more on some of the out of stocks. I mean as we’ve all noted, your acceleration this quarter was remarkable, if not extraordinary. And trying to decouple that with the thought that a lot of your products come overseas. It takes 6 months of a supply chain to kind of go from start to finish. And so you had to kind of know this that was coming, to some extent, or have significant out of stocks. And we see in some stores other than Target and Ulta, there are some – a fair amount of out of stock. So maybe you can understand what you think was left on the table in terms of having out of stocks that could have been done, where retailer inventory levels are as we move into the summer? And maybe it’s not a big issue at all. Maybe you fully saw this coming and making too much of it. But I’m just trying to understand how your supply chain did so well or how it will continue to do so well when you have that kind of a 6-month planning process?

Tarang Amin

Sure. So Bill, I feel great about our supply chain. It’s a real area of strength for our company that’s a combination of cost, quality and speed in our industry. And it’s been highly resilient. If I go back all the way to the pandemic in terms of how we’ve navigated the pandemic, the supply disruptions in terms of container imbalances, lockdowns, you name it, we’ve been able to maintain over 95% customer in stock. So it’s a real testament to our overall operations team and the terrific job they do.

In terms of planning horizons, we typically think in terms of about 14 weeks on average in terms of getting goods in from the time that we place those orders. So it’s not so long in terms of the 6-month horizon. There will be periods where we have a number of things that build upon each other and take off virally. So I mentioned our e.l.f. Beauty Wands. All throughout last year, I think our Halo Glow liquid filters has been a phenomenal innovation that we – every time we take that forecast up, the demand goes even higher.

And Power Grip primer, again, not only our number one SKU, but the number one SKU across the entire mass cosmetics category. So these innovations tend to build upon themselves, I gave the example of Halo Glow. When we launched those Beauty Wands, we’ve seen triple-digit indices on our original Halo Glow liquid filter, even the Halo Glow setting powders we launched almost 3 years ago. So we’re seeing strength built upon strength.

I’m not concerned in terms of any long-term issues. We have plenty of capacity. We have incredible partnerships with our key suppliers where we share with them what our future plans and outlook are that they can work against. So I think this is a temporary – next couple of months, I continue to see elevated out of stocks. But we talked on the call also making the investment of kind of building back up our inventory levels, such that we can continue to serve the tremendous growth that we have.

Operator

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

Linda Bolton-Weiser

Yes. Hi, I’m wondering if you could give a little bit more color about your infrastructure investments – so with SAP implementation, I think we’re all a little nervous that sometimes that causes some disruption. So maybe you can give us a little color on how you’re planning for that and if you expect any retailer ordering lumpiness in anticipation of that implementation? And then secondly, in terms of the added distribution, can you give more color? Is that like a DC? Are you building one yourself? Or what exactly are you adding in the distribution side? Thank you.

Mandy Fields

Hi, Linda. So I can – I’ll take the first part of that question, and then I’ll pass it over to Tarang. So I can say we’re really excited about our ERP transition to SAP, and we’ve had this strategy all along. To continue to invest behind people and infrastructure, it’s something that’s been a part of our base plan every year. And we’ve continued to optimize that as we’ve gone through. So really, as we look at SAP, we’re putting that in place as we want to make sure that the back of house is ready for the growth that we have on the road ahead and is able to scale with us. And so we have our time line built out. We’re in the implement – not implementation just yet. We’re not expecting that for another year out. We’re just building right now.

And so as we go through, we will have several phases where we’re testing. We’re not going to put in jeopardy any orders or anything like that. It will be a very phased approach with lots of testing along the way. But this year, we’re building towards that. So for fiscal ‘24, I don’t see any risk at all related to the project because we don’t plan to implement until we get into fiscal ‘25.

Tarang Amin

Yes. And just adding to that, I think we have a good platform in NetSuite that serves the business well. And so we will continue to operate on that platform. So, it allows us to sequentially test each of the different processes before we fully implement SAP. So, we feel really good about the implementation plan, the outside experts we have brought in, the team that we have built to be able to do that. And as Mandy said, a continuation of what’s been a pretty consistent build-out year-after-year. And then on your second on the distribution capacity, we have a couple of key initiatives on distribution given the growth that we have seen. The first is moving to a more distributed model in terms of our e-commerce fulfillment. Prior, we had basically one automated warehouse that we use to fulfill our e-commerce with consumer expectations of how fast they get their packages. It could take quite a while if you are on the West Coast to get your package shipping out from Columbus, Ohio. So, moving to a multi-node distribution network is the first phase of that. So far, that has been going well. We are already about the first couple of nodes up and running and feel really good about how that’s going and also seeing an improvement in the time it takes consumers to get their packages. The second is continue to add distribution capacity to our main distribution warehouse in Ontario, California hub, just given the growth we have had in the business, really and looking out even further, adding more capacity to that distribution network. And so again, feel good about both those projects and how they are progressing and continue to be able to support the business.

Operator

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

Anna Lizzul

Hi. Thank you so much for the question. I wanted to ask about gross margin. You talked about several factors benefiting gross margin expansion in the fourth quarter, from price increases as of March of 2022, margin accretive mix and from cost savings. Could you talk a bit about how much lower shipping costs contributed to that benefit? And what are shipping costs as a percent of sales? And then I have a follow-up. Thanks.

Mandy Fields

Hi Anna, so overall gross margin, we are really pleased with the progress that we saw in Q4. To your point, we did get benefits from the pricing that we implemented last year. So, that was implemented in March of last year, that we continue to have benefit from all year. We have cost savings. And so that cost savings really had two parts to it. One, just savings from some of the retailer activity that we had around our resets that came in a bit better than we expected. And then also the cost savings that we got with our suppliers. We got some rebates towards the end of the quarter that also helped our gross margin. And then from a mix perspective, this has long been a part of our gross margin strategy as we introduce innovation to have better margins on those innovation so that, that sweetens the mix as we go across, and so all of those factors play into it. And then, of course to your point on transportation, that did play a role. We started to see that transportation cost savings flow through in Q4. We haven’t quantified that as a percentage of our total gross margin or as a percentage of sales, but it did have an impact. And we do continue to see those rates be favorable to where they were a year ago. And so as we think about the 100 basis points that we have baked in for our fiscal ‘24 guidance, transportation is a portion of that as well.

Operator

[Operator Instructions] The next question comes from Andrea Teixeira with JPMorgan. Please go ahead.

Andrea Teixeira

Hi. Good afternoon and congrats again to all of you on these results. I have a question on guidance. And I was curious if you were assuming any change in velocity as you go per door, as you increase your shelf space? I am assuming this is probably going back to how Mandy spoke about how being conservative to perhaps that helps us kind of frame why you see that deceleration given that you are probably starting a very strong pace in the first quarter. And embedded – in kind of related to that, I am assuming you are not embedding pricing, additional pricing. So, most of that 20% to 22%, 22% to 24% growth in top line is mostly on units based on distribution gains, is that correct?

Mandy Fields

Hi Andrea. Nice to hear from you. So, I will take the question on guidance and how we think about shelf space versus productivity. As we said on the call, productivity is the primary driver and has been the primary driver of our results. And so while we have picked up shelf space along the way, remember, it’s in a subset of doors. And really, you have to have a strong productivity to continue to unlock that shelf space on the road ahead. So, the combination of our innovation and the marketing that we have put around that innovation has really paved the way for that productivity to continue to be strong. From a pricing standpoint, we have not baked any pricing into our plans, but I will say from an AUR standpoint. Because we have introduced some higher AUR innovation, higher-priced innovation, you may see some mix towards AUR. So, I wouldn’t say 100% driven by units, but you will see a little bit of that AUR expansion driven by some of the higher priced innovation that we have out there.

Operator

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

Susan Anderson

Hi. Good evening. Thanks for taking my question, really nice job on the quarter. I was wondering on the Digital segment, it looks like there was acceleration in the quarter on top of some really strong results back during COVID. So, I am curious, it looks like it’s kind of accelerated all year. Is that the increased marketing you think the Beauty Squad program, or is there anything new or different that you are doing there that are driving more consumers to shop online?

Tarang Amin

Hi Susan, this is Tarang. So, we are really pleased with the acceleration we have seen in digital. I think our digital penetration is now up to 17% versus 14% a year ago and over 75% growth in the quarter as well. I would say there are three factors that are driving it. One is the overall levels of marketing support that we are doing. We have very strong ROIs on that marketing support and a lot of it does bring consumers onto our digital channels as well, particularly given our approach that’s digital first. Digital definitely benefits from that increased support. I would say the second is this consistent focus we have had on Beauty Squad loyalty members. We now have 3.7 million members. They were up 25% year-over-year, and they are the biggest driver of our digital business. On elfcosmetics.com, they account for over 80% of the sales. So, as we continue to make enhancements to that program, we see really great benefit. And the third, as we think about our digital channels is we are seeing strength not only on elfcosmetics.com, but really strong growth rates at Amazon as well as our retailer dot-coms and the work that we are doing with each of them, I think is further building upon itself. So, I am quite bullish in terms of our prospects digitally, not only do we have strong growth of our national retail customers, but I see major opportunity in terms of what else we can do on digital.

Operator

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

Korinne Wolfmeyer

Hey. Good afternoon. Thanks for taking the question and congrats on a really great year. I would like to touch a little bit more on some of the marketing investments you are making with this kind of increased budget you have laid out for the next fiscal year. Can you talk a little bit about what kind of marketing initiatives you are planning to do? I mean we seem to be a little bit more exploratory in the past couple of months. And with some of the more brand awareness type efforts, how are you kind of tracking the ROI on these investments? And then as we think about the new marketing run rate for spending going forward, what really makes you think that, that’s necessary versus just kind of keeping those – that top line benefit we are seeing versus reinvesting in marketing? Thank you.

Tarang Amin

So, hi Korinne, we feel great about our marketing investment. It’s one of the reasons why we invested more based on the strong ROIs we see. And in terms of how we measure that, we use Nielsen marketing mix, it’s a multivariate regression that can get down to the vehicle level behind our marketing spend. And we are seeing strength across every one of our core marketing vehicles. And I think starting with our digital advertising, the work we do with influencers, our public relations. Even the first time that we did our TV ad, we have seen strong results against each of them. So, as I think about the increased levels of marketing support, it’s really going to be to continue this disruptive strategy that we have had, continue to test our new platforms, put even more in from an awareness standpoint and the awareness campaigns we do that highlight our terrific value and our core innovation, and then also an expansion as we continue to look at different vehicles. So, you will see that as the year unfolds in terms of some of the other partnerships we are engaged with to continue to engage and entertain our community, but feel really great about marketing. And then from an awareness standpoint, we still have a massive opportunity to build awareness. Our unaided awareness is less than 20%. It’s almost half of what a couple of the core legacy brands are. So, we see the opportunity to bring in more consumers. We have had great success in the past year. We expanded our leadership among Gen Z. I think just in the last six months, we have gotten 900 basis points more in terms of Gen Z, but we have also picked up quite a few Millennial and Gen X consumers as well as Hispanic consumers. So, we see opportunity across each of the core demographic groups, and we know the strategy is working.

Operator

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

Ashley Helgans

Hey. Thanks for taking our question and congrats on the quarter. We just wanted to ask a little bit about your market share gains. Any color on where they are coming from and your expectations going forward? Thanks.

Tarang Amin

Hi Ashley, we feel great about our market share gains. If you look at e.l.f. in the last 4 years, we have doubled our market share. We are now at a 9.5% share nationally. That puts us in the number three spot relative to, I think we were number five just a year ago. So, we have surpassed both Revlon and CoverGirl for that number three spot. In terms of where we are getting that market share from, it’s pretty broad-based, a number of the different legacy brands as well as other brands that retailers will test with. We are seeing strength pretty much across the board. And I think our 270 basis points of share growth was multiples ahead of what anybody else was in terms of the absolute gain. But the thing that encourages me the most, and we said in our prepared remarks, is this past year, we also became the number one brand at Target. We have almost an 18% share at Target, double our national share. And the reason why that’s significant is Target had a head start over everyone else, almost a 4-year to 5-year head start over in other national retailers. So, as the others lean into e.l.f., give us more space, give us more support, we feel like other retailers can mirror what Target has been able to achieve over time. So, that gives me the hope that just as we have doubled our market share over the last 4 years, we have an opportunity over the next few years to again double that market share and take over a clear leadership of color cosmetics versus any brand.

Operator

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

Oliver Chen

Hi Tarang and Mandy, really spectacular quarter on the year. Broadening your aperture has clearly worked. With respect to that, where do you see the most opportunities in the unaided awareness and/or how to approach the different aspects of broadening the opportunities you have there? And as we think about shelf space, you gave some great statistics in your prepared remarks, Tarang. What do you see ahead, because the 20 number is quite alluring compared to your 12 at Target and 7 at Walmart and then you are really executing so well. So, what should we understand like why can’t they just give you all 20 right now? Thanks.

Tarang Amin

Yes. So – well, thanks Oliver. We are really pleased with our overall results. If I think about it from a marketing standpoint and consumer, we have so many more consumers to attract to our franchise. So, we continue to be strong with Gen Z, continue to pick up share there. We are increasingly focused on Gen Alpha as well. But one of the biggest differences is we are now also picking up a lot of times the teens that we get, we are picking up their moms as well from an interest standpoint. They may try one of our holy grail innovations and both anecdotally as well as in some of the data we see. We are picking up many more Millennials, Gen X. I am particularly excited about our efforts against Hispanics. We over-deliver, over-index among Hispanics, and we have a number of different initiatives to even bring more of them in. So, you see a pretty broad-based approach in terms of bringing consumers because we find that when a consumer gets their hands on e.l.f. and sees the quality of our products and the prices, they stick with the brand and so very bullish on continuing to pick that up. And then on from a shelf standpoint, you are right, we have still a massive opportunity. Even Target, our most developed national retailer, we are not the biggest brand from a space standpoint. There are a number of brands that have much more space. So, I think over time, you will continue to see us pick up more space with each of our key national retailers. But the way we pick that up, I think, is important. Our focus, first and foremost, on productivity, always results in retailers awarding us more space. One of my favorite examples from this past year is we grew our Ulta Beauty business, over 70% without any additional space. And so it speaks to when you see that level of productivity, we talked Ulta is rewarding us with more space in the fall as the CVS and Walgreens, which have plenty of more room to go. So, I would say we will continue to pick up more space. It’s just a natural outcome of the productivity, innovation and consumer profile we have. But as long as we stay focused on driving very strong productivity growth, and I think it’s been a great formula for us to get these sequential wins. And then the last part of your question, why don’t they just all give us 20 feet overnight? It always takes longer for retailers in color cosmetics, just given that you are talking about feet instead of just items that you are giving. And in some respects, we prefer that. To Andrea’s earlier question on our velocity assumptions, we do assume a little bit lower velocity as we pick up more space. But over time, we have been able to actually build up that velocity to even higher than smaller shelf sets. We talked in our prepared remarks, we are the most productive brand that Target and Walmart carry. And yet in this past year, we increased our productivity on a dollar per linear foot basis. So, we have a great model particularly through our innovation, our assortment, our Project Unicorn, that really focuses on that navigation on shelf to improve our visual merchandising, improve the ability for consumers to shop. And we see pretty consistent increases in that productivity measure, which again, is one of the best signs for future space gains.

Operator

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

Rupesh Parikh

Good evening and thanks for taking the question, also congrats on a great quarter. So, on the EBITDA margin guide for the year, is there anything you can share from a quarterly cadence perspective? And then I just had one additional follow-up as well. As we look at operating margins, I know you guys have talked about tariffs and other opportunities that could still benefit margins, but just curious what you see as the bigger margin opportunities beyond this year?

Mandy Fields

Hi Rupesh. So, from an EBITDA margin standpoint, I think it’s fair to assume, given the outside sales growth that we expect in Q1 that your EBITDA margins could be stronger in Q1 versus where we have pegged them for the year. So, I would use that as a little bit of color on how to think about it. And in terms of margin opportunity overall, just as we saw in fiscal ‘23 and as we spoke to, gross margin remains an opportunity for us. We have talked about some of the cost headwinds that we have carried and particularly related to transportation costs or foreign exchange and things of that nature that should come our way over time. And then also from a non-marketing SG&A standpoint, continuing to seek leverage out of that non-marketing SG&A line. We did that in fiscal ‘23. Our current outlook does not necessarily have that. But if things perform better than we expect, we certainly could see that be a margin driver over the year as well.

Operator

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

Jon Andersen

Hey. Good afternoon everybody. Thanks for taking the question. Just one quick one, a bit of a follow-up to Rupesh’s. On gross margin, you have talked about the benefits of mix and cost savings and then the transportation costs, particularly ocean freight. You posted your strongest gross margin rate of the year in the fourth quarter. And I think the guidance for 2024 implies a full year rate that might be somewhat below what you just did in the fourth quarter. So, I just want to understand some of the puts and takes and the assumptions there if our numbers are accurate. And then whether there is just some conservatism baked in there as well, given that we are very early in the year. Thank you.

Mandy Fields

Hi Jon. So yes, so from a gross margin standpoint, I think your question is getting us to what comes off of Q4 that would drive that gross margin down. And one of the things that we talked about on the call is we have a lot of good things to go on our way. We have the transportation costs and things of that nature, moving margin to the positive. But there are also certain costs related to the space expansion and things like that that we called out that we also have to balance that with. And to your point, it is our first quarter call and out-looking 100 basis points of gross margin expansion on top of the 300 basis points plus that we just delivered in fiscal ‘23 is certainly a positive. So, as I have said earlier, taking it one quarter at a time, but feeling good about how it’s positioned.

Operator

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

Tarang Amin

Well, thank you for joining us today. I am so proud of the incredible team at e.l.f. Beauty for again delivering outstanding results to close out fiscal ‘23. We look forward to seeing some of you at our upcoming investor meetings and speaking with you in August when we will discuss our first quarter results. Thank you and be well.

Operator

The conference has now concluded. Thank you for your participation. You may now disconnect.