e.l.f. Beauty, Inc. (ELF) Q2 2026 Earnings Call Transcript
Access earnings results, analyst expectations, report, slides, earnings call, and transcript.
Overview
The earnings call reveals mixed signals: strong net sales growth due to the Rhode acquisition but a decline in organic sales and adjusted EBITDA. Tariff impacts and increased SG&A expenses weigh on margins. Despite optimistic guidance and strategic international expansion, unresolved pricing issues and unclear management responses raise concerns. The Q&A provided some reassurance about future growth, but the lack of clarity on core business deceleration tempers optimism. The neutral sentiment reflects these balanced positive and negative factors.
Key Financial Performance
Net Sales $344 million in Q2, grew 14% year-over-year. The acquisition of Rhode contributed $52 million or approximately 17 percentage points to the results. Organic net sales, excluding Rhode, were down approximately 3% due to a temporary halt in shipments to certain retailers.
Adjusted EBITDA $66 million in Q2, down 4% year-over-year. The decline was attributed to increased SG&A expenses and investments in team and infrastructure.
Gross Margin 69% in Q2, down approximately 165 basis points year-over-year. The decline was largely driven by incremental tariff costs, partially offset by benefits from price increases and mix.
Adjusted Net Income $41 million or $0.68 per diluted share in Q2, compared to $45 million or $0.77 per diluted share a year ago. The decrease was due to higher SG&A expenses and tariff costs.
Cash Balance $194 million at the end of Q2, compared to $97 million a year ago. The increase reflects strong cash flow and liquidity management.
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Operating Highlights
Acquisition of Rhode: e.l.f. Beauty acquired Rhode, a high-growth beauty brand founded by Hailey Bieber, contributing $52 million to Q2 net sales. Rhode is expected to generate $300 million in annualized net sales by March 2026, growing 40% year-over-year.
Product Innovation: e.l.f. launched the Mega Power Grip Primer, which sold out in 3 minutes on TikTok Shop. The Bright Icon Vitamin C + E + Ferulic Serum was highlighted for its value at $17 compared to a prestige item at $185.
Market Share Growth: e.l.f. achieved its 27th consecutive quarter of market share gains, growing its share by 140 basis points in Q2. It is the only brand among nearly 1,000 tracked by Nielsen to achieve this.
Global Expansion: e.l.f. is expanding into Rossmann in Poland, Sephora in the Gulf Cooperation Council countries, and DM in Germany in spring 2026. Rhode launched in Sephora North America and will expand to Sephora U.K.
Price Increase: A $1 global price increase was implemented on August 1, with 75% of the portfolio priced at $10 or less. Consumption trends remain strong despite the increase.
Tariff Management: e.l.f. adjusted to varying tariff rates, with the current rate at 45%. Each 10% tariff increment impacts costs by $17 million annually.
Strategic Acquisitions: The acquisition of Rhode and Naturium positions e.l.f. with four brands surpassing $100 million in annual retail sales, enhancing its long-term growth potential.
Marketing Investments: Marketing spend is targeted at 24%-26% of net sales for fiscal '26, with a focus on digital and global brand awareness.
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Risk or Challenges
Tariffs and Supply Chain Costs: The company faces significant risks from high tariffs on products imported from China, which constitute 75% of its global production. Tariff rates have been volatile, ranging from 170% to 45%, and every 10 percentage points of incremental tariffs result in a $17 million gross impact to cost of goods sold annually.
Organic Sales Decline: Excluding the acquisition of Rhode, organic net sales were down approximately 3% in Q2, driven by a temporary halt in shipments to retailers who delayed implementing price increases.
Dependence on U.S. Market: Approximately 80% of the company's net sales come from the U.S., indicating a heavy reliance on a single market. This poses risks if domestic market conditions deteriorate.
High Marketing and Digital Spend: The company plans to increase marketing and digital spend to 27%-29% of net sales in the second half of fiscal '26, which could pressure adjusted EBITDA margins.
International Expansion Challenges: While international sales account for only 20% of net sales, the company is in the early stages of global expansion, which may involve execution risks and higher costs.
Integration of Acquisitions: The company has recently acquired Rhode and Naturium, and the integration of these brands poses operational and strategic risks, including achieving projected sales and maintaining brand identity.
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Guidance & Outlook
Fiscal 2026 Net Sales Growth: The company expects net sales growth of 18% to 20% year-over-year, building on the 28% growth achieved in fiscal 2025. Organic net sales, excluding the Rhode acquisition, are projected to grow approximately 3% to 4%.
Rhode Contribution to Sales: Rhode is expected to contribute approximately $200 million in net sales for fiscal 2026, with an annualized projection of $300 million in net sales for the 12 months ending March 31, 2026, representing a 40% year-over-year growth.
Second Half Fiscal 2026 Net Sales Growth: Guidance implies net sales growth of 24% to 27% year-over-year in the second half, with Rhode contributing 22 percentage points to this growth. Organic growth is expected to range between 2% to 5%.
Adjusted EBITDA for Fiscal 2026: The company projects adjusted EBITDA between $302 million and $306 million, reflecting a 2% to 3% year-over-year increase. Adjusted EBITDA margins are expected to be approximately 17% in the second half, compared to 22% in the first half.
Marketing and Digital Spend: Marketing and digital spend is targeted at 24% to 26% of net sales for the full year, with second-half spending expected to increase to 27% to 29% of net sales.
Gross Margin Improvements: Gross margin in the second half is expected to improve to approximately 71%, up 200 basis points sequentially from the first half, driven by price increases and favorable business mix from the Rhode acquisition.
International Expansion: The company plans to expand its international presence, including launching e.l.f. products with Rossmann in Poland, Sephora in six Gulf Cooperation Council countries, and DM in Germany by spring 2026.
Tariff Impact: The company assumes a 45% tariff rate for the remainder of fiscal 2026, with every 10 percentage points of incremental tariffs estimated to impact cost of goods sold by $17 million annually.
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Shareholder Return Plan
The selected topic was not discussed during the call.
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Key Q&A
Q:Can you provide more details on the corporate top-line guidance for the year and the downside in the quarter excluding Rhode?
A:Mandy Fields explained that the primary driver of the disconnect between consumption and shipments in Q2 was pricing impact. Consumption outperformed the category, with e.l.f. growing 7% compared to the category's 2%. For the second half, they expect 2% to 5% organic growth, driven by strong consumption and cycling space expansion at Dollar General and Target.
Q:How did you resolve the pricing issue with retailers, and did it change the economics of the relationship?
A:Tarang Amin stated that e.l.f. maintains an everyday low price philosophy. The pricing issue arose because some retailers were slow to reflect the new pricing. e.l.f. resolved it by not filling orders with incorrect pricing, and the issue naturally resolved as retailers adjusted. The approach ensures price consistency across the market.
Q:Where did you exit the quarter, and where was the deceleration highest?
A:Mandy Fields noted that consumption in Q2 was 7%, with stronger performance in Q3. U.S. growth was 18%, while international growth was 2%, impacted by lapping the Rossmann, Germany launch. The deceleration was primarily due to shipment and consumption mismatches, which will net out over time.
Q:What is the status of tariffs and their impact on inventory and gross margins?
A:Mandy Fields mentioned that tariffs were reduced to 45%, but the average impact this year is 60%, compared to 25% last year. This created a 3,500 basis point headwind. Gross margins are expected to improve in the second half, reaching 71%, and be down 100 basis points for the year.
Q:Why is there a significant increase in marketing spend in the second half?
A:Mandy Fields explained that the increase is due to a timing shift, with campaigns moving to Q3 and Q4. The annual marketing spend remains in the 24% to 26% range of net sales.
Q:What are the expectations for Rhode's performance and its impact on the business?
A:Mandy Fields stated that Rhode is expected to contribute $200 million post-acquisition and $300 million annually, with 40% year-over-year growth. Rhode's gross margins are accretive, and the brand is performing well at Sephora and DTC channels.
Q:What is the outlook for international growth and consumption trends?
A:Mandy Fields highlighted that international growth was 2% in Q2, impacted by lapping the Rossmann, Germany launch. The company expects continued international growth with new launches in Poland, GCC countries, and Germany.
Q:What is the strategy for Rhode's wholesale versus DTC channels?
A:Tarang Amin explained that Rhode focuses on both Sephora (in-store and online) and its DTC business, with exclusive windows for DTC to drive sales. The brand is performing well in both channels.
Q:What are the expectations for Naturium's growth and product rollouts?
A:Tarang Amin stated that Naturium is showing strong momentum, with growth in Target and Ulta Beauty. The brand recently launched in Sephora Australia and is expanding into Boots.
Q:What is the outlook for adjusted EBITDA margins and the impact of Rhode?
A:Mandy Fields noted that adjusted EBITDA margins are expected to be around 19% this year, down from 22% previously, due to tariff headwinds and investments. Rhode's margins are accretive and contribute positively to the overall business.
Q:Review of Unclear Management Responses
A:Management avoided directly addressing the question about why the core business's top-line growth outlook moved lower since the beginning of the year. They attributed it to cycling space expansion but did not provide detailed reasons for the slowdown in innovation or other potential factors.
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Earnings Word Cloud
The most frequently occurring keywords in this quarter's earning call
America acquisition
America history
Beauty category
Beauty family
Beauty foot
Beauty result
Bieber record
Consumers elf
Cosmetics female
Cosmetics makeup
Council launch
DM launch
DTC
Elf SKIN
Exchange founder
Gen awareness
Mega
North America
Primer
Rossmann
Stock
beauty brand
care brand
community product
consumption trend
cosmetic skin
elf Beauty
elf SKIN
increase effect
launch North
purpose
reach
record launch
result outlook
sale acquisition
sale basis
shipment consumption
survey
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