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e.l.f. Beauty Announces Second Quarter and First Half 2018 Results

Share:

– Delivers 6% net sales growth over Q2 2017 –

– Revises 2018 outlook –

e.l.f. Beauty (NYSE:ELF) today announced results for the three- and
six-month periods ended June 30, 2018.

"Our second quarter saw healthy sales growth, operating profit and cash
flows. This was on top of 27% net sales growth in the prior year
period," stated Tarang Amin, Chairman and Chief Executive Officer. "We
are working to improve trends at select national retailer partners and
are confident in our long-term potential. Our brand continues to
resonate with consumers, as demonstrated by our expansion within leading
retailers. We believe there is significant whitespace for the e.l.f.
brand and seek to deliver shareholder value through the capabilities of
our broader platform."

Three months ended June 30, 2018 results

Net sales increased 6%, or $3.2 million from the second quarter of 2017,
to $59.1 million, primarily driven by growth in leading national
retailers, largely attributable to new customer expansion and additional
retailer store locations. Gross margin decreased from 64% to 62% in the
second quarter of 2018, primarily as a result of unfavorable movements
in foreign exchange rates, partially offset by margin accretive
innovation.

Selling, general and administrative expenses ("SG&A") were
$33.8 million, or 57% of net sales, compared to $32.7 million, or 59% of
net sales in the second quarter of 2017. SG&A includes $4.9 million of
expenses that are non-cash or that management does not believe are
reflective of the Company's ongoing operations. Adjusted SG&A, excluding
these expenses, was $28.9 million, or 49% of net sales, compared to
$29.1 million, or 52% of net sales in the same period in fiscal 2017.

The provision for income taxes was $0.1 million in the second quarter of
2018, as compared to a tax benefit of $3.4 million in the second quarter
of 2017. The change was primarily driven by excess tax benefits from
stock option exercises and vesting of restricted stock, which decreased
to $0.3 million in the second quarter of 2018 from $3.7 million in the
second quarter of 2017. The increase in income tax expense was partially
offset by a reduction in our U.S. federal statutory rate from 35% to 21%
as a result of the tax reform laws effective as of the beginning of 2018.

On a GAAP basis, net income was $1.2 million, or $0.03 per diluted
share, based on a weighted-average share count of 49.4 million shares.
This compares to net income of $4.0 million, or $0.08 per diluted share,
based on a weighted-average share count of 49.5 million shares in the
second quarter of 2017.

Adjusted EBITDA (EBITDA excluding the items identified in the
reconciliation table below) increased 29% to $13.0 million from
$10.0 million in the second quarter of 2017.

Adjusted net income (net income excluding the items identified in the
reconciliation table below) decreased to $6.5 million, or $0.13 per
diluted share, based on a weighted-average diluted share count of
49.4 million in the second quarter of 2018. This compares to adjusted
net income of $7.3 million, or $0.15 per diluted share, based on a
weighted-average diluted share count of 49.5 million in the same quarter
of 2017. Beginning in the first quarter of 2018, the Company excluded
the impact of amortization of acquired intangible assets, net of the
related tax effect, from both current and prior period adjusted net
income.

Six months ended June 30, 2018 results

Net sales increased 7%, or $8.5 million from the first half of 2017, to
$125.0 million, primarily driven by growth in leading national
retailers, largely attributable to new customer expansion, the benefit
of shelf space acquired in 2017, and additional retailer store
locations. Gross margin decreased from 64% to 61% in the first half of
2018, primarily as a result of unfavorable movements in foreign exchange
rates, customer mix and freight, partially offset by margin accretive
innovation.

SG&A were $70.0 million, or 56% of net sales, compared to $65.7 million,
or 56% of net sales in the first half of 2017. SG&A includes
$9.4 million of expenses that are non-cash or that management does not
believe are reflective of the Company's ongoing operations. Adjusted
SG&A, excluding these expenses, was $60.6 million, or 48% of net sales,
compared to $58.5 million, or 50% of net sales in the same period in
fiscal 2017.

The provision for income taxes was $0.6 million in the first half of
2018, as compared to a tax benefit of $3.3 million in the first half of
2017. The change was primarily driven by excess tax benefits from stock
option exercises and vesting of restricted stock, which decreased to
$0.2 million during the first half of 2018 from $4.4 million in the
first half of 2017. The increase in income tax expense was partially
offset by a reduction in our U.S. federal statutory rate from 35% to 21%
as a result of the tax reform laws effective as of the beginning of 2018.

On a GAAP basis, net income was $1.9 million, or $0.04 per diluted
share, based on a weighted-average share count of 49.4 million shares.
This compares to net income of $6.1 million, or $0.12 per diluted share,
based on a weighted-average share count of 49.5 million shares in the
first half of 2017.

Adjusted EBITDA increased 15% to $24.9 million from $21.7 million in the
first half of 2017.

Adjusted net income decreased to $11.9 million, or $0.24 per diluted
share, based on a weighted-average diluted share count of 49.4 million
in the first half of 2018. This compares to adjusted net income of
$12.8 million, or $0.26 per diluted share, based on a weighted-average
diluted share count of 49.5 million in the first half of 2017. Beginning
in the first quarter of 2018, the Company excluded the impact of
amortization of acquired intangible assets, net of the related tax
effect, from both current and prior period adjusted net income.

CEO stock purchase

Today Tarang Amin, Chairman and Chief Executive Officer, announced that
he intends to purchase up to $500,000 of the Company's common stock. The
timing and amount of any purchases by Mr. Amin will be determined based
on market conditions, share price and other factors. Mr. Amin is not
required to purchase any specific number of shares of the Company's
common stock, and he may modify, suspend or terminate his purchases at
any time without notice.

Balance sheet

At June 30, 2018, the Company had $17.4 million in cash, as compared to
$3.4 million as of June 30, 2017. Inventory at June 30, 2018 totaled
$59.9 million, compared to $72.3 million on June 30, 2017. At June 30,
2018, long-term debt totaled $143.7 million, as compared to $152.2
million as of June 30, 2017.

Company outlook

Accounting for current trends within select national retailer partners,
the Company is revising its outlook for 2018.

                 
   

New Fiscal
2018 Outlook

  Original Fiscal
2018 Outlook
 

Fiscal
2017 Actual

 
Net sales growth Low single digits 6-8%

18%

 

Adjusted EBITDA $ 58-62 million $ 65-66.5 million $ 62 million
Adjusted net income $ 28-31 million $ 30-31 million $ 32 million (a)
Adjusted diluted EPS $ 0.56-0.61 $ 0.59-0.61 $ 0.64 (a)
Fully diluted shares outstanding 50.4 million 51.4 million 49.4 million
 
(a) The Company's 2018 adjusted net income and adjusted diluted EPS
guidance excludes amortization of acquired intangible assets. The
Company began excluding these items from its adjusted net income and
adjusted diluted EPS metrics beginning with the first quarter of
fiscal 2018. Fiscal 2017 adjusted net income includes $4.4 million
in amortization of acquired intangible assets (net of the related
tax effect).
 

Second quarter 2018 conference call

The Company will hold a conference call today, August 8, 2018, at 4:30
p.m. ET to discuss the Company's second quarter 2018 results. Investors
and analysts interested in participating in the call are invited to dial
approximately ten minutes prior to the start of the call. The U.S. toll
free dial-in for the conference call is (877) 407-3982 and the
international dial-in number is (201) 493-6780. The conference call will
also be webcast live at: http://investor.elfcosmetics.com/news-and-events/events
and remain available for 90 days. A telephone replay of this call will
be available at 7:30 p.m. ET on August 8, 2018, until 11:59 p.m. ET on
August 15, 2018, and can be accessed by dialing the U.S. toll free
dial-in, (844) 512-2921 or the international dial-in, (412) 317-6671,
and entering replay pin number 13681796.

About e.l.f. Beauty

e.l.f. makes luxurious beauty accessible for all. Established in 2004 as
an e-commerce business (www.elfcosmetics.com),
e.l.f. has become a true multi-channel brand through its e.l.f. stores
and national distribution at Target, Walmart, Ulta Beauty and other
leading retailers. By engaging young, diverse beauty enthusiasts with
high-quality, prestige-inspired cosmetic and skin care products at
extraordinary value, e.l.f. has become one of the fastest growing beauty
companies in the United States.

For more information about e.l.f. Beauty, visit the Company's website at http://www.elfcosmetics.com.

Note regarding non-GAAP financial measures

This press release includes references to non-GAAP measures, including
adjusted SG&A, adjusted gross profit, EBITDA, adjusted EBITDA, adjusted
net income and adjusted diluted EPS. The Company presents these non-GAAP
measures because its management uses them as supplemental measures in
assessing its operating performance, and believes they are helpful to
investors, securities analysts and other interested parties in
evaluating the Company's performance. The non-GAAP measures included in
this press release are not measurements of financial performance under
GAAP and they should not be considered as alternatives to measures of
performance derived in accordance with GAAP. In addition, these non-GAAP
measures should not be construed as an inference that the Company's
future results will be unaffected by unusual or non-recurring items.
These non-GAAP measures have limitations as analytical tools, and you
should not consider such measures either in isolation or as substitutes
for analyzing the Company's results as reported under GAAP. The
Company's definitions and calculations of these non-GAAP measures are
not necessarily comparable to other similarly titled measures used by
other companies due to different methods of calculation. Adjusted gross
profit excludes costs related to a fixturing and packaging
transformation initiative. Adjusted EBITDA excludes costs related to
"restructuring" of operations, stock-based compensation, retail store
pre-opening costs and other non-cash and non-recurring costs. Adjusted
net income excludes costs related to "restructuring" of operations,
stock-based compensation, retail store pre-opening costs, other non-cash
and non-recurring costs, amortization of acquired intangible assets and
the tax impact of the foregoing adjustments. With respect to the
Company's expectations under "Company Outlook" above, the Company is not
able to provide a quantitative reconciliation of the adjusted EBITDA,
adjusted net income, and adjusted diluted EPS guidance non-GAAP measures
to the corresponding net income and diluted EPS GAAP measures without
unreasonable efforts. The Company cannot provide meaningful estimates of
the non-recurring charges and credits excluded from these non-GAAP
measures due to the forward-looking nature of these estimates and their
inherent variability and uncertainty. For the same reasons, the Company
is unable to address the probable significance of the unavailable
information.

Forward-looking statements

This press release contains forward-looking statements within the
meaning of the federal securities laws, including those statements
relating to, the Company's outlook for 2018 under "Company Outlook"
above and those statements relating to among other things: the Company's
ability to improve trends at select national retail partners; the
Company's confidence in its long-term potential; the Company's belief
regarding the whitespace for the e.l.f. brand; the Company's ability to
deliver shareholder value through the capabilities of its broader
platform; and Mr. Amin's announcement of his intention to purchase the
Company's common stock. These forward-looking statements are based on
management's current expectations, estimates, forecasts, projections,
beliefs and assumptions and are not guarantees of future performance.
Although the Company believes that the expectations reflected in the
forward-looking statements are reasonable, actual results and the timing
of selected events may differ materially from those expectations.
Factors that could cause actual results to differ materially from those
in the forward-looking statements include, among other things, the risks
and uncertainties that are described in the Company's most recent Annual
Report on Form 10-K, as updated from time to time in the Company's SEC
filings, as well as the Company's ability to grow net sales and adjusted
EBITDA as anticipated; the Company's ability to effectively compete with
other beauty companies; the Company's ability to successfully introduce
new products; the Company's ability to attract new retail customers
and/or expand business with its existing retail customers; the Company's
ability to optimize shelf space at its key retail customers; the loss of
any of the Company's key retail customers or if the general business
performance of its key retail customers declines; and the Company's
ability to effectively manage its SG&A and other company expenses.
Potential investors are urged to consider these factors carefully in
evaluating the forward-looking statements. These forward-looking
statements speak only as of the date hereof. Except as required by law,
the Company assumes no obligation to update or revise these
forward-looking statements for any reason, even if new information
becomes available in the future.

           
e.l.f. Beauty, Inc. and subsidiaries
Condensed consolidated statements of operations and comprehensive
income
(unaudited)

(in thousands, except share and per share data)

 
Three months ended June 30, Six months ended June 30,
2018       2017 2018       2017
 
Net sales $ 59,055 $ 55,856 $ 124,975 $ 116,430
Cost of sales 22,410   19,966   48,122   42,311  
Gross profit 36,645 35,890 76,853 74,119
Selling, general and administrative expenses 33,791   32,705   70,025   65,710  
Operating income 2,854 3,185 6,828 8,409
Other income (expense), net 509 (244 ) (379 ) (1,044 )
Interest expense, net (1,989 ) (2,387 ) (3,952 ) (4,543 )
Income before provision for income taxes 1,374 554 2,497 2,822
Income tax benefit (provision) (126 ) 3,416   (559 ) 3,308  
Net income $ 1,248   $ 3,970   $ 1,938   $ 6,130  
Comprehensive income $ 1,248   $ 3,970   $ 1,938   $ 6,130  
Net income per share:
Basic $ 0.03 $ 0.09 $ 0.04 $ 0.14
Diluted $ 0.03 $ 0.08 $ 0.04 $ 0.12
Weighted average shares outstanding:
Basic 46,625,915 45,465,723 46,531,264 44,786,305
Diluted 49,425,927 49,509,940 49,364,875 49,524,447
 
                 
e.l.f. Beauty, Inc. and subsidiaries
Condensed consolidated balance sheets
(unaudited)

(in thousands, except share and per share data)

 

June 30,
2018

December 31,
2017

June 30,
2017

Assets
Current assets:
Cash $ 17,445 $ 10,059 $ 3,354
Accounts receivable, net 27,639 44,634 26,143
Inventories 59,861 62,679 72,274
Prepaid expenses and other current assets 10,385   6,272   5,724  
Total current assets 115,330 123,644 107,495
Property and equipment, net 18,813 18,037 16,080
Intangible assets, net 102,375 105,882 109,390
Goodwill 157,264 157,264 157,264
Investments 2,875 2,875 2,875
Other assets 9,655   9,542   2,720  
Total assets $ 406,312   $ 417,244   $ 395,824  
 
Liabilities and stockholders' equity
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 8,660 $ 8,646 $ 22,765
Accounts payable 13,760 26,776 15,653
Accrued expenses and other current liabilities 9,815   15,939   12,053  
Total current liabilities 32,235 51,361 50,471
Long-term debt and capital lease obligations 143,708 147,702 152,201
Deferred tax liabilities 22,732 21,341 31,740
Other long-term liabilities 3,123   2,977   3,259  
Total liabilities 201,798 223,381 237,671
 
Commitments and contingencies
 
Stockholders' equity:

Common stock, par value of $0.01 per share; 250,000,000
shares
authorized as of June 30, 2018, December 31, 2017 and
June
30, 2017; 47,581,682, 46,617,830 and 46,082,501 shares
issued
and outstanding as of June 30, 2018, December 31, 2017
and
June 30, 2017, respectively

467 463 458
Additional paid-in capital 729,135 720,372 712,012
Accumulated deficit (525,088 ) (526,972 ) (554,317 )
Total stockholders' equity 204,514   193,863   158,153  
Total liabilities and stockholders' equity $ 406,312   $ 417,244   $ 395,824  
 
     
e.l.f. Beauty, Inc. and subsidiaries
Condensed consolidated statements of cash flows
(unaudited)

(in thousands)

 
Six months ended June 30,
2018       2017
Cash flows from operating activities:
Net income $ 1,938 $ 6,130
Adjustments to reconcile net income to net cash provided by
(used
in) operating activities:
Depreciation and amortization 8,712 7,147
Stock-based compensation expense 8,271 5,933
Amortization of debt issuance costs and discount on debt 398 403
Deferred income taxes 1,409 (2,682 )
Other, net 175 364
Changes in operating assets and liabilities:
Accounts receivable 16,912 11,486
Inventories 2,818 (2,861 )
Prepaid expenses and other assets (5,464 ) (3,507 )
Accounts payable and accrued expenses (18,942 ) (40,328 )
Other liabilities 144   52  
Net cash provided by (used in) operating activities 16,371 (17,863 )
 
Cash flows from investing activities:
Purchase of property and equipment (5,162 ) (2,149 )
Investment in equity securities   (2,875 )
Net cash used in investing activities (5,162 ) (5,024 )
 
Cash flows from financing activities:
Proceeds from revolving line of credit 2,000 20,600
Repayment of revolving line of credit (2,000 ) (6,500 )
Repayment of long term debt (4,125 ) (4,125 )
Cash received from issuance of common stock 497 1,153
Other, net (195 ) (182 )
Net cash provided by (used in) financing activities (3,823 ) 10,946  
 
Net increase (decrease) in cash 7,386 (11,941 )
Cash - beginning of period 10,059   15,295  
Cash - end of period $ 17,445   $ 3,354  
 
           
e.l.f. Beauty, Inc. and subsidiaries
Reconciliation of GAAP gross profit to non-GAAP adjusted gross
profit
(unaudited)

(in thousands, except percentages)

 
Three months ended June 30, Six months ended June 30,
2018       2017 2018       2017
Gross profit $ 36,645 $ 35,890 $ 76,853 $ 74,119
Costs related to Project Unicorn (a) 305     305  

 
Adjusted gross profit $ 36,950   $ 35,890   $ 77,158   $ 74,119  
 
Gross margin 62 % 64 % 61 % 64 %
Adjusted gross margin 63 % 64 % 62 % 64 %
 
(a)   Represents costs associated with Project Unicorn, a fixturing and
packaging transformation initiative.
 
           
e.l.f. Beauty, Inc. and subsidiaries
Reconciliation of GAAP net income to non-GAAP adjusted EBITDA
(unaudited)

(in thousands)

 
Three months ended June 30, Six months ended June 30,
2018       2017 2018       2017
Net income $ 1,248 $ 3,970 $ 1,938 $ 6,130
Interest expense, net 1,989 2,387 3,952 4,543
Income tax (benefit) provision 126 (3,416

)

559 (3,308 )
Depreciation and amortization 4,424 3,488

 

8,712 7,147  
EBITDA $ 7,787 $ 6,429 $ 15,161 $ 14,512
Costs related to "restructuring" of operations (a)

6

Stock-based compensation 4,631 3,529 8,271 5,933
Pre-opening costs (b) 7 29 42 70
Other non-cash and non-recurring costs (c) 540 35   1,434 1,152  
Adjusted EBITDA $ 12,965 $ 10,022   $ 24,908 $ 21,673  
 
(a)   Represents costs associated with the restructuring of the Company's
operations, including the transition of the Company's New Jersey
warehouse and distribution center in 2016.
(b) Represents costs associated with e.l.f. stores incurred prior to the
store opening, including legal-related costs, rent and occupancy
expenses, marketing and other store operating supply expenses.
(c) Represents various non-cash or non-recurring costs including costs
related to secondary offering of common stock, costs related to
certain transformational information technology projects,
third-party costs related to M&A due diligence, and Project Unicorn.
 
           
e.l.f. Beauty, Inc. and subsidiaries
Reconciliation of GAAP SG&A to non-GAAP adjusted SG&A
(unaudited)

(in thousands)

 
Three months ended June 30, Six months ended June 30,
2018       2017 2018       2017
Selling, general, and administrative expenses $ 33,791 $ 32,705 $ 70,025 $ 65,710
Costs related to "restructuring" of operations (a) (6 )
Stock-based compensation (4,631 ) (3,529 ) (8,271 ) (5,933 )
Pre-opening costs (b) (7 ) (29 ) (42 ) (70 )
Other non-cash and non-recurring costs (c) (235 ) (35 ) (1,129 ) (1,152 )
Adjusted selling, general, and administrative expenses $ 28,918   $ 29,112   $ 60,583   $ 58,549  
 
(a)   Represents costs associated with the restructuring of the Company's
operations, including the transition of the Company's New Jersey
warehouse and distribution center in 2016.
(b) Represents costs associated with e.l.f. stores incurred prior to the
store opening, including legal-related costs, rent and occupancy
expenses, marketing and other store operating supply expenses.
(c) Represents various non-cash or non-recurring costs including costs
related to secondary offering of common stock, costs related to
certain transformational information technology projects, and
third-party costs related to M&A due diligence.
 
           
e.l.f. Beauty, Inc. and subsidiaries
Reconciliation of GAAP net income to non-GAAP adjusted net income
(unaudited)

(in thousands, except share and per share data)

 
Three months ended June 30, Six months ended June 30,
2018       2017 2018       2017
Net income $ 1,248 $ 3,970 $ 1,938 $ 6,130
Costs related to "restructuring" of operations (a) 6
Stock-based compensation 4,631 3,529 8,271 5,933
Pre-opening costs (b) 7 29 42 70
Other non-cash and non-recurring costs (c) 540 35 1,434 1,152
Amortization of acquired intangible assets (d) 1,754 1,754 3,508 3,613
Tax Impact (e) (1,726 ) (2,061 ) (3,288 ) (4,154 )
Adjusted net income (f) $ 6,454   $ 7,256   $ 11,905   $ 12,750  
 
Weighted average number of shares outstanding - diluted 49,425,927 49,509,940 49,364,875 49,524,447
Adjusted diluted earnings per share $ 0.13 $ 0.15 $ 0.24 $ 0.26
 
(a)   Represents costs associated with the restructuring of the Company's
operations, including the transition of the Company's New Jersey
warehouse and distribution center in 2016.
(b) Represents costs associated with e.l.f. stores incurred prior to the
store opening, including legal-related costs, rent and occupancy
expenses, marketing and other store operating supply expenses.
(c) Represents various non-cash or non-recurring costs including costs
related to a secondary offering of common stock, costs related to
certain transformational information technology projects,
third-party costs related to M&A due diligence, and Project Unicorn.
(d) Represents amortization expense of acquired intangible assets
consisting of customer relationships and favorable leases.
(e) Represents the tax impact of the above adjustments.
(f) Adjusted net income for the three and six months ended June 30,
2017, as previously reported, was $6.2 million and $10.5 million,
respectively. The difference of approximately $1.1 million and $2.2
million relates to amortization of acquired intangible assets, net
of tax. The Company's 2018 adjusted net income and adjusted diluted
EPS guidance excludes amortization of acquired intangible assets. As
such, prior year results have been adjusted to reflect a similar
basis of presentation.

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