e.l.f. Beauty Announces Results for Transition Period Ended March 31, 2019

e.l.f. Beauty (NYSE:ELF) (the "Company”) today announced results for the three-month transition period ended March 31, 2019. As previously disclosed, the Company changed its fiscal year to better align with its key customers’ annual shelf resets from the twelve months beginning January 1 and ending December 31 to the twelve months beginning April 1 and ending March 31. As a result, throughout this press release, the three-month period ended March 31, 2019 is referred to as the "Transition Period” and the twelve-month periods ended March 31, 2018, March 31, 2019 and March 31, 2020 are referred to as "fiscal 2018,” "fiscal 2019” and "fiscal 2020,” respectively.

"Our Transition Period results exceeded our expectations with net sales of $66 million, which is an increase of three percent after excluding the impact of e.l.f. stores. These results were driven by Project Unicorn and increased marketing activations behind our new first-to-mass products,” said Tarang Amin, Chief Executive Officer. "We are pleased with the initial progress on our growth initiatives and by improvements in tracked channel performance. We recognize that it will take time to fully implement our strategic repositioning, and therefore, we remain cautious as we enter fiscal 2020.”

Transition Period results

Net sales increased $0.2 million from the first calendar quarter of 2018, to $66.1 million, primarily due to increases in shelf space at existing retailers, distribution into new accounts and lower sales adjustments, partially offset by the timing of pipeline shipments and the closing of all 22 e.l.f. retail stores in February 2019.

Gross margin was 61%, flat when compared to the first calendar quarter of 2018, with benefits from lower sales adjustments and margin accretive innovation offset by the impact of tariffs on goods imported from China along with adjustments to inventory and the Company’s inventory reserve.

Selling, general and administrative expenses ("SG&A”) was $37.3 million, or 56% of net sales, compared to $36.2 million, or 55% of net sales in the first calendar quarter of 2018. SG&A included $3.7 million of expenses that were non-cash or that management does not believe are reflective of the Company’s ongoing operations. Adjusted SG&A (SG&A excluding the items identified in the reconciliation table below) was $33.6 million, or 51% of net sales, compared to $31.7 million, or 48% of net sales in the first calendar quarter of 2018.

The benefit for income taxes was $3.3 million in the Transition Period, as compared to a provision for income taxes of $0.4 million in the first calendar quarter of 2018. The change in the provision for income taxes was primarily driven by the change in income before taxes. This was partially offset by an increase in tax expense related to excess tax deficits on equity compensation from $0.2 million in the first calendar quarter of 2018 to $1.5 million in the Transition Period.

On a GAAP basis, net loss was $17.9 million, or $0.37 per share, based on a weighted-average share count of 48.0 million shares. The net loss in the Transition Period includes $22.2 million in restructuring expenses related to the closing of all 22 e.l.f. retail stores in February 2019. This compares to net income of $0.7 million, or $0.01 per diluted share, based on a weighted-average share count of 49.3 million shares in the first calendar quarter of 2018.

Adjusted EBITDA (EBITDA excluding the items identified in the reconciliation table below) increased 1% to $12.0 million from $11.9 million in the first calendar quarter of 2018.

Adjusted net income (net income excluding the items identified in the reconciliation table below) decreased to $3.2 million, or $0.06 per diluted share, based on a weighted-average diluted share count of 49.4 million in the Transition Period. This compares to adjusted net income of $5.5 million, or $0.11 per diluted share, based on a weighted-average diluted share count of 49.3 million in the first calendar quarter of 2018.

Balance sheet

As of March 31, 2019, the Company had $53.9 million in cash and cash equivalents, as compared to $10.5 million as of March 31, 2018, due to cash generated from operations and working capital management. Notably, disciplined inventory management has helped drive a decrease in inventory from $61.7 million as of March 31, 2018 to $43.8 million as of March 31, 2019. As of March 31, 2019, long-term debt totaled $138.0 million, as compared to $145.7 million as of March 31, 2018.

e.l.f. retail stores closure

In February 2019, the Company closed all 22 e.l.f. retail stores to enable a reallocation of investment against the e.l.f. brand and prioritization of national retailer and digital channels (the "e.l.f. Store Closing”). The Company incurred one-time accounting charges associated with the e.l.f. Store Closing of $22.2 million, which are presented in restructuring expenses in the Company’s statement of operations for the Transition Period. The substantial majority of the expense for the Transition Period is non-cash, including $16.1 million in accelerated rent expense and $5.4 million in accelerated depreciation expense.

Company outlook

The Company is providing the following outlook for fiscal 2020. The outlook assumes a flat and highly competitive mass color cosmetics category and the expectation that it will take time to fully realize benefits from increased marketing and digital investments.

In the table below, fiscal 2019 includes the operation of e.l.f. stores during the year. Fiscal 2020 outlook does not include e.l.f. stores. When compared to net sales in fiscal 2019 excluding the contribution of e.l.f. stores, the fiscal 2020 outlook reflects an expected 4-8% decline in net sales.

Company outlook and comparability notes

• The footnotes to the table below provide additional information regarding the e.l.f. stores contributions to fiscal 2019 and Transition Period results:

• The following tables present a reconciliation of quarterly net sales for fiscal 2019 and fiscal 2018 to quarterly net sales excluding e.l.f. stores for the same periods:

• The Company’s outlook for fiscal 2020 includes marketing and e-commerce expenditures of approximately 10 to 12 percent of sales, as compared to historical expenditures in the mid-single digits as a percent of sales. The inclusion of e-commerce expenditures reflects the important role that digital plays in building demand for the brand.
• The Company expects to partially offset its incremental investment in marketing and e-commerce through cost- savings initiatives.
• The Company expects its effective tax rate for fiscal 2020 to be approximately 28% before the impact of any discrete items. The Company’s outlook for fiscal 2020 assumes no tax benefits or deficits from stock option exercises or vesting of restricted stock. The fiscal 2019 results include tax benefits from these items totaling $0.7 million, or $0.01 per diluted share.

Share repurchase program

The Company also announced that its Board of Directors approved a share repurchase program authorizing the Company to repurchase up to $25 million of its common shares.

"We are pleased to be in a position to return excess cash to shareholders while still investing in our key growth initiatives,” said Mandy Fields, Chief Financial Officer.

Purchases under the share repurchase program may be made from time to time in the open market, in privately negotiated transactions or otherwise. The timing and amount of any repurchases pursuant to the share repurchase program will be determined based on market conditions, share price and other factors. The share repurchase program may be suspended or discontinued at any time and there is no guarantee that any shares will be purchased under the share repurchase program.

Transition Period conference call

The Company will hold a conference call today, May 8, 2019, at 4:30 p.m. ET to discuss the Company’s Transition Period results. Investors and analysts interested in participating in the call are invited to dial-in 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 May 8, 2019, until 11:59 p.m. ET on May 15, 2019, 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 13690102.

About e.l.f. Beauty

e.l.f. makes luxurious beauty accessible for all. As one of the most innovative beauty companies, e.l.f. engages young, diverse beauty enthusiasts by offering high-quality, prestige-inspired cosmetic and skin care products at extraordinary value. In addition, e.l.f. is proud to be 100% vegan and cruelty-free. You can find e.l.f. products on www.elfcosmetics.com, at leading retailers such as Target, Walmart and Ulta, and also internationally.

Learn more about e.l.f. at www.elfcosmetics.com or follow us on Instagram (@elfcosmetics) or Twitter (@elfcosmetics).

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. Additionally, the financial metrics provided for the trailing twelve months ended March 31, 2018 and 2019 are non-GAAP measures and have been presented in order to provide a comparison that aligns with the Company's new fiscal year end. 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 Project Unicorn. Adjusted EBITDA excludes costs related to restructuring of operations, stock-based compensation and other non-cash and non-recurring costs. Adjusted net income excludes costs related to restructuring of operations, stock-based compensation, 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 fiscal year 2020 under "Company outlook” above and the statements related to the Company’s beliefs regarding its initial progress on its growth initiatives and improvements in tracked channel performance, the Company’s expectations regarding time to fully implement its strategic repositioning, the Company’s expectations regarding its performance in fiscal 2020, the Company’s expectations regarding investing behind its key growth initiatives, and the recently announced share repurchase program. 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 Quarterly Report on Form 10-Q and 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 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 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.

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