e.l.f.(ELF) - 2024 Q4 - Annual Report

Part I Business e.l.f. Beauty, Inc. is a multi-brand beauty company offering cosmetics and skincare, focusing on value, innovation, digital marketing, and a unique team culture Overview and Brands e.l.f. Beauty operates a portfolio of five clean, vegan, and cruelty-free beauty brands distributed through major retailers and online channels - The company operates a family of five brands: e.l.f. Cosmetics, e.l.f. SKIN, Naturium, Well People, and Keys Soulcare[21] - e.l.f. Beauty's products are characterized as inclusive, accessible, clean, vegan, and cruelty-free[20] - The company's mission is to make the best of beauty accessible to every eye, lip, face, and skin concern[22] Products and Strategy The company's strategy is built on four pillars: strong value proposition, rapid innovation, disruptive digital marketing, and a unique 'one-team' culture - The company's strategy is based on four key pillars: Value Proposition, Powerhouse Innovation, Disruptive Marketing Engine, and Unique One-Team Culture[24][26] - e.l.f. Cosmetics' average product price is approximately $6, significantly lower than other mass brands (over $9) and prestige brands (over $20)[26] - Marketing and digital expenses for fiscal year 2024 totaled $256.0 million, representing about 25% of net sales[26] - All full-time employees receive a base salary, are eligible for the same bonus plan, and receive an annual equity award in e.l.f. Beauty stock[27][45] Distribution and Customers The company uses an omni-channel distribution strategy, with retailers accounting for 84% of FY2024 net sales and the U.S. market representing 85% FY 2024 Sales Distribution | Channel/Region | Percentage of Net Sales | | :--- | :--- | | Retailers (National & International) | 84% | | E-commerce | 16% | | United States | 85% | | International | 15% | FY 2024 Top Customer Concentration | Customer | Percentage of Net Sales | | :--- | :--- | | Target | 25% | | Walmart | 17% | | Ulta Beauty | 16% | Supply Chain e.l.f. Beauty operates an asset-light supply chain, primarily sourcing and manufacturing products in China through third-party partners - The company employs an asset-light supply chain, sourcing and manufacturing nearly all products through third-party partners in China[35] - Distribution is managed by third-party logistics providers with centers in the U.S. (California, Utah, Ohio, Georgia) and internationally (UK, Germany, Canada)[37] Human Capital and Social Impact The company emphasizes diversity and inclusion, with 475 employees, a two-thirds female board, and commitments to cruelty-free and Fair Trade practices - As of March 31, 2024, the company had 475 full-time employees, with 377 in the US, UK, and Canada, and 98 in China[38] - The Board of Directors is 67% female and over one-third diverse. The overall employee base is 75% female and over 40% diverse[40][42] - The company was the first in the beauty industry to have a third-party manufacturing facility become Fair Trade Certified™[50] - The company is 100% cruelty-free and holds dual certification from PETA and the Leaping Bunny Program for its main brands[55] Government Regulation The company's products are subject to U.S. and international regulations, with new stringent requirements introduced by MoCRA for cosmetics - The company is subject to regulation by the FDA, CPSC, and FTC in the United States, and international bodies like Health Canada and the European Commission[58] - The Modernization of Cosmetic Regulation Act of 2022 (MoCRA) will significantly expand FDA authority with new requirements for facility registration, product listing, safety substantiation, and mandatory recalls[63][186] - Certain products, such as sunscreens and acne treatments, are regulated as over-the-counter (OTC) drugs by the FDA and must comply with specific monograph requirements[64] Risk Factors The company faces diverse risks including intense competition, supply chain reliance on China, cybersecurity threats, and evolving regulations Industry and Competition Risks Success in the highly competitive beauty industry depends on anticipating trends, launching new products, and maintaining brand reputation - The beauty industry is highly competitive, with pressure from large multinational companies (L'Oréal, Estee Lauder) and new 'indie' brands[76][77] - The success of new product introductions is not guaranteed and involves risks such as lack of consumer acceptance, supply chain delays, and potential cannibalization of existing product sales[81][82][83] - Damage to brand reputation, which is critical to financial success, can arise from failure to comply with ethical or product standards, adverse publicity, or poor product quality[85][88] Growth, Profitability, and Acquisition Risks Future growth is not guaranteed and depends on successful strategy implementation and integration of acquisitions like Naturium, which carry inherent risks - The company's ability to successfully implement its growth strategy, which includes building brand demand, leading innovation, and driving retail productivity, is not assured[92] - Acquisitions, such as the purchase of Naturium, present risks including integration challenges, diversion of management attention, and potential incurrence of unanticipated liabilities[99][103] - The acquisition of Naturium brings specific risks, such as the potential for inaccurate assumptions about its performance, discovery of unknown liabilities, and reliance on a limited number of third-party suppliers for raw materials[104][105][106] Operations, Supply Chain, and Macroeconomic Risks The business is vulnerable to global supply chain disruptions, reliance on third-party suppliers in China, and adverse macroeconomic conditions affecting consumer spending - Operations are subject to disruption risks in the supply chain, including manufacturing issues, shipping delays (port congestion, container shortages), and problems at third-party distribution centers[110][111] - The company relies on a number of third-party suppliers and manufacturers, primarily in China, without long-term contracts, exposing it to risks of quality control problems, production delays, and increased costs[115] - Adverse economic conditions, such as inflation, rising interest rates, or a recession, could decrease consumer discretionary spending and negatively impact net sales and profitability[129] - Failure to effectively manage inventory can lead to obsolescence, write-downs, and reduced profit margins[121] Financial and Customer Risks The company's indebtedness and heavy reliance on a few key retailers pose significant financial and operational risks, exacerbated by seasonal sales fluctuations - As of March 31, 2024, the company had $262.9 million of total indebtedness, which could require substantial cash flow for debt service and limit operational flexibility[135] - A limited number of retailers account for a large portion of net sales, and the loss or reduced business from one or more of these customers could adversely affect results[145] - The business is seasonal, with higher net sales in the third and fourth fiscal quarters due to holiday purchasing and shelf resets, making these periods critical for annual performance[148] IT, Cybersecurity, and AI Risks Increasing IT dependence, cyberattack vulnerability, new system implementation risks, and AI challenges pose significant operational and reputational threats - The company relies heavily on IT networks and systems, making it vulnerable to service interruptions, data corruption, and cyberattacks, which are increasing in frequency and sophistication[151][155] - The implementation of major new IT systems, such as SAP software, presents risks of disruption, significant capital expenditure, and potential delays[162][163] - The use of Artificial Intelligence (AI) presents risks including accuracy issues, unintended biases, increased cybersecurity vulnerabilities, and evolving legal and regulatory uncertainty[165] - A breach of security involving sensitive consumer information could damage the company's reputation, lead to litigation and regulatory fines, and harm financial results[166][170] International and Regulatory Risks Significant operations in China and evolving global regulations, including MoCRA and data privacy laws, expose the company to political, economic, and compliance risks - Sourcing and manufacturing substantially all products in China exposes the company to risks inherent to that country, including rising labor costs, and a fluid political and legal climate[176][177] - Evolving regulations, particularly the Modernization of Cosmetic Regulation Act of 2022 (MoCRA) in the U.S., could increase costs, require product reformulation, and expand FDA oversight[183][186] - The business is subject to complex and evolving data privacy laws such as the GDPR in Europe and the CCPA/CPRA in California, which impose significant compliance obligations and penalties for non-compliance[198][199][200] - Compliance with anti-corruption laws like the FCPA is critical due to international sourcing and sales operations[205] Legal, Intellectual Property, and Marketing Risks The company faces risks from legal proceedings, product liability claims, intellectual property infringement, and reputational damage from social media marketing - The company could be required to recall products or face product liability claims, which could result in significant costs and reputational harm[213][214] - Protecting intellectual property is vital, but the company may not be successful in asserting trademark protection in all jurisdictions and faces risks of infringement claims from others[216][221] - Heavy reliance on social media platforms like TikTok for marketing exposes the company to risks from platform policy changes, regulatory actions (e.g., potential U.S. ban on TikTok), and negative publicity[224][227] - Use of social media influencers for marketing carries risks, as their behavior could reflect poorly on the brand, and the company has limited control over their communications[229] Unresolved Staff Comments The company reports that it has no unresolved staff comments from the SEC - None[259] Cybersecurity The company has a cybersecurity risk management program overseen by the Board, with no past material threats identified, but acknowledges future risks - The company has a cybersecurity risk management program guided by frameworks from NIST and COSO to identify, assess, and manage cybersecurity risks[260][261] - The Board of Directors oversees the cybersecurity program, with the Chief Digital Officer (CDO) having primary management responsibility[264][266] - The company has not identified any past cybersecurity threats that have materially affected its operations or financial condition[263] Properties The company leases all its properties, including headquarters and offices, and utilizes third-party distribution centers globally, totaling over 500,000 sq ft - All company properties are leased, with the principal executive offices located in Oakland, California[270][272] Leased Property Overview | Use | Total Square Feet | | :--- | :--- | | Commercial Space (Offices) | ~57,018 | | Distribution Centers | ~465,219 | - The company utilizes third-party distribution centers in Ohio, Utah, Georgia, California, New Jersey, England, Germany, and Canada[273] Legal Proceedings The company is not currently involved in any legal proceedings expected to have a material adverse effect on its business or financial condition - The company is not currently involved in any legal proceedings that are expected to have a material adverse effect on its business[274] Mine Safety Disclosures This item is not applicable to the company - Not applicable[275] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities e.l.f. Beauty's common stock trades on the NYSE, has never paid dividends, and significantly outperformed market indices over five years - The company's common stock trades on the NYSE under the symbol 'ELF'[277] - The company has never paid cash dividends and does not plan to in the foreseeable future, as earnings are retained for business expansion[279] 5-Year Stock Performance ($100 Investment on 3/31/2019) | Index | Value as of 3/31/2024 | | :--- | :--- | | e.l.f. Beauty, Inc. (ELF) | $1,849.34 | | S&P 500 Index | $185.38 | | S&P 500 Consumer Discretionary Index | $172.62 | - No shares were repurchased during the fiscal year ended March 31, 2024. A total of $17.1 million remains available for purchase under the authorized Share Repurchase Program[290] Management's Discussion and Analysis of Financial Condition and Results of Operations In fiscal 2024, net sales grew 77% to $1.02 billion, gross margin improved to 71%, and net income more than doubled, supported by the Naturium acquisition Acquisition of Naturium On October 4, 2023, the company acquired Naturium LLC for $333.0 million in cash and stock to expand its brand portfolio - The company acquired Naturium LLC on October 4, 2023, for a total purchase price of $333.0 million, consisting of cash and company common stock[296] Results of Operations Fiscal 2024 net sales increased 77% to $1.02 billion, with net income reaching $127.7 million and gross margin expanding to 71% Consolidated Statements of Operations (Fiscal Years 2022-2024) | (in thousands) | FY 2024 | FY 2023 | FY 2022 | | :--- | :--- | :--- | :--- | | Net sales | $1,023,932 | $578,844 | $392,155 | | Gross profit | $724,096 | $390,396 | $251,732 | | Gross Margin | 71% | 67% | 64% | | Operating income | $149,678 | $68,143 | $29,770 | | Net income | $127,663 | $61,530 | $21,770 | - FY 2024 vs. FY 2023: Net sales increased by $445.1 million (77%), driven by strength in both retailer channels (+$353.5M) and e-commerce (+$91.6M). Gross margin improved from 67% to 71% due to favorable FX, cost savings, and improved transportation costs[312][313] - FY 2023 vs. FY 2022: Net sales increased by $186.6 million (48%), driven by growth in retailer channels (+$158.0M) and e-commerce (+$28.6M). Gross margin improved from 64% to 67%, primarily due to pricing, cost savings, and product mix[319][320] Financial Condition, Liquidity and Capital Resources As of March 31, 2024, the company had $108.2 million in cash, $262.9 million in debt, with operating cash flow of $71.2 million funding investments and acquisitions Cash Flow Summary (FY 2024) | (in thousands) | Amount | | :--- | :--- | | Net cash provided by operating activities | $71,154 | | Net cash used in investing activities | ($284,660) | | Net cash provided by financing activities | $200,945 | - As of March 31, 2024, the company had $108.2 million in cash and cash equivalents and total debt of $262.9 million[326][506] - To fund the Naturium acquisition, the company borrowed an incremental term loan of $115.0 million and drew on its revolving credit facility[135][339][346] Critical Accounting Policies The company's critical accounting policies involve significant judgment in revenue recognition, business combinations, and impairment testing of assets - Revenue Recognition: Involves estimating variable consideration from sales discounts, markdowns, and other allowances based on historical and expected trends[352][353] - Business Combinations: Requires allocating the purchase price of acquisitions to assets and liabilities based on estimated fair values, with any excess recorded as goodwill[354] - Impairment of Long-Lived Assets: Goodwill and intangible assets are tested for impairment annually or when triggering events occur, using qualitative assessments and quantitative comparisons of carrying value to fair value[355][356][359] Quantitative and Qualitative Disclosures About Market Risk The company is exposed to interest rate risk, with a 1% increase impacting annual interest expense by $2.6 million, and foreign exchange risk, particularly with the Chinese Renminbi - A hypothetical 1% increase in interest rates would increase the company's annualized interest expense by approximately $2.6 million as of March 31, 2024[365] - A hypothetical 10% adverse movement in the Chinese Renminbi (RMB) against the US dollar would have adversely affected cost of sales and net income by approximately $32.0 million for fiscal year 2024[367] Financial Statements and Supplementary Data This section presents the company's audited consolidated financial statements for FY2024 and the unqualified audit report from Deloitte & Touche LLP - This section includes the audited consolidated financial statements and the report of the independent registered public accounting firm[368] - The independent auditor, Deloitte & Touche LLP, issued an unqualified opinion on the financial statements and on the effectiveness of internal control over financial reporting[380][416] - The audit of internal control over financial reporting excluded the recently acquired operations of Naturium LLC, which represented 4% of total assets and 5% of total revenues for fiscal 2024[382] Changes in and Disagreements with Accountants on Accounting and Financial Disclosure The company reports no changes in or disagreements with its accountants regarding accounting principles or financial disclosure - None[369] Controls and Procedures Management concluded that disclosure controls and internal control over financial reporting were effective as of March 31, 2024, excluding the Naturium acquisition - Management concluded that disclosure controls and procedures were effective as of March 31, 2024[370] - Management concluded that internal control over financial reporting was effective as of March 31, 2024. The assessment excluded the acquired operations of Naturium[372][373] - There were no changes in internal control over financial reporting during the fourth quarter that materially affected, or are reasonably likely to materially affect, internal controls[376] Other Information No director or officer adopted, terminated, or modified a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement during the fourth quarter - During the three months ended March 31, 2024, no director or officer adopted, terminated, or modified a Rule 10b5-1 trading plan[388] Disclosure Regarding Foreign Jurisdictions That Prevent Inspections This item is not applicable to the company - Not applicable[389] Part III Directors, Executive Officers and Corporate Governance Information regarding directors, executive officers, and corporate governance is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the Definitive Proxy Statement for the 2024 annual meeting of stockholders[392] Executive Compensation Information concerning executive compensation is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the Definitive Proxy Statement for the 2024 annual meeting of stockholders[393] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership by beneficial owners and management is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the Definitive Proxy Statement for the 2024 annual meeting of stockholders[394] Certain Relationships and Related Transactions, and Director Independence Information on related party transactions and director independence is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the Definitive Proxy Statement for the 2024 annual meeting of stockholders[395] Principal Accountant Fees and Services Information detailing fees paid to the principal independent accountant is incorporated by reference from the 2024 Proxy Statement - Information is incorporated by reference from the Definitive Proxy Statement for the 2024 annual meeting of stockholders[396] Part IV Exhibits, Financial Statement Schedules This section lists all documents filed as part of the Annual Report, including financial statements and various exhibits - This section provides an index of all exhibits filed with the Form 10-K, including financial statements, credit agreements, and executive compensation plans[399] Form 10-K Summary This optional item is listed as a heading, but no summary content is provided in this report - No summary is provided under this optional item[403][404]