e.l.f. Beauty Announces Fourth Quarter and Full Year 2018 Results

– Delivered $267 million of net sales –

– Closes e.l.f. stores to focus on national retailers and digital –

OAKLAND, Calif.–(BUSINESS WIRE)–e.l.f. Beauty (NYSE: ELF) today announced results for the three- and
twelve-month periods ended December 31, 2018.

“2018 was a challenging year with net sales of $267 million, down one
percent from last year, driven by headwinds in tracked channels. Despite
this, we improved our overall margin profile and delivered strong
operating cash flow,” said Tarang Amin, e.l.f.’s Chairman and Chief
Executive Officer. “We also made significant progress on initiatives
that we believe will better position e.l.f. in the rapidly evolving mass
beauty landscape. Going forward, we will be laser-focused on reasserting
e.l.f.’s core advantage to delight beauty enthusiasts with
prestige-quality cosmetics and skin care at an extraordinary value. We
intend to do this by driving demand in our brand, focusing on key,
first-to-mass products, getting the right assortment and placement
on-shelf and on-line and generating the cost savings to help pay for
these investments.”

Fiscal year 2018 summary

  • Net sales decreased 1% to $267 million;
  • Gross margin remained consistent at 61%;
  • GAAP net income was $16 million, or $0.32 per diluted share, based on
    a weighted-average share count of 49.3 million shares;
  • Adjusted EBITDA increased 1% to $62 million;
  • Adjusted net income decreased 3% to $35 million;
  • Adjusted EPS decreased 3% to $0.71, based on a weighted-average share
    count of 49.3 million shares;
  • Cash and cash equivalents increased to $51 million from $10 million.

Full year ended December 31, 2018 results

Net sales decreased 1%, or $2.5 million from fiscal 2017, to
$267.4 million, primarily driven by declining trends at select national
retailers and a $4.9 million decrease in sales to discount channel
customers. These impacts were mostly offset by increases in shelf space
and distribution in new accounts.

Gross margin remained consistent at 61% in the fiscal years ended 2018
and 2017, as unfavorable movements in foreign exchange rates were offset
by changes in customer mix and margin accretive innovation.

Selling, general and administrative expenses (“SG&A”) was
$136.6 million, or 51% of net sales, compared to $131.4 million, or 49%
of net sales for fiscal 2017. SG&A included $18.2 million of expenses
that were non-cash or that management does not believe are reflective of
the Company’s ongoing operations. Adjusted SG&A was $118.3 million, or
44% of net sales, compared to $115.6 million, or 43% of net sales in
fiscal 2017.

The provision for income taxes was $2.4 million, or an effective rate of
14%, as compared to a benefit of $11.0 million in fiscal 2017. The
change in the provision for income taxes was primarily driven by a
non-cash tax benefit in fiscal 2017 of $11.6 million related to the
revaluation of deferred tax liabilities as a result of U.S. tax reform.
Additionally, excess tax benefits on stock option exercises and vesting
of restricted stock decreased to $2.0 million in fiscal 2018, as
compared to $7.2 million in fiscal 2017. These changes were partially
offset by a reduction in the U.S. federal statutory rate from 35% to 21%.

On a GAAP basis, net income was $15.5 million, or $0.32 per diluted
share, based on a weighted-average share count of 49.3 million shares.
This compares to net income of $33.5 million, or $0.68 per diluted
share, based on a weighted-average share count of 49.4 million shares in
fiscal 2017. GAAP earnings per diluted share for fiscal 2017 included a
non-cash tax benefit of $11.6 million, or $0.23 per diluted share.

Adjusted EBITDA (EBITDA excluding the items identified in the
reconciliation table below) increased 1% to $62.4 million from
$61.6 million in fiscal 2017.

Adjusted net income (net income excluding the items identified in the
reconciliation table below) decreased to $34.9 million, or $0.71 per
diluted share, based on a weighted-average diluted share count of
49.3 million in fiscal 2018. This compares to adjusted net income of
$36.1 million, or $0.73 per diluted share, based on a weighted-average
diluted share count of 49.4 million in fiscal 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.

Three months ended December 31, 2018 results

Net sales decreased 4%, or $3.0 million from the fourth quarter of 2017,
to $78.6 million, primarily attributable to declining trends at select
national retailers, a decline in holiday program sales and lower
pipeline shipments as compared to the fourth quarter of 2017.

Gross margin increased from 58% to 60% in the fourth quarter of 2018,
primarily as a result of timing of recognition of customer allowances
and lower expense related to the Company’s inventory reserve, partially
offset by unfavorable movements in foreign exchange rates.

SG&A was $33.9 million, or 43% of net sales, compared to $32.6 million,
or 40% of net sales in the fourth quarter of 2017. SG&A included
$4.6 million of expenses that were non-cash or that management does not
believe are reflective of the Company’s ongoing operations. Adjusted
SG&A, excluding these expenses, was $29.3 million, or 37% of net sales,
compared to $28.3 million, or 35% of net sales in the fourth quarter of
2017.

The provision for income taxes was $1.0 million in the fourth quarter of
2018, or an effective rate of 9%, as compared to a benefit of
$9.0 million in the fourth quarter of 2017. The change in the provision
for income taxes was primarily driven by a non-cash tax benefit in
fiscal 2017 of $11.6 million related to the revaluation of deferred tax
liabilities as a result of U.S. tax reform.

On a GAAP basis, net income was $9.7 million, or $0.20 per diluted
share, based on a weighted-average share count of 49.2 million shares.
This compares to net income of $21.5 million, or $0.44 per diluted
share, based on a weighted-average share count of 49.2 million shares in
the fourth quarter of 2017. GAAP earnings per diluted share for the
fourth quarter of 2017 includes a non-cash tax benefit of $11.6 million,
or $0.23 per diluted share.

Adjusted EBITDA decreased 1% to $22.4 million from $22.7 million in the
fourth quarter of 2017.

Adjusted net income increased to $14.6 million, or $0.30 per diluted
share, based on a weighted-average diluted share count of 49.2 million
in the fourth quarter of 2018. This compares to adjusted net income of
$13.7 million, or $0.28 per diluted share, based on a weighted-average
diluted share count of 49.2 million in the fourth 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.

Balance sheet

As of December 31, 2018, the Company had $51.2 million in cash and cash
equivalents, as compared to $10.1 million as of December 31, 2017, due
to disciplined working capital management. Notably, inventory as of
December 31, 2018 totaled $46.3 million, compared to $62.7 million as of
December 31, 2017. As of December 31, 2018, long-term debt totaled
$140.5 million, as compared to $147.7 million as of December 31, 2017.

Executive transition

John Bailey, the Company’s President and Chief Financial Officer will be
stepping down from his role at the Company effective March 31, 2019. The
Company is working with a national search firm to hire a new CFO. Mr.
Bailey’s responsibilities as President will be absorbed by Mr. Amin and
members of the executive team.

“John has been a terrific strategic partner to me and the entire
executive team from inception through the IPO and to this stage in the
Company’s journey. I thank him for his service and wish him the very
best as he returns to the investment world,” said Mr. Amin.

“While it is a bittersweet decision to be leaving e.l.f., as the brand
transitions, I am comforted by the strong talent that exists in and
continues to be added to the Company,” said Mr. Bailey.

Exiting e.l.f. retail stores

The Company is closing its 22 e.l.f. stores, which contributed 5% of net
sales in 2018, to enable a reallocation of investment against the e.l.f.
brand and prioritization of national retailer and digital channels. The
Company currently expects to incur one-time accounting charges
associated with the closing of e.l.f. retail stores of approximately
$23.0 to $25.0 million in total, which will be recorded in the
transition period ended March 31, 2019 (the “Transition Period”). The
Company expects the cash outlay associated with this charge to be
substantially lower. Approximately $16.0 million relates to assets and
liabilities that will be recorded in the Transition Period upon adoption
of a new lease accounting standard. The remaining costs are expected to
include non-cash asset write-offs of approximately $5.0 to $6.0 million,
employee severance payments of approximately $0.5 million and other
costs of approximately $1.5 to $2.5 million.

Fiscal year change and company outlook

As previously disclosed, the Company changed its fiscal year from the
twelve months beginning January 1 and ending December 31 to the twelve
months beginning April 1 and ending March 31. The Company’s largest
national retailer customers, Walmart and Target, reset their cosmetics
shelves annually in February or March. By changing the fiscal year
start, the Company will be better able to assess initial performance of
these resets when setting annual guidance. The Company will file a
transition report on Form 10-QT for the Transition Period. The Company’s
fiscal year 2020 will begin April 1, 2019 and end March 31, 2020.

The Company is providing the following guidance for the Transition
Period, which has been adjusted to exclude the contribution of e.l.f.
retail stores. Guidance for the Transition Period reflects expected
continued declining trends in tracked channels ahead of annual shelf
resets. The Company will provide updates on the impact of shelf resets
when it announces its results for the Transition Period and provides
guidance for fiscal year 2020.

             
 

Three months ended
March 31, 2019 (1)

Net revenue $ 55-58 million
Adjusted EBITDA $ 8-9.5 million
Adjusted net income $ 2-3 million
Adjusted diluted EPS $ 0.04-0.06
Fully diluted shares outstanding 49.3 million
 

______________________

(1) The three months ended March 31, 2018 included net sales
of $3.3 million and four-wall expenses of $3.7 million related to e.l.f.
retail stores. Four-wall expenses include only directly identifiable
costs, which are primarily $0.8 million of product costs and $3.0
million of rent and occupancy expenses and store employee salaries.
Other indirect shared costs such as corporate overhead, depreciation and
corporate employee salaries have not historically been allocated to the
e.l.f. retail stores business for internal reporting purposes and have
not been adjusted from the amounts cited above.

The three months ended March 31, 2018 also included approximately $3
million of national retailer pipeline.

Fourth quarter and full year 2018 conference call

The Company will hold a conference call today, February 26, 2019, at
4:30 p.m. ET to discuss the Company’s fourth quarter and fiscal year
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 February 26, 2019, until 11:59 p.m. ET
on March 5, 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 13687376.

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. 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 “Fiscal year change and 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 the Transition Period under
“Fiscal year change and company outlook” above and those statements
related to the Company’s belief that significant progress on initiatives
will better position the Company in the rapidly evolving mass beauty
landscape; the Company’s expectations regarding the Company’s increased
focus on reasserting its core advantage and the methods to achieve such
results; the Company’s change in its fiscal year end and the Company’s
expectation that it will be better able to assess initial performance of
shelf resets at Walmart and Target when setting annual guidance; the
e.l.f. retail store closings (including the Company’s expectations
regarding the charges and costs associated with the e.l.f. retail store
closings, and the Company’s expectations regarding the period in which
such charges and costs will be recorded); and Mr. Bailey’s resignation.
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 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
Consolidated statements of operations and comprehensive income

(in thousands, except share and per share data)

 
Three months ended December 31, Twelve months ended December 31,
2018   2017 2018   2017

(unaudited)

Net sales $ 78,571 $ 81,593 $ 267,435 $ 269,888
Cost of sales 31,652   33,899   104,694   105,163  
Gross profit 46,919 47,694 162,741 164,725
Selling, general and administrative expenses 33,898   32,603   136,579   131,446  
Operating income 13,021 15,091 26,162 33,279
Other income (expense), net (371 ) (613 ) (390 ) (2,035 )
Interest expense, net (1,963 ) (1,970 ) (7,816 ) (8,775 )
Income before provision for income taxes 10,687 12,508 17,956 22,469
Income tax benefit (provision) (1,015 ) 8,972   (2,431 ) 11,006  
Net income $ 9,672   $ 21,480   $ 15,525   $ 33,475  
Comprehensive income $ 9,672   $ 21,480   $ 15,525   $ 33,475  
Net income per share:
Basic $ 0.20 $ 0.47 $ 0.33 $ 0.74
Diluted $ 0.20 $ 0.44 $ 0.32 $ 0.68
Weighted average shares outstanding:
Basic 47,477,597 46,028,739 46,828,798 45,358,452
Diluted 49,211,311 49,201,766 49,268,616 49,374,758
 
   
e.l.f. Beauty, Inc. and subsidiaries
Consolidated balance sheets

(in thousands, except share and per share data)

 
December 31, 2018 December 31, 2017
Assets
Current assets:
Cash and cash equivalents $ 51,205 $ 10,059
Accounts receivable, net 36,724 44,634
Inventory, net 46,341 62,679
Prepaid expenses and other current assets 7,473   6,272  
Total current assets 141,743 123,644
Property and equipment, net 21,804 18,037
Intangible assets, net 98,773 105,882
Goodwill 157,264 157,264
Investments 2,875 2,875
Other assets 13,397   9,542  
Total assets $ 435,856   $ 417,244  
 
Liabilities and stockholders’ equity
Current liabilities:
Current portion of long-term debt and capital lease obligations $ 9,861 $ 8,646
Accounts payable 20,483 26,776
Accrued expenses and other current liabilities 12,671   15,939  
Total current liabilities 43,015 51,361
Long-term debt and capital lease obligations 140,523 147,702
Deferred tax liabilities 20,217 21,341
Other long-term liabilities 2,770   2,977  
Total liabilities 206,525 223,381
 
Commitments and contingencies
 
Stockholders’ equity:

Common stock, par value of $0.01 per share; 250,000,000 shares
authorized as of
December 31, 2018 and December 31, 2017;
48,715,276 and 46,617,830 shares
issued and outstanding as of
December 31, 2018 and December 31, 2017, respectively

478 463
Additional paid-in capital 740,354 720,372
Accumulated deficit (511,501 ) (526,972 )
Total stockholders’ equity 229,331   193,863  
Total liabilities and stockholders’ equity $ 435,856   $ 417,244  
 
 
e.l.f. Beauty, Inc. and subsidiaries
Consolidated statements of cash flows

(in thousands)

 
Twelve months ended December 31,
2018   2017
Cash flows from operating activities:
Net income $ 15,525 $ 33,475

Adjustments to reconcile net income to net cash provided by
operating activities:

Depreciation and amortization 17,861 14,521
Stock-based compensation expense 16,821 13,474
Amortization of debt issuance costs and discount on debt 792 810
Deferred income taxes (939 ) (13,434 )
Other, net 476 1,728
Changes in operating assets and liabilities:
Accounts receivable 7,649 (8,001 )
Inventories 16,338 6,718
Prepaid expenses and other assets (8,484 ) (11,200 )
Accounts payable and accrued expenses (10,251 ) (25,483 )
Other liabilities (206 ) (230 )
Net cash provided by operating activities 55,582 12,378
 
Cash flows from investing activities:
Purchase of property and equipment (8,872 ) (7,544 )
Investment in equity securities   (2,875 )
Net cash used in investing activities (8,872 ) (10,419 )
 
Cash flows from financing activities:
Proceeds from revolving line of credit 2,000 25,900
Repayment of revolving line of credit (2,000 ) (25,900 )
Repayment of long-term debt (8,250 ) (8,250 )
Debt issuance costs paid (519 )
Cash received from issuance of common stock 3,176 1,978
Other, net (490 ) (404 )
Net cash used in financing activities (5,564 ) (7,195 )
 
Net increase (decrease) in cash and cash equivalents 41,146 (5,236 )
Cash and cash equivalents – beginning of period 10,059   15,295  
Cash and cash equivalents – end of period $ 51,205   $ 10,059  
 
                 
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 December 31, Twelve months ended December 31,
2018   2017 2018   2017
Gross profit $ 46,919 $ 47,694 $ 162,741 $ 164,725
Costs related to Project Unicorn (a) 180     485    
Adjusted gross profit $ 47,099   $ 47,694   $ 163,226   $ 164,725  
 
Gross margin 60 % 58 % 61 % 61 %
Adjusted gross margin 60 % 58 % 61 % 61 %
 

(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 December 31, Twelve months ended December 31,
2018   2017 2018   2017
Net income $ 9,672 $ 21,480 $ 15,525 $ 33,475
Interest expense, net 1,963 1,970 7,816 8,775
Income tax (benefit) provision 1,015 (8,972 ) 2,431 (11,006 )
Depreciation and amortization 4,956   3,845   17,861   14,521  
EBITDA $ 17,606 $ 18,323 $ 43,633 $ 45,765
Costs related to “restructuring” of operations (a) 109 131
Stock-based compensation 4,357 3,754 16,821 13,474
Pre-opening costs (b) 148 42 310
Other non-cash and non-recurring costs (c) 394   320   1,856   1,909  
Adjusted EBITDA $ 22,357   $ 22,654   $ 62,352   $ 61,589  
 

(a) Represents costs associated with the restructuring of the Company’s
operations.
(b) Represents costs associated with e.

Contacts

Investor Relations:
Investors:
Willa McManmon, Ellipsis
(646)
776-0886

Media:
Alecia Pulman, ICR, Inc.
(203) 682-8200

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