e.l.f. Beauty (ELF) Q3 2025 Earnings Call Transcript

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e.l.f. Beauty (NYSE: ELF)
Q3 2025 Earnings Call
Feb 06, 2025, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

KC Katten -- Vice President, Corporate Development and Investor Relations

Thank you for joining us today to discuss e.l.f. Beauty's third quarter fiscal '25 results. I'm KC Katten, vice president of corporate development and investor relations. With me today are Tarang Amin, chairman and chief executive officer; and Mandy Fields, senior vice president and chief financial officer.

We encourage you to tune into our webcast presentation for the best viewing experience, which you can access on our website at investor.elfbeauty.com. Since many of our remarks today contain forward-looking statements, please refer to our earnings release and reports filed with the SEC, where you'll find factors that could cause actual results to differ materially from these forward-looking statements. In addition, the company's presentation today includes information presented on a non-GAAP basis. Our earnings release contains reconciliations of the differences between the non-GAAP presentation and the most directly comparable GAAP measure.

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With that, let me turn the webcast over to Tarang.

Tarang P. Amin -- Chairman and Chief Executive Officer

Thank you, KC, and good afternoon, everyone. Today, we will discuss the drivers of our third quarter results and our updated outlook for fiscal '25. In Q3, we delivered another quarter of consistent category-leading growth. We grew net sales 31%, delivered $69 million in adjusted EBITDA and increased our U.S.

market share by 220 basis points. Q3 marked our 24th consecutive quarter of both net sales growth and market share gains, putting e.l.f. Beauty in a rarefied group of high-growth companies. We're one of only six public consumer companies out of 546 that has grown for 24 straight quarters and averaged at least 20% sales growth per quarter.

e.l.f. is the only brand of the nearly 1,000 cosmetics brands tracked by Nielsen to gain share for 24 consecutive quarters. Our fiscal 2025 year-to-date results have been exceptional with our team delivering 40% net sales growth. We remain confident in our strategy, ability to take market share and capitalize on the white space ahead of us.

At the same time, our consumption trends to start calendar 2025 have been softer than we expected. We see three factors: First, the category continued to decline in January. We believe this decline is reflective of consumer stocking up in a highly promotional December and lower social conversation around beauty. Consumer mindshare is focused elsewhere, including wildfires in L.A.

and uncertainty around the TikTok platform. Second, in Q4, we're lapping the global launch of our viral Glow Reviver Lip Oil, which was our biggest launch in calendar 2024. In addition, we had higher shipments in Q4 last year as retailers built inventory ahead of the big game. Third, initial reads for a couple of our new product launches for spring 2025 have started off slower than we expected.

We're still in the early days of marketing activations for these launches and our spring resets. Over the next few weeks, our retailers will add spring innovation to shelf and refresh our shelf sets, including expanded space in Target and Walgreens. These results are still in progress and will not be complete until the end of February. Balancing these factors, we're lowering our net sales outlook for the final quarter of the fiscal year to minus 1% to plus 2%.

Given the dynamics between Q3 and Q4, we do not believe Q4 is indicative of the underlying run rate of our business and we remain confident in our ability to deliver market-leading growth. As updated, our outlook contemplates 14% to 16% net sales growth in the second half of 2025. On top of the 77% growth we delivered in the second half of last year. As we look ahead, we remain focused on four areas with significant runway for growth, digital, color cosmetics, skincare, and international.

Let me update you on our progress in each in Q3. Starting with digital. Founded as a digitally native brand, e.l.f. remains the only top five mass cosmetics brand with our own direct-to-consumer site.

Q3 digital consumption trends were up nearly 30% year over year on top of triple-digit growth in Q3 of last year. Digital channels drove 24% of our consumption in Q3 in line with last year. We're pleased with these results as Q3 was highly promotional across mass beauty. Instead, we held to our approach of delivering outstanding value every day, foregoing promotional activity on elfcosmetics.com during the holidays.

We're seeing continued momentum across our digital and social platforms with strength on Amazon and supported by our ongoing enhancements to our loyalty program and mobile app. Our Beauty Squad loyalty program recently surpassed 5.6 million members, with enrollment consistently growing over 20% year over year. Our mobile app now has over 3 million downloads, making the most downloaded single-brand cosmetics and skincare app in the U.S. and holds a 4.9 rating out of 5.

In color cosmetics, we continue to significantly outperform the category. In Q3, e.l.f. cosmetics grew 16% in tracked channels as compared to a category that was down 5%, increasing our market share by 220 basis points. Nationally, e.l.f.is the No.

1 brand on a unit basis with approximately 14% share and the No. 2 mass brand on a dollar basis with approximately 12% share, more than double the level we had three years ago. We remain focused on the opportunity to double our market share in the coming years. In Target, our longest-standing international retail customer, we're the No.

1 brand with over 20% share, delivering consistent growth over time. In Q3, we grew our cosmetics share at Target by 170 basis points and believe we can fuel further growth with space expansion this spring. We believe we're making great progress on replicating our success at Target with other key retailers. In Q3, we reached the No.

2 brand rank at Walmart for the first time, up from No. 4 a year ago. We're also finding success with newer retailers like Dollar General, where we launched e.l.f.in a subset of doors. Our initial results have exceeded our expectations in this new channel, and we'll continue to expand into additional Dollar General doors this spring.

We share Dollar General's mission to serve the underserved and democratize access to the best of beauty, particularly in rural areas, which have traditionally only been served by legacy brands. We are pleased with our continued retail expansion opportunities unlocked by our focus on driving productivity. e.l.f. remains the most productive cosmetics brand on a dollar per linear foot basis with our largest retail customers globally.

Our 24 consecutive quarters of share gains are a testament to the effectiveness of our productivity model and we believe our continued focus on productivity will aid in further space expansion in the years to come. Looking at Skincare. In just five years, e.l.f. skin has become a top 10 skincare brand in a category dominated by legacy brands built over decades.

For context, the average age of the other top 10 skincare brands is 63 years old. In Q3, e.l.f. skin continued to meaningfully outperform the category and grow market share. As we look ahead, we see significant runway for growth.

e.l.f. skin today holds about a 2% share as compared to the No. 1 brand holding nearly 14% share. With the acquisition of Naturium, we've doubled our skincare penetration to 18% of our retail sales.

We now have two of the fastest-growing mass skincare brands that are distinct yet complementary in their price points, positioning in audiences. The launch of Naturium into Ulta Beauty continues to perform well, and we see further expansion opportunities ahead. Turning to International. Our net sales grew 66% in Q3, fueled by growth in our existing markets, as well as our expansion into new markets.

International drove 20% of our net sales in Q3, up from 15% a year ago. We see significant white space ahead with our global peers having over 70% of their sales outside the U.S. We've seen success with our engagement model across social platforms, driving global consumer demand well before we enter a particular country. Today, e.l.f.

has retail presence in 15 countries with launches over the last year, including Rossmann, Germany; Etos, Netherlands; Douglas, Italy and Sephora, Mexico. We've achieved a top three ranking in each of these new markets we've launched in, reflecting our strength in driving global brand demand. We're also excited to bring our disruptive marketing to new markets using our universal brand superpowers with local cultural relevance. In Germany, e.l.f.

translates to the No. 11. e.l.f. von zehn, the title of our latest campaign means 11 of 10.

A wink in an odd to an obsession in Germany with quality ratings. [Commercial break] In Mexico, we're tapping into the love of telenovelas with Descubre el efecto, discover the e.l.f. effect. This campaign, which is launching over the next few weeks is rooted in e.l.f.'s core value proposition.

The engagement with our global audience and success we're seeing across geographies gives us confidence in the global opportunity we see ahead for our brands. e.l.f. has been one of the few brands able to scale through our five unique areas of advantage. Our passionate team of owners with a performance culture, our value proposition powered by an asset-light supply chain delivering the best combination of quality, cost, and speed.

Our powerhouse innovation delivering premium holy grail products at accessible price points, our disruptive marketing engine, activating millions of consumers around the world and our unique productivity model, bring this to life at retail globally. While other brands may seek to imitate parts of our strategy. It's how each of these areas of advantage reinforce each other that forms our competitive moat. This quarter, I'd like to spotlight our powerhouse innovation and how that's integrated with our disruptive marketing engine to fuel our industry-leading growth.

We have a unique ability to deliver a steady stream of Holy Grails taking inspiration from our community and the best products in prestige and bringing to market an extraordinary value. Our Holy Grail innovation approach is working and driving share gains across segments. In 2024, e.l.f. held 6 of the top 10 new product launches in mass cosmetics, the most of any year, and we held four of the top 10 SKUs across both mass and prestige.

In Q3, our focused innovation strategy drove triple-digit share gain across face, lip and eye makeup. We've more than doubled our share in each of these segments over the last five years and see significant opportunity ahead. As compared to our over 20% share and No. 1 ranking we have in face, we have an 11% share, and a No.

4 ranking in lip, and an 8% share of the No. 4 ranking in eye. With significant white space in these large segments and believe we have the innovation engine to conquest them. We have a track record of building rural product franchises that endure instead of the one-and-done launches.

Many of our product launches for Spring 2025 expand our largest franchises. As one example, we recently launched Power Grip Matte Primer, a mattifying version of our original Power Grip Primer, which continues to be the No. 1 cosmetics SKU in both mass and prestige. We spoke last quarter about better balancing support between innovation and our core franchises.

To that end, in Q3, we created a campaign called eyes, lips, face fandom. [Commercial break] Our spot made its U.S. debut on Thanksgiving Day and continue to have multiple high visibility placements during the playoff season. We saw strong community engagement with 95% positive sentiment, a lift in our site traffic and an increase in Power Grip sales.

Our most recent campaign with Meghan Trainor, a longtime fan of the brand. Spotlights are expanding Halo Glow franchise. We believe our marketing engine is best in class in finding unique ways to entertain and engage our community through the disruptive brand partnerships, sports, music and movies. e.l.f.

is the No. 1 favorite brand among Gen Z and ranks No. 1 in purchases among Millennials and Gen Alpha. Our increased marketing investment has helped to expand our unaided brand awareness from 13% in 2020 to 33% in 2024.

I've been in the consumer space over 30 years and never seen a 20-point jump in unaided awareness in just a few years. As great as that is, the leading U.S. mass cosmetics brand has 55% unaided awareness, giving us confidence in our runway for growth. In summary, we believe our five key areas of advantage will continue to fuel our ability to win in fiscal '25 and beyond.

As we look ahead, we remain confident in our ability to continue to gain share and deliver best-in-class growth in beauty. I'll now turn the call over to Mandy.

Mandy Fields -- Senior Vice President, Chief Financial Officer

Thank you, Tarang. I'll now cover the highlights of our third quarter results and our updated outlook for fiscal '25. Q3 net sales grew 31% year over year on top of 85% growth in Q3 of last year. We experienced growth across international retailers, digital commerce and our national retailers and benefited from pipeline shipping earlier than it did last year.

Our sales growth throughout fiscal '25 has been underpinned by continued category outperformance and market share gains, both in the U.S. and globally. Higher unit volume contributed approximately 30 points to growth in Q3 with mix adding an additional point. Q3 gross margin of 71% was up approximately 40 basis points compared to prior year.

Gross margin benefits were primarily driven by favorable foreign exchange impacts on goods purchased from China, cost savings and inventory adjustments. This was partially offset by mix related to Naturium's wholesale expansion and higher transportation costs. On an adjusted basis, SG&A as a percentage of sales was 54% in Q3, in line with last year. Marketing and digital investment for the quarter was 27% of net sales, in line with our expectations and as compared to 26% last year.

Q3 adjusted EBITDA was $59 million, up 16% versus last year. Adjusted net income was $43 million or $0.74 per diluted share compared to $43 million or $0.74 per diluted share a year ago. Both adjusted EBITDA and net income this quarter were impacted by an unanticipated foreign currency loss of approximately $7 million that was driven by quarter-over-quarter fluctuations between the British pound and U.S. dollar.

Moving to the balance sheet and cash flow. Our balance sheet remains strong, and we believe positions us well to execute our long-term growth plans. We ended the quarter with $74 million in cash on hand compared to a cash balance of approximately $73 million a year ago. Our ending inventory balance was $215 million, in line with our expectations and up from $205 million a year ago.

Our liquidity position remained strong. We ended the quarter with less than one times leverage in terms of net debt to adjusted EBITDA. We expect our cash priorities for the year to remain on investing behind our growth initiatives and supporting strategic extensions. The specific growth initiatives we're focused on this year include investing in our people and infrastructure, our ERP transition to SAP, as well as increased distribution capacity to support strong global consumer demand.

Now let's turn to our updated outlook for fiscal '25. For the full year, we now expect net sales growth of approximately 27% to 28% as compared 28% to 30% previously. Our Q3 net sales growth came in better than expected, largely driven by the timing of pipeline shipments. In Q4, our consumption trends are starting off softer than we expected, driven by the factors Tarang discussed earlier in the call.

As we look to the second half overall, our updated guidance range implies 14% to 16% net sales growth and the backdrop of a challenged mass cosmetics category. And on top of the 77% growth we delivered in the back half of last fiscal year. As we look forward, we remain confident in our ability to deliver share gains in the U.S. and expand our business internationally.

Turning to gross margin. In fiscal '25, we now expect our gross margin to be up approximately 40 basis points year over year as compared to approximately 30 basis points previously. This outlook does not include any impact from the recently announced tariffs at an incremental 10% on goods imported from China. As a reminder, tariff hikes will not impact our fiscal year results.

We plan to address our response to the incremental tariffs and our fiscal 2026 outlook in May. We believe we have a successful playbook to leverage from 2019, when tariffs move to the 25% level. This included supplier concessions, cost savings and select price increases. We also had FX move in our favor at that time, which further mitigated the impact.

This time around, with our increased supplier diversification outside of China and our growing international sales base, we believe we have multiple levers to address the impacts of these tariffs. We continue to expect marketing and digital investment at approximately 24% to 26% of net sales in fiscal '25 as compared to 25% in fiscal '24. From a cadence standpoint, that implies significant expected leverage in our marketing in Q4 on a year-over-year basis as marketing spend was approximately 34% of net sales in Q4 last year. Turning now to adjusted EBITDA.

For the year, we now expect adjusted EBITDA between $289 million to $293 million as compared to $304 million to $308 million previously. The change is due to the incremental $7 million FX loss that I discussed earlier, as well as our lowered top-line outlook. Our outlook for fiscal '25 now implies adjusted EBITDA growth of approximately 23% to 25% on top of the strong 101% growth we delivered in fiscal '24. In summary, our third quarter results underscore our ability to drive category-leading sales growth and market share growth.

We believe we have a winning strategy and are in the early innings of unlocking the full potential for our brands. With that, operator, you may open the call to questions.

Questions & Answers:

Operator

Thank you. We will now begin the question-and-answer session. [Operator instructions] Today's first question comes from Bill Chappell with Truist Securities. Please go ahead.

Bill Chappell -- Analyst

Thanks. Good afternoon. Hey, Mandy. Tarang, maybe just I guess the key question is with the guidance with kind of what you saw in January, just trying to understand how long you see this lasting? I think, if you walk through the different aspects like the tougher comp on the lip oil was kind of understood going into it.

So, it's the other two areas we're just trying to understand in terms of will the comps get better as we move to February, March, April? Do you think this is part of a longer slowdown? Just any more color, Tarang, on that would be great.

Tarang P. Amin -- Chairman and Chief Executive Officer

Hi, Bill. Why don't I start? I'd say on our approach is to be more cautious or prudent when we see a slow month. And in January, the three factors of the category being down 5%, the lip oil that we're lapping while we knew about it. It is by far our biggest launch in 2024.

And I think one of the things that happened in lip oil is we gave it exclusively to Ulta to start in December. And then it went pretty broad right away in January. So, we're going across a pretty big hill on that. And then a couple of our new items are off to a slower start, and it's still early as we go through.

As we go through each of those elements, starting with the category. I think two things on the category that gives us a bit more confidence going forward. One, we feel the consumers have a little bit a hangover from the highly promotional period in December. While we didn't promote, the industry promoted quite a bit, and you often see a trough right after that promotional area.

Second, in January, social conversation was way down over 20%. We attribute to two things. One, to wildfires in L.A., I don't think brands wanted to be tone deaf during that devastation. And then the uncertainty around TikTok, seen for a while, the only thing people are posting on TikTok is whether it's going to stay open or shut down.

So, we do see those potentially being better as time goes on. As I mentioned, particularly, this is specificity on what happened in the category, what happened with the social commerce. And that in turn also relates to some of the softness we saw initially in some of our spring new items. We count on that social conversation to really light those items virally.

And so, with our marketing activations coming up with resets, when we're able to get that spring innovation on shelf is particularly with the expanded space we have coming at Target and Walgreens. We're hoping for better trends as we go forward, but we just took the more cautious stance and said, OK, let's assume it doesn't get better for a couple of months, and that's why you see us adjust our Q4.

Bill Chappell -- Analyst

Got it. And then maybe just a little more update on how international is trending? Did you go into any new countries this quarter? And are you seeing any of the same in terms of color categories or stuff like that? Any slowdown internationally? Or is it still kind of full steam ahead?

Tarang P. Amin -- Chairman and Chief Executive Officer

We're really pleased with the progress we're making in International. For Q3, we grew our International business 66%. Also from a category standpoint, we're not seeing quite the same level of headwinds internationally. So, I think the category is a little bit better, but more importantly, it's our execution.

As we launched in the back half of last year into Rossmann, Germany, Etos, the Netherlands, even our Douglas, Italy, we've maintained a top three rank in all three of those customers, and we continue to see a tremendous amount of pent-up consumer demand. We're currently in conversations with pretty much every retailer and a retailer out there that does want e.l.f. given our growth profile, the innovation we bring, the consumer profile we bring. So, you'll continue to see us full steam ahead on international.

We continue to hear additional countries that we're going to be expanding into. And so, we feel great about our progress there.

Bill Chappell -- Analyst

Great, thanks for the color.

Operator

Thank you. And our next question today comes from Andrea Teixeira with J.P. Morgan. Please go ahead.

Andrea Teixeira -- Analyst

Thank you, operator, and good afternoon, everyone. I was hoping if you can talk about more detail about the U.S., what is the consumption in the U.S. as you exit the quarter and currently? I mean you did speak about a good amount of how the innovation is coming for the spring season and how it informed you on this guidance? And also, what I think I heard from Mandy that there was some pull forward in this quarter. So, we're just hoping to see what is consumption in the U.S.

and how we should be seeing because, obviously, if you have a 7%-ish at the midpoint, growth in top line, in the fourth quarter, it implies a pretty negative number in the U.S. So, if you're assuming that, obviously, the European and International continues to do well. So, just wanted to see what is embedded in each of the assumption. Thank you.

Tarang P. Amin -- Chairman and Chief Executive Officer

Hi, Andrea. If you take a look at Q3 consumption, we still finished Q3 consumption double digits, I think, about 12% in tracked channels. So, it was pretty strong. In January, we did see that come down.

You saw actually a couple of weeks of negative scanner data so that was a slowdown that I talked about. We're hoping that gets better, but we're basically embedding in our guidance, what if it doesn't get better in the course of the quarter. And then in terms of the pull forward or not, that really relates to our pipeline. We had a much more pipeline go out the door in Q3 than in Q4.

That's a little bit wide, when we really think of kind of what is the growth in the second half. That 14% to 16%, which our new guidance implies in a down category, we feel really good about. We continue to grow share. In fact, January, which was a soft month for us from a consumption standpoint, we still built 90 basis points of share.

We're the only ones growing out of any of the brands in that period. I mean it was pretty modest growth from a consumption standpoint. I think in the track channels is probably up 1%. But that gives you an indication of how much better we're doing than the category.

Andrea Teixeira -- Analyst

And is there any difference between the channels? Or like any kind of like on the ground view besides what you discussed TikTok and all these things that kind of shake everyone's opinion consumer sentiment? Anything you might say regarding newness of the category, it seems like the newness kind of is not as strong, and this is something that the industry needs time to time. Anything you can say as we look forward, that may change that in terms of the newness or the cadence of your execution on the trade?

Tarang P. Amin -- Chairman and Chief Executive Officer

So, what I'd say on our newness is we still feel good about our spring new items. We saw softness in January, some of it related to less social conversations that I mentioned, it's still early. Part of what we're doing about it is we always have marketing activations against our new items. And so, you're going to see those marketing activations hit.

The other thing that helps with newness is when we're able to get them on the spring recess. The spring recess will not be complete until end of February, but that always helps our new items as well. And then I'd say between channels, for us, going back to Q3, we saw strength across pretty much most of our channels. We were a little worried about Ulta given they had, the lip oils exclusively during that period, and I actually was pleased with how we were able to comp that massive amount of lip oil in Ulta in that month.

As we get into January, as I look across the retailers in our digital business in January, we continue to see Amazon do extremely well. Walmart is off to a pretty good start in terms of their comps. We have a little bit of softness in Ulta and Target as we take a look. But again, that's before we often see that before resets, particularly at Target, where we shut off a number of items as we get ready for the space expansion that we see.

So, no warning signs as I look across the retailers from a macro is what we're pinning that guidance on.

Andrea Teixeira -- Analyst

Thank you. I'll pass it on.

Operator

Thank you. And our next question comes from Dara Mohsenian with Morgan Stanley. Please go ahead.

Dara Mohsenian -- Analyst

Hey, good afternoon, guys. The detail you gave us around the drivers of the January softness was helpful. Can you just spend a little more time on maybe how you plan to adjust your strategies here or tweak your efforts in light of a new environment? You just mentioned with some of the innovation, the marketing activations, etc., and the plans there, but maybe a bit more detail on tweaks across the portfolio. And also from a marketing perspective, just as you think about the level of spend necessary for the business and how you manage that in a softer industry environment that would be helpful.

Thanks.

Tarang P. Amin -- Chairman and Chief Executive Officer

So, I'll start with for this quarter, as I mentioned, the key to our innovation is really the marketing activations we do against that. We feel social conversation will normalize as we go forward in the quarter now that the wildfire is over, some of the TikTok kind of uncertainties gone back and forth. So, we definitely are starting to see a little bit of a pickup in the social conversations, which will also help with our newness, the activations. And then the resets, we have really good resets coming across customers as we've seen those plans and what's going to roll out.

That will help along those lines. In terms of our marketing strategy standpoint, I would say there's not a big shift last quarter or a quarter before we talked about better balancing support behind our new items, as well as our core franchises and that spot that we shared on our webcast, the eyes, lips, face fandom we saw it have an immediate impact on our Power Grip business. We ran it in Thanksgiving throughout the playoffs. And so, we're going to keep that balanced team, I'd call it, our core franchises and our new items.

One of the other things I like about a lot of our new items this season is they are on our core franchises. So, if I look at Power Grip Matte, that builds on our Power Grip franchise, Power Grip original is the No. 1 SKU across mass and prestige. Halo Glow, powder builds on our Halo Glow franchise.

We didn't show the spot with Meghan Trainor, but we've got good creative on each of those core new items, which also we believe will benefit the core franchise. We debated whether we spend more money. But what we decided is in the face of kind of the consumer macro, where consumers are a little bit more cautious. We didn't think it made sense necessarily to invest more money behind that.

We feel good about the ROIs we're currently achieving. And we'll continue to disrupt. I mean I think you'll see some news tomorrow, other things that we're doing to continue to get attention on e.l.f.

Dara Mohsenian -- Analyst

Great. Thanks, guys.

Operator

Thank you. And our next question today comes from Ashley Helgans with Jefferies. Please go ahead.

Ashley Helgans -- Jefferies -- Analyst

Hi, thanks for taking our question. So, Tarang, you gave some good color on the slowdown in January in mass beauty. But if we look back at kind of the mass cosmetics industry over the last six months, I mean it's definitely slowed. You guys have been outperforming.

But maybe any more color on just what's going on with that mass cosmetics consumer, if we look back a little further? Thanks.

Tarang P. Amin -- Chairman and Chief Executive Officer

So, if I look back on the mass cosmetics industry over the last six months, I'd say there's two primary factors that I would say results in a weaker category. One, there was a lot of consumer uncertainty. We saw that across a number of consumer categories, whether it was the uncertainty leading up to the elections, a little bit of the post. I think there's still worries out there in terms of what's going to happen with inflation, what's the state of the economy.

So, that definitely did weigh on the mass category. I would say the second thing is sometimes we felt like we're the only ones going in the right direction in terms of the level of our marketing spend, level of engagement, our innovation. And so, we definitely look for more of that to see kind of a rebound in the category. The last thing I would say, if you go back actually quite a long period, there have been cycles, where the mass category has been soft.

Each one of those cycles, we've seen it come back at a pretty strong level. I'll go all the way back to -- back in 2016 to 2017, we saw a very strong category, soft period in 2018. Obviously, the pandemic was really soft, so it come back really strong. So, I still remain bullish on the category longer term.

But I do think there is a macro on the consumer right now that is weighing on the category. And again, our approach to the last question from Dara, I should have said there are no huge shifts in our approach. And there's a reason we've delivered 24 consecutive quarters of net sales growth averaging over 20%. Our strategy is working.

The tweaks we're making are really in response to what we're seeing in the marketplace, that balance between core franchises and our new items, really making sure that we're activating those properly and having the right visual merchandising on shelf to bring them to life, we feel confident with that approach even in a challenged category.

Ashley Helgans -- Jefferies -- Analyst

OK, thanks so much.

Operator

Thank you. And our next question today comes from Olivia Tong with Raymond James. Please go ahead.

Olivia Tong -- Analyst

Great, thanks. Good afternoon. I wanted to talk a little bit more about Q4, recognizing, of course, the distractions that you talked about in the last several weeks. But you've typically outperformed what scanner shows, whether because of e-commerce or international.

So, why isn't that the case this quarter? And what's your view on that? And then, of course, realizing you're not immune when categories slow down. But can you talk about your ability to capitalize on consumer trade down, perhaps some greater focus on the value messaging? Thank you.

Mandy Fields -- Senior Vice President, Chief Financial Officer

Hi, Olivia. Thank you so much for the question. So, Q4, overall, we feel great about because we are looking at our second half overall, 14% to 16% growth is what we're looking at for the second half. And again, some of those pipeline shipments pulled up into Q3.

So, I think you got to look at the second half overall. And when you talk about outperformance of scanner trends, we do still have business on digital and internationally that is stronger outside of those U.S. scanner trends that you're seeing. And so, this is why we're looking at our second half overall at the 14% to 16%, and we're feeling pretty good about that.

Tarang P. Amin -- Chairman and Chief Executive Officer

And just to add to that, I mentioned earlier, we're just taking a more cautionary stands given the consumer macro and the softer start to January, I think our approach has always been a great deal of transparency with our investors, where we don't get ahead of ourselves. If we see something, we'll call it out. And hopefully, it's a little better than that, it is in our track record over time. And then in terms of how we capitalize in this current environment, we see it as a great opportunity to continue to build share.

As I mentioned, even in January, which was a weak month for us, we've still built 90 basis points of share, the most share anybody built. So, that's how we're going to continue to capitalize. And as you mentioned, we have an incredible value proposition, prestige quality, incredible prices. You're going to see us continue to shine a light on that, particularly some of our lower-priced items that are available for those, who are really worried about kind of the overall economy.

We have a great assortment on those, and you'll see more messaging on that, as well as an opportunity to continue to build share.

Olivia Tong -- Analyst

Thank you.

Operator

Thank you. And our next question comes from Patty Kanada with Goldman Sachs. Please go ahead.

Patty Kanada -- Goldman Sachs -- Analyst

Hi, thank you for the question. Just one on Amazon and digital. In terms of your digital channels, could you maybe talk more about the momentum you're seeing online and specifically with Amazon. And I guess, one, maybe some detail on what that partnership has brought to you, for example, bringing in new consumers or reaching new demographics? And then two, how do you think about cannibalization risk? Is this something you're seeing relative to your in-store presence? Thanks.

Tarang P. Amin -- Chairman and Chief Executive Officer

So, I would say our digital business is strong in the quarter, Q3. Our digital business overall was up 30%, Amazon's growth rate was even higher than that. We've continued to see really strong results with Amazon. The role Amazon plays is a great deal of discovery happens on Amazon.

A great deal of search happens on Amazon. Obviously, those consumers who want the convenience of the speed of being able to get their product. So, we see a long growth trajectory ahead with Amazon. That partnership is extremely strong.

We're one of their top-performing brands on the entire platform, and we continue the opportunity not only in the U.S., but also internationally as we started expanding in Amazon and other markets, the U.K., Germany, Italy, and a number of other markets. We see that being one of our key customers. And then in terms of new consumer profile, we definitely see that on Amazon, as I talked about discovery and search capability that they have or strength they have there. And then cannibalization, there is some cannibalization, I think, with some of our retail customers.

But because of our model in terms of being agnostic in terms of where consumer buys the way we've done our terms, where kind of our net margins are pretty comparable across customers. We have always taken the stance that we want to make the best of beauty accessible to every consumer wherever they want to shop. And so, if there is some cannibalization on Amazon, we do think net it's additive to our overall portfolio just given the strength, and we love having consumers have that choice of where they get their product.

Patty Kanada -- Goldman Sachs -- Analyst

Great.

Operator

Thank you. And our next question comes from Korinne Wolfmeyer with Piper Sandler. Please go ahead.

Korinne Wolfmeyer -- Analyst

Hey, good afternoon. Thanks for the question. My first one is a quick one. I just wanted to see, if there's any way to quantify the kind of the pipe spill that happened in Q3 to help us better understand how much of a lift that's provided.

And then can you give us any more color on how you're expecting international to trend for fiscal Q4? I mean you typically say that international outperforms as we've seen in the numbers, it's been doing exceptionally well. The guidance does imply a pretty meaningful slowdown versus what we've been seeing. So, maybe you could help us understand the puts and takes there of why you're anticipating such a slowdown for the quarter.

Mandy Fields -- Senior Vice President, Chief Financial Officer

So, for the pipeline deal, we have not quantified that, but we did have much more pipeline go out in Q3 than we did in Q3 of last year. That's why, again, we're really looking at the second half on a whole because that helps to kind of make that story whole.

Tarang P. Amin -- Chairman and Chief Executive Officer

And then on international, we continue to see momentum on international. What I'd tell you in Q4 in international is we had a pipeline go out in a number of our launches, as I think of Etos in the Netherlands, I can't remember, which other countries might have been Douglas, but we had some more there. So, the overall run rate in the absence of kind of launching a new retailer in the quarter will come down a little bit, but it's not something we're worried about. A lot of that has to do with the cadence of our launches.

The overall growth rate within our existing markets continues to be pretty strong.

Korinne Wolfmeyer -- Analyst

Great. Thank you. And then if I could just touch quickly on the gross margin. I think with the expansion in Naturium and wholesale, the margin is coming down a little bit.

How should we be thinking about the proper run rate for gross margin going forward with more wholesale for Naturium? Thanks.

Mandy Fields -- Senior Vice President, Chief Financial Officer

Yeah. So, we're really pleased with what we're seeing on Naturium and our ability to expand distribution on the brand overall. From a gross margin standpoint, this is something that we had planned for. And as you can see in our raised gross margin guidance, actually, we're taking our gross margin up from 30 basis points previously to 40 basis points in our outlook on the year.

And so, still see strength from a gross margin standpoint, even with Naturium's mix.

Korinne Wolfmeyer -- Analyst

Thank you.

Operator

Thank you. And our next question comes from Peter Grom from UBS. Please go ahead.

Peter Grom -- Analyst

Thanks, operator. Good afternoon, hope you're doing well. So, Tarang you mentioned that you don't think the 4Q run rate is indicative of the growth profile of this business. And I know it will be a few months before we get fiscal '26 guidance.

But I would love some perspective on what you think is a reasonable run rate for growth just given what you're seeing today? And then maybe within that, totally understand wanting to keep a conservative outlook, in the near term, just given the many moving pieces, but should a weaker category environment persist like, how are you thinking about your market share performance? Still solid 90 basis points in January, but it is a bit of a step down versus the 220 basis points you referenced for 3Q. So, just a little curious, if you kind of see that market share trend improving from here?

Tarang P. Amin -- Chairman and Chief Executive Officer

Hi, Peter, I would say in terms of the run rate, probably going to have to wait until May for us to give the guidance for FY '26 for us to kind of tell you what that run rate is, I'll tell you somewhere between what we have in Q4 and what we had in Q3 is run rate. So, it doesn't give you that much color other than Q4, we see this as an anomaly. And otherwise, it's been a highly consistent growth. Also, the fact that we're lapping, if I look at that 14% to 16% growth we have in the back half, I think we're lapping 77% growth the year before.

So, on a two-year basis, it's still really great. The other thing that gives me confidence on why the run rate will be much better than Q4 is a significant white space we still have. I mean not only No. 1 in units and No.

2 in dollars in the U.S. a clear line of sight to clear market leadership in color cosmetics. We continue to pick up share in both e.l.f. skin and Naturium, see very strong growth rates there.

I just talked about digital and international. So, we have quite a bit of white space that gives me greater confidence in terms of our ability to kind of sustain category-leading growth. In terms of market share. I actually was pleasantly surprised that we built 90 basis points of share in probably our weakest month that we've seen in January, which just tells you the strength we have.

So, we're highly confident of our ability to continue to build market share. For perspective, if I look at Target, we have over 20% share at target versus closer to a 12% share nationally with other customers, we're seeing great progress across other retail customers. We saw great progress even at Target. We grew 170 basis points of share in Target even with a strong share position.

So, Target's not standing still. I'm particularly pleased that we went from the No. 4 position to the No. 2 position at Walmart.

And again, really strong growth there. We continue to pick up ranking in our other customers. So, I look at the bogey from a market share standpoint long term is I don't understand -- I mean, we haven't told you that time frame, but I don't understand why we wouldn't be able to get to the types of shares. As we have at Target at other retail customers over time.

Skincare is even a bigger opportunity. I think we're sitting on a 2% share in skincare on e.l.f. skin market. We just got 14%, we have a long way to go there.

The cadence of that share growth will vary part of what are you lapping? I think what sometimes investors miss is just how much share we've grown on top of very strong share growth rates. So, you'll see that bounce around a little bit, but we're still very confident in terms of being able to lead the category and our share growth.

Peter Grom -- Analyst

That was super helpful. And then maybe if I could just squeeze one in for you. Just the fourth quarter implied guidance, it seems to imply a lot of SG&A leverage. So, can you maybe just unpack how much of that is the marketing and digital versus maybe other buckets within SG&A?

Mandy Fields -- Senior Vice President, Chief Financial Officer

So, Q4, does imply leverage in our SG&A. And as we talked about, a significant leverage, really, from marketing and digital, which was 34% in Q4 of last year. And as our outlook implies 24% to 26% for the year, which applies to Q4 as well. So, a lot of that leverage is coming from marketing and digital as we have continued to invest behind our people and infrastructure.

Tarang P. Amin -- Chairman and Chief Executive Officer

And importantly, I would say on the SG&A point, we continue to invest in the business, not only in our brands, but we mentioned the investments we're making to get on to SAP later this year, our continued expansion internationally. The investments we've made in our distribution centers to be able to support that growth that we're seeing both in the U.S., as well as globally. So, I feel good about the balance of being able to get leverage, but also continue to be able to invest in the things we're going to need to be able to continue to drive strong growth.

Peter Grom -- Analyst

Thanks so much. I'll pass it on.

Operator

Thank you. And our next question comes from Linda Bolton-Weiser with D.A. Davidson. Please go ahead.

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

Yes, hi. Just on the question of your product launches and innovation. It seems like there is some pretty good innovation in the prestige sector of the market that you could be copying, there's a company out there that has jelly tints. And then in the primers, there's a Cloud Glow product, this is like a foam primer.

So, there's definitely innovation out there. It just seems like maybe a slowdown in terms of your copying. So, maybe you could talk about that. And then talk about also the progress you're making in those categories where your market share is very low, like Foundations, and Mascara.

And maybe you could talk about what progress you're making there?

Tarang P. Amin -- Chairman and Chief Executive Officer

Hi, Linda. So, first of all, I would tell you, we have an incredibly strong innovation pipeline. So, what I talked about was a little bit of a slower start in January on a couple of our items. But if you take a look at our Halo Glow Powder, it has an incredible prestige equivalent.

Power Grip Matte is a unique innovation for us, but overall Power Grip really continues to follow that Holy Grail approach of taking inspiration. From our community the best of prestige, and you'll continue to see that. We have a great cadence of innovation coming for the fall as well, spring of next year, we go out three years. A lot of it comes to what the sequence or cadencing of some of that innovation is.

So, we not only study the market. The one thing I'll probably correct you on is, we never copy a product. It always has our e.l.f. twist.

We always put our e.l.f. twist. I mean the biggest one being able to have that prestige quality with the incredible price points, we have, but we always make a twist within the products. And so, I would say our innovation team does a terrific job of getting inspiration not only from our community with those products from prestige, and you'll continue to see a very strong innovation cadance in a pipeline from us.

Mandy Fields -- Senior Vice President, Chief Financial Officer

Yeah. And I would just add on, Linda, on your question on the progress in some of our what we call Conquest categories. I think lip is a great example of that. A few years ago, even last year, we had maybe a 3%, 4% share in Lips, and we have seen that grown over 800 basis points as we've come into this year.

And so, when we do have those innovations to Tarang's point, it really allows us to continue to pick up share, and we're doing that across lip, mascara, foundation, those Conquest categories. So, we do have a lot to share but have so much potential.

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

OK, thank you very much.

Operator

Thank you. And our next question today comes from Susan Anderson at Canaccord Genuity. Please go ahead.

Susan Anderson -- Canaccord Genuity -- Analyst

Hi, good evening. Thanks for taking my question. I wanted to maybe follow-up on Naturium. I'm not sure if you could give some more color on how that performed in the quarter in terms of the growth rate there.

And then also on the rollout to Ulta, curious if you're seeing new customers or existing customers buy the brand there? And then also, if you have any colors on kind of more space that you could gain in the U.S. and globally. Thanks.

Mandy Fields -- Senior Vice President, Chief Financial Officer

We're very pleased with our performance overall with Naturium, Susan and especially in Q3. They continue to show growth, particularly in Ulta, where we've launched, we continue to see that business build week over week in Ulta. And so, we're very pleased with the expanded distribution and the growth that we're seeing on Naturium. And as a reminder, it has tremendous white space opportunity as well.

Really only two retailers are Target and Ulta, overall physical retail. They do sell on Amazon and have their own dot-com, but really the rest of the world is white space opportunity for them. We're pleased as well with the progress that we've seen in boots. They did launch in a few hundreds of boot skincare doors, top-performing skincare doors, and we continue to see great progress there as well.

So, very excited for the prospects for Naturium as we look forward.

Tarang P. Amin -- Chairman and Chief Executive Officer

Yeah, you'll continue to hear other distribution expansion on Naturium. It's performed extremely well, it's clinically effective, biocompatible skincare, incredible formulations with really great resonance with consumers. So, we're very excited about continuing to build that out.

Susan Anderson -- Canaccord Genuity -- Analyst

OK. Great. And then maybe, if I could just add a follow-up, just in general, on the competitive landscape. I mean it sounds like you guys don't think that other brands are necessarily able to copy kind of your differentiated strategy.

I guess, does it seem like though maybe some of these legacy brands are kind of starting to learn how you guys operate and copy you guys a little bit and in terms of rolling out these dupes and other hot products? And then also, do you feel like there's more new brands coming into the landscape that's making it a little bit more competitive, such as maybe some K-Beauty brands or other smaller pop-up brands? Thanks.

Tarang P. Amin -- Chairman and Chief Executive Officer

So, what I'd tell you is this category has always been competitive. Nielsen alone, I think there's 1,900 cosmetics and skincare brands tracked by Nielsen. The big difference is which ones are you able to scale and very few are able to. I mean I think e.l.f.'s one of only four with more than $850 million retail sales.

But even if you look at who has more than $100 million in retail sales, I think it's only 26. So, you're going to see a lot of brands come and go or sustain at a very small level. From a competitive position, I feel like we're stronger than we've ever been. If you take a look at our unique areas of competitive advantage.

While some people will try to copy elements of this, I mean, often, people will go and try to copy elements of our marketing, but we've already pivoted and moved on and conquest on other platforms by the time they're figuring out the first one, our ability of how we engage and entertain our community, I think, in the last year alone we have 20 unique campaigns as we look at any of our competitors by brand, they are lucky to do one or two. So, it's just a different kind of for freneticism and bubble at which we're operating on those elements. And then probably the most important thing we have not seen anyone come anywhere close to this ability of having prestige quality at the price points we have. That is a unique competitive advantage we have.

And so, even on the dupes as I look at the legacy players, if they're lucky, they might have one or two in a couple of year period, it's nowhere near. I mean, we have basically, I don't know, at least four, five Holy Grails that we just launched. We'll be able to follow that up with more in the fall. So, I feel great from that competitive position.

I think the best indication of that, frankly, is the market share. And we've more than doubled our market share in the last three years shows kind of the momentum on how others have not been able to replicate the success that we have.

Susan Anderson -- Canaccord Genuity -- Analyst

OK, great. Thanks so much. Good luck the rest of the year.

Operator

Thank you, and our next question comes from Anna Lizzul with Bank of America. Please go ahead.

Anna Lizzul -- Analyst

Hi, good afternoon and thank you so much for the question. I just wanted to see, if you could give us more detail on a breakdown maybe by category in the quarter, as well as in January on which parts underperformed versus performed well? I think lip continued to perform well for part of that time frame. And then if you can comment on just skincare outside of color cosmetics, the trends you're seeing there and how e.l.f. skin is performing versus Naturium? Thank you.

Tarang P. Amin -- Chairman and Chief Executive Officer

So, I'll do it in two parts. I'd say, in Q3, we saw pretty broad strength across every one of our segments in color cosmetics, as well as in skincare. And you saw a pretty massive share gains in each one of our core segments. In January, I'd say the strongest subcategory with lip.

We continue to see good momentum in Lip back to this point. I think collection was a little bit more challenged. But again, we don't see anything any indicators for the long term on that. And then skincare continues to grow at a faster clip in January.

But overall, our strategy with the innovation we have, our approach of how we engage consumers is we see an opportunity to continue to grow share across each of our segments and skincare.

Anna Lizzul -- Analyst

Great. Thank you so much.

Operator

Thank you. And our next question comes from Mark Altschwager with Baird. Please go ahead.

Mark Altschwager -- Analyst

Good afternoon. Thank you for taking my question. Does your updated guidance incorporate expectations for retailer destocking? And are any of your major retailer partners talking about this given the softer consumption trends?

Mandy Fields -- Senior Vice President, Chief Financial Officer

Hi, Mark. We have not heard that from our retailers at this point. With e.l.f.'s, even with our consumption being down, we still are the most productive brand that our retailers carry. And so, we typically will see continued orders on our product.

And so, we have just not seen anything like that yet.

Mark Altschwager -- Analyst

Thank you. And then separately, understanding, I don't want to get too specific on your expectations for revenue run rates in fiscal '26. But could you just frame up the level of flexibility there is on the cost structure should this softer demand backdrop persist?

Mandy Fields -- Senior Vice President, Chief Financial Officer

Yes. So, we have as you can see in Q4, our SG&A is leveraging. Again, I talked about that being driven largely by our marketing investment, but as we think about kind of where there is flexibility in our P&L, we certainly have the flexibility to reduce costs on certain areas. We have cost savings programs that we are running with our suppliers every year.

But really, our focus has been on investing behind the business and making sure that we have the people and the infrastructure that we need to capitalize on those white space areas, that Tarang just spoke about. And so, that's really more so of our focus as we move ahead, just really making sure that we continue to make progress against those growth areas in the business.

Mark Altschwager -- Analyst

Thank you.

Operator

Thank you. And this concludes our question-and-answer session. I'd like to turn the conference back over to Tarang Amin for closing remarks.

Tarang P. Amin -- Chairman and Chief Executive Officer

Well, thank you, everyone, for joining us today. I want to close by saying how proud I am of the incredible e.l.f. Beauty team for delivering another quarter of industry-leading results. I want to thank every e.l.f.

and every e.l.f. partner for your passion and dedication to our vision of creating a different kind of beauty company. We look forward to seeing some of you at CAGNY in a few weeks and speaking with you in May. We will discuss our fourth quarter results and FY '26 outlook.

Thank you, and be well.

Operator

[Operator signoff]

Duration: 0 minutes

Call participants:

KC Katten -- Vice President, Corporate Development and Investor Relations

Tarang P. Amin -- Chairman and Chief Executive Officer

Mandy Fields -- Senior Vice President, Chief Financial Officer

Bill Chappell -- Analyst

Tarang Amin -- Chairman and Chief Executive Officer

Andrea Teixeira -- Analyst

Dara Mohsenian -- Analyst

Ashley Helgans -- Jefferies -- Analyst

Olivia Tong -- Analyst

Patty Kanada -- Goldman Sachs -- Analyst

Korinne Wolfmeyer -- Analyst

Peter Grom -- Analyst

Linda Bolton-Weiser -- D.A. Davidson -- Analyst

Susan Anderson -- Canaccord Genuity -- Analyst

Anna Lizzul -- Analyst

Mark Altschwager -- Analyst

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