Thank you for joining us today to discuss e.l.f. Beauty's second quarter fiscal 2021 results. I'm KC Katten, vice president of 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 in to our webcast presentation for the best viewing experience on the content we're presenting, which you can access on our website at investor.elfcosmetics.com.
Please note, after the presentation, there is a separate dial-in for the Q&A session, also noted in the press release. 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.
We refer you to today's press release for a reconciliation of the differences between the non-GAAP presentation and the most directly comparable GAAP measure. With that, let me turn the webcast over to Tarang.
Thank you, KC. Good afternoon, everyone. I hope that you're staying safe and well. Today, I will talk about the fundamental drivers behind our second quarter results, our growth opportunities, and the overall strategic framework for our company. I am so proud of our e.l.f. Beauty team for delivering strong results in the second quarter, as we continue to navigate major category headwinds as a result of COVID-19.
This is our seventh consecutive quarter of net sales growth, with Q2 net sales of $72 million, up 7% versus a year ago. We expanded gross margin to 65%, up approximately 100 basis points versus last year, and delivered Adjusted EBITDA of $14 million, while increasing our investment in marketing and digital. We continue to grow share in the quarter, with 5.5% of the color cosmetics market, up 100 basis points versus a year ago.
We also took important next steps in our transformation to a multi-brand portfolio with the unveiling of Keys Soulcare, our groundbreaking new lifestyle beauty brand with Alicia Keys, and the launch of our recharged Well People plant-powered clean beauty brand. Before Mandy goes into more detail on our results, I want to share the key pillars underpinning our performance and talk about why I'm optimistic about the future of our brand portfolio.
Our strategy is working. We came into this volatile period from a position of strength. Our superpowers that center on our ability to deliver 100% cruelty-free, premium quality beauty products at accessible price points with universal appeal are more important than ever before. The focused work behind our five strategic imperatives has continued to drive our outperformance relative to the category trends.
We believe the strength of our platform gives us the ability to drive even greater value through strategic extensions, like our Keys Soulcare and Well People brands. Let me provide a few highlights from the quarter. Our first strategic imperative is to drive brand demand. We're driving greater brand relevance and expanding our consumer reach. Our press impressions soared over 160% versus the prior year.
In August, e.l.f. was named one of Beauty's Most Powerful Brands in 2020 by Women's Wear Daily. We also increased our rank in Piper Sandler's 40th Semiannual Teen Survey from fourth favorite cosmetics brand amongst teens last year to second this year, reflecting strong appeal with Gen Z. e.l.f.'s social audience continues to grow double digits, reaching over nine million followers to- date across our digital ecosystem.
We're expanding our existing footprint with deeper engagement on key platforms like TikTok, Instagram, YouTube, Snapchat, and Pinterest, while continuing to test and learn on new frontiers. TikTok continues to be a great way for us to galvanize Gen Z and build awareness among other growing cohorts on the platform. The record-breaking viral success of our #eyeslipsface hashtag challenge, coupled with our #elfmagicact hashtag challenge heroing our $8 Poreless Putty Primer, collectively garnered nearly 10 billion views and 6 million user-generated videos.
TikTok is taking note how e.l.f. is changing the game. We're continuing to make history with the release of Eyes Lips Famous, the first-ever TikTok reality show. Alongside other innovative activations, the engagement on our @elfyeah channel continues to outpace top beauty brands, and our products continue to go viral organically on the platform, resulting in sales surges.
Looking across our digital ecosystem, we recently hosted our fifth annual and first-ever fully virtual Beautyscape. This event helps foster ongoing relationships with the influencer community and empowers beauty's rising stars with the opportunity to build a cosmetics and skincare collection that will be sold through a national retailer.
This year's event, called Beautyscape: The Remix, infused the power of makeup and music, featuring three musical artists, including Grammy-nominated global superstar Tove Lo. Even in the new virtual format, we saw participation grow over 90% year-over-year.
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I couldn't talk about our big brand moments without recognizing Kory Marchisotto, chief marketing officer of e.l.f. Beauty and president of Keys Soulcare, who was honored as one of Adweek's 2020 Brand Geniuses, recognizing the principal leaders behind the boldest and most imaginative marketing efforts. Kory is one of 10 brand geniuses, putting e.l.f. in admirable company with leaders from Nike, Walmart, Apple, Verizon, P&G, PepsiCo, and Disney+. Congrats, Kory, and our entire marketing team.
Even with the success of our brand-building activities, we still see a significant opportunity to bring in new consumers. In fact, our latest attitude and usage study shows that there's almost a 30 percentage point gap in our unaided consumer awareness as compared to some of the legacy color cosmetics brands. We're the fastest-growing among the top five color cosmetics brands in the U.S., and we see a lot of runway ahead.
This quarter, we took an important next step in our transformation to a multi-brand portfolio with the unveiling of Keys Soulcare, our groundbreaking new lifestyle beauty brand with Alicia Keys. This is not another celebrity beauty line. We see Keys Soulcare as a brand with long-term potential. Alicia is truly an inspiration to so many, and we believe her passion for bringing light into the world will resonate with a broad set of consumers across the globe.
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The brand has already captured hearts and minds well ahead of our scheduled first product launch on December 3rd, with over 6.5 billion press impressions to- date. The Keys Soulcare community is growing nicely, with Instagram engagement metrics trending well above platform averages. It's clear now, more than ever, the world is craving a brand with soul.
Last month, we also launched the recharge of Well People, our plant-powered clean beauty brand, utilizing learnings from last year's e.l.f. brand recharge. At the core of this recharge is our brand vision, because all people can be Well People, as we strive to make clean beauty accessible. wellpeople.com now reflects the brand's new vision of clean beauty, with much more vibrant colors and messaging, along with updated content that really brings Well People's plant-powered beauty to life.
With a 360-degree marketing plan in place, we aim to broaden consumer awareness for this brand. Our second strategic imperative is a major step up in digital. We continue to execute a digitally led strategy that is benefiting both elfcosmetics.com as well as our retail partner sites. Q2 digital consumption grew nearly triple digits versus year ago, even as major brick-and-mortar locations started to reopen around the globe. elfcosmetics.com, the number one mass cosmetics e-commerce site, powers our digital ecosystem.
We also saw strength on our retailer .coms, and on Amazon in particular, as we launched our new beauty store. Our digital channels expanded to 13% of our total business this quarter, up from 7% a year ago. The number of new consumers acquired in the quarter on elfcosmetics.com was up nearly 60% year- over- year, and we're encouraged by the retention and repeat purchase rates we're seeing.
While the demographics of these new consumers look similar to our existing consumers, we're starting to see some differences. For example, our new consumers over-index on skincare, and a greater percentage of these consumers are signing up for our Beauty Squad loyalty program. Beauty Squad now has 2.1 million members, up almost 40% year-over-year.
Our loyalty members purchase more frequently, have higher order values than our non-loyalty members, and collectively drive almost 70% of our sales on elfcosmetics.com. We're continuing to test and iterate and believe Beauty Squad has even greater potential to drive our business going forward.
Looking at Keys Soulcare, our launch of keysoulcare.com is the start of an exciting journey that aims to transform the way the world engages with beauty. Keys Soulcare shares the soul of beauty with a focus on content, conversation, and community. To this end, we're building a digital community well before consumers see product launch. On September 29th, keysoulcare.com went live with rich editorial and a weekly email newsletter.
The site features original and co-created content, including an inspirational story from Alicia's community of lightworkers, people who collectively use their voices and platforms to spread light and positivity. It's clear that Keys Soulcare community is active, vocal, and passionate about Alicia and the brand, and we're pleased with the strong engagement and open rates we're seeing with our weekly newsletters.
Our third strategic imperative centers on innovation. Across our brand portfolio, we pride ourselves on delivering 100% cruelty-free, premium quality beauty products at accessible price points with universal appeal. With our e.l.f. brand, we saw continued success this quarter in our core segments, brushes, primers, concealers, brows, and sponges, which make up approximately half our track channel sales.
We have the number one or two position in all five segments and continue to drive market share gains in each. Our Camo Concealer and Poreless Putty Primer franchises in particular continue to be sources of strength, supporting ongoing share gains in their respective categories. Looking beyond our core offerings, we're humbled at the recognition our innovation efforts are receiving.
In the highly coveted annual Allure Best of Beauty Awards, e.l.f.'s Liquid Glitter Eyeshadow was highlighted as one of the best beauty steals, and Well People's Expressionist Volumizing Mascara was highlighted as one of the best clean beauty products. In Influenster's Sixth Annual Reviewer's Choice Awards, determined by the products with the most buzz based on millions of Influenster reviews, e.l.f.'s Poreless Putty Primer and Lock On Liner Brow Cream were both recognized amongst the best in makeup.
Skincare remains a major focus in our innovation pipeline, and we're encouraged by the results that we're seeing. Across our business, our skincare consumption continues to outpace our color cosmetics trends, with particularly strong skincare results on elfcosmetics.com. We're continuing to see growth behind e.l.f.'s best-selling Holy Hydration! franchise, both in stores and online, and we're also seeing strong results behind our Cannabis Sativa, Full Spectrum CBD, and The Supers collections. We see a lot of runway in this category.
For perspective, year-to-date skincare represents just 8% of our track channel consumption, but drives nearly 25% of our business on elfcosmetics.com. We have additional e.l.f. skincare launches slated for the balance of this fiscal year that we expect to propel our momentum in the category. We expect our innovation efforts will be shining even brighter in the months to come with the launch of Keys Soulcare.
Our first three products are scheduled to launch online on December 3rd, and will include a signature sage and oat milk candle, and two yet-to-be-revealed skincare products. We're planning on a global skincare collection launch in early 2021 on keysoulcare.com, and with our retail partners, both online and in stores. We have a multi-category, multi-year pipeline of innovation to drive the brand beyond the initial launch.
Our fourth strategic imperative is driving productivity with our national retail partners. We remain focused on our relative performance to key competition. Of the top five color cosmetics brands in the U.S., e.l.f. was the only one to post growth, with our track channel color cosmetics sales up 3% year-over-year as compared to declines of almost 20% or more for each of the remaining brands.
We were also the only brand to grow share in the quarter, with 5.5% of the market, up 100 basis points year-over-year. Project Unicorn, our ongoing initiative to drive productivity with our national retail partners by improving assortment, presentation, and navigation at shelf, continues to impress retailers.
During the quarter, our visual merchandising team developed stunning in-store signage and graphics with some of our largest customers, elevating our skincare collections and highlighting our best-selling products like Poreless Putty Primer, Camo Concealer, and brow pencils. We're also finding innovative ways to translate our success on TikTok to stores. In September, we had an incredibly successful display program at Superdrug stores in the U.K. dedicated to what's trending on TikTok. It featured our most viral and trending products from the platform, and sold out quickly.
Given the strength of our productivity, innovation, and consumer engagement, Walmart and Ulta Beauty expanded shelf space for e.l.f. towards the end of the quarter in a subset of their doors. For context, Target is our most developed and longest-standing national retailer, and our store footprint as of FY 2020 was approximately 11 ft on average.
Our footprint in Walmart and Ulta stores was about half of that. While our fall shelf space expansion helped narrow that gap somewhat, we see plenty of runway ahead. In fact, we're pleased to report that Ulta Beauty plans to expand space even further for the e.l.f. brand in spring 2021. Internationally, where we continue to have a lot of white space, we're also excited to launch in spring 2021 at Shoppers Drug Mart, a leading beauty retailer in Canada.
In early 2021, Keys Soulcare will light up in a much bigger way with the planned global launch of our full skincare collection on keysoulcare.com, and with our retail partners both online and in store. For the U.S. specifically, our exclusive national retail partner is Ulta Beauty. We look forward to sharing much more on our plans with Ulta Beauty closer to launch. What I can say is they share our enthusiasm for the long-term potential of the brand.
In the coming months, we plan to unveil our international distribution partners as well. We're also excited that six of Well People's best-selling SKUs are now featured in all Ulta Beauty stores as part of Ulta's Conscious Beauty program, an initiative to provide consumers greater choices and transparency in clean beauty. Well People was already sold on ulta.com, and this marks the brand's entry in Ulta stores.
Well People continues to raise the standard for high-performance, plant-powered clean beauty. Our fifth strategic imperative is delivering cost savings to help fuel brand investments. Our operations team continues to generate cost savings via lean manufacturing techniques that have contributed to our strong gross margin rates. As just one example, our team's collective cost-saving efforts have driven a 15% reduction in cost per unit for our best-selling Camo Concealer franchise since its initial product launch.
With the integration of Well People into our supply chain now complete, we are also encouraged by the significant cost savings we are seeing. These savings in turn allow us to invest in the Well People brand recharge and sharpen our retail pricing for select products, in line with the brand's vision to make clean beauty accessible.
On the operations front, we did have a systems migration issue at our main distribution center during the latter part of the quarter, which has caused a backlog in customer orders and higher out-of-stocks with some of our key customers. That said, we are confident in our ability to meet customer demand and are already starting to ship at higher rates.
The progress in our five strategic imperatives has been terrific, and we believe we have further opportunity with each. Before I turn the call over to Mandy, let me provide a bit more perspective on the overall strategic framework of the company and our brands. Our company was founded 16 years ago with a mission to make the best of beauty accessible to every eye, lip, and face.
Underpinned by the foundational work behind our five strategic imperatives, the strength of our platform allows us to expand our portfolio with strategic extensions that support our purpose and values. Our shared value system and deep commitment to diversity and inclusion are what connect us and fuel our actions. As we evolve from a single-brand company into a diversified multi-brand portfolio, we strongly believe there's opportunity for significant value creation, leveraging the investments we've made in our world-class team and capabilities.
Each of our brands is positioned to touch diverse consumer cohorts at different price points. e.l.f. Cosmetics is trend-driven beauty at extraordinary value in the mass segment, with average unit retails of approximately $5. Well People is plant-powered clean beauty in the prestige segment, with average unit retails of approximately $20. Keys Soulcare is lifestyle beauty and entry-level prestige, with initial unit retails between $20 and $40.
All three brands are accessible relative to their competitive set. Importantly, all three brands are complementary and incremental to the e.l.f. Beauty platform. Looking ahead, we believe the color cosmetics category will return to growth, given the major role cosmetics play in consumer self-expression.
We remain focused on continuing to grow share regardless of category trends. We were strong entering the pandemic, and with our digital strength, core value proposition, and ability to adapt at elf speed, have continued to fuel our performance in this uncertain economy. With the strength of our more diversified brand portfolio, we believe we are positioned for an even brighter future. I'll now turn the call over to Mandy.
Thank you, Tarang, and thank you all for joining us this afternoon. Today, I'll cover our Q2 financial results and fiscal 2021 guidance. We are quite pleased with our Q2 results. We delivered net sales of $72 million, up 7% from a year ago. This growth was mainly fueled by ongoing strength in e-commerce and international, as well as growth in track channels. We also saw sequential improvement in our performance at Ulta relative to Q1 as stores reopened.
From a cadence standpoint, track channel sales growth moderated through the quarter as expected, as stimulus dollars dried up and we cycled the price increase implemented last year. Gross margin of 65% was up approximately 100 basis points compared to prior year. Similar to the last several quarters, we saw gross margin benefits from margin-accretive product mix and cost savings, a favorable FX impact, and a mix shift to elfcosmetics.com.
These benefits were partially offset by the impact of tariffs and certain costs associated with space expansion. Additionally, our year-over-year gross margin improvement moderated relative to last quarter, as expected, with cycling the price increases we took last year. On an adjusted basis, SG&A as a percentage of sales was 51%, or approximately flat compared to last year at 51%.
Marketing and digital investment for the quarter was approximately 15% of net sales versus 14% a year ago. For the first half, marketing and digital spend as a percentage of sales was 14%, in line with our expectations. Q2 Adjusted EBITDA was $14 million, down 4% to last year, and Adjusted EBITDA margin was approximately 20% of net sales. Adjusted net income was $8 million or $0.16 per diluted share compared to $8 million or $0.15 per diluted share a year ago.
Our liquidity remains strong with the combination of our cash balance and access to our revolving credit facility sitting at over $90 million. For the six months ended September 30th, we generated $3 million in cash flow from operations and reduced our capital expenditures by $3 million versus the prior year. We ended the quarter with $41 million in cash on hand compared to a cash balance of $59 million a year ago.
This was driven by increased investment in inventory to support space expansion and new distribution for spring 2021. We expect our cash priorities for the balance of this year to focus on investing behind our five strategic imperatives, supporting the launch of Keys Soulcare, and our Well People brand recharge. As we mentioned last quarter, we expect $5 million-$7 million in inventory and CapEx investments behind Keys Soulcare and Well People in fiscal 2021.
In addition to certain costs that we are treating as one-time expenses related to integration and brand development. Now let's turn to our outlook for the remainder of fiscal 2021. There are still many uncertainties around the duration and impact of COVID-19, as well as the general economic environment.
However, we believe our visibility is improving. As a result of our strong performance in the first half of the year and confidence in our ability to continue to execute our long-term strategy, we are now providing guidance for fiscal 2021. For the full year fiscal 2021, we expect net sales growth of approximately 5% - 7% versus fiscal 2020. We expect Adjusted EBITDA between $57 million and $60 million, adjusted net income between $31 million and $33 million, and Adjusted EPS of $0.59 - $0.63 per share on a fully diluted basis.
It's important to note that our guidance assumes no significant disruption to our consumers, customers, or supply chain for the remainder of fiscal 2021. Let me provide you with a little more color on our planning assumptions for the remainder of the year. Let's start with the top line. We expect consumer behavior to remain impacted by COVID-19 through the rest of our fiscal year, which will likely continue to pressure both in-store shopping levels and cosmetics category trends.
Specific to track channels, we anticipate Nielsen trends to inflect negative in the coming weeks as we resolve the out-of-stocks Tarang mentioned related to the system migration at our main distribution center. That said, we are confident in our ability to meet customer demand and are already starting to ship at higher rates. Importantly, we expect to deliver top-line growth in the second half as reflected in our guidance.
Let me step you through a few of the building blocks. First, we remain focused on our relative performance to the mass color cosmetics category and are optimistic around our ability to continue to grow share. Second, we expect our second half trends will benefit from the recent space expansion in Walmart and Ulta Beauty, as well as pipeline related to new distribution in spring 2021 with Shoppers Drug Mart in Canada and Ulta Beauty.
Third, we believe our digitally-led strategy will result in strong e-commerce trends throughout the year, although likely moderating from the levels we saw in the first half. Lastly, we anticipate a modest net sales contribution from the launch of Keys Soulcare in fiscal 2021. These top-line drivers will be partially offset by tougher year-over-year comparisons in Q4 as we anniversary the strong 16% net sales growth we saw last year, as well as less incremental merchandising on a year-over-year basis in Target starting in Q4.
Turning now to Adjusted EBITDA. We expect several of our underlying gross margin drivers to remain intact, including margin-accretive product mix and a favorable mix shift to elfcosmetics.com. We continue to focus on reducing expenses where we can while still investing in our long-term growth. That said, we do have two specific factors that will pressure our Adjusted EBITDA margins in the second half relative to the first half.
First, on FX. We purchase almost all of our product in China, in RMB, and favorable FX rates have driven a gross margin benefit of approximately 100 - 200 basis points on average over the last several quarters. Based on current exchange rates, we expect that FX benefit to moderate through the year and will likely inflect to a gross margin headwind starting in Q4. Second, on Keys Soulcare.
As I mentioned, Keys Soulcare is expected to contribute a modest amount to our top line this fiscal year. We expect gross margin for the brand to be relatively neutral to our overall gross margin. In addition, we expect to have an incremental $5 million-$6 million in marketing spend in the second half, which has an outsized impact as we invest ahead of the brand launch. This will take our marketing spend as a percentage of sales up to approximately 14%-16% on a full year basis.
From a cadence standpoint, we expect top line growth to be more weighted to Q3 than Q4, largely due to the timing of our planned distribution expansion as well as much tougher compares as we anniversary the 16% net sales growth we saw in Q4 last year. We expect Adjusted EBITDA margins will be more pressured in Q4 than Q3, given the dynamics we just discussed on the top line, anticipated FX headwinds, and incremental Keys Soulcare marketing spend that is largely concentrated to Q4.
Let me now take a step back to talk about our long-term economic model and why we're optimistic about the future. With fiscal 2021 as the base, as we look out over the next three years, we believe we can achieve compounded annual top line growth in the mid to high single digits from the combination of e.l.f. brand growth and shelf space gains, along with contributions from our strategic extensions, like Keys Soulcare and Well People brands. We anticipate Adjusted EBITDA leverage will be achieved through a mix of top line growth and leverage on COGS and/or SG&A over that three-year horizon.
Our brand portfolio reflects our deep commitment to inclusive, accessible, and cruelty-free beauty. We believe that our digital strength, core value proposition, and ability to adapt at e.l.f. speed will continue to fuel our performance. Importantly, we believe Keys Soulcare and Well People are both distinctive and complementary to our portfolio and allow us to leverage the cost structure we have in place as we scale them up. While there are still many uncertainties in the operating environment in the short term, I am confident in our ability to deliver.
Our performance over the last seven quarters, both on an absolute basis and relative to the category, give us confidence in our ability to continue to execute our long-term strategy. With that, operator, you may open the call to questions. For those who would like to ask a question, please do so through a separate dial-in line noted on this screen. Those not asking questions can hear the question and answer session through the webcast. We will pause a few minutes for those seeking to ask questions to queue up on the dial-in line.
We will now begin the question and answer session. To ask a question you may press star and one on your touch phone. If you're using a speaker phone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. We ask that you please limit yourself to one question so that we can respond to all of you within the time scheduled for this call. At this time, we will pause momentarily to assemble our roster. Our first question comes from Erinn Murphy with Piper Sandler. Please go ahead.
Great. Thanks, good afternoon. My question is around inventory. The balance was up 26%, I believe, at the end of the quarter. Could you just maybe walk through some of the components around how much were shelf space gains, maybe the operational hiccups, excuse me, that you saw in the quarter, and then maybe the build for Keys Soulcare? Where do you expect inventory to be by the end of the third quarter?
Hi, Erinn. Let me first say that we feel great about our inventory levels. If you look at the cash flow statement, March was particularly low as we were managing through the initial onset of COVID. As you look at our inventory today, we've talked about pipeline that is related to space gains. We also talked about the system migration issue that shifted inventory from Q2 into Q3. Also you mentioned space gains picked up within the quarter. All of those things are playing a role into our current inventory balance, and we feel like we're in a much healthier place right now.
Okay. If I could ask a separate question on Keys Soulcare, could you just maybe walk through the broader launch plan as we think about 2021, just given the price point positioning? Is there an opportunity to work with new retailers that maybe you don't work with currently with both Well People and e.l.f.? Just help us think about the cadence as we look to next year. Thank you.
Hi, Erinn. We're really excited about our launch on Keys Soulcare. As you know, the site is already up and running, keysoulcare.com. We led with content, community, and conversation, and the response has been terrific so far in terms of how people are responding to this new beauty lifestyle brand.
In December 3rd, we start our commerce with our first three items, a sage, oat milk, candle, as well as two other skincare products that will go on sale on keysoulcare.com, as well as Ulta Beauty in ulta.com. In early 2021, we'll expand that range to a full line of skincare products, so both online on keysoulcare.com, as well as ulta.com, and then later in Ulta Beauty stores.
We're quite excited about the full range that will be going out the door by the end of this fiscal year, and have plans beyond that to enter other categories and new other products as our normal cadences.
Great.
As well as--
Yeah.
Yeah, thank you. I should have just added, our initial, the only customer that we've disclosed so far is Ulta Beauty, where we'll be exclusively in the U.S. In the coming months, we'll also discuss some of our global retail partners, as this will be a global brand in 2021.
Excellent. Thank you, Tarang and Mandy.
As a reminder, please limit yourself to one question. Our next question will come from Linda Bolton-Weiser with D.A. Davidson. Please go ahead.
Hi. I guess I can do the math on this, if you were to exclude the incremental spending on the Keys Soulcare launch, I think you said it was $5 million-$6 million, would EBITDA be up year-over-year in the second half? Thanks.
Hi, Linda. Yes. As we look at the full year, the $5 million-$6 million we're layering on for Keys Soulcare, if you take that out, we would be $5 million-$6 million higher on the year from an EBITDA standpoint. That would put you ahead of last year, if you look at the guidance range we provided.
Can I just fit in, longer term, you're very committed, I think, to growing your EBITDA faster than your revenue growth as a long-term objective. Is that the case even in years where you may have future launches, or is there an exception in a year when you have a launch?
Linda, the long-term economic model that we've outlined is a three-year model, and it's based on a three-year CAGR. As you look over on a three-year timeframe, we do expect Adjusted EBITDA to outpace net sales growth. That you're really looking at that beginning and ending point for your measurement.
Okay, thanks very much.
Our next question comes from Dara Mohsenian with Morgan Stanley. Please go ahead.
Hey, guys.
Hi.
A couple questions around the Soulcare. Tarang, you sound excited about it. Can you give us some type of thought process for the ultimate size of where that business could be longer term, maybe what the best brand comps are in the marketplace, just as we think about the revenue size of the brand or some type of order of magnitude, or how you think about it relative to your existing business?
Incrementality of that brand relative to your existing business. Just second on the spend you mentioned in the back half of the year, as we look at the spend for that brand going forward, is it more incremental to what you'd typically be spending at the company? Can it be handled more within the existing budget in terms of a reallocation? How do you think about that longer term ahead of obviously some upfront spending in the back half of the year this year? Thanks.
Well, Dara, we are tremendously excited about Keys Soulcare because we are creating something we believe is completely new in the category, a lifestyle beauty brand really aimed at nourishing your soul. Starting with content and then going into product. In terms of the business size, we're building this for the long term. We said it'll have a modest sales contribution this fiscal year. We'll maybe later disclose kind of what size range it would be. We're starting in skincare, so you can usually use comps in terms of other skincare brands as a starting point. It's even beyond skincare because this will go into multiple categories.
I think one of the things that gives us great heart beyond our own excitement for the brand is just how excited Ulta Beauty is. We'll be partnering with them to launch this brand, the level of support they're going to put behind the brand and in terms of what they really believe for the long term.
In terms of spend, we would put the spend in the context of the overall percentage of the company. Each brand that we have between Well People, Keys Soulcare, and e.l.f. Cosmetics really have their own spend levels that we use to support the brand. The overall 14%-16% that Mandy gave is a comfortable level for us right now in terms of being able to support all three brands. Again, we'll update on that as we get into the launch year.
Our next question comes from Stephanie Wissink with Jefferies. Please go ahead.
Thank you. Good afternoon, everyone. Mandy, I have a clarification question on the system migration. It sounds like that was detrimental to your sales growth in the quarter. I'm wondering if you can help us quantify what that holdback might have been. Tarang, for you, just a question following up on Keys Soulcare.
The gross margin structure being net neutral to the company was a bit below what we would see typically for a prestige skincare business. Maybe talk a little bit about the gross margin neutrality. Does that include a royalty or something unique that would benchmark you differently than what we see in the broader marketplace? Thank you.
Hi, Steph. I'll take the first question. I'll pass it to Tarang on Keys Soulcare. On the system migration, we did have shipments shift out of Q2 into Q3. We have not put a dollar amount on that publicly. I will say that it did contribute to the higher inventory levels we did have coming into the quarter and will also be kind of a building block, if you think about it, for how our second half forecast will come together. It's already implied there in the guidance.
Maybe just building to that, the system migration issue was related to our Ontario, California distribution center, which is our largest distribution center. We have a third-party logistics provider that had a long-planned migration in their warehouse management system. It ran into a hiccup. It's one of the reasons we shipped less and why we have some higher out of stocks right now.
The good news is we're already past that issue. We're shipping at much higher rates and quickly catching up in terms of our in-stock positions with our customers. On your second question regarding Keys Soulcare, the product margin is actually higher than the overall e.l.f. average gross margin, but it does include, to get to the gross margin, you do have a royalty in the form of both cash as well as e.l.f. equity.
We like that structure quite a bit because it really ties into our longer term vision for the brand and really aligning our interests with Alicia Keys in terms of what we're building here for the long term, and that's why the overall gross margin's in line with the company.
Thank you.
Our next question comes from Andrea Teixeira with JPMorgan. Please go ahead.
Hi, thank you, and congrats on the numbers. My question is how we should be thinking the second half top line growth, in particular the Q4, in terms of the new distribution. I'm assuming you're still going to get some of that benefit from Walmart and also Ulta. Second, on the clarification on the comments that Mandy, and just now also Tarang, you made on the Keys Soulcare profitability.
Should we be thinking of the $5 million-$6 million marketing launch expenditure to be recurring, and then you're going to build up to that margin, and to get the leverage throughout the fiscal 2021? I'm just thinking of the internal fiscal 2022 through 2024, because you're doing that in your long term algorithm that your margin is going to expand more. I'm just thinking, it will be more gradual. I'm assuming it will depend on the top line re-accelerating. Is that a fair assumption?
Right. Okay. Yes. Andrea, let me start with your first question on the second half top line growth and the assumptions around there. As we talked on our prepared remarks, we, one, do believe that there's going to continue to be volatility within the color cosmetic category, we are confident that we will continue to gain share in the category.
I would say our second half trends will benefit from the space expansion that we've had recently in Walmart and Ulta Beauty. That was in the fall. Additionally, we'll also benefit from new distribution that we're picking up in the spring with Shoppers in Canada, and then also additional space expansion that we will get in Spring 2021 with Ulta Beauty as well.
Third, we believe that e-commerce will continue to be a driving force in our net sales performance, though likely moderating from the levels that we've seen earlier in this year as consumer behavior kind of starts to stabilize or shift back to the brick and mortar side. I would say those things, plus the modest contribution that we're expecting from Keys Soulcare, are really the top line drivers that we're looking at for the second half. On Keys Soulcare, the $5 million-$6 million, that is really related to the launch of Keys Soulcare. Too early to tell.
We haven't given fiscal 2022 guidance yet on how to think about that marketing spend on a longer term horizon. I would say that $5 million-$6 million that we're talking about for now is really in preparation for the launch of the brand here in the next quarter or so.
Thank you, and super helpful. e-commerce represented how much again? I'm sorry if I missed during the quarter from your sales.
I don't think we provided the percentage of e-commerce. Oh, did we? 13%, sorry, of the total net sales that we had in the quarter.
Okay, thank you.
Our next question comes from Oliver Chen with Cowen. Please go ahead.
Thanks very much. Congrats on the expansion at Walmart and Ulta. As that happens, what should we know about product changes or the products that will be incremental? Are there thoughts around mix? We're curious about skincare. As that continues to really succeed, how are you thinking about breadth versus depth in skincare, and/or mix and innovation happening there with the assortment?
Would also just love your thoughts on community and Keys Soulcare. Seems like it's a core tenet of what you're doing there, and how you might contrast that against the community you've built at e.l.f. Thank you.
Hi, Oliver. I'll tell you first of all, in terms of our expansion, one of the reasons we're excited about space expansion is other than Target, which is our longest standing national retail account, where we had about 11 ft of linear space at the end of FY 2020, really every other customer has about less than half that space.
Getting more space at Walmart and Ulta Beauty were important in our journey to get the right footprint on e.l.f. As we pick up space, one of the real strengths we have is our innovation program and the new items we have across our entire line. It's one of the reasons we've been able to sustain growth in a challenged category across face, eyes, lips, tools, and skincare. In particular, the space gives us an opportunity to get more skincare items into national retailers.
If you take a look at our business overall, skincare is about 8% of our track channel sales, but almost 25% of our sales on elfcosmetics.com. If you look at the difference, a big part of that difference is the assortment, our ability to put more of our ranges into national retailers and put focus against that.
We believe skincare has quite a bit of white space just based on the success that we have on elfcosmetics.com. As we get larger footprints, it gives us the opportunity to put a richer mix of skincare in addition to some of our other key holy grail innovation. On the second question on community is such an important part and has been for our entire 16 years.
If you think about e.l.f. Cosmetics, it really was built behind this passionate community that knew about the brand and helped build it up and continues to be buoyed by that. Community is really core to our DNA and our digital roots. Keys Soulcare is no different from a standpoint of starting digitally, starting with content, conversation, and community.
As I mentioned earlier, the response has been incredibly positive to that. I'd say it's a really rich community. It'll be a different community than the e.l.f. Cosmetics community in many respects, partly because Keys Soulcare will be in the entry-level prestige area. With unit retails between $20 and $40 for the initial range, that's quite a bit different than the average $5 average unit retail with e.l.f., and then also with the primarily skin focus in the beginning going into other categories.
I think you'll continue to see, and the great news is just like e.l.f. Cosmetics, all you have to do is go on the website, keysoulcare.com, and you can see the rich content and then even on the social channels, the level of consumer reaction we're getting, and how meaningful this brand is really gives us a great deal of heart in terms of its future potential.
Thank you very much. Best regards.
Our next question comes from Bill Chappell with Truist Securities. Please go ahead.
Thanks. Good afternoon.
Good afternoon.
Well, first, I guess housekeeping, how much was the kind of marketing startup cost for Keys Soulcare in 2Q?
Bill, there's not really marketing startup costs. There are certain launch costs related to Keys Soulcare included in our adjusted SG&A and Adjusted EBITDA numbers. You can see that called out in the footnotes in the non-GAAP schedules in our press release.
Got it. Okay. I will double check. Second, I guess, can you kind of give us an update just kind of on the health of color cosmetics, especially the mass side? I mean, you said you were the only one of the five major players to grow, and I'm trying to understand how much of that is category still recovering in later stages of the pandemic. Have we recovered at all from the later stages of pandemic, or is it just more your competition isn't kind of rising to the occasion?
I'd say first of all, the category's definitely been impacted by the pandemic. Everyone has been restricted, been cooped up, haven't been able to get about their normal routines, and that's certainly impacted the category on the whole. While not quite at the bottom that it was at the start of the pandemic, particularly through different waves of COVID, you definitely see an impact on the category.
I think we've been not only fortunate, but we've executed really well in terms of being able to buck that trend across every one of the categories in which we compete. I think it's the fundamental value equation we have of the best of beauty made accessible to every eye, lip, and face, as well as the execution against the five strategic imperatives we've been talking about now for about two years. I think we've bucked the trend.
We feel confident in our ability to continue to build share even in a challenged category. What I will tell you longer term is I'm quite bullish on the category. I think as consumer behavior returns to normal, this is such a central category to consumer self-expression and importance. I believe the category will come back quite strongly.
A lot of that in terms of the timing will really depend on when people are able to get back to normal behavior. Regardless of whether the category is challenged or does better, I like our position within the category. We had strength going into the pandemic. We've executed well during the pandemic, and we're building a brand portfolio that I think will make us even stronger as the category recovers.
Got it. Thank you.
Our next question comes from Jon Andersen with William Blair. Please go ahead.
Good afternoon. Thanks, everybody. Just two quick ones. If you could talk a little bit about the Keys Soulcare sourcing model. Does the sourcing model line up with the model you use for the rest of your business, and whether there'll be any ties between the elfcosmetics.com website and the Keys Soulcare site?
The second question is, you're now managing three brands, as you move forward, as opposed to one historically, are there any changes that you've made or you feel you need to make to people, process, systems, approaches internally, to manage the added complexity? Thanks.
Sure. Hey, Jon. I'd say first of all, on Keys Soulcare, it's one of the real basis of our strategic extensions, is being able to leverage the chassis we've built with e.l.f. Beauty, particularly the investments we have in our team and infrastructure. The sourcing model on Keys Soulcare is it fully leverages the innovation model we have on e.l.f. as well as our overall operating platform.
It gives us that great combination of cost, quality, and speed going forward, as well as the ability to get into other categories. We supplemented that really through by the acquisition that we had on Well People. One of the key developers of the product range is Dr. Renee Snyder, one of the core co-founders on Well People, a board certified dermatologist. One of the cofounders of Well People.
She's been part of our innovation team, working very closely with Alicia Keys to really develop a phenomenal product range. It's really leveraging both those investments and capabilities we have, and you'll continue to see that. In terms of ties between the brands, I'd say the ties really are on the back end and our overall infrastructure and chassis we have.
Our ability to stand up the site much faster really came from our strength in digital, a lot of what we're doing from a content standpoint. From a consumer-facing standpoint, all three are distinct brands with distinct consumer segments and complementary to each other. You won't necessarily see a strong tie between the brands as much as our ability to leverage the company. In terms of managing three brands versus one, I'd say a couple of things.
First and foremost, most of us come with multi-brand experience. The company's full of very strong backgrounds in both consumer and beauty that have managed portfolios of brands. We definitely have that expertise within the company. We have also brought on incremental resources.
If I think of the additional personnel that we've brought on in anticipation of Keys Soulcare, I feel really good about the balance of leveraging the core chassis and then having some dedicated resource. Some of those dedicated resources by each of the brands is how we're able to manage the consumer-facing aspects of them, while at the same time leveraging all the investments we've made in the company.
Thank you.
Our next question comes from Rupesh Parikh with Oppenheimer. Please go ahead.
Good afternoon. Thanks for taking my question. I just had a related question, just related to the longer-term guidance. First on COVID, as we think about, I guess, FY 2023 to FY 2024, is the assumption that we'll now be past the COVID headwinds? Second, in regards to the sales guidance, I was just curious if there's any granularity you can provide in terms of how you guys are thinking about the growth of the e.l.f. brand versus some of the newer brands you have?
Rupesh, I'll start with the long-term economic model and any impacts from COVID. I would say that we're just really focused on driving growth through that long-term economic model, and I think that our track record over the last seven quarters of delivering strong sales growth gives us confidence that we can continue to do that and deliver on our long-term economic model.
In terms of sales guidance on e.l.f. versus the other brands, I would say that, I've just talked about some of the things and the drivers that will impact our second half net sales, which included a modest contribution from the Keys Soulcare brand. Beyond that, we have not broken that down just yet. Really keeping the focus on e.l.f. Beauty as a total. Yeah.
Great. If I can fit just one more question. Given all the second wave risks we're seeing in the U.S. right now, are you guys seeing, I guess, as you look at your data, are you starting to see an impact on your business related to second wave spikes in different markets?
Well, we track that pretty closely, and we certainly can see a correlation depending on restrictions in different areas in terms of both traffic to retail stores and consumer behavior. I think the field that we feel more confident about is our ability to execute even in the face of that. We did that through the first wave of COVID, really the second wave. We may be on a third right now, depending on where you're at.
Our ability to continue to drive growth in a down category. Given the drivers that we have coming, both in terms of space gains, the space we already gained, space we're about to gain, as well as the new brand launch, we feel good about where we stand relative to the category.
Great. Thank you. I'll pass it along.
Our next question is a follow-up from Oliver Chen with Cowen. Please go ahead.
Hi. Thanks again. You've made a really amazing success with TikTok. Just would love your thoughts on return on ad spend in relation to how you're analyzing the metrics there and the impressions, and what that may imply for your thoughts around marketing spend, whether that be dollar or rate, in relation to the success you had on TikTok. Would also just love your take on live streaming and how that's manifesting in different aspects of your business and what you see ahead. Thank you.
Sure. Oliver, I'd say, we have had tremendous success on TikTok, but we've also had success across platforms. On TikTok specifically, I think we're now, between our various brand challenges, up to 10 billion views, 6.5 million user-generated videos, and it's really helping drive relevancy on the brand, particularly amongst Gen Z. On terms of marketing spend and how we evaluate it, we really evaluate it in two different ways.
One is overall ROI, where we talked last quarter, getting the Nielsen Marketing Mix analysis done, which showed very strong returns on our spending in total, and then across various vehicles. The second is really kind of by what's really causing buzz and having e.l.f. stay top of mind, particularly amongst key demographics, like we just talked about, TikTok and Gen Z. We really look at both those together.
Live streaming, I would say, will continue to have an important impact on the business going forward as other initiatives have for the consumer, including our kind of virtual try-on feature on elfcosmetics.com, as well as different ways of kind of engaging consumers. I think you'll continue to see us do more there.
Thanks a lot. I appreciate that.
Our next question comes from Mark Altschwager with Stifel. Please go ahead.
Hey, guys. This is actually Peter on for Mark, so thanks for taking our question. Can you provide more color on where you see promotional activity maybe category-wide, and also if we're seeing any sort of return to normal there? Thank you.
I'd say on the promotional activity, we haven't seen any major spike, at least on the mass side. On the promotional side, some number of brands have been highly promotional in the category, and I think we continue to see them be highly promotional. I'd say as far as e.l.f. is concerned, that's never really been our strategy.
Our strategy has been to provide the best of beauty at extraordinary values every day, and we like that strategy because it allows us to kind of both stay true to not only who we are and what our consumers expect, but also gives us a certain level of stability in not having to play in all the nonsense of high-low.
Overall, I'd say we haven't seen that much of a change in the category, even though some players have been highly promotional, and then two, our strategy remains intact as it's winning in the marketplace.
Great. Thank you.
This concludes our question and answer session. I would like to turn the conference back over to Chief Executive Officer, Tarang Amin, for any closing remarks.
Great. Well, thank you everyone for joining us today. I'm so grateful for our incredible team at e.l.f. Beauty, have shown tremendous talent meeting the challenges of the pandemic and building market share. I believe our future is bright and remain confident in our long-term strategy. We hope everyone's happy and healthy this holiday season. Thank you, and be well. Thanks, everyone.
The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.