Allison Malkin - MD, ICR Tarang Amin - Chairman and CEO John Bailey - President and CFO

Steph Wissink - Jefferies Bill Chappell - SunTrust Robinson Humphrey Oliver Chen - Cowen & Company Andrea Teixeira - J.P. Morgan Jon Andersen - William Blair Bonnie Herzog - Wells Fargo Securities Erinn Murphy - Piper Jaffray Jason Gere - KeyBanc Capital Markets Inc. Mark Astrachan - Stifel Nicolaus Linda Bolton-Weiser - D.A. Davidson

Greetings and welcome to the e.l.f. Beauty Fourth Quarter Fiscal 2017 Earnings Call. At this time, all participations are in a listen-only mode. A question-and-answer session will follow the formal presentation [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Allison Malkin. Thank you. You can begin.

Good afternoon everyone. Thank you for joining us today to discuss e.l.f. Beauty fourth quarter and full year 2017 earnings results. A copy of today's press release is available in the Investor Relations section of elfcosmetics.com. A recording of the call will also be available for 90 days on elfcosmetics.com. As a reminder, this call contains forward-looking statements that are based on management's beliefs and assumptions, expectations, estimates, and projections. These statements, including those relating to the company's fiscal year 2018 outlook, are subject to known and unknown risks and uncertainties and therefore actual results may differ materially. Important factors that may cause actual results to differ from those expressed or implied by such forward-looking statements are detailed in today's press release and the company's SEC filings. 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 measures. Certain brand equity measures cited in this presentation are based on third-party settings. With us from management today are Tarang Amin, Chairman and Chief Executive Officer; and John Bailey, President and Chief Financial Officer. For today's call, Tarang will begin with an overview of our results and as typical for us, John and Tarang will then alternate, sharing the progress we made against our growth strategy and providing additional details related to the financial performance and guidance. This will be followed by a Q&A session. It is now my pleasure to turn the call over to Tarang.

Thanks Allison and hello everyone. We're pleased to report full year 2017 results with net sales of $270 million, an increase of 18% versus year ago and adjusted earnings per share of $0.64, up 77%. We took market share in tracked channels from 4.1% in 2016 to 4.5% in 2017. We also continue to see strong growth in non-track channels, including both our direct business as well as Ulta Beauty. Stepping back, since establishing our growth strategy in 2014, we have made meaningful progress on our mission to make luxurious beauty accessible to all. Over the four-year period, we've advanced each pillar of our strategy, delivering net sales and adjusted EBITDA growth at a CAGR of over 20%, and increasing our tracked market share for 1.9% to 4.5%. We will spend time on this call sharing perspective on the progress we've made and the foundation we've created for future growth. Our first strategy is to build a great brand. e.l.f. is a brand that young, diverse beauty enthusiasts love. Over the past four years, we increased unaided awareness from 3% to 16%, followers from 19 million to over 37 million, brand retention from 55% to 65%, and our value ratings from 63% to 73%. We now have amongst the highest retention and value ratings of any mass cosmetics brands. In 2017, highlights include growing unaided awareness three points, increasing our social following by 37% and further scaling our consumer engagement efforts. Beautyscape leads the combined audience of 600 million, and our Beauty Squad loyalty program grew to 850,000 members. We are pleased with both the efficiency and effectiveness of our engagement efforts in building a brand that consumers love. I'll now turn it over to John to discuss progress on innovation and brand penetration.

Thanks Tarang. Our second strategy is to lead innovation. We believe our depth and breadth of high quality innovation at an extraordinary value sets us apart from other brands and is the linchpin of our strategy. Over the past four years, we've progressed from around 40 launches a year to over 120, shortened our average time to market from 32 weeks to 22 weeks and increased our gross margins from 47% to 61%. In 2017, we launched 128 new items, an increase of 40% over the prior year, including 39 products that were first-to-mass. A major area of focus of our innovation last year was the continued expansion of skin care with the launch of our Beauty Shield and Active lines. Both are great examples of how our flexible innovation approach allows us to move quickly on trends. We were also able to improve our speed-to-market. In 2017, we were able to go from initial idea to selling online in 22 weeks, down significantly from our previous average of 27 weeks. Our fastest launches took 13 weeks. We believe our ability to quickly validate new items through our direct channels provides us with a significant advantage in our overall innovation approach. Our third strategy is to expand brand penetration. Over the last four years, we've grown our shelf presence at leading national retailers from around 12,000 linear feet to over 70,000. In our direct business, we've expanded our e.l.f. store count from one Manhattan-based store to 22 stores in multiple markets and more than doubled our digital sales and traffic. In 2017, we saw major space expansion at both Target and Walmart. At Target where we have long been the number one unit share brand, we also became the number three dollar share brand, with 11.2% share in 2017. We grew share at Walmart and continued to get more prominent positioning in space. Both customers continued to grow e.l.f. retail sales at double-digits in 2017. In addition, we're pleased that our early performance at Ulta Beauty is leading the chain-wide expansion during the first half of 2018. Finally, our direct business also exhibited strong growth with the opening of three new Ulta stores and improved presence across digital channels. I'll now turn it back to Tarang to discuss our operational progress.

Thanks John. Our fourth strategy is to drive world-class operations, which starts with world-class people. We've made significant investments over the past four years in our team and infrastructure to scale the business. We are proud that the team, which is 85% female, 80% millennial, and over 60% diverse, reflects the young diverse beauty enthusiasts that we serve. Our operational results over this period have also dramatically improved, with our on-time, in-full fulfillment rates increasing from 83% to 97%, and first-pass quality increasing to 100%. In 2017, we further strengthened the team and operational results, including penetrating the supply chains of our customers and improving the horizontal integration with our suppliers. We believe that we have the best combination of cost, quality, and speed in our industry. In summary, we made good progress on our strategy over the last four years and in 2017 in particular. I'll now turn it back to John to discuss our financial progress and 2018 outlook.

Thanks Tarang. Our 2017 results are consistent with the expectations we provided in early January. For the full year, net sales increased 18% to $270 million, reflecting strong growth across our business. Gross margin expanded from 58% to 61%, primarily as a result of margin-accretive innovation, coupled with improvements in customer returns, freight costs, and foreign exchange, partially offset by customer mix. On an adjusted basis, SG&A as a percentage of sales is 43%. Adjusted EBITDA was $62 million compared to $54 million in 2016. Adjusted net income was $32 million or $0.64 per share compared to $18 million or $0.36 per share in 2016. I note that the 2017 figures include a significant tax benefit of $7.2 million or $0.15 per share, largely driven by a number of employees that exercised options post-IPO. We are proud of our strong 2017 results, having delivered 18% net sales growth, over 300 basis points of gross margin expansion and 77% adjusted EPS growth in a category that has been experiencing headwinds. Turning to 2018. In January, we outlined an expectation for net sales and adjusted EBITDA growth of 10% to 15% on a compound annual basis from 2016 to 2019. Consistent with this CAGR and our strong results in 2017, our outlook for 2018 includes net sales and adjusted EBITDA growth of 6% to 8%. While we build our forecast account-by-account, the outlook generally assumes that the overall mass color cosmetics category continues to experience headwinds throughout 2018. Given our significant space expansion at existing national retailers in 2017, we have assumed minimal incremental space in 2018. A core part of the e.l.f. proposition is expanding to incremental space and then leverage insights from our direct channels to further optimize our merchandising and assortment in those expanded footprints. We noted specific opportunities coming into 2018 to optimize overall shelf flow, increase the number of SKUs per foot, and secure more of our qualified new items on shelves. We are in the midst of applying these learnings during spring resets, which are currently in process for many of our national retailer partners. We expect to have a better sense of the impact of the changes we have made in the coming months. In summary, in 2018, our national retailer focus is to further optimize our productivity within existing national retailer partners. Therefore, in terms of new distribution, the only meaningful new doors embedded in our guidance are the Ulta Beauty stores we previously announced. Over the last few years, we have made significant progress on gross margin. While we expect our Sweeten the Mix approach to continue to drive benefits through innovation and cost savings into 2018, we're pleased with our margin profile and expect that gross margins will be similar to 2017. I'd note that in 2017, we saw a benefit from the advantaged U.S. dollar to RMB exchange rate that we expect to become a headwind to margin in the coming year. From an SG&A perspective, our outlook assumes continued reinvestment back into the business consistent with our algorithm. While the thematic areas continue to be the same; people, infrastructure, and brand, we expect specific investments in 2018 to support our digital leadership and increase our digital impact. An example is the launch of our new e-commerce platform earlier this year, which will improve our mobile experience and site functionality. We plan to continue to deploy the investments behind content, digital marketing, consumer loyalty and personalization and our brand presence as leading e-tailers in retailer.coms. As a digitally native brand, we believe that it is important to continue to double down on our strengths in these areas. Finally, with respect to adjusted net income, we are forecasting $30 million to $31 million for 2018, which translates to $0.59 to $0.61 based on a projected share count of 51.4 million. These income and EPS figures assume a tax rate of approximately 30% as we are significant beneficiaries of U.S. tax reform and the movement in the federal rate. There are a couple of important callouts as it pertains to our adjusted net income and adjusted EPS figures. First, in the 2017 period, we saw significant tax benefit from stock option exercises as a number of employees exercised options post-IPO. As mentioned earlier, these benefits translated to $7.2 million or $0.15 per share in 2017. While we may see further benefits in the future, they're inherently difficult to forecast. Our guidance therefore, assumes no benefits from these equity awards in 2018. The second callout pertains to a methodology change that would take place in the first quarter of 2018. Specifically, going forward, we will adjust our adjusted net income figures to remove the amortization and associated tax impact of intangibles related to the original TPG acquisition. This change is reflected in our 2018 outlook and the amount of the item included in 2018 adjusted net income is $4.3 million. I will turn it over to Tarang to provide some final thoughts.

Thanks John. As discussed, over the last four years, we've driven tremendous growth and value creation in the e.l.f. brand. Even with the progress to-date, I'm encouraged about the significant whitespace ahead. Let me provide a few examples. We have an opportunity to continue to build one of the great brands in beauty. As far as we've come, we still only have 16% unaided awareness relative to legacy brands around 60%. Given we have some of the highest retention rates in the category, we believe we can further scale our efficient engagement tactics. In addition to Beautyscape and Beauty Squad, we plan to make additional investments in digital to build a larger, loyal e.l.f. community. We also believe we can further improve our industry-leading innovation output and speed. This innovation capability can be applied to new trends, segments, and brands. For example, we believe that our evolving skin care portfolio has great runway, with global skin care even larger than global color cosmetics. We have significant opportunity to expand brand penetration. Our direct channels are the engine that drives our entire business model and we continue to see strong growth potential. In national retailers, we are now the number three dollar share brand at our most established customer, Target, and are delivering that performance in less than half the space of the legacy brands ahead of us. Similar to our history with Target, we believe we have a great opportunity to continue gaining share at other retailers, most of whom are predominantly in a four-foot set. We also see continued ability to leverage our digital routes to partner with high growth e-tailers in customer.coms. We are still in the early days of international expansion, having seen the brand resonate and deliver strong results in our initial focus markets of Canada, Mexico, and the U.K. Finally, over the last four years, we've made meaningful investments in creating world-class operations. We have multiple capabilities that we believe can be leveraged to drive value in both the e.l.f. brand as well as perspective new brands. These capabilities include a world-class team; an innovation capability that spans various beauty segments; distinct supply chain advantages in cost, quality and speed; strong cross functional execution at leading national retailers; and importantly, a multi-channel digitally-grounded engagement approach. We look forward to discussing how we're leveraging these capabilities in the coming year. In closing, we're pleased with our progress making luxurious beauty accessible for all and encouraged by the whitespace ahead of us. I'd now like to ask the operator to open the call for questions.

At this time, we'll be conducting question-and-answer session. [Operator Instructions] Our first question comes from the line of Steph Wissink from Jefferies. Please proceed with your question.

Thanks. Good afternoon everyone. Just a quick clarification, first, John, on the removal of the amortization and tax impact from the TPG ownership. I think you qualified that as $4.3 million or roughly $0.09 or so to earnings. That is excluded from your EPS guidance? Or that is embedded in your EPS?

For 2018, it is excluded, Steph, that's correct.

Okay. And then just my question, broader picture, is regarding your comments on gross margin kind of flattish in 2018. It sounds like you have some optimization opportunities with the existing shelf space that you've earned over the last year or so. But can you talk about that with respect to skin care? I think, Tarang, your comments on excitement around the skin care portfolio, how should we think about gross margin on a mixed basis? And then how should we think about it on an optimization basis?

Yes, so Steph, what I'd say is it really comes back to our core approach, which isn't new. So outside of specific segments like skin care that's driving any particular sort of mix item, it really is across our entire assortment. And the way that we go in, sub out new items on the wall, take out old items, and in the process, often find that the new items that we're introducing are tremendous values, but do mix up that AUR a bit. Just to put a finer point on the 2017 to 2018 sort of walk, obviously, we've seen tremendous gross margin expansion in the business to the tune of 1,300 basis points over the last four years and over 300 in the last year alone. So, we always want to be mindful of that broader balance between continuing to offer extraordinary value to the consumer, but also looking for opportunities to take margin through that innovation and Sweeten the Mix approach. Headed into 2018, as we mentioned, that will continue, but we do have some headwinds, specifically in the form of FX, that was a benefit to the numbers in 2017 that we do not anticipate to be a benefit, but actually be a headwind in 2018.

And Steph what I'd add on your question on skin care. Skin care follows that model very well. While the average unit retails are higher on skin care, each of those items are still an extraordinary value. And so our approach overall on our innovation is it's been margin-accretive to the company and as we continue to mix that out, we've been pleased with the progress.

Thank you.

Our next question comes from the line of Bill Chappell from SunTrust. Please proceed with your question.

Thanks. For both John and Tarang, looking at the guidance for this year, I understand that's kind of what you had talked about a month ago and I'm just trying to take a step back at $270 million in revenue in a $25 billion-plus industry, did you think or are you comfortable or are you happy that you're now a single-digit grower when there's so much unaided awareness still to go, so much shelf space still to go, so much new products? Shouldn't you at this stage still be growing double-digits? Or -- and if you're comfortable with it, then maybe you can help us understand what's changed over the past year to 18 months within the industry that's kind of changed that algorithm?

Sure. So, Bill, I'll give perspective. Overall, as we said in our comments, over the last four years, we've delivered over 20% CAGR. Even in 2017, we delivered 18% sales growth, despite the category headwinds. So, -- and as we talked about a month ago, our 2016 to 2019 CAGR is 10% to 15%. So, we're not a single-digit grower. We've -- our history has been much better than that. In terms of drivers to 2018, let me turn it over to John and he can talk about that.

Yes, Bill, I mean what I'd tell you is long-term, we continue to see tremendous whitespace on this brand. Obviously, we talked a lot about the inflection in the category in 2017 and as we think about that single digit guidance for 2018, obviously, we mentioned a few of the drivers that underpin that. First of all, continued headwinds in the category itself. Second of all, as we think about the drivers that are available to us in this business over time across space, new doors, within existing accounts and new distribution generally, we have very little of any of those drivers underpinning that baseline number in 2018 outside of the expansion in Ulta that we've already announced and a lot of that pipeline for Ulta actually shift last year. So, we take a look at the drivers that are available to us, where we are relative to that broader new kind of whitespace set and we still think we have great opportunity for years to come but the 2018 number, that's why you see the growth numbers that we talked about.

So, just kind of paraphrasing to make sure and a follow-up, you don't necessarily look at 2018 growth rate as the permanent new normal. It's more of -- and I think you had said it recently, you really wanted to focus on Ulta more than -- and getting that right and so, 2018 is kind of a specific year that you're -- that will grow this level, is that the right way to look at it?

Yes, look, I think we've probably given what we're able to give in terms of specific quantification for what happens in 2019 or long-term. For us, I think the paraphrase for me would be that in 2018, we're not opening a bunch of new doors. We're not getting a bunch of space and it's really about optimizing within the accounts that we're in and focusing on that execution within the new Ulta doors. And so that rolls up in a tough category dynamic to 6% to 8%.

Got it. Thanks.

Our next question comes from the line of Oliver Chen with Cowen & Co. Please proceed with your question.

Hi. Regarding the productivity and existing doors, what are some of those opportunities when you spoke to optimization of shelf flow? And also as you think about as you're prioritizing innovation within categories, which categories should we be most excited about in terms of where you see the biggest opportunities? Thank you.

Sure. So, on the productivity, our model all along has been get the space, optimize the space based on the insights we're getting from our direct channels. As we mentioned, we launched 128 new items last year. So, we have a lot of data that we've been able to collect, both in terms of the sales as well as reviews on what some of the best items are. And our best opportunity is to apply those learnings is -- first one is here right now during the spring resets. So, as we go through kind of what did we learn last year as we picked up new space? How are those items doing? What did we qualify from our new items? You're going to start to see some of that on shelf over the next couple of months. I think Walmart went first so their numbers should be coming through pretty soon in terms of how they're doing. Target is behind that in terms of when they did their resets. And so you'll be able to see both the new items as well as what that does from a productivity standpoint, as I said, in the next couple of months here. In terms of product categories, I'd say, we have a great track record of innovating across eyes, lips, face, tools and skin care. I think in particular, last year, a big area of focus for us is skin care, just given the tremendous run rate we see ahead of us. And I'd say two launches, in particular, that we're pretty excited about. One is Beauty Shield and the other one is our Active line. And again, both of those, you can now start to see in retail and again, we'll see some of the numbers coming off of those.

Okay. And just a follow-up. Regarding the headwinds and you've done a very helpful job speaking to us about this, what would you articulate in terms of the temporary versus not temporary nature of the headwinds and what should investors understand? Because there's a lot of crosscurrents in Beauty depending on the channel or the product categories. Just love for you to frame up for how we should think about that risk factor?

Yes, so our point of view all along is we do not see this as a long-term structural issue in the category. And in fact, if you take a look at the CAGRs in Beauty, in color cosmetics over a very long period of time, it's one of the healthiest categories in all of consumer, given the importance it plays with consumers, their love with new ideas and new products. So, we do not see, particularly when we look at the data of our own direct channels, anything that would say this is a long-term trend. Having said that, I think there was a lot of noise last year in terms of, hey, where is the category? And where are the headwinds? Where is skin data, et cetera? That we wanted to come up with a very clean kind of approach in terms of establishing that 6% to 8% baseline where we said, hey, let's just assume the category continues. If we see a change -- a dramatic change in the category or door space, et cetera that we pick up, you'd see upside from there. But we feel it's a good baseline.

Thank you. Best regards.

Our next question comes from the line of Andrea Teixeira from J.P. Morgan. Please proceed with your question.

Thank you. So, I just want to clarify the math in terms of the base of comparison for the 2017 EPS, adjusted EPS, so we need to exclude the $0.09 from amortization of intangibles plus another $0.15. So the base, instead of $0.64 would be $0.40, so $0.09 plus $0.15? And then related to that, like, when you say EPS would fall within the guidance from 5% to 8%, are you including that or are you excluding that from the base? I'm just, like, trying to reconcile that part of the guidance. And then related to that, you also alluded in the press release that you had to increase, in terms of the gross margin, you had to increase your reserve for inventory. So, I wanted to reconcile what is that related to if you're having returns or if you're just having changes in your inventory of goods sold so that you'd have to write-down? Thank you.

Yes. So, first, I'll start with the adjusted EPS numbers. Two major things happening in adjusted EPS. The first is in 2017, we saw a significant benefit from stock option exercises and therefore, the tax benefit that resulted, which is about a $0.15 benefit that is reflected in that 2017 number. We haven't forecasted any tax benefits in 2018 because those are very difficult to forecast. So, if we were to see benefits that would be upside to the 2018 number. The other relates to a methodology change, which hasn't happened yet, but will be reflected in the Q1 results, that actually normalizes for amortization related to intangibles from the TPG acquisition in 2014. That is reflected in the adjusted EPS and adjusted net income figures in the 2018 outlook and the amount going through that 2018 set of figures is $4.3 million net of the associated tax benefits. So, that's how to think about the base. There is no adjustments of the amortization in the 2017 base because we have not gone through that methodology change yet. With respect to gross margin, what I'd tell you, Andrea, is we're quite proud about the gross margin progress that we've made over the last four years and even 2017, over 300 basis points of improvement. During the Q3 call, we obviously talked about continued expansion, driven by our Sweeten the Mix initiative and FX, offset by customer mix. And we talked a little bit about customer mix pertaining to discount volumes that we have in each and every year of the history of this business, which tend to run at less than 5% of sales in any given year. We said that in 2016, that discount volume was very front-half weighted and in 2017, conversely, it was very back-half weighted. So, heading into Q4, our margins came in very consistent with our expectations. The one nuance I'd say is that, that discount business tends to be pretty deal-driven and in any given point in time, you can either have kind of capacity in that channel or not. And relative to our overall approach from a reserve perspective, instead of going through discounters, we ended up writing off $1.5 million of inventory. So, very consistent with how we move through items that come off the wall.

Our next question comes from the line of Jon Andersen from William Blair. Please proceed with your question.

Hi, good afternoon Tarang, John.

Good afternoon.

I wanted to ask -- at this point in the calendar year, is it fair to say that your plans are set in terms of space and doors? So, when you've guided for the year and assume no incremental space or door activity ex-Ulta, that there's good visibility that there will not be incremental space and doors. And then the second part to that question, if that's accurate, how are you thinking about space and door expansion with maybe some bigger whitespace retailers as you look beyond 2018, which sounds more like an optimized what you have here. Thanks.

So, John, what I'd tell you is there is opportunity for additional space and doors in 2018. What we provided in our guidance is what the assumption was underlying the 6% to 8%, which basically was the two things we most are focused on, which is optimizing our space within existing retailers and the previously announced rollout of Ulta Beauty. We still have, if you take a look at how the brand resonates with kind of retailers from a total proposition in terms of our consumer profile, our new items and our productivity, there's plenty of space ahead of us from a whitespace standpoint. I think last year, kind of our learning is we entered the year kind of talking about all the space that was embedded and every time we went and kind of announced something, people are like, is that additional -- is that in addition to your number? I think our approach this year is, no, we have what our focus areas are that leads to the baseline. And if we have additional news, we'll add that news as time goes on. Long term, as I said, if I look at the landscape, we've used the figures that we cited within Target where we're now the number three dollar share brand and we still are about half the footprint of the legacy brands ahead of us. Walmart is four years behind where Target was, still kind of predominant set, there is a four-foot set. Every time they tip touch a store, we get more prominent space and positioning within Walmart. And then we have entire channels of Ulta still in the early days of that rollout and in addition to that, I'd say, drug, we still have major whitespace left there. So, that's just in the U.S. before we get to international and other opportunities that we have.

That's really helpful. One quick follow-up. Can you give us an update on the status of Ulta? To what extent have you shipped product in the fourth quarter? How much is kind of left to come? We've noticed some four-foot sets in our region of the country. Just an update on kind of where we sit and what benefit you've seen already and what some of the incremental results are showing? Thanks.

Yes. So, Ulta is in the middle of their rollout. As we mentioned, that's going to be happening through the first half of 2018, but we've been making good progress as you saw in your local market, Jon. What I'd tell you is the pipeline related to that rollout, a lot of that did go out in the fourth quarter. So, while we'll certainly see a replenishment benefit in 2018 from the new stores that we've secured, a lot of that initial fill did go out in 2017. But we're very excited. Again, we don't comment on specific retailers. I'd just mention that we're quite pleased with the early days at Ulta.

Thanks.

Our next question comes from the line of Bonnie Herzog from Wells Fargo. Please proceed with your question.

Thank you. I guess I wanted to verify, in terms of your guidance, what level of category growth is baked into that guidance? And then what your expectations are for category growth over the long-term? And then I had a question on the Nielsen scanner data. I guess I'm wondering why we haven't seen an acceleration in the tracked channels sales from the incremental shelf space you've gotten at both Target and Walmart. I feel like in the past, you guys have talked about you first need to earn the space, then the next year, optimize it. So, just trying to understand when the optimization phase begins and when we could begin to gauge your success in optimizing the new space? Just sort of wondering why we're not seeing this reflected in the data. Thank you.

Sure. Hey Bonnie, it's John. I'm going to take the first part. I'll let Tarang take the second. So, the first on the category, our assumption for 2018, what I'd tell you is, we build our plans account-by-account and bottoms-up versus taking a category growth assumption and then share off of that. Obviously, a dynamic business, not a mature grower. So, that bottoms-up approach is much better in our view. What I would tell you and I think we alluded to it in the commentary, was that generally speaking, we're not assuming any big recovery in the category in 2018 versus the continued headwinds that underpin the overall plan. Long-term, what I'd tell you is similar to what Tarang mentioned, which is this is not, in our view, something that's structural and going to be sustained over the long-term. If you look back many, many years in mass color cosmetics, you will have these periodic pullbacks, particularly given various places that you find yourself in the cycle. But over time, it's been a very consistent grower. So, beyond 2018, we don't have specific guidance or perspective that we would give other than to say we don't see this sustaining over the long-term.

And then on your second question in terms of when can you see -- when will you start seeing the benefits of the space expansion. I would tell you, you'll start seeing that benefit this year and just for perspective, even in 2017, the Nielsen data, which shows sell-through rates at both Target and Walmart in the double-digits, amongst the highest in their category and we were able to take share at both customers. Into the model that we talk, while we picked up space last year at both customers, our first real opportunity to optimize that space starts in the spring resets that are happening right now. And as I mentioned earlier, Walmart is a little bit ahead of Target in those resets so pretty soon, I'd say, over the next month or two, you probably start to see what's going on at Walmart to see what the benefit of that space gain is and that optimization, followed by that probably Target and then other customers. And that you won't be able to read everything because Nielsen only covers about two-thirds of our business. So, it will exclude, continue to exclude kind of Ulta Beauty, our own direct business and certainly, international, which is also a growth vector for us.

Thank you.

Our next question comes from the line of Erinn Murphy with Piper Jaffray. Please proceed with your question.

Great. Thanks. Good afternoon. I was curious, you talked in your prepared remarks and just actually in the answer to the last question on the double-digit growth you're seeing at Target and Walmart. Can you reference kind of what you've seen in the drug channel broadly? Is it over or under-indexing relative to the average?

Yes. So, in the drug channel, I think it was a challenging year in 2017 for the drug channel overall. There was, I know, for example, CVS pulled back on a lot of their merchandising support for color cosmetics, focusing in other areas -- other chains that they've seen. Walmart -- I mean Walgreens was quite busy with the integration of their Boots brands from that acquisition as well, or the integration of Boots with Walgreens. So, I would say I'd characterize 2017 as probably a transitional year within drug overall. I'd say we still have a tremendous opportunity when we take a look at drug as a channel and the number of doors kind of available to us, and we feel good about kind of how we stack up within drug.

Okay. And then with Walmart, the 20% linear footage expansion, I think, you had at the end of the year, are you starting to see now that the resets have started to unfold? Any of -- kind of sequential improvement from there?

Yes, I'd just echo what Tarang said, Erinn, which is we're still early in that reset process. So, we'll have a much better view of that in the coming month or two.

Okay. And then just the last question on the pace of newness. You guys had a stellar year in terms of the new products launched, I think, 128. Is that type of level what we should see going forward? Or is it kind of more in terms of the skin care, maybe a fewer number of new products that's much more earmarked towards skin care? Just trying to understand how sustainable that is. Thank you.

Yes, sure. So, I wouldn't say we have a target number in terms of how many launches. Whether we did 128 last year, so we're going to do 130 this year. We -- what we really talk to is kind of our innovation capability and our ability to quickly be able to have the innovation that our consumers are looking for. A couple of things I'll point to in particular are our first-to-mass innovations. So, we launched 39 items last year that were previously only available in Prestige, they're not available in the marketplace at all and those, in particular, I think, are big focus areas of ours as addition to kind of what are the types of things that we can really make kind of luxurious beauty accessible on, and so that will continue to be our focus. Having said that, I think one of the great things that we have in terms of our core capability is being able to do, I'd say, all three things at the same time, which is have incredible output in terms of the amount of -- number of items that we're able to launch. The speed at which we're able to launch those items and also have and meet major consumer needs similar to our examples on Beauty Shield and Active.

Thank you.

Our next question comes from the line of Jason Gere from KeyBanc. Please proceed with your question.

Okay. Thanks. Just one kind of follow-up, just wondering if you can maybe talk about the competitive landscape out there that -- we've heard a lot about some of your -- Coty and Revlon doing some relaunches on the mass category. So, just wanted to see what type of impact they may have had into the guidance that you've provided us today. And then the second question, the direct-to-consumer business. How big you think that, that could be over the next couple of years? And especially from a marketing standpoint, how -- you used kind of these unpaid enthusiasts out there. Any thought in terms of going the traditional route that some of the other brands do when you think about the brick-and-mortar business in terms of trying to drive up, I guess, some of the unaided awareness and getting to levels that you are seeking? Thank you.

So, what I'd tell you from a competitive standpoint, we always take a look at the horizon and take a look at kind of what our competitors are doing. We have a lot of respect for our competitors. The way we build our plans and kind of the whitespace ahead of us, it's less about kind of who we going to steal share from and how do we approach kind of helping our customers build their category. So, there isn't anything particularly that's any of the legacy brands that particularly concern us. And in fact, I've always taken the point of view that I hope that many of them are more successful. I do believe it would be good for the category versus us driving that alone. We always though are looking at different brands, and which ones really appeal to us from an engagement standpoint, which ones really appeal from an innovation and speed and we'll continue to kind of take that in our model. The second, in terms of the unaided awareness, we love our approach on consumer engagement and how we've been able to build -- I cited the figure in the last four years being able to go from 3% unaided awareness to 16% unaided awareness in an approach that's highly efficient and effective, and more importantly, really continues to drive that authenticity that we have with our consumers. We see, even in 2017, an additional three points we're able to build from 13% to 16%. So, I would say we're really pleased with our efforts on Beautyscape, the number of consumers we're able to reach that way in a way that makes a lot of sense, but we're a test and learn company so we're always looking at different approaches of how do we engage consumers and we never say never to any particular approach, but we like the approach that we're on right now.

Our next question comes from the line of Mark Astrachan from Stifel. Please proceed with your question.

Thanks and good afternoon. I wanted a clarification, first. Inventory in the balance sheet, John, so that reflects the $1.5 million write-down, which you said, I think, had already happened. And then taking the inventory reserve would suggest that there's more inventory write-down to come, would that be fair?

No, taking the reserve was effectively the write-down. So, they're one and the same. So, that inventory balance does reflect the actual reserve, which would have lowered that inventory balance.

Okay. And then more broadly, just thoughts on an overall A&P support, given comments on the slowing category and your own expectations for 2018, sort of how do you think about responding to it? What do you think your customers are -- or what are you hearing from your customers in terms of what they would like to hear from you? And I guess, putting some of the questions in a different light, have you lost any shelf space with retailers, not absolute in terms of being taken out of store, but has any shelf space been reduced that you had?

Yes, mark, to your question on A&P, I'd say absolutely no difference in terms of conversations we're having with retailers or consumers around our approach. We've continued -- leverage a lot of those same digital and socially-driven tactics and been able to continue seeing really strong engagement from consumers. And I think our retailers really appreciate us for that. So, as we think about A&P in 2017, it was still around 3% of sales, the way that the SEC has us report it and no change or no change in the tone in our conversations with retailers around what we would need to go out and do.

And on your second question, Mark, on shelf space. We'll continue to gain space. We haven't seen any losses in any of our retailers. I talked a little bit about the optimization we're doing at Target and Walmart right now and our current existing retailers. We're in a very strong position with each of those core customers. If you just take a look at the consumer profile, the innovation, our productivity and us taking share, we're one of the key go-to brands for these retailers, and we have a lot of whitespace ahead of us. So, no, space, we're still quite bullish on in terms of the whitespace ahead of us.

Thanks.

Our next question comes from the line of Linda Bolton-Weiser from D.A. Davidson. Please proceed with your question. Linda Bolton-Weiser: Yes, thank you. So, could you maybe comment on the cadence of sales growth through the four quarters of 2018? I seem to recall, when you gave the guidance for fourth quarter, there was some shifting of some things into the first quarter. So, should we assume a slightly higher sales growth rate for the first quarter or is it kind of equal across the four quarters?

Yes. So, Linda, we don't actually provide quarterly guidance and a big part of that is just the dynamic nature of our business. There's so much that can happen in any given quarter between pipeline moves, merchandising programs, things that happen year-to-year that we've always found it very difficult to provide specificity on the quarters. And I think if you look back on our history as a public company, you can see that our growth rates vary pretty widely from quarter-to-quarter. To your core question about the first quarter, the only thing that I would come back to is what Tarang spoke a little bit about in terms of the timing of those resets, which were -- are still in process and therefore, find their way to actually setting pretty late in the quarter. So, we're not going to see any replenishment benefit from the new products on those walls. And in fact, as retailers are sitting there with significant out of stocks and products that they're marking through probably more of a headwind than anything else. So, in the first quarter, I wouldn't expect to be -- be significantly higher than what we forecasted for the year. Linda Bolton-Weiser: Thanks. And then just as a follow-up. So, in terms of my understanding of your growth algorithm over the three years, in the unlikely event that you don't get any more additional shelf space and you report the 6% to 8% growth in 2018, does that mathematically correlate to then a high-teen sales growth rate in 2019 to get to the three-year algorithm?

The only thing I'd say is we're not giving 2019 guidance on the call, obviously, implied by the 10% to 15% from 2016 to 2019 with a 6% to 8% growth rate in this year. Obviously, there are a variety of outcomes in 2019. What I'd tell you is we continue to see a lot of different opportunities on this business in various levers. This is a year that doesn't see a lot of those opportunities baked into the plan and probably just leave it at that.

Ladies and gentlemen, we have reached the end of the question-and-answer session. And I would now like to turn the call back over to Tarang for closing remarks.

Well, thanks, again, for joining us. We really look forward to discussing our Q1 results in May. I hope everyone has a great day. Thanks.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.