ELF BEAUTY, INC. Management report and analysis of the financial situation and operating results. (Form 10-Q)

Management's discussion and analysis of financial condition and results of
operations ("MD&A") should be read together with the MD&A presented in the
Annual Report on Form 10-K for the year ended March 31, 2022 (the "Annual
Report"), and the unaudited condensed consolidated financial statements and
accompanying notes included in Part I, Item 1 of this Quarterly Report on Form
10-Q (this "Quarterly Report"), which include additional information about our
accounting policies, practices and the transactions underlying our financial
results.

Overview and Business Trends

We are a multi-brand beauty company that offers inclusive, accessible, clean and
cruelty-free cosmetics and skincare products. Our mission is to make the best of
beauty accessible to every eye, lip and face.

We believe our ability to deliver 100% cruelty-free, clean, premium-quality
products at accessible prices with broad appeal differentiates us in the beauty
industry. We believe the combination of our innovation engine, core value
proposition, digitally-led strategy, as well as our world-class team's ability
to execute with speed, has positioned us well to navigate a rapidly changing
landscape in beauty.

Our family of brands includes e.l.f. Cosmetics, e.l.f. SKIN, Well People and
Keys Soulcare. Our brands are available online and across leading beauty,
mass-market, and clean-beauty specialty retailers. We have strong relationships
with our retail partners such as Walmart, Target, Ulta Beauty and other leading
retailers that have enabled us to expand distribution both domestically and
internationally.

Global supply chain disruptions

Since the start of the COVID-19 pandemic there has been disruption to the global
supply chain, including manufacturing and transportation delays due to port
closures and congestion, labor and container shortages, and shipment delays. As
a result, we've seen higher transportation costs. In response to these higher
costs, we increased prices on a portion of our products in March of 2022 to help
mitigate the impact on our business. If we see further increases in
transportation costs those could have an unfavorable impact on our results.
Additionally, delays or further disruption to the global supply chain could
cause out of stocks or unfavorably impact our ability to service demand.

Seasonality

Our results of operations are subject to seasonal fluctuations, with net sales
in the third and fourth fiscal quarters typically being higher than in the first
and second fiscal quarters. The higher net sales in our third and fourth fiscal
quarters are largely attributable to the increased levels of purchasing by
retailers for the holiday season and customer shelf reset activities,
respectively. Lower holiday purchases or shifts in customer shelf reset activity
could have a disproportionate effect on our results of operations for the entire
fiscal year. To support anticipated higher sales during the third and fourth
fiscal quarters, we make investments in working capital to ensure inventory
levels can support demand. Fluctuations throughout the year are also driven by
the timing of product restocking or rearrangement by our major retail customers
as well as expansion into new retail customers. Because a limited number of our
retail customers account for a large percentage of our net sales, a change in
the order pattern of one or more of our large retail customers could cause a
significant fluctuation of our quarterly results or impact our liquidity.
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Operating results

The following table sets forth our Consolidated Statements of Income data in dollars and as a percentage of net sales for the periods presented:

                                                         Three months ended June 30,
(in thousands)                                                                  2022           2021
Net sales                                                                    $ 122,601      $ 97,047
Cost of sales                                                                   39,616        35,141
Gross profit                                                                    82,985        61,906
Selling, general and administrative expenses                                    61,555        50,749
Restructuring income                                                                 -           (14)
Operating income                                                                21,430        11,171
Other expense, net                                                              (1,663)         (162)
Interest expense, net                                                             (663)         (745)
Loss on extinguishment of debt                                                       -          (460)
Income before provision for income taxes                                        19,104         9,804
Income tax provision                                                            (4,635)       (1,528)
Net income                                                                   $  14,469      $  8,276
Comprehensive income                                                         $  14,469      $  8,276



                                                                        Three months ended June 30,
(percentage of net sales)                                                                  2022                   2021
Net sales                                                                                      100  %                 100  %
Cost of sales                                                                                   32  %                  36  %
Gross margin                                                                                    68  %                  64  %
Selling, general and administrative expenses                                                    50  %                  52  %
Restructuring income                                                                             -  %                   -  %
Operating income                                                                                17  %                  12  %
Other expense, net                                                                              (1) %                   -  %
Interest expense, net                                                                           (1) %                  (1) %
Loss on extinguishment of debt                                                                   -  %                   -  %
Income before provision for income taxes                                                        16  %                  10  %
Income tax provision                                                                            (4) %                  (2) %
Net income                                                                                      12  %                   9  %
Comprehensive income                                                                            12  %                   9  %


Comparison of the three months ended June 30, 2022 at the end of three months
June 30, 2021

Net sales

Net sales increased $25.6 million, or 26%, to $122.6 million for the three
months ended June 30, 2022, compared to $97.0 million for the three months ended
June 30, 2021. The increase was driven primarily by strength in our national and
international retailers. Net sales increased $22.6 million, or 26%, in our
retailer channels and increased $3.0 million, or 28%, in our e-commerce
channels. From a price and volume perspective, a higher volume of units sold
drove $10.9 million of the increase in net sales and a higher average item price
within retailer and e-commerce orders drove the remaining $14.7 million increase
in net sales as compared to the three months ended June 30, 2021.

Gross profit

Gross profit increased $21.1 million, or 34%, to $83.0 million for the three
months ended June 30, 2022, compared to $61.9 million for the three months ended
June 30, 2021. Gross margin increased to 68% from 64%, when compared to the

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three months ended June 30, 2021. From a rate and volume perspective, increased
volume accounted for approximately $16.3 million of the increase in gross profit
and a higher gross margin rate accounted for approximately $4.8 million of the
increase in gross profit. The increase in gross margin rate in the three months
ended June 30, 2022 was primarily driven by price increases, cost savings, and
product mix, which helped to mitigate the impact of higher transportation costs
in the quarter.

Selling, general and administrative expenses

Selling, general and administrative ("SG&A") expenses were $61.6 million for the
three months ended June 30, 2022, an increase of $10.8 million, or 21%, from
$50.7 million for the three months ended June 30, 2021. SG&A expenses as a
percentage of net sales decreased to 50% for the three months ended June 30,
2022 from 52% for the three months ended June 30, 2021. The $10.8 million
increase was primarily related to an increase in compensation and benefits of
$5.5 million and marketing and digital spend of $3.6 million.

Other expenses, net

Other expense totaled $1.7 million for the three months ended June 30, 2022, as
compared to other expense of $0.2 million for the three months ended June 30,
2021. The year-over-year variance was primarily related to unfavorable foreign
exchange rate movements in the Euro and British pound on our cash balances held
abroad, driving an unrealized loss in the quarter.

Interest expense, net

Interest expense, net decreased $0.1 million, or 11%, to $0.7 million for the
three months ended June 30, 2022, as compared to $0.7 million for the three
months ended June 30, 2021. This decrease was mainly due to a reduction in our
long-term debt, partially offset by the increased interest rate on outstanding
debt.

Income tax provision

The provision for income taxes was $4.6 million, or an effective rate of 24.3%
for the three months ended June 30, 2022, as compared to a provision of $1.5
million, or an effective rate of 15.6% for the three months ended June 30, 2021.
The change was primarily driven by an increase in income before taxes of
$9.3 million and a decrease in discrete tax benefit of $0.2 million, primarily
related to stock-based compensation.

Financial position, liquidity and capital resources

Insight

From June 30, 2022we have had $72.2 million cash and cash equivalents. Moreover, from June 30, 2022we had a borrowing capacity of $100.0 million under our amended revolving credit facility.

Our primary cash needs are for capital expenditures, retail product displays and
working capital. Capital expenditures typically vary depending on strategic
initiatives selected for the fiscal year, including investments in
infrastructure, digital capabilities and expansion within or to additional
retailer store locations. We expect to fund ongoing capital expenditures from
existing cash and cash equivalents, cash generated from operations and, if
necessary, draws on our Amended Revolving Credit Facility.

Our primary working capital requirements are for product and product-related
costs, compensation and benefits, rent, distribution costs, advertising and
marketing. Fluctuations in working capital are primarily driven by the timing of
when a retailer rearranges or restocks its products, expansion of space within
our existing retailer base and the general seasonality of our business. As of
June 30, 2022, we had working capital, excluding cash, of $82.7 million,
compared to $84.7 million as of March 31, 2022. Working capital, excluding cash
and debt, was $88.5 million and $90.4 million as of June 30, 2022 and March 31,
2022, respectively.

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We believe that our operating cash flow, existing cash and cash equivalents and
available financing under the Amended Revolving Credit Facility will be adequate
to meet our planned operating, investing and financing needs for the next twelve
months. If necessary, we can borrow funds under the Amended Revolving Credit
Facility to finance our liquidity requirements, subject to customary borrowing
conditions. To the extent additional funds are necessary to meet our long-term
liquidity needs as we continue to execute our business strategy, we anticipate
that they will be obtained through the incurrence of additional indebtedness,
additional equity financings or a combination of these potential sources of
funds; however, such financing may not be available on favorable terms, or at
all. Our ability to meet our operating, investing and financing needs depends to
a significant extent on our future financial performance, which will be subject
in part to general economic, competitive, financial, regulatory and other
factors that are beyond our control, including those described elsewhere in Part
II, Item 1A "Risk factors". In addition to these general economic and industry
factors, the principal factors in determining whether our cash flows will be
sufficient to meet our liquidity requirements will be based on our ability to
provide innovative products to our customers, manage production and our supply
chain.

Cash flows

                                         Three months ended June 30,
(in thousands)                                2022                   2021
Net cash provided by (used in):
Operating activities              $        30,578                  $ 7,492
Investing activities                         (241)                  (2,336)
Financing activities                       (1,442)                     478
Net increase in cash:             $        28,895                  $ 5,634

Cash flow from operating activities

For the three months ended June 30, 2022, net cash provided by operating
activities was $30.6 million. This included net income as adjusted for
depreciation, amortization and other non-cash items of $30.8 million and an
increase in operating assets and liabilities as shown on the statement of cash
flows of $0.2 million. The increase was primarily driven by a $6.7 million
increase in accounts receivable, a $3.3 million increase of prepaid expense and
other assets, a $3.4 million decrease of accounts payable and accrued expenses,
and a $0.9 million decrease of other liabilities. This was partially offset by a
$14.2 million decrease related to inventory.

For the three months ended June 30, 2021net cash provided by operating activities was $7.5 million. This included net income adjusted for depreciation, amortization and other non-cash items of $23.7 million and an increase in operating assets and liabilities as shown in the statement of cash flows of $16.2 million.

Cash used in investing activities

For the three months ended June 30, 2022, net cash used in investing activities
was $0.2 million. The change was primarily driven by a decrease in capital
expenditures related to machinery, equipment and software during the three
months ended June 30, 2022, as compared to net cash used in investing activities
of $2.3 million during the three months ended June 30, 2021.

Cash (used) from financing activities

For the three months ended June 30, 2022the net cash allocated to financing activities was $1.4 million and was primarily attributable to the repayment of the term loan facility.

For the three months ended June 30, 2021net cash provided by financing activities was $0.5 million and was primarily related to proceeds from the amended revolving line of credit, net of term loan facility repayments, and cash received from the exercise of stock options.

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Description of the debt

Amended credit agreement

On April 30, 2021we have amended and restated the Prior Credit Agreement (the “Amended Credit Agreement”), amended and restated the Prior Term Loan Facility and the Prior Revolving Credit Facility, and refinanced all loans under the previous credit agreement.

The Amended Credit Agreement has a five year term and consists of (i) a $100
million revolving credit facility (the "Amended Revolving Credit Facility") and
(ii) a $100 million term loan facility (the "Amended Term Loan Facility").

All amounts under the Amended Revolving Credit Facility are available for draw
until the maturity date on April 30, 2026. The Amended Revolving Credit Facility
is collateralized by substantially all of our assets and requires payment of an
unused fee ranging from 0.10% to 0.30% (based on our consolidated total net
leverage ratio (as defined in the Amended Credit Agreement)) times the average
daily amount of unutilized commitments under the Amended Revolving Credit
Facility. The Amended Revolving Credit Facility also provides for sub-facilities
in the form of a $7 million letter of credit and a $5 million swing line loan;
however, all amounts under the Amended Revolving Credit Facility cannot exceed
$100 million. The unused balance of the Amended Revolving Credit Facility as of
June 30, 2022 was $100.0 million.

Both the Amended Revolving Credit Facility and the Amended Term Loan Facility
bear interest, at borrowers' option, at either (i) a rate per annum equal to an
adjusted LIBOR rate determined by reference to the cost of funds for the United
States dollar deposits for the applicable interest period (subject to a minimum
floor of 0%) plus an applicable margin ranging from 1.25% to 2.125% based on our
consolidated total net leverage ratio or (ii) a floating base rate plus an
applicable margin ranging from 0.25% to 1.125% based on our consolidated total
net leverage ratio. The interest rate as of June 30, 2022 for the Amended Term
Loan Facility was approximately 3.5%.

The Amended Credit Agreement contains a number of covenants that, among other
things, restrict our ability to (subject to certain exceptions) pay dividends
and distributions or repurchase our capital stock, incur additional
indebtedness, create liens on assets, engage in mergers or consolidations and
sell or otherwise dispose of assets. The Amended Credit Agreement also includes
reporting, financial and maintenance covenants that require us to, among other
things, comply with certain consolidated total net leverage ratios and
consolidated fixed charge coverage ratios. As of June 30, 2022, we were in
compliance with all financial covenants under the Amended Credit Agreement.

Contractual obligations and commitments

No material changes have been made to our contractual obligations and commitments as disclosed in the annual report.

Off-balance sheet arrangements

We are not party to any off-balance sheet arrangements.

Significant Accounting Policies and Estimates

The MD&A is based upon our condensed consolidated financial statements, which
have been prepared in accordance with U.S. generally accepted accounting
principles. The preparation of these condensed consolidated financial statements
required the use of estimates and judgments that affect the reported amounts of
our assets, liabilities, revenues and expenses. Management bases estimates on
historical experience and other assumptions it believes to be reasonable under
the circumstances and evaluates these estimates on an on-going basis. Actual
results may differ from these estimates. There have been no significant changes
to the critical accounting policies and estimates included in the Annual Report.

Recent accounting statements

Recent accounting pronouncements are disclosed in Note 2 to our condensed consolidated financial statements.

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