Operator:

Good afternoon and welcome to Ulta Beauty's Conference Call to discuss Results for the Ulta Beauty's First Quarter 2024 Earnings Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Ms. Kiley Rawlins, Vice President of Investor Relations. Ms. Rawlins, please proceed.

Dave Kimbell:

Thank you, Kylie, and good afternoon, everyone. We appreciate your interest in Ulta Beauty. For the first quarter, net sales increased 3.5% to $2.7 billion and comp sales grew 1.6%. Operating profit was 14.7% of sales and diluted EPS was $6.47 per share. We expected comp growth this quarter would be in the low single-digit range as we lapped strong performance last year. I am proud of how our teams adjusted our go-to-market activity to adapt to a rapidly evolving marketplace, thoughtfully managed expenses across the enterprise and importantly, continued to execute our transformational agenda with excellence. As we look forward to the rest of the year, we believe it is prudent to anticipate a continuation of the dynamic environment we experienced in the first quarter and therefore have adjusted our expectations for the remainder of the year. Paula will give more detail on these revisions later in her prepared comments. Before we talk about the quarter, I want to emphasize a few important points. First, we are confident in our model and our ability to gain share and drive significant sustainable value over the long-term. The actions we have taken and investments we have made over the past few years have fortified our operating foundation and we are a stronger, more profitable company today than we were just a few years ago. And we have an outstanding team that knows how to execute and deliver profitably and they are doing so every day with focus, passion and determination. However, we are not satisfied with our market share trends and we are taking actions to reinforce our leadership position and accelerate growth. For more than 30 years, Ulta Beauty has disrupted the beauty industry by bringing mass brands, prestige brands, luxury brands and services together in an accessible, fun shopping environment. This differentiated strategy, combined with welcoming an inclusive guest experiences, has enabled us to shape consumer expectations and drive profitable growth. Today, we operate nearly 1,400 stores and manage a multibillion dollar digital business, providing guests with unique opportunities to play, discover and try beauty. With warm and authentic experiences, our passionate associates are creating strong emotional connections with our guests and helping them discover beauty on their own terms. We've created a world-class loyalty program that engages with more than 43 million active members and provides us with valuable customer and transaction data, and we've expanded our differentiated assortment and built strong strategic partnership with large and emerging brands around the world. We operate in a healthy, growing category. While growth is moderating as expected after three years of unprecedented expansion and competitive intensity is increasing, we have a powerful operating model, excellent brand partnerships and I believe the impact of our winning culture and outstanding teams will enable us to protect and expand our leadership position. In the first quarter, we've strengthened our market position in several areas. Consumer awareness and brand love for Ulta Beauty continues to increase. Our marketing amplification of key brand launches, elevation of our tentpole events and culturally relevant social activation delivered 4 points of improvement in unaided brand awareness this quarter, driven primarily by key growth cohorts. Trust for our expertise, welcoming guest experiences, a diverse assortment and efforts to increase convenience through multiple touch points drove our brand love metric to record levels with strong gains among both Gen Z and baby boomers, which demonstrates the broad appeal of our model. Newness is resonating with our guests. Recent brand launches, including Sol de Janeiro, Charlotte Tilbury and exclusive brands win by Serena Williams and Kylie Jenner Fragrance, are driving sales, new member acquisition and member reengagement. We delivered traffic growth in both our store and digital channels. We increased marketing investments across TV, audio and social platforms to maximize our brand launches, support our semiannual beauty and Spring Haul tentpole events, and amplify our brand equity with the Joy Project. These strategic media investments drove higher traffic across our web and app platforms and increased traffic growth per store, even as we lapped strong double-digit growth last year. Our world-class loyalty program expanded again this quarter with the retention of our most valuable members remains very strong. We ended the quarter with 43.6 million Ulta Beauty rewards members, 6% higher than last year, primarily driven by member retention. Additionally, we continued to acquire new members and reengage lapsed members. Targeted marketing efforts are elevating more members to our platinum and diamond tiers, and exclusive promotions, point accelerators and personalized contents are driving engagement and retention of these valuable members. Our new store portfolio continues to perform well. During the quarter, we opened 12 stores, seven more than last year, and their performance exceeded our expectations. Our associate retention has improved across stores, distribution centers and our corporate teams, and we are on track to complete critical elements of our transformational agenda this year, giving us a stronger foundation for future growth. Our teams are operating at a high level as we execute these transitions, and it is worth noting that they delivered several significant operational milestones this quarter. First, we successfully completed the final phase of our digital store transition and are on track to decommission the legacy platform in the second quarter. Second, we completed an important phase of Project SOAR with a successful transition of our Dallas, Greenwood and Fresno distribution centers to our new ERP system. Now, all of our primary distribution centers are operating on the same platform. Third, we began the process of migrating stores to our new ERP system and I am pleased to share that we have completed the transition in 30% of our fleet. The benefits include an upgrade of a key digital application to provide our store teams with a guided user experience, enhanced reporting to support inventory management, and increased visibility to product information to elevate the guest experience. Beauty is a competitive category and our success reflects the differentiation we provide in the market and our effectiveness in creating meaningful and enduring guest connections. These strengths have enabled us to outperform the market, especially through the pandemic recovery. According to Circana data, between 2019 and 2023, Ulta Beauty expanded its share of both prestige and mass beauty significantly. More recently, the strength of the beauty category, combined with an attractive margin profile, has drawn significant and diverse competition to the category. Today, there are significantly more places to buy beauty, especially prestige beauty, with more than 1,000 new points of distribution opened in the last two years. Additionally, prestige brands are expanding their online availability as digital penetration grows in the category. As a result, our market share has been more challenged for the last few quarters, particularly within the prestige beauty category. Using the consumer lens of how guests experience Ulta Beauty through all of our touch points, we estimate we maintained our share of the total U.S. beauty product industry this quarter. Based on Circana data for the 13 weeks ended May 5, 2024, we outpaced the growth of the mass market but lost share in prestige beauty, primarily driven by pressure in makeup and hair. This prestige share pressure was concentrated in stores as we increased share in e-com for the quarter. Given our proven ability to engage our guests and lead the industry, I am confident we can reinvigorate market share gains. At our Analyst Day in October, we will share longer term plans to drive share growth, but today I want to highlight actions we are taking now to leverage our traffic growth, increase conversion and accelerate top line growth. Our plans are focused on five key areas; strengthening our assortment, accelerating our social relevance, enhancing our digital experience, leveraging our world class loyalty program and evolving our promotional levers. Starting with our assortment, we are enhancing our assortment with the addition of highly recognized brands as well as emerging and exclusive brands. This year, our brand pipeline includes more than 25 new brands, including many exclusive to Ulta Beauty. Importantly, this year's pipeline includes a balanced mix of category growth driving brands like Sol de Janeiro and Charlotte Tilbury and Naturium and emerging exclusive brands like Wyn, a makeup brand developed by Serena Williams and Orebella, a fragrance brand developed by Bella Hadid. To support stronger growth of our core assortment, we plan to accelerate growth with key exclusive brands including Polite Society, Live Tinted and LolaVie, among others. We plan to expand key growth driving brands into more stores and we are excited to relaunch the Ulta Beauty collection this summer. Additionally, we intend to leverage our marketing and social capabilities to lean into emerging trends, amplify key growth brands and drive relevance and engagement and activate new trend focused events across all our channels. Social media is amplifying and accelerating beauty. Social relevance is the gateway to customer reach, connection and engagement, and relevance drives sales and loyalty. While we have increased our EMV and share voice across key platforms including TikTok and Instagram, we see further opportunity to ensure we are at the heart of the social and cultural conversation for beauty. To accelerate our social relevance, we will scale our creator network, amplify brand networks and collaborations, and use our platforms to showcase our unique assortment. With the completion of our digital store transition, we are increasing our focus on leveraging new capabilities and optimizing the guest experience to accelerate traffic, drive conversion and increase average ticket. We recently expanded our partnership with DoorDash with our launch on DoorDash Marketplace, which extends our unique assortment to the more than 70 million active users of the DoorDash app. We will introduce new digital buying guides that amplify search engine optimization while providing guests with educational content, beauty tips and product recommendations. We will improve the path to purchase through guided navigation and leverage new innovative search capabilities to facilitate discovery and we will accelerate app adoption through targeted communication and offers as app users spend nearly two times more. In the first quarter, our app accounted for 57% of our e-commerce sales, up more than 450 basis points compared to last year. Our loyalty program is a powerful strategic asset and we will lean into this platform to drive greater engagement and support top line growth. Earlier this year, we rebranded the program to Ulta Beauty rewards, enhanced the birthday experience, and launched a refreshed look in stores online and across social. These improvements are driving greater awareness and deepen connections with our members. We have also introduced new mobile POS capabilities to engage existing members and drive new member acquisition, and we are testing new ways for guests to engage with loyalty benefits in store transactions. At the same time, we are leaning in to amplify the value of the program through member love events and social engagement and we are also testing new gamification platforms, creating new ways to engage with our program and Ulta Beauty. And later this year, we will activate new marketing technology that will advance our personalization efforts with our guests. Finally, we continue to enhance our promotional events and strategies. We will evolve our unique tentpole events to drive basket and new member acquisition, increase our use of effective targeted offers while eliminating or shifting less productive offers, and to create new platforms and offers to excite and engage our guests. In closing, we continue to expect the beauty category will grow in the mid-single-digit range this year barring a major economic event. We are confident we have identified the right actions to deliver stronger revenue growth, and our associates are working together as one unified Ulta Beauty team to expand our leadership position and deliver engaging guest experiences across all our touch points. I look forward to sharing our progress with you throughout the year. And now, I will turn the call over to Paula for a discussion of the financial results. Paula?

Dave Kimbell:

Before we begin the Q&A session, I'd like to recap our perspective on the first quarter and reiterate our confidence in our plans. Love for the Ulta Beauty brand is growing. Our member retention is strong and our teams are laser focused on delivering great guest experiences, while managing through an evolving environment. We are pleased with the progress we are making across key areas of our business and we are taking steps to drive stronger performance through strengthening our assortment, expanding our relevance, enhancing our digital experience, leveraging our world class loyalty program and evolving our promotional levers. We have a strong plan in place to navigate near-term pressures while continuing to invest in support of the long-term opportunity. I am confident in the power of our differentiated business model and our team's ability to execute with excellence against our priorities and deliver value for our shareholders. Ulta Beauty is a force in the beauty industry as we captured a large share of this dynamic category and I am as optimistic as ever about the future of our business. And now I'll turn the call over to our operator to moderate the Q&A session.

Simeon Siegel:

Thanks. Hey everyone, good afternoon. Dave, I guess maybe following up on that, I was just hoping you could elaborate a little bit more on the guidance change, perhaps to oversimplify it. And I apologize if this is an annoying question, but I guess are you comfortable that you're lowering it deep enough and now work towards the long-term margin rate? Just any help in terms of thinking how you're thinking about your margin target and the underlying opportunity would probably be helpful. Thank you, guys.

Paula Oyibo:

Sure. Thank you, Dave. Good afternoon, Simeon. What I would say is, as we think about our operating margin guide of 37 to 40 on the comp of 2% to 3%, we've shared that top line performance plays an important role in driving fixed cost leverage for us. And with the comps now below our long-term algo of 3% to 5% comps, we expect less leverage and have adjusted our operating margin expectations accordingly. One thing that I will also share is that in addition to the fixed cost deleverage on lower sales, we've embedded flexibility in our guidance to invest in sales levers like promo, marketing and store labor to strengthen our top line and defend share and so that also gives us confidence in the adjusted comp guide that Dave spoke about.

Dave Kimbell:

Thanks, Simeon.

Simeon Gutman:

All right, that was a setup. Hi, everyone. So my question, Dave, talking about prestige and the increased shifting to channels, can you share if that's brands that are deciding to sell on different channels or you're just seeing the customer, I guess, moving over themselves and have we absorbed the worst of that? That's the first part. And then this is connected to the question, is it fair to think that merchandise -- is merchandise margins about 200 basis points above where we were around the pre-COVID time, and it feels like you have an appropriate mix now? You kind of see where the business is going in terms of the tradeoff between sales and gross margin, such that we're not going to retest those pre-COVID lows. Thank you.

Paula Oyibo:

Sure, Dave. Simeon, I'll give a little color on merch margin. When we think about merch margin from a guidance perspective, we currently expect lower merchandise margin for the year due to the lower sales, increased promotional activity and category mix. We saw merchandise margin decline in Q1 generally for these similar reasons, increase in promo, adverse impacts from brand mix, and then we had a bit of lapping price increases from 2023. When we think about 2020 versus 2019, you are correct. As of last year, we were about 200 basis points of merch margin above 2019 levels. And really, what I would say is a lot of that benefit that we saw was coming from ongoing category performance improvement efforts by our merchandise team, category mix and promo efficiency. Now we are seeing that some of that merch margin is getting a bit pressured as we're seeing in Q1 and as reflected in our current guide.

Operator:

Our next question is from Kate McShane with Goldman Sachs. Please proceed.

Dave Kimbell:

Well, what I'd say is, as we look forward throughout the year to clarify, Paula mentioned in her remarks that we are protecting our investment in marketing, in store labor and other aspects that we know drive our business and that's reflected in our updated operating margin outlook and we'll continue to invest appropriately as we see opportunities to support growth, so all of that is reflected. The types of things we're doing are continuing to strengthen our connection with our guests. As I said, our unaided awareness and our brand love both increased meaningfully in Q1 after strong growth throughout 2023, we are on a good trajectory as it relates to connecting our guests. The fact that we're driving traffic in both to our stores and online, we're growing our connection to our app, our loyalty, engagement and retention is strong. Our marketing efforts are working. The point in my comments about us finding even better ways and stronger ways to connect is an always on focus for us and we see continued opportunity to drive greater connection through social, so that will be a big focus for us. I highlighted our growth in EMV, which is which we're pleased with, but we know we can do even more. It is the key driver of this category, the way so many consumers are learning and discovering and engaging in the category. So we will continue to have a focus there. And importantly, we're partnering with our brands to find ways to connect as their brands drive growth within our environment. So we're pleased with the efficiency of our spend. It is driving our results and we'll continue to optimize our spend and add appropriately throughout the year as we see opportunities and all of that is reflected both in our top line and our operating margin outlook.

Operator:

Our next question is from Chris Horvers with JPMorgan. Please proceed.

Dave Kimbell:

All right, thanks Chris. Yes, let me take the first part, and again, I'll ask Paula to talk about most recent trends. Yes, 1.6% comp is and we talked about delivering comps in the first half of the year in the low single digits. The reason that we see the need to adjust our outlook for the year is the 1.6% is clearly, and we talked about this earlier in the quarter Chris, at the low end of that range of low single digits. We anticipate the pressures and dynamics that I've been talking about to continue into Q2. And so as we looked at the second half of the year, while we see upside potential through the activities that I mentioned in driving elevated efforts across many parts of our business, strong newness platform and an easier overlap, we do anticipate an increase in the second half of the year, but because of the first half landing at the low end of that range, we see, we felt it was appropriate to update our outlook for the whole year, anticipating some of the pressures, even with growth in the second half of the year, elevated growth in the second half of the year, those pressures continuing through throughout the year, so that all lands us in that updated outlook of 2% to 3%. As far as April and more recent outlook Paula, do you want to talk about that?

Chris Horvers:

Got it. And then just one quick follow up. You did mention that you expect merchandise margin, I believe up in the back half of the year, but lower in the first half. So what drives the change in the merchandise margin dynamic? Thank you.

Operator:

Our next question is from Mark Altschwager with Baird. Please proceed.

Dave Kimbell:

Mark, that's a great question and we're very confident in that. We have worked hard over many years to build very strong relationships with our brand partners, both the largest brands in the category and a real dedicated effort in supporting emerging new smaller brands. And that is an area of high confidence that we'll continue to be connected and partnering with our brands. We are a very large part of the category across all segments; mass and prestige, makeup, hair care, skincare, fragrance, bath, wellness. We play a significant role. We have a unique proposition. Nobody does what Ulta Beauty does. Our stores and the experience we deliver is special and differentiated and our brands recognize that. They value the opportunity that they have in our stores and on our online to connect with now nearly 44 million loyalty members and the activation and capabilities we have to activate their strategies directly with the largest pool of beauty enthusiasts in the country. And we have long been a destination for growth and so many of our brands are driving growth and taking full advantage of that experience. So I am confident in our brand relationships as we work through some of the changes in the category. In my direct discussion with brands and our overall relationships, we are working together to continue to drive growth and strengthen our partnership, add new brands, as many of which I've highlighted, and drive our business forward in partnership with our brands and that will continue for sure.

Paula Oyibo:

No, real concern with regards to inventory. I guess for perspective, approximately 75% of that inventory growth in the quarter was attributable to our new brands and our new stores that were mainly due to opening at DC. We do expect that growth to normalize as we progress during the year. And I know we've shared this previously, but as you think about inventory, keep in mind that most of our inventory is current and largely what we consider core product, which means very little seasonal or at risk inventory. And as you mentioned, we do look for opportunities to invest in inventory to best position ourselves to capture future demand and so we are also doing that as well.

Oliver Chen:

Hi, David and Paula. Regarding makeup being down mid-single digits and also thinking about the newness opportunity there, what's embedded with guidance for how that meaningful category may proceed? And we continue to see a lot of innovation at competitors such as Amazon, which is leveraging a lot of personalization as well as affiliates and community members. What are your thoughts in terms of how you'll remain competitive? And I know there has always been a lot of overlap with product that they sell and you sell as well. Thank you.

Oliver Chen:

Thank you. Best regards.

Operator:

Our next question is from Michael Binetti with Evercore ISI. Please proceed.

Paula Oyibo:

Okay, let me, I'll take the first question and then Dave will talk about what we're seeing from the social environment with the bank [ph]. So Michael, what we've shared is that the top line performance plays a really important role in our ability to drive fixed cost leverage and comps below our long-term algorithm really causes a challenge for us to be able to drive margins at that range above the 14% and 15%. You see that with how we've adjusted our guidance. So on a 2% or 3%, our low end has come down because of the effect of that difficulty of leveraging occupancy costs. What I would say is, from a long-term perspective, we're not sharing long term guidance on the call today, but we do have an Investor Day in October and we plan to share more about the opportunities ahead, how we're thinking about the next phase of growth, and of course how that impacts our financials.

Kiley Rawlins:

So, operator, I think we have time for one more question.

Krisztina Katai:

Hi, good afternoon. Thanks for squeezing me in. So Dave, I wanted to follow-up on the call to action items. Maybe if you could talk a bit more about how these are helping with just the increased member retention you're seeing. What you can share on the promotional efficiencies of your different and point multiplier events that you have been working on to spend market share. And then secondly, just how do you view the composition of your brand portfolio currently? And I'm asking this in particular, just your legacy brands with some of them getting their own storefront at a competitor's website. Thank you.

Krisztina Katai:

Okay, great. Thank you very much.

Operator:

Thank you. This will conclude today’s conference. You may disconnect your lines at this time and thank you for your participation.

Operator:

Good afternoon, and welcome to Ulta Beauty's Conference Call to discuss results for the third quarter of fiscal 2023. [Operator Instructions] As a reminder, this conference is being recorded.

Kiley Rawlins:

Thank you. Good afternoon, everyone, and thank you for joining us for a discussion of Ulta Beauty's results for the third quarter of fiscal 2023. Hosting our call today are Dave Kimbell, Chief Executive Officer; and Scott Settersten, Chief Financial Officer; Kecia Steelman, President and Chief Operating Officer, will join us for the Q&A session; Paula Oyibo, Senior Vice President of Finance, is also on the call with us today.

David Kimbell:

Thank you, Kiley, and good afternoon, everyone. We appreciate your interest in Ulta Beauty. I'll start today with comments about our CFO transition plans and then discuss our third quarter performance. Then Scott will review the financial results and our outlook.

Our holiday campaign this year is "The gift is just the beginning," which underscores our belief in the power of beauty and Ulta Beauty. While a gift can be a signature fragrance or an innovative hair tool, beauty can also be the gift of self-care, fun and joy. Through this campaign, we're celebrating the moments that make the holiday special:

family, friends, connections, joy and pairing them with the perfect gifts.

Scott Settersten:

Thanks, Dave. Good afternoon, everyone. I want to echo Dave's sentiments and thank the Ulta Beauty team for delivering third quarter financial results that were ahead of our internal expectations.

Dana Telsey:

Congratulations on the nice results. And Scott, congratulations on such a wonderful tenure at Ulta, and looking forward to your next chapter. And Paula, congratulations on the new role.

In new items with existing brands continue to make a difference in the category, and we're confident in what's ahead. A couple of recent examples:

Tarte's Shape Tape Radiant Concealer, exclusive at Ulta Beauty; Juvia's Place blush liquid -- blushes, exclusive at Ulta; and newness from other existing brands like Clinique, Benefit, Anastasia, NYX, Maybelline, go down the list.

Lorraine Maikis:

You mentioned some brick-and-mortar share loss in prestige in the quarter. Can you talk about strategies, brand launches, marketing that you're working on to defend the share and return to growth?

Operator:

Our next question comes from the line of Mark Altschwager with Baird.

David Kimbell:

Yes. I would -- yes, so I'll start and let Scott give a little insight here. When we look at the promotional environment, maybe I'll start there, Mark. The -- as we highlighted in the third quarter, the promotional environment was higher in Q3 than a year ago, but still meaningfully below 2019 levels. So while we're seeing some increase, it's -- we don't see an irrational promotional market. We're definitely not back to 2019 levels. And we've been able to leverage our capabilities behind CRM and overall personalization to manage more effectively within our promotional intensity.

Scott Settersten:

And I would just reiterate what Dave said, our fourth quarter comp sales expectations have not changed, all right? We are giving ourselves a little bit wider range, I would say, on operating margin than you would probably expect to see at this stage of the year. But it is $1 billion above the last couple of quarters. So small changes in consumer reaction could have a bigger impact on our business.

Operator:

And our next question comes from the line of Michael Binetti with Evercore ISI.

David Kimbell:

Yes, I'll start with comp. But yes, I think you've said it well. We're again, when we look long term, very confident in the total growth of the category and our ability to gain share. That's certainly our objective all the time. As we look in the fourth quarter, it's a -- we are lapping a very strong fourth quarter last year. We anticipated this. We've been talking about a moderation in our comp trends all year long. And so far, it's played out essentially as we thought with some modest improvement, a little bit ahead of that, but that's how we anticipated.

Scott Settersten:

And Michael, we're in the midst of a multiyear transformation on many fronts across the business that, again, we expect to deliver significant efficiencies and optimization opportunities for our business for many years to come. And so 2023 is an extraordinary investment year. A lot of it is coming through the SG&A line, again, the $60 million to $70 million on top of $50 million last year, again, we believe we're at or near the peak of that. Third quarter bore a large brunt of the burden for 2023. So we would expect SG&A growth to moderate in '24 and beyond.

Operator:

Our next question comes from the line of Oliver Chen with TD Cowen.

David Kimbell:

Yes. Thanks, Oliver. I'll start with stores. We continue to reiterate our outlook of 1,500 to 1,700 stores, and towards -- and we've said that we believe we'll be towards the high end of that range. That hasn't changed and we're confident in that. And that does not include our expansion in partnership with Target. And as I mentioned in the call, we're up to 510 of those locations.

David Kimbell:

Yes. You're sneaking another question in, Oliver. On Scott's announcement day, too, right? So -- but yes, AI is an important part of our business. You mentioned QM Scientific, which we bought a few years ago, really is one step among many to increase the power of advanced analytics to more personalize our guest experience.

Krisztina Katai:

I'll add my congratulations to both Scott and Paula. But my question is to you, Dave. I was wondering if you could talk about member engagement. You said that Diamond and Platinum members increased 20%. So what are you seeing with some of these newer members versus your more mature cohorts? And what are some of the early reads that you can share from a personalization effort perspective, how those are helping the maturation of wallet share or member spending that essentially gives you confidence that you can continue to deliver on your compound goals?

Kiley Rawlins:

Operator, I think we have time for one more question.

Michael Lasser:

Best wishes to Scott and Paula. My question is, how long are you willing to absorb market share losses in the prestige beauty category before responding with an increase in promotional activity? And if we assume that those market share losses extend into 2024, how is that going to impact Ulta Beauty's ability to achieve its earnings algorithm next year?

Operator:

And this concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.

Operator:

Good afternoon, and welcome to Ulta Beauty's conference call to discuss results for the second quarter of fiscal 2023.

David Kimbell:

Thank you, Kiley, and good afternoon. We appreciate your interest in Ulta Beauty. The Ulta Beauty team delivered strong performance again this quarter with sales, gross profit and SG&A expenses all better than planned.

Operator:

[Operator Instructions] Our first question is from Ashley Helgans with Jefferies.

David Kimbell:

Yes. Ashley, for the quarter, we saw strong traffic throughout the quarter with double-digit traffic. And we continue to be pleased with the engagement that we're seeing, and we saw actual comp performance sequentially accelerate through the quarter as well. And all of those trends are reflected into our updated and elevated guidance for the full year.

Kecia Steelman:

Yes. Actually, we've locked up about 50% of our stores right now. And what we're seeing is in the initial stores that we rolled out the locked fragrance cases for, we actually saw sales improvement because we were in stock with the product and we had it available to the guests. So we're staying very close to that. We're also investing in labor because we don't want to be sales preventative from the guests being able to purchase. So that's a little bit of the investment in labor that you heard earlier from Scott, is that in these stores, we are upping our labor a bit because we want to make sure that we're able to take care of the guests.

Operator:

Our next question is from Michael Baker with D.A. Davidson.

David Kimbell:

Yes, I'd say, yes, we do anticipate continuing to gain share. We've done so through the first half of the year, and that is our outlook. The commentary is really as we look into the second half of the year, we see some strength. Engagement continues to be high. Certainly, our business is performing very well. We're attracting new members. We're growing across all key categories, both -- and then in both e-com and stores. But we also see some uncertainty as we get in later into the year.

Operator:

Our next question is from Olivia Tong with Raymond James.

David Kimbell:

What was the last part of that question? What was -- could you repeat the last...

David Kimbell:

Well, yes, we -- as I discussed, we've seen strong performance really across our entire assortment as we look at it, but mass has been a bit stronger for a couple of quarters now in -- across our business. And that's driven largely by strong consumer engagement across some key brands in makeup, health, NYX and some others are really hitting the market with great innovation, great marketing, great consumer engagement. And the fact that we offer the full assortment from mass to prestige is a real benefit. We're able to capitalize on strong trends and strong engagements across all aspects of that.

Anthony Chukumba:

Congrats on the solid results. So just a real quick one. You mentioned luxury, and in fact, it's exceeding your expectations. You mentioned launching Pat McGrath Labs. Just -- it's all one related question in just 2 parts.

David Kimbell:

Yes. Won't break out exact percentages. Again, to reiterate, it's in 200 stores. We're really pleased with it, a strong assortment across a number of the very best brands in luxury. Chanel, Dior, NATASHA DENONA, HOURGLASS, an extension of Chanel with Chanel Número Uno, Lancôme, Absolute, now Pat McGrath. A luxury fragrance business with brands like YSL and TOM FORD and Viktor&Rolf.

Christopher Horvers:

Layered gross margin question. So how did shrink in the promotional environment play out in the second quarter relative to your expectations? Have you changed any of your expectations around those line items in the back half? And do you expect any improvement perhaps in the shrink line?

Scott Settersten:

Sure, Chris. So yes, versus -- we did say, again, versus our expectations for the quarter, we're very happy with the overall financial results we were able to deliver. So breaking it down a little bit more, I'd say merchandise margin was better than what we expected, and so that speaks partially to the promotional lever that people are focused on here. So again, generally better than what we expected, so we can lean in and lean out. That's 1 of the great strengths of our business, being able to have real-time information and be able to take quick action and be agile.

Scott Settersten:

Yes. So there was -- we -- third quarter last year is where we saw a significant step-up in the pricing increases across the portfolio, and really, the margin benefit started really rolling through in the second quarter and into the back half of the year. So this is really the toughest anniversary point in the year is ahead of us right now, and that's why we're calling out third quarter. Third quarter is kind of peak on a number of different fronts. Again, every year is a little unique, but the third quarter now, we've got a little bit of delays in some of our project work, which is shifting back some of our IT expense into the third quarter. And a lot of that flows through SG&A.

Operator:

Our next question is from Adrienne Yih with Barclays.

Scott Settersten:

Yes. We don't want to get into quantifying it specifically, Adrienne. But I'd say directionally, you're in the right zip code. So yes, on the SG&A side, that's roughly kind of the shift back into the third quarter on some of the IT spend. And yes, operating margin is going to be down meaningfully versus what we saw earlier this year, and that's going to result in negative EPS growth year-over-year for the third quarter.

Kecia Steelman:

Adrienne, I'll start, and then I'll kick it over to Scott. So yes, we're in the middle of an ambitious transformational agenda. That's for sure. And part of this is really positioning all parts of the organization for our future efforts, and overall we're really pleased with how our progress is working. But anyone who's taken on this large scale of a project, we definitely have timing shifts that happen because we want to make sure that while we're staying forward, progressing and moving, we are really limited in our distraction and our disruption for our guests and also for our associates.

Operator:

Our next question is from Kelly Crago with Citi.

Katharine McShane:

Thanks for giving me another chance here to ask our question. I wondered if you could talk a little bit about the strategy behind combining your promotional events like you did this past quarter? And did you see a bigger lift as a result of that change versus last year? And will there be any similar approaches to some of your promotional events being taken in the second half?

Operator:

Our next question is from Oliver Chen with TD Cowen.

David Kimbell:

Yes. Well, I'd say first of all, we're just pleased overall with the continued engagement that beauty enthusiasts are showing for this category. Coming out of the pandemic for these last a couple of years now, just a high level of engagement. You know how over the long term, last 50 years, this has been a strong growth -- consistently growing category because of the emotional connection that it plays in our guest lives, the importance it has and how they express themselves to the world, and that is more true now than ever. And some of the behaviors and engagement tools that emerge coming out of the pandemic continue to fuel the category. Strong innovation, strong connection through marketing and consumer tools and an increased understanding of the role of beauty to wellness and self-care.

Kiley Rawlins:

Paul, I think we have time for maybe one more question.

Steven Forbes:

Dave, Scott, you both mentioned in your prepared remarks the expectation for promotions to remain well below 2019 levels. And I was hoping you could just maybe clarify that statement? Is it isolated in 2023? Or is it meant to be a longer-term comment? And as we think about merchandise margin risk in the model, any way to frame what the sort of structural change in promotional activity in the category means for the margin profile in and of itself?

David Kimbell:

Great. Well, thank you all for joining us today. I appreciate your interest and engagement in Ulta Beauty. I want to close by thanking all of our Ulta Beauty associates for their continued care for our guests while delivering another quarter of strong financial results. We look forward to speaking to all of you again when we report results for the third quarter on November 30.

Operator:

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

Operator:

Good afternoon, and welcome to Ulta Beauty conference to discuss results for the fourth quarter of fiscal 2022. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Ms. Kiley Rawlins, Vice President of Investor Relations. Ms. Rawlins, please proceed.

Scott Settersten:

Thanks, Dave, and good afternoon, everyone. Before I review our financial results, I want to take a moment to express my sincere gratitude to our teams for delivering these exceptional results for our shareholders. We have long known our associates are our competitive advantage, and this year's results are an ongoing reflection of their relentless commitment to our guests and to executing with excellence.

Katharine McShane:

I think you mentioned there were 5 points of pricing that you got in the comp for Q4. How should we think about the role of higher prices in the 2023 comp guide?

Anthony Chukumba:

Congrats on an incredibly strong year. I was intrigued by your comments about, I guess, this luxury department is -- or expanding the luxury beauty offering in select stores and online. What exactly does that look like? Because when I think about Ulta, particularly where you are now versus where you were, let's say, 10 years ago, you have a ton of luxury brands. So if you can just help me sort of dimensionalize that.

Operator:

Our next question is from Christopher Horvers with JPMorgan.

David Kimbell:

Let's see. So a few things in that. First of all, yes, January was elevated, as Scott said there. And there were multiple factors. It's hard to nail down exact drivers, exact -- the exact elements of the contribution, but you mentioned a few, Omicron, lapping Omicron being one of those. And -- but we -- the underlying consumer engagement was strong as we emerged out of holiday. There's no doubt about that. The importance of the category, the elevated connection between beauty and wellness is showing up in January and gives us confidence as we go into the year.

Operator:

Our next question is from Adrienne Yih with Barclays.

Scott Settersten:

Yes, Adrienne. Maybe I'll just give that a slightly different spin. So again, as we said, we're confident that we can deliver now adjusted 14% to 15% operating margin on a 3% to 5% comp for the next few years. Again, we came -- at our Analyst Day back in late fall 2021, we were giving our point of view on the financial model through the end of 2024. So since then, a lot of things have changed. I think less so on the sales drivers because there's a lot -- again, this category provides a lot of opportunities for us to drive the top line through various means.

Operator:

Our next question is from Kelly Crago with Citi.

David Kimbell:

Great. Yes. Of course, our assortment is key to our success. One of the things that's really encouraging to us and again, gives us confidence moving forward is our performance has been broad-based. We're seeing double-digit growth across all major categories. And as we look forward into 2023, we see good healthy momentum in each of the categories. So we feel confident.

Simeon Gutman:

I hope you can hear me, and well done on 2022. Scott, I may have missed this, but I heard modest deleverage on gross margin. I don't know if you gave any framework for that. But if this math is right, down 50 or so, it means SG&A dollars would be up around 8%. And if those are roughly right numbers, can you get us the building blocks to why SG&A is up that much? And then obviously, if gross is down even less, then the dollars are greater. It just seems like a big amount. I'm curious what the building blocks are.

Jungwon Kim:

This is Jonna on for Oliver. Just curious what you're seeing in terms of the promotional environment broader in the industry and you talked about normalizing promo levels. But what are your strategies as you think about 2023?

Dana Telsey:

Making sure you can hear me okay. As you think about the levels of strength that are out there and obviously was incorporated into the results, how are you looking at that for 2023? And what are you baking in? And then just on pricing, where the expectation to go to a more normalized pricing cadence, what do you see in that more normalized pricing cadence of increases? And does it differ by category?

Operator:

Our next question would be from Mark Altschwager with Baird.

Kecia Steelman:

I'll go ahead and start. And what I would say is that we've got 3 areas of really concentrated efforts in our partnership with the Ulta Beauty and Target partnership. First is about deepening the guest engagement. It's really focusing on new guest acquisition, increasing the spend of the existing linked Circle and Ulta Beauty reward members in engaging that lapsed member. When we see the Ulta Beauty at Target member coming in and engaging with Ulta Beauty itself, what we're seeing is we like what their spend patterns look like. They're at our average spend, if not, even higher. So we like what we're seeing from the ecosystem.

Operator:

Good afternoon, and welcome to Ulta Beauty's conference call to discuss results for the third quarter of fiscal '22. [Operator Instructions] As a reminder, this conference is being recorded. And it is now my pleasure to introduce Ms. Kiley Rawlins, Vice President of Investor Relations. Thank you, Ms. Rawlins, please proceed.

During the quarter, we expanded our BIPOC brand assortment with 4 new BIPOC brands:

[indiscernible], BREAD BEAUTY SUPPLY, sugardoh and Undefined Beauty. As another way we look to create foundational industry change, we proudly launched our MUSE Accelerator program to support early-stage BIPOC brands as they prepare for retail readiness. Our inaugural class included 8 BIPOC founders, with innovative brands across skin care, makeup, fragrance, haircare and wellness.

Operator:

[Operator Instructions] And our first question comes from the line of Steven Forbes with Guggenheim Securities.

David Kimbell:

Great. Thanks, Steve. Yes, as I said in the remarks, our loyalty program, our membership is vital and critical to our long-term success and one that we're extremely proud of what we've built the relationship that we have with our guests. Yes, I guess, a few things that I'd call out. Naturally, our longer tenured. You get -- if you're tenured 3-plus years, we see kind of a higher level of retention, higher level of engagement that tends to grow over time. Greater percentage of our guests, the longer they're here, move into our higher levels, platinum and diamond levels. So naturally, with that tenure comes greater engagement.

Operator:

And our next question comes from the line of Ike Boruchow with Wells Fargo.

Lorraine Maikis:

Your sales guidance continues to include pressure from increased points of distribution for prestige. Can you talk about what you're seeing in the fleet when one of these new stores open and how meaningful it is?

Ashley Helgans:

Congrats on the quarter. So we just wanted to ask about the promotional landscape that you've seen heading into holiday. And if you feel discounting at other retailers has been as heavy as initially expected?

Michael Baker:

I just wanted to ask a little bit about cadence, the month throughout the third quarter. And then November, you said it slowed. I guess I'm just wondering, within your 6% to 8% guidance for the fourth quarter, we know the comparisons get easier in December relative to November. Is that contemplated within the guidance? Or maybe another way to ask it is, is November slow? Did it slow below 6% to 8% and you need to pick up to get there? Or is it within that range?

Adrienne Yih-Tennant:

Great. Scott, I was wondering if you can talk about -- you had mentioned sort of the vendor contribution that was offsetting some of the lower marketing spend. So does that mean that they want to present their brands more aggressively, and therefore, are taking more space either on the 21 Days of Beauty or gift with purchase that type of thing.

Scott Settersten:

Yes. So I'll start. So the first part of your question, yes, it's an accounting recognition of how the debits and credits flow through the P&L, Adrienne. So there's really nothing related to the vendor choices or how we work or execute any of those kinds of things. It's just accounting convention, matching up expense with income when it's incremental expenses related to these marketing activities and then the rest of it kind of rolls through the gross margin through our inventory accounting.

Operator:

Our next question comes from the line of Korinne Wolfmeyer with Piper Sandler.

David Kimbell:

Well, I'll start with saying, yes, we're really encouraged by what we saw in the third quarter. And really, we've seen this trend for the first 3 quarters, a strong growth across all categories, which is obviously a great place to be. The strength we're seeing in our business is not outweighted by one specific category. It's balanced across our portfolio. And it's because we've -- our team across both merchandising, marketing, our stores have done a great job engaging our guests in our entire assortment.

Olivia Tong Cheang:

I have two questions. First one on newness. Because you had a few brands that really anchored newness, and I would imagine contributed towards the upper end of your average ranges this year, so could you talk about your view on innovation, the level of innovation as you think about the next 12 months versus the prior 12?

David Kimbell:

Yes. So just on the broader idea of newness, it's important to our business and the beauty category always. And as I mentioned in our remarks, typically 20% to 30% of sales are new items, and that's the range that we will land this year and anticipate we'll be able to continue to be in that range going forward. As I -- we did -- Scott mentioned, we had some really important new brands in 2022. But we're excited and encouraged by the outlook. This category, both big brands like some mentioned, but also new and emerging brands that take off and connect. I mentioned a couple of those like Good Molecules, among others.

Operator:

Our next question comes from the line of Michael Lasser with UBS.

Michael Lasser:

I'm trying.

Operator:

And the final question comes from the line of Michael Binetti with Credit Suisse.

Operator:

Good afternoon, and welcome to Ulta Beauty's conference call to discuss results for the second quarter of fiscal 2022. [Operator Instructions] And as a reminder, this conference call is being recorded. And it is now my pleasure to introduce Ms. Kiley Rawlins, Vice President of Investor Relations. Thank you, Ms. Rawlins, please proceed.

Rupesh Parikh:

Also congrats on a really strong quarter. So I guess I start -- I want to start out with the consumer. So I was curious if you guys are seeing any behavior changes of note and whether you're seeing any side of the trade down or even resistance to price increases? And then just given some concerns out there about volatility and trends, I'm just curious if you're seeing more volatility in the business than what you've seen in the prior months.

Operator:

And our next question comes from the line of Omar Saad with Evercore ISI.

David Kimbell:

Let me just -- I'll start with the deceleration and Scott can pick up on the gross margin and some of the things we're seeing there. So again, yes, we did -- our quarter in total was strong. We were pleased with the results throughout the quarter. There was a modest slowdown in the trends right at the end of June, early July as a number of things, both, I guess, within retail and in the world around us, we're showing up.

Scott Settersten:

And as far as gross margin is concerned, again, we're very happy with the results that the business is generating year-to-date. Our longer-term guidance assumes gross margin is going to moderate somewhat from what we saw last year, again, when we started out with our longer-term algorithm. And again, this year, the sales performance has just been extraordinary.

Operator:

And our next question comes from the line of Dana Telsey with the Telsey Advisory Group.

Kecia Steelman:

Thanks, Dana. I'll start and then turn it over to Scott. Our salon team delivered strong quarter growth of double-digit comps during the quarter, and really what we saw with some strength in our hair coloring services. We have strength across all geographies and regions, which was great. And the sales were really fairly consistent throughout the quarter.

Mark Altschwager:

With respect to the recovery you're seeing in the makeup category, what are your current views on whether we're seeing with whether what we are seeing is pent-up replenishment post COVID versus perhaps the early innings of a new innovation-driven cycle that could have some legs to it? And then bigger picture, just based on the trends you're seeing in your business year-to-date and the projections for the year, calling for low teens sales growth at the high end, is the 5% to 7% 3-year CAGR still the right way to be thinking about the medium-term growth outlook?

Operator:

Our next question comes from the line of Krisztina Katai with Deutsche Bank.

Oliver Chen:

Great quarter. As we think in terms of the guidance, what's embedded with respect to pricing? And how would you speak to that against the promotional needs that you'll have fourth quarter is always a very promotional time and you do a lot of great personalization to drive promotions as well?

Scott Settersten:

Yes. So I'll start that one. So pricing, we said about 300 basis points of price increases reflected in our 2Q results. And all the price increases that we're aware of through our vendor partnerships are embedded in our guidance, right, for the back half of the year. So we feel like we have that framed up well.

Kecia Steelman:

And for new store layouts, we're really focused on our new stores and our planned remodels going forward. While we're always making changes to improving the in-store guest experience, it's been a while since we've really made any significant changes to the store layout itself.

Operator:

And our next question comes from the line of Chris Horvers with JPMorgan.

Scott Settersten:

Chris, you don't need me to answer the question. You already figured it all out. So gold star for you today. So I mean, that's it in essence. I mean, again, we talk about guidance and estimates on every one of these calls, people have questions. I mean -- and we really do look at it right up to just before the call. And so what we've seen in the last couple of weeks with sales strength. Again, Dave mentioned this late July bounced back just like how it looked early parts of the quarter. And August, we've kind of continued on the same trend.

Christopher Horvers:

Since I answered my own -- since I answered my own question maybe [indiscernible] one in here. I guess maybe can you talk about how the prestige category performed in 2Q versus '19? And was that acceleration relative to what you saw in the first quarter?

Operator:

And the next question comes from the line of Mark Astrachan with Stifel.

David Kimbell:

We've mentioned in the past that there's been a large number that have linked their accounts, but we haven't shared specific details on number of new members and break out by that, and we're not planning on doing that now. But as Kecia mentioned, we're just -- we're really encouraged by what we're seeing. We're really pleased with the overall partnership. The execution has been strong. The consumer reaction has been very positive. And the engagement in Ulta Beauty has really been a positive aspect.

Kiley Rawlins:

John, I think we have time for one more question.

Kelly Crago:

I'm just curious, we did notice that you did sort of layer back in another sort of store-wide 20% off coupon promotion more recently. And I'm just trying to understand that. I know you pulled away from it during 2021 just because the business was so strong and promotions across the board are low. But I'm just curious some of the comments you're saying about back half of the year, whether or not you're sort of seeing that tick and that's a response to an uptick in promotions across beauty. So just curious any thoughts on that and if we should kind of expect that to be layered into your promotional strategy going forward?

David Kimbell:

Great. I'm really glad you asked, Kelly. I do want to clarify, I know there's been some comments about a 20% off storewide customer base-wide. That is not -- we have not executed that. We haven't all year executed that.

Operator:

Good afternoon, and welcome to Ulta Beauty's conference call to discuss results for the first quarter of fiscal year 2022. [Operator Instructions] As a reminder, this conference call is being recorded.

Kiley Rawlins:

Thank you, John. Good afternoon, everyone, and thank you for joining us today for our discussion of Ulta Beauty financial and operational results for the first quarter of fiscal '22. Hosting our call are Dave Kimbell, Chief Executive Officer; and Scott Settersten, Chief Financial Officer; Kecia Steelman, Chief Operating Officer, will join us for the Q&A session.

David Kimbell:

Thank you, Kiley, and good afternoon. Fiscal 2022 is off to an outstanding start with the Ulta Beauty team delivering another quarter of excellent performance on top of last year's record results.

Operator:

[Operator Instructions] Our first question comes from the line of Simeon Siegel with BMO Capital Markets.

Scott Settersten:

Yes. Simeon, thanks for the question. So even if I answer directly, the units per transaction were essentially flat year-over-year. So again, we're seeing a lot of the benefit from the continuation what I'd call a moderate promotional environment overall, coupled with the mix of brands we have that entered the assortment here over the course of the last year. So again, you know the names well. We've been talking about Fenty and OLAPLEX and some of the other big hitters here we've added recently. So again, the mix of those 2 are really doing -- making a big contribution to our gross margin here in recent quarters.

Scott Settersten:

Yes. We don't really have anything in more detail to share with that at this point in time. Again, we are very happy to see the rebound in store traffic, right. And so a nice healthy transaction growth is always what we're striving for and planned for. And so we're super excited to see the bounce back of the consumer in the stores and making sure, again, that we deliver best-in-class specialty retail omnichannel experience.

Korinne Wolfmeyer:

Congrats on the quarter. So first of all, I'd like to just get your thoughts on the current inflation environment and how that's impacting consumers and maybe more so here in the early parts of Q2? Are you seeing any sort of shift in demand maybe from prestige to mass or vice versa? Or are you seeing mass be maybe more resilient than prestige or vice versa? Just any thoughts here would be helpful.

Korinne Wolfmeyer:

And then I'd just like to ask quickly on Target and the shop-in-shops in Target and how they're doing. Are you seeing any like big difference in traffic in the Target shop-in-shops versus Ulta shops? How is ticket value different between the two? And then also, are there any key brands you'd like to call out that are being particularly successful in Target versus Ulta?

Olivia Tong Cheang:

My first question is just around the makeup recovery and compare and contrast that to the emergence of Prestige hair care and your view in terms of the opportunity in front of you, obviously, makeup is significantly larger. The recovery accounted like, from your earlier comments, is progressing faster than you had anticipated. As you think about the second half of the year and continuing to drive acceleration, can you talk a little bit about the plans in place to keep that going? And then I have a follow-up.

Olivia Tong Cheang:

And then on the gross margin, you said earlier that you're still expecting gross margin to be down. It was obviously a much better start to the year than we probably thought. But of course, costs are material as you progress through the year. But relative to your prior expectations, as you think about gross margin being down, is it the same level? And could you talk about like the puts and takes there, maybe a little bit of granularity in terms of your thought process on costs now versus mix improvement and obviously some leverage associated with an improved sales outlook?

Operator:

And our next question comes from the line of Steph Wissink with Jefferies.

Scott Settersten:

That's 2 for me, Steph. That's not fair. Okay. So we'll go first up on the inventory. So again, it's up 16% year-over-year. We feel like we're in a good position. Again, it looks easy based on the results we're posting here, but our teams are doing an excellent job and working really hard with our vendor partners, the merchants, the inventory planning teams, the supply chain teams to make sure we get the right product in the right place. And so fill rates are good. We're feeling better. Things have kind of bounced back a little bit from what we saw mid- to late last year. So again, focused on high velocity SKUs, new brands to make sure we take advantage where we can there. We do expect that the growth rate, again, will moderate as we get further into the year this year and start anniversary-ing some of the steps we took last year to get more aggressive on inventory. So again, that's one place we always feel confident that we would make more investment if good judgment suggests that.

Operator:

And our next question comes from the line of Kate McShane from Goldman Sachs.

David Kimbell:

Yes. We -- the beauty category is attractive and has been highly competitive for a long time. I've been here at Ulta for about 8.5 years now, and it's been hypercompetitive the whole time and for years before that. It's attractive. It's growing. It's engaging. So that's been part of the dynamic for a while. And certainly, it's true now. We're seeing new competitive locations, particularly on the prestige side, at the same time that we're opening up new stores of our own and in our partnership with Target. So there is some shift going on.

Daniel Hofkin:

Just a quick question regarding the Target partnership. I don't know if you commented specifically on this, but can you say whether it's having a measurable impact yet on your overall comp sales, obviously not at the Target stores themselves, but in the form of additional traffic to nearby Ulta stores or ulta.com and then kind of how you expect that contribution to evolve over the rest of this year and the next couple of years?

Daniel Hofkin:

And then just as you think about the, obviously, overall stellar results, any just differentiation among categories or regions or parts of the quarter that you might call out plus or minus?

David Kimbell:

No region. I mean 1 of the things that we really like about our model is our model works in all different types of geographies. Big cities from New York and L.A. to Chicago to smaller remote single-store markets, suburbs, urban, rural, and we saw strong performance across the board. So there was no real region or marketplace distinctions of note. And that to us is a reflection, this is working really well. And then when we look across economic, we saw growth across all income levels as well as we look at our consumer base. So strong growth from our highest income to more moderate income. So -- again, well-rounded growth. Consumers are engaged in the category. The category itself is, we think, more relevant, more important to our consumers, more connected to their overall sense of self-care and well-being. At the same time, there are so many more occasions to go out. We think the category is in great shape, and we're proud to be leading the category and driving these results through our strong execution.

Michael Lasser:

Understanding you're looking to be conservative and mindful of the uncertain macro environment, you get to low single-digit comps in the back half. Again given the strength in the cosmetics category, it would imply that haircare and skincare probably turn negative, why would that be the case?

Michael Lasser:

My follow-up question is you're still -- you haven't seen it, but you're still expecting promotions to come back. What is going to be the catalyst to spark an increasing in promotions? And how much have you factored in for that rise in promotions in the back half of the year?

Simeon Gutman:

I'm going to ask my question and follow-up. So Kiley -- coming back to the next call. My first question is on the merch margin. Given that haircare seems to be mixing up, shouldn't that have been a positive? And then when Scott, when you made the comment X reserve adjustments, does that mean the merch margin X reserve adjustments could have been up year-over-year? You're using that against the compare? And then the follow-up is what is just changing in the back half? It sounds like you're keeping sales the way you modeled it, if I'm interpreting it right, but what if anything else changed?

Operator:

Okay. And our final question comes from the line of Michael Binetti with Credit Suisse.

David Kimbell:

Okay. Great. Well, thank you all for joining us today. The year is off to a great start, and I want to thank the entire Ulta Beauty team for their collective efforts to support our guests and each other while moving our business forward. We look forward to speaking to you all again at the end of August when we report our second quarter results. I hope you all have a great evening. Thanks, again.

Operator:

Good afternoon, and welcome to Ulta Beauty's conference call to discuss results for the fourth quarter of fiscal year 2021. [Operator Instructions] As a reminder, this conference is being recorded.

Kiley Rawlins:

Thank you, Hector, and good afternoon, everyone, and thank you for joining us today. Hosting our call today are Dave Kimbell, Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Kecia Steelman, Chief Operating Officer, will join us for the Q&A session.

Dana Telsey:

Congratulations on the nice progress. As you think about the current macro landscape out there and the inflationary pressures, how are you thinking about pricing in 2022? And how does that feed into the margin? And do you see any difference by category?

Mark Altschwager:

I wanted to ask about the rewards program and spend per member. It looks like kind of your average spend per Ultimate Rewards member must have been up pretty nicely 2021 versus 2019. Just any color there would be great. And how much of that is category recovery versus share of wallet gains? And then looking ahead, you did allow some of the increased distribution points for Prestige Beauty as a consideration in your guidance. So curious how you're thinking about ability to continue to capture share of wallet and the opportunities in 2022?

Operator:

Our next question comes from Oliver Chen with Cowen.

David Kimbell:

Great. Thanks, Oliver. Yes, there are some important topics in your questions. First, makeup, we are confident in the path ahead of makeup. And yes, and I'd say as we reflect back on the year, there were certainly some ups and downs. And what we continue to see is makeup, more than any other category, is sensitive to COVID fluctuations. And we saw that in the fourth quarter with Omicron and Delta and continued challenges there.

Operator:

Our next question comes from Chris Horvers with JPMorgan.

Scott Settersten:

Yes. Thanks, Chris. So I don't really think that there's any inconsistency in our messaging here. I think the variables at play are pretty consistent over the course of the year as you think about 2022, I would say. So again, it's back to merchandise margins, right, being under pressure in 2022 compared to what we've just been through the last year or so.

Operator:

Our next question comes from Kelly Crago with Citi.

Kecia Steelman:

Yes. Thanks, Kelly, for the question. As a retail leader, we're really aiming to deliver a seamless, omnichannel experience that meets our guests wherever they are. The newest element of this omnichannel strategy of the Ulta Beauty at Target is really providing us another way to engage and discover Ulta Beauty for a new guest set that's shopping at Target. The strategy is working.

Michael Baker:

Maybe a 2-parter. Just on makeup, were you seeing it up on a 2-year basis earlier in the quarter and then Omicron slowed that down? Is that what you're saying? And can you talk about what you might be seeing in some areas of the country that seem to reopen earlier and not be as impacted by Omicron or at least didn't seem to slow down some of the people going out, Texas, Florida, maybe places like that?

Anthony Chukumba:

To be respectful for everyone on the call, I'll actually limit it to one question, one actual question. So I just was wondering if you could just give us a little bit more color on the rollout of Fenty Beauty. Just any color in terms of number of stores, linear feet, end caps. Any additional color would be very helpful.

Operator:

Our final question comes from Adrienne Yih with Barclays.

David Kimbell:

Well, let me give a little bit of color, and I'll ask Kecia to kind of follow -- give some more detail to build off her previous answer on this. But -- and we are just thrilled to be partnering with Target. We know there's been -- we're in the midst of a real transformation in the Prestige Beauty landscape.

David Kimbell:

All right. Awesome. Thank you all for joining us today. Really appreciate it. In closing, I want to thank, again, our 40,000 associates for delivering a simply outstanding 2021 and with a relentless commitment to our guests, to each other and to moving our business forward.

Operator:

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

Operator:

Good afternoon, and welcome to Ulta Beauty's conference call to discuss results for the Third Quarter of fiscal 2021. [Operator Instructions] As a reminder, this conference is being recorded.

Kiley Rawlins:

Thank you, Laura. Good afternoon, everyone. Hosting our call today are Dave Kimbell, Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Kecia Steelman, Chief Operating Officer, will join us for the Q&A.

David Kimbell:

Thank you, Kiley, and good afternoon, everyone. The Ulta Beauty team delivered outstanding results again this quarter. For the third quarter, net sales increased 28.6% to a record $2 billion. Operating profit increased to 14.2% of sales, and diluted EPS increased to $3.94 per share.

In addition to delivering growth from our core categories, we are focused on driving growth from key cross-functional platforms. Starting with Conscious Beauty, our cross-category initiative intended to help guests discover and engage with brands and products which reflect their personal values. Through this program, we identify brands across 5 key pillars:

clean ingredients, cruelty free, vegan, sustainable packaging and positive impact.

David Kimbell:

Hello, everyone. I think we're having -- we had a -- we were disconnected. I think we're having some phone network issues. But hopefully, you can hear me, and I'm going to pick up, I think, where we got cut off. So if I repeat a little bit, I apologize, but we'll dive right back in.

Michael Lasser:

At the time that you provided your longer-term guidance, you were expecting to have a 13% operating margin this year. You're now on pace to have the mid-14% operating margin, and yet you still expect your operating margin to be within your guidance for next year. So will you be investing more than you had originally planned for 2022? And as part of that, if you do better than the 3% to 5% sales -- comp sales increase that you're anticipating for next year, would you let that flow to the bottom line and have better-than-expected margins?

Operator:

Our next question comes from the line of Lorraine Hutchinson with Bank of America.

David Kimbell:

Great. Thanks, Lorraine. Yes, makeup, obviously, is an important topic for us and one that we're very focused on, and I'd reiterate our confidence in the category. It is -- as I said in the remarks, it is not performing at the level that our other categories, skincare, haircare, bath, fragrance, which are all delivering double-digit comp versus 2020. It has not caught up to that level of growth. But even with that, we feel encouraged by what we're seeing.

Simeon Gutman:

Dave, I want to ask about OLAPLEX. Would you be willing to share with us how it could stack up relative to some of the prior big launches? Maybe Kylie. I wrote down Clinique and Lancôme. You also considered getting into pro hair color. And then this is Part 3, but I assume you're not going to give this product to Target right away, but curious how that works.

Operator:

Our next question comes from the line of Steve Forbes with Guggenheim Securities.

Kecia Steelman:

I'll take that with one, Matt. This is Kecia. It's really too early to comment on the results as we really want to see a few purchase cycles to confirm the role of this new addition, how it plays for our guests.

Operator:

Our next question comes from the line of Michael Binetti with Crédit Suisse.

Scott Settersten:

Yes, I don't think there's anything incrementally new, I guess, I could share. It's really a combination of all the variables that we've been talking about with investors and with the analyst for quite some time. So it all kind of gets back to our EFG efforts, right? So a lot of great work has been done by our teams over the last couple of years across a wide variety of cost targets across our business. We talked about occupancy costs. We've been talking about promotional effectiveness. We've been talking about core end-to-end process opportunities. We've been talking about supply chain investments for the future. So there's a lot of variables at play here.

Mark Astrachan:

I guess maybe I could try to just squeeze in a follow-up on Target and then another question. Maybe if you could just talk about any sort of thoughts on what consumers are buying there relative to kind of expectations, that would be helpful. And then just a bigger question, the brand owners seem to be reporting, what I guess I would call, kind of stickier D2C sales on their own website relative certainly to pre-pandemic levels. It would obviously seem like given your growth, these are incremental consumers to the category. So I'm curious how you're thinking about dealing with the partners as a supplier but also the customers -- or I mean the suppliers -- your suppliers, I should say, and then how they're dealing with their own customers and how kind of those 2 things interplay in your business over time? Do you think that's incremental? Do you think that's potentially something that you've got to watch for going forward? Because, obviously, as I said, it hasn't seemed to have an impact so far.

Operator:

Our next question comes from the line of Omar Saad with Evercore.

David Kimbell:

Great. Omar, thanks for the question. Yes, I'd really -- I guess I'd answer that by looking back at what we shared at Analyst Day and the comprehensive nature of our strategic approach. There isn't any one thing that gives us confidence. And yes, we are having a very strong year, recovering out of the challenges of 2020 and increasing versus 2019. But by no means do we think this is kind of the end of the road. We actually see this is us strengthening and leading the category recovery. We think the category itself is going to be healthy beauty category in 2022 and beyond. And we think our differentiated model will continue to lead that category, gain share and drive growth for us. So it is the combination of an exceptional differentiated assortment. Nobody has the collection of products that we have, and we've brought a lot of newness in this year, some of that hitting even late in the year like OLAPLEX hitting in January that we'll be driving. And we've got a pipeline that I'm excited about going into 2022, and we'll be sharing that as time is appropriate. So assortment always drives our business.

Rupesh Parikh:

So Scott, I guess I just wanted for Q4, just dig into more how you're thinking about operating margins. So maybe if you can just talk more about the puts and takes on the gross margin and SG&A line.

David Kimbell:

Great. Well, thank you for joining us today, and I want to thank all of our Ulta Beauty associates across our stores, distribution centers and corporate offices who are working hard to ensure we deliver an outstanding guest experience this holiday season and who are committed to taking good care of our guests and each other every single day. As I said in the past, we have the absolute best team in retail, and I am so proud to lead this great team.

Operator:

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.

Operator:

Good afternoon, and welcome to Ulta Beauty's conference call to discuss results for the second quarter of fiscal 2021. [Operator Instructions] As a reminder, this conference is being recorded.

Kiley Rawlins:

Thank you, Paul. Good afternoon, everyone. Hosting our call today are Dave Kimbell, Chief Executive Officer; and Scott Settersten, Chief Financial Officer; Kecia Steelman, Chief Operating Officer, will join us for the Q&A session.

David Kimbell:

Thank you, Kiley, and good afternoon, everyone.

Adrienne Yih-Tennant:

Congratulations. I mean, really, it's a huge inflection starting last quarter and great to see the momentum continuing. Dave, my first question is for you about Ulta and Target. Obviously, it's early days with just 10 days under your belt. But I wanted to see, what have your early learnings been? If you can help us with any details on that. And then I know the initial target was somewhere around 100 stores. What would be the benchmarks for more aggressive rollout?

David Kimbell:

Great. Well, thanks for the question and the comments, Adrienne. I appreciate it. Yes, let me start on Target and then I'm going to ask Kecia to give some more color because Kecia is leading this for us. But we are, as I said in the comments, we're just thrilled with the partnership and the launch guest response. We feel really confident how we've come out of the gate operationally, working really well. And most importantly, as I mentioned, consumers are thrilled by this. They're really excited about the idea of bringing together 2 great retailers in a unique experience that nobody else is doing. This is totally new to beauty. And so we're really, really pleased with the results and the engagement and the partnership. Kecia, why don't you share a few more details about what we're seeing and maybe the outlook on stores.

Scott Settersten:

And then I'll follow up on the international piece and supply chain. So we don't really break out geographic sourcing exposure. But most of our products, lipsticks, serums are made in the U.S. or Europe. We do have some limited exposure to China with the Ulta Beauty brand, private label and a few specific brands in the assortment like Morphe, and some components, of course, which are part of our vendor partners supply chain as well.

Operator:

Our next question comes from Simeon Siegel with BMO.

David Kimbell:

Great. Thanks, Simeon. Yes, let me start with loyalty and let me just, before I talk specifically about Target, zoom out a little bit. And we're really, really pleased with our loyalty results in the quarter and really through this first half of the year to get back to a new high of 34.6 million members, 8% above last year, 4% above 2019. As I mentioned in the comments, that's faster than we had anticipated. But it's really a testament to an effort across the entire organization from our loyalty team, our analytics team, marketing, merchandising and of course, our store teams and e-commerce teams that are delivering a great experience every day.

Christopher Horvers:

So my first question is, your 2-year comp CAGR accelerated in 2Q versus the first quarter. You're fading that back down to get to low double-digit comps in the fourth quarter despite what should be more work from work and learn from school in the back half. Is this just looking out into the uncertainty? And related to that, have you seen any impact from Delta in August from any markets in particular?

Scott Settersten:

Yes. I would just say, we're taking a more tempered view, I guess, of the promotional environment. Again, naturally, holiday is more promotional. We're competing against a wider variety of retailers during the gift-giving season. We've got some incremental supply chain costs that we're baking into the plan to be prudent around fuel costs and things like that. So again, on balance, we think it's a prudent estimate forecast and we think it's achievable. And if things turn out better, sales are stronger, we'll deliver better results.

Olivia Tong Cheang:

First, congrats on the quarter. The first question has to do with the margin because I imagine a lot of this is fixed cost leverage. But how much of this is, how much of the margin, incremental margin is an extension of some of the efficiency and promotional improvements lasting? And how does this, in any way, change your view on customer acquisition costs or additional promotional efficiencies over time?

Scott Settersten:

Yes. So maybe I'll start with the margin. So it's not exactly clear. But if we're looking at the second quarter, again, we describe that the biggest drivers in the second quarter were the reserve adjustments versus last year. Again, this is versus 2020. And so they were pretty significant last year. So of course, we didn't absorb any of that this year. We're doing a much better job with the stronger sales and better discipline in the stores. So that was a pretty significant benefit. Promotional, less discounting was kind of in the middle of the list, I guess, I would say. Fixed cost is another major driver of gross margin expansion in the second quarter and for the first half of the year just because of the much higher sales levels overall.

Olivia Tong Cheang:

Maybe if I could just follow up on makeup. You mentioned obviously that the momentum has continued 2Q versus 1Q, even if it isn't back to where it was before. Why do you think it hasn't fully recovered back to where it used to be given the replenishment, given that people are going out, there is a lot of innovation. Do we need another trend or is it just there is still some holdback? Just kind of curious given the strength particularly of other categories outside of makeup.

Stephanie Schiller Wissink:

Hopefully, this is a quick one for you, but wanted to just talk about SG&A leverage because I don't think we've seen on a full year basis that in the guidance for quite some time. So I just wanted to understand a little bit about the key pieces. Maybe, Scott, if you could talk about what components of SG&A you expect to see the best leverage and where you might see some opportunity still in the future periods?

Operator:

Our next question comes from Ike Boruchow with Wells Fargo.

Scott Settersten:

Yes. Thanks, Ike. So again, yes, second quarter, a little bit unusual. I mean, we did see some growth in the first quarter. But again, we were lapping kind of just the initial stages, I guess, of the COVID and the shift and the store closings and kind of becoming a digital business 100% kind of overnight back in 2020.

Katharine McShane:

You had mentioned that the comp did come in higher than your expectations. I wondered if that was a commentary on both what you saw in prestige and mass. And within mass, are you seeing an acceleration in market share gains there, whether it's in cosmetics or other categories?

Katharine McShane:

Oh, I'm sorry. I'll speak up a little bit. I just wondered based on your comments that you came in higher than your expectations for comp. Is that a similar commentary both for the prestige category and the mass category? And then just within mass, are you seeing an acceleration in share gains there versus what you saw in Q1?

Krisztina Katai:

Congrats on a very strong quarter. I wanted to touch on the membership base. You mentioned that it reached a new record. You are re-engaging with lapsed consumers and signing on new ones. So where do you think you are in terms of the target customer share of wallet compared to 2019?

David Kimbell:

Great. Yes. Loyalty, as I mentioned earlier, we're really pleased and encouraged by the results we're seeing, both in the absolute number of active members as well as spend per member. We're seeing nice healthy improvement there, and it's just driven by high-level engagement across categories. And so as we look at share of wallet, we are confident that we're continuing to grow both share of categories and share of wallet, and feel like our efforts to lead the category recovery are driving a high level of engagement.

Operator:

Good afternoon, and welcome to Ulta Beauty's conference call to discuss results for the first quarter of fiscal 2021. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Ms. Kiley Rawlins, Vice President of Investor Relations. Ms. Rawlins, please proceed.

To build on this success, I am focused on 4 key areas as I transition into the CEO role:

our culture, our members, omnichannel experiences and operational excellence. Ulta Beauty has built a guest- and associate-centric, values-based and high-performance culture. We value and encourage collaboration and enterprise thinking, and we respect and listen to our associates to continually improve as a company. These tenets are core to how we lead, how we engage with our guests and partners and how we make decisions. Our culture is a key part to our success and why I am committed to protecting and enhancing our culture as we move forward.

Rupesh Parikh:

So first, Mary, wish you all the best, and you're certainly going to be missed.

Rupesh Parikh:

And then, I guess, for the team, just congrats on a really amazing quarter. So I guess the one question I have is, if you look at Q1, obviously, operating margins are now well above where they were in Q1 '19. Are there any new learnings that you can share in terms of maybe some new structural benefits you see in operating margins going forward just based on the performance we saw during the quarter?

Operator:

Our next question is from Mark Altschwager with Baird.

David Kimbell:

Yes, Mark, yes, we are very encouraged by the performance of our store channel. In fact, our entire omnichannel experience, even as our e-comm performed above expectations, our stores strengthened. So it just reinforces for us, the importance and the power of our model and the connections that we've built.

Scott Settersten:

Yes. So I guess I would start with overall versus last year, the channel shift is going to work to our advantage, right? So that's going to be a nice tailwind as we talk about gross margin specifically, but operating margins overall. So as you've heard us talk about before, Mark, many times, there's a lot of different levels we have at our disposal to help mitigate some of this -- the margin headwinds that come with that part of the business. So again, that's just part of how consumers are going to shop, and we're focused on making sure we deliver the best shopping experience regardless if it's in our stores or an online digital kind of environment.

Mark Altschwager:

That's great. Congrats to the team on a strong start and best of luck.

Oliver Chen:

Great quarter and, Mary, we'll miss you a lot. Congrats on the next steps. The inventory position looks really, really tight in terms of it being somewhat low. Were sales left on the table? And what are your thoughts on inventory versus sales going forward in an environment where supply chains have been tougher and just making sure you're as well positioned as possible to realize the market share gains?

Oliver Chen:

And a follow-up, related question for Kecia or David. Supply chain priorities, just would love your take on the major priorities on the road map ahead as there are many initiatives you're working on?

Kecia Steelman:

Yes. We're continuing to look for efficiencies within our supply chain and our network as we build out to support the -- not only the store business, but also the e-com business. So we'll have more to share here in the future, but we're continuing to look for efficiencies and the ways to get the products to our stores and to our consumers in the quickest, most efficient way possible.

Erinn Murphy:

Mary, it's been an absolute pleasure working with you. And Dave and Kecia, congratulations. So my question is for Dave. On the cosmetics category, you mentioned it was still negative versus 2019. Could you just put a finer point on quantifying that? And then as you've kind of monitored the pace of reopening, has there been any key regional differences between markets like Florida or Texas that has been a little bit more outspoken in terms of the going out trend? And then what's implied in the guidance for cosmetics as you look at the back half of this year versus 2019 levels?

Kecia Steelman:

Yes. Sure. We stayed really close to this as they were starting to list the mask mandates across the states. And we really didn't see the variances across the United States, like what we would have thought. It was strength across the whole U.S. in regards to traffic. And I think it was more related around the confidence of the vaccine, the vaccine rollout and people getting more confident with coming back out into the stores and also getting ready for the reemergence of getting the mask off in the near future.

Erinn Murphy:

That's great. And then just my quick follow-up. So 1.7 million gain in loyalty members this quarter. How did that break down between lapsed versus new consumers?

Michael Baker:

Okay. Sort of following up on something that they talked about earlier. But if I have -- if I look at your guidance right here, you still have profits down, operating profit that is versus 2019. I think by about $50 million at the midpoint, yet you were up in the first quarter by $70 million. So that implies down somewhere in the $110 million, $125 million for the next 3 quarters. So what are the reasons that the operating profits would be down over the 3-year basis versus being up in the first quarter?

Scott Settersten:

Yes. So we're not providing any long-term guidance today. We'll save that for November at our planned Investor and Analyst Day. But obviously, the trends of the business are quite strong, right? First quarter, way exceeded our expectations. The early read on second quarter is it's going well. Again, you got to keep in mind what we're lapping, right? Last year, in the first quarter, we were on a decelerating trend and then all those stores closed. Second quarter, we're starting to open stores last year in a kind of a wave action, but there was still a lot of requirements and limited capacity, things we were dealing with. And so that's phenomena. That explains the comp guidance, 40 to 50 first half and much more moderated in the second half. So that's what's driving the lower operating margin expectations versus last year.

Operator:

Our next question is from Anthony Chukumba with Loop Capital Markets.

Mary Dillon:

That's right, Anthony, thank you.

David Kimbell:

Yes. I'd say we're just getting a little more specific. We've been kind of talking in general terms previously and now a bit more specific in late summer. I'll say we're really excited about it. And I guess I'd ask Kecia to just give a quick update. Kecia, as I think was mentioned in the call, is leading our Target initiative, and we're very excited about the opportunity. Kecia, do you want to give where we are on that?

Operator:

We have reached the end of our question-and-answer session. I'll now turn the call over to Dave Kimbell for closing remarks.

Operator:

Greetings, and welcome to the Ulta Beauty Fourth Quarter 2020 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

Kiley Rawlins:

Thank you, Laura, and good afternoon, everyone. Joining me on the call today are Mary Dillon, Chief Executive Officer; Scott Settersten, Chief Financial Officer; and Dave Kimbell, President.

In a year that saw the contraction of the U.S. prestige beauty market, Ulta Beauty gained dollar share, specifically in key categories, such as makeup, skincare and fragrance based on NPD's point-of-sale data for the 52 weeks ending January 30, 2021. We expanded our assortment in key growth categories like skincare, haircare and wellness to provide guests with engaging newness and innovation. And we launched Conscious Beauty at Ulta Beauty in stores and at ulta.com, certifying more than 230 brands across 4 key pillars:

clean ingredients; cruelty-free; vegan; and sustainable packaging.

Scott Settersten:

Thanks, Dave, and good afternoon, everyone.

Operator:

[Operator Instructions] Our first question comes from the line of Kate McShane with Goldman Sachs.

David Kimbell:

Yes, Kate. Yes. Great question and one that we're spending a lot of time on. As we look out over the course of the year, we continue to be encouraged by the engagement that we're seeing from our guests across channels, both in stores and online. Our non-makeup businesses have been strong throughout -- really, throughout 2020 and certainly in the fourth quarter with skincare, fragrance, haircare, bath, all performing at or above our expectations. And we anticipate that continuing throughout this year.

Christopher Horvers:

And so, Mary, you're still young. You own a lot of stock in the company, and the business is clearly poised to recover here in 2021. So I think a lot of investors look at the announcement and think this is at least a year early. Can you share your thoughts on why -- further why now? Why investors shouldn't think that way? And any thoughts on how you're thinking about your next career steps beyond June '22 when you leave the board?

Mary Dillon:

There is so many questions. Yes. No, listen, I'm focused on Ulta Beauty right now, and I'm very excited about that. And that's why I'm going to be the Executive Chair. I'll be the CEO through June and the Executive Chair for a year after that. And we'll see. I'm excited to the next -- for the next chapter, but I don't really have any plans yet.

Omar Saad:

I would add my congratulations to everyone as well. I'd be curious -- this is kind of a specific question on makeup, but I'd just be curious what you're seeing given this kind of uncertainty around what the recovery is going to look like and when it's going to start to happen. But a lot of the products you sell have expiration dates on them, expiration periods. I'd be curious if you're seeing any consumers come back into the store or online and kind of throwing out the expired makeup that hasn't been used in the last year and starting to replenish that part of their closet, if you will.

Dana Telsey:

And Mary, congratulations on a wonderful career at Ulta, and who knows what comes next.

Dana Telsey:

And Dave, congratulations to you on assuming the new role also. As you think about the changes that happened in 2020 going into 2021, how do you think of the digital channel and e-commerce and the margins that you've had in the past? Any opportunity for margins on e-com and digital to improve go forward and how we get there?

Scott Settersten:

No, no. We've seen -- we've demonstrated in the fourth quarter some of the benefits from promotional optimization, which, again, a lot of that occurs in the digital channel just by the very nature of the shopping experience there. So we believe there's plenty of opportunity to improve the profitability of that channel of our business, both on the promotional side, but also on the supply chain effectiveness side of the business.

Operator:

Our next question comes from the line of Kelly Crago with Citi Research.

Scott Settersten:

Yes. I think it'll be a little stronger first half of the year because we're lapping some large disruptions over a year ago and then building momentum throughout the course of the year. So again, there's a lot of levers that we have to pull and push as we navigate through the course of the year with promotion cadence and some of our major events. So again, we're be looking to optimize the total business as we navigate throughout the year.

Simeon Gutman:

Congratulations, Mary and Dave. I want to ask a question that I think you'll probably defer to the Analyst Day. So I guess, Dave, in the next chapter of growth where margin can go, and part of the question is, it looks like your sales level is not going to be that far below 2019, and it looks like your SG&A level is somewhat back to 2019 levels. So I guess, what level of sales can you get back to 2019 level of margin?

Simeon Gutman:

Yes. And Dave, when Mary did the keynote for shop talk a couple of years back, she came out dancing. So yes.

Operator:

Our next question comes from the line of Steph Wissink with Jefferies.

David Kimbell:

Yes. Of course, our loyalty program is key to our success and has been for a long time and will be well into the future. We believe we've got just a world-class loyalty program. The engagement, it remains incredibly high. We think we've got one of the best loyalty programs in all of retail.

Michael Lasser:

And congratulations to everybody. As part of the succession process, was there a thought to guide conservatively for the year ahead to help with the transition and provide more flexibility for 2021 as folks will be in their new roles? Or does it simply reflect the fact that Ulta's long-term operating profit margin won't be as high as it's been, in part to e-commerce penetration being in the low to mid-20% range versus 2019 when it was in the 13% range?

Paul Trussell:

My congratulations as well Mary, Dave and Kecia, and also to the team. On the MUSE campaign, this household is a fan. Just wanted to inquire about a few updates. One, 40 store openings this year, just maybe if you can put that in context of how you think about long-term door growth and potential kind of reacceleration in the outer years and maybe incorporate just any updates on Canada into that? And then similarly, just any updates as you've had further conversations with your vendor partners around the Target shop-in-shop and that partnership and what your expectations are for when that launches.

Michael Binetti:

And let me add my congrats. Mary, we'll miss you a lot. And Dave, we look forward to working with you. Congrats on the new role.

Operator:

Our next question comes from the line of Steve Forbes with Guggenheim Securities.

Scott Settersten:

Yes. So maybe I can start there. So again, I would just say we're being flexible. Like we were in 2020 when the COVID crisis was on us, we pulled back significantly, especially in area of print and reallocated resources into the digital space, I think, smartly, right, looking at the results of that. So again, this is an area when we talk about EFG, efficiencies for growth, the print -- the whole advertising bucket is another large area of opportunity for us over the long term. And so we continue to look for ways to optimize both print, just the cost of print overall, but also the distribution and the postage and working with our vendor partners on new, better ways to be thinking about how we go to market over the long term. So that's part and parcel of our everyday activities, I guess, I would say. And again, we're thinking it's going to be flattish year-over-year as a percent of sales. So -- but always a work in progress.

Irwin Boruchow:

Congrats to everyone as well. Just 2 quick ones. So Dave, for you, on store productivity, can you talk to us -- I think you were doing around $500 a foot pre-COVID. Can you -- not necessarily this year, but maybe over the next 2 to 3 years, where do you see store productivity kind of normalizing to given the rise in e-com?

David Kimbell:

Yes. Store productivity, I'm not going to give any specifics right now because we've got a lot to figure out of where things settle out and settle down. Having said that, we remain really committed and positive about the physical store channel for Ulta Beauty and in beauty in general. And so we're watching that closely. We're seeing positive trends as guests are getting reengaged. We know our guests are telling us and then increasingly demonstrating that they want to get back in a physical way, but we know e-com will play a bigger part of it, too. So I imagine that'll be a big part of our discussion in the fall as we kind of talk about a longer-term outlook, but it's a big focus for sure.

Operator:

Greetings, and welcome to the Ulta Beauty Third Quarter 2020 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

Kiley Rawlins:

Thank you, Sumali. Good afternoon, and thank you for joining us today for our discussion of Ulta Beauty's results for the third quarter of fiscal 2020. Hosting today's call are Mary Dillon, Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Dave Kimbell, President, will join us for the Q&A session.

Mary Dillon:

Thank you, Kiley, and good afternoon, everyone.

Scott Settersten:

Thanks, Mary, and good afternoon, everyone.

Operator:

[Operator Instructions] Our first question is from Erinn Murphy with Piper Sandler.

Mary Dillon:

Great. Thank you. Well, let me just start about the fact by reiterating we're very, very excited about the partnership. We've got a strong business model and track record to start with and feel very confident about our long-term growth prospects. And of course, we're really thrilled to unlock even more excitement for guests and growth with our Target partnership.

Operator:

Our next question is from Joe Altobello with Raymond James.

Mary Dillon:

Yes. I would say it's not -- wasn't a surprise. I mean we made a very specific decision to pull back some level of promotion. And adjusted without the promotion, of course, the comps are even stronger. So we think it's an important step, and just continuing to refine our promotion strategies to make them be as ultimately profitable as possible, but it's not a pullback on our ability to be very competitive. So the holiday season, we started early because we needed to get people to start early in November, right, given the capacity constraints. And we've got a very robust program throughout the holiday season that we think is very competitive. And so far, as I said in the script, we feel good about the results that we're seeing. So I think it played out exactly as we had expected.

Mary Dillon:

Yes. Well, stepping back, again, we're pleased with the momentum that we're seeing, and the demand signals are strong. And we did feel good about how we started in November. It's a pretty simple answer to your question. We're in the middle of this unprecedented pandemic. And as you know, we just reached peak levels of hospitalizations yesterday in the U.S. So it's uncertain.

Operator:

Our next question is from Oliver Chen from Cowen.

Mary Dillon:

Sure. Well, Oliver, that's a 3-pronged question. That's impressive. And I'll -- maybe Dave and I will tag team a little bit. E-commerce traffic and comp, we -- we're very pleased with how that's going, and in fact, expected it to moderate somewhat as we open up stores. And that -- we like that. It's -- obviously, as people are coming back to stores, historically, what we've seen is omnichannel guests are our best guests because they add the e-commerce purchase on top and really spend 3x as much as somebody who is store-only. So as we open up stores, expected to see some moderation of e-commerce demand, but it's still up 90% last quarter. So we feel very good about that.

David Kimbell:

Yes. Oliver, category performance on e-com really mirrors the total company performance that we highlighted in the script. So strength across skincare, haircare, bath, fragrance, exceptionally strong and continued challenges although some bright spots in makeup. So nothing different about our e-commerce business versus our store from a category standpoint with real strength and growth coming outside of the makeup category. So we're pleased with that.

Operator:

Our next question is from Rupesh Parikh from Oppenheimer.

Scott Settersten:

All right. Thanks, Rupesh. So first, I think with fourth quarter, it's important to keep in mind what the sales guidance is. So again, we expect a softer top line in Q4 versus Q3. Again, that's compared to last year's trends, right? So that comes with inherent margin pressure, generally speaking.

David Kimbell:

Then on your promotional question for the holidays, of course, as we've talked about before, holiday is always a very promotional time frame for every retailer. And we see it as not just competing against other beauty retailers, but really other categories as well as we're competing for the gift-giving occasions. So naturally, we see an increase in promotionality. We also, as Mary mentioned, have -- we've pulled up our promotions and changed the cadence a bit, and we're seeing that across the category as well as more effort to spread promotional activity around, to give guests more opportunities to feel more comfortable shopping both in store and online to manage their gift-giving and personal occasions.

Scott Settersten:

And Rupesh, I just want to clarify, I did mean deleverage. So gross margin deleverage in Q4 versus Q3, same with SG&A.

Simeon Siegel:

Maybe a little higher level. Mary or Dave, I get pandemic might be a weird time to ask this, but how are you thinking about where you are in terms of the target -- your target customer share of wallet versus where you've told us historically? And then maybe any views you have on how the selling landscape might change post pandemic? So just thinking about potentially shrinking department stores but growing online beauty, maybe DTC brands, big box, et cetera. Just any of the changes you're seeing there. And then, Scott, did you say what you expect to save from Canada next year?

Operator:

And our last question would be from Mark Altschwager with Baird.

Scott Settersten:

Yes. So I guess maybe I'll go to the last piece of that first. So no, it doesn't change our outlook really on that range that we've been talking about and reaffirming over the last few years. So 1,500 to 1,700 stores in the U.S. We still feel comfortable that that's very doable range even with the new Target announcement here recently. So as you can well imagine, real estate being one of our core competencies, this has been on the front burner, just thinking about the impact to store growth in the future and how -- what changes this might drive us to. So we don't see any big pendulum swing with respect to that, although that's something we'll keep our eyes on, right, as we move down the pathway with the Target team.

Mary Dillon:

I'm just going to add one thing to Scott's answer, which is on top of it, the way that we thought about the Target partnership, I'd say, is really an amplifier to our business model. As Scott said, we believe we can still build out the number of stores that we've mapped out. And this yet gives us yet another point of distribution, a way to reach millions of new guests with a trial and discovery version of Ulta Beauty, right, that we amplify back to the Ulta Beauty full business model as well. And so as we map out the future of those locations, plus our store locations, working in partnership with Target to make this a win for everybody.

Mary Dillon:

Thank you for joining us today. I'd like to close by thanking all of the Ulta Beauty associates across our stores, distribution centers and offices for their truly relentless effort to navigate through this challenging environment while also working hard to get our stores, website and DCs ready for the holiday season. We know this holiday season will be like no other, but our team is ready and excited to help our guests see the joy of the season. And we hope that you, your colleagues and your loved ones stay safe and healthy. We look forward to speaking to all of you again in March when we report our fourth quarter and full year results. Thank you.

Operator:

Greetings, and welcome to the Ulta Beauty Second Quarter 2020 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

Kiley Rawlins:

Thank you, Diego.

Operator:

[Operator Instructions] Our first question comes from Adrienne Yih with Barclays.

Scott Settersten:

Yes. And as far as the comp sequence is concerned, I would just point maybe to looking at the promotional calendar. I know a lot of you guys track this stuff very closely. So you can schedule out what types of things we did last year over the course of the third and fourth quarters. And with the background color being we're trying to pull back on some of those things, right, we talked about in our comments.

Mary Dillon:

And Dave, would you take the first part of the question? Thank you.

Operator:

Our next question comes from Ike Boruchow with Wells Fargo.

Steven Forbes:

Mary, maybe a question for you. You mentioned in the prepared remarks about the doubling of the omnichannel penetration rate, right, among the members. Curious if you could just discuss how the behaviors of these new omnichannel members has compared, right, to the legacy group. Are they repeating faster, shopping more categories or sort of think like potentially consolidating their spend, right, with Ulta, just given the trip consolidation pieces? We'd love to hear how you sort of think about that doubling in this quarter.

Michael Binetti:

Nice job on the quarter. I guess, Mary, I found it a little, on the plan of pullback on promotions in the back half, somewhat counterintuitive. I think there's obviously an unprecedented numbers of department stores that have been closing around you, and it seems to me that, that's a really good opportunity for you guys to grab market share. You seem like the heir apparent for that share.

Mary Dillon:

Oh, you're going to ask a 2-part question, okay. I'll call you on that.

David Kimbell:

Just to reinforce, yes, this idea of just being much more strategic in our approach towards promotional optimization, but we are not pulling, eliminating all promotions. In fact, starting this Sunday will be 21 Days of Beauty, one of our biggest and most important, most strategic events of the year. And it's a good example of an event that is promotional but it has a strategic role in driving what we call mass migration, introducing our guests many times for the first time to a new prestige brand.

Michael Binetti:

Got you. If I could ask a follow-up. I mean, how best to connect that to the progression of margins as you think multiyear? I think what I heard here today that was incremental. I heard more efficient promotions, more efficient labor model. You have Jacksonville coming back online -- or coming online again, so e-com should be more efficient. I think you talked about negotiations, other EFG initiatives.

Scott Settersten:

Yes. So when we work -- I mean, we're in the throes of it right now, Michael, looking at 2021 operating plan and looking at new embedded cost headwinds to the business overall. So some of the things we've talked about historically around channel mix headwinds and store payroll headwinds, and some new, like PP&E cost implications and how long that might be with us. So there's a lot of ores in the water, so to speak, right now. The team is focused on it.

Operator:

Our next question comes from Paul Trussell with Deutsche Bank.

Scott Settersten:

Well, I guess I'll start. So just the basic runway on the store buildout program, so we pulled back, we moderated this year for obvious reasons, right? So you're in that 30 new store opening range for 2020. And as we stated in our remarks, next year, the way we're looking at it now because, again, you're working on leases as years in advance, right? Working with landlord partners, lining up the right kind of space and making sure you got the right co-tenancy mix there. So these are far down the road kind of decision.

Operator:

Our next question comes from Simeon Gutman with Morgan Stanley.

Stephanie Schiller Wissink:

First part of the question is for Scott. You gave us some great detail for the back half on gross margin. I'm wondering if you're willing to give us some direction on SG&A. In the quarter, you had a few transitory elements. So I'm just curious if you can help us unpack -- or I think retention credits, you mentioned around $48 million. Some of your store staff are still furloughed. Maybe just help us think about the puts and takes as you think about first semester versus second.

Mary Dillon:

I'll start with that one, because I'm sure our Head of Marketing probably wasn't thrilled when I make that comment. I thought that's a logical question.

Operator:

Thank you. This concludes today's conference. All parties may disconnect. Thank you for your participation.

Operator:

Greetings and welcome to the Ulta Beauty First Quarter 2020 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded.

Kiley Rawlins:

Thank you, Shamal. Good afternoon, and thank you for joining us today for our discussion of Ulta Beauty's results for the first quarter of fiscal 2020. Hosting today's call are Mary Dillon, Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Dave Kimbell, President, will join us for the Q&A session.

I'll just add that earlier this week, I was able to hold a virtual store team visit with Kecia Steelman, our Chief Stores Officer, in markets across the country:

Epping, New Hampshire; Hendersonville, Tennessee; Delray Beach, Florida; Austin, Texas, Indian Land, South Carolina; Norridge, Illinois; and Orland Park, Illinois. Some of these stores are doing curbside. Some are fully reopened for retail. But one thing was true for all, our teams are excited to be back to work and appreciate how Ulta Beauty has treated them through this difficult time.

Scott Settersten:

Thanks, Mary, and good afternoon, everyone. Before I review our financial results, I'd like to reiterate Mary's comments, and on behalf of Ulta Beauty, express our immense gratitude for the first responders who are on the frontlines every day, protecting us from the spread of the coronavirus. I would also like to acknowledge all our associates, from those in the field and in our distribution centers, to our team members from our home office, who have worked tirelessly to adapt to the rapidly changing environment. I could not be more proud of the work they are doing.

Megan Alexander:

This is actually Megan Alexander on for Chris. I was just hoping you could elaborate a bit on what you're seeing in the stores that you've reopened just in terms of pent-up demand and whether you're seeing any change in the category trends as you reopen them. And then can you just talk about any detail on what you're seeing in terms of guests using curbside versus actually coming into the stores?

Operator:

And our next question is from Mark Altschwager from Robert W. Baird.

Mary Dillon:

Thank you, Mark. I'd say in some ways going into this, what we've seen is at the beginning of the cycle, of course, the types of things that people bought were quite different than what we've seen in the past, right, things like hand sanitizers and soaps. And then we saw folks get more engaged in things that I would call like self-care, do-it-yourself at home. So haircare, nails, that kind of thing, and then kind of more into things that are a bit more self-indulgent or self-care, like whether it's mask, skincare, fragrances for the bath, that kind of stuff. So it's just kind of interesting to see that cycle of -- the psyche of consumer behavior.

Operator:

And our next question is from Kate McShane from Goldman Sachs.

David Kimbell:

Yes. So I'll start with the promotion and maybe Scott will take the impairment piece here. Yes, promotion activity, of course, like everything else, was disrupted through the quarter. Our strategy pre-COVID has been on really a multiyear journey to try to reduce broad-based promotions and be more strategic and focused on driving consumer engagement demand across all of our activities, the brands that we're bringing in, our loyalty program and other aspects of ways to engage with our guests.

Kelly Crago:

I was just wondering what your exposure is to some of the department stores that have announced store closings. Have you done any work there? And should we expect any sort of promotional cadence geared towards gaining that customer? And then my second question is just around vendor support given you're expecting a more promotional environment. How are those conversations going with your vendors?

David Kimbell:

And vendor support.

Operator:

And our next question is from Omar Saad from Evercore ISI.

David Kimbell:

Well, yes. We've been really, of course, pleased with the e-commerce performance. It's a part of our business that we've been building and investing in and bringing innovation into for many years, and it certainly has been paying off for us through this crisis. Obviously, as stores opened, it will decrease in its total penetration of our business from being 100% e-commerce only. But what we do believe going forward is that we've moved quite a few of our guests that have previously only shopped us in-store, has shopped us online. And that's a really positive thing.

Operator:

And our next question is from Dana Telsey from Telsey Advisory Group.