Ulta Beauty Q3 2022 Earnings Call Transcript

Quartr
Provided by Quartr
December 2, 2021

There are 11 speakers on the call.

Operator

Good afternoon, and welcome to Ulta Beauty's Conference Call to discuss results for the Q3 of Fiscal 2021. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce Ms.

Operator

Kiley Rollins, Vice President of Investor Relations, Ms. Rollins, please proceed.

Speaker 1

Thank you, Laura. Good afternoon, everyone. Hosting our call today are Dave Kimball, Chief Executive Officer and Scott Settersten, Chief Financial Officer. Keshia Steelman, Chief Operating Officer, will join us for the Q and A. This afternoon, we released our financial results for the Q3 of fiscal 2021.

Speaker 1

A copy of the press release is available in the Investor Relations section Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC. We caution you not to place statements except as required by law and you should not expect us to do so. In today's comments, we will discuss certain non GAAP financial measures, including adjusted operating income and adjusted diluted EPS for the Q3 of fiscal 2020. A reconciliation of these measures to the corresponding GAAP measures can be found in our earnings release, which is available in the Investor Relations section of our website.

Speaker 1

We'll begin this afternoon with prepared remarks from Dave and Scott. Following our prepared comments, we will open up the call for questions. We respectfully request that you ask one question to allow us to have time to respond to as many of you as possible during the hour scheduled for this call. As always, Mary Kate and I will be available for any follow-up questions after the call. Now I'd like to turn the call over to Dave.

Speaker 1

Dave?

Speaker 2

Thank you, Kiley, and good afternoon, everyone. The Ulta Beauty team delivered outstanding results again this quarter. For the Q3, net sales increased 28.6 percent to a record $2,000,000,000 Operating profit increased to 14.2% of sales And diluted EPS increased to $3.94 per share. In addition to producing these excellent financial results, We also delivered strong operational results. We continue to increase our market share in prestige beauty based on dollar sales for the 13 weeks ended October 30, 2021 compared to the same period last year.

Speaker 2

We increased the number of members in our ultimate rewards Loyalty program by 13% to a record 35,900,000 members and returned to pre pandemic member penetration levels And we navigated global supply chain challenges and tight labor markets and remained well positioned to meet guests' needs and deliver a successful holiday season. This performance reflects the strength and resiliency of the beauty category, the power of Ulta Beauty's differentiated model and the impact of our winning culture and Standing team. I want to express my sincere appreciation to all of our Ulta Beauty associates for their incredible efforts to serve our guests and deliver these excellent results. I'm inspired every day by our associates' passion for beauty and passion for our guests And I'm honored to lead such a great company of talented associates who continue to care for each other while driving our business forward. At our Analyst Day in October, we introduced a new strategic framework, which will shape our future and enable Ulta Beauty to deliver against longer term financial targets.

Speaker 2

Today, I'll reiterate some of the information we discussed about our strategic imperatives and share an update on progress made in the Q3. Then I'll share how we are positioning Ulta Beauty for holiday before I turn it over to Scott to discuss the financials. Starting with our focus on driving breakthrough And we continue to innovate, evolve and expand our offering to excite the beauty enthusiast. In the Q3, all major categories delivered robust Double digit comp growth compared to the Q3 of fiscal 2020, driven by cycling last year's disruption from COVID, Product newness and strong performance from our strategic promotional events, including 21 Days of Beauty, Ball Haul and our gorgeous hair event. Compared to the Q3 of fiscal 2019, fragrance, bath, hair care and skincare all delivered strong double digit comp growth.

Speaker 2

While makeup was slightly below 2019 levels, we are encouraged that the trend in prestige makeup improved from the 2nd quarter And growth in mass cosmetics remained strong. Engagement with the category remains high with consumers looking to refresh their beauty stash with new products and recent trends give us confidence the makeup category will return to growth compared to pre pandemic levels. Compared to last year, eyes, face and lip continued to deliver strong growth within the makeup category. Engagement with false lashes and lash growth serums Combined with innovation like creamy eyeshadow sticks are driving continued growth within eye. Increased interest in tinted moisturizers Blush are driving growth within face and lip color, lip gloss and lip balm continue to drive growth within lip.

Speaker 2

Newness continues to excite engaged guests. New brands like Bobbie Brown and Ella Lou's combined with new product launches from A wide range of brands including ColourPop, Urban Decay, Tarte and NYX drove nice growth in the quarter. In addition, this quarter we expanded MAC into 200 additional stores. Hair Care delivered another quarter of double digit growth driven by strong guest engagement with our strategic events, newness and our Backbar takeover events. In early October, we kicked off our Fall Gorgeous Hair event, a semi annual event Strategically focused on acquiring members who do not shop the hair care category or engage with our salon services.

Speaker 2

Building on the success of our spring event, we continue to streamline offers, focus our marketing events and create relevant storytelling around hair goals, Service enhancements and holiday kits. We saw a good growth from our core assortment and engagement with new brands like Kristen S, Briogeo and Verb And product newness from brands like Dyson, Living Proof, Redken and Curlsmith continued to resonate with guests. We continue to expand our assortment of prestige hair care brands and I'm excited to share we will launch Olaplex, The number one prestige hair brand in the market in all Ulta Beauty stores and on ulta.com in January. Our back bar takeovers give our stylists a unique opportunity to introduce new brands and products to guests. In this quarter, salon takeovers by Bondaibooz, IGK, Verb and Kristen S.

Speaker 2

All drove nice sales growth during their respective takeovers. Skincare delivered another quarter of strong double digit sales growth as guests continue to invest in self care and maintain their skincare regimens. Similar to last quarter, skincare routines, including moisturizers, serums and cleansers drove category growth. New brands, including Drunk Elephant, Fresh, Good Molecules, which is exclusive to Ulta Beauty and Peach Slices as well as new products from Tula, Clinique and The Ordinary drove solid guest engagement. Finally, our fragrance and bath category continued to deliver exceptional growth.

Speaker 2

Ariana Grande's latest fragrance, God is a Woman, which is exclusive to Ulta Beauty, as well as newness from Carolina Herrera, Coach, YSL and Dior, drove strong growth during the quarter. Events including our back to School gift with purchase and our monthly fragrance crush program also drove strong engagement. Beyond fragrance, the bath and body category continues 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.

Speaker 2

During the quarter, we certified 19 new brands, including L'Amico, Wildcat and Better Not Younger bringing the total number of certified conscious beauty brands to 275 at the end of Q3. During the Q3, we expanded our certification to the SKU level for clean ingredients and vegan and added in store badging at the shelf for certified brands as well as new search filters online to help guests easily identify products, which reflect what is most important to them. Moving now to our efforts to expand our assortment of Black owned and BIPOC brands. During the Q3, we added 2 new black owned brands, Sunday 2 Sunday and Nude Sugar, and we are on track to double the number of black owned brands in our assortment this year. In addition, I am excited to share that we have welcomed our 1st South Asian owned makeup brand To the Ulta Beauty family, Live Tinted, founded by Asian influencer, Deepika Mutyala, Live Tinted is a cosmetic brand that celebrates multicultural beauty.

Speaker 2

The brand is also

Speaker 3

Ladies and gentlemen, thank you for standing by. Our presentation will resume momentarily. Ladies and gentlemen, thank you for standing by. Our presentation will resume momentarily. Thank you all for your patience.

Speaker 2

Hello, everyone. I think we're having we had a we were disconnected. I think we're 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. So moving now to our efforts to expand our assortment of Black owned and BIPOC brands.

Speaker 2

During the Q3, we added 2 new black owned brands, Sunday to Sunday and Nude Sugar, and we are on track to double the number of black owned brands in our assortment this year. In addition, I am excited to share we have welcomed our first South Asian owned makeup brand to the Ulta Beauty family, LiveTinted. Founded by Asian influencer Deepika Mutyala, LiveTinted is a cosmetic brands that celebrates multicultural beauty. The brand is also part of our conscious beauty platform certified as clean, Vegan and cruelty free. Based on our proprietary research, we know 65% of beauty enthusiasts Believe Beauty is significantly connected to wellness.

Speaker 2

Reflecting this consumer insight, in the Q2, we launched The wellness shop online and in 4 50 stores. This cross category platform offers self care In the Q3, we refreshed Wellness Shop assortment shifting from summer solutions to total body care and hydration, which is especially relevant during colder months and introduce new items from Hairdaman, Ellum, Osea and Josie Moran. Turning now to our efforts To evolve the guest experience through our personalized and connected omnichannel ecosystem, all in your world. We know the guest journey is increasingly blurring across physical and digital channels, and we aim to deliver a cohesive omnichannel strategy to serve our guests. During Q3, we enhanced our omni channel strategy in 4 ways.

Speaker 2

1st, we launched Beauty2Go, Our promise that buy online, pick up in store orders will be picked up and ready to go within 2 hours or less, giving our guests fast convenient access to the beauty they want most. We also continued to test incentive strategies to encourage guest utilization. During the Q3, BOPIS orders increased 28% compared to last year, totaling 20% of e commerce sales in the quarter, compared to 16% last year. 2nd, partnering with DoorDash, we launched same day delivery in Atlanta, Boston, Chicago, Los Angeles, Houston and Boise, and we're excited about the value and convenience it will provide guests this holiday season. 3rd, in October, we launched 2 exclusive salon services in all stores and relaunched skin services in select stores.

Speaker 2

Starting with salons, we have partnered with Olaplex to offer guests a professional bond repair service, which reverses damage caused by hair color, chemical treatments, heat and styling and the environment. And we have partnered with Redken to introduce a new Express Route Touch Up service that offers guests 100 percent gray coverage color in only 10 minutes. These new exclusive services are bringing new guests into our salon. We also relaunched skin services in 100 locations, featuring a revamped menu with new services to address Specific guest concerns such as hydration, anti aging and acne. While it's still early, we are pleased with how guests are engaging with these new offerings.

Speaker 2

Finally, we launched Ulta Beauty at Target in 92 stores and online during the Q3, and I am pleased to Chair, we have reached our fiscal year goal of opening more than 100 shops. We are excited about this innovative partnership and how together with Target, we will change the way guests experience beauty. While it will take time for us To understand what role this new distribution point will play for our guests, we are incredibly pleased with the ongoing customer excitement and encouraged to see Ultimate Reward members linking their accounts with Target Circle as well as new members signing up through the shop. Moving on to our efforts to expand and deepen our presence across the Guess' beauty journey as the heart of the beauty community. We are focused on how to best elevate consumer connections, supercharge member acquisition and drive guest loyalty, love and share of wallet.

Speaker 2

In the Q3, we continue to elevate our storytelling with relevant content across channels to launch Ulta Beauty at Target and support our strategic events. In addition, as students return to classrooms after more than a year of virtual learning, We saw an opportunity to deepen our engagement with Gen Z audiences across channels with insight driven campaigns during key back to school moments. We ended the 3rd quarter with 35,900,000 active members, 13% above last year and 6% above 2019. While we continue to add new members, Member growth this quarter was largely driven by reactivation of lapsed members and active member retention. After experiencing headwinds last year due to the disruption from the pandemic, we have accelerated personalization to create stronger life cycle strategies, build baskets and maximize business returns, and we are very pleased with the results.

Speaker 2

We are driving strong conversion of new members in stores and online. We are successfully reengaging members who lapsed during the pandemic, and we are driving stronger engagement from our existing members. Importantly, our member retention rates have recovered to pre pandemic levels and spend per member is at an all time high. Shifting now to our plans and expectations for holiday. Based on our consumer insights, we expected many guests would start their holiday shopping earlier this year, and we proactively took steps to ensure we were ready with holiday sets, stocking stuffers and unique collaborations to help guests get a head start on their gifting needs.

Speaker 2

If holiday 2020 was about less, holiday 2021 is about more, more fun, more in real life Gatherings more gifting and more glamming. All of our teams at Ulta Beauty are ready and excited to help our guests celebrate more this year. Like last year, we kicked off the holiday season in early November with our Hello Holidays campaign, early Black Friday deals and new loyalty offers. With authentic stories of connection and joy across video, digital, social and print Platforms to encourage and motivate beauty enthusiasts to shop Ulta Beauty will be everywhere our guests are this holiday season. Our merchant teams have built an outstanding holiday assortment with giftable fun items across categories and price points.

Speaker 2

With new brands like Bobby Brown, Drunk Elephant and Briogeo, expanded assortments from brands like Laura Mercier, Florence and Pattern and exciting holiday offerings from brands like Dyson, Tarte, Ariana Grande, Truly and our very own Ulta Beauty collection, We have great gifts for everyone. To help guests explore our best holiday gifts, We developed a unique digital experience to allow for easy discovery of holiday gifts online and in store. When guests visit ulta.com or scan the QR code on a banner at the front of our store, an app clip will launch, giving the guest an opportunity to easily explore top gifts by category. Our stores are always the center of holiday at Ulta Beauty. As we combine our great in store experience with our innovative omnichannel capabilities, we'll meet every guest wherever and however they want to shop Ulta Beauty.

Speaker 2

To help guests get ready for in real life celebrations, we've expanded salon capacity to 100% In all Ulta Beauty salons and Benefit brow bars, except we're limited by state or local mandates. And we've relaunched skin services in select stores. Finally, our BOPIS curbside and same day delivery options will provide guests with great shopping convenience this holiday seasons. Our teams are excited, engaged and ready to support our guests from proactively managing inventory flow and anticipating supply chain challenges to stress testing our IT systems and digital platforms to successfully accelerating our holiday hiring. The holiday season is off to a strong start, and I am confident we are well positioned to deliver another successful holiday season at Ulta Beauty.

Speaker 2

In closing, we are excited about the strength we are seeing in our business. Our Q3 performance exceeded our initial expectations and we are encouraged by the early holiday trends. The beauty category is recovering and our teams are executing well. We are investing and innovating to ensure Ulta Beauty will lead the new beauty landscape and we are confident our well defined strategy will enable us to capture more market share and drive profitable growth. And now, I will turn the call over to Scott for a discussion of the financial results.

Speaker 2

Scott?

Speaker 4

Thanks, Dave, and good afternoon, everyone. Today, we reported stronger than expected Q3 results, and I would like to echo Dave's comments and express my appreciation to all our Ulta Beauty associates for delivering another outstanding quarter. Starting with the income statement. Q3 sales increased 28.6%, driven by double digit growth in comp sales and strong new store performance. Total company comp increased 25.8 percent, primarily driven by strong transaction growth in stores.

Speaker 4

In addition to robust sales growth from stores, e commerce exceeded our expectations, delivering modest growth on top of last year's 90% growth. Total company transactions for the quarter increased 16.8%. Average ticket increased 7.7%, primarily due to an increase in average selling price, reflecting favorable category mix shifts and lower promotional levels. During the quarter, we opened 7 new stores and closed 1 store. We also remodeled 3 stores and relocated 2 stores.

Speaker 4

Compared to the Q3 of fiscal 2019, Total sales increased 19% and comp sales increased 14.3%. From a mix perspective, makeup was 45% of sales compared to 47% last year. Hair Care Products and Styling Tools were 21% of sales compared to 20% last year. Skin Care was 16% of sales, flat with last year, And the fragrance and bath category increased 200 basis points to 12% of sales. Q3 gross profit margin increased 450 basis points to 39.6 percent of sales compared to 35.1% last year.

Speaker 4

The increase was primarily due to leverage of fixed costs, channel mix shifts, leverage of salon expenses and higher margin merchandise margin. Consistent with what we experienced in the first half of this year, Strong top line growth and benefits from our occupancy cost optimization efforts resulted in significant leverage of fixed costs. E commerce sales penetration in Q3 was about 500 basis points lower than last year as we cycled last year's strong e commerce growth. As a percentage of sales, salon expenses also leveraged, reflecting strong top line sales and lower costs from the elimination of the salon manager role. As a reminder, we will anniversary this change in Q4.

Speaker 4

The improvement in merchandise margin was primarily the result of higher sales, lower promotional activity and ongoing benefits from our category management efforts. Comparing this year's performance to the Q3 of fiscal 2019, Gross margin improved by 250 basis points. Higher merchandise margin, fixed cost leverage and leverage of salon expenses were partially offset by adverse channel mix. As a percentage of sales, SG G and A decreased to 25.2 percent compared to 26.8% last year. Strong top line growth drove leverage of corporate overhead, store expenses and store payroll and benefits.

Speaker 4

This leverage was partially offset by deleverage from marketing expense, primarily reflecting increased spend on print advertising compared to the Q3 last year. Last year, we significantly reduced our spend on print material in Q3 due to the pandemic. This year, our cadence of print was more normalized. And as Dave mentioned earlier, we are leveraging our CRM capabilities to optimize circulation and increase the profitability of our print vehicles. Compared to Q3 of fiscal 2019, SG and A as a percentage of sales was about 150 basis points favorable.

Speaker 4

As a percentage of sales, lower store expenses, store payroll and benefits and corporate overhead were partially offset by higher marketing expense. Operating margin was 14.2 and 8% of sales on an adjusted basis. Strong top line growth driven primarily by stores, Combined with the impact of our ongoing cost optimization efforts, including promotional optimization, delivered strong operating margin results. The company's tax rate decreased to 24.1% compared to 25.1% in the Q3 last year. The lower effective tax rate is primarily due to favorable provision to tax return adjustments, driven by federal employment tax credits compared to the Q3 of fiscal 2020.

Speaker 4

Diluted GAAP earnings per share increased to $3.94 compared to $1.32 last year. Adjusted diluted earnings per share in Q3 of last year was $1.64 Moving on to the balance sheet and cash flow. We ended the quarter with $1,900,000,000 of inventory compared to $1,400,000,000 last year. In addition to the impact of 40 additional stores, the increase in inventory reflects our proactive efforts to mitigate holiday sales risk due to anticipated supply chain disruptions. Where appropriate, our teams work closely with our brand partners to prioritize receipts to ensure we have adequate inventory of core and seasonal product to support expected demand for the holiday season.

Speaker 4

Capital expenditures were $51,100,000 for the quarter, driven by investments in new stores, remodels and relocations, Supply Chain and IT Systems. Depreciation was $65,200,000 compared to $72,400,000 last year, primarily reflecting the impact of last year's store impairment and store closures. We ended the quarter with 605 point $400,000 At the end of the quarter, we had $759,800,000 remaining under our current $1,600,000,000 repurchase authorization. We continue to expect to repurchase approximately 850,000,000 of shares in fiscal 20 21, but as always, have the flexibility to modify the cadence of repurchases in response to market conditions. Turning now to our updated outlook for 2021.

Speaker 4

We are very pleased with our year to date results through Q3 and are encouraged by the strong trends we've experienced so far in the Q4. However, we recognize We still have several significant sales weeks left in the holiday season and the operating environment continues to be dynamic. Despite these uncertainties, we have increased our financial expectations for the year. We now Net sales for the year will be between $8,500,000,000 $8,600,000,000 with comp sales growth forecasted in the 36 to 37% range. This guidance reflects our expectation that 4th quarter comp growth will be between 15% 20%.

Speaker 4

For the year, we plan to open approximately 44 net new stores and remodel or relocate 17 stores. We now expect operating margin rate for fiscal 2021 will be between 14.3% 14.5% of sales. We continue to believe the largest driver of operating margin expansion will come from gross margin, driven by leverage of fixed costs, less headwind from channel shift, improving merchandise margin and leverage of salon costs. Based on higher top line growth, We now expect to leverage SG and A more than previously expected as compared to fiscal 2020. Based on these assumptions, we now expect diluted earnings per share will be between $16.70 $17.10 per share, including the impact of approximately $850,000,000 in share repurchases.

Speaker 4

We now expect to spend between $200,000,000 $225,000,000 in CapEx in fiscal 2021, including approximately $100,000,000 for new stores, remodels and merchandise fixtures, dollars 80,000,000 for supply chain and IT and about $34,000,000 for store maintenance and other. As a reminder, our guidance for fiscal 2021 assumes a consistent federal tax rate and no material increases in the federal minimum wage. Before we open the call for questions, I'd like to address a few follow-up questions we received from our October Analyst Day event. First, our longer term financial targets. In October, we shared targets for revenue and earnings growth, which we are confident we can deliver through fiscal 2024 based on the limited visibility we have in the dynamic operating environment.

Speaker 4

As a reminder, we are targeting net sales growth between 5% 7% and diluted earnings per share growth in the low double digit range on a compound annual growth basis using fiscal 2019 as base through fiscal 2024. In addition, we are targeting operating profit margins in the 13% to 14% range over the next 3 years. Our operating margin expectations reflect a balanced and disciplined approach to strategic investments that will support our long term growth aspirations and deliver strong shareholder returns. Regarding the timing of investments related to Project SOAR, our multiyear effort to upgrade our Enterprise Resource Planning or ERP platform, We expect to invest $160,000,000 to $180,000,000 in capital over the next 3 years, with most of the investment planned for fiscal 20222023. As a reminder, in addition to providing us with more We expect to begin to see operational benefits from this investment in fiscal 2023.

Speaker 4

Lastly, we are still finalizing our budget for fiscal 2022 and plan to provide financial guidance in line with our regular cadence on our March earnings call. However, we wanted to share some initial thoughts to consider as you update your financial models. Comp sales growth in fiscal 2021 is expected to be significantly stronger than we initially planned, but we remain confident we can deliver comp sales growth in fiscal 2022 within our longer term targeted range of 3% to 5%. While we expect fiscal 2021 operating margin will be modestly above our longer term target, we expect Operating margin in fiscal 2022 will be within our longer term targeted range of 13% to 14%, reflecting a more normalized pace of top line growth and capital and operational investment. We continue to target EPS growth in fiscal 2022 despite the challenge of cycling this year's stimulus payments and reopening of the economy, but acknowledge that earnings growth rate next year will likely be lower than our longer term target.

Speaker 4

And now, I'll turn the call back over to our operator to moderate the Q and A session.

Operator

At this time, we will be conducting a question and answer One moment while we poll for questions. Our first question comes from the line of Michael Lasser with UBS. You may proceed with your

Speaker 3

question. Good evening. Thanks a lot for taking my question. 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-fourteen percent 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?

Speaker 3

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? Thank you.

Speaker 4

Yes. So to the first part of your question, Michael, What we're talking about today is consistent with how we framed it up back at our Analyst Day in the later part of October. So again, Over the longer term, we're very confident we can deliver operating margin in the 13% to 14% range. We again reiterated today that's a function of what we expect to be a more moderate top line sales growth environment next year, coupled with a more normalized investment cycle for the company and that's with people cost and all the capital costs that go along. With all those new great strategic initiatives that we have well underway now.

Speaker 4

So as we think about Potential sales over performance next year, which again we would hope to see that. We would continue to take what we always have is a very disciplined, Pragmatic approach to long term investment to drive healthy growth in the business, balanced against short term operating results. So again, just making sure we take a very balanced approach to that as we have in the past, and You can expect that to continue into the future.

Speaker 2

And Michael, I'd just add to what Scott said, just to reiterate what we talked about at Analyst Day that we are very optimistic The path ahead, that's reflected in that long term guidance. We believe we'll be growing faster than the market. The initiatives both in our core business today as well as new programs and initiatives that we'll be adding over Next year and the years ahead give us a lot of confidence that we'll be leading the category and delivering a profitable growth of that timeframe. And as we shared at Analyst Day, we feel a lot of confidence in that path ahead.

Speaker 3

Thank you and have a great holiday.

Operator

Our next question comes from the line of Lorraine Hutchinson with Bank of America. You may proceed with your question. Thank you. Good afternoon. I wanted to follow-up on the comments you made around cosmetics.

Operator

Are you seeing any newness that you're excited about? And what do you think will be the catalyst to move the to move the comp into positive territory versus 2019?

Speaker 2

Great. Thanks, Lorraine. Yes, makeup obviously is an important topic for us One that we're very focused on and I would 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, Hair Care, Bath, Fragrance, which are all delivering double digit comp versus 2020, it has not caught up to that level of growth.

Speaker 2

But even with that, we feel encouraged by what we're seeing. Our mass side of the business remains double digit growth versus 2019 and is performing well. And our Prestige business improved in the quarter and we saw some real pockets of growth and success. And I think it's a combination of things, both currently driving the business and as we look forward, we continue to see Strong innovation and growth from a number of brands, brands across the spectrum from Clinique and NARS and Lancome to NYX and Maybelline. We're expanding Mac into 200 additional stores to have it in over 500 of our stores.

Speaker 2

We've launched new brands like Bobbi Brown and we're seeing newness From Laura Mercier, ColourPop, Urban Decay, Tarte. And so it is there's a robust pipeline and it's hitting across all price points. When I look at some of the trends that we see in the market and we believe will drive the business into next year, there's a number of things that Again, encourage us. We see really a duality of looks that's going on right now, a combination many consumers Looking to a combination of both natural looks and bolder looks. The bolder looks that reflect kind of this idea of individual expression, Bold colors with innovation, innovative formulas, color boost that bright impactful particularly around the eye and that's that combination People looking to do both, natural and bolder colors is really positive.

Speaker 2

We've talked about skinification For a while, bringing moisturizing benefits or lightweight concealers or other elements that combine those categories. There's evolved application techniques, including what we kind of see is kind of next generation of contouring that's been driven by TikTok and Other social media, which we think is encouraging. New product forms, including longwear, lip. We've been looking at inclusive beauty for a while and that's continuing to drive across all different types of skin tones, again driven by influence in TikTok. And Mascare and Lashes is another space I've mentioned that we're seeing innovation and growth, a combination of both Using more than one product or having different mascaras for different events and different times of day.

Speaker 2

So a number of things that are Coming together that are helping improve the category and give us confidence as we look forward. So as we look at the pipe both The trend impact in the total category and the pipeline that we have both of existing brands and new brands on the horizon in 2022, We feel confident in the path ahead and are working every day to drive that business forward.

Operator

Thank you. Our next question comes from the line of Simeon Gutman with Morgan Stanley. You may proceed with your question.

Speaker 5

Hi, everyone. Happy holidays. 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 Lancome. Have you also considered getting into pro hair color?

Speaker 5

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.

Speaker 2

Well, yes, I'm not going to give you real like exact specifics of how any one launch would match up with others, other than to say We're thrilled about our partnership with Olaplex. We're already in partnership. We have been for several weeks now with our salon service And that's performing exceptionally well, exceeding our expectations. Our guests are thrilled by it. And importantly, our stylists Are thrilled by it and so it's that's gotten out of the gates really strong.

Speaker 2

And as we move into January to be able to launch The product line in all stores and online, a complete assortment of Olaplex. As I mentioned in the remarks, and you know, it's the number one prestige hair care brand. And so we anticipate That it will have a big impact on our hair business and continue to support and drive our salon business. So we're excited about it and we're putting The unique capabilities of Ulta Beauty behind the launch, a real 360 marketing program leveraging our Almost 36,000,000 members and all the marketing tools and capabilities in partnership with the just fantastic Olaplex team. So Excited about that launch and looking forward to taking the next step of that in January.

Speaker 2

And then as far as Other extending into Target, we look at every brand and every opportunity and Nothing here to specifically talk about as it relates to Olaplex, but Target is we're excited about and we'll continue to evolve that assortment Over time.

Speaker 5

Thank you.

Operator

Our next question comes from the line of Steve Forbes with Guggenheim Securities, you may proceed with your question.

Speaker 3

Hey, Matt Norton on for Steve Forbes here. Wanted to ask about Target partnership, we know it's early, but wanted to ask if you guys have seen any categorical differences, any customer demographic differences, spend per member, frequency, Anything of that nature would be helpful.

Speaker 6

Yes. I'll take that one, Matt. This is Kisha. It's really too early to comment on the results as we really want to cycle is similar to what we see with our members who really typically shop Ulta Beauty 3 to 4 times a year. So it's going to take a little bit more time because we just opened these stores at the beginning of August.

Speaker 6

Longer term, we do believe this partnership is going to really enable us to expand our loyalty members, increase our engagement and ultimately increase our spend per member. Bottom line, our partnership brings together these 2 powerhouse retailers to really reimagine Prestige. We're really off to a strong start. We're excited to see what the holiday season brings, but we'll be able to update you after a few more shopping cycles here.

Speaker 3

Thanks. Good luck for the holiday period.

Operator

Our next question comes from the line of Michael Binetti with Credit Suisse. You may proceed with your question.

Speaker 7

Hey guys, thanks for taking our question here. Scott, can we talk a little bit more about the gross margin? You helped us a lot with some of the drivers there in merch margin, fixed cost leverage, salon leverage, and I think you said a little bit of an offset from channel mix headwinds. But you gave some comments on the merch margin as well. But as we think of where you are today, are there elements There that you're seeing in the gross margin this year that are that help you form a new baseline to grow off of going forward?

Speaker 7

Or would you Point just to some of those elements that you think you need to give back. And I know you've done a lot of work on things like promotional levels in merch margin, you just told us the revenues will grow, so maybe there should be some fixed cost leverage still next year. I'm just wondering, as we take your comments and try to Put them out to 2022, if there's things we should think about as offsets there as well. Yes.

Speaker 4

I don't think there's anything incrementally new, I guess, I Good, Sher. It's really a combination of all the variables that we've been talking about with investors and with the analysts for quite some time. 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.

Speaker 4

We're, think producing very good results this year under very difficult circumstances. So all this good work now is starting to bear fruit for us. So again, I would say those are the building blocks that we start with as we started thinking about our longer term plan. And then as you heard us describe at Analyst Now we're into 2.0, I guess I would call it, with our continuous improvement initiatives, right? And so Building highly skilled resources internally here that can help us get after some of those harder to capture benefits and of course, Some of the new infrastructure investments that we talked about as well at Analyst Day, especially at Project SOAR, which is really a multi generational opportunity for us to reimagine business flows across And improve our processes and take a lot of inefficiencies out of the business here.

Speaker 4

But again, some of that takes time. So As we're thinking about the next 3 years or so, EFG core benefits will continue to deliver Good cost optimization for us in the near term and then CI with SOAR will drive longer term benefits So we still think there's plenty of opportunity to keep operating margins in a very healthy 13% to 14% range here over the longer term.

Speaker 7

Very encouraging. Thanks, Scott.

Operator

Our next question comes from the line of Mark Atterkin with Stifel, you may proceed with your question.

Speaker 8

Yes, thanks and afternoon everyone. 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'd be helpful. And then just a bigger question. The brand owners seem to be reporting what I guess I would call Stick your D2C sales on their own websites, relative certainly to pre pandemic level.

Speaker 8

It would obviously seem like, given your growth, that 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 maybe the suppliers are your suppliers, I should say, and then how they're dealing with their own customers and how Kind of those two 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.

Speaker 8

Thanks.

Speaker 2

Great. Thanks, Mark. I'll start with your second question and then Kisha can give any more color On the target part of that, but on DTC, it's that's not new, not new this year, that's been DTC, that's been building for a while. And so we really look at that as Yes, something that we're obviously monitoring and watching, but also see as a development in the competitive landscape that We can manage through. And in fact, DTC, most of many of the DTC brands have found The importance of physical retail and many of them have chosen to partner with Ulta Beauty.

Speaker 2

So start DTC and come into Ulta Beauty. Ulta Beauty Brands, some larger brands kind of building a DTC brand presence, which we know is happening. But we see it our model has Very different. The guest experience, the combination of in store and online, our loyalty program, the breadth of products Across price points, the depth within brands and segments and categories, the salon services, everything that we offer, the competitive Differentiation that we have really separates us from our other retailers and from DTC. And as I said, many DTC are partnering with us, whether they're long time established brands or newer brands.

Speaker 2

And so we're watching that landscape, but for us, it's like we think with any competitive Evolution in the category, we play offense, we do what we do best, we adjust and adapt, But we look to drive our business forward in a really differentiated way, and I think that's what's been driving our business so far this year. Keisha, any more color you want to add on the target?

Speaker 6

Yes, absolutely. What we're seeing is that they're shopping the entire assortment. You have to remember this was a highly curated assortment of hero SKUs Best selling item, must have minis. So we are really pleased that they are shopping the entire shop which is what the intention was, was not just to have them shop 1 category, but to get a taste of what Ulta Beauty has to offer As a whole in the shop. So I'd say bottom line, they're really shopping the entire assortment.

Speaker 6

We like what we're seeing so far.

Speaker 3

Thank you.

Operator

Our next question comes from the line of Omar Saad with Evercore. You may proceed with your question.

Speaker 9

Good afternoon. Thanks for taking my question. Great quarter. Appreciate all the color and especially the kind of initial look at what you Comps and sales could look like in 2022. Really want to kind of get a better understanding of what underlies that confidence behind what you think is a plus 3 to 5 Kind of long term algorithm on top of what's obviously going to be a very big number this year.

Speaker 9

I think investors expect some Of these franchises have done so well this year to give back some of those gains next year, but obviously you guys don't see it that way. We'd love to know if it's Whether it's reactivating existing customers or new customers coming in or the trends around product innovation, would love to get a better sense of why you expect to grow on top of This great growth next year. Thanks.

Speaker 2

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 Increasing versus 2019, but by no means do we think this is kind of the end of the road.

Speaker 2

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.

Speaker 2

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. Our loyalty program recovered from 2020, frankly, faster than we thought. And we think that's a great sign that What we believe was going on in 2020 when we took a step back was not because they didn't like Ulta, just the disruption In their lives and they've shown us that retention is high, we're acquiring Novembers, we're bringing Labs members back in and we see many more beauty enthusiasts to capture. We see that growth happening across Age groups, you've heard us talk about our strength with Gen Z as one example, and we see a lot of opportunity to continue to gain with our loyalty program.

Speaker 2

And then frankly, the unique combination of digital and physical, We believe guests are showing us demonstrating with their loyalty and their spend that they really do prefer what all the data says. And They're showing us with their dollars that they prefer to shop a combination of physical and digital. That's why our e com actually grew in Q3 after such Strong growth in 2020, even as our stores show exceptional growth versus 2020. So that experience And our continued innovation and evolution across both digital and physical, we believe is where the consumer is going and we're leading in that as well. And then all the other initiatives, our program with Target, of course, is massive, New programs like Ulta Beauty, UB Media.

Speaker 2

So we think we've got a pipeline. Growth won't be what it is this year and that's Reflected, but we're going to lead this category and it's going to take, it will be a unique combination of what makes us differentiated that gives us confidence.

Speaker 9

Thanks, Dave. Happy holidays.

Speaker 2

Thank you, Omar.

Speaker 1

We have time for one more question, please.

Operator

Our last question comes from the line of Rupesh Parikh with Oppenheimer. You may proceed with your question.

Speaker 10

Good afternoon. Thanks for taking my question. So Sky, 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 and A line.

Speaker 4

Sure. Thanks for the question. So big picture operating margin versus 2020, it's going to be flattish In the Q4 and versus 2019, we'd see some deleverage in operating margin. Again, both of those will have a mix of Gross margin expansion and SG and A deleverage. So gross margin, goodness coming from all the things we've talked about this year, It's a benefit for us versus last year.

Speaker 4

Channel mix more of a headwind versus 2019. So gross margin leverage for both years. On the SG and A line, again, deleverage for both years. 2020, not as significant as it is versus 2019. Again, 2020 consistent with all the things we've been talking about all year with the addition of incentive compensation, I guess, I would say is more significant in the Q4 Then earlier in the year and then when we compare it back to 2019, store labor and wages, not only hours, but wage rates are up significantly Versus 2019 incentive comp again is a bigger impact versus 2019.

Speaker 4

You remember 2019, we were Short of our targets in 2021, it's a bit of a different story. And then marketing expense as well. Again, more investment versus 2019 when we were kind of Battening down the hatches, I guess, I would say in a tougher environment. And this year, we're taking advantage of tailwinds and investing in market awareness activities to again capture more market share over the long term. So that's what I would say.

Speaker 4

Short story, Again, super excited and happy with the results so far this year through Q3 and very encouraged and excited about the kickoff to the Q4.

Speaker 10

Okay, great. Thank you. Happy holidays.

Operator

Ladies and gentlemen, we have reached the end of today's question and answer session. I would like to turn this call back over to Mr. Day Kimball for closing remarks.

Speaker 2

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 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. We hope you all have a safe and joyous holiday season And we look forward to speaking to all of you again in March when we report our Q4 and full year results.

Speaker 2

Have a great evening.

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.

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Earnings Conference Call
Ulta Beauty Q3 2022
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