Dave Kimbell
Chief Executive Officer at Ulta Beauty
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.
Starting with the succession plans we announced this afternoon. After nearly 20 years with Ulta Beauty and more than a decade as CFO, Scott Settersten, has shared with us his decision to retire, effective April 1, 2024. From his early days helping take Ulta Beauty public, and throughout the last 10 years as CFO, Scott's impact on Ulta Beauty has been tremendous. He's been a passionate steward of our business and the strong and constant shareholder returns achieved during his tenure are a testament to his leadership and disciplined approach to driving profitable growth. I want to express my sincere gratitude to Scott for his partnership and his remarkable contributions to our business. He has been an exceptional partner to me and an inspirational leader for our team across the company.
With Scott's retirement, I'm very pleased to announce that Paula Oyibo will be our next Chief Financial Officer. Paula is a dynamic finance executive with broad industry experience, and I am confident she is the right leader for this next chapter of Ulta Beauty's growth. Since joining the company in 2019, she has established herself as a trusted partner and visionary leader. Her deep understanding of our business, experience leading large finance organizations and strong commitment to nurturing talent with an inclusive culture make her the ideal person to serve as Ulta Beauty's next CFO. Paula will be a great addition to our dynamic executive team, and I look forward to partnering with her as we continue our growth journey.
This announcement represents another great succession story for Ulta Beauty. I am grateful to Scott for being intentional and thoughtful in ensuring we have a seamless plan for this critical leadership role. And I am excited that Paula will bring her business-first mindset, influence and energy to the executive team.
Okay. Now let's talk about our third quarter performance. The Ulta Beauty team delivered strong performance again this quarter, with sales, gross profit and EPS all exceeding our internal expectations. Our traffic trends remain healthy, our brand awareness and loyalty program reached all-time highs, and our transformational initiatives are on track. I want to thank all Ulta Beauty associates for maintaining their focus on creating great guest experiences and delivering these results while executing against our transformational agenda.
For the quarter, net sales increased 6.4% to $2.5 billion. Operating profit was 13.1% of sales and diluted EPS was $5.07 per share. Comparable sales increased 4.5%. As discussed on prior calls, we expected the sales growth to moderate from the first half as we lapped two years of strong double-digit comp growth. Comp sales growth for the quarter was driven by approximately 10% growth from our digital channels. Stores delivered low-single-digit comps as we lapped high-teen growth last year. Store traffic remained healthy, increasing in the high-single-digit range.
Turning to performance by category. Skincare was again our fastest-growing category, driven by double-digit growth in mass and prestige segments. Beauty enthusiasts have maintained their skincare routines while also experimenting with new regimens. Consumer interest in moisturizers, serums and cleansers is driving growth, and brands leading into these trends like Drunk Elephant, Good Molecules and COSRX contributed to our strong results. Dermatologist-recommended brands also continued to resonate, driving growth for brands like La Roche-Posay, Cetaphil and Dermalogica.
The fragrance and bath category delivered low-double-digit growth. Newness from Ariana Grande, Burberry and YSL contributed to the category's performance. Prestige brands, Valentino and Carolina Herrera, and luxury brands, CHANEL and Dior also drove meaningful growth.
Sales in the makeup category were flat, with mid-single-digit growth in mass makeup offsetting a modest decline in prestige makeup. New brands like Dior and NATASHA DENONA and Beautycounter and existing brands with compelling newness and innovation, including e.l.f., Juvia's Place, MAC and OPI, all delivered growth during the quarter. While many mass brands continue to benefit from engaging newness and social engagement, our prestige makeup business was more challenged as we continue to lap the strong impact of last year's Fenty launch.
Finally, comp sales for the hair care category decreased in the low-single-digit range, primarily driven by a decline in hair tools. Newer brands, including exclusive brand LolaVie and Shark Beauty and Donna's Recipe as well as newness from Not Your Mother's and OUAI deliver growth for the category. Trend-relevant products from Redken and Biolage resonated strongly with guests while social virality drove growth for IGK and Mielle.
Comparing to mass beauty dollar sales for the 13 weeks ended October 28, 2023, we continue to outpace the growth of the mass market according to Circana data. In prestige beauty, our share gains in skin care and fragrance were offset by softness in makeup and hair according to Circana. From a channel perspective, we gained prestige beauty share across digital channels, but were more challenged in brick-and-mortar channels, reflecting the impact of increased distribution for prestige beauty. While these dynamics increased competitive intensity in the short term, we are confident our sales-driving strategies will support our ability to capture more market share over the long term.
Our services business delivered high-single-digit comp growth, primarily driven by engagement in core services, including haircuts, blowouts and makeup services. Ear piercing, one of our newer services also performed well, and salon backbar takeovers, which give our stylists an opportunity to introduce brands to guests continue to drive product attachment and new guest acquisition for participating brands.
Unlike other discretionary retail categories, the U.S. beauty category has consistently driven growth over time. Based on data from Euromonitor, in the 15 years prior to the pandemic, the U.S. beauty category grew in the low- to mid-single digit range every year except during the Great Recession when the category experienced low-single-digit declines and in 2020 when the category declined 6%. In 2021 and 2022, the category experienced unprecedented double-digit growth as consumers recovered from the pandemic. And as we lap the strong growth this year, consumer spend has remained healthy. While we expect growth will continue to normalize to historic ranges, we remain confident the category will continue to grow, barring a macroeconomic event.
In addition to factors that have driven the category historically, including a strong emotional connection with consumers, newness and innovation, and societal changes, today, consumers are thinking differently about the role beauty can play in their wellness routine, which we believe will drive increased usage for the category.
As we think about the opportunity to expand our market leadership and drive long-term profitable growth, our strategic framework guides our priorities and focus. Let me share some highlights and the progress made this quarter.
Starting with our efforts to drive growth with an expanded definition of All Things Beauty. During the quarter, we enhanced our assortment with trend relevant brands in every category. In makeup, we introduced luxury brand, PAT McGRATH LABS, expanded our presence with MAC to nearly all stores, launched several exclusive and innovative brands, including HALF MAGIC, Polite Society and Rabanne. In skin care, we launched PanOxyl, a dermatologist-recommended brand popular with Gen Z. In haircare, we launched Shark Beauty, an innovative brand of hair styling tools at accessible price points. And in fragrance, we launched Snif, an emerging brand offering gender-neutral sense available only at Ulta Beauty.
Building on our long-term partnership with CHANEL and other luxury fragrance brands, we see an opportunity to expand our luxury offering into makeup and skincare. In Q1, we launched Luxury at Ulta Beauty and our member analytics confirms that our new luxury assortment is driving incrementality and increased spend per member.
In addition to strengthening our core assortment, we are leaning into broader trends in beauty through our cross-category platforms. We continue to expand our Conscious Beauty platform. At the end of the quarter, more than half of our brand portfolio was certified in at least one pillar, with 260 brands certified in more than one pillar. Newly-certified brands include COSRX, Loving Tan and Polite Society. We also increased our portfolio of BIPOC brands, welcoming PAT McGRATH LABS, CurlMix, BETTER WORLD FRAGRANCE HOUSE by Drake and POUND CAKE to the portfolio. And we expanded our wellness assortment with the launch at -- of at-home spa tools from LUV SCRUB, Solawave and Skin Gym.
In addition, we expanded the wellness shop to an additional 500 stores and refresh the presentation with elevated aesthetics, improved navigation and more storytelling graphics to inspire and educate our guests how to connect to wellness in their everyday lives.
Guests are moving effortlessly between physical and digital channels, and we are investing to enhance the guest experience across all touch points. We have been on a multiyear digital transformation journey to upgrade our infrastructure and deliver a more engaging and seamless digital guest experience while also positioning future growth. In August, we completed a significant step in this process with the transition of our digital commerce experience, including cart, emotions, checkout and member account data to our new architecture. Overall, our team successfully executed these changes, and I am pleased to report our new digital experience performed very well over the high demand Thanksgiving weekend, including Cyber Monday.
The modernization of our digital technology ecosystem is nearly complete, enabling us to elevate and optimize our existing guest experience while driving digital innovation, utilizing a modern, agile approach.
In addition to our digital platforms, we are also enhancing our in-store experiences. Our member data demonstrates that an excellent guest experience drives spend, increased frequency and creates lasting loyalty. This quarter, we launched a refreshed guest engagement model, which elevates the guest experience through authentic engagement, helpful experiences and friendly interactions to create a genuine human connection. While still early, we are encouraged by the improving trends in guest satisfaction scores.
We continue to expand and enhance the Ulta Beauty at Target experience. We opened 89 Ulta Beauty at Target shops during the quarter, ending the quarter with 510 shops. This quarter, we were excited to launch FENTY BEAUTY, delighting our guests with a new way to shop this fan favorite brand. Created exclusively for Ulta Beauty at Target, the Fenty snacks assortment features a curated lineup of best-selling must-haves, minis, and unique sets. And just in time for holiday, we launched a curated assortment of Dyson hair tools in select stores and exclusive holiday sample kits in all Ulta Beauty at Target shops.
Beauty is an emotionally-driven category, and we are investing to drive greater love, loyalty and connection with Ulta Beauty. We continue to strengthen the Ulta Beauty brand, unaided brand awareness increased to a record level this quarter with meaningful gains among Gen Z and millennial beauty consumers. We also expanded the connection guest field for Ulta Beauty as measured by significant growth in brand love. These gains reflect the impact of our strategic brand building efforts as well as our marketing actions to support key promotional events and brand launches.
At Ulta Beauty, our mission is to use the power of beauty to bring to light the possibilities that lie within each of us. Building on our commitment to make beauty as a force for good, we've created The Joy Project, a multiyear initiative to make beauty and the world a more joyful place. We launched The Joy Project in September with an integrated campaign across national TV, PR, social media and our owned channels. In addition, we created a training curriculum for transforming the way our associates think about self-confidence, and to give them tools to empower our guests to do the same. In October, we expanded The Joy Project while reinforcing our role at the intersection of beauty and culture as the exclusive beauty partner for TikTok's first ever beauty month. Grounded in TikTok's theme of reclaimed joy, this month-long activation leveraged creator content and events, premium platform advertising placements and custom filters that allowed users to see their inner joy.
We continue to adjust our promotional strategies as the category normalizes and consumers navigate rising cost pressures. Responding to consumer needs and competitive shifts, we continue to evolve our key tentpole events like 21 Days of Beauty, while also deploying new offers with more relevant storytelling to drive sales and traffic. While our promotional activity increased this quarter, our targeting capabilities and promo optimization efforts enabled us to manage the financial impact. Notably, overall promotional levels remained meaningfully below 2019 levels.
Turning to our loyalty program. We ended the quarter with 42.2 million active members, 8% higher than last year, driven primarily by improving member retention and new member acquisition. Spend per member remains healthy, driven by greater shopper frequency. As we engage members with exclusive promotions, point accelerators and personalized content and recommendations, we are driving engagement spend and frequency. These targeted efforts are also enabling us to elevate more members to our platinum and diamond tiers. Compared to last year, the number of platinum and diamond members has increased more than 20%.
Turning now to our efforts to drive operational excellence and optimization. We are executing a multiyear transformation agenda intended to unlock new capabilities and efficiencies to fuel our growth. In addition to the digital store progress achieved this quarter, we continued to advance our road map in other key areas. We completed the retrofit of our Greenwood distribution center, began shipping to stores and fulfilling e-commerce orders from our new Greer market fulfillment center and transitioned our Chambersburg distribution center to our new ERP platform.
Our teams have delivered several major milestones this year, and we are on track to complete many of our transformational projects next year. We plan to complete the transition of our digital store in the first half of 2024, and we expect to complete the upgrade of our ERP platform and the expansion of our data management systems in the second half of 2024. We will advance our supply chain optimization efforts next year with the continuation of our Dallas DC retrofit, as well as the conversion of our Romeoville, Illinois fast fulfillment center to a new market fulfillment center.
Finally, as the nation's leading specialty beauty retailer, we strive to be good stewards of our environment. Reflecting our commitment to leave a positive legacy, I am excited to share we have established a mission reduction goals approved by the science-based target initiative. Details of our commitments are available in the ESG section of our investor website.
Shifting now to our plans and expectations for holiday. The holiday is off to a good start. But we know the biggest selling weeks are still ahead of us. Our insights suggest that consumers are ready to celebrate even as they navigate in an uncertain economic environment. With our diverse assortments and convenient omnichannel touch points, we are well positioned to help our guests celebrate this season.
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. Our merchants have thoughtfully created a holiday assortment of exclusive first-to-market items along with iconic classics. With products across mass, prestige and luxury, we offer guests both value-first and splurge-worthy items to help them find perfect budget-friendly guests for others or themselves.
Our store teams are ready to bring the holiday to life for our guests. Our new POS system enables associates to easily order items not currently available in their store and our new mobile POS tools provide guests with an elevated and faster checkout process. And with BOPUS and same-day delivery options in every store, it's never been easier or more convenient to shop at Ulta Beauty. Our teams have been working hard all year to ensure Ulta Beauty is ready to bring joy to our guests this holiday season, and I am proud of how well they are executing for our guests.
While the beauty category will likely be a bit more promotional this holiday season, I'm confident our marketing and assortment strategies combined with new capabilities will position us to deliver another successful holiday.
In closing, the beauty category remains healthy, and consumer engagement remains high. We remain confident in the resilience and power of beauty and in our ability to drive market share and profitable growth.
And now I will turn the call over to Scott for a discussion of the financial results. Scott?
