Ulta Beauty Q1 2024 Earnings Call Transcript

Quartr
Provided by Quartr
May 25, 2023

There are 13 speakers on the call.

Operator

Afternoon, and welcome to Ulta Beauty's Conference Call to discuss results for the Q1 of Fiscal 2023. At this time, all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. We ask that you please limit yourself to one question and then reenter the queue for any additional questions. As a reminder, this conference is being recorded.

Operator

It is now my pleasure to introduce your host, Ms. Kiley Rawlins, Vice President of Investor Relations. Ms. Rawlins, please proceed.

Speaker 1

Thank you. Good afternoon, everyone, and thank you for joining us for a discussion of Ulta Beauty's financial and operational results for the Q1 of fiscal 20 Hosting our call today are Dave Kimball, Chief Executive Officer and Scott Settersten, Chief Financial Officer. Keisha Steelman, our Chief Operating Officer, will join us for the Q and A session. Before we begin, I'd like to remind you of the company's Safe Harbor language. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Speaker 1

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 undue reliance on these forward statements, which speak only as of today, May 25, 2023. We have no obligation to update or revise our forward looking statements, We'll begin this afternoon with prepared remarks from Dave and Scott. Following our prepared comments, we'll open up the call for questions. To allow us to accommodate as many questions as possible during the hours scheduled for this call, We respectfully ask that you limit your time to one question.

Speaker 1

If you have additional questions, please re queue. As always, the IR team will be available for any follow-up questions after the call. Now I'd like to turn the call over to Dave. Dave?

Speaker 2

Thank you, Kiley, and good afternoon, everyone. We appreciate your interest in Ulta Beauty. Fiscal 2023 is off to a good start. For the Q1, we delivered net sales, operating margin and diluted EPS that were consistent with our internal expectations. Net sales increased 12.3 percent to $2,600,000,000 and comparable sales increased 9.3%.

Speaker 2

Operating margin was 16.8 percent of sales and diluted EPS increased 9.2% to $6.88 per share. Our store traffic remained healthy and member growth continued to be strong. We delivered growth across key categories and we Strengthened engagement with the Ulta Beauty brand. I want to thank our Ulta Beauty associates for their focus on creating great guest experiences, While continuing to adapt to a dynamic environment and executing our transformational agenda. The operating environment continues to evolve consumers are exploring how best to navigate the economic uncertainty.

Speaker 2

Inflation concerns remain high and consumers are spending more selectively while also showing a continued willingness to splurge and treat themselves. Engagement with beauty remains strong, Reflecting the prioritization of self care, category growth is healthy, but moderating as we lap 2 years of unprecedented growth. And as category growth normalizes, promotional activity is increasing. While we do not intend to leave promotional intensity, we will respond as appropriate Protect and expand our share using a variety of tools we have developed and invested in over the last several years. Using the consumer lens of how guests experience Ulta Beauty through our multiple touch points to include our physical stores, our e commerce business and Ulta Beauty at Target, The Ulta Beauty experience is resonating with our guests and gaining share.

Speaker 2

As we have seen in previous quarters, Sales in our mass category grew faster than prestige categories. It is difficult to know with certainty if the robust growth of Mass products is due to strong engagement with innovative mass brands such as e. L. F. And La Roche Posay or due to increased consumer price sensitivity.

Speaker 2

Importantly, Ulta Beauty is the only beauty retailer that offers a wide variety of price points from entry level mass to luxury and everything in between. And as such, we are uniquely positioned to capture any consumer shifts within price points in the beauty category. Skincare was our best performing category again this quarter with both prestige and mass delivering double digit comp growth, Driven primarily by newness, engaging social media content and strong performance through 21 Days of Beauty and Springhall. Newness from innovative brands like The Ordinary, Drunk Elephant and Hero Cosmetics, as well as new brands including Bubble, Beautycounter and Vyoma contributed to growth during the quarter. In addition, social media platforms continue driving content category engagement resulting in robust growth for dermatologist recommended brands like La Roche Posay and Treadforward brands like CauseRx.

Speaker 2

The fragrance and bath categories delivered low double digit percent growth this quarter, lapping 2 consecutive years of strong double digit growth. Newness from Ariana Grande, Carolina Herrera and Valentino contributed meaningfully and our monthly fragrance crush program fueled strong engagement Makeup delivered high single digit growth for the quarter, driven by newness and guest engagement with 21 Days of Beauty and Spring Haul. Soft bronzing, glossy lips and expressive eyes and nails are trends driving growth for the category. New brands like Dior, About Face and Natasha Denona drove sales during the quarter, while new products from a wide range of brands including e. L.

Speaker 2

F, Fenty and Nicks also contributed to growth. In addition, the expansion of MAC into more stores combined with compelling newness continued to drive sales. Finally, the hair category was flat for the quarter with growth in hair care products and color Offset by lower demand for tools as we lapped strong newness last year. Products focused on hair health, including bonding, scalp treatments and hydration, as well as those focused on styling are resonating strongly. Newer brands like Donna's Recipe, Odell and Divvy as well as new products Trend relevant products from Way, Redken and Kenra resonated with guests, while engaging social media content drove healthy growth for MYEL And IGK.

Speaker 2

Our services business delivered double digit comp growth again this quarter, driven by growth in cut Stylist talent, more members are using services and our salon back bar takeovers, which give our stylist Unique opportunity to introduce new brands and products to guests drove sales growth and new member acquisition for participating brands. Now similar to what other retailers have shared, we continue to see pressure from inventory shrink this quarter And we have updated our full year guidance to reflect the persistence of this trend. While shrink is the result of various factors, theft, Specifically, organized retail crime or ORC is an increasingly concerning challenge, especially as we've seen a rise in violence and aggression during these incidents. Our first priority is the safety and well-being of our associates and our guests. We are committed to ensuring a safe work environment and are investing in fixtures, training, support structures and increased staffing and security to aggressively address this concerning trend.

Speaker 2

ORC impacts all of our stakeholders, Guests, associates, brand partners, investors and communities, and it will not be solved by retailers alone. Given the complexity, it will take collaboration across retail, manufacturing, law enforcement and legislative levels to solve these problems. Now working together, I'm optimistic we can create meaningful impact and bring forward creative sustainable solutions to But has historically been more resilient compared to other discretionary categories due to its deep emotional connection with consumers. We believe this connection is even greater today given the importance of beauty as a form of self care and wellness. As we navigate this dynamic operating environment, our strategic framework guides our priorities and positions us to build on our market leadership and drive long term Profitable growth.

Speaker 2

Let me give you an update on the progress we've made against this framework in the Q1. Starting with our efforts to drive growth with an expanded definition of all things beauty, our strategy is to delight beauty enthusiasts with our thoughtfully curated Assortment focused on inclusivity and leading trends. During the Q1, we further enhanced our assortment with the launch of several exciting brands, including Natasha Denona, luxury artistry brand and known for high quality makeup palettes, cross eye, face and cheek Beautycounter, A clean beauty pioneer offering high performing skincare and makeup with unmatched ingredient safety standards and Odell, A hair care brand focused on clean, assessable products for the whole family. To drive engagement and capture additional market share this quarter, we launched luxury at Ulta Beauty in 200 stores and on ulta.com. Driven by social platforms and strong Gen Z interest, luxury brands are fueling beauty category growth.

Speaker 2

Our vision for luxury at Ulta Beauty is to provide guests with a uniquely modern luxury beauty experience, strategically curated to reflect what guests are engaging most in, Including iconic luxury with brands like Dior and Lancome Absolut, clean luxury with brands like Hourglass and Chanel Numero Hommes and Luxe Artistry Brands like Natasha Denona. In addition to strengthening our core assortment, we continue to expand, evolve and amplify our cross Let me share some Q1 highlights. We ended the quarter with 306 brands certified and at least 1 conscious beauty pillar, including newly certified brands Nutritious, Bayes De Lauter, Winky Luxe and Ma'el. In celebration of Earth Day, To promote sustainability and to drive discovery, we launched a collectible Ulta Beauty Reusable Tote and Beauty Essentials Sample Kit with hero products from 14 certified brands including Beauche, Beekman at 1802 and Acure. We continue to support Black owned and founded brands with the launch of new brands, Hana Hana Beauty and Gold.

Speaker 2

We created a Black owned and founded brands discovery kit featuring 11 brands and 100% of the purchase price of this kit was Donated to Big Brothers Big Sisters of America. In recognition of Black History Month, we celebrated and supported the black community through rich Ode to Black Beauty storytelling and used our digital and social platforms to highlight innovative brands like Nu. Sugar, Beauty Bakery and Sunday 2 Sunday. As we meet beauty enthusiasts wherever they are on their beauty journey, all in your world, we are investing to enhance guest experiences across all of our touch This quarter, we completed the 2 year phased rollout of the guest facing elements of our digital store, Delivering a fresh innovative front end guest experience across both ulta.com and our app. Today, Guests enjoy more seamless navigation and checkout experiences, can discover and browse new experiences, including buy more, save more, Luxury at Ulta Beauty and our new Foundation Finder and also benefit from enhanced search and recommendation capabilities.

Speaker 2

Later this year, we will finish the transition by converting our back end infrastructure to support enhanced checkout, order and inventory management and pricing and promotion capabilities. The completion of the front end of our digital store is a major milestone in our journey to enhance our omnichannel experiences. And it is worth noting, our teams executed these changes while maintaining an active digital platform and delivering our e commerce growth goals. While we experienced a minor disruption during the transition, I am proud of how our digital IT and guest services teams have worked together while minimizing Guest impact. To support omni channel guest experiences, we continued to expand our buy anywhere, fill anywhere capabilities.

Speaker 2

This quarter, we introduced same day delivery in 6 new markets, bringing the number of stores with this convenient option to 5 40 stores across 18 markets. In addition, we're making it easier for store associates to assist guests in ordering products online when not available in store through our upgraded POS system. We have refreshed store POS systems in 1100 stores are on track to complete this transition before holiday. Turning to our partnership with Target. We opened 4 Ulta Beauty shops in the quarter ending with 359 locations.

Speaker 2

This touch point introduces new guests to Ulta Beauty and enables reengagement of lapsed guests And we are leveraging our CRM capabilities to ensure bounce back to Ulta Beauty. Our dedicated field team continues to support this important partnership with Beauty is a personal, emotional emotionally connected category. To increase consideration, loyalty and engagement, we are creating authentic connections With our guests with work that sits at the heart of the beauty community. In the Q1, we executed impactful activations around key cultural moments including Black History Month, prom and Earth Day and delivered improved brand health metrics with significant increases in awareness across Gen Z, Black and Hispanic consumers. These trends confirm that the Ulta Beauty brand is continually becoming stronger, more relevant and more meaningful to guests.

Speaker 2

We ended the Q1 with 41,000,000 active members, 9% higher than the Q1 last year, driven by new member acquisition, lapsed member reactivation and healthy retention rates. Spend per member also increased, Driven primarily by trip frequency and growth of Elite members. Increased visibility, personalized reminders and incentives are driving Growth of Diamond and Platinum members. At the end of the Q1, the number of members in these higher tiers increased more than 30% compared to the same period last year, which is a strong indicator of high loyalty and elevated engagement in all that Ulta Beauty has to offer. Our multifaceted go to market plan to drive member growth and nurture the member lifecycle is delivering results.

Speaker 2

To drive new member acquisition and reactivate lapsed members, we refreshed store associate training and created new tools to help associates communicate the program's benefits. We enhanced the integration of our loyalty program across our refreshed digital experiences and introduced Guest facing signage in stores to drive awareness and we executed targeted reactivation campaigns And tested new personalized digital communications to improve retention and contactability. Turning to UB Media, our retail media network. We are harnessing the power of our exclusive first party data to transform the way our brands connect with beauty enthusiasts. With dedicated resources and new tools in place, this quarter we engaged with more brands, manage more digital campaigns and And our product portfolio to include advertising opportunities on Ulta owned digital properties.

Speaker 2

As UB Media continues to scale, We are confident it will add meaningful value to our company over time. Reflecting our priority to drive Operational excellence and optimization. We are executing an ambitious multi year roadmap of transformation initiatives, which will unlock new capabilities and operation operating efficiencies to fuel our future growth. We are upgrading our enterprise resource planning platform, expanding and optimizing our supply chain with new facilities, systems and processes, Transitioning our digital store to modern technology and architecture while upgrading our order management system, Expanding our data management systems to enable further analytical capabilities and upgrading POS systems in all stores. We have made good progress against our roadmap and expect to deliver major milestones over the next several months.

Speaker 2

While change of this magnitude can be disruptive, Our teams have consistently moved quickly and collaboratively to limit impact to guests and associates. Our success is enabled by our people and we are investing purposefully in our teams to protect and cultivate our world class culture and talent. In the Q1, we launched a refreshed and modernized Ulta Beauty competency model across the enterprise to drive further consistency and talent management processes, Establish clear measures of success and enhance culture with common language. We also launched a new service award recognition program to elevate the associate experience and reward associates in meaningful ways. And we hosted our annual field leadership meeting, Bringing together our general managers, district managers, field support teams and brand partners for several days of recognition, Leadership Development and Product Education.

Speaker 2

I walked away from this event inspired by our talented associates and their passion This quarter, we partnered with Pact Collective to test the packaging recycling program in select locations with the goal of collecting the beauty hard to recycle packaging so that it is diverted from landfills and put to its highest and best use. We also published our 2022 ESG report, which describes our approach to priorities in these areas and provides In closing, fiscal 2023 is off to a good start. Our teams are executing Well against an ambitious transformational agenda while navigating a dynamic environment. While we expect the operating environment will continue to evolve, We are confident the resilience of the category combined with the power of our proven business model and world class team Position Ulta Beauty for continued profitable growth. And now, I will turn the call over to Scott for a discussion of the financial results.

Speaker 2

Scott?

Speaker 3

Thanks, Dave, and good afternoon, everyone. As Dave said earlier, today we reported results for the Q1 that were generally in line with our expectations. We entered 2023 anticipating that the unprecedented growth in the beauty category would moderate and that the promotional environment would increase. These trends materialized in the Q1 and are reflected in our results. Starting with the income statement.

Speaker 3

Net sales for the quarter increased 12.3 percent driven by 9.3% growth in comp sales and strong new store performance. In addition, other revenue increased $19,000,000 primarily due to growth in both credit card income and royalty income from our Target partnership. The comp sales growth for the quarter was driven by an 11% increase in transactions, primarily due to double digit growth in store traffic, which more than offset a 1.5% decline in average ticket. The decline in average ticket reflected lower units per transaction, which more than offset higher average selling price. We estimate that product price increases, most of which were executed last year, Contributed about 400 basis points to the overall comp increase.

Speaker 3

Looking at the cadence of sales through the quarter, Momentum from post holiday tailwinds continued into February, which also benefited from lapping of COVID headwinds last year. Comp sales subsequently moderated to mid single digits as we move through the quarter. During the quarter, we opened 5 new stores and closed 1 store. In addition, we relocated 1 store and remodeled 2 stores. For the quarter, gross margin was down 10 basis points compared to the same period last year at 40% of sales.

Speaker 3

Higher inventory shrink, lower merchandise margin, higher supply chain costs And deleverage of salon expenses were partially offset by strong growth in other revenue and leverage of store fixed costs. As Dave shared earlier, we continue to experience a worsening trend of theft and organized retail crime. We are actively working to stabilize and mitigate these trends through investments in staffing, training and fixtures. In addition to greater pressure from shrink, gross margin was impacted by lower merchandise margin, primarily due to increased promotional activity and category mix which more than offset benefit from price increases. We also incurred additional costs in the quarter related to our supply chain optimization efforts.

Speaker 3

SG and A increased 22.2 percent to $612,000,000 which was slightly better than our plan. As a percentage of sales, SG and A increased 180 basis points to 23.2% compared to 21.4% last year, primarily due to deleverage of store payroll and benefits, corporate overhead and marketing expense, partially offset by leverage of incentive and store expenses due to higher sales. Store payroll and benefits expense increased, driven primarily by higher average wage rates and increased staffing levels compared to the same period last year. Corporate overhead expense deleveraged in the quarter, primarily due to investments related to priorities, including Project SOAR, other IT capabilities and UB Media. Marketing expense increased reflecting investment in strategies to drive member acquisition and retention, increase brand awareness and expand omni member penetration.

Speaker 3

Operating margin was 16.8% of sales compared to 18.7 percent of sales in the Q1 of 2022. As expected, the decline in operating margin Net interest income for the quarter increased to $7,300,000 driven by higher average interest rates and higher average cash balances during the quarter. The company's tax rate decreased to 22.8% compared to 24.2% in the Q1 last year. The lower effective tax rate is primarily due to greater benefit from income tax accounting for stock based compensation. Diluted GAAP earnings per share increased 9.2 percent to $6.88 compared to $6.30 last year.

Speaker 3

Moving on to the balance sheet and cash flow statement. Total inventory increased 11.5 percent to $1,800,000,000 compared to $1,600,000,000 last In addition to the impact of 41 net new stores, the increase reflects the impact of higher purchases to support demand, Product cost increases and inventory to support new brand launches and expansion of existing brands. Capital expenditures were $109,800,000 for the quarter compared to $71,100,000 last year. The increase in capital expenditures was primarily related to investments in IT and supply chain as well as new remodeled and relocated stores. Depreciation decreased to $57,900,000 compared to $62,800,000 last year, primarily due to lower store depreciation And a shift of IT investments from capital to cloud expense.

Speaker 3

We ended the quarter with $636,400,000 in cash and cash equivalents. In the Q1, we repurchased 541,000 shares at a cost of $285,800,000 At the end of the quarter, we had $816,000,000 remaining under our current $2,000,000,000 repurchase authorization. Turning now to our outlook. We have refined our expectations for the full year to reflect our Q1 actual performance and recent trends. We are maintaining our expectations for annual comp sales growth and diluted earnings per share, but are updating our outlook for operating margin.

Speaker 3

We continue to expect comp sales growth for the year will be between 4% 5%, with growth moderating as we move through the year. As we shared on our last call, we expect comp growth for the first half to be in the upper single digit range and then moderate to low single digit growth in the second half. We now expect operating margin for the full year will be between 14.5% 14.8% of sales, primarily reflecting an updated view of gross margin. We have increased our expectations for gross margin deleverage from our original outlook to include the impact of higher shrink in a more competitive and promotional environment. We continue to expect SG and A deleverage driven primarily by We have updated our assumptions for interest income to reflect the current interest rate environment and are now planning for about $17,000,000 of interest income for the year.

Speaker 3

We have also incorporated our Q1 tax rate into our full year forecast And now expect the effective tax rate for the year will be approximately 23.8%. These assumptions result in guidance for diluted earnings per Let's start. We remain optimistic about the health of the beauty category, confident in our team and our growth strategies And steadfast in our belief that our proven business model uniquely positions us to deliver for our guests, associates and shareholders. And now I'll turn the call back over to our operator to moderate the Q and A session.

Operator

Thank you. We will now be conducting a question and answer session. A confirmation tone will indicate that your line is in the question Thank you. Our first question is from Simeon Siegel with BMO Capital Markets. Please proceed with your question.

Speaker 4

Thank you. Hey, everyone. Good afternoon.

Speaker 2

Dave, I know you talked about

Speaker 4

the mass 1st prestige dynamic within the Ulta offering. Do you have any view as to whether you're seeing any signs of external trade down, I guess, either customers trading into or out of Ulta from somewhere else? And then Dave or Scott, I was hoping you could speak a little bit more about the decline in ticket. Any opinions on the lower UPT despite the higher ASP and transactions? I don't know if you think this is Because of a purse tightening or if it's a mix dynamic or compare, just any further color there would be helpful.

Speaker 4

Thanks a lot guys.

Speaker 2

Yes. Thanks, Simeon. What we are seeing as we said in the call is mass and our business is growing faster than proceeding. We saw that in Some previous quarters right now. And so a little bit of detail about that as we look underneath.

Speaker 2

As we look across income levels, There's actually good there's growth across all income levels, across all income cohorts, Roughly equivalent across all in cohorts, although the growth rate did moderate from Q4 pretty consistently. As we said, traffic remains strong, double digit traffic average spend per member increased. Average ticket did decline as We have fewer units per transaction. When we look at the mass category, it's we have some exceptional newness going on in Really high performing brands in our mass category, brands like e. L.

Speaker 2

F, NYX, The Ordinary, La Roche Posay. So we know that is certainly contributing to that. And it's So the fact that mass is growing higher than Prestige, it's difficult for us to exactly parse apart the core driver of that. But we know for sure is a high level of engagement in those brands because they are culturally relevant and driving great engagement. At the same time, we have Strong growth and some strong newness on our Prestige side of the business as well.

Speaker 2

Prestige skincare comping double digit as an example of that. So we're watching closely. What we feel is the total category remains strong. Engagement is high. As we've talked in previous quarters, This is an emotionally connected category that's important and coming out of the pandemic even more important In overall self care and wellness and we expect that to continue.

Speaker 2

But the high level of growth that we've seen these last two years as we've talked about in several quarters Will moderate. We think ultimately getting back to more the high end of historical average, but We know engagement is high and we continue to be encouraged by overall consumer engagement.

Speaker 3

Yes. So overall, I would just remind Yes, Simeon. And then we did state, so total units are up across the enterprise, right, for the period year over year and total spend per member is up year over year as So again, great evidence of a healthy strong business model at play. Very strong traffic trends In both channels, but especially in our brick and mortar channel that we're pleased to see. When we look at the specific units per transaction, again, it was down.

Speaker 3

It's been decelerating a bit over the course of the last 3 or 4 quarters, I guess, I would say. So again, not totally surprising to us to see that. And again, we would Take away from that what most people just looking at the trends and looking at how consumers are just being a little bit more selective now than maybe they were at this time last year, but Trying not to read too much into that at this point in time.

Speaker 4

Great. Thanks a lot guys. Best of luck for the rest of the

Speaker 5

year.

Speaker 6

Thanks.

Operator

Thank you. Our next question comes from Rupesh Parikh with Oppenheimer. Please proceed with your question.

Speaker 7

Afternoon and thanks for taking my question. So I wanted to go back to your commentary on the promotional environment. So clearly, it's gotten more competitive out there. Was just hoping to get more color in terms of what you guys are seeing. And as you look at some of the promotions out there, how does the gap compare to maybe what we've seen maybe To that pre pandemic 2019 earlier?

Speaker 2

Yes. Well, as I mentioned on the call, we anticipated and planned For it to be more promotional this year coming out of all the trends that we've talked about over the last couple of years. And Yes. What we saw as the quarter progressed that actually promotional activity did increase and was even a little bit more than we had So when we look at broader competitive activity, we know this is It's a strong category. It's an important category for all of our competitors.

Speaker 2

And our long term approach to this has been To not to lead the promotional intensity, but to make sure that we are competitive and continue to The leader and gain share in the environment. And so that's what's driving some of the competitive activity and the increase in promotional. As versus 2019, we're still below 2019 and we've planned and anticipate that will be the case through this year. That as you know well, Rupesh, the 2019 and leading up to that was a highly promotional period. We're not anticipating getting back to those levels.

Speaker 2

But as we've talked Really throughout the last several quarters, we anticipated it getting more promotional and we're certainly seeing that in the environment. Well, as a reminder, we worked hard for the last several years and certainly through the last 2 years to expand our CRM capabilities to Grow our loyalty program, 9% growth in our loyalty program, 41,000,000 members now gives us some new tools and new capabilities It will be strategic and thoughtful as we look ahead in the environment as the year unfolds.

Speaker 7

Thank

Operator

you. Thank you. Our next question is from Steve Forbes with Guggenheim Securities.

Speaker 7

Good evening. This is Anders Mayer on for Steve Forbes. I wanted to start with services, so maybe a 2 part question. One outside of the details in the prepared remarks, can you comment further on the trends you are seeing broadly within This is possibly measured by member utilization rate. And 2, can you provide an update on the percentage of consumers that make an in store purchase For receiving a service, I believe in the faster is approximately 50%.

Speaker 7

So wanted to see if there's any moderation there. Thank you.

Speaker 5

Yes. Well, thank you for the question. Yes, again, our salon service business was really strong again in the quarter. What we've liked that we've seen is in the prepared remarks, we talked about these back bar events. So Not that we specifically ever break out purchase by service guests, but what I can share with you is that our backfire events, What we've seen is 90% of guests that are purchasing through those activations are new to those brands.

Speaker 5

So The guest experience in services is really resonating when we get them in the chair. Cut and color is the main driver of our overall services business. And then the trends that we're seeing really are around healthcare, hair care, around Loss of hair, treatments and that also helps with our average ticket. So the business is really strong. Our stylists are really critical to our overall business.

Speaker 5

We hired over 9 50 stylists in this last quarter. So The business is strong. We've got capacity and it's a unique proposition that we have here at Ulta Beauty.

Speaker 7

Great. Thank you.

Operator

Thank you. Our next question is from Christina Kasai with Deutsche Bank. Please proceed with your question.

Speaker 8

Hi, good afternoon and thank you for taking the question. I had a question on the Ultimate Rewards program, right, which continues to set Record both with membership and spend per member. Has your share of wallet increased with your members given some of the High profile brand launches and also the luxury assortment that you're creating. And I also wanted to ask what type of return do you see on some of the more personalized or Tailored promos that you offer whenever needed as you leverage the vast amount of data that you have. Thank you.

Speaker 2

Great. Well, yes, our loyalty program Ultimate Rewards is one of our greatest assets and And I'm really excited that the investments that we've made, the work that the team does, the commitment that our store teams have to driving that Variants continue to pay off. We're really proud of 9% growth in members in Q1, spend per member growth. Our strategies, our plans Our working. We do separately, we do believe we continue to Improved share of wallet of our best guests.

Speaker 2

I talked about Platinum and Diamond members being showing strong growth. We believe we continue to add new experiences, add new brands, engage them in more touch points. Everything that we do It really is designed to increase share of wallet. If we have a store only guest to get them to shop, to use our salon, to shop online, to download our app, get our credit card to shop at Target, all these experiences collectively add the share of wallet and we have continued evidence that when we do that, It works to increase share of wallet. And one example, a store only guest that starts shopping us in an omnichannel Online, Wade, their spend with us increases over 2.5 times.

Speaker 2

So we know we're improving share of wallet across our engaged guests. And as we add new members, which we continue to do as we grow, we're on the journey of getting them more engaged with All of our touch points. So, yes, we are committed to that. We're finding a lot of success. As far as some of the personalization, that's another aspect of our experience that we've been working hard on Several years and it is working and paying off the return of our programs around things like replenishment or Engaging in new categories are working.

Speaker 2

We see strong return. And in fact, the return is enough that we're going to continue to invest more in data capabilities, bringing in new tools, Leveraging innovation across all ways of experimenting and engaging with our guests. So we're seeing good returns and we see there's a lot more opportunity for us ahead in the world of personalization fueled by our data.

Speaker 8

Thank you so much. Best of luck.

Speaker 2

Thanks.

Operator

Thank you. Our next question is from Ike Boruchow with Wells Fargo, please proceed with your question.

Speaker 9

Hey, everyone. Scott, I was just wondering if you could give more color on The shrink-depth component of what's impacting you guys on the P and L. And I'm just asking, it does sound like it's a fairly meaningful Dynamic that's taking place and if there's any way you can kind of quantify that so we kind of know what the impact was in Q1 or what you're now pricing in for the remainder of the year. Anything there would just be a little bit more helpful, so we understand just how impactful it is to your gross margin.

Speaker 3

Yes. So it was When I think about the financial results in totality and really shrink was the thing that surprised us in The quarter and that's really the driver when we think about the operating margin adjustment for the year. So we knew sales were going to moderate a little bit after 2 Calculatively strong years. We knew the promotional environment was going to ramp up some and maybe it's slightly richer than we were expecting, But that's not the driver. The driver is shrank by far.

Speaker 3

And so that's what put a pretty meaningful drag on our Q1. And we're expecting those trends to continue the rest of the year. Again, coming into 2023, we thought the shrink trends were going to moderate a little bit because of some of the investments We were putting behind mitigation tactics, but they haven't resonated yet. We're still hopeful. We're still our teams are doing a great job.

Speaker 3

A lot of effort is going into this. But from a financial standpoint, we're not banking on any improvement the rest of the way. So it's going to remain a challenge for the rest of the year.

Speaker 2

Hey, Ike. I'm glad you asked. I'd add the as I mentioned in the script, this is A really important and critical topic. There's certainly the financial impact that Scott described, but This is impacting our associates. It's impacting our guests.

Speaker 2

And unfortunately, despite our efforts Investments, it's getting worse, not better, and we need to we're working hard. And I mentioned this, but What it's going to take is our efforts and I'm going to ask Kisha to describe in a bit more detail some of the steps we're taking. But we're working hard within Well, we directly control, but we need support from other in partnership with other retailers, support from local leaders, from law enforcement, from DAs, from National governmental leaders, this is a macro problem that needs a macro answer and I'm personally Heavily involved in it to help try to find solutions both for our business and hopefully contribute to some answers across But it's important topic and one they're focused on. But we are doing a lot. Kisha, do you want to highlight a few of those things?

Speaker 5

Sure. Yes. We'll be in 70% of the chain by the end of this Here with Lotte fragrance cabinets, fragrance is one of the base target areas that we see them going after. We're also increasing labor in those specific locations. We're training and educating our associates how best to These type of situations, it's upsetting.

Speaker 5

If you're shopping in a store and you see this activity happening, it's pretty shocking. I'm sure you've seen some of The reports that have come out there, the camera systems catching these groups coming in. So we've invested in security guards, Armed security guards in some locations partnering with our landlords on what can we do to help lease the parking lots and ensure them from even coming in. So it's a full court press out there and we're keeping the communication lines open with our associates when this happens. Like I said, very disturbing and we've got to get those scores corrected No, that's an entire retail group.

Speaker 3

Hey, just one final note, Ike, on that one. So for quantification purposes, as a reference point, in the Q1, The shrink deleverage above expectations totally offset all fixed store volume in

Operator

Thank you. Our next question

Speaker 5

I'd just like to touch on a little bit on your customer retention efforts. I know you've talked a bit on the loyalty program and how that's been doing. But As we think about maybe consumers doing a little bit more pressure in their wallets and maybe seeking out more, say, mass retailers or lower cost items, How are you ensuring customers fit with Ulta and keeping that retention rate strong? Thank you.

Speaker 2

Well, Corinne, it is as you would imagine, a huge focus for our entire team And everybody in the company really participates in loyalty and retention. And that fundamentally starts with delivering a great experience. We have 50,000 associates in our stores that are committed to delighting our guests every time they walk in. And that's key to retention that every guest The experience is a positive, uplifting, fun, engaging experience. And I'm proud that that is so consistently The experience that our guests receive and what they love about us.

Speaker 2

Our retention remains strong And Ed, we and that was an important driver of our 9% growth in loyalty In Q1 and we've got a number of activities from, as I said, the in store experience with all of our digital touch points, Our experience and connection that we have with our guests through Target, our Ulta Beauty at Target and all of our personalization and communication efforts So really engage and excite and delight our guests. So we are pleased with retention and feel That we have a very strong, probably best in class retention rate that we do. And as things as the environment shifts, And I talked about some of that in the script and an earlier question about shifts between mass and prestige. And As that changes, again, that is one of the unique aspects of Ulta Beauty. Nobody does what Ulta Beauty does.

Speaker 2

We're the only ones that offer From entry level price to prestige to luxury, all price points, all categories. So As long as we keep delighting and exciting our guests, if they choose to adjust their spending or maybe decide to buy different price points, They can do that within Ulta across all aspects and that's been a key aspect, key part of our business And one that we'll continue to lean on and leverage going forward.

Operator

Thank you. Our next question is from Olivia Tong with Raymond James. Please proceed with your question.

Speaker 5

Great. Thank you.

Speaker 10

I wanted to see if you could talk a little bit about where the incremental promotion is coming from, whether Certain categories, certain channels that are pushing it harder as they try to expand, or whether it's fairly broad based.

Speaker 3

And then you said you

Speaker 10

I know you said you won't believe the promos, but of course you have to be competitive. So can you talk about how your promo levels compare to your peers? And is there more you can do to leverage your loyalty members and the data that you have that you could potentially promote less versus peers And still stay at the same level of competitiveness. Thank you.

Speaker 2

Yes. First, I'd say the incremental promotion, We see it happening. We see really an intense competitive environment across all parts of the beauty category. And again, because of our model, mass to prestige to luxury, we are directly competing with everybody That sells beauty. And so we watch and track and we're seeing promotional activity across mass, across prestige, across luxury.

Speaker 2

And so that's All part of it. And so I wouldn't say it's any one part of the category. As far as exactly, We don't have perfect insight. So we don't know exactly what each of our competitors are doing and understand all of their Kind of internal measurements. But we watch very closely track year to year, observe what's happening and then we do get some Industry data that gives us a macro picture.

Speaker 2

So for us, it is just about making sure that we're delivering a great experience to our guests delivering the right value at the right time. And you touched on it, but we have invested heavily in our capabilities To personalize and be more targeted. And that's what's allowed us to reduce our promotion From the levels that we saw in 2018 2019 and even as we planned for a more elevated level this year, as I mentioned earlier, believe it will be below those levels in part because of the tools that we have. The fact that now we have 41,000,000 people, We have new personalization capabilities. We've got better CRM experience that allows us to be more pinpointed.

Speaker 2

That doesn't mean we won't do some broad scale offers here and there as they make sense for us. But under the covers, we're doing a whole lot more value added at a more personalized level and that's paying off in an important way.

Operator

Thank you. Our next question is from Michael Lasser with UBS. Please proceed with your question.

Speaker 11

Good evening. Thank you so much for taking my question. One of

Speaker 3

the narratives from the skeptics that is going to

Speaker 11

come out of this report is that their hypothesis It's coming true, trends are going to slow, promotional activity is going to increase and that's going to put pressure on Ulta Beauty's margins And it's probably going to now feature some element of shrink as well. So if you look at where your margins are on Tastes to be this year somewhere in the mid-fourteen percent range. You add the increase in shrink and the Solution that that's going to have on your margin. And if promotional activity were to go back to 2019 levels, What would that mean for your margins in that scenario?

Speaker 2

Let me sorry, and I'm going to ask Scott to Give a bit more color, but definitely more color on specifically around your question. What I'd say is We're really confident in our business. We had guided for this year that we'd be delivering 4% to 5% comp growth And we're committed to doing that. That's what we set out to do and we are on track to do that. We've made an adjustment to Our operating margin and Scott will give more detail on that, but that's a reflection of some very specific things.

Speaker 2

But we remain confident in our long term operating margin and our profitability over time. And we will go address Some of the shrink issues, we do not believe promo is going to get back to historic highs And in part because of what I just talked about, the impact our ability, our capabilities around personalization and others. So I understand that of those questions might be out there, but I tell you we are committed to delivering what we set out to do. We are off to a good start to doing that in Q1, 9.3 percent comp, strong operating margin, strong EPS growth. And we believe our model is uniquely We position to navigate whatever comes our way and we've got the right team and the right strategies in place.

Speaker 2

So that's kind of how I feel about it at a macro level. But Scott, any color specifically about Michael's question on

Speaker 3

No, I would just add that again, shrink in slightly richer promotional mix, Temporary headwinds. We are very ready and able to be able to react to those kinds of things. So again, to Dave's point, With the toolbox that we have and the levers that we have to optimize this business, we're still very confident that 14% to 15% is the right range to be Things like UB Media that's just kind of really getting off the ground is a long term margin accretive part of our business model, Project store, digital store of the future, all these other large strategic initiatives we have underway right now are going to provide meaningful benefit For our stakeholders over a long period of time, so very confident in our own.

Speaker 11

Thank you very much and good luck.

Speaker 2

Thanks, Michael.

Operator

Thank you. Our next question is from Susan Anderson with Canaccord. Please proceed with your question.

Speaker 12

Hi, good evening. Thanks for taking my question. I was wondering if you could talk about the Health wellness business and how that's been trending relative to the rest of the store? Are you seeing a pretty good response From the consumer in terms of adding that to their basket and then also where do you see that going longer term? Thanks.

Speaker 2

Yes, I'm glad you asked as wellness is an important growth opportunity. I'd start before I talk specifically about the Wellness, SHOP and the assortment we have there, I'd say this overall idea of wellness and self Care and the connection it has to beauty. I've talked about this for a little while, so you may have heard this Before, but it is an important trend coming out of the last couple of years that we think will drive continued growth and engagement. The fact that more and more Consumers understand the importance of beauty as part of their overall wellness routine is a very strong positive. It's one that's driving so much innovation Both in products specifically designed for wellness, but also across makeup and fragrance and just bringing in more The idea of wellness into all forms of innovation.

Speaker 2

We did launch our wellness shop in May of 2021. We're currently in About 800 doors. We'll be adding more doors this year to continue to expand that presence. We have a strong presence Online, we have 140 brands, 700 SKUs, cross category focus, and it's a great experience. It's working really well.

Speaker 2

A number of really engaging brands like Love Wellness, Truly, Kitsch, Mega Babe, Gold that we just add, Lemmy by Kourtney Kardashian. There's a strong experience, high level of engagement across all 6 of our segments and pillars, And we're really pleased with its impact in connection. But we're also just getting started in that assortment. And so we See good growth in that area over time and we're excited about the potential of that business for the long term.

Speaker 1

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

Operator

Thank you. Our final question is from Simeon Gutman with Morgan Stanley. Please proceed with your question.

Speaker 6

Hey, everyone. I think you had the wrong Simeon to start the call, but it's okay. My question is 2 parts. The first part is actually related to his earlier question. Thinking about the AUR and some of the innovation that's driven some of the inflation, whether or not the customer is reaching some resistance point and the number of items they put in the basket.

Speaker 6

And second, how to think about shrink and just what level of accrual given we're seeing it still ramping across other retailers, how much you've accrued for and how much could it force again? Thanks.

Speaker 3

Maybe I'll start with shrink. So I addressed here just a few minutes earlier just directional In the Q1, shrink basically offset fixed store cost leverage entirely. So again, remember, that's been Trending upward here over the last couple of years with the huge step on the top line, Simeon. And so we would expect that trend to continue through the rest of the year. We're not We were expecting some moderation in 2023, but at this stage, it doesn't seem like we're going to be able to deliver.

Speaker 3

So Not optimistic about how that plays out in gross margin the rest of the way.

Speaker 2

Yes. And Simeon, it's good to bookend our Q and A by Simeon. So we're glad to do that. And I'd just say, yes, on the point, I mean, I think we covered some of the thoughts there about how we're seeing Yes, both. It's Ben per member, AUR, the units.

Speaker 2

I mean, there's a lot of positive Yes, indicators on our business and we're still working hard to get a read on how our consumers navigate it. We know there's pressures out there, But we also see a high level of engagement in beauty. And so our focus now is to continue to drive great engagement across all aspects, Newness, innovation, our core business to get them engaged in all of our touch points and make sure that we're delivering a great Ulta Beauty guest experience because we know when we do that they respond. So we're tracking all that carefully and we'll continue to report out in future Earnings calls and make sure that we are leading the category appropriately. So with that, Let me just say, I'd like to close by, again, thanking all of our Ulta Beauty associates across our stores, distribution centers and our corporate Offices were delivering another strong quarter for our stakeholders.

Speaker 2

We know the environment will continue to evolve, but As I said, we remain committed to our long term growth strategies and we are very confident in our team as we look forward To build continue to build the foundation that we set here in the Q1. So we look forward to speaking to you all again when we report results for the Q2 on August 24. Thanks. Hope everybody has a nice Memorial Day weekend and we'll talk to you all again soon.

Operator

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

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Earnings Conference Call
Ulta Beauty Q1 2024
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