Dave Kimbell
Chief Executive Officer at Ulta Beauty
Thank you, Kylie, and good afternoon, everyone. We appreciate your interest in Ulta Beauty.
For the quarter, net sales increased 0.9% to $2.6 billion and comparable sales decreased 1.2%. Operating profit was 12.9% of sales and diluted EPS was $5.30 per share.
Although we anticipated the headwinds experienced in the first quarter would continue, our results were short of our expectations, driven by a decrease in comp store sales, specifically comp store transactions. E-commerce sales increased as expected. We do not believe these results reflect the strong engagement with our brand, the strength of our operating model, or the performance I know we can deliver over the longer term. Importantly, we are clear about the factors that adversely impacted our store transaction growth in the second quarter, and we have actions underway to address the trends.
We attribute the decline in comp store transactions to four factors. First, while the beauty category remains resilient, growth is normalizing after three years of unprecedented gains. Additionally, consumer behavior is starting to shift as consumers increasingly focus on value and become more cautious with their spending. Based on data from Circana, U.S. beauty growth slowed to approximately 3% through the first half of 2024, with prestige beauty experiencing high single-digit growth and mass beauty maintaining low single-digit growth.
Second, competitive intensity in the beauty category remains high. As we have shared previously, the strength of the beauty category, combined with an attractive margin profile, has drawn substantial and diverse competition to the category. Today, there are significantly more places to buy beauty, especially prestige beauty, with more than 1,000 new points of distribution opened in the last three years. As a result, our market share continues to be challenged, particularly within prestige beauty.
Based on Circana data for the 13 weeks ended August 3, 2024, we maintained our share in Mass Beauty but lost share in the beauty -- prestige beauty, particularly driven by makeup and hair categories. We know beauty enthusiasts love to shop for beauty, and they love Ulta Beauty and the unique experiences we offer. But they also love engaging in new beauty offerings. As a result, we often see a short-term impact of new distribution points on an existing nearby store, whether it's a competitor opening or a new Ulta Beauty store.
What is unique about the current environment is the scale and pace of change. More than 80% of our stores have been impacted by one or more competitive opening in recent years, with more than half impacted by multiple competitive openings. This significant portion of our store fleet is experiencing a prolonged sales impact. Notably, the positive signals we see in our broader business reinforce the appeal of our differentiated model and our confidence that we will mitigate these near-term competitive pressures.
Our brand awareness and brand love continue to increase with strong gains across multiple demographics, demonstrating the broad appeal of our unique, All Things Beauty, All In One Place offering. We continue to attract new and lapsed members to our loyalty program while maintaining strong retention of our existing members. At the end of the second quarter, we had 43.9 million active Ulta Beauty Rewards members, 5% more than last year. Importantly, we continue to experience healthy growth in our platinum and diamond members.
Newness continues to resonate with guests and drive growth. Newer brands, including Sol de Janeiro, Charlotte Tilbury, and OLEHENRIKSEN are driving sales, new member acquisition and member reengagement while newness from a variety of existing brands, including Clinique, Way and PEACH & LILY are driving healthy comp growth.
Guests continue to engage with our unique in-store services offering, which delivered mid-single-digit growth in the quarter. And new stores continue to perform well. During the quarter, we opened 17 stores, including our 1,400th store and their performance was in line with our expectations.
Now we've disrupted the beauty category for more than 30 years, and we understand how to successfully manage competitive forces. To reinforce our competitive position and drive stronger performance, we are aggressively taking actions across five areas: strengthening our assortment, expanding our social relevance, enhancing our digital experience, leveraging our powerful loyalty program, and evolving our promotional levers. I will discuss each of these areas in detail shortly.
Now in addition to these external factors, we experienced unanticipated operational disruption during the quarter, resulting from the completion of our ERP transformation. In March, we began updating key store systems through a thoughtful and controlled implementation plan. And in July, we finished the migration of all of our stores to our new ERP platform.
We are pleased to have successfully completed this important phase, but we have experienced some unexpected operational challenges as our teams have adjusted to new capabilities, new processes, and new ways of working associated with the new systems. Specifically, through the transition, our teams were managing portions of our fleet on both the old and new systems, which led to some store inventory allocation disruption.
With all of our stores and DCs now operating on the same core systems, we are shifting from implementation to system optimization and are working quickly to help our teams navigate these new ways of working in order to balance inventories across the network and deliver an optimized guest experience.
To minimize future disruption, we have identified key legacy processes that are creating friction and implemented proactive monitoring as well as dedicated support to quickly address issues when they arise. I am confident that our new capabilities will support better, more agile decision-making in the future. And I'm grateful for our collective team's hard work and dedication to manage through this critical transformation.
The fourth factor impacting our performance this quarter was the effect of incremental promotions, which did not deliver the expected sales lift. As the top line trends softened in late June and July, we executed incremental promotions to drive revenue. These offers drove strong sales and traffic across our digital platforms, but did not deliver the expected incrementality in stores.
The increased frequency of offers, combined with the introduction of new offer structures, put pressure on average selling price without activating incremental purchases in stores. We understand why the incremental promotions did not deliver as expected and will apply these learnings as we manage promotional activity in the second half.
Turning now to performance by category. Fragrance delivered double-digit growth, driven by strong guest engagement with Mother's Day and exciting newness. Newness from existing brands, including Valentino, YSL, and Burberry as well as new brands, NOYZ, Orebella and Kylie Jenner, all of which are exclusive to Ulta, contributed to the category's growth. Our exciting Mother's Day gift with purchase offers and gift sets fueled strong guest engagement and our unique assortment of gift sets for Father's Day and back-to-school also delivered growth for the category.
The skin care category delivered mid-single-digit comp growth this quarter driven by strong growth in Body Care. Sol de Janeiro continues to excite guests, and this quarter, we introduced an exclusive body mist, which is resonating well. Reflecting the appeal of dermatologist-recommended brands and favorite La Roche-Posay and new brands, PanOxyl and VANICREAM delivered strong growth. And relevant mass brands, including Bubble and BIOMA, continued to engage guests.
Overall, prestige skincare was pressured as engaging newness from PEACH & LILY and OLEHENRIKSEN was offset by softness from certain brands impacted by increased distribution or the lapping of strong social media engagement last year.
Comp sales in the makeup category decreased mid-single-digit range. Among new brands, Charlotte Tilbury, Polite Society, and WYN BEAUTY as well as exclusive newness from Clinique delivered strong growth. This growth was more than offset by sales decreases from existing brands that had newness that did not meet expectations or have experienced increased points of distribution in the market.
In Mass makeup, e.l.f., about-face, and Milani delivered strong growth but this growth was mitigated by planned softness in Ulta Beauty Collection as we prepared for the brand relaunch.
Comp sales for the hair care category decreased in the high single-digit range, driven primarily by planned promotional shift. As we shared previously, we incorporated prestige hair care offers in our first quarter semiannual beauty sale and eliminated our Gorgeous Hair event, which took place in May of last year. In addition, the impact of exciting newness from Wahl, Divi and Odele and strong engagement with Redken was offset by pressure from key brands lapping strong newness last year.
As I mentioned at the outset, we are focused on five key areas to reinforce our competitive position. And we are pleased with the progress we've made in many areas and have identified further opportunities to shift our momentum.
Starting with our efforts to strengthen our assortment. During the quarter, we continued to enhance our brand portfolio with new engaging brands, including Orebella, Naturium and Naked Sundays while also launching several emerging exclusive prints through our Spark program, including Door, a clean french beauty inspired skincare brand; Magic Molecule, a skincare healing brand; and NOYZ of premium gender-neutral fragrance. We also expanded the key growth driving brands like Sol de Janeiro, MAC, and Kiehl's into additional stores. Looking ahead, we have an exciting pipeline of brand launches planned for the balance of the year, including the recently announced ILIA Beauty, a clean skin centric prestige makeup brand; and DIBS Beauty, a multipurpose easy-to-use makeup brand.
In addition to enhancing our assortment with compelling newness, we are focused on building greater awareness and engagement with key exclusive brands, including PEACH & LILY, Polite Society, WYN BEAUTY, and LolaVie while also collaborating closely with strategic legacy brands to drive stronger growth and profitability.
I'm excited to share that we have relaunched Ulta Beauty Collection to inspire beauty discovery, celebrate self-expression, and create a deeper emotional connection with guests. With simplified and good-for-you formulas, the new collection includes refreshed fan favorites as well as new innovations that reflect modern trends across skin care, body care, bath, suncare and cosmetics.
Certified with clean ingredients and cruelty-free products across the entire assortment, the reimagined collection is positioned at a masstige price point and is designed to make beauty discovery purposeful and accessible for beauty enthusiasts of all ages. While the new assortment has only been available for a few weeks and is still ramping up as we roll out additional SKUs, we are pleased with our early results.
Social relevance powers customer connection and loyalty. To accelerate our social relevance and enhance our brand awareness, we have scaled our creator and influencer networks, and we are expanding our culture forward activations to ensure we are at the heart of the social and cultural conversation for beauty. As a result, this quarter, we delivered meaningful growth and earned media value and social sentiment and drove more than 250 million social impressions.
During the quarter, we doubled the size of our influencer network to include a double -- a diverse range of influencers across key audience segments to reflect our inclusive audience targeting strategy. We also launched Ulta Beauties, our new associated ambassador program to harness the superpowers of our team and highlight the expertise and passion of our talented associates.
As a group, these talented creators developed compelling content in support of our big summer Beauty sale, back-to-school, and the Joy project, which increased our EMV by more than 10% this quarter. Additionally, we launched a new affiliate program, UB Creates, to drive traffic and conversion.
Last year, we launched the Joy project, a multiyear initiative to make Beauty and the world a more joyful place. In celebration of National Day of Joy, we kicked off the second chapter of our Joy project with the launch of a social movement to spark positivity in the beauty space, partnering with brands, celebrities and creators as well as our own UB collective and UB beauties, our viral complement chain reached more than 260 million people and generated meaningful growth in EMV.
To continue to expand our social relevance, we plan to deploy amplification and content strategies in the second half, leading into trend in cultural moments, leveraging our expanded creator network and enhancing brand partner activations.
Leveraging new capabilities, we are enhancing our digital experiences to drive traffic and sales. During the quarter, we enhanced search and filtering functionality and make it easier for guests to find what they want quickly. And we streamlined the path to purchase with a new quick add-to-bag feature, making it more convenient for guests to add products to their cart. And to facilitate greater basket building, we introduced new personalized product recommendations and additional upsell placements along the guest purchasing journey.
Importantly, we continue to drive increased app adoption through associate engagement, targeted communications, and app-only offers. In the second quarter, member engagement with our app increased 16%. And now our app accounts for about two-thirds of our e-commerce sales, 600 basis points higher than last year. While the app is a vital tool to drive e-commerce sales, the majority of our spend from app users actually incurs in store, making the app another key engagement tool to drive sales per member.
As we look forward, we will continue to create and apply new digital features and functionality to give our guests new and more convenient ways to discover, transact, and engage with Ulta Beauty.
With more than 44 million active members, our loyalty program is a strategic asset that provides us with unique insights across categories, price points and channels and enables us to drive traffic and spend per member. To drive deeper connection and greater awareness, we are amplifying the value of our rewards program through member-only events, social engagement, and marketing activations.
In May, we launched Member Love, a member-only event of enticing category-focused points offers, which delivered healthy member engagement and higher spend per member. And in July, we launched our first member tiered offer to drive traffic, new member acquisition, and member reactivations. In addition to targeted events and communications, we have integrated our rewards program into our digital experience, MAGs [Phonetic] and tentpole events to drive engagement and reinforce the value of the program.
Looking ahead, we are focused on attracting customer segments to drive new member growth, driving differentiated engagement early in the life cycle to enhance retention, and leveraging our extensive member data to accelerate traffic.
Finally, we continue to evolve our promotional strategies to drive traffic and sales. Supported by a robust media strategy, in-store amplification, and engaging social content, we enhanced our big summer Beauty sale event with compelling offers across categories and price points. In addition to driving strong sales, the event delivered growth in new members and member reactivation as well as increased penetration of existing members.
And always a fan favorite, we're excited to kick off 21 Days of Beauty with a new look, new beauty steals and unique events for our best members. As the competitive and promotional environment evolves, we will apply the learnings I mentioned earlier and leverage our member insights to execute productive, targeted offers while eliminating less-effective promotions and applying new capabilities to create engaging events for our guests.
In closing, Ulta Beauty remains a key beauty destination with strong consumer awareness and brand love. And our exceptional teams are committed to offering guests unique inclusive beauty experiences across all of our touch points. We are confident we have identified the factors that impacted our performance in the second quarter and are focused on the right actions to deliver stronger performance.
As we turn to the second half of the year, our teams are focused on driving stronger sales and traffic, executing with excellence for our guests, exercising financial discipline as we adapt to a more challenging operating environment, and protecting and cultivating our unique culture, driven by our talented and passionate associates. While it will take time to shift the top line trend, I remain extremely confident in our model and in our ability to execute and win in an increasingly competitive category.
And now I will turn the call over to Paula for a discussion of the financial results and outlook. Paula?
