Ulta Beauty Q1 2024 Earnings Call Transcript

Participants

Corporate Executives

• Dave Kimbell, Chief Executive Officer
• Paula Oyibo, Chief Financial Officer
• Kiley Rawlins, Vice President, Investor Relations

Analysts

• Simeon Siegel, BMO Capital Markets
• Simeon Gutman, Morgan Stanley
• Kate McShane, The Goldman Sachs Group, Inc.
• Christopher Horvers, JPMorgan Chase & Co.
• Mark Altschwager, Robert W. Baird
• Oliver Chen, TD Cowen
• Michael Binetti, Evercore ISI
• Krisztina Katai, Deutsche Bank Aktiengesellschaft

Presentation

[Operator]

Good afternoon, and welcome to Ulta Beauty's Conference Call to discuss results for the Ulta Beauty's First Quarter 2024 Earnings Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. We ask that you please limit yourself to one question and then re-enter the queue for any additional questions. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Ms. Kiley Rawlins, Vice-President of Investor Relations. Ms. Rawlins, please proceed. Thank you, Sherry. Good afternoon, everyone, and thank you for joining us for a discussion of Ulta Beauty's results for the first-quarter of fiscal 2024. Hosting our call today are Dave Kimbell, Chief Executive Officer; and Paula Oyibo, Chief Financial Officer. Kecia Steelman, President and Chief Operating Officer, will join us for the Q&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 be -- to constitute forward-looking statements, which within the meaning of the 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 undue reliance on these forward-looking statements, which speak only as of today, May 30, 2024. We have no obligation to update or revise our forward-looking statements, except as required by law, and you should not expect us to do so. Now, I'll turn the call over to Dave. Dave?

[Dave Kimbell, Chief Executive Officer at Ulta Beauty]

Thank you, Kiley, and good afternoon, everyone. We appreciate your interest in Ulta Beauty. For the first-quarter, net sales increased 3.5% to $2.7 billion and comp sales grew 1.6%. Operating profit was 14.7% of sales and diluted EPS was $6.47 per share. We expected comp growth this quarter would be in the low single-digit range as we lapped strong performance last year. I am proud of how our teams adjusted our go-to-market activity to adapt to a rapidly evolving marketplace, thoughtfully managed expenses across the enterprise, and importantly, continued to execute our transformational agenda with excellence.

As we look-forward to the rest of the year, we believe it is prudent to anticipate a continuation of the dynamic environment we experienced in the first-quarter and therefore, have adjusted our expectations for the remainder of the year. Paula will give more detail on these revisions later in her prepared comments. Before we talk about the quarter, I want to emphasize a few important points. First, we are confident in our model and our ability to gain share and drive significant sustainable value over the long term. The actions we have taken and investments we have made over the past few years have fortified our operating foundation and we are a stronger, more profitable company today than we were just a few years ago and we have an outstanding team that knows how to execute and deliver profitably, and they are doing so every day with focus, passion, and determination.

However, we are not satisfied with our market-share trends and we are taking actions to reinforce our leadership position and accelerate growth. For more than 30 years, Ulta Beauty has disrupted the beauty industry by bringing mass brands, prestige brands, luxury brands and services together in an accessible, fun shopping environment. This differentiated strategy combined with welcoming an inclusive guest experiences has enabled us to shape consumer expectations and drive profitable growth. Today, we operate in nearly 1,400 stores and manage a multi-billion dollar digital business, providing guests with unique opportunities to play, discover, and try beauty.

With warm and authentic experiences, our passionate associates are creating strong emotional connections with our guests and helping them discover beauty on their own terms. We've created a world-class loyalty program that engages with more than 43 million active members and provides us with valuable customer and transaction data and we've expanded our differentiated assortment and built strong strategic partnership with large and emerging brands around the world.

We operate in a healthy growing category. While growth is moderating as expected after three years of unprecedented expansion and competitive intensity is increasing, we have a powerful operating model, excellent brand partnerships, and I believe the impact of our winning culture and outstanding teams will enable us to protect and expand our leadership position. In the first quarter, we've strengthened our market position in several areas. Consumer awareness and brand love for Ulta Beauty continues to increase. Our marketing amplification of key brand launches, elevation of our tentpole events and culturally relevant social activation delivered 4 points of improvement in unaided brand awareness this quarter, driven primarily by key growth cohorts.

Trust for our expertise, welcoming guest experiences, a diverse assortment and efforts to increase convenience through multiple touch points drove our brand [Indecipherable] metric to record levels with strong gains among both Gen Z and Baby Boomers, which demonstrates the broad appeal of our model. Newness is resonating with our guests, recent brand launches, including Sol de Janeiro, Charlotte Tilbury and exclusive brands Wyn by Serena Williams and Kylie Jenner Fragrance are driving sales, new member acquisition, and member re-engagement.

We delivered traffic growth in both our store and digital channels. We increased marketing investments across TV, audio and social platforms to maximize our brand launches, support our semi-annual beauty and Spring Hall tentpole events and amplify our brand equity with the Joy project. These strategic media investments drove higher traffic across our web and app platforms and increased traffic growth per store even as we lapped strong double-digit growth last year.

Our world-class loyalty program expanded again this quarter with the retention of our most valuable members remains very strong. We ended the quarter with 43.6 million Ulta Beauty Rewards members, 6% higher than last year, primarily driven by member retention. Additionally, we continued to acquire new members and reengage lapsed members. Targeted marketing efforts are elevating more members to our platinum and diamond tiers and exclusive promotions, point accelerators, and personalized contents are driving engagement and retention of these valuable members.

Our new-store portfolio continues to perform well. During the quarter, we opened 12 stores, seven more than last year and their performance exceeded our expectations. Our associate retention has improved across stores, distribution centers, and our corporate teams. And we are on track to complete critical elements of our transformational agenda this year, giving us a stronger foundation for future growth. Our teams are operating at a high-level as we execute these transitions and it is worth noting that they delivered several significant operational milestones this quarter.

First, we successfully completed the final phase of our digital store transition and are on track to decommission the legacy platform in the second-quarter. Second, we completed an important phase of Project store with the successful transition of our Dallas, Greenwood, and Fresno distribution centers to our new ERP system. Now all of our primary distribution centers are operating on the same platform. Third, we began the process of migrating stores to our new ERP system, and I am pleased to share that we have completed the transition in 30% of our fleet. The benefits include an upgrade of a key digital application to provide our store teams with a guided user experience, enhanced reporting to support inventory management and increased visibility to product information to elevate the guest experience.

Beauty is a competitive category and our success reflects the differentiation we provide in the market and our effectiveness in creating meaningful and enduring guest connections. These strengths have enabled us to outperform the market, especially through the pandemic recovery. According to Circana data between 2019 and 2023, Ulta Beauty expanded its share of both Prestige and mass beauty significantly. More recently, the strength of the beauty category combined with an attractive margin profile has drawn significant and diverse competition to the category.

Today, there are significantly more places to buy beauty, especially prestige beauty with more than 1,000 new points of distribution opened in the last two years. Additionally, Prestige brands are expanding their online availability as digital penetration grows in the category. As a result, our market-share has been more challenged for the last few quarters, particularly within the prestige beauty category. Using the consumer lens of how guests experience Ulta Beauty through all of our touch points, we estimate we maintained our share of the total US beauty product industry this quarter.

Based on Circana data for the 13 weeks ended May 5, 2024, we outpaced the growth of the mass-market, but lost share in Prestige beauty, primarily driven by pressure in makeup and hair. This prestige share pressure was concentrated in stores as we increased share in E-com for the quarter. Given our proven ability to engage our guests and lead the industry, I am confident we can reinvigorate market-share gains. At our Analyst Day in October, we will share longer-term plans to drive share growth. But today, I want to highlight actions we are taking now to leverage our traffic growth, increase conversion, and accelerate top-line growth.

Our plans are focused on five key areas, strengthening our assortment, accelerating our social relevance, enhancing our digital experience, leveraging our world-class loyalty program, and evolving promotional levers. Starting with our assortment, we are enhancing our assortment with the addition of highly recognized brands as well as emerging and exclusive brands. This year, our brand pipeline includes more than 25 new brands, including many exclusive to Ulta Beauty. Importantly, this year's pipeline includes a balanced mix of category growth driving brands like Sol de Janeiro and Charlotte Tilbury and Naturium and emerging exclusive brands like Wyn, a makeup brand developed by Serena Williams and Orebella, a fragrance brand developed by Bella Hadid.

To support stronger growth of our core assortment, we plan to accelerate growth with key exclusive brands, including Polite Society, Live Tinted, and Lola Bay, among others. We plan to expand key growth driving brands into more stores and we are excited to relaunch the Ulta Beauty collection this summer. Additionally, we intend to leverage our marketing and social capabilities to lean into emerging trends, amplify key growth brands and drive relevance and engagement and activate new trend-focused events across all our channels. Social media is amplifying and accelerating beauty. Social relevance is the gateway to customer reach, connection, and engagement and relevance drives sales and loyalty.

While we have increased our EMV and share voice across key platforms, including TikTok and Instagram, we see further opportunity to ensure we are at the heart of the social and cultural conversation for beauty. To accelerate our social relevance, we will scale our creator network, amplify brand networks and collaborations, and use our platforms to showcase our unique assortment. With the completion of our digital store transition, we are increasing our focus on leveraging new capabilities and optimizing the guest experience to accelerate traffic, drive conversion and increase average ticket.

We recently expanded our partnership with DoorDash with our launch on DoorDash Marketplace, which extends our unique assortment to the more than 70 million active users of the DoorDash app. We will introduce new digital buying guides that amplify search engine optimization while providing guests with educational content, beauty tips and product recommendations. We will improve the path to purchase through guided navigation and leverage new innovative search capabilities to facilitate discovery and we will accelerate app adoption through targeted communication and offers as app users spend nearly two times more.

In the first-quarter, our app accounted for 57% of our e-commerce sales, up more than 450 basis-points compared to last year. Our loyalty program is a powerful strategic asset and we will lean into this platform to drive greater engagement and support topline growth. Earlier this year, we rebranded the program to Ulta Beauty Rewards, enhanced the birthday experience and launched a refreshed look in stores, online, and across social. These improvements are driving greater awareness and deepen[Phonetic] connections with our members. We have also introduced new mobile POS capabilities to engage existing members and drive new member acquisition, and we are testing new ways for guests to engage with loyalty benefits in store transactions.

At the same time, we are leaning in to amplify the value of the program through member love events and social engagement. And we are also testing new gamification platforms, creating new ways to engage with our program and Ulta Beauty. And later this year, we will activate new marketing technology that will advance our personalization efforts with our guests. Finally, we continue to enhance our promotional events and strategies. We will evolve our unique tentpole events to drive basket and new member acquisition, increase our use of effective targeted offers while eliminating or shifting less promotion -- less productive offers and create new platforms and offers to excite and engage our guests.

In closing, we continue to expect the beauty category will grow in the mid-single-digit range this year barring a major economic event. We are confident we have identified the right actions to deliver stronger revenue growth and our associates are working together as one unified Ulta Beauty team to expand our leadership position and deliver engaging guest experiences across all our touch points. I look forward to sharing our progress with you throughout the year. And now, I will turn the call over to Paula for a discussion of the financial results. Paula?

[Paula Oyibo, Chief Financial Officer at Ulta Beauty]

Thanks, Dave, and good afternoon, everyone. As Dave shared, our team responded to the dynamic operating environment with focus and financial discipline. As a result, we delivered net income and diluted EPS in line with our internal expectations. We are focused on reinforcing our leadership position and driving stronger performance. And while we believe our efforts will deliver results, we think it is prudent to expect many of the pressures we identified and faced throughout the first-quarter may continue for the balance of the year and therefore, have revised our annual guidance.

I'll begin with a discussion of our first-quarter results, followed by comments about our updated full-year outlook. Net sales for the quarter increased 3.5%, driven by 1.6% growth in comp sales. The contribution from 36 net-new stores opened since the first-quarter last year and a $9 million increase in other revenue, primarily due to an increase in credit card income and growth in royalty income from our target partnership. Comp transactions for the quarter increased 1.3%, driven by traffic growth in stores and on our digital platforms. Average ticket increased 0.3%. Looking at the cadence of sales throughout the quarter. Comp sales in February decreased slightly as we lapped strong double-digit comps last year.

Comp growth accelerated in March, reflecting the impact of our semi-annual beauty event and the benefit of the Easter shift. April trends were positive but softened compared to March, primarily reflecting the adverse impact of the Easter shift. From a channel perspective, e-commerce sales increased in the high single-digit range. Sales from comp stores were flat compared to last year, reflecting the expansion of brick-and-mortar distribution points and the lapping of strong comp growth last year. Turning to comp sales performance by category. Fragrance delivered double-digit growth, driven by newness from existing brands and exciting brand launches, including Cosmic from Kylie Jenner, which is exclusive to Ulta Beauty.

Additionally, Valentine's Day drove strong growth across both men and women's fragrances. The skincare category delivered mid-single-digit comp growth this quarter, primarily driven by double-digit growth in body care and mass skincare, which was partially offset by a decline in prestige skin care. The strong performance of body care was driven primarily by the launch of Sol de Janeiro and the expansion of key emerging brands into additional Ulta Beauty stores.

The growth of mass skincare was primarily due to strong engagement with our dermatologists recommended platform as well as the expansion of in store presentation of select emerging brands. Our prestige business was challenged this quarter, reflecting the impact of increased distribution for key brands, timing shifts of product newness, and the lapping of the impacted strong social media engagement with certain brands last year. Haircare comp sales increased to low single digit range, primarily due to newness and hair tools, the inclusion of prestige haircare in our semi-annual beauty event and high engagement with MAC[Phonetic] hair-care products during our Spring Hall event.

Makeup comp sales decreased to mid single digit range, while new brands and guest engagements with our luxury platform was strong. This growth was more than offset by sales decreases from brands that experienced extraordinary growth last year, newness from existing brands that did not meet expectations, and increased points of distribution. In addition, sales of the Ulta Beauty collection were impacted by planned markdowns as we prepare to relaunch the brand this summer.

Finally, the strength of our services business continued with high single-digit comp growth in the quarter, driven by increases in hair treatment, specialty services, including ear piercing, brow and makeup, and core salon cut and color services. For the quarter, gross margin decreased 80 basis-points to 39.2% compared to 40% last year. This decrease was primarily due to lower merchandise margins and higher inventory shrink, which were partially offset by growth in other revenue. Merchandise margin declined during the quarter primarily due to increased promotions, adverse impacts from brand mix and the lapping of benefits from price increases last year.

Promotional activity in the quarter was higher than last year, reflecting the expansion of our semi-annual beauty event and incremental offers to drive traffic. Inventory shrink was higher in the quarter. Our investments in new fixtures and operating processes are reducing shrink in the fragrance category, but this improvement is being offset by higher shrink in other prestige categories. Moving to expenses. SG&A increased 8.8% to $666 million. Overall, SG&A spend was better-than-planned due to disciplined expense management. As a percentage of sales, SG&A increased by 120 basis-points to 24.4% compared to 23.2% last year.

In addition to the impact of lower top-line growth, higher corporate overhead, store payroll and benefits, and store expenses contributed to the deleverage in the quarter. Corporate overhead expense increased in the quarter, primarily due to technology-related strategic investments. The increase in store payroll and benefits was driven primarily by higher average wage rates and the increase in store expenses was primarily due to IT investments and increased testers. Operating margin was 14.7% of sales compared to 16.8% of sales last year.

Net interest income for the quarter was $6.9 million compared to $7.3 million last year. Lower average cash balances were partially offset by the benefit of higher average interest rates. The company's tax rate increased to 23.2% compared to 22.8% in the first-quarter last year. The higher effective tax rate is primarily due to less benefit from income tax accounting for stock-based compensation. For the quarter, diluted GAAP earnings per share was $6.47 compared to $6.88 last year.

Now moving to the balance sheet and capital allocation. We ended the quarter with $524.6 million in cash and cash equivalents. Total inventory increased 8.8% to $1.9 billion compared to $1.8 billion last year. In addition to the impact of 36 net-new stores, the increase was primarily due to the inventory needed to support new brands in our new market fulfillment center in Greer, South Carolina. Capital expenditures were $91 million for the quarter, reflecting investments in merchandise fixtures, new and existing stores and IT investments. Depreciation was $64.7 million compared to $57.9 million last year, primarily due to higher depreciation related to new stores and IT investments. In the first-quarter, we returned $285.1 million of capital to our shareholders through the repurchase of 588,000 shares.

At the end-of-the quarter, we had $1.8 billion remaining under our current $2 billion of repurchase authorization. Now turning to our outlook. We have updated our expectations for the full-year to reflect our first-quarter performance, the dynamic operating environment, and the actions we are taking to drive -- to drive stronger top-line growth. With this in mind, we currently expect net sales to be between $11.5 billion to $11.6 billion with comp sales growth in the range of 2% to 3%. We continue to expect comp growth to be in the low single-digit range in the first-half of the year. We expect comp growth to accelerate in the second-half of the year to be between 2% and 4%.

Reflecting the impact of our sales driving initiatives, our newness pipeline and decelerating growth in the second-half of last year. We currently expect operating margin to be between 13.7% and 14% of net sales, primarily driven by SG&A deleverage as we protect sales driving investments, including marketing and store labor. Complete many of the elements of our transformational agenda and operationalize investments made in 2023. We will also continue to maintain our financial discipline. For the full-year, we now expect SG&A growth to be in the mid to-high single-digit range, with growth in the low double-digit range in the first-half of the year and in the low-to mid-single-digit range in the second-half of the year.

We expect gross margin for the year to be down modestly as lower merchandise margin and deleverage of fixed costs are mostly offset by lower supply-chain costs and other revenue growth. For modeling purposes, we anticipate gross margin will deleverage in the first-half of the year, primarily driven by lower merchandise margins. Deleverage of fixed costs due to lower sales and higher shrink, partially offset by growth of other revenue. In the second-half of the year, we expect gross margin to be flat-to-up modestly as higher merchandise margin and lower supply-chain costs offset deleverage of fixed costs.

As a result, we now anticipate diluted EPS to be in the range of $25.20 to $26 per share. We expect diluted EPS to decline in the first-half of the year and be flat-to-up modestly in the second-half of the year, including the impact of the extra week in fiscal 2023, which was $181.9 million of net sales and $0.46 of diluted EPS. Finally, we continue to expect to repurchase $1 billion of Ulta Beauty stock this year, reflecting the strength of our cash flow and the confidence we have in our future. And now, I'll turn the call-back over to Dave. Dave?

[Dave Kimbell, Chief Executive Officer at Ulta Beauty]

Before we begin the Q&A session, I'd like to recap our perspective on the first-quarter and reiterate our confidence in our plans. Love for the Ulta Beauty brand is growing. Our member retention is strong and our teams are laser-focused on delivering great guest experiences while managing through an evolving environment. We are pleased with the progress we are making across key areas of our business, and we are taking steps to drive stronger performance through strengthening our assortment, expanding our relevance, enhancing our digital experience, leveraging our world-class loyalty program, and evolving our promotional leverage.

We had a strong plan in place to navigate near-term pressures while continuing to invest in support of the long-term opportunity. I am confident in the power of our differentiated business model and our team's ability to execute with excellence against our priorities and deliver value for our shareholders. Ulta Beauty is a force in the beauty industry as we've captured a large share of this dynamic category, and I am as optimistic as ever about the future of our business. And now I'll turn the call over to our operator to moderate the Q&A session.

Questions and Answers

[Operator]

Thank you. [Operator Instructions] Our first question is from Simeon Siegel with BMO Capital Markets. Please proceed.

[Simeon Siegel, Analyst at BMO Capital Markets]

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

[Dave Kimbell, Chief Executive Officer at Ulta Beauty]

Well, thanks, Simeon, for the question. I'll start with some overarching thoughts and then maybe, Paula, you can give some specifics on the -- on the operating margin outlook. I'd say broadly, we are confident in our outlook for the year as we've assessed the landscape in which we're operating. We see the opportunities ahead of us. As I mentioned in the prepared remarks, there are a lot of positives across our business right now as we see strong engagement in our brand, growth in brand love and awareness, strength in key parts and aspects of our business, traffic, continuing to be healthy in stores and online, newness working, new stores performing well. So we are confident in many of the key metrics of our business. And then clear about our opportunity to address some of the areas that we've been more pressured.

When we look at the comp outlook that we've updated for the year, which is obviously a key part of our overall model, we feel very clear and confident about that revised outlook. We do see over the -- particularly in the second-half of the year, our lap becomes a bit easier. And so as we look at it on a two-year stack, we feel very comfortable and confident in that. But I'd say more important, we are taking actions, as I described in the prepared remarks to address where we have some potential to drive our business even more with more newness, strong marketing, enhanced digital capabilities as we take advantage of the new platform that we put in and of course, leaning heavily on our loyalty program to take full advantage of our relaunch there.

So we feel clear about what's ahead of us, confident in our comp. And then as that relates specifically to the margin outlook, Paula, do you want to give some more color on that?

[Paula Oyibo, Chief Financial Officer at Ulta Beauty]

Sure. Thank you, Dave. Good afternoon, Simeon. What I would say is, as we think about our operating margin guide of 13.7% to 14% on the comp of 2% to 3%. We've shared that top-line performance plays an important role in driving fixed-cost leverage for us and with the comps now below our long-term algo of 3% to 5% comps, we expect less leverage and have adjusted our operating margin expectations accordingly. One thing that I will also share is that in addition to the fixed cost deleverage on lower sales, we've embedded flexibility in our guidance to invest in sales levers like promo, marketing, and store labor to strengthen our top-line and defend share. And so that also gives us confidence in the adjusted comp guide that Dave spoke about out.

[Simeon Siegel, Analyst at BMO Capital Markets]

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

[Dave Kimbell, Chief Executive Officer at Ulta Beauty]

Thanks, Simeon.

[Operator]

Our next question is from Simeon Gutman with Morgan Stanley. Please proceed.

[Simeon Gutman, Analyst at Morgan Stanley]

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

[Dave Kimbell, Chief Executive Officer at Ulta Beauty]

All right. Well, yeah, I'll talk about the overall competitive environment and what we're seeing in there and Paula can give you some more color on the merch margin and our outlook related to that. So to reiterate, as we look at the competitive environment, what we -- as I mentioned in the remarks, this category has always been attractive and it's always been very competitive given the growth potential, the connection it has with consumers, its margin profile. So we've long -- for the entire 33-year history of this company, we've been competing in a very competitive environment.

What's unique about what's going on today is the cumulative impact of the competitive intensity really driven by a significant increase in distribution of prestige, both in store and online. And as consumers navigate that broader choice, they're making -- they're making choices. We're confident in our ability to continue to engage and that shows up in some of the results I highlighted, but it certainly is an impact. When we look at stores opening near our stores, and we talked about this in the past. Historically, we do see a short-term hit to a nearby store when a competitor opens up and we're able to recover and those stores comp at our -- at our enterprise-level.

What's unique about right now is the scale of it to have over 1,000 new locations within a short-term period, it's unprecedented in our history and probably in retail more broadly. So it's -- it means that we're navigating that and understanding consumer behavior as we go forward. But even with that, to kind of highlight again some of the things that we see our strengths even in this elevated competitive environment, holding share in total Beauty for the quarter is a real positive as we gained in mass and we gained in prestige E-com in our brand love, our brand awareness, our total loyalty members, our member retention, our traffic, all-up, all positive, all healthy as we -- as we see strength with our consumer connection.

So your question about our consumer, the fact that we gained 6% in total members, our retention is healthy. We're moving more members up into platinum and diamond and retention of those guests is very high and our brand love reached an all-time high. The connection to Ulta Beauty is strong and we're managing through this really again unprecedented competitive environment. And all the things I talked about, our confidence in our model, our confidence in the health of this category, and our ability to adapt and adjust our strategies and initiatives, as I discussed, give us confidence both in delivering the updated guidance. But I'd say even more importantly, the future continues to be very bright for Ulta Beauty because we're well-positioned with a strong share of the category, strong connection to consumers, and the ability to navigate and adjust our plans as necessary as we've been doing throughout the history of this company.

Paula, do you want to talk then about merch margin?

[Paula Oyibo, Chief Financial Officer at Ulta Beauty]

Sure. Thanks, Dave. Simeon I'll give a little color on merch margin. When we think about merch margin from a guidance perspective, we currently expect lower merchandise margin for the year due to the lower sales, increased promotional activity, and category mix. We saw merchandise margin decline in Q1, generally for these similar reasons, increase in promo, adverse impact from brand mix and then we had a bit of lapping price increases from 2023. When we think about 20 -- versus 2019, you are correct. We -- as of last year, we were -- we were about 200 basis-points of merch margin above 2019 levels and really what I would say is a lot of that benefit that we saw is coming from ongoing category performance improvement efforts by our merchants team, category mix and promo efficiency. Now we are seeing that some of that merch margin is getting a bit -- a bit pressured as we're seeing in Q1 and as reflected in our current guide.

[Simeon Gutman, Analyst at Morgan Stanley]

Okay. Thank you. Good luck.

[Operator]

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

[Kate McShane, Analyst at The Goldman Sachs Group]

Hi, good afternoon. Thanks for taking our question. We wanted to drill down a little bit more on the marketing spend that you're planning to increase for the year. We're just wondering how much -- how much of an increase are we talking about? What are some of the tactics here? And are you building in a corresponding sales lift with the marketing spend? And then finally, just within that, did you elevate the marketing in the midst of Q1 and did that have any impact on the comp?

[Dave Kimbell, Chief Executive Officer at Ulta Beauty]

Well, what I'd say is, as we look-forward throughout the year to clarify, we, Paula mentioned in her remarks that we are protecting our investment in marketing, in store labor and other aspects that we know drive our business and that's reflected in our updated operating margin outlook. And we'll continue to invest appropriately as we see opportunities to support growth. So all of that is reflected. The types of things we're doing are continuing to strengthen our connection with our guests. As I said, our unaided awareness and our brand love both increased meaningfully in Q1.

After strong growth throughout 2023, we are on a good trajectory as it relates to connecting our guests. The fact that we're driving traffic in both to our stores and online, we're growing our connection to our app, our loyalty engagement and retention is strong. Our marketing efforts are working. The point in my comments about us finding even better ways and stronger ways to connect is an always-on focus for us. And we see continued opportunity to drive greater -- greater connection through social. So that will be a big focus for us. I highlighted our growth in EMV, which is -- which we're pleased with, but we know we can do even more. It is the key driver of this category, the way so many consumers are learning and discovering and engaging in the category.

So we will continue to have a focus there. And importantly, we're partnering with our brands to find ways to connect as their brands drive growth within our environment. So we're pleased with the efficiency of our spend. It is driving our results and we'll continue to optimize our spend and add appropriately throughout the year as we see opportunities and all of that is reflected both in our top-line and our operating margin outlook.

[Kate McShane, Analyst at The Goldman Sachs Group]

Thank you.

[Operator]

Our next question is from Chris Horvers with J.P. Morgan. Please proceed.

[Christopher Horvers, Analyst at JPMorgan Chase & Co.]

Thanks and good morning. So I'll also do a two-pronged question here. So it seems like the 1.6% comp wasn't really different from your internal plan and you had mentioned in -- you had expected improvement over -- over the year on all the factors that you mentioned. So at the same time, you lowered the back half. So can you just share with us, was it just you're being preemptive to maybe a hockey-stick that you set-up? And then can you also talk about April ex-Easter? Was that better than the 1.6% for the quarter, ex-Easter shift? And any commentary on how May is doing so far?

[Dave Kimbell, Chief Executive Officer at Ulta Beauty]

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

So that all lands us in that in that updated outlook of 2% to 3%. As far as April and more recent -- more recent outlook. Paula, do you want to talk about that?

[Paula Oyibo, Chief Financial Officer at Ulta Beauty]

Yeah. Yes. Thank you. So, Chris, as it relates to the cadence for the quarter and our April and kind of our exit-rate for the quarter, March was the strongest period for a quarter and it's for all the reasons you mentioned, benefiting from the Easter timing as well as our expansion of our Q1 beauty event. Comps in April were positive, but did moderate from March as we expected, negatively impacted from the timing of the Easter shift. With regards to May and what we're seeing quarter-to-date, I won't comment on that specifically. But what I will share is that we expect Q2 comps to look very similar to the first-quarter [Indecipherable].

[Christopher Horvers, Analyst at JPMorgan Chase & Co.]

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

[Paula Oyibo, Chief Financial Officer at Ulta Beauty]

Yeah. Well, so in that we expect more pressure in the first-half due to the promo and brand mix and that lapping effect of those price increases. And so when we think about the second-half, we're not lapping the price increase benefits and we will be largely past the inventory markdowns associated with our rebranding of Ulta Beauty Collection. We'll still have the brand mix and promo intact, but net-net, we're expecting the second-half to be flat.

[Operator]

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

[Mark Altschwager, Analyst at Robert W. Baird]

Good afternoon. Thank you for taking my question. I wanted to follow-up on the competitive backdrop, but maybe slightly different angle. So you've talked about the increased points of distribution, but at the same time, Ulta has been investing a lot in its loyalty program and its data analytics capabilities for years that I suspect can drive a lot of value for brand partners. So how is your value proposition for these brands evolving? And what gives you the confidence that you can remain a premier distribution point for established and emerging brands even as this competitive environment continues to evolve.

[Dave Kimbell, Chief Executive Officer at Ulta Beauty]

Mark, it's a great question and we're very confident in that. We have worked hard over many years to build very strong relationships with our brand partners, both the largest brands in the category and a real dedicated effort in supporting our emerging new smaller brands. And we are -- that is an area of high confidence that we'll continue to be connected and partnering with our brands. We are a very large part of the category across all segments, mass and prestige, makeup, hair-care, skincare, fragrance, bath, wellness, we play a significant role.

We have a unique proposition. Nobody does what Ulta Beauty does. Our stores and the experience we deliver is special and differentiated and our brands recognize that. They value the opportunity that they have in our stores and on our online to connect with now nearly 44 million loyalty members and the activation and capabilities we have to activate their strategies directly with the largest pool of beauty enthusiasts in the country. And we are a -- we have long been a destination for growth and so many of our brands are driving growth and taking full advantage of that experience. So I am confident in our brand relationships as we work through some of the changes in the category in my direct discussion with brands and our overall relationships.

We are working together to continue to drive growth and strengthen our partnership, add new brands as many of which I've highlighted and drive our business forward in partnership with our brands and that will continue for sure.

[Mark Altschwager, Analyst at Robert W. Baird]

Thank you, Dave. Quick follow-up for Paula on inventory. As we look at the inventory growth versus the sales growth, the spread is, I think, wider there than we've seen in a bit and obviously, you're adjusting your demand outlook for the back half of the year. Just any pockets of aging inventory that could weigh on margins and anything incorporated there from a clearance markdown perspective in the second-quarter? Thank you.

[Paula Oyibo, Chief Financial Officer at Ulta Beauty]

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

[Operator]

Our next question is from Oliver Chen with TD Cowen. Please proceed.

[Oliver Chen, Analyst at TD Cowen]

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

[Dave Kimbell, Chief Executive Officer at Ulta Beauty]

Well, so first on makeup, we -- it's the largest part, continues to be the largest part of our business, about 44% of our business and -- and we have a very large share of that -- of that category. And when we look at our business right now, we talked about some pressure on the prestige side, many of the things that I've highlighted. In the mass, the category slowed some as we're lapping a very strong Q1 and first-half of last year. When I look out and embedded in our guidance is confidence on many parts of our makeup business and the ability to strengthen our performance in that. On the mass side, we see our continued opportunities with several brands, including Elf has performed very well and has been an important partner for us, exclusive partnership with Morphe.

We've got a key partnership with Nyx, early lead on some of their innovation. And we've got brands like Juvia's Place and [Indecipherable] have demonstrated strong partnership and growth -- growth in our business. So we're confident in our ability to continue to evolve that. And then on Prestige side, the newness that I've highlighted has contributed. And while we've got more work to do there, Charlotte Tilbury is now in 600 stores and online and has contributed meaningfully to our business. We highlighted the expansion -- continued expansion and performance of our luxury business, brands like Wyn, the launch with Serena and we're expanding MAC into more doors that is just rolling out really as we -- as we speak into more doors. And we've got a number of really exciting exclusive brands, brands like Live Tinted, Polite Society, Rabanne, Wyn and others in the makeup space that are just an outstanding portfolio of emerging brands that we are confident will drive growth over time.

So we will continue to drive makeup connection. We've got a very big makeup business and -- and we've got clear plans to drive that going-forward. As far as other competitive environment in the digital space, the efforts that I talked about across our -- across our business, it will apply both the in store and online. One of the great things about our business is when we get our in store guest shopping online, they increase their brand love, their brand connection, our share of wallet, their spend goes up 2.5 times. And our efforts there -- and we gained share in the prestige E-com business in Q1 despite some of the other pressures that I talked about.

So we see opportunity to continue to drive programs like communities and affiliates. We're doing a lot of that, drive more influencers, expand our assortment and drive newness across the business. So competing both in store and online is what we do and we're focused on that and make-up as we are with all of our categories looking-forward.

[Oliver Chen, Analyst at TD Cowen]

Thank you. Best regards.

[Dave Kimbell, Chief Executive Officer at Ulta Beauty]

Thanks, Oliver.

[Operator]

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

[Michael Binetti, Analyst at Evercore ISI]

Hey, guys. Thanks for taking our question here. So, Paula, I think the math for the rest of the year puts operating margin below 14% just the rest of the year on a comp range 2% to 4%, not far from your long-term guide. Can you speak to how we rebuild to the level back to the long-term 14% to 15% margin if the comp trend continues at the 2% to 4% type rate in the second-half or the comment that you think you can hold share in a category that grows mid-single digits, is that supportive of 14% to 15% margins? And then I guess, secondly, as you look at the higher markdowns in the marketplace today and think about the backdrop of some of the key brands and the expanding distribution you pointed to. Are you seeing promotions more pronounced in the products and brands that have expanded their distribution the most? I'm curious if there's any link there.

[Paula Oyibo, Chief Financial Officer at Ulta Beauty]

Okay. Let me -- I'll take the first question and then -- and then Dave will talk about what we're seeing from promotional [Phonetic] environment with [Indecipherable]. So Michael, what we've shared is that the top-line performance plays a really important role in our ability to drive fixed-cost leverage. And comps below our long-term algorithm really causes a challenge for us to be able to drive margins at that -- at that range above the 14% to 15%. And you see that with where -- how we've adjusted our guidance. So on one or two to three, our low-end has come down because of the effect[Phonetic] of that difficulty of leveraging occupancy costs.

What I would say is from a long-term perspective, we're not sharing long-term guidance on the call today, but we do have an Investor Day in October and we plan to share more about the opportunities ahead, how we're thinking about the next phase of growth and of course, how that impacts our financials.

[Dave Kimbell, Chief Executive Officer at Ulta Beauty]

Yeah. And as far as promotional environment, Michael, we came into the year with the assumption that the promotional environment would increase, but remain rational and we built in expectations that we would be able to continue to invest in core parts of our business going forward. What we're seeing now is largely that's holding true. We continue to plan for promotional levels to increase in 2023 because of the competitive nature of this business right now. But as we saw in the first-quarter and we anticipate through the rest of the year, we're not looking to -- in a rational level, I guess, I'd say of promotional and we expect our promotional levels to be below 2019 levels for the year and that's in large part due to our CRM capabilities, promotional efficiencies.

As far as specifically about brands, I don't -- we haven't really witnessed any specific trends, brands that are in this competitor or in a certain marketplace, it's a broad dynamic going on across the industry, again, elevated, but still below historical highs.

[Kiley Rawlins, Vice President, Investor Relations at Ulta Beauty]

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

[Operator]

Our next question is from Krisztina Katai with Deutsche Bank. Please proceed.

[Krisztina Katai, Analyst at Deutsche Bank Aktiengesellschaft]

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

[Dave Kimbell, Chief Executive Officer at Ulta Beauty]

Well, let's see on the -- the actions that we're taking to drive our business, I've highlighted them and all of them come in. We came in the end-of-the year with a number of initiatives that we're continuing to drive and then we're finding ways to do even more newness being a big part of that. We're excited about our program. I highlighted many of the activities. So we talked about social and marketing efforts, specifically around promotional program and a few things I'd highlight is, we're continuing to amplify and elevate our key tentpole events like our semi-annual beauty event we held in Q1, our Spring Hall event.

We've got an event coming up in the summer of this year and more throughout the rest of the year and certainly going into holiday. That is an effort that every year we continue to find ways to improve, elevate the connection and the relationship that we build with our guests through the power of these tentpole events. We complement that through a steady effort in promotional connection that's more targeted through the power of our loyalty program and the strength in the personalization efforts. And we see that right now. We're in the midst of a program, if you've seen in the market, what we call member love. It's a three-week program, each week highlighting a different category. This week focused on skincare.

And what we see with that is a really differentiated way to connect with our guests to again add more value to our guests in a way that only Ulta Beauty can to leverage our personalization and differentiation capabilities, the strength of our loyalty program, and we're pleased with the results. So we'll continue to amplify the big -- the big efforts that we have throughout the year and complement that with targeted efficient promotions that we have a lot of data to continue to optimize.

As far as our brand portfolio, I'm really proud and pleased with the portfolio that we -- that we have. We've got the very best of beauty. We've got brands across all major categories, all price points from the biggest, most established longest-term brands in this category that continue to provide great performance and outlook for us, brands like MAC and Clinique and Lancome, the Estee Lauder brand, newer brands like Cosmic from Kylie and Wyn from Serena. We've got the portfolio of emerging -- large emerging brands, large brands and strength in all key segments of the category. So I highlighted that the competitive environment continues to evolve and brands will adapt to that and take advantage of growth prospects where they see them.

But to reiterate something I mentioned in a previous question, our brand relationships are incredibly strong. It's something that we value immensely and work hard to continue to develop. And so our brands see us as a place for growth. They're experiencing so many of them are experiencing that growth right now. And that's one of the many reasons that I am very confident in the future of Ulta Beauty and we're very clear on our -- what's ahead of us throughout 20 -- throughout 2024 and ready to continue to lead the category for the long-term.

Okay. So with that, let me wrap-up today with just a couple of quick remarks. Our teams are working hard to deliver against our short-term objectives while also taking necessary steps to position Ulta Beauty for longer-term profitable growth. And I want to thank our more than 50,000 Ulta Beauty associates across the country for all that they are doing. Again, I appreciate your interest in Ulta Beauty and we look-forward to speaking to you all again when we report our results for the second-quarter on August 29. I hope you all have a great evening. Thanks again for joining.

[Operator]

[Operator Closing Remarks]