Q3 2019 Earnings Call
Greetings and welcome to Ulta Beauty <unk> third quarter 2019 earnings results Conference call. At this time, just about sarno listen only mode. A brief question answer session will follow the formal presentation. If any what's your <unk> operators. This is turn the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it does.
Now my pleasure to introduce your host Ms. Kiley Rawlins, Vice President Investor Relations. Thank you you May proceed.
Thank you Kevin Good afternoon, and thank you for joining us today for Ulta Beauty <unk> third quarter earnings Conference call.
During today's call I'm married Dillon, Chief Executive Officer, Scott Settersten, Chief Financial Officer.
Dave Kimbell, President and Chief merchandising and marketing officer, It's also with us today.
This afternoon, we released our financial results for the third quarter fiscal 2019, a copy of the press release is available in the Investor Relations section of our website at Www Dot Dot com.
Before we begin I'd like to remind you of the company's Safe Harbor language statements contained in today's conference call, which are not historical sac maybe deemed to constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Actual results may differ materially from those projected in such statements due to a number of risks and uncertainties all of which I described in the company's filings at U.S.J.C.
We caution you not to place undue reliance on these forward looking statements, which speak only as of today December 2019.
No obligation to update or revise our forward looking statements, except as required by law and you should not expect us to do so.
Well begin this afternoon, we prepared remarks from Mary and Scott following our prepared comments, we will open the call for questions.
To allow us to accommodate as many questions as possible during the hours scheduled for this call. We ask that you would ask one question only during the Q any session now I'll turn the call it a Mary Mary <unk>.
Thank you Kylie and good afternoon, everyone. The Ulta beauty team delivered another quarter of solid top line performance gross margin expansion and EPS growth.
The current challenges facing the U.S. beauty category, our differentiated model is winning in the marketplace. We continue to gain market share across all major beauty categories, and we're extending our leadership position by creating stronger connections with our guest engagement and that better and more exciting ways.
Our financial performance for the quarter was generally in line with our internal expectations to recap total sales grew 7.9% comp store sales increased 3.2% on top of 7.8% growth in the third quarter last year gross margin expanded by about 40 basis points and diluted earnings.
Per share increased 3.2%.
As we discussed her last earnings call. We believe that makeup category in the U.S. experiencing a down cycle.
Other consumer categories make up the has experienced a number of up and down cycle.
The most recent growth cycle began in 2014, driven by new application techniques and looks like countering highlighting and browse styling and new products, such as pallets minis and travel sizes. The rise of social media Influencers video tutorial. It's healthy. It's also contributed to strong growth in the category after.
Several years of robust growth the category began to decelerate in 2017 and turned negative in late 2018, resulting from a lack of engaging newness and incremental innovation.
The second a trend has continued through 2019 with further deceleration in the most recent quarter.
Makeup looks and trends are constantly evolving driven by industry innovation fashion and pop culture, and while we've seen sales decline in the U.S. makeup category. This year consumers are still buying at wearing makeup for example, we're seeing the interest into more natural book, which is different than birthdays and actually requires multiple products to create a neutral.
All in glow we look.
Alternatively, some popular culture influences, our leading into bold unconventional applications of color and the dormant like sequencing pearls and that the spring 2020 fashion shows. This fall we saw a variety of looks ranging from natural and globally to embellish sprout literacy when I shadows in graphic eyeliner.
We know what will take time to bring newness and innovation to the category, but we're confident that the makeup category will emerge from this down cycle and returned to growth.
Longer term growth drivers such as demographic trends remain favorable for example, the peanuts or one of the fastest growing populations segments in the U.S. and the over indexing makeup usage and gensix customers, who already highly engaged in beauty are expected to increase their usage is makeup as they age and enter the workforce as we saw with millennial consumer.
Yes.
In addition, our proprietary research confirms that beauty enthusiast are still passionate about make up use makeup as a tool for self expression and enjoy expressing themselves with multiple looks.
In the near term, we're collaborating with her brand partners to identify at trends are white spaces in the category and we're actively working on these efforts to drive incremental category innovation to reignite growth.
Well, it's difficult to predict timing, we're confident these efforts combined with favorable demographic trend will result in a return to growth for the U.S. makeup category.
In the meantime, with media categories that are experiencing stronger growth for example, the skin care category for seeing nice growth in both the prestige and mass segments. The categories experienced meaningful newness in brand innovation in terms of new brand new products and new routines and we're seeing that the gensix demographic is more engaged.
Skincare and other cohorts, where at the same age, which bodes well for longer term growth for the category.
We're taking a number of actions to ensure we fully captured the opportunity of the skin care trends.
For example, this year, we've added more than 30, new skincare brands to our assortment increasing their offering across mass and prestige and we're increasing the focus on skincare and our marketing campaign as well leveraging flux decent stores to highlight key brands and newness in this growing category.
In addition, we've expanded our multi brand skincare skin bar model into 100 more stores and important differentiator for Ulta beauty is our ability to connect product with services to create deeper customer engagement.
Almost every ulta store offers a full array of skin care services and has a license as petition onsite to provide guests with personalized recommendations.
About 20% of our stores feature our multi brand skin bar model, which offers guests the opportunity to experience quick services like a 10 minute express spatial or a 20 minute mineral infusion and interact with different brands, including Dermalogica Marat in killed.
And the configuration of the skin bars frees up an average of 12 additional seat of retail space for skin care products and the Mystifies the skin service experience and services are performing directly on the sales floor.
As a result of all these efforts new brands increased marketing and expanded skin services. We've continued to increase our market share of the U.S. skin care category.
To wrap up what we're currently seeing in the U.S. beauty market trends the skincare fragrance in hair categories are expanding growth in the overall U.S. beauty industry continues to be constrained by softness in the makeup category.
We continue to believe that the headwinds facing the makeup category are largely cyclical resulting from a lack of incremental innovation and compelling newness. We remain confident the makeup category will return to growth well recognize it it will take time.
The Ulta beauty model is winning within beauty space and we remain confident that our differentiated business model our strategic investments in our highly engaged associates will enable us to drive further market share gains positioning us well for when the make up cycle recovers.
Now I'd like to give an update on the progress we've made this quarter on our strategic imperatives.
Getting with our efforts to strengthen the Ulta beauty brand it increased loyalty I am pleased this year that we continue to make great progress in both of these areas from an overall awareness standpoint, our aided brand awareness remains strong at 92% and unaided brand awareness increased two point to 57% compared to the same period a year ago.
Our integrated marketing campaigns, including fall refresh 21 days, a beauty and our gorgeous hair about all help keep us top of mind and drive engagement with gas well celebrating the emotional and inclusive power possibilities at Ulta beauty.
I'm, particularly proud of our fundraising campaign for the breast cancer Research Foundation in which we brought to life stories of how donations can lead to life changing medical advancements like featuring researchers alongside breast cancer survivors you print in store it digital and social media.
We continue to expand our social media capabilities, focusing on creating moments is basis to drive meaningful conversations and connect with beauty enthusiast and relevant ways.
Reflecting this strategy with marks our first ever tick Tock campaign to support the launch a floor Funnelled, a new beauty brand from Billy Bobbi Brown.
Using this rising platform to showcase at the possibilities are beautiful we ran a campaign used in the hashtag beauty is that encouraged users to define a showcase beauty and their terms a powerful message that middle East brand shares.
As a result, this and other social media campaigns and conversations launch this year I'm really proud to say the Ulta beauty recently earned the number one spot in engagement Lambs labs ranking for social influence amongst top beauty and personal care brands in the U.S.
On the brand loyalty side, we've seen tremendous growth in members and engaging that since converting our loyalty program to ultamate rewards in 2014.
At the end of the third quarter, we had 33.9 million active members in our ultimate rewards loyalty program, an increase of 11% versus the third quarter last year.
Sales for loyalty members continue to represent more than 95% of our total revenues and importantly, we continue to see growth an average spend per member.
In addition to converting new members to our program. Our team is focused on driving strong member engagement, especially among our new and second your members as well as we activated members who have lapsed to ensure we're creating a strong first impression we've revamped our communications and welcome to provide enhance education about benefits of our program.
With personalized relevant content, along with targeted promotions to drive frequency of purchase and engagement.
As a result of these efforts were seeing positive improvement and our member retention trends.
Recognizing that the growth of new members will naturally slow program matures, we're increasingly focused on how we can drive greater spend per member we continue to test and optimize personalized E mail and push recommendations and replenishment reminders based on previous transaction activity and we've just started to test targeted recommendation.
Based upon other guess behaviors to improve the relevance of our recommendations to our guess.
Expanding participation in the ultimate rewards credit card program is another key strategy to drive higher spend per member as we know that members who participate in the credit card program shop us more often it's been more with us and in the third quarter. We again saw strong growth in our credit card portfolio.
Now moving onto our strategic imperative to delight guests with a one of a kind world class beauty assortment, the new exclusive product launches we brought to market. This year are delivering results in the third quarter newness drove about 25% of our total comp driven primarily by new brands and products in skin care and hair care.
From a category standpoint, we saw strong comp sales growth this quarter in skincare fragrance accessories in hair care.
Skincare continues to be one of our strongest growth categories with prestige mass in Sun care, all delivering double digit comps again this quarter.
Each of this growth is the result of strong brand and product innovation as well as Nu skin care routines.
In prestige skincare newer brands like heels and to the light continue to drive strong guest engagement, while more established brands like first a beauty and dermalogica benefited from strong product newness.
Recently launched brands Sunday, Riley and Kylie skin also performed well.
And masking care, we saw strong growth across a number of brands, including the ordinary which we launch in select stores early in the quarter.
Dermatologist recommended brands are such a survey and newer natural brands such as theirs and German. He also continues to drive great guest engagement.
Sales in Sun care with strong again, this quarter, driven by self panning and Sun protection products.
Fragrance delivered high single digit comp growth this quarter, driven primarily by the launch of exclusive fragrances by Ariana Grande day, Jennifer Lopez, and kw fragrance as well as newness from luxury brands, why SL, Dolce and Gabbana and Versace.
In the hair care category, we saw mid single digit comp growth, reflecting the success of our gorgeous hair event and the impact of new brands like I GK and pattern, a new brand by Tracy Ellis Ross for Curly coyly, and textured hair available exclusively at Ulta beauty sugar bear hair vitamins also continue to draw.
Growth in the mass hair category.
As expected. The overall makeup category was down slightly this quarter driven by a low single digit decline in prestige cosmetics.
Despite the challenging headwinds facing the U.S. prestige makeup market Ulta beauty continued to capture significant market share gains.
During the quarter, we saw strong growth from our iconic prestige brands, partially driven by the expansion at these brands to additional doors.
Clinique Lancome in particular experienced nice growth, even after excluding gains related to distribution growth.
Newer brands, including Kati cosmetics and kw beauty also delivered nice growth in the quarter. These gains were more than offset by soft performance of other established brands in the portfolio.
Now looking forward to the fourth quarter, we've launched two exciting new prestige brands just in time for the holiday season.
First we're offering an assortment apparel items by Lora Mircea on ultra dotcom, our platinum and Diamond members have premium access to the new assortment now which will be available to all Ulta beauty guess next week. We have also just launch in exclusive capsule collection with thrive cosmetics digitally native brands founded by entrepreneur.
And beauty product developer Curis about an hour.
Thrive sells products that are began cruelty free and without parabens latex and sulfate and for every product purchase the company makes a product donation to help women.
Ulta beauty is honored to be the exclusive retail partner to thrive cosmetics and delighted to offer our guests the opportunity to discover and explore the products in store for the very first time.
The capsule collection includes a number of thrives most notable products offer compelling value.
Look for more to come from both of these brands in 2020.
Although the U.S. mass cosmetics markets continued to experience sales declines RMS cosmetics division delivered a mid single digit comp increase in the quarter, reflecting growth from our exclusive brick and mortar brands, including morphine color cop into the US place recently launched Florence by Mills, and new brand created by Millie.
Bobbi Brown also performed well.
Now shifting to our imperative to transform the in store and beauty Sears services experience I am pleased to share that we're seeing a nice strengthening of our salon business driven primarily by growth in cod color and texture treatments last quarter, we completed the rollout of our services optimization program in all stores and.
As a result of these investments were delivering better trends in comp sales average ticket guest retention and satisfaction and product attachment. We're also seeing increased stylist retention as well as stronger recruitment of experience stylists with an established book a plan.
We continue to implement new ways to make the shopping experience easier for guests in the second quarter. We completed the rollout of buy online pickup in store to all stores and we continue to be very pleased with how our customers are responding to this new convenient.
And this quarter, we expanded our mobile pilot point of sale to a 100 sort of high the higher volume stores, which will enhance the guest experience by reducing checkout wait times, especially important during the busy holiday season.
Now turning to real estate activity in the quarter. We opened 28 net new stores relocated two stores and remodeled three stores compared to 39 net new stores, one relocation and for Remodels in the third quarter last year, ending the quarter with 1241 stores.
New store productivity remains strong with first year sales training ahead of plan and we remain on track to open 80 stores this year.
We also executed number of refreshes this quarter expanding the distribution for our iconic prestige brand, which include benefit Clinique lancome back and estee Lauder to more doors.
Today, almost all Ulta beauty stores carry the clinique and benefit brands more than 90% of stores carry lancome slightly more than half of the chain curious estee Lauder and nearly a third of stores now carry Mac.
Turning now to some highlights in our reinvent digital imperative, we continue to make progress in creating a more seamless omnichannel experience that meets the gas wherever they want to engage in shop.
This quarter, we refreshed the Ulta beauty apps incorporate more personalization and a stronger linkage to ultamate rewards to reinforce the value of our loyalty program.
The new version includes a prominent loyalty dashboard that makes it easier for guests attract the value of their loyalty points shows how points can add up and be more valuable and features a fun birthday module to highlight the benefits of their birthday month.
We've also combined our message center at offer hub, making it easier for members to activate targeted offers and quickly access eligible offers and we've added new replenishment reminders and Handpick recommendations. Both are powered by our in house artificial intelligence engine philosophy.
We also continue to leverage augmented reality in artificial intelligence to create compelling beauty experiences for our guests to drive stronger brand loyalty within the Ulta beauty App guests are using glam lab to virtually try on makeup for eyes lips antiques, and we recently added a foundation option to help them navigate the wide variety of available shape.
I have virtually trying them on.
To further extends the reach of virtual try and experiences beyond the mobile App. This quarter, we began to experiment with try on capabilities on ultra dotcom.
We also continued experiment and learn as who create more virtual beauty advisors. In addition to the existing skincare advisor. We recently launched a foundation finder, and I must mascara and lash advisor to help our gas find what works best for their needs.
In late in the third quarter, we launched after pay as another payment option at Ulta Dot com.
Popular with millennials and budget focus consumers after pay allows shoppers to receive products immediately and pay for them and for installments. We're very encouraged by the early response in a Suzy ASM for after pay and we're excited to have it in place of the holiday season.
We've made a lot of progress this year in pursuit of our strategic imperatives, all of which position us well to drive growth in the fourth quarter.
To recap heading into the fourth quarter. This year by online pickup in store is available on ultra dotcom and through our App and pickup is available in all stores. After pay is available on ultra dot com and in our mobile app.
We've refreshed our Ulta beauty apps to serve our best guess better with more personalized experiences and easier access to their ultimate rewards benefits.
We have completed services optimization at every store, we have more loyalty members and enhance personalization capabilities.
We have a lot of newness across the box, including exclusives from Millie Bobbi Brown, Tracy Ellis Ross thrive kw beauty in Kylie cosmetics as well as a great collection of exclusive holiday gift sets curated by merchandising team and brand partners.
And we have a great talent to team a store associates are prepared and excited to serve or I guess this holiday season.
We kicked off the 2019 holiday season with a new in store event in mid November we called the Ulta beauty fast our goal was to create an immersive event across our 1200 plus stores to engage our guests and associates with tremendous support from 60 of our key brand partners. Our store teams hosted two days of demonstrations.
Influencer Activations and giveaways.
The event generate a lot of traffic to our stores and I'm pleased with how our teams executed our plant.
While we certainly have identified opportunities to improve the event overall the guest response was positive with many of our guests, making it a fun family events.
The holiday season is in full flow and our teams are executing well our holiday campaign. This year reflects the diversity of our guests and honors all the reasons to good chances to gather and ways to low we've elevated our beauty Blitz program. We're collaborate collaboratively with our brand partners to create new exclusive items and kits.
Forgetting planning and simplified the flow and presentation in stores and online to make it easier for guests to find gifts.
We expect the beauty category will likely be more promotional this holiday season, but I'm confident that our holiday marketing campaigns and our merchandise exclusive combined with new strategic capabilities position us really well to deliver a successful holiday.
In closing, while we've refined our full year guidance to reflect our year to date performance our expectations for fiscal 19 have not materially changed since our last earnings call.
We are working through our 2020 planning process and prioritizing our investment agenda for the year, that's likely to remain challenged from a top line perspective, given the headwinds facing the cosmetics category.
Well make thoughtful choices regarding the pacing of investment as we look to deliver earnings growth in the short term will also protecting longer term growth potential.
While we haven't finalized all of our decisions, we have decided to delay the opening of our Jacksonville fast film a center until 2021.
We've also decided to maintain or investments to build international capabilities, which will support our entry into the Canadian market.
We intend to provide more detail about our expectations for 2020 on our yearend call in March as we normally do.
And with that I'll turn over to Scott to discuss the drivers of our third quarter financials and outlook for the fourth quarter and full year in more detail.
Thank you Mary and good afternoon, everyone.
As Mary said earlier today, we reported results for the third quarter that were generally in line with our internal expectations.
Starting with the income statement topline growth of 7.9% was driven by 3.2% comp strong new store productivity and robust growth in other income primarily driven by continued growth of our credit card program.
Total company comp of 3.2% was composed of 2.3% transaction growth and 0.9% average ticket growth.
Despite softness in the cosmetics category, we were pleased to see a modest increase in store traffic during the quarter.
From a category standpoint, cosmetics was 51% of sales down about 200 basis points from last year, while the skincare Bath and fragrance category increased 200 basis points to 21% of sales.
As a percent of sales hair care products and styling tools decreased about 100 basis points to 18% of sales while the services category was flat at about 6% sales.
Although we no longer breakout ecommerce growth, specifically Oprah Dot com growth was at the low end of our expected range of 20% to 30% growth driven by traffic.
Gross profit margin of 37.1% improved 40 basis points year over year from 36.7% driven by stronger merchandise margin and leverage of rent and occupancy expense.
This was partially offset by investments in our services business, while our supply chain operations were roughly flat as a percentage sales.
Merchandise margins were higher year over year, reflecting ongoing benefit from our efficiencies for growth or F. G cost optimization program and lower promotional activity as compared to last year, which more than offset headwinds from category and channel mix.
Oh promotional activity was lower as compared to last year, largely because we anniversary the impact of last year's clearance event.
Promotional activity in Q3 this year was higher than we initially plan.
Many of these incremental promotions were targeted using data from our loyalty program.
SGN a rate of 26.7% de leveraged by a 140 basis points compared to the prior years rate of 25.3%.
We experienced corporate overhead leverage primarily related to anticipated investments and growth initiatives, including our efforts around digital innovation, such as Omnichannel and personalization and international expansion.
We also saw deleverage in store labor and benefits versus last year, primarily due to continued investments to support the guest experience.
This was partially offset by lower incentive compensation expense, reflecting our current financial performance as well as lower stock price.
We saw leverage of marketing expense as we lap the investments from a year ago related to the launch of our new marketing.
Operating margin of 10% of sales was down 80 basis.
Diluted GAAP earnings per share grew 3.2% to $2 in 25 cents, which included a two cents per share benefit primarily due to an increase in federal income tax credits.
Fair to $2, an 18 cents reported for last year's third quarter, which included a two cents per share benefit due to income tax accounting for share based compensation.
Turning to the balance sheet and cash flow.
We continue to manage our inventory well improving inventory productivity, while maintaining strong in stock positions.
Total inventory grew 8.9% and increased 2.1% on a per store basis nicely below the comp rate due to an increase in net new stores and the timing of inventory shipments ahead of the holiday season.
We continue to focus on investing inventory in our top sellers, new brand and product launches and ensuring that we are in a strong inventory position going into our peak holiday season.
Capital expenditures were $89.9 million for the quarter driven by our new store opening program investments in IP systems and store Remodels and relocations.
We ended the quarter with $208.8 million in cash and equivalents.
Taking advantage of a lower share price, we repurchase more shares this quarter to our stock repurchase plan than initially planned in the quarter, we repurchased 529000 shares at a cost of 128.6 million.
Leaving 388.8 million available on our 875 million authorization as of quarter and.
We continue to expect to repurchase approximately 70 million of shares in fiscal 2019.
Turning now to guidance our expectations for fiscal 2019 have not materially changed since our last earnings call.
For the full year, we continue to expect to open approximately 80, new stores all of our traditional 10000 square foot prototypes.
We plan to remodel 12 stores and relocate eight stores and execute 270 store refreshes, where many remodels to enable the addition of new brands and improvements to overall fixturing.
We anticipate driving top line growth of approximately 10% with total company comparable sales plan in the 4.7% to 5% range compared to the previous guidance of 4% to 6%.
We continue to expect ecommerce to grow in the 20% to 30% range.
We expect to deliver diluted earnings per share in the range of $11, a 93 cents to $12 in three cents with approximately 60 to 70 basis points of operating margin de leverage.
This compares to previous guidance of $11.86 to $12 in six cents.
Our updated EPS guidance includes the two cents of income tax benefit earned in the third quarter and a narrower range, reflecting the fact that there is only one quarter remaining in the year.
We continue to expect to deliver gross profit improvement for the year driven by merchandise margin expansion rent and occupancy expense cost leverage and the benefits of our credit card program.
These benefits will be offset by SGN, a de leverage due to investments in store labor growth initiatives and digital innovation.
We now plan to spend between 305 in 315 million in Capex.
The reduction from previous guidance, primarily reflects our decision to delay the opening of our fast fulfillment center in Jacksonville until 2021.
We now expect full year Capex will include approximately 170 million for new stores, Remodels and merchandise fixtures 90 million for supply chain, and IP and about $50 million for store maintenance and other.
Depreciation and amortization expense is expected to be approximately 300 million.
We expect our tax rate for the year to be approximately 23%.
This projected tax rate does not include any estimate for the potential for impact of share based compensation or federal income tax credits.
Fully diluted share count for the year is expected to be approximately $58 million. Our plan assumes share repurchases in 2019 in the 700 million range.
And now I'll turn it over to our conference call host to moderate the Q any session.
Thank you and we will now be conducting a question and answer session. If you will like to ask questions. Please press star one on your telephone keypad.
Information so indicate your line is in the queue. You May proceed starts to if you will look to remove your question from the Q4 participants using speaker equipment and may be necessary to pickup you had said before person. The sarkies. We respectfully request that you asked one question only to allow us to have time to response was many of you as possible one moment. Please while we pull for questions.
Our first question comes a lot of Michael Binetti with Credit Suisse. Please proceed with your question.
Hey, guys. Good evening Merian Scott Thanks for all the detail congrats on a nice quarter.
I wanted to ask about.
I guess on the gross margin you mentioned third quarter were was lower.
The promotions are a little lower on the clearance, but a little above your expectations I would love any help you could offer us on how to connect that to the fourth quarter do you still think the fourth quarter gross marginally positive I think the the fourth quarter and beds.
EPS growth of about.
1.5% to 4%, so maybe a little bit below the mid single digits. You were talking about previously I'm just trying to keep it could help us on whether thats, a little bit more conservatism on the gross margin or on the M&A line.
Sure Michael So looking back at the third quarter I would say overall, we're happy with the results.
I would now as we said in our prepared remarks, we were lapping that large clearance event last year. So we've got some natural leverage there year over year, and we were slightly more promotional in the and then we had anticipated back in August when we last spoke to you and and as we look out here towards the fourth quarter, we're guiding now too.
Gross margin overall being flattish versus what we said back in late August , which we thought we could be a little better than flat you know even at the low end of the guidance and really the biggest change there's just looking at the overall retail universe. So to speak I mean, we expected to be more promotional in a beauty space and I think we can you.
Indicated that to a lot of folks we've talked you over the last few months well, what we see what the ratcheting up really in the overall retail environment right now with that kind of the compressed shopping season, we're starting earlier, we've got deeper discounts across the board and it just remind everyone that in holiday season. Unlike in the rest of the.
The three quarters of the year, we compete with everyone in retail for wallet share right in the gift giving experience. So this is a critical time for us we're driving a lot of new guest to our stores. We've got roughly 80, new stores versus last year and a much larger ecommerce business with engagement. There. So it's critical for us to make sure we keep healthy trends.
Eric.
So driven to both the through both of those channels and we're not going to be deterred on that will spend some margin rate. There if we need to and were being prudent I would say with our outlook here based on all the facts and circumstances here as we speak today, So again merchandise margin a little weaker in the fourth quarter than we anticipated and Thats really the only change with the gross margin flat outlook.
Here as we look ahead.
Okay.
Just follow that with a quick follow up I think a year ago, you had asked for and on analyst day.
You gave us the rough framework of how Youre thinking about the next few years, you just mentioned to see pushed out some spending on on Jacksonville does that do the expected in efficiencies that youre baking into the multiyear plan on the margin change at all as we as we think multiyear out through a model because of that because of that change at all on Jacksonville.
So our ERP program again efficiencies for growth, we're seeing benefits you're seeing benefits in the PML right now we're seeing them in the merch margin line item. We're also seeing them and fix store cost there around real estate, that's helping drive some of the leverage that we're seeing there year over year. So we're still confident on that 150 to 200 rain.
So we shared last year, we're still confident there were in the early innings. There we explained and that it's a multi year kind of program and it starts out slow and there's lots of different levers there some delivers faster some deliver slower so we still feel confident with.
What we've got in front of us and that we can execute against that.
Thanks, a lot for all that detail on the health and I guys. Congrats thanks.
Our next question comes the line of Christopher Horvers with Jpmorgan. Please proceed with your question.
Thanks, Good evening.
Mary mentioned that the industry growth slowed in threeq relative to two Q.
Curious how you would characterize the growth since the fall off in August that did you describe to us last quarter has industry growth and relatively flat since August two down and I think it was like low double digit.
And have you seen any variation in cosmetics cosmetics versus skincare.
And all related to that how is your market share capture.
I will fall to against the changing industry trends.
Yes, sure well first of all I'd say within the category. The issue about lack of growth is really about makeup rights. So other categories skincare fragrance hair, all positive and we've seen really strong comps in all of those categories makeup has been it was a little bit sort of bumpy around August I'd say those big picture Q2.
Two was negative and then Q3 was slightly more negative than that so I'm not as bad as the double digits that we're seeing at the time that we had the call. So we were anticipating it will continue to be pressured and I could basically we are right. The data supports that.
And it's again I'll, just reiterate I, it's tough to be in the cycle, but this cycle in the U.S. feels very much about innovation not just being is incremental to categories that has been in prior years in.
You can imagine we're working very closely with our brand partners Big and small on this or really bring back strong growth and we believe the category will return to growth, there's always shifting preferences, but demographic demographic trends really continue to be favorable for us in our brand partners are very laser focused on white space innovation category growing up.
Today, so tough to predict when that will turn but we feel confident it will.
Our market share capture continues to be the I think one of the strongest parts of our story. So it's a it's a little easier to get distracted by the short term. Our long term view is that we have the winning model and we are it's I think proven by the fact that we're driving market share growth new gas to our loyalty program and for US to continue to do that in the time is really important et cetera et cetera.
We think really well for the future.
So do you think that as you sort of given that.
The category growth span relatively consistent, albeit Bob do you think that as you look ahead, it's just going to be a function of.
Get us to July August next year and.
Things will sort of flattened out from a from a market growth perspective.
I wish I could give you that exact timing it's pretty tough.
Hey, so nice try though.
Yes, I mean, we feel good about you know about that it will turn I don't want to give a specific timeframe, but you can imagine everybody in the industry and make up we'd like to see this could improve as well as well so.
Thanks, so much of a great holiday.
Our next question comes on line of Dana Telsey with Telsey Advisory Group. Please proceed with your question.
Good afternoon, everyone. As you think about the marketing that you're doing this year as compared to last during the holiday season, especially given that highly launch last holiday season.
Yes, as you head to 2012 2020.
The issues with color cosmetics, how are you thinking about the marketing game plan or what you allocate to its relative to sales. Thank you.
Yes, we were.
Very positive about our total impact in the marketplace through marketing and the innovation that we're bringing into the marketplace new brands.
In marketing specifically, we're continuing.
The.
Campaign that we launched last year possibilities are beautiful it's had a very strong reaction in them in the marketplace consumers have seen a very positively as Mary mentioned in her remarks, our awareness continues to grow.
And we're confident that will continue to see that success through the fourth quarter and into 2020, we did have some big launches last year.
You mentioned Kylie, but we.
We continue to bring new brands across across the store this year.
Larry mentioned, a few of those in hair care brands like pattern with Tracy LS Ross I GK in skincare. Many of the brands that are coming in and driving growth and in makeup as well. So we're working hard to continue to evolve the assortment to drive growth and can and reach our guest and new and compelling way.
Ways behind our possibilities are beautiful campaign. So we're optimistic with that are seeing the results and we'll continue to drive that through 2020.
Our next question comes a lot of Mark Altschwager with Robert W. Baird. Please proceed with your question.
Good afternoon. Thanks for taking my question. So just wanted to ask about the updated comp guidance I mean, it doesnt still imply a bit of strengthening in Q4, despite the tougher compare maybe update us on the drivers you see there to the strengthening sequentially and then just given the backdrop you're expecting the makeup category to remain under pressure to the extent.
You're able to deliver those that level and comp in Q4, despite the backdrop I guess what changes as we get into next year, just as we think about the comp growth algorithm. Thanks.
Well, we're not guiding for next year right now so I understand the question I'd say this we think about the fourth quarter you know I guess the the guidance that we gave at the midpoint is moderately better than Q3.
Right, we have a lot lot that we're lapping, but I think as Dave just described we feel like we've got a really good ASO array of tools from the offerings, the marketing promotions et cetera, and we feel like we're off to a good start and so as I said. It also in my call I mean in my comments here, there's quite a few things we have this quarter. This.
This year that we didnt have last holiday I.
I think focus might be one example of that the buy online pickup store capability is something that we did not have last year. It it's off to a strong start fourth this year.
Stronger I'd say, our Ulta beauty app is even better than before in terms of the ease of execution. The ease of understanding what you're up points are at how they add up.
After pay is another one that we have this year that we didnt have last year. Our service optimization has enrolled out now across every store.
A lot of newness in the box. So and then again, there's no way Bobbi Brown trade sales Ross thrive ticket W. beauty, there's a lot of things that are incremental to year ago. So we look at and feel confident that the way we're guiding as accurate as we can make it in.
Summing up against a big quarter last year I think as we're in good place to do that.
Thanks, and then just maybe quickly following up in understanding we don't want to get into specifics for next year.
To the extent that we remain at a slower growth mode, maybe speak to some of the areas in ESG today that you have the ability to pull back on your comfortable pulling back on I know you mentioned that the DC, but any other kind of bigger buckets, we should think about as we try to triangulate that leverage point.
Yes, it before maybe Scott you can take that will add because I forgot you had a second part the tricky two part question, but.
When you asked about that will go a little color on 2020 is that as I said, we would expect that the makeup category headwinds are with us for awhile.
That said we are in a great position because we operate I think everybody knows this but across so many categories of beauty and we have the ability to flex and we are flexible talked a lot about skin care as a category in the in our comments more brands more space more activation. So we think that while even with the headwinds.
Beauty of makeup and that will create some tough topline environment for us in 2020. It we have other categories that were going to continue to grow well in.
And as far as 2020 is concerned I guess I would just at that we've talked to a lot of investors here over the last couple of months in their communication I think has been consistent that.
We're not taken US you know lying down I mean were that's all hands on deck here looking at the business now in a new what we expect to be lower growth environment here for the foreseeable future. So we're looking at any and all the levers on the business to see what we can do to control cost in a new kind operating environment. So we're being.
Realistic about the current operating environment Ellen competitive threats, but we continue to strongly to believe in our ability to drive long term profitable growth. So as we are building. Our 2020 plans, we've got an eye towards balancing short term topline pressure with the need to reduce cost and our business while also ensuring that.
Position Ulta beauty to continue to win in the long term Jacksonville's. Just one example of something that came up that we made a decision that you're on recently if theres. Many more of those into Q right now that we're talking with our board about and thinking through all the pluses and minuses Wayne the strategic benefits and the cost implications.
And we'll have more to say about that in our March.
Okay very helpful. Thanks, and happy holidays. Thank you.
Our next question comes a lot of Ike Boruchow with Wells Fargo. Please proceed with your question.
Hey, good afternoon, everyone.
A question for Scott I was actually surprised and Plugless Fries, you guys are able to get leverage in the fixed cost component of your cost of goods sold could you kind of tell us what's going on there and there's been a lot of investment and some deleverage, but on a three comps to get to get some leverage can you just explain as Scott what exactly is going on within the fixed cost and then.
Thats kind like is that sustainable should we think that way going forward that if you can call, but three you can get leverage within Cogs.
Hi, Theres a lot of variables that roll through any one quarter through that line. So the number quality and timing of store openings lease renewals depreciation things we've been talking around BSG initiatives that we have so the team is making great progress on that and we're seeing some of that roll through role.
Through 2019, so we're very happy with what we were able to deliver the third quarter, we're going to stay focused on F. G and optimization and all those things are working our real estate team is doing a great job working with our landlord partners to make sure. We got fair economic deals as we look across a 1200 plus so.
Store fleet, so we still think theres.
There's good progress to be made there and I just want to just remind people again, it's as we continue to look at how we can manage our business in a lower top line environment. This is a good example of things that we can do again, it's not necessarily going to be a straight line or a hockey stick up into the right Ike, but it shows that we're flexible than we can manage.
Yes.
Got it and then as a quick one for Mary I am going I'm going to come to give this a shot so.
You guys.
So that you expect to make up headwinds to say there for a while lower growth environment for seeable future.
I guess I want to ask on Osmar guidance, what Mary would you expect this 3% comps to cannot be the trough for the business or is it just impossible to tell at this point us figured I'd ask you about a second nice try I like that.
I guess I just want to be clear, though I mean I hope this come through that we feel very strongly that our business model is working and were no less confident in the long term attractiveness of our business model at all.
We're outperforming the rest of the market in terms of gaining market share I feel very good about our capabilities, our brand awareness or omnichannel capabilities, which are so important right now right our digital capabilities.
So where the destination preferred for teens Thats really important we think about the future the business and so you know everything from services to how we operate in store I think are just really exceptionally well executed right now so being a little patient taking a long view on the categories and important stands for us and not getting ahead of our skis on this and so.
If we could call it better we would we don't have control of everything that happens this industry, obviously, but we've got great partners that are working hard with us to make sure that we continue to bring this back to growth so, but I think as Scott said.
We're I think taking a realistic and cautious.
Look our view of the current operating environment and planning for that I think that's the most pragmatic thing for us to do as we plan for 2020.
I don't so in terms of what that number looks like we'll talk more about that we get to March but that's how we're viewing this.
Thank you.
Thank you.
Our next question comes a lot of Michael Goldsmith with you'll be US. Please proceed with your question.
Good evening. Thanks for taking my question in response to the deceleration in cosmetics, how have your conversations with suppliers evolved of they've been more willing to provide more support them, having the path thats, taking more collaborative view on innovation I was talking about their product pipeline introductions any differently. And then also are you seeing any signs of Stephens civilization from the pristine.
Yes.
Yes, I would say.
Our brand partners across the board are very engaged and very focused as we are in both understanding and turn it around the challenges in the in the makeup category and so their level engagement has always been high what I'd say is different now than what we've been experiencing.
Over the period of growth over the last few years is much deeper under said effort to understand consumer behavior, a much more robust.
Focus.
Driving new forms of innovation that will really be incremental to really uncover new habits and behaviors for consumers. So we're seeing that across the board with our brand partners and were very feeling very positive about the engagement that we're getting a level of focus that they have because they're obviously very incented to.
To drive.
Returned to growth in this category so we feel.
We feel good about it I think as both Marriott and Scott said, it's hard to predict exactly when the category is going to turn around but we're working hard every day.
We have a lot of bright spots that while the categories challenged the work we're doing to bring in new brands bring an exclusive brands brands like Morphy dubious place new launches like thrive kw. So even in a tough market, we're gaining share because our arc our strategy is working.
By both partnering with new brands, and then returning to growth with existing brands. So.
Everybody is working hard on this and we feel confident that the category will return to growth and we're working to make sure that's as soon as possible.
Just following up on that plane, but seems like outside the deceleration cosmetics other categories.
Generally study, maybe fragrance accelerated a bit Sharon.
Seller it a little but is there any risk in the reduced interest in cosmetics could lead into other categories and start to drag them down.
Well, we do.
We continue to see strength across.
The non makeup parts of our business and that's a great part of our overall model because we do have all things beauty at all in one place so strengthened air and scan and Bath and so on and fragrance.
And and as we mentioned traffic was modestly positive. So consumers are absolutely still coming into store, we're gaining new members. So we had strong new member growth because they are attracted to the whole portfolio. So.
We're not we're not.
Anticipating a big impact on the other parts of the business if anything.
As consumers are.
Maybe slowing in their engagement and make up to two.
Moderated extent, we're certainly seeing.
Greater growth and focus on skin care and emerging of those categories in some ways as brands are looking for ways to drive new growth. So now we don't think that we'll have a long term impact.
And as I said, we're optimistic that make up will stabilize and get back to growth spot overtime.
Thank you very much good luck in fourth quarter.
Our next question comes a lot of each journey with Barclays. Please proceed with your question.
Yes. Thank you for taking my question. There I was wondering if you could talk about.
On the purchase.
Codis purchase a majority share Kylie cosmetics, how does that impact your exclusive relationship and then if you could also talk maybe David about the K T. W launch in the third quarter, one didn't launch and then.
In terms of skew count was it same larger on the kind of launch last year and really really quick one.
Scott can you give us any color on areas, where you see cut.
Today or in the key program for next year. Thank you so much.
So yes, let me start with your question about Coty Kylie So Kylie.
We've had a fantastic relationship with the Kylie business and the Kylie team. It is certainly contributed to our comp growth. We're pleased with the brand.
And driving excitement and new guest and so we're really happy with the overall performance.
And.
The Kylie Cody partnership is is new and still being finalized, but we have great relationship with Cody and we anticipate.
A lot of positive opportunity to continue to grow those brands together.
Going forward so were really positive about the kw is been a nice addition to our business we launched it in all stores on a on a customized in cap.
Late in the third quarter and we're very pleased with the results in the again the partnership we we've had with that brand. It's a different assortment Kylie if you remember when we launched was a limited assortment predominantly lift kits and some individual lift goods expanded overtime.
Kw had as a broader assortment across different segments of.
Makeup.
And so it's a it has a different assortment in a different approach reflective of the different strengths of each of those brands. So again glad to have KBW and our portfolio and feeling good about the early results of that business.
Yes, so with respect to 2020, Onest DNA I know thats at the top of everyone's list is what is 2020 look like and we it's still a little just it's too early for us to give too much detail on Apple when we think about SGN a the types of costs that are in there and roll through our SDN and line our store labor.
Variable store expenses.
Corporate overhead people costs, and then innovation investments right that that rolled through there that are long term in nature that it can help us grow our business. So when we think about EFG.
Sprinkles all through the piano so.
Theres a lot of work underway there to try to optimize the business whether it's in the gross margin line through some of the merchandise margin things, we've talked about with transition than even the clearance event that we mentioned that we're getting a benefit of this year I mean, thats already FG as well I mean, we're doing a lot of work on how the transitions work in our store. So that we have less clearance items at the end of that.
We have to take markdowns on so it's going to be a balanced view I would tell you that he FG applies equally on the margin gross margin line as it does on MSG and we're just going to be very thoughtful as we think about what the right balances for 2020 and beyond.
Great. Thank you very much and best of luck the holiday.
Our next question comes a lot of Omar Saad with Evercore ISI. Please proceed with your question.
Thanks for taking my question.
I wanted to follow up on some of the commentary around color makeup and cosmetics.
Are you guys are focused on that you're working with your brand partners all different levels. It sounds like a whole industry is really focused on this issue is there anything that you can see in your obviously robust data stream.
That give some insight into the behavior around this category are there certain types of customers reducing that spend.
In that category slow or whether its age or regional or demographic or.
It's a pretty much across the board and I guess not ultimately asking the question is there any change in behavior out new generations come of age and enter the category.
In terms of how they're consuming the category.
Yeah, I'm happy to take that.
First of all me step back and say, we're all selling heck a lot to make up still it sounds like people aren't where it make up I think that's really important that this is about growth versus year ago really at at that most macro level. It's really about at our main thesis is that there just isn't as many items that people are adding to their basket that are creating that our new rituals like things like Ontario.
And your browse so people are buying lots of makeup and third we say engagement the category still quite high but just not at the level. It was or the kind of newness that we've seen for a few years. That's all solvable that's around finding new consumer insights around white spaces and whatnot. So so I I think that's that's kind of at a macro what we think is happening.
The when we think about Theres also I think some misnomers about gen. Z. I mean, all of our data amgen's easier that they're very engaged in the category and if that's the good news to is that they're also getting engaged Skinner younger age then people did it with older consumers when theyre at that age that means they will carry that have that forward as they get into the workforce they start.
During and using more makeup so that we think is a positive factor and is we also said just looking at other demographic trends, we feel very positive about the ability that we don't see people turning away from makeup is actually see then turning more to it doesn't it says that there is always been a segment of of women in the U.S. It don't wear makeup and are engaged in that category, that's not new we've now.
Were counted on that segment, it's a small segment as we never count on that said the for growth for our business model.
We focus on the beauty enthusiasts, which represent 77% of sales in the U.S. in terms of beauty and that's in we certainly have a third of them in our in our ultimate rewards program. So we've got lots of potential we think it's 77% of span beauty enthusiast out there for us to continue to grow at so we think that has the cat.
Degree in the industry gets back to more incremental type category growth will see this began to change.
Is there anything that you can read into the natural trend on the that's informative the color DRAM Mary Yeah, and I mentioned this in the in the script to certainly a more we see I'd say, it's almost like a bifurcation of things we see a national were Nashville look for sure, but anybody who whereas makeup noted that requires sometimes quite a few products to achieve.
That is not a bear phase you might want to wealthy celebrities out there taking their face Lps and if our but it looked like that we'd be having a different covers asia, but thats, but thats not so even a bear face more natural look is really about using products to create that log into we'd look at more neutral I et cetera. Conversely, if you look at what's happening in the Paris fashion shows in the spring.
And there was some very cool extreme I makeup looks too so it all kind of not everybody does one thing I guess is the best way to think about it and even a more natural look prevent presents plenty of opportunity for product at a patient.
Got it thank you.
Ladies and gentlemen, we have reached the end of our question and answer session. I will now, let's turn the call back over to maybe doing for any closing remarks.
Thank you I'd just like the close by thanking all of the Ulta beauty associates across our stores distribution centers in our headquarters for delivering another quarter of solid financial results at the same some executing against our longest longer term strategic imperatives, and working really hard to get our stores website in DC is ready for this busy holiday season. So we look forward to speak.
With all of you again in March and we'll be reporting our fourth quarter results, then and hope you'll have a happy holiday.
This concludes today's teleconference. You may now disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.