Q4 2019 Earnings Call
Greetings and welcome to the Ulta Beauty fourth quarter 2019 earnings results Conference call.
This time, all participants are in listen only mode.
A brief question and answer session will follow the formal presentation.
And you watch require operator assistance during the conference. Please press star zero on your telephone keypad.
Reminder, this conference is being recorded.
It's now my pleasure to introduce your host Ms. Kiley Rawlins, Vice President of Investor Relations. Please proceed.
[music]. Thanks, Darryl good afternoon, everyone and thank you for joining us today for Ulta Beauty Sports order and fiscal 2019 earnings conference call.
Thanks, todays call I'm married to Allen, Chief Executive Officer, and got Settersten, Chief Financial Officer, Dave Kimbell, President and also with us today.
This afternoon, we released our financial results for the fourth quarter and it's great that full year fiscal 2019, a copy of the press release is available in the Investor Relations section of our website at Www dot Okay Dot com.
Before we begin I'd like to remind you of the company's Safe Harbor language statements contained in this conference call, which are not historical facts may be deemed to constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
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 FCC.
We caution caution you not to place undue reliance on these forward looking statement, which speak only as of today March 12, 2020, 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.
Please note that in our comments today, we will reference a number of non-GAAP metrics, including free cash flow and earnings growth adjusted for the impact of income tax benefit in fiscal 2019 and fiscal 2018.
Well begin this action in my prepared remarks from Mary and Scott following our prepared comments, we will open up the corporate question.
To allow us to accommodate as many questions as possible during the hours scheduled for this call we've changed how we're going to manage the Q and a portion of the call. We that's the operator to actively manage the Q and limit callers to one question during the Q and a session to ask a second or follow up question. We ask that you would take you to allow us to come.
Today as many questions as possible now I'll turn the call Liberty Mary Mary.
Thank you Kylie and good afternoon, everyone before we talk about a results I want to address a topic. That's on everyone's mind, the ongoing risk related to the spread of the Corona virus.
Our first can sort of course is the safety and well being of our associates guests and brand partners and we've taken a number of actions focused on prevention to keep people safe and healthy.
We've increased sanitation measures, including the frequency in all stores with extra focus on product testers and high traffic areas and we've increased availability of hand, sanitizers in high traffic areas, including our cats rap makeup stations and salons station.
We closed decided in stores directing guests, who want to try a product to find an associate school sanitize testers on demand.
In addition, we're implementing a no touch approach when it comes to selling assistance like shade matching.
We temporarily suspended all make up skin and brow services in stores based on feedback from experts, we will continue to offer hair services with an increased focus on maintaining the health and safety of our guests and associates.
For our associates were encouraging them to stay home, if they're not feeling well and we're adjusting our policies to accommodate personal a family needs and ensuring that associates, who face a corn teen are compensated during that time.
We've also limited travel in the U.S. unrestricted international travel and we're limiting in person meetings, especially for large groups is a further step with canceled our annual general managers conference originally scheduled for April.
We're closely monitoring guidance from public health officials in government agencies to make sure. We have the best information to keep our associates in gas state and therefore.
We have a cross functional team meeting daily to respond to implant for any potential impacts. This may have on her associates or operations and we're working closely with our partners to manage any potential disruption to our supply chain.
Given the highly uncertain nature of the situation. We are actively assessing various actions we can take manage our business differently during the current environment.
Now I'd like to turn back to our normal course of business before opening up to your question moving onto our results for 2019 and expectations for 2020.
Starting with the fourth quarter, the Ulta beauty team delivered sales and earnings that were at the high end up or expectations to recap our fourth quarter financial performance total sales increased 8.5% and comp store sales increased 4% on top of the strong 9.4% comp last year.
Gross margin for the quarter expanded by 10 basis points and diluted EPS increased 7.8%.
These results were achieved despite ongoing challenges in the U.S. makeup category.
We discussed on previous earnings calls the makeup category in the U.S. is experiencing a down cycle.
U.S. makeup category was negative again this quarter across both prestige and mass measured channels.
We knew the fourth quarter would be challenging given both the category headwinds and make up in the fact that we're lapping a very strong fourth quarter last year, but are enhanced omnichannel capabilities combined with our merchandise exclusive to cross category marketing events helped us deliver a successful quarter.
Consumer shopping patterns continue to evolve with convenient online options, becoming more important during key shopping periods retailers, who offer a great in store experience as well as great online and Omnichannel experience is will benefit from these shifts.
With increased distribution center shipping capacity by online pick up in store options available every store and enhanced app and mobile platforms in place, including a new virtual waiting room to improve the guest experience on Black Friday, Ulta beauty was well positioned for shifting consumer preferences. This holiday season and delivered strong.
Double digit growth and ecommerce sales.
We kicked off the holiday season in mid November with Ulta beauty fast with product demonstrations influencer activation and merchandise giveaways. This new in store that drove nice traffic to our stores and health is comp last year was very successful launches of collie cosmetics and the James Charles Pallet My morphine.
Our new holiday campaign give together in CLO positions Ulta beauty as the go to destination for all things beauty and included improved promotions like holiday Beauty Blitz, and cross channel gift guide to inspire and help our guests with their holiday shopping.
That's holiday is a great time of year for Ulta beauty, because we participate in both gift, giving and is well what we call gladly, which is guest prepared for holiday parties and events and what services optimization fully implemented in all stores. We saw good growth in our hair skin and last services during the quarter.
We delivered stopped strong comp performance your key holiday periods, including Black Friday, Cyber Monday and finished the holiday season well.
Importantly, our teams did a great job resetting post holiday in executing on our January that Jumble Love and love your skin and as a result, we saw a nice acceleration in sales and traffic trends post Christmas.
Now turning to our performance by category, we increased our market share across all major beauty categories.
Skin care category delivered the strongest growth this quarter with prestige and mass and Sun care, all delivering double digit comps fragrance in P.C.A. important get categories and hair care all delivered high single digit comp growth this quarter.
As expected. Our makeup category was down slightly again this quarter driven by low single digit decline in prestige cosmetics growth from newer brands like Kylie cosmetics kw beauty in ground day cosmetics as well as growth from iconic prestige brands like Clinique, partially driven by the expansion of these brands to additional.
Doors was offset by sales declines in many of our established prestige brands.
Mats cosmetics delivered a low single digit comp for the quarter on top of robust double digit growth in the fourth quarter of last year.
Strong sales or brands exclusive to old to including Colorpak floors, and Julius place helped offset the impact of anniversary in the launch of the James Charles palette last year.
Turning now to the full year well fiscal 2019 was more challenging than we initially plan I'm proud of how our teams reacted and adjusted to the unexpected headwinds in the U.S. makeup category and delivered solid results for our shareholders.
From a financial perspective total sales increased 10% to 7.4 billion. It comp store sales increased 5%, we expanded gross profit margin and delivered EPS growth of 11%.
Importantly, this year, we made good progress across each of our strategic imperatives, which position us to deliver industry, leading growth and long term shareholder value.
Some of the highlights of 2019, we opened up 86, new stores remodeled 12 stores relocated eight and refresh 240 stores.
We increased our unaided brand awareness by three points from 53% to 56 was increases across every demographic group, we gained market share across all major beauty categories.
We expanded membership and Ultamate rewards by 8% to 34.3 million active members and increase our average spend per member to $206.
We grew diamond and platinum membership by 10%, which outpaced overall portfolio growth I continue to retain these members at very high rate.
We increased the number of cardholders in or Ultamate rewards credit card program by 40%.
<unk> outstanding execution from both our store in digital team and engaging with our guests.
We increased our penetration of Omnichannel members, while the percentage of members to shop in store only remains in the low eightys the percentage of members, who shop online and in store increase to just over 12% a total members.
We expanded the distribution for our iconic prestige brands, including Clinique, Lancome Machen Estee Lauder to more doors.
In total we rolled out 973 expressions that these brands in 2019 in various in store presentation.
We completed the rollout of services optimization in all stores as a result, we significantly improved have retention of stylist, an assistant and are seeing encouraging trends and guest retention and average ticket.
We delivered strong double digit growth in ecommerce sales on top of strong double digit growth last year.
We completed the rollout of buy online pickup in store in all stores refreshed, our mobile App and launched after pay as a new payment option for online purchases.
We seamlessly transitioned our romeoville distribution center into a fast fulfillment center and improve the productivity in our full service facilities, resulting in faster ecommerce order processing for I guess and more consistent on time deliveries tourist stores as well as better in stocks during the holiday season.
We began planning and building the capabilities to operate as a global beauty brands.
We continue to strengthen our culture and again achieved industry, leading associate engagement scores and accelerated our diversity and inclusion efforts across the company, culminating in national recognition, including Forbes best employers for women and that's employers for diversity. We also raised more than $5 million to benefit life changing breast cancer research.
At Vcrs.
Now 2019 was not without challenges posed by keeping our guests center associates at the center of all of our decision staying focused on the longer term growth opportunities and also staying agile flux along the moment our teams delivered solid results.
As I described in our priorities for 2020 I want to acknowledge that these plants, we develop before the recent changes we've made to services and do not consider any prolonged disruption to demand, resulting from krona virus.
Earlier, we're actively assessing girth actions, we may take to react to the current environment, but the theme still hold on are important to discuss.
So person 2020, we expect the make up U.S. makeup category will continue to be challenge and we built a plan that reflects these headwinds while also supporting opportunities for longer term growth.
Starting with our strategic imperative to drive growth across beauty enthusiast segment and strengthen the Ulta beauty brand in 2019, we continue to evolve our guests messaging to reflect our brand purpose, we create a stronger more immersive storytelling and all of our communications and we launched key partnerships with NBC Universal Telemundo S.
Since end of lower to connect with key consumer segment as.
We also continue to optimize our marketing mix and invested in channels that drive even stronger returns, including mass channels multicultural media digital streaming and emerging channels like podcast.
Building on these successes and 2020 will continue to elevate media partnerships that help us raise awareness and deepen our connection with key beauty enthusiast segment and increase our focus on cross category storytelling and event that reflects how our Howard gate, our guess engage with beauty.
Moving to our efforts to deepen loved and loyalty with our members in 2019, we added 2.5 million guest loyalty program and increased our average spend per member driven by double digit growth in our lead membership levels credit card program and mix it omnichannel guest as well as our personalization efforts.
With more than 34 million active members, we built a differentiated loyalty program that engages guess it provides us valuable customer insights.
As a program matures and as new store growth flows we know that absolute new member growth will continue to moderate in 2020, we'll focus our efforts to attract educate and engage new members well also reaching out to members who haven't shop with us in a while well also sharpen our focus on increasing spend per member through more personalized experiences across catty.
No worries in channels.
Turning now to our strategy to delight, our guests with a one of a kind world class beauty assortment. Our focus in 2020 is on increasing our market share across all major beauty categories, especially as skincare hair care and make up.
Skin care delivered double digit comp growth and was our fastest growing category 2019, and remains a meaningful growth opportunity for us.
In 2019, we added 47, Nu skin care brand store assortment, including the ordinary Sunday Riley urban skin, our acts and most recently belief skincare.
We also increased selling space in stores and enhanced our marketing communications to support this growing category.
In 2020 will continue these efforts with a focus on further expanding the assortment across channels to highlight emerging brands and product innovation and will increase associate training and education in this category.
Hair care delivered high single digit comp growth in 2019, driven by newness and a focus on key categories like color and texture.
Newness in 2019, including popular brands like I, GK and way is well disclose the brands like pattern by Tracy Ellis Ross and CRO Smith.
In 2020 will continue to focus on growth areas like texture in color care, and we'll look for additional opportunities to gain share in prestige here.
We also plan to leverage our slides and experienced stylist with signature hair events. The highlight brands educate guess and drive sales.
Make up remains our largest category and delivered low single digit comp growth in 2019, well. The category continues to face near 10 near term sales headwinds. Our research continues to show strong interest in makeup among gensix millennial segment.
Leveraging our proprietary research and loyalty member data in 2020 will focus on key brands that are driving growth.
New brands at a dress assortment opportunities and continue to explore co creation opportunities.
And finally clean beauty continues to be a growing area of interest with our guests guests are engaging in a variety of areas within beauty, including ingredients animal testing is sustainable packaging.
While the demand for clean products is strong and growing the landscape is challenging regulation, particularly related to chemicals doesn't provide the clarity that guests need or want in this space.
Seeking transparency in choice in the products that are line to their personal values, but they need help navigating the complexities.
2020, we intend to provide our guests with the framework to help them evaluate products based on what's most important to them.
Our goal is to give or I guess access to more choices guide them on their journey and celebrate the brands and products are aligned with this mission.
We'll hear more about these efforts on future calls.
Now moving onto beauty services in 2019, we completed the rollout of services optimization to all stores and as a result delivered better trends in average ticket guest retention and satisfaction and product attachment.
We also increased stylist retention and strengthen our recruitment of experienced stylus with established client books.
In 2020, we'll work to optimize these investments and to drive further improvements to support these efforts will introduce our new proprietary online booking and scheduling tool in all stores. This spring.
Available through the Ulta beauty App this tool will make it easier and more convenient forget the schedule and manage their salon service appointment and it will make it easier for our associates manage I guess books.
Beyond our new booking tool, we've increased our focus on reinventing digital engagement.
In 2019, we refreshed the Ulta beauty app to incorporate more personalization reinforced the value of our loyalty program and make it even easier to shop directly from the App.
We also leverage augmented reality capabilities to provide virtual try and experiences for our guests across multiple categories.
Building on these capabilities and 2020, we'll invest should accelerate engagement with the app with the goal of transforming the absence, the ulta beauty personal shopping assistant or I guess can track and activate point respond to App only personalized offers scheduled services check store availability engage with opus BOPUS in plan, but.
New lots in play with new looks including lashes browse make up in here.
Now let me give you a quick update on our ongoing efforts to drive operational excellence and deliver efficiencies for growth.
In 2019, we leverage our size and scale to deliver cost savings improve key merchandise planning processes and enhance processes to support core operational disciplines across our real estate and supply chain operations.
As a result, we delivered meaningful savings to fund investment.
In 2020 will build on these efforts and work to improve our operational execution through enhancing our merchandising effectiveness optimizing our supply chain network enhancing fulfillment capabilities and capturing additional efficiencies for growth.
We'll also work to ensure we delivered expected returns from investments and process improvements we made in 2018 in 2019.
Finally in 2020 will continue to invest to build our international capabilities. As we continue to continue to believe this is an important long term growth opportunity.
As we've discussed on previous calls, Canada will be our first step towards becoming a global beauty brand and will allow us to build experienced and capabilities to expand successfully into other international markets.
We intend to leverage U.S. best practices to preserve what has made ulta beauty successful, but will also enhance our assortment systems and processes to ensure that we address the unique needs of our Canadian gas.
In 2019, we began the effort developing our strategies plans and requirements in 2020, well ready or systems and processes and begin hiring and training new associates with the goals offering an omnichannel experience for Canadian gas in 2021.
So today, we shared with you our priorities for 2020, while we believe the U.S. makeup category will return to growth at some point, we believe it's prudent to build a plan for 2020 that assumes no improvements. This year, we can certainly adjusts if we start to see positive momentum in the category.
Before Scott discusses the financials in more detail I want to talk about how we're thinking about the longer term growth opportunity for Ulta beauty.
At our analyst meeting in late 2018, we talked about growth targets for 2019 through 2021 of comp sales growth in the 5% to 7% range modest operating margin expansion and earnings growth in the mid to high teens. Since we initially share. These expectations. The U.S. makeup category has experienced much.
Slower sales trend than we initially expected.
We remain very optimistic about our future the beauty market is growing and the Ulta beauty model is strong and winning share.
We remain confident that we will see a return to growth in the U.S. makeup category, although the exact timing of recovery is still uncertain.
Without improvement in the U.S. make accordingly. The makeup category. We believe we can deliver comp growth in the range of 3% to 4% EPS growth in the high single digit rage, and our expectations for 2020 after adjusting for incentive compensation and tax benefits in 2019 are in line with this view.
Well, we're confident that the U.S. makeup category will return to growth, it's unlikely that it will return to the elevated levels of growth seen during the most recent upcycle, however, with more normalized growth in the U.S. makeup category. We think we can deliver mid single digit comp growth and low double digit EPS growth.
And with that I'll turn over to Scott to discuss our financial results and outlook for 2020 in more detail.
Thanks, Mary and good afternoon, everyone.
I'll begin with an overview of our fourth quarter before turning into a summary of our results for 2019 and I'll close by sharing our outlook for 2020.
Starting with the income statement.
Q4 topline growth of 8.5% was driven by a 4% com strong new store productivity and robust growth in other income primarily driven by continued growth of our credit card program.
The total company comp a 4% was composed of 2.2% average ticket growth and 1.8% transaction growth.
Our retail comp was down slightly as growth in average ticket was more than offset by a low single digit decline in transactions.
Opened dot com growth was modestly above our expected range of 20% to 30% growth driven by traffic.
To provide some more color on our ecommerce performance, we were up against an easier comparison this quarter.
You may recall than in the fourth quarter of 2018, we experienced a reverse channel chef given our guess avid interest to come to stores to see inexperience high profile launches from several digitally native brands.
This year the rollout of buy online pickup in store and enhancements made to our App. We're also contributors to the ecommerce channels outperformance.
From a mix perspective makeup was 48% of our sales down 300 basis points from last year.
Skincare, Bath and fragrance category increased 200 basis points to 25% of sales.
As a percent of sales hair care products and styling tools were flat at 18%.
The services category was also flat at about 4% of sales.
Gross profit margin of 35% increased 10 basis points from 34.9% a year ago.
Primarily due to improvement in merchandise margins, driven by marketing and merchandising strategies, partially offset by investments and services and supply chain.
We leveraged fixed store costs slightly.
To provide more color on merchandise margin the improvement year over year reflects ongoing benefits from our efficiencies for growth or ETG cost optimization program, which more than offset headwinds from channel and category mix.
While we made good progress this year in improving the profitability across many of our merchandise categories, particularly our prestige skincare category. The softness in prestige makeup, which is our largest category as well as the expanded distribution of our iconic brands pressured merchandise margin in the quarter.
The impact of promotional activity during the quarter was slightly higher than last year.
As we shared on our last earnings call, we expected to be more promotional in the quarter to offset the headwinds we're experiencing in a color cosmetics category.
And did indeed implement incremental promotions many of which were in partnership with our brand partners.
I would remind you that we take a holistic approach to our promotional strategy and were able to pull back on other promotional levers during the quarter to minimize the overall impact of merchandise margin.
SGN a rate of 22.4% de leveraged 90 basis points from 21.5% last year as anticipated we experienced the most de leverage from planned investments in growth initiatives and we saw de leverage of marketing expense as we invested in digital marketing campaign.
Okay and media spend to support the holiday season.
We also experienced de leveraging store labor and benefits versus last year, primarily due to continued investments to support the guest experience as well as wage pressure as we adjust to rising minimum hourly wages.
This was partially offset by lower incentive compensation expense, reflecting our actual financial performance versus our internal targets, which were established at the beginning of the year.
Operating margin of 12.5% was down 70 basis points from 13.2% in the fourth quarter of 2018.
Diluted GAAP earnings per share grew 7.8% to $3.89 per share, which included a six cents per share benefit primarily due to an increase in federal income tax credits.
Compared to $3.61 per share reported for last year's fourth quarter.
Before we move on I'd like to take a moment to review our operating results for fiscal year 2019.
Net sales increased 10.1% driven by a 5% comp on top of an 8.1% comp in fiscal 2018.
For the year ecommerce sales growth was near the high end of our expected range of 20% to 30% growth.
Operating profit for the year increased 5.5%.
As Mary highlighted our FG efforts provided meaningful net savings in 2019.
Operating profit margin also benefited from about 30 basis points of lower incentive stock and stock compensation expense. This year as our actual results were below our internal targets.
These gains were more than offset by 110 basis points of pressure from strategic investments to drive longer term growth.
Including Salon optimization personalization digital store of the future and efforts to support F. G.
SGN a was also pressured by increases in payroll and benefits primarily due to continued investments to support the guest experience as well as ongoing wage pressures.
Diluted GAAP earnings per share increased 11.1% to $12.15 per share, which included 20 cents per share of benefit related income tax accounting for share based compensation.
10 cents per share related to federal income tax credits compared to $10. A 94 cents per share in fiscal 2018, which included a nine cents per share benefit due to income tax accounting for share based compensation.
Moving onto the balance sheet and cash flow.
Total inventory grew 6.5% driven by 80 net new stores.
Inventory per store was approximately flat as we continue to gain efficiencies from enhanced merchandising and supply chain processes.
Capital expenditures for the year were $298.5 million.
Our new remodeled and relocated stores investments in IP systems store maintenance merchandise fixtures and supply chain activities.
Free cash flow defined as cash flow from operations less Capex was 802.8 million for the year.
We ended the quarter with 502.3 million in cash cash equivalents in short term investments.
During the fourth quarter, we repurchased 681000 shares for cost of 174.1 million.
For the full year, we repurchased 2.3 million shares for cost of 681 million.
Turning now to guidance for 2020.
Before I get into specifics I'd like to provide an overview of how we're approaching this year.
As Mary mentioned earlier, our outlook assumes that the U.S. makeup category remains challenged throughout the year.
We are no less confident in our ability to gain share and believe we will be well positioned when the U.S. makeup category returns to growth, but we lack visibility into the exact timing of a recovery.
Given our expectations that topline growth will continue to be challenged we are prioritizing our investments and slowing capex and SGN eight growth, while continuing to invest in initiatives that will further differentiate ulta beauty and drive long term growth.
Reflecting our confidence in the longer term growth opportunity, we intend to leverage our strong financial position to accelerate our share repurchase program. This year.
Our board of directors has approved a new share repurchase authorization, a 1.6 billion, which replaces the prior authorization implemented in March 2019.
Yesterday, we expanded our revolver to 1 billion and extended the term to 2025.
We intend to use our strong free cash flow and some of the capacity of our expanded revolver to repurchase around 1.3 billion worth of stock in fiscal 2020.
Now specifically for 2020.
We expect to open approximately 75, net new stores remodel or relocate 15 stores and execute 42 store refreshes or many remodels to facilitate the addition of new brands and improvements to overall fixturing.
We anticipate driving topline growth in the 7% to 8% range with total company comparable sales plan in the 3% to 4%.
Reflecting the quarterly cadence in 2019, we expect comps in the first half for the year will be near the low end of this range and comps in the second half of the year will be near the high end of the range.
We expect operating margin for the year will de lever by approximately 70 to 80 basis points.
Good to give you a little bit more color on the expected puts and takes driving our operating margin expectation.
Overall, we expect modest gross margin expansion in 2020 with benefits from F G and our credit card program offset by higher shrink.
While shrink was flat in 2019, we started to see some adverse trends emerge.
We expect other items and cost of goods, including fixed costs supply chain cost and salon will be mostly flat as a percent of sales for the year, given our comp expectations.
Also embedded in our operating margin guidance is an expectation that SGN eight will delever, primarily due to investments to support long term growth and the normalization of incentive comp.
While we are investing at a lower pace in 2020 than we did in 2019, we expect that investments to support international expansion personalization digital store of the future and other capabilities will result in about 60 basis points of SGN a headwind in 2020.
In addition, the normalization of incentive compensation expense will result in about 30 basis points of SGN 80 leverage for the year.
We estimate that depreciation and amortization expense will be between 310 and 320 million.
Net interest interest expense is expected to be approximately 9 million and we expect our tax rate for the year to be in the range of 24% to 24.5%.
As we do not expect to repeat the benefit of federal income tax credits that we experienced in 2019.
These assumptions, resulting guidance for diluted earnings per share in the range of $12.55 to $12.75 per share.
Assuming weighted average diluted shares of approximately 54 million.
We expect to repurchase about $1.3 billion of stock in 2020.
While we don't provide quarterly guidance, we expect the first half of the year will be more challenging than the second half.
Specifically, we expect that EPS in the first half of the year will be lower than EPS in the first half the last year as we anniversary strong comp growth strong gross margin expansion and 21 cents in tax rate benefits from share based compensation.
We expect capex to be in the range of 280 to 300 million.
Including approximately 165 million for new stores, Remodels and merchandise fixtures 90 million for supply chain, and 90, and about 35 million for store maintenance and other.
Finally, I would note again that our guidance for 2020 does not include assumptions for any impact related to Corona virus.
The situation is dynamic and it's very difficult to predict or quantified the impact of any potential disruption to our supply chain changes in consumer demand or any other actions that may become necessary as events unfold.
As Mary indicated we are monitoring this evolving situation closely.
We are assessing actions, we can take to manage our business through this rapidly changing conditions.
And we will certainly adjust our plans as necessary.
And now I'll turn the call back over to the operator to moderate Acuities session.
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Our first question comes from the line of Rupesh Parikh of Oppenheimer. Please proceed with your question.
Good afternoon. Thanks for taking my question. So I guess Mary just going back to your comments on the kroner virus I was just curious if you can just share any color in terms of what impact you're seeing right now in your stores and if you're seeing any changes in the behavior I guess the past few days. Thank you.
Thank you are rupesh.
Thanks for asking that I guess I would start with just reiterating that our first priority is really focusing on the safety and health of our associates our gas our brand partners you can imagine as a leadership team. We're very focused on this staying agile 24, seven focus universally action oriented so I think obviously everybody in this.
This will look at it that way I'd say, if you break it apart from a supply chain perspective, we really haven't seen any material impacts our supply chain. Our teams in the working closely with our brand partners in our carrier partners really for weeks as necessary to pull forward some inventory of high velocity skews. So right now we feel pretty good about that it's possible that could get.
Disrupted, but we feel good about that on the demand side, we started to see some impact on store traffic this week, but it really varies by market.
On the flip side, our ecommerce business has continued to perform strongly and I'd say, that's true broadly really even including.
That area. So we're keeping a close eye on all of this.
It's really too early to tell how it's going to play out, but so far that's that's our assessment of situation.
Our next question comes from the line of Simeon Gutman of Morgan Stanley. Please proceed with your question.
Thanks, everyone. Good afternoon ill get my one question and I'll jump off.
It's just it's a bit somewhat of a modeling question.
First you mentioned on the makeup comps you're not expecting an improvement if we heard it right I think you see actually ended the year positive even though the fourth quarter was was negative.
If I heard that right what is the assumption for the full year for 2020 is it a low single digit comp or is it the negative run rate from the fourth quarter and then related to your to your point that you just said on.
E Commerce, Mary doing doing well what is your expectation for the mix of E. Commerce, Hi, good deliveries in 2020 and could that end up being low given what we're going to maybe see from from consumer behavior over the next week's or weeks or months.
Ecommerce deliveries as you say every commerce demand I'm, sorry, just to clarify that Simeon.
I think he's got thinking if the macro built yet if the delivery goes up what the what happened so the gross margin.
Oh, Okay. So you want to start with the category question, Dave and then we'll come back sure we'll start with makeup.
And just to reiterate.
One thing we remain confident over the long term of makeup and are optimistic about the role that that will continue to play over the long term, but as both Scott and Mary mentioned.
We.
Our uncertain about when this turnaround will happen. So specifically wanted to ask your question, Yes, we did see combined total.
Growth in makeup we're anticipating that too.
Roughly in line or maybe slightly below that flat, maybe slightly negative so consistent with.
2019 performance or not a dramatic change.
Results, but again overtime as we look at both demographic trends innovation that we feel like theres opportunities.
Down the road.
We believe that the category will be returned to help.
On the E Commerce front, you know we're watching it closely I mean, the good news is that we feel like the investments that we've been making to improve the overall experience for our gas from the app to the platform to the offerings as well it is investing in our supply chain capabilities has put us in a good place as well as both SMB focus was.
Good addition to the to the portfolio of the Omnichannel tools last year.
So we'll watch it closely the it's certainly a shift up in that mix has some pressure on margin, but we'll obviously we were going to meet consumer demand, where it is and make other adjustments of the business model as we need to.
Our next question comes from the line of Oliver Chen of Cowen and company. Please proceed with your question.
Hi, Thank you Mary one of the strategies that's.
Under unfolding here as social distancing in terms on the strategy to mitigate the unfolding what are your thoughts on how your business is a best prepared in that context, and what are some levers you could pool regarding graphic and thinking about the interplay of physical traffic as well as a potential for.
Our recession would love your thoughts.
Well again, the investments that we've been making in our digital platforms are a our platforms.
I think our smart that we have those capabilities right. So one of the things that were encouraging guests to do is to get engaged with our app and use our glam lab to do a virtual try on its really I'd say pre state of the art and allows that gas are really explore a lot of different looks virtually digitally which is pretty cool in store and I talked about this a little bit earlier.
We've we've taken some steps I mean certainly.
Our guess health and safety of that of our associates as are really is our top priority.
We've been focused always on really cleanliness of stores, but what we've done is increase sort of some of the protocols. There. We've also as I mentioned temporarily suspended services that are touching the face makeup skin and proud surfaces and really I guess doing more of a coaching no touch kind of approach, we're starting that right now in terms of helping our.
Having said that haired services based on expert advice that we're getting our we're going to continue to do hair services and just continue to implement additional protections you know as as needed. So I think that the other thing I would say as you know extra attention is being placed on things like testers in telling our guests. So if you want to use a test or if you want to see also me, let's go to glam lab.
Virtual Tri Ed or and associate can help you will sanitize that first so these things are fluid, we're exploring a number of options and we will adjust as necessary, we see our guest wanting to shop in person for beauty and we want to accommodate them in every way that we can but we'll stay fluid and pay close attention obviously make adjustments if needed.
I guess the other part if it with somebody signs off now we can they I cant Essen declared by the second question, but you did ask Oliver about a few they about about.
Potential recession, and certainly ill just touch on that which is that we think as a category right where it had a good category to be in in that beauty is in some ways essential very central People's lives Replenishable kind of an affordable indulgent indulgent, our business model like could moderate like others during a recession our category will.
We think performed better than others and retailers we've seen historically.
And of course, our model, we're able to flex based on consumer preferences, so having a broad range of price points and categories allows our guests are really have a lot of options.
In terms of how they spend their money. We also have a strong margin profile that allows us to invest in driving traffic and I'd say most importantly, we've got a strong team in place at knows how to be operationally financially disciplined so.
Good communication of visibility into what's occurring flexing to meet consumer demand, that's how we're going to lead through this.
Our next question comes from the line of Erinn Murphy of Piper Sandler. Please proceed with your question.
Great. Thanks. Good afternoon. My one question is around the loyalty program.
Believe you said there are 34 members now in 34 million members down the program I think would be flat relative to the third quarter. So.
And that program matures, how do you think about the ongoing potential per transaction growth.
Particularly given that we did see it had ticked down in this quarter just curious on that thank you.
I'll, let Dave Pitts, Eleanor and thank you.
Yes so.
I'll start was saying that.
We.
Continue to be really excited about the power of our loyalty program. It did grow 8% for 2019 to 34 million.
Which we believe makes it one of the leading loyalty program certainly in our space in the in the country in a powerful tool for us to continue to to drive our business you did highlight that in the fourth quarter growth versus the third quarter was a little slower than some of the recent trends we would look at that as.
Both as the program gets bigger we did anticipate that it would moderate.
Somewhat in growth, but also.
Hi.
As we were lapping some of the strong traffic driver and new guests driver activity of some of the launches that we've talked about also.
Made our overlap a little bit tougher as it relates to that but we're optimistic about our opportunity to continue to reach beauty enthusiast across the country and continue to grow that.
But having said that you're right that we also see a it important.
Growth opportunity over an extended period around spend per member and it's a big focus for us really everything that we're doing is focused on continuing to find new gate engaging ways for our guests to.
Participate in old whether it's the new brands, we're bringing in credit card program innovation and loyalty services and then of course personalization as we believe one of the biggest opportunities ahead of us and we've been investing heavily in that to make sure that we can continue to find ways to delight our guest.
The very end Scott both highlighted some of the things that we've been doing that we believe will drive personalization.
Our app and innovation and refreshes of our at both in 2019 and more to come we think will drive more personalized connection to our integration of augmented reality or virtual reality with glam lab glam lab as continues to get better and we expand that across new formats like foundation and skin skin tone.
On our we have skin quizzes, and we continue to get better and better on product recommendations new member engagement replenishment reminders. All these things, we think will contribute to the growth that weve.
See continues the growth that we've seen on spend spend per member. So both sides of the cage occasion, we have up we're optimistic about.
We continue to drive that.
Our next question comes from the line of Steph Wissink of Jefferies. Please proceed with your question.
Thank you. Good afternoon, everyone have a question for knew about the operating margin guidance.
Hey, I believe you quantified about 60 basis points of the drag year over year from incremental investments. So two part question. One is just what are you looking forward to kind of justify those returns to maintain that level of incremental investment and is it something related to market share disruption that you're watching for or that you think an opportunity exists today.
Take incremental share in the near term. Thank you.
Yeah, I would say, we'd look at or what are very balanced and pragmatic kind of way. So the things that we called out in our prepared remarks around the investments that we believe we need to continue to to move ahead on including the Big International opportunity again long term sales and margin dollar driver for us.
For the long term personalization is something again that that we've been working on for some time, we continue to ramp up and see results now I mean, these things are helping drive sales for us today, and we think theres a lot more opportunity for that over the longer term salon optimization is another big one again, where it's a bit of a headwind in the.
First half of 2020 until we anniversary some of the let's start up initial costs, there, but we expect to get benefits out of that over the long term. So I mean, you could just all boil. It. These are all market share opportunity levers and Thats. The way we're looking at it and we think these are again the right things to do for investors for the long term.
Our next question comes from the line of Joe Altobello of Raymond James. Please proceed with your question.
Hey, guys. Good afternoon, I guess first.
The comp impact from the suspension of make up the other brow services I don't look you guys quantified that that'd be helpful. And then maybe a quick one for Scott.
Needs of share repurchases. This year is that going to be reasonable throughout the year or is it more front end loaded. Thanks.
Yeah, I'll start no we have not quantified that yeah that was a today decision, but I would say that is certainly one of the things for sure. Our associates that would perform those services will be actively in stores also selling products and servicing guess right. So we hope to keep our our associates engaged and it will.
See how this plays out will quantify that at some point, but we just it's an early decision. So we haven't done that yet.
And the repurchases I think for modeling you should just assume kind of a ratable kind of run rate throughout the year again, I'll remind folks that we were opportunistic last year. When we saw disruption in the stock price and midway through the year, we took opportunities there where we thought it was appropriate again in light of what's going on what the market right now.
Now you know again, we would take a very pragmatic approach. This is something that's always top of mind with us with our board of directors and something that we're in constant communication on so you can whatever expect us to be very measured in our approach you're right in that.
The company at risk.
Our next question comes from the line of Paul Trussell of Deutsche Bank. Please proceed with your question.
Good afternoon.
And did fourth quarter.
I would want to just dig in to the puts and takes around gross margin.
Both in regards to.
The up 10 basis points in for acute and outlook you can just give a little bit more color on what you're seeing it in terms of their promotional environment.
You called out shrink and then obviously.
The E G contribution that we can expect moving forward. Thank you.
Yeah, So theres a lot to unpack there so just going back to fourth quarter or give you a little bit more.
More color on that so again in our prepared remarks I mean.
Theres always a lot of different factors that go into.
The outcome of any particular quarter. So the GM gross margin expansion in the quarter. We're happy with the result, it was roughly in line with kind of what our expectations expectations were so F. G was a big component of that we've been talking about that consistently through 2019. So that seem continues into 2020, there was definitely benefit.
Captured there through a lot of hard work by a lot of our teams and that's something that's a benefit that's going to produced good results for us in years to come as well.
Post holiday, we called out the events in the air in the Jumbo Love events were great executed well both in store and online were were beneficial to us promotion, while it was a bit higher than last year as we expected it was a little bit less than what we had forecasted.
When we were looking ahead to fourth quarter credit card continues to deliver great incremental benefits.
For us and again, that's another lever that is going to be a multiyear contributor overall to the gross margin expansion and so those those benefits were enough to offset the mix headwinds the ecommerce channel shift that we've been talking about for many years, though and some of the shrink tougher shrink results that we had in the quarter again shrink by and large.
Was flattish to last year, which is the good news, but it was a little bit tougher than we were expecting all right and so we were seeing trend there not unlike many across the retail world I mean, you've probably seen this referred to in other places and so this is something again, we haven't spent a lot of time talking about with investors over time, because the pendulum does.
Swing back and forth a bit of a bit like whack a mole I guess you could say our teams are doing a great job managing shrink we're focused on things that we can control around processes and tools, but this is a trend that we think is going to be tougher in 2020 than we are expecting it's probably going to mitigate some of the gross margin expansion that.
We were hoping for.
As we look ahead. The next year again, you have G Hello Hello.
Shrink a bit of a headwind salon optimizations going to be a bit of a headwind in the first half of the air but will moderate in the second half and hopefully do better than we have planned six store cost I would say flattish in 2020 compared to good leverage that we saw last year again most of that is the due to a lower comp expert.
Station for the full year supply chain doing well overall, Mary mentioned, our facilities or will be an optimized in producing better results than expected a little bit of pressure and supply chain late in the year as new FFC, we start ramping up.
Activities there.
One thing I would call out on the gross margin line as BOPUS. So again, we said, we just rolled that out late in the second quarter really we're just getting our hands what that I guess, you could say so theres a lot of learnings that we captured during the fourth quarter and so.
I think thats, an area, where we could see some upside potentially that to help maybe drive gross margin in 2020.
Our next question comes from the line of Ike Boruchow of Wells Fargo. Please proceed with your question.
Hey, good afternoon, everyone. So I guess my question going back to the Corona impact on the business.
Maybe just at a higher level from areas. Scott can you maybe talk about what percent of your makeup transactions do you believe carries some kind of in store trial component.
Maybe combined with the service component of what you guys offer and I guess, where out where I'm going with that as I'm, just trying to understand how important customer trial in store behavior is.
The sales model.
Yes, I mean, it's it's a good question and I would say certainly.
Services in total are much much is a very small part of our business compared to what we sell at retail right. So in general and most of that his hair surfaces. So you know the thing is at that and that part of the business, we're going to continue as planned.
No.
It's certainly the the notion of being able to try things is an important aspects of how we serve up beauty, but it doesn't happen every transaction. It really just doesn't it also we have the ability for our associates to fill help our guests in multiple ways right. So they can take a tester sanitize it put us somebody's and.
As shown on the color, we can use our glanced rate our glam lab app, which is really very realistic in so it's it's early stages, but we don't really think thats something that is going to prevent people from making great transactions and decisions. We're going to everything we can we got a skin matched tool also on our app. So we've got tools that we think will allow.
That kind of consumer behavior, but we'll as we look at this we'll learn more quantify more but it's I mean theres no question. It's the right decision to make right now in the short term and your questions. A good one about you know and this may not last for that long, we'll just have to see but we'll do our level best to make a shopping experience online and in store for our guests just as immersive is weaker.
And if that makes sense, then, but we feel like it's find its going to be the right thing to do and guess what expected.
Our next question comes from the line of Anthony Chukumba Loop capital markets. Please proceed with your question.
Good evening and thanks for taking my question. So just had a real quick question on buy online pick up in store you can just give us.
Just a little bit more color on that now that you've been doing a few quarters, just particularly in terms of penetration or just any learnings that that you've gotten from a from doing that thank you.
Yes, okay.
I'll take that the we're we're just really thrilled with the performance.
Probably first and foremost executionally our store teams.
Picked up this new capability and deliberative with excellence and we're really excited about.
Able to offer this too I guess, because our guests responded very favorably to it we do as you know we rolled that out to all stores.
Mid year last year, and we saw very strong adoption across the entire chain every store had transactions of course, some more than others, but every store participated our guest.
I was interested the across a small markets big markets.
And everything in between.
Where it's still you know despite the you know the versus the success. We had over the ended the year last year, it's still relatively small part of our ecommerce business.
And we're getting learnings.
We're we're trying to understand the incrementality of BOPUS, we believe it's there but we.
So have some learning to really understand how what the longer term behavior. One thing we do know is.
The average ticket for BOPUS orders is somewhat lower than April regular E commerce order in parts, suggesting using that capability to avoid shipping costs to be able to pick up items with certainty that same day. So unless thing I'd say is we're seeing a nice attachment rate level.
Attachment rate in store meeting those that are coming to pick up their BOPUS orders.
Many of them are also picking up additional items, whether they're in the store. So overall pleased to but but early and we're looking forward to learn even more about ways to leverage this with our guests through 2020.
Thanks, Dave I'd, just like to wrap up by thanking our more than 44000 associates were staying focused on delivering.
Serving our guests and delivering really solid results in 2019, I'm very excited about the future for Ulta beauty I believe our business model, our strategy and our talented team will continue to drive success and create significant shareholder value and we look forward to speaking with all of you again in May when we report our first quarter results. Thank you.
This concludes todays teleconference. You may disconnect your lines at this time. Thank you for your participation.