Q1 2020 Earnings Call
And welcome to the Ulta Beauty first quarter 2020 earnings results Conference call. At this time, all participants are in a recent or a.
A brief question and answer session will follow the formal presentation.
The ones, who require operator systems during the conference. Please press star zero on your telephone keypad.
This conference is being recorded.
It is now my pleasure to introduce your host Ms. Kiley Rawlins, Vice President Investor Relations. Please proceed.
Thank you should Molly good afternoon, and thank you for joining us today for a discussion of Ulta beauty as a result for the first quarter Osisko 2020 hurt during today's call our Mary Dillon, Chief Executive Officer, It's got Settersten, Chief Financial Officer, Dave Kimbell, President will join us for the QNX session.
This afternoon, we released our financial results for the first quarter fiscal 2020, a copy of the press release is available in the Investor Relations section of our website at Www Dot Ultra dot com.
Before we begin I'd like to remind you of the company's safe Harbor language.
Fitments 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 1950 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 you not to place undue reliance on these forward looking statements, which speak only as of today May 28 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.
Well begin this afternoon with prepared remarks from Marianne Scott following our prepared remark common well 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. Please limit your time to one question to ask a second or follow up question. We would ask you re queue.
As always the IR team will be available for any follow up questions. After the call now I'll turn the call over to Mary Mary.
Good afternoon, everyone.
Well, we talk about our first quarter results in how we're responding to the challenge is created by Cobot 19, I Wanna first take a momentous. They all go a bit on the front line Selflessly fighting the outbreak in carry into the country surface pandemic began we're truly grateful for your dedication.
I also want to thank my leadership team and all Ulta beauty associates for their unwavering commitment tireless efforts and continued agility as we adjust to it very dynamic and uncertain operating environment.
As Weve navigated through this crisis our lands for every decision has been the safety in the well being up our associates and guess in early March as the virus began to spread in the U.S.. We quickly took steps to keep our associates and guess safe and healthy.
We increased sanitation measures in cleaning frequency in stores limited the use of testers and suspended all beauty services.
The situation escalated we've made it difficult decision to temporarily closed all of our stores on March 19th it quickly shifted our focus to operating our ecommerce channel only.
Well, we began 2020, we certainly did not plant operates a digital only business, but I'm very proud of how quickly our teams pivoted to support our ecommerce operations.
Our marketing team shifted rapidly to create highly relevant digital content sensitive to the mindset.
I guess at that time, I focus on connection self care and positivity, well also acknowledging new consumer behaviors, such as social dispensing and worry masks.
Anticipating an increase in demand our digital teams quickly leverage existing capabilities to support higher E Commerce order volumes and manage order flow.
Our supply chain teams quickly increased capacity well implementing it has cleaning protocols in alignment with CDC guidelines and new processes that supports social distancing within the distribution centers to keep our associates say.
Our D.C. associates were incredible and their ability to quickly meet the increased demand in our ecommerce business and I'm deeply grateful for their efforts.
With more than 80% of our revenues previously generated in stores, we knew that the expected acceleration and ecommerce would not recoup all of the boss brick and mortar sales.
So early in the Cobot 19 crisis, we took several cautionary steps to protect liquidity and enhance our financial flexibility, which Scott will discuss shortly.
And as we actively took steps to manage the business through the short term uncertainty we simultaneously began to plan the reopening up our stores into adjust our operational plans for the rest of 2020.
In April it became clear our stores would remain close longer than initially expected after evaluating multiple options and considering the changes in unemployment insurance details incorporated into the carriers that we made the decision to furlough many of our store in Salon associates, our intention is to retain as much of our workforce as possible.
And we look forward to when we can safely Balkan associates back into all of our stores.
To help support or associates through this crisis, we expanded the criteria for our associate relief program to include those who need assistance due to a personal hardship as a result of cobot 19.
This program is one way, we can care for our associates and I, along with Ulta beauty executive team that board of directors have make personal donations to the program.
We're also providing support for those who are working hard in frontline to take care of all of US since the crisis began Ulta beauty has donated 450000 clubs and 110000 essential beauty items to several national organizations, serving local communities and health care workers.
It's Ralph this crisis, we've worked closely with our brand partners, both big and small to ensure that we successfully navigate this crisis together, where appreciative of their ongoing partnership and are confident our relationship remains strong at a good position to drive growth.
Now, let's turn to our first quarter results.
Reflecting the impact the store closures total net sales for the quarter 1.2 billion comp store sales declined 35.3% and we had a net loss of $1.39 per share.
Well. These are certainly not the results we planned I'm proud of how our team has worked together to respond to the unexpected challenges.
The first quarter began well with good growth in comp store sales marketshare and are Ultamate rewards loyalty program.
However, the escalation of Kogut 19 in mid March the need to temporarily closed all of our physical stores and immediate changes in consumer behavior disrupted these positive trends.
Within beauty consumers focused on immediate safety and protection necessities like canceled the anti bacterial gels early in the crisis.
Salons and other beauty service outlets close Gus gets shifted to do it yourself beauty solutions, including hair color nail care and hair removal products.
And as corn teams became more pervasive guestbook to self care and wellness products like skin care treatment hair masks and that products home fragrance and others to relieve Strauss.
Although comp sales after mid March declined in all categories. As a result, our store closures the skincare hair care Bath and nail categories, all increased as a percentage of sales.
Early in the quarter, we saw nice market share gains across the majority of categories. The temporary closure of our stores in mid March and pass it or overall market share, but in our digital business, which operated for the full quarter. We're pleased to see strong market share gains across all of our prestige categories.
From a channel perspective, our ecommerce channel with strong early in the quarter with sales trends accelerating from levels. We saw in the fourth quarter as we close stores and transition to a digital only business sales accelerated further despite proactively managing to man in light of capacity constraints resulted from increased social distancing protocols and our DC.
Yes, we more than doubled our ecommerce sales this quarter.
The number of active members in our ultimate rewards loyalty program increased 2% compared to the first quarter last year to 33.1 million members.
Well this growth is lower than planned we're pleased to see it in spite of the store closures historically stores. It then the largest source of new member acquisition and while we saw significant growth in new member acquisition right digital channels. It was not enough to offset the impact the store closures.
We're also very pleased to see that a large number of previously in store only members engages us online for the first time.
Our Omnichannel guess historically it had very strong occasionally helps a beauty with nearly three times the annual spend of it in store only guest so we're excited about the opportunity to maintain strong engagement with with these new gas that her shopping at our omnichannel formats as our operations fully real bad.
Reflected reflecting heightened guess focus on sapiens also discussing our digital in store teams moved quickly to create a launch a new touchless curbside pickup option for our gas and on April 20, Threerd, we launch buy online pick up curbside and 70 stores across nine states guests have enthusiastically embraced.
This beauty to go option and our store associates are doing an amazing job, bringing this to life for them from flawless execution to wear and welcome back science is they deliver purchases to gas.
Since launching this option six weeks ago, we see it a nice acceleration in the average number of orders per store strong average order value values and high satisfaction ratings. It's more guests are using this option as a funny convenient way to come back to Ulta beauty.
Over the last month, various state and local authorities had begun to lift restrictions in an effort to restart their economies, allowing us to make key decisions on how and when to reopen source.
Of course, who want to open our sources quickly in a safely as possible and have been doing sell.
To help us make weakening decisions, we've developed a rigorous process to evaluate the safety risk for each store. In addition to reviewing the legal guidance to determine if we're allowed to reopen we also assessed local cobot 19 transmission trends and evaluate certain operational criteria and local gas sentiment.
Once we determine determine that it's safe to open we will flex based on local conditions. Some stores will reopen curbside pickup some stores are real quick curbside or retail only and some stores will reopen with curbside retail and have limited service offering.
All stores will initially reopened with limited store hours.
We know that health and safety will remain top concerns for all and as we reopened stores were implementing new shopping shops safe standards to ensure the safety of our associates and guess.
Reflecting guidance from government health officials as well as recommendations from real and enter up. These standards include associate wellness checks increased cleaning frequency and additional hand science sanitizer stations.
All associates are wearing face coverings in store and we're asking all guests to do the sample shopping.
Sure promotes social distancing, we've reduced the number of Edda shares on the sales floor created one way aisles and add a plexiglass shields at checkout and will eliminate occupancy and the number of open registers.
The opportunity to test simply isn't important car the beauty shopping experience. So while we've kept most testers on the sales floor to help guess visualize color texture and packaging, we've made them unavailable forgets Hughes as an alternative we're directing guests to our glam lab tool, which is our live interactive virtual experience outlets.
With isn't Ulta beauty up.
Glam lab allows users to virtually discover and try and thousands of beauty products.
Since the crisis began guest engagement with the tool has increased nearly five times and more than 13 million shades have been tested virtually.
We're also making changes in our salons and promote and protect safety, including offering services by appointment only performing associated gas wellness checks.
Using protective were increasing cleaning between appointments and implementing social dispensing between stations.
Last month, we began the reopening process with the launch of curbside pickup and I may 11th we reopened 180 stores to guess included many with Salon surfaces.
As of today 840, Ulta beauty stores are about two thirds of the fleet offer curbside pickup.
333 stores or about a quarter. The fleet are open to guess for retail and 283 of those stores are open with Salon services.
While it's early in the reopening process, we've seen stronger than expected sales and Riocan stores and we're seeing great guest engagement with our Salon services with many appointments booked several weeks out.
To get a sense of how reopen stores are performing well look at the first wave of 180 stores that have reopened omnichannel comp sales and these stores are collectively flat two years ago with some safe even comping higher than last year.
And sales in these initial stores continue to reflect strong strong penetration of E commerce in focus and curbside pickup as well as ship to home.
Of course these are early results, but encouraging.
Over the next several weeks, we'll continue to assess opportunities to reopen additional stores and expand services offerings. As we learn we will adjust communicated continue to prioritize the safety of wellbeing of our associates and guess.
Based on current available information, we expect to have a vast majority of stores reopened in some capacity by the end of June.
I'll just add that earlier this week I was able to hold the virtual store team visit with Kesa Steelmen, our chief stores up officer in markets across the country Happy New Hampshire, Hendersonville, Tennessee, Delray Beach, Florida, Austin, Texas Indian Land, South Carolina, Norge, Illinois, and Orland Park, Illinois.
Some of these stores are doing curbside some are fully reopen for retail, but one thing was true for all our teams are excited to be back to work and appreciate how Ulta beauty has traded down through this difficult time.
That was would look beyond the reopening process, we're adjusting our plans for the rest of 2020.
Consumer safety concerns macroeconomic pressures and the risk of a resurgence in the infection rate our dynamics that might constrained demand for the rest of year. As a result, we're re imagining holiday rethinking our tentpole events and continuously looking for opportunities to reduce cost.
We believe that man will improve as guest regain confidence and our goal is to maintain operational flexibility. So we can adjust quickly to changes in demand while also managing inventory resin cost as we navigate continued uncertainty.
Longer term I remain excited about the opportunity for Ulta beauty, the beauty category, while not recession proof fared better than many other discretionary categories in economic downturns, reflecting the relatively low price point any emotional connection with the product.
Well, our business is larger and more diverse and it wasn't a last downturn our annual comp performance into 2008 in 2009 was positive.
And we know from our proprietary research and engagement with the beauty category remains strong despite the uncertainty many guests are experiencing today.
Within the beauty category, our diverse assortment combined with convenient locations strong brand awareness and our differentiated loyalty program all position us to gain market share in a challenging economic environment.
Most importantly, I believe our values based guests and associates centric culture and commitment to high performance will enable us to continue to expand our leadership position.
Over the last 90 days I have been inspired by the power of the culture. We felt as our teams have worked quickly and collaboratively to care for our associates to support our ecommerce business into reopened our stores.
Whether its volunteered to help get services respond to E. Commerce inquiry is stepping in to help our HR service center support furloughed associates or virtually collaborating to slot samples for lab glam lab, our associates have stepped out of their regular duty to support each other our gas and Ulta beauty through this truly unprecedented period.
Despite a universal desire to return to normal cobot, 19 will likely have sustained effects on consumers the competitive environment and how we all operate and work.
Thank you through all of these changes in what they may need to our business model going forward, but we know will emerge strong.
Health and safety concerns are elevated and while we're all rethinking the risks of close contact in fiscal touch.
Consumers have adopted new shopping behaviors quickly many consumers have more comfort with online purchases. It in store pick up and we expect the may continue to participate in these convenient ways of shopping.
Businesses have been financially challenged due to closures categories shifts and liquidity pressures and some will likely not reopened.
And we will likely see additional cost pressures due to channel shifts pp he costs and increased promotional intensity as businesses look to drive demand in a difficult economic environment.
At Ulta beauty, we're not sitting still we intend to leverage the strengths of our operating model and investments to Reimagine, the future Ulta beauty and the new normal specifically, we're accelerating efforts in five key areas to expand our market share gains and extend our competitive advantages.
First over the last few years, we've invested to expand our digital an omnichannel capabilities. As a result, we delivered double digit growth in ecommerce sales.
Cobot 19, as hastened channel shift across retail and we believe in much of this new consumer behavior will be sticky. So we're focused on how we can move even faster to win an omnichannel world.
We're accelerating investment to expand our shipping capacity this year, which includes a pull forward of our Jacksonville fast fulfillment center into 2020 investments in existing buildings and the expansion of our ship from store capabilities.
During this crisis, we've seen strong conversion of an in store only guest omnichannel guest.
Trends it celebrating since launch a curbside pickup.
We know there's a strong connection and beauty between that does the digital and the physical and we're looking at our brick and mortar footprint and how it can accelerate our efforts to build a comprehensive multichannel view of how we serve I guess.
Second we know the beauty enthusiast loves to shop for discovery and trial no matter the channel and we do not expect this desire to change.
We also know their concerns about personal safety in close contact caused by Koeppen 19 will require the beauty experienced a change in the short term, but will also likely spark longer term innovation.
We're re imagining the guest experience and product discovery and looking at ways technology services and the role of our associate can evolve to create a new while experience for I guess.
Our Ulta beauty App and glass glam lab tool will continue to play a big Roland guess discovery in trial.
Today, I guess can use glam lab to match foundation try and make up and play with hair color and lashes and in the future. Yes, we'll have even more opportunities as we accelerate the implementation of new categories and experiences.
Third we plan to build on the successful work, we've done to expand our market share and accelerate gains even further in key categories like skincare air and wellness.
Social distancing has resulted in many consumer behavior changes and the crisis has exacerbated many of the category trends that we saw playing out during the crisis.
Well, we remain confident in the long term potential of makeup headwinds facing the makeup category will likely persist in the short term given the impact of social distancing in math as well as a delayed introduction of newness and innovation this year.
On the flip side, many people seem to be on video calls now most of the day. So we'll watch the impact that make us usage closely.
Conversely, skincare has become more important as guest look to take care of their skin and relief stress and wellness has taken a new dimensions extending to both physical and mental asbestos consumers increased efforts to stay healthy and look to feel better in this new environment.
We intend to lean into these trends to drive further market share expansion.
Fourth we built a tremendous asset and our ultimate rewards program with more than 33 billion active members. We built a differentiated loyalty program that provides us with valuable customer insights and we're applying advanced analytics and artificial intelligence to leverage associated to deliver personalized targeted communications as we focus on.
Deepening guest engagement, we're looking at ways to drive next level loyalty and accelerate personalization to increase spend per member.
This will be particularly relevant in an increasingly omnichannel marketplace as more consumers move seamlessly between channels.
Finally to our efficiency for growth or if GE efforts, we've made progress in improving our merchandising effectiveness and enhancing core processes across our real estate and supply chain operations as we think about cost pressures increasing as we move forward. We're looking at how we can go beyond process optimization and develop a cost structure.
That will enable us to weather economic challenges, while also supporting investment it capabilities and opportunities that will set us up for future success.
So in closing this crisis certainly has been fluid swifton inescapable.
Businesses and consumers alike are adjusting to the effects of cobot 19 and longer term depends Dennis will have a sustained impact on how we all live and work.
While the economic environment will be challenged beauty enthusiast have a deep emotional connection with beauty that in the past has not diminished in software and softer economic environments.
The teams will continue to shift in evolve a beauty as a platform for self expression togetherness Joy and self care all of which are even more important for beauty enthusiast. During this time of uncertainty and change.
At Ulta beauty, we have a strong differentiated operating model a brand that's known and loud and dedicated associates, who are passionate about our guests and our company and I'm confident we will emerge from this crisis well positioned to accelerate our market share gains and extend our competitive advantages and now I'll turn the call over to Scott for a discussion of financial results Scott.
Thanks, Mary and good afternoon, everyone.
Before I review, our financial results I'd like to reiterate marries comments and on behalf of Ulta Beauty Express our immense gratitude for the first responders who are on the front lines everyday protecting us from the spread of the Corona virus.
I would also like to acknowledge all our associates from those in the field and in our distribution centers to our team members from our home office, who have worked tirelessly to adapt to the rapidly changing environment.
I would not be more proud of the work they are doing.
Now the situation with coded 19 is dynamic and fluid. So our first priority has been to protect liquidity.
We have taken steps to enhance our financial flexibility, including drawing down 800 million EUR 1 billion revolver suspending our stock buyback program and actively managing and prioritizing our expense structure working capital and capital investments.
We've also taken a conservative approach to inventory management adjusting receipts to reflect current and expected sales levels.
As a result of these efforts we had 1.15 billion in cash cash equivalents and short term investments at the ended the quarter.
We are proud of the quick actions, we've taken to further enhance our financial strength and are confident that we have sufficient liquidity to fund our operations now and into future.
Turning now to our results for the first quarter, beginning with the income statement.
Q1 sales declined 32.7% as we temporarily closed all of our stores in response to this spread of Cobot 19.
Total company comp declined 35.3% and was composed of 3.3% average ticket growth and a 38.6% decline and transactions.
As Mary mentioned, we were pleased with our performance in the beginning of the quarter with total company comp sales trending above our plan through March 10th.
However, we began to experience offer traffic as consumers became concerned about the spread of the virus and we subsequently closed all of our stores on March 19th.
Resulting in a 62% comp decline from March 11th to the ended the quarter.
Fortunately, we continue to operate our ecommerce business, which delivered a comp increase of just over 100% for the quarter.
Okay.
From a mix perspective makeup was 49% of sales down 400 basis points from last year.
The skin care Bath, and fragrance category increased 300 basis points to 24% of sales.
Hair care products and styling tools increased 100 basis points to 18% of sales.
The services category was down 100 basis points to about 4% of sales, reflecting the temporary suspension of all services in mid March.
Gross profit margin was 25.9% of the decline of 11 percentage points compared to 37% a year ago. So.
So do you leverage in the quarter was primarily due to three items deleverage of fixed costs channel mix and the deleverage of Salon services.
Fixed store and supply chain costs de leveraged roughly 500 basis points due to significantly lower sales related to temporary store closures.
Channel shift contributed approximately 400 basis points of de leverage as our stores were closed for much of the quarter and E. Commerce was a much larger mix of our overall business.
As we've shared previously our ecommerce channel sales or more accurately describe our direct to consumer sales channel are less profitable than a typical retail store sale.
With the variance between the two channels being most pronounced on the gross margin line.
Where all of the fixed and variable cost as well as the higher promotional intensity cost of that channel sales are captured.
Well for retail store sales a large portion of the variable cost our E store labor is included in our SGN a line.
It's also important to keep in mind that unique circumstances, we experienced this quarter, having all of our stores closed which exacerbated the impact of channel shift.
We would not anticipate this kind of de leverage on gross margin from channel shift once we returned to a more normalized operating environment and our stores are open.
We also experienced deleverage in Salon services as we chose to continue to compensate our stylists for most of the quarter. Despite all stores being closed.
These headwinds were partially offset by the impact of lower promotional activity within the ecommerce channel as we chose to pull back on many promotional levers to manage ecommerce demand and volumes at our distribution centers as well as benefits from our credit card program.
SGN, a expenses decreased 5.5% to 380.9 million compared to 403.1 million in the first quarter of 2019, as we pulled back on store expenses in light of temporary store closures as well as advertising by reducing our spend on print material and reallocating.
Sources into our digital vehicles.
As a percentage sales SGN, a increased to 32.5% compared to 23.1% last year.
We experienced the most the leverage from store labor, which is the largest expense within SGN Amy.
Store labor is normally a more variable expenses, we often adjust payroll hours to support sales volumes. However, payroll was more fixed during the quarter as we chose to continue to Paris store associates for most of the quarter. Despite temporary closing all stores.
We also experienced the leverage and corporate overhead, reflecting the impact of investments we made in 2019 that have not yet bit anniversary.
This quarter, we recorded an apparent in charge of 19.5 million related to the expected future performance of a small number of stores.
To provide some context, we perform reviews on long life assets on a quarterly basis or when events or circumstances indicate that asset values may not be recoverable.
The basis of our evaluation is whether future cash flows through the lease term are greater than or equal to the asset balance on the balance sheet.
There are a small number of stores that were underperforming before we made the decision to temporarily closed stores.
These stores were further impacted due to Colgate 19.
The projected cash flows for these stores are lower than the current asset balance and based on the market value of the rent relative to our contractual obligation of the property resulted in impairment charges.
We have a strong and protect the fleet of stores, but going forward, we will continue to test for impairment and adjust accordingly.
Preopening expense was 4.6 million in the quarter, an increased from 4.2 million a year ago as we assumed control of the property at Herald Square in New York City, a rent for this property is higher than our other stores and will be recognized in the pre opening line until the store opens.
Interest expense related to the draw down of our revolver totaled 1.3 million compared to interest income of 2 million a year ago.
Diluted GAAP loss per share was $1.39 compared to earnings per share $3.26 reported for last year's first quarter.
Moving on to the balance sheet and cash flow for the quarter total inventory grew 7.2%, primarily reflecting inventory needed to support 68, net new stores inventory per store increased 1.5%, reflecting the impact of store closures for most of the quarter.
We will continue to closely monitor demand as we begin to reopen stores and we'll adjust our inventory levels accordingly.
Fortunately, we have not experienced any significant issues accessing inventory.
Reflecting our proactive efforts to manage liquidity capital expenditures for the quarter were 45.1 million compared to 71.8 million last year.
Turning now to the rest of 2020.
We continue to operate in an uncertain environment. It had been working under a variety of assumptions to help us make the best financial decisions, we can for our people and our business.
However, the situation is dynamic and it remains difficult to model sales and expenses with certainty.
Therefore, we are not providing earnings guidance at this time.
We are able to provide an update for a few other key model inputs.
We have reduced our capex plan by about 100 million in response to the current operating environment. Our updated planned for the year is to invest between 202 hundred $10 million, including approximately 92 million for new stores, Remodels and merchandise fixtures $80 million for supply chain and I T and about 33 million first.
For maintenance and other.
We now expect to open approximately 30 to 40, new stores in 2020 and relocate three stores.
We have chosen to defer some store openings into 2021 and are currently evaluating what the right pace of new store openings should be next year.
We have a strong and profitable fleet of stores and given the new operating environment, we plan to accelerate efforts to strengthen our fleet through relocations negotiations with our landlord partners and potential store closures.
And while we believe there's opportunity to open more stores and reach new gas. We're also evaluating our long term store target in the us given the acceleration we are experiencing with our ecommerce business.
In closing, although we lack some near term visibility we remain confident in our differentiated business model and our ability to adapt to our guests changing preferences. We believe that we have the financial strength to manage through the crisis and are making decisions to ensure ulta beauty is even better position for the long.
Term.
And now I'll turn the call back over to our operator to moderate acuity session.
Thank you.
We will not be conducting a question and answer session. If you like to ask your question. Please press star one on your telephone keypad a confirmation Tom will indicate your line is in question.
You mean for as far too if you would like to remove your question from Q.
Congrats using some degree and maybe next June it begins to answer questions to start.
We respectfully request that you ask one question only so I'll have times response as many of you as possible.
After you segment or follow up question, we ask that you re Q1.
And then one more please while we pull for questions.
Okay.
Our first question is from.
Christopher Horvers from Jpmorgan.
Proceed with your question.
Hi, This is actually a mega and Alexander on for Chris.
I was just hoping you could elaborate a bit on what you're seeing in the stores that you feel Ben just in terms of pent up demand and whether you're seeing any change in the category trends of urea open them and then can you just talk about.
Detailing what you're seeing in terms of gas using curb side or is actually coming in at the start.
Yes, well, we're really I guess I'd say pretty pleased about what we're seeing so far in terms of consumer behavior right. So so far our trends are stronger than we expected in terms of sales. It varies by market, we actually some markets comping positively others negative or the ecommerce trends have been very encouraging and.
In their remaining resilience.
It really accelerating because of the adoption of curbside, which we can talk more about but and I mentioned this in the script, but the first 180 stores. If you look at their performance. So far you know total sales are flat to a year ago, but of course, the mix is quite different right between stores curbside BOPUS ship to home. So I'd say overall guest reaction has been quite.
Positive, but we're cautious I mean, it's early early and we're taking a conservative stance as we look forward the opportunity for us that we see as well as that we I mentioned that we've got a lot of gas who've never shop online with us before who are now converting to omnichannel gas I guess out of necessity and that gets the more that we can keep.
Shopping multiple channels channels are very valuable to us they spend almost three times as much historically as somebody who shopped in stores only so the other thing I'd add is that maybe David gave can come in a category mix, but.
Curbside deal so far we invented that I'm very proud of the team for really kind of putting that together pretty quickly we hadn't been doing curbside. We've been done had had launched focus in the fourth quarter of last year and that was going really well, but we haven't needed to do curve side, yet so I really congratulate our team for forgetting that stood up and we've been pleased to see.
The the guest reaction so I'd say, what they like about it is the speed the ease and overall enthusiasm our staff.
We are following all that kind of social distancing and safety guidelines that you can imagine.
But we feel that so far that could be a again as such as people try that they find it is another convenient way to shop at Ulta beauty and we expect that will continue to be part of the mix as we go forward spending on one Anna categories stable only thing I'd add on categories and you mentioned it in the script Mary's that.
Categories that were strong with us when were operated on an E. Commerce only continue to be strong in those those kind of self care categories of wellness category skin care hair care Bath. Other other categories that have been that accelerated throughout this crisis, but interestingly as curbside.
Became available we also saw a pickup on makeup as more guests were engaging in that category and as we've made as we've evolved through the initial phases of of this crisis. We've seen the makeup.
Take a bit of a strengthening move as curbside has as given our guests more options to engage in the category.
Thank you ill.
Our next question is from Mark.
Ill.
Robert W. Baird. Please proceed with your question.
Thanks, Good afternoon, Thanks for taking my question.
Maybe following up on the on a category trends wondering if you can give us some broader perspective on the beauty cycle and how you're planning for mix shifts in the near term just with that economic backdrop are you seeing are expected to see a shift to mass and message from prestige.
Skincare has remained robust however, as the industry starts to cycle. The sharp decline in color cosmetics as we go through the mid to late part of the year. Just wondering theres any reason to think there's while at the end of the tunnel there from us product innovation and growth standpoint. Thank you. Yes. Thank you Mark I say in some ways going towards what we've seen as.
At the beginning of the cycle of course.
Types of things that people bought were quite different than what we've seen in the past right things like hand, Sanitizers themselves and then we saw folks get more engage in things that I would call like self care do it yourself at home so hair care nailed that kind of thing and then kind of more into things that are a bit more self indulgent or self care like whether its math skin care.
Fragrance fragrances for the Bath that kind of stuff. So it just kind of interesting to see that cycle or the psyche of consumer behavior as an aside one thing I'll say as I feel like our team did a great job.
Social media, just marketing person to really meet our guests where they were in kind of talk to them about those things engagement was really high the core category trends I'd say, we're similar roughly similar to what we saw coming into this year, which is acceleration in skincare, we've talked about that we see that as a big future tranche the intersection in wellness beauty together.
There is going to be important I think with makeup as Dave said it is interesting early fast that on curbside, we saw some tick up and backup.
You can debate two sides of it but I mean, anecdotally I'd say that folks who maybe you are doing working from home before on phone calls are now all of US on all working from home on video calls and everybody's on video call. So will that have will that help bring the light of via the total as you said, yes. You. Certainly makeup is still a large and very if customers are very engaged in that category.
Laurie, but it has been in a in a lower cycle you're right. So could this held but I think we'll see we don't know right now I wouldn't say that's happening in the large scale.
Thank you.
Okay.
And our next question is from take machines from Goldman Sachs. Please proceed with your question.
Hi, good afternoon. Thanks for taking my question I Wonder, if we could drill down a little bit more around your commentary about the promotional environment, maybe what you saw during the quarter and what you expect.
For the rest of the year and just one housekeeping question about the impairment charge just how many underperforming stores account for that and do you plan to reopen them.
Yes.
So I'll start with the promotion amenity scheduled to take the impairment piece shared it promotion activity of course like everything else was disrupted through through the quarter our strategy.
Pre cobot has been on a really a multiyear journey to.
Try to reduce broad based promotions and be more strategic and focus and driving consumer engagement demand across all of our activities. The brands are we're bringing in our loyalty program.
Other aspects of ways to engage with our guest we are we do as.
We enter into the.
Category shifts into a reopening of stores in <unk> and a recovery phase coming out of the March and April elements of this crisis, we are anticipating as a category potentially higher promotional activity, but our focus will continue to be.
On driving the more strategic aspects of our business was very strong loyalty program we've built.
We think very strong personalization capabilities and in fact in some ways that strengthened aspects of that over the first part of this year and we intend to leverage that to be more.
A personalized and direct with our with our communications and aspects, we will lean into the most strategic aspects of our of our promotional annual promotional programs 21 days, a beauty holiday skin and hair events through the year.
But of course, we're going to be nimble in the category and why we'd know we're not anticipating leading.
A massive increase in promotional activity, we won't see share either so we have tools to respond appropriately in the category and we'll do so and make sure that we're remaining competitive in the marketplace.
And on to the impairment question. So the short answer is.
It was around 20 stores and total that were impacted by this and really was 10.
10 stores that drove the majority of the impairment charge during the quarter.
Slightly longer answer is Kate this is going to be a multi chapter story here. So again.
The fact that we took impairment charges on these stores doesn't mean, we're closing these stores necessarily these might still be productive stores, but they just might be in higher rent to kind of geographies in the United States for example, and as we mentioned in our prepared remarks, we are taking a clean sheet look at the whole store fleet. So there are instances.
As you know that we're looking at where maybe we're not in the best center or we're not in the best position in the center and now with the disruption were seen in the retail environment. There are centers that we've been block from historically that we might get more aggressive on it might have opportunities now in the future. So there could be other potential store closures comments somewhere down the road here hoped.
We we can get all that house cap in fiscal 2020, but it's not all of won our first quarter kind of story.
Thank you.
Thanks.
Our next question is from kind of cargo from Citi Research. Please proceed with your question.
Hi, Thanks for taking my question I was just wondering what your exposure into some of us apartment story.
We have announced store closings on had Guinea workfare and.
Should we expect any sort of promotional cadence geared towards.
Gaining that customer and then my second question is it's around.
Vendor support given you're expecting more promotional environment, how those conversations going with your vendors.
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Yeah, I would say it will sit back and start with department stores I mean, just in general.
We have a very sort of broad competitive environment, and we think about that because we do we bring all things together and beauty and as a result, we compete with everybody from department stores too.
To a mass retailers to other specialty retailers ecommerce only so it actually is pretty broad competitive environment that we're in and we pay close attention everything that's happening in and see opportunities and risks throughout so thats, how weve always events, then businesses to play our offense and to make sure that we get the share.
Gains that we believe we can get in certain categories I mentioned already in the digital channel. We gained share in every category per season, we're only digital this past quarter. So we feel good about that so thats something we pay close attention to in the second part of question was.
And vendor support all vendors for yeah listen there is it's a very important time for us to be very close with our vendor partners big and small and so I feel very good about we have worked you know Dave leads the merchandising team and you can add more to this if you'd like but I mean, we I'm proud about the fact that I feel that we've been very transparent with our vendors share the dilemmas with them.
Sure the opportunities with them as we move forward and our relationships are very strong so.
Certainly I feel very confident about our ability to come out of this stronger than ever and continue to win in the marketplace and I think our vendor relationships will be a key part of that.
Great. Thank you.
Okay.
Okay.
Our next question is from Omar size from Evercore ISI. Please proceed with your question.
Good evening, Thanks for taking my question.
No really impressive digital ecommerce growth in the quarter. Obviously, you guys have one of the best in class loyalty programs out there I'm curious what you're seeing in that part of the business as stores reopen or what your expectations are for that kind of run rate you've been at do you expect that's a moderate are you seeing that moderate is that demand shifting to more byline pick up or curbside.
You know what are your expectations for that strong digital growth and the intermediate term as we go from a fully lockdown state to one that's more open to Mystore store network. Thanks.
Well, yeah, we've been really of course pleased with the ecommerce performance its a.
A part of our business that we've been building.
And and investing and bringing the innovation into for many years and Thats certainly has been paying off for us through this crisis.
Obviously as stores opened it will.
Decrease in its total penetration of our business from being 100% ecommerce only.
What we do believe going forward is that we've moved quite a few of our guests that had previously only shopped us in store as shopped us online and that's a really positive thing, we know and Mary mentioned some of these.
Statistics, what we know that guess shop that shop us in an omnichannel way are among our very best guess they shop as more frequently both in store and online they spend more with us. So we anticipate from a member standpoint. This could have some really positive lasting impacts of introducing more gas to the total ulta.
Variance penetration going forward, we think a a there will be a step change in penetration because of this introduction of.
Omnichannel capabilities to more guest.
We think it'll be a higher run rate going forward, but time will tell exactly where that settles, but certainly higher than it was and faster acceleration and adoption of our E. Commerce capabilities incurred side has been a big a big win for US Mary said, how quickly we adopted that we're happy to have BOPUS in the fourth quarter as we roll that out last.
Year to be able to shift in pivot that to a curbside capability it was really meaningful and as stores of reopened.
Guest in some guest or so opting for curbside capability and so we'll sustain that.
Going forward and we think it adds actually a nice essentially a third options for our guest if they.
I don't want to actually come at a store at this time, they can still get their products that same day and have a great experience from opus that'll be a bit growth going forward.
That's helpful color. Thanks.
And our next question is from Dana Telsey from Telsey Advisory Group. Please proceed with your question.
Hi, good afternoon help everyone safe and healthy as you think about the story opening platform and the service service model in there how do you think of employee staffing and the percentage of payroll that you'll need going forward versus what you would need in the past and then secondly on products and just color cosmetics is to stay.
Eight of innovation or the pace of innovation that you've seen with your vendors does that accelerate or decrease going forward and does the closures. The department stores give you more runway to gain market share even as we go through this year. Thank you.
Hey, Dan as Mary Thank you.
The service the staffing you know I can't tell you that precise ratio there in terms of where we're going to land, but I will tell you that actually feel that well for so we're taking a conservative and cautious approach to thinking about services, but also believe we've got a great opportunity.
Because you know, there's we have a national platform, a national brand and there's still a pretty I'd say low usage of our services relative to the total retail preset business that we have so we feel like Theres a great opportunity. We also know as you know like our Omnichannel guests that people, who use our services are spending almost three times as much as.
Somebody who's not so it's a great opportunity we are starting slowly and we're starting with hair only and I would say with even stricter protocols of health and safety than just the reopening of the store, which is very strict so theres additional.
Steps in place to make sure thats done safely and well, but frankly as we started to open up we've about 280 stores that have salons open right now and that there's a lot of pent up demand for cotton color as you can imagine so we have many many stores that are well booked right now.
We are stylists, we kept him on the payroll largely so that we knew we could come back strong we wanted them to stay with Ulta beauty and and help us capitalizing on this on this opportunity over time, so overtime will go from here to browse again and things like that but we're just going to take a step at a time.
Your question about cosmetics innovation, maybe Dave if you want to add to that yes, I'd say on innovation in total.
Certainly this is disrupted the the.
Brands view on innovation and timing and in some cases, new launches have been shifted shifted back or or readjusted, but but what I'd say is.
Two two parts that we felt really good about newness across categories makeup included but skin care hair care fragrance coming and committed.
Pre covert and this crisis several new brands across the portfolio. The glor Mercy a thrive pixie on the makeup side kills ordinary indeed, the urban skin Rx and in skin care pattern Arctic Fox weigh in hair, several new brands that had launched recently in either very late Q4 early in Q.
One.
Actually performed well throughout this crisis, and we'll be well positioned coming out. So we still have that pipeline newness and then as we look forward over the rest of the year across categories get including makeup.
As I said brands in some cases of adjusted their plans.
But as we start to get more confidence and consumer reaction and store opening timing, we will rebuild our our innovation introduction timeline in the second half of the year and and are optimistic we know our guests continue to be.
Track to newness.
New brands and and new products from existing brand. So we see a strong pipeline come in.
Through.
As we work our way through this through the 2020 and then certainly into 2021.
Thank you.
Our next question is Simeon Siegel from being capital. Please proceed with your question.
Good afternoon, everyone. I hope you are all doing okay.
Merrier, Dave how are you thinking about marketing I know, it's obviously de lever to pull back on but just given the balance sheet strength was there an opportunity we've actually gone for bear and take some share.
How you think about inventory.
Gross margin.
It sounds like a party at your House EMEA I love it.
Everyone is so excited for this call.
I'm also happy they're excited that thoughts.
Yes so.
I'm glad you asked about marketing yeah, we have we really see a great opportunity to continue to build the Ulta beauty Brandon and.
In a lot of ways accelerate out of this crisis behind the strength of our brand and everything that our brand represents the assortment the loyalty program. The guest experience the strength of our of our associates and what they bring to our guest every day.
Coming into this crisis the work that we've done to establish our brand and to.
Create a brand platform that.
That is rooted in this idea of.
Possibilities of joy of of connection to others in the power beauty I think actually served us really well and I'm really proud of the work that the marketing team.
Did to shift the strategy to be really responsive and reflective of the new mindset and to more of a focus more on these connections and self care and just bringing joy and happiness, which is ultimately what beauty is about through all channels to your point, we should we.
We believe we have an opportunity continue to invest in marketing because we're so we believe well positioned to again have a leadership voice in that so while we pulled back on certain elements, most notably print tactics because they have long lead time, we can't be as responsive to store dynamics.
Shifting consumer dynamics.
We've been pulled back on those elements, we've invested more in digital and social aspects and as we look out over the rest of the year.
Is not our plan to to.
To make a significant reduction in total marketing spend as much as shift our shift our focus to both a messaging thats relevant and compelling as well as the tools that will be both give us some flexibility to adjust to whatever comes ahead of us through the rest of the year, but it was also.
Very relevant in the timeframe.
And it sounds like you had three questions and right three questions. There, but there are important so we will answer the to the final two years, so and inventory I would just say we're being careful I think the team did a great job again, hi sense of urgency to you know monitor receipts in order flow during the depths of the crisis and now.
We're back you know again, it's back to vendor relationships, Stephen Mary both alluded to being transparent and clear and Evan.
Good connections with vendors, because we're making orders were making orders and we have that have been now for a number of weak. So you know the sales throughput there on our ecommerce business, we need to stand stock and with the stores opening backup we want to make sure that the newness that the back half BNL is flowing out there I don't make sure we're ready for gas to come back and visit with us.
On the gross margin I think we laid out the first quarter.
Early in the prepared comments you know as we think about the rest of the year I mean that.
Part of the primary reason why we don't feel comfortable for right providing guidance for the rest of 2020 at this point, but again you can go back through the script comments I mean, we've given you a laundry list of things that we're thinking about right in with the key being opportunistic as we go through the rest of 2020, whether it be pulling forward the Jacksonville feet.
Fast fulfillment center here in the back half Didier provide more capacity, we talked about rethinking the cadence that some of our major events and the promotional elements that go with some of those things.
Reassessing, our assortment strategies, you know maybe being opportunistic about moving out of some of the slow movers. So to speak as we go through the back after the year, we talked about store footprint optimization. So there could be some you know impairment charges or closure charges that come along with those kinds of things.
But again, it's not going to be first quarter.
Only story this will evolve as we go through the rest of the year in will be as transparent with you as we can along the way.
Great. Thanks, very much frozen Maya children wish you best of luck for the rest of the year.
Thank you [laughter]. So let me just close as I really want to thank everybody for joining us today I know at the end of every quarter I think my team, but honestly I myself nears the sale of this company if that in my career I don't think I've ever seen a group of people, leading with more resilience and heart in collaboration and more drive to win so I want to thank the Ulta beauty team.
And we hope that you stay healthy in say the will of course speaking with all of you again in August We report our second quarter results. Thank you.
And this concludes todays teleconference. You may disconnect. Your line at this time. Thank you for your participation.