Q2 2020 Ulta Beauty Inc Earnings Call
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It's my pleasure to introduce your host Ms. Kiley Rawlins, Vice President Investor Relations. Please.
Thank you Diego good afternoon, and thank you for joining us today for our discussion at Ulta beauty. Its results for the second quarter at critical 2020 hosting todays call, our Mary Dillon, Chief Executive Officer, and Scott Peterson, Chief Financial Officer, Dave Kimbell, President will join us for the queuing <unk> session.
Let me 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 do enough.
Risks and uncertainties all of what you're describing 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 August 27th 2020, we have no obligation to update or forward looking statements, except as required by law and you should not expect us to do so.
In today's comments, we will discuss certain non-GAAP financial measures, including adjusted diluted EPS, which has been presented to reflect our view of our ongoing operations by adjusting for store impairment charges and costs associated with the permanent closure 19 stores. A reconciliation of these measures to the corresponding GAAP measures can be found in our earnings.
Lease, which is available on the Investor Relations section of our website at Www Dot Dot com.
Well begin this afternoon, we prepared remarks from Marianne Scott following our prepared comments, we'll open the call up for questions.
The allowance 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 and one follow up question to ask a second question. We ask that you re queue as always the IR team will be available for any follow up questions. After the call now I'd like to turn the call over to Mary Mary. Thank you Kylie and good afternoon every.
Martin.
Let's start with an overview of where we are today first I will say that since the beginning of the pandemic, we've navigated through the crisis with our associate in guests at the center every decision night I really proud of how our teams have responded to the challenging period I want to thank my leadership team and all of our Ulta beauty associates, especially our store in distribution center.
Associates for their agility creativity and commitment to serving our guests are taking care of each other during this unprecedented period.
I do last earnings call. We were in the early stages are reopening process. During the second quarter, we reopened stores for retail expanded curbside capabilities to nearly all stores and began with marching through like services, all with a thoughtful consideration for the safety of our associates in cash balance with our desire to reopen quickly.
By the end of June more than 90% of our stores were opened for retail and by mid July our reopening process once complete.
We bought the local regulations and guidance the resumption of our service offerings has been on a more measured pace today Salon services are available at about 80% of stores and brow services are offered at about 85% of fleet. We've not resumed Skinner makeup surfaces, but we're working closely with medical experts to ensure we have strong safety.
Protocols in place when it's appropriate to resume the surface says.
And this new normal <unk> operating Ulta beauty stores with new shops say standards limited physical capacity to accommodate social dispensing and reduced operating hours to date, we have reactivated approximately 17000 of our furloughed associates, who are able to return to work.
We're committed to maintaining a safe experience for our associates and our gas.
Different markets managed fluctuating Kogan 19 cases, we will continue to monitor guidance from government health authorities as well as local transmission levels to determine if we need to modify our shopping options or refer to closures in the near term.
Now turning to our second quarter results.
The second quarter total net sales were 1.2 billion comp sales declined 26.7% and GAAP diluted EPS was 14 cents per share excluding the impact of impairment charges and costs associated with the previously announced store closures adjusted diluted EPS was 73 cents per share.
[noise] comp sales improved significantly throughout the quarter from down 37% in early may as it began reopening stores to down only 10% in July after most of the stores have reopened.
Sales trends have continued to improve with comps down in the mid single digit range for the first three weeks of August.
We're excited about the positive signals, we're seeing from gas. However, we believe it will take some time to fully returned to pre cobot levels and expect demand will continue to be suppressed for the rest of the here given the likely ongoing disruptions, we'll see as we continue to live with the reality is up cobot 19.
What are the continuation of working from home managing the complexities of educating our children the ongoing need for social distancing mask wearing a need to avoid large gathering or coping with near term employment and economic uncertainties.
Longer term, we're confident beauty will recover and thrive given the strong emotional connection consumers have with the category.
We know beauty enthusiast remain passionate about beauty and Ulta beauty, we see it through the engagement in their social channels and while the connection with beauty has not diminished how consumers engaged with the categories changing health and safety concerns have led to fewer physical shopping trips, but higher average ticket and while we've seen greater adoption of online shopping well.
Really encouraged to see guests coming back to stores as well.
From a channel perspective ecommerce achieved record growth in the quarter delivering sales growth in excess of 200% curbside pickup and buy online pick up in store were very strong during the quarter totaling about 20% a total ecommerce orders as guests embraced this limited it's limited touch beauty to go option.
Despite reducing advertising and promotional activity during the quarter, we maintained our unaided awareness in the mid 50% range and increased our aided awareness to 94% and our focus on driving meaningful connections with our gas through relevant content and inspirational brand messaging through our digital and social channels is having an impact.
Our brand health is very strong with improvements in consideration connection integrity and advocacy, reflecting our responses response of the safety and social concerns of our guests.
Building our brands affinity during this tumultuous time, we'll continue to pay dividends over the long term.
Now turning to our performance by category during the second quarter, we increased our market share across most major prestige beauty categories, and we saw an improving trend and our share of mask beauty as we reopened stores, reflecting our paced reopening process comps sales declined across all major categories for the full quarter.
As stores reopened sales trends improved with skincare fragrance, Bath and PC delivering double digit comp growth in July.
The makeup category continues to be challenged due to shifts in consumer behavior and limited newness and innovation in the category, even with these headwinds some subcategories that make up performed better than others, including latches Brown and I.
Sales and services decreased for the quarter, reflecting our measured reactivation of hair and browse surfaces and limited capacity due to social dissipate.
Sales is salons, we opened we saw significant increases in average ticket driven by pent up demand, particularly for color and texture service as importantly, we're seeing strong double digit growth in rebooking rate as our stylists liver, a safe and enjoyable experience and proactively focus on scheduling future visits.
The number of active members in our ultimate rewards loyalty program decreased by 4% compare to the second quarter last year to 31.9 million members. As a reminder, active members our members to shop with us at least once in the last 12 months.
During the quarter quarter, we saw modest growth in our diamond and platinum membership levels. However, new member growth and retention rates were pressured due to store closures and lower levels of marketing and promotional activity.
New member acquisition through our digital channels continue to expand at healthy rates and we continue see previously in store only members engages us online with greater frequency.
Omnichannel numbers are most engage in most productive members historically spending three times more per year that store only gas. So we're pleased to see that omnichannel gas grew to 21% up our members in the second quarter nearly doubled the penetration in the same quarter last year and online only members represented 7.5% of our members.
Two and a half times the penetration last year.
With our fleet open in trends, improving we're shifting our attention to strengthening the business in this new normal and expanding our market share in second half of the year well also setting the foundation for for profitable growth and 2021 and beyond.
On the last earnings call, we introduced five strategic priorities, where we're accelerating efforts to expand our market share gains and extend our competitive advantage as I'd like to give an update on our progress in each of these areas.
But first I'd like to sure perspective on racially quality inclusion and diversity as a priority and the value. This is not new for us, but certainly our focus has been sharpened an elevated by the recent awakening in our country to the forces of systemic racism and the important dialogue and actions that have resulted.
And Ulta beauty diversity inclusion of always been core values and important part of who we are in the seven years I've been CEO. We've worked hard to represent a wonderful diversity of our country and how we show up as a brand and as a retailer and everything we do some our marketing communications to our brand partnerships entertainment.
I'm proud that our board is 18% black and more than half or when that our executive team is 13% black and 50% women and our Ulta beauty team overall includes 47% people of color and 92% of our associates or when that said, there's still much more to do.
Today more than ever were working to accelerate our leadership in this space, we using our social channels to amplify black voices in beauty and we're working to grow our roster of black on brands. We recognize this was a journey, but we're firmly committed to creating an inclusive experience for our guests building a diverse representative workforce and serving as an authentic lead.
Our diversity and inclusion in corporate America.
Let me now recap the progress we're making on our five strategic priorities. Our first priority is to expand our omnichannel business to more deeply connect with gas across channels and unlock the potential of our combined physical and digital footprint. This is not a new priority for us we've been on this journey for several years and we've made progress however, the pandemic.
Mike has accelerate consumer engagement and desire for online and contact the shopping and we believe our ecommerce penetration will remain meaningfully higher than pre cobot 19 levels.
Our customer insights and member data show many of our members prefer to transact in store, where they can discover interact with products and other beauty enthusiasts, but we also know our members engage on mine to research learn and discover new products.
As a pandemic has accelerated the adoption of these digital channels, we're expanding our investments in digital innovation with enhancements to the Ulta beauty App and also dot com to create more personalized and seamless shopping experience as.
We've also continue to enhance and expand our ability to provide members with personalized recommendations based on insights from our loyalty data.
Today to the Ulta beauty App and on Ulta Dotcom, we provide members with unique recommendations across a variety of experiences, including new products products based on category preferences reminders for replenishment or handpicked items, all powered by our internal at AI platform.
We also recently launched App only offers and exclusives to drive temporary app engagement and we've introduced sponsored adds to allow our brand partners to influence specific product placement.
We continue to drive innovation to make it easier for guests a shopping Ulta beauty in July we began rolling out I do service booking tool in the astronaut Ulta dotcom, which enables gassy easily book or reschedule Salon Brown other surface appointments more than 1000 stores are actively using this new tool and the feedback from gases stylus has been.
Great.
We're also testing new drug application processes to expedite the curbside pickup experience with the goal of having a more seamless digital experience in place for holiday.
As we work to enhance a digital experience for gas Weve launching guest service chat bought an ultra dot com for east convenience and speed and resolving basic ask questions and we launched a new guest service customer engagement platform that allows our call center team to seamlessly respond to guess needs across a variety of content channels and across it.
Oh platform.
We continue to invest in our fulfillment capacity to support a larger ecommerce business as discussed in the last earnings call. We pulled forward the opening of our Jacksonville Facile film in center and we're on track to be operational to support higher levels of E Commerce demand this holiday season.
In addition, we're expanding our ship from store program to 100 stores to increase shipping capacity and improve speed to gas well also leveraging store labor and inventory.
Longer term, we'll continue to evaluate our infrastructure to determine how we can leverage our supply chain network and store footprint to support a growing omnichannel business.
We are actively reviewing our network to identify opportunities to improve product flow from brand to gas well enhancing inventory productivity and guest service levels.
Similarly, we're looking at our store footprint through an omnichannel lens to ensure were strategically positioned to optimize share and profitability opportunities in every market.
Moving on to our second strategic priority, we're re imagining guests experience and discovery, we know guests still want the opportunity to test in play, but we also recognized increase important society as we think about supporting discovery and the new channel, we're leveraging digital tools like glam lab, our virtual try on tool.
Since the covert 19 crisis began guest engagement with the tool has increased meaningfully with product views in the second quarter, increasing more than 150% on the first quarter.
In addition in the second quarter, we expanded our virtual try on capabilities include hair color fall flashes and the benefit brow bar well. These are newer capabilities. Our guests are actively playing and engaging with these innovative tools.
Longer term, we intend to support discovery trial in play by offering a combination of limited safe product testing with an expanded selection of single use samples and seamless digital innovation like glam lab and Threed printing.
In addition were retooling our approach to install education events and services and re imagining or fixtures and visual merchandising with a focus on safety flexibility in cost effectiveness.
We know human connection in the fiscal shopping experience are important to the beauty enthusiasts. So we are rethinking the whole store experience from BOPUS and curbside to the flow and feels the store and the role of the associate as a trusted guide.
Our vision is to continue to be the most loved destination and beauty I re imagining the end to end guests experience Ulta beauty and we'll share more about these efforts on future calls.
Turning now to our third area of strategic focus to drive winning category strategies and engage in satellite beauty enthusiast with a curated relevant and unique beauty assortment.
Newness and product innovation drives beauty category growth and while we successfully launched newness on line. This year many of our plan brand launches and expansions at stores have been necessarily delayed because of store closures.
With the reopening process complete our store teams are working hard to deliver more exciting newness across all categories.
Clean beauty continues to be a growing area of interest among our gas last month, we announced the launch of conscious beauty at Ulta Beauty and initiative intended to help guess find brands and products that reflect their personal values through this initiative, we will certified brands across five key pillars clean ingredients cruelty free begin.
Sustainable packaging and positive impact our goal is to give guest access to more choices guide them along their journey and celebrate the brands and products are aligned with this mission.
Conscious beauty at Ulta beauty will launch this fall in all stores online at Ulta Dotcom and on our App.
In conjunction with US launch, we established sustainable packaging goals with a pledge to ensure a 50% of all packaging sold will be made from recycled or biosource source materials or will be recyclable or refillable I 2025, as part of this effort will pilot a circular shopping experience with loop a reasonable packaging.
Pioneer and early 21.
Cobot 19 is amplified many of the category trends, we've experienced over the last year, most notably the emergence of self care has fuel consumer interest and skincare and hair.
We're accelerating our focus in these areas to drive market share growth.
In skincare, our merchant teams have made terrific progress in expanding our assortment and improving the profitability of this important growth category. We continue to expand our brand portfolio across all price points, including brands like Beekman 18, no two blocks it turn in GLAMGLOW expanding brands like the ordinary.
Urban skin, our acts in L.S. skin care.
In addition, we're highlighting a number of new skincare brands from our spark platform, including kinship ups circle and it just didn't routes.
To support these launches were dedicating more states skincare and prominent areas of the sales floor and an ultra dot com and next year, we plan to implement more holistic changes to to the layout in select new stores, which allocates more prominent and easy to navigate stays for skin more intuitive adjacent sees and space in the front of the source for curated event.
Yes.
In addition to product newness, we're investing in digital innovation to help or I guess identifying to dress skincare concerns with the launch of the Nu skin analysis tool and the Ulta beauty App. This is skin analysis tool use augmented reality technology and AI to assess skincare needs and offer personalized recommendations in skincare attempts.
And here, we are expanding our focus and texture color with the introduction of brands like Arctic Fox Creel essence and expansion of brands like pattern in Crolles Smith to support these launches we've increased our storytelling to our marketing vehicles elevated the visibility of our style Silas via social media and relaunched our salon takeovers.
Increased visibility to key brands.
Makeup remains our largest category and we remain confident in the long term opportunity, but changes in consumer behavior, a reduction in wearing occasions and events and the delay of new product innovation coming to market will likely continue to challenge growth in the category in the near term.
Makeup is still an important profitable category for us and we're prioritizing newness in high growth areas, including bar Mercy Pixie and the launch the newly launched KBB Beacon beauty, while also working to improve the space productivity of prestige color impressive skin categories through recent planet Graham realignments.
Moving on to our four strategic pricing will continue to drive innovation in the ultimate rewards program in meaningful ways.
Personalized experience across touch points in creating stronger connections with our members.
We have a large differentiated loyalty program with strong member engagement recent store closures and disruptions will constrain member growth. This year, but we believe in the long term opportunity to expand our loyalty program to increased membership we're focused on converting new members, both online and in store and Reengaging with members we haven't seen it allow.
As consumers shifts increasingly online shopping we're seeing more non members engaging with us online.
Since the pandemic began we've seen more than 2 million online transactions from nonmembers more than four times. The number over the same period a year ago to increase our conversion that these are my guess, we're enhancing our communications on Ulta dotcom, because we can reach sensor email and we're proactively communicating and promoting the value of Ultamate rewards with these gas.
To Reenergize our in store efforts, we provided additional associate training during store closures and the stores of reopen we've seen in store member acquisition rates rebound at higher levels than pre co that.
With the reopening process complete we're actively implementing reengagement strategy, starting with member appreciation Merck and August where we celebrated our members welcoming them back to Ulta beauty with new Boeing bonus points offers incentives for App downloads and exclusive App offers in addition to communicate directly with our member as we've highlighted these off.
Across all of our digital channels, including ultra dot com to raise visibility and awareness of our ultimate rewards program.
In addition, we're using our customer insights and predictive tools to create relevant real time anticipatory interactions across channels to reactivate engage targeted membership segments and to drive greater loyalty.
And finally, a fifth area of focus is to drive strategic holistic cost structure optimization.
As we've discussed previously we've made progress through our efficiency for growth or FG efforts to improve our merchandising effectiveness and enhance core processes across our real estate and supply chain operations, but we recognize the rapid growth of E commerce, and increasing external cost pressures combined with the need to build critical Cape.
Abilities to support our growth strategies, all require us to evolve or thinking about how we operate. So in addition to the near term actions, we're taking a stabilized and recover the business at the same time, we're also looking at opportunities to optimize our cost structure.
A few examples include store optimization.
We have a strong profitable store fleet and as with any portfolio, there's always top and bottom performers last month, we announced our decision to permanently closed 19 stores. This year to strengthen our overall portfolio. In addition, we slowed new store growth to manage operational risks this year.
The role of physical retail and beauty remains crucial to the shopping experience. So while we know the role of ecommerce will continue to grow. We also continue to believe we can ultimately operate between 1500 to 1700 stores in the U.S.
As we planned growth beyond this year, we will seek balanced the opportunity for lower rents with the opportunity to upgrade existing locations.
Second example of promotional efficiency, we continue to refine and strengthen our promotional strategies, while we will continue to lead into strategic events to drive market share, we're moderating or eliminating less profitable or less strategic promotions. For example, this summer we eliminated our jumbo love leader event, replacing it with a more focused promotional event for hair.
Care, we limited the number of participating brands reduced the average discount rate and eliminated additional marketing coupons. These changes delivered significantly more profit despite negatively impacting the comp in the hair category and our core business a stronger during and after the event.
Another example store labor model, we're implementing changes to our store management structure. This fall, we will eliminate the store manager and prestige manager roles and create a new single service manager role responsible for services events in prestige retail.
This change will create a stronger linkage between services and products and provide our guests with better customer service and expertise. It will also result in a more cost efficient labor store model store labor model.
And one additional comment about our labor model in April we furloughed 33000 associates into it we brought back about 17000 associates.
Given that reduce operating hours, we know not all of our part-time associates will be able to work the shifts available given personal needs and availability. We also want to be realistic about capacity constraints service limitations and the likelihood that demand will take time to recover as such not all of our furloughed associates will likely returned to Ulta beauty.
This year.
These are a few examples steps, we're taking to adjust our cost structure for the new environment. We're also looking at additional opportunities across the enterprise to optimize our cost structure, while also building new capabilities to support our competitive advantage and our future growth.
So in closing we believe in near term environment will continue to be dynamic, but I'm confident our team can successfully navigate the challenges and longer term I remain optimistic about the growth opportunity for the beauty category and for Ulta beauty, we have a strong a differentiated business model with diversity across categories and price points and outstanding service offerings.
We are actively evolving in investing to extend our brand leadership and I remain confident that Ulta beauty will continue to innovate and lead capture market share and drive profitable growth as we continue to be the most admired beauty retailer and now I'll turn the call over to Scott for a discussion of the financial results Scott.
Thanks, Mary and good afternoon, everyone.
Starting with the income statement sales for the second quarter declined 26.3% in total company comp declined 26.7%.
Ceded our internal expectations and delivered a comp increase of more than 200% for the quarter as guests continue to take advantage of our omnichannel capabilities, including curbside pickup and buy online pickup in stores as expected ecommerce growth slowed as stores reopened but continued to deliver strong triple.
Growth versus last year.
From a mix perspective makeup was 43% of sales down 400 basis points from last year skincare, Bath and fragrance collectively increased 600 basis points to 28% of sales as the penetration of all three categories increased year over year.
As a percent of.
Sales hair care products in signing tools was flat at 21% of sales.
The services category was down 300 basis points to about 3% of sales as all services were suspended for much of the quarter.
Gross profit margin was 26.8% a decline of 9.6 percentage points compared to.
His 0.4% a year ago.
Many of the trends we saw in the first quarter continued in the second quarter as we transition through the store reopening process.
Similar to what we saw in the first quarter the largest driver of margin de leverage were fixed costs due to significantly lower sales.
Although not readily apparent in the gross margin results. This quarter, we continue to reduce overall store occupancy costs. In addition to our ongoing efforts our real estate team is capturing significant benefits from lease negotiation efforts, reflecting the market impacts of cobot 19.
These ongoing efforts will help us continue to reduce our occupancy costs over the long term.
Channel shift was also alert contributor to gross margin deleverage this quarter, albeit less pressure than we experienced in the first quarter due to increased utilization of curbside pickup and buy online pickup in store and higher shipping volumes.
As we shared last quarter, we would not anticipate this magnitude of deleverage on gross margin from channel shift to continue once we return to a more normalized operating environment.
We also experienced deleveraging salon expenses, while we furloughed many of our stylists as stores were closed we continue to pay salon managers and our lead stylists.
In addition, as Mary mentioned as salons have reopened our guest capacity has been constrained by safety protocols and social distancing, resulting in lower sales.
In addition to these factors, we increased inventory reserves by $16.5 million during the quarter, primarily to adjust for slow turning and discontinued makeup skews and permanently close stores.
The sales pressure we have seen in makeup over the last several quarters has been exacerbated by Colgate 19, which has resulted in changes in consumer behavior, as well as delays and newness and innovation within the category.
As we believe these factors will persist in the short term, we decided to move aggressively through slower turning makeup skews to ensure that we maintain healthy inventory levels.
In addition, we wrote off 1.4 million of inventory related to the previously announced 19 stores that will close in the third quarter.
These headwinds were partially offset by the impact of lower promotional activity as we chose to pullback on many promotional levers during the quarter as well as benefits from our credit card program.
As seen a expenses decreased to 271.6 million compared to 392.8 million in the second quarter of 2019.
A large portion of the decrease compared to last year was due to employee retention credits of 48.2 million made available under the cares Act.
It's important to keep in mind that the employee retention credits were recorded in the second quarter, but reflect credits for payroll taxes paid in both the first and second quarters.
The decrease in SGN, a is also attributable to lower store payroll and benefits as many store associates were furloughed for much of the quarter.
We also pulled back on marketing by significantly reducing spend on print material, while investing into our digital channels store expenses were also lower reflecting that many stores were closed for much of the quarter.
These reductions more than offset an increase in corporate overhead.
Reflecting the impact of investments to support growth initiatives. We made in 2019 that have not yet been anniversary.
And the impact of $37.5 million of ERP and other Colgate 19 related expenses incurred in the quarter.
We recorded a charge of 40.8 million for impairment store closure and other costs as discussed on our first quarter earnings call. We perform reviews on long lived assets on a quarterly basis or when events or circumstances indicate that asset values may not be recoverable based on current expectations.
For future cash flows through the remaining lease term.
This quarter, there were 26 stores, where the projected cash flows are lower than the current asset balance.
Which based on market value of the rent relative to our contractual obligation of the property resulted in impairment charges of 20.9 million.
We have a strong and productive fleet of stores, but the dynamic operating environment May result in additional impairments as we complete our quarterly testing process.
We also recorded an impairment charge of 19.9 million related to the previously announced permanent closure of 19 stores.
Preopening expense was $3.9 million in the quarter, a decrease from 5 million a year ago.
As a reminder, preopening expense represents primarily rent expense associated with stores, we control, but are not yet open.
Given the disruption related to covert 19, and Dan endemic we chose to not open any new stores during the quarter.
We resumed new store openings in early August and are on track to open 19 stores in the second half of fiscal 2020.
Interest expense related to the draw down of our revolver totaled 2.6 million compared to interest income of $1.7 million a year ago.
Diluted GAAP earnings per share was 14 cents compared to earnings per share of $2.76 reported for last year's second quarter just.
Diluted earnings per share excluding charges related to impairments store closures and other cost was 73 cents compared to adjusted diluted earnings per share of $2.72 a year ago.
Moving onto the balance sheet and cash flow.
We ended the quarter with 1.16 billion in cash and cash equivalents and remain confident that we have sufficient liquidity to fund our operations now and into future.
For the quarter total inventory grew 4% compared to the second quarter last year, primarily reflecting inventory needed to support 51, net new stores inventory per store decreased slightly as we have closely monitor demand as stores reopened and adjusted inventory levels Accordingly.
Turning now to the rest of 2020.
We're not providing an earnings outlook at this time, however, I want to share with you how we're thinking about the rest of the year.
As Mary mentioned, we're pleased with the sales performance, we have seen since we reopened stores, but we believe it is prudent to take a cautious approach to the second half given the ongoing uncertainty. We're currently planning comps to be down in the low double digit to mid teens range in the second half roughly.
Correct. The in a number of factors first we believe the near term environment relative to containing the endemic and related economic impacts will continue to be dynamic in challenging.
Unlike others, we have seen volatility in our business as local markets experienced higher transmission levels of cobot 19.
Two we are pulling back on our promotional activity to drive profitability.
Of course, we're watching the competitive environment closely and we'll adjust if needed.
And finally, we expect store traffic. This holiday season will be impacted by ongoing consumer health concerns and limited physical capacity in our stores as well as our decision to close stores for Thanksgiving.
We anticipate our gross profit margin will deleverage in the second half, but not as much as we experienced in the first half.
Compared to the first half trends, we expect less deleverage from fixed costs and channel mix as sales improve and ecommerce penetration normalizes to a level higher than last year, but lower than what we saw in the first half when stores were closed.
We expect to incur between 35, and 40 million in PE and co vid 19 related costs in the second half.
As Mary discussed we are actively taking steps across the organization to rightsize our cost structure in the new operating environment.
We have limited the number of new hires and look to re purpose open positions, we delayed and reduced merit increases for our corporate store and Salon associates, we reduced marketing travel and other controllable expenses and moderated our pace of investments to build international capabilities.
Looking forward, we continue to identify additional opportunities across the enterprise to optimize our cost structure, while also building new capabilities to support competitive advantage and future growth.
In addition to cost management efforts, we continue to refine our capital spending plans our updated planned for the year is to invest between 180 and 200 million.
Including approximately 65 million for new stores, Remodels and merchandise fixtures $90 million for supply chain in IP and about $30 million per store maintenance and other.
We expect to open approximately 30, new stores in 2020 and relocate five.
We're still finalizing our real estate plans for next year, but plan to open at least as many new stores in 2021 as we do in 2020.
While we have slowed our new store growth opening pace in the near term in response to covert 19 and evolving market conditions, we remain confident in the longer term opportunity to continue to expand our fleet.
And now I'll turn the call back over to our operator to moderate acuity session.
Thank you.
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Our first question comes from Adrian knee with Barclays. Please state your question.
Good afternoon. Thank you for keeping my question and nice to see the progress Mary I wanted to go back to the comment you made on each business sort of coming through non traditional brand. So I want to get back to.
Given that prestige brands are helping with the contracting mall based distribution channel are you seeing either broader SKU assortment from existing prestige brands and is there an opportunity to expand beyond fragrance into some brands like personality alarm.
And then my follow ups for Scott just a clarification on the negative low double digit to negative mid teen if you're running negative mid single digit now to beginning at the third quarter should we expect third quarter to be stronger than the fourth quarter with all the uncertainty or media to it in similar in nature on from.
Year on year standpoint, thank you very much.
So Adrian Thank you for your questions and maybe I'll start with that I'll start with the second one first because he asked so the right Directionally, we say, we're expecting Q3 to be somewhat better than Q or as a lot of uncertainty as everybody knows but we've got resets of launches coming in Q3, I think holiday is just than they were all of them more cautious about given in new.
Ways, if youre going to think about shopping and hours available et cetera. So we're thinking directionally that way.
And as far as the comp sequences concerned I would just point maybe too.
Looking at the promotional calendar I know a lot of you guys track. This stuff very closely so you can schedule what types of things we did last year over the course of the third and fourth quarters.
And with the background color being we're trying to pull back on some of those things Ray we talked about in our comments. So overall directionally I would say the fourth quarter, probably slightly slightly weaker on balance just because of the volume of sales there and some of the promotional activity that historically have taken place in the fourth quarter over.
Paul.
Dave would you take the first part of the question. Thank you yeah, absolutely as it relates to.
Your question.
Assortment and evolution of that for sure we're continuing to see disruption in the prestige.
Marketplace, and that's something we've seen for Wilan and.
A dynamic that we feel like we've been taken advantage of and continuing to grow share across across all categories. In the proceeds side of the business and that comes from all different types of brand certainly exclusive new brands like like highlights some of our established independent brands. Indeed brands like it's hard to an urban decay into phase.
As to where we've launched so exclusive innovation across those brands and on the more prestige luxury side. We have made specific advancements on that you asked specifically about Chanel and yes, we have a strong fragrance business, but we have rolled out in the Chanel butane line, a small number of stores with the expanded portfolio in them.
Make up side. So we see continued opportunity across all aspects of that business to capture more share expand our assortment and meet our guest needs in multiple ways.
Thank you.
Our next question comes from Ike Boruchow with Wells Fargo. Please state your question.
Hi, everyone Lauren craft on for thanks for taking our question and given that massive acceleration in E. Commerce that we've seen in 2020 could you talk a bit about that current margin profile of E. Com initiative and any initiatives you might be taking on to improve that and then as a follow up how does that new accelerate.
Question in online penetration play into your vision of longer term margins for the overall business. Thank you.
Yes, that's that's a broad question, but let me let me first start out by saying just I guess reiterating how proud we are of our teams.
Income digital teams the distribution centers, our store associates in all the support people that work with them I mean, it was a spectacular outcome to deliver accomplish that took 200% year over year expansion, just really a great outcome overall with the thought being that the average for the quarter at some point during the quarter with higher.
Than that right higher than 200%, so very proud of the outcomes. There. When we think about you know we overtime the ecommerce business, we haven't been shy about sharing that the challenges we have with rate I mean, everybody is very aware that overall, so when we think about what we're trying to balances rate versus.
Dollars and speed versus cost and we've talked to investors in recent years about the heavy investment cycle, we've been in to support that part of our business and it's really work to our advantage now right. In this time of of crisis and change pivot point with consumers. So very happy what we've been doing in recent years to support that bill.
Yes, and book, obviously that that's going to be the trend for the future as well. So we'll continue to be focus there.
When we think about the margin profile overall in the future again, our historical guide was that it was going to be a 20 to 40 basis point headwind. Obviously, that's not what it is you know in this time in space, We're happy with the sequential improvement we saw from the first quarter right and we expect that to continue to moderate.
Sequentially as we go deeper into 2020, and we're thinking and working collectively on other levers we can pull to try to mitigate some of that rate headwind specifically in the ecommerce space. So things like BOPUS, we've been talking about and curbside now that we have have that.
Salable to us and again those are higher ticket transactions typically in and better margin profile overall, our Dcs are operating more efficiently now so that helps offset some of that headwind and then we're thinking about other parts of the business right Mary pointed to cost optimization. So it's not just at E. Commerce question, it's more of.
What else are we looking at overall for the enterprise to help optimize the overall margin profile of the business not just the E com piece of it. So the entire team is focused on that and we're doing a lot of work now framing up 2021, and how we deliver the best overall financial result, there and start March and back to healthy.
Your operating margins.
Thank you.
Our next question comes from Steven Forbes with Guggenheim Securities. Please state your question.
Good evening Murray, maybe a question for you you mentioned in the prepared remarks about the doubling of the omni channel penetration rate among the numbers.
Curious if you could just discussed how the behaviors abuse. These new Omnichannel members is has compared right. The legacy group or are they repeating faster shopping more categories or.
That's what I think potentially consolidating their spend right with old.
No just given the trip consolidation diesel while bigger how you sort of think about.
That doubling.
This quarter, yes, well, it's too early to really kind of parse out the exact dynamics of their behavior, but we we like where it's heading I mean omnichannel gas I said this really I think you probably know this but there are most engaged gas than they spend three times historically as much as somebody who is shopping in store only so this is sort of a forced migration to more focusing.
Got it into this and so like in debates are the margin impacts of E. Com. We know that total value of this customer is quite significantly strong because if the most of our I guess historically have started as store only and then started to shop online with us as we saw their spend triple they basically we're keeping pretty similar what they are buying in store and.
Just adding incrementally online in the categories tenant to be similar so we would expect a similar behavior, except we've got a lot of folks now who started first and align right and so on and we as we opened up our stores and saw people coming back and certainly in traffic isn't where it was but we're pleased with the pace of people kind of that the stores I think it just kind of continues.
Support that promise that enthusiasm like the idea of shopping both physically and digitally they get good things out of both of those saying. So you know I mentioned this also that.
As we saw a lot of new people shopping with us who weren't rewards members. We also has opportunity now that we as or email to convert them into their loyalty program. So so I think this is all good I mean that the seeing that Thats Swift increase that happen showed that a we were in the right place from ecommerce perspective, any that ecommerce businesses and just happened on its own.
Our team is doing great job of connecting with gas and social and digital channels to drive make sure. We're driving awareness sustained top of mind at a time that there was a lot of things on People's minds right. So we pivoted out of what we would have done traditionally and really focus on understanding where people were in terms of self care and things like that so it was strategically I think a great pivot.
And we'll continue to watch it closely but we think it's a it's a good it's a good thing for our business.
Thank you. Our next question comes from Michael Binetti with Credit Suisse. Please state your question.
Hey, guys. Thanks for taking my question has shown on the quarter.
I guess, maybe it sounded a little it's on the planet pullback on promotions in the back half somewhat counterintuitive, there's obviously, an unprecedented numbers and department stores that have been closing around you seems to me that that's a really good opportunity for you guys to grab market share you seemed like the Arabs and for that share.
Our would you be willing to walk away from a new customer opportunities you do see a path to customers those doors start to close in the back.
Yes.
Okay.
I have asked a two part question okay.
Let me just start with that will not maybe Dave you can add to it but I'd say high level of course, you know we're focused on driving market share gains and theres opportunities out there having said that you know all we're doing a saying let's be as targeted and strategic as we can about how to do that we are at me through this entire pandemic, we've been gaining share in prestige beauty and.
While it and so we know that we're competing well even with a somewhat less promotional kind of cadence that and then we would have had at that time. So the ideas is still compete at the if at peak times or things like holiday, New strategic promotions that we know work really well for us and just be more efficient with how we how we do this and certainly if we see opportunities.
More aggressive or need to we will I mean, we're not we understand that theres an opportunity to convert especially as we convert people into our loyalty program on that becomes very sticky. So I think it's a good balanced way to think about this but we're obviously keeping a close eye on it is there anything you'd add to that they that I didnt hit. So there's just to reinforce you have this idea of just pretty much more strategic in our approach towards promotional offer.
Position, but we're not pulling eliminating all promotions in fact, starting.
This Sunday will be 21 days, a beauty one of our biggest the most important most strategic events of the year and it's a good example of a program of an event that is promotional but it has the strategic role in driving what we call mass migration introducing our guest many times for the first time to new prestige brands, so focusing in activities like that optimal.
It doesn't.
Programs like our loyalty program.
Personalization efforts that more pinpoint and direct targeted direct promotional activity specifically to people that we know respond to it will just a allows to be more efficient with that spend and ultimately me more effective in the marketplace.
Just wanted to ask a follow up I mean.
How best to connect sensitive progression and margins as you think multiyear I think of what I heard today, those incremental entered more efficient promotions more efficient labor model you have Jacksonville coming back online. So are coming online again, so E com should be more efficient.
Alright negotiations on various initiatives.
One of the headwinds we should think about there will be offset some margins as we try and oriented ourselves I guess, we're looking at 29 team since we're trying to forget about 2020 for several reasons here.
[music].
Yeah. So when we were I mean, we're in the throws of at right now Michael you know looking at 2021 operating plan and looking at.
No new embedded cost headwinds to the business overall, so some of the things we've talked about historically around channel mix headwinds in store payroll headwinds in some new light PPD cost implications and how long that might be with us. So theres a lotta oars in the water so to speak right now the team is focused on.
But again, we're focused on overall operating margins trying to squeeze out the best overall financial results and we're focused on double digit operating margins over the longer term, we still think that thats kind of the minimum threshold for this business. We got healthy product margins you know, it's part of the the base.
Of our operating model and there's still lots lots of levers for us to pull on and we're just making decisions now on which ones were going to push and pull for next year. So we'll have more to say on that as we get further along this year.
Thank you. Our next question comes from Paul Trussell with Deutsche Bank. Please state your question.
Good afternoon.
And good job in the quarter.
Wanted to ask about stores, you mentioned that as stores reopened.
Online still remain very strong up triple digits, how should we think about.
Productivity and the profitability of your store fleet and while your long term target remains intact.
Do you view the cadence of store openings on an annual basis potentially any different going forward.
Both in the U.S. and your approach to opening in Canada.
Well I guess I'll start so just.
But the basic runway on on the store build out program. So we pulled back we moderated this year for obvious reasons right. So you're in that 30, new store opening range for 2020 and as we stated in our remarks next year. The way we're looking at it now because again, you're working on leases years in advance right working with landlord partners.
His line and up the right kind of space and making sure you got the right co tenancy mix. There. So these are far down the road kind of decision. So we feel good about at least 30, new stores for next year and hopefully maybe more depending on how.
Some of the pandemic.
Impacts other retailers and our centers across the us right now.
So we still feel good again I think we mentioned in the remarks that we're looking at the optimal footprint right. So the fleet, we have now versus the fleet. We would want if we had a white sheet of paper to work with and then layering on top of that the omni channel sales opportunity for us for the long term and just making sure we got the right number of stores with the.
Right incremental.
Digital.
Sales offering as well so again.
Looking at it today, we still feel like 15 to 1700 is a good range I mean, that's definitely something we feel comfortable with and that we just want to make sure that its optimal right. So we're in the midst of that work now and we'll have more to share in that later this year.
Thank you. Our next question comes from Simeon Gutman with Morgan Stanley. Please state your question.
Hi, everyone through good.
My question and follow up and one is financial related first can you talk about the fixed costs per store may sound like they are going lower are you able to quantify so we can understand.
Leverage or even de leverage going forward and then related to something that was asked earlier Scott. The 20 to 40 basis points, you mentioned in E commerce or its penetration went up margins got hit.
Does that number inclusive of what was happening to the store only business and now with the overall results to the business or was that a channel exclusive comment that and that mix to that channel increased that was the pure impact to the overall business hopefully that made sense.
Mm.
Yes, so we're thinking about the second part of your question Simeon, but as far as the first.
The first question there cells. So fixed cost overall is something that weve been focused on for a couple of years already so when we talk about efficiencies for growth or F. G. Real estate is a core pillars in the work that we do there so again thinking.
About the whole portfolio when we're dealing with landlords not just individual stores and looking further out into the future on renewals and opportunities to reposition stores or renegotiate overall economics on those stores. So thats been a that's been underway now for a period of time and so we.
We're we've got to embedded process in the business and we're feeling really good about we're doing so covert 19, just kind of put that on steroids here you know in the near term. So again, you've seen other retailers talking about challenges they've had so we're doing a lot of the same things behind the scenes, we feel like we've got a better process, we've got strong relationships, where a retail.
Our of choice for many landlords the beauty category being.
A healthy one to add to the mix and we drive a lot of traffic that centers. So we feel like we're in a good position to make sure we get the best overall economic deals.
Thats something that we will be part of our long term plan, we're getting benefits now and we will continue to scale that up over the long term.
As far as the 20 to 40 basis point headwind in our historical.
Guidance I mean, that's again thats the pages been turned on that here over the last call. It three to five months and we've been reacting and leveraging and trying to optimize the overall impact there I think I mentioned earlier DC throughput efficiencies are getting better as the business scales up you know.
You know two and three X times, we are getting efficiencies out of the network. Overall I mean, there are headwinds you know you've seen the news reports here on some of the surcharges that are coming from some of the shipping operations here in the U.S. So thats another suitable wildcard that we're balancing against but it's a little too early to.
Really be able to quantify what the impact on that is I would say in the big scheme of things, that's a smaller item compared to some of the other headwinds that we're dealing with now here in 2020, but again, we've got a great team in supply chain that smart and thinking about all the long term impacts of this over the long term and again when we.
Put it into the mosaic that we're dealing with whether its specific.
Digital Beano gross margin headwinds or other things in the business ppt costs were kind of putting all the pp all the puzzle pieces together here to kind of trying to try to come up with the best overall operating margin answer that we can.
Thank you.
Our next question comes from the Wissink with Jefferies. Please state your question.
Thank you good afternoon, everyone. Kathryn part of the question is for Scott can you give us great detail for the back half on gross margin I'm wondering if you're willing to give us some direction on us DNA.
In the quarter you had a few transitory element. So I'm just curious if you can help us untapped game I think retention credits you mentioned around 48 million.
Some of your store staff are still slow maybe just help us think about the puts and takes thank you think about first semester versus second.
And then Merian DP related to that is on marketing I think Mary you mentioned that your unaided awareness with stable, despite calling back pretty significantly on marketing I'm wondering if thats reshaping, how you're thinking about marketing. The Ulta brand. If you are seeing that you're better known and by selecting today and you spend in the path and if that changes how much you think you need to spend.
On foreign markets and going forward. Thank you buffer I'll start with that long because I'm sure I had a marketing it probably wasn't thrilled when I hate that sounds like that's a logical question now I would say that I think about Dave's postage with an eye on but the notion of being able to retain and maintain great aided awareness unaided awareness and strong brand equity means just consistent.
Investments you have to make overtime I guess I'd say through the lens of things that like media like advertising. So we have pulled back maybe some pieces here and there because we really didnt have the ability of need to create that kind of demand, but our marketing team has an amazing job just constantly looking at return on investment and improving what we do everyday to maximize the levers.
So that we that we use so I think our marketing investments gotten selling around more efficient overtime. It will continue to do so so okay. Scott so SGN a in the back half of the year. So you're right. The the cures Act.
$48 million was a one time kind of thing for the second quarter and won't recur in the back half for the year, but then we'll have the pp any cost ERP costs. The 35 to 40 million in the back half that's primarily SGN a cost. So a lot of it is store labor when you think about metering people in and out of the stores and maybe.
Leading them to safe shopping practices, and then you got cleaning of the stores and related supplies to all that.
Store payroll and benefits is the largest you know bucket in the SGN a line item.
Directionally you heard us talk about some of the changes we're making here Mary mentioned, a few of those and so lower in the second half versus last year.
By by some of those actions that were taken.
Marketing lower in the second half versus last year, but not as low as it was in the first half. Some we pulled some expenses out of the first half and we're putting in the second half two.
We've got some great new advertising television advertising coming here. So we're really excited about overhead then would be the last bucket and there's going to be some growth versus last year, because some of those investments. We made growth investments are still yet to be anniversaried and will be when we get through the full year.
So thank you thanks, everybody for joining us today right of time I just want to express my sincere appreciation to all of our Ulta beauty associates for their efforts as we continue to navigate well through this unprecedented environment as hope that you and your colleagues who loved ones are safe and healthy and we look forward to speak with all of you again in December when we report our third quarter results. Thank you.
Thank you. This concludes todays conference all parties may disconnect. Thank you for your participation.