Q3 2020 Ulta Beauty Inc Earnings Call
Greetings and welcome to the call for beauty third quarter 20, <unk> earnings conference call at.
At this time all participants are in a listen only mode.
The brief question and answer session will follow the formal presentation.
And we should require operator assistance during the conference. Please press star zero on telephone keypad and as a reminder, for just conference season, the recorded and it's now my pleasure to introduce your host Ms., Katie Rawlins, Vice President Investor Relations. Please go see.
Thank you Shelly good afternoon, and thank you for joining us today for a discussion of the Ulta beauty its results for the third quarter of fiscal 2020.
Hosting today's call and Mary Dillon, Chief Executive Officer, and Scott Settersten, Chief Financial Officer.
Dave Kimbell, President will join us for the Q and a session.
Before we begin I'd like to remind you of the company's Safe Harbor language. The statements contained in this conference call, which are not historical facts may be deemed to 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 at such statements due to a number of risks and uncertainties all of which are described in the companys filings with the SEC.
We caution you not the place undue reliance on these forward looking statements, which speak only as of today December 3rd at 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.
In todays comments, we will discuss certain non-GAAP financial measures, including adjusted diluted EPS, which has been presented to reflect our view of our ongoing operation by adjusting for impairment and restructuring related costs.
A reconciliation of these measures to the corresponding GAAP measure can be found in our earnings release, which is available in the Investor Relations section of our website at www dot on the Dot com.
Well the again this afternoon with prepared remarks, and Mary and Scott.
Following our comments well open the call for questions.
To allow us to accommodate as many questions as possible during the hour scheduled for this call. We'd ask that you. Please limit your time to one question and one follow up question as always Patrick and I will be available for any follow up questions. After the call now I will turn the call over the Mary Mary.
Thank you Kiley and good afternoon, everyone today at <unk>, we reported financial results that reflect the strength of the Ulta beauty model and improving trends and consumer demand I continue to be very proud of how well our teams are responding and navigating through this difficult period and I want to thank all of our Ulta beauty associates for their continued and.
Melody creativity and commitment to serving our guests and taking care of each other and during this unprecedent at period.
For the third quarter net sales for 1.6 billion and GAAP diluted EPS was the dollar the pretty two per share at <unk>.
Adjusted diluted EPS for the quarter was the Dollarssixty four per share.
Building on the momentum we saw at the end of the second quarter third quarter comp store sales declined 8.9% and.
The mid single digit comp the claims we experience an August continued through September with October sales impacted by our decision not to repeat certain promotional activity from last year.
As we discussed on our last earnings call, we're working to optimize promotional events to remain competitive while also improving profitability.
And the third quarter, we execute at several promotional events at drove strong guest engagement and profitable sales.
We launched our first ever we love, our membership and to Reengage and welcome Ultimate rewards members. That's the Ulta beauty, having completed our phase store reopening process.
We reported guests with number only points and services offerings and amplify the offer to cross the old earned and paid channels to reinforce the value of our rewards program.
We successfully executed at more focused 21 days of beauty one of our most strategic and that's intended to drive mass migration to prestige products.
The excite and Reengage guess, we accelerated our digital and screaming first approach the support expanded messaging for our compelling beauty steals newness and exclusive products.
We expanded the focus of our fall holiday that beyond makeup to include the key self care categories, while reducing the length of the event to drive greater productivity.
And to further elevate our Harris the already through our gorgeous hair of that we'd leverage engage and storytelling around healthy hair color care and black on branch.
Now turning to our performance by category, we continue to increase our market share across most major prestige beauty categories starting.
Starting with one of our strategic growth categories skincare delivered positive comp growth driven by newer brands like the ordinary true love and Beekman 80, you know too as well as the existing brands like Serafini first day of beauty and the Roche close at for.
For my proprietary consumer insights work, we ended the most beauty enthusiasts are maintaining or expanding their skin care of routine as a form of self care.
Increased interest for home skincare treatments as well as newness and innovation and body treatments sales Serums and eye creams are driving strong category growth.
Moving into these trends and the opportunity to increase our market share in this category. We continue to expand our assortment while also increasing space end marketing support for this key growth categories.
[laughter] fragrance and Bath was our strongest category this quarter at delivering double digit comp growth driven by newness exclusive and unique Ulta beauty programs.
Guests responded well to our fragrance gift with purchase programs as well as our fragrance crush program, which highlights the favorite fragrance each month sales.
Sales of fragrance also benefited from our exclusive launch of already from already on the ground day and innovation front established brands like why the cell and Marc Jacobs.
The back of category continues to deliver strong growth and this quarter, we introduced new does for brands like truly and Ulta beauty collection and tree Hot.
[noise], reflecting on going T I, why beauty and self care trends hair care and hair styling tools also delivered positive comp sales growth this quarter.
Then hair care of color continued to deliver strong growth driven by brands like Arctic Fox and Madison free cash.
Extra at here of brands CRO Smith and pattern by Tracy Ellis Ross also delivered nice growth.
Our leader business also continued to perform well and newness and dice and and the continued popularity of one step tools drove strong growth and styling tools this quarter as guest leverage more options to achieve different lux.
Makeup continued to be challenged given shifts and consumer behavior and delays and planned newness and innovation. Despite these headwinds subcategories that focus above the mask continued to perform better including lashes Brown and I.
Newness, while more limited and last year continues to be important to guess what the stall took seems like Ulta beauty. Harry Potter collection makeup revolutions nightmare before Christmas and color Pops, Hocus Pocus collection, all of resonating really well with guess.
Although the pandemic has accelerated the channel shifts our consumer insights and results continue to confirm that our members prefer to shop and physical stores for beauty, even as they have increased their adoption of online shopping and.
As expected the stores opened for the full quarter store traffic trends improved and ecommerce growth moderated from and trends, we saw and the first half of the year for.
For the quarter, our ecommerce business delivered sales growth of about 90% and buy online pickup and store was strong again this quarter.
Turning out of services, our services business continues to be adversely impacted by cold it really the capacity constraints and local restrictions at the end of the third quarter Salon and brow services were available and nearly all stores, but we have not resumed skinner make up the services based on the ongoing safety concerns although.
Trends improved from the second quarter sales from our services business were down more than 30% and the third quarter, primarily due to the decline in transactions.
Average ticket was higher reflecting pent up demand for cod color and style services.
At the end of the quarter, we had 31.7 million active members and our ultimate rewards program essentially flat with the second quarter and about 6% lower than the third quarter last year.
While we're pleased with our new member acquisition and Reengagement trends. This quarter, we will continue to focus on reactivation of members, who haven't shopped with us since depends on the began.
Importantly retention rates, among our platinum and Diamond members, who are most engaged with our brand remained very strong.
We continue to see an increase in number of shopping with us on line as we've discussed before and the channel members are our most engaged and most productive number is historically spending three times more per year, and then store only guess and the third quarter Omni channel members were about 22% of the total compared to about 12% and the third quarter.
Last year.
And our teams continue to manage the day to day operations and the current environment. We're also building the foundation for profitable growth at 2021 and be on.
Specifically, we are focused on five strategic priorities to expand our market share gains and extend our competitive advantages and during the third quarter. We made progress on each of these priorities.
Starting with our continued focus on building the capabilities to win and an Omnichannel world.
We're committed to meeting guess wherever they want to shop in April and response, the cold and related constraints, our digital and store teams moved quickly to launch a new curbside pickup option to.
To make it easier for our guests and our store teams. We have recently enhanced this option with the launch of the curbside customer alert notification, we've refreshed curbside signage and established dedicated Ulta beauty parking spaces at select stores.
We've also expanded our store locator functionality and crude and clue greater visibility to store specific service offerings and separate store and curbside hours and.
On the Ulta beauty and we now provide store specific occupancy levels for greater transparency and guess safety.
To support our growing ecommerce business. This quarter, we opened our Jacksonville fast fulfillment center extended E Commerce operations, and our Chambersburg, Greenwood and Dallas distribution centers and extended our ship from store program to 105 stores. These investments have increased our E commerce shipping capacity and.
The improved delivery speed to guess.
This quarter, we also completed the rollout of our new booking tool, our new booking tool for services and the App and on Ulta Dotcom. This new digital application enables guests the easily book or reschedule Salon Brown and other service appointments.
Adoption of the tool continues to increase and nearly a third of our service deployments were book through this new tool in the most recent quarter.
Resulting in more convenience for our guests and more efficiency for our associates.
Our second priority is to re imagine how guests experience and discover beauty and the new normal.
Product discovery is a hallmark of the beauty shopping experience and we're welcoming more cash to experience the fun of glam lab, our virtual try and tool.
Our store associates have done a great job of introducing glam lab to guess at the safe alternative to testers and stores, which are currently for display purposes only.
The help facilitate even more and store engagement, we've introduced new QR codes on select shelf straps and take us directly into the glam lab experience, making the even easier for guests and virtually try and products while the in source.
Building on our successful virtual try and capabilities last quarter, we introduced the skin analysis tool, which uses augmented reality technology and artificial intelligence to assess skincare needs and offer personalized product recommendations.
This quarter, we enhances tool to include new of routine recommendations and the ability for guests a stay of analyses to track changes.
In addition to offer and guess digital tools were also testing one on one video consultations across all beauty categories in collaboration with the brand partners and our own services team members.
Our third priority is to engage and delight beauty enthusiast with the curated beauty assortment and focused on exclusivity and leading brands.
Reflecting on the growing importance of clean beauty in October we launched conscious beauty at Ulta beauty at all stores and on Ulta Dotcom and on our App and the enthusiasm and feedback for our guests and brand partners has been tremendous.
This holistic initiative provides greater transparency the help guest shoes brands and products that reflect their personal values and individual needs.
Through this initiative, we are sort of five brands across for key pillars clean ingredients cruelty free the big and and sustainable packaging and highlighting participating brands and their positive impact on communities and today more than 200 brands are participating on the program and more than half of the certified and more than one pillar.
As part of the launch we establish the conscious beauty Advisory Council a coalition of experts at the forefront of clean beauty product development and packaging sustainability.
With the help of our Advisory Council, we will ensure the conscious beauty at Ulta beauty will continue to evolve and grow at expectations and standards for clean beauty continue to change.
In tandem with the launch of conscious with the launch of conscious beauty, we collaborated with Credo beauty of pioneer and clean to introduce the Credo collection at Ulta beauty, a curated collection of prestige and mass the each brand's avail.
Available and flux stores and an Ulta Dot Com. This collection features nine clean brands handpicked by the credo experts across multiple categories, including skin care hair care and cosmetics.
Our fourth priority is to leverage the insights from our ultimate rewards program to cultivate brand love and loyalty deep and guest engagement and increased spend per member.
We continue to build content that reflects our brand purpose and drive meaningful connections with our guests after spending most of our marketing efforts and the first half of the year. While stores were closed this quarter, we launched where dreams began a campaign that reflects the next chapter of our brand journey.
Launch the cross linear television and digital streaming platforms. The work reinforces our brand purpose and celebrates optimism togetherness self care and self expression and a world increasingly challenged by uncertainty and division.
We continue to enhance our ability to create personalize offers and recommendations based on a holistic data led understanding of guest preferences and behaviors.
This quarter, we increased our use of propensity modeling to help reactivate members and we continue to strengthen our ability to optimize offers and email and online enabling us to maximize the return on select promotions.
Our fifth and final strategic priority is to drive holistic cost optimization.
We continue to work to create and more cost efficient store labor model as we discussed on the last earnings call. We made the difficult decision to eliminate two store leadership roles. The Salon manager and the prestige manager and created a new service manager role of responsible for services events and prestige retail store.
At Didnt of MBR first this new structure creates a stronger linkage between services and products.
This quarter. We also made another difficult decision to suspend our expansion into Canada. This was not an easy decision the bake and the no way reflects a lack of confidence and the international growth opportunity for Ulta beauty.
Our teams worked diligently to position us for successful entry into Canada, and next year and I'm proud of what the accomplish in such a short period of time on.
And for after much consideration, we determined that prioritizing our efforts to strengthen and grow our U.S. operations must be our top priority and the current operating environment.
So these are just a few of the examples we've taken to adjust our model to reflect the challenges and opportunities we see today weve.
We've also maintained significant limitations on corporate hiring and controllable expenses and we continue to look across the enterprise for additional ways. We can optimize the cost structure, while also investing and new capabilities to support future growth.
We've made a lot of progress in pursuit of for our strategic priorities, which positions us to drive continued market share growth in the fourth quarter and beyond.
Certainly 2020 has been the year like no other and it's difficult to predict exactly what the holiday season will bring this year with shop space standards, and all stores and enhanced digital shopping options. Our teams are ready to meet our guests wherever and however, they want to shop with us This holiday season.
We're encouraged by the sales trends, we have seen so far on the quarter, but the uncertainty remains as we navigate ongoing disruption from the resurgence and the virus and continued economic uncertainty.
As we execute through this holiday season, our top priorities are to reengage existing members and capture new gas with relevant content compelling offers and unique products and also to deliver engaging omni channel experiences.
Ulta beauty is well positioned for this gift giving season as consumer seek moments of joy connection and self care. Our holiday campaign is focused on helping guests see the joy of this holiday season.
Leveraging influencers from our Ulta beauty collective we're sharing waste of practice self care, we're celebrating community and relationships with gifting ideas and we're highlighting the magic and generosity of the season.
We kicked off the holiday season at the beginning of November with the distribution of our holiday print magazine or re imagining of our holiday offers and multiple number appreciation events.
Building on newness and exclusive introduced earlier this year, we've launched several new brands just in time for holiday season, and skin care and we're excited to launch Alicia keys, New brand. She is still care exclusively at Ulta beauty with a limited selection of products for the holiday season, the full assortment will the available on early 2020.
One.
And make up we're excited to welcome our glass accruals the free luxury beauty brand to the Ulta beauty family.
And while we offer Chanel fragrances and stores. We're excited to announce we have recently launched and I'll fragrances on ultra dotcom for holiday gifting and beyond.
To help our guests gives the best guess this year, we have introduced a new digital gift guide, including a three step quiz to inspire and help find the perfect gift and for those who prefer to give gift cards. We've expanded our designs include more inclusive the options and Weve expanded our distribution and third party outlets as well for added guest.
On the unions.
And anticipation that more guests will utilize digital channels. The season, we've made curbside and both the pick up the easier than ever. These enhancements combined with the investments we've made to increase our ship to home capacity position us well to deliver a great omnichannel experience this holiday season.
The operating environment continues to be dynamic and challenging is COVID-19 prevalence increases so our market specific government restrictions, resulting in some reductions and operating hours limitations on in store capacity and in some cases mandated store closures our priority is to ensure the safety and well.
Being of our associates guests and brand partners and we'll continue to monitor the situation closely and are just and adjust our operations as needed.
Now before I turn the call over to Scott I want to highlight the exciting new partnership I'm sure you've all read about in 2021, Ulta beauty will partner with another powerhouse retailer target corporation to disrupt the retail industry and redefine how guests experience beauty net.
The next fall will introduce Ulta beauty at target, a shop and shop experience online and in select target locations with 1000 square feet of space Ulta beauty at target will offer a curated assortment of established emerging and prestige brands across multiple categories. Our vision is to create an extension of our.
Welcome and Ulta beauty experience with dedicated target team members trained to provide elevated service and offer deep product expertise with the dedicated space and inspire the trial and discovery lean.
Leading into the power of our respective loyalty programs, we intend to reward guests with benefits across both programs for all purchases made within the shop.
Leveraging the royalty structure. This unique loss ratio and brings together ulta beauty categories, the already and brand relationships with targets traffic driving business model and industry, leading fulfillment services together, we will deliver industry, leading guest experiences across multiple touch points provide the prestige.
Beauty category and participating brands with an unparalleled platform for growth drive market disruption and capture more market share.
For Ulta beauty. This partnership will build on our strength as the nation's largest beauty retailer bring our beauty authority to life and the new way and create additional touch points for millions of loyal and new guests to discover and engage with the Ulta beauty ultimately leading to more members as well as greater spend per member Ics.
Expanding our omni channel capabilities to more deeply connect with guests is a strategic priority for us. We believe this new channel would create more opportunity to drive demand for the full beauty experience for discovery services and play available on all Ulta beauty stores import.
Importantly, we will be able to leverage our of robust CRM capabilities to engage guests who shop Ulta beauty at target with targeted personalized communications, the highlight and enhance their total ulta beauty experience.
In closing, we know guests are changing how they shop for beauty, but their engagement with the category remains strong at that the role of beauty is more important now than ever and this new normal beauty has become more the make up more than product today beauty is critical link to the acts of self care and all of this and has a well of brand with a diverse.
Assortment and a wide range of price points outstanding service offerings, and knowledgeable and passionate associates Ulta beauty is well positioned to lead and shape, how guests experienced beauty and this new normal and now I will turn the call over to Scott for discussion of the financial results Scott. Thanks, Mary and good afternoon, everyone. We appreciate your.
The support of Ulta beauty and hope you and your loved ones are staying safe and healthy.
I will reiterate related reiterate larrys comments and thank all of our dedicated associates.
For their tireless efforts and safely serving our guests and keeping our operations running smoothly during this difficult time.
I'll begin with the income statement.
Net sales for the quarter declined 7.8% and total company comp declined 8.9%.
Given the challenges from the cold at 19 pandemic. We are very pleased with this performance as topline results for the quarter were better than our internal expectations.
Average ticket increased 7.6%, primarily driven by an increase in units per transaction, while transactions declined 15.4%.
We experienced nice conversion and both channels, but continued to be impacted by softer traffic to stores.
As expected E commerce growth slowed relative to the second quarter, but continued to deliver very strong growth versus last year.
Our ecommerce operations delivered a comp increase of 90 per cent for the quarter as guests continue to take advantage of our omni channel capabilities.
Buy online pickup and store was strong again this quarter totaling about 16% of ecommerce sales approximately double the penetration and the third quarter last year.
From a mix perspective makeup was 45% of sales of down 600 basis points from last year skincare, Bath and fragrance collectively increased 500 basis points to 26% of sales hair care products and styling tools increased 300 basis points, the 21% of sales while the services category was down two.
100 basis points to about 4% of sales.
As Mary indicated our service business continued to be negatively impacted by cold period related capacity constraints.
Gross profit margin was 35.1% the decline of about 200 basis points compared to 37.1% a year ago.
Similar to what we have seen since the onset of the pandemic the largest driver of gross margin de leverage was fixed costs due to lower sales.
I would note that the trend improved from what we experienced in the second quarter due to the stronger sales trend.
Channel shift was also a large contributor to gross margin de leverage again this quarter, albeit less than we experienced in the second quarter and stores were open for the entire quarter the.
These headwinds were partially offset by increased and merchandise margin, which was primarily driven by our lower promotional activity as well as continuing benefits from our efficiencies for growth we're EEG efforts.
SGN and expenses decreased to $416.4 million compared to $449.2 million and the third quarter of last year the.
The largest driver of the decrease was lower store payroll and benefits as we reduced investments and labor to reflect lower demand.
The store expenses were also lower as we adjusted and managed to softer traffic and stores.
Marketing expense was also lower year over year, reflecting reduced spend on print offset.
Offset by higher investment and digital channels.
These reductions more than offset a modest increase and corporate overhead and PE and Colgate related expenses the.
The increase in corporate overhead primarily reflects higher compensation and benefit expense, partially offset by investments to support the strategic growth initiatives made last year.
As a reminder, and the third quarter of last year incentive compensation expense decreased versus the prior year, reflecting financial performance that was below targeted levels as well as the lower stock price.
This quarter, we recorded a charge of $23.6 million for impairment restructuring and other costs as Mary mentioned earlier, we suspended our planned expansion to Canada, resulting in a 15.9 million charge related to long lived asset impairments lease termination costs and severance art.
Teams continue to wind down this effort and we now expect to incur between $30 million to $40 million of Canada exit expenses in fiscal 2020.
And the third quarter, we also recorded $5.7 million and severance associated with the elimination of the Salon manager and prestige manager roles and record of $2 million of lease termination costs related to the previously announced the permanent closure of 19 stores.
Pre opening expense was $4.2 million in the quarter, a decrease from 6.5 million a year ago. We.
We resumed new store openings in early August and opened 17 stores and the third quarter compared to 31, new stores a year ago.
Interest expense related to the drawdown of our revolver totaled $1.4 million compared to interest income of 900000, a year ago.
Diluted GAAP earnings per share was a dollar and 32 cents compared with $2.25 reported for last years third quarter adjusted diluted earnings per share excluding charges related to the impairment restructuring and other costs was $1.60 for compared to $2.
The 23 cents, a year ago, which excludes stock compensation and other tax credits.
Moving onto the balance sheet and cash flow for the quarter total inventory decreased 11% compared to the third quarter last year and inventory per store decreased 12.5% year over year as we adjusted to recent demand trends and reduced holiday receipts.
To maintain flexibility and manage inventory risk we have reduced our exposure to limited edition holiday sets and are leaning more into core product.
We ended the quarter with $560.9 million and cash and cash equivalents.
At the beginning of the pandemic, we drew down 800 million on our $1 billion revolver and suspended our stock buyback program as precautionary measures to increase liquidity.
Reflecting on our confidence that we have sufficient liquidity to support our operations and investment priorities, we repaid at $800 million of borrowings that were outstanding under the facility on September 2nd.
We remain confident and our ability to generate strong cash flow and we may resume our stock buyback program this quarter, depending on market and operating conditions we.
We currently have 1.58 billion remaining under our current repurchase authorization.
Turning now to the rest of 2020 the.
The overall operating environment remains uncertain and it continues to be difficult the forecast our business with precision the.
Therefore, we are not providing the EPS guidance at this time.
However, I want to provide some color on how we are thinking about the fourth quarter.
We are encouraged by the sales results for November however, the operating environment continues to be dynamic and it is difficult to predict how the effects of the pandemic, including any lockdowns or restrictions may impact consumer demand through the rest of the quarter as such we now expect our fourth quarter comps.
To be in the range of down 12% to 14%.
Slightly better than the expectation of mid teen comp declines we shared on our last earnings call.
To call outs as you think about your models as Mary shared we of realigned our store management structure to create a more cost efficient store model.
As a result of these changes we will see a reduction of salon payroll and cost of goods sold and an increase in store payroll and SGN a relative to last year space.
And we expect to incur $15 million to $20 million of PE and cole good related expenses in the fourth quarter.
Overall, we expect SG and $8 in the fourth quarter will be similar to last year's levels.
We continue to adjust our capital spending plans our updated plan for 2020 is to invest between 150 and $160 million on capital expenditures, including approximately $65 million for new stores, Remodels and merchandise fixtures $65 million for supply chain, and IP and about $25 million for store meat.
And ends and the other way.
We expect to open approximately 30, new stores and relocate five stores in 2020.
We are still finalizing our plans for next year, but continue to expect to open at least 30 new stores in 2021.
We remain confident in the long term opportunity to continue to expand our store fleet.
One final comment.
We recognize that our long term profitability potential is top of mind with investors and I want to take this opportunity to reiterate our confidence that Ulta beauty is at double digit margin business.
However, given the uncertainty and lack of visibility as to when the operating environment will stabilize and recover from the pandemic. It is difficult to say with certainty when we will return to double digit margins.
To start we have healthy product margins and our merchant teams continue to work to improve merchandise margins as we expand and enhance our assortment through both negotiation efforts as well as you have g. opportunities.
As sales stabilize and return to growth, we will be able to leverage fixed costs.
In addition to our ongoing efforts our real estate team is capturing significant benefits from lease renegotiation efforts, reflecting the market impacts of cold at 19, and these efforts will help us reduce occupancy costs over the longer term.
Although ecommerce will likely continue to be a headwind overall EBIT margins, we are improving ecommerce profitability as we increase utilization of BOPUS leverage size and scale with growth and get closer to our guests through the expansion of our supply chain network and we see additional opportunities the.
Mitigate rate impacts in the future.
As we discussed on our last earnings call. We continue to make progress on our journey to strengthen the effectiveness and profitability of our promotions.
And we are actively taking steps in the near term to rightsize, our cost structure and the new operating environment longer term. We are also working to identify additional opportunities across the enterprise to optimize our cost structure, while also supporting investment to support growth capabilities.
And now I will turn the call back over to the operator to moderate the Q and a session.
Thank you we will we will now be conducting a question and answer session disconnect.
So the next asked the question. Please press star one on your television and Keith.
The confirmation tone will indicate your line is and the question Q you made for store too.
I'd like to remove your question. Please.
Our use of his uses degree.
And maybe necessary to keep your hands, if you from the first and the start usage.
Moving to request that you asked the one question for me.
So the response and as many of us.
The second one small question do you actually to review and the.
And then in the Q.
One moment please.
And.
Yes.
Our first question is from Erinn Murphy with Piper soon.
Please proceed with your question.
Great. Thanks, good afternoon of Mike.
Mike and Mary and per year on the target partnership I was hoping you could talk a little bit more about the brand the perhaps on the process and the inventory buying process between both target as well as Ulta and then how do you intend to integrate the Ulta reward program at target some of the technology perspective. Thank you.
Great. Thank you well, let me just start about the fact at both by reiterating we're very very excited about the partnership we've got a strong business model and track record of.
To start with and feel very confident about our long term growth prospects and of course, we're really thrilled to unlock even more excitement for guest and growth with our target partnership.
Just to recap and we're thrilled at the it's an amazing retail or Brian credentials, the fantastic CEO and they've got a fantastic team. These are two very strong retail brands at the loved by consumers and the concept of Ulta beauty inside of target at nine out of the 10 people loved it.
Complimentary brand and brand DNA and and team DNA and of course, I think we both bring very different strengths of the equation from Ulta. It's you know our beauty authority, our best in class a understanding of the beauty category.
And for it for target of certainly of the scale of target and the millions of the best that we will discover ulta beauty at target as the huge benefit for us as well as well as their omni channel capabilities as we think about bringing this forward I think our brand. We're early in the process with our brand negotiations and discussions on the lot of positive a lot of enthusiasm.
I think as the category and for brands, it's a great new platform for growth and for new customers millions of new customers to discover brands.
And so we feel very optimistic about that.
Target will own the inventory and that I think we've talked about that publicly so thats, what we really on the brand relationships and Thats part of the partnership we developed from the start early.
Early on in terms of integration of technology, but certainly a very important part of this is at our is at the customers that participate in the Ulta beauty at target, we will be able to earn and we'll be able to sign up if they are not currently members and ultimate rewards if their ultimate rewards members earn loyalty points is seen as well as target loyalty points and then for ultimate rewards rate.
Deemed those at Ulta beauty, so we think Thats a critical part as we think about the weighted really create a flywheel here that works creates the win win win I'd say for guests at fault of beauty and for target.
Great that was very helpful. All the best.
Thank you.
Our next question is from.
Joe Altobello at Raymond James.
Two questions.
Hey, good afternoon.
First question in terms of the experience and you got that and October you mentioned on.
Comps were down mid singles and August September and saw a little bit of a downdraft at October given the fact and guys. The repeat of promotion did last year.
Was that different from what you expected the for them through.
The recall you guys. The rethink the promotion strategy as we head into the holiday season. Thanks, Yeah, I would say at this fits not wasn't a surprise to me we made a very specific decision to pull back some level of promotion and adjusted without the promotion of course, the comps are even stronger. So we think it's an important step in and just continuing to refine our price.
On the strategies to make them be as ultimately profitable as possible, but its out of pull back on our our ability to be very competitive. So the holiday season, and we started early because we needed to get people to start early in November right, given the capacity constraints and we've got a very robust program throughout the holiday season that we think.
Is very competitive and so far as I said on the in the script, we feel good about the results that we're seeing so I think it played out exactly as we had expected.
And the terms of the guide for Q4, you mentioned the comp down 12 to 14 and does the like November was off to a really.
Really decent starts and maybe help us understand why you're assuming.
A pretty significant flow down.
And in December.
Well the stepping back again, we're pleased with the momentum that we're seeing and the demand signals are strong and we did feel good about how we started in November it's a pretty simple answer to your question. We're in the middle of this unprecedented and on that cash and as you know, we just reached peak levels of hospitalizations yesterday and the U.S. So it's uncertain and certainly we know were.
Set up well, our our ecommerce businesses is performing extremely well on our stores are doing a great job, but there is uncertainty about what will happen I guess I'd say as we get closer to the holiday in terms of store traffic and.
And that would be true for everybody. So we're just trying to meet the guests where they are the pragmatic about this certainly of the news about the vaccine is positive but theres. Many difficult weeks ahead. So we feel good but we're also being cautious about the on the uncertainty that's gonna, we think play out and the next several weeks and few months on.
Understood. Okay. Thank you.
And next question is from Oliver Chen from Cowen. Please go see which of your question.
Hi, Thank you on the E commerce growth continues to be outstanding but at decelerated from prior amazing quarter. So what are you seeing there in terms of the category performance and what's happened and different areas of growth and that business would also just love.
More details on ultimate rewards and the number count and how that may trend and whats under your control in terms of keeping the member count at or above.
Of 31.7, thank you.
Sure well Oliver that the three pronged question and that's impressive.
And I'll, maybe Dave and I'll tag team and little bit on E Commerce traffic and comp we were very pleased with how that's going on and if thats expected it to moderate somewhat as we opened up stores and that we'd like that it's the obviously as people are talking about the stores historically, what we've seen is omnichannel guests are our best guess.
Because they add the ecommerce purchase on on top and on and really spend three times as much as somebody who is store only so as we open up stores expected to see some moderation of E commerce demand, but it's still the up 90 per cent last quarter. So we feel very good about that.
In terms of I think the second part of the question was about category performance on E Com, which Dave will be happy to take and then we can just get into all sort of what's at the end of the three pronged question.
Yes.
All of our category performance on the.
Income related mirrors. The total total company performance that we highlighted and the script so strength across skincare hair care at fragrance exceptionally strong.
And continued challenges, although some bright spots and make up so nothing.
Different about our ecommerce business versus our store from a category standpoint.
With real strength and growth coming outside of the makeup category. So we're pleased pleased for that as it relates to the.
For our loyalty program and I'll, just start with say and we.
We are really remain incredibly proud of what we believe is one of the best loyalty programs and all of all of all of retail and even with some of the challenges we face. This year. We know our guests continue to love the program. They are highly engaged.
And in that program our brand partners continue to find a lot of value through the access and the insights that they get by engaging and that a program our elite guest star Diamond and and platinum guests are still highly engaged it is working.
At a very high level and were really glad the we we've always been glad to have at and we certainly have been.
Happy to have that as part of our Arsenal of this year as we faced this unprecedented times, but yes.
We did see at declined this year, primarily due to.
Store closures that hurts, our our new member conversion and it also impacts retention because as you know I'm at while our ecommerce business is growing and we have a significant increase and penetration of our member base that are E. Commerce is still the majority store based.
User and loyalty program and some of those guests, particularly the leads to engage the non of the guest.
We have seen and a.
A bit of a hit on retention with those lease tenured guests importantly, as we as I think Mary mentioned in the script our retention with our most on your guess the platinum and Diamond remains very strong and we're seeing a lot of strong performance and that so with nearly 32 million members were we feel like of still very strong and we're focused on re.
Activating guest continuing to drive strong engagement with our engage guests and those elite guest.
But as a reminder, we do calculate loyalty the.
The number of our loyalty program over a rolling 12 months and so at each month goes by.
We're still at been a pre co good.
Free cash of if you're through through the for the next several months. So we're working hard to Reengage, our guest but we're we're continue to be lapping a period, where we werent facing the challenges, particularly on our store fleet. So we're anticipating some some challenges with our less tenured guests for a little while book focused on re.
Regarding the and seen.
Strength as we emerge out of this and 2021.
Thank you congrats on target best regards.
Thank you thanks Oliver.
Our next question is from Rupesh Parikh from Oppenheimer. Please proceed with your question.
Good afternoon, and thanks for taking my questions. So it's I guess, Scott just going back to some of the commentary that you provided for guidance for Q4 I was curious of Beacon broad maybe the puts and takes for gross margins and the related to that just wanted to get a sense of what you guys are seeing right now the promotional environment during the holiday season.
All right. Thanks for your parish, so first I think with fourth quarter its important to keep in mind with the sales guidances.
So again, we expect the softer topline and and Q4 versus Q3 again thats compared to last year's trends right. So that comes with.
Inherent margin pressure and generally speaking, we anticipate gross margin deleverage and Q4 similar to Q3 levels.
With many of the same drivers that we've seen through the last couple of quarters, you know price.
Primarily deleverage of fixed cost and the stores and across the supply chain and lower sales volumes and then this going on we're going to have some nice offsets with improving merchandise margin similar to what we saw in Q3.
I guess as long as I'm talking about margins I'll, just pivot over the SGN as well just as a reminder, we made some comments and in the call about the shift and the payroll right from related to the services manager of going from cost of goods sold on the SGN Ace. So thats something the keep in mind the update your model and the.
Just a little bit more color there. So we expect and SGN day, we do expect more deleverage in Q4 versus Q3.
And with the pressure being from store payroll and benefits as we ramp up store labor again and make sure we deliver excellent guest experience during the holiday season, and then some increasing store expenses, primarily due to the Cove it.
And people related costs lastly, there I'd say the on the advertising or marketing side. There was a shift we talked about this earlier in the year. So marketing is going to be heavier in the fourth quarter as we go in the holiday, we view that as opportunistic spend versus what we saw earlier in the year.
And then on your promotional question for the holidays of course as we've talked about.
Before holiday is always always a very promotional timeframe for every retailer and we see it as not just competing against other beauty retailers, but really.
The other categories as well as we're competing for the gift, giving the occasion so.
Naturally we see the increase in and Promotionality. We also as Mary mentioned have EPS have we pulled up our promotions and change the cadence of that and we're seeing that across the the category as well as more of a more effort to spread promotional activity around to give cash more opportunity.
These two of.
Feel more comfortable shopping and both in store and and online to to manage their gift, giving and personal occasions overall, we see it as competitive we've seen some competitors the bit more promotional we've seen brands.
A bit more.
Aggressive and some limited time offers and their DTC I wouldn't classify that as a dramatic or radical shift and promotionality and as always we're watching the market very closely we've got great tools in place we feel like the efforts weve implemented so far this holiday season this quarter have been at been effective and we.
We're confident in the promotional plans that we have both leading up.
Through the rest of Christmas and then and the post holiday as well so.
I feel good about the position and certainly manage at managing and monitoring at on a daily basis, and Rupesh I just want to clarify I did.
Mean de leverage so gross margin deleverage and Q4 versus Q3 same with SGN a.
Okay, great. Thank you and best of luck for the holiday.
Thanks.
And our next question is from Simeon Siegel with the more capital markets. Please proceed with your question.
Thanks, Pedro and hope you and the families at a nice and safe holiday weekend.
Maybe a little higher level merrier, Dave I get pandemic might be aware of time to ask this but how are you thinking about where you are in terms of the target at your target customer of share of wallet versus.
Where you've told US historically and then maybe any views you have on how the selling the landscape might change post pandemic. So just thinking about potentially shrink and department stores, but growing online beauty. The BDC brands Big box et cetera, just any of the changes you're seeing there and then Scott did you say what you expect to save from Canada next year. Thank you.
Okay. Thank you and other three prong question on starting.
Starting with the broader environment, you know I would say we are always in a strategic planning mode right looking around the corner is thinking about the future looking at what's happening with consumer behavior channel behavior competitive behavior and there is no question about that the pandemic has accelerated many things that were on the horizon any ways and certainly increase.
At U. E Commerce shopping at no surprise, the disruption and some some physical shopping which is coming back.
And we think there is a bit of the shakeout of maybe accelerate at shake out in terms of who the winners and losers will be long term in terms of retail format. So part of what we are big part of what we do is think about how can we meet guests and new ways and new channels, new formats to meet them, where they are going to be and that has been a strategy for us already which is increasing and.
On the channel capabilities and.
So whether its focus curbside E commerce shipping capacity of digital tools, but.
But we certainly that's another great opportunity for us with the target partnership is really disrupt at a time that there is disruption happening and accelerate the opportunities for us to drive growth through ex the accessing new customers and new Omnichannel way so.
To see brand certainly there's strength in that segment as well the the overall you know ecommerce will be bigger than it would of benefit and pull forward I think we all know that but we see that our customer in this category also still really want the in store shopping experience and so that's kind of exciting for us as we are always thinking about what that store of the future and experience of the future.
Would look like and and frankly I'm very happy that we had digital tools available like glam lab to immediately pivot to on.
Virtual try on for for makeup and skin care and a way that is very helpful. Right. Now. So I think we're well positioned given the shifts I don't think the ships are done I think we just have to assume that we have to continue to look around corners for new new of ships and opportunities.
Share wallet, you want the but yes, I'd just say certainly it's the it's as you as you said in your question of really disruptive time to try to measure of consumer dynamics and so we're watching closely on share of while at what we do know is we continue to gain share and we've talked about this I think in previous calls and discussions.
Gaining share on the prestige side were of across categories. Within prestige makeup skincare hair care, we've seen that consistently as we've talked on previous calls we lost one for you feel like we lost some share as our stores were shot.
Earlier in the pandemic in the mass side and our mass competitors remained open which would imply a bit of a short term hit on share of wallet, but we are seeing that business strength and and perform really well and Q3, and so confident and the so we're going to wait for the dust of fully settle on 2020 the.
Really the assess the impact of share of while and what we do know is we came into this pandemic, where the real momentum and strength across categories and price points and gaining share gaining share of wallet gaining customer growth. There has been disruption, but we think our model as Mary said is quite strong we think were.
Very well positioned to accelerate out of this.
And and continue the path of drive and driving growth and share across all dimensions.
And then finally on the Canada piece, we Havent really quantified at any element of you know the Canadian expansion plans here.
Over the last couple of years, we've been talking about the so.
It's suffice it to say, it's the startup investment like a lot of other things and you know there is typically some de leverage that comes along with that you know.
During the early phases that wasn't there. So we will avoid that next year, obviously by not moving ahead with that but.
Back to Mary his comments, that's not the reason why we stepped away from that I mean, it was just a question of what were the highest priorities and where should we be focusing our efforts and in light of the all the disruption we're dealing with these days.
Great. Thanks, so much guys and happy holiday season. Thank you.
Thanks Richard.
Operator, I think we have time for one more question.
Okay.
Sure and on last question will be from Mark I was weighted with Baird. Please proceed to the questions.
Great. Thanks for taking my question I guess at two prong one related to stores, but maybe just first is with respect to the store opening plans you mentioned at.
At least 30 next year and one of the factors you are considering today that would most impact the final plan for 2021 and is there a scenario where you could get back to something closer to the to the prior speeds.
And then the second part is related to target.
The.
From a stores perspective, I mean at that partnership is successful does it change your view on the longer term store target for Ulta. Thanks.
Yeah. So I guess, maybe I'll go to the last piece of that for so no. It doesn't change our outlook really on that range that we've been talking about and reaffirming over the last few years. So 15 to 1700 stores in the US we still feel comfortable that that's very doable range, even with the new target.
The announcement here recently, so as you can well you know.
Imagine real estate being one of our core competencies. This at this is Ben on the front burner, just thinking about the impact to store growth and the future and how you know what changes.
This may drive us too so we don't see any big pendulum swing with respect to that although thats something we will keep our eyes on right as we moved on the pathway with the target team.
And so as far as next year the cadence so yes at least 30 stores markets, partly related to our ability to work with our land more partners. I mean, you know a lot of these leases were working years and advance rates of their signed leases and commitments to move forward with certain price.
Project So again.
We're relooking at all of those all of the signed agreements that we have and all the others that are in the queue just to make sure we're making good decisions and go on with the best of the best kind of locations that we feel very confident and so it's a thoughtful process, but we feel like we've got really great capabilities, there analytically and our real estate team.
As the best in class. So we feel confident in the future on just to add one thing Scott the answer which is on.
On top of the the way that we thought about the target partnership I'd say is really an amplifier to our business model is Scott said, where we believe we can fill build out the number of stores that we have mapped out and this yet gives us yet another point of distribution a weighted reach millions of new gas with a a trial and discovery version of Ulta beauty right that we amplify back to the Ulta beauty.
The full business model as well and so as we map out the future of those locations plus or store locations working in partnership with targets and make this a win for everybody.
Thank you and at the holidays. Thank you.
And we have received and of the question and answer session and I would now like to turn the call back over to and Mary Dillon for closing remarks.
Thank you for joining us today I'd like to close by thanking all of the Ulta beauty associates across our stores distribution centers and offices for they are truly relentless efforts and navigate through the challenging environment. While also working hard to get our stores website and DC is ready for the holiday season. We know this holiday season will be like no other but our team is ready and excited to help our guest.
The joy of the season, and we hope that you your colleagues for their loved ones stay safe and healthy and look forward to speaking all of you again in March we report our fourth quarter and full year results. Thank you.
Okay.
This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.