Q1 2021 Ulta Beauty Inc Earnings Call
Good afternoon, and welcome to the Ulta Beauty's conference call to discuss the results for the first quarter through 2021 at this time all participants are in a listen only mode.
The question and answer session will follow the formal presentation.
If anyone should require the operators who prefer an income.
Conference. Please press Star zero on your telephone keypad as a reminder, this conference is being recorded it is now my pleasure to introduce MS. Kiley Rawlins, Vice President of Investor Relations Ms. Ross. Please proceed.
Thank you for Molly good afternoon, everyone and thank you for joining us today hosting our call are Mary Dillon, Chief Executive Officer, Dave Kimbell, President and Scott first and Chief Financial Officer. He should steelman She's store operations officer will join us for the Q&A session.
Before we begin I'd like to remind you that the statements made on this conference call, which are not historical facts may be deemed to constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Actual future results may differ materially from those projected in such statements due to a number of risks and uncertainties all of which are described in the company's filings with the SEC.
We caution you not to place undue reliance on these forward looking statements, which speak only as of today May 27, 2021, 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 operating income adjusted net income and adjusted diluted earnings per share, which had been presented to reflect our view of ongoing operations by adjusting fiscal 2020 results for store impairment charges and adjusting the.
The 'twenty 'twenty, 1 and 'twenty 'twenty for stock compensation and other tax credit a reconciliation of these measures for the corresponding GAAP measures can be found in our earnings release, which is available in the Investor Relations section of our website at Www Dot Ulta Dot com.
Following prepared comments from our leadership team, we will open the call for questions to allow us to accommodate as many people as possible during the hour scheduled for this call. We ask that you. Please limit your time to 1 question with 1 quick related follow up question if needed as always I'll be available for any follow up questions. After the call.
Now I will turn the call over to Mary Mary. Thank you Kelly and good afternoon, everyone. This afternoon, we reported record first quarter financial performance with sales and earnings exceeding both fiscal 'twenty 'twenty and fiscal 2019 levels for the first quarter net sales increased 65, 2% to $1.9 billion.
Operating margin was 15, 8% of sales and GAAP diluted EPS was $4.10 per share adjusted diluted EPS for the quarter was $4.07 per share. This.
Fiscal 'twenty 'twenty, 1 is off to a fantastic start at Ulta beauty and I want to thank all of our associates for their continued efforts to deliver great experiences and support of business in an environment that continues to be very dynamic.
As you know this will be the final time I speak with all of you as CEO and I will transition to executive chair of Ulta Beauty next week after our annual shareholder meeting.
I cannot express how much of an honor of serving as the CEO of Ulta beauty has been for me I'm proud of what we've accomplished over the last 8 years and the amazing team of culture that we've built.
1 of the thank my leadership team for their collaboration agility and commitment to our associates and guests and I want to thank all of you in the Investor community for your interest and support.
I am really excited about Ulta beauty future and I'm confident this will be a seamless leadership transition daves passion for Ulta beauty and our associates is unmatched and he knows the beauty category, our business and our guests very well that his roles as chief marketing Officer, Chief merchandising officer, and precedent of giving him a much better.
Understanding of the category of demand creation and the needs of our guests and I had when I assumed the CEO role 8 years ago I know his knowledge of commitment will position him well to lead Ulta beauty through its next chapter of growth.
And although many of you have met her I want to take a moment to introduce keeps the steel net who is joining the call today and will become our chief operating officer. He has just done an outstanding job as our store operations leader for the past 7 plus years and I'm excited the sugar expand her scope to include supply chain Ulta beauty of target.
And the enterprise level of continuous improvement efforts.
You get to know her in this new role I know you'll be impressed by her knowledge leadership style and passion for our business associates and guests.
Although this change of somewhat bittersweet for me personally I'm excited about my new role as executive Chair I look forward to supporting Dave Keisha and the rest of the Ulta beauty leadership team as they build on what we've accomplished together and continue to lead and disrupt the beauty category for many years to come now I'll turn the call over to Dave to share more detail about the.
First quarter's results.
Thanks, Mary for your kind words confidence and support.
We've worked together for a long time and I'm grateful for the opportunity I've had to learn from you and to leave with you.
Under your leadership Ulta beauty has established a winning engaging culture become the largest U S beauty retailer joined the fortune 500, and tripled its market cap.
And we have of solidified the company as the preferred destination for beauty enthusiasts.
Weighted and inclusive well regarded workplace and to become a recognized leader in the business and retail community.
1 of thank you personally for your leadership and Mentorship and I look forward to your ongoing support and counsel as I transition into my new role.
Keisha I'm thrilled to continue to work with you in your new role as Chief operating Officer. We've worked closely for the last 7 years and I look forward of meeting with you and our experienced executive team in service of our associates guests and shareholders.
I am excited and humbled to become the CEO of Ulta beauty.
For the last several years I've worked closely with Mary and the entire executive team to build our culture strengthen our guest engagement and develop our strategic plan and I will work hard to ensure a seamless transition as we plan and execute the next chapter of our growth.
Over the last 60 days I've spent time talking with and listening to our leaders and our associates across the enterprise.
Most recently Keisha and I visited our Greenwood distribution center, and our new Jacksonville, Florida fast fulfillment center as well as the number of stores.
And more than exceptional operations, we saw firsthand the commitment and passion, our associates bring to serving our guests.
Despite the challenges of maintaining COVID-19 related safety protocols, our DC teams continue to meet the growing demand across channels.
And our store teams continue to create human connections and meaningful connections with our guests every day.
I continue to be proud of how our teams navigated the challenges of the last year with the strength Grace and our commitment to our guests and to each other.
We are emerging from 2020 as the leader we see this in our sales trends market share gains consumer sentiment brand strength and most importantly in our culture.
I believe this is a testament of the choices we made throughout 2020 and also to the strength of our 31 year history as a vibrant company and successful category disruptor.
To build on the success I am focused on 4 key areas as I transition into the CEO role our culture, our members omni channel experiences and operational excellence.
Ulta beauty has built a guest and associate centric values based and high performance culture.
We value and encourage collaboration and the enterprise thinking and we respect and listened to our associates to continually improve as the company.
These tenants are core to how we lead how we engage with our guest.
And partners and how we make decisions.
Our culture is a key parts of our success and why I am committed to protecting and enhancing our culture as we move forward.
As we emerge from the challenges of the pandemic consumers or create a new routines and habits and we have the unique opportunity to build deeper connections and drive greater engagement with our members.
Each of our more than 37000 associates play a role in member engagement and retention. My vision is that together, we can and will accelerate how we engage and delight our guests every day.
And not just in stores or online, but through a seamless omni channel lens.
Consumers are quickly evolving expectations for how physical and digital platforms work together to create a holistic brand experiences as.
As we focus on longer term growth for Ulta beauty, we are thinking about how we can create emotional immersive human experiences across all touch points and how we can evolve our organization and the ways. We work together to support of buy anywhere fill anywhere approach.
Accordingly, as we navigated the pandemic, we proactively took steps to optimize our cost structure, while investing of new capabilities to support future growth.
Looking forward, we see opportunities to drive greater efficiencies across the enterprise wide processes.
The elevate our rigor and discipline and to focus on metrics that are most important to achieving our operational and financial goals.
By expanding our focus on operational excellence will be able to invest more in creating great guest experiences while also improving profitability.
Now, let's talk about our first quarter performance.
For the quarter comp store sales increased 65, 9%.
This outstanding performance was broad based with above planned performance across channels categories and geographic markets.
While we believe stimulus payments contributed to the quarter's strength. We also believe the relaxation of restrictions and increasing consumer confidence and the desire for newness are positively impacting consumer spending in the beauty category.
Our differentiated model combined with our efforts to create meaningful guest connections and experiences.
<unk> well to attract more guests and lead the category of recovery.
Sales were strong across channels with stores, leading the way as consumers, we're increasingly comfortable with shopping in stores.
As local restrictions lifted we increased our operating hours and welcome brand partners back to stores.
And as store traffic trends improved we adjusted staffing levels to support the increased demand while the hiring market remains challenging we are pleased with our ability to hire and staff our stores.
E. Commerce performance was also higher than expected strong traffic and higher average order value resulted in a mid teen growth on top of last year's 100% growth with sales penetration in the mid twenties.
This quarter, we continued to test ways to incentivize guests to use buy online pick up in store with new both of us only promotions.
Importantly, we drove above trend both of US penetration, while also continuing to drive growth through our store and ship to home channels.
For the quarter focus increased to about 16% of total e-commerce sales compared to about 4% in the first quarter last year and slightly above the fourth quarter levels.
Well, we certainly expected brick and mortar would drive nice comp quarter in the nice comp growth in the quarter as we anniversaried the store closures last year. The sales strength, we're seeing in physical stores and in ecommerce continues to reinforce the reinforced to us that E. Commerce transactions are incremental and helped drive greater overall.
<unk> engagement and spend.
From a category perspective, we increased our market share across all major prestige beauty categories based on the MPD group's point of sales data for the quarter ending may for 2021. Additionally, we saw terrific strength across our mass categories and believe we are increasing our share within mass beauty is.
Well.
Newness in our strategic Tentpole events, 21 days of beauty and Spring Hall.
<unk> to resonate very well with guests.
All major categories delivered robust double digit comps as we anniversaried last year's store closures.
Compared to the first quarter of fiscal 2019 fragrance Bath skincare and hair care for all delivered robust double digit comp growth.
Now starting with 1 of our strategic growth categories skincare delivered strong sales growth this quarter, driven by newness and great engagement in our Tentpole events.
Guests continue to embrace skincare is a form of self care and wellness with body care Sun protection and facial serum driving nice year over year growth.
New brands, including keys, so of care lowly viewed of beauty and urban skin pro as well as new products from Tula, Pacifica and central PE drove good guest engagement.
And dermatologists recommended brands, including survey in La Roche pose continued to see gains driven from interest and support on social media platforms.
Fragrance and Bath was our strongest category again this quarter demonstrating the consumers remain focused on self care, even as they become more comfortable reentering the public spaces.
Fragrance from Dolce and Gabbana, Versace, and Carolina Herrera as well as continued strength in body Scrubs and moisturizer from brands like truly Shreveport, and hems drove exceptional category growth strong.
Strong guest engagement with our monthly fragrance crush programs Valentine's Day, and Spring Hall also drove robust growth in the quarter.
We're seeing nice momentum in the hair care category as well driven by newness innovation and do it yourself beauty.
The first quarter saw growth from new brands like <unk>, Kristin S and Monday as well as product launches from Redken, Karl Smith and pattern.
And our Salon back bar Takeovers helped drive growth for established brands like living proof for Chi and Bumble and bumble.
Reflecting the ongoing DIY trends haircolor colored care and hair styling tools also contributed.
For the category strong sales performance for this quarter.
Compared to 2019 comp sales in the makeup category were negative.
We are encouraged by sequential improvement in the trends from Q4.
Newness and innovation combined with the strong guest engagement during our tentpole events, the delivered better than expected performance in this category.
Subcategories that focus above the mass continued to perform well, including mascara lashes and eyeliner.
We're also beginning to see guests engage with categories like lip and face driven by newness from brands like benefit Tarte and morphy as many begin to adjust to reduce COVID-19 restrictions and look to refresh their stash of newness from Nick's, helping kiss are driving strong growth in mass cosmetics, while newer per.
The <unk> brands, including the <unk> being in beauty, our glass and Jacqueline cosmetics are delivering growth in prestige.
Although it remains difficult to predict the specific timing of a full recovery. In makeup we are seeing early signs the guest or currently are engaging more with the category.
Competence is growing restrictions are lifted and many consumers are increasingly looking forward to a fresh start and a new post COVID-19 normal.
As travel and wearing occasions increase the desire for something new is growing at the same time engagement with social media platforms like Tictac are bringing new life to the color cosmetic category engaging younger audiences driving trends and reinvigorating trial and usage the.
These drivers combined with an expanded pipeline of newness expected in the second half of 2021 increase our optimism about the pace of recovery of the makeup category this year.
This quarter, we continued to enhance and expand our conscious beauty platform and initiative intended to help guests discover brands and products that reflect their personal values.
In Q1, we certified 27 additional brands, bringing the total number of brands in the program to 250.
We refreshed our conscious beauty and cap in stores, adding new brands like pure first aid beauty and cooler to the presentation and.
And celebrated Earth day, with a unique gift with purchase offer.
We also launched our circular shopping Thailand with reusable packaging pioneer loop and 10 of our brand partners.
Building on the success of this cross category of promote platform earlier. This month, we lost the launch the wellness shop in a select number of stores and on all of the Dot com.
With a focus on self care for the mind body and spirit. The wellness shop features a curated selection of products across 5 key segments to help our guests easily navigate their personal wellness journey.
We built the assortment with hero brands like Love Wellness Mega Babe and kitsch and also introduce new brands like Bloom go away and the good patch.
From scalp care routines, and Bath and shower rituals to supplements and adapter Jens.
The relaxation and sleep regimens this new shaft addresses a variety of wellness needs and of curated easy to navigate presentation.
Yeah.
As the country's beauty retail leader, we have the power to shape, how the world sees beauty and our responsibility to drive greater diversity and inclusivity and equity in.
In February we announced the tangible commitments to this effort and I am proud to share that we continue to make progress in support of our goals.
This quarter, we debuted it debuted muse of multiple multifaceted platform to celebrate honor and amplify black voices in beauty and announced the partnership with Carl box, a subscription box service catering to bypass textured hair consumers featuring some of our most coveted products in.
Brands.
We've launched 5 new black owned brands, including Black Opel and mentored and cosmetics Black girl Sunscreen, and skincare Camille rose in hair and home body of wellness focused Bath and body brand and we created new educational content for textured hair, which was deployed to our salon teams earlier this.
Month.
Sales from our service businesses increased nearly 50% compared to 2020, but were still lower than 2019 levels, reflecting appointment constraints due to social distancing.
We are excited to welcome walk ins for Salon, and brow services in states, where mandates allow it and hope to Reengage skin services in select stores later this year.
We continue to focus on strengthening of our stylist teams and where we have high demand of capacity, we're hiring experienced stylist with existing books. As a result, we are seeing nice increases in our style of sales productivity as compared to 2019.
Our mobile App virtual try on in skin analysis tools continue to resonate with guests as easy and safe ways to discover and try new products. We continue to see good conversion and higher average order values from guests to engage in these experiences.
This quarter, our services and events team began leveraging these tools for 1 on 1 consultations and small group events in April we launched a modified in store event strategy aligned with Covid protocols, utilizing our virtual tools and successfully educating executing 350.
The events with 17 prestige brand partners.
Turning now to our loyalty program, we increase our loyalty members by 1.7 million members in Q1, the largest increase we've seen in the single quarter.
We ended the quarter with $32.3 million members above our initial expectations.
While this level is about 2% lower than Q1 last year. It is 5% higher than Q4, and only slightly below our member level in the first quarter of 2019.
The recovery of our member base from Q4 was driven by strong reactivation back into the Ulta beauty stores as we as well as increased new member acquisition.
Our store associates continue to deliver a compelling remember experiencing welcoming members back in converting new members at higher rates than in 2019.
We are seeing strong retention across all tenures as we deepen engagement with members who continue to shop with us throughout the pandemic.
Manage at risk members to prevent attrition and introduce Ulta beauty to new or newly reactivated members. We continue to lean into our member data as the target high value audiences and apply predictive behavioral modeling, while personalizing experiences with product recommendations replenishment reminders and offer.
<unk> optimized for incremental response.
We're using engagement levers like the mobile app to communicate our holistic member experience and drive key moments like 21 days of beauty, where we featured personalized offer for every member to drive retention and increased sales per member.
These efforts are helping us accelerate the recovery of our member base and give us confidence that we can get back to 2019 levels. This year.
Before I turn the call over to Scott I want to provide a quick comment on Ulta beauty of target.
We continue to make progress across all of our work streams to bring this new experience to life for our guests and we're on track to open our first shops later this summer.
We remain confident that this innovative partnership with the light guest and strengthen engagement with the Ulta beauty brand.
We have very strong support from our brand partners and are confident that our assortment, which is an exciting mix of large established favorites and vibrant often exclusive of emerging brands while.
While the light guest when we launch <unk>.
No. There are many questions about the assortment and experience, but our focus now is on building guest anticipation and excitement for the launch stay tuned for more details closer to launch now.
Now, let me turn it over to Scott to provide more detail about our financial results Scott.
Thanks, Dave and good afternoon, everyone starting with the income statement Q1 sales increased 65, 2% as we anniversaried the temporary closure of the closure of all of our stores last year in response to COVID-19, we opened 28, new stores during the quarter, including our New Herald square store.
In New York City and closed 2 stores, we also remodeled 3 stores and relocated 1 store.
Total company comp increased 65, 9% driven by an 8.8% growth in average ticket and of 52, 5% increase in transactions.
Compared to the first quarter of fiscal 2019 total sales increased 11, 2% and comp store sales increased 7%.
As Dave mentioned, we saw stronger than expected sales growth across channels with brick and mortar and e-commerce contributing to the strong comp performance.
From a mixed perspective cosmetics was 45% of sales compared to 50% last year skincare increased 200 basis points to 19% of sales the fragrance and Bath category increased 400 basis points to 11% of sales and hair care products and styling tools increased 90 basis.
This points to 19% of sales.
As a percentage of sales the services category was down 40 basis points to about 3%.
Note. The nail category is now included in cosmetics instead of other and we have updated 2020 results to reflect this change.
Gross profit margin increased to 38.9 percentage of sales compared to 25, 9% last year. The increase was primarily due to significant leverage of fixed costs, resulting from higher sales. In addition, gross margin benefited from higher merchandise margin lower salon expenses and a more.
Favorable channel mix.
While the higher sales delivered some benefit of merchandise margin. The improvement also reflects lower promotional activity in the quarter and ongoing benefits from our efficiencies for growth or ESG cost optimization program.
<unk> expenses were lower compared to last year, reflecting the elimination of the salon manager role.
As a reminder, we will anniversary of this change in Q4.
Comparing this year's performance to the first quarter of fiscal 2019 gross margin improved by 190 basis points.
Higher merchandize margin fixed cost leverage and lower Salon expenses were partially offset by channel mix.
As a percentage of sales SG&A decreased to 22, 9% compared to 32, 5% last year, reflecting strong expense leverage on higher sales.
Compared to the first quarter of fiscal 2019, SG&A as a percentage of sales was about 20 basis points favorable.
As a percentage of sales lower corporate overhead and store expenses were partially offset by higher advertising expense.
Operating margin was 15, 8% of sales compared to a negative 8.7% in the first quarter of fiscal 2020 on a GAAP basis, and a negative 7% on an adjusted basis.
Strong top line growth, especially in brick and mortar combined with the impact of our cost optimization efforts resulted in robust operating margin performance.
The tax rate increased to 24, 5% compared to 23, 6% last year, primarily due to a decrease in state tax credits.
Diluted GAAP earnings per share was $4.10 compared to a diluted loss per share.
<unk> 39 last year.
Adjusted diluted earnings per share were $4.7.
Compared to a diluted loss per share of $1.13 a year ago.
Moving onto the balance sheet and cash flow.
Total inventory increased 1% compared to last year, reflecting the impact of 26 additional stores as well as the opening of our Jacksonville fast fulfillment center.
Partially offset by lower inventory levels due to the higher than expected sales.
Capital expenditures were $34.6 million for the quarter driven by our new store opening program investments in it systems and store Remodels and relocations.
The decrease in capital expenditures compared to the first quarter last year was primarily related to investments last year related to our planned Canadian expansion, which was suspended in the second half of fiscal 2020.
Depreciation was $70.6 million compared to $76.6 million last year, primarily reflecting the impact of last year's store impairments and the 19 stores, which we permanently closed.
We ended the quarter with $947.5 million in cash and cash equivalents.
In the first quarter, we repurchased 1.2 million shares at a cost of $392.3 million.
At the end of the quarter, we had $1.1 billion remaining under our current $1.6 billion repurchase authorization.
We continue to expect to repurchase approximately $850 million of shares in fiscal 2021, but as always have the flexibility to modify the cadence of repurchases in response to market conditions.
Turning now to our updated outlook for 2021.
We are encouraged by the our first quarter results and the trends we've experienced so far in the second quarter, but we are still early in the year.
While the presence of vaccines and new CDC guidance gives us optimism for the recovery our visibility into the trajectory and sustainability of recent trends is limited and the second half of the year remains difficult to forecast.
We now expect net sales for the year will be between 7.7 and $7.8 billion with.
With comp sales plan and the 23% to 25% range.
We continue to expect comp results will vary significantly between the front half and the back half of the year as we lap store closures that occurred in the first half of 2020.
But we now anticipate comp growth will be in the high 40% of low fifties for the first half of 2021, and then moderate to high single digit growth for the second half.
We continue to expect to open approximately 40 net new stores in fiscal 2021 and to know remodel or relocate 19 stores.
We now expect operating margin for the year will be approximately 11% of sales.
We continue to expect the largest driver of operating margin expansion will come from gross margin.
Driven by leverage of fixed costs less headwind from channel shift improving merchandise margin and Leverages Salon clause.
Based on higher topline growth, we now expect modest SG&A leverage for the year as compared to fiscal 2020.
These assumptions result in an expectation for diluted earnings per share in the range of $11.52 of $11.95 per share, including the impact of approximately $850 million of share repurchases.
We plan to spend between 225 and $250 million in Capex in fiscal 2021, including approximately $115 million for new stores, Remodels and merchandise fixtures $90 million for supply chain in <unk> and.
And about $33 million for store maintenance and other.
As a reminder, our guidance for 2021 assumes that consistent federal tax rate and no material increases in the federal minimum wage and does not include assumptions for any impact related to a resurgence of COVID-19.
And now I'll turn the call back over to our operator to moderate the Q&A session.
And at this time, we will be conducting a question and answer the question.
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We control in Wuhan the King your line is in the question Keith made.
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Minded the please limit yourself to the only 1 question and 1 client pricing.
1 of more of a term loan for some questions.
Our first question is from cash.
Patrick with Oppenheimer. Please proceed with your fleet.
Good afternoon. Thanks for taking my questions. So first Mary wish you all of the best and Youre certainly going to be missed.
Thank you for <unk>.
And then I guess for the team just congrats on a really amazing quarter.
So I guess my I guess, the 1 question I had how does do you look at Q1, you know obviously operating margins are now well above where they were in Q1.19 are there any new learnings you can share in terms of you know maybe some new structural benefits of using operating margins going forward just based on the performance we saw during during the quarter.
Yeah. So we're very proud of the passion of the results that we were able to post in the first quarter and our teams did a great job collaborating with our brand partners to deliver a great experience to our guests and an outstanding financial performance.
Part of part of what was driving some of that over performance was obviously, the very strong comp right in the sales generation versus what our initial expectations were so nearly a 66% versus last year antibody of 7% versus fiscal 2019.
So a lot of good things going into that besides the great tailwind as we saw from stimulus payments and optimism about the economy and the Covid vaccine rollout across the nation. There was also structured structural changes we made in our business model right. So we've talked about these over the course of the last couple of calls so theres some.
Great sales environment as we think about the 15.8 that we posted in the first quarter versus kind of of the rest of the year and what our long term expectations are I would say that there was a bit of overleverage, maybe in the first quarter right. So again, we didn't expect those sales levels, obviously as we got started.
In a year and so the spending we were unable to kind of match spending with with the sales generation, so, especially in the store environment. I mean, there were some longer lines at the checkout than maybe we would have preferred to see if we had had that choice of ahead of time. So as we're looking out to the rest of the second half of the year.
Things around wages store labor.
Some upward pressure in fuel and transportation costs, and then we're going to do some more advertising in the back half of the year than what we had initially planned to make sure we take advantage of the environment and make sure we.
Really maximize market share gain opportunities in this environment, so longer term very optimistic about operating margin expansion opportunities across the wide variety of elements in our business.
Great. Thank you for best of luck for the balance of year.
Okay.
Our next question is from.
Mark oscillator with Baird. Please proceed with your the question.
Good afternoon, Thanks for taking my question.
I was hoping you could speak a little bit more to the trend youre seeing in the recovery in stores, perhaps the relative to 2019, I think comps up 7% debt with the some of the E. Commerce growth you cited if my maths right. So you can imply stores.
Still down versus 19, but it sounds like traffic is recovering nicely. So just any insight there just bigger picture of all of those of Q1 results of really informs your thinking on the trajectory of the store productivity recovery through the remainder of the year. Thank you.
Hey, Mark.
Yeah, we are very encouraged by the performance of our of our store channel in fact, our entire Omnichannel experience.
Even as our E comm performed above expectations, our store strengthened so it just reinforces for us the.
The importance and the power of our model and the.
The connections that we've we've felt yes.
Yes, yes stores did exceed our expectations through throughout the quarter we saw.
As our guest.
Became more comfortable and shopping in person.
Certainly benefited from that and so.
Continued improvement throughout the quarter traffic was still down meaningfully down for the quarter down in the 20% range. So the strength we saw in stores.
We're pleased to see a lot of guests coming back in but also strong saw strong ticket performance.
Which we think is driven by renewal re engagement in the category trip consolidation a lot of newness come in but yeah. So while we're encouraged.
<unk> by store, we know we still have.
<unk> ahead to get all of our guests back comfortable shopping in store and we're continuing to see see that trend.
I will just say that.
The as I mentioned the e-commerce business.
Also exceeded our expectations, including strength in both of us sort of reinforces for us not not just any individual strength across either stores or e-commerce or.
Any element, but the connected strength that we're seeing which is the strong <unk>.
Indicator to us that our members are getting back involved in all aspects of of of Ulta, and we're pleased with that and anticipate more to come as we look out over the over the rest of this year as it relates to the store traffic, we would anticipate of getting it.
To improve traffic, but theres still a lot of uncertainty about how the rest of the year will play out in the exactly how that will translate into and the store behaviors, but we're encouraged by what we saw in Q1.
That's really helpful. Thank you and maybe just as a quick follow up to that just the strength in both business, it's nice to hear.
Could you maybe address e-commerce margins and how you're kind of closing the gap there relative to the stores I guess.
Maybe that would be for Scott.
Yeah, So I guess I would start with overall versus last year. The channel shift is going to work to our advantage right. So that's going to be a nice tailwind as we talk about gross margin, specifically, but operating margins overall so.
As you've heard us talk about before Mark many times there is a lot of different levels, we have at our disposal to help mitigate some of this the margin headwinds that come with that part of the business. So again, that's just part of how consumers are going to shop, and we're focused on making sure we deliver the best shop.
Shopping experience, regardless, if it's in our stores or an online digital kind of environment. So opus is 1 piece of that we saw a nice increase this quarter. We're working on other ways. We can motivate our guests to take advantage of that because that is the margin help for us on a rate basis again, we do want to remind everyone that.
As Dave mentioned during the prepared remarks debt our E. Comm business is largely an incremental piece. So it's driving a lot of incremental sales.
And the rate the rate headwind, we get from that is something we will take all things considered but we've got lots of ways to help improve that over the longer term focus is a piece of it supply chain and getting closer to the guest is piece of it and optimizing our promotional cadence overall is a big piece of it as well so there is still.
A lot of ways for us to improve that as we look ahead.
That's great congrats of the team on a strong start and the best of luck.
Thank you.
Our next question is from Oliver Chen with Cowen. Please proceed with your question.
Hi.
Well, we will Miss you lot of congrats on the next steps.
And the inventory position looks really really tight in terms of it being somewhat low where sales left on the table on 1 of your thoughts.
Inventory versus the sales going forward.
In an environment, where supply chains have been tougher in just making sure you are as well positioned as possible to realize the market share gains. Thank you.
Yes. Thanks for your question Oliver we feel good about our inventory position, but it's certainly true that.
<unk> been working hard to ensure that we maintain a strong level of in stocks. We've been working very closely with all of our brand partners.
To respond to this increased demand. Unfortunately, we're having good success with that as we look forward over the year, we would anticipate inventory levels to be higher than that.
2020, but at a rate lower than that our comp sales so as far as leaving sales on the table.
We feel like we were able to deliver and meet meet the demand.
There are pockets of of brands that had just extraordinary growth.
We are working hard to maintain our in stock levels, but I'd say overall, our guests and we're able to.
You'll find what they were looking for and we felt like we met there their expectation of that's probably reflected in the strong basket size, we saw both in store and online so.
A lot of work going on to ensure this I don't want brand partners are really looking to maximize their there.
Production to meet this growing demand and we feel confident we'll be able to meet our guest guest demand going forward.
Thank you and just a follow up unrelated question for Keith share David of.
Supply chain priorities, just would love your take on the major priorities on the roadmap the head.
There are many initiatives you're working on.
Yes, that's great why don't you share that you want it gives miles or yeah, we're continuing to look for efficiencies within our supply chain in our network as we build out to support the not only the store of business, but also the E. Com business. So yes, we will have more of a share here in the future of but we're continuing to look for efficiencies and the ways to get the products to.
Of our stores and to our consumers and the quickest most efficient way possible.
Thank you best regards.
Yeah.
The next question is from Erinn Murphy with Piper Sandler. Please proceed with your question.
Great. Thanks, Good afternoon, Mary it's been an absolute pleasure working with you and Dave and Keith I congratulate them. So my question is the for Dave on the cosmetics category. You mentioned it was still negative versus 2019 could you maybe put a finer point on quantifying that and then as you.
Kind of monitored the teeth of reopening has there been any regional differences between markets like Florida or Texas.
Has been a little bit more outspoken in terms of the going out trend and then what's the implied in the guidance for cosmetics as you look at the back half of this year versus 2019 level.
Alright, let me I'll tackle some of the.
For your cosmetics questions and is both what we're seeing as it relates to the guidance and and.
A L. S keeps it got to talk about our regional regional performance here as far as makeup as we said well again, we're really pleased with the performance across all categories with strong growth versus 2020.
We won't get.
Greenlee specific value by category other than to say the our makeup category was 1 major category where versus 2019.
Total.
We were still sort of 2019 of performance, having said that we're seeing lots of encouraging signs of our mass business.
As particularly strong or weak.
We've always been we've been working on for many years building of really differentiated mass assortment with many brands that are exclusive or in limited distribution with us.
Those partners have been meeting innovation and driving new ways to connect with our guests and that debt that strength is really show it really showed up in Q4.
We had strong positive growth on the on a number of our brands and brands across the assortment in our mass Nicks Elf.
Kiss Morphy Maybelline.
Across the across the portfolio really pleased with the business.
On that on that side of the business for.
Prestige prestige makeup.
Was not quite as strong, but again encouraging signs of newness is kicking in and we see a lot more come in as we look into the balance of the year the.
The the performance that we've had for a while.
Pandemic on on prestige has been challenging book and so many of our brand partners have reacted with strong innovation strong product innovation, new marketing approaches connection through social media and as as customers come back in as our guests come back in.
We're anticipating that part of our business really.
Strengthening over the balance of the year a couple of highlights for you again newness I talked about it in the script, but we're seeing some newness across different areas of the business Anastasia and browse benefit with mascara, new entry of expanded.
Span of performance in our luxury segment with our glass newer brands like <unk> and Jacqueline cosmetics performance from some of our strongest largest brands like Clinique and <unk>. So we're seeing some encouraging signs not quite yet back to 2019.
And some uncertainty how that will play out for the rest of the year.
Your question about.
Performance and how Mako performance as reflected in our guidance, we would say we're still.
We're still watching it closely.
Not anticipating of massive turnaround, but we do see some encouraging signs and of newness of strengthened throughout the rest of the year, we'd anticipated performing even better. So good signs in makeup great signs happening in all categories outside of makeup and the and so the balance of our portfolio of feels really helpful healthy right now.
<unk> do you want to talk about some regional share we stayed really close to the says they were starting to lift the mask mandates across the states and we really didn't see the variances across the United States like what we would have thought at the strength across the whole U S. In regards to traffic and I think it was more related around the confidence of the vaccine the vaccine rollout.
And people are getting more confident with coming back out into the stores and also getting ready for the reemergence of getting the mask off of in the near future. So there were no real regional variances that we saw across the U S. It was the strength in traffic really from coast to coast.
That's great and then just my quick follow up the 1.7 million gain in loyalty members. This quarter, how did that break down between lap versus new consumers Inc.
Yes, we don't we don't typically break that break that out that specifically I'll just say, we're really proud of of our team and coming together to both Reengage I've talked in previous calls about the.
For the disruption in 2020.
It wasn't anything necessarily that the.
The they didn't like about Ulta, the just for all of the obvious reasons.
<unk> engaged in 2020, and so the re engagement strategy across all aspects of our business in particular in our stores really paid off with a lot of lapsed guests recently lapsed guests coming back in but but equally encouraged by the number of new members in this environment that we attracted.
And what's exciting about that is there's a lot of disruption of lot of a lot of potential new members that are maybe reevaluating their there.
The the way they engage in beauty and we think our model is perfect for that so strength across both and we find it really a good sign for more to come in throughout the rest of this year.
Thank you.
As a reminder to allow everyone the chance to ask the question of real.
So do you want to ask the question of total of 2 questions..1 main question and 1 follow up.
Our next question is from Mike Baker with D. A Davidson. Please proceed with your question.
Okay. Thanks.
Sort of following up on something that they talked about earlier, but if I have if I look at your guidance right here, you're still of profit down.
Operating profit versus 2019.
I think.
By about $50 million of the midpoint, yet you were up in the first quarter by $70 million, so that implies down somewhere in the $110.125 million for the net.
3 quarters, so 1 of the.
Reasons that the operating profit would be down over the 2 year basis versus being up in the first quarter.
Yeah. So there's a mix of things again the elements at play here, whether you are comparing the last year 2020 or 2019 of the drivers are largely the same it just the you know the the overall impact a way to those in any 1 particular period that you are looking at so the primary reason.
As channel mix right when Youre looking back to 2019 channel mixes of Big Influencer. There again, we're doing a lot of things sales increased sales back in the brick and mortar helps offset some of that the headwind. When you look into 2020, but back to 2019, that's a much larger part of our business and as we've talked about before on a rate base.
It's definitely at a pretty significant headwind for US again, a reminder, those are incremental sales. So it's helping the total the total debt.
The performance in profit performance, but it hurts us on a rate basis. The other thing is you still got COVID-19 costs and they're right. In 2021, you had non in 2019, we still have social distancing. We mentioned salons were operating at 50% capacity TBD. When all of that is going to be able to open up.
When we will be able to be in.
In our full line of businesses as we want to be there is things in our D. C's, where we still have the social assistance again, you got to look beyond the headlines on a lot of these themes and so we are operating at reduced capacities, we have to add weekend shifts to make sure we can.
Get our pic bins filled and keep the product moving to support an accelerated brick and mortar bounce back as well as Oh.
Continued strong e-commerce business here above what we expected. This year. We also have wage pressure again. These these are things. Most people are aware of have seen in the headlines whether it be just recruiting people to come back and fill open roles in our stores or pressure in the DC network, we see what others.
They are doing out there to try to retain.
Find new employees, so again, we're not.
We have to compete with those people the same way everyone else has to do and then lastly, I'd say of big pieces of incentive compensation fallen on the SG&A line again, when you think back to 2019, and our performance there and what the outcome was for as far as incentive comp goes versus the performance of the expected performance now for 'twenty.
'twenty 1 that's the big that's a big headwind as well so those are kind of the major elements Mike.
Okay. That's helpful and in a lot of wahoo commodity pressures there, but some of the falloff.
I think it's sort of so you got to the doctors, it's 11% of you will get back from this 11% quicker than you expected what was the.
All of those processes you just articulated you know can we think about ever getting back to the 12% to 13% level that you ran out from I think like 2012 to 2019 or to all of those pressures you know make that.
Not attainable, yes, so we're not providing any long term guidance today, we'll save that for November at our planned investor Analyst day, but obviously the.
The trends of the business are quite strong right first quarter way exceeded our expectations. The early read on second quarter is it's going well again, you got to keep in mind, what we're lapping right last year in the first quarter. We were on a decelerating trend and then all of the stores closed second quarter, we're starting to open stores last.
Youre in a kind of of wave action, but there was still of lot of requirements and limited capacity things, we were dealing with and so that's the Nam and all of that explains the comp guidance 40 to 51st half and much more moderated in the second half so that's what's driving.
Of the lower operating margin expectations versus last year longer term, we feel like Theres a lot of levers again, we've talked about this often with investors whether it be things around the the e-commerce business with both base and supply chain initiatives are ESG work in the real estate area and other parts of our business and a lot of other.
Other Keisha mentioned a lot of efficiency work that's underway right now under the E. F. G. Enbrel the gives us a lot of optimism for longer term operating margin improvements.
Fair enough I appreciate all of the color. Thank you.
Our next question comes from Anthony 2 combo of loop capital work pre.
The 2 questions.
Thank you so much for taking my question. Thank you so much for squeezing me in let me add my congratulations to mirror as well Bill I'm sure I'll see you work on your daughter's in the neighborhood so [laughter].
That's right Anthony Thank you [laughter].
So my question just a quick clarification.
If I was looking at my notes from from the last earnings call and it said that you were going to you plan to open those first target shop in shops in the fall and now Youre, saying late summer. So I just want to make sure I heard that correctly and if so just any any reason that you were sort of moving up the.
The.
The the rollout.
To the extent of would you actually are moving up the raw day. Thank you.
Yeah, I'd say, we're just getting a little more specific than we've been.
The kind of talking in general terms previously and now are a bit more specific in late and late summer I'll say, we're really excited about it and I guess I'd ask you said of just give a quick updates keisha.
As I think was mentioned in the call as leader in our target initiative and we're very excited about the opportunity of the issue do you want to give where we are in the yeah, absolutely you know what.
So exciting is that it's been highly collaborative with the target team and we've got a cross functional team that is hard at work to bring the Ulta beauty at target concept of life.
We price them critical milestones we've built the joint project plan of fulfillment plans are all completed and selections in the store selection for the first wave are all done or finalizing our I T requirements of our training of our target team members and the joint marketing strategies, but we are on track to deliver and launch this at the end of late summer.
And we're really looking for it to that's coming to life and having our guests see.
What this is all going to bring to play for target and also the day together.
For the 90 million loyalty members of the target and $32 million of ours I, just think that the ecosystem that this is going to deliver for the wall of the beauty is gonna be second to none.
That's very helpful. Thank you.
Okay.
We have reached the end of our question and answer session I'll now turn the call over to David Campbell for closing remarks.
Great. Thank you all for joining us today.
Fiscal 2021 is off to a great start and I want to close by thanking the entire Ulta beauty team for their collective efforts to support the business and to meaningfully engage with our guests at every touch point.
Our team has the secrets of our success and I'm and I'm, so grateful for their impact, particularly during these disruptive times.
I also want to thank our brand partners for their continued support as we navigate the dynamic operating environment.
We are encouraged by the momentum we're seeing in the business and excited about our opportunity as consumers gain confidence and engage in the new normal.
While the sequencing of sustainability of demand remains difficult to predict our teams are prepared and actively engaged to capitalize on opportunities as they arise.
We remain very excited about the opportunity for Ulta beauty to continue leading the beauty category recovery and we look forward to speaking with all of you again in August when we report our second quarter results. Thank you.
This concludes today's conference and you may disconnect your lines of at this time.
Thank you for your participation.
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