Q2 2021 Ulta Beauty Inc Earnings Call
Good afternoon, and welcome to Ulta Beauty's conference call to discuss the results for the second quarter of fiscal 2021 at this time all participants are in a listen only mode.
Question and answer session will follow the formal presentation.
If anyone should require operator assistance during the conference. Please press star zero on your telephone.
Yes.
As a reminder, this conference is being recorded it is now my pleasure to introduce MS. Kiley Rawlins, Vice President of Investor Relations Ms. Rawlins. Please proceed.
Thank you Paul Good afternoon, everyone hosting our call today are Dave Kimbell, Chief Executive Officer, and Scott <unk> Chief financial.
Oscar He says Steelman, Chief operating officer will join us for the Q&A session.
Afternoon, we released our financial results for the second quarter of fiscal 'twenty 'twenty. One a copy of the press release is available in the Investor Relations section of our website.
Before we begin I'd like to remind you of the Companys Safe Harbor language.
Keep that statements contained in this conference call are not which are not historical facts may be deemed to constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of $19.95.
Actual future results may differ materially from those projected in such statements due to.
Sure 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 August 25th 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 and adjusted diluted EPS, which have been presented to reflect our view of our ongoing operations by adjusting fiscal 'twenty.
<unk> 'twenty results for store impairment charges and costs associated with the permanent closure of 19 store a reconciliation of these measures to the corresponding GAAP measures can be found in our earnings release.
We will begin this afternoon with prepared remarks from Dave and Scott following our prepared comments, we'll open up the call.
All four questions.
To allow us to accommodate as many questions as possible during the hour scheduled for this call. We ask that you. Please limit your time to one question to ask a second or follow up question. Please re queue.
As always I'll be available for any follow up questions. After the call now I'll turn the call over to Dave Dave.
Thank you Kiley and good afternoon, everyone.
The Ulta beauty team delivered excellent results again, this quarter and I want to start by expressing my sincere appreciation to all of our Ulta beauty associates for their outstanding efforts to drive these results.
I have traveled around the country visiting with our teams across all.
All parts of the company I continue to feel inspired by their commitment and passion for our guests our business and for each other.
We are excited about the momentum we're seeing in our business and are optimistic about our future.
The beauty category is recovering faster than we expected and the investments we've made.
Last year to adapt to the market disruption and strengthen our leadership position are delivering results.
Our value proposition is strong and we are evolving and innovating to lead in the new beauty landscape capture more market share and drive profitable growth.
For the second quarter net sales increased 62% to 1.97 billion operating margin increased to 16, 9% of sales and diluted EPS was $4.56 per share.
These strong results exceeded our.
Over the like Spectation and reflect our ongoing efforts to serve our guests, especially as we continue to adapt to the changing environment.
In recognition of their dedication to our guests and their efforts to deliver these strong results. This quarter, we awarded a one time discretionary appreciation bonus to eligible.
Internal door and DC associates.
For the quarter comp sales increased 56, 3% driven by strong growth in our brick and mortar channel as.
As consumer confidence optimism and comfort to shop in physical stores continues to increase we are seeing more of our members returned to stores.
<unk> traffic trends in stores improved from the first quarter, but remained lower than 2019 levels. However comp sales in stores increased this quarter compared to 2019, driven by strong average ticket growth.
We continue to optimize operating hours and I am pleased to share that our retail operating hours.
Our nearly back to 2019 levels.
As expected e-commerce declined as compared to the second quarter last year, but were more than double 2019 levels. The sales decline was driven by a decrease in the number of transactions and average ticket remains strong recall that.
Our e-commerce business increased more than 200% in the second quarter last year as we phased reopening of stores.
Guest utilization of buy online pickup in store remained high totaling 20% of e-commerce sales in the quarter to enhance the experience we made operational improvements the increase.
Our order accuracy and fulfillment speed and in the second quarter, 97% of orders were ready for pick up within two hours we.
We have also increased the number of stores with dedicated parking spaces, and we continue to look for opportunities to make curbside pickup available at non traditional ulta beauty locations.
<unk> customer engagement in our digital platforms remained strong even as store traffic ramps up.
Compared to the first quarter, our omnichannel guests on average maintained the same number of transactions in the online channel even as they increased their in store transactions reinforcing that e-commerce transactions are.
Our incremental.
<unk> helped drive greater overall member engagement and spend.
From a category perspective, we increased market share across all major prestige beauty categories based on dollar sales for the 13 weeks ended July 31, 2021 compared to the same time period last year.
So saw sales strength across all of our major mass categories.
Compared to the second quarter of fiscal 2020, all major categories delivered robust double digit comps as we anniversaried last year's phased reopening process and introduced more newness.
Compared to the second quarter of fiscal.
We all 2019 fragrance Bath skincare and hair care, all delivered strong double digit comp growth.
Makeup was only slightly lower than 2019.
While comp sales in the makeup category are not yet positive compared to 2019 momentum is building with.
Fiscal mass and prestige categories, improving from the first quarter trend.
Reductions in mask wearing requirements combined with an increase in makeup wearing occasions helped drive strong growth in face and lip while engagement with I continued to be healthy.
During the quarter, we launched three new makeup brands Bobbi.
With both of them.
Hello, Luiz a prestige brand founded by a well known Brazilian Influencer in makeup artist and undone beauty.
These new brands combined with new product launches from a wide range of brands, including Mac Clinique Nicks Elf and Maybelline drove improved sales.
Brown Forman in the quarter.
Skin care delivered another quarter of strong double digit sales growth compared to 2019, reflecting.
Reflecting the strong connection between beauty and self care guest are maintaining their skincare regimens, even as they increase makeup purchases.
Moisturizer CRM and.
<unk> preserves continue to drive category growth.
We also saw robust growth in Sun protection, and self tanning as consumers re engaged with travel and vacation activities.
New brands, including fresh good molecules, which is exclusive to ulta beauty and <unk> as well as new.
And Clinton Tula Shadow survey, La Roche pose and the crem shop drove solid guest engagement.
Hair care continued to deliver double digit growth driven by newness and strong guest engagement with our strategic tent pole events.
We began the quarter with our semi annual gorgeous hair event.
Event and event strategically designed to convert members, who do not currently shop, the hair care category or engage with our Salon services. This.
This year, we streamlined offers and invested in dedicated social and digital marketing campaigns to expand our reach as a result, the event attracted new members.
<unk> for a category and delivered stronger than expected sales and profitability.
We ended the quarter with our Jumbo Love event, a basket building event focused on larger product sizes.
We continued to narrow brand participation and simplify our presentation to guests. These improvements resulted in.
Stronger sales and profitability.
In addition to strong strategic events. We also launched a number of new hair care brands throughout the quarter, including results curls verb and curls are well established rack black owned brand.
These new brands combined with the recently.
As to the <unk> and Kristin S contributed to the strong category growth this quarter as consumers focus on building and maintaining her health.
Finally, fragrance and Bath delivered exceptionally strong growth driven by mothers day, and fathers day sales as well as our fragrance crush events.
Fence newness in fragrance from Marc Jacobs, and Carolina Herrera as well as engagement with the base business from favorites, like Dolce and Gabbana and Chanel drove meaningful market share growth.
Body Scrubs, and moisturizer from brands like truly and treat hut continued to drive outstanding sales growth.
Reflecting guests continued commitment to self cure.
Our conscious beauty platform continues to expand and resonate with guests.
At the end of the second quarter more than 270 brands were certified and at least one of the five conscious beauty pillars and now include fresh Kylie cosmetics.
<unk> happy dance and good molecules among others.
To promote guests discovery and trial this quarter, we will offer guests the new conscious beauty sampler kit, which includes hero brands like Beekman 18, O two kinship tarte and too low.
We will also refresh our in cap in stores, adding products.
From Dermatologic Sunday, Riley Florence and truly.
As we work to scale conscious beauty further we are enhancing our search capabilities on <unk> dot com and in the mobile app to make it easier for guests to find certified products that reflect their personal values.
Through the pandemic.
The lines between health and beauty have blurred.
Based on our proprietary research, we know that 65% of beauty enthusiasts believe beauty is significantly connected to wellness.
Reflecting these consumer insights this quarter, we launched the wellness shop in select stores and on Ulta Dot com to Hell.
Best navigate their personal wellness journey journey.
With a guest category focus on self care for the mind body and spirit. The wellness shop features a curated selection of products across five key segments, including supplements in adjustables and spa at home.
From daily.
Rituals to relaxation in sleep regimens. This shop addresses a variety of wellness needs in an accessible easy to navigate presentation.
Our guests are responding well to the platform and we will continue to increase awareness of the offering and expand its presence over time.
Our services.
Argus is also gaining momentum sales from hair brow services increased more than 60% compared to 2020.
Despite capacity limitations due to mandates from the CDC and state and local authorities, we are increasing member engagement and driving retail attachment, especially through our salon Backbar takeovers.
His business.
Services play an important role in driving guest engagement loyalty frequency and spend I.
I am excited to share that we plan to relaunch skin services in select stores in the third quarter.
We plan to offer new services that target specific concerns such as hydration anti aging as well.
Covert facials that cater to our Gen Z guest <unk>.
And we will test micro channeling derma planning and hydro facials in select stores.
Turning now to our loyalty program, we are seeing faster recovery in active member growth than initially expected.
We ended the second quarter with a record.
As at $34.6 million active members, 8%, 8% above last year and 4% above 2019.
Spend per member also increased driven by higher average ticket, surpassing both 4039 levels.
The majority of.
Some of our acquisition happens in stores and our talented store associates continue to convert new members at higher rates than in 2019.
We are also improving our conversion rates online, reflecting improvements we've made in the online customer journey.
In addition to growth in new members, we are accelerating.
New movie activation of lapsed members and increasing retention rates of existing members as we continue to advance and imply our data and analytics capabilities.
From a channel perspective in store only members totaled 73% this quarter, increasing from 67% in the first quarter.
As expected the mix of Omnichannel members moderated from the first quarter to 18% of total members, but remained well above 2019 levels.
Importantly, omnichannel members continued to increase their spend across both store and digital channels.
As we.
We progressed through the rest of the year, we expect the penetration of Omnichannel guest will continue to moderate as in store shopping increases, but remain above 2019 levels.
Discovery and trial are critical parts of the beauty experience and we offer a variety of physical and digital ways to discover new products new.
New trends and new applications.
This quarter, we launched new functionality in our mobile App that allows guest greater access to select product scanning for content and reviews loyalty information and virtual try on while shopping in stores. In addition, we reintroduced testers in stores.
With expanded stations are testing and sanitation supplies.
We continue to deliver hyper relevant content to drive discovery and build stronger connections with our guests. This quarter, we introduced beauty school live virtual Masterclasses posted focused brand launches.
Store demonstrations and beauty tutorials.
Beauty bio founder, Jamie Jamie Obanion hosted a megawatt glow master class showcasing skincare tools and products and in honor of National Lipstick Day, we partnered with a Nyx professional makeup pro artist to walk viewers.
<unk> through a long wear lift look.
In July we launched a partnership with Super grade a hyper relevant app based Gen Z centric livestream platform that is 100% focused on beauty.
From shopper bow live videos to editorial content and exclude.
Through product drops the Super Great community is an ideal partnership for experiential immersive beauty.
While we are early in our pilot we've already seen encouraging results with engagement tracking ahead of other live platforms.
As part of our holistic marketing efforts to reinforce Ulta beauty's.
Lucid authority in the skincare category, we launched hashtag ultra skin talk our first multi branded tic Tac hashtag hashtag challenge.
To drive increased awareness of our beauty of our of our category breadth and depth, we asked audience.
Audiences to post their favorite skincare.
<unk> with products from Ulta beauty.
The hashtag has amassed more than 8 billion views to date with one 6 million videos created.
We want Ulta beauty to be the most love beauty destination and the most inclusive.
Building on our focus as a diversity forward company, we announced a number.
<unk> care amendments at the beginning of this fiscal year to further our efforts to champion diversity and inclusion.
This quarter, we joined the 15% pledge committing to dedicated 15% of our total assortment the black owned black founded and Black led brands to date. This year, we have welcomed eight new blackout.
<unk> commands to the Ulta beauty family, including Homebody, Camille Rose and mentored and we are on track to double the number of black owned brands and our assortment this year.
As part of our cross functional approach to integrate diversity and inclusion into all that we do our teams launched a textured hair training series for all style.
Oh and breast to better enable more inclusive experiences in our salons.
We also launched mandatory inclusion inaction training in stores.
To understand what diversity equity and inclusion means to Ulta beauty.
We strive to make a positive difference in the communities, where we live.
Style at the.
The Ulta beauty charitable foundation focuses on improving the lives of women and families. This quarter with the generosity of our guests our teams raised more than $2 million for save the children to support mothers and children in need.
We also partnered with linked in with the hashtag back.
And work campaign, highlighting the pandemic impact on women and providing resources to aid economic recovery.
And as part of our ongoing efforts to reduce waste and minimize our impact on the environment.
We recently launched the consortium to reinvent the retail bag, a multi year collaborations.
To work across retail sectors that aims to identify test and implement implement innovative new design solutions that serve the functions of todays single use plastic retail bag.
Finally, I am very excited to share that Ulta beauty at target has launched in 58 stores.
<unk> and online with plans to open about 100 stores by the end of the quarter.
Over the last nine months, the Ulta beauty and target teams have collaborated closely to create a unique way for guests to experience beauty and we are excited to see it come to life.
As guests come to Ulta beauty at target they will be welcome.
And to a 1000 square foot co design space with bold, new fixtures and lighting that celebrate premium beauty with a modern look.
Each aspect of the shop was thoughtfully designed to make the space feel authentic to Ulta beauty target and the featured brands within the assortment.
From the.
Welcome and Mistakable, Ulta beauty, Orange pop canopies, and Vivek graphics that weave into the existing target store everything was designed to create an inspiring and unique beauty experience for guests.
With compelling product displays and unique discovery zones. The shop offers a curated selection of more than.
Andi prestige and emerging brands, including Mac Clinique morphy to la the ordinary pattern Madison Reed urban decay and the Ulta beauty collection.
The assortment is a compelling mix of best selling items as well as limited edition collaborations and.
Fifties to drive discovery and trial.
We're making the experience as seamless as possible both in store and online.
Guest shopping Ulta beauty at target on target Dot com and the target App will enjoy free shipping for qualifying orders and all of target same day fulfillment.
And many of the services.
And guests will benefit from rewards across both ultimate rewards and target circle.
While it has only been 10 days since the first shop was opened guest response has been overwhelmingly positive with enthusiasm about two of their favorite retailers coming together.
Excitement about the ability to earn points and both loyalty programs.
We're thrilled about this partnership and how together we can change the way the world experiences beauty.
Before I turn the call over to Scott I want to announce that we will host an analyst day here in Chicago on October 19th to share how.
And our strategic priorities are evolving and how we plan to continue to position Ulta beauty to deliver sustainable profitable growth.
Given the ongoing uncertainty around the Delta variant, we're planning the event to accommodate to accommodate both in person and virtual participation. Our teams will continue to assess guidance from.
D C and we will adapt our plans as necessary to ensure the safety of our team and attendees.
And now I will turn the call over to Scott for a discussion of the financial results Scott. Thanks, Dave and good afternoon, everyone. Starting with the income statement Q2 sales increased 62% as we.
From the <unk> III the disruption of stores last year due to COVID-19, we opened seven new stores during the quarter and closed one store. We also remodeled five stores and relocated one store.
Total company comp increased 56, 3% driven by a 52, 5% increase.
We anniversaried actions and a two 5% growth in average ticket.
As Dave mentioned, the resurgence of traffic in stores drove this strong comp performance.
Compared to the second quarter of fiscal 2019, total sales increased 18% and comp sales increased 13, 1%.
And train a mix perspective, cosmetics was 43% of sales compared to 45% last year skincare was 17% of sales compared to 18% last year, the fragrance and Bath category increased 300 basis points to 12% of sales and hair care products and styling tools was flat.
From last year at 21% of sales.
The services category increased to 4% of sales compared to 3% last year.
Q2, gross profit margin increased to 46% of sales compared to 26, 8% last year. The increase was primarily due to.
The leverage of fixed costs higher merchandize margin more favorable channel mix and leverage of Salon expenses.
Strong top line growth drove significant leverage of fixed costs.
The improvement in merchandise margin was primarily the result of Anniversarying higher inventory reserves.
<unk> with second quarter last year, as well as higher sales lower promotional activity and ongoing benefits from our cost optimization efforts.
Recall that we increased inventory reserves by $16.5 million in the second quarter last year, primarily to adjust for slow turning and disc.
Discontinued makeup skus and permanently closed stores.
As a percentage of sales salon expenses were lower compared to last year, reflecting strong topline sales and the elimination of the Salon manager role as a reminder, we will anniversary this change in Q4.
Comparing this.
<unk> performance to the second quarter of fiscal 2019 gross margin improved by 420 basis points.
Higher merchandize margin fixed cost leverage and leverage of Salon expenses were partially offset by adverse channel mix.
As a percentage of sales SG&A increase.
Increased to 23, 6% compared to 22, 1% last year higher store payroll and benefits and higher marketing expense was partially offset by leverage of corporate overhead and variable store expenses.
<unk> payroll and benefits deleveraged in the quarter, primarily due to the anniversary.
Anniversarying of the $48.2 million in employee retention credits made available last year under the cares Act.
In addition, reflecting the strong operational performance, we elected to grant discretionary appreciation bonuses to our Nonexempt store and DC teams.
In recognition of their efforts.
Marketing expense also deleveraged during the quarter, primarily reflecting increased spend on print marketing.
Recall that last year, we significantly reduced our spend on print material, while our stores were closed due to the pandemic.
We are also expanding our investment.
And general marketing to support key events and Reengage lapsed members. In addition, we are leveraging our CRM capabilities and working more closely with our brand partners to create more targeted digital marketing campaigns across multiple touch points.
Strong top line growth resulted in a nice leverage.
And did corporate overhead and store expenses.
Compared to the second quarter of fiscal 2019, SG&A as a percentage of sales was flat.
As a percentage of sales lower store expenses were offset by higher store payroll and corporate overhead.
Compared to the second quarter of fiscal 2019.
19 advertising in the second quarter of 2021 was flat as a percentage of sales.
Operating margin was 16, 9% of sales compared to one 1% in the second quarter of fiscal 2020 on a GAAP basis, and four 5% on an adjusted basis.
Average of strong top line growth driven by brick and mortar combined with the impact of our cost optimization efforts, including promotional optimization delivered record operating margin results.
The tax rate increased to 24, 4% compared to 26% last year due.
Due to a decrease in state tax credits as a result of an increase in pre tax income.
Diluted GAAP earnings per share were $4.56.
Which included <unk> <unk> per share of tax benefit related to share based compensation compared to <unk> 14 last year.
Adjusted diluted earnings per share in the second quarter of last year was 73.
Moving on to the balance sheet and cash flow total inventory increased five 5% compared to last year, reflecting the impact of 32 additional stores the opening of our Jacksonville fast fulfillment center in Q3 of fiscal two.
2020, and increased inventory purchases to support higher demand cap.
Capital expenditures were $22.7 million for the quarter driven by our new store opening program investments in it systems and store Remodels and relocations depreciation was $69 million compared with.
$77.4 million last year, primarily reflecting the impact of last year's store impairments and the 19 stores, which were permanently closed.
We ended the quarter with $770.1 million in cash and cash equivalents in the second quarter, we repurchased 746000 shares.
Shares at a cost of $243.5 million.
At the end of the quarter, we had $886.2 million 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.
Set base have the flexibility to modify the cadence of repurchases in response to market conditions.
Turning now to our updated outlook for 2021, we.
We are encouraged by our first half results and the trends we've experienced so far in the third quarter.
While the operating environment continues to be dynamic.
As all term visibility remains limited and especially as it relates to the spread of.
Covid variance, we have increased our financial expectations for the year.
We now expect net sales for the year to be between eight one and $8.3 billion.
With comp sales growth plan to be in the 30 to.
<unk>, 32% range.
We continue to expect comp results will moderate to the low double digit range as we move through the second half.
We expect to open approximately 44, net new stores and remodel or relocate 18 stores.
We now expect operating margin rate for the.
Our near it will be approximately 13% of sales.
We continue to believe 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 leverage of salon costs.
Based on.
Year with topline growth, we now expect to leverage SG&A more than previously expected as compared to fiscal 2020.
These assumptions result in an expectation for diluted earnings per share in the range of $14.50.
The $14.70 per share, including the impact of approximately.
The higher than $50 million in share repurchases.
Like others, we are managing global supply chain constraints port congestion and other headwinds, including the resurgence of COVID-19, our teams are working diligently to mitigate risk and where appropriate we are proactively working with our brand partners to prioritize.
<unk> receipts to ensure we have adequate inventory for the holiday season.
As a result, we expect that our inventory levels at the end of the third quarter will likely be elevated above expected sales growth.
We plan to spend between $475 million in Capex in fiscal 2021.
Barclays. Please proceed with your question.
With any details on that and then I know the initial target was somewhere around 100 stores what would be the the benchmarks for more aggressive rollout and then my second follow up question is for Scott.
<unk> freight and supply chain, although it isn't issue you're not as exposed to the far east. So can you talk about kind of where you are exposed if you can any kind of basis point impact for the back half. Thank you very much.
Great well thanks for.
Thanks for the question and the comments I appreciate it.
Yeah, Let me start on target and then I'm going to ask you to give some more color because keisha is leading this for for us, but we are as I said in the comments, we're just thrilled with the.
With the partnership.
The launch.
Guest response.
We feel really confident how we've come out of the gate operationally working really well and most importantly, as I mentioned.
Consumers are thrilled by this are really excited about the idea of bringing together two great retailers and a unique experience that nobody.
Also too and this is totally due to beauty and so we're really really pleased with the with our results and the engagement and the partnership.
Sure why don't you share a few more details about what we're seeing and then maybe the outlook on stores yeah. What we're most excited about really is the operational execution across both Ulta beauty and the target teams.
As you know the seamless integration between our technologies and making sure that we're capturing.
Target circle members and the Ulta beauty members and having them linked their accounts were out of the gates really strong we love what we see the gas they are really loving this experience overall and there's just huge momentum that we're looking forward to continuing.
I'm getting the rest of the 100 stores open in Q3.
And then I'll follow up on the international piece and supply chain. So we don't really break out geographic sourcing exposure.
But most of our products lipsticks Serums are made in the U S or Europe.
We do have some limited exposure.
I know with the Ulta beauty brand private label in a few specific brands and the assortment like more fee and some components of course, which are part of our our vendor partners supply chain as well. So again, we're keeping a close eye on that Theres nothing that we see as a critical a watch out at this point in time, but we're just trying to plan ahead.
Head and making sure we're as well prepared as we can you know despite any eventual outcomes. There are development. So we feel like we're well positioned for the for holiday in the second half of the year.
Right well the floor is looking great well best of luck.
Thanks, Andrew.
Yeah.
Thank you our next question.
That comes from Simeon Siegel with BMO. Please proceed with your question.
Hey, everyone. Congrats on the great results.
Okay and to follow up and you can follow up on that just slightly from the loyalty angles. So can you just speak to your expectations of the member first of all fantastic loyalty results can you just speak to your expectations of member growth.
Maybe over to.
A year and then beyond just with the target relationship now in effect and then the follow up Scott as you look past. This year can you just speak to how you're viewing these margin rates as to whether they are a new base or whether there's a whether you expect just give back from the benefits. We're seeing right now thank you.
Great. Thanks Simeon.
Let's start.
Chart with loyalty and let me just before I talk specifically about target zoom out a little bit and we're really really pleased with our.
With our loyalty results in the quarter and really through this first half of the year to get back to.
A new a new high of $34.6 million members a percent above.
Above last year, 4% above 2019, as I mentioned in the comments that's faster than we had anticipated, but it is really a testament to our effort across the entire organization.
From our loyalty TMR analytics, the marketing merchandising and of course, our store teams and E. Commerce teams that are delivering a great.
Experience every day and the fact that we were able to increase total loyalty.
Members by $2.3 million members, which is the largest growth. We've had in any single quarter is is just exceptional and again really proud of the team and the efforts that come through.
Drawing new member growth.
Strong new member acquisition strong reactivation rates of lapsed members.
Of course high retention among our existing.
Members and so our loyalty program has long been a focus of ours.
Absolutely a key differentiating aspect of our total model, we're very proud of it and we're continuing.
And to innovate and drive that part of our business and specifically about target.
Right.
I cannot give any specific numbers about our outlook other than one of the main reasons.
The reasons that we're really excited about this program is the connection that are that we.
We see with our loyalty program both in delighting, our existing guests and we think over time, increasing their total share of spend with Ulta beauty.
With another another key pillar in our Omnichannel experience with our relationship with target, but also attracting new guests.
The circle program.
Graham.
It has over 90 million members in it they have $30 million.
People walking through a target.
Every week. So we feel like there is a very large opportunity for us to attract new loyalty guests into into our program get them engaged in the Ulta beauty at target experience, but then also introducing.
<unk> them to all things alter across all touch points. So.
We're confident in our two early to kind of talk about the experience so far but as Keith said, we're excited about the results so far and see it as a big driver.
Do you want to hit on the margin sure Simeon. So again, we're very very proud of the results we posted this quarter and appreciative of all the.
The hard work on behalf of all our associates and brand partners to deliver great experiences to our guests which is at the end of the day is what delivers those kind of financial results. So I would say the comp performance again it was elevated over initial expectation. So the <unk> 56 versus last year and a 13%.
<unk> comp versus 19.
It reflects the mix of bench.
Benefits unique external factors I guess I would say combined with the power of our model and all the great execution and things we're doing.
To drive stronger results and leverage across the P&L.
I'd.
It makes us increasingly more optimistic again, you've heard us say that we believe this is a double digit EBIT margin business over the long term. Our goal is to expand operating margins and we feel confident we can do that I guess I would say, we're not going to share too much today, we'll have more to say more color to share on.
Sales outlook and margin expansion.
Cartoon eighties, when when when we get together at our analyst day here in October.
Sounds great. Congrats again, guys and best of luck for the rest of the year.
So it is.
Thank you. Our next question comes from Chris <unk> with J P. Morgan. Please proceed with your question.
Thanks, Good afternoon everybody.
My first question is your two year comp stack or accelerated.
Two two versus the first quarter youre fading that back down to get to low double digit comps in the fourth quarter are despite what should be more work from work and learn from school.
<unk> that back half is this just.
Looking out into the uncertainty and have you and related to that have you seen any impact from delta and.
August from any of the any markets in particular.
Yes, great. Thanks, Chris.
Absolutely we are so excited and encouraged.
By the first half results and the trends and as you said the strengthening we saw in the momentum we see from throughout the first half.
And we're feeling.
<unk> by what we're seeing so far in the third quarter and that's why we have increased our our sales expectation for.
Or for the full year I will say.
So with that optimism and confidence it does remain difficult for us with certainty to understand.
How these variables will impact our business through the through the remainder of this year's the resurgent of variance.
<unk>.
Certainly that's having a broader impact on the world around us our business remains healthy but difficult to predict exactly how that will play out in consumer behavior, and we're optimistic about holiday.
We feel like it's going to be a strong holiday.
But holiday is always a.
Time of year of course it.
With a lot of you you know new.
<unk> going on and uncertainty how COVID-19 and other influences will drive through that and then and then we are lapping our business.
In the second half of the year in 2020 was stronger than the first half of the year.
For sure.
Sure as we reopened reopened stores and started to gain momentum. So we do believe our sales forecast as prudent it's achievable.
But it's also reflective of the uncertainty that we see out there and the last thing I'd say as we've been doing throughout all of this if the recovery is stronger.
A unique faster than planned we're prepared we're working closely with our brand partners to be ready to adapt and adjust.
We're working hard to make sure we have the right inventory the right store staffing the right marketing plans to continue to lead the recovery in the beauty categories. We believe we've been doing so far this first.
The year so.
Optimistic, but feel like our guidance is appropriate given given the environment.
It makes sense.
A follow up quick math suggests that it seems like youre, implying maybe at 36 and a half three 7% type gross margin in the back half or is that.
Half of that and the ZIP code and if that's the case what drives the lower rate versus the first half.
Yeah, I would just say, we're just we're taking a more tempered view I guess of the promotional environment again naturally holiday is more promotional we're competing against a wider variety of retailers you know during the gift giving season.
Then we've got some incremental supply chain costs that were baking into the plan to be prudent around.
Fuel costs and things like that so again on balance we we think it's a prudent estimate forecast and we think it's achievable and if things turn out better sales are strong.
That will deliver better results.
Thanks, so much.
Yeah.
Thanks, Chris.
As a reminder.
We ask the participants limit themselves to one question in the interest of time and re queue for additional questions.
Our next question comes from Olivia Tong with Raymond James. Please proceed with your question.
Great. Thank you first congrats on the quarter.
First question has to do with the margin because I imagine a lot of this is fixed cost leverage but how much of this is.
How much of the margin incremental margin as an extension of some of the effects.
Sam promotional.
Last thing and how does this in.
In any way change your view on customer acquisition costs or additional promotional efficiencies over time.
And then you also mentioned that.
E Commerce sales are mostly incremental which is fantastic. So can you talk a little bit about the profile of the customer that.
Maybe primarily shops via online versus in stores are changing.
Is it is is the incremental new people still coming in via Omnichannel are they replacing customers back to shopping in store now or.
Or can you just give a little bit more color there that would be helpful. Thank you.
Yeah, So maybe I'll start with the margins.
Official it's not exactly clear, but if we're looking at the second quarter again, we described that the biggest drivers in the second quarter, where the reserve adjustments versus last year again. This is versus 2020 and so they were pretty significant last year. So of course, we didnt absorb any of that this year, we're doing a much better job with the stronger sales and better disciplines.
And the stores, so that was a pretty significant benefit promotional less discounting was kind of.
In the middle of the list I guess I would say fixed cost is another major driver of gross margin expansion in the second quarter and for the first half of the year, just because of the much higher sales levels overall.
So when I think about those things and of course, the Salon manager shift versus last year was another element to that so again, we're not going to quantify those things, but as I think about the future.
We're thinking about the back half of the year merchandise margin, we still expect to be able to expand at the promotional the promotional <unk> disappear.
Disciplines I think again, we've got a good start on that last year with some good learnings those are being played forward now we still think there's opportunity there for us there's other things we can do as far as.
Tools and process improvements to.
To help that aid that over the longer term fixed costs again once we got sales back on track.
Track fixed cost leverages, the gift that keeps giving so that's something again that we feel pretty confident in and then there's other things we're working on as part of as part of our ESG efforts.
They will continue to deliver benefits over the long term. So you know when we think about gross margin merch margin being the most.
<unk> piece of that we still think.
Think there's plenty of opportunity for us over the longer term.
And on your E.
E Com member profile.
A couple of high points here, which is first.
Our ecommerce business very healthy and such a strong and important part of our total omni channel mix and we're really pleased with.
How that's complementing and integrating with our with our.
The store experience and so we're so glad to see strength across.
Both both of those channels e-commerce guests. The Omnichannel guest are among our very best guess those that are shopping both in store and online do do demonstrate a high level of <unk>.
<unk> mentality with their ecommerce purchases because.
What we typically see is those that have been shopping in store that start shopping online continue to shop in store at or in some cases, even higher levels and it's because they get more ingrained in and integrated into the total Ulta beauty experience they become more loyal.
Loyal to Ulta beauty and concentrate more of their beauty spend at <unk>. So last year with the stores being closed and the dramatic increase in our ecommerce we introduced a whole lot of new consumers to our E. Commerce business now some of them have gone back to shopping only in store, but most of them are continuing to shop in an e-commerce business.
Yeah.
And I'm, sorry in an Omnichannel way and the behavior is really positive both helping to deliver our Q2 results, but importantly, as we grow that base of Omnichannel shoppers will have even more.
More consumers.
Shopping across channels going forward, which we know will drive.
Total sales in the.
In the out years going forward. So excited about this omnichannel behavior in and believe that one of the lasting impacts of this disruption will be.
A significant increase in our ecommerce business and our Omnichannel behaviors.
Great. Thanks, maybe if I could just follow up on makeup.
You mentioned, obviously that the momentum has continued into Q1 Q, even if it was even if it isn't back to where it was before why do you think it hasnt fully recovered back to where it used to be given the replenishment given that people are going out there there's a lot of innovation.
It.
Do we need to Oh, another trend or is it just in the retail some hold back just kind of curious given the strength.
Particularly of other categories outside of makeup.
Sneaking in one more makeup question, but yes.
I'll just be brief here.
Makeup we're encouraged by what we see and I think it's just.
It's estimate that the other categories have been strong.
Skincare hair care bass fragrance and they remained strong theres a high level of engagement, but.
Makeup the trends that we're seeing are encouraging while it was slightly below 2019 levels in Q2.
We had a weeks in <unk>.
<unk> during the quarter that it was positive versus 2019, our mass business, we talked about in Q1.
Was above 2019 levels and it accelerated in Q2 also about 2019 and our prestige business is improving we're bringing in newness our biggest brands are performing.
While new brands are performing and so I think just consumer behavior.
As we recover.
There is a high level of engagement and level of excitement about makeup more usage occasions and the.
Momentum is building.
Time will tell exactly when we get back to steadily being above.
2019.
Levels and growing from there, but we're encouraged by what we see.
Thanks.
Great. Thanks, Olivia. Thank you. Our next question comes from Steph Wissink with Jefferies. Please proceed with your question.
Thank you. This is a quick one for you but wanted to just talk about SG&A leverage because I don't think we've seen on a full year basis.
And the guidance for.
Quite some time, so I just wanted to understand a little bit about the key pieces, maybe Scott if you could talk about what components of SG&A, you expect to see the best leverage and where you might see some opportunities still in the future period. Thank you.
Yeah. So if you're looking back at 2020 staff I think you know that.
There's going to be a good story, there as far as leverage on SG&A overall of course, the better comparison as 2019, and so that's where I'll spend my time.
As we look back there there is still.
I guess I would say you know theres going to be leveraged versus 19 now versus our earlier in the year outlook there again.
A lot of that is due to a stronger than expected sales. So that's that's good news, we expect dollars to be higher in 'twenty, one than 19, primarily on store growth number one wage pressures primarily in the stores and a big variable here is higher incentive compensation.
Ah levels than what we saw back in 2019, you'll recall 2019, we we missed our internal targets by a fair range and so that was that's going to be a headwind a significant headwind when we're measuring back against 2019 of course, we have that service manager role as well that's being reallocated.
Hated from the gross margin line, where it's a good guy down to SG&A, where it's a headwind versus 2019, but again, that's a net net benefit for the company overall at the operating margin level. We're also going to be pulling in some incremental advertising marketing expense in the back half of the year I think we mentioned that.
In sum.
Some interim investor calls here to take advantage of market share opportunities now and the strength of our business and of course you know.
We've got a good sales trends here too so we're going to make some some more significant investments there in the back half of the year in digital channels. So again places we know that it works and it's effective and they're strong.
Rois.
Yeah.
Thank you. Our next question comes from Ike <unk>.
Joe with Wells Fargo. Please proceed with your question.
Hey, everyone. Scott can you talk a little bit more about the E. Commerce I mean, I think you said that the dollar has doubled versus.
19, which I think implies year over year was down around 25% to 35%.
Which makes sense, given where you were lapping but now that your competitors are more minutes or so.
Tough, but not quite as elevated do you expect ecommerce growth to return when you get to the third quarter and background.
Yeah. Thanks.
So again, yes second quarter, a little bit unusual I mean, we did see some growth in the first quarter, but again, we were lapping kind of just the initial stages I guess of the Covid and the shift in the store closings and kind of becoming a digital business, 100% kind of overnight back in 2020. So.
You know it was what we expected that was what was in our annual plan to see an overall decrease in the E com business versus last year again brick and mortar again, our gas demonstrating that brick and mortar is important part of their beauty shopping experience and so were ecstatic to see traffic numbers coming back.
Back to the stores and again sequentially improving here in 2021, So I think Dave called it out in his prepared remarks, we got to remember last year second quarter, we doubled our ecommerce business right. So to expect a little bit of moderation here I don't think is anything extraordinary under the circumstances as.
We think about the rest of the year again stores. The traffic trends are good. We're encouraged there. So I would expect that E. Commerce is going to moderate as we look out to the rest of the year and I wouldn't expect it to be a growth growth in absolute terms here as we look over the next couple of quarters again for the full year, we expect ecommerce.
<unk> penetration to be in the low to mid 20% range.
Thanks, Matt.
Yeah.
Thank you. Our next question comes from Kate Mcshane with Goldman Sachs. Please proceed with your question.
Hi, Thanks for taking my question.
You had mentioned that the comp.
It did come in higher than your expectations I wondered if that was a commentary on both what you saw in prestige and mass and within the mass are you seeing.
An acceleration in market market share gains there, whether its in cosmetics or other categories.
Okay I'm, sorry can you repeat the first part of your question no. We didn't we didn't hear you.
Oh, I'm, sorry, I'll speak up a little bit.
I just wondered based on your comments that you came in at higher than your expectations for comp is that a similar commentary both.
Both for the prestige category in the mass category and then just within mass are you seeing an acceleration in share gains they are versus what you saw in Q1.
Yes. Thanks for the question Kate and yes, we are really across the board, yes, we were higher than our expectations and we're seeing strength versus expectations across.
It really all aspects of our business.
I talked about all of our all of our categories demonstrating strong.
Improvement and and and and all but makeup growth versus healthy growth versus 2019 and that is true both on the prestige and the mass side and then within makeup.
Quickly and while we said it not quite back to 2019, although getting closer and again showing.
Moments through Q2, where we were about 2019, we saw improvement in both mass and prestige mass has recovered faster, but prestige is is certainly showing signs.
<unk> seen some good and its really driven by newness across the board both some new brands that we brought in but but a strong newness across our.
So many of our brands and different segments of makeup that are exciting our guests getting them re engaged in the category.
So yes, we're seeing it across.
All both price points and categories and it's encouraging.
Yes.
Thank you Molly I think we have time for one more question.
Thank you our last question comes from Cristina <unk>.
With Deutsche Bank. Please proceed with your question.
Hi, good afternoon.
And we're in a very strong quarter.
I wanted to touch on the membership base you mentioned that it has reached a new record you are re engaging with lapsed consumers and finding a new one.
Where do you think you are in terms of the target customer share of wallet as compared to 2019, and then secondly, do you have any views on how to sell.
Selling and competitive landscape is really evolving here as we exit the pandemic and how are you thinking about the various players, including department stores brand DTC and specialty beauty players like alternative for them.
Great.
Loyalty as I mentioned earlier, we're really.
Pleased and.
Congrats which by the results we're seeing both.
And the number of <unk>.
Of of absolute absolute number of active members as well as spend per member, we're seeing nice healthy improvement there and it's just driven by a high level of engagement across categories. So as we look at share of wallet. We are confident that we are continuing to grow.
<unk> incurred both share of categories and share of wallet and feel like our efforts to lead the category recovery are driving a high level of engagement and across the competitive environment. Certainly this is a yes.
The beauty category is always highly competitive this is a disruptive time with.
No.
A lot of.
Changes, we have a high level of respect for all of our competitors, but our focus is is on Ulta beauty and driving our business forward and leading the beauty category and leading the beauty recovery on our.
Our model is unique nobody does what Ulta beauty does the.
The the assortment that we provide the loyalty program the guest experience, which is so important and done with excellence in our stores in particular and across.
Across all other touch points and.
And so we believe we have a unique a unique business model that.
Yes, while we certainly watch and are well aware of competitive activity.
We're focused on playing offense and driving our business forward and again I couldn't be more proud of the way. The team is is delivering across every part of our business to ensure that ulta beauty as the.
Really definitive leader in the beauty category in driving this recovery.
Recovery that we're very encouraged to see.
So with that thank you again for joining us today really appreciate your time.
I do want to thank all of our Ulta beauty associates for their continued agility and commitment to serving our guests and taking care of each.
Each other especially through the changing dynamics of COVID-19, we.
We look forward to sharing more about why we are so excited about the future of Ulta beauty when we host our 2021 analyst day here in the Chicago area in October so have a good evening and thanks again for joining.
This.
Today's conference you may disconnect your lines at this time. Thank you for your participation and have a wonderful evening.