Q4 2021 Ulta Beauty Inc Earnings Call
Good afternoon, and welcome to Ulta Beauty's conference call to discuss our results for the fourth quarter of fiscal year 2021 at.
At this time all participants are in a listen only mode. A brief question and answer session will follow the formal presentation. We ask that you. Please limit yourself to one question and then reenter the queue for any additional questions. If anyone should require operator assistance. During the conference. Please press star zero on your telephone.
Phone 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. Rollins. Please proceed thank.
Thank you Hector and good afternoon, everyone and thank you for joining us today hosting our call today are Dave Kimbell, Chief Executive Officer, and Scott Patterson, Chief Financial Officer, He should Steelman, Chief operating officer will join us for the Q&A session.
This afternoon, we announced our financial results for the fourth quarter and full year fiscal 2021 .
A copy of the press release is available in the Investor Relations section of our website.
Four we begin I'd like to remind you of the company's Safe Harbor language. The statements contained in this conference call, which are not historical facts may be deemed to constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Actual future results may differ materially from those projected 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 March 10 2022.
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 will discuss certain non-GAAP financial measures, including adjusted operating income and adjusted diluted EPS for the fourth quarter of fiscal 2020, a reconciliation of these measures to the corresponding GAAP measures can be found in our press release.
We will begin with some prepared remarks from David Scott and following our comments, we'll open up the call for questions.
Their remarks will be a little longer than usual to accommodate as many questions as possible during the hour scheduled for this call. We'd ask that you. Please limit your time to one question. If you have a follow up question. Please re queue and as always the IR team will be available for any follow up questions. After the call.
Now I'd like to turn the call over to Dave <unk>.
Thank you Kiley and good afternoon, everyone before discussing our results I want to share how proud I am of our associates' performance throughout 2021 well.
While consistently providing care and service to our guests and to each other they successfully navigated pandemic related challenges and delivered exceptional results for all of our stakeholders.
In fiscal 2020 , one the beauty category recovered earlier and faster than we expected and our teams adjusted quickly in many ways, including working with our brand partners to accelerate receipts and manage in stocks, creating highly relevant content that reflected the rapidly evolving mindset of our guest.
Adjusting staffing levels across the organization to meet growing demand.
And protecting and strengthening our culture, leading with their hearts and working together to create new ways to delight and excite guests.
All while continuing to execute against our strategic priorities and drive our business forward.
Now moving to our results for the quarter. The Ulta beauty team delivered record fourth quarter financial results, Despite COVID-19 and winter weather disruptions net.
Net sales increased 24, 1% to $2 $7 million.
$2 $7 billion operating profit increased to 13, 8% of sales and diluted EPS increased to $5 41 per share for the quarter.
The decisions our team has made and the plans they executed with excellence around assortment strategies inventory flow marketing and staffing levels positioned us to take advantage of a positive consumer environment. This holiday season and deliver strong results.
I want to express my sincere appreciation to all Ulta beauty associates, particularly in our stores and distribution centers, who show up every day positive and optimistic ready to serve our guests while facing personal challenges posed by the ongoing pandemic their dedication enabled us to deliver these outstanding results and I am <unk>.
April for their flexibility as circumstances shifted.
We kicked off the holiday season in early November with our multichannel celebrate more campaign, our audience tailored creative and contextually relevant storytelling connected with consumers in fresh and bold ways across platforms, and we continued to expand live streaming and social selling experiences.
We enhanced our member love events rewarding members with new loyalty offers to drive engagement reactivation and retention and we leveraged our CRM capabilities to further enhance the productivity of our promotions. We also enhanced our gift card program, including more innovative and inclusive designs and new multi pack options, which helped deliver.
Strong double digit growth in gift card sales across stores and third party channels.
Our decision to proactively manage inventory flow resulted in strong sell through of holiday merchandise and core product.
And our teams transitioned quickly after Christmas to support our strategic Jumbo Love and Love your skin event as well as significant brand launches.
In January we executed four exciting new brand launches at Ulta beauty all of Plex numeral, one day, Chanel Super Goop and Billy Irish.
As the number one prestige hair care brand in the market all the Plex offers patented bond building products and is changing how consumers engage with the hair care category.
While our initial assortment included only seven Skus. It was one of the strongest brand launches and Ulta beauty history.
With a unique ability to offer guests the professional service in our salons and the retail products to take home. We are delighted to expand our partnership with all the blacks.
In makeup we are excited to partner with Chanel beauty as the exclusive U S retailer for the historic launch of Nomura One day Chanel.
Operating luxury the younger generations. This new line is sustainably sourced with clean ingredients and sustainable packaging.
With an assortment spanning skin care makeup and fragrance neuro one day Chanel is currently available in 250, Ulta beauty stores and on Ulta Dotcom.
This launch is a key element of our luxury beauty strategy and we're very pleased with the initial results.
In skincare, we launched Super Goop known for its sunscreen expertise Super Group Super Group has made with clean reef friendly ingredients is cruelty free and Leverages sustainable packaging.
And in fragrance, we launched a new offering exclusive to Ulta beauty from acclaimed recording artists Billy Irish.
Taking a closer look at sales trends in the quarter guests were excited to return to in store holiday shopping even as stores delivered robust double digit comp growth ecommerce sales exceeded our expectations, increasing slightly on top of last year's 70% growth. This reinforces to us that ecommerce is complementary and.
Incremental to the physical shopping experience.
Guests continue to increase their utilization of buy online pickup in store, while also engaging with our new same day delivery option.
During the quarter, both as sales increased 20% to account for 17% of ecommerce sales compared to 15% in the fourth quarter last year.
While only available in about 200 stores. We are pleased with the performance of our new same day delivery options.
From a category perspective, all major categories delivered double digit comp growth compared to the fourth quarter of fiscal 2020, driven by cycling last year's disruption from Covid strong execution of our holiday plans and product newness.
Compared to the fourth quarter of 2019 fragrance Bath hair care and skincare, all continued to deliver strong double digit growth.
Makeup was more challenged this quarter with trends decelerating from the third quarter across both prestige and mass makeup. Although sales of mass makeup continued to be positive compared to 2019.
Over the last year as the beauty category has recovered the performance of makeup has been more volatile and lagged other categories in part, reflecting higher sensitivity to COVID-19 fluctuations.
We remain confident that makeup will returned to growth as consumer optimism and comfort without a home activities increases, but we recognize the timing and rate of recovery will continue to be impacted by changes in the COVID-19 environment.
Looking specifically at the fourth quarter trends in makeup face lip and eye continued to deliver strong growth driven by blush tinted moisturiser lip balm and lashes newness.
Newness from L. Kiss in our Doe continued to excite and engage guests while prestige brands like Mac Clinique and Lancome also delivered positive growth.
In addition, this quarter, we expanded Chanel butane to 50 additional stores and launched the bowl assortment on older Dot com.
Hair care delivered double digit growth increasing to 28% of net sales consumer focus on her help drove strong growth in treatments shampoo and conditioner and tools like the Dyson Air Rab, where hot holiday gifts. This year, new brands like all the plaques Kristin S embryo geo as well as guest favorites like redken and.
Living proof delivered nice growth during the quarter.
The fragrance and Bath category was again, the best performing major category during the quarter, delivering robust double digit comp growth and increasing to 18% of net sales.
Palin newness from luxury brands like Gucci D Oar, and Carolina Herrera as well as exclusive newness from Ariana Grande and Billy Irish contributed to the strong growth.
In addition, our holiday fragrance programs and our monthly fragrance crush program performed very well.
Finally skin care delivered another quarter of double digit sales growth.
Beauty enthusiasts are maintaining their skincare regimens as they continue to focus on self care category growth in the quarter was primarily driven by moisturizer cleansers and Sun care newness.
Newness continue to appeal to guests as new brands, including drunk elephant, good molecules fresh and Black girl sunscreen as well as new products from Tula drove strong growth there in the quarter in.
In addition, dermatology based brands like survey in La Roche pose continued to resonate with guests.
The performance of our services business accelerated in the quarter, increasing to more than increasing more than 30% over last year, driven primarily by growth in transactions.
During the quarter, we expanded salon capacity to 100% in all Ulta beauty salons and benefit brow bars, except we're limited by state or local mandates and we relaunched skin services in 130 stores.
In addition, our recently launched Salon services Express color and all the plex repair and protect continued to bring in new members to our salons, an encouraging trend as we know members who use our services are some of our most valuable and engaged guests.
Reflecting this momentum during the quarter, we hired approximately 1000, new associates to support our expanding services business.
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Turning to our results for the full year. The Ulta beauty team delivered record sales of $8 $6 billion recorded operating margin of 15% of sales and record diluted EPS of 17 point $17.98 per share.
Comparable sales increased 37, 9% compared to fiscal 2020, and 12, 6% compared to fiscal 2019.
We expanded our market share in prestige beauty based on dollar sales for the 52 weeks ended January 29, 2022 compared to the same period last year based on point of sale data from the NPD group.
We continued to fuel guest's desires for newness with relevant brand launches such as drunk elephant Bobbi Brown, Ola plagues, Kristin S and verb.
We expanded our conscious beauty platform to 270 certified brands launch SKU level certification for the clean ingredients and vegan pillars and expanded are made without list.
We doubled the number of black owned brands and our assortment welcoming Black girl Sunscreen Camille Rose Homebody in Black Hawk, all among others to the Ulta beauty family and introduce dedicated space for ipod Brown founded brands and 260 stores.
We launched the wellness shop, a cross category platform that offers guests self care for the mind body and spirit on older Dot com and in more than 450 stores.
We opened 44 net new stores relocated seven stores remodeled nine stores and negotiated more than 150 lease renewals.
We continued to drive higher bonus utilization with new guest incentives increased marketing to drive awareness and operational improvements to the guest and associate experience.
As a result, <unk> sales increased to 18 point percent of e-commerce sales compared to 14% in fiscal 'twenty 'twenty between both us and our ship from store capabilities about 28% of our digital orders. This year were fulfilled by stores.
We launched our exciting new partnership with target Corporation, and opened 100 Ulta beauty at target locations I'll share more on this later.
We drove member growth through new acquisition, remember Reengagement and targeted retention efforts, increasing the number of ultimate rewards members to a record 37 million members.
We grew aided awareness to 94% and maintained unaided awareness and 48% importantly, we significantly increased ulta beauty consideration with Gen Z Hispanic and black beauty enthusiast and created deeper more emotional connections with consumers.
We successfully navigated macro headwinds, including supply chain challenges and tight labor markets, we proactively invested in our teams with appreciation bonus for our store and DC associates.
We doubled our renewable energy credits invested in energy management system retrofits diverted nearly 15 tons of waste from landfills through our recycling efforts and joined other leading retailers in the consortium to reinvent the retail bag.
And we made meaningful progress against our D E commitments, including launching abuse platform signing the 15% pledge investing it in in store guest experience training re imagining our diverse leaders development program and integrating D E and I across our internal talent lifecycle.
Now as we turn to fiscal 2020 to consumers in the operating environment are changing faster than ever consumers are becoming increasingly resilient to COVID-19 searches, but macro Henry headwinds global uncertainty and potential pandemic setbacks will likely continue to impact consumers the.
The beauty category is healthy and growing and our proprietary consumer insights give us confidence that the recovery, which began last year will continue in 2022 as consumers maintain their self care routines and engage in more social activities.
And as consumers increase their consumption of services and experiences our assortment and service offerings position us to benefit from these shifts.
We know there will be challenges, but I am more excited than ever about the opportunity for Ulta beauty to grow and continue to lead the beauty category.
Last fall, we introduced a new strategic framework, which will shape, our future and enable us to deliver against our long term financial targets.
Let me share our fiscal 2022 priorities through the lens of each of our strategic pillars.
Starting with our first pillar, we will drive breakthrough and disruptive growth through an expanded definition of all things beauty.
Our differentiated assortment is core to our success and in fiscal 2022 we intend to enhance and expand our conscious beauty platform.
Other increase our assortment of black on Black founded in Black led brands in support of our 15% pledge and build the infrastructure to support these brands.
Expand the wellness shop to an additional 300 stores and continue to evolve and expand our offering across core categories to engage and excite the beauty enthusiast.
To drive growth and capture market share, we will continue to add relevant brands to our assortment in recent weeks, we've executed one of our most anticipated brand launches ever Fenty beauty.
Partnering with Rihanna and Fenty beauty, we announced the news on February 17 through social channels, achieving higher mentioned volume and reach than any other ulta beauty brand launch announcement.
The initial guest response was incredibly positive trending as the number one topic on Twitter the day of the announcement.
Turning now to our second pillar to evolve the guest experience through our personalized and connected Omnichannel ecosystem all in your world.
Already enthusiasts are increasingly leveraging both physical and digital channels and we have the power to connect and engage with them across the beauty journey and meet them wherever they are.
In fiscal 2022 we intend to leverage our real estate pipeline to pilot a new in store experience with a layout and flow that reflects our key merchandising strategies and consolidates guest services in a central location.
Test a small store format with an optimized assortment and service offering and a handful of small markets enhance our buy anywhere fill anywhere efforts by expanding our same day delivery option.
Continue to create leading digital experiences through the ongoing refresh of our digital store to provide guests with an experience that seamlessly merge is content with commerce the.
The expansion of our virtual try on capabilities and new capabilities, resulting from our digital fund investments.
Will provide guests with more convenience through the launch of after pay as a payment option in stores and will expand the ulta beauty at target shop in more than 250, new target locations.
As part of our efforts to expand our Omnichannel ecosystem last year, we joined forces with the target Corporation to create a new way for guests to discover prestige beauty.
Just nine short months, the Ulta beauty and target teams worked together to design a space that feels authentic to both brands. We connected two independent loyalty programs and we made it easy for guests to link their accounts and we on boarded more than 50 prestige and emerging brands.
I am pleased to share that in our Ulta beauty at target location.
Customer awareness remains very strong guests are shopping across categories and more than a million members have linked their ultimate rewards and target circle accounts.
Building on this foundation this year, our focus is on accelerating new member acquisition optimizing the guest experience and continuing to amplify marketing as we scale.
Moving now to our third pillar expand and deepen our presence across the guest beauty journey firmly placing ulta beauty at the heart of the beauty community.
In fiscal 2022, we intend to further build upon our brand purpose and elevate our marketing efforts to include more action based programming that address the needs of key audiences.
They span livestream and in social selling drive member growth and leverage data and analytics to increase the personalization of our communications deepen engagement and shift share of wallet.
And launch our retail media network Ub media.
Our fourth pillar is to drive operational excellence and optimization.
We are investing in multiple significant cross functional projects that require capital and resources, but position us to capture additional market share and enhancements to the guest experience and deliver future profitable growth.
In fiscal 2022 we plan to execute the first phase of projects Soar, our multiyear effort to upgrade our enterprise resource planning platform.
[noise] migrate to Google cloud as our data and analytics platform to facilitate data accessibility enhanced reporting and faster decision making.
We began a two year effort to refresh our store Pos systems and leverage our continuous improvement capability to identify prioritize activate and measure meaningful cross functional process optimization opportunities.
In support of our supply chain optimization efforts. This year, we plan to begin an upgrade and retrofit of our Greenwood distribution Center began construction of our first market fulfillment center and implement new transportation tools to provide better visibility to loads in transit.
Our winning culture is a key driver of Ulta beauty success, and our fifth strategic pillar is to protect and cultivate cultivate our world class culture and talent.
We strive to make Ulta beauty, a great place to work by leading with our hearts caring for each other in everything we do and demonstrating integrity authenticity and inclusive inclusivity daily.
To reinforce our position as an employer of choice and enable us to continue to successfully navigate anticipated labor tight labor markets. This year, we intend to increase investments in training and development programs to enhance the guest experience improve personal performance and help associates manage their career.
Continued leveraging our diverse slate recruitment efforts further enhance and optimize our talent acquisition processes.
Increased investment in development programs to help associates plan and develop their careers and continue to navigate the pandemic with safety at the forefront for all of our associates.
Finally, our sixth strategic pillar is to expand our environmental and social impact.
As the largest U S beauty retailer, we have the power to shape, how the world sees beauty and our responsibility to inspire positive change building on the progress we made in 2020 . One this year, we plan to continue to amplify underrepresented voices through media investments with multicultural platform.
Arms, the expansion of our music platform and increased brand marketing support or black on black founded in Black led brands within our assortment.
Building ecosystem to support the pipeline of bypass brands, including the creation of an accelerator program focused on early stage Bipack beauty brands to educate inspire and support brand participants to prepare for retail readiness and investment in new voices, a venture capital firm that partners.
With an invest in entre and entrepreneurs of color to drive scalable sustainable businesses continue.
Continue to invest in training and internal programming to ensure our guests associates and communities, you'll connected to and reflected at Ulta beauty.
And as we look to reduce our carbon footprint, we plan to expand our led lighting retrofit program double our investment in renewable energy credits and explore opportunities to collaborate with our brand partners to identify opportunities to reduce scope three emissions together.
We recently published our 2021 ESG report, which includes information about our strong corporate governance practices and commitment to operate in an ethical business.
In addition, it includes disclosures aligned with SaaS B Index N T C F D as well as updated E O one information.
In closing I am incredibly proud of what the Ulta beauty team has accomplished and excited about the opportunities ahead.
We operate in a healthy culturally relevant and growing categories. We have a strong proven business model and we have a winning culture and simply outstanding associates, we have ambitious plans and I'm confident we have the right team to execute our strategies and deliver for our guests.
Associates and shareholders.
And now I will turn the call over to Scott for a discussion of the financial results Scott.
Thanks, Dave and good afternoon, everyone.
Before I review, our financial results I want to Echo Dave's comments and express my sincere appreciation to all our Ulta beauty associates for their focus on providing great guest experiences in managing the business, especially in such a dynamic operating environment their dedication to our guests and each.
Other enabled us to deliver another strong quarter and an outstanding year for our shareholders.
Now to our fourth quarter results beginning with the income statement.
Overall results for the quarter were better than anticipated, primarily driven by stronger than expected holiday sales and irrational promotional environment sale.
Sales growth across both physical and digital channels were stronger than expected, resulting in better gross margin and less SG&A deleveraged and planned.
As a result operating margin increased to 13, 8% of sales for the quarter.
Net sales for the quarter increased 24, 1% driven by 21, 4% growth in comp sales and strong new store performance transactions for the quarter increased 10, 4% driven by double digit growth in store traffic and average ticket increased nine 9%.
Resulting from both a higher average selling price and an increase in units per transaction.
Looking at the cadence of sales through the quarter November was the strongest months supported by our successful marketing efforts and guests early holiday shopping.
Most holiday overall growth moderated driven primarily by a deceleration of store traffic likely reflecting disruption from weather and the army crime Barry.
During the quarter, we opened six new stores relocated three stores and remodeled one store.
Compared to the fourth quarter of fiscal 2019 total sales increased 18, 4% and comp sales increased 15, 4%.
For the quarter gross margin increased about 250 basis points to 37, 6% of sales compared to 35, 1% last year. The increase was primarily due to the leverage of fixed costs favorable channel mix shifts and higher merchandise margin.
Consistent with trends, we experienced in the first three quarters of the year in the fourth quarter strong top line growth and benefits from our occupancy cost optimization efforts resulted in significant leverage of fixed costs.
Channel mix was favorable as the penetration of E. Commerce sales was about 600 basis points lower than last year and merchandise margin improved primarily due to lower promotional activity and ongoing benefits from our category management efforts.
Comparing this year's performance to the fourth quarter of fiscal 2019 gross margin improved by 260 basis points higher merchandise margin and fixed cost leverage were partially offset by adverse channel mix.
As planned SG&A increased 26% to 200 $650 million.
As a percentage of sales SG&A increased 40 basis points to 23, 8% compared to 23, 4% last year, primarily due to higher incentive compensation and store payroll and benefits, partially offset by leverage of marketing expense due to higher sales.
Reflecting strong operational performance versus our internal targets incentive compensation associated with our annual bonus programs increased compared to last year in.
In addition, we elected to grant discretionary appreciation bonuses to our store associates in recognition of their efforts to deliver this outstanding performance.
In total higher incentive compensation drove about 60 basis points of deleverage in the quarter.
Store payroll and benefits expense in the quarter was higher than last year, reflecting an increase in the number of store associates and higher average wage rates.
Compared to fiscal 2019, SG&A as a percentage of sales was about 140 basis points unfavorable.
Merely due to higher incentive compensation and marketing expense.
Operating margin was 13, 8% of sales compared to 10, 2% of sales in the fourth quarter of fiscal 2020 on a GAAP basis, and 11, 6% of sales on an adjusted basis.
Strong top line growth driven primarily by stores combined with the impact of our ongoing cost optimization efforts resulted in record level operating margin performance.
The companys tax rate decreased to 22, 9% compared to 23, 4% in the fourth quarter last year. The lower effective tax rate was primarily due to a benefit from the income tax accounting for share based compensation and state tax credits.
Diluted GAAP earnings per share increased to $5.41 compared to $3 <unk> last year.
Adjusted diluted earnings per share in Q4 of last year was $3.41.
To recap the full year, our teams delivered sales and profits that are exceeded pre pandemic levels.
Compared to fiscal 2019 sales increased 16, 7% to $8 6 billion.
Operating profit increased 44% to $1 3 billion or 15% of sales and diluted EPS increased 48% to $17 98 per share.
Moving on to the balance sheet and cash flow statement.
Total inventory increased 28% to 1.5 billion compared to $1 2 billion last year.
In addition to the impact of 44 net new stores. The increase reflects inventory purchases to support new brand launches, including older Plex, MTN Chanel as well as proactive efforts to maintain strong and stocks are key items to support expected demand and mitigate anticipated global supply.
Chain disruptions.
In fiscal 2021, we invested 172 million in capital expenditures, including approximately $89 million for new stores, Remodels and merchandise fixtures $60 million for supply chain, and I T and about $23 million for store maintenance maintenance and other.
Depreciation for the year was $268 million compared to $298 million last year.
Primarily reflecting the impact of last year's store impairments and store closures.
Ulta beauty continues to generate significant cash from operations.
As we shared at our October analyst day, our priority for use of cash is to reinvest in the business to drive profitable growth.
After investing to support growth, we will continue to look to return excess capital to shareholders.
During the fourth quarter, we repurchased one 9 million shares at a cost of $760 million we.
We elected to accelerate repurchases in the fourth quarter to take advantage of better than expected cash flow.
Since launching our start stock buyback program in 2014, we purchased 14 million shares at an average price of $275 effectively returning $3 9 billion to shareholders, while continuing to invest in strategic growth drivers.
Having essentially completed the authorization announced in March of 2020 today, we announced a new share repurchase authorization for $2 billion.
Turning now to our outlook.
We are emerging from the pandemic as a stronger healthier business over the last two years, we've strengthened category margins and improved our ability to optimize promotions, our real estate portfolio is healthy and improving economics.
Our e-commerce business is larger and more profitable.
And we've strengthened our analytical capabilities and adjusted our cost structure.
At our analyst day in October we shared an updated growth algorithm with investors over the next three years, we expect to deliver net sales growth between five and 7% on a compound annual growth basis, using fiscal 2019 as the base year.
Operating profit between 13, and 14% of sales low double digit diluted earnings per share growth on a CAGR basis again, using fiscal 2019, as the base year and maintaining capital expenditures between four and 5% of sales.
As we look to fiscal 2022, we continue to expect net sales growth and operating margin will be in line with these longer term targets.
Our EPS guidance of low to mid single digit growth reflects lapping extraordinary performance in fiscal 2021.
Our guidance for fiscal 2022 also includes macro considerations, including continued wage pressures and higher supply chain costs as well as the impact of a more normalized investment agenda.
Specifically in fiscal 2022, we plan to open approximately 50, net new stores and remodel or relocate approximately 35 stores we.
We expect net sales will be between nine point, all 5 billion and $9, one 5 billion with comp sales growth between three and 4%.
Our sales outlook reflects a more normalized growth trend for the beauty category, including a modest recovery in makeup while also considering various uncertainties, including inflationary risks to consumer spending and the impact of increasing points of distribution for prestige beauty.
For your modeling purposes, we anticipate comp growth in the first half will be in the mid single digit range driven by stronger growth in the first quarter and then moderate to low single digit growth as we lap last year's recovery.
We expect operating margin for the year will be between $13, seven and 14% of sales compared to 15% in fiscal 2020 , one with deleverage from both gross margin and SG&A we.
We anticipate operating margin deleverage will be greater in the first half as we lap last year's strong performance.
We expect gross margin will be lower than fiscal 2021, driven primarily by lower merchandize margin, resulting from the impact of new brand launches lapping onetime benefits from favorable inventory reserve adjustments and a more normalized promotional environment.
We also expect supply chain costs will increase more than sales, resulting in additional pressure on gross margin.
We expect SG&A expense will deleverage driven primarily by 70% to 75 million of expenses related to our strategic priorities, including investments to support you'd be media Ulta beauty at target project, SOR and other capabilities as well as higher wage rate growth.
Across the enterprise, partially offset by lower incentive compensation.
These assumptions result in guidance for diluted earnings per share in the range of $18.20 to <unk>.
$18 70 per share, including the impact of approximately 900 million and share repurchases.
We are not providing specific quarterly guidance, but as you update your financial models consider that the second quarter will likely be our most challenging quarter of the year as we lap extraordinary performance in fiscal 2021.
As a result, we are currently planning for EPS in the second quarter to decrease about 10%.
Finally, we plan to spend between 375, and 425 million in capex, including approximately $195 million for supply chain and I T $150 million for new stores, Remodels and merchandise fixtures and about $55 million for store maintenance and other.
We expect depreciation for the year will be between 250 and $255 million.
I would note that our guidance assumes no changes in federal tax rate environment and no material increases in the federal minimum wage.
In closing.
A rapidly recovering environment combined with the outstanding efforts of our teams and the work we have done to strengthen the business enabled us to deliver record performance in fiscal 2021.
While lapping this performance will be difficult, we remain confident in our longer term growth targets.
Oh, the beauty has established significant long term competitive advantages and we believe we are well positioned to capitalize on growth opportunities within the 140 billion U S beauty products in Salon services industry and continue to deliver long term shareholder value.
And now I'll turn the call back over to our operator to moderate the Q&A session.
Thank you at this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
If I start to if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Yeah.
Our first question comes from Dana Telsey with Telsey Group. Please proceed with your question.
Good afternoon, everyone and congratulations on the nice pop back.
As you think about the correct macro landscape out there and inflationary pressure passionate how are you thinking about pricing.
2022, and how does that feed into the margin and you see that.
Alright, thank you.
Great Dana Thanks for the question and yes, certainly we are tracking.
Tracking and monitoring closely the inflationary environment and we understand the the unique dynamics that were facing we recognize consumers gonna be facing headwinds from rising prices and other dynamics I will say that as we look at the beauty category, even with these headwinds we remain.
Positive the category is healthy it is growing it's emotionally important and connected to our consumers. We are in the midst even as we face some of these inflationary pressures.
That we're in the midst of of our of our opening of of the of the economy of the world around US which is beneficial we know consumers are working to maintain their self care routine AR and so.
Despite the headwinds we think the category is well positioned and uniquely ulta is well positioned because of our of our model. The fact that we are across all price points all categories mass prestige.
We were able to adjust and reflect.
Evolving consumer needs says as the world around us changes.
Pricing. It has you know every year, there's pricing certainly over the last few months, we've seen some pricing action in from from some of our brands. A reminder, in our prestige side of the business it tends to be MSRP and so were yeah, we would.
Be reflective of where the broader market is going.
But it hasn't been an extraordinary amount of price increase yet.
And any benefit of that is certainly reflected in our guidance going forward.
But as as cost pressures increased both on our business and our brand partners business will be clearly tracking this closely and making sure we're addressing address adjusting appropriately as we manage through the year.
Thank you.
Our next question comes from Mark all trigger with Baird. Please proceed with your question.
Good afternoon. Thanks for taking my question I wanted to ask about.
Now the rewards program and in spend per member it looks like kind of your average spend per ultimate rewards member must have been up pretty nicely 2021 versus 2019.
Just any color there would be great and how much of that category recovery versus share of wallet gains and then looking ahead you did call out some of the increased distribution points for prestige beauty as a consideration in your guidance. So curious how you are you just thinking about ability to continue after share of wallet and the.
In 2022, thank you.
Great well, we are Inc. Incredibly.
We are incredibly proud of our loyalty program, we have been for a long time and I'm really really pleased with the results that the team delivered in in 2020 one to reach a record level of 37 million active members, which not only 13% ahead of 2021 'twenty 'twenty, but 6% ahead of.
2019, so our guests are highly engaged reactivation rates retention rates very strong.
We did see an increase in spend per member, which we're encouraged by and that's driven by a number of factors as we continue to optimize the way we're engaging leveraging our personalization.
Our efforts are providing more relevant.
Appropriate messages to our guests we brought through our CRM capability we've.
We've seen a category mix change we've talked consistently through the year about the growth of fragrance. Some other tools in our in our our hair tools. Some higher ticket items that have been driving very strong growth growth ahead of the total store and so that's contributing to.
Do it and I, just say you get an overall connection to Oh Ulta beauty I mentioned, just the high level of unaided awareness. The strong emotional connection that we're building is driving greater share of wallet and our efforts going forward will continue to drive that as I look at the broader market place.
And and share of wallet and yes. There is a there is expanded points of distribution on the prestige side of the business part of witches Ulta beauty, both on our own stores and our partnership with target and I'm really pleased that in the in the in the fourth quarter, we gained share.
There when we look across all of our points of distribution, including target despite hundreds.
Hundreds more hundreds of more new locations competitive locations. So.
We're confident we think we've got it right the right model strong competitive position and most importantly deep connection to our guest that is demonstrating stronger loyalty to ulta beauty and we're going to leverage that to continue to drive growth and share growth into 2022.
Yeah.
Our next question comes from Oliver Chen with Cowen. Please proceed with your question.
Hi, Thank you very much on the guidance.
Gives you confidence that makeup will return to growth and how does that intersect with inventory category planning and also your comments on prestige and the competition there as a follow up as you make strides and.
Bypass brands Black indigenous and people of color brands Austin investors measure.
Success here how are you measuring success do you have a lot of innovative programs there. Thank you.
Great. Thanks Oliver.
Yes.
Some important topics in your questions. First makeup we are confident in the path ahead of makeup and and yeah, there and I'd say you know as we reflect back on the year. There were certainly some ups and downs and what we continue to see us make up more than any other category is sensitive to COVID-19 COVID-19 .
Fluctuations.
And and we saw that in the fourth quarter with Omicron and Delta and continued challenges there, but as I look forward. On makeup there are so many things that continue to encourage us and we've seen some of these trends for a little while but we've also as soon as we get momentum we see some setbacks related to COVID-19 , but broad macro trends.
Of Oh, opening up and more opportunity for consumers to get back in the World you know youre seeing it and back to work, we're seeing just a rapid acceleration in that events activities those things people getting out of their house or all.
Exceptionally positive for for the total category, we know all along that consumers have been passionate about makeup just their opportunities are their usage opportunities have been more limited, but we see the passion and social media engagement continues to be high at all and pick pocket and in Instagram and all other four.
So we know the connection is there we know the opportunities are coming we know theres important trends like the duality of natural looks in Boulder looks increased focused around I and brow Ah that you know, even though even a resurgence of contour in all these things are positive and then you layer in for US a R.
Yeah. The outstanding work, our merchandising team has done to continue to evolve our assortment.
I mentioned the launch authentic Fenty beauty, which are which is just a really important step in our continued our connection with our guests and that's is off to a very strong start.
Launch of Chanel on the luxury side to tap into a new opportunity. There we have expansion in Mac, which is going quite well and then a number of great brands. We're seeing innovation I'll give you a couple of examples on Mac of Mac stack Mascara that has one formula two ones for both volume and precision we've got a knicks lot line loud lip liner that's it.
Exclusive to Ulta beauty, that's performing well, we've got morphine lucky charm, that's getting oh exclusive and driving our engagement and we've got a trailer J by Becky G, which is our Mexican American singer celebrating.
Celebrating laden her laden Russo we have exclusivity newness, where big brands emerging brands and it ties to your last point. Your question about byproduct, we see success by these brands thriving we're not here just to get these brands on the shelf.
It's one thing to arrive on ourselves, it's another thing to thrive and that's how we're measuring success. We want these brands are to be performed.
Perform well to grow to have great opportunities to reach guests and that's how we're measuring it and that's how I suggest you look at our where we're doing that is to drive engagement with our guests and we're seeing it for a brand. So we're optimistic about beauty about makeup.
And <unk> will be one of the elements that will help us drive growth going forward.
Our next question comes from Chris <unk> with J P. Morgan. Please proceed with your question.
Thanks, Good evening.
You talked about gross margin down in 'twenty.
<unk> 2020 , two that seems a bit different from your prior commentary is that is that simply lapping through this big gross margin beat in the fourth quarter or is there something changing in your outlook or something here that you're seeing in the market and then on the gross margin side can you help us a little bit on the cadence front.
Yeah. Thanks, Chris So I don't really think that there's any inconsistency in our messaging here I think you know the variables at play are pretty consistent over the course of the year. As you think about 2022 I would say so again, it's back to merchandize margins right.
Under pressure in 2022 compared to what we've just been through the last year or so with the promotional environment. We think it's going to get back to more normal kind of business.
Business environment, and then incremental supply chain costs, including transportation cost and wages and our distribution centers being greater than our growth outlook is for next year. So a combination of those things are driving deleverage and then as we think about the year I guess as we.
Said second quarter is going to be the toughest. So again first half of the year stronger generally speaking on operating margin in the second half, partly that's being driven in the first quarter by stronger sales as we lap over you know last year. At this time, we were just starting to come out of the depths of the pandemic, so sales, especially in the store.
Our fleet is stronger this year than the first quarter than they were a year ago that drives a lot of leverage for us and helps gross margin and operating margin overall, and then sequencing and again I think we said in our prepared remarks, those impacts overall kind of moderate as we get deeper into the year.
Our next question comes from Kelly Crago with Citi. Please proceed with your question.
Hi, Thanks for taking my question I'm, just curious if you can elaborate a bit on your partnership with target.
Terry your nine months and that's hard to swap helping guide.
New customers that will buy you know what is it.
But it looked like from a customer who shops both channels.
Any other color you can provide around customer behavior as it relates to triangle it'd be helpful. Thank you.
Yeah. Thanks, Kelly for the question you know at the retail leader, we're really aiming to deliver seamless omnichannel experience that meets our guests wherever they are.
The newest element of this omnichannel strategy as they ought to be at target, it's really providing us another way to engage and discover ulta beauty for a new guests that shopping at target you know the strategy is working our what I would share is that our existing I'll tell you what numbers. They are taking advantage of shopping at all CBD at target.
And we're also introducing us to some new guest the guest response has been really positive. The awareness remains strong as Dave mentioned in his comments more than a million numbers have linked their ultimate rewards and target circle accounts and we're signing up new members every week.
Target shared at their recent financial community meeting that the productivity in the space is very high. So that's always a good indicator to and and I would say that while it's still really early were really encouraged that we see new members bouncing back into Ulta beauty and their shopping behaviors are very similar to our existing loyalty members.
So you know just to kind of wrap up overall, we're very pleased well. This is still new we're pleased with how this is playing out as part of our omni strategy going forward.
Our next question comes from Mike Baker with D. A Davidson. Please proceed with your question Oh, Okay, Hi, Thanks, maybe a two parter just on makeup.
Where are you seeing it on a two year basis earlier in the quarter and then it kind of and then Oh micron slow that down and is that what you're saying and could you talk about you know what you might be seeing in some areas of the country that are seem to reopen earlier in and not be as impacted by the omicron or where are we.
Didn't seem to slow down some of the people going out Oh, you know, Texas, Florida, maybe places like that thanks.
Yes.
What I will say, we wont get into like every every period throughout the quarter.
But for sure what we see our makeup is.
A as anxiety around Covid is and as increased fluctuated through the last two years, we do see more pressure on on makeup and but now across the country as more and more people with both some some parts of.
The country had been more open than others, but there still has been.
Consumer concern even as even as elements are open that is easing right now across all parts of the country and so that's encouraging to us and that's what we think we need is more ongoing consistent our confidence to be back into work the back at our various activities.
He is an events and and as we see that that.
We know that's an element it's not the only thing, but it's an important element tied to makeup success going forward.
Our next question comes from Anthony to combo with loop capital markets. Please proceed with your question.
Thanks, So much for taking my question and to be respectful for everyone on the call actually limit to one question. One actual question. So I just was wondering if you could just give us a little bit more color on the rollout of Fenty beauty.
Just any color in terms of the number of stores linear feed and caps and any any any additional color would be very helpful. Thank you.
Thank you for modeling the one question rule and so they appreciate that and yeah. We are thrilled with venting. It isn't all stores. It is online. It is if you have a chance to go into any Ulta beauty store Youll see it right at the front of the store and most of our stores are.
Right at the fraud that has a entire.
Eight.
It would be 18 throughput, Ron and an end cap.
Our broad assortment featuring.
Fenty among other thing is known for the breadth of assortment in and are in place in particular, so youll see that being able to test and try a items. So and then strong strong presence online in fact, Oh, we really found some unique ways in our online footprint to bring that.
Brand to life and communicate to our guests and so off to a great start really pleased with it.
Really glad that.
Kendo organization.
<unk> has partnered with us in many ways and see this as a key part of our success going forward and thrilled to have every honour and fenty as part of the Ulta beauty family for a long time to come.
Actually I think we have time for one more question. Please.
Our final question comes from Adrian <unk> with Barclays. Please proceed with your question.
Alright, Thank you very much and congratulations to the team and all of the store in place.
Wonderful.
Hi, Mike.
My question is for you and it's getting back to the old Tech target a couple of weeks ago before the potential to expand to 850 stores by 2023 call you mentioned over 200 for this year.
Wondering can you share with us.
The data from that partnership.
Condition.
Any details there and what would you need to see to accelerate that.
It'd be a little more.
Thank you very much.
Well, let me.
Yeah, Let me, let me give a little bit of color and I'll ask you showed a kind of follow give some more detail that build off our previous Ah. It's her on this but and we are just thrilled to be partnering with target. We know there's been we're in the midst of a of a real transformation in the in the prestige.
<unk> beauty landscape.
And the fact that in the fourth quarter with hundreds of new locations across our prestige beauty across the location and the fact that Ulta beauty continues to gain share. We think is a reflection of the strength of our of our strategy are the execution that we brought both in stores online and in our target our LTV.
<unk> target relationship we are delighting guests, we're gaining share even as there's other competitive activity and we're confident we're going to be able to continue to do that but kishore do you want to give some specifics about the number of stores and what the outlook looks like well we saw it Adrian is a little over 250 odd. This next year you know we are in close partnership and.
We are following target's remodel schedules, so that really kind of plays into timing and sequencing et cetera, and how we're going about opening new stores.
The partnership is really strong.
We are pleased with our results and the space the productivity in the space is really high you know, it's a highly curated assortment with 50, he brand partners and we're continuing to learn and evolve and grow as we continue to rollout more location, but over 250 in the next year.
Ladies and gentlemen, we have reached the end of the question and answer session and I would like to turn the call back to Mr. Dave Kimball for closing remarks.
Awesome. Thank you all for joining us today really appreciate it in closing I want to thank again, our 40000 associates for delivering a simply outstanding 2021, and with a relentless commitment to our guests to each other and to moving our business forward.
We all look forward to speaking to all of you again in May when we report our first quarter results I Hope you have a great evening, thanks again for joining us.
This concludes today's conference you may disconnect your lines at this time. Thank you all for your participation.
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