Q1 2022 Ulta Beauty Inc Earnings Call
Good afternoon, and welcome to Ulta Beauty's conference call to discuss results for the fourth first quarter of fiscal year 2022.
At this time all participants are in a listen only mode. A brief 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 keypad.
As a reminder, this conference call is being recorded and it is now my pleasure to introduce MS. Kiley Rawlins, Vice President of Investor Relations. Thank you Ms wrong. Please proceed.
Thank you John and good afternoon, everyone and thank you for joining us today for our discussion also beauty financial and operational results for the first quarter of fiscal 'twenty two.
Hosting our call are days Kimble, 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 first quarter 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 Companys 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 May 26, 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.
We'll begin this afternoon with prepared remarks from Dave and Scott following our prepared comments, we will open the call for questions.
To allow us to accommodate as many questions as possible during the hour scheduled for this call. We respectfully ask that you. Please limit your time to one question and one follow up question. If you have additional questions. We ask that you reach you 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 that date.
Kiley and good afternoon.
Fiscal 2022 is off to an outstanding start with the Ulta beauty team delivering another quarter of excellent performance on top of last year's record results.
For the quarter net sales increased 21% to $2 3 billion comp sales increased 18%.
Operating profit increased to 18, 7% of sales and diluted EPS increased 54% to $6 30 per share.
During the quarter, all major categories exceeded our expectations and we increased our market share in prestige beauty based on point of sale data from the NPD group.
We also increased the number of members in our ultimate rewards loyalty program introduced innovative digital experiences for our guests and continued to execute major strategic projects, including investments in new stores supply chain and technology infrastructure.
All while successfully navigating supply chain challenges, a tight labor market and operating cost pressures.
I want to express my sincere appreciation to all of our Ulta beauty associates for their collaborative efforts to create guess great guest experiences execute against our plans and deliver these outstanding results.
Consumers continue to be highly engaged with the beauty category as they participate in more in person activities engaged in more travel and lean into experiential spending and while macroeconomic pressures such as rising inflation are top of mind for consumers their resilience and emotional connection to beauty continues to drive the recovery.
With the category.
This consumer demand paired with strong execution of our strategic priorities fueled our exceptional results.
Looking at our operational performance for the quarter I will focus on the progress we are making with our consumer facing priorities and then share an update on our optimization efforts.
Let's start with our first strategic priority to drive disruptive growth through an expanded definition of all things beauty.
From a category perspective fragrance and bad hair care makeup and skin care, all delivered double digit comp growth against the first quarter last year.
Importantly sales of makeup exceeded pre pandemic levels in both mass and prestige cosmetics.
The makeup recovery is progressing faster than we expected coming into this year compared to the first quarter of 2021 prestige cosmetics outperformed mass cosmetics, driven by new and expanded brands and a strong 21 days of beauty event.
From a trend standpoint Foundation, Concealer XI liners, and lipstick continued to deliver strong comp growth.
New brands like Fenty beauty, our a M beauty by Ariana Grande and trace Lucha mass cosmetics brand founded by my team musician Becky G contributed to growth during the quarter, while new product launches from a wide range of brands, including Clinique Lancome Nars Elf.
And Nyx also delivered strong sales growth.
In addition, this quarter, we expanded Mac into 233 additional stores and introduce Chanel beaut Te into 104 stores.
Even as they increase makeup usage beauty enthusiasts are maintaining their skincare routines as a results skin care delivered another quarter of strong double digit sales comps on top of robust double digit growth in the first quarter of last year.
Moisturizer XI serums and acne treatments continue to drive category growth in the quarter we.
We also saw strong growth in Sun protection, and son, self tanning and consumers increased travel and social activities.
Newness continues to appeal to guests with new brands, including drunk elephant fresh Super Goop and good molecules.
As well as new products from two long stripe Acton and first aid beauty contributing to the category growth during the quarter.
And established brands, including Peter Thomas Roth, and the Roche pose continue to benefit from engaging social media content.
Hair care delivered another quarter of double digit growth driven by strong guest engagement with newness and our core assortment as well as successful Salon backbar takeover events.
<unk> focused on her health like damage repair color care and scalp treatments continued to resonate with guests and interest and hair styling AIDS increased with the rise of social occasions.
New brands like all the plants as well as new product launches from way embryos Yo contributed to category growth in the quarter and Tysons are wrapped styling tool will continue to be a member favorite.
Guests can continue to engage with core professional brands like redken, urology, and biologics and our Salon Backbar takeovers drove strong growth for Cai and I G K as our stylists engage guests with these brands.
Consumer strong engagement with the fragrance category continue driving double digit growth on top of a phenomenal results last year exciting newness, a strong Valentine's day, and strategic events, including 21 days of beauty and spring Hall contributed to this performance.
The in store launch of Ulta beauty exclusive Billy eyelash, as well as newness from Gucci and Carolina Herrera resonated with guests and our monthly fragrance crush program drove growth for established brands like YSL and Valentino.
In addition to driving core category growth, we are investing in key cross category platforms to drive guest engagement and market share growth.
Since launching conscious beauty in 2020, we have continued to expand brand participation increased guest awareness and drive trial at the end of the first quarter more than 280 brands offered certified products in at least one pillar.
And while we continue to certify existing brands and Skus. Many new brands are launching with certification in place. One such example is Andrew Fitzsimmons, a hair care brand that offers proprietary bonding technology at accessible price points, which was certified across all four pillars when it launched in the first quarter.
Another example is skip and Ulta beauty exclusive hair and body care brand packaged in a fully recyclable shower friendly paper beauty carton, which also launched in the first quarter.
Moving now to our efforts to continually expand and support our assortment of bypass brands, we launched five new Bipack brands beauty Stat Rosen skincare, Fenty beauty trace Lucci beauty and my L. Organics.
We also expanded black girl sunscreen into all stores.
To promote trial, we introduced a spotlight display in select stores to showcase our bypass founders.
In recognition of Black history month, we launched a compelling omnichannel campaign to recognize and celebrate and support the black community and black owned brands.
Feature black owned brands in stores and across enhanced digital and print channels and we offered compelling loyalty reward rewards on black owned brand purchases to drive awareness.
Finally, our wellness shop continues to resonate with guests as they prioritize self care and wellness journeys.
We recently expanded the shop to an additional 266 stores now reaching about 55% of our fleet and refresh the digital landing page on <unk> Dot com.
With easy ways to explore our curated assortment and helpful tips about easy self care routines guests can now more readily incorporate wellness into their busy schedules.
Turning now to our efforts to evolve the omnichannel experience through a connected physical and digital ecosystem all in your world.
Store traffic trends were strong in the quarter as guests capitalized on their preference for in store shopping with fewer COVID-19 restrictions in place than last year in store capacity returned to normal levels.
While store traffic is still below pre pandemic levels the trend is improving.
As a core differentiator for Ulta beauty beauty services, deepen engagement and loyalty through human connection.
Consumers are resuming their beauty service routines as they participate in more in person activities in the first quarter, our beauty services delivered double digit comp growth, primarily due to increased capacity and new offerings, including all the plex repair and protect and express colored by redken.
To meet growing guest interest in services and experiences we continue to expand our in store events and enhance our service offerings.
April we relaunched makeup services in all stores just in time to support special events, such as Proms graduations and weddings.
As guests are coming back to shop in stores. They were also maintaining their use of convenient engaging digital channels.
Collecting these trends, we continue to enhance our omnichannel offerings, including buy online pickup in store and same day delivery.
During the quarter <unk> increased 26% to 221% of ecommerce sales compared to just 16% last year.
Well, it's still limited guest are increasing their use of our same day delivery options based on engagement trends. We recently expanded same day delivery to five new markets, including New York City and today about 30% of our stores offer guests this convenient option.
During the first quarter, we continued to expand and enhance our digital experiences as part of our digital store of the future journey, we introduced a new homepage for both ultra dot com and our mobile App. We also launched two virtual try on tools each powered by technology developed by companies we've invested in through our <unk>.
Digital innovation fund.
First we launched glam lab skin advisor to point out powered by global artificial intelligence startup Hot Dot AI. This best in class in analysis technology enables us to provide guests with a more accurate skin diagnosis, which has resulted in stronger satisfaction with the tool.
We also launched glam lab hairstyle try on Howard by Restyle, a beauty tech startup that uses artificial intelligence and machine learning to enable virtual try on of more than 50 different hair styles, including options by gender and texture.
We also introduced innovative a R and virtual reality experiences to support our launch of Fenty beauty and our a M beauty.
Finally, we continued to enhance and expand our partnership with target. This leading partnership as part of our long term strategy to build brand loyalty and engagement with Ulta beauty.
We are seeing existing ultimate reward members take advantage of the convenience of shopping while earning points at Ulta beauty at target and we are leveraging target strong traffic to introduce Ulta beauty and ultimate rewards to new guests.
During the first quarter, we opened 26 Ulta beauty at target shops ended the quarter with 127 locations one of our priorities in 2022 is to leverage marketing to build engagement as we scale as an example in support of our 21 days of beauty event, we co created brand relevant digital and in store.
Core communications with target to support this strategic Ulta beauty event, which resulted in strong performance and guest engagement across both channels.
Moving to our efforts to drive love loyalty, an emotional connection with Ulta beauty by expanding and deepening our presence at the heart of the beauty community.
During the first quarter, we continued to optimize our marketing mix to reach guests through the most relevant channels and platforms, we leveraged audience data to execute a targeted digital first approach to 21 days of beauty and spring Hall, driving greater awareness and increase sales, we launched content partnerships to engage new audiences and increase awareness of.
Our cross category plateau platforms, and we created innovative marketing campaigns to support key brand launches.
We ended the quarter with 37, $737 7 million active members in our ultimate rewards loyalty program, 17% above the first quarter last year.
This increase was primarily driven by continued member reactivation growth new member acquisition and strong retention.
Our strategy is to Reengage lapsed met lapsed members, many of whom dropped off during the pandemic are delivering results. Additionally, new member conversion remains strong in stores and online conversion rates are improving as we increase the visibility and value of ultimate rewards throughout the guests online journey.
I'm also excited to share that we launched UB media, our retail media network through you be media, we will harness the power of our exclusive first party data to transform the way brands connect with beauty enthusiasts.
Building on our successful digital marketing partner program, you be media offers brand partners and enriched portfolio of advertising products and channels as well as enhanced measurement and reporting including audience and creative insights.
The media network offers advertising access via display video search product listing ads, social and Influencers on both open web platforms and Ulta beauty owned properties.
In addition to unlocking a new income stream, while helping brand partners build digital campaigns to effectively engage audiences. We expect to see sales benefits as campaigns lead consumers back to Ulta beauty properties to transact.
Underlying these customer facing priorities is a focus on to drive operational excellence and optimization.
Last fall, we shared our updated supply chain strategy, including our plan to build market fulfillment centers or M. S seized to supplement our existing D. C network capacity and provide greater speed to stores and e-commerce guest in specific markets.
We recently broke ground on our first MSC in Greenville, South Carolina, and expect the facility will be fully operational in the third quarter next year.
In addition, our planned retrofit of our full service distribution center in Greenwood, Indiana is on track to be complete in the second quarter of 2023.
I am confident our infrastructure investments, including key supply chain and it investments will enable ulta beauty to continue to deliver strong results and capitalize on future growth opportunities.
In closing a few weeks ago I had the privilege to welcome nearly 2000 members of the Ulta beauty team to our annual field leadership meeting, bringing together, our general managers district managers field support teams and brand partners for several days of recognition leadership development and product edge.
<unk>.
The excitement was palpable and the optimism about our future was truly inspiring.
We celebrated everything we have accomplished throughout the last two challenging years and set the stage to deliver on the incredible opportunities ahead for Ulta beauty.
I left the event even more excited about all we can do together as one ulta beauty team to refine redefine how the world sees and expresses beauty.
As we look forward the world around us continues to be dynamic.
Product prices and operating costs are rising and consumers are increasingly concerned about the impact of inflation.
While it is difficult to forecast how inflation may impact consumer behavior going forward, we're monitoring guest engagement and remain encouraged by the underlying trends, we see in our business and in the beauty category.
I am confident our team will continue to navigate near term pressures and I remain excited about the long term opportunity for Ulta beauty to continue to deliver profitable growth.
And now I will turn the call over to Scott for a discussion of the financial results Scott.
Thanks, Dave and good afternoon, everyone I wanted to Echo Daves comments and thank our Ulta beauty associates for delivering another outstanding quarter are collaborative efforts and commitment to serving our guests enabled this extraordinary performance.
Our first quarter results were stronger than we planned robust topline growth due to several factors, including the continued resilience of the beauty category stronger than expected store performance and the impact of new brand launches drove better than expected leverage in both gross margin and SG&A results.
We had a record operating margin of 18, 7%.
Now, let's dig into the details of our results.
With sales net sales for the quarter increased 21% driven by 18% growth in comp sales and increase in other revenue and strong new store performance from.
From a channel perspective stores delivered strong double digit comp growth, reflecting fewer colgate restrictions than last year, while ecommerce sales were flat in line with our plan.
These actions for the quarter increased 10% driven by double digit growth in store transaction.
Average ticket increased seven 3%, resulting primarily from an increase in average selling price.
The increase in average selling price reflects the impact of product mix retail price increases executed in the quarter and lower promotions.
Other revenue increased $24 million, primarily due to growth in credit card income and higher loyalty point redemption.
The increase in credit card income was primarily due to stronger sales growth.
Increase in loyalty point redemptions reflects the improving trend in store traffic and the impact of our proactive member engagement campaigns.
During the quarter, we opened 10, new stores and relocated six stores.
For the quarter gross margin increased 120 basis points to 41% of sales compared to 38, 9% last year.
The increase was primarily due to leverage of fixed costs the growth of other revenue and favorable channel mix, partially offset by lower merchandize margin.
Robust topline growth and benefits from our occupancy cost optimization efforts resulted in meaningful leverage of store fixed costs.
Despite experiencing double digit growth in supply chain costs.
I merely resulting from increases in wage rates transportation costs and fuel surcharges strong topline growth during the quarter enabled us to leverage supply chain costs.
As sales growth moderates through the rest of the year, we expect higher supply chain costs and become more of a headwind.
Reflecting strong sales performance of stores channel mix was favorable this quarter as a percentage of sales E. Commerce sales were about 400 basis points lower in the first quarter last year.
Although the impact of lower promotions was favorable during the quarter merchandise margin was lower than last year, primarily due to the impact of brand mix and lapping benefits from favorable inventory reserve adjustments last year.
As planned SG&A increased 12, 9% to $501 million.
As a percentage of sales SG&A decreased 150 basis points to 21, 4% compared to 22, 9% last year.
Lower marketing expenses and leverage of store payroll and benefits due to higher sales were partially offset by deleverage in corporate overhead reflecting investments related to our strategic priorities.
As Dave shared we recently launched yoga media are more sophisticated and expanded version of our digital marketing partner program.
Reflecting the expected scaling of this platform we are offsetting the incremental marketing expense at the digital campaigns, we manage for our brand partners with the vendor income that is a direct reimbursement for these specific costs within total marketing expense.
This resulted in about 70 basis points of favorable impact to SG&A in the quarter.
Operating income increased 43, 4%, a $437 7 million compared to $305 3 million last year.
As a percentage of sales operating margin increased 290 basis points.
18, 7% of sales compared to 15, 8% last year.
Diluted GAAP earnings per share increased 53, 7% to $6 30 per share compared to $4.10 per share last year.
Moving onto the balance sheet and cash flow statement.
Total inventory increased 16% to $1 57 billion compared to 135 billion last year.
In addition to the impact of 28 additional stores the increase reflects inventory purchases to support key brand launches as well as continued efforts to maintain strong in stocks are key items to support expected demand and mitigate anticipated global supply chain disruptions.
Capital expenditures were $71 1 million for the quarter compared to $34 6 million last year.
The increase in capital expenditures reflects a more normalized investment cadence versus the last couple of years and includes investments in it systems merchandising improvements and store maintenance and other.
Depreciation was $62 8 million compared to $70 6 million last year, primarily due to a shift of investments from capital to cloud expense.
We ended the quarter with $654 5 million in cash and cash equivalents.
In the first quarter, we repurchased 332000 shares at a cost of $132 8 million at.
At the end of the quarter, we had $1 87 billion remaining under our current 2 billion repurchase authorization.
Turning now to our outlook.
Reflecting our strong first quarter performance and sales trends, we've experienced so far in the second quarter, we are increasing our outlook for fiscal 2022.
We now expect net sales to be between 935, and $9 55 billion with comp sales growth between six and 8%.
Our updated outlook reflects trends year to date, while continuing to consider uncertainty that could impact the second half of the year, including inflationary risks to consumer spending and the impact of increased points of distribution for prestige beauty.
We anticipate that growth will be in the low to mid teens in the first half and then moderate to low single digit growth in the second half.
We now expect operating margin for the year to be between 14.1, and 14, 4% of sales, we anticipate operating margin leverage in the first half, but deleverage in the second half.
Sales growth moderates and cost pressures and planned investments have a greater impact.
We continue to expect gross margin for the full year will be lower in fiscal 2021, driven primarily by lower merchandise margin, resulting from the impact of brand mix more normalized assortment management activity in a more normalized promotional environment.
In addition, we believe fuel prices will continue to be volatile, resulting in higher supply chain cost than initially planned.
We continue to expect SG&A expense will deleverage for the year, driven primarily by 70% to 75 million of expenses related to our strategic priorities, including investments to support you'd be media Ulta beauty I target project SOR and other capabilities.
As well as higher wage rate growth across the enterprise.
Partially offset by lower marketing expense and incentive compensation.
In addition, we are seeing inflationary pressure on operating expenses like service provider fees labor supplies and travel and we expect these trends to continue throughout fiscal 2022.
These assumptions result, and updated full year guidance for diluted EPS growth in the high single to low double digit range.
For modeling purposes. Some expenses initially planned for Q2 are expected to shift into Q3, primarily reflecting availability of resources and equipment.
As a result of these shifts and a stronger than initially planned sales trend. We now expect to deliver earnings growth in the second quarter.
In closing.
Fiscal 2022 is off to a great start.
Uncertainties remain.
Our updated outlook reflects stronger top line performance and greater cost pressures as well.
Well as economic and global uncertainties that could adversely impact consumer spending later in the year.
While our updated expectations for fiscal 2022 are above our longer term targets for comp sales and operating margin. We are not changing our long term financial targets at this time, given our limited visibility into the economic environment and expected cost pressures as we move through the rest of the year.
And into 2023.
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 would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate that your line is in the queue.
You May press star two if he 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 any sarkies.
One moment, please when we poll for questions.
Our first question comes from the line of Simeon Siegel with BMO capital markets. Please proceed with your question.
Thanks, Hey, everyone. Congrats on the great results and really nice to see.
So great comp within the strong ticket growth could you break out EUR from U P. T. And then maybe more broadly how you were thinking about average ticket going forward and then just a follow up just given how well you guys do without in any way to know within that 2% transaction growth how much of your guest visits versus not check and guest visit frequency. Thanks a lot.
Yeah Simeon thanks for the question so you're gonna to answer directly the units per transaction were essentially flat year over year. So again, we're seeing a lot of the benefit from the continuation of I'd call. It a moderate promotional environment overall, coupled with the mix of brands. We have entered the assortment here over the course of the last.
Year. So again, you know the name as well we've been talking about N E and <unk> and some of the other big hitters here. We've added recently so again the mix of those two are really doing are making a big contribution to our gross margin here in recent quarters.
Thanks, and then just within the transactions frequency versus unique visits.
Yeah, we don't really have anything in more detail to share with that at this point in time and again, we are very happy to see the rebound in store trend right and so a nice healthy transaction growth is always what we're striving for and planned for and so we're super excited to see the bounce back of the consumer in the stores and making sure again that we have.
Deliver best in class specialty retail Omnichannel experience.
That's great Congrats again and best of luck for the rest of the year.
Yeah.
Our next question comes from the line of Karen in both Meyer with Piper Sandler. Please proceed with your question.
Hi, good afternoon, and congrats on the quarter, but first I'd like to just get your thoughts on that current inflation.
And how that's impacting consumer then named Maurice I was here in the early parts of Q2 are you seen any sort of shift in demand mainly from prestige and mass or vice versa or are you seeing nasby, maybe more resilient than prestige or vice versa. Just any thoughts here would be helpful. Thank you.
Yeah, that's great.
Question in the inflationary environment is weak as both I and Scott said in the remarks is certainly.
One that we're watching carefully and we're staying close to our guests. So far our guests are managing through it and we're not seeing.
Huge impacts in fact as I mentioned in the script prestige makeup performed a bit higher than mass makeup. So we're seeing strong results across our portfolio. We have an experienced no meaningful trade down behavior that we can we can identify a and it's you know one of the unique things that we do.
You feel is core to our model is the breadth of our assortment all price points from mass to prestige all categories.
Hair care, and skincare, and makeup and and Bath and fragrance and so being able to adjust and adapt as consumers' needs evolve has been true to our model for a long time and allowed us to.
Manage through any any disruption in the marketplace, but right now we're seeing strength across all aspects of our business, which we're obviously really pleased with but we're also prepared to adjust and adapt if and when consumer behavior adjusts.
Helpful. Thank you and then I just like to ask quickly on <unk>.
Target in the shop in shops, and target and how they're doing are you are you seen any big difference in <unk>.
Traffic in the targets have to transfer versus all the shops and how its ticket.
The value of different differing between the two and then also are there any other key brands you'd like to call out that are being particularly successful and target first of all pets.
Yeah, I'll take that one.
I will say is that yeah, we're really pleased with the overall partnership with target as Dave mentioned, we co created.
Rand relevant digital in store campaign.
During our 21 days of beauty and we're really pleased with that performance.
You know I I would just say that we will continue to share more as me well more to scale right now as of today. We've got 140 stores that are open as of today. We're on track to open 250, plus stores with them. This year, but we like what we see you know when we get a member engaged.
Our ultimate rewards program, what we're seeing is that they're behaving very similar to our existing loyalty numbers as.
As far as brand go you know.
The beauty I worked closely with our partners with our brand partners on the assortment et cetera that target really owns the sale. So you know we're not at Liberty to Cook.
Comment on the sale of specific performance by brand at this time.
Thank you.
And our next question comes from the line of Olivia Tong with Raymond James. Please proceed with your question.
Great. Thank you. My first question is just around the makeup recovery.
And compare and contrast that to the emergence of prestige hair care and you know your view in terms of the opportunity in front of you obviously make up significantly larger.
The recovery it sounded like.
In your earlier comments is progressing faster than you had anticipated as you think about the second half of the year and continuing to drive acceleration can you talk a little bit about the plans in place to keep that going and then I have a follow up thank you.
Great well thanks for the question Olivia Yeah makeup that is recover.
Faster than we had anticipated coming into the year you all know that we we've been working on makeup for a for a while it was.
Somewhat soft going into the pandemic and was arguably the hardest hit category or segment.
Beauty during the pandemic and we're so we're we're excited to see it at a it recovering and that's driven by an elevated overall engagement.
The category in part by driven by more opportunities to go out more social occasions more people going back to work in person and then just some of the things that we've been talking about the engagement. The excitement. The enthusiasm for makeup has remained high as evidenced in social media to see opportunities to wear makeup haven't been as numerous so where is that <unk>.
As the world opens up.
Definitely.
More opportunity a high level of engagement Theres, new trends that are coming in to make up that we're excited about definitely a push towards bold looks bright glam glitter people are ready to get out in the world and that's showing up in that looks at the same time some of the dynamics around a more of a more natural look that requires makeup.
Yeah same consumers are balancing both of those we're seeing brow innovation contour arenas is being discovered by younger consumers who missed it the first time around long lift we're a long long way in lip as as it is a trend that started in the pandemic is continuing so we're excited about what we're seeing and then all in the total.
Category and then also through our assortment.
Has has really been performing quite well, adding key brands like <unk> T. R. M. Chanel lots of innovation from both mass and prestige Mac Clinique lancome and ours on the prestige side L for Nyx or two big highlights on the on the on the mass side. So we're getting a lot of them.
<unk> a lot of creativity, all the things that we had been working on and and and driving towards a really came together in a nice way in the in the quarter. So as we look forward to the second half of the year. We're confident it's it's a it's hard to predict exactly how consumer.
Consumer behavior will go but as more and more people are comfortable going out more opportunities exists more people going back to the word coupled with continued pipeline of strong innovation we.
We feel like makeup is on its way to a full recovery and in fact in Q1 was up over 2019 results. So pre pandemic results for the first time in the pandemic. So excited about what we're seeing and looking to continue to drive that forward.
Great and then on the on the gross margin you said earlier that you're still expecting gross margin to be down and it was obviously a much better start to the year than we probably thought but of course, you know costs are material as you progress through the year, but relative to your prior expectations as you think about gross margins.
Being down is it the same level you know and could you talk about like you know the puts and takes there maybe a little bit of granularity in terms of your thought process on costs now versus a mix improvement and then obviously some some leverage associated with them and improved sales outlook. Thanks, so much.
Yeah. So the so the great start we got in the first quarter is really you know kind of a background here driving some of the gross margin. So we still expect it to be down as you said, but down less than what our initial initial plan was for the year. So we still have the same variables at play there we talked about brand mix being a headwind this.
Here, we think the promotional environment will normalize during the year again, we didn't see so much of that in the first quarter, but we are expecting more of that to come into play as we get deeper into the year and then supply chain costs again, we expected cost generally to be higher this year, we're seeing some cost, especially around fuel higher than we are.
Expected and we you know the back half of the year there'll be more headwind from that piece of the equation as well. So overall I feel like we're in a good place and if sales stay strong and we're always focused on optimizing the business overall.
To deliver great results.
Great Congrats and best of luck for recipe.
Okay.
And our next question comes from the line of Steph Wissink with Jefferies. Please proceed with your question.
Thank you good afternoon, everyone and I have a really quick question on inventory I'm wondering if you can just talk a little bit about the complexion of the balance sheet inventory and feel free to ask but do you feel like you have enough to chase if the momentum persist in the business.
And I just got one question for you just a clarification could you just walk through the accounting on the Ub media and that's very attractive to you in your prepared remarks in terms of the offset to marketing. If you could just talk a little bit about how those vendor agreements work.
Understand about how that affects the middle of the P&L. Thank you.
That's too for me, that's not fair, Okay, and we'll go first up on the inventory. So again, it's up 16% year over year, we feel like we're in a good position again it looks easy based on the results. We're posting here, but our teams are doing an excellent job in working really hard with our vendor partners and merchants.
Inventory planning teams to supply chain teams.
To make sure we get the right product in the right place and so.
Fill rates are good we're feeling better and things have kind of bounced back a little bit from what we saw a mid to late last year. So again focused on high velocity Skus new brands to make sure. We take advantage, where we can there are we do expect that the growth rate again will moderate as we get further into.
The year this year and start you know anniversaried.
Anniversaried some of the steps, we took last year to get more aggressive on inventory. So again, that's one place we always feel confident that we would make more investment.
Good judgment suggests.
Suggest that.
And then on the accounting for the U B media. So this one again for for the accountants in the room. So so last year again, the vendor the marketing partner program that we had in place again, we've explained it we've always been doing this in a smaller scale I guess I would say and so his.
Eric Lee the accounting with all in the gross margin line by and large okay. The vendor income piece of it the cost the actual marketing costs within SG&A and all the benefits recoup we're flowing through the gross margin line kind of in line with all of our vendor a vendor money economy, so to speak and this year they differ.
As we're able to offset the incremental advertising costs in the SG&A line and the residual rolls through the gross margin.
I hope that helps.
I think it does help.
Well as always thank you.
Yeah.
And our next question comes from the line of Kate Mcshane from Goldman Sachs. Please proceed with your question.
Hi, good afternoon. Thanks for taking our question I just had a quick one from us.
You mentioned, an increasing points of sale proceeds.
How are you viewing the competitive environment in light of that and how are you looking to further differentiate yourself as Doug points continue to roll out.
Yeah, We you know the beauty category.
As attractive and has been highly competitive for a long time I've been here at Ulta for about eight and a half years now and it's been hyper competitive the whole time in three years before that it's attractive it's growing it's engaging so that's been part of the dynamic for a while and certainly it's true now we're seeing.
New logo, new competitive locations, particularly on the prestige side at.
At the same time that our you know where we're.
You're opening up new stores of our own and in our partnership with target. So there is some shift going on.
What we're what we're excited about and proud of is the fact that even in that environment, even in the first quarter with hundreds of new competitive locations. We continued to gain meaningful share in the prestige category and I think it's a reflection of the strength of our model.
We have something that nobody else offers in the marketplace. The unique combination of a an assortment that reflects the way consumers want to buy and shop beauty across price points mass to proceeds across categories.
And most importantly in an inexperienced in environment.
It reflects the human connection that consumers are looking for in this highly emotional category.
All of our research suggests that our experience is unique and special what our team does every day to deliver a unique experience stands out in the marketplace and that helps us drive drive our.
Our business and drive our market share you add in loyalty and services and a great digital experience and <unk>.
And all the innovation that we continue to bring in all aspects of our business. We feel like we're doing a we're playing offense, we're leading through what we know how to do best which is drive engagement with beauty enthusiasts through all aspects of the beauty journey and so we feel confident that we continue to do that it's going to continue to show up in our results which reflect.
And these strong results we had in the first quarter the momentum we had coming out of fiscal 'twenty, one and our share results and are in our loyalty member growth.
We're that's our that's our plan going forward for US we've always been focused on our on our strategy executing our strategy with excellence when we do that the results follow and that will be our plan going forward.
Thank you.
Yeah.
Our next question comes from the line of Daniel Hopkins with William Blair. Please proceed with your question.
Good afternoon.
Just a quick question regarding the target partnership I don't know if you.
Commented specifically on those.
Can you say, whether it's having a measurable impact yet.
Your overall comp sales, obviously not at the target stores themselves, but you know in the form of additional traffic to nearby Ultra stores are also dot com and then kind of how you expect that contribution to evolve over the you know the rest of this year in the next couple of years.
Yeah, Dan what I would say is that anytime as Steve mentioned earlier, we have new points of distribution, there's natural cannibalization that happens.
You know, it's not meaningful yet and we've got just about 140 stores as I mentioned as of today that are opened we factored this into our expectations. We do see that whenever we've opened or there's other district points of distribution, including our own office. Many stores, we do see an initial impact but that dissipates over time, we expect a similar pattern.
To happen here with our Ulta beauty at target locations.
As we continue to roll out more stores.
That continues to hold true, but what we've seen so far is that seems to be the case.
Okay great.
And then just.
Think about the obviously overall stellar results any any just differentiation among.
Categories or regions or parts of the quarter that you might call out plus or minus.
Yeah.
A few things that I might say, it's one of the cross categories were really pleased that we see strength on on all of our major categories. I talked about makeup in detail already and so that's an important.
Improvement in our business, but at the same time that improved it.
It was encouraging to see skin care delivered strong results hair care continue through innovation in prestige and tools to drive a lot of engagement of newness.
Across hair care continues to drive great great results fragrance, which has been a shining star throughout the last two years continues to drive growth I talked in the script about some of the drivers.
Drivers of that newness brands exclusive brands like <unk> as well as innovation on our existing brands that driving drawing growth strong gross sun care expansion into wellness.
And driving incremental growth. So category performance was healthy across the board channel performance again strong results in both driven by our stores and traffic and engagement and a desire to get back and shopping in person, but to have our ecommerce business essentially flat after all the growth we've seen.
In that business over the last couple of years was in.
In line with our expectation and Salon coming back very strong so our channels are.
Our performing performing well through the quarter itself. The first here at the first of month or so of the quarter was <unk> was the strongest as we kind of came out of the gates and then started lapping stimulus, but the other two months of the quarter were where were strong as well and well ahead of our expectations.
Oh around Oh, well rounded delivery of results with all aspects of our business contributing to the performance that we have.
And then anything anything you would call out either regionally or in terms of customer.
I'm a graphic differences.
No. We all regions I mean, one of the night what are the things that we really.
I really like about our model is our model works in all different types of geographies Big Big cities from New York and L. A to Chicago to smaller remote single store markets suburbs are urban rural and we saw strong performance across the board. So there was no real region or or marketplace.
Distinctions to of note and that to US is a reflection of this is this is working really well and then when we look across our economic we saw growth across all income levels as well as we look at our consumer base, so strong growth from our highest.
Income to more moderate income so.
Again, well rounded growth consumers are engaged in the category. The category itself is as we think more relevant more important to our consumers more connected to their overall sense of self care and wellbeing at the same time there's.
There are so many more occasions to go out and we think the category is in great shape, and we're proud to be leading the category in driving these results through our strong execution.
And our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.
Good evening. Thanks, a lot for taking my question understanding you're looking to be conservative and.
Mindful of the uncertain macro environment.
The low single digit comps in the back half it getting given the strength in the cosmetics category. It would imply that hair care and skincare, probably turn it negative.
Why would that be the case.
Yeah, I guess I would just chalk it up like like indicating like albeit prudent all things considered looking at the world and all the uncertainty and all the warning signs that seem to be flashing a bit right. Now. So again, there's no. We took the benefit of what we've seen strong performance. So far in the first half of the year.
That into our full year outlook and didn't really modified the second half of the year based on what our initial plan was for 2022 and so you take that and then you adjust for some of the expense pressures that we're seeing across the business right now and that's where we think is an appropriate place to land. It for the time being and then we will.
Continue to modify as we work our way through the rest of the year.
Thank you very much for that Scott My follow up question is Youre still you haven't seen it but you're still expecting promotions to come back what is going to be the catalyst to <unk>.
Spark and increasing in promotions and how.
How much have you factored in for that ryzen promotions in the back half of the year. Thank you.
Well, we won't get specific on any any like.
Specific elements of what we factored in what I'd say about promotion is.
The.
The environment.
As dynamic as we've talked about highly competitive and there is uncertainty ahead from consumer behavior. We what we know is we've been able to continue to manage our promotions and a smart strategic way we've been on a journey for a while to reduce non strategic broad scale.
Discounts and promotions to focus our efforts on.
On personalization CRM enabled it.
Highly relevant strategic efforts that drive not just short term, but long term results through higher engagement higher loyalty higher connection to Ulta beauty over time, and that's what we were able to do in the first quarter.
But as we've said probably you know through many of these calls we're well aware that this is a competitive environment, we've got lots of.
Outstanding competitors that are also looking at ways to drive their business, we will not lose share will respond appropriately we have more tools than we've ever had through our personalization and CRM capabilities to ensure that we are leader in the market, but with uncertainty around inflation consumer behavior competitive environment.
We are prepared to react to we're not going to lead promotional intensity, but we're also going to make sure that we're appropriately engaging with our beauty enthusiasts to drive them to Ulta beauty.
Good luck.
Yes.
And our next question comes from the line of Simeon Gutman with Morgan Stanley . Please proceed with your question.
Hey, everyone I'm going to ask my question and follow up so so kindly welcome gets me back to the next call. My My first question is on the merch margin.
Given the hair care seems to be mixing up shouldnt that had been a positive and then when Scott when you made the comment ex reserve adjustments.
Does that mean, the merch margin ex reserve adjustments could've been up year over year or you're using that against the compare and then the follow up is what is just changing in the back half it sounds like Youre keeping sales. The way you you modeled it if that if I'm interpreting it right, but what else anything else changed thank you.
But that sounds like three questions, there actually but oh I'll give it a swing here so yeah hair care, it's been it's been.
A real contributor here recently again, it kind of gets back to the brand mix overall for the business I would say so while hair care generally speaking is higher margin than the house.
Some of the some of the mix. That's been added here recently, you know doesn't necessarily file might follow the same metrics.
Overall, when we're talking about inventory so with favorable adjustments last year that was driving the tougher compare this year. So again last year cleaner inventories we were coming off.
What I would call some housekeeping probably late in 2020, right. We closed some stores we exited some some brands later in the year. So we got some some a book benefit from that.
Last year.
Which makes it a tougher compare as far as the guidance overall what changed.
Again, the strong sales the strong start obviously, it's helping.
I have a lot of fixed it.
Cost leverage here for the year.
Other revenue was something that was unexpected really wasn't in the plan to see those redemptions come back in a loyalty program that way and to see the credit card benefit a pop here in the first quarter. So again, we're planning for more of that to continue throughout the year.
We've got.
Operating costs that are increasing across the business specifically in supply chain, but we're seeing in other areas too as we mentioned in our prepared remarks. So that's been feathered in as we think about the second half of the year. So again.
We feel like we're in a good position we feel like we got all the variables covered again, we think it's prudent to take a more thoughtful careful approach and outlook as we're looking ahead to the second half of the year considering all the uncertainties that are kind of cool.
Out there right now.
Thank you very much John .
And I think we'll take one more question. Please.
Okay and our final question comes from the line of Michael Binetti with Credit Suisse. Please proceed with your question.
Hey, guys congrats on a great quarter and thanks for all the detail here.
One of our questions have been answered, but on the I guess as we think about SG&A versus gross margin on the SG&A.
You look at it on a per store basis, or some kind of leveling metric like that it looks like it was up about 12% versus 2019.
Comps up in the mid twenties I just wonder if there's more noise in the SG&A line in <unk> and I. Appreciate it I know you mentioned Scott that a few expenses move out of <unk> into <unk> was there any one time items to think about it and in <unk> that led to some understand in SG&A and I guess the follow up is if I if I look at some normalized G&A seasonality back.
Pre COVID-19 it would suggest gross profit margin could be down as much as a couple of hundred basis points and in the guidance that you gave into two through four key was that is that the right now.
Magnitude of the puts and takes that you that you laid out for us earlier.
Could you direct me.
So on the SG&A, there's really nothing Theres no one time extraordinary items floating around in there I would call out go back and look at our comments around the marketing.
Expense and how that is being treated year over year because that is.
Other significant change again that comes from the you know the U.
You be media change going from what I'd call, a small scale kind of operation to a more formalized in larger scale.
Process overall, so we did change the accounting there year over year and that is providing a pretty significant benefit in the first quarter versus a year ago and that's going to continue for the rest of the year, obviously that comparison.
And when we're talking about gross margin and some of that variability that you've called out there in the second half.
Again, we think it's still in the same range that we guided to early in the year again, you know we.
I would point back to changing an expectation so again first quarter promotional environment was.
Moderate to slightly better than what we saw a year ago, which was not our plan for the year and we expect that to get more aggressive.
<unk> in the back half of the year. So that's baked in there along with the brand mix. So again brand mix kind of worked to our benefit in the first quarter. We think some of that will moderate as we get further into the year as well.
Okay, great. Thanks, Thanks, a lot everyone.
Thank you we have reached the end of the question and answer session and I will turn the call back over to Dave Campbell for any closing remarks.
Okay, great well. Thank you all for joining us today, the year is off to a great start and I want to thank the entire Ulta beauty team for their collective efforts to support our guests and each other while moving our business forward.
We look forward to speaking to you all again at the end of August when we report our second quarter results I Hope you all have a great evening. Thanks again.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
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