Q2 2022 Ulta Beauty Inc Earnings Call
[music].
Good afternoon, and welcome to Ulta Beauty's conference call to discuss results for the second quarter of fiscal 2022.
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 keypad.
And 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. Rawlins. Please proceed.
Good afternoon, everyone and thank you for joining us today for our discussion of Ulta Beauty's result for the second quarter of fiscal 2022.
Hosting our call are Dave Kimbell, Chief Executive Officer, and Scott Patterson, Chief Financial Officer T shirts, Steelman, Chief operating officer will join us for the Q&A session.
This afternoon, we announced our financial results for the second quarter, a copy of the press release is available in the Investor Relations section of our website.
Before we begin I'd like to remind you that 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.
Caution you not to place undue reliance on these forward looking statements, which speak only as of today August 22022, we.
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'll 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.
As always the IR team will be available for any follow up questions. After the call now I'll turn the call over to Dave Dave. Thank you Kiley and good afternoon. We appreciate your continued interest in Ulta beauty.
The Ulta beauty team delivered outstanding performance again this quarter for the second quarter net sales increased 16, 8% to $2 3 billion operating profit increased to 17% of sales and diluted EPS increased 25% to $5 70 per share.
We continue to be very pleased with the broad based strength of our business for the quarter all major categories exceeded our expectations and we increased our market share in prestige beauty versus last year based on point of sale data from the NPD group.
Sales in stores and digital channels also increase exceeded our expectations with both channels delivering solid comp growth in the quarter.
And we saw healthy sales gained from members across all income demographics.
Consumer engagement with beauty remains strong, reflecting a deep emotional connection with the category as well as the continued importance of self care and wellness.
This healthy engagement paired with solid operational execution from our teams fueled our results.
Before we talk about the results I want to recognize and thank our Ulta beauty associates their collaborative commitment to serving our guests caring for each other and executing our plans with absolute excellence has enabled us to continue navigating a dynamic environment and deliver outstanding results.
The strength in our business. Despite a turbulent environment reflects the power of our differentiated model and our ability to capitalize on the strength of the overall beauty category.
Our unique enduring value proposition continues to drive our success and our strategic framework anchors our focus as we look forward.
This afternoon I want to share an update on our strategic progress.
Our first strategic priority is to is to drive disruptive growth through an expanded definition of all things beauty.
We engage and delight beauty enthusiasts with a curated differentiated assortment focused on inclusivity and leading trends and this approach continues to deliver results for.
From a category perspective, fragrance and Bath skincare hair care and makeup all exceeded expectations delivering double digit comp growth against the second quarter last year.
We are encouraged that the vast majority of our comparable sales growth was fueled by growth from both core and newness with a modest benefit from recently executed price increases.
As we have discussed on previous calls we have received a large number of price increases from our brand partners in the first half of this year <unk>.
Given ongoing cost pressures facing our brand partners, we expect to receive additional increases as we move throughout the rest of the year.
Turning to the performance of our core categories, starting with our largest category makeup.
Compared to the second quarter of 2021, both prestige and mass makeup delivered double digit comp growth as consumers participated in more in person activities traveled and increasingly used makeup as a form of self expression.
Guests continue to engage with new brands like Fenty beauty, RM beauty and recently launched about phase by Halsey, while new products from established brands like Clinique Nicks elephant color pop also contributed to the sales growth.
In addition, the ongoing expansion of Mac and should know butane into more stores contributed to the strong prestige performance.
Hair care, our second largest category delivered another quarter of double digit growth driven by newness and strong engagement in our semi annual gorgeous hair event, our strategic event designed to acquire new guests increase existing member spend and drive salon penetration.
New brands like <unk>, as well as new product launches from way and living proof contributed to the category growth in the quarter.
And the initial launch of Tysons latest air Rab styling tool with new features and attachment sold out quickly.
Guests continue to engage with core professional brands like Reg Ken in urology, <unk> and our Salon back bar takeovers drove strong growth with <unk> and recently launched Andrew Fitzsimmons.
Skin care was one of our best performing categories. This quarter with both prestige and mass delivering double digit comp growth driven by new brands and product innovation.
Newness continues to appeal to guests with newer brands, such as drunk elephant fresh Super Super Goop, and recently launched vacation as well as new products from Pizza, and Lilly <unk> and hero cosmetics contributing to category growth during the quarter.
And skin Fatuous mission, our monthly skincare program, which works to demystify skincare with educational content and focused themes delivered nice growth for established brands like Tula sunburn cooler and good molecules.
The fragrance category again delivered strong double digit comp growth on top of extraordinary growth last year.
Compelling newness and strong engagement with our mothers day and fathers day events contributed to this performance.
<unk> launched Ulta beauty exclusive Billy Eyelash, and Charlie do you do you mind Leo born Dreamer, as well as new sense from Gucci, YSL and D oar drove meaningful sales growth.
While our monthly fragrance crush program drove greater engagement with established brands like Valentino and our minds.
In addition to driving core category growth, we are investing in three cross category platforms to increase guest engagement and expand our market share.
We know consumers seek beauty brands that are good for the world and align with their values and conscious beauty at Ulta beauty continues to resonate with guests as it addresses these interests.
At the end of the second quarter 290 brands offered certified products in at least one conscious beauty pillar, including newly certified brand born Dreamer about base SC and good light.
To increase the visibility of conscious beauty and make it easier for guests to identify products that align with what is important to them. This quarter, we refreshed the landing page on <unk> Dot com and added digital bad Janine to all product pages.
Now guests can quickly identify certified brands and products across our conscious beauty pillars, where they're shopping in stores or on our digital channels.
Moving to our efforts to expand and support our assortment of Bipack brands. We are committed to diversifying our assortment. So all guests can see themselves reflected at Ulta beauty.
In addition to continuing to expand our portfolio of byproduct brands and enhance our marketing support for these brands. We are focused on driving structural change within the beauty industry.
As the leader in beauty, we believe we have a responsibility to take tangible steps to create foundational industry change through the investment of capital and resources as such next month, we will officially launch our Muse accelerator program focused on early stage Bipack brands through this program.
We will provide a diverse leaders founders and entrepreneurs with resources Mentorship and support to prepare them for retail readiness.
I look forward to sharing more about our inaugural class on future calls.
Finally, we continue to enhance our wellness shop to support guest as they prioritize self care.
This quarter, we expanded the shaft two additional stores and now roughly 750 stores offer guest and elevated cohesive presentation of wellness products to help them easily navigate their personal journey.
Today, we offer a curated omni assortment of more than 140 brands, including newly launched brands women Ness and Ali.
And more than 700 skus to help our guests feel their best inside and out.
Moving now to our ongoing efforts to evolve the omni channel experience through our connected physical and digital ecosystem all in your world.
Store traffic trends were strong again this quarter as guest return to in store shopping and services, while store traffic remains slightly below pre pandemic levels. The trend continues to improve.
Our services business delivered another quarter of double digit comp growth, primarily due to increased capacity and new service offerings in.
In addition, we implemented modest price increases for core services in May.
Notably member engagement with services accelerated from the first quarter, reflecting our ongoing efforts to amplify our salon services and encourage first time trial through our member Love offers.
As guests return to stores. They are also engaging in our digital channels.
After lapping the tremendous digital acceleration prompted by cohort our E Commerce channel returned to more normalized growth delivering mid single digit comp growth for the quarter.
We continue to incentivize guests to try alternative delivery options for E. Commerce orders, while also investing to improve the guest experience.
During the quarter <unk> increased 32% to 25% of ecommerce sales compared to 20% last year.
Importantly, we saw a significant improvement in guest satisfaction with the focus experience, reflecting the engagement and focus of our store associates.
While limited to 12 markets guest are also increasing their use of our same day delivery options and we continue to be pleased with the <unk> and.
Stability metrics of this fulfillment capability.
Between both is same day delivery and ship from store more than a third of our digital orders were fulfilled by stores.
We continue to expand and enhance our guest experience across all channels and our digital channels. Our teams can continue to deliver a more seamless experience through what we call our digital store of the future. This quarter, we introduced new more engaging product pages on both <unk> dot com and our mobile app.
We are also improving our physical store experience next month, we plan to introduce a new front of store presentation that will allow us to enhance our ability to support more editorial storytelling around newness events and trends and later this fall we will introduce a new layout in select stores to elevate.
A key growth categories unified presentation of skincare and makeup and enhance the store that services experience.
Longer term, we are exploring innovative ways to connect our digital and physical stores and delivered forward thinking guest experiences.
This quarter, we officially launched Prisma ventures, a $20 million fund focused on investing in early stage startups and emerging tech entrepreneurs, who will shape the future of retail and beauty.
To date the fund the fund is partnered and invested in a variety of startups to enable greater personalization, including Hot AI adept mind, <unk> and re style.
And we recently announced an investment in <unk>, a startup that provides robotic lash extensions opening new intersections between beauty and robotics.
Finally, we continued to enhance and expand our partnership with target.
During the second quarter, we opened 59, Ulta beauty target shops, ending the quarter with 186 locations.
During the quarter, we refreshed the assortment expanding the fragrance offering launched two black owned brands Sunday, the Sunday, and melon and hair care and introduce newness from existing brand partners, including benefit Morphy end to that.
As we anniversary the initial launch of this innovative partnership and reflect on the progress made we continue to be pleased with overall guest engagement and we are encouraged by the behavior of new members, who enter our ecosystems through this new channel.
The foundation of our partnership is strong and we are focused on driving further loyalty conversion to unlock even greater value as we scale.
Now let me give you an update on some of the steps were taken to drive love loyalty and emotional connection with Ulta beauty.
We have been on a multi year journey to create a stronger more emotional connection with our guests and bring our brand purpose to life.
Beauty is inherently inclusive every individual is unique and beauty can help celebrate this uniqueness.
As the leader in the category, we want to move beauty forward, making it a force for good for all and inspiring everyone to discover their own possibilities through the power of beauty.
Building on our previous brand equity work, we are launching a new brand equity campaign beauty and.
To celebrate the expansive nature of beauty and empower people to embrace their enlist possibilities.
The campaign will launch with content across paid owned and earned media with unique elements that we believe will prompt new culturally relevant conversations about beauty and inspire greater inclusivity and positivity in our industry and the world.
This campaign has performed performed extraordinarily well in consumer testing and I'm proud of the efforts Ulta beauty is making to change the way the world sees beauty.
Turning to our loyalty program, we ended the quarter with $38 2 million active members in our ultimate rewards loyalty program, 10% above the second quarter last year.
In addition to converting new members and re engaging lapsed members, we are maintaining healthy retention rates, especially among our diamond and platinum members.
Overall spend per member increased again this quarter driven by both increased trip frequency and higher average ticket and our channel metrics remained steady with in store only members totaling 76% of members and Omnichannel only members totaling 17%.
Over the last several years, we have expanded our CRM capabilities and develop stronger lifecycle marketing strategies that will allow us to drive loyal shopping behaviors more precisely through promotional activity.
Today, we are leveraging predictive decisioning to target strategic member segments with personalized communications and offers to increase frequency and drive higher lifetime value.
We are seeing encouraging engagement in these offers resulting in increases in spend per member.
As promotional intensity increases in beauty and across retail these capabilities enable us to rely less on mass market promotions and leverage more targeted and profitable offers.
In May we launched <unk> media, our new retail media network and the response from brand partners has been tremendous our brand partners are excited about the opportunity to leverage the power of our exclusive first party data to transform the way they connect with beauty enthusiasts.
Our team is ramping up well and we remain excited about the opportunity to unlock a new income stream and drive sales as we enable our brand partners to engage consumers more effectively.
In closing I am incredibly pleased with the strength, we have seen across our business. So far this year.
Our operational and financial performance is a testament to the power of our values based culture, our business model and the important role beauty plays in our customers' lives.
We recognize beauty is not immune immune to macro economic challenges, but the categories deep emotional connection has historically resulted in stronger resilience compared to other discretionary categories and as our results illustrate we believe this is even more true today given the <unk>.
<unk> of self care and wellness.
As we look to the future. We know there will be challenges, particularly with the wide ranging impact of rising inflation, both on our business and our guests.
But we remain confident in the resilience of the beauty category and our ability to lease the beauty category and drive long term profitable growth.
And now I will turn the call over to Scott <unk> for a discussion of the financial results Scott.
Thanks, Dave and good afternoon, everyone.
As Dave indicated our second quarter results were better than we expected strong sales growth due to several factors, including the resilience of the beauty category stronger than expected sales growth from stores and the impact of new brands drove better than expected performance in gross margin and SG&A leverage resulted in an op.
Operating margin of 17%.
These results reflect the hard work and commitment of our associates and I want to thank all of our teams for staying focused on serving our guests and managing our business through this dynamic operating environment.
Now to the financial results starting with the income statement.
Net sales for the quarter increased 16, 8% driven by 14, 4% growth in comp sales a $19 million increase in other revenue and strong new store performance.
Transactions for the quarter increased eight 3%, primarily driven by growth from stores average ticket increased five 6%, resulting primarily from an increase in average selling price average units per transaction were down slightly.
The increase in average selling price primarily reflects the impact of product mix and retail price increases executed this year.
We estimate that price increases contributed about 300 basis points to the overall comp.
During the quarter, we opened seven new stores and relocated four stores.
For the quarter gross margin decreased 20 basis points to 44% of sales compared to 46% last year.
Although we had less total promotional activity during the quarter overall merchandize margin was lower than last year, primarily due to the impact of brand mix and lapping benefits from favorable inventory reserve adjustments in the second quarter last year.
Gross margin was also negatively impacted by higher inventory shrink primarily due to increased theft.
Across the retail landscape SaaS and organized retail crime are increasing and we are seeing similar trends in our business. We are working diligently to keep our associates and guests safe and to reduce the risk of impact through investment in new fixtures additional associate training innovative tech.
<unk> solutions and increased staffing levels.
We are also working with and supporting retail industry organizations and the buy safe coalition to address opportunities at the legislative level.
These gross margin headwinds were partially offset by leverage of fixed costs due to the strong top line growth and an increase in other revenue.
Double digit growth in supply chain costs persisted into the second quarter, driven by increased freight costs and higher wage rates in our distribution centers.
Strong top line growth enabled us to mitigate the gross margin impact this quarter, but as sales growth moderates, we continue to expect that higher supply chain costs, including fuel costs, which are expected to remain above last year will be a larger headwind to gross margin in the second half of the year.
SG&A increased 15, 1% to $534 5 million.
As a percentage of sales SG&A decreased 30 basis points to 23, 3% compared to 23, 6% last year.
Lower marketing expense and Leverages store payroll and benefits due to higher sales were partially offset by deleverage in corporate overhead, primarily reflecting strategic investments as well as higher incentive compensation, reflecting our strong performance year.
Year to date through the second quarter, we have invested about a third of our plan in support of our strategic initiatives.
As we discussed last quarter. This year, we are offsetting the incremental marketing expense of 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.
Similar to the first quarter. This resulted in about 70 basis points of favorable impact to SG&A in the second quarter.
Operating income increased 17, 8% to $391 4 million compared to $332 3 million last year as.
As a percentage of sales operating margin increased 10 basis points to 17% compared to 16, 9% last year.
Diluted GAAP earnings per share increased 25% to $5 70 per share compared to $4 56 per share last year.
Moving to the balance sheet and cash flow statement.
Total inventory increased 15, 4% to $1 67 billion compared to 144 billion last year in.
In addition to the impact of 29 additional stores the increase reflects inventory purchases to support key brand launches and increases in inventory costs.
As well as ongoing efforts to maintain strong and stocks are key items to support expected demand.
Capital expenditures were $49 4 million for the quarter compared to $22 7 million last year.
The increase in capital expenditures was primarily related to investments in new remodeled and relocated stores supply chain investments and merchandising improvements.
Depreciation was $60 9 million compared to $69 million last year.
Primarily due to a shift of investments from capital to cloud expense.
We ended the quarter with $434 2 million in cash and cash equivalents.
During the quarter, we repurchased 798000 shares at a cost of $301 6 million.
At the end of the second quarter, we had $1 6 billion remaining under our current 2 billion repurchase authorization.
Turning now to our outlook.
Reflecting our second quarter performance and sales trends, we've experienced so far in August we are increasing our outlook for fiscal 2022.
We now expect net sales to be between $9 65, and $9 75 billion.
With comp sales growth between nine 5% and 10, 5%.
Our updated outlook reflects year to date trends, while continuing to consider uncertainties that could impact the second half of the year, particularly during the holiday season.
Embedded in our forecast is an expectation for mid single digit comp growth in the second half.
<unk> the risk of potential shifts in consumer spending due to inflationary pressures the impact of increased points of distribution for prestige beauty and the likelihood of a more promotional holiday season.
We now expect operating margin for the year will be between $14 six and 14, 8% of sales.
We expect operating margin will deleverage in the second half as sales growth moderates and cost pressures and planned investments have a greater impact.
We expect gross margin expansion for the year with leverage of fixed costs and growth in other revenue, partially offset by lower merchandize margin higher shrink and higher supply chain costs.
We continue to expect SG&A expense will deleverage for the year, driven primarily by $60 million to $65 million of expenses related to our strategic priorities as well as higher wage rate growth across the enterprise, partially offset by lower marketing expense in.
In addition, we expect inflationary pressure in operating expenses will continue.
These assumptions result, and updated full year guidance for diluted EPS growth between $20 70.
And $21 20.
One final update.
We now expect to spend between $350 and $400 million in Capex in fiscal 2022 <unk>.
Including approximately $195 million for supply chain and it.
$180 million for new stores, Remodels, and merchandise fixtures and about $20 million for store maintenance and other.
We expect depreciation for the year will be up around $250 million.
In closing we are very pleased with our performance year to date.
While we continue to face uncertainties in the current macro environment, we are focused on delivering great guest experiences and driving sustained profitable growth.
Longer term, we believe the beauty category will continue to be resilient and we are confident that we are differentiated and proven model and growth strategy combined with our outstanding Associates will continue to position Ulta beauty as the preferred beauty destination.
And now I'll turn the call back over to our operator to moderate the Q&A session.
Thank you at this time, we will 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 Youre line is in the queue. You May press star two if you would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
<unk>.
One moment, please pull for questions.
Yes.
Okay.
And our first question comes from the line of <unk> Parikh with Oppenheimer. Please proceed with your question.
Good afternoon, and thanks for taking my question and also congrats on a really strong quarter.
So I guess I start I want to start out with the consumer. So I was curious if you guys are seeing any behavior changes have no and whether youre seeing any thought the trade down or even resistance or price increases and then just given some concerns out there about voluntary and trends I'm just curious if you're seeing more volatility in the business and what you've seen in the prior months.
Hi, <unk>. Thanks, Thanks for the question.
Yes, the short answer on trade down is no. We're not we're not experiencing that are seeing that.
At this time similar to what we talked about last quarter, we're seeing strong growth across all aspects of our business as I mentioned.
Every category performed in double digits strength across channels stores E Com services.
And as we look at income levels of our guests, we're seeing healthy growth.
At all income levels. So.
No no real.
Signs or signals of trade down with.
Within the market within the marketplace, yet and again I think that's a reflection of the importance that this category plays in our guest slides the increasing connection that beauty <unk> wellness the desire to express that our.
Our guests to express themselves to the world in this as the World Reopens. So the importance of this category is demonstrating itself and so so far we're not seeing it but we're prepared as we look forward.
To continue to make any adjustments if and when that behavior starts to show up as you know within our model we're uniquely prepared to.
To adjust if any of that does show up with our mass to prestige.
Our offer in all price points, all different categories, but as of now we are seeing strong growth as far as throughout the quarter the.
The quarters strong started very strong we did see a slight moderation towards the end of June and early July is as you may have seen with other retailers, but the trends picked up towards the end of the quarter and we're pleased with what we're seeing so far this quarter. So no.
No Big <unk>.
In terms of downturns is across any part of our business right now.
Great. Thank you.
Yes.
And our next question comes from the line of Omar Saad with Evercore ISI. Please proceed with your question.
Thanks for taking my question. So I just want to confirm you know a lot of retailers are saying they thought some deceleration beginning around June .
It doesn't sound like you guys are seeing that and then also on the profitability of that business.
Gross margin probably go a little bit of pressure there versus last year, but last year was so clean it.
It seems like it's still the promotional levels are still well below pre COVID-19 is that a sustainable phenomenon.
Thanks.
Let me, let me just I'll start with the deceleration and Scott can pick up on the gross margin and some of the things we're seeing there. So again, yes, we did.
Our quarter end total was strong we were pleased with the results throughout the quarter there was a modest.
The slowdown in the trends right at the end of June early July as a number of things both.
I guess within retail and in the world around us, we're showing showing up but again nothing alarming on our business and we did see trends return to.
Early in the quarter rates.
As we.
Got to the end of July and then certainly as I said into the end of this quarter so modest impact.
But again the category itself the importance it plays in our guests' lives.
Allowed us to kind of ride through any macro disruption in short term impacts that we saw throughout the quarter.
And as far as gross margin is concerned again, we're very happy with the results.
This business is generating year to date, our longer term guidance assumes gross margin is going to moderate somewhat from what we saw last year again, when we started out with our longer term algorithm and again this year. The sales performance has just been extraordinary so.
Looking at it year over year, I'd say product mix.
Something to do with the variability you'll be media mix and how we are accounting for that in a geography on the P&L.
Something to do with that as we look out towards the remainder of 2022, we've been clear about we expect the promotional environment is probably going to get a little bit tougher, especially with what we've seen here across the retail universe here most recently.
So moderation as we look to the future.
Still a lot of great levers, we have in the business. When we talk about project solar delivering benefits over the longer term, our continuous improvement and ESG efforts still with a lot of benefit to generate for the company over the long term. So I think operating margin we feel good about opportunities to continue to leverage there, but we think gross margin will certainly mark.
Right as we look to look ahead.
Thanks, well done.
Thank you and our next question comes from the line of Dana Telsey with the Telsey Advisory Group. Please proceed with your question.
Hi, congratulations on the nice performance.
The services business.
Improvement there can you talk a little bit about what youre seeing there what that impact could be and then next just on the price increases that you had put in place where are we in the scale of price increases by category and how do you see a blending out for the year. Thank you.
Thanks, Dan I'll start and then turn it over to Scott.
Our salon team delivered strong quarter growth is double digit comps.
During the quarter and really what we saw with some strength in our Haircoloring services, we had strength across all geographies and regions, which was great and the sales were really fairly consistent throughout the quarter.
What we like what we see is these partnerships with their black Backbar Salon takeover event as Dave was mentioning it has both a notes that joy co Anderson.
Kendra are examples of where you can have a salon expert and really engage with the consumer to try a new brand that they've never tried before.
Also really driving trial to a personalized offers.
So we're getting people to come in and tire services, which is really important.
<unk> perspective, we continue to really invest in our education and training for our stylists, particularly focusing on textured hair styles and then from a pricing perspective, Dave was mentioning that is not really playing into the comp and this is the first time that we've increased our price in the last three years really modest so really its student growth of subs.
Core business and services, that's driving that comp overall, so I'm really pleased with how the guest is responding coming out of Covid, Scott and price increases as.
As far as product is concerned throughout the channels again, there were a number of increases in the second quarter slightly higher than what we saw in the first quarter. We estimate it's about 300 basis points to total comp.
For the second quarter again, the number the number of Skus that have been impacted and the total impact to our assortment is higher than we expected early in the year and we expect there to be more in the back half of the year, we've already been alerted by some of our vendor partners that there is some into Q now and we expect there to be more as we get deeper.
Into the year, so well continue to update.
Quantitatively on how that impacts our business and how we're thinking about it maybe for 2023, when we get further down the road.
Thank you.
And our next question comes from the line of Mark <unk> with Baird. Please proceed with your question.
Good afternoon, and thank you for taking my question with respect to the recovery you're seeing in the makeup category what are your current views on weather.
With whether what we're seeing is ends up replenishment post COVID-19 versus.
Versus perhaps the early innings of a new innovation driven cycle that could have some legs to it and then bigger picture just based on the trends Youre seeing.
Your business year to date and the projections for the year, calling for low teen sales growth at the high end is the 5% to 7% three year CAGR is still the right way to be thinking about.
The medium term growth outlook.
Yes.
Great Mark Jan makeup, yes, we're really really pleased and encouraged with what we're seeing is as I mentioned double digit growth across mass and prestige and you know well.
<unk> been following us for a while.
That category has had its ups and downs and been struggling for a little bit and so we're really pleased with the results and we think it's well rounded.
Theres no doubt theres some elements of.
Maybe pent up demand although.
As we get further into the reopening we think thats, probably a smaller and smaller part of of what's what's driving the business. What we do see happening is just strong innovation across.
Across both mass and prestige.
Really good performance by new brands that we brought in <unk>.
Our new brand about face great innovation.
Mass side with mix and color pop in L. A and others, but also in the prestige, which benefit Mac clinique and many others. So we're seeing strong innovation, that's really connecting and its and its being fueled by some core trends that we think are here to stay for a while.
That are driving engagement and it's and it is kind of an interesting time within makeup right now that we're seeing a combination of very bold playful looks kind of retro looks euphoria type engagement driven engagement that that are reminiscent of some of the things we saw back in 2016.
That are encouraging but at the same time, there's a equally strong trend around a clean look glowy glaze that are driven by <unk>.
Higher usage of foundation, and Highlighters, which are really important to the category and frankly have been struggling for a little bit. So we're pleased with the innovation the as people get out want to.
Express themselves to the world and there are more occasions, that's driving more usage and theres some core underlying trends and innovation that are supporting the category. So we're we're optimistic about the path ahead and will continue to be investing in our makeup business and partnering with our brands to drive this.
<unk>.
Four.
The foreseeable future as far as our long term targets no no no.
We're not updating our changing that so.
The outlook that we shared with you.
Last fall is still on our on our horizon and so I would keep that as our long term guidance.
Okay.
Thank you.
And our next question comes from the line of Cristina <unk> with Deutsche Bank. Please proceed with your question.
Hey, guys good afternoon, and congratulations on a very nice quarter.
So just wanted to follow up on innovation, especially on the skincare and hair care side of the business, which has been really strong can you talk about some of the areas of the business that you are seeing this newness that is driving very strong sequential performance. How we should think about some of the product innovation and just potential launch time for any big <unk>.
Launches that are coming up and then secondly, you.
Could you just touch on your expectations in member growth going forward Youre, bringing back a lot of consumers are they all back now is there still room, there to get them back and then maybe layer and the opportunity that you see from the target partnership.
Okay. There is a lot of great stuff to talk about and then let me just hit.
A few of that first.
Innovation, So Doug talked about makeup, let's hit on skin care and hair care and it's.
That kind of highlights one of the aspects of our business that we're really excited about right. Now is the strength, we're seeing across all of our categories double digit growth in every in every category, which again I think is a reflection of the of the strength of our model and the power of beauty right now within skin care.
Scene.
The strong strong growth, that's driven by a combination of new behaviors that were strengthened.
Or developed during during Covid around skin health and skin care, new brands that we've launched that continue to drive our business drunk elephant fresh Super group vacation.
New innovation great innovation.
Across moisturizer, Serums eye creams, acne by brands like Peach and Lilly USA hero, So many others clinique across the entire assortment the trends that we're seeing in skincare.
Again, we think will help.
We will sustain for a while we continue to see skin indication that consumers, including young Gen Z consumers.
The importance of skincare and how that lays the foundation for their overall.
Skin health and their overall look there is a growth in and science are clinically brac or our derma.
Dermatological improvements so.
Savvy consumers are looking for these active ingredients and that's been driving a lot of growth.
And theres been a lot of innovation around just core hydration.
As a recognition that that's healthy healthy skin is driven by that so many things coming together to drive that double digit comp in both mass and prestige skincare hair care Similarly strong growth.
I think in strong engagement, both by newness, but also the execution of our.
All of our programs like gorgeous hair event.
We benefited from.
A number of new brands, including all of <unk>, we're seeing strong innovation across a number of brands like way and living proof.
<unk> Dyson, that's been a key to our overall hair care and the innovation that they continue to bring so in that area. It's her health much like skin health continues to resonate and be important and take a priority.
A growing trend around shine and the treatments and accessories that helped drive that and of course texture is been a grow in an increasingly important part of the category and Ulta Beauty's expression for the last couple of years and that continues to be strong. So we're seeing strong growth.
And we think innovation consumer behaviors, the connection and the importance of these categories much like makeup.
Helped sustained growth as we look into the future on members. We're really pleased 10% growth on members for the quarter, a new record high and our member performance driven by guest acquisition reactivation retention, yes, we've reactivated a number of.
<unk>.
Of members, but there are more to get.
And as high as retention is theres always some guests that are that are dropping out for a number of reasons. So there is an always on activity to reactivate members and we have quite a few large pool to continue to activate and there is quite a few beauty enthusiast is big as we've grown there is.
Huge pool of beauty enthusiasts that or not.
Not yet members.
Of our of our program and we think they should be and we're going after them one of the ways to do that he shows through our target program and what we're doing with you to want to talk a little bit about that.
We're really pleased with how our partnership is progressing and the future opportunities that really provides our guests brand partners target and Ulta beauty. We're leaning in in fact, one of the nuances that we're introducing this next quarter is that we're creating a dedicated field team and that as we scale. This partnership there can be really focused on train.
And education with an emphasis really on loyalty and unlocking that loyalty opportunity with not only our existing members, but with new members as they come into the Ulta beauty at target. So.
We're excited as we continue to expand and grow and we feel.
The video target as another way to drive new loyal loyalty members into our ecosystem.
Great. Thank you so much.
Thank you and the next question comes from the line of Oliver Chen with Cowen. Please proceed with your question.
Hi, great quarter as.
As we think of that in terms of the guidance, what's embedded with respect to pricing and how would you.
Speak to that.
Against the promotional needs that Youll have fourth quarter is always a very promotional timing.
You do a lot of great personalization to drive.
Promotions as well.
And a follow up on the new layout, there can be disruption and customers don't necessarily.
New layout some times on your inventory needs to change so I would love your thoughts on timing and execution risk and rationale it sounds like it's a prudent move to focus on categories, but it comes with.
Different risk factors. Thanks.
Yes, so I'll start that one so pricing, we said about 300 basis points.
Our price increases reflected in our <unk> results and all of the price increases that were aware off through our vendor partnerships are embedded in our guidance right for the back half of the year. So we feel like we have that.
Framed up well when we think about again, the second quarter spectacular performance above our expectations.
Our updated guidance includes straight the beat on the second quarter and the trends we've seen so far.
Early stages of the third quarter, when I think about the top line trends and again back half of the year, we're going to be lapping some stronger performance last year, we have referenced the competitive environment, we expect that to be tougher as we get into the back half of the year the promotional environment again.
This well Oliver in the fourth quarter holiday, we compete with all of retail for gift, giving right. So it's a it's a wholly totally different kind of game for a relatively short period of time. So we expect it to be more more competitive more promotional this year than it was a year ago, you've heard us talk about distribution points additional points of distribution on.
Prestige beauty coming as we get deeper into the year that's another consideration.
<unk>.
And then on the <unk>.
Operating income side, we referenced.
This strategic initiative expenses kind of pushing back later into the year some of Thats due to just shortages of.
Manpower and delays sometimes in shipping some of the hardware that we need to get some of these projects finalized so again nothing to be overly concerned with but there are some delays as there is in all parts of the world right now it seems so nothing unusual there and then some of the costs right. The increased cost inflationary pressures, we're seeing in the business is going.
Be heavier in the back half of the year than it was the first half of the year. So all in we think we're in a good a good place and its reasonable its a reasonable estimate of the guide and what we should expect for the second half of the year.
And for new store it may out, we're really focused on our new stores and our planned remodels going forward.
We're always making changes to improving the in store guest experience, it's been a while since we've really been any significant changes to the surely add itself.
Just as a point of reference our today, our merchandize is organized by price point with prestige makeup and skin care in one side of the store and mass makeup and skincare and the other with fragrance in the metal and hair care in the back half of the line going forward, we really want to have a merchandise layout to magnify, our differentiated assortment and really better reflects how the guests.
Shops, with consolidated category and intuitive Adjacencies. So we're gonna take mass and prestige makeup together in front of the store with real clear brand delineation and then also reflect the growth of the category and Thats important to the guests, but moving skincare upfront so than mass and prestige skin care is going to be altogether.
Again with clear brand delineation, so youll be able to tell the difference between mass and prestige, but it will be organized together the way the guest shops it.
We're also going to elevate the front of the store to support more editorial store storytelling, and nunez and events and recent trends and then we're going to also create this new beauty bar at the center of the store, that's really going to amplify the service experience and highlight the beauty payment that is really happening on the sales floor, but really excited to see this all come.
Later, yet this fall.
Thank you great job on the bypass.
She lives as well best regards.
Thanks Oliver.
And our next question comes from the line of Chris <unk> with J P. Morgan. Please proceed with your question.
Thanks, Good afternoon.
A follow up question, maybe for Scott could you talk about how you how your thoughts on the cadence in the back half change. It seems like your you originally said low single digits for the back half it seems like you're raising the third quarter comp by keeping <unk> intact.
We could get some more leverage.
But at the same time, it sounds like youre, adding a bit more promotion in the fourth quarter and maybe more.
Estimates.
Essentially hitting that fourth quarter as well.
Chris You don't need me to answer the question you already to figure it all out so.
Star for you today, so I mean that said in essence, I mean again, we talk about guidance and estimates on every one of these calls people have questions.
And we really do look at it right up to just before the call and so while we've seen the last couple of weeks with sales strength again, Dave mentioned this late July bounced back just like how it looked early parts of the quarter in August we've kind of continued on the same trends.
Taken up the third quarter in essence for the strength, there and we're kind of being careful with the fourth quarter for the reasons. We've already stated we think promotional environment is going to be higher and so just navigating that balance between the sales line and the margin investment it takes to close that sale.
That's exactly right instance, I answered my own since answer my own question.
And one in here.
Joe.
Yes.
Can you talk about how the prestige category.
Formed in <unk> versus <unk> 19 in was that acceleration relative to what you saw in the first quarter.
Yes, the prestige category is up versus 2019, and so we're encouraged by that you know that prestige has been we've talked about this has been the laggard prestige makeup in particular and now we're seeing that that's that performance come back.
Compared to 2019, it would still be.
That's kind of the lowest I guess performance incremental performance over that as these other categories have been strong.
Like hair care and skincare really throughout the last couple of years, but yes.
Yes, we're pleased.
With the performance we've been working on this for a while as you know the brands have continued to bring innovation and.
The combination of changing consumer behaviors opening up engagement in the innovation that I talked about and I think with specifically within Ulta beauty as we've our merchants have done just a tremendous job of evolving our assortment to make sure. We have the brands the products the innovation that allow us to gain share and lead in the category.
So we're pleased with the with the overall performance and glad to see prestige performing at a high level.
Thanks Best of luck.
And the next question comes from the line of Mark <unk> with Stifel. Please proceed with your question.
Yes, Thanks and afternoon everyone.
A brief question I think curious about the contribution to.
Ultimate reward members from from the target relationship or year end.
Target mentioned I think it was about 1 million and a half.
<unk> co linking accounts from from their loyalty program to yours are those incremental kind of any learnings that you've gotten there.
Folks who have participated in your program as well thank you.
We've mentioned in the past that there has been a large number that have linked their accounts, but we havent shared specific details.
A number of new members and breakout by that and we're not we're not planning on doing that now.
But as as Keith mentioned, we're just we're really encouraged by what we're seeing we're really pleased with the overall partnership.
The execution has been strong the consumer reaction has been very positive and the engagement in Ulta beauty.
Has has.
It really been a positive aspects so our focus going forward as I mentioned in the remarks is to continue to drive that loyalty that is key to our success is is to engage guests in a new way to touch Ulta beauty and ultimately get them connected Dol aspect. We're encouraged by what we're seeing and we're focused on on driving that.
Well into the future.
Hey, John I think we have time for one more question.
Okay. Thank you and the next question comes from the line of Kelly Crago with Citi. Please proceed with your question.
Hi, there thanks for squeezing me in.
Just curious.
Yes, we did notice that.
You did sort of a layer back in another.
Im sorry, storewide, 20% off coupon promotion more recently and I'm just trying to understand that I know you poor with maturing.
And 2021, just because of the data.
With a strong and promotions across the board for a while but I'm just curious if you.
The comments youre, saying about without coffey here, whether or not and you start seeing an uptick in that.
A response to an uptick in promotions across beauty.
Curious any thoughts on that.
Should kind of expect that to be layered into your.
Commercial strategy going forward and then secondly on the on the San Juan.
Your line of thinking just curious.
The promotional environment and there are some apparel.
Gordon.
It's another category that there just wondering if in the past you've had to sort of.
Step up promotion, even if the beauty category has been strong have you had to get more promotional during the holiday period in the past. So just curious on your thoughts there. Thanks, great I'm really glad you asked Kelly I wanted I do want to clarify I know theres been some.
The comments about a 20% off store wide customer base wide.
That is not we have not executed that we haven't all year executed that and.
Going back in history, we that was a trigger that we used frequently in that holding that out is core to our strategy of being more.
The.
Purposeful in how we're connecting with our guests what you may have seen it.
As a more targeted I mentioned, how we've been you know we've been on this journey of investing in our personalization in our CRM capabilities. So we use a variety of offers including 20% off but also points offers or newness offers or other broad communication to.
To pinpoint and target subgroups within within are typically smaller subgroups based on a specific behavior that we want to incentivize a one example might be if it's a.
A diamond remember that Hasnt shopped with us all year for several months.
That guests may get at 20% off coupon, but its only a small subset of groups and we test and learn and we drive and we understand the profitability and return of doing that so any 20% off has not been there was an offer just as some of you saw this week that came out that was 20% off that is a comp offer.
<unk> and is not person is not store wide. It is we have a strategy within our mass side of the business.
That is as you know mass tends to be a bit more promotional.
So if any of you saw an offer this week that was 20% off that was not storewide that was focused on.
On our non prestige side of our business and and we've been doing that particular author for many years.
At this time of the year. So that's a comp event. So no incremental offers at this point now having said that to your second point about promotional intensity going forward.
And holiday as Scott has mentioned this as well.
Our scene.
Promotional.
Intensity Thats, obviously, no surprise to any of you on the call you are seeing it.
You mentioned Kelly apparel is happening just across across retail right now we.
It continued to be focused in in the second quarter, we were able to decrease our promotional intensity.
We haven't layered in any big.
Programs like I mentioned, but as we look forward, particularly going into the holiday.
As Scott mentioned, the competitive set expands and gift, giving too to really all possible guests, including apparel. So we're going to watch that.
Our more promotional in the fourth quarter in the holiday historically.
And we see that as a strategic move to be competitive and to make sure. We're delivering both on the gifting and the glamour inside of our business. So we're watching that carefully and Scott mentioned, that's kind of incorporated in our guidance going forward.
Okay. So with that great question and thank you all again for your interest and thank you for joining us today I'll wrap up here and I want to wrap up by again thanking the entire Ulta beauty team for their passionate commitment to delivering on our mission vision and values every day, our strong performance is the.
Direct result of our store DC and corporate associates working together as one unified Ulta beauty team to take care of our guests and to take care of each other while driving our business forward.
So we look forward to speaking to all of you again in early December when we report our third quarter results. Thanks, again for joining and I Hope you all have a great evening.
Thank you everyone. This does conclude today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a great day.
Okay.
Yes.