Q3 2022 Ulta Beauty Inc Earnings Call
And.
Good afternoon and welcome to Ulta Beauty's conference call to discuss results for the third quarter of fiscal 22.
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 re-enter the queue for any additional questions.
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As a reminder, this conference is being recorded, and it is now my pleasure to introduce Ms. Kylie Rawlins, Vice President of Investor Relations. Thank you, Ms. Rawlins. Please proceed. Thank you, John . Good afternoon, everyone, and thank you for joining us today for our discussion of Ulta Community's results for the third quarter of fiscal 2022.
Hosting our call are Dave Kimball, Chief Executive Officer, and Scott Setterson, Chief Financial Officer. Keisha Steelman, Chief Operating Officer, will join us for the Q&A session.
This afternoon we announced our financial results for the third 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 of the company's safe harbor language.
The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.
Actual future results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the FCC.
We caution you not to place undue reliance on these forward-looking statements, which speak only as of today, December 1, 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'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 limit your time to one question and one follow-up question.
If you have additional questions, we ask that you review. And 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, Kylie, and good afternoon everyone. We appreciate your interest in Ulta Beauty.
The Ulta Beauty team delivered outstanding performance this quarter, with strong revenue growth driving operating margin expansion and double-digit earnings growth.
We accomplished these results because the Ulta Beauty teams continued to execute at a high level, and I want to thank all of our associates for their commitment to delivering great guest experiences, ensuring operational excellence, strengthening our culture, and working together as one team to move our business forward as the leader in beauty.
For the third quarter, net sales increased 17.2% to $2.3 billion and comp sales increased 14.6%.
Operating margin increased to 15.5% of sales and diluted EPS increased 35.5% to $5.34 per share.
Reflecting these results and our updated fourth quarter expectations, we have increased our outlook for the full year.
Scott will share more details about our expectations later in the call.
Our third quarter results are a testament to the resilience of the beauty category and our team's ability to drive strong guest engagement that fueled broad-based growth across our business.
This touch point enables us to connect and reconnect with members and while the partnership isn't material yet to our overall member growth. It has contributed positively.
Importantly, we are seeing members bounce back to Ulta beauty after becoming an active member Wow at the Ulta beauty at target shop.
Now let me give you an update on some of the steps, we're taking to drive love loyalty and emotional connection with Ulta beauty.
Recognizing the beauty is personal we are on a multi year journey to create stronger more emotional connections with our guests and bring our brand purpose to life.
Launched in September our latest brand building campaign beauty and is rooted in insights from cultural leaders in beauty enthusiasts.
Creative content on to owned and paid channels is driven broad improvement in top of mind awareness and is resonating with our guests, particularly black black in Latin next beauty enthusiasts.
Turning to our loyalty program, our efforts to nurture loyalty and personalized ways is driving member growth and delivering incremental value.
We ended the quarter with 39 million active members, 9% higher than the third quarter last year.
Overall spend per member increased driven by increased frequency and higher <unk> higher average ticket.
While price increases are having an impact we are encouraged to see unit growth per member.
Our loyalty program is a strategic asset and an important driver of our long term growth.
We prioritize member engagement loyalty and retention across every Ulta beauty touch point, the growth and strength of our loyalty programs starts with ensuring that our existing guests stay engaged nurturing our existing members through our member love events and lifestyle life cycle marketing strategies has enabled us to maintain healthy retention.
Eights, which have contributed to member growth and higher spend per member.
Remember reactivation remember remains a priority and we are leveraging CRM tools to personalize offers and re engage members and more targeted ways and of course conversion of new members also contributes to overall member growth and we continue to acquire new members in our stores and digital platforms and through our partnership with target.
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Shifting now to our plans and expectations for holiday.
The holiday season is in full flow and our teams are executing well.
Predicting holiday shopping patterns. This year is challenging I am optimistic about the opportunity for Ulta beauty this holiday season.
Our engaging holiday messaging, one of a kind assortment with exceptional seasonal seasonal options and diverse touch points, all paired with our team's unrelenting passion for delivering great guest experiences positioned us well to deliver another successful holiday season.
Rounded and robust consumer insights our holiday marketing strategy positions Ulta beauty as the place for gifting Glamming and self care this season.
Our intent is to empower our guests to celebrate the season. However, they want.
And our integrated media plan for the holiday aims to build broad awareness of Ulta beauty as a holiday destination spark connection with key audiences leverage our beauty expertise and drive consideration and purchase.
Our merchandising team has built an outstanding holiday gifting assortment, whether guests want to get others or treat themselves. We are thoughtfully curated options across every category and budget with a balanced approach to the mix of seasonal holiday items and core items that make great gifts.
We entered the holiday season, with well staff stores and Dcs and our teams are excited and engaged and ready.
For the first time since 2019, our store teams gathered in person to review, our holiday strategies and I know their excitement and enthusiasm for our plans will be felt in every cast interaction.
And our corporate and DC teams have worked cross functionally to ensure all the beauty is positioned to deliver for our store teams and our guests.
In closing I am incredibly proud of our year to date results and I'm excited about our holiday plans.
Even as consumers continue to navigate economic headwinds, we believe the beauty category will remain resilient and we are confident that our differentiated model and growth strategy combined with our outstanding Associates will continue to position Ulta beauty as the preferred beauty destination.
And now I will turn the call over to Scott for a discussion of the financial results Scott.
Thanks, Dave and good afternoon, everyone.
Today, we reported results that were better than our initial expectations and strong double digit revenue growth resulted in record setting third quarter operating margin performance.
These excellent results reflect the continued focus and hard work of our store DC and corporate teams and I want to thank all of our Ulta beauty associates for working together to deliver another outstanding quarter for our shareholders.
Now to the financial results starting with the income statement.
Net sales for the quarter increased 17, 2% driven by comp sales growth of 14, 6% and strong new store performance.
In addition, other revenue increased $20 million, primarily due to credit card income growth higher loyalty point redemptions and an increase in royalty income from our partnership with target.
Breaking down the comp performance for their comp transactions for the quarter increased 10, 7%, primarily driven by strong growth from in store transactions.
Average ticket increased three 5% due to an increase in average selling price, partially offset by slightly lower average units per transaction.
The increase in average selling price primarily reflects the impact of retail price increases executed this year we.
We estimate that price increases contributed about 500 basis points to the overall comp increase.
While average units per transaction was slightly lower than last year. The total number of units sold increased about 10% on a comp basis.
During the quarter, we opened 18, new stores relocated one store and remodeled eight stores.
For the quarter gross margin increased 160 basis points to 41, 2% of sales compared to 39, 6% last year the.
The increase was primarily due to the leverage of store fixed costs other revenue growth and higher merchandise margin, partially offset by higher inventory shrink.
Robust topline growth and benefits from our ongoing occupancy cost optimization efforts resulted in healthy leverage of store fixed costs.
The improvement in merchandise margin was primarily due to benefits, resulting from the timing of retail price changes.
Partially offset by brand mix.
As we have discussed we have executed a number of price increases from our brand partners. This year Jen.
Generally when the new prices affected at the shell, we are still selling inventory purchased at the lower cost.
As a result, there is a short term benefit to cost of goods as we move through the lower cost inventory.
As expected our promotional activity increased from the second quarter, but the impact to margin was not meaningful compared to last year.
SG&A increased 18, 6% to $597 2 million as.
As a percentage of sales SG&A increased 30 basis points to 25, 5% compared to 25, 2% last year.
Early due to increases in store payroll and benefits and corporate overhead.
Partially offset by lower marketing expenses.
So our payroll and benefits deleverage this quarter, primarily due to increase labor hours to maintain service standards higher average wage rates to support recruitment and retention and a timing shift of incentive compensation accruals.
Corporate overhead expense deleveraged in the quarter, primarily reflecting investments related to our strategic priorities.
Including project SOR and other capabilities you'd be media and Ulta beauty at target.
These headwinds were partially offset by lower marketing expense as we have discussed on previous calls. This year. We are offsetting the incremental marketing expense of digital campaigns, we manage for our brand partners with vendor income is a direct reimbursement for these specific costs within total marketing.
Expense.
Similar to what we saw in the first half. This resulted in about 70 basis points of favorable impact to SG&A in the quarter.
Operating income for the quarter increased 27, 3% to $361 9 million.
As a percentage of sales operating margin increased 130 basis points to 15, 5% of sales compared to 14, 2% last year.
Diluted GAAP earnings per share increased 35, 5% to $5 34 per share compared to $3 94 per share last year.
Moving to the balance sheet and cash flow.
Total inventory increased 10, 3%.
In addition to the impact of 41 additional stores the increase reflects purchases to support key brand launches and increases in inventory costs.
As well as ongoing efforts to maintain strong and stocks to support expected demand.
Capital expenditures in the quarter were $83 5 million compared to $51 1 million last year. The increase was primarily related to investments in new remodeled and relocated stores.
Projects and merchandising improvements.
Depreciation was $58 5 million compared to $65 2 million last year, primarily due to a shift of investments from capital to cloud expense.
We ended the quarter with $250 6 million in cash cash equivalents.
During the quarter, we repurchased 340000 shares at a cost of $137 5 million.
At the end of the third quarter, we had one 4 billion remaining under our current 2 billion repurchase authorization.
Turning now to our outlook.
We have raised our financial guidance for fiscal 2022 to reflect our strong third quarter performance and increased expectations for the fourth quarter.
We now expect net sales for the year will be between $9 95, and 10 billion with comp sales growth between 12, six and 13, 2%.
This guidance reflects our expectation that fourth quarter comp growth will be between six and 8%.
From our previous expectation for low single digit increase.
Sales growth moderated in November as we lapped last year's strong performance, but we are pleased with the sales trends, we saw through the Thanksgiving holiday shopping weekend, including cyber Monday.
We still have several important weeks left in the Hollywood holiday season, and the operating environment continues to be dynamic.
Our Q4 comp outlook reflects both the expected resiliency of the beauty category as well as potential risks from shifts in consumer spending increased points of distribution for prestige beauty and higher promotional activity.
For the year, we plan to open approximately 47, net new stores and remodel or relocate 33 stores.
Our new store performance continues to be strong, but like many other major retailers. We are seeing project delays, resulting from external real estate and construction issues as well as supply chain disruption for key equipment.
These external factors have impacted our fiscal 2022 plans and will likely shift new stores originally planned for fiscal 2023 into 2024.
We continue to expect to open about 100 stores over the next two years, but the timing of opening between fiscal 2023, and 2024 may shift as we navigate these external challenges.
The operating environment is fluid and we will provide specific targets for fiscal 2023, when we report in March.
We now expect operating margins for the year will be between $15 five and 15, 6% of sales. We expect gross margin for the year will increase 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 for the year will increase between 15, and 16% or approximately flat as a percentage of sales driven primarily by 60 to 65 million of expenses related to our strategic priorities as well as higher wage rate growth across the enterprise partially.
All set by lower marketing expense.
Reflecting these assumptions, we now expect diluted earnings per share for the year will be between $22 60.
And $22.90.
One final update we now expect to spend between 303 hundred $50 million in Capex in fiscal 2022, including approximately $160 million for supply chain and I T $140 million for new stores, Remodels and merchandise fixtures and about $30 million for store maintenance and other.
We expect depreciation for the year will be around $250 million.
While we are not providing guidance for next year on this call. We wanted to share some high level thoughts for your consideration as you model fiscal 2023.
The beauty category has been stronger this year than expected.
Barring a major economic events, we would expect category growth to continue in 2023, albeit at lower rates, reflecting strong consumer engagement with the category and we remain confident we can deliver comp sales growth in fiscal 2023 within our longer term targeted range.
<unk> of 3% to 5%.
In this sales scenario, we would expect operating margin deleverage versus our fiscal 2022 guidance.
In addition to inflationary pressures on wage rates and other operational expenses, we expect to increase investment spending related to our strategic priorities, reflecting timing shifts from fiscal 2022, and the planned ramp up of key I T and supply chain investments.
Finally fiscal 2023 will be a 53 week year for Ulta beauty.
We are still finalizing our budget for fiscal 2023 and plan to provide specific financial guidance.
And update our longer term growth targets, if appropriate on our March earnings call.
And now I'll turn the call back over to our operator to moderate the Q&A session.
Thank you we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad.
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One moment, please while we poll for questions.
And our first question comes from the line of Steven Forbes with Guggenheim Securities. Please proceed with your question.
Good evening.
Scott I wanted to focus in start with member engagement. So Dave curious if you can expand on how member engagement trends within the recent cohorts.
Cohorts differ or I guess are similar from the from the more mature cohorts in terms of retention repeat behavior. The maturation of wallet share channel preferences really just any color that helps maybe underpin your conviction for a positive comp outlook next year.
Great. Thanks, Steve Yeah, as I said in the in the remarks, our loyalty program our membership as a buyer.
Oh and critical to our long term success and one that we're extremely proud of what we've built the relationship that we have with with our guest.
I guess, a few things that I'd call out naturally our longer tenured you get.
If your tenured three plus years, we see kind of a higher level of retention higher level of engagement that tends to grow over time greater percentage of our guests the longer they're here move into our higher levels of platinum.
And diamond levels, so naturally with that.
10 year comes greater engagement.
And as I mentioned, one of the drivers of our third quarter growth, 9% growth in our total membership.
Was healthy retention and it's been a big focus for our entire team.
Our loyalty team our store teams, our digital everybody that participates in delivering a great experience. So that's key and really job. One is is engaging and retaining our existing guests.
Our our newer members that we acquire in stores online and increasingly with our partnership with target play an important role there their spend per member makes sense, it's on average lower and and we work hard to get them into into the.
Full ulta beauty experience often they enter into one category or one experience they might come in store, we try to move them in line and I come in to make up we try to move them into skincare get them into services, we have a full suite of activities and experiences designed to engage our new members through an end to end, including there well.
We call their sophomore year their second year with us, which is important pivot year into long term retention. So we look across all spectrum of what we're what we're excited about now and encouraged by is we're seeing strength across all sectors.
All income demographics, all geographies Oh, we have a healthy member base, that's what's driving the 9% growth in our loyalty and of course that in turn played a big role in the sales performance, we had in the third quarter.
Thank you.
Yeah.
And our next question comes from the line of Ike for a child with Wells Fargo. Please proceed with your question.
Hey, everyone congrats great quarter.
I guess, Scott I was going to focus on the margins with you merch margins better in <unk> sounds like you're you're off to a good start on the promotional side and <unk> as well.
You're going to end the I mean, it's a good problem to have you're going to end the year closer to 16% margins. Your long term target of 13 to 14.
Yes, just with merch margins as elevated as they are as healthy as they are are you guys starting to think more longer term about the AUR dynamics in the business and maybe that this elevated level of merch margin that you're at might be more sustainable than maybe what you had originally thought it may be that 13% to 14 actually can move.
A bit higher I mean, it more as a high level question not not necessarily 2023, but that that's kind of where it was coming from.
Yeah. Thanks, Mike I think you know probably gets to a larger picture.
Versus the E. R. AUR piece of your question there. So let me start it because I know this is at the top of the list for all investors right now as we're thinking about next year. So let me start by saying we are very proud of what the Ulta beauty team has been able to deliver over the last several years with respect to our operating margin profile overall.
Paul we continue to lead the beauty category, capturing market share gains and deliver some of the strongest operating margins in all of retail.
We are also absorbing significant cost pressures driven by an e-commerce business that we double the size up since 2019, along with wage pressures supply chain disruptions fuel cost and other inflationary pressures across the business and also continuing to make significant investments to innovate and build.
A healthy and vibrant business for the long term.
Having said that we've been very transparent with investors all year when discussing the.
The continued rebound in 2022 and that sales trends have been much stronger than what we expected back in the fall of 2021, when we provided our long term financial outlook.
And that's at that sales performance is driving stronger than expected operating margins driven primarily by fixed cost leverage price increase benefits in gross margin that are extraordinary this year and more moderate promotion levels and that the sales increases have been outpacing the inflationary cost pressures that we see.
And our business so.
Again Big picture, let me just lay out a couple of the bigger variables here as we're thinking about modeling for next year. So again back to what we referenced in the script. We do expect we can grow sales next year in line with our longer term, 3% to 5% target.
So on the top line.
Merchants have done an outstanding job and we feel good about the queue for newness next year, we've got some great things lined up but we're gonna be lapping over some extraordinary newness. This year right with these leading brands in each of our key categories empty and makeup drunk elephant in skincare, and all looks likes and hair care.
Right.
This increase is another major lever so we're kind of in uncharted territory right now right the percentage of our assortment, where we seen increases and the depth of those increases is something that we've never experienced in all the years here at Ulta beauty. So we're gonna be cycling over some of that next year, and it's kind of yet to be seen.
The consumer is going to react to that over the longer period of time, so that elasticity and resilient, while it's been resilient. So far there is a question of how far we're able to push this without seeing some kind of impact.
Lastly on the topline I'd say, we're going to lean into our very powerful loyalty program. The benefits of our credit card and of course, we're going to look to you now.
To see benefit from our Ulta beauty at target relationship next year.
Thinking about the rest of the P&L Dan on the gross margin piece of it promotion levels, we think will likely be higher next year than they had been the last couple of years.
<unk> been kind of a benefit this year because stores the big bounce back in traffic. We've seen in stores has helped right. Some of the margin headwinds that we see from our digital business.
<unk> benefits again, this gross margin benefit from the tiny between price versus the inventory change has contributed meaningful benefits. This year and again some of that will recur next year, but the question is to what significant.
Wage pressure will continue fuel will probably moderate but have you seen that here more recently supply chain investments will ramp up next year and of course, you'll be media will accelerate will step up there so ramp up or will contribute on the margin line gross margin line N.
In SG&A, we got store payroll upward pressure on wages, which we expect to continue maybe not to the same rate. We've seen here. This year, but certainly we'll continue upward variable cost inflationary pressure again credit card fees I mean, we're seeing it in every part of our business right now we've been able to mitigate a lot of that.
And Super High sales increases help help camouflage that a bit as well and then of course, our strategic strategic investments as we mentioned in the script, we plan to ramp those up and that has come in in 2023, so sort of other digital investments.
You'd be media and you'd be at target as well.
So we've got mitigating we got mitigating strategies in place right you've heard us talk about some of these over the years. We've demonstrated our company. We are able to deliver we've delivered hundreds of millions of dollars and benefits from our E. F T efforts and where we've got plenty of margin enhancement and cost optimization.
Asian opportunities in front of us and we're building out new continuous improvement capabilities, which again, you've heard us talk about our building for the long term cost optimization of the business. So I'll close it up by saying you know even in what we see is a more uncertain environment being with us here into next year.
We are well positioned we got a strong business model. We are in a great category that is growing and we've got a very a business that delivers very healthy margins and we expect to be able to grow the top line next year, even off extraordinary performance in 2021 and 'twenty. Two so we feel good about where we are.
Thanks Scott.
And our next question comes from the line of Lorraine Hutchinson with Bank of America. Please proceed with your question.
Thanks. Good afternoon. Your sales guidance continues to include pressure from increased points of distribution for <unk>.
Prestige can you talk about what you're seeing in the fleet when one of these new store stores open and how meaningful it is.
Yeah, we're certainly watching and monitoring tracking all competitive activity across the across the landscape and.
I've said before our focus continues to really be on offense for us to really leverage what we do best the unique differentiated model that we have nobody does what ulta beauty does so our competitive strategy.
Is to lead and to drive our business forward, having said that we are watching there are changes.
When our stores competitive stores open.
It is dependent on the circumstances the situation we can see.
Relatively minor impact typically over time, our business sustains and and recoveries any short term impact so where we're you know we're confident that again our focus is on delivering.
What our experience is what we found over time is doing that allows us to continue to find growth and.
Deliver an experience that our guests continues to want to want to find at Ulta beauty.
Thank you.
And our next question comes from the line of Ashley Hogan with Jefferies. Please proceed with your question.
Hi, Thanks for taking my question and congrats on the on the quarter.
Wanted to ask about the promotional landscape that you've seen heading into holiday and if he feel just county.
Retailers has been as has he isn't as initially expected. Thanks.
Yeah.
Yeah, I guess, we'd say for holiday a little early to know exactly when we're right in the middle of the of the of a battle here I guess with our biggest biggest weeks of the holiday period is still ahead of us and we know we've been I think we shared this.
Our last call and really anytime we're talking about holiday holiday is a more promotional period.
The November December period is different than the other 10 months of the year because the.
The gifting aspects.
The idea that we're not just competing with beauty, we're competing with other gift.
<unk> across retail.
The landscape I know, it's hard for us to judge mid midstream exactly what we've you know we've been delivering as a as a an aggressive.
Our promotional but not a wildly different than what we've done in the past. So we've seen consistency there. So far we're really encouraged by what we're seeing and feeling like Ulta beauty is well positioned to compete effectively but we're also monitoring tracking and and ensuring that we are.
Closeout. This next Oh, I guess 'twenty 'twenty four 'twenty five days with.
With excellence as we as we complete the holiday and that's our focus going forward.
Great. Thanks, so much.
And our next question comes from the line of Mike Baker with D. A Davidson. Please proceed with your question.
Oh, Hey, Thanks, I, just wanted to ask a little bit about cadence.
The months throughout the third quarter, and then I remember you said it slowed.
I guess I'm, just wondering within your 6% to 8% guidance.
Guidance for the fourth quarter are we know the comparisons get easier in December relative to November is that contemplated.
You know within the guidance or maybe another.
Another way to ask it is you know where it's November slowed to just slow below 6% to 8% and you need to pick up to get there or is it within that range. Thanks, Okay, well, what I will say it first on the third quarter.
We saw strong growth throughout the quarter, Although October was modestly.
Decelerated modestly, but still double digit growth in each each period of the quarter.
As is suggested in our six to eight guidance for the fourth quarter, we're anticipating deceleration from what we saw in the third quarter and really throughout the year.
Ben.
I would have anticipated and this all year as are we.
Our comps are strong and again, we're in a different type of.
Period, and holiday, but we're not going to get into specific week by week. A replay you will as I said, we're right in the middle of it we've got Big weeks ahead of US, we'll obviously share you know.
When we share our fourth quarter results all the details, but what I will say is again reflected in the in the <unk> is a anticipated.
Healthy growth, but not not to the level of what we saw in the third quarter and we're encouraged by what we're seeing so far in the holiday period, knowing that there's a lot of ground still to cover as we complete holiday and.
And you know January is a big big important period for us as well so still a lot ahead of us, but encouraged by what we're seeing so far.
Thank you.
And our next question comes from the line of Adrienne <unk> with Barclays. Please proceed with your question.
Great. Thank you very much.
Hi, Scott I was wondering if you can talk about you had mentioned so it is that the vendor contribution that was offsetting some of the lower marketing spend so does that mean that they want to present their brand more aggressively and therefore are taking more space either on the 21 days of beauty or you know gift with purchase.
That type of thing.
And then I also wanted to know did you.
At the beginning of the pandemic you pulled out of the international Canada opening now that the domestic business seems to be on pretty good putting how long are you thinking about kind of reentry into that market. Thank you very much.
So I'll start so that the first part of your question, Yes, yes.
Yes.
It's in a county, you know recognition of how the debits and credits flowed through the P&L Adrianne. So theres really nothing related to the vendor choices or how we work or execute any of those kinds of things. It's just accounting convention matching up expense with income when its incremental expenses related.
To these marketing activities and then the rest of it kind of rolls through the gross margin through our inventory accounting.
Okay. Thank you.
And on the on your question about Canada and International as you as you stated a yeah, we obviously stopped that.
Early in the pandemic.
Right now we have no plans are consistent with what we shared at our analyst day No no plans to expand internationally at this time, although we are always looking for opportunities to find new growth potential and.
So in the future at some point, that's possible, but nothing nothing in our immediate plans for sure.
Okay. Thank you very much that's a lot right.
And our next question comes from the line of Korean Wolf Meyer with Piper Sandler. Please proceed with your question.
Hey, good afternoon.
Congrats on the quarter and thanks for taking the question.
I'd like to expand a little bit on what you're seeing within the specific product categories. I mean, you didn't know pretty strong growth for all categories, but as we head into their early part here at Q4 end and the holiday season can you talk about kind of like for like trends, you're seeing for cosmetics skincare fragrance what categories maybe.
Requiring a little bit heavier promotional activity for holiday and just any color you can provide there would be helpful. Thank you.
Well I'll start with saying Yeah, we're really encouraged by what we saw in the third quarter and really we've seen this trend for the first three quarters said strong growth across all categories, which is.
Obviously, a great place to be this the strength, we're seeing on our business.
Is not you know outweighed by one specific category, it's balanced across our portfolio and it's because we are our team.
Across both merchandising marketing and our stores have done a great job engaging our guests.
And in our entire assortment and so we're we're excited and encouraged to see strength across double digit growth across all key categories. Each each one has unique stories makeup driven by this increased engagement and and social activities.
Plus strong product trends that are that are highlighted through social media and new product growth that are spec.
A spectrum of newness, that's really working so a collection of activity that's coming together, both product newness marketing newness.
And engagement opportunities skincare continued strength by both science back clinically proven.
A dermatologist recommended solutions, so that engagement that many people are elevated through the pandemic has sustained its actually our fastest growing category in the third quarter hair care, you know well, we've been driving that growth as a leader in hair care and strong trends.
The portfolio of newness that.
That continues to driving greater engagement, and then well really all year pleased with fragrance and that as I look at the and the innovation engagement I mentioned Gen Z being a part of that and really the whole portfolio working quite well across that important category as we look in the fourth quarter and not get it and we won't get into any specifics right now we're in the middle of holiday.
And so there's a lot to cover I wouldn't say, there's anything jumping out uniquely for any category from a.
Promotional standpoint, we come in Oh really with a focus in the fourth quarter of what we call gifting and Glamming and the gifting component.
<unk> is a mix of of holiday specific but core items that serve all year long and the team has done a nice job with the balance there. So we feel great about our assortment. It's so again, we're encouraged by what we're seeing at this point in the holiday and are confident that we'll be able to deliver a strong holiday occur.
All of our categories.
Okay.
Thank you.
And our next question comes from the line of Olivia Tong with Raymond James. Please proceed with your question.
Thanks, Good afternoon.
First one on newness.
Because you have you have two brands that really anchored units and I would imagine, particularly towards the upper end of your average range is next year or so.
You know your view on innovation and the level of innovation as you think about the next 12 months versus the prior 12 and then you also mentioned in your comments that masses, outperforming christine's plus adding revenue dependent.
Definitively trade down so can we dive into that a little.
Is there more.
Illness in one versus the other or or any other reason that you think that math is starting to outperform prestige I think.
So it wasn't related to our consumer.
Thank you so much.
So just on the broader idea of newness, it's important to.
Our business in the beauty category.
Always and as I had mentioned in the in our in our.
Our remarks, typically 20% to 30% of sales are new items and that's the range that we will.
Where will land this year and anticipate we'll be able to continue to be in that range going forward. As I. You know we did as Scott mentioned, we had some really important new brands in 2022.
We're excited and encouraged by the outlook. This this category are both big brands like some months I've mentioned, but also new and emerging brands that are takeoff and connect Oh I've mentioned, a couple of those like good molecules among others that so we've got a portfolio of brands as we look forward into next.
Year.
And and confident about newness, both new brands and newness from our existing existing brands that plays a big role and <unk>.
As we work with all of them.
And see their pipeline, we're encouraged by what we're seeing the trends are strong across each of the categories. We're seeing healthy growth and we think newness will play an important part in that going forward knowing that we've got some of these big brands that Scott mentioned earlier to launch or to lap.
As it relates to the mass and prestige.
We did see mass growing somewhat faster than prestige.
The but both.
[laughter] sides were strong and healthy.
I wouldn't say the strength in mass or that somewhat higher growth in mass as we look at it and do it and analyze our members didn't come at the expense of procedure just game because masses strong and theres. Good newness brands like Els Nicks ordinary Laroche pose survey I mean, there is strong.
<unk> newness and engagement and.
They're just capturing and growing prestige is doing really well too. So I don't look at them being a little bit higher than prestige is coming at the expense of just there several of these brands in some of our bigger brands are hitting the mark and and that's working in all of our analysis.
Suggests that we have not seen clear signs of trade down, but I'd reinforce if there is that we are uniquely positioned to deliver and support our guests.
Regardless of what choices they make from a price point.
Great. Thank you best of luck.
Thank you.
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.
Can you help stress test a couple of the key variables that are going to impact <unk> gross overall operating margin in 2023 between the expense spending that you're slated for this year and the step up that you had originally planned for 2023.
Is it reasonable that we think around about that as like a $50 million five zero increase in the next year and then the second part of the question.
You're on pace to have a 15, 5% to 15, 6% operating margin. This year. If you were to take the level of promotional activity from 2019 and apply it all else being equal to this year is it reasonable that you would have like a 14, 5% operating.
Margin so.
Worst case, it's promotion to go back to 2019 levels that would be like 100 basis points to the operating margin. Thank you very much.
Is this something Michael Lasser that I know I mean.
We had tried and true.
To your question Mike.
Now we are yes, and I understand but we can't we're not gonna piecemeal all you know that it's.
Pieces of.
The variables in the Formula for EBIT margin for next year. It's just it's too hard and that's why we we said we would we'll update in March if it's appropriate okay. We got to kind of see how 2022 shakes out here in totality and then look at our 'twenty three plan, which we're in the heat of Battle on right now finalizing.
Here, which you know the final step of that is as we get finalize through the holiday season, so to see what the numbers look like so we either as I laid out for Ike here, a little bit earlier in the call all the different variables and of course, they're all on why continue ones right and so we're doing our best to assess each one of those end up.
I'm coming up with our best idea of how we think it's going to shake out for next year again, we're very optimistic about the long term.
Options for our business anywhere in a great position, we got lots of levers to push and pull.
They deliver healthy operating margins over the long term.
Okay.
A great holiday. Thank you. Thanks, Michael John I think we have time for one more question. Please.
Okay, Great and the final question comes from the line of Michael Binetti with Credit Suisse. Please proceed with your question.
Hey, guys. Thanks for our question congrats on nice quarter.
Maybe since you mentioned it a few times now how much is how much is shrink versus 2019 as a percent of sales I'm wondering if that's becoming.
Meaningful number and maybe you could just help us orient how much incentive comp influences. The margin. This year I don't know if I heard that and then I guess, just maybe touching on Michael's question.
You seem to be getting the higher margins the right way here with.
Interest sales and gross profit dollars from driving the business and leveraging the fixed cost you'll be at a revenue level that you wouldnt expect to see until 'twenty 'twenty four and you still see me I'll go next year I know you gave the long list to Ike.
The middle of the P&L, but it feels like you earn some upside to the framework that 13 to 14 I'm just wondering if you can.
Give us some color on what you think relative to the framework you laid out remains structurally higher or what you think needs more investment than what you thought at the analyst day framework to bring all those extra dollars down to that 13 and 14.
Yeah, Michael So so working backwards so the shrink part of your question.
I mean strike when you think about our category, we are especially susceptible to some of the trends that you see across retail, but that's not new to us is that we've been dealing with this since the very early days because of the category. We operate in so I wanted to make sure I say, thank you to our teams to our L. P teams our store operations.
Teams and all the support personnel that had been working hard to try to mitigate the losses that we've seen.
Step up here accelerate over the last couple of years again when times get tough.
You know shrink those up we've seen that in retail over a long period of time.
And then on the incentive compensation I would say we for the year, it's going to be flattish versus 2021 again, our performance has been super strong. This year and then back to the operating margin question, which everyone has again, we really can't provide any more quantitative detail at this point in time I would just point back to the.
A long laundry list of different variables.
I described earlier in the call and just that where a pragmatic team we're trying to optimize with all the things that we have oh, the challenges and the opportunities we're going to do our best to lean in where we can and try to optimize and deliver the best.
Overall financial performance that we're capable of whether it's the fourth quarter or 2023, you can rely on us for that.
Thanks, a lot guys.
Alright, with that I'm going to wrap it up I don't want to first. Thank you. Thank you for your interest and engagement in Ulta beauty and I want to close by thanking our more than 40000, Ulta beauty associates for delivering another excellent quarter, while also executing against our strategic priorities. Our teams have been working hard to get our stores digital channels in D. C.
Ready for this holiday season, and I sincerely appreciate their focus and commitment to delivering meaningful guest experiences across every single touch point.
We hope you all have a happy and healthy holiday season, and we look forward to speaking to all of you again in early March when we report results for fiscal 2022 and share our plans for fiscal 2023.
Have a great evening, everybody. Thanks again.
This.
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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