Q2 2023 Ulta Beauty Inc Earnings Call
Speaker 1: Good afternoon and welcome to Ulta Beauty's conference call to discuss results for the second quarter of fiscal 2023. 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.
Speaker 1: If anyone should require operator systems during the conference, please press star 0 on your telephone keypad.
Speaker 1: As a reminder, this conference is being recorded. It is now my pleasure to introduce Ms. Kylie Rollins, Vice President of Investor Relations. Ms. Rollins, you may proceed.
Speaker 2: Thanks, Paul. Good afternoon, everyone, and thank you for joining us for a discussion of Ulta Beauty's results for the second quarter of fiscal 2023.
Speaker 2: Hosting our call today 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.
Speaker 2: 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 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.
Speaker 2: We caution you not to place undue reliance on these forward-looking statements, which speak only as of today, August 24, 2023. 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.
Speaker 2: We'll begin this afternoon with prepared remarks from Dave and Scott. Following our comments, we'll open up the call for questions.
Speaker 2: 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.
Speaker 2: If you have additional questions, please re-queue. As always, the IR team will be available for any follow-up questions after the call.
Speaker 2: Now, I'll turn the call over to Dave. Dave?
Speaker 3: Thank you, Kylie, and good afternoon. We appreciate your interest in Ulta Beauty.
Speaker 3: The older Beauty team delivered strong performance again this quarter, with sales, gross profit and SG&A expenses all better than planned.
Speaker 3: Net sales increased 10.1% to $2.5 billion, and comparable sales increased 8%. Operating profit was 15.5% of sales and diluted EPS increased 5.6% to $6.02 per share.
Speaker 3: In addition to delivering great financial results, our teams executed against our operational priorities.
Speaker 3: During the quarter, we drove growth across all major categories, increased the number of loyalty members, strengthened our brand engagement, and achieved important milestones within our multi-year transformation initiatives.
Speaker 3: Through the first half, our financial results are ahead of our internal expectations, and I remain confident we can deliver against our updated guidance for fiscal 2023.
Speaker 3: I want to express my sincere appreciation to all Ulta Beauty Associates for their continued commitment to delivering great guest experiences, while working collaboratively to execute our ambitious transformational agenda.
Speaker 3: Starting with the discussion of our operational results, we saw strong, solid sales performance across both our store and digital channels, driven by double-digit traffic growth.
Speaker 3: All major categories delivered comp growth for the quarter.
Speaker 3: supported by strong engagement with the overall beauty category, compelling product newness and innovation, and successful execution of cross category promotional events including our reimagined Big Summer Beauty Sale. Building on last year's promotional events, we consolidated key summer events like our popular Jumbo Love and Mix and Match Minis into a broader, more cohesive event with holistic storytelling and impactful messaging. The three-week long Big Summer Beauty Sale drove market disruption, member conversion, and strong sales across our hair care, makeup, and skincare categories. Turning to performance by category, skincare continues to be one of our strongest categories even as we lap on unprecedented growth during the pandemic.
Speaker 3: For the quarter, both Prestige and Mass Skincare delivered double-digit growth. Newer brands, including Bubble, Bioma, and Beauty Counter, and innovation from existing brands like The Ordinary, Drunk Elephant, and Supergoop, contributed to the strong sales results.
Speaker 3: Reflecting consumer interest in dermatologist recommended brands, La Roche Poussé and Cerve continued to perform well and brands like Good Molecules, Hero Cosmetics and Peach Slices continued to benefit from social virality.
Speaker 3: The fragrance and bath category delivered double digit comp growth again this quarter.
Speaker 3: Layering and wardrobing sense is a form of self-expression, especially among Gen Z consumers, continues to drive category engagement.
Speaker 3: NUNAS from Ariana Grande, Valentino, and Burberry contributed to the category's performance, and key gift-giving events like Mother's Day and Father's Day drove growth for luxury brands like Carolina Herrera, Chanel, and YSL.
Speaker 3: The hair care category delivered mid-single digit comp growth driven by newness and guest engagement with our strategic events.
Speaker 3: HairCare focused on bonding, scalp treatments, and other repair solutions.
Speaker 3: as well as products that offer healthy heat styling options continue to drive consumer engagement.
Speaker 3: Trend relevant products from professional brands of Redken, Violage and Matrix, as well as newness from prestige brands, Way and IGK resonated strongly.
Speaker 3: New brands, including exclusive brands LoLaVe, created by Jennifer Aniston, and Donna's Recipe, also contributed to growth this quarter. While still challenged as we lapsed several years of strong growth, sales trends in hair tools improved from the first quarter, driven by compelling newness from Dyson and innovation from BioIonic. Finally, makeup delivered low single-digit comp growth driven by strong performance in mass cosmetics. New brands like Dior, Natasha Denona, and Beauty Counter drove growth during the quarter, while new and exclusive products from a wide range of brands, including E.L.F., NYX, and O.P.I.
Speaker 3: brands including exclusive brands LoLave, created by Jennifer Aniston, and Donna's Recipe also contributed to growth this quarter. While still challenged as we lapsed several years of strong growth, sales trends in hair tools improved from the first quarter, driven by compelling newness from Dyson and innovation from BioIonic. Finally, makeup delivered low single-digit comp growth driven by strong performance in mass cosmetics. New brands like Dior, Natasha Denona, and Beauty Counter drove growth during the quarter, while new and exclusive products from a wide range of brands including E.L.F., NYX, and OPI also contributed positively.
Speaker 3: Compelling events, including our big summer beauty sale, National Lipstick Week, and our foundation event, as well as successful Barbie and Little Mermaid collaborations drove guest engagement. While the performance of Mass Cosmetics benefited from engaging newness and social content, our prestige makeup business was challenged as we lapped the significant impact of the Fenty launch last year. Our services business delivered double-digit comp growth again this quarter, primarily driven by increased appointments.
Speaker 3: Guests are engaging in core cut, color and blowout services as well as newer services, including extensions and scalp and hair treatments.
Speaker 3: We continue to enhance our service offering and this quarter we launched ear piercings chain wide and introduced a new keratin express treatment.
Speaker 3: The beauty category growth remains healthy across both prestige and mass price tiers, as consumers maintain their post-pandemic routines and expand their definition of beauty.
Speaker 3: When we look at the total beauty market, our analysis demonstrates we continue to gain market share. In MassBeauty, we gain share this quarter across all major categories.
Speaker 3: In Prestige, we continue to drive solid gains in skin and fragrance that saw pressure in makeup and hair based on Sirkana's beauty sales data.
Speaker 3: Our proprietary insights suggest consumers are becoming less focused on product pricing tiers and are trading around, choosing to engage with brands that offer on-trend newness and compelling social media content.
Speaker 3: As the only beauty retailer to offer a curated assortment of products from entry-level mass to luxury and everything in between.
Speaker 3: we are uniquely positioned to capture share of the total beauty market as consumers ship.
Speaker 3: We remain confident in the resilience of beauty. Our strategic framework guides our priorities and positions us to expand our market leadership and drive long-term profitable growth.
Speaker 3: Let me share some highlights of the progress we made against this framework in the second quarter.
Speaker 3: Starting with our efforts to drive growth with an expanded definition of all things beauty.
Speaker 3: Newness and innovation are critical growth drivers for beauty. Newness comes to life in the form of new brands, products and product lines, shade extensions and reformulations, and fuels discovery and drives trips and engagement.
Speaker 3: As we seek to continuously delight guests with all things beauty, we continue to expand our assortment with innovative and emerging brands.
Speaker 3: Building on NUNUS introduced in the first half, we have several exciting launches planned for the third quarter, including Half Magic, a vegan and cruelty-free makeup brand created by Euphoria makeup artist Donnie Davey, exclusive to Ulta Beauty.
Speaker 3: Polite Society, a prestige makeup brand exclusive to Ulta Beauty, curated, created by the founders of Too Faced Cosmetics.
Speaker 3: Rabanne, a contemporary and relevant Spanish fashion brand launching cosmetics exclusively at Ulta Beauty.
Speaker 3: Hairstyling tools at accessible price points from Shark Beauty, Panoxyl, a dermatologist recommended brand popular with Gen Z, and Snip, an emerging fragrance band offering gender neutral scents. Available only at Ulta Beauty.
Speaker 3: Reflecting the growth and popularity of luxury products with younger generations, last quarter we launched Luxury at Ulta Beauty in 200 stores and on Ulta.com. The program has exceeded our expectations and we continue to see strong guest engagement with our offerings across all categories.
Speaker 3: Building on this success, we are excited to launch Pat McGrath Labs, a PyPox Luxe Artistry Makeup Brand.
Speaker 3: Pat McGrath is a trusted expert who has shaped and disrupted the cosmetic category.
Speaker 3: Now, let me share an update on our key cross-category platforms which lean into broader emerging trends in beauty. Facts that are good for the world, inclusivity and wellness.
Speaker 3: As we seek to provide guests with a diverse assortment that reflects their personal values and individual needs, we continue to expand our assortment of brands featuring clean, cruelty-free, and vegan ingredients.
Speaker 3: leveraging sustainable packaging, and driving positive impact through our Conscious Beauty platform.
Speaker 3: At the end of the quarter, 314 brands were certified in at least one pillar, with more than 270 brands certified in multiple pillars.
Speaker 3: To ensure all guests feel connected and reflected at Ulta Beauty, we continue our important efforts to drive inclusivity.
Speaker 3: In addition to amplifying our portfolio of IPOC brands through informative marketing and in-store presentations,
Speaker 3: This quarter we hosted a summit for our BIPOC brands, providing them with opportunities to network with peers while learning more about the beauty industry and operational best practices.
Speaker 3: Lastly, as the importance of beauty as a form of self-care and wellness continues to build, we enhanced the Wellness Shop assortment with the launch of two exciting supplements.
Speaker 3: Lemmy Gummies, created by Kourtney Kardashian, and the introduction of Big Brain Probiotics from Love Wellness.
Speaker 3: Turning now to our second strategic pillar, All in Your World, we are enhancing guest experiences across all of your
Speaker 3: All of our touchpoints.
Speaker 3: Guests continue to shift effortlessly between physical and digital channels depending on their individual needs, and we are committed to meeting them wherever they are in their beauty journey.
Speaker 3: Reflecting our efforts to enhance our buy anywhere, bill anywhere capabilities, we have expanded our same-day delivery option to essentially every store, and improved our store fulfillment process to drive greater efficiency and speed.
This is a significant milestone in our multiyear effort to elevate our digital experience in a way that positions us for long term growth in this critical channel.
Finally, we completed the P O S upgrade in all stores.
While our transformation agenda is not finished we have made significant progress and I am proud of how our teams have worked to execute our plans, while eliminating disruption to guests and associates.
Looking forward, we continue to operate in a dynamic environment.
While consumer confidence has strengthened there are signs pointing to moderating growth going forward.
Many consumers have begun to reduce overall spending credit card debt remains high and the restart of student loan repayments is approaching it is unclear. How these factors will impact consumer behavior in the near term.
But despite these factors beauty has remained a bright spot.
Based on <unk> beauty sales data total U S beauty sales for the first half of 2023 increased double digits compared to the same period last year with prestige beauty channels delivering higher growth in mass beauty channels.
Looking to the rest of the year, we believe growth for the U S beauty market will remain healthy, but normalize into the mid single digits as we lapped two years of strong growth experienced less impact from pricing and face more economic uncertainty.
As category growth normalizes, we continue to expect promotional activity within the category will also normalize.
Over the last two years unprecedented category growth and strong demand limited promotional activity as a result, the promotional environment in 2021, and 2022 was unsustainably low reflecting these factors we planned for higher promotional activity. This year, but continue to expect promotions will remain well below.
2019 levels.
In closing we operate in an attractive and growing category, we have a strong proven business model and a winning culture and outstanding teams.
Through the first half of fiscal 2023, we have exceeded our internal financial expectations and we remain confident we can deliver our updated expectations for the rest of the year and.
And now I will turn the call over to Scott for a discussion of the financial results Scott.
Thanks, Dave and good afternoon, everyone.
We've shared we delivered second quarter financial results that were ahead of our expectations strong sales growth supported by healthy guest engagement and strong in store sales performance drove better than expected gross margin SG&A spend was also lower than plan, resulting in an operating margin of 15, 5%.
Turning to the P&L net.
Net sales for the quarter increased 10, 1% driven by 8% growth in comp sales strong new store performance and solid growth in other revenue.
Transactions for the quarter increased 9%.
Really driven by healthy traffic both channels.
Average ticket decreased 1% with a decline in average units per transaction more than offset the impact of higher average selling price.
The increase in average selling price was primarily driven by the impact of retail price increases.
Many of which were executed last year.
We estimate price increases contributed about 300 basis points and the overall comp.
During the quarter, we opened three new stores and relocated two stores. In addition, we remodeled three stores.
Second quarter gross margin decreased 110 basis points to 39, 3% compared to 44% last year.
The decrease was driven by lower merchandise margin and increase in inventory shrink and higher supply chain costs.
Overall merchandise margin was lower due primarily to increased promotional activity unfavorable category mix and less benefit from the timing of retail price changes.
While promotional activity continues to normalize it is important to note that overall promotions remain well below 2019 levels.
Inventory shrink continues to be a headwind this quarter.
Our efforts to address shrink are having an impact but the overall environment remains challenging.
Today, we have the new fragrance fixtures and more than 50% of our stores and expect to have these installed in 70% of the fleet by year end.
Remained focused on taking action in areas, we can control, including continued investment in fixtures associate training staffing as well as operational improvements and leveraging our influence to enact broader changes that will disincentivize unlawful behavior.
Supply chain costs were higher primarily driven by ongoing investments in our supply chain transformation.
As we made progress on the retrofit of our Dallas and Greenwood distribution centers and prepared to open our new market fulfillment Center in Greer South Carolina.
These gross margin pressures were partially offset by strong growth in other revenue and leverage of store fixed costs due to top line sales growth.
SG&A increased 12, 4% to $600 7 million.
SG&A increased 40 basis points to 23, 7% compared to 23, 3% last year.
The increase in SG&A as a percent of sales was driven by deleverage in corporate overhead due to strategic investments planned increases in store payroll and benefits and higher store expenses, which more than offset lower incentive compensation.
Corporate overhead expense deleveraged in the quarter, primarily due to investments related to our strategic priorities, including project SOR other capabilities and you'd be media.
Year to date through the second quarter, we have invested a little less than half of our planned $60 million to $70 million of incremental spend to support our strategic initiatives.
The increase in store payroll and benefits was primarily due to the impact of planned growth in average wage rate and increased staffing levels compared to the same period last year.
Incentive compensation was a tailwind in the quarter, reflecting operational performance that is more in line with our internal targets compared to last year's significant outperformance.
Operating income for the quarter was $391 6 million flat to last year as a percentage of sales operating margin decreased 150 basis points to 15, 5% compared to 17% last year.
Diluted GAAP earnings per share increased five 6% $6 <unk> per share compared to $5.70 per share last year.
Turning to the balance sheet and cash flow statement.
Total inventory increased 9% to 182 billion compared to $1 67 billion last year. In addition to the impact of 37 additional stores. The increase reflects inventory to support higher demand increases in product costs and new brand launches.
Capital expenditures were $95 million for the quarter compared to $49 4 million last year the.
The increase in capital expenditures was primarily related to investments in it and supply chain to support our transformational agenda as well as merchandising investments to support the rollout of our luxury assortment and brand expansion.
Depreciation was $61 9 million in the quarter compared to $60 9 million last year, we ended the quarter with $388 6 million in cash and cash equivalents.
During the quarter, we repurchased approximately 594000 shares at a cost of $275 5 million.
Year to date, we have repurchased one 1 million shares at a cost of $559 million.
At the end of the second quarter, we had $541 million remaining under our current 2 billion repurchase authorization.
Moving to our outlook.
We are updating our guidance for fiscal 2023 to reflect our better than expected second quarter performance.
We have raised our top line expectations and now project net sales will be between 11.05 and $11. One 5 billion with comp sales growth between four five and five 5%.
Our updated outlook reflects our strong first half performance, while continuing to consider risks and uncertainties that could impact demand in the second half of the year, including rising consumer debt levels and the expected resumption of student loan repayments we.
We continue to expect comps will moderate to the low single digits in the second half of the year and we remain on track to open 25 to 30, new stores and renovated relocate 20 to 30 stores this year.
Reflecting our year to date performance, we've raised the low end of the range of operating margin and now expect.
<unk> operating margins for the year will be between $14, six and 14, 8% of sales.
Deleverage to come fairly evenly from both gross margin and SG&A or.
Our expectations reflect the continuation of the trends we experienced through the first half of the year around shrink promotional activity and supply chain costs as well as greater headwind from lapping the merchandize margin benefits from the timing of retail price increases last year.
For modeling purposes, we expect third quarter operating margin will be meaningfully more pressure than what we saw in the second quarter as we lap greater pricing benefits in the third quarter last year as well as a shift of investment spending from Q2 to Q3.
As a result, we expect earnings per share for the third quarter will be lower than last year.
Reflecting these updated assumptions, we now expect diluted earnings per share for the year will be between $25 and Tencent and $25 60.
As a reminder, fiscal 2023 is a 53 week year, we anticipate the additional week will add between $165 million to $175 million in sales and approximately 40 of earnings per share.
In closing.
Our results through the first six months of fiscal 2023 highlights the ongoing power and resilience of our business model.
To thank our associates for their dedication and commitment to keeping our guests at the center of all we do and giving them more reasons to shop Ulta beauty as.
As we look to the future we are focused on capitalizing on the growth opportunity in the beauty category and executing our strategic framework at all.
Liver long term sustainable growth for all our stakeholders.
And now I'll turn the call back over to our operator come out or in the Q&A session.
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A reminder, we ask that you limit yourself to one question and reenter the queue. If you have additional questions.
One moment, please while we poll for questions.
Okay.
Thank you. Our first question is from Ashley Hogan with Jefferies. Please proceed with your question.
Hi, Thanks for taking my question to start maybe any details you can share on how traffic progressed throughout the quarter and what you're seeing now in August and then also on the fragrances being locked up have you seen any adverse effects on sales.
Yeah.
Yeah, absolutely for.
For the quarter, we saw a strong traffic throughout the quarter with double digit comp.
<unk> and we continue to be pleased with the engagement that we're seeing and we saw our actual comp performance.
Sequentially accelerate through the quarter as well.
And all of those trends are reflected into our into our updated and elevated guidance or for the full year.
On fragrance.
The Oh, I'll, let kishore kind of discuss what we're doing in fragrance and how that's impacting our business yeah actually we've locked up about 50% of our stores right now what we're seeing is another additional stores that we rolled out the luxury fragrances cases before we actually saw sales.
Cause more in stock with the product and we had it available. So we're staying very close to that we're also investing in labor.
B cells prevent it prevented us from the gas being able to purchase so that's a little bit of the investment in labor that you currently have.
Got that.
In these stores, we are I think our labor that he has.
To make sure that we're able to take care of the Guy. So we're staying close to the bottom line is that we're pleased that we're able to maintain or in fact for our guests and quite frankly, it's a bad actors from Cummins Westport.
Great. Thanks.
Thank you. Our next question is from Michael Baker with D. A Davidson. Please proceed with your question.
Yeah.
Thanks, I'm just curious you said you expect the beauty industry to grow mid single digits, yet you're only expecting comps to be up low single digits and even if you added some store growth.
Still expect them to grow maybe up but seemingly below the industry I don't suppose you guys think you're losing share. So I'm just wondering if you could help flesh that out a little bit.
Yeah, I'd say, yeah, we do anticipate continuing to gain share we've done so through the first half of the year and that is that is our outlook.
The commentary is really as we look into the second half of the year are you always see some strength engagement continues to be high certainly our business is performing very well, we're attracting new members were growing across all key.
Categories, both and then in both ecommerce and stores, but we also see some uncertainty as we get in later into a into the year. So while we're confident in the category are you where are you know just are incorporating into our outlook a sinful.
Yes, some of that and you know for the full year, we're looking at our.
Revenue in the plus 8% to 9% range, so where we anticipate gaining share for the year being ahead of the total category growth.
Yeah that will be our plan.
Thank you.
Thank you. Our next question is from Olivia Tong with Raymond James. Please proceed with your question.
Thanks, My first question is around them.
Questions like that because you mentioned that you're still seeing strong growth in both.
Prestige and mass, but only a macro makeup, but you mentioned that the launch of hunting in a year ago with a big contributor yourself. If you excluded that are you seeing anything different there.
And then going forward you know as you think about your expectations on growth in mass versus prestige what implications might that have on comp in your opinion. Thank you.
What was the last.
Part of that question what was could you repeat the question.
And just the implicate implication on comp if you know what youre thinking in terms of growth of mass versus prestige across.
Their stories and what implication that might have in terms of comp that's math becomes a bigger piece of the driver.
Well, yes, we are.
As Ed discussed.
As discussed we've seen strong performance really across our entire assortment as we look at it but mass has been a bit stronger for a couple of quarters now in our across our business and thats driven largely by.
Strong consumer engagement across some key brands and makeup.
Else Nicks and some others are are really hitting the mark with great innovation, great marketing, great consumer engagement and the fact that we offer the full assortment.
From mass to prestige is a real benefit we're able to capitalize on strong trends and strong engagements across all aspects of that in skincare, we're seeing brands, particularly in the dermatologist recommended area driving strong growth and that's great. We strong player for us as we look forward.
It's always our intent to continue to adapt and adjust and lean into the areas that are driving growth find ways to strengthen those that may be more challenged but.
We're confident in the outlook going forward and the fact that we have both is unique of course, you know that but the fact that we're the only ones that offer mass masstige prestige and a growing established now business in luxury we're seeing strong points across all will continue.
To flex and adapt and incorporate it into our comp guidance is is our ability to continue to drive growth, but through the through the first half of the year. We were really pleased with the the mass performance in several brands driving strong growth and continue to lean in and bring innovation into the prestige side of the business and collectively it's working to allow us.
To gained share across total beauty.
Thank you. Our next question is from Kate Mcshane with Goldman Sachs. Please proceed with your question.
Okay is your line on mute.
And when we go to the next person. Thank you. Our next question is from Anthony true.
Cooper with loop capital markets. Please proceed with your question.
Good afternoon.
That's on the solid results and thanks for taking my question. So just a real quick one you mentioned luxury in fact, it's exceeding your expectations you mentioned marching Pat Mcgrath Labs I guess.
Oh, and one related question and just two parts first off.
Once these luxury what percentage of your assortment I guess is luxury and in the stores that it's an easy it's big enough at this point to be a comp driver.
Yeah.
We won't break out exact percentages again to reiterate it's in 200 stores, we're really pleased with it.
Our strong assortment across a number of the very best brands and in luxury should know your Natasha Danone. Our hourglass are a extension of Sonora Chanel with Chanel numerous room lancome absolute now Pat Mcgrath are a luxury fragrance business with brand.
Like YSL, and Tom Ford and Victor and Ralph.
So we won't get into exact percentages.
But it's a you know it is a an important part of our overall strategy. We know there's growth in the luxury side of the business we've been in luxury for a while but now with this expanded presence. It is a contributor to our total comp.
We're excited about the addition of Pat Mcgrath and we will continue to innovate and evolve and you find ways to drive further growth down the road. So yes, we think its control we know it's contributing to our growth and we're excited about the our guests' response to an expanded luxury experience.
Thank you.
Thank you. Our next question is from Christopher <unk> with J P. Morgan. Please proceed with your question.
Thanks, Thanks, good evening a layered.
Gross margin question, so how did shrink in the promotional environment play out in the second quarter, you know relative to your expectations have you changed.
Any of your expectations around those line items in the back half and do you expect any improvement perhaps in the shrink line and then.
Scott could you remind us of the price cost headwind that we faced in the third quarter, because I know that was pretty significant last year. Thank you.
Sure Chris So yeah versus we just say again versus our expectations for the quarter were very happy with the overall.
Actual results, we were able to deliver so breaking.
Breaking it down a little bit more I'd say merchandise margin was better than what we expected until that speaks partially to the promotional lever that people are focused on here. So again.
Generally better than what we expected. So we can lean in and leave out that's one of the great strengths of our business being able to have real time information and be able to take quick action and agile I say shrink generally directionally about the same as what we saw in the first quarter as we look out through the rest of the year, we don't really.
We're not anticipating a significant turn in expectations, there and we'd expect it to be tough the rest of the way I will say, maybe the fourth quarter, maybe slightly less negative than it was early part of the year because remember last year in the fourth quarter was the first time, we really all about and quantified what the shrink impact was so weak.
It had a little bit of a catch up there over and then fixed store fixed costs, we talked about that was stronger than what we used to go into an expectation because sales were a bit stronger than we thought and then channel mix overall helped us as well.
As we look to think about gross margin the second half of the year I'd say the drivers the headwinds are consistent with what we've seen in the first half of 2023 again, we're taking a prudent approach as we always do with our guidance and we will work hard to do better than that.
And then the price cost and <unk>.
Yeah, so that was the.
We.
Third quarter last year, where we saw a significant step up in our pricing.
And the pricing increases across the portfolio and really the margin benefits started really rolling through in the second quarter and into the back half of the year. So this is really the toughest anniversary point in a year is ahead of us and that's why we're calling out third quarter third quarter's kind of peak on a <unk>.
<unk> had different France again every year is a little unique but you know the third quarter now we've got we've got a little bit of delays in some of our project work, which is shifting back some of our I T expense into the third quarter and a lot of that flows through SG&A. So we'll see more pressure there than we saw earlier in the year and then likewise with gross margin.
A little more moderate sales growth expectation, coupled with cycling over the margin benefits last year from the price increases step off in the back half of the year, it's putting more pressure on third quarter than maybe some would expect.
By the time, we get in the fourth quarter and get back to focusing on sales and holiday and we expect that to bounce back in a healthy manner.
Got it thank you.
Our next question is from Adrienne <unk> with Barclays. Please proceed with your question.
Great. Thank you very much Scott and then stay on that topic with the third quarter.
If I'm not mistaken it seems like about 10 to 12 million of the SG&A spend perhaps is moving into the third quarter and if we have a little bit more gross margin pressure does that imply the EPS to be down sort of high single digit range. Just wondering if I'm in the right ballpark.
Yeah, we don't we don't want to get into quantifying it specifically, Adrian but I'd say directionally, you're you're in the right ZIP code. So yeah on the SG&A side, that's roughly another shift back into the third quarter on some of the it spend and yeah.
Operating margin is going to be down significant you know meaningfully versus what we saw earlier this year and that's going to result in a.
Negative EPS growth year over year for the third quarter.
Very helpful. And then just following through with the SG&A.
So can you help us walk through the season I know theres four phases of our packaged tour and all of the other investments it seems like Youre running dual strapped curious perhaps on some of the D. C. And then the website or let's call it sort of half of the year, how should we think about that rolling off there's a lot of it's kind of redundant people go away.
Next year, I know, you're not giving guidance, but just to help us shape.
SG&A growth looks like next year, because it seems like it's come down a lot on the consensus I just wanted to make sure we had that correct in my mind. Thank you.
Well Adrian I'll start and then I'll kick it over to Scott. So yes, we're in the middle evident Fisher transformational attention that's for sure.
You know and part of this is really positioning all parts of the organization for our future.
So really pleased with how our progress.
Working but anyway. He was taken on this large scale project you definitely have timing shifts that happened.
Because we want to make sure that what we're seeing for addressing and moving we're really limited in our distraction disruption for our guests and also apart. So we've adopted a few of our timelines and that shifted a couple of the projects from Q2 into Q3, and we might even see some shifting from Q3 into Q4.
Well, we're still on track with plan to 60 to 70 million incremental to the prior year and while we've got some of those shifts we still are very confident that we're going to stay with our overall timeline and how things wrapped up by the right timeline for next year, which is more mid 2024, and I'll turn it over to Scott, Yeah, and I had in your <unk>.
Right, we're not providing guidance for 2024 here today, but yeah investors should expect that we will.
Hope of a re cool benefits from these significant investments that we're making in our core systems here in <unk> 2022 into 'twenty three and then we're gonna see benefits materialize in 2024 and beyond again, you've heard US talk about these are major initiatives here that we expect to see dividend for <unk>.
Number eight years into the future, but I would you know what.
I also caution investors just to be you know prepared I mean, there's we are in the business of growing out the beauty for the long term and so there's plenty of other great growth initiatives out there that we've got in the queue and we're ready to go tackle as soon as we get through some of more of this I call. It core transformation work here in 'twenty three in early 'twenty.
Thank you that's very helpful best of luck.
Thank you.
Our next question is from Kelly Crago with Citi. Please proceed with your questions.
Hi, Thanks for taking my question I, just had a couple of quick ones on on category.
Just I make up it looks like he gets growth decelerated from a high singles and like you can maintain oven tiki was that driven by the slowdown.
Question is will that prestige pitbull to salary and and how should we think about makeup growing are in.
And just secondly on skin, we've heard from some of the brands that maybe there is slowing growth in that category that you you do but you know under index versus the category overall ticket just curious whether that dynamic can help offset maybe some weakness.
And we're seeing we're starting to see in skin and any thoughts on the growth that would be great. Thank you.
Yeah, I'd say in makeup.
Main driver as well are we're bringing a lot of innovation and newness across that.
<unk> portfolio lapping really with one of the biggest launches in the history of Ulta beauty with Fenty lapping that fully in the second quarter is probably the biggest driver.
We're excited though as we look forward I mentioned, a few launches that we that we have coming out.
Rabban, Pat Mcgrath a light society.
Among others that are many of which are exclusive to ulta beauty or are coming into our business in the in the second half of the year, but we anticipate as we lap that launch. We are we'll continue to see pressure on prestige mass continues to drive growth behind great innovation great engagement.
And so we're pleased with the total makeup.
Side of the business even as we.
Address some of the pressure and lapping our previous launches and the skincare side. Yes. We are we have somewhat lower share than we do in makeup but are you know we have established over time, a meaningful share position and the fact that we're able to continue to drive growth is again, a testament to our model our ability.
The strength, we have across price points, we're seeing.
Strong healthy growth in both mass and prestige are really leaning into dermatologist recommended space and and believe that we can continue to drive growth going forward and and and continue to drive share. The category. We think is healthy as I said with the total beauty category we do.
We anticipate some moderation.
It's unlikely to see a double digit growth Oh forever, but we're leading and we've got a great skin business. Our merchants continue to bring strong innovation. Our store teams are doing a great job educating our guest and we're delivering a lot of growth and we see more coming.
Thank you.
Thank you. Our next question is from Kate Mcshane with Goldman Sachs. Please proceed with your question.
Hi, good afternoon, Thanks for giving me another chance here to ask a question.
Wonder if you can just talk a little bit about the strategy behind combining our promotional events like you did this past quarter and did you see a bigger lift as a result of that change versus last year and will there be any similar approaches to some of your promotional events being taken in the second half.
Great Yeah, I almost use your silence to answer any question that I wanted to.
Earlier case, but glad you got back in the queue. Yeah. The yeah. We're excited we I think what what we did in the second quarter of what our teams did a merchant market.
Marketing and digital store teams our go to market teams really where they are continually evaluating how we can get better and how we can.
Elevate the impact in the summer sale as an example that we had strong events solid events that we're delivering for years, but the team through great consumer insights continued understanding of guest behavior AR.
In the end a full understanding of what unique strengths, we bring to to to the table reevaluated that in it and we're pleased with the results of that event, the big summer sale as well as really our entire promotional strategy.
It was it was not a.
A huge acceleration in promotional intensity as much as a smarter strategy and it worked our guests engage we attracted new members.
Delivered strong comp growth.
We saw strength in both stores and on our ecommerce business traffic was healthy so oh.
Frankly, it didn't surprise me because I know how the team continues to look for ways to elevate and its another example of great strategy, leading to strong execution as we look into the second half of the year. We're evaluating as we always do every aspect of our of our go to market strategy.
We continue to.
You know evolve our efforts will adapt to no competitive changes consumer insights and make our make sure we're delivering at a high level.
Sunday Gate starts 21 days of beauty.
One of our biggest events of the year end and I think youll see as that rolls out.
Graham that's been around for a while continued innovation in ways to engage our guests in new ways. So we're excited to get that going.
Thank you.
Thank you. Our next question is from Oliver Chen with TD Cowen. Please proceed with your question.
Hi, This is Neil here on for Oliver.
Would love to hear more about your thoughts on the broader beauty consumer.
You want me to comment about consumers are being less focused on pricing and penetrating around different price points. So I'm just curious how that behavior of holds against the different macro headwinds you mentioned, particularly student loans you know what.
Is your exposure to that or how do you quantify that impact as we get closer to the October time frame when that becomes more material.
Yeah well.
I'd say first of all.
We are where we're just pleased overall with the continued engagement that Julien.
Beauty enthusiasts or are shown for this category come in and out of the pandemic for these last.
A couple of years now just a high level of engagement you you know how low over the long term.
50 years ago. This has been a strong growth consistently grow growing category because of the emotional connection that are that it plays in our guests' lives. The importance it has and how they express themselves to the world and that is more true now than ever and some of the behaviors and engagement tools that emerge coming out of the pit.
Debit continue to fuel the category strong innovation strong connection Oh through marketing and consumer tools and a increased understanding of the role of beauty to wellness and self care. So when we look at the consumer going forward, we remain confident in the long term.
Outlook for this for this category and the strength of the beauty enthusiast, a fuel that going forward as I mentioned in the in my comments.
Comments are there's a lot of uncertainty there has been frankly for the last couple of years, but we look into the remainder of this of this year. We know we're laughing we continue to lap strong growth. We've been on this strong are strong.
Category growth for a while now we have no more changes coming including a student loan so where are you cautious and certainly watching carefully how that.
Evolves historically, it's been difficult to tease out any kind of economic stimulus shift and how directly that impacts the category of our business.
And our business and the category itself has been largely resilient not immune but largely resilient. So when we look out I guess I'd say, we're optimistic but watching closely and carefully staying really close really close to rguest understanding what's what's happening in their lives and what's influencing their decisions and making sure.
We're adapting last thing I'd say and I know I've said this many times, but our position our unique model of having all price points and a really accessible experience both in store and online positions us well so even if their shifts even if there are pressures on consumers.
Our history says we are able to adapt and I know that's the strategy that we're implementing to make sure. We're here for our guests to deliver regardless of what goes on in.
In the broader environment around them.
All I think we have time for maybe one more question.
Okay.
Thank you. Our final question is from Steven Forbes with Guggenheim Securities. Please proceed with your question.
Good afternoon, Steve.
Steve Scott you both mentioned in your prepared.
Remarks, the expectation for promotions remain well below 2019 levels.
I was hoping we could just maybe clarify that statement does he did ice.
Ladies and 2023.
Is it meant to be a longer term comment.
And as we think about merchandise margin risk in the model.
The way to frame, what sort of structural change in promotional activity in the category means for the margin profile in and of itself.
Yeah. So when we're talking again this has been our evergreen topic I think with investors now for quite a while.
Waiting back to 2019, so the business is in a much different position today than it was back in 2019 again.
For those that have been following 2019, we had some major disruption in the middle of the year in the makeup category unexpected deceleration. There there were channel mix headwinds that we were dealing with is a business. There was some investment in some international expansion.
That was causing some significant deleverage on the business and so you know during the course of the pandemic. Some initiatives that had been started pre pandemic, but during the pandemic, we were able to take advantage of making sure that we fully leverage some of our cost optimization initiatives by way of ESG and now continuous improvement.
Initiatives layered on top of that I would say.
The scale of the business much larger today than it was back in 2019, so we're going to get the benefit of the fixed store cost leverage in the base business are far and above what we were looking at pre pandemic things around our capabilities like ship from store and opus capabilities that really did not exist in any meaningful way.
Back in 2019 that now you heard us say again today, 30% of those digital sales are being serviced out of our store fleet so much more efficient.
Delivery to the consumer and much better overall margin profile of those sales things like our credit card program, our Ulta beauty at target relationship you be media new business for US just really out of the starting gate here over the course of the last year puts us in a much better position overall than we were back in those.
So again, that's not promotion directly but those all of those elements play a role in gross.
Gross margin and operating margin and expanding that over the course of time. So we feel you know we feel confident that.
The promotion levels again, they're gonna moderate we've been talking over the last couple of years that are extraordinary environment that we saw in 'twenty. One 'twenty two was not sustainable for the long term in that as people got back in the business and people went back in malls and other retail outlets at the promotional level was probably going to come back.
Back to us a little bit and that's kind of what we're seeing play out today. So again there is nothing unexpected here it within our forecast our plans for the year, we're moderating in navigating our way through that in an effective manner and again nothing I don't think anything that I.
It should be overly concerning to investors again, we're confident that we're going to be able to manage our way through that with new capabilities new lines of business.
Our loyalty program and CRM capabilities being much more mature today than they were back then the prepayment fees. So we're confident we're going to be able to deliver a healthy operating margins in that 14% to 15% range on a very moderate growth expectation of three to five so feeling good about our position and where we're headed.
For the future.
Great well. Thank you all for joining US today appreciate your interest and engagement and Ulta beauty I want to close by thanking all of our Ulta beauty associates for their continued care for our guests while delivering another quarter of strong financial results. We look forward to speaking to all of you again, when we report results for the third quarter.
On November 30th.
Thanks, again and have a good evening.
This concludes today's conference you may disconnect your lines at this time. Thank you for your participation.