Q3 2023 Ulta Beauty Inc Earnings Call
Good afternoon, and welcome to the Ulta Beauty's conference call to discuss results for the third 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. If anyone should require operator assistance. During the conference. Please press star zero on your telephone keypad. As a reminder, this conference is being recorded it is now my pleasure to introduce MS. Kiley Rawlins, Vice President of Investor Relations Ms. Rawlins. Please proceed.
Thank you good afternoon, everyone and thank you for joining us for a discussion of Ulta Beauty's results for the third quarter of fiscal 'twenty twenty-three hosting our call today are David Campbell, Chief Executive Officer, and Scott <unk> Chief Financial Officer.
He said Steelman, President and Chief operating officer will join us for the Q&A session.
E Bow senior Vice President of Finance is also on the call with us today.
Before we begin I'd like to remind you of the company's Safe Harbor language. The statements contained in our conference call, which are not historical facts may be deemed to constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.
Actual future results may differ materially from those projected in such statements due to a number of risks and uncertainties all of which are described in the company's filings with the SEC.
We caution you not to place undue reliance on these forward looking statements, which speak only as of today November 30th 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 well.
We'll begin this afternoon with prepared remarks from Dave and Scott and then open up 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. Please re queue as always the IR team will be available for any follow up Chris.
After the call.
Now I will turn the call over to Dave Davis.
Thank you Kiley and good afternoon, everyone. We appreciate your interest in Ulta beauty.
I'll start today with comments about our CFO transition plans and then discuss our third quarter performance then Scott will review the financial results and our outlook.
Starting with the succession plans, we announced this afternoon.
After nearly 20 years with Ulta beauty in more than a decade as CFO Scott Sider, Stan has shared with US his decision to retire effective April one 2024.
His early days, helping take Ulta beauty public and throughout the last 10 years as CFO Scott's impact on Ulta beauty has been tremendous he's been a passionate steward of our business and the strong and constant shareholder returns achieved during his tenure are a testament to his leadership and disciplined approach to driving profitable.
Gross.
Want to express my sincere gratitude to Scott for his partnership and his remarkable contributions to our business.
He has been an exceptional partner to me and an inspirational leader for our team across the company.
Well Scott's retirement, I'm very pleased to announce that Paulo, Evo will be our next chief financial Officer.
Paula is a dynamic finance executive with broad industry experience and I am confident she is the right leader for this next chapter of Ulta Beauty's growth.
Since joining the company in 2019, she has established herself as a trusted partner and visionary leader.
Her deep understanding of our business experience, leading large finance organizations and strong commitment to nurturing talent with an inclusive culture make her the ideal person to serve as Ulta Beauty's next CFO.
<unk> will be a great addition to our dynamic executive team and I look forward to partnering with her as we continue our growth journey.
This announcement represents another great succession story for Ulta beauty I am grateful to Scott for been intentional and thoughtful and ensuring we have a seamless plan for this critical leadership role and I'm excited that Paulo will bring her business first mindset influence and energy to the executive team.
Okay now, let's talk about our third quarter performance.
The Ulta beauty team delivered strong performance again this quarter with sales gross profit and EPS, all exceeding our internal expectations. Our traffic trends remained healthy our brand awareness and loyalty program reached all time highs and our transformational initiatives are on track I want to thank all Ulta beauty associates for maintaining their focus.
On creating great guest experiences and delivering these results while executing against our transformational agenda.
For the quarter net sales increased 6.4% to 2.5 billion operating profit was 13, 1% of sales and diluted EPS was $5 seven per share comp.
Comparable sales increased four 5%.
As discussed on prior calls we expected the sales growth to moderate from the first half as we lapped two years of strong double digit comp growth.
Comp sales growth for the quarter was driven by approximately 10% growth from our digital channels stores delivered low single digit comps as we lapped high teen growth last year store traffic remained healthy increasing in the high single digit range.
Turning to performance by category Skincare was again, our fastest growing category driven by double digit growth in mass and prestige segments.
Beauty enthusiasts have maintained their skincare routines, while also experimenting with new regimens consumer interest in moisturizer, Serums and cleansers is driving growth and brands leading into these trends like drunk elephant good molecules and Cosrx contributed to our strong results.
Dermatologists recommended brands also continued to resonate driving growth for brands like La Roche Jose CFO and Dermatologic huh.
The fragrance at Bath category delivered low double digit growth newness from Ariana Grande Burberry and Y S. L contributed to the categories performance prestige brands, Valentino and Carolina Herrera and luxury brands. So now in New York also drove meaningful growth.
Sales in the makeup category were flat with mid single digit growth in mass makeup offsetting a modest decline in prestige makeup.
New brands like Dr. Natasha Dodona in beauty counter and existing brands with compelling newness and innovation, including Alf dubious plays Mac and OPI all delivered growth during the quarter.
While many mass brands continued to benefit from engaging newness and social engagement are prestige makeup business was more challenged as we continued to lap the strong impact of last year's Fenty launch.
Finally comp sales for the hair care category decreased in the low single digit range, primarily driven by a decline in hair tools.
Newer brands, including exclusive brand Lola Weil, and shark beauty, and donna's recipe as well as newness from not your mother's and way deliver growth for the category trend relevant products from Reg Canaan biologic resonated strongly with guests, while social morality drove growth for I G K and mail.
Yes.
Comparing to mass beauty dollar sales for the 13 weeks ended October 28, 2023, we continue to outpace the growth of the mass market accord interests are kind of data.
In prestige beauty, our share gains in skincare and fragrance were offset by softness in makeup and hair according to sarcoma.
From a channel perspective, we gained prestige beauty share across digital channels, but were more challenged in brick and mortar channels, reflecting the impact of increased distribution for prestige beauty.
While these dynamics increased competitive intensity in the short term we are confident our sales driving strategies will support our ability to capture more market share over the long term.
Our services business delivered high single digit comp growth, primarily driven by engagement and core services, including haircuts Blowouts and makeup services ear piercing one of our newer services also performed well and Salon, Backbar, takeovers, which give our stylists and opportunity to introduce brands to guests.
To drive product attachment in new guest acquisition for participating brands.
Unlike other discretionary retail categories. The U S beauty category has consistently driven growth overtime based.
Based on data from Euro monitor in the 15 years prior to the pandemic. The U S. Beauty category grew in the low to mid single digit range every year, except during the great recession, when the category experienced low single digit declines and in 'twenty 'twenty when the category declined 6%.
In 2021 and 2022 the category experienced unprecedented double digit growth as consumers recovered from the pandemic and as we lap. This strong growth. This year consumer spend has remained healthy.
While we expect growth will continue to normalize to historic ranges. We remain confident the category will continue to grow barring a macro economic event.
In addition to factors that have driven the category historically, including a strong emotional connection with consumers newness and innovation and societal changes today consumers are thinking differently about the raw beauty can play in their wellness routine, which we believe will drive increased usage for the category.
As we think about the opportunity to expand our market leadership and drive long term profitable growth, our strategic framework guides, our priorities and focus let.
Let me share some highlights of the progress made this quarter.
Starting with our efforts to drive growth with an expanded definition of all things beauty during.
During the quarter, we enhanced our assortment with trend relevant brands in every category and makeup we introduce luxury brand Pat Mcgrath labs expanded our presence with Mac to nearly all stores launched several exclusive and innovative brands, including half Magic polite Society and robot.
In skin care, we launched Pan OXXO, a dermatologist recommended brand popular with Gen Z and hair care, we launched short beauty and innovative brand of hair styling tools at accessible price points and in fragrance, we launched sniff and emerging brand offering gender neutral sense available only at Ulta beauty.
Building on our long term partnership with Chanel and other other luxury fragrance brands, we see an opportunity to expand our luxury offering and to makeup and skincare in Q1, we launched luxury at Ulta beauty in our member analytics confirms that our new luxury assortment is driving Incrementals city and increased <unk>.
<unk> per member.
In addition to strengthening our core assortment, we are leaning into broader trends in beauty through our cross category platforms.
We continue to expand our conscious beauty platform at the end of the quarter more than half of our brand portfolio was certified in at least one pillar with 260 brand certified more than one pillar.
Newly certified brands include Cosrx loving Tan in polite Society. We also increased our portfolio of Bipack brands welcoming Pat Mcgrath labs, curl mix better world fragrance outs by Drake and pound cake to the portfolio Andrew.
And we expanded our wellness assortment with the launch AD of at home spy tools from Love Scrubbed solar wave and skincare.
In addition, we added we expanded the wellness shop to an additional 500 stores and refresh the presentation with elevated aesthetic improved navigation and more storytelling graphics to inspire and educate our guests how to connect to wellness in their everyday lives.
Guests are moving effortlessly between physical and digital channels and we are investing to enhance the guest experience across all touch points.
We have been on a multi year digital transformation journey to upgrade our infrastructure and deliver a more engaging and seamless digital guest experience, while also positioning future growth.
In August we completed a significant step in this process with the transition of our digital commerce experience, including card motions checkout and member of Cat account data to our new architecture.
Overall, our team successfully executed these changes and I'm pleased to report our new digital experience performed very well over the high demand Thanksgiving weekend, including cyber Monday.
The modernization of our digital technology ecosystem is nearly complete enabling us to elevate and optimize our existing guest experience, while driving digital innovation utilizing a modern agile approach.
In addition to our digital platforms. We are also enhancing our in store experiences. Our member data demonstrates that an excellent guest experience drive spend increased frequency and creates lasting loyalty.
This quarter, we launched a refreshed guest engagement model, which elevates the guest experience through authentic engagement helpful experiences and friendly interactions to create a genuine human connection.
While still early we are encouraged by the improving trends in guest satisfaction scores.
We continue to expand and enhance the ulta beauty at target experience.
We opened 89 Ulta beauty at target shops during the quarter ending the quarter with 510 shops. This quarter. We were excited to launch Fenty beauty delighting, our guests with a new way to shop. This day, Dan favorite brand.
Created exclusively for Ulta beauty at target the Fenty snacks assortment features a curated lineup of best selling must haves minis and unique sets.
And just in time for holiday, we launched a curated assortment of Dyson hair tools in select stores and exclusive holiday sample kits in all Ulta beauty at target shops.
Beauty is an emotionally driven category and we are investing to drive greater love loyalty in connection with Ulta beauty.
We continue to strengthen the Ulta Ulta beauty brand unaided brand awareness increased to a record level this quarter with meaningful gains among gen Z and millennial beauty consumers. We also expanded the connection guests feel for Ulta beauty as measured by significant growth in brand love.
These gains reflect the impact of our strategic brand building efforts as well as our marketing actions to support key promotional events and brand launches.
At Ulta beauty, our mission is to use the power of beauty to bring to life. The possibilities that lie within each of US building on our commitment to make beauty a force for good we've created the Joy project, a multi year initiative to make beauty and the world of more joyful place.
We launched the Joy project in September with an integrated campaign across National TV, PR, social media and our owned channels.
In addition, we created a training curriculum for transforming the way our associates think about self confidence and to give them tools to empower our guests to do the same.
In October we expanded the Joy project, while reinforcing our role at the intersection of beauty and culture as the exclusive beauty partner for tick tax first ever beauty months.
Grounded in tick tax theme of reclaimed joy. This month long activation leveraged cure creator content and events premium platform advertising placements and custom filters that allowed users to see their inner joy.
We continue to adjust our promotional strategies as the category normalizes and consumers navigate rising cost pressures.
Responding to consumer needs and competitive shifts we continue to evolve our key tentpole events like 21 days of beauty, while also deploying new offers with more relevant storytelling to drive sales and traffic.
While our promotional activity increased this quarter, our targeting capabilities and promo optimization efforts enabled us to manage the financial impact, notably overall promotional levels remained meaningfully below 2019 levels.
Turning to our loyalty program, we ended the quarter with 42.2 million active members, 8% higher than last year, driven primarily by improving member retention and new member acquisition.
Spend per member remains healthy driven by greater shopper frequency.
As we engage members with exclusive promotions point accelerators, and personalized content and recommendations, we are driving engagement spend and frequency.
These targeted efforts are also enabling us to elevate more members to our platinum and diamond tiers compared to last year, the number of platinum and Diamond members has increased more than 20%.
Turning now to our efforts to drive operational excellence and optimization, we are executing a multiyear transformation agenda intended to unlock new capabilities and efficiencies to fuel our growth.
In addition to the digital store progress achieved this quarter, we continued to advance our roadmap in other key areas. We completed the retrofit of our Greenwood distribution center began shipping to stores and fulfilling e-commerce orders from our new Greer market fulfillment center and transition our Chambersburg distribution center to our new ERP platform.
Our teams have delivered several major milestones this year and we are on track to complete many of our transformational projects next year we.
We plan to complete the transition of our digital store in the first half of 'twenty 'twenty four and we expect to complete the upgrade of our ERP platform and the expansion of our data management systems in the second half of 'twenty 'twenty four.
We will advance our supply chain optimization efforts next year with the continuation of our Dallas DC retrofit as well as the conversion of our Romeoville, Illinois fast fulfillment center to a new market fulfillment center.
Finally, as the nation's leading specialty beauty retailer, we strive to be good stewards of our environment rich.
Reflecting our commitment to leave a positive legacy I am excited to share we have established emission reduction goals approved by the science based target initiative.
Details of our commitments are available in the E. S. G section of our Investor website.
Shifting now to our plans and expectations for holiday.
Holiday is off to a good start but we know the biggest selling weeks are still ahead of us. Our insight suggests that consumers are ready to celebrate even as they navigate an uncertain economic environment.
With our diverse assortment and convenient omnichannel touch points, we are well positioned to help our guests celebrate this season.
Our holiday campaign. This year is the gift is just the beginning which underscores our belief in the power of beauty and Ulta beauty.
While our gift can be a signature signature fragrance or an innovative hair tool beauty can also be the gift of self care fund enjoy.
Through this campaign, we were celebrating the moments that make the holiday special family friends connections Joy and pairing them with the perfect gifts.
Our merchants have thoughtfully created a holiday assortment of exclusive first to market items, along with iconic classics with products across mass prestige and luxury we offer our guests both value first and splurge worthy items to help them find perfect budget friendly gifts for others or themselves.
Our store teams are ready to bring the holiday to life for our guests our new P. O S system enables associates to easily order items not currently available in their store and our new mobile P. O S tools provide guests with an elevated and faster checkout process and with focus and same day delivery options in every store and.
It's never been easier or more convenient to shop at Ulta beauty.
Our teams have been working hard all year to ensure Ulta beauty is ready to bring joy to our guests. This holiday season, and I am proud of how well they are executing for our guests.
The beauty category will likely be a bit more promotional this holiday season, I'm confident our marketing and assortment strategies combined with new capabilities will position us to deliver another successful holiday.
In closing the beauty category remains healthy and consumer engagement remains high we remain confident in the resilience and power of beauty and in our ability to drive market share and profitable growth.
And now I will turn the call over to Scott for a discussion of the financial results Scott.
Thanks, Dave Good afternoon, everyone I.
I want to Echo, Dave sentiments and thank the Ulta beauty team for delivering third quarter financial results that were ahead of our internal expectations.
<unk> sales growth supported by strong guest traffic and new store sales performance helped to mitigate some of the unique margin pressures, we faced in the third quarter and enabled us to deliver gross margin modestly ahead of plan.
S. G&A spend was in line with expectations, resulting in operating margin of 13, 1%.
Turning to the P&L.
Net sales for the quarter increased six 4% driven by four 5% growth in comp sales strong new store performance and solid growth in other revenue.
Transactions for the quarter increased five 9% driven by healthy traffic across both channels.
Average ticket decreased one 4% as the decline in average units per transaction more than offset the impact of a higher average selling price.
While retail price increases remain a benefit to our comp performance. The overall environment continues to normalize and we are seeing the extraordinary pricing benefits from last year continue to roll off.
We estimate price increases contributed less than 200 basis points to the overall comp in the third quarter.
During the quarter, we opened 12, new stores and relocated two stores. In addition, we remodeled 11 stores.
Q3, gross margin decreased 130 basis points to 39, 9% compared to 41, 2% last year. The decrease was primarily driven by lower merchandise margin higher inventory shrink and higher supply chain costs, which were partially offset by strong growth in other.
Revenue.
Overall merchandise margin was lower primarily due to lapping the timing benefit of retail price changes last year as well as increased promotional activity this year.
While promotional activity continues to normalize the overall financial impact remains meaningfully below 2019 levels.
Inventory shrink continued to be a headwind.
Our efforts to address shrink appear to be stabilizing the impact, but the overall environment remains challenging.
In addition to new fragrance fixtures, which had been installed in nearly three quarters of the store fleet. We continued to invest in associate training staffing and operational improvements to mitigate the impact of shrink.
And we continue to work with our retail industry partners to influence macro changes aimed at improving the overall environment.
Supply chain costs were higher during the quarter, reflecting depreciation related to investments in our supply chain transformation as well as the recent opening of our new market fulfillment Center in South Carolina.
These gross margin pressures were partially offset by strong growth in other revenue primarily due to growth in both credit card income and royalty income from our target partnership.
SG&A increased 10, 8% to $661 4 million.
As a percentage of sales SG&A increased 110 basis points to 26, 6% compared to 25, 5% last year, primarily due to higher corporate overhead greater store expenses investments in store payroll and benefits as well as higher marketing expense, which more than <unk>.
Offset lower incentive compensation.
Corporate overhead expenses were higher in the quarter, primarily due to investments related to our strategic priorities, including projects solar digital store other it capabilities and Ub media.
Year to date through the third quarter, we have invested about 75% of our planned $60 million to $70 million of incremental spend to support our strategic initiatives.
Store expenses were higher in the quarter, reflecting ongoing inflationary pressures across the business the increase in store payroll and benefits was primarily due to the impact of planned investments in average wage rates.
Higher marketing expenses in the quarter were largely driven by increased investments to drive member acquisition loyalty and brand awareness across key channels, including social video and streaming.
Lower incentive compensation was a benefit 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 declined nine 6% to $327 2 million.
As a percentage of sales operating margin decreased 240 basis points to 13, 1% compared to 15, 5% last year.
Diluted earnings per share decreased five 1% to $5 seven per share compared to $5 34 per share last year.
Turning to the balance sheet and cash flow statements total inventory increased nine 8% to $2 3 billion compared to $2 1 billion last year.
In addition to the impact of 31 additional stores the increase reflects inventory to support higher demand and the stocking of our new market fulfillment center in South Carolina, as well as new brand launches and product cost increases.
Capital expenditures were $106 million for the quarter, reflecting investments in new and existing stores as well as supply chain and it investments to support our transformational agenda.
Depreciation was $61 4 million in the quarter compared to $58 5 million last year.
We repurchased approximately 687000 shares at a cost of $281 5 million.
Year to date, we have repurchased one 8 million shares at a cost of $845 million.
During the quarter, we drew on our revolving credit facility to support our ongoing capital allocation priorities, including share repurchases and capital expenditures during a period in the year when our working capital needs Pete as we build inventory for holiday.
I would note our recent activity does not reflect a change in our capital allocation philosophy, rather a lever to support short term cash needs.
We ended the quarter with $195 4 million in short term debt and $121.8 million in cash and cash equivalents.
Moving to our outlook, we are narrowing our sales and EPS guidance for fiscal 2023 to reflect our actual performance through the first three quarters of the year and our expectations for Q4.
We expect net sales for the year will be between 11.1 and 11, one 5 billion.
With comp sales growth between five and five 5% for.
For the year, we continue to plan to open approximately 25 to 30, net new stores and remodel or relocate 20 to 30 stores.
Our expectations for operating margin for the year remains unchanged at between $14, six and 14, 8% of sales, which deleveraged to come from both gross margin and SG&A with slightly more deleverage coming from SG&A.
Reflecting these assumptions, we now expect diluted EPS for the year will be between $25 in 'twenty than.
And $25 60.
We have refined our expectations for Q4 to reflect the expected resiliency of the beauty category as well as potential risks from cautious consumer spending increased points of distribution for prestige beauty and higher promotional activity.
We continue to expect comp sales will be flat to up modestly for the fourth quarter.
We still have several important weeks left in the holiday season, and the operating environment continues to be dynamic.
In addition, we are lapping exceptional results last year, including an incredibly strong January which was our strongest monthly comp sales performance of fiscal 2022.
For modeling purposes, we now expect gross margin to de leverage modestly and operating margin to be flat to down compared to last year.
One final update we now expect to spend between 400 and $425 million in Capex in fiscal 2023, including approximately $180 million for supply chain and a T $170 million for new stores, Remodels and merchandise fixtures and about $60 million for store maintenance and other.
Yeah.
We expect depreciation for the year will be around $245 million.
We now expect share repurchases to be approximately $950 million.
Our teams delivered another solid quarter amidst a dynamic operating environment. As we look ahead, we are focused on delivering our plans for the holiday season, and finalizing our plans for next year.
We will share more about our expectations for fiscal 2024, when we report our year end results.
But we remain confident we are well positioned to deliver performance in line with our financial targets of 3% to 5% comp sales growth and 14% to 15% operating margin with EPS growth next year, reflecting the lapping of an extra week in fiscal 2023.
Before I turn it over to our operator to moderate the Q&A I want to take a moment to say thank you.
It has been an honor and a privilege to serve as CFO for this special company for more than a decade.
I look forward to passing the Baton to Paulo, <unk>, who I've worked with closely over the last several years, we will continue to work together over the coming months to ensure a smooth transition.
Thank you again.
And now I'll turn the call back over to our operator to moderate the Q&A session.
Thank you and at this time, we will be conducting a question and answer session. If you would.
Like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue.
Press Star two if you would like to remove your question from the queue for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first question comes from the line of Dana Telsey with Telsey Advisory group. Please.
Proceed with your question.
Hello, everyone and congratulations on the nice results and Scott Congratulations on such a wonderful tenure at all.
And looking forward to your next chapter and Paul Congratulations on the new role.
As all of you think about the beauty category, which obviously are such resiliency in your sales up around 6%.
So how do you feel on the category trends with makeup and what we see there is that evolves going into next year product newness pricing, how do you parse it together and looking at the gross margin and SG&A levers the lower merchandise margin that you had in the higher shrink how do you see that evolving going forward.
And what's changing in the promotional and pricing area. Thank you.
Great well, thanks for those nice comments about Scott and Paula and I appreciate that and I'll start with some thoughts about the beauty category and makeup specifically to answer your question. There and then maybe Scott can pick up on the gross margin.
As I mentioned in our in my comments, we remain very confident about the long term future of the beauty category for all the reasons I highlighted a steady stream of compelling newness high level of engagement emotional connection the connection between wellness and beauty that stronger than ever coming out of the pandemic.
<unk> give us confidence more broadly in beauty and then makeup specifically Ah is an important are important part of that and well. The makeup category for US was essentially flat for the quarter. We are confident in the future of that important part of of our business.
We see strong positive trends a high level of engagement across all demographic groups.
And as we get into both completing this fourth quarter and moving into next year. We're confident in what will drive are driving our makeup business you know some of the actions that we've taken specifically in makeup to drive this business forward continuing to launch several new exclusive.
Makeup brands brands like half Magic, which was created by the Euphoria makeup artist a polite society, a prestige brand exclusive again to alter from the creators of two faced Rabban, which is a contemporary Spanish fashion brand launching into cosmetics exclusively at Ulta, We're just getting started with.
Those three exclusive brands at Ulta beauty, we continue to see strength with Mac and we've expanded that into nearly all doors.
Strong growth on key mass brands like Els and with great compelling innovation within that segment of the makeup business I talked to in my remarks about luxury and where well we've expanded that throughout the year. We feel like we're just getting started there we launched.
And it should now launch D oar Natasha Dodona this year, and then added Pat Mcgrath in the in the third quarter a.
New items with existing brands continue to make a difference in the category and more confidence in what's ahead. A couple of recent examples towards shape tape radiant concealer exclusive at Alta Julius place Blushed liquid.
Rush's exclusive at Alta and newness from other existing brands like Clinique <unk> benefit Anastasia Nyx Maybelline go down the list. So we're confident we're lapping the biggest launch we had with Fenty from 'twenty to 'twenty two.
But as we look forward, we see as both the items that we've launched and more newness coming as we enter into 2024.
We're confident and optimistic both in the consumer engagement in makeup in beauty in general and our specific strategies to drive growth. Scott do you want to talk about margin sure. Thanks, Dana. So I gave you a little bit more maybe than you were thinking about when you initially.
With this question together because I'm sure. It's on other investors' minds as well so thinking about 'twenty four and beyond and again. This is directional in no particular order, but I kind of start with the headwinds so supply chain transformation will continue to be a.
A tougher compare for us as we think about next year as we continue to build out.
And work through our our distribution centers across the country E. Commerce mix, we've talked about again, it's been up a bit of a benefit for us. The last couple of years, we expect e-commerce to grow at a higher rate than brick and mortar next year and the years to come and so that will be a headwind for us on gross margin again, we got ways to mitigate that now that we.
Didn't have back in 2019, namely boat best ship from store and same day delivery.
So those would be the headwinds I'd say promotion Ality is something I call kind of a.
TBD, so again 2023 it's been a bit of a deleverage point for us because we're getting back into a more normal environment.
It's yet to be seen on how 2024 will shake out so that's something we'll have to navigate.
Syed you mentioned a couple while other revenue number one and 2023, it's been a big tailwind for US we would expect that to continue although moderating a bit in 'twenty four.
Cycling over price increases this year has been a major headwind to the business and the gross margin line that will moderate as we get into and deeper into 2024 and cycled through some of that shrink we called out third quarter, we were gaining on it a little bit again, it's not a mission accomplished by any stretch of the <unk>.
Nation, but we do feel like we've got tactics in place now that will help us.
Get that better managed UV media mix and as that business continues to scale up we expect that to be a margin benefit.
Benefit for US and then of course fixed cost.
Again in the third quarter, a bit of an anomaly with some of the.
Repair and maintenance expenses that we absorbed but over the long term, we expect to be able to leverage fixed store cost on that three to five comp.
Thank you.
And our next question comes from the line of Lorraine Hutchinson with Bank of America. Please proceed with your question.
Thank you good afternoon.
You mentioned, some brick and mortar share walks in prestige.
In the quarter can you talk about strategies brand launches marketing that you're working on to defend the sharing and returned to growth.
Yeah.
Yeah. Thanks for the question Lorraine, Yes, Yeah. We are it is our objective to gain share across all parts of our business and and we did.
We felt positive about that and in many parts are included in our mass or mass business, our prestige skincare prestige fragrance business, a prestige e-commerce business, but brick and mortar.
Was pressured and we think that's.
Largely due to a.
<unk> expanded points of distribution, there are hundreds more brick and mortar.
Locations in the market now than there were even just a couple of years ago, and but what we see is a more of a short term impact from this competitive kind of the competitive pressure historically as we've seen new locations opened near near our near our existing.
Locations, there's a short term modest impact, but relatively quickly our stores are able to rebound and recover and to drive growth share growth over time.
So largely what we're seeing and we're confident in the in the path ahead that are our strategies, our holistic strategy and everything that we're doing across our assortment across our brand engagement. Our loyalty program and then certainly the human experience that we uniquely deliver in in our stores give us a lot of confidence that while there's.
There's some short term pressure year over year, we're still stronger than share than we were pre pandemic.
And <unk> and we're confident in.
And in growth.
And our strategies going forward.
Thank you.
Our next question comes from the line of Mark <unk> with Baird. Please proceed with your question.
Good afternoon, Thanks for taking the question and Scott and Paul Congratulations to each of you.
So.
For the Q4, you mentioned that you refined your outlook given some of the risk to consumer spending and points of distribution I guess, you know, but overall you are raising the low end of your guide Q3, a bit better than your internal expectations. So maybe just give us a little bit more detail on how your views on category spending and the promotional backdrop has changed.
Versus three months ago.
Yeah.
Yeah, I would yeah, so I'll start and let Scott give a little insight.
Inside here when we look at the promotional environment, maybe I'll start start there mark.
The as we highlighted in the third quarter the promotional environment.
Was higher in Q3 than a year ago, but still meaningfully below.
Hmm.
<unk> 2019 levels. So while we're seeing some some increase it's we don't see an irrational promotional market, we're definitely not back to 2019 levels and we've been able to leverage our capabilities behind CRM.
And.
And overall, our personalization too.
To managed more effectively within our promotional intensity so with that backdrop as we look into the fourth quarter. We again, we're not expecting anything radically different than what we saw a bit more promotional not irrational what we've essentially seen so far are not back to 2019 levels and when we.
Look at our outlook and I'll, let Scott give a little bit more color are we really haven't changed our fourth quarter comp.
Comp sales.
As we've been talking for a while we've seen we expected in the second half of this year for comp to moderate to low single digits. We had we were a bit ahead of that in the third quarter and we're still confident in our outlook for the fourth quarter and that gave us youll really our third quarter performance gave us the confidence to move up the bottom end of that range. So.
As we look out we're not anticipating any major disruptions from promotion, but Scott mentioned the biggest weeks of holiday are still ahead. So we're staying close to that.
The consumer engagement.
We're positive about and and that's reflected in our updated our refined outlook going forward.
Just reiterate what Dave said, our fourth quarter comp sales expectations have not changed alright, we are giving ourselves a little bit wider range I would say on operating margin than you would probably expect to see at this stage of the year, but it is a $1 billion above you know the last couple of quarters sell small changes in consumer reacts.
And could have a bigger impact on our business. So we're just being prudent given ourselves room to maneuver I guess I would say thinking about you know how we deliver overall great experience for the gas both in the store and online and again, we feel like we're really well positioned we're off to a good start, but there's still a long way to go.
Very helpful. Thank you.
Okay.
And our next question comes from the line of Michael Binetti with Evercore ISI. Please proceed with your question.
Thanks, a lot for taking my question here Scott, Let me add my congrats it's been great conversations over the years have been wonderful and Paula cannot wait to work with you.
Dave you reminding us how resilient the category isn't allowed us at low to mid single digit growth over time, the comp guide for the fourth quarter allows commscope was flat.
So below the algo below the industry rate I know, there's some unique hurdles that you pointed to is that is that really the only impediment to a normal return to normal comp as the hurdles in January in fact that you pointed to.
And then I'm also I'm also curious with SG&A growing double digits this quarter.
Scott You mentioned algo comp next year can you just kind of walk us through how how to get to leverage on.
On SG&A, given given the recent growth rate and the SG&A line.
Yeah, I'll start with with cockpit, yes.
You said, it well where again when we look long term very confident and.
The total growth of the category and our ability to gain share.
And that's certainly our objective all the time as we look in the fourth quarter, Oh, I'd say, we are lapping a.
<unk>, a very strong fourth quarter last year, we anticipated this we've been talking about.
A moderation in our comp trends all year long and and so far it's played out essentially as we thought.
With some modest improvement a little bit ahead of that but that's how we anticipate it. So when we look into the fourth quarter was reflected in our in our outlook has continued.
Strong engagement, a successful holiday and and healthy comps certainly on a two three year basis, but we're lapping some strong performance last year as we as we get through this fourth quarter.
And you know Michael were in the midst of a multi year transformation on many fronts across the business that again, we expect to deliver significant efficiencies and optimization opportunities for our business for many years to come and so in <unk> 'twenty.
2023 is an extraordinary investment year and a lot of it is coming through the SG&A line again to $60 million to $70 million on top of $50 million last year again, we believe were at or near the peak of that third quarter bore a large brunt of the burden for 2023, So we would expect SG&A growth to moderate.
In 'twenty, four and beyond and but I would remind folks again, when you're just calling out the SG&A line. We have said consistently we are willing to invest in SG&A as long as we can deliver operating margin leverage. So again you'd be media is a good example of that it cost money people cost tool cost.
And things to ramp up there over time, but we'll get back on the gross margin line over the long term. So we're well positioned for the future and believe we're on the right track.
Thanks, a lot guys.
Look around it.
Okay.
Our next question comes from the line of Oliver Chen with TD Cowen. Please proceed with your question.
Hi, David Paula and Scott it's been awesome.
Working with you congrats on everything you have done in the years ahead.
As you think about stores in the store maximum potential you've had really nice new store productivity and also pretty extraordinary ecommerce growth. What are you thinking about for smaller format and also as you continue to modernize the experience how how the stores you know.
It should be laid out and then second on <unk> media, a big a big part of the future of digital advertising.
What's the path there in terms of what Youre doing it it feels.
We believe that a lot of the brands do appreciate the data that you have in the cross section you can offer them as well. Thank you very much.
Yeah. Thanks Oliver.
I'll start with with stores, we continue to reiterate our outlook of 15 to 1700 stores.
And towards and we've said that we believe will be towards the high end of that range and that hasn't changed and we're confident in that and.
And that does not include.
Our expansion in partnership with target and as I mentioned in the call we're up to 510 of those locations.
Our store a store level earnings our store profitability remains very healthy we're very positive about the new store opening.
Performance and we're confident in the opportunity to continue to expand our presence.
We have a couple of things that you you highlighted we've.
Ben.
Justin and I and I'd say.
Expanding really a smaller format.
Which is a 5000 square foot.
Store, that's larger that's really targeted towards smaller markets more remote markets and we're having good success. There. We've we've updated our our full store layout.
That we've expanded into.
I think it's maybe 80 80 stores now or so that are all new stores and some remodels that have a new format that makes it more intuitive to shop the whole store. The categories are bundled together. The services are highlighted more the the brands are easy to engage in and so we continue to invest in.
In the experience and elevate our you know how we're engaging with our guests and we're very bullish on the stores the performance and the outlook on UV media, where we're pleased with our advancements we've invested in that this year, we've had hundreds of brands participate.
<unk> of campaigns over the course of the year, we've expanded our team.
And it's exactly what you said that the power of our data the unique.
The insights that we can bring because we have 42 million members and we have our assortment that spans all price points and all categories and all geographies and demographics, we've got a really powerful tool that our brands.
We can bring value to our brands through that and so I'd say, we continue to see good results from that and but I'd also say, we're just getting started with a lot of opportunity more to come.
As we look into the future so were put in we're.
We're accelerating that effort as well.
Okay, David last on AI, you have QM science.
Scientific and creative deals you've done and you've also been active in augmented reality are there any highlights about how you see AI impacting the pre and post shopping experience and Gore.
How you're utilizing across the organization.
Yeah, you sneak in another question and Oliver on Scott's announcement day too right. So, but yeah. AI is AI is an important part of our business you mentioned QM scientific which we bought a few years ago are really as one step among many to increase the power.
Our of advanced analytics too.
Two more personalize our guest experience and I'd say across the board, we're bringing that to life more opportunity to go for sure, but with an ultimate objective of being able to better anticipate and understand our guest needs and desires and behaviors. So we can better service them in store online and through all of our touch points and then were used.
<unk> generative AI, we're really just getting started but we see opportunities within gen AI too.
To streamline accelerate and advance some of the experiences things like our product descriptions to automate some of that to make it more real time to speed up our innovation are too.
To leverage some of our creative processes and behind the scenes with some data management and supply chain and other places. So we're excited about both what it's contributed so far and it's a big focus for our organization to take full advantage and be a leader in that space as well.
Thank you very much.
Okay.
Our next question comes from the line of Chris.
Christina.
With Deutsche Bank. Please proceed with your question.
Hi, good afternoon, and I'll add.
My congratulations to both Scott and Paul.
But my question is for you Dave.
Wondering if you could talk about member engagement, you said, the diamond and platinum members.
20%. So what are you seeing with some of these newer members versus your more mature cohorts.
And what are some of the early read that you can share from the person organization upgrade perspective, how those are helping the maturation of wallet members spending that essentially gives me confidence that you can continue to build on your comp. Thank you.
Yeah.
Great question, Kristina because our loyalty program is so key to our business and our success and I tell you I can't couldnt be more pleased and proud of the team's efforts to evolve and advance this program and what I I say internally to our 53000 associates is every single.
One of us own and contribute to loyalty.
Both the acquisition of new members, but importantly, the engagement and delighting. Our members every single day in store online and our guest services through our assortment, our advertising or social media every touch point, we have and so it is an always on activity for us. It's top of mind every day for us to make sure that we have.
Delighting our guests because we know that's the secret to our success and our long term long term future. The the debt. The Big picture result of 8% growth of our loyalty program Ah is evidence that that's working because the things that come together to.
To drive that type of growth on a big number from a big number to start with is first and foremost retention, we wouldn't be growing it if we werent retaining at a very high very healthy.
We believe industry, leading level and we continue to work to improve that everyday with every member.
Through our personalization so the personalization efforts I'd say first and foremost are ultimately about retention because if I can use personalization too.
To provide more value to our guests than they will be more likely to stay with us to buy more with us and to be a long term gas to move up into the platinum and diamond levels and all of that.
We also saw nice results in new member <unk> never been a member of Ulta beauty.
And we continue to expand that.
That's through our new stores, our advertising our partnership with target our digital presence, our social media and we feel like Wow. We've got a lot of scale. There are tens of millions of beauty enthusiasts that are not currently part of our program and the third area is reactivation, where while we have very strong healthy retention, we don't retain.
Everybody's so there is a pool of guests that most of the time it isn't because they had a bad experience that just fell out of the habit of shopping at Ulta and so we have a very personalized direct program to Reengage and reactivate those lapsed guests that that's been contributing to our growth so across the board. We're pleased with the engagement we're pleased with.
The spend per member are all in all all metrics in that program continue to be in.
Encouraging to us and we see a long runway and we're focused on it every day through innovation hard work and just the commitment to guest experience to drive that for the long term.
Operator, I think we have time for one more question.
Sure No problem all right last question comes from the line of Michael Lasser with UBS. Please proceed with your question.
Good evening. Thank you so much for taking my questions and best wishes to Scott and Paula.
My question is how long are you willing to absorb market share losses in the prestige beauty category before.
Bonding with an increase in promotional activity and if we assume that those.
Market share losses extend into 2024, how is that going to impact Ulta beauty's ability to achieve its earning algorithm next year. Thank you so much.
Yeah, Michael I'd say that you know at first I'd start by answering that question is yes, our goal and our long term history is to gain share and our entire strategy.
Cross our assortment our marketing.
The loyalty program.
Our stores, our E com or digital tools everything we do is designed to be.
As a leader and to gain share and to drive our business forward and in many parts of our business. We have been and continue to be doing that our prestige makeup and <unk>.
Their business had been more challenged.
And that's really.
Yeah, really reflection of expanded points of distribution, which I talked about hundreds of points of distribution.
In largely in those that are impacting disproportionately those categories.
Some other competitive.
Pressures in mass makeup and mass skin care.
Mass hair care in prestige skincare prestige fragrance, we are gaining share and have continued to do so so our focus is continue to do that to take the healthy strong share growing parts of our business and accelerate that and to return the ones that have been a bit more challenged.
To growth and we have got plans to do that I talked about makeup on an earlier question and and with both through the newness that we've launched and more to come as we turn the calendar to 2024.
The execution that we have in store focus online we are confident that we will.
Be able to drive that back same holds true in hair care, specifically around promo honestly.
We see it Michael as a as a balance where we feel good about our overall position of our overall growth.
As I said, we're gaining share in many parts of our business and.
And so we're pinpointed in how we wanted to leverage our promotional intensity.
We don't want a wildly swing back when we have confidence that it is not just promo that will return to share growth. It's the collective strategies and actions. The long term stay our efforts around assortment and execution that will drive share growth over time, and so we'll leverage promo in the short term we have been.
But as we said earlier, we no way have turned back to 2019, which is one indicator. We're not just going to swing wildly, we'll be thoughtful strategic and have a clear actions and long term actions that get us to.
Sustained share growth and and I say that from.
Our position.
Of confidence given our track record of gaining share consistently for many years and we're confident we'll be able to do that.
Well into the future.
Alright. So thank you for that question, Michael and thanks for all of you for your engagement I want to close by thanking our more than 53000, Ulta beauty associates for delivering another strong quarter for our shareholders. While also successfully executing against our strategic priority and once again I want to thank Scott.
For his partnership and tremendous impact on Ulta beauty and I want to congratulate Paula as I know she is going to be an outstanding CFO for our company. We wish you all a happy and healthy holiday season, I Hope you get out and shop at Ulta beauty, often and we look forward to speaking to you again when we report.
<unk> results for fiscal 2023 on March 14th Hope you have a good evening.
And this concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation.
Yeah.
Yeah.
[music].
Yeah.
[music].
Okay.
[music].
Sure.
[music].
Yeah.
[music].