Q3 2024 Ulta Beauty Inc Earnings Call
Good afternoon, and welcome to Ulta Beauty's conference call to discuss results for the Ulta Beauty third quarter 2024 earnings results.
At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. We ask that you please limit yourself to one question and then re-enter the queue for any additional questions.
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Speaker Change: It is now my pleasure to introduce Ms. Kiley Rawlins, Vice President of Investor Relations. Ms. Rawlins, you may proceed.
Kiley Rawlins: Thank you, Julian. Good afternoon, everyone, and thank you for joining us for a discussion of Ulta Beauty's results for the third quarter of fiscal 2024. Hosting our call today are Dave Kimbell, Chief Executive Officer, and Paula Oyibo, Chief Financial Officer. Keisha Steelman, President and Chief Operating Officer, will join us for the Q&A session.
Speaker Change: Before we begin, I'd like to remind you of the company's safe harbor language. Many of our remarks today will contain forward-looking statements, which speak only as of today, December 5, 2024.
Speaker Change: We refer you to our earnings release and SEC filings, where you will find a number of factors which could cause actual results to differ materially from these forward-looking statements.
Speaker Change: We'll begin this afternoon with prepared remarks from Dave and Paula. Following our prepared comments, we'll open the call for questions.
Kiley Rawlins: As always, the IR team will be available for any follow-up questions after the call. Now I'd like to turn the call over to Dave. Dave? Thank you, Kiley, and good afternoon, everyone. We appreciate your interest in Ulta Beauty.
Speaker Change: Our team delivered improved performance for this quarter with better than expected sales and profitability.
Speaker Change: For the quarter, net sales increased 1.7% to $2.5 billion, and comparable sales increased 0.6%.
Diluted EPS increased 1.4% to $5.14 per share.
Speaker Change: As we shared on our last call, we are navigating a number of headwinds, including the normalization of the U.S. beauty category, a dynamic consumer environment, and elevated competition, particularly in prestige beauty.
Speaker Change: We are starting to see benefit from actions we are taking to reinforce our market position and improve our performance. And while the headwinds have not abated, we are making progress.
Speaker Change: In the third quarter, our Prestige market share trends improved, resulting in flat market share this quarter based on Circana data for the 13 weeks into November 2nd, 2024.
Speaker Change: The trend was driven primarily by improvements in makeup and hair, and we continue to see strength in fragrance and skin care.
Speaker Change: Our shared performance in Mass Beauty was consistent with the second quarter.
Speaker Change: Comp growth improved from the second quarter trend, driven by stronger transaction trends across both stores and e-commerce channels.
Speaker Change: We continue to expand our loyalty program, ending the quarter with 44.4 million active members, 5% more than last year. We continued to convert new members, we reactivated more lapsed members, and we improved existing member retention.
Speaker Change: Our marketing strategies to support our tentpole events and drive relevance and buzz deliver double-digit growth in earned media value and stronger sentiment.
Speaker Change: And we made progress to optimize our new ERP system and help our teams adapt to new processes, balance inventories across the network, and deliver a better guest experience.
Speaker Change: Our teams are working hard to strengthen our market position and I want to thank all of our associates for continuing to deliver great guest experiences while working collaboratively to drive improved performance in a dynamic operating environment.
Speaker Change: Turning to performance by category, fragrance was our strongest category, delivering high single-digit comp growth, driven by men's fragrance, gender-neutral fragrances, and new products, including new fall and holiday gift sets.
Speaker Change: The growth of mints fragrance was fueled primarily by newness from Armani and YSL and the appeal of established franchises from Jean Paul Gaultier and Volatino.
Speaker Change: Consumer interest in gender-neutral scents is increasing and our assortment including Billie Eilish and Noise, an exclusive fragrance launched this summer, is driving guest engagement.
Speaker Change: New women's brands, Kylie Jenner and Orbella, both exclusive to Ulta Beauty, and new women's fragrances from Valentino, YSL, and Nest, are also contributed to overall category growth.
Speaker Change: The skincare category delivered mid single-digit count growth this quarter as strong growth in body care was partially offset by a decline in prestige skincare. Mass skincare was flat.
Speaker Change: The strong performance of body care was driven in large part by newer brand Solveiginero, which continues to engage guests with exciting innovation and exclusivity, and Touchland, which introduced compelling new lists.
Speaker Change: In Prestige Skincare, newness from brands Ole Hendrickson, Chasseau, Dyne Beauty, and others resonated with guests, while engagement from Naturium, Bubble, and La Roche-Posay delivered growth in the mass skincare category.
Thank you.
Speaker Change: Comp sales in the makeup category decreased in the low single-digit range, driven primarily by softness and mass makeup.
Speaker Change: Strong growth from recently relaunched Ulta Beauty Collection was offset by certain brands lapping space expansion, strong innovation, or social media engagement last year.
Prestige Makeup was flat.
Speaker Change: New Prestige Brands Charlotte Tilbury, Ilia Beauty, and Dibbs Beauty resonated with guests and compelling product newness combined with in-store investments delivered growth for established brands MAC and Clinique.
Speaker Change: Promotional events during the quarter, including 21 Days of Beauty and Fall Haul, performed well, driving growth for several makeup brands, while our engaging Wicked collaboration was well received, highlighted by exclusive brand R.E.M. Beauty.
Speaker Change: Comp sales for the hair care category also decreased in the low single-digit range.
Speaker Change: Exciting newness from Raytrix, Way, Divi, and Odell deliver growth for the category while Redken continued to drive healthy guest engagement with their Hero product lines.
Speaker Change: In Hair Tools, new products from Shark Beauty and Dyson resonated with guests.
Speaker Change: This growth was offset by softness in key brands with expanded distribution and limited newness this year.
Speaker Change: Our services business delivered low single-digit comp growth primarily driven by engagement in core services including color, styling, and hair treatments.
Speaker Change: Ear Piercing and Makeup Services also performed well. And our Salon Back Bar Takeovers, which gives stylists an opportunity to introduce brands to guests, continued to drive product attachment and new guest acquisition for participating brands.
Speaker Change: We are seeing improvements in our business and we are focused on strengthening our market position and performance further. In October, we shared our refreshed strategic framework designed to lean into our existing strengths while also driving innovation to meet the evolving needs of beauty enthusiasts.
Speaker Change: As the beauty destination of a lifetime, we intend to drive profitable growth and market share leadership in beauty and wellness over the longer term through curating the best of all things beauty and wellness for all beauty enthusiasts.
Speaker Change: engaging our guests wherever they want to shop by expanding our reach through seamless and immersive omnichannel experiences.
Speaker Change: and building lifelong loyalty and brand love through member growth and personalization.
Speaker Change: We are confident our focus on these foundational areas will drive stronger revenue and earnings growth over the long term.
Speaker Change: In the near term, we are addressing key areas to reinforce our competitive position.
Speaker Change: Let me share some highlights of the progress made this quarter, starting with our efforts to strengthen our assortment.
We are enhancing our brand portfolio to drive category growth.
Speaker Change: During the third quarter, we launched new makeup brands, Ilia Beauty, Dibs Beauty, and RMS Beauty.
as well as emerging skincare brand, Oak Essentials.
Speaker Change: Additionally, we expanded our wellness offerings with emerging brands the Honey Pot and Joy Locks.
Speaker Change: Looking ahead, we have an exciting pipeline of brand launches planned for the fourth quarter, including the recently announced Prestige skincare brand Tatcha, celebrated for balancing timeless Japanese botanicals with proven clinical ingredients.
Speaker Change: XO Chloe, an exclusive fragrance brand created by Khloe Kardashian, and Apothecary, an emerging wellness brand.
Speaker Change: In addition to new brands, we launched two exciting exclusive collaborations this quarter.
Speaker Change: First, as the exclusive beauty retail partner with NBCUniversal Pictures for the movie Wicked, we worked with key brands to develop a limited edition collection of products across multiple price points and categories.
Speaker Change: The Wicked-inspired collection features products from leading brands, including REM Beauty by Ariana Grande and Beatman 1802, both of which are exclusive to Ulta Beauty, as well as OPI and Scunchie, among others.
Speaker Change: With immersive in-store experiences and engaging displays, Wicked came to life in Ulta Beauty stores, through our digital channels, and through Ulta Beauty at Target.
Speaker Change: Second, we launched an exclusive and a disruptive beauty offering of the beloved Mini Brands.
Speaker Change: which offers miniature versions of popular consumer brands. This first-ever beauty mini-brands collection includes 68 tiny replicas of best-selling products from 13 brands including e.l.f., NYX, Drybar, and Supergroup.
Speaker Change: Both of these unique collaborations are driving strong sales, awareness, traffic, and engagement, especially with Gen Z and millennial members.
Speaker Change: As we discussed at our recent Investor Day, engaging guest experiences drive differentiation, loyalty, and meaningful business value, and we are focused on creating authentic, personalized experiences across all our channels.
Speaker Change: In Q3, we hosted more than 13,000 in-store events, including unique celebrity and brand founder events, multi-branded events, and skincare-focused events.
Speaker Change: We also expanded our salon event, The Workshop, to more stores and invited guests to learn how to create salon-worthy blowouts while receiving customized coaching and personalized recommendations from our talented in-store stylists.
Speaker Change: We are enhancing our digital experiences to drive traffic and sales.
Speaker Change: During the quarter, key online activations drove guest engagement, and our expanded sampling program delivered double-digit sales growth.
Speaker Change: Our digital merchandising strategies, including enhanced search, guided navigation, and enriched product pages drove conversion, and our site optimization efforts are improving the guest experience and delivering stronger conversion trends.
Speaker Change: We continue to introduce new digital experiences and resources to drive discovery and triumph.
Speaker Change: This quarter, we enhanced our suite of virtual try-on and AI-enabled skin and hair analysis experiences with the launch of Glam Lab 2.0, which includes a new 3D engine to enhance precision and stability, shoppable makeup looks, and a new user interface that includes sharing capabilities.
Speaker Change: We also launched new digital buying guides that amplify search engine optimization while providing guests with educational content, beauty tips, and product recommendations.
Speaker Change: To deepen the meaningful connection we have with beauty enthusiasts, we launched UB Community, a welcoming, inclusive digital forum for guests to connect, learn, empower, and engage in the immersive world of beauty to foster authentic connections.
Speaker Change: Launched in October, our community amplifies the intersection of beauty, wellness, and joy, and our user count is already three times our initial target, confirming the meaningful role Ulta Beauty plays in our members' lives.
Thank you.
Speaker Change: With more than 44 million active members, Ulta Beauty Rewards is an unmatched strategic asset that provides us with unique consumer insights to drive sales.
Speaker Change: In Q3, we expanded personalization across digital channels with enhanced product recommendations, replenisher reminders, site experiences, and retargeted and social channels.
Speaker Change: Leaning into targeted lifecycle campaigns in both owned and paid channels, we reactivated members with greater efficiency.
Speaker Change: Additionally, we grew our Platinum and Diamond member base, leveraging unique incentives like exclusive and early access to key events and brain launches, gifting and personalized offers that drive engagement.
Speaker Change: Platinum and Diamond members shop more frequently and spend more each visit and continue to retain at best-in-class rates.
Speaker Change: Increasingly, social relevance drives authentic customer connection and brand advocacy, especially in beauty, and we're evolving to position social at the center of our marketing strategies to accelerate browse and earned media value growth.
Speaker Change: During the third quarter, we leveraged our marketing and social capabilities to lean into emerging trends, amplify key growth brands, and activate new trend-focused events.
Speaker Change: We also engage talent from our UB Collective, our Affiliate Program, and Ulta Beauties, our new Associate Ambassador Program, as well as key brand founders to support key brand launches, exclusive collaborations, and tent pole events,
Speaker Change: in new and innovative ways across social channels to drive guest buzz and engagement.
Speaker Change: These efforts delivered accelerated EMB growth, increased impression, and expanded key brand health metrics.
Speaker Change: We continue to enhance our product capabilities to grow our retail media network, UBmedia.
Speaker Change: We recently partnered with e-commerce tech company Rocket to introduce AI non-endemic ads for products and services outside the beauty category. And we are partnering with Roblox, the ultimate virtual universe, to create innovative advertising opportunities for our partners.
Speaker Change: Over the years, our Ultiverse has grown into one of the largest beauty games on Roblox, attracting over 11 million visits.
Speaker Change: With growing interest from beauty brands to participate in our Ultaverse, we're unlocking new possibilities at the intersection of gaming, innovation, and media to bring those brands to life in exciting new ways through our UB media capabilities.
Speaker Change: Now leveraging lessons in the second quarter, we continue to evolve and tailor our promotional strategies to reiterate our value offering and drive sales and traffic.
Speaker Change: We began the quarter with a new hair event showcasing the glossy hair trend. Replacing last year's fall gorgeous hair event, this event featured a strong promo offer, new and exclusive items from Dyson, and a spotlight on gloss and shine products.
Speaker Change: Especially strong in stores, the new event exceeded our expectations and drove strong results for participating brands.
Speaker Change: At the end of August, we brought back our beloved 21 Days of Beauty event.
Speaker Change: New Beauty Steals, member-only events, and bonus offers combined with robust marketing and social support, 21 Days of Beauty delivered strong growth versus last year's event.
Speaker Change: We wrapped up the quarter with a successful Fall Hall event, which drove mass engagement and new member acquisition with compelling offers that surprised and delighted guests.
Speaker Change: In addition to strengthening and evolving our merchandising tentpole events, we optimized our loyalty offers, proactively planning the timing, type, and target audience of these offers.
Speaker Change: As a result, our promotional effectiveness improved from the first half trend.
Shifting now to our plans and expectations for holiday.
Speaker Change: The formal holiday season is in full flight, and while we're encouraged by our performance through Cyber Monday, we have several significant holiday sales weeks still ahead.
Speaker Change: While consumers continue to spend, our insights suggest that economic concerns are driving a greater focus on value.
Speaker Change: With our diverse assortment of products and price points, compelling offers, and convenient on-bin channel touchpoints, we are well positioned to support our guests as they celebrate the season, and our teams are excited, engaged, and ready to help them deliver a joyful holiday.
Speaker Change: Our holiday campaign this year is Find Joy in the Present, a reminder of the joy that comes not only from gifts of beauty but from the big and small moments that drive authentic emotional connection.
Speaker Change: With the goal of driving deeper emotional engagement, our campaign is supported with robust, integrated activation across media, member marketing, PR, and social channels, as well as festive experiences in stores and on our digital platforms.
Speaker Change: We have strategies in place to fortify our competitive positioning and manage through the compressed holiday selling season.
Speaker Change: We are transforming our channels into a concierge for all things holiday.
Speaker Change: providing greater value to consumers with real-time beauty solutions, gift guides, and tips tailored to our guests' needs, and creating fun experiences that drive awareness and make Ulta Beauty the go-to destination for the holidays.
Speaker Change: Our merchandising team has created an exciting holiday assortment with a strong focus on newness and exclusives, balanced with value-driven holiday kits and core items that make great gifts.
Speaker Change: Whether guests want to gift others or treat themselves, we have thoughtfully curated options across every category and budget.
Speaker Change: Our corporate and supply chain teams have been working hard all year to ensure Ulta Beauty is ready to bring our guests joy this holiday season. And our store teams are ready to bring the holiday to life for our guests with new in-store events and demonstrations to build guest connection and drive sales and traffic.
Speaker Change: And, with Bopas, same-day delivery options, and new for this holiday, our participation in DoorDash and soon-to-be-launched Instacart marketplaces, it's never been easier or more convenient to shop at Ulta Beauty.
Speaker Change: With our engaging holiday messaging, incredible holiday insortment, knowledgeable associates ready to provide guidance and recommendations, new innovative digital tools, and multiple ways to shop, I am confident we are well positioned to deliver another successful holiday season.
Speaker Change: In summary, I am encouraged by the improving trends we are seeing in the business and optimistic about our holiday plans.
Speaker Change: We believe the beauty category will remain resilient and we are confident the actions we are taking to deliver stronger performance combined with our outstanding associates who are committed to offering guests authentic inclusive experiences across all of our touch points.
Speaker Change: will enable us to reinforce our market position and drive long-term profitable growth.
Speaker Change: Now before Paula discusses our financial results, I want to share that Monica Arnado, Chief Merchandising Officer, has announced her plan to retire from Ulta Beauty in the spring of 2025.
Speaker Change: Since joining Ulta Beauty in 2017, Monica has built an outstanding team and elevated our assortment in ways that have helped us deliver remarkable sales and market share growth, while furthering our mission to be our guests most loved beauty destination.
Speaker Change: I want to thank Monica for everything she has contributed as a member of our executive team and for the impact she has had on our organization.
Speaker Change: While we work to identify Monica's successor, she is fully committed to supporting her team and Ulta Beauty with a successful transition.
Speaker Change: And now, I will turn the call over to Paula for a discussion of the financial results. Paula?
Paula Oyibo: Thanks Dave and good afternoon everyone. I want to echo Dave's sentiments and congratulate Monica. Monica has been a trusted leader and steadfast ambassador of our brand and we are so grateful for all of her contributions.
Paula Oyibo: Now turning to our financials, I'll begin with a discussion of our third quarter financial results and then provide more color on our fourth quarter and full year expectations.
Paula Oyibo: For the third quarter, we delivered better-than-expected performance across the P&L, reflecting stronger top-line growth, continued financial discipline and expense management, and favorable shrink trends.
Paula Oyibo: Net sales for the quarter increased 1.7 percent, sales contribution from new stores and a 0.6 percent increase in comp sales was partially offset by lower other revenue.
Paula Oyibo: During the quarter, we opened 28 new stores, closed 2 stores, and remodeled 27 stores.
Paula Oyibo: The comp sales increase was driven by a 0.5% increase in transactions and a 0.1% increase in average ticket.
Paula Oyibo: Other revenue declined $5 million to $48 million, primarily due to an increase in deferred revenue related to our loyalty program, driven by the expansion of our member engagement efforts, which were partially offset an increase in income from our credit card program.
Paula Oyibo: Looking at the cadence of sales throughout the quarter, comp sales in August decreased slightly, primarily due to a shift in timing of our semi-annual 21 Days of Beauty event, which resulted in stronger comp performance in September. October trends were positive but softened compared to the previous period.
Paula Oyibo: From a channel perspective, our e-commerce channel delivered mid-single-digit sales growth.
Paula Oyibo: The sales trend in cop stores improved from the second quarter, decreasing modestly compared to last year.
Paula Oyibo: For the quarter, growth margin decreased 20 basis points to 39.7% compared to 39.9% last year.
Paula Oyibo: The decline was primarily due to deleverage of fixed costs and lower other revenue, which was partially offset by favorable channel mix due to lower e-commerce shipping costs and lower shrink.
Paula Oyibo: Lower revenue growth resulted in de-leverage of store and supply chain fixed costs. Additionally, more new store openings and the expansion of our supply chain network pressured these areas.
Paula Oyibo: As a percentage of sales, inventory shrink was lower than last year.
Paula Oyibo: Our investments in secure fragrance fixtures combined with new inventory management processes and enhanced training for our field teams are helping us control inventory shrink. Year-to-date, shrink as a percentage of sales is roughly flat with last year and we continue to expect shrink will be flat for the full year.
Paula Oyibo: Merchandise margin was flat with lower inventory reserves primarily related to the relaunch of Ulta Beauty Collections.
offset by unfavorable blend mix.
Paula Oyibo: Moving to expenses, SG&A increased 3.2% to $682 million. Overall, SG&A spend was better than planned again this quarter, primarily due to focused expense management.
Paula Oyibo: As a percentage of sales, SG&A increased 40 basis points to 27%, compared to 26.6% last year.
Reflecting lower top-line growth, most expenses deleveraged this quarter.
In addition, SG&AD leveraged
Paula Oyibo: primarily due to higher store payroll and benefits, primarily due to higher average wage rates, and higher corporate overhead, primarily due to strategic investments.
Paula Oyibo: These pressures were partially offset by lower incentive compensation reflecting operational performance that was below our internal targets.
Paula Oyibo: Depreciation was $67 million for the quarter compared to $61 million last year, primarily due to new store and supply chain investments.
Operating profit decreased 2.7% to $318.5 million.
Paula Oyibo: As a percentage of sales, operating margin was 12.6% of sales, compared to 13.1% of sales last year.
Paula Oyibo: and diluted GAAP earnings per share increased 1.4% to $5.14 compared to $5.07 last year.
Moving to the balance sheet and our capital allocation priorities.
Paula Oyibo: We ended the quarter with $178 million in cash and cash equivalents and $200 million in short-term debt.
Paula Oyibo: Similar to third quarter last year, we drew on our revolving credit facility during the quarter to support working capital needs and ongoing capital allocation priorities, including share repurchases and capital expenditures.
Paula Oyibo: Total inventory increased 1.9% to $2.4 billion compared to $2.3 billion last year. The increase was primarily due to the impact of 63 net new stores.
Paula Oyibo: Year-to-date, through the third quarter, we generated $302 million in operating cash flow.
Paula Oyibo: Capital expenditures were $114 million for the quarter, primarily reflecting investments in new and existing floors.
IT Investments, and Merchandise Fixtures.
Paula Oyibo: In the third quarter, we returned $267 million of capital to our shareholders through the repurchase of 731,000 shares.
Paula Oyibo: At the end of the quarter, we had $2.9 billion remaining under our $3 billion share repurchase program we announced at our investor meeting in October.
Paula Oyibo: Now turning to our outlook. We have refined our sales and EPS guidance for the fiscal for fiscal 2024 to reflect our third quarter results while continuing to take a cautious view of the consumer and operating environment.
Paula Oyibo: We expect next sales for the year will be between $11.1 and $11.2 billion with comp sales growth between negative one and flat.
Paula Oyibo: For the year, we continue to plan to open approximately 60 to 65 net new stores and remodel or relocate 40 to 45 stores.
Paula Oyibo: We expect operating margins will be between 12.9% and 13.1% of net sales, with D leverage to come from both gross margin and SG&A, reflecting our top-line expectations.
Paula Oyibo: Reflecting these assumptions, we now expect the needed EPS for the year will be between $23.20 and $23.75.
Paula Oyibo: With one quarter left in the year, I want to share how we are thinking about Q4.
Paula Oyibo: While we are encouraged by our third quarter results and our performance quarter to date, we also acknowledge that the fourth quarter will likely be impacted by a compressed holiday season, a dynamic operating environment, and continued uncertainty around underlying consumer demand.
Paula Oyibo: For Q4 modeling purposes, we expect comp sales will decline in the low single-digit range and operating margin will be between 11.6% and 12.4%.
One final update.
Paula Oyibo: We have updated our capital expenditures expectations for the full year and now expect to spend between $400 and $425 million in CapEx in fiscal 2024.
Paula Oyibo: including approximately $230 million for new stores, remodels, and merchandise fixtures, $130 million for supply chain and IT, and about $50 million for store maintenance and others.
Paula Oyibo: In closing, we know it will take time to see the full benefits from our efforts, but we remain confident that our go-to-market strategies and investments, along with continued operational and financial discipline, will enable us to drive stronger sales and value creation over the long term.
Speaker Change: And now, I'll turn the call back over to our operator to moderate the Q&A session.
Speaker Change: Thank you. We will now be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. Confirmation will indicate your line is in the question queue. You may press star 2 to remove yourself from the queue.
Speaker Change: For participants using speaker equipment, it may be necessary to pick up the handset before pressing the star keys. As a reminder, we ask that you please limit yourself to one question and then re-enter the queue for any additional questions. One moment while we poll.
Our first question comes from Simeon Siegel, BMO Capital Markets.
Speaker Change: Thanks, everyone. Nice job, and if I forget later, I hope you and your families all have a nice holiday season.
Speaker Change: Dave, any further color you can share in how you're thinking about the broader competitive and promotional landscape over holiday? And then just, Paula, could you quantify any of those gross margin pressure points this quarter, how you're thinking about them next quarter and beyond? And then just, does any of today's progress in the full year guide list impact your initial margin views you had given us in October? Thank you.
Speaker Change: Thanks, Simeon, and happy holidays to you as well. I'll start with just the broader competitive and promotional landscape, and Paula, you can pick up on some of the margin-specific areas. So for the third quarter,
Speaker Change: What yeah as we as I mentioned in the in the remarks we continue to
see, you know, this is an intensely competitive.
Speaker Change: time frame, and we've been managing and discussing that throughout the year. We feel like our actions, the adjustments we made in the third quarter, helped us improve our performance, strengthen our performance, but we also recognize we have more work to
Speaker Change: ahead of us. The dynamics in the marketplace, you know, continue particularly in this prestige space.
Speaker Change: But we're seeing progress. And our unique proposition, the aspects that only ULTA delivers through our servant, our loyalty program, our points of presence, the experience we deliver, you know, have always been
Speaker Change: reduced promotion coming right out of COVID. So we anticipated that coming into Q3. Coming into this year, we saw that in Q3. Our promotional rates in Q3 were lower than Q2, but still somewhat higher than last year. But as I mentioned in the remarks,
Speaker Change: Our efforts to adjust our promotional strategy, to lean in and amplify our tentpole events, made our overall efforts more effective.
Speaker Change: personalization efforts are driving the business. As we look into the holiday, it is obviously a very promotional timeframe, the most promotional timeframe. That's certainly true this year. And as we navigate through and share our fourth quarter results, we'll have reflections on the overall dynamics, but we're anticipating continued promotional intensity, but not significantly outside of what we would expect so far this holiday.
Paula, do you want to talk about that?
Paula Oyibo: Sure. Hi. Good afternoon, Cynthia. Yeah, so we raised our full-year operating margin in EPS reflecting, you know, Q3 performance and also ongoing expense discipline.
Paula Oyibo: What I would say as we think about kind of Q4...
Paula Oyibo: generally for the full year. We continue to expect growth margin de-leverage.
Paula Oyibo: and when we think about Q4, reflecting the top line expectations in a competitive environment.
Paula Oyibo: will continue to de-leverage and really the trends we've seen all year will continue. So headwinds are the least de-leverage we expect to see from a fixed cost perspective. Merchandise margin pressure will continue given promotions in Category Mix.
Paula Oyibo: And then our 12 wins, lower transportation costs, which we've been speaking about all year, we'll continue to provide some offsets to that.
Paula Oyibo: I would say from an SG&A perspective, we're expecting growth from a full year in the mid-single-digit range, but Q4, expecting that to be in the low-single-digit growth range. We still expect most of our expenses to be leveraged on the lower sales, but we'll continue to maintain financial discipline.
as we have in the future.
Great, thanks so much, best of luck and happy holidays.
Speaker Change: Oh, yeah. Okay, thank you. No, sorry, I didn't mean to cut you off.
No, all good. Thank you, Tamiya.
Thanks guys.
Thank you. Our next question comes from Kelly, Cargo City.
Speaker Change: Hi, thanks for taking my question. I just wanted to see if you could provide a little bit more context on the prestige makeup. I believe it was flat in the quarter.
Speaker Change: How was it for the industry overall? And if you could just talk about the innovation pipeline in Prestige Makeup. I'm sorry if I said Prestige Beauty before, I'm talking about Prestige Makeup. If you could talk about the innovation pipeline there.
Speaker Change: And then just secondly, any way to kind of quantify the drag you've seen from the competitive pressures, you know, specifically with those new points of distribution and sort of where we're at in the timeline for when you expect those headwinds to evade further. Thanks.
Speaker Change: Great. Well, thanks, Kelly. Yeah, let's see. Starting with Prestige Makeup, obviously an important category, our largest category, and I'd start with saying overall you know, we're pleased in the third quarter that
Speaker Change: was flat for the quarter for us, which was improvement from some of the trends. The drivers behind that are...
Speaker Change: Our innovation that we continue to launch brands like ILIA coming into our portfolio. Strong execution across our key programs like 21 Days of Beauty, which is focused on prestige and makeup, of course, is the highlight of that. And real emphasis on some of our core brands like...
Speaker Change: like Clinique and MAC and other strong performing brands that we've been working closely with to ensure we're delivering for our guests and our guests respond well to them. And so we've been focused on this category for a long time to strengthen its performance and we're really pleased that we were able to do that. Overall in the category, we saw the category, the total prestige makeup category.
Speaker Change: A bit more than us in low single digits, so we saw pressure in share, although our share performance while still pressured
Speaker Change: improved from the second quarter, so we're making headway and we're pleased with that.
Overall, on the competitive environment, you asked about competitive openings.
Speaker Change: As we've been talking about throughout the year, that's certainly a meaningful dynamic as there's been more than a thousand new points of distribution in prestige beauty over the last couple of years, and that has been a pressure. I shared in previous...
discussions that 80% of our stores
Speaker Change: have experienced at least one competitive opening and more than half have had multiple competitive openings. And that continues to be a dynamic that's going on in the marketplace.
but it's...
Speaker Change: You know, we're still in the midst of it, and so by no means are we claiming that, you know, we're through it. We've got more work to do. We're working through the dynamics, and our focus there is continue to do what we do best, lean into our strengths.
Speaker Change: in our stores, and online, and all of our experiences. That activity, those things that I highlighted earlier are what helped us make progress this quarter and are the things that are going to drive us into 2025 as we continue to strengthen our business.
Thanks, best of luck, and happy holidays.
Speaker Change: Happy Holidays. Thank you. Our next question comes from Corinne Wolfmeyer, Piper Sandler.
Corinne Wolfmeyer: Hey, good afternoon. Thanks for taking the question and congrats on the quarter. I'd like to touch a little bit on the competitiveness on the mass piece of business. I feel like we talk a lot about prestige, but I do want to understand mass. A lot of the broader mass or larger mass retailers have been talking a little bit more positively about beauty. You've got dollar stores expanding more in beauty. So how is this impacting the competitive landscape, would you say, for that piece of business? And how are you thinking about the mass piece going forward and heading into 2025? Thank you.
We'll start with saying that beauty is...
Speaker Change: is emphasizing the category, investing in the category, and that's been going on across all of our competitors. In the mass-specific business, that total mass business continues to...
Speaker Change: perform in that mid-single-digit range for the quarter in total mass. And it's an important category for us. As you know, one of the...
Speaker Change: key differentiators of our business is strength in mass and prestige and luxury. And so we continue to be focused on our mass business and the important role that it plays. And so that we're well aware of the dynamics. We have seen mass makeup as a category, across the category, decelerate. Certainly there's brands that are stronger, but the total category has been more pressured. But we're seeing continued strength in mass skin, which is an important business for us. So we're focused on continuing to drive our mass business and make sure we're delivering the assortment that we know our guests love.
Speaker Change: to engage with us across all price points and continue to be confident in our ability to excite them and engage them in our mass business.
Speaker Change: Okay, thank you. And our next question comes from Anthony Chakumbo, Loop Capital Market.
Anthony Chakumbo: Thank you so much for taking my question. Hopefully, you can hear me okay, and I'll just keep it to one question. Obviously, you had a very impressive sequential improvement in your performance, and you've touched on a few different things. But if you had to sort of almost like kind of stack rank what you thought drove the better performance, you know, would it be the, you know, more effective promotions? Would it be some of the merchandising changes? Would it be, you know, some of the partnerships you talked about, like with Wicked and I guess the mini brands or whatever? Like, yeah, if you could just give us – help us to understand, you know, what from a sequential perspective led to the improvement performance.
Thank you.
Speaker Change: Thanks, Anthony. I wouldn't point to one thing. There's not one thing that ever really drives our business. We talked about coming out of the second quarter. While we were getting
Speaker Change: pleased with some aspects of our business. We were clear on areas that we needed to address.
Speaker Change: and we leaned into several of the key factors. Assortment is always critical.
Speaker Change: bringing in newness. Some of the brands I highlighted like Ilia into the quarter played an important role. The collaborations that that you mentioned also, you know, drove excitement and enthusiasm. Assortment is always a key driver and certainly was in the in the third quarter. Our promotional effectiveness
Speaker Change: We had some learnings in the second quarter as we were faced with more pressure sales, how we adapted our promotional environment. We had learnings there that we built from into the third quarter. Leaning in, strengthening our core ten pull events that our guests value from Ulta Beauty, 21 Days of Beauty, our hair event.
Speaker Change: and Paul Hall, as well as smart, purposeful, targeted, and effective.
Speaker Change: complimentary promotions throughout the quarter in a very personalized, so that drove a strong effectiveness. We worked hard throughout the quarter. Our teams across the organization, store teams,
Speaker Change: for sure. Supply chain, our IT teams, our digital teams, to make sure we were delivering a great experience to improve conversion and we're pleased that we were able to do that both in-store and in strong performance online. And that took a holistic effort with making sure we had strong in-stock, strong engagement from our store associates, and strong execution online. And we also, the last thing I'd mention is we highlighted
Thank you.
Speaker Change: In the second quarter, some disruption from some of the system changes, and we made improvements in that space to make sure our products were where they needed to be. So multiple elements contributed. It was a really holistic effort across the organization, and we're pleased. Having said that, we know we've got more work to do. We're pleased with the sequential improvement. We are focused on stronger improvement over time as we move both through the holiday period and into 2025 and beyond. So we'll continue to lean into all of those things and the broader strategies.
Speaker Change: that we went through in a lot of detail at our investor day in October.
Very helpful, thank you.
Speaker Change: Thank you. Our next question comes from Christopher Horvitz, J.P. Morgan, Chase & Company.
Thank you.
Speaker Change: Thanks. Good evening. So I'll throw a quick two-parter in there as well. So the first part is, are you positive quarter to date? You mentioned encouraging. How are you thinking about the balance between the 5 fewer days, but at the same time, the very substantial gift card business and 5 fewer days would suggest a strong January follow-through? And then following up on an earlier question, any further thoughts on how you think about 25? You talked about a floor of 11% long-term, 12% plus.
Speaker Change: How did this quarter change that point of view, if at all? Thanks.
Speaker Change: Hi, Chris. Thanks for the question. What I would say is, you know, we want to get into the details of specifically
Speaker Change: comp quarter to date, but what I will say is that, you know, our holiday season is off to a solid start and our teams are executing well. We are encouraged by what we're seeing, but we also recognize that we have several important weeks ahead of us in the holiday season, and the operating environment is dynamic. And so that is why we shared that we're expecting Q4 crop sales to decline in the low single-digit range.
Speaker Change: So, that's what we're thinking from a quarter perspective. And I would say, yeah, there's a component of the dynamic environment that is related to, you know, how consumers spend the fewer shopping days and things of that sort that we are obviously contemplating as we think about our expectations for this work.
Speaker Change: invest to re-accelerate our growth and we continue to expect to make investments in 2025 that will position us for a stronger long term, but we will make decisions to enable to ensure that we're delivering operating margin at least above 11 percent.
That's great. Thanks very much.
Speaker Change: Thank you. Our next question comes from Kate McShane, Goldman Sachs.
Speaker Change: Hi, this is Emily Gosch on for Kate. We were wondering, on UBmedia, how big of a competitive moat do you think it could be, especially considering what it does to help your relationship with vendor partners? And how much is UBmedia contributing to the long-term operating margin outlook that you provided at the Investor Day?
We think we're very...
Speaker Change: optimistic and excited about the role that UB Media both is and will play on our business going forward. As you suggest, we have a real competitive opportunity because of the
Speaker Change: The scale and the breadth of our business, the data that we have, the understanding of beauty, engagement, and transactions across
Speaker Change: really all beauty enthusiasts of all ages and all geographies is really unmatched and so we've worked hard to
Deliver an experience for our brand partners that
Speaker Change: adds value, and most importantly, adds strong ROI in their media investments.
Speaker Change: and the growth that we've seen in that business reinforces that we're able to do that. As we did talk about it, our Investor Day continued investment in capabilities. I highlighted a couple of those capabilities on the call earlier today related to Roblox and other ways that we can further give our brands opportunities. But because of the great relationships that we have,
Speaker Change: and the role that we play in the category. We're confident that our opportunity to grow this business, continue to grow this business over time will be a positive impact on the business.
Paula Oyibo: Paula, do you want to talk about the financial impact? Sure, what I would say is UB Media, Emily, is contributing positively to growth margin in a way. To think about it over time is that it plays an important role.
Paula Oyibo: for us, and it will help offset some of the merchandising margins pressure.
Paula Oyibo: We currently see and we have shared as we make certain investments in brand building and other things in 2025 and beyond that would serve to help offset some of those pressures.
Thank you.
And our next question comes from Oliver Chen, TD Co.
Speaker Change: Bye. Thanks, David and Keisha. On your thinking longer term, what will it take to
positive comp in terms of what categories
Speaker Change: Perhaps you see as the biggest opportunities and was the commentary on October being a bit softer? Was that surprising to you? It sounds like you may continue to expect to see a fair bit of volatility. And Keisha, on the cost door sales, is it a mid-single digit to leverage occupancy? Anything we should know about that in terms of achieving fixed cost leverage based on the comp? Thank you.
Speaker Change: Hi, Oliver. Let's see, so first on long-term growth, what's going to deliver positive comps? You know, I guess I would go back to what we talked about in detail at our Investor Day. You know, we really see a combination of leaning in and reinforcing our established strengths as well as innovating across
Speaker Change: our entire ecosystem as key contributors to our performance. We talked about, you know, four key pillars or platforms. Assortment,
Speaker Change: having the best assortment across beauty and wellness, experience, delighting our guests in every touchpoint that we have, access, continuing to expand our availability, both with stores, accelerated new store openings, as well as strong online expressions, and then, of course, loyalty and building brand love.
Speaker Change: You know, we're really focused on driving innovation across each of those and making sure that we're ready to do that. And what I talked about in an earlier question that contributed to the...
third quarter
Speaker Change: improvement versus the second quarter, you know, it's the foundations, it's the fundamentals, it's the core things, Oliver, that you know about our business having...
Speaker Change: They've tracked us for a long time. When assortment is stronger and experience is right and our loyalty is working, and our touch points are thriving, both in store and online, those are the things that will come together. So, really all of it we just shared a couple months ago. Those are aspects that will drive our business going forward.
Paula Oyibo: Yeah, and Oliver, this is Paula. Given you asked a question about October and whether or not we were surprised, what I would say is, no, we, you know, and we thought, Dave mentioned or we talked about the timing and some of our ten poll events, and so that had a role to play in kind of the bi-period performance in Q3. And then I think you had a question about leverage points. I know, you know, we don't specifically disclose a specific point, but we've shared in the past one way to think about things is from a rent standpoint.
Paula Oyibo: perspective our expenses around 4% and so as you think about, you know, comp and total growth, maybe think about it in that perspective.
Happy Holidays. Thanks.
Thanks Oliver.
And our next question comes from Christina Katai, Deutsche Bank.
Christina Katai: Hi, good afternoon. Congrats on a nice quarter. So I just wanted to follow up on your early learnings from your market share reinforcing strategy. It obviously enables you to maintain flat market share in the third quarter, at least in Prestige. Where are you seeing some of the biggest gains in member engagement? I think, Dave, you talked about both Platinum and Diamond members are up in the program year over year. And then just as the competitive opening pressures abate, is it fair to say that maybe the worst is behind us and is there a timeline for when you think maybe you could return to market share gains? Thank you.
Speaker Change: Well, let's see, so on the where we've seen engagement, yeah, you highlighted an important part of our business which is
Speaker Change: You know, what we call our elite guests, our platinum and our diamond members, and we're pleased that we continue to see strong performance from them, high engagement, high spend. They are obviously our best guests.
Speaker Change: We've seen that across the board and it's something we've been focused on to continue to grow our business. Our loyalty program in total was up 5% for the quarter and that was a combination of attracting new members. One of the things we talked about in October was even though we've had a lot of growth in our loyalty program over time, we still see a lot of opportunity ahead and we're continuing to attract new members and bring them into our business and that of course
Speaker Change: important fuel for future growth. We also had success reactivating LAPS members. A LAPS member is somebody that has … was part of the program but hasn't purchased with us for the… at least once in the last 12 months. And we have a very focused…
Speaker Change: CRM personalized program going after that group and we continue to see success.
Speaker Change: And then our retention is strong. You know, there is an intense competitive environment, but our guests continue to demonstrate that they like what ULTA is offering, and so retention remains healthy. And so those things come together. We're seeing it across all ages, all geographies, strength across...
Speaker Change: All types of beauty enthusiasts, which is an important part of our business.
Speaker Change: Competitively, you asked about the dynamics there and continue to say something that we've shared in the past is it's difficult for us to exactly predict or lay out when we would see us to completely moving through this because we've never experienced the scale of this in such a concentrated period of time.
Having said that, I'll reiterate.
Speaker Change: It's something I mentioned earlier, which is, you know, we have confidence. We've seen it in the data before.
Speaker Change: New store openings, our stores are able to recover and return to strong contributors. The data that we see now, stores that have not been impacted.
Speaker Change: by a competitive opening, continue to perform better and positively, and we saw improved performance in Q3. But I would not take that fully as a, okay, we're 100% through it and it's totally behind us. This is a meaningful disruption in the category. We're learning every period how the dynamics are evolving, but we did make progress in Q3, and so our focus continues to do that as we move into 2025.
Speaker Change: All right. So with that, thank you all. I will wrap up. Thank you for joining us today.
Speaker Change: So, I want to close out by thanking our more than 55,000 Ulta Beauty Associates working together in our stores, in our distribution centers, and across our entire corporate team. I sincerely appreciate their continued focus and commitment to delivering unique and memorable guest experiences across all our channels.
Speaker Change: So, as we close, I want to wish you all a happy and healthy holiday season. There's still time to get out and shop at Ulta Beauty, so make sure you put that into your holiday shopping plans, and we look forward to speaking to you again when we report results for fiscal 2024 on March 13th. Have a great evening.
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