Q2 2019 Earnings Call

Greetings and welcome to the Ulta Beauty second quarter 2019 earnings results Conference call. At this time, all participants are in listen only mode.

A brief question and answer session will follow the formal presentation.

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 you to your host Ms. Kelly Rollins Vice President Investor Relations. Please proceed.

Thanks, Dan Good afternoon, everyone and thank you for joining us today for Ulta Beauty second quarter earnings Conference call hosting today's call are Mary Dillon, Chief Executive Officer, and Scott Settersten, Chief Financial Officer, Dave Kimbell, President and Chief merchandising and marketing Officer is also with us today.

This afternoon, we released our financial results for the second quarter of fiscal 2019, a copy of the press release is available in the Investor Relations section of our website at Www Dot all to Dot com.

Before we begin I would like to remind you of the company's safe Harbor language. The statements contained in this conference call, which are not historical facts may be deemed to constitute forward looking statements within the meaning of the private Securities Litigation Reform Act of 1995.

Actual future results may differ materially from those projected in such statements due to a number of risks and uncertainties all of which are described in the companys filings with the SEC.

We caution you not to place undue reliance on these forward looking statements, which speak only as of today August 29, 2019, 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.

Please note that in our comments today, we will reference non-GAAP earnings growth adjusted for the impact of income tax benefit in the second quarter of 2019 and of the second quarter of fiscal 2018.

We will begin this morning with our this afternoon with prepared remarks from Mary and Scott. Following our prepared comments, we will open the call for questions to allow us to accommodate as many of you as possible during the hour scheduled for this call. We ask that you ask one question only during the Q and a session.

Now I will turn the call over to Mary Mary Thank you Kiley and good afternoon, everyone.

The Ulta beauty team delivered another quarter of solid topline performance gross margin expansion and double digit earnings growth to recap our financial performance for the quarter total sales grew 12% comp store sales increased 6.2% on top of 6.5% growth in the second quarter of last year gross margin expanded by 40 basis points and diluted earnings per share excluding the tax benefit increased 11.5%.

Looking forward, however, weve adjusted our expectations for the second half of 2019 to reflect the headwinds and volatility. We're currently seeing in the U.S. cosmetics market and we'll share more with you how we're thinking about the current sales environment.

But let me reiterate our differentiated model is winning in the marketplace and we continue to invest in building the long term capabilities that will further extend our leadership position in the dynamic beauty industry.

Year to date, we've continued to expand our market share across most categories increase our brand awareness delivered double digit growth in active loyalty members increased traffic and delivered double digit growth in almost every key merchandise category I will also add that our salon business is showing real comp strength is we're executing on our optimization strategies.

That said the cosmetics category at Ulta, which is roughly 50% of our business and one of our highest margin categories has only delivered in the low single digit growth year to date, well outperforming the market, but below our expectations.

So let me explain more Ulta beauty continues to drive meaningful market share growth in makeup across mass and prestige, but it's clear that cosmetics and the overall us market is challenged after several years of very strong performance growth. In the makeup category has been decelerating over the last two years, but recently turned negative based on the latest track data the cosmetics category in the total US market has experienced mid single digit declines through the first six months of 2019 and has been more volatile in recent weeks.

Notably when we look at sales growth by brand, we see that most of the top brands across both mass and prestige our negative year to date.

We had expected this trend to stabilize and improve as we move through 2019, but we now believe that the softness we've seen so far in 2019, we will continue through the remainder of the year.

We believe that the main issue driving this softer cycle and cosmetics is that the newness and innovation that had been the focus of most brands. This year has just not driven the kind of incremental growth. We've enjoyed for some period of time.

Over the past several years, we've seen strong growth in cosmetics, driven by new rituals and application techniques like countering and browse styling and innovative new product formats like liquid lib pellets in many ways.

This innovation resulted in new makeup routines, requiring new products, which drove strong incremental growth. The most recent cycle of innovation is just not driven those behaviors, resulting in a soft cycle for the cosmetics category in the us as innovation and newness process and market has not driven the expected growth.

By contrast, as I mentioned earlier, we're seeing very strong growth in every other category in the case of skin care category and brand innovation is driving new rituals and incremental purchases, thus driving strong comps and we're continuing to drive market share gains in the category, but of course skincare is a smaller part of the business.

We believe the industry wide challenges in the makeup category will continue in the near term and as a result, we've adjusted our outlook for the rest of 2019 to reflect ongoing volatility in the category.

Leveraging our guest insights we are working very closely with all of our brand partners to ensure that the innovation pipeline pivot to more exciting to incremental innovation. We are optimistic the cosmetic category in the U.S market will move back to growth, but we need more time to move through this innovation cycle.

In the meantime, our team is laser focused on the exceptional execution and guest experience that we know our team delivered in store and online.

We will continue to build on our momentum and non makeup categories. While we work to stabilize growth in makeup categories to that end, we have a number of exciting new and exclusive product launches planned for the second half, which I'll discuss in more detail in a little bit.

Despite the near term headwinds, we remain confident that our differentiated and diverse business model, our commitment to our strategic investments and our highly engaged associates will continue to drive market share gains and deliver strong returns for our shareholders.

Let me give you now an update on the progress we've made this year on our strategic imperatives.

Our first strategic imperative is to drive growth across beauty enthusiast segment, and we're making good progress reflecting data for the February through July period, Ulta beauty now represents 24.5% of the proceeds beauty market as tracked by NPD, an increase of 210 basis points from a year ago.

We continue to expand our brick and mortar footprint in the second quarter. We opened 17 net new stores relocated four stores and remodeled eight stores compared to 19 net new stores, one relocation and seven remodels in the second quarter last year.

Ending the quarter with 1200 13 stores.

New store productivity remains strong with first year sales trending ahead of plan and we remain on track to open 80 stores this year.

Now turning to our second imperative to deepen love and loyalty for the Ulta Beauty brand our brand awareness continues to grow and our possibilities are beautiful campaign and inclusive positioning have been very well received and very effective as measured by our marketing analytics tools.

Unaided awareness grew by five points to 56% compared to the same period, a year ago, and our aided awareness increased to 91% from 90.

Importantly, we continue to strengthen our connection with consumers across the spectrum, including the increasingly influential Gen Z segment, where we have been recognized as a leader among beauty retailers.

Guess also continue to respond well to the compelling combination of our loyalty credit card in gift card programs, resulting in double digit growth in all three programs for the second quarter.

Our ultimate rewards loyalty program has grown to 33.2 million active members an increase of about 13% since the second quarter last year.

We continue to see nice growth in the number of guests, who achieved platinum and diamond status. Our most engaged guest as well as growth in overall sales per member.

Our loyalty members account for more than 95% of sales and we're using insights about preferences to create more personalized recommendations replenishment reminders and unique offers all to drive deeper engagement and increased spend per member.

We're making nice progress on this effort is the number of guests receiving these personalized recommendations and replenishment reminders continues to grow we've also begun to use artificial intelligence in our efforts to drive promotional effectiveness.

By leveraging data, we're identifying guest responsiveness to different types of offers and using these insights to help us determine the best offer to present each guest with a goal of building a larger basket and driving incremental sales.

Our marketing events in the second quarter were anchored by Omnichannel campaigns, including our gorgeous hair event, our new summer Slash campaign, and our semi annual Jumbo love events. We augmented these multi week events with a number of new smaller events, including Mascara, Bonanza and National Lipstick day.

Now turning to our imperative to deliver a world class beauty assortment. Our merchant team is doing a great job, creating a highly differentiated omnichannel offering across all of our categories.

Newness drove about 20% of our total comp this quarter, driven primarily by new items in skincare and cosmetics.

From a category standpoint, we saw strong sales growth this quarter in skincare hair care and personal care appliances.

Skincare continues to be one of our strongest growth categories with prestige masks and Sun care, all delivering double digit comps this quarter.

As I mentioned earlier this category strength is being driven by strong innovation supported by new ingredients like moisturizers, with Sps and sunless, Tanners and new skincare rituals like Serums and math.

Mass skincare delivered strong comps driven by growth from both new and core brands.

We implemented our mass skincare reset in July and added several new brands to our assortments such as a cure a clean skincare line and a brand called naturally good for you, which includes both skincare and supplements in the regime.

We also launched the ordinary skincare collection founded to offer results driven products at an affordable price point.

We initially launched the ordinary on Ulta Dotcom and recently expanded the brand to 400 stores.

Sales in Sun care were also robust driven by an expanded selection of self standing products and the Sun protection options.

In prestige skincare newer brands like heels and to the life drove strong guest engagement Wellbore established brands like Dermalogica benefited from strong product newness. In addition, new exclusive emerging brands, including awake fountain of truth in Canoga, all contributed to the strong growth in the second quarter.

And earlier this month, we launched a favorite indie brands Sunday Riley in all stores and later this quarter, we will extend our exclusive partnership with Kylie cosmetics with the introduction of our full line of Kylie skin also in all doors.

Hair care delivered another quarter of strong high single digit comp growth, reflecting the success of our gorgeous hair in jumbo love events and supported by the Reflow, we completed in the first quarter.

Fragrance delivered solid mid single digit growth this quarter, driven primarily by Ulta beauty exclusive as well as newness from luxury brands why SL and Versace.

We have some exciting new exclusives coming in fragrance this quarter, including thank you next a new fragrance from Ariana Grande day.

Personal care appliances delivered strong double digit growth driven by strong demand for dice in products and the Revlon, one step volumizer hair dryer as well as new one step products from bed head and hot tools.

Now as we discussed earlier the cosmetics category overall at Ulta delivered low single digit comp for the quarter, reflecting double digit growth in mass cosmetics and low single digit growth in prestige cosmetics, including iconic brand.

This performance was in spite of weak category trends in the us market as I mentioned before especially in proceeds.

Due to the strength of our business model and ability to secure some important exclusives, we continues to drive significant market share gains in the category.

Mass cosmetics continued to benefit from the Reflow, we completed earlier this year, which allocated additional space for exclusive or limited distribution brands.

In addition, newness continues to drive strong growth in traffic, especially with our exclusive brick and mortar brands such as morphine Enjuvia as plays.

In addition, we continued to deliver newness and innovation through the Ulta beauty collection in the second quarter, we partnered with Bretaa Kalo Corporation to launch an exclusive makeup line within the Ulta Beauty collection and guest response to the collection has exceeded our expectations.

And earlier this month, we debut the exclusive girls United collection created by six talented African American young women through a special mentoring initiative with essence magazine.

Prestige cosmetics was mixed we continue to see strong growth from our iconic prestige brands driven primarily by the expansion of Clinique and lancome two additional stores.

In addition, prestige cosmetics sales benefited from strong growth from new brands, such as highly cosmetics and newness, including the introduction of park Big Eagle Mascara, which launched personnel to beauty and the expansion of a collection of Beacon and cruelty free lashes from multiple brands, including tart and the lower.

These gains were offset by soft performance in a number of other established brands in the portfolio.

Looking forward to the second half of the year, we have a number of new exclusive product and brand launches plan, which we believe will have a strong appeal for our guests.

In prestige, we have an exciting new exclusive brand launch plan this quarter kw beauty by Kim Kardashian, West is coming to Ulta beauty.

With more than 146 million Instagram followers. He was one of the strongest forces and pop culture, and we are very excited to extend our partnership with her.

The New collection will launch was 67 skews and include products that are most iconic to Tim including content and highlight kids nude lift and versatile I look.

And for holiday, we will offer our guests to exclusive holiday kits available only at Ulta beauty.

We also have some exciting news to share in mass cosmetics, we just unveiled the launch of Florence by Mills, a collection created by merely Bobbi Brown star of Stranger things.

Really is an influential voice was in her generation has more than 27 million followers on Instagram.

Exclusive to Ulta beauty Florence by Mills offers a fresh fun approach to clean beauty with a universal range of both skin care and makeup products that will appeal to all guests, especially Gen Z.

In addition, we have a number of new morphy collaborations with key influencers in the pipeline for the second half.

The first collaboration launched just this week with Jefferies Star one of the most prominent social media Influencers and beauty today and offers guests a collection of makeup and accessories.

As we've discussed on previous calls emerging brands and digitally native brands are driving new growth within the beauty channel at Ulta beauty, we have a strong track record of successfully working with digitally native and emerging beauty brands and our footprint of more than 1200 stores in more than 30 million loyalty members positions us very well to be a great partner to these brands as they evolve and expand their reach.

To support this effort last year, we created a new dedicated team within our merchandising organization to focus on identifying smaller or emerging brands across all beauty categories and working with them closely to ensure they're successful in a retail environment.

Year to date. This team has launched more than 30 unique new brands.

To showcase these brands and give guests the opportunity to discover exploring played with new emerging brands. We debuted sparked at Ulta beauty at beauty Con earlier this month.

Sparked at Ulta beauty is a new platform designed to feature a curated ever evolving selection of emerging brands across all categories in select stores and on Ulta dotcom.

Moving on to our imperative to transform the in store in beauty services experience. We've completed our services optimization program in all stores and we are very encouraged by the improving trends, we're seeing across the board and staff recruitment and retention average ticket and guest engagement. As a reminder, this effort is both associate and guest facing.

To attract and retain top talent, we've implemented a more compelling compensation structure and a newly formed fuel base leadership team to support industry, leading training and education programs.

For the gas we've simplified our service menu introduced new services and made our pricing easier to understand.

We continue to leverage our highly influential pro hair team, which is made up of industry, leading educators and platform artists, which helps us to attract top talent.

This talented and award winning team is creating excitement and raising awareness of Ulta Beautys brand within the beauty industry through participation in national and local events that highlight the artistry and opportunity that exists at Ulta beauty.

In addition to optimizing the services business. We're also integrating our services business with more of our marketing campaigns and larger merchandising strategies.

In conjunction with a gorgeous hair event, we launched a new blow up program introducing five new looks created by the award winning Ulta beauty protein.

And we continue to leverage back bar takeovers to introduce new brands like living proof and elements to guests and to drive add on purchases.

Now I'll turn to our fifth strategic imperative to reinvent beauty digital engagement during the second quarter. We successfully completed the rollout of Biod line pickup in store to all stores, while still early guest response of this convenient omnichannel experience has exceeded our initial expectations.

We know our Omnichannel gas our best guest and we believe this capability will make it even easier for guests to seamlessly shop between our online store and our physical stores.

In conjunction with the launch of BOPUS, We also enhanced our mobile site and App with improved product detail page and as a cleaner look and feel including better better visibility to in store inventory availability.

We continue to leverage augmented reality and artificial intelligence to create compelling beauty experiences for our guests.

During the second quarter, we updated glam lab, our virtual try and experience to include life trend for Android devices.

We also began testing our skin care virtual beauty advisor online, which is powered by AI and they are it provides guests easy ways to get skincare advice.

Lastly, I'd like to announce two partnerships in the digital space first we recently announced a new exclusive partnership with Samsung and Raviv to provide beauty enthusiasts with access a personalized skincare diagnostic information targeted product recommendations and the ability to quickly purchase products from Ulta dotcom directly through samsung's virtual assistant fixed fee vision.

And second later this year will offer our guests the ability to use after pay on Ulta Dotcom, we know that some gas principally younger ones are sensitive to cumulating personal debt. After pay allows shoppers who receive products immediately and pay for them and for installment without taking out a traditional loan or paying upfront upfront fees or interest after pays buy now pay later option will offer guests more freedom and flexibility without the weight.

Underpinning and fueling our strategic imperatives, our ongoing efforts to deliver operational excellence and drive greater efficiencies, we continue to enhance our supply chain investments, including a recent end to end optimization of our store shipment categories, which both improved DC processing efficiency and reduce sorting time for product in stores.

In addition, our store on time delivery trend continued to improve this quarter delivering 80 basis points of improvement over last year.

And finally, we continue to make progress toward our goal of today E Commerce shipping by 2021 with a successful conversion of our Romeoville distribution center to an ecommerce fast fulfillment center. The team completed the transition seamlessly and was able to leverage much of the existing infrastructure for the new operation.

The facility began fulfilling guest orders in early August as currently fulfilling about 10% of our total ecommerce volume with that I'll turn it over to Scott to discuss our second quarter financials, and our updated outlook for the rest of the year in more detail.

Thank you Mary and good afternoon, everyone.

I'll start with the income statement.

Sales growth of 12% was driven by a 6.2% comp and strong new store productivity.

Increased traffic drove the majority of our comp for the quarter with transaction growth of 5.4% and ticket growth of 8.8%.

Although we no longer breakout ecommerce growth, specifically I can share that ultra dotcom growth was towards the high end of our expectations of 20% to 30% growth driven by traffic.

Looking at trends through the quarter, we began to see more volatility in our sales trends in July and pulled a number of levers to drive traffic and deliver healthy topline growth.

On the gross profit line margin of 36.4% improved 40 basis points year over year from 36%.

Driven by leverage of rent and occupancy expense and stronger merchandise margin, partially offset by investments in our services business.

Our supply chain operations were roughly flat as a percent of sales as leveraging our DC operations was offset by growth in E Commerce.

To provide more color on our merchandise margin, we continued to benefit from efforts related to our efficiencies for growth.

Or FG program.

This goodness was offset by increased promotional activity to drive traffic as well as ongoing mix headwinds.

SGN a rate of 23.6% de leveraged by 90 basis points compared to the prior year's rate of 22.7%.

Reflecting planned de leveraging corporate overhead related to investments in growth initiatives, including our efforts around digital innovation, including Omnichannel and personalization and our recently announced Canadian expansion.

We also saw deleverage in store labor versus last year, primarily due to continued investments to support the guest experience.

Operating margin of 12.5% of sales was down 50 basis points.

Given our investment agenda, we had planned for operating margin de leverage for the quarter.

The effective tax rate for the quarter decreased to 23.1% compared to 23.9% in the second quarter last year, primarily due to an increase in federal income tax credits.

Diluted GAAP earnings per share grew 12.2% to $2.76 compared to $2.46 reported for last years second quarter adjusting for the four cents of tax benefit this year and the two cents tax benefit last year EPS increased 11.5%.

Turning to the balance sheet and cash flow.

Total inventory grew 7.9% and was flat on a per store basis.

We continue to manage our inventory effectively investing in key growth areas, while reducing unproductive inventory to hold average inventory per store flat to last year, while delivering a 6.2% comp increase.

Our in stock position also remains strong through Q2, as we focused on investing inventory and our top sellers, new brand and product launches and key promotional events.

Capital expenditures were $79.3 million for the quarter driven by our new store opening program investments in it systems and store Remodels and relocations.

We ended the quarter with $327.4 million in cash and short term investments.

We repurchased 791000 shares at a cost of $270.9 million to our stock repurchase program.

517.3 million remained available on our $875 million authorization as of quarter end.

We continue to expect to repurchase approximately $700 million of shares in fiscal 2019, but as always have the flexibility to modify the cadence of repurchases in response to market conditions.

Turning now to guidance as Mary indicated we have updated our outlook for the remainder of the year to reflect our expectations for ongoing challenges in the makeup category.

Before I get into specifics I'd like to spend a moment, giving you a little color on the bridge between our initial 2019 guidance and our updated view.

As we put together our fiscal 2019 plan, we assumed a strong mid single digit comp based on an expectation that we would see strong performance from makeup overall and in an improving trend in prestige makeup, which would contribute to both sales and margin improvement with an acceleration in the second half of the year.

These gains will be partially offset by necessary strategic investments to support healthy long term growth.

Based on second quarter results and more recent trends in the U.S cosmetics market.

It has become apparent to us that we will not see the improvement we had expected in prestige makeup.

And we will likely also see moderation in the mass makeup sales trend.

As a result, we have lowered our sales and gross margin expectations for the second half of the year.

We are adjusting controllable expenses where appropriate.

Well, we'll continue to invest in initiatives that drive long term growth.

Such as digital innovation, our Salon services strategy, expanding our omni channel capabilities, IP security and infrastructure and initiatives to enhance the guest experience.

Specifically for fiscal 2019, we continue to expect to open approximately 80, new stores all our traditional 10000 square foot prototypes, we plan to remodel 12 stores and relocate eight stores and execute 270 store refreshes or mini remodels to enable the addition of new brands and improvements to overall fixturing.

We anticipate driving topline growth between nine and 12% with total company comparable sales plan in the 4% to 6% range compared to previous guidance range of 6% to 7%.

We continue to expect e-commerce to grow in the 20 to 30 percentage range contributing approximately 200 basis points to comparable sales.

Although we are no longer providing precise quarterly guidance, we expect comparable store sales growth in Q4 will be stronger than Q3, as we benefit from holiday newness within the assortment.

We expect to deliver earnings per share in the range of $11.86 to $12.06 with approximately 60% to 70 basis points of operating margin de leverage.

This compares to previous guidance of $12.83 to $13.03 and approximately 10 to 20 basis points of operating leverage.

We continue to expect to deliver gross profit improvement for the year driven by merchandise margin expansion rent and occupancy occupancy expense costs leveraged and the benefits of our credit card program.

I will be lower than our previous expectations.

These benefits will be offset by more SGN a few leveraged than initially planned due to the lower sales expectation, which will increase deleverage of store labor and investments in growth initiatives and innovation.

Thinking about the flow of earnings in the second half we are planning for EPS in the third quarter to be flat to lower as compared to the third quarter last year.

While we continue to expect gross margin expansion in Q3, our lower comp expectations will result in more SGN a deleverage in the quarter.

For Q4, we're planning for EPS growth in the mid single digit range, reflecting our higher expectations for Q4 sales.

We plan to spend between 340 and $350 million in capex compared to previous guidance of $380 million to $400 million.

This includes capex of approximately $170 million for new stores, Remodels and merchandise fixtures $130 million for supply chain, and IP, including new fast fulfillment centers and about $50 million for store maintenance and other.

Depreciation and amortization expense is planned to be approximately $300 million compared to previous guidance of $315 million.

We expect our tax rate for the year to be 23%, which does not include any estimate for the impact of share based compensation.

Fully diluted share count for the year is expected to be approximately $58 million.

And our plan assumes share repurchases in 2019 in the 700 million range.

And with that I'll turn it back over to Mary.

Thank you Scott before we begin the Q and a session I'd just like to take a step back to recap our perspective on the quarter, our current challenges and the strength of our differentiated business model.

While the second quarter results were solid as Scott said, we've updated our guidance reflects our best assessment of second half performance based on our expectations for the U.S. makeup category. We are doing our level of best of both set realistic short term expectations and ensure that we work with our brand partners to stabilize and then grow the important color cosmetics category I am confident we can do that.

Our unique business model, representing all of the major categories of beauty, a range of price points and access to many exclusive and digitally native brand is enabling us to drive growth and market share gains in spite of headwinds in our largest category. We've expanded our gross profit margin increase our brand awareness driven traffic growth expanded our loyalty program and exceeded new store performance targets, we are relevant to a large and diverse set of beauty enthusiasts and we're focused on attracting growing demographic groups late teens millennials Latinos will all over index in beauty, we have a powerful and increasingly personalized loyalty program with strong guest engagement. We're also driving strong momentum in our salon business based on our actions to optimize the experience.

And I'm proud that we have a team that continues to deliver operational excellence and exceptional guest experiences every day.

That said, we are not immune to macro cycles like what we're currently seeing in the makeup category, but I am optimistic and committed to ensure that will move through these near term headwinds and I believe we have the right strategy the right business model and the right team to continue to grow and win over the long term.

And now I will turn it over to our conference call host to moderate the Q and a session.

Thank you we will now be conducting a question and answer session.

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We respectfully request that you ask one question only to allow us to have time to respond to as many of you as possible one moment please pull for questions.

The first question comes from Steph was that he was with Jefferies. Please go ahead Sir.

Thanks, Good afternoon, everyone Mary ill ask you to some first matter related question for Dave.

But if you can help us think about the comp guidance for the back half what component is category versus your relative outperformance to the category. So asked another way how much of that is purely macro or backdrop, and you expect to kind of retain share and follow the backdrop or do you expect to see some of that share advantage released and my question for David on the comments that you made on mass versus prestige you indicated mass cosmetics up double digits prestige up low single digits.

Anything in your data that would suggest the consumer is.

Trading down from prestige into math. Thank you.

Okay. Thank you.

At the risk of reiterating I will just say that I think your questions spot on I mean, we're very confident our business model is working and is going to continue to work. We are outperforming the outperforming the rest of the market. We believe we're going to continue to do so because of the many assets that we have from a brand thats known and loved.

Our loyalty program, our omnichannel capabilities digital capabilities, a lot of the exclusives that we have in our assortment and you know the fact that we've got the ability to work across all categories really works to our advantage right. Because we've had very strong growth in all the categories right now except for makeup.

But yeah. The NATO category is challenged we're winning I'd say, we've hit the categories hit a bit of a speed bump.

And we're working with our brand partners Big and small really to pivot this and so to us as we look at the second half its really about we've talked about this for several quarters that after years of very strong growth. As this has been growing but at a somewhat slower rate than it had been but really I'd say trends deteriorated further late in the second quarter and even more recently into this quarter and so we would say as we look at this we figure okay. It's going to stay for a while until we get through the cycle, but I'm confident that our ability to drive share gains will continue I don't see anything in our business model that makes me feel otherwise.

And Dave you want to comment about the other question is right on mass cosmetics, so as as.

Both Mary and Scott said, our mass business did perform somewhat better than our prestige business.

In both categories, we gained gainshare and we think we outperformed the total industry should get significantly which allowed us to continue to grow our business and the mass side of the business.

We probably had a bit more advancement in shifting our assortment away from brands.

Broad brands into brands that are a bit more an unlimited and exclusive distribution at Ulta beauty. So our business has been stronger, but we believe from what we see in the marketplace that the mass total made us make up a massive makeup category is equally as challenged relative to proceed. So we don't believe its a shift between prestige and mass.

As much as an overall Malays driven by the innovation trends that very pointed out.

We're confident that the innovation that we're bringing in both mass and prestige will allow us to continue to gain share, but the softness in the total cosmetic both mass and prestige category will will provide these headwinds that we've described.

The next question comes from Erinn Murphy with Piper Jaffray. Please go ahead.

Great. Thanks, Good afternoon, I guess, just a follow up to that question as you think about the comp cadence at 4% to 6% now for the year in year, one year into your analyst day, which was 5% to 7% long term guide I guess, what gives you the confidence or do you believe that you should be re accelerating to 5% to 7% beyond this year I guess is the slowdown in cosmetics from what you can see just temporarily.

Through the back half of this year and then I guess Mary you commented or I guess, Scott. Both of you commented on a little bit more promotional activity in the back half of the quarter. What are you expecting for the holiday season from a promotional perspective. Thank you.

Okay. So I'd sit back and see I want to be really clear, we're really no less confident about the attractiveness of our business model or growth potential.

We we do see the current dynamics is a speed bump certainly as a speedy speed bump right.

But you know we're confident cosmetics category will returns we will continue to return to growth. The timing is a little unpredictable, but yeah theres been in the past cycles that affects different categories and make it was very strong for many years and is going through a tough cycle, but as we look at you know demographic trends as we look at engagement and make up as we look at the white space that we believe exist and I know our brand partners commitment to getting us back to growth.

We feel we feel that we still stand by that guidance you know I'd say, we're not you know today, we're not talking about a longer term outlook now it's prudent for us to plan in the near term for this potentially lower growth environment, and we're thinking about that but we have not changed our optimistic view of the future on the promotional and you know I mean holiday is always a promote highly coveted time for everybody to get traffic into their stores. So Scott talked about promotion and I'd say the good news is we have a lot of levers in that we have and we use those levers at different times as everybody I think understands we've gone too much more targeted types of promotions over the years versus more broad base and you know with our loyalty program being kind of the core of what we do.

It's going to be I think a competitive second half because everybody who's in beauty would be facing the same headwinds. So we feel we're well set up for holiday. We obviously, that's a key focus area for us.

But we're going to continue to I guess, I'd say drive traffic make sure that we capture of guests into our loyalty program and not see that two competitors at a time that.

That will be competitive but at the same token I think again, we're pretty smart about how we use the levers and we have more efficient levers that ever.

The next question comes from Steven Forbes, who is with Guggenheim Securities. Please go ahead Sir.

Good morning, maybe a follow up on on that previous question right given that the comp revision is based.

Really on the store level comp rate first ecommerce growth.

You are giving you reiterated that the 20% to 30%.

Can you discuss sort of the mature store comp outlook for the back half and whether the recent performance impacts.

And whether it's a saturation targets or unit growth outlook through 2021 that was provided during last year's analyst day.

So were happy overall with new store performance I think we mentioned that in our prepared remarks. So we haven't seen anything in there that would that would give us any concern on the longer term target of 15 to 1700 stores.

In a recent over I would call. The rolling 12 month period, we saw new stores performing well in a low to mid single digit kind of range again vis-a-vis what we saw high single digits in the years, where we are delivering double double digit comps. So they have moderated somewhat.

As we looked at Q2 in absolute terms the comps in the older cohorts were lower they were in the low very low single digit range. As you would expect when you do the math on the overall comp makeup.

Again, when we look at cosmetics color cosmetics overall, and what were the dynamics, we're seeing in the industry. They affect all stores equally theres nothing in special Ed stands out with the new stores.

Compared to some of the older stores in the fleet. So again very happy overall doesn't change our outlook on the long term store build out here in the U.S.

And I think I would just add that I think he might have inferred in your question about did it affect channels differently and I'd say now.

Obviously, he comes growing faster than stores. It has been for a while but that channels equally if that affected by the headwind.

Thank you.

The next question comes from semi Goodman, Who's with Morgan Stanley . Please go ahead.

Thanks, Good afternoon, everyone Im little bit of a follow up right. You have this medium to long term outlook out there a mid to high Tdps growth, obviously, the operating de leverage in the back half.

Stan at the disconnect to that.

I guess, if you look at.

2020, which I realize we're not talking about yet.

Is the de leverage that you could see let's say if you do a 3% to 4% comp it's gonna <unk> could look similar to what we're seeing in the back half of this year or is there more flexibility on the margin side such that that gets you back to your outlook and just within that.

I know you've talked about the makeup market being softer than you need some time to cycle through it what is your going in assumption on this like Mary I don't know if there's a conversations you're having with executives you know who sell to sell this product as well, but when do you think this this this recycling in the market get soft on the early part of last year, even though you were outperforming it so do we cycled at beginning of the early part of 2020. Thanks.

Yeah, Yeah, let me start with Atlas and then yeah, you know I I don't exactly have a crystal ball on this because there's a lot of moving parts and different brands that participate I can tell you everybody is focused on this north America make up markets important for everybody and it needs to improve I know I'd say, it's going to take some time because part of the well we think that's driving it is the innovation, while good and exciting innovation like good innovation hasn't really driven Incrementality I mentioned in the script that some previous forms of innovation that would be like Oh, I'm gonna contour I need three products for that right I you know I'm Gonna do my browse now with two products. So what we're what we're focused on is pivoting to white space that will drive incremental and exciting type innovation and that doesn't happen overnight and frankly, I'd say it takes a while to assess incrementality. So it wasn't obvious probably until recently that some of that innovation you have to go through a trial and repeat cycle to see is that going to be incremental so no categories pivot in certain ways. We're very focused on that with our brand partners and I don't have exactly.

Timeframe, but I think it's going to take some time to work through it but I feel I feel that by you know second half 2020, I at least we should be in a better place, but again I'm not I'm not holding to that I hope its sooner, but I think it does take some time to cycle through.

And those who know us well understand makeup right. It's a huge part of our business and it's very high margin for us. So when there is disruption there it creates a lot of ripple effects across the business. So.

You know we believe over the long term, there's still opportunity to expand operating margin Simeon you know through primarily through F. G and initiatives that we've talked about before and the fruit for work streams.

Along with scale over the long term you know it just it's we think it's too early to reconsider you know.

Modifying our long term guidance outlook in any significant way here, we need a little time to let things shake out a little bit and of course, you know, we're looking to manage our investments and expenses and everything here really closely and assuming we're thinking about this actively assuming we're going to be in a lower growth environment here in the near term and adjust our priorities accordingly.

Right.

The next question comes from Rupesh Parikh with Oppenheimer. Please go ahead.

Good afternoon. Thanks for taking my question. So first on the tower side, we've seen some more mass companies talk about taking price.

I was just curious you know just given some of them lays out there I wanted to get your thoughts on where you thought the consumer acceptance acceptance I had price increases are and then second you know Scott. So you mentioned that you expect Q3 comps to be lower than Q4.

I would have expected protect to stronger comps in Q3, just given the easier comparison Q3 versus Q4 is there just wanted to get your thoughts on that thank you.

Yeah. So maybe we'll start with the tariff question. So again at this point for US we we've talked about this over the last few quarters, it's kind of difficult to predict what the impact is going to be in beauty products. Overall again, we're not seeing any you know significant step up in pricing negotiations or issues with any of our vendors, we expect to be able to manage our way through that navigate that as best we can.

And so yeah, we're managing that as best we can through some prior supplier relationships today, and we expect that to continue overall as far as the comp stack year over year I know, we can look at two or three years and trends and what what you would expect that's not the environment. We're in right now I mean, the disruption we're seeing in the prestige and color makeup overall is a step change in the normal flow of the business year to year, and that's really what's driving our outlook.

Great. Thank you.

The next question comes from Beth Kite, whose with Citi. Please go ahead.

Hi, everyone.

Well we.

A question about your skin care exposure and given the pressure.

In color cosmetics, especially Christie's if you've considered a bigger move into scam more brands more shelf space more.

Yeah space in store. If you will have have you entertain those conversations to to shift the skin care exposure in a greater way more quickly.

Yes, well we are already experiencing.

Strong growth in skin care, both on the mass and prestige side of the business.

And Weve made moves to continue to emphasize that part of the business.

Through both the brands that we've been bringing in and partnering with with strong innovation that Mary described earlier and and a further amplification within our both our store and our E Commerce and App business. So for sure we've been emphasizing and driving that are a part of the business as well as the other categories that have been driving growth hair and fragrance.

Our personal care appliances, so absolutely emphasizing that having said that and we're always on the move on the on.

On the effort to continue to try to optimize our assortment and look to lean into areas that are that have demonstrated the most growth having said that even though makeup is going through this.

Tougher cycle, we still are confident in the long term growth prospects of this category. So we're not anticipating a dramatic shift away long term from makeup a we'll continue to.

Try to continue the strong share growth gains that we've had bring new brands and partner with our key brand partners to get those brands back on track because the demographic trends.

In makeup are still a strong everything were seeing around millennials agentes Latinos all the growth drivers were confident and we're working through this innovation cycle that marries described but we believe we will come out of that and so we'll continue to maintain a strong makeup business, but absolutely emphasizing the growth categories like skin and others across our store.

No volatility in July through now was that primarily color or did that impact your other categories.

Yeah. It was primarily color that were seeing this that as weve talked theres been a disruption in the makeup category a slowdown in the makeup category for.

A little while now but in many measures and are tracking and.

Our view of the category there was more disruption more recently over the last several weeks.

Wonderful thanks very much.

The next question comes from Christopher Horvers with JP Morgan. Please go ahead.

Thanks, Good evening, so a couple of follow its first in terms of.

The comps that you're implying for the third quarter or are you basically assuming the current trend that you've seen sustained or are you expecting 21 days of beauty in September and to improve the trend and following up on the fourth quarter.

Any you're lapping James Charles you're lapping kindly. So are you sizing the new this newness factor bigger this year or is there something else on the comment in terms of newness that hasn't been announced or.

Are you assuming you know investment in March margin.

To try to drive the comp overall thanks.

Yeah, I'll start and then I'll see if Dave wants to add anything you know, we're not going to get that done that granular as were in the quarter right. Now obviously I'm. Just you know we're trying to do our best to sort of call. It like we see it and I'd say it is a combination of our view of category trends and as we size newness and and also all the things that we have on the fourth quarter just in terms of holiday promotions. So it's our it's our best call right now with a range around that.

Okay.

The next question comes from Michael Binetti, Who's with Credit Suisse. Please go ahead.

Hey, guys. Thanks for taking my questions here.

Yeah I I was wondering maybe if you could just give us a little more color on the magnitude of the issues in July and August . The you know the magnitude of the guidance kind of is quite heavy and it seems like its.

Based on a fairly short period in time and you know obviously you still have big thing you've described twoq was less informative.

Seasonally about the underlying trend in your business you still got big things like 21 days of beauty marrying the body language is very clear older commentary you expect cosmetics to improve.

I'm just trying to figure out why cosmetics home prove you said the incrementality hasn't worked what's driving the comp improvement in Fourq you.

Versus third quarter based on those comments, especially Latin obviously the bigger compare.

Mhm, Yeah, and then I'd say the first part of your question has just said it has been is the category data that we have access to it sounds like the more recent than what you would see has shown more recent deceleration I guess, so that's sort of part of the why the shift in more dramatic change again, we just try to call you know kind of we take multiple views of how we build up our volume forecast and so our Q4 is a combination of all the things thinking about category trends not necessarily dramatically improving but thinking about what we have coming in giving our best shot at both Q3 Q4 cadence of promotional events and launches.

So I guess just follow that you I think you started first calling on slowing prestige cosmetic trends in mid 2017, you you've done a really nice job of providing your business slower for almost two years now I feel like.

I just want to ask you like what do you think is happening in the industry I feel like I'm missing something on why a lot of change lower so suddenly here here recently.

Well I you know if I had the answer to that [laughter] I wouldn't think that already I mean, it's honestly I think it's a combination of factors in and you're right. I mean, there are business model. We're proud about the fact that we can flex across categories and to drive the market share growth and carry a lot of fantastic exclusive brand, but you know as we look at its a combination we think of just innovation not really you know the cycle of innovation that we're in right now it doesn't compare to but we've seen a few years ago and it's easy to say that now it's hard to know what and prospectively that that's going to be the case right. So we think the combination of what our brand we bet on what our brand partners a bet on just wasn't driving that kind of incrementality that we've seen in the past. So that's you know at the highest level probably the biggest factor.

Okay. Thanks Best of luck with 20 Onest. Thank you.

Our next question comes from Mark Altschwager, whose with Baird. Please go ahead.

Good afternoon. Thanks for taking my question could you walk us through just a little bit further the puts and takes on the updated EBIT margin guidance for the back half of the year, how much of the change in expectations on merchandise margin versus greater fixed cost de leverage just any help on the gross margin versus that's unique cadence over the next couple of quarters would be great.

Yes, I guess, we can talk directionally for the back half of the year I'm not going to we're not going to get into specifics quarter by quarter. We're trying to move away from that Mark I. Appreciate the question.

So I think we stated in our comments that we still merchandise margin right. We still expect to expand that so that's the good news our ft efforts are working we're making progress on that unfortunately, it's going to be masked a little bit by the downward pressure, we have in prestige right and the mix overall of the business. So we're happy with margin expansion overall blended you know up for the back half of the year as what we expect to see.

SGN a is heavier I mean again, we pointed to these are these are necessary long term investments for the health of the business that we're not going to back away from right now in some knee jerk reaction. So again SGN a de leverage is going to be heavier in the second half of the year than what we expected I guess I would say there, it's probably a little heavier weighted to third quarter than it is fourth quarter, because fourth quarter, we're kind of shut down and we're all on all hands on deck for holiday. So you know also I would say third quarter, maybe you're kinda at peak with fixed cost you know, while it's leveraging year over year, there's less of that in the third quarter because.

We're getting a full or load of new store openings and things like that weighted towards the back half of the year. This year. So that's probably about as much color as I want to give on specifically the quarter's themselves.

That's helpful. Thank you and best of luck.

Thank you.

The next question comes from Michael Goldsmith, Who's with US. Please go ahead Sir.

[noise] session.

What are you assuming about the company's level of market outperformance in the cosmetic category in the back half of the year and does that represent a change from what we've seen in the last couple of quarters and given the market share gains achieved over the years that make it more difficult to pick up share in the category going forward.

Yeah, I'd say that we are expecting continued similar share gains through the rest of the year as probably the easiest way to put it.

And then going forward.

I I wouldn't comment on that yet today, but you know there's still we still see plenty of share for us to gain that is out there in other channels that you know we've been successfully with our business model, attracting new guests and share. So we see that playing out for a while.

Thank you very much.

The next question comes from Ike Boruchow with Wells Fargo. Please go ahead.

Hey, good afternoon, everyone.

Mary I understand there's a lot going on right now and I do apologize to go back to Simeons question, but less than a year ago. There was a multiyear plan that was laid out and it did call for 5% to 7% comps and it specifically called out for margin expansion in 2020, I understand that there is no crystal ball right now, but I guess, what I'd ask is given whats.

Taking given it sounds like this is going to take some time to work through and looking at the comps and the leverage you're guiding to in the back half should we consider that plan still at this point.

I think it's really too soon to say that you know I mean part of what we need to do is sort of work through this cycle. We've not put our plan for 2020 together yet you know we still feel very confident about the business model and we can make choices about the pacing of what we spend in terms of investment you know we've been pretty aggressive. They go after a lot of investment. This year that you know our multiyear important long term investments for us and so as prudent planners, we would say okay. We want to plan for it maybe a different comp cycle for part of the year. How do we then think about you know how do we Stacy investments to deliver the appropriate return. So I think it is I mean, I think Scott said it well. This is not a time to have a knee jerk reaction about the long term prospects of the business I don't believe that but we're also being food and how we think about you know how we do this kind of planning stage investment.

Got it understood. Thank you.

The next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead.

Hi, Good afternoon, everyone. As you think about the go forward. How do you think of what type of comps that you need to leverage expenses, given the new trajectory of.

Sales growth in category growth and also as you think about mass and prestige has there been a difference in the cadence of mass and prestige in terms of how they're performing most recently thank you.

Yeah. So the first part of the question I guess I would say to marry point you just made the business has been very healthy for a long period of time and we've been riding a wave. So to speak on makeup makeup in general right across both mass and prestige, which has allowed us the flexibility to be more aggressive on the investment right. So there was a time before that phenomena, where old the operated very effectively and very well perform produce some really great financial results on much lower comps. So we're no stranger to operating in a tougher lower growth kind of environment and that's just the kinds of things that we're pivoting towards right. Now. So again, we don't have all the answers as we sit here today, but you can bet that we're actively managing with that thought in mind.

Then on on your second question about mass and prestige just to reiterate we are seeing in the total U.S. market weakness softness in both mass and prestige at Ulta beauty, specifically, we are gaining share in both categories due to the strategies in the brands that we brought in and the focus we've had in that category, but as I mentioned earlier mass has performed better than per stage a in the in the recent recent quarters as that business has been a bit stronger for us.

Thank you.

This concludes time allocated for questions on today's call I would now like to turn the call back over to Mary Dillon for any closing comments, yes, I would just like to close by thanking our very hard working more than 44000 associates for delivering another quarter of solid financial results and great guest experience every day and we look forward to speaking with all of you again soon.

This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.