Ulta Beauty, Inc. (ULTA) Earnings Call Transcript & Summary

Greetings, and welcome to the Ulta Beauty 2020 Annual Stockholder Meeting. As a reminder, this webcast is being recorded. It is now my pleasure to introduce the Chairman of the Ulta Beauty Board of Directors. Mr. Bob DiRomualdo. Please proceed.

Good morning, and welcome to the Ulta Annual Meeting of Stockholders. I'm so pleased to have you join this webcast. Now if you've attended one of our annual stockholder meetings in the past, you've probably already noticed that today's meeting is a little different. Typically, we host our stockholders in our corporate office located in Bolingbrook, Illinois, where we gather to conduct our meeting and highlight our accomplishments from the past year. The COVID-19 pandemic has made this year unlike any other year in Ulta Beauty's history and certainly in my lifetime. I'm proud to be part of a company like Ulta Beauty that places the safety of its guests, associates, stockholders and all of you who have joined us today at the center of everything we do. So while we are not able to talk with you in person today, our team has worked hard to offer you the same participation opportunities as would be provided at an in-person annual meeting. And once again, we would like to thank you for taking the time to attend. I also want to thank my colleagues on the Ulta Beauty Board of Directors, our Chief Executive Officer, Mary Dillon and our executive team, all of whom are practicing safe social distancing and are joining us virtually today. And thank you to the entire Ulta Beauty leadership team and all of our dedicated Ulta Beauty associates joining us from around the country. In keeping with the virtual approach to this year's meeting, it is now 10:02 Central Time, and I call the meeting to order. If you have not voted yet, please do so now as we will be -- well, we will close the polls in a few minutes. You may vote by clicking on the Voting button on the web portal and following the instructions there. Before we begin the business portion of this meeting, I would like to introduce the other directors and certain officers of our company who are all present and like me, participating virtually today. Other directors of the company, Sally Blount; Michelle Collins, Mary Dillon, Catherine Halligan, Charles Heilbronn, Patricia Little, Michael MacDonald, George Mrkonic, Lorna Nagler and Michael Smith. Officers of the company: Mary Dillon, Chief Executive Officer; Dave Kimbell, President; Scott Settersten, Chief Financial Officer; Jodi Caro, General Counsel, Chief Compliance Officer and Corporate Secretary. She wins the most number of titles award; Jeff Childs, Chief Human Resources Officer; Kecia Steelman, Chief Store Operations and President, International; Diane Randolph, Chief Information Officer; and Elliott Rodgers, Chief Supply Chain Officer. Jodi Caro, Ulta's General Counsel, will act as the secretary of the meeting. There is a representative from Ernst & Young also present virtually today. During the question-and-answer session at the end of the meeting, persons from Ernst & Young will be available to answer questions concerning the company's financial statements. Now moving to the formal business of today's meeting. Our first action in the general order of business today will be to act upon the business of the meeting, which consists of 3 proposals that require stockholder action. We will then receive a report about the voting results. After that, our formal meeting will end, and I will turn the meeting over to Mary Dillon to offer some comments about the company. After Mary's presentation, we will have a question-and-answer session. [Operator Instructions] [ Tod Shafer ], a representative of Broadridge Financial Solutions, Inc., has been appointed to act as inspector of the elections for the meeting and any adjournment or postponement thereof, he has previously taken his oath as inspector of elections. I've been advised by Jodi Caro, who's also the company's corporate secretary, that notice of this meeting has been properly given and that a list of the stockholders entitled to vote is available for inspection by any stockholder or their proxy via the web portal for this meeting. By using the -- and you can do that by using the control number found on your proxy card. Jodi, can you please advise as to the number of shares represented at the meeting?

Sure, Bob, and thank you. As of the close of business on April 6, 2020, the record date for this meeting, there were 56,309,476 shares of Ulta Beauty common stock issued and outstanding, each with 1 vote. Based on a report by the inspector of elections, stockholders holding over a majority of the shares of common stock outstanding on the record date are present at this meeting virtually or by proxy. This constitutes a quorum under the company's bylaws.

On the basis of that report, I declare that a quorum is present and this meeting is properly convened and ready to transact business. Okay. It is now 10:05 Central Time. And since everyone has now had a chance to vote, I hereby declare that the polls are closed. And now to the election of directors, the first proposal to come before this meeting is the election of Michelle Collins, Patricia Little and Michael Smith as Class 1 directors to hold office until the 2023 Annual Meeting of the Stockholders. Second, ratification of Ernst & Young as the company's independent auditor for fiscal 2020. The second proposal to ratify the appointment of Ernst & Young registered public accounting firm for our fiscal year ending January 30, 2021. The third and final proposal to come before this meeting is for the stockholders to approve, on an advisory basis, the compensation of the company's named executives as disclosed in the proxy statement. A complete description of this proposal can be found in the proxy materials. Jodi, can you please provide a report on the results of the voting?

Yes. So based on a tabulation provided by the inspector of elections, the preliminary results of the voting are as follows: Each nominee has been elected to the Board of Directors by the affirmative votes of the holders of at least the majority of the shares of common stock present virtually or represented by proxy and entitled to vote at this meeting. The appointment of Ernst & Young as the company's independent registered public accounting firm for the fiscal year 2020 has been ratified by the affirmative vote of the holders of at least a majority of the shares of common stock present virtually or represented by proxy and entitled to vote at this meeting. And finally, the advisory resolution to approve the company's executive compensation has been approved by the affirmative vote of the holders of at least a majority of the shares of common stock present virtually or represented by proxy and entitled to vote at this meeting.

On the basis of the inspector of elections' report, I declare that the minutes of record reflect the foregoing results. The final voting results will be reported by the company in a current report on Form 8-K as required by SEC rules. There being no further business to be brought before this meeting, I hereby declare that this meeting is now officially adjourned. At this time, I would like to turn the meeting over to our Chief Executive Officer and Director, Mary Dillon. Mary?

Thank you, Bob, and thank you, everyone, for attending Ulta Beauty's Annual Shareholder Meeting. There's no question this is an unprecedented time and although we never anticipated hosting this meeting virtually, we greatly appreciate your flexibility and your support of Ulta Beauty. Before we talk about our business results, I want to address the events happening across our country. Like many, we continue to watch the division across the country with sadness and pain. The death of George Floyd last week has left many reeling, hurting and searching for answers. At Ulta Beauty, diversity and inclusion have always been core values, an important part of who we are. With that responsibility, we will continue to work hard to start new conversations, listen intently and do what's right. In addition to donating to the Equal Justice Initiative to support efforts challenging racial injustices, we're developing and implementing expanded recruiting, training and inclusion efforts. Our diversity and inclusion champions network is creating a safe space for our teams to have open and honest dialogue to help us learn about associates' individual experiences related to racism, police brutality, privilege and allyship. These discussions will inform how we continue to grow as individuals, teams and as a company. Now let's review our performance and accomplishments in 2019 and discuss how we're responding to the challenges created by COVID-19. The Ulta Beauty team achieved record sales and earnings in fiscal 2019. While the year was more challenging than we initially expected, I'm proud of how our teams came together to deliver solid results for our shareholders. Net sales for the year increased 10.1% to $7.4 billion, total company comparable store sales increased 5%, and diluted earnings per share increased 11.1% to $12.15. Importantly, this past year, we announced our decision to expand internationally and establish Ulta Beauty as a global brand with our first market entry in Canada. After extensively studying the market opportunity in multiple countries, we believe the Ulta Beauty value proposition is very relevant and differentiated in multiple geographies around the globe. Canada is an attractive and logical place to start. We are already hard at work building our capabilities and established -- expect to establish an omnichannel presence in Canada in mid-2021. We've continued to strengthen our culture, and again, achieved industry-leading associate engagement as measured by our annual culture survey. We also accelerated our diversity and inclusion efforts across the company in new and meaningful ways. And I'm proud to share that we were included as a noteworthy company by DiversityInc, a leading assessment of diversity management in Corporate America. Now turning to the current environment. The impact of COVID-19 has been pervasive. Every sector of the economy has been affected in some way. Every company has needed to adapt to new regulations and expectations. And as individuals, we've all felt the impact. As a leadership team, we've made a number of decisions to support and protect the Ulta Beauty business as we've navigated through this uncharted territory. Our first priority has been to help care for and protect our associates, our guests, their families and the communities we serve. In early March, as the virus began to spread in the U.S., we quickly took steps to keep our associates and guests safe. We increased sanitation measures and cleaning frequency in stores, limited the use of testers and suspended all beauty services. As the situation escalated, we made the difficult decision to temporarily close all our stores on March 19, and quickly shifted our focus to operating our e-commerce channel only, while simultaneously planning for how, not just when, to reopen safely. In early April, it became clear our stores will remain close longer than initially expected. After evaluating multiple options and considering the changes in unemployment insurance details incorporated into the CARES Act, we made a difficult decision to furlough many store and salon associates. Our intention is to retain as much of our workforce as possible, and we look forward to safely welcoming associates back to Ulta Beauty stores. Another top priority has been to protect liquidity. We've taken steps to enhance our financial flexibility, including drawing down $800 million on our $1 billion revolver, suspending our stock buyback program and actively managing and prioritizing our expense structure, working capital and capital investments. As a result of these efforts, we had $1.15 billion in cash, cash equivalents and short-term investments at the end of the first quarter of fiscal 2020. We're proud of the quick, important actions we've taken to further enhance our financial strength and are confident that we have sufficient liquidity to fund our operations now and in the future. Over the last month, various states and local authorities have begun to lift restrictions in efforts to restart the economies, allowing us to make key decisions on how and when to reopen our stores. Of course, we want to open our stores as quickly and as safely as possible, and in the past few weeks, have been doing so. To guide our reopening decisions, we've developed a rigorous process to evaluate the safety risk for each store. In addition to legal guidance that determines if we're allowed to reopen, we also assess local COVID-19 transmission trends and evaluate certain operational criteria and local guest sentiment. We began a reopening process with the launch of a new touchless curbside pickup option for our guests. And later, we opened 180 stores to guests, many with salon services. As of today, about 3/4 of the fleet offers curbside pickup, and about half of our chain is open to guests for retail with many open with salon services. Over the next several weeks, we'll continue to assess opportunities to reopen additional stores and expand our services offering. As we learn, we will adjust, communicate and continue to prioritize the safety and well-being of our associates and our guests. Based on current available information, we expect to have a vast majority of stores reopened in some capacity by the end of June. Now just last week, we announced results for the first quarter of 2020. And although these are certainly not the results we planned, I'm very proud of how our team has worked together to respond to the unexpected challenges. Reflecting the impact of temporary store closures, total net sales for the quarter were $1.2 billion, comp store sales declined 35.3%, and we had a net loss of $1.39 per share. Despite the ongoing challenges, the quarter was not without some highlights. Our e-commerce business remained operational the entire quarter, which delivered a comp increase of just over 100% for the quarter. Guest engagement with GLAMlab, our virtual try-on tool, has increased nearly 5x since the crisis began. And more than 13 million shades have been tested virtually. We are also very pleased to see a large number of previously in-store only members engage with us online for the first time. Our omnichannel guests have had very strong engagement with Ulta Beauty with nearly 3x the annual spend of an in-store only guest. So we're excited about the opportunity to maintain strong engagement with those who are new omnichannel guests as our operations fully reopen. While still early in the process, we've seen stronger-than-expected sales in reopened stores. We're also seeing great guest engagement with our salon services and have many appointments booked several weeks out. Now COVID-19 will likely have sustained effects on consumers, the competitive environment and how we all operate and work. At Ulta Beauty, we're not sitting still. We're accelerating efforts in 5 key areas to expand our market share gains and extend our competitive advantages. First, COVID-19 has hastened the channel shift across retail, and we believe much of this new consumer behavior will be sticky. We've invested to expand our digital and omnichannel capabilities, and we're focused on how we can move even faster to win in an omnichannel world. Second, we know that beauty enthusiasts love to shop for discovery and trial, but also know concerns about personal safety and close contact will require the beauty experience to change. We're reimagining the guest experience and looking at ways technology, services and the role of our associate can evolve to create a new wow experience for guests. Third, we plan to build on the successful work we've done to expand our market share and accelerate gains even further in key categories like skincare, hair and wellness. Fourth, we're looking at ways to drive next-level loyalty and accelerate personalization to increase spend per member. And finally, thinking about cost pressures increasing as we move forward, we're looking at how we can go beyond process optimization and develop a cost structure that will enable us to weather economic challenges, while also supporting investment in capabilities and opportunities that will set us up for future success. This crisis certainly has been fluid, swift and inescapable, but I remain excited about the opportunities ahead for Ulta Beauty. We have a strong differentiated operating model, a brand that is known and loved and dedicated associates are passionate about our guests and our company. I'm confident we will emerge in this crisis well positioned to accelerate our market share gains and extend our competitive advantages. I'd like to close by thanking you for your continued support of Ulta Beauty. I'd also like to thank our guests, our 44,000 dedicated and passionate associates, our brand partners and our Board of Directors for everything they do to support our company's continued success. And now I'd like to turn it back to Jodi to kick off our question-and-answer session.

Thank you, Mary. Now I'd like to invite Ulta Beauty's Vice President of Investor Relations, Kiley Rawlins, to join me to moderate today's question-and-answer session. Welcome, Kiley.

Thank you, Jodi, and thank you to all of our stockholders who are joining us today. [Operator Instructions] We will attempt to answer as many questions as time allows, but only questions that are germane to the meeting and/or our business will be addressed. Any questions that we do not get to and that are applicable to our business will be addressed in the Investor Relations section of our website. I also want to remind you of the company's safe harbor language. The statements made today, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC. I would note that a few -- we've had a few questions submitted prior to opening up the queue. And those were actually answered in Mary's prepared responses. So the question -- the first question we have in the queue is from a shareholder, I think, here in the Chicago area. Mary, I was looking forward to hearing you speak at the Executives' Club of Chicago webinar that was canceled over the past few days as I am a member of the Chicago-Latino network and an avid fan of Ulta for services and products, as a consumer and shareholder myself. I listened in on the last investors quarterly meeting. And I'm curious if you can elaborate more on Ulta's initiatives with the Latino market segment, and if that is reflected in diversity and inclusion, hiring and recruiting, not only at the line level, but also within its corporate structure. Thank you for any insight.

Thank you. Yes, and I was disappointed we had to cancel that panel. But of course, the governor had pressing issues at hand. So I appreciate your question. I'll step back by saying, first of all, the Latinx consumer is very important to the Ulta Beauty brand. And the great news is we focus on a segment of a population that is a mindset of really a behavioral psychographic segment called beauty enthusiast. And these are folks who are very engaged in the beauty category, the trial, the discovery, all aspects of beauty. And the Latinx consumer actually over indexes as beauty enthusiasts. And we have a lot of strong relationships with our Latinx consumers, and they're very important in our Ultimate Rewards program and in everything that we do. Over the years, I'd say, from a marketing perspective, we have really evolved all of our marketing tools, how we represent folks in our imagery, but also really going after the Latinx consumer in the places that she or he are, from a social media perspective and overall media perspective. So that is quite a significant portion of how we think about connecting with that market. From a corporate perspective, I'd say, if you step back, we're proud about where we sit today from an overall diversity perspective, particularly through the lens of gender diversity. You may know this, but Ulta Beauty has 92% associates that are women. And that's a great starting point for us. That stands out in Corporate America. And I'd say as it relates to the representation of the Latinx associate, we've got some work to do. We -- in the store, at the store level, we over-index to the general population in terms of employees that are either managers or associates at our stores, which is fantastic. And then as we go through into more senior levels, we have some work to do. I think we're about 18% representation in senior management of all people of color. And that's a good starting point, but more to be done. So the way that we're looking at is from our talent acquisition team and our diversity inclusion team are really executing strategies that make sure that we are able to, over time, get even more inclusive in the processes and the practices that we use to make sure that our talent sources are as diverse as possible. Starting with building diverse slates, every time we have a position open. So it's a high key area of focus for us. And I really appreciate you asking the question today. Thank you.

So Mary, we have no more questions in the queue. So if you have some closing comments.

Yes, I do. Give me a second here. A new format here, right, for all of us. Well, I don't have the formal comments, but I will just say, again, I want to thank our shareholders for being on this call and for supporting Ulta Beauty. I want to thank our Ulta Beauty associates who have just done an outstanding job throughout our entire company during these very challenging times to help us make sure that we continue to represent everything that beauty is about and to be a great investment for our shareholders. So with that, I will conclude. Thank you.

The conference is now concluded. Thank you for attending today's presentation, and you may now disconnect.