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

All right. Well, good afternoon, everyone. Thank you, everyone, for joining us for the Ulta Beauty fireside chat. Thank you to Dave Kimbell and Kiley Rawlins for joining us as well and for taking the time out. This is great to have you guys, especially at our first virtual conference. I am required to first inform everyone listening that for a complete list of disclosures, you can find that on williamblair.com. Again, my name is Dan Hofkin. I cover hardlines and specialty retail, including Ulta Beauty. With us today from management is Dave Kimbell, who was named President of Ulta Beauty in 2019. Dave, I believe you've been with the company since 2014. Altogether, a lot of prior consumer experience as well, but key merchandising and marketing leadership prior to being named President last year. In any event, let's kick it off with some just interactive Q&A, and then we'll open it up to some client questions in the latter part, if that's all right.

Great.

Maybe if you could just start, especially for people that may be newer to the story, could you start with where you guys are today in terms of your store base, how many stores have fully reopened in this process? How many remain closed to in-store traffic, things like that? When do you expect to have your full store base reopen?

Yes. Yes. Great. First of all, Dan, thanks for having us today. It's great to connect with you and for everybody watching, listening in, thanks for your interest in Ulta Beauty. Appreciate you joining us today. Yes, I'll start with just a bit of a background on what the last few months have looked like, as I think you're well aware, Dan. And then mid-March, we had the unprecedented decision to shut down all of our stores and become -- and we're running really an e-commerce only business from the end of March through April. Towards the end of April, we started rolling out a curbside capability that leveraged the buy online, pick up in store offering that we launched in 2019. We were glad to have that capability available to us, and we pivoted that, enabled curbside pickups starting late April in a small set of stores and have been expanding our offerings ever since as various states and localities across the country have deemed it safe and we deemed it safe for both our associates and our guests to offer services. So right now, sitting here today, about 75% of our stores offer curbside, a little over half of our stores, and we have about 1,200 stores, little over 1,200 stores across the country, so a little over half of our stores today offer kind of the in-store experience where just can come in. It's a bit modified, but still most of what our guests love about Ulta is available to them. Those, of course, are -- continue -- those stores continue to offer curbside as well. And then just under 600 stores, about 580 stores offer salon services now. So in those, again, localities, in states where it's been deemed to be safe and acceptable within our analysis, we started to light that back up as well. And we're moving in waves of stores, just being really careful and smart about how to manage the evolving landscape. We've done a ton of analysis to determine when and how and where to open. And we're making good progress. We have more waves coming, and we anticipate by the end of June, we'll have the vast majority, if not all of them, all of our stores open at least in some capacity. And many, if not most of them, will offer the full suite of services that Ulta delivers.

Great. So -- and then in terms of -- on the reopening front, to the degree that you're able to tell so far, the various limitations that are being required on all sorts of companies by state, municipality, federal government and health authorities on number of customers in a store, for example, at a given time, distance apart, any sense for whether those types of requirements are effectively requiring you to kind of hold back your in-store traffic from what it otherwise might be? Or are you able to stay from what you can tell below that required level either through just typical traffic or what customers are choosing to do on their own? Any feel for that?

Yes. Let me start with just a bit of an overview about how we're feeling about the progress and the path that we're on. I'll start actually back and I'll get specifically to your question, but start with when we went to e-commerce only, the response was -- actually exceeded our expectation. We had a lot of guests that migrated in and started shopping with us online that hadn't before. And so we saw a nice surge in demand through our e-commerce channel. Then as we lit up curbside, in stores, that also performed really well and gave a great experience to our guests. And the response and reaction was quite positive and our guests both took advantage of it and were appreciative of the opportunity to get their favorite beauty products from Ulta in a really safe, convenient way. So really specifically to the stores, yes, we've had to modify what our experience looks like. Some of the key dynamics you mentioned, one, for sure, that we're limiting the number of people in the store at any time. We're asking -- we have one of our associates to help monitor that. And where we've reached capacity, we're asking guests to wait outside. We're finding that's not typically a long wait, and generally speaking, we're able to kind of manage the capacity in our current environment given the traffic levels. We've also adjusted things like testers. We're not allowing testing in store. We've turned our testers into really demonstration units to give guests a visual of what the product is. They can see the color. They can see the packaging, but they can't test and use. Our associates are wearing masks. We're asking our guests to wear masks. Our stylists have new -- our hairstylists have some new regulations in how we're setting them up to be safe, both for them and the guests. So a number of new elements. But as I mentioned earlier, the core of the Ulta Beauty experience, I think, still shines through. And that fortunately is showing up in early data. I mean it's -- there's a long road ahead of us as we understand the consumer reaction, but the first wave of stores was about 180 stores that opened in -- I think it was May 11 or so. And so we have the most experience with them. And we mentioned on our earnings call that we're encouraged by the customer response. Certainly, stores are down. We expected that as guests in these markets are getting comfortable with the idea of going out and shopping again. But if you look at these markets that we opened in that first wave through an omnichannel lens, meaning the store traffic, BOPIS and curbside as well as ship-to-home e-commerce. In some markets, in some cases, we're actually comping equal or a little positive to last year. And in other markets, we're down a little bit. But overall, we feel our guests are responding, and they're coming back. The mix is a little bit different by channel than certainly it was before, but we know our guests love beauty and they're engaging in multiple ways across our business.

That's great. It kind of leads a little bit into the next question. Obviously, you guys are -- especially with the website offering and the digital offer being closer and closer to your in-store merchandise offering. But product testing historically is an important aspect of this business for new product. How does trial, product trial, new product trial work in a kind of COVID world? And any sort of workarounds or ways to introduce different technologies, for example?

Yes. Yes. It's one that we're thinking a lot about. And this is an example of an area. There are other things that we're kind of moving down the path. We knew, for example, e-commerce was going to be a bigger part of our business, and we were preparing for that. This is a step change. The idea of in-store trial being as disruptive as it is was not something, frankly, that was on our short-term radar or something we were planning towards. Having said that, what we see is there's multiple levers that engage our guests, our beauty enthusiasts, in discovering new products. Absolutely, one of the -- one way is through in-store touching, feeling, trying product. And for the time being, that's not available and it won't be until we're confident and comfortable that we can offer that up in a safe way or in a different way that introduce these new safety parameters, and we're exploring all of those. So we can have physical sampling and exploration and discovery of products in-store. But we also know there's other ways that our customers learn about new products. We bought a company called GlamST a couple of years ago that has built our virtual reality try-on capability, and we're really glad we did, particularly in light of the current situation where we've seen just an exponential increase in the use and engagement of that. And so it's a great way to discover products virtually, to try them on virtually. And we've seen both an increase in the usage of that and a strong increase in the conversion as people try that on. But there's also social media. We know influencers drive a lot of discovery of new products. We've seen -- we're placing more emphasis on that, our own marketing, our own communication and even how we bring products to life in-store to encourage discovery. We're trying a new -- we had been before looking to bring new brands to life in different ways, yes, including testing but also just making sure our guests had visibility and access to it. So we're going to lean heavier into that. So I'd answer that then, yes, we're going to go and continue to find new ways to allow and enable the physical testing and touching and experiencing of products, but we're also leaning into other ways that we know historically have driven discovery of new products, and we think will play even a bigger role going forward.

Great. One other interesting takeaway from the first quarter call, just, I guess, 1.5 weeks ago at this point, is some commentary from you, Mary and Scott regarding your digital channel had already been growing quickly. It obviously took off even faster in the last 3 months or so. Can you talk about how that relates to your view of your long-term store? What's the right number of stores to potentially operate in the United States? How does that affect that, even just beyond the near-term pandemic, maybe international opportunities as well? I would just be interested to hear your latest take on that.

Yes. Yes. So first, I'd say we are excited about the increase in penetration. I mean, as I mentioned earlier, we were anticipating a growing penetration and a growing e-commerce business, and we're really positive about that because it has such a dramatic impact on our business for those guests that migrate in and start using our e-commerce business. When we see a store-only guest start to use e-commerce, that guest spends more with us, shops more frequently, both in-store and online and really becomes one of our best guests across the portfolio of offerings that we have. So we were actively pushing to increase penetration. What's happened now is the step change that we weren't obviously anticipating. And while it's been disruptive, one silver lining will be, we believe, a lasting effect of getting more guests quicker -- more quickly connected to our e-commerce business. So we saw a surge of what were previously store-only guests now shopping online when we were an online-only business. And that, we think, will pay dividends for us down the road. And so we're working hard to understand their behavior, to engage that group of guests through our communication and our loyalty program. And we're anticipating that, that will help us long term. It does cause us to rethink a few things. Certainly, the operational side, we're shifting around and accelerating the capacity building that we have, things like our Jacksonville DC and some other elements to make sure that we can deliver a great experience to our guests as that business grows. And we're thinking about our stores. I'll say we firmly believe that our stores -- we have a lot of confidence and are committed to the belief that our stores will play an extremely important part of our overall guest experience. We have a lot of faith and belief in the store experience. And we know our guests, even as they shift to e-commerce, they still shop with us in-store and they value everything that we can deliver in store. The idea of being able to explore and discover products, to talk to an associate, to be able to see and touch products when that capability comes back. Services play a big role that obviously can only be done in store. So we believe firmly that stores are a critical part of our future and in fact, the dominant part of our future going forward, even as e-commerce becomes a bigger part of our business. But with this acceleration, we're going to take a look at both the number of stores. We've shared historically, previously, that we were on trajectory to 1,500 to 1,700 stores. We're in the mid-1,200s now. We will continue to open up stores, for sure, in the near term. And we're evaluating if we should think differently about the number of stores. But we definitely see more store opportunities, new store opportunities ahead of us. And then the experience itself, creating more omnichannel. BOPUS is one example, curbside. But more intersection between the online, the digital and the physical experience. Last thing I'd just say on that. We'll also use this as an opportunity to really dig deep and take a look at our -- any stores that are underperforming. We are fortunate that we have a very healthy store base. We have only really a handful of stores that we feel might not make sense for us. And so we're going to dig into that and just make sure we use this as a chance with a new view of the role of e-commerce and penetration, can we clean some of that up to improve overall profitability. But bottom line, stores will be a big part of our future, and we see lots of opportunity with them.

Great. Maybe on the topic of stores and not -- obviously, there's a couple of ways to look at their sort of defensive and offensive opportunities, perhaps in your case, probably more offensive than defensive. But from the standpoint of either deferments or lowering real estate costs or opening up additional real estate opportunities that an advantaged retailer might be able to take care of or take advantage of, maybe talk about both sides of the real estate outlook here.

Yes. No. Absolutely. And we've prided ourselves in having great relationships with our -- with the real estate community across the country. We do feel like we are a strong tenant and a strong retailer that has -- that is -- and we've been able to leverage that in a way that's positioned ourselves well to have access to the best real estate, best positions. And through this crisis, we've tried to make sure that we're maintaining and, in fact, trying to strengthen the relationship we have with our real estate partners across the country. And so that's been a big focus for us because we want to be in a position to accelerate out of this, and we want to protect the relationships we have, the elements of our agreements with our real estate partners that allow us to continue to grow. And so what I'd say is one of the things that we're really looking at is -- yes, and at the same time, we're evaluating the number of stores we mentioned just a minute ago. We also see some real opportunity. I mean there's a lot of disruption in the real estate and retail marketplace. We are very positive and optimistic about our future. We see this as a real opportunity to accelerate in a number of ways as we connect with our guests, and one of them is in making sure that our portfolio of stores is as strong as it can be. And as markets -- local markets change, as some retailers are no longer able to continue in certain spaces, that will open up new opportunities. We think we're in a good position because of the relationships and the strengths of our business to, in some cases, upgrade locations; in other cases, get access to top centers that maybe were just full and we didn't -- we weren't able to enter in before. And so our team is -- our outstanding team of real estate leaders is working hard to really find ways that we can position ourselves to take advantage of a disruptive market and, at the same time, be great partners to the real estate community as everybody is navigating all of this change.

Great. Maybe the makeup -- the color cosmetics, specifically makeup category, has been -- had a couple of softer years prior to COVID-19. Maybe, obviously, that's taken -- given distancing and whatnot, that's taken -- that got an additional leg. But any updated thoughts on kind of when that category might stabilize or turn back up? Obviously, probably not second half, I'm guessing, like it might have been thought prior to the pandemic, but any thoughts on that? And just how you're thinking about the category overall?

Yes. Yes. So makeup, obviously, has been, well, a huge driver of our growth over an extended period of the time when we really were -- we saw great growth in the category, and we were leading the charge and gaining a lot of share. But of course, we've been more challenged in that category over the last 1.5 years, 2 years as some of that growth has tapered off and behaviors are shifting. Coming into this year and really the beginning of this year, in the end of our fiscal year in January and then into February and March, by no means were we feeling like the category was recovering, but we were seeing signs of stabilization and feeling solid about the beauty -- the makeup landscape. And we were optimistic about some new brands we're bringing in and some innovation that's coming. This, of course, has changed. That marketplace has changed, every market, I suppose. But in the near term, for sure, a lot of disruption as behaviors have changed. People aren't going to work -- going out to work. They're not going out to dinner, going out to entertainment and that changes short-term consumption. And we know that's going to be disrupted for a little while. There are some offsets to that. There's been this obvious surge in video usage, which a lot of people are discovering different ways to make sure they look and feel their best in that environment. We also have seen a really cool trend in really the height of quarantine and stay-at-home orders that there was beauty enthusiasts and makeup lovers who are experimenting with looks and sharing them in social media and really discovering new ways to engage in beauty. So we know -- in makeup. So we know makeup is strong. There's a core belief and we're confident about the long term. What the second half holds, we're studying that every day and trying to figure out how to best navigate that. We do have some good newness come in that has been shifted back from the first year -- first half of the year. But consumer behavior and trends, we're watching closely and preparing for different scenarios about how consumers react to the changes and the kind of recovery as we pull out of the depths of what we saw in April. But -- so a little hard to know in the short term. But in the long term, we're confident that makeup will be an important category. It will, at some point, return to a growth category, and we are well positioned to lead that.

Any things on some of the other important categories like skincare, haircare, fragrance that have shown really good relative strength? Any additional earnings during this period?

Yes. Yes. So the categories that we have been talking about for a little while largely have strengthened through this skincare. Skincare was strong pre COVID. We saw an increase in engagement in that through trends like self-care and just having more time to think about routines and taking care of yourself. So skincare, haircare, hair color, a lot of like DIY and beauty at home kind of categories like nail and even accessories have been strong. Fragrance is largely going out. It plays a big part. So that is a bit more like makeup that, that took a bit of a hit. But a lot of other categories, we've seen strong, strong growth. And as we look forward, we know definitely, we're seeing strong makeup trends. We're focused on bringing in new brands, leaning into the brands we have. We've seen some cool dynamics that a newer brand that we're carrying, The Ordinary is one example, has had just a really strong performance pre COVID and definitely during COVID. We have -- and we're expanding that as in store, very strong online. But then a big established brand like Clinique has done really well for us, and we're really pleased with the skincare -- total performance with skincare, in particular, in Clinique, which is cool to see a big, established brand like that with a lot of trust and connection to consumers, a lot of migration towards a brand like that. So we're seeing it across new brands, big established brands across the category. And we're going to lean into skincare. And hair is also one that we're excited about and see a lot of opportunity to continue to drive growth there.

Great. Maybe just a combined question on the competitive landscape, how that's maybe shifting, whether it's competitors becoming stronger, more promotional, et cetera, or not. And then on your loyalty program, obviously, growth in membership is affected when stores aren't open. But what are your latest thoughts on membership growth but also particularly spend per member going forward?

Yes. Okay. Yes. On the competitive side, yes, we've talked before, and I think probably, I know you're well aware, Dan, this is a really competitive category. It's an attractive category. It's had -- it's generally a growth category. There's tons of consumer engagement. The margins are good. It's an attractive category, which means we have a lot of competitors. And because of our assortment, really being the only ones that offer what we call All Things Beauty, All in One Place from mass products up to prestige across all categories, haircare, skincare, makeup, bath and body and fragrance, salons and services, we really compete with everybody in beauty, directly compete with everybody in beauty because we have products that overlap with really all parts of the marketplace. So as we look at that landscape, we have a ton of respect for the competitors on all sides of our business, and we watch them closely and really make sure that we're leading through an offensive posture that builds and strengthens our differentiating -- the factors on our business. But when we look at the competitive landscape, some of the central retailers, Walmart, Target, Amazon, performed differently, stayed open, no doubt attracted some new guests across their business. You saw it in their -- some of their results. And we'd anticipate, even within beauty, some of that happening. On the other side, the department sort of side has had some challenges before this, of course, and this certainly didn't help. And so we're watching that side of the marketplace really, really closely. All of that, though, we really focus on making sure we're delivering our best experience, and as I said, playing offense. The assortment is key, making sure that we've got the best assortment. We're the only ones that do what we do. A nice part of our assortment, in fact, often, the fastest-growing part of our assortment is exclusive, and we're continuing to add brands and drive that growth. Our loyalty program is key to that, and we're strengthening all aspects of that business. I'll come back to that to answer the second part of your question. And then the experiences that we have, both in-store and online, are critical, and we're building new capabilities across both the physical and the digital world to make sure we're differentiating and being the destination for beauty and establishing a brand that ultimately builds an emotional connection that deepens loyalty across the landscape. So very aware of the competitive landscape, watching closely, leaning into our competitive strengths and making sure that we continue to drive share, which we have been for a while. On the loyalty piece, we're fortunate to have a really strong loyalty, well over 30 million members in the program, high level of engagement. We saw in Q1 year-over-year growth, which we're really pleased with, given the circumstances. There was -- we were down a bit from Q4 largely because our stores were closed. And there's a group of our guests that are more occasional. We've got a nice chunk of our consumers that are our best guests. Our diamond and platinum, they're in very frequently. But there's obviously a segment that are in less regularly, and there's a group that maybe shopped with us in Q1 last year that didn't come back in part because our stores were closed, and so we lost some guests there. We will -- but having said that, we're very positive about the future of our loyalty program. We'll continue to find ways to reengage those guests that have lapsed but also find ways to drive share wallet and spend per member. All of the efforts that we have around personalization and data analytics have been focused on driving spend per member. We've made a lot of good progress on it. We're pleased that we have the capabilities. And they're just getting, frankly, smarter and stronger every day as we test new things, and we've been able to test a lot through all of this because since there's been a lot of disruption, and so we're trying new things at a faster pace, and we're seeing results and we're leaning into them. And so a big focus for us is spend per member, but we'll also look at growing the total base and reactivating guests that may have dropped out.

Great. Dave, Kiley, thanks so much. Best of luck the rest of the second quarter. I appreciate your joining us. Appreciate everyone joining us.

Thanks, Dan.

Yes. Thanks for your time.