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

Thank you. Good morning, everyone, and welcome to Day 2 of JPMorgan's 8th Annual Retail Roundup. I'm Chris Horvers, broadlines, hardlines retailer at JPMorgan, my own commercial. So welcome, and I'm very pleased to have the Ulta management team with me, Dave Kimbell to my right, the CEO; Scott Settersten, all the way down at the end, the CFO; and then Kecia Steelman, COO, right in the middle. We're going to pass it over to Dave. He's going to have some brief opening commentary. I will open up the -- I will lead the Q&A and then we'll leave plenty of time at the end, and there's mics on the table for you to ask questions.

Great. Well, thanks, Chris. Thanks for having us, and thanks, everyone, for your -- for spending time with us today and your interest in Ulta Beauty. Really appreciate it. We're excited to be here. We just, a few weeks ago, announced our fiscal year 2021 results, and we're really pleased with what we were able to accomplish last year. The beauty category recovered faster than we anticipated, and through stronger recovery and what we believe was really exceptional execution across all aspects of our business, we were able to really lead the recovery, both exceeding our pre-pandemic sales and profit levels. And so we feel like we have very strong momentum. Importantly, that was across all aspects of our business. We saw a record level membership growth, up to 37 million members of our loyalty program. We gained market share across our business. We launched a new partnership, really a game-changing breakthrough partnership with Target that we're very excited about. We managed, we think, very effectively the dynamics that were going on across the landscape with consumer changes and supply chain disruption, the introduction inflation late in the year. We feel like we managed all of that with excellence that allowed us to deliver on our business. And importantly, we're really proud that we made progress on our ESG -- key ESG efforts across engagement and community DE&I and sustainability, specifically. So we're optimistic about the future of the category and the outlook, both in the short term and the long term, for the beauty category. Consumers are highly engaged and there's a deeper connection to the category between beauty and self-care. So we feel confident in the category, and we believe Ulta Beauty is positioned to lead the category, as we've been doing for many years now. But with that, we know there's certainly a lot of disruption in the world around us. The consumer environment is disruptive [ with you ], all the dynamics that you know going on here domestically and then, of course, around the world as it creates more uncertainty and anxiety. So we know it will be a -- continue to be a disruptive environment in which we're operating, but we feel very confident and optimistic about Ulta Beauty's position and are ready to continue to lead the category. So with that, Chris, I'll turn it over to you, and thanks again for having us.

Awesome. So maybe we'll start at a high level and we'll think about the category in the industry. If you look back over a long period of time, the industry sort of grows about 4% on average looking at -- and even in the GFC, you were sort of flattish in '08. And the industry was maybe flattish in '08, down 3% or so in '09. How are you thinking about the growth of the category? It seems like your expectation for the industry growth in '22 in the context of your 3% to 4% comp guide would seem like you're sort of putting in the category at the lower end of the growth and not baking in that healthy share that you've gained really over the cycle for many years?

Yes. Well, first, I'd say, as I mentioned in my opening remarks, we're optimistic about the outlook for beauty. It's a great category. It's dynamic. It's personally and emotionally connected to consumers' lives, and I think coming out of the pandemic, that connection and importance in consumers' lives actually elevated. So, optimistic. We shared at our Analyst Day last fall that we see over the next 3 years, the category growing in the 2% to 4% range, consistent with some of the things that we've seen historically. The category did recover faster than we anticipated in 2021. In MPD, the category was up 9% versus 2019. So the recovery was strong. Consumer engagement came back faster. There are some ups and downs, certain categories, skin care and hair care and fragrance, in particular, performed really well; makeup was more challenged, but the category as a total actually fared fairly well through the pandemic and 2021 came back stronger. So when we look out over the long term, we remain confident in the growth. When we think specifically of 2022, we believe the category growth will be in that 2% to 4% range. We are growing faster, our comp guide in that 3% to 4% range. Our total sales in 5% to 6%. We will be leading the category as we have been for many years now. And so we feel like it's reflective of the dynamics that are happening. There is some uncertainty still ahead of us as we go through lapping all the dynamics of last year. The recovery was stronger in '21 than we anticipated. So when you bake that into what the outlook is for this year, we certainly have reflected that. But through all that, we're confident that Ulta Beauty will continue to lead and gain share. And if the market grows faster, we're ready to lead it.

Understood. So maybe you could help us a little dive into some of the category growth themselves and the innovation and the newness factor. So maybe Kecia, I'm not sure if you want to jump in on some of these. How are you thinking about growth in mass versus prestige? And then also, how are you thinking about the growth of the cosmetics category relative to the rest of the box?

Yes, absolutely. Well, Ulta Beauty was founded on having both mass and prestige from day 1, and we continue to operate that today. Newness does play an important role in cosmetics, specifically around makeup. And what we like that we're seeing is for fiscal year 2022, we see a lot of newness and innovation in both mass and prestige. So it's not just in one sector of our offering. Just to play on that a little bit, when you start to hear about the economy and the concerns around disposable spending, we're also very -- we're positioned very well to take share because we have that flexibility and are offering that -- beauty enthusiasts that choice. The beauty enthusiast doesn't just shop prestige or mass, they generally shop both. So I think that we're well positioned to continue to take share in makeup specifically. And as social occasions start to open back up, I think that we're primed and ready to go there, too.

So question on the -- sort of the newness cycle. If we went back, you had the contouring '15, '16 phase, Kardashians and social media. And that cycle sort of decelerated and crashed in 2019. You've talked a lot about how that newness, the vendors really were getting back to driving innovation and the newness in the cosmetics category, and then COVID hit. So can you help us frame out like the degree of newness in the brands that you're really excited about in 2022? And how would you compare the newness element in '22 relative to 2019?

Well, first, the Kardashians have a new show. So I haven't seen it, but we're excited about it because we've got a great partnership with Kylie. And so yes, there's always stuff going on there. But broadly on makeup, yes, you said it well. We've been on a journey, and there were so many things that came together in 2016, not just product newness, but marketing innovation through social media. New trends and ways to engage in the category and then certainly, new brands and experiences that drove just tremendous growth. What we're seeing now on makeup, we think is actually encouraging. It is -- it has been the, I guess, most pressured part of our business. Every other category grew double digits versus 2019. In 2021, it was skin care and hair care and bath and fragrance and all of them and -- but makeup and specifically prestige makeup. So what we're seeing is a few things that give us optimism going forward. One is the level of engagement in makeup remains really high. Consumers, through social media and other metrics like including our own virtual try-on app, the engagement in discovering makeup and just engaging in the category remains really high, even in the depths of the pandemic. So that's really good. We are seeing some new and emerging trends, the way consumers are engaging in beauty, even contouring starting to come back for Gen Z who missed it the first time around, and some other dynamics that are happening in the category that are creating new ways to try and discover and use makeup, which we're excited about. And then product newness is really important. And so what we're seeing this year is a stronger pipeline of newness certainly versus 2020 when makeup, in particular, really kind of stopped once -- in March and April of 2020 when they saw what was happening. But even versus 2019, we feel really good about the pipeline of makeup innovation. We're seeing it across the board. There -- on the prestige side, one example recently is MACStack Mascara, which is performing really well, took off in TikTok and we've got a great relationship with them. We're expanding our business. On the mass side, a number of brands, Morphe had a new line of partnership, a new partnership line that's doing really well. We had a mixed liner -- lip liner that's off to a great site. So we're seeing strong innovation that's tapping into consumer behavior. At Ulta, specifically, we want to lead it. We want to drive the makeup recovery. And so we're taking actions that we think position us well. We've launched a number of new brands, Fenty being probably the biggest in makeup. That's off to a great start. We have exclusives and partnerships like we've always had. We just launched this week an exclusive line with e.l.f., a collaboration they're doing with Dunkin' Donuts, which if you haven't seen that, go check it out. But yes, so we're -- we see a strong pipeline of innovation. We see consumer engagement being really, really high, and we think Ulta Beauty is positioned to gain share, as we have been even in a disrupted time. So makeup is not going to just all of a sudden, we don't think we're going to wake up in one period or one quarter it's going to be just an exceptional growth, but we think steady recovery driven by consumer engagement and innovation will get the category back on track.

On that side, prestige cosmetics. Can you talk about what happened in '21? Was that -- at the industry level was prestige cosmetics positive versus 2019 or was it sort of -- and how affected it was it by sort of the events versus the COVID side? So were there periods where at an industry level that prestige cosmetics was positive versus 2019, but still pretty much down for the year?

Yes. Yes. So the makeup category in total was down throughout the year in each quarter. Mass did perform better and was positive versus 2019. But prestige was negative versus 2019 in all 4 quarters of the year. We had seen some periods, particularly in the middle of the year, where it was getting sequentially better, still not positive, when things were loosening up and then as Delta hit and then Omicron. And what we for sure have confirmed is makeup is most susceptible to the ups and downs of COVID and lockdowns and the changes in that environment. So it was negative throughout the year. But when we look -- so what again gives us some encouragement is we are seeing the world opening up. You're all experiencing it. We're doing this. I think this is the first one of these we've done in -- since 2019. This -- and so steps that will continue to get people out and more use educations, combined with some of the other things I talked about, we believe will get the category going. I will just reiterate, even with the category, prestige category down, we gained share. So we were still down, but down less than the total category for the year. And so our actions, we think, are helping to lead the category. We just need to get it back into positive territory, and we're working hard to do that.

So I'm often quoted saying that if makeup and cosmetics works, it's all you need to know about Ulta, right, given mass, prestige and shop across the store, shop across brands, new brands and newness. So as you reflected back on the contours of the makeup cycle, were your share gains more substantial in '15 and '16 when -- versus, let's say, in 2019 as the ex sort of department stores closing, like do your share gains tend to accelerate around the makeup cycle in particular versus other categories?

I don't -- I can't answer that specifically because I just don't remember exactly the kind of year-to-year share gain and how much we did in '16 versus '17 or '19. But what I will -- my sense is no, it really -- we gained share because our model is unique. And we're not just a makeup destination. I mean I think this, we are not a makeup business. We are a beauty destination. We deliver for our guests something they can't find anywhere else across all price points, as you said, mass and prestige, but also across all categories and experiences. That's what makes Ulta Beauty so connected and why loyalty is so high, why we're continuing to gain members. So even as makeup was struggling, and you remember in 2018 and 2019, our business still grew. It wasn't the category, makeup category was down, we were still growing. We were gaining share. We gained a meaningful amount of share in '19 and we also gained a meaningful amount of share in 2016. I don't remember the exact percentage changes in each of those years, but I know we were gaining share in each of those years. And so when the category is healthy, we lean in and lead it. And when the category is struggling, we're taking actions to adjust and adapt. And there's still, what's important to remember is even as the category has -- even in the 2019 and 2018 when the category, we -- it's still a big category. People were still buying a ton of makeup and they were still discovering newness, and there's still a lot of people that were driving it. And what was happening was the combination of social media and influence, and the rise of that, of big trends like brows and contouring, of a lot of new brands that are taking off like IT Cosmetics and innovation across the board came together to drive this extraordinary level of innovation that just couldn't sustain all parts coming together. So even in 2019, when the category was down, we gained share because we took action on driving the right newness, leveraging social media. So yes, we feel confident that in any dynamic, we'll be able to gain share because of the unique dynamic of our environment, because of our ability to move people across the store from makeup into hair care, skin care, and that's one of the things that makes us, I think, special.

Yes. I've always found that when engagement rises, the special -- the leading specialty players tend to win because it drives traffic to the store. You're going -- you're trying to find newness for that new product and it sort of becomes this sort of flywheel of traffic. As you think about all the optimism, the world's changed a lot. You probably benefited. There's a little bit of a line in the sand in our coverage of like people guided in early February versus people who guided late in the cycle, and so the environment has arguably gotten more uncertain, at least for everybody who stares at the screen that's flashing red all day recently, may not be true for the consumer. So I guess, to what extent did you bake in the uncertainty around gas prices and inflation and all these potential risks into your guidance relative to when you talked about being inside the comp [ that'll go]. In the fall, you talked about 3% to 5%, but you specifically guided 3% to 4%. So my question is, to what extent did you have the sort of benefit relative to other retailers just to say, we need to add just a little bit more of uncertainty into our outlook, given how the world's changed.

Well, that's part -- I mean we're really -- we feel our 3% to 4% guidance is smart and reflective of the environment in which we're operating, and as I said, very much in the range of 3% to 5% that we think we're going to be delivering over the long term. What we're facing this year is a combination of, yes, the dynamics and uncertainty and -- of the world around us, and that's certainly something that we're incorporating into our thinking, and we want to make sure that we're prepared to adjust and adapt as a consumer environment. But also, and I mentioned it earlier, the -- what we're lapping in 2021 was much stronger than we thought a year ago when we were thinking about the outlook. The category recovered faster, as I mentioned, and we led the way. We had a 12% comp versus 2019, which is very strong performance. And it was double-digit comps in every category except for makeup, high-level engagement, our stores came back and we saw recovering traffic. Our membership was -- recovered faster. So the recovery in '21 was faster, which is not incorporated as we lap that. If the recovery had been slower, I suppose we won't be thinking about it, but the recovery came faster around our business to get us back to being ahead of 2019. And then we look at the outlook ahead, lapping that and then incorporating some of the dynamics that we see ahead of us, we feel that 3% to 4% is smart and prudent. But as always, like every business, I suppose, we're looking for ways to beat that, but we think it's the right way to kind of look at our business going forward.

Maybe we can jump back to the top line, but this is a perfect dovetail into every retail investors' favor topic, gross margin. So there, you also had talked about previously sort of long-term ability to drive merchandise margin expansion. And then -- but in the context of this year, you're talking about an increased competitive environment and sort of baking in normalized promotionality. So can you talk about what went into that thought process? And to what degree did you sort of add a dollop of extra prudence because of all the change in the world that we've seen?

Yes. So again, as Dave well described here a moment ago, I mean part and parcel of the algorithm we were considering and the change from maybe the way we were thinking about it back in the fall, getting ready for Analyst Day and what the reality is as we're preparing our budgets and final plans for the year and providing guidance to investors, was the fact that 2021 was just an extraordinary period of time. So again, we delivered peak operating margins. We delivered peak gross margins, right? And that -- the gross margins were a result of a lot of good work the team has done stretching way back to late 2018 when we began talking about efficiencies for growth and category management initiatives that we had underway to help improve margins over the long term. And you couple that with the quicker than expected and stronger-than-expected rebound in the beauty space, right, and us really during the course of '21, just trying to keep pace with sales trends across the business. So a lot of interesting factors there went into delivering, again, peak gross margins last year. As we thought about the lapping effect of that, right, and what we were going to do to navigate through that, it just -- it's a tougher hill to climb. And so again, trying to be prudent and reasonable about setting investor expectations for this year, especially in the second quarter, where if you look back to 2021, you delivered almost a 17% operating margin and a 40% gross margin as a result of some extraordinary onetime events that happened there, largely around lapping some extraordinary inventory reserve activity. So again, when we lay things out and we look at what we're lapping over and then what's new, like what's coming down the pipe for us and thinking about new brand additions that are at slightly less strong gross margins, again, we love the halo effect of those brands and what they're going to bring to our offering over the long term. But in the short term, there's a bit of a headwind to deal with there. Thinking about back to a more normal cadence with our inventory flows, again, Dave mentioned, more newness going to be implemented across the business. And so that creates some disruption in the stores, right, and planogram changes. And so there wasn't a lot of that over the course of the last couple of years. There'll be more in 2022, more markdowns, more clearance kind of activity. Again, anticipating some of that. And then lastly, the promotional level. Again, the company is in a much stronger position today than it was 2 or 3 years ago, with our CRM capabilities and taking advantage of our loyalty membership data to be more direct focused with our promotional offers. So during the pandemic, we've been able to pull back from some of the what you call more mass market kinds of offers to drive traffic to the stores. So we've taken advantage of that. We've been able to get more focused on our key -- I call tentpole events like 21 Days of Beauty and Love Your Hair events. Our capabilities around being more focused with those offers and driving more efficiencies and more profit to the business overall. So again, while we think '22 is going to be a bit of a step back in gross margin from an overall impact, we feel like we're very well positioned. We're more capable today and in a good position to expand gross margin and operating margins over the longer term.

Understood. Dovetailing a little bit off that. A lot of retailers at this conference and on their conference calls are talking about advertising opportunities from a revenue and margin perspective. You've always -- and sort of how important 1P data is. You have such a rich loyalty program. And you often use that in partnership with the brand to say, like new Chanel mascara, let's -- we'll harvest our data, send it to this subset of customers to try to see what their response is like. I guess to what degree can that -- could that database of information go beyond just helping the vendors innovate and actually become a source of opportunity in terms of advertising revenue that a lot of retailers are talking about?

Yes. We're -- we are excited about that opportunity. We announced in October the launch of UB Media, which is a big step for us in taking advantage of the opportunity that's ahead of us. You mentioned it, Chris, we've got what we believe is the strongest transactional level data, the most robust database of beauty transactions really in the country when you look at our -- the scale of our business, 37 million members, 95% of our sales go through our loyalty program. So we can track back almost every item that we sell back to an individual. And then you look at the breadth of our business across price points. We're the only one at scale that sells ColourPop and Chanel in the same store and sometimes in the same transaction to the same guest, as well as across categories, big in makeup and hair care and skin care and fragrance and bath and tools. We also have services. We have a big e-com business, a big in-store. So we are very holistic. We talk about it, all things beauty all in one place, and that comes to comes to life in our experience, and then we're able to get data about all aspects of that. So being able to leverage that data to make our -- to help our brands be more effective and efficient in their advertising is a big opportunity. We've been doing that, I'd almost call it a pilot, for probably at least a year, maybe longer, maybe 2 years now. And we're elevating and expanding that dramatically with the launch of UB Media with the idea of helping our brands be more efficient in their spend to leverage our first-party data, which is ever more important in a cookie [ listed ] world as other privacy changes. We can tap into that. We can help them with their advertising spend. And some of our brand partners are among the biggest advertisers in the country. And so for us to be able to help them be more efficient, it's good for them in the sense that they can get, again, more efficient with their advertising spend. It taps into a different pool of dollars for them and their advertising versus some of the things they might do in trade spend. And it's good for us. Yes, we make margin on it. We'll make some money on that activity. But we'll also be the disproportionate beneficiary of the sales that result from these because often, this advertising is directing them direct to Ulta. So we're excited about the opportunity. We've already had some great experience with it, and we think it will be a nice opportunity for us to deepen our relationship with our brands and to drive our business forward.

Awesome. So maybe for Kecia. So can you talk about what you've seen so far in terms of the Target partnership, in terms of the sort of retention of the customer between the cross-shop of Target and then on the customer acquisition front. And just overall, what are your initial views on the partnership so far?

Yes. Well, we're -- we've opened our first 100 stores just in the last 6 months. We've got plans to open 250 more following the Target renovation schedule. We like what we see so far. Our early signs are that this is really a loyalty play to strengthen our relationship with our consumer, with our member. We know that our members shop beauty at other places. We've given them a convenience play now with our partnership at Target. It's a highly curated assortment. So [ tourists use ], it's must-haves, minis that bounce them back into the Ulta Beauty store. What we're seeing in regards to the behavior is that we had 1 million of the Circle members and Ulta Beauty members link their accounts initially out of the gates. So we like what we're seeing there. We're really working hard on new member acquisition. That was one of the benefits to us being in front of a new guest set that has a lot of traffic coming into the Target stores. We're prominently at the front of the store. We like what we're seeing there. We're going to continue to double down on those efforts. Again, we're still 6 months in. But what we're seeing with new member sign-ups as they're joining the Ulta Beauty Rewards program through Target is that they're behaving very similarly to our average Ulta Beauty member, which is great. So they're coming, they're bouncing back into our Ulta Beauty store. But this is a long-term play. This is really about continuing to strengthen our brand relationships with our members. And in the short term, yes, we're seeing a little bit of cannibalization, but we had that built into our plan. And we have more points of distribution where the consumer can purchase. But we're keeping them in our ecosystem, which is really important for us to get them to bounce back into the Ulta Beauty stores. So I think we're continuing to learn. We're working really well together with the Target team and the Ulta Beauty team. So we're all about taking share together.

And so, I guess the devil's advocate question on the Target side, it's almost like -- it's like Estée's in Target hands, like getting closer to touch each other. It's like the Return of the Jedi, I think where the electric's going through and their fingers touch. So I guess, maybe talk about how you like think about that risk to where an Estée says, you know what, like, I'm now comfortable in the Target environment. They've elevated their presentation and the remodels around the beauty category. So how do you think about managing that risk over the very long term?

Yes. I will say that our brands presentation, the experience is really important to the prestige brands. And when you come into a store at the Ulta Beauty at Target, you're getting a little bit elevated associate that's interacting, that's been trained and educated by the Ulta Beauty teams. Those brands don't want to put their products on a gondola. Even with the elevated presentation of Target, they want to have that experiential shopping experience, and you get that in the Ulta Beauty at Target partnerships. So it's a competitive environment always out there. But as we're going at this together, I do believe that what we're giving is an elevated experience because it's not just about putting the product on a gondola or on a shelf, even in an elevated way. It's about the overall experience and the education that Ulta Beauty really brings to the portfolio.

Excellent. Well, before I ask a lot more margin questions, there's 18 minutes left. So open it up to the audience. There are mics on the table. Stephanie?

Would you ever have [indiscernible] or like how much capacity is there relative to the demand? Is there opportunity to expand the client set for that part of the business?

Great question. Initially, it's really focused on our current -- on our brand partners in our portfolio and really providing a service that makes sense for them that, again, does all the things I talked about earlier. So that will be our focus for the foreseeable future. But we have -- we do see, I mean the data that we have, the understanding of consumer behavior is relevant for other brands and advertisers outside of specific beauty. So yes, we've consider that. And it's -- once we get really going here, we might open that up, both in directing their advertising and then perhaps tapping into some of our owned assets. But that's down the road. Right now, it's really taking full advantage. And we're a beauty company. We've got great relationships with every beauty brand, pretty much. And so there's a lot, a lot of opportunity there, and we want to get that really right. As far as the capabilities, they'd be very similar. But the thing that we'd have to add is we don't have -- we've got relationships with every brand in beauty. We don't have relationships with -- as direct relationship with brands outside of beauty, but the technology to do it, the capabilities to actually deliver it will be very similar, and we have -- we're building that capability, and we'd be ready to do that if and when it makes sense.

Would you have capacity on the site for that additional or additional partners to come in? Or are you sort of at capacity with the demand there is from your existing partners?

Well, and there's kind of 2 ways to think. There's on our assets, so on our website or in our e-mails or on our app or any other owned digital assets, our virtual try-on. There is limited capacity there. And that will largely, we think, be beauty. Anything can change, but certainly, for now, that's beauty. And we're actually not -- the first phase of UB Media is not so much about advertising on our site or getting a banner that somebody goes and buys on our site. Our focus is off of our assets, tailoring their advertising in social media platforms or any other display advertising that we're doing, that a brand is doing to drive awareness. And so we essentially become a conduit for them to drive more efficiency in their off-Ulta asset advertising, in a social media platform, for example. And that capacity from an advertiser is kind of unlimited, I suppose. Then we just need the internal capacity to be able to build those relationships and drive it. But our focus will be, again, initially on the beauty brands.

[ Leslie ]?

Can you guys talk a little bit more about the fragrance category? It sort of seemed like it was left for dead for a while, and we've seen a resurgence of. What's driving it? And does this trend have legs to it going forward?

We -- it's interesting, when the pandemic broke out and we're all, in March and April, we were trying to assess what was going to happen in our business, I think we all felt, hey, fragrance, that's going to be a problem. And just -- yes, everybody is at home -- and initially, it definitely slowed. Then it took off and was way -- it had been fine prepandemic, unlike makeup that had been going through -- it had been doing fine, chugging along, and then it took off. And the reason is, and it's reflective of something that we think and we've seen across beauty, which we think is so powerful, but fragrance is perhaps the most clear example. The role of beauty has elevated in many consumers' minds from being an external reason why you participate in it or somebody -- I'm doing this for somebody else. I'm wearing a fragrance because I'm going to be at a party and I'm around other people, and I want to make a great impression, to a more internal reason why I'm doing it. If I'm at home with my partner watching Netflix, I just feel better. Or even if I'm by myself, I just feel better. It gives me a boost of energy. I just feel that it's a self-care -- part of my self-care regimen and routine just as much as, I don't know, drinking green juice or doing yoga. Taking care of yourself through beauty has become -- the connection that consumers have has dramatically increased. We see it in all of our research, 65% of consumers now say they see a deep connection between beauty and self-care and wellness. How you feel about how you're showing up in the world, even if you're at home by yourself, is directly related to your overall wellness. So that's -- so when we do research, we say, why have you started buying more fragrance? People were like, I just discovered that wearing a little fragrance, even when I'm sitting at home, makes me just feel better about myself. And so that will help with fragrance. We're seeing continued momentum. We saw it all throughout 2021, and we're optimistic about the path ahead for fragrance. But that broader trend of the connection between beauty becoming less about the superficial external element, although that's still important, but more and more about overall wellness, we think is going to drive the total beauty category, including fragrance for quite a while to come, and we're excited about that.

I would just be curious how you guys are seeing social selling evolve. When Instagram's sort of first on shopping, everyone got all excited and didn't really do much of anything. And I know TikTok obviously has a bit of a push there, and the whole influencer thing is definitely maturing a bit. So I'm just curious, when you guys think about that as a competitive threat or an opportunity, how you're -- sort of what you're seeing there?

Yes. It's an area that we're watching closely. We've participated in the space in a number of ways. You're right, it's not -- it hasn't exploded that a huge part of the category is shifting into kind of social selling. But that's an area of interest. Live streaming is specifically one that we've been exploring. We had a partnership last year with an experience, a site, an experience, a community called Supergreat. That was all about live streaming beauties, positive live streaming of beauty. So we learned a lot through that. And that's an area of interest for us over time. We see that as very big in China. Some of these trends that are happening in China have started to emerge here but really haven't taken off in a way that certainly to the level they have in China and maybe some other markets. So yes, you're right. It hasn't transformed the category yet. But there are some signs that certainly the role of social media in general, the idea of engaging in the category, being able to learn and discover is a big part of the category, has been for many years. How that translates specifically to transactions, that is something we're watching and we're participating in. And our intent is that we'll be at the forefront of any of those changes as they come.

Can you provide us some details on your partnership with PayPal with respect to the Happy Returns in the store? What you saw in [ test help ] benefits you? Is there expense sharing with them? And where in the store are you putting this? I know most of your stores are large, but you do have some smaller mall stores that sort of make me wonder where it's going to be.

Yes. Absolutely. It's a convenience play. When we ran this through a test, staying really close to how our associates were responding, did they view this as just another task to complete? Was this a nuisance to them? Because we really want to focus on, of course, the consumer that's coming into Ulta Beauty, and the feedback was really positive. A couple of things. Number one, the speed and the ease of the return was seconds. It wasn't minutes, it was seconds. The pickups were relatively easy and fast from the pickup partner. And we were getting a new consumer in because they definitely had an ESG mindset because instead of shipping something back via UPS or FedEx, you're taking it to a centralized location that's doing a more of a mass type of return. So we did see some new guests that we were able to convert into our loyalty program. We like that. The ease of the interaction for our associates to make it really smooth and easy, continuing to support ESG efforts on a broader retail sector. And we liked what we saw, so we rolled it out to all the stores chain-wide. So, so far, so good. We like it. We're the exclusive beauty retailer, too. I think that's important to note, too, is that from a retail return location, Ulta Beauty is the only beauty retailer that you can return anything that goes through a Happy Return process in the U.S. The associates are associate based, yes. The platform is on a separate platform, they provide an iPad, and again, it's seconds for the return. And we felt like the offset of the associate pay with potentially getting a new consumer into our membership program was well worth the investment.

[ Arturo ]?

Just on the categories, you said that makeup is something that is exciting for this year and fragrance is picking up. Where do you see skin care going this year compared to pandemic times?

Skincare has been healthy for a while for several years. It's been driving really nice growth. It, for us, grew double digits in 2021 versus 2019. And there's been a continued -- there's been a -- yes, I guess, a sustained trend of just greater recognition about the importance of skin care. It ties back a little bit to this idea of self-care. What we saw in the pandemic was, again, a greater recognition, more -- maybe people had more time, more time to kind of think about how they were taking care of themselves, a little introspection about am I doing the right things. Time to kind of discover and learn about skincare routines, to try new products. And so we -- what we see going forward is those routines, those -- across all different aspects of skin care for health, for wellness, for kind of the recognition that your skin is your largest organ and taking care of it is every bit as important to your overall wellness routine. And important in your beauty routine; makeup is better if skin is well taken care of. So we think that's going to continue. Consumer engagement and education continue to increase. And one difference of what's happening in the last couple of years versus previous years is younger consumers in particular, even Gen Z, who maybe historically just didn't see the need or understanding the importance of investing in their skin and taking care of it. So with Gen Z and young millennials adopting these behaviors, we think the category has -- will be healthy for a while.

So do you think it will take share again this year or lose share? And also, could you talk about the difference between the newer type brands and the prestige kind of old guard brands, how they're performing?

Well, let's see. So is take share, you mean like penetration of the total beauty category? Well, yes, so skin care has been growing. I think it's probably yet faster than our total, certainly faster than makeup. So relative to makeup it has been gaining penetration versus makeup. And we see strong growth of skin care continuing. What dynamic that we think we're actually excited about is, historically, skincare and makeup would work kind of in opposite. When skin care was strong, makeup was weaker and vice versa. We see that even as the makeup recovery comes, skin care will continue to grow. So penetration should at least hold steady, if not increase slightly for us. We're seeing growth across price points. We've got -- we had an exceptional partnership with The Ordinary as one example, brands like CeraVe, La Roche-Posay are performing really well in more kind of mass and dermatologist-recommended brands. But on the prestige side, we launched Drunk Elephant last October. That's performed really well, brands like Clinique, the kind of long-established, Estée Lauder, great partnership. So long-established brands with great products like Advanced Night Repair on Estée Lauder is just a classic in the category. That's performing well, and then new and emerging brands across all price points are also. So skin care is doing well, and it's hitting on kind of all parts of the business, which again is unique to our model. We're the only ones that have the breadth of mass to prestige across all these price points.

Scott.

Kecia, would you elaborate on what you're seeing in terms of the loyalty members that have signed up through Target coming to actually shop or repeat purchase in Ulta? And in your mind, is that projectable as you roll out more and more shops? Or is there something unique to the ones you've opened already?

Yes. Just as a point of reference, I think the way that we should always think about it is the loyalty growth within the portfolio of our membership base will predominantly always come from Ulta Beauty. Target is just another way that we can get in front of a new consumer. We do like what we're seeing. Again, it's early on. We're 6 months into the first 100 stores. They opened up sporadically, not all at the same time. But we're staying really close to it and measuring and monitoring the bounce back into the Ulta Beauty location. We're also really focused on engaging them into services because if we can engage them into services, that's something that's unique within Ulta Beauty, too. We like what we see on the initial reads from the members bouncing back into after they initially signed up through the Ulta Beauty at Target into Ulta Beauty. But we're going to continue to learn more as we continue to move forward with more stores and greater scale. But we're working really closely with the Target team on how do we keep those new loyalty member sign-ups happening in the Ulta Beauty at Target locations.

And then just when you were drawing this all up on paper, adding these members through Target and also the cannibalization, is that -- were you guys good guessers? Is this one more wildly above versus below?

Yes. I will tell you, we're continuing to learn as we move forward for 2022. We did have cannibalization built into the plan for the short term. This is a long-term play. It's really about building that brand loyalty within the Ulta Beauty ecosystem. And of course, when we hit on all cylinders, it's going to work for the brands because they're getting a new consumer into their product lines in a highly curated way without adding a ton of distribution points. They don't want to necessarily flood the gates with a bunch of products down at gondola. They want to bounce them also back into Ulta Beauty. I mean we're the largest beauty retailer in the U.S. If we make this ecosystem work, it works for everyone, it works for Target, it works for the brands and it works ultimately for Ulta Beauty and then ultimately, the consumer. So we're just continuing to stay really close to the ecosystem and learning as we go.

Well, awesome. That is actually time. So we appreciate the management team for joining us today and seeing everybody in person, and thank you for everybody here in the room. Have a great day.

Thanks, Chris. Thanks, everybody.

Thank you.