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

Well, good morning, all. I am Korinne Wolfmeyer, senior research analyst here at Piper. I cover the beauty and wellness coverage list, and we have a couple of members of the Ulta Beauty team here with us today. So we have some Prama Bhatt, Chief Digital Officer; and in the audience, we have Mary Kate Boyce and Kiley Rawlins from Investor Relations. So really happy to have you all with us today, and we'll get started.

Great. Great to be here, Korinne.

So Prama, you set into the role as Chief Digital Officer kind of right before the pandemic. I'd love to first hear from you, how you say Ulta was positioned digitally prior to the pandemic? And how prepared were you for the digital boom in 2020?

Sounds good. Yes, I joined Ulta Beauty in 2014, so 8 years. And heading into the pandemic, the company was really focused in our belief, not only in the power of beauty to bring possibilities to life, which is kind of the core purpose of Ulta Beauty, but in the beauty journey being very digital and physical. And so there had been active investments and road map and a strategic importance on really connecting the dots, both from a channel perspective in terms of driving growth with our site and our apps and the e-commerce channel, but also in the influence of the digital channel across all touch points that eventually drives even our guests, obviously, to our stores. So I would say, our investments through pandemic were focused on that, and that positioned us really well when the pandemic hit. A couple of examples of some of those investments. One was, we were testing buy online, pick up in-store in 2018. We rolled it out to the full chain in the fall of 2019, literally a quarter before the pandemic hit and having those capabilities in place really served us well. In April of 2020, we were able to leverage our store teams and our field associates, leverage our inventory, leverage our assets, and not only meet the demand, but significantly increased for the digital channels at that time through our ship-to-home supply chain, but also quickly flip the script and turn into curbside pickup in less than a month while our stores were closed. And that capability and experience continues on. So that was very fortunate timing to have. I'd like to say, we were super planful about that timing, but there's no way we could have predicted our stores being closed down and the need for curbside pickup. So that's one example of being well positioned. One more example is in -- early on, we were really committed. If you're a beauty enthusiast and you know the beauty journey, getting to play around with the product, trial and sample products, watch products in-store, sit with an associate and have them do a little makeover is all part of the fun and the experience of beauty. And Ulta Beauty is very approachable. And in our store experience, you either can do that on your own or you can do that with a store associate. And so we always thought about the digital equivalent of that being virtual try-on. So our commitment to virtual try-on as the digital equivalent of that awesome experience, and then, therefore, to the technology that powers that, which is augmented reality, was a bet we made in 2016. We thought so strongly about that bet. We went ahead and brought into the Ulta Beauty family the partner we were working with, which was GlamST, and we acquired that start-up in 2018 and made them part of the Ulta Beauty family and the innovation team. And of course, that was a long-term bet and a long-term play, knowing that adoption of these kinds of experiences would take time. Well, for sure, during the pandemic, digitally trying-on scale significantly in terms of its adoption and more importantly, it serves a real purpose because there were points in time where you really couldn't try-on physically. And so that's another example of we just believed in the experience and the pandemic, obviously, created a scenario that really positioned us well to capture that.

Yes. No, absolutely. And now that we're years off of 2020 now and things are opening back up, people are getting back into the stores, I'd love to dive just a bit deeper into how you're now blending physical and digital? And how you're integrating digital capabilities into the stores and even the services component of the stores?

Sure, yes. I mean we know each of us. It's not a linear journey. Each of you is consumers. Whether it's for the beauty industry or any other industry, know that you kind of are seamlessly moving between your digital channels and physical channels. And so from a consumer perspective, it's very natural. Especially in beauty, you're going to be in a social channel, getting inspired or discovering. We're hoping and what we are working on is making sure that our mobile app, that our digital experience is not only about the time of purchase, but actually a discovery tool and assistant throughout your journey. So when we talk about the physical and digital, we, of course, know that our guests are using our app when they're at home or on the go, but we also see that our guests are using that app in our stores. Some examples of that are, of course, with the adoption of QR codes. I mean that's not new technology. It's been around for a long time, but everyone became very comfortable, whether it was at your favorite restaurant or your favorite retailer, with QR codes. And so the idea that we can bring augmented experiences through QR codes, whether it was just to try on, but in many cases, for example, with some of our key brand launches like Fenty or r.e.m. beauty with Ariana Grande, we've created a unique experience of the brought to like product information, information about their brand to QR code. So that's one way we're integrating. The other ways are just simply having key tools like a personalized skin analysis that you can, of course, do on your own, but you can be guided through with an associate in-store and that skin analysis tool that helps guide and recommend product that's right for you. And we know that our associates are oftentimes leveraging that experience in-store with our guests. So that's another way that we're kind of integrating the two. We have other small waves. Our print vehicles that are really important in staying connected to our member base, also introduced digital experiences that sit on top of those print vehicles. And we know many of those guests end up in our stores and same deal QR codes that take you to unique experiences, whether it's about making an Obsession or Fragrance Crush or whatever are our key messages and storytelling are. So I would say, those are some ways. Now you asked specifically about services. We obviously are able to book an appointment online and make sure we're depicting kind of all the capabilities of our salon and our services. But we are introducing. We are testing and learning this year. I think it's relatively unique to us and differentiated, which is a hair style try-on, like the actual ability to try different hair styles, not just hair colors on. And we do think that will have a link to services. We obviously engage the guests in that hair try-on, hairstyle try-on experience and then obviously, kind of guide them toward booking an appointment. And we have tested and learned with various experiments with our salon services team about trying on makeup before a makeup appointment or trying on hair color before a color appointment. So those are all the different ways we're kind of experimenting and testing and learning about how we can drive the services experience as well.

Yes. Absolutely. That's all super helpful and super exciting. And so I'd like to turn more to the macro, and it's obviously very top of mind right now, and we're in a pretty volatile environment. And we are seeing consumers react to some of the big selling events amongst all retailers. So can you speak about some of the strategies Ulta has to keep your retention rates high when there are a bunch of like other competitors selling...

Sure. Yes, the competitive space is always competitive and even more dynamic and more competitive now. There's no question about that. I think the way we differentiate ourselves in that space are, we have kind of a whole -- bunch of different things in our toolkit. One is our CRM capabilities and the engagement that we have with our loyalty program and the ability for us to be very targeted and understanding what that member or guest needs. And 95% of our sales are coming from this loyalty program and having that first-party data really allows us to serve that guest well with what makes most sense for them, understanding their life cycle, understanding their behavior and relationship with Ulta Beauty. So our CRM capabilities are steeped in our understanding of the industry and steeped in our understanding of this guest behavior across our entire breadth of assortment as well as kind of digital interactions they have. So that's very useful in terms of how we think about communicating and engaging with our member base and our guests. We leverage our physical footprint in terms of some of the experience that we already talked about and connecting the dots between the two. We leverage where our guests and our beauty enthusiasts are, which is in social journeys and really making sure we're present and relevant, whether it's in TikTok or in Facebook and leading the way in terms of beauty engagement and beauty trends. So I think all of those ways are ways we stay connected. Now from a pure kind of -- we believe strongly, like I talked about with trial and sampling and try before you buy, and so incenting our guests with the things that are value-added for them. We have amazing kits and curated beauty bags and exclusives that we carry that aren't carried in other places. We work closely with our brand partners in bringing those to life and those are other ways. And so when we are kind of driving additional differentiation from just what's in the competitive space, a lot of that is coming through exclusive and unique value-added experiences with our gift with purchase.

Yes. Absolutely. And we are in the midst of 21 days of beauty.

We are.

We have a few more days left.

Couple more days left, if you haven't shopped.

Yes. Everyone go online. So can you just speak to how this sale this year has maybe differed from years past? I know you've talked a lot about more targeted marketing, and now you're getting a lot of customer data through a lot of your digital capabilities. So can you talk about how you've been able to maybe be a bit more targeted? And maybe how the sale has differed from prior years? And then any sort of early trends or insights you've seen in the first couple of weeks of the sale?

Yes. I mean I think we know this event resonates really well with our guests. It serves as a way for those that are already engaged with beauty to try other products or other brands, and it definitely serves as a way that we acquire new guests into beauty. So it still serves those key purpose, and that's unchanged from the event. We have continued to build out our assortment with relevant brands. And so introducing new brands into the events this year, I can't remember the exact number, but it's a high number. So it's not repeat deals that you might have seen in the past, but fresh and new steals that are relevant with -- across product categories. We've also introduced additional digital incentives like app-only exclusive that you can get. And that helps our guests stay even more engaged and driving incrementality, and we see that incrementality. And we've also incented buy online, pickup in-store experiences. So you're not only engaging in the event, but we see that guests engage with obviously our steals, which are the drive, but our entire assortment and our other strategic platforms, whether it's Conscious Beauty or black-owned brands and kind of being a gateway to kind of connect across all of those other experiences. So I would say, the event is -- a lot more brands continue to be mindful about like what's relevant to our guests, introducing new digital unique experiences and driving omnichannel behavior so that you can get the full experience of the event in our stores.

Yes. Absolutely. And you've mentioned omnichannel a number of times.

Yes.

I continue to be impressed by how much more an omnichannel customer spends versus a single channel. I believe it's -- probably, you said, about 4x. Can you just talk about how you guys are working to grow your amount of omnichannel penetration like grow the amount of customers that are shopping in multiple avenues?

Yes, sure. So our omnichannel member base is our best guests and our healthiest guests, and they spend about 2x to 3x more than a single-channel guests, but it's still really meaningful, both in terms of their spend levels, but more importantly, in terms of their frequency and trips. And what we see is, they visit the store, the physical store, even more often than the single channel store guest. And of course, they visit their digital channels, and when we kind of think about their whole life cycle and their whole experience with Ulta Beauty, we continue to measure whether we believe that to be incremental or not. And we see that as incremental when we compare it to like cohorts that are only in the single channel. So that guest, that omnichannel guest is highly engaged. They transact in both channels. And in this case, we're being very literal with omnichannel. They're transacting in both channels. Many of you know, more than 85% or 95% -- 90% of our guests will engage with the digital channel even if they're shopping in our stores. But in this case, when we're talking about these particular guests, they're transacting in both. So they are our most value -- our most valued guests. They're highly engaged, and we're continuing to use our understanding of what are the triggers that drive that behavior. Obviously, the pandemic drove a lot of omnichannel adoption and that had nothing to do with us being smart enough to figure out who has the inclination. But we do also have predictive models when we think about app behavior or when we think about those guests that -- and their profile, and when they made their first omnichannel purchase and what the figures might have been. And so we're continuing to kind of mine that data, understand it more and then be intentional and targeted. But broadly, beyond that targeting, we are just focused on being BOPIS as a high-growth channel. So buy online, pick up in-store was about 25% of e-commerce sales. About 1 in every 3 orders was fulfilled from our stores in the last quarter. And so we're seeing that as the highest growth channel, and that's -- so if we're seeing that channel grow, how do we kind of continue to incentivize and drive adoption of that channel and offering appropriate incentives to do that. So I would say, those are all the different ways we're hopefully growing our omnichannel customer base.

It's awesome. It's awesome to hear that. So another -- a few exciting newer developments at Ulta I'd like to touch on, including Prisma Ventures, Digital Innovation Fund, and UB Media. So maybe first touching on Prisma Ventures, I'd love to hear about some of your investments you've made so far, and what you're looking for in your -- in the investments within the fund.

Yes. Prisma Ventures is really exciting for Ulta Beauty. It's a new space for us, but we've been on this journey. In 2018, we made a real commitment to creating the future of beauty experiences that are powered through digital and technology, and we did that with early strategic partners. I mentioned one already, GlamST. We acquired a company called QM Scientific to kind of power our AI capabilities, and we partnered with an innovation workflow partner, Iterate. And so we were starting to build both our internal capabilities of where we believe we have differentiation with our data, but also build an ecosystem. And so the progression of that from 2018 until now led us to this thesis, which is, we have a lot of differentiation and competitive capabilities that we think will help us shape future experiences, but we know there are creative, hungry and innovative start-ups that are ready to disrupt the space, and how can we best partner with them. So when we think about Prisma Ventures, its focus is twofold. One is very much about co-collaboration, co-creation and partnering with these kinds of start-ups to transform beauty experiences for the long term. And we've made some investments, and I can walk through a couple of those. The other part is just opportunistic ways that we stay close to those startups that we think will have different models that will potentially disrupt the space. We're kind of committed to our core innovation technology areas, personalized -- personal basin and data, AR, VR and all things. Metaverse, tech-powered beauty and all things around social and new models for commerce. So those are the territories that we're focused on. Some of the early investments we've made, one with a company called Revea. They're a precision skin care company, and we know that their understanding of skin care along with our customer data and our skin portfolio will allow us to kind of bring personalized experiences to our member base and our customers in a different way. We have a relationship with Haut.AI, also personalized skin, clinical in nature and deep rich data that will help us get even more intelligent about how to think about our skin analysis. We made a -- we have a relationship with a company called ReStyle, and we sense that we're -- actually, if you spend a little time on our site, we have our virtual hairstyle try-on, and that's coming through that partnership. But we also, most recently, for -- again, testing and learning, launched the game in Roblox. And for those of you that know Roblox, probably more than 50% of the users on Roblox in that virtual world are under the age of 15. I may not have that number perfect, but quite young. And so this is a space they're spending time in and was just an appropriate way for us to test and learn what it would mean to be showing up in that space and reach out with a partner that we partnered with to just launch our game, which we just launched a little while ago. So I guess those are some examples of some of the investments and partnerships we've created through Prisma Ventures.

That's awesome, and it's all super exciting.

It's fun.

So on UB Media, I just want to touch a bit on it. It's been launched now for a few months. How has brand engagement been so far? And how have you been able to leverage some of the customer data here?

Yes. I mean we're really excited about this retail media network and UB Media. We think our positioning of having the data sets that we have as a strategic asset is a one-of-a-kind data set in the beauty industry because not only given the size of our member base, but -- 38 million, but also given the fact that we really understand their behavior across a breadth of assortment and price points as well as touch points, both physical and digital, right? And so that gives us, I think, a really coveted position to really be a great partner for brands to leverage our relationships to build out their business and their brands. We've been on the journey for a couple of years in much smaller fashion, testing and learning, and that led us to this proof point on launching the retail media network. And our engagement with our brands has been great. There is a good amount of demand for that. As a matter of fact, we're going to have to figure how to keep up with demand, but we're being thoughtful and methodical. This is a longer-term journey. There's more capabilities we're building. So today, most of our brands are engaging in interacting with campaigns and connecting with guests in either paid channels, whether they be social or display on our site and our app, which we are expanding because we know that, that's a really differentiated and unique experience. We'll be testing more of those capabilities this fall and early next year. And so as we kind of expand the touch points and bring back real solid measurement and insights, we think that's going to continue to be a flywheel for our brands to really find value, and we continue to expect the retail media network to grow and so far, so good.

Yes. That's awesome. We have just a few minutes left. So I also -- the last thing I want to touch on is, you have got Adeptmind investment. We're almost a year into it, and I just want to know like how has progress of the digital store of the future spans here in the past year?

Yes. We're starting to talk about the digital store. The future is like the digital store are now because we're kind of there, and we still have work to do. As you know -- or if you don't know, of course, it's a huge technology migration. We're taking our large-scale digital business and pretty much moving it off of all legacy systems and moving it into the future with a more modern architecture. And so the digital -- I'm laughing a little bit, but the digital store of the future, once we complete that, looks to be the start of the digital -- for the future journey because the whole purpose of doing this is our ability to with speed and flexibility to be able to create digital experiences that are more relevant, more personalized, improved merchandising, improved search results. And so that's what we're -- that's our focus. So where are we now Adeptmind specifically? So our transformation is -- it's in the works. So we have launched a new homepage for our app and our sites this year. We've launched a new product page. And for those of you that are avid digital shoppers know that, that product page is kind of core to the commerce business. That's where your add to bag is, that's where all your product information is, that's where your reviews are. So -- and we've, of course, replaced the prior experience, but we've also learned from consumer feedback on what they were looking for, brought other strategic key platforms like Conscious Beauty badging into that experience. So we're on the journey. We have more -- and pretty much almost every month, every couple of weeks, we're moving another page or another section of the site over. And with that is a really important part of the digital journey is always the search engine. So Adeptmind is our partner on our new search engine of the future. They have robust AI and ML capabilities that allow them to understand language. And so, therefore, hopefully, the language of beauty enthusiasts, things mean different things in different industries. So illumination and baking means something very different in beauty than it means in cooking or in housewares, right? So having that adeptness of Adeptmind to understand language is something we're really excited about. So of course, keyword searching like, "Hey, I want to look for a pallet." That's one thing. But getting to a point where you can have a more advanced conversation with the search engine is what we're looking for. And what makes it unique is, we're connecting it to our member data and making it more personalized. So that personalized search engine journey will start early next year, and then it will continue to have progress over the coming years. So we're really excited about seeing it come to life.

Awesome. That was all such great color and that puts us at time. And so Prama, thank you so much for being with us today. I think we learned a lot about all the digital stuff going on at Ulta, and it's all very exciting.

Thank you so much for having us. Appreciate it.