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

I am Oliver Chen, Cowen's Retail, new platforms and luxury analyst. Thanks for joining us on the webcast as well. We definitely appreciate your support in [ II ] if we've been helpful. We're in the retailing department stores category. Cowen rates Ulta outperform $530 price target on 21 times. We have the pleasure of welcoming Prama Bhatt, Chief Digital Officer of Ulta Beauty and Paula Oyibo, SVP of finance. Ulta provides a unique shopping experience by offering top prestige and mass brands with friendly and accessible service combined with salon. I had my brows done at Ulta. It really is a ultra-modern concept that has reinvented what is happening in beauty. We think Ulta is well prepared to gain share in the Brazilian Beauty category. Prama was named Chief Digital Officer in 2019 after having served as SVP, Digital and E-commerce since 2107 and she joined Ulta in 2014. Paula has over 20 years of finance and global management consulting experience. She joined Ulta in 2019 and prior health senior roles at Whirlpool Corp. Thanks so much, Paula and Prama. Great being here with you.

Thanks Oliver.

So i will turn it over to you, Prama, for some opening comments.

Yes. First of all, just thank you. Thank you for your time today in advance. We really always appreciate the interest in Ulta Beauty. As the largest beauty retailer in the United States, we continue to be really excited about our growth and our future opportunities. We live in a very attractive and growing category, one that has a strong consumer connection, and we have a deep emotional connection with our guests. One, where we have a proven business model, an innovative business model, and we continue to strengthen our capabilities, increase our efficiencies, and we're starting to see sustainable benefits from those. We feel really strongly about our culture, which is strong. It's a passionate culture. It's a committed culture. We have an experienced leadership team and the combination of that ensures that we are taking care of our guests, and we're taking care of each other. Post-pandemic, we've seen unprecedented growth in the beauty category, and that growth continues. But as expected, is moderating as we lap back-to-back years of extraordinary growth. And 2023 is off to a really good start. We have recently announced our Q1 results, and we met our financial results from an internal expectation perspective. Our brand is strong. Our traffic is healthy and robust. We see E-commerce acceleration. We saw 9% growth in our loyalty member base to $41 million. And so while the operating environment continues to evolve, and each of us are seeing that every day, we feel really confident about the resilience of the beauty category. We feel really strong about our already proven business model to continue to drive share and profitable growth. And more importantly, at the heart of it is a diverse and best-in-class product assortment, and that's enveloped by best-in-class loyalty program with great experiences in our stores and our digital channels and most importantly, a world-class team that's excited about driving growth. So a little bit about Ulta Beauty.

Ulta momentum's has been incredible. Paula, Ulta does have this unique position in the beauty industry, mass plus prestige, skin care, makeup, haircare, fragrance, all things beauty all in one place. So how can you drive sustained growth? What are 2 factors that will keep this going?

Yes. Thank you, Oliver. We are excited about our Growth ahead. We are operating in very attractive and growing categories. We have a unique position in that category where, as you mentioned, we serve consumers from all price points, every point from mass to luxury and every place in between. Beauty is a category that is very emotionally connected to consumers. And so the category has an elevated place in consumers' lives. And so it is not typically viewed as purely discretionary. It also is a category that has broad appeal across key growth segments, which we are uniquely positioned to serve. We also have 41 million loyalty members, who we know a lot about what they shop for, how they shop, how frequently they shop. And it enables us to be able to really capitalize on future growth opportunities, whether it is capturing more share of wallet or personalized experiences that will enable them and us to continue to grow our share. And then as Prama stated, we have an experienced and passionate team that is -- our culture is one that drives everything with regards to what we do and how we do it.

Thank you for that. Very helpful. Prama, bricks and clicks, omni; you have a long, great career with digital. What's next in terms of your capabilities? We've seen an acceleration of everything you do from a much better mobile app to augmented reality. What does the customer want next?

Yes, that's -- we're really excited about our omnichannel model. And just to lay the foundation, we know the beauty journey is not linear. Every one of us as consumers is seamlessly moving from our physical experiences, our digital experiences, our social touch points and we're discovering in all of those ways. And Ulta Beauty's goal is to ensure that we are wherever our guests and our beauty enthusiasts want to be. And so on that journey, we've been building really strong capabilities that connect our physical and digital store. And the reason to do that, not only is because our consumers are everywhere, but we see with our data, the strength in the value proposition of this consumer that is engaging in all these touch points. We know that they visit our stores more frequently if they actually shop both online and in-store. And we know that their spend levels increase. And we have an understanding that, that spend level and the value of this omnichannel member is around 2.5x to 3x higher and we see that both in dollars as well as an increase in frequency. So this consumer that's highly engaged in all these touch points, it's highly valuable. And for that reason, we've been building our capabilities. Over the last few years, we've introduced pickup in store capabilities, same-day capabilities, ship from store capabilities. And all those are starting to connect the dots between our physical and digital store. But to your point, we've also increased omnichannel capabilities related to how the mobile app is a perfect assistant in our store. We use it to bring to life store experiences and augment the store experiences. Our members have easy access to their loyalty program when they're in our physical stores. We're leveraging the basics of augmented reality so that you can not only try on physically and swatch up and down your hand, but you can also try on a whole host of colors that might not fit on your arm or colors you might not think about actually trying with the digital experience, and we've made it more seamless to be able to access those digital experiences from the physical store. So those are all the ways that we're really starting to connect the dots between our physical and digital store, and we're going to continue on that journey of bringing digital experience into our physical ones and starting to augment those experiences to continue to drive this omnichannel behavior.

Prama, one of the big opportunities historically for Ulta has been increasing consumption across categories with customers. Furthermore, we often think about magic and logic. So thinking about inventory management and how it's connected. Could you dive into how that's juxtaposing digitally with what you're doing?

Yes. I'm actually going to turn the inventory question over to Paula.

Absolutely. From an inventory perspective, we are really happy with our inventory levels. I mean, we use -- we have inventory strategies that allow us to make sure that we have healthy in-stocks and fulfill from what we have within our DC, fulfilling into our over 1,300 stores across the U.S. but also to fulfill guest orders through our digital channels.

Another topic -- hot topic for everybody is promotions. So unfortunately, other folks are much more over inventoried. On the other hand, you have a really advanced loyalty program that's very targeted. Could you provide some examples here. What are you seeing on the last call -- there's definitely a potential for tick up in this category.

Yes. I'll take that. Over 95% of our sales come from our loyalty members. And so we have data and information on just about every sale, which allows us through our CRM capabilities, which we have been expanding over the last couple of years to use data-driven insights to drive our promotionality. And so when we -- late last year, and again, Oliver, on the call, we mentioned that we expected promotions to increase this year in that category, but also Ulta led promotions year-over-year because if you recall, in 2021 and 2022, the category had unprecedented growth and the demand was so high that promotions wasn't necessary to encourage or drive sales. We expected that when the category moderates a bit, that promotions would be more impactful and important to consumers. We believe we are very well positioned to operate within that capacity more smartly and strategically and more targeted as a result of our personalization efforts. And so we use promotions and levers to drive strategic -- our strategies, whether it's our tent-pole events like 21 Days of Beauty or Gorgeous Hair, where we have an intentional decision to migrate or shift customers between, for example, mass and prestige or introduce them to new categories. So if one customer is primarily a makeup shopper, but we want to introduce them to hair, we use our tent-pole events to do that. Then from a personalization perspective, our marketing offers, we can personalize an offer to a consumer based on where they are in their lifecycle or where they have a propensity to engage, again, based on the data that we have. And then finally, we use our promotions to drive strategic intent. So Prama mentioned buy online, pick up in store. And so we can offer a promotion that encourages a guest to leverage buy online, pick up in store or if we have a specific intent around driving makeup share or driving hair share, we can provide an offer for that as well. And so we believe that the investments that we've made in our capabilities over the last couple of years has allowed us to navigate even a heightened promotional environment more strategically and more importantly, more profitably.

That's very encouraging. So we're asking every management team this, on a scale of 1 to 10 regarding the health of the consumer, how would you rate the health of your consumer on a scale of 1 to 10, Paula?

I would say, as we mentioned earlier, we think beauty -- the beauty category is still incredibly strong, and it has a lot to do with the role beauty plays into consumers' lives. We recognize that there is a macroeconomic pressure. And we believe that Ulta is uniquely positioned to navigate in that environment because of our proven business model, where we have multiple price points across various categories. And so we are able to meet the consumer where she or he is, how ever he or she wants to spend and how much he or she wants to spend.

What number is that on a scale of 1 to 10?

I don't have a number for you, Oliver. But we are highly confident.

7 or 8?

We can go with that.

7.56. So on the guidance, one question. Like you're navigating promos and inventory shrink and you're really acknowledging that. What could drive upside? What could drive downside?

Our guidance, as you know, we reiterated our guidance from a top line perspective as well as from an EPS perspective but we did adjust operating margin by 20 basis points driven primarily, as you stated, due to shrink and then moderately due to increased promotional environment. From a shrink perspective, we have implemented several actions that would, one, keep our employees safe in our stores but also help mitigate the risk that we're seeing on the business from worsening shrink trends. And so that's one thing that we're expecting to at least -- at where we sit now, control or mitigate some of the additional risk that we see from shrink, but all of our expectations is built into our guidance. And then from a promotional perspective, like I said, we believe we expect the promotionality to be higher. We have incorporated a modest increase to our expectations in our guidance. We believe that we are well positioned to navigate an increasingly promotional environment due to some of our CRM capabilities.

Okay. And related to that, Paula, have your long-term targets changed at all?

No, they have not. We are still committed to our long-term targets. We believe that we can have comps in the range of 3% to 5% and operating margins of between 14% to 15%. As you know, we had unprecedented growth in the last couple of years, and we actually achieved our net sales target of $10 billion in 2022 which was 2 years earlier than we had initially planned. With that, we also, based on some optimizing of our operating margin in our structure, we were able to achieve record profitability and so when we think about being able to sustain that 14% to 15% margin, we have implemented several changes to our core operating margin that will help in addition to the heightened sales help as we navigate kind of short-term margin pressures because our structure and our underlying business is healthier now than it was, say, back in 2019.

My take is the that beauty enthusiast are some of the most diverse populations ever as well as Gen Z. And the [indiscernible] opportunity is huge in beauty. Could you speak to a few efforts Ulta's making there, either one of you?

Yes. We made a strong commitment in line with our ethos and DNA of being a very inclusive brand -- of being a brand that's there to empower everyone, to your point, because the possibilities are beautiful. We made a $50 million commitment toward diversity, equity and inclusion. Our programs are broad, meaning they absolutely impact our guest experience. When we think about our assortment, when we think about supporting black-owned brands in addition to the investment and the partnership in terms of growing that brand -- that set of brands. And we are committed with the 15% pledge as a part of that. And -- but in addition, nurturing these brands to achieve their goals, wrapping it around a broader marketing strategy where we are partnering with up and coming emerging brands that are part of our MUSE Accelerator program, which we just launched and is about 1 year old, and we're just getting ready to announce our second cohort. And in that, not only are we nurturing those brands, but we're giving them unparalleled access to other founders that have been on the journey, educating them about the beauty industry, sharing our knowledge and our insights about our business and our customers. So we take these relationships and this nurturing really, really importantly. So I would say, broadly, we are supporting having an inclusive assortment. We've made commitments to diversity, equity and inclusion in the range of $50 million. We're supporting the 15% pledge, and we're really proud of our MUSE Accelerator program.

Another favorite topic of mine is artificial intelligence. I teach a class on this at Columbia. So what are ways you're leveraging it? How do you see it evolving? Related cousin is metaverse, NFTs, blockchain. So would love a couple of points on each.

I want to sit in your class. No, I'm not going to come see to that. I'm going to come to learn because now I got to make sure I'm saying things that makes sense. No. Listen, we're really excited about technology. We're really excited about the bets we've placed in augmented reality and artificial intelligence. And we've done that not because they're cool -- I mean they are cool technologies, but because they actually serve our ability to have really differentiated experience that are really critical to the beauty journey. So just to hit on both of those a little bit, when it comes to augmented reality, in 2018, we acquired one of our key partners and brought them into the Ulta Beauty family. That company with glam street. Their capabilities are virtual try-on. And of course, that comes from the fundamental idea that beauty enthusiasts love to try on makeup and we want to make it accessible and available to them. So we continue to build our capabilities in virtual try-on and augmented reality, and we've expanded from makeup to -- you could go to our app and you can try on a NARS blush or a MAC lipstick and Anastasia brow set. And you can do that in the comfort of your own home, you can do that when you're in our stores and you're augmenting it with other things that you're physically trying on. So trying on is really, really important. Newness is really, really important in the beauty industry and augmented reality technology plays a really important role in that discovery journey. We've expanded it to hair and lashes and we've expanded it to nails and all of the categories that are critical. So that discovery journey is critical. When it comes to AI, you heard Paula talk about the importance of optimizing our offers, the importance of providing the right recommendation at the right time on your beauty journey, the importance of having personalized tools like a skin analysis tool that will take your face live, analyze it and I don't want to see too many of the fine lines, but trust me, they're there. But when we have that analysis, help provide recommendations that help me improve my skin and put me on a skin journey with those personalized recommendations. So those are ways that we're using AI and AR to really create experiences that allow our guests to discover and it's more about the outcomes that they get and less about the technology, which is what makes it really, really beautiful.

Part of the magic is sometimes you don't want to see the technology at all. I'll ask one more before we open it up. What percentage is mobile? Mobile is the new [indiscernible] and what are a couple of initiatives to improve mobile as it's ever evolving.

Yes. So a couple of things. One, our mobile app and because mobile, we have our app, we have our mobile site and we have our desktop. And if I just spend a little bit of time on the app, we're excited about the penetration of that to our business. It's over 50% of our business, and that's a really healthy penetration relative to benchmarks in the industry. In terms of where it's going; one, it's been completely redesigned. So if you take a look at the app, you'll see improved in fresh navigation, improved experiences. We have a new search engine that's AI-powered. So those are elements of our mobile app experience that were in -- our in-flight right now and already in market, and we have more to come. But we want to really bring in the discovery journey in different ways. We really have a strong basis of recommendations that surface throughout your app journey. And we may have 10 to 12 algorithms that power us through our mobile app or through an e-mail, even in print, but we want to really expand that -- those sets of insights that we have, with the beauty knowledge that we have that's data-driven, like Paula talked about earlier. So you can continue to see the mobile app evolving in terms of bringing beauty tools, some of the latest technologies. We're testing and learning with generative AI. We haven't brought that to market yet, but behind the scenes. We're thinking about how that can take our current virtual beauty advisor with our custom models and our own internal data layer in that knowledge that exists broadly from an open source perspective, control it and bring it to market. So our guests can pave path in the future of more easy and seamless 2-way conversation where most of our recommendations are kind of path that you through the beauty journey. So those are just some examples of how we're thinking about our app experience. We're also dabbling with live stream and so those are all kind of areas where emerging technologies are going to start to continue to be tested and then make their way into our app to drive the discovery journey.

I need the Ulta Avatar. So please make this...

Well, you -- that it's interesting because you talked about the metaverse, and we actually did do an Avatar and we did a little bit of testing in [ robots ] , and that's primarily because we believe, obviously, in empowering our beauty enthusiasts to be their best selves in the physical world. And we do want to do it in the digital world.

Makeup, big [ pink dresses ], let's get digital. So digital, physical and also the virtualization of status and gamification. Excited to see all that. So we'll open it up. Any questions? There's one right there. Go ahead.

What do you think are the biggest challenges faced by Ulta right now?

Wow, I mean, we feel really, really strongly about our business model. So some of the challenges that we're facing right now, I can talk specifically about the digital space. We're undergoing one of the most exciting transformations and we've been on this journey for 2 or 3 years. So while it's a challenge, it's a huge opportunity. We're changing literally every part of our technology stack and bringing a new store to life and we've been -- we started that journey about a year ago, and we completed the front-end part of that journey a couple of months ago. And so I would say that process of transforming our multibillion-dollar business, while it's running, while it's needing to support our beauty enthusiasts in their entire journey and make sure we kind of retool ourselves to set ourselves up for the future. And the reason for changing all the technology is so that we can be faster to market, so we can be more flexible. So we can be responsive to the signals that we get from our members every single day and what their interests are and how we can help them. And so I would say that journey is almost done, but there's more to go. And so that just continues to be a critical heavy lift for us to deliver flawlessly so we can continue to drive that engagement with our consumers. And then we're really excited about the road map we have ahead so we can start building on these experiences to drive growth.

It is balance between new and existing because sometimes in retail, if you move something 1 inch, people get really mad.

Oh, for sure.

There's a question in the middle, back there.

Pandemic ushered in all sort of [indiscernible] changes and sexual wellness became part of the overall wellness [Technical Difficulty] question, but how sexual wellness is not your main [Technical Difficulty]

So the question is about sexual wellness and wellness in large...

Yes. I mean we feel strongly about tapping into our insights and hearing what our member base is telling us and our merchandising team did a phenomenal job. They're always thinking about our brand pipeline. They're always assessing where there's opportunities. And this was one that the team collectively felt strongly about, making it be accessible and approachable, a category that lives with -- in its adjacent categories of makeup, hair and skin, part of our broader wellness journey. And so we did launch into sexual wellness specifically online and we're really pleased with the initial engagement, and we are excited about continuing to grow the intersection of beauty and wellness.

Female Health and wellness is a big opportunity. We have a lightning round that we're asking everybody. So favorite recent purchase, favorite show, favorite book, who wants to go first?

What are the 3 again?

Recent purchase that you love, favorite show?

Recent purchase was Shadow by Ulta Beauty Collection. Show is the -- what's the show, Queen, the Bridgerton spin-off for Queen -- and then what's the third?

Book -- any book or [ leader ].

Book -- the last book, I would say, is The Light We carry by Michelle Obama.

Great. You had 5 seconds...

I was so interested in her answer ... My most favorite purchase recently is an Hourglass primer that we carry, and I just tried it, and I'm in love with it. So that's my most recent purchase. I don't do well on TV show. So I tell people I'm usually catching up on TikTok or YouTube watching like -- doing like an immersive rabbit -- diving into the rabbit hole. And so I mentioned this recently, I somehow got deep into the [ mass finger ], I don't know why. That was silly escape. And then I would just say from a recent book, what recent book would I be inspired by? I don't know Oliver. Leave that one alone.

It is a book on AI. I'll give you a copy [indiscernible] intelligence. My favorite purchase is [indiscernible] had some great partnership with you too. Congrats on all the innovation. We really appreciate your time this morning. Thank you.

Thanks so much, Oliver.

Thank you, Oliver.