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

Good morning, everyone. Thank you for attending Oppenheimer's 24th Annual Consumer Conference. My name is Rupesh Parikh, and I'm the Senior Food, Grocery and Consumer Products Analyst here at Oppenheimer. I'm excited to introduce our next presented company, Ulta Beauty. We're excited to have joining us today, COO, Kecia Steelman; and for the first time, CFO, Paula Oyibo. So we're very excited to have the Ulta management team again at the conference. Although the past quarter is a bit more challenging and a more difficult competitive backdrop, we continue to look favorably upon the company's longer-term prospects. Over the years, management has navigated various macro obstacles to drive strong earnings growth and industry-leading shareholder returns in the U.S. retail space. The format of today's session will be a fireside chat going through a number of flection I've prepared. So let's get started.

So Kecia and Paula, thank you so much for being here today. We're going to kick it off with a few macro and consumer questions. So maybe to begin, I would like to hear your overall thoughts on the health and the beauty consumer right now.

Yes. Thanks, Rupesh, thanks Oppenheimer for hosting Ulta Beauty and Paula and I today. The macro environment is dynamic and consumer confidence is clearly under pressure. Inflation is a real issue out there. There's a focus on value, prioritizing essentials. The good news is that people are viewing beauty as an essential that they can't live without. The commitment to beauty is really demonstrated by the solid category growth, even though it's moderating, it's still showing positive growth and it's still healthy. And what we're tracking internally also is are we seeing any changes within income cohorts that are shopping with us. And there's not a lot of variation there. So that's really a fantastic thing for us to see. The strength of our model cure Ulta Beauty and our ability to really connect with consumers that are looking to whether they're going to try to spend a little bit less from mass all the way to luxury. Anything in between, along with cross categories that are around beauty and wellness space for us, we feel like we're really well positioned to continue to whether whatever storm is going to be coming our way because beauty is really viewed as an essential for the consumer today.

Great. That's a good segue way into my next question. I just want to touch on category growth. So some of the players have called out weaker category growth, especially in mass makeup. So I'd just love to hear what your team is currently seeing in the beauty category more broadly?

Yes. Well, we've seen the category growth, it's moderated to the mid-single digits, lapping several years of what we would say is unprecedented double-digit growth. So we did see that -- we knew that, that was going to start to moderate at some point in time. But we saw it moderate both within mass and prestige. The data that we're seeing for the industry as a whole is that prestige is moderating to high single digits, but that's down from double digits the previous quarter. Mass is in the low single digits from the mid-single digits the previous quarter. But despite that moderation, beauty still remains healthy and growing. The guest is still really engaged. As I mentioned earlier, the guest is engaged brand innovation. We're really pleasantly surprised to see innovation continuing to grow. We see innovation this year. We see it in the following years out, too. And then I would say that something else that's continued to evolve is this crossover between beauty and wellness. So the beauty consumer is seeing that it's not just about the products, but it's about wellness and beauty and wellness collectively coming together as a category. We see that continuing to propel the growth in the future for us. We've got solid plans in place here at Ulta Beauty to strengthen our top line and to capture and retain our fair share of this growth here in the future.

Great. And then switching to another area where we get a lot of collection just competition. So in recent quarters, we've seen a clear step-up in beauty distribution points between Kohl's Sephora, Ulta, Target, Bluemercury and now Amazon also carrying some brands for L'Oreal and Estee Lauder. So how do you feel about Ulta's competitive position today in the face of shifting brick-and-mortar backdrop and omnichannel landscape? So we'll start there.

Yes. Sure. We are a key destination for beauty. And we have positive signals with regards to our competitive positioning in our business. Our traffic is up. Our consumer awareness and brand love is continuing to increase. Our Loyalty program is expanding. We shared in our earnings call a couple of weeks ago that our program is grew by 6% and nearly 44 million members. Number of retention is up. And so those are signals for us that despite the current pressure that we have shared and with the expanding distribution points for prestige beauty, our beauty -- our business is strong and well positioned for -- to continue to grow. I mean, beauty has always been a competitive environment, a competitive category. But what we know is that we've disrupted this category over the past 30 years by breaking mass, prestige and luxury services, all of that together to really meet the consumer and I guess needs from beauty and wellness in perspective. And so we know that our model works. And when you combine that plus the power of our loyalty program, it's a powerful formula for growth, and we're confident in our ability to grow forward and compete in environment.

That's great. And then, Paula, you touched on this briefly on the last month's conference call, but what leverage do you have to pull within your guidance to defend share?

Right. And so we share a couple of things, right? We said that we're taking several actions. Approximately many dimensions, we have newness right? We talked about the newness pipeline, and we're really confident about go forward. We talked about improving our social relevancy. We talked about digital. We talked about the strength in our membership program. And promo, we also mentioned. So in our guidance, we have assumed that we will protect sales driving levels, and that's a combination of promotions as well as advertising and store labor. And so we believe that's important for us to continue to drive traffic and experience in our store to help strengthen the bottom line.

Okay. Great. And then switching gears to a few category-specific questions. So makeup was down mid-single digits in our latest quarter. What do you believe needs to happen for Ulta to get back to positive makeup growth over time? Is the biggest piece simply lapping competitive dynamics?

Yes. Well, what I would say, Rupesh, about this, is that prestige makeup is growing in total in the market. And we're implementing strategies to really protect our share. In reality, our market share position is very significant. So we're taking actions to really defend it overall. We're excited about the newness in the pipeline. And Dave shared on the last earnings call, we've got 25 new brands in this back half of the year, which gives us confidence to continue to fuel the business going forward and to unlock our strength in our core categories, too. Sometimes when you get a guest coming in with that newness, they're also reengaging back into 4 categories. So we're doubling down and leaning into brands that are still really exclusive to us like Polite Society and WYN Beauty, which we recently launched, exclusive brands that you can only get at Ulta Beauty, but we're also really focused on our core assortment and continuing to drive that business overall.

Okay. Great. And then switching gears to skin care. So skincare has been a bright spot for several quarters now. What are the key efforts on the skin care side of the house that we should be thinking about? And how are you thinking about Ulta's ability to sustain momentum in skin care going forward?

Yes. We're really lapping some very strong performance last year. You think about social relevant moments like with Drunk Elephant, D-Bronzi. So a lot of newness was happening last year. But we're continuing to lean in on things that are working right now. Derm brands are really hot. So Dermalogica recommended brands like La Roche-Posay, Dermalogica, are resonating really, really well with the consumer. And then mass brands like Bubble, Kinship, BIOMA, Good Molecules. Those brands are also generating a new guests coming into us, too. So we think that it is an opportunity for growth. We're focusing on the right assortment, and we're going to continue to lean into the growth opportunities for us in the future in skin. Skin is a very important category for us.

Okay. Great. And then within the box, as Ulta allocated more or less space skincare, or has it been fairly consistent?

It's very consistent. Skin care has -- from a space perspective, has been pretty consistent overall. One thing that we are leaning in on is, skin care can be a tough category to shop sometimes because it can be overwhelming to the consumer. So we've taken efforts to really, what I would call, demystify skin through training and education of our associates and making sure that our associates can really help demistify the skin shopping experience. And that help you find the right products that are a good fit for you in a good regimen for you, whatever your skincare needs may be.

Great. So I want to switch to haircare. So haircare turn positive in Q1. Overall, what are you seeing in the category? And are we finally turning the corner in hair tools?

Well, the category was up low single digits in Q1, as you mentioned. In newness and hair tools, along with Prestige, [ Sharecare ], it helped us. We had an event called our semi-annual beauty event, of which haircare was a highly engaged category in this year. And mass care also was pretty successful because we had a really great successful event with our spring call event. Some areas that we're seeing the consumer really lean in on is around hair and scalp health that's really resonating. And there's strong engagement with brands that are like our legacy brands like Redken, all the way to newer brands that we have introduced like LolaVie. Hair tools that you mentioned earlier too, we finally have lapped over that strong Dyson surge that we had in the overall business that started really in early 2022. So now we've lapped that strength in that performance. And we've had some great successes with Dyson had a limited edition peak Mother's Day activation that resonated really well with the guest. And then Sharp Beauty was introduced in Q3 of 2023. That still continuing to remain a strong driver for us in the category overall. So I'd say that we've lapped the tough comps that we had, some newness is still coming into the category. Haircare is an important category to us as an overall business, and we look forward to the business continuing to remain very strong overall.

Okay. Great. And then I wanted to touch on fragrances next. So last year at the conference, we talked about the booming fragrance category. And Kecia, you gave us some insight into your impressive collection. What types of legs do you think this fragrance boom still has? And then what opportunities do you see in fragrances for Ulta from here?

Yes. Well, thanks for remembering my I have a pretty impressive fragrance collection. It's continuing to grow is what I would say. Beauty enthusiasts are still really engaged with this category. And one of the changes that we've seen is that a younger consumer is even engaging earlier on. Brands like Sol de Janeiro that offer a body mist, that's really resonating very well with the Gen alpha consumer. And it also is an item that you can have your misstate layer of fragrance on top of it. You can get a unique cent along the way. We talked last conference about lingering. And it used to be that someone had their signature cent, that was the cent that they had. But that's not really the way it works anymore. It's more about cent by occasion, it's about lingering and adding on. Some new launches that we've recently had that are pretty exciting is Cosmic by Kylie Jenner and Orabella by Bella Hadid, both of which have added to my collection, my ever-growing collection. But we see fragrance as a continual growing category for us. It's very strong. And we're going to continue to lean in on that because it's resonating against all consumer segments.

And then just going back to innovation. So you've had some nice brand additions so far this year, including Sol de Janeiro and Charlotte Tilbury. And on your call last month, you highlighted the pipeline more than 25 new brands for the year that you discussed earlier. How have the recent brand additions and other innovation to date perform versus expectations?

Yes. We're really pleased with the newness in how the brands have been resonating with our guests. These are brands that our guests were asking for, especially called out Charlotte Tilbury, Sol de Janeiro. The guests wanted those in Ulta Beauty, and they've been responding really, really well. We've also had some great launch, as I mentioned, Kylie and Orabella earlier with their fragrances and then WYN Beauty by Serena Walliams. It's great to see this new category that the set is beautiful in store. It's resonating with the new guests that we're getting into odor. So the newness is really important to us in the pipeline. As you mentioned, I talked about it earlier, the 25 new brands coming in. We're very, very excited about that, gives us a lot of confidence in the back half of this year. continuing to drive the business. But we're still really focused on our core assortment, too. Our core assortment is very important. We want to make sure that as we're getting a new guest that's coming in that we're engaging with them as they're coming through that threshold in our store. And then leaning into brands like Polite Society and Live Tinted, and LolaVie that are exclusive to Ulta Beauty, those are brands that are really important to us also. And then I'm very, very excited about our relaunch of our Ulta Beauty Collection that's happening later this summer. It's new packaging. It's hitting all of our core clean and conscious beauty elements. I can't wait for the guest to come and engage with this category. There's no better brand for us to really lean in and double down on than our own private brand.

And then as you look at the beauty categories -- and clearly, Ulta has a lot of newness in stores right now, and it sounds like a lot more is coming. But what are some of the hotter transit products you're seeing out there currently just from an industry perspective?

Well, what we're seeing some trends that are hot right now is like make up. Right now, we're just wrapping up our Golden Hour Glow campaign. So it's all about the glowy and the dewy looks, summer shimmery. For skin care, it's really about health and hydration. Especially going into the summer months, it's all about that hydration and taking care of your skin. And Sol de Janeiro is right in that sweet spot for us. Haircare, it's about here and scalp health, as I mentioned earlier. Retro softer looks for hairstyles are really coming in some more of the beachy, it's not as maybe as finished. We're seeing that trend happen right now. And then in fragrance, body mist, so layering that's still continuing to hold true. So those are some of the top trends that I would call out that we're seeing in Ulta Beauty right now.

Okay. That's helpful. And a few other areas I was hoping to cover. So first, a Target partnership. So I'd love to hear about how the Target partnership is trending versus expectations, including on the cannibalization front? And then has anything surprised your team to date?

Yes. Well, we've opened up 27 stores in the last quarter, and we're just right now at about 540 stores, so just under 540 locations. It's really about deepening guest engagement. That's one of the sweet spots that we thought we would get with this partnership. Our guest was telling us that they really -- they're shopping other locations, but Target is a great partner for us. So it's really a focus around new member conversion and reengaging lapsed members. We love overseeing when a lapsed member has reengaged through Ulta Beauty at Target. We're seeing them come back into Ulta Beauty and actually outperform the previous spend that they were having before. So that's great. This loyalty linkage with Target relaunching their circle campaign, we're seeing a really nice linkage. And it's very important for us because when they're buying products at Ulta Beauty at Target, we only are able to see that purchasing pattern when they link their transactions. So we'll really focus on that linkage. And then ultimately, it's all about bounce back. It's about getting that guest, engaged to come back into our locations. Some things that we've learned along the way, I would share are, it's really important to have joint marketing campaigns that really are resonating at the peak promotional activity with Target and hitting on their promotional cadence. So we just recently in the quarter, had a Target circle promotion that we participated in the full shop with their offer, and it resonated really well with the guest. We're going to be leaning in at the back-to-school, back-to-college time because of Target, that's really essentially almost a Christmas -- a secondary Christmas holiday season for them. So we're leaning in on these key moments in time. That's something that we've really learned along the way. And then assortment is really important. So continuing to evolve this assortment, what the guest is winning. They love this Fenty Snackz. So it's a way that we've kind of created this third space. You can only buy Fenty Snackz at Ulta Beauty at Target. It's gift sets. It's trial sized. We like that because it gets -- our products in Target guest has at a reasonable price point. They like what they're experiencing, and they bounce them back into Ulta Beauty location to get the full-size assortment. So we're learning a lot along the way. The collaboration is great, and I'm really looking forward to our continued successful partnership in the future.

Okay. So it sounds like it's going really well so far, and there could be upside essentially as you [ uncapped ] before?

Yes. Absolutely.

Okay. And then on UB Media, if you remind us where Ulta is on the journey of UB Media, how is it progressing versus expectations? And then what are the bigger opportunities remaining from here?

Sure. So UB Media is the really exciting -- very strategic investment for us. And really what it is. It is us utilizing the power of our member -- our membership data. And so taking our first-party data and driving growth for our brands and for ourselves. And really, that's to drive the digital campaigns that are very focused and targeted to specific audiences this that we and the brands collectively will see a huge opportunity. The results have been great. We're still in the early days. We launched the business in 2022. We're continuing to scale the business, but we're making great progress. I mean every day, we're advancing our capabilities. We're introducing new products on site, which means, we're creating more opportunities for brands and for us with our brands to advertise that whether it is on our own personal -- owned sites, our website or e-mail, our app. We have introduced a more robust measurement capabilities because that's really important for our brand, right? We're driving need to clearly identify that they're getting a return on their ad spend, and the measurement capability is helping them to see that so that, that continues to grow. We're ramping our team. As we think about it, we expect the UB Media business to be margin accretive over time. And so -- but like I said, we're in early days, but the way to think about it from a financial standpoint is that it will continue to -- it will help in the gross profit space.

Great. And then switching to the Loyalty program. So when it comes to Loyalty program, what type of things are you exploring to enhance member benefits from here? And I'm curious if there are things you're doing with the Loyalty program to further differentiate the Ulta Beauty experience, given what we're seeing on the competitive front with more protege brands moving on to Amazon.

Yes. Our Loyalty program is a powerful, powerful asset of ours. It's continuing to grow. It's nearly 44 million members at the end of 2022 -- 2022 -- at the end of Q1. We -- our teams are -- we continue to focus on bringing exciting and innovative ideas to our members. Kecia mentioned this earlier, we relaunched our Loyalty program and rebranded it, and we saw a ton of excitement and engagement around that. We enhanced our birthday experience for our members, which was really about giving them choice, help letting them choose what they want their reward to be that we saw us really engaging. We're doing new looks and new activations in our stores. We divested from a technology perspective. So when a member comes into the store, we can drive more acquisition, we can help them navigate whether they have offers in their app that we have specifically delivered to them. We have member love events, which our guests love that, whether it's like you new [indiscernible] shop, and you get 5x points or 3x points about -- on a category that you love. We also are doing some really cool things with testing gamification and even more enhanced personalization. And so when I think about our program, it's a bit of a secret -- [ max ] secret sauce of our. But it's a key differentiator, and we continue to innovate it. And it's something that our competitors just -- is unmatched. Our competitors don't have that.

Great. I think on the Platinum number for almost 10 years now, I [ think ] also.

We love that. So on the [indiscernible] case, there's been a lot of media attention on the younger generation that's going wild over skin care. So how is Ulta benefiting from this phenomenon?

We say that the team case is real. It's out there, and I think it's here to stay. We are proud to be a destination where the guests of all ages feel that they can explore and shop here at Ulta Beauty. It doesn't matter, any age that you are, any stage of life that you want to come and shop with us is great. This social media relevance, though, is here to stay, and it's really resonating with younger consumers. In fact, one of the things that's been very interesting is that we're starting to see more and more that these younger consumers, age of 9, 10 are actually educating their parents on what's new and what's hot and what they should be using. We have a compelling assortment that appeals to all age levels, and we have knowledgeable associates that are really helping guide, the right products for this younger generation skin care. Brands that we are carrying right now are like Bubble and BIOMA, and Kinship and Good Molecules, La Roche-Posay and CeraVe, just to name a few. So we're covering various price points, but we're really leaning into making sure that we're supporting this tween praise, but we want to make sure that our knowledgeable associates and our stores are recommending products that are really good for this younger skin that's out there. So I think that we have a responsibility to do that.

As we look at Volta's efforts on the social media side, can you talk a little bit deeper for us in terms of what you're doing in a social media influencer front to drive growth at open?

Yes. We were really leaning into a social media side, really, really strongly because as you think about advertising and marketing, it's changed a lot in the last few years. If you're not on social media and you don't have a social media network creator group, you're not really participating. The virality of what is picking up and what sells that has totally changed the game today versus the traditional media efforts. So we've surpassed 1 million in TikTok followers on social media, which was a good milestone for us. TikTok leader in the beauty space, we're really focused on EMV. So we earned media value to continue to grow scale. We've got a couple of ways that we're doing that. We've got the Ulta Beauty Collective. We've got the squad of social media influencers that are out there that are supporting Ulta Beauty itself. We've just launched our first-ever associate ambassador program, who better to talk about what's working then people who work in the beauty industry themselves. So we started with 25 associated ambassadors right now. We're giving them the skill set and the training to really be an influencer out there in this space. And then we have this Ulta Create segmentation, which is our influencer affiliate program. So social media has changed the game of marketing and how you're engaging. I do think it's very important that we still remain very authentic because what we see that relates to the consumer is when it's really authentic moments where people really are believing in the products that they're talking about on social media. And that's really what's -- I think the consumer is really wanting to. They don't want somebody that's being overly influenced. They want somebody that they complete and that's really what's working and translating to the guest.

And then from a merchandising perspective, how quickly can you react to some of the trends that you're seeing out there?

Yes. Well, we have great relationships with our brands. So I would say that as soon as we see something and we have social media tracking on all the time, we're immediately reaching out to the brand partners to try to capture that moment together and try to continue to build the business.

Okay. Great. So switching gears to a few financial questions. So guidance implies an acceleration on the top line in the back half of the year. Can you remind us the drivers here? And what gives you confidence in this back half acceleration?

Right. So from the first half, we guided full year 2 to 3 with a first half comp growth in a low single-digit range. And then what we shared is that second half will be -- will accelerate in the Q4 range, and really it's driven by 3 factors. One, and Kecia touched on this, our exciting in this pipeline. So as we look forward for the year, we are confident that the newness that we have coming will help to drive the acceleration in cost as well as some of the sales driving initiatives that we spoke about on our call and that I shared earlier today. The other consideration is that we will have -- we will be lapping or we have decelerated growth in 2023. And so if we think about how the comp cadence in 2023 when it was high single-digit growth in the first half and low single-digit growth in the second half. And so that decelerating comp, lapping and comparison makes it a bit easier in the second half for us. And so those are the things that give us confidence in the acceleration that we added to.

Okay. Great. And then the other area we get a lot of questions is just on gross margins. So you expect gross margins to be flat to up modestly in the second half versus down in the first half of the year. Can you remind us the key drivers behind this cadence? And what are your latest expectations on shrink?

Sure. So we continue to expect gross margin to be down modestly for the year. And while we expect promotional activity to be a bit higher than we initially planned, and we expect more deleverage from a store fixed cost on the lower sales. We now expect supply chain costs to improve. And so we're expecting savings from our transportation cost that is helping to offset some of that. So when you think about the cadence, we are expecting in the second half for merchandise margin to be a bit better, right? And that is largely driven by lapping. What would be largely past the price increases of last year, and we're lapping the benefit of that in the first half, which is pressuring merchandise margin. Second half will be largely through that. We also are -- Kecia mentioned earlier, we're relaunching our UBC brand. And so some of the costs and the markdowns associated with that thing we're seeing in the first half, we'll be largely through that. And so merchandise margin is a bit better. And then that transportation and supply chain cost improvement that really starts to ramp up and we see that in the second half. And so that gives us confidence in kind of the cadence of gross margin. From a shrink perspective, we saw higher shrink in Q1. We saw some pressure, really, most of that was contained in certain parts of the country. We continue to expect shrink to be largely flattish for the year.

And then switching gears to SG&A. So you expect SG&A to deleverage this year with low double-digit growth in the first half of the year, moderating to low to mid-single range in the second half of the year. Can you remind us the key puts and takes driving that expectation? Is there anything else we should be thinking about on the SG&A front?

Yes. I would say there's a few factors that play from an SG&A perspective. First, we are in the midst of completing a multiyear transformation agenda, which is building a foundation for us for future growth. The increase in SG&A reflects the ongoing investments for the transformation as well as the cost of operationalizing some of the investments we made last year into the P&L. And then also, importantly, the investments that we're making in our sales and traffic drivers that I spoke about earlier. And then we also see wage growth, right? And so that -- those are the things broadly that's kind of affecting kind of the SG&A growth. We do expect SG&A growth to moderate in the second half. And really, that's a combination of we will be completing much of the transformation portfolio, which helps that. And then also one thing that you asked about, what should we keep in mind. What I would say is that we will continue to be prudent with SG&A, right? And so we demonstrated this in the first quarter where our SG&A spend was lower than our expectation, and it's because our teams were thoughtful and prudent in adjusting our spend in context of how our top line is profile.

Great. That's really helpful. And I'm going to wrap it up with one final question just on the luxury opportunity. So last year, your team launched luxury in 200 stores and online. Can you remind us what you're seeing on the -- out of the offering? And then based on what you've seen today, how you think about the luxury opportunity from here?

Yes. We feel like luxury is -- it's really important in our category as a whole. It was a place where we were really not playing previously, but we are now. We're seeing luxury resonate with the younger consumer. So I think there's this misinterpretation that it's only for the more mature consumer, but it really resonates through a younger consumer lens also, really important to our category. We feel like it's important to be able to offer Ulta Beauty in one location, and that's what Ulta Beauty's super strength is, and now we can do that with having luxury. We've introduced it into 200 odors. With the introduction of Charlotte Tilbury in about 60-ish stores right now, we're going to continue to lean in where it makes sense with the right brands that are going to be fantastic partners for us. So I would say stay tuned and you'll continue to see us grow in this category also.

Great. Thank you. So I'd like to thank Kecia and Paula for joining us today.

Thank you, Rupesh.

Thank you, Rupesh.