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

Okay. Well, thank you, everybody, for joining us at Raymond James' Consumer & TMT Conference. I'm Olivia Tong. I had the coverage of Beauty and HPC, and we're so excited to have Ulta with us today. Thank you for joining us. Dave, Paula, really appreciate it. We have Dave Kimbell, CEO; and Paula Oyibo, CFO. So we're going to do a fireside chat here. I think, Dave, I'd love to start talking about an overview in terms of the growth in competition that you have in front of you. So perhaps can you just start with a perspective on the beauty category and the growth opportunity and what your view is on the state of beauty retailing, maybe compare and contrast in-store and online after the volatility that we've seen this year and how you can differentiate yourselves versus your peers? And thanks again for being here.

Well, thank you for having us. It's a real pleasure. Yes. So let's start with the category. Start by saying the beauty category is a great category. It has been for a long time, a consistent, healthy, dynamic category with consistent growth in the low to mid-single digits over the long range. And that certainly has been true say, over the last decade. And the reason for that is it's the important role that beauty plays in consumers' lives. It's important to how people feel about themselves, how they express themselves to the world, how they take care of themselves. It's important culturally and in so many ways. And so because of that emotional connection, it's been a resilient, strong category, driven by a lot of innovation, a high level of consumer engagement. More recently, really coming out of the pandemic, the category, the total category has seen very strong growth, double-digit growth for 2021, 2022, even in for most of 2023. So a lot of growth coming out. That was fueled, again, by a high level of engagement, a greater connection in the category between beauty and wellness. The beauty is certainly about how I look, but it's also about how I feel, about how I take care of myself, and about overall self-care and wellness. The idea that beauty is as much part of my wellness routine as anything else, exercise and nutrition and all the others, how I take care of myself and feel about expressing myself to the world is important. So that recognition, and not just in skin care, although it's true there, but in fragrance and makeup and really the entire category and of course, the connection to the wellness specific products has been part. So wellness is strong. Younger consumers have gotten into the category in a bigger way. That's a trend that's been going on for a while. Older millennials, younger millennials, Gen Z and now Gen Alpha, all -- each of them progressively getting into the category bigger and earlier than the previous generation. So that's performing well. Demographic trends, the Hispanic consumer in the U.S. over indexes in beauty and is obviously an important and growing part of our population here. And so there's a lot of positives going on in the category. This year, we've seen some expected, and I'd call natural moderation. You're not going to grow this very big category, double digits forever. And so it's moderating into its more historic range, and we've seen that certainly even in the third quarter, the prestige category moderating a bit more. And so that is a dynamic in the category, but it's not unexpected and it's still a healthy, growing, important category in consumers' lives. So we're optimistic, but we're pleased with the performance it's had, and we're optimistic as we look forward. And then our role, we've long been a leader in the category. We have a very differentiated unique proposition from our assortment to our experience, in-store, online, of course, our loyalty program and services. So the collection of experiences that we offer have allowed us over time to gain share, and we think position us well with continued innovation to be a share leader for many years to come.

Great. Can you talk a little bit about your differentiation versus the competition? Obviously, competition has increased. It's, as you mentioned, a very attractive category over longer term with the addressable market increasing. That's obviously attracted a lot of competition both from beauty specific retailers and then, of course, Amazon and to some extent our price as well. So compare and contrast to competition, how you differentiate, given this new landscape and how you think about levels of spend going forward as a result of that?

Yes. Well, yes, this is an attractive category, both for its growth and frankly, for its margin profile. So every retailer that has any connection to beauty has been trying to capture some of that growth. And that's been true for a long time. I've been with the company for almost 11 years now, and it's been an intensely competitive environment throughout that time. More recently in these last couple of years coming out of COVID with these double-digit growth, we've seen an elevation, continued evolution of that category. And so we're used to competing and we're well positioned, we believe. Nobody does what Ulta Beauty does. We have a very unique model. We have a ton of -- I'd say, very strong competitors. We have a lot of respect for the competition that's out there. But we're focused on what we do. And again, nobody does -- nobody brings the Ulta Beauty experience to life the way we do. And our guests recognize that. And that's why they continually tell us and increase things like brand love, brand awareness, loyalty, retention. What makes us special is the combination of experiences that we offer, starting with our assortment, all things beauty, all in one place. We are the only omnichannel merchant to have entry-level mass to masstige, prestige to high-end luxury from brands like ELF and Maybelline to Chanel and Dior and everything in between. Strength in hair care and makeup and bath and fragrance and skin care and wellness, a strong position across that's unique to have such a balanced portfolio, to have services on top of that as part of our overall assortment is really critical. So assortment is key. Our experience is friendly, welcoming, inviting and our guests recognize us for that and we work hard. 50,000 associates showing that every day, but also online. Our access over 1,400 stores, a strong, robust digital presence, online, in our app, expanded partnerships for things like same-day delivery. And of course, our partnership with Target give us availability to guests across the country, which is really important. And then loyalty. Our guest, over 44 million members see Ulta as their trusted partner. Our retention is high. And what's cool about it, something that I'm proud of is our member base is almost exactly representative of the U.S. as a whole. And that's because beauty enthusiasts aren't defined by any demographic. They're beauty enthusiasts of all ages, all geography, all ethnicities, all genders. I mean it is -- and so we are representative of that. And it's because we've got a great presence and an experience that deliver. So we're very strong with [ teens ] and Gen A but we're equally as strong with boomers. And so we work hard to deliver an experience that reaches everybody grounded in insights around beauty enthusiasts and delivering a unique experience that nobody else does.

Got it. Let's talk a little bit about the short term. Obviously, in Q3, you were able to comp positive. So I would love to hear a little bit more about the drivers of that. And then Black Friday or the holiday season was off to a positive start, Black Friday seems to be shaping up quite nicely. So could you talk about how your holiday strategy is different this year to the extent that it is and the one thing that we're obviously focused on the level of promotion. So if you could talk about that, how promotional the environment has been of late. And also, how do you make sure on promotion that the consumer doesn't just expect that? Obviously, holiday is always promotional. But coming out of that, how you think about promotion over the next, not just holiday, but the next 12 months?

Yes. So I'll start with Q3. Yes, a positive comp. We were pleased with that. The drivers of that, our core business really delivering on some key aspects of assortment. Our core efforts on big brands that we've had for a while, like Mac and Clinique and some newness and innovation within those brands of how we bring them to life drove nice growth. But new brands like ILIA, new partnerships like with Wicked that performed well. So assortment is always big and we had some key elements that excited our guests throughout the year. Our promotional strategy continues to evolve anchored in our tentpole events in the third quarter, 21 Days of Beauty, our Fall Haul hair event, and those worked well. And then just connection. We continue to drive strong engagement with our guests. Our retention is high. We added new members. We reactivated lapsed members, and we engaged with them through our marketing, our personalization, our CRM to drive traffic and engagement, and we saw that both in-store and online. And so it's the foundational fundamental elements of our business that we know drive success, and we're pleased with the progress from the second quarter into the third quarter to have some momentum there. As it relates to looking forward, we're right in the middle of Q4 and our holidays, so I'm not going to get into too much detail other than to say our teams have been working all year to get ready for holiday. We're really pleased with the experience that we're delivering, I'd say, just a great assortment of holiday items and new brands coming in and new collaborations that are really exciting our guests, great marketing anchored in this ideas, the joys in the present and bringing life this idea of joy to life in our stores and online. Our stores -- our store teams did a great job staffing up, being ready. I've been in many, I'll be more tomorrow, and it's fun, it's joyful, it's exciting. Our teams are ready to go. Operationally, we've worked hard with our IT systems to deliver great experiences in-store and online and our supply chain is cranking. And so we're ready and as I said on the call, we, through Cyber Monday right before our call, had felt encouraged by what we are seeing. But knowing even sitting here today, we're 2 weeks out from Christmas and these are like big, massive weeks, 2 big weekends that have a critical impact on our holiday performance. So we won't really be able to judge holiday until the doors close on Christmas Eve to have a good sense of the whole time frame. But all that thinking of coming out of Cyber Monday and be encouraged by what we're seeing and confident in the plans we're building was incorporated in our updated guidance, really seen Q4 as we shared on the call, down low single digit. But again, we are feeling like our holiday is we're set up on our holiday, but that's -- all that thinking is incorporated in that. And then to your point about promotional, I'll take it in two part. You're right. This is a highly promotional period. It always has been. It is this year. It's not really -- we don't see it as different either in what we're executing or seeing in the category. But this is different in part because for the rest of the year, the other 10 months of the year, it's really a beauty competition that's going on of our beauty. There were these 2 months, November, December and certainly, probably the 6 weeks leading up. we're competing against every gift giving, electronics and apparel and shoes. And so there's a lot of promotional activity going on across all of retail. And so -- but it's not -- we're not seeing it being in any way meaningfully different than previous years. It's kind of a full-on effort. Going forward, promotion is important, but it's not the key driver of this business. It's an important part of our business, and Ulta wants to add value to our guests through our tentpole events like 21 Days Beauty that drives engagement in prestige brands often for the first time, like Fall Haul that highlights our mass brands, like our various events like skin or hair that highlight core categories and bring newness and trend to light. We'll lean into those. We'll leverage our CRM capabilities to be efficient in adding value to our guests to drive deeper engagement into our loyalty program and finding balance throughout that. So we don't see necessarily a big increase over time. There's been normalization this year as we came out of strong growth coming out of COVID, but promo is just one part of the category and it certainly isn't predominant.

Yes. In terms -- maybe you can break down top line and bottom line. In terms of normalization, do you think that there is still some normalization after this year to be had on the top line? And then we know, obviously, with respect to margins, that there is some desire to increase the spend next year, perhaps sort of bucket -- sort of the big key buckets there as well.

Yes. Thanks, Olivia. Thanks for having us. What I would say, we shared this in October at our Analyst Day that as we look to over the long term, we expect to drive growth in the range of 4% to 6%. And we expect to deliver mid-single-digit operating profit growth and targeting a 12% margin over time. Now we also shared that we believe 2024 and 2025 would be transitional periods as we reaccelerate kind of our growth and implement some of those strategies that we've talked about to capture more market share and some of the incremental areas like wellness opportunity ahead. So what I would say is that as we think about the investments we plan to make go forward, they're across a couple of different areas that will help us shore up and continue to be a leader in the category. And so from a bottom line perspective, we talked about investments in brand building. So as we think about continuing to invest and grow with new brands and our exclusive portfolio, as well as continued growth, I would say, in our mature and emerging brands, we see opportunity with that. And then advertising is another area that we -- as we think about the future, the 2025 and beyond, we'll continue to invest in advertising to drive kind of brand loyalty, our member goals, new member growth. Wellness is another category, an area that we'll continue to invest in. And then we've talked about how important guest experience is for us. And so we'll make investments in things like labor in our stores to increase training as well as implementing more in-store events and programming. All those things, we believe, will help us drive the growth that we're expecting to drive over the long term.

Got it. That's very helpful. Let's talk a little bit about loyalty. At your Analyst Day, you talked about a new partnership with Adobe. Can you elaborate on that and discuss any further developments there? And then what capabilities does this partnership unlock that you don't have right now?

Well, the whole focus of that partnership and a broader body of work around personalization is to drive deeper connection with our guests. We shared at Analyst Day a simple model of Ulta Beauty's growth is our ability to continue to grow members and increase spend per member. And we're focused on doing both and many of our initiatives are designed to do both. This one does that, but it's particularly, our personalization, particularly focused on spend, on increasing spend per member. And by taking our $44 million and more deeply understanding each individual's motivations, opportunities to personalize the communication that we have to them is we've proven that, that drives better results. The more the communication we have to you is something that you see and says, "Well, that makes sense. That's something I'm looking for." If it's relevant to you, obviously, that will be something you're more likely to respond to. So we look across all the opportunities we have to drive greater engagement, whether it's downloading our app, using our services, shopping online for the first time. If you're only shopping skin care with us, starting to buy makeup or hair care, I mean you go down the list, there are so many ways that we can introduce our guests to different parts of our business. Our personalization efforts really are our key to doing that. And our partnership with Adobe is one new step in driving that. They bring advanced capabilities around AI and other technology that we can then leverage with the capabilities and systems that we've had built. But most importantly, the data that we have 44 million members, broad sense, 95% of our sales. So nearly every item we sell we can track back to an individual, and that just makes us smarter about trends and opportunities to connect. So we're excited about that partnership and all of the efforts even beyond the Adobe partnership to advance our personalization. We see it as a key growth driver over time. And we've been working hard to advance our capabilities, think we're in a solid position now and it's adding value today, and it will increasingly add value over the next several years.

Got it. Member count has been up about 4% to 5%. Despite the comp challenges, you're obviously seeing quite good membership growth. How do you convert more of those members into more sales?

Yes. It's personalization, communication, connection, in-store. I mean it's one of the key focus areas for us. Again, to get them -- job one is to get them into Ulta. And we're doing a good job. We want to do even better. We've got a broader opportunity that we've seen and defined as an increase what we see as the pool of beauty enthusiasts. But once we get them in, and we do a good job on retention, which means we define active members as shopping at least once in the last 12 months. And we have a strong industry-high retention rate, particularly very strong among our best guests. And we do a good job of keeping our guests engaged in the program. We're always working to do that better. And then using every tool we have, personalization being an example, of getting them to shop across more areas. I'll give you one example that that's cool. I mentioned app in-store. So you would think, okay, app in-store. Our store teams do a great job communicating to our guests the value of the app as a destination, a hub of all things loyalty. It is for shopping, well over half of our sales now go through our app. But more importantly, it's a loyalty hub. And so our store teams have taken it on themselves to encourage people in-store in the moment, "Hey, you want to see what's going on in 21 Days of Beauty? Or how many points you have or what the newest launches are? Let's go download your app right now. When we get somebody to download their app, spend increases incrementally. And so just one of many examples that we have to take -- to deliver great experiences that drives loyalty and spend share of wallet.

Got it. Let's talk a little bit about some of the puts and takes over the next 12 months, right? Competitive store openings, we're through the bulk of some of the launches. Obviously, there's still some impact with respect to having -- it's quite a bit of stores that have opened in the last couple of years. The other thing, of course, as we think about your brand building efforts, the newness, it does feel like next year, you'll have -- you've talked about TATCHA, a couple of other brands that are coming, expanding the wellness, some marketing spending and the guest experience spending that you're doing. Help us understand like compare and contrast those expenditures also shrink, right? Shrinked and stabilized last quarter. So thinking about the next 12 months and how you're planning as you're in the planning stages right now of the year, realizing, of course, that you're not going to give numbers, but just sort of help dimensionalize some of these puts and takes.

Yes. So I mean, you hit on a lot of them. What I would say is we do many of those areas across the assortment and newness and some of the investments we're making in spend and all of that gives us the confidence that we shared at our Investor Day that although '25 will be more of a transitional year, we will be able to accelerate comp and that our plan is to have positive comp in 2025. So I think we're excited and encouraged about that. We have focused on a lot of areas of our business that we believe are required and necessary for us to not only address some of the challenges that we have had this year, but also really accelerate and make the investments that's going to drive the long-term growth go forward. I would say as we think about 2025, some of the things we've shared. I mean you mentioned shrink, our expectation for shrink still remains for this year that we expect that to be flattish. We haven't necessarily shared 2025, all the puts and takes of operating margin, but there are some areas that we know between gross profit and SG&A that because of the improved but still top line that's below our long-term targets, we'll see some deleverage and pressure across both of those lines, gross profit as well as SG&A.

And at what level do you start to see that leverage come back? Is it sort of a 3 to 4 or something along those lines?

Yes. We haven't necessarily shared a specific leverage point, but what I will share is that as we think about occupancy costs, right, and so that's our rent for our fleet and all of that, our complexity costs are about 4%. And so that is a major contributor to how we think about leverage point.

Got it, got it. Let's talk a little bit about stores. You recently raised at the Analyst Day, the upper end of your store count opportunity to 1,800 from 1,500 to 1,700. So can you talk about what underlies that, how payback could potentially look different for the next tranche of stores versus the previous? And we've talked a lot about the smaller format stores and the store economics around that.

Yes. I would say there are several factors that give us a lot of confidence in what we shared with regards to our increasing our top line expectation up to 1,800 stores and 200 new stores over the next several years. A couple of those factors are our new store performance is -- continues to be really, really strong. Our existing stores perform at or better in our profitability target. I would say, several years ago, we started testing smaller and smaller markets and with smaller formats. And we've been really pleased with the performance of those stores. And I think that, that represents a good opportunity for us to take our model into markets with a different format and address light space opportunities. And then Dave talked about the category. And so the beauty category is expected to continue to grow. There's a lot more people just are engaging in the category today, whether it's because of the expansion of beauty and wellness for new generations engaging in the category, also the pie is just bigger, right? And so those are several of the factors that gave us confidence in increasing and accelerating our stores. I would say it's also -- it's data-driven. We -- when we look at our opportunity ahead, we really look at it on a market basis. And based on our analysis, we still have opportunities for new stores in 75% of the market areas that we're in existing and then as we look at the small markets, that is another opportunity for us. So between our market level data and our member data that we overlay with that, it really helps us get very focused and targeted on where there is additional opportunity. I would say the guidance that we provided with regards to the economics represents a mix of our traditional opening -- traditional store footprint, the 10,000 square feet as well as smaller stores as well as in major markets and smaller markets. And so we've shared that we -- our stores, we expect -- we have 20% -- at least 20% returns, and our stores reach sales and profit maturity by year 5. They're accretive to our business by year 2. And so it's just really strong economics from our store portfolio, and we feel good about the growth that's to come from that.

Got it. Is there any difference in terms of store economics in the small format versus the traditional format?

I mean, there is, there is economic differences. And it really just depends. It depends on the market. It depends on the market, the size of the stores, we do anything from a 10,000, 7,000, 5,000, and so it all really depends but the economics that I share, that's on average across those.

Got it. And where does the Target partnership fit in?

That's a really important strategic part of our -- the experience. We built that together with Target and our brands to give a unique, differentiated, additive opportunity for our guests to engage in beauty. So that experience was built not to be an entire Ulta inside target, but a very thoughtfully curated -- so Ulta has in total about 600 brands. Target has 50 to 60 brands. That's a smaller presence of prestige brands that's curated even within those brands. And the idea is to do provide an experience to the 30 million people that walk through Target every week to introduce some of them that don't know Ulta or are not part of our program to Ulta for the first time, and we've had success signing up members, but also for existing members, just to make it easier. I talked about some of the things that we do to have more touch points and engagement and Target is an example, by making it easier for our guests to engage when they're shopping at Target. They reward us with greater loyalty shopping overall share of wallet in totality. And so we're excited about it. It's an important partnership and looking forward to continuing to grow together.

Great. Well, we're out of time. But thank you, Dave. Thank you, Paula. Really appreciate your attendance here. And thank you everybody for joining us.

Thank you very much.

Thank you.

Happy holidays.