Ulta Beauty, Inc. ($ULTA)

We are 10 seconds over. So I'll get started. My name is Dylan Carden. I'm the analyst here at Blair that covers Ulta. I am very pleased today to have Kecia Steelman, Chris DelOrefice, CEO, CFO of Ulta respectably. I'm required to tell you that there's disclosures on our website. And let's get into it. So I want to start just sort of broadly your background, you've been with the company now 12 years, 11 years, you've worn different hats, kind of as you're easing into the leadership role what your past experience with the company even before then sort of brings to the table and kind of how you see the position of the company?

Well, I want to start by saying thank you, Dylan, for having us in William Blair. Just to give a little background on what Ulta Beauty is, Ulta Beauty is the largest specialty beauty retailer in the United States. And now we are in an international beauty retailer. We have everything from beauty to wellness and we cover all price categories from mass to luxury and everything in between along with services. Yes, I've been at Ulta Beauty now for almost 12 years. Time has gone really fast. My background was -- I started as an hourly associated Target Corporation in the early '90s, grew my career there into management positions and then went to Home Depot and was a VP GM for specialty retail, expo design centers there and then went to the Dollar store segment, where I was responsible for real estate and then went into operations, and I ran 2000 Family Dollar stores, tough job. And then when Ulta Beauty called, I wanted to see what this store was about because I never even walked into a store. And when I walked in, I was like, wow, this is one of the best kept secrets out there in retail. When I joined the company in 2014, we had about 600 stores. And I was leading the store operations side of the business as an SVP. We now have 1,500. So I've seen over 900 stores kind of come to life. And before I took over the CEO position, I was the COO for about 3 years. And what I would say is that this is a fantastic model, all centered around the experiential piece of beauty. Our passionate 60,000 associates really bring our brands to life, and it's a true asset that we have. I do think that my experience of over 30 years in retail and being in almost every single position gives me a unique perspective as a CEO and an understanding for the role that everyone has to play in the organization and the value of how hard it is to really make this machine work. And again, I'm truly, truly blessed to now the last 18 months have been in the role as CEO and it's been a long journey to get here, but it's been a lot of fun and well worth the journey to have arrive now as the CEO here of Ulta Beauty. It's been a lot of fun.

Absolutely. Chris, same question to you. Quite the opposite set up, you're relatively newer, mind yourself in a very important role as it relates to messaging. Kind of your background and just your philosophical approach to the CFO role, how you address, the Street deal with the Street and sort of what you find here as sort of that skill set?

Yes. Appreciate it. Yes. Thanks, everyone, for being here and taking the time. One, it's been great to be at Ulta. It's about 6 months now. So my role prior to this, I was the CFO, Becton Dickinson, large medtech player. There, I led strategy, corporate development, technology, transformation and then all the traditional CFO functions. Prior to that, I had about 20-plus years with Johnson & Johnson. I did spend about 8 years leading various roles in the consumer business there, including Global CFO and CFO of their North America business. So familiar with the beauty market, had the great opportunity to be presented with this opportunity. Kecia is an outstanding leader who has brought together a really great team, and I was really excited about the Ulta Beauty Unleash strategy. One, it's just a great, resilient market, which I think is very relevant for the discussion today. But on top of that, as you think of Ulta Beauty Unleashed, I really see opportunity with new growth vectors that will both support top line growth and profit growth on the bottom line. And they're all in very early innings. So I'm excited about the journey that we're on, the opportunity ahead of us. And look, as I think of my role as a CFO, it's how do we scale those opportunities in a thoughtful way, focus on discipline, focus on profitable growth, kind of orchestrating the plan, that paces them the right way, picks the right priorities and unlocks and maximizes value creation. At the end of the day, my lens should be maximizing value creation. And I think you see that reflected in our plan this year and look forward to talking more about that.

Yes, absolutely. Let's start near term, and we can kind of blow it out. A lot of debate kind of coming out of the first quarter, which you reported the other night. Why not flow through more of the EPS beat in the quarter, you beat gross margin or you grew gross margin 100 basis points, you're kind of guiding flat on the year. The questions we're getting, is there conservatism in there? Are you seeing something currently that gives you some pause? And maybe just some points of upside and downside as you kind of look to the balance of the year.

Yes. That's a good question. If you step back last year, was a year where the goal was to drive share. We did that. We fully executed. We did what we said. This year, we wanted to take that to the next level, still focused on strong top line driving share gains, but driving profitable growth. At the end of the day, we want to deliver guidance that delivers against our long-term algo. We view that as a compelling value creation algorithm. We want to deliver double-digit EPS growth at the end of the day, and you saw that reflected in our initial guide at the start of the year. There was really nice, strong top line, 6% to 7%, strong flow-through on the bottom line, double-digit earnings at the midpoint. Really pleased with how we executed through the quarter. There was consistent execution throughout from sales down to EPS, positions us well for the back end of the year. So coming out of the quarter, we did enhance our guidance, right? The way we think of it is on the strength of the quarter. We wanted to hold top line. Again, remember, our top line growth is 6% to 7%. That includes the benefits we're getting from an acquisition we did, Space NK. If you take that out, we're still nicely positioned with our long-term top line sales growth algorithm goal of 4% to 6%. And we have nice flow-through in terms of discipline on profit. The original operating profit growth was 6% to 9%, and then we had strong double-digit EPS growth. With the strength in the quarter, we increased the bottom end of our operating profit growth to 6.5% to 9%. I think that reflects the strength in the P&L, what you saw in some of the margins. With that said, I would frame it as, we wanted to be prudent in kind of an uncertain backdrop, right? We came out with the quarter with strong performance. As we move through the back end of the year, we still have strong 2-year double stack growth rates in the high single digits and you have a nice balance in terms of earnings growth. I think what we've cared for is if you think about all the things we've done, right, you have increased fuel costs, which we cared for. We had talked about that. That's reflected in there. And we think we've built in the flexibility to be responsive in a competitive marketplace. So the way I look at it is strong Q1 performance. The original guide was strong. It positions us nicely to execute through the balance of the year. We increased the profitability goal. We also doubled down in share buybacks, given what you're seeing in terms of the stock price and what we see in terms of the compelling value proposition given the intrinsic value. So we increased our share buybacks in April from $1 billion to $1.5 billion. You saw us execute about over $550 million in the quarter and just feel nicely positioned as we enter the year and feel like we have the flexibility built into our guide to deliver and execute through the balance of the year.

And then forward looking longer term, you're kind of guiding 12%, 12.5% on op margin. This has been sort of the focal point in the model over the last year plus. Is that the right level sort of that 12-ish percent looking forward, where you can take share and kind of continue to invest and even broader than that, those investments are sort of what are allowing you to take share, maybe we can move on.

That's a great question. So when we set out our -- the investor in long-term algo, we had talked about a floor of 12%. Last year, we actually delivered -- this is on operating margin. Last year, we delivered 12.4% in a peak of our investment year. And we've been very clear. We're not going backwards. So the 12% is no longer relevant. I would take that off of the table. The goal every year, really the positioning we want to do is how can we maximize profit growth. We're going to be disciplined on margin and 2026 is very illustrative of how you can see us execute our guidance profile. So we exited 2025 with 12.4% margin. You see in our 2026 guidance profit growing faster than sales. We've talked about operating margin being anywhere from flat to up 20 basis points. As we execute through the year, what we want to do is continue to try and not only deliver against operating profit, but look for opportunities to continue to accelerate operating profit. That's what we did in this updated guidance by increasing the low end of our guidance range on operating profit growth from 6.5% to 9%. The way we think about that in any given year is if I have opportunities to reinvest back in the business as we deliver on our top line, and I can fuel top line, I can drive flow-through to profit, which ultimately flows through EPS and continue to grow it that way. If I don't see prudent investments to capitalize in the marketplace, the leverage opportunities are there, and I can drive leverage. We want to get to sustainable operating profit growth at the end of the day. And so you're going to see us be disciplined. There's a floor that's already nicely above the 12%. Again, the 12% is off the table. This year, we're going to drive profitable growth, and there's opportunities to continue to expand margin. It is a competitive category. I think it's important to have that flexibility. And it's not just about running profit up too fast. You want to be investing back in the business, growing share and driving operating profit growth as fast as we can go. So again, when you look at Ulta, we can compound earnings at double digits. We have strong cash flow. I think the financial discipline with the strength of our go-to-market model, driving strong top line, growing share is a nice formula of value creation.

The only thing I would just add is that we said last year, we were going to grow top line revenue and take share, and we did that. This year, we said we're going to do that with better financial discipline of which we showed that we could do it in the first quarter, and you should expect that from us the rest of this year.

Excellent. And just to be clear there, operating margin growth as far as margin or dollars, what you say it's...

Operating profit dollar growth.

Dollar growth. And then...

But again, to be clear, I don't want [indiscernible] it's not at the expense of margin. You have to do both, right? It's going to be disciplined on margin. Think of our guide this year, we're going to maximize operating profit dollar growth while being disciplined in margin, there will always be a floor in the guide, an opportunity for leverage. And then it's just a question of what's the best way to maximize operating profit dollar growth, is it a leverage opportunity, or can I reinvest and drive it through the top line but not going backwards.

So state of the union then. I think last year was supposed to be sort of a reset year for the industry, and it wasn't. There's a lot of different sort of pieces of the category that are growing fragrance well in this sort of away from sort of your traditional makeup. I'd love to know kind of where you see yourself positioned there. And then you speak to these investments to sort of drive top line. What are those that -- impact those 2 as we sort of [indiscernible]?

Yes. Well, we made quite a few investments last year in our go-to-market. If you just take a quick step back, when I was the COO before stepping into the CEO role, we were very invested in our foundational investments. We were a little bit behind. We had to upgrade our ERP system. We had multiple POS systems. So we now we're on one common POS system. Our data governance, we needed to make sure it was really clean as we were going through this ERP upgrade, which I'm very excited about because if you can leverage your data and you have clean data with AI, you can really unlock a lot of future potential opportunities for us. And then we were investing in the supply chain. So it was taking up a lot of CapEx, OpEx and also talent resources within the organization because we had to do some catching up. In 2025, then we started to really reinvest into our go-to-market strategy. And what I was pleased about is in 2025, not only were we investing in go-to-market but our top line revenue really started to respond very, very quickly. A couple of things that we did in '25 that I feel have positioned us even greater for '26 is, number one, we did make some management changes in our team, and I realigned the way that the teams were working internally. The benefit of being here for a longer period of time I saw where we maybe had some opportunities to do things a little bit more efficiently and better in the future. So we made some talent changes out to position us for the next generation of growth and they're all [indiscernible]

[indiscernible]

Yes, sure. So we -- previously, we had somebody that was leading marketing and they also had digital. It didn't make sense to me that digital was not aligned with merchandising. Digital to me and stores are the consumer interaction. So I moved digital from underneath marketing, and we promoted somebody internally that had really deep -- in fact she helped build the loyalty program for us. So she really understood the data behind our members and how to really grow the members. And when you think about marketing today, it's not just about your traditional print marketing, that's all gone. It's really about how do you leverage the data insights to really drive the consumer behavior. So she is very well positioned from a marketing perspective. And you can see some of the great things that we've done on a social perspective and also behind the scenes with leveraging AI. So that's one big changes aligning that. And then we brought in a great leader -- that was a previous CEO actually for a brand, Lauren Brindley into our merchandising team, and she's the leader there. And then I had a Chief Store Operations Officer, who's been with us for a while. Amiee Thomas that we elevated her position and made her our Chief Retail Officer. So all things that touch stores from store planning and design to real estate, to stores, all aligned under her. When we now go to market with our brands, it's the 3 of them and a lot of the bigger meetings I'm sitting in there, too, whether it's [ Estee Ladder ] or L'Oreal or it's a brand that we're trying to get into our ecosystem. The fact that we can now move the speed and alignment, and we've got the decision makers sitting at the table has really quickly elevated our ability to execute in bringing new product and newness into the assortment. That was part of the change that we saw really happening live and in action in 2025, and it's continued into 2026. And then our investments that we made in our digital platforms for e-commerce. So we were a little bit playing behind some of the traditional e-commerce sites that you see out there that are selling beauty, and we really closed that gap. The leverage that we have that makes Ulta Beauty a little bit more unique on that is that we have a store within 20 minutes of the beauty enthusiasts in the United States now with having 1,500 locations. The fact that we [indiscernible] can sell online, but one of the fastest growth online is buy online, pick up in store. So the fact that I have that convenience play of stores, and I also unleashed in this last year, ship from store capabilities. So my time to consumer has shortened and the cost to ship to consumer has shortened too because of the miles to get there and also the labor in stores is less than the labors in the distribution centers. So there are those things that we were investing in that we're seeing the returns on those investments this next year, and that's been great to be able to see and witness.

I want to get to online, as you know. But so when you're saying if you see the opportunity for investment, profitable investment. Is that then after you put in place these systems, it sounds like a sort of a harmonious relationship between marketing brands, store experience? Is that kind of the investments that are out there that you're seeing? Is that the right way to think about it? Is it sort of more of a harvesting period now that you put these systems in place where you can grow more profitably?

Yes. I mean the systems that we had to have in place were kind of table stakes that we couldn't unlock some of the capabilities that we wanted to do until we have the systems in place. We've invested a lot in the systems in place in 2025. There's still a little bit of work to do from our ERP because we did a little bit of some MVPs, something like just had to get some stuff done. And then we've got to make a few more investments, but nothing to the scale of a full ERP system platform. So there is some general investment that needs to happen. But really when we're looking at where do we invest the dollars, it's like where can we get the return on that investment right now. And we're looking at that cohesively as a team. We have an Analyst Day that's going to be coming up in 2027, very, very quickly, this year, I know is going to go really fast. And we'll be able to share more at that time of exactly what it is that we're going to be looking at doing in terms of investments to really continue to drive our business forward for the next generation of growth.

And you touched on this. So my -- we've been in conversation about this. One thing that I've worried about just in the category is that it's depending on whose number you want to use, 25%, 30% online, right? If you look at other categories, historically, that has been an inflection after which it becomes much more cannibalistic to retail, right, which is sort of beyond retailers control in that the risk is your every dollar that moves online, it cannibalizes more directly in physical retail. I look at a quarter like the one you just put up, where you're holding it feels like retail margins even with that massive growth in online. And so it feels like your business is positioned in a way perhaps more uniquely whereby you can manage through some of that disruption. The ship from store, leveraging sort of the fixed cost through that. You talked about sort of exclusive brands and events through the retail channel. Can you sort of unpack how you're seeing that threat to the extent that it is one and how you manage sort of the fixed cost deleverage in the retail channel through that?

Yes. Well, I'll start and then Chris, maybe you can talk about the -- how it's flowing through the panel. So what I would say is that this sector is a little bit unique because the consumer likes to come in store to touch and feel and play with the products. And when we just announced over the last quarter, we had 40,000 events that happened in stores. So given the guest a reason to get off the couch, get in the car and come to your store location is really important. We also see that the younger consumers, so the digitally native consumer, likes to shop in store. They actually prefer to shop in store. And I think part of that is they're getting off their devices, and they want to come in and touch and feel and play and they want to do with their friends. So you'll see us continuing to lean into that. I just announced on the call on Tuesday that we're opening a new store in Times Square that's going to be very experiential. You'll see us looking at elements of that, that we can put into our other stores that are out there. And then buy online, pick up in store is a huge growth driver in our e-commerce, and that actually flows through like a store sale because it's actually kind of getting picked up by our store associates, the guest is coming there. We don't have the shipping cost, et cetera. So we like that we're seeing that, that's a lever that's being really responsive to the guest. But Chris, maybe I'll let you share how it's flowing through the P&L.

I mean the premise makes sense, right? It's cannibalistic, it doesn't matter which channel is more profitable. It just -- it comes down to deleverage on the labor, the rent and all [indiscernible].

Yes. Well, just what I would think, too, is what's unique about our model is 80% of our sales are still flowing through the stores. And even though the e-commerce channel is growing, our store channel is growing also. 90% of the guests are shopping in our stores still today. So there is this concern like is that guests going to just go purely to an online play? I don't think that's going to happen. I think our very best guests shop both channels. .

And you're stimulating that. I guess that's embedded in the question is sort of how are you doing that? How are you making sure that the 2 channels are cohesive in that regard?

Yes. And I think that's where you have to have the reason for being -- to get them to come into the store, you're leveraging your app to balance people back into the store, the more that you can create gamification of even shopping through a store, leveraging your mobile devices, et cetera, that's all like, I think, table stakes going forward.

Yes. I mean it's worth doubling down on -- Kecia noted the percent of sales. But when you think of our loyalty membership and how they activate, 95% of our member base is operating in both channels with a significant portion of it still in-store, 75%, the balance being kind of omni across, right? This is not an ecosystem where they're discrete channels, they're going to constantly interplay off of each other. And that's the way we manage it from a profitability. We're thinking of kind of like an omnichannel P&L. We both look at the pieces to make sure that we're trying to optimize costs individually and then collectively, where do you take advantage of scale. So as I think of the P&L, you have to kind of manage the pieces but also look at holistically, how are you getting scale in your business. Distributions is a good example, right? As we continue to grow and we're growing in both channels, right, we're getting scale. We're getting good supply chain optimization, leverage with what we're doing from a cost optimization standpoint out of our distribution centers and building kind of capabilities on transportation as well, right? So you're creating these leverage points and efficiency opportunities, some of them cut across omnichannel and then you're also looking for opportunities to optimize within the respective channels as well. I mean e-commerce alone, too, right? It's -- you're going to actually get leverage and scale there as well that helps the total profit picture. I think on the retail side, we're super disciplined around how we're going to market and you think of store footprint and optimizing those assets as you think of new store, a different footprint, smaller store footprint. There's still plenty of opportunity for us to get leverage points, how are we managing shrink in store, NPCs. So it's a constant thing. Every year, you have to have this balance of being very disciplined on leverage, kind of a zero-based mindset of investments and what are you investing in that's new to fuel growth, what are you doing from a cost optimization and having a strong funnel there. We're doing a nice job there, that both helps get the profitability we need and reinvest back in the business. I mean, at the end of the day, if our growth rate consistent with our long-term algorithms in that mid-single-digit growth, we're going to find opportunities to get leverage throughout the ecosystem. And I'm no concern around how to drive that with what's happening in the marketplace. I would view it the opposite actually, that I think our unique go-to model with a really strong e-commerce capability and our store footprint is actually a competitive advantage. And you're even seeing that play out from a complementary standpoint, both from a cost and a revenue standpoint with like buy online, pick up in stores, right? That's a way to engage with the guest 2 times, right, if you think about that, and it does improve the cost picture so.

And to be fair, I mean a lot of other industries didn't have that capability back in 2015, like in apparel, when it was really sort of laying waste to that space. You mentioned kind of the data, sort of the reorg and some of those positions. UB media, how you're using data, some of the initiatives online for the efficiencies on marketing I'd be curious sort of how you use data to your advantage?

Yes. Well, I will just say that the fact that we have 47 million loyalty members, and those are active loyalty members, they've had to have shopped in the last rolling 12 months for us to count you into the ecosystem, is a very powerful tool that we have. I'll start first with our marketing. Some of the things that we've changed within our marketing is you've got to be in the cultural moments where the guests are today. And you've seen us maybe change in 2025 being a little bit more engaged with festivals. And even we just did this unique thing with Beyonce on our Cowboy Carter Tour, where there was this authentic connection with her brand and our brand and getting our brand in front of her loyal following and us following around through the cities and creating unique looks, that -- the old days of just putting products out in front of people, that's kind of over. You've got to be immersive in all of their thought processes and where they are. in their communities. So that's one great example. You'll see us at festivals like Cocea and Lalapluza. We just were at BottleRock. So we're looking at different ways that we can be front and center, so we're top of mind. And then our Ulta Beauty world, which we just recently had where the lucky 3,000 of the 3 million people that wanted to go, were able to see 240 brands that are really being brought to life and then leveraging that social content because the everyday consumer was taking video content and sending it out, that's all part of marketing, believe it or not. So there's unique things that we've done that are really making Ulta Beauty top of mind to that consumer. And then UB Media, there's a huge unlock there because it's not just about taking in those -- that revenue dollars, which we're happy about. I know Chris and I both really like that. It flows nicely through the overall P&L. But it's generally also about letting -- giving the brand a way to leverage their dollars and get a good return on their dollars of investing in advertising to generate sales. That's a win for them, that's a win for us. So we're really pleased with how UB Media is really coming to life. It's continuing to grow. And we think that we've got the right support behind it because one of the opportunities that we had is giving the brands the good clean reporting that they wanted, like, are these dollars really working on driving the sales? Yes, you can look at the overall top line and the category is growing or not, but for us, maybe give more specific data to them. We're getting more closed-loop type reporting. I just announced on the last call that through YouTube, now we have an enterprise view where guests clicked on YouTube and they ended up purchasing through us. We can now link those to actually show back to the brand this was the return rate on that. Pinterest is coming now in Q2. So we're seeing more and more of these social platforms leaning into this in partnership with the retailer on giving this information to the brand. So it's not just about taking that revenue in, which I'm happy about, but it's about driving the top line revenue at the same time.

We're going to run out of time here in a bit, but what I kind of hear you guys saying today is just spent the last 2 years making some sort of foundational investments that were perhaps on sexy but necessary. Now this year and beyond, you've kind of got a baseline of growth, right? You sort of speak to mid- to high while keeping 12.5 plus, looking for opportunities to kind of accelerate in a market that's dynamic, but you're learning kind of ways to improve your particular sort of online muscle, right, which I think some people kind of discounted you before TikTok in particular, I think at your Analyst Day, you didn't have the TikTok box, right, checked. And so I don't know if you'd want to add to that or sort of leave with a different message, but I'll kind of leave it open to both of you to close it out here.

Why don't you start and I will finish, Chris.

Yes. I think we're committed to that compounding earnings growth at double digits, and then we have multiple ways to do it. I think maybe that's what's unappreciated. We're in a great category that's resilient in terms of core beauty. You heard us hit some examples of other things that can create both a low on sales growth but also drive profitable growth like UB Media. The other one I would point to that gets right at the heart of your retail store question as well [indiscernible] we're very early innings there. You think of 4-wall revenue. There's still opportunity to grow that and expand that in store. It's going to leverage our asset base. So it's quite the opposite dynamic, right, where that should flow through at stronger operating profit growth and margins. So there's some exciting opportunities of things that are still very much in their early innings while we're still also competing and driving our core beauty business. And I think that lends itself to a really nice value proposition.

And I would just wrap up by saying, this is what we do. Beauty is a competitive environment. If everybody wants to be in it because of the strong margins that come along with it. But this is what Ulta Beauty does, and this is what we do well, is beauty and wellness. This is the reason for us being. And we have invested in these core systems to enable us to really unlock even future value and be very agile at the same time. You're right, Tiktok wasn't even on the radar before, and we very quickly because I've got such great talent in this organization now, we were able to activate and bring it to life very, very quickly. So I believe that we're in a great category. It's not necessarily recessionary proof, but it's recession-resistant. The consumer is going to continue to prioritize this category as they're looking at their spend, and we are here to be able to take care of any guest regardless of the price that they can spend because we cover everything from mass to luxury, everything in between along with services. So I look forward to what we're going to be able to continue to deliver at Ulta Beauty, and I believe the best is still yet to come.

Thank you, everyone. We actually do have the breakout session here. So this would be the signal that clicks over.