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

Okay. Great. Thank you very much. Good morning, everybody, and thank you for joining us. I'm Adrienne Yih, Barclays specialty retail, apparel and footwear analyst. And it is my pleasure to welcome Kecia Steelman, President and Chief Executive Officer of Ulta Beauty; and Chris DelOrefice, Chief Financial Officer. So I would like to give a little bit of background on the management before we start for those who aren't familiar with the company. Kecia joined Ulta Beauty in 2014 and has held leadership roles spanning store operations, merchandising, enterprise strategy, including Chief Store Operations Officer, Chief Operating Officer and President before being named President and CEO in January of 2025, a very well recognition. Prior to Ulta Beauty, she also held leadership positions at Family Dollar, Home Depot and Target. Chris is the newcomer, right? So Chris joined Ulta Beauty as a CFO in December of 2025. And prior to that, he served as EVP and CFO of Becton Dickinson, and previously to that, more than 2 decades at Johnson & Johnson in a variety of senior finance leadership roles. And I think what we've really been impressed so far having known you is the amount of rigor that from your kind of CPG background that you're now bringing in overlaying to the retail landscape here. So we thank you for all that work there. What makes this story particularly interesting today, it's entering a period where years of investments in loyalty, digital capabilities, stores, services and technology are now beginning to create meaningful leverage. So today, I want to focus on 5 key areas kind of that sits at the center of the investment debate. The first is what investors misunderstand about the beauty category and perhaps the Ulta Beauty story. Why Ulta's moat and competitive advantages remain very difficult to replicate. Number three, the strength and loyalty of this customer, right, the beauty enthusiast, not just any beauty, but the beauty enthusiast. Number for the next wave of growth, including the potential scale of wellness and other white space opportunities. And then the fifth to wrap it all up is how these growth investments translate into more leveraged earnings. So that's where Chris comes to do all the listing on the finance.

So Kecia, let's start with the consumer that's -- we're asking all of our companies sort of there's a debate of a consumer macro, you can see it every day and every data point, where we were at the beginning of the year, at the beginning of the year, we were kind of like we're generating actually Ulta was returning to positive comps and coming out of kind of the normalization post COVID. Where we are kind of in the second quarter and how you are looking at the backdrop, right, with all the oil going up, gas going up, et cetera.

Yes. What we've seen is that the consumer, you're right, they've been navigating a very dynamic macroeconomic industry right now today. And there's a lot of unknowns that are out there. But we have not really seen any change with our consumer shopping behaviors. And I think it's because they view beauty as an affordable luxury. It's also self-care for them. It's something that they can do for themselves, even if they feel like they have to pull back in other parts of their spending. The fact that Ulta Beauty has categories from low-end entry-level price points all the way to luxury. We have something that is for absolutely everyone in the store. And we're really happy how we've seen our consumer be weathering the storm right now. And you saw that when we just reported our Q2 earnings that we beat our guidance, and we've raised our guidance for the year. So we feel like this is going to be in the category that the consumer is going to continue to invest in and spend.

Great. And then with Space NK, you have a little exposure to the European consumer and the health of that. We've heard I would say, notions of a deterioration in that European consumer. Can you speak to that and the fact that Space NK is quite a bit at the prestige items?

Yes. Absolutely. Space NK has previously reported strong double-digit comps. We're not seeing any change in that consumer, either we're still actively investing in growth in the U.K. with Space NK stores. So yes, I mean, I think that they're experiencing very similar things to what we are. They're just a little bit earlier in their growth cycle, how Ulta Beauty was many, many years ago. But we're continuing to invest in Space NK. We see the U.K. is still a very important growth opportunity. The U.K. is the sixth largest beauty market in the countries. So we're investing. We like what we see, and we're really happy with that acquisition.

Fantastic. Any meaningful differences in income cohort, age cohorts or regions of the country? And I know that there's been discussion between sort of more of the mass versus prestige that you've called out on the earnings call.

Yes, maybe I can -- yes, sure. Again, as Kecia said, Beauty has demonstrated that we continue to be a very resilient category. Folks are very engaged. Our per average member spend was actually up. As we looked at the dynamics that played out in Q2, we didn't see any change, whether it be age demographics, income cohorts, behaviors were pretty consistent across. We actually had increases in all average spend at the income cohort level and age demographics. So I think, again, it's a testament to the category. It's a testament to the competitive moat that we have. We executed strong in the quarter, and we continue to feel good about that -- how we progress through the year. Obviously, we're watching it, but I think we've set up a guide that we feel confident that we can deliver as we said on our earnings call, and continuing to focus on what we can control and delivering strong performance.

Great. Just as an analyst, I often get sort of these questions about just beauty as a category. And within beauty, there are so many subcategories. There's fragrance, skin care, makeup, hair care, services wellness. So can you talk about the speed or the maturity of each of those categories for Ulta specifically within the box and how you think about those over the next 1-year horizon than maybe the 3-year horizon?

Yes. As you mentioned earlier, I've been with the company for 12 years. And what I would say is that we've really evolved into a much more balanced portfolio than when I started 12 years ago, we were so heavily reliant on the mega category in and of itself. So let me take those 1 by one. So fragrance right now is one of our largest growing categories. It's really continuing to propel our business. If you look at our Q2 results, a little bit of our AOV or average volume transaction was due to the fragrance category itself, we've leaned in to fragrance. We have gone out there and public has said that we want to be #1 in the U.S. in fragrance, and we're on the path to be able to do that. fragrance is really important to us because not only is it continuing to bring in new guests into the category. And as you mentioned, it skews a little bit more higher-end luxury prestige and price point. but it also is bringing in a new consumer around the male consumer -- a younger male consumer is coming into this category. And we like what we're seeing because it gets them into our store. The behaviors around fragrance specifically is that you used to buy a signature scent and that's the one you kind of stuck with. Now it's you're buying multiple cents and you're layering and you're actually creating your own personalized scent and you're even changing that from day to night. So we love what we're seeing in the fragrance category itself. We've also got some great exclusivities that have launched with us with a brand like noise, some strong partnerships with Ella Langley. So that cultural moment and product coming together is really brought to life in fragrance. If you look at skin care next, to skin care, the K-Beauty launching stronger in the U.S. for the last 18 months, Ulta Beauty has been the #1 retailer of Beauty. And in the last quarter, I shared that 50% of our sales in K-Beauty were due to exclusive. So our merchants have done a fantastic job of really going out and curating the best of the best of the assortments within K-Beauty. I announced on our second quarter earnings call that we're bringing in for you beauty. So from China, it's not just about K-Beauty, it's also about all types of beauty, and we're leveraging even our partnerships in Mexico the Middle East to look for other brands that we can bring into the Ulta Beauty ecosystem. So I think you're going to see that continuing to grow, especially with GLP-1 as part of more common everyday life here in the United States, skim elasticity is really important. And then where we've been facing some challenges, especially in skin care as we're cycling over some pretty big growth in regards to some brands that we launched in a broader base. But as we go through the rest of this year, we will -- that will ease up a little bit on our comps because we will have cycled through that. If you look at makeup, what I love about makeup is that we went through a period of time where it was like the fresh face look, which does take some makeup to have a fresh fall less space. But it's getting into a heavier makeup cycle where bigger glam looks are coming back, heavier I make up kind of the 1980s trends, which I personally am happy about, not only for the business, but it's what I love, that's when I got really involved in to make up. So you're going to see heavier use of makeup, which is great for us, and I love what I'm seeing in the innovation pipeline for makeup specifically. If you go to hair care, hair care also, it's not just about shampoos and conditioners anymore. It's about scalp treatment, scalp health, longevity of your hair. GLP-1s is impacting hair care office. So you're bringing in a new consumer that has different needs than maybe they had 5 years ago into the category. And the fact you mentioned that we have services in the majority of our stores definitely is a competitive advantage for us. not only that you can get your service, but the expertise that we have with people who really do know and understand this category that can help you shop in a category that can be a little bit mystifying at times. And then you wrap that up really with wellness and wellness is a huge growth category for us. of our guests are shopping wellness today. And anything we can do to really simplify that shopping experience in a highly complex, very diversified space, I think, is going to be a huge win for us in the future. So the fact that we're really diverse across all those portfolios, we have levers that we can pull for all those categories working together, I think, makes up the beauty on to be successful here in the future.

Fantastic. So let's move on to kind of beauty distribution. So historically, department stores, right, and then they're really only 2 specialty multi-brand beauty players. One is yourself and one Sephora. And then you have mass, you have drug stores and all those. We've seen the continuation of kind of closing stores and department stores. So you're becoming more and more important to the brands. We've also seen you exit the Target partnership as of August. And I think today, actually, they're launching Target Beauty studio. So can you talk about kind of what prompted that and how you think about kind of the opportunity to take back a lot of that share that preexisted there. and whether you think -- what are the competitive elements?

Yes. Well, I want to start with actually the first part of your question -- or your question was that -- there's only a couple out there that do specialty beauty and you were talking about us in Sephora. We're really the only ones that do end-to-end low to luxury. So I do think that puts us in a different element around specialty beauty and especially as the consumers' wallets pressured, I do think it puts us in a really different situation. So I'm very thankful for our founders for starting off Ulta Beauty in a very unique and retinal way. You asked about target specifically. Yes, we ended the partnership in the middle of August, and I'm very thankful for our big brand beauty brands L'Oreal, Outladter, LVMH for successfully exiting the partnership along with the other prestige beauty brands that came with us, they all came back into the UltiPD ecosystem. That's really important for us because, number one, they understand and recognize how important is for our associates to be able to bring that brand to life. We've been at this for 35 years. to be able to articulate and give service to a guest that is looking for spending a little bit more on a product, you have to have the expertise to be able to do that. And we were at the end of this partnership with Target. We learned a lot. I'm very thankful for our experience there but we also now have that data of those guests that were shopping and shopping Target and also shopping on the Ulta Beauty. And we've got marketing efforts of keeping them and getting them back into this ecosystem because they can only buy those prestige beauty products back in Ulta now. I've seen the beauty Studio. I think it's great what Target is doing. However, what we're doing is very different than what they're doing today.

Yes. I think just from a consumer standpoint, take my analyst hat off, I think there is a purpose like, say, you are off-mall, you're driving to the store with that as the destination and the primary purpose is to buy beauty at your store. And I think that going into kind of larger stores that have this as another component is a very different environment.

Yes, absolutely. And when we initially launched in Target, it did cannibalize our stores, and it was no different than I've spoken about this many times that no different than when a competitor had opened and you'd see a period of time of canalization, then you'd recover those sales. This is an opportunity for us to really lean in to those guests and get them back into the Ulta Beauty ecosystem.

Great. So let's segue into competitive position and what investors really care about is kind of building a moat. We touched upon a lot of those, but let's bring it all together. And I always like to ask this, if somebody handed somebody else unlimited capital, and they ask them to recreate Ulta Beauty from scratch. What would be the hardest piece of the model to replicate? And why is capital alone not as us?

I think it's a great question. What I would say is, I mentioned this earlier, we've been at this for 35 years. Anybody can sell products or put products on the shelf. But how you bring those products to life and the experience that you give, this is a very experiential business, and that matters. I today would walk into a port, and I think of myself as a beauty grew, but when I meet a great associate truck me, they're getting a lot of my wallet, and I'm spending a lot of money at that time. So I would say the one thing that's really difficult to replicate is the associates that we have working in our store. So love for beauty and wellness and how they bring beauty and wellness to life I love the fact that we're very authentic. Beauty is different things to different people. You don't have 1 specific way to walk into our store. You don't have to get dressed up. You can come as you are our associates get that. We just want to help people feel their best versions of themselves. That is really difficult to get into your DNA as a company and to really perfect that. And we've been doing this for 35 years. And I think that's the one thing that really does that is apart from everyone else.

Yes. One of the things I always mentioned kind of as you analyze retail companies, is back in the day, it was all about, can you make somebody feel like $1 million walking out of the store from when they came into the store. And Beauty just does that by itself, but I think Ulta does that space. So Chris, with that in mind, from a financial perspective, it's hard to replicate advantage. How does it show up in the financial model? Is it primarily in customer acquisition, retention, inventory productivity, returns on capital or any of those do you want to talk about?

Yes. A little bit of all of the above. But I love to keep kind of the growth orientation. What I was excited about, love about the model and love about the strategy that we have is there's sort of like an embedded flywheel in who we are, right? Kecia has touched on a lot of these things, but the unmatched access to just outstanding brands that we specifically curate services, experiences, you can't get to anywhere else. It obviously attracts a ton of guests. It builds our loyalty program. As we're successful executing there and delivering on that promise with guests, the brands want to partner with us, right? So it's this flywheel then brands want to put more business there. It brings the best newness. It brings exclusive. And we do that, it attracts more into the ecosystem. They're spending more. They're engaging more. We're getting new customers. As that happens, right, it furthers that flywheel with our brand partners wanting to do that. build up loyalty. That gives us more data. It allows us to engage in a very unique, differentiated way with our guests, which further kind of builds out their loyalty, lifetime value. And so there's literally like an embedded flywheel in kind of our growth algorithm that allows us in a very attractive market to deliver strong growth win share and as the CFO, starting the strong growth you can make a lot of things happen within your P&L. I'm sure we'll talk about profitable growth later. But it's the anchor part of our algorithm to get to double-digit EPS growth. And I spend a lot of time making sure that our primary emphasis is on serving the guest, winning the guest and making sure there's a healthy top line.