Ulta Beauty, Inc. — 2023 Q1

Yes. Thanks, Simeon. What we are seeing, as we said in the call, is mass and our business is growing faster than preceding -- we saw that in some previous quarters right now. And so a little bit of detail about that as we look underneath. As we look across income levels, there's actually good -- there's growth across all income levels, across all income cohorts, roughly equivalent across all cohorts, although the growth rate did moderate from Q4 pretty consistently. .

Yes. So overall, I would just remind you, Simeon, that we did state, so total units are up across the enterprise, right, for the period year-over-year, and total spend per member is up year-over-year as well. So again, great evidence of a healthy, strong business model at play. Very strong traffic trends in both channels, but especially in our brick-and-mortar channel that we're pleased to see.

Yes. Well, as I mentioned on the call, we anticipated and planned for it to be more promotional this year coming out of all the trends that we've talked about over the couple of years. And what we saw as the quarter progressed that actually promotional activity did increase and was even a little bit more than we had anticipated through that quarter. So when we look at broader competitive activity, we know this is a strong category. It's an important category for all of our competitors. And our long-term approach to this has been to not to lead the promotional intensity, but to make sure that we are competitive and continue to be the leader and gain share in the environment. And so that's what's driving some of the competitive activity and the increase in promotional.

This is Anders Myhre, on for Steve Forbes. I wanted to start with services. So maybe a two-part question. One, outside of the details in the prepared remarks, can you comment further on the trends you were seeing broadly within services and possibly measured by member utilization rate? And two, can you provide an update on the percentage of consumers that make an in-store purchase after receiving a service? I believe in the past, there is approximately 50%. So I wanted to see if there's any moderation there.

Yes. Well, thank you for the question. Yes. So again, our salon service business was really strong again in the quarter. We -- what we like that we've seen is we -- in the prepared remarks, we talked about these backbar events. So not that we specifically ever break out purchase by service guests, but what I can share with you is that our backbar events, what we've seen is 90% of guests that are purchasing through those activations are new to those brands. So the guest experience and services is really resonating when we get them in the chair.

Great. Well, yes, our loyalty program, Ultamate Rewards, is one of our greatest assets, and I'm really excited that the investments that we've made, the work that the team does, the commitment that our store teams have driving that experience continue to pay off. We're really proud of 9% growth in members in Q1, spend per member growth. Our strategies, our plans are working.

Yes. So it was -- when I think about the financial results and totality, and really shrink was the thing that surprised us in the quarter, and that's really the driver when we think about the operating margin adjustment for the year. So we knew sales were going to moderate a little bit after 2 spectacularly strong years. We knew the promotional environment was going to ramp up some. And maybe it's slightly richer than we were expecting, but that's not the driver.

Ike, I'm glad you asked. I just -- I'd add the -- as I mentioned in the script, this is a really important and critical topic. There's certainly the financial impact that Scott described. But this is impacting our associates. It's impacting our guests. And unfortunately, despite our efforts, and investments, it's getting worse, not better, and we need to -- we're working hard.

Sure. Yes. We'll be in 70% of the chain by the end of this year, with locked fragrance cabinets as fragrance is one of the base target areas that we see them going after. And we're also increasing labor in those specific locations. We're training and educating our associates how best to handle these types of situations. It's upsetting. If you're shopping in a store, and you see this activity happening, it's pretty shocking.

Just one final note, Ike, on that one. So for quantification purposes, as a reference point in the first quarter, the shrink deleveraged above expectations, totally offset all fixed store cost.

Well, Korinne, this is, as you would imagine, a huge focus for our entire team. And everybody in the company really participates in loyalty and retention. And that fundamentally starts with delivering a great experience. We have 50,000 associates in our stores that are committed to delighting our guests every time they walk in, and that's key to retention that every guest experience is a positive uplifting fun, engaging experience. And I'm proud that, that is so consistently the experience that our guests receive and what they love about.

I want to see if you could talk a little bit about the incremental promotions coming from, whether it's certain categories, certain channels that are pushing it harder as they try to expand or whether it's fairly broad-based. And then you said you -- I know you said you won't leave the promos, but of course, you have to be competitive. Can you talk about how your promo levels compare to your peers? And is there more you can do to leverage your loyalty members and the data that you have that you could potentially promote less [ versus previous ] years and still stay at the same level of competitiveness?

Yes. First, I'd say the incremental promotion we see it happening. We see really an intense competitive environment across all parts of the beauty category. And again, because of our model, mass to prestige, to luxury, we are directly competing with everybody that sells beauty. And so we watch and track and we're seeing promotional activity across mass, across prestige, across luxury. And so that's all part of it. And so I wouldn't say it's any one part of the category.

Let me start, and I'm going to ask Scott to give a bit more color, but -- or definitely more color on specifically around your question. What I'd say is we're really confident in our business. We guided for this year that we'd be delivering 4% to 5% comp growth, and we're committed to doing that. That's what we set out to do, and we are on track to do that. .

9.3% comp, strong operating margin, strong EPS growth. And we believe our model is uniquely positioned to navigate whatever comes our way, and we've got the right team and the right strategies in place. So that's kind of how I feel about it at a macro level. But Scott, any color specifically about Michael's question?

No, I would just add that, again, shrink and slightly richer promotional mix, temporary headwinds, we are very ready and able to be able to react to those kinds of things. So again, to Dave's point, with the toolbox that we have and the levers that we have to optimize this business, we're still very confident the 14% to 15% is the right range to be in. Things like UB Media, that's just kind of really getting off the ground, is a long-term margin accretive part of our business model. Project SOAR, digital store of the future, all these other large strategic initiatives we have underway right now are going to provide meaningful benefits for our stakeholders over a long period of time. So very confident in our [indiscernible].

Yes, I'm glad you asked as wellness is it's an important growth opportunity. I'd start -- before I talk specifically about the wellness shop and the assortment we have there, I'd say this overall idea of wellness and self-care and the connection it has to beauty, I talked about this for a little while. So you may have heard this before, but it is an important trend coming out over the last couple of years that we think will drive continued growth and engagement.

Maybe I'll start with shrink. So I addressed here just a few minutes earlier, just directional in the first quarter, shrink basically offset fixed store cost leverage entirely. So again, remember, that's been trending upward over the last couple of years with a huge peer step on the top line, Simeon. And so we would expect that trend to continue through the rest of the year. We're not -- we were expecting some moderation in 2023, but at this stage, it doesn't seem like we're going to be able to deliver that. So not optimistic about how that plays out in gross margin the rest of the way.

Yes. And Simeon, it's good to book end our Q&A by Simeon, so we're glad to do that. And I'd just say, yes, on the point, I mean, I think we covered some of the thoughts there about how we're seeing both spend per member, AUR, the units. I mean there's a lot of positive indicators on our business, and we're still working hard to get a read on how our consumer is navigating. We know there's pressures out there, but we also see a high level of engagement in beauty.