Ulta Beauty, Inc. — 2023 Q2

Yes. Ashley, for the quarter, we saw strong traffic throughout the quarter with double-digit traffic. And we continue to be pleased with the engagement that we're seeing, and we saw actual comp performance sequentially accelerate through the quarter as well. And all of those trends are reflected into our updated and elevated guidance for the full year.

Yes. Actually, we've locked up about 50% of our stores right now. And what we're seeing is in the initial stores that we rolled out the locked fragrance cases for, we actually saw sales improvement because we were in stock with the product and we had it available to the guests. So we're staying very close to that. We're also investing in labor because we don't want to be sales preventative from the guests being able to purchase. So that's a little bit of the investment in labor that you heard earlier from Scott, is that in these stores, we are upping our labor a bit because we want to make sure that we're able to take care of the guests.

Yes, I'd say, yes, we do anticipate continuing to gain share. We've done so through the first half of the year, and that is our outlook. The commentary is really as we look into the second half of the year, we see some strength. Engagement continues to be high. Certainly, our business is performing very well. We're attracting new members. We're growing across all key categories, both -- and then in both e-com and stores. But we also see some uncertainty as we get in later into the year.

My first question is around prestige versus mass breakout, because you mentioned in skin that you're still seeing strong growth in both prestige and mass. But only in mass for makeup, but you mentioned that the launch of Fenty a year ago was a big contributor. So if you exclude that, are you seeing anything different there? And then going forward, as you think about your expectations on growth in mass versus prestige, what implications may that have on comp, in your view?

What was the last part of that question? What was -- could you repeat the last...

Yes. Just the implication on comp, if -- what you're thinking in terms of growth of mass versus prestige across your stores? And what implications that might have in terms of comp if mass becomes a bigger piece of the driver of growth?

Well, yes, we -- as I discussed, we've seen strong performance really across our entire assortment as we look at it, but mass has been a bit stronger for a couple of quarters now in -- across our business. And that's driven largely by strong consumer engagement across some key brands in makeup, health, NYX and some others are really hitting the market with great innovation, great marketing, great consumer engagement. And the fact that we offer the full assortment from mass to prestige is a real benefit. We're able to capitalize on strong trends and strong engagements across all aspects of that.

Congrats on the solid results. So just a real quick one. You mentioned luxury, and in fact, it's exceeding your expectations. You mentioned launching Pat McGrath Labs. Just -- it's all one related question in just 2 parts.

Yes. Won't break out exact percentages. Again, to reiterate, it's in 200 stores. We're really pleased with it, a strong assortment across a number of the very best brands in luxury. Chanel, Dior, NATASHA DENONA, HOURGLASS, an extension of Chanel with Chanel Número Uno, Lancôme, Absolute, now Pat McGrath. A luxury fragrance business with brands like YSL and TOM FORD and Viktor&Rolf.

Sure, Chris. So yes, versus -- we did say, again, versus our expectations for the quarter, we're very happy with the overall financial results we were able to deliver. So breaking it down a little bit more, I'd say merchandise margin was better than what we expected, and so that speaks partially to the promotional lever that people are focused on here. So again, generally better than what we expected, so we can lean in and lean out. That's 1 of the great strengths of our business, being able to have real-time information and be able to take quick action and be agile.

Yes. So there was -- we -- third quarter last year is where we saw a significant step-up in the pricing increases across the portfolio, and really, the margin benefit started really rolling through in the second quarter and into the back half of the year. So this is really the toughest anniversary point in the year is ahead of us right now, and that's why we're calling out third quarter. Third quarter is kind of peak on a number of different fronts. Again, every year is a little unique, but the third quarter now, we've got a little bit of delays in some of our project work, which is shifting back some of our IT expense into the third quarter. And a lot of that flows through SG&A.

Scott, I'm going to stay on that topic with the third quarter. If I'm not mistaken, it seems like about $10 million to $12 million of the SG&A spend perhaps is moving into the third quarter. And if we have a little bit more gross margin pressure, does that imply that EPS could be down sort of high single-digit range? Just wondering if I'm in the right ballpark.

Yes. We don't want to get into quantifying it specifically, Adrienne. But I'd say directionally, you're in the right zip code. So yes, on the SG&A side, that's roughly kind of the shift back into the third quarter on some of the IT spend. And yes, operating margin is going to be down meaningfully versus what we saw earlier this year, and that's going to result in negative EPS growth year-over-year for the third quarter.

Super helpful. And then to just follow through with the SG&A. So can you help us walk through the phases? I know there's 4 phases of Project SOAR and all of the other investments. It seems like you're running sort of dual structures perhaps on some of the DCs and then the website or, let's call it, 1/3 or half of the year. How should we think about that rolling off? Because a lot of this kind of redundancy will go away next year. I know you're not giving guidance, but just to help us shape sort of what SG&A growth looks like last -- next year? Because it seems like it comes down a lot on the consensus. I just want to make sure we have that correct in our mind.

Adrienne, I'll start, and then I'll kick it over to Scott. So yes, we're in the middle of an ambitious transformational agenda. That's for sure. And part of this is really positioning all parts of the organization for our future efforts, and overall we're really pleased with how our progress is working. But anyone who's taken on this large scale of a project, we definitely have timing shifts that happen because we want to make sure that while we're staying forward, progressing and moving, we are really limited in our distraction and our disruption for our guests and also for our associates.

Yes, and you're exactly right. We're not providing guidance for 2024 here today, but yes, investors should expect that we will cultivate, recoup benefits from the significant investments that we're making in our core systems year 20 -- '22 into '23 and that we're going to see benefits materialized in 2024 and beyond. Again, you've heard us talk about, these are major initiatives here that we expect to see dividends for a number of years into the future, but I would also caution investors just to be prepared. I mean there's -- we are in the business of growing Ulta Beauty for the long term, and so there's plenty of other great growth initiatives out there that we've got in the queue that we're ready to go tackle. As soon as we get through some of more of this, I'd call core transformation work here in '23 and early 2024.

Yes. I'd say on makeup, the main driver is while our -- we're bringing a lot of innovation and newness across that prestige portfolio, lapping -- really, one of the biggest launches in the history of Ulta Beauty with Fenty, lapping that fully in the second quarter is probably the biggest driver. We're excited though as we look forward. I mentioned a few launches that we that we have coming out, Rabanne, Pat McGrath, Polite Society, among others that many of which are exclusive to Ulta Beauty and are coming into our business in the second half of the year.

Great. Yes, I almost used your silence to answer any question that I wanted to [indiscernible] the earlier Kate, but glad you got back in the queue. We're excited. We -- I think what we did in the second quarter, what our teams did, our merchant marketing, digital, store teams, our go-to-market teams, really, we -- they are continually evaluating how we can get better and how we can elevate the impact, and the summer sale is an example of that. We had strong events, solid events that were delivering for years, but the team, through great consumer insights, continued understanding of guest behavior and full understanding of what unique strengths we bring to the table, reevaluated that.

Yes. Well, I'd say first of all, we're just pleased overall with the continued engagement that beauty enthusiasts are showing for this category. Coming out of the pandemic for these last a couple of years now, just a high level of engagement. You know how over the long term, last 50 years, this has been a strong growth -- consistently growing category because of the emotional connection that it plays in our guest lives, the importance it has and how they express themselves to the world, and that is more true now than ever. And some of the behaviors and engagement tools that emerge coming out of the pandemic continue to fuel the category. Strong innovation, strong connection through marketing and consumer tools and an increased understanding of the role of beauty to wellness and self-care.

Paul, I think we have time for maybe one more question.

Yes. So when we're talking -- again, this has been an evergreen topic, I think, with investors now for quite a while, pointing back to 2019. So the business is in a much different position today than it was back in 2019. Again, for those that have been following 2019, we had some major disruption in the middle of the year in the makeup category, unexpected deceleration there. There were channel mix headwinds that we were dealing with as a business. There was some investment in some international expansion that was causing some significant deleverage on the business. And so during the course of the pandemic some initiatives that have been started pre-pandemic but during the pandemic, we were able to take advantage of making sure that we fully leverage some of our cost optimization initiatives by way of EFG, and now continuous improvement initiatives layered on top of that.

Great. Well, thank you all for joining us today. I appreciate your interest and engagement in Ulta Beauty. I want to close by thanking all of our Ulta Beauty associates for their continued care for our guests while delivering another quarter of strong financial results. We look forward to speaking to all of you again when we report results for the third quarter on November 30.