Ulta Beauty, Inc. — 2023 Q3

Great. Well, thanks for those nice comments about Scott and Paula, and I appreciate that. And I'll start with some thoughts about the beauty category and makeup specifically, to answer your question there, and then maybe Scott can pick up on the gross margin.

Tarte's Shape Tape Radiant Concealer, exclusive at Ulta Beauty; Juvia's Place blush liquid -- blushes, exclusive at Ulta; and newness from other existing brands like Clinique, Benefit, Anastasia, NYX, Maybelline, go down the list.

Sure. Thanks, Dana. So I'll give you a little bit more maybe than you were thinking about when you initially put this question together because I'm sure it's on other investors' minds as well.

You mentioned some brick-and-mortar share loss in prestige in the quarter. Can you talk about strategies, brand launches, marketing that you're working on to defend the share and return to growth?

Yes. Thanks for the question, Lorraine. Yes, yes, we -- it is our objective to gain share across all parts of our business, and we did -- we feel positive about that in many parts, including our mass business, our prestige skin care, our prestige fragrance business, our prestige e-commerce business. But brick-and-mortar was pressured, and we think that's largely due to expanded points of distribution. There are hundreds more brick-and-mortar locations in the market now than there were even just a couple of years ago.

Yes. I would -- yes, so I'll start and let Scott give a little insight here. When we look at the promotional environment, maybe I'll start there, Mark. The -- as we highlighted in the third quarter, the promotional environment was higher in Q3 than a year ago, but still meaningfully below 2019 levels. So while we're seeing some increase, it's -- we don't see an irrational promotional market. We're definitely not back to 2019 levels. And we've been able to leverage our capabilities behind CRM and overall personalization to manage more effectively within our promotional intensity.

And I would just reiterate what Dave said, our fourth quarter comp sales expectations have not changed, all right? We are giving ourselves a little bit wider range, I would say, on operating margin than you would probably expect to see at this stage of the year. But it is $1 billion above the last couple of quarters. So small changes in consumer reaction could have a bigger impact on our business.

Yes, I'll start with comp. But yes, I think you've said it well. We're again, when we look long term, very confident in the total growth of the category and our ability to gain share. That's certainly our objective all the time. As we look in the fourth quarter, it's a -- we are lapping a very strong fourth quarter last year. We anticipated this. We've been talking about a moderation in our comp trends all year long. And so far, it's played out essentially as we thought with some modest improvement, a little bit ahead of that, but that's how we anticipated.

And Michael, we're in the midst of a multiyear transformation on many fronts across the business that, again, we expect to deliver significant efficiencies and optimization opportunities for our business for many years to come. And so 2023 is an extraordinary investment year. A lot of it is coming through the SG&A line, again, the $60 million to $70 million on top of $50 million last year, again, we believe we're at or near the peak of that. Third quarter bore a large brunt of the burden for 2023. So we would expect SG&A growth to moderate in '24 and beyond.

Yes. Thanks, Oliver. I'll start with stores. We continue to reiterate our outlook of 1,500 to 1,700 stores, and towards -- and we've said that we believe we'll be towards the high end of that range. That hasn't changed and we're confident in that. And that does not include our expansion in partnership with Target. And as I mentioned in the call, we're up to 510 of those locations.

Yes. You're sneaking another question in, Oliver. On Scott's announcement day, too, right? So -- but yes, AI is an important part of our business. You mentioned QM Scientific, which we bought a few years ago, really is one step among many to increase the power of advanced analytics to more personalize our guest experience.

Yes. Great question, Krisztina, because our loyalty program is so key to our business and to our success. And I tell you, I can't -- couldn't be more pleased and proud of the team's efforts to evolve and advance this program.

Operator, I think we have time for one more question.

Yes, Michael, I'd say that, first, I'd start by answering that question is, yes, our goal and our long-term history is to gain share. And our entire strategy across our assortment, our marketing, the loyalty program, our stores, our e-com, our digital tools, everything we do is designed to be a leader and to gain share and to drive our business forward. And in many parts of our business, we have been and continue to be doing that.