Ulta Beauty, Inc. — 2023 Q4

Rupesh, thanks for your question, and thanks for calling out, Scott, well deserved. Yes. I'll say on makeup, and I'll even speak a little bit more broadly across all our categories, we are focused on driving growth in every part of our business. Our makeup business in 2023, particularly in the second half, we saw healthy growth on the mass side and more challenges on the prestige side. So we have a strategy to drive performance within all parts of our makeup business. It is our largest segment and obviously important in the beauty category.

I'm just going to say we're really excited about this announcement and really, as I said in the prepared remarks, see Mexico as a great opportunity that's tailor-made for the Ulta Beauty experience. Kecia is leading this effort among many things that she does. So I'm going to ask Kecia to give some more color on it.

Yes, absolutely. Well, after careful evaluation of many market opportunities, we really felt like the Mexican market is the next step for Ulta Beauty for us to have this partnership with Axo. And we're really excited about this. I know that the future is going to be really bright in this partnership. We've spent a lot of time with their teams from a cultural perspective, also just even from the best-in-class performance with global partners that they've brought to the Mexico consumer -- the Mexican consumer.

This is Juliana on for Ike. I just wanted to ask in regards to thoughts on the beauty categories moving forward, particularly the balance of prestige and mass, and maybe in addition, how we can see that driving merchandise margin given the benefit that we've seen.

Well, for the overall category, as I mentioned in the remarks, we're fortunate to be in a category that continues to be healthy, that is highly connected to our consumers, a high level of engagement, that there's an emotional connection that's driving the category and has been for a very long time, and then certainly coming out of COVID, has been exceptionally strong.

Yes. What I would say is our merchandise margin, I would remind, we are meaningfully higher and better, our merchandise margin since 2019. And really that has a lot to do with we are a much healthier business now, and we have -- our mix in our business between our categories as well as prestige and mass through category performance efforts over the years has really helped us be able to be flexible as the consumer shifts between various categories as well as between mass and prestige. And so we believe that our -- we're able to manage that dynamic.

Thanks, Susan. We are planning to open between 60 and 65 net new stores in fiscal 2024. That puts our growth between the 2-year period at 90 to 95, which is generally in line with the 100 that we had communicated. And so our thinking hasn't materially changed there.

Yes. We're really pleased with the progress that we've made. As a reminder for those on the call, this really does represent a way for us to generate positive impact on our business by leveraging the first-party data and insights that we have in partnering with our brands. We're not sharing, we haven't shared and we don't plan to share specific on a number of brands or even specific financial impact at this time.

Congrats, Scott, and looking forward to working with you, Paula. I wanted to ask you a little bit about your thoughts on new product contribution this year because it does seem like certainly starting off with the momentum with Charlotte Tilbury and Sol de Janeiro. We did some store tours in New York recently, and the team is very energized around these brands. So was wondering if you could talk about contribution this year versus previous years and then helping us understand sort of -- I think you mentioned Sol de Janeiro that -- a portion of the doors. Maybe can you give the same statistics for Charlotte Tilbury?

Okay. Thanks, Olivia. Yes, I'll talk about new product at our newness pipeline, and then Paula can pick up on your question around margins. So we're -- well, first, I'll say newness is always a critical part of our business and historically has been between 20% to 30% of our sales. And that's an important part of the category and one of the best things about the category. There is a large desire from our beauty enthusiast guests from our members to discover what's new and exciting across all of our categories.

Yes. So from an operating margin perspective, we shared 14% to 14.3% of sales. And that is mostly deleverage coming from SG&A as we complete many of our foundational elements of our transformation agenda and move to investments to enable growth as well as we operationalize the investments that we made to date and those go into one state. We also are managing ongoing wage pressures, which is assumed in the guidance. And we also will continue to support core traffic and experienced drivers.

Yes, Michael, I'll start with some of the numbers and then turn it over to Kecia so she can give a little bit more flavor for where we are. So we had an incremental $55 million in 2022 related to our transformational strategic investments. We communicated $62 million incremental in 2023. As you think about 2024, we expect limited incremental investment as we complete the foundational elements of our transformational agenda. Think about Project SOAR, Digital Store and other IT projects.

Yes. So in regards to like where we are on the investments and where we are in the projects for our ERP upgrade or what we're internally calling as Project SOAR, just this week, we completed our Dallas DC. And we have plans to wrap up Greenwood and Fresno and open up our new MFC in Bolingbrook, which is a relocation of the existing FFC in Romeoville before peak this year. Part of the ERP upgrade, we're also transitioning our store systems and our merchandising systems. And we have those plans to be completed before the second half, again prior to peak.

Great. Well, thanks for the question. And yes, luxury, as I said, was one of our -- one of many initiatives last year to drive engagement. And we're really pleased with establishing that more firmly with some of our existing partners, including Chanel, but Dior, NATASHA DENONA, Pat McGrath. And so we see strong performance, and we're really pleased with how our guests are engaging in that part of the business.

Operator, can we have the last question, please?

Scott, congratulations. It's been great, and thanks for all the help over the years. This question is maybe for Dave or Kecia. Can you talk about the promotional environment that your guidance is under for 2024? Is it expected to sort of remain in maybe the first half and then abate or kind of preexist all year long and whether it was more from prestige? Are you concerned that there perhaps is a longer-term shift to mass or masstige from younger or more price-sensitive consumers?

So yes, just on the promotional environment, what -- I probably won't answer every one of your detailed questions because we're not going to break it out that way exactly. What I'll say more broadly is we're not expecting that the promotional environment is going to significantly intensify or become irrational. We are in a competitive environment. That's for sure. And we are focused on ensuring that we're delivering on our leadership position.

Sure. Adrienne, on your question with regards to expectation around ASP, what I would share is that we are planning for a more normalized pricing environment in 2024.

Great. Thank you, and thanks, everyone, for joining today. I'd like to close by thanking our 55,000 associates for delivering a strong 2023. Together, I know we will continue to unleash the unique power of beauty and keep moving our business forward in exciting ways. I'm optimistic about the future of Ulta Beauty and confident we will continue to create significant shareholder value.