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Ulta Beauty (ULTA -1.86%)Q2 2022 Earnings CallAug 25, 2022, 4:30 p.m. ETContents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks: OperatorGood afternoon, and welcome to Ulta Beauty’s convention name to debate outcomes for the second quarter of fiscal 2022. [Operator instructions] And as a reminder, this convention name is being recorded. And it’s now my pleasure to introduce Ms. Kiley Rawlins, vp of investor relations. Thank you, Ms. Rawlins, please proceed.Kiley Rawlins — Vice President, Investor Relations Thanks, John. Good afternoon, everybody, and thanks for becoming a member of us right now for our dialogue of Ulta Beauty’s outcomes for the second quarter of fiscal 2022. Hosting our name are Dave Kimbell, chief govt officer; and Scott Settersten, chief monetary officer; Kecia Steelman, chief working officer, will be part of us for the Q&A session. This afternoon, we introduced our monetary outcomes for the second quarter. A duplicate of the press launch is on the market within the Investor Relations part of our web site. Before we start, I’d prefer to remind you that the statements contained on this convention name, which aren’t historic information, could also be deemed to represent forward-looking statements throughout the that means of the Private Securities Litigation Reform Act of 1995. Actual future outcomes might differ materially from these projected in such statements resulting from a lot of dangers and uncertainties, all of that are described within the firm’s filings with the SEC. We warning you to not place undue reliance on these forward-looking statements, which communicate solely as of right now, August 25, 2022.We haven’t any obligation to replace or revise our forward-looking statements, besides as required by legislation, and you shouldn’t count on to take action. We’ll start this afternoon with ready remarks from Dave and Scott. Following our ready feedback, we’ll open the decision for questions. [Operator instructions] As at all times, the IR workforce will likely be obtainable for any follow-up questions after the decision. Now I’ll flip the decision over to Dave. Dave? Dave Kimbell — President Thank you, Kiley, and good afternoon. We respect your continued curiosity in Ulta Beauty. The Ulta Beauty workforce delivered excellent efficiency once more this quarter. For the second quarter, web gross sales elevated 16.8% to $2.3 billion. Operating revenue elevated to 17% of gross sales and diluted EPS elevated 25% to $5.70 per share. We proceed to be more than happy with the broad-based energy of our enterprise. For the quarter, all main classes exceeded our expectations, and we elevated our market share in status magnificence versus final yr based mostly on point-of-sale knowledge from the NPD Group. Sales in shops and digital channels additionally elevated — exceeded our expectations with each channels delivering stable comp development within the quarter. And we noticed wholesome gross sales acquire from members throughout all earnings demographics. Consumer engagement with magnificence stays sturdy, reflecting a deep emotional reference to the class, in addition to the continued significance of self-care and wellness. This wholesome engagement paired with stable operational execution from our groups, fueled our outcomes. Before we speak in regards to the outcomes, I need to acknowledge and thank our Ulta Beauty associates. Their collaborative dedication to serving our company, caring for one another and executing our plans with absolute excellence has enabled us to proceed navigating a dynamic setting and ship excellent outcomes. The energy in our enterprise, regardless of a turbulent setting displays the facility of our differentiated mannequin and our means to capitalize on the energy of the general magnificence class. Our distinctive enduring worth proposition continues to drive our success and our strategic framework anchors our focus as we glance ahead. This afternoon, I need to share an replace on our strategic progress. Our first strategic precedence is to drive disruptive development by way of an expanded definition of all issues magnificence. We interact into mild magnificence fans with a curated differentiated assortment centered on inclusivity and main developments, and this strategy continues to ship outcomes. From a class perspective, perfume and tub, skincare, haircare and make-up all exceeded expectations, delivering double-digit comp development in opposition to the second quarter final yr. We are inspired that the overwhelming majority of our comparable gross sales development was fueled by development from each core and newness with a modest profit from not too long ago executed value will increase. As we now have mentioned on earlier calls, we now have acquired a lot of value will increase from our model companions within the first half of this yr. Given ongoing price pressures going through our model companions, we count on to obtain extra will increase as we transfer all through the remainder of the yr. Turning to the efficiency of our core classes, beginning with our largest class, make-up. Compared to the second quarter of 2021, each status and mass make-up delivered double-digit comp development. As shoppers participated in additional in-person actions, traveled and more and more used make-up as a type of self-expression. Guests proceed to interact with new manufacturers like Fenty Beauty, R.E.M. Beauty and not too long ago launched About-Face by Halsey, whereas new merchandise from established manufacturers like Clinique, NYX, e.l.f., and ColourPop additionally contributed to the gross sales development. In addition, the continuing enlargement of MAC and Chanel Beauté into extra shops contributed to the sturdy status efficiency. Haircare, our second largest class, delivered one other quarter of double-digit development pushed by newness and powerful engagement in our semiannual Gorgeous Hair Event, a strategic occasion designed to accumulate new company, improve current member spend and drive salon penetration. New manufacturers like OLAPLEX, in addition to new product launches from Way and Living Proof, contributed to the class development within the quarter and the preliminary launch of Dyson’s newest Airwrap styling instrument with new options and attachment bought out shortly. Guests proceed to interact with core skilled manufacturers like Redken and Pureology, and our salon backbar takeovers drove sturdy development with Joico and not too long ago launched Andrew Fitzsimons. Skincare was considered one of our best-performing classes this quarter with each status and mass delivering double-digit comp development, pushed by new manufacturers and product innovation. Newness continued to enchantment to company with newer manufacturers, similar to Drunk Elephant, Fresh, Supergoop!, and not too long ago launched Vacation, in addition to new merchandise from Peach & Lily, OSEA, and Hero cosmetics, contributing to class development through the quarter. And Skinfatuation, our month-to-month skincare program, which works to demystify skincare with academic content material and centered themes, delivered good development for established manufacturers like Tula, Sun Bum, COOLA, and Good Molecules. The perfume class once more delivered sturdy double-digit comp development on prime of extraordinary development final yr. Compelling newness and powerful engagement with our Mother’s Day and Father’s Day occasions contributed to this efficiency. Recently launched Ulta Beauty unique Billie Eilish and Charli D’Amelio Born Dreamer, in addition to new scents from Gucci, YSL, and Dior, drove significant gross sales development. While our month-to-month Fragrance Crush program drove larger engagement with established manufacturers like Valentino and Armani. In addition, in core class development, we’re investing in three cross-category platforms to extend visitor engagement and broaden our market share. We know shoppers search magnificence manufacturers which might be good for the world and align with their values. And Conscious Beauty at Ulta Beauty continues to resonate with company because it addresses these pursuits. At the top of the second quarter, 290 manufacturers provided licensed merchandise in a minimum of one Conscious Beauty pillar, together with newly licensed manufacturers, Born Dreamer, About-Face, SE, and Good Light. To improve the visibility of Conscious Beauty and to make it simpler for company to establish merchandise that align with what’s essential to them, this quarter we refreshed the touchdown web page on ulta.com and added digital badging to all product pages. Now company can shortly establish licensed manufacturers and merchandise throughout our Conscious Beauty pillars, whether or not purchasing in shops or on our digital channels. Moving to our efforts to broaden and assist our assortment of BIPOC manufacturers, we’re dedicated to diversifying our assortments, so all company can see themselves mirrored at Ulta Beauty. In addition to persevering with to broaden our portfolio of BIPOC manufacturers and improve our advertising and marketing assist for these manufacturers, we’re centered on driving structural change throughout the magnificence trade. As the chief in magnificence, we imagine we now have a duty to take tangible steps to create foundational trade change by way of the funding of capital and sources. As such, subsequent month, we’ll formally launch our MUSE Accelerator program centered on early stage BIPOC manufacturers. Through this program, we’ll present eight various leaders, founders and entrepreneurs with sources, mentorship and assist to arrange them for retail readiness. I sit up for sharing extra about our inaugural class on future calls. Finally, we proceed to boost our wellness store to assist company as they prioritize self-care. This quarter, we expanded the store to extra shops and now roughly 750 shops provide company an elevated cohesive presentation of wellness merchandise to assist them simply navigate their private journey. Today, we provide a curated omni assortment of greater than 140 manufacturers, together with newly launched manufacturers, Womeness and Olay, and greater than 700 SKUs to assist our company really feel their greatest inside and outside. Moving now to our ongoing efforts to evolve the omnichannel expertise by way of a linked bodily and digital ecosystem, all in your world. Store visitors developments have been sturdy once more this quarter as company return to in-store purchasing and providers. While retailer visitors remained barely under pre-pandemic ranges, the pattern continues to enhance. Our providers enterprise delivered one other quarter of double-digit comp development, primarily resulting from elevated capability and new service choices. In addition, we carried out modest value will increase for core providers in May. Notably, member engagement with providers accelerated from the primary quarter, reflecting our ongoing efforts to amplify our salon providers and encourage first-time trial by way of our Member Love affords. As company return to shops, they’re additionally partaking in our digital channels. After lapping the super digital acceleration prompted by COVID, our e-commerce channel returned to extra normalized development, delivering mid-single-digit comp development for the quarter. We proceed to incentivize company to attempt various supply choices for e-commerce orders whereas additionally investing to enhance the visitor expertise. During the quarter, BOPIS elevated 32% to 25% of e-commerce gross sales, in comparison with 20% final yr. Importantly, we noticed a big enchancment in visitor satisfaction with the BOPIS expertise, reflecting the engagement and focus of our retailer associates. While restricted to 12 markets, company are additionally rising their use of our same-day supply choices, and we proceed to be happy with the AOV and profitability metrics of this success functionality. Between BOPIS, same-day supply and ship from retailer, greater than a 3rd of our digital orders have been fulfilled by shops. We proceed to broaden and improve our visitor expertise throughout all channels. In our digital channels, our groups proceed to ship a extra seamless expertise by way of what we name our digital retailer of the longer term. This quarter, we launched new, extra partaking merchandise on each ulta.com and our cell app. We are additionally bettering our bodily retailer expertise. Next month, we plan to introduce a brand new entrance of retailer presentation that may enable us to boost our means to assist extra editorial storytelling round newness, occasions and developments. And later this fall, we’ll introduce a brand new structure in choose shops to raise key development classes, unify the presentation of skincare and make-up, and improve the shop — the providers expertise. Longer time period, we’re exploring modern methods to attach our digital and bodily shops and ship forward-thinking visitor experiences. This quarter, we formally launched Prisma Ventures, a $20 million fund centered on investing in early stage start-ups and rising tech entrepreneurs who will form the way forward for retail and wonder. To date, the fund has partnered and invested in quite a lot of start-ups to allow larger personalization, together with Haut.AI, Adeptmind, Revea, and ReStyle. And we not too long ago introduced an funding in LUUM, a start-up that gives robotic lash extensions, opening new intersections between magnificence and robotics. Finally, we proceed to boost and broaden our partnership with Target. During the second quarter, we opened 59 Ulta Beauty at Target retailers, ending the quarter with 186 areas. During the quarter, we refreshed the assortment, increasing the perfume providing, launched two Black-owned manufacturers, Sunday to Sunday and Melanin Haircare, and introduce newness from current model companions, together with Benefit, Morphe, and Tula. As we anniversary the preliminary launch of this modern partnership and mirror on the progress made, we proceed to be happy with total visitor engagement and we’re inspired by the conduct of recent members who enter our ecosystem by way of this new channel. The basis of our partnership is robust, and we’re centered on driving additional loyalty conversion to unlock even larger worth as we scale. Now let me offer you an replace on a few of the steps we’re taking to drive love, loyalty, and emotional reference to Ulta Beauty. We have been on a multiyear journey to create a stronger, extra emotional reference to our company and produce our model function to life. Beauty is inherently inclusive. Every particular person is exclusive, and wonder will help have fun this uniqueness. As the chief within the class, we need to transfer magnificence ahead, making it a drive for good for all and galvanizing everybody to find their very own potentialities by way of the facility of magnificence. Building on our earlier model fairness work, we’re launching a brand new model fairness marketing campaign, magnificence and to have fun the expansive nature of magnificence and empower folks to embrace their infinite potentialities. The marketing campaign will launch with content material throughout paid, owned and earned media with distinctive parts that we imagine will immediate new culturally related conversations about magnificence and encourage larger inclusivity and positivity in our trade and the world. This marketing campaign has carried out terribly nicely in shopper testing, and I’m pleased with the efforts Ulta Beauty is making to alter the best way the world sees magnificence. Turning to our loyalty program. We ended the quarter with 38.2 million energetic members in our Ultimate Rewards loyalty program, 10% above the second quarter final yr. In addition to changing new members and reengaging lapsed members, we’re sustaining wholesome retention charges, particularly amongst our Diamond and Platinum members. Overall spend per member elevated once more this quarter, pushed by each elevated journey frequency and better common ticket. And our channel metrics stay regular with in-store-only members totaling 76% of members and omnichannel-only members totaling 17%. Over the final a number of years, we now have expanded our CRM capabilities and developed stronger life cycle advertising and marketing methods that may enable us to drive loyal purchasing behaviors extra exactly by way of promotional exercise. Today, we’re leveraging predictive decisioning to focus on strategic member segments with personalised communications and affords to extend frequency and drive larger lifetime worth. We are seeing encouraging engagement in these affords, leading to will increase in spend per member. As promotional depth will increase in magnificence and throughout retail, these capabilities allow us to rely much less on mass market promotions and leverage extra focused and worthwhile affords. In May, we launched UB Media, our new retail media community and the response from model companions has been super. Our model companions are excited in regards to the alternative to leverage the facility of our unique first-party knowledge to rework the best way they join with magnificence fans. Our workforce is ramping up nicely, and we stay excited in regards to the alternative to unlock a brand new earnings stream and drive gross sales as we allow our model companions to interact shoppers extra successfully. In closing, I’m extremely happy with the energy we now have seen throughout our enterprise up to now this yr. Our operational and monetary efficiency is a testomony to the facility of our values-based tradition, our enterprise mannequin and the essential position magnificence performs in our prospects’ lives. We acknowledge magnificence just isn’t resistant to macroeconomic challenges, however the class’s deep emotional connection has traditionally resulted in stronger resilience in comparison with different discretionary classes. And as our outcomes illustrate, we imagine that is much more true right now given the significance of self-care and wellness. As we glance to the longer term, we all know there will likely be challenges, notably with the wide-ranging impression of rising inflation, each on our enterprise and our company. But we stay assured within the resilience of the sweetness class and our means to steer the sweetness class and drive long-term worthwhile development. And now I’ll flip the decision over to Scott for a dialogue of the monetary outcomes. Scott?Scott Settersten — Chief Financial Officer Thanks, Dave, and good afternoon, everybody. As Dave indicated, our second quarter outcomes have been higher than we anticipated. Strong gross sales development resulting from a number of components, together with the resilience of the sweetness class, stronger-than-expected gross sales development from shops, and the impression of recent manufacturers, drove better-than-expected efficiency in gross margin and SG&A leverage, leading to an working margin of 17%. These outcomes mirror the onerous work and dedication of our associates, and I need to thank all of our groups for staying centered on serving our company and managing our enterprise by way of this dynamic working setting. Now to the monetary outcomes, beginning with the earnings assertion. Net gross sales for the quarter elevated 16.8%, pushed by 14.4% development in comp gross sales, a $19 million improve in different income and powerful new retailer efficiency. Transactions for the quarter elevated 8.3%, primarily pushed by development from shops. Average ticket elevated 5.6%, ensuing primarily from a rise in common promoting value. Average items per transaction have been down barely. The improve in common promoting value primarily displays the impression of product combine and retail value will increase executed this yr. We estimate that value will increase contributed about 300 foundation factors to the general comp. During the quarter, we opened seven new shops and relocated 4 shops. For the quarter, gross margin decreased 20 foundation factors to 40.4% of gross sales, in comparison with 40.6% final yr. Although we had much less complete promotional exercise through the quarter, total merchandise margin was decrease than final yr, primarily as a result of impression of brand name combine and lapping advantages from favorable stock reserve changes within the second quarter final yr. Gross margin was additionally negatively impacted by larger stock shrink, primarily resulting from elevated theft throughout the retail panorama, theft and arranged retail crime are rising, and we’re seeing comparable developments in our enterprise. We are working diligently to maintain our associates and company secure and to cut back the chance of impression by way of funding in new fixtures, extra affiliate coaching, modern expertise options and elevated staffing ranges. We are additionally working with and supporting retail trade organizations and the Buy Safe Coalition to handle alternatives on the legislative stage. These gross margin headwinds have been partially offset by leverage of mounted prices as a result of sturdy top-line development and a rise in different income. Double-digit development in provide chain prices endured into the second quarter, pushed by elevated freight prices and better wage charges in our distribution facilities. Strong top-line development enabled us to mitigate the gross margin impression this quarter however as gross sales development moderates, we proceed to count on that larger provide chain prices, together with gasoline prices, that are anticipated to stay above final yr, will likely be a bigger headwind to gross margin within the second half of the yr. SG&A elevated 15.1% to $534.5 million. As a share of gross sales, SG&A decreased 30 foundation factors to 23.3%, in comparison with 23.6% final yr. Lower advertising and marketing expense and leverage of retailer payroll and advantages resulting from larger gross sales have been partially offset by the leverage of company overhead primarily reflecting strategic investments in addition to larger incentive compensation, reflecting our sturdy efficiency. Year thus far by way of the second quarter, we now have invested a few third of our plan in assist of our strategic initiatives. As we mentioned final quarter, this yr, we’re offsetting the incremental advertising and marketing expense of the digital campaigns we handle for our model companions with the seller earnings that may be a direct reimbursement for these particular prices inside complete advertising and marketing expense. Similar to the primary quarter, this resulted in about 70 foundation factors of favorable impression to SG&A within the second quarter. Operating earnings elevated 17.8% to $391.4 million, in comparison with $332.3 million final yr. As a share of gross sales, working margin elevated 10 foundation factors to 17%, in comparison with 16.9% final yr. Diluted GAAP earnings per share elevated 25% to $5.70 per share, in comparison with $4.56 per share final yr. Moving to the steadiness sheet and money circulation assertion. Total stock elevated 15.4% to $1.67 billion, in comparison with $1.44 billion final yr. In addition to the impression of 29 extra shops, the rise displays stock purchases to assist key model launches and will increase in stock prices in addition to ongoing efforts to keep up sturdy in-stocks of key objects to assist anticipated demand. Capital expenditures have been $49.4 million for the quarter, in comparison with $22.7 million final yr. The improve in capital expenditures was primarily associated to investments in new, transformed and relocated shops, provide chain investments and merchandising enhancements. Depreciation was $60.9 million, in comparison with $69 million final yr, primarily resulting from a shift of IT investments from capital to cloud expense. We ended the quarter with $434.2 million in money and money equivalents. During the quarter, we repurchased 798,000 shares at a value of $301.6 million. At the top of the second quarter, we had $1.6 billion remaining underneath our present $2 billion repurchase authorization. Turning now to our outlook. Reflecting our second quarter efficiency and gross sales developments we have skilled up to now in August, we’re rising our outlook for fiscal 2022. We now count on web gross sales to be between $9.65 billion and $9.75 billion, with comp gross sales development between 9.5% and 10.5%. Our up to date outlook displays year-to-date developments whereas persevering with to contemplate uncertainties that would impression the second half of the yr, notably through the vacation season. Embedded in our forecast is an expectation for mid-single-digit comp development within the second half, reflecting the chance of potential shifts in shopper spending resulting from inflationary pressures, the impression of elevated factors of distribution for status magnificence and the probability of a extra promotional vacation season. We now count on working margin for the yr will likely be between 14.6% and 14.8% of gross sales. We count on working margin will deleverage within the second half as gross sales development moderates and price pressures and deliberate investments have a larger impression. We count on gross margin enlargement for the yr with leverage of mounted prices and development in different income, partially offset by decrease merchandise margin, larger shrink and better provide chain prices. We proceed to count on SG&A expense will deleverage for the yr, pushed primarily by $60 million to $65 million of bills associated to our strategic priorities, in addition to larger wage charge development throughout the enterprise, partially offset by decrease advertising and marketing expense. In addition, we count on inflationary strain in working bills will proceed. These assumptions lead to up to date full yr steering for diluted EPS development between $20.70 and $21.20. One remaining replace. We now count on to spend between $350 million and $400 million in capex in fiscal 2022, together with roughly $195 million for provide chain and IT, $180 million for brand new shops, remodels and merchandise fixtures, and about $20 million for retailer upkeep and different. We count on depreciation for the yr will likely be round $250 million. In closing, we’re more than happy with our efficiency yr thus far. While we proceed to face uncertainties within the present macro setting, we’re centered on delivering nice visitor experiences and driving sustained worthwhile development. Longer time period, we imagine the sweetness class will proceed to be resilient, and we’re assured that we’re differentiated and confirmed mannequin and development technique, mixed with our excellent associates will proceed to place Ulta Beauty as the popular magnificence vacation spot. And now I’ll flip the decision again over to our operator to average the Q&A session. Questions & Answers:OperatorThank you. [Operator instructions] And our first query comes from the road of Rupesh Parikh with Oppenheimer. Please proceed along with your query.Rupesh Parikh — Oppenheimer and Company — Analyst Good afternoon. Thanks for taking my query. Also, congrats on a extremely sturdy quarter. So I assume I begin — I need to begin out with the patron. So I used to be curious should you guys are seeing any conduct adjustments of be aware and whether or not you are seeing any facet of the commerce down and even resistance to cost will increase? And then simply given some issues on the market about volatility and developments, I’m simply curious should you’re seeing extra volatility within the enterprise than what you have seen within the prior months.Dave Kimbell — President Hi, Rupesh. Thanks for the query. Yeah, the quick reply on commerce down is not any. We’re not experiencing that or seeing that presently, just like what we talked about final quarter. We’re seeing sturdy development throughout all facets of our enterprise. As I discussed, each class carried out in double digits, energy throughout channels, shops, e-comm providers. And as we have a look at earnings ranges of our company, we’re seeing wholesome development in any respect earnings ranges. So no actual indicators or indicators of commerce down throughout the market but. And once more, I believe that is a mirrored image of the significance that this class performs in our visitor lives, the rising connection that magnificence has, wellness, the will to precise them — our company to precise themselves to the world on this — because the world reopens. So the significance of this class is demonstrating itself. And so, up to now, we’re not seeing it, however we’re ready as we sit up for proceed to make any changes if and when that conduct begins to indicate up, as you realize, inside our mannequin, we’re uniquely ready to regulate. If any of that does present up with our mass to status providing, all value factors, all completely different classes. But as of now, we’re seeing sturdy development. As far as all through the quarter, the quarter began very sturdy. We did see a slight moderation towards the top of June and early July as you’ll have seen with different retailers, however the developments picked up towards the top of the quarter, and we’re happy with what we’re seeing up to now this quarter. So no massive issues or down developments is throughout any a part of our enterprise proper now.Rupesh Parikh — Oppenheimer and Company — Analyst Great. Thank you.OperatorAnd our subsequent query comes from the road of Omar Saad with Evercore ISI. Please proceed along with your query.Omar Saad — Evercore ISI — Analyst Thank you taking my query. So I simply need to affirm, a variety of retailers are saying they thought some deceleration starting round June. It does not sound such as you guys are seeing that. And then additionally on the profitability of the enterprise, gross margin feels like there’s a little bit little bit of strain there versus final yr, however final yr was so clear. It looks as if it is nonetheless — the promotional ranges are nonetheless nicely under pre-COVID. Is {that a} sustainable phenomenon in your opinion? Thanks.Dave Kimbell — President Let me simply — I’ll begin with the deceleration, and Scott can decide up on the gross margin and a few of the issues we’re seeing there. So once more, sure, we did — our quarter in complete was sturdy. We have been happy with the outcomes all through the quarter. There was a modest slowdown within the developments proper on the finish of June, early July as a lot of issues, each, I assume, inside retail and on the earth round us, we’re displaying up. But once more, nothing alarming on our enterprise. And we did see developments return to early within the quarter charges as we obtained to the top of July after which definitely, as I stated, into this quarter. So a modest impression. But once more, the class itself, the significance it performs in our visitor lives, allowed us to sort of trip by way of any macro disruption and short-term impacts that we noticed all through the quarter.Scott Settersten — Chief Financial Officer And so far as gross margin is worried, once more, we’re very proud of the outcomes that the enterprise is producing yr thus far. Our longer-term steering assumes gross margin goes to average considerably from what we noticed final yr, once more, once we began out with our longer-term algorithm. And once more, this yr, the gross sales efficiency has simply been extraordinary. So should you’re taking a look at it yr over yr, I’d say product combine has one thing to do with the variability, UB Media combine and the way we’re accounting for that within the geography and the P&L has one thing to do with that. As we glance out towards the rest of 2022, we have been clear about we count on the promotional setting might be going to get a little bit bit more durable, particularly what we have seen right here throughout the retail universe right here most not too long ago. So moderation as we glance to the longer term. It’s nonetheless a variety of nice levers we now have within the enterprise. When we speak about Project SOAR delivering advantages over the long run. Our steady enchancment in EFG efforts nonetheless with a variety of profit to generate for the corporate over the long run. So I believe working margin, we be ok with alternatives to proceed to leverage there, however we predict gross margin will definitely average as we glance forward.Omar Saad — Evercore ISI — Analyst Thanks. Well accomplished.OperatorThank you. And our subsequent query comes from the road of Dana Telsey with the Telsey Advisory Group. Please proceed along with your query.Dana Telsey — Telsey Advisory Group — Analyst Hi. Congratulations on the good efficiency. You had talked about the providers enterprise and the advance there. Can you speak a little bit bit about what you are seeing there? What that impression could possibly be? And final — after which subsequent, simply on the value will increase that you just had put in place. Where are we within the scale of value will increase by class? And how do you see it mixing out for the yr? Thank you.Kecia Steelman — Chief Store Operations Officer Thanks, Dana. I’ll begin after which flip it over to Scott. Our salon workforce delivered sturdy quarter development of double-digit comps through the quarter, and actually what we noticed with some energy in our hair coloring providers. We have energy throughout all geographies and areas, which was nice. And the gross sales have been actually pretty constant all through the quarter. What we like what we see is these partnerships with our backbar salon takeover occasion, as Dave was mentioning in his spoken notes that Joico, Andrew Fitzsimons, Kenra are examples of the place you may have a salon knowledgeable and actually interact with the patron to attempt a brand new model that they’ve by no means made tried earlier than. We’re additionally actually driving trial by way of our personalised affords. So we’re getting folks to come back in and take a look at our providers, which is admittedly essential. From a staffing perspective, we proceed to essentially spend money on our training, in our coaching for our stylists, notably specializing in textured hair gross sales. And then from a pricing perspective, Dave was mentioning, that is probably not taking part in into the comp. This is the primary time that we have elevated our value within the final three years. It was actually modest. So actually, it is by way of the expansion of the core enterprise and providers that is driving that comparable off. So I’m actually happy with how the visitor is refining popping out of COVID. Scott?Scott Settersten — Chief Financial Officer And value will increase so far as product is worried all through the channels. Again, the place a lot of will increase within the second quarter, barely larger than what we noticed within the first quarter. We estimate it is about 300 foundation factors to complete comp for the second quarter. Again, the variety of SKUs which have been impacted and the entire all impression to our assortment is larger than we anticipated early within the yr, and we count on there to be within the again half of the yr. We’ve already been alerted by a few of our vendor companions that there is some within the queue now, and we count on there to be extra as we get deeper into the yr. So we’ll proceed to replace quantitatively on how that impacts our enterprise and the way we’re fascinated about it possibly for 2023 once we get additional down the highway.Dana Telsey — Telsey Advisory Group — Analyst Thank you.OperatorAnd our subsequent query comes from the road of Mark Altschwager with Baird. Please proceed along with your query.Mark Altschwager — Robert W. Baird and Company — Analyst Good afternoon. Thank you for taking my query. With respect to the restoration you are seeing within the make-up class, what are your present views on whether or not we’re seeing with whether or not what we’re seeing is pent-up replenishment submit COVID versus maybe the early innings of a brand new innovation-driven cycle that would have some legs to it? And then larger image, simply based mostly on the developments you are seeing in your enterprise yr thus far and the projections for the yr, calling for low-teens gross sales development on the excessive finish, is the 5% to 7% three-year CAGR nonetheless the appropriate approach to be fascinated about the medium-term development outlook? Thank you.Dave Kimbell — President Great, Mark. Yeah, on make-up, yeah, we’re actually, actually happy and inspired with what we’re seeing as I discussed, double-digit development throughout mass and status. And you realize nicely. You’ve been following us for some time. That class has had its ups and downs and been struggling for a little bit bit. And so we’re actually happy with the outcomes, and we predict it is nicely rounded. There’s little doubt there’s some parts of possibly pent-up demand, though as we get additional into the reopening, we predict that is most likely a smaller and smaller a part of what’s driving the enterprise. What we do see occurring is simply sturdy innovation throughout each mass and status, actually good efficiency by new manufacturers that we introduced in, Fenty, R.E.M., new model About-Face, nice innovation. On the mass facet with NYX and ColourPop, and e.l.f., and others, but in addition on the status with Benefit, MAC, Clinique, and lots of others. So we’re seeing sturdy innovation that is actually connecting. And it is being fueled by some core developments that we predict are right here to remain for some time which might be driving engagement. And it is sort of an fascinating time inside make-up proper now that we’re seeing a mixture of very daring, playful appears to be like, sort of retro appears to be like, euphoria kind engagement pushed engagement which might be paying homage to a few of the issues we noticed again in 2016 which might be encouraging. But on the identical time, there’s an equally sturdy pattern round a clear look, glowy, glazed, which might be pushed by larger utilization of basis and highlighters, that are actually essential to the class and albeit, have been struggling for a little bit bit. So we’re happy with the innovation, the — as folks get out and need to specific themselves to the world and there are extra events that is driving extra utilization and there is some core underlying developments and innovation which might be supporting the class. So we’re optimistic in regards to the path forward, and we’ll proceed to be investing in our make-up enterprise and partnering with our manufacturers to drive this pattern for the foreseeable future. As far as our long-term targets, no — we’re not updating or altering that. So sure, the outlook that we shared with you final fall continues to be on our horizon, and so I’d maintain that as our long-term steering.Mark Altschwager — Robert W. Baird and Company — Analyst Thank you.OperatorOur subsequent query comes from the road of Krisztina Katai with Deutsche Bank. Please proceed along with your query.Krisztina Katai — Deutsche Bank — Analyst Hey, guys, good afternoon, and congratulations on a really good quarter. I simply needed to observe up on innovation, particularly on the skincare and haircare facet of the enterprise, which has been actually sturdy. Can you speak about a few of the areas of the enterprise that you’re seeing this newness that’s driving very sturdy sequential efficiency? How ought to we take into consideration a few of the product innovation and simply potential launch time for any massive launches which might be developing? And then secondly, should you may simply contact in your expectations and member development going ahead. You’re bringing again a variety of lab shoppers, are all of them again now? Is there nonetheless room there to get them again? And then possibly layer within the alternative that you just see from the goal partnership?Dave Kimbell — President OK. There’s a variety of nice stuff to speak about in that. Let me simply hit a couple of of that. First, on innovation. So sure, I talked about make-up, let’s hit on skincare and haircare. And it is that sort of highlights one of many facets of our enterprise that we’re actually enthusiastic about proper now could be the energy we’re seeing throughout all of our classes, double-digit development in each class, which, once more, I believe is a mirrored image of the energy of our mannequin and the facility of magnificence proper now. Within skincare, we’re seeing the sturdy development that is pushed by a mixture of recent behaviors that have been strengthened or developed throughout COVID round pores and skin well being and skincare, new manufacturers that we have launched that proceed to drive our enterprise, Drunk Elephant, Fresh, Supergoop!, Vacation, new innovation, nice innovation throughout moisturizers, serums, eye lotions, zits by manufacturers like Peach & Lily, OSEA, Hero, so many others, Clinique throughout your entire assortment. The developments that we’re seeing in skincare once more, we predict will assist — will maintain for some time. We proceed to see skinification that buyers, together with younger Gen Z shoppers, seen the significance of skincare and the way that lays the inspiration for his or her total pores and skin well being and their total look. There is a development in science or clinically backed or dermatological enhancements. So savvy shoppers are in search of these energetic elements, and that is been driving a variety of development. And there’s been a variety of innovation round simply core hydration as a recognition that that is wholesome pores and skin is pushed by that. So many issues coming collectively to drive that double-digit comp in each mass and status on skincare. Haircare, equally sturdy development we predict, in sturdy engagement, each by newness but in addition the execution of our applications like Gorgeous Hair Events. We benefited from a lot of new manufacturers, together with OLAPLEX. We’re seeing sturdy innovation throughout a lot of manufacturers like Way and Living Proof. I discussed Dyson as being a key to our total haircare and the innovation that they proceed to convey. So in that space, it is hair well being, very similar to pores and skin well being, continues to resonate and be essential and take a precedence. There’s a rising pattern round shine and the remedies and equipment that assist drive that. And in fact, texture has been a rising and more and more essential a part of the class and Ulta Beauty’s expression for the final couple of years, and that continues to be sturdy. So we’re seeing sturdy development, and we predict innovation, shopper behaviors, the connection and the significance of those classes very similar to make-up will assist maintain development as we glance into the longer term. On members, we’re actually happy, 10% development on members for the quarter, a brand new document excessive in our member efficiency pushed by visitor acquisition, reactivation, retention. Yes, we have reactivated a lot of members, however there are extra to get. And as excessive as retention is, there’s at all times some company which might be dropping out for a lot of causes. So there’s an at all times on exercise to reactivate members, and we now have fairly a couple of a big pool to proceed to activate. And there’s fairly a couple of magnificence fans as massive as we have grown, there’s an enormous pool of magnificence fans that aren’t but members of our program, and we predict they need to be and we’re going after them. One of the methods to do this, Kecia by way of our goal program and what we’re doing, so do you need to speak a little bit bit about that?Kecia Steelman — Chief Store Operations Officer Yeah. We’re actually happy with how our partnership is progressing and the longer term alternatives that actually present our company, model companions Target in Ulta Beauty. We’re leaning in. In truth, one of many nuances that we’re introducing this subsequent quarter is that we’re making a devoted area workforce that as we scale this partnership, they will be actually centered on coaching and training with an emphasis actually on loyalty and unlocking that loyalty alternative with not solely our current members, however with new members as they arrive into the Ulta Beauty at Target. So we’re excited as we proceed to broaden and develop, and we really feel Ulta Media and Target is one other approach to drive loyalty members into our ecosystem.Krisztina Katai — Deutsche Bank — Analyst Great. Thank you a lot.OperatorThank you. And the subsequent query comes from the road of Oliver Chen with Cowen. Please proceed along with your query.Oliver Chen — Cowen and Company — Analyst Hi. Great quarter. As we predict by way of the steering, what’s embedded with respect to pricing? And how would you communicate to that in opposition to the promotional wants that you will have fourth quarter is at all times a really promotional time and also you do a variety of nice personalization to drive promotions as nicely? And a follow-up on the brand new structure. There will be disruption and prospects do not essentially like new layouts typically and your stock wants to alter. So I might love your ideas on timing and execution danger and rationale. It sounds prefer it’s a prudent transfer to concentrate on classes, nevertheless it comes with completely different danger components. Thanks.Scott Settersten — Chief Financial Officer Yeah. So I’ll begin that one. So pricing, we stated about 300 foundation factors of value will increase mirrored in our 2Q outcomes. And all the value will increase that we’re conscious of by way of our vendor partnerships are embedded in our steering, proper, for the again half of the yr. So we really feel like we now have that framed up nicely. When we take into consideration, once more, the second quarter spectacular efficiency above our expectations. Our up to date steering contains, proper, the beat on the second quarter and the developments we have seen up to now, early levels of the third quarter. When I take into consideration the top-line developments, and once more, again half of the yr, we will be lapping some stronger efficiency final yr. We’ve referenced the aggressive setting. We count on that to be more durable as we get into the again half of the yr, the promotional setting, once more, you realize this nicely, Oliver, within the fourth quarter vacation. We compete with all of retail for reward giving, proper? So it is an entire completely completely different sort of sport for a comparatively quick time frame. So we count on it to be extra aggressive, extra promotional this yr than it was a yr in the past. You’ve heard us speak about distribution factors, extra factors of distribution on status magnificence coming as we get deeper into the yr. That’s one other consideration. Then on the working earnings facet, we referenced the strategic initiative bills sort of pushing again later into the yr. Some of that is resulting from simply shortages of manpower and delay typically in shifting a few of the {hardware} that we have to get a few of these tasks finalized. So once more, nothing to be overly involved with, however there are some delays as there may be in all components of the world proper now, it appears. So nothing uncommon there. And then a few of the prices, proper, the elevated price, inflationary pressures we’re seeing within the enterprise. It’s going to be heavier within the again half of the yr than it was the primary half of the yr. So all in, we predict we’re in a great place, and it is cheap — it is a cheap estimate of the information and what we count on for the second half of the yr.Kecia Steelman — Chief Store Operations Officer And for brand new retailer layouts, we’re actually centered on our new shops and our deliberate remodels going ahead. While we’re at all times making adjustments to bettering the in-store visitor expertise, it has been some time since we have actually made any important adjustments to the shop structure itself. Just as some extent of reference, our — right now, our merchandise is organized by value level with status make-up and skincare in a single facet of the shop and mass make-up and skincare on the opposite, with perfume within the center and haircare within the again and salon. Going ahead, we actually need to have a merchandise structure to enlarge our differentiated assortment and actually higher mirror how a visitor actually retailers with consolidated classes and intuitive adjacencies. So we will take mass and status make-up collectively within the entrance of the shop with actual clear model delineation after which additionally mirror the expansion of the class and that is essential to the company that transferring skincare upfront. So the mass and status skincare are going to be all collectively, once more with clear model delineation. So you can inform the distinction between mass and status, however will probably be organized collectively the best way the visitor retailers it. We’re additionally going to raise the entrance of the shop to assist extra editorial storytelling and newness and occasions and up to date developments. And then we will additionally create this new magnificence bar on the middle of the shop that is actually going to amplify the service expertise and spotlight the sweetness attainment that’s actually occurring on the gross sales ground. We’re actually excited to see this all come to life later but this fall.Oliver Chen — Cowen and Company — Analyst Thank you. Great job on the BIPOC initiatives as nicely. Best regards.Scott Settersten — Chief Financial Officer Thanks, Oliver.OperatorThank you. And our subsequent query comes from the road of Chris Horvers with J.P. Morgan. Please proceed along with your query.Chris Horvers — JPMorgan Chase and Company — Analyst Thanks. Good afternoon As a follow-up query, possibly for Scott, may you speak about how your ideas on the cadence of the again half modified? It looks as if your — you initially stated low single digits for the again half, it looks as if you are elevating the third quarter comp, however preserving 4Q intact, 3Q will get extra leverage. But on the identical time, it sounds such as you’re including a bit extra promotion within the fourth quarter and possibly extra investments doubtlessly hitting that fourth quarter as nicely?Scott Settersten — Chief Financial Officer Chris, you do not want me to reply the query. You already figured all of it out. So gold star for you right now. So I imply, that is it in essence. I imply, once more, we speak about steering and estimates on each considered one of these calls, folks have questions. I imply — and we actually do have a look at it proper as much as simply earlier than the decision. And so what we have seen within the final couple of weeks with gross sales energy. Again, Dave talked about this late July bounced again similar to the way it appeared early components of the quarter. And August, we have sort of continued on the identical pattern. So we’re taken up the third quarter, in essence, for the energy there. And we’re sort of being cautious with the fourth quarter for the explanations we have already said. We assume promotional setting goes to be larger. And so simply navigating that steadiness between the gross sales line and the margin funding it takes to shut that. So that is precisely proper.Chris Horvers — JPMorgan Chase and Company — Analyst Since I answered my very own — since I answered my very own query, possibly I can squeeze one in right here. I assume possibly are you able to speak about how the status class carried out in 2Q versus ’19? And was that acceleration relative to what you noticed within the first quarter?Dave Kimbell — President Yeah. The status class is up versus 2019. And so we’re inspired by that. You know that status has been — we talked about this had been the laggard, status make-up specifically. And now we’re seeing that efficiency come again. Compared to 2019, it might nonetheless be — have the sort of the bottom, I assume, efficiency, incremental efficiency over that as these different classes have been sturdy, like hair care and skincare actually all through the final couple of years. But sure, we’re happy with the efficiency. We’ve been engaged on this for some time. As you realize, the manufacturers have continued to convey innovation and the mixture of fixing shopper behaviors, opening up engagement and the innovation that I talked about. And I believe with — particularly inside Ulta Beauty, as we have — our retailers have accomplished only a super job evolving our assortment to verify we now have the manufacturers, the merchandise, the innovation that enable us to achieve share and lead within the class. So we’re happy with the general efficiency and glad to see status acting at a excessive stage.Chris Horvers — JPMorgan Chase and Company — Analyst Thanks. Best of luck.OperatorAnd the subsequent query comes from the road of Mark Astrachan with Stifel. Please proceed along with your query.Mark Astrachan — Stifel Financial Corp. — Analyst Yeah. Thanks, and good afternoon, everybody. Just a short query, I believe. curious in regards to the contribution to Ultimate Rewards members from the Target relationship at yr finish. Target talked about, I believe it was about $1.5 million visitor co-linking accounts from their loyalty program to yours. Are these incremental sort of any learnings that you’ve got gotten as these people have participated in your program as nicely? Thank you.Dave Kimbell — President We’ve talked about prior to now that there is been a big quantity which have linked their accounts, however we’ve not shared particular particulars on variety of new members and escape by that, and we’re not planning on doing that now. But as Kecia talked about, we’re simply — we’re actually inspired by what we’re seeing. We’re actually happy with the general partnership. The execution has been sturdy. The shopper response has been very optimistic. And the engagement in Ulta Beauty has actually been a optimistic side. So our focus going ahead, as I discussed within the remarks, is to proceed to drive that loyalty. That’s key to our success is to interact company in a brand new approach to contact Ulta Beauty and in the end get them linked to all facets. We’re inspired by what we’re seeing, and we’re centered on driving that nicely into the longer term.Kiley Rawlins — Vice President, Investor Relations Hey, John, I believe we now have time for yet one more query.OperatorOK. Thank you. And the subsequent query comes from the road of Kelly Crago with Citi. Please proceed along with your query.Kelly Crago — Citi — Analyst Hi there. Thanks for squeezing me in. I’m simply curious, we did discover that you just did kind of layer again in one other kind of storewide 20% off coupon promotion extra not too long ago. And I’m simply attempting to grasp that. I do know you pulled away from it throughout 2021 simply because the enterprise was so sturdy and promotions throughout the board are low. But I’m simply curious a few of the feedback you are saying about again half of the yr, whether or not or not you are kind of seeing that tick and that is a response to an uptick in promotions throughout magnificence. So simply curious any ideas on that and if we should always sort of count on that to be layered into your promotional technique going ahead? And then secondly, on the identical line of pondering, simply curious with the promotional setting in some attire classes and another classes on the market, simply questioning if prior to now, you have needed to kind of step up promotions, even when the sweetness class has been sturdy. Have you needed to get extra promotional through the vacation interval prior to now? Just curious in your ideas there. Thanks.Dave Kimbell — President Great. I’m actually glad you requested, Kelly. I do need to make clear, I do know there’s been some feedback a few 20% off storewide buyer base large. That just isn’t — we now have not executed that. We have not all yr executed that. And that — going again in historical past, we — that was a set off that we used continuously. And then pulling that out is core to our technique of being extra purposeful in how we’re connecting with our company. What you’ll have seen is extra focused. I discussed how we have been — you realize we have been on this journey of investing in our personalization and our CRM capabilities. So we use quite a lot of affords, together with 20% off but in addition factors affords or newness affords or different broad communication to pinpoint and goal subgroups inside our usually smaller subgroups based mostly on a selected conduct that we need to incentivize. One instance could be if it is a Diamond member that hasn’t shopped with us all yr for a number of months, that visitor might get a 20% off coupon, nevertheless it’s solely a small subset of teams. And we take a look at and be taught, and we drive, and we perceive the profitability and return of doing that. So any 20% off has not been. There was a proposal simply — if a few of you noticed this week that got here out that was 20% off, that may be a comp provide and isn’t storewide. It is — we now have a method inside our mass facet of the enterprise that’s — as you realize, mass tends to be a bit extra promotional. So if any of you noticed a proposal this week that was 20% off, that was not storewide that was centered on our non-prestige facet of our enterprise, and we have been doing that exact provide for a few years presently of the yr. So that is a comp occasion. So no incremental affords at this level. Now having stated that to your second level about promotional depth going ahead. And holidays, Scott has talked about this as nicely. We are seeing promotional depth. That’s clearly no shock to any of you on the decision, you are seeing it — you talked about Kelly attire, it is occurring simply throughout retail proper now. We proceed to be centered. And within the second quarter, we’re capable of lower our promotional depth. We have not layered in any massive applications like I discussed. But as we glance ahead, notably going into the vacation, as Scott talked about, the aggressive set expands in reward giving to essentially all attainable presents, together with attire. So we will watch that. We are extra promotional within the fourth quarter within the vacation traditionally. We — and we see that as a strategic transfer to be aggressive and to verify we’re delivering each on the gifting and the gaming facet of our enterprise. So we’re watching that rigorously. And Scott talked about, that is sort of integrated in our steering going ahead. OK. So with that, a terrific query, and thanks, all, once more to your curiosity, and thanks for becoming a member of us right now. I’ll wrap up right here. And I need to wrap up by once more thanking your entire Ulta Beauty workforce for his or her passionate dedication to delivering on our mission, imaginative and prescient, and values day-after-day. Our sturdy efficiency is the direct results of our retailer, DC, and company associates working collectively as one unified Ulta Beauty workforce to deal with our company and to deal with one another whereas driving our enterprise ahead. So we sit up for chatting with all of you once more in early December once we report our third quarter outcomes. Thanks once more for becoming a member of, and I hope you all have a terrific night.Operator[Operator signoff] Duration: 0 minutesCall members:Kiley Rawlins — Vice President, Investor RelationsDave Kimbell — PresidentScott Settersten — Chief Financial OfficerRupesh Parikh — Oppenheimer and Company — AnalystOmar Saad — Evercore ISI — AnalystDana Telsey — Telsey Advisory Group — AnalystKecia Steelman — Chief Store Operations OfficerMark Altschwager — Robert W. Baird and Company — AnalystKrisztina Katai — Deutsche Bank — AnalystOliver Chen — Cowen and Company — AnalystChris Horvers — JPMorgan Chase and Company — AnalystMark Astrachan — Stifel Financial Corp. — AnalystKelly Crago — Citi — Analyst
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