2023-12-04 12:42:10 ET
Call End:
Ulta Beauty, Inc. (ULTA)
Raymond James 2023 TMT and Consumer Conference
December 04, 2023 10:55 AM ET
Company Participants
Kecia Steelman - President and Chief Operating Officer
Conference Call Participants
Olivia Tong - Raymond James
Presentation
Olivia Tong
Thank you everybody for being here. I'm Olivia Tong, I cover beauty, personal care, and household products for Raymond James. And it's my pleasure to welcome Ulta Beauty and Kecia Steelman, President and COO. Ulta just reported a strong quarter and raised the full year outlook with the holiday season off to a strong start. So thank you, Kecia for joining us. Really appreciate it.
Kecia Steelman
Absolutely. Thank you so much for having myself and Ulta Beauty here with you today.
Question-and-Answer Session
Q - Olivia Tong
Thank you. Thank you. So let's start off first with holidays as we're in a crucial period right now, and Black Friday was strong. So can you bring us up to date, on the in-store activity since Black Friday? Any surprises one way or the other, cadence of promotions? And then, well, I know we shouldn't read too much into one -- the first weekend of the holiday, but just a little bit of update and how you're thinking about the season? Thanks.
Kecia Steelman
Yes. Absolutely. At our last week's earning call Dave shared with everyone that we were off to a good start. And I couldn't be any prouder of our teams, because we're executing at a very high level across the entire organization. This year is really going to be an interesting holiday, because there's 31 days between Thanksgiving to Christmas, and then there's a full weekend going into Christmas, because Christmas falls on a Monday this year. So there's plenty of room for the procrastinators out there to come in late into the season.
We do think that what we're hearing from our insights is that, beauty is still the top of a lot of people's lists, so we're excited about that. We feel like we're positioned very well from an inventory perspective, a great array of assortment of goods. The fact that we are in a category that has mass to prestige to luxury positions us really well. Couple of things that we have in our [indiscernible] this year that we did not have last year are, we've got our new POS system across the entire fleet. So what that enables us to do is be able to have mobile POS in all locations, so it'll help us line bust, also be able to - if somebody wants to come in and buy a gift card, they're not going to have to stand in line. We can take care of them. We're really focused on gift cards in the month of December too, because it's the gift that keeps on giving in January for sure.
It also will enable us to provide store to door at all of our fixed registers. So what that means is, if a guest is coming in, they're been -- they couldn't find an item in store that's on their Christmas shopping list, we will be able to very quickly place the order right at the registers, charge them right then if it's in the DCs, and ship it to their home free of charge. That's a tool that we did not have last year for us during the holiday season.
Couple other things I’ll just call out, we've got 400 ship from store locations this year versus a 115 last year. And then we also have same day delivery. So if you're still wanting to do an e-comm shopping experience, but you kind of ran the clock out a little longer, you'll still be able to purchase at Ulta Beauty and have it delivered same day. We have that across the fleet this year in all stores. So we feel great about the holiday season. We're positioned and it's going to be unpredictable, but I guess that's the world of retail that we're in, and we're ready to go.
Olivia Tong
Well, the stores look great. So I’m really looking forward to seeing more. Obviously, this brings us to margins, right? Which has been a big focus for investors, and you've been very clear on your expectations of returning to the 14% to 15% operating margin long term. Obviously, lots of investments in 2023 that are continuing into 2024. You mentioned several of them. Where do you think you stand after that? And the main drivers of margin from there, are they related to promotional levels? Or are there other larger investment projects that you think, you need to potentially tap into?
Kecia Steelman
Yes. We're very confident in what we've shared with The Street that we can deliver between a 3% to 5% comp and a 14% to 15% operating margin. That's really -- those numbers are reflected due to the maturation and the optimization within our business model that we're being able to see sustained. Right now, we're in a very heavy investment cycle around our foundational systems. We're going to be cycling through that in mid-2024. So if you think about, we've totally invested in our ERP platform, we're investing in our supply chain, we've invested in our digital store of the future, so our guest facing and our back facing architecture on our e-comm site, and our POS that I just mentioned, that investment is now wrapped up. So we feel that as we're finalizing those investments and we can start to pivot more on the investment cycle to more growth facing and growth initiatives in the future and still remain in that 4% to 5% of sales investment in CapEx that will be able to deliver that 14% to 15% operating margin, while still driving capabilities, increasing our market share, and driving long-term profitable growth for the organization. So we're very confident in the 14% to 15%.
Olivia Tong
Great. You guys also last week sounded quite confident in achieving that long-term algo. It applies to fiscal 2024, which is great to hear. So what's your overall view on the health of the consumer right now, the beauty consumer specifically? Our sense is, they remain very connected to the category, but are feeling a little bit more stretched. So do you have to bring more value to the consumer? And if so, what impact do you think that that might have on margins?
Kecia Steelman
Well, what's great about the business that we're in of beauty is that, the consumer, while they're maybe being very thoughtful with their wallet and where they're spending, they're still spending it on themselves. So that's great for us to see. We feel like the overall health of the consumer, again, really being focused on spending on themselves and taking care of themselves, we see that sticking. We have 42.2 million loyalty members in our platform, and we are able to leverage and have -- see exactly what they are purchasing on a consistent basis. We also every single month survey about 10,000 beauty enthusiasts to get real-time data that help provide us insights and information that we need to leverage in our CRM capabilities. So that enables us to in real time adjust to the market conditions and the needs to continue to drive share for Ulta Beauty.
The other thing that we're really focused on is, just continuing to look at and have our merchant team really look at what's the trend and what's selling and really leaning into those trends. I would say that the partnership that we have between the merchant organization and the stores and the marketing teams with the CRM capabilities, we're really able to very quickly respond to what the guest is requesting and what's really driving the business. So we feel overall pretty good about the health of the beauty consumer in today's environment.
Olivia Tong
Great. So beauty, obviously, has been going through a rapid period of growth in recent years. There was higher demand and a lot of newness post-COVID. Social media has obviously contributed as well, but now we're seeing some slowing in the pace of growth. So how much of the moderation would you attribute to the beauty category versus the macros or any other external factors? And what do you think about the next 12 to 24 months with respect to the category?
Kecia Steelman
Well, beauty has shown that it's pretty resilient and it has a long-term history of growth. So if you just take a quick step back before the pandemic, so pre-pandemic, the 15 years from 2005 to 2019, the beauty category consistently had between 2% to 5% growth. With the exception of a couple of outline years, so 2008 and 2009, it was negative low single digits, and then in 2020, it was negative 6%. And then you bring yourselves to 2021 and 2022. Just unprecedented growth, double digit growth in beauty as a whole. So the question is, what of those drivers in those strong years are sustainable and those that have staying power and there's a difference.
So there's three that we saw that we felt had maybe more of that short-term increase during that timeframe. One was inflation, so the amount of price changes that we saw was definitely driving some of the growth. The other was really the focus on regimens. And the people spending a lot more time on themselves and really taking time, while they were working from home to really build new processes in place. And then the third is, people were leaving their home. Finally they were getting masks off and you could see that people were going out to activities so the makeup category was really starting to accelerate at that time. We think that's normalized. People have kept their masks off and we don't see that necessarily having staying power. But the beauty regimens and the focus on wellness and health care, we definitely see that continuing to stick and it has staying power.
We also would say that the social media, you mentioned earlier social media playing into it, the trends that we're seeing and that everybody's got to go after the newest, hottest, greatest thing. We see that continuing to stay in play for us for our future growth drivers. And then the last category I would say is this new demographic that's coming in. So we talk a lot about Gen Alpha. Younger and younger people are wanting to get into the world of beauty and makeup and skincare. And what's great for Ulta Beauty is, we're really well positioned because we have focused on clean and conscious beauty and we like getting the individual coming in shopping with us at a younger age, but brands like Bubble that are clean, it's fun. It's categories that we see that continuing to have some legs.
So now you pivot to where we are today. So if you look at our fiscal year today, our prestige cosmetics is running up double digits. Mass is up mid-single digits. So the category is still really, really strong. And that plays very well for us again because we participate across all categories. If you switch just a little bit to what does that mean from an operating model, we've said our traffic still remains really high, so traffic is coming through really consistently, but the average ticket is down and if you look at it, it's more normalized to where our levels were in 2019. So that to me is a sign that I think there was a lot of trip consolidation that was happening in 2021 and 2022. But we're staying really close to that on the [UBTs] (ph).
So I would say, as a whole, we feel very confident that we can continue to drive the business and that there's a lot of levers that have that staying power that will continue to provide us future growth in many more years to come.
Olivia Tong
That's great. Do you think [Ticken and UBT] (ph) have now stabilized more or less?
Kecia Steelman
Yes, I do think that, like I said, UBT is more in line to what we saw in 2019. But the great news is that, the traffic is still really strong, so people are still coming through that threshold and coming into Ulta Beauty to spend their dollars.
Olivia Tong
That's great. Sounds like it's one gift for whomever and then one gift for yourself as well, right?
Kecia Steelman
Absolutely. We're all about that for sure.
Olivia Tong
Hopefully that means a good holiday. Actually, one question about holiday. Typically when it's -- do you see a lot of variation as the period progresses? I know this year in particular, we have the longest period between Thanksgiving and Christmas. And obviously, that last weekend is very material. Do you typically see, if it starts off well, that it stays the course? Or can you sometimes see quite a valley in the middle and then it sort of normalizes after that?
Kecia Steelman
Well, that's the billion dollar question. If I had the crystal ball, I would be able to share that with you. But I would say that holidays are always unpredictable. But what we are well positioned for is that, we have got -- we're operating very well, we've got great in stocks, and we've got a wide range of product and price lines to take care of the guest needs. So I think it's going to be completely unpredictable, but I would say I've been in retail 30 years and every holiday has been unpredictable.
Olivia Tong
Got it. You touched on this just briefly, but you continue to gain share in all categories in mass. But prestige has been more limited to just skincare and fragrance of late. Makeup and hair have been a little bit more choppy. Right now you're lapping some tough comps with a couple of brands in prestige, but do you expect market share to grow in all of prestige once you lap that? And how would you characterize your competition in dealing with the same issues with respect to a couple of brands that were really hot last year that you're having to lap?
Kecia Steelman
Yes, well I think as you look at share, especially in the short term, there can be share variations and there's a few drivers for that. One of them is the promotional cadence. If you've got a retailer out there that's specifically being heavy on their promotions, they can take share during that period of time. You mentioned brand launches. Brand launches definitely impact the ability for someone to take share. We've been on the winning side of that and we've had the opportunity side of that too at the same time. And then the third is really points of distribution. And if you look at prestige as a whole, there are many more points of distribution in the thousands this year than there have been in years prior.
Specifically looking at skin care and fragrance, those are categories that we've continued to take market share on more recently. And part of that is because we've under-indexed in those categories as a whole. So we've got the opportunity to continue to drive share. If you look at makeup and hair care, what you called out, we already own a tremendous amount of share in that space today. And we are overlapping some very large launches. Even though we had newness this year, it wasn't enough to really offset the previous launches that we had with Fenty and with OLAPLEX. So that's something that we continually look at.
We are about continuing to drive profitable growth in market share for Ulta Beauty. We will not ever just step back and concede. And some of the things that we've put in place are we have the ability with improved CRM capabilities to target market. So we're not just going to go blast discounts across the board to drive the guests into our store. We're going to be very thoughtful in our marketing dollars and making sure that we're being really prescriptive and leveraging that personalized experience to get them into the store. So I feel very confident that we can continue to drive long-term profitable growth and driving share at the same time in the future for Ulta Beauty.
Olivia Tong
Great. In terms of some of the investments, I want to touch on that a little bit, because gross margin obviously benefited materially in recent years with the promotion [indiscernible], fixed cost leverage, operating margins are now normalizing a bit. So as you think about the next couple of years, what gains do you think you've made that can be held versus those that were a little bit more of a temporary benefit that are now expected to return towards normal?
Kecia Steelman
Well I think it's almost best for me to just take a quick step back and look at 2019 to 2022 and during that period of time we were able to improve our operating margin by about 400 basis points. Now, there's a piece of that that was on top line sales and leveraging SG&A, but the majority of that really was coming through gross margin. We had about 340 basis point improvement during that timeframe in our gross margin. So, if you look at the improvements on fixed cost leverage, so our top line sales really helped, our EFG efforts were starting to come to play, our real estate portfolio was being leveraged, we had -- we’re cycling up against a lot of lease renewals. 10 years -- we're on a 10-year lease renewal, so 10 years ago versus closer to the period of time today, we're in a much better position to renegotiate better terms and rates. So those were all really good guys.
And then you start looking at the overall merchandising margin. And so merchandising margin, really two components there were low promotional environment was a benefit. And then also in the funding margin piece to the merchants. If you look at funding margins, our merchants a lot of times will look for opportunities to get a brand into our store and we'll take a little bit less margin on that front side to help them build their business. And then as we help build the business together, the merchants, this is part of their job and part of their DNA, is they'll go back and they will work on renegotiating better terms. The teams did a fantastic job with that.
Some other good guys during that period of time were the credit card, the profit sharing of the credit card, the Ulta Beauty at Target was hitting us in 2022, the royalty, and then our loyalty point conversion. Some of the headwinds that we had were really more around shrink that was really impacting us. And then our channel mix. So from 2019 to 2022, our e-commerce business doubled in size. So when you look at that overall mix, that was putting a little bit of pressure offset by some of the good guys.
Okay, so what makes us think that we can hit the 3% to 5% and the 14% to 15% operating margins in the future, after all of that being said? It's really about scale, the size of our organization, our investments, we used to call it EFG, we're calling it continuous improvement. We have continuous improvement teams built into our store teams -- not just store teams, but the corporate teams too. So we're always looking for efficiencies coming out of the model. There also is the opportunity to look at other forms of revenue, so UB Media is going to be coming through, it's going to continue to grow. Our Ulta Beauty at Target partnership is continuing to grow. All of that together, along with us cycling over this heavy, heavy investment period of 2024 gives us the belief that we will be able to then heed some headwinds that could be around a little bit more normalized promotional environment along with increase in wages and some wage pressure.
All of that said, we feel very confident that within that 14% to 15% operating margin and all the inputs and outputs that I just kind of walked you through, that we can still drive capabilities within our organization, take long-term share growth within beauty, and continue to provide shareholder return.
Olivia Tong
Great. We have to talk a little bit about shrink. It did stabilize in Q3 versus the first half, which is great to see, but could you talk a little bit about some of the actions that you're taking in store and how you find the right balance between, obviously, preserving the in-store experience and the guest experience with also security.
Kecia Steelman
Yes, it's an ongoing problem and it's unfortunate that we even have to talk about this to be perfectly honest, but it is a real issue out there and some of the actions that we've taken are locking up one of the highest shrink categories and that was fragrances. We've locked up fragrances in about 70% of our stores right now, so that's going to be better for us this holiday season because that last year and fourth quarter is when it just really started to spike. So I feel like we're in a better position there. We don't want to lock up the whole store. I think part of the essence of Ulta Beauty and shopping at Ulta Beauty is to be able to experience and trial and play. And you can go to other retailers today. And it's hard to shop. It's very distracting. So when we've put the locked cases in our stores in fragrance, we've also increased our labor because we want to make sure we're continuing to have great experiences for our guests.
But there are other tools that we've got in place. We've got great partnerships with the local authorities in many of our markets because they want to take these bad guys off the streets as much as we do. You'll see there's security tags on a lot of the prestige category items. And it's just about awareness and making sure that we're providing great service to our guests as they're coming into the store. So a lot of times if you have good staffing, it deters because the bad guys want to come in to places where they can just come in and get out really easily and not create too much of a distraction to the retailer. So I feel like we're in a really good spot. We're not going to lock everything up. I don't think that's the right thing to do, but it is a full-court press and we're continuing to lean in to the areas that we feel like we can continue to make progress.
Olivia Tong
Social media. So influencers, TikTok, social media overall, obviously, growing in importance in the beauty industry. So could you talk about how you manage your assortment differently as their influence grows? And how do you improve your capabilities to ensure that the product is aligned with what consumers want if it shifts this frequently nowadays?
Kecia Steelman
Well, social media has always influenced beauty, pun intended. It's always been a key part, I think, of our ecosystem. So it started with YouTube, and I call them the OG. And that was where individuals really started to show their ability to have their skills of makeup trends and talk about products. That's evolved now to Instagram and getting a lot of followers and having more influencers out there in the industry. And then now it's TikTok. And TikTok has totally democratized that anyone in this room or anyone out there can be an influencer on their own. What that's done is, it's created some unexpected spikes in some businesses. And when I say unexpected, it's because it needs to be authentic. When we see authentic viral takeoffs, that's really where the magic happens. It's not when it's overly curated.
There are some brands that we see that are doing a fantastic job of really leveraging their social media. I'll call out just a few. You've got CarsRx, Elf out there, IGK, just to name a few, where they really understand the power and the influence of these social media influencers that are out there. What we do is, when we see that happening, our merchants are immediately reaching out to the brand partners when we see something upticking that's going to be hot. And partnering to try to get as many of the goods as we can. We want more than our fair share, is what I would say. And then we quickly get it through our supply chain system and into our stores. We also have a communication that's coming from our marketing team, because I think it's important for our stores across the United States to really understand what's hot and why it's hot. So we're also taking advantage of -- we've got a tool in stores called work jam where we can do a quick video that's just a few seconds long that goes out to all of our associates that talks about why this trend is really hot right now. We're doing that on a continuous basis. So it's really about reacting very quickly, getting the product in stock, and making sure that our associates are educated to make sure that that trend is seen all the way through.
Olivia Tong
The loyalty program has been fantastic and continues to grow quite nicely, which is great. And 95% of your customers are in that program. So how do you leverage that force even more? Can you discuss how you capitalize on trends a little bit faster than your competition, how you can leverage the loyalty program even that much more?
Kecia Steelman
Yes. Well, I'm very proud of our loyalty program at 42.2 million loyalty members and we had an 8% increase in that loyalty base this last quarter. I mean, that's a huge growth on some big numbers. Why we feel like we can continue to grow that is that, the majority of our new member acquisition is coming through our stores, because our associates really believe in the program. It's very easy to understand. They're like why not be in this program as you're checking out if you're not currently in our loyalty program. The Ulta Beauty at Target partnership is also helping us get the ability to get new members into our ecosystem. We've got the opportunity to get in front of a new guest. We also see great results with reactivation of lapsed members coming through Ulta Beauty at Target, our new digital platform with our digital e-comm site. We're starting to see increased application flow into the loyalty program coming there too.
But what I would say is, while we've got 42.2 million loyalty members, there's 70 million beauty enthusiasts out there, so we don't have them all yet. We're working really hard to get them. And the power of that first party data is incredible. The fact that we can real time understand their purchasing patterns, what they're buying, what promos resonate with them, that is a great competitive asset that we have as an organization that we're going to continue to invest in.
Olivia Tong
Running close to time, but I wanted to ask you about Target and you're now at about 500 stores, the target for Target is 800. What about after that? Is 800 still the right number? Is there more that can be done there? How does the Target partnership also help you in terms of thinking about beyond Target?
Kecia Steelman
Yes. Well, we've publicly stated 800. We haven't discussed anything beyond the 800 stores. This last quarter they opened up 90 locations. They're at 510 right now. We do believe that it's important to our ecosystem, the partnership is. What we're learning in this partnership is that, brands like Fenty Snacks, so it's Fenty, but it's in smaller sizes that are more price accessible for that guest, are really what's resonating. They love trial, and we love that because it will bounce them back into Ulta Beauty for the full-sized assortment. So that's really how we see this working. It gives them access to prestige, but it gives us access to a new guest coming back into Ulta Beauty for their products and also their services since we have services in all of our locations. So we do believe that's a great partnership. We look forward to the continued success with them. But we're staying on that 800 number for right now.
Olivia Tong
And then just with two minutes left, where do you expect more of the growth to come from in the future? Is it more efficiency in stores, some of the small format stores that you guys have discussed in some of the rural areas, UB Media, expansion into the other categories, perhaps geographies. Just talk us through sort of a longer term in terms of where the growth comes from as time progresses.
Kecia Steelman
Yes. Well, we believe in the framework that we've shared, which is all things beauty, all in your world, at the heart of the beauty community. So all things beauty, first and foremost, it's about having the products that the guests want. We're going to continue to lean into wellness and luxury and the products and the brands that we don't currently carry. Our merchants are hot and heavy on that consistently. All in your world, you mentioned already we've got a 5,000 square foot prototype that we're testing out there and it's more in rural America. I think Wilson, North Carolina or Paris, Texas. And then I would also say we do believe that Ulta Beauty could be a global brand in the future, not in the short term or near term, but we do believe that there's the ability for us to continue to grow and expand globally in the future.
And then at the heart of the beauty community, and I'll just wrap it up, that it is all about this emotional connection that we can create. We just launched our Joy project, which is resonating very well with our guests, and it's also about having this emotional connection that they think about Ulta Beauty for all of their beauty needs and really increasing that aided and unaided awareness and being top of mind for the guests as they're thinking about where to spend their beauty dollars. So I'd say all of those combined together give us great confidence that we will have continued growth in the future.
Olivia Tong
Well, with that, thank you, Kecia. Thank you, Kiley. Thank you, Mary Kate, as well. And thank you all for joining us with Ulta.
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Ulta Beauty, Inc. (ULTA) Raymond James 2023 TMT and Consumer Conference (Transcript)