Ulta Beauty's Conference Call to discuss Results for the Second Quarter of Fiscal 2023 is underway. The call is being hosted by Dave Kimbell, Chief Executive Officer; Scott Settersten, Chief Financial Officer; and Kecia Steelman, Chief Operating Officer. Kiley Rawlins, Vice President of Investor Relations, provided a reminder of the company's Safe Harbor language before the formal presentation. After the prepared remarks from Dave and Scott, participants will have the opportunity to ask questions, with a limit of one question per person. The IR team will be available for any follow-up questions after the call.

Ulta Beauty had a successful quarter, with net sales increasing 10.1%, operating profit at 15.5%, and diluted EPS increasing 5.6%. All major categories saw comp growth, driven by strong engagement with the beauty category, new products, and promotional events like the Big Summer Beauty Sale, which consolidated key summer events into a cohesive event with holistic storytelling and messaging.

Skin Care was a strong category for the quarter, with double-digit growth driven by newer and existing brands. Fragrance and Bath also had double-digit growth, driven by layering and wardrobing scents and gift-giving events. Hair Care saw mid-single-digit growth, driven by bonding, scalp treatments, and healthy heat styling options. Makeup had low single-digit growth, driven by strong performance in mass cosmetics.

In the most recent quarter, new and exclusive products from a variety of brands, such as Dior, NATASHA DENONA, Beautycounter, e.l.f, NYX and OPI, contributed to growth. Compelling events, such as Big Summer Beauty Sale, National Lipstick Week and the foundation event, drove guest engagement. Mass cosmetics benefited from engaging newness in social content, while the prestige makeup business was challenged due to the Fenty launch last year. Services business saw double-digit growth due to increased appointments, and the Beauty category remains healthy across both Prestige and Mass price tiers. Analysis suggests consumers are trading around and choosing brands that offer on-trend newness and compelling social media content, and the retailer is positioned to capture share of the total beauty market.

Ulta Beauty is expanding its assortment of beauty products and introducing several new brands in the third quarter, including Half Magic, Polite Society, Rabanne, Shark Beauty, PanOxyl, Sniph, and Pat McGrath Labs. The Luxury at Ulta Beauty program has been successful and continues to attract strong guest engagement.

Ulta Beauty is expanding their assortment of brands with clean, cruelty-free, and vegan ingredients, as well as amplifying their portfolio of BIPOC brands to ensure inclusivity. They have also launched two new supplements, Lemme Gummies and Big Brain Probiotics, to enhance the wellness shop assortment. To meet guests wherever they are in their beauty journey, they have expanded same-day delivery and improved store fulfilment process.

Ulta Beauty has seen an increase in e-commerce sales and digital orders fulfilled by store teams, which has been attributed to BOPIS, same-day delivery, and ship from store capabilities. The company has also seen an increase in omni-channel conversion with 9 million active members engaging with their mobile app over the last 12 months. Additionally, Ulta Beauty has partnered with Target to open 62 Ulta Beauty at Target shops, bringing the total number of shops to 421.

Ulta Beauty is working closely with their target partners to build awareness for new brands, while also amplifying their Summer Prestige must-haves and minis. They have also been running campaigns to drive top-of-mind awareness and traffic, such as their Mother's Day campaign and their Big Summer Beauty Sale. Their loyalty program has seen strong growth, with 41.7 million active members and increased spend per member.

Ulta Beauty is making efforts to nurture the member life cycle, resulting in growth in their Diamond and Platinum tiers. They are also executing a multiyear road map of transformation initiatives to unlock new capabilities and efficiencies. Recent milestones include the opening of a new fulfillment center, installation of a new automated storage and retrieval system, expansion of ship-from-store capabilities, transition to a new ERP platform, and upgrade of the end-to-end e-commerce platform.

Beauty sales in the US have increased double-digits in the first half of 2023 compared to the same period last year, and growth is expected to remain healthy but normalize into the mid-single digits for the rest of the year. Promotional activity will remain higher than in 2021 and 2022, but still below 2019 levels. This is part of a multiyear effort to improve the digital experience and position the company for long-term growth. The teams have worked hard to execute the plans while limiting disruption.

Dave reported that the company had exceeded their internal financial expectations in the first half of fiscal 2023, and Scott Settersten discussed the financial results. Net sales increased 10.1% due to strong store performance and other revenue growth, and transactions increased 9%. Gross margin decreased 110 basis points due to lower merchandise margin, increased inventory shrink, and higher supply chain costs. Promotional activity remains lower than 2019 levels.

The company has invested in new fragrance fixtures in more than 50% of their stores and expects to have them installed in 70% of their fleet by the end of the year. Additionally, they are investing in their supply chain transformation, increasing other revenue, and leveraging store fixed costs. SG&A increased 12.4% and 40 basis points, driven by investments in strategic initiatives, planned store payroll and benefits increases, and corporate overhead. Year-to-date, they have invested around half of their planned $60-70 million of incremental spend.

The company reported a 5.6% increase in diluted GAAP earnings per share and a 9% increase in total inventory. Capital expenditures for the quarter were $95 million, primarily related to investments in IT and supply chain. During the quarter, the company repurchased 594,000 shares at a cost of $275.5 million, and have $541 million remaining under their current $2 billion repurchase authorization. Guidance for the year has been raised, with net sales projected between $11.05 billion and $11.15 billion and comp sales growth between 4.5% and 5.5%.

Ulta Beauty has experienced a strong first half performance and expects to open 25-30 new stores and relocate 20-30 stores this year. They have raised the low end of their operating margin range and anticipate third quarter operating margin to be more pressured than the second quarter due to lapping of pricing benefits from last year. As a result, they now expect diluted earnings per share for the year to be between $25.10 and $25.60. The company has thanked their associates for their dedication and commitment to keeping their guests at the center of all they do.

The company has seen strong traffic throughout the quarter with double-digit growth and sequentially accelerating comp performance. In addition, they have locked up 50% of their stores and are investing in labor to ensure that the guests are able to purchase products without any sales prevention.

Dave Kimbell states that they are expecting to gain market share in the beauty industry and that their outlook is for revenue to be up 8-9%, which is ahead of the total category growth. He also mentions that in skin care they are seeing strong growth in both Prestige and Mass, while in makeup they are only seeing growth in Mass, which was partially due to the launch of Fenty a year ago.

Dave Kimbell discussed the strong performance of the company's entire assortment, with Mass being a bit stronger for a couple of quarters due to consumer engagement with key brands. Skin Care, particularly in the dermatologist recommended area, is also driving strong growth. The company's intent is to continue to adapt and adjust to the areas that are driving growth, while also offering the full assortment from Mass to Prestige and a growing luxury business. Kimbell is confident in the outlook going forward and the company's ability to flex and incorporate it into their comp guidance.

Dave Kimbell of Ulta Beauty discussed the success of the company's Luxury segment, which is now present in 200 stores and includes brands such as Chanel, Dior, NATASHA DENONA, HOURGLASS, Chanel Numero Un, Lancome, Absolute, YSL, Tom Ford, Viktor&Rolf, and Pat McGrath. The segment is an important part of their overall strategy and is a contributor to their total comp. They plan to continue innovating and evolving to drive further growth.

The company was pleased with their financial results in the second quarter, as merchandise margin was better than expected and shrink was directionally about the same as the first quarter. Shrink is expected to remain tough for the rest of the year, but may be slightly less negative in the fourth quarter due to a catch-up from last year.

Scott Settersten discussed the store fixed costs, channel mix, and gross margin for the second half of 2023. He noted that the third quarter is the toughest anniversary point of the year due to delays in project work, which is shifting IT expenses into the third quarter, and more moderate sales growth expectations. Despite these headwinds, the company expects sales to bounce back in a healthy manner in the fourth quarter.

Scott Settersten and Kecia Steelman answered Adrienne Yih's questions about the SG&A spend in the third quarter and how it will affect EPS. They mentioned that the SG&A spend is shifting back into the third quarter, which will lead to negative EPS growth year-over-year, and they discussed the phases of Project SOAR and other investments that are running dual structures in some of the DCs and on the website. They also noted that there will be a lot of redundancy that will go away next year, which will affect SG&A growth and consensus.

Ulta Beauty is investing between $60 million and $70 million in core systems and expects to see benefits in 2024 and beyond. They are also working on other growth initiatives to tackle in the future. In terms of makeup, it looks like the growth rate decreased from high-singles in 1Q to mid-singles in 2Q.

Dave Kimbell discusses the slowdown in the Prestige makeup category, which is due to lapping the Fenty launch. He is optimistic about the upcoming launches of Rabanne, Pat McGrath, and Polite Society, and believes Mass makeup will continue to drive growth. He also believes Ulta Beauty can drive growth in the Skin Care category, as they have established a meaningful share position and are seeing strong healthy growth in both Mass and Prestige. He anticipates some moderation in the total beauty category.

Dave Kimbell discussed the success of the Big Summer Sale, a promotional event that was re-evaluated by the marketing, digital, store, and go-to-market teams. The event attracted new members, delivered strong comp growth, and saw strength in both stores and e-commerce. Traffic was also healthy, indicating the success of the smarter promotional strategy.

Dave Kimbell states that beauty enthusiasts have shown a high level of engagement since the pandemic began, and the category has been consistently growing for the past 50 years due to its emotional connection and how it helps people express themselves. He also mentions that the team is looking for ways to elevate their go-to-market strategy, and they will be launching their 21 Days of Beauty event soon.

The paragraph discusses the long-term outlook for the beauty industry, despite the uncertainty caused by the pandemic and other economic factors such as student loan changes. The industry has been largely resilient, and the unique model of having all price points and an accessible experience both in-store and online positions it well to adapt to any shifts in consumer behaviour. The company is optimistic but is also closely monitoring the situation and staying close to customers to understand their decisions and ensure they are delivering what they need.

Scott Settersten explains that the business is in a much different position than it was in 2019 due to major disruption in the makeup category, channel mix headwinds, and international expansion. The company has taken advantage of cost optimization initiatives, such as ESG and continuous improvement initiatives, and now has the benefit of fixed store cost leverage. Additionally, capabilities like ship-from-store and focus capabilities did not exist in any meaningful way before the pandemic.

Ulta Beauty has been able to increase their gross and operating margins due to the growth of digital sales, their credit card program, their relationship with Ulta Beauty and Target, and UB Media. They expect to return to a more moderate level of promotion, and are confident they will be able to deliver healthy operating margins of 14-15% and a moderate growth expectation of 3-5%.

Ulta Beauty expresses its gratitude to its associates for their hard work and dedication to the company, and looks forward to giving an update on the third quarter on November 30. The conference is then concluded.

This summary was generated with AI and may contain some inaccuracies.