The conference call for Ulta Beauty's Third Quarter Fiscal 2023 results begins with a reminder of the call's format and a safety disclaimer. The call will include prepared remarks from the CEO and CFO, followed by a Q&A session. Participants are asked to limit their questions to one and one follow-up.

Ulta Beauty's CFO, Scott Settersten, has announced his retirement after 20 years with the company. He will be succeeded by Paula Oyibo, who has been with the company since 2019 and is known for her strong leadership and inclusive approach. Settersten's contributions to the company and his successful tenure as CFO are recognized and appreciated. Oyibo is expected to be a valuable addition to the executive team and will continue to drive the company's growth.

In the third quarter, Ulta Beauty's sales, gross profit, and EPS exceeded expectations, with healthy traffic and record brand awareness and loyalty program. Net sales increased 6.4%, operating profit was 13.1% of sales, and diluted EPS was $5.07. Skincare was the fastest-growing category, with double-digit growth in mass and prestige segments, driven by consumer interest in moisturizers, serums, and cleansers. Ulta Beauty thanks its associates for their focus on delivering great guest experiences and executing transformational initiatives.

Dermatologist-recommended brands like La Roche-Posay, Cetaphil, and Dermalogica drove growth in the skincare category, while the fragrance and bath category saw low double-digit growth thanks to new products from brands like Ariana Grande, Burberry, and YSL. Prestige and luxury brands like Valentino, Carolina Herrera, Chanel, and Dior also contributed to growth. Sales in the makeup category were flat, with new brands like Dior, NATASHA DENONA, Beautycounter, and existing brands with newness and innovation driving growth. The hair care category saw a decline, primarily due to a decrease in hair tools, but newer brands and trend-relevant products from Redken and Biolage performed well. The company continues to outpace the growth of the mass market in both mass and prestige beauty, with gains in digital channels but challenges in brick-and-mortar channels.

The company is confident in their ability to capture more market share in the long term, with their services business delivering high growth. The U.S. beauty category has consistently grown over time and is expected to continue growing, driven by factors such as emotional connection with consumers and societal changes. The company's strategic framework guides their priorities and focus for expanding market leadership and driving long-term growth.

Ulta Beauty has been focused on driving growth through an expanded definition of All Things Beauty. This includes adding trend-relevant brands in every category, such as Pat McGrath Labs and Shark Beauty. They have also launched a Luxury at Ulta Beauty platform, which has been successful in driving increased spend per member. Additionally, they have been expanding their Conscious Beauty platform, increasing their portfolio of BIPOC brands, and adding wellness products from LUV SCRUB, Solawave, and Skin Gym. The wellness shop has also been expanded to more stores and features improved aesthetics and educational graphics.

Ulta Beauty is investing in enhancing the guest experience across all touch points, including their digital platforms and in-store experiences. They have recently completed a significant step in their digital transformation journey and have seen success with their new digital experience over the high demand Thanksgiving weekend. They have also launched a refreshed guest engagement model and continue to expand and enhance their Ulta Beauty at Target shops, including the recent launch of Fenty Beauty.

Ulta Beauty has recently launched a curated assortment of Dyson hair tools and exclusive holiday sample kits in select stores and all Ulta Beauty at Target shops. They are investing in driving greater love, loyalty, and connection with their brand, resulting in increased brand awareness and growth in brand love among Gen Z and millennial beauty consumers. They have also launched The Joy Project, a multiyear initiative to make beauty and the world a more joyful place, with an integrated campaign and training curriculum for their associates. They have expanded The Joy Project as the exclusive beauty partner for TikTok's first ever beauty month, leveraging creator content and events, advertising placements, and custom filters. Ulta Beauty continues to adjust their promotional strategies as the category normalizes and consumers face rising cost pressures.

Ulta Beauty is continuously adapting to consumer needs and market changes by evolving their key events and promotions. Despite an increase in promotional activity, they have managed to maintain lower levels compared to 2019. Their loyalty program has seen growth in active members and spend per member, thanks to targeted efforts and personalized engagement. The company is also focused on driving operational excellence and optimization through a multiyear transformation agenda, with major milestones already achieved this year and more to come in the next few years.

Ulta Beauty plans to optimize their supply chain and reduce emissions, while also focusing on their holiday campaign "the gift is just the beginning". They offer a diverse assortment of products and convenient omnichannel options for customers to find the perfect gifts for themselves or others. The store teams are prepared to bring the holiday to life with the help of new POS systems and tools.

Ulta Beauty's third quarter financial results exceeded expectations, with solid sales growth driven by strong guest traffic and new store sales. Gross margin was slightly higher than expected, while SG&A spend was in line with expectations. Net sales increased by 6.4%, with comp sales growing by 4.5% and transactions increasing by 5.9%. Average ticket decreased due to a decline in average units per transaction, but retail price increases continue to benefit comp performance. The company expects the beauty category to remain strong and is confident in its ability to drive market share and profitable growth.

In the third quarter, the company opened 12 new stores, relocated 2 stores, and remodeled 11 stores. This resulted in a 130 basis point decrease in gross margin, primarily due to lower merchandise margin, higher inventory shrink, and higher supply chain costs. However, there was strong growth in other revenue, including credit card and royalty income. SG&A also increased by 10.8% to $661.4 million.

In the third quarter, SG&A expenses increased by 110 basis points to 26.6% of sales, mainly due to higher corporate overhead and store expenses, investments in store payroll and benefits, and increased marketing expenses. However, lower incentive compensation was a benefit. Operating income declined by 9.6% and operating margin decreased by 240 basis points. Diluted earnings per share also decreased. Total inventory increased by 9.8%, primarily due to the impact of new stores, higher demand, and new brand launches.

The company's capital expenditures for the quarter were $106 million, with investments in new stores, supply chain, and IT. Depreciation was $61.4 million. They also repurchased shares and drew on their credit facility to support their capital allocation priorities. The company has narrowed their sales and EPS guidance for the year, with expected net sales between $11.1 billion and $11.15 billion and comp sales growth between 5% and 5.5%. They plan to open new stores and remodel or relocate existing ones. The company's operating margin for the year remains unchanged at 14.6% to 14.8% of sales, with deleverage from both gross margin and SG&A. They expect diluted EPS for the year to be between $25.20 and $25.60. The company has refined their expectations for Q4, taking into account potential risks from cautious consumer spending and increased competition in the Prestige Beauty market.

The company expects flat to modestly positive comp sales for the fourth quarter, with a slight decrease in gross margin and flat to lower operating margin compared to last year. They also plan to spend $400 million to $425 million in CapEx for fiscal 2023, with a focus on supply chain, IT, and new stores. Depreciation is expected to be around $245 million, and share repurchases are estimated to be $950 million. The CFO will be stepping down and passing the role to Paula Oyibo, with a smooth transition planned. The company remains confident in their financial targets for next year, with growth in EPS reflecting the extra week in fiscal 2023.

During a conference call, Ulta executives discussed the company's recent results and the future of the beauty category. They expressed confidence in the resiliency of the beauty industry and the importance of makeup within it. The company saw a flat performance in the makeup category for the quarter, but remains optimistic about future growth. They attribute this confidence to a steady stream of new products, high engagement, and the connection between wellness and beauty. They also discussed the company's gross margin and SG&A levers, with plans to focus on driving their makeup business in the upcoming quarter and year.

Ulta has taken several actions to drive their makeup business forward, including launching new exclusive brands like Half Magic and Polite Society. They have also expanded their luxury offerings and added new items with existing brands. They are confident in their strategies to drive growth and are optimistic about consumer engagement in the beauty industry. Scott Settersten also addresses margin concerns for 2024 and beyond.

The speaker discusses the headwinds and tailwinds that will affect the company's gross margin in the coming years. Supply chain transformation and the growth of e-commerce will be headwinds, but the company has ways to mitigate them. Promotionality is still uncertain, but other revenue, cycling over price increases, shrinking, UB Media, and fixed costs are expected to be tailwinds for the company's gross margin.

The speaker, Dave Kimbell, is responding to a question about the company's strategies for defending market share and returning to growth. He mentions that they have seen some loss in brick-and-mortar share due to increased competition, but they are confident in their strategies and expect to rebound and continue growing. He also notes that they have adjusted their outlook for the fourth quarter due to potential risks to consumer spending and expansion of distribution points.

The speaker discusses the promotional environment and its impact on the company's performance. They mention that while there has been an increase in promotions compared to last year, it is still below 2019 levels and not considered irrational. The company's outlook for the fourth quarter remains unchanged, with a moderate to low single-digit comp sales growth expected. The speaker also mentions that the company's performance in the third quarter gave them confidence to raise the lower end of their guidance range. They remain positive about consumer engagement and will continue to monitor the situation closely.

Scott Settersten and Dave Kimbell reiterate the company's fourth quarter comp sales expectations and mention a wider range in operating margin. They are being prudent and giving themselves room to maneuver in case of any changes in consumer reaction. Michael Binetti congratulates Scott and Paula and asks about the comp guide for the fourth quarter and SG&A growth. Dave responds that the company is confident in long-term category growth and gaining share, but is lapping a strong fourth quarter from last year.

The company has seen a moderation in their comp trends, as expected, and is anticipating continued strong engagement and healthy comps in the fourth quarter. They are currently in the midst of a multiyear transformation and expect to see significant efficiencies and optimization opportunities in the future. They are willing to invest in SG&A as long as they can deliver operating margin leverage. The company has also had strong new store productivity and impressive e-commerce growth.

The speaker discusses the company's plans for smaller format stores and modernizing the store layout. They are confident in their goal of having 1,500 to 1,700 stores and have had success with a smaller 5,000 square foot format. They have also updated the layout of their full stores to make it easier for customers to shop. The company has also invested in UB Media, a digital advertising platform, and has had many brands participate in campaigns. They have expanded their team in this area.

Dave Kimbell, the CEO of the company, talks about the power of their data and how it can provide unique insights due to their large member base and diverse assortment of products. He mentions that they have seen good results from this and are continuing to invest in it for the future. He also discusses their use of AI, specifically through their acquisition of QM Scientific, to personalize the guest experience and streamline processes. They see a lot of potential in using AI to better understand and service their customers.

The speaker expresses excitement about the contributions of their loyalty program and their focus on being a leader in that space. They also mention the increase in diamond and platinum members and the importance of member engagement in driving the success of the program. The team is constantly working to evolve and advance the program to delight members and this has resulted in an 8% growth in the loyalty program. Retention is a key factor in this growth.

The speaker discusses their high retention rate and efforts to improve personalization for guests. They also mention their success in gaining new members and reactivating lost guests. They are committed to driving growth through innovation and guest experience. The questioner asks about their response to market share losses in the Prestige Beauty category.

Dave Kimbell, CEO of Ulta Beauty, addresses concerns about the company's market share losses and how they will impact its earnings algorithm in 2024. He assures that their goal is to gain share and that their strategies are designed to be a leader in the industry. While certain categories, such as prestige makeup and hair, have been more challenged due to increased competition, they are gaining share in other areas. The company plans to accelerate growth in these categories and is confident in their ability to do so. Kimbell also mentions that they are balancing their promotional intensity in order to maintain their overall growth and market position.

The speaker, Dave Kimbell, thanks the Ulta Beauty associates for their strong performance and announces the appointment of a new CFO. He also expresses confidence in the company's ability to sustain share growth through long-term strategies and actions. He concludes by wishing everyone a happy holiday season and announcing the next earnings report date.

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