Ulta Beauty, Inc. Q2 FY2024 Earnings Call

Good afternoon, and welcome to Ulta Beauty's Conference Call to discuss results for the Ulta Beauty Second Quarter 2024 Earnings Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. As a reminder, this conference is being recorded. It is now my pleasure to introduce you to Ms. Kiley Rawlins, Vice President of Investor Relations. Ms. Rawlins, please proceed.

Thanks, Alicia. Good afternoon, everyone, and thank you for joining us for a discussion of Ulta Beauty's results for the second quarter of fiscal 2024. Hosting our call today are Dave Kimbell, Chief Executive Officer; Paul Oyibo, Chief Financial Officer; and Kecia Steelman, President and Chief Operating Officer, who will join us for the Q&A session. Before we begin, I'd like to remind you of the company's safe harbor language. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC. We caution you not to place undue reliance on these forward-looking statements, which speak only as of today, August 29, 2024. We have no obligation to update or revise our forward-looking statements, except as required by law, and you should not expect us to do so. We'll begin this afternoon with prepared remarks from Dave and Paula. Following our prepared comments, we'll open up the call for questions. As always, the IR team will be available for any follow-up questions after the call. And now, I'd like to turn the call over to Dave. Dave?

Thank you, Kiley, and good afternoon, everyone. We appreciate your interest in Ulta Beauty. For the quarter, net sales increased 0.9% to $2.6 billion and comparable sales decreased 1.2%. Operating profit was 12.9% of sales and diluted EPS was $5.30 per share. Although we anticipated the headwinds experienced in the first quarter would continue, our results were short of our expectations, driven by a decrease in comp store sales, specifically comp store transactions. E-commerce sales increased as expected. We do not believe these results reflect the strong engagement with our brand, the strength of our operating model, or the performance that I know we can deliver over the longer term. Importantly, we are clear about the factors that adversely impacted our store transaction growth in the second quarter, and we have actions underway to address the trends. We attribute the decline in comp store transactions to four factors. First, while the beauty category remains resilient, growth is normalizing after three years of unprecedented gains. Additionally, consumer behavior is starting to shift as consumers increasingly focus on value and become more cautious with their spending. Based on data from Circana, U.S. beauty growth slowed to approximately 3% through the first half of 2024, with prestige beauty experiencing high-single digit growth and mass beauty maintaining low-single digit growth. Second, competitive intensity in the beauty category remains high. As we have shared previously, the strength of the beauty category, combined with an attractive margin profile, has drawn substantial and diverse competition to the category. Today, there are significantly more places to buy beauty, especially prestige beauty, with more than 1,000 new points of distribution opened in the last three years. As a result, our market share continues to be challenged, particularly within prestige beauty. Based on Circana data for the 13 weeks ended August 3, 2024, we maintained our share in mass beauty but lost share in the prestige beauty, particularly driven by makeup and hair categories. We know beauty enthusiasts love to shop for beauty, and they love Ulta Beauty and the unique experiences we offer. But they also love engaging in new beauty offerings. As a result, we often see a short-term impact of new distribution points on an existing nearby store, whether it's a competitor opening or a new Ulta Beauty store. What is unique about the current environment is the scale and pace of change. More than 80% of our stores have been impacted by one or more competitive openings in recent years, with more than half impacted by multiple competitive openings. This significant portion of our store fleet is experiencing a prolonged sales impact. Notably, the positive signals we see in our broader business reinforce the appeal of our differentiated model and our confidence that we will mitigate these near-term competitive pressures. Our brand awareness and brand love continue to increase with strong gains across multiple demographics, demonstrating the broad appeal of our unique, All Things Beauty, All In One Place offering. We continue to attract new and lapsed members to our loyalty program while maintaining strong retention of our existing members. At the end of the second quarter, we had 43.9 million active Ulta Beauty Rewards members, 5% more than last year. Importantly, we continue to experience healthy growth in our platinum and diamond members. Newness continues to resonate with guests and drive growth. Newer brands, including Sol de Janeiro, Charlotte Tilbury, and OLEHENRIKSEN are driving sales, new member acquisition, and member reengagement while newness from a variety of existing brands, including Clinique, Way, and PEACH & LILY are driving healthy comp growth. Guests continue to engage with our unique in-store services offering, which delivered mid-single digit growth in the quarter. And new stores continue to perform well. During the quarter, we opened 17 stores, including our 1,400th store, and their performance was in line with our expectations. Now we've disrupted the beauty category for more than 30 years and we understand how to successfully manage competitive forces. To reinforce our competitive position and drive stronger performance, we are aggressively taking actions across five areas: strengthening our assortment, expanding our social relevance, enhancing our digital experience, leveraging our powerful loyalty program, and evolving our promotional levers. I will discuss each of these areas in detail shortly. Now in addition to these external factors, we experienced unanticipated operational disruption during the quarter, resulting from the completion of our ERP transformation. In March, we began updating key store systems through a thoughtful and controlled implementation plan. And in July, we finished the migration of all of our stores to our new ERP platform. We are pleased to have successfully completed this important phase, but we have experienced some unexpected operational challenges as our teams have adjusted to new capabilities, new processes, and new ways of working associated with the new systems. Specifically, through the transition, our teams were managing portions of our fleet on both the old and new systems, which led to some store inventory allocation disruption. With all of our stores and distribution centers now operating on the same core systems, we are shifting from implementation to system optimization and are working quickly to help our teams navigate these new ways of working in order to balance inventories across the network and deliver an optimized guest experience. To minimize future disruption, we have identified key legacy processes that are creating friction and implemented proactive monitoring as well as dedicated support to quickly address issues when they arise. I am confident that our new capabilities will support better, more agile decision-making in the future. And I'm grateful for our collective team's hard work and dedication to manage through this critical transformation. The fourth factor impacting our performance this quarter was the effect of incremental promotions, which did not deliver the expected sales lift. As the top line trends softened in late June and July, we executed incremental promotions to drive revenue. These offers drove strong sales and traffic across our digital platforms, but did not deliver the expected incrementality in stores. The increased frequency of offers, combined with the introduction of new offer structures, put pressure on average selling price without activating incremental purchases in stores. We understand why the incremental promotions did not deliver as expected and will apply these learnings as we manage promotional activity in the second half. Turning now to performance by category. Fragrance delivered double-digit growth, driven by strong guest engagement with Mother's Day and exciting newness. Newness from existing brands, including Valentino, YSL, and Burberry as well as new brands, NOYZ, Orebella, and Kylie Jenner, all of which are exclusive to Ulta, contributed to the category's growth. Our exciting Mother's Day gift with purchase offers and gift sets fueled strong guest engagement, and our unique assortment of gift sets for Father's Day and back-to-school also delivered growth for the category. The skincare category delivered mid-single digit comp growth this quarter driven by strong growth in Body Care. Sol de Janeiro continues to excite guests, and this quarter, we introduced an exclusive body mist, which is resonating well. Reflecting the appeal of dermatologist-recommended brands and favorite La Roche-Posay and new brands, PanOxyl and VANICREAM delivered strong growth. And relevant mass brands, including Bubble and BIOMA, continued to engage guests. Overall, prestige skincare was pressured as engaging newness from PEACH & LILY and OLEHENRIKSEN was offset by softness from certain brands impacted by increased distribution or the lapping of strong social media engagement last year. Comp sales in the makeup category decreased in the mid-single digit range. Among new brands, Charlotte Tilbury, Polite Society, and WYN BEAUTY as well as exclusive newness from Clinique delivered strong growth. This growth was more than offset by sales decreases from existing brands that had newness that did not meet expectations or have experienced increased points of distribution in the market. In mass makeup, e.l.f., about-face, and Milani delivered strong growth, but this growth was mitigated by planned softness in Ulta Beauty Collection as we prepared for the brand relaunch. Comp sales for the hair care category decreased in the high-single digit range, driven primarily by planned promotional shift. As we shared previously, we incorporated prestige hair care offers in our first quarter semi-annual beauty sale and eliminated our Gorgeous Hair event, which took place in May of last year. In addition, the impact of exciting newness from Wahl, Divi, and Odele and strong engagement with Redken was offset by pressure from key brands lapping strong newness last year. As I mentioned at the outset, we are focused on five key areas to reinforce our competitive position. We are pleased with the progress we've made in many areas and have identified further opportunities to shift our momentum. Starting with our efforts to strengthen our assortment. During the quarter, we continued to enhance our brand portfolio with new engaging brands, including Orebella, Naturium, and Naked Sundays while also launching several emerging exclusive products through our Spark program, including Door, a clean French beauty inspired skincare brand; Magic Molecule, a skincare healing brand; and NOYZ, a premium gender-neutral fragrance. We also expanded key growth-driving brands like Sol de Janeiro, MAC, and Kiehl's into additional stores. Looking ahead, we have an exciting pipeline of brand launches planned for the balance of the year, including the recently announced ILIA Beauty, a clean skin-centric prestige makeup brand; and DIBS Beauty, a multipurpose easy-to-use makeup brand. In addition to enhancing our assortment with compelling newness, we are focused on building greater awareness and engagement with key exclusive brands, including PEACH & LILY, Polite Society, WYN BEAUTY, and LolaVie, while also collaborating closely with strategic legacy brands to drive stronger growth and profitability. I'm excited to share that we have relaunched the Ulta Beauty Collection to inspire beauty discovery, celebrate self-expression, and create a deeper emotional connection with guests. With simplified and good-for-you formulas, the new collection includes refreshed fan favorites as well as new innovations that reflect modern trends across skincare, body care, bath, suncare, and cosmetics. Certified with clean ingredients and cruelty-free products across the entire assortment, the reimagined collection is positioned at a masstige price point and is designed to make beauty discovery purposeful and accessible for beauty enthusiasts of all ages. While the new assortment has only been available for a few weeks and is still ramping up as we roll out additional SKUs, we are pleased with our early results. Social relevance powers customer connection and loyalty. To accelerate our social relevance and enhance our brand awareness, we have scaled our creator and influencer networks, and we are expanding our culture-forward activations to ensure we are at the heart of the social and cultural conversation for beauty. As a result, this quarter, we delivered meaningful growth and earned media value and social sentiment and drove more than 250 million social impressions. During the quarter, we doubled the size of our influencer network to include a diverse range of influencers across key audience segments to reflect our inclusive audience targeting strategy. We also launched Ulta Beauties, our new associated ambassador program to harness the superpowers of our team and highlight the expertise and passion of our talented associates. As a group, these talented creators developed compelling content in support of our big summer beauty sale, back-to-school, and the Joy project, which increased our EMV by more than 10% this quarter. Additionally, we launched a new affiliate program, UB Creates to drive traffic and conversion. Last year, we launched the Joy project, a multiyear initiative to make beauty and the world a more joyful place. In celebration of the National Day of Joy, we kicked off the second chapter of our Joy project with the launch of a social movement to spark positivity in the beauty space, partnering with brands, celebrities, and creators as well as our own UB collective and UB beauties, our viral complement chain reached more than 260 million people and generated meaningful growth in EMV. To continue to expand our social relevance, we plan to deploy amplification and content strategies in the second half, leading into trends and cultural moments, leveraging our expanded creator network and enhancing brand partner activations. Leveraging new capabilities, we are enhancing our digital experiences to drive traffic and sales. During the quarter, we enhanced search and filtering functionality to make it easier for guests to find what they want quickly. And we streamlined the path to purchase with a new quick add-to-bag feature, making it more convenient for guests to add products to their cart. To facilitate greater basket building, we introduced new personalized product recommendations and additional upsell placements along the guest purchasing journey. Importantly, we continue to drive increased app adoption through associate engagement, targeted communications, and app-only offers. In the second quarter, member engagement with our app increased 16%. Our app accounts for about two-thirds of our e-commerce sales, 600 basis points higher than last year. While the app is a vital tool to drive e-commerce sales, the majority of our spend from app users actually incurs in-store, making the app another key engagement tool to drive sales per member. As we look forward, we will continue to create and apply new digital features and functionality to give our guests new and more convenient ways to discover, transact, and engage with Ulta Beauty. With more than 44 million active members, our loyalty program is a strategic asset that provides us with unique insights across categories, price points, and channels and enables us to drive traffic and spend per member. To drive deeper connection and greater awareness, we are amplifying the value of our rewards program through member-only events, social engagement, and marketing activations. In May, we launched Member Love, a member-only event of enticing category-focused points offers, which delivered healthy member engagement and higher spend per member. In July, we launched our first member tiered offer to drive traffic, new member acquisition, and member reactivations. In addition to targeted events and communications, we have integrated our rewards program into our digital experience, major tentpole events to drive engagement and reinforce the value of the program. Looking ahead, we are focused on attracting customer segments to drive new member growth, driving differentiated engagement early in the life cycle to enhance retention, and leveraging our extensive member data to accelerate traffic. Finally, we continue to evolve our promotional strategies to drive traffic and sales. Supported by a robust media strategy, in-store amplification, and engaging social content, we enhanced our big summer beauty sale event with compelling offers across categories and price points. In addition to driving strong sales, the event delivered growth in new members and member reactivation as well as increased penetration of existing members. We're excited to kick off 21 Days of Beauty with a new look, new beauty steals, and unique events for our best members. As the competitive and promotional environment evolves, we will apply the learnings I mentioned earlier and leverage our member insights to execute productive, targeted offers while eliminating less effective promotions and applying new capabilities to create engaging events for our guests. In closing, Ulta Beauty remains a key beauty destination with strong consumer awareness and brand love. Our exceptional teams are committed to offering guests unique inclusive beauty experiences across all of our touchpoints. We are confident we have identified the factors that impacted our performance in the second quarter and are focused on the right actions to deliver stronger performance. As we turn to the second half of the year, our teams are focused on driving stronger sales and traffic, executing with excellence for our guests, exercising financial discipline as we adapt to a more challenging operating environment, and protecting and cultivating our unique culture, driven by our talented and passionate associates. While it will take time to shift the top line trend, I remain extremely confident in our model and in our ability to execute and win in an increasingly competitive category. And now, I will turn the call over to Paula for a discussion of the financial results and outlook.

Thanks, Dave, and good afternoon, everyone. I'll begin with a discussion of our second quarter financial results and then provide more color on our updated outlook. We faced greater-than-expected challenges in the second quarter, resulting in overall financial performance that were below our expectations. Sales growth from comp stores was softer than expected and gross margin was pressured by incremental promotional offers. However, our teams exercised financial discipline, and we took swift actions to mitigate impacts of the top-line trend. Net sales for the quarter increased 0.9%, solid new store performance from 49 net new stores and a 12% increase in other revenue, primarily due to an increase in credit card income and growth in royalty income from our Target partnership, was partially offset by a 1.2% decline in comparable sales. During the quarter, we opened 17 new stores, closed one store, remodeled nine stores, and relocated one store. The comp sales decline was driven by a 1.8% decline in transactions, which was partially offset by a 0.6% increase in average ticket. The increase in average ticket reflects growth in average selling price per item, offset by lower average unit per transaction. Looking at the cadence of sales, net sales trends decelerated as we moved through the quarter, with July being our most challenged period. Comp store sales climbed in the low-single digit range, primarily driven by a decrease in store transactions. Average ticket also decreased. Our digital channel performance was stronger with e-commerce sales increasing in the low-single digit range. Across digital channels, the sales trends accelerated as we moved through the quarter, with incremental promotional activity driving stronger guest engagement, particularly in July. For the quarter, gross margin decreased 100 basis points to 38.3% compared to 39.3% last year. The decline was primarily due to lower merchandise margin and deleverage of store fixed costs, which were partially offset by growth in other revenues and lower shrink. Merchandise margin declined primarily due to increased promotional activity, adverse impact from brand mix, and the continued lapping of benefits from price increases last year. While the impact of promotional activity was higher than planned, it was well below 2019 levels. Store fixed costs also deleveraged driven by lower top-line growth and more net new store openings. As a percentage of sales, inventory shrink was lower in the quarter. We completed the rollout of our new fragrance fixtures to all stores and introduced an additional fixture to protect our assortment of popular smaller rollerball fragrances. These investments are having a meaningful impact on fragrance tests, and we expect the additional fixtures will support a continuation of the trend. In addition, we continue to increase our ORC focus and have deployed new tools, capabilities, and training to our store and field loss prevention teams. Year-to-date, shrink as a percentage of sales is flat with last year, and we continue to expect shrink will be roughly flat for the full year. Moving to expenses. SG&A increased 7.3% to $645 million. Overall, SG&A spend was better than planned again this quarter, primarily due to focused expense management. As a percentage of sales, SG&A increased 160 basis points to 25.3% compared to 23.7% last year. Reflecting lower top-line growth, most expenses deleveraged this quarter. In addition, we preserved sales-driving expenses, including store labor and marketing, and completed key elements of our transformational agenda this quarter. These pressures were partially offset by lower incentive compensation, reflecting operational performance that was below our internal target. Operating margin was 12.9% of sales compared to 15.5% of sales last year. Diluted GAAP earnings per share was $5.30 compared to $6.02 last year. Moving to the balance sheet and capital allocation priorities. We ended the quarter with $414 million in cash and cash equivalents. Total inventory increased 10.1% to $2 billion compared to $1.8 billion last year. In addition to the impact of 49 net new stores, the increase was primarily due to inventory to support new brands and the opening of our new market fulfillment center in Greer, South Carolina, which opened in the third quarter last year. Year-to-date, through the second quarter, we generated $359 million in operating cash flow. Capital expenditures were $95 million for the quarter, primarily reflecting investments in new and existing stores, IT investments, and merchandise fixtures. Depreciation was $65 million compared to $62 million last year, primarily due to higher depreciation related to new stores and IT investments. In the second quarter, we returned $212 million of capital to our shareholders through the repurchase of 550,000 shares. At the end of the quarter, we had $1.6 billion remaining under our current $2 billion repurchase authorization. Now turning to our outlook. We have taken a more cautious view for the year. We now expect net sales for the year will be between $11 billion and $11.2 billion, with comp sales in the range of down 2% to flat. In addition to reflecting our first half performance, our updated outlook for sales assumes it will take more time for our actions to change the top-line trajectory, and that stores impacted by multiple competitive openings will continue to be pressured more than the rest of the fleet. The operating environment remains dynamic, and the low end of our range implies incremental pressure on consumer spending. For the year, we expect operating margin will be between 12.7% and 13% of net sales. Most of the reduction in our expectation for operating margin compared to our previous view is due to the lower top line. But we have also included flexibility to respond to the evolving promotional environment. For the year, we expect gross margin will deleverage 70 basis points to 90 basis points as lower merchandise margin and deleverage of store fixed costs are partially offset by other revenue growth and lower transportation costs. For the year, we expect SG&A expense will increase in the mid-single digit range. We expect many of the trends we experienced in the first half will continue in the second half, with SG&A driving most of the operating margin deleverage. Reflecting these assumptions, we now anticipate diluted EPS will be in the range of $22.60 to $23.50 per share. We continue to expect to generate strong operating cash flow for the year, which will support our planned CapEx investments of $400 million to $450 million and share repurchases of $1 billion. In closing, we are focused on improving performance in the second half, and we believe our newness and go-to-market strategies, along with continued operational and financial discipline, will enable us to navigate the dynamic environment and drive improved sales and profit momentum over time. And now, I'll turn the call over to our operator to moderate the Q&A section.

Thank you. We will now be conducting a question-and-answer session. Thank you. Our first question comes from the line of Steven Forbes with Guggenheim Securities. Please proceed with your question.

Good evening, Dave, Paula. Dave, I was hoping you could expand on the competitive pressures you noted in the prepared remarks. Any way to help us contextualize the size of this headwind such as year one cannibalization rates, and any early insights on the recovery path? Meaning, what does the recovery for those stores impacted look like? And maybe you can give us an example of some of those earlier stores that were impacted, any timeframe to sort of get back to those prior levels pre-cannibalization? Thank you.

Great. Thanks for the question, Steve. And yeah, let me just start by saying we are, of course, no strangers to competition. We know how to compete effectively. As I said in the remarks, this is a very attractive category that continues to increase in the competitive environment. As it relates to increased points of pressure, what we've shared before is that we have historically seen a short-term impact from new distribution points on our existing store when a competitor opens near one of our stores. What's unique about this time and this environment is the scale and the pace of change, which has made it difficult for us to fully forecast the cumulative impact. Approximately 88% of our stores have been impacted by at least one new store. More than half of our stores have been impacted by multiple competitive openings, which, to give you context, if you take a single Ulta Beauty store, two or more competitive stores have opened within that store's trade area, which is unusual for us historically and something that we're navigating through. What we saw during this quarter is that stores with multiple competitive openings are underperforming those stores with no or limited competitive impact. Stores that have not had a direct in-market trade area competitive impact delivered positive comps for the quarter, which provides us confidence in our model, business, and guest engagement. Stores that have only had one competitive opening that occurred early in the expansion cycle are performing in line with historical trends, another data point that gives us confidence. We know we're still in the midst of this, and stores have opened aggressively over the last couple of years. These competitive pressures will likely continue into the near term. But the positive signals I highlighted, guest engagement, the impact of newness, the success of our salon business, the loyalty growth—all of those factors suggest to us that our business has underlying strength and is well positioned for recovery. While it will take time, we are not sitting still, and we're aggressively taking actions across all areas highlighted in my prepared remarks.

Thank you. Our next question comes from the line of Mark Altschwager with Baird. Please proceed with your question.

Hi. Good afternoon. This is Amy Teske on for Mark. With the demand backdrop continuing to be pressured, can you talk more about the actions you were taking within SG&A to limit the amount of deleverage you're seeing in the model? Thank you.

Sure. Thank you. Thank you, Amy. As I mentioned in our prepared remarks, we did deliver better than planned SG&A due to focused and disciplined cost management as we navigated our top-line pressures. As we think about the second half, we've planned SG&A expenses to increase in the mid-single digit range for the year, reflecting a more moderated growth in the second half. We continue to exercise financial discipline as we navigate these near-term pressures while still ensuring we're investing to position ourselves for success over the long term. But as we look ahead, we're expecting that moderation in SG&A growth because we are completing our transformation; many of our transformational investments are concluding. We will continue to exercise financial discipline as we navigate.

Thank you. Our next question comes from the line of Michael Lasser with UBS. Please proceed with your question.

Good evening. Thank you so much for taking my question. Given the competitive overlap with all these new points of distribution that is not going to go away anytime soon, how long do you expect that it will take to restore the business to positive comps? And since it seems that hitting the promotional lever is not having the intended impact, what is the backup plan or what is the alternative if the actions you are taking don't work to restore positive comps? Thank you.

Thanks, Michael. Yes, it is, as we've discussed, a dynamic and competitive environment that we're navigating. I gave you some of those dynamics in my prepared remarks. We remain confident and bullish in the long-term outlook for this business because of all the positives highlighted. We're executing across several efforts to drive our business. Here's what I know about our business right now. We are seeing many positive signals that are gaining traction, and we're addressing areas that may not be working as well as we had hoped. Assortment is always key. So when we look at key levers, assortment is critical. Newness is working and resonating with our guests, with brands like Sol de Janeiro and Charlotte Tilbury driving sales. Our exclusive brands are playing an important role, and we continue to add brands like Naturium in Q2, and tomorrow, we launch ILIA, an important makeup brand that we're excited to add to our assortment. Continued innovation is a key lever that’s working, and we'll continue to drive that. I talked about the importance of marketing and social relevance to connect and deepen brand love. We're pleased with the progress—an all-time high of brand love and brand awareness. Our digital business is critical, and I shared that our digital sales were on expectation; we're focused on delivering across all experiences. We know we've invested heavily in digital capabilities over the last couple of years. Earlier this year, we completed our new digital store platform, and that's providing new ways to delight our guests. Loyalty is core to our long-term success; we're pleased with the 5% year-over-year growth and high retention and engagement among our platinum and diamond guests. Services and experience are also driving positive trends. Promotions are an important piece of our business, and I'm glad you highlighted this. Some incremental offers we added when our performance decelerated did not have the intended effect, particularly in our store channel. Our tentpole events, including our big summer beauty sale and tomorrow's launch of 21 Days of Beauty, have driven strong traffic. We'll take our learnings from the promotional impacts we had in the second quarter and continue to focus on the highest return, highest impact promotions. If you step back and think about our business, we feel very confident that we're well-positioned to recover. Our differentiated business model remains intact, and while some elements have been pressured, our model continues to connect with our guests. We still offer unique services and experiences, and we deliver that every day in our stores. We’re sharpening our approach to drive growth across the board, focusing on what's working and addressing opportunities for improvement. While it may take time to return to being a share gainer, we're confident that we'll get there and our actions align accordingly.

Thank you. Our next question comes from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question.

Good afternoon. Thanks for taking my question. So just going back to unit growth and also Target rollout. Just given the more difficult environment right now, any thoughts on salon unit growth? And as you look at Target, I believe that continues to roll out. Just curious how that's playing out in the current backdrop.

Yes. We are pleased with our new store openings. As I mentioned in my prepared remarks, our new stores, despite some of the other dynamics going on, continue to perform well. We have opportunities across the country in a variety of markets to reach new consumers. I've shared before in previous calls about our small format store, which is also performing well. Regarding our Target partnership, we're pleased with its strategic role in our member engagement program. We are optimistic about this path.

In the last quarter, we opened four Ulta Beauty at Target stores. We have 541 total locations through the quarter. We're still on track to hit our 800 stores through our commitment. It's about deepening guest engagement, driving the growth of new members, and reengaging lapsed members, and we're seeing that. Nearly 4 million guests have linked their Ulta Beauty and Target Circle loyalty programs. We see this as a means to connect with guests and engage them back into the Ulta Beauty home store.

Thank you. Our next question comes from the line of Kelly Crago with Citi. Please proceed with your question.

Hi. Thanks for taking my question. I just wanted to follow up on the promotional levels that you're assuming this year. What gives you the confidence that promo levels can sustain at this lower rate relative to pre-COVID, just given the category slowing and consumers seeking value, alongside a big step up in the competitive environment? And just curious about your thoughts on the product assortment makeup—any rethinking regarding the distribution points of some of the more established brands. Just any thoughts on how you see the brand assortment evolving over the next couple of years? Thanks.

Thanks, Kelly. On the promotional levers, when we look ahead, we see that promotional activity has increased. This reflects both the normalization of the category and increased competition. As I shared, we were more promotional in the first half of the year. As we enter the second half, promotion will play an important role, driven largely by the holiday period. Holiday is a different dynamic and is intensely promotional as it has been for years. Our guidance assumes that, while higher than last year, promotional activity will remain below 2019 levels, which will be driven by smart execution, our CRM capabilities, and maximizing tentpole events. As far as our assortment going forward, Ulta Beauty has a unique assortment across various price points, and we're truly proud of that. Our collaborative relationships with brands will continue to drive growth and innovation. We focus on finding new offerings while maintaining strong partnerships with legacy brands. Our assortment will evolve with a mix of established and new brands, ensuring we serve the diverse needs of our customers.

Thank you. Our next question comes from the line of Korinne Wolfmeyer with Piper Sandler. Please proceed with your question.

Hey, good afternoon. Thanks for taking the question. I'd like to hear a little bit more about the operational disruption you referenced with the ERP transition. Can you provide a little bit more detail on what exactly happened and how the business was impacted? What gives you confidence that the issue is cleared out going forward? Thank you.

Yes, Korinne. As Dave mentioned in his earlier comments, we executed the most complex element of our multiyear ERP implementation during this quarter, which was the rollout to our stores. Our teams had to manage dual systems as we phased through the 1,400-plus stores, adding a lot of complexity. This created challenges to our purchasing, store allocation, and planning processes. However, we see this as a short-term headwind. We have completed this challenging phase and are focused on fine-tuning and optimizing the system. While there are still some investments needed for continued optimization, we have built that into an ERP budget plan, and it's reflected in our current guidance. A change of this magnitude when you're going through distribution centers and stores is very challenging. Adapting takes some time, but we're grateful to our teams for embracing these transformative changes. We feel we're progressing well and are confident that we're ready for a great holiday season.

Thank you. Our next question comes from the line of Ike Boruchow with Wells Fargo. Please proceed with your question.

Hi. Thank you for taking my question. This is Juliana on for Ike. As we head into your Analyst Day in a few weeks, I was just wondering if there's any preliminary update on the long-term algo or the long-term margin target that you can give us. Thank you.

Hi, Juliana. Thank you for the question. I certainly understand and appreciate the reason for the question, but we are not providing an update on our long-term expectations on today's call. However, we do plan to share our long-term growth outlook at our Investor Day in October. We look forward to discussing our growth opportunities in the category and investments to support them.

Thank you. Our next question comes from the line of Michael Baker with D.A. Davidson. Please proceed with your question.

Okay. Hi. Thanks. I wanted to ask about the pace of the share losses in prestige. Your business seems to have gotten worse based on your comps, but some industry data and competitive data are also seeing a deceleration. I wonder if you can give us any context on the gap between what you're seeing in your own business versus competitors. Are you seeing the share losses actually get worse? Is the question. Thanks.

Yeah, Michael. Thanks for the question. As you said, yes, the category has moderated, really anticipated through the year after years of growth. As far as our performance, we maintained our mass share but continue to be pressured in prestige, particularly driven by hair and makeup. No, we wouldn't say that it's getting any worse. The dynamics are as they've been for much of the year regarding share; it's a reflection of both a moderated category and continued competitive pressures, and then some of the dynamics discussed today contributed to the performance delivered in the second quarter.

Thank you. Our next question comes from the line of Ashley Helgans with Jefferies. Please proceed with your question.

Hey. Thanks for taking the question. So a question around the increasing competitive environment. Has that changed the ability to get new brands at all? And then when you're adding new brands like ILIA, do you factor in where they're currently distributed?

Yes, great question, Ashley. Big picture, no. Our brand partners are crucial to our success, and I'm proud of how our team manages these relationships. Brands continue to see Ulta Beauty as a leading destination to expand their business. Our brands continue to lean into us. We focus on rolling established brands through exclusive innovation and new brands while expanding opportunities to reach our guests. Despite the competitive environment, we see significant potential in our partnerships. With 44 million members, 1,400 stores, and a dynamic digital environment, we believe we're positioned uniquely. No one does what Ulta Beauty does, and our brand partners recognize that.

Thank you. Our next question comes from the line of Olivia Tong with Raymond James. Please proceed with your question.

Great. Thank you. A few questions left. First, how much of the miss relative to your expectations this quarter do you think was a function of the category decelerating versus your own share loss? And then, second, why do you think the promos you did this quarter didn't quite work? As you think about the rest of the year, do you have to deploy more promo or different promo considering that you expect comps to potentially fall another 100 basis points in the second half? Lastly, can you discuss what you observed towards the end of the quarter that influenced your guidance? Thank you.

Great. Thanks, Olivia. On the mix of drivers, we highlighted four primary elements that we believe impacted our business in the second quarter, and we think each played a role in our sales performance, with competitive pressures being the largest driver. As we've discussed, we're focusing on the competitive pressure, recognizing the category has moderated some, which requires us to elevate our efforts. The internal dynamics also played a role in our operational efforts and promotions. Regarding promo specifically, while our core strategic elements and loyalty events are working, incremental promotions layered in when performance decelerated didn’t resonate as well as intended, particularly in stores. Those promotional complexities impacted our messaging clarity, which we will learn from in the future. Regarding our outlook, we have assessed a variety of scenarios reflecting the consumer trends and competitive dynamics that we've mentioned. We are not standing still; we have highlighted many ongoing initiatives and will continue to take action on our various fronts to drive confidence in our comp guidance for the second half of the year.

Operator, I think we have time for one more question.

All right. Great. Our last question comes from the line of Susan Anderson with Canaccord Genuity. Please proceed with your question.

Hi. Good evening. Thanks for fitting me in here. I was curious; it sounds like most of the competitive pressure is on the prestige side, and it did sound like you maintained that mass share. But are you also seeing any increased competition on the mass side, especially since some of the mass retailers are likely becoming more competitive from a promotional standpoint? And then also, regarding hair care, was that decline primarily driven by prestige or did you see anything on the mass side as well? Thanks.

Great. Yes, this is a very competitive category. We're pleased to have maintained our mass share while acknowledging there is competition happening on both the mass and prestige side. However, we haven't seen the same dramatic increase in distribution points in mass as we have in prestige. This has allowed us to drive our overall experience. It's crucial that we recognize the interplay between mass and prestige, as the guests often shop across both categories. Regarding hair dynamics, while we continue to drive strong efforts in hair care, a shift in one of our strategic tentpole events impacted the quarters results; however, our salon business continues to perform well. Yeah. Thank you. Thank you, Susan, and thank you all again for joining us today. We appreciate your interest in Ulta Beauty. I want to take this last moment to thank our more than 55,000 Ulta Beauty associates for their continued commitment to serving our guests. Our teams have managed through significant change over the last three years, and I so appreciate how quickly they've embraced new technology, new processes, and new ways of working, always while keeping our guests and each other at the center of everything we do. We look forward to speaking to you all again a little sooner than normal after one of our quarterly calls and at our investor event in October. I hope to see you there. I hope you all have a good evening, and thanks again for joining.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time. Thank you for your participation.