Earnings Call Transcript
Ulta Beauty, Inc. (ULTA)
Earnings Call Transcript - ULTA Q1 2022
Operator, Operator
Good afternoon, and welcome to Ulta Beauty's conference call to discuss results for the first quarter of fiscal year 2022. As a reminder, this conference call is being recorded. And it is now my pleasure to introduce Ms. Kiley Rawlins, Vice President of Investor Relations. Thank you, Ms. Rawlins. Please proceed.
Kiley Rawlins, Vice President of Investor Relations
Thank you, John. Good afternoon, everyone, and thank you for joining us today for our discussion of Ulta Beauty financial and operational results for the first quarter of fiscal '22. Hosting our call are Dave Kimbell, Chief Executive Officer; and Scott Settersten, Chief Financial Officer; Kecia Steelman, Chief Operating Officer, will join us for the Q&A session. This afternoon, we announced our financial results for the first quarter. A copy of the press release is available in the Investor Relations section of our website. 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, May 26, 2022. 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 Scott. Following our prepared comments, we will open the call for questions. And as always, the IR team will be available for any follow-up questions after the call. Now I'd like to turn the call over to Dave. Dave?
David Kimbell, CEO
Thank you, Kiley, and good afternoon. Fiscal 2022 is off to an outstanding start with the Ulta Beauty team delivering another quarter of excellent performance on top of last year's record results. For the quarter, net sales increased 21% to $2.3 billion, comp sales increased 18%, operating profit increased to 18.7% of sales and diluted EPS increased 54% to $6.30 per share. During the quarter, all major categories exceeded our expectations, and we increased our market share in Prestige Beauty based on point-of-sale data from the NPD Group. We also increased the number of members in our Ultimate Rewards Loyalty Program, introduced innovative digital experiences for our guests and continued to execute major strategic projects, including investments in new stores, supply chain and technology infrastructure, all while successfully navigating supply chain challenges, a tight labor market and operating cost pressures. I want to express my sincere appreciation to all of our Ulta Beauty associates for their collaborative efforts to create great guest experiences, execute against our plans and deliver these outstanding results. Consumers continue to be highly engaged with the beauty category as they participate in more in-person activities, engage in more travel and lean into experiential spending. And while macroeconomic pressures, such as rising inflation are top of mind for consumers, their resilience and emotional connection to beauty continues to drive the recovery of the category. This consumer demand, paired with strong execution of our strategic priorities, fueled our exceptional results. Looking at our operational performance for the quarter, I will focus on the progress we are making with our consumer-facing priorities and then share an update on our optimization efforts. Let's start with our first strategic priority to drive disruptive growth through an expanded definition of All Things Beauty. From a category perspective, fragrance and bath, hair care, makeup and skin care all delivered double-digit comp growth against the first quarter last year. Importantly, sales of makeup exceeded pre-pandemic levels in both mass and prestige cosmetics. The makeup recovery is progressing faster than we expected coming into this year. Compared to the first quarter of 2021, prestige cosmetics outperformed mass cosmetics, driven by new and expanding brands and a strong 21 Days of Beauty event. From a trend standpoint, foundation, concealers, eyeliners, and lipstick continue to deliver strong comp growth. New brands like Fenty Beauty, r.e.m. Beauty by Ariana Grande and Treslúce, a mass cosmetics brand founded by Latin musician Becky G, contributed to growth during the quarter. While new product launches from a wide range of brands, including Clinique, Lancome, NARS, e.l.f. and NYX also delivered strong sales growth. In addition, this quarter, we expanded MAC into 233 additional stores and introduced Chanel Beauté into 104 stores. Even as they increase makeup usage, beauty enthusiasts are maintaining their skincare routines. As a result, skin care delivered another quarter of strong double-digit sales comp on top of robust double-digit growth in the first quarter last year. Moisturizers, eye serums and acne treatments continue to drive category growth in the quarter. We also saw strong growth in sun protection and self-tanning as consumers increased travel and social activities. NEWNESS continued to appeal to guests with new brands, including Drunk Elephant, Fresh, Super Goop and Good Molecules, as well as new products from TULA, StriVectin and First Aid Beauty, contributing to the category growth during the quarter and established brands, including Peter Thomas Roth and La Roche-Posay, continue to benefit from engaging social media content. Hair care delivered another quarter of double-digit growth, driven by strong guest engagement with NEWNESS and our core assortment as well as successful salon back bar takeover events. Trends focused on hair health like damage repair, color care and scalp treatments continue to resonate with guests and interest in hair styling aids increased with the rise of social occasions. New brands like OLAPLEX as well as new product launches from WEI and Briogeo contributed to category growth in the quarter. And Dyson's Airwrap styling tool continues to be a member favorite. Guests continued to engage with core professional brands like Redken, Pureology and Biolage and our salon back bar takeovers drove strong growth for FEKKAI and IGK as our stylists engaged guests with these brands. Consumer strong engagement with the fragrance category continued, driving double-digit growth on top of phenomenal results last year. Exciting newness, a strong Valentine's Day and strategic events, including 21 Days of Beauty and Spring Haul, contributed to this performance. The in-store launch of Ulta Beauty exclusive Billie Eilish as well as newness from Gucci and Carolina Herrera resonated with guests, and our monthly Fragrance Crush program drove growth for established brands like YSL and Valentino. In addition to driving core category growth, we are investing in key cross-category platforms to drive guest engagement and market share growth. Since launching Conscious Beauty in 2020, we have continued to expand brand participation, increase guest awareness and drive trial. At the end of the first quarter, more than 280 brands offered certified products in at least one pillar. And while we continue to certify existing brands and SKUs, many new brands are launching with certification in place. One such example is Andrew Fitzsimons, a hair care brand that offers proprietary bonding technology at accessible price points, which was certified across all four pillars when it launched in the first quarter. Another example is Sk*p, an Ulta Beauty exclusive hair and body care brand packaged in a fully recyclable, shower-friendly paper beauty carton, which also launched in the first quarter. Moving now to our efforts to continually expand and support our assortment of bipack brands, we launched five new bipack brands, BeautyStat, Rosen Skincare, Fenty Beauty, Treslúce Beauty, and Mielle Organics. We also expanded Black Girl sunscreen into all stores. To promote trial, we introduced a spotlight display in select stores to showcase our bipack founders. In recognition of Black History Month, we launched a compelling omnichannel campaign to recognize, celebrate and support the black community and black-owned brands. We featured black-owned brands in stores and across enhanced digital and print channels, and we offered compelling loyalty rewards on black-owned brand purchases to drive awareness. Finally, our wellness shop continues to resonate with guests as they prioritize self-care and wellness journeys. We recently expanded the shop to an additional 266 stores, now reaching about 55% of our fleet and refreshed the digital landing page on ulta.com. With easy ways to explore our curated assortment and helpful tips about easy self-care routines, guests can now more readily incorporate wellness into their busy schedules. Turning now to our efforts to evolve the omnichannel experience through a connected physical and digital ecosystem, All In Your World. Store traffic trends were strong in the quarter as guests capitalized on their preference for in-store shopping with fewer COVID restrictions in place than last year and store capacity returned to normal levels. While store traffic is still below pre-pandemic levels, the trend is improving. As a core differentiator for Ulta Beauty, beauty services deepen engagement and loyalty through human connection. Consumers are resuming their beauty service routines as they participate in more in-person activities. In the first quarter, our beauty services delivered double-digit comp growth, primarily due to increased capacity and new offerings, including OLAPLEX Repair and PROTECT and express color by Redken. To meet growing guest interest in services and experiences, we continue to expand our in-store events and enhance our service offerings. In April, we relaunched makeup services in all stores, just in time to support special events such as proms, graduations and weddings. As guests are coming back to shop in stores, they are also maintaining their use of convenient engaging digital channels. Reflecting these trends, we continue to enhance our omnichannel offerings, including buy online, pickup in store and same-day delivery. During the quarter, BOPIS increased 26% to 21% of e-commerce sales compared to just 16% last year. While still limited, guests are increasing their use of our same-day delivery options. Based on engagement trends, we recently expanded same-day delivery to five new markets, including New York City. And today, about 30% of our stores offer guests this convenient option. During the first quarter, we continued to expand and enhance our digital experiences. As part of our Digital Store of the Future Journey, we introduced a new homepage for both ulta.com and our mobile app. We also launched two Virtual Try-On tools, each powered by technology developed by companies we have invested in through our digital innovation fund. First, we launched GLAMlab Skin Advisor 2.0, powered by global artificial intelligence startup, pot.ai. This best-in-class skin analysis technology enables us to provide guests with a more accurate skin diagnosis, which has resulted in stronger satisfaction with the tool. We also launched GLAMlab hairstyle try-on powered by RE/STYLE, a beauty tech start-up that uses artificial intelligence and machine learning to enable virtual try-on of more than 50 different hairstyles, including options by gender and texture. We also introduced innovative AR and virtual reality experiences to support our launch of Fenty Beauty and r.e.m. Beauty. Finally, we continue to enhance and expand our partnership with Target. This leading partnership is part of our long-term strategy to build brand loyalty and engagement with Ulta Beauty. We are seeing existing ultimate rewards members take advantage of the convenience of shopping while earning points at Ulta Beauty at Target. And we are leveraging Target's strong traffic to introduce Ulta Beauty and Ultimate Rewards to new guests. During the first quarter, we opened 26 Ulta Beauty at Target shops, ending the quarter with 127 locations. One of our priorities in 2022 is to leverage marketing to build engagement as we scale. As an example, in support of our 21 Days of Beauty event, we co-created brand-relevant digital and in-store communications with Target to support this strategic Ulta Beauty event, which resulted in strong performance and guest engagement across both channels. Moving to our efforts to drive love, loyalty and emotional connection with Ulta Beauty by expanding and deepening our presence at the heart of the beauty community. During the first quarter, we continued to optimize our marketing mix to reach guests through the most relevant channels and platforms. We leveraged audience data to execute a targeted digital-first approach to 21 Days of Beauty and Spring haul driving greater awareness and increased sales. We launched content partnerships to engage new audiences and increase awareness of our cross-category platforms, and we created innovative marketing campaigns to support key brand launches. We ended the quarter with 37.7 million active members in our Ultimate Rewards Loyalty Program, 17% above the first quarter last year. This increase was primarily driven by continued member reactivation growth, new member acquisition and strong retention. Our strategy is to reengage lapsed members, many of whom dropped off during the pandemic are delivering results. Additionally, new member conversion remains strong in stores and online conversion rates are improving, as we increase the visibility and value of ultimate rewards throughout the guests online journey. I'm also excited to share that we launched UB Media, our retail media network. Through UB Media, we will harness the power of our exclusive first-party data to transform the way brands connect with beauty enthusiasts. Building on our successful digital marketing partner program, UB Media offers brand partners an enriched portfolio of advertising products and channels as well as enhanced measurements in reporting, including audience and creative insights. The media network offers advertising, access fee display, video, search, product listing ads, social and influencers on both open web platforms and Ulta Beauty-owned properties. In addition to unlocking a new income stream while helping brand partners build digital campaigns to effectively engage audiences, we expect to see sales benefits as campaigns lead consumers back to Ulta Beauty properties to transact. Underlying these customer-facing priorities is a focus on driving operational excellence and optimization. Last fall, we shared our updated supply chain strategy, including our plan to build market fulfillment centers, or MFCs, to supplement our existing DC network capacity and provide greater speed to stores and e-commerce guests in specific markets. We recently broke ground on our first MFC in Greenville, South Carolina, and expect the facility will be fully operational in the third quarter next year. In addition, our planned retrofit of our full service distribution center in Greenwood, Indiana is on track to be complete in the second quarter of 2023. I am confident our infrastructure investments, including key supply chain and IT investments, will enable Ulta Beauty to continue to deliver strong results and capitalize on future growth opportunities. In closing, a few weeks ago, I had the privilege to welcome nearly 2,000 members of the Ulta Beauty team to our annual field leadership meeting, bringing together our general managers, district managers, field support teams and brand partners for several days of recognition, leadership development and product education. The excitement was palpable and the optimism about our future was truly inspiring. We celebrated everything we have accomplished throughout the last two challenging years and set the stage to deliver on the incredible opportunities ahead for Ulta Beauty. I left the event even more excited about all we can do together as one Ulta Beauty team to refine and redefine how the world sees and expresses beauty. As we look forward, the world around us continues to be dynamic. Product prices and operating costs are rising and consumers are increasingly concerned about the impact of inflation. While it is difficult to forecast how inflation may impact consumer behavior going forward, we are monitoring guest engagement and remain encouraged by the underlying trends we see in our business and in the beauty category. I am confident our team will continue to navigate near-term pressures, and I remain excited about the long-term opportunity for Ulta Beauty to continue to deliver profitable growth. And now I will turn the call over to Scott for a discussion of the financial results. Scott?
Scott Settersten, CFO
Thanks, Dave, and good afternoon, everyone. I want to echo Dave's comments and thank our Ulta Beauty associates for delivering another outstanding quarter. Their collaborative efforts and commitment to serving our guests enabled this extraordinary performance. Our first quarter results were stronger than we planned. Robust top line growth due to several factors, including the continued resilience of the beauty category, stronger-than-expected store performance and the impact of new brand launches drove better-than-expected leverage in both gross margin and SG&A, resulting in record operating margin of 18.7%. Now let's dig into the details of our results. Starting with sales. Net sales for the quarter increased 21%, driven by 18% growth in comp sales, an increase in other revenue and strong new store performance. From a channel perspective, stores delivered strong double-digit comp growth, reflecting fewer COVID restrictions than last year, while e-commerce sales were flat, in line with our plan. Transactions for the quarter increased 10%, driven by double-digit growth in store transactions. Average ticket increased 7.3%, resulting primarily from an increase in average selling price. The increase in average selling price reflects the impact of product mix, retail price increases executed in the quarter and lower promotions. Other revenue increased $20.4 million, primarily due to growth in credit card income and higher loyalty point redemptions. The increase in credit card income was primarily due to stronger sales growth. The increase in loyalty point redemptions reflects the improving trend in store traffic and the impact of our proactive member engagement campaigns. During the quarter, we opened 10 new stores and relocated six stores. For the quarter, gross margin increased 120 basis points to 40.1% of sales compared to 38.9% last year. The increase was primarily due to leverage of fixed costs, the growth of other revenue and favorable channel mix, partially offset by lower merchandise margin. Robust top line growth and benefits from our occupancy cost optimization efforts resulted in meaningful leverage of store fixed costs. Despite experiencing double-digit growth in supply chain costs, primarily resulting from increases in wage rates, transportation costs and fuel surcharges, strong top line growth during the quarter enabled us to leverage supply chain costs. As sales growth moderates through the rest of the year, we expect higher supply chain costs to become more of a headwind. Reflecting strong sales performance of stores, channel mix was favorable this quarter. As a percentage of sales, e-commerce sales were about 400 basis points lower than the first quarter last year. Although the impact of lower promotions was favorable during the quarter, merchandise margin was lower than last year, primarily due to the impact of brand mix and lapping benefits from favorable inventory reserve adjustments last year. As planned, SG&A increased 12.9% to $501 million. As a percentage of sales, SG&A decreased 150 basis points to 21.4% compared to 22.9% last year. Lower marketing expenses and leverage of store payroll and benefits due to higher sales were partially offset by deleverage of corporate overhead, reflecting investments related to our strategic priorities. As Dave shared, we recently launched UB Media, a more sophisticated and expanded version of our digital marketing partner program. Reflecting the expected scaling of this platform, we are offsetting the incremental marketing expense of the digital campaigns we manage for our brand partners with the vendor income that is a direct reimbursement for these specific costs within total marketing expense. This resulted in about 70 basis points of favorable impact to SG&A in the quarter. Operating income increased 43.4% to $437.7 million compared to $305.3 million last year. As a percentage of sales, operating margin increased 290 basis points to 18.7% of sales compared to 15.8% last year. Diluted GAAP earnings per share increased 53.7% to $6.30 per share compared to $4.10 per share last year. Moving on to the balance sheet and cash flow statement. Total inventory increased 16% to $1.57 billion compared to $1.35 billion last year. In addition to the impact of 28 additional stores, the increase reflects inventory purchases to support key brand launches as well as continued efforts to maintain strong in-stock of key items to support expected demand and mitigate anticipated global supply chain disruptions. Capital expenditures were $71.1 million for the quarter compared to $34.6 million last year. The increase in capital expenditures reflects a more normalized investment cadence versus the last couple of years and includes investments in IT systems, merchandising improvements and store maintenance and other. Depreciation was $62.8 million compared to $70.6 million last year, primarily due to a shift of IT investments from capital to cloud expense. We ended the quarter with $654.5 million in cash and cash equivalents. In the first quarter, we repurchased 332,000 shares at a cost of $132.8 million. At the end of the quarter, we had $1.87 billion remaining under our current $2 billion repurchase authorization. Turning now to our outlook. Reflecting our strong first quarter performance and sales trends we've experienced so far in the second quarter, we are increasing our outlook for fiscal 2022. We now expect net sales to be between $9.35 billion and $9.55 billion with comp sales growth between 6% and 8%. Our updated outlook reflects trends year-to-date while continuing to consider uncertainties that could impact the second half of the year, including inflationary risk to consumer spending and the impact of increased points of distribution for Prestige Beauty. We anticipate comp growth will be in the low to mid-teens in the first half and then moderate to low single-digit growth in the second half. We now expect operating margin for the year to be between 14.1% and 14.4% of sales. We anticipate operating margin will leverage in the first half but deleverage in the second half, as sales growth moderates and cost pressures and planned investments have a greater impact. We continue to expect gross margin for the full year will be lower than fiscal 2021, driven primarily by lower merchandise margin resulting from the impact of brand mix, more normalized assortment management activity and a more normalized promotional environment. In addition, we believe fuel prices will continue to be volatile, resulting in higher supply chain costs than initially planned. We continue to expect SG&A expense will deleverage for the year, driven primarily by $70 million to $75 million of expenses related to our strategic priorities, including investments to support UB Media, Ulta Beauty at Target, Project SOAR and other IT capabilities as well as higher wage rate growth across the enterprise, partially offset by lower marketing expense and incentive compensation. In addition, we are seeing inflationary pressure on operating expenses like service provider fees, labor, supplies and travel, and we expect these trends to continue throughout fiscal 2022. These assumptions result in updated full year guidance for diluted EPS growth in the high single to low double-digit range. For modeling purposes, some expenses initially planned for Q2 are expected to shift into Q3, primarily reflecting availability of resources and equipment. As a result of these shifts and a stronger than initially planned sales trend, we now expect to deliver earnings growth in the second quarter. In closing, fiscal 2022 is off to a great start, but uncertainties remain. Our updated outlook reflects stronger top line performance and greater cost pressures as well as economic and global uncertainties that could adversely impact consumer spending later in the year.
Operator, Operator
Our first question comes from the line of Simeon Siegel with BMO Capital Markets.
Simeon Siegel, Analyst
Congrats on the great results. So great comp. Within the strong ticket growth, could you break out AUR from UPT? And then maybe more broadly, how you're thinking about average ticket going forward? And then just a follow-up, just given how well you guys do with that, any way to know within that 10% transaction growth, how much are the unique guest visits versus an uptick in guest visit frequency?
Scott Settersten, CFO
Yes, Simeon, thank you for your question. To answer directly, the units per transaction were essentially flat year-over-year. We are benefiting from what I would describe as a moderate promotional environment, along with the mix of brands we’ve added to our assortment over the past year. You’re familiar with these names; we’ve talked about Fenty, OLAPLEX, and other key brands we've recently introduced. The combination of these factors is making a significant contribution to our gross margin in recent quarters.
Simeon Siegel, Analyst
And then just within the transactions, frequency versus unique visits?
Scott Settersten, CFO
Yes. We don't really have anything in more detail to share with that at this point in time. Again, we are very happy to see the rebound in store traffic, right. And so a nice healthy transaction growth is always what we're striving for and planned for. And so we're super excited to see the bounce back of the consumer in the stores and making sure, again, that we deliver best-in-class specialty retail omnichannel experience.
Operator, Operator
Our next question comes from the line of Korinne Wolfmeyer with Piper Sandler.
Korinne Wolfmeyer, Analyst
Congrats on the quarter. So first of all, I'd like to just get your thoughts on the current inflation environment and how that's impacting consumers and maybe more so here in the early parts of Q2? Are you seeing any sort of shift in demand maybe from prestige to mass or vice versa? Or are you seeing mass be maybe more resilient than prestige or vice versa? Just any thoughts here would be helpful.
David Kimbell, CEO
Yes. Great question. And yes, the inflationary environment, as both I and Scott said in the remarks, is certainly one that we're watching carefully, and we're staying close to our guests. So far, our guests are managing through it and we're not seeing huge impacts. In fact, as I mentioned in the script, Prestige makeup performed a bit higher than mass makeup. So we're seeing strong results across our portfolio. We haven't experienced meaningful trade down behavior that we can identify. And it's one of the unique things that we feel is core to our model is the breadth of our assortment, all price points, from mass to prestige, all categories, hair care and skin care, makeup and bath and fragrance. And so being able to adjust and adapt as consumers' needs evolve has been true to our model for a long time and allowed us to manage through any disruption in the marketplace. But right now, we're seeing strength across all aspects of our business, which we're obviously really pleased with. But we're also prepared to adjust and adapt if and when consumer behavior adjusts.
Korinne Wolfmeyer, Analyst
And then I'd just like to ask quickly on Target and the shop-in-shops in Target and how they're doing. Are you seeing any big difference in traffic in the Target shop-in-shops versus Ulta shops? How is ticket value different between the two? And then also, are there any key brands you'd like to call out that are being particularly successful in Target versus Ulta?
Kecia Steelman, COO
Yes, I'll take that one. What I will say is that we're really pleased with the overall partnership with Target. As Dave mentioned, we co-created from brand-relevant digital in-store campaign during our 21 Days of Beauty, and we're really pleased with that performance. I would just say that we will continue to share more as we grow more to scale right now. As of today, we've got 140 stores that are open as of today. We're on track to open 250 plus stores with them this year, but we like what we see. When we get a member engaged in our Ultimate Rewards Program, what we're seeing is that they're behaving very similar to our existing loyalty members. As far as brands go, Ulta Beauty works closely with the partners, with our brand partners on the assortment, et cetera, but Target really owns the sales. So we're not at liberty to comment on the sales-specific performance by brand at this time.
Operator, Operator
And our next question comes from the line of Olivia Tong with Raymond James.
Olivia Tong Cheang, Analyst
My first question is just around the makeup recovery and compare and contrast that to the emergence of Prestige hair care and your view in terms of the opportunity in front of you, obviously, makeup is significantly larger. The recovery accounted, from your earlier comments, is progressing faster than you had anticipated. As you think about the second half of the year and continuing to drive acceleration, can you talk a little bit about the plans in place to keep that going? And then I have a follow-up.
David Kimbell, CEO
Thanks for the question, Olivia. Yes, makeup has recovered more quickly than we expected at the start of the year. As you know, we’ve been focused on makeup for some time now. It was relatively weak before the pandemic and was one of the most affected areas of beauty during that time. It's exciting to see it bouncing back, driven by increased engagement in the category due to more opportunities to go out, social events, and a return to in-person work. The enthusiasm for makeup remains high, as shown on social media. With more chances to wear makeup, we're witnessing a resurgence in engagement. New trends are emerging in makeup that we're enthusiastic about, including a shift towards bold looks with vibrant colors and glitter, as people feel ready to venture out. At the same time, there's a trend for more natural looks, with consumers balancing both styles. Innovations in brows and contouring are being embraced by younger consumers discovering them for the first time. Long-lasting lip products, which gained popularity during the pandemic, continue to trend. We're pleased with what we see across the total category, and Ulta is performing well by adding key brands like Fenty, r.e.m., and Chanel, along with innovative offerings from both mass and prestige brands such as MAC, Clinique, Lancome, NARS, e.l.f., and NYX. All our efforts toward creativity and innovation came together nicely this quarter. Looking ahead to the second half of the year, we feel confident. While it’s challenging to predict consumer behavior, with more people feeling comfortable going out and returning to work, along with a steady stream of strong innovations, we’re optimistic about makeup’s recovery. In fact, in Q1, it surpassed pre-pandemic results for the first time. We are excited about the progress and are looking to keep that momentum going.
Olivia Tong Cheang, Analyst
And then on the gross margin, you said earlier that you're still expecting gross margin to be down. It was obviously a much better start to the year than we probably thought. But of course, costs are material as you progress through the year. But relative to your prior expectations, as you think about gross margin being down, is it the same level? And could you talk about like the puts and takes there, maybe a little bit of granularity in terms of your thought process on costs now versus mix improvement and obviously some leverage associated with an improved sales outlook?
Scott Settersten, CFO
Yes. The strong start we experienced in the first quarter is definitely influencing some of our gross margin. While we still expect it to decrease, it will be less than our original plan for the year. The same factors are still in play. We previously mentioned that the brand mix is a challenge this year. We anticipate that the promotional environment will stabilize as the year progresses. Although we didn't see much of an impact in the first quarter, we do expect it to become more significant as we move forward. Additionally, we're generally anticipating higher costs this year, with some, particularly fuel costs, exceeding our expectations. In the latter half of the year, we expect more challenges from that as well. Overall, I believe we're in a solid position. If sales remain strong, we will continue to prioritize optimizing the business to deliver excellent results.
Operator, Operator
And our next question comes from the line of Steph Wissink with Jefferies.
Stephanie Schiller Wissink, Analyst
I have a really quick question on inventory. I'm wondering if you can just talk a little bit about the complexion of the balance sheet inventory? And it feels strange to ask, but do you feel like you have enough to chase if the momentum persists in the business? And Scott, one question for you. This is a clarification. Could you just walk through the accounting on the UB Media? I'm not sure I tracked with you in your prepared remarks in terms of the offset to marketing fee, just talk a little bit about how those vendor agreements work, just to understand a bit how that affects the middle of the P&L?
Scott Settersten, CFO
That's two for me, Steph. That's not fair. Okay. So let's start with inventory. It's up 16% year-over-year, and we believe we are in a solid position. The results we are posting may seem straightforward, but our teams are working incredibly hard with our vendor partners, the merchants, and the inventory and supply chain teams to ensure we have the right products in the right places. Fill rates are strong, and we're feeling more optimistic as conditions have improved from what we experienced in the middle to late last year. We are focusing on high-velocity SKUs and new brands to capitalize on opportunities as they arise. We anticipate that the growth rate will moderate as we progress further into this year and begin to anniversary some of the proactive inventory actions we took last year. We remain confident that we will continue to invest in this area when prudent. Regarding the accounting for UB Media, for those interested in the specifics, last year we had a marketing partner program in place, which we have discussed before. Traditionally, most of the accounting for this was included in the gross margin line. Essentially, vendor income was recorded there, while the actual marketing costs were captured in SG&A, and the benefits flowed through the gross margin line along with our typical vendor accounting. This year, the distinction is that we can now offset the additional advertising costs in the SG&A line, and the remaining amounts will flow through the gross margin line. I hope that clarifies things.
Operator, Operator
And our next question comes from the line of Kate McShane from Goldman Sachs.
Katharine McShane, Analyst
Just a quick one from us. Just you mentioned increasing points of sales Prestige, just how are you viewing the competitive environment in light of that? And how are you looking to further differentiate yourself as those points continue to roll out?
David Kimbell, CEO
The beauty category is appealing and has been very competitive for a long time. I have been with Ulta for about 8.5 years, and this competitiveness has been consistent throughout that time and even before. It's an attractive and growing segment. We're currently seeing new competitive locations, especially in prestige, while we continue to open our own stores, including our partnership with Target. This shift is taking place, but we are excited and proud that even in the first quarter, with so many new competitors, we are still gaining significant market share in the Prestige category. This indicates the strength of our model, which offers something unique in the marketplace. Our assortment aligns with how consumers want to shop for beauty across various price points and categories, all within an experience that emphasizes the human connection sought in this emotional category. Research shows that our experience is distinct and special. Our team works every day to provide a unique experience that stands out and supports our business and market share growth. When you consider our loyalty programs, services, excellent digital experience, and continuous innovation across our business, we believe we are taking proactive steps. We are effectively engaging beauty enthusiasts throughout their beauty journey. We are confident that by maintaining this approach, we will see positive results. This is evident in the strong results from the first quarter and the momentum we've experienced coming out of fiscal '21, especially in our share results and loyalty member growth, which will be our focus going forward.
Operator, Operator
Our next question comes from the line of Daniel Hofkin with William Blair.
Daniel Hofkin, Analyst
Just a quick question regarding the Target partnership. I don't know if you commented specifically on this, but can you say whether it's having a measurable impact yet on your overall comp sales, obviously not at the Target stores themselves, but in the form of additional traffic to nearby Ulta stores or ulta.com and then kind of how you expect that contribution to evolve over the rest of this year and the next couple of years?
Kecia Steelman, COO
Yes. Dan, what I would say is that any time, as Dave mentioned earlier, we have new points of distribution, there's natural cannibalization that happens. But it's not meaningful yet. We've got just about 140 stores, as I mentioned, open as of today. We've factored this into our expectations. We do see that whenever we've opened or there's other points of distribution, including our own Ulta Beauty stores, we do see an initial impact that, that dissipates over time, we expect a similar pattern to happen here with our Ulta Beauty and Target locations. So as we continue to roll out more stores, we'll see if that continues to hold true. But what we've seen so far is that seems to be the case.
Daniel Hofkin, Analyst
And then just as you think about the, obviously, overall stellar results, any differentiation among categories or regions or parts of the quarter that you might call out plus or minus?
David Kimbell, CEO
Yes. A few things that I might say. One, across categories, we're really pleased that we see strength in all of our major categories. I talked about makeup in detail already. And so that's an important improvement on our business. But at the same time, that improved. It was encouraging to see skincare deliver strong results, haircare continue through innovation and prestige, on tools to drive a lot of engagement and newness across haircare, continues to drive great results. Fragrance, which has been a shining star throughout the last two years continues to drive growth. I talked in the script about some of the drivers of that newness, brands, exclusive brands like Billie Eilish as well as innovation on our existing brands, driving strong growth, sun care, expansion into wellness and driving incremental growth. So category performance was healthy across the board. Channel performance, again, strong results in both driven by our stores and traffic and engagement and the desire to get back and shopping in person, but to have our e-commerce business essentially flat after all the growth we've seen in that business over the last couple of years was in line with our expectation and salon coming back very strong. So our channels are performing well. Through the quarter itself, the first period, the first month or so of the quarter was the strongest as we kind of came out of the gates and then started lapping stimulus. But the other two months of the quarter were strong as well and well ahead of our expectations. So around a well-rounded delivery of results with all aspects of our business contributing to the performance that we have.
Daniel Hofkin, Analyst
And then anything you would call out either regionally or in terms of customer demographic differences?
David Kimbell, CEO
No region. I mean one of the things that we really like about our model is our model works in all different types of geographies. Big cities from New York and L.A. to Chicago to smaller remote single-store markets, suburbs, urban, rural, and we saw strong performance across the board. So there was no real region or marketplace distinctions of note. And that to us is a reflection, this is working really well. And then when we look across economic, we saw growth across all income levels as well as we look at our consumer base. So strong growth from our highest income to more moderate income. So again, well-rounded growth. Consumers are engaged in the category. The category itself is, we think, more relevant, more important to our consumers, more connected to their overall sense of self-care and well-being. At the same time, there are so many more occasions to go out. We think the category is in great shape, and we're proud to be leading the category and driving these results through our strong execution.
Operator, Operator
And our next question comes from the line of Michael Lasser with UBS.
Michael Lasser, Analyst
Understanding you're looking to be conservative and mindful of the uncertain macro environment, you get to low single-digit comps in the back half. Again given the strength in the cosmetics category, it would imply that haircare and skincare probably turn negative, why would that be the case?
Scott Settersten, CFO
Yes, I would attribute this to being cautious, given the current uncertainties and warning signs we are observing. We have utilized the strong performance from the first half of the year in our full-year outlook and have not changed our expectations for the second half based on our initial 2022 plan. We have also taken into account the expense pressures affecting the business. This is where we believe we should aim for now, and we will keep adjusting as we progress through the year.
Michael Lasser, Analyst
My follow-up question is, although you haven't seen it yet, you are still expecting promotions to return. What will trigger an increase in promotions? And how much have you accounted for that increase in promotions in the latter half of the year?
David Kimbell, CEO
We won't delve into specific elements that we considered. Regarding promotions, the environment is dynamic, highly competitive, and there's uncertainty surrounding consumer behavior. However, we have successfully managed our promotions strategically. For some time, we have been working to eliminate broad, nonstrategic discounts and instead focus on personalized, CRM-enabled efforts that are relevant and strategic, driving both short-term and long-term results through increased engagement, loyalty, and connection to Ulta Beauty over time. We achieved this in the first quarter. As we've mentioned in previous calls, we are fully aware of the competitive landscape and the excellent competitors aiming to grow their businesses. We will not lose market share and will respond as needed. We possess more tools than ever through our personalization and CRM capabilities to maintain market leadership. With the uncertainty around inflation, consumer behavior, and the competitive landscape, we are ready to respond. While we won’t initiate a high level of promotional intensity, we will ensure that we are effectively engaging our beauty enthusiasts to attract them to Ulta Beauty.
Operator, Operator
Our next question comes from the line of Simeon Gutman with Morgan Stanley.
Simeon Gutman, Analyst
I'm going to ask my question and follow-up. Kiley, regarding the next call, my first question is about the merchandise margin. Since haircare seems to be improving, shouldn't that be a positive factor? Also, Scott, when you mentioned the reserve adjustments, does that indicate that the merchandise margin, excluding those adjustments, could have increased year-over-year? Are you using that for comparison? As a follow-up, what changes are anticipated in the second half? It appears you're maintaining sales projections as modeled, but has anything else changed?
Scott Settersten, CFO
That sounds like three questions, Simeon, actually. But I'll give it out three here. So yes, haircare has been a real contributor here recently. Again, it kind of gets back to the brand mix overall for the business, I would say. So while haircare, generally speaking, is higher margin than the house, some of the mix that's been added here recently, doesn't necessarily follow the same metrics overall. When we're talking about inventory, so it was favorable adjustments last year that was driving the tougher compare this year. So again, last year, cleaner inventories, we were coming off what I'd call some housekeeping, probably late in 2020, right? We closed some stores. We exited some brands later in the year. So we got some book benefit from that last year, which makes it a tougher compare. As far as the guidance overall, what changed, again, the strong sales, the strong start. Obviously, it's helping drive a lot of fixed cost leverage here for the year. For the revenue, it was something that was unexpected, really wasn't in the plan to see those redemptions come back in our loyalty program that way and to see the credit card benefit pop here in the first quarter. So again, we're planning for more of that to continue throughout the year. We've got operating costs that are increasing across the business, specifically in supply chain, but we're seeing in other areas, too, as we mentioned in our prepared remarks. So again, we feel like we're in a good position. We feel like we've got all the variables covered. Again, we think it's prudent to take a more thoughtful, careful approach and outlook as we're looking ahead to the second half of the year, considering all the uncertainties that are kind of floating out there right now.
Kiley Rawlins, Vice President of Investor Relations
John, I think we'll take one more question, please.
Operator, Operator
Okay. And our final question comes from the line of Michael Binetti with Credit Suisse.
Michael Binetti, Analyst
Congratulations on an excellent quarter, and thank you for the detailed information provided. Many of our questions have been addressed. Regarding SG&A compared to gross margin, if we analyze SG&A on a per-store basis or similar metric, it appears to have increased by about 12% since 2019, while comps are up in the mid-20s. I'm curious if there were more fluctuations in the SG&A line in the first quarter than I realize. I understand you mentioned that a few expenses were shifted from the second quarter to the third quarter. Are there any one-time factors to consider in the first quarter that resulted in some underspending in SG&A? Additionally, when I review typical SG&A seasonality from before COVID, it implies that gross profit margin could decrease by as much as a couple of hundred basis points based on the guidance you provided for the second through fourth quarters. Is that the correct assessment of the factors you discussed earlier?
Scott Settersten, CFO
Regarding SG&A, there are no extraordinary one-time items. I encourage you to review our comments about the marketing expense, as there has been a significant change from last year. This change is due to the transition of UB Media from a small operation to a more formal, larger-scale process. As a result, we adjusted our accounting practices year-over-year, which has positively impacted the first quarter compared to last year, and this trend will continue throughout the year. As for gross margin and the variability you mentioned for the second half, we believe it remains aligned with our earlier guidance. Notably, the promotional environment in the first quarter was slightly better than last year, which was unexpected, and we anticipate a more aggressive approach in the latter half of the year. This change is accounted for, alongside the brand mix, which benefited us in the first quarter. However, we expect some moderation in that benefit as the year progresses.
Operator, Operator
We have reached the end of the question-and-answer session. And I would now like to turn the call back over to Dave Kimbell for any closing remarks.
David Kimbell, CEO
Okay. Great. Well, thank you all for joining us today. The year is off to a great start, and I want to thank the entire Ulta Beauty team for their collective efforts to support our guests and each other while moving our business forward. We look forward to speaking to you all again at the end of August when we report our second quarter results. I hope you all have a great evening. Thanks, again.
Operator, Operator
This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation, and have a great day.