Earnings Call Transcript - ULTA Q1 2020

Operator, Operator

Greetings and welcome to the Ulta Beauty First Quarter 2020 Earnings Results Conference Call. This conference is being recorded. It is now my pleasure to introduce your host, Ms. Kiley Rawlins, Vice President of Investor Relations. Please proceed.

Kiley Rawlins, Vice President, Investor Relations

Thank you, Shamal. Good afternoon, and thank you for joining us today for our discussion of Ulta Beauty's results for the first quarter of fiscal 2020. Hosting today's call are Mary Dillon, Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Dave Kimbell, President, will join us for the Q&A session. This afternoon, we released our financial results for the first quarter of fiscal 2020. A copy of the press release is available in the Investor Relations section of our website at www.ulta.com. 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 considered 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 various risks and uncertainties, all of which are detailed in the company's filings with the SEC. We caution you not to place undue reliance on these forward-looking statements, which reflect only the situation as of today, May 28, 2020. We have no obligation to update or revise our forward-looking statements unless required by law, and you should not expect us to do so. We'll begin this afternoon with prepared remarks from Mary and Scott. Following our prepared remarks, we'll open the call for questions. As always, the IR team will be available for any follow-up questions after the call. Now I'll turn the call over to Mary. Mary?

Mary Dillon, CEO

Thank you, Kiley, and good afternoon, everyone. Before we talk about our first quarter results and how we're responding to the challenges created by COVID-19, I want to first take a moment to thank all who have been on the frontlines selflessly fighting the outbreak and caring for the country since this pandemic began. We're truly grateful for your dedication. I also want to thank my leadership team and all Ulta Beauty associates for their unwavering commitment, tireless efforts and continued agility as we adjust to a very dynamic and uncertain operating environment. As we've navigated through this crisis, our lens for every decision has been the safety and the well-being of our associates and guests. In early March, as the virus began to spread in the U.S., we quickly took steps to keep our associates and guests safe and healthy. We increased sanitation measures and cleaning frequency in stores, limited the use of testers and suspended all beauty services. As the situation escalated, we made the difficult decision to temporarily close all of our stores on March 19 and quickly shifted our focus to operating our e-commerce channel only. When we began 2020, we certainly did not plan to operate the digital-only business, but I'm very proud of how quickly our teams pivoted to support our e-commerce operations. Our marketing team shifted rapidly to create highly relevant digital content sensitive to the mindset of our guests at that time, a focus on connection, self-care and positivity while also acknowledging new consumer behavior such as social distancing and wearing masks. Anticipating an increase in demand, our digital teams quickly leveraged the existing capabilities to support higher e-commerce order volumes and manage order flow. Our supply chain teams quickly increased capacity while implementing enhanced cleaning protocols in alignment with CDC guidelines and new processes that support social distancing within the distribution centers to keep our associates safe. Our DC associates were incredible in their ability to quickly meet the increased demand in our e-commerce business, and I'm deeply grateful for their efforts. With more than 80% of our revenues previously generated in stores, we knew that the expected acceleration in e-commerce would not recoup all of the lost brick-and-mortar sales. So early in the COVID-19 crisis, we took several precautionary steps to protect liquidity and enhance our financial flexibility, which Scott will discuss shortly. And as we actively managed the business through the short-term uncertainty, we simultaneously began to plan the reopening of our stores and to adjust our operational plans for the rest of 2020. In April, it became clear our stores would remain closed longer than initially expected. After evaluating multiple options and considering the changes in unemployment insurance details incorporated into the CARES Act, we made the decision to furlough many of our store and salon associates. Our intention is to retain as much of our workforce as possible, and we look forward to when we can safely welcome associates back into all of our stores. To help support our associates through this crisis, we expanded the criteria for our Associate Relief Program to include those who need assistance due to a personal hardship as a result of COVID-19. This program is one way we can care for our associates. I, along with Ulta Beauty's executive team and Board of Directors, have made personal donations to the program. We're also providing support for those who are working hard on the frontlines to take care of all of us. Since the crisis began, Ulta Beauty has donated 450,000 gloves and 110,000 essential beauty items to several national organizations serving local communities and health care workers. Throughout this crisis, we've worked closely with our brand partners, both big and small, to ensure that we successfully navigate this crisis together. We're appreciative of their ongoing partnership and are confident our relationship remains strong and in a good position to drive growth. Now let's turn to our first quarter results. Reflecting the impact of store closures, total net sales for the quarter were $1.2 billion. Comp store sales declined 35.3%, and we had a net loss of $1.39 per share. While these are certainly not the results we planned, I'm proud of how our team has worked together to respond to the unexpected challenges. The first quarter began well with good growth in comp store sales, market share, and our Ultamate Rewards loyalty program. However, the escalation of COVID-19 in mid-March, the need to temporarily close all of our physical stores and immediate changes in consumer behavior disrupted these positive trends. Within beauty, consumers focused on immediate safety and protection necessities like hand soap and antibacterial gels early in the crisis. As salons and other beauty service outlets closed, guests shifted to do-it-yourself beauty solutions, including hair color, nail care and hair removal products. As quarantines became more pervasive, guests looked to self-care and wellness products like skincare treatments, hair masks, bath products, home fragrance and others to relieve stress. Although comp sales after mid-March declined in all categories as a result of our store closures, the skincare, haircare, bath and nail categories all increased as a percentage of sales. Early in the quarter, we saw nice market share gains across the majority of categories. The temporary closure of our stores in mid-March impacted our overall market share. But in our digital business, which operated for the full quarter, we were pleased to see strong market share gains across all of our prestige categories. From a channel perspective, our e-commerce channel was strong early in the quarter, with sales trends accelerating from levels we saw in the fourth quarter. As we closed stores and transitioned to a digital-only business, sales accelerated further. Despite proactively managing demand in light of capacity constraints resulting from increased social distancing protocols in our DCs, we more than doubled our e-commerce sales this quarter. The number of active members in our Ultamate Rewards loyalty program increased 2% compared to the first quarter last year to 33.1 million members. While this growth was lower than planned, we are pleased to see it in spite of the store closures. Historically, stores have been the largest source of new member acquisition. While we saw significant growth in new member acquisition through our digital channels, it was not enough to offset the impact of store closures. We're also very pleased to see that a large number of previously in-store-only members engage with us online for the first time. Our omnichannel guests historically have had very strong engagement with Ulta Beauty, with nearly 3x the annual spend of an in-store-only guest. We're excited about the opportunity to maintain strong engagement with these new guests that are shopping in our omnichannel format as our operations fully reopen. Reflecting heightened guest focus on safety and social distancing, our digital and store teams moved quickly to create and launch a new touchless curbside pickup option for our guests. On April 23, we launched buy online, pickup curbside in 70 stores across 9 states. Guests have enthusiastically embraced this beauty-to-go option, and our store associates are doing an amazing job bringing this to life for them from flawless execution to wearing welcome back signs as they deliver purchases to guests. Since launching this option 6 weeks ago, we've seen a nice acceleration in the average number of orders per store, strong average order values, and high satisfaction ratings as more guests are using this option as a fun and convenient way to come back to Ulta Beauty. Over the last month, various states and local authorities have begun to lift restrictions in an effort to restart their economies, allowing us to make key decisions on how and when to reopen stores. Of course, we want to open our stores as quickly and as safely as possible and have been doing so. To help us make reopening decisions, we've developed a rigorous process to evaluate the safety risk for each store. In addition to reviewing the legal guidance to determine we're allowed to reopen, we also assess local COVID-19 transmission trends and evaluate certain operational criteria and local guest sentiment. Once we determine that it's safe to open, we will flex based on local conditions. Some stores will reopen curbside pickup, some stores will reopen curbside and retail only, and some stores will reopen with curbside retail and a limited service offering. All doors will initially reopen with limited store hours. We know that health and safety will remain top concerns for all. As we reopen stores, we're implementing new Shop Safe Standards to ensure the safety of our associates and guests. Reflecting guidance from government and health officials as well as recommendations from RILA and NRF, these standards include associate wellness checks, increased cleaning frequency, and additional hand sanitizer stations. All associates are wearing face coverings in-store, and we're asking all guests to do the same while shopping. To promote social distancing, we've reduced the number of chairs on the sales floor, created one-way aisles, and added plexiglass shields at checkout. We're limiting occupancy and the number of open registers. The opportunity to test and play is an important part of the beauty shopping experience. While we've kept most testers on the sales floor to help guests visualize color, texture, and packaging, we've made them unavailable for guest use. As an alternative, we're directing guests to our GLAMlab tool, which is our live interactive virtual experience that lives within the Ulta Beauty app. GLAMlab allows users to virtually discover and try thousands of beauty products. Since the crisis began, guest engagement with the tool has increased nearly 5x, and more than 30 million shades have been tested virtually. We're also making changes in our salons to promote and protect safety, including offering services by appointment only, performing associate and guest wellness checks, using protective wear, increasing cleaning between appointments, and implementing social distancing between stations. Last month, we began the reopening process with the launch of curbside pickup. On May 11, we reopened 180 stores to guests, including many with salon services. As of today, 840 Ulta Beauty stores or about 2/3 of the fleet offer curbside pickup. 333 stores or about 1/4 of the fleet are open to guests for retail, and 283 of those stores are open with salon services. While it's early in the reopening process, we've seen stronger-than-expected sales in reopened stores. We're seeing great guest engagement with our salon services with many appointments booked several weeks out. To get a sense of how reopened stores are performing, when we look at the first wave of 180 stores that have reopened, omnichannel comp sales in these stores are collectively flat compared to a year ago with some states even comping higher than last year. Sales in these initial stores continue to reflect strong penetration of e-commerce in BOPIS and curbside pickup as well as ship to home. Of course, these are early results but encouraging. Over the next several weeks, we'll continue to assess opportunities to reopen additional stores and expand services offerings. As we learn, we will adjust, communicate, and continue to prioritize the safety and well-being of our associates and guests. Based on current available information, we expect to have a vast majority of stores reopened in some capacity by the end of June. I'll just add that earlier this week, I was able to hold a virtual store team visit with Kecia Steelman, our Chief Stores Officer, in markets across the country: Epping, New Hampshire; Hendersonville, Tennessee; Delray Beach, Florida; Austin, Texas; Indian Land, South Carolina; Norridge, Illinois; and Orland Park, Illinois. Some of these stores are doing curbside; some are fully reopened for retail. But one thing was true for all: our teams are excited to be back to work and appreciate how Ulta Beauty has treated them through this difficult time. Now as we look beyond the reopening process, we're adjusting our plans for the rest of 2020. Consumer safety concerns, macroeconomic pressures, and the risk of a resurgence in the infection rate are dynamics that might constrain demand for the rest of the year. As a result, we are reimagining holiday, rethinking our tentpole events, and continuously looking for opportunities to reduce costs. We believe that demand will improve as guests regain confidence, and our goal is to maintain operational flexibility so we can adjust quickly to changes in demand while also managing inventory risk and cost as we navigate continued uncertainty. Longer term, I remain excited about the opportunity for Ulta Beauty. The beauty category, while not recession-proof, has fared better than many other discretionary categories in economic downturns, reflecting the relatively low price point and the emotional connection with the product. While our business is larger and more diverse than it was in the last downturn, our annual comp performance in 2008 and 2009 was positive. We know from our proprietary research and engagement that the beauty category remains strong despite the uncertainty many guests are experiencing today. Within the beauty category, our diverse assortment, combined with convenient locations, strong brand awareness, and our differentiated loyalty program all position us to gain market share in a challenging economic environment. Most importantly, I believe our values-based, guest and associate-centric culture and commitment to high performance will enable us to continue to expand our leadership position. Over the last 90 days, I have been inspired by the power of the culture we've built as our teams have worked quickly and collaboratively to care for our associates, to support our e-commerce business and to reopen our stores. Whether it's volunteering to help guest services respond to e-commerce inquiries, stepping in to help our HR service center support furloughed associates, or virtually collaborating to swatch samples for GLAMlab, our associates have stepped out of their regular duties to support each other, our guests, and Ulta Beauty through this truly unprecedented period. Despite our universal desire to return to normal, COVID-19 will likely have sustained effects on consumers, the competitive environment, and how we all operate and work. We're thinking through all of these changes and what they may mean to our business model going forward, but we know we'll emerge strong. Health and safety concerns are elevated. While we're all rethinking the risk of close contact in physical touch, consumers have adopted new shopping behaviors quickly. Many consumers have more comfort with online purchases and in-store pickup, and we expect they may continue to participate in these convenient ways of shopping. Businesses have been financially challenged due to closures, category shifts, and liquidity pressures, and some will likely not reopen. We will likely see additional cost pressures due to channel shifts, PPE costs, and increased promotional intensity as businesses look to drive demand in a difficult economic environment. At Ulta Beauty, we are not sitting still. We intend to leverage the strengths of our operating model and investments to reimagine the future of Ulta Beauty and the new normal. Specifically, we're accelerating efforts in five key areas to expand our market share gains and extend our competitive advantages. First, over the last few years, we've invested to expand our digital and omnichannel capabilities. As a result, we've delivered double-digit growth in e-commerce sales. COVID-19 has hastened channel shift across retail, and we believe much of this new consumer behavior will be sticky. So we're focused on how we can move even faster to win in an omnichannel world. We're accelerating investments to expand our shipping capacity this year, which includes the pull forward of our Jacksonville fast fulfillment center into 2020, investments in existing buildings, and the expansion of our ship-from-store capabilities. During this crisis, we've seen strong conversion of in-store-only guests to omnichannel guests, with trends accelerating since the launch of curbside pickup. We know there's a strong connection in beauty between the digital and physical and are looking at our brick-and-mortar footprint and how we can accelerate our efforts to build a comprehensive multichannel view of how we serve our guests. Second, we know that beauty enthusiasts love to shop for discovery and trial, no matter the channel, and we do not expect this desire to change. We also know that concerns about personal safety and close contact caused by COVID-19 will require the beauty experience to change in the short term but will likely spark longer-term innovation. We're reimagining the guest experience and product discovery, looking at ways technology, services, and the role of our associates can evolve to create a new wow experience for our guests. Our Ulta Beauty app and GLAMlab tool will continue to play a big role in guest discovery and trial. Today, guests can use GLAMlab to match foundation, try on makeup, and play with hair color and lashes. In the future, guests will have even more opportunities as we accelerate the implementation of new categories and experiences. Third, we plan to build on the successful work we've done to expand our market share and accelerate gains even further in key categories like skincare, hair, and wellness. Social distancing has resulted in many consumer behavior changes, and the crisis has exacerbated many of the category trends that we saw playing out during the crisis. While we remain confident in the long-term potential of makeup, headwinds facing the makeup category will likely persist in the short term, given the impact of social distancing and masks as well as the delayed introduction of newness and innovation this year. On the flip side, many people seem to be on video calls now most of the day, so we'll watch the impact on makeup usage closely. Conversely, skincare has become more important as guests look to take care of their skin and relieve stress. Wellness has taken on new dimensions, extending to both physical and mental aspects as consumers increase efforts to stay healthy and look to feel better in this new environment. We intend to lean into these trends to drive further market share expansion. Fourth, we've built a tremendous asset in our Ultamate Rewards program. With more than 33 million active members, we build a differentiated loyalty program that provides us with valuable customer insights, and we're applying advanced analytics and artificial intelligence to leverage this data to deliver personalized targeted communications. As we focus on deepening guest engagement, we're looking at ways to drive next-level loyalty and accelerate personalization to increase spend per member. This will be particularly relevant in an increasingly omnichannel marketplace as more consumers move seamlessly between channels. Finally, through our efficiency for growth or EFG efforts, we've made progress in improving our merchandising effectiveness and enhancing core processes across our real estate and supply chain operations. As we think about cost pressures increasing as we move forward, we're looking at how we can go beyond process optimization and develop a cost structure that will enable us to weather economic challenges while also supporting investment in capabilities and opportunities that will set us up for future success. So in closing, this crisis certainly has been fluid, swift, and inescapable. Businesses and consumers alike are adjusting to the effects of COVID-19, and longer term, the pandemic will have a sustained impact on how we all live and work. While the economic environment will be challenged, beauty enthusiasts have a deep emotional connection with beauty that, in the past, has not diminished in softer economic environments. Routines will continue to shift and evolve, but beauty is a platform for self-expression, togetherness, joy, and self-care, all of which are even more important for beauty enthusiasts during this time of uncertainty and change. At Ulta Beauty, we have a strong differentiated operating model, a brand that's known and loved, and dedicated associates who are passionate about our guests and our company. I'm confident we will emerge from this crisis well-positioned to accelerate our market share gains and extend our competitive advantages. And now I'll turn the call over to Scott for a discussion of the financial results. Scott?

Scott Settersten, CFO

Thanks, Mary, and good afternoon, everyone. Before I review our financial results, I'd like to reiterate Mary's comments on behalf of Ulta Beauty and express our immense gratitude for the first responders who are on the frontlines every day, protecting us from the spread of the coronavirus. I would also like to acknowledge all our associates, from those in the field and in our distribution centers to our team members from our home office, who have worked tirelessly to adapt to the rapidly changing environment. I could not be more proud of the work they are doing. Now the situation with COVID-19 is dynamic and fluid, so our first priority has been to protect liquidity. We have taken steps to enhance our financial flexibility, including drawing down $800 million on our $1 billion revolver, suspending our stock buyback program, and actively managing and prioritizing our expense structure, working capital, and capital investments. We have also taken a conservative approach to inventory management, adjusting receipts to reflect current and expected sales levels. As a result of these efforts, we had $1.15 billion in cash, cash equivalents, and short-term investments at the end of the quarter. We are proud of the quick actions we've taken to further enhance our financial strength and are confident that we have sufficient liquidity to fund our operations now and in the future. Turning now to our results for the first quarter, beginning with the income statement. Q1 sales declined 32.7% as we temporarily closed all of our stores in response to the spread of COVID-19. Total company comp declined 35.3% and was composed of 3.3% average ticket growth and a 38.6% decline in transactions. As Mary mentioned, we were pleased with our performance in the beginning of the quarter, with total company comp sales trending above our plan through March 10. However, we began to experience softer traffic as consumers became concerned about the spread of the virus. Subsequently, we closed all of our stores on March 19, resulting in a 62% comp decline from March 11 to the end of the quarter. Fortunately, we continued to operate our e-commerce business, which delivered a comp increase of just over 100% for the quarter. From a mix perspective, makeup was 49% of sales, down 400 basis points from last year. The skincare, bath, and fragrance category increased 300 basis points to 24% of sales. Haircare products and styling tools increased 100 basis points to 18% of sales. The services category was down 100 basis points to about 4% of sales, reflecting the temporary suspension of all services in mid-March. Gross profit margin was 25.9%, a decline of 11 percentage points compared to 37% a year ago. The deleverage in the quarter was primarily due to three items: deleverage of fixed costs, channel mix, and the deleverage of salon services. Fixed store and supply chain cost deleveraged roughly 500 basis points due to significantly lower sales related to temporary store closures. Channel shift contributed approximately 400 basis points of deleverage as our stores were closed for much of the quarter and e-commerce was a much larger mix of our overall business. As we have shared previously, our e-commerce channel sales, or more aptly described, our direct-to-consumer sales channel, are less profitable than a typical retail store sale, with the variance between the two channels being most pronounced on the gross margin line, where all of the fixed and variable costs, as well as the higher promotional intensity cost of that channel's sales, are captured, while for retail store sales, a large portion of the variable cost, i.e., store labor, is included in our SG&A line. It's also important to keep in mind the unique circumstances we experienced this quarter, having all of our stores closed, which exacerbated the impact of channel shift. We would not anticipate this kind of deleverage on gross margin from channel shift once we return to a more normalized operating environment and our stores are open. We also experienced deleverage in salon services as we chose to continue to compensate our stylists for most of the quarter despite all stores being closed. These headwinds were partially offset by the impact of lower promotional activity within the e-commerce channel as we chose to pull back on many promotional levers to manage e-commerce demand and volumes at our distribution centers, as well as benefits from our credit card program. SG&A expenses decreased 5.5% to $380.9 million compared to $403.1 million in the first quarter of 2019, as we pulled back on store expenses in light of temporary store closures as well as advertising by reducing our spend on print material and reallocating resources into our digital vehicles. As a percent of sales, SG&A increased to 32.5% compared to 23.1% last year. We experienced the most deleverage from store labor, which is the largest expense within SG&A. Store labor is normally a more variable expense as we often adjust payroll hours to support sales volumes. However, payroll was more fixed during the quarter as we chose to continue to pay our store associates for most of the quarter despite temporarily closing all stores. We also experienced deleverage on corporate overhead, reflecting the impact of investments we made in 2019 that have not yet been anniversaried. This quarter, we recorded an impairment charge of $19.5 million related to the expected future performance of a small number of stores. To provide some context, we perform reviews on long-lived assets on a quarterly basis or when events or circumstances indicate that asset values may not be recoverable. The basis of our evaluation is whether future cash flows through the lease term are greater than or equal to the asset balance on the balance sheet. There are a small number of stores that were underperforming before we made the decision to temporarily close stores. These stores were further impacted due to COVID-19. The projected cash flows for these stores are lower than the current asset balance, and based on the market value of the rent relative to our contractual obligation of the property, resulted in impairment charges. We have a strong and productive fleet of stores, but going forward, we will continue to test for impairments and adjust accordingly. Preopening expense was $4.6 million in the quarter, an increase from $4.2 million a year ago as we assumed control of the property at Herald Square in New York City. The rent for this property is higher than our other stores and will be recognized in the preopening line until the store opens. Interest expense related to the drawdown of our revolver totaled $1.3 million compared to interest income of $2 million a year ago. Diluted GAAP loss per share was $1.39 compared to earnings per share of $3.26 reported for last year's first quarter. Moving on to the balance sheet and cash flow. For the quarter, total inventory grew 7.2%, primarily reflecting inventory needed to support 68 net new stores. Inventory per store increased 1.5%, reflecting the impact of store closures for most of the quarter. We will continue to closely monitor demand as we begin to reopen stores, and we'll adjust our inventory levels accordingly. Fortunately, we have not experienced any significant issues accessing inventory. Reflecting our proactive efforts to manage liquidity, capital expenditures for the quarter were $45.1 million compared to $71.8 million last year. Turning now to the rest of 2020. We continue to operate in an uncertain environment and have been working under a variety of assumptions to help us make the best financial decisions we can for our people and our business. However, the situation is dynamic, and it remains difficult to model sales and expenses with certainty. Therefore, we are not providing earnings guidance at this time. We are able to provide an update for a few other key model inputs. We have reduced our CapEx plan by about $100 million in response to the current operating environment. Our updated plan for the year is to invest between $200 million and $210 million, including approximately $92 million for new stores, remodels, and merchandise fixtures, $80 million for supply chain and IT, and about $33 million for store maintenance and other. We now expect to open approximately 30 to 40 new stores in 2020 and relocate three stores. We have chosen to defer some store openings into 2021 and are currently evaluating what the right pace of new store openings should be next year. We have a strong and profitable fleet of stores. Given the new operating environment, we plan to accelerate efforts to strengthen our fleet through relocations, negotiations with our landlord partners, and potential store closures. While we believe there's opportunity to open more stores and reach new guests, we are also evaluating our long-term store target in the U.S. given the acceleration we are experiencing with our e-commerce business. In closing, although we lack some near-term visibility, we remain confident in our differentiated business model and our ability to adapt to our guests' changing preferences. We believe that we have the financial strength to manage through the crisis and are making decisions to ensure Ulta Beauty is even better positioned for the long term.

Operator, Operator

Our first question is from Christopher Horvers from JPMorgan.

Megan Alexander, Analyst

This is actually Megan Alexander on for Chris. I was just hoping you could elaborate a bit on what you're seeing in the stores that you've reopened just in terms of pent-up demand and whether you're seeing any change in the category trends as you reopen them. Can you also talk about any detail on what you're seeing in terms of guests using curbside versus actually coming into the stores?

Mary Dillon, CEO

Yes, we are quite pleased with the consumer behavior we’re seeing. Our sales trends are stronger than anticipated, although they vary across different markets. Some areas are performing positively while others are not. E-commerce trends are also very encouraging and seem to be accelerating, particularly with the adoption of curbside pickup. As I mentioned, the first 180 stores have shown sales that are flat compared to last year, but the mix between curbside, buy online pick up in store, and shipping to home is quite different. Overall, guest feedback has been positive, but we remain cautious as it is still early and we are taking a conservative approach as we look ahead. We see a significant opportunity as many guests who have never shopped online with us before are now becoming omnichannel shoppers out of necessity. These guests tend to spend nearly three times as much historically as those who only shop in stores. Additionally, on the topic of curbside, I am proud of our team for quickly implementing it. While we had previously launched buy online pick up in store, we hadn't needed to introduce curbside until now. The initial guest reaction has been favorable due to the speed and convenience it offers, and we are following all safety and social distancing guidelines. We believe that as more people try it, curbside will continue to be a convenient shopping option at Ulta Beauty going forward.

David Kimbell, President

I would like to add that the categories we saw strong performance in during our e-commerce phase continue to do well. These include self-care and wellness categories, such as skincare, haircare, and bath products, which have accelerated during this crisis. Interestingly, with the introduction of curbside service, we noticed an increase in makeup sales as more customers engaged with that category. As we progress beyond the initial stages of this crisis, makeup is showing signs of strengthening due to the additional options provided by curbside service.

Operator, Operator

And our next question is from Mark Altschwager from Robert W. Baird.

Mark Altschwager, Analyst

Maybe following up on the category trend. I'm wondering if you can just give us some broader perspective on the beauty cycle and how you're planning for mix shifts in the near term just with the economic backdrop. Are you seeing or expecting to see a shift to mass and masstige from prestige? Sounds like skincare has remained robust. However, as the industry starts to cycle the sharp decline in color cosmetics as we go through the mid- to late part of the year, just wondering if there's any reason to think there's a light at the end of the tunnel there from a product innovation and growth standpoint.

Mary Dillon, CEO

Thank you, Mark. I'd say in some ways going into this, what we've seen is at the beginning of the cycle, of course, the types of things that people bought were quite different than what we've seen in the past. Things like hand sanitizers and soaps. Then we saw folks get more engaged in things that I would call self-care, do-it-yourself at home. So haircare, nails, that kind of thing, and then more into things that are a bit more self-indulgent or self-care, like masks, skincare, fragrances for the bath, that kind of stuff. It’s just interesting to see that cycle of consumer behavior. As an aside, one thing I'll say is I feel like our team did a great job from a social media and just marketing perspective to meet our guests where they were and talk to them about those things. Engagement was really high. The core category trends, I'd say, were roughly similar to what we saw coming into this year, which is acceleration in skincare. We've talked about that. We see that as a big future trend. The intersection of wellness and beauty together is going to be important. I think with makeup, as Dave said, it's an interesting early fact that on curbside, we saw some uptick in makeup. You can debate the 2 sides of it. But anecdotally, I'd say that folks who maybe were working from home before on phone calls are now all of a sudden working from home on video calls, and everybody is on video calls. Will that help bring the light at the end of the tunnel? We'll see. Right now, I wouldn’t say that's happening on a large scale.

Operator, Operator

And our next question is from Kate McShane from Goldman Sachs.

Katharine McShane, Analyst

I wondered if we could drill down a little bit more around your commentary about the promotional environment. Maybe what you saw during the quarter and what you expect for the rest of the year. And just one housekeeping question about the impairment charge. Just how many underperforming stores account for that? And do you plan to reopen them?

David Kimbell, President

I'll begin by discussing the promotion, and then Scott can cover the impairment aspect. Promotional activity, like many other areas, faced disruptions throughout the quarter. Our strategy before COVID was centered on reducing widespread promotions over the long term and focusing on increasing consumer engagement across all our efforts, including the brands we introduce, our loyalty program, and other ways to connect with our customers. As we transition into a recovery phase following the crisis in March and April, we expect an increase in promotional activity across the board. However, we will continue to prioritize the more strategic facets of our business. Our loyalty program is strong, and we have enhanced our personalization capabilities this year. We plan to utilize these enhancements for more tailored and direct communication with our audience. We will emphasize key elements of our annual promotional programs, such as the 21 Days of Beauty, along with holiday and skin and hair events throughout the year. While we aim to be adaptable in this area, we do not foresee a significant rise in promotional activity; however, we will remain competitive and will not give up market share. We have the necessary tools to respond effectively in this category and will take action to stay relevant in the marketplace.

Scott Settersten, CFO

In response to the impairment question, the short answer is that around 20 stores were affected. Specifically, 10 stores accounted for most of the impairment charge during the quarter. The longer answer is that this will unfold over time. Taking impairment charges on these stores does not necessarily mean they will be closed; they could still be performing well but located in higher rent areas in the U.S. As mentioned earlier, we are reassessing our entire store fleet. There are cases where we might not be in the best location within a shopping center. Given the current disruption in the retail landscape, we may become more aggressive in pursuing opportunities in centers we've previously overlooked. Therefore, there may be additional store closures in the future. We aim to address all of these issues in fiscal 2020, but it’s not a situation that will resolve immediately in the first quarter.

Operator, Operator

Our next question is from Kelly Crago from Citi Research.

Kelly Crago, Analyst

I was just wondering what your exposure is to some of the department stores that have announced store closings. Have you done any work there? Should we expect any sort of promotional cadence geared towards gaining that customer? My second question is just around vendor support given you're expecting a more promotional environment. How are those conversations going with your vendors?

Mary Dillon, CEO

Yes. I'd say we'll step back and start with department stores. In general, we have a broad competitive environment and think about that as we compete with everyone from department stores to mass retailers to other specialty retailers and e-commerce only. It is a wide competitive landscape. We pay close attention to everything happening and see opportunities and risks throughout. About our digital channel, we gained share in every category in prestige while being only digital in this past quarter. As for vendor support, it’s a crucial time for us to be very close with our vendor partners, big and small. I feel that we've worked well—Dave leads our merchandising team, so he can add more to those details if needed. We've been transparent with our vendors, sharing dilemmas and opportunities as we move forward. I feel confident about our ability to emerge stronger than ever and continue to win in the marketplace through our key vendor relationships.

Operator, Operator

And our next question is from Omar Saad from Evercore ISI.

Omar Saad, Analyst

Really impressive digital e-commerce growth in the quarter. Obviously, you guys have one of the best-in-class loyalty programs out there. I'm curious what you're seeing in that part of the business as stores reopen or what your expectations are for that strong digital growth in the intermediate term as we go from a fully locked-down state to one that's more open. Do you expect that to moderate? Are you seeing that moderate? Is that demand shifting to more buy online pickup or curbside? What are your expectations for that strong digital growth?

David Kimbell, President

Yes. We've been pleased with the e-commerce performance, which is part of our business that we've been building and investing in for many years. It has certainly been paying off during this crisis. Obviously, as stores opened, it will decrease in its total penetration of our business from being 100% e-commerce only. However, we do believe we've moved many of our guests who previously only shopped us in store to online. This is helpful for us. Guests who shop us in an omnichannel way are our best guests. They shop more frequently, both in-store and online, and spend more with us. We expect that this acceleration in omnichannel capabilities will have lasting positive impacts. We think it will lead to a higher run rate moving forward, but time will tell exactly where that settles. Curbside has been a big win for us. Mary said how quickly we adopted that. We are happy to have BOPIS, but the ability to pivot to curbside was a meaningful achievement. As stores reopen, some guests still opt for curbside capability. We'll keep that going forward and think it's a great third option for our guests.

Operator, Operator

And our next question is from Dana Telsey from Telsey Advisory Group.

Dana Telsey, Analyst

I hope everyone's healthy. As you think about the store reopening platform and the service model in there, how do you think of employee staffing and the percentage of payroll that you'll need going forward versus what you would need in the past? On products, especially color cosmetics, does the state or pace of innovation you’ve seen with your vendors accelerate or decrease going forward? Do the closures of department stores provide you more runway to gain market share this year?

Mary Dillon, CEO

Thank you, Dana. On the services staffing, I can't tell you the precise ratio we'll need. We are taking a cautious approach to services. However, I believe we have a great opportunity with our national platform. We have low usage of our services relative to our total retail business. We feel there's a significant opportunity ahead. We know, as you do, that our omnichannel guests spend almost 3x as much as those who don't use our services. We're starting conservatively, focusing on hair services, with strict health and safety protocols. Since we’ve started opening up, about 280 stores have salons open, and many of them are very well booked right now with appointments. We kept stylists on payroll during the closures to ensure we could capitalize on this opportunity. Over time, we will sequentially roll out additional services. Regarding cosmetic innovation, perhaps David can add on that?

David Kimbell, President

Yes. I'd say on innovation in total, certainly, this has disrupted the view and timing across the brands. In some cases, new launches have been shifted back or readjusted. However, we felt really good about newness across categories, including makeup and skincare, going into the crisis. Several new brands had launched recently and have performed well throughout this crisis. As we look ahead, we expect opportunities for innovations across all categories and anticipate rebuilding our launch schedules in the second half of the year with strong introductions. Our guests have a continued attraction to newness, both from new brands and existing ones.

Operator, Operator

Our next question is from Simeon Siegel from BMO Capital.

Simeon Siegel, Analyst

I hope you're all doing okay. Mary or Dave, how are you thinking about marketing? I know it's the easiest lever to pull back on, but just given the balance sheet strength, is there an opportunity to actually go on the offensive and take some share? How are you thinking about inventory savings for the rest of the year? Any color on gross margin?

Mary Dillon, CEO

It sounds like a party at your house, Simeon. I love it. I'm so happy they're excited. Regarding marketing, yes, we see a great opportunity to continue to build the Ulta Beauty brand and even accelerate out of this crisis. Our strong brand platform is rooted in possibilities, beauty, connection, and joy. I’m proud of our marketing team for shifting our strategy to be responsive and reflective of current consumer needs, focusing on connection, self-care, and joy through all channels. We do not plan to reduce total marketing spend but instead to shift our focus to relevant and compelling messaging. As we look out over the rest of the year, we will maintain flexibility to adapt to the ever-changing dynamics. That said, we'll invest in our digital and social aspects.

Scott Settersten, CFO

Simeon, it sounds like you had three questions, and they’re all important. On inventory, we're being careful. The team did a great job monitoring receipts and order flow during the depths of the crisis. Sales through our e-commerce business has been significant; we need to stay in stock. As stores open, we want to ensure new merchandise is available and ready for guests. Regarding gross margin, we've given you a thorough view through the prepared comments. We don't feel comfortable providing guidance for 2020 at this point due to uncertainty. Many moving parts affect margin, including promotional cadence, assortment strategies, and operational efficiency.

Mary Dillon, CEO

Let me just close this call by thanking everyone for joining us today. I want to acknowledge my team. In my 7 years as CEO, I've never seen such resilience, heart, and collaboration. I want to thank the Ulta Beauty team for their efforts. We hope you all stay healthy and safe, and we look forward to speaking with all of you again in August when we report our second quarter results. Thank you.

Operator, Operator

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