Earnings Call Transcript
Ulta Beauty, Inc. (ULTA)
Earnings Call Transcript - ULTA Q4 2020
Operator, Operator
Greetings, and welcome to the Ulta Beauty Fourth Quarter 2020 Earnings Results Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Kiley Rawlins, Vice President, Investor Relations. Please proceed.
Kiley Rawlins, Vice President, Investor Relations
Thank you, Laura, and good afternoon, everyone. Joining me on the call today are Mary Dillon, Chief Executive Officer; Scott Settersten, Chief Financial Officer; and Dave Kimbell, President. Before we begin, I’d like to remind you that statements on 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, March 11, 2021. 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. In today’s comments, we will discuss certain non-GAAP financial measures, including adjusted operating income, adjusted net income and adjusted diluted EPS, which have been presented to reflect our view of our ongoing operations by adjusting fiscal 2020 results for store impairment charges, costs associated with the permanent closure of 19 stores and the decision to suspend our expansion into Canada as well as other restructuring costs, and adjusting both 2020 and 2019 for stock compensation and other tax credits. A reconciliation of these measures to the corresponding GAAP measures can be found in our earnings release, which is available in the Investor Relations section of our website at www.ulta.com. Following prepared remarks from our leadership team, we will open the call for questions. As our prepared remarks will be longer than usual, we plan to end our call today at 5:15 Central Time. As always, the IR team will be available for any follow-up questions you have after the call. Now I’d like to turn the call over to Mary. Mary?
Mary Dillon, CEO
Thank you, Kiley, and good afternoon, everyone. I'll start today with comments about our leadership transition plans and then share highlights from our fourth quarter and full year results. Then Dave will discuss our priorities for 2021, and Scott will review the financial results and our outlook. Starting with the succession plans we announced this afternoon. I am very excited to announce that in June, Dave Kimbell will become CEO of Ulta Beauty, and I will transition to Executive Chair of the Board. In addition, Kecia Steelman will be elevated to Chief Operating Officer in June. In conjunction with these changes, Bob DiRomualdo will retire from his role as Chair of the Board as planned, and Lorna Nagler will assume the role of Lead Independent Director. These changes reflect a thorough and thoughtful succession planning process I have engaged in with our Board of Directors over multiple years and are designed to ensure strategic and leadership continuity as Ulta Beauty moves into its next chapter of growth. I personally want to thank our Board for their care, consideration, and oversight of this important process. After serving as CEO for nearly 8 years, I believe the time is right for me and for Ulta Beauty to make this change. We have a differentiated business model that has proven its strength over and over again throughout our 30-plus year history and position Ulta Beauty as a leader in the beauty industry. We've developed and sustained a world-class, guest-centric, values-based, high-performance culture. We're emerging from the 2020 pandemic with a strong foundation and good operational momentum, and we have a talented, diverse and experienced team of leaders to drive our next phase of growth. While I'm proud of what we've achieved over these past 8 years, I truly believe now is the time for my successor and their leadership team to continue the journey. Since joining Ulta Beauty as Chief Marketing Officer in 2014, Dave has continued to expand his leadership responsibilities, ultimately assuming the role of President in 2019. Highly regarded in the beauty industry, Dave is a results-driven, guest-focused, inclusive leader who motivates teams and activates strategies to move our business forward. Dave’s passion for Ulta Beauty, our guests, and our associates is extraordinary, and I believe there is no one more prepared or better suited to lead Ulta Beauty into the future. Kecia Steelman joined Ulta Beauty in 2014 as Senior Vice President of Operations before assuming the role of Chief Store Operations Officer in 2015. In this role, she has overseen all aspects of store and salon operations, leading passionate associates to consistently deliver great experiences for our guests, even as we nearly doubled our footprint. As Chief Operating Officer, Kecia will have responsibility for store and services operations, supply chain, external partnerships, including Ulta Beauty at Target, and key enterprise-wide continuous improvement initiatives. Dave and Kecia will be supported by an executive team with deep expertise and Ulta Beauty experience. My focus has been and will continue to be on Ulta Beauty. And in my new role as Executive Chair, I’ll advise and support Dave on key issues, including strategy, external relationships, and organizational development. My plan is to remain in the Executive Chair role for 1 year. I am optimistic and excited about the long-term growth opportunity for Ulta Beauty, and I’m confident that under Dave’s leadership, Ulta Beauty will keep shaping and leading the beauty industry for many years to come. Now let’s talk about our fourth quarter performance. The Ulta Beauty team delivered better-than-expected results for the fourth quarter. For the quarter, net sales were $2.2 billion, and GAAP diluted EPS was $3.03 per share. Adjusted diluted EPS for the quarter was $3.41 per share. Strong enterprise-wide execution of our plans, combined with improving trends in consumer demand, resulted in momentum across multiple metrics, including sales, transactions, and profitability. We experienced less disruption from COVID than we anticipated in the quarter, and top line trends improved across all channels and all categories, resulting in a comp store sales decline of 4.8%, an improvement compared to the 8.9% decline in the third quarter. We kicked off the holiday season in early November with our multichannel See the Joy campaign, targeted marketing and promotional activity, and an extended Black Friday event. We continue to lean into our successful We Love Our Members events throughout the holiday, rewarding guests with member-only offers promoted broadly across channels to reinforce the value of the program and to engage our members. And we leveraged our CRM and analytics capabilities to expand our reach and maximize productivity. We drove strong sell-through of holiday merchandise and core product, and transitioned quickly after the holiday to support our strategic Love Your Skin and Jumbo Love events. The planned expansion of our gift card program drove robust year-over-year growth in gift card sales during the holiday period and delivered elevated redemption activity in stores post-holiday. Our e-commerce business increased more than 70%. With increased fulfillment capacity in place, our distribution center and store teams did an excellent job supporting record levels of e-commerce demand. Limitations on in-store capacity and reduced operating hours are still in place, but we’re encouraged by the momentum we’re seeing in store traffic. From a category perspective, we continue to increase our market share across most major prestige beauty categories. Starting with one of our strategic growth categories, skincare delivered a low double-digit comp. In addition to broader self-care and wellness trends, newness and engagement on social media platforms are driving interest in newer brands like The Ordinary and Urban Skin Rx, as well as established brands like CeraVe and First Aid Beauty. Fragrance and bath delivered strong double-digit comp growth driven by newness and a strong base fragrance business from brands like Chanel and Dior. Bath also continued to benefit from self-care trends, newness, and social media engagement. Comp sales in haircare were down slightly in the quarter, primarily reflecting planned changes to our Jumbo Love event, which negatively impacted top line growth but delivered significant profit improvement. Excluding the event, comp sales in the haircare category were positive for the quarter, driven by hair color, color care, texture, and innovation. Prestige hair continues to be an area of focus. And in January, we launched Briogeo, a black-owned clean brand formulated for all hair types in all stores and online. Comp sales in the makeup category were negative but improved sequentially, reflecting less year-over-year product newness and continued mask wearing and limitations on makeup wearing occasions. While new launches were limited, we do see guests eager to engage with newness from established brands like Too Faced and NYX, as well as new brands including Laura Mercier, KVD Beauty, and HOURGLASS. Sales from our services business were down more than 40% in the fourth quarter due to a decline in transactions, while average ticket continued to be higher. Our services business remains adversely impacted by COVID-related capacity constraints and local restrictions, but we’re starting to see some local markets increase capacity thresholds. While we ended fiscal 2020 with 30.7 million loyalty members, about 10% fewer than last year, we maintained strong retention levels of our high-value platinum and diamond members. The reduction in total members was anticipated given store closures earlier in the year and ongoing store traffic challenges. Importantly, we saw a rebound in new membership this quarter as our store associates delivered stronger conversion versus last year. Reactivation trends also rebounded due to amplified marketing and promotional efforts across print and digital channels. We also saw good growth in our credit card program, increasing our member penetration by about 400 basis points versus last year, reflecting strong acquisition and retention of our highly engaged credit card members. We ended the year with noteworthy changes in our member channel mix. While two-thirds of our members continue to be in-store-only shoppers this year, our mix of omnichannel members nearly doubled to 23% of members, and our online-only members grew to 12% of members. While Scott will take you through the details of the P&L in a few minutes, I want to highlight two areas of focus that are delivering tangible results for our profitability. First, we continue to see strong success in optimizing our promotions. We offered a number of compelling promotions during the holiday, but we further leveraged our CRM capabilities to be more targeted and more profitable with our offers. Post-holiday, we saw an opportunity to be more strategic and employ relevant storytelling to drive guest engagement. For our Love Your Skin and Jumbo Love event, we took a content-forward approach across print and digital channels to focus on education and routines, highlighted newness like never before, and refined the focus of offers in brand participation. As a result of these efforts, we delivered meaningful improvements in our merchandise margin. Second, we continued to take steps to reset our cost structure. After a thorough and thoughtful evaluation of work and capabilities across every corporate function, this quarter, we eliminated approximately 340 roles, resulting in a charge in the quarter of approximately $10 million. Even as we made difficult decisions to eliminate certain roles, we also reorganized select teams, expanded some roles, and introduced a number of new positions in key investment areas aligned to our strategic priorities. We expect these decisions will result in approximately $50 million of SG&A savings in 2021. These decisions were incredibly difficult, but I'm proud of the respect, care, and compassion that went into the process. I'm confident these changes, combined with planned investments to enhance our enterprise capabilities, will position Ulta Beauty for continued success in the short and long term. And now turning to the full year. From a financial perspective, total sales were $6.2 billion; comp store sales decreased 17.9%; and GAAP diluted EPS was $3.11 per share. Adjusted diluted EPS for the year was $4.68 per share. While fiscal 2020 was not the year we originally planned, I am proud of how our teams adjusted and responded to the unprecedented challenges, and I want to express my sincere appreciation to my leadership team and all Ulta Beauty associates for their flexibility, agility, and unwavering commitment to our guests and to each other. Facing a very dynamic operating environment early in 2020, we moved quickly to align on six strategic priorities intended to expand our market share and extend our competitive advantages. We made meaningful progress across each of these priorities in 2020. Our teams continue to deliver great omnichannel experiences for our guests. After temporarily closing all of our stores in March in response to the spread of the virus, we began welcoming back guests and associates to stores in May with our new shop safe standards in all stores and enhanced digital shopping capabilities to keep our guests and our associates safe. While store traffic remained challenged, sales through our digital channels doubled in fiscal 2020. To meet this increased demand, we expanded our e-commerce fulfillment capabilities, including the opening of our Jacksonville fast fulfillment center, expansion of our ship-from-store capabilities, and introduction of curbside pickup. Reflecting increased safety concerns, we restricted the use of testers in stores but accelerated our virtual try-on capabilities. We expanded GLAMlab, our virtual try-on tool, beyond cosmetics to include hair color, false lashes, and the Benefit Brow Bar. We expanded our shade library to include more than 11,000 shades. We introduced QR codes so that guests could virtually try on shades while in-store. We also introduced a digital skin analysis tool to assess guest skincare needs and offer personalized product and regimen recommendations. In 2020, more than 11 million guests engaged with these tools, trying on more than 100 million shades through the app and ulta.com. In a year that saw the contraction of the U.S. prestige beauty market, Ulta Beauty gained dollar share, specifically in key categories such as makeup, skincare, and fragrance based on NPD's point-of-sale data for the 52 weeks ending January 30, 2021. We expanded our assortment in key growth categories like skincare, haircare, and wellness to provide guests with engaging newness and innovation. And we launched Conscious Beauty at Ulta Beauty in stores and at ulta.com, certifying more than 230 brands across four key pillars: clean ingredients; cruelty-free; vegan; and sustainable packaging. Our marketing teams pivoted quickly to reflect the environment. And as a result, we maintained our unaided awareness in the mid-50% range and increased our aided awareness. We drove innovation in our Ultamate Rewards loyalty program, launching new member appreciation events, implementing new reactivation campaigns, and reinforcing the value of the program across all communication channels. Behind the scenes, we expanded our CRM capabilities, leveraging new propensity modeling applications to optimize the return on print investment and reengage with labs and at-risk members in our marketing outreach. We took actions in fiscal 2020 also to adjust our cost structure. We delivered meaningful reductions in occupancy costs through aggressive negotiations and effective portfolio management, and we permanently closed 19 stores to further strengthen our store portfolio. We made changes to our store management structure to improve efficiency and productivity, and we took steps to rightsize our corporate structure. We announced, of course, an exclusive partnership with Target Corporation that will disrupt the beauty category and change how guests experience beauty. And finally, we published our first ESG report, sharing our efforts and commitments in four key pillars: people, product, community, and the environment. While we're early in our journey, I am proud of the progress we've made in these areas, particularly as it relates to diversity and inclusion. Diversity and inclusion have always been important at Ulta Beauty as we want all associates to feel they can be their true authentic selves. Given the events that unfolded throughout 2020, addressing racial and social injustice has become more important than ever. At the end of fiscal 2020, 91% of our associates were women and 47% of our associates were people of color. On our leadership team, 64% were female and 18% were people of color. We recently announced new commitments to help us progress further in our journey to support greater diversity, inclusivity, and equity. Our team is deeply committed to leading purposefully with and for underrepresented voices across retail and beauty. Fiscal 2020 was a difficult year, but the progress we've made positions us well to grow and lead in a post-COVID environment. And now I'd like to introduce Dave Kimbell, who will share more about our plans and priorities for fiscal '21. Dave?
David Kimbell, President
Thanks, Mary. Before I discuss our priorities for 2021, I want to thank you, Mary, for your world-class and exceptional leadership of Ulta Beauty, and personally, for your mentorship. Your impact on our company has been tremendous. Under your leadership, Ulta Beauty has grown to become a beloved beauty destination, known as a welcoming and accessible place for guests and an inclusive workplace, offering outstanding career opportunities for associates. I’m grateful to have worked alongside you for many years and look forward to your ongoing support and guidance as I transition to my new role in June. I also want to express my sincere appreciation to our Board of Directors for the opportunity to become Ulta Beauty's next CEO and to all of our associates and partners for their continued support. In addition, I want to offer congratulations to Kecia on her well-deserved promotion to Chief Operating Officer. I look forward to leading with Kecia and our experienced diverse executive team in service of our Ulta Beauty associates, our guests, and our shareholders. I am passionate about the beauty category, the vibrant and dynamic business we have built, and the role we play in the beauty industry and in our guests’ lives. Ulta Beauty is the leading destination for beauty discovery and meaningful human experiences, and I am excited and humbled by the opportunity to lead such a strong organization through the next phase of its growth. As Mary said earlier, fiscal 2020 was a difficult year, but our teams met the challenges with agility, creativity, and an unwavering focus on serving our guests. As a result, we begin 2021 with a strong foundation from which we can accelerate our growth and shape how guests experience beauty in the post-COVID environment. As we think about growth opportunities in the new normal, we are focused on six strategic priorities to continue expanding our market share gains and extending our competitive advantages. First, we are committed to meeting guests wherever they want to shop, whether it’s in physical stores or on digital platforms. To support this commitment, we’re building capabilities to win in an increasingly omnichannel world. This is not a new journey for us. And as Mary noted, we made a lot of progress in 2020. As we look forward to 2021, we plan to continue to expand and refresh our store fleet, including opening approximately 40 net new stores this year; further accelerate our e-commerce business through elevated marketing, loyalty engagement, and advancement on our journey to create a more personalized experience for our guests on all our digital platforms; continue to evolve our supply chain to enable more flexibility while also supporting our omnichannel strategies; and as the newest pillar in our omnichannel strategy, successfully open Ulta Beauty at Target. Since our November announcement about the new partnership with Target, our teams continue to make progress to bring our vision to life. Our brands are excited to partner with us, and we have more brands than originally considered for the space, with strong support from our largest brand partners as well as several brands which are exclusive to Ulta Beauty across makeup, skincare, haircare, and fragrance. We remain confident that this partnership is an innovative, forward-looking approach to further delight our existing members while also acquiring new members from the millions of guests that shop in Target every day. We continue to see great social engagement and enthusiasm for Ulta Beauty at Target, and we’re on track to launch online in about 100 stores in the fall, scaling to hundreds of stores in the next few years. Our second strategic priority is to reimagine how guests experience and discover beauty across all touch points. COVID-19 has not changed the importance of beauty, and we are confident in the future growth of the category. Beauty enthusiasts still value the human connection and physical experience of beauty but want to balance safety with the desire to discover and play with products. Reflecting these factors, we are elevating the end-to-end guest experience at Ulta Beauty. In 2021, we intend to safely reintroduce testers in select areas of the store and work closely with our brand partners to develop innovative sampling programs; drive enhancements to our digital experiences; further invest in our app, including guided education and recommendation experiences like our skin advisor; implement layout changes in select new stores to elevate key growth categories; unify the presentation of skincare makeup and improve the focus pickup experience; and as our associates have the greatest impact on the guest experience, we plan to implement training for our team, focused on priority categories like skincare as well as key skills to further strengthen human connections with our guests. Our third priority is to drive winning category strategies to engage and delight beauty enthusiasts and expand our market share. Our curation of a diverse assortment focused on newness, exclusivity, and leading brands has enabled us to grow our market share over time. Building on the progress we made in 2020, we plan to continue to strengthen our assortment in key growth categories like skincare and haircare while protecting our strength in makeup; scale our Conscious Beauty platform; introduce a new wellness shop to offer guests self-care for the mind, body, and spirit; and double the number of black-owned brands while investing to increase awareness and support of those brands. Our fourth priority is to deepen Ulta Beauty love, loyalty, and engagement. Over time, we've evolved our brand purpose to build stronger connections with our guests, and the changes and challenges our guests experienced in 2020 provide us with a unique opportunity to reinforce our brand purpose. And of course, our loyalty program is central to our efforts to build brand love for Ulta Beauty. In fiscal 2021, we are focused on creating culturally relevant content that leverages the power of beauty to deeply engage with guests across channels, including expanding our Where Dreams Begin campaign and building out our MUSE platform, which was developed to celebrate, honor, and amplify black voices in beauty; expanding Beauty School at Ulta Beauty, our content-forward entertainment digital platform to drive hyper-relevant product and services engagement; increasing member growth across channels through new guest acquisition, lapsed member reengagement, and targeted retention efforts; and we will accelerate spend and engagement through further personalization efforts, including advancing offer optimization in print and digital channels. Our fifth priority is to drive holistic cost optimization. Like others, we face ongoing headwinds from macro costs, including wage pressure and transportation costs. We are also navigating category and channel shifts. In fiscal 2020, we actively took steps to reshape our organization and adjust our cost structure while also investing in new capabilities that will drive future growth. Building on these efforts, we will continue to pursue process optimization opportunities in merchandising and supply chain while also looking for ways to reduce occupancy and operating costs. Importantly, we will continue to invest some of these savings in support of our strategic priorities to drive growth. Our final priority is to develop our talent and strengthen our culture. This is not a new priority. Our talent and culture are always in focus, and we know that our associates bring to life the Ulta Beauty brand for our guests. I am incredibly proud of how our teams led through 2020 with respect, empathy, and courage. Looking to 2021, we will continue to work to create an environment where every associate feels they can fully contribute, and every guest is optimally served regardless of differences. We will expand our training and development to inspire and empower our associates, and we will continue to enhance and magnify our diversity and inclusion efforts. In closing, I am excited and optimistic about the future of Ulta Beauty. Our business is emerging from 2020 with good momentum and a strong foundation in place. We are positioned to thrive going forward, and I am confident our team will continue to lead with creativity, passion, and continued care for each other and our guests while leading the beauty industry, capturing market share, and driving profitable growth. And now I’ll turn the call over to Scott for a discussion of the quarter’s financial results and our outlook for fiscal 2021. Scott?
Scott Settersten, CFO
Thanks, Dave, and good afternoon, everyone. Before I review our financial results and provide our outlook for the year, I just wanted to take a moment on behalf of the entire executive team and all of our associates to congratulate Dave on his upcoming appointment as our next CEO. We are excited for Dave as he takes this next step in his already successful career and have the utmost confidence in his ability to lead Ulta Beauty through its next phase of growth. Now beginning with the income statement. Net sales for the quarter declined 4.6%, and total company comp declined 4.8%. As Mary mentioned, we are incredibly pleased with our performance as top line results for the quarter were much better than our internal expectations. Average ticket increased 8.3%, primarily driven by an increase in units per transaction. Transactions declined 12.2%. As we have seen in recent quarters, we experienced nice conversion in both channels. We continue to be impacted by softer traffic to stores as well as capacity limitations and fewer operating hours compared to last year. However, we are encouraged by the sequential improvement in store traffic during the fourth quarter. As expected, e-commerce growth slowed relative to the third quarter as demand in stores improved but still delivered very strong growth versus last year. Our e-commerce operations delivered a sales increase of 72% for the quarter as guests continue to take advantage of our omnichannel capabilities. Buy online, pick up in store and curbside were strong again this quarter, particularly in the weeks leading up to Christmas, and totaled about 15% of e-commerce sales for the quarter. Gross profit margin was 35.1%, an increase of about 10 basis points compared to 35% a year ago. The largest driver of gross margin performance was an increase in merchandise margin, which was driven primarily by lower promotional activity as we chose not to repeat certain promotional activity from last year and continue to refine our promotional strategies. We also experienced a positive outcome from our holiday purchasing strategy, which reduced our exposure to limited edition holiday sets and leaned more into core product, resulting in higher sell-through and minimal post-season markdowns and clearance. Lastly, we continue to see benefits from our cost optimization efforts across the organization. The increase in merchandise margin was partially offset by the impact of channel shift. However, we are pleased with the profitability improvement in our e-commerce business driven by continued strong adoption of our buy online, pick up in store, and curbside capabilities as well as the impact from our efforts to refine our promotional strategy. We also experienced deleverage of fixed costs due to lower sales, although the headwinds improved from what we experienced earlier in the year, given the better sales trend and actions taken by our real estate team to strengthen our portfolio and reduce occupancy costs, including lease negotiation efforts and our decision to permanently close 19 stores. SG&A expenses decreased to $514.1 million compared to $515.5 million in the fourth quarter of 2019. The largest drivers of the decrease were lower store payroll and benefits, and lower variable store expenses as we adjusted to softer store traffic. These reductions were partially offset by higher marketing expense as we continue to prioritize and invest in digital and social channels and resume print advertising in preparation for the holiday season. We also experienced an increase in corporate overhead, primarily due to higher incentive compensation, reflecting our financial performance versus our internal targets, partially offset by reduced spending across multiple areas. We incurred about $18 million in PPE and COVID-related expenses during the quarter. This quarter, we recorded a charge of $30.4 million for impairment, restructuring, and other costs. Last quarter, we suspended our planned expansion to Canada, and our teams completed the wind down effort during the fourth quarter. This resulted in a $13.2 million charge related to lease termination costs, long-lived asset impairment charges and severance. We also recorded $10 million in severance associated with the charges and changes made to our corporate and field management organization, $5.6 million in lease termination costs related to the previously announced permanent closure of 19 stores, and $1.5 million due to the impairment of tangible long-lived assets and operating lease assets associated with certain stores. GAAP operating income decreased to $224.3 million compared to $287.8 million a year ago. Adjusted operating income was $254.7 million or 11.6% of sales. Diluted GAAP earnings per share was $3.03 compared to $3.89 for last year's fourth quarter. Adjusted diluted earnings per share was $3.41 compared to $3.83 a year ago. Moving on to the balance sheet and cash flow. Total inventory decreased 9.7% compared to last year as we adjusted purchasing to maintain flexibility and manage inventory. For the year, we invested $152 million in capital expenditures, including approximately $70 million for new stores, remodels, and merchandise fixtures, $49 million for supply chain and IT, and about $33 million for store maintenance and other. We ended the year with $1 billion in cash and cash equivalents. Reflecting our confidence, we resumed our stock buyback program in the fourth quarter and repurchased approximately 148,000 shares of stock. We have $1.5 billion remaining under our current repurchase authorization. Turning to our outlook for 2021. While we are encouraged by recent sales momentum, visibility into the timing of a demand recovery remains limited. We expect much of 2021 will continue to be negatively impacted by masking requirements and social distancing. And while we expect sales trends will improve as we progress throughout the year and COVID-19 vaccines become more accessible, we are planning for total sales to be slightly lower than 2019. That being said, we plan to be nimble and agile, and we'll be prepared to capitalize should the environment improve earlier than we expect. Now specifically for 2021. We expect to open approximately 40 net new stores, remodel 11 stores, and relocate approximately 10 stores. Note that when the pandemic hit last year, we moved quickly to defer most of the new stores planned for 2020. As a result, more than half of our new stores are expected to open in the first quarter. We anticipate net sales for the year will be between $7.2 billion and $7.3 billion, with comp sales planned in the 15 to 17 percentage range. We expect comp results will vary significantly between the front half and the back half of the year as we lap store closures that occurred in the first half of 2020. With this in mind, we anticipate comp growth will be in the low to mid-30s for the first half of 2021 and then moderate to low- to mid-single-digit growth for the second half. We expect operating margin rate for the year will be around 9% of sales as we lap easier top line comparisons due to COVID-19-related store closures in 2020. To give you a little more color on the expected puts and takes driving our operating margin expectation, overall, we expect the largest driver of operating margin expansion will come from gross margin. For the year, we anticipate an improving sales trend from our brick-and-mortar operations, resulting in less headwind from channel shift and leverage of fixed costs. We are planning e-commerce penetration to be in the low to mid-20s for the year. We also expect merchandise margin will improve modestly as we continue to optimize our promotional strategy and continue to pursue efficiency for growth opportunities. We also expect SG&A will deleverage, driven primarily by higher store payroll as we anniversary the $52 million benefit from the CARES Act in fiscal 2020. In addition, we expect to see payroll deleverage from store management changes made in 2020 and ongoing wage pressures. Recall that in the fourth quarter of 2020, we realigned our store management structure to create a more cost-efficient store model. As a result of these changes, we will see a reduction of salon payroll, which is part of cost of goods sold, and an increase in retail payroll, which is included in SG&A relative to last year. The deleverage of retail payroll should partially offset by lower corporate overhead, reflecting changes we made in 2020 to reset our corporate cost structure. We anticipate advertising will be relatively flat for the year as a percent of sales. These assumptions result in guidance for diluted earnings per share in the range of $8.85 to $9.30 per share, including the impact of approximately $850 million in share repurchases. We plan to spend between $200 million and $250 million in CapEx, including approximately $115 million for new stores, remodels, and merchandise fixtures, $77 million for supply chain and IT, and about $33 million for store maintenance and other. I would note that our guidance for 2021 assumes a consistent federal tax rate and no material increases in the federal minimum wage and does not include assumptions for any impact related to a resurgence of COVID-19. Before we take your questions, I want to announce that we plan to host an analyst and investor conference this fall to share our longer-term plans and outlook. We'll share more of the logistical details later this summer. And now I’ll turn the call back over to our operator to moderate the Q&A session.
Operator, Operator
Our first question comes from Kate McShane with Goldman Sachs.
Katharine McShane, Analyst
Congratulations, Mary and Dave, on the news today. My question is centered around the guidance for the 15% to 17% comp growth for 2021. I just wondered to the extent that you could comment on how you expect the cadence or the role of haircare and skincare driving that comp versus makeup.
David Kimbell, President
Yes, Kate. That's a great question and something we're focusing on. Throughout the year, we remain optimistic about the engagement from our guests both in stores and online. Our non-makeup categories have performed well throughout 2020, particularly in the fourth quarter, with strong results in skincare, fragrance, haircare, and bath, all meeting or exceeding our expectations. We expect this trend to continue this year. There is still some uncertainty regarding makeup, but we believe in its long-term potential and anticipate innovation and growth that will drive future success. Our consumer research shows signs of engagement, and we expect pent-up demand from consumers as they feel more comfortable socializing and celebrating. The question we face is the timing of this recovery. We have prepared various models for the anticipated increase in makeup engagement. While we haven't fully observed this yet, we are well-positioned to drive innovation with our brand partners through our marketing and digital tools, including virtual try-on features, and we are closely coordinating with our brand partners on inventory as the makeup category begins to grow. Although the timing remains uncertain, we are confident in the long-term prospects and ready for that growth, which is reflected in our guidance for 2021.
Operator, Operator
Our next question comes from the line of Christopher Horvers with JPMorgan.
Christopher Horvers, Analyst
Mary, you're still young, and you hold a substantial amount of stock in the company. The business is clearly set to recover in 2021, so many investors might perceive this announcement as being made a year too soon. Could you elaborate on why now is the right time for this? How can you reassure investors not to think that way? Additionally, what are your thoughts on your career plans after June 2022 when you leave the board?
Mary Dillon, CEO
Well, Chris, I'll take that as a compliment. I'm teasing you. Listen, this has been planned for a while with the Board in terms of the kind of governance and succession planning that we all do. I just feel that this is the right time for me personally. I'm excited. I'm going to be the Executive Chair for a year. So I'm excited about that as well. I'm staying very close to the strategies in the future as well. We're coming out of 2020 strong. The foundation of the business is very strong. Most importantly, Dave is ready to take on the next chapter of growth as the CEO of the company. So it just felt to us and to me like a natural time to make this transition. I'm very confident, very confident about the future of Ulta Beauty. And we're excited. I'm also excited that Kecia Steelman is going to have new responsibilities as Chief Operating Officer. So all told, I think this is about as seamless of a succession story as you can come up with, and that we're really excited about it.
Operator, Operator
Our next question comes from the line of Omar Saad with Evercore ISI.
Omar Saad, Analyst
I would like to extend my congratulations to everyone as well. I have a specific question regarding makeup. Given the uncertainty around what the recovery will look like and when it will begin, are you noticing any consumers returning to stores or shopping online, perhaps discarding expired makeup that hasn't been used in the past year and starting to restock that part of their collection?
David Kimbell, President
We haven't encountered any problems with expired products or excess inventory. However, we believe that consumers refreshing their at-home stock is a trend that's been developing throughout 2020. With diminished engagement in makeup prior to the pandemic and the disruptions of that year, we anticipate a resurgence in how our guests engage with makeup. Fashion trends, styles, and looks will continue to change, and we are excited and hopeful about this revival. While the timing remains uncertain, we sense it on the horizon. Our guests have a strong passion for makeup and beauty, and they enjoy exploring new categories. Given the challenges faced by the makeup category over the past couple of years, we know that beauty enthusiasts are eager for new products. We expect to see the behavior you mentioned, where consumers clean out their old stock, replace it with new items, and embrace fresh looks and styles as we move forward. This will be an integral part of the overall narrative.
Operator, Operator
Our next question comes from the line of Dana Telsey with Telsey Advisory Group.
Dana Telsey, Analyst
And Mary, congratulations on a wonderful career at Ulta, and who knows what comes next. Dave, congratulations to you on assuming the new role also. As you think about the changes that happened in 2020 going into 2021, how do you think of the digital channel and e-commerce and the margins that you’ve had in the past? Any opportunity for margins on e-com and digital to improve going forward and how we get there?
David Kimbell, President
We are very pleased with our digital and e-commerce experience. The growth has been robust for several years, particularly remarkable in 2020 as our customers embraced that channel. Our entire team worked diligently to ensure we could meet the unexpectedly high demand from our guests. This engagement will benefit Ulta Beauty for a long time, not only through short-term sales but also because history indicates that as we involve our guests in various aspects of our business—both in stores and online, as well as in salons—their loyalty to Ulta Beauty, their spending, and purchasing frequency increase significantly. We are confident that this will be advantageous for us. Overall, having more people engaged with our digital channels is a positive development for our business. However, we are aware of the margin pressures in that area. Despite being a very positive aspect of our business, we are focused on addressing these challenges. We have processes in place to optimize costs through promotional efforts and service costs, which we believe is an essential part of the business.
Scott Settersten, CFO
We've seen benefits from promotional optimization in the fourth quarter, particularly in the digital channel due to the nature of the shopping experience there. We believe there are significant opportunities to enhance the profitability of that channel in terms of both promotional strategies and supply chain effectiveness.
Operator, Operator
Our next question comes from the line of Kelly Crago with Citi Research.
Kelly Crago, Analyst
Mary, Dave, congratulations. Mary, you will be missed. My first question or my question is really around the gross margin. A couple of different areas I want to focus on. I guess, number one, is there a chance that gross margin could reach back to FY '19 levels in FY '21? And then just drilling down a little bit further on the rent and occupancy line. Could you first talk about some of the abatements you got this year and how we should think about the rent and occupancy line in '21? And then on the merch margin, I think you said that you expect the merchandise margin to be up for the year. Is that going to be pretty consistent throughout the year given it seems as though your strategy can pull on to some of these lower promotional savings going forward?
Scott Settersten, CFO
Yes. There are many factors related to that question, but the main point about gross margin returning to 2019 involves various considerations. If you refer to our prepared remarks, we provided extensive details on this topic. Our initial outlook does not indicate a return to 2019 levels. Part of this is due to the change in geography affecting the services manager, which is beneficial for us, but overall lower sales create some challenges when we compare to 2019. There are several factors to consider beyond channel mix, which has been a significant driver when comparing 2021 to 2019. It's worth noting that in 2019, e-commerce represented mid-teens percentages of total sales, while we expect it to be in the mid-20s for 2021. There are many factors at play here. However, we remain optimistic about the potential for sales growth. We feel positive about concluding the fourth quarter, and if sales increase, particularly in our makeup segment, that could create favorable conditions. Ultimately, sales growth supports scaling and drives leverage.
Kelly Crago, Analyst
Got it. On the merchandise margin side, do you expect it to be consistently up throughout the year, or is it more likely to be stronger in the first half due to some of the challenges experienced in the first quarter last year?
Scott Settersten, CFO
Yes. I think it'll be a little stronger first half of the year because we're lapping some large disruptions over a year ago and then building momentum throughout the course of the year. So again, there's a lot of levers that we have to pull and push as we navigate through the course of the year with promotion cadence and some of our major events. So again, we're looking to optimize the total business as we navigate throughout the year.
Operator, Operator
Our next question comes from the line of Simeon Gutman with Morgan Stanley.
Simeon Gutman, Analyst
Congratulations, Mary and Dave. I want to ask a question that I think you'll probably defer to the Analyst Day. So I guess, Dave, in the next chapter of growth where margin can go, and part of the question is, it looks like your sales level is not going to be that far below 2019, and it looks like your SG&A level is somewhat back to 2019 levels. So I guess, what level of sales can you get back to 2019 level of margin?
David Kimbell, President
We will provide more information about our future growth and what we anticipate during the Analyst Day in the fall, and we are excited to share those plans with you. We are currently experiencing some pressure on the guidance regarding our overall profitability for 2021, as Scott mentioned, but we are committed to improving it over time. We are optimistic about our ability to enhance our profitability and believe that growth will continue as we navigate through short-term disruptions. More details will be available regarding our outlook, planning, and sales projections beyond this year. Our current focus is on driving our business as we move into 2021.
Scott Settersten, CFO
I would just add that our executive team and senior leadership are committed to achieving double-digit EBIT margins. We are confident in our ability to reach that goal. You can see from the fourth quarter results that we are close. Although those results are somewhat exceptional due to high sales levels and the leverage they create, we believe that with the right planning for 2021, and if the crisis resolves more quickly, we can gain momentum and achieve better overall results than we are currently projecting.
David Kimbell, President
Yes. And Dave, when Mary did the keynote for shop talk a couple of years back, she came out dancing.
Operator, Operator
Our next question comes from the line of Steph Wissink with Jefferies.
Stephanie Schiller Wissink, Analyst
I want to extend my congratulations to the entire team. Dave, I have a question for you regarding the changes in the loyalty balance. Mary, you mentioned a 10% decrease in customers within the program. Could you clarify if this relates to active customers, meaning those who haven't shopped with you in the specified timeframe, or if these are customers who have chosen to opt out of the loyalty program? If it's the latter, is this providing any insight into how you should approach retaining or reengaging those customers you may have lost?
David Kimbell, President
Our loyalty program is essential to our success and has been for a long time, and it will continue to be important in the future. We have a top-tier loyalty program with a high level of engagement, and we believe it is among the best in retail. Our definition of a member hasn't changed; to be counted, one must have shopped with us at least once in the past 12 months. However, during the early part of the crisis, when our stores were closed about a year ago, we lost some of our less engaged store-only guests who either stepped away from beauty for a while or shopped with other retailers that were open and did not transition to e-commerce. We are focusing on reengaging these customers, as we know they didn’t have a negative experience with us but rather shifted their behavior temporarily. As we compare our performance to strong months in 2019, we recognize there will be challenges from 2020. There is no indication in our research that our guests have become less engaged with beauty over time or with Ulta Beauty. Our most engaged members, the diamond and platinum guests, have shown excellent retention and connection to our brand. We have a dedicated team focused entirely on our loyalty guests, which includes personalized communication, broad-scale marketing, and an evolving product assortment that our customers appreciate. Our stores are committed to providing a great experience for every guest. Although we are currently facing some challenges, the long-term outlook for our loyalty program remains very positive.
Operator, Operator
Our next question comes from the line of Michael Lasser with UBS.
Michael Lasser, Analyst
And congratulations to everybody. As part of the succession process, was there a thought to guide conservatively for the year ahead to help with the transition and provide more flexibility for 2021 as folks will be in their new roles? Or does it simply reflect the fact that Ulta's long-term operating profit margin won't be as high as it's been, in part to e-commerce penetration being in the low to mid-20% range versus 2019 when it was in the 13% range?
Mary Dillon, CEO
We provide guidance based on our best estimates of what we expect will happen, along with some variability around that. Looking at our guidance, we feel positive and optimistic about the business's momentum. However, as mentioned, there remains considerable uncertainty ahead, and we've factored this uncertainty into our outlook, as we do in any situation, not just because of a transition. We still don’t have a clear understanding of when we can expect improvement in our largest category, makeup. While we do see some positive signs, and Dave articulated this well, the timing remains unpredictable. Considering the various factors at play, including our successful cost management and our investments for future growth, we believe the guidance we've set is achievable. We are prepared to act quickly if the economic and consumer recovery accelerates, but we believe this guidance is quite reasonable.
Operator, Operator
Our next question comes from the line of Paul Trussell with Deutsche Bank.
Paul Trussell, Analyst
My congratulations as well, Mary, Dave, and Kecia, and also to the team. On the MUSE campaign, this household is a fan. Just wanted to inquire about a few updates. One, 40 store openings this year, just maybe if you can put that in context of how you think about long-term door growth and potential kind of reacceleration in the outer years and maybe incorporate just any updates on Canada into that? And then similarly, just any updates as you've had further conversations with your vendor partners around the Target shop-in-shop and that partnership and what your expectations are for when that launches.
David Kimbell, President
Yes, I’ll start here by thanking you for the recognition of MUSE. The team is proud of that work, and I’m sure some of them are listening and will be pleased to hear it. This year, we are opening 40 stores, and we remain steady in our guidance that we can grow to 1,500 to 1,700 stores over time. There’s no new information regarding Canada, as that project is currently on hold. We maintain a positive outlook on physical retail and are committed to finding excellent locations nationwide. We are enthusiastic about the 40 new openings this year and see significant growth ahead. This relates to our partnership with Target. We are very pleased with how that collaboration is progressing. The relationship has been exceptional as we build this together, and the feedback from consumers has been overwhelmingly positive. They are excited about this initiative. We see it as a new way to engage consumers in the prestige segment of beauty, which is essential during this time of market disruption. Our approach will be completely innovative and distinct, focusing on the best in prestige with a highly curated assortment, attractive presentation, and outstanding staffing. We expect strong consumer engagement and a compelling guest experience that will allow us to attract millions of new members over time. We aren’t revealing many details yet, but I can assure you our plans are on track, and we are ready to launch Ulta Beauty. We have strong support from both our major brand partners and emerging brands, and we will have more brands at launch than we initially anticipated. We are excited about everything coming together and believe it will be an incredible experience. We are thrilled to partner with Target, who has been exceptional in helping us create this next chapter in the beauty industry.
Operator, Operator
Our next question comes from the line of Michael Binetti with Credit Suisse.
Michael Binetti, Analyst
And let me express my congratulations. Mary, you'll be greatly missed, and Dave, we look forward to collaborating with you. My first question is for Scott. Can you help us understand the metrics related to the SG&A that you have outlined for this year in terms of what constitutes investment? I believe Dave mentioned that some investments are partially balancing out margin tailwinds. Looking at EBIT dollars per store, it appears you were at around $740,000 in 2019, but the guidance suggests it may be closer to $500,000 now. It seems a lot of focus is being placed on SG&A. Additionally, Mary, in markets that have been less restricted or have reopened more rapidly, what leading indicators are you observing that cause you to describe the beauty category, particularly color cosmetics, as having low visibility or uncertainty as you share your views on the reopening of other markets?
Mary Dillon, CEO
Yes. I wouldn’t say that we’ve seen a material difference in performance across markets for the most part. I mean there’s certainly been weather disruptions and everything with COVID. We’ve been watching it closely. And I think just with makeup, we just know it’s a category that’s been under pressure even prior to COVID. And then we have a long period of time where folks are changing their makeup routines. And so we know that the category has lots of newness and innovation to come, and it’s large. People are very engaged in the category. We’re just not sure exactly when people are going to start wearing makeup, more makeup for social occasions and things like that. So we’re watching it closely. But it’s a great aspect of our business model that we are across so many categories that the self-care, the skincare, the bath and fragrance categories have performed, as you know, exceptionally well. So we're well balanced, and we’re poised to take advantage of the uptick, which we think will come.
Scott Settersten, CFO
Yes. Regarding the SG&A portion of the question, the comparison can vary depending on whether you're measuring against 2020 or 2019. Focusing on 2019, by the end of 2020, we expect to have around 50 new stores added to our fleet compared to 2019. This naturally introduces a fixed cost component that impacts gross margin, along with variable costs related to store payroll and signage necessary for operations. Our initial outlook indicates a top line that is slightly weaker than in 2019, which is a significant factor. The reclassification of service management from gross margin to SG&A improves gross margin but presents a challenge for SG&A; however, it ultimately benefits the company as it enhances our effectiveness and operating margin. We've consistently invested in our business and view 2019 as a recovery year. Makeup is a crucial segment for us, and while there's uncertainty about its return, we remain optimistic about its eventual recovery, which is essential for our operations. Additionally, we are making ongoing investments in our infrastructure, particularly in digital and IT, which are vital for delivering an excellent omnichannel experience and fostering long-term innovation and growth for the business.
Operator, Operator
Our final question comes from the line of Steve Forbes with Guggenheim Securities.
Steven Forbes, Analyst
Let me extend my congratulations as well. Maybe I wanted to sort of focus on the outlook for ad spend. So a quick two-part here. Scott, you mentioned flat year-over-year. Maybe just tell us, if you can, on what the expense ratio was for 2020. And then more importantly, for maybe all of you, as I think about the reopening opportunity here, right, to drive new customer acquisition, to drive services adoption, and maybe reaccelerate those member trends, it just seems like there's a very large opportunity ahead of us. So I'd love to just hear about why not be more aggressive, right, or sort of how you're thinking about overall ad spend, whether it's payback or just love to hear just higher level thoughts on how you're sort of viewing this reopening opportunity in terms of customer acquisition vehicle.
Scott Settersten, CFO
Yes. I can start there. We’re being flexible, similar to how we approached the situation in 2020 during the COVID crisis when we significantly reduced our print efforts and shifted resources towards digital, which proved to be a smart move based on the outcomes. Regarding EFG, our focus on efficiencies for growth, print advertising represents a significant long-term opportunity for us. We continue to seek ways to optimize the costs associated with print, as well as distribution and postage, by collaborating with our vendor partners to develop new and improved strategies for reaching the market over the long term. This is a regular part of our operations. We anticipate that as a percentage of sales, it will remain relatively stable year-over-year, but it's always a work in progress.
David Kimbell, President
Yes. To reiterate on your points about reopening and guest engagement in the category, we feel confident in what we’re observing, though we are uncertain about the pace and recovery, particularly in our largest category of makeup. As Mary and Scott have mentioned, we believe our guidance is accurate, but we are also ready to make adjustments. The events of 2020 have further sharpened our agility and preparedness for any challenges that may arise. We are prepared to drive growth and lead the industry while also maintaining that our guidance is correct.
Operator, Operator
Our final question comes from the line of Ike Boruchow with Wells Fargo.
Irwin Boruchow, Analyst
Congratulations to everyone. I have two quick questions. Dave, regarding store productivity, you mentioned it was around $500 per square foot before COVID. Looking ahead, not just this year but over the next two to three years, how do you anticipate store productivity normalizing in light of the increase in e-commerce? And Scott, about the guidance, it appears to suggest that you expect a year-over-year decline in e-commerce sales in dollars due to the mix. Could you provide some insight into what’s included in the e-commerce revenue projections for either the first half, second half, or the full year? Any information would be appreciated.
David Kimbell, President
Yes. Store productivity, I’m not going to give any specifics right now because we’ve got a lot to figure out of where things settle out and settle down. Having said that, we remain really committed and positive about the physical store channel for Ulta Beauty and in beauty in general. And so we're watching that closely. We're seeing positive trends as guests are getting reengaged. We know our guests are telling us and then increasingly demonstrating that they want to get back in a physical way, but we know e-com will play a bigger part of it, too. So I imagine that’ll be a big part of our discussion in the fall as we kind of talk about a longer-term outlook, but it’s a big focus for sure.
Scott Settersten, CFO
I would like to add that in the fall, we will have more updates for investors. The reality is that store traffic trends have been negative for some time, and we need to closely monitor how consumer behavior rebounds as 2021 progresses and how it integrates with our overall digital strategy and omnichannel approach. Regarding the e-commerce question, you are correct. We are anticipating a mid-20 percent penetration for the year, which we believe is strong based on our performance in 2020. That segment is now twice as large as it was at this time last year, and our team is prepared to scale it and capitalize on new opportunities. Our current focus is on ensuring that our store fleet and teams are well-equipped so when customers return to shop in our physical locations, we can provide an excellent guest experience and keep them engaged with our brand.
Mary Dillon, CEO
Okay. I think we're done with the questions. Thank you. So I just want to thank everybody for joining us today. The future is really bright for Ulta Beauty. We have a strong and differentiated business model. We're emerging from the 2020 pandemic with good momentum. We're strategically investing in our business to drive further market share gains, and we have strong leadership for the next chapter of growth. I'm really proud of the job that the Ulta Beauty store, distribution center, and corporate associates did all year to deliver this amazing but tough year. I remain very excited about the long-term growth opportunity. I'm confident Ulta Beauty will continue to shape and lead the beauty industry. I'm excited about the next chapter ahead for all of us. It's the right time for me personally, the right time for Dave and Kecia, and the right time for Ulta Beauty as the team continues to drive growth for many years to come. We look forward to speaking with all of you again in May when we report on our first quarter results. Thank you.
Operator, Operator
This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.