Earnings Call Transcript - ULTA Q2 2023

Operator, Operator

Good afternoon, and welcome to Ulta Beauty's conference call to discuss results for the second quarter of fiscal 2023. As a reminder, this conference is being recorded. It is now my pleasure to introduce Ms. Kiley Rawlins, Vice President of Investor Relations. Ms. Rawlins, you may proceed.

Kiley Rawlins, Vice President of Investor Relations

Thanks, Paul. Good afternoon, everyone, and thank you for joining us for a discussion of Ulta Beauty's Results for the Second Quarter of Fiscal 2023. Hosting our call today are Dave Kimbell, Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Kecia Steelman, Chief Operating Officer, will join us for the Q&A session. Before we begin, I'd like to remind you of the company's safe harbor language. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC. We caution you not to place undue reliance on these forward-looking statements, which speak only as of today, August 24, 2023. We have no obligation to update or revise our forward-looking statements except as required by law, and you should not expect us to do so. We'll begin this afternoon with prepared remarks from Dave and Scott. Following our comments, we'll open up the call for questions. As always, the IR team will be available for any follow-up questions after the call. Now I'll turn the call over to Dave. Dave?

David Kimbell, CEO

Thank you, Kiley, and good afternoon. We appreciate your interest in Ulta Beauty. The Ulta Beauty team delivered strong performance again this quarter with sales, gross profit, and SG&A expenses all better than planned. Net sales increased 10.1% to $2.5 billion, and comparable sales increased 8%. Operating profit was 15.5% of sales, and diluted EPS increased 5.6% to $6.02 per share. In addition to delivering strong financial results, our teams executed against our operational priorities. During the quarter, we drove growth across all major categories, increased the number of loyalty program members, strengthened our brand engagement, and achieved important milestones within our multiyear transformation initiatives. Through the first half, our financial results are ahead of our internal expectations, and I remain confident we can deliver against our updated guidance for fiscal 2023. I want to express my sincere appreciation to all Ulta Beauty associates for their continued commitment to delivering great guest experiences while working collaboratively to execute our ambitious transformational agenda. Starting with our operational results, we saw solid sales performance across both our store and digital channels, driven by double-digit traffic growth. All major categories delivered comp growth for the quarter, supported by strong engagement with the overall beauty category, compelling product newness and innovation, and successful execution of cross-category promotional events, including our reimagined Big Summer Beauty Sale. Building on last year's promotional events, we consolidated key summer events like our popular Jumbo Love and Mix & Match Minis into a broader, more cohesive event with holistic storytelling and impactful messaging. The three-week long Big Summer Beauty Sale drove market disruption, member conversion, and strong sales across our hair care, makeup, and skin care categories. Turning to performance by category, skin care continues to be one of our strongest categories, even as we compare against unprecedented growth during the pandemic. For the quarter, both Prestige and mass skin care delivered double-digit growth. Newer brands, including Bubble, BIOMA, and Beautycounter, alongside innovation from existing brands like The Ordinary, Drunk Elephant, and Supergoop!, contributed to the strong sales results. Reflecting consumer interest in dermatologist-recommended brands, La Roche-Posay and CeraVe continued to perform well, and brands like Good Molecules, Hero Cosmetics, and Peach Slices continue to benefit from social virality. The fragrance and bath category delivered double-digit comp growth again this quarter. Layering and wardrobing scents as a form of self-expression, especially among Gen Z consumers, continues to drive category engagement. Newness from Ariana Grande, Valentino, and Burberry contributed to the category's performance, and key gift-giving events like Mother's Day and Father's Day drove growth for luxury brands like Carolina Herrera, Chanel, and YSL. The hair care category delivered mid-single-digit comp growth driven by new product offerings and guest engagement with our strategic events. Products focused on bonding, scalp treatments, and other repair solutions, as well as healthy heat styling options, continue to drive consumer interest. Trend-relevant products from professional brands such as Redken, Biolage, and Matrix, along with new offerings from prestige brands, resonated strongly. New brands, including the exclusive LolaVie from Jennifer Anderson and Donna's Recipe, also contributed to growth this quarter. Despite facing challenges as we compare against several years of strong growth, sales trends in hair tools improved from the first quarter, driven by new innovations from Dyson and Bio Ionic. Finally, makeup delivered low single-digit comp growth, driven by strong performance in mass cosmetics. New brands like Dior, NATASHA DENONA, and Beautycounter drove growth during the quarter, while new and exclusive products from a wide range of brands, including e.l.f, NYX, and OPI also contributed positively. Compelling events, including our Big Summer Beauty Sale, National Lipstick Week, and our foundation event, along with successful collaborations with Barbie and Little Mermaid, drove guest engagement. While the performance of mass cosmetics benefited from engaging newness in social content, our prestige makeup business faced challenges as we compared against the significant impact of the Fenty launch last year. Our services business delivered double-digit comp growth again this quarter, primarily driven by increased appointments. Guests are engaging in core cut, color, and blowout services, as well as newer offerings, including extensions and scalp and hair treatments. We continue to enhance our service offerings, and this quarter, we launched ear piercings chain-wide and introduced a new Keratin Express treatment. The beauty category growth remains healthy across both prestige and mass price tiers as consumers maintain their post-pandemic routines and expand their definition of beauty. When we look at the total beauty market, our analysis demonstrates that we continue to gain market share. In mass beauty, we gained share this quarter across all major categories. In prestige, we continue to drive solid gains in skin and fragrance but faced pressures in makeup and hair based on Circana's beauty sales data. Our insights suggest consumers are becoming less focused on product pricing tiers and are trading around, choosing to engage with brands that offer on-trend newness and compelling social media content. As the only beauty retailer to offer a curated assortment of products from entry-level mass to luxury and everything in between, we are uniquely positioned to capture a share of the total beauty market as consumer preferences shift. We remain confident in the resilience of beauty. Our strategic framework guides our priorities and positions us to expand our market leadership and drive long-term profitable growth. Let me share some highlights of the progress we made against this framework in the second quarter. Starting with our efforts to drive growth with an expanded definition of All Things Beauty. Newness and innovation are critical growth drivers for beauty. Newness manifests in the form of new brands, products and product lines, shade extensions, and reformulations, fueling discovery, driving trips, and increasing engagement. As we seek to continuously delight guests with all Things Beauty, we continue to expand our assortment and innovate with emerging brands. Building on the newness introduced in the first half, we have several exciting launches planned for the third quarter, including Half Magic, a vegan and cruelty-free makeup brand created by Euphoria makeup artist Donni Davy, exclusive to Ulta Beauty; Polite Society, a prestige makeup brand exclusive to Ulta Beauty created by the founders of Too Faced Cosmetics; Rabanne, a contemporary and relevant Spanish fashion brand launching cosmetics exclusively at Ulta Beauty; hair styling tools at accessible price points from Shark Beauty; PanOxyl, a dermatologist-recommended brand popular with Gen Z; and Sniff, an emerging fragrance brand offering gender-neutral scents available only at Ulta Beauty. Reflecting the growth and popularity of luxury products with younger generations, last quarter, we launched Luxury at Ulta Beauty in 200 stores and on ulta.com. The program has exceeded our expectations, and we continue to see strong guest engagement with our offerings across all categories. Building on this success, we are excited to announce the launch of Pat McGrath Labs, a BIPOC luxe artistry makeup brand. Pat McGrath is a trusted expert who has shaped and disrupted the cosmetic category. Now, let me share an update on our key cross-category platforms, which lean into broader emerging trends in beauty, products that are good for the world, inclusivity, and wellness. As we seek to provide guests with a diverse assortment that reflects their personal values and individual needs, we continue to expand our selection of brands featuring clean, cruelty-free, and vegan ingredients, leveraging sustainable packaging, and driving positive impact through our Conscious Beauty platform. At the end of the quarter, 314 brands were certified in at least one pillar, with more than 270 brands certified in multiple pillars. To ensure all guests feel connected and reflected at Ulta Beauty, we continue our important efforts to drive inclusivity. In addition to amplifying our portfolio of BIPOC brands through informative marketing and in-store presentations, this quarter, we hosted a summit for our BIPOC brands, providing them with the opportunity to network with peers while learning more about the beauty industry and operational best practices. Lastly, as the importance of beauty as a form of self-care and wellness continues to build, we enhanced the wellness shop assortment with the launch of two exciting supplements: Lemme Gummies created by Kourtney Kardashian, and Big Brain Probiotics from Love Wellness. Turning now to our second strategic pillar, All In Your World, we are enhancing guest experiences across all of our touchpoints. Guests continue to shift seamlessly between physical and digital channels, depending on their individual needs, and we are committed to meeting them wherever they are in their beauty journey. Reflecting our efforts to enhance our buy anywhere fill anywhere capabilities, we have expanded our same-day delivery option to nearly every store and improved our store fulfillment process to drive greater efficiency and speed. Between BOPIS, same-day delivery, and ship from store capabilities, 31% of our e-commerce sales and 39% of our digital orders were fulfilled by our store teams this quarter. Our consumer insights confirm the importance of physical shopping in beauty. More than 75% of our members transact with us only in stores, yet we know many of these members use our digital platforms for discovery, try-on, and inspiration. Converting these members to omnichannel members represents a significant opportunity to increase engagement and spending per member, as omnichannel shoppers spend 2.5x to 3x more than single-channel shoppers. Importantly, the increase in spending is largely incremental. Expanded engagement with our mobile app is one way we are driving omnichannel conversion. Through our digital store refresh, we enhanced the user search and discovery experience, seamlessly blending commerce and content for a more personalized experience. We also continue to expand our digital try-on capabilities. This quarter, we launched a virtual try-on tool that enables guests to try multiple nail looks simultaneously and upgraded our virtual hair try-on experience with expanded color options and enhanced transfer quality and speed. These enhancements, combined with awareness campaigns and unique offers to drive utilization, have delivered meaningful growth. Over the last 12 months, nine million active members engaged with our mobile app, double the number of members who engaged with the app before the pandemic. We're seeing stronger engagement, with more than 55% of e-commerce sales coming through our mobile app. Turning to our partnership with Target, we opened 62 Ulta Beauty at Target shops during the quarter, ending with 421 shops. Our marketing teams work closely with our target partners to build awareness for newer brands, including Billie Eilish and Ariana Grande Fragrances, Glamnetic, and Living Proof, while also amplifying Summer prestige Must-Haves and minis. As the partnership scales, we are learning more about the Ulta Beauty at Target guests and the role this touchpoint plays in their beauty journey, and we will continue to leverage our expertise to develop unique assortments that reflect the preferences of the Ulta Beauty at Target guests. Moving to our third strategic pillar, operating at the heart of the beauty community, we are focused on driving greater love, loyalty, and emotional connection with Ulta Beauty. We began this quarter with a Mother's Day campaign that highlighted exclusive cross-category gifts, including our luxury assortment and hero fragrances. Moving into June, we positioned Ulta Beauty as the destination for Summer Beauty, driving awareness and traffic with compelling promotional offers and special deals across the assortment to celebrate our members. Finally, we closed the quarter with our Big Summer Beauty Sale, a bold event that offered opportunities to save on fan-favorite beauty items across all categories and price points from established and emerging brands. These key events, paired with our culturally relevant content amplifications, drove record-level highs in unaided awareness, with the greatest gains among Gen Z consumers. Turning to our loyalty program, we ended the quarter with 41.7 million active members, 9% higher than last year, driven by strong member acquisition, reactivation, and healthy retention of existing members. Spend per member also increased due to greater shopper frequency. The strength of our loyalty program remains a powerful and differentiated strategic asset for Ulta Beauty, and we are pleased with its robust growth and performance. Our continued efforts to nurture the member lifecycle are driving results. We accelerated new member acquisition and continue to engage and retain members with meaningful events, compelling offers, personalized content, and special guests. These strategies also delivered growth in our Diamond and Platinum tiers, which increased nearly 30% compared to the same period last year, reflecting strong loyalty and engagement with all Ulta Beauty offers. Turning now to our efforts to drive operational excellence and optimization, we are executing an ambitious multiyear roadmap of transformation initiatives intended to unlock new capabilities and efficiencies to fuel our future growth. As we have mentioned in previous calls, we are expanding and optimizing our supply chain, upgrading our enterprise resource planning platform, transitioning our digital store to a new platform, enhancing our data management systems, and upgrading store POS systems. I am pleased to share that our teams have achieved several key milestones. Our new Greer, South Carolina market fulfillment center began receiving inventory last month, and we expect to start shipping to stores next week. We completed the installation of a new automated storage and retrieval system in our Greenwood distribution center, increasing capacity and enhancing productivity. We expanded our ship from store capabilities to an additional 276 stores, enabling faster, more cost-effective delivery to our guests. We successfully transitioned two distribution centers, Jacksonville and Greer, to our new ERP platform. As part of our digital store transformation, we successfully completed a large-scale upgrade of our end-to-end e-commerce platform and migrated to a modernized platform that includes a new promotion engine, guest accounts, cart, and checkout system. This represents a significant milestone in our multiyear effort to elevate our digital experience for long-term growth in this critical channel. Finally, we completed the POS upgrade in all stores. While our transformation agenda is ongoing, we have made significant progress, and I am proud of how our teams have executed our plans while minimizing disruption for guests and associates. Looking ahead, we continue to operate in a dynamic environment. Although consumer confidence has strengthened, signs indicate moderating growth may occur. Many consumers have started reducing overall spending, credit card debt remains high, and the restart of student loan repayments is approaching. It remains uncertain how these factors will affect consumer behavior in the near term, but beauty has remained a bright spot. According to Circana beauty sales data, total U.S. beauty sales for the first half of 2023 increased double digits compared to the same period last year, with prestige beauty channels outperforming mass beauty channels. Looking to the rest of the year, we believe growth for the U.S. beauty market will remain healthy but normalize into the mid-single digits as we compare against two years of strong growth, experience less pricing impact, and face more economic uncertainty. As category growth normalizes, we expect promotional activity within the category will also normalize. Over the past two years, unprecedented category growth and strong demand limited promotional activity, leading to an unsustainably low promotional environment in 2021 and 2022. Consequently, we planned for higher promotional activity this year but continue to anticipate promotions will remain well below 2019 levels. In closing, we operate in an attractive and growing category. We have a strong, proven business model, a winning culture, and outstanding teams. Throughout the first half of fiscal 2023, we have exceeded our internal financial expectations, and we remain confident that we can deliver our updated expectations for the remainder of the year. Now, I will turn the call over to Scott for a discussion of the financial results.

Scott Settersten, CFO

Thanks, Dave, and good afternoon, everyone. As Dave shared, we delivered second quarter financial results that were ahead of our expectations. Strong sales growth supported by healthy guest engagement and strong in-store sales performance drove better-than-expected gross margin. SG&A spend was also lower than planned, resulting in an operating margin of 15.5%. Turning to the P&L. Net sales for the quarter increased 10.1%, driven by 8% growth in comp sales, strong new store performance and solid growth in other revenues. Transactions for the quarter increased 9%, primarily driven by healthy traffic on both channels. Average ticket decreased 1% as the decline in average units per transaction more than offset the impact of higher average selling price. The increase in average selling price was primarily driven by the impact of retail price increases, many of which were executed last year. We estimate price increases contributed about 300 basis points to the overall comp. During the quarter, we opened three new stores and relocated two stores. In addition, we remodeled three stores. Second quarter gross margin decreased 110 basis points to 39.3% compared to 40.4% last year. The decrease was driven by lower merchandise margin, an increase in inventory shrink and higher supply chain costs. Overall merchandise margin was lower due primarily to increased promotional activity, unfavorable category mix and less benefit from the timing of retail price changes. While promotional activity continues to normalize, it is important to note that overall promotions remain well below 2019 levels. Inventory shrink continued to be a headwind this quarter. Our efforts to address shrink are having an impact, but the overall environment remains challenging. Today, we have the new fragrance fixtures in more than 50% of our stores and expect to have these installed in 70% of the fleet by year-end. We remain focused on taking action in areas we can control, including continued investment in fixtures, associate training, staffing as well as operational improvements, and leveraging our influence to enact broader changes that will disincentivize unlawful behavior. Supply chain costs were higher, primarily driven by ongoing investments in our supply chain transformation as we made progress on the retrofit of our Dallas and Greenwood distribution centers and prepared to open our new market fulfillment center in Greer, South Carolina. These gross margin pressures were partially offset by strong growth in other revenue and leverage of store fixed costs due to top line sales growth. SG&A increased 12.4% to $600.7 million. SG&A increased 40 basis points to 23.7% compared to 23.3% last year. The increase in SG&A as a percentage of sales was driven by deleverage of corporate overhead due to strategic investments, planned increases in store payroll and benefits and higher store expenses, which more than offset lower incentive compensation. Corporate overhead expense deleveraged in the quarter primarily due to investments related to our strategic priorities, including Project SOAR, other IT capabilities and UB Media. Year-to-date through the second quarter, we have invested a little less than half of our planned $60 million to $70 million of incremental spend to support our strategic initiatives. The increase in store payroll and benefits was primarily due to the impact of planned growth in average wage rates and increased staffing levels compared to the same period last year. Incentive compensation was a tailwind in the quarter, reflecting operational performance that is more in line with our internal targets compared to last year's significant outperformance. Operating income for the quarter was $391.6 million, flat to last year. As a percentage of sales, operating margin decreased 150 basis points to 15.5% compared to 17% last year. Diluted GAAP earnings per share increased 5.6% to $6.02 per share compared to $5.70 per share last year. Turning to the balance sheet and cash flow statement. Total inventory increased 9% to $1.82 billion compared to $1.67 billion last year, in addition to the impact of 37 additional stores, the increase reflects inventory to support higher demand, increases in product costs and new brand launches. Capital expenditures were $95 million for the quarter compared to $49.4 million last year. The increase in capital expenditures was primarily related to investments in IT and supply chain to support our transformational agenda as well as merchandising investments to support the rollout of our luxury assortment and brand expansions. Depreciation was $61.9 million in the quarter compared to $60.9 million last year. We ended the quarter with $388.6 million in cash and cash equivalents. During the quarter, we repurchased approximately 594,000 shares at a cost of $275.5 million. Year-to-date, we have repurchased 1.1 million shares at a cost of $559 million. At the end of the second quarter, we had $541 million remaining under our current $2 billion repurchase authorization. Moving to our outlook. We are updating our guidance for fiscal 2023 to reflect our better-than-expected second quarter performance. We have raised our top line expectations and now project net sales will be between $11.05 million and $11.15 billion, with comp sales growth between 4.5% and 5.5%. Our updated outlook reflects our strong first half performance while continuing to consider risks and uncertainties that could impact demand in the second half of the year, including rising consumer debt levels and the expected resumption of student loan repayments. We continue to expect comps will moderate to the low single digits in the second half of the year, and we remain on track to open 25 to 30 new stores and renovate or relocate 20 to 30 stores this year. Reflecting our year-to-date performance, we've raised the low end of the range of operating margin and now expect operating margins for the year will be between 14.6% and 14.8% of sales, with deleverage to come fairly evenly from both gross margin and SG&A. Our expectations reflect the continuation of the trends we experienced through the first half of the year around shrink, promotional activity and supply chain costs as well as greater headwind from lapping the merchandise margin benefits from the timing of retail price increases last year. For modeling purposes, we expect third quarter operating margin will be meaningfully more pressured than what we saw in the second quarter as we lap greater pricing benefits in the third quarter last year as well as a shift of investment spending from Q2 to Q3. As a result, we expect earnings per share for the third quarter will be lower than last year. Reflecting these updated assumptions, we now expect diluted earnings per share for the year will be between $25.10 and $25.60. As a reminder, fiscal 2023 is a 53-week year. We anticipate the additional week will add between $165 million to $175 million in sales and approximately $0.40 of earnings per share. In closing, our results through the first six months of fiscal 2023 highlight the ongoing power and resilience of our business model. I'd like to thank our associates for their dedication and commitment to keeping our guests at the center of all we do and giving them more reasons to shop Ulta Beauty. As we look to the future, we are focused on capitalizing on the growth opportunities in the beauty category and executing our strategic framework to deliver long-term sustainable growth for all our stakeholders. And now, I'll turn the call back over to our operator to moderate the Q&A session.

Operator, Operator

Our first question is from Ashley Helgans with Jefferies.

Ashley Helgans, Analyst

To start, maybe any details you can share on how traffic progressed throughout the quarter and what you're seeing now in August? And then also on the fragrances being locked up, have you seen any adverse effects on sales?

David Kimbell, CEO

Yes. For the quarter, we observed strong traffic with double-digit growth. We are happy with the level of engagement we experienced and noted a sequential acceleration in comp performance throughout the quarter. These trends are reflected in our updated and higher guidance for the full year. Regarding fragrance, I'll hand it over to Kecia to discuss our initiatives in that area and their impact on our business.

Kecia Steelman, COO

Yes. Actually, we've locked up about 50% of our stores right now. And what we're seeing is in the initial stores that we rolled out the locked fragrance cases for, we actually saw sales improvement because we were in stock with the product and we had it available to the guests. So we're staying very close to that. We're also investing in labor because we don't want to be sales preventive from the guests being able to purchase. So that's a little bit of the investment in labor that you heard earlier from Scott, is that in these stores, we are upping our labor a bit because we want to make sure that we're able to take care of the guests. So we're staying close to it. The bottom line is that we're pleased that we're able to maintain our in-stock for our guests, and quite frankly, keep the bad actors out from coming into our stores.

Operator, Operator

Our next question is from Michael Baker with D.A. Davidson.

Michael Baker, Analyst

I'm just curious, you said you expect the beauty industry to grow mid-single digits, yet you're only expecting comps to be up low single digits. And even if you add in store growth, you're still expecting to grow maybe up, but seemingly below the industry. I don't suppose you guys think you're losing share, so I'm just wondering if you can help flesh that out a little bit?

David Kimbell, CEO

Yes, we do expect to continue gaining market share. We have seen this trend in the first half of the year, and we believe it will carry on. As we approach the second half, we're noticing some positive signs. Our engagement remains high, and our business is performing well. We are attracting new members and experiencing growth across all key categories, both online and in stores. However, we do anticipate some uncertainty later in the year. While we are confident in our market segment, we are adjusting our outlook to account for those uncertainties. For the full year, we project revenue growth in the range of 8% to 9%, which indicates we expect to outperform the overall category growth. That is our intention moving forward.

Operator, Operator

Our next question is from Olivia Tong with Raymond James.

Olivia Tong Cheang, Analyst

My first question is around prestige versus mass breakout, because you mentioned in skin that you're still seeing strong growth in both prestige and mass. But only in mass for makeup, but you mentioned that the launch of Fenty a year ago was a big contributor. So if you exclude that, are you seeing anything different there? And then going forward, as you think about your expectations on growth in mass versus prestige, what implications may that have on comp, in your view?

David Kimbell, CEO

What was the last part of that question? Could you repeat the last...

Olivia Tong Cheang, Analyst

Yes. What are your thoughts on the growth of mass versus prestige across your stores, and how might that affect comparable sales if mass starts to play a larger role in driving growth?

David Kimbell, CEO

We have observed strong performance across our entire assortment, with mass performing particularly well for a couple of quarters. This success is largely due to strong consumer engagement with key brands in makeup and health, such as NYX, which are innovating and marketing effectively. Our ability to provide a full range from mass to prestige allows us to take advantage of strong trends and engagements. In skin care, brands in the dermatologist-recommended category are also driving significant growth. Looking ahead, we plan to continually adapt and focus on areas of growth while strengthening those that face challenges. We are confident in our future outlook. Our unique position in offering mass, masstige, prestige, and a growing luxury segment sets us apart. We will keep adjusting our strategies and integrating them into our comp guidance to maintain growth. Overall, we are pleased with the Mass performance and the strong growth from several brands while continuing to innovate in the prestige segment. This strategy is helping us gain market share at Ulta Beauty.

Operator, Operator

Our next question is from Kate McShane with Goldman Sachs.

Kate McShane, Analyst

Thanks for giving me another chance here to ask our question. I wondered if you could talk a little bit about the strategy behind combining your promotional events like you did this past quarter? And did you see a bigger lift as a result of that change versus last year? And will there be any similar approaches to some of your promotional events being taken in the second half?

David Kimbell, CEO

We're excited about what our teams accomplished in the second quarter. Our merchant marketing, digital, store teams, and go-to-market teams are constantly assessing how to improve and enhance our impact, with the summer sale showcasing this effort. We had successful events that have performed well over the years, but thanks to valuable consumer insights and a deep understanding of guest behavior, the team re-evaluated our approach. We were pleased with the results of the Big Summer Sale and our overall promotional strategy. It wasn't about dramatically increasing promotional intensity, but rather implementing a smarter strategy that proved effective. Our guests engaged, we welcomed new members, and we experienced strong comp growth, with robustness in both our stores and e-commerce traffic. This outcome was expected, as I'm aware of the team's dedication to finding new ways to elevate our performance, demonstrating how effective strategy translates into strong execution. As we move into the second half of the year, we are reviewing all elements of our go-to-market strategy. We will continue to adapt to competitive changes, consumer insights, and ensure we maintain high standards. Starting Sunday, we will launch 21 Days of Beauty, which is one of our premier events of the year. You will notice continued innovation in engaging our guests in fresh ways, and we look forward to kicking that off.

Operator, Operator

Our next question is from Oliver Chen with TD Cowen.

Unknown Analyst, Analyst

This is Neil here on for Oliver. I would love to hear more about your thoughts on the broader beauty consumer. Someone made a comment about consumers being less focused on pricing and kind of trading around different price points, so just curious how that behavior holds against the different macro headwinds you mentioned, particularly student loans? What's your exposure to that? Or how do you quantify that impact as we get closer to the October timeframe when that becomes more material?

David Kimbell, CEO

We're overall pleased with the ongoing enthusiasm that beauty enthusiasts have for this category. Over the past couple of years post-pandemic, we've seen a high level of engagement. Historically, for the last 50 years, this has consistently been a growing category due to the emotional connection it has in people's lives and its importance in self-expression, which is more relevant now than ever. Emerging behaviors and engagement tools since the pandemic are still driving growth in this category. We see strong innovation and effective marketing that enhances the understanding of beauty's role in wellness and self-care. Looking ahead, we remain confident about the long-term outlook for this category and the role of beauty enthusiasts in driving it forward. While there is uncertainty, especially with recent developments like student loans, we are cautious and closely monitoring situations as they evolve. Although it has historically been challenging to link economic changes to direct impacts on our business and category, we've seen a largely resilient performance from both. So, we are optimistic but vigilant, staying close to our guests to understand their lives and needs. Our unique model, offering a range of price points and making our experience accessible both in-store and online, positions us well to adapt to any shifts or pressures on consumers. We have a proven strategy to ensure we can support our guests regardless of broader environmental changes.

Kiley Rawlins, Vice President of Investor Relations

Paul, I think we have time for maybe one more question.

Operator, Operator

Our final question is from Steven Forbes with Guggenheim Securities.

Steven Forbes, Analyst

Dave, Scott, you both mentioned in your prepared remarks the expectation for promotions to remain well below 2019 levels. And I was hoping you could just maybe clarify that statement? Is it isolated in 2023? Or is it meant to be a longer-term comment? And as we think about merchandise margin risk in the model, any way to frame what the sort of structural change in promotional activity in the category means for the margin profile in and of itself?

Scott Settersten, CFO

Yes, we've been discussing this topic with investors for quite some time now, referencing 2019. The business is in a significantly different position today compared to 2019. Back then, we experienced major disruptions in the makeup category and faced unexpected slowdowns, as well as channel mix challenges. Investment in international expansion led to considerable business deleverage. During the pandemic, we managed to utilize some pre-existing initiatives and took advantage of cost optimization efforts and continuous improvement strategies. Our business scale has grown considerably since 2019, allowing us to benefit from fixed store cost leverage that exceeds pre-pandemic expectations. Our capabilities, such as shipping from stores and buy online, pick up in store, have greatly improved since 2019, with 30% of our digital sales now fulfilled from our stores, leading to more efficient consumer delivery and better margins on those sales. New initiatives like our credit card program and the Ulta Beauty and Target partnership are also providing a strong foundation for our growth. Although we expect promotions to moderate and return to levels below what we saw in 2021 and 2022, this was anticipated in our forecasts and plans for the year. We're managing this situation effectively, and we believe there’s nothing concerning for investors. With our new capabilities, improved loyalty program, and matured CRM tools, we're confident in achieving healthy operating margins in the 14% to 15% range with modest growth expectations of 3% to 5%. Overall, we feel optimistic about our position and future trajectory.

David Kimbell, CEO

Great. Well, thank you all for joining us today. I appreciate your interest and engagement in Ulta Beauty. I want to close by thanking all of our Ulta Beauty associates for their continued care for our guests while delivering another quarter of strong financial results. We look forward to speaking to all of you again when we report results for the third quarter on November 30. Thanks again, and have a good evening.

Operator, Operator

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