Earnings Call Transcript
Ulta Beauty, Inc. (ULTA)
Earnings Call Transcript - ULTA Q3 2024
Operator, Operator
Good afternoon, and welcome to Ulta Beauty's conference call to discuss results for the Ulta Beauty Third Quarter 2024 Earnings Results. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. We ask that you please limit yourself to one question and then re-enter the queue for any additional questions. 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
Thank you, Julian. Good afternoon, everyone, and thank you for joining us for a discussion of Ulta Beauty's results for the third quarter of fiscal 2024. Hosting our call today are Dave Kimbell, Chief Executive Officer, and Paula Oyibo, Chief Financial Officer. Kecia Steelman, President and 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. Many of our remarks today will contain forward-looking statements which speak only as of today, December 5th, 2024. We refer you to our earnings release and SEC filings where you will find a number of factors which could cause actual results to differ materially from these forward-looking statements. We'll begin this afternoon with prepared remarks from Dave and Paula. Following our prepared comments, we'll open the call for questions. As always, the IR team will be available for any follow-up questions after the call. Now, I'd like to turn the call over to Dave.
Dave Kimbell, CEO
Thank you, Kiley, and good afternoon, everyone. We appreciate your interest in Ulta Beauty. Our team delivered improved performance for this quarter with better-than-expected sales and profitability. For the quarter, net sales increased 1.7% to $2.5 billion and comparable sales increased 0.6%. Diluted EPS increased 1.4% to $5.14 per share. As we shared on our last call, we are navigating a number of headwinds, including the normalization of the US beauty category, a dynamic consumer environment, and elevated competition, particularly in prestige beauty. We are starting to see benefits from actions we are taking to reinforce our market position and improve our performance. And while the headwinds have not abated, we are making progress. In the third quarter, our prestige market share trends improved, resulting in flat market share this quarter based on Circana data for the 13 weeks ended November 2, 2024. The trend was driven primarily by improvements in makeup and hair, and we continue to see strength in fragrance and skin care. Our share performance in Mass Beauty was consistent with the second quarter. Comp growth improved from the second quarter trend, driven by stronger transaction trends across both stores and e-commerce channels. We continued to expand our loyalty program, ending the quarter with 44.4 million active members, 5% more than last year. We continued to convert new members, we reactivated more lapsed members, and we improved existing member retention. Our marketing strategies to support our tent pole events and drive relevance and buzz deliver double-digit growth in earned media value and stronger sentiment. And we made progress to optimize our new ERP system and help our teams adapt to new processes, balance inventories across the network, and deliver a better guest experience. Our teams are working hard to strengthen our market position, and I want to thank all of our associates for continuing to deliver great guest experiences while working collaboratively to drive improved performance in a dynamic operating environment. Turning to performance by category. Fragrance was our strongest category, delivering high single-digit comp growth, driven by men's fragrance, gender-neutral fragrances, and new products, including new fall and holiday gift sets. The growth of men's fragrance was fueled primarily by newness from ARMANI and YSL and the appeal of established franchises from Jean Paul Gaultier and Valentino. Consumer interest in gender-neutral scents is increasing and our assortment including Billie Eilish and NOYZ, an exclusive fragrance from LUSH that's launched this summer, is driving guest engagement. New women's brands Kylie Jenner and Orebella, both exclusive to Ulta Beauty, and new women's fragrances from Valentino, YSL, and NEST also contributed to overall category growth. The skincare category delivered mid-single-digit comp growth this quarter, as strong growth in body care was partially offset by a decline in prestige skincare. Mass skincare was flat. The strong performance of body care was driven in large part by newer brand Sol de Janeiro, which continues to engage guests with exciting innovation and exclusivity, and Touchland, which introduced compelling newness. In prestige skincare, newness from brands OLEHENRIKSEN, Sacheu, DIME Beauty, and others resonated with guests, while engagement from Naturium, Bubble, and La Roche-Posay delivered growth in the mass skincare category. Comp sales in the makeup category decreased in the low single-digit range, driven primarily by softness in mass makeup. Strong growth from the recently relaunched Ulta Beauty Collection was offset by certain brands lapping space expansion and strong innovation or social media engagement last year. Prestige makeup was flat. New prestige brands Charlotte Tilbury, ILIA Beauty, and DIBS Beauty resonated with guests and compelling product newness combined with in-store investments delivered growth for established brands MAC and Clinique. Promotional events during the quarter including 21 Days of Beauty and Fall Haul performed well, driving growth for several makeup brands, while our engaging Wicked collaboration was well-received, highlighted by exclusive brand r.e.m. beauty. Comp sales for the hair care category also decreased in the low single-digit range. Exciting newness from Matrix, Way, Divi, and Odele delivered growth for the category, while Redken continued to drive healthy guest engagement with their hero product lines. In hair tools, new products from Shark Beauty and Dyson resonated with guests. This growth was offset by softness in key brands with expanded distribution and limited newness this year. Our services business delivered low single-digit comp growth, primarily driven by engagement in core services, including color, styling, and hair treatments. Ear piercing and makeup services also performed well. And our salon backbar takeovers, which give stylists an opportunity to introduce brands to guests, continued to drive product attachment, and new guest acquisition for participating brands. We are seeing improvements in our business, and we are focused on strengthening our market position and performance further. In October, we shared our refreshed strategic framework designed to lean into our existing strengths while also driving innovation to meet the evolving needs of beauty enthusiasts. As the beauty destination of a lifetime, we intend to drive profitable growth and market share leadership in beauty and wellness over the longer term by curating the best of all things beauty and wellness for all beauty enthusiasts, fostering authentic empowering human connections that inspire, delight, and engage at every touchpoint, engaging our guests wherever they want to shop by expanding our reach through seamless and immersive omnichannel experiences, and building lifelong loyalty and brand love through member growth and personalization. We are confident our focus on these foundational areas will drive stronger revenue and earnings growth over the long term. In the near term, we are addressing key areas to reinforce our competitive position. Let me share some highlights of the progress made this quarter, starting with our efforts to strengthen our assortment. We are enhancing our brand portfolio to drive category growth. During the third quarter, we launched new makeup brands ILIA Beauty, DIBS Beauty, and RMS Beauty, as well as emerging skincare brand Oak Essentials. Additionally, we expanded our wellness offerings with emerging brands, The Honey Pot and Joylux. Looking ahead, we have an exciting pipeline of brand launches planned for the fourth quarter, including the recently announced prestige skincare brand TATCHA, celebrated for balancing timeless Japanese botanicals with proven clinical ingredients, XO KHLOE, an exclusive fragrance brand created by Khloe Kardashian, and Apothekary, an emerging wellness brand. In addition to new brands, we launched two exciting exclusive collaborations this quarter. First, as the exclusive beauty retail partner with NBCUniversal Pictures for the movie Wicked, we worked with key brands to develop a limited edition collection of products across multiple price points and categories. The Wicked inspired collection features products from leading brands including r.e.m. beauty by Ariana Grande and Beekman 1802, both of which are exclusive to Ulta Beauty, as well as OPI and Scunci among others. With immersive in-store experiences and engaging displays, Wicked came to life in Ulta Beauty stores through our digital channels and through Ulta Beauty at Target. Second, we launched an exclusive and disruptive beauty offering of the beloved Mini Brands, which offers miniature versions of popular consumer brands. This first-ever Beauty Mini Brands collection includes 68 tiny replicas of best-selling products from 13 brands, including e.l.f., NYX, Drybar, and Supergoop! Both of these unique collaborations are driving strong sales, awareness, traffic, and engagement, especially with Gen Z millennial members. As we discussed at our recent Investor Day, engaging guest experiences drive differentiation, loyalty, and meaningful business value, and we are focused on creating authentic, personalized experiences across all our channels. In Q3 we hosted more than 13,000 in-store events including unique celebrity and brand founder events, multi-branded events, and skincare focused events. We also expanded our salon event, The Workshop, to more stores and invited guests to learn how to create salon-worthy blowouts while receiving customized coaching and personalized recommendations from our talented in-store stylists. We are enhancing our digital experiences to drive traffic and sales. During the quarter, key online activations drove guest engagement, and our expanded sampling program delivered double-digit sales growth. Our digital merchandising strategies, including enhanced search, guided navigation, and enriched product pages drove conversion, and our site optimization efforts are improving the guest experience and delivering stronger conversion trends. Importantly, we continued to drive increased app adoption. In the third quarter, we saw double-digit growth in member engagement with the app, which accounted for about two-thirds of our e-commerce sales in Q3, up about 600 basis points from last year. We continued to introduce new digital experiences and resources to drive discovery and trial. This quarter we enhanced our suite of virtual try-on and AI-enabled skin and hair analysis experiences with the launch of GLAMlab 2.0 which includes a new 3D engine to enhance precision and stability, shoppable makeup looks, and a new user interface that includes sharing capabilities. We also launched new digital buying guides that amplify search engine optimization while providing guests with educational content, beauty tips, and product recommendations. To deepen the meaningful connection we have with beauty enthusiasts, we launched UB Community, a welcoming, inclusive digital forum for guests to connect, learn, empower, and engage in the immersive world of beauty to foster authentic connections. Launched in October, our community amplifies the intersection of beauty, wellness, and joy, and our user count is already three times our initial target, confirming the meaningful role Ulta Beauty plays in our members' lives. With more than 44 million active members, Ulta Beauty Rewards is an unmatched strategic asset that provides us with unique consumer insights to drive sales. In Q3, we expanded personalization across digital channels with enhanced product recommendations, replenishment reminders, site experiences, and retargeted and social channels. Leaning into targeted life cycle campaigns in both owned and paid channels, we reactivated members with greater efficiency. Additionally, we grew our platinum and diamond member base, leveraging unique incentives like exclusive and early access to key events and brand launches, gifting, and personalized offers that drive engagement. Platinum and diamond members shop more frequently and spend more each visit and continue to retain at best-in-class rates. Increasingly, social relevance drives authentic customer connection and brand advocacy, especially in beauty, and we're evolving to position social at the center of our marketing strategies to accelerate browse and earned media value growth. During the third quarter, we leveraged our marketing and social capabilities to lean into emerging trends, amplify key growth brands and activate new trend-focused events. We also engage talent from our UB Collective, our affiliate program, and Ulta Beauties, our new associate ambassador program as well as key brand founders to support key brand launches, exclusive collaborations and tent pole events in new and innovative ways across social channels to drive guest buzz and engagement. Efforts delivered accelerated EMV growth, increased impressions, and expanded key brand health metrics. We continue to enhance our product capabilities to grow our retail media network, UB Media. We recently partnered with an e-commerce tech company to introduce AI non-endemic ads for products and services outside the beauty category, and we are partnering with Roblox, the ultimate virtual universe to create innovative advertising opportunities for our partners. Over the years, our Ultaverse has grown into one of the largest beauty games on Roblox, attracting over 11 million visits. With growing interest from beauty brands to participate in our Ultaverse, we're unlocking new possibilities at the intersection of gaming, innovation, and media to bring those brands to life in exciting new ways through our UB Media capabilities. Now leveraging lessons in the second quarter, we continue to evolve and tailor our promotional strategies to reiterate our value offering and drive sales and traffic. We began the quarter with a new hair event showcasing the glossy hair trend, replacing last year's fall Gorgeous Hair event. This event featured a strong promo offer, new and exclusive items from Dyson and a spotlight on gloss and shine products. Especially strong in stores, the new event exceeded our expectations and drove strong results for participating brands. At the end of August, we brought back our beloved 21 Days of Beauty event. New beauty steals, member-only events, and bonus offers, combined with robust marketing and social support, 21 Days of Beauty delivered strong growth versus last year's event. We wrapped up the quarter with a successful Fall Haul event, which drove mass engagement and new member acquisition with compelling offers that surprised and delighted guests. In addition to strengthening and evolving our merchandising tent pole events, we optimized our loyalty offers, proactively planning the timing, type, and target audience of these offers. As a result, our promotional effectiveness improved from the first half trend. Shifting now to our plans and expectations for the holiday. The formal holiday season is in full flight. And while we're encouraged by our performance through Cyber Monday, we have several significant holiday sales weeks still ahead. While consumers continue to spend, our insights suggest that economic concerns are driving a greater focus on value. With our diverse assortment of products and price points, compelling offers, and convenient omnichannel touchpoints, we are well positioned to support our guests as they celebrate the season and our teams are excited, engaged and ready to help them deliver a joyful holiday. Our holiday campaign this year is Find Joy in the Present, a reminder of the joy that comes not only from gifts of beauty, but from the big and small moments that drive authentic emotional connection. With the goal of driving deeper emotional engagement, our campaign is supported with robust integrated activation across media, member marketing, PR, and social channels as well as festive experiences in stores and on our digital platforms. We have strategies in place to fortify our competitive positioning and manage through the compressed holiday selling season. We are transforming our channels into a concierge for all things holiday, providing greater value to consumers with real-time beauty solutions, gift guides, and tips tailored to our guests' needs and creating fun experiences that drive awareness and make Ulta Beauty the go-to destination for the holidays. Our merchandising team has created an exciting holiday assortment, with a strong focus on newness and exclusives balanced with value-driven holiday kits and core items that make great gifts. Whether guests want to gift others or treat themselves, we have thoughtfully curated options across every category and budget. Our corporate and supply chain teams have been working hard all year to ensure Ulta Beauty is ready to bring our guests joy this holiday season. And our store teams are ready to bring the holiday to life for our guests, with new in-store events and demonstrations to build guest connection and drive sales and traffic. And with BOPIS, same-day delivery options, and new for this holiday our participation in DoorDash and soon-to-be launched Instacart marketplaces, it's never been easier or more convenient to shop at Ulta Beauty. With our engaging holiday messaging, incredible holiday assortment, knowledgeable associates ready to provide guidance and recommendations, new innovative digital tools, and multiple ways to shop, I am confident we are well positioned to deliver another successful holiday season. In summary, I am encouraged by the improving trends we are seeing in the business and optimistic about our holiday plans. We believe the beauty category will remain resilient, and we are confident the actions we are taking to deliver stronger performance combined with our outstanding associates who are committed to offering guests authentic inclusive experiences across all of our touch points will enable us to reinforce our market position and drive long-term profitable growth. Now, before Paula discusses our financial results, I want to share that Monica Arnaudo, Chief Merchandising Officer, has announced her plan to retire from Ulta Beauty in the spring of 2025. Since joining Ulta Beauty in 2017, Monica has built an outstanding team and elevated our assortment in ways that have helped us deliver remarkable sales and market share growth, while furthering our mission to be our guests’ most loved beauty destination. I want to thank Monica for everything she has contributed as a member of our executive team and for the impact she has had on our organization. While we work to identify Monica’s successor, she is fully committed to supporting her team and Ulta Beauty with a successful transition. And now, I will turn the call over to Paula for a discussion of the financial results.
Paula Oyibo, CFO
Thanks, Dave, and good afternoon, everyone. I want to echo Dave's sentiments and congratulate Monica. Monica has been a trusted leader and steadfast ambassador of our brands, and we are so grateful for all of her contributions. Now turning to our financials. I'll begin with a discussion of our third-quarter financial results and then provide more color on our fourth-quarter and full-year expectations. For the third quarter, we delivered better-than-expected performance across the P&L, reflecting stronger top-line growth, continued financial discipline and expense management, and favorable shrink trends. Net sales for the quarter increased 1.7%, sales contribution from new stores and a 0.6% increase in comp sales was partially offset by lower other revenue. During the quarter, we opened 28 new stores, closed two stores, and remodeled 27 stores. The comp sales increase was driven by a 0.5% increase in transactions and a 0.1% increase in average ticket. Other revenue declined $5 million to $48 million, primarily due to an increase in deferred revenue related to our loyalty program, driven by the expansion of our member engagement efforts, which were partially offset by an increase in income from our credit card program. Looking at the cadence of sales throughout the quarter. Comp sales in August decreased slightly primarily due to a shift in the timing of our semiannual 21 Days of Beauty event, which resulted in stronger comp performance in September. October trends were positive but softened compared to the previous period. From a channel perspective, our e-commerce channel delivered mid-single-digit sales growth. The sales trend in comp stores improved from the second quarter, decreasing modestly compared to last year. For the quarter, gross margin decreased 20 basis points to 39.7% compared to 39.9% last year. The decline was primarily due to deleveraging of fixed costs and lower other revenue, which was partially offset by favorable channel mix due to lower e-commerce shipping costs and lower shrink. Lower revenue growth resulted in deleverage of store and supply chain fixed costs. Additionally, more new store openings and the expansion of our supply chain network pressured these areas. As a percentage of sales, inventory shrink was lower than last year. Our investments in secure fragrance fixtures combined with new inventory management processes and enhanced training for our field teams are helping us control inventory shrink. Year-to-date, shrink as a percentage of sales is roughly flat with last year, and we continue to expect shrink will be flat for the full year. Merchandise margin was flat with lower inventory reserves primarily related to the relaunch of Ulta Beauty Collection, offset by unfavorable brand mix. Moving to expenses. SG&A increased 3.2% to $682 million. Overall, SG&A spend was better than planned again this quarter, primarily due to focused expense management. As a percentage of sales, SG&A increased 40 basis points to 27% compared to 26.6% last year, reflecting lower top line growth; most expenses deleveraged this quarter. In addition, SG&A deleveraged primarily due to higher store payroll and benefits, primarily due to higher average wage rates and higher corporate overhead, primarily due to strategic investments. These pressures were partially offset by lower incentive compensation, reflecting operational performance that was below our internal targets. Depreciation was $67 million for the quarter compared to $61 million last year, primarily due to new store and supply chain investments. Operating profit decreased 2.7% to $318.5 million. As a percentage of sales, operating margin was 12.6% of sales compared to 13.1% of sales last year, and diluted GAAP earnings per share increased 1.4% to $5.14 compared to $5.07 last year. Moving to the balance sheet and our capital allocation priorities. We ended the quarter with $178 million in cash and cash equivalents and $200 million in short-term debt. Similar to third quarter last year, we drew on our revolving credit facility during the quarter to support working capital needs and ongoing capital allocation priorities, including share repurchases and capital expenditures. Total inventory increased 1.9% to $2.4 billion compared to $2.3 billion last year. The increase was primarily due to the impact of 63 net new stores. Year-to-date, through the third quarter, we generated $302 million in operating cash flow. Capital expenditures were $114 million for the quarter, primarily reflecting investments in new and existing stores, IT investments, and merchandise fixtures. In the third quarter, we returned $267 million of capital to our shareholders through the repurchase of 731,000 shares. At the end of the quarter, we had $2.9 billion remaining under our $3 billion share repurchase program we announced at our investor meeting in October. Now turning to our outlook. We have refined our sales and EPS guidance for the fiscal year to reflect our third-quarter results, while continuing to take a cautious view of the consumer and operating environment. We expect net sales for the year will be between $11.1 billion and $11.2 billion, with comp sales growth between negative 1% and flat. For the year, we continue to plan to open approximately 60 to 65 net new stores and remodel or relocate 40 to 45 stores. We expect operating margin will be between 12.9% and 13.1% of net sales, with deleveraging to come from both gross margin and SG&A, reflecting our top line expectations. Reflecting these assumptions, we now expect diluted EPS for the year will be between $23.20 and $23.75. With one quarter left in the year, I want to share how we are thinking about Q4. While we are encouraged by our third-quarter results and our performance quarter-to-date, we also acknowledge that the fourth quarter will likely be impacted by a compressed holiday season, a dynamic operating environment, and continued uncertainty around underlying consumer demand. For Q4 modeling purposes, we expect comp sales will decline in the low single-digit range and operating margin will be between 11.6% and 12.4%. One final update. We have updated our capital expenditure expectations for the full year and now expect to spend between $400 million and $425 million in CapEx in fiscal 2024, including approximately $230 million for new stores, remodels, and merchandise fixtures, $130 million for supply chain and IT, and about $50 million for store maintenance and others. In closing, we know it will take time to see the full benefits from our efforts, but we remain confident that our go-to-market strategies and investments along with continued operational and financial discipline will enable us to drive stronger sales and value creation over the long term. 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 Simeon Siegel at BMO Capital Markets.
Simeon Siegel, Analyst
Thanks. Hey, everyone. Nice job, and if I forget later, I hope you and your families all have a nice holiday season. Dave, any further color you can share on how you're thinking about the broader competitive and promotional landscape over holiday? And then just Paula, could you quantify any of those gross margin pressure points this quarter, how you're thinking about the next quarter and beyond? And then just does any of today's progress in the full year guide lift impact your initial margin views you had given us in October? Thank you.
Dave Kimbell, CEO
Great. Thanks, Simeon, and happy holidays to you as well. I'll start with just the broader competitive and promotional landscape. And Paula, you can pick up on some of the margin specific areas. So for the third quarter, as I mentioned in the remarks, we continue to see this is an intensely competitive timeframe. And we've been managing and discussing that throughout the year. We feel like our actions, the adjustments we made in the third quarter helped us improve our performance, strengthen our performance, but we also recognize we have more work ahead of us. The dynamics in the marketplace continue, particularly in the prestige space, but we're seeing progress. Our unique proposition, the aspects that only Ulta delivers through our assortment, our loyalty program, our points of presence, and the experience we deliver have always been key to our business and continue to be core drivers. Promotionally, what we experienced in the third quarter was continued normalization after some reduced promotion coming right out of COVID. So we anticipated that coming into this year. We saw that in Q3. Our promotional rates in Q3 were lower than Q2, but still somewhat higher than last year. But as I mentioned in the remarks, our efforts to adjust our promotional strategy to lean in and amplify our tent-pole events made our overall efforts more effective leveraging our CRM program and our personalization efforts are driving the business. As we look into the holiday, it is obviously a very promotional time frame, the most promotional time frame. That's certainly true this year. And as we navigate through and share our fourth-quarter results, we'll have reflections on the overall dynamics, but we're anticipating continued promotional intensity, but not significantly outside of what we would expect so far this holiday.
Paula Oyibo, CFO
Sure. Good afternoon, Simeon. Yeah, so we raised our full year operating margin and EPS, reflecting Q3 performance and also ongoing expense discipline. What I would say as we think about Q4, generally for the full year, we continue to expect gross margin deleverage, and when we think about Q4, reflecting the top line expectations in a competitive environment. Gross margin will continue to deleverage. And really, the trends we've seen all year will continue. So, headwinds are the deleverage we expect to see from a fixed cost perspective, and merchandise margin pressure will continue given promotions and category mix. And then our tailwinds, lower transportation costs, which we've been speaking about all year, will continue to provide some offsets to that. I would say from an SG&A perspective, we're expecting growth from a full year in the mid-single-digit range. But Q4, expecting that to be in the low single-digit growth range. We still expect most of our expenses to deleverage on the lower sales. But we'll continue to maintain financial discipline as we have in Q3.
Simeon Siegel, Analyst
Great. Thanks...
Paula Oyibo, CFO
And I think the second point is clear. Thank you.
Simeon Siegel, Analyst
No, sorry. Didn’t mean to cut you off.
Paula Oyibo, CFO
No, all good. Thank you, Simeon.
Operator, Operator
Thank you. Our next question comes from Kelly Crago, Citi.
Kelly Crago, Analyst
Hi, thanks for taking my question. I wanted to get more context on the prestige makeup line that was flat this quarter. How did that perform in the industry overall? Also, could you discuss the innovation pipeline specifically for prestige makeup? Additionally, can you quantify the impact of competitive pressures, particularly regarding new distribution points, and give an update on when you expect those challenges to ease? Thanks.
Dave Kimbell, CEO
Thanks, Kelly. Starting with prestige makeup, our largest category, we are pleased to report that it remained flat in the third quarter, which is an improvement compared to previous trends. This stability is due to our ongoing innovation, including the addition of brands like ILIA to our portfolio, and the strong execution of key programs such as 21 Days of Beauty, which focuses on prestige makeup. We have placed a real emphasis on our core brands like Clinique and MAC, and others that have been performing well, ensuring that we meet our guests' needs effectively. We have been focused on enhancing the performance of this category for a long time, and we are happy to see this effort pay off. Overall, in the prestige makeup category, we experienced low single-digit growth, which put some pressure on our market share. However, our share performance improved from the second quarter, and we are pleased with that progress. Regarding the competitive landscape, there have been over 1,000 new points of distribution in prestige beauty over the past couple of years, which has created pressure. I've mentioned before that 80% of our stores have encountered at least one new competitor, with more than half facing multiple new competitors, and this trend continues to shape the market. Despite this, we are confident in our strategic actions. Historically, we have managed to mitigate the short-term impacts of new store openings and have successfully transitioned our stores back into positive contributors over the long term. This situation is unique due to the large number of new openings occurring within a short timeframe, but we believe we can handle it. We did observe improvements in the third quarter that contributed to our stronger performance compared to the second quarter, indicating that we made some progress. However, we recognize that we are still navigating these challenges and have more work ahead. Our focus remains on leveraging our strengths in our stores and online, along with enhancing the experiences we provide. The initiatives that I mentioned earlier have been instrumental in our progress this quarter and will continue to propel us toward 2025 as we work to enhance our business.
Kelly Crago, Analyst
Thanks. Best of luck and happy holidays.
Dave Kimbell, CEO
Happy holidays.
Operator, Operator
Thank you. Our next question comes from Korinne Wolfmeyer, Piper Sandler.
Korinne Wolfmeyer, Analyst
Good afternoon. Thank you for the question and congratulations on the quarter. I want to discuss the competitiveness in the mass segment. While we've discussed prestige extensively, I want to understand the mass market better. Many larger mass retailers have been more positive about beauty lately, and dollar stores are increasing their presence in this area. How is this affecting the competitive landscape for that segment of the business? How are you planning to approach the mass segment as we move towards 2025? Thank you.
Dave Kimbell, CEO
Thank you, Korinne. I want to start by highlighting that beauty is a very appealing category. We have discussed previously how everyone in beauty, regardless of being in mass, prestige, or luxury, is emphasizing and investing in this category, and this trend is evident among all our competitors. Regarding the mass-specific business, the total mass sector continues to perform in the mid-single-digit growth range for the quarter. This is a vital category for us. One of the key strengths of our business is our presence in mass, prestige, and luxury. We remain focused on our mass business and recognize its important role. We are aware of the current dynamics, and while we have seen a deceleration in the mass makeup category, some brands are still performing well. Overall, the category faces some pressure, but we are experiencing ongoing strength in mass skincare, which is significant for us. We are committed to driving our mass business forward and ensuring that we provide an assortment that our guests love, allowing them to engage with us at all price points. We are confident in our ability to inspire and engage our customers in the mass segment.
Operator, Operator
Okay. Thank you. And our next question comes from Anthony Chukumba, Loop Capital Markets.
Anthony Chukumba, Analyst
Thank you for taking my question. I hope you can hear me well. I'll keep it to one question. You had a notable improvement in performance, and you've mentioned various factors. If you had to prioritize what you believe contributed the most to this better performance, would it be more effective promotions, changes in merchandising, or partnerships like the one with Wicked and Mini Brands? It would be helpful to understand which sequential factors led to this improvement. Thank you.
Dave Kimbell, CEO
Great. Thanks, Anthony. Yeah, I mean, I wouldn't point to one thing. There was not one thing that ever really drives our business. And we talked about coming out of the second quarter. While we're pleased with some aspects of our business, we were clear on areas that we needed to address, and we leaned into several of the key factors. Assortment is always critical. Bringing in newness, some of the brands I highlighted like ILIA into the quarter played an important role. The collaborations that you mentioned also drove excitement and enthusiasm. Assortment is always a key driver and certainly was in the third quarter. Our promotional effectiveness, we had some learnings in the second quarter as we were faced with more pressured sales, how we adapted our promotional environment. We had learnings there that we built from into the third quarter. We focused on enhancing our key events that customers appreciate, such as 21 Days of Beauty, our hair brand, and Fall Haul, along with targeted and effective promotions throughout the quarter in a personalized manner. This approach resulted in strong effectiveness. Our teams worked diligently during the quarter, including store teams, supply chain, IT, and digital teams, to ensure we provided a great experience that improved conversion rates. We are pleased with our performance both in-store and online, which required a coordinated effort with strong engagement from store associates and effective online execution. Additionally, we addressed some disruptions from system changes in the second quarter by making improvements to ensure our products were available where needed. Multiple factors contributed to our success, and it was a comprehensive effort across the organization, which we are happy with. However, we recognize there is more work to be done. While we are encouraged by the sequential improvement, we are committed to achieving even stronger results as we progress through the holiday season and into 2025 and beyond. We will continue to emphasize these strategies, as discussed in detail during our Investor Day in October.
Anthony Chukumba, Analyst
Very helpful. Thank you.
Operator, Operator
Thank you. And our next question comes from Christopher Horvers, JPMorgan Chase & Company.
Christopher Horvers, Analyst
Thanks, good evening. I have a quick two-part question. First, are you currently positive quarter-to-date? You mentioned being encouraged, and how do you view the balance between having five fewer days but also a substantial gift card business, which might indicate a strong follow-through in January? Secondly, following up on a previous question, do you have any additional thoughts on your outlook for 2025? You mentioned a floor of 11% and a long-term goal of over 12%. How has this quarter influenced that perspective, if at all? Thanks.
Paula Oyibo, CFO
Hi, Chris, thank you for your question. I won't dive into the specifics of our comp quarter-to-date, but I can say that our holiday season has started positively, and our teams are performing well. We are optimistic about the current trends, but we are mindful that there are still several crucial weeks remaining in the holiday season, and the operating environment is quite fluid. This is why we indicated that we anticipate Q4 comp sales to decline in the low single-digit range. That's our outlook for the quarter. Additionally, we are considering factors related to consumer behavior, such as the fewer shopping days, as we form our expectations for Q4. Regarding 2025, we still have important weeks ahead, and our focus is on finishing the holiday season strong and closing out the fiscal year positively. We will offer more details about 2025 when we release our guidance in March, as is our usual practice. That said, the directional insights we provided at our Investor Day remain unchanged. We expect 2024 and 2025 to be transitional years as we invest in accelerating our growth. We plan to continue making investments in 2025 that will set us up for stronger long-term performance, while also ensuring that we maintain an operating margin of at least 11%.
Christopher Horvers, Analyst
That’s great. Thanks very much.
Operator, Operator
Thank you. Our next question comes from Kate McShane, Goldman Sachs.
Emily Ghosh, Analyst
Hi, this is Emily Ghosh, on for Kate. We were wondering on UB Media, how big of a competitive moat do you think it could be, especially considering what it does to help your relationship with vendor partners? And how much is UB Media contributing to the long-term operating margin outlook that you provided at the Investor Day?
Dave Kimbell, CEO
Thank you, Emily. We are very optimistic and excited about the role that UB Media will play in our business moving forward. We have a significant competitive advantage due to the scale and breadth of our operations, along with our extensive data and understanding of beauty engagement and transactions among beauty enthusiasts of all ages and locations. Our efforts to deliver valuable experiences for our brand partners are evident, especially as we have seen strong returns on their media investments. The growth we have experienced in that segment demonstrates our ability to succeed. As mentioned during our Investor Day, we will continue to invest in our capabilities, which I highlighted earlier in the call, including addressing roadblocks and providing more opportunities for our brands. Given our strong relationships with brands and our position in the category, we are confident that we can continue to grow this business, positively influencing our overall performance.
Paula Oyibo, CFO
Sure. What I would say is UB Media, Emily, is contributing positively to gross margin in a way to think about it over time is that it plays in for role for us, and it will help offset some of the merchandise margin pressure. We currently see we have shared as we make certain investments in brand building and other things in 2025 and beyond that would serve to help offset some of those pressures.
Emily Ghosh, Analyst
Thank you.
Operator, Operator
And our next question comes from Oliver Chen, TD Cowen.
Oliver Chen, Analyst
Hi, thanks, David and Kecia. On your thinking longer term, what will it take positive comp in terms of what categories perhaps you see as the biggest opportunities? And was the commentary on October being a bit softer. Was that surprising to you? It sounds like you may continue to expect to see a fair bit of volatility. And Kecia, online half store sales, is it a mid-single-digit leverage occupancy. Anything we should know about that in terms of achieving fixed cost leverage based on the comp? Thank you.
Dave Kimbell, CEO
Thank you. Oliver, let's see. So first on long-term growth, what's going to deliver positive comps. I guess I would go back to what we talked about in detail at our Investor Day. We really see a combination of leaning in and reinforcing our established strengths as well as innovating across our entire ecosystem as key contributors to our performance. We talked about four key pillars or platforms assortment, having the best assortment across beauty and wellness experience, delighting our guests in every touchpoint that we have access, continuing to expand our availability, both with stores, and accelerated new store openings as well as strong online expressions and then, of course, loyalty and building brand love. We're really focused on driving innovation across each of those and making sure that we're ready to do that. And what I talked about in an earlier question, that contributed to the third-quarter improvement versus the second quarter. It's the foundation. It's the fundamentals. It's the core things, Oliver, you know about our business having tracked us for a long time. When assortment is stronger and experience is right and our loyalty is working, and our touchpoints are driving both in-store and online, those are the things that will come together.
Paula Oyibo, CFO
Yes, Oliver, this is Paula. In response to your question about October and our level of surprise, I would say that we had discussed the timing of some of our major events, which impacted the performance during the buy period in Q3. Regarding your question about leverage points, we don't disclose specific figures, but we have previously indicated that from a rental perspective, expenses are around 4%. As you consider comparable and total growth, you might want to think of it in that context.
Oliver Chen, Analyst
Happy holidays. Thanks.
Dave Kimbell, CEO
Thanks, Oliver.
Operator, Operator
And our next question comes from Krisztina Katai, Deutsche Bank.
Krisztina Katai, Analyst
Hi, good afternoon. Congrats on a nice quarter. So I just wanted to follow up on your early learnings from your market share reinforcing strategy. It obviously enabled you to maintain flat market share in the third quarter, at least in prestige. Where are you seeing some of the biggest gains in member engagement? I think, Dave, you talked about both platinum and diamond members are up in the program year-over-year. And then just as the competitive opening pressures abate, is it fair to say that maybe the worst is behind us? And is there a timeline for when you think maybe you could return to market share gains? Thank you.
Dave Kimbell, CEO
We've noticed strong engagement from our lead guests, particularly our Platinum and Diamond members, who continue to perform well with high engagement and spending. These members are crucial for our business, and we're actually seeing positive trends across all segments. Our loyalty program saw a 5% increase this quarter, thanks to attracting new members. While we've experienced significant growth in our loyalty program, we still believe there's plenty of opportunity ahead. We're focused on bringing new members into our business, which is essential for driving future growth. We also had success in reactivating lapsed members, who are individuals that are part of the program but haven't made a purchase in the last 12 months. We have a focused customer relationship management program targeting that group, and we continue to see success with it. Our retention rates are strong despite a competitive environment, as our guests indicate that they appreciate what Ulta offers. This healthy retention is evident across all age groups and locations, showing strength among all types of beauty enthusiasts, which is vital for our business. Regarding competition, as we've mentioned before, it's challenging to predict when we will fully move past this situation since we've never faced a disruption of this scale in such a short timeframe. However, I want to emphasize that we are confident. The data we have shows that, before new store openings, our existing stores manage to recover and become strong contributors. Currently, stores that haven't been affected by competitive openings continue to perform well, and we noted an improvement in performance in the third quarter. Still, I wouldn't declare that we're completely past it; this disruption remains significant. We are continually learning how the dynamics are changing, but we did make progress in the third quarter, and our aim is to maintain that momentum as we approach 2025. All right. So with that, thank you all. I will wrap up. Thank you for joining us today. So, I want to close out by thanking our more than 55,000 Ulta Beauty associates working together in our stores, in our distribution centers, and across our entire corporate team. I sincerely appreciate their continued focus and commitment to delivering unique and memorable guest experiences across all our channels. So, as we close, I want to wish you all a happy and healthy holiday season. There's still time to get out and shop at Ulta Beauty. So make sure you put that into your holiday shopping plans, and we look forward to speaking to you again when we report results for fiscal 2024 on March 13. Have a great evening. Thank you all.
Operator, Operator
Thank you. That does conclude today's teleconference. You may disconnect your lines at this time.