HomeFinance NewsUlta Magnificence (ULTA) Q2 2023 Earnings Name Transcript

Ulta Magnificence (ULTA) Q2 2023 Earnings Name Transcript


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Ulta Magnificence (ULTA -3.48%)
Q2 2023 Earnings Name
Aug 24, 2023, 4:30 p.m. ET

Contents:

  • Ready Remarks
  • Questions and Solutions
  • Name Contributors

Ready Remarks:

Operator

Good afternoon and welcome to Ulta Magnificence’s convention name to debate outcomes for the second quarter of fiscal 2023. Presently, all contributors are in a listen-only mode. A quick question-and-answer session will comply with the formal presentation. We ask that you just please restrict your self to 1 query after which reenter the queue for any extra questions.

[Operator instructions] As a reminder, this convention is being recorded. It’s now my pleasure to introduce Ms. Kiley Rawlins, vice chairman of investor relations. Ms.

Rawlins, chances are you’ll proceed.

Kiley RawlinsVice President, Investor Relations

Thanks, Paul. Good afternoon, everybody, and thanks for becoming a member of us for a dialogue of Ulta Magnificence’s outcomes for the second quarter of fiscal 2023. Internet hosting our name as we speak are Dave Kimbell, chief government officer; and Scott Settersten, chief monetary officer. Kecia Steelman, chief working officer, will be a part of us for the Q&A session.

Earlier than we start, I might wish to remind you of the corporate’s protected harbor language. The statements contained on this convention name which aren’t historic info could also be deemed to represent forward-looking statements throughout the that means of the Non-public Securities Litigation Reform Act of 1995. Precise outcomes might differ materially from these projected in such statements as a consequence of a lot of dangers and uncertainties, all of that are described within the firm’s filings with the SEC. We warning you to not place undue reliance on these forward-looking statements, which converse solely as of as we speak, August 24, 2023.

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We now have no obligation to replace or revise our forward-looking statements, besides as required by regulation, and you shouldn’t count on us to take action. We’ll start this afternoon with ready remarks from Dave and Scott. Following our feedback, we’ll open up the decision for questions. To permit us to accommodate as many questions as doable throughout the hour scheduled for this name, we respectfully ask that you just restrict your time to 1 query.

You probably have extra questions, please requeue. As at all times, the IR crew can be obtainable for any follow-up questions after the decision. Now, I am going to flip the decision over to Dave. Dave.

Dave KimbellChief Govt Officer

Thanks, Kiley, and good afternoon. We admire your curiosity in Ulta Magnificence. The Ulta Magnificence crew delivered robust efficiency once more this quarter with gross sales, gross revenue, and SG&A bills all higher than deliberate. Internet gross sales elevated 10.1% to $2.5 billion, and comparable gross sales elevated 8%.

Working revenue was 15.5% of gross sales, and diluted EPS elevated 5.6% to $6.02 per share. Along with delivering nice monetary outcomes, our groups executed in opposition to our operational priorities. Throughout the quarter, we drove development throughout all main classes, elevated the variety of loyalty members, strengthened our model engagement, and achieved vital milestones inside our multiyear transformation initiatives. By way of the primary half, our monetary outcomes are forward of our inner expectations, and I stay assured we will ship in opposition to our up to date steerage for fiscal 2023.

I need to specific my honest appreciation to all Ulta Magnificence associates for his or her continued dedication to delivering nice visitor experiences whereas working collaboratively to execute our bold transformational agenda. Beginning with the dialogue of our operational outcomes, we noticed robust stable gross sales efficiency throughout each our retailer and digital channels, pushed by double-digit visitors development. All main classes delivered comp development for the quarter, supported by robust engagement with the general magnificence class, compelling product newness and innovation, and profitable execution of cross-category promotional occasions, together with our reimagined Massive Summer time Magnificence Sale. Constructing on final yr’s promotional occasions, we consolidated key summer time occasions like our common Jumbo Love and mix-and-match minis right into a broader, extra cohesive occasion, with holistic storytelling and impactful messaging.

The three-week-long Massive Summer time Magnificence Sale drove market disruption, member conversion, and robust gross sales throughout our hair care, make-up, and skincare classes. Turning to efficiency by class. Skincare continues to be certainly one of our strongest classes, whilst we lap unprecedented development throughout the pandemic. For the quarter, each status and mass skincare delivered double-digit development.

Newer manufacturers, together with Bubble, BYOMA, and Beautycounter, and innovation from present manufacturers like The Extraordinary, Drunk Elephant, and Supergoop! contributed to the robust gross sales outcomes. Reflecting shopper curiosity in dermatologist-recommended manufacturers, La Roche-Posay and CeraVe continued to carry out properly, and types like Good Molecules, Hero Cosmetics, and Peach Slices continued to learn from social virality. The perfume and bathtub class delivered double-digit comp development once more this quarter. Layering and wardrobing scents is a type of self-expression, particularly amongst Gen Z customers, continued to drive class engagement.

Newness from Ariana Grande, Valentino, and Burberry contributed to the class’s efficiency, and key gift-giving occasions like Mom’s Day and Father’s Day drove development for luxurious manufacturers like Carolina Herrera, Chanel, and YSL. The hair care class delivered mid-single-digit comp development, pushed by newness and visitor engagement with our strategic occasions. Hair care targeted on bonding, scalp therapies, and different restore options, in addition to merchandise that provide wholesome warmth styling choices, continued to drive shopper engagement. Pattern-relevant merchandise from skilled manufacturers Redken, Biolage, and Matrix, in addition to newness from status manufacturers OUAI and IGK, resonated strongly.

New manufacturers, together with unique manufacturers LolaVie, created by Jennifer Aniston; and Donna’s Recipe, additionally contributed to development this quarter. Whereas nonetheless challenged as we lapped a number of years of robust development, gross sales developments in hair instruments improved from the primary quarter, pushed by compelling newness from Dyson and innovation from Bio Ionic. Lastly, make-up delivered low single-digit comp development, pushed by robust efficiency in mass cosmetics. New manufacturers like Dior, Natasha Denona, and Beautycounter drove development throughout the quarter, whereas new and unique merchandise from a variety of manufacturers, together with e.l.f, NYX, and OPI, additionally contributed positively.

Compelling occasions, together with our Massive Summer time Magnificence Sale, Nationwide Lipstick Week, and our basis occasion, in addition to profitable Barbie and Little Mermaid collaborations, drove visitor engagement. Whereas the efficiency of mass cosmetics benefited from partaking newness and social content material, our status make-up enterprise was challenged as we lapped the numerous influence of the Fenty launch final yr. Our companies enterprise delivered double-digit comp development once more this quarter, primarily pushed by elevated appointments. Visitors are partaking in core lower, shade, and blowout companies, in addition to newer companies, together with extensions and scalp and hair therapies.

We proceed to reinforce our service providing. And this quarter, we launched ear piercings chainwide and launched a brand new keratin specific therapy. The sweetness class development stays wholesome throughout each status and mass value tiers as customers preserve their post-pandemic routines and develop their definition of magnificence. Once we have a look at the full magnificence market, our evaluation demonstrates we proceed to achieve market share.

In mass magnificence, we gained share this quarter throughout all main classes. In status, we proceed to drive stable positive aspects in pores and skin and perfume however noticed stress in make-up and hair based mostly on Circana’s magnificence gross sales knowledge. Our proprietary insights counsel customers have gotten much less targeted on product pricing tiers and are buying and selling round, selecting to interact with manufacturers that provide on-trend newness and compelling social media content material. As the one magnificence retailer to supply a curated assortment of merchandise from entry-level mass to luxurious and all the pieces in between, we’re uniquely positioned to seize share of the full magnificence market as customers shift.

We stay assured within the resilience of magnificence. Our strategic framework guides our priorities and positions us to develop our market management and drive long-term worthwhile development. Let me share some highlights of the progress we made in opposition to this framework within the second quarter, beginning with our efforts to drive development with an expanded definition of All Issues Magnificence. Newness and innovation are crucial development drivers for magnificence.

Newness involves life within the type of new manufacturers, merchandise and product traces, shade extensions, and reformulations and fuels discovery and drives journeys and engagement. As we search to repeatedly delight company with All Issues Magnificence, we proceed to develop our assortment and innovate — with modern and rising manufacturers. Constructing on newness launched within the first half, we now have a number of thrilling launches deliberate for the third quarter, together with HALF MAGIC, a vegan and cruelty-free make-up model created by Euphoria make-up artist, Donni Davy, unique to Ulta Magnificence; Well mannered Society, a status make-up model unique to Ulta Magnificence, curated — created by the founders of Too Confronted cosmetics; Rabanne, a recent and related Spanish style model launching cosmetics completely at Ulta Magnificence; hairstyling instruments at accessible value factors from Shark Magnificence; PanOxyl, a dermatologist-recommended model common with Gen Z; and Snif, an rising perfume model, providing gender-neutral scents, obtainable solely at Ulta Magnificence. Reflecting the expansion in reputation of luxurious merchandise with youthful generations, final quarter, we launched Luxurious at Ulta Magnificence in 200 shops and on ulta.com.

This system has exceeded our expectations, and we proceed to see robust visitor engagement with our choices throughout all classes. Constructing on this success, we’re excited to launch PAT McGRATH LABS, a BIPOC luxe artistry make-up model. Pat McGrath is a trusted knowledgeable, who has formed and disrupted the beauty class. Now, let me share an replace on our key cross-category platforms, which lean into broader rising developments in magnificence, merchandise which might be good for the world, inclusivity, and wellness.

As we search to supply company with a various assortment that displays their private values and particular person wants, we proceed to develop our assortment of manufacturers that includes clear, cruelty-free, and vegan elements, leveraging sustainable packaging, and driving optimistic influence by means of our aware magnificence platform. On the finish of the quarter, 314 manufacturers have been licensed in not less than one pillar, with greater than 270 manufacturers licensed in a number of pillars. To make sure all company really feel linked and mirrored at Ulta Magnificence, we proceed our vital efforts to drive inclusivity. Along with amplifying our portfolio of BIPOC manufacturers by means of informative advertising and in-store displays, this quarter, we hosted a summit for our BIPOC manufacturers, offering them with alternatives to community with friends whereas studying extra concerning the magnificence trade and operational greatest practices.

Lastly, because the significance of magnificence as a type of self-care and wellness continues to construct, we enhanced the wellness store assortment with the launch of two thrilling dietary supplements, Lemme Gummies created by Kourtney Kardashian and the introduction of Massive Mind Probiotics from Love Wellness. Turning now to our second strategic pillar, all in your world. We’re enhancing visitor experiences throughout all of our contact factors. Visitors proceed to shift effortlessly between bodily and digital channels, relying on their particular person wants, and we’re dedicated to assembly them wherever they’re of their magnificence journey.

Reflecting our efforts to reinforce our purchase wherever, fill wherever capabilities, we now have expanded our same-day supply choice to primarily each retailer and improved our retailer achievement course of to drive larger effectivity and velocity. Between BOPIS, same-day supply, and ship-from-store capabilities, 31% of our e-commerce gross sales and 39% of our digital orders have been fulfilled by our retailer groups this quarter. Our shopper insights and member knowledge affirm the significance of bodily buying in magnificence. Greater than 75% of our members select to transact with us solely in shops.

And but, we all know many of those members use our digital platforms for discovery, try-on, and inspiration. Changing these members to omnichannel members is a significant alternative to extend engagement and spend per member as omnichannel buyers spend 2.5 to a few instances greater than single-channel buyers. Importantly, the rise in spend is basically incremental. Increasing engagement with our cellular app is a method we’re driving omnichannel conversion.

By way of our digital retailer refresh, we enhanced the consumer search and discovery expertise, seamlessly mixing commerce and content material for a extra customized expertise. We additionally proceed to develop and improve our digital try-on capabilities. This quarter, we launched a digital try-on instrument that permits company to strive a number of nail appears concurrently, and we upgraded our digital hair try-on expertise with expanded shade choices and enhanced switch high quality and velocity. These enhancements, mixed with consciousness campaigns, distinctive affords to drive utilization, and elevated affiliate schooling, have delivered significant development.

During the last 12 months, 9 million lively members have engaged with our cellular app, double the variety of members who engaged with the app earlier than the pandemic. And we’re seeing stronger engagement, with greater than 55% of e-commerce gross sales coming by means of our cellular app. Turning to our partnership with Goal. We opened 62 Ulta Magnificence at Goal retailers throughout the quarter, ending the quarter with 421 retailers.

Our advertising groups work intently with our Goal companions to construct consciousness for newer manufacturers together with Billie Eilish and Ariana Grande fragrances, Glamnetic, and Residing Proof, whereas additionally amplifying summer time status must-haves in minis. Because the partnership scales, we’re studying extra concerning the Ulta Magnificence at Goal visitor and the position this contact level performs of their magnificence journey. And we’ll proceed to leverage our experience to develop distinctive assortments that replicate the preferences of the Ulta Magnificence at Goal visitor. Shifting to our third strategic pillar, working on the coronary heart of the sweetness neighborhood.

We’re targeted on driving larger love, loyalty, and emotional reference to Ulta Magnificence. We started this quarter with a Mom’s Day marketing campaign that highlighted unique cross-category items, together with our luxurious assortment and Hero fragrances. Shifting into June, we positioned Ulta Magnificence because the vacation spot for summer time magnificence, driving top-of-mind consciousness and visitors with compelling factors, affords, and particular offers throughout the assortment to have fun our members. Lastly, we closed the quarter with our Massive Summer time Magnificence Sale, a daring and disruptive occasion that supplied alternatives to save lots of on fan-favorite magnificence objects throughout all classes and value factors from quite a lot of established and rising manufacturers.

These key occasions, paired with our culturally related content material amplifications, drove record-level highs in unaided consciousness, with our biggest positive aspects amongst Gen Z customers. Turning to our loyalty program. We ended the quarter with 41.7 million lively members, 9% larger than final yr, pushed by robust member acquisition and reactivation, mixed with wholesome retention of present members. Spend per member additionally elevated, pushed by larger shopper frequency.

The energy of our loyalty program continues to be a strong and differentiated strategic asset for Ulta Magnificence, and we’re happy with its elevated development and efficiency. Our continued efforts to nurture the member life cycle is driving outcomes. We accelerated new member acquisition and proceed to interact and retain members with significant occasions, compelling factors affords, customized content material, and particular company. These strategic — methods additionally delivered development in our diamond and platinum tiers, which elevated almost 30% in comparison with the identical interval final yr, reflecting robust loyalty and engagement with all Ulta Magnificence affords.

Turning now to our efforts to drive operational excellence and optimization. We’re executing an bold multiyear highway map of transformation initiatives supposed to unlock new capabilities and efficiencies to gas our future development. As we now have mentioned on earlier calls, we’re increasing and optimizing our provide chain, upgrading our enterprise useful resource planning platform, transitioning our digital retailer to a brand new platform, enhancing our knowledge administration techniques, and upgrading retailer POS techniques. I’m happy to share that our groups have delivered a number of key milestones.

Our new Greer, South Carolina market achievement middle started receiving stock final month, and we count on to start out delivery to shops subsequent week. We accomplished the set up of a brand new automated storage and retrieval system in our Greenwood distribution middle, which can improve capability and allow larger productiveness. We expanded our ship-from-store capabilities to an extra 276 shops. Immediately, we fulfill e-commerce orders from 400 strategically positioned shops, enabling quicker, more cost effective supply to the visitor.

We efficiently transitioned two distribution facilities, Jacksonville and Greer, to our new ERP platform. As a part of our digital retailer transformation, we efficiently accomplished a large-scale improve of our end-to-end e-commerce platform and migrated to a brand new modernized platform that features a new promotion engine, visitor account, cart, and checkout. This can be a important milestone in our multiyear effort to raise our digital expertise in a manner that positions us for long-term development on this crucial channel. Lastly, we accomplished the POS improve in all shops.

Whereas our transformation agenda is just not completed, we now have made important progress, and I’m pleased with how our groups have labored to execute our plans whereas limiting disruption to company and associates. Trying ahead, we proceed to function in a dynamic setting. Whereas shopper confidence has strengthened, there are indicators pointing to moderating development going ahead. Many customers have begun to scale back total spending, bank card debt stays excessive, and the restart of pupil mortgage repayments is approaching.

It’s unclear how these elements will influence shopper habits within the close to time period. However regardless of these elements, magnificence has remained a vivid spot. Based mostly on Circana’s magnificence gross sales knowledge, complete U.S. magnificence gross sales for the primary half of 2023 elevated double digits in comparison with the identical interval final yr, with status magnificence channels delivering larger development than mass magnificence channels.

Trying into the remainder of the yr, we imagine development for the U.S. magnificence market will stay wholesome however normalize into the mid-single digits as we lap two years of robust development, expertise much less influence from pricing, and face extra financial uncertainty. As class development normalizes, we proceed to count on promotional exercise throughout the class may even normalize. During the last two years, unprecedented class development and robust demand restricted promotional exercise.

Because of this, the promotional setting in 2021 and 2022 was unsustainably low. Reflecting these elements, we deliberate for larger promotional exercise this yr however proceed to count on promotions will stay properly beneath 2019 ranges. In closing, we function in a pretty and rising class. We now have a robust confirmed enterprise mannequin and a successful tradition and excellent groups.

By way of the primary half of fiscal 2023, we now have exceeded our inner monetary expectations, and we stay assured we will ship our up to date expectations for the remainder of the yr. And now, I’ll flip the decision over to Scott for a dialogue of the monetary outcomes. Scott.

Scott SetterstenChief Monetary Officer

Thanks, Dave, and good afternoon, everybody. As Dave shared, we delivered second quarter monetary outcomes that have been forward of our expectations. Sturdy gross sales development, supported by wholesome visitor engagement and robust in-store gross sales efficiency, drove better-than-expected gross margin. SG&A spend was additionally decrease than deliberate, leading to an working margin of 15.5%.

Turning to the P&L. Internet gross sales for the quarter elevated 10.1%, pushed by 8% development in comp gross sales, robust new retailer efficiency, and stable development in different income. Transactions for the quarter elevated 9%, primarily pushed by wholesome visitors throughout each channels. Common ticket decreased 1% because the decline in common models per transaction greater than offset the influence of upper common promoting value.

The rise in common promoting value was primarily pushed by the influence of retail value will increase, lots of which have been executed final yr. We estimate value will increase contributed about 300 foundation factors to the general comp. Throughout the quarter, we opened three new shops and relocated two shops. As well as, we reworked three shops.

Second quarter gross margin decreased 110 foundation factors to 39.3%, in comparison with 40.4% final yr. The lower was pushed by decrease merchandise margin, a rise in stock shrink, and better provide chain prices. Total, merchandise margin was decrease due primarily to elevated promotional exercise, unfavorable class combine, and fewer profit from the timing of retail value adjustments. Whereas promotional exercise continues to normalize, you will need to be aware that total promotions stay properly beneath 2019 ranges.

Stock shrink continued to be a headwind this quarter. Our efforts to deal with shrink are having an influence, however the total setting stays difficult. Immediately, we now have the brand new perfume fixtures in additional than 50% of our shops and count on to have these put in in 70% of the fleet by year-end. We stay targeted on taking motion in areas we will management, together with continued funding in fixtures, affiliate coaching, staffing, in addition to operational enhancements, and leveraging our affect to enact broader adjustments that can disincentivize illegal habits.

Provide chain prices have been larger, primarily pushed by ongoing investments in our provide chain transformation as we made progress on the retrofit of our Dallas and Greenwood distribution facilities and ready to open our new market achievement middle in Greer, South Carolina. These gross margin pressures have been partially offset by robust development in different income and leverage of retailer mounted prices as a consequence of top-line gross sales development. SG&A elevated 12.4% to 600.7 million. SG&A elevated 40 foundation factors to 23.7%, in comparison with 23.3% final yr.

The rise in SG&A as a share of gross sales was pushed by deleverage of company overhead as a consequence of strategic investments, deliberate will increase in retailer payroll and advantages, and better retailer bills, which greater than offset decrease incentive compensation. Company overhead expense deleveraged within the quarter, primarily as a consequence of investments associated to our strategic priorities, together with Undertaking SOAR, different IT capabilities, and UB Media. Yr so far by means of the second quarter, we now have invested rather less than half of our deliberate 60 million to 70 million of incremental spend to help our strategic initiatives. The rise in retailer payroll and advantages was primarily as a result of influence of deliberate development in common wage charges and elevated staffing ranges in comparison with the identical interval final yr.

Incentive compensation was a tailwind within the quarter, reflecting operational efficiency that’s extra in keeping with our inner targets in comparison with final yr’s important outperformance. Working earnings for the quarter was 391.6 million, flat to final yr. As a share of gross sales, working margin decreased 150 foundation factors to fifteen.5%, in comparison with 17% final yr. Diluted GAAP earnings per share elevated 5.6% to $6.02 per share, in comparison with $5.70 per share final yr.

Turning to the steadiness sheet and money move assertion. Whole stock elevated 9% to 1.82 billion, in comparison with 1.67 billion final yr. Along with the influence of 37 extra shops, the rise displays stock to help larger demand, will increase in product prices, and new model launches. Capital expenditures have been 95 million for the quarter, in comparison with 49.4 million final yr.

The rise in capital expenditures was primarily associated to investments in IT and provide chain to help our transformational agenda, in addition to merchandising investments to help the rollout of our luxurious assortment and model expansions. Depreciation was 61.9 million within the quarter, in comparison with 60.9 million final yr. We ended the quarter with 388.6 million in money and money equivalents. Throughout the quarter, we repurchased roughly 594,000 shares at a value of 275.5 million.

Yr so far, we now have repurchased 1.1 million shares at a value of 559 million. On the finish of the second quarter, we had 541 million remaining beneath our present 2 billion repurchase authorization. Shifting to our outlook. We’re updating our steerage for fiscal 2023 to replicate our better-than-expected second quarter efficiency.

We now have raised our top-line expectations and now undertaking internet gross sales can be between 11.05 billion and 11.15 billion, with comp gross sales development between 4.5% and 5.5%. Our up to date outlook displays our robust first half efficiency whereas persevering with to contemplate dangers and uncertainties that would influence demand within the second half of the yr, together with rising shopper debt ranges and the anticipated resumption of pupil mortgage repayments. We proceed to count on comps will average to the low single digits within the second half of the yr, and we stay on observe to open 25 to 30 new shops and renovate or relocate 20 to 30 shops this yr. Reflecting our year-to-date efficiency, we have raised the low finish of the vary of working margin and now count on working margins for the yr can be between 14.6% and 14.8% of gross sales, with deleverage to return pretty evenly from each gross margin and SG&A.

Our expectations replicate a continuation of the developments we skilled by means of the primary half of the yr round shrink, promotional exercise, and provide chain prices, in addition to larger headwind from lapping the merchandise margin advantages from the timing of retail value will increase final yr. For modeling functions, we count on third quarter working margin can be meaningfully extra pressured than what we noticed within the second quarter as we lap larger pricing advantages within the third quarter final yr, in addition to a shift of funding spending from Q2 to Q3. Because of this, we count on earnings per share for the third quarter can be decrease than final yr. Reflecting these up to date assumptions, we now count on diluted earnings per share for the yr can be between $25.10 and $25.60.

As a reminder, fiscal 2023 is a 53-week yr. We anticipate the extra week will add between 165 million to 175 million in gross sales and roughly $0.40 of earnings per share. In closing, our outcomes by means of the primary six months of fiscal 2023 spotlight the continued energy and resilience of our enterprise mannequin. I might wish to thank our associates for his or her dedication and dedication to preserving our company on the middle of all we do and giving them extra causes to buy Ulta Magnificence.

As we glance to the longer term, we’re targeted on capitalizing on the expansion alternatives within the magnificence class and executing our strategic framework to ship long-term sustainable development for all our stakeholders. And now, I am going to flip the decision again over to our operator to average the Q&A session.

Questions & Solutions:

Operator

Thanks. We’ll now be conducting a question-and-answer session. [Operator instructions] Our first query is from Ashley Helgans with Jefferies. Please proceed together with your query.

Ashley HelgansJefferies — Analyst

Hello. Thanks for taking our query. To start out, possibly any particulars you possibly can share on how visitors progressed all through the quarter and what you are seeing now in August? After which additionally on the fragrances being locked up, have you ever seen any antagonistic results on gross sales? Thanks.

Dave KimbellChief Govt Officer

Sure. Ashley, for the quarter, we noticed robust visitors all through the quarter with double-digit visitors, and we proceed to be happy with the engagement that we’re seeing, and we noticed precise comp efficiency sequentially speed up by means of the quarter as properly. And all of these developments are mirrored into our up to date and elevated steerage for the total yr. On perfume, the — I am going to let Kecia type of focus on what we’re doing in perfume and the way that is impacting our enterprise.

Kecia SteelmanChief Working Officer

Yeah. Really, we have locked up about 50% of our shops proper now. And what we’re seeing is in these preliminary shops that we rolled out the locked perfume instances for, we really noticed a gross sales enchancment as a result of we have been in inventory with the product and we had them obtainable to the company. So, we’re staying very near that.

And we’re additionally investing in labor as a result of we do not need to be gross sales preventative from the company with the ability to buy. So, that is just a little little bit of the funding in labor that you just heard earlier from Scott is that in these shops, we’re upping our labor a bit as a result of we need to make it possible for we’re capable of care for the company. So, we’re staying near it. The underside line is that we’re happy that we’re capable of preserve our in-stock for our company and, fairly frankly, hold the unhealthy actors from coming into our shops.

Ashley HelgansJefferies — Analyst

Nice. Thanks.

Operator

Thanks. Our subsequent query is from Michael Baker with D.A. Davidson. Please proceed together with your query.

Mike BakerD.A. Davidson — Analyst

Thanks. I am simply curious, you stated you count on the sweetness trade to develop mid-single digits, but you are solely anticipating comps to be up low single digits. And even should you add in some retailer development, you are still anticipating to develop possibly up however seemingly beneath the trade. I do not suppose you guys assume you are dropping share, so I am simply questioning should you may help flesh that out just a little bit.

Dave KimbellChief Govt Officer

Yeah. I might say, yeah, we do anticipate persevering with to achieve share. We have completed so by means of the primary half of the yr, and that’s our outlook. The commentary is de facto as we glance into the second half of the yr, you realize, we see some energy.

Engagement continues to be excessive. Actually, our enterprise is performing very properly. We’re attracting new members. We’re rising throughout all key classes, each — after which in each e-com and shops.

However we additionally see some uncertainty as we get in later into the yr. So, whereas we’re assured within the class, you realize, we’re, you realize, simply incorporating into our outlook, you realize, some full — you realize, a few of that. And, you realize, for the total yr, we’re taking a look at income within the plus 8% to 9% vary. So, we anticipate gaining share for the yr being forward of the full class development, and that is — you realize, that can be our plan.

Mike BakerD.A. Davidson — Analyst

Thanks.

Operator

Thanks. Our subsequent query is from Olivia Tong with Raymond James. Please proceed together with your query.

Olivia TongRaymond James — Analyst

Thanks. My first query is round status versus mass breakout since you talked about in pores and skin that you just’re nonetheless seeing robust development in each status and mass, however solely in mass for make-up, however you talked about that the launch of Fenty within the yr in the past was an enormous contributor. So, should you excluded that, are you seeing something totally different there? After which going ahead, you realize, as you concentrate on your expectations on development in mass versus status, what implications might which have on comp in your view? Thanks.

Dave KimbellChief Govt Officer

What was the final a part of that query? What was — might you repeat the final —

Olivia TongRaymond James — Analyst

Yeah. The — simply the implication on comp if — what you are pondering by way of development of mass versus status throughout your shops and what implication which may have by way of comp if mass turns into a much bigger piece of the driving force of development?

Dave KimbellChief Govt Officer

Properly, yeah, as we — as I’ve mentioned, we have seen robust efficiency actually throughout our whole assortment as we have a look at it. However mass has been, you realize, a bit stronger for a few quarters now in — throughout our enterprise. And that is pushed largely by robust shopper engagement throughout some key manufacturers in make-up. e.l.f, NYX, and a few others are actually hitting the mark with nice innovation, nice advertising, nice shopper engagement.

And the truth that we provide the total assortment from mass to status is an actual profit. We’re capable of capitalize on robust developments and robust engagements throughout all features of that. In skincare, we’re seeing manufacturers, significantly within the dermatologist-recommended space, driving robust development, and that is nice. We — robust participant for us.

As we glance ahead, you realize, it is at all times our intent to proceed to adapt and alter and lean into the areas which might be driving development, discover methods to strengthen these that could be extra challenged, however we’re assured within the outlook going ahead. And the truth that we now have each is exclusive. In fact, you realize that. However the truth that we’re the one ones that provide mass, masstige, status and a rising established now enterprise in luxurious, we’re seeing, you realize, robust factors throughout all.

We’ll proceed to flex and adapt and incorporate it into our comp steerage is our means to proceed to drive development. However by means of the primary half of the yr, we’re actually happy with the mass efficiency and a number of other manufacturers driving robust development and proceed to lean in and produce innovation into the status aspect of the enterprise. And collectively, it is working to permit us to achieve share throughout complete magnificence.

Operator

Thanks. Our subsequent query is from Kate McShane with Goldman Sachs. Please proceed together with your query. Kate, is your line on mute?

Dave KimbellChief Govt Officer

How about we go to the following individual?

Operator

Thanks. Our subsequent query is from Anthony Chukumba with Loop Capital Markets. Please proceed together with your query.

Anthony ChukumbaLoop Capital Markets — Analyst

Good afternoon. Congrats on the stable outcomes and thanks for taking my query. So, only a actual fast one. You understand, you talked about luxurious.

And, in actual fact, it is exceeding your expectations. You talked about launching PAT McGRATH LABS. I suppose, it is all one associated query in simply two components. First off, what — is luxurious — what share of your assortment, I suppose, is luxurious within the shops that it is in, and is it sufficiently big, at this level, to be a comp driver?

Dave KimbellChief Govt Officer

Yeah. We can’t get away precise percentages. Once more, to reiterate, it is in 200 shops. We’re actually happy with it.

A powerful assortment throughout a lot of the easiest manufacturers in luxurious: Chanel, Dior, Natasha Denona, Hourglass, an extension of Chanel with Chanel Numero Un; Lancome Absolute; now, PAT McGRATH; a luxurious perfume enterprise with manufacturers like YSL and Tom Ford and Viktor&Rolf. So, we cannot get into precise percentages, but it surely’s — you realize, it is a vital a part of our total technique. We all know there’s development within the luxurious aspect of the enterprise. We have been in luxurious for some time.

However now, with this expanded presence, it’s a contributor to our complete comp. We’re excited concerning the addition of PAT McGRATH, and we’ll proceed to innovate and evolve and, you realize, discover methods to drive additional development down the highway. So, sure, we predict it is — we all know it is contributing to our development, and we’re excited concerning the — our visitor response to an expanded luxurious expertise.

Anthony ChukumbaLoop Capital Markets — Analyst

Thanks.

Operator

Thanks. Our subsequent query is from Christopher Horvers with J.P. Morgan. Please proceed together with your query.

Chris HorversJPMorgan Chase and Firm — Analyst

Thanks. Good night. A layered gross margin query. So, how did shrink within the promotional setting play out within the second quarter, you realize, relative to your expectations? Have you ever modified any of your expectations round these line objects within the again half? And do you count on any enchancment maybe within the shrink line? After which, Scott, might you remind us of the value price headwind that we confronted within the third quarter as a result of I do know that was fairly important final yr? Thanks.

Scott SetterstenChief Monetary Officer

Certain, Chris. So, yeah, versus — we did say, once more, versus our expectations for the quarter, we’re very pleased with the general monetary outcomes we have been capable of ship. So, breaking it down just a little bit extra, I might say merchandise margin was higher than what we anticipated, and in order that speaks partially to the promotional lever that individuals are targeted on right here. So, once more, usually higher than what we anticipated, so we will lean in and lean out.

That is one of many nice strengths of our enterprise, with the ability to have real-time data and have the ability to take fast motion and be agile. I might say shrink usually directionally about the identical as what we noticed within the first quarter. As we glance out to the remainder of the yr, we do not actually — we’re not anticipating a major flip in expectations there. We count on it to be powerful the remainder of the best way.

I’ll say, possibly the fourth quarter could also be barely much less unfavorable than it was early a part of the yr as a result of, keep in mind, final yr within the fourth quarter was the primary time we actually known as out and quantified what the shrink influence was, so we did have just a little little bit of a catch-up there. After which mounted — you realize, retailer mounted prices, we talked about, that was stronger than what we stepping into expectation as a result of gross sales have been a bit stronger than what we thought. After which channel combine, total, helped us as properly. You understand, as we glance to consider gross margin the second half of the yr, I might say the drivers, the headwinds are in keeping with what we have seen within the first half of 2023.

Once more, we’re taking a prudent method, as we at all times do with our steerage, and we’ll work laborious to do higher than that.

Chris HorversJPMorgan Chase and Firm — Analyst

After which the value price in 3Q?

Scott SetterstenChief Monetary Officer

Yeah, so there was — we — third quarter final yr is the place we noticed a major step-up within the pricing will increase throughout the portfolio, and actually, the margin profit began actually rolling by means of within the second quarter and into the again half of the yr. So, that is actually the hardest anniversary level within the yr is forward of us proper now. And that is why we’re calling out third quarter. Third quarter is type of peak on a lot of totally different fronts.

Once more, it is — yearly is just a little distinctive, however, you realize, the third quarter now, we have got just a little little bit of delays in a few of our undertaking work, which is shifting again a few of our IT expense into the third quarter, and a number of that flows by means of SG&A, so we’ll see extra stress there than we noticed earlier within the yr. After which likewise with gross margin, on just a little — on extra average gross sales development expectations, coupled with biking over the margin advantages final yr from the value will increase step-up within the again half of the yr, placing extra stress on third quarter than possibly some would count on. However once more, by the point we get within the fourth quarter, get again to specializing in gross sales and vacation, we count on that to bounce again in a wholesome method.

Chris HorversJPMorgan Chase and Firm — Analyst

Obtained it. Thanks.

Operator

Our subsequent query is from Adrienne Yih with Barclays. Please proceed together with your query.

Adrienne YihBarclays — Analyst

Nice. Thanks very a lot. Scott, I will keep on that subject with the third quarter. If I am not mistaken, it looks like about 10 million to 12 million of the SG&A spend maybe is shifting into the third quarter.

And if we now have just a little bit extra gross margin stress, does that indicate that EPS may very well be down type of excessive single-digit vary? Simply questioning if I am in the suitable ballpark.

Scott SetterstenChief Monetary Officer

Yeah, we do not need to get into quantifying it particularly, Adrienne, however I might say directionally, you are in the suitable ZIP code. So, yeah, on the SG&A aspect, that is roughly type of the shift again into the third quarter on among the IT spend. And yeah —

Adrienne YihBarclays — Analyst

Okay.

Scott SetterstenChief Monetary Officer

Working margin goes to be down considerably — you realize, meaningfully versus what we noticed earlier this yr. And that is going to end in, you realize, unfavorable EPS development yr over yr for the third quarter.

Adrienne YihBarclays — Analyst

Tremendous useful. After which to only comply with by means of with the SG&A, so are you able to assist us stroll by means of the phases? I do know there’s 4 phases of Undertaking SOAR and the entire different investments. It looks like you are working type of twin buildings maybe on among the DCs after which the web site for, let’s name it, a 3rd or half of the yr. How ought to we take into consideration that rolling off as a result of a number of this sort of redundancy will go away subsequent yr? I do know you are not giving steerage, however simply to assist us form type of what SG&A development appears like much less subsequent yr as a result of it looks like it comes down so much on the consensus, and simply need to ensure that we now have that right in our thoughts.

Thanks.

Kecia SteelmanChief Working Officer

So, Adrienne, I am going to begin, after which I am going to kick it over to Scott. So, sure, we’re in the course of an bold transformational agenda. That is for certain. You understand, and a part of that is actually positioning all components of the group for our future efforts.

And total, we’re actually happy with how our progress is working. However anybody who’s taken on this massive scale of a undertaking, you undoubtedly have timing shifts that occur, you realize, as a result of we need to make it possible for whereas we’re staying ahead, progressing and shifting, we’re actually restricted in our distraction and our disruption for our company and likewise for our associates. So, we have adopted a number of of our timelines and have shifted a few the tasks from Q2 into Q3, and we would even see some shifting from Q3 into This fall. However we’re nonetheless on observe to spend the 60 million to 70 million incremental to the prior yr.

And whereas we have got a few of these shifts, we nonetheless are very assured that we will stick with our total timeline and have issues wrapped up by the suitable timeline for subsequent yr, which is extra mid-2024. I am going to flip it over to Scott.

Scott SetterstenChief Monetary Officer

Yeah, and also you’re precisely proper. We’re not offering steerage for 2024 right here as we speak, however yeah, buyers ought to count on that we are going to domesticate, recoup advantages from the numerous investments that we’re making in our core techniques right here in ’22 into ’23 and that we will see advantages materialize in 2024 and past. Once more, you’ve got heard us discuss these are main initiatives right here that we count on to pay dividends for a lot of years into the longer term. However I’d — you realize, I might additionally warning buyers, simply to be ready.

I imply, there’s — we’re within the enterprise of rising Ulta Magnificence for the long run. And so, there’s loads of different nice development initiatives on the market that we have got within the queue that we’re able to go sort out as quickly as we get by means of some extra of this, I might name, core transformation work right here in ’23 and early ’24.

Adrienne YihBarclays — Analyst

Thanks. That is very useful. Better of luck.

Operator

Thanks. Our subsequent query is from Kelly Crago with Citi. Please proceed together with your questions.

Kelly CragoCiti — Analyst

Hello. Thanks for taking my query. I simply have a few fast ones on classes. Simply on make-up, it appears like make-up’s development decelerated from excessive singles in 1Q to mid-singles in 2Q.

Was that pushed by a slowdown in status? Did each decelerate? And the way ought to we take into consideration make-up rising in 2H? After which simply secondly on pores and skin, we have heard from among the manufacturers that possibly there’s slowing development in that class, however you do under-index versus the class total. So, simply curious whether or not that dynamic may help offset possibly some weak point that we’re seeing or we’re beginning to see in pores and skin and any ideas on the expansion there can be nice. Thanks.

Dave KimbellChief Govt Officer

Yeah. I might say, on make-up, the principle driver is, properly, we’re bringing a number of innovation and newness throughout that status portfolio, lapping actually one of many greatest launches within the historical past of Ulta Magnificence with Fenty. Lapping that absolutely within the second quarter might be the most important driver. We’re excited, although, as we glance ahead.

I discussed a number of launches that we now have popping out, Rabanne, PAT McGRATH, Well mannered Society, amongst others, that lots of that are unique to Ulta Magnificence and are coming into our enterprise within the second half of the yr. However we anticipate as we lap that launch, we’ll proceed to see stress on status. Mass continues to drive development behind nice innovation, nice engagement. And so, we’re happy with the full make-up, you realize, aspect of the enterprise, whilst we, you realize, handle among the stress in lapping earlier launches.

Within the skincare aspect, sure, we’re — we now have considerably decrease share than we do in make-up. However our — you realize, we have established, over time, a significant share place. And the truth that we’re capable of proceed to drive development is, once more, a testomony to our mannequin, our means, the energy we now have throughout value factors. We’re seeing robust wholesome development in each mass and status, actually leaning into dermatologist-recommended house, and imagine that we will proceed to drive development going ahead and proceed to drive share.

The class, we predict, is wholesome. As I stated, with the full magnificence class, we do anticipate some moderation. You understand, it is unlikely to see double-digit development, you realize, ceaselessly. However, you realize, we’re leaning in.

We have an incredible pores and skin enterprise. Our retailers proceed to convey robust innovation. Our retailer groups are doing an incredible job educating our company. And we’re delivering a number of development, and we see extra coming.

Kelly CragoCiti — Analyst

Thanks.

Operator

Thanks. Our subsequent query is from Kate McShane with Goldman Sachs. Please proceed together with your query.

Kate McShaneGoldman Sachs — Analyst

Hello. Good afternoon. Thanks for giving me one other likelihood right here to ask our query. We questioned should you might discuss just a little bit concerning the technique behind combining your promotional occasions such as you did this previous quarter.

And did you see a much bigger carry because of that change versus final yr? And can there be any comparable approaches to a few of your promotional occasions being taken within the second half?

Dave KimbellChief Govt Officer

Nice. Yeah. I virtually used your silence to reply any query that I wished to that you just did not earlier, Kate, however glad you bought again within the queue. Yeah, the — you realize, we’re excited.

You understand, we — I believe what we did within the second quarter, what our groups did, our service provider, advertising, digital retailer groups, our go-to-market groups, actually, we — they’re regularly evaluating how we will get higher and the way we will elevate the influence. And summer time sale is an instance of that. We had robust occasions, stable occasions that we’re delivering for years, however the crew, by means of nice shopper insights, continued understanding in visitor habits, and, you realize, full understanding of what distinctive strengths we convey to the desk, you realize, reevaluated that, and it — and we’re happy with the outcomes of that occasion, the Massive Summer time Sale, in addition to, actually, our whole promotional technique. You understand, it was not an enormous acceleration in promotional depth as a lot as a better technique, and it labored.

Our company engaged. We attracted new members. It delivered robust comp development. We noticed, you realize, energy in each shops and on our e-commerce enterprise.

Site visitors was wholesome. So, you realize, it is — frankly, it did not shock me as a result of I understand how the crew continues to search for methods to raise. And it is one other instance of nice technique resulting in robust execution. As we glance into the second half of the yr, we’re evaluating, as we at all times do, each facet of our go-to-market technique.

We proceed to evolve. Our efforts will adapt to, you realize, aggressive adjustments, shopper insights and ensure we’re delivering at a excessive stage. Sunday, Kate, begins 21 Days of Magnificence, you realize, certainly one of our greatest occasions of the yr. And I believe you will see, as that rolls out, you realize, program that is been round for some time, continued innovation and methods to interact our company in new methods.

So, we’re excited to get that going.

Kate McShaneGoldman Sachs — Analyst

Thanks.

Operator

Thanks. Our subsequent query is from Oliver Chen with TD Cowen. Please proceed together with your query.

Unknown speaker

Hello. That is Neil right here on for Oliver. We might love to listen to extra about your ideas on the broader magnificence shopper. Somebody made a remark about customers are being much less targeted on pricing and type of buying and selling round totally different value factors.

So, simply curious how that habits holds in opposition to the totally different macro headwinds you talked about, significantly pupil loans. You understand, what’s your publicity to that or how do you quantify that influence as we get nearer to that October time-frame and that turns into extra materials? Thanks.

Dave KimbellChief Govt Officer

Yeah. Properly, I might say, to start with, we’re — we’re simply happy total with the continued engagement that magnificence fanatics are displaying for this class popping out of the pandemic for these final couple of years now, only a excessive stage of engagement. You understand how over the long run, you realize, the final 50 years, this has been a robust development, constantly develop — rising class due to the emotional connection that it performs in our company’ lives and the significance it has in how they specific themselves to the world. And that’s extra true now than ever.

And among the behaviors and engagement instruments that emerged popping out of the pandemic proceed to gas the class: robust innovation, robust connection by means of advertising and shopper instruments, and a elevated understanding of the position of magnificence to wellness and self-care. So, after we have a look at the patron going ahead, we stay assured within the long-term, you realize, outlook for this class and the energy of the sweetness fanatic to gas it going ahead. As I discussed within the — in my feedback, there’s a number of uncertainty, there was, frankly, for the final couple of years. However we glance into the rest of this yr, we all know we’re lapping, we proceed to lap robust development.

We have been on this robust class development for some time now. We now have, you realize, extra adjustments coming, together with a pupil mortgage. So, we’re, you realize, cautious and positively watching rigorously how that evolves. Traditionally, you realize, it has been tough to tease out any type of financial or stimulus shift and the way immediately that impacts the class or our enterprise, and our enterprise and the class itself has been largely resilient, not immune, however largely resilient.

So, after we look out, I suppose I might say we’re optimistic however watching intently and punctiliously, staying actually near our company, understanding what’s occurring of their lives and what’s influencing their selections, and ensuring we’re adapting. Very last thing I might say, and I do know I’ve stated this many instances, however our place, our distinctive mannequin of getting all value factors and a very accessible expertise, each in-store and on-line, positions us properly. So, even when there are shifts, even when there are pressures on customers, historical past says we’re capable of adapt. And I do know that is the technique that we’re implementing to verify we’re right here for our company to ship no matter what goes on within the broader setting round them.

Kiley RawlinsVice President, Investor Relations

Paul, I believe we now have time for possibly yet another query.

Operator

Thanks. Our last query is from Steven Forbes with Guggenheim Securities. Please proceed together with your query.

Steve ForbesGuggenheim Companions — Analyst

Good afternoon. Dave, Scott, you each talked about in your ready remarks the expectation for promotions to stay properly beneath 2019 ranges, and I hoped you possibly can simply possibly make clear that assertion. Is it remoted to 2023 or is it meant to be a longer-term remark? And as we take into consideration merchandise margin threat within the mannequin, any approach to body what these type of structural change in promotional exercise within the class means for the margin profile in and of itself?

Scott SetterstenChief Monetary Officer

Yeah. So after we’re speaking — once more, this has been an evergreen subject, I believe, with buyers now for fairly some time, pointing again to 2019. So, the enterprise is in a a lot totally different place as we speak than it was again in 2019. Once more, for these which have been following, you realize, 2019, we had some main disruption in the course of the yr within the make-up class, surprising deceleration there.

There have been channel combine headwinds that we have been coping with as a enterprise. There was some funding in some worldwide enlargement that was inflicting some important deleverage on the enterprise. And so, you realize, throughout the course of the pandemic, some initiatives which have been began pre-pandemic, however throughout the pandemic, we have been capable of make the most of ensuring that we absolutely leverage a few of our price optimization initiatives by the use of ESG and now steady enchancment initiatives layered on high of that. I’d say the dimensions of the enterprise, a lot bigger as we speak than it was again in 2019.

So, we will get the good thing about the mounted retailer price leverage within the base enterprise far and above what we have been taking a look at pre-pandemic. Issues round our capabilities like ship from retailer and BOPIS capabilities that actually didn’t exist in any significant manner again in 2019 that now you heard us say once more as we speak, 30% of these digital gross sales are being serviced out of our retailer fleet. So, rather more environment friendly supply to the patron and significantly better total margin profile of these gross sales. Issues like our bank card program; our Ulta Magnificence at Goal relationship; UB Media, new enterprise for us, simply actually out of the beginning gate right here over the course of the final yr, places us in a significantly better place total than we have been again in these days.

So, once more, that is not promotion immediately, however these — all these parts play a job in gross margin and working margin and increasing that over the course of time. So, we really feel assured that the promotion ranges, once more, they’ll average. We have been speaking during the last couple of years that extraordinary setting that we noticed in ’21 and ’22 was not sustainable for the long run. And that — as folks bought again within the enterprise and folks have been again in malls and different stores, that the promotion stage was most likely going to return again to us just a little bit.

And that is type of what we’re seeing play out as we speak. So, once more, there’s nothing surprising right here. It was in our forecast, our plans for the yr. We’re moderating and navigating our manner by means of that in an efficient method.

And once more, nothing — I do not assume something that ought to be overly regarding to buyers. Once more, we’re assured that we’re going to have the ability to handle our manner by means of that with new capabilities, new traces of enterprise, our loyalty program, and CRM capabilities being rather more mature as we speak than they have been again within the pre-pandemic days. So, we’re assured we’re going to have the ability to ship wholesome working margins in that 14% to fifteen% vary on a really average comp development expectation of three% to five%. So, feeling good about our place and the place we’re headed for the longer term.

Dave KimbellChief Govt Officer

Nice. Properly, thanks, all, for becoming a member of us as we speak. Respect your curiosity and engagement in Ulta Magnificence. I need to shut by thanking all of our Ulta Magnificence associates for his or her continued take care of our company whereas delivering one other quarter of robust monetary outcomes.

We look ahead to talking to all of you once more after we report outcomes for the third quarter on November thirtieth. Thanks once more and have a great night.

Operator

[Operator signoff]

Period: 0 minutes

Name contributors:

Kiley RawlinsVice President, Investor Relations

Dave KimbellChief Govt Officer

Scott SetterstenChief Monetary Officer

Ashley HelgansJefferies — Analyst

Kecia SteelmanChief Working Officer

Mike BakerD.A. Davidson — Analyst

Olivia TongRaymond James — Analyst

Anthony ChukumbaLoop Capital Markets — Analyst

Chris HorversJPMorgan Chase and Firm — Analyst

Adrienne YihBarclays — Analyst

Kelly CragoCiti — Analyst

Kate McShaneGoldman Sachs — Analyst

Unknown speaker

Steve ForbesGuggenheim Companions — Analyst

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