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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Greetings and welcome to the Ulta Beauty Fourth Quarter 2017 Earnings Results Conference Call. At this time, all participants are in a listen-only-mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.
It is now my pleasure to hand over – to introduce your host, Ms. Laurel Lefebvre, Vice President, Investor Relation. Please proceed.
Thank you. Good afternoon and thanks for joining us for Ulta Beauty’s fourth quarter 2017 conference call. Hosting our call are Mary Dillon, Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Also joining us is Dave Kimbell, Chief Merchandising and Marketing Officer.
Before we begin, I’d like to remind you of the Company’s Safe Harbor language. The statements contained in this conference call which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the Company’s filings with the SEC. We make references during this call to non-GAAP sales and earnings growth in 2017 adjusted for the 53rd week, tax reform and one-time bonuses.
During the Q&A session, we respectfully request that you ask one question only please to allow us to have time to respond to as many of you as possible during the hour scheduled for this call. Also we’ve gotten a few questions about our 2018 EPS guidance and just to clarify, we expect to grow 2018 EPS approximately 20% of the 2017 GAAP EPS of $8.96.
Thanks. With that I’ll turn it over to Mary.
Great. Thank you, Laurel, and good afternoon, everyone.
The Ulta Beauty team delivered excellent results in 2017, with an 11% comp on top of the 15.8% comp in 2016 and 37% GAAP earnings per share growth or 25% earnings per share adjusted for items primarily related to tax reform.
However, the continued moderation in the growth rate of makeup our largest category, made our fourth quarter a bit more challenging than expected. But nonetheless, we achieved strong sales and earnings growth in the fourth quarter while continuing to gain market share and make significant progress on our strategic imperatives. We grew the top-line 22.6% or 15.7% adjusted for the 53rd week. Comp sales grew 8.8% on top of 16.6% comp in the fourth quarter of 2016 driven by positive traffic in ticket growth, a strong January and continued great momentum in e-commerce.
Adjusted for tax reform benefits and one-time bonuses for hourly associates, earnings per share were up $2.75, up 23% compared to the fourth quarter of the prior year.
I’ll be briefer than usual with our highlights for the fourth quarter and view the complexity of tax rate impacts and our desire to provide a full discussion of the planned deployment of the benefits of the lower tax rate, as well as the various cost pressures in forming our view of 2018.
Starting with highlights on our loyalty program and brand awareness. The Ultamate Rewards loyalty program grew its membership 19% year-over-year to 27.8 million active members driven by our store team’s successful conversion efforts. We launched a new diamond tier for our top guests who spend more than $1200 per year with a goal of driving higher share of wallet with our best customers.
The new program offers compelling benefits including exclusive offers in even more points earned. The program launched two months ago and it’s off to a great start. Our credit card program continues to perform well with new accounts at conversion above plan and ongoing evidence that we garner a higher share of wallet from guests who sign-up for the card.
We also drove rapid growth in gift card sales, up about 30% in the fourth quarter in part driven by strong performance of our expanded Black Hawk partnership in supermarkets and other national retailers. Our brand awareness metrics reached all-time highs. We grew aided awareness to 91% compared to 86% a year ago and unaided awareness rose six points to 55% from 49% last year. We are also proud to learn that Ulta was the most Googled beauty brand in 2017.
Moving on to merchandizing. We continued to strengthen our partnerships with our brands and launched new and coveted brands across all of our categories. While the Black Friday, Cyber Monday period was very strong, bill for our holiday period was a bit softer than expected with the best monthly growth of the quarter coming in January.
The stand out performance of prestige boutique brands MAC, Clinique, Lancome, and Benefit drove the best growth rate in the portfolio. Reflecting the strong performance we are ramping up the rollout of these boutiques faster than we initially anticipated. We now plan to add 675 boutiques in 2018, compared to 700 in 2017 with the openings more weighted to new stores this year with about 380 in new stores and the remainder in existing stores. This includes plans to rollout more than 200 new MAC boutiques.
Our top-line was also driven by strength in prestige skin care, prestige fragrance and mass cosmetics all of which delivered double-digit comps. Skin care continues to perform very well and we are adding several new skin care brands to take advantage of the growing trend in skin health including the better skin company, Crepe Erase, Mamonde, and House 99 by David Beckham which is the men’s grooming brand that is exclusive to Ulta Beauty.
We are pleased to see a meaningful acceleration in mass cosmetics in the fourth quarter driven by the success of popular new brands like Morphe. Ulta Beauty is this brand’s exclusive brick and mortar partner. We’ve just completed a major cosmetics reflow, making significant enhancements to further differentiate our offering in this category.
This entailed a major expansion of brands like Morphe, E.L.F, Makeup Revolution and the introduction of new brands like Milani, Flower and Wet n Wild. We also launched color top cosmetics, color cosmetics, a cold favorite in select doors and online in late February. This is a true fast beauty brand featuring trend right and affordable products and is exclusive to Ulta Beauty.
Turning to prestige cosmetics, so much in the third quarter we saw this category slowed from its stellar growth in 2015 and 2016. While certain brands of makeup were very strong, others struggled the comp over significant multiyear increases. We are optimistic that we can accelerate growth in this category with encouraging newness in the pipeline.
We are currently updating our prestige cosmetics assortment including the launch of Beauty by POPSUGAR. And this is another Ulta Beauty exclusive inspired by POPSUGAR’s network of 100 million beauty enthusiasts.
We are adding high growth brands like Estée Lauder, NARS and COVER FX to dozen more stores rolling out social media darling doors of colors to several hundred doors with an expanded assortment from its current small share. We are also excited about two recent Ulta exclusive foundation launches, Tarte Shape Tape Foundation which follows Tarte’s best selling concealers and It Cosmetics’ Bye Bye Foundation.
And finally we are thrilled to announce that prestige is positioned for 2018, Chanel Beaute following our longstanding partnership with Chanel offering their iconic fragrances in hundreds of our stores, we are honored to introduce Chanel Beaute in a small number of Ulta Beauty doors this year. This will be an added assortment featuring a Chanel branded makeup station with the first Chanel store opening in Westport, Connecticut in just a few weeks.
With significant newness across all of our categories and particularly focused on mass and prestige cosmetics and ramping up our efforts our offering of the – our efforts around the products and brands, we are certainly planning for make-up to have a much better year in 2018.
Let me turn now to our services business. Salon sales grew 17.2% or 8.7% excluding the extra week and comped 3.2% in the fourth quarter. We are encouraged by the early results of the test of our improved salon business model in two districts and are in the process of rolling out the new model to additional markets including the entire central region of the country with more markets planned to convert in the summer.
Guests and styles unlike are very pleased with this new approach which simplifies the menu of the hair’s conservative, offers better transparency and provides increased training for stylists. We are also investing in a new model for skilled services in all new stores and a number of remodels in 2018, which we will pass 180 stores.
The new model called the Skin Bar at Ulta Beauty is designed to improve our skin services offering and will feature a full-time skin expert with responsibility for both prestige retail sales and skin service sales. This will also add retail space to the skin area compared to our previous model. We expect this model to also drive higher productivity of the space dedicated to skin care.
Moving on to store expansion. We opened 16 stores in the fourth quarter ending the year with 1074 stores. The net cost to open a new store was about $1.6 million in 2017, up slightly from 2016 as expected in light of the increase in merchandise fixtures for boutiques. This cost is expected to be slightly lower in 2018, as we continue to gain efficiencies in new store construction.
We are on track to open 100 stores in 2018 and we are very pleased with the quality of the stores that we’ve accrued so far. We continue to evolve our store format to respond to guest rising expectations for an experiential environment. In addition to the new Skin Bar I just mentioned, the latest store model, our level 10 features upgrades with the Ulta Beauty collection walls, enhanced impulse pictures and elevated prestige hair pictures.
We expect average store rents for the class of 2018 stores to be slightly lower compared to the class of 2017.
Now let me turn to our e-commerce business. Ulta.com grew 60.4% including the extra week or 50.4% on a comp basis in the fourth quarter maintaining its strong momentum and representing 12.8% of total company’s sales. E-commerce contributed 460 basis points of our total company comps driven by transaction growth.
Total site traffic growth rose 54%, while mobile traffic was up 66%. Our recently rolled out omni-channel capabilities store to door is rising faster than expected in satisfying strong demand for online-only brands like Ofra, Lime Crime, and new additions like Storybook Cosmetics, as well as brands like Morphe and MAC that are not yet available in every store.
And finally to update you on our supply chain operation. Our supply chain performed very well during the quarter operating at peak capacity for an extended period while maintaining high in-stock levels during the holiday selling periods. In support of the higher e-commerce order volumes, our distribution teams continued to exceed their goals for processing times and in-home delivery speeds during holidays.
With e-commerce representing nearly 13% of total sales in the quarter, our supply chain was able to support this volume while reducing cost per order by about 10% compared to last year. Our investments in the new operating model allows the network to deliver record daily order throughput capacity at 10% above planned.
From an inventory perspective, the team maintained high in-stock levels during the holiday season and through the end of the quarter improving on last year’s strong performance and exceeding our inventory term goals for the year. Our post-holiday inventory plan was well executed allowing us to recover from the holiday selling season quickly and capture strong post-holiday sales.
So that wraps up my recap of the fourth quarter and now I’d like to spend some time discussing how we are thinking about the future. As we began to plan 2018, we’ve recognized several significant factors that will impact not just this year, but the subsequent years as well and allow modifications to our original long-range planning assumptions.
First the impact of tax reform. This changes the game and provides us with a unique opportunity to deploy a portion of the benefits to invest in our associates, and make us more competitive. It also enables us to accelerate certain investments to drive growth and innovation. These will deliver clear benefits to our business. But any reinvestment obviously impacts our operating margin rates.
We also have to adopt the new accounting standard for revenue recognition that boost the path we are in, but is expected to negatively impact operating margin by roughly 201 basis points this year. Next is clear that our business will have a higher mix of e-commerce sales than previously anticipated. While it’s good news that we reached our target of 10% e-com penetration two years ahead of plan, this does put modest pressure on the P&L from a rate perspective since gross margin for Ulta.com is below that of our brick and mortar business.
The great news is that e-commerce sales and margin dollars are largely incremental and represent additional share gains. The investments that we’ve made to enhance our digital and fulfillment capabilities position us to capture significant sales in e-commerce, while providing exceptional experience for our growing number of omni-channel guests.
We are also not immune to the various cost pressures that most retailers are facing today including labor, freight and healthcare. Labor cost is the most significant of these for Ulta Beauty and we face two challenges, rising hourly wages – wage rates in many markets across the country and increased competition for workers in our distribution centers.
And more importantly, the ongoing aggressive rollout that we are doing of our prestige brand boutiques with dedicated and highly trained staffing.
And finally, we are operating at a highly competitive marketplace coupled with the slowdown of growth rate of cosmetics that has persisted longer than expected. While we remain optimistic that our differentiated model will continue to gain share in a very fragmented market, these category and competitive dynamics are likely to pressure on margins in the near-term.
These headwinds will be in part offset by a formalized cost optimization program expected to unlock savings later in 2018 and beyond. As we mentioned on last quarter’s call, we believe there is plenty of opportunities to leverage our scale to reduce inefficiencies and we’ve identified four major work streams to drive benefits in the areas of indirect procurements, end-to-end operational efficiency, real estate costs and merchandize margin improvements.
So taking all these factors into consideration, it’s clear that for the long-term health of the business, it no longer makes sense to drive toward the 15% operating margin target on the timetable we set several years ago. And managing the business to attain that target would require under investment in areas that we believe will drive robust sustainable long-term growth.
We still expect to expand operating margin over the long-term. For 2018 however, we anticipate taking a small step-back in the order of magnitude a 50 to 70 basis points. Going forward, rather than guiding to a precise operating margin target or timeline, we will instead ask stakeholders to focus on how we create value through our very healthy earnings per share and margin dollar growth.
We are planning to invest a portion of the roughly $100 million tax rate benefit expected in 2018 in a variety of projects designed to further enhance our differentiated positioning and elevate our overall guest experience. First, we are making critical investments in our people including employee benefit enhancements that will improve our position of the competitive labor market and increased retention.
In addition, we’ve planned to invest in a series of new initiatives that will accelerate customer-facing innovation across multiple touch points to drive growth and strengthen our competitive position. One area of focus will be our store experience where we’ll be innovating on the human physical and digital aspects of the journey since where we are delivering a compelling, exciting and easy experience for our guests in every trip.
We’ll also accelerate our investment in AI and data capabilities to drive more personalization and one-to-one offers for our loyalty program members. In addition, we will increase investments in digital innovation to drive guest experience enhancements designed to drive engagement and education, as well as increased sales through our e-commerce business.
We’ll also enhance our capabilities to both identify and incubate new brand opportunities that will further evolve our assortment and take full advantage of the changing landscape of brand and we’ll accelerate our services strategy with the continued rollout of the new salon model and the addition of the new skin services model.
Finally, from an infrastructure standpoint, we’ll accelerate activities around supply chain network optimization, as well as investments to supply chain systems that enable buy anywhere, sell anywhere capabilities.
We are confident that these investments will allow us to continue to deliver industry-leading sales and earnings growth while making us a more competitive employer, improving the guest experience and allowing us to invest in growth platforms to drive sustainable differentiation, exceptional market share gains and long-term success.
Before I turn it over Scott, I’d like to address the topic of the recent lawsuits alleging that Ulta Beauty has resold used products. We are vigorously defending against these lawsuits and taking action to ensure our guests continue to have the highest confidence in the integrity and quality of Ulta Beauty’s products and packaging.
Let me be clear, we do not sell used, damaged or expired products. It has zero tolerance for any actions that would compromise the integrity of the products we sell. We are confident that our associates are following our policies regarding the handling of returned products. To fortify this policy, we are re-communicating and reinforcing with every associate across the country the proper procedures for processing returns.
We have seen no indications that the publicities surrounding the allegations has negatively impacted our brand, our store traffic or financial results in any discernible way, but we will remain vigilant and ready to take any necessary action to protect our brand and ensure we maintain the trust of our loyal guests.
Now, Scott will cover in more detail the drivers of our fourth quarter financials and our outlook for the first quarter and fiscal year 2018.
Thank you, Mary. Good afternoon, everyone. Starting with the income statement. Q4 sales of $1.94 billion were driven by 8.8% comparable sales growth, strong new store productivity and the benefit of the 53rd week. The total company of 8.8% was composed of 6.2% transaction growth and 2.6% average ticket growth.
E-commerce sales growth remained strong and contributed 460 basis points to the total comps. The retail-only comp was 4.2% with traffic up 2.7% and average ticket growing 1.5%. Ticket was driven by an increase in average selling price, while growth in units per transaction was slightly negative. The salon business comped 3.2%, driven primarily by ticket growth.
Gross profit rate decreased 50 basis points, including about 20 basis points from the one-time bonuses for hourly associates. The 30 basis points of remaining deleverage are attributed to modest pressure on merchandise margins and investments in our salon business in part offset by leverage in fixed store costs.
Distribution expense was flat as a rate of sales year-over-year. Product margins continued to face some headwinds from channel, category and brand mix dynamics with the mix of e-commerce sales, the most significant driver. We were just slightly more promotional year-over-year, largely due to the higher mix of e-commerce which tends to be a more promotional channel.
Preopening expenses leveraged about 10 basis points, related to the timing and number of store openings in the quarter with 16 openings in Q4 this year versus 25 in Q4 last year. SG&A expense deleveraged 60 basis points including 40 basis points for the one-time hourly associate bonuses. Store labor was the most significant contributor to the remaining 20 basis point increase in SG&A by deleveraging about 50 basis points.
As we continue to invest in prestige boutiques, as well as in more hours during the holiday season to deliver an optimal guest experience during peak shopping days. Corporate overhead leveraged about 30 basis points benefiting from strong expense controls. Advertising expense deleveraged slightly.
As a reminder, some of the upside we saw in the first quarter of 2017 came from shifts in the timing of some of the planned advertising expenses into the third and fourth quarters. Operating margin was 13.1% of sales, down 110 basis points on a GAAP basis. Excluding the impact of the one-time bonuses for hourly associates, adjusted operating margins decreased 40 basis points to 13.8% of sales.
Turning to EPS, GAAP earnings per share grew 51.8% to $3.40 and adjusted EPS rose 22.8% to $2.75. The tax reform impact from both the one-time deferred tax remeasurement and the impact of the new lower effective tax rate starting January 1, benefitted the quarter by $0.78. We made the decision to pay one-time bonuses to our hourly associates totaling $12.3 million.
About a third of the expense impacted gross profit and about two-thirds impacted SG&A and in total reduced EPS by $0.13. The 53rd week was worth $109 million in sales and about $13 million in EBIT.
Moving on to the balance sheet and cash flow, inventories were up 5.3% on a per store basis, well below comparable sales driven primarily by inventory for new brands and boutiques. This performance demonstrates that our new merchandize planning systems are working to drive improvements in inventory management. This is particularly positive in light of the lower than expected sales and volatility of sales trends throughout the holiday season.
Capital expenditures were $441 million for the year, driven by our new store opening program, investments in digital capabilities, prestige boutiques and merchandize fixtures. We ended the quarter with $397 million in cash and short-term investments. In terms of share buybacks, through our 10b5-1 program, we’ve repurchased approximately 266,000 shares of our stock at a cost of $58 million during the fourth quarter. The resulting lower share count added $0.07 to Q4 earnings per share.
As of February 3, 2018, approximately $79 million remained available under the 425 million share repurchase program announced back in March 2017. Earlier this week, the Board of Directors approved a new share repurchase authorization in the amount of $625 million.
Turning now to guidance for the full year 2018 and for the first quarter. Our initial 2018 outlook is in keeping with our plan to deliver high single-digit comparable sales and earnings per share growth in the 20% range. With some of the drivers have evolved, as Mary just described, we expect to open 100 net new stores in 2018 and execute on 17 remodel and relocation projects.
Our e-commerce business is expected to grow in the 40% range. Total top-line growth is planned in the low-teens including the impact of the 53rd week in fiscal 2017. Beginning in Q1 of this year, we’ll be implementing a new accounting standard for revenue recognition. As a result, we expect to see a benefit to sales from credit card income and gift card breakage, which were previously classified in SG&A.
This will be partially offset by the impact of the loyalty program reserves now being grossed up into sales. Since we have such a high customer engagement in our rapidly growing loyalty program, Ulta Beauty has a more significant impact from this accounting change than some other retailers. Adoption of the revenue recognition standard is expected to increase sales by about $50 million and reduce operating margin by about 20 basis points.
Total company comps are expected to be in the range of 6% to 8% with the retail comp in the mid single-digits. We are planning for comps to strengthen throughout the year as comparisons ease and newness in our merchandize offering improves. We expect to grow earnings per share approximately 20% on a GAAP basis including the extra week in the 2017 in the base.
Excluding the impact of the extra week, EPS growth is expected to be in the low 20s. Earnings growth adjusted for the lower tax rate would equate the lower double-digit EPS growth. We anticipate capital expenditures of approximately $375 million. This breaks down to $175 million for new stores, remodeled and boutique expansions, $95 million for supply chain and IT, $80 million for merchandizing and $25 million for store maintenance and other.
Depreciation is forecasted at approximately $290 million. We expect to repurchase shares in the $500 million range for the year and the annual tax rate is expected to be 24%.
One note I’d like to add related to Mary’s comments about the recent social media allegation. This guidance does not include any actions we may take to protect our brand and reputation to ensure that our guests continue to have the highest confidence in Ulta Beauty.
As we look further out to 2019, the last year for which we gave long-term guidance at our Analyst Day in late 2016, we still expect to grow earnings per share in the 20% range and plan for modest margin expansions. We plan to host our next Analyst Day in the fall, and expect to share our longer-term outlook at that time.
Turning to more specific guidance for the first quarter of 2018, we expect sales to be in the range of $1,506 million to $1,519 million versus $1,315 million last year. We expect comparable sales to increase in the range of 6% to 7% versus 14.3% last year. E-commerce sales are expected to grow in the 40% range.
We plan to open 33 new stores in the first quarter, compared to 18 in Q1 of 2017. Q1 preopening expense is expected to deleverage slightly at the rate of sales. Diluted earnings per share are expected to be in the range of $2.43 to $2.48 versus $2.05 last year with operating margins planned to deleverage.
Recall that in last year’s first quarter, we had meaningful tax rate benefits resulting from a change in accounting for equity compensation, as well as earnings upside from a timing shift of expenses in the back half of the year.
The tax rate for Q1 is expected to be 24% and our fully diluted share count is estimated at $61 million. We hope that our detailed press release and comments herein today has been beneficial to investors in understanding the quarter and outlook that have a bit more complexity than usual.
And with that, I’ll turn it back over to Mary.
Thank you, Scott. And I’d just like to wrap up our prepared comments with some reflections on our overall 2017 performance. We made significant progress on our strategic imperatives throughout the year. We attracted millions of new customers adding 4.4 million net new loyalty members and we achieved all-time highs in brand awareness.
We gained market share across all categories, added dozens of leading brands to the assortment, successfully rolled out 700 prestige brand boutiques and significantly revamped our services offering. We drove impressive new store productivity. We delivered stellar growth in e-commerce sales and increased the percentage of omni-channel shoppers.
We improved our infrastructure and supply chain capabilities. I am really perhaps, most importantly we continue to grow and develop a workforce that’s passionate, highly engaged associates who create and sustain our winning culture.
All these accomplishments give us tremendous confidence in executing our plans and driving sustainable profitable growth in 2018 and beyond. Our business model remains strong and differentiated and the investments we are making will continue to set us apart, support market share gains and make us relevant in the beauty industry for many years to come.
So now, I’ll turn it over to our conference call host for Q&A.
[Operator Instructions] Our first question comes from the line of Christopher Horvers from J.P. Morgan. Please proceed with your question.
Thanks, good evening everybody. So, I wanted to ask about the promotional – your promotional plans and your promotional posture. I think a big question over the past two quarters is it looks like you added incremental promotional drive to sales at the end which looks like you are trying to catch-up to where you had guided the street.
So, how do you think about those in retrospect? Do you think as a private company, would you have run those? And how are you thinking about 2018 differently, especially in light of some of the works you are doing around the Ultamate Rewards program?
Thank you, Chris. Let me start just by stepping back and providing some context which is that, we have many different demand drivers and we always are really striving to deliver great value equation to our guests and one that’s going to drive share gains and profitable growth. So some of those demand drivers are easy to see on track and others are maybe less so, because they are very targeted and a lot of folks are consumer target, right.
So, what I would say, it’s a great thing is that we can and do flex those tactics as needed given the timing here, category competitive dynamics. So, we set out, I guess, more context really over four years ago to reduce our reliance on broad price discounting and as you said, increased targeted offerings through our loyalty program.
We also significantly shifted spending out of price promotion tactics into awareness and brand building tactics and we’ve done that, the business I would say is, much healthier because of that. So, our brand partners, they appreciate what we are doing with the data and the insights in the loyalty program and I am confident that these are the right levers.
So to your point, at the end of the fourth quarter, we did have an incremental 20% off the postcard, at the end of the quarter, drove traffic and share gains, slight headwind to margin rate. But as I said, we actually had many levers and we take a very holistic approach. So, in fact, we are less promotional on other tactics that will cover less visible.
So net-net, there is only a slight increase in overall promotions and really that was largely driven by the higher mix of e-commerce in the quarter which tends to be more promotional. So, to your question about looking forward, I’d say, more save – is this constant- how do we – over time we know that getting more and more and one-to-one and personalized is the goal for us. Our loyalty program allows us to do that.
Some of the investments I talked about to as well. But we’ll continue to use an array of tactics and levers to drive the long-term growth in share gains of the business.
And I would just like to add, because I know this is a hot button for investors and we of course read all the weekly analyst reports that are tracking our every move on the promotional front.
Yes.
So, one other fact I’d like to add is, it’s not – this postcard in particular, it drove a lot of traffic to our stores, which helps at mitigate other potential gross margin risk to the business, right. So, that helps us move through clearance products, in this case, it helps us move through some of the residual holiday products that’s still in the stores.
And so, you are able to sell that at a profit with vendor support rather than sending it back to the vendor, right, where you have labor cost and potential shrinkage use or a worst case having to write it off at the end of the quarter. So those are both worst outcomes. So, again, we try to be very thoughtful about the decisions we make and how we execute.
And I just want to throw in, you mentioned potentially having to react to some of these new stories about the used cosmetics as potentially seems to foreshadowing, maybe pulling one of those out to make sure you are defending the market share out there and you also guided a more narrow range 6 to 7 in the first quarter. So just trying to interpret that. Thank you.
Our next question comes from the line of…
Could we just stay on that? So, pulling, what out, I am sorry, I wasn’t tracking if that was a question or if not a follow-on question Chris, so.
Chris can you repeat your question? Okay, he is gone.
I am happy to answer, but I wasn’t clear about.
Okay, let’s keep going.
I’m sorry. The next question comes from the line of
That’s okay.
Simeon Siegel from Nomura Instinet. Please proceed with your question.
Great, thanks. Congrats on a strong year guys. So, Mary, can you just talk about how your new store openings are going? You did mentioned these stronger new store productivity. I am just wondering as the brand continues to gain awareness, are you seeing a faster sales ramp? And maybe is there any change to the maturity profile? Thanks.
Yes, I mean, I am very encouraged with our new class of store as each year continues to ramp up stronger. Productivity continues to get better. The maturity ramp of the stores is a function of the overall comp right, so that’s going to flex based on that where we are in the overall comp. But what we are seeing in new store openings continues to be very strong and very encouraging and it allows us to continue to drive more market share gains as we enter markets, even markets that we already have stores, right. If we are adding stores, we are continuing to build our market share and overall penetration. So it’s quite strong.
Okay, great. And then, thanks. Just quickly, Scott, did you, sorry if I missed it. Did you quantify or can you quantify what you expect mix shift to do to gross margins going forward?
We didn’t quantify it. I would tell you that merch merchants in general as we said now for quite some time, we expect to manage to flattish, right, that’s what’s been inherent in our long-term thought process. So, but we believe there is opportunities over the long-term. So again, e-commerce is pretty obvious. So that’s going to be a headwind for us.
It has been in recent quarters and will continue to be and so we are planning and we are looking at things. We have ways to mitigate that both our private-label offering might be a way, just getting smarter about our assortment and newness decisions by making use of our new merchandize tools that we’ve put in place over the last couple of years, better analytical tools as well.
Inventory productivity gains, we think we have in our future, and of course the DC split it will limits as well. So there are better capabilities, better optimized performance overall and with Fresno, we are making thoughtful decisions on where we place these to make sure that we are closer to our end-customers there. So, again, helping with transportation cost over the long-term.
All right. Thanks, best of luck for the year.
Thank you.
Thank you.
Our next question comes from the line of Simeon Gutman from Morgan Stanley. Please proceed with your question.
Thanks. Good afternoon. Question for Mary. Ulta has been making a lot of investments while growth was robust. And now, it sounds like, we are still needing to make some investments at a time where, I think some of us would think that you are relatively better off than your peers. And so, I know, you’ve mentioned some reasons why can we revisit that. A
nd I don’t know if I caught it, but within the margin guidance, and I think you adjusted outside of the accounting changes down 30 to 50, how much of it is down to the extra investments outside of the e-commerce mix shift and some of the freight and the labor margin headwind that you face?
Okay, great. Thank you, Simeon. And I’ll start with the question I guess about why we feel we need to make investments, I’d say, first of all I think we’ve got a really strong track record of making smart investments that earn a great return and we’ve had in fact, really significant progress against the five year plan that we communicated back in 2014.
We are well ahead on – I guess, every dimension you might measure from sales and profits, comp performance, share gains and what not. I would say though that, retail is rapidly changing and really more so maybe we would have thought four years ago. So, I feel very good about the investments we’ve made. This is simply an opportunity now, frankly with the tester format to size up the opportunities that have forged us to invested and accelerated pace.
And some of the dimensions I talked about, I am really investing from a position of strength. We are very confident about our business model and our growth potential, but continuing to invest and maybe doing at an accelerated pace allows us to adapt to the increased pace of change I think are passing on guest expectations in retail.
So, if we solved for margin, I think we would not maximize the opportunity that’s ahead of us. So, when we think about those investments, it’s both on people, as well as guest-facing initiatives and really, it’s more about imagining a future of this intersection of a digital and physical world that’s more focused on experiences and discovery, personalization and let’s on what you might think of what the friction of commerce.
So, for us, it’s just about how do you pace that and do it in a way that continues to allow us to really be the leader in beauty that we are and believe we continue to be. So, it’s just simple as that. Do you want to take the second question?
Sure, so, the 50 to 70 basis points down for the year that we guided to, I think you mentioned, Simeon, you got the 20 basis points on the accounting change which is kind of a one-time item I guess, I would say for the changing going from the cost method to the retail method for accounting for loyalty transactions.
The remaining 30 to 50 primarily driven by labor, store labor, is a big driver of that and that’s connected to the boutique strategy. So, we talked in the past a lot about cost implications there. So, we are in a better position in 2018, because more of the boutiques are going into new stores than they had historically. Historically, that’s been going back into the comp base which has been more of an expensive proposition for us through this accelerated depreciation notion that we’ve talked about in the past.
So, labor, the biggest piece with boutiques which we say, we are accelerating from what we have thought about earlier. And then the rest of that is really this tax benefit reinvestment I would say and most of that ends up in SG&A in the back half of the year largely, as does the store payroll as well, is in the SG&A line.
Okay, thanks.
Our next question comes from the line of Kelly Crago from Buckingham Research Group. Please proceed with your question.
Hi, thanks for taking my question. Mary, could you just talk about the prestige cosmetics category a little further, first, did you mentioned how that grew in 4Q? And then, as we begin to lapse some of the outsize growth in the category, what do you feel an appropriate level of normalized growth? And what are some of your assumptions driving that outlook?
And then, just piggy backing on that, it would be great to hear your thoughts on the recent successes of celebrity brand introductions, which you haven’t necessarily been able to participate in. So, do you expect this to be a sustainable trend? And if so, are you seeing any opportunities to get involved in a bigger way? Thank you.
Great, thank you. I am going to pass it you to Dave, so I’ll start and I guess, I would say, we think about our – let me reiterate, we’ve continued to gain share in all the categories in all the channels that we are in, right. So, we participate in a lot of different categories I’ve being – so there is a lot of different items in the past that we have to drive our growth. And in prestige, for us, we comped around 10% last quarter.
And a year ago, that was 20%. So, that was still great growth, little bit, not as strong as it was a year before, but we have some brands that had great – as our prestige beauty brands were really strong, it continued to rollout. We have some other brands that had innovation that didn’t work as well as the previous year.
But we see our partners in new brand innovation very strong both in mass which we can talk more about and prestige and I feel very confident that that’s going to continue to be a strong segment of growth and really coming in a lot of different ways. So, to your point about celebrity brands, that’s just a one of that many levers that are out there in terms of creation of brands and we are participating across all those. So, I would not move that out. I think, there is a lot of ways for us to get innovation that we are. So, Dave, why don’t you give a little more color and attend on that?
Yes. On our cosmetic – on our makeup business, so, yes, I’d just add to what Mary said by – and we really take a holistic approach at building our total makeup business and while your question was about prestige, I want to talk about both mass and prestige, because that’s really unique for Ulta Beauty, obviously and an important part of our strategy as we help introduce guests into get into the mass business, but then see them over time move into our prestige business. So they work very – in a very integrated way.
But I’d call out just a few core areas of how we are thinking about building – or continuing to build our assortment and our growth and success in the makeup business. First and foremost, it is about strengthening the performance with our biggest brand partners, our established brands and we are seeing continued success with that, that drove some of the comps that Mary talked about in prestige and also in mass.
So, our Ulta Beauty collection at the forefront of that going forward as well as Maybelline and L'Oréal Paris on the mass side, brands like TARTAN, Seche, It Cosmetics Too Faced driving growth on the prestige side. We are also rolling out, we’ve mentioned a couple of times key brand partners that we’ve been establishing at more stores, largely on the prestige side.
We said 675 new boutiques across MAC, Lancôme, Clinique, adding benefit in new stores, but also, NARS, Estée Lauder, on the mass side, E.L.F rolling to all stores. So, brands that have been successful in smaller subset of doors continuing to expand out. Key exclusive brands are big part of that, Tarte Double Duty Beauty has been a big success and a great partnership.
T Brushes For ULTA makeup revolution on the mass side, an exclusive brand that is we are expanding and seeing a lot of success with. And then I’d say, in the socially relevant, socially-driven brands, we are seeing a lot of success and many of these brands are exclusive to Ulta and we are seeing them already driving a lot of growth on mass side, Morphe launched late last year.
We just launched ColourPop, Milani, Sleek, Flower. On the prestige side, Dose of Colors, Beauty by POPSUGAR, which is an exclusive line created by Ulta. Mary mentioned Storybook Cosmetics, which is an online brand. So we are seeing these influencer led brands having a major impact in the marketplace. We got many that we’ve brought over the last six months and several that have just launched over the last few weeks.
So, we are very confident about the growth that we’ll see there. And then the last thing I’d just reinforce is, to as reflective of a holistic view that we see on the makeup business is the addition of Chanel Beaute and we are very excited about that rolling into a small number of doors, but another example of us driving growth in all aspects and all dimensions of the cosmetic business.
Great, thank you.
Our next question comes from the line of Mark Altschwager from Robert W. Baird. Please proceed with your question.
Great. Good afternoon. Thanks for taking the question. So, your prior long range plan called for stronger comps in the early years relatively lower comps in the out years. So is the question is, would you expect your comp growth rates to reaccelerate as you accelerate some of these investments in personalization and store experience?
Or would it allow you to at least sustain something in the 6% to 8% range for a longer period of time? Just, I guess, without previewing the Analyst Day this fall too much, it would be great to hear how you are thinking about the longer-term comp growth algorithm. Thanks.
Okay, thank you, Mark. Wait, again, a little preview. I like that, which we can’t do and don’t have, but, I would think about it is sustaining really helped to held the comps that which I am not right now and that we would – I would expect that the need to evolve any retail business is going to be it’s out there for all of us. So, when we think about these investments, it’s really to continue to be just as strong as we are and sustain the kind of comps that we are talking about. So, more to come on that.
Thank you.
Our next question comes from the line of Erinn Murphy from Piper Jaffray. Please proceed with your question.
Great, thanks. Good afternoon. I guess, Mary, my question was for you regarding the loyalty membership. The growth was pretty strong following 2017 I think you said 27.8 million at the end of the year, I guess, first, how do you anticipate the growth of that to continue in 2018? And then, how are you thinking about the customer acquisition cost if you get up into that next 5 million to 10 million customers? Thanks.
Yes, I’ll just start and have Dave add some more to this. But, that really drove with the kind of growth that we’ve had, we are almost at 28 million members as we said, which is fantastic and still, there is a lot beauty associates out there that are not in our loyalty program. So we anticipate to be able to continue to drive growth albeit at a moderate pace over time, we’ve had really strong growth. We know we’ll continue to grow it. So, well, do you like to answer?
Yes, and I’d say, as far as cost of acquisition, we are not seeing a dramatic change and then we are finding more efficient ways to drive our total marketing plan and we really do take a comprehensive approach to drive new guests into our store. Mary mentioned in her prepared remarks the increased awareness, both unaided and aided which we know contributes to our growth.
We’ve got very strong marketing plan supporting both our total brand store as well many of the new items that I’ve talked about and then our stores have done a very good job improving their effectiveness at converting non-members into members and we are anticipating they will continue to do that through 2018. So we are not expecting a real change in our efficiency of attracting new members into our program.
Okay. That’s helpful. If I can sneak in one more, just on the credit card, is that still a drag on gross margin or has that neutralized now? Thank you.
Yes, no, I am trying to put into context the drag. So, the credit card has been a spectacular success and it’s been a real tailwind for the business overall, I mean.
The 20% offer that came with the [Indiscernible]
Yes, yes, so that’s moderated. The 20% offering case that didn’t come through loud and clear. So the initial sign-up margin rate headwind with that initial purchase really had subsided once we got it the program off the ground in the second half of last year, really hasn’t been an impact overall when we are talking about margin rates here, recent quarters.
Net impact is very positive.
Absolutely.
Thank you.
Our next question comes from the line of Dana Telsey from Telsey Advisory Group. Please proceed with your question.
Good evening everyone. As you are thinking about this category performance, makeup and what you’re saying with prestige, how do you see the growth rates of that in the future and do you see any changes going on with skin care versus makeup that we should be looking forward to? And then just on the store base, any changes to the store base potential given the stronger than expected e-commerce build? Thank you.
Great, thank you, Dana. And I’ll start with the store base. We obviously continue to look at that very closely and are thrilled with the productivity that we have, the real estate opportunities, the ability to take advantage of situations, I think that are right for us in retail. So, and we love the e-commerce growth because it’s so incremental to the business, right.
So it’s not – we don’t have a shifting of purchases happening here as you know. We look at that omni-channel guest closely and analytically, she continues to buy even more in store and online and becomes the best guest. So, we look at it closely as we continue to build out the store base and make sure that we are picking the right spots and that won’t just keep watching that.
But we feel very encouraged, as I say, we are going to open 100 stores this year. We are off to a very strong start already and we think we are in the right place. On the all category stuff, why don’t you take that Dave?
Sure, yes, on the category – on the makeup specifically, we are confident about both mass and prestige. They both slowed down in 2017 and but we are seeing through some of the items that I talked about earlier, strong signs within our portfolio of growth. So we are optimistic at least within our business and our model that makeup trends will improve and we anticipate seeing that across the market.
As far as skin care, I’m glad you asked because, skin care has been accelerating and we are very pleased with the results that we’ve seen on our skin care business. Again, both on the mass and prestige side. Mary mentioned several of the new brands that we just recently launched, actually last week that we are excited about, but also continued strong performance with brands like Mario Badescu, Peter Thomas Roth, expansion of Proactiv, Origins, Clarins.
And then men’s skin business, we think we’ll also drive some incremental growth highlighted by House 99 with David Beckham. So, we see a lot of growth in skin across the marketplace and we are certainly , we think, leading the way and gaining share in that category as well.
Thank you.
Our next question comes from the line of Jason Gere from KeyBanc Capital Markets. Please proceed with your question.
Okay, thanks, and good afternoon. Mary, I might need you to go into that crystal ball again. Just on the cost optimization program, I guess, I want to get a little bit of color now. Did you use outside consultants on some of the projects, because you guys haven’t really gone through, I wouldn’t call it restructuring, but this level of some of this detail?
And then, Scott, when you think about the 50 to 70 basis points, that margin will be down this year, how much of – I mean, the cost optimization program, I guess, will help offset in the second half of the year? How much is that going to contribute this year? What would be the full year runrate? And then, how, and this is the crystal ball question, how much of that gets reinvested when you think about going forward into next year? So I was just wondering if you could – lot of details, but hope that we can get some answers.
Thank you, Jason. I also start by saying a couple of things. One is, I am thrilled that we are really in a formalized program that we are working on with dedicated internal leaders and a formal process in place and we are doing it from a position of strength.
So I think it’s the right time for us to think about how do we take our growth and scale and identify opportunities to drive more efficiencies in the business, smarter way to do business for many years to come. So, we are fairly forward on the path of identifying buckets of opportunities. But way too early to start getting specific about what that’s going to look like and when, but I feel really good about the progress we are making.
I guess, I would just add that, the executive team is committed to seeing this through. I mean, I think we are in a good spot in our maturity curve here to be working on this ahead of what you might have seen historically in other operations. So we are not going to share a lot of specifics, but there is hard targets in the 2018 plan and this is going to be a multiyear program. Actually, we are really good about it at this stage.
Is it fair to say, I mean, just to follow-up when you look at some of the other competitors out there, whether department stores have kind of gone through this type of, I guess, cost-cutting efforts in the past that they aren’t kind of near the tail-end of those programs here at the beginning, it puts you in a competitive advantage, as we think about the next couple of years?
Well, it will. So, I mean, the idea is that it really is the right time for us to think about short-term and long-term ability to continue to drive the kind of returns that our shareholders are expecting, while continuing to invest in the business that has many, many years of growth ahead of it, and the need for investment in a changing retail environment. So, frankly, I think about it little bit less of cost-cutting. I think about it more as driving efficiencies, invest in growth. And now it’s the right time for us to do that.
Okay, great. Thank you.
Our next question comes from the line of Brian Tunick from RBC Capital Markets. Please proceed with your question.
Thanks for taking my question. This is [Indiscernible] on for Brian. Just wanted to ask about the ticket growth, I believe it’s been around mid single-digits over the last three years and starting to slow a little here. How do you think about the comp sales from here? Is it reasonable to assume a lower contribution from ticket growth or do you think there is still opportunities to grow the average ticket from maybe channel mix, product mix or anything that we should be aware of?
And then, secondly, I might have missed this, but, so the vendor participation for the different kinds of promotions, say 20% off-coupon, is that different that planned events like the 21 days of maybe that you run almost every year?
Yes, so maybe I can start with the comp deconsolidation. So, when we think about the business, it’s always with a healthy balance of traffic versus ticket and a contribution. That’s the way we plan our business.
I mean, over the last couple of years, you’ve seen us outperform that, especially on the traffic side of things. So, again, it’s a balance, the way we think about, we wouldn’t – there is nothing moved ahead of us that we would say, we would expect anything materially different than that at this stage of the game.
Yes, and as far as brand partner support of our key promotional activity, I guess, we’ll get into specific details about each individual item other than to say, we are very close – work very closely with our brands to deliver the best experience to our guest and they are active supporters of our efforts in the marketplace and we just – they’ll continue to do that.
Okay, thanks very much.
Our next question comes from the line of Adrienne Yih from Wolfe Research. Please proceed with your question.
Good afternoon everybody. Mary, first of all, congrats on the Chanel Beaute. Very, very impressive to land them. Why don’t if you could talk a little bit about how many stores, how many SKUs and the timing of that? And then, along with that, the skin care size of – prestige skin care size of market relative to prestige cosmetics, and then your penetration within Ulta in those two categories. Thank you.
Yes, I am not sure we break out all that in so much detail. But I’ll tag team this with Dave. Thank you, we are thrilled with Chanel Beaute as well. It will be a pretty – a small number of stores to start. We are starting at Westport Connecticut in the next couple of weeks, additive assortment, beautiful brand. So, which will help to continue and deepen that partnership.
And the assortment will be highlighting the most iconic items as Mary said, a real highlighted assortment, we are really excited about the presentation in-store, but it will feature their Iconic Lipstick, ROUGE COCO LIPGLOSS and Blush, Screen Foundation, skin care items. And so, we think it will be a really nice presentation of their brand and a nice addition into our portfolio.
Fantastic. And then, Scott, just a clarification, on the year-over-year operating margin pressure, is that against the GAAP 13.1 or the 13.8? And then for Q1, can you help us that a little bit with the gross margin, because you are opening – I think more stores in Q1, year-over-year. Should we think about more pressure and then having relieve itself or reverse itself in Q2? Thank you very much.
Yes, so it is, so to guide the operating margin guidance is versus the GAAP information.
Okay.
To certify that. And then, Q1, interesting I am glad you asked this question, because it is important for people, we did stated a few times, Q1 is probably our toughest compare of the year, right. So, we had a 14 comp last year. We had some – we pushed some expenses out of first quarter into the back half of 2017. So that helped us as well.
So, the other things to keep in mind there I would say is supply chain deleverage that we got a new DC in Fresno California, that’s going to open up mid-year next year. So, some slight deleverage there in the early part of the year and then improving in the back half of the year and then you are right on with the store program.
So a lot more stores opening up in first quarter 2018 than a year ago. Plus, we are carrying forward, some what I would call higher cost kinds of real estate, right, that we put online, second half of last year. Manhattan being the most notable of those that we are still up against during the early part of the year. So, again, fixed store cost leverage, tougher in the first half of the year, but improving as the year goes on.
Okay, great. Thank you for the detail. We’ll be looking forward to Westport.
Our last question comes from the line of Oliver Chen from Cowen and Company. Please proceed with your question.
Hi, thank you. Hi Mary, Dave, Scott. Our question is the evolution of the state and how you are thinking about driving value and experience in the context of Amazon and other pure play competitors. What’s on your mind in terms of the shifting needs of the consumer and how are you prioritizing what you can do to just make sure you have a competitive advantage along the value of store experience, personalization and customer engagement?
I would say, all the above Oliver. But it’s a great question and I believe we are really well positioned to really be a leader in this category for many years to come, both in the physical space as well as digital, both stuff. I mean, to us, this is a category and the consumer that we focus on the beauty enthusiasts who really loves both.
The in-store experience to try and discover and get services as well as the conveniences on buying online and so, we offer really what nobody else does and we will continue to do that. So the product assortment across all categories of price points, a great in-store experience and online experience that needs to just keep getting better, right.
Services, our loyalty program and I’d say, as we think about our e-commerce platform, we just continue to build out our e-commerce platform at a way that is great- it gives us great control over content, the guest experience, the pricing the data. So, we like the model.
We think we are well positioned and as we think about the future imagining what that guest wants five and ten years from now in that intersection of the physical and digital world, is that’s our job to do. But we believe still continue to want to have physical experience as well. So, that’s how we think about it. It’s a competitive space, but we think we are playing to win. So, we will.
And lastly, as a quick follow-up, on the inventory journey, you’ve done a really good job of managing capital and also the slip system and thinking about accuracy. What are the next steps for inventory in terms of what you want to do in ensuring the omni-channel as well as the supply chain and speed in turns and stocks and service levels are where you want them to be regarding both the customer-facing, as well as the Planograms in the stores, just curious about inventory.
Yes, I’d say, we are still in the early innings with respect to inventory optimization. So, I mean, as you well know it’s a never ending quest, right to have right products, at the right place, at the right time what she is interested in purchasing. Whether it’s on the store shelf or it’s in our distribution centers ready to shipped to her front door.
So we’ve been making significant number of investments over the course of the last couple of years with tools, you mentioned slip is one and better space planning kinds of tools in the stores. I mean, our analytical capabilities have improved a lot over the last three to four years.
That will continue. That’s a quest again that will be evergreen for us to try to get better and better insights into our purchasing behavior in how we ship things quicker and more efficiently to folks. So, there is still a lot of, I guess, I would say a lot of progress for us to be made there when we think about inventory productivity and inventory turns kinds of things as we look to the future.
Thank you. Thanks for all the details. Appreciate it.
Ladies and gentlemen, we have reached the end of our question and answer session. I would now like to turn the call back over to Mary Dillon for closing remarks.
I want to close by thanking our 35,000 associates for their commitment to provide a guest experience and for delivering exceptional financial results in 2017. I look forward to speaking with all of you soon. Thank you.
This concludes today’s teleconference. You may disconnect your lines at this time. Thank you for your participation.