Ulta Beauty Inc (ULTA) 2020 Q1 法說會逐字稿

Greetings and welcome to the Ulta Beauty First Quarter 2020 Earnings Results Conference Call.

(Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Kiley Rawlins, Vice President, Investor Relations.

Please proceed.

Thank you, Shamal.

Good afternoon, and thank you for joining us today for our discussion of Ulta Beauty's results for the first quarter of fiscal 2020.

Hosting today's call are Mary Dillon, Chief Executive Officer; and Scott Settersten, Chief Financial Officer.

Dave Kimbell, President, will join us for the Q&A session.

This afternoon, we released our financial results for the first quarter of fiscal 2020.

A copy of the press release is available in the Investor Relations section of our website at www.ulta.com.

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 caution you not to place undue reliance on these forward-looking statements, which speak only as of today, May 28, 2020.

We have no obligation to update or revise our forward-looking statements, except as required by law, and you should not expect us to do so.

We'll begin this afternoon with prepared remarks from Mary and Scott.

Following our prepared remarks -- comments, we'll open the call for questions.

(Operator Instructions) As always, the IR team will be available for any follow-up questions after the call.

Now I'll turn the call over to Mary.

Mary?

Thank you, Kiley, and good afternoon, everyone.

Before we talk about our first quarter results and how we're responding to the challenges created by COVID-19, I want to first take a moment to thank all who have been on the frontlines selflessly fighting the outbreak and caring for the country since this pandemic began.

We're truly grateful for your dedication.

I also want to thank my leadership team and all Ulta Beauty associates for their unwavering commitment, tireless efforts and continued agility as we adjust to a very dynamic and uncertain operating environment.

As we've navigated through this crisis, our lens for every decision has been the safety and the well-being of our associates and guests.

In early March, as the virus began to spread in the U.S., we quickly took steps to keep our associates and guests safe and healthy.

We increased sanitation measures and cleaning frequency in stores, limited the use of testers and suspended all beauty services.

As the situation escalated, we made the difficult decision to temporarily close all of our stores on March 19 and quickly shifted our focus to operating our e-commerce channel only.

When we began 2020, we certainly did not plan to operate the digital-only business, but I'm very proud of how quickly our teams pivoted to support our e-commerce operations.

Our marketing team shifted rapidly to create highly relevant digital content sensitive to the mindset of our guests at that time, a focus on connection, self-care and positivity while also acknowledging new consumer behavior such as social distancing and wearing masks.

Anticipating an increase in demand, our digital teams quickly leveraged the existing capabilities to support higher e-commerce order volumes and manage order flow.

Our supply chain teams quickly increased capacity while implementing enhanced cleaning protocols in alignment with CDC guidelines and new processes that support social distancing within the distribution centers to keep our associates safe.

Our DC associates were incredible in their ability to quickly meet the increased demand in our e-commerce business, and I'm deeply grateful for their efforts.

With more than 80% of our revenues previously generated in stores, we knew that the expected acceleration in e-commerce would not recoup all of the lost brick-and-mortar sale.

So early in the COVID-19 crisis, we took several precautionary steps to protect liquidity and enhance our financial flexibility, which Scott will discuss shortly.

And as we actively took steps to manage the business through the short-term uncertainty, we simultaneously began to plan the reopening of our stores and to adjust our operational plans for the rest of 2020.

In April, it became clear our stores would remain closed longer than initially expected.

After evaluating multiple options and considering the changes in unemployment insurance details incorporated into the CARES Act, we made the decision to furlough many of our store and salon associates.

Our intention is to retain as much of our workforce as possible, and we look forward to when we can safely welcome associates back into all of our stores.

To help support our associates through this crisis, we expanded the criteria for our Associate Relief Program to include those who need assistance due to a personal hardship as a result of COVID-19.

This program is one way we can care for our associates.

And I, along with Ulta Beauty executive team and Board of Directors, have made personal donations to the program.

We're also providing support for those who are working hard on the frontlines to take care of all of us.

Since the crisis began, Ulta Beauty has donated 450,000 gloves and 110,000 essential beauty items to several national organizations serving local communities and health care workers.

And throughout this crisis, we've worked closely with our brand partners, both big and small, to ensure that we successfully navigate this crisis together.

We're appreciative of their ongoing partnership and are confident our relationship remains strong and in a good position to drive growth.

Now let's turn to our first quarter results.

Reflecting the impact of store closures, total net sales for the quarter were $1.2 billion.

Comp store sales declined 35.3%, and we had a net loss of $1.39 per share.

While these are certainly not the results we planned, I'm proud of how our team has worked together to respond to the unexpected challenges.

The first quarter began well with good growth in comp store sales, market share and our Ultamate Rewards loyalty program.

However, the escalation of COVID-19 in mid-March, the need to temporarily close all of our physical stores and immediate changes in consumer behavior disrupted these positive trends.

Within beauty, consumers focused on immediate safety and protection necessities like hand soap and antibacterial gels early in the crisis.

As salons and other beauty service outlets closed, guests shifted to do-it-yourself beauty solutions, including hair color, nail care and hair removal products.

And as quarantines became more pervasive, guests looked to self-care and wellness products like skincare treatments, hair masks and bath products, home fragrance and others to relieve stress.

Although comp sales after mid-March declined in all categories as a result of our store closures, the skincare, haircare, bath and nail categories all increased as a percentage of sales.

Early in the quarter, we saw nice market share gains across the majority of categories.

The temporary closure of our stores in mid-March impacted our overall market share.

But in our digital business, which operated for the full quarter, we are pleased to see strong market share gains across all of our prestige categories.

From a channel perspective, our e-commerce channel was strong early in the quarter, with sales trends accelerating from levels we saw in the fourth quarter.

As we close stores and transition to a digital-only business, sales accelerated further.

Despite proactively managing demand in light of capacity constraints resulting from increased social distancing protocols in our DCs, we more than doubled our e-commerce sales this quarter.

The number of active members in our Ultamate Rewards loyalty program increased 2% compared to the first quarter last year to 33.1 million members.

While this growth was lower than planned, we are pleased to see it in spite of the store closures.

Historically, stores have been the largest source of new member acquisition.

And while we saw significant growth in new member acquisition through our digital channels, it was not enough to offset the impact of store closures.

We're also very pleased to see that a large number of previously in-store-only members engage with us online for the first time.

Our omnichannel guests historically have had very strong engagement with Ulta Beauty with nearly 3x the annual spend of an in-store-only guest.

So we're excited about the opportunity to maintain strong engagement with these new guests that are shopping in our omnichannel format as our operations fully reopen.

Reflecting heightened guest focus on safety and social distancing, our digital and store teams moved quickly to create and launch a new touchless curbside pickup option for our guests.

And on April 23, we launched buy online, pickup curbside in 70 stores across 9 states.

Guests have enthusiastically embraced this beauty-to-go option, and our store associates are doing an amazing job bringing this to life for them from flawless execution to wearing welcome back signs as they deliver purchases to guests.

Since launching this option 6 weeks ago, we've seen a nice acceleration in the average number of orders per store, strong average order values and high satisfaction ratings as more guests are using this option as a fun and convenient way to come back to Ulta Beauty.

Over the last month, various states and local authorities have begun to lift restrictions in an effort to restart their economies, allowing us to make key decisions on how and when to reopen stores.

Of course, we want to open our stores as quickly and as safely as possible and have been doing so.

To help us make reopening decisions, we've developed a rigorous process to evaluate the safety risk for each store.

In addition to reviewing the legal guidance to determine we're allowed to reopen, we also assess local COVID-19 transmission trends and evaluate certain operational criteria and local guest sentiment.

Once we determine that it's safe to open, we will flex based on local conditions.

Some stores will reopen curbside pickup, some stores will reopen curbside and retail only, and some stores will reopen with curbside retail and a limited service offering.

All doors will initially reopen with limited store hours.

We know that health and safety will remain top concerns for all.

And as we reopen stores, we're implementing new Shop Safe Standards to ensure the safety of our associates and guests.

Reflecting guidance from government and health officials as well as recommendations from RILA and NRF, these standards include associate wellness checks, increased cleaning frequency and additional hand sanitizer station.

All associates are wearing face coverings in store, and we're asking all guests to do the same while shopping.

To promote social distancing, we've reduced the number of [added chairs] on the sales floor, created one-way aisles and added plexiglass shields at checkout.

And we're limiting occupancy and the number of open registers.

The opportunity to test and play is an important part of the beauty shopping experience.

And while we've kept most testers on the sales floor to help guests visualize color, texture and packaging, we've made them unavailable for guest use.

As an alternative, we're directing guests to our GLAMlab tool, which is our live interactive virtual experience that lives within the Ulta Beauty app.

GLAMlab allows users to virtually discover and try thousands of beauty products.

Since the crisis began, guest engagement with the tool has increased nearly 5x, and more than 30 million shades have been tested virtually.

We're also making changes in our salons to promote and protect safety, including offering services by appointment only, performing associate and guests wellness checks, using protective wear, increasing cleaning between appointments and implementing social distancing between stations.

Last month, we began the reopening process with the launch of curbside pickup.

And on May 11, we reopened 180 stores to guests, including many with salon services.

As of today, 840 Ulta Beauty stores or about 2/3 of the fleet offer curbside pickup.

333 stores or about 1/4 of the fleet are open to guests for retail, and 283 of those stores are open with salon services.

While it's early in the reopening process, we've seen stronger-than-expected sales in reopened stores.

And we're seeing great guest engagement with our salon services with many appointments booked several weeks out.

To get a sense of how reopened stores are performing, when we look at the first wave of 180 stores that have reopened, omnichannel comp sales in these stores are collectively flat a year ago with some states even comping higher than last year.

And sales in these initial stores continue to reflect strong penetration of e-commerce in BOPIS and curbside pickup as well as ship to home.

Of course, these are early results but encouraging.

Over the next several weeks, we'll continue to assess opportunities to reopen additional stores and expand services offerings.

As we learn, we will adjust, communicate and continue to prioritize the safety and well-being of our associates and guests.

Based on current available information, we expect to have a vast majority of stores reopened in some capacity by the end of June.

I'll just add that earlier this week, I was able to hold a virtual store team visit with Kecia Steelman, our Chief Stores Officer, in markets across the country: Epping, New Hampshire; Hendersonville, Tennessee; Delray Beach, Florida; Austin, Texas, Indian Land, South Carolina; Norridge, Illinois; and Orland Park, Illinois.

Some of these stores are doing curbside.

Some are fully reopened for retail.

But one thing was true for all, our teams are excited to be back to work and appreciate how Ulta Beauty has treated them through this difficult time.

Now as we look beyond the reopening process, we're adjusting our plans for the rest of 2020.

Consumer safety concerns, macroeconomic pressures and the risk of a resurgence in the infection rate are dynamics that might constrain demand for the rest of the year.

As a result, we are reimagining holiday, rethinking our tentpole events and continuously looking for opportunities to reduce costs.

We believe that demand will improve as guests regain confidence, and our goal is to maintain operational flexibility so we can adjust quickly to changes in demand while also managing inventory risk and cost as we navigate continued uncertainty.

Longer term, I remain excited about the opportunity for Ulta Beauty.

The beauty category, while not recession-proof, has fared better than many other discretionary categories in economic downturns, reflecting the relatively low price point and the emotional connection with the product.

While our business is larger and more diverse than it was in the last downturn, our annual comp performance in 2008 and 2009 was positive.

And we know from our proprietary research and engagement that the beauty category remains strong despite the uncertainty many guests are experiencing today.

Within the beauty category, our diverse assortment, combined with convenient locations, strong brand awareness and our differentiated loyalty program all position us to gain market share in a challenging economic environment.

Most importantly, I believe our values-based, guest and associate-centric culture and commitment to high performance will enable us to continue to expand our leadership position.

Over the last 90 days, I have been inspired by the power of the culture we've built as our teams have worked quickly and collaboratively to care for our associates, to support our e-commerce business and to reopen our stores.

Whether it's volunteering to help guest services respond to e-commerce inquiries, stepping in to help our HR service center support furloughed associates or virtually collaborating to swatch samples for GLAMlab, our associates have stepped out of their regular duties to support each other, our guests and Ulta Beauty through this truly unprecedented period.

Despite our universal desire to return to normal, COVID-19 will likely have sustained effects on consumers, the competitive environment and how we all operate and work.

We're thinking through all of these changes and what they may mean to our business model going forward, but we know we'll emerge strong.

Health and safety concerns are elevated.

And while we're all rethinking the risk of close contact in physical touch, consumers have adopted new shopping behaviors quickly.

Many consumers have more comfort with online purchases and in-store pickup, and we expect they may continue to participate in these convenient ways of shopping.

Businesses have been financially challenged due to closures, category shifts and liquidity pressures, and some will likely not reopen.

And we will likely see additional cost pressures due to channel shifts, PPE costs and increased promotional intensity as businesses look to drive demand in a difficult economic environment.

At Ulta Beauty, we are not sitting still.

We intend to leverage the strengths of our operating model and investments to reimagine the future of Ulta Beauty and the new normal.

Specifically, we're accelerating efforts in 5 key areas to expand our market share gains and extend our competitive advantages.

First, over the last few years, we've invested to expand our digital and omnichannel capabilities.

As a result, we've delivered double-digit growth in e-commerce sales.

COVID-19 has hastened channel shift across retail, and we believe much of this new consumer behavior will be sticky.

So we're focused on how we can move even faster to win in an omnichannel world.

We're accelerating investments to expand our shipping capacity this year, which includes the pull forward of our Jacksonville fast fulfillment center into 2020, investments in existing buildings and the expansion of our ship-from-store capabilities.

During this crisis, we've seen strong conversion of an in-store-only guest to omnichannel guest, with trends accelerating since the launch of curbside pickup.

We know there's a strong connection in beauty between the digital and the physical, and we're looking at our brick-and-mortar footprint and how we can accelerate our efforts to build a comprehensive multichannel view of how we serve our guests.

Second, we know that beauty enthusiasts love to shop for discovery and trial no matter the channel.

And we do not expect this desire to change.

We also know that concerns about personal safety and close contact caused by COVID-19 will require the beauty experience to change in the short term but will also likely spark longer-term innovation.

We're reimagining the guest experience and product discovery and looking at ways technology, services and the role of our associates can evolve to create a new wow experience for our guests.

Our Ulta Beauty app and GLAMlab tool will continue to play a big role in guest discovery and trial.

Today, guests can use GLAMlab to match foundation, try on makeup and play with hair color and lashes.

And in the future, guests will have even more opportunities as we accelerate the implementation of new categories and experiences.

Third, we plan to build on the successful work we've done to expand our market share and accelerate gains even further in key categories like skincare, hair and wellness.

Social distancing has resulted in many consumer behavior changes, and the crisis has exacerbated many of the category trends that we saw playing out during the crisis.

While we remain confident in the long-term potential of makeup, headwinds facing the makeup category will likely persist in the short term given the impact of social distancing and masks as well as the delayed introduction of newness and innovation this year.

On the flip side, many people seem to be on video calls now most of the day, so we'll watch the impact on makeup usage closely.

Conversely, skincare has become more important as guests look to take care of their skin and relieve stress.

And wellness has taken on new dimensions, extending to both physical and mental aspects as consumers increase efforts to stay healthy and look to feel better in this new environment.

We intend to lean into these trends to drive further market share expansion.

Fourth, we've built a tremendous asset in our Ultamate Rewards program.

With more than 33 million active members, we build a differentiated loyalty program that provides us with valuable customer insights, and we're applying advanced analytics and artificial intelligence to leverage this data to deliver personalized targeted communications.

As we focus on deepening guest engagement, we're looking at ways to drive next level loyalty and accelerate personalization to increase spend per member.

This will be particularly relevant in an increasingly omnichannel marketplace as more consumers move seamlessly between channels.

Finally, through our efficiency for growth or EFG efforts, we've made progress in improving our merchandising effectiveness and enhancing core processes across our real estate and supply chain operations.

As we think about cost pressures increasing as we move forward, we're looking at how we can go beyond process optimization and develop a cost structure that will enable us to weather economic challenges while also supporting investment in capabilities and opportunities that will set us up for future success.

So in closing, this crisis certainly has been fluid, swift and inescapable.

Businesses and consumers alike are adjusting to the effects of COVID-19, and longer term, the pandemic will have a sustained impact on how we all live and work.

While the economic environment will be challenged, beauty enthusiasts have a deep emotional connection with beauty that in the past has not diminished in softer economic environment.

Routines will continue to shift and evolve, but beauty is a platform for self-expression, togetherness, joy and self-care, all of which are even more important for beauty enthusiasts during this time of uncertainty and change.

At Ulta Beauty, we have a strong differentiated operating model, a brand that's known and loved and dedicated associates who are passionate about our guests and our company.

And I'm confident we will emerge in this crisis well positioned to accelerate our market share gains and extend our competitive advantages.

And now I'll turn the call over to Scott for a discussion of the financial results.

Scott?

Thanks, Mary, and good afternoon, everyone.

Before I review our financial results, I'd like to reiterate Mary's comments, and on behalf of Ulta Beauty, express our immense gratitude for the first responders who are on the frontlines every day, protecting us from the spread of the coronavirus.

I would also like to acknowledge all our associates, from those in the field and in our distribution centers, to our team members from our home office, who have worked tirelessly to adapt to the rapidly changing environment.

I could not be more proud of the work they are doing.

Now the situation with COVID-19 is dynamic and fluid, so our first priority has been to protect liquidity.

We have taken steps to enhance our financial flexibility, including drawing down $800 million on our $1 billion revolver, suspending our stock buyback program and actively managing and prioritizing our expense structure, working capital and capital investments.

We have also taken a conservative approach to inventory management, adjusting receipts to reflect current and expected sales levels.

As a result of these efforts, we had $1.15 billion in cash, cash equivalents and short-term investments at the end of the quarter.

We are proud of the quick actions we've taken to further enhance our financial strength and are confident that we have sufficient liquidity to fund our operations now and in the future.

Turning now to our results for the first quarter, beginning with the income statement.

Q1 sales declined 32.7% as we temporarily closed all of our stores in response to the spread of COVID-19.

Total company comp declined 35.3% and was composed of 3.3% average ticket growth and a 38.6% decline in transactions.

As Mary mentioned, we were pleased with our performance in the beginning of the quarter, with total company comp sales trending above our plan through March 10.

However, we began to experience softer traffic as consumers became concerned about the spread of the virus.

And we subsequently closed all of our stores on March 19, resulting in a 62% comp decline from March 11 to the end of the quarter.

Fortunately, we continue to operate our e-commerce business, which delivered a comp increase of just over 100% for the quarter.

From a mix perspective, makeup was 49% of sales, down 400 basis points from last year.

The skincare, bath and fragrance category increased 300 basis points to 24% of sales.

Haircare products and styling tools increased 100 basis points to 18% of sales.

The services category was down 100 basis points to about 4% of sales, reflecting the temporary suspension of all services in mid-March.

Gross profit margin was 25.9%, a decline of 11 percentage points compared to 37% a year ago.

The deleverage in the quarter was primarily due to 3 items: deleverage of fixed costs, channel mix and the deleverage of salon services.

Fixed store and supply chain cost deleveraged roughly 500 basis points due to significantly lower sales related to temporary store closures.

Channel shift contributed approximately 400 basis points of deleverage as our stores were closed for much of the quarter, and e-commerce was a much larger mix of our overall business.

As we have shared previously, our e-commerce channel sales, or more aptly described, our direct-to-consumer sales channel, are less profitable than a typical retail store sale with the variance between the 2 channels being most pronounced on the gross margin line, where all of the fixed and variable costs as well as the higher promotional intensity cost of that channel sales are captured, while for retail store sales, a large portion of the variable cost, i.e., store labor, is included in our SG&A line.

It's also important to keep in mind the unique circumstances we experienced this quarter, having all of our stores closed, which exacerbated the impact of channel shift.

We would not anticipate this kind of deleverage on gross margin from channel shift once we return to a more normalized operating environment and our stores are open.

We also experienced deleverage in salon services as we chose to continue to compensate our stylists for most of the quarter despite all stores being closed.

These headwinds were partially offset by the impact of lower promotional activity within the e-commerce channel as we chose to pull back on many promotional levers to manage e-commerce demand and volumes at our distribution centers as well as benefits from our credit card program.

SG&A expenses decreased 5.5% to $380.9 million compared to $403.1 million in the first quarter of 2019 as we pulled back on store expenses in light of temporary store closures as well as advertising by reducing our spend on print material and reallocating resources into our digital vehicles.

As a percent of sales, SG&A increased to 32.5% compared to 23.1% last year.

We experienced the most deleverage from store labor which is the largest expense within SG&A.

Store labor is normally a more variable expense as we often adjust payroll hours to support sales volumes.

However, payroll was more fixed during the quarter as we chose to continue to pay our store associates for most of the quarter despite temporarily closing all stores.

We also experienced deleverage on corporate overhead, reflecting the impact of investments we made in 2019 that have not yet been anniversaried.

This quarter, we recorded an impairment charge of $19.5 million related to the expected future performance of a small number of stores.

To provide some context, we perform reviews on long-lived assets on a quarterly basis or when events or circumstances indicate that asset values may not be recoverable.

The basis of our evaluation is whether future cash flows through the lease term are greater than or equal to the asset balance on the balance sheet.

There are a small number of stores that were underperforming before we made the decision to temporarily close stores.

These stores were further impacted due to COVID 19.

The projected cash flows for these stores are lower than the current asset balance, and based on the market value of the rent relative to our contractual obligation of the property, resulted in impairment charges.

We have a strong and productive fleet of stores.

But going forward, we will continue to test for impairments and adjust accordingly.

Preopening expense was $4.6 million in the quarter, an increase from $4.2 million a year ago as we assumed control of the property at Herald Square in New York City.

The rent for this property is higher than our other stores and will be recognized in the preopening line until the store opens.

Interest expense related to the drawdown of our revolver totaled $1.3 million compared to interest income of $2 million a year ago.

Diluted GAAP loss per share was $1.39 compared to earnings per share of $3.26 reported for last year's first quarter.

Moving on to the balance sheet and cash flow.

For the quarter, total inventory grew 7.2%, primarily reflecting inventory needed to support 68 net new stores.

Inventory per store increased 1.5%, reflecting the impact of store closures for most of the quarter.

We will continue to closely monitor demand as we begin to reopen stores, and we'll adjust our inventory levels accordingly.

Fortunately, we have not experienced any significant issues accessing inventory.

Reflecting our proactive efforts to manage liquidity, capital expenditures for the quarter were $45.1 million compared to $71.8 million last year.

Turning now to the rest of 2020.

We continue to operate in an uncertain environment and have been working under a variety of assumptions to help us make the best financial decisions we can for our people and our business.

However, the situation is dynamic, and it remains difficult to model sales and expenses with certainty.

Therefore, we are not providing earnings guidance at this time.

We are able to provide an update for a few other key model inputs.

We have reduced our CapEx plan by about $100 million in response to the current operating environment.

Our updated plan for the year is to invest between $200 million and $210 million, including approximately $92 million for new stores, remodels and merchandise fixtures, $80 million for supply chain and IT and about $33 million for store maintenance and other.

We now expect to open approximately 30 to 40 new stores in 2020 and relocate 3 stores.

We have chosen to defer some store openings into 2021 and are currently evaluating what the right pace of new store openings should be next year.

We have a strong and profitable fleet of stores.

And given the new operating environment, we plan to accelerate efforts to strengthen our fleet through relocations, negotiations with our landlord partners and potential store closures.

And while we believe there's opportunity to open more stores and reach new guests, we are also evaluating our long-term store target in the U.S. given the acceleration we are experiencing with our e-commerce business.

In closing, although we lack some near-term visibility, we remain confident in our differentiated business model and our ability to adapt to our guests' changing preferences.

We believe that we have the financial strength to manage through the crisis and are making decisions to ensure Ulta Beauty is even better positioned for the long term.

And now I'll turn the call back over to our operator to moderate the Q&A session.

(Operator Instructions) Our first question is from Christopher Horvers from JPMorgan.

This is actually Megan Alexander on for Chris.

I was just hoping you could elaborate a bit on what you're seeing in the stores that you've reopened just in terms of pent-up demand and whether you're seeing any change in the category trends as you reopen them.

And then can you just talk about any detail on what you're seeing in terms of guests using curbside versus actually coming into the stores?

Yes.

Well, we're really, I guess, I'd say pretty pleased about what we're seeing so far in terms of consumer behavior, right?

So, so far, our trends are stronger than we expected in terms of sales.

It varies by market.

We actually have some markets comping positively, others negative.

The e-commerce trends have been very encouraging.

And they're remaining resilient and really accelerating because of the adoption of curbside, which we can talk more about.

But -- and I mentioned this in the script, but the first 180 stores, if you look at their performance so far, total sales are flat to a year ago.

But of course, the mix is quite different, right, between stores, curbside, BOPIS, ship to home.

So I'd say overall, guest reaction has been quite positive.

But we're cautious.

I mean it's early, early, and we're taking a conservative stance as we look forward.

The opportunity for us that we see as well is that I've mentioned that we've got a lot of guests who've never shopped online with us before who are now converting to omnichannel guests, I guess, out of necessity.

And that guest, the more that we can keep them shopping in multiple channels, they're very valuable to us.

They spend almost 3x as much historically as somebody who shops in stores only.

So the other thing I'd add is that -- and maybe David can comment on category mix.

But on the curbside, so far, we invented that.

I'm very proud of the team for really kind of putting that together pretty quickly.

We hadn't been doing curbside.

We even had launched BOPIS in the fourth quarter of last year, and that was going really well, but we hadn't needed to do curbside yet.

So I really congratulate our team for getting that stood up.

And we've been pleased to see the guest reaction.

So I'd say what they like about it is the speed, the ease and the overall enthusiasm of our first staff.

We're following all the kind of social distancing and safety guidelines that you can imagine.

But we feel that so far, that could be -- again as people try that, they find it as another convenient way to shop at Ulta Beauty, and we expect that will continue to be part of the mix as we go forward.

Is there anything else you want to add on categories, Dave?

Well, the only thing I'd add on categories, and you mentioned it in the script, Mary, is that categories that were strong with us when we were operating on an e-commerce only continue to be strong.

And those are kind of self-care categories and wellness categories, skincare, haircare, bath, other categories that have been -- that have accelerated throughout this crisis.

But interestingly, as curbside became available, we also saw a pickup on makeup as more guests were engaging in that category.

And as we've made -- as we've evolved through the initial phases of this crisis, we've seen makeup make a bit of a strengthening move as curbside has given our guests more options to engage in the category.

And our next question is from Mark Altschwager from Robert W. Baird.

Maybe following up on the category trend.

Wondering if you can just give us some broader perspective on the beauty cycle and how you're planning for mix shifts in the near term just with the economic backdrop.

Are you seeing or expecting to see a shift to mass and masstige from prestige?

Sounds like skincare has remained robust.

However, as the industry starts to cycle the sharp decline in color cosmetics as we go through the mid- to late part of the year, just wondering if there's any reason to think there's a light at the end of the tunnel there from a product innovation and growth standpoint.

Thank you, Mark.

I'd say in some ways going into this, what we've seen is at the beginning of the cycle, of course, the types of things that people bought were quite different than what we've seen in the past, right, things like hand sanitizers and soaps.

And then we saw folks get more engaged in things that I would call like self-care, do-it-yourself at home.

So haircare, nails, that kind of thing, and then kind of more into things that are a bit more self-indulgent or self-care, like whether it's mask, skincare, fragrances for the bath, that kind of stuff.

So it's just kind of interesting to see that cycle of -- the psyche of consumer behavior.

As an aside, one thing I'll say is I feel like our team did a great job from a social media and just marketing perspective to really meet our guests where they were and kind of talk to them about those things.

Engagement was really high.

The core category trends, I'd say, were similar -- roughly similar to what we saw coming into this year, which is acceleration in skin care.

We've talked about that.

We see that as a big future trend.

The intersection of wellness and beauty together is going to be important.

I think with makeup, as Dave said, I think it's an interesting early fact that on curbside, we saw some tick-up in makeup.

You can debate the 2 sides of it.

But I mean anecdotally, I'd say that folks who maybe were doing -- working from home before on phone calls are now all of a sudden all working from home on video calls, and everybody is on video call.

So will that have -- will that help bring the light at the end of the tunnel as you said?

Well, certainly, makeup is still large and it's very -- customers are very engaged in that category.

But it has been in a lower cycle.

You're right.

So could this help it?

I think we'll see.

We don't know.

Right now, I wouldn't say that's happening in the large scale.

And our next question is from Kate McShane from Goldman Sachs.

I wondered if we could drill down a little bit more around your commentary about the promotional environment, maybe what you saw during the quarter and what you expect for the rest of the year.

And just one housekeeping question about the impairment charge.

Just how many underperforming stores account for that?

And do you plan to reopen them?

Yes.

So I'll start with the promotion and maybe Scott will take the impairment piece here.

Yes, promotion activity, of course, like everything else, was disrupted through the quarter.

Our strategy pre-COVID has been on really a multiyear journey to try to reduce broad-based promotions and be more strategic and focused on driving consumer engagement demand across all of our activities, the brands that we're bringing in, our loyalty program and other aspects of ways to engage with our guests.

We are -- we do -- as we enter into -- as the category shifts into a reopening of stores and a recovery phase coming out of the March and April elements of this crisis, we are anticipating, as a category, potentially higher promotional activity.

But our focus will continue to be on driving the more strategic aspects of our business.

We have a very strong loyalty program.

We've built, we think, very strong personalization capabilities, and in fact, in some ways, have strengthened aspects of that over the first part of this year.

And we intend to leverage that to be more personalized and direct with our communications and aspects.

We will lean into the most strategic aspects of our promotional -- annual promotional programs, 21 Days of Beauty, holiday, skin and hair events through the year.

But of course, we're going to be nimble in the category.

And while we know we're not anticipating leading a massive increase in promotional activity, we won't cede share either.

So we have tools to respond appropriately in the category, and we'll do so and make sure that we're remaining competitive in the marketplace.

To the impairment question, so the short answer is it was around 20 stores in total that were impacted by this.

And really, it was 10 stores that drove the majority of the impairment charge during the quarter.

The slightly longer answer is, Kate, this is going to be a multi-chapter story here.

So again, the fact that we took impairment charges on these stores doesn't mean we're closing these stores necessarily.

These might still be productive stores, but they just might be in higher rent kind of geographies in the United States, for example.

And as we mentioned in our prepared remarks, we are taking a clean sheet look at the whole store fleet.

So there are instances that we're looking at where maybe we're not in the best center or we're not in the best position in the center.

And now with the disruption we're seeing in the retail environment, there are centers that we've been blocked from historically that we might get more aggressive on and might have opportunities now in the future.

So there could be other potential store closures come somewhere down the road here.

Hopefully, we can get all that house kept in fiscal 2020, but it's not all a one -- a first quarter kind of story.

Our next question is from Kelly Crago from Citi Research.

I was just wondering what your exposure is to some of the department stores that have announced store closings.

Have you done any work there?

And should we expect any sort of promotional cadence geared towards gaining that customer?

And then my second question is just around vendor support given you're expecting a more promotional environment.

How are those conversations going with your vendors?

Yes.

I would say we'll step back and start with department stores.

I mean just in general, we have a very sort of broad competitive environment, and we think about that because we do -- we bring all things together in beauty.

And as a result, we compete with everybody from department stores to mass retailers to other specialty retailers, e-commerce only.

So it actually is a pretty broad competitive environment that we're in.

And we pay close attention to everything that's happening and see opportunities and risks throughout.

So I mean that's how we've always been as a business, is to play our offense and to make sure that we get the share gains that we believe we can get in certain categories.

I mentioned already in the digital channel, we gained share in every category in prestige, and we were only digital in this past quarter.

So we feel good about that.

So that's something we pay close attention to.

And the second part of the question was...

And vendor support.

Vendor support.

Yes.

I mean listen, there was -- it's a very important time for us to be very close with our vendor partners, big and small.

And so I feel very good about -- we have worked -- Dave leads the merchandising team.

And you can add more to those if you like.

But I mean we -- I'm proud about the fact that I feel that we've been very transparent with our vendors, share the dilemmas with them, share the opportunities with them as we move forward.

And our relationships are very strong.

So I certainly -- I feel very confident about our ability to come out of this stronger than ever and continue to win in the marketplace, and I think our vendor relationships will be a key part of that.

And our next question is from Omar Saad from Evercore ISI.

Really impressive digital e-commerce growth in the quarter.

Obviously, you guys have one of the best-in-class loyalty programs out there.

I'm curious what you're seeing in that part of the business as stores reopen or what your expectations are for that kind of run rate you've been at.

Do you expect that to moderate?

Are you seeing that moderate?

Is that demand shifting to more buy online pickup or curbside?

What are your expectations for that strong digital growth in the intermediate term as we go from a fully locked down state to one that's more open than the store network thing?

Well, yes.

We've been really, of course, pleased with the e-commerce performance.

It's a part of our business that we've been building and investing in and bringing innovation into for many years, and it certainly has been paying off for us through this crisis.

Obviously, as stores opened, it will decrease in its total penetration of our business from being 100% e-commerce only.

But what we do believe going forward is that we've moved quite a few of our guests that have previously only shopped us in-store, has shopped us online.

And that's a really positive thing.

We know -- and Mary mentioned some of these statistics, but we know that guests shop -- that shop us in an omnichannel way are among our very best guests.

They shop us more frequently, both in store and online.

They spend more with us.

So we anticipate, from a member standpoint, this could have some really positive lasting impacts of introducing more guests to the total Ulta Beauty experience.

Penetration going forward, we think there will be a step change in penetration because of this introduction of omnichannel capabilities to more guests.

We think it will be a higher run rate going forward, but time will tell exactly where that settles, but certainly higher than it was and a faster acceleration and adoption of our e-commerce capabilities.

And curbside has been a big win for us.

Mary said how quickly we adopted that.

We were happy to have BOPIS in the fourth quarter as we rolled that out last year.

To be able to shift and pivot that to curbside capability was really meaningful.

And as stores have reopened, guests -- some guests are still opting for curbside capability.

And so we'll sustain that going forward, and we think it adds actually a nice -- essentially a third option for our guests.

If they don't want to actually come into a store at this time, they can still get their products that same day and have a great experience from Ulta.

So that will be a big role going forward.

And our next question is from Dana Telsey from Telsey Advisory Group.

I hope everyone's and healthy.

As you think about the store reopening platform and the service model in there, how do you think of employee staffing and the percentage of payroll that you'll need going forward versus what you would need in the past?

And then secondly, on products and just color cosmetics, is the state of innovation or the pace of innovation that you've seen with your vendors, does that accelerate or decrease going forward?

And does the closures of department stores give you more runway to gain market share even as we go through this year?

Dana, it's Mary.

Thank you.

On the services staffing, I can't tell you the precise ratio there in terms of where we're going to land.

But I will tell you that I actually feel that -- first of all, we're taking a conservative and cautious approach to thinking about services.

But I also believe we've got a great opportunity because there's -- we have a national platform, a national brand.

And there's still pretty, I'd say, low usage of our services relative to the total retail percent of business that we have.

So we feel like there's a great opportunity.

We also know, as you know, like our omnichannel guests, that people who use our services are spending almost 3x as much as somebody who's not.

So it's a great opportunity.

We are starting slowly, and we're starting with hair only and I would say with even stricter protocols of health and safety than just the reopening of the store, which is very strict.

So there's additional steps in place to make sure that that's done safely and well.

But frankly, as we started to open up, we have about 280 stores that have salons open right now.

And there's a lot of pent-up demand for cut and color, as you can imagine.

So we have many, many stores that are well booked right now.

We are stylists.

We kept them on the payroll largely so that we knew we could come back strong.

We wanted them to stay with Ulta Beauty and help us capitalize on this opportunity over time.

So over time, we'll go from hair to brows again and things like that, but we're just going to take it a step at a time.

Your question about cosmetic innovation, maybe, Dave, if you want to add to that?

Yes.

I'd say on innovation in total, certainly, this has disrupted the brand's view on innovation and timing.

And in some cases, new launches have been shifted back or readjusted.

But what I'd say is 2 parts to that.

We felt really good about newness across categories, makeup included, skincare, haircare, fragrance coming in pre-COVID and this crisis, several new brands across the portfolio like Laura Mercier, Thrive, Pixi on the makeup side; Kiehl's, Ordinary, Indie Lee, Urban Skin Rx in skincare; Pattern, Arctic Fox, [Wella] in hair.

Several new brands that had launched recently, in either very late Q4 or early in Q1, actually performed well throughout this crisis and will be well positioned coming out.

So we still have that pipeline of newness.

And then as we look forward over the rest of the year across categories, again, including makeup, as I said, brands, in some cases, have adjusted their plans.

But as we start to get more confidence in consumer reaction and store opening timing, we will rebuild our innovation introduction time line in the second half of the year and are optimistic.

We know our guests continue to be attracted to newness, both new brands and new products from existing brands.

So we see a strong pipeline coming through as we work our way through this, through the 2020 and then certainly into 2021.

Our next question is from Simeon Siegel from BMO Capital.

I hope you're all doing okay.

Mary or Dave, how are you thinking about marketing?

I know -- it's obviously the easiest lever to pull back on, but just given the balance sheet strength, is there an opportunity to actually go on the offensive there and take some share?

And then just, Scott, how are you thinking about inventory savings for the rest of the year?

And maybe any color you might be able to give on gross margin.

It sounds like a party at your house, Simeon.

I love it.

Everyone is so excited for this call.

I'm so happy they're excited.

That's awesome.

Yes.

So I'm glad you asked about marketing.

Yes, we have -- we really see a great opportunity to continue to build the Ulta Beauty brand and really in a lot of ways, accelerate out of this crisis behind the strength of our brand and everything that our brand represents: the assortment, the loyalty program, the guest experience, the strength of our associates and what they bring to our guests every day.

Coming into this crisis, the work that we've done to establish our brand and to create a brand platform that is rooted in this idea of possibilities, of joy, of connection to others and the power of beauty, I think, actually that served us really well.

And I'm really proud of the work that the marketing team did to shift the strategy to be really responsive and reflective of the new mindset and to more focus more on these connections and self-care and just bringing joy and happiness, which is ultimately what beauty is about through all channels.

To your point, we believe that we have an opportunity to continue to invest in marketing because we're so, we believe, well positioned to, again, have a leadership voice in that.

So while we pull back on certain elements, most notably print tactics because they have long lead time, we can't be as responsive to store dynamics or shifting consumer dynamics.

We've pulled back on those elements.

We've invested more in digital and social aspects.

And as we look out over the rest of the year, it is not our plan to make a significant reduction in total marketing spend as much as shift our focus to both a messaging that's relevant and compelling as well as the tools that will be -- both give us some flexibility to adjust whatever comes ahead of us through the rest of the year.

But it was also very relevant in the time frame.

And it sounds like you had 3 questions, Simeon, right, 3 questions there.

But they're important.

So we'll answer the 2 -- the final 2 here.

So on inventory, I would just say we're being careful.

I think the team did a great job, again, high sense of urgency to monitor receipts and order flow during the depths of the crisis.

And now we're back.

Again, it's back to vendor relationships.

Dave and Mary both alluded to being transparent and clear and having good connections with vendors because we're making orders.

We're making orders, and we have been now for a number of weeks.

So the sales throughput there on our e-commerce business, we need to stay in stock.

And when the store is opening back up, we want to make sure that the newness, that the back half is flowing out there to make sure we're ready for guests to come back and visit with us.

On the gross margin, I think we laid out the first quarter pretty thoroughly in the prepared comments.

As we think about the rest of the year, I mean, that's part of the primary reason why we don't feel comfortable providing guidance for the rest of 2020 at this point.

But again, you can go back through the script comments.

I mean we've given you a laundry list of things that we're thinking about, right, and with the key being opportunistic as we go through the rest of 2020, whether it be pulling forward the Jacksonville fast fulfillment center here in the back half of the year, provide more capacity.

We talked about rethinking the cadence of some of our major events and the promotional elements that go with some of those things, reassessing our assortment strategies, maybe being opportunistic about moving out of some of the slow movers, so to speak, as we go through the back half of the year.

We talked about store footprint optimization.

So there could be some impairment charges or closure charges that come along with those kinds of things.

But again, it's not going to be a first quarter only story.

This will evolve as we go through the rest of the year, and we'll be as transparent with you as we can along the way.

So let me just close this.

I really want to thank everybody for joining us today.

I know at the end of every quarter, I thank my team.

But honestly, in my 7 years as CEO of this company, in fact, in my career, I don't think I've ever seen a group of people leading with more resilience and heart and collaboration and more drive to win.

So I want to thank the Ulta Beauty team, and we hope that you stay healthy and safe, and we look forward to speaking with all of you again in August when we report our second quarter results.

Thank you.

And this concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.