Ulta Beauty Inc (ULTA) 2019 Q1 法說會逐字稿

Greetings, and welcome to the Ulta Beauty First Quarter 2019 Earnings Results Conference Call.

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

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

Please proceed.

Thank you.

Good afternoon, and thank you for joining us for Ulta Beauty's First Quarter Conference Call.

Hosting our call are Mary Dillon, Chief Executive Officer; and Scott Settersten, Chief Financial Officer.

Also joining us is Dave Kimbell, President and 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 earnings growth adjusted for the impact of income tax rates due to accounting for equity compensation.

During the Q&A session, please ask one question only to allow us to accommodate as many of you as possible during the hour scheduled for this call.

I'll now turn the call over to Mary.

Thank you, Laurel, and good afternoon, everyone.

2019 is off to a strong start with solid first quarter financial performance.

Total sales increased 12.9%, and we achieved a 7% comp on top of an 8.1% comp in the first quarter of 2018.

These top line results reflect a healthy balance of traffic and ticket growth as well as continued double-digit comp across growth in mass category, skincare and fragrance, tempered by mixed performance in prestige cosmetics.

We're driving stellar growth with expansion brands like Clinique, MAC, Lancôme, Estée Lauder and NARS.

But this isn't yet sufficient to offset the continuous softness in several large established prestige cosmetic brands.

Gross profit leverage was a highlight during the quarter, benefiting from progress with our Efficiencies for Growth initiatives and stable promotions year-over-year, which helped to offset ongoing channel, category and brand mix headwinds.

Continued progress on our strategic imperatives drove our performance during the quarter, and I'll give a brief update on each one.

Beginning with our strategies to increase loyalty and evolve our brand.

Our Ultamate Rewards loyalty program grew to 32.6 million active members, representing member growth of 14% on a rolling 12-month basis.

Our store associates continue to do a fantastic job in bringing new guests to the program.

We're also seeing healthy increases in Diamond and Platinum members.

Credit card account growth was above plan, and we are maintaining the nearly 50% increase in incremental spend from guests once they become cardholders.

Gift card sales increased 32% in the first quarter, continuing to benefit from the expansion of our third-party distribution partnerships.

Brand awareness continues to reach new highs at 56% for unaided awareness compared to 53% last year and 92% for aided awareness compared to 90% a year ago, reflecting the ongoing success of our Possibilities Are Beautiful campaign and more broadly, our strategies to make a more emotional connection with our guests.

We're making good progress driving awareness across age groups and ethnicities, and we're maintaining a position of strength relative to competition.

Our marketing activities during the quarter focused on our spring trend promotion, our signature 21 Days Of Beauty event, the launch of our exclusive Tarte Sugar Rush brand, which is targeted to Gen Z beauty enthusiasts, and Mother's Day.

This year, we enhanced our Mother's Day efforts with the launch of a new in-store program in partnership with Save the Children.

We invited our guests to donate to the Ulta Beauty Charitable Foundation at point of sale in support of Save the Children's early childhood programming and disaster relief efforts in the U.S., raising more than $1.1 million.

We continue to advance our brand purpose with our Girls United partnership with Essence, supporting and empowering young black women through mentorship.

Moving on to the strategic imperative to delight our guests with a merchandise assortment, where innovation, differentiation, exclusivity, relevancy and speed-to-market are key.

Our merchant team is focused on curating a highly differentiated set of offerings across all categories.

We continue to gain share across all major categories in both mass and prestige, with Ulta Beauty again driving all the growth in the prestige beauty industry year-to-date based on NPD data.

We're very pleased with the performance of fragrance, mass cosmetics, prestige iconic brands, prestige skincare, Pro Hair, suncare and PCA.

However, prestige cosmetics is still quite a bit softer than the rest of the portfolio, with spring newness generally underperforming our expectations.

However, late in the quarter, we set several promising new collections, including highly anticipated launches such as Urban Decay's Game of Thrones collection, a Disney Aladdin limited edition collection by MAC, a line of NARS limited edition blushes and lip products and Tarte's Big Ego mascara.

Also we're encouraged by the pipeline we see for the rest of the year.

Kylie Cosmetics continues to drive traffic and incremental sales with new products, including eyeshadow pallets and the Kris Jenner Momager palette.

We plan to add blushes, highlighters, bronzers and a birthday pallet, which will be flown into stores in a few weeks.

In April, we launched UOMA Beauty, a new makeup line inspired by African beauty, which is exclusive to us.

UOMA is an innovative bold product line with a focus on diversity and unity and offers vivid color and inclusive shades for all women.

The centerpiece of the brand is a line of foundations with 6 custom formulas, including skincare benefits offered in many shades.

We continue to roll out Clinique, Lancôme, Benefit and MAC in additional stores, adding a total of 50 new doors during the quarter.

Performance was strong across the board, with MAC leading the pack.

We plan to add several hundred expressions of these 4 brands this year in various formats, including boutiques, gondola runs and wall presentations.

The majority of the rollouts throughout the remainder of the year will be in presentations without dedicated payroll.

Mass cosmetics continue to perform very well following a significant reset earlier in the year.

This reflow further differentiated our mass cosmetics assortment with additional space dedicated to exclusive or limited distribution brands that are preferred by younger consumers, including Morphe, Revolution Beauty, BH Cosmetics, e.l.f.

and ColourPop.

We plan to continue to invest in fixtures and labor to execute more frequent reflows to keep our vibrant unique assortment fresh and compelling for our guests.

Prestige skincare delivered double-digit comps, helped by the success of our new and loved curated assortment highlighting guest favorite brands.

Kiehl's has a dozen of their top sellers in all Ulta Beauty doors in this section, and the brand will be in more than 100 doors with a broader assortment by year-end.

We're bringing a focus on wellness to the forefront in our prestige skincare assortment, with clean-ingredient brands like TULA, Kopari, Little Barn Apothecary, Trilogy and The Better Skin Co.

While new brands were the key driver of our performance in skincare, we also drove impressive growth in a legacy brand like Philosophy by running a special event which highlighted the brand in our services business.

Fragrance, despite tough comparisons from last year, was the best performing major category during the quarter, delivering a high-teens comp and significant market share gains.

New fragrances from Ariana Grande and Versace led the growth in this category.

Haircare delivered strong high single-digit comp growth, aided by a reflow that improved the assortment and shopping experience for color and texture.

These categories significantly improved our comp trends following the reflow.

Smaller categories were also very robust, with accessories and suncare delivering double-digit comps.

Personal care appliances were bolstered by strong demand for Dyson hairdryers and the Revlon One-Step Volumizer Hair Dryer.

In the bath category, we're responding to consumers' growing interest in wellness and clean beauty and are launching a new wellness assortment in 350 stores.

This will expand to 700 doors later this year and features 8 brands.

Many of the 80 items in the assortment are exclusive to Ulta Beauty, including the Ulta Beauty essentials oil -- essential oils collection.

Our emerging brands team launched 8 brands in the first quarter across multiple categories, including Cannuka skincare with CBD, Black Moon Cosmetics, DHC skincare, that brings together Japanese innovation and botanical ingredients, Grande Cosmetics, Sara Happ lip products, Nurse Jamie skincare products and tools and Erborian skincare, that combines sophisticated Korean technologies with high-quality ingredients derived from herbs found in traditional Korean medicine.

More than 20 additional brands are planned to launch in the second quarter, including many online-only brands.

So next, an update on our services business.

Our services team drove strong performance across all major categories, color, cut and style, blowouts and skin treatments.

After launching the ability to redeem loyalty points on services, we saw a meaningful increase in loyalty members using the salon for the first time as well as an increase in overall active members using the salon.

We also drove new guest acquisition through events like our Galentine's promotion, offering $30 blowouts when guests booked with a friend and received a gift with service.

We are now rolling out our services optimization program to the full chain.

As a reminder, the components of the program are compensation designed to attract and retain top talent, industry-leading internal training and education, simplified menus, transparent pricing and an updated skill team focused on business and technical training in each district.

We train district managers and general managers on the new program during the spring, and in-market training is taking place across the country, with all regions planned to be rolled out by the end of June.

We're seeing significant improvement in stylist retention in regions that were converted to the new program last year, and this is an important metric since tenure of our salon associates has the highest correlation to our best-performing salons.

The program is also driving a significant increase in product sales in the high-margin professional haircare category.

Ulta Beauty's Pro and Design teams had a big presence at America's Beauty Show in Chicago, hosting demos during this key industry event, which welcomed over 65,000 salon service professionals.

Hundreds of attendees were excited to submit applications on site to join the Ulta Beauty salon teams.

Through events like this one, we continue to focus on hiring and retaining great talent and elevating Ulta Beauty's profile in the salon industry.

And now turning to store growth.

We opened 22 new stores in the first quarter compared to 34 net new stores last year, ending the quarter with 1,196 stores.

New store productivity remains very strong, with first year sales trending ahead of plan as well as IRR sales hurdles.

We're on track to open 80 stores this year, the majority in suburban strip centers and power centers.

And now I'd like to share some exciting news about our growth plan.

While we have years of attractive domestic growth ahead of us, we've been evaluating the potential for growth beyond U.S. borders for some time.

Today, we're announcing our decision to expand internationally and establish Ulta Beauty as a global brand with our first market entry in Canada.

International expansion represents an attractive and incremental long-term growth platform, which extends our core capabilities and leverages our value proposition.

Over the past few years, we've extensively studied the market opportunity in multiple countries and evaluated various operational models.

We believe that the Ulta Beauty value proposition is very relevant and differentiated in multiple geographies around the globe.

And Canada is an attractive and logical place to start.

We're planning to launch stores and e-commerce in Canada, but we won't be sharing a lot of details yet for competitive reasons.

We can say that we're planning to start small but are prepared to scale quickly as we learn and see success.

The startup investment to support the Canada launch is expected to put modest pressure on the P&L this year, but we still expect to deliver financial results within our guidance range.

Our Canadian business is not expected to be material to sales or income for the next few years as we thoughtfully build a foundation to become a global beauty retailer over the long term.

Now moving on to an update on our progress in our digital experience and innovation.

We continue to invest in omnichannel capabilities to enhance the guest experience and support our buy anywhere, fill anywhere strategies.

Our save-a-sale program called store-to-door, where store associates assist guests with ordering products online when they aren't available in store is performing well.

It's improving guest satisfaction, particularly as we expand our assortment of emerging and digitally native brands that are frequently offered in limited doors.

Store-to-door demand increased about 20% versus last year during the first quarter.

We're also seeing growth in awareness and usage of buy online, pick up in store, currently operating in 47 stores.

We redesigned the find-in-store functionality on our website to support the upcoming full chain rollout of buy online, pick up in store to improve and simplify the guest experience.

We've also rolled out enhancements to the mobile app, including an improved order history view to make reordering or replenishing more efficient and improved usability of our GLAM LAB, live try-on function driven by our recently acquired GlamST subsidiary.

We're launching live try-on for Android next month after launching the iPhone version back in January.

Augmented reality innovation includes testing in in-store Ulta digital stylists in 6 pilot stores.

This tool, intended for our associates in the salon or brow bars to show possibilities to guests in the store, offers virtual try-on for hair color, makeup and eyebrow-shaping.

From an AI innovation perspective, we launched the skincare virtual beauty advisor on ulta.com, enabling guests to explore our skincare assortment by concern or by product.

The virtual beauty advisor asks a series of dynamically generated questions and presents a set of personalized recommendations that can be further reviewed and then purchased.

This user-friendly interactive experience is another great example of how last year's strategic acquisitions are adding value.

Our e-commerce team recently partnered with guest services and IT to deliver our first production chatbot experience on our customer conversation platform.

These initial experiences automate our communication with guests in response to frequently asked questions about loyalty points or birthday e-mails.

And lastly, I'll recap our supply chain performance.

We delivered excellent in-stock levels in the first quarter with a rapid recovery following better-than-expected Q4 sales and post-holiday out-of-stocks.

With good control of overall inventory levels, inventory turns improved and came out -- came in ahead of our goal.

Our transportation team continues to focus on service-level enhancements and costs and improved on-time store delivery by about 40 basis points in the first quarter.

We're also collaborating closely with our brand partners to measure and improve performance and compliance with our supply chain requirements.

Since implementing the program in the fall of last year, we've seen a 200 basis point improvement in fill rates.

As part of our omnichannel strategy, buy online and pick up in store will be deployed chain-wide this summer, and we'll begin testing ship-from-store capabilities in 5 stores this fall.

Our Fresno distribution center continues to ramp up and is now serving 245 stores and fulfilling 22% of e-commerce orders.

The conversion of our Romeoville distribution center into an e-commerce fast fulfillment center is underway and on track to open this summer.

The second FFC is planned to open in the summer of 2020 in Jacksonville, Florida.

FFCs serve e-commerce orders only and are designed to fill up to 30,000 orders per day during peak times.

These facilities are part of the infrastructure plan we're executing to attain our goal of 2-day e-commerce shipping by 2021.

Now before I turn it over to Scott, I want to share with you that this will be Laurel's last earnings call as she has decided to retire after 7 years at Ulta Beauty and a long and successful career in Investor Relations.

She's been a value partner and resource to me, our leadership team and our Board of Directors, and we're grateful for her many contributions to the company.

So while we're very sad to say farewell to Laurel, we are delighted to welcome Kiley Rawlins, who's joined us to succeed Laurel and lead our Investor Relations function.

Many of you already know Kiley, who has more than 25 years of experience building and leading Investor Relations for retail Fortune 500 companies.

She has served in Investor Relations and Communications leadership positions at Michaels, Family Dollar Stores and Dollar General, demonstrating her ability to proactively manage investor relation programs and engage with internal and external stakeholders to serve as an effective spokesperson to the investment community.

Kiley holds a Bachelor Degree in Commerce from the University of Virginia and is a CFA.

You can anticipate a seamless transition as Kiley joins Patrick Flaherty, our Senior Manager of Investor Relations, to support our mission to provide high-quality service to analysts and shareholders.

I know you'll be joining me in congratulating Laurel on her well-deserved retirement and in welcoming Kiley to the Ulta Beauty team.

And with that, I'll turn it over to Scott to discuss in more detail the drivers of our first quarter financials and the outlook for the rest of the year.

Thanks, Mary.

Good afternoon, everyone.

Starting with the income statement.

Our top line growth of 12.9% was driven by a 7% comp in strong new store productivity.

Traffic was healthy, with transaction growth of 4.3% and ticket growth of 2.7%.

While we are no longer breaking out e-commerce growth specifically, I can share that ulta.com growth was in line with our expectations of 20% to 30% growth driven by traffic.

The retail comp was balanced between transaction and ticket growth.

On the gross profit line, margin of 37% improved 70 basis points year-over-year from 36.3% driven by strong merchandise margin and leverage of rent and occupancy expense, offset by investments in supply chain and our services business.

Merchandise margin benefited from early gains from our Efficiencies for Growth program.

SG&A rate of 23.1% deleveraged by 70 basis points compared to the prior year's rate of 22.4%, reflecting planned deleverage in corporate overhead related to investments in growth initiatives, including store labor, offset by leveraging marketing and variable store expenses.

Operating margin was flat year-over-year at 13.6% of sales.

Diluted GAAP earnings per share of $3.26 grew 20.7% compared to $2.70 reported for last year's first quarter.

Adjusted for the $0.18 of benefit from a lower tax rate associated with equity compensation accounting, the underlying earnings per share of $3.08 were up 14%.

EPS rose 17% on a like-for-like basis, adjusting for the tax rate benefit in both years, which includes a $0.07 benefit in Q1 of 2018.

Turning to the balance sheet and cash flow.

Total inventory grew 10% and was up 1.8% on a per-store basis, well below comparable sales as we continue to gain efficiencies from improved systems and processes.

Capital expenditures were $69 million for the quarter driven by our new store opening program, supply chain systems and merchandise fixtures.

I'd like to touch on a new lease accounting standard and how it impacts Ulta Beauty's financial statements.

We adopted a new accounting standard on February 3, 2019 using the modified retrospective approach.

The adoption of this standard resulted in the recording of operating lease assets of $1.46 billion and lease liabilities of $1.84 billion as of the beginning of the year.

There's no impact on our income statement or cash flows.

Our Form 10-Q, which was filed this afternoon, includes comprehensive disclosures related to our adoption of the new lease accounting.

We ended the quarter with $521.8 million in cash and short-term investments.

We repurchased 318,000 shares at a cost of $107.4 million through our 10b5-1 program.

$788.2 million remained available on our $875 million authorization as of quarter end.

We continue to expect to repurchase approximately 700 million of shares in fiscal 2019, but as always, have the flexibility to modify the cadence of repurchases in response to market conditions.

Turning now to guidance.

We are maintaining our previous view for the remainder of the year and are flowing through the $0.18 of earnings per share benefit related to the lower tax rate in the first quarter.

We are on track to open approximately 80 new stores.

All are traditional 10,000 square-foot prototype.

We plan to remodel 12 stores and relocate 8 stores and execute 270 store refreshes or mini-remodels to enable the addition of new brands and improvements to overall fixturing.

We anticipate driving top line growth in the low double digits, with total company comparable sales planned in the 6% to 7% range.

We expect e-commerce to grow in the 20% to 30% range, contributing approximately 200 basis points to comparable sales.

We expect to deliver earnings per share in the range of $12.83 to $13.03, with approximately 10 to 20 basis points of operating margin expansion.

We expect to improve gross profit rate driven by merchandise margin expansion, rent and occupancy expense leverage and the benefits of our credit card program.

These benefits will be offset by deleveraging SG&A due to store labor and investments in growth initiatives and innovation.

Areas such as digital innovation, our salon services strategy, expanding our omnichannel capabilities, IT security and infrastructure, personalization efforts, our strategy to pursue emerging brands and initiatives to enhance the guest experience and now our investments ahead of launching operations in Canada are the factors driving corporate overhead deleverage.

We reiterate our previous comments on the cadence of earnings per share throughout the year, excluding the tax rate benefits from the first quarter, with EPS growth slightly weighted to the back half, with more of the benefits of our Efficiency for Growth cost optimization program occurring later in the year.

Excluding the Q1 tax rate benefits, we expect low-teens EPS growth and modest operating margin deleverage in the first half of the year and high-teens EPS growth and modest operating margin leverage in the second half of the year.

We plan to spend between $380 million and $400 million in CapEx.

This includes CapEx of approximately $190 million for new stores, remodels and merchandise fixtures, $140 million for supply chain and IT, including new fast fulfillment centers, and about $60 million for store maintenance and other.

Depreciation and amortization expense is planned to be approximately $315 million.

We expect our tax rate for the remainder of the year to be 24%, which does not include any estimate for the impact of share-based compensation.

The fully diluted share count for the year is expected to be approximately $58 million.

Our plan assumes share repurchases in 2019 in the 700 million range, contributing about 4 points of earnings per share growth.

And with that, I'll turn it over to our conference call host for Q&A.

(Operator Instructions) Our first question comes from the line of Rupesh Parikh with Oppenheimer.

So first, congrats to Laurel on your retirement and also welcome, Kiley.

I guess one of the questions I had is just going back to Mary, your comments on the mix of prestige cosmetics backdrop.

So it seems like we've continued to have challenges on some of those larger, established cosmetic brands, so I just want to get a sense of what you think is actually weighing on those brands and any sense in terms of how long this can continue.

Well, it's a -- I mean the good news is, with our model, that we offer a lot of different brands and categories, et cetera.

So we have discussed this before.

Prestige cosmetics category have struggled in '18, and some of the brands continue to struggle in terms of comping over some strong growth in previous years.

We've continued to gain share in all the track channels, which is great.

We also -- not all the data that you see is measured in all the -- or the marketplace is not all captured in tracking reports, so a lot of growth happening from digital and native brands, and we're obviously participating in that well.

So we continue to see the category as healthy overall.

We're going to continue to add new brands and work with our brand partners to continue to drive innovation pipelines and balance, I guess, the risk of that with the other great newness that we bring into the box.

Our next question comes from the line of Oliver Chen with Cowen and Company.

And Laurel, best regards.

We're going to miss you a lot.

Regarding of the Canada opportunity, which sounds really promising, what are your thoughts on the size of the box and also as you think about the assortment architecture and pricing, just considerations there?

And if you could brief us on why it makes sense now and how your competitive set may or may not be different.

Sure.

Thank you, Oliver.

As you can imagine, I'm going to stay very high-level on this in terms of we're not -- we don't want to disclose a lot, to folks about what we're doing exactly, okay?

But we do -- we're very excited about the opportunity.

I mean we've got years of domestic growth ahead, but we do see this as a next step in our long-term growth journey.

I would say we've done a lot of diligence in the last couple of years understanding consumer categories, competitive dynamics, just like you're asking, not just in Canada, but in other key geographies, studying success and failure, precedence and learning.

And bottom line is that we do believe whitespace opportunity exists for the Ulta Beauty proposition because it's differentiated, right, in terms of experiences in-store and online, breadth and depth of offerings in what is an important and growing category.

So it's incremental growth for us.

I guess back to your question, I would think about it more of leveraging our core competencies, but also being open to some modifications and local adaptations as needed.

So how that plays out relative to offerings, you can imagine that or a real estate model, but overall, we plan to stay true to the Ulta Beauty business model.

We know it's working, and what we have studied and believe is the opportunity is something that's pretty close to that.

And just related to that, as a quick follow-up, how well is the consumer awareness build in Canada and your thoughts in terms of like how the awareness is in that market now versus how you'll leverage the marketing programs to build your unaided awareness in the market?

Yes, lots more details to come, but you can imagine, I think, that we feel good about our ability to create the Ulta Beauty brand and that's obviously behind our list of important priorities from the start.

So that's all I'll say now.

Our next question comes from the line of Ike Boruchow with Wells Fargo.

And I will bid Laurel farewell.

We will miss you.

Congratulations on the retirement.

I guess my question -- 2 questions, actually, really real quick to Scott.

Scott, I don't mean to nitpick, but I'm going to have to do it anyway.

I think you said on the first half, the EPS, ex the tax benefit, low teens, I think that would imply like a low double-digit EPS growth for Q2.

I'm kind of making sure we're thinking about that the right way.

No.

You got the message that, that was the signal we were -- we intended to send for folks without being too literal about things.

There's still a fair amount of investment that's embedded.

I guess I would just back up and say that the gross margin leverage you saw in the first quarter, I think, directionally is what you can -- how you can think about it for the rest of the year.

But there is a fair amount of investment that -- in the plan, all the things we started last year around innovation and personalization that we accelerated last year.

We won't start lapping that until the back half of 2019.

And then we have some incremental things that we kicked off this year, most notably the Canada thing that we just announced here recently.

So there is a fair amount of corporate overhead deleverage that's coming in, in the second and third quarter.

Got it.

And then just a quick follow-up for Mary.

Just on the prestige business, I understand the softness just kind of persists, and sounds like you're confident in the pipeline.

I just feel like we've heard confidence in the pipeline for a while, and the business has been great, but that prestige business hasn't really -- doesn't seem like it's really picked up any real momentum.

Do you have visibility in that category for yourself, or is this just kind of your best guess at the moment?

I'm just trying to understand what kind of visibility you have.

Yes, I'll make a couple of comments.

I'll ask Dave to add more to this because he obviously is quite expert in this arena as well.

But I would say this is not a factor for all brands in prestige, right, so it's really like a few large prestige brands that are having a tough time comping over some amazing growth they have had for a couple of years.

We have many prestige brands that are doing quite well.

So we do our best, level best as can be, and be as direct and transparent as we can about how we feel about the pipeline.

But of course, it's in partnership with our brand partners, and like I said, the fact that we have an array of choices that we can make in the marketplace work to our advantage given our box.

So David, anything else you want to add on the prestige question...

I'll just say, as we look at the total prestige makeup business, many of the things that Mary talked about are critical to us compensating for some continued struggles that the bigger brands that have been in our store for a while are going through.

So continuing to focus on digitally native brands, but driving exclusivity with both new brands and existing brands, such as Tarte, Double Duty Beauty and Too Faced, with Tutti Frutti and other elements like that.

On the existing brands, yes, we -- they are going through many of them, as Mary said, not all of them, but many of them, and including some of the biggest brands that had been driving growth over some time at Ulta are continuing to struggle.

There's a transformation in the makeup business right now.

The category remains healthy, but there's a shift in consumer preference on brands.

What we know about these brands though is there are equities in all of our studies and understanding remain strong and healthy, that we're confident in the teams that are driving these businesses.

They're focused on driving innovation and adjusting to evolving market conditions.

We do have visibility to their innovation throughout the rest of this year and even into the first part of next year.

And then we see some positive things, but time will tell on some of these.

So we're not -- as we look forward on our business, we're not anticipating these -- some of the big brands that have been a drain turning around immediately, but we're confident over time that these brands will regain their fitting -- footing and get back to growth.

Our next question comes from the line of Christopher Horvers with JPMorgan.

Laurel, it's been such a pleasure working with you all these years, going back to your time in Framingham, and certainly, a top-notch job the whole time and best of luck in the next phase of your career.

Kiley, welcome.

Clearly, some similarities to Laurel as well, given both of you made a great trade, a comely transition, in your career in coming to Ulta.

So...

I love it.

I wish you could see their faces.

That's good, and thank you.

I'm sure you've talked about that.

So can you talk about -- a couple of questions, I'll put them all in one.

Can you remind us what caused the deceleration in last year's second quarter comp relative to the first?

And then in the gross margin, how did that come in relative to your internal plan with the investment expense versus the March margins?

How did that shake out?

And then the last one, of course, topic du jour tariffs, what are your comments there?

Yes, I can take a swing at last year's second quarter.

And just it's a -- it's part of the cycle of the business, I would say.

Second quarter's just been a little bit tougher for us the last few years.

The 21 Days Of Beauty phenomena, I guess, is probably what's driving the first quarter, and then we do it again in the fall and that's really a great event for us that drives healthy business in a lot of -- in a variety of ways.

So it's probably really just the impact of that.

And as far as margins and business overall results versus the forecast, we're very happy with gross margin leverage that we had in the first quarter.

I mean I would say we're right on target.

Coming through the first quarter, we had a similar conversation with the Board earlier this week.

We're right on plan, kind of right where we thought we would be.

The leverage on the gross margin line is where we thought we would be and then the investment cycle here.

So again, heavier maybe than what some of you were modeling or were expecting, but kind of right in line where we thought we'd be at this point in the year.

And I'll add lastly on that tariff question.

So -- and we've said this before.

We're certainly less exposed than other retailers.

Most cosmetics, fragrance, haircare, liquids were made in North America and Europe, but we have some in Ulta Beauty Collection, some things that are made in China.

But we're -- it's small.

We're managing it through supplier relations and pricing, if needed.

So we consider that a pretty small impact for us.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

This is Xian Siew on for Simeon.

We want to ask about D&A.

It looks like guidance of $315 million was reiterated, but the Q1 run rate is a little bit lighter than that.

Is there anything around timing there?

Yes, I would attribute that primarily to the investment notion that we've been talking about, Canada kind of plays heavily into that.

So there's a lot of things coming around systems, upgrades and things like that and a lot of that is expense-related.

I'm not sure if you're familiar with the way some of the new pricing is working with SaaS solutions and things like that, so it's more of an immediate hit and there's more of that back-half weighted.

Got it, so back-half weighted D&A?

Correct.

Our next question comes from the line of Erinn Murphy with Piper Jaffray.

Congrats to Laurel on your retirement.

It's very well deserved.

Look forward to working with Kylie as well.

I guess my question is either for Mary or Dave, you guys have brought in a lot of newness over the last year.

And I think last quarter, you talked about it driving 400 basis points of contribution to the comp.

Could you just share with us what the benefit was in Q1?

And then Mary, you talked about a lot of initiatives within wellness in particular, I'd love to just hear you talk about what the opportunity is in that category as you start to really play that up in the future.

How about we tag team.

I'll take the newness one and then I'll give Dave the other question, which is great.

I would just say, yes, newness is really obviously continues to be really important to our business and to our guests.

In this quarter, we saw a strong contribution from some categories like prestige skincare, [EOS] and Tula, mass cosmetics, the refill I talked about, those are the exclusives.

We saw strong contribution there, I'd say, somewhat less on prestige cosmetics.

There are some tough comps versus year ago on some of that.

So overall, I'd say, not a significant in terms -- relative to Q4, we had some pretty high profile launches, but still obviously, very important key strategy and we continue to feel good about the continued cadence of newness that's coming.

And on wellness, yes, the broader idea of wellness or clean, we're seeing the positive effect of that really across the entire store.

Most categories are benefiting from a elevated engagement from consumers, elevated awareness.

So we're seeing brands, organic, natural, gluten-free, vegan, cruelty-free, ethically traded all across the board, a number of brands that either have had those attributes for a long time or are newly created brands that are focused on clean or natural wellness beauty are driving a lot of growth.

But in some of the brands that where we see benefiting from that, Tarte certainly has been a leader in that they have launched new brands, much of which are new sub lines, many of which are exclusive to Ulta, that's been driving growth, bareMinerals, Origins, Juice Beauty, Peter Thomas Roth, and a number of new brands.

We launched an endcap in a few hundred doors in Q1 of vegan impact -- endcap that featured a number of brands that are 100% vegan, 100% cruelty-free, and we plan to expand that to more doors throughout the year based on the success.

We have a wellness section in the bath category that's in about 350 doors, that we'll plan to roll out to more doors throughout the year.

Mary highlighted some of the brands that are part of that.

And in our broader communication to our guests through all vehicles, our magazines, our social media, digital efforts, our app highlighting wellness and clean brands and some of the efforts that we're bringing into that space and it's being received very well.

So definitely a strong trend across all categories and one that we see driving growth for some time to come.

Our next question comes from the line of Michael Goldsmith with UBS.

Congratulations, Laurel.

The new store productivity, as we calculated it, it looks like it was a bit lower than what we are accustomed to.

First, is that right?

And if so was there anything unique from a timing perspective for the markets that you entered during the quarter?

And should we think about this in the 70% range going forward instead of maybe the 80% we've seen in the past couple of years?

Yes, I don't know that we could say anything specific on the 70% to 80% range modification, but we didn't really see anything in new store productivity.

I mean it may be a function of a fewer less stores right open in the first quarter this year.

I think it was 22 versus 34 last year.

We look at the comp waterfall.

We look at historical basis of the whole fleet every quarter in detail, something we keep a close eye on.

We didn't really see anything, any material changes overall in the business.

New stores, I think Mary pointed out in her remarks, we're happy with productivity there and how they've come out of the gate so far this year, and so we're still very confident in our 1,500 to 1,700 range in new stores in the U.S. over the long term.

Our next question comes from the line of Adrienne Yih with Wolfe Research.

Nice quarter, and congrats, Laurel.

My first question is for Mary.

Can you talk about the promo environment?

It seems to have abated somewhat, and we haven't seen a lot of these sort of vendor-based promos, so what's the opportunity as the year goes on, to continue to pull back on those promos?

And then Scott, a housekeeping question on the legacy distribution center that's going off-line.

Can you remind us which quarter that occurs and if there is any notable margin impact from that?

Sure.

I'll start with the promotional question, Adrienne.

I would say that certainly the beauty market remains competitive and offering a strong value proposition is always going to be important for us.

So we haven't seen -- I guess, I'd say material increases in competitive promotions, but it as intense as ever, I guess, I'd say, and it's evolving.

We're going to continue to evolve.

Our promotion level for the quarter was pretty consistent year-over-year.

So obviously, we always look for opportunities to sort of optimize how we think about using promotional levers and that's not going to change.

So we prioritize our loyalty and our CRM platform in getting more and more -- able to be more personalized offers obviously that's a kind of Holy Grail.

We continue to test and learn behind the scenes there's a lot happening that is hard to track but testing different circs and values and reminders and durations, so all those in the spirit of optimizing return on that investment.

So I think we've got the right track, the tools to drive traffic and sales and deploy them in a balanced way and will continue to, as we do all the time, keep a very close eye on the competitive environment as well.

Yes, and then specifically on the question, so that was our Phoenix DC and that's behind us now.

That was completed early part of the first quarter of 2019.

And I'll just give you a little color, so we're not quite lapping Fresno opened last year, right, so there is some moderate deleverage in the first quarter for Fresno that kind of moderates here once we lap that in the second quarter.

And so second and third quarter pretty flat, I guess, I would say, overall in supply chain.

And then fourth quarter, a bit of deleverage with -- as we stand up the FCC for Romeoville here and then are deeper into the planning stages for Jacksonville, which is coming early part of next year.

Our next question comes from the line of Steve Forbes with Guggenheim Securities.

I wanted to focus on the refresh program, so maybe if you can, just how many did you complete in the first quarter?

And then bigger picture, can you sort of give us some color and expand on what expressions maybe you're most excited about, right, as you head into the back half of the year here given some of the commentary about prestige cosmetic trends and just the industry in general?

Yes, so I can start on that one.

So the refresh, I think they'll go on throughout the course of the year.

It's really just kind of getting off the mark in the first quarter, Steve, so percentage-wise, I'd say, somewhere in the 10%, 20% range of the total 270 we have planned for the year, was completed in the early part of the year.

So the best is yet to come, so to speak, and impacts from that.

And then overall, the assortment in the store, so again, it's more of those, I guess, we call them, growth brands in the script today, but have historically referred to them as the iconic brands, right?

So again, those will go in stores.

Those will be the biggest newness as part of the refresh program.

And again, those will go in a variety of presentations, right, not the historical boutique square footage allocation that you're familiar with but in a number of endcaps, in line runs and things like that across those 270 stores.

Our next question comes from the line of Steph Wissink with Jefferies.

Thanks, Laurel, for all your help over the years.

And this question is actually for Dave.

Just curious, Dave, as you look at your CRM and maybe some of the business analytics or insights that you're able to glean from that with respect to the decline in prestige cosmetics, are you finding that some of your core customers in that category may be navigating over into prestige skincare and pairing it with some of the initiatives you have had in mass cosmetics?

Is there wallet share kind of shifting across the store?

We'd -- well, I'd answer that in a few ways.

One, we are definitely seeing strong growth across skincare.

Our mass cosmetics business is healthy.

And even with, though -- but even with the struggles that we've had on some of the brands in prestige cosmetics, we're still growing in prestige cosmetics.

That business is still positive comping even though some big brands have been a challenge for us.

So we're still attracting new consumers in that.

In some cases, there are big existing brands that we've launched exclusive lines such as Tarte and Too Faced, new brands that are coming in, attracting new guest, brands like Beauty Bakerie, Kylie and others, so we're definitely still seeing a healthy consumer engagement in prestige.

It just isn't growing at the level that we had seen in the past and that we think it can grow in the future.

But having said that, there's -- we're really pleased with the overall consumer engagements.

One of our best opportunities to continue to gain wallet share to gain spend per member is to get our guest to shop in multiple categories across the store.

It's a big focus for us.

And you mentioned our analytic and CRM capabilities, as we advance our personalization and AI efforts, a big focus for us will be to help our guests migrate into different categories, still keep them engaged in, say, prestige cosmetics, but if they're not shopping in skin or in hair or in bath or fragrance to help them see other parts of the store.

That has been working.

We're having a lot of success with that and that will be a focus for us going forward.

Our next question comes from the line of Simeon Siegel with Nomura Instinet.

Congrats, Laurel.

Wish you only the best in the next chapter, and welcome Kylie.

Mary or Dave, as the gift cards in Kylie grow, are you seeing any notable shopping differences in the customers that are brought in from them versus the others?

And then can you talk to your expectations for the trajectory of just channel an product mix from here with kind of thought to any underlying impact to gross margin with those shifts?

On Kylie, as we discussed, I think, last quarter with the launch, we're again really pleased with that partnership.

Kylie and her team had just been great partners with us from the time -- moment we launched it, and we did see early on and at a sustained strong engagement from our existing guests, but also new guests coming in, in particular younger guests, more diverse guests and so we're really pleased with that, and we would anticipate that continuing.

As we've seen with other new digitally native brands across the store, it's helping us attract new guests and contributing to the new guest growth that we've experienced in Q1, so we'll drive -- we'll continue to drive that part of the business, and we'll see that success coming.

On the margin piece, Scott?

Yes, so a lot of the headwinds or crosswinds that we talked about with channel in category and brand mixes, I mean those are in the first quarter.

We've talked about that historically that we expect those, we anticipated that and that we were still planning through and again, [you got G] this quarter, to be able to mitigate much of that and just running our business smarter, so that's what you see in the gross profit leverage in the first quarter, and we feel good about where we are and plan to see more of that as we move into the future.

Our next question comes from the line of Michael Binetti with Crédit Suisse.

Let me add my congrats to Laurel and welcome, Kylie.

And congrats on a nice quarter.

I just wanted to ask you one nitpicky question as well.

On the gross margins, I think when we talked last quarter you were thinking first quarter would be the weakest gross margin quarter of the year.

It came in above how we were thinking this quarter.

It sounded like though in your earlier comments that it was closer to actually being in line with your plans.

I'm wondering if you sounded directionally like you didn't think it was going to be above that the rest of year.

I'm just wondering if anything has changed on the rest of year outlook for gross margin to flag at all.

Yes, so I guess we'd kind of walking a bit of a tight rope here.

We'll try not to give -- be too specific on guidance by quarter, right, for the rest of the year.

We're trying to move away from that a little bit.

I would say we got better traction on the reflows, so again we're pointing at the EFG and being smarter about the reflows that we rolled out here in the first quarter.

They just -- they took off faster, right, than maybe we would have anticipated, so that's great news.

And again, directionally, as you're thinking about the rest of the year, I mean gross margin leverage directionally should be consistent with what you saw in the first quarter, and actually, we might get a little -- a bit stronger in the second half of the year as more of the EFG initiatives are scaled up across the business.

Okay.

Let me back up and just ask a bigger picture.

Mary, you made some comments, it sounds like maybe there is a bit of a pivot in the prestige boutiques format to some formats without a dedicated payroll, anything you would want to call out there?

Is that -- I don't know if that's just something to be able to push these further into some of the lower volume stores and things like that?

Yes, and -- so we talked about this last quarter as well.

So it's an evolution, I guess, is the way I think about it.

They are brands that have a service component, like Benefit Brows and MAC makeup artistry.

We'll continue to have dedicated labor in most stores.

Other brands, Clinique and Lancôme should be rolling them into all of our stores with various expressions that make sense to the store from -- could be a full boutique as we know it today with labor or could be a gondola run, a wall presentation.

So we're working with our brand partners to really optimize the best way to do that for both us and for them.

Okay.

If I could sneak one more in you've seen, with Canada, I know -- a couple of U.S. retailers have gone off to Canada.

And I think the results have been fairly mixed.

But one thing that's been a tougher thing to figure out is how much they can lean on U.S. infrastructure versus building discrete assets to service Canada.

I know, you don't want to get into the competitive aspects here, but on the back end, do you think there is an opportunity to leverage your U.S. assets?

Or do you need to put discrete assets in Canada?

And maybe any of the case studies that you've looked at, as you think about that market and obvious similarities that you could emulate or some clear misses from strategy you've seen from these closures, didn't have such (inaudible)?

Yes, and today is not the day I'm going to get into details on this, but I can assure you that we've studied this intensely for a long period of time deeply.

And that includes case studies around success and failure.

So I think we're fully aware and trying to take into consideration everything that we know and have learned and take it, like I said in the script, sort of start small but be prepared to scale aggressively if we see success, so I appreciate the comment.

Understand that fully, but all those things are things we'll talk more about as we get further down the pike.

Our next question comes from the line of Mark Altschwager with Robert W. Baird.

Congratulations, Laurel.

Scott, I was hoping you could elaborate a bit more on the progress with efficiency initiatives.

I guess, what are the primary areas where you're seeing savings this year?

Any updated thoughts on how you see those savings building over the planning horizon?

And of the bigger buckets you outlined at the Analyst Day, I think from CPI and direct procurement and others, just any big themes that are emerging this year as you've been ramping up those initiatives?

Yes.

No, I mean we're kind of right on track with where we thought we would be overall, again, kind of rolling back to Analyst Day and we talked about the various buckets, the major pieces being procurement and real estate and around our core merchandising, inventory management practices.

So really, it's the core processes, again, probably not the easiest or the sexiest to talk about and describe to people.

But what we saw in the first quarter, so again, EFG takes many forms and shapes as we think about it across the business.

But in the first quarter, and one that we're really counting on is making smarter merchandising decisions.

So it's executing -- first of all, determining what brands, what the space allocation is, what the profit profiles are on those brands and making sure we're driving good economic outcomes for the business overall, making sure that it's balanced right with other challenges and opportunities we have across the assortment, and then executing that.

So we call -- talk about transitions, making sure we got the teams ready, we got the right labor, we got the right products and marketing and all the other things that go along with that at the right place at the right time and just making sure we're taking out as many inefficiencies out of that process as we can.

So I mean that was the big driver in first quarter.

And all of that kind of activity is something that's a long-term driver for the business because we do a lot of this day in and day out in our business.

Our next question comes from the line of Mike Baker with Deutsche Bank.

Scott, maybe this gets too close to that quarterly guidance that we're trying to get away from.

And if so let me know, but should the same store sales follow that same trajectory of the earnings, i.e., a little bit less growth in the second quarter?

And maybe a second way to ask that, as you said that the second quarter has been tough for you for the reasons that you outlined with the 21 Days Of Beauty, is that sort of an expectation that we should think about for this year second quarter as well?

That's fair observation overall.

Again, we try to give you a little bit of color on the ins and the outs and the deleverage points as we go through the year.

Maybe I can just give a little more color on that, right?

So on the gross margin line besides the great positive outcomes on merchandise margin, we also last year, started doing some clearance activity.

You'll remember that, it started late in the first quarter and ran pretty heavy through the second and third quarters.

And again, we're not expecting to repeat that this year, so that will be helpful.

Fixed door cost leverage, I think, was stronger in the first quarter this year than it was a year ago.

And again, the store sequencing, right, the cadence this year is a little bit different, so just keep that in mind as you're looking at the rest of the year.

It's helpful in the first half of the year, less so in the back half of the year, as we put more stores in line in the third quarter this year.

Salon is kind of a headwind all year, heavier in the first part of the year as we roll out services optimization, but then we expect to get traction, and we're going to drive sales and productivity in the stores in the second half and I think I already described supply chain and how we see that kind of playing out through the rest of the year.

So again, I would just maybe clarify for folks, we're really happy with the gross margin leverage, but a lot of that's driven by investments in the SG&A line, right.

So there is people, there is process, there is tools, there is D&A that goes along with that to help drive productivity improvement in our stores.

But again, over the long term, we expect that to pay for itself, right, and that SG&A deleverage will moderate over time.

Makes sense.

And my part here by saying congratulations, also to Kylie and Laurel.

Our next question comes from the line of Dana Telsey with Telsey Advisory Group.

Congratulations on the results.

Laurel, bravo, what a great career and wonderful success on your next chapter.

I'm sure whatever it will be, it'll -- you'll be terrific at it.

And Kylie, look forward to working with you and welcome to the Ulta team.

Mary, Dave and Scott, as you think about the opportunities on AR and AI and what you're learning there, it seems like there is an increased emphasis on what it's doing to drive sales.

What should we be looking at through the year?

And how do you see that rolling out?

I'll start high level, and I'll open it up to David, if he wants to add more.

But yes, Dana, thank you.

This is one of those things that I would say, it's not going to be like a flip of a switch, where all of a sudden, you'll be able -- we'll be able to sort of feel this dramatic impact.

It's going to build over time.

I'm really excited that we have got a strong start.

And that the acquisitions that we made last year, the team is integrated exceptionally well with our team, digital innovation to drive our top line and other efficiencies will be a key theme really for us, I guess, forever.

I don't think that ever changes.

So I use a few examples on the -- in the script that are ready live now.

And I think a great example is our GLAM LAB, which is live tryout functionality.

It works really well and that's a big improvement to what it was before with the static photo, many examples.

So I guess we -- behind the scenes, we're constantly measuring, testing and measuring and seeing impacts, and we're confident that this is going to continue to drive growth for us.

Is there any other color you want to add to this, Dave?

I'll just add one more example of the type of impact that our advancements in this area can have on the business and that's around our new member onboarding and we're actively testing and experimenting with different programs to take the millions of new guests that we've been acquiring every year and making sure they stay engaged with us.

We have a high retention rate to begin with, but we think it could be higher.

So it's a good example by exploring a lot of different communication techniques, programs, offers to new guests and then leveraging our AI capabilities, we're already seeing positive response in doing that.

And we think over time, it will take a little time, but we'll just get smarter and smarter and smarter through the capabilities that we have.

So as Mary said, it will take time, but it's exciting frontier for us for sure.

Ladies and gentlemen, we have reached the end of our question-and-answer session.

I would like to turn the call back over to Mary Dillon for closing remarks.

I'd just like to close by thanking all of the Ulta Beauty associates for a strong start to the year and delivering solid financial results and operational excellence across the enterprise while everybody's been working very hard to also lay the foundation to realize our many future growth opportunities.

So we look forward to speaking with all of you again soon.

Thank you.

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