Mary Dillon - Chief Executive Officer
Thank you, Laurel, and good afternoon, everyone. The Ulta Beauty team delivered strong performance in the second quarter, reflecting rapid growth in prestige boutique brands, mass cosmetics, skin care and fragrance, offset by continued moderation in the growth rate of a few of our large color cosmetics brands.
Our flexible business model continues to support healthy retail comps, excellent new store productivity, and high-growth for Ulta.com, resulting in significant market share gains across categories.
To recap our financial performance, total sales grew 15.4%. We drove 6.5% comp sales growth on top of a 11.7% comp in the second quarter of 2017 with balanced traffic and ticket growth overall. Diluted earnings per share grew 34.4%.
We continued to deliver our results by executing on our strategic imperatives. I’ll give you a progress report in each one starting with their efforts to drive loyalty and differentiate our brand.
We grew our Ultamate Rewards loyalty program to 29.5 million active members at the end of the second quarter, representing a 15.5% year-over-year increase. As we’ve seen over the past few quarters, we expect the absolute growth in members to continue to moderate, but still exceed square footage growth.
Going forward, we expect to increase average sales per member to complement member growth. These gains will come from multiple sources, including the maturation of loyalty members, who buy more over time, the addition of new brands, the benefits of our Platinum and Diamond Tiers to increase share of wallet, higher penetration of our credit card program and greater personalization of our communications and offers to our guests.
This combination is expected to drive continued healthy revenue growth. Our guests continue to respond to the powerful combination of our loyalty, credit card and gift card programs. In the second quarter, we saw continued momentum with both Platinum and Diamond members of our Ultamate Rewards loyalty program, where we continue to innovate with the new tier enhanced rewards and increased personalization.
Our Ultamate Rewards credit card program continues to exceed our expectations, driven by great execution from our store teams and ongoing marketing efforts. Sales of gift cards grew more than 40% driven by expanding distribution in other retailers this year, as well as strong growth in our stores.
We’re maintaining the very high levels of brand awareness we obtained earlier this year through our marketing efforts around events and promotions, including Mother’s Day, our Gorgeous Hair events, our sale on jumbo-sized hair care products, as well as our programs targeting distinct guest segments, such as Latina, millennials and teenagers.
We continue to grow awareness of Ulta Beauty as the beauty destination and authority in many ways: Digital partnerships, which utilize influencers, social media and high-impact display placement. And these include POPSUGAR, Refinery29, and Bustle, as well as new Hispanic media partnerships with Mobvious, HCODE, Hola and CaféMedia. We also continue to invest in network radio and streaming audio, with Spotify and Pandora.
We’ll continue to drive awareness and further depth to differentiate the Ulta Beauty brand as we evolve our positioning in deepening the emotional connection we have with our guests, beginning with an inspiring new television advertising campaign launching next week in which we’ll bring to life our new brand statement, “The Possibilities are Beautiful.”
We’ll share more of this topic at our upcoming Analyst Day, but this new positioning which will be infused through all of our marketing communications and partnerships will unveil a new chapter for our brand celebrating the emotional and inclusive power of possibilities at Ulta Beauty.
Turning now to an overview of how we are continuing to differentiate our merchandise assortment. We continue to gain significant market share in prestige beauty as evidenced by NPD data from February through July this year. U.S. prestige beauty sales for the industry were up 6.4% and we grew more than 2.5 times as fast. Ulta Beauty has gained 210 basis points of share in prestige beauty so far this year and now represents almost 23% of the prestige beauty market as tracked by NPD.
Our share gains year-to-date was the strongest in the makeup category, up 360 basis points as Ulta Beauty grew prestige cosmetics in the mid-teens, compared to the total market growth of 1%. More broadly during the second quarter, we benefited from strength in mass cosmetics, prestige skincare, fragrance, prestige boutique brands, and sun care. Each of these categories drove healthy double-digit comps with particular strength in fragrance and boutique brands. These gains were offset by continued softness across a few large brands of prestige cosmetics.
We’re seeing excellent growth in the expansion of brands that are not present in all doors, such as NARS, MAC, Clinique, Lancôme, Estee Lauder, Morphe, and Chanel Beauté. And we anticipate that these rollouts will be an even bigger benefit in the second-half of the year.
We’re also encouraged by the amount of newness in the pipeline ahead, both new brands and new products from existing brands. We’re delighted to announce the addition of Kiehl’s Since 1851, the prestige skincare brand known for naturally-derived ingredients inspired by their apothecary roots. This brand will launch in a small number of doors in the second-half of the year and will be part of the Ulta Beauty express skin bar offering in these doors. The brand will then launch online in early January.
We plan to roll out Kiehl’s in a more significant number of stores starting early next year. The product lineup will include Kiehl’s skincare, body and men’s products. On the mass cosmetics side, we’re excited about the addition of Juvia’s Place. This digitally-native brand was founded just a couple of years ago by a Nigerian-born woman inspired by the beauty of African queens. The line offers rich, vibrant, highly pigmented, and affordable collection of colorful eyeshadows, as well as its makeup tools and beauty essentials.
Juvia’s Place recently launched online and will set in 500 stores later this year. Headwinds like Kiehl’s and Juvia’s Place to name just those two, reflect Ulta Beauty’s status as a partner of choice for a wide range of brands from digitally native, vertically integrated brands to large, iconic brands.
In terms of new items from existing brands much more newness is on tap for the second half of the year giving us confidence for an improved comp trend. In many cases, these brand expansions or new product launches are exclusive to Ulta Beauty, or we have an early lead on must-have products that the beauty enthusiasts want to be the first to own.
The Tutti Frutti collection from Too Faced is expected to be a big hit with our guests. This is a fruit scented assortment of lip, eye, cheek and highlighter products with mega influencer Kandee Johnson, partnering with Too Faced as the face of the collection. Launched online in mid-August and set in stores just this week, this collection is only available at Ulta Beauty and toofaced.com.
Recently launched digitally-native brand, Morphe will be expanding to ten feet in all doors in just a few weeks, as a new Vault four-palette collection with influencer Jaclyn Hill had a very strong launch just a couple weeks ago. We’re the only brick-and-mortar outlet for this brand.
NYX just launched exclusively with Ulta Beauty their Can’t Stop Won’t Stop long-wear foundation with a broad shade range. Other recent major product launches include equally anticipated items like the Norvina palette from Anastasia; the newest NARS mascara, where in both cases Ulta Beauty had an early lead for the launch.
Other new products include Clinique’s Dramatically Different Hydrating Jelly; Tarte Creaseless Concealer; Urban Decay Aphrodisiac Palette; Dose of Colors limited edition collaboration with influencer iluvsarahii; Benefit Brow Contour pen; and Clinique My Happy Splashes fragrances designed for layering.
Now the last thing I want to mention is some breaking news. We are thrilled to confirm our exclusive partnership with Kylie Cosmetics, which will be launching in all stores and online later this year. Kylie Jenner is a highly influential force in the beauty industry. This brand addition is yet another example of successful, digitally-native brands valuing a brick-and-mortar partnership with Ulta Beauty to extend their reach with consumers. We’ll share more details about this launch at a later date.
Now moving on to our services business. Salon sales increased 8.8% and comp sales rose 1.7% due to growth in average ticket. Skin services were a top performer helped by strength in microzone services. The express skin bar continues to roll out in new stores with about 40 stores now offering this new model.
These stores are already showing increases in prestige skincare sales compared to the prior model. This program offers our guests quick services on the sales floor with licensed skincare experts focused on helping guests choose a skin care regimen that addresses her concerns.
Select locations will begin offering facial services from Murad, Kate Somerville and Kiehl’s in addition to Dermalogica, our longstanding skincare partner across the chain. We’re on track to roll out 180 express skin bars by year-end and 50 of these will offer multi-brand skin services.
During the quarter, we completed training in California in preparation for their conversion to our new services optimization program, a model that improves and simplifies the guest and associated experiences with changes to pricing, training, and compensation.
Our new stores in Hawaii opened with this program joining the central region, as well as the DC and Denver districts, which were launched in the first quarter. Early results indicate higher guest retention and our stylists have received the new program very favorably. We plan to introduce this model to additional regions in 2019.
We continue to focus on gaining awareness within the salon industry. We participated in Premiere Orlando, attended by over 57,000 beauty professionals and we hosted the first-ever Ulta Beauty show at the North American Hair Stylists Awards in Las Vegas. NAHA represents the most prestigious hair industry awards in North America, viewed by over 200,000 people and garnering 5 million impressions.
Last quarter, we mentioned that the Ulta Beauty pro hair team had received nine nominations across multiple hair categories, and we’re pleased to update you that one of our team members took home the award for Hair Stylist of the Year. Events like these establish Ulta Beauty as a great place to work for stylists and help us to continue to attract top quality talent.
And now turning to real estate. We opened 19 stores in the second quarter, compared to 20 last year and closed two, ending the quarter with 1,124 stores. Our growth and development team has done a great job getting stores opened earlier in the year with 53 stores opened in the first-half compared to 38 last year.
We opened our first store in Hawaii on Maui in the second quarter and have opened another Hawaii store early in the third quarter, with plans to open two more on Oahu during Q3. Our Hawaii stores are off to an excellent start. We’ll also be entering Vermont later this year to reach the milestone of opening of operating stores in all 50 states.
New store productivity continues to be very strong. We continue to study new store productivity and observe cannibalization to be stable and well within our expectations. So we feel very comfortable with our network strategy in reaching our target of 1,400 to 1,700 stores in the U.S. over the next several years.
And now turning to an update on Ulta.com. E-commerce sales grew 37.9% and represented 9% of total company sales. This moderation relative to the first quarter was expected as we’re comping over 72% growth last year when we benefited from the MAC launch and high-growth from several online-only brands.
Ulta.com contributed 250 basis points of the total company comp, driven by transaction growth. Total traffic rose close to 40%, with mobile traffic up 50%. We continue to drive significant growth with online-only brands and online-only promotions.
Our store-to-door program that allows guests to order online in our stores and have products shipped to their homes continues to exceed expectations, particularly with brands that aren’t available in every door, such as ColourPop, MAC, and several digitally-native brands that are in high-demand, but in limited distribution.
Ulta.com recently launched a foundation finder. We’re continuing to see success from enhanced content programs like our monthly fragrance crush and we just launched a new program focusing on a key skincare trend each month called Skinfatuation. We’re also testing personalization initiatives in several areas.
Omni-channel customers now represent 10% of loyalty members and the shopping behavior of these guests continues to reinforce our view that e-commerce sales are largely incremental. The guest shopping on Ulta.com continues to shop more frequently in stores than retail-only customers. This guest is our most engaged loyalty member, demonstrating interest in new brands and products and a low incidence of replenishing exact items.
And finally, I’ll update you on our supply chain operations. Ulta Beauty supply chain operations continued to mature in the first-half of 2018, supported by investments in capabilities that support growth, deliver a great guest experience and enable network efficiencies.
Our in-stock position throughout the second quarter was consistently strong, particularly for our top selling items. We effectively manage our inventory position throughout the quarter with our inventory per store well below comp growth and inventory turn slightly ahead of our goal.
We’ve made several improvements for a logistics network over the last several months to better serve our retail and e-commerce customers. And so far the results have led to improved performance and reduced costs across both channels.
We also recently implemented an order management system that enables future omni-channel capabilities such as buy online, pickup in store. Our newest distribution center in Fresno, California went live in July, serving both e-commerce and retail operations. This DC is planned to ramp quickly with a more aggressive first-year build than Greenwood and Dallas.
Fresno is currently serving nearly 100 stores and about 20% of our e-com volume. In the fall, Fresno will ramp to about 170 stores and maintain it’s share of Ulta.com sales. And after the holiday season, Fresno will ramp to serve you more than 200 stores and more than 20% of our e-commerce sales.
Overall, we’re pleased with the strong performance of our supply chain operations in-stocks and decreases in inventory per door. This year, we’ve implemented improved processes for the large number of inventory transitions we execute as a result of our growing access to new brands and products.
At the end of the quarter, we ran a special clearance event with extra discounts and inventory resulting from the major plan where reset we executed recently. The event was designed to sell-through inventory no longer on a store’s planogram and cleanup our back room, setting us up for a great 21 Days of Beauty and strong holiday season and is proceeding on plan.
Now before I turn it over to Scott, I’d like to give you a preview of our upcoming Investor and Analyst Conference. Scheduled for November 8, near Chicago, this will be our third Biennial Investor Conference. In similar and prior events, it’s an opportunity to get to know the management team, learn about our latest thinking on our market share gain opportunities, our consumer targets, our brand positioning, get an update on our loyalty program and share wallet potential, hear about the outlook for newness across our merchandise portfolio, learn more about the salon services optimization program, see how we’re investing in technology and innovation to enhance the guest experience, get a refresher on our supply chain capabilities, learn more about our efficiencies for growth program, and get a current view on our capital allocation. So lot’s to cover and we hope you’ll join us in November.
And with that, I’ll hand it over to Scott to talk in more detail about our second quarter results and share outlook for the second-half.
Ulta Beauty, Inc. (ULTA) CEO Mary Dillon on Q2 2018 Results - Earnings Call Transcript | Seeking Alpha
