Ulta Beauty, Inc.

Greetings and welcome to the Ulta Beauty third quarter 2020 earnings results conference call. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Kylie Rollins, Vice President of Investing Relations. Please proceed.

Thank you, Shamali. Good afternoon, and thank you for joining us today for our discussion of Ulta Beatty's results for the third quarter of fiscal 2020. Hosting today's call are Mary Dillon, Chief Executive Officer, and Scott Setterson, Chief Financial Officer. Dave Kimble, President, will join us for the Q&A session. 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 play undue reliance on these forward-looking statements, which speak only as of today, December 3, 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. In today's comments, we will discuss certain non-GAAP financial measures, including adjusted diluted EPS, which has been presented to reflect our view of our ongoing operations by adjusting for impairment and restructuring-related costs. A reconciliation of these measures to the corresponding GAAP measures can be found in our earnings release, which is available in the investor relations section of our website at www.ulta.com. We'll begin this afternoon with prepared remarks from Mary and Scott. Following our comments, we'll open the call for questions. To allow us to accommodate as many questions as possible during the hour scheduled for this call, we'd ask that you please limit your time to one question and one follow-up question. As always, Patrick and I will be available for any follow-up questions after the call. Now I'll turn the call over to Mary. Mary?

Thank you, Kylie, and good afternoon, everyone. Today we reported financial results that reflect the strength of the Ulta Beauty model and improving trends in consumer demand. I continue to be very proud of how well our teams are responding and navigating through this difficult period. And I want to thank all of our Ulta Beauty associates for their continued agility, creativity, and commitment to serving our guests and taking care of each other during this unprecedented period. For the third quarter, net sales were $1.6 billion, and GAAP diluted EPS was $1.32 per share. Adjusted diluted EPS for the quarter was $1.64 per share. Building on the momentum we saw at the end of the second quarter, third quarter comp store sales declined 8.9%. The mid-single-digit comp declines we experienced in August continued through September, with October sales impacted by our decision not to repeat certain promotional activity from last year. As we discussed on our last earning call, we're working to optimize promotional events to remain competitive while also improving profitability. In the third quarter, we executed several promotional events that drove strong guest engagement and profitable sales. We launched our first ever We Love Our Members event to re-engage and welcome Ultimate Rewards members back to Ulta Beauty, having completed our phase store reopening process. We rewarded guests with member-only points and services offers and amplified the offers across owned, earned, and paid channels to reinforce the value of our rewards program. We successfully executed a more focused 21 Days of Beauty, one of our most strategic events intended to drive mass migration to prestige products. To excite and re-engage guests, we accelerated our digital and streaming-first approach to support expanded messaging for our compelling beauty steals, newness, and exclusive products. We expanded the focus of our fall hall event beyond makeup to include key self-care categories while reducing the length of the event to drive greater productivity. And to further elevate our hair authority through our Gorgeous Hair event, we leverage engaging storytelling around healthy hair, color care, and black-owned brands. Now, turning to our performance by category, we continue to increase our market share across most major prestige beauty categories. Starting with one of our strategic growth categories, skincare delivered positive comp growth, driven by newer brands like The Ordinary, Tula, and Beekman 1802, as well as existing brands like CeraVe, First Aid Beauty, and La Roche-Posay. From our proprietary consumer insights work, we know most beauty enthusiasts are maintaining or expanding their skincare routines as a form of self-care. Increased interest for home skincare treatments, as well as newness and innovation in body treatments, face serums, and eye creams are driving strong category growth. Leaning into these trends and the opportunity to increase our market share in this category We continue to expand our assortment while also increasing space and marketing support for this key growth category. Fragrance and Bath was our strongest category this quarter, delivering double-digit comp growth driven by newness, exclusives, and unique Ulta Beauty programs. Guests responded well to our Fragrance Gift with Purchase programs as well as our Fragrance Crush program, which highlights a favorite fragrance each month. Sales of fragrance also benefited from our exclusive launch of REM from Ariana Grande and innovation from established brands like YSL and Marc Jacobs. The bath category continues to deliver strong growth, and this quarter we introduced newness from brands like Truly, Hemp's, Ulta Beauty Collection, and Tree Hut. Reflecting ongoing DIY beauty and self-care trends, Haircare and hairstyling tools also delivered positive comp sales growth this quarter. Within haircare, color continued to deliver strong growth, driven by brands like Arctic Fox and Madison Reed. Textured hair brands Curlsmith and Pattern by Tracy Ellis Ross also delivered nice growth. Our leader business also continued to perform well, and newness from Dyson and the continued popularity of one-step tools drove strong growth in styling tools this quarter, as guests leverage more options to achieve different looks. Makeup continued to be challenged, given shifts in consumer behavior and delays in planned newness and innovation. Despite these headwinds, subcategories that focus above the mask continue to perform better, including lashes, brow, and eye. Newness, while more limited than last year, continues to be important to guests, with nostalgic themes like Ulta Beauty Harry Potter collection, Makeup Revolution's Nightmare Before Christmas, and ColourPop's Hocus Pocus collection, all resonating really well with guests. Although the pandemic has accelerated channel shifts, our consumer insights and results continue to confirm that our members prefer to shop in physical stores for beauty, even as they have increased their adoption of online shopping. As expected, with stores open for the full quarter, store traffic trends improved, and e-commerce growth moderated from trends we saw in the first half of the year. For the quarter, our e-commerce business delivered sales growth of about 90%, and buy online, pick up in store was strong again this quarter. Turning now to services, our services business continues to be adversely impacted by COVID-related capacity constraints and local restrictions. At the end of the third quarter, salon and browse services were available in nearly all stores, but we've not resumed skin or makeup services based on ongoing safety concerns. Although trends improved from the second quarter, sales from our services business were down more than 30% in the third quarter, primarily due to a decline in transactions. Average ticket was higher, reflecting pent-up demand for cut, color, and style services. At the end of the quarter, we had 31.7 million active members in our Ultimate Rewards program, essentially flat with the second quarter and about 6% lower than the third quarter last year. While we're pleased with our new member acquisition and re-engagement trends this quarter, we will continue to focus on reactivation of members who haven't shopped with us since the pandemic began. Now, importantly, retention rates among our Platinum and Diamond members who are most engaged with our brand remain very strong. We continue to see an increase in members shopping with us online. As we discussed before, omnichannel members are our most engaged and most productive members, historically spending three times more per year than store-only guests. In the third quarter, omnichannel members were about 22% of the total, compared to about 12% in the third quarter last year. As our teams continue to manage the day-to-day operations in the current environment, we're also building the foundation for profitable growth in 2021 and beyond. Specifically, we're focused on five strategic priorities to expand our market share gains and extend our competitive advantages. And during the third quarter, we made progress on each of these priorities, starting with our continued focus on building the capabilities to win in an omnichannel world. We are committed to meeting guests wherever they want to shop. In April, in response to COVID-related constraints, our digital and store teams moved quickly to launch a new curbside pickup option. To make it easier for our guests and our store teams, we've recently enhanced this option with the launch of a curbside customer alert notification. We've refreshed curbside signage and established dedicated Ulta Beauty parking spaces at select stores. We've also expanded our store locator functionality to include greater visibility to store-specific service offerings and separate store and curbside hours. And in the Ulta Beauty app, we now provide store-specific occupancy levels for greater transparency and guest safety. To support our growing e-commerce business, this quarter we opened our Jacksonville Fast Fulfillment Center, expanded e-commerce operations in our Chambersburg, Greenwood, and Dallas distribution centers, and expanded our Ship from Store program to 105 stores. These investments have increased our e-commerce shipping capacity and will improve delivery speed to guests. This quarter we also completed the rollout of our new booking tool for services in the app and on ulta.com. This new digital application enables guests to easily book or reschedule salon, brow, and other service appointments. Adoption of the tool continues to increase and nearly a third of our service appointments were booked through this new tool in the most recent quarter, resulting in more convenience for our guests and more efficiency for our associates. Our second priority is to reimagine how guests experience and discover beauty in the new normal. Product discovery is a hallmark of the beauty shopping experience, and we're welcoming more guests to experience the fund of Glam Lab, our virtual try-on tool. Our store associates have done a great job introducing Glam Lab to guests as a safe alternative to testers in stores, which are currently for display purposes only. To help facilitate even more in-store engagement, we've introduced new QR codes on select shelf strips that take us directly into the Glam Lab experience, making it even easier for guests to virtually try on products while they're in stores. Building on our successful virtual try-on capabilities, last quarter we introduced a skin analysis tool, which uses augmented reality technology and artificial intelligence to assess skin care needs and offer personalized product recommendations. This quarter, we enhanced this tool to include new routine recommendations and the ability for guests to save analyses to track changes. In addition to offering guest digital tools, we're also testing one-on-one video consultations across all beauty categories in collaboration with our brand partners and our own services team members. Our third priority is to engage and delight beauty enthusiasts with a curated beauty assortment focused on exclusivity and leading brands. Reflecting the growing importance of clean beauty, in October, we launched Conscious Beauty at Ulta Beauty at all stores and on Ulta.com and on our app, and the enthusiasm and feedback from our guests and brand partners has been tremendous. This holistic initiative provides greater transparency to help guests choose brands and products that reflect their personal values and individual needs. Through this initiative, we're certifying brands across four key pillars, clean ingredients, cruelty-free products, vegan and sustainable packaging, and highlighting participating brands for their positive impact on communities. And today more than 200 brands are participating in the program, and more than half have been certified in more than one pillar. As part of the launch, we established the Conscious Beauty Advisory Council, a coalition of experts at the forefront of clean beauty, product development, and packaging sustainability. With the help of our advisory council, we will ensure that Conscious Beauty at Ulta Beauty will continue to evolve and grow as expectations and standards for clean beauty continue to change. In tandem with the launch of Conscious Beauty, we collaborated with Credo Beauty, a pioneer in clean, to introduce the Credo Collection at Ulta Beauty, a curated collection of prestige and mass-siege brands. Available in select stores and at Ulta.com, this collection features nine clean brands handpicked by the Credo experts across multiple categories, including skin care, hair care, and cosmetics. Our fourth priority is to leverage insights from our Ultimate Rewards program to cultivate brand love and loyalty, deepen guest engagement, and increase spend per member. We continue to build content that reflects our brand purpose and drives meaningful connection with our guests. After suspending most of our marketing efforts in the first half of the year while stores were closed, This quarter we launched Where Dreams Begin, a campaign that reflects the next chapter of our brand journey. Launched across linear television and digital streaming platforms, the work reinforces our brand purpose and celebrates optimism, togetherness, self-care, and self-expression in a world increasingly challenged by uncertainty and division. We continue to enhance our ability to create personalized offers and recommendations and based on a holistic, data-led understanding of guest preferences and behaviors. This quarter, we increased our use of propensity modeling to help reactivate members, and we continue to strengthen our ability to optimize offers in email and online, enabling us to maximize the return on select promotions. Our fifth and final strategic priority is to drive holistic cost optimization. We continue to work to create a more cost-efficient stored labor model. As we discussed on the last earnings call, we made the difficult decision to eliminate two store leadership roles, the salon manager and the prestige manager, and created a new service manager role responsible for services, events, and prestige retail. Effective November 1st, this new structure creates a stronger linkage between services and products. This quarter, we also made another difficult decision to suspend our expansion to Canada. This was not an easy decision to make and in no way reflects a lack of confidence in the international growth opportunity for Ulta Beauty. Our teams worked diligently to position us for a successful entry into Canada next year, and I'm proud of what they accomplished in such a short period of time. However, after much consideration, we determined that prioritizing our efforts to strengthen and grow our U.S. operations must be our top priority in the current operating environment. So these are just a few of the examples we've taken to adjust our model to reflect the challenges and opportunities we see today. We've also maintained significant limitations on corporate hiring and controllable expenses, and we continue to look across the enterprise for additional ways we can optimize our cost structure while also investing in new capabilities to support future growth. We've made a lot of progress in pursuit of our strategic priorities, which positions us to drive continued market share growth in the fourth quarter and beyond. Certainly 2020 has been a year like no other, and it's difficult to predict exactly what the holiday season will bring this year. With shop-safe standards in all stores and enhanced digital shopping options, our teams are ready to meet our guests wherever and however they want to shop with us this holiday season. We're encouraged by the sales trends we've seen so far in the quarter. but uncertainty remains as we navigate ongoing disruption from a resurgence in the virus and continued economic uncertainty. As we execute through this holiday season, our top priorities are to re-engage existing members and capture new guests with relevant content, compelling offers, and unique products, and also to deliver engaging omnichannel experiences. Ulta Beauty is well positioned for this gift-giving season as consumers seek moments of joy, connection, and self-care. Our holiday campaign is focused on helping guests see the joy this holiday season, leveraging influencers from our Ulta Beauty Collective. We're sharing ways to practice self-care. We're celebrating community and relationships with gifting ideas, and we're highlighting the magic and generosity of the season. We kicked off the holiday season at the beginning of November with a distribution of our holiday print magazine, a reimagining of our holiday offers, and multiple member appreciation events. Building on newness and exclusives introduced earlier this year, we've launched several new brands just in time for holiday season. In skincare, we're excited to launch Alicia Keys new brand, Keys Soul Care, exclusively at Ulta Beauty, with a limited selection of products for the holiday season. The full assortment will be available in early 2021. In makeup, we're excited to welcome Hourglass, a cruelty-free luxury beauty brand that to the Ulta Beauty family. And while we offer Chanel fragrances in stores, we're excited to announce we've recently launched Chanel fragrances on Ulta.com for holiday gifting and beyond. To help our guests give the best gifts this year, we have introduced a new digital gift guide, including a three-step quiz to inspire and help find the perfect gift. And for those who prefer to give gift cards, we've expanded our designs to include more inclusive options, And we've expanded our distribution in third-party outlets as well for added guest convenience. In anticipation that more guests will utilize digital channels this season, we've made curbside and BOPUS pickup easier than ever. These enhancements, combined with the investments we've made to increase our ship-to-home capacity, position us well to deliver a great omnichannel experience this holiday season. The operating environment continues to be dynamic and challenging. As COVID-19 prevalence increases, so are market-specific government restrictions resulting in some reductions in operating hours, limitations on in-store capacity, and in some cases, mandated store closures. Our priority is to ensure the safety and well-being of our associates, guests, and brand partners, and we'll continue to monitor the situation closely and adjust our operations as needed. Now, before I turn the call over to Scott, I want to highlight the exciting new partnership I'm sure you've all read about. In 2021, Ulta Beauty will partner with another powerhouse retailer, Target Corporation, to disrupt the retail industry and redefine how guests experience beauty. Next fall, we'll introduce Ulta Beauty at Target, a shop and shop experience online and in select Target locations. With 1,000 square feet of space, Ulta Beauty at Target will offer a curated assortment of established, emerging, and prestige brands across multiple categories. Our vision is to create an extension of our welcoming Ulta Beauty experience with dedicated Target team members trained to provide elevated service and offer deep product expertise with a dedicated space that inspires trial and discovery. Leaning into the power of our respective loyalty programs, we intend to reward guests with benefits across both programs for all purchases made within the shop. Leveraging a royalty structure, this unique collaboration brings together Ultra Beauty's category authority and brand relationships with Target's traffic-driving business model and industry-leading fulfillment services. Together, we will deliver industry-leading guest experiences across multiple touchpoints, provide the prestige beauty category and participating brands with an unparalleled platform for growth, drive market disruption, and capture more market share. For Ulta Beauty, this partnership will build on our strength as the nation's largest beauty retailer, bring our beauty authority to life in a new way, and create additional touch points for millions of loyal and new guests to discover and engage with Ulta Beauty, ultimately leading to more members as well as greater spend per member. Expanding our omnichannel capabilities to more deeply connect with guests is a strategic priority for us. We believe this new channel will create more opportunity to drive demand for the full beauty experience for discovery, services, and play available in all Ulta Beauty stores. Importantly, we'll be able to leverage our robust CRM capabilities to engage guests who shop Ulta Beauty at Target with targeted personalized communications to highlight and enhance their total Ulta Beauty experience. In closing, we know guests are changing how they shop for beauty, but their engagement with the category remains strong. In fact, the role of beauty is more important now than ever. In this new normal, beauty has become more than makeup, more than product. Today, beauty is a critical link to acts of self-care and wellness. And as a well-loved brand with a diverse assortment and a wide range of price points, outstanding service offerings, and knowledgeable and passionate associates, Ulta Beauty is well positioned to lead and shape how guests experience beauty in this new normal. And now I'll turn the call over to Scott for discussion of the financial results. Scott?