Ulta Beauty, Inc.

Good afternoon and welcome to Ulta Beauty's conference call to discuss results for the fourth quarter of fiscal year 2021. At this time, all participants are in a listen-only mode. A brief question and answer session will follow the formal presentation. We ask that you please limit yourself to one question and then re-enter the queue for any additional questions. 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 Ms. Kylie Rollins, Vice President of Investor Relations. Ms. Rollins, please proceed.

Thank you, Hector. And good afternoon, everyone, and thank you for joining us today. Hosting our call today are Dave Kimball, Chief Executive Officer, and Scott Setterson, Chief Financial Officer. Keisha Steelman, Chief Operating Officer, will join us for the Q&A session. This afternoon, we announced our financial results for the fourth quarter and full year of fiscal 2021. A copy of the press release is available in the investor relations section of our website. Before we begin, I'd like to remind you of the company's safe harbor language. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC. We caution you not to place undue reliance on these forward-looking statements, which speak only as of today, March 10, 2022. 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'll discuss certain non-GAAP financial measures, including adjusted operating income and adjusted diluted EPS for the fourth quarter of fiscal 2020. A reconciliation of these measures to the corresponding GAAP measures can be found in our press release. We'll begin with some prepared remarks from Dave and Scott. And following our comments, we'll open up the call for questions. Today our remarks will be a little longer than usual. 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. If you have a follow-up question, please re-queue. And as always, the IR team will be available for any follow-up questions after the call. Now I'd like to turn the call over to Dave. Dave?

Thank you, Kylie. And good afternoon, everyone. Before discussing our results, I want to share how proud I am of our associates' performance throughout 2021. While consistently providing care and service to our guests and to each other, they successfully navigated pandemic-related challenges and delivered exceptional results for all of our stakeholders. In fiscal 2021, the beauty category recovered earlier and faster than we expected, and our teams adjusted quickly in many ways, including working with our brand partners to accelerate receipts and manage in-stocks, creating highly relevant content that reflected the rapidly evolving mindset of our guests, adjusting staffing levels across the organization to meet growing demand, and protecting and strengthening our culture, leading with their hearts and working together to create new ways to delight and excite guests, all while continuing to execute against our strategic priorities and drive our business forward. Now moving to our results for the quarter. The Ulta Beauty team delivered record fourth quarter financial results despite COVID and winter weather disruptions. Net sales increased 24.1% to $2.7 billion. Operating profit increased to 13.8% of sales and diluted EPS increased to $5.41 per share for the quarter. The decisions our teams made and the plans they executed with excellence around assortment strategies, inventory flow, marketing, and staffing levels positioned us to take advantage of a positive consumer environment this holiday season and deliver strong results. I want to express my sincere appreciation to all Ulta Beauty associates, particularly in our stores and distribution centers, who show up every day positive and optimistic, ready to serve our guests while facing personal challenges posed by the ongoing pandemic. Their dedication enabled us to deliver these outstanding results, and I am grateful for their flexibility as circumstances shifted. We kicked off the holiday season in early November with our multi-channel Celebrate More campaign. Our audience-tailored, creative, and contextually relevant storytelling, connected with consumers in fresh and bold ways across platforms, and we continued to expand live streaming and social selling experiences. We enhanced our member love events, rewarding members with new loyalty offers to drive engagement, reactivation, and retention, and we leveraged our CRM capabilities to further enhance the productivity of our promotions. We also enhanced our gift card program, including more innovative and inclusive designs and new multi-pack options, which helped deliver strong double-digit growth in gift card sales across stores and third-party channels. Our decision to proactively manage inventory flow resulted in strong sell-through of holiday merchandise and core product, and our teams transitioned quickly after Christmas to support our strategic Jumbo Love and Love Your Skin events, as well as significant brand launches. In January, we executed four exciting new brand launches at Ulta Beauty, Olaplex, Numero Un de Chanel, Supergoop, and Billie Eilish. As the number one prestige hair care brand in the market, Olaplex offers patented bond-building products and is changing how consumers engage with the hair care category. While our initial assortment included only seven SKUs, it was one of the strongest brand launches in Ulta Beauty history. With the unique ability to offer guests the professional service in our salons and the retail products to take home, we are delighted to expand our partnership with Olaplex. In makeup, we are excited to partner with Chanel Beauté as the exclusive U.S. retailer for the historic launch of Numéro 1 de Chanel. Offering luxury to younger generations, this new line is sustainably sourced with clean ingredients and sustainable packaging. With an assortment spanning skincare, makeup, and fragrance, Numero 1 de Chanel is currently available in 250 Ulta Beauty stores and on Ulta.com. This launch is a key element of our luxury beauty strategy, and we're very pleased with the initial results. In skincare, we launched Supergoop, known for its sunscreen expertise. Supergoop is made with clean, reef-friendly ingredients, is cruelty-free, and leverages sustainable packaging. And in fragrance, we launched a new offering exclusive to Ulta Beauty from acclaimed recording artist Billie Eilish. Taking a closer look at sales trends in the quarter, guests were excited to return to in-store holiday shopping. Even as stores delivered robust double-digit comp growth, e-commerce sales exceeded our expectations. increasing slightly on top of last year's 70% growth. This reinforces to us that e-commerce is complementary and incremental to the physical shopping experience. Guests continue to increase their utilization of buy online, pick up in store, while also engaging with our new same-day delivery option. During the quarter, Bopas sales increased 20% to account for 17% of e-commerce sales compared to 15% in the fourth quarter last year. While only available in about 200 stores, we are pleased with the performance of our new same-day delivery options. From a category perspective, all major categories delivered double-digit comp growth compared to the fourth quarter of fiscal 2020, driven by cycling last year's disruption from COVID, strong execution of our holiday plans, and product newness. Compared to the fourth quarter of 2019, fragrance, bath, hair care, and skin care all continued to deliver strong double-digit growth. Makeup was more challenged this quarter, with trends decelerating from the third quarter across both prestige and mass makeup, although sales of mass makeup continued to be positive compared to 2019. Over the last year, as the beauty category has recovered, the performance of makeup has been more volatile and lagged other categories, in part reflecting higher sensitivity to COVID fluctuations. We remain confident that makeup will return to growth as consumer optimism and comfort with out-of-home activities increases, but we recognize the timing and rate of recovery will continue to be impacted by changes in the COVID environment. Looking specifically at the fourth quarter trends in makeup, face, lip, and eye continue to deliver strong growth driven by blush, tinted moisturizer, lip balm, and lashes. Newness from Elf, Kiss, and Ardell continued to excite and engage guests, while prestige brands like MAC, Clinique, and Lancome also delivered positive growth. In addition, this quarter we expanded Chanel Beauté into 50 additional stores and launched the full assortment on Ulta.com. Haircare delivered double-digit growth, increasing to 20% of net sales. Consumer focus on hair health drove strong growth in treatments, shampoo and conditioner, and tools like the Dyson Airwrap were hot holiday gifts this year. New brands like Olaplex, Kristen Ess, and Briogeo, as well as guest favorites like Redken and Living Proof, delivered nice growth during the quarter. The fragrance and bath category was again the best performing major category during the quarter, delivering robust double digit comp growth and increasing to 18% of net sales. Compelling newness from luxury brands like Gucci, Dior, and Carolina Herrera, as well as exclusive newness from Ariana Grande and Billie Eilish, contributed to the strong growth. In addition, our holiday fragrance programs and our monthly fragrance crush program performed very well. Finally, skincare delivered another quarter of double-digit sales growth. Beauty enthusiasts are maintaining their skincare regimens as they continue to focus on self-care. Category growth in the quarter was primarily driven by moisturizers, cleansers, and sun care. Newness continued to appeal to guests as new brands including Drunk Elephant, Good Molecules, Fresh, and Black Girl Sunscreen, as well as new products from Tula, drove strong growth during the quarter. In addition, dermatology-based brands like Cerve and La Roche-Posay continued to resonate with guests. The performance of our services business accelerated in the quarter, increasing more than 30% over last year, driven primarily by growth in transactions. During the quarter, we expanded salon capacity to 100% in all Ulta Beauty salons and benefit brow bars, except we're limited by state or local mandates. And we relaunched skin services in 130 stores. In addition, our recently launched salon services, Express Color and Olaplex Repair and Protect, continue to bring in new members to our salons, an encouraging trend as we know members who use our services are some of our most valuable and engaged guests. Reflecting this momentum, during the quarter, we hired approximately 1,000 new associates to support our expanding services business. Now, turning to our results for the full year. The Ulta Beauty team delivered record sales of $8.6 billion, recorded operating margin of 15% of sales, and record diluted EPS of $17.98 per share. Comparable sales increased 37.9% compared to fiscal 2020 and 12.6% compared to fiscal 2019. We expanded our market share in Prestige Beauty based on dollar sales for the 52 weeks ended January 29, 2022, compared to the same period last year based on point-of-sale data from the MPD group. We continued to fuel guests' desires for newness with relevant brand launches such as Drunk Elephant, Bobby Brown, Olaplex, Kristen Ess, and VIRB. We expanded our Conscious Beauty platform to 270 certified brands. launched SKU-level certification for the clean ingredients and vegan pillars, and expanded our Made Without list. We doubled the number of Black-owned brands in our assortment, welcoming Black Girl Sunscreen, Camille Rose, Homebody, and Black Opal, among others, to the Ulta Beauty family, and introduced dedicated space for IPOC-founded brands in 260 stores. We launched the Wellness Shop, a cross-category platform that offers guests self-care for the mind, body, and spirit on Ulta.com and in more than 450 stores. We opened 44 net new stores, relocated seven stores, remodeled nine stores, and negotiated more than 150 lease renewals. We continued to drive higher purpose utilization with new guest incentives, increased marketing to drive awareness and operational improvements, and to the guest and associate experience. As a result, Bopas sales increased to 18% of e-commerce sales, compared to 14% in fiscal 2020. Between Bopas and our ship-from-store capabilities, about 28% of our digital orders this year were fulfilled by stores. We launched our exciting new partnership with Target Corporation and opened 100 Ulta Beauty at Target locations. I'll share more on this later. We drove member growth through new acquisition, member re-engagement, and targeted retention efforts, increasing the number of Ultimate Rewards members to a record 37 million members. We grew aided awareness to 94% and maintained unaided awareness at 48%. Importantly, we significantly increased Ulta Beauty consideration with Gen Z, Hispanic, and Black beauty enthusiasts. and created deeper, more emotional connections with consumers. We successfully navigated macro headwinds, including supply chain challenges and tight labor markets. We proactively invested in our teams with appreciation bonus for our store and DC associates. We doubled our renewable energy credits, invested in energy management system retrofits, diverted nearly 15 tons of waste from landfills through our recycling efforts, and joined other leading retailers in the consortium to reinvent the retail bag. And we made meaningful progress against our DE&I commitments, including launching the Muse platform, signing the 15% pledge, investing in in-store guest experience training, reimagining our diverse leaders development program, and integrating DE&I across our internal talent lifecycle. Now, as we turn to fiscal 2022, Consumers in the operating environment are changing faster than ever. Consumers are becoming increasingly resilient to COVID surges, but macro headwinds, global uncertainty, and potential pandemic setbacks will likely continue to impact consumers. The beauty category is healthy and growing, and our proprietary consumer insights give us confidence that the recovery which began last year will continue in 2022 as consumers maintain their self-care routines and engage in more social activities. And as consumers increase their consumption of services and experiences, our assortment and service offerings position us to benefit from these shifts. We know there will be challenges, but I am more excited than ever about the opportunity for Ulta Beauty to grow and continue to lead the beauty category. Last fall, we introduced a new strategic framework which will shape our future and enable us to deliver against our long-term financial targets. Let me share our fiscal 2022 priorities through the lens of each of our strategic pillars. Starting with our first pillar, we will drive breakthrough and disruptive growth through an expanded definition of all things beauty. Our differentiated assortment is core to our success, and in fiscal 2022, we intend to enhance and expand our conscious beauty platform, further increase our assortment of black-owned, black-founded, and black-led brands in support of our 15% pledge, and build the infrastructure to support these brands, expand the wellness shop to an additional 300 stores, and continue to evolve and expand our offering across core categories to engage and excite the beauty enthusiast. To drive growth and capture market share, we will continue to add relevant brands to our assortment. In recent weeks, we've executed one of our most anticipated brand launches ever, Fenty Beauty. Partnering with Rihanna and Fenty Beauty, We announced the news on February 17th through social channels, achieving higher mention volume and reach than any other Ulta Beauty brand launch announcement. The initial guest response was incredibly positive, trending as the number one topic on Twitter the day of the announcement. Turning now to our second pillar, to evolve the guest experience through our personalized and connected omni-channel ecosystem, all in your world. Beauty enthusiasts are increasingly leveraging both physical and digital channels, and we have the power to connect and engage with them across the beauty journey and meet them wherever they are. In fiscal 2022, we intend to leverage our real estate pipeline to pilot a new in-store experience with a layout and flow that reflects our key merchandising strategies and consolidates guest services in a central location. Test a small store format with an optimized assortment and service offering in a handful of small markets. Enhance our buy anywhere, fill anywhere efforts by expanding our same-day delivery option. Continue to create leading digital experiences through the ongoing refresh of our digital store to provide guests with an experience that seamlessly merges content with commerce. the expansion of our virtual try-on capabilities, and new capabilities resulting from our digital fund investments. We'll provide guests with more convenience through the launch of Afterpay as a payment option in stores, and we'll expand the Ulta Beauty at Target shop in more than 250 new Target locations. As part of our efforts to expand our omnichannel ecosystem, last year we joined forces with with the Target Corporation to create a new way for guests to discover prestige beauty. In just nine short months, the Ulta Beauty and Target teams worked together to design a space that feels authentic to both brands. We connected two independent loyalty programs. We made it easy for guests to link their accounts. And we onboarded more than 50 prestige and emerging brands. I am pleased to share that in our Ulta Beauty and Target location, Customer awareness remains very strong. Guests are shopping across categories and more than a million members have linked their ultimate rewards and target circle accounts. Building on this foundation, this year our focus is on accelerating new member acquisition, optimizing the guest experience, and continuing to amplify marketing as we scale. Moving now to our third pillar, expand and deepen our presence across the guest beauty journey. firmly placing Ulta Beauty at the heart of the beauty community. In fiscal 2022, we intend to further build upon our brand purpose and elevate our marketing efforts to include more action-based programming that address the needs of key audiences, expand live streaming and social selling, drive member growth and leverage data and analytics to increase the personalization of our communications, deepen engagement, and shift share of Wallet, and launch our retail media network, UB Media. Our fourth pillar is to drive operational excellence and optimization. We are investing in multiple significant cross-functional projects that require capital and resources, but position us to capture additional market share, fund enhancements to the guest experience, and deliver future profitable growth. In fiscal 2022, we plan to execute the first phase of Project SOAR, our multi-year effort to upgrade our enterprise resource planning platform, migrate to Google Cloud as our data and analytics platform to facilitate data accessibility, enhanced reporting, and faster decision-making, begin a two-year effort to refresh our store POS systems, and leverage our continuous improvement capability to identify, prioritize, activate, and measure meaningful cross-functional process optimization opportunities. In support of our supply chain optimization efforts, this year we plan to begin an upgrade and retrofit of our Greenwood Distribution Center, begin construction of our first Market Fulfillment Center, and implement new transportation tools to provide better visibility to loads in transit. Our winning culture is a key driver of Ulta Beauty's success, and our fifth strategic pillar is to protect and cultivate our world-class culture and talent. We strive to make Ulta Beauty a great place to work by leading with our hearts, caring for each other in everything we do, and demonstrating integrity, authenticity, and inclusivity daily. To reinforce our position as an employer of choice and enable us to continue to successfully navigate anticipated tight labor markets, this year, we intend to increase investments in training and development programs to enhance the guest experience, improve personal performance, and help associates manage their career, continue leveraging our diverse slate recruitment efforts, further enhance and optimize our talent acquisition processes, increase investment and development programs to help associates plan and develop their careers, and continue to navigate the pandemic with safety at the forefront for all of our associates. Finally, our sixth strategic pillar is to expand our environmental and social impact. As the largest U.S. beauty retailer, we have the power to shape how the world sees beauty and a responsibility to inspire positive change. Building on the progress we made in 2021, this year we plan to continue to amplify underrepresented voices through media investments with multicultural platforms, the expansion of our Muse platform, and increase brand marketing support for black-owned, black-founded, and black-led brands within our assortment. Build an ecosystem to support the pipeline of BIPOC brands, including the creation of an accelerator program focused on early-stage BIPOC beauty brands to educate, inspire, and support brand participants to prepare for retail readiness, and an investment in New Voices, a venture capital firm that partners with and invests in entrepreneurs and entrepreneurs of color to drive scalable, sustainable businesses. Continue to invest in trainings and internal programming to ensure our guests, associates, and communities feel connected to and reflected at Ulta Beauty. And, as we look to reduce our carbon footprint, we plan to expand our LED lighting retrofit program, double our investment in renewable energy credits, and explore opportunities to collaborate with our brand partners to identify opportunities to reduce Scope 3 emissions together. We recently published our 2021 ESG report, which includes information about our strong corporate governance practices and commitment to operating an ethical business. In addition, it includes disclosures aligned with the SASB index and TCFD, as well as updated EEO1 information. In closing, I am incredibly proud of what the Ulta Beauty team has accomplished and excited about the opportunities ahead. We operate in a healthy, culturally relevant, and growing category. We have a strong, proven business model, and we have a winning culture and simply outstanding associates. We have ambitious plans, and I am confident we have the right team to execute our strategies and deliver for our guests, associates, and shareholders. And now, I will turn the call over to Scott for a discussion of the financial results. Scott?

Thanks, Dave, and good afternoon, everyone. Before I review our financial results, I want to echo Dave's comments and express my sincere appreciation to all our Ulta Beauty associates for their focus on providing great guest experiences and managing the business, especially in such a dynamic operating environment. Their dedication to our guests and each other enabled us to deliver another strong quarter and an outstanding year for our shareholders. Now to our fourth quarter results, beginning with the income statement. Overall, results for the quarter were better than anticipated, primarily driven by stronger than expected holiday sales and a rational promotional environment. Sales growth across both physical and digital channels were stronger than expected. resulting in better gross margin and less SG&AD leverage than planned. As a result, operating margin increased to 13.8% of sales for the quarter. Net sales for the quarter increased 24.1%, driven by 21.4% growth in comp sales and strong new store performance. Transactions for the quarter increased 10.4%, driven by double-digit growth in store traffic, and average ticket increased 9.9%, resulting from both a higher average selling price and an increase in units per transaction. Looking at the cadence of sales through the quarter, November was the strongest month, supported by our successful marketing efforts and guests' early holiday shopping. Post-holiday, overall growth moderated, driven primarily by a deceleration of store traffic, likely reflecting disruption from weather, and the Omicron variant. During the quarter, we opened six new stores, relocated three stores, and remodeled one store. Compared to the fourth quarter of fiscal 2019, total sales increased 18.4% and comp sales increased 15.4%. For the quarter, gross margin increased about 250 basis points to 37.6% of sales compared to 35.1% last year. The increase was primarily due to the leverage of fixed costs, favorable channel mix shifts, and higher merchandise margin. Consistent with trends we experienced in the first three quarters of the year, in the fourth quarter, strong top line growth and benefits from our occupancy cost optimization efforts resulted in significant leverage of fixed costs. Channel mix was favorable as the penetration of e-commerce sales was about 600 basis points lower than last year, and merchandise margin improved, primarily due to lower promotional activity and ongoing benefits from our category management efforts. Comparing this year's performance to the fourth quarter of fiscal 2019, gross margin improved by 260 basis points. Higher merchandise margin and fixed cost leverage were partially offset by adverse channel mix. As planned, SG&A increased 26% to $650 million. As a percentage of sales, SG&A increased 40 basis points to 23.8% compared to 23.4% last year, primarily due to higher incentive compensation and store payroll and benefits, partially offset by leverage of marketing expense due to higher sales. Reflecting strong operational performance versus our internal targets, incentive compensation associated with our annual bonus programs increased compared to last year. In addition, we elected to grant discretionary appreciation bonuses to our store associates in recognition of their efforts to deliver this outstanding performance. In total, higher incentive compensation drove about 60 basis points of deleverage in the quarter. Store payroll and benefits expense in the quarter was higher than last year, reflecting an increase in the number of store associates and higher average wage rates. Compared to fiscal 2019, SG&A as a percentage of sales was about 140 basis points unfavorable, primarily due to higher incentive compensation and marketing expense. Operating margin was 13.8% of sales compared to 10.2% of sales in the fourth quarter of fiscal 2020 on a gap basis, and 11.6% of sales on an adjusted basis. Strong top-line growth, driven primarily by stores, combined with the impact of our ongoing cost optimization efforts, resulted in record-level operating margin performance. The company's tax rate decreased to 22.9% compared to 23.4% in the fourth quarter last year. The lower effective tax rate was primarily due to a benefit from the income tax accounting for share-based compensation and state tax credits. Diluted GAAP earnings per share increased to $5.41 compared to $3.03 last year. Adjusted diluted earnings per share in Q4 of last year was $3.41. To recap the full year, our teams delivered sales and profits that far exceeded pre-pandemic levels. Compared to fiscal 2019, sales increased 16.7% to $8.6 billion. Operating profit increased 44% to $1.3 billion, or 15% of sales, and diluted EPS increased 48% to $17.98 per share. Moving on to the balance sheet and cash flow statement. Total inventory increased 28% to $1.5 billion compared to $1.2 billion last year. In addition to the impact of 44 net new stores, the increase reflects inventory purchases to support new brand launches, including Olaplex, Entity, and Chanel, as well as proactive efforts to maintain strong-end stocks of key items to support expected demand and mitigate anticipated global supply chain disruptions. In fiscal 2021, we invested $172 million in capital expenditures, including approximately $89 million for new stores, remodels, and merchandise fixtures, $60 million for supply chain and IT, and about $23 million for store maintenance and others. Depreciation for the year was $268 million compared to $298 million last year, primarily reflecting the impact of last year's store impairments and store closures. Ulta Beauty continues to generate significant cash from operations. As we shared at our October Analyst Day, our priority for use of cash is to reinvest in the business to drive profitable growth. After investing to support growth, we will continue to look to return excess capital to shareholders. During the fourth quarter, we repurchased 1.9 million shares at a cost of $760 million. We elected to accelerate repurchases in the fourth quarter to take advantage of better than expected cash flow. Since launching our stock buyback program in 2014, we've purchased 14 million shares at an average price of $275, effectively returning $3.9 billion to shareholders, while continuing to invest in strategic growth drivers. Having essentially completed the authorization announced in March of 2020, today we announced a new share repurchase authorization for $2 billion. Turning now to our outlook. We are emerging from the pandemic as a stronger, healthier business. Over the last two years, we've strengthened category margins and improved our ability to optimize promotions. Our real estate portfolio is healthy and improving economics. Our e-commerce business is larger and more profitable, and we've strengthened our analytical capabilities and adjusted our cost structures. At our analyst day in October, we shared an updated growth algorithm with investors. Over the next three years, we expect to deliver net sales growth between 5% and 7% on a compound annual growth basis using fiscal 2019 as the base year, operating profit between 13% and 14% of sales, low double-digit diluted earnings per share growth on a CAGR basis, again using fiscal 2019 as the base year, and maintaining capital expenditures between 4% and 5% of sales. As we look to fiscal 2022, we continue to expect that sales growth and operating margin will be in line with these longer-term targets. Our EPS guidance of low- to mid-single-digit growth reflects lapping extraordinary performance in fiscal 2021. Our guidance for fiscal 2022 also includes macro considerations, including continued wage pressures and higher supply chain costs, as well as the impact of a more normalized investment agenda. Specifically, in fiscal 2022, we plan to open approximately 50 net new stores and remodel or relocate approximately 35 stores. We expect net sales will be between $9.05 billion and $9.15 billion, with comp sales growth between 3% and 4%. Our sales outlook reflects a more normalized growth trend for the beauty category, including a modest recovery in makeup, while also considering various uncertainties, including inflationary risks to consumer spending and the impact of increasing points of distribution for prestige beauty. For your modeling purposes, we anticipate comp growth in the first half will be in the mid single-digit range, driven by stronger growth in the first quarter and then moderate to low single-digit growth as we lap last year's recovery. We expect operating margin for the year will be between 13.7 and 14% of sales, compared to 15% in fiscal 2021, with deleverage from both gross margin and SG&A. We anticipate operating margin deleverage will be greater in the first half as we lap last year's strong performance. We expect gross margin will be lower than fiscal 2021, driven primarily by lower merchandise margin resulting from the impact of new brand launches, lapping one-time benefits from favorable inventory reserve adjustments, and a more normalized promotional environment. We also expect supply chain costs will increase more than sales, resulting in additional pressure on gross margin. We expect SG&A expense will deleverage. driven primarily by 70 to 75 million of expenses related to our strategic priorities, including investments to support UB Media, Ulta Beauty at Target, Project SOAR, and other IT capabilities, as well as higher wage rate growth across the enterprise, partially offset by lower incentive compensation. These assumptions result in guidance for diluted earnings per share in the range of $18.20 to $18.70 per share, including the impact of approximately $900 million in share repurchases. We are not providing specific quarterly guidance, but as you update your financial models, consider that the second quarter will likely be our most challenging quarter of the year as we lap extraordinary performance in fiscal 2021. As a result, we are currently planning for EPS in the second quarter to decrease about 10%. Finally, we plan to spend between $375 and $425 million in CapEx, including approximately $195 million for supply chain and IT, $150 million for new stores, remodels, and merchandise fixtures, and about $55 million for store maintenance and other. We expect appreciation for the year will be between $250 and $255 million. I would note that our guidance assumes no changes in federal tax rate environment and no material increases in the federal minimum wage. In closing, a rapidly recovering environment combined with the outstanding efforts of our teams and the work we have done to strengthen the business enabled us to deliver record performance in fiscal 2021. While lapping this performance will be difficult, we remain confident in our longer-term growth targets. Oath to Beauty has established significant long-term competitive advantages, and we believe we are well-positioned to capitalize on growth opportunities within the $140 billion U.S. beauty products and salon services industry and continue to deliver long-term shareholder value. And now I'll turn the call back over to our operator to moderate the Q&A session.

Thank you. At this time, we'll be conducting a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. Our first question comes from Dana Telsey with Telsey Group. Please proceed with your question.

Good afternoon, everyone, and congratulations on the night's progress. As you think about the current macro landscape out there and the inflationary pressures, how are you thinking about pricing in 2022, and how does that feed into the margin, and do you see any difference by category? Thank you.

Well, great. Dana, thanks for the question. And, yes, certainly we are tracking and monitoring closely the inflationary environment, and we understand the unique dynamics that we're facing. We recognize consumers are going to be facing headwinds from rising prices and other dynamics. I will say that as we look at the beauty category, even with these headwinds, we remain – positive. The category is healthy. It is growing. It's emotionally important and connected to our consumers. We are in the midst, even as we face some of these inflationary pressures, that we're in the midst of an opening of the economy, of the world around us, which is beneficial. We know consumers are working to maintain their self-care routine. And so the Despite the headwinds, we think the category is well positioned and then uniquely Ulta is well positioned because of our model. The fact that we are across all price points, all categories, masked, prestige, we are able to adjust and reflect evolving consumer needs as the world around us changes. Pricing has, you know, every year there's pricing. Certainly over the last few months we've seen some pricing action from some of our brands. A reminder in our prestige side of the business, it tends to be MSRP, and so we would be reflective of where the broader market is going. But it hasn't been an extraordinary amount of price increase yet. And any benefit of that is certainly reflected in our guidance going forward. But as cost pressures increase both on our business and our brand partner's business, we'll be clearly tracking this closely and making sure we're adjusting appropriately as we manage through the year.

Thank you.

Our next question comes from Mark Altschweiger with Baird. Please proceed with your question.

Good afternoon. Thanks for taking my question. I wanted to ask about the rewards program and spend per member. It looks like kind of your average spend per ultimate rewards member must have been up pretty nicely 2021 versus 2019. This IndyColor there would be great. And how much of that's category recovery versus share of wallet gains? And then looking ahead, you did call out some of the increased distribution points for Prestige Beauty as a consideration in your guidance. So curious how you're just thinking about ability to continue to capture share of Wallet and the opportunities in 2022. Thank you.

Great. Well, we are incredibly proud of our loyalty program. We have been for a long time, and I'm really, really pleased with the results that the team received. delivered in 2021 to reach a record level of 37 million active members, which is not only 13% ahead of 2020, but 6% ahead of 2019. So our guests are highly engaged. Reactivation rates, retention rates, very strong. We did see an increase in spend per member, which we're encouraged by. And that's driven by a number of factors as we continue to optimize the way we're engaging, leveraging our personalization efforts, providing more relevant, appropriate messages to our guests through our CRM capability. We've seen a category mix change. We've talked consistently through the year about the growth of fragranced. some other tools in our hair tools, some higher ticket items that have been driving very strong growth, growth ahead of the total store. And so that's contributing to it. And I'd just say an overall connection to Ulta Beauty. I mentioned just the high level of unaided awareness, the strong emotional connection that we're building is driving greater share of wallets. And our efforts going forward will continue to drive that. As I look at the broader marketplace and share wallet, and yes, there is expanded points of distribution on the prestige side of the business, part of which is Ulta Beauty, both in our own stores and our partnership with Target. And I'm really pleased that in the fourth quarter, we gained share when we look across all of our points of distribution. including Target, despite hundreds of more new locations, competitive locations. So we're confident. We think we've got the right model, strong competitive position, most importantly, deep connection to our guests that's demonstrating stronger loyalty to Ulta Beauty, and we're going to leverage that to continue to drive growth and share growth into 2022.

Our next question comes from Oliver Chen with Cowen. Please proceed with your question.

Hi, thank you very much. On the guidance, what gives you confidence that makeup will return to growth, and how does that intersect with inventory, category planning, and also your comments on prestige and the competition there? As a follow-up, as you make strides in BIPOC brands, black, indigenous, and people of color brands, How should investors measure your success here? How are you measuring success? You have a lot of innovative programs there. Thank you.

Great. Thanks, Oliver. Yeah, some important topics in your questions. First, makeup. We are confident in the path ahead of makeup. And, yeah, and I'd say, you know, as we reflect back on the year, there were certainly some ups and downs there. And what we continue to see is makeup more than any other category is sensitive to COVID fluctuations. And we saw that in the fourth quarter with Omicron and Delta and continued challenges there. But as I look forward on makeup, there are so many things that continue to encourage us. And we've seen some of these trends for a little while. But we've also, as soon as we get momentum, we see some setbacks related to COVID. But broad macro trends of opening up and more opportunity for consumers to get back in the world. You know you're seeing it in back to work. We're seeing just a rapid acceleration in that. Events, activities, those things, people getting out of their house are all exceptionally positive for the total category. We know all along that consumers have been been passionate about makeup, just their opportunities, their usage opportunities have been more limited. But we see the passion in social media, the engagement continues to be high in TikTok and in Instagram and all other forms. So we know the connection is there. We know the opportunities are coming. We know there's important trends like the duality of natural looks and bolder looks, increased focus around eye and brow, even a resurgence of contouring. All these things are positive. And then you layer in for us the outstanding work our merchandising team has done to continue to evolve our assortment. I mentioned the launch of Fenty Beauty, which is just a really important step in our continued connection with our guests, and that is off to a very strong start. Launch of Chanel on the luxury side to tap into a new opportunity there. We have expansion in MAC, which is going quite well. And then a number of great brands. We're seeing innovation. I'll give you a couple of examples. On MAC, a MAC stack mascara that has one formula and two wands for both volume and precision. We've got a NYX line loud lip liner that's exclusive to Ulta Beauty that's performing well. We've got Morphe and Lucky Charm that's getting exclusive and driving engagement. And we've got Trey Luce by Becky G, which is a Mexican-American singer celebrating her Latin roots. So we have exclusivity, newness, big brands, emerging brands. And it ties to your last point, your question about BIPOC. We see success by these brands thriving. We're not here just to get these brands on the shelf. You know, it's one thing to arrive on ourselves. It's another thing to thrive. And that's how we're measuring success. We want these brands to perform well, to grow, to have great opportunities to reach guests. And that's how we're measuring it. And that's how I'd suggest you look at it. We're doing this to drive engagement with our guests and we're seeing it for our brands. So we're optimistic about beauty, about makeup. And BIPOC will be one of the elements that will help us drive growth going forward.

Our next question comes from Chris Horvers with JP Morgan. Please proceed with your question.

Thanks. Good evening. You talked about gross margin down in 2022. That seems a bit different from your prior commentary. Is that simply lapping through this big gross margin beat in the fourth quarter, or is there something changing in your outlook or something that you're seeing in the market. And then on the gross margin side, can you help us a little bit on the cadence front?

Yeah, thanks, Chris. So I don't really think that there's any inconsistency in our messaging here. I think, you know, the variables at play are pretty consistent over the course of the year as you think about 2022, I would say. So, again, it's back to merchandise margins, right, being under pressure in 2022 compared to what we've just been through the last year or so. With the promotional environment, we think it's going to get back to more normal kind of business environment. And then, you know, incremental supply chain costs, including transportation costs and wages in our distribution centers being greater than our growth outlook is for next year. So a combination of those things driving the leverage. And then as we think about the year, I guess as we said, second quarter is going to be the toughest. So again, first half of the year stronger, generally speaking, on operating margin than the second half. Partly that's being driven in the first quarter by stronger sales as we lap over, you know, last year at this time we were just starting to come out of the depths of the pandemic. So sales, especially in the store fleet, stronger this year in the first quarter than they were a year ago. That drives a lot of leverage for us and helps, you know, gross margin and operating margin overall. And then sequencing, again, I think we said in our prepared remarks, those impacts overall kind of moderate as we get deeper into the year.

Our next question comes from Kelly Crago with Citi. Please proceed with your question.

Hi. Thanks for taking my question. Just curious if you could elaborate a bit on your partnership with Target now that you're nine months in. Are Target shops helping drive New customers to Ulta. What does the spend look like for a customer who shops both channels? Any other color you could provide around customer behavior that relates to Target would be helpful. Thank you.

Yeah, thanks, Kelly, for the question. You know, as a retail leader, we're really aiming to deliver a seamless omni-channel experience that meets our guests wherever they are. The newest element of this omni-channel strategy is the Ulta Beauty at Target. It's really providing us another way to engage and discover customers Alta Beauty for a new guest set that's shopping at Target. You know, the strategy is working. What I would share is that our existing Ultimate Rewards members, they're taking advantage of shopping at Alta Beauty at Target, and we're also introducing this to some new guests. The guest response has been really positive. The awareness remains strong. As Dave mentioned in his comments, more than a million members have linked their Ultimate Rewards and Target Circle accounts, and we're signing up new members every week. You know, Target shared at their recent financial community meeting that the productivity in their space is very high, so that's always a good indicator, too. And I would say that while it's still really early, we're really encouraged that we see new members bouncing back into Ulta Beauty, and their shopping behaviors are very similar to our existing loyalty members. You know, just to kind of wrap up overall, we're very pleased. While this is still new, we're pleased with how this is playing out as part of our Omni strategy going forward.

Our next question comes from Mike Baker with D.A. Davidson. Please proceed with your question.

Okay. Hi. Thanks. Maybe a two-parter. Just on makeup, can Were you seeing it up on a two-year basis earlier in the quarter, and then Omicron slowed that down? Is that what you're saying? And can you talk about, you know, what you might be seeing in some areas of the country that seem to, you know, reopen earlier and not be as impacted by Omicron or at least didn't seem to slow down, you know, some of the people going out, you know, Texas, Florida, maybe places like that? Thanks.

Yeah. What I will say, we won't get into every period throughout the quarter, but for sure what we see on makeup is as anxiety around COVID has increased, has fluctuated through the last two years, we do see more pressure on makeup. But now, across the country, as more and more people both yes, some parts of the country have been more open than others, but there still has been a consumer concern, even as elements are open, that is easing right now across all parts of the country. And so that's encouraging to us. And that's what we think we need is more ongoing, consistent confidence to be back into work, be back at various activities and events. And as we see that, that We know that's an element. It's not the only thing, but it's an important element tied to make up success going forward.

Our next question comes from Anthony Chukumba with Loop Capital Markets. Please proceed with your question.

Thanks so much for taking my question and to be respectful for everyone on the call. I'll actually limit it to one question, one actual question. So I just was wondering if you could just give us a little bit more color on the rollout of Fenty Beauty, you know, just any color in terms of number of stores, linear feet, end caps, any additional color would be very helpful. Thank you.

Thank you for modeling the one-question rule, Anthony. I appreciate that. And, yeah, we are thrilled with Fenty. It is in all stores. It is online. It is if you have a chance to go into any Ulta Beauty store, you'll see it right at the front of the store. In most of our stores, right at the front, it has an entire 18-foot run and an end cap. A broad assortment featuring Fenty, among other things, is known for the breadth of assortment in face in particular. So you'll see that being able to test and try items. And then strong, strong presence online. In fact, we really found some unique ways in our online footprint to bring that brand to life and communicate to our guests. And so off to a great start. Really pleased with it. You know, really glad that, you know, Kendo organization, you know, has partnered with us in many ways and see this as a key part of our success going forward and thrilled to have Rihanna and Fenty as part of the Ulta Beauty family for a long time to come.

Hector, I think we have time for one more question, please.

Our final question comes from Adrian Yee with Barclays. Please proceed with your question.

Great. Thank you very much, and congratulations to the team and all the store employees. What a wonderful year. Dave, my question is for you, and it's getting back to the Alt-Tet target a couple weeks ago. Sephora announced the potential to expand to 850 stores by 2023 through Kohl's. You mentioned over 200 for this year. So I'm just wondering, can you share with us any data from that partnership, new customer acquisition, Any details there, and what would you need to see to accelerate that a little bit more aggressively beyond the 200? Thank you very much.

Well, let me give a little bit of color, and I'll ask Keisha to kind of follow, get some more detail to build off her previous answer on this. And we are – Just thrilled to be partnering with Target. We know we're in the midst of a real transformation in the prestige beauty landscape. And the fact that in the fourth quarter, with hundreds of new locations across of prestige beauty, across the location, the fact that Ulta Beauty continues to gain share, we think is a reflection of the strength of our strategy, the execution that we brought both in stores, online, and in our Target business. Elta Beauty and Target relationship. We are delighting guests. We're gaining share, even as there's other competitive activity, and we're confident we're going to be able to continue to do that. But, Keisha, do you want to give us some specifics about the number of stores and what the outlook looks like there?

Yeah, well, we said, Adrienne, it's a little over 250 this next year. You know, we are in close partnership, and we are following Target's remodel schedule, so that really – kind of plays into timing, sequencing, et cetera, of how we're going about opening new stores. But the partnership is really strong. We're really pleased with our results. And the productivity in this space is really high. It's a highly curated assortment with 50 key brand partners. And we're continuing to learn and evolve and grow as we continue to roll out more locations, but over 250 in the next year.

Ladies and gentlemen, we have reached the end of the question and answer session, and I would like to turn the call back to Mr. Dave Kimball for closing remarks.

All right. Awesome. Thank you all for joining us today. Really appreciate it. In closing, I want to thank, again, our 40,000 associates for delivering a simply outstanding 2021 and for their relentless commitment to our guests, to each other, and to moving our business forward. We all look forward to speaking to all of you again in May when we report our first quarter results. I hope you have a great evening. Thanks again for joining.

This concludes today's conference. You may disconnect your lines at this time. Thank you all for your participation.