Ulta Beauty, Inc.

Good afternoon and welcome to Ulta Beauty Conference to discuss results for the fourth quarter of fiscal 2022. 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-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. Riley Rollins, Vice President of Investor Relations. Ms. Rollins, please proceed.

Thank you, Sherry. Good afternoon, everyone, and thank you for joining us for a discussion of our Fiscal 22 results and our expectations for Fiscal 23. Hosting our call today are Dave Kimball, Chief Executive Officer, and Scott Setterson, Chief Financial Officer. Dave will begin with some key highlights from our fourth quarter and full year, and then share our priorities for fiscal 23. Then Scott will review our financial results in more detail and discuss our financial outlook. After our prepared comments, we will open the call for questions, and Keisha Steelman, Chief Operating Officer, will join us for the Q&A session. Before we begin, I'd like to remind you that the statements contained in this conference 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 FCC. We caution you not to place undue reliance on these forward-looking statements, which speak only as of today, March 9, 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. Today's prepared remarks will be a little longer than usual. To allow us to accommodate as many questions as possible during the hours scheduled for this call, we respectfully ask that you limit your time to one question. If you have additional questions, please re-queue. 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. We appreciate your interest in Ulta Beauty. Our fourth quarter was a strong end to a record-setting year. For the first time in our 33-year history, our annual revenues surpassed $10 billion, and our annual net income exceeded $1 billion. In addition, we expanded our loyalty program to more than 40 million members. Achieving such meaningful milestones reflects healthy consumer engagement with the beauty category, the power of Ulta Beauty's highly differentiated model, and the impact of our winning culture and outstanding teams. The Ulta Beauty team continues to execute with excellence and inspire me daily with their passion and leadership. I want to thank all of our associates for their commitment to delivering great guest experiences and for working together as one team to move our business forward. I am honored to lead such a great company of talented associates who bring our mission, vision, and values to life for all of our stakeholders. Now to the results. Starting with the fourth quarter, net sales increased 18.2% to $3.2 billion. Operating profit increased to 13.9% of sales, and diluted EPS increased 23.5% to $6.68 per share. Sales of all major categories exceeded our expectations, and we saw solid sales momentum across both our store and digital channels. Additionally, we continued to see healthy growth in spend per member across all income demographics. This broad-based strength reflects successful execution of our key fourth quarter events, including Holiday, Jumbo Love, and Love Your Skins. Our holiday marketing plan, which included new television advertising, engaging storytelling, and robust digital and social support, delivered strong guest engagement and drove significant increases in top-of-mind awareness. Our holiday gifting assortment, which was thoughtfully curated across every category and budget, resonated with guests. And our innovative and inclusive gift card program delivered strong double-digit growth across Ulta Beauty-owned and third-party channels. Turning to performance by category, all major categories delivered double-digit growth again this quarter, and we increased our market share in Prestige Beauty versus the fourth quarter last year, based on data from the MPD group. Skincare delivered the strongest growth this quarter, with double-digit growth in both Prestige and Mass. Growth in the quarter was primarily driven by serums, moisturizers, acne treatments, and holiday gift sets. Guests engaged with newness from brands like Drunk Elephant, The Ordinary, and Hero Cosmetics, while dermatology-based brands like La Roche-Posay and CeraVe also resonated strongly with guests. Our successful Love Your Skin event also contributed to the category's strong growth. In addition to converting members to the skincare category with prestige skincare offers, we also introduced guests to our wellness assortment with new beauty steals from a variety of brands, including Truly, Love Wellness, and Sugar Bear. The fragrance and bath category delivered another quarter of double-digit growth on top of strong double-digit growth last year. Compelling newness from luxury brands like Burberry, YSL, and Dior, as well as exclusive newness from Billie Eilish and Ariana Grande, including her latest fragrance, Mod, contributed to the positive growth. In addition, the category benefited from strong engagement with our exclusive holiday fragrance gift sets and monthly Fragrance Crush programs. Growth of the makeup category accelerated from the third quarter, with double-digit growth in both prestige and mass makeup. Top subcategories were face and lip, driven by newness in foundation, concealers, and lip balms and glosses. New brands like Fenty Beauty, REM Beauty, and recently launched Dior contributed to growth during the quarter, while new products from a wide range of brands, including Tarte, e.l.f., NYX, and Clinique, also continued to engage guests. Finally, hair care delivered double-digit growth, driven by newness and innovation, focused on hair health. Newer brands like Olaplex, Miel, and recently launched Adana's Recipe contributed to the quarter's growth. Our Jumbo Love event drove healthy growth for key professional brands like Pureology, Redken, and Biolage, as well as Mastige brands Kristen S. and Batiste. Hair tools continued to experience broad softness as we lapped strong newness last year. Our services business also delivered strong double-digit growth again this quarter, driven by an increase in transactions. Leveraging our CRM capabilities, we continue to welcome new members to services while increasing frequency with members who already engaged in our service offering. And the salon back bar takeovers, which give our stylists a unique opportunity to introduce new brands and products to guests, help drive growth and new member acquisition for way and bumble and bumble. Now, turning to the full year, strong consumer demand and outstanding execution by our teams fueled broad-based strength across our business. Net sales for the year increased 18.3% to $10.2 billion. Operating profit increased to 16.1% of sales, and diluted EPS increased 33.5% to a record $24.01 per share. In 2021, we introduced a new strategic framework designed to guide our priorities and enable Ulta Beauty to expand our market leadership and drive profitable growth. Let me share a few highlights of the progress we made against this framework in fiscal 2022. Our first strategic pillar is to drive growth through an expanded definition of all things beauty. And this year, we continued to enhance our offerings to engage and excite beauty enthusiasts. All major categories delivered double-digit comp growth, and we increased our market share in Prestige Beauty versus Fiscal 2021 based on data from the MPD group. We strengthened our assortment with the addition of leading brands in every major category, including Fenty Beauty, Dior, Bioma, and Mio, and expanded MAC and Chanel Beauté into more doors. We also introduced guests to exciting emerging brands, including About Face, Divi, Skip, and Vacation through our Sparked platform. We enhanced conscious beauty at Ulta Beauty, ending the year with 300 brands certified in at least one conscious beauty pillar and made it easier for guests to identify brands and products that reflect their values in this important space. We added 12 black-owned and founded brands to our assortment and launched our Muse Accelerator program to help early-stage BIPOC brands prepare for retail readiness. And we expanded the wellness shop to an additional 330 stores and enhanced our online offering to include intimate wellness. Turning now to our second strategic pillar, all in your world, we're focused on evolving guest experiences through a personalized, connected, omnichannel ecosystem. In fiscal 2022, we continue to enhance the guest experience across all our touch points. We expanded our physical footprint, opening 47 new stores and renovating or relocating 32 stores. We relaunched makeup services and introduced new salon services, including curl-specific treatments and extensions. These enhancements, combined with record-setting stylist productivity and increased transactions, resulted in strong double-digit growth for our services business. Reflecting our efforts to enhance our buy-anywhere, fill-anywhere capabilities, We expanded our same-day delivery offering to six new markets and delivered significant improvement in guest satisfaction with the BOPIS experience. Between BOPIS, same-day delivery, and ship-from-store capabilities, 31% of our digital orders this year were fulfilled by stores, up from 28% last year. We also created new digital experiences through the phased refresh of our digital store and the expansion of virtual try-on capabilities. including Glam Lab Skin Advisor 2.0 and the Hairstyle Try-On. Finally, our successful partnership with Target continued to grow with the opening of 254 additional Ulta Beauty at Target shop and shop locations. We also created a dedicated field team to help unlock greater opportunity with the partnership. And through engaging store visits and communications, this team had a positive impact on staffing, training, and loyalty. Moving to our third strategic pillar, expanding and deepening our engagement with guests by ensuring Ulta Beauty operates at the heart of the beauty community. During the year, we continued to drive guests' love, loyalty, and share of wallet, and our efforts created stronger, more emotional connections with our guests. Overall, our native awareness grew significantly with meaningful gains among key audiences, including Gen Z, Hispanic, and Black beauty consumers. Importantly, we increased the number of active members in our loyalty program by more than 3 million members, ending fiscal 2022 with a record-breaking 40.2 million ultimate reward members who shopped more frequently and spent more with us on average. And we launched our retail media network, UB Media, with a dedicated sales team and supported by new processes and tools. Our fourth strategic pillar is to drive operational excellence and optimization to enable us to capture additional market share, fund guest experience, enhancements, and deliver future profitable growth. In fiscal 2022, we made progress on a number of initiatives that will enable us to scale more easily, including successfully executing phase one of Project SOAR, our three-year effort to upgrade our enterprise resource planning platform on time and on budget. In addition to successfully navigating inflationary pressures in wages and fuel, we initiated a multi-year supply chain optimization effort, breaking ground on our first market fulfillment center and beginning the planned retrofit of our Greenwood Distribution Center. Both facilities are on track to be fully operational in fiscal 2023. Our winning culture is key to driving our success. So our fifth strategic pillar is focused on protecting and cultivating our world-class culture and talent. Our vision is to create a highly aligned, engaged workforce and an inclusive workplace that creates opportunities for our people and our business, and I am proud of the progress we made last year. With strong participation rates in our annual company-wide engagement survey, our overall engagement remains high and continued to exceed retail benchmarks. And our investments in our team and culture enabled us to promote more than 11,000 associates into new roles and improve associate retention across the enterprise. Finally, our sixth strategic pillar is to expand our environmental and social impact. As the largest US beauty retailer, we can influence how the world sees beauty while driving positive impact. In fiscal 2022, we delivered on our DEI commitments by investing $50 million across our major areas of focus, including multicultural media to amplify underrepresented voices, dedicated support for BIPOC brands, and associate training to reinforce inclusivity and address unconscious bias. On the environmental side, we continue to reduce our energy usage through the expansion of our LED lighting retrofit program to an additional 100 stores and our chambers for D.C., as well as additional energy efficiency project in select stores. We also enhanced our ESG disclosures in our second ESG report and submitted emissions targets to the Science Based Target Initiative, a globally recognized organization that validates these targets. Fiscal 2022 was an outstanding year, and I am incredibly proud of our associates dedication to delivering value for all stakeholders while building the foundation for the future. As we move into fiscal 2023, we remain optimistic about the strength and resiliency of the beauty category and the opportunities for Ulta Beauty. Over the last two years, the U.S. beauty category experienced unprecedented growth, reflecting various factors such as product innovation, expanding regimens, new social media platforms, return to work and resumed social activities, and the elevated connection between beauty and overall self-care. In addition to these consumer drivers, an elevated level of price increases also contributed to growth for the category. While some are unique to the post-pandemic recovery, we believe other factors will continue driving growth for the category. Importantly, consumer engagement with beauty is stronger than ever and is more connected with wellness. These factors give us confidence that the growth of the US beauty category will remain healthy but moderate to the higher end of the category's historical annual growth rate of between 2 and 5%, barring a major economic event. Building on the progress made in fiscal 2022, we intend to continue executing against our strategic framework to further expand our market leadership, drive profitable growth, and transform our business for the future in fiscal 2023. Starting with our consumer-centric strategic pillars, we will continue to innovate, evolve, and expand all things beauty to excite and engage the beauty enthusiast. Today, Ulta Beauty is the preferred destination for mass and prestige beauty. To maintain this leadership and capture additional market share, we will continue to add relevant brands to our assortment across categories and price points. Additionally, building on customer insights and strong engagement with our current portfolio of luxury brands, we see luxury beauty as an emerging opportunity. In fiscal 2023, we will expand our luxury beauty offering with an engaging experience in select stores and an elevated presence on olta.com. In addition to strengthening our core assortment, we will continue to expand, evolve and amplify our cross category platforms, including conscious beauty, our BIPOC-founded brands, The Wellness Shop, and Spark, our emerging brands platform. As we meet beauty enthusiasts wherever they are on their beauty journey, all in your world, we will continue to invest in our omnichannel experiences. Our physical footprint is a strategic advantage, and we plan to open 25 to 30 net new stores and remodel or relocate 20 to 30 stores throughout the year. As we expand our physical footprint, we will also accelerate growth across digital platforms, supported by the completed transition of our digital store to a modern technology and architecture, as well as the expansion of our buy-anywhere, fill-anywhere capabilities. Our partnership with Target will continue to expand as we support additional Ulta Beauty and Target shops, evolve the assortment, and leverage our dedicated field team to deliver elevated guest experiences. This newest touchpoint is introducing new guests to Ulta Beauty, and we intend to leverage our customer insights and CRM capabilities to continue driving additional member acquisition and bounce back to Ulta Beauty. To operate at the heart of the beauty community, we will continue to create and nurture authentic, meaningful connections with our guests to drive stronger relevance and brand consideration, especially with key constituents. We plan to expand the power of our loyalty program by enhancing our media mix to acquire new members and elevate the loyalty program throughout our digital shopping experience. We plan to leverage our analytics and data insights further to reactivate lapsed guests, increased retention, and shift share of wallet. And we intend to leverage our digital and physical assets to drive greater omnichannel member penetration. Finally, we plan to accelerate UB Media to capture greater demand from our brand partners. Building on the foundation established in 2022, we will offer new opportunities on Ulta-owned properties and enhanced existing products with advanced reporting and optimized audience selection. Turning now to our operational excellence and optimization efforts, in fiscal 2023, We plan to implement the next phase of Project SOAR, transitioning key supply chain and merchandising processes to the new platform. We will continue our supply chain optimization efforts as we complete the retrofit of our Greenwood DC and the opening of our first Market Fulfillment Center. In addition, we will begin the retrofit of our Dallas DC and construction of our second Market Fulfillment Center here in Bolingbrook, Illinois. This new facility will replace our existing Romeoville facility and transition our experienced team to a new state-of-the-art facility. In addition to these transformation initiatives, we will leverage our established continuous improvement capabilities to drive additional cost efficiency. Our success is enabled by our world-class culture. Values-based and anchored in caring for each other, the Ulta Beauty culture attracts and retains top talent who deliver great guest experiences across multiple channels every day. To protect and cultivate our culture and enable future business performance, we will invest purposefully in our associates and teams. This year, we plan to modernize our talent strategy and planning practices, enrich our learning and development offerings, and enable a leading DEI ecosystem. Finally, in 2023, we will stay focused on our environmental and social impact. Being good stewards of resources, taking care of each other, and creating a positive impact on the world is part of our DNA. And our ESG priorities are integrated into our guest-facing, operational excellence, and culture strategies. Building on progress made today, we expect the Science-Based Targets Initiative to take action on our submission in the first quarter And based on their feedback, we plan to develop a roadmap to achieve our emission reduction targets. We also plan to launch packaging, recycling, and reusable bag pilots as we explore ways to support a more sustainable beauty industry. We will continue working to expand our DEI efforts to amplify underrepresented voices, support black entrepreneurs in the business industry, ensure inclusivity remains top priority in every guest engagement, and foster an inclusive, bias-free, and equitable workplace for all associates. And we will continue to strengthen our corporate governance practices. Over the last several years, our board has updated our governance guidelines to better express our commitment to diversity, implemented an age limit for directors to encourage board refreshment, and updated committee charters to address oversight of ESG risks. This year, our Board will propose, for stockholder approval, changes to our Certificate of Incorporation and Bylaws, which, among other things, will declassify the Board and provide for the annual election of each director for one-year terms. If approved, the Board will be fully declassified by our 2025 Annual Stockholder Meeting. These proactive measures reflect our commitment to operating with best-in-class governance practices. More detail about these proposed changes will be provided in our 2023 proxy statements. In closing, the Ulta Beauty team delivered an outstanding performance in fiscal 2022, on top of a very strong performance in fiscal 21. As we look to 2023, I am optimistic about our opportunities to expand our market leadership and drive profitable growth. We are leaders in a culturally relevant growing category with a strong proven business model and a winning culture with outstanding associates who are passionate about caring for our guests and each other. I remain confident we will continue to lead the category and move beauty forward in ways that have a positive impact on our guests, our associates, and the communities we serve. 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 take a moment to express my sincere gratitude to our teams for delivering these exceptional results for our shareholders. We have long known our associates are our competitive advantage, and this year's results are an ongoing reflection of their relentless commitment to our guests and to executing with excellence. Now to our fourth quarter results, beginning with the income statement. Results for the quarter were well ahead of our expectations, primarily driven by strong holiday sales and robust guest demand, which accelerated post-holiday. Sales growth across both physical and digital channels were stronger than expected, resulting in less gross margin deleverage than planned and greater SG&A leverage. As a result, operating margin increased to 13.9% for the quarter. Net sales for the quarter increased 18.2%, driven by 15.6% growth in comp sales and strong new store performance. In addition, other revenue increased 18 million, primarily due to credit card income growth and an increase in loyalty income from our partnership with Target. The growth in comp sales was primarily a result of a 13.6% increase in transactions, driven by double digit growth in store traffic. Average ticket increased 1.8%, driven by higher average selling price, which more than offset lower units per transaction. Similar to last quarter, we estimate that product price increases contributed about 500 basis points to the overall comp increase. Looking at the cadence of sales through the quarter, sales moderated in November from the third quarter trend as we lapped more challenging comparisons. But well-executed holiday plans drove strong results and momentum that accelerated in January. Post-holiday results benefited from robust guest traffic in stores and the lapping of weather and impacts from COVID-19 variants during the same period last year. During the quarter, we opened 12 new stores, relocated one, and remodeled 12 stores. For the quarter, gross margin was flat compared to the same period last year at 37.6%. Leverage of fixed costs, favorable channel mix shifts, and strong growth in other revenue were offset by higher inventory shrink. The impact of promotional activity was flat compared to last year. Consistent with trends we experienced in the first three quarters of the year, in the fourth quarter, robust top-line growth delivered significant fixed-cost leverage. Channel mix was favorable, as the penetration of e-commerce sales was about 270 basis points lower than last year, and solid growth in other revenue was primarily driven by increased credit card income and royalties earned through our target partnerships. SG&A increased 17% to $763 million. As a percentage of sales, SG&A decreased 20 basis points to 23.6% compared to 23.8% last year, primarily due to leverage in marketing expenses and incentive compensation due to higher sales, partially offset by deleverage of store payroll and benefits and corporate overhead. Marketing expenses during the quarter were lower as a percentage of sales compared to the same period last year. As we have discussed on previous calls, this year we offset the incremental marketing expense of digital campaigns we manage for our brand partners with vendor income that is a direct reimbursement for these specific costs within total marketing expense. We will begin to cycle this change in the first quarter of fiscal 2023. Incentive compensation drove 50 basis points of leverage in the quarter, primarily driven by higher sales and a shift in the timing of bonus accruals for store associates. Offsetting these benefits, corporate overhead expense was higher than the same period last year, primarily reflecting investments related to our strategic priorities, including Project SOAR and other IT capabilities, UB Media, and Ulta Beauty at Target. Store payroll and benefits spent in the quarter was higher than last year, driven by an increase in the number of store associates and higher average wage rates. Operating margin was 13.9% compared to 13.8% last year. Healthy top-line growth, driven primarily by stores, combined with the impact of our ongoing cost optimization efforts, supported better operating margin performance. The company's tax rate increased to 24.6% compared to 22.9% in the fourth quarter last year. A higher effective tax rate is primarily due to less benefit from income tax accounting for share-based compensation and state tax credits. Diluted GAAP earnings per share increased 23.5% to $6.68 compared to $5.41 last year. To recap the full year, net sales increased 18.3% to $10.2 billion. Comp sales increased 15.6%, driven by a 10.8% increase in transactions and a 4.3% increase in average tickets. We estimate that product price increases contributed about 400 basis points to the overall comp increase for the year. Operating profit increased to 16.1% of sales. primarily driven by strong revenue growth. And diluted EPS increased 33.5% to our record $24.01 per share. Moving on to the balance sheet and cash flow statement. Total inventory increased 7% to $1.6 billion compared to $1.5 billion last year. In addition to the impact of 47 new stores, The increase reflects inventory purchases to support new brand launches and brand expansions, as well as the impact of inventory cost increases. Our well-established business model continues to generate significant cash from operations, including more than $1.4 billion in fiscal 2022. Our capital allocation philosophy remains consistent. Our first priority is to reinvest in our business to drive future growth followed by returning excess cash to our shareholders. In fiscal 2022, we invested $312 million in capital expenditures, including approximately $136 million for new stores, remodels, and merchandise fixtures, $74 million for IT, $70 million for supply chain, and $32 million for store maintenance and others. Appreciation for the year was $241 million compared to $268 million last year, primarily due to a shift of IT investments from capital to cloud expense. During the fourth quarter, we repurchased 722,000 shares at a cost of $328 million, bringing total share repurchases to $900 million for the year. Since launching our stock buyback program in 2014, we've purchased more than 16 million shares at a weighted average price of $293, effectively returning 4.8 billion to shareholders while continuing to invest in strategic growth drivers. Turning to our outlook for fiscal 2023, we ended fiscal 2022 with strong momentum and are confident the U.S. beauty category will remain healthy. Our financial expectations reflect this optimism, but our risk adjusted to reflect an uncertain macro environment, increasing competitive pressures, and the reality that we will lack two years of stronger than expected performance. Specifically for fiscal 2023, we plan to open between 25 and 30 net new stores and remodel or relocate 20 to 30 existing stores. As we shared on our last earnings call, we are seeing project delays resulting from external real estate and construction issues as well as supply chain disruption for key equipment. We continue to expect to open about 100 stores over the next two years, but the timing of openings are expected to shift between fiscal 2023 and 2024 as we navigate these external challenges. We expect net sales will increase 7% to 8%, with comp sales growth between 4% and 5%. We anticipate comp growth in the first half will be in the upper single-digit range, driven by stronger growth in the first quarter, and then moderate to low single-digit growth in the second half of the year. We expect operating margin for the year will be between 14.7% and 15% of sales, driven primarily by SG&A delivery. reflecting investments to support our strategic priorities and higher store expenses, as well as ongoing wage pressures. We expect gross margin will be leveraged modestly as we lap benefits from the timing of retail price changes in 2022 and plan for a more normalized promotional environment in 2023. We expect to invest an incremental 60 to 70 million to support our strategic priorities, including Project SOAR, our digital store and other IT capabilities, and UB Media. In fiscal 2022, we invested $52 million to support our strategic agenda. These assumptions result in guidance for diluted earnings per share in the range of $24.70 to $25.40 per share, including the impact of approximately $900 million in share repurchases. As a reminder, fiscal 2023 will be a 53-week year. We anticipate the additional week will add between 165 to 175 million in sales and approximately 40 cents of earnings per share. Finally, we plan to spend between 400 to 475 million in CapEx, including approximately 200 to 220 million for supply chain and IT, $155 to $205 million for new stores, remodels, and merchandise fixtures, and $45 to $50 million for store maintenance and others. We expect appreciation for the year will be between $245 to $250 million. In closing, our business has recovered from the pandemic faster than initially expected. Our annual net sales this year exceeded $10 billion to dollars. which is two years earlier than planned, and when combined with our ongoing efforts to optimize our model, has enabled record profitability. In fiscal 2022, operating margin was a record 16.1% of sales, as compared to 12.1% in fiscal 2019, driven primarily by fixed cost leverage, higher merchandise margin, and other revenue growth, partially offset by shrink and channel While stronger revenue growth has resulted in meaningful improvement compared to pre-pandemic levels, our efforts to optimize our model through this period of disruption are delivering sustainable benefits. As a result, we are updating our expectations for operating margins. We remain confident we can deliver comp sales growth between 3% to 5%, but now believe we can maintain operating margins between 14% to 15% of sales over the next few years. We believe the outlook for the beauty category is bright, and we are confident our strategic framework and strong financial foundation will enable us to drive long-term growth in shareholder returns. And now I'll turn the call back over to our operator to moderate the Q&A session.

Thank you. If you would 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. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Kate McShane with Goldman Sachs. Please proceed.

Thanks for taking our question. I think you mentioned there were five points of pricing that you got in the comp for Q4. How should we think about the role of higher prices in the 2023 comp guide?

Hi, Kate. Yep, thanks for the question.

Yes, 500 basis points in Q4, similar to Q3. The pricing, what we anticipate for pricing going forward into 2023 is a more normalized level. 2022 is really unprecedented across the category. We believe that that will return to kind of more steady state level of price increases going forward, or at least into 2023. So that is included in our guidance and is in part driving the stronger first half versus second half. As Scott mentioned, high single digits in the first half, lower single digits in the second half. One contributor to that is lapping price increases. Many of them happened through the second quarter into the third quarter last year. So as we lap those that So it's incorporated in our guidance and we anticipate it being at a more moderate normalized rate going forward.

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

Thank you so much for taking my question. Congrats on an incredibly strong year. I was intrigued by your comments about, I guess, these luxury departments are expanding the luxury beauty offering in select stores and online. What exactly does that look like? Because when I think about Ulta, particularly where you are now versus where you were, let's say, 10 years ago, you have a ton of luxury brands. So if you can just help me sort of dimensionalize that. Thank you.

Absolutely. Thanks for the question. We are excited about the luxury opportunity, and we have been participating in luxury for a while. We've had a long-term relationship with Chanel and among many other brands. But what's evolving and changing is an expanded presence of luxury in select stores and online. We recently launched Dior in makeup and skincare. We'd had the Dior fragrance business. So Dior is another along with Chanel, key anchors of our expanded luxury business. Natasha Denona, which is a beautiful and elevated color brand. Hourglass, Chanel Numero Un, Lancôme Absolume, we believe other luxury brands over time. That complements a portfolio of luxury fragrance brands that we have, including YSL, Tom Ford, Gucci, and others. And so the effort here is to make a stronger statement in luxury that further reinforces our all things beauty all in one place, the idea that you can shop across all price points, all categories, and luxury while we had a presence. We felt there was an opportunity to expand and solidify, and that's the actions we've been taking so far this year, and we're really encouraged by the results of the launch of several of these brands, including Dior, and excited about the opportunity ahead.

Our next question is from Christopher Herbers with J.P. Morgan. Please proceed.

Thanks. Good evening. So a couple related questions about the business momentum. You talked about the acceleration in January. If you teased out the Omicron lap and whether, was there an underlying acceleration? You also lapped the launch of Fenty and Olaplex into the first quarter. How did that play out relative to your expectations? You know, did it sort of Did the business slow in line with the lift that you saw last year, or did it do better? And then the last related question is, as you think about the high single-digit comp guide in the first quarter, are you essentially assuming that from today forward to the balance of the year, the business comp's in line with the annual guide?

Let's see. So a few things in that.

First of all, yeah, January was elevated, as Scott said. And there were multiple factors. It's hard to nail down exact drivers, the exact elements of the contribution, but you mentioned a few. Omicron, lapping Omicron being one of those. But the underlying consumer engagement was strong as we emerged out of holiday. There's no doubt about that. The importance of the category was The elevated connection between beauty and wellness is showing up in January and gives us confidence as we go into the year. We are lapping some major launches. Olaplex in January. Fenty, actually, the launch happened in Q1 of last year. So that launch was not lapped in January, but will be lapped here in the first quarter soon. And as we look into the year, again, the outlook that we have is 4% to 5% comp growth, stronger in the first half, higher in the first half, a double digit, I'm sorry, high single digit, excuse me, high single digit in the first half of the year, lower single digit in the second half of the year, leading to the 4% to 5% comp guidance for the full year. The drivers, again, of that are are in part pricing, you know, some continued momentum coming out of the strength we saw in January and other factors that lead to a bit stronger in the first half of the year.

Our next question is from Adrienne with Barclays. Please proceed.

Great. Thank you very much and congratulations on the quarter and the year and the great start to the new year. David, I guess I want you to So I'll start with kind of a question about the model itself. So pre-COVID, sales for gross square foot was kind of, you know, averaging in the 500 bucks a square foot. And at that time, sort of the potential margin was 15%. We're now kind of post-COVID in that $800 a square foot range. And it looks like these are new TAM bolt-ons, services, BIPOC, Conscious Beauty. It doesn't look skincare. It doesn't seem like there's kind of a replacement or shift going on. So I'm just wondering if you can kind of talk about the 15% sustainable margin and how we should think about sort of that on a longer term basis after you get through the investment phase. Thank you very much.

Yeah, Adrian, maybe I'll just give that a slightly different spin. So again, as we said, we're confident that we can deliver now adjusted 14 to 15% operating margins on a three to 5% comp for the next few years. Again, We came at our analyst day back in late fall 2021. We were giving our point of view on the financial model through the end of 2024. So since then, a lot of things have changed. I think less so on the sales drivers, because there's a lot, again, this category provides a lot of opportunities for us to drive the top line through various means. Really, the changes versus 2019 a lot are in the infrastructure the cost infrastructure of the business overall so you've probably heard us refer to some of this in the past so we of course we've benefited here over the last couple years from double digit you know sales growth driving a lot of fixed cost leverage across the business there's also been a more rational promotional environment the last couple years um and so and and these you know, elevated sales levels have also mitigated some of the other inflationary cross pressures that we are experiencing across the business. So, you know, as we look to 2023, we expect sales growth to moderate from where it's been the last couple years. And so that will, you know, that's going to drive some deleverage. That's our year-over-year tougher comparisons. We've described that. I mean, as we think about, again, stronger and sustainable operating margins, we just feel like The business is in a much healthier position today than it was back in 2019. Again, we've described improved capabilities across the business, like ship from store and BOPIS helping to do that. Our EFG initiative that we started years ago now are continuing to drive significant benefits to the business overall, and we believe that coupled with some of the new initiatives that we have along the lines of continuous improvement and some of the other long-term benefits strategic investments we're making for the business help give us comfort that we can hold on to those stronger margins with a three to five percent comp over the next few years.

Our next question is from Kelly Crago with Citi. Please proceed.

Hi, thanks for taking my question. I was wondering if you could talk a little bit about category growth and a breakdown how you're looking at growth by category in F23. And then just talk about some of the opportunities you have in skin. I think at 17% of sales, you index lower than the beauty category overall. So just curious, you know, if you have any initiatives in place to expand. I think you talked about maybe adding some square footage to stores dedicated to skin care. So anything else from like a brand perspective, any partnerships there would be helpful. Thanks.

Great.

Yeah, of course, our assortment is key to our success. One of the things that's really encouraging to us and, again, gives us confidence moving forward is our performance has been broad-based. We're seeing double-digit growth across all major categories. And as we look forward into 2023, we see good, healthy momentum in each of the categories, so we feel confident. And And fundamentally, it's driven by a overarching beauty trend and understanding of the power and importance of beauty and how it connects to overall wellness and self-care. That elevated connection, the increased emotional connection and the importance that beauty plays is fueling the entire category. And that's what's helping drive each element and each individual subcategory within the total beauty space. So we feel clearly good about what 2022 looked like and have good optimism going forward. A lot of newness, a lot of activity across each of our major categories. We've got newness in makeup and in hair care and fragrance. We'll continue to drive innovation and things we're excited about. Skin care is, as we mentioned in the script, was our fastest growing category. We had double-digit growth in each category, but skin care led the way. And we feel like there's even more opportunity. We've launched new products like Drunk Elephant. We've had great growth with the Ordinary Hero Cosmetics. We have, in our newest store design that we started rolling out last year, we brought skincare together. And our other categories make up a skincare and a more prominent front-of-store location that allows our guests to engage across all price points in a really elevated, beautiful way. We're bringing... New brands in. We just launched a partnership, an exclusive partnership with Beauty Counter, which spans both color and skin care, but has a very strong skin care presence. So we'll bring innovation across all parts of the business. And we see strong trends, most of which are rooted in wellness and overall health and self-care, which we think will drive each of the categories in a positive way going into 2023.

Our next question is from Simeon Gutman with Morgan Stanley. Please proceed.

Hey, everyone. Hope you can hear me and well done on 2022. God, I may have missed this, but I heard modest deleverage on gross margin. I don't know if you gave any framework for that, but if this math is right, down 50 or so, it means SG&A dollars would be up around 8%. And if those are roughly right numbers, can you get us the building blocks to why SG&A is up that much? And then, obviously, if gross is down even less and the dollars are greater, it just seems like a big amount. I'm curious what the building blocks are. Thank you.

Sure, Simeon. So, yeah, we expect operating margins going to be leveraged in fiscal 2023 compared to last year. by slight deleverage in gross margin, but the primary lever is going to be SG&A. That's where most of the pressure will come from during the year. We expect gross margin, you know, again, modest deleverage there, as we lap benefits and the timing of retail price increases during 2022, and we plan for a more normalized promotional environment overall. Those headwinds will probably be offset by growth in other revenue and continued fixed cost levels. So on the SG&A side, it really comes down to continuing our efforts with our strategic investments, our strategic initiatives across the business. So again, last year we got out of the gates on most all of those things, Project SOAR being the largest by far, but Digital Store of the Future, UB Media, there are a number of other digital investments across the business. Really getting into the thick of it, I guess I would say, during 2023. So that's the primary driver of it. But there's also inflationary pressures and store expenses. And of course, we reference the wage pressure as well. And most of that falls through to our field teams, which is recognized in our SG&A line. So that's it by far. I'd say overall, we feel good about where we are. We've got a good plan. We think it's balanced. in all ways and takes recognition of both the opportunities we have but also the risks that we see in 2023.

Our next question is from Oliver Chen with PD Cowan. Please proceed.

Hi, this is Joan Ellen. So, Oliver, thanks for taking our question. Just curious what you're seeing in terms of the promotional environment broader in the industry, and you talked about normalizing promo. But what are your strategies as you think about 2023? Thank you.

Yeah, we, in the fourth quarter, we saw, we'd call it rational promotional intensity. It was relatively flat to the previous year, still down versus 2019. And, of course, as we, I guess we probably have said several times previously, Q4 is an elevated promotional quarter because of the role of holiday and the gifting and the competition that we have with all gifting, not just within beauty. But nothing extraordinary in Q4. As we look into this fiscal year, we do see that continue to normalize. The step down, the improvements that we've made versus 2019 over the last couple of years We'll moderate somewhat. We won't continue the pace of improvement. We'll see a more normalized level of promotion, not back to previous pre-pandemic levels, but it is a competitive environment. There are added points of distribution. Brands are bringing newness and innovation and competing. So we would anticipate, as I said, a somewhat normalized level of promotion, but not –

not an irrational level of promotion as we look on forward.

Thank you.

Our next question is from Dana Telsey with the Telsey Group. Please proceed.

Just making sure you can hear me okay. As you think about the levels of shrink that are out there and obviously was incorporated into the results, How are you looking at that for 2023 and what are you baking in? And then just on pricing, where the expectation to go to a more normalized pricing cadence, what do you see in that more normalized pricing cadence of increases and does it differ by category? Thank you.

Maybe I'll start, Dana. Like you're hearing from the broader retail industry, organized retail crime and strength is a real issue out there and we're not immune to what's happening. The concern is really twofold. Firstly, it's about safety and well-being of our associates and our guests. When these groups are coming in to the stores, it's really upsetting and can take an emotional toll on everyone that's involved. And secondly, as you mentioned, it's clearly a financial impact to our bottom line. We're continuing to invest in measures to not only deter but catch those who are conducting these activities. Some of the investments are around increasing our talent level, targeting our payroll in both our store and our loss prevention teams, testing new technology, And then also installing new fixtures that can protect some of our key categories. Fragrance is the one we're really leaning into right now. What we're seeing is when we're investing in these locked cases and fragrance, we're seeing sales go up and shrink go down. And our associates are very, very thankful for this because it's really deterring these bad actors from coming into our stores. We're going to be at 75% of the chain by the end of the year with these new fixtures. And then in regards to what the shrink impact is, it's about 70 basis points of headwinds that we had in 2022 to gross margin, and we're proactively taking these steps, as I mentioned before, to make sure that we understand these macro factors are going to continue to persist, but we're looking at only a modest benefit in shrink improvement in 2023.

And on the pricing side, don't see any real – Differences by category, what we saw in 2022 was really broad-based across categories because the inflationary pressures for brands really impacted all segments. So as we look forward, by normalized, we mean every year in beauty over time, there's a percentage of brands that go through just more standard price increases. And we anticipate kind of going back into that. And we think it will be across categories.

Thanks, Sherry. We have time for one more question.

Our next question would be from Mark with Baird. Please proceed.

Good afternoon. Thank you for taking my question.

So it sounds like things are going great with Target. Just any color you can provide on the incrementality of that new Target customer that may be returning to Alta? And then separately, I know there's been some supply chain delays impacting your store openings, but just wondering if you could provide a broader update on how you view the store runway and perhaps how any of the learnings from the target relationship are impacting the pace of openings over the next few years. Thank you.

Well, I'll go ahead and start. What I would say is that we've got three areas of really concentrated efforts in our partnership with the AltaBD and Target partnership. First is about deepening the guest engagement. It's really focusing on new guest acquisition, increasing the spend of the existing linked circle and Ulta Beauty reward members, and engaging that lapsed member. When we see the Ulta Beauty at Target member coming in and engaging with Ulta Beauty itself, what we're seeing is we like what their spend patterns look like. They're at our average spend, if not even higher. So we like what we're seeing from the ecosystem. In regards to new store growth, I mean, listen, we've got competition out there always on in regards to where we're opening up new stores. So, you know, we are looking at this as part of the ecosystem where we actually would even have in some locations Ulta Beauty at Target in the same center as an Ulta Beauty store. And what we're seeing is that's really, it's performing very nicely that the customer is shopping in both. While there's competition out there, it's not necessarily playing into what our new store opening guidelines look like. Maybe you want to weigh in on the supply chain with supplies for new stores.

Yeah, so for our new store outlook, our long-term outlook, still 1,500 to 1,700 stores with roughly 800 of the beauty at target locations on top of that. So again, we're still very comfortable from everything we've seen. The interaction between, as Keisha just described, between the shop and shops and what we're doing in our standalone stores are happy with the overall performance. Again, this year, there's just a shift. We're just smart business, we think, not chasing a number with new store openings and trying to be wise about how we plan that to make sure we keep good disciplines on site selection and the cost ramifications because these are long-term investments.

All right. Great. Well, thank you all for your interest and engagement today. And I want to close by thanking all 53,000 Ulta Beauty associates for delivering just excellent financial results in 2022 while executing against our strategic priorities. I am excited about the future of Ulta Beauty and believe firmly in our differentiated business model, strategic framework, and talented and committed teams. will continue to drive success and create significant shareholder value. We look forward to speaking to all of you again when we report results for the first quarter of fiscal 2023 on May 25th. Have a good evening and talk to you all soon. Thanks.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation. Thank you. © transcript Emily Beynon you Thank you. Thank you.

Thank you. music music Thank you.

Good afternoon and welcome to Ulta Beauty Conference to discuss results for the fourth quarter of fiscal 2022. 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 recue 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. Riley Rollins, Vice President of Investor Relations. Ms. Rollins, please proceed.

Thank you, Sherry. Good afternoon, everyone, and thank you for joining us for a discussion of our Fiscal 22 results and our expectations for Fiscal 23. Hosting our call today are Dave Kimball, Chief Executive Officer, and Scott Sutterston, Chief Financial Officer. Dave will begin with some key highlights from our fourth quarter and full year, and then share our priorities for fiscal 23. Then Scott will review our financial results in more detail and discuss our financial outlook. After our prepared comments, we will open the call for questions, and Keisha Steelman, Chief Operating Officer, will join us for the Q&A session. Before we begin, I'd like to remind you that the statements contained in this conference 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 FCC. We caution you not to place undue reliance on these forward-looking statements, which speak only as of today, March 9, 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. Today's prepared remarks will be a little longer than usual. To allow us to accommodate as many questions as possible during the hours scheduled for this call, we respectfully ask that you limit your time to one question. If you have additional questions, please re-queue. 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. We appreciate your interest in Ulta Beauty. Our fourth quarter was a strong end to a record-setting year. For the first time in our 33-year history, our annual revenues surpassed $10 billion, and our annual net income exceeded $1 billion. In addition, we expanded our loyalty program to more than 40 million members. Achieving such meaningful milestones reflects healthy consumer engagement with the beauty category, the power of Ulta Beauty's highly differentiated model, and the impact of our winning culture and outstanding teams. The Ulta Beauty team continues to execute with excellence and inspire me daily with their passion and leadership. I want to thank all of our associates for their commitment to delivering great guest experiences and for working together as one team to move our business forward. I am honored to lead such a great company of talented associates who bring our mission, vision, and values to life for all of our stakeholders. Now to the results. Starting with the fourth quarter, net sales increased 18.2% to $3.2 billion. Operating profit increased to 13.9% of sales, and diluted EPS increased 23.5% to $6.68 per share. Sales of all major categories exceeded our expectations, and we saw solid sales momentum across both our store and digital channels. Additionally, we continued to see healthy growth in spend per member across all income demographics. This broad-based strength reflects successful execution of our key fourth quarter events, including Holiday, Jumbo Love, and Love Your Skins. Our holiday marketing plan, which included new television advertising, engaging storytelling, and robust digital and social support, delivered strong guest engagement and drove significant increases in top-of-mind awareness. Our holiday gifting assortment, which was thoughtfully curated across every category and budget, resonated with guests. And our innovative and inclusive gift card program delivered strong double-digit growth across Ulta Beauty-owned and third-party channels. Turning to performance by category, all major categories delivered double-digit growth again this quarter, and we increased our market share in Prestige Beauty versus the fourth quarter last year, based on data from the MPD group. Skincare delivered the strongest growth this quarter, with double-digit growth in both Prestige and Mass. Growth in the quarter was primarily driven by serums, moisturizers, acne treatments, and holiday gift sets. Guests engaged with newness from brands like Drunk Elephant, The Ordinary, and Hero Cosmetics, while dermatology-based brands like La Roche-Posay and CeraVe also resonated strongly with guests. Our successful Love Your Skin event also contributed to the category's strong growth. In addition to converting members to the skincare category with prestige skincare offers, we also introduced guests to our wellness assortment with new beauty steals from a variety of brands, including Truly, Love Wellness, and Sugar Bear. The fragrance and bath category delivered another quarter of double-digit growth on top of strong double-digit growth last year. Compelling newness from luxury brands like Burberry, YSL, and Dior, as well as exclusive newness from Billie Eilish and Ariana Grande, including her latest fragrance, Mod, contributed to the positive growth. In addition, the category benefited from strong engagement with our exclusive holiday fragrance gift sets and monthly Fragrance Crush programs. Growth of the makeup category accelerated from the third quarter, with double-digit growth in both prestige and mass makeup. Top subcategories were face and lip, driven by newness in foundation, concealers, and lip balms and glosses. New brands like Fenty Beauty, REM Beauty, and recently launched Dior contributed to growth during the quarter, while new products from a wide range of brands, including Tarte, e.l.f., NYX, and Clinique, also continued to engage guests. Finally, hair care delivered double-digit growth, driven by newness and innovation, focused on hair health. Newer brands like Olaplex, Miel, and recently launched Adana's Recipe contributed to the quarter's growth. Our Jumbo Love event drove healthy growth for key professional brands like Pureology, Redken, and Biolage, as well as Mastige brands Kristen S. and Batiste. Hair tools continued to experience broad softness as we lapped strong newness last year. Our services business also delivered strong double-digit growth again this quarter, driven by an increase in transactions. Leveraging our CRM capabilities, we continue to welcome new members to services while increasing frequency with members who already engaged in our service offering. And the salon back bar takeovers, which give our stylists a unique opportunity to introduce new brands and products to guests, help drive growth and new member acquisition for way and bumble and bumble. Now, turning to the full year, strong consumer demand and outstanding execution by our teams fueled broad-based strength across our business. Net sales for the year increased 18.3% to $10.2 billion. Operating profit increased to 16.1% of sales, and diluted EPS increased 33.5% to a record $24.01 per share. In 2021, we introduced a new strategic framework designed to guide our priorities and enable Ulta Beauty to expand our market leadership and drive profitable growth. Let me share a few highlights of the progress we made against this framework in fiscal 2022. Our first strategic pillar is to drive growth through an expanded definition of all things beauty. And this year, we continued to enhance our offerings to engage and excite beauty enthusiasts. All major categories delivered double-digit comp growth, and we increased our market share in Prestige Beauty versus Fiscal 2021 based on data from the MPD group. We strengthened our assortment with the addition of leading brands in every major category, including Fenty Beauty, Dior, Bioma, and Mio, and expanded MAC and Chanel Beauté into more doors. We also introduced guests to exciting emerging brands, including About Face, Divi, Skip, and Vacation through our Sparked platform. We enhanced conscious beauty at Ulta Beauty, ending the year with 300 brands certified in at least one conscious beauty pillar and made it easier for guests to identify brands and products that reflect their values in this important space. We added 12 black-owned and founded brands to our assortment and launched our Muse Accelerator program to help early-stage BIPOC brands prepare for retail readiness And we expanded the wellness shop to an additional 330 stores and enhanced our online offering to include intimate wellness. Turning now to our second strategic pillar, all in your world, we're focused on evolving guest experiences through a personalized, connected, omnichannel ecosystem. In fiscal 2022, we continue to enhance the guest experience across all our touch points. We expanded our physical footprint, opening 47 new stores and renovating or relocating 32 stores. We relaunched makeup services and introduced new salon services, including curl-specific treatments and extensions. These enhancements, combined with record-setting stylist productivity and increased transactions, resulted in strong double-digit growth for our services business. Reflecting our efforts to enhance our buy-anywhere, fill-anywhere capabilities, We expanded our same-day delivery offering to six new markets and delivered significant improvement in guest satisfaction with the BOPIS experience. Between BOPIS, same-day delivery, and ship-from-store capabilities, 31% of our digital orders this year were fulfilled by stores, up from 28% last year. We also created new digital experiences through the phased refresh of our digital store and the expansion of virtual try-on capabilities. including Glam Lab Skin Advisor 2.0 and the Hairstyle Try-On. Finally, our successful partnership with Target continued to grow with the opening of 254 additional Ulta Beauty at Target shop and shop locations. We also created a dedicated field team to help unlock greater opportunity with the partnership. And through engaging store visits and communications, this team had a positive impact on staffing, training, and loyalty. Moving to our third strategic pillar, expanding and deepening our engagement with guests by ensuring Ulta Beauty operates at the heart of the beauty community. During the year, we continued to drive guests' love, loyalty, and share of wallet, and our efforts created stronger, more emotional connections with our guests. Overall, our native awareness grew significantly with meaningful gains among key audiences, including Gen Z, Hispanic, and Black beauty consumers. Importantly, we increased the number of active members in our loyalty program by more than 3 million members, ending fiscal 2022 with a record-breaking 40.2 million ultimate reward members who shopped more frequently and spent more with us on average. And we launched our retail media network, UB Media, with a dedicated sales team and supported by new processes and tools. Our fourth strategic pillar is to drive operational excellence and optimization to enable us to capture additional market share, fund guest experience, enhancements, and deliver future profitable growth. In fiscal 2022, we made progress on a number of initiatives that will enable us to scale more easily, including successfully executing phase one of Project SOAR, our three-year effort to upgrade our enterprise resource planning platform on time and on budget. In addition to successfully navigating inflationary pressures in wages and fuel, we initiated a multi-year supply chain optimization effort, breaking ground on our first market fulfillment center and beginning the planned retrofit of our Greenwood Distribution Center. Both facilities are on track to be fully operational in fiscal 2023. Our winning culture is key to driving our success. So our fifth strategic pillar is focused on protecting and cultivating our world-class culture and talent. Our vision is to create a highly aligned, engaged workforce and an inclusive workplace that creates opportunities for our people and our business, and I am proud of the progress we made last year. With strong participation rates in our annual company-wide engagement survey, our overall engagement remains high and continued to exceed retail benchmarks. And our investments in our team and culture enabled us to promote more than 11,000 associates into new roles and improve associate retention across the enterprise. Finally, our sixth strategic pillar is to expand our environmental and social impact. As the largest US beauty retailer, we can influence how the world sees beauty while driving positive impact. In fiscal 2022, we delivered on our DEI commitments by investing $50 million across our major areas of focus, including multicultural media to amplify underrepresented voices, dedicated support for BIPOC brands, and associate training to reinforce inclusivity and address unconscious bias. On the environmental side, we continue to reduce our energy usage through the expansion of our LED lighting retrofit program to an additional 100 stores and our Chambers for D.C., as well as additional energy efficiency project in select stores. We also enhanced our ESG disclosures in our second ESG report and submitted emissions targets to the Science-Based Target Initiative, a globally recognized organization that validates these targets. Fiscal 2022 was an outstanding year, and I am incredibly proud of our associates' dedication to delivering value for all stakeholders while building the foundation for the future. As we move into fiscal 2023, we remain optimistic about the strength and resiliency of the beauty category and the opportunities for Ulta Beauty. Over the last two years, the U.S. beauty category experienced unprecedented growth, reflecting various factors such as product innovation, expanding regimens, new social media platforms, return to work and resumed social activities, and the elevated connection between beauty and overall self-care. In addition to these consumer drivers, an elevated level of price increases also contributed to growth for the category. While some are unique to the post-pandemic recovery, we believe other factors will continue driving growth for the category. Importantly, consumer engagement with beauty is stronger than ever and is more connected with wellness. These factors give us confidence that the growth of the US beauty category will remain healthy but moderate to the higher end of the category's historical annual growth rate of between 2 and 5%, barring a major economic event. Building on the progress made in fiscal 2022, we intend to continue executing against our strategic framework to further expand our market leadership, drive profitable growth, and transform our business for the future in fiscal 2023. Starting with our consumer-centric strategic pillars, we will continue to innovate, evolve, and expand all things beauty to excite and engage the beauty enthusiast. Today, Ulta Beauty is the preferred destination for mass and prestige beauty. To maintain this leadership and capture additional market share, we will continue to add relevant brands to our assortment across categories and price points. Additionally, building on customer insights, and strong engagement with our current portfolio of luxury brands, we see luxury beauty as an emerging opportunity. In fiscal 2023, we will expand our luxury beauty offering with an engaging experience in select stores and an elevated presence on Ulta.com. In addition to strengthening our core assortment, we will continue to expand, evolve, and amplify our cross-category platforms, including Conscious Beauty, our BIPOC-founded brands, The Wellness Shop, and Spark, our emerging brands platform. As we meet beauty enthusiasts wherever they are on their beauty journey, all in your world, we will continue to invest in our omnichannel experiences. Our physical footprint is a strategic advantage, and we plan to open 25 to 30 net new stores and remodel or relocate 20 to 30 stores throughout the year. As we expand our physical footprint, we will also accelerate growth across digital platforms, supported by the completed transition of our digital store to a modern technology and architecture, as well as the expansion of our buy anywhere, fill anywhere capabilities. Our partnership with Target will continue to expand as we support additional Ulta Beauty at Target shops, evolve the assortment, and leverage our dedicated field team to deliver elevated guest experiences. This newest touchpoint is introducing new guests to Ulta Beauty, and we intend to leverage our customer insights and CRM capabilities to continue driving additional member acquisition and bounce back to Ulta Beauty. To operate at the heart of the beauty community, we will continue to create and nurture authentic, meaningful connections with our guests to drive stronger relevance and brand consideration, especially with key constituents. We plan to expand the power of our loyalty program by enhancing our media mix to acquire new members and elevate the loyalty program throughout our digital shopping experience. We plan to leverage our analytics and data insights further to reactivate lapsed guests, increased retention, and shift share of wallet. And we intend to leverage our digital and physical assets to drive greater omnichannel member penetration. Finally, we plan to accelerate UB Media to capture greater demand from our brand partners. Building on the foundation established in 2022, we will offer new opportunities on Ulta-owned properties and enhanced existing products with advanced reporting and optimized audience selection. Turning now to our operational excellence and optimization efforts, in fiscal 2023, We plan to implement the next phase of Project SOAR, transitioning key supply chain and merchandising processes to the new platform. We will continue our supply chain optimization efforts as we complete the retrofit of our Greenwood DC and the opening of our first Market Fulfillment Center. In addition, we will begin the retrofit of our Dallas DC and construction of our second Market Fulfillment Center here in Bolingbrook, Illinois. This new facility will replace our existing Romeoville facility and transition our experienced team to a new state-of-the-art facility. In addition to these transformation initiatives, we will leverage our established continuous improvement capabilities to drive additional cost efficiency. Our success is enabled by our world-class culture. Values-based and anchored in caring for each other, the Ulta Beauty culture attracts and retains top talent who deliver great guest experiences across multiple channels every day. To protect and cultivate our culture and enable future business performance, we will invest purposefully in our associates and teams. This year, we plan to modernize our talent strategy and planning practices, enrich our learning and development offerings, and enable a leading DEI ecosystem. Finally, in 2023, we will stay focused on our environmental and social impact. Being good stewards of resources, taking care of each other, and creating a positive impact on the world is part of our DNA. And our ESG priorities are integrated into our guest-facing, operational excellence, and culture strategies. Building on progress made today, we expect the Science-Based Targets Initiative to take action on our submission in the first quarter And based on their feedback, we plan to develop a roadmap to achieve our emission reduction targets. We also plan to launch packaging, recycling, and reusable bag pilots as we explore ways to support a more sustainable beauty industry. We will continue working to expand our DEI efforts to amplify underrepresented voices, support black entrepreneurs in the business industry, ensure inclusivity remains top priority in every guest engagement, and foster an inclusive, bias-free, and equitable workplace for all associates. And we will continue to strengthen our corporate governance practices. Over the last several years, our board has updated our governance guidelines to better express our commitment to diversity, implemented an age limit for directors to encourage board refreshment, and updated committee charters to address oversight of ESG risks. This year, our Board will propose, for stockholder approval, changes to our Certificate of Incorporation and Bylaws, which, among other things, will declassify the Board and provide for the annual election of each director for one-year terms. If approved, the Board will be fully declassified by our 2025 Annual Stockholder Meeting. These proactive measures reflect our commitment to operating with best-in-class governance practices. More detail about these proposed changes will be provided in our 2023 proxy statements. In closing, the Ulta Beauty team delivered an outstanding performance in fiscal 2022, on top of a very strong performance in fiscal 21. As we look to 2023, I am optimistic about our opportunities to expand our market leadership and drive profitable growth. We are leaders in a culturally relevant growing category with a strong proven business model and a winning culture with outstanding associates who are passionate about caring for our guests and each other. I remain confident we will continue to lead the category and move beauty forward in ways that have a positive impact on our guests, our associates, and the communities we serve. 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 take a moment to express my sincere gratitude to our teams for delivering these exceptional results for our shareholders. We have long known our associates are our competitive advantage, and this year's results are an ongoing reflection of their relentless commitment to our guests and to executing with excellence. Now to our fourth quarter results, beginning with the income statement. Results for the quarter were well ahead of our expectations, primarily driven by strong holiday sales and robust guest demand, which accelerated post-holiday. Sales growth across both physical and digital channels were stronger than expected, resulting in less gross margin deleverage than planned and greater SG&A leverage. As a result, operating margin increased to 13.9% for the quarter. Net sales for the quarter increased 18.2%, driven by 15.6% growth in comp sales and strong new store performance. In addition, other revenue increased 18 million, primarily due to credit card income growth and an increase in loyalty income from our partnership with Target. The growth in comp sales was primarily a result of a 13.6% increase in transactions, driven by double digit growth in store traffic. Average ticket increased 1.8%, driven by higher average selling price, which more than offset lower units per transaction. Similar to last quarter, we estimate that product price increases contributed about 500 basis points to the overall comp increase. Looking at the cadence of sales through the quarter, sales moderated in November from the third quarter trend as we lapped more challenging comparisons. But well-executed holiday plans drove strong results and momentum that accelerated in January. Post-holiday results benefited from robust guest traffic in stores and the lapping of weather and impacts from COVID-19 variants during the same period last year. During the quarter, we opened 12 new stores, relocated one, and remodeled 12 stores. For the quarter, gross margin was flat compared to the same period last year at 37.6%. Leverage of fixed costs, favorable channel mix shifts, and strong growth in other revenue were offset by higher inventory shrink. The impact of promotional activity was flat compared to last year. Consistent with trends we experienced in the first three quarters of the year, in the fourth quarter, robust top-line growth delivered significant fixed-cost leverage. Channel mix was favorable, as the penetration of e-commerce sales was about 270 basis points lower than last year, and solid growth in other revenue was primarily driven by increased credit card income and royalties earned through our target partnerships. SG&A increased 17% to $763 million. As a percentage of sales, SG&A decreased 20 basis points to 23.6% compared to 23.8% last year, primarily due to leverage in marketing expenses and incentive compensation due to higher sales, partially offset by deleverage of store payroll and benefits and corporate overhead. Marketing expenses during the quarter were lower as a percentage of sales compared to the same period last year. As we have discussed on previous calls, this year we offset the incremental marketing expense of digital campaigns we manage for our brand partners with vendor income that is a direct reimbursement for these specific costs within total marketing expense. We will begin to cycle this change in the first quarter of fiscal 2023. Incentive compensation drove 50 basis points of leverage in the quarter, primarily driven by higher sales and a shift in the timing of bonus accruals for store associates. Offsetting these benefits, corporate overhead expense was higher than the same period last year, primarily reflecting investments related to our strategic priorities, including Project SOAR and other IT capabilities, UB Media, and Ulta Beauty at Target. Store payroll and benefits spent in the quarter was higher than last year, driven by an increase in the number of store associates and higher average wage rates. Operating margin was 13.9% compared to 13.8% last year. Healthy top-line growth, driven primarily by stores, combined with the impact of our ongoing cost optimization efforts, supported better operating margin performance. The company's tax rate increased to 24.6% compared to 22.9% in the fourth quarter last year. A higher effective tax rate is primarily due to less benefit from income tax accounting for share-based compensation and state tax credits. Diluted GAAP earnings per share increased 23.5% to $6.68 compared to $5.41 last year. To recap the full year, Net sales increased 18.3% to $10.2 billion. Comp sales increased 15.6%, driven by a 10.8% increase in transactions and a 4.3% increase in average tickets. We estimate that product price increases contributed about 400 basis points to the overall comp increase for the year. Operating profit increased to 16.1% of sales, primarily driven by strong revenue growth. and diluted EPS increased 33.5% to our record $24.01 per share. Moving on to the balance sheet and cash flow statement. Total inventory increased 7% to $1.6 billion compared to $1.5 billion last year. In addition to the impact of 47 new stores, the increase reflects inventory purchases to support new brand launches and brand expansions, as well as the impact of inventory cost increases. Our well-established business model continues to generate significant cash from operations, including more than 1.4 billion in fiscal 2022. Our capital allocation philosophy remains consistent. Our first priority is to reinvest in our business to drive future growth, followed by returning excess cash to our shareholders. In fiscal 2022, we invested $312 million in capital expenditures, including approximately $136 million for new stores, remodels, and merchandise fixtures, $74 million for IT, $70 million for supply chain, and $32 million for store maintenance and other. Appreciation for the year was $241 million compared to $268 million last year, primarily due to a shift of IT investments from capital to cloud expense. During the fourth quarter, we repurchased 722,000 shares at a cost of $328 million, bringing total share repurchases to $900 million for the year. Since launching our stock buyback program in 2014, we've purchased more than 16 million shares at a weighted average price of $293, effectively returning $4.8 billion to shareholders. while continuing to invest in strategic growth drivers. Turning to our outlook for fiscal 2023, we ended fiscal 2022 with strong momentum and are confident the US beauty category will remain healthy. Our financial expectations reflect this optimism, but our risk adjusted to reflect an uncertain macro environment, increasing competitive pressures, and the reality that we will lack two years of stronger than expected performance. Specifically for fiscal 2023, we plan to open between 25 and 30 net new stores and remodel or relocate 20 to 30 existing stores. As we shared on our last earnings call, we are seeing project delays resulting from external real estate and construction issues, as well as supply chain disruption for key equipment. We continue to expect to open about 100 stores over the next two years, but the timing of openings are expected to shift between fiscal 2023 and 2024 as we navigate these external challenges. We expect net sales will increase 7% to 8%, with comp sales growth between 4% and 5%. We anticipate comp growth in the first half will be in the upper single digit range, driven by stronger growth in the first quarter and then moderate to low single-digit growth in the second half of the year. We expect operating margin for the year will be between 14.7% and 15% of sales, driven primarily by SG&A deleverage, reflecting investments to support our strategic priorities and higher store expenses, as well as ongoing wage pressures. We expect gross margin will be leveraged modestly as we lap benefits from the timing of retail price changes in 2022 and plan for a more normalized promotional environment in 2023. We expect to invest an incremental 60 to 70 million to support our strategic priorities, including Project SOAR, our digital store and other IT capabilities, and UB Media. In fiscal 2022, we invested 52 million to support our strategic agenda. These assumptions result in guidance for diluted earnings per share in the range of $24.70 to $25.40 per share, including the impact of approximately $900 million in share repurchases. As a reminder, fiscal 2023 will be a 53-week year. We anticipate the additional week will add between $165 to $175 million in sales, and approximately 40 cents of earnings per share. Finally, we plan to spend between $400 to $475 million in CapEx, including approximately $200 to $220 million for supply chain and IT, $155 to $205 million for new stores, remodels, and merchandise fixtures, and $45 to $50 million for store maintenance and other. We expect appreciation for the year will be between $245 to $250 million. In closing, our business has recovered from the pandemic faster than initially expected. Our annual net sales this year exceeded $10 billion, which is two years earlier than planned, and when combined with our ongoing efforts to optimize our model, has enabled record profitability. In fiscal 2022, operating margin was a record 16.1% of sales. as compared to 12.1% in fiscal 2019, driven primarily by fixed cost leverage, higher merchandise margin, and other revenue growth, partially offset by shrink and channel mix. While stronger revenue growth has resulted in meaningful improvement compared to pre-pandemic levels, our efforts to optimize our model through this period of disruption are delivering sustainable benefits. As a result, we are updating our expectations for operating margins. We remain confident we can deliver comp sales growth between 3% to 5%, but now believe we can maintain operating margins between 14% to 15% of sales over the next few years. We believe the outlook for the beauty category is bright, and we are confident our strategic framework and strong financial foundation will enable us to drive long-term growth in shareholder returns. And now I'll turn the call back over to our operator to moderate the Q&A session.

Thank you. If you would 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. And for participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. Our first question is from Kate McShane with Goldman Sachs. Please proceed.

Hi, thanks for taking our question. I think you mentioned there were five points of pricing that you got in the comp for Q4. How should we think about the role of higher prices in the 2023 comp guide?

Hi, Kate. Yep, thanks for the question. Yes, 500 basis points.

in Q4, similar to Q3. The pricing, what we anticipate for pricing going forward into 2023 is a more normalized level. 2022 is really unprecedented across the category. We believe that that will return to kind of more steady state level of price increases going forward, or at least into 2023. So that is included in our guidance. and is in part driving the stronger first half versus second half. As Scott mentioned, high single digits in the first half, lower single digits in the second half. One contributor to that is lapping price increases. Many of them happened through the second quarter into the third quarter last year. So as we lap those, the comparables get a little tougher. So it's incorporated in our guidance, and we anticipate it being at a more moderate normalized rate going forward.

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

Thank you so much for taking my question. Congrats on an incredibly strong year. I was intrigued by your comments about I guess, these luxury departments are expanding the luxury beauty offering in select stores and online. What exactly does that look like? Because when I think about Ulta, particularly where you are now versus where you were, let's say, 10 years ago, you have a ton of luxury brands. So if you can just help me sort of dimensionalize that. Thank you.

Absolutely. Thanks for the question. We are excited about the luxury opportunity, and we have been participating in luxury for a while. We've had a long-term relationship with Chanel, among many other brands. But what's evolving and changing is an expanded presence of luxury in select stores and online. We recently launched Dior in makeup and skincare. We'd had the Dior fragrance business, so Dior is another along with Chanel, key anchors of our expanded luxury business. Natasha Denona, which is a beautiful and elevated color brand, Hourglass, Chanel Numero Un, Lancôme Absolue, and we believe other luxury brands over time. That complements a portfolio of luxury fragrance brands that we have, including YSL, Tom Ford, Gucci, and others. And so the effort here is to make a stronger statement in luxury that that further reinforces our all things beauty all in one place, the idea that you can shop across all price points, all categories, and luxury while we had a presence. We felt there was an opportunity to expand and solidify, and that's the actions we've been taking so far this year, and we're really encouraged by the results of the launch of several of these brands, including Dior, and excited about the opportunity ahead.

Our next question is from Christopher Herbers with JP Morgan. Please proceed.

Thanks. Good evening. So a couple related questions about the business momentum. You talked about the acceleration in January. If you teased out the Omicron lap and whether, was there an underlying acceleration? You also lapped the launch of Fenty and Olaplex into the first quarter. How did that play out relative to your expectations? Did the business slow in line with the lift that you saw last year, or did it do better? And the last related question is, as you think about the high single-digit comp guide in the first quarter, are you essentially assuming that from today forward to the balance of the year, the business comp's in line with the annual guide?

Let's see. So a few things in that.

First of all, yeah, January was elevated, as Scott said. And there were multiple factors. It's hard to nail down exact drivers, the exact elements of the contribution, but you mentioned a few, Omicron, lapping Omicron being one of those. But the underlying consumer engagement was strong as we emerged out of holiday and There's no doubt about that. The importance of the category, the elevated connection between beauty and wellness is showing up in January and gives us confidence as we go into the year. We are lapping some major launches. Olaplex in January. Fenty, actually, the launch happened in Q1 of last year. So that launch was not lapped in January, but will be lapped here in the first quarter next. And as we look into the year, again, the outlook that we have is 4% to 5% comp growth, stronger in the first half, higher in the first half, a double digit, I'm sorry, high single digit, excuse me, high single digit in the first half of the year, lower single digit in the second half of the year, leading to the 4% to 5% comp guidance for the full year. The drivers, again, of that are are in part pricing, you know, some continued momentum coming out of the strength we saw in January and other factors that lead to a bit stronger in the first half of the year.

Our next question is from Adrienne with Barclays. Please proceed.

Great. Thank you very much and congratulations on the quarter and the year and the great start to the new year. David, I guess I'll actually... So I'll start with kind of a question about the model itself. So pre-COVID, sales for gross square foot was kind of, you know, averaging in the 500 bucks a square foot. And at that time, sort of the potential margin was 15%. We're now kind of post-COVID in that $800 a square foot range. And it looks like these are new TAM bolt-on services, BIPOC, Conscious Beauty. It doesn't look skincare. It doesn't seem like there's kind of a replacement or shift going on. So I'm just wondering if you can kind of talk about the 15% sustainable margin and how we should think about sort of that on a longer term basis after you get through the investment phase. Thank you very much.

Yeah, Adrian, maybe I'll just give that a slightly different spin. So again, as we said, we're confident that we can deliver now adjusted 14 to 15% operating margin on a three to 5% comp for the next few years. Again, We came at our analyst day back in late fall 2021. We were giving our point of view on the financial model through the end of 2024. So since then, a lot of things have changed. I think less so on the sales drivers, because there's a lot, again, this category provides a lot of opportunities for us to drive the top line through various means. Really, the changes versus 2019 a lot are in the infrastructure the cost infrastructure of the business overall so you've probably heard us refer to some of this in the past so we of course we've benefited here over the last couple years from double digit you know sales growth driving a lot of fixed cost leverage across the business there's also been a more rational promotional environment the last couple years um and so and and these you know, elevated sales levels have also mitigated some of the other inflationary cross pressures that we are experiencing across the business. So, you know, as we look to 2023, we expect sales growth to moderate from where it's been the last couple years. And so that will, you know, that's going to drive some deleverage. That's our year-over-year tougher comparisons. We've described that. I mean, as we think about, again, stronger and sustainable operating margins, we just feel like The business is in a much healthier position today than it was back in 2019. Again, we've described improved capabilities across the business, like ship from store and BOPIS helping to do that. Our EFG initiative that we started years ago now are continuing to drive significant benefits to the business overall. And we believe that coupled with some of the new initiatives that we have along the lines of continuous improvement and some of the other long-term benefits strategic investments we're making for the business help give us comfort that we can hold on to those stronger margins with a three to five percent comp over the next few years.

Our next question is from Kelly Crago with Citi. Please proceed.

Hi, thanks for taking my question. I was wondering if you could talk a little bit about category growth and break down how you're looking at growth by category in F23. And then just talk about some of the opportunities you have in skin. I think at 17% of sales, you index lower than the beauty category overall. So just curious, you know, if you have any initiatives in place to expand. I think you talked about maybe eyes and square function stores dedicated to skin care. So anything else from like a brand perspective, any partnerships there would be helpful. Thanks.

Great. Yeah, of course, our assortment is key to our success. One of the things that's really encouraging to us and, again, gives us confidence moving forward is our performance has been broad-based. We're seeing double-digit growth across all major categories. And as we look forward into 2023, we see good, healthy momentum in each of the categories, so we feel confident. And And fundamentally, it's driven by a overarching beauty trend and understanding of the power and importance of beauty and how it connects to overall wellness and self-care. That elevated connection, the increased emotional connection and the importance that beauty plays is fueling the entire category. And that's what's helping drive each element and each individual subcategory within the total beauty space. So we feel clearly good about what 2022 looked like and have good optimism going forward. A lot of newness, a lot of activity across each of our major categories. We've got newness in makeup and in hair care and fragrance. We'll continue to drive innovation and things we're excited about. Skin care is, as we mentioned in the script, was our fastest growing category. We had double-digit growth in each category, but skin care led the way. And we feel like there's even more opportunity. We've launched new products like Drunk Elephant. We've had great growth with the Ordinary Hero Cosmetics. We have in our newest store design that we started rolling out last year, we brought skincare together and our other categories make up a skincare and a more prominent front of store location that allows our guests to engage across all price points in a really elevated, beautiful way. We're bringing... New brands in. We just launched a partnership, an exclusive partnership with Beauty Counter, which spans both color and skin care, but has a very strong skin care presence. So we'll bring innovation across all parts of the business. And we see strong trends, most of which are rooted in wellness and overall health and self-care, which we think will drive each of the categories in a positive way going into 2023.

Our next question is from Simeon Gutman with Morgan Stanley. Please proceed.

Hey, everyone. Hope you can hear me and well done on 2022. God, I may have missed this, but I heard modest deleverage on gross margin. I don't know if you gave any framework for that, but if this math is right, down 50 or so, it means SG&A dollars would be up around 8%. And if those are roughly right numbers, can you get us the building blocks to why SG&A is up that much? And then, obviously, if gross is down even less than the dollars or greater, it just seems like a big amount. I'm curious what the building blocks are. Thank you.

Sure, Simeon. So, yeah, we expect operating margins going to be leveraged in fiscal 2023 compared to last year. by slight deleverage in gross margin, but the primary lever is going to be SG&A. That's where most of the pressure will come from during the year. We expect gross margin, you know, again, modesty leverage there, as we lap benefits and the timing of retail price increases during 2022, and we plan for a more normalized promotional environment overall. Those headwinds will probably be offset by growth in other revenue and continued fixed cost leverage. So on the SG&A side, it really comes down to continuing our efforts with our strategic investments, our strategic initiatives across the business. So again, last year we got out of the gates on most all of those things, Project SOAR being the largest by far, but Digital Store of the Future, UB Media, there are a number of other digital investments across the business. Really getting into the thick of it, I guess I would say, during 2023. So that's the primary driver of it. But there's also inflationary pressures and store expenses. And of course, we reference the wage pressure as well. And most of that falls through to our field teams, which is recognized in our SG&A line. So that's it by far. I'd say overall, we feel good about where we are. We've got a good plan. We think it's balanced. in all ways and takes recognition of both the opportunities we have, but also the risks that we see in 2023.

Our next question is from Oliver Chen with PD Cowan. Please proceed.

Hi, this is Joan Ellen. So, Oliver, thanks for taking our question. Just curious what you're seeing in terms of the promotional environment broader in the industry, and you talked about normalizing promo But what are your strategies as you think about 2023? Thank you.

Yeah, we, in the fourth quarter, we saw, we'd call it rational promotional intensity. It was relatively flat to the previous year, still down versus 2019. And, of course, as we, I guess we probably have said several times previously, Q4 is an elevated promotional quarter because of the role of holiday and the gifting and the competition that we have with all gifting, not just within beauty. But nothing extraordinary in Q4. As we look into this fiscal year, we do see that continue to normalize. The step down, the improvements that we've made versus 2019 over the last couple of years We'll moderate somewhat. We won't continue the pace of improvement. We'll see a more normalized level of promotion, not back to previous pre-pandemic levels, but it is a competitive environment. There are added points of distribution. Brands are bringing newness and innovation and competing, so we would anticipate, as I said, a somewhat normalized level of promotion, but not...

not an irrational level of promotion as we look on forward.

Thank you. Our next question is from Dina Telsey with the Telsey Group. Please proceed.

Just making sure you can hear me okay. As you think about the levels of shrink that are out there and obviously was incorporated into the results, How are you looking at that for 2023 and what are you baking in? And then just on pricing, where the expectation to go to a more normalized pricing cadence, what do you see in that more normalized pricing cadence of increases and does it differ by category? Thank you.

Maybe I'll start, Dana. Like you're hearing from the broader retail industry, organized retail crime and strength is a real issue out there and we're not immune to what's happening. The concern is really twofold. Firstly, it's about safety and well-being of our associates and our guests. When these groups are coming into the stores, it's really upsetting and can take an emotional toll on everyone that's involved. And secondly, as you mentioned, it's clearly a financial impact to our bottom line. We're continuing to invest in measures to not only deter but catch those who are conducting these activities. Some of the investments are around increasing our talent level, targeting our payroll in both our store and our loss prevention teams, testing new technology, And then also installing new fixtures that can protect some of our key categories. Fragrance is the one we're really leaning into right now. What we're seeing is when we're investing in these locked cases and fragrance, we're seeing sales go up and shrink goes down. And our associates are very, very thankful for this because it's really deterring these bad actors from coming into our stores. We're going to be at 75% of the chain by the end of the year with these new fixtures. You know, and then in regards to what the shrink impact is, it's about 70 basis points of headwinds that we had in 2022 to gross margin, and we're proactively taking these steps, as I mentioned before, to make sure that we understand these macro factors are going to continue to persist, but we're looking at only a modest benefit in shrink improvement in 2023.

And on the pricing side, don't see any real... Differences by category, what we saw in 2022 was really broad-based across categories because the inflationary pressures for brands really impacted all segments. So as we look forward, by normalized, we mean every year in beauty over time, there's a percentage of brands that go through just more standard price increases. And we anticipate kind of going back into that. And we think it will be across categories.

Thanks, Sherry. We have time for one more question.

Our next question would be from Mark Altrager with Baird. Please proceed.

Good afternoon. Thank you for taking my question.

So it sounds like things are going great with Target. Just any color you can provide on the incrementality of that new Target customer that may be returning to Alta? And then separately, I know there's been some supply chain delays impacting your store openings, but just wondering if you could provide a broader update on how you view the store runway and perhaps how any of the learnings from the target relationship are impacting the pace of openings over the next few years. Thank you.

Well, I'll go ahead and start. And what I would say is that we've got three areas of really concentrated efforts in our partnership with the Altabedia Target Partnership. First is about deepening the guest engagement. It's really focusing on new guest acquisition, increasing the spend of the existing link, circle, and Ulta Beauty reward members, and engaging that lapsed member. When we see the Ulta Beauty at Target member coming in and engaging with Ulta Beauty itself, what we're seeing is we like what their spend patterns look like. They're at our average spend, if not even higher. So we like what we're seeing from the ecosystem. In regards to new store growth, I mean, listen, we've got competition out there always on in regards to where we're opening up new stores. So, you know, we are looking at this as part of the ecosystem where we actually would even have in some locations, Ulta Beauty at Target in the same center as an Ulta Beauty store. And what we're seeing is that's really, it's performing very nicely that the customer is shopping in both. While there's competition out there, it's not necessarily playing into what our new store opening guidelines look like. Maybe you want to weigh in on the supply chain with supplies for new stores.

Yeah, so for our new store outlook, our long-term outlook, still 1,500 to 1,700 stores with roughly 800 of the beauty at target locations on top of that. So again, we're still very comfortable from everything we've seen. The interaction between, as Keisha just described, between the shop and shops and what we're doing in our standalone stores are happy with the overall performance. Again, this year there's just a shift. We're just smart business, we think, not chasing a number with new store openings and trying to be wise about how we plan that to make sure we keep good disciplines on site selection and the cost ramifications because these are long-term investments.

All right. Great. Well, thank you all for your interest and engagement today. And I want to close by thanking all 53,000 Ulta Beauty associates for delivering just excellent financial results in 2022 while executing against our strategic priorities. I am excited about the future of Ulta Beauty and believe firmly in our differentiated business model, strategic framework, and talented and committed teams. will continue to drive success and create significant shareholder value. We look forward to speaking to all of you again when we report results for the first quarter of fiscal 2023 on May 25th. Have a good evening and talk to you all soon. Thanks.

Thank you. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.