Ulta Beauty, Inc. (NASDAQ:ULTA) SHARE Series Women in Investing December 8, 2023 10:00 AM ET
Company Participants
Kiley Rawlins – VP of IR
Conference Call Participants
Katy Hallberg – TD Cowen
Katy Hallberg
Thank you. Good morning, everyone. As Shannon mentioned, my name is Katy Hallberg, and I’m a Vice President at TD Cowen, covering retail, department stores and luxury names, and I have the pleasure of hosting Kiley Rawlins today, VP of Investor Relations at Ulta, and she’s been with Ulta since 2019. At TD Cowen, we rate Ulta outperform with a $570 price target based on 20 times our next year earnings and Ulta is also one of our top holiday picks because we believe beauty will remain a very important category this holiday season, and it continues to outperform on innovation in masks, skincare and fragrance. We also believe the Ultimate Rewards loyalty program is a key differentiator, which I’m sure we’ll get to talk about this morning.
So now I’ll turn it to Kiley for prepared remarks, and then we can jump into Q&A.
Kiley Rawlins
Great. Thank you, Katy. And thank you, Shannon, for organizing this. And I wish I was there in person with you in New York for the holidays, but unfortunately, due to other commitments, couldn’t be. But thank you for your interest in Ulta Beauty. And I thought before we jump into the Q&A, I thought I’d share a quick video that I think illustrates both the power of the category and how we think about our role in moving the category forward. So can we play that quick little video?
[Video Presentation]
Thank you for letting me share that. Just real quickly, hopefully, you all are familiar with Ulta Beauty. And hopefully, some of you are members and guests from us — for us. We operate in a growing and attractive and resilient category with really strong consumer engagement. We have a proven, differentiated business model, and we underpin that with an experienced leadership team and really caring passionate associates who are committed to giving great guest experiences. If we think about the post-pandemic period, the category has been experiencing really strong growth coming out of the pandemic. And while that growth is starting to moderate a bit, engagement continues to be really strong.
We delivered record-setting profitability and revenues last year. We are lapping that. And I’m pleased to say that our results year-to-date are running a little bit ahead of our expectations. We also, in addition to driving sales and profitability, we’re driving growth in our loyalty program, we’re driving growth across categories, we’re expanding our brand awareness. And in addition to all of that, we are delivering against a multiyear, pretty ambitious transformational agenda. So we have a lot going on at Ulta Beauty right now. And while we know the category and the environment will continue to evolve, we’re confident in our ability to continue to drive market share and profitable growth. And so with that, maybe, Katy will jump into the questions.
Question-and-Answer Session
Q – Katy Hallberg
Absolutely. Thank you so much, Kiley. So Ulta is one of the largest specialty beauty retailers in the US. A huge and evolving assortment of beauty, skin care, fragrance services. What differentiates Ulta from other beauty destinations? And how do those factors drive sustained growth?
Kiley Rawlins
Yeah. I think there is no one else who does what we do, right? And I think if we try to simplify it, I’d call out really five things that make our position in the model a bit unique. One is our one-of-a-kind assortment and service offering. We carry products across multiple categories, makeup, skincare, fragrance, hair and at multiple price points. We carry e.l.f. and Chanel and Dior and Estee Lauder. And so our guests can meet their needs, whether it’s they’re looking for something that’s a little bit lower price point or they really want to indulge in luxury, we can help them find what they need. In addition, we have a salon in nearly every store with experienced stylists and we offer brow services as well as makeup services. So we really bring the entertainment, if you will, of beauty to life in our stores. So that’s one. So our assortment and services.
Two, I think we have a broad footprint of almost 1,400 stores across the US. Most of them are in power centers or strip centers. So they’re easily accessible and I think really deliver a consistent experience across all of those formats. In addition to the retail stores, we also have a leading digital experience with ulta.com and our app that has really driven some nice growth for us over the years. And then I think our loyalty program, which I know we’ll talk about in a little bit, is really first rate and best-in-class. It’s easy for guests to understand it delivers real value to the guest, and it delivers to us really unique insights that we can use as we develop our assortment and help our brands grow their business.
And I think finally, most important is the culture and the experience that we deliver in our stores. We really strive to create warm, welcoming experiences that are not judgmental that are inclusive and really work to make our guests feel welcome and comfortable as they enjoy their beauty journey. And so I think those factors, so the assortment, the footprint, the digital experiences, the loyalty program and our guest experience really differentiate us from other players and have really driven success for us.
Katy Hallberg
That’s a great segue into the Ultimate Rewards loyalty program. So it has over 42 million members, which is one of the biggest in our coverage which spans across broad lines and department stores. How is the performance of your new loyalty members change versus maybe your legacy loyalty members? And how do you continue to innovate that program essentially with first-party data to continually evolve that offering?
Kiley Rawlins
Sure. So we have, as you said, we have 42.2 million active members, right? And that means these are folks who have transacted with us at least once in the last year. So our database is much bigger. But when we talk about members, we’re really focused on those members who are engaging with us regularly. And so I think a couple of other just things to think about is before I get into your — the question about new members, our members represent more than 95% of our sales. So they’re a very good proxy for what’s happening in the business and the trends and interest of the beauty enthusiasts. Our program is really simple. For every dollar you spend at Ulta Beauty, you get a point or I should say, at least a point. And you can use those points for anything in the store. So you can buy e.l.f. and save your points and use it on Dyson. Or you can use it to get your brows done or your hair done, right? And so for the guest, it’s really easy to use. And for us, it gives us really unique insights into member shopping behavior, cross-category behavior for cross brand behavior that we can then use as we’re thinking about our product assortment, our brand assortment and how we can help our brand partners really grow their business.
It’s interesting between — when we think about the evolution of a member, I wouldn’t say that we’re seeing anything different today in that evolution than where — what we saw before the pandemic. I think for new members, they are just getting to know us. We’re just getting to know them. And so there are transactions and spend are on the lower side. So new members will often shop with us one to two times a year. And then as we get to know them and we use our CRM capabilities to send them communications send them e-mails so that we can get to understand what are their interest, what do they — what resonates most with them. then we can start to personalize the experience. And so as we track the journey or the life cycle, if you will, of our members, what we see is, again, new members shop with us once or twice a year, [sophomores] (ph) shop with us two to three times a year. And then as they stay in the program, they increase both their frequency and their spend. And part of that is, I think, attributed to our active work to personalize the experience, right? We’re making a lot of investments, particularly in our digital platforms to be able to give you, Katy, personalized recommendations based on your interest that are different than what I might receive based on my interactions and transactions. And so it’s a really powerful tool that we continue to invest in to learn to be more personalized with our guests.
Katy Hallberg
Maybe we could take this moment to just step back and understand who is Ulta’s core customer? How do they interact with the brand and how do they interact with beauty?
Kiley Rawlins
Yeah. So we often talk about our core customer being a beauty enthusiast. And I’m hopeful that there is some beauty enthusiasts in the audience. So we know that not everyone who buys beauty is a beauty enthusiast. But when we look at the numbers, about two thirds of beauty consumers define themselves as beauty enthusiasts. And more importantly, they account for more than 80% of the spend in the category. So these are folks who are really engaged. They love beauty. And they — for them, it’s not about a lipstick, a blush, it is drawers of lipsticks, closets of eye shadow colors, make up bags full of product, right? It’s about newness and innovation and always wanting to experiment and try new brands and new products. And that for them, beauty isn’t a routine. It’s an investment in themselves. If you looked at my medicine cabinet in my bathroom right now, I’m pretty sure you would probably find, let’s say, at least three serum — daytime serums, two nighttime serums, a handful of daytime moisturizers, not to be confused with nighttime moisturizers, I have three of those right now as well, right. So it’s a category where replenishment certainly plays a role. But newness and innovation really drives the with the category.
Katy Hallberg
Great. I’d love to know what your favorite moisturizers are, but we can take that offline. Stores are such an important part of the story, but you’ve also done such an excellent job in the digital channel. Could you talk a little bit about how stores and digital interact with each other? And maybe this could be a great opportunity to talk about the Target partnership as well?
Kiley Rawlins
Sure. So I think what is interesting about this category and even post-pandemic, we find through our customer research and through our member data. that the physical shopping experience continues to be preferred. When we look at our member data, 76% of those 42 million members only shop in-store. That doesn’t mean that they’re not on TikTok, that doesn’t mean that they’re not on the app. It doesn’t mean that they’re not using digital channels as part of their journey, but they are choosing to go into a store to buy a product or get a service. And that is mirrored in the customer research that we’ve done. Particularly with Gen Z, there is a preference for that physical shopping. And I think it’s because it gives you the opportunity to play, right? You should play with different products and brands and try different colors and talk to other beauty enthusiasts. And it’s just fun. It is a fun experience. It’s not a chore to-do list. It Saturday morning. I have to go to Whole Foods and Ulta, and it’s more — much more of an experience. But having said that, we know that the digital platforms are important to the category. I mentioned TikTok earlier. TikTok, YouTube, Instagram, social media platforms have always had an impact on this category and certainly continue to serve as a way for consumers to find new brands, new products, get recommendations, et cetera. And so we are investing significantly in our digital experiences. We are in the process that we should finish this up next year, but we are transitioning our digital platform, so ulta.com and our apps to a new architecture. That will give us the ability to be more nimble in our guest experience and more personalized when guests interact with those channels.
But in addition to that, we have invested in virtual try-on capabilities. So make up, nail, foundation finders, lash and brow tools. We also have skin advisers, so tools that can help diagnose opportunities and [health then] (ph) also recommend products and regimen. So it’s an important part of the beauty journey and our digital teams continue to experiment and try new things as those worlds, both the digital and the physical come together. So today, you can use QR codes in the store if you’re looking — if you want more product information or reviews. And we see longer term more opportunities to really bring those two worlds together through the app to really elevate the guest experience. So our Target partnership is part of our ecosystem. So in 2021, we launched a really unique partnership with Target. And today, we have about 500 shop-in-shops. So it’s an Ulta Beauty and Target. It’s not part of the beauty assortment. It’s a distinct and separate space within the store, but it is adjacent to Target’s beauty assortment. And what we’ve really tried to do is create something unique and elevated and give the Target guests the opportunity to get to know and engage with emerging and prestige brands. And so for us, it’s an opportunity to introduce Ulta Beauty to folks who don’t know us and continue to drive new members into our ecosystem. At the same time, we’re meeting our existing members where they already are. We know — we don’t know how many, but we know that many of our members shop Target. I have a drive up order waiting for me to pick up this weekend. So we know there’s some overlap.
And so if we can continue to meet our guests where they are and provide more convenience, we know that we will drive engagement and loyalty. So when we think about the role of the Target partnership, it’s another way for us to engage our guests, right? And we know that when we can provide more convenience, another way to engage with Ulta Beauty, whether it’s digital or the credit card or the member program or now Ulta Beauty at Target, over time, we increase loyalty, engagement and spend. So we’re excited about the partnership. Again, we’ve gone from zero to about 500 shop-in-shops. We’re getting great feedback from the guests. And ultimately, we think we can have about 800 shop-in-shops across the US.
Katy Hallberg
Great. Yeah, those experiences are so exciting, they’re so innovative, and I’d recommend everyone to just check out a Target and experience the Ulta shop-in-shop for themselves. We only have a couple more minutes left with Kiley. I’d love to open it up if there are any questions in the audience.
Unidentified Analyst
[indiscernible]
Kiley Rawlins
I cannot hear the question. So Katy, can you repeat it.
Katy Hallberg
[indiscernible]
Kiley Rawlins
Okay. I’m sorry, I still can’t. Your mic is not on or…
Unidentified Analyst
I wanted to hear a bit about the retail investor relationship with Ulta and what Ulta has in plans for expanding on that?
Kiley Rawlins
For the retail investor?
Unidentified Analyst
Yes, yeah.
Kiley Rawlins
So we actually don’t have a large retail ownership. I’d say 85% of our shares are held by institutions. And so it is, frankly, just not an area that we focus on. We are a consumer brand and focus really more on the guest experience and building our brand with consumers and the general public overall. But we don’t have a direct stock purchase program or a dividend reinvestment program, again given the size of the retail shares, and I’m making guesses here based on just where the shares are held. It’s still a pretty small percentage of our ownership.
Unidentified Analyst
Hopefully, that will change soon. Would love to do some stock perks of Ulta.
Unidentified Analyst
Hi, I have a question around celebrity beauty brands, which we’re seeing a lot of these days. And more traditional legacy brands, how does Ulta balance that? I know Ulta has launched so many celebrity beauty brands like Kylie’s line and all of that.
Kiley Rawlins
Yeah. So I mean, I think this is a category where newness and innovation really drives growth. There are new brands coming to market literally every day. And some of them are partnerships with celebrities. We’ve got about-face, which is a partnership with Halsey. We’ve got Florence. Certainly, we have a number of fragrances from Ariana Grande as well as our r.e.m. line. But it’s not a new trend. It’s certainly been happening over time, whether it’s fragrance or skin care. We launched this year LolaVie, which is the brand created by Jennifer Aniston. So it certainly is a part of the market. I think for us, when we’re thinking about our assortment, whether it’s a celebrity brand or an established brand or a new emerging brand, we’re thinking about how does it fit in the assortment, does it fulfill a need or a gap that we have and how do we think it’s going to resonate with the guests. And so we have a great merchandising strategy group that is constantly looking at trends and social media impacts and consumer engagement and helping our buyers make those choices. I think we have — so we have an emerging — we have a team dedicated to new brands and emerging brands. And I think they look at, gosh, on average, between 2,000 and 3,000 brands a year and probably less than 5% make it into our assortment. So it is a category where newness and innovation are really strong. And I think we have a lot of tools at our disposal to really think about how do we bring new brands to market? Is it a brand that we want to launch online first to understand what is the consumer engagement to introduce it to guests? Or is it something that we want to start in 100 stores, again, to understand consumer engagement. And so there are a lot of things that we do as we think about brand launches. Ultimately, we’re thinking about what’s exciting the guest, what is engaging the guest? Is it a brand? Is it a trend? And how do we fill that need?
Unidentified Analyst
One more question. Katy, you can ask the final or just wrap with following comments.
Katy Hallberg
Yeah, I’d be happy to ask this question. I think this is on a lot of investors’ minds. It’s really around how do you comp the comp? Beauty has seen really impressive growth over the past couple of years. So, how are you thinking about continuing to drive that revenue expansion in the near term?
Kiley Rawlins
Yeah. So you’re absolutely right. I mean, beauty is a category that has delivered consistent growth over time. If we look at the 15, 20 years before the pandemic, the category grew on average in that 2% to 5% range. With the exception of the great recession, where it pulled back a little bit and the pandemic, of course. Coming out of the pandemic, the category has seen double-digit growth. And I think that’s both a function of the role of beauty, which has continued to evolve and is more closely linked with self-care and wellness but also just the excitement of frankly, getting out of your house and engaging with people more. And so the category is moderating. And our expectation is we’re going to see the category moderate or normalize back to that 2% to 5% range. And our business is doing the same. We’ve had two years of really strong comp growth. And this year, our expectation is that our comp growth is going to be more in that 5% to 5.5% range. Looking out, we think we can deliver comp growth in the 3% to 5% range for the next several years. And again, that’s driven by newness and innovation and leveraging our loyalty program and continuing to expand and evolve our assortment, building on our digital channels. and continuing to drive share. So we’re really excited about the future of beauty and our role in it and the opportunities that lie ahead of us.
Katy Hallberg
Thank you so much, Kiley.
Kiley Rawlins
Thank you, Katy. Thank you, everyone.
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