Okay. Hello, everyone. Thank you for joining us for the Ulta Beauty fireside chat. Today, we're very happy to have Dave Kimbell, Chief Executive Officer of Ulta; and Scott Settersten, Chief Financial Officer. And we'll just get started and start asking questions here.
So we're starting most of these sessions with asking about the state of the consumer, health of the consumer. So far, your comps this year have been stronger than expected, driven by traffic as the makeup category recovers. But it's been well documented that the consumer has a little less income with the amount of inflation, that's in the world. So can you talk a little bit about how your business fares when there is more of a cash constrained consumer and what you're seeing from some of the different income demographics that shop also.
Great. Well, first of all, great to see you, and thanks for having us, and thanks, everyone here for your interest in joining us this afternoon and your engagement in Ulta Beauty. Yes, great place to start, of course, and I know we're all tracking and monitoring and trying to figure out what's going on in the consumer landscape, and we feel fortunate that so far, about halfway through, we just reported our second quarter results a few weeks ago, and we're having a strong start of the year, 14% comp in the second quarter is demonstrating the strength that we have right now in our business.
So our consumer is highly engaged in beauty, and we believe Ulta Beauty is leading the category in many ways. So we're very encouraged by what we see despite the disruption that's happening in the world around us. Having said that, probably more than a normal time, there's a large amount of uncertainty as we look into the second half of the year. Some of the things you talked about, uncertainty around inflation and other economic pressures as we move into holiday season and turn the calendar towards 2023. We're watching very closely about -- to see how our guests will engage in beauty and how that could translate to potential impacts on our business.
If we step back, what we've historically seen, and we, of course, haven't been in any circumstances similar to what we're collectively experiencing right now. But if we go back to the last kind of economic -- big economic disruption in 2008 in our business and the category is very different than. But through that and other disruptions, beauty itself has historically fairly resilient. So we haven't -- that while there's a discretionary aspect, it is for many guests, a really important part in their overall routines, how they show up, they express themselves to the world and increasingly an important part of their wellness and self-care and how they choose to invest.
And so, so far, what we've seen is no major impact on our business. We either trade down, prestige customer moving down to price to a mass price points, to our spend per member -- spend per guest is really healthy. And so what -- we've been able to navigate that.
When we look forward, we're looking at all the things probably every retailer is looking at. We're looking at traffic trends, spend per member trends. We're watching that carefully, adjusting our business model, anticipating some promotional activity, elevating and the competitive environment and making sure that we're doing everything we can to take care of our guests. As we updated our outlook for the full fiscal year just a couple of weeks ago, we reflected the strength that we've seen so far this year, but also some of the uncertainty as it relates to consumer trends as we look into the rest of this year.
Great. And then if I could just talk or ask about that trade down, which you have not yet seen, but being 50% precision, 50% math, I would imagine that you are positioned well to capture a trade-down opportunity. So is that -- again, looking back, is that something -- is that how the consumer would shop you then if there were to be more of an impact to the consumer, you would see -- you would capture that trade down?
We are uniquely positioned to be able to capture any shifts within price points in the beauty category, is one of our key differentiating points. We're the only retailer that in beauty that offers mass to prestige from entry-level mass points all the way up to high-end luxury and everything in between.
And so again, we haven't seen that behavior. In fact, in the second quarter in the makeup category is one example. Our prestige makeup business comp somewhat higher than our mass makeup. Both were double digits, but prestige was higher than mass. So we haven't seen a trade down. But yes, historically, and as we look at how we might flex there in whatever comes ahead of us, we're uniquely positioned to be able to do that.
And the CRM capabilities that we've invested in and built and expanded over the years, we have -- give us some tools to go reach our guests if we see those behaviors. We have 38 million members in our loyalty program, and we have tools to go in. If we do see certain segments of guests maybe changing behaviors, we can reach them, make sure they know about our full assortment and keep them within the Ulta Beauty family. But again, so far, we haven't seen that.
Okay. So if I could ask about the guide that you gave on this last call a couple of weeks ago, it does imply a deceleration on a 3-year stack. So we wondered what degree of conservatism is baked in there for the health of the consumer, how does it incorporate any kind of newness and innovation within the category and how you're thinking about holiday gifting?
So we're very, very happy about our strong start to 2022. Again, first half of the year has been beyond our initial expectations for the year. We updated our guidance on our second quarter call here a couple of weeks back. And it includes, of course, all the overperformance we've seen so far year-to-date as well as the early trends that we saw entering into the third quarter.
So again, the business is in a very good place overall. We did not, however, take those trends and extrapolate those into the fourth quarter for a couple of reasons. First of all, tougher comps in the second half of the year, so anniversarying over a much stronger business at the tail end of 2021 than we saw earlier in the year.
Second of all, Dave alluded to is just uncertainty of the consumer overall and how they're going to react in this very dynamic environment with increasing inflationary pressures, again, across a large loss of the U.S. economy. Increasing distribution points of prestige beauty, again, this is something we've been talking to investors about all year, but that is coming, and it will peak in the fourth quarter. So that's something we're taking into consideration. And yes, so all that, we think we're in a very good position overall, feel good about our business, but I think it's appropriate planning to be prudent here under the circumstances.
And you mentioned the possible impact of more points of beauty distribution opening up by Q4, which you have been talking about for a while. But aside from that, how would you describe what the competitive landscape looks like today versus maybe prepandemic?
Well, we are always -- beauty has always been very competitive. It's an attractive category, a high level of engagement with consumers, and it's been growing over an extended period of time. So it's always been an attractive category. And so by its very nature, it's been competitive for the entire 32 years that Ulta Beauty has been around and for decades before that.
And so what we see right now is we've got a number of really strong competitors that we have a lot of respect for that are doing some really interesting things. You're probably aware of a lot of different dynamics across different segments of the competition. But broadly speaking, there's -- the category itself is doing well, and many of our competitors are talking about beauty as a highlight for them, and it's because of the health of the category.
Having said that, our focus is really on doing what we do best. Nobody does what Ulta Beauty does. We believe we have a really differentiated model. Again, the only ones to have the assortment that we have mass to prestige, all price points, strength across categories, makeup, haircare, skincare, fragrance, bath, increasing presence in wellness, strong salon business and experience in our stores that dedicated to beauty that's inviting and welcoming and friendly and inclusive and exciting for our guests, they want their guests really respond positively to and for our guests, but 38 million of them now, they find it as a really distinctive differentiated experience when you walk into one of our stores.
Strong e-commerce business with increased investments that we've made in innovation through things like virtual try-on and other digital experiences that allow you to engage in beauty outside of the store. So we think the collective aspects of our model, the loyalty program that we've created, the connection we have with our guests, the unique differentiated model positions us well. Recognizing we have formidable competitors, but we're really focused on playing offense, driving our business forward, doing what we do best, innovating and evolving our business. And fortunately, so far, that's been working and that's what we'll continue to do.
Maybe I can add just 1 more comment to that, too, as far as the competitive environment and thinking about the fourth quarter. So we've, again, been talking with investors, we do expect it to be more promotional this year in the fourth quarter. Again, unique to Ulta Beauty versus the other 3 quarters of the year. During the holiday period, we compete not only with our beauty competitors, but with all of retail or gift-giving dollars, right? And so especially with the overhang here, we're seeing it across the retail category, I'd say we do expect the fourth quarter to be more promotional than it has been the last couple of years.
Okay. If I could ask about the loyalty program. Has the recent growth been driven more by rejoins, which I know during the pandemic, you lost some members just as people have stayed home or is it being driven more by brand new members? And are you seeing the sign-ups more in-store or online?
So let me just give a brief overview for those maybe not as familiar, our loyalty program plays a big part in our performance. 95% of our sales go through our loyalty program, reached a new kind of historic high of about 38.2 million members in the second quarter. It has been growing essentially quarter after quarter after quarter with the exception of 2020 when we had to close our stores and we saw some disruption in that. So an important part of our business. We spend a lot of effort and resources in every single touch point we have to drive engagement and loyalty and retention through that.
Our strength in our program starts with retention and making sure that our guests that are part of the program now stay with us because that's what allows us to grow over time. And so we spent a lot of time through again, every touch point. We define a member -- an active member is somebody who shopped at least once with us during the last 12 months. And so that's what's reflected in that $38 million -- 38 million member number.
As far as the growth that we've seen -- so again, retention plays in part to that, and that's healthy and really playing a big role. We have seen over the last year [indiscernible] we always have reactivation because the strong as much effort as we put into we don't have 100% retention, which means we have some people that have fallen out. Usually, it's our least engaged guest, somebody that might have shopped with us just once or twice in the last 12 months. They, for whatever reason slip out most of the time, not because they had a bad experience with Ulta, just circumstances. We know who they are. We try -- we've always tried to get them back in. We've had more of those because of COVID.
So they played a larger-than-normal role in the growth and just in new member growth beyond retention, and we still have some reactivation opportunity ahead of us. But our new member growth, brand new, never been part of our loyalty program is also contributing, and that comes from a number of ways its stores, our largest source of new members. We have a high level. You're very likely if you walk into one of our stores, not a member our stores do a great job converting those into members. So we have high conversion in there. As we open new stores or expand our presence or add new brands or leverage our marketing and advertising, we get new members coming in. But e-comm and our digital channels also play an important role.
So we have a full-on always on press to both retain and attract new members, and we're pleased with the results we've seen so far this year.
Okay. And if I could maybe round out the top line discussion, I wanted to ask about the real estate opportunity. but also your new store layout. So could you maybe talk about how you view your unit growth opportunity, why 1,500 to 1,700 which has been the target for a long time, why that's the right number, especially now that your digital capabilities are ramping up pretty significantly. And how does the first year performance of a new store differ from the more mature stores?
So I'll start and maybe you can add a little on the new store layout. So yes, our long-term target of 1,500 to 1,700 stores, full line prototype Ulta stores in the U.S., we still think is a great place to be. Again, our real estate capabilities is really one of our core competencies at Ulta Beauty. So very mature analytical capabilities. So that range takes into account all the demographic data that we have, all the loyalty membership data that we have on spending trends. All our competitive set is involved there and of course, our Ulta Beauty Target long-term objectives are included in that assessment as well.
So we still feel very comfortable with that long-term target along, of course, we're opening up 50 new stores per year, right? Still feeling good about that sequence as well. We did mention at our Analyst Day, a small store format, so we were going to open up, a handful of small stores this year. Actually, we're just in the midst of that right now. Those stores are just opening up. And so it's still a little early to talk about the trends there or what we're seeing, but we're optimistic. We think that potentially presents a nice incremental add to that 1,500 to 1,700 store target over the longer term. And so there'll be in lighter population, lighter beauty spend kind of markets across the United States.
Yes. You mentioned our new store layout that we've shared at a couple of forms, including briefly touching on it on our last earnings call. So we are -- well, stepping back, we have always evolved our store formats to kind of find incrementally better ways to engage our guests to update and monetize. We've had multiple formats over years and we'll continue to do that. The new format that we're rolling out this year has some important changes to the experience that we're excited to learn about. A couple of the big ones are, we are making more store assortment flow changes, where we are putting our key categories across price points adjacent to each other. And previously, skin care, for example, mass skin care, prestige skin care have been separated within the store.
So we're creating our -- and after research with our guests, a lot of engagement with the -- like just how I want to shop across price points, the key difference to bringing in a more defined skincare zone, makeup, hair care that helps our guests navigate those categories. So that's one change. We're excited to do that. We created what we're calling a hub for services, the services hub beyond our salon. It creates a more center of store destination for brows and skin and makeup and other events and activities that'll be more elevated. So you'll see and feel that different.
And we're creating a dedicated zone for newness in the front of our stores to give our guests ways to engage in new brands in a real kind of clear space that all over time learn this is where I kind of understand where there's newness, some changes to the front of the store that we're doing and -- so some important changes. But again, it is not -- we've been evolving our store layout for a number of years, and this is an important step. It is for new stores and remodels. It's not something we anticipate now to kind of go back and change 1,300 stores anytime soon.
Okay. Okay. So it's more with your newer stores that you're going to...
Yes. And we'll get learnings out of it as probably won't be reflowing every store anytime soon because our current environment is working, and we're excited about it. And we have other areas that we'll want to invest CapEx into beyond that. But we'll get learnings. And if things are really working, there are some changes we can make even in our current environment. One example of that, that we're already rolling out to all stores is changing the front the experience when you walk into a store, it's been pretty consistent across all stores for quite a while. We've elevated that, made it more engaging, easier for our guests to discover kind of the new things that are happening right at that moment. And we've done that across stores. So we'll do things like that, that reach all of our stores over time.
And just speaking of new initiatives UB Media is something that I think we heard about the first time at your Investor -- your Analyst Day in the fall. And we've seen several specialty retailers now leaning into this as a strategy given the margin potential. But how big can this business ultimately be? And do you think that there are incremental dollars involved, i.e., are they really going to be incremental? Or are they going to be taken from the brick-and-mortar and towards digital.
We are really excited about our UB Media, a great opportunity for us to, over time, add to our business, add to our overall profitability. Right now, we'd say this year is relatively small and not a material impact. It will take us time to build it, but we're doing it because we think it will add -- incrementally add to both the top line and the bottom line of our business. We believe that, yes, we're certainly seeing this trend across retail, and it's one that we're excited to be part of. We've been doing a similar program at a more kind of, I guess, scrappier level for the last couple of years for our brands what we've done over the last 6, 8 months or so is improved the capabilities, invested in technologies, added highly skilled and capable team that's meeting this effort. Our brands are responding very favorably to it, and we have a high level of demand and engagement.
That's really driven going back to our loyalty discussion by the fact that we have a large group, arguably 1 of, if not the largest group of beauty enthusiasts data and insights in the country. And because of our assortment, mass to prestige across price points, categories, geographies, income levels, we have arguably the best insight -- transaction level insight in beauty that's broad.
And so our brands are really attracted to that. And so the demand as we built this capability has been high. They like it because they can more precisely target beauty enthusiasts, leveraging our 38 million members and pinpoint their advertising. We've been able to demonstrate to them a higher ROI than some other vehicles through their advertising. Because we have transaction first-party level data, we can show them the results. You advertised to Scott. Here's what happened and here's the results and the transaction Scott had over the next 30, 60, 90 days, things like that. So we've got the full circle closed-loop reporting process that is very attractive to our brands.
As far as your question about incrementality, our expectation is that it will be incremental, and it's not about just trying to squeeze our brands at all. It's about trying to create a new partnership opportunity to provide new ways to grow at a higher return. Our brands, many of them are some of the largest advertisers in the country. L'Oreal is our biggest partner. They're one of the largest advertisers. They are always looking for more efficient ways to reach beauty enthusiasts. And if we have been able to and if we continue to demonstrate to them, this is a higher ROI than some of the other digital advertising tools or at least as a good complement to those, we have seen and we believe we'll continue to see incremental dollars. It's a different pool when you're a brand of our advertising dollars versus, I guess, our trade support dollars or spent money we're spending on other activities. Those activities are still important. You want to activate in our stores, you want to be part of other programs. Those will continue, but this will be an incremental way for our brands to grow at Ulta Beauty.
Great. I wanted to ask a general margin question. I think 1 question we get a lot, Scott, is about your long-term margin target, and maybe why it's not higher. Which -- when it is higher, then we get the question, why isn't it more conservative? So we wondered if you could walk us through your longer-term margin target? And maybe the drivers of what could get you may be higher than the parameters you've laid out or lower.
You're exactly right with that one. I guess, I would start off with the fact that our business is in a much healthier position than it was back in the pre-pandemic days. So back in 2019, we were struggling a little bit with makeup deceleration and then we had channel mix headwinds and of course, wage pressure has been with us for a while, and we had some fixed costs that we're building partly due to our expectation of launch in Canada back in 2019. So the team has done a great job over the course of the last couple of years to kind of put us in a good position and change the trajectory of our business overall.
So lots of good things done by way of our ESG efforts, new initiatives with our continuous improvement, of course, Project SOAR, a big investment, a big transformation for our business taking place over the next couple of years, which will deliver significant benefits to us over the long term.
So again, that gives us great comfort that we're going to be able to deliver much healthier operating margins, i.e., 13% to 14% range on a much lower comp, 3 to 5 than this business has been able to deliver historically, and I feel very confident. Now having said that, I know we've been overperforming. 2021 was a spectacular year, a great rebound from the depths of the COVID situation. This year, we're seeing that momentum continually at least through the first half of the year and is set up for a great 2022 as well. We don't necessarily expect that top line momentum to continue unabated into the future, right, the mid-teens comp.
So thinking about the long term, we think top line is probably going to moderate somewhat. -- and our investment cadence is really kind of just getting out of the starting gate, right? So Projects SOAR being of the biggest pieces here, but also our supply chain investments that are coming. We set up the $275 million over the next couple of years to modernize and automate and be able to support a growing both physical store and a digital store business for the long term.
So a lot of things kind of coming together that we don't really see the impacts of today, right? A lot of that top line overperformance is falling right through the P&L and kind of camouflaging some of the cost pressures that we have in supply chain and wage rate growth across both our stores and our DC operations. So we think all that's going to moderate. And we'll see how '22 shakes out when all the final accounting is done and how the '23 plan takes up, all things considered. And if we think there's a reason to update our long-term algorithm, we would do it at that point in the spring.
This is my last question before 4 questions, but I can't go without asking about Target. Because I don't know. You guys have been a little tight-lipped on the Ulta Target partnership other than to note that you're very pleased with the results. So we wondered I don't know today, maybe you share a little bit more about the translation of the shopper target between the Ulta Shop-in-Shop and then ultimately Ulta customers.
Well, Kate, we are very pleased with the project partnership. Yes. Does that answer your question?
It answers it.
Right. No, we are thrilled to have this experience. I -- let me -- I'll tell you a little bit about it, but let me just address the kind of the type lift piece. There's kind of 2 drivers. One, we're still relatively early. The very first store is only opened about a year ago. We want to get some experience over time. We are pleased and encouraged by what we're seeing. But this is we want to get consumer behavior purchase cycles, engagement over time. And so we're watching closely. But perhaps more importantly, this is a partnership like something -- nothing we've done in the past. 2 public companies kind of reporting, kind of what's going on. So you should expect -- we'll be careful about kind of sharing too much detail and insights and getting ahead of our partner in any way and making sure that we're tracking along and sharing in a thoughtful, appropriate way. But I would not expect a detailed blow-by-blow, month-by-month deep insights on this just because that's not what we're anticipating doing in partnership with Target.
So just to address that. So I'm sorry if that feels like it's tight lip, but that's the kind of the reason and rationale behind it as we learn about this together and we -- both for as again 2 public companies and for competitive reasons, and there's certain aspects of this that they own, other parts that we own. So we'll probably follow the trend that we have been.
So -- but what I can say is, again, we're encouraged by what we're seeing. As I said, some of the very first stores are now about a year in. We're -- we, at the end of the second quarter, we're up to 186 stores. We're opening more in the second half of this year. Right now, we're opening many more. And so as we -- every day, we're getting more and more learnings and more engagement about it. First and foremost, consumers are excited about it. They were from the moment -- well, going back to when we researched this before we decided to do it and agreed together to do this, we were doing consumer research, they were consumers who told us they would be excited about it. We announced it, they were thrilled and they continue to show us and demonstrate to us that the idea of Ulta Beauty and Target partnering together to create this unique differentiated new-to-the-world experience is relevant and engaging and exciting and meeting or exceeding their expectations.
So if you start there with consumer engagement, it's a great place to be. Target has done an exceptional job as a partner in executing and bringing this to life in hundreds -- a couple of hundred of their stores now with more to come. And so we're really pleased with that. And our brand partners have been great partners through this and bringing their brands in a new way to reach new consumers.
For us, what we see is kind of 2 big things that again, to reinforce what we see in this partnership, there's a lot of opportunity for us to extend our brand and extend our presence. And what that means is attract new guests for sure. We talked about a new guest growth earlier and Target hasn't been a material component to our new acquisition yet because it's still relatively small compared to our 1,300 mainline stores these that we're doing. But it has contributed. And we think over time, we'll continue to attract new guests. 30 million people walk through the Target every week. Many of them are not Ulta Beauty customers, but our beauty enthusiasts or engage in beauty and can discover us for the first time and then ultimately get introduced and engaged in all the beauty -- all that Ulta Beauty has to offer.
For our existing guests, we're equally as excited. What we've seen again and again and again in almost everything that we do, if we find new ways to engage our guests to give them a new way and a new reason to love Ulta Beauty, they'll reward us with greater spend and greater share of wallet and greater engagement across everything we have.
So we get a store-only guest to shop online or to download our app or to join our loyalty or to take advantage of salon, they shop more in store. And we think that's what's going to happen here with Target is just by making it easier to engage and ultimately love Ulta will be rewarded with both shopping at that Target, but shopping across every touch point we have for our guests. And again, we're encouraged by what we're seeing. So proud and pleased to be partnering with them and looking forward to a lot of growth for years to come.
Okay. Thank you. So we're going to ask the 4 questions it's been asking every company that's been on stage with us today. Again, a lot of these have been addressed. But just to get to the crux of it, just with a lot still unknown about the health of the consumer, how are you planning for the consumer in 2023? Do you think the consumer will be weaker or stronger, about the same as what you're seeing today?
I guess I'll have to land in the middle about the same just because there is a lot of uncertainty out there and the impact that you all are aware -- more aware than we are just about the consumer dynamics of the impact of inflation, unemployment, election, everything else that's coming to people right now. So we're kind of in the zone of. Maybe it will sustain for a while. I don't think it's going to get radically better. It's been good for us so far. And we're certainly hopeful that it doesn't kind of fall off in a dramatic way.
And we talked about promotions, especially in the fourth quarter, how you compete with everybody. And it does sound like the whole retail environment will be more promotional because there are heightened inventory levels in certain pockets of -- in certain categories. But how should we think about the cadence of promotions once we exit this year? How do you view the promotional environment and a more normalized setting?
Yes. Yes. We think we've been fortunate that both the category in general and certainly Ulta Beauty, we've moderated and then our strategy at Ulta has been more strategic in our promotional leverage, capabilities like our CRM and our loyalty program to be more targeted and more efficient and effective in our promotion. It's an important part of who we are. We want to have value -- provide value to our guests, but we don't want to just blanket them with random 20% off and nonstrategic. And we've been able to pull back on that and the category has generally speaking, been part of that as well.
As we look into -- as Scott mentioned earlier, we're anticipating going into holiday for all the reasons Scott talked about, be more promotional as we look into next year. We don't think it's going to get back to maybe some of the drivers in 2019, but it will be -- we're anticipating and planning and preparing and building and making sure we have the tools to navigate through a bit higher promotional.
The inventory challenges and certainly for us at Ulta Beauty have -- aren't as great. It's not like we don't believe the category. And certainly, Ulta Beauty has a very healthy inventory position. So that's not a big driver. It's just competitive nature of the category right now and a fight for consumer that could drive an elevated promotional activity.
Okay. And we discussed margins, so I'll skip that. But for our last question, units versus price. Now it's been more traffic led for Ulta than it has been priced than other retailers that's been the opposite. But again, more normalized environment, 2023, how do you see the balance between units and ticket or traffic and ticket next year.
Yes. So just take a quick step back. We always plan for a nice healthy balance between traffic and ticket. And again, for a healthy retail operation traffic, whether it's in our physical space or our digital space super critically important, right, to have a healthy business. On the ticket side, then between units and pricing, I guess, I'll call it, pricing has been leading the way, I guess, if I'm forced to choose one, that's where I would lean and it's partially the mix of our business right now with some of the great things that we've added to our assortment overall that are driving a higher price points, less promotional in nature, less promotion overall. Again, we're kind of at historic lows versus where we've been historically. And then lastly, pricing that's been passed on from our vendor partners that, again, we're passing on to our consumers, and we haven't seen really any resistance to this point in time. So I think that continues into 2023.
Okay. Well, thanks so much for being here with us today. Thanks for all the time.
Thanks, Kate. Thank you for joining us.
Thank you.
