Ulta Beauty (ULTA) Q4 2023 Earnings Call Transcript

Ulta Beauty (ULTA -0.31%)
Q4 2023 Earnings Call
Mar 14, 2024, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to Ulta Beauty’s conference call to discuss results for the fourth quarter 2023 earnings results. 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 reenter the queue for any additional questions.

[Operator instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Ms. Kiley Rawlins, vice president of investor relations. Ms.

Rawlins, please proceed.

Kiley Rawlins — Vice President, Investor Relations

Thank you, Camilla. Good afternoon, everyone, and thank you for joining us for our discussion of our fourth quarter and fiscal 2023 results. Dave Kimbell, CEO, will begin the call with key highlights from our quarter and full year results and share our priorities for fiscal 2024. Then, Scott Settersten, CFO, will review our quarterly financial results and more detail.

And Paula Oyibo, SVP of finance and incoming CFO, will discuss our fiscal 2024 outlook. After our prepared comments, we will open the call for questions. Kecia Steelman, president and chief operating officer, will join us for the Q&A session. As a reminder, our fourth quarter and full year fiscal results include an extra week as compared to fiscal 2022.

Comments regarding comp sales are based on a comparable number of weeks from the prior year. Before we begin, I’d like to remind you of the company’s safe harbor language. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company’s filings to the SEC.

We caution you not to place undue reliance on these forward-looking statements, which speak only as of today, March 14, 2024. 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 longer than usual. To allow us to accommodate as many questions as possible, we respectfully ask that you limit your time to one question.

If you have additional questions, please requeue. As always, the IR team will be available for any follow-up questions after the call. Now, I’ll turn the call over to Dave. Dave?

Dave Kimbell — Chief Executive Officer

Thank you, Kiley, and good afternoon, everyone. We appreciate your interest in Ulta Beauty. The Ulta Beauty team delivered strong performance again this quarter with sales, operating margin, and EPS, all exceeding our internal expectations. Our traffic trends remained healthy, our brand awareness reached all-time highs, and we drove strong member growth and retention.

For the quarter, net sales increased 10.2% to $3.6 billion. Operating profit was 14.5% of sales and diluted EPS was $8.08 per share. Comparable sales increased 2.5%, driven by high single-digit growth from digital channels. Store comp sales increased slightly as we lapped high-teen growth last year.

A thoughtfully curated assortment, engaging marketing strategies, and new fulfillment and technology capabilities enabled our teams to deliver mid single-digit comp growth for the holiday period. Our holiday campaign this year centered around the gift is just the beginning, which underscored our belief in the power of beauty and Ulta Beauty. To support the campaign, we created relevant storytelling which inspired authentic connection, leading to record breaking impressions, significant growth in share voice, and strong social engagement. These successful marketing efforts complemented our engaging in-store messaging and events, which focused on bringing view detainment to guests and building the basket.

Compelling content, combined with successful promotional strategies, drove strong new member acquisition and reactivation, while increasing shopping frequency and retention. From a market share perspective, we continued to outpace the growth of the mass market for the 14 weeks ended February 3rd, 2024, according to Circana data. Our market share of Prestige Beauty was more challenged as we lapped strong share growth in 2022 and continued to face pressure from the expansion of beauty distribution points in Prestige. While competitive intensity has increased, we remain confident our differentiated model and sales driving strategies will support our ability to capture additional market share over the long term.

Turning to performance by category, skincare was our fastest growing category, delivering double-digit comp growth. Brands leading into relevant trends like BYOMA, Bubble, and Good Molecules, which is exclusive to Ulta Beauty, delivered strong growth. Dermatologist-recommended brands also continued to appeal to consumers, looking for efficacious products from trusted brands, fueling growth for La Roche-Posay, Dermalogica, and Cetaphil. The fragrance and bath category also delivered low double-digit comp growth again this quarter.

Newness from Valentino, Burberry, and Tree Hut, and holiday gift sets from consumer favorites, YSL, Gucci, and Billie Eilish, contributed to strong performance. In addition, in January, we welcomed Sol de Janeiro, a Brazilian-inspired body care brand to the Ulta Beauty family. Available in 700 stores and online, Sol de Janeiro has quickly become a guest favorite, driving growth in the category. Pump sales for the makeup category decreased in the low single-digit range.

Softness in prestige cosmetics was partially offset by growth in mass makeup. Lip layering and blush proliferation continue to resonate with beauty enthusiasts, and brands leaning into these trends, including e.l.f., NYX, and exclusive brand, Juvia’s Place, delivered strong growth. While prestige makeup was challenged in totality as we lapped strong growth last year, luxury brands, Dior, Natasha Denona, and Pat McGrath, continued to engage guests, and Hourglass, Tarte, and Lancome saw success with compelling holiday offerings. Finally, comp sales for the haircare category decreased in the mid single-digit range, primarily due to a decline in hair tools and the lapping of strong brand launches in 2022.

Products focused on styling and foundational routines drove growth for professional brands, Redken, Kenra, and Biolage, and interest in hair health and treatments drove increased guest engagement with Wahl, Mielle, and Divi. Newer brands, including Shark Beauty and LolaVie, also resonated with guests. Our services businesses delivered high single-digit growth for this quarter, driven by an increase in transactions. In addition to core styling services, specialty offerings including extensions, hair treatments, texture services, and ear piercing drove strong engagement with guests.

Turning now to the full year, net sales for the year increased 9.8% to $11.2 billion, comp sales increased 5.7%, operating profit was 15% of sales, and diluted EPS increased 8.4% to a record $26.03 per share. In addition to delivering strong financial results, we also made meaningful progress against our strategic priorities. Let me share highlights of advances made this year. Reflecting our efforts to drive growth through all things beauty, we strengthened our assortment with compelling newness and the expansion of strategic cross-category platforms.

Using the consumer lens of how guests experience Ulta Beauty through all of our touch points, we estimate we maintained our share of the total U.S. beauty product industry. We launched customer favorite brands, including Dior, Beautycounter, and Sol de Janeiro, and introduced emerging and exclusive brands including HALF MAGIC and Polite Society. We launched luxury at Ulta Beauty, a strategically curated luxury beauty experience, and we expanded our cross-category platforms.

We ended the year with more than half of our brand portfolio certified in at least one conscious beauty pillar and continue to drive greater awareness and discovery through unique sample kits and greater marketing support. We expanded our Black-owned or founded brands to 50 brands and welcome to the second cohort of BIPOC brands to our MUSE Accelerator program, a program designed to help early stage BIPOC brands prepare for retail readiness. Additionally, we expanded the wellness shop to nearly all stores and refreshed the presentation to inspire and educate guests how to integrate wellness into their everyday lives. Turning to our second strategic pillar, all in your world, we improved the guest experience across all of our touch points.

We enhanced our physical footprint, opening 33 new stores and renovating or relocating 25 stores. Our services business delivered double-digit comp growth for the year, increasing frequency with members who already engaged in services, while also introducing new members to our offering. And we drove greater experiential shopping through more in-store events focused on engaging and educating the guests about new products, new techniques, and the latest beauty trends. We also delivered significant improvements in our digital store experience.

We successfully transitioned key guest-facing and commerce elements to a new modern architecture, delivering a fresh guest experience across both ulta.com and our app and providing our teams with new tools to optimize the guest experience. These enhancements, combined with our efforts to drive the omnichannel member penetration, resulted in high single-digit growth in e-commerce sales and a 30% increase in member utilization of our app. To support stronger omnichannel experiences, we continue to improve our buy-anywhere-fill-anywhere capabilities. We expanded same-day delivery to all stores and increased our ship-from-store capabilities to 450 stores.

Between BOPIS, same day delivery and ship from store, 37% of our digital orders this year were fulfilled by stores, up from 31% last year. Finally, we strengthened our partnership with Target with the introduction of new brands and the opening of 155 additional Ulta Beauty at Target locations, ending the year with 510 shops. And we deepened guest engagement as reflected in growth of new member conversions, reengagement of lapsed guests, and greater loyalty account linkage, as well as increased bounce back to Ulta Beauty stores. Moving to our third strategic pillar, expanding and deepening guest engagement and loyalty by operating at the heart of the beauty community.

Our marketing strategies, media investments, and brand building efforts resulted in record-level unaided awareness, brand love, and loyalty. To drive awareness and spark deeper connection engagement, we launched The Joy Project, a multi-year brand equity initiative to make beauty and the world a more joyful place. We expanded our social media engagement across multiple platforms with new trendsetting series and compelling content, which drove strong engagement, positive social sentiment, and share a voice. And we achieved an important milestone.

In December, we surpassed 1 million followers on TikTok, reinforcing our position as a social brand leader in beauty. With improved member retention, strong new member acquisition, and healthy reactivation of lapsed members, we expanded our loyalty program by 8%, ending the year with 43.3 million loyalty members who shopped more frequently and spent more with us on average. Leaning into the power of our best-in-class loyalty program in January, we rebranded the program to Ulta Beauty Rewards, featuring a stronger birthday experience and a refreshed look in stores and online and across social to drive greater awareness and deepen connection with our members. We are excited to reward our members with even more of what they love and showcase how much we appreciate them.

Finally, UB Media, our retail media network, continued to deliver value. This year, we expanded the team, introduced new on-site products, and launched an innovative omnichannel solution, which supports the measurement of campaigns across both digital and physical stores. 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. I am very proud of what our teams accomplished in fiscal 2023, which was an ambitious year of foundational transformation for Ulta Beauty.

We completed the retrofit of our Greenwood distribution center, began the retrofit of our Dallas distribution center, opened our Greer market fulfillment center, and began work on our Bolingbrook market fulfillment center. We successfully transitioned our Jacksonville, Greer, and Chambersburg distribution facilities and key merchandising processes to our new enterprise resource planning platform. And we converted key merchandising and commerce elements of our digital store to a new architecture while maintaining digital operations. We built a new enterprise data platform on Google Cloud infrastructure, establishing a modern ecosystem for future analytics and data-driven decision capabilities.

And we completed our rollout of new POS systems, including mobile checkout in all stores. Our teams enable our success, and we continue to invest and protect and cultivate our world-class culture and talent. This year, we introduced a new leadership competency model, redesigned our succession planning and talent review processes, expanded our associate development offering, and completed enterprisewide training to reinforce inclusivity and address unconscious bias. Associate retention improved across stores, distribution centers, and our corporate team.

And our 2023 culture survey results reinforce that our overall associate engagement remains strong. Finally, we made progress against our sixth strategic pillar to expand our environmental and social impact. We continue to improve the energy efficiency of stores through LED lighting retrofits, HVAC retrofits, and energy management system upgrades, and established 2030 emissions reduction goals approved by the Science-Based Target initiative. I am incredibly proud of what our teams accomplished in 2023.

Our teams worked through unexpected challenges with agility and grace, and I am grateful for their steadfast commitment to deliver value for all stakeholders while also enabling new capabilities for future growth. As we look forward, we remain optimistic about the strength and resiliency of the beauty category. Over the last three years, the beauty category has experienced unprecedented growth. In 2024, we expect the category will remain healthy, but the growth will moderate to the mid single-digit range, barring a major economic event.

Beauty is an attractive category, and competitive intensity continues to increase as channels blur and distribution expands. To protect and expand our leadership position, this year, we expect to advance our transformational agenda with the completion of key projects while also investing in core traffic and experienced drivers to strengthen engagement and enhance the guest experience. Starting with our go-to-market strategic pillars, we will innovate, evolve, and expand all things beauty to excite and engage the beauty enthusiast. To strengthen our differentiated position, we will continue to expand our assortment with compelling and relevant brand launches like Sol de Janeiro and Charlotte Tilbury, while also building exclusive emerging brands in our pipeline yet to be announced.

In addition, this year, we will refresh ULTA Beauty Collection and position the brand as the cornerstone of our Conscious Beauty platform. And we will continue to enhance and amplify luxury at Ulta Beauty and our cross-category platforms. Reflecting the importance of omnichannel engagement, we will invest in the guest experience across all of our touch points. We will further expand and enhance our physical footprint through additional new stores, remodels, and relocations.

In all stores, we will focus on enhancing the guest experience through friendly and helpful associates, fast and frictionless fulfillment, and engaging services and events, while also improving operational excellence through simplification, prioritization, and optimizing our store teams. We also plan to drive growth across digital platforms as we leverage new capabilities to amplify brand launches and events, drive greater digital discovery and conversion, and expand personalization across our digital platforms. And we will expand and enhance our partnership with Target as we support new Ulta Beauty at Target shops, evolve the assortment, and deepen member engagement through targeted loyalty strategies. Operating at the heart of the beauty community, we intend to expand and deepen guest loyalty and engagement.

To support long-term brand equity and drive deeper emotional connection with consumers, we will amplify The Joy Project with a continuous rhythm of engaging activations and drive community through an expanded creator network and affiliate program. We will support brand activations and events to drive new member acquisition, while also leveraging our unique data insights to expand our targeting and member engagement. We will evolve our strategic promotional events to inspire and engage our beauty community, drive trips, and encourage omnichannel engagement. And we plan to expand the impact and value of UB Media.

Turning now to our operational excellence and optimization efforts. In fiscal 2024, we plan to complete many of the foundational elements of our transformational agenda, including Project SOAR, digital store, and the upgrade of our data management capabilities. We also plan to invest in a new MarTech stack to support our personalization, retail media, and overall e-commerce efforts. Our supply chain optimization journey will continue as our Bolingbroke market fulfillment center is completed, we continue to retrofit our Dallas distribution center, and we begin the retrofit of our remaining in Chambersburg and Fresno.

In addition, we intend to leverage our established continuous improvement capabilities to drive additional cost efficiencies with a priority on improving processes to reduce shrink. To protect our culture and cultivate our talent while also enabling future business performance, we will continue to invest in our associates and team. We intend to focus on enrichments to the frontline associate experience, enhance associate learning and development, and deepen our DDI impact. Turning to our final strategic pillar, we intend to stay focused on our environmental and social impact.

Building on progress made in 2023, we plan to implement a roadmap to achieve our emission reduction goals. Finally, I want to share an update on how we are approaching expansion opportunities outside the U.S. International expansion represents an incremental long term opportunity for Ulta Beauty to extend our reach and leverage our differentiated value proposition. Today, we are excited to announce our planned market entry into Mexico.

The Mexican beauty market is sizable, growing, and has significant beauty opportunity. Our research suggests there is a healthy awareness of the Ulta Beauty brand with local beauty enthusiasts, and we also see strong engagement in stores located in geographically adjacent markets. After extensive evaluation, we prioritized an asset-light partnership approach to enable us to move quickly, and I am excited to announce we have formed a joint venture with Axo, a highly experienced operator of global brands to launch and operate Ulta Beauty in Mexico in 2025. As a result of this partnership approach, we do not expect this venture to be material to our financials in fiscal 2024.

For competitive reasons, we’re not sharing more details today, but we’ll provide updates as appropriate. In closing, the Ulta Beauty team delivered strong financial performance in fiscal 2023, while also achieving meaningful progress against our strategic priorities. As we look to 2024, I remain excited about the opportunity to enhance our market leadership and drive profitable growth. We operate in a growing category with strong consumer engagement, and I am confident that our proven differentiated business model, strategic priorities, and outstanding, passionate team will enable us to move beauty forward in ways that create values for our shareholders and have a positive impact on our guests, associates, and the communities we serve.

Now, as many of you know, this will be Scott’s last earnings call. Now, I want to recognize and thank Scott for his many contributions to Ulta Beauty. He has been an exceptional partner to me and an inspirational leader for our entire team. Now, today, you will also hear from Paula Oyibo, who will become our CFO on April 1st.

Paula joined Ulta Beauty in 2019 and is a dynamic finance executive with broad industry experience. She understands our business and our guests, and I know she will have a strong impact on our business going forward. And now, I will turn the call over to Scott for a discussion of our financial results. Scott?

Scott Settersten — Chief Financial Officer

Thanks, Dave, and good afternoon, everyone. I will review our fourth quarter financial results before turning it over to Paula Oyibo, who will walk through the outlook for fiscal 2024. Financial results for the fourth quarter came in ahead of our expectations across the top and bottom line, reflecting strong holiday performance, growth in other revenue, and healthy traffic trends, as well as strong execution and focused expense management. Net sales for the quarter increased 10.2%, driven by 2.5% growth in comp sales, strong new store performance, a $25 million increase in other revenue, as well as the impact of the 53rd week in fiscal 2023.

Net sales for the 53rd week were 181.9 million. The growth in comp sales was driven by a 4.5% increase in transactions. Average ticket declined 1.9%, driven by lower units per transaction, which were partially offset by higher average selling price. Reflecting a more normalized pricing environment, we estimate that product price increases contributed about 100 basis points to the overall comp increase.

Looking at the cadence of sales through the quarter, comp sales were solid in November and December, reflecting strong holiday performance. As expected, sales were more challenged in January as we lapped the exceptional results from our strongest month in fiscal 2022. During the quarter, we opened 13 new stores, relocated two, remodeled two stores, and closed two stores. For the quarter, gross margin increased 10 basis points to 37.7% of sales.

The increase was driven by strong growth in other revenue, lower shipping rates, and leverage of supply chain costs, which were largely offset by lower merchandise margin. Our efforts to grow other revenue continue to yield benefits with performance driven by increased credit card income, greater loyalty point redemptions, and royalties earned through our Target partnership. At the same time, we realized benefits from our supply chain optimization efforts as our carrier diversification strategy drove improved profitability. As anticipated, merchandise margin was pressured during the quarter, reflecting the lapping of benefits from price increases, increased promotionality, as well as the impact from brand mix.

These pressures were partially offset by ongoing category management efforts. The impact of promotional activity was above last year but continues to be well below 2019 levels. Notably, shrink was flat during the quarter, slightly better than our expectations, reflecting the impact of our investments this year in training, labor, and new fragrance fixtures. For the full year, shrink as a percentage of sales increased 40 basis points.

Moving to expenses, SG&A increased 7.6% to 820 million. Overall, SG&A spend was better than planned due to focused expense management and a shift in timing of certain strategic investments. As a percentage of sales, SG&A decreased 50 basis points to 23.1% compared to 23.6% last year, primarily due to lower incentive compensation and leverage of marketing expenses and store payroll and benefits, which was partially offset by deleverage of corporate overhead and store expenses. Incentive compensation drove 40 basis points of leverage in the quarter reflecting operational performance that was more in line with our internal targets compared to last year’s significant outperformance.

In addition to the impact of higher sales, marketing expense leverage was driven by the timing of advertising expenses. While store payroll and benefits leverage reflected fewer payroll hours per store, which more than offset ongoing wage rate pressures. Offsetting these benefits, corporate overhead expense deleveraged during the quarter, primarily reflecting investments related to our strategic priorities, including Project SOAR, digital store, and other IT capabilities, and UB Media. For the full year, we invested 62 million of incremental spend to support our strategic initiatives, which was at the lower end of our expectations, reflecting the shift in timing of certain projects into 2024.

Finally, store expenses also deleveraged, driven by investments to support merchandising initiatives, as well as ongoing inflationary pressures across the business. Operating margin was 14.5% of sales compared to 13.9% last year. The company’s tax rate decreased to 24.2% compared to 24.6% in the fourth quarter last year. The lower effective tax rate is primarily due to benefits from a decrease in state income taxes.

Diluted GAAP earnings per share increased 21% to $8.08 compared to $6.68 last year. The EPS impact of the 53rd week was $0.46. To recap the full year, net sales increased 9.8% to 11.2 billion. Comp sales increased 5.7%, driven by a 7.4% increase in transactions and a 1.5% decrease in average ticket.

We estimate that product price increases contributed about 200 basis points to the overall comp increase for the year. Operating profit was 15% of sales, with deleverage coming evenly from gross margin and SG&A, and diluted EPS increased 8.4% to a record $26.03 per share. Moving on to the balance sheet and cash flow statement. Total inventory increased 8.6% to 1.7 billion compared to 1.6 billion last year.

In addition to the impact of 30 net new stores, the increase reflects inventory to support new brand launches, the new market fulfillment center in Greer, South Carolina; as well as the impact of product cost increases. Our well-established business model continues to generate significant cash from operations, including nearly 1.5 billion in fiscal 2023. Our capital allocation approach 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 2023, we invested $435 million in capital expenditures, including approximately 178 million for new stores, remodels, and merchandise fixtures, 124 million for IT, 73 million for supply chain, and 60 million for store maintenance and other. Depreciation for the year was 244 million compared to 241 million last year and primarily reflects the ongoing shift of IT investments from capital to cloud expense. During the fourth quarter, we repurchased 352,000 shares at a cost of 159 million, bringing total share repurchase to 1 billion for the full year. Since launching our stock buyback program in 2014, we’ve purchased more than 18 million shares at a weighted average price of $313, effectively returning 5.8 billion to shareholders, while continuing to invest in strategic growth drivers.

Before I turn the call over to Paula, I wanna take a moment to express my sincere gratitude to our teams for delivering these strong results for our shareholders this year and throughout my tenure with Ulta Beauty. It has been an honor to serve as the company’s CFO and a privilege to lead and serve alongside such talented associates. I’m excited to pass the baton to Paula, who I know will be an excellent leader and steward of Ulta Beauty’s business going forward.

Paula Oyibo — Senior Vice President, Finance

Thank you, Scott. I am honored and humbled to be assuming the position of chief financial officer at Ulta Beauty, and I am excited to lead our talented finance organization and to drive Ulta Beauty’s next phase of growth. I want to thank Scott for his mentorship over the years and wish him all the best in his well-deserved retirement. I look forward to working with those on the call today and meeting those of you I have not yet met.

Before we talk about our expectations for fiscal 2024, I want to share two capital allocation updates. First, yesterday, we amended our revolver agreement to $800 million and extended the term to 2029. Reflecting the current rate environment, we reduced the size of the revolver to lower the impact of higher fees but retained flexibility to upsize the capacity if needed. Second, having essentially completed the authorization announced in March 2022, today, we announced a new share repurchase authorization for 2 billion.

Now, turning to our outlook for fiscal 2024. We expect next sales will be in the range of $11.7 billion to $11.8 billion with comp sales growth expected to be between 4% and 5%. We anticipate comp growth will be in the low single-digit range in the first half and then increase to mid single-digit growth in the second half of the year. We expect operating margin will be between 14% and 14.3% of sales, primarily driven by SG&A deleverage as we complete many of the foundational elements of our transformational agenda and move to investments to enable growth, operationalize the investments made in 2023, manage ongoing wage pressures, and support core traffic and experience drivers.

In total, we expect SG&A growth for the year will moderate into the high single-digit range from 12.5% growth in fiscal 2023. We expect SG&A growth in the first half will be in the low double-digit range as we annualize investment spend in 2023 and complete key milestones of our transformational agenda and then slow to mid single-digit growth in the second half. We expect gross margin for the year will be down modestly as lower merchandise margin and deleverage of supply chain costs are partially offset by other revenue. Our assumptions result in a diluted earnings guidance in the range of $26.20 to $27 per share.

We are planning EPS to decline in the first half and then accelerate to high single-digit growth in the second half of the year. For modeling purposes, we expect operating margin to be the most challenged in the first quarter, with meaningful deleverage across SG&A and gross margins. Finally, we plan to spend between 415 million and 490 million in capex, including approximately 270 million to 282 million for new stores, remodels, and merchandise fixtures; 120 million to $155 million for supply chain and IT; and 45 million to 53 million for store maintenance and others. We expect appreciation for the year will be between 275 million to 280 million.

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 and shareholder returns. Before we take your questions, I want to announce that we plan to host an investor event here in Chicago this fall to share our longer-term plans and outlook. We will share more of the logistical details later this summer. And now, I’ll turn the call back over to our operator to moderate the Q&A.

Questions & Answers:

Operator

[Operator instructions] Our first question comes from the line of Rupesh Parikh with Oppenheimer. Please proceed with your question.

Rupesh Parikh — Oppenheimer and Company — Analyst

Good afternoon. Thanks for taking our question. And also, Scott, best wishes in retirement. So, I wanted to start out just with the prestige cosmetics category.

As you look toward this fiscal year, you know, we’re seeing a lot of news in stores. You’re moving past, I think, pretty difficult comparisons. Just curious if you guys expect to return to share games within the prestige cosmetics category.

Dave Kimbell — Chief Executive Officer

Rupesh, thanks for your question and thanks for calling out Scott, well-deserved. Yeah, I’ll say on makeup and I’ll even speak a little bit more broadly across all of our categories, you know, we are focused on driving growth in every part of our business. Our makeup business in 2023, you know, particularly in the second half, we saw healthy growth on the mass side and more challenges on the prestige side. So, we have a strategy to drive performance within all parts of our makeup business.

It is our largest segment and obviously important in the beauty category. You know, our efforts are holistic. We’ve got a number of new brands that we believe will either already are or will add value to the category, including the launch of Charlotte Tilbury, which just rolled out recently, also, exclusive brands like HALF MAGIC and Polite Society, Rabanne; innovation from newness — from our existing big brands that will continue to see that have been so important to our business like Tarte and Benefit and Clinique and Lancome. On the prestige side, our luxury, you know, proposition really launched last year at two — with a lot of success.

And as we continue to grow and build our presence in that space, we see that as a contributor. And then, through our holistic efforts we’re going to try to find ways to lean into, you know, the important trends. Makeup is, of course, has a key trend component. So, whether it’s blush, shade, proliferation, lip layering, matte makeup, nail, it’s an important opportunity.

We’re going to continue to drive that. And the last thing I’d say is we continue to revamp and elevate our events that play an important role in mass migration. The number of mass consumers that we’ve acquired over the years, continuing to introduce them to prestige for the first time. So we’re focused on driving that business.

We are confident over time that we’ll be able to deliver the growth that we expect, and we’re working hard to deliver across all parts of that business.

Rupesh Parikh — Oppenheimer and Company — Analyst

Great. Thank you. I’ll pass it along.

Operator

Our next question comes from the line of Korinne Wolfmeyer with Piper Sandler. Please proceed with your question.

Korinne Wolfmeyer — Piper Sandler — Analyst

Hey, good afternoon, team. Thanks for taking the question, and congrats on the quarter. I’d like to touch a little bit on the decision to enter into Mexico. I mean, previously, we’d been talking about potentially going into Canada.

Just would like to understand your thought process of going or doing Mexico versus Canada and what kind of opportunity do you really see there over the longer term? Thanks.

Dave Kimbell — Chief Executive Officer

I’m just going to say we’re really excited about this announcement. And really, as I said in the prepared remarks, we see Mexico as a great opportunity that’s, you know, tailor-made for the Ulta Beauty experience. Kecia is leading this effort among many things that she does, so I’m going to ask Kecia to give some more color on it.

Kecia Steelman — Chief Operating Officer

Yeah, absolutely. Well, after careful evaluation of many market opportunities, we really felt like the Mexican market is the next step for Ulta Beauty for us to have this partnership with Axo. I’m really excited about this. I know that the future is going to be really bright in this partnership.

We spend a lot of time with their teams from a cultural perspective. Also, just even from the best-in-class performance with global partners that they’ve brought to the Mexico consumer, the Mexican consumer, our border stores are performing really, really well. And I just think it’s the next natural step for us as we continue to expand internationally. So, we are really excited about this.

Again, we are planning to be operational in 2025. The cost of this is built into the guidance in ‘024, so we don’t feel like it’s very material. But we’re super excited and feel that Axo is the right partner for us to launch in this next new territory for us.

Korinne Wolfmeyer — Piper Sandler — Analyst

Great, thanks so much.

Operator

Our next question comes from the line of Ike Boruchow with Wells Fargo. Please proceed with your question.

Juliana Duque — Wells Fargo Securities — Analyst

Hi, everyone. Good afternoon, team. This is Juliana on for Ike. Thank you for taking my question.

I just wanted to ask in regards to thoughts on the beauty categories moving forward, particularly with the balance of prestige and mass and maybe in addition how we can see that driving merchandise margin given the benefit that we’ve seen. Thank you.

Dave Kimbell — Chief Executive Officer

Well, for the overall category, as I mentioned in the remarks, you know, we’re fortunate to be in a category that continues to be healthy, that is highly connected to our consumers, a high level of engagement. There’s an emotional connection that’s driving the category and has been for a very long time and then, certainly, coming out of COVID has been exceptionally strong. All indicators, as we look at the at the consumer landscape is continued level of engagement. When we look into this year, though, of course, we are evaluating and anticipating and preparing, you know, for consumer behavior to continue to evolve.

We know there’s external pressures on the consumer. We know we’re entering into a dynamic time with an election year. And what we’ve seen in this category is strong growth but, as expected, some moderation in that growth. Still above historical trends, but is some moderation.

You know, simply put, we think consumers, highly engaged in the category but still — you know, and still passionate about the category but will continue to be thoughtful in all of their spending. But fortunately, we know that beauty is an important one. And as a reminder, Ulta Beauty is well-positioned to manage through really kind of economic disruption or challenge, given our unique portfolio, all price points, all categories that allow us to meet our consumers’ needs if there is a time that they feel more pressured to have other changes. But overall, category healthy.

Paula, as it relates to any potential margin changes?

Paula Oyibo — Senior Vice President, Finance

Yes, hi. What I would say is, you know, our merchandise margin, I will remind, we are meaningfully higher and better in our merchandise margin since 2019. And really, that has a lot to do with we are much healthier business now. And we have our mix in our business between our categories, as well as prestige and mass.

The category performance efforts over the years has really helped us to be able to be flexible as the consumer shifts between various categories, as well as between mass and prestige. And so, we believe that our — we’re able to manage that dynamic.

Juliana Duque — Wells Fargo Securities — Analyst

Got it. Thank you very much.

Operator

Our next question comes from the line of Susan Anderson with Canaccord Genuity. Please proceed with your question.

Susan Anderson — Canaccord Genuity — Analyst

Hi, good evening. Thanks for taking my question. I wanted to maybe ask about the store expansion. It looks like it picks up a lot this year.

I guess how should we think about timing throughout the year? And then, also, should we expect these to be the full-size stores, or are you going to roll out any of the smaller test stores that you’ve been looking at? And then, also, just how do you think this helps to maybe win back some of the share from other competition. Thanks.

Paula Oyibo — Senior Vice President, Finance

Thanks, Susan. We are planning to open between 60 and 65 net new stores in fiscal 2024. That puts our growth between the two-year period at 90 to 95, which is generally in line with the 100 that we had communicated. And so, our thinking hasn’t materially changed there.

We remain confident in our ability to open and operate between 1,500 and 1,700 traditional Ulta Beauty freestanding locations in the U.S. And we’re optimistic the small format store prototype could give us an opportunity for additional growth, as does the partnership with Target. And then, similarly, as we’re excited about the additional opportunity with our international expansion into Mexico. Related to the small geographies, we are planning to open 10 small store formats in 2024.

Susan Anderson — Canaccord Genuity — Analyst

Great, thanks so much. Good luck the rest of the year.

Operator

Our next question comes from the line of Ashley Helgans with Jefferies. Please proceed with your question.

Ashley Helgans — Jefferies — Analyst

Hi, thanks for taking our questions. We just wanted to ask for an update on UB Media. Anything you can share about the number of brands that are currently on the platform, maybe demand for the platform? And then, any color to help us model as UB starts to scale? Thanks.

Dave Kimbell — Chief Executive Officer

Yeah, we’re really pleased with the progress that we’ve made. As a reminder for those on the call, this really does represent a way for us to generate positive impact on our business by leveraging the first-party data and insights that we have in partnering with our brands. We’re not sharing, we haven’t shared, and we don’t plan to share specific on number of brands or even specific financial impact at this time. But what i will say is, you know, we’re really pleased with progress that we’ve made in 2023 and are confident that will continue to grow this part of the business.

You know, the network that we have offers advertising access via off-site display, video social influencers, as well as on-site sponsored products here. Our on-site display inventory is one of the actually new core offerings that we activated just in 2023, so we’ve got a full suite of that inventory experiences, value-added services. And as i said, we’re competent in its impact going forward. And the support, engagement, reaction from brands has been very positive.

As you know, the advertising world continues to evolve, so the value that we can bring through first-party data with 43 million beauty enthusiasts is very meaningful. And we continue to work with our brand partners, and they have demonstrated to us that they see a positive return, and we’re continuing to grow that business.

Ashley Helgans — Jefferies — Analyst

Great, thanks so much. Best of luck.

Operator

Our next question comes from the line of Olivia Tong with Raymond James. Please proceed with your question.

Olivia Tong — Raymond James — Analyst

Great. Thanks. Good afternoon. And congrats, Scott, and looking forward to working with you, Paula.

I wanted to ask you a little bit about your thoughts on new product contribution this year because it does seem like, you know, certainly starting off with some momentum with Charlotte Tilbury and Sol de Janeiro. We did some store tours in New York recently, and the team is very energized around these brands. So, I was wondering if you could talk about contribution this year versus previous years and then helping us understand, you know, sort of — I think you mentioned Sol de Janeiro that — portion of the doors. Maybe can you give the same statistics for Charlotte Tilbury? And then, on the margin, I would just love a little bit more detail in terms of what’s driving the margin outlook to the, you know, 14 to 14.3 end of the longer-term range, whether there’s anything, you know, sort of higher investment or what have you that sort of dragging that to that end of the range.

Thank you.

Dave Kimbell — Chief Executive Officer

OK, thanks, Olivia. Yeah, I’ll talk about new product at our newness pipeline, and then Paula can pick up on your question around margin. So, yeah, we’re — you know, well, first, I’ll say, newness is always a critical part of our business and historically has been between 20% to 30% of our sales. And that’s an important part of the category, and one of the best things about the category.

There is a large desire from our beauty enthusiasts guests, from our members, to discover what’s new and exciting across all of our categories. And so, we do have, what I believe is, a well-balanced portfolio of new brands between big recognized brands like Charlotte Tilbury, as well as a steady stream of emerging brands that are unique or exciting within the Ulta Beauty environment. And so, we don’t — we’re not going to give any specific numbers about newness this year versus last year. But I will give you a couple of highlights.

First, you mentioned Charlotte Tilbury. And just to reiterate, that is in 600 stores and online. And we’re excited about that. It was one of the top requested brands from our members.

And we’re pleased to be partnering with them to bring a unique and powerful experience to life. Sol de Janeiro is in 700 stores and also online, and also was highly requested and brings just a terrific experience in store and online and has been very well-received since we launched that in January. But there’s a whole range of products that we’re going to continue to launch and bring to life. We do focus, as I said, on emerging brands.

And while I’m not going to, for competitive reasons, share some of the pipeline that are ahead of us, I’d highlight some of the brands that we launched last year like LolaVie, Polite Society, HALF MAGIC, a brand like Live Tinted, which has been with us for a little bit. Important brands play an exciting role in driving growth in various categories that we’re excited about. In our luxury business that I talked about, you know, we continue to add brands to that throughout the year and see growth. So, newness is important.

We see — we like the balance that we have. We’re excited about the brands that we’ve launched so far. And I look forward to rolling out more partnerships and bringing newness across our portfolio throughout 2024. Paula, on the margin question?

Paula Oyibo — Senior Vice President, Finance

Yes, so from an operating margin perspective, we shared 14% to 14.3% of sales. And that is mostly deleverage coming from SG&A as we complete many of our foundational elements of our transformational agenda and move to investments to enable growth, as well as we operationalize the investments that we’ve made to date. And those go into run state. We also are managing ongoing wage pressures, which is assumed in a guidance, and we also will continue to support core traffic and experience drivers.

And so, as you think about SG&A growth for the year, it will moderate into the high single-digit range from the 12.5% growth we saw in fiscal 2023. And then, we do expect gross margin to be down modestly as lower merchandise margin and deleverage from supply chain costs are partially offset by the growth we see and expect in other revenues.

Kiley Rawlins — Vice President, Investor Relations

Operator, can we have the next question?

Operator

Of course. Our next question comes from the line of Michael Baker with D.A. Davidson. Please proceed with your question.

Mike Baker — D.A. Davidson — Analyst

OK, thanks. Really, just to follow up on what you just said, can you tell us where you are in this investment in these foundational investments? I think you said $62 million in 2023, which was below plan and shift some into 2024. So, what should it be in 2024? And even working backwards, can you remind us what it was in ’21 and 2022? It was sort of supposed to be a three-year investment plan that was rolling off. Sounds like it’s still rolling off and there’ll be some lingering costs in 2024.

So, just trying to conceptualize, you know, what 2024 investments will look like versus 2023. Thank you.

Paula Oyibo — Senior Vice President, Finance

Yes, Michael, I’ll start with some of the numbers and then turn it over to Kecia so she can give a little bit more flavor for where we are. So, we had incremental 55 million in 2022 related to our transformational strategic investments. We communicated 62 million incremental in 2023. As you think about 2024, we expect limited incremental investment as we complete the foundational elements of our transformational agenda.

Think about Project SOAR, digital store, and other IT projects. But as I communicated, once we complete those particular systems, these upgraded systems roll into our core operations and become a part of our base, and there’s run costs associated with that. So, there is run costs associated with those foundational investments. We will continue to invest to enable growth, as well as the other items that I mentioned regarding wage pressures in investing in traffic and experience drivers.

Kecia?

Kecia Steelman — Chief Operating Officer

Yeah, so in regards to like where we are on the investments and where we are on the projects, for our ERP upgrade or what we’re internally calling as Project SOAR, just this week, we completed our Dallas DC, and we have plans to wrap up Greenwood and Fresno and open up our new MSC in Bolingbrook, which is a relocation of the existing FFC in Romeoville all before peak this year. Part of the ERP upgrade, we’re also transitioning our store systems and our merchandising systems, and we have those plans to be completed before the second half. Again, prior to peak. For supply chain in ’24, we’re continuing to invest in our automation capabilities.

And I mentioned already, the MSC in Bolingbrook hits on our supply chain lines, and then also finishing out that retrofit in Dallas, the Dallas DC. And then, for the Digital Store of the Future, so our digital store platform, we expect that to be completed in the first half of 2024, and we’re wrapping up all of our upgrades around our analytical tools and reporting capabilities. So, bottom line, we continue to be on track and on our budget, and we are all-in on wrapping these foundational enabling systems up this year.

Mike Baker — D.A. Davidson — Analyst

Thank you.

Operator

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

Anthony Chukumba — Loop Capital Markets — Analyst

Thank you so much for taking my question, and let me add my congratulations to Scott as well. It’s been a pleasure working with you all these years. So, my question was on the luxury brands. I guess just two parts to the same question, both pretty quick.

First off, how do they perform relative to your expectations in 2024? And what are your expectations in terms of additional brand rollouts, luxury brand rollouts in — sorry, in 2023 and then in order expectations for additional luxury brand rollouts in 2024. Thank you.

Dave Kimbell — Chief Executive Officer

Great. Well, thanks for the question. And yeah, luxury, as I said, was one of our — one of many initiatives last year to drive engagement. And we’re really pleased with establishing that more, more firmly with some of our existing partners, including CHANEL, Dior, Natasha Denona, Pat McGrath.

And so, we see strong performance, and we’re really pleased with how our guests are engaging in that part of the business. We had a lot of confidence going in because of existing relationships with brands like CHANEL, then by elevating and expanding it, it has really, we believe, met our guest needs. And they’re excited about it and further demonstrates our ability to deliver all things beauty from all price points, including luxury. You know, we’re not sharing any specific launches of anything beyond what I’ve already shared today.

More broadly, as I said with newness, we have a steady stream of newness throughout the year, and we’ll continue to innovate. Specifically within luxury, our focus is continuing to grow in partnership with the brands that we’ve launched and find new ways to expanding those businesses and delight our guests with them. And we’re really pleased and proud to have that experience in our stores.

Kiley Rawlins — Vice President, Investor Relations

Operator, can we have the last question, please?

Operator

Our final question comes from the line of Adrienne Yih with Barclays. Please proceed with your question.

Adrienne Yih — Barclays — Analyst

Thank you very much. Good afternoon. Scott, congratulations. It’s been great, and thanks for all the help over the years.

This question is maybe for Dave or Kecia. Can you talk about the promotional environment that your guidance is under for 2024? Is it expected to sort of remain in maybe the first half and then abate or kind of pre-exist all year long? And whether it was from more from prestige? Are you concerned that there, perhaps, is a longer-term shift to mass or mass-stige from younger or more price-sensitive consumers? And then, Scott and Paula, just a quick one, in your four to five comp, what are you expecting in terms of any ASP increases this year? And what’s the rationale behind the low single-digit to mid single-digit comp in the back half, what’s going to drive the acceleration? Thank you very much.

Dave Kimbell — Chief Executive Officer

So, yeah, just on the promotional environment, what I would — you know, probably won’t answer every one of your detailed questions because we’re not going to break it out that way exactly. What I’ll say more broadly is, you know, we’re not expecting that the promotional environment is going to significantly intensify or become irrational. We are in a competitive environment, that’s for sure. And we are focused on ensuring that we’re delivering on our leadership position.

So, as we look forward we would anticipate and we have in our plans the ability to, you know, drive our business, which includes marketing store labor, digital experiences, and promotional activity as appropriate, but, you know, not an expectation more broadly for, you know, a significant step. And we do anticipate, as we saw in 2023, that it’ll still remain well below 2019 levels. The mass to mass prestige question, we see opportunity across both parts of the business. Yes, consumers are engaged and young consumers are engaged in mass, but they’re also engaged in prestige.

They’re loving our luxury experience. So, it’s really not so much about price or promotion necessarily as what brand is really delivering great innovation, great marketing, engaging with them in social media. Those brands will win regardless of the price points. Paula, do you want to give a little color on some of the four to five?

Paula Oyibo — Senior Vice President, Finance

Sure. Adrienne, on your question with regards to expectation around ASP, what I would share is that we are planning for a more normalized pricing environment in 2024.

Adrienne Yih — Barclays — Analyst

Perfect. Thank you very much. Thanks so much.

Dave Kimbell — Chief Executive Officer

Great. Thank you. And thanks, everyone, for joining today. I’d like to close by thanking our 55,000 associates for delivering a strong 2023.

Together, I know we will continue to unleash the unique power of beauty and keep moving our business forward in exciting ways. I’m optimistic about the future of Ulta Beauty and confident we will continue to create significant shareholder value. I do want to take one second to thank Scott again. Scott, as I said, has been an amazing partner to all of us, and I so appreciate his impact and his leadership.

And I want to thank those on the call that have the chance to thank him yourself. I know he loved spending time in all of our meetings, in all of our earnings calls. I know he appreciated partnership with all of you, and I do want to thank Scott for everything you’ve done for our company. Thank you, Scott.

We look forward to speaking to all of you again when we report results for the first quarter of fiscal 2024 on May 30th. Thank you again, and have a great night.

Operator

This concludes today’s teleconference. [Operator signoff]

Duration: 0 minutes

Call participants:

Kiley Rawlins — Vice President, Investor Relations

Dave Kimbell — Chief Executive Officer

Scott Settersten — Chief Financial Officer

Paula Oyibo — Senior Vice President, Finance

Rupesh Parikh — Oppenheimer and Company — Analyst

Korinne Wolfmeyer — Piper Sandler — Analyst

Kecia Steelman — Chief Operating Officer

Juliana Duque — Wells Fargo Securities — Analyst

Susan Anderson — Canaccord Genuity — Analyst

Ashley Helgans — Jefferies — Analyst

Olivia Tong — Raymond James — Analyst

Mike Baker — D.A. Davidson — Analyst

Anthony Chukumba — Loop Capital Markets — Analyst

Adrienne Yih — Barclays — Analyst

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