Ulta Beauty, Inc. (ULTA) Q1 2016 Earnings Report, Transcript and Summary

Greetings, and welcome to the ULTA Beauty First Quarter 2016 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Laurel Lefebvre. Thank you. You may begin.

Thank you. Good afternoon and thanks for joining us for ULTA Beauty's First Quarter 2016 Conference Call. Hosting our call are Mary Dillon, Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Also joining us is Dave Kimbell, Chief Merchandising and Marketing Officer. Before we begin, I'd like to remind you of the company's safe harbor language. Statements contained in this conference call, which are not historical fact may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC. [Operator Instructions] I'll now turn it over to Mary.

Thank you, Laurel. Good afternoon, everyone. 2016 is off to a phenomenal start with excellent top and bottom line growth in our first quarter. There are several factors coming together to drive the momentum in our business: healthy consumer demand in the beauty category; ULTA Beauty's unique and relevant format and positioning; and effective collaboration across the enterprise, which is driving strong execution of our growth strategy. To recap the first quarter results: We grew the top line 23.7% and delivered a 15.2% comp on top of an 11.4% comp in the first quarter of 2015. This is our best comp growth since 2006. Comp sales were driven primarily by traffic, while ticket also saw healthy increases. Ongoing strength in cosmetics, both mass and prestige, is the largest contributor to our growth, but other major categories are delivering robust comps as well. E-commerce continues to see rapid sales growth. The Salon's top line was solid even while we reduced the frequency of our promotions. So with overall revenue growth significantly better than planned, coupled with strong execution of our strategic imperatives, we delivered earnings per share growth of almost 40%, well above our expectations. I'd like to call out some more specific details on the primary contributors for our performance during the quarter. Growth in our loyalty program continues to fuel our business results. ULTAmate Rewards membership grew to 19.4 million active members, up 25% year-over-year. This continued acceleration of sign-ups reflects our store associates' efforts to convert new members and strong traffic driven in part by our advertising campaigns. The number of members shopping increased as well as their average sales per ticket -- per visit. Loyalty member retention has increased steadily each quarter and is up almost 200 basis points compared to last year. Using the loyalty program points as currency, our CRM team is working closely with our merchants and our brand partners to continue developing targeted and relevant campaigns that are increasingly resonating with our guests. Our marketing mix continues to evolve with great balance across television, radio, digital and social media as well as our traditional print vehicles. In March, we ran television and radio ads for our signature 21 Days of Beauty event. We complemented this with an aggressive online video campaign as well as extensions into online radio with Spotify and Pandora. We elevated our social media and influencer efforts anchored on our spring trends. We surrounded our consumer with current and relevant content online and in-store as well as activation at high-profile events, including the Coachella music festival. Our comprehensive campaign for Mother's Day, which was called Pamper Her with Pretty, was designed to build awareness of our brand, deepen our connection with our guests and provide a platform to make ULTA Beauty a top-of-mind destination for gift-giving, especially in fragrance. In addition to the return of the Mother's Day gift guide and fragrance finder, we offered more Gifts with Purchase and CRM promotions in conjunction with many exciting new fragrance launches. The Mother's Day activities also included a social media campaign with the launch of a special video entitled Mom, the Original Beauty Icon, which invited guests to celebrate mom by sharing what makes their own moms' beauty iconic through a post on Facebook, Twitter or Instagram. This campaign was viewed over 4.5 million times. We believe all these marketing efforts contributed to our strong traffic growth during the quarter. Now to update you on merchandising. The trends from last year continued to drive the business, with Urban Decay, IT Cosmetics, NYX, Anastasia, Too Faced, Tarte, Clinique, Lancôme, Benefit and ULTA Beauty Collection among the best performing brands for the quarter. The pipeline of newness really continues to be quite compelling, translating into strong growth in both mass and prestige cosmetics. During the quarter, we launched Honest Beauty in 250 stores, rolled out our exclusive Fiona Stiles line in 500 stores and added Buxom Cosmetics to all doors. Anastasia Beverly Hills and Perricone launched new product lines. Clarins was rolled out to additional doors. We introduced Tarte's Double Duty Beauty collection, which is exclusive to ULTA Beauty. And we rolled out Dior mascara to all stores. More recently, we announced the addition of dpHUE hair care products, and we began to offer Nuxe, a French skincare brand, on our website. We also rolled out an assortment of the iconic Drybar hair products and tools in hundreds of stores. We are enhancing our ULTA Beauty Collection through a series of initiatives. We've been updating and elevating the formulas and packaging as well as the in-store graphics, while improving speed to market and on-trend products. Trend categories include contouring, strobing and multidimensional makeup. And we've also added an endcap featuring new spring kits. We've produced compelling training videos and enhanced our sampling programs. While we've made great progress, we're just getting started with our efforts to evolve ULTA Beauty Collection to continue to represent our brand personality. Turning to services. Our salon sales rose 14.7% and comped 7.7%, with strength in blowouts, hair treatments and makeup services. We view the services business as a growth opportunity, and we're very focused on our strategy to convert more of our loyalty members to discover our high-quality services offering. Our Benefit Brow Bar business continued its strong performance, with brow services now in 738 stores. And we're proud to perform more brow services than anyone else in the U.S. Moving on to stores. We opened 13 stores and closed 1 in the first quarter, well on our way to executing our 2016 program of 100 net new stores. We ended the quarter with 886 stores. New store productivity remains very strong, with all vintages of stores benefiting from the successful execution of our strategic imperatives. Our growth and development team is now in the process of performing a deep dive analysis to refresh our estimate of the store potential in the U.S. This analysis includes an updated assessment of the potential for smaller and urban markets as well as how our small store format will fit into the future store mix. Sharing the outcome of this work is expected to be one of the topics we plan to cover at our next Analyst Day this fall as well as other updates from our long-term strategic plan that we're now in the process of refreshing as well. Moving on to ulta.com. Our e-commerce growth was very strong, up 38.8% and contributing 130 basis points to our total company comp. The mix of professional hair care and prestige cosmetics continues to grow, helping our e-commerce margin rate. We're also adding brands and products that are available only online such as J.Cat Beauty, StriVectin Hair Care, Eyeko and ManCave among others. Our ulta.com guests remain very interested in our beauty bag sampling program and Beauty Break! limited time promotions. Mobile is growing rapidly, now representing more than 60% of site traffic. We released new versions of our iPhone and Android apps in the first quarter. The iPhone app was featured on the Apple Store home page. Moving up to a 5-star rating, this new version now includes features such as Apple Pay checkout, enhanced features displaying ULTAmate Rewards information and Gifts with Purchase details on product pages. Both app versions have been a big hit with users, garnering enthusiastic user reviews and an increase in downloads, now reaching well over 2 million between the 2. Finally, our supply chain and IT teams have done a great job managing the ramp-up of the Greenwood distribution center while preparing to open our new distribution center in Dallas, which began to accept inbound inventories just last week. The Greenwood DC is now serving about 200 stores and fulfilling roughly 40% of our e-commerce orders. We're on track to end the year delivering to approximately 240 stores from Greenwood. Our Dallas facility, a carbon copy of our Greenwood building, is right on track to begin outbound shipments in July as planned. We expect to ramp up this newest DC to serve 125 stores by holiday. As expected, the Greenwood distribution center and systems are producing efficiencies and cost per unit shipped. On the system side, we have good progress to report here as well. SWIFT, our forecasting replenishment tool, has been rolled out to additional categories including skincare and hair care, and the rest of categories will be implemented throughout the remainder of the year. I am particularly proud of the supply chain team and the IT teams' performance and deep collaborations, and they're balancing the execution of several major initiatives and projects while doing an excellent job improving in-stocks in our stores to support the higher-than-expected sales trends. So now I'll turn it over to Scott to discuss the drivers of our first quarter results and outlook for the second quarter and the year.

Thanks, Mary. Good afternoon, everyone. Starting with the income statement. Similar to previous quarters, our top line was driven by a very healthy 15.2% comp and strong new store productivity. The total company comp was composed of 11% transaction growth and 4.2% average ticket growth. The retail comp of 14.3% was made up of 10.5% traffic and 3.8% ticket. The Salon business comped 7.7%, and Salon growth was all ticket-based. E-commerce growth was almost entirely driven by traffic, with modest ticket growth. Gross profit increased 150 basis points. The improvement was driven by strong leverage on store rent and occupancy expenses as well as by healthy product margin expansion, offset by planned supply chain deleverage related to investments in new distribution centers and core merchandising systems. Strong product margin performance was driven in part by significant margin improvement in mass departments due to changes in our promotional offers and a mix of higher margin brands, including the ULTA Beauty Collection. We continued to carefully pull back on broad discounting, while placing more reliance on loyalty and our CRM tool kit. Moving on to SG&A expenses. We deleveraged by 20 basis points, primarily related to investments in headcount and consulting to support our growth initiatives. Turning to the balance sheet and cash flow. Inventories were up 14.5% on a per-store basis, slightly below the comp rate. This growth was driven by investments in inventory to keep up with better-than-expected top line growth, new brand additions and the accelerated expansion of our prestige boutiques. In-stock levels have improved year-over-year, but we still expect to make more progress going forward as we begin to reap the benefits of our new distribution centers and related systems. Capital expenditures were $54.3 million in the quarter, driven by new store openings, merchandise fixtures for the rollout of prestige brand boutiques and supply chain and system investments. We ended the quarter with $369 million in cash and short-term investments. We repurchased 158,000 shares at a cost of $27 million under our 10b5-1 plan. And as you know, we entered into a $200 million ASR agreement in March, which settled just last week. During the first quarter, we received 80% of the shares we expected to receive on settlement, or about 852,000 shares. The reduction in shares outstanding year-over-year contributed approximately $0.03 of earnings per share growth in the quarter. Including the entire $200 million paid as part of the ASR agreement, approximately $219 million remained available under the $425 million share repurchase program announced in March. Turning now to guidance for the second quarter. We anticipate sales to be in the range of $1.041 billion to $1.058 billion compared to $877 million last year. We expect comparable sales to increase in the range of 11% to 13% versus 10.1% last year. Online sales growth is expected to be in the 40% range. We plan to open about 25 stores in Q2 compared to 20 stores during the same period last year. And preopening expense for the quarter is expected to be about $4.6 million. Earnings per share are expected to be in the range of $1.32 to $1.37 versus $1.15 for Q2 of 2015. Our supply chain investments, including the new Dallas DC, are expected to weigh on margins the most in the second and third quarter. And we expect earnings per share growth to be higher in the fourth quarter this year. We anticipate a tax rate of 37.6% and a fully diluted share count of approximately 63 million. In terms of our outlook for the full year 2016, we are raising our guidance for comparable sales and earnings per share growth to reflect the strong start to the year. Total company comps are now expected to be approximately 10% to 12% compared to our prior guidance of 8% to 10%. We now expect to grow earnings per share in the low 20s percentage range versus our prior guidance of 18% to 20% growth. Operating margins are now expected to leverage slightly. The other elements of our guidance for the year are unchanged. We are on track to open approximately 100 stores, all planned to be on our 10,000 square foot prototype. We expect to open about 25 stores in Q2, 50 stores in Q3 and 15 stores in Q4. We're also planning 12 major remodels and 2 relocations. We plan to grow e-commerce approximately 40%. We expect CapEx to be about $390 million, driven by slightly higher capital per new store and the rollout of boutiques. As a reminder, we planned about $80 million for boutique expansion and updates, with over 500 Clinique, Lancôme and Benefit boutiques as well as updates to our fragrance fixtures and the ULTA Beauty Collection. We anticipate that share repurchase activity under our $425 million authorization will contribute about 2 percentage points of earnings per share growth. I'll now turn the call over to our conference call host for the Q&A session. Operator?

[Operator Instructions] Our first question comes from Chris Horvers of JPMorgan.

I was curious. A lot of retailers talk about an uneven cadence during the quarter. Some folks are [ph] to manage earlier in the quarter, some weather issues. I was curious if you had a view on how that impacted your business during the quarter.

Thank you, Chris. Well, I guess, first of all, I'd say, what we saw was pretty consistent across the quarter in terms of comps. Not a lot of variation. Where we did see variation, it was maybe cadence in promotions than we had planned. So I think at the end of the day, beauty as a category is a great place to be, as you know, and it's a healthy category. And it's fairly, we think, insulated from some of the factors that are affecting maybe retail broadly. And in particular, our -- what we bring to the marketplace in terms of this differentiated proposition of categories, various price points, products and services, we think makes us pretty insulated right now. And we're pretty proud of the results.

Understood. And then, as a follow-up, can you just talk about the performance, the comp performance in your mature store base and how that impacts your view on potential store penetration over the long term?

Yes, I can. Our store model reflects mature stores 5 years and older kind of moderating, comped down to middle, lower single-digit kind of comps over the long term. With the 15 comp in total, as you can well imagine, Chris, I mean, the existing store base, very healthy comps overall, very productive on the SLE [ph] contribution line, which is a huge contributor to the profit increases that we saw year-over-year. As we look to the future, I mean, that's part of the mix. We're adding the boutiques, that's why we're being so aggressive with the CapEx this year to get those installed. We believe that, that along with all the other great parts of the pipeline that we have coming aboard, loyalty on top of that, some of the marketing and advertising kind of initiatives we have underway, we think all of those things together will come together to drive really strong productivity in that existing store base.

Our next question comes from Joe Altobello with Raymond James.

I guess, first question on the ULTAmate Rewards program. Obviously, hugely successful for you guys. You're now well north of 19 million. First, how high can that number get? I guess you guys, I'm sure, have done some demographic analysis in terms of the potential size of that. And secondly, if you can remind us what percentage of your sales comes from your loyalty club members.

Thank you, Joe. Well, first of all, I would say we've said it's well over 80%. Over 80% of our sales are driven by the loyalty program members. We're really pleased with how that's working for our business. It's really one of the key drivers of the results that we're seeing is the acceleration in members entering the program. Really proud about our store teams being able to convert new traffic and new members into the store and into the program. How high is that? I mean, certainly, we ask ourselves that question as well. As we think about our kind of long-term view of the business, it's going to be obviously a very key driver for us as we move forward. And if you step way back and look at it, our share of the market in beauty in the U.S. is still only 3% or so of the total market, right? So we know there's a lot of growth ahead. And we're very focused on understanding kind of what it is about the loyalty program that drives the appeal and continue to make sure that we fine-tune it going forward. So we think there's more growth there certainly, and I think our results are showing that.

Okay, understood. And then just moving on. I guess, one for Scott. The guide for 2Q, you mentioned, it looks like earnings per share down sequentially. That's seasonally feel [ph] unusual. You mentioned some of the costs related to Dallas hitting you in 2Q and 3Q. You had the Greenwood facility around the same time last year, and yet, you had sequential earnings improvement in 2Q. So I'm just curious, is Dallas bigger in terms of the impact? Or is the timing a little bit moved forward relative to Greenwood?

No, I would say it's probably more along the lines of a couple of new factors this year. So again, I think we've kind of talked about the DCs and the lapping effect there year-over-year. So not a huge change there, I would say, in the sequence. We do have accelerated depreciation from this boutique acceleration that we talked about, so again, you guys can't really model that very accurately. But that's a little bit lumpy, and it's kind of first half of the year kind of weighted, I would say. And then, we also have some store payroll implications related to the same boutique strategy, right? So I think we explained back in the fourth quarter that it takes a lot for those boutiques to ramp up, right? So they're being installed now and we got some payroll investment there in the early days, which again, over time moderates and plays very well at least from a profitability standpoint. So it's really the payroll piece of that and some of the depreciation that's related there that's causing it.

Our next question comes from Brian Tunick with the Royal Bank of Canada.

So excited to hear you guys are having an Analyst Day in the fall. It sounds like the footage in the smaller stores, you'll be updating us on. But I guess I was curious about the mid-teen operating margin that you have been talking about. I guess, if you look at these double-digit comps you've been running, I guess the question is, can you get to a mid-teen operating margin target faster? Or is there anything impairing you from getting to a high-teens operating margin over the next couple of years? So curious on that. And then from a market share perspective, when we all look at the department store numbers they've been putting up in the last couple of quarters, can you maybe talk how that affects the brand conversations? So are there still major holdouts regarding brands that you'd like to be offering your guests, that might be still looking at the department stores as one of their key channels of distribution?

Okay, thank you, Brian. On your first question, well, I'm not going to provide our guidance today. Nice try, though. But it's a really fair question. I'd say this. We're very confident. First of all, we're thrilled with the progress in the business. I mean, I think that should be pretty clear and confident that we understand the drivers, and we see plenty of growth ahead. We're confident in the mid-teen operating margin target that we've stated previously. I think what you'll see is we -- we're looking to refresh our view but feel good about where we are. I wouldn't expect to change our outlook materially. We believe we can continue to drive top line and invest in the business for the long term as well as drive efficiencies with the investments that we're making today. And while we're thrilled about the top line momentum, I think all of us would say consumer expectations in the future will continue to evolve. And so we need to be prepared to be able to respond in some areas, lead in some areas. So that makes us cautious about getting more aggressive about that gross margin target.

Great. And Brian, it's Dave Kimbell. On your second question around adding new brands in this environment, I'd start with saying that we're really focused on growing our business with our existing brands, and that's working very well for us. We've got a great portfolio of brands across all categories. And that's been very successful and will continue to drive success for us going forward. Having said that, Mary mentioned some of the brands that we've added just in the last quarter. You've heard that we've added well over 100 over the last several years. So we're always looking at new brands. And as our growth continues, I think we're an attractive partner for brands. So we'll continue to be having discussions and exploring new opportunities. But right now, we're really focused on continuing to drive behind the success that we've been having.

Our next question comes from Jason Gere with KeyBanc Capital Markets.

I guess I want to go back to talking about maybe the omnichannel customer, and I know you talked about e-com was up almost 40%. A lot of that was traffic-driven. So I was just wondering, as you're kind of learning more with the loyalty card and CRM and the personalization, how are you getting that transaction size of that omnichannel customer to kind of increase? And any updated outlook in terms of how big that customer could actually become as a part of your subscriber base?

Well, I'll start, and maybe, Dave, if there's any additional color you want to add. We're totally [ph] with the growth that we're seeing in e-commerce. Of course, it's still a pretty small percentage of our sales, just under 6%. So -- and what's interesting is that as we look at that omnichannel shopper, I guess, multichannel shopper, we love that guest because they're really our best guests in many ways. So the person who's shopping both in-store and online is driving 2.5x the sales than somebody who's only shopping in the store. So what that says to us is it's quite incremental. There's not like a lot of replenishment-type activity happening. We talked about this. We focus on this beauty enthusiast who's really focused on trend and newness. And actually, when we get her email address, the ability to give her email, spark her imagination and curiosity about other products that maybe she didn't see in the store, seems to be driving. Whether it's that or Beauty Breaks! or samples, they're really responding. So over time, we certainly see that expanding in terms of percentage of sales. It's a small percentage of our sales today in terms of the multichannel shopper, but it's a very healthy place for us to continue to look at driving growth.

Yes, the only thing I'd add to that is what we see as this omnichannel guest, most of them pretty quickly if they come in through e-commerce, pretty quickly move into retail. And that's what we like to see. We want her experiencing the entire ULTA Beauty experience, both online and in store. We're investing heavily in various -- both enablers of omnichannel around our inventory and our understanding of our guests as well as guest-facing experiences that we've talked in the past. We've got beacons in our stores now that allow us to -- will allow us over time to identify our guests. We've got same-day shipping with -- in partnership with Google. Mary mentioned some of the app improvements, which will make it easier for her to buy anywhere and anytime she wants. So it's a big focus for us, and we see lots of upside going forward from that.

Okay. And then the other one, I was just going to squeeze in. So I know you talked about Greenwood and Dallas in terms of the DCs. Just given that the last 3 years, you've made some key investments, and obviously, you guys have been really doing a terrific job in terms of top line and bottom line. How does that make you think about the older DCs? Like as you're continuing to really drive strong growth now, is now the time to maybe think about retrofitting some of the older DCs that eventually you might have to do just to obviously keep it best in class? So I was just wondering if that's something that you guys internally talk about. Or you're happy at the way things are with the older DCs, and down the road maybe you'll just deal with it?

No. I mean it's part -- the whole supply network is part of our -- we've got a road map built, right, 5 years into the future showing us different things that we're going to address at different points in time. So yes, you're right on, Jason. We're thinking about the rest of the network and those buildings. We'd like to have everyone on one platform, right, best-in-class kind of platform at one point in time. So those decisions are a little bit yet out in front of us, but I would say definitely, that will be a focus of ours over the long term.

Our next question comes from Ike Boruchow with Wells Fargo.

Scott, just for you, I guess. I'm sorry if I missed this. But on the gross margin, great, very impressive expansion this quarter. Can you just elaborate how much of that was merchandise -- core merchandise margin versus fixed cost leverage? And then the 4% pricing in the quarter, maybe just how do we think about that in terms of product mix and then just higher like-for-like pricing due to the pullback in couponing?

Well, let me take a crack at that. So gross margin overall, we're not going to break down all the basis points, pluses and minuses here, puts and takes, but I could just directionally talk. And I know sometimes people, it may not be clear because this is kind of a multivariable equation that we're solving for here and also when we talk about promotions, right? So there's a couple of major buckets, I guess, I would call them. Merchant discounts, right? So what are we -- what are the offers in the magazines that we distribute or the tabs that we put into newspapers? Is it a 2-for-1? Is it a buy one, get one 50% off? Is there a GWP with it, right? So that's one bucket. Then there's the marketing discount bucket, right, which is the coupon, right? $3.50 off $10, 20% off one item, 20% off the entire order kind of thing, right, with the postcard offer that we described in the past. And then there's the loyalty, right? So that would be the third leg of the stool. So again, we approach this very carefully, right, and we're testing and learning constantly. But if we look at the first quarter, for example, we talked about the mass area, right? So mass has been generating really healthy comps for us. We've kind of learned over the course of the last year that the merchandise discounts don't need to be as broad maybe as what we've done in the past. So this year, we kind of narrowed it down. Instead of 2 -- buy 2, get 1 across the whole brand, maybe it's just a narrower set of SKUs. So that would be one example of something that we executed very well in the first quarter, right? And then there's just another -- a set of other just what I'd call smart merchandising marketing decisions, continuing to tweak our coupon offers and the circulation that we have on our marketing offers, Ulta Beauty collection, private label, super high margin part of our business where they're especially strong in the first quarter this year. E-commerce, we called out again, product mix there is being very helpful to us. So you got a lot of good things happening in the merch margin bucket, I would say. And then you layer on top of that a 15 comp, right? That helps a lot on the fixed store cost line. We called that out in our comments. And then we had some offset, some deleverage on supply chain, which was planned and which was expected. So that's kind of it, I guess, I'd say in a nutshell. On the explanation of the variation year-over-year, when we think about the comp breakout and the ticket bifurcation, units were pretty flat year-over-year, so most of it was on average selling price.

Our next question comes from Mark Altschwager with Robert W. Baird.

Scott, thanks for all that detail on gross margin. I guess I wanted to follow up quickly on SG&A. Spending was up 25% in the quarter, which is presumably more than you initially planned when you built your -- the plan for the quarter and for the year. So I guess can you break out just how much of that was pull-forward and some of the accelerated depreciation you referred to that would potentially allow greater leverage later in the year? And then to the extent you had more dollars to spend, given the top line growth, what are the areas where you've chosen to really intensify investment?

Yes, so we're really trying to stay focused on not breaking out in too much detail kind of the variations. And I know you guys would love to have that. But again, directionally, the store payroll, there is some investment there as we ramp up the boutiques. There was accelerated depreciation in the first quarter. It's going to be heavy again in the second quarter as we look -- compare against last year. I would say that there's some cost of doing business things that are in there. You guys read all these stories about credit card fraud and the whole EMV thing that all of retail is kind of struggling with. So we're not immune to that, right? We had some of that in the first quarter. Now lucky for us, our EMV rollout is complete now. So that -- we've mitigated that risk as we look out across the rest of the year. I would also say that we're -- like we've done in the past, we look to optimize the business, right? So there's some additional investments, I guess, I would call, in the short term around some test-and-learn things around levers, future levers to drive growth, that we think we can move up here and accelerate a little bit into 2016. And again, those aren't huge things, but there's a little bit here and a little bit there. So again, we're doing it in a very disciplined manner, making sure we have the right balance for both the short-term and long-term financial results of the business.

Our next question comes from Simeon Gutman with Morgan Stanley.

Mary, you mentioned, I think 3%, you said, market share. I don't know if that was including or excluding services. But my question is, do you have a sense of the share of the beauty spend among your best customers? What percent of their wallet are you getting? And then based on what you carry, I know this is a moving target because that will change over time but, based on what the carry, how much of that wallet is attainable?

Well, the 3% number that I mentioned is if you take all of beauty products and services in the U.S. and that's sort of a very macro view of it, which is kind of where we start. And then if you look at, really, just the dollars that are spent even amongst the target that we focus on, the beauty enthusiasts, the beauty enthusiasts on a budget, certainly, is higher. We have 5% of their share of wallet. Of the people that are in a loyalty program, well, clearly, it's higher than that. But I'll tell you what, there's a lot of upside to that as well. We believe, even if you look at our best guess it would be a step back. There are, I don't know, I'm going to make -- 50,000 places you can buy beauty in the U.S., right? So between grocery, mass, drug, department stores, specialty retailers, online, there's a lot of places you could buy beauty. So there's a lot of sources of volume and share gain. That whole idea for us that our guest could be really resonating with this is the more success with us with loyalty program, right, the more benefit she gets by consolidating her spend at ULTA. So we have not had that at ULTA either in terms of the number of relevant -- the addressable market kinds of folks that could be in our loyalty program as well as -- we'll never have 100% of anybody's wallet, I think. That's kind of, in any category, think about grocery, for example, people buy food probably in 2 or 3 or 4 different types of retail outlets. It's probably always going to be a little bit like that with beauty. But we feel good about where it is and there's still a lot of potential for that growth.

Our next question comes from Daniel Hofkin with William Blair.

Two quick questions, one on the comp, further uptick. Anything you could point to either in terms of brand, marketing, et cetera, that led to the further acceleration in the first quarter? Second question is just on the labor cost outlook with some of -- what's going on in retail broadly and some of the recent legislation or Department of Labor rulings. Any impact on you guys in the next couple of years.

Thank you, Dan. In terms of the drivers, honestly, it really is a combination of a lot of factors. It really -- I guess you can point most directly to the acceleration in the growth of the member file. So with a 25% increase in the members in ULTAmate Rewards program, that clearly we can point to as a major driver. So more guests in the program and guests spending more often, reactivation of guests, better retention. Now that doesn't happen kind of on accident, right? So it's really a combination of, I would say, everything we're doing. I mentioned at the top, I mean, it's great to be in a category that's growing and beauty, we believe, what we have is a very compelling proposition relative to a large segment of the market, right? So what we offer them is relevant. And as we look out into the future, the future consumer, millennials, I think even more so relevant. But then in addition, right, we have to be driving awareness and traffic. So I feel great about what I would call our demand creation tools, so we wouldn't have an increase in the numbers if we didn't have new people aware of and coming to ULTA, and the traffic shows that. And then, in addition, of course, it's about what we sell in the store and the service that we give and the services and the guest experience. So I talked a lot about the merchandise assortment. So I feel good about -- we're really doing business smartly with our brand partners. So I guess, in total, it's a lot of things coming together, I think, effectively for us to drive members into our loyalty program and have a relevant proposition to drive their growth. The second part you asked about was on -- yes, there's a lot obviously happening as it relates to wages and whatnot. In particular, the overtime pay thing that just passed, we are -- we've already factored that into our forecast. There's some attach to us this year, it's pretty immaterial, I would say. Most of our managers are typically paid above the threshold, and some of our comanagers are affected. And as we look out into future years, we'll continue to obviously be cognizant of the factoring wage and other pay factors.

Our next question comes from Adrienne Yih with Wolfe Research.

Two quick -- very quick questions. Mary, what is the overall forecast that you're using for beauty and services segment growth? And then, secondarily, as you build or as you do your brand awareness studies, where are you finding -- which demographic do you have the highest brand awareness with?

I would say that we would just look at kind of the current growth factors for the industry that you guys can see as well, which is the industry is up, what, 4%, which is great. And obviously, prestige up more than that, color cosmetics up a lot. So we look at the published forecast or the published data that's out there as well as just do our own kind of work that's both qualitative and quantitative, thinking about future sources of growth. So we don't have a great -- any other crystal ball than anybody else, but we -- we're, I think, pretty darn good at understanding consumer segments, understanding and projecting where their demand might go in the future and use that to try to figure out what we think the category growth will be. Second question was...

Awareness.

Awareness. Yes, let me give that one to Dave.

Yes. So on brand awareness, overall, we see -- we don't see huge swings by any demographic group. It's really -- it's pretty broad-based, and we're seeing growth across all demographic, all age ranges, ethnicities. But I would say Hispanic women do have a bit higher, in general, across the board, and that's the strength that we're continuing to grow with.

Okay, great. Any quantification of that, please?

No. I guess we won't share any of that detail, but -- yes. Yes. Well, we give you our total awareness, and we've shared that in the past. So our total awareness are -- increased 5 points in Q1 versus Q1 of last year to 84% on an aided basis and was up 2 points on an unaided basis to 40%. So continued strong growth of that behind kind of marketing efforts, and we expect to continue to drive that go forward.

Our next question comes from Simeon Siegel with Nomura Securities.

Did you say -- or how many prestige brand boutiques do you currently have? I think, Scott, did you say you expect to open 500 this year? And then can you share any color on the comp lift and maturity curve you tend to see in those stores when added?

Yes, we -- I think we've shared this last time. So we started the year with -- we talked about in a couple of hundred range of Clinique and Lancôme. This year, yes, 500, in the approximately 500 new boutiques across Clinique, Lancôme and Benefit, those 3 brands. We will see growth over the year. We're just getting those new ones opened. So while it had some impact on Q1, it was not the big driver of Q1. And frankly, I don't -- it will be a contributor, but there's a lot of other parts of our business that are driving growth, a lot of other brands in prestige space with mass and hair care, skin care so it will continue to drive growth, but we're not counting on that being the primary driver of growth throughout the rest of the year.

Okay. And then did you say what the Ulta Beauty collection penetration was at this point? I mean do you see that business grow in mix as the overall brand awareness grows? Did you actively look to grow that penetration? Any thoughts there?

Yes. Yes. Yes, Mary gave a few of the highlights of some of the things that we're doing to build that. And frankly, I think we are at the beginning of a, really, reinvention of that business, and we're seeing the impact of that already, strong growth. Scott talked about high margins, of all the reasons we'd want to grow them. When we look at all the exclusive Ulta Beauty collection and the exclusive brands combined like -- including brands like IT Brushes for ULTA, it's about 6% of our business. But we -- and we'll see that growing over time. We've got new innovation we'll continue to drive that business behind. And we'll -- as you mentioned, as our brand grows, as our recognition grows and then if we improve its presentation and quality of the product and just overall merchandising strategy, marketing strategy, we'll see that grow as well.

Our next question comes from Matthew Fassler with Goldman Sachs.

A couple of follow-ups. In terms of demographics, you spoke a bit about Hispanic customers. You talked to millennials. If you think about the market share opportunity you have and where you're getting incremental traction, it would be interesting to talk a bit more about age and also new versus existing markets, what cohorts you feel you're uncovering and kind of awakening to the vitality in the comps up to this point as the marketing has exploded here.

Let me just say I think more of this we'll talk about in the fall as we do the Analyst Day because it's -- kind of as we think about the future, that's obviously -- we're sort of in the insights and mulling machine about kind of where the world is going and how to think about those dynamics for ULTA. I'll let Dave maybe add some color, but I will tell you, I think we all feel personally very optimistic about that. That as we think about the way the world -- if we just look at the world today, sort of the influences are really converging nicely as it relates to beauty as a category as well as shopping in the way that we offer to be able to come in with a point of view and be -- already have a curated idea in mind but to get some help as well. So maybe you can add a little more to that. But more on this topic later, I'd say, is the best way to think about it.

Yes. The only thing I'd say is our growth -- we're excited to see in our growth, as I mentioned earlier, it isn't concentrated on any specific age range, demographic profile. It's really is this beauty enthusiast, and she's all ages. She lives all across the country. And so we're seeing strength with teenagers. There's been reports out from other third parties about ULTA continuing to gain a strength and presence with teenagers, certainly millennials, but through -- all the way through ages and, for instance [ph] a great part of beauty is it's not age-dependent. Needs might change, but their desire to be a part of a beauty category continues. So we're seeing that across the board right now.

My second follow-up, so it sounds like the boutiques, while they're rolling in, are only about -- or only starting to really impact the business. As you think about your historical experience and the kind of pop that, that can give the business relative to the double-digit same-store sales you've been posting, without that catalyst, is the input or the additional volume from those boutiques material in that context? Or is this something that should just be sort of absorbed by the strong growth that you've got these days?

Yes. I think, in the short term, it's absorbed. So again, back to Dave's earlier point here, it's going to be additive. It takes a while for those boutiques to ramp up much -- similar to our store maturation curve overall. We've seen that demonstrated over a long period of time. So again, over the longer term, yes. We think it's a significant add to the box overall and will help productivity significantly over the long term.

Our next question comes from Oliver Chen with Cowen and Company.

This is Courtney Wilson in for Oliver tonight. We just had a question in terms of the consumer dynamics of the mass consumer versus the prestige consumer. Which segment is experiencing higher rates of new customer acquisition? And is there an increasing amount of cross-shopping between the 2 customer segments?

Thank you, Courtney. Yes, you know what, the great thing is there's not really a separate mass versus prestige consumer at our store, which is kind of cool. Our guests, there's just been a tendency to come in. I think we've talked about this right, on maybe more the mass side than prestige and then migrate over time. Typically, our guest has a mixture though. There's really very few people that I think are just completely one versus another type category. And that's part of the beauty of what we offer that makes it super relevant for our guests and I think as well for our brand partners.

Our next question comes from Rupesh Parikh with Oppenheimer.

So 2 quick questions. First, are you guys seeing any significant differences between the performance or traffic at your mall locations versus non-mall locations? And then, second, on new products, clearly, from your Q1 remarks, it sounds like there's a significant amount of newness and innovation in Q1. As we look out for the balance of the year, what can we expect in terms of brand and product additions?

Okay. So we'll tag team this again, Dave. I'll start on the mall piece. Malls are about, what, 10% or so of our store base, and we're not really -- we're not seeing much of a difference. We're seeing positive traffic. I would say when we're in malls, we pick those spots pretty carefully, both in terms of the market, it being a great place to shop in a given market, as well as our locations tend to be on the exterior of the mall, so we feel good about how they're performing.

Yes. On new brands, not -- nothing to report specifically here. But I will say, as has been our trend of late, we'll continue to add new brands. But I'd say, while that is a big contributor, we're also, I mentioned this earlier, we're really focused on driving growth with our existing brands. We have a lot of new products coming in and growth with existing products within our portfolio across many of the brands that Mary mentioned in her remarks. And so it will be a mix, continue to drive with the strength of our big brands like Urban Decay and Redken, and Bare and Too Faced and NYX. But then, we'll certainly complement that with new brands throughout the year.

Our next question comes from Steph Wissink with Piper Jaffray.

I just have one question on the brand boutiques. I wonder if you can give us a little bit more information on the return on invested capital or some of the productivity goals that you have within that floor space? And just given the $80 million investment, I think, that you talked about so far, can you talk to us about what the brands are committing to, whether it's capital or exclusive product or marketing?

Yes, let me start there. So as far as the $80 million is concerned, I mean, that's all on ULTA, right? So we're stepping up with the CapEx investment. And again, that $80 million, partly it's not just a boutique drop-in, right? So again, there's 500 -- roughly 500 individual boutique drop-ins across the chain. But we're going to take the opportunity while we're in the stores to also refresh our fragrance fixtures in those stores and Ulta Beauty collection fixturing as well, as well as other miscellaneous things, right? You’re in the store, touching it up and causing some chaos. You're going to take the opportunity to do what you think is best for the guest long term. So that's how we're deploying the $80 million. Again, each vendor, we have a different set of economic terms with them. So I think by and large, it's kind of a -- it's a payroll share kind of model, right? So again, they're trained. There are associates, they're on our payroll. The vendors provide -- our vendor partners provide excellent training for them. We kind of share the payroll model on a go-forward basis. And it takes a while. Again, we install the boutiques upfront. It takes a while for those to reach maturity, right? So again, as we go over time, we add more payroll resources there to make them more productive. So I think that's it in a nutshell.

Our next question comes from Michael Baker with Deutsche Bank.

So I just want to ask about the loyalty card increased membership. Is a lot of that -- or is there any way to break down how much of that is coming from people who already were shopping in your store but weren't loyalty cards, and now you're sort of upgrading them to loyalty members? Or versus what percent is coming from customers who are new to the brand, and they're coming in and then they're signing up?

What we've shared, I think a couple of quarters ago, that we've seen an increase in, I guess, what we call, reactivation, which were lapsed customers. And so we've seen a healthy increase of that. Probably, we won't get into sharing that every quarter, but that is part of it. So customers that might have shopped with us 2 years ago would not be considered a current customer, but we have a record of them. They come back in. They reactivate their account, and they would move into our active -- would move back into our active member profile. So that's a chunk of it. But the biggest part of it is new-to-ULTA customers. And that is exactly, as you described, customers coming in and shopping at ULTA and starting that experience not a customer, and when they get up and interact with one of our associates, they become a customer during their visit there. And a key part of our success has been our store associates really doing an excellent job converting nonmembers into members in the store, and we've seen a strong increase in that. So that's -- that is the primary driver of our new member growth.

Okay, great. That's helpful. While I have you, one more, maybe a more mundane question. But we've heard from a couple of other retailers that the real estate opportunities are very strong out there, much -- very much a buyer's market. Can you talk about what you're seeing in some of your new stores in terms of rents and those types of metrics?

I guess we could echo those comments that you've heard from others. We have -- there's no shortage of great real estate sites that we're seeing as we look at proposals across the country. Again, our stores, we have a typical, I guess, best-in-class kind of set of co-tenants that we would like to operate with. But we've proven and demonstrated over time, ULTA stores work in a wide variety of real estate locations and types. So we feel very confident about our current pace of 100 stores a year, right, that we talked about here as our medium-term target. We just came back, I guess, from ICSC here in the last day or so. And again, we -- the landlords, the relationships that we have are very strong. We know ULTA's being sought out as a tenant of choice, we're proven traffic drivers to centers. And the beauty category is something that many landlords -- that's a piece of the offering, retail offering, that they'd love to add to the mix overall.

So I guess the punchline there, is that materially changing your new store economic model? And is that something that you would address at your Analyst Day in the fall?

Yes. I mean, I don't -- we haven't -- we're always very competitive when we get into the rent structures and the economic terms of our deals. I mean I think Ulta is probably best-in-class when you look at our operating model overall. So it's not like we're seeing some big step decreases in rent terms or anything like that, at least not at this stage. A lot of these liquidation events are kind of in process, I guess, I would say right now. So I guess that's yet to be seen. And we don't -- it's not causing us to rethink the number of stores that we open every year, right? 100 a year, again, there's no magic in our method, that's kind of been a comfortable pace for us with the number of new associates we need to add to the mix overall and the time of year that those stores usually get open. All in, when you think about that, 100 is kind of a good pace.

Our final question comes from Omar Saad with Evercore ISI.

Was wondering if you could elaborate a little bit on the comment you made earlier around urban stores and doing some more thought process around that. If you have anything in the fleet now that resembles kind of an urban location, and how it does and how those locations may do in more densely populated urban-type areas? It seems like it could be a great fit. Obviously, real estate costs are a bit different, but would love to hear more about it.

Yes. No problem, Omar. I guess what I would say is that, yes, we have several urban, I guess, you'd call them, stores in the fleet. And they do fine. As we're thinking about the future, I wouldn't say we've ever had a concerted urban strategy, right? So we don't have a lot of them. Our main strategy has been really in suburbs and in power centers, in lifestyle centers. We've talked about -- we feel good about the 10,000 square foot store format and the ability to hit at least 1,200 at least of that format. But what I referenced at, we're also looking at what's the opportunity in smaller markets and then also what's the opportunity in places where the parcels of real estate would, by definition, be smaller, so whether it's urban centers or the downtown maybe shopping area of high-end suburbs, right? So all I -- we've got 2/3 with 2 5,000-square-foot stores right now that we're operating to learn about the dynamics of a different sized box. And they're doing well, they're also learning a lot about the best way to operate that. And as we look at refreshing our view of store growth, urban is a question we're asking ourselves and would look at. As you said, obviously, the economics are different. But as we drive brand awareness across the country with our marketing efforts, we know that we've -- wherever we go now, people know more about us than, I guess, they would have been in the past, right? So that's a good way, a place to start. So more to come on that.

That's helpful. And then can I ask one follow-up on the loyalty? Have you thought about ever partnering with a financial services firm and maybe adding a private label credit element to that? Or are you happy as a stand-alone loyalty program?

Well, we're very happy with our loyalty program today. It's really a key asset for us. And so that's a fair question. I mean, that's something that could be a good asset in the long run, right? Nothing to announce on that certainly, but it’s certainly something that has a history in retail that's been successful for many retailers, no doubt.

I'd now like to turn the call back over to management for closing remarks.

Thank you. I'd just like to close by thanking our 26,000 associates for an incredible start to the year, and I look forward to speaking with all of you again soon. Thank you.

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