Greetings, and welcome to the Ulta Beauty Fourth Quarter 2019 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Kiley Rawlins, Vice President of Investor Relations. Please proceed.

Thanks, Daryl. Good afternoon, everyone, and thank you for joining us today for Ulta Beauty's Fourth Quarter and Fiscal 2019 Earnings Conference Call. Hosting today's call are Mary Dillon, Chief Executive Officer; and Scott Settersten, Chief Financial Officer; Dave Kimbell, President, is also with us today. This afternoon, we released our financial results for the fourth quarter and fiscal -- full year of fiscal 2019. A copy of the press release is available in the Investor Relations section of our website at www.ulta.com. Before we begin, I would 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 with the SEC. We caution you not to place undue reliance on these forward-looking statements, which speak only as of today, March 12, 2020. 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. Please note that in our comments today, we will reference a number of non-GAAP metrics, including free cash flow and earnings growth adjusted for the impact of income tax benefits in fiscal 2019 and fiscal 2018. We'll begin this afternoon with prepared remarks from Mary and Scott. Following our prepared comments, we will open up the call for questions. [Operator Instructions] Now I'll turn the call over to Mary. Mary?

Thank you, Kiley, and good afternoon, everyone. Before we talk about our results, I want to address a topic that's on everyone's mind, the ongoing risk related to the spread of the coronavirus. Our first concern, of course, is the safety and well-being of our associates, guests and brand partners, and we've taken a number of actions focused on prevention to keep people safe and healthy. We've increased sanitation measures and cleaning frequency in all stores with extra focus on product testers and high traffic areas, and we've increased availability of hand sanitizers in high traffic areas, including our cash wraps, makeup stations and salon stations. We've posted signage in stores directing guests who want to try a product to find an associate who will sanitize testers on demand. In addition, we're implementing a no-touch approach when it comes to selling assistance, like shade matching. We have temporarily suspended all makeup, skin and brow services in stores. Based on feedback from experts, we will continue to offer hair services with an increased focus on maintaining the health and safety of our guests and associates. For our associates, we're encouraging them to stay home if they're not feeling well, and we're adjusting our policies to accommodate personal and family needs and ensuring that associates who face a quarantine are compensated during that time. We've also limited travel in the U.S. and restricted international travel, and we're limiting in-person meetings, especially for large groups. And as a further step, we've canceled our Annual General Managers Conference originally scheduled for April. We're closely monitoring guidance from public health officials and government agencies to make sure we have the best information to keep our associates and guests safe and informed. We have a cross-functional team meeting daily to respond to and plan for any…

Thanks, Mary, and good afternoon, everyone. I'll begin with an overview of our fourth quarter before turning to a summary of our results for 2019, and I'll close by sharing our outlook for 2020. Starting with the income statement. Q4 top line growth of 8.5% was driven by a 4% comp, strong new store productivity and robust growth in other income primarily driven by continued growth of our credit card program. The total company comp of 4% was composed of 2.2% average ticket growth and 1.8% transaction growth. Our retail comp was down slightly as growth in average ticket was more than offset by a low single-digit decline in transactions. Ulta.com growth was modestly above our expected range of 20% to 30% growth driven by traffic. To provide some more color on our e-commerce performance, we were up against an easier comparison this quarter. You may recall that in the fourth quarter of 2018, we experienced a reverse channel shift given our guests' avid interest to come to stores to see and experience high-profile launches from several digitally native brands. This year, the rollout of Buy Online, Pick Up In Store and enhancements made to our app were also contributors to the e-commerce channel's outperformance. From a mix perspective, makeup was 48% of our sales, down 300 points from last year. The skincare, bath and fragrance category increased 200 basis points to 25% of sales. As a percent of sales, haircare products and styling tools were flat at 18%. The services category was also flat at about 4% of sales. Gross profit margin of 35% increased 10 basis points from 34.9% a year ago, primarily due to improvement in merchandise margins driven by marketing and merchandising strategies, partially offset by investments in services and supply chain. We leveraged fixed store…

[Operator Instructions] Our first question comes from the line of Rupesh Parikh of Oppenheimer.

So I guess, Mary, just going back to your comments on the coronavirus, I was just curious if you can just share any color in terms of what impact you're seeing right now in your stores, and if you're seeing any changes in the behavior, I guess, the past few days.

Thank you, Rupesh. Thanks for asking that. I guess I would start with just reiterating that our first priority is really focusing on the safety and health of our associates, our guests, our brand partners. You can imagine, as a leadership team, we're very focused on this, staying agile 24/7, focused, really action-oriented. So -- and I think, obviously, everybody in business will look at it that way. And I'd say if you break it apart from a supply chain perspective, we really haven't seen any material impacts to our supply chain. Our team has been working closely with our brand partners and our carrier partners really for weeks as necessary to pull forward some inventory of high velocity SKUs. So right now, we feel pretty good about that. It's possible that it could get disrupted, but we feel good about that. On the demand side, we started to see some impact, on store traffic this week, but it really varies by market. On the flip side, our e-commerce business has continued to perform strongly. And I'd say that's true broadly, really, even including affected areas. So we're keeping a close eye on all of this. It's really too early to tell how it's going to play out. But so far, that's our assessment of the situation.

Our next question comes from the line of Simeon Gutman of Morgan Stanley.

I'll get my one question in, and I'll jump off. It's somewhat of a modeling question. First, you mentioned on the makeup comps, you're not expecting an improvement. If we heard it right, I think you actually ended the year positive even though the fourth quarter was negative. If I heard that right, what is the assumption for the full year for 2020? Is it a low single digit comp? Or is it the negative run rate from the fourth quarter? And then related to your point that you just said on e-commerce, Mary, doing well, what is your expectation for the mix of e-commerce, I guess, deliveries in 2020? And could that end up being low given what we're going to maybe see from consumer behavior over the next, I don't know, weeks or months?

E-commerce deliveries, did you say, or e-commerce demand? I'm sorry, just to clarify that, Simeon. I think he's gone...

Thinking of the mix of the -- yes, if the deliveries goes up, what happens to the gross margin?

Okay. So do you want to start with the category question, Dave, and then we'll come back to e-commerce?

Sure. We'll start with makeup. And yes, to reiterate one thing, we remain confident over the long term of makeup and are optimistic about the role that, that will continue to play over the long term. But as both Scott and Mary mentioned, we are uncertain about when this turnaround will happen. So specifically, wanting to answer your question, yes, we did see a combined total growth in makeup. We're anticipating that to be roughly in line or maybe slightly below that, flat to maybe slightly negative. So consistent-ish with 2019 performance and not a dramatic change in results. But again, over time, as we look at both demographic change, innovation that we feel like there's opportunities down the road, we believe that the category will be returned to health at some point.

On the e-commerce front, yes, we're watching it closely. I mean the good news is that we feel like the investments that we've been making to improve the overall experience for our guests from the app to the platform, to the offerings as well as investing in our supply chain capabilities has put us in a good place as well as BOPIS. I mean BOPIS was a good addition to the portfolio of the omnichannel tools last year. So we'll watch it closely. I mean certainly, a shift up in that mix has some pressure on margin. But we'll -- obviously, we're going to meet consumer demand where it is and make other adjustments in the business model as we need to.

Our next question comes from the line of Oliver Chen of Cowen and Company.

Mary, one of the strategies that's under -- unfolding here is social distancing in terms of the strategy to mitigate what's unfolding. What are your thoughts on how your business is best prepared in that context? And what are some levers you could pull regarding traffic and thinking about the interplay of physical traffic as well as a potential for a recession? I would love your thoughts.

Well, again, the investments that we've been making in our digital platforms, our AR platforms, are all, I think, are smart that we have those capabilities, right? So one of the things that we're encouraging guests to do is to get engaged with our app and use our GLAM LAB to do a virtual try-on. It's really, I'd say, pretty state of the art and allows the guests to really explore a lot of different looks virtually, digitally, which is pretty cool. In store, and I talked about this a little bit earlier, we've taken some steps. I mean certainly, our guests' health and safety and that of our associates is really is our top priority. We've been focused always on really cleanliness of stores, but what we've done is increase sort of some of the protocols there. We've also, as I mentioned, temporarily suspended services that are touching the face, makeup, skin and brows services. And really, I guess, doing more of a coaching, no-touch kind of approach. We're starting that right now in terms of helping our guests. Having said that, hair services based on expert advice that we're getting, we're going to continue to do hair services and just continue to implement additional protections as needed. So I think that -- the other thing I would say is extra attention is being placed on things like testers and telling our guests, if you want to use a tester, if you want to see how somebody looks, go to GLAM LAB virtual try-on or an associate can help you and we'll sanitize that first. So these things are fluid. We're exploring a number of options, and we'll adjust as necessary. We see our guests wanting to shop in person for beauty, and we want to accommodate them in…

Our next question comes from the line of Erinn Murphy of Piper Sandler.

My on one question is around the loyalty program. I believe you've said there are 34 members now in -- 34 million members now in the program, which I think would be flat relative to the third quarter. So as that program matures, how do you think about the ongoing potential for transaction growth, particularly given that we did see it kind of ticked down in this quarter? Just curious on that.

I'll let Dave take that one, Erinn. Thank you.

Yes. So I'll start with saying that we continue to be really excited about the power of our loyalty program. It did grow 8% for 2019 to 34 million, which we believe makes it one of the leading loyalty programs certainly in our space in the country and a powerful tool for us to continue to drive our business. You did highlight that in the fourth quarter, growth versus the third quarter was a little slower than some of the recent trends. We would look at that as both -- as the program gets bigger, we did anticipate that it would moderate somewhat in growth, but also as we were lapping some of the strong traffic driver and new guest driver activity of some of the launches that we've talked about also made our overlap a little bit tougher as it relates to that. But we're optimistic about our opportunity to continue to reach beauty enthusiasts across the country and continue to grow that. But having said that, you are right that we also see an important growth opportunity over an extended period around spend per member, and it's a big focus for us. Really, everything that we're doing is focused on continuing to find new and engaging ways for our guests to participate in Ulta whether it's the new brands we're bringing in, credit card program, innovation and loyalty services. And then of course personalization is, we believe, one of the biggest opportunities ahead of us, and we've been investing heavily in that to make sure that we can continue to find ways to delight our guests. Mary and Scott both highlighted some of the things that we've been doing that we believe will drive personalization. Our app and innovation and refreshes of our app both in 2019 and more to come, we think, will drive more personalized connection. Our integration of augmented reality or virtual reality with GLAM LAB. GLAM LAB continues to get better, and we expand that across new formats like foundation and skin tone. We have skin quizzes. And we continue to get better and better on product recommendations, new member engagement, replenishment reminders, all these things, we think, will contribute to the growth that we've seen -- continue the growth that we've seen on spend per member. So both sides of the equation we are optimistic about, and we'll continue to drive that.

Our next question comes from the line of Steph Wissink of Jefferies.

Scott, I have a question for you about the operating margin guidance. I believe you quantified about 60 basis points of the drag year-over-year from incremental investments. So a 2-part question. One is just what are you looking for to kind of justify those returns to maintain that level of incremental investment? And is it something related to market share disruption that you're watching for or that you think an opportunity exist to take incremental share in the near term?

Yes, I would just say we look at it in a very balanced and pragmatic kind of way. So the things that we called out in our prepared remarks around the investments that we believe we need to continue to move ahead on, including the big international opportunity, again, long-term sales and margin dollar driver for us over the long term, personalization is something again that we've been working on for some time but continue to ramp up and see results now, I mean these things are helping drive sales for us today, and we think there's a lot more opportunity for that over the longer term. Salon optimization is another big one. Again, we're -- it's a bit of a headwind in the first half of 2020 until we anniversary some of the start-up initial cost there, but we expect to get benefits out of that over the long term. So I mean you could just all -- these are all market share opportunity levers, and that's the way we're looking at it. And we think these are, again, the right things to do for investors for the long term.

Our next question comes from the line of Joe Altobello of Raymond James.

I guess, first, the comp impact from the suspension of makeup, skin and brow services. I don't know if you guys quantified that, but that'd be helpful. And then maybe a quick one for Scott. The pace of share repurchases this year, is that going to be ratable throughout the year? Or is it more front-end loaded?

Yes, I'll start. No, we have not quantified that yet. That was today's decision. But I would say that, certainly, one of the things, for sure, our associates that would perform those services will be actively in stores also selling products and servicing guests, right? So we hope to keep our associates engaged, and we'll see how this plays out. We'll quantify that at some point, but it's just an early decision. So we haven't done that yet.

And the repurchases, I think for modeling, you should just assume kind of a ratable kind of run rate throughout the year. Again, I'll remind folks that we were opportunistic last year when we saw a disruption in the stock price midway through the year. We took opportunities there where we thought it was appropriate. Again, in light of what's going on with the market right now, again, we would take a very pragmatic approach. This is something that's always top of mind with us, with our Board of Directors and something that we're in constant communication on. So you can, whatever, expect us to be very measured in our approach here, right, and not put the company at risk.

Next question comes from the line of Paul Trussell of Deutsche Bank.

Good fourth quarter. I would want to just dig into the puts and takes around gross margin, both in regards to the up 10 basis points in 4Q and the outlook. If you can just give a little bit more color on what you're seeing in terms of the promotional environment. You called out shrink and then obviously the EFG contribution that we can expect moving forward.

Yes. So there's a lot to unpack there. So just going back to fourth quarter, give you a little bit more color on that. So again, in our prepared remarks, I mean there's always a lot of different factors that go into the outcome of any particular quarter. So the GM, gross margin, expansion in the quarter, we're happy with the result. It was roughly in line with kind of what our expectations were. So EFG was a big component of that. We've been talking about that consistently through 2019. So that theme continues into 2020. There was definitely benefits captured there through a lot of hard work by a lot of our teams, and that's something that's a benefit that's going to produce good results for us in years to come as well. The post-holiday, we called out, the events in the hair and the Jumbo Love events were great, executed well, both in-store and online, were beneficial to us. Promotion, while it was a bit higher than last year as we expected, it was a little bit less than what we had forecasted when we were looking ahead to fourth quarter. Credit card continues to deliver great incremental benefits for us. And again, that's another lever that's going to be a multiyear contributor overall to the gross margin expansion. And so those benefits were enough to offset the mix headwind, the e-commerce channel shift that we've been talking about for many years now and some of the shrink -- tougher shrink results that we had in the quarter. Again, shrink, by and large, was flattish to last year, which is the good news, but it was a little bit tougher than we were expecting. All right? And so we're seeing trends there, not unlike many across the retail…

Our next question comes from the line of Ike Boruchow of Wells Fargo.

So I guess my question, going back to the corona impact on the business. Maybe just at a higher level for Mary or Scott, can you maybe talk about what percent of your makeup transactions do you believe carry some kind of in-store trial components and maybe combined with the service component of what you guys offer? And I guess where I'm going with that is I'm just trying to understand important customer trial and in-store behavior is to the sales model.

Yes. I mean it's a good question. I would say, certainly, services in total are much, much -- it's a very small part of our business compared to what we sell at retail, right? So in general -- and most of that is hair services. So the thing is that -- and that part of the business, we're going to continue as planned. Certainly, the notion of being able to try things is an important asset of how we serve up beauty, but it doesn't happen in every transaction. It really just doesn't. And also, we have the ability for our associates to still help our guests in multiple ways, right? So they can take a tester, sanitize it, put on somebody's hand to show them a color. We can use our GLAM Street -- our GLAM LAB app, which is really very realistic. And so it's early stages, but we don't really think that's something that is going to prevent people from making great transactions and decisions. We're going to do everything we can. We've got a skin match tool also on our app. So we've got tools that we think will allow that kind of consumer behavior. But we'll -- as we look at this, we'll learn more and quantify more. But if -- I mean there's no question it's the right decision to make right now in the short term, and your question is a good one about -- and this may not last for that long. We'll just have to see. But we'll do our level best to make the shopping experience online and in-store for our guests just as immersive as we can, if that makes sense. But we feel like it's fine, it's going to be the right thing to do, and guests would expect it.

Our next question comes from the line of Anthony Chukumba of Loop Capital Markets.

So I just had a real quick question on Buy Online, Pick Up In Store. If you can just give us just a little bit more color on that now that you've been doing it for a few quarters. Just particularly in terms of penetration or just any learnings that you've gotten from doing that.

Yes, I'll take that. We're just really thrilled with the performance. Probably first and foremost, executionally, our store teams picked up this new capability and delivered it with excellence, and we're really excited about being able to offer this to our guests because our guests responded very favorably to it. As you know, we rolled that out to all stores in midyear last year, and we saw very strong adoption across the entire chain. Every store had transactions, of course, some more than others, but every store participated. Our guest was interested across small markets, big markets and everything in between. We're -- it's still -- despite the success we had over the end of the year last year, it's still a relatively small part of our e-commerce business, and we're getting learnings. We're trying to understand the incrementality of BOPIS. We believe it's there, but we still have some learning to really understand what's the longer-term behavior. One thing we do know is the average ticket for our BOPIS orders is somewhat lower than a full regular e-commerce order, in part suggesting -- using that capability to avoid shipping costs or to be able to pick up items with certainty that same day. So the last thing I'd say is we're seeing a nice attachment level -- attachment rate in-store, meaning those that are coming to pick up their BOPIS orders, many of them are also picking up additional items while they're there in the store. So overall, pleased but early, and we're looking forward to learning even more about ways to leverage this with our guests through 2020.

Thanks, Dave. I'd just like to wrap up by thanking our more than 44,000 associates. We're staying focused on delivering -- serving our guests and delivering really solid results in 2019. I am very excited about the future for Ulta Beauty. I believe our business model, our strategy and our talented team will continue to drive success and create significant shareholder value. And we look forward to speaking with all of you again in May when we report our first quarter results. Thank you.

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