Ulta Beauty, Inc. (ULTA) Q1 2021 Earnings Report, Transcript and Summary

Good afternoon, and welcome to Ulta Beauty's conference call to discuss results for the first quarter of fiscal 2021. [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.

Thank you, Shamali. Good afternoon, everyone, and thank you for joining us today. Hosting our call are Mary Dillon, Chief Executive Officer; Dave Kimbell, President; and Scott Settersten, Chief Financial Officer. Kecia Steelman, Chief Store Operations Officer, will join us for the Q&A session. Before we begin, I'd like to remind you that statements made on 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, May 27, 2021. 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. In today's comments, we will discuss certain non-GAAP financial measures, including adjusted operating income, adjusted net income and adjusted diluted earnings per share, which have been presented to reflect our view of ongoing operations by adjusting fiscal 2020 results for store impairment charges and adjusting both 2021 and 2020 for stock compensation and other tax credits. A reconciliation of these measures for the corresponding GAAP measures can be found in our earnings release which is available in the Investor Relations section of our website at www.ulta.com. Following prepared comments from our leadership team, we will open the call for questions. [Operator Instructions] As always, I'll be available for any follow-up questions after the call. Now I'll turn the call over to Mary. Mary?

Thank you, Kylie, and good afternoon, everyone. This afternoon, we reported record first quarter financial performance, with sales and earnings exceeding both fiscal 2020 and fiscal 2019 levels. For the first quarter, net sales increased 65.2% to $1.9 billion. Operating margin was 15.8% of sales, and GAAP diluted EPS was $4.10 per share. Adjusted diluted EPS for the quarter was $4.07 per share. Fiscal 2021 is off to a fantastic start at Ulta Beauty, and I want to thank all our associates for their continued efforts to deliver great experiences and support our business in an environment that continues to be very dynamic. Now as you know, this will be the final time I speak with all of you as CEO as I will transition to Executive Chair of Ulta Beauty next week after our Annual Shareholder Meeting. I cannot express how much of an honor serving as the CEO of Ulta Beauty has been for me. I'm proud of what we've accomplished over the last 8 years and the amazing team and culture that we've built. I want to thank my leadership team for their collaboration, agility and commitment to our associates and guests. And I want to thank all of you in the investor community for your interest and support. I am really excited about Ulta Beauty's future, and I'm confident this will be a seamless leadership transition. Dave's passion for Ulta Beauty and our associates is unmatched. And he knows the beauty category, our business and our guests very well. In fact, his role as a Chief Marketing Officer, Chief Merchandising Officer and President have given him a much better understanding of the category, demand creation and the needs of our guests than I had when I assumed the CEO role 8 years ago. I know his knowledge and commitment will position him well to lead Ulta Beauty through its next chapter of growth. And although many of you have met her, I want to take a moment to introduce Kecia Steelman, who is joining the call today and will become our Chief Operating Officer. Kecia has done an outstanding job as our Store Operations Leader for the past 7-plus years, and I'm excited that she will expand her scope to include supply chain, Ulta Beauty at Target and enterprise level continuous improvement efforts. As you get to know her in this new role, I know you'll be impressed by her knowledge, leadership style and passion for our business, associates and guests. Although this change is somewhat bittersweet for me personally, I'm excited about my new role as Executive Chair. I look forward to supporting Dave, Kecia and the rest of the Ulta Beauty leadership team as they build on what we've accomplished together and continue to lead and disrupt the beauty category for many years to come. Now I'll turn the call over to Dave to share more detail about the first quarter's results.

Thanks, Mary, for your kind words, confidence and support. We've worked together for a long time, and I'm grateful for the opportunity I've had to learn from you and to lead with you. Under your leadership, Ulta Beauty has established a winning, engaging culture, become the largest U.S. beauty retailer, joined the Fortune 500 and tripled its market cap. And we have solidified the company as the preferred destination for beauty enthusiasts, created an inclusive, well-regarded workplace and become a recognized leader in the business and retail community. I want to thank you personally for your leadership and mentorship, and I look forward to your ongoing support and counsel as I transition into my new role. Kecia, I'm thrilled to continue to work with you in your new role as Chief Operating Officer. We've worked closely for the last 7 years, and I look forward to leading with you and our experienced executive team in service of our associates, guests and shareholders. I am excited and humbled to become the CEO of Ulta Beauty. Over the last several years, I've worked closely with Mary and the entire executive team to build our culture, strengthen our guest engagement, and develop our strategic plan, and I will work hard to ensure a seamless transition as we plan and execute the next chapter of our growth. Over the last 60 days, I've spent time talking with and listening to our leaders and our associates across the enterprise. Most recently, Kecia and I visited our Greenwood distribution center and our new Jacksonville, Florida fast fulfillment center as well as a number of stores. And more than exceptional operations, we saw firsthand the commitment and passion our associates bring to serving our guests. Despite the challenges of maintaining COVID-related safety protocols, our DC teams continue to meet the growing demands across channels, and our store teams continue to create human connections and meaningful connections with our guests every day. I continue to be proud of how our teams navigated the challenges of the last year with strength, grace and a commitment to our guests and to each other. We are emerging from 2020 as a leader. We see this in our sales trends, market share gains, consumer sentiment, brand strength and most importantly, in our culture. I believe this is a testament to the choices we made throughout 2020 and also to the strength of our 31-year history as a vibrant company and successful category disruptor. To build on this success, I am focused on 4 key areas as I transition into the CEO role: our culture, our members, omnichannel experiences and operational excellence. Ulta Beauty has built a guest- and associate-centric, values-based and high-performance culture. We value and encourage collaboration and enterprise thinking, and we respect and listen to our associates to continually improve as a company. These tenets are core to how we lead, how we engage with our guests and partners and how we make decisions. Our culture is a key part to our success and why I am committed to protecting and enhancing our culture as we move forward. As we emerge from the challenges of the pandemic, consumers are creating new routines and habits, and we have the unique opportunity to build deeper connections and drive greater engagement with our members. Each of our more than 37,000 associates play a role in member engagement and retention. My vision is that, together, we can and will accelerate how we engage and delight our guests every day. And not just in stores or online, but through a seamless omnichannel lens. Consumers are quickly evolving expectations for how physical and digital platforms work together to create holistic brand experiences. As we focus on longer-term growth for Ulta Beauty, we are thinking about how we can create emotional, immersive, human experiences across all touch points and how we can evolve our organization and the ways we work together to support a buy anywhere, fill anywhere approach. Importantly, as we navigated the pandemic, we proactively took steps to optimize our cost structure while investing in new capabilities to support future growth. Looking forward, we see opportunities to drive greater efficiencies across enterprise-wide processes, to elevate our rigor and discipline, and to focus on metrics that are most important to achieving our operational and financial goals. By expanding our focus on operational excellence, we'll be able to invest more in creating great guest experiences while also improving profitability. Now let's talk about our first quarter performance. For the quarter, comp store sales increased 65.9%. This outstanding performance was broad-based, with above plan performance across channels, categories and geographic markets. While we believe stimulus payments contributed to the quarter's strength, we also believe the relaxation of restrictions, increasing consumer confidence and a desire for newness are positively impacting consumer spending in the beauty category. Our differentiated model, combined with our efforts to create meaningful guest connections and experiences position us well to attract more guests and lead the category recovery. Sales were strong across channels, with stores leading the way as consumers were increasingly comfortable with shopping in stores. As local restrictions lifted, we increased our operating hours and welcome brand partners back to stores. And as store traffic trends improved, we adjusted staffing levels to support the increased demand. While the hiring market remains challenging, we are pleased with our ability to hire and staff our stores. E-commerce performance was also higher than expected. Strong traffic and higher average order value resulted in mid-teen growth on top of last year's 100% growth, with sales penetration in the mid-20s. This quarter, we continue to test ways to incentivize guests to use buy online, pickup in-store with new BOPIS-only promotions. Importantly, we drove above-trend BOPIS penetration while also continuing to drive growth through our store and ship-to-home channels. For the quarter, BOPIS increased to about 16% of total e-commerce sales compared to about 4% in the first quarter last year and slightly above fourth quarter levels. While we certainly expected brick-and-mortar would drive nice quarter nice comp growth in the quarter as we anniversaried store closures last year, the sales strength we're seeing in physical stores and in e-commerce continues to reinforce to us that e-commerce transactions are incremental and help drive greater overall member engagement and spend. From a category perspective, we increased our market share across all major prestige beauty categories based on the NPD group's point-of-sale data for the quarter ending May 1, 2021. Additionally, we saw terrific strength across our mass categories and believe we are increasing our share within mass beauty as well. Newness in our strategic tent-pole events, 21 days of Beauty and Spring Haul, continue to resonate very well with guests. All major categories delivered robust double-digit comps as we anniversaried last year's store closures. Compared to the first quarter of fiscal 2019, fragrance, bath, skincare and hair care all delivered robust double-digit comp growth. Now starting with one of our strategic growth categories. skincare delivered strong sales growth this quarter, driven by newness and great engagement in our tent-pole events. Guests continue to embrace skincare as a form of self-care and wellness with body care, sun protection and facial serums driving nice year-over-year growth. New brands, including Keys Soulcare, LOLI Beauty, and Urban Skin Pro as well as new products from Tula, Pacifica and [ Central Pay ] drove good guest engagement. And dermatologist-recommended brands, including CeraVe and La Roche-Posay, continued to see gains driven from interest and support on social media platforms. Fragrance and bath was our strongest category again this quarter, demonstrating that consumers remain focused on self-care, even as they become more comfortable reentering public spaces. Newness in fragrance from Dolce & Gabbana, Versace and Carolina Herrera as well as continued strength in potty scrubs and moisturizers from brands like Truly, Tree Hut and Hempz drove exceptional category growth. Strong guest engagement with our monthly Fragrance Crush programs, Valentine's Day and Spring Haul also drove robust growth in the quarter. We're seeing nice momentum in the hair care category as well, driven by newness, innovation and do-it-yourself beauty. The first quarter saw growth from new brands like Briogeo, Kristin Ess and Monday, as well as product launches from Redken, Curlsmith and Pattern. And our salon back bar takeovers helped drive growth for established brands like Living Proof, FEKKAI and Bumble and Bumble. Reflecting ongoing DIY trends, hair color, color care and hair styling tools also contributed to the category's strong sales performance for this quarter. Compared to 2019, comp sales in the makeup category were negative, but we are encouraged by sequential improvement in the trends from Q4. Newness and innovation, combined with strong guest engagement during our tentpole events, delivered better-than-expected performance in this category. Subcategories that focus above the mass continue to perform well, including mascara, lashes and eyeliner. We're also beginning to see guests engage with categories like lip and face, driven by newness from brands like Benefit, Tarte and Morphe, as many begin to adjust to reduce COVID-19 restrictions and look to refresh their stash. Newness from Nicks, e.l.f. and Kiss are driving strong growth in mass cosmetics, while newer prestige brands, including KBD, Vegan Beauty, HOURGLASS and Jaclyn Cosmetics are delivering growth and prestige. Although it remains difficult to predict the specific timing of a full recovery in makeup, we are seeing early signs that guests are engaging more with the category. Confidence is growing, restrictions are lifting, and many consumers are increasingly looking forward to a fresh start in a new post-COVID normal. As travel and wearing occasions increase, the desire for something new is growing. At the same time, engagement with social media platforms like TikTok are bringing new life to the color cosmetic category, engaging younger audiences, driving trends and reinvigorating trial and usage. These drivers, combined with an expanded pipeline of newness expected in the second half of 2021, increase our optimism about the pace of recovery of the makeup category this year. This quarter, we continued to enhance and expand our Conscious Beauty platform, an initiative intended to help guests discover brands and products that reflect their personal values. In Q1, we certified 27 additional brands, bringing the total number of brands in the program to 250. We refreshed our Conscious Beauty end cap in stores, adding new brands like Pure, First Aid Beauty and COOLA to the presentation. And celebrated Earth Day with a unique gift with purchase offer. We also launched our circular shopping pilot with reusable packaging pioneer loop in 10 of our brand partners. Building on the success of this cross-category promote platform, earlier this month, we launched the Wellness Shop in a select number of stores and on ulta.com. With a focus on self-care for the mind, body and spirit, the Wellness Shop features a curated selection of products across 5 key segments to help our guests easily navigate their personal wellness journey. We built the assortment with hero brands like Love Wellness, megababe and Kitsch and also introduced new brands like BLUME, Goli and The Good Patch. From scalp care routines and bath and shower rituals to supplements and adaptogens to relaxation and sleep regimens, this new shop addresses a variety of wellness needs in a curated, easy-to-navigate presentation. As the country's beauty retail leader, we have the power to shape how the world sees beauty and a responsibility to drive greater diversity, inclusivity and equity. In February, we announced tangible commitments to this effort and I am proud to share that we continue to make progress in support of our goals. This quarter, we debuted MUSE in multifaceted platform to celebrate, honor and amplify black voices in beauty and announced the partnership with CURLBOX, a subscription box service catering to [ curly ] and textured hair consumers, featuring some of our most coveted products and brands. We've launched 5 new black-owned brands, including BLK/OPL and Mented Cosmetics, Black Girl Sunscreen and Skincare, CAMILLE ROSE and Hair and Homebody, a wellness-focused bath and body brand. And we created new educational content for textured hair, which was deployed to our salon teams earlier this month. Sales from our service businesses increased nearly 50% compared to 2020, but were still lower than 2019 levels, reflecting appointment constraints due to social distancing. We are excited to welcome walk-ins for salon and brow services in states where mandates allow it and hope to reengage skin services in select stores later this year. We continue to focus on strengthening our stylist teams and where we have high demand in capacity, we're hiring experienced stylists with existing books. As a result, we are seeing nice increases in our stylist sales productivity as compared to 2019. Our mobile app, virtual try on and skin analysis tools continue to resonate with guests as easy and safe ways to discover and try new products. We continue to see good conversion and higher average order values from guests to engage in these experiences. This quarter, our services and events team began leveraging these tools for one-on-one consultations and small group events. In April, we launched a modified in-store event strategy aligned with COVID protocols, utilizing our virtual tools and successfully executing 350 events with 17 prestige brand partners. Turning now to our loyalty program. We increased our loyalty members by 1.7 million members in Q1, the largest increase we've seen in a single quarter. We ended the quarter with 32.3 million members above our initial expectations. While this level is about 2% lower than Q1 last year, it is 5% higher than Q4 and only slightly below our member level in the first quarter of 2019. The recovery of our member base from Q4 was driven by strong reactivation back into Ulta Beauty stores as well as increased new member acquisition. Our store associates continue to deliver a compelling member experiencing, welcoming members back and converting new members at higher rates than in 2019. We are seeing strong retention across all tenures as we deepen engagement with members who continue to shop with us throughout the pandemic, manage at-risk members to prevent attrition and introduce Ulta Beauty to new or newly reactivated members. We continue to lean into our member data to target high-value audiences and apply predictive behavioral modeling while personalizing experiences with product recommendations, replenishment reminders and offers optimized for incremental response. We're using engagement levers like the mobile app to communicate our holistic member experience and drive key moments like 21 Days of Beauty, where we featured personalized offer for every member to drive retention and increase sales per member. These efforts are helping us accelerate the recovery of our member base and give us confidence that we can get back to 2019 levels this year. Before I turn the call over to Scott, I want to provide a quick comment on Ulta Beauty at Target. We continue to make progress across all of our work streams to bring this new experience to life for our guests and we're on track to open our first shops later this summer. We remain confident that this innovative partnership with the light guest and strengthen engagement with the Ulta Beauty brand. We have very strong support from our brand partners and are confident that our assortment, which is an exciting mix of large established favorites and vibrant, often exclusive emerging brands, with the light guest when we launch. I know there are many questions about the assortment and experience, but our focus now is on building guest anticipation and excitement for the launch. Stay tuned for more details closer to launch. Now let me turn it over to Scott to provide more detail about our financial results. Scott?

Thanks, Dave, and good afternoon, everyone. Starting with the income statement. Q1 sales increased 65.2% as we anniversaried the temporary closure of all of our stores last year in response to COVID-19. We opened 28 new stores during the quarter, including our new Herald Square store in New York City and closed 2 stores. We also remodeled 3 stores and relocated 1 store. Total company comp increased 65.9%, driven by an 8.8% growth in average ticket and a 52.5% increase in transactions. Compared to the first quarter of fiscal 2019, total sales increased 11.2% and comp store sales increased 7%. As Dave mentioned, we saw stronger-than-expected sales growth across channels, with brick-and-mortar and e-commerce contributing to the strong comp performance. From a mix perspective, cosmetics was 45% of sales compared to 50% last year. Skin care increased 200 basis points to 19% of sales, the fragrance and bath category increased 400 basis points to 11% of sales, and hair care products and styling tools increased 90 basis points to 19% of sales. As a percent of sales, the services category was down 40 basis points to about 3%. Note, the nail category is now included in cosmetics, instead of Other and we have updated 2020 results to reflect this change. Gross profit margin increased to 38.9% of sales compared to 25.9% last year. The increase was primarily due to significant leverage of fixed costs resulting from higher sales. In addition, gross margin benefited from higher merchandise margin, lower salon expenses and a more favorable channel mix. While the higher sales delivered some benefit on merchandise margin, the improvement also reflects lower promotional activity in the quarter and ongoing benefits from our efficiencies for growth, or EFG, cost optimization program. Salon expenses were lower compared to last year, reflecting the elimination of the salon manager role. As a reminder, we will anniversary this change in Q4. Comparing this year's performance to the first quarter of fiscal 2019, gross margin improved by 190 basis points. Higher merchandise margin, fixed cost leverage and lower salon expenses were partially offset by channel mix. As a percentage of sales, SG&A decreased to 22.9% compared to 32.5% last year, reflecting strong expense leverage on higher sales. Compared to the first quarter of fiscal 2019, SG&A as a percent of sales was about 20 basis points favorable. As a percentage of sales, lower corporate overhead and store expenses were partially offset by higher advertising expense. Operating margin was 15.8% of sales compared to negative 8.7% in the first quarter of fiscal 2020 on a GAAP basis, and a negative 7% on an adjusted basis. Strong top line growth, especially in brick-and-mortar, combined with the impact of our cost optimization efforts, resulted in robust operating margin performance. The tax rate increased to 24.5% compared to 23.6% last year, primarily due to a decrease in state tax credits. Diluted GAAP earnings per share was $4.10 compared to a diluted loss per share of $1.39 last year. Adjusted diluted earnings per share were $4.07 compared to a diluted loss per share of $1.13 a year ago. Moving on to the balance sheet and cash flow. Total inventory increased 1% compared to last year, reflecting the impact of 26 additional stores as well as the opening of our Jacksonville fast fulfillment center, partially offset by lower inventory levels due to higher-than-expected sales. Capital expenditures were $34.6 million for the quarter, driven by our new store opening program, investments in IT systems and store remodels and relocations. The decrease in capital expenditures compared to the first quarter last year was primarily related to investments last year related to our planned Canadian expansion, which was suspended in the second half of fiscal 2020. Depreciation was $70.6 million compared to $76.6 million last year, primarily reflecting the impact of last year's store impairments in the 19 stores, which we permanently closed. We ended the quarter with $947.5 million in cash and cash equivalents. In the first quarter, we repurchased 1.2 million shares at a cost of $392.3 million. At the end of the quarter, we had $1.1 billion remaining under our current $1.6 billion repurchase authorization. We continue to expect to repurchase approximately $850 million of shares in fiscal 2021, but as always, have the flexibility to modify the cadence of repurchases in response to market conditions. Turning now to our updated outlook for 2021. We are encouraged by our first quarter results and the trends we've experienced so far in the second quarter, but we are still early in the year. While the presence of vaccines and new CDC guidance gives us optimism for the recovery, our visibility into the trajectory and sustainability of recent trends is limited and the second half of the year remains difficult to forecast. We now expect net sales for the year will be between $7.7 billion and $7.8 billion, with comp sales planned in the 23% to 25% range. We continue to expect comp results will vary significantly between the front half and the back half of the year as we lap store closures that occurred in the first half of 2020. But we now anticipate comp growth will be in the high 40s to low 50s for the first half of 2021 and then moderate to high single-digit growth for the second half. We continue to expect to open approximately 40 net new stores in fiscal 2021 and to now remodel or relocate 19 stores. We now expect operating margin for the year will be approximately 11% of sales. We continue to expect the largest driver of operating margin expansion will come from gross margin, driven by leverage of fixed costs, less headwind from channel shift, improving merchandise margin and leverage of salon costs. Based on higher top line growth, we now expect modest SG&A leverage for the year as compared to fiscal 2020. These assumptions result in an expectation for diluted earnings per share in the range of $11.50 to $11.95 per share, including the impact of approximately $850 million in share repurchases. We plan to spend between $225 million and $250 million in CapEx in fiscal 2021, including approximately $115 million for new stores, remodels and merchandise fixtures, $90 million for supply chain and IT and about $33 million for store maintenance and other. As a reminder, our guidance for 2021 assumes a consistent federal tax rate and no material increases in the federal minimum wage and does not include assumptions for any impact related to a resurgence of COVID-19. And now I'll turn the call back over to our operator to moderate the Q&A session.

[Operator Instructions] Our first question is from Rupesh Parikh with Oppenheimer.

So first, Mary, wish you all the best, and you're certainly going to be missed.

Thank you, Rupesh.

And then, I guess, for the team, just congrats on a really amazing quarter. So I guess the one question I have is, if you look at Q1, obviously, operating margins are now well above where they were in Q1 '19. Are there any new learnings that you can share in terms of maybe some new structural benefits you see in operating margins going forward just based on the performance we saw during the quarter?

Yes. So we're very proud, Rupesh, of the results that we were able to post in the first quarter and our teams did a great job collaborating with our brand partners to deliver a great experience to our guests and an outstanding financial performance. Part of what was driving some of that overperformance was obviously the very strong comp, right, in the sales generation versus what our initial expectations were. So nearly a 66% versus last year and about 7% versus fiscal 2019. So a lot of good things going into that. Besides the great tailwinds we saw from stimulus payments and optimism about the economy and the COVID vaccine rollout across the nation, there was also structural changes we made in our business model, right? So we've talked about these over the course of the last couple of calls. So there's some good things that we did, some great self-help things, but we also took advantage of a great sales environment. As we think about the 15.8 that we posted in the first quarter versus kind of the rest of the year and what our long-term expectations are, I would say that there was a bit of over-leverage maybe in the first quarter, right? So again, we didn't expect those sales levels obviously, as we get started in the year. And so the spending, we were unable to kind of match spending with the sales generation. So especially in the store environment, I mean, there were some longer lines at the checkout that maybe we would have preferred to see if we had that choice ahead of time. So as we're looking out to the rest -- the second half of the year, there's things around wages, store labor, some upward pressure in fuel and transportation costs. And then we're going to do some more advertising in the back half of the year than what we had initially planned to make sure we take advantage of the environment and make sure we really maximize market share gain opportunities in this environment. So longer term, very optimistic about operating margin expansion opportunities across the wide variety of elements in our business.

Our next question is from Mark Altschwager with Baird.

I was hoping you could speak a little bit more to the trend you're seeing in the recovery in stores, perhaps relative to 2019, I think comps up 7%, with some of the e-commerce growth you cited, if my math is right, I think it implies stores still down versus '19, but it sounds like traffic is recovering nicely. So just any insight there. Just bigger picture, how the Q1 results have really informed your thinking on the trajectory of the store productivity recovery through the remainder of the year?

Yes, Mark, yes, we are very encouraged by the performance of our store channel. In fact, our entire omnichannel experience, even as our e-comm performed above expectations, our stores strengthened. So it just reinforces for us, the importance and the power of our model and the connections that we've built. Yes. Yes. Stores did exceed our expectations, grew throughout the quarter. We saw -- as our guests became more comfortable in shopping in person, we certainly benefited from that and saw continued improvement throughout the quarter. Traffic was still down -- meaningfully down for the quarter, down in the 20% range. So the strength we saw in stores, we are pleased to see a lot of guests coming back in, but also strong -- saw strong ticket performance, which we think is driven by renewal reengagement in the category, trip consolidation, a lot of newness coming. But yes, so while we're encouraged by store, we know we still have opportunity ahead to get all of our guests back comfortable shopping in store, and we're continuing to see that trend. I will just say that the -- as I mentioned, the e-commerce business also exceeded our expectations, including strength in BOPIS, so it reinforces for us, not just any individual strength across either stores or e-commerce or any element, but the connected strength that we're seeing, which is a strong indicator to us that our members are getting back involved in all aspects of Ulta, and we're pleased with that and anticipate more to come. As we look out over the rest of this year, as it relates to store traffic, we would anticipate it getting -- continue to improve traffic, but there's still a lot of uncertainty about how the rest of the year will play out and exactly how that will translate into store behaviors, but we're encouraged by what we saw in Q1.

That's really helpful. And maybe just as a quick follow-up to that, just the strength in BOPIS is nice to hear. Could you just maybe address e-commerce margins and how you're kind of closing the gap there relative to stores? I guess, maybe that would be for Scott.

Yes. So I guess I would start with overall versus last year, the channel shift is going to work to our advantage, right? So that's going to be a nice tailwind as we talk about gross margin specifically, but operating margins overall. So as you've heard us talk about before, Mark, many times, there's a lot of different levels we have at our disposal to help mitigate some of this -- the margin headwinds that come with that part of the business. So again, that's just part of how consumers are going to shop, and we're focused on making sure we deliver the best shopping experience regardless if it's in our stores or an online digital kind of environment. So BOPIS is one piece of that. We saw a nice increase this quarter. We're working on other ways we can motivate our guests to take advantage of that because that is a margin help for us on a rate basis. Again, we want to remind everyone that, as Dave mentioned during the prepared remarks, that our e-com business is largely an incremental piece. So it's driving a lot of incremental sales and the rate headwind we get from that is something we will take, all things considered, but we've got lots of ways to help improve that over the longer term. BOPIS is a piece of it, supply chain, getting closer to the guest is piece of it. And optimizing our promotional cadence overall is a big piece of it as well. So there's still a lot of ways for us to improve that as we look ahead.

That's great. Congrats to the team on a strong start and best of luck.

Our next question is from Oliver Chen with Cowen.

Great quarter and, Mary, we'll miss you a lot. Congrats on the next steps. The inventory position looks really, really tight in terms of it being somewhat low. Were sales left on the table? And what are your thoughts on inventory versus sales going forward in an environment where supply chains have been tougher and just making sure you're as well positioned as possible to realize the market share gains?

Yes. Thanks for your question, Oliver. We feel good about our inventory position, but it's certainly true that we've been working hard to ensure that we maintain a strong level of in-stocks. We've been working very closely with all of our brand partners to respond to this increased demand. And fortunately, we're having good success with that. As we look forward over the year, we would anticipate inventory levels to be higher than 2020, but at a rate lower than our comp sales. So as far as leaving sales on the table, we feel like we were able to deliver and meet the demand. There are pockets of brands that had just extraordinary growth that we're working hard to maintain in-stock levels. But I'd say, overall, our guests were able to -- you'll find what they were looking for, and we felt like we met their expectations. And it's probably reflected in the strong basket size we saw both in-store and online. So a lot of work going on to ensure this. I know our brand partners are max -- really looking to maximize their production to meet this growing demand, and we feel confident we'll be able to meet our guest demand going forward.

And a follow-up, related question for Kecia or David. Supply chain priorities, just would love your take on the major priorities on the road map ahead as there are many initiatives you're working on?

Yes. That's great. Kecia, do you want to give some highlights there?

Yes. We're continuing to look for efficiencies within our supply chain and our network as we build out to support the -- not only the store business, but also the e-com business. So we'll have more to share here in the future, but we're continuing to look for efficiencies and the ways to get the products to our stores and to our consumers in the quickest, most efficient way possible.

And our next question is from Erinn Murphy with Piper Sandler.

Mary, it's been an absolute pleasure working with you. And Dave and Kecia, congratulations. So my question is for Dave. On the cosmetics category, you mentioned it was still negative versus 2019. Could you just put a finer point on quantifying that? And then as you've kind of monitored the pace of reopening, has there been any key regional differences between markets like Florida or Texas that has been a little bit more outspoken in terms of the going out trend? And then what's implied in the guidance for cosmetics as you look at the back half of this year versus 2019 levels?

All right, Erinn, let me -- I'll tackle some of the your cosmetics questions and as both what we're seeing as it relates to the guidance. And I'll ask Kecia to kind of talk about our regional performance here. As far as makeup, as we said, well, and we're really pleased with the performance across all categories with strong growth versus 2020. We'll get extremely specific by category other than to say our makeup category was one major category where versus 2019, in total, we were still short of 2019 performance. Having said that, we're seeing lots of encouraging signs. Our mass business is particularly strong. We've always been -- we've been working on for many years, building a really differentiated mass assortment with many brands that are exclusive or in limited distribution with us. Those partners have been leading innovation and driving new ways to connect with our guests, and that strength has really showed up in Q4. We had strong positive growth on a number of our brands and brands across the assortment in our mass NICs, e.l.f., kiss, Morphe, Maybelline, really across the portfolio, really pleased with the business on that side of the business. Prestige makeup, was not quite as strong. We -- but again, encouraging signs. Newness is kicking in, and we see a lot more coming as we look into the balance of the year. The performance that we've had for a while, prepandemic on Prestige has been challenging, but so many of our brand partners have reacted with strong innovation -- strong product innovation, new marketing approaches, connection through social media. And as customers come back in, as our guests come back in, we're anticipating that part of our business really strengthening over the balance of the year. A couple of highlights where, again, newness, I talked about it in the script, but we're seeing some newness across different areas of the business. Anastasia and brows, Benefit with Mascara new entry -- expanded performance in our luxury segment with HOURGLASS, newer brands like KVD Vegan and Jaclyn cosmetics, performance from some of our strongest largest brands like Clinique and Tarte. So we're seeing some encouraging signs, not quite yet back to 2019 and some uncertainty, how that will play out for the rest of the year. As your question about performance and how makeup performance is reflected in our guidance, we'd say we're still watching it closely. We're not anticipating a massive turnaround, but we do see some encouraging signs. And if newness strengthened throughout the rest of the year, we'd anticipate it performing even better. So good signs in makeup, great signs happening in all categories outside of makeup, and so the balance of our portfolio feels really helpful -- healthy right now. Kecia, do you want to talk about some regional?

Yes. Sure. We stayed really close to this as they were starting to list the mask mandates across the states. And we really didn't see the variances across the United States, like what we would have thought. It was strength across the whole U.S. in regards to traffic. And I think it was more related around the confidence of the vaccine, the vaccine rollout and people getting more confident with coming back out into the stores and also getting ready for the reemergence of getting the mask off in the near future. So there were no real regional variances that we saw across the U.S. There was strength in traffic really from coast to coast.

That's great. And then just my quick follow-up. So 1.7 million gain in loyalty members this quarter. How did that break down between lapsed versus new consumers?

Yes. We don't typically break that out that specifically. I'll just say we're really proud of our team in coming together to both reengage. I've talked in previous calls about the disruption in 2020 wasn't anything necessarily that they didn't like about Ulta. They just for all the obvious reasons, weren't engaged in 2020. And so the reengagement strategy across all aspects of our business, in particular, in our stores, really paid off with a lot of lapsed guests -- recently lapsed guest coming back in. But equally encouraged by the number of new members in this environment that we attracted. And what's exciting about that is there's a lot of disruption and a lot of potential new members that are maybe reevaluating their -- the way they engage in beauty, and we think our model is perfect for that. So strength across both, and we find it really a good sign and more to come throughout the rest of this year.

[Operator Instructions] Our next question is from Mike Baker with D.A. Davidson.

Okay. Sort of following up on something that they talked about earlier. But if I have -- if I look at your guidance right here, you still have profits down, operating profit that is versus 2019. I think by about $50 million at the midpoint, yet you were up in the first quarter by $70 million. So that implies down somewhere in the $110 million, $125 million for the next 3 quarters. So what are the reasons that the operating profits would be down over the 3-year basis versus being up in the first quarter?

Yes. So there's a mix of things. Again, the elements that play here, whether you're comparing to last year 2020 or 2019, the drivers are largely the same. It's just the overall impact weight of those in any one particular period that you're looking at. So the primary reason is channel mix, right? When you're looking back to 2019, channel mix is a big influencer there. Again, we're doing a lot of things. Sales increase sales back into brick-and-mortar helps offset some of that headwind when you're looking to 2020. But back to 2019, that's a much larger part of our business. And as we've talked about before on a rate basis, it's definitely a pretty significant headwind for us. Again, a reminder, those are incremental sales. So it's helping the total dollar performance and profit performance, but it hurts us on a rate basis. The other thing is you still got COVID costs in there, right? In 2021, you had none in 2019. We still have social distancing. We mentioned salons were operating at 50% capacity. TBD when all that's going to be able to open up and when we'll be able to be in our full line of businesses as we want to be. There's things in our DCs where we still have the social distance. Again, you got to look beyond the headlines on a lot of these themes. And so we're operating at reduced capacities. We have to add weekend shifts to make sure we can get our pick bins filled and keep the product moving to support an accelerated brick-and-mortar bounce back as well as a continued strong e-commerce business here above what we expected this year. We also have wage pressure. Again, these are things most people are aware of, have seen in the headlines, whether it be just recruiting people to come back and fill open roles in our stores. Or pressure in the DC network. We see what others are doing out there to try to retain and find new employees. So again, we're not -- we have to compete with those people the same way everyone else has to do. And then lastly, I'd say a big piece is incentive compensation falling on the SG&A line. Again, when you think back to 2019 and our performance there, and what the outcome was for -- as far as incentive comp goes versus the performance, the expected performance now for 2021, that's a big headwind as well. So those are kind of the major elements, Mike.

Okay. That's helpful. And a lot of pressure there. But so as a follow-up, I think it's fair to say you got back to this 11%, or you will get back to this 11% quicker than you expected. But with all those pressures you just articulated, can we think about ever getting back to the 12% to 13% level that you ran out from, I think, like 2012 to 2019? Or do all those pressures make that not attainable?

Yes. So we're not providing any long-term guidance today. We'll save that for November at our planned Investor and Analyst Day. But obviously, the trends of the business are quite strong, right? First quarter, way exceeded our expectations. The early read on second quarter is it's going well. Again, you got to keep in mind what we're lapping, right? Last year, in the first quarter, we were on a decelerating trend and then all those stores closed. Second quarter, we're starting to open stores last year in a kind of a wave action, but there was still a lot of requirements and limited capacity, things we were dealing with. And so that's phenomena. That explains the comp guidance, 40 to 50 first half and much more moderated in the second half. So that's what's driving the lower operating margin expectations versus last year. Longer term, we feel like there's a lot of levers. Again, we've talked about this often with investors whether it be things around the e-commerce business with BOPIS and supply chain initiatives, our EFG work in the real estate area and other parts of our business and a lot of other -- Kecia mentioned a lot of efficiency work that's underway right now under the EFG umbrella gives us a lot of optimism for longer-term operating margin improvements.

Our next question is from Anthony Chukumba with Loop Capital Markets.

Let me add my congratulations to Mary as well, though I'm sure I'll see you walking your daughters in the neighborhood. So glad...

That's right, Anthony, thank you.

So my question, just a quick clarification. If I was looking at my notes from the last earnings call and it said that you're going to -- you're planning to open those first Target shops and shops in the fall. And now you're saying late summer. So I just want to make sure I heard that correctly. And if so, just any reason that you were sort of moving up the rollout to the extent that you actually are moving up the rollout date?

Yes. I'd say we're just getting a little more specific. We've been kind of talking in general terms previously and now a bit more specific in late summer. I'll say we're really excited about it. And I guess I'd ask Kecia to just give a quick update. Kecia, as I think was mentioned in the call, is leading our Target initiative, and we're very excited about the opportunity. Kecia, do you want to give where we are on that?

Yes. Absolutely. What's been so exciting is that it's been highly collaborative with the Target team and we've got a cross-functional team that's hard at work to bring the Ulta Beauty at Target concept to life. We've crossed some critical milestones. We've built the joint project plan. Our fulfillment plans are all completed. Brand selections and store selections for this first wave are all done. We're finalizing our IT requirements, our training of our Target team members and the joint marketing strategies. But we're on track to deliver and launch this at the end of late summer, and we're really looking forward to this coming to life and having our guests see what this is all going to bring to play for Target and Ulta Beauty together. To the 90 million loyalty members of Target and 32 million of ours, I just think that the ecosystem that this is going to deliver for the world of beauty is going to be second to none.

We have reached the end of our question-and-answer session. I'll now turn the call over to Dave Kimbell for closing remarks.

Great. Thank you all for joining us today. Fiscal 2021 is off to a great start, and I want to close by thanking the entire Ulta Beauty team for their collective efforts to support the business and to meaningfully engage with our guests at every touch point. Our team is the secret to our success, and I'm so grateful for their impact, particularly during these disrupted times. I also want to thank our brand partners for their continued support as we navigate the dynamic operating environment. We are encouraged by the momentum we're seeing in the business and excited about our opportunity as consumers gain confidence and engage in the new normal. While the sequence and sustainability of demand remains difficult to predict, our teams are prepared and actively engaged to capitalize on opportunities as they arise. We remain very excited about the opportunity for Ulta Beauty to continue leading the beauty category recovery and we look forward to speaking with all of you again in August when we report our second quarter results. Thank you.

This concludes today's conference, and you may disconnect your lines at this time. Thank you for your participation.