Ulta Beauty, Inc. (ULTA) Q3 2021 Earnings Report, Transcript and Summary

Good afternoon, and welcome to Ulta Beauty's conference call to discuss results for the Third 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, Laura. Good afternoon, everyone. Hosting our call today are Dave Kimbell, Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Kecia Steelman, Chief Operating Officer, will join us for the Q&A. This afternoon, we released our financial results for the third quarter of fiscal 2021. A copy of the press release is available in the Investor Relations section of our website. Before we begin, I'd like to remind you of the company's safe harbor language. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC. We caution you not to place undue reliance on these forward-looking statements, which speak only as of today, December 2, 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 and adjusted diluted EPS for the third quarter of fiscal 2020. A reconciliation of these measures to the corresponding GAAP measures can be found in our earnings release, which is available in the Investor Relations section of our website. We'll begin this afternoon with prepared remarks from Dave and Scott. Following our prepared comments, we will open up the call for questions. [Operator Instructions] As always, [ Mary Kate ] and I will be available for any follow-up questions after the call. Now I'd like to turn the call over to Dave. Dave?

Thank you, Kiley, and good afternoon, everyone. The Ulta Beauty team delivered outstanding results again this quarter. For the third quarter, net sales increased 28.6% to a record $2 billion. Operating profit increased to 14.2% of sales, and diluted EPS increased to $3.94 per share. In addition to producing these excellent financial results, we also delivered strong operational results. We continue to increase our market share in Prestige Beauty based on dollar sales for the 13 weeks ended October 30, 2021, compared to the same period last year. We increased the number of members in our Ultimate Rewards loyalty program by 13% to a record 35.9 million members and returned to pre-pandemic member penetration levels. And we navigated global supply chain challenges and tight labor markets and remained well positioned to meet guest needs and deliver a successful holiday season. This performance reflects the strength and resiliency of the beauty category, the power of Ulta Beauty's differentiated model and the impact of our winning culture and outstanding team. I want to express my sincere appreciation to all of our Ulta Beauty associates for their incredible efforts to serve our guests and deliver these excellent results. I'm inspired every day by our associates' passion for beauty and passion for our guests, and I am honored to lead such a great company of talented associates who continue to care for each other while driving our business forward. At our Analyst Day in October, we introduced a new strategic framework, which will shape our future and enable Ulta Beauty to deliver against longer-term financial targets. Today, I'll reiterate some of the information we discussed about our strategic imperatives and share an update on progress made in the third quarter, then I'll share how we are positioning Ulta Beauty for holiday before I turn it over to Scott to discuss the financials. Starting with our focus on driving breakthrough and disruptive growth through an expanded definition of All Things Beauty. Our differentiated assortment is core to our success. And we continue to innovate, evolve and expand our offering to excite the beauty enthusiast. In the third quarter, all major categories delivered robust double-digit comp growth compared to the third quarter of fiscal 2020, driven by cycling last year's disruption from COVID, product newness and strong performance from our strategic promotional events, including 21 Days of Beauty, [ Ahava ] and our Gorgeous Hair event. Compared to the third quarter of fiscal 2019, fragrance, bath, haircare and skincare all delivered strong double-digit comp growth. While makeup was slightly below 2019 levels, we are encouraged that the trend in Prestige Makeup improved from the second quarter, and growth in mass cosmetics remained strong. Engagement with the category remains high with consumers looking to refresh their beauty stash with new products, and recent trends give us confidence the makeup category will return to growth compared to pre-pandemic levels. Compared to last year, eyes, face and lip continued to deliver strong growth within the makeup category. Engagement with false lashes and lash growth serums, combined with innovation like creamy eye shadow sticks, are driving continued growth within eye. Increased interest in tinted moisturizers and blush are driving growth within face. And lip color, lip gloss and lip balm continue to drive growth within lip. Newness continues to excite and engage guests. New brands like Bobby Brown and Elaluz, combined with new product launches from a wide range of brands, including ColourPop, Urban Decay, Tarte and NYX drove nice growth in the quarter. In addition, this quarter, we expanded MAC into 200 additional stores. Haircare delivered another quarter of double-digit growth driven by strong guest engagement with our strategic events, newness and our Back Bar Takeover events. In early October, we kicked off our fall Gorgeous Hair event, a semiannual event strategically focused on acquiring members who do not shop the haircare category or engage with our salon services. Building on the success of our spring event, we continue to streamline offers, focus our marketing events and create relevant storytelling around hair goals, service enhancements and holiday kits. We saw good growth from our core assortment and engagement with new brands like KRISTIN ESS, Briogeo, and Verb. And product newness from brands like Dyson, Living Proof, Redken and Curlsmith continued to resonate with guests. We continue to expand our assortment of prestige haircare brands, and I'm excited to share we will launch OLAPLEX, the #1 prestige hair brand in the market, in all Ulta Beauty stores and on ulta.com in January. Our Back Bar Takeovers give our stylists the unique opportunity to introduce new brands and products to guests. And this quarter, salon takeovers by Bondi Boost, IGK, Verb and KRISTIN ESS all drove nice sales growth during their respective takeovers. Skincare delivered another quarter of strong double-digit sales growth as guests continue to invest in self-care and maintain their skincare regimens. Similar to last quarter, skincare routines, including moisturizers, serums and cleansers, drove category growth. New brands, including Drunk Elephant; Fresh; Good Molecules, which is exclusive to Ulta Beauty and peach slices; as well as new products from Tula, Clinique and The Ordinary drove solid guest engagement. Finally, our fragrance and bath category continued to deliver exceptional growth. Ariana Grande's latest fragrance, God is a Woman, which is exclusive to Ulta Beauty; as well as newness from Carolina Herrera; Coach; YSL and Dior, drove strong growth during the quarter. Events included in our back-to-school gift with purchase and our monthly Fragrance Crush program also drove strong engagement. Beyond fragrance, the bath and body category continues to drive robust growth as moisturizers and scrubs remain on trend. In addition to delivering growth from our core categories, we are focused on driving growth from key cross-functional platforms. Starting with Conscious Beauty, our cross-category initiative intended to help guests discover and engage with brands and products which reflect their personal values. Through this program, we identify brands across 5 key pillars: clean ingredients, cruelty free, vegan, sustainable packaging and positive impact. During the quarter, we certified 19 new brands, including LAMIK Beauty, WLDKAT and Better Not Younger, bringing the total number of certified conscious beauty brands to 275 at the end of Q3. During the third quarter, we expanded our certification to the SKU level for clean ingredients and vegan and added in-store badging at the shelf for certified brands as well as new search filters online to help guests easily identify products, which reflect what is most important to them. Moving now to our efforts to expand our assortment of black-owned and BIPOC brands. During the third quarter, we added 2 new black-owned brands, Sunday || Sunday and Nude Sugar, and we are on track to double the number of black-owned brands in our assortment this year. In addition, I am excited to share that we have welcomed our first South Asian owned makeup brand to the Ulta Beauty family, Live Tinted. Founded by Asian influencer Deepica Mutyala, Live Tinted is a cosmetic brand that celebrates multicultural beauty. The brand is also...

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Hello, everyone. I think we're having -- we had a -- we were disconnected. I think we're having some phone network issues. But hopefully, you can hear me, and I'm going to pick up, I think, where we got cut off. So if I repeat a little bit, I apologize, but we'll dive right back in. So moving now to our efforts to expand our assortment of black-owned and BIPOC brands. During the third quarter, we added 2 new black-owned brands, Sunday || Sunday and Nude Sugar, and we are on track to double the number of black-owned brands in our assortment this year. In addition, I'm excited to share we have welcomed our first South Asian-owned makeup brand to the Ulta Beauty family, Live Tinted. Founded by Asian influencer, Deepica Mutyala, Live Tinted is a cosmetic brand that celebrates multicultural beauty. The brand is also a part of our conscious beauty platform certified as clean, vegan and cruelty-free. Based on our proprietary research, we know 65% of beauty enthusiasts believe beauty is significantly connected to wellness. Reflecting this consumer insight, in the second quarter, we launched the wellness shop online and in 450 stores. This cross-category platform offers self-care products for the mind, body and spirit in an accessible, easy-to-navigate way. In the third quarter, we refreshed the wellness shop assortment shifting from summer solutions to total body care and hydration, which is especially relevant during colder months and introduced new items from HAIRtamin, [ Alum ], OSEA and Josie Maran. Turning now to our efforts to evolve the guest experience through our personalized and connected omnichannel ecosystem, All in Your World. We know the guest journey is increasingly blurring across physical and digital channels, and we aim to deliver a cohesive omnichannel strategy to serve our guests. During Q3, we enhanced our omnichannel strategy in 4 ways. First, we launched Beauty to Go, our promise that buy online, pick up in store orders will be picked up and ready to go within 2 hours or less, giving our guests fast, convenient access to the beauty they want most. We also continue to test incentive strategies to encourage guest utilization. During the third quarter, BOPIS orders increased 28% compared to last year, totaling 20% of e-commerce sales in the quarter compared to 16% last year. Second, partnering with DoorDash, we launched same-day delivery in Atlanta, Boston, Chicago, Los Angeles, Houston and Boise, and we're excited about the value and convenience that will provide guests this holiday season. Third, in October, we launched 2 exclusive salon services in all stores and relaunched skin services in select stores. Starting with salons. We have partnered with OLAPLEX to offer guests a professional bond repair service, which reverses damage caused by hair color, chemical treatment, heat and styling and the environment. And we have partnered with Redken to introduce a new express root touch-up service that offers guests 100% gray coverage color in only 10 minutes. These new exclusive services are bringing new guests into our salon. We also relaunched skin services in 100 locations featuring a revamped menu with new services to address specific guest concerns, such as hydration, anti-aging and acne. While it's still early, we are pleased with how guests are engaging with these new offerings. Finally, we launched Ulta Beauty at Target in 92 stores and online during the third quarter, and I am pleased to share we have reached our fiscal year goal of opening more than 100 shops. We are excited about this innovative partnership and how, together with Target, we will change the way guests experience beauty. While it will take time for us to understand what role this new distribution point will play for our guests, we are incredibly pleased with the ongoing customer excitement and encouraged to see Ultimate Reward members linking their accounts with Target Circle as well as new members signing up through the shop. Moving on to our efforts to expand and deepen our presence across the guest beauty journey as the heart of the beauty community. We are focused on how to best elevate consumer connection, supercharge, member acquisition and drive guest loyalty, love and share of wallet. In the third quarter, we continue to elevate our storytelling with relevant content across channels to launch Ulta Beauty at Target and to support our strategic events. In addition, as students return to classrooms after more than a year of virtual learning, we saw an opportunity to deepen our engagement with Gen Z audiences across channels with insight-driven campaigns during key back-to-school moments. We ended the third quarter with 35.9 million active members, 13% above last year and 6% above 2019. While we continue to add new members, member growth this quarter was largely driven by a reactivation of lapsed members and active member retention. After experiencing headwinds last year due to the disruption from the pandemic, we have accelerated personalization to create stronger life cycle strategies, build baskets and maximize business returns, and we are very pleased with the results. We are driving strong conversion of new members in stores and online. We are successfully reengaging members who lapsed during the pandemic, and we are driving stronger engagement from our existing members. Importantly, our member retention rates have recovered to pre-pandemic levels, and spend per member is at an all-time high. Shifting now to our plans and expectations for holiday. Based on our consumer insights, we expected many guests would start their holiday shopping earlier this year, and we proactively took steps to ensure we were ready with holiday sets, stocking stuffers and unique collaborations to help guests get a head start on their gifting needs. If holiday 2020 was about less, holiday 2021 is about more, more fun, more in real life gatherings, more gifting and more glamming. All of our teams at Ulta Beauty are ready and excited to help our guests celebrate more this year. Like last year, we kicked off the holiday season in early November with our Hello Holidays campaign, early Black Friday deals and new loyalty offers. With authentic stories of connection and joy across video, digital, social and print platforms to encourage and motivate beauty enthusiasts to shop Ulta Beauty, we'll be everywhere our guests are this holiday season. Our merchant teams have built an outstanding holiday assortment with giftable fun items across categories and price points. With new brands like Bobby Brown, Drunk Elephant and Briogeo, expanded assortments from brands like Laura Mercier, Florence and Pattern and exciting holiday offerings from brands like Dyson, Tarte, Ariana Grande, Truly and our very own Ulta Beauty Collection, we have great gifts for everyone. To help guests explore our best holiday gifts, we developed a unique digital experience to allow for easy discovery of holiday gifts online and in-store. When guests visit ulta.com or scan the QR codes on a banner at the front of our store, an app click will launch giving the guest an opportunity to easily explore top gifts by category. Our stores are always the center of holiday at Ulta Beauty. As we combine our great in-store experience with our innovative omnichannel capabilities, we'll meet every guest wherever and however they want to shop Ulta Beauty. To help guests get ready for in real-life celebrations, we've expanded salon capacity to 100% in all Ulta Beauty salons and benefit brow bars except where limited by state or local mandates, and we've relaunched skin services in select stores. Finally, our BOPIS, curbside and same-day delivery options, will provide guests with great shopping convenience this holiday season. Our teams are excited, engaged and ready to support our guests from proactively managing inventory flow and anticipating supply chain challenges to stress testing our IT systems and digital platforms to successfully accelerating our holiday hiring. The holiday season is off to a strong start, and I am confident we are well positioned to deliver another successful holiday season at Ulta Beauty. In closing, we are excited about the strength we are seeing in our business. Our third quarter performance exceeded our initial expectations, and we are encouraged by the early holiday trends. The beauty category is recovering, and our teams are executing well. We are investing and innovating to ensure Ulta Beauty will lead the new beauty landscape, and we are confident our well-defined strategy will enable us to capture more market share and drive profitable growth. And now I will turn the call over to Scott for a discussion of the financial results. Scott?

Thanks, Dave, and good afternoon, everyone. Today, we reported stronger-than-expected third quarter results, and I would like to echo Dave's comments and express my appreciation to all our Ulta Beauty associates for delivering another outstanding quarter. Starting with the income statement. Q3 sales increased 28.6% driven by double-digit growth in comp sales and strong new store performance. Total company comp increased 25.8% primarily driven by strong transaction growth in stores. In addition to robust sales growth from stores, e-commerce exceeded our expectations delivering modest growth on top of last year's 90% growth. Total company transactions for the quarter increased 16.8%. Average ticket increased 7.7%, primarily due to an increase in average selling price, reflecting favorable category mix shifts and lower promotional levels. During the quarter, we opened 7 new stores and closed 1 store. We also remodeled 3 stores and relocated 2 stores. Compared to the third quarter of fiscal 2019, total sales increased 19%, and comp sales increased 14.3%. From a mix perspective, makeup was 45% of sales compared to 47% last year. Haircare products and styling tools were 21% of sales compared to 20% last year. Skincare was 16% of sales, flat with last year. And the fragrance and bath category increased 200 basis points to 12% of sales. Q3 gross profit margin increased 450 basis points to 39.6% of sales compared to 35.1% last year. The increase was primarily due to leverage of fixed costs, channel mix shifts, leverage of salon expenses and higher margin merchandise margin. Consistent with what we experienced in the first half of this year, strong top line growth and benefits from our occupancy cost optimization efforts resulted in significant leverage of fixed costs. E-commerce sales penetration in Q3 was about 500 basis points lower than last year as we cycled last year's strong e-commerce growth. As a percentage of sales, salon expenses also leveraged, reflecting strong top line sales and lower costs from the elimination of the salon manager role. As a reminder, we will anniversary this change in Q4. The improvement in merchandise margin was primarily the result of higher sales, lower promotional activity and ongoing benefits from our category management efforts. Comparing this year's performance to the third quarter of fiscal 2019, gross margin improved by 250 basis points. Higher merchandise margin, fixed cost leverage and leverage of salon expenses were partially offset by adverse channel mix. As a percentage of sales, SG&A decreased to 25.2% and compared to 26.8% last year. Strong top line growth drove leverage of corporate overhead, store expenses and store payroll and benefits. This leverage was partially offset by deleverage from marketing expense, primarily reflecting increased spend on print advertising compared to the third quarter last year. Last year, we significantly reduced our spend on print material in Q3 due to the pandemic. This year, our cadence of print was more normalized. And as Dave mentioned earlier, we are leveraging our CRM capabilities to optimize circulation and increase the profitability of our print vehicles. Compared to Q3 of fiscal 2019, SG&A as a percentage of sales was about 150 basis points favorable. As a percentage of sales, lower store expenses, store payroll and benefits and corporate overhead were partially offset by higher marketing expense. Operating margin was 14.2% of sales compared to 6.5% of sales in the third quarter of fiscal 2020 on a GAAP basis and 8% of sales on an adjusted basis. Strong top line growth driven primarily by stores, combined with the impact of our ongoing cost optimization efforts, including promotional optimization, delivered strong operating margin results. The company's tax rate decreased to 24.1% compared to 25.1% in the third quarter last year. The lower effective tax rate is primarily due to favorable provision to tax return adjustments driven by federal employment tax credits compared to the third quarter of fiscal 2020. Diluted GAAP earnings per share increased to $3.94 compared to $1.32 last year. Adjusted diluted earnings per share in Q3 of last year was $1.64. Moving on to the balance sheet and cash flow. We ended the quarter with $1.9 billion of inventory compared to $1.4 billion last year. In addition to the impact of 40 additional stores, the increase in inventory reflects our proactive efforts to mitigate holiday sales risk due to anticipated supply chain disruptions. Where appropriate, our teams work closely with our brand partners to prioritize receipts to ensure we have adequate inventory of core and seasonal product to support expected demand for the holiday season. Capital expenditures were $51.1 million for the quarter, driven by investments in new stores, remodels and relocations, supply chain and IT systems. Depreciation was $65.2 million compared to $72.4 million last year, primarily reflecting the impact of last year's store impairments and store closures. We ended the quarter with $605.1 million in cash and cash equivalents. In the third quarter, we repurchased 341,000 shares at a cost of $126.4 million. At the end of the quarter, we had $759.8 million 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 very pleased with our year-to-date results through Q3 and are encouraged by the strong trends we've experienced so far in the fourth quarter. However, we recognize we still have several significant sales weeks left in the holiday season, and the operating environment continues to be dynamic. Despite these uncertainties, we have increased our financial expectations for the year. We now expect net sales for the year will be between $8.5 billion and $8.6 billion with comp sales growth forecasted in the 36% to 37% range. This guidance reflects our expectation that fourth quarter comp growth will be between 15% and 20%. For the year, we plan to open approximately 44 net new stores and remodel or relocate 17 stores. We now expect operating margin rate for fiscal 2021 will be between 14.3% and 14.5% of sales. We continue to believe the largest driver of our 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 to leverage SG&A more than previously expected as compared to fiscal 2020. Based on these assumptions, we now expect diluted earnings per share will be between $16.70 and $17.10 per share, including the impact of approximately $850 million in share repurchases. We now expect to spend between $200 million and $225 million in CapEx in fiscal 2021, including approximately $100 million for new stores, remodels and merchandise fixtures, $80 million for supply chain and IT and about $34 million for store maintenance and other. As a reminder, our guidance for fiscal 2021 assumes a consistent federal tax rate and no material increases in the federal minimum wage. Before we open the call for questions, I'd like to address a few follow-up questions we received from our October Analyst Day event. First, our longer-term financial targets. In October, we shared targets for revenue and earnings growth, which we are confident we can deliver through fiscal 2024 based on the limited visibility we have in the dynamic operating environment. As a reminder, we are targeting net sales growth between 5% and 7% and diluted earnings per share growth in the low double-digit range on a compound annual growth basis using fiscal 2019 as base through fiscal 2024. In addition, we are targeting operating profit margins in the 13% to 14% range over the next 3 years. Our operating margin expectations reflect a balanced and disciplined approach to strategic investments that will support our long-term growth aspirations and deliver strong shareholder returns. Regarding the timing of investments related to Project SOAR, our multiyear effort to upgrade our enterprise resource planning or ERP platform. We expect to invest $160 million to $180 million in capital over the next 3 years, with most of the investment planned for fiscal 2022 and 2023. As a reminder, in addition to providing us with more flexible and scalable operating environment, this new platform will support future growth and innovation. We expect to begin to see operational benefits from this investment in fiscal 2023. Lastly, we are still finalizing our budget for fiscal 2022 and plan to provide financial guidance in line with our regular cadence on our March earnings call. However, we wanted to share some initial thoughts to consider as you update your financial models. Comp sales growth in fiscal 2021 is expected to be significantly stronger than we initially planned, but we remain confident we can deliver comp sales growth in fiscal 2022 within our longer-term targeted range of 3% to 5%. While we expect fiscal 2021 operating margin will be modestly above our longer-term target, we expect operating margin in fiscal 2022 will be within our longer-term targeted range of 13% to 14%, reflecting a more normalized pace of top line growth and capital and operational investment. We continue to target EPS growth in fiscal 2022 despite the challenge of cycling this year's stimulus payments and reopening of the economy, but acknowledge the earnings growth rate next year will likely be lower than our longer-term target. And now I'll turn the call back over to our operator to moderate the Q&A session.

[Operator Instructions] Our first question comes from the line of Michael Lasser with UBS.

At the time that you provided your longer-term guidance, you were expecting to have a 13% operating margin this year. You're now on pace to have the mid-14% operating margin, and yet you still expect your operating margin to be within your guidance for next year. So will you be investing more than you had originally planned for 2022? And as part of that, if you do better than the 3% to 5% sales -- comp sales increase that you're anticipating for next year, would you let that flow to the bottom line and have better-than-expected margins?

Yes. So to the first part of your question, Michael, what we're talking about today is consistent with how we framed it up at our Analyst Day in the later part of October. So again, over the longer term, we're very confident we can deliver operating margin in the 13 to 14 percentage range. We, again, reiterated today, that's a function of what we expect to be a more moderate top line sales growth environment next year, coupled with a more normalized investment cycle for the company, and that's with people cost and all the capital costs that go along with all those new great strategic initiatives that we have well underway now. So as we think about potential sales overperformance next year, which, again, we would hope to see that, we would continue to take what we always have as a very disciplined, pragmatic approach to long-term investment to drive healthy growth in the business balanced against short-term operating results. So again, just making sure we take a very balanced approach to that as we have in the past, and you can expect that to continue into the future.

And Michael, I'd just add to what Scott said, just to reiterate what we talked about at Analyst Day that we are very optimistic about the path ahead. That's reflected in that long-term guidance. We believe we'll be growing faster than the market. The initiatives, both in our core business today as well as new programs and initiatives that we'll be adding over next year and the years ahead, give us a lot of confidence that we'll be leading the category and delivering profitable growth over that time frame. And as we shared at Analyst Day, we see a lot of confidence in that path ahead.

Our next question comes from the line of Lorraine Hutchinson with Bank of America.

I wanted to follow up on the comments you made around cosmetics. Are you seeing any newness that you're excited about? And what do you think will be the catalyst to move the comp into positive territory versus 2019?

Great. Thanks, Lorraine. Yes, makeup, obviously, is an important topic for us and one that we're very focused on, and I'd reiterate our confidence in the category. It is -- as I said in the remarks, it is not performing at the level that our other categories, skincare, haircare, bath, fragrance, which are all delivering double-digit comp versus 2020. It has not caught up to that level of growth. But even with that, we feel encouraged by what we're seeing. Our mass side of the business remains double-digit growth versus 2019 and is performing well. And our prestige business improved in the quarter, and we saw some real pockets of growth and success. And I think it's a combination of things, both currently driving the business and as we look forward. We continue to see strong innovation and growth from a number of brands, brands across the spectrum from Clinique and NARS and Lancôme to NYX and Maybelline. We're expanding MAC into 200 additional stores to have it in over 500 of our stores. We've launched new brands like Bobby Brown, and we're seeing newness from Laura Mercier, ColourPop, Urban Decay, Tarte. And so it is -- there's a robust pipeline, and it's hitting across all price points. When I look at some of the trends that we see in the market and we believe will drive the business into next year. There's a number of things that, again, encourage us. We see really a duality of looks that's going on right now, a combination -- many consumers looking to a combination of both natural looks and bolder looks. Looks, the bolder looks that reflect kind of this idea of individual expression, bold colors with innovation, innovative formulas, color boost that bright impactful, particularly around the eye. And that's -- that combination of people looking to do both, natural and bolder colors, is really positive. We've talked about skinification for a while, bringing moisturizing benefits or lightweight concealers or other elements that combine those categories. There's evolved application techniques, including what we kind of see as kind of next generation of contouring that's been driven by TikTok and other social media, which we think is encouraging. New product forms, including long wear lip. We've been looking at inclusive beauty for a while, and that's continuing to drive across all different types of skin tones, again, driven by influence and TikTok. And mascara and lashes is another space I've mentioned that we're seeing innovation and growth. A combination of both using more -- with more than one product or having different mascaras for different events and different times a day. So a number of things that are coming together that are helping improve the category and give us confidence as we look forward. So as we look at the -- both the trend impact in the total category and the pipeline that we have, both of existing brands and new brands on the horizon in 2022, we feel confident in the path ahead and are working every day to drive that business forward.

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

Dave, I want to ask about OLAPLEX. Would you be willing to share with us how it could stack up relative to some of the prior big launches? Maybe Kylie. I wrote down Clinique and Lancôme. You also considered getting into pro hair color. And then this is Part 3, but I assume you're not going to give this product to Target right away, but curious how that works.

Well, yes, I'm not going to give you real, like, exact specifics of how any one launch would match up with others, other than to say we're thrilled about our partnership with OLAPLEX. We're already in partnership. We have been for several weeks now with our salon service, and that's performing exceptionally well, exceeding our expectations. Our guests are thrilled by it. And importantly, our stylist are thrilled by it. And so it's -- that's gotten out of the gates really strong. And as we move into January to be able to launch the product line in all stores, in online, a complete assortment of OLAPLEX. As I mentioned in the remarks, and you know it's the #1 prestige haircare brand, and so we anticipate that it will have a big impact on our hair business and continue to support and drive our salon business. So we're excited about it, and we're putting the unique capabilities of Ulta Beauty behind the launch, a real 360 marketing program, leveraging our almost 36 million members and all the marketing tools and capabilities and partnership with just a fantastic OLAPLEX team. So excited about that launch and looking forward to taking the next step of that in January. And then as far as other -- extending into Target, we look at every brand and every opportunity, and nothing here to specifically talk about as it relates to OLAPLEX. But Target is -- we're excited about, and we'll continue to evolve that assortment over time.

Our next question comes from the line of Steve Forbes with Guggenheim Securities.

Matt Norton on for Steve Forbes here. I wanted to ask about the Target partnership. We know it's early but wanted to ask if you guys have seen any categorical differences, any customer demographic differences, spend for member frequency? Anything of that nature would be helpful.

I'll take that with one, Matt. This is Kecia. It's really too early to comment on the results as we really want to see a few purchase cycles to confirm the role of this new addition, how it plays for our guests. We think about purchase cycle similar to what we see with our members who really typically shop Ulta Beauty 3 to 4x a year. So it's going to take a little bit more time because we just opened these stores at the beginning of August. Longer term, we do believe this partnership is going to really enable us to expand our loyalty members, increase our engagement, ultimately increase our spend per member. But bottom line, our partnership brings together these 2 powerhouse retailers to really reimagine prestige. We're really off to a strong start. We're excited to see what the holiday season brings, but we'll be able to update you after a few more shopping cycles here.

Our next question comes from the line of Michael Binetti with Crédit Suisse.

Scott, can we talk a little bit more about the gross margin? You helped us a lot with some of the drivers there in merch margin, the fixed cost leverage, salon leverage and I think you said a little bit of an offset from the channel mix headwinds. But you gave some comments on the merch margin as well. But as we think of where you are today, are there elements there that you're seeing in the gross margin this year that are -- that help you form a new baseline to grow off of going forward? Or would you point us to some of those elements that you think you need to give back? And I know you've done a lot of work on things like promotional levels and merch margin. You just told us the revenues will grow, so maybe there should be some fixed cost leverage still next year. I'm just wondering, as we take your comments and try to put them out to '22, if there's things we should think about as offsets there as well?

Yes, I don't think there's anything incrementally new, I guess, I could share. It's really a combination of all the variables that we've been talking about with investors and with the analyst for quite some time. So it all kind of gets back to our EFG efforts, right? So a lot of great work has been done by our teams over the last couple of years across a wide variety of cost targets across our business. We talked about occupancy costs. We've been talking about promotional effectiveness. We've been talking about core end-to-end process opportunities. We've been talking about supply chain investments for the future. So there's a lot of variables at play here. We're, I think, producing very good results this year under very difficult circumstances. So all this good work now is starting to bear fruit for us. So again, I would say those are the building blocks that we start with as we started thinking about our longer-term plan. And then as you heard us describe at Analyst Day, now we're into 2.0, I guess, I would call it, with our continuous improvement initiatives, right? And so building highly skilled resources internally here that can help us get after some of those harder to capture benefits. And of course, some of the new infrastructure investments that we talked about as well at Analyst Day, especially in Project SOAR, which is really a multigenerational opportunity for us to reimagine business flows across the business and improve our processes and take a lot of inefficiencies out of the business here. But again, some of that takes time. So as we're thinking about the next 3 years or so, EFG core benefits will continue to deliver good cost optimization for us in the near term, and then CI with SOAR will drive longer-term benefits for us. So we still think there's plenty of opportunity to keep operating margins in a very healthy 13% to 14% range here over the longer term.

Our next question comes from the line of Mark Astrachan with Stifel.

I guess maybe I could try to just squeeze in a follow-up on Target and then another question. Maybe if you could just talk about any sort of thoughts on what consumers are buying there relative to kind of expectations, that would be helpful. And then just a bigger question, the brand owners seem to be reporting, what I guess I would call, kind of stickier D2C sales on their own website relative certainly to pre-pandemic levels. It would obviously seem like given your growth, these are incremental consumers to the category. So I'm curious how you're thinking about dealing with the partners as a supplier but also the customers -- or I mean the suppliers -- your suppliers, I should say, and then how they're dealing with their own customers and how kind of those 2 things interplay in your business over time? Do you think that's incremental? Do you think that's potentially something that you've got to watch for going forward? Because, obviously, as I said, it hasn't seemed to have an impact so far.

Great. Thanks, Mark. I'll start with your second question and then Kecia can give any more color on the Target part of that. But on DTC, it's -- that's not new, not new this year. That's been DTC. That's been building for a while, and so we really look at that as something that we're obviously monitoring and watching but also see as a development in the competitive landscape that we can manage through. And in fact, DTC, most of -- many of the DTC brands have found the importance of physical retail, and many of them have chosen to partner with Ulta Beauty. So start DTC and come into Ulta Beauty. Ulta Beauty brands, some larger brands kind of building a DTC brand presence, which we know is happening. But we see -- our model has been very different. The guest experience, the combination of in-store and online, our loyalty program, the breadth of products across price points, the depth within brands and segments and categories, the salon services, everything that we offer. The competitive differentiation that we have really separates us from our other retailers and from DTC. And as I said, many DTC are partnering with us, whether they're long-time established brands or newer brands, and so we're watching that landscape. But for us, it's like we think with any competitive evolution in the category, we play offense. We do what we do best. We adjust and adapt, but we look to drive our business forward in a really differentiated way, and I think that's what's been driving our business so far this year. Kecia, any more color you want to add on the Target?

Yes, absolutely. What we're seeing is that they're shopping the entire assortment. You have to remember, this was a highly curated assortment of pure SKUs, best-selling items, must-have minis. So we are really pleased that they are shopping the entire shop-in-shop, which is what the intention was. Was it not just to help them shop one category to get a taste of what Ulta Beauty has to offer as a whole in the shop. So I'd say bottom line, they're really shopping the entire assortment. We like what we're seeing so far.

Our next question comes from the line of Omar Saad with Evercore.

Great quarter. Appreciate all the color and especially the kind of initial look at what you think comps and sales could look like in 2022. I really want to kind of get a better understanding of what underlies that confidence behind what you think is a plus 3% to 5% kind of long-term algorithm on top of what's obviously going to be a very big number this year. I think investors expect some of these franchise. They've done so well this year to give back some of those gains next year. But obviously, you guys don't see it that way. Would love to know if it's -- whether it's reactivating existing customers or new customers coming in or the trends around product innovation. Would love to get a better sense of why you expect to grow on top of this great growth next year.

Great. Omar, thanks for the question. Yes, I'd really -- I guess I'd answer that by looking back at what we shared at Analyst Day and the comprehensive nature of our strategic approach. There isn't any one thing that gives us confidence. And yes, we are having a very strong year, recovering out of the challenges of 2020 and increasing versus 2019. But by no means do we think this is kind of the end of the road. We actually see this is us strengthening and leading the category recovery. We think the category itself is going to be healthy beauty category in 2022 and beyond. And we think our differentiated model will continue to lead that category, gain share and drive growth for us. So it is the combination of an exceptional differentiated assortment. Nobody has the collection of products that we have, and we've brought a lot of newness in this year, some of that hitting even late in the year like OLAPLEX hitting in January that we'll be driving. And we've got a pipeline that I'm excited about going into 2022, and we'll be sharing that as time is appropriate. So assortment always drives our business. Our loyalty program recovered from 2020, frankly, faster than we thought. And we think that's a great sign that what we believe what's going on in 2020 when we took a step back was not because they didn't like Ulta, just the disruption in their lives, and they've shown us that retention is high. We're acquiring new members. We're bringing lapsed members back in, and we see many more beauty enthusiasts to capture -- we see that growth happening across age groups. You know -- you've heard us talk about our strength with Gen Z as one example, and we see a lot of opportunity to continue to gain with our loyalty program. And then frankly, the unique combination of digital and physical. We believe guests are showing us demonstrating with their loyalty and their spend that they really do prefer what all the data says, and they're showing us with their dollars they prefer to shop a combination of physical and digital. That's why our e-com actually grew in Q3 after such strong growth in 2020, even as our stores show exceptional growth versus 2020. So that experience and our continued innovation and evolution across both digital and physical, we believe is where the consumer is going, and we're leading in that as well. And then all the other initiatives, our program with Target, of course, is massive, new programs like Ulta Beauty UB Media. So we think we've got a pipeline. Growth won't be what it is this year, and that's reflected. But we're going to lead this category, and it's going to take -- it will be a unique combination of what makes us differentiated that gives us confidence.

Our last question comes from the line of Rupesh Parikh with Oppenheimer.

So Scott, I guess I just wanted for Q4, just dig into more how you're thinking about operating margins. So maybe if you can just talk more about the puts and takes on the gross margin and SG&A line.

Sure. Thanks for the question. So big picture, operating margin versus 2020, it's going to be flattish in the fourth quarter. And versus 2019, we'd see some deleverage in operating margin. Again, both of those will have a mix of gross margin expansion and SG&A deleverage. So gross margin goodness coming from all the things we've talked about this year, fixed store cost leverage, merchandise margin improvements versus 2020. Channel mix is a benefit for us versus last year. Channel mix, more of a headwind versus 2019. So gross margin leverage for both years. On the SG&A line, again, deleverage for both years. 2020 not as significant as it is versus 2019. Again, 2020, consistent with all the things we've been talking about all year with the addition of incentive compensation, I guess I would say, is more significant in the fourth quarter than earlier in the year. And then when we compare it back to 2019, store labor and wages, not only hours, but wage rates are up significantly versus 2019. Incentive comp, again, is a bigger impact versus 2019. If you remember, 2019, we were short of our targets in 2021. It's a bit of a different story, and then marketing expense as well. Again, more investment versus 2019 when we were kind of battening down the hatches, I guess I would say, in a tougher environment. And this year, we're taking advantage of tailwinds and investing in market awareness activities to, again, capture more market share over the long term. So that's what I would say a short story. Again, super excited and happy with the results so far this year through Q3 and very encouraged and excited about the kickoff to the fourth quarter.

Ladies and gentlemen, we have reached the end of today's question-and-answer session. I would like to turn this call back over to Mr. Dave Kimbell for closing remarks.

Great. Well, thank you for joining us today, and I want to thank all of our Ulta Beauty associates across our stores, distribution centers and corporate offices who are working hard to ensure we deliver an outstanding guest experience this holiday season and who are committed to taking good care of our guests and each other every single day. As I said in the past, we have the absolute best team in retail, and I am so proud to lead this great team. We hope you all have a safe and joyous holiday season, and we look forward to speaking to all of you again in March when we report our fourth quarter and full year results. Have a great evening.

This concludes today's conference. You may disconnect your lines at this time. Thank you for your participation. Enjoy the rest of your day.