Greetings, and welcome to the Ulta Beauty Fourth Quarter 2017 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to hand over -- to introduce your host, Ms. Laurel Lefebvre, Vice President, Investor Relations. Please proceed.

Thank you. Good afternoon, and thanks for joining us for Ulta Beauty's Fourth Quarter 2017 Conference Call. Hosting our call are Mary Dillon, Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Also joining us is Dave Kimbell, Chief Merchandising and Marketing Officer. Before we begin, I'd like to remind you of the company's safe harbor language. 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 make references during this call to non-GAAP sales and earnings growth in 2017, adjusted for the 53rd week, tax reform and one-time bonuses. [Operator Instructions] Also, we've gotten a few questions about our 2018 EPS guidance. And just to clarify, we expect to grow 2018 EPS approximately 20% off the 2017 GAAP EPS of $8.96. With that, I'll turn it over to Mary.

Great. Thank you, Laurel, and good afternoon, everyone. The Ulta Beauty team delivered excellent financial results in 2017 with an 11% comp on top of the 15.8% comp in 2016 and 37% GAAP earnings per share growth or 25% earnings per share adjusted for items primarily related to tax reform. However, the continued moderation in the growth rate of makeup, our largest category, made our fourth quarter a bit more challenging than expected. But nonetheless, we achieved strong sales and earnings growth in the fourth quarter while continuing to gain market share and make significant progress on our strategic imperatives. We grew the top line 22.6% or 15.7% adjusted for the 53rd week. Comp sales grew 8.8% on top of 16.6% comps in the fourth quarter of 2016, driven by positive traffic and ticket growth, a strong January and continued great momentum in e-commerce. Adjusted for tax reform benefits and onetime bonuses for hourly associates, earnings per share were up $2.75, up 23% compared to the fourth quarter of the prior year. I'll be briefer than usual with our highlights for the fourth quarter in view of the complexity of tax rate impacts and our desire to provide a full discussion of the planned appointment of the benefits of the lower tax rate as well as the various cost pressures informing our view of 2018. Starting with highlights on our loyalty program and brand awareness. The Ultamate Rewards loyalty program grew its membership 19% year-over-year to 27.8 million active members, driven by our store team's successful conversion efforts. We launched a new Diamond tier for our top guests who spend more than $1,200 per year with the goal of driving higher share of wallet with our best customers. The new program offers compelling benefits, including exclusive offers and even more…

Thank you, Mary. Good afternoon, everyone. Starting with the income statement. Q4 sales of $1.94 billion were driven by 8.8% comparable sales growth, strong new store productivity and the benefit of the 53rd week. The total company comp of 8.8% was composed of 6.2% transaction growth and 2.6% average ticket growth. E-commerce sales growth remained strong and contributed 460 basis points to the total comp. The retail-only comp was 4.2%, with traffic up 2.7% and average ticket growing 1.5%. Ticket was driven by an increase in average selling price, while growth in units per transaction was slightly negative. The salon business comped 3.2%, driven primarily by ticket growth. Gross profit rate decreased 50 basis points, including about 20 basis points from the onetime bonuses for hourly associates. The 30 basis points of remaining deleverage are attributed to modest pressure on merchandise margins and investments in our salon business, in part offset by leverage in fixed store costs. Distribution expense was flat as a rate of sales year-over-year. Product margins continued to face some headwinds from channel, category and brand mix dynamics, with the mix of e-commerce sales the most significant driver. We were just slightly more promotional year-over-year largely due to the higher mix of e-commerce, which tends to be a more promotional channel. Preopening expenses leveraged about 10 basis points related to the timing and number of store openings in the quarter, with 16 openings in Q4 this year versus 25 in Q4 last year. SG&A expense deleveraged 60 basis points, including 40 basis points for the onetime hourly associate bonuses. Store labor was the most significant contributor to the remaining 20 basis point increase in SG&A by deleveraging about 50 basis points as we continue to invest in prestige boutiques as well as in more hours during the…

Thank you, Scott. And I'd just like to wrap up our prepared comments with some reflections on our overall 2017 performance. We made significant progress on our strategic imperatives throughout the year. We attracted millions of new customers, adding 4.4 million net new loyalty members, and we achieved all-time highs in brand awareness. We gained market share across all categories, added dozens of leading brands to the assortment, successfully rolled out 700 prestige brand boutiques and significantly revamped our services offering. We drove impressive new store productivity. We delivered stellar growth in e-commerce sales and increased the percentage of omnichannel shoppers. We improved our infrastructure and supply chain capabilities. And really perhaps most importantly, we continue to grow and develop a workforce of passionate, highly engaged associates who create and sustain our winning culture. All of these accomplishments give us tremendous confidence in executing our plans in driving sustainable, profitable growth in 2018 and beyond. Our business model remains strong and differentiated, and the investments we're making will continue to set us apart, support market share gains and make us relevant in the beauty industry for many years to come. So now I'll turn it over to our conference call host for Q&A.

[Operator Instructions] Our first question comes from the line of Christopher Horvers from JPMorgan.

So I wanted to ask about the promotional -- your promotional plan and your promotional posture. I think a big question in -- over the past few quarters is it looks like you added an incremental promotion to drive sales at the end. Which looked like you were trying to catch up to where you had guided The Street. So how do you think about those in retrospect? Do you think as a private company, would you have run those? And how are you thinking about 2018 differently, especially in light of some of the work you're doing around the Ultamate Rewards program?

Thank you, Chris. Let me start just by stepping back and providing some context, which is that we have many different demand drivers, and we always are really striving to deliver a great value equation to our guests and one that's going to drive share gains and profitable growth. So some of those demand drivers are easy to see and track, and others are maybe less so because they're very targeted, and a lot of folks are consumer target, right. So what I would say is the great thing is that we can and do flex those tactics as needed given the time of year, category, competitive dynamics. So we set out -- I guess some more context, really over 4 years ago to reduce our reliance on broad price discounting and, as you said, increased targeted offerings through our loyalty program. We also significantly shifted spending out of price promotion tactics into awareness and brand building tactics. And we've done that. The business, I would say, is much healthier because of that. So our brand partners, they appreciate what we're doing with the data and the insights in the loyalty program. And I'm confident that these are the right levers. So to your point, at the end of the fourth quarter, we did have an incremental 20% off postcard, end of the quarter, drove traffic and share gains, slight headwind in margin rate. But as I said, we actually have many levers and we take a very holistic approach. So in fact, we're less promotional on other tactics that we're probably less visible. So net-net, it's only a slight increase in overall promotions. And really, that was largely driven by the higher mix of e-commerce in the quarter, which tends to be more promotional. So to your question about looking forward, I'd say more of the same. It's just constant -- how do we -- over time, we know that getting more and more one-to-one and personalized is the goal for us. Our loyalty program allows us to do that. Some of the investments I talked about do as well. But we'll continue to use an array of tactics and levers to drive the long-term growth and share gains of the business.

And I would just like to add because I know this is a hot button for investors and we, of course, read all the weekly analyst reports that are tracking our every move on the promotional front. So one other fact I'd like to add is it's not -- this postcard in particular, it drove a lot of traffic to our stores, which helps us mitigate other potential gross margin risk to the business, right. So it helps us move through clearance products. In this case, it helps us move through some of the residual holiday products that's still in the stores. And so we were able to sell that at a profit with vendor support rather than sending it back to the vendor, right, where you have labor costs and potential shrink issues or, worst case, having to write it off at the end of the quarter. So those are both worst outcomes. So again, we try to be very thoughtful about the decisions we make and how we execute.

And I just want to throw in -- you mentioned potentially having to react to some of the -- these new stories about the used cosmetics potentially, seems to be foreshadowing -- maybe pulling one of those out to make sure you're defending the market share out there. And you also guided a more narrow range, 6% to 7% in the first quarter, so just trying to interpret that.

Is that a question?

Yes.

Our next question comes from the line...

Look, we just found out [indiscernible] I'm sorry. I wasn't tracking if that was a question or not, a follow-on question, Chris. So...

Chris, can you repeat your question?

Okay, he's gone. I'm happy to answer but I wasn't clear about it.

Okay, let's keep going.

I'm sorry. The next question comes from the line of Simeon Siegel from Nomura Instinet.

Congrats on a strong year, guys. So Mary, can you just talk about how your new store openings are going? You did mention these stronger new store productivity. I'm just wondering as the brand continues to gain awareness, are you seeing a faster sales ramp? And maybe, is there any change to the maturity profile?

Yes. I mean, I'm very encouraged as our new class of stores each year continues to ramp up stronger. Productivity continues to get better. The maturity ramp of the stores is a function of the overall comp rate. So that's going to flex based on the -- where we are in the overall comp. But what we are seeing in new store openings continues to be very strong and very encouraging and allows us to continue to drive more market share gains as we enter markets, even markets that we already have stores, right. As we're adding stores, we're continuing to build our market share and overall penetration. So it's quite strong.

Okay, great. And then just quickly, Scott, did you -- sorry if I missed it. Did you quantify or can you quantify what you expect mix shift to do to gross margins going forward?

We didn't quantify it. I would tell you that merch margins in general, as we said now for quite some time, we expect to manage to flattish, right. That's what's been inherent in our long-term thought process. So -- but we believe there's opportunities over the long term. So again, e-commerce, it's pretty obvious that that's going to be a headwind for us. It has been in recent quarters and will continue to be. And so we're planning and we're looking at things. We have ways to mitigate that. Both our private-label offering might be a way, just getting smarter about our assortment and numerous decisions by making use of our new merchandise tools that we put in place over the last couple of years, better analytical tools as well, inventory productivity gains we think we have in our future. And of course, the DCs play a big role in this as well so there are better capabilities, better optimized performance overall. And with Fresno, we're making thoughtful decisions on where we place these to make sure that we're closer to our end customers there, so again helping with transportation cost over the long term.

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

A question for Mary. Ulta has been making a lot of investments while growth was robust. And now it sounds like we're still needing to make some investments at a time -- or I think some of us would think that you were relatively better off than your peers. So I know you'd mentioned some reasons why. Can we revisit that? And I don't know if I caught it, but within the margin guidance and, I think, the adjusted outside of the accounting change is down 30 to 50, how much of it is down to the extra investment outside of the e-commerce mix shift and some of the freight and the labor margin headwinds that you face?

Okay, great. Thank you, Simeon. Now I'll start with the question, I guess, about why we feel we need to make investments. I'd say first of all, I think we've got a really strong track record of making smart investments that earn a great return. And we've, in fact, made really significant progress against the 5-year plan that we communicated back in 2014. We're well ahead on, I guess, every dimension you might measure from sales and profit, the comp performance, share gains and whatnot. I would say though that retail is rapidly changing and really more so than maybe we would have thought 4 years ago. So while I feel very good about the investments we've made, this is simply an opportunity now frankly with the Tax Reform Act to size up the opportunities that affords us to invest at an accelerated pace on some of the dimensions that I talked about and really investing from a position of strength. We're very confident about our business model and our growth potential, but continuing to invest and maybe doing at an accelerated pace allows us to adapt to the increased pace of change, I think, that's happening in guest expectations and retail. So if we only solved for margin, I think we would not maximize the opportunity that's ahead of us. So when we think about those investments, it's both in people as well as guest-facing initiatives. And really, it's more about imagining a future of this intersection of the digital and physical world that's more focused on experiences, on discovery, personalization and less on what you might think of like the friction of commerce. So for us, it's just about how do you pace that and do it in a way that continues to allow us to really be the leader in beauty that we are and believe we continue to be. So it's as simple as that. Do you want to take the second question?

Sure. So the 50 to 70 basis points down for the year that we guided to -- I think you mentioned, Simeon. You caught the 20 basis points on the accounting change, which is kind of a onetime item, I guess, I would say, for the changing going from the cost method to the retail method for accounting for loyalty transactions. The remaining 30 to 50 primarily driven by labor, store labor, is a big driver of that, and that's connected to the boutique strategies. So we talked in the past a lot about cost implications there. So we're in a better position in '18 because more of the boutiques are going into new stores than they have historically. Historically, it's been going back into the comp base, which has been more of an expensive proposition for us through this accelerated depreciation notion that we've talked about in the past; so labor, the biggest piece with boutiques, which we say we're accelerating from what we had thought about earlier. And then the rest of it is really this tax benefit reinvestment, I would say, and most of that ends up in SG&A in the back half of the year largely, as does the store payroll as well is in the SG&A line.

Our next question comes from the line of Kelly Crago from Buckingham Research Group.

Mary, could you just talk about the prestige cosmetics category a little further? First, did you mention how that grew in 4Q? And then as we begin to lap some of the outsized growth in the category, what do you feel is an appropriate level of normalized growth? And what are some of your assumptions driving that outlook? And then just piggybacking on that, it'd be great to hear your thoughts on the recent successes of celebrity-brand introductions, which you haven't necessarily been able to participate in. So do you expect this to be a sustainable trend? And if so, are you seeing any opportunities to get involved in a bigger way?

Great. Thank you. I'm going to tag team this with Dave. So I'll start. And I guess I would say when I -- we think about our -- I'll really reiterate. We've continued to gain share in all the categories and all the channels that we're in, right. So we participate in a lot of different categories, All Things Beauty, All in One Place. So there's a lot of different irons in the fire that we have to drive our growth. And in prestige, for us, we comped around 10% last quarter. And a year ago, that was 20%. So that was still great growth, a little bit not as strong as it was the year before, but we had some brands that had great -- our prestige boutique beauty brands were really strong and continued to roll out. We had some other brands that had innovations that didn't work as well as the previous year. But we see our partners and new brand innovation very strong both in mass, which we can talk more about, and prestige. And I feel very confident that that's going to continue to be a strong segment of growth and really coming in a lot of different ways. So to your point about celebrity brands, that's just one of the many levers that are out there in terms of creation of brands, and we're participating across all of those. So I would not rule that out. I think there's a lot of ways for us to get innovation and we are -- so Dave, why don't you give a little more color on [indiscernible]

Yes, on our cosmetic -- on our makeup business. So yes, I'd just add to what Mary said by -- we really take a holistic approach at building our total makeup business. And while your question was about prestige, I want to talk about both mass and prestige because that's really unique for Ulta Beauty, obviously, and an important part of our strategy as we help introduce guests into opting into the mass business but then see them over time move into our prestige business. So they work very -- in a very integrated way. But I'd call out just a few core areas of how we're thinking about building our -- continuing to build our assortment and our growth and success in the makeup business. First and foremost, it is about strengthening the performance with our biggest brand partners, our established brands there. And we're seeing continued success with that. That drove some of the comps that Mary talked about in prestige and also in mass, so our Ulta Beauty Collection at the forefront of that going forward, as well as Maybelline and L'Oreal Paris on the mass side; brands like Tarte, Anastasia, IT Cosmetics, Too Faced driving growth on the prestige side. We're also rolling out, we've mentioned a couple of times, key brand partners that we've been establishing in more stores largely on the prestige side. We said 675 new boutiques across MAC, Lancôme, Clinique, adding benefit in new stores, but also NARS, Estée Lauder; on the mass side, e.l.f. rolling to all stores. So brands that have been successful in smaller subset of doors continue to expand out. Key exclusive brands are a big part of that. Tarte Double Duty Beauty has been a big success and a great partnership. IT Brushes for Ulta, Makeup Revolution…

Our next question comes from the line of Mark Altschwager from Robert W. Baird.

So your prior long-range plan called for stronger comps in the early years, relatively lower comps in the out years. So I guess, the question is, would you expect your comp growth rate to reaccelerate as you accelerate some of these investments in personalization and store experience? Or would it allow you to at least sustain something in the 6% to 8% range for a longer period of time? Just I guess without previewing the Analyst Day this fall too much, it would be great to hear how you're thinking about the longer-term comp growth algorithm.

Okay. Thank you, Mark. A way to get a little preview, I like that, which we can't do and don't have, but no -- I would think about it as sustaining really the healthy comps that we're talking about right now and that we would -- I would expect that the need to evolve any retail business is going to be -- it's out there for all of us. So when we think about these investments, it's really to continue to be just as strong as we are and may -- and sustain the kind of comps that we're talking about. So more to come on that.

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

I guess, Mary, my question was for you regarding the loyalty membership. The growth was pretty strong, so in 2017, as you said, 27.8 million at the end of the year. I guess, first, how do you anticipate the growth of that to continue in '18? And then how are you thinking about the customer acquisition cost if you get up into that next 5 million to 10 million customers?

Yes, I'll just start and then have Dave add some more to this. But I'm really thrilled with the kind of growth that we've had. We're at almost 28 million members, as we said, which is fantastic. And still, there's a lot of beauty enthusiasts out there that are not in our loyalty program. So we anticipate to be able to continue to drive growth albeit at a moderate pace over time. We've had really strong growth. We know we'll continue to grow it. So what would you like to add to that?

Yes. And I'd say as far as cost of acquisitions, we're not seeing a dramatic change. And then in fact, we're finding more efficient ways to drive our total marketing plan. And we really do take a comprehensive approach to drive new guests into our store. Mary mentioned in her prepared remarks the increased awareness, both unaided and aided, which we know contributes to our growth. We've got very strong marketing plans supporting both our total brand story as well as many of the new items that I've talked about. And then our stores have done a very good job improving their effectiveness at converting nonmembers into members, and we're anticipating that we'll continue to do that through 2018. So we're not expecting a real change in our efficiency of attracting new members into our program.

Okay, that's helpful. If I can sneak in one more just on the credit card. Is that still a drag on gross margin? Or is that neutralized now?

Yes -- no. I'm trying to put into context the drag. So the credit card has been a spectacular success and has been a real tailwind for the business overall. I mean...

The 20% offer that came with the launch [indiscernible]

Yes, yes. So that's moderated, the 20% off, in case that didn't come through loud and clear. So the initial sign-up margin rate headwind with that initial purchase really had subsided once we got the program off the ground back the second half of last year, really hasn't been an impact overall when we're talking about margin rates here in recent quarters.

The net impact is very positive.

Absolutely.

Our next question comes from the line of Dana Telsey from Telsey Advisory Group.

As you're thinking about this category performance, makeup and what you're seeing with prestige, how do you see the growth rates of that in the future? And do you see any changes going on with skincare versus makeup that we should be looking forward to? And then just on the store base, any changes to the store base potential given the stronger-than-expected e-commerce build?

Great. Thank you, Dana. I'll start with the store base. We obviously continue to look at that very closely and are thrilled with the productivity that we have, the real estate opportunity, the ability to take advantage of situations, I think, that are right for us in retail. So -- and we love the e-commerce growth because it's so incremental to the business, right. So it's not -- we don't have a shifting of purchases happening here. As you know, we look at that omnichannel guest closely and analytically. She continues to buy even more in-store and online and becomes the best guest. So -- but we look at it closely as we continue to build out the store base and make sure that we are picking the right spots and that we'll just keep watching that. But we feel very encouraged as I said we're going to open 100 stores this year. We're off to a very strong start already, and we think we're in the right place. On the -- oh, category stuff was the first question. Do you want to take that, Dave?

Sure, yes. I mean, on the category, on makeup specifically, the -- we're confident about both mass and prestige. They both slowed down in 2017 and -- but we're seeing through the -- some of the items that I talked about earlier, strong signs within our portfolio of growth. So we're optimistic at least within our business and our model that makeup trends will improve and we anticipate seeing that across the market. As far as skincare, I'm glad you asked because skincare has been accelerating. And we're very pleased with the results that we've seen on our skincare business again both on the mass and prestige side. Mary mentioned several of the new brands that we just recently launched actually last week that we're excited about but also continued strong performance with brands like Mario Badescu, Peter Thomas Roth, expansion of proactiv, Origins, Clarins. And then men's skin business, we think, will also drive some incremental growth, highlighted by House 99 with David Beckham. So we see a lot of growth in skin across the marketplace, and we're certainly, we think, leading the way and gaining share in that category as well.

Our next question comes from the line of Jason Gere from KeyBanc Capital Markets.

Mary, I might need you to go into that crystal ball again.

Got it.

Just on the cost optimization program, I guess I wanted to get a little bit of color on that. Did you use outside consultants on some of the projects? Because you guys haven't really gone through -- I wouldn't call it restructuring, but this level of some of this detail. And then Scott, when you think about the 50 to 70 basis points that margin will be down this year, how much of -- I mean, the cost optimization program, I guess, will help offset in the second half of the year. How much is that going to contribute this year? What would be the full year run rate? And then how -- and this is the crystal ball question. How much of that gets reinvested when you think about going forward into next year? So I was just wondering. A lot of details about -- well, hopefully, I can get some answers.

Thank you, Jason. I'll just start by saying a couple of things. One is I am thrilled that we're really in a formalized program that we're working on with dedicated internal leaders and a formal process in place, and we're doing it from a position of strength. So I think it's the right time for us to think about how do we take our growth and scale and identify opportunities to drive more efficiencies in the business, smarter ways to do business for many years to come. So we're fairly far down the path of identifying buckets of opportunities but way too early to start getting specific about what that's going to look like and when, but I feel really good about the progress we're making.

Yes. I guess, I would just add that the executive team is committed to seeing this through. I mean, I think we're in a good spot in our maturity curve here to be working on this ahead of what you might have seen historically in other operations. So we're not going to share a lot of specifics, but there's hard targets in the 2018 plan and this is going to be a multi-year program and feeling really good about it at this stage.

Is it fair to say -- and maybe just to follow up, when you look at some of the other competitors out there, whether department stores who've kind of gone through this type of, I guess, cost-cutting efforts in the past that they're kind of near the tail end of those programs, you're at the beginning, it puts you in a competitive advantage as we think about the next couple of years?

Well, I would hope so. I mean, the idea is that it really is the right time for us to think about short term and long term, the ability to continue to drive the kind of returns that our shareholders expect and want while continuing to invest in the business that has many, many years of growth ahead of it and the need for investment in a changing retail environment. So firstly, I think about it a little bit less of cost-cutting. I think about it more as driving efficiencies to invest in growth, and now is the right time for us to do that.

Our next question comes from the line of Brian Tunick from RBC Capital Markets.

This is Bilun on for Brian. I just wanted to ask about the ticket growth. I believe it's been around mid-single digits over the last 2 years and starting to slow a little here. So as you think about the comp sales from here, is it reasonable to assume a lower contribution from ticket growth? Or do you think there is still opportunities to grow the average ticket from maybe channel mix, product mix or anything that we should be aware of? And then secondly, I might have missed this but -- so the vendor participation for the different kinds of promotions, say the 20% off coupon, is that different than planned events, like the 21 Days of Beauty that you run almost every year?

Yes. So maybe I can start with the comp deconsolidation. So when we think about the business, it's always with a healthy balance of traffic versus ticket kind of contribution. That's the way we plan our business. I mean, over the last couple of years, you've seen us outperform that especially on the traffic side of things. So again, it's a balance. The way we think about -- we wouldn't -- there's nothing out ahead of us that we would say we would expect anything materially different than that at this stage of the game.

And as far as brand partner support of our key promotional activity, I guess I won't get into specific details about each individual item other than to say we are very close -- work very closely with our brands to deliver the best experience to our guests, and they are active supporters of our efforts in the marketplace. And we anticipate that they'll continue to be that.

Our next question comes from the line of Adrienne Yih from Wolfe Research.

Mary, first of all, congrats on the Chanel Beauté, very, very impressive to land them. I was wondering if you could talk a little bit about how many stores, how many SKUs and the timing of that. And then along with that, the skincare size of -- prestige skincare size of market relative to prestige cosmetics and then your penetration within Ulta in those 2 categories.

Yes, I'm not sure we'd break out all that in so much detail, but I'll tag team this with Dave. Thank you. We're thrilled about Chanel Beauté as well. It will be a pretty -- a small number of stores to start. We're starting Westport, Connecticut, in the next couple of weeks, [ additive ] assortment, beautiful brand. So we're thrilled to continue and deepen that partnership.

Yes. And the assortment will be highlighting the most iconic items. As Mary said a real [ additive ] assortment, we're really excited about the presentation in-store. But it will feature their iconic lipstick, Rouge Coco lip gloss and blush, cream foundation, skincare items. And so we think it will be a really nice presentation of their brand and a nice addition into our portfolio.

Fantastic. And then Scott, just a clarification. On the year-over-year operating margin pressure, is that against the GAAP 13.1% or the 13.8%? And then for Q1, can you help us out a little bit with the gross margin? Because you're opening, I think, more stores in Q1 year-over-year, should we think about more pressure and then having that relieve itself or reverse itself in Q2?

Yes. So it is -- so the guide -- the operating margin guidance is versus the GAAP information. We'll clarify that. And then Q1, yes, interesting -- I'm glad you asked this question because it is important for people. We did state it a few times. Q1 is probably our toughest compare of the year, right. So we had a 14% comp last year. We had some -- we pushed some expenses out of first quarter into the back half of '17. So that helped us as well. So the other things to keep in mind there, I would say, is supply chain deleverage. So we got a new DC in Fresno, California that's going to open up mid-year next year, so some slight deleverage there in the early part of the year and then improving in the back half of the year. And then you're right-on with the store program, so a lot more stores opening up in first quarter '18 than a year ago, plus we're carrying forward somewhat, I would call, higher cost kinds of real estate, right, that we put online second half of last year, Manhattan being the most notable of those that we're still up against here in the early part of the year; so again, fixed door cost leverage, tougher the first half of the year but improving as the year goes out.

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

Our question is just the evolution of the space and how you're thinking about driving value and experience in the context of Amazon and other pure-play competitors. Just what's on your mind in terms of the shifting needs of the consumer? And how are you prioritizing and what can -- you can do just to make sure you have a competitive advantage along the [ attributes ] of value, of store experience, personalization and customer engagement?

I would say all of the above, Oliver. It's a great question. And I believe we are really well positioned to really be a leader in this category for many years to come, both in the physical space as well as digital, full stop. I mean, to us, this is a category and a consumer that we focus on, the beauty enthusiasts who really loves both the in-store experience to try and discover and get services as well as the convenience and fun of buying online. And so we offer really what nobody else does, and we will continue to do that, so the broadest assortment across all categories and price points, a great in-store experience and online experience that means we just keep getting better, right, services, our loyalty program. And I'd say as we think about our e-commerce platform, we just continue to build out our e-commerce platform in a way that is great. It gives us great control over content, the guest experience, the pricing, the data. So we like the model. We think we're well positioned. And as we think about the future, imagining what that guest wants 5 and 10 years from now in that intersection of the physical and digital world, it's -- that's our job to do. But we believe she'll continue to want to have a physical experience as well. So that's how we think about it. It's a competitive space, but we think we're playing to win. So we will.

And lastly, just as a quick follow-up. On the inventory journey, you've done a really good job managing capital and also the SWIFT system and thinking about accuracy. What are the next steps for inventory in terms of what you want to do and ensuring the omnichannel as well as the supply chain and speed and turns and stocks and service levels are where you want them to be regarding both the customer-facing as well as the planograms in the stores? Just curious about inventory.

Yes. I'd say we're still in the early innings with respect to inventory optimization. So I mean, as you well know, it's a never-ending quest, right, to have the right product at the right place at the right time, which she's interested in purchasing, whether it's on the store shelf or it's in our distribution centers ready to be shipped out to her front door. So we've been making a significant number of investments over the course over the last couple of years with tools. You mentioned SWIFT is one and better space planning kinds of tools in the stores. I mean, our analytical capabilities have improved a lot over the last 3 to 4 years. That will continue. That's the quest again that will be evergreen for us to try to get better and better insights into our purchasing behavior and how we ship things quicker and more efficiently to folks. So there's still a lot of -- I guess, I would say a lot of progress for us to be made there when we think about inventory productivity and inventory turns kinds of things as we look to the future.

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to turn the call back over to Mary Dillon for closing remarks.

I want to close by thanking our 35,000 associates for their commitment to providing a great guest experience and for delivering exceptional financial results in 2017. I look forward to speaking with all of you soon. Thank you.

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