Greetings and welcome to the Ulta Beauty First Quarter 2020 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Kiley Rawlins, Vice President, Investor Relations. Please proceed.

Thank you, Shamal. Good afternoon, and thank you for joining us today for our discussion of Ulta Beauty's results for the first quarter of fiscal 2020. Hosting today's call are Mary Dillon, Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Dave Kimbell, President, will join us for the Q&A session. This afternoon, we released our financial results for the first quarter of fiscal 2020. A copy of the press release is available in the Investor Relations section of our website at www.ulta.com. 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, May 28, 2020. We have no obligation to update or revise our forward-looking statements, except as required by law, and you should not expect us to do so. We'll begin this afternoon with prepared remarks from Mary and Scott. Following our prepared remarks -- comments, we'll open the call for questions. [Operator Instructions] As always, the IR team will be available for any follow-up questions after the call. Now I'll turn the call over to Mary. Mary?

Thank you, Kiley, and good afternoon, everyone. Before we talk about our first quarter results and how we're responding to the challenges created by COVID-19, I want to first take a moment to thank all who have been on the frontlines selflessly fighting the outbreak and caring for the country since this pandemic began. We're truly grateful for your dedication. I also want to thank my leadership team and all Ulta Beauty associates for their unwavering commitment, tireless efforts and continued agility as we adjust to a very dynamic and uncertain operating environment. As we've navigated through this crisis, our lens for every decision has been the safety and the well-being of our associates and guests. In early March, as the virus began to spread in the U.S., we quickly took steps to keep our associates and guests safe and healthy. We increased sanitation measures and cleaning frequency in stores, limited the use of testers and suspended all beauty services. As the situation escalated, we made the difficult decision to temporarily close all of our stores on March 19 and quickly shifted our focus to operating our e-commerce channel only. When we began 2020, we certainly did not plan to operate the digital-only business, but I'm very proud of how quickly our teams pivoted to support our e-commerce operations. Our marketing team shifted rapidly to create highly relevant digital content sensitive to the mindset of our guests at that time, a focus on connection, self-care and positivity while also acknowledging new consumer behavior such as social distancing and wearing masks. Anticipating an increase in demand, our digital teams quickly leveraged the existing capabilities to support higher e-commerce order volumes and manage order flow. Our supply chain teams quickly increased capacity while implementing enhanced cleaning protocols in alignment with CDC guidelines…

Thanks, Mary, and good afternoon, everyone. Before I review our financial results, I'd like to reiterate Mary's comments, and on behalf of Ulta Beauty, express our immense gratitude for the first responders who are on the frontlines every day, protecting us from the spread of the coronavirus. I would also like to acknowledge all our associates, from those in the field and in our distribution centers, to our team members from our home office, who have worked tirelessly to adapt to the rapidly changing environment. I could not be more proud of the work they are doing. Now the situation with COVID-19 is dynamic and fluid, so our first priority has been to protect liquidity. We have taken steps to enhance our financial flexibility, including drawing down $800 million on our $1 billion revolver, suspending our stock buyback program and actively managing and prioritizing our expense structure, working capital and capital investments. We have also taken a conservative approach to inventory management, adjusting receipts to reflect current and expected sales levels. As a result of these efforts, we had $1.15 billion in cash, cash equivalents and short-term investments at the end of the quarter. We are proud of the quick actions we've taken to further enhance our financial strength and are confident that we have sufficient liquidity to fund our operations now and in the future. Turning now to our results for the first quarter, beginning with the income statement. Q1 sales declined 32.7% as we temporarily closed all of our stores in response to the spread of COVID-19. Total company comp declined 35.3% and was composed of 3.3% average ticket growth and a 38.6% decline in transactions. As Mary mentioned, we were pleased with our performance in the beginning of the quarter, with total company comp sales trending above…

[Operator Instructions] Our first question is from Christopher Horvers from JPMorgan.

This is actually Megan Alexander on for Chris. I was just hoping you could elaborate a bit on what you're seeing in the stores that you've reopened just in terms of pent-up demand and whether you're seeing any change in the category trends as you reopen them. And then can you just talk about any detail on what you're seeing in terms of guests using curbside versus actually coming into the stores?

Yes. Well, we're really, I guess, I'd say pretty pleased about what we're seeing so far in terms of consumer behavior, right? So, so far, our trends are stronger than we expected in terms of sales. It varies by market. We actually have some markets comping positively, others negative. The e-commerce trends have been very encouraging. And they're remaining resilient and really accelerating because of the adoption of curbside, which we can talk more about. But -- and I mentioned this in the script, but the first 180 stores, if you look at their performance so far, total sales are flat to a year ago. But of course, the mix is quite different, right, between stores, curbside, BOPIS, ship to home. So I'd say overall, guest reaction has been quite positive. But we're cautious. I mean it's early, early, and we're taking a conservative stance as we look forward. The opportunity for us that we see as well is that I've mentioned that we've got a lot of guests who've never shopped online with us before who are now converting to omnichannel guests, I guess, out of necessity. And that guest, the more that we can keep them shopping in multiple channels, they're very valuable to us. They spend almost 3x as much historically as somebody who shops in stores only. So the other thing I'd add is that -- and maybe David can comment on category mix. But on the curbside, so far, we invented that. I'm very proud of the team for really kind of putting that together pretty quickly. We hadn't been doing curbside. We even had launched BOPIS in the fourth quarter of last year, and that was going really well, but we hadn't needed to do curbside yet. So I really congratulate our team for getting that stood up. And we've been pleased to see the guest reaction. So I'd say what they like about it is the speed, the ease and the overall enthusiasm of our first staff. We're following all the kind of social distancing and safety guidelines that you can imagine. But we feel that so far, that could be -- again as people try that, they find it as another convenient way to shop at Ulta Beauty, and we expect that will continue to be part of the mix as we go forward. Is there anything else you want to add on categories, Dave?

Well, the only thing I'd add on categories, and you mentioned it in the script, Mary, is that categories that were strong with us when we were operating on an e-commerce only continue to be strong. And those are kind of self-care categories and wellness categories, skincare, haircare, bath, other categories that have been -- that have accelerated throughout this crisis. But interestingly, as curbside became available, we also saw a pickup on makeup as more guests were engaging in that category. And as we've made -- as we've evolved through the initial phases of this crisis, we've seen makeup make a bit of a strengthening move as curbside has given our guests more options to engage in the category.

And our next question is from Mark Altschwager from Robert W. Baird.

Maybe following up on the category trend. Wondering if you can just give us some broader perspective on the beauty cycle and how you're planning for mix shifts in the near term just with the economic backdrop. Are you seeing or expecting to see a shift to mass and masstige from prestige? Sounds like skincare has remained robust. However, as the industry starts to cycle the sharp decline in color cosmetics as we go through the mid- to late part of the year, just wondering if there's any reason to think there's a light at the end of the tunnel there from a product innovation and growth standpoint.

Thank you, Mark. I'd say in some ways going into this, what we've seen is at the beginning of the cycle, of course, the types of things that people bought were quite different than what we've seen in the past, right, things like hand sanitizers and soaps. And then we saw folks get more engaged in things that I would call like self-care, do-it-yourself at home. So haircare, nails, that kind of thing, and then kind of more into things that are a bit more self-indulgent or self-care, like whether it's mask, skincare, fragrances for the bath, that kind of stuff. So it's just kind of interesting to see that cycle of -- the psyche of consumer behavior. As an aside, one thing I'll say is I feel like our team did a great job from a social media and just marketing perspective to really meet our guests where they were and kind of talk to them about those things. Engagement was really high. The core category trends, I'd say, were similar -- roughly similar to what we saw coming into this year, which is acceleration in skin care. We've talked about that. We see that as a big future trend. The intersection of wellness and beauty together is going to be important. I think with makeup, as Dave said, I think it's an interesting early fact that on curbside, we saw some tick-up in makeup. You can debate the 2 sides of it. But I mean anecdotally, I'd say that folks who maybe were doing -- working from home before on phone calls are now all of a sudden all working from home on video calls, and everybody is on video call. So will that have -- will that help bring the light at the end of the tunnel as you said? Well, certainly, makeup is still large and it's very -- customers are very engaged in that category. But it has been in a lower cycle. You're right. So could this help it? I think we'll see. We don't know. Right now, I wouldn't say that's happening in the large scale.

And our next question is from Kate McShane from Goldman Sachs.

I wondered if we could drill down a little bit more around your commentary about the promotional environment, maybe what you saw during the quarter and what you expect for the rest of the year. And just one housekeeping question about the impairment charge. Just how many underperforming stores account for that? And do you plan to reopen them?

Yes. So I'll start with the promotion and maybe Scott will take the impairment piece here. Yes, promotion activity, of course, like everything else, was disrupted through the quarter. Our strategy pre-COVID has been on really a multiyear journey to try to reduce broad-based promotions and be more strategic and focused on driving consumer engagement demand across all of our activities, the brands that we're bringing in, our loyalty program and other aspects of ways to engage with our guests. We are -- we do -- as we enter into -- as the category shifts into a reopening of stores and a recovery phase coming out of the March and April elements of this crisis, we are anticipating, as a category, potentially higher promotional activity. But our focus will continue to be on driving the more strategic aspects of our business. We have a very strong loyalty program. We've built, we think, very strong personalization capabilities, and in fact, in some ways, have strengthened aspects of that over the first part of this year. And we intend to leverage that to be more personalized and direct with our communications and aspects. We will lean into the most strategic aspects of our promotional -- annual promotional programs, 21 Days of Beauty, holiday, skin and hair events through the year. But of course, we're going to be nimble in the category. And while we know we're not anticipating leading a massive increase in promotional activity, we won't cede share either. So we have tools to respond appropriately in the category, and we'll do so and make sure that we're remaining competitive in the marketplace.

To the impairment question, so the short answer is it was around 20 stores in total that were impacted by this. And really, it was 10 stores that drove the majority of the impairment charge during the quarter. The slightly longer answer is, Kate, this is going to be a multi-chapter story here. So again, the fact that we took impairment charges on these stores doesn't mean we're closing these stores necessarily. These might still be productive stores, but they just might be in higher rent kind of geographies in the United States, for example. And as we mentioned in our prepared remarks, we are taking a clean sheet look at the whole store fleet. So there are instances that we're looking at where maybe we're not in the best center or we're not in the best position in the center. And now with the disruption we're seeing in the retail environment, there are centers that we've been blocked from historically that we might get more aggressive on and might have opportunities now in the future. So there could be other potential store closures come somewhere down the road here. Hopefully, we can get all that house kept in fiscal 2020, but it's not all a one -- a first quarter kind of story.

Our next question is from Kelly Crago from Citi Research.

I was just wondering what your exposure is to some of the department stores that have announced store closings. Have you done any work there? And should we expect any sort of promotional cadence geared towards gaining that customer? And then my second question is just around vendor support given you're expecting a more promotional environment. How are those conversations going with your vendors?

Yes. I would say we'll step back and start with department stores. I mean just in general, we have a very sort of broad competitive environment, and we think about that because we do -- we bring all things together in beauty. And as a result, we compete with everybody from department stores to mass retailers to other specialty retailers, e-commerce only. So it actually is a pretty broad competitive environment that we're in. And we pay close attention to everything that's happening and see opportunities and risks throughout. So I mean that's how we've always been as a business, is to play our offense and to make sure that we get the share gains that we believe we can get in certain categories. I mentioned already in the digital channel, we gained share in every category in prestige, and we were only digital in this past quarter. So we feel good about that. So that's something we pay close attention to. And the second part of the question was...

And vendor support.

Vendor support. Yes. I mean listen, there was -- it's a very important time for us to be very close with our vendor partners, big and small. And so I feel very good about -- we have worked -- Dave leads the merchandising team. And you can add more to those if you like. But I mean we -- I'm proud about the fact that I feel that we've been very transparent with our vendors, share the dilemmas with them, share the opportunities with them as we move forward. And our relationships are very strong. So I certainly -- I feel very confident about our ability to come out of this stronger than ever and continue to win in the marketplace, and I think our vendor relationships will be a key part of that.

And our next question is from Omar Saad from Evercore ISI.

Really impressive digital e-commerce growth in the quarter. Obviously, you guys have one of the best-in-class loyalty programs out there. I'm curious what you're seeing in that part of the business as stores reopen or what your expectations are for that kind of run rate you've been at. Do you expect that to moderate? Are you seeing that moderate? Is that demand shifting to more buy online pickup or curbside? What are your expectations for that strong digital growth in the intermediate term as we go from a fully locked down state to one that's more open than the store network thing?

Well, yes. We've been really, of course, pleased with the e-commerce performance. It's a part of our business that we've been building and investing in and bringing innovation into for many years, and it certainly has been paying off for us through this crisis. Obviously, as stores opened, it will decrease in its total penetration of our business from being 100% e-commerce only. But what we do believe going forward is that we've moved quite a few of our guests that have previously only shopped us in-store, has shopped us online. And that's a really positive thing. We know -- and Mary mentioned some of these statistics, but we know that guests shop -- that shop us in an omnichannel way are among our very best guests. They shop us more frequently, both in store and online. They spend more with us. So we anticipate, from a member standpoint, this could have some really positive lasting impacts of introducing more guests to the total Ulta Beauty experience. Penetration going forward, we think there will be a step change in penetration because of this introduction of omnichannel capabilities to more guests. We think it will be a higher run rate going forward, but time will tell exactly where that settles, but certainly higher than it was and a faster acceleration and adoption of our e-commerce capabilities. And curbside has been a big win for us. Mary said how quickly we adopted that. We were happy to have BOPIS in the fourth quarter as we rolled that out last year. To be able to shift and pivot that to curbside capability was really meaningful. And as stores have reopened, guests -- some guests are still opting for curbside capability. And so we'll sustain that going forward, and we think it adds actually a nice -- essentially a third option for our guests. If they don't want to actually come into a store at this time, they can still get their products that same day and have a great experience from Ulta. So that will be a big role going forward.

And our next question is from Dana Telsey from Telsey Advisory Group.

I hope everyone's and healthy. As you think about the store reopening platform and the service model in there, how do you think of employee staffing and the percentage of payroll that you'll need going forward versus what you would need in the past? And then secondly, on products and just color cosmetics, is the state of innovation or the pace of innovation that you've seen with your vendors, does that accelerate or decrease going forward? And does the closures of department stores give you more runway to gain market share even as we go through this year?

Dana, it's Mary. Thank you. On the services staffing, I can't tell you the precise ratio there in terms of where we're going to land. But I will tell you that I actually feel that -- first of all, we're taking a conservative and cautious approach to thinking about services. But I also believe we've got a great opportunity because there's -- we have a national platform, a national brand. And there's still pretty, I'd say, low usage of our services relative to the total retail percent of business that we have. So we feel like there's a great opportunity. We also know, as you know, like our omnichannel guests, that people who use our services are spending almost 3x as much as somebody who's not. So it's a great opportunity. We are starting slowly, and we're starting with hair only and I would say with even stricter protocols of health and safety than just the reopening of the store, which is very strict. So there's additional steps in place to make sure that that's done safely and well. But frankly, as we started to open up, we have about 280 stores that have salons open right now. And there's a lot of pent-up demand for cut and color, as you can imagine. So we have many, many stores that are well booked right now. We are stylists. We kept them on the payroll largely so that we knew we could come back strong. We wanted them to stay with Ulta Beauty and help us capitalize on this opportunity over time. So over time, we'll go from hair to brows again and things like that, but we're just going to take it a step at a time. Your question about cosmetic innovation, maybe, Dave, if you want to add to that?

Yes. I'd say on innovation in total, certainly, this has disrupted the brand's view on innovation and timing. And in some cases, new launches have been shifted back or readjusted. But what I'd say is 2 parts to that. We felt really good about newness across categories, makeup included, skincare, haircare, fragrance coming in pre-COVID and this crisis, several new brands across the portfolio like Laura Mercier, Thrive, Pixi on the makeup side; Kiehl's, Ordinary, Indie Lee, Urban Skin Rx in skincare; Pattern, Arctic Fox, [ Wella ] in hair. Several new brands that had launched recently, in either very late Q4 or early in Q1, actually performed well throughout this crisis and will be well positioned coming out. So we still have that pipeline of newness. And then as we look forward over the rest of the year across categories, again, including makeup, as I said, brands, in some cases, have adjusted their plans. But as we start to get more confidence in consumer reaction and store opening timing, we will rebuild our innovation introduction time line in the second half of the year and are optimistic. We know our guests continue to be attracted to newness, both new brands and new products from existing brands. So we see a strong pipeline coming through as we work our way through this, through the 2020 and then certainly into 2021.

Our next question is from Simeon Siegel from BMO Capital.

I hope you're all doing okay. Mary or Dave, how are you thinking about marketing? I know -- it's obviously the easiest lever to pull back on, but just given the balance sheet strength, is there an opportunity to actually go on the offensive there and take some share? And then just, Scott, how are you thinking about inventory savings for the rest of the year? And maybe any color you might be able to give on gross margin.

It sounds like a party at your house, Simeon. I love it.

Everyone is so excited for this call.

I'm so happy they're excited. That's awesome.

Yes. So I'm glad you asked about marketing. Yes, we have -- we really see a great opportunity to continue to build the Ulta Beauty brand and really in a lot of ways, accelerate out of this crisis behind the strength of our brand and everything that our brand represents: the assortment, the loyalty program, the guest experience, the strength of our associates and what they bring to our guests every day. Coming into this crisis, the work that we've done to establish our brand and to create a brand platform that is rooted in this idea of possibilities, of joy, of connection to others and the power of beauty, I think, actually that served us really well. And I'm really proud of the work that the marketing team did to shift the strategy to be really responsive and reflective of the new mindset and to more focus more on these connections and self-care and just bringing joy and happiness, which is ultimately what beauty is about through all channels. To your point, we believe that we have an opportunity to continue to invest in marketing because we're so, we believe, well positioned to, again, have a leadership voice in that. So while we pull back on certain elements, most notably print tactics because they have long lead time, we can't be as responsive to store dynamics or shifting consumer dynamics. We've pulled back on those elements. We've invested more in digital and social aspects. And as we look out over the rest of the year, it is not our plan to make a significant reduction in total marketing spend as much as shift our focus to both a messaging that's relevant and compelling as well as the tools that will be -- both give us some flexibility to adjust whatever comes ahead of us through the rest of the year. But it was also very relevant in the time frame.

And it sounds like you had 3 questions, Simeon, right, 3 questions there. But they're important. So we'll answer the 2 -- the final 2 here. So on inventory, I would just say we're being careful. I think the team did a great job, again, high sense of urgency to monitor receipts and order flow during the depths of the crisis. And now we're back. Again, it's back to vendor relationships. Dave and Mary both alluded to being transparent and clear and having good connections with vendors because we're making orders. We're making orders, and we have been now for a number of weeks. So the sales throughput there on our e-commerce business, we need to stay in stock. And when the store is opening back up, we want to make sure that the newness, that the back half is flowing out there to make sure we're ready for guests to come back and visit with us. On the gross margin, I think we laid out the first quarter pretty thoroughly in the prepared comments. As we think about the rest of the year, I mean, that's part of the primary reason why we don't feel comfortable providing guidance for the rest of 2020 at this point. But again, you can go back through the script comments. I mean we've given you a laundry list of things that we're thinking about, right, and with the key being opportunistic as we go through the rest of 2020, whether it be pulling forward the Jacksonville fast fulfillment center here in the back half of the year, provide more capacity. We talked about rethinking the cadence of some of our major events and the promotional elements that go with some of those things, reassessing our assortment strategies, maybe being opportunistic about moving out of some of the slow movers, so to speak, as we go through the back half of the year. We talked about store footprint optimization. So there could be some impairment charges or closure charges that come along with those kinds of things. But again, it's not going to be a first quarter only story. This will evolve as we go through the rest of the year, and we'll be as transparent with you as we can along the way.

So let me just close this. I really want to thank everybody for joining us today. I know at the end of every quarter, I thank my team. But honestly, in my 7 years as CEO of this company, in fact, in my career, I don't think I've ever seen a group of people leading with more resilience and heart and collaboration and more drive to win. So I want to thank the Ulta Beauty team, and we hope that you stay healthy and safe, and we look forward to speaking with all of you again in August when we report our second quarter results. Thank you.

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