Good afternoon, and welcome to Ulta Beauty's conference call to discuss results for the fourth quarter of fiscal year 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, Hector, and good afternoon, everyone, and thank you for joining us today. 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 session. This afternoon, we announced our financial results for the fourth quarter and full year 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, March 10, 2022. 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'll discuss certain non-GAAP financial measures, including adjusted operating income and adjusted diluted EPS for the fourth quarter of fiscal 2020. A reconciliation of these measures to the corresponding GAAP measures can be found in our press release. We'll begin with some prepared remarks from Dave and Scott. And following our comments, we'll open up the call for questions. Today, our remarks will be a little longer than usual. [Operator Instructions] And as always, the IR team 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. Before discussing our results, I want to share how proud I am of our associates' performance throughout 2021. While consistently providing care and service to our guests and to each other, they successfully navigated pandemic-related challenges and delivered exceptional results for all of our stakeholders. In fiscal 2021, the beauty category recovered earlier and faster than we expected. And our teams adjusted quickly in many ways, including working with our brand partners to accelerate receipts and manage in-stocks, creating highly relevant content that reflected the rapidly evolving mindset of our guests, adjusting staffing levels across the organization to meet growing demand and protecting and strengthening our culture, leading with their hearts and working together to create new ways to delight and excite guests, all while continuing to execute against our strategic priorities and drive our business forward. Now moving to our results for the quarter. The Ulta Beauty team delivered record fourth quarter financial results despite COVID and winter weather disruptions. Net sales increased 24.1% to $2.7 million -- $2.7 billion. Operating profit increased to 13.8% of sales and diluted EPS increased to $5.41 per share for the quarter. The decisions our teams made and plans they executed with excellence around assortment strategies, inventory flow, marketing and staffing levels positioned us to take advantage of a positive consumer environment this holiday season and deliver strong results. I want to express my sincere appreciation to all Ulta Beauty associates, particularly in our stores and distribution centers, who show up every day, positive and optimistic, ready to serve our guests while facing personal challenges posed by the ongoing pandemic. Their dedication enabled us to deliver these outstanding results, and I am grateful for their flexibility as circumstances shifted. We kicked off the holiday season in…

Thanks, Dave, and good afternoon, everyone. Before I review our financial results, I want to echo Dave's comments and express my sincere appreciation to all our Ulta Beauty associates for their focus on providing great guest experiences and managing the business, especially in such a dynamic operating environment. Their dedication to our guests and each other enabled us to deliver another strong quarter and an outstanding year for our shareholders. Now to our fourth quarter results, beginning with the income statement. Overall, results for the quarter were better than anticipated, primarily driven by stronger-than-expected holiday sales and a rational promotional environment. Sales growth across both physical and digital channels were stronger than expected, resulting in gross margin and less SG&A deleverage than planned. As a result, operating margin increased to 13.8% of sales for the quarter. Net sales for the quarter increased 24.1%, driven by 21.4% growth in comp sales and strong new store performance. Transactions for the quarter increased 10.4%, driven by double-digit growth in store traffic. And average ticket increased 9.9%, resulting from both a higher average selling price and an increase in units per transaction. Looking at the cadence of sales for the quarter. November was the strongest month, supported by our successful marketing efforts and guests' early holiday shopping. Post-holiday, overall growth moderated, driven primarily by a deceleration of store traffic, likely reflecting disruption from weather and the Omicron variant. During the quarter, we opened 6 new stores, relocated 3 stores and remodeled 1 store. Compared to the fourth quarter of fiscal 2019, total sales increased 18.4% and comp sales increased 15.4%. For the quarter, gross margin increased about 250 basis points to 37.6% of sales compared to 35.1% last year. The increase was primarily due to the leverage of fixed costs, favorable channel mix shifts…

Our first question comes from Dana Telsey with Telsey Group.

Congratulations on the nice progress. As you think about the current macro landscape out there and the inflationary pressures, how are you thinking about pricing in 2022? And how does that feed into the margin? And do you see any difference by category?

Great. Dana, thanks for the question. And yes, certainly, we are tracking and monitoring closely the inflationary environment, and we understand the unique dynamics that we're facing. We recognize consumers are going to be facing headwinds from rising prices and other dynamics. I will say that as we look at the beauty category, even with these headwinds, we remain positive. The category is healthy. It is growing. It's emotionally important and connected to our consumers. We are in the midst, even as we face some of these inflationary pressures, that we're in the midst of opening of the economy, of the world around us, which is beneficial. We know consumers are working to maintain their self-care routine. And so despite the headwinds, we think the category is well positioned. And then uniquely, Ulta is well positioned because of our model. The fact that we are across all price points, all categories, mass, prestige, we are able to adjust and reflect evolving consumer needs as the world around us changes. Pricing has -- every year, there's pricing. Certainly, over the last few months, we've seen some pricing action in -- from some of our brands. A reminder, in our prestige side of the business, it tends to be MSRP. And so we're -- we would be reflective of where the broader market is going. But it hasn't been an extraordinary amount of price increase yet. And any benefit of that is certainly reflected in our guidance going forward. But as cost pressures increase, both on our business and our brand partners' business, we'll be clearly tracking this closely and making sure we're adjusting appropriately as we manage through the year.

Our next question comes from Mark Altschwager with Baird.

I wanted to ask about the rewards program and spend per member. It looks like kind of your average spend per Ultimate Rewards member must have been up pretty nicely 2021 versus 2019. Just any color there would be great. And how much of that is category recovery versus share of wallet gains? And then looking ahead, you did allow some of the increased distribution points for Prestige Beauty as a consideration in your guidance. So curious how you're thinking about ability to continue to capture share of wallet and the opportunities in 2022?

Great. Well, we are incredibly proud of our loyalty program. We have been for a long time. And I'm really, really pleased with the results that the team delivered in 2021 to reach a record level of 37 million active members, which is not only 13% ahead of 2020, but 6% ahead of 2019. So our guests are highly engaged. Reactivation rates and retention rates are very strong. We did see an increase in spend per member, which we're encouraged by. And that's driven by a number of factors as we continue to optimize the way we're engaging, leveraging our personalization efforts, providing more relevant, appropriate messages to our guests brought through our CRM capability. We've seen a category mix change. We've talked consistently through the year about the growth of fragrance. Some other like tools in our hair tools, some higher ticket items that have been driving very strong growth ahead of the total store. And so that's contributing to it. And I'd just say an overall connection to Ulta Beauty. I mentioned just the high level of unaided awareness, the strong emotional connection that we're building is driving greater share of wallet. And our efforts going forward will continue to drive that. As I look at the broader marketplace and share of wallet, and yes, there is expanded points of distribution on the prestige side of business, part of which is Ulta Beauty, both in our own stores and our partnership with Target. And I'm really pleased that in the fourth quarter, we gained share when we look across all of our points of distribution, including Target, despite hundreds of more new locations, competitive locations. So we're confident. We think we've got the right model, strong competitive position, most importantly, deep connection to our guests that's demonstrating stronger loyalty to Ulta Beauty. And we're going to leverage that to continue to drive growth and share growth into 2022.

Our next question comes from Oliver Chen with Cowen.

On the guidance, what gives you confidence that makeup will return to growth? And how does that intersect with inventory, category planning and also your comments on prestige and the competition there? As a follow-up, as you make strides in BIPOC brands, black indigenous and people of color brands, how should investors measure your success here? How are you measuring success? Do you have a lot of innovative programs there?

Great. Thanks, Oliver. Yes, there are some important topics in your questions. First, makeup, we are confident in the path ahead of makeup. And yes, and I'd say as we reflect back on the year, there were certainly some ups and downs. And what we continue to see is makeup, more than any other category, is sensitive to COVID fluctuations. And we saw that in the fourth quarter with Omicron and Delta and continued challenges there. But as I look forward on makeup, there are so many things that continue to encourage us. And we've seen some of these trends for a little while, but we've also -- as soon as we get momentum, we see some setbacks related to COVID. But broad macro trends of opening up and more opportunity for consumers to get back in the world, you know you're seeing it in back to work. We're seeing just a rapid acceleration in that. Events, activities, those things people getting out of their house are all exceptionally positive for the total category. We know all along that consumers have been passionate about makeup. Just there are opportunities -- their usage of opportunities have been more limited, but we see the passion in social media. The engagement continues to be high in all -- in TikTok and in Instagram and all other forms. So we know the connection is there. We know the opportunities are coming. We know there's important trends like the duality of natural looks and bolder looks, increased focus around eye and brow that even a resurgence of contouring, all these things are positive. And then you layer in for us our -- the outstanding work our merchandising team has done to continue to evolve our assortment. You -- I mentioned the launch of Fenty Beauty,…

Our next question comes from Chris Horvers with JPMorgan.

You talked about gross margin down in 2022. That seems a bit different from your prior commentary. Is that simply lapping through this big gross margin beat in the fourth quarter? Or is there something changing in your outlook or something that you're seeing in the market? And then on the gross margin side, can you help us a little bit on the cadence front?

Yes. Thanks, Chris. So I don't really think that there's any inconsistency in our messaging here. I think the variables at play are pretty consistent over the course of the year as you think about 2022, I would say. So again, it's back to merchandise margins, right, being under pressure in 2022 compared to what we've just been through the last year or so. With the promotional environment, we think it's going to get back to more normal kind of business environment and then incremental supply chain costs, including transportation costs and wages and our distribution centers being greater than our growth outlook is for next year. So a combination of those things driving deleverage. And then as we think about the year, I guess, as we said, second quarter is going to be the toughest. So again,first half of the year stronger, generally speaking, on operating margin than the second half. Partly that's being driven in the first quarter by stronger sales as we lap over. Last year at this time, we were just starting to come out of the depths of the pandemic. So sales, especially in the store fleet, stronger this year in the first quarter than they were a year ago. That drives a lot of leverage for us and helps gross margin and operating margin overall and then sequencing again, and I think we said in our prepared remarks, those impacts overall kind of moderate as we get deeper into the year.

Our next question comes from Kelly Crago with Citi.

Just curious if you could elaborate a bit on your partnership with Target. Now that you're at your 9 months in, are Target stops helping drive new customer sales? What does the spend look like for our customers who shop both channels? Any other color you could provide around customer behavior, at least at Target, would be helpful?

Yes. Thanks, Kelly, for the question. As a retail leader, we're really aiming to deliver a seamless, omnichannel experience that meets our guests wherever they are. The newest element of this omnichannel strategy of the Ulta Beauty at Target is really providing us another way to engage and discover Ulta Beauty for a new guest set that's shopping at Target. The strategy is working. What I would share is that our existing Ultimate Rewards members, they're taking advantage of shopping at Ulta Beauty at Target, and we're also introducing this to some new guests. The guest response has been really positive. The awareness remains strong. As Dave mentioned in his comments, more than 1 million members have linked their Ultimate Rewards in Target Circle accounts, and we're signing up new members every week. Target shared at their recent financial community meeting that the productivity in their space is very high. So that's always a good indicator, too. And I would say that while it's still really early, we're really encouraged that we see new members bouncing back into Ulta Beauty, and their shopping behaviors are very similar to our existing loyalty members. So just to kind of wrap up, overall, we're very pleased. While this is still new, we're pleased with how this is playing out as part of our omni strategy going forward.

Our next question comes from Mike Baker with D.A. Davidson.

Maybe a 2-parter. Just on makeup, were you seeing it up on a 2-year basis earlier in the quarter and then Omicron slowed that down? Is that what you're saying? And can you talk about what you might be seeing in some areas of the country that seem to reopen earlier and not be as impacted by Omicron or at least didn't seem to slow down some of the people going out, Texas, Florida, maybe places like that?

Yes. What I will say, we won't get into like every period throughout the quarter. But for sure, what we see on makeup is a -- as anxiety around COVID has increased, has fluctuated through the last 2 years, we do see more pressure on makeup. And -- but now across the country, as more and more people both -- yes, some parts of the country have been more open than others, but there still has been a consumer concern, even as elements are open, that is easing right now across all parts of the country. And so that's encouraging to us. And that's what we think we need is more ongoing, consistent confidence to be back into work, be back at various activities and events. And as we see that, we know that's an element. It's not the only thing, but it's an important element to make up success going forward.

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

To be respectful for everyone on the call, I'll actually limit it to one question, one actual question. So I just was wondering if you could just give us a little bit more color on the rollout of Fenty Beauty. Just any color in terms of number of stores, linear feet, end caps. Any additional color would be very helpful.

Thank you for modeling the one question rule, Anthony. I appreciate that. And yes, we are thrilled with Fenty. It is in all stores. It is online. It is -- if you have a chance to go into any Ulta Beauty store, you'll see it right at the front of the store. In most of our stores right at the front, it has an entire the 18-foot run and an end cap broad assortment featuring Fenty among other things is known for the breadth of assortment in [ beige ] in particular. So you'll see that being able to test and try items. So -- and then strong, strong presence online. In fact, we really found some unique ways in our online footprint to bring that brand to life and communicate to our guests. And so off to a great start, really pleased with it. Really glad that Kendo organization has partnered with us in many ways and see this as a key part of our success going forward. I'm thrilled to have Rihanna and Fenty as part of the Ulta Beauty family for a long time to come.

Hector, I think we have time for one more question, please.

Our final question comes from Adrienne Yih with Barclays.

Congratulations to the team and all the store employees, what a wonderful year. Dave, my question is for you, and it's getting back to the Ulta at TARGET a couple of weeks ago before announced the potential to expand to 850 stores by 2023 through Kohl's. You mentioned over 200 for this year. So I'm just wondering, can you share with us any data from that partnership, new customer acquisition? Any details there? And what would you need to see to accelerate that a little bit more aggressively beyond the 200?

Well, let me give a little bit of color, and I'll ask Kecia to kind of follow -- give some more detail to build off her previous answer on this. But -- and we are just thrilled to be partnering with Target. We know there's been -- we're in the midst of a real transformation in the Prestige Beauty landscape. And the fact that in the fourth quarter, with hundreds of new locations across Prestige Beauty, across the location, the fact that Ulta Beauty continues to gain share we think is a reflection of the strength of our strategy, the execution that we brought both in stores, online and in our Target Ulta Beauty at Target relationship. We are delighting guests. We're gaining share even as there's other competitive activity. And we're confident we're going to be able to continue to do. But Kecia, do you want to give some specifics about number of stores and what the outlook looks like there?

Yes. What we've said, Adrienne, is a little over 250 this next year. We are in close partnership and we are following Target's remodel schedule. So that really kind of plays into timing, sequencing, et cetera, of how we're going about opening new stores. But the partnership is really strong. We're really pleased with our results. And the space -- the productivity in this space is high. It's a highly curated assortment with 50 key brand partners. And we're continuing to learn and evolve and grow as we continue to roll out more locations, but over 250 in the next year.

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

All right. Awesome. Thank you all for joining us today. Really appreciate it. In closing, I want to thank, again, our 40,000 associates for delivering a simply outstanding 2021 and with a relentless commitment to our guests, to each other and to moving our business forward. We all look forward to speaking to all of you again in May when we report our first quarter results. I hope you have a great evening. Thanks again for joining.

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