Good afternoon, and welcome to Ulta Beauty conference to discuss results for the fourth quarter of fiscal 2022. [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, Sherry. Good afternoon, everyone, and thank you for joining us for a discussion of our fiscal '22 results and our expectations for fiscal '23. Hosting our call today are Dave Kimbell, Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Dave will begin with some key highlights from our fourth quarter and full year and then share our priorities for fiscal '23. Then Scott will review our fiscal results -- our financial results in more detail and discuss our financial outlook. After our prepared comments, we will open the call for questions. And Kecia Steelman, Chief Operating Officer, will join us for the Q&A session. Before we begin, I'd like to remind you that 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 9, 2023. 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. Today's prepared remarks will be a little longer than usual to allow us. To accommodate as many questions as possible during the hour scheduled for this call, we respectfully ask that you limit your time to one question. If you have additional questions, please requeue. 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. We appreciate your interest in Ulta Beauty. Our fourth quarter was a strong end to a record-setting year. For the first time in our 33-year history, our annual revenue surpassed $10 billion, and our annual net income exceeded $1 billion. In addition, we expanded our loyalty program to more than 40 million members. Achieving such meaningful milestones reflects healthy consumer engagement with the beauty category, the power of Ulta Beauty's highly differentiated model and the impact of our winning culture and outstanding teams. The Ulta Beauty team continues to execute with excellence and inspire me daily with their passion and leadership. I want to thank all of our associates for their commitment to delivering great guest experiences and for working together as one team to move our business forward. I am honored to lead such a great company of talented associates who bring our mission, vision and values to life for all of our stakeholders. Now to the results. Starting with the fourth quarter, net sales increased 18.2% to $3.2 billion. Operating profit increased to 13.9% of sales, and diluted EPS increased 23.5% to $6.68 per share. Sales of all major categories exceeded our expectations, and we saw solid sales momentum across both our store and digital channels. Additionally, we continued to see healthy growth in spend per member across all income demographics. This broad-based strength reflects successful execution of our key fourth quarter events, including holiday, Jumbo Love and Love Your Skin. Our holiday marketing plan, which included new television advertising, engaging storytelling and robust digital and social support, delivered strong guest engagement and drove significant increases in top-of-mind awareness. Our holiday gifting assortment, which was thoughtfully curated across every category and budget, resonated with guests, and our innovative and inclusive gift…

Thanks, Dave, and good afternoon, everyone. Before I review our financial results, I want to take a moment to express my sincere gratitude to our teams for delivering these exceptional results for our shareholders. We have long known our associates are our competitive advantage, and this year's results are an ongoing reflection of their relentless commitment to our guests and to executing with excellence. Now to our fourth quarter results beginning with the income statement. Results for the quarter were well ahead of our expectations, primarily driven by strong holiday sales and robust guest demand, which accelerated post holiday. Sales growth across both physical and digital channels were stronger than expected, resulting in less gross margin deleverage than planned and greater SG&A leverage. As a result, operating margin increased to 13.9% for the quarter. Net sales for the quarter increased 18.2%, driven by 15.6% growth in comp sales and strong new store performance. In addition, other revenue increased $18 million, primarily due to credit card income growth and an increase in royalty income from our partnership with Target. The growth in comp sales was primarily a result of a 13.6% increase in transactions driven by double-digit growth in store traffic. Average ticket increased 1.8% driven by higher average selling price, which more than offset lower units per transaction. Similar to last quarter, we estimate that product price increases contributed about 500 basis points to the overall comp increase. Looking at the cadence of sales through the quarter, sales moderated in November from the third quarter trend as we lapped more challenging comparisons, but well-executed holiday plans drove strong results and momentum that accelerated in January. Post-holiday results benefited from robust guest traffic in stores and the lapping of weather and impacts from COVID-19 variants during the same period last year.…

[Operator Instructions] Our first question is from Kate McShane with Goldman Sachs.

I think you mentioned there were 5 points of pricing that you got in the comp for Q4. How should we think about the role of higher prices in the 2023 comp guide?

Kate, yes, thanks for the question. Yes, we -- 500 basis points in Q4 similar to Q3. The pricing, what we anticipate for pricing going forward into 2023 is a more normalized level. 2022 is really unprecedented across the category. We believe that, that will return to kind of more steady state level of price increases going forward or at least into 2023. So that is included in our comp guidance and is, in part, driving the stronger first half versus second half. As Scott mentioned, high single digits in the first half, lower single digits in the second half. One contributor to that is lapping price increases. Many of them happened through the second quarter into the third quarter last year. So as we lap those, the comparables get a little tougher. So it's incorporated in our guidance, and we anticipate it being at a more moderate normalized rate going forward.

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

Congrats on an incredibly strong year. I was intrigued by your comments about, I guess, this luxury department is -- or expanding the luxury beauty offering in select stores and online. What exactly does that look like? Because when I think about Ulta, particularly where you are now versus where you were, let's say, 10 years ago, you have a ton of luxury brands. So if you can just help me sort of dimensionalize that.

Absolutely. Thanks for the question. We are excited about the luxury opportunity, and we have been participating in luxury for a while. We've had a long-term relationship with Chanel, among many other brands. But what's evolving and changing is an expanded presence of luxury in select stores and online. We recently launched Dior in makeup and skin care. We had the Dior fragrance business. So Dior is another along with Chanel, key anchors of our expanded luxury business. NATASHA DENONA, which is a beautiful and elevated color brand; HOURGLASS, Chanel N°1, Lancôme Absolue, we believe other luxury brands over time, now that complements a portfolio of luxury fragrance brands that we have, including YSL, TOM FORD, Gucci and others. And so the effort here is to make a stronger statement in luxury that further reinforces our All Things Beauty all in one place. The idea that you can shop across all price points, all categories and luxury, while we had a presence, we felt there was an opportunity to expand and solidify. And that's the actions we've been taking so far this year, and we're really encouraged by the results of the launch of several of these brands including Dior and excited about the opportunity ahead.

Our next question is from Christopher Horvers with JPMorgan.

So a couple of related questions about the business momentum. You talked about the acceleration in January. If you teased out the Omicron lap and weather, was there an underlying acceleration? You also lapped the launch of Fenty and OLAPLEX into the first quarter. How did that play out relative to your expectations? Did it sort of -- did the business slow in line with the lift that you saw last year? Or did it do better? And then last related question is, as you think about the high single-digit comp guide in the first quarter, are you essentially assuming that from today forward to the balance of the year the business comps in line with the annual guide?

Let's see. So a few things in that. First of all, yes, January was elevated, as Scott said there. And there were multiple factors. It's hard to nail down exact drivers, exact -- the exact elements of the contribution, but you mentioned a few, Omicron, lapping Omicron being one of those. And -- but we -- the underlying consumer engagement was strong as we emerged out of holiday. There's no doubt about that. The importance of the category, the elevated connection between beauty and wellness is showing up in January and gives us confidence as we go into the year. We are lapping some major launches, OLAPLEX in January. Fenty, actually, the launch happened in Q1 of last year, so that launch was not lapped in January but will be lapped here in the first quarter. And as we look into the year, again, the outlook that we have is 4% to 5% comp growth, stronger in the first half -- higher in the first half, a double digit -- I'm sorry, high single digits -- excuse me, high single digit in the first half of the year, lower single digit in the second half of the year leading to the 4% to 5% comp guidance for the full year. The drivers, again, of that are import pricing, some continued momentum coming out of the strength we saw in January and other factors that lead to a bit stronger in the first half of the year.

Our next question is from Adrienne Yih with Barclays.

Congratulations on the quarter and the year and the great start to the new year. David, I guess -- well, actually -- so I'll start with kind of a question about the model itself. So pre-COVID, sales per gross square foot was kind of averaging in the $500 a square foot and at that time, sort of the potential margin at 15%. We're now kind of post COVID in that $800 a square foot range. And it looks like these are new TAM bolt-on services, BIPOC, Conscious Beauty. It doesn't look skin care -- it doesn't seem like there's kind of a replacement or a shift going on. So I'm just wondering if you can kind of talk about the 15% sustainable margin and how we should think about sort of that on a longer-term basis after you get through the investment phase.

Yes, Adrienne. Maybe I'll just give that a slightly different spin. So again, as we said, we're confident that we can deliver now adjusted 14% to 15% operating margin on a 3% to 5% comp for the next few years. Again, we came -- at our Analyst Day back in late fall 2021, we were giving our point of view on the financial model through the end of 2024. So since then, a lot of things have changed. I think less so on the sales drivers because there's a lot -- again, this category provides a lot of opportunities for us to drive the top line through various means. Really, the change is versus 2019, a lot are in the infrastructure, the cost infrastructure of the business overall. So you've probably heard us refer to some of this in the past. So we -- of course, we benefited here over the last couple of years from double-digit sales growth, driving a lot of fixed cost leverage across the business. There's also been a more rational promotional environment the last couple of years. And so -- and these elevated sales levels have also mitigated some of the other inflationary cost pressures that we are experiencing across the business. So as we look to 2023, we expect sales growth to moderate from where it's been the last couple of years. And so that will -- that's going to drive some deleverage. That's our year-over-year tougher comparisons. We've described that. I mean, as we think about, again, stronger and sustainable operating margins, we just feel like the business is in a much healthier position today than it was back in 2019. Again, we've described improved capabilities across the business, like ship from store and BOPIS helping to do that. Our ESG initiative that we started years ago now are continuing to drive significant benefits to the business overall. And we believe that, coupled with some of the new initiatives that we have along the lines of continuous improvement and some of the other long-term strategic investments we're making for the business, help give us comfort that we can hold on to those stronger margins with a 3% to 5% comp over the next few years.

Our next question is from Kelly Crago with Citi.

I was wondering if you could talk a little bit about category growth and break down how you're looking at growth by category in F '23. And then just talk about some of the opportunities you have in skin. I think at 17% of sales, you indexed lower than the beauty category overall. So just curious if you have any initiatives in place to expand. I think you talked about maybe eyeing some square footage in stores dedicated to skin care. So anything else from like a brand perspective? Any partnerships there? Would be helpful.

Great. Yes. Of course, our assortment is key to our success. One of the things that's really encouraging to us and again, gives us confidence moving forward is our performance has been broad-based. We're seeing double-digit growth across all major categories. And as we look forward into 2023, we see good healthy momentum in each of the categories. So we feel confident. And fundamentally, it's driven by a overarching beauty trend and understanding of the power and importance of beauty and how it connects to overall wellness and self-care. That elevated connection, the increased emotional connection and the importance that beauty plays is fueling the entire category. And that's what's helping drive each element in each individual subcategory within the total beauty space. So we feel clearly good about what 2022 looked like and have good optimism going forward. A lot of newness, a lot of activity across each of our major categories. We've got newness in makeup and in hair care and fragrance. We'll continue to drive innovation in things we're excited about. Skin care is -- as we mentioned in the script, was our fastest-growing category. We had double-digit growth in each category, but skin care led the way. And we feel like there's even more opportunity. We've launched new products like Drunk Elephant. We've had great growth with The Ordinary, Hero Cosmetics. We have in our newest store design that we started rolling out last year. We brought skin care together, and our other categories, makeup with skin care and a more prominent front-of-store location that allows our guests to engage across all price points in a really elevated, beautiful way. We're bringing new brands in. We just launched a partnership, an exclusive partnership with Beautycounter, which spans both color and skin care but has a very strong skin care presence. So we'll bring innovation across all parts of the business, and we see strong trends, most of which are rooted in wellness and overall health and self-care, which we think will drive each of the categories in a positive way going into 2023.

Our next question is from Simeon Gutman with Morgan Stanley.

I hope you can hear me, and well done on 2022. Scott, I may have missed this, but I heard modest deleverage on gross margin. I don't know if you gave any framework for that. But if this math is right, down 50 or so, it means SG&A dollars would be up around 8%. And if those are roughly right numbers, can you get us the building blocks to why SG&A is up that much? And then obviously, if gross is down even less, then the dollars are greater. It just seems like a big amount. I'm curious what the building blocks are.

Sure, Simeon. So yes, we expect operating margin is going to be leveraged in fiscal 2023 compared to last year driven by slight deleverage in gross margin, but the primary lever is going to be SG&A. That's where most of the pressure will come from during the year. We expect gross margin, again, modest deleverage there as we lap benefits and the timing of retail price increases during 2022, and we plan for a more normalized promotional environment overall. Those headwinds will probably be offset by growth in other revenue and continued fixed cost leverage. So on the SG&A side, it really comes down to continuing our efforts with our strategic investments, our strategic initiatives across the business. So again, last year, we got out of the gates on most all of those things, Project SOAR being the largest by far but Digital Store of the Future, UB Media. There are a number of other digital investments across the business, so really getting into the thick of it, I guess, I would say, during 2023, so that's the primary driver of it. But there's also inflationary pressures in store expenses. And of course, we referenced the wage pressure as well, and most of that falls through to our field teams, which is recognized in our SG&A line. So that's it by far. I'd say overall, we feel good about where we are. We've got a good plan. We think it's balanced in all ways and takes recognition of both the opportunities we have but also the risks that we see in 2023.

Our next question is from Oliver Chen with TD Cowen.

This is Jonna on for Oliver. Just curious what you're seeing in terms of the promotional environment broader in the industry and you talked about normalizing promo levels. But what are your strategies as you think about 2023?

Yes. We -- in the fourth quarter, we saw, we'd call it, rational promotional intensity. It was relatively flat to the previous year, still down versus 2019. And of course, as we -- I guess, we probably have said several times, Q4 is an elevated promotional quarter because of the role of holiday and the gifting and the competition that we have with all gifting, not just within beauty. So -- but nothing extraordinary in Q4. As we look into this fiscal year, we do see that continue to normalize. The step down of the improvements that we've made versus 2019 over the last couple of years will moderate somewhat. We won't continue the pace of improvement. We'll see a more normalized level of promotion, not back to previous pre-pandemic levels, but it is a competitive environment. There are added points of distribution, brands, bringing newness and innovation and competing. So we would anticipate, as I said, a somewhat normalized level of promotion but not in a rational level of promotion as we look going forward.

Our next question is from Dana Telsey with the Telsey Group.

Making sure you can hear me okay. As you think about the levels of strength that are out there and obviously was incorporated into the results, how are you looking at that for 2023? And what are you baking in? And then just on pricing, where the expectation to go to a more normalized pricing cadence, what do you see in that more normalized pricing cadence of increases? And does it differ by category?

Maybe I'll start, Dana. Like you're hearing from the broader retail industry, organized retail crime and shrink is a real issue out there, and we're not immune to what's happening. The concern is really twofold. Firstly, it's about safety and well-being of our associates and our guests. The news groups are coming in to the stores. It's really upsetting and can take an emotional toll on everyone that's involved. And secondly, as you mentioned, it's clearly a financial impact to our bottom line. We're continuing to invest in measures to not only deter but catch those who are conducting these activities. So the investments are around increasing our talent level, targeting our payroll in both our store and our loss prevention team, testing new technology, and then also installing new fixtures that can protect some of our key categories. Fragrance is the one we're really leaning into right now. What we're seeing is when we're investing in these locked cases in fragrance, we're seeing sales go up and shrink goes down. And our associates are very, very thankful for this because it's really deterring these bad actors from coming into our stores. We're going to be at 75% of the chain by the end of the year with these new fixtures. And then in regards to what the shrink impact is, it's about 70 basis points of headwinds that we had in 2022 to gross margin, and we're proactively taking these steps, as I mentioned before, to make sure that we understand these macro factors are going to continue to persist, but we're looking at only a modest benefit and shrink improvement in 2023.

And on the pricing side, we don't see any real differences by category. What we saw in 2022 was really broad-based across categories because the inflationary pressures for brands was -- really impacted all segments. So as we look forward, by normalize, we mean every year in beauty over time, there's a percentage of brands that go through just more standard price increases, and we anticipate kind of going back into that. And we think it will be across categories.

Our next question would be from Mark Altschwager with Baird.

So it sounds like things are going great with Target. Just any color you can provide on the incrementality of that new Target customer that may be returning to Ulta? And then separately, I know there's been some supply chain delays impacting your store openings, but just wondering if you could provide a broader update on how you view the store runway and perhaps how any of the learnings from the Target relationship are impacting the pace of openings over the next few years.

I'll go ahead and start. And what I would say is that we've got 3 areas of really concentrated efforts in our partnership with the Ulta Beauty and Target partnership. First is about deepening the guest engagement. It's really focusing on new guest acquisition, increasing the spend of the existing linked Circle and Ulta Beauty reward members in engaging that lapsed member. When we see the Ulta Beauty at Target member coming in and engaging with Ulta Beauty itself, what we're seeing is we like what their spend patterns look like. They're at our average spend, if not, even higher. So we like what we're seeing from the ecosystem. In regards to new store growth, I mean, listen, we've got competition out there always on in regards to where we're opening up new stores. So we are looking at this as part of the ecosystem where we actually would even have, in some locations, Ulta Beauty at Target in the same center as an Ulta Beauty store. And what we're seeing is that's really -- it's performing very nicely that the customer is shopping in both. So while there's competition out there, it's not necessarily playing into what our new store opening guidelines looks like. Maybe you want to weigh in on the supply chain with supplies for new stores.

Yes. So for our new store outlook, our long-term outlook, still 1,500 to 1,700 stores with roughly 800 Ulta Beauty at Target locations on top of that. So again, we're still very comfortable from everything we've seen, the interaction between, as Kecia just described, between the shop in shops and what we're doing in our stand-alone stores, are happy with the overall performance. Again, this year, there's just a shift or just smart business, we think, not chasing a number with new store openings and trying to be wise about how we plan that to make sure we keep good disciplines on site selection and the cost ramifications because these are long-term investments.

All right. Great. Well, thank you all for your interest and engagement today. And I want to close by thanking all 53,000 Ulta Beauty associates for delivering just excellent financial results in 2022 while executing against our strategic priorities. I am excited about the future of Ulta Beauty and believe firmly in our differentiated business model, strategic framework and talented and committed teams will continue to drive success and create significant shareholder value. We look forward to speaking to all of you again when we report results for the first quarter of fiscal 2023 on May 25. Have a good evening and talk to you all soon. Thanks.

Thank you. This will conclude today's conference. You may disconnect your lines at this time, and thank you for your participation.