News & Press
The Motley Fool: Ulta Beauty (ULTA) Q2 2020 Earnings Call Transcript
Prepared Remarks:
Operator
Greetings, and welcome to the Ulta Beauty second-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.
Kiley Rawlins -- Vice President, Investor Relations
Thank you, Diego. Good afternoon, and thank you for joining us today for our discussion of Ulta Beauty's results for the second 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.
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, August 27, 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. In today's comments, we will discuss certain non-GAAP financial measures, including adjusted diluted EPS, which has been presented to reflect our view of our ongoing operations by adjusting for store impairment charges and costs associated with the permanent closure of 19 stores. A reconciliation of these measures to the corresponding GAAP measures can be found in our earnings release, which is available on the Investor Relations section of our website at www.ulta.com. We'll begin this afternoon with prepared remarks from Mary and Scott.
Following our prepared comments, we'll open the call up for questions. [Operator instructions] 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 Mary. Mary?
Mary Dillon -- Chief Executive Officer
Thank you, Kylie, and good after afternoon, everyone. Let's start with an overview of where we are today. First, I will say that since the beginning of the pandemic, we've navigated through the crisis with our associate and guests at the center of every decision made. I'm really proud of how our teams have responded through this challenging period and I want to thank my leadership team and all of our Ulta Beauty associates, especially our store and distribution center associates for their agility, creativity and commitment to serving our guests and taking care of each other during this unprecedented period.
On our last earnings call, we were in the early stages of our reopening process. During the second order, we reopened stores for retail, expanded curbside capabilities to nearly all stores and began relaunching select services, all with a thoughtful consideration for the safety of our associates and guests, balanced with our desire to reopen quickly. By the end of June, more than 90% of our stores were open for retail. And by mid-July, our reopening process was complete.
Reflecting local regulations and guidance, the resumption of our service offerings has been on a more and more measured pace. Today, salon services are available in about 88% of stores and brow services are offered in about 85% of the fleet. We've not resumed skin or makeup services, but we're working closely with medical experts to ensure we have strong safety protocols in place when it's appropriate to resume these services. In this new normal, we're operating Ulta Beauty stores with new shop safe standards, limited physical capacity to accommodate social distancing and reduced operating hours.
To date, we have reactivated approximately 17,000 of our furloughed associates who are able to return to work. We're committed to maintaining a safe experience for our associates and our guests. As different markets manage fluctuating COVID-19 cases, we will continue to monitor guidance from government and health authorities, as well as local transmission levels to determine if we need to modify our shopping options or revert to closures in the near term. Now turning to our second-quarter results.
For the second quarter, total net sales were $1.2 billion, comp sales declined 26.7% and GAAP diluted EPS was $0.14 per share. Excluding the impact of impairment charges and costs associated with the previously announced store closures, adjusted diluted EPS was $0.73 per share. Comp sales improved significantly throughout the quarter from down 37% in early May, as we began reopening stores, to down only 10% in July after most of the stores have reopened. Sales trends have continued to improve, with comps down in the mid single-digit range for the first three weeks of August.
We're excited about the positive signals we're seeing from guests. However, we believe it will take some time to fully return to pre-COVID levels and expect demand will continue to be suppressed for the rest of the year given the likely ongoing disruptions, we'll see as we continue to live with the realities of COVID-19, whether the continuation of working from home, managing the complexities of educating our children, the ongoing need for social distancing, mask wearing and need to avoid large gatherings, or coping with near-term employment and economic uncertainties. Longer term, we're confident beauty will recover and thrive given the strong emotional connection consumers have with the category. We know beauty enthusiasts remain passionate in and about Beauty and Ulta Beauty.
We see it through the engagement in our social channels. And while the connection with Beauty has not diminished, how consumers engage with the category is changing. Health and safety concerns have led to fewer physical shopping trips but higher average ticket. And while we've seen greater adoption of online shopping, we're really encouraged to see guests coming back to stores as well.
From a channel perspective, e-commerce achieved record growth in the quarter, delivering sales growth in excess of 200%. Curbside pickup and buy online pickup in some store were very strong during the quarter, totaling about 20% of total e-commerce orders as guests embrace this limited touch beauty-to-go option. Despite reducing advertising and promotional activity during the quarter, we maintained our unaided awareness in the mid-50% range and increased our aided awareness to 94%, and are focused on driving meaningful connection with our guests through relevant content and inspirational brand messaging through our digital and social channels is having an impact. Our brand health is very strong with improvements in consideration, connection, integrity and advocacy, reflecting our response to the safety and social concerns of our guests.
Building our brand affinity during this tumultuous time will continue to pay dividends over the long term. Now turning to our performance by category. During the second quarter, we increased our market share across most major prestige beauty categories, and we saw an improving trend in our share of mass beauty as we reopened stores. Reflecting our pace reopening process, comp sales declined across all major categories for the full quarter.
As stores reopened, sales trends improved with skincare, fragrance, bath and PCA, delivering double-digit comp growth in July. The makeup category continues to be challenged due to shifts in consumer behavior and limited newness and innovation in the category. Even with these headwinds, some subcategories of makeup performed better than others including lashes, brow and eye. Sales and services decreased for the quarter, reflecting our measured reactivation of hair and brow services and limited capacity due to social distancing.
As sales -- as salons reopened, we saw significant increases in average ticket driven by pent-up demand, particularly for color and texture services. Importantly, we're seeing some strong double-digit growth in rebooking rates as our stylists deliver a safe and enjoyable experience and proactively focused on scheduling future visits. The number of active members in our ultimate rewards loyalty program decreased by 4% compared to the second quarter of last year to 31.9 million members. As a reminder, active members are members who have shopped with us at least once in the last 12 months.
During the quarter, we saw modest growth in our diamond and platinum membership levels, however, new member growth and retention rates were pressured due to store closures and lower levels of marketing and promotional activity. New member acquisitions through our digital channels continue to expand at healthy rates, and we continue to see previously in-store only members engage with us online with greater frequency. Omnichannel members are our most engaged and most productive members, historically spending 3 times more per year than store-only guests. So we're pleased to see that omnichannel guests grew to 21% of our members in the second quarter, nearly double the penetration in the same quarter last year.
And online-only members represented 7.5% of our members, 2.5 times the penetration last year. With our fleet open and trends improving, we're shifting our attention to strengthening the business in this new normal and expanding our market share in the second half of the year while also setting the foundation for profitable growth in 2021 and beyond. On the last earnings call, we introduced five strategic priorities where we're accelerating efforts to expand our market share gains and extend our competitive advantages. I'd like to give you an update on our progress in each of these areas.
But first, I'd like to share our perspective on racial equality, inclusion and diversity. As a priority and a value, this is not new for us. But certainly our focus has been sharpened and elevated by the recent awakening in our country to the forces of systemic racism and the important dialogue and actions that have resulted. At Ulta Beauty, diversity and inclusion have always been core values, an important part of who we are.
In the seven years I've been CEO, we have worked hard to represent the wonderful diversity of our country and how we show up as a brand and as a retailer in everything we do, from our marketing communications to our brand partnerships and our team. I'm proud that our board is 18% black and more than half are women. Our executive team is 13% black and 50% women. And our Ulta Beauty team overall includes 47% people of color and 92% of our associates are women.
That said, there is still much more to do. Today, more than ever, we're working to accelerate our leadership ship in this space. We're using our social channels to amplify black voices and beauty, and we're working to grow our roster of black-owned brands. We recognize this as a journey, but we're firmly committed to creating an inclusive experience for our guests, building a diverse representative workforce and serving as an authentic leader of diversity and inclusion in corporate America.
Let me now recap the progress we're making on our five strategic priorities. Our first priority is to expand our omnichannel business to more deeply connect with guests across channels and unlock the potential of our combined physical and digital footprint. This is not a new priority for us. We've been on this journey for several years, and we've made progress.
However, the pandemic has accelerated consumer engagement and desire for online and contactless shopping, and we believe our e-commerce penetration will remain meaningfully higher than pre-COVID-19 levels. Our customer insights and member data show many of our members prefer to transact in store where they can discover and interact with products and other beauty enthusiasts. But we also know our members engage online to research, learn and discover new products. As the pandemic has accelerated the adoption of these digital channels, we're expanding our investment in digital innovation with enhancements to the Ulta Beauty app and ulta.com to create more personalized and seamless shopping experiences.
We've also continued to enhance and expand our ability to provide members with personalized recommendations based on insights from our loyalty data. Today through the Ulta Beauty app and on ulta.com, we provide members with unique recommendation across a variety of experiences including new products, products based on category preferences, reminders for replenishment or handpicked items, all powered by our internal AI platform. We also recently launched app-only offers and exclusive ships to drive member app engagement, and we've introduced sponsored ads to allow our brand partners to influence specific product placements. We continue to drive innovation to make it easier for guests to shop with Ulta Beauty.
In July, we began rolling out our new service booking tool in the app and on ulta.com, which enables guests to easily book or reschedule salon, brow and other service appointments. More than 1,000 stores are actively using this new tool, and the feedback from guests and stylists has been great. We're also testing new notification processes to expedite the curbside pickup experience with the goal of having a more seamless digital experience in place for holiday. As we work to enhance the digital experience for guests, we've launched a guest service chatbot on ulta.com for ease, convenience and speed in resolving a basic guest questions.
And we launched a new guest service customer engagement platform that allows our call center team to seamlessly respond to guest needs across a variety of contact channels and across internal platforms. We continue to invest in our fulfillment capacity to support a larger e-commerce business. As discussed in the last earnings call, we pulled forward the opening of our Jacksonville fast fulfillment center, and we're on track to be operational to support higher levels of e-commerce demand this holiday season. In addition, we're expanding our ship-from-store program to 100 stores to increase shipping capacity and improve speed to guests, while also leveraging store labor and inventory.
Longer term, we'll continue to evaluate our infrastructure to determine how we can leverage our supply chain network and store footprint to support our growing omnichannel business. We're actively reviewing our network to identify opportunities to improve product flow from brand to guest while enhancing inventory productivity and guest service levels. Similarly, we're looking at our store footprint through an omnichannel lens to ensure we're strategically positioned to optimize share and profitability opportunities in every market. Moving on to our second strategic priority: We are reimagining guest experience and discovery.
We know guests still want the opportunity to test and play, but we also recognize the increased importance of safety. As we think about supporting and discovering the new channel, we're leveraging digital tools like GLAMlab, our virtual try-on tool. Since the COVID-19 crisis began, guest engagement with the tool has increased meaningfully, with product views in the second quarter increasing more than 150% from the first quarter. In addition in the second quarter, we expanded our virtual try-on capabilities to include hair color, false lashes and the benefit brow bar.
While these are newer capabilities, our guests are actively playing and engaging with these innovative tools. Longer term, we intend to support discovery trial in play by offering a combination of limited safe product testing with an expanded selection of single-use samples and seamless digital innovation like GLAMlab and 3-D printing. In addition, we're retooling our approach to in-store education, events and services and reimagining our fixtures and visual merchandising with a focus on safety, flexibility and cost effectiveness. We know human connection in the physical shopping experience are important to beauty enthusiasts, so we're rethinking the whole store experience from BOPIS and curbside to the flow and feel of the store and the role of the associate as a trusted guide.
Our vision is to continue to be the most loved destination and beauty by reimagining the end-to-end guest experience at Ulta Beauty, and we'll share more about these efforts on future calls. Turning now to our third area of strategic focus, to drive winning category strategies and engage and delight beauty enthusiasts with a curated, relevant and unique beauty assortment. Newness and price innovation drive beauty category growth. And while we've successfully launched newness online this year, many of our planned brand launches and expansions in stores have been necessarily delayed because of store closures.
With the reopening process complete, our store teams are working hard to deliver more exciting newness across all categories. Clean Beauty continues to be a growing area of interest among our guests. Last month, we announced the launch of Conscious Beauty at Ulta Beauty, an initiative intended to help guests find brands and products that reflect their personal values. Through this initiative, we will certify brands across five key pillars: Clean ingredients; cruelty-free; vegan; sustainable packaging; and positive impact.
Our goal is to give guests access to more choices, guide them along their journey and celebrate the brands and products that are aligned with this mission. Conscious Beauty at Ulta Beauty will launch this fall in all stores online@ulta.com and on our app. In conjunction with this launch, we established sustainable packaging goals with a pledge to ensure 50% of all packaging sold will be made from recycled or bio-sourced materials or will be recyclable or refillable by 2025. As part of this effort, we'll pilot a circular shopping experience with Loop, a reusable packaging pioneer in early '21.
COVID-19 has amplified many of the category trends we've experienced over the last year, most notably the emergence of self-care has fueled consumer interest in skin care and hair. We're accelerating our focus in these areas to drive market share growth. In skincare, our merchant teams have made terrific progress at expanding our assortment and improving the profitability of this important growth category. We continue to expand our brand portfolio across all price points including brands like Beekman 1802, L'Occitane and GLAMGLOW; and expanding brands like the ordinary Urban Skin Rx and e.l.f.
skin care. In addition, we're highlighting a number of new skin care brands from our Sparked platform, including kinship, UpCircle and Gift on Routes. To support these launches, we're dedicating more space for skincare in prominent areas of the sales floor and on ulta.com. And next year, we plan to implement more holistic changes to the layout in select new stores, which allocates more prominence and easy to navigate space for skin, more intuitive adjacencies and spaces in the front of the stores for curated events.
In addition to product newness, we're investing in digital innovation to help our guests identify and address skin care concerns with the launch of a new skin analysis tool in the Ulta Beauty app. This new skin analysis tool uses augmented reality technology and AI to assess skin care needs and offer personalized recommendations and skin care tip. In hair, we're expanding our focus on texture and color with the introduction of brands like Arctic Fox, Kreyol Essence, and the expansion of brands like Pattern and Curlsmith. To support these launches, we've increased our storytelling through our marketing vehicles, elevated the visibility of our stylists via social media and relaunched our salon takeovers to increase this visibility to key brands.
Makeup remains our largest category and we remain confident in the long-term opportunity. But changes in consumer behavior, a reduction in wearing occasions and events and the delay of new product innovation coming to market will likely continue to challenge growth in the category in the near term. Makeup is still an important, profitable category for us, and we're prioritizing newness in high-growth areas including Laura Mercier, Pixi and the launch -- the newly launched KVD Vegan Beauty, while also working to improve the space productivity of prestige color and prestige skin categories through recent planogram realignment. Moving on to our fourth strategic priority.
We'll continue to drive innovation in the ultimate rewards program in meaningful ways, personalizing experience across by touch points and creating stronger connections with our members. We have a large differentiated loyalty program with strong member engagement. Recent store closures and disruptions will constrain member growth this year, but we believe in the long-term opportunity to expand our loyalty program. To increase membership, we're focused on converting new members, both online and in-store and reengaging with members we haven't seen in a while.
As consumers shift increasingly to online shopping, we're seeing more nonmembers engaging with us online. Since the pandemic began, we've seen more than 2 million online transactions from nonmembers, more than 4 times the number over the same period a year ago. To increase our conversion of these online guests, we're enhancing our communications on ulta.com because we can reach them through email, and we're proactively communicating and promoting the value of ultimate rewards with these guests. To reenergize our in-store efforts, we provided additional associate training during store closures.
And in stores that have reopened, we've seen in-store member acquisition rates rebound at higher levels than pre-COVID. With the reopening process complete, we're actively implementing reengagement strategy starting with member appreciation months in August, where we celebrated our members, welcome them back to Ulta Beauty with new bonus points offers, incentives for app downloads and exclusive app offers. In addition to communicating directly with our members, we've highlighted these offers across all of our digital channels, including ulta.com, to raise visibility and awareness of our ultimate rewards program. In addition, we're using our customer insights and predictive tools to create relevant, real-time anticipatory interactions across channels to reactivate and engage targeted membership segments and to drive greater loyalty.
And finally, our fifth area of focus is to drive strategic, holistic cost structure optimization. As we've discussed previously, we've made progress through our efficiency for growth, or EFG efforts, to improve our merchandising effectiveness and enhance core processes across our real estate and supply chain operations. While we recognize the rapid growth of e-commerce and increasing external cost pressures combined with the need to build critical capabilities to support our growth strategies, all require us to evolve our thinking about how we operate. So in addition to the near-term actions we're taking to stabilize and recover the business at the same time, we're also looking at opportunities to optimize our cost structure.
A few examples include store optimization. We have a strong profitable store fleet. And as with any portfolio, there's always top and bottom performers. Last month, we announced our decision to permanently close 19 stores this year to strengthen our overall portfolio.
In addition, we slowed new store growth to manage operational risk this year. The role of physical retail and beauty remains crucial to the shopping experience. So while we know the role of e-commerce will continue to grow, we also continue to believe we can ultimately operate between 1,500 to 1,700 stores in the U.S. As we plan growth beyond this year, we will seek to balance the opportunity for lower rents with the opportunity to upgrade existing locations.
Second example, promotional efficiency. We continue to refine and strengthen our promotional strategies. While we will continue to lead into strategic events to drive market share, we're moderating or eliminating less profitable or less strategic promotions. For example this summer, we eliminated our Jumbo Love leader event, replacing it with a more focused promotional event for haircare.
We limited the number of participating brands, reduced the average discount rate and eliminated additional marketing coupons. These changes delivered significantly more profit despite negatively impacting the comp in the hair category, and our core business was stronger during and after the event. Another example of store labor model, we're implementing changes to our store management structure. This fall, we will eliminate the store manager and prestige manager roles and create a new single service manager role responsible for services, events and prestige retail.
This change will create a stronger linkage between services and products and provide our guests with better customer service and expertise. It will also result in a more cost-efficient labor store model -- store-labor model. Now one additional comment about our labor model. In April, we furloughed 33,000 associates, and to date, we brought back about 17,000 associates.
Given our reduced operating hours, we know not all of our part-time associates will be able to work the shifts available given personal needs and availability. We also want to be realistic about capacity constraints, service limitations and the likelihood that demand will take time to recover. As such, not all of our furloughed associates will likely return to Ulta Beauty this year. These are a few examples of steps we're taking to adjust our cost structure for the new environment.
We are also looking at additional opportunities across the enterprise to optimize our cost structure while also building new capabilities to support our competitive advantage and our future growth. So in closing, we believe the near-term environment will continue to be dynamic, but I'm confident our team can successfully navigate the challenges. And longer term, I remain optimistic about the growth opportunity for the beauty category and for Ulta Beauty. We have a strong and differentiated business model with diversity across categories and price points and outstanding service offerings.
We're actively evolving and investing to extend our brand leadership, and I remain confident that Ulta Beauty will continue to innovate and lead, capture market share and drive profitable growth as we continue to be the most admired beauty retailer. And now I'll turn the call over to Scott for a discussion of the financial results. Scott?
