Ulta Beauty's (ULTA) CEO Mary Dillon on Q1 2016 Results - Earnings Call Transcript

| About: Ulta Salon, (ULTA)

Ulta Beauty, Inc. (NASDAQ:ULTA)

Q1 2016 Earnings Conference Call

May 26, 2016 05:00 PM ET

Executives

Laurel Lefebvre - IR

Mary Dillon - CEO

Scott Settersten - CFO

Dave Kimbell - Chief Merchandising and Marketing Officer

Analysts

Chris Horvers - JPMorgan

Joe Altobello - Raymond James

Brian Tunick - Royal Bank of Canada

Jason Gere - KeyBanc Capital Markets

Ed Birtel - Wells Fargo

Mark Alswager - Robert W. Baird

Simeon Gutman - Morgan Stanley

Daniel Hofkin - William Blair

Adrienne Yih - Wolfe Research

Simeon Siegel - Nomura Securities

Matthew Fassler - Goldman Sachs

Courtney Willson - Cowen and Company

Rupesh Parikh - Oppenheimer

Steph Wissink - Piper Jaffray

Mike Baker - Deutsche Bank

Omar Saad - Evercore ISI

Operator

Greetings and welcome to the Ulta Beauty First Quarter 2016 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Laurel Lefebvre. Thank you, you may begin.

Laurel Lefebvre

Thank you. Good afternoon and thanks for joining us for Ulta Beauty's first quarter 2016 conference call. Hosting our call are Mary Dillon, Chief Executive Officer and Scott Settersten, Chief Financial Officer. Also joining us is Dave Kimbell, Chief Merchandising and Marketing Officer.

Before we begin, I would like to remind you of the company's Safe Harbor language. The statements contained in this conference call which are not historical fact 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.

During the Q&A session, we respectfully request that you please ask just one question to allow us to have time to respond to as many of you as possible during the hour scheduled for this call.

I will now turn it over to Mary.

Mary Dillon

Thank you Laurel. Good afternoon everyone. 2016 is off to a phenomenal start with excellent top and bottom line growth in our first quarter. There are several factors coming together to drive the momentum of our business. Healthy consumer demand in the beauty category, also Beauty's unique and relevant format and positioning and effective collaboration across the enterprise which is driving strong execution of our growth strategy.

To recap the first quarter results. We grew the top line 23.7% and delivered 15.2% comps on top of an 11.4% comp in the first quarter of 2015. This is our best comp growth since 2006. Comp sales were driven primarily by traffic while ticket also saw healthy increases. Ongoing strength in cosmetics both mass and prestige is the largest contributor to our growth. But other major categories are delivering robust comps as well. E-commerce continues to see rapid sales growth. The salon's top line was solid even while we reduced the frequency of our promotions.

So with overall revenue growth significantly better than planned coupled with strong execution of our strategic imperatives we delivered Earnings per Share growth of almost 40% well above our expectations. I'd like to call out some more specific details on the primary contributors for our performance during the quarter. Growth in our loyalty program continues to fuel our business results. Ultimate rewards membership grew to 19.4 million active members up 25% year-over-year. This continued acceleration and sign ups reflects our store associates' effort to convert new members and strong traffic driven in part by our advertising campaign. The number of members shopping increased as well as their average sales per ticket, per visit.

Loyalty member retention has increased steadily each quarter and is up almost 200 basis points compared to last year. Using our loyalty program points as currency our CRM team is working closely with our merchants and our brand partners to continue developing targeted and relevant campaigns that are increasingly resonating with our guests. Our marketing mix continues to evolve with great balance across television, radio, digital and social media as well as our traditional print vehicle.

In March we ran television and radio ads for our signature 21 days of beauty event. We complemented this with an aggressive online video campaign as well as extensions into online radio with Spotify and Pandora. We elevated our social media and improved efforts anchored on our spring trends, we surrounded our consumer with current and relevant content online and in store as well as activation at high profile events including the Coachella Music Festival.

Our comprehensive campaign for Mother’s Day, which was called Pamper Her with Pretty, was designed to build awareness of our brand, deepen our connection with our guest and provide a platform to make Ulta Beauty a top of mind destination for gift giving especially in Fragrance. In addition to the return of the mother’s day gift guide and fragrance finder, we offered more gift at purchase and salon [ph] promotions in conjunctions with many exciting new fragrance launches. The mother’s day activities also included a social media campaign with the launch of the special video entitled, Mom The Original Beauty Icon, which invited guests to celebrate mom by sharing what makes their own mom beauty iconic through post on Facebook, Twitter or Instragram. This campaign was viewed 4.5 million times. We believe all these marketing efforts contributed to our strong traffic growth during this quarter.

Now to update on merchandising, the trends from last year continued to drive the business, with Urban Decay, It Cosmetics, Nyx, Anastasia, Too Faced, Tarte, Clinique, Lancôme, Benefit and the Ulta Beauty Collection among the best performing brands for the quarter. The pipeline of Muncie [ph] really continuing to be quite compelling, translating into strong growth in both mass and prestige cosmetics. During the quarter we launched Honest Beauty in 250 stores, rolled out our exclusive Fiona Stiles line in 500 stores and added Buxom cosmetics all doors.

Anastasia at Beverly Hills and it’s [indiscernible] launched new product lines, Clarence was rolled out to additional doors, we introduced Tarte’s Double Duty Beauty collection, which is exclusive to Ulta Beauty and we rolled out Vevo Mascara to all stores. More recently we announced the addition on Beauty’s new hair care products and we began to offer NUXE, a French skin care brand on our website. We also rolled out an assortment of the iconic Drybar hair products and tools in hundreds of stores.

We’re enhancing our Ulta beauty collection through a series of initiatives. We’ve been updating and elevating the formulas and packaging as well as the in store graphics, while improving speed to market in on trend product. Trends categories include countering, Strobing and multi-dimensional makeup and we’ve also added an end-cap featuring new spring hits. We’ve produced compelling training videos and enhanced our sampling program. While we’ve made great progress, we’re just getting started with our efforts to evolve Ulta Beauty collections to continue to represent our brand’s personality.

Turning to services, our Salon sales grows 14.7% and comp 7.7% with strength in blow outs, hair treatments and make up services. We view the services business as a growth opportunity and we’re very focused on our strategy to convert more of our loyalty members to discover our high quality services offering. The Benefit Brow Bar continued its strong performance with brow services now in 738 stores and we’re proud to perform more brow services than anyone else in the U.S.

Moving on to stores, we opened 13 stores and closed to one in the first quarter, well on our way to executing our 2016 program of 100 net new stores. We ended the quarter with 886 stores. New store productivity remains very strong with all vantages of stores benefiting from the successful execution of our strategic alternatives. Our growth and development team is now in the process of performing a detailed analysis to refresh out estimates of the store potential in the U.S. This analysis includes an updated assessment of the potentials for smaller and urban markets as well as how our small store format will fit into the future store mix. Sharing the outcome of this work is expected to be one of the topics we planned to cover at our next Analyst Day this fall. A small other update from our long term strategic plan that we’ll now in the process of refreshing as well.

Moving on to ulta.com, our e-commerce growth was very strong up 38.8% and contributing a 130 basis point to our total company comp, that mix of professional hair care and prestige cosmetics continues to grow helping our e-commerce margin rate. We’re also adding brands and products that are available only online such as J.Cat Beauty, StriVectin Hair Care, Ico [ph] and ManCave among others. Our ulta.com guests remain very interested in our Beauty Bags sampling programs and Beauty Breaks limited time promotions. Mobile is growing rapidly, now representing more than 60% of site traffic. We released new versions of our iPhone and Android apps in the first quarter. The iPhone app was featured on the apple store home page, moving up to a 5 star rating, this new version now includes features such as ApplyPay check out, enhance features displaying ultimate reward information and get quick purchase details on product pages. Both app versions have been a big hit with users, garnering enthusiastic user reviews and an increase in downloads now reaching well over 2 million between the two.

Finally, our supply teams and IT teams have done a great job, managing the ramp up of the Greenwood distribution sender, while preparing to open our new distribution center in Dallas, which began to accept inbound inventory just last week. The Greenwood BC is now serving about 200 stores and fulfilling roughly 40% of our e-commerce orders. We’re on track to end the year delivering to approximately 240 stores from Greenwood. Our Dallas facility, a carbon copy of our Greenwood building is right on track to begin outbound track shipment in July as planned. We expect to ramp up this newest BC to several 125 stores by holiday. As expected the Greenwood distribution center and systems are producing efficiencies and cost per unit shift.

On the system side, we have good progress report here as well, Swiss our forecasting and replenishment tool has rolled out through additional categories including skincare and hair-care and rest of categories will be implemented throughout the remainder of the year. I'm particularly proud as the supply chain team and IT teams performance and deep collaboration and their balancing and execution of several major initiatives and projects while doing an excellent job improving in stocks in our stores to support the higher than expected sale trend.

So now I'll turn over to Scott to discuss the drivers of our first quarter result and outlook for the second quarter and the year.

Scott Settersten

Thanks, Mary. Good afternoon, everyone. Starting with the income statement, similar to previous quarters, our top line was driven by a very healthy 15.2% comp and strong new store productivity. The total company comp was composed of 11% transaction growth and 4.2% average ticket growth. The retail comp of 14.3% was made up of 10.5% traffic and 3.8% ticket. The Salon business comped 7.7% and Salon growth was all ticket based, e-commerce growth was almost entirely driven by traffic with modest ticket growth.

Gross profit increased 150 basis points, the improvement was driven by strong leverage on store rent and occupancy expenses as well as by healthy product margin expansion, offset by planned supply chain deleverage related to investments in new distribution centers and core merchandizing systems. Strong product margin performance was driven in part by significant margin improvement in mass departments due to changes in our promotional offers and mix of higher margin brands including the Ulta Beauty collection. We continue to carefully pullback on product discounting while placing more reliance on loyalty in our CRM tool kit.

Moving on to SG&A expenses, we deleveraged by 20 basis points, primarily related to investments in headcount and consulting to support our growth initiatives. Turning to the balance sheet and cash flow, inventories were up 14.5% on a per store basis, slightly below the comp rate. This growth was driven by investments in inventory to keep upward better than expected top line growth, new brand addition and the accelerated expansion of prestige boutiques.

In stock levels have improved year-over-year, but we still expect to make more progress going forward as we begin to reap the benefits of our new distribution centers and related systems. Capital expenditures were 54.3 million in the quarter, driven by new store openings, merchandize fixtures for the rollout of prestige brand boutiques and supply chain in system investments. We ended the quarter with 369 million in cash and short-term investments. We repurchased 158,000 shares at a cost of 27 million under our 10b5-1 plan. As you know, we entered into a $200 million ASR agreement in March which settled just last week.

During the first quarter, we received 80% of the shares we expected to receive on settlement or about 852,000 shares, a reduction in shares outstanding year-over-year contributed approximately $0.03 of earnings per share growth in the quarter, including the entire 200 million paid as part of the ASR agreement approximately 219 million remained available under the 425 million share repurchase program announced in March.

Turning now to guidance for the second quarter. We anticipate sales to be in the range of 1.041 billion to 1.058 billion compared to 877 million last year. We expect comparable sales to increase in the range of 11% to 13% versus 10.1% last year. Online sales growth is expected to be in the 40% range. We planned to open about 25 stores in Q2 compared to 20 stores during the same period last year and preopening expense for the quarter is expected to be about 4.6 million.

Earnings per share are expected to be in the range of $1.32 to $1.37, versus the $1.15 for Q2 of 2015. Our supply chain investments including our new Dallas BC are expected to weigh on margin the most in the second and third quarter and we expect earnings per share growth to be higher in the fourth quarter this year. We anticipate a tax rate of 37.6% and fully diluted share count of approximately 63 million.

In terms of our outlook for the full year 2016, we are raising our guidance for comparable sales and earnings per share growth to reflect the strong start to the year. Total company comps are now expected to be approximately 10% to 12%, compared to our prior guidance of 8% to 10%. We now expect to growth earnings per share in the low 20 percentage range versus our prior guidance of 18% to 20% growth. Operating margins are now expected to leverage slightly. The other elements of our guidance for the year are unchanged. We are on track to open approximately 100 stores, all planned to be on 10,000 square foot prototype. We expect to open about 25 stores in Q2, 50 stores in Q3 and 15 stores in Q4. We are also planning 12 major remodels into the locations. We plan to grow ecommerce approximately 40%. We expect CapEx to be above 390 million driven by slightly higher capital for new store and the roll out of boutiques.

As a reminder we planned about 80 million for boutique expansion and updates, with over 500 Clinique, Lancôme, and Benefit boutiques, as well as updates to our fragrance fixtures and the Ulta Beauty collection. We anticipate that share repurchase activity under our $425 million authorization will contribute about 2 percentage points of earnings per share as well.

I'll now turn the call over to our conference call host for the Q&A session. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Chris Horvers of JPMorgan. Please state your question.

Christopher Horvers

Was just curious, a lots of retailers talk about an uneven cadence during the quarter. Some pulled forward to manage early in the quarter some weather issues. Was curious if you had a view on how that impacted your business during the quarter?

Mary Dillon

Thank you, Chris. First of all I would say that what we saw was pretty consistent across the quarter in terms of comps, not on lot of variations, where we did see variation it was maybe cadence of promotions that we had planned. So I think at the end of day beauty as a category is great price to be as and it's a healthy category and it's fairly we think insulated from some of the factors that are effecting maybe retailers broadly, in particular our -- what we bring to the marketplace in terms of the differentiated proposition of categories, various price points, products and services we think makes us pretty insulated right now and we’re pretty proud of the results.

Christopher Horvers

Understood and then as a follow up. Can you just talk about the performance the comp performance in your mature store base and how that impacts your view on the potential store penetration over the long-term? Thank you.

Scott Settersten

Again, our store model reflects mature stores five years and older kind of moderating comps down to mid or lower single digit kind of comps over the long-term. With the 50 [ph] comp in the total as you can well imagine Chris, I mean the existing store base, very healthy comps overall, very productive on the SLV [ph] contribution line, which is a huge contributor to the profit increases that we saw year-over-year.

As we look to the future I mean that's part of the mix here, we’re adding the boutiques that's why we’re being so aggressive with the CapEx this year to get those installed. We believe that along with all the other great purchase of pipeline that we have coming aboard, loyalty on top of that after that, some of the marketing and advertising kind of initiatives we have underweight. We think all of those things together will come together to drive really strong productivity in that existing stores.

Operator

Our next question comes from Joe Altobello with Raymond James. Please state your question.

Joseph Altobello

I guess the first question on the ultimate awards program, obviously hugely successful for you guys, well north of 19 million. First, how high can that number get, I guess you guys have, I'm sure you've done some demographic analysis in terms of the potential size of that. And secondly, if you could remind us what percentage of your sales comes from the loyalty club members?

Mary Dillon

Thank you, Joe. Well first obviously we've said as well over 80%. Over 80% of our sales are driven by the loyalty program members. We are really pleased with how that's working for our business, it's really one of the key drivers of the results that we’re seeing as the acceleration in members entering this program really proud about our store teams been able to convert new traffic and new members into the store into the program. How high is up, I mean certainly we asked ourselves that question as well as, as we think about our kind of launch review of the business, it's going to be obviously a very key driver for us as we move forward and if you step way back and look at it, our share of the market in Beauty in the U.S. is still only a 3% or so of the total market right. So we know there is a lot of growth ahead and we are very focused on understanding kind of what it is about the loyalty program that drives the appeal and continue to make sure that we find tune it going forward. So we think there is more growth there certainly and I think our results are showing that.

Joseph Altobello

Okay, understood. And then, just moving on, I guess, one for Scott. The guide for Q2, you mentioned looks like earnings per share down sequentially. That's seasonally fairly unusual. You mentioned some the costs related to Dallas hitting you in Q2 and Q3 and you had the Greenwood facility around the same time last year and yet you had sequential earnings improvement in Q2. So I'm curious is Dallas bigger in terms of the impact or is the timing a little bit moved forward relative to Greenwood? Thanks.

Scott Settersten

No, I'd say it's more along the lines of a couple of new factors this year. So again I think we've talked about the DCs and the lapping effect there year-over-year. So not a huge change there within the sequence. We do have accelerated depreciation from this boutique acceleration that we talked about. So again, you guys can't really model that very accurately, but that's a little bit lumpy and it’s kind of first half of the year kind of weighted I would say. And then we also had some store payroll implications related to the same boutique strategy right.

So I think we explained back in the fourth quarter it takes a lot for those boutiques to ramp up. So they’re being installed now and we’ve got some payroll investment there in the early days, which again over time moderates and plays very, but it’s far from a profitability standpoint. So it's really the payroll piece of that is some of the depreciation that's really there that's causing that.

Operator

Our next question comes from Brian Tunick of Royal Bank of Canada. Please state your question.

Brian Tunick

So excited here, you guys are having an Analyst Day in the fall, sounds like for the footage and the smaller storage you’ll be updating us on. But I guess, I was curious about the mid-teen operating margin that you’ve been talking about. I guess, you look at this double-digit comps you’ve been running, I guess the question is can you get to mid-teen operating margin target faster or is there anything impairing you from getting to a high-teens operating margin over the next couple of years, so curious on that.

And from a market share perspective, when we all look at the depreciation store numbers, they’ve been putting up the last couple of quarters. Can you maybe talk how that effects the brand conversations? So are there still major hold outs regarding brands that you’d like to be offering I guess there might be still looking at the department stores as one of the key channels of distribution? Thanks very much.

Mary Dillon

Okay thank you, Brian. On your first question, while I'm not going to provide guidance today, nice try though, but that is a really fair question. I'd say this, we're very confident, first of all we're thrilled with the progress of the business. I think that should be pretty clear and confident that we understand the driver and we see plenty of growth ahead. We're confident in the mid-teen operating margin target that we've stated previously. I think what you'll see is we're looking to refresh our view, but feel good about where we are. I wouldn't expect to change our outlook materially.

We believe we can continue to drive top line and invest in the business for the long term as well as drive efficiencies with the investments that we're making today and while we're thrilled about the top line momentum I think all of us would say consumer expectations in the future will continue to evolve, so we need to be prepared to be able to respond in scenarios, lead instance scenarios, so that makes us cautious about getting more aggressive about the operating margin target.

Dave Kimbell

Great and Brian, its Dave Kimbell. On your second question around adding new brands in this environment. I'd start with saying that we're really focused on growing our business with our existing brands and that's working very well for us and we've got a great portfolio of brands across all categories and that's been very successful and will continue to drive success for us going forward. Having said that, we may have mentioned some of the brands that we've added just in the last quarter. You've heard that we've added well over 100 over the last several years, so we're always looking at new brands and as our growth continues, I think we're an attractive partner for brands. So we'll continue to be having discussions and exploring new opportunities, but right now really focused on continuing to drive behind the success that we've been having.

Operator

Our next question comes from Jason Gere with KeyBanc Capital Markets. Please state your question.

Jason Gere

I guess I wanted to go back to talking about the OmniChannel customer and I know you talked about ecom was up almost 40%, a lot of that was traffic driven. So I was wondering as you're learning more with the loyalty card and CRM and the specialization, how are you getting that transaction size of that OmniChannel customer to kind of increase and any updated outlook in terms of how big that customer could actually become as a part of your subscriber base? Thanks.

Mary Dillon

Well I'll start and maybe David if there is any additional color you want to add. What’s wrong with the growth that we're seeing in ecommerce, of course it's still pretty small percentage of our sales, just under 6%. And what's interesting is that as we look at the OmniChannel shopper multi-channel shopper, we love that guest because they are really our best guest in many ways. So the person who is shopping both in store and online is driving two and a half times the sales than somebody who’s only shopping in the store.

So what that says to us is it's quite incremental. There's not a lot of replenishment type activity happening. We’ve talked about this, we’ve focused on this Beauty enthusiast who’s really focused on trend and newness and actually it’s when we get her e-mail address and the ability to give her e-mail, spark her imagination and curiosity about other products that maybe she didn't see in the store seems to be driving, whether it’s that or beauty breaks or samples they are really responding. So over time, we certainly see that expanding in terms of percentage of sales. It's a small percentage of our sales today is from the multi-channel shopper, it’s a very healthy place for us to continue to look at driving growth.

Dave Kimbell

The only thing I'd add to that is what we see with the OmniChannel guest most of them pretty quickly if they come in through ecommerce pretty quickly move into retail and that's what we would like to see. We want her experiencing the entire Ulta Beauty experience both online and in store. We're investing heavily in various both enablers of OmniChannel around our inventory and understanding of our guest as well as guest facing experiences that we talked in the past, we've got beacons in our stores now that allow us to -- will allow us over time to identify our guests, we've got same day shipping in partnership with Google. Mary mentioned some of the App improvements which will make it easier for her to buy anywhere and anytime she wants. So it’s a big focus for us and we see lots of upside going forward.

Jason Gere

Okay and then the other one I was going to squeeze in so you talk about Greenwood and Dallas in terms of the DCs. Given the last few years you've made key investments and obviously you guys have been doing a terrific job in terms of top line and bottom line. How does it make you think about the older DCs like as you continue to really drive strong growth now? Is now the time to maybe think about retrofitting some of the older DCs that eventually you might have to do just too obviously keep the best-in-class. So I was just wondering if that's something that you guys internally talk about or you're happy the way things are with the older DCs and down the road maybe you'll deal with it.

Scott Settersten

Uh, no. I mean its part of the whole supply network. It's part of our -- you know we've got a roadmap built right five years into the future showing us different things that we're going to address at different points in time so yes, you're right on Jason, we're thinking about the rest of the network and those buildings. We'd like to have everyone on one platform right, best in class kind of platform at one point in time, so those decisions are a little bit yet out in front of us, but I would say definitely that would be a focus of ours over the long term.

Operator

Our next question comes from Ed Birtel with Wells Fargo, please state your question.

Ed Birtel

Scott just for you I guess. I'm sorry if I missed this, but on the gross margin very impressive expansion this quarter. Can you just elaborate how much of that was merchandise -- core merchandise margin versus fixed cost leverage and then of the 4% pricing in the quarter maybe just how do we think about that in terms of product mix and then just higher like-for-like pricing due to the pull back on couponing?

Scott Settersten

Well let me take a crack at that. So gross margin overall, we aren't going to break down all of the basis points pluses and minuses here, puts and takes, but just directionally talking, I know sometimes people may not be clear to this, it’s a multi-variable equation that we're solving for here at Ulta when we talk about promotions. So there is a couple of major buckets I would call them, merchant discounts, right. So what are the offers in the magazines that we distribute or the tabs that we put in the newspapers, whether it's two or one or is it buy one get one 50% off or a GWP with it, so that's one bucket. Then there is the Marketing discount bucket, which is the coupon 3.50 off 10, 20% off one item, 20% off the entire order kind of thing, with the postcard offers that we've described in the past, and then there is the loyalty. So that would be the third leg of the stool.

So again we’ve approached this very carefully and we're testing and learning constantly, but if we look at the First Quarter for example, we talked about the mass area, so mass has been generating really healthy comps for us. We've kind of learned over the course of the last year that the merchandise discounts don't need to be as broad, maybe as what we've had done in the past. So this year we kind of narrowed it down instead of, buy two get one across the whole brand, maybe it's just a narrower set of skews. So that would be one example of something that we executed very well in the First Quarter.

And then there's just another set of other, just what I'd call smart merchandising marketing decisions. Continuing to tweak our coupon offers and the circulation that we have on our marketing offers both beauty collection, private label, super high margin part of our business was especially strong in the first quarter this year, ecommerce we called out again. Product mix there being very helpful to us, so we've got a lot of good things happening in the merc margin bucket I would say. And then you layer on top of that a 15 comp that helps a lot on the fixed store cost line, we called that out in our comments and then we had some offset, some deleverage on the supply chain which was planned and which was expected.

So that's kind of it, I guess I'd say in a nutshell, on the explanation of the variation year-over-year when we think about the comp break out and the ticket bifurcation, units were pretty flat year-over-year, so most of it was on average selling price.

Operator

Our next question comes from Mark Alswager with Robert W. Baird, please state your question.

Mark Alswager

Scott thanks for all of that detail on gross margin. I guess I wanted to follow-up quickly on SG&A. Spending was up 25% in the quarter which is presumably more than you initially planned when you built your -- planned for the quarter and for the year. So I guess can you break out just how much of that was pull forward and some of the accelerated depreciation you referred to that would potentially allow greater leverage later in the year and then to the extent you've had more dollars to spend given the top line growth, what are the areas where you've chosen to really intensify investment?

Scott Settersten

So we're really trying to stay focused and not break it out in too much detail the variations and I know you guys would love to have that but again, directionally the store payroll, there's some investment as we ramp up the boutiques and there was accelerated depreciation in the first quarter and it's going to be heavy again in the Second Quarter as we look compare against last year. I would say there's some cost of doing business things that in there.

You guys read all these stories about credit card fraud and the whole EMV thing that all of retail is kind of struggling with. So we aren't immune to that, we had some of that in the first quarter. Now lucky for us our EMV rollout is complete now. So we've mitigated that risk as we looked out across the rest of the year. I would also say that we're -- like we've done in the past, we look to optimize the business.

So there's some additional investments I would call in the short-term around some test and learn things, around levers, future levers to drive growth that we think we can move up here and accelerate a little bit into 2016, again those aren't huge but there's a little bit here and a little bit there. So again we're doing it in a very disciplined manner making sure we have the right balance for both short-term and long term financial results of the business.

Operator

Our next question comes from Simeon Gutman with Morgan Stanley. Please state your question.

Simeon Gutman

Mary you mentioned 3% you said market share. I don't know if that was including or excluding services, but my question is do you have a sense of the share of the beauty spend among your best customers, what percent of their wallet are you getting and then based on what you carry, I know this is a moving target because that will change over time, but based on what you carry how much of that wallet is attainable?

Mary Dillon

Well the 3% of that I mentioned is if you take all of beauty product and services in the US, and that very macro view of it which is kind of where we start. And then if you look at really just the dollars that are spent even among the target that we focus on, the beauty enthusiast [indiscernible] on a budget certainly is higher, we have 5% of their share of wallet.

Of the people that are in our loyalty program, clearly it’s higher than that. But I'll tell you what there's a lot of upside to that as well. We believe even we look at our best guest, when you step back there are 50,000 places you can buy beauty in the U.S. right? So between grocery, mass drug, department store, specialty retailers, online there's a lot of places you could buy beauty. So it’s a lot of sources of volume and share gain. That whole idea for us and our guests seem to be really resonating with this is the more she spends with us, the loyalty program right, the more benefit she gets by consolidating for spend at Ultra.

So we have not tapped that out either in terms of the number of repellant -- the addressable market in terms of folks that could be our loyalty program as well as -- we’ll never have the 100% of anybody’s wallet I think, that’s kind of in any category think about grocery for example, people buy food in two or three or four different types of retail outlets. It’s probably always going to be a little bit like that with beauty, but we feel good about where it is and there is still a lot of potential for that growth.

Operator

Our next question comes from Daniel Hofkin with William Blair. Please state your question.

Daniel H. Hofkin

Two quick questions, one on the comp, further uptick. Anything you could point to in terms of brand marketing et cetera. That led to the further acceleration in the First Quarter? Second question is just on the labor cost outlook, what's going on in the retail broadly and some of the recent legislation or Department of Labor rulings, any impact on you guys for the next couple of years? Thanks.

Mary Dillon

Thank you, Dan. In terms of the drivers honestly it's really a combination of a lot of factors really you could point most directly to the acceleration and the growth in the number file. So it was a 25% increase in the members and ULTAmate reward program that clearly we can point to as a major driver. So more guests in the program and guests spending more often, reactivation of guests, better retention.

Now that doesn't happen on accident, so it's really a combination of I would say anything we're doing I mentioned at the top, it's great to be in a category that's growing in beauty. We believe what we have is a very compelling proposition relative to a large segment of the market right? So what we offer them is relevant and as we look out into the future of the future consumer and Millenials even more so relevant, but then in addition we have to be driving awareness and traffic. So I feel great about what I would call our demand creation tools. So we wouldn't have an increase in the numbers if we didn't have new people coming to Ulta and the traffic shows that.

Then in addition of course it's about what we sell in the store and the service that we give and the services and the guest experience. So I talked a lot about the merchandise assortment, so I feel good about we're really doing business smartly with our brand partners, so I guess in total it's a lot of things coming together effectively for us to drive members into loyalty program and have a relative proposition to drive their growth.

On the second part you asked about was yes there's a lot obviously happening as it relates to wages and what not in particular, there is an overtime pay, a thing that just passed. We have already factored that into our forecast. There's some attached to us this year it’s immaterial I would say, most of our Managers are typically paid above their threshold and some co-managers are affected and as we look out into future years, we'll continue to obviously be cognizant in factor wage into other pay factors.

Operator

Our next question is comes from Adrienne Yih with Wolfe Research. Please state your question.

Adrienne Yih

Two quick, very quick questions. Mary what is the overall forecast that you're using for beauty and services segment growth and then secondarily, as you build or as you do your brand awareness studies where are you finding which demographic do you have the highest brand awareness with? Thanks very much.

Mary Dillon

As I stated we would just look at the current growth factors to the industry that you guys can see as well, which is the industry is up what 4% and which is great and obviously prestige up more than mass, color cosmetics up a lot. So we look at the published forecast or published data that’s out there as well as do our own kind of work that's both qualitative and quantitative thinking about future sources of growth.

So don’t have a great -- any other Crystal ball than anybody else, but we’re I think pretty darn good at understanding consumer segments, understanding and projecting where their demand might go in the future and use that to try to figure out what we think the category growth will be. The second question was?

Dave Kimbell

Awareness

Mary Dillon

Awareness, let me give that one to Dave, thank you.

Dave Kimbell

Yes so on brand awareness, overall, we see -- we don't see huge swings by any demographic group that's really -- it’s pretty broad based and we're seeing growth across all demographic, all age ranges, ethnicity, but I would say Hispanic women do have a bit higher in general across-the-board and that's the strength that we're continuing to grow with.

Adrienne Yih

Okay, great and any quantification of that?

Dave Kimbell

No. I guess we won't share any of that detail, but we did grow our total awareness and we shared that in the past, so total awareness increased five points in Q1 versus Q1 of last year to 84% on a native basis and was up two points on a non-native basis to 40% [ph]. So continued strong growth of that behind the marketing efforts and we expect to continue to drive that going forward.

Operator

Your next question is comes from Simeon Siegel with Nomura Securities. Please state your question.

Simeon Siegel

Did you say or how many prestige brand boutiques do you currently have? I think Scott did you say you expect to open 500 this year and can you share any color on the comp lift and maturity in those stores when add?

Scott Settersten

I think we shared this last time, so we started the year and we talked about in the couple hundred range of Clinique and and this year yes, approximately 500 new boutiques across Clinique, Lancôme and Benefit those three brands. We will see growth over the year. We're just getting those new ones opened, so while it had some impact on and Q1 was not the big driver of Q1 and frankly to add, it will be a contributor but there's a lot of other parts of our business that are driving growth a lot of the brands in prestige phase with mass and hair care, skincare, so it will continue to drive growth but we aren't counting on that being the primary driver of growth throughout the rest of the year.

Simeon Siegel

Great thanks and then did you say with the Ulta Beauty collection penetration was at this point? Do you see that business grow in mix as the overall brand awareness grows, do you actively look to grow that penetration, any thoughts there?

Dave Kimbell

Yes, Mary gave a few of the highlights about some of the things that we're doing to build that and frankly I think we are on at the beginning of a really reinvention of that business and we're seeing the impact of that already strong growth. Scott talked about high margins, so when we look at the exclusive Ulta Beauty collection and exclusive brands combined like included brands like gift brushes for Ulta it's about 6% of our business and we'll see that growing over time. We've got new innovation we'll continue to drive that business behind and we'll as you mentioned as our brand grows as our recognition grows, and then we improve its presentation and quality of the product and just overall merchandising strategy, marketing strategy, we'll see that grow as well.

Operator

Our next question comes from Matthew Fassler with Goldman Sachs. Please state your question.

Matthew Fassler

A couple of follow-ups. In terms of demographics you spoke a bit about Hispanic customers, you talked to Millenials. If you think about the market share opportunity you have and where you're getting incremental traction, could you for instance talk a bit more about age and also new versus exiting Markets. What cohorts you feel that you're uncovering and kind of awakening to the vitality of the concept at this point, as the marketing has exploded here.

Mary Dillon

Let me just say, I think more of this we'll talk about in the fall as we do the Analyst Day because it’s kind of as we think about the future that's obviously, we're sort of in the insights and mailing machine about kind of where the world is going and how to think about those dynamics for Ulta. I'll let Dave add color, but I will tell you I think we all feel personally very optimistic that as we think about the way the world edges with the world today, sort of the influences are really converging nicely as it relates to beauty as a category as well as shopping in the way that we offer, should be able to commend with a point of view and Steve already a curated idea in mind to get some help as well. So maybe you could add a little more to that, but more on this topic. I'd say is the best way to think about it.

Dave Kimbell

The only thing I'd say is our growth, we're excited to see in our growth as I mentioned earlier, it isn't concentrated on any specific age range or demographic profile, it's really is beauty enthusiast and she's all ages, she looks all across the country, so we're seeing strength with teenagers, there has been -- reports are out that from other third parties about Ulta continue to gain strength and presence with teenagers, certainly Millenials, but through all the way through ages and of course a great part of beauty is it's not age dependent, we each might change, but their desire to be part of a beauty category continued. So I will see that across the board right now.

Matthew Fassler

Thank you for that. My second follow up, so it sounds like that the boutiques while they’re rolling in are only about are already starting to impact the business, if you think about your historical experience and the kind of pop that that can give the business relative to the double-digits same-store sales you've been posting without that catalyst, is the input or the additional volumes from those boutiques material in that context or is it something that should just be absorbed by the strong growth that you've got these days?

Scott Settersten

I think it was short-term it's absorbed so again back to today’s earlier point here, it's going to be additive, it takes a while for those boutiques to ramp up much similar to our store, maturation curve overall we've seen I’ve demonstrated over a long period of time. So again over the longer term yes we think it is a significant add to the [indiscernible] grow and will help productivity significantly over the long-term.

Operator

Our next question comes from the line of Oliver Chen with Cowen and Company. Please state your question.

Courtney Willson

This is Courtney Willson in for Oliver Chen. Thanks for taking our question and congrats on the impressive results. We just had a question in terms of the consumer dynamics, the mass consumer versus the prestige consumer. Which segment is experiencing higher rates of new customer acquisition and is there an increasing amount of cross shopping between the two customer segments? Thanks very much.

Mary Dillon

Thank you, Courtney. The great thing is there is definitely separate mass versus prestige consumers at our store, which is kind of core I guess. There is a bit of a tendency to come in and I think we’ve talked about this grade and maybe more the mass side and prestige -- and migrate overtime. Typically, our guest has a mixture through, there is really very few people I think are just completely one versus another type category. And that's part of the beauty of what we offer that makes it super relevant for our guest and I think it is well for our grand partners.

Operator

Our next question comes from Rupesh Parikh with Oppenheimer. Please state your question.

Rupesh Parikh

So I have two quick questions. First are you guys seeing any similar things differences between the performance or traffic at your mall locations versus non-mall locations? And then second our new products clearly from your Q1 remarks it sounds like there is a significant amount in unit and innovation Q1. As we look out for the balance of the year what can we expect in terms of brand product additions?

Mary Dillon

Okay, so we’ll tag team this again, Dave. Certainly, the mall as you know, malls are about with 10% or so of our store base and we’re not seeing much of a difference. We’re seeing positive traffic, I would say when we’re in malls we pick those spots pretty carefully, both in terms of the market as being a great place to shop in the given market as well as our locations in the exterior of the mall store, so we feel good about how they’re performing.

Dave Kimbell

Yes, on new brands, nothing to report specifically here. But I will say as has been our trend of Lancôme [ph], we’ll continue to add new brands. But I’d say that is a big contributor, we’re also I mentioned this earlier, we’re really focused on driving growth with our existing brands. We had a lot of new products coming in and growth with existing products within our portfolio across many other brands that Mary mentioned in her remarks. So it will be a mix continue to drive with a strength of our big brands like Urban Decay and Redken and Bear and Two Face and Nyx, but then we’ll certainly compliment that with new brands throughout the year.

Operator

Our next question comes from Steph Wissink with Piper Jaffray. Please state your question.

Steph Wissink

I just have one question on the brand Boutique, I’m wondering if you can give us a little bit more information on the return on invested capital or some of the productivity goals that you have within that floor space. And just given the $80 million investment I think that you talked about so far, can you talk to us about what the brands are that committing to, whether it's capital exclusive product or marketing? Thank you.

Scott Settersten

Let me start there, as far as the 80 million is concerned, I mean that's all Ulta. So we’re stepping up with the CapEx investment and again that 80 million partly it's not just a boutique drop in, so again this 500 -- roughly 500 individuals boutiques drop ins across the team. But we’re going to take the opportunity while we’re in the stores to also refresh our fragrance fixtures in those stores and Ulta Beauty collection fixturing as well. As well as other miscellaneous things, right during the store touching it up and causing some chaos. You’re going to take the opportunity to do what you think is best for the guests long-term.

So that’s how we’re deploying the $80 million. Again each vendor, we have a different set economic terms with them. So I think by-and-large, it’s kind of, it’s a payroll share kind of model. So again they’re trained, they’re our associates, there are on our payroll, the vendors provide, or vendor partners provide excellent training for them. We kind of share the payroll, model on a go forward basis and it takes a while, again we install the boutique’s upfront, it takes a while for those the reach maturity, right. So again as we go overtime we add more payroll resources there to make a more productive. So I think that’s it in a nutshell.

Operator

Our next question comes from Mike Baker with Deutsche Bank. Please state your question.

Mike Baker

So I just want to ask about the loyalty card increased membership. Is a lot of that or is it break out, how much better coming from people who already were shopping in each store, but weren’t loyalty cards and now you’re sort of upgrading them to loyalty numbers or versus what percent is coming from customer who would use the brand and they’re coming in and then they’re signing on?

Dave Kimbell

What we’ve shared, I think couple of quarters ago that we’ve seen an increase in, I guess what we call reactivation which were last customers. And so we’ve seen a healthy increase of that. Probably won’t get sharing that every quarter of that is a part of it. So customers that might have shopped with us two years ago would not be considered a current customer. But we have a record of them, they comeback in they reactive their accounts and they move into our active, would move back into our active member profile.

So that’s the chunk of it, but the biggest part of it is new to older customers. And that is exactly as you describe customers coming in and shopping at Ulta and starting that experience as our customers and when they get up and interact with one of our associates, become customer during their visit there. And a key part of our success has been our store associates really doing an excellent job converting non-members into members in the store, and we’ve seen a strong increase in that. So that is the primary drive or new member growth.

Mike Baker

Okay, great. That’s helpful. Well, you have one more maybe more mundane question, but what we’ve heard from couple of other retailers that the real state opportunities are very strong out there, very much a buyers’ market. Can you talk about what you’re seeing in some of the new stores in terms of rents and those types of metrics?

Scott Settersten

I guess, we could echo those comments that you’ve heard from others. We have a no shortage of great real estate sites and we’re seeing as we look at proposals across the country, again our stores. We have a typical, I guess best in class kind of set of co-tenants that we would like to operate with, but we’ve proven and demonstrated overtime, Ulta store is working on wide variety of real estate locations and types.

So I feel very confident about our current pace of 100 stores a year right that we’ve talked about here as our medium term target. We just came back I guess from ICSC here in the last day of so. Again the landlords, the relationships that we have a very strong, we know Ulta is being sought out as a tenant of choice. We’re proven traffic drivers at centers and the Beauty category is something that many landlords as a piece of the offering, retail offering that they would love to add the mix overall.

Mike Baker

So I guess the punch line there is that, materially changing your new store economic model and is that something that you would address at your Analyst Day this fall?

Scott Settersten

Yes, I mean, I don’t -- we haven’t -- we’re always very competitive, when we get into the rent structure and the economic terms of our deals, I mean, I think Ulta is probably best in class. When you look at our operating model overall. So it’s not like we’re seeing something step decreases and rent terms or anything like that, at least not at this stage. Not a lot of the liquidation events are kind of in profit I guess, I would say right now. So I guess that’s yet to be seen. And it’s not causing us to rethink the number of stores that we open every year. Like a 100 a year, again there is no magic around that, but that’s kind of a comfortable pace for us with the number of new associates we need to add to the mix overall and the time here that those storage usually get open, all in when we think about that a hundred is kind of a good pace.

Operator

Our final question comes from Omar Saad with Evercore ISI. Please state your question.

Omar Saad

I was wondering if you could elaborate a little bit on the comment you made early around urban stores and doing some more thought process around that. If you have anything in the fleet now that resembles is kind of an urban location and how it does and how those locations may do in more densely populated urban type areas. It seems like it could be a great fit, obviously the real estate costs are a bit different. But would love to hear more about it?

Mary Dillon

Yes. No problem Omar. I guess, what I would say is yes, we have several urban, I guess you can call them stores in the fleet, and they do fine. As were thinking about the future, I wouldn’t say we’ve ever had a conservative urban strategy right. So we don’t have a lot of them Omar. Our main strategy has been to reach in suburbs and in power centers, [indiscernible]. We've talked about, we feel good about the 10,000 sq. foot store format and the ability to hit at least 1,200 of that format, but when I referenced that we’re also looking at, let’s say opportunity in the smaller market and then also looking at opportunity in places where the parcels of real estate by definition would be smaller.

So whether it's urban centers or the downtown maybe shopping area of high end suburbs right, so we've got just curious of 2,000 to 5,000 square foot stores right now and that we are operating to learns about the dynamics of a different size box and they’re doing well, they were also burning a lot about the best way to operate that and as we look at refreshing our view of store growth, urban is the question we’re asking ourselves and look as you said, obviously the economics are different, but as we drive brand awareness across the country with our marketing efforts we know that wherever we go now people know more about us that I guess they would have in the past, right. So that's a good way to place a start, so more to come on that.

Omar Saad

Thanks, that's helpful and then can I ask one follow up on the loyalty, have you thought about ever partnering with a financial services firm and maybe adding a private label credit element to that, or are you happy as a standalone loyalty program?

Mary Dillon

Well, we're very happy with the loyalty program today, it's really a key asset for us and that's a fair question, I mean that something that could be a good asset in the long run rate, nothing to announce on that certainly, but it's certainly something that has history in retail that's been successful from the retailers.

Operator

And now like to turn the call back over to management for closing remarks.

Mary Dillon

Thank you. I'd just like the close by thanking our 26,000 associate for an incredible start to the year and look forward to speaking with all of you again soon. Thank you.

Operator

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

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