Ulta Salon, Cosmetics & Fragrance's (ULTA) CEO Mary Dillon on Q3 2016 Results - Earnings Call Transcript

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About: Ulta Beauty, Inc. (ULTA)
by: SA Transcripts

Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA) Q3 2016 Earnings Conference Call December 1, 2016 5:00 PM ET

Executives

Laurel Lefebvre - Investor Relations

Mary Dillon - Chief Executive Officer

Scott Settersten - Chief Financial Officer

Dave Kimbell - Chief Merchandising and Marketing Officer

Analysts

Matt Fassler - Goldman Sachs

Dan Stroller - Nomura

Adrienne Yih - Wolfe Research

Mike Baker - Deutsche Bank

Joe Altobello - Raymond James

Rupesh Parikh - Oppenheimer

Brian Tunick - Royal Bank of Canada

Ike Boruchow - Wells Fargo

Mark Altschwager - Robert W. Baird

Mark Astrachan - Stifel

Chris Horvers - JPMorgan

Jason Gere - KeyBanc Capital Markets

Kelly Halsor - Buckingham Research Group

Stephanie Wissink - Piper Jaffray

Oliver Chen - Cowen & Company

Simeon Gutman - Morgan Stanley

Operator

Greetings and welcome to the Ulta Beauty Third Quarter 2016 Earnings Results Conference Call. [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. Ms. Lefebvre, you may begin.

Laurel Lefebvre

Thank you. Good afternoon and thank you for joining us for Ulta Beauty third 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’d like to remind you of the company’s Safe Harbor language. The statements contained in this conference call, which are not historical facts maybe 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 one question only 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. Ulta Beauty’s top line momentum accelerated in the third quarter driving record sales and earnings performance. The team continues to execute exceptionally well against our key strategies. Highlights of the quarter include success in acquiring new brands, strength in overall newness, increases in awareness of the Ulta Beauty brand, continued excellent results from our loyalty program, improving performance of our supply chain and systems, and robust growth in our e-commerce business.

In the third quarter, we grew the top line 24.2% and delivered 16.7% comp sales on top of the 12.8% comp in the third quarter of last year. This is the best comp performance on both the 1- and 2-year basis in our history as a public company, driven by healthy traffic and ticket growth. We achieved the strongest quarterly comps of the year in all three channels. E-commerce growth was well above planned and the retail and salon businesses also delivered their best top line growth of the year.

In terms of categories, cosmetics, both mass and prestige continues to lead our growth, with new brands and new items from existing brands contributing to better than expected performance. Strength on the top line was broad-based as we gained market share across all major categories. Earnings per share rose to $1.40, representing 26% growth significantly better performance than what we anticipated going into the quarter when our initial outlook called for 13% to 17% earnings per share growth. This upside in EPS was due to better than expected top line growth and our continued success with loyalty and CRM efforts.

I would now like to highlight some of the key drivers of our third quarter performance in the context of our strategic imperatives starting with our loyalty program. We grew rolling 12-month active membership by 28% to reach 21.7 million active members as our store teams continued to drive excellent conversion at checkout. Similar to the trends we have seen all year, the loyalty program metrics including retention rate, sales per member, frequency of purchase, and average member ticket all continued to be very strong. We continued to prioritize more personalized CRM offers for our loyalty members versus broad discounts and promotions, and as evolution in our marketing strategy continues to benefit margin rate and allows us to invest in other parts of the marketing mix such as television, radio, and digital advertising, which continued to drive awareness and clarity about our brands.

Our Ultimate Rewards credit card program continues to be well received since its launch in August. We are seeing strong guest engagement both in-store and online. Our team carried out extensive associate training and planning ahead of the launch, resulting in seamless execution of the program. Credit card signups are exceeding expectations. Some of the compelling promotions we are offering for new cardholders are driving higher average baskets and units per transaction as guests take advantage of one-time offers.

Turning to our marketing and brand awareness activities, our third quarter marketing plan features signature promotions like 21 Days of Beauty in September, our Gorgeous Hair events in October, and a series of activities focused on raising funds for the Breast Cancer Research Foundation. We returned as the official partner to The Ellen DeGeneres Show, putting BCRF and Ulta Beauty on a national stage to millions of viewers each week to raise awareness and funds. Our store teams raised nearly $3 million during this year’s Gorgeous Way to Give campaign, and our salon stylists were proud to perform more than 50,000 beauty services at our Cut for a Cause event in support of our BCRF fundraising program.

From an advertising perspective, during the fall, we ran national TV and radio ads to support our 21 Days of Beauty and Gorgeous Hair promotions. We created this new and built on the inaugural campaign from last year. We continue to also see significant growth in our social platforms, especially Instagram and Snapchat. We recently surpassed 2.6 million fans on Instagram and held our first-ever Snapchat takeover with YouTube influencer, Jenny Fox. We have Wende Zomnir, the Founder and Chief Creative Officer of Urban Decay take over our Snapchat and Instagram channels, yielding millions of impressions. And we also announced a partnership with E! News, with the launch of freeSTYLE a weekly Facebook Live show. The program includes fan interactions, discussions, and reviews of the best and most relevant people, products, and trends that matter to the 9.5 million highly engaged E! News Facebook fans.

Now, on the merchandising front, new brands and new products within existing brands drove better than expected sales growth with strength across all categories. Similar to what we have experienced all year long, makeup brands like Urban Decay, IT Cosmetics, NYX, Anastasia, Too Faced, Tarte, Clinique, Lancôme, Benefit, Real Techniques, and Ardell delivered the highest growth rates in the quarter. Our own Ulta Beauty collection was also a top performer. We have restaged the brand with new packaging, branding, and innovation, and about 600 stores now feature an enhanced mall presentation with improved signage and elevated fixtures.

In mass skincare, Tony Moly and Boots No7 were standouts. And our Pro Hair business accelerated, with newness from DevaCurl and Living Proof contributing to strong comps in this category. Living Proof also partnered with our services business for a 1-day salon takeover event to introduce salon guests to this brand, and we discussed many of the new brands we are adding to our assortment at our Analyst Day just a few weeks ago, but let me recap a few of the highlights.

During the third quarter, we launched Estée Lauder skincare and cosmetics in 30 stores and online. We launched Shiseido, Origins, and Proactiv, greatly enhancing our skincare offering. We added e.l.f. to our online assortment. We introduced the innovation – the innovative Dyson hairdryer in 200 stores and online. We have also completed almost all of the 500 plus Clinique, Lancôme, and Benefit boutiques planned for the year. In addition, we added the best of Clinique end cap in all stores that don’t have a full Clinique boutique.

Now, turning to our services business, salon sales grew 16.7% and comped 10.3% with strength in color, hair treatments, and makeup services. Our services business is increasingly using CRM campaigns to drive awareness and encourage trial of our service offerings. We rolled out our improved online booking experience to all stores during the quarter to make it even easier for our guests to make an appointment in our salons. We continue to focus on elevating our in-house artistic team and curating design trends exclusive to Ulta Beauty. Our fall and holiday trends include a look we call Sombre, which is a new softer way to achieve an ombre look and a new color we call ronze, highlights that bring together beautiful shades of copper and auburn. The artistic team participated in several designer runway shows at Fashion Week, driving awareness to Ulta Beauty’s hair authority and inspiring the entire salon team across the chain, and our Benefit Brow boutiques continued their excellent performance with brow services now available in more than 800 stores and a successful launch of the wide range of new brow products in more shades. We are now testing online booking for brow services to make it easier for our guests to make an appointment in our Benefit Brow bars.

Turning to store growth, we opened 42 stores in the third quarter on our way to executing our 2016 program of 100 net new stores ending the quarter with 949 stores. Our growth and development team has completed almost all of the 500 plus prestige brand boutiques we planned for this year, including new stores and remodels, along with updates to the Ulta Beauty collection in fragrance and nail fixtures. New store productivity remains very strong with the class of 2016 stores performing well above budget and far above sales hurdles established to meet our internal rate of return thresholds. We have already approved all of the 100 stores planned for 2017 program, including a new store on Michigan Avenue in Chicago.

As you heard in our Analyst Day, we completed our in-depth analysis of the real estate opportunity in the U.S. and announced a new launch room target to rollout between 1,400 to 1,700 stores, with opportunities to further penetrate existing suburban markets, expand our penetration in small markets and begin to develop urban markets. At the same time, we updated our new store maturation ramp based on current trends and higher new store productivity, upgrading year one sales from $2.8 million to $3.1 million and revising upward our year five sales estimate to $4.5 million from $4 million. We are confident that our stores will continue to produce very attractive returns.

Turning to our e-commerce business, ulta.com sales grew 59.1% on top of 56.3% growth last year, contributing 240 basis points to our total company comp. The strong revenue growth was driven entirely by increased transactions. We continue to evolve and upgrade the guest experience while improving site performance. We made enhancements to our mobile app, including our product detail page redesigned to better display product options and information, integration of our briefly launched content platform called The Mix and the addition of our new salon appointment booking tool. We launched the try and feature called Glam Lab last month to allow guests to virtually test products and shades within our iPhone and Android app by uploading a selfie or choosing a model with a similar complexion. Our technology partner for this platform is a company known for best-in-class realism and accuracy of color matching.

Finally, to update you on supply chain performance and investments, we are very pleased and proud with how smoothly our team has executed on a very complex set of initiatives and system rollouts in addition to opening two new DCs in the past 1.5 years. Our Greenwood DC is now servicing 227 stores and fulfilling 44% of our e-commerce orders. Our newest distribution center in Dallas is ramping on schedule and currently fulfilling 130 stores and 30% of total e-comm orders. On the systems side, we are starting to see benefits from the core merchandise systems we recently implemented. SWIFT, our new forecasting replenishment tool, continues to ramp up and help us optimize inventory. Our store level in-stocks are improving and more of our inventories in our stores versus in our DCs improving the guest experience. We now have all the tools in place to help us make better, more database assortment and inventory decisions.

So that wraps up my third quarter review. Looking at the holiday, we are expecting healthy traffic and strong sales growth as a result of our integrated merchandising and marketing plan. From a product standpoint, we are excited to offer an array of newness and exclusivity in our holiday assortment across all categories and brands. To share a few highlights, we will feature an assortment of Clinique and Lancôme products in every store for holiday. We just launched NARS, featuring three hero products; their famous blush, bronzer and a multipurpose stick, The Multiple. These are available online and featured on [indiscernible] and every store in time for holiday with a more expansive assortment offered online later this month and then launched in select stores next year.

Our merchants have done a great job partnering with our brands to offer exclusive products across many brands and categories, a wide variety of holiday themed kits and stocking stuffers and men’s grooming and fragrance kits. This year, we upgraded our fragrance kit with purchase program, complementing the exciting newness in our holiday fragrance assortment. And we have also launched an elevated Ulta Beauty collection of our traditional blockbuster kits that have already shown strong consumer response. And to support our compelling merchandise offering, we rolled out our holiday advertising campaign Joy to the Girl, which is integrated from a design and messaging perspective across all touch points, from in-store signage to new TV and radio spots running now to print and even the packaging of our Ulta Beauty collection holiday assortment. Our campaign encourage our guests to see us as a great gift giving destination as well as a place to get glammed up for holiday events with a visit to our salon. The guest kits and get glammed theme is featured in our television and radio spots through inspirational content on our social media platforms and on the mix on our website.

Key to executing our holiday plan, our store operations, e-commerce, supply chain and systems teams have all done an excellent job, preparing for the busy holiday season and our efforts have already paid off with the successful Black Friday, Cyber Monday weekend both in stores and online. All areas are stacked up and ready to delight our guests during the big weeks ahead.

So now I will hand over to Scott to discuss our third quarter financials and our outlook for the fourth quarter.

Scott Settersten

Thanks Mary. Good afternoon everyone. I will start with the income statement. Net sales for the quarter increased 24.2% to $1.13 billion, driven by 16.7% comparable sales and continued strong performance of new stores. The total company comp was composed of 11.1% transaction growth and 5.6% average ticket growth. The retail comp of 14.6% was comprised of 9.6% traffic and 5% ticket. Ticket growth was driven about a third by units per transaction and about two-third by average selling price. The salon business comped 10.3% and similar to the recent trend was driven by ticket growth. The combined retail comp and salon comp yielded a total store comp of 14.3%. Gross profit increased 90 basis points. The improvement was the result of product margin expansion and leverage of store rent and occupancy expenses on strong comps, offset by planned supply chain investments.

Turning to SG&A expense, we de-leveraged by 80 basis points, driven by investments in growth initiatives, including store payroll to support our boutique strategy and a differentiated guest experience and de-leveraged overhead costs, in part due to an impairment charge related to the closure of a store in Louisiana due to the August flooding. This was partially offset by modest leverage in marketing. The tax rate was 37.4%, consistent with the first half of the year. Last year’s Q3 tax rate of 36% reflected the benefit of some tax true-ups.

Moving to the balance sheet, inventories increased 16.5% on a per store basis, which is slightly below the comp rate. Similar to the recent trend, we continue to invest in inventory to support sales growth, seeing access to new brands and expand the presence of prestige boutiques in our stores. Also, our new distribution centers in Greenwood and Dallas are ramping and performing well, but are still far from being fully optimized. Capital expenditures were $131.6 million for the quarter, driven by new store openings, fixtures related to the continued rollout of boutiques as well as investments in systems. We ended the quarter with $243 million in cash and short-term investments.

In terms of share buybacks, we continue to repurchase shares in the open market as part of our 10b5-1 plan. During the third quarter, we repurchased about 179,000 shares of our stock, net of cost of just over $44 million. Year-to-date, including the accelerated share repurchase program and activity under our 10b5-1 plan, we repurchased approximately 1,450,000 shares at an average price of about $205 per share. Share repurchases under our current authorization are expected to contribute about 2 points of EPS growth for the year. At the end of the third quarter, we had approximately $148 million remaining available under the $425 million share repurchase program announced in March 2016.

Turning now to guidance for the fourth quarter, we anticipate sales to be in the range of $1.516 billion to $1.541 billion versus $1.268 billion last year. We expect comparable sales to increase in the range of 12% to 14% versus 12.5% last year. E-commerce sales are expected to grow in the 14% range. We plan to open about 25 stores in the fourth quarter versus the 14 last year, so pre-opening expense will be higher. Earnings per share are expected to be in the range of $2.08 to $2.13 versus $1.69 last year, with modest leverage on both the gross profit and SG&A lines. The tax rate is expected to be 37.5% and our fully diluted share count is estimated at $63 million. At our Analyst Day event in October, we raised our guidance for the full year 2016, expecting comparable sales to grow approximately 12% to 14% including the impact of the e-commerce business and EPS to increase in the mid 20s percentage range.

Now, with the upside to third quarter earnings, we expect full year comparable sales to grow 13% to 15% and earnings growth to be in the high 20s percentage range. Operating margin is expected to be up modestly for the year. CapEx is on track to reach approximately $390 million, driven by slightly higher CapEx per new store and also includes about $80 million for boutique expansion, with 500 plus store touches for Clinique, Lancôme and Benefit boutiques as well as fragrance fixtures and Ulta Beauty collection updates.

Now, I will turn the call over to our conference call host to moderate the Q&A session. Operator?

Question-and-Answer Session

Operator

Thank you. [Operator Instructions] Our first question comes from Matt Fassler of Goldman Sachs.

Matt Fassler

Thanks a lot and good afternoon. Congratulations on obviously terrific quarter. Anyway you look at it, you saw meaningful acceleration. Mary, you spoke about the 2-year comp, if you look at the typical seasonality of the business you really broke out. What would you say, among the different drivers of the business really changed the most? I mean you talked about the credit card as being new and being successful. Would you say that, that was decisive? Would you say it was the convergence of brand ads? Would you say it was anything on the online side? How would you – what would you identify as the primary catalyst to drive that kind of step change in sales momentum?

Mary Dillon

Thank you, Matt. Honestly, I would say it’s the convergence of multiple factors, some of which you just said. So, we have been on a path for a while to drive increased brand awareness that obviously starts with the fact you will need to know who we are. I would say that certainly the assortment of products of brands, the acceleration of new brands, and the – frankly, the great performance of newness of brands and newness within existing brands has been a key factor, and I want to also say that our sort of demand creation engine just gets more fine tuned and the team has done a great job through loyalty evolving the way that we promote to becoming more personalized, our CRM platform working extremely well. As you mentioned the launch of the credit card has been another layer of a way for us to drive relevancy and drive share of beauty wallet with our shoppers. So, it’s really a combination of all those things coming together, plus I would say, fantastic execution. So in store, the experience we think just gets better. Our associates have done a fantastic job of converting guests into our loyalty program. And obviously, our loyalty members are driving the majority of our sales. And of course, our in-stocks are just getting better all the time with supply chain and systems and teams behind those are working to just make sure their guests have what they want. So, I hate to fill the laundry list at you, but it really is a combination of all those factors working in concert.

Matt Fassler

Can I ask a quick follow-up without breaking your rule?

Mary Dillon

Matt, you just broke the rule. Go ahead.

Matt Fassler

So to the extent that loyalty has typically generated the majority of your sales, as we look at the growth in loyalty members per store, is that a pretty good representative of your – representation of your view of the growth in customers who are new to the chain on a same-store basis?

Mary Dillon

Yes, I am not sure if I could do exactly the equation you are doing. But that the majority of our sales are -- vast majority are driven by loyalty members, and so that’s where the growth is coming from. And we know that we are getting new – I mean, we just really keep accelerating the growth of the number of people in the loyalty program having 21.7 at the end of last quarter. So yes, I would say that those things go together. And awareness is part of what’s driving them in, but it’s also the relevancy of our offers and everything else that we are doing.

Matt Fassler

Thank you.

Mary Dillon

Sure.

Operator

Our next question comes from Simeon Siegel of Nomura.

Dan Stroller

Hi, this is Dan Stroller on for Simeon. Thanks for taking our question. With regards to the online booking, is there anyway to quantify how much that contributed to performance? How should we think about the benefits this might provide to the Brow Bar and then other ways you could leverage this tool? Thanks.

Scott Settersten

We are really excited to have it particularly on the Brow Bar. No, we are still monitoring and tracking it as relatively new on the Brow Bar. So, there is no real specific data that we are ready to share about direct impact, but we think it’s really important for us across all services to make it as easy as possible for our guests to make appointments and engage with us. And so, we will continue to evolve the technology and we know that will improve the guest experience and we are excited about that going forward.

Dan Stroller

Thanks.

Operator

Our next question comes from Adrienne Yih of Wolfe Research.

Adrienne Yih

Good afternoon. Congratulations. Great performance. Mary, I was out in the stores over Black Friday and Black Friday weekend and it was tremendous conversion. I was wondering could you give us some metrics on kind of some of your Black Friday traffic stats and also kind of what you did differently this year over last year and what the results ended up being? Thank you very much.

Mary Dillon

Sure. Thank you, Adrienne. Yes, I can’t get specific about the quarter that we are in. I will just give you a little bit of color on it. We are pleased with how the holiday is starting, very pleased. And I think you saw that in action. I would say, there is kind of a few things. One is that really it’s about what we sell, what we offer. So, I mentioned some of this already, but we have really got great new brands, existing brands with great newness, and then I would say we just keep raising our game as it relates to whether it’s partnering with our brand partners and exclusives and great holiday kits or really raising our own game like on our Ulta Beauty collection blockbusters and products. So that, I would say, is a continuation of just improving. It’s not new, but it’s what we do, but doing it better, even our gift with purchase, stronger than year ago and really pull together in a really fantastic 360 degree marketing plan. So more to come in the holiday, I am pleased with how it’s starting both in-store and online frankly. And again, I’d say that our store teams and our supply chain are working together to make sure that the experience is great for the guests.

Adrienne Yih

And I will just add that the salon was incredibly busy during that weekend, so good job there.

Mary Dillon

Thank you.

Operator

Our next question comes from Mike Baker of Deutsche Bank.

Mike Baker

Hi, this question is for Scott. I believe you said that SG&A was leveraged in the fourth quarter, slight leverage, I think you said. And if that’s right, this will be the first time in four quarters when you leverage SG&A. So, is that a sign that we are now fully through all the supply chain and systems investments and then should we, therefore, think that we should be able to leverage these really strong comps going forward?

Scott Settersten

Yes. I would say, as we looked at 2016, the third quarter kind of represented the high watermark, I guess I would say as far as the deleverage is concerned. Again, a lot of factors come together at that particular point in the year, whether it’s boutiques ramping up, new stores, right, 42 new stores there as kind of the high bar, the supply chain, we are just getting out of the gate with our Dallas there. So, it takes a while for those things to scale up. So fourth quarter, as we go in with the heavier sales lift in the fourth quarter, we expect to see operating margin expansion and SG&A leverage as well. As I look to ‘17 and beyond, I would just be a little careful there. Again, we have given some long-term financial framework there, right when we expect operating margin to expand. And I think we said generally heavier on the gross profit line, a little bit less so on the SG&A line, but they both are expected to leverage in ‘17 and beyond.

Mike Baker

Okay, understood. Thanks. I will keep to one question.

Operator

Our next question comes fro Joe Altobello of Raymond James.

Joe Altobello

Thanks. Hey, guys. Good afternoon. First question, I guess, for Scott, obviously the upside to the gross margin in the quarter much better with what we are looking for and I think you guys have talked about that being flattish last quarter. And Scott, you mentioned product margin helped there as well as fixed cost leverage. Can you kind of give us a little more color on what happened on the product margin side that led to that upside? And then secondly if I could for Mary, as you look at the introduction of new bands going forward, do you feel like there is more of an opportunity on the department store brand side or more from upstarts? Thanks.

Scott Settersten

Yes. So, as far as the product margins are concerned, Joe, it’s really just a continuation of all the things we have been doing over the course of the last couple of 2 to 3 years, right? So, just being smart about our marketing, our merchandise mix, how we are optimizing the business for both in short and the long-term. So, we mentioned pulling back on broader kind of promotional efforts and kind of redeploying some of that into more targeted things with our loyalty and CRM tools. I mean, that just continues to work really well. So, we are a pragmatic crew here. One of the fortunate things we have in this model is being able to toggle while we are in the corner, right and watching sales trends. So, we mentioned the credit card got off to a spectacular start as we got into the quarter. We weren’t expecting it to be quite so strong. So again Mary mentioned there is a nice offer there right, 20% off for your entire purchase when you sign up initially. So as we saw that kind of take off, we are able to pull back on the postcard that we typically do later in the quarter. So again, just looking at all the different elements and levers that we have to pull-in to try to optimize total results each quarter.

Mary Dillon

And Joe, I will have Dave take your second question. Dave?

Dave Kimbell

Yes. So about new brands and where we see opportunity, I will start with just saying we see opportunity across all parts of the store, that’s one of the real secrets to our success is this all things beauty, all in one place that we are looking for growth, in prestige brands, mass brands, hair, skincare, fragrance and we have been – and that’s part of the reason we have been having success is w have been bringing in new brands or expanding with existing brands in all parts of the store. Specifically, you asked about department stores brands, our big established brands versus upstarts. And frankly, I think we are looking for both. We talked about expansion in some of the biggest established prestige brands. You know we have been continuing to expand our partnership with Clinique and Lancôme. We are just getting started with Estée Lauder and NARS. But then upstarts have been a big part of our success over time and we feel really privileged to be partnering with smaller brands that are innovating in new and creative ways, Makeup Revolution in the mass cosmetic space is one example of that that has demonstrated some nice growth. So we will look for those opportunities as well and both of those areas will continue to drive our growth.

Joe Altobello

Perfect. Thanks guys.

Operator

Our next question comes from Rupesh Parikh of Oppenheimer.

Rupesh Parikh

Thanks for taking my question and congrats on a great quarter. So my one question is around your advertising efforts. So again, in the past few months, you guys again run the TV campaigns. It sounds like they are still meeting your expectations even as you lap some of the prior year offers, I just wanted to get a sense of what’s helping you drive still strong performance on some of those advertising campaigns?

Dave Kimbell

Yes. So yes, we are really – feel really good about where we are from our overall marketing campaign. We did this third quarter was the lap of our first national TV campaign in the fall of 2015. And as Mary said, we repeated that again, really supporting our 21 Days of Beauty effort in the middle of the quarter and the results were quite strong. We track that, we measure it very closely, but we see strong and growing ROI across that probably most visible vehicle in TV. But other elements of our marketing plan, really all elements of our marketing plan are coming together to drive awareness in growth. Radio is a strong contributor to that, but we have been investing much more heavily in the digital space, in awareness, in social media, influencer, really across our entire digital footprint to connect with our guests where she wants to be connected. Mary mentioned in her remarks, our Ulta Beauty mix is an example of that on our own website, of creating our own content, as a big push, also partnering with influencers to drive that. So TV is a big part of it. We are pleased with the results. We are continuing that as we speak over the holiday period. We are back on air and we see that as a part of our mix, but we will also continue to innovate in all parts of it to make sure we are really taking advantage of the awareness opportunity that we see ahead of us.

Rupesh Parikh

Great. Best of luck for the holiday season.

Mary Dillon

Thank you.

Operator

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

Brian Tunick

Thanks. Good afternoon. I will add my congrats as well. I guess my first question is, ticket versus traffic, just curious I know you don’t probably manage the business to it, but just curious as you think about, when you head into 2017 or beyond, what do you think is the makeup of that comp performance you had laid out between ticket and traffic and what might be the drivers. And then just a second quick one is online profitability versus the store four walls, like what kind of sales volume perhaps to the online business need to be to reach parity? Thanks very much.

Mary Dillon

Yes. I would say on the traffic versus ticket, to me their deal was just to be balanced and we have been doing that I think pretty effectively in the last quarter I think were about two-thirds traffic, one-third ticket and retail online was mostly transact traffic, which is great. But that balance is important because it’s the ability to just continue to grow the business and not be reliant on just sort of set number of people and visits. So, a balance I think we would expect to hope certainly it’s never going to be exactly that every quarter but that’s the overall goal. In terms of the e-comm profitability, I mean I guess that’s the constant area of focus. First of all, our e-commerce business has gotten more profitable in last couple of years as we expanded the assortment. Certainly, in the investments in the supply chain, being able to get those orders together in a more effective and efficient way. It will probably always be a somewhat lower profit margin than in the bricks-and-mortar parts of the business just because of the shipping cost. But we are happy with it. I mean the online business, as you can tell as we have talked at the Analyst Day it looks to be quite incremental to our guests in terms of how she uses the channel. And so as we continue to close the gap on profit margin, it’s the great part of the business.

Operator

Our next question comes from Ike Boruchow of Wells Fargo.

Ike Boruchow

Hi everyone, congrats on another great quarter. I guess my question, I am not sure Scott, I think this is for you, I am not sure if I am looking at this right, but I think you said supply chain pressures should be the most pronounced in Q2 and Q3 and your gross margins were up really nice in Q2 and Q3 about 100 basis points in those quarters and it looks like if you are assuming expense leverage in Q4 that the gross margin expansion should be much more moderate in Q4, I guess my question is, is there a call out there, is this just holiday being a more competitive quarter for you or is this just general conservatism, if I am thinking about this right?

Scott Settersten

Yes. I mean directionally, we are on the same – when I say it’s the high watermark for supply chain we leverage it, but we don’t – we are not expecting a lot of improvement, I guess I would say in the fourth quarter, it’s directionally about roughly the same kind of de-leverage level. But again, it takes – these are, I would say, we – inside joke here, we are kind of belt and suspenders crew and we think that some of this is behind the curtain complex new systems and processes that we are implementing. So better to be prudent and careful and make sure that we can execute to make sure we keep our guests happy and the performance in both of those buildings is outstanding. They are doing much better than original target and expectations, so we are very happy with the performance.

Ike Boruchow

Got it. But is there a specific reason why the gross margin gains you have been seeing, which have been pretty massive over the last 12 months, why would those taper down significantly in Q4 and going forward, may be?

Scott Settersten

Yes. I would just say overall, the guidance is prudent, right. I mean, the holiday is wild and woolly. A lot of things can happen. Weather, other kinds of things, so we just want to make sure that we are prudent with our outlook and make sure that we provide financial targets that we feel comfortable that we can hit.

Ike Boruchow

Got it. Thank you.

Operator

Our next question comes from Mark Altschwager of Robert W. Baird.

Mark Altschwager

Good afternoon and congrats on the continued success. One of the follow-up on the boutiques, big investment and ramping up throughout the year here, can you just give us a better sense of maybe how that’s impacting the basket size and ticket expansion within those stores, is it a trade up versus an incremental purchase and if you found a lift from these recent additions to be consistent of what you have experienced in the past and perhaps, difficult to view these things in the back view, but just interested in any other learnings you have from the recent rollout?

Dave Kimbell

Yes. Overall, I would say, we continue to be really pleased with the addition of these boutiques. We have shared specific incrementality, although we say this is incremental to our business and the new boutiques are performing as well or better than – at this stage in their life as the previous boutiques that we launched. So we wouldn’t – have any reason to believe that they wouldn’t continue to add in the way they have been adding. Having said that, of course there are just – is a portion of our new brand additions. So while they are important, a lot of other things have been driving our overall comp growth in new brand additions, so we are pleased with it and we see growth come in as we look into 2017.

Mark Altschwager

Okay. Thanks and best of luck.

Dave Kimbell

Thanks.

Operator

Our next question comes from Mark Astrachan of Stifel.

Mark Astrachan

Yes. Thanks and good afternoon everybody. I wanted to ask about what’s driving comp growth by category, if you can give a bit more granularity there, makeup, skincare, etcetera. And then just sort of a broader question and elaborating on one that was previously asked, I appreciate the kitchen sinking answer to the question of sort of what is rising comp growth, but what is the price you most since March given the original plan was 8% to 10% now, you are expecting 13% to 15% just sort of? Any granularity there would be helpful?

Mary Dillon

Yes, I will start with that which is that, I think it’s really the performance of some of the new brands and the newness in existing brands have been stronger than we perhaps had forecasted, credit card stronger than we initially thought. So, those are a couple of things that I’d say were somewhat more accelerated. It really is – those aren’t the only things that are driving the comp growth, right. So, that’s why I listed the dynamic of multiple factors working together, but those will be a couple examples of things that probably stronger than we would have thought back then. And then, Dave, on the other question?

Dave Kimbell

Yes. On the specific categories, I guess, I just say, we are one really pleased across all categories that we are seeing strong growth. I think Mary mentioned in her remarks that we are gaining share in each of our key categories and the drivers overall, we have talked about in the past is just a highly engaged consumer in beauty and our continued ability to connect with her and gain market share and gain her trust and loyalty and wallet share. And we think specifically within makeup, lot of trends driving makeup, it is the fastest growing segment of beauty right now and that’s really driven by a high-level engagement, particularly with the young women, teens and millennials, but really across all age groups and all ethnicities, Hispanic and all women of color, in particular, are heavily engaged in makeup. There is more education and training and knowledge and trends around different makeup looks and styles. So, it is just a really healthy category and our participation in that has expanded through the brands that we are carrying, the way we are marketing it, the way we are participating in social media. So, we are benefiting from that. Skincare has been struggling for a few years, but has shown some nice signs of growth. Korean skincare has played a role in that. We are seeing strong growth in different aspects. Masks are a big part of other Asian skincare trends are driving growth. And overall recognition by millennials, in particular, that it isn’t all about makeup, but you need to make sure your skin is in good shape as well. And so we are seeing a nice rebound of skincare. Other categories, fragrance, nice – isn’t going anywhere near the level of makeup, but a lot of innovation in that space. We, of course, have been driving that with your one example of that is our Sarah Jessica Parker exclusive stash. So, lot of different reasons throughout key categories and it’s a big focus for Ulta to make sure that we are front and center in all of those trends.

Operator

Our next question comes from Chris Horvers of JPMorgan.

Chris Horvers

Thanks. Good evening. So, I wanted to ask about the cadence of the quarter. You pre-announced in sort of mid-October at 14% to 15% at the Analyst Day. Were you anticipating the potential election disruption that didn’t materialize? Was there an acceleration or was it just being prudent and conservative in the outlook?

Scott Settersten

Yes. Again, there is always a lot of things to consider during the course of the quarter, right and this pre-announcement always presents a little bit of risk. So again, you want to be confident in the numbers you are offering up to investors, right, that you feel confident that you can hit the target. So, there was some hurricane things floating around there in the middle of the quarter, there was the election, the uncertainty, again, we didn’t see it reflected in our business day-to-day, but everyone else seemed to be talking about it. So, again it was just making sure we are prudent and comfortable with what we were communicating.

Chris Horvers

Understood. That’s very helpful. And then just as a quick follow-up, was there any incentive comp pressure that you had in this quarter, because the numbers came in much better than expected and could you quantify the impact to SG&A? Thank you.

Scott Settersten

Could you repeat that question again? Chris, I don’t think I quite followed it.

Chris Horvers

Was there any incentive – any bonus accrual….

Scott Settersten

I am sorry, I did share the comp piece, not the incentive. Yes, so that year-over-year that there was an impact in SG&A. It’s not the most significant piece of it, but there definitely was higher incentive comp this year, obviously because of the performance that’s right from what we initially thought early in the year.

Chris Horvers

Understood. Thanks very much. Have a good Halloween.

Mary Dillon

Thank you.

Operator

Our next question comes from Jason Gere of KeyBanc Capital Markets.

Jason Gere

Okay. Good evening and congratulations on another great quarter. Just a simple question, I guess, as you think about the holiday season now, are you surprised by what your competitors are not doing differently than maybe over the last couple of years? Because it seems like based on our checks, they are doing kind of sticking to the script and we know how that story kind of turns out. So, I don’t mean to put you on the spot, but just in terms of other retailers out there and how they are approaching the holiday season, it’s a great category obviously, but you seem to have kind of the right recipes to surprise that some of your competitors have not adjusted their strategy?

Mary Dillon

Well, thank you, Jason, I don’t know. I mean, I really can’t just focus on playing our offense, which sounds cliché. But I think we have got a really good beat on the insights and Dave talked about this that core focus on is our guests, current and perspective guests, what their needs are, how to think about a shopping experience, partnering with our brand partners to have great products, and then our teams putting together great demand tools whether it’s a CRM platform, credit card, all the marketing. So, I mean I really can’t really comment on what people are doing or not doing. We certainly pay a lot of attention out there watching it as well. I am proud about the fact that I think we are leading to guest insights and really driving execution through a lot of collaboration and its working.

Jason Gere

Okay, great. Thank you.

Operator

Our next question comes from Kelly Halsor of Buckingham Research Group.

Kelly Halsor

Hi, guys. Thanks for taking my question and congrats again on an excellent quarter. I just want to follow-up on the boutiques. I think, correct me if I am wrong, you called out 500 touch points related to the three brands where you have boutiques currently. And I know you guys said that you had accelerated the growth of that this year kind of ahead of the holiday season. So, is that the case? I mean, what’s the kind of opportunity into next year? I mean, are there opportunities with new brands in terms of the class of store, is this a situation where as you go to the kind of next tier down of stores that we shouldn’t expect the same sort of returns on the boutiques or perhaps you are not wanting to expand further. Just any color on the boutiques would be helpful? And then secondly just on e-commerce, with the implied deceleration relative to 3Q. I mean, we saw that last year as well, but I know you guys had just opened up the Greenwood DC. Now, that the 2 DCs are running together and seemed to be doing pretty well. Is there any opportunity there that you could speak about? Thanks.

Dave Kimbell

Yes. So, on the boutiques, you are right, we have talked about 500 total boutique installations across the entire chain, both new and existing stores and with those three brands, Clinique, Lancôme and Benefit. We said before that we intend or anticipate that – about that same amount next year both new stores as well as existing stores. I wouldn’t think of it as much of going to a different tier of stores, we have really been ruling them out in our comp stores based on what’s optimal from a scheduling standpoint, where it can fit lease terms for stores, because we do other activities within the storm when we put a boutique and we will update our Ulta Beauty collection presentation in some cases we put in a new fragrance presentation. So, it is a part – an important part, but only a portion of the activity that we have in store when we put that in. So, we will continue to put those in next year and see that again. I would say, well, so that’s important. It is one element of new brand activity that we will have across the whole chain next year. And as far as e-comm growth in the fourth quarter, we just – we feel confident within the guidance that we have given and we will continue to try to focus on that business. We are happy of the results we have had so far this year and it’s an important season for e-comm, for our e-commerce business and we are confident in our efforts.

Kelly Halsor

Thank you.

Operator

Our next question comes from Stephanie Wissink of Piper Jaffray.

Stephanie Wissink

Thanks. Good evening, everyone. I just have follow-up question on the e-commerce business. Could you compare or contrast a bit your online orders versus some of the store level analytics? Is it similar from a category mix or mass versus prestige? And then as you think about overall your loyalty program, how important is that online business if you are driving kind of a multi-channel shopper over time? Thank you.

Dave Kimbell

Yes. So the first part of your question around mix, generally yes. It is very similar in both online and in-store. Her shopping behavior is reflective of the in-store experience. In particular, over the last couple of years, as we have rounded out our portfolio not so long ago, we didn’t have all the brands in professional hair care or even in prestige online that we had in-store. Now that we do have that and so her behavior is very similar and we really see it as a complementary part of our in-store business. She looks to find what’s the most convenient for her as we book. As far as loyalty and the importance of that, your question is about loyalty and importance of both online and in-store and how we drive that, is that right?

Stephanie Wissink

Yes. And I think historically, you have given us some metrics around that cross channel shopper precise and kind of important versus the single channel?

Dave Kimbell

Yes. So we shared some of those statistics back at our Analyst Day is it’s really consistent in that 6% range of online omni-channel shopper. It’s growing a little bit. But when our base store growth is so strong that takes a really high e-commerce growth to make a complete difference in that number, but importantly, an absolute number of omni-channel shoppers is expanding. And that’s very much part of our overall strategy. We see that as a big part of our future growth as to get her fully engaged in all aspects of our business. E-commerce, retail business, services and salon, we feel like once we can get her engaged in all parts, then her loyalty rates or spend has gone up, we shared those numbers before and so we are continuing to see that in the third quarter and will be a focus for us going forward.

Stephanie Wissink

Thanks guys. Have a great holiday.

Mary Dillon

Thank you.

Operator

Our next question comes from Oliver Chen of Cowen & Company.

Oliver Chen

Hi. Thank you. We are curious about the next few years with mobile innovation and what’s on your radar towards making sure your experience is set apart and in that context, the reality of Amazon making strides in this category, what are just some of the factors that really continue to set you apart as you look to the future and continue to really distinguish yourself with a product assortment with the loyalty program with the newness factor as well versus Amazon. And then, if you could just tell us, is strobing and contouring still middle innings, because it seems like it continues to be a hot trend? Thanks.

Mary Dillon

I love it. Oliver, I appreciate your knowledge about the categories. I will say, contouring and strobing, highlighting all of that is still popular. Interesting, false eyelashes is on the move too, right, so it’s something that you wouldn’t think of the timing, but it’s a fast growing kind of trend too. So anyway, that’s a great thing about beauty there is so much innovation and interesting trends that cycle in and out. I would just say, I will make a comment about mobile has saved to add more color and context here, but you are absolutely spot on, we all – everybody stands at mobile is the center of everybody’s life. But it’s our appendage, our attachment. And I am proud about the fact that I think as a company our team has really been increasing our focus and our execution around mobile. It’s becoming more important to us than ever in terms of driving sales and traffic and its fast growing. We have been innovating in terms of our mobile platform and I mentioned already, but an example is Glam Lab, which is a nice little piece of technology that I am not good enough to take myself to really execute it well, I have tried. But it’s a great thing for millennials who wanted to have a more interacted experience. So as our offerings and our execution in mobile improve, we just get stronger there. And it’s certainly going to be the epicenter how we think about sort of a mobile first mentality as we go forward. Is there anything else you might want to add, Dave, which was innovation there?

Dave Kimbell

I would just say in mobile, to put it simplistically, it’s certainly for us it is the focus of really all of our e-commerce efforts on this. So we will continue to work on that desktop, but where all the growth is and the attention is in mobile, over two-thirds of our traffic is kind of coming through mobile right now and a growing part of our sales. And two core components of that content in commerce and we will keep building that content experience that gives her access to information when and where she wants it and then just make it as easy as possible for her to shop. And then as you well know it’s a different shopping experience on a mobile device and so we are continuing to innovate in that space and make it easy through finding products, paying for products and exploring new information and trends. So it’s really a focus for us.

Oliver Chen

Thank you. Best regards.

Operator

Our last question comes from Simeon Gutman of Morgan Stanley.

Simeon Gutman

Thanks. Congratulations again. First, I will put them in two parts. On the top line, you said a lot of the sales or a majority are getting done in the loyalty card, as we know, can you tell us how, I don’t know if this was mentioned, the mix of either new sign ups and that’s where the majority of the sales are coming versus existing and how that’s trended versus prior quarters. And then, this is also a clarification to an earlier question, on the expense line, if I heard right, even excluding the impairment charge, did the corporate expense line de-lever and if so, I am sorry if you said, but can you tell us why and if that should continue?

Mary Dillon

Yes. On the loyalty Simeon, so I mean we are growing rapidly and adding new members, but the majority of the sales are coming from existing members or members that have reactivated. But as we get new members into the program everyday, frankly, every week, obviously that gives us a great base for future sales growth.

Scott Settersten

And as far as the SG&A line is concerned, the answer to the question is yes. It did de-lever even ex the store impairment charge. And it was primarily kind of a mixture of things, store payroll and one of the primary drivers again part of it is connected to the boutique strategy. So there is a lot of training and payroll preparation associated with those new boutiques that are kind of just getting off the starting line during the course of the third quarter, right and setting us up for success in fourth quarter and many quarters beyond that. And then, we also kind of – we were also – with people costs associated with expenses in the quarter. Again in the way we kind of operate out, but we finally get all of our corporate headcount kind of in place as you see the third quarter, so again that’s max de-leverage point during the course of the year. And then a little bit of incentive compensation that goes along with that year-over-year comparison again. We leverage that as we go into fourth quarter and then into the following years.

Simeon Gutman

Thanks.

Operator

Ladies and gentlemen, we have reached the end of the question-and-answer session. I would now like to turn the call back to Ms. Mary Dillon for closing remarks.

Mary Dillon

I just like to thank our 30,000 associates for another fantastic quarter and all the hard work that everybody has put in and continues to put it to give our guests a great shopping experience over the holiday season. And thanks to all of you for your interest in Ulta Beauty and we wish you a happy and healthy holiday.

Operator

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