Ulta Salon, Cosmetics & Fragrance's (ULTA) CEO Mary Dillon on Q1 2017 Results - Earnings Call Transcript

May 25, 2017 11:10 PM ETUlta Beauty, Inc. (ULTA)
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Ulta Beauty, Inc. (NASDAQ:ULTA) Q1 2017 Earnings Conference Call May 25, 2017 5:00 PM ET

Executives

Laurel Lefebvre - IR

Mary Dillon - CEO

Scott Settersten - CFO

Dave Kimbell - Chief Merchandising and Marketing Officer

Analysts

Mark Altschwager - Robert W. Baird

Oliver Chen - Cowen & Company

Mark Astrachan - Stifel

Chris Horvers - JPMorgan

Rupesh Parikh - Oppenheimer

Simeon Siegel - Nomura

Michael Baker - Deutsche Bank

Ike Boruchow - Wells Fargo

Shannon Coyne - BMO Capital Markets

David Schick - Consumer Edge Research

Joe Altobello - Raymond James

Adrienne Yih - Wolfe Research

Omar Saad - Evercore ISI

Kelly Halso - Buckingham Research Group

Operator

Greetings and welcome to the Ulta Beauty First Quarter 2017 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. 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, 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'll now turn it over to Mary.

Mary Dillon

Thank you, Laurel. Good afternoon. The Ulta Beauty team kicked off 2017 with excellent first quarter results. Strong sales growth driven by product newness and solid execution of our merchandise and marketing programs translated into better than expected earnings growth even excluding the significant tax rate benefit.

Comp sales grew 14.3% on top of 15.2% in the first quarter of last year maintaining the more than 29% two year comp trend we achieved in the previous couple of quarter. Comp sales were driven by balanced traffic and ticket and the growth in our stores and remarkable strength in e-commerce.

We’re particularly proud of these results in light of the challenging environment many retailers are experiencing. Our differentiated increasing compelling assortment, the experience and nature of our stores, the strength of our loyalty program and CRM capabilities that help us drive traffic and mange promotional activity with greater precision. The supply chain investment we’ve made to support the acceleration of our e-commerce channel. All of these assets are contributing to our exceptional growth.

Now let me provide some more detail on the components of our strategy that drove our first quarter performance. Starting with our strategic imperative to acquire new guests and deepen loyalty of existing guests.

During the first quarter we acquired $1.1 million net new loyalty members, bringing the ultimate rewards program to 24.5 million active members. This represents growth of 26% year-over-year, driven by continued strong execution by our store teams were passionate about converting new members and healthy traffic in our stores, supported by our merchandising and marketing efforts.

As we anticipated the growth rate is beginning to moderate slightly as we cycle the big impact from initiatives that led the conversion rate over the past several quarters. But we still expect to see rapid growth in loyalty membership well above square footage growth.

All of the metrics we track, including retention rate, sales per member, frequency of purchase and average member ticket, remain very strong. We continue to find ways to enhance the benefits with the program, particularly adding products for our most engaged platinum level customers, who spend more than $450 a year.

Our brands are increasingly interested in partnering with us on loyalty and CRM efforts. An example of this is our most recent free birthday gift for loyalty members, who with the deluxe sample of Lancôme’s new Monsieur Big Mascara, offered to our members before the full size product launch in store.

Our credit card program continues to exceed expectations and we’re excited to be launching a gift card program with Blackhawk in grocery [ph] stores this quarter. To update you on progress in increasing brand awareness, in April we reached 86% aided awareness versus 84% a year ago, and our unaided awareness was up 6 point at 45% this year, versus 39% last year.

Awareness of Ulta’s Beauty brand is at an all-time high, as our marketing and PR activities, including TV and radio advertising for 21 days of beauty, partnerships such as those with POPSUGAR, Refinery 29, which included an activation at the Cotele [ph] festival and stronger focus on social media all are contributing to make Ulta Beauty top of mind.

Key promotional periods during the quarter included our spring trend report, where we highlight new staff sales in products through the integration of care and makeup trends in our print and social media channels, 21 Days of Beauty, our Signature Prestige beauty event that just keep getting bigger and better and Mother's Day, when we highlight the fragrance category.

For the spring 21 Days of Beauty event, we enhance the daily beauty feel program with additional [indiscernible] and elevated our Ulta Beauty collection offering, resulting in our strongest 21 Days of Beauty event ever. One of our daily beauty steals Anastasia Beverly Hills iconic Brow Wiz pencil broke the record for the best beauty steal in the history of the event.

For Mother's Day, we upgraded our gift with fragrance purchase offer and elevated both our [indiscernible] pretty and our Mother's Day gift guide. This year’s social media activation invited our guests to share their mom’s beauty wisdom, which is our best tips in makeup advice and this garner high engagement on social media.

Now turning to our efforts in merchandising, we continue to gain share across every major categories with particular strength in prestige cosmetics, as well as in skin care in both the mass and prestige categories. IT Cosmetics, Tarte, Too Faced, Mario Badescu, BECCA, Anastasia, Clinique, Lancôme, Benefit, TONYMOLY, Yes Too, and the Ulta Beauty collection were among the best performing brands for the quarter.

Half of the product launches included, IT Cosmetics confidence in a Compact Serum Foundation, Too Faced peanut butter and honey pallet, Smashbox's Be Legendary, liquid metal lip color, BECCA’s Sunchaser or Bronzing Palette, Stella’s Magnificent Metals Eye Shadow and a new line of 30 Estee Lauder lipsticks exclusive to Ulta Beauty that are now features in 650 stores.

The new brand, [indiscernible] remains robust as well reach in addition to the Prestige cosmetics portfolio include several brands much loved by beauty enthusiasts, including Nudestix and Cover FX. In prestige skincare, we launched Nikayo and a new brand targeted to Millennials, NIA which stands for Not Into Aging. We also added a handpicked assortment of K beauty favorites to our prestige skincare offering.

Our pro hair assortment received a significant assortment refill -- reflow with the additional of Klorane, Aquage, Flawless by Gabrielle Union, which is exclusive to Ulta Beauty and Madison Reed salon quality hair color.

In mass cosmetics, we launched several new brands in select stores, L.A Girl, Catrice and Model Zone. The Mass skincare portfolio added skin food and derma E essentials. In addition, many existing brands expanded into additional doors, including NARS, Origins, Drybar and Estee Lauder.

Now to update you on our MAC introduction, we launched about 600 MAC Skews online a couple of weeks ago and the brand is off to a very strong start in the website. To generate buzz for the e-commerce launch, we ran a one day flash sale for lip palette on Instagram a week before the launch. The excitement is building for our MAC launch in store this quarter, we're on track to open more than 100 MAC doors before the end of the year with the similar breadth of assortment. The first MAC Boutique will open in June 10th in Davenport, Iowa.

Moving on to services, the Salon business grew 16.7% and comped 9.9% with strength in color services, laurels and makeup services. We're investing in people and processes in our services business to continually improve the guest experience and drive sustainable market share gains.

So for example, we're investing in training and brand building for the salon through the recently announced formation of the Ulta Beauty Protein. This is a group of five artists and educators from some of the industry's top professional hair care brands Redken, Matrix, L'anza and Vella.

With over 100 years of combined experience these professionals will elevate the profile of Salon at Ulta Beauty, and help to educate and inspire on stylist across the country by working to enhance our salon education programming, building trend collections and providing training. Their efforts will be complemented by the Ulta Beauty design team who'll bring these collections to life of the company's aided educators who in turn will train Ulta Beauty's 6,500 stylists.

In addition, we've created dedicated key team at corporate to build out our analytical capabilities and will be testing a variety of changes to our model including pricing, staffing and technology enhancements. As a result of all these investments, we're very optimistic by the opportunity to continue to enhance our market position in salon services.

Now turning to store expansion, we opened 18 stores in the first quarter to launch our 2017 program of 10 new stores. We closed two stores, relocated two and needed the quarter with 990 stores. New store productivity continues to be very strong, reflecting excellent site selection, growing brand awareness and an increasingly appealing assortment of brand.

We're on track to open a handful of high profile stores this year including a store at Michigan Avenue in Chicago opening in a couple of weeks, our first store at Manhattan planned for October and a store in the Mall of America expected to open in the fall as well. As a result of these higher rent locations as well as the higher percentage of stores on the West and East Coast with generally higher rent in the center of the country, we expect some modest pressure on rent per square foot for the change.

We're confident we can offset this impart by continuing to optimize lease terms. We're very active with renegotiation of rents as part of the lease renewal process after the initial 10 year term to ensure we're paying the most competitive rents.

To update you on the e-commerce business, the ulta.com team delivered growth of 70.9% in the first quarter. This was the highest quarterly growth rate for our e-com business since the first quarter of 2014 back when the base was only $17 million. This sales growth contributed 340 basis points to our total company comp, driven almost entirely by transaction growth.

As we study our guest purchase behavior, our e-commerce business has proven to be largely incremental. The Ulta rewards member who shops online are also increasing their purchases in bricks and mortar versus shifting their purchases online. We continue to improve our site experience and fulfillment capabilities. Ulta.com drove very strong growth during 21 Days of Beauty and other event including the limited time offers we called Beauty Bets and Beauty Break and special offers for platinum loyalty members.

These events are often a catalyst for retail guest to become omnichannel shoppers, which brings many benefits. The number of omnichannel loyalty members continue to increase and now represent 8.6% of our members, up 140 basis points year-over-year. We continue to add online only brands and expand the assortments of brands we carry in-stores. During the quarter total traffic growth was up 77% and mobile traffic rose 107%, driven by growth in pay search, affiliate, display and social including Facebook, Twitter and YouTube.

And now turning to progress in our supply chain and systems, supply chain operations really performed well across all matrices in the first quarter, maintaining a high inside position throughout the quarter, while managing multiple reset introducing new brands and working with some of our brand partners to get back in stock after strong holiday demand.

Our supply chain supported ulta.com strong performance as we continue to ramp order volume shipping out of our new more efficient distribution center. Our DCs process significantly more e-commerce shipments have forecasted during the quarter, while improving productivity decreasing cost per shipment and keeping labor cost in line with forecast.

For an inventory management perspective we maintain high inventory in stocks to support our best ever 21 Days of Beauty and better. Our task skews continue to be fully supported as we identify opportunity to make our inventory more productive.

Finally to update you on our new distribution center in Fresno California, construction is underway and we’re on track for a summer 2018 opening. As a reminder this DC is similar to our Dallas DC a 670,000 square foot facilities that can serve us up to 400 stores and 45,000 e-commerce orders per day. This DC will enable new distribution technology that would increase our productivity and significantly reduce transit time to our West Coast customers.

In summary, 2017 is off to a great start and I would like to hand it over to Scott to discuss the drivers of our first quarter financials and our outlook for the second quarter and 2017.

Scott Settersten

Thanks, Mary. Good afternoon everyone. Starting with the income statement, sales for the quarter rose 22.5% to $1.3 billion, driven by 14.3% comparable sales growth and continued very strong new store productivity. The total comp of 14.3% was made up of 8.7% transaction growth and 5.6% average ticket growth.

The retail comp was 10.5% composed of 6.2% traffic growth and 4.7% average ticket. With ticket roughly split equally between units per transaction and average selling price. The salon business comp 9.9%, driven primarily by ticket growth although traffic growth was the strongest we’ve seen in several quarters. The retail and salon comp combined for a total store comp of 10.9%.

Operating margin increased 60 basis points driven by SG&A leverage. The drivers of our P&L were fairly similar to what we saw on the fourth quarter with gross profit decreasing by 20 basis points and SG&A improving by 80 basis points.

On the gross profit line, we leveraged rent and occupancy cost and product margins at retail were about flat. This reflects similar levels of promotion year-over-year with one exception. As you know we introduced the ultimate rewards credit card in August last year as an important tool to enhance loyalty and drive higher share of wallet of our guest.

We’re very happy with the program and the positive overall impact to the P&L. However, it impact some of the geography of expanses and benefits. When guest signup for the card they receive a onetime 20% off and begin to earn extra loyalty points.

Both pressure gross margin rate, but we see offset of these factors with the credit card income including signup royalties, labor support and lower transaction processes fees which are included in SG&A.

On the mix side we benefited from strong growth in the Ulta Beauty collection in some of the higher margin brands, but offsets included headwinds from higher mix of boutique brand sales. As a reminder, some of the prestige brands we’ve added are contributing significant margin dollars, but are dilutive to margin rate. With the hundreds of prestige brand boutiques we rollout last year and are now accelerating this year we are seeing a higher percentage of sales from these brands and anticipate that this margin rate headwind will continue.

We also fell some pressure from a higher mix of e-commerce sales, investment in the salon business, as well as higher distribution cost as our recent DCs and newly implemented systems continue to scale up.

Turning to SG&A, the improvement here was primarily driven by advertising expense leverage on strong sales, corporate overhead savings as we anniversary G&A investments made last year to support our supply chain and systems initiatives and benefits from the ultimate rewards credit card.

We also had some savings due to the timing of certain expenses, with some planned activities in areas like marketing and consulting that didn’t occur as expected in the first quarter. But these dollars are expected to be deployed later in the year.

These timing impacts represented about half of the earnings upside in the quarter excluding the tax rate benefit. Investments in store labor to enhance the guest experience and to ensure strong execution of planogram changes, partially offset these improvements.

Just to touch on the tax rate for a moment. You saw that we called out a $0.14 earnings per share benefit in the quarter, primarily related to the new accounting standard, that changes how companies record the tax effects of employee stock option exercises and vestings of equity awards. The tax benefit moves from the balance sheet to the P&L.

Going forward we may see fluctuations in our tax rate quarter-to-quarter, which will be difficult to forecast. Broadly speaking we expect the full year rate to be about a point lower than last year or approximately 36.5%. Our guidance will assume a 37.5% tax rate for the remainder of the year.

Moving on to the balance sheet, inventories increased 11.2% on a per store basis, well below the comp rate driven by solid inventory management, especially in light of the inventory additions for new brand and boutiques as well as ramping up the Dallas distribution center. Capital expenditures were $77 million for the quarter, driven by new store openings, systems and fixtures for prestige brand boutiques.

Depreciation and amortization were $62 million for the quarter. We ended the quarter with $472 million in cash and short-term investments. In terms of share buybacks, we continue to repurchase shares through our 10b5-1 plan. During the first quarter we repurchased approximately 185,000 shares of our stock at a cost of $51.6 million or an average share price of $279. As of April 29, 2017 approximately 395 million remained available under the 425 million share repurchase program announced in March 2017.

Turning now to guidance for the second quarter and fiscal 2017, for the second quarter we expect sales to be in the range of $1.257 billion to $1.278 billion versus $1.069 billion last year. We expect comparable sales to increase in the range of 10% to 12%, versus 14.4% last year. E-commerce sales are expected to grow in the 50% range.

We plan to open approximately 25 new stores in the second quarter versus 24 last year. So pre-opening is expected to be slightly higher. Diluted earnings per share are expected to be in the range of $1.72 to $1.77 versus $1.43 last year. With leverage on the gross profit line and modest deleverage on the SG&A line, with overall operating margin rate flattish. The tax rate excluding any impact of the new accounting standard for share based payments is expected to be 37.5% and our fully diluted share count is estimated at $62.4 million.

Now turning to full year guidance, we plan to open approximately 100 new stores all of which will be our prototypical format. We plan to complete about 11 major remodels and six relocations during the year. We expect to grow our e-commerce business approximately 50%.

Total company comps are expected to be in the 9% to 11% range. CapEx is expected to be $460 million including new stores, remodels, relocations approximately 700 prestige brand expansions and investments in systems to improve inventory visibility, which will enable future omnichannel capabilities.

We are increasing our annual earnings per share guidance to flow through the tax rate benefit reported in Q1 and about half of the operating upside to account for the timing of planned expenses shifting from the first quarter to later in the year.

We anticipate earnings per share growth in the mid 20% range compared to our earlier outlook of low-20s EPS growth. This includes the impact of the 53rd week, assumes approximately 300 million share buyback and assumes a full year tax rate of 36.5% and a tax rate of 37.5% for quarters two through four.

To be clear, our EPS outlook excludes any impact from the new accounting standard for share based payments for the remainder of the year. Operating margin is expected to increase in the 20 to 30 basis point range.

And with that, I'll turn it over to our conference call host to moderate the Q&A session.

Question-and-Answer Session

Operator

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first comes from Mark Altschwager of Robert W. Baird. Please proceed with your question.

Mark Altschwager

Great, good afternoon. Thanks for taking the question, congrats on the continued success. I did want to ask about the loyalty program, you've had a lot of success in the past year, reactivating some of the laps to loyalty members. Just curious how much opportunity remains on that front? And then first some of your more mature stores is how are you thinking about the balance between adding new members versus capturing that incremental share of wallet to drive the comp moving forward. Thank you.

Mary Dillon

Thank you, Mark. Let's -- I'll break into two, I’ll take the second part of the question first. Let's say in total wherever our stores exists whether they're more mature or newer stores, we see plenty of opportunity to continue to drive market share growth of loyalty member growth. And so overtime, certainly it's about more share of wallet of current members, but we believe there is opportunity out there as we look at the marketplace for both of those kinds of growth going forward.

In terms of lapsed users, do you want to...

Dave Kimbell

Yes absolutely from our [indiscernible] we have had a lot of success as you mentioned continuing to reengage lapsed guests. And that has continued and continued in the first quarter of this year and we more opportunity in that. We've got a larger database beyond the number of members active members and we continue to reach out and attract them both through our broader marketing that we know reaches them and encourages them to come back and then some direct marketing efforts that we start to do experiment with. So we see continued opportunity on that side as well.

Mark Altschwager

Thanks for the color and best of luck.

Mary Dillon

Thank you.

Operator

Our next question comes from Oliver Chen with Cowen & Company. Please proceed with your question.

Oliver Chen

Hi, congratulations and I need to get some of that NIA I can’t wait to try that out so…

Mary Dillon

Not into aging, you got to love that.

Oliver Chen

It’s pretty phenomenal looking stuff. So the question we had is a broader question on that topic regarding Amazon, what are your thoughts on how you preserve the specialness of your brands, and how you will continue to do a really excellent job with the growth in loyalty you're seeing in the face of Amazon, which as you know have so many -- such a big user base.

And then if you could just brief on your thoughts around your smaller formats, pros and cons in terms of what you're thinking about flexible format as you continue to grow and be relevant across different types of opportunities given that there is opportunities in different formats I'm sure. Thank you.

Mary Dillon

Okay, the two pronged question got it. In terms of -- I would just step back and just say that I think we feel as we've discussed at length about as we look at the category we operate, the consumers that we're focused on, the beauty enthusiast our loyalty program is quite large 24.5 million people and growing.

The uniqueness of our business model is that we're in a category that’s only growing, but as we look at demographic trends and we look at Millennials and GenEx and Latinos, all fast growing sectors of our economy these are all bolster really are engaged in beauty as frankly love the way that we offer how to shop for beauty with notions of all things beauty all in one place clearly is resonating.

And it's a very much about of an in person experiences as well as we're seeing a very incremental online experience. And so the notion of continuing to have a wonderful shopping experience with the great assortment of products and categories and brands launch services plus the ability to have a great online experience we see plenty of runway for us to continue to be a very relevant both bricks and mortar and online player.

We know that the beauty enthusiast wants to shop in person and our associates love that interaction with the guest as well. So that we think -- I believe strongly that platform will continue to do what we do by just getting better at it all the time, is what we are focused on and why we feel confident about our ability to continue on the growth path.

In terms of formats, we just have a couple of those smaller format stores and we learned a lot about operating them, we like what we saw but we also feels as we have said very confident that our basic overall 10,000 square foot format is our most productive best for our guest, we see plenty of real estate opportunities to do more of that. And we see opportunities both to go deeper into markets that we are in, to go open up stores in more one store kind of market as well as urban opportunities.

In most of those cases we’d say the 10,000 square foot can be a little bit less, could be a little bit more, but bringing Ulta Beauty in kind of a full throttled way that we do is really we think the best way to continue to see it.

Oliver Chen

Thank you, best regards.

Operator

Our next question comes from Mark Astrachan of Stifel. Please proceed with your question.

Mark Astrachan

Thanks and good afternoon everyone. I am curious how you think about the ultimate number of boutiques and stores relative to current levels if you start to think about it, on a longer term basis. How do you think about the existing brands for those versus newer brands? And related to that how do you think about picking up more brands from some of the larger beauty companies like the L’Oreal and Estee compared to Indi brands that may not have broader distribution?

Mary Dillon

I’d say as we think about this as a continuation of some of all of those all of the above how is that, our guest they are really interested in brands that they know and love that want to be able to access so is in a more convenient format like Ulta Beauty, as well as discovering new brands that maybe we’re first to bring to market. So that mosaic of interesting brands and we will continue to play that out in the future.

In terms of boutique, Dave do you answer that?

Dave Kimbell

Yes, we as we said before we are adding about 700 boutiques across the chain this year with those key boutique brands Clinique, Lancome, Benefit and MAC. And we see more expansion certainly as we build new stores many of them will get all of those or a most of those boutiques. And then we will continue to penetrate our existing stores, where it makes sense and we have the opportunity to back and do that.

So that will be a continued source of growth, but as by no means the only growth and as we are building on what Mary said continued mix of both big established brands like a MAC or an Estee Lauder. But also uncovering new emerging independent brands and bringing that balance to our guest which is what you want.

Mark Astrachan

That’s helpful. If I could squeeze in one more sort of related question. Just curious how you are thinking about with now a few weeks of MAC online, how you are seeing that doing relative to on expectations it might not be the best way to think about it, but just in terms of how sales have been whether you think it’s cannibalizing each stores outside of Ulta. And sort of thoughts about how that would fit into the e-commerce expectation, which would seem like to be even better than that given that MAC just started?

Dave Kimbell

We not talk too specifically about any individual brand performance, other than say we are very pleased with just a couple of weeks in. Mary mentioned in her comments that we are happy with the results. And then we have included that our anticipation of continued success there in our forward-looking view of the business. So we are excited about it and we will continue to drive that business going forward.

Mark Astrachan

Thank you.

Operator

Our next question comes from Christopher Horvers of JP Morgan. Please proceed with your question.

Chris Horvers

Thanks, good evening. So wanted to first follow-up on the MAC question. I know you are pleased with these results so far, but I guess could you share any thoughts on the demographics that you are picking up on the MAC side, and how maybe that -- how your core customer is also responding to MAC offering? And then in terms of how the quarter play out for you obviously you guided a lot lower to start the quarter, was February hurt by tax refund? And then it sound like you basically just recaptured that into the balance of the quarter.

Mary Dillon

Yes I’ll start with that, I guess which is -- yes, I mean, I think we saw some -- a little bit of choppiness overall kind of averaged out, but we saw a little bit of volatility I would say late January early February probably due to the same factor that others saw with the tax refund. April was our strongest of the periods as that was also benefited from a change in Easter timing.

So in total I’d say it kind of all worked itself out and it wasn't -- we felt good about -- I mean, we did better than we had guided, better than we thought. And I think the e-commerce business in particular was stronger than we had planned. So that’s kind of how it netted out.

In terms of MAC, I would say way too early. We just launched it online, but I appreciate the question. And I would say I would expect that this will be very much our core guest will love it and is already showing online response this year I wouldn't expect it to be different than who would be interested in many of the other brands that we offer. But she's excited to be able to get at Ulta Beauty that's for sure.

Chris Horvers

Understood. And I think the biggest question out there right now is what you're seeing in the promotional environment from the department store channel, I mean, there were some news out there that you added a couple of incremental promotions it sounds like it went to your best customers that optimize the value to them. But what are you seeing in the department store channel and is there a wholesale change going on in terms of the complexion of the industry?

Mary Dillon

Well, that's a deep question I'd say the beauty it's really always has been a competitive category. I would just step back and I'd say I think our results in terms of traffic and market share scores that what we are doing is working, right it's competitive. Also I would say yes in the quarter we over the past several quarters and several years we've actually been modifying our approach to marketing task, this was a meaningful reduction in the broad based to more kind of balanced and targeted mix.

We do use postcards and we do it more limited and targeted basis really than we ever have. So in the quarter, we did too, we did one that was -- they're both digital one was very targeted to our platinum only guests in February. So here we’ve got a lot of different levers that we can use influx as we need to in terms of demand creation.

So I feel that we will always be offering a great value proposition to our guests, and we've got the right tools to allow that to happen. So will some competitors get more aggressive price motion sure. That sometimes happens in a competitive market, but we've got the levers that we can use to respond in a dynamic environment.

I'd also add that we always -- we work with our brand partners to make sure that we have really great exciting offers for our guest all the time and again I would say that our results are showing that that’s working.

Chris Horvers

Understood, thanks very much.

Operator

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

Rupesh Parikh

Thanks for taking my question and congrats on another great quarter. So I was hoping to get a little more clarity in terms of how you guys are thinking about gross margins for the balance of the year. It sounds like the greater e-commerce sales this quarter and greater prestige sales weighted on your margins in Q1. So just want to get a sense if you expect similar pressures or potential decline to continue for the remainder of the year. Thank you.

Scott Settersten

Yes, I mean, the one thing that I would just remind folks that we're lapping some pretty significant promotional kind of pull backs here over the course of the last whatever call it six to eight quarters right. So we're lapping some pretty tough compares I would say on the margin line, recently.

So the big schema things we look at each quarter individually and try to optimize as best we can to deliver the best overall results for the business. There is nothing as we sit here today that would indicate that there would be any significant change in the trend that we’ve seen here recently. We'll just do our best right to try to of course correct as we think necessary as we navigate through that.

Rupesh Parikh

Okay great. Thank you.

Operator

Our next question comes from Simeon Siegel of Nomura. Please proceed with your question..

Simeon Siegel

Thanks guys. Good afternoon and obviously congrats. Are you -- Mary or Dave are you see any change in your incremental customer as your brand awareness grows. And are you reaching any new demographics with marketing? And then how is the awareness in City Center just particularly ahead of the high profile store openings? Thanks.

Dave Kimbell

Yes, we had a definitely an effort to continue to expand our appeal across all consumers in all markets and geographies. And I think we're seeing success with that. Our awareness in total continues to grow and certainly is much higher than it was two or three years ago. Our aided awareness is at 86% or our unaided awareness remains about at all time high around 45%. So we're feeling very good about that.

We have a big focus this year and we've talked about it in the past in expanding our efforts to reach Latina guest. We’ve had more dedicated marketing partnerships with key media sites like Viva La, Top Sugar, Latina and others kind of reach out directly through influencers. We're testing some Spanish Language advertising later this year that will give us the opportunity to reach them more directly.

So, there is -- we see strength there and lots of opportunity to continue to build that. As far as urban centers, we do measure and look at awareness across major centers. And it’s actually quite strong, I mean, Loss Angelis as an example we’ve opened quite a few stores there over the last few years and we have strong awareness that really mimics our national Chicago, New York we’re building and it’s quite strong.

So there isn’t big packet of undeveloped in urban areas, but we see more growth potential across the board and specifically with key group like Latinas.

Simeon Siegel

Okay, thanks. And then just to the point of the leveraging marketing, what’s the right way to think about the marketing dollar growth or as a percent of sales? And then Scott I don’t know if I missed it, but did you say what the right way to think about total SG&A dollar growth for Q2 and the full year would be? Thanks.

Scott Settersten

We don’t really talk about SG&A in terms of dollars like some of big box guys, I mean, when we’re thinking about the full year I guess this gets back to Rupesh’s question as well. I mean, I think we set operating margins flattish in the second quarter up a little bit on the gross profit line down a little bit on the SG&A line.

I think as we navigate through the rest of year the third quarter I would say gross profit were going to have a little bit more pressure on that because some of the rent the heavier rents we are going pay for some of those higher profile kind of stores that are coming in Manhattan and Mall of America and a few others in the Burroughs of the New York metro area.

So that might be a little tougher on the gross profit line, we’ll get a little offset during SG&A to offset it there again. I would say maybe slight deleverage in the third quarter overall and then we make it back up in the first quarter when we’ve got we’re lapping the Dallas DC there and we’re scaling up on e-commerce and retail overall. So, we see more leverage in the fourth quarter.

Simeon Siegel

Great, thanks a lot. Best of luck for the rest of the year.

Mary Dillon

Thank you.

Operator

Our next question comes from Michael Baker of Deutsche Bank. Please proceed with your question.

Michael Baker

Hi, thanks. More of a longer term bigger picture question, typically I think you saw this quarter as companies grow their e-commerce it does pressure margins because I think contrary to [ph] five years ago, e-commerce can actually be a lower margin business. The question there was how does that leverage as your e-commerce business grows, does the e-commerce business gets bigger, do the margins on the ecommerce itself get better? And then therefore it becomes less of a drag or if that doesn’t occur as e-commerce grows does the drag actually get bigger?

Mary Dillon

Well, first of all I step back and say just reiterate that was great about our e-commerce business group, which is that as we measure and look at it closely it look to be very incremental business to us. So, I’ll come back to margin but in total this is incremental dollars and it’s supported by the consumer behavior that we understands our guest, especially our most engaged guests she loves to buy a lot of offers from us. And so when somebody becomes an omnichannel shopper they ends up basically being our best guest because they are spending 2.5 times amount of money of somebody who is just shopping in store.

21 Days of Beauty is a great example of an event that can drive that kind of incremental additive behavior it’s 21 days a lot of days everyday has special offer. So guests might come in a couple of times and then see a couple of things online that she also want to get to the incremental shopping occasion. So, it plays out that whether it’s an event or pallet that you can only get online at first before we put it in stores or other special things she is looking for it sort of feeding into this behavior and creating a nice incremental business for us.

That said, we also -- the margin yes it’s somewhat lower on our e-commerce business and we don’t really break this out in a lot of detail, but basically they are pretty -- it’s getting closer, the gap is not that large and it’s actually closing. So, it’s incremental dollars at a somewhat less but narrowing gap of a margin and it’s just the kind of decision we think is right for our business as we continue to grow the business in total. And our supply chain estimates has certainly helped us to make this part of our business more efficient overtime.

Michael Baker

Okay. I appreciate the color. I’ll turn over to someone else for questions.

Mary Dillon

Sure.

Operator

Our next question comes from Ike Boruchow of Wells Fargo. Please proceed with your question.

Ike Boruchow

Hey, thanks for taking my question everyone. Scott, so I saw the prestige brand business was higher margin for you, but I think you said in your prepared remarks the new prestige boutique sales are a little dilutive. Can you maybe just walk us through some of the economics and how the boutique business differs from the other prestige business that you guys have?

Scott Settersten

Sure, Ike. There is an interesting mix and that's why we’ve been trying to walk people back a little bit from counting a number of boutiques we’re putting in and what stores locations and so on that we are going into. Because it is kind of an interesting mix and dynamic that we have in the store and it’s the overall offering and the variety of brands and the different price points, I mean, collectively with services that’s driving the results, right.

So, that directly more to your questions, so the prestige boutique brands are -- well take a step back prestige generally overall is higher margin business than mass is, alright. So that’s one general statement but there is a lot of exceptions to the general rule unfortunately or fortunately for us.

So on the prestige side, those boutique brands are lower than a lot of our other prestige brands, right. So adding into the mix while it’s driving incremental sales and margin dollars on a rate basis creates a headwind for us. So again fantastic comps, very healthy growth there, excellent overall result for us.

On the mass side, well again it’s generally lower margin business the exceptions there Ulta Beauty Collection, right, very high private label margins there, mix would be another one that provides better than average mass margin rate. So the secrets are that Ulta having all those different levers and ability to promote and drive conversion on those brands to help deliver the best overall results.

Ike Boruchow

Got it, thank you.

Operator

Our next question comes from Shannon Coyne of BMO Capital Markets. Please proceed with your question.

Shannon Coyne

Hi, thanks congratulations on a great quarter. I was just wondering if you could talk directionally about the growth rate in the prestige brands versus the mass brands do you find that the growth rates are widening or converging overtime. And then maybe if so kind of what’s driving those differences, any changes that you might be seeing? Thanks.

Dave Kimbell

Yes, so I’d say, if you just look across the industry as a whole, over the last several quarters, a year or so, prestige in general has had higher growth rate than mass both have been growing. And that’s been true largely true at Ulta that our prestige brands have been growing or prestige portfolio has been growing a little bit faster than mass.

Having said that mass is quite strong. Prestige has benefit of -- we are still building our penetration adding probably more brands into prestige than into mass over the last year or so. But our focus is to drive growth and we are pleased with the growth that we are seeing on both sides of the business again that’s one of the key differentiators for us is the mass, prestige the ability to offer all things beauty all in one place.

So we are really happy with the growth and nice benefit of having a diverse portfolio is we can take advantage of wherever there is growth in the industry and then drive our own business that way.

Shannon Coyne

Okay, thanks.

Operator

Our next question comes from the David Schick, Consumer Edge Research. Please proceed with your question.

David Schick

Thanks for taking my question. Just wanted an update on as you have added the prestige brand, is it bringing in a different customer at a different clip. I think we have talked about that over the last year, but any update to whether it’s a different customer, your existing customer trying those brands, what’s driving the ticket?

Dave Kimbell

Well we have been adding as we talked about over the last several quarters, we’re really pleased and I guess proud of new member growth that we have been having. I’ll tell you that growth comes some are coming in for new prestige brands, many are coming in for the first time and buying mass brands, they buy hair brand.

So there is still a mix of the new brands, I’d say yes, adding brands anywhere in the house can help us attract new customers if it’s a known brand or a new brand that we are launching with social buzz exclusivity. So certainly that helps to add new prestige brands and driving new members in. But by no means is it the only source of new member growth in our business.

Ulta Beauty does a great job of introducing customers to their prestige brands would many often our guest that come in and buy mass discover brands in the prestige portfolio for the first time at Ulta Beauty. So that’s a big growth driver for us and an important growth driver for our brand partners.

Mary Dillon

I would just ad one thing what Dave which is kind of the core premise that we operated off of it because really the deep understanding of the consumer segment in the beauty market. And the beauty enthusiast is a phrase that we use that really defines the core segment, really a large segment it’s 57% of shoppers by definition they are made by products and brands all across the spectrum in terms of price points and categories.

So I wouldn't expect that by adding certain types of brands like prestige brand that could have fundamentally changed who is attractive to Ulta Beauty. I think as Dave said well it kind of add to the mosaic, but she consistently -- she might change that shift that mix a bit overtime, but she loves the fact that she can get an array that's what we call all things beauty on the play. So this we expect to continue, we expect the beauty enthusiast segment to grow as well.

David Schick

Thanks so much.

Operator

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

Joe Altobello

Thank you. Hey guys good afternoon. So I was hoping to get a little more insight into the spending patterns for your typical ultimate awards members and how that plays out overtime. How long do you see that ramp before there is a plateau, and how does spending patterns of your newer members differ from spending patterns of your more tenured members?

Mary Dillon

Well our newer members, our members spend more overtime and she gets more engaged with Ulta Beauty and certainly if she becomes the multiple an omnichannel shopper. As you step back we still really only have a third on average of our shoppers’ beauty wallet certainly higher for some lower for others. We also know that most of our members -- our members always shopping about a quarter of the categories that we operate in.

So it's hard to kind of pinpoint an exact feeling. I think there is plenty of opportunity for us to continue to drive a growth through share of both new members coming into the programs as well as the beauty wallet of our existing members. Plenty of opportunity for them to continue to expand.

Joe Altobello

Okay got it. And then if I can just sneak one more in for Scott the ROIC of the non-traditional doors versus your typical 10,000 square foot variety?

Scott Settersten

I think we said on our fourth quarter call right probably not at exactly the same kind of returns, at least in the early years we're not expecting that, I mean, these are significantly higher cost kind of real estate deals, but they are subject to the same exact disciplines that we used for every other store in the chain.

These are not the term flagship in any way shape perform are expected to be very productive stores over the long-term. We're just allowing ourselves a little cushion to see to give ourselves a little bit more ramp up time in those stores. But again we expect them to produce very solid financial results for our investors.

Joe Altobello

Great, thank you guys.

Operator

Our next question comes from Adrienne Yih of Wolfe Research. Please proceed with your question.

Adrienne Yih

Thank you, good afternoon and congratulations on a great quarter. Mary I guess my question is going to go back to e-commerce and the tremendous strength and growth you saw there up 70%. Were you surprised by that first of all? And then secondarily were you doing something to kind of move the customer to that particular channel.

And Scott, I guess in that vein when we're looking at the gross margin or the margin both gross margin and operating margin, on the gross margin side is it pressuring because they're inclusive of free shipping, they're smaller lower margin items there. And then is it operating margin accretive. So to the extent that we see this channel it should be accretive to earnings. Thank you.

Mary Dillon

Okay thanks Adrienne I'll take the first part on e-commerce. Yes so it was a stronger result than we have planned. We're very, very excited about the fact that because of our supply chain investments we're able to fulfill what the guest wanted in a way that was very exceptional so that was terrific.

And I would say we're probably benefiting from some newer digital marketing tools that we implemented last year. So paid search, display advertising, paid social those are all building momentum to really drive traffic, so that certainly is benefited our e-commerce business. We also just had great offers, I think, I believe smartly targeted site improvements and again the supply chain investments that have made the overall experience for the guests even better. So those things in total I think created that kind of momentum on e-commerce.

Scott Settersten

And that's a good question Adrienne. I think people get -- it gets a little fuzzy when you're talking about margin and contribution on e-commerce versus retail I know myself. So we've been spending a lot of time here actually we just refreshed our board here recently and just new ways of thinking about that. So the difference at the gross margin versus operating, I’d say at the operating margin level we're almost to the point now where we're kind of agnostic on what channel she buys in.

And so when you think about the dynamics there, it really almost not quite, but it’s close to being a wash with the trade-off behind the shipping. We have made a lot of progress, right, on the efficiencies in our DCs here over the last couple of years, we have the full assortment online now, remember wasn’t that longer go that we didn’t have Pro Hair online, which is one of our higher margin categories. So we have gotten to a good place overall with our e-commerce business, where at the operating margin line it’s almost kind of a net zero.

You are trading off shipping cost for store labor and boutique investments and all those things that you are doing in the store right labor investments to go along with that. So that’s the good news. Working our way backup to the gross profit line, really what’s going on there it’s more of a I’d call it a category, a product mix kind of issue, right. So the margin there is lower online than it is our typical store at lease today it is and it’s generally because it’s we over index on things like PCA, right.

So take $200 hair dryers where it’s easier you are going to price compare that maybe a little bit more closely that you would if you were walking on our store, you got easier access to a coupon, right, it’s easy to go find is there some kind of deal I can get on this appliance when I am spending this kind of money.

So that’s kind of what’s putting pressure on the gross profit line I would say right now, but again we kind of make up for a lot of that as you move your way down the P&L. So the good news there as well as it’s something that we are aware of and we are working on and thinking about ways that we can try to improve that for our business, as we look to the future.

Adrienne Yih

And then to your gross margin up a little bit in the second quarter, what dynamics change there or what’s the underlying e-commerce growth in Q2?

Scott Settersten

It’s approximately 50% comp we set for the second quarter.

Adrienne Yih

Okay, very good. Thank you very much.

Operator

Our next question comes from Omar Saad of Evercore ISI. Please proceed with your question.

Omar Saad

Thanks for taking my question, great quarter. It’s interesting to us that it seems like your traffic numbers are phenomenal, but almost as they slowed down just a little bit you are seeing the e-commerce side accelerate. And I am wondering through the great data that you guys collected at the loyalty program. If you can see patterns or trends it’s the same consumers shopping less in stores and more online, is it total incremental trips that are coming online in addition to what they have been doing in the stores or is it new people who are shopping online only. Would love to kind of get a perspective on that those changing dynamics between your online and physical stores.

Mary Dillon

Yes, I will start, Dave if anything else you want to add. But we really have very few people that shop online only at all, it’s really the bulk of our business people shopping obviously in store and then around 8.5% of our guests are now doing omnichannel shopping. And really as I said earlier, as we study it, it looks to be quite incremental.

So I mean in any given quarter there is going to be variations I guess on traffic patterns and what not. But the incremental -- what’s happening with the e-commerce business really for those guests as we’ve kind of separate them out and look at them they are growing in terms of retail sales the same with similar looking guests, or adding e-commerce trip I guess you would call it and purchases on top of that.

So I think it’s a very healthy place to be, pleasing to the consumer insights that we have about how should like the shop most engaged shop or likes to try a lot of things that we offer which goes up well online. So I think it’s a continuation of that, which is great for our business longer term because these omnichannel shoppers are best guests not unlike our store on guest, most engage at that.

Dave Kimbell

The only thing I guess…

Omar Saad

Definitely, sorry go ahead.

Dave Kimbell

I was just going to say the only thing I’d add is it goes back to Mary’s wallet share opportunity and I think that’s really the big driver of this as we’re -- we believe it’s very incremental and because of that it’s capturing just a greater share of the wallet.

So we see a lot of runway there without it cannibalizing stores. So our goal is to have them work together. We want a new guest that we acquire online to get into store as quickly as possible and then we are working hard to convert our in-store customers to online. So, there doesn’t appear to be a big trade off at this point and we see a lot of runway ahead of us.

Omar Saad

Yes that’s definitely pretty interesting, now you are not saying the in-store trips and spend drop off that much as they add online trips to their menu. Thanks for all of the information, it’s very helpful.

Mary Dillon

Thank you.

Operator

Our next question comes from Kelly Halso of Buckingham Research Group. Please proceed with your question.

Kelly Halso

Hi, thank you for taking my question and congrats on another great quarter. I just want to follow-up on a previous question since there has been a lot of chat around the beauty category lately. So how did the total beauty category grow, prestige beauty in particular and prestige cosmetics? And just remind us of how it grew in FY16?

And then as you go deeper with some of these premier prestige brands and have you thoughts about how that opens you up or possible makes you more exposed competitors who may not be as discipline with their promotional cadence. And is that conversation you’ve had with some of these key vendors historically they have been very discipline with their pricing and promotion.

And then just secondly, I know Pro Hair Care is a pretty important category in the second quarter, how has that category been growing is there been any changes in growth or anything we should be thinking about? Thank you.

Mary Dillon

Let me just start with the first part and see if Dave can come back in on the category type work. So I guess I would just say as I said before it certainly a competitive category, there is a light of moving dynamics. I’ll give you a split of offence and I think our offence proven to be a pretty good offence, right. So, we offer our guest a whole array of ways to get great deals and being a great total value proposition is important for every consumer category that exists.

And so we can flex up and down, I would say that our ability to be very targeted, to be very varied in our marketing mix and our demand creation tools and the ability to leverage our loyalty program to get insights and drive work with our brands partners to offer really targeted smart promotions is pretty unparalleled.

And so I think that for us as we work with our brand partners, we are making sure that we have always working to make sure we got great guest offers that are compelling and differentiated. And I’m confident that that's going to continue to be a way for us to be -- continue to win and drive share growth in a dynamic marketplace.

And frankly our guests love the fact that when she buys more from us she gets more points and she can then redeem in the stores. So the royalty program really is the foundation of helping offsetting being protective in our competitive position. On category.

Dave Kimbell

Yes, on the total category I don’t if we’ve got full inside on the combined category. What I will -- and although we feel confident in beauty as we have for a while and see a lot of growth all the demographic trends that we’ve talked about are everybody is true today as what we’ve talked about in the past continue to see high engagement in beauty. Young women with Latinas, with African American, there is plenty of growth ahead of us.

I will say we see strong growth in categories that hadn’t been growing strong like skin care is strong we’ve seen strong performance in fragrance, bath is doing well. You asked specifically about hair, hair has been strong for us and you are right that we’ve got -- hair is always important for us and we’ve got some big activities on hair we’ve launched several new brands.

And there is strong newness across key brands like Paul Mitchell and Dyson and Mary mentioned the Flawless line that we just launched. So there is Madison Reed lots of newness, lots of strength good marketing and promotional strategy in hair so we’re confident about that. So we feel really good about the total category and are seeing some strength in key pockets that we’re excited about.

Kelly Halso

Thank you.

Operator

Ladies and gentlemen we receive end of the question and answer section. I would like to turn the call over to Ms. Mary Dillon for closing comments.

Mary Dillon

I’d just like to say thank you to our 34,000 associates who delivered a terrific start to 2017 and has set the stage for another year of strong top and bottom-line growth. And thank you all for your interest in Ulta Beauty and look forward to speaking with you soon. Thank you.

Operator

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

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