Q2 2025 Earnings Call Transcript

Good afternoon, everyone. My name is [ Leila, ] and I will be your conference operator today. At this time, I would like to welcome you to Ulta Beauty's Second Quarter 2025 Earnings Call. This conference is being recorded. [Operator Instructions] At this time, I would like to turn the call over to Ms. Kiley Rawlins, Senior Vice President of Investor Relations. Ms. Rawlins, please proceed.

Thank you, [ Leila. ] Good afternoon, everyone, and thank you for joining us for a discussion of Ulta Beauty's results for the second quarter of fiscal 2025. Hosting our call today are Kecia Steelman, Chief Executive Officer; and Chris Lialios, Interim Chief Financial Officer. Before we begin, I'd like to remind you of the company's safe harbor language. Many of our remarks today will contain forward-looking statements. We refer you to our earnings release and our SEC filings where you will find several factors which could cause actual results to differ materially from these forward-looking statements.

We caution you not to place undue reliance on these forward-looking statements, which speak only as of today, August 28, 2025. We have no obligation to update or revise our forward-looking statements except as required by law, and you should not expect us to do so. Following our prepared comments, we'll open the call for questions. To allow us to accommodate as many questions as possible during the hour scheduled for this call, we respectfully ask that you limit your time to one question. If you have additional questions, please re-queue.

As always, the IR team will be available for any follow-up questions after the call. And now I'll turn the call over to Kecia. Kecia?

Thank you, Kiley, and good afternoon, everyone. I'd like to start by welcoming Chris Lialios to our call. As you know from our announcement in June, Chris is a 25-year veteran of Ulta Beauty and is serving as our interim CFO in addition to his responsibilities as the company's Controller. He is a trusted leader across our organization, and I want to express my gratitude to Chris for his partnership and leadership during the important time for our business while our CFO search is in progress.

Today, I'd like to spend a few minutes highlighting what drove our strong performance, the progress we're making against our Ulta Beauty Unleashed strategy and where we're headed. The Ulta Beauty team delivered significantly better than planned sales performance and continue to successfully execute our strategic priorities. For the quarter, net sales increased 9.3% to $2.8 billion. Operating profit was 12.4% of sales and diluted earnings per share was $5.78. Our Ulta Beauty Unleashed strategy continues to gain traction, and we're building on our momentum.

I am pleased with how our team has incorporated key learnings to strengthen our performance as we lap the impact of the operational disruption and promotional effectiveness challenges we experienced in the second quarter of 2024. Customers are responding favorably to the actions that we've taken to sharpen our business and our teams have made solid progress in advancing our long-term initiatives. Highlights from our quarterly results include comp sales growth of 6.7%, positive comp growth in both channels and all major categories, continued market share gains during a highly competitive quarter, loyalty member growth of 4% year-over-year to a record 45.8 million members and ongoing improvement across several key performance indicators, including brand engagement, earned media value, in-store conversion and app engagement.

We're encouraged by the visible progress underway and see continued opportunities to strengthen our operating model to ensure that Ulta Beauty delivers sustainable, positive performance and attractive shareholder returns. Before I dive into the key drivers of our performance, I want to touch on what we're seeing across the beauty and consumer landscape. Engagement with beauty and wellness remains healthy. The growth of the U.S. beauty category has been fairly stable with low single- digit growth in mass and mid-single-digit growth in prestige beauty during the second quarter, according to Circana.

Our insights suggest consumers continue to prudently manage their day-to-day spending and are watchful of pricing trends in response to tariffs. At the same time, beauty enthusiasts tell us that they're prioritizing their beauty regimens and remain strongly engaged within the category. While we continue to manage the business thoughtfully amid ongoing macroeconomic uncertainty, we believe beauty and wellness offer a unique sense of comfort and escape which we expect will continue to support the beauty category resilience. Turning to the key drivers of our performance.

Let me begin with our efforts to drive core business growth. Performance in the second quarter was fueled by the strength of our core business, reflecting our commitment to getting back to the basics, improved in-store execution and elevating our go-to-market approach through operational excellence, marketing leadership and compelling merchandising and innovation, tighter collaboration and planful coordination across our field, marketing and merchandising teams is having a tangible impact. We continue to make progress in advancing our brand building and digital and personalization efforts. In stores, our team has built on our successes in Q1, maintaining our focus on elevating the store experience and delighting our guests with every interaction.

Our thoughtful go-to-market planning paired with strong execution in stores, delivered comp growth across all categories and supported strong execution of key events and holidays, like Mother's Day and Father's Day are newly created only at Ulta event and our Big Summer Beauty sales. I am incredibly proud of our store and field teams who have passionately embraced our Ulta Beauty Unleashed strategy and are enhancing the in-store experience for our guests. In addition to sales growth, these collective efforts drove improved in-store conversion and guest satisfaction. From a category perspective, our comp growth in the quarter reflected balanced contribution from in-demand newness and core assortment growth.

Fragrance continues to lead the way as our strongest performing category, delivering robust double-digit growth in the second quarter. Performance was fueled by successful Mother's Day and Father's Day activation, compelling newness and continued strength in gift sets and men's fragrances, new and exclusive brands, including the launch of our first men's exclusive fragrance, Drake's Summer Mink as well as newness from YSL, Gucci, Chanel and exclusive brand Snif and Noise supported strong category performance. Sales in the skin care and wellness category increased in the high single-digit range led by strong growth in body care and wellness.

Our trends in mass and prestige skin care grew and improved with both segments delivering low single-digit growth for the quarter. New brands, including Tatcha and Saltair as well as trend-relative brand MAËLYS resonated with guests while product expansions of Sol de Janeiro, [indiscernible] and Touchland also contributed to category growth. In addition, our robust and expanded K-Beauty assortment continues to contribute with new brand Anua and exclusive brand Peach & Lily is leading the way. Wellness performance benefited from the launch of new brands like Honey Pot and ARMRA along with newness from supplements and ingestibles favorite Lemme.

The makeup category delivered mid-single-digit comp growth driven by positive performance in both mass and prestige makeup, compelling newness from existing brands, including HOURGLASS, MAC and NYX drove excitement and category performance. MAC makeup grew in the high single-digit range, reflecting the strength of trend across eye, face and lip and the benefit from lapping the sell-down of our Ulta Beauty Collection in association with our Q3 relaunch last year. Prestige makeup increased in a low single-digit range, supported by newness and key brand expansions. Comp sales in the hair care category increased in the mid-single-digit range supported by growth in professional hair care, accessories and hair tools.

Performance also reflected the benefit of the timing shift of a key promotional event. Redken and our exclusive brand, Cécred, continued their momentum, contributing to comp performance for the quarter while the brand new launches including exclusive brand, isima by Shakira built engagement and contributed to sales growth. Care tool performance benefited from strong innovation from Shark and Conair. Finally, services delivered a low single-digit comp, driven primarily by the strength of cutting color services.

We continue to bring beauty to life in our stores through our events, salon workshops and salon brand features. During the quarter, we hosted more than 30,000 events across our fleet and guests and brands love our new digital tools that enable guests to see and sign up for these fun and educational opportunities. We also hosted three unique salon experiences, including our Father's Day, Daddy and Daughter Day Out Workshop, which educated guests and drove trial and salon sales. Our eventing and workshop strategies are powerful ways in which we're supporting our go-to- market strategy and successfully activating key events, brand launches and promotions.

Moving to marketing. We are elevating our marketing efforts to spark excitement and awareness, drive engagement and attract and retain loyalty members. During the second quarter, we reimagined our events and activations to be more relevant and differentiated for our guests. This include kicking off summer with our Here We Glow Sun event, which replaced last year's Member Love event and launching a new Only at Ulta event to highlight and support our exclusive brands.

In addition, we applied lessons learned last year to our Big Summer Beauty Sale and Back-to-School events, including shifting timing to better align with consumer shopping behavior. And we are driving connection with the beauty enthusiast by strengthening Ulta Beauty's cultural relevance with unique activations at Coachella and Lollapalooza and serving as the official beauty retail partner of the Cowboy Carter Tour, a powerful collaboration featuring curated beauty looks exclusive product assortments and immersive brand experiences across Beyonce's tour markets in the U.S. As beauty continues to move at the speed of culture, we're keeping pace with strong social media engagement and trend-forward content that is engaging and relevant to our consumers, resulting in meaningful growth in unaided awareness, brand engagement and earned media value.

At Ulta Beauty, we celebrate the transformative power of beauty and wellness inspiring self-expression, empowerment, well-being and connection. We believe that beauty goes beyond the surface. It's really what radiates from within. This belief fuels our purpose to unlock the possibilities within each of us through beauty and wellness.

We have been on a journey to bring this purpose to life, creating emotional connections, building trust and shaping a brand that truly champions and celebrates every guest, all ages and life stages. This fall, we will take the next bold step with our multiyear brand platform. Beauty Happens here, celebrated by the debut of our new brand campaign. It begins with a powerful declaration, we are beautiful, an inspiring way to share that Ulta Beauty is where beauty lives, and when we inspire our guests and connect with our guests, beauty spreads to others, making the world a more beautiful place.

Stay tuned for more in the coming weeks. Turning to our long-term strategy to enhance our assortment and brand building capabilities. We're focused on launching, building, scaling and globalizing brands to strengthen our position as the partner of choice for beauty and wellness brands. We continue to make exciting progress in enhancing our assortment and merchandising approach.

During the quarter, we launched 24 new brands, many of which are exclusive to Ulta Beauty, newly launched brands like isima, INKEY List, Uni, Goop's beauty are driving excitement for our guests. At the same time, our exclusive brands, including Cécred, Snif, Half Magic, Live Tinted, DIBS are all driving growth and market share. And there is more to come. Our merchants are hard at work to ensure that we complement the strength of our existing core assortment with the hottest new brands and innovation in beauty and wellness.

This includes the introduction of Moroccanoil, a fan favorite was launched in stores and online this week. We continue to lead the market in body care, and we are excited for Tracee Ellis Ross' entry into body care with Pattern Body launching first at Ulta Beauty and for the debut of Rihanna's new skin line, Fenty Skin Body which will launch exclusively at Ulta Beauty in a few short weeks. Our brand-building efforts are driving guest engagement and results, and we're optimistic about the new brand launches and activations planned for the rest of the year. Moving to digital and personalization.

We are accelerating capabilities to deepen guest connection and drive performance. During the second quarter, we continued to expand automation and real-time delivery content, enabling us to deliver a more personalized customer experience across key digital channels. New features like Split Cart and recently launched Replenish and Save combined with personalized recommendations are removing friction, increasing relevance and driving measurable results. Taken together, these enhancements contributed to strong measurable results in e-commerce.

We're leveraging our power as an omni-channel retailer to deliver speed to guests and provide more choices in the way they shop. During Q2, half of e-commerce orders were fulfilled by the stores. The highest rate we've ever recorded. Moving to our second strategic priority, the team made steady progress to scale new businesses to capitalize on key growth opportunities and ensure that we remain relevant in a rapidly changing world, beginning with our international expansion.

We reached a major milestone in our international journey with our entry into the U.K. market. As one of the largest beauty markets in the world, the U.K. represents an attractive market with a healthy growing beauty landscape. Our acquisition of the U.K. specialty beauty retailer, Space NK was a unique and strategically compelling opportunity to enter the growing U.K. market with an established and successful player, a top destination for beauty lovers, Space NK operates 83 U.K. and Ireland stores and a vibrant online platform. Space NK will continue to operate as a stand-alone subsidiary with CEO, Andy Lightfoot and his talented team staying at the helm leading operations from the U.K.

We see opportunities to leverage each other's strengths, talents and expertise. And over the long term, we will focus on sharing best practices and transferring learnings between markets, particularly around assortment, guest experience and scaling growth. Chris will share more about the financial details of the acquisition shortly. In addition to our expansion in the U.K., we just celebrated the soft opening of our first Ulta Beauty store in Mexico with the grand opening to come in a few weeks, and we remain on track to open our first store in the Middle East later this year.

In wellness, we're focused on leveraging our position as a trusted leader to expand more meaningfully into wellness. Our goal is to establish ourselves as a one-stop shop for relevant products to support living a well-balanced lifestyle through improvements to the mind, body and spirit. During the second quarter, we launched several new wellness brands and expanded the in-store footprint of the wellness shop in about 370 stores. In the third quarter, we will introduce a larger enhanced guest experience with new elevated fixtures in 50 additional stores.

Moving to our online marketplace initiative. Our merchandising vision is to curate and inspire guests with the best beauty and wellness for all life stages. The Ulta Beauty marketplace, which we'll launch in the third quarter is a curated invitation-only online platform that allows guests to explore a broader and complementary array of beauty, wellness and lifestyle products on ulta.com from both established and emerging brands. This new platform will enable us to not only strengthen our existing category authority that go after new subcategories and trends to build incremental growth for our business.

Finally, moving to our third strategic priority to realign our foundation for the future. Our culture is truly a differentiator for our business and we are on a journey to reenergize this critical competitive advantage. We know that stronger employee engagement leads to better customer experiences. We recently completed our annual culture survey, and I'm proud to share that our participation rates and results exceeded industry benchmarks.

Associate engagement has increased across the enterprise, reflecting decisive steps that we've taken to streamline decision-making, empower creativity and align our teams around guest-centric goals. While we always have work to do, we are proud of this progress and intend to build upon it. Associates are the heart of our business, and I am proud of how our teams have embraced our Ulta Beauty Unleashed strategy and new ways of working and are leading through our values, all while keeping our guests at the center of all we do. Finally, earlier this month, we announced our mutual decision with Target not to extend our shop-in-shop partnership, which will conclude in August of 2026. We've achieved a lot together, and we remain committed to supporting the shopping experience for guests through the end of the partnership as well as continuing to support our teams and partners during the transition.

Looking forward, we believe the successful execution of our Ulta Beauty Unleashed strategy will maximize key growth opportunities in beauty and wellness and enable us to bring to life the Ulta Beauty experience in new ways and define the next chapter of growth for our brand. For perspective, the royalty revenue from our Target partnership in fiscal 2024 was well below 1% of net sales. To recap, we are proud of the steady progress we're making against our Ulta Beauty Unleashed strategy to accelerate our performance and lay the groundwork for sustained long-term growth. As we look to the future, we remain focused on controlling what we can control, executing our plans with excellence and building on our momentum to drive future growth.

While we are pleased with our year-to-date performance and the level of engagement we've seen with beauty enthusiasts, we remain cautious in our approach to planning our business, given the rapidly evolving macro landscape and ongoing wallet pressures. I want to again thank our incredible associates for their hard work in delivering these results. Our results reaffirm my confidence in our team, strategy and business model and in our ability to deliver for our guests and create enduring profitable growth for our shareholders. I'll now turn it over to Chris to cover the financial results for the second quarter and our updated financial outlook before we take your questions.

Chris?

Thanks, Kecia, and good afternoon, everyone. I'm honored to serve as interim CFO and I'm grateful to Kecia and the Board for their trust and confidence. I'll begin my comments with a discussion of our second quarter results and then share how we are thinking about the rest of the year. Before we discuss the results, I want to remind you that we acquired Space NK on July 10. Our second quarter results include financial results for Space NK for the week since the transaction closed and preliminary estimates of the purchase consideration and fair value of Space NK's net assets.

The acquisition was funded with cash on hand and borrowings under our existing credit facility and is not material to our consolidated financial statements. Turning now to the second quarter financial results. The Ulta Beauty team delivered strong performance this quarter, reflecting better- than-expected growth from comparable sales, favorable shrink results and merchandise margin expansion. Consolidated net sales for the quarter increased 9.3% to $2.8 billion compared to $2.6 billion last year.

During the quarter, we opened 24 new stores, relocated 2 stores remodeled 5 stores and closed 2 stores. Comparable sales increased 6.7%, driven by a 3.7% increase in transactions and a 2.9% increase in average ticket. Other revenue was approximately flat versus the second quarter last year. Looking at the cadence of comp sales through the quarter.

Growth was strongest in May and July, primarily reflecting shifts in the timing of key promotional events. From a channel perspective, both store and digital channels contributed to comp growth with e- commerce sales increasing in the low double-digit range, and comp sales delivering mid-single-digit growth. For the quarter, consolidated gross margin increased 90 basis points to 39.2% of sales compared to 38.3% last year. The increase was largely due to lower inventory shrink and higher merchandise margin, which was partially offset by the deleverage of supply chain fixed costs and other revenue.

Our team's collective focus on reducing inventory shrink while also improving merchandise in-stock levels continues to deliver results. Fixture investments, process improvements, associate training and specific store level actions are driving improved trends. And I'm pleased to share that we've experienced shrink reductions across every category and every region. Merchandise margin increased primarily due to the impact of more effective promotional strategies.

Similar to Q1, we continue to strengthen our go-to- market strategies. We optimized key events and offers to align with relevant shopping moments and provide guests with value. We eliminated unproductive and overlapping offers to drive increased clarity, and we implemented new functionality such as replenish and save to drive greater engagement. As a result, the gross margin impact from promotional activity was lower than last year.

Supply chain fixed costs increased, reflecting higher wage rates and higher depreciation and implementation costs associated with our ongoing supply chain optimization efforts. Moving to expenses. Consolidated SG&A increased 15% to $742 million, including approximately $7 million of onetime transaction expenses related to the acquisition of Space NK. As a percentage of sales, SG&A increased 130 basis points to 26.6% compared to 25.3% last year, driven in large part by higher incentive compensation, store payroll and benefits and corporate overhead.

Incentive compensation deleveraged for the quarter, reflecting our better-than-planned second quarter performance as well as the lapping of a benefit from lower incentive compensation last year. Store payroll and benefit expense increased primarily due to higher healthcare costs and additional selling hours to support the guest experience. And the growth of corporate overhead largely reflects investments to support our Ulta Beauty Unleashed strategy. Operating profit increased 4.8% to $345 million compared to $329 million last year.

As a percent of sales, operating margin decreased 50 basis points to 12.4% of sales compared to 12.9% last year. Wrapping up the P&L, diluted earnings per share increased 9.1% to $5.78 per share, including $0.03 of benefit due to income tax accounting for stock-based compensation. Moving to highlights from the balance sheet and cash flow statement. We ended the quarter with $243 million in cash and cash equivalents and $289 million in short-term debt.

During the quarter, we drew on our revolving credit facility, primarily to support the acquisition of Space NK. Total inventory increased to $2.4 billion compared to $2 billion last year primarily reflecting additional inventory to support new brand launches, the impact of 62 net new stores and the acquisition of Space NK. Capital expenditures were $77 million for the quarter, mostly driven by investments in new and existing stores. Depreciation increased 9% to $71 million compared to $65 million last year, largely reflecting supply chain and store investments.

In the quarter, we repurchased 245,000 shares, bringing the year-to-date total for our share buyback program to 1.2 million shares or $468 million. At the end of the quarter, we had $2.2 billion remaining under our current $3 billion repurchase authorization. Turning now to our updated outlook for 2025. We have increased guidance for the year to reflect our strong first half performance and the impact of Space NK, which was not contemplated in our previous forecast, reflecting the momentum we saw in the first half, we have increased our sales expectation for the second half, but we continue to believe it is prudent to take a cautious approach given continued uncertainty around consumer spending.

We now expect consolidated net sales for the year will be between $12 billion and $12.1 billion, with comp sales growth in the range of 2.5% to 3.5%. This outlook reflects our expectation that comp sales will be in the range of flat to up low single digits in the second half. We now expect operating profit for the year will decrease in the high single-digit range and operating margin will be between 11.9% and 12% of sales reflecting our updated sales expectations, higher incentive comp and how we are forecasting the flow of investment spend, we expect operating margin will be between 10.7% and 10.9% of sales for the second half of the year.

For modeling purposes, we continue to expect gross margin for the year will deleverage primarily driven by store occupancy and supply chain costs, partially offset by lower shrink. We've updated our expectations for SG&A growth and now expect SG&A will increase between 13% and 14% for the year, driven largely by higher incentive compensation, our strategic investments, including increased advertising and the addition of Space NK. We expect SG&A growth will be elevated in the second half reflecting both the shift of investment spending initially planned for the first half as well as the lapping of last year's expense trend.

As a reminder, SG&A grew 1% in the second half of fiscal 2024 as we proactively reduced planned spend in response to lower- than-expected revenue growth. Reflecting these assumptions, we now anticipate diluted EPS for the year will be between $23.85 and $24.30 per share. These EPS estimates include the impact of share repurchases and assume a tax rate of approximately 24%. In closing, we remain focused on executing our Ulta Beauty Unleashed strategy and committed to investing in our operating model to position sustainable growth.

We are encouraged by our first half performance but we remain cautious about how consumer demand may evolve in the second half of the year. As we look to the rest of fiscal 2025, we intend to invest to strengthen our competitive position to deliver long-term profitable growth while also continuing to be thoughtful about pacing and prioritization as the environment evolves. And now I'll turn the call over to our operator to moderate the Q&A session.

[Operator Instructions] Your first question will come from Dana Telsey with Telsey Advisory Group.

Congratulations, Kecia, and the team, what a stellar quarter and the outlook certainly seems very doable. As you think about the initiatives that you've put in place, Kecia, with the beauty unleashed plan, what's the sustainability given you doubled the comp growth that you did last quarter, this quarter was a 6.7% and the pace of newness that you suggested, is there a difference between third and fourth quarter, given the guidance you gave out? And on the technical side in terms of less shrink, your shrink going down. It just seems like everything is coming together, what is the pathway going forward to the opportunity to have increased operating margins on a go-forward basis?

So thank you, Dana, for the question. And I'll start, then I'll let Chris answer the operating margin question. Yes, I'm very pleased with how the team is responding to Ulta Beauty Unleashed plan. And I think it's very clear, everyone understands the role that they play, and we're getting synergies and momentum is definitely happening.

We're going against some higher comps in the back half of the year. So that's -- the starting point is a little different than the first half was. And our guidance is reflecting the uncertainty that still is out there that remains with the consumer and the macroeconomic conditions. We're being prudent in our guidance and how we're looking at the business.

But I'm very pleased with how the company is really rallying around our Ulta Beauty Unleashed plan. And I do feel like the momentum is going to continue this year. And as we continue to play things forward, it should be continuing to look at that. And then we're looking at our long-term operating margin, is something that we're continuing to keep in our wheelhouse of what we're wanting to be focused on is the growth of that in the future.

Reflecting on our comp growth expectations for the back half of the year, low single digits, you will see that many costs will likely deleverage inflationary pressures, primarily around healthcare cost, increased costs associated with our infrastructure investments. In addition to that, the shrink benefit in the second half or the back half of the year will start to moderate based on lapping meaningful shrink benefits from the prior year. Additionally, we expect operating margin will be pressured with the timing of some of our go-to-market investments. As you know, we started off a little bit slower in the first half, and they're moving more into the second half as well as higher incentive comp, right.

As I called out earlier, reflecting our better-than-planned performance this year, we're lapping a low incentive comp from 2024.

Your next question will come from Michael Binetti with Evercore.

Let me have my congrats on a great quarter. Nice to see it. Maybe, I guess, just to look at the revenues first, can you help us understand some of the assumptions at the high end and the low end of the comp range flat to positive low singles in the back half, a little hard to understand with the momentum in the business today. And then as we think about the comps in the back half and the upside scenarios and dream a little bit, you're now approaching the 12% margin that you said you would achieve for 2026 and beyond at the Analyst Day.

Can you just help us understand, is there a breakpoint in the model where there's more leverage than you expected at the Analyst Day, you start to get into 2026. Is there -- and as we think about, I guess, 2Q, delevering on supply chain, delevering on corporate overhead, is there a comp rate that levers those line items in the back half, if there were deleveraged components on 6.7% in the second quarter?

I think you asked like five questions in there, Michael, so -- I'm going to start, thank you for the question -- multiple questions, it wasn't a question. And well, I'll start with the long term, maybe the long-term outlook, and then I'll let Chris kind of wrap it up a little bit more on the margin, is that -- looking at our long-term algorithm, if you look at our performance in 2025, we've come out of the gate much stronger than what we planned. We've had a lot that's happened in 2025 that was not originally in the plan. You look at the acquisition of Space NK, the mutual decision not to move forward with Target.

So there's a lot of nuances that weren't baked into that long-term work. And while our comp performance through the first half of the year has been stronger, the operating environment continues to be really dynamic, and we think it's a little premature to change our long-term goals at this time. We've just started planning for 2026 and we'll share our expectations in March as we normally do. But right now, we're just staying really laser-focused on executing our strategy, making the necessary investments to improve our competitiveness and reaccelerate our long-term share growth.

As I said earlier, we're very encouraged by the progress that we're making, and we're confident in our investment position that's going to give us the ability to be able to deliver long-term profitable growth in the future?

On the comp sales question, Michael, while we continue to be cautious about the second half, we have modestly increased our expectations for the second half reflecting less uncertainty around the macroenvironment compared to where we were in May. So on that, we feel confident with our back half guidance. On SG&A growth, second quarter was modestly higher than we planned, driven primarily by the $7 million onetime transaction expenses related to the Space NK acquisition as well as higher incentive comp due to the over-performance in the second quarter.

Your next question will come from Adrienne Yih with Barclays.

Adrienne Eugenia Yih-Tennant: And let me add my congratulations. Kecia, I was wondering if you can talk about the promotional backdrop in beauty. It feels like the entire sector sort of is now in that sort of more normalized mid-single-digit growth after normalizing for a couple of years. And it also seems like you had some promotional restraint throughout the quarter. So if you can speak to that. And then secondarily, if you can talk to the health and wellness category, this is a new noncomp category that obviously has significant kind of growth potential. Where are you now? And with all of the different opportunities and ways to play that strategy, how are you deciding on what is the best and highest use of your assets and your time?

Well, thank you, Adrienne, for the question. I'll start with that. In 2025 second quarter, the impact to gross margin from promotional offers was lower than second quarter of '24. We eliminated less productive events and overlapping offers. And we optimized the timing of some key offers in some promotional events like the Big Summer Beauty Sale and our Back-to-School timing.

We're going to continue to evolve our promotional strategies to really drive profitable growth, but we're taking a very thoughtful approach to our promotional calendar with what I would call purposeful considerations around holidays, temple events and brand launches. And you shouldn't be surprised if you see some promotional strategy shifts and changes as we're continuing to respond to our business. Going forward, barring any economic event, we do expect the promotional environment to stay rational at this time. You asked a little bit about wellness.

I would say that we had wellness in all of our stores in [ an 8-foot ] section for a period of time. And we've just expanded into an additional 370 stores in the footprint in store now with an additional 50 that are coming with an even larger assortment. We're still working through that curation of self-care and focused around everyday care, supplements ingestibles, relax and renew, down there care and intimate wellness. We have about 150 brands and 700 SKUs with this focus on self-care.

But we do recognize this wellness market is large and growing, and it's really driven by consumer engagement and product innovation. The market itself is about a $410 billion market that was in 2024. And it's growing faster than beauty right now. But it's complex and it's personal. We believe this is an opportunity for us to really leverage our brand credibility and scale growth drivers in this wellness category.

So we do believe in the long term that wellness can be a $1 billion business over time. So in the quarter, we've launched 7 new brands in line. And like I said, we've expanded in 370 stores, but we're going to continue to look at the four-wall productivity and how we can continue to make sure that we're bringing an assortment in that's not only what our guests are wanting and that they're asking for, but it's also accretive to our overall top line sales and our profitability.

Your next question will come from Simeon Gutman with Morgan Stanley.

So congratulations on the comp in the quarter. So you've been asked a few different ways about the operating margin of the business. I know it's too early to talk about long term. But you've been at the company a while, you've seen the margin low teens, even the mid-teens.

Now that the business is getting reinvigorated and you're reinvesting to do it. Do you have a philosophy or a feeling on whether the margin of this business should be higher or no, you should keep it at a certain level so that you can continue this type of top line momentum Again, I'm not asking for 12 versus 15, but philosophically about reinvestment, maintaining a higher level of comp growth.

Well, thank you, Simeon, for the question. I will say that what we're really leaning into is focused around operating profit dollars and really making sure that when we're doing these investments that we're getting the payback in the overall business, we're still in the early phases, and I could not be more proud of where we are in the first 2 quarters of this year, we still have a ways to go. And we've got quite a few investments that we're continuing to look at to make -- to drive this business forward. And one of the commitments that I have as the CEO and Chris as interim CFO, is that we're really looking at value creation and how we're investing our capital and our operating expense that we're getting a return on those investments.

So pacing them at the appropriate rate and also making sure that we're giving it some time for the returns, it's a balancing act. But we're really focusing on operating profit dollars. And then just as a reminder, you're right, I have been in this category for a while. This is a highly competitive category that gets more competitive every single day.

We are going to continue to focus in investing in this business, so we can continue to grow our business going forward.

Your next question will come from Steven Forbes with Guggenheim Securities.

Kecia, I was sort of curious to hear your thoughts here, right? We're sort of 12 months behind some of the cannibalization pressure and the competitive pressures that you guys experienced last year. I would imagine you guys are sort of actively looking at the recovery and the productivity of those stores that were cannibalized. I would just love to hear your frame up, how those stores are recovering.

And in essence, how much of that is sort of just natural? And if you can expand on sort of the company-specific initiatives that you were leaning into to make sure that the recaptured sales sort of stick with you and create sustainable growth opportunities.

Yes. Well, thank you, Steve, for the question. The competitive distribution expansion has started to slow, and we are starting to see some recovery. We saw a steady improvement in comp trends that were impacted in the first quarter and also in the second quarter.

But we also -- as a whole company, we saw increases across all stores across the United States. So we still expect there to be some competitive pressures and impacts for our fleet, but we expect that impact is going to be lower than what we experienced in 2024. And then in regard to the recapture, I mean that's where I think that our loyalty program is one of our largest assets. We understand the consumer, the shopper, where they're shopping, and we're going to be leveraging our investments in personalization and engaging with those guests to keep them into the Ulta Beauty ecosystem or get them even back into our ecosystem to come back and shop with us as we've started to lap some of these competitive openings.

And then also, as you know, we continue to cycle through at the end of 2026 when we now are not going to be in Target anymore. I think there's going to be a huge upside potential opportunity for us to really recapture those guests back into the Ulta Beauty ecosystem and keep them hold here.

Your next question will come from Olivia Tong with Raymond James.

Congrats on the quarter. In terms of the Q2 results, could you kind of break it down a little bit in terms of the outperformance in mass versus prestige. Mass, obviously, bit more economically sensitive, seeing a lot of new focus from retail competition. So can you talk about your initiatives to differentiate, capture the consumer there, which obviously is working?

And then on prestige, interesting to hear about the next tranche of exclusive, you mentioned Rihanna. Can you give us some broad insights to how the pipeline is looking for next year? It seems like Cécred has been very, very solid. We launched a number of new brands this year.

Where are you now versus perhaps where you were at this point last year and what your view is for the go forward?

I'll start with -- thanks, Olivia, for the question. I'll start with the second question first. And that is our launch of newness, I feel great about for the rest of this year, and we're actively already working on really great launches next year. One of the things that I think makes it very unique and different this year is it's not just in one category, it's really balanced across the entire portfolio.

So it keeps that engagement in the store -- on all parts of the store very active. So really like what we're seeing there. In regard to the business of -- the blend of mass plus prestige, we're pleased with how we are performing in all categories really going forward. But one thing that's been unique is that makeup, we had growth in both in this quarter and it's been a while since that's happened.

So we like what we're seeing. I think newness is getting a new guests coming into our store, and we're seeing the halo impact of that. Some of what -- and just as a reminder, some of what was impacting us in that mass makeup category was last year, we're cycling over us getting out of the old Ulta Beauty collection. So we've got some benefits on that this year, but we're really pleased to see makeup as a category in both mass and prestige that were up in those, and like I said, it's been a while.

Your next question will come from Susan Anderson with Canaccord Genuity.

Congrats on the quarter again. I guess maybe if you could -- I don't know if you could talk about Space NK and just the thought process around buying another retailer to expand internationally versus using your own Ulta stores? And then also I'm not sure if you could give some color just on the differences between Space NK and Ulta in terms of productivity or sales per store or any metrics that you can provide?

Yes. Thank you, Susan, for the question. So international expansion is an integral part of our Ulta Beauty Unleashed strategy to drive long-term growth. And acquiring Space NK was a unique opportunity that really enabled us to enter one of the largest beauty markets that's with a successful and growing brand and to provide less capital-intensive approaches because we would not have ever gone into that market and just built it from ground level up.

They're going to operate as a stand-alone subsidiary and led by their existing management team. I could not be more pleased with what we're seeing with their business. It does provide us a way that we can continue to grow Ulta Beauty in a way that we can be more global as a support to our brand partners. What I would just say is that our U.S. business does remain our top priority.

I have a small team that's really focused on building our international business. But we're really excited. And one of the things that I also think that was unique about this opportunity, it does show the market that there's three ways that we are looking at how we could expand Ulta Beauty brand outside of the U.S., whether it's through a license or franchise partnership, it's through a joint venture or it's through an acquisition we're willing to do. Any one of those that really fits within our model that's in a margin-accretive way that helps us continue to grow our footprint in a way that's not overly disruptive to our Ulta Beauty core business here in the United States.

Space NK is also a little bit unique in that they're smaller footprint stores that are predominantly on high street locations. And I think that there's this huge benefit that we're going to be able to get from them. And there's some great learnings that we can have in regard to how to operate in high street but they're predominantly prestige. They've got really good high consumer touch.

And like as we move even further into this partnership, that's one of the things that was really intriguing to me is it's not just about taking that asset and trying to Ulta [ Beautyize ] it. It's keeping the asset special and unique the way it is and taking those learnings and bringing them back in the United States that can maybe even make us even stronger in the future. So I'm very excited about it. I can't wait to see what we can continue to do with this asset and it's a great market to be in.

We're looking forward to continuing to grow.

Your next question will come from Chris Horvers with JPMorgan.

So my first question has to do with what you think is driving the share change that you're seeing on the -- really across the business with mass and prestige. How much do you attribute to the fact that you've seen the competitive encroachment fade, Kohl Sephora comp flat versus what you're doing from a self-help and from a newness perspective.

Well, I'd like to believe that -- thanks, Chris, for the question. But I'd like to believe that it's a lot of what we're doing and we're focused on that we do best. No one does beauty the way that we do here at Ulta Beauty and also carries across all price ranges including the service component. And us just really operating better and leaning into our core strengths and putting that guest front and center.

No matter what price point they're shopping, I think it's definitely making a difference. We've seen a difference in our in-store conversion, our NPS, everything is moving in the right direction. So it's really kind of getting back to those basic fundamentals that I think is helping both the mass and the prestige businesses continues to drive forward. The other thing is the newness that we have been able to bring in is, again, it's like I shared earlier, it's across all different categories.

And that's bringing a new consumer into our stores or on our online presence. And then as I give it to our marketing team, being part of the social relevance in our conversation that's out there, it's a change step for us. We're talking to the guests in a very different way that's kind of fun and exciting, and we're working really hard to have all to be -- having a high cool factor back again. And it's really resonating with our guests in all ages.

So we're just going to continue to lean into what we're seeing. And I think it's going to continue to help us raise both sides of the business, both prestige and the mass.

Your next question will come from Kate McShane with Goldman Sachs.

We wondered what the announcement of the Target relationship means for the stand-alone Ulta real estate strategy going forward.

Well, thanks, Kate, for the question. What I will say is that our real estate strategy is important because new stores consistently attract new members and encourage multi-store channel shopping, which drives greater spend per member. So you get that halo impact. Our plan is 63 net new stores this year, and that includes our Space NK store.

But one of the things that we are seeing is we're seeing some higher cost pressures with rent, insurance and CAM and some lower vacancy rates in our higher quality centers. And we want to make sure that we're going into the right locations for us. So I'm going to answer the question. It doesn't have anything necessarily to do with Ulta Beauty at Target partnership but it does have to do with how we're looking at our new stores and new store growth.

We are now targeting 50 to 56 new stores a year over the next 2 to 3 years. So coming down on that previously communicated 200, to be more of that 150 to 160 range. But again, it doesn't have to do with the Target question. You asked about new stores, so I want to make sure I'm answering that.

It has to do with making sure that we're thinking very thoughtfully of investing our capital and expense dollars in the right way for our return and making sure that we're making really good business decisions on our new store opening growth. We feel very comfortable with the 50 to 56 range per year going forward.

Your next question will come from Oliver Chen with TD Cowen.

The marketplace sounds exciting. There's always a balance between curation and trust relative to the speed of growth. How do you envision that working within your loyalty ecosystem? And as you think about these evolving landscape, affiliates, TikTok, Amazon, those are important factors, too. Would love your thoughts there.

Yes. Thanks, Oliver, for your question. Our marketplace is going to be a closed marketplace. It's invitation only, so it allows us to be able to curate the very best assortment for our guests.

We have thousands of brands that want to be in with us, but it doesn't mean that we're going to let them all in. So we want to make sure that we're being very thoughtful. Have you expect a mix of new and established brands and emerging brands across beauty and wellness? Members can earn their points on the marketplace purchases, and we're also making sure that the -- the ease of return is one thing that you hear often in the marketplaces, they're going to be able to return their products through stores through our happy return process, which we already do -- we have a relationship with happy returns right now.

We think this is going to enable us to really expand our assortment and drive margin accretion and growth in both beauty and wellness in a low-risk way. In regard to other marketplaces that you can sell your products on. We're continuing to lean in. We're keeping a close eye on TikTok, et cetera, we've done some activity with them.

I think you want to be where the guest is and make sure that we're putting products in relevant spaces and engaging with a guest in the way that they want. So I'd say stay tuned. We're going to -- I am going to be excited to share more about Marketplace in our Q3 call. But we're very excited about this and our -- and brands are very excited about joining this also.

We're getting out of the gate, we're starting it off on the right foot versus having to course correct. And I just feel like it's going to be a great complement to our already fantastic ulta.com presence.

[ Leila, ] I think we have time for one more question, please.

Your final question will come from Mark Altschwager with Baird.

Congrats on the results here. I wanted to follow up on Target. I know you called out that it's well less than 1% of sales last year, but that is royalty revenue with a high flow-through to EBIT margin, at least is my understanding. So I guess the question is, should we think that there's enough margin tailwinds from the core strength through Ulta Unleashed some of these new investments, franchise partnerships, marketplace.

Is there enough there from a good guy perspective to neutralize Target going away in 2026, and anything you can share there would be helpful?

Yes. Well, Mark, thank you for the question. I would say the flow through, think about it as about a 60% to 65% flow-through to start. We believe that our strategic priorities and our initiatives outlined in the Ulta Beauty Unleashed strategy position us to really maximize our growth opportunities and replace any lost royalties.

The partnership conclusion doesn't change how we're looking at our long-term financial targets. And we're really confident that this transition is going to actually position us to focus more fully on the successful execution of our strategy and to advance the initiatives that maximize growth opportunities in beauty and wellness for us. We -- again, we look to the future, we're focused on maximizing our growth opportunities and bringing to life the uniquely Ulta Beauty guest experience in ways that we define the next chapter of growth for our brand. All right.

I think that was the last question. Yes, of course. Thank you all for joining us today. I want to wrap up again by thanking the entire Ulta Beauty team for their passionate commitment to delivering on our mission, vision and values every day.

Our performance is the direct result of the collective effort of our dedicated store, DC and corporate associates to deliver for our guests and drive our business forward. Before we end the call, I want to share that we are celebrating our 35th anniversary this year. In 1990, we opened the first store in Lombard, Illinois, and today, we operate more than 1,550 stores across 4 countries. I am proud of what our team has achieved.

I'm confident the changes that we are setting in motion today position us to bring to life the beautiful possibilities in many more years to come. We look forward to sharing more about our progress when we report results for the third quarter in early December and have a good evening, everyone. Thank you.

Thank you for joining. This concludes today's call. You may now disconnect.