Ulta Salon, Cosmetics, & Fragrance, Inc. (ULTA) 17 Preview: Increasing our estimates on stronger trends in January; comparable store sales growth likely to slow further in 2018 as a few KPIs have slowed. John Tomlinson, CFA/CPA Head of Consumer Senior Analyst, Consumer 646.751.1443 john.tomlinson@mscience.com Sandi Xu Associate, Consumer 646.751.1403 xuan.xu@mscience.com ULTA Year Ago Reported Guidance SSS (Y/Y) 16.6% 8% to 10% E-commerce ($M) $155 $230 48.4% $217 39.9% $226 45.7% $234 51.2% Total Revenue ($M) $1,581 $1,926 to $1,959 $1,957 23.8% $1,921 21.5% $1,944 23.0% $1,965 24.3%, Consensus Metrix, Company Reports M Science Consensus Low Average High 8.8% to 9.8% 7.5% 9.1% 10.4% Keep up-to-date with the latest from M Science Follow us on Facebook, LinkedIn, and Twitter OVERVIEW We are increasing our 17 estimates for Ulta Beauty. In summary, we believe that comparable store sales likely decelerated slightly but that sales trends appeared to improve during January, the last month of the quarter. We estimate that Y/Y comparable transactions grew 6.2%, compared to gains of 6.0% Y/Y in 17. Conversely, we believe that average ticket growth decelerated further in 17, likely a function of tougher prior-year comparisons, increased promotions, and slower e-commerce growth. We estimate e-commerce revenues grew to $230 million for 17, or up 48.4% Y/Y versus the 67.1% Y/Y gain recorded in 17. We see e-commerce share growth slowing to 200 bps of growth, compared to the 230-bp share gains, on average, through the first three quarters of 2017. Due to stronger trends in January, we saw Ulta Beauty post a slight share gain within our panel, according to data through quarter-end. Collectively, the growth rate for the combination of Ulta, Sephora, Sally Beauty (SBH), and Blue Mercury improved slightly in 17, but the downward trend of the past year appears to have continued. Our data suggests that growth trends in the first three weeks of February in 18 appear to have slowed at Ulta Beauty. According to our data and models, we suspect that comparable sales growth may have slowed 200 bps to 400 bps Q/Q through the first Analyst Certifications and Important Disclosures can be found at the end of this report.
three weeks of the quarter. As such, we believe management is likely to issue more conservative 18 comparable sales guidance possibly in the range of 7% to 9% Y/Y. The slower trends appear to be solely a function of weaker traffic QTD. We are also publishing insights from our online pricing study, which has tracked between 10,000 and 20,000 products on Ulta.com. We believe our pricing study should help investors gain a better understanding of Ulta Beauty s pricing and promotional trends in aggregate and by product category. We believe our study should become particularly interesting and helpful as industry competition intensifies. Our work in 17 showed a continued increase in the level of promotions relative to 17 and 17. For example, we observed greater discounting trends Y/Y in the Cosmetics category and the Skincare, Bath & Fragrance category in 17. At a high level, changes in our discounting work have a directional Q/Q (0.62) and Y/Y (0.36) correlation with reported gross margin changes at Ulta Beauty going back to 2014. That said, many other factors have an impact on the reported gross margin result each quarter. However, when coupled with the slower growth in average ticket, and an aggressive promotion in the final week of 17, we would not be surprised to see gross margin pressure again this quarter as we observed in 17 ( 105 bps Y/Y). Additionally, we used our online receipt data to analyze key category trends within Ulta Beauty s e-commerce business. On a category basis, the Skincare, Bath & Fragrance category gained share Y/Y, while Cosmetics share was about flat. Conversely, Haircare Products & Styling Tools lost share Y/Y. Within the Prestige segment, MAC and IT Cosmetics gained the most share Y/Y. However, the Prestige category lost share online Y/Y in 17 against a tough prior-year comparison. Finally, we analyzed key drivers that may impact Ulta Beauty s comparable stores sales growth trajectory over the next couple of years. Our findings suggest that Y/Y spending growth in tranches for new UTLA customers has decelerated compared to prior cohorts. In addition, our data suggests that favorable trends in new customer acquisition and customer retention rates have also slowed over the past year. As such, we believe that Ulta Beauty s comparable store sales growth will likely continue to slow in 2018 and 2019, unless these key performance indicators (KPIs) start to improve. 2
Key Takeaways: Increasing our 17 estimates on stronger sales growth in January, while promotional trends less favorable Y/Y; February sales start off slowly. Figure 1: Comparable Store Average Ticket Growth Y/Y 8.0% 7.0% 5.6% 5.7% 6.2% 5.8% 6.0% 5.6% 5.2% 5.0% 5.0% 4.7% 4.2% 4.2% 4.3% 3.9% 4.0% 3.6% 3.4% 3.1% 3.1% 3.0% 2.2% 2.0% 1.0% '15 '15 '15 '15 '16 '16 '16 '16 '17 '17 '17 '17 M Science Est. Company Figure 2: Comparable Store Transaction Growth Y/Y 14.0% 12.3% 12.0% 11.1% 10.6% 11.0% 10.9% 10.2% 9.7% 9.4% 1 8.6% 8.7% 8.0% 7.2% 7.0% 7.0% 6.2% 5.5% 6.0% 6.0% 5.0% 4.0% 2.0% '15 '15 '15 '15 '16 '16 '16 '16 '17 '17 '17 '17 M Science Est. Company Figure 3: Comparable Store Sales Growth Y/Y 21.0% 17.5% 18.0% 16.7% 16.6% 15.2% 14.4% 15.0% 12.5% 13.5% 13.8% 14.3% 12.8% 12.5% 12.8% 12.8% 11.4% 11.5% 11.0% 11.7% 12.0% 10.5% 10.5% 10.3% 10.1% 1 9.3% 9.0% 6.0% 3.0% '15 '15 '15 '15 '16 '16 '16 '16 '17 '17 '17 '17 M Science Est. Company We are raising our estimates for Ulta Beauty s 17 based on spending data through January. In a nutshell, we believe the company s comparable store sales likely finished up (+8.8% to +9.8% Y/Y) but at a decelerated rate relative to 17 (+10.3% Y/Y), as it faced the secondtoughest prior-year comparison (+16.6%) of the year. Management issued less-aggressive 17 comparable store sales guidance (+8% to +10% Y/Y) relative to 17 (+9% to +11% Y/Y) on the 17 earnings call on November 30, 2017. Our data suggests that growth trends in the first three weeks of February in 18 appear to have slowed. We suspect that comparable sales growth may have slowed 200 bps to 400 bps Q/Q through the first three weeks of the quarter. As such, we believe management is likely to issue more conservative 18 comparable sales guidance possibly in the range of 7% to 9% Y/Y. The slower trends appear to be solely a function of weaker traffic QTD. Comparable store sales likely finished up in 17, driven by gains in traffic and ticket, and continued growth in e- commerce spending. After incorporating sales through quarterend, we now expect net sales of $1.957 billion (+23.8% Y/Y), which is slightly above the $1.944 billion consensus (Street range: $1.921 billion to $1.965 billion). We estimate comparable store sales finished in the range of +8.8% to +9.8% Y/Y, with a midpoint of +9.3%, slightly above the consensus of 9.1% (Street range: +7.5% to +10.4% Y/Y) and within management s guidance (+8.0% to +1 Y/Y). Our research suggests that Y/Y growth in comp traffic finished marginally stronger in 17 relative to 17 but was slower than in much of the past year. Y/Y growth in ticket trends has cooled moderately, which likely has been driven in part by the 3
increased level of promotions we observed in 17. As such, we estimate Y/Y comparable store average ticket gains of +3.1% and average transaction growth of +6.2% Y/Y, which compares to the +4.3% Y/Y and +6.0% Y/Y realized in 17, respectively. Based on these trends, we believe traffic drove about 67% of comp growth, with ticket accounting for the remaining 33% of comparable store sales gains. In terms of comp growth cadence, trends were strongest in January 18 and weakest in December 17. We also noted that Ulta held a 20% off sale including Prestige brands during the last week of the quarter, the 14th week that is likely to be included in the company s comparable sales calculation for the quarter. We do not believe this promotion ran at the same time last year. In addition, we do not believe this type of promotion is reflected in our online pricing study. Figure 4: Ulta Beauty Average Basket Breakdown Transaction Value '15 '15 '15 '15 '16 '16 '16 '16 '17 '17 '17 '17 $0 - $25 8.4% 8.4% 8.4% 7.9% 7.9% 7.9% 7.9% 7.3% 7.4% 7.2% 7.3% 7.0% $25 - $50 19.1% 19.6% 19.1% 18.8% 18.6% 19.0% 19.3% 18.3% 18.3% 18.7% 18.5% 18.5% $50 - $75 33.3% 33.3% 33.2% 33.0% 33.1% 33.2% 33.7% 33.4% 33.3% 33.4% 33.6% 33.5% $75 - $100 18.3% 18.1% 18.0% 18.4% 18.4% 18.2% 17.9% 18.7% 18.6% 18.6% 18.2% 18.5% $100 - $150 9.9% 9.6% 9.9% 10.1% 10.1% 1 9.7% 10.2% 1 9.9% 10.3% 10.3% $150+ 11.1% 10.9% 11.3% 11.9% 11.9% 11.7% 11.6% 12.1% 12.2% 12.2% 12.1% 12.2% Figure 5: Product Mix Reported in 10-K Category FY2016 FY2015 FY2014 Cosmetics 51% 46% 42% Skincare, Bath & Fragrance 20% 23% 24% Haircare Products & Styling Tools 20% 22% 24% Salon Services 5% 5% 5% Other 4% 4% 5%, Company Reports Ulta Beauty s Y/Y average ticket tracked up at a decelerated rate in 17. Tickets in $25 to $50 range gained the most share in the quarter. Based on data through quarter-end, we project average basket size growth of +3.1% Y/Y for 17, a deceleration from the growth of 4.3% in 17. We have seen a mix trends toward higher-priced basket sizes, with tickets above $50 gaining 10 bps of share. However, the greatest share gain was for tickets between $25 and $50, which rose 20 bps Y/Y. We estimate Ulta Beauty s online spend as a percentage of total spend tracked up in 17 at a decelerated growth rate. In 17, share of online spend continued to increase (see Figure 25 on page 13). We are forecasting e-commerce revenue of roughly $230 million (+48.4% Y/Y) for the quarter. However, we are forecasting slower Y/Y gains in e-commerce share (+200 bps Y/Y) in 17 than what was posted in the first three quarters of FY2017 (+230 bps Y/Y, on average). Our online pricing study suggests the longer-term discounting trend for Ulta Beauty is favorable, with less-frequent markdowns As we did in 17, we are publishing insights from our extensive online pricing study, which tracks a range of 10,000 to 20,000 products on Ulta.com. The longer-term trend in the data suggests that Ulta Beauty has reduced its total level of discounting, as the percentage of items on sale has steadily declined since late-2013. Conversely, the depth of its discounting has been relatively steady to slowing rising. At a high level, changes in our discounting work have a directional Q/Q (0.62) and Y/Y correlation (0.36) with reported gross margin changes at Ulta 4
Beauty going back to 2014. That said, many other factors have an impact on the reported gross margin result each quarter. Vendor allowances, distribution costs, store occupancy and payroll costs, inventory shrink, valuation reserves, and changes in product mix can impact reported gross margin each period. Figure 6: Ulta s Category Mix Reported vs. M Science Online Purchases 70% 60% 50% 40% 30% 20% 10% 0%, Company Reports Figure 7: Category Share Change Y/Y of Ulta s Online Sales 3% 2% 1% 0% -1% -2% -3% 59% 58% 54% Cosmetics 21% 20% 21% 16% 18% 19% Skincare, Bath & Fragrance Haircare Products & Styling Tools 5% 4% 5% Others FY2016 M Science FY2016 Rported - Adjusted ex.salon FY2017 M Science 1.1% 1.3% 1.1% 0.8% 0.9% 0.8% -2.0% -2.1% -0.1% -1.6% -0.3% -0.3% -0.1% -0.6% -0.9% -1.6% Figure 8: Top Prestige Makeup & Skincare Brands as % of Total Online Sales 10% 8% 6% 4% 2% 0% -2% -4% 1.7% 0.1% 2016 2017 2017 2017 2017 Cosmetics Skincare, Bath & Fragrance 4.7% Haircare Products & Styling Tools Others 1.4% 0.4% 1.1% -2.4% '15 '16 '16 '16 '16 '17 '17 '17 '17 1.6% 40% 35% 30% 25% 20% 15% 10% 5% 0% All that said, we believe our pricing study should help investors gain a better understanding of Ulta s pricing and promotional trends in aggregate and by product category. We believe our study should become particularly interesting and helpful as industry competition intensifies. however, our 17 pricing study showed a Q/Q increase in discounting, with Y/Y growth in the Cosmetics category and the Skincare, Bath & Fragrance category. As such, we believe more recent trends suggest that Ulta Beauty may have been more aggressive with promotional activities to drive sales in 17. Our study shows an increased level of discounting Q/Q in 17 relative to what we observed in 17. For instance, our data points toward greater promotional activity in the Cosmetics category and the Skincare, Bath & Fragrance category during the holiday season relative to prior year. In aggregate, we note that total discount dollars as a percentage of total dollars available for sales declined approximately 10 bps Y/Y, driven by a larger discount size and a smaller percentage of items on sale (see Figure 20 on page 11). This compares to the 27-bp Y/Y decrease we observed in 17. For category-level trends, our data shows a 60-bp increase Y/Y in discount dollar percentage for the Cosmetics segment, a 20-bp increase Y/Y for the Skincare, Bath & Fragrance segment, and a decline of 90 bps Y/Y for Hair products. Figure 23 on page 12 shows the directional correlation (0.36) between Y/Y changes to Ulta s gross margin and Y/Y changes to the total discount percentage. For reference, the Street is currently modeling gross margins of 34.40% for 17, versus the 34.47% posted in 16. While many factors can impact a company's reported gross margin, our analysis suggests that downside risk is possible given the changes in discounting in our online pricing study coupled with the pressure on average basket size we observed again in 17. In addition, we observed an aggressive 20% promotion, including Prestige brands, during the last week of the quarter that we did not see in the same period last year. Y/Y Change (Left Axis) Top Brands Sales as % of Total Online Sales (Right Axis) 5
Our online purchase study for Ulta Beauty suggests strength in the Skincare category, which grabbed share mostly from haircare, while Cosmetics share was flat Y/Y. In recent quarters, Ulta has gained market share across every major category, with strength in Skincare in both the mass and Prestige sectors, as well as Prestige cosmetics. In 17, within our online purchase study, we continued to see the Skincare, Bath & Fragrance category outpace the other categories, with a share gain of 1.6% Y/Y. The Cosmetics category was flat Y/Y while Haircare Products & Styling Tools share decelerated (see Figure 6 and Figure 7 on page 5). From a merchandising standpoint, Ulta Beauty has been expanding the assortment in its Prestige category and has been aggressively rolling out brand boutiques which carry Prestige products in its stores. Figure 9: Top Prestige Makeup & Skincare Brands on Ulta.com 17 17 16 Too Faced 10% BareMinerals 9% Lancome 4% Tarte 13% NARS 3% Anastasia 11% MAC 6% Urban Decay 15% It Cosmetics 12% Estee Lauder 4% Benefit Clinique 7% 6% Too Faced BareMinerals 8% 6% Lancome 4% Tarte 13% NARS 3% Anastasia 10% Clinique 6% MAC 9% Urban Decay 15% It Cosmetics 13% Estee Lauder 4% Benefit 9% BareMinerals 12% Lancome 3% Tarte 16% Too Faced 12% NARS 1% Anastasia 8% MAC 0% Urban Decay 23% Clinique 4% It Cosmetics 9% Estee Lauder 3% Benefit 9% On its most recent earnings call, management provided an update on its MAC introduction. The company had 107 stores rolled out, with plans to open about 120 MAC stores by yearend. As Ulta continued to roll out the 700 Prestige boutiques featuring Clinique, Lancôme, Benefit, and MAC, the four high-growth brands contributed almost one-third of Ulta s total comp growth in 17. We believe the slowing share of the MAC brand Q/Q within our data is a function of the products being offered in more stores, whereas it was originally offered online when it was first introduced. For 17, we note that the company s Y/Y online comp growth attributed to Prestige brands was softer than it was in 16. The sales of top Prestige brands, including makeup and skincare, as a percentage of total online sales decreased approximately 2.4% Y/Y within our panel (see Figure 8 on page 5). Figure 9 exhibits the share of sales of those most popular Prestige brands on Ulta.com. MAC (+6%), It Cosmetics (+3%), Anastasia Beverly Hills (+3%), Clinique (+2%), NARS (+2%), Lancôme (+1%), and Estee Lauder (+1%) likely posted above-average Y/Y growth in 17. In addition, our data suggests that Too Faced, BareMinerals, Urban Decay, and Tarte were the Y/Y share losers. MAC, Benefit, and It Cosmetics were the Q/Q share losers. Our analysis of spending trends of Ulta s consumers within our panel suggests that retention rates have worsened while spending growth from more recent user cohorts has slowed. 6
Management commented that as of the end of October, they acquired 1.8 million net new loyalty members, bringing the Ultimate Rewards program to ~26.4 million active members (+21% Y/Y). However, the growth in Ulta s loyalty members has slowed in recent quarters along with its growth in comparable store sales. Given these slowing trends at Ulta, we thought it would be helpful to take a closer look at trends within our panel that could provide insight into what trends could be impacting organic sales growth at Ulta Beauty. Figure 10: Y/Y Growth Rate of New Customers Annual Spend at Ulta Year of First Time Shopping with ULTA FY2011 FY2012 FY2013 FY2014 FY2015 FY2016 T+1 6.7% 8.8% 6.1% 7.3% 7.0% 5.3% T+2 6.2% 3.7% 4.7% 3.9% 2.7% T+3 4.0% 4.9% 4.2% 3.4% T+4 4.7% 3.7% 3.5% T+5 3.8% 3.7% Figure 11: Ulta s New Customer Acquisition Growth Y/Y 0.04% 0.02% 0.00% -0.02% -0.04% -0.06% -0.08% -0.10% -0.12% -0.14% Figure 12: Trends of Ulta s Customer Retention Rate vs. Same Store Sales 5% 4% 3% 2% 1% 0% -1% -2% For example, we have seen Ulta s new customer acquisition Y/Y growth (Figure 11) rate moderate since 17. Meanwhile, we have seen the Y/Y growth rate in annual spending of its most recent cohort of new customers a decelerate through the end of FY2017 across every customer cohort (Figure 10). '15 '15 '15 '15 '16 '16 '16 '16 '17 '17 '17 '17 '14 '14 '14 4-Quarter Rolling Average of New Customer Acquisition Growth Y/Y '14 '15 '15 '15 '15 '16 '16 '16 '16 '17 '17 4Q Rolling Average of the Y/Y Changes in Retention Rate (Right Axis) 4Q Rolling Average of Y/Y Changes in Same Store Sales (Left Axis) '17 '17 2% 2% 1% 1% 0% -1% -1% Shoppers who started to shop with Ulta during FY2016, spent about 5.3% more at Ulta in FY2017, on average. This compared to the +7% growth we ve observed in FY2016 for customers who joined in FY2015 and was the lowest growth in one year spend we have seen in our panel history. Furthermore, since the growth in spend has historically been the strongest in the first full year after a customer appears in our panel, we believe growth trends in new customer acquisition and retention rates (see below) are very important to comparable store sales growth in future years. We also analyzed retention rate trends across Ulta s new customer cohorts. Our work on Ulta Beauty s retention rate also suggests a strong directional correlation (~0.8) between the Y/Y growth of the four-quarter moving average of Ulta s same store sales and the four-quarter moving average of its retention rate change Y/Y, going back to 14. The same store sales growth has fallen as the average retention rate has tracked down Y/Y in recent quarters since 17 (see Figures 12). Looking at the retention rate for each customer cohort, we see a general decline across different time periods, as shown in Figure 13 on page 8. More specifically, the retention rate for one quarter (i.e., T+1) was approximately 28% for the 17 cohort, meaning that about 28 percent of customers who shopped at Ulta in 17 also shopped again in 17. This compares to the onequarter retention rate of 30% for the 16 cohort. 7
Figure 13: Customer Retention Rate 35% 30% 25% 20% 15% 10% '14 '14 '14 '14 '15 '15 '15 '15 '16 '16 '16 '16 '17 '17 '17 T+1 T+5 T+9 T+13 *Note that the horizontal axis represents time T, the first quarter our data panel shows a customer shopping with UTLA. Figure 14: Loyalty Tranche Analysis Share of Customers 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Figure 15: Loyalty Tranche Analysis Share of Spend 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 56.6% 55.1% 53.6% 36.3% 37.2% 38.1% 6.3% 6.8% 7.4% 0.7% 0.9% 1.0% FY2015 FY2016 FY2017 Diamond ($1200 + ) Platinum ($450 -$1200) Members ($100 - $450) Members ($100 - ) 16.4% 15.4% 14.6% 48.2% 47.4% 46.8% 27.1% 28.0% 28.9% 8.3% 9.2% 9.7% FY2015 FY2016 FY2017 Diamond ($1200 + ) Platinum ($450 -$1200) Members ($100 - $450) Members ($100 - ) Loyalty spend tranche analysis suggests that Platinum and Diamond members likely are gaining dollar and customer share while lower-spending members are becoming less of the mix. Based on the annual spend requirements of Ulta Beauty s reward programs, we broke down their guests into four tranches, as shown in Figure 14 and Figure 15. Within our data, share of Diamond members (annual spend of more than $1,200) increased 10 bps Y/Y to 1% of our panel, along with a spend share gain of 50 bps Y/Y to 9.7% of spend. Share of Platinum members (annual spend of $450 to $1,200) increased 60 bps Y/Y to 7.4% of the customer base while spend share was up 90 bps Y/Y to 28.9% for FY2017. However, the relatively slower growth of less-engaged customers (nearly 92% of total customers and 61% of spend) likely reflects a more competitive industry environment as well as the challenges involved to secure customers willing to spend more than $37.50 a month to $100 a month at one retailer for beauty products, in our view. Excluding Diamond and Platinum club spenders, we estimate that the average Ulta Beauty customer spends about $114 per year or $9.50 per month. Through the end of January 18, Ulta Beauty appeared to post a slight share gain over rivals, and we saw a slight improvement in the Y/Y growth rate for the collective set of beauty retailers, although the downward trend of the past year seems to have continued. From a low of 26.7% of spend in 11, Ulta Beauty s share versus Sally Beauty, Sephora, and Blue Mercury rose to an alltime high of 43.2% through the end of 17 (see Figure 17 on page 10). However, in 17, Ulta Beauty s share finished up at its lowest Y/Y growth rate after having climbed steadily over the past 20 quarters within our consumer spending panel. Ulta 8
Beauty, Sephora, and Blue Mercury gained shares by ~9 bps Y/Y, ~16 bps Y/Y, and ~51 bps Y/Y, respectively, while Sally Beauty lost ~75 bps Y/Y. This compares to a share gain of ~220 bps in 17 for Ulta. For the group, we saw Y/Y growth improve from 7.7% in 17 to 8.2% in 17. Trends were weakest in the South region in 17. In Figure 16, our regional spending mix analysis suggests that sales trends were weakest within Ulta Beauty s South region ( 60 bps Y/Y, ~38% of the store base) and strongest in its Northeast region (+30 bps Y/Y, ~14% of store base). From a state perspective, New York had the strongest performance (+20 bps Y/Y), and share trends were weakest in Florida ( 20 bps Y/Y). Figure 16: Ulta Beauty Change in Spending Mix by Region Region % of Store Base Spending Change At ULTA Beauty in bps Northeast 13.9% 30 South 38.3% -60 Midwest 22.3% 20 West 25.5% 0 We believe that weather conditions likely had a neutral to slightly less favorable impact on sales trends in 17, all else being equal. 17 experienced lower temperatures with more extremely cold days and slightly less precipitation than in the year-ago period around Ulta Beauty stores. In November 17, average precipitation decreased 9% Y/Y, and the percentage of rain days increased 610 bps Y/Y. Average temperature decreased 2.5 degrees over the year-ago period but was 1.1 degree above the historical average. Extremely cold days (20 ) increased 10 bps Y/Y, and average snowfall declined 7% Y/Y. In December 17, the average temperature decreased 0.8 degrees Y/Y at Ulta Beauty stores and was 2.8 degrees below the historical average for the period. The percentage of extremely cold days (20 ) increased 340 bps Y/Y and was 530 bps above the historical average for the month. Average precipitation decreased 39% Y/Y during the month, as the percentage of rain days dropped 690 bps Y/Y. In January 18, average precipitation decreased 42% Y/Y at Ulta Beauty stores, as the percentage of rain days decreased 1,140 bps Y/Y. Average temperature decreased 3.7 degrees Y/Y and was 0.7 degrees below the 5-year historical average for the month. Snowfall increased 6% Y/Y and the percentage of extremely cold days (20 ) increased 770 bps Y/Y, which was 370 bps above the historical average for the month. We believe that weather conditions likely had a neutral to slightly less favorable impact on sales trends in 17, all else being equal. That said, we do not believe weather was a material factor in overall sales trends in the quarter. 9
Figure 17: Share of Beauty Retailers Ulta Beauty, Sally Beauty, Sephora, and Blue Mercury (share of $ spend in our panel) 7 6 5 4 3 2 1 2012 2013 2014 2015 2016 2017 Sally Beauty ULTA Sephora Blue Mercury Figure 18: Share Change Y/Y Ulta Beauty, Sally Beauty, Sephora, and Blue Mercury (share of $ spend in our panel Y/Y change in bps) 6.00% 4.00% 2.00% 0.00% -2.00% -4.00% -6.00% -8.00% 2012 2013 2014 2015 2016 2017 Sally Beauty ULTA Sephora Blue Mercury Figure 19: Spending Growth Y/Y of Ulta Beauty, Sally Beauty, Sephora, and Blue Mercury 3 25.0% 2 15.0% 1 5.0% 2014 2015 2016 2017 Y/Y Change 4-Quarter Rolling Average of Y/Y Change 10
Figure 20: Ulta s Percentage of Items on Sale & Average Discount Dollar Percentage 35.0% 3 25.0% 2 15.0% 1 5.0% Average % items on sale Average % Discount Per Item Total Discount Dollars As % Of Total Dollars in Store Looking at discounting at Ulta in 17 through quarter-end, the total discount dollars as a percentage of total dollars available for sales decreased approximately 10 bps Y/Y, compared to a 27-bp Y/Y decline in 17; discount size increased Y/Y, while the percentage of items discounted decreased Y/Y. Figure 21: Dollar Spread Between Average Regular Price & Average Discounted Price $25.5 $1.2 $25.0 $1.0 $24.5 $0.8 $24.0 $23.5 $0.6 $23.0 $0.4 $22.5 $0.2 $22.0 $0.0 Jan-14 Mar-14 May-14 Jul-14 Sep-1 4 Nov-14 Jan-15 Mar-15 May-15 Jul-15 Sep-1 5 Nov-15 Jan-16 Mar-16 May-16 Jul-16 Sep-1 6 Nov-16 Jan-17 Mar-17 May-17 Jul-17 Sep-1 7 Nov-17 Jan-18 Dollar Spread - Right Axis Average Regular Price - Left Axis Average Discounted Price - Left Axis 11
Figure 22: Ulta s Average Discount Dollar Percentage Y/Y Change by Category 1.0% 0.5% -0.5% -1.0% -1.5% -2.0% '14 '14 '15 '15 '15 '15 '16 '16 '16 '16 '17 '17 '17 '17 Cosmetics Skincare, Bath & Fragrance Hair Total Breaking down the total discount percentage decline of about 7 bps Y/Y into Ulta s product categories, we saw a promotion increase of 60 bps Y/Y in the Cosmetics segment and a 20-bp Y/Y increase in the Skincare, Bath & Fragrance segment. Inversely, the discounts on Hair products trended down Y/Y through the end of January 18. Figure 23: Y/Y Change in Average Inverted Dollar Discount Percentage vs. Y/Y Change in Reported Gross Margin 1.5% 3.0% 1.0% 2.0% 0.5% 1.0% -0.5% -1.0% -1.0% '14 '14 '15 '15 '15 '15 '16 '16 '16 '16 '17 '17 '17 '17-2.0% Average Inverted Dollar Discount Percentage Y/Y - Left Axis Reported Gross Margin Y/Y - Right Axis 12
Figure 24: Ulta Beauty Online Basket Size Premium Over In-Store 3 25.0% 2 15.0% 1 5.0% 2012 2013 2014 2015 2016 2017 Based on our data and analysis, the online premium was about 12.7%, a decline of 30 bps Y/Y in 17. Over the past three years, Ulta Beauty s e-commerce segment has generally posted an 18%+ premium in average basket size over the in-store segment. We saw consistent negative Y/Y growth in online premium for most quarters since 16 except for past two quarters ( 17 and 17). Figure 25: E-Commerce Sales as a % of Total Sales M Science Index vs. Reported 14.0% 12.0% 1 8.0% 6.0% 4.0% 2.0% 2012 2013 2014 2015 2016 2017 Reported E-Commerce % of Total M Science E-Commerce % of Total Ulta s e-commerce mix continued to ramp significantly though the end of 17. We are projecting e- commerce revenues of roughly $230 million for the quarter, or roughly 11.8% of estimated revenues. * 17 reported e-commerce % of total is represented by M Science 17 estimates. 13
Figure 26: US Temperature Change During Ulta Beauty s 17 November 2017 Temperature Y/Y Nov. 2017 Temperature vs. 5-yr. Historical Average December 2017 Temperature Y/Y Dec. 2017 Temperature vs. 5-yr. Historical Average January 2018 Temperature Y/Y Jan. 2018 Temperature vs. 5-yr. Historical Average Red indicates temperature was up Y/Y. Blue indicates temperature was down Y/Y. Red indicates temperature was up versus the 5-year historical average. Blue indicates temperature was down versus the 5-year historical average. 14
Figure 27: US Precipitation Change During Ulta Beauty s 17 November 2017 Precipitation Y/Y Nov. 2017 Precipitation vs. 5-yr. Historical Average December 2017 Precipitation Y/Y Dec. 2017 Precipitation vs. 5-yr. Historical Average January 2018 Precipitation Y/Y Jan. 2018 Precipitation vs. 5-yr. Historical Average Blue indicates precipitation was up Y/Y. Yellow indicates precipitation was down Y/Y. Blue indicates precipitation was up versus the 5-year historical average. Yellow indicates precipitation was down versus the 5- year historical average. Figure 28: Ulta Beauty s Store Footprint 15
Figure 29: Ulta Beauty Weather Trends, 17 vs. 16 & 15 3 26.6% 25.0% 2 21.1% 23.2% 22.8% Percentage of Store Days 15.0% 1 8.3% 9.8% 6.0% 5.0% 2.7% 2.9% 2.9% 1.9% 3.9% Rain Snow 95 + 20 According to our weather data, there was a 380-bp Y/Y decrease in the percentage of rain days in 17 at Ulta Beauty stores. The percentage of extremely cold days (20 ) increased 380 bps Y/Y, which was 160 bps above the historical average. The percentage of snow days remained flat Y/Y. Q4 Hist. Avg. Q4 '15 Q4 '16 Q4 '17 Figure 30: Ulta Beauty Average 17 Temperature & Precipitation 55.0 0.300 54.0 53.0 52.0 0.280 0.260 51.0 50.0 49.0 0.240 0.220 Average Temperature ( F) 48.0 47.0 46.0 45.0 44.0 43.0 42.0 41.0 40.0 39.0 38.0 37.0 36.0 42.6 0.085 0.062 45.5 44.5 42.2 0.079 0.082 0.086 0.086 0.077 0.051 0.200 0.180 0.160 0.140 0.120 0.100 0.080 0.060 0.040 Average Precipitation & Snowfall (inches) 35.0 Q4 Hist. Avg. Q4 '15 Q4 '16 Q4 '17 0.020 The average temperature decreased 2.3 degrees Y/Y around Ulta Beauty stores in 17, which was 0.4 degrees above the historical average. Precipitation volume decreased 34% Y/Y in the month and was 17% lower than the historical norm. Snowfall remained about flat versus the year-ago period and the five-year historical average. Average Temperature ( F) Average Precipitation (inches) Average Snowfall (inches) 16
Figure 31: Ulta Beauty Weather Trends, November 17 vs. November 16 & November 15 3 25.0% 22.7% 24.5% Percentage of Store Days 2 15.0% 1 19.5% 18.4% 5.0% 1.4% 1.5% 0.8% 0.2% 0.3% 0.6% 0.1% Rain Snow 95 + 20 According to our weather data, there was a 610-bp Y/Y increase in the percentage of rain days in November 17 at Ulta Beauty stores. The percentage of extremely cold days (20 ) increased 10 bps Y/Y but was 50 bps below the historical average. Nov. Hist. Avg. Nov. '15 Nov. '16 Nov. '17 Figure 32: Ulta Beauty Average November Temperature & Precipitation Average Temperature ( F) 65.0 64.0 63.0 62.0 61.0 60.0 59.0 58.0 57.0 56.0 55.0 54.0 53.0 52.0 51.0 50.0 49.0 48.0 47.0 46.0 45.0 44.0 43.0 42.0 41.0 40.0 39.0 38.0 37.0 36.0 35.0 52.8 51.7 50.3 49.2 0.076 0.057 0.050 0.045 0.055 0.027 0.008 0.008 Nov. Hist. Avg. Nov. '15 Nov. '16 Nov. '17 0.300 0.280 0.260 0.240 0.220 0.200 0.180 0.160 0.140 0.120 0.100 0.080 0.060 0.040 0.020 - Average Precipitation & Snowfall (inches) The average temperature decreased 2.5 degrees Y/Y around Ulta Beauty stores in November 17 but was 1.1 degree above the historical average. Precipitation volume decreased 9% Y/Y in the month and was 12% lower than the historical norm. Snowfall decreased 7% Y/Y and was down 69% versus the historical average in the month. Average Temperature ( F) Average Precipitation (inches) Average Snowfall (inches) 17
Figure 33: Ulta Beauty Weather Trends, December 17 vs. December 16 & December 15 3 27.6% 27.0% 25.0% 23.5% 2 20.1% Percentage of Store Days 15.0% 1 8.5% 11.9% 6.6% 5.0% 4.1% 4.0% 2.7% 1.5% 2.0% Rain Snow 95 + 20 According to our weather data, the percentage of rain days at Ulta Beauty stores decreased 690 bps Y/Y in December 17 and was 340 bps below the historical average. The percentage of extremely cold days (20 ) increased 340 bps Y/Y and was 530 bps above the historical average. Dec. Hist. Avg. Dec. '15 Dec. '16 Dec. '17 Figure 34: Ulta Beauty Average December Temperature & Precipitation Average Temperature ( F) 60.0 59.0 58.0 57.0 56.0 55.0 54.0 53.0 52.0 51.0 50.0 49.0 48.0 47.0 46.0 45.0 44.0 43.0 42.0 41.0 40.0 39.0 38.0 37.0 36.0 35.0 34.0 33.0 32.0 31.0 30.0 47.2 42.2 0.122 0.110 0.099 40.2 0.091 39.4 0.078 0.074 0.070 0.043 Dec. Hist. Avg. Dec. '15 Dec. '16 Dec. '17 0.300 0.280 0.260 0.240 0.220 0.200 0.180 0.160 0.140 0.120 0.100 0.080 0.060 0.040 0.020 - Average Precipitation & Snowfall (inches) The average temperature decreased 0.8 degrees Y/Y in December 17 and was 2.8 degrees below the historical average for the month. Average precipitation decreased 39% Y/Y, 43% below the historical normal level. Snowfall decreased 10% Y/Y but was 21% above the historical average for the month. Average Temperature ( F) Average Precipitation (inches) Average Snowfall (inches) 18
Figure 35: Ulta Beauty Weather Trends, January 18 vs. January 17 & January 16 4 35.0% 33.8% 3 Percentage of Store Days 25.0% 2 15.0% 19.8% 18.8% 22.4% 13.3% 17.0% 1 8.9% 9.3% 5.0% 4.0% 4.3% 4.3% 3.0% Rain Snow 95 + 20 According to our weather data, the percentage of rain days at Ulta Beauty stores decreased 1,140 bps Y/Y in January 18 but was 260 bps above the 5-year historical average. The percentage of extremely cold days (20 ) increased 770 bps Y/Y and was 370 bps above the historical average. Jan. Hist. Avg. Jan. '16 Jan. '17 Jan. '18 Figure 36: Ulta Beauty Average January Temperature & Precipitation Average Temperature ( F) 55.0 54.0 53.0 52.0 51.0 50.0 49.0 48.0 47.0 46.0 45.0 44.0 43.0 42.0 41.0 40.0 39.0 38.0 37.0 36.0 35.0 34.0 33.0 32.0 31.0 30.0 0.128 41.0 0.134 0.130 0.126 38.0 38.0 0.103 37.3 0.060 0.060 0.059 Jan. Hist. Avg. Jan. '16 Jan. '17 Jan. '18 0.300 0.280 0.260 0.240 0.220 0.200 0.180 0.160 0.140 0.120 0.100 0.080 0.060 0.040 0.020 - Average Precipitation & Snowfall (inches) The average temperature decreased 3.7 degrees Y/Y in January 18 and was 0.7 degrees below the 5-year historical norm Average precipitation decreased 42% Y/Y and was 1% below the historical level. Snowfall increased 6% Y/Y and was 3% above the historical average for the month. Average Temperature ( F) Average Precipitation (inches) Average Snowfall (inches) 19
Figure 37: Ulta Beauty Average Temperature and Rainfall by Region Average Temp. ( F) Regional % Q4 '15 Nov. '15 Dec. '15 Jan. '16 Q4 '16 Nov. '16 Dec. '16 Jan. '17 Q4 '17 Nov. '17 Dec. '17 Jan. '18 New England 3.3% 41.1 46.8 44.9 31.3 37.6 44.6 34.1 34.1 33.4 42.5 29.7 28.0 Middle Atlantic 9.8% 43.1 48.8 47.5 31.8 39.8 46.2 36.2 35.9 35.7 43.0 33.1 29.7 East North Central 27.4% 36.9 45.4 39.8 25.8 34.3 45.8 27.4 30.0 30.1 39.9 26.4 24.4 West North Central 5.3% 35.9 46.5 36.7 25.8 34.3 48.5 27.1 28.8 31.0 43.3 27.8 24.2 South Atlantic 15.4% 57.6 60.2 61.7 47.9 56.3 57.1 54.8 54.3 52.4 56.3 51.8 46.2 East South Central 7.9% 50.4 57.1 54.5 40.2 50.6 55.7 46.6 49.9 44.7 53.6 43.6 37.7 West South Central 4.9% 51.7 57.7 52.5 45.2 53.1 60.7 48.6 50.2 49.5 59.6 46.8 42.6 Mountain 9.4% 33.9 39.0 31.6 32.1 34.0 46.3 28.1 28.7 37.0 45.4 32.0 35.1 Pacific 16.7% 51.2 55.2 49.4 50.6 51.6 59.5 48.9 47.7 54.2 59.4 51.4 53.7 TOTAL 10 45.5 51.7 47.2 38.0 44.5 52.8 40.2 41.0 42.2 50.3 39.4 37.3 Avg. Temp. ( F) Y/Y Regional % Q4 '16 Nov. '16 Dec. '16 Jan. '17 Q4 '17 Nov. '17 Dec. '17 Jan. '18 New England 3.3% -3.5-2.2-10.8 2.8-4.2-2.1-4.4-6.1 Middle Atlantic 9.8% -3.3-2.6-11.3 4.1-4.1-3.2-3.1-6.2 East North Central 27.4% -2.6 0.4-12.4 4.2-4.2-5.9-1.0-5.6 West North Central 5.3% -1.6 2.0-9.6 3.0-3.3-5.2 0.7-4.6 South Atlantic 15.4% -1.3-3.1-6.9 6.4-3.9-0.8-3.0-8.1 East South Central 7.9% 0.2-1.4-7.9 9.7-5.9-2.1-3.0-12.2 West South Central 4.9% 1.4 3.0-3.9 5.0-3.6-1.1-1.8-7.6 Mountain 9.4% 0.1 7.3-3.5-3.4 3.0-0.9 3.9 6.4 Pacific 16.7% 0.4 4.3-0.5-2.9 2.6-0.1 2.5 6.0 TOTAL 10-1.0 1.1-7.0 3.0-2.3-2.5-0.8-3.7 Average Precipitation (in.) Regional % Q4 '15 Nov. '15 Dec. '15 Jan. '16 Q4 '16 Nov. '16 Dec. '16 Jan. '17 Q4 '17 Nov. '17 Dec. '17 Jan. '18 New England 3.3% 0.085 0.056 0.111 0.083 0.108 0.089 0.109 0.127 0.094 0.071 0.064 0.146 Middle Atlantic 9.8% 0.066 0.032 0.096 0.064 0.092 0.095 0.082 0.097 0.053 0.051 0.042 0.067 East North Central 27.4% 0.064 0.073 0.095 0.023 0.060 0.053 0.048 0.080 0.068 0.113 0.034 0.060 West North Central 5.3% 0.085 0.106 0.127 0.016 0.044 0.052 0.042 0.041 0.025 0.016 0.022 0.030 South Atlantic 15.4% 0.104 0.088 0.111 0.105 0.061 0.023 0.063 0.097 0.042 0.023 0.038 0.051 East South Central 7.9% 0.148 0.122 0.209 0.087 0.157 0.089 0.176 0.207 0.089 0.050 0.116 0.096 West South Central 4.9% 0.088 0.130 0.101 0.039 0.069 0.083 0.059 0.074 0.043 0.013 0.081 0.034 Mountain 9.4% 0.017 0.019 0.016 0.016 0.028 0.014 0.026 0.043 0.022 0.030 0.019 0.021 Pacific 16.7% 0.074 0.038 0.074 0.101 0.100 0.041 0.083 0.162 0.043 0.032 0.014 0.071 TOTAL 10 0.079 0.076 0.099 0.060 0.077 0.055 0.070 0.103 0.051 0.050 0.043 0.059 Avg. Prec. Y/Y % Regional % Q4 '16 Nov. '16 Dec. '16 Jan. '17 Q4 '17 Nov. '17 Dec. '17 Jan. '18 New England 3.3% 27% 59% -3% 52% -13% -21% -41% 16% Middle Atlantic 9.8% 41% 196% -15% 51% -42% -47% -48% -31% East North Central 27.4% -6% -27% -49% 240% 12% 112% -29% -24% West North Central 5.3% -48% -51% -67% 163% -43% -70% -47% -26% South Atlantic 15.4% -41% -74% -44% -8% -32% 3% -39% -47% East South Central 7.9% 6% -28% -16% 139% -43% -44% -34% -54% West South Central 4.9% -21% -36% -42% 89% -38% -85% 38% -54% Mountain 9.4% 68% -25% 58% 166% -21% 117% -28% -51% Pacific 16.7% 35% 8% 12% 60% -57% -22% -83% -56% TOTAL 10-3% -28% -29% 71% -34% -9% -39% -42% Source: US Census 20
Figure 38: Ulta Beauty Revenue Estimate History (in millions) $2,250 $2,000 $1,750 $1,581 $1,593 $1,541 $1,300 $1,289 $1,342 $1,500 $1,581 $1,295 $1,340 $1,131 $1,275 $1,275 $1,344 $1,250 $1,074 $1,069 $1,066 $1,103 $1,050 $1,030 $1,057 $1,110 $1,000 $750 $500 $250 $0 $1,957 $1,944 '16 '16 '16 '16 '17 '17 '17 '17 Est. M Science Est. Company Street Our estimate for Ulta Beauty s 17 total net sales is $1.957 billion, slightly above the $1.944 billion consensus., Consensus Metrix, Company Reports 21
M SCIENCE ANALYSTS Mark W. Bachman Senior Analyst, TMT 503.433.1544 Mark.Bachman@mscience.com Matthew Jacob, CFA Senior Analyst, Consumer 646.751.1429 Matthew.Jacob@mscience.com INDUSTRIALS Airlines CONSUMER Grocers Leisure Lodging Restaurants Retail TMT Cable and Satellite China Internet Consumer Technology Internet/E-Commerce Semiconductor Technologies Software Telecom Video Games Corey Barrett Senior Analyst, TMT 503.433.1545 Corey.Barrett@mscience.com Michael Erstad, CFA Senior Analyst, Consumer 646.751.1426 Michael.Erstad@mscience.com Matthew Goodman, CFA Senior Analyst, TMT 646.751.1428 Matthew.Goodman@mscience.com Henry Guo, CFA Senior Analyst, TMT 503.433.1547 Henry.Guo@mscience.com Byrne Hobart Senior Analyst, Consumer 646.751.1444 Byrne.Hobart@mscience.com Troy Li Senior Analyst, Consumer 646.802.6273 Troy.Li@mscience.com Spenser Marshall Senior Analyst, TMT 503.433.1550 Spenser.Marshall@mscience.com John Tomlinson, CFA/CPA Head of Consumer, Senior Analyst, Consumer 646.751.1443 John.Tomlinson@mscience.com Steve Weinstein Head of TMT, Senior Analyst, TMT 503.433.1543 Steven.Weinstein@mscience.com 22
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