ULTA - NASDAQ

Good afternoon, and welcome to Ulta Beauty's conference call to discuss results for the second quarter of fiscal 2023. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce Ms. Kiley Rawlins, Vice President of Investor Relations. Ms. Rawlins, you may proceed.

Thanks, Paul. Good afternoon, everyone, and thank you for joining us for a discussion of Ulta Beauty's Results for the Second Quarter of Fiscal 2023. Hosting our call today are Dave Kimbell, Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Kecia Steelman, Chief Operating Officer, will join us for the Q&A session. Before we begin, I'd like to remind you of the company's safe harbor language. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC. We caution you not to place undue reliance on these forward-looking statements, which speak only as of today, August 24, 2023. 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. We'll begin this afternoon with prepared remarks from Dave and Scott. Following our comments, we'll open up the call for questions. [Operator Instructions] As always, the IR team will be available for any follow-up questions after the call. Now I'll turn the call over to Dave. Dave?

Thank you, Kiley, and good afternoon. We appreciate your interest in Ulta Beauty. The Ulta Beauty team delivered strong performance again this quarter with sales, gross profit and SG&A expenses all better than planned. Net sales increased 10.1% to $2.5 billion, and comparable sales increased 8%. Operating profit was 15.5% of sales and diluted EPS increased 5.6% to $6.02 per share. In addition to delivering great financial results, our teams executed against our operational priorities. During the quarter, we drove growth across all major categories, increased the number of loyalty program members, strengthened our brand engagement and achieved important milestones within our multiyear transformation initiatives. Through the first half, our financial results are ahead of our internal expectations, and I remain confident we can deliver against our updated guidance for fiscal 2023. I want to express my sincere appreciation to all Ulta Beauty associates for their continued commitment to delivering great guest experiences while working collaboratively to execute our ambitious transformational agenda. Starting with the discussion of our operational results, we saw strong sales -- solid sales performance across both our store and digital channels, driven by double-digit traffic growth. All major categories delivered comp growth for the quarter, supported by strong engagement with the overall beauty category, compelling product newness and innovation and successful execution of cross-category promotional events, including our reimagined Big Summer Beauty Sale. Building on last year's promotional events, we consolidated key summer events like our popular Jumbo Love and Mix & Match Minis into a broader, more cohesive event with holistic storytelling and impactful messaging. The 3-week long Big Summer Beauty Sale drove market disruption, member conversion and strong sales across our hair care, makeup and skin care categories. Turning to performance by category. Skin care continues to be 1 of our strongest categories, even as we lap unprecedented growth during the pandemic. For the quarter, both Prestige and mass skin care delivered double-digit growth. Newer brands, including Bubble, BIOMA and Beautycounter and innovation from existing brands like The Ordinary, Drunk Elephant and Supergoop! contributed to the strong sales results. Reflecting consumer interest in dermatologist recommended brands, La Roche-Posay and CeraVe continued to perform well, and brands like Good Molecules, Hero Cosmetics and Peach Slices continue to benefit from social virality. The fragrance and bath category delivered double-digit comp growth again this quarter. Layering and wardrobing scents as a form of self-expression, especially among Gen

Thanks, Dave, and good afternoon, everyone. As Dave shared, we delivered second quarter financial results that were ahead of our expectations. Strong sales growth supported by healthy guest engagement and strong in-store sales performance drove better-than-expected gross margin. SG&A spend was also lower than planned, resulting in an operating margin of 15.5%. Turning to the P&L. Net sales for the quarter increased 10.1%, driven by 8% growth in comp sales, strong new store performance and solid growth in other revenues. Transactions for the quarter increased 9%, primarily, driven by healthy traffic on both channels. Average ticket decreased 1% as the decline in average units per transaction more than offset the impact of higher average selling price. The increase in average selling price was primarily driven by the impact of retail price increases, many of which were executed last year. We estimate price increases contributed about 300 basis points to the overall comp. During the quarter, we opened 3 new stores and relocated 2 stores. In addition, we remodeled 3 stores. Second quarter gross margin decreased 110 basis points to 39.3% compared to 40.4% last year. The decrease was driven by lower merchandise margin, an increase in inventory shrink and higher supply chain costs. Overall merchandise margin was lower due primarily to increased promotional activity, unfavorable category mix and less benefit from the timing of retail price changes. While promotional activity continues to normalize, it is important to note that overall promotions remain well below 2019 levels. Inventory shrink continued to be a headwind this quarter. Our efforts to address shrink are having an impact, but the overall environment remains challenging. Today, we have the new fragrance fixtures in more than 50% of our stores and expect to have these installed in 70% of the fleet by year-end. We remain focused on taking action in areas we can control, including continued investment in fixtures, associate training, staffing as well as operational improvements, and leveraging our influence to enact broader changes that will disincentivize unlawful behavior. Supply chain costs were higher, primarily driven by ongoing investments in our supply chain transformation as we made progress on the retrofit of our Dallas and Greenwood distribution centers and prepared to open our new market fulfillment center in Greer, South Carolina. These gross margin pressures were partially offset by strong growth in other revenue and leverage of store fixed costs due to top line sales growth. SG&A increased 12.4% to $600.7 million. SG&A increased 40 basis points to 23.7% compared to 23.3% last year. The increase in SG&A as a percentage of sales was driven by deleverage of corporate overhead due to strategic investments, planned increases in store payroll and benefits and higher store expenses, which more than offset lower incentive compensation. Corporate overhead expense deleveraged in the quarter primarily due to investments related to our strategic priorities, including Project SOAR, other IT capabilities and UB Media. Year-to-date through the second quarter, we have invested a little less than half of our planned $60 million to $70 million of incremental spend to support our strategic initiatives. The increase in store payroll and benefits was primarily due to the impact of planned growth in average wage rates and increased staffing levels compared to the same period last year. Incentive compensation was a tailwind in the quarter, reflecting operational performance that is more in line with our internal targets compared to last year's significant outperformance. Operating income for the quarter was $391.6 million, flat to last year. As a percentage of sales, operating margin decreased 150 basis points to 15.5% compared to 17% last year. Diluted GAAP earnings per share increased 5.6% to $6.02 per share compared to $5.70 per share last year. Turning to the balance sheet and cash flow statement. Total inventory increased 9% to $1.82 billion compared to $1.67 billion last year, in addition to the impact of 37 additional stores, the increase reflects inventory to support higher demand, increases in product costs and new brand launches. Capital expenditures were $95 million for the quarter compared to $49.4 million last year. The increase in capital expenditures was primarily related to investments in IT and supply chain to support our transformational agenda as well as merchandising investments to support the rollout of our luxury assortment and brand expansions. Depreciation was $61.9 million in the quarter compared to $60.9 million last year. We ended the quarter with $388.6 million in cash and cash equivalents. During the quarter, we repurchased approximately 594,000 shares at a cost of $275.5 million. Year-to-date, we have repurchased 1.1 million shares at a cost of $559 million. At the end of the second quarter, we had $541 million remaining under our current $2 billion repurchase authorization. Moving to our outlook. We are updating our guidance for fiscal 2023 to reflect our better-than-expected second quarter performance. We have raised our top line expectations and now project net sales will be between $11.05 million and $11.15 billion, with comp sales growth between 4.5% and 5.5%. Our updated outlook reflects our strong first half performance while continuing to consider risks and uncertainties that could impact demand in the second half of the year, including rising consumer debt levels and the expected resumption of student loan repayments. We continue to expect comps will moderate to the low single digits in the second half of the year, and we remain on track to open 25 to 30 new stores and renovate or relocate 20 to 30 stores this year. Reflecting our year-to-date performance, we've raised the low end of the range of operating margin and now expect operating margins for the year will be between 14.6% and 14.8% of sales, with deleverage to come fairly evenly from both gross margin and SG&A. Our expectations reflect the continuation of the trends we experienced through the first half of the year around shrink, promotional activity and supply chain costs as well as greater headwind from lapping the merchandise margin benefits from the timing of retail price increases last year. For modeling purposes, we expect third quarter operating margin will be meaningfully more pressured than what we saw in the second quarter as we lap greater pricing benefits in the third quarter last year as well as a shift of investment spending from Q2 to Q3. As a result, we expect earnings per share for the third quarter will be lower than last year. Reflecting these updated assumptions, we now expect diluted earnings per share for the year will be between $25.10 and $25.60. As a reminder, fiscal 2023 is a 53-week year. We anticipate the additional week will add between $165 million to $175 million in sales and approximately $0.40 of earnings per share. In closing, our results through the first 6 months of fiscal 2023 highlights the ongoing power and resilience of our business model. I'd like to thank our associates for their dedication and commitment to keeping our guests at the center of all we do and giving them more reasons to shop Ulta Beauty. As we look to the future, we are focused on capitalizing on the growth opportunities in the beauty category and executing our strategic framework to deliver long-term sustainable growth for all our stakeholders. And now, I'll turn the call back over to our operator to moderate the Q&A session.

[Operator Instructions] Our first question is from Ashley Helgans with Jefferies.

To start, maybe any details you can share on how traffic progressed throughout the quarter and what you're seeing now in August? And then also on the fragrances being locked up, have you seen any adverse effects on sales?

Yes. Ashley, for the quarter, we saw strong traffic throughout the quarter with double-digit traffic. And we continue to be pleased with the engagement that we're seeing, and we saw actual comp performance sequentially accelerate through the quarter as well. And all of those trends are reflected into our updated and elevated guidance for the full year. On fragrance, the -- I'll let Kecia kind of discuss what we're doing in fragrance and how that's impacting our business.

Yes. Actually, we've locked up about 50% of our stores right now. And what we're seeing is in the initial stores that we rolled out the locked fragrance cases for, we actually saw sales improvement because we were in stock with the product and we had it available to the guests. So we're staying very close to that. We're also investing in labor because we don't want to be sales preventative from the guests being able to purchase. So that's a little bit of the investment in labor that you heard earlier from Scott, is that in these stores, we are upping our labor a bit because we want to make sure that we're able to take care of the guests. So we're staying close to it. The bottom line is that we're pleased that we're able to maintain our in-stock for our guests, and quite frankly, keep the bad actors [ out ] from coming into our stores.

Our next question is from Michael Baker with D.A. Davidson.

I'm just curious, you said you expect the beauty industry to grow mid-single digits, yet you're only expecting comps to be up low single digits. And even if you add in store growth, you're still expecting to grow maybe up, but seemingly below the industry. I don't suppose you guys think you're losing share, so I'm just wondering if you can help flesh that out a little bit?

Yes, I'd say, yes, we do anticipate continuing to gain share. We've done so through the first half of the year, and that is our outlook. The commentary is really as we look into the second half of the year, we see some strength. Engagement continues to be high. Certainly, our business is performing very well. We're attracting new members. We're growing across all key categories, both -- and then in both e-com and stores. But we also see some uncertainty as we get in later into the year. So while we're confident in the category, we're just incorporating into our outlook some full -- some of that. And for the full year, we're looking at revenue in the plus 8% to 9% range, so we anticipate gaining share for the year being ahead of the total category growth. That's -- that will be our plan.

Our next question is from Olivia Tong with Raymond James.

My first question is around prestige versus mass breakout, because you mentioned in skin that you're still seeing strong growth in both prestige and mass. But only in mass for makeup, but you mentioned that the launch of Fenty a year ago was a big contributor. So if you exclude that, are you seeing anything different there? And then going forward, as you think about your expectations on growth in mass versus prestige, what implications may that have on comp, in your view?

What was the last part of that question? What was -- could you repeat the last...

Yes. Just the implication on comp, if -- what you're thinking in terms of growth of mass versus prestige across your stores? And what implications that might have in terms of comp if mass becomes a bigger piece of the driver of growth?

Well, yes, we -- as I discussed, we've seen strong performance really across our entire assortment as we look at it, but mass has been a bit stronger for a couple of quarters now in -- across our business. And that's driven largely by strong consumer engagement across some key brands in makeup, health, NYX and some others are really hitting the market with great innovation, great marketing, great consumer engagement. And the fact that we offer the full assortment from mass to prestige is a real benefit. We're able to capitalize on strong trends and strong engagements across all aspects of that. In skin care, we're seeing brands, particularly in the dermatologist recommended area driving strong growth, and that's great, we -- strong player for us. As we look forward, it's always our intent to continue to adapt and adjust and lean into the areas that are driving growth, find ways to strengthen those that may be more challenged, but we're confident in the outlook going forward. And the fact that we have both is unique. Of course you know that, but the fact that we're the only ones that offer mass, masstige, prestige and a growing, established now, business in luxury. We're seeing strong points across all. We'll continue to flex and adapt and incorporate it into our comp guidance is our ability to continue to drive growth. But through the first half of the year, we're really pleased with the Mass performance and several brands driving strong growth, and continue to lean in and bring innovation into the prestige side of the business. And collectively, it's working to allow us to gain share across Ulta Beauty.

Our next question is from Kate McShane with Goldman Sachs. Kate is your line on mute? Our next question is from Anthony Chukumba with Loop Capital Markets.

Congrats on the solid results. So just a real quick one. You mentioned luxury, and in fact, it's exceeding your expectations. You mentioned launching Pat McGrath Labs. Just -- it's all one related question in just 2 parts. First off, what -- is luxury -- what percentage of your assortment, I guess, is luxury in the stores that it's in? And is it big enough at this point to be a comp driver?

Yes. Won't break out exact percentages. Again, to reiterate, it's in 200 stores. We're really pleased with it, a strong assortment across a number of the very best brands in luxury. Chanel, Dior, NATASHA DENONA, HOURGLASS, an extension of Chanel with Chanel Número Uno, Lancôme, Absolute, now Pat McGrath. A luxury fragrance business with brands like YSL and TOM FORD and Viktor&Rolf. So we won't get into exact percentages, but it is an important part of our overall strategy. We know there's growth in the luxury side of the business. We've been in luxury for a while, but now with this expanded presence, it is a contributor to our total comp. We're excited about the addition of Pat McGrath, and we'll continue to innovate and evolve and find ways to drive further growth down the road. So yes, we think it's -- we know it's contributing to our growth, and we're excited about our guest response to an expanded luxury experience.

Our next question is from Christopher Horvers with JPMorgan.

Layered gross margin question. So how did shrink in the promotional environment play out in the second quarter relative to your expectations? Have you changed any of your expectations around those line items in the back half? And do you expect any improvement perhaps in the shrink line? And then Scott, could you remind us of the price cost headwind that we faced in the third quarter? Because I know that was pretty significant last year.

Sure, Chris. So yes, versus -- we did say, again, versus our expectations for the quarter, we're very happy with the overall financial results we were able to deliver. So breaking it down a little bit more, I'd say merchandise margin was better than what we expected, and so that speaks partially to the promotional lever that people are focused on here. So again, generally better than what we expected, so we can lean in and lean out. That's 1 of the great strengths of our business, being able to have real-time information and be able to take quick action and be agile. I'd say shrink generally directionally about the same as what we saw in the first quarter. As we look out to the rest of the year, we don't really -- we're not anticipating a significant turn and expectations there. We expect it to be tough the rest of the way. And we'll say maybe the fourth quarter may be slightly less negative than it was early part of the year because remember, last year in the fourth quarter was the first time we really called out and quantified what the shrink impact was, so we did have a little bit of a catch-up there. Over -- and then fixed -- store fixed costs we talked about, that was stronger than what we -- going in expectation because sales were a bit stronger than what we thought. And then channel mix overall helped us as well. As we look to think about gross margin the second half of the year, I'd say the drivers, the headwinds are consistent with what we've seen in the first half of 2023. Again, we're taking a prudent approach as we always do with our guidance, and we'll work hard to do better than that.

And then the price cost in 3Q?

Yes. So there was -- we -- third quarter last year is where we saw a significant step-up in the pricing increases across the portfolio, and really, the margin benefit started really rolling through in the second quarter and into the back half of the year. So this is really the toughest anniversary point in the year is ahead of us right now, and that's why we're calling out third quarter. Third quarter is kind of peak on a number of different fronts. Again, every year is a little unique, but the third quarter now, we've got a little bit of delays in some of our project work, which is shifting back some of our IT expense into the third quarter. And a lot of that flows through SG&A. So we'll see more pressure there than we saw earlier in the year, and then likewise, with gross margin. And a little -- and more moderate sales growth expectations, coupled with cycling over the margin benefits last year from the price increases step up in the back half of the year, putting more pressure on third quarter than maybe some would expect. But again, by the time we get in the fourth quarter and get back to focusing on sales in the holiday, we expect that to bounce back in a healthy manner.

Our next question is from Adrienne Yih with Barclays.

Scott, I'm going to stay on that topic with the third quarter. If I'm not mistaken, it seems like about $10 million to $12 million of the SG&A spend perhaps is moving into the third quarter. And if we have a little bit more gross margin pressure, does that imply that EPS could be down sort of high single-digit range? Just wondering if I'm in the right ballpark.

Yes. We don't want to get into quantifying it specifically, Adrienne. But I'd say directionally, you're in the right zip code. So yes, on the SG&A side, that's roughly kind of the shift back into the third quarter on some of the IT spend. And yes, operating margin is going to be down meaningfully versus what we saw earlier this year, and that's going to result in negative EPS growth year-over-year for the third quarter.

Super helpful. And then to just follow through with the SG&A. So can you help us walk through the phases? I know there's 4 phases of Project SOAR and all of the other investments. It seems like you're running sort of dual structures perhaps on some of the DCs and then the website or, let's call it, 1/3 or half of the year. How should we think about that rolling off? Because a lot of this kind of redundancy will go away next year. I know you're not giving guidance, but just to help us shape sort of what SG&A growth looks like last -- next year? Because it seems like it comes down a lot on the consensus. I just want to make sure we have that correct in our mind.

Adrienne, I'll start, and then I'll kick it over to Scott. So yes, we're in the middle of an ambitious transformational agenda. That's for sure. And part of this is really positioning all parts of the organization for our future efforts, and overall we're really pleased with how our progress is working. But anyone who's taken on this large scale of a project, we definitely have timing shifts that happen because we want to make sure that while we're staying forward, progressing and moving, we are really limited in our distraction and our disruption for our guests and also for our associates. So we've adopted a few of our time lines and have shifted a couple of the projects from Q2 into Q3, and we might even see some shifting from Q3 into Q4, but we're still on track to spend the $60 million to $70 million incremental to the prior year. And while we've got some of those shifts, we still are very confident that we're going to stay with our overall time line and how things wrapped up by the right time line for next year, which is more mid-2024. I'll turn it over to Scott.

Yes, and you're exactly right. We're not providing guidance for 2024 here today, but yes, investors should expect that we will cultivate, recoup benefits from the significant investments that we're making in our core systems year 20 -- '22 into '23 and that we're going to see benefits materialized in 2024 and beyond. Again, you've heard us talk about, these are major initiatives here that we expect to see dividends for a number of years into the future, but I would also caution investors just to be prepared. I mean there's -- we are in the business of growing Ulta Beauty for the long term, and so there's plenty of other great growth initiatives out there that we've got in the queue that we're ready to go tackle. As soon as we get through some of more of this, I'd call core transformation work here in '23 and early 2024.

Our next question is from Kelly Crago with Citi.

I just have a couple of quick ones on categories. Just on makeup, it looks like makeup's growth decelerated from high singles in 1Q to mid-single to 2Q. Was that driven by a slowdown -- a subsequent slowdown in prestige? Did both decelerate? And how should we think about makeup growing in 2H? And then just secondly on skin, we've heard from some of the brands that maybe there's slowing growth in that category, but you do under index versus the category overall. So just curious whether that dynamic can help offset maybe some weaknesses that we're seeing or starting to see in skin? And any thoughts on the growth there would be great.

Yes. I'd say on makeup, the main driver is while our -- we're bringing a lot of innovation and newness across that prestige portfolio, lapping -- really, one of the biggest launches in the history of Ulta Beauty with Fenty, lapping that fully in the second quarter is probably the biggest driver. We're excited though as we look forward. I mentioned a few launches that we that we have coming out, Rabanne, Pat McGrath, Polite Society, among others that many of which are exclusive to Ulta Beauty and are coming into our business in the second half of the year. But we anticipate as we lap that launch. We'll continue to see pressure on prestige. Mass continues to drive growth behind great innovation, great engagement. And so we're pleased with the total makeup side of the business even as we address some of the pressure in lapping previous launches. In the skin care side, yes, we are -- we have somewhat lower share than we do in makeup, but our -- we have established over time a meaningful share position and the fact that we're able to continue to drive growth is, again, a testament to our model, our ability, the strength we have across price points. We're seeing strong healthy growth in both mass and prestige, really leaning into dermatologist recommended space, and believe that we can continue to drive growth going forward and continue to drive share. The category, we think, is healthy. As I said, with the total beauty category, we do anticipate some moderation. It's unlikely to see double-digit growth forever, but we're leaning in. We've got a great skin business. Our merchants continue to bring strong innovation. Our store teams are doing a great job educating our guests, and we're delivering a lot of growth and we see more coming.

Our next question is from Kate McShane with Goldman Sachs.

Thanks for giving me another chance here to ask our question. I wondered if you could talk a little bit about the strategy behind combining your promotional events like you did this past quarter? And did you see a bigger lift as a result of that change versus last year? And will there be any similar approaches to some of your promotional events being taken in the second half?

Great. Yes, I almost used your silence to answer any question that I wanted to [indiscernible] the earlier Kate, but glad you got back in the queue. We're excited. We -- I think what we did in the second quarter, what our teams did, our merchant marketing, digital, store teams, our go-to-market teams, really, we -- they are continually evaluating how we can get better and how we can elevate the impact, and the summer sale is an example of that. We had strong events, solid events that were delivering for years, but the team, through great consumer insights, continued understanding of guest behavior and full understanding of what unique strengths we bring to the table, reevaluated that. And we're pleased with the results of that event, the Big Summer Sale as well as, really, our entire promotional strategy. It was not a huge acceleration in promotional intensity as much as a smarter strategy, and it worked. Our guests engaged, we attracted new members, it delivered strong comp growth. We saw strength in both stores and on our e-commerce business traffic was healthy. So it's -- frankly, didn't surprise me because I know how the team continues to look for ways to elevate, and it's another example of great strategy leading to a strong execution. As we look into the second half of the year, we're evaluating, as we always do, every aspect of our go-to-market strategy. We continue to evolve our efforts. We'll adapt competitive changes, consumer insights and make sure we're delivering at a high level. Sunday, Kate, starts 21 Days of Beauty, 1 of our biggest events of the year. And I think you'll see as that rolls out, a program that's been around for a while, continued innovation and ways to engage our guests in new ways, so we're excited to get that going.

Our next question is from Oliver Chen with TD Cowen.

This is [ Neil ] here on for Oliver. I would love to hear more about your thoughts on the broader beauty consumer. Someone made a comment about consumers are being less focused on pricing and kind of trading around different price points, so just curious how that behavior holds against the different macro headwinds you mentioned, particularly student loans? What's your exposure to that? Or how do you quantify that impact as we get closer to the October time frame when that becomes more material?

Yes. Well, I'd say first of all, we're just pleased overall with the continued engagement that beauty enthusiasts are showing for this category. Coming out of the pandemic for these last a couple of years now, just a high level of engagement. You know how over the long term, last 50 years, this has been a strong growth -- consistently growing category because of the emotional connection that it plays in our guest lives, the importance it has and how they express themselves to the world, and that is more true now than ever. And some of the behaviors and engagement tools that emerge coming out of the pandemic continue to fuel the category. Strong innovation, strong connection through marketing and consumer tools and an increased understanding of the role of beauty to wellness and self-care. So when we look at the consumer going forward, we remain confident in the long-term outlook for this category and the strength of the beauty enthusiast to fuel it going forward. As I mentioned in the -- in my comments, there's a lot of uncertainty, and there has been, frankly, for the last couple of years. But we look into the remainder of this year, we know we're lapping. We continue to lap strong growth. We've been on this strong category growth for a while now. We have more changes coming, including student loans. So we're cautious and certainly watching carefully how that evolves. Historically, it's been difficult to tease out any kind of economic or stimulus shift and how directly that impacts the category or our business, and our business and the category itself has been largely resilient. Not immune, but largely resilient. So when we look out, I guess I'd say we're optimistic but watching closely and carefully. Staying really close to our guests, understanding what's happening in their lives and what's influencing their decisions and making sure we're adapting. Last thing I'd say, and I know I've said this many times, but our position, our unique model of having all price points and a really accessible experience, both in-store and online positions us well. So even if there's shifts, even if there are pressures on consumers, history says we are able to adapt, and I know that's the strategy that we're implementing to make sure we're here for our guests to deliver regardless of what goes on in the broader environment around them.

Paul, I think we have time for maybe one more question.

Our final question is from Steven Forbes with Guggenheim Securities.

Dave, Scott, you both mentioned in your prepared remarks the expectation for promotions to remain well below 2019 levels. And I was hoping you could just maybe clarify that statement? Is it isolated in 2023? Or is it meant to be a longer-term comment? And as we think about merchandise margin risk in the model, any way to frame what the sort of structural change in promotional activity in the category means for the margin profile in and of itself?

Yes. So when we're talking -- again, this has been an evergreen topic, I think, with investors now for quite a while, pointing back to 2019. So the business is in a much different position today than it was back in 2019. Again, for those that have been following 2019, we had some major disruption in the middle of the year in the makeup category, unexpected deceleration there. There were channel mix headwinds that we were dealing with as a business. There was some investment in some international expansion that was causing some significant deleverage on the business. And so during the course of the pandemic some initiatives that have been started pre-pandemic but during the pandemic, we were able to take advantage of making sure that we fully leverage some of our cost optimization initiatives by way of EFG, and now continuous improvement initiatives layered on top of that. I would say the scale of the business, much larger today than it was back in 2019. So we're going to get the benefit of the fixed store cost leverage in the base business far and above what we were looking at pre-pandemic. Things around our capabilities like ship from store and BOPIS capabilities that really did not exist in any meaningful way back in 2019 that now you heard us say again today. 30% of those digital sales are being serviced out of our store fleet, so a much more efficient delivery to the consumer and a much better overall margin profile of those sales. Things like our credit card program, our Ulta Beauty and Target relationship, UB Media, new business for us, just really out of the starting gate here over the course of the last year, puts us in a much better position overall than we were back in those days. So again, that's not promotion directly, but those -- all those elements play a role in gross margin and operating margin and expanding that over the course of time. So we feel confident that the promotion levels, again, they are going to moderate. We've been talking over the last couple of years that extraordinary environment that we saw in '21 and '22 was not sustainable for the long term. And that -- as people got back in the business and people were back in malls and other retail outlets that the promotion level was probably going to come back to us a little bit, and that's kind of how -- what we're seeing play out today. So again, there's nothing unexpected here. It was in our forecast, our plans for the year. We're moderating and navigating our way through that in an effective manner, and again, nothing -- I don't think anything that should be overly concerning to investors. Again, we're confident that we're going to be able to manage our way through that with new capabilities, new lines of business, our loyalty program and CRM capabilities being much more mature today than they were back in the pre-pandemic days. So we're confident, we're going to be able to deliver healthy operating margins in that 14% to 15% range and a very moderate growth expectation of 3% to 5%. So feeling good about our position and where we're headed for the future.

Great. Well, thank you all for joining us today. I appreciate your interest and engagement in Ulta Beauty. I want to close by thanking all of our Ulta Beauty associates for their continued care for our guests while delivering another quarter of strong financial results. We look forward to speaking to all of you again when we report results for the third quarter on November 30. Thanks again, and have a good evening.