Ulta Beauty (ULTA) Q2 2021 Earnings Call Transcript

Ulta Beauty (NASDAQ:ULTA)
Q2 2021 Earnings Call
Aug 25, 2021, 4:30 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good afternoon, and welcome to Ulta Beauty’s conference call to discuss results for the second quarter of fiscal 2021. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [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, please proceed.

Kiley Rawlins — Vice President of Investor Relations

Thank you, Paul. Good afternoon, everyone. 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.

This afternoon, we released our financial results for the second quarter of fiscal 2021. A copy of the press release is available in the Investor Relations section of our website. 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 or future results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company’s filings with the SEC. We caution you not to place undue reliance on these forward-looking statements, which speak only as of today, August 25, 2021. 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. In today’s comments, we will discuss certain non-GAAP financial measures, including adjusted operating income and adjusted diluted EPS, which have been presented to reflect our view of our ongoing operations by adjusting fiscal 2020 results for store impairment charges and costs associated with the permanent closure of 19 stores.

A reconciliation of these measures to the corresponding GAAP measures can be found in our earnings release. We’ll begin this afternoon with prepared remarks from Dave and Scott. Following our prepared comments, we’ll open up the call for questions. To allow us to accommodate as many questions as possible during the hour scheduled for this call, we ask that you please limit your time to one question.

To ask a second or follow-up question, please requeue. As always, I’ll be available for any follow-up questions after the call. Now, I will turn the call over to Dave. Dave?

Dave Kimbell — Chief Executive Officer

Thank you, Kiley, and good afternoon, everyone. The Ulta Beauty team delivered excellent results again this quarter, and I want to start by expressing my sincere appreciation to all of our Ulta Beauty associates for their outstanding efforts to drive these results. As I have traveled around the country visiting with our teams across all parts of the company, I continue to feel inspired by their commitment and passion for our guests, our business, and for each other. We are excited about the momentum we are seeing in our business and are optimistic about our future.

The beauty category is recovering faster than we expected and the investments we’ve made over the last year to adapt to the market disruption and strengthen our leadership position are delivering results. Our value proposition is strong, and we are evolving and innovating to lead in the new beauty landscape, capture more market share, and drive profitable growth. For the second quarter, net sales increased 60.2% to $1.97 billion. Operating margin increased to 16.9% of sales and diluted EPS was $4.56 per share.

These strong results exceeded our internal expectations and reflect our ongoing efforts to serve our guests, especially as we continue to adapt to the changing environment. In recognition of their dedication to our guests and their efforts to deliver these strong results, this quarter we awarded a one-time discretionary appreciation bonus to eligible store and DC associates. For the quarter, comp sales increased 56.3%, driven by strong growth in our brick-and-mortar channel. As consumer confidence optimism and comfort to shop in physical stores continues to increase, we are seeing more of our members return to stores.

Traffic trends in stores improved from the first quarter but remained lower than 2019 levels. However, comp sales in stores increased to this quarter compared to 2019, driven by strong average ticket growth. We continue to optimize operating hours and I’m pleased to share that our retail operating hours are nearly back to 2019 levels. As expected, e-commerce declined as compared to the second quarter last year but were more than double 2019 levels.

The sales decline was driven by a decrease in the number of transactions. Average ticket remains strong. Recall that our e-commerce business increased more than 200% in the second quarter last year as we faced the reopening of stores. Guest utilization of buy online, pickup in store remained high, totaling 20% of e-commerce sales in the quarter.

To enhance the experience, we made operational improvements to increase order accuracy and fulfillment speed and in the second quarter, 97% of orders were ready for pickup within two hours. We have also increased the number of stores with dedicated parking spaces, and we continue to look for opportunities to make curbside pickup available at nontraditional Ulta Beauty locations. Customer engagement in our digital platforms remains strong even as store traffic ramps up. Compared to the first quarter, our omnichannel guests on average maintained the same number of transactions in the online channel even as they increased their in-store transactions, reinforcing that e-commerce transactions are incremental and help drive greater overall member engagement in spend.

From a category perspective, we increased market share across all major prestige beauty categories based on dollar sales for the 13 weeks ended July 31, 2021, compared to the same time period last year. We also saw sales strength across all of our major mass categories. Compared to the second quarter of fiscal 2020, all major categories delivered robust double-digit comps, as we anniversary-ed last year’s phased reopening process and introduced more newness. Compared to the second quarter of fiscal 2019, fragrance, bath, skincare, and haircare all delivered strong double-digit comp growth.

Makeup was only slightly lower than 2019. While comp sales in the makeup category are not yet positive compared to 2019, momentum is building with both mass and prestige category improving from the first-quarter trend. Reductions in mask-wearing requirements combined with an increase in makeup wearing occasions helped drive strong growth in face and lip, while engagement with eye continued to be healthy. During the quarter, we launched three new makeup brands, Bobbi Brown, [Inaudible], a prestige brand founded by well-known Brazilian influencer and makeup artist, and Undone Beauty.

These new brands combined with new product launches from a wide range of brands, including MAC, Clinique, NICs, e.l.f, Maybelline drove improved sales performance in the quarter. Skincare delivered another quarter of strong double-digit sales growth compared to 2019. Reflecting the strong connection between beauty and self-care, guests are maintaining their skincare regimens even as they increase makeup purchases. Moisturizer, serums, and cleansers continue to drive category growth.

We also saw robust growth in sun protection and self-tanning as consumers reengaged with travel and vacation activities. New brands including fresh, good molecules, which is exclusive to Ulta Beauty, and b.tan, as well as new products from Tula, Shiseido, CeraVe, La Roche-Posa, and the Creme shop drove solid guest engagement. Haircare continued to deliver double-digit growth, driven by newness and strong guest engagement with our strategic tent-pole events. We began the quarter with our semi-annual gorgeous hair event, an event strategically designed to convert members who do not currently shop the haircare category or engage with our salon services.

This year, we streamlined offers and invested in dedicated social and digital marketing campaigns to expand our reach. As a result, the event attracted new members to the category and delivered stronger than expected sales and profitability. We ended the quarter with our Jumbo Love Event, a basket-building event focused on larger product sizes. We continued the narrow brand participation and simplify our presentation to guests.

These improvements resulted in stronger sales and profitability. In addition to strong strategic events, we also launched a number of new haircare brands throughout the quarter, including Rizos Curls, Verb and Curls, a well-established Black-owned brand. These new brands combined with the recently launched Briogeo, Kristin Ess contributed to the strong category growth this quarter, as consumers focus on building and maintaining hair health. Finally, fragrance and bath delivered exceptionally strong growth, driven by Mother’s Day and Father’s Day sales, as well as our Fragrance Crush events.

Newness and fragrance from Marc Jacobs and Carolina Herrera, as well as engagement with the base business from favorites like Dolce & Gabbana and Chanel, drove meaningful market share growth. Body scrubs and moisturizers from brands like Truly and Tree Hut continued to drive outstanding sales growth, reflecting guests’ continued commitment to self-care. Our Conscious Beauty platform continues to expand and resonate with guests. At the end of the second quarter, more than 270 brands were certified in at least one of the five Conscious Beauty pillars, and now include Fresh, Kylie Cosmetics, Happy Dance, and Good Molecules among others.

To promote guest discovery and trial this quarter, we will offer guests the new Conscious Beauty sampler kit, which includes hero brands like Beekman 1802, Kinship, Tarte, and Tula. We will also refresh our in-cap in stores, adding products from Dermalogica, Sunday Riley, Florence, and Truly. As we work to scale Conscious Beauty further, we are enhancing our search capabilities on ulta.com and in the mobile app to make it easier for guests to find certified products that reflect their personal values. Through the pandemic, the lines between health and beauty have blurred.

Based on our proprietary research, we know that 65% of beauty enthusiasts believe beauty is significantly connected to wellness. Reflecting these consumer insights, this quarter, we launched the wellness shop in select stores and on ulta.com to help our guests navigate their personal wellness journey. With the guest category focus on self-care for the mind, body, and spirit, the wellness shop features a curated selection of products across five key segments, including supplements and ingestibles and Spa at Home. From daily rituals to relaxation and sleep regimens, the shop addresses a variety of wellness needs in an accessible easy to navigate presentation.

Our guests are responding well to the platform, and we’ll continue to increase awareness of the offering and expand its presence over time. Our services business is also gaining momentum. Sales from hair and brow services increased more than 60% compared to 2020. Despite capacity limitations due to mandates from the CDC and state and local authorities, we are increasing member engagement and driving retail attachment, especially through our salon back bar takeovers.

Services play an important role in driving guest engagement, loyalty, frequency, and spend. I’m excited to share that we plan to relaunch skin services in select stores in the third quarter. We plan to offer new services that target specific concern such as hydration, anti-aging, as well as acne facials that cater to our Gen-Z guest, and we will test micro channeling, dermaplaning, and hydro facials in select stores. Turning now to our loyalty program.

We are seeing faster recovery in active member growth than initially expected. We ended the second quarter with a record 34.6 million active members, 8% above last year and 4% above 2019. Spend per member also increased driven by higher average ticket, surpassing both 2020 and 2019 levels. The majority of new member acquisition happens in stores and our talented store associates continue to convert new members at higher rates than in 2019.

We are also improving our conversion rates online, reflecting improvements we had made in the online customer journey. In addition to growth in new members, we are accelerating reactivation of lapsed members and increasing retention rates of existing members as we continue to advance and imply our data and analytics capabilities.From a channel perspective, in-store-only members totaled 73% this quarter, increasing from 67% in the first quarter. As expected, the mix of omnichannel members moderated from the first quarter to 18% of total members but remained well above 2019 levels. Importantly, omnichannel members continue to increase their spend across both store and digital channels.

As we progress through the rest of the year, we expect the penetration of omnichannel guests will continue to moderate as in-store shopping increases but remain above 2019 levels. Discovery and trial are critical parts of the beauty experience, and we offer a variety of physical and digital ways to discover new products, new trends, and new applications. This quarter, we launched a new functionality in our mobile app that allows guests greater access to select product scanning for content and reviews, loyalty information, and virtual try-on while shopping in stores. In addition, we reintroduced testers in stores with expanded stations of testing and sanitation supplies.

We continue to deliver hyper-relevant content to drive discovery and build stronger connections with our guests. This quarter, we introduced Beauty School live virtual masterclasses focused on brand launches, demonstrations, and beauty tutorials. BeautyBio founder, Jamie O’Banion, hosted a Megawatt Glow Masterclass, showcasing skin care tools and products. And in honor of national lipstick day, we partnered with a NYX Professional makeup pro artist to walk viewers through a long-wear lip look.

In July, we launched a partnership with Supergreat, a hyper-relevant app-based Gen Z-centric live stream platform that is 100% focused on beauty, from shoppable live videos to editorial content and exclusive product drops, the Supergreat community is an ideal partnership for experiential immersive Beauty. While we are early in our pilot, we’ve already seen encouraging results with engagement tracking ahead of other live platforms. As part of our holistic marketing efforts to reinforce Ulta Beauty’s authority in the skincare category, we launched hashtag Ulta skin tuck, our first multi-branded TikTok hashtag challenge. To drive increased awareness of our category breadth and depth, we asked audiences to post their favorite skincare products from Ulta Beauty.

The hashtag has amassed more than 8 billion views to date with 1.6 million videos created. We want Ulta Beauty, to be the most loved beauty destination and the most inclusive. Building on our focus as a diversity-forward company, we announced a number of commitments at the beginning of this fiscal year to further our efforts to champion diversity and inclusion. This quarter, we joined the 15% pledge, committing to dedicated 15% of our total assortment, the Black-owned, Black-founded, and Black-led brands.

To date this year, we have welcomed eight new Black-owned brands to the Ulta Beauty family, including Homebody, CAMILLE ROSE, and Mented, and we are on track to double the number of black-owned brands in our assortment this year. As part of our cross-functional approach to integrate diversity and inclusion into all that we do, our teams launched a textured hair training series for all stylists to better enable more inclusive experiences in our salons. We also launched mandatory inclusion in action training in stores to understand what diversity, equity, and inclusion means to Ulta Beauty. We strive to make a positive difference in the communities where we live and work.

The Ulta Beauty Charitable Foundation focuses on improving the lives of women and families. This quarter, with the generosity of our guests, our teams raised more than $2 million for Save the Children to support mothers and children in need. We also partnered with LinkedIn, for the hashtag Back to Work campaign, highlighting the pandemic’s impact on women and providing resources to aid economic recovery. And as part of our ongoing efforts to reduce waste and minimize our impact on the environment, we recently launched the consortium to reinvent the retail bag, a multi-year collaboration across retail sectors that aims to identify, test, and implement innovative new design solutions that serve the functions of today’s single-use plastic retail bag.

Finally, I am very excited to share that Ulta Beauty at Target has launched in 58 stores and online with plans to open about 100 stores by the end of the quarter. Over the last nine months, the Ulta Beauty and Target teams have collaborated closely to create a unique way for guests to experience beauty, and we are excited to see it come to life. As guests come to Ulta Beauty at Target, they will be welcomed into a 1,000-square-foot co-design space with bold new fixtures and lighting that celebrate premium beauty with a modern look. Each aspect of the shop was thoughtfully designed to make the space feel authentic to Ulta Beauty, Target, and the featured brands within the assortment.

From the unmistakable Ulta Beauty orange pop canopies and vivid graphics that weave into the existing Target store. Everything was designed to create an inspiring and unique beauty experience for guests. With compelling product displays and unique discovery zones, the shop offers a curated selection of more than 50 prestige and emerging brands, including MAC, Unique, Morphe, Tula, The Ordinary, Pattern, Madison Reed, Urban Decay, and the Ulta Beauty collection. The assortment is a compelling mix of best-selling items, as well as limited-edition collaborations and minis to drive discovery and trial.

We’re making the experience as seamless as possible, both in-store and online. Guests shopping Ulta Beauty at Target on target.com and the Target app will enjoy free shipping for qualifying orders and all of Target same-day fulfillment services, and guests will benefit from rewards across both Ultimate Rewards and Target Circle. While it’s only been 10 days since the first half was open, guest response has been overwhelmingly positive with enthusiasm about two of their favorite retailers coming together and excitement about the ability to earn points in both loyalty programs. We’re thrilled about this partnership and how together we can change the way the world experiences beauty.

Before I turn the call over to Scott, I want to announce that we will host an Analyst Day here in Chicago on October 19th to share how our strategic priorities are evolving and how we plan to continue to position Ulta Beauty to deliver sustainable profitable growth. Given the ongoing uncertainty around the Delta variant, we are planning the event to accommodate both in-person and virtual participation. Our teams will continue to assess guidance from the CDC, and we will adapt our plans as necessary to ensure the safety of our team and attendees.And now, I will turn the call over to Scott for a discussion of the financial results. Scott?

Scott Settersten — Chief Financial Officer

Thanks, Dave, and good afternoon, everyone. Starting with the income statement. Q2 sales increased 60.2% as we anniversary-ed the disruption in stores last year due to COVID-19. We opened seven new stores during the quarter and closed one store.

We also remodeled five stores and relocated one store. Total company comp increased 56.3%, driven by a 52.5% increase in transactions and a 2.5% growth in average ticket. As Dave mentioned, the resurgence of traffic in stores drove the strong comp performance. Compared to the second quarter of fiscal 2019, total sales increased 18% and comp sales increased 13.1%.

From a mix perspective, cosmetics was 43% of sales, compared to 45% last year, skincare was 17% of sales, compared to 18% last year, the fragrance and bath category increased 300 basis points to 12% of sales, and haircare products and styling tools was flat with last year at 21% of sales. The services category increased to 4% of sales, compared to 3% last year. Q2 gross profit margin increased to 40.6% of sales, compared to 26.8% last year. The increase was primarily due to the leverage of fixed costs, higher merchandise margin, more favorable channel mix, and leverage of salon expenses.

Strong topline growth drove significant leverage of fixed costs. The improvement in merchandise margin was primarily the result of anniversary-ing higher inventory reserves in the second quarter last year, as well as higher sales, lower promotional activity, and ongoing benefits from our cost optimization efforts. Recall that we increased inventory reserves by $16.5 million in the second quarter last year, primarily to adjust for slow turning and discontinued makeup SKUs and permanently closed stores. As a percentage of sales, salon expenses were lower compared to last year, reflecting strong topline sales and the elimination of the salon manager role.

As a reminder, we will anniversary this change in Q4. Comparing this year’s performance to the second quarter of fiscal 2019, gross margin improved by 420 basis points. Higher merchandise margin, fixed cost leverage, and leverage of salon expenses were partially offset by adverse channel mix. As a percentage of sales, SG&A increased to 23.6%, compared to 22.1% last year.

Higher store payroll and benefits and higher marketing expense was partially offset by leverage of corporate overhead and variable store expenses. Store payroll and benefits deleveraged in the quarter primarily due to the anniversary-ing of the $48.22 million in employee retention credits made available last year under the CARES Act. In addition, reflecting the strong operational performance, we elected to grant discretionary appreciation bonuses to our nonexempt store and DC teams in recognition of their efforts. Marketing expense also deleverage during the quarter, primarily reflecting increased spend on print marketing.

Recall that last year, we significantly reduced our spend on print material while our stores were closed due to the pandemic. We are also expanding our investment in digital marketing to support key events and reengage lapsed members. In addition, we are leveraging our CRM capabilities and working more closely with our brand partners to create more targeted digital marketing campaigns across multiple touchpoints. Strong topline growth resulted nice leverage of corporate overhead and store expenses.

Compared to the second quarter of fiscal 2019, SG&A as a percentage of sales was flat. As a percentage of sales, lower store expenses were offset by higher store payroll and corporate overhead. Compared to the second quarter of fiscal 2019, advertising in the second quarter of 2021 was flat as a percentage of sales. Operating margin was 16.9% of sales, compared to 1.1% in the second-quarter fiscal 2020 on a GAAP basis and 4.5% on an adjusted basis.

Strong topline growth driven by brick-and-mortar combined with the impact of our cost optimization efforts, including promotional optimization delivered record operating margin results. The tax rate increased to 24.4%, compared to 20.6% last year due to a decrease in state tax credits as a result of an increase in pre-tax income. Diluted GAAP earnings per share were $4.56, which included $0.04 per share of tax benefit related to share-based compensation, compared to $0.14 last year. Adjusted diluted earnings per share in the second quarter of last year was $0.73.

Moving on to the balance sheet and cash flow. Total inventory increased 5.5% compared to last year, reflecting the impact of 32 additional stores, the opening of our Jacksonville fast fulfillment center in Q3 of fiscal 2020, and increased inventory purchases to support higher demand. Capital expenditures were $22.7 million for the quarter, driven by our new store opening program, investments in IT systems and store remodels and relocations. Depreciation was $69 million compared with $77.4 million last year, primarily reflecting the impact of last year’s store impairments in the 19 stores which were permanently closed.

We ended the quarter with $770.1 million in cash and cash equivalents. In the second quarter, we repurchased 746,000 shares at a cost of $243.5 million. At the end of the quarter, we had $886.2 million remaining under our current $1.6 billion repurchase authorization. We continue to expect to repurchase approximately 850 million of shares in fiscal 2021, but as always, have the flexibility to modify the cadence of repurchases in response to market conditions.

Turning now to our updated outlook for 2021. We are encouraged by our first-half results and the trends we’ve experienced so far in the third quarter. While the operating environment continues to be dynamic and our near-term visibility remains limited, especially as it relates to the spread of COVID variance, we have increased our financial expectations for the year. We now expect net sales for the year to be between $8.1 billion and $8.3 billion, with comp sales growth planned to be in the 30% to 32% range.

We continue to expect comp results will moderate to the low double-digit range as we move through the second half. We expect to open approximately 44 net new stores and remodel or relocate 18 stores. We now expect operating margin rate for the year will be approximately 13% of sales. We continue to believe the largest driver of operating margin expansion will come from gross margin, driven by leverage of fixed costs, less headwind from channel shift, improving merchandise margin, and leverage of salon costs.

Based on the higher topline growth, we now expect to leverage SG&A more than previously expected as compared to fiscal 2020. These assumptions result in an expectation for diluted earnings per share in the range of $14.50 to $14.70 per share, including the impact of approximately $850 million in share repurchases. Like others, we are managing global supply chain constraints, port congestion, and other headwinds, including the resurgence of COVID-19. Our teams are working diligently to mitigate risk and where appropriate, we are proactively working with our brand partners to prioritize receipts to ensure we have adequate inventory for the holiday season.

As a result, we expect that our inventory levels at the end of the third quarter will likely be elevated above expected sales growth. We plan to spend between $225 million and $250 million in capex in fiscal 2021, including approximately $100 million for new stores, remodels, and merchandise fixtures, $105 million for supply chain and IT, and about $33 million for store maintenance and other. As a reminder, our guidance for 2021 assumes a consistent federal tax rate and no material increases in the federal minimum wage. It does not include assumptions for any impact related to a resurgence of COVID-19.And now, I’ll turn the call back over to our operator to moderate the Q&A session.

Questions & Answers:

Operator

Thank you. [Operator instructions] In the interest of time, we ask the participants to limit themselves to one question and one follow-up. One moment, please, while we poll for questions. Thank you.

Our first question comes from Adrienne Yih with Barclays. Please proceed with your question.

Adrienne Yih — Barclays — Analyst

Hey, thank you very much. Good afternoon and congratulations. I mean, really, it’s a huge influx since our last quarter, and great to see the momentum continuing. Dave, my first question is for you about Ulta and Target.

Obviously, it’s early days with just 10 days under your belt. But I want to see what is your early learnings then, if you can help us with any details on that? And then I know the initial target was somewhere around 100 stores. What would be the benchmark for more aggressive rollout?And then my second follow-up question is for Scott. Just remind us, this was the first call where we haven’t spent a large amount of time on freight and the supply chain, although it is an issue.

You’re not as exposed to the Far East. So can you talk about kind of where you are exposed? And if you can, any kind of basis point impact for the back half? Thank you very much.

Dave Kimbell — Chief Executive Officer

Great, well, thanks for the question and the comments. I appreciate it. Yeah, let me start on Target, and then I’m going to ask Kecia to give some more color because Kecia is leading this for us. But we are, as I said in the comments, we’re just thrilled with the partnership and the launch, guest response.

We feel really confident how we’ve come out of the gate operationally, working really well. And most importantly, as I mentioned, consumers are thrilled by this. They’re really excited about the idea of bringing together two great retailers and a unique experience that nobody else is doing. This is totally due to beauty, and so we’re really, really pleased with the results and the engagement and the partnership.

Kecia, why don’t you share a few more details about what we’re seeing in the outlook on stores.

Kecia Steelman — Chief Operating Officer

Yeah. What we’re most excited about really is the operational execution across both Ulta Beauty and the Target teams. The seamless integration between our technologies and making sure that we’re capturing both Target Circle members and the Ulta Beauty members and having them link their accounts. We’re out of the gates really strong.

We love what we see. The guests are really loving this experience overall and there is just huge momentum that we’re looking forward to continuing on getting the rest of 100 stores opened in Q3.

Scott Settersten — Chief Financial Officer

And then I’ll follow up on the international piece and supply chain. So we don’t really break out geographic sourcing exposure, but most of our products, lipstick, serums are made in the U.S. or Europe. We do have some limited exposure to China with the Ulta Beauty brand private label and a few specific brands in the assortment like Morphe and some components, of course, which are part of our vendor partners supply chain as well.

So again, we’re keeping a close eye on that. There’s nothing that we see as a critical watch-out at this point in time, but we’re just trying to plan ahead and making sure we’re as well prepared as we can despite any eventual outcomes there or development. So we feel like we’re well-positioned for the holiday in the second half of the year.

Adrienne Yih — Barclays — Analyst

Great. Well, the stores are looking great, so best of luck.

Dave Kimbell — Chief Executive Officer

Thanks, Adrienne.

Operator

Thank you. Our next question comes from Simeon Siegel with BMO. Please proceed with your question.

Simeon Siegel — BMO Capital Markets — Analyst

Thanks. Hey, everyone, congrats on the great results. Dave, to follow-up, and Kecia to follow-up on that just slightly from the loyalty angle. So can you just speak to your expectations of the member referral are fantastic while the results? Can you just speak to your expectations of member growth, maybe over the year and then beyond just with the Target relationship now in effect? And then, the follow-up, Scott, as you look past this year, can you just speak to how you’re viewing these margin rates as to whether there are a new base or whether there is, what you would expect — just get back from the benefits we’re seeing right now? Thank you.

Dave Kimbell — Chief Executive Officer

Great. Thanks, Simeon. Yeah, let’s start with loyalty, and let me just, before I talk specifically about Target, zoom out a little bit. And we’re really, really pleased with our loyalty results in the quarter and really through this first half of the year to get back to a new high of 34.6 million members, 8% above last year, 4% above 2019.

As I mentioned in the comments, that’s faster than we had anticipated. But it’s really a testament to effort across the entire organization from our loyalty team, our analytics team, marketing, merchandising, and of course, our store teams and e-commerce teams sort of delivering a great experience every day. And the fact that we were able to increase total loyalty members by 2.3 million members, which is the largest growth we’ve had in any single quarter is just exceptional and again really proud of the team and the efforts that come through strong new member growth — strong new member acquisition, strong reactivation rates of lapsed members, and of course, high retention among our existing members. And so our loyalty program has long been a focus of ours.

It’s absolutely a key differentiating aspect of our total model. We’re very proud of it and we’re continuing to innovate and drive that part of our business. And to your — specifically about Target, I’m not going to give any specific numbers about our outlook other than one of the main reasons that we’re really excited about this program is the connection that we see with our loyalty program, both in delighting our existing guest and we think over time increasing their total share of spend with Ulta Beauty, with another key pillar in our omnichannel experience with our relationship with Target, but also attracting new guests. The circle program has over 90 million members in it.

They have 30 million people walking through at Target every week. So we feel like there is a very large opportunity for us to attract new loyalty guests into our program, get them engaged in the Ulta Beauty at Target experience, but then also introduce them to all things across all touchpoints. So we’re confident and too early to kind of talk about the experience so far, but as Kecia said, we’re excited about the results so far and see it as a big driver. Scott, do you want to hit on the margin.

Scott Settersten — Chief Financial Officer

Sure, Simeon. So, again, we’re very, very proud of the results we posted this quarter and appreciative of all the hard work on behalf our associates and brand partners to deliver great experiences to our guests, which is at the end of the day is what delivers those kinds of financial results. So I would say the comp performance again, it was elevated over initial expectation. So the 56 versus last year and 13% comp versus ’19 reflects the mix of benefits, unique external factors, I guess, I would say, combined with the power of our model and all the great execution and things we’re doing to drive stronger results and the leverage across the P&L.

I’d say it makes us increasingly more optimistic. Again, you heard us say that we believe this is a double-digit EBIT margin business over the long term. Our goal is to expand operating margins and we feel confident we can do that. I guess I would say we’re not going to share too much today.

We’ll have more to say, more color to share on sale outlook and margin expansion opportunities when we get together at our Analyst Day here in October.

Simeon Siegel — BMO Capital Markets — Analyst

Sounds great. Congrats again, guys, and best of luck for the rest of the year.

Dave Kimbell — Chief Executive Officer

Thanks, Simeon.

Operator

Thank you. Our next question comes from Chris Horvers with J.P. Morgan. Please proceed with your question.

Chris Horvers — J.P. Morgan — Analyst

Thanks. Good afternoon, everybody. So my first question is, your two-year comp target accelerated in Q2 versus the first quarter. You’re fading that back down to get to low double-digit comps in the fourth quarter despite what should be more work from work and learn from school in the back half.

Is this just looking out into the uncertainty? And related to that, have you seen any impact from Delta in August from any of the — any markets in particular?

Dave Kimbell — Chief Executive Officer

Yeah. Great. Thanks, Chris. Yeah, absolutely, we are so excited, encouraged by the first-half results and trends.

And as you said, the strengthening, we saw and the momentum we see throughout the first half. And we’re feeling encouraged by what we’re seeing so far in the third quarter and that’s why we have increased our sales expectation for the full year. I will say — so with that optimism and confidence, it does remain difficult for us with certainty to understand how these variables will impact our business through the remainder of this year’s that with the resurgent of variants, certainly, that’s having a broader impact in the world around us. Our business remains healthy, but difficult to predict exactly how that will play out in consumer behavior.

We’re optimistic about holiday. We feel like it’s going to be a strong holiday, but holiday is always a unique time of year of course with a lot of new dynamics going on and uncertainty of COVID and other influences will drive through that. And then we are lapping our business in the second half of the year, and 2020 was stronger than the first half of the year, for sure, as we reopen stores and started to gain momentum. So we do believe our sales forecast is prudent.

It’s achievable, but it’s also reflective of the uncertainty that we see out there. And last thing I’d say, as we’ve been doing throughout all of this, if the recovery is stronger or faster than planned, we’re prepared. We’re working closely with our brand partners to be ready to adapt and adjust. We’re working hard to make sure we have the right inventory, the right store staffing, the right marketing plans to continue to lead the recovery in the beauty categories.

We believe we’ve been doing so far this first half of the year. So optimistic but feel like our guidance is appropriate given the environment.

Chris Horvers — J.P. Morgan — Analyst

Makes sense. And as a follow-up, quick math suggests that it seems like you’re implying maybe a 36.5%, 37% type gross margin in the back half. Is that in the zip code? And if that’s the case, what drives the lower rate versus the first half?

Scott Settersten — Chief Financial Officer

Yeah. I would just say we’re taking a more tempered do you I guess at the promotional environment. Again, naturally, holiday is more promotional. We’re competing against a wider variety of retailers during the gift-giving season.

We’ve got some incremental supply chain costs that we’re baking into the plan to be prudent around fuel costs and things like that. So again, on balance, it’s prudent estimate forecast, and we think it’s achievable. And if things turn out better, sales are stronger, we’ll deliver better results.

Chris Horvers — J.P. Morgan — Analyst

Thanks so much. Best of luck.

Dave Kimbell — Chief Executive Officer

Thanks, Chris.

Operator

[Operator instructions] Our next question comes from Olivia Tong with Raymond James. Please proceed with your question.

Olivia Tong — Raymond James — Analyst

Great. Thank you. First, congrats on the quarter. My first question has to do with the margins because I imagine a lot of this is fixed cost levers.

But how much of this is — how much of the margin, incremental margin is an extension of some of the efficiency and promotional improvements lasting? And how does this in any way change your view on customer acquisition cost or additional promotional efficiencies over time? And then you also mentioned that the e-commerce sales are mostly incremental, which is fantastic. So can you talk a little bit about the profile of the customer that maybe primarily shops via online versus in-store? Is it changing? Is the incremental new people still coming in via omnichannel? Are they replacing customers who are back to shop in-store now? Or can you just give a little bit more color there? That would be helpful. Thank you.

Scott Settersten — Chief Financial Officer

Yeah. So maybe I’ll start with the margin. So it’s not exactly clear. But if we’re looking at the second quarter, again we describe that the biggest drivers in the second quarter were the reserve adjustments versus last year.

Again, this is versus 2020, and so they were pretty significant last year. So of course, we didn’t absorb any of that this year. We’re doing a much better job with the stronger sales and better disciplines in the stores. So that was a pretty significant benefit, promotional, less discounting was kind of in the middle of the list I guess I would say.

Fixed cost is another major driver of gross margin expansion in the second quarter and for the first half of the year just because of the much higher sales levels overall. So when I think about those things, and of course, the salon manager shift versus last year was another element to that. So again, we’re not going to quantify those things. But as I think about the future, when we’re thinking about the back half of the year in merchandise margin, we still expect to be able to expand it.

The promotional — the promotionality disciplines, I think, again, we got a good start on that last year with some good learnings. Those are being played forward now. We still think there is opportunity there for us. There’s other things we can do as far as tools and process improvements to help that, aid that over the longer term.

Fixed costs, again once we got sales back on track, fixed cost leverage is the gift that keeps giving. So that’s something again that we feel pretty confident in and then there’s other things we’re working on as part of our EFG efforts that will continue to deliver benefits over the long term. So when we think about gross margin, merch margin being the most important piece of that, we still think there’s plenty of opportunity for us over the longer term.

Dave Kimbell — Chief Executive Officer

And on your e-comm member profile, I’ll just hit a couple of high points here, which is, first, our e-commerce business very healthy and such a strong and important part of our total omnichannel mix and we’re really pleased with how that’s complementing and integrating with our historic experience. And so we’re so glad to see strength across both of those channels. E-commerce guest — the omnichannel guests are among our very best guests. Those that are shopping, both in-store and online do demonstrate a high level of incrementality with their e-commerce purchases because what we typically see is those that have been shopping in-store that start shopping online continue to shop in-store at or in some cases even higher levels.

And it’s because they get more ingrained and integrated into the total Ulta Beauty experience, they become more loyal to Ulta Beauty and concentrate more of their Beauty spend at Ulta. So last year, with the stores being closed and the dramatic increase in our e-commerce, we introduced a whole lot of new consumers to our e-commerce business. Now, some of them have gone back to shopping only in-store, but most of them are continuing to shop in an e-commerce business — I’m sorry, in an omnichannel way and the behavior is really positive, both helping to deliver our Q2 results. But importantly, as we grow that base of omnichannel shoppers, we’ll have even more consumers shopping across channels going forward, which we know will drive total sales in the out years going forward.

So excited about this omnichannel behavior and believe that one of the lasting impacts of this disruption will have a significant increase in our e-commerce business and our omnichannel behaviors.

Olivia Tong — Raymond James — Analyst

Great. Thanks. Maybe if I could just follow up on makeup. You mentioned, obviously, that the momentum has continued 2Q versus 1Q even if it isn’t back to where it was before.

Why do you think it hasn’t fully recovered back to where it used to be given the replenishment, given that people are going out, there is a lot of innovation? Do we need another trend? Or is it just — there is still some holdback? Just kind of curious given the strength, particularly of other categories Ulta to make up.

Dave Kimbell — Chief Executive Officer

Sneaking in one more makeup question. But that — yeah, I’ll just be brief here that the makeup — yeah, we’re encouraged by what we see, and I think it’s just — it’s at estimates that the other categories have been strong, skincare, haircare, bath fragrance, and they remain strong. There is a high level of engagement but make up the trends that we’re seeing are encouraging. While it was slightly below 2019 levels in Q2, we had weeks at times during the quarter that it was positive versus 2019.

Our mass business we talked about in Q1 was above 2019 levels and it accelerated in Q2 also about 2019, and our Prestige business is improving. We are bringing in newness. Our biggest brands are performing well, new brands are performing. So it’s just consumer behavior as we recover is — there is high level of engagement, high level of excitement about makeup, more usage occasions and the momentum is building.

Time will tell exactly when we get back to steadily being above 2019 levels and growing from there, but we’re encouraged by what we see.

Olivia Tong — Raymond James — Analyst

OK, thanks.

Dave Kimbell — Chief Executive Officer

Great. Thanks, Olivia.

Operator

Thank you. Our next question comes from Steph Wissink with Jefferies. Please proceed with your question.

Steph Wissink — Jefferies — Analyst

Thank you. I’ll say this is a quick one for you. But wanted to just talk about SG&A leverage because I don’t think we’ve seen on a full-year basis that in the guidance for quite some time. So I just wanted to understand a little bit about the key pieces.

Maybe, Scott, if you could talk about what components of SG&A you expect to see the best leverage and where you might see some opportunity still in the future periods? Thank you.

Scott Settersten — Chief Financial Officer

Yeah. So if you’re looking back at 2020, Steph, I think there’s going to be a good story there as far as leverage on SG&A overall. Of course, the better comparison is 2019. So that’s where I’ll spend my time.

As we look back there, there is still, I guess I would say there is going to be leverage versus ’19 now versus our earlier in the year outlook there. Again, a lot of that’s due to stronger than expected sales. So that’s good news. We expect dollars to be higher in ’21 than ’19 primarily on store growth.

Number one, wage pressures primarily in the stores, and a big variable here is higher incentive compensation levels than what we saw back in 2019. You’ll recall, 2019 we missed our internal targets by a fair range and so that was — that’s going to be a headwind, a significant headwind when we’re measuring back against 2019. Of course, we have that service manager role as well that’s been reallocated from the gross margin line where it’s a good guide down to SG&A where it’s a headwind versus 2019. But again, that’s a net-net benefit for the company overall at the operating margin level.

We’re also going to be pulling in some incremental advertising marketing expense in the back half of the year. I think we’d mentioned that in some interim investor calls here to take advantage of market share opportunities now and the strength of our business, and of course, we’ve got good sales trends here too. So we’re going to make some more significant investments there in the back half of the year in digital channels. So again, we know that it works and it’s effective and they’re strong ROAs.

Operator

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

Ike Boruchow — Wells Fargo Securities — Analyst

Hey, everyone. Scott, can you talk a little bit more about just e-commerce. I mean, I think you said the dollars doubled versus ’19 with that implies year over year was down around 25% to 35%, which makes sense given where you are lapping. But now that your competitors are more, I mean, I think still tough but not quite as elevated, do you expect e-commerce growth to return when you get to the third quarter and back half?

Scott Settersten — Chief Financial Officer

Yeah. Thanks, Ike. So again, yeah, second quarter a little bit unusual. I mean, we did see some growth in the first quarter, but again we were lapping kind of just the initial stages I guess of the COVID and the shift and the store closings and kind of becoming a digital business, 100% kind of overnight back in 2020.

So it was what we expected. That was what was in our annual plan to see a overall decrease in the e-comm versus last year. Again, brick-and-mortar, again, our guests demonstrating that brick-and-mortar is important part of the beauty shopping experience and ecstatic to see traffic numbers coming back to the stores and sequentially improving here in 2021. So I think Dave called it out in his prepared remarks.

We got to remember last year second quarter, we doubled our e-commerce business, right? So to expect a little bit of moderation here, I don’t think is anything extraordinary under the circumstances.As we think about the rest of the year, again stores, the traffic trends are good. We’re encouraged there. So I would expect that e-commerce is going to moderate as we look out to the rest of the year. And I wouldn’t expect it to be a growth — growth in absolute terms here as we look over the next couple of quarters.

Again, for the full year, we expect e-commerce penetration to be in the low to mid-20% range.

Dave Kimbell — Chief Executive Officer

Thanks, Ike.

Operator

Thank you. Our next question comes from Kate McShane with Goldman Sachs. Please proceed with your question.

Kate McShane — Goldman Sachs — Analyst

Hi. Thanks for taking my question. You had mentioned that the comp did come in higher than your expectations. I wondered if that was commentary on both what you saw in prestige and mass.

And within the mass, are you seeing an acceleration in market share gains there, whether it’s in cosmetics or other categories?

Kecia Steelman — Chief Operating Officer

So, Kate, I’m sorry. Can you repeat the first part of your question? We didn’t hear you.

Kate McShane — Goldman Sachs — Analyst

Oh, I’m sorry. I’ll speak up a little bit. I just wondered based on your comments that you came in at higher than your expectations for comp. Is that a similar commentary both for the prestige category and the mass category? And then just within mass, are you seeing an acceleration in share gains there versus what you saw in Q1?

Dave Kimbell — Chief Executive Officer

Got it. Yes. Thanks for the question, Kate. And, yeah, we’re really across the board.

Yes, we were higher than our expectations and we’re seeing strength versus expectations across really all aspects of our business. I talked about all of our — all of our categories demonstrating strong improvement and in all but makeup growth versus healthy growth versus 2019. And that is true both on the prestige and the mass side. And then within makeup specifically, and what we said it’s not quite back to 2019, although getting closer and again showing moments through Q2 where we were above 2019.

We saw improvement in both mass and prestige. Mass has recovered faster, but prestige is certainly showing signs and we’re seeing some good — and it’s really driven by newness across the board, both some new brands that we brought in, but a strong newness across our so many of our brands and different segments of makeup that are exciting our guests, getting them reengaged in the category. So yeah, we’re seeing it across all — both price points and categories, and it’s encouraging.

Kiley Rawlins — Vice President of Investor Relations

All right. I think we have time for one more question.

Operator

Thank you. Our last question comes from Krisztina Katai with Deutsche Bank. Please proceed with your question.

Krisztina Katai — Deutsche Bank — Analyst

Hi. Good afternoon, and congrats on a very strong quarter. I wanted to touch on the membership base. You mentioned that it’s reached a new record.

You’re reengaging with lapsed consumers and finding on new ones. So where do you think you are in terms of the Target customer share of wallet compared to 2019? And then secondly, do you have any views on how the selling and competitive landscape is really evolving here as we exit the pandemic? And how are you thinking about the various players, including department stores, brand DTC, and specialty Beauty players like [Inaudible] or Flora?

Dave Kimbell — Chief Executive Officer

Great. Yeah, loyalty, as I mentioned earlier, we’re really pleased and encouraged by the results we’re seeing both in the number of absolute — absolute number of active members, as well as spend per member. We’re seeing nice healthy improvement there and it’s just driven by higher-level engagement across categories. And so as we look at share of wallet, we are confident that we’re continuing to grow both share categories and share of wallet and feel like our efforts to lead the category recovery are driving a high level of engagement.

And across the competitive environment, certainly, this is a — the beauty category is always highly competitive. This is a disrupted time with a lot of changes. We have a high level of respect for all of our competitors, but our focus is on Ulta Beauty and driving our business forward and leading the beauty category and leading the beauty recovery. Our model is unique.

Nobody does what Ulta Beauty does, the assortment that we provide, the loyalty program, the guest experience, which is so important and done with excellence in our stores in particular and across all other touchpoints. And so we believe we have a unique business model that, yeah, while we certainly watch and well aware of competitive activity, we’re focused on playing offense and driving our business forward and again I couldn’t be more proud of the way the team is delivering across every part of our business to ensure that Ulta Beauty is the really definitive leader in the beauty category and driving this recovery that we’re very encouraged to see. So with that, thank you again for joining us today. Really appreciate your time.

And I do want to thank all of our Ulta Beauty associates for their continued agility and commitment to serving our guests and taking care of each other, especially through the changing dynamics of COVID-19. We look forward to sharing more about why we are so excited about the future of Ulta Beauty when we host our 2021 Analyst Day here in the Chicago area in October. So have a good evening, and thanks again for joining.

Operator

[Operator signoff]

Duration: 64 minutes

Call participants:

Kiley Rawlins — Vice President of Investor Relations

Dave Kimbell — Chief Executive Officer

Scott Settersten — Chief Financial Officer

Adrienne Yih — Barclays — Analyst

Kecia Steelman — Chief Operating Officer

Simeon Siegel — BMO Capital Markets — Analyst

Chris Horvers — J.P. Morgan — Analyst

Olivia Tong — Raymond James — Analyst

Steph Wissink — Jefferies — Analyst

Ike Boruchow — Wells Fargo Securities — Analyst

Kate McShane — Goldman Sachs — Analyst

Krisztina Katai — Deutsche Bank — Analyst

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