Ulta Beauty, Inc. (ULTA) Q1 2018 Earnings Conference Call Transcript

Ulta Beauty, Inc. (ULTA 0.13%)
Q1 2018 Earnings Conference Call
May 31, 2018, 5:00 p.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Greetings and welcome to the Ulta Beauty first quarter 2018 earnings results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press *0 on your telephone keypad. As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Ms. Laurel Lefebvre, Vice President, Investor Relations. Please proceed.

Laurel Lefebvre -- Vice President, Investor Relations

Thank you. Good afternoon and thanks for joining us for Ulta Beauty's first quarter 2018 conference call. Hosting the call are Mary Dillon, Chief Executive Officer, and Scott Settersten, Chief Financial Officer. Also joining us is Dave Kimbell, Chief Merchandising and Marketing Officer.

Before we begin, I'd like to remind you of the Company's Safe Harbor language. The statements contained in this conference call which are not historical facts may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the Company's filings with the SEC. We make references during this call to non-GAAP earnings growth and margin rates in Q1 of 2018, adjusted for the impact of a lower tax rate, and the new revenue recognition accounting standards. During the Q&A session, we respectfully request that you ask one question only please, to allow us to have time to respond to as many of you as possible during the hour scheduled for this call.

I'll now turn the call over to Mary.

Mary Dillon -- Chief Executive Officer

Thank you, Laurel. Good afternoon, everyone. 2018 is off to a strong start, with better-than-expected sales and earnings growth reflecting our highly differentiated business model that continues to drive healthy retail same-store sales, excellent new story productivity, and continued outperformance of our e-commerce business.

To recap our first quarter financial results, the Ulta Beauty team delivered 17.4% top line growth. Comp sales growth was 8.1%, on top of 14.3% comps in the first quarter of 2017. This performance was driven by balanced transaction and ticket growth, the successful reset of our mass cosmetics assortment, and continued strength in skincare, fragrance, and prestige boutique brands.

Diluted earnings per share of $2.70 grew 31.7%. These results reflect continued market share gains across all major categories, as well as steady progress on a strategic imperative. I'll update you on some of our key accomplishments, starting with our loyalty program and brand awareness.

At the end of the first quarter, the Ultamate Rewards loyalty program boasted 28.6 million active members, up 17% year-over-year. The loyalty program continues to grow rapidly as we add benefits and enhance our CRM capabilities to make it even more relevant and personalized, while our store teams remain focused on converting new guests into highly engaged members. Results from the newer elements of our loyalty program, including the Elite Diamond Tier and our credit card program, continue to exceed our expectations.

Our gift card increased by 45% in the first quarter, driven by strong sales at all channels, including rapid growth through third-party distribution. In 2018, we expect continued growth in gift card sales as we add about 15,000 more doors of distribution through our third-party partners. This continues to be an area of emphasis for us because our analysis demonstrates that gift cards are driving significant incremental sales and margin dollars.

During the quarter, our marketing team focused on programs that support the Ulta Beauty Collection, Spring newness, and our signature 21 Days of Beauty promotion. We leveraged digital partnerships and PR to elevate and position the Ulta Beauty Collection as a contemporary and trend-right brand. This included partnering with Cosmopolitan to execute a new first-to-market video series with Cosmo editor Carly Cardellino and shoppable Facebook posts.

To celebrate Spring newness, we increased our focus on digital and social, with partnerships with Bustle, Pop Sugar, and Refinery29, as well as streaming audio with Spotify and Pandora. For 21 Days of Beauty, we launched a partnership with Waze, the crowdsourcing navigation app, and drove navigations to the store via branded pins and takeovers. We also partnered with Bustle's Instagram Stories series, driving 1.5 million views. Another innovation was to incorporate influencer tutorials, with shoppable content to promote 21 Days of Beauty Daily Steals through videos and gifs paired with shoppable products.

Overall, our media spend is shifting more into digital, streaming audio, and streaming television, to align with the beauty enthusiasts' digital-first lifestyle. These marketing programs are supporting the high levels of brand awareness we achieved last year. Aided awareness for the first quarter was at 90%, compared to 87% a year ago, and unaided awareness rose 7 points to 53%, compared to 46% last year. These levels jumped to 92% and 58%, respectively, for the month of April in concert with our comprehensive marketing plan around 21 Days of Beauty.

Now turning to merchandising. I mentioned strength in mass cosmetics, prestige skincare, fragrance, and prestige boutique brands, but smaller categories such as sun care and bath also delivered robust growth. Mass cosmetics, after a significant step-up in its growth rate in the fourth quarter, accelerated further in the first quarter, reflecting a major reflow to category completed earlier in the year.

This reflow highlights several new brands, including direct-to-consumer brands Morphe and ColourPop, which are available in a retail environment only at Ulta Beauty. We plan to expand Morphe to all doors later this quarter, from about half of our stores currently. We have continued opportunity to expand other best-selling brands in additional stores throughout the year. We continue to drive very strong growth with the prestige boutique brands, which are contributing about a third of our overall comp. We've added 132 of the planned 675 new boutiques featuring MAC, Clinique, Lancôme, and Benefit so far this year.

The performance of the prestige cosmetics category excluding those four boutique brands is still a bit mixed, with some brands overperforming, while others had a more muted growth result. The top performers include Tarte, which built on the success of the Shape Tape line, with a strong foundation launch during the quarter, Estēe Lauder and NARS, which continue to roll out into additional doors and benefit from guest interest in their classic products and their new launches, and Anastasia, which benefited from significant newness and the highest quality in Beauty Steals during our 21 Days of Beauty event.

One of the most exciting brands is Chanel Beauté, which is off to a terrific start in the first few stores. We and the brand are so pleased with the early results that we're now planning to accelerate the number of stores this year compared to our initial expectation. Another addition coming later this quarter to our prestige cosmetics assortment is a new brand called Flesh. This is a color cosmetics brand developed by Linda Wells, Chief Creative Officer of Revlon and founder and former editor-in-chief of Allure magazine. Flesh is Revlon's newest foray into prestige beauty and Ulta Beauty will be the first to exclusively launch this brand. Offering 40 shades of foundation, the brand stands for diversity and inclusivity. In addition to the wide shade range, this new line offers vibrant pops of color that encourage self expression.

Both fragrance and skincare continue to comp above the house as well. Driving the fragrance business were newness, strength in men's fragrances, and a successful Mother's Day gift-with-purchase campaign. Prestige skincare also benefited from significant newness from Dermalogica, First Aid Beauty, and Juice Beauty, as well as stellar growth from Mario Badescu, as social media buzz continues to propel that business.

We also continue to enhance our haircare assortment and rolled out Bumble and bumble chainwide in April, and launched Keracolor online and in 800 doors, which is an innovative, color-infusing conditioning cleanser. New brands like Bumble and bumble, Drybar, and Aquage, combined with high-growth brands like Pravana, Joico, and DevaCurl continue to support healthy comps in market share gains in the salon haircare category. Overall, we're encouraged by the opportunities we have with our brand partners to evolve our assortment, and continue to add new brands and products to delight our guests.

Now moving on to our services business. Salon sales increased 10.1% and comps 3.2%, driven by average ticket increases. During the quarter, we rolled out our services optimization model to our central region. This initiative is designed to transform our services business by attracting, growing, and retaining high-quality talent and delivering guest satisfaction better than ever before. This includes updates to our menu, pricing, career development and compensation models, as well as additional education and support for our salon team.

We continue to see increases in sales, guest satisfaction, rebooking rates, associate satisfaction, improved hiring, and reduced turnover. We plan to introduce the new model to additional regions in August and complete the rollout to the entire chain in 2019. The salon team also participated this year in America's Beauty Show in April, which is one of the biggest events in the salon industry, and plans to participate in additional industry events to position the salon at Ulta Beauty as the beauty destination for service and retail. These events help us attract top talent, create brand awareness, and gain industry credibility.

Also, our salon pro team entered the 2018 North American Hair Styling Awards and secured nine nominations in the finals for improve hair categories. These prestigious awards celebrate hair artistry and are very meaningful within the stylist community and help us attract top talent to the salon. This demonstrates our continued commitment to leading the industry in trend and motivating and inspiring our 8,000 stylists nationwide.

Turning to skin services, we rolled out our latest skincare service model in 22 stores. This new model, called the Skin Bar at Ulta Beauty, offers quicker services, and is designed to meet the demands of our guests' busy lifestyle. Our licensed skin therapists provide guests with a skin diagnosis and personalized recommendations for a proper at-home skincare routine. The Skin Bar also spans the space for skincare brands by up to 12 feet of incremental retail space, so we can continue to evolve our product assortment. We plan to roll out 180 Skin Bars this year in new and remodeled or refreshed stores.

Now moving on to store expansion. We opened up 34 stores in the first quarter and closed 1, ending the quarter, with 1,107 stores. New story productivity continues to be very healthy, reflecting excellent site selection, as well as the more significant presence of prestige brand boutiques in newer stores. If you're calculating new store productivity for the quarter, note that we opened 6 of these 34 stores on the last day of the quarter. Comps in older stores remain positive, as many mature stores are benefiting from new brands like MAC and Clinique rolling out to refresh stores.

Now to update you on our e-commerce business. Ulta.com sales grew 48%, maintaining strong momentum and representing 10% of total company sales. E-commerce contributed 340 basis points of our total company comp, driven by transaction growth. Total site traffic rose 38%, while mobile traffic was up 52%. Better-than-expected growth came from strong response online to our 21 Days of Beauty event, continued success of ulta.com-only offers, like our weekly beauty breaks and programs like Fragrance Crush, spotlighting a favorite fragrance each month, and our newest program, Skin-fatuation, which focuses on a key skincare trend each month, such as masks, oils, and naturals.

We also continue to see significant growth in e-commerce from brands that are available online or in limited distribution in stores, as well as from growing use of our store-to-door initiative that allows customers to purchase items online while shopping in our stores to be delivered to their home. Recent additions of online-only brands include: Storybook Cosmetics; SugarBearHair Vitamins; men's lines like Frederick Benjamin and Fatboy; Korean brands including Too Cool for School, IPKN, Wish Formula, and Touch in Sol, as well as influencer brands like Dominique Cosmetics.

Our store, e-commerce, IP, and supply chain teams are working very closely to launch a test of buy online/pick-up in store later this year, as we continue to enhance our omnichannel capability. Lastly, we also improved our Glam Lab Try On app to make it easy for guests to filter and sort by brand, color, finish, and form factor. This capability helps guests find products to try on and purchase quickly and easily.

Finally, I'll touch on our supply chain operations. Our overall performance of our supply chain operations remains very strong, as we continue to leverage recent investments and capabilities that support our growth and enhance the guest experience. While we invested in inventory to support comp growth, maintaining strong in-stock levels, and supporting brand expansions and new product launches, we were able to capture efficiencies within our network. Inventory-per-door was down 3%, reflecting improvements in inventory management from the systems and tools we've implemented recently, such as Swift, as well as a clearance event late in the quarter to sell through inventory related to seasonal items or transitioning Plan-o-grams.

Our newest West Coast distribution in Fresno is on track. We've completed all construction activities and have started to receive inbound shipments. We plan to start shipping outbound to retail stores and e-commerce guests this summer, which will help us achieve our goal of delivering orders in three days or less for more than 95% of our e-commerce sale substantially year-end.

Last quarter, we mentioned that among the investments we are accelerating in 2018, was the optimization of our supply chain network. This entails, among other initiatives, the recently announced closure of our Phoenix distribution center next spring. Closing any facility that impacts our valued associates is never an easy decision, but the right thing to do for our business needs. We're proceeding with the closing with great care for our people. This step is part of our multi-year supply chain evolution, as we continue to find ways to increase efficiencies, drive operational improvements, and improve our overall supply chain to better serve our guests and meet the needs of our growing store base, as well as the rapid expansion of our e-commerce business.

With that, I'll turn it over to Scott to discuss in more detail the drivers of our first quarter financials and our outlook for the second quarter and the rest of the year.

Scott Settersten -- Chief Financial Officer

Thank you, Mary. Good afternoon, everyone. Starting with the income statement. Top line growth of 17.4% was driven by an 8.1% comp and strong new story productivity. The new revenue recognition accounting added about $14 million of revenue. This represents the impact of income from our credit card program and gift card breakage moving up to the revenue line, as well as e-commerce revenue now being recognized upon shipment versus our previous accounting method whereby revenue was based on delivery of merchandise to the guest. These items are partly offset by the value of points earned in our loyalty program now deducted from sales. Note that our retail comparable sales number was not impacted by the revenue recognition change.

Traffic and ticket for the total company remained strong, with a 5.1% gain in transactions and a 3% increase in average ticket. The retail-only comp of 4.8% was made up of 2.1% traffic, and a 2.7% ticket increase. Ticket was driven by average selling price, with units flat. Including the salon comp of 3.2%, the combined retail salon comp was 4.7%.

Turning to margins, GAAP gross profit leveraged 10 basis points. The new revenue recognition accounting added about 50 basis points to the gross profit line, so the underlying roughly 40 basis points of deleverage was attributed to a contribution of higher mix of e-commerce sales, a higher mix of sales from prestige brand boutiques in mass cosmetics, relative to higher margin categories, investments in our salon business, and modest supply chain deleverage as we ramp up Fresno, offset by leverage of rent and occupancy expenses.

Retail-only margin rate was roughly flat year-over-year as we ran one postcard offer this quarter, compared to two smaller events last year, and we ran a clearance event at the end of the quarter to exit with very clean inventories.

Moving on to SG&A. We deleveraged by 80 basis points, of which 70 were due to the new revenue recognition accounting. The remaining 10 basis points of deleverage were attributed to a higher store payroll expense, primarily related to the prestige boutique expansion, offset by corporate overhead and marketing expense leverage. This performance demonstrates solid expense management, as well as the result of some planned dollars for investments in growth initiatives that were pushed later in the year. Operating margin was 13.6% of sales and it was down 70 basis points, as expected, from last year's Q1 results of 14.3%, with 20 basis points coming from the revenue recognition accounting change.

The tax rate of 22.1% was lower than the expected 24% effective tax rate, due to the impact from income tax accounting for share-based compensation. This contributed about $0.07 Q1 earnings per share. Diluted EPS increased 31.7%, with about 17 points of growth from the lower tax rate and 3 points for the lower year-over-year share counts, as we return value to shareholders through our repurchase program. Excluding $0.07 from the lower-than-expected tax rate due to the share-based compensation, earnings per share came in about $0.15 higher than the high end of our guidance. About half can be attributed to better-than-expected sales, both from comparable stores and new stores. The remainder is a combination of some planned expenses shifting into later quarters, and a bit more favorability than usual from a number of smaller line items, such as a modest benefit from insurance recoveries from last year's hurricane-related losses.

Moving on to the balance sheet and cash flow. Total inventory grew 8.4%, but was down 3% on a per-store basis, well below comparable sales growth. With the opening of the new DC in Fresno, we expect to see inventory-per-door growth step up the next couple of quarters, as we ramp up inventory in the DC before it goes live in August. We expect per-door growth to be well below our comp for the full year.

Capital expenditures were $74 million for the quarter, driven by our new store opening program, investments in systems, prestige boutiques, merchandise fixtures, and supply chain. We ended the quarter with $469.1 million in cash and short-term investments. We continue to repurchase shares through our 10b5-1 program, buying back 618,551 shares at a cost of $133 million during the first quarter. $529 million remained available on the $625 million authorization as of quarter end.

Turning now to guidance for the second quarter and full-year. For the second quarter of 2018, we expect sales to be in the range of $1.475 billion, to $1.488 billion, versus $1.29 billion last year. We expect comparable sales to increase in the range of 6% to 7%, versus 11.7% last year. E-commerce sales are expected to grow in the 40% range. We plan to open approximately 20 new stores in the second quarter, compared to 18 in Q2 of last year. Q2 pre-opening expense is expected to be relatively flat as a rate of sales.

Diluted earnings per share are expected to be in the range of $2.35 to $2.40 versus $1.83 last year, and operating margin is planned to deleverage, including about 20 basis points from the new revenue recognition accounting, similar to what you saw in the first quarter.

The tax rate for Q2 is expected to be 24%. This does not include any assumptions for the tax rate impact of share-based compensation accounting, which is difficult to forecast. Our fully diluted share count is estimated at 60.7 million. In terms of the full-year, most of the elements are of our full-year guidance remain the same, but we are modestly raising our earnings-per-share outlook for full-year 2018 to flow through a portion of our better-than-expected EPS performance in the first quarter.

We plan to open approximately 100 new stores. All are 10,000-square-foot prototypes. We'll complete 50 remodel and relocation projects. We expect to grow e-commerce approximately 40%. We anticipate top line growth in the low teens, including the impact of the 53rd week last year. Total company comps are expected to be in the 8% to 8% range, with the retail comp in the mid-single digits. We now expect to grow earnings per share in the low 20's percentage range on a GAAP basis, including the extra week in 2017, up modestly from prior guidance of approximately 20%. We anticipate capital experiences of approximately $375 million. Depreciation is forecasted at approximately $290 million. We expect to repurchase shares in the $500 million range for the year, and the annual tax for the remainder of the year is expected to be 24%. With that, I'll turn it over to our conference call host for Q&A.

Questions and Answers:

Operator

Thank you. We will now be conducting a question-and-answer session. If you would like to ask a question, please press *1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press *2 if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the * key.

We respectfully request that you ask one question only to allow us to have time to respond to as many of you as possible. One moment, please, while we poll for questions.

Our first question comes from the line of Rupesh Parikh from Oppenheimer & Company. Please proceed with your question.

Rupesh Parikh -- Oppenheimer & Company -- Analyst

Good evening. Thanks for taking my question. Mary, I was hoping to touch more on some of your comments on the prestige cosmetics category. As you guys like at the balance of the year, just wanted to get your thoughts on what you're seeing from a newness perspective and whether you expect any improvements on the underperforming brands that you called out during the quarter. Thank you.

Mary Dillon -- Chief Executive Officer

Okay, thank you, Rupesh. I'm going to tag-team this with Dave since he's that much closer to all the exciting things coming. I'll tell you, first of all, I would just say this quarter I think is a good example of the strength of our business model, our team and our business model where we were able to deliver the kind of results that we just described despite the fact that there was a lull in a few key brands within prestige cosmetics, which is a very significant category, and a lot of strength across all the other categories that we participate in. Prestige cosmetics, obviously very important to us, driving a large percentage of our business and we're very focused on it. I'll ask Dave to just add some more thoughts onto this here.

Dave Kimbell -- Chief Merchandising and Marketing Officer

We're confident about the rest of the year. We really look comprehensively across our portfolio to make sure that we're pushing on all angles. I think it starts with our biggest brands and some of them have been struggling. Mary mentioned a few that have been really working quite well -- Tarte and Anastasia, being a couple of those. We expect those to continue with great newness. But other brands, as we look at their newness over the rest of the year, we're confident and excited about some of the products they're bringing, including some exclusive lines that you'll only find at Ulta, and we'll be sharing more details about those as we get later into the year. We'll also be expanding door count on key prestige brands that Mary talked about -- our boutique brands: MAC, Lancôme, Clinique, but also NARS, Estēe Lauder, and small increase in the number of doors of Chanel as well. So, we'll see that contributing.

Exclusive brands do play an important role for us. We're excited about the amount of exclusivity that we'll see over the rest of the year. We've had big success with a few brands that we've already talked to you about, like Tarte Double-Duty Beauty, innovation within that portfolio already this year has had an impact. We expect that to continue throughout the rest of the year. Mary mentioned a new line that we're launching later this quarter, Flesh, that is exclusive to Ulta.

Then finally, I'd say as we look across the prestige landscape, there's definitely changing dynamics as some of the big brands face new competitors from smaller, independent brands. We've having a lot of success with those and rolling those out across our portfolio. We see Dose of Color as being one brand that started small and we're rapidly expanding that. Brands like Storybook, Beauty by PopSugar, Dominique Cosmetics, which is online only right now. Then also a brand like Morphe, which kind of spans between mass and prestige from a price and an engagement standpoint.

So, we're taking a holistic push across all aspects of the portfolio and are optimistic about the collective impact of those changes throughout the rest of the year.

Rupesh Parikh -- Oppenheimer & Company -- Analyst

Great, thank you for all the color.

Mary Dillon -- Chief Executive Officer

No pun intended or pun intended.

Operator

Our next question comes from the line of Matt Fassler from Goldman Sachs. Please proceed with your question.

Matt Fassler -- Goldman Sachs -- Analyst

Thanks so much and good afternoon, everybody. My question, and I know you want to restrict this to one, relates to some of the new mass exclusive that you spoke about introducing and that we've seen in the stores. I guess my question relates to the economics of those adds. Can you add about the margin of the mass exclusive products? You talked about Morphe, for example. Can you talk about the margin profile of that product versus say prestige and versus your typical mass product? Also, it's an exclusive, but there's no boutique associated with it as you have with some of your prestige adds. What impact as these grow presumably do you expect them to have on the profitability of the business? Thanks.

Mary Dillon -- Chief Executive Officer

Matt, I'll just say you're right. An example like Morphe doesn't have a boutique associated with it. But we don't break out the margin on any specific brand. It's really kind of a mixture from, I think in general, prestige products tend to have somewhat of a higher margin. There's plenty of exceptions to that, as well as we feel like we're very focused on the profitability of the total box when we think about brands that we bring in across every category. So, there's going to be a mixture of profitability, but all, we think, adding to the profitability of the business. So, we can't give more color than that, but the great thing is that participating, as Dave said, across so many aspects of the beauty industry with innovation and newness and exclusivity is really driving great growth for us as well.

Matt Fassler -- Goldman Sachs -- Analyst

Understood. Thank you.

Operator

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

David Schick -- Consumer Edge Research -- Analyst

Hi, very quickly. Just wanted to understand the wage outlook. We're seeing certain markets with a little more wage growth. Is anything changing in your outlook there over the next couple years?

Mary Dillon -- Chief Executive Officer

I would say we certainly see some wage pressures, like everybody does on the Coast and larger urban areas. We would expect it to be sort of a modest headwind going forward. We're competitive. We've taken some of the investments from the tax reform to make our benefits and wages a little bit more competitive, but we look at this very closely. We look out and we factor it into our business model and expect that to play out as planned.

Operator

Our next question comes from the line of Michael Binetti from Credit Suisse. Please proceed with your question.

Michael Binetti -- Credit Suisse -- Analyst

Thanks for taking our question here. Quickly, can I make sure I understand the gross margin dynamics in the first quarter? I think you said the retail gross margin was flat, but you did have one less sale event in the quarter compared to last year. I just want to make sure that I got that right. I don't know if you can put any context into how big that impact was. Then I guess just the dynamics impacting gross margin as we go forward through the year. I think you pointed to e-commerce and the prestige brand rollouts as being headwinds. Are there points on the horizon where there's an inflection in the leverage on those or are those dynamics present as we go forward through the year?

Scott Settersten -- Chief Financial Officer

Thanks for the question, Mike. Maybe we'll just kind of step back and look at the bigger picture here. Again, there's a lot of things kind of flexing back and forth between the gross profit line and SG&A with the revenue recognition piece there. If I think about operating margin in totality for the year, we guided 50 to 70 basis points down and we feel like we're right on target with what we expect for the full-year. Q1, the net 70 basis points down versus last year I think was a little better than we expected. Again, we had slightly stronger sales trends than we planned, and then we had some other planned expenses that we pointed to in our remarks that got pushed back further in the year. So, again, a slightly better result there than we expected.

As we look out to the rest of the year, I would say you could probably plan for slightly higher deleverage point in the second quarter. Not feeling quite as bullish with the sales in the second quarter, I think. 21 Days of Beauty is our signature event. It was fantastic overall. So, again, we don't have another one of those in the second quarter. Although, we expect the events to perform as well as we look ahead.

We're going to have the Fresno DC continue to ramp up here in the second quarter, so you're going to see a full expense load there, but we don't actually turn it on, so to speak, until August, which falls into the third quarter. So, that'll be a headwind as well. Then, we'll see more of these tax savings ramp up, the spend of those, in the second quarter as the teams become more mobilized. So, I'd say the second quarter is probably the toughest for us. As we look at the back half of the year, I would think the deleverage starts to moderate, so it gets us back into that 50 to 70 basis points range for the full-year.

Dave spoke to the prestige newness coming in the back half of the year that we're confident will hit well. Fresno impact will moderate as it starts servicing stores. Then, of course, in the fourth quarter we should get some sales leverage on those expenses as well. So, there's always going to be a mix of things on the gross profit line in and out, quarter to quarter. We pointed to the clearance that we ran opportunistically at the end of the first quarter. That was something that we just looked at and we said we're better off in the long term to try to move through some of this inventory in a disciplined manner. So, that would be my answer.

Michael Binetti -- Credit Suisse -- Analyst

Okay, thanks for all the detail.

Scott Settersten -- Chief Financial Officer

You're welcome.

Operator

Our next question comes from the line of Steven Forbes with Guggenheim Securities.

Steven Forbes -- Guggenheim Securities -- Analyst

Good afternoon. You mentioned how some of the prestige cosmetic brands are facing greater competition. So maybe just touch on how your relationships with these vendors are evolving, especially as you start to better capitalize on the data from your membership base, your Ultamate Rewards membership base, and whether your foresee that translating into kind of a strengthening of that vendor/retailer relationship over time and then more kind of access to the exclusive lines as you look to 2019 and 2020. Is it something that we're early on, as you think about that cycle evolving?

Dave Kimbell -- Chief Merchandising and Marketing Officer

We take our relationships very seriously. We're proud of the partnerships that we've built over years. I would call them very healthy and I think strengthening every day as our business continues to grow and we provide I think a great opportunity for brands to reach new consumers and to grow their business. That's something that we work very hard on.

You mentioned data and insights and that's something that we feel like we're getting even better at providing and developing insights that both help our brand partners understand the dynamics of consumers within our environment, but also help us identify growth opportunities, white space, and new areas to evolve our assortment to make sure we're meeting the evolving needs of our guests. So, insights, data understanding, is something that we're working hard on and while we feel like we've accomplished a lot, there's a lot more we think we can be doing.

As far as access to exclusivity, we've had quite a bit of that. It's an important part; it's not the only part. We've had a lot of success with brands that are sold at some of our competitors, but exclusivity is important, one, because it does drive growth for us, but our customers, importantly, our customers expect that from us. They get excited about it and it's a real motivating reason for them to come in and discover what's new and only at Ulta. So, we've had quite a few of those over the last few years. I mentioned a few just in my comments a few minutes ago. I would anticipate us getting more of those over time as our environment evolves, our customer count grows, and our contribution to brand growth continues to be strong. We see plenty more of that coming.

Steven Forbes -- Guggenheim Securities -- Analyst

Thank you.

Operator

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

Joe Altobello -- Raymond James -- Analyst

Thanks. Hey, guys, good afternoon. So, I just wanted to sort of understand, I guess the comp guidance a little bit better, maybe more of the comp cadence for this year. Obviously, for the full-year you're still up 6% to 8%, despite the outperformance in the first quarter. I think the expectation coming into this quarter was that this was the toughest quarter for the year for you and that we would see some acceleration throughout the year because of easier compares, because of merchandising activity, etc. I'm just curious why are we going to see a deceleration in the second quarter and then an acceleration in the second half? Is this something that you guys saw in May that caused you take a step back for the second quarter?

Mary Dillon -- Chief Executive Officer

Hey, Joe, it's Mary. I'll give a start here. First of all, I'd say, as you said, we're guiding 6% to 7% for the second quarter. We try to take a prudent view of sales. We have some visibility into the quarter because we're in it, so we just try to really be prudent about what we expect and guide the best we can. We continue to see, of course, the strength that we just described in the first quarter in mass, in prestige skin, prestige boutique brands, fragrance, excited about the pipeline of newness, but that is still somewhat offset by the persistent challenges in prestige cosmetics. My stance is let's wait until we see inflection in prestige on some key brands before we start to get more aggressive.

You're right that we also have easier comparison in the second half, but we'll get more aggressive if we think that's appropriate.

Joe Altobello -- Raymond James -- Analyst

Okay. So, there was nothing in May that caused you to get a little bit more nervous about the comp?

Mary Dillon -- Chief Executive Officer

No.

Joe Altobello -- Raymond James -- Analyst

Okay. Great. Thank you, guys.

Mary Dillon -- Chief Executive Officer

Thank you.

Operator

Our next question comes from the line of Stephanie Wissink from Jefferies. Please proceed with your question.

Stephanie Wissink -- Jefferies -- Analyst

Thank you. Our question, Mary and Scott, is regard the supply chain progression. I think, Mary, you mentioned that advances are strong, you're seeing some improvement in inventory per door. But can you talk a little bit about how we progress toward leverage on the de-warehouse and logistics network once Fresno comes online? Does that inch us closer to a point of leverage? Then also on the e-commerce, can you talk a little bit about closing that contribution margin gap over the next couple of years? Thank you.

Scott Settersten -- Chief Financial Officer

I guess we start with the supply chain question. Again, I think we've shared with you historically that there's a multi-year roadmap that's been built, very sophisticated by our supply chain team. It's a multiple prong, driven program; Phoenix being a recent outcome of some of that planning. Fresno helps us get a lot closer to our end customers in the California market, which is a very important market for us. We expect that business to continue to grow at a high rate for the foreseeable future, so that's a key element of what we're planning. There's still a number of what I call older, legacy facilities that we're running. So, we're running two different IT plant forms to execute in those buildings, so that's all part and parcel of what we're thinking about the long term and how we optimize the footprint and the network and all that goes with that over the long term. We're nowhere near close being finished with the plan, I guess I would say on that.

Then as far as the e-commerce contribution to the business overall, in closing the gap there on profitability, again, this is a good place to remind folks that we've talked about this, consistently talked about the geography challenge that we have with our e-commerce business. It is a headwind; yes, we know that. We've communicated it clearly. Gross profit rate does get impacted with e-commerce business in a negative way. But we make up a lot of that on the SG&A line by leveraging some significant investments in technology and people that we've made over the last few years. So, on a net basis, it's not that big of a gap between a retail sale and an e-commerce sale.

I'd remind folks that those e-commerce sales are largely incremental sales and margin dollars. So, it's a good thing for our business. By building Fresno, for example, getting closer to the end customer helps transportation cost, helps the model overall, so we're confident that over time we're going to continue to close the gap there.

Stephanie Wissink -- Jefferies -- Analyst

Thank you.

Operator

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

Oliver Chen -- Cowen & Company -- Analyst

Hi, thank you. Regard the future in terms of product categories, what are your thoughts on the mix that you'd like to see between cosmetics, skincare, and hair, as you look to continue to build a really fortified, diversified model? On the application on Ultamate Rewards, I think you've been really creative and personalized with a lot of the promotions and the connectivity with customers. What are your thoughts on the future use of data and how you can continue to innovate in terms of running interesting promotions that make sense for brand health and are engaging to customers and creative?

Mary Dillon -- Chief Executive Officer

Hey, Oliver. All that sounds like a very good idea. I agree. Really, we're quite pleased with the Ultamate Rewards program on many levels, right? The size, the scope, the growth, the engagements that our guests have, how much is driving our sales. I feel very good about our team's ability to leverage insights and data to get that much more personalized and relevant, and that's kind of what it's all about. Having said that, we absolutely understand that there's more to be done as it relates to AI capabilities that we're building and investing in and going to continue to make sure that we are as advanced as we can be in terms of being as relevant and personalized. It's all about how you drive demand in a way that is as efficient as possible and personalization is what that's all about.

In terms of categories, I guess we always like to see where the customer will take us. You mentioned cosmetics, skincare, hair. The four categories that we're in today, I believe we'll always be in. The beauty of our model, this all things beauty, where the categories that guests care about and even categories that are smaller, like sun care and bath, are examples of categories that we're driving innovation and profitability and share growth.

Generally, I'd say the mix of sort of mass to prestige if you want to say that, and I think that continues to evolve in terms of the way that guests look at it. The general mix is probably right and somewhat going to be the same, but the products, the brands, and the innovation exclusives underneath that will continue to evolve. That's how we would envision the model for many years to come.

Oliver Chen -- Cowen & Company -- Analyst

Should you acquire brands? Is that on the table in terms of priorities or is it not necessarily the right priorities relative to opportunities you have? The Ulta brand itself is interesting in terms of your own private label and what you can do there to make it more emotional and functional.

Mary Dillon -- Chief Executive Officer

Right. All right, considering you had a second or third question. Yeah, Ulta Beauty Collection, really proud about that and you're absolutely right. We continue to elevate everything about that brand and we like how it's performing. Can we buy brands? Sure. I mean, we could; we haven't. I think for us right now the focus is around partnering with innovators, companies large and small that want to work with us to drive contribution of their brand. So, for now, that's our focus.

Oliver Chen -- Cowen & Company -- Analyst

Thank you. Best regards.

Operator

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

Mike Baker -- Deutsche Bank -- Analyst

Hi, thanks. The increase in gift cards, I presume with the accounting, but even under old accounting, you don't necessarily recognize gift card sales until people come in to redeem that, so can the big growth in gift card sales be thought of as a leading indicator for sales that are going to come later in the year as people redeem those gift cards?

Scott Settersten -- Chief Financial Officer

We do think that's going to continue to grow. Mary talked about just the distribution expansion. Yes, when we sell a gift card, we see her come pretty quickly within the next couple of months typically. The great aspect of our gift card business is not only the redemption of the card value itself, but typically we see her spend more than that in our store. So not only do the gift card sales today translate into future sales, it tends to get her more engaged. In many cases, it is introducing a new customer to Ulta Beauty, depending on where that gift goes. So, a lot of positivity on that. We are really pleased with performance. We expanded that quite a bit going into holiday and saw strong results coming out of holiday gift period. But we're seeing that continue and sustain and anticipate that being a positive driver of our top line sales throughout the balance of this year.

Mike Baker -- Deutsche Bank -- Analyst

And I guess a natural follow-up, part of the same question, is that pick-up that you just described included already in your guidance?

Scott Settersten -- Chief Financial Officer

Yes.

Mike Baker -- Deutsche Bank -- Analyst

Okay, thank you.

Operator

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

Mark Astrachan -- Stifel Nicolaus -- Analyst

Thanks and good afternoon, everyone. I wanted to ask just broadly on promotions. It seems like maybe it's just sort of been increasing across the category where historically there just hasn't been as much promotion, particularly perhaps in prestige. I guess curious how you think about levels of promotion going forward relative to the current base? And sort of related to that, if you could comment on just how you think about the transaction component of comp given the modest slowdown there and how those two pieces would fit together? That'd be helpful.

Scott Settersten -- Chief Financial Officer

Thanks for the question. Let me start with this one because I want to make sure that we get this on the record. Talking about gross profit and operating margin deleverage here for the first quarter, operating margin specifically. But I just want to be clear that that's not being driven by product margins, right? So, we pointed to retail product margins being roughly flat year-over-year and that's 85%+ of our business, right? So, we have to keep that in mind. Keeping it flat year-over-year in light of what's going on in the department store sector right now and the dynamics in the prestige color business, we consider that a huge win for our enterprise overall.

The clearance event we called out, that was one contributing factor, but a very small one in the big scheme of things. Again, it was the best thing to do for the business in the long term. We believe that there's probably way too much time and attention being invested in attempting to track the number of promotional offers each quarter and trying to read through that on the impact to gross profit.

The fact of the matter is, we see reports quite often that place a lot of weight on a very limited view into only one element of our overall promotional toolbox, and that being primarily the 20% off postcard, right? You guys, nobody is taking into account all the other promotional things that we do that are part and parcel of our everyday business. Things around merchandising discounts and offers in our circulars, and of course, the loyalty program, right? That's another part of the discount equation that we use to kind of mitigate some of the things. So, we're always going into this with a very balanced view.

An important part of what makes Ulta unique in retail is the variety of tools that we have at our disposal and our ability to be very flexible and deploy those in a timely manner and in a very financially disciplined way. So, looking ahead, we've talked about the long-term view for us is to focus more on loyalty and CRM and making sure that it's more personalized than targeted offers as we look ahead.

Operator

Our next question comes from the line of Michael Goldsmith from UBS. Please proceed with your question.

Michael Goldsmith -- UBS Securities -- Analyst

Good evening. Thanks a lot for taking my question. It seems that a number of retailers from the mass players to the department stores are rethinking of renovating their beauty departments. You have a unique app with a number of capabilities [inaudible] to the differentiator. How do you think you stand in terms of what the customer is looking for in a customer experience in an omnichannel retailer? Is there anything that you feel you're missing? You called out buy online/pick up in stores as a test later in the year. Is there anything else either in store or digital?

Mary Dillon -- Chief Executive Officer

Yeah, I would say broadly speaking, you're absolutely right. The beauty category is a pretty competitive one. So, in some ways, we compete with a lot of players. In other ways, really nobody does what we do. We call this "All things beauty all in one place" our model. It's differentiated. It's distinct because of the [inaudible] of categories and price points, the fact that there is services in our store -- so, brows, skin, hair, makeup services -- and a really robust e-commerce platform, all supported by our loyalty program. I'd say increasingly sophisticated use of data and use of social media and digital.

Our marketing campaigns have really continued to evolve in that way as well. I guess we feel that we've got -- we're not perfect and we're not complacent -- but a relevant model. The reason we think it's really relevant and has lots of relevancy for the future is we focus on a segment of shopper than we call the beauty enthusiast, and that shopper is a large and growing segment of beauty. She's really focused on exactly what we offer, which is a lot of newness and excitement and experiences and likes to shop in the way that we serve up the shopping experience.

That segment of shopper is growing as we look at future demographics in growth around millennials, teenagers, Hispanics. So, fast growing segments for the population in the US, over index as beauty enthusiasts. So, we believe that our model is actually more relevant than ever for them and our job is really to continue to innovate, think about what the shopping experience will look like ten years from now versus today, because that's going to continue to evolve. We feel really good about that. Full stop.

Michael Goldsmith -- UBS Securities -- Analyst

Thank you.

Operator

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

Nancy -- Wells Fargo -- Analyst

Hi, everyone, this is Nancy on for Ike. Just a quick question. You mentioned you're prioritizing skincare and expanding that by, I think 12 feet you said. Is there something that's taking the place of? Is that mass or is it other prestige items? Then also a quick question, are there any early learnings from your New York City store that you would share with us?

Mary Dillon -- Chief Executive Officer

Well, I'll just say the New York City store, we're really pleased with it. I'm thrilled that we have the store there. It's performing nicely. Lots of foot traffic in that store any time of the day or night that you go in there. So, we think it was a really smart move for us. The skincare, I'm going to ask Dave to take it. I was referencing in my prepared remarks a skin express bar that we're putting into a small number of stores next year, that's in those instances where this extra space will free up.

Dave Kimbell -- Chief Merchandising and Marketing Officer

That's right. That space comes from just a new layout of the skin bar that does free up more space for product. So your question what is it replacing? It's really just that we're still offering skin services, but it's a more efficient use of that space. Actually, we believe in an elevated experience in our store that we're really excited about. As Mary said, it's in a limited number of doors today, but we're encouraged by the results of the skin bar. So then that extra space allows us to continue to expand our prestige skincare business.

We've added a number of brands over the last few years. Some big brands like Origins, Shiseido, ProActive, but also earlier this year, launched several new smaller brands: Little Barn, Mamonde, Crepe Erase, Kopari, as well as a men's skincare brand, House 99 by David Beckham, and all of those are off to a great start. So a mix of both big, established brands and new brands to fill that space. We're encouraged and positive about the results so far.

Nancy -- Wells Fargo -- Analyst

Thank you.

Operator

Our next question comes from Erinn Murphy from Piper Jaffray. Please proceed with your question.

Erinn Murphy -- Piper Jaffray -- Analyst

Thanks, good afternoon. My question is just following up on the competitive environment. On the Bon Ton liquidation, can you speak to what you've noticed thus far for the stores that you have that co-locate with Bon Ton? Then is there anything baked into your guidance on potential share recapture once these stores close later in the year?

Scott Settersten -- Chief Financial Officer

We're certainly watching that closely. We do have trade area overlap with quite a few of the stores that are closing. We anticipate some opportunity there and we're actually exploring different ways to reach that consumer that may be looking for a new beauty destination, so we do see some opportunity. What we've noticed in other department store closings is yes, there is some opportunity there, but we're not anticipating an immediate flood of new customers. In some cases, store closings actually change dynamics of traffic and so we'll adjust to that. But we're reaching out aggressively in those markets to make sure that we're seen as the best alternative. In some cases, in some markets, we're really the only alternative for many of these brands.

So, yes, we do see opportunity. We would say that any upside there would be reflected in our guidance going forward. We're looking to capture any upside in those markets going forward.

Erinn Murphy -- Piper Jaffray -- Analyst

Okay, but any disruption on some of the liquidations? I believe they're promoting beauty roughly 10% to 15% depending on the location. So just curious on what you've seen thus far.

Dave Kimbell -- Chief Merchandising and Marketing Officer

We haven't seen any direct impacts to our business. But we're aware of that and we're monitoring it. We'll be quick to take action if we see any negative consequences.

Erinn Murphy -- Piper Jaffray -- Analyst

Okay. Thank you, guys. All the best.

Operator

Our next question comes from Simeon Gutman from Morgan Stanley. Please proceed with your question.

Simeon Gutman -- Morgan Stanley -- Analyst

Hi, everyone. I'll be Simeon Gutman. My follow-up, Scott, is on the merch margin. If I heard right, you said that the retail merch margin came in flat and I'm assuming that's excluding e-commerce, both in terms of shipping and just the lower margin mix. I just want to clarify that. Then, I guess the debt play out as you'd expect? I think you said flattish for the year. I didn't know if there was any cadence that you had built in to your original guidance.

Scott Settersten -- Chief Financial Officer

No, I think you have the right take on it, Simeon. The retail part of the business was flat. Yes, that excludes the impact that we see from the mix of the e-commerce part of the business. But it does include some of the other shifts that we're talking about -- prestige versus mass versus some of the prestige brand boutiques. Again, we think we can manage that over the longer term. We've talked in the past about flattish merchandise margins in the assumption over the long term in our plans. We're not expecting to see significant gains there. So, we've got headwinds that are a fact. We've got a lot of arrows in the quiver, so to speak, to try to mitigate a lot of that. It's private label kinds of things. It's continued benefits like we just saw in the first quarter with inventory, performance improvements to help drive leverage there over the long term. We think we have a lot of nice tools to help us mitigate some of those challenges that we have.

Simeon Gutman -- Morgan Stanley -- Analyst

When you guided to merch margins flat, that was excluding the e-commerce business all along or was it including the e-commerce geography change?

Scott Settersten -- Chief Financial Officer

It includes it primarily. We're looking at the business overall, so we're talking the long term. All of that's baked into the merch margin, definitely.

Simeon Gutman -- Morgan Stanley -- Analyst

Thank you.

Operator

Our next question comes from Christopher Horvers with J.P. Morgan. Please proceed with your question.

Christopher Horvers -- J.P. Morgan -- Analyst

Thanks, good evening. Two quick ones. The other half of the $0.15 upside that wasn't driven by the sales beat, is that relatively balanced between the expense items and the other items that you called out? Does most of that expense shift show up in the second quarter?

Scott Settersten -- Chief Financial Officer

I think it's a fair statement to say it's about 50/50. So let's call it that $0.08. We said $0.15. Half was sales performance, call that $0.07. The other half, just being a mix of unusual benefits that we saw come through in the first quarter and some deferred spending. So, I'd say allocating that 50/50 is fair. The timing of that, that's one place where we're trying to be purposely vague, so some of the deferred spending is on the innovation and marketing things. We like to hold that in reserve and use it when necessary, right? So, if it's not, we take it to the bottom line, but if it is, later in the year we're going to use it as we see best.

Christopher Horvers -- J.P. Morgan -- Analyst

Understood. Then just a follow-up on the retail product margins. As you look out into the back half of the year, you're going to anniversary some stepped-up coupon in and promotions and such, do you still expect that those retail product margins can expand in the back half?

Scott Settersten -- Chief Financial Officer

Yeah, we're not counting on that. Again, to Mary's point here earlier, we're being prudent, which is what we always are. The prestige color business is a big piece of the overall pie and it has better margin rate than some of the other categories that we sell, so we want to see some improvement there, some marked improvement before we get any more aggressive with our guidance.

Christopher Horvers -- J.P. Morgan -- Analyst

Understood. Thanks very much.

Operator

Our next question some from Simeon Siegel with Nomura Instinet. Please proceed with your question.

Julie Kim -- Nomura Instinet -- Analyst

Hi, this is Julie Kim on for Simeon. Thank you for taking our question. Can you just color on the comp progression you saw in the quarter and if momentum has continued into Q2? Also, if you saw any impacts from weather or the calendar shift in the quarter? Thank you.

Mary Dillon -- Chief Executive Officer

I would say really no impacts from weather and minimal impact on calendar shift. The cadence was, as you saw, we had a balanced ticket, transaction and ticket result for the quarter. We certainly see some increased movement around things like 21 Days of Beauty and other events like that. But pretty balanced, I guess I'd say throughout the quarter and consistent coming into this quarter as well.

Scott Settersten -- Chief Financial Officer

We don't normally share anything about the current quarter that we're in, so we won't be able to provide any more detail on that.

Julie Kim -- Nomura Instinet -- Analyst

If I could just follow up, anything we should keep in mind looking for the rest of the year in terms of the calendar shift? Apart from Q4, of course.

Scott Settersten -- Chief Financial Officer

No, I guess we could clarify for folks, right? We're comparing weeks 1 through 52 last year with 1 through 52 this year. So the 53rd week is kind of out of the equation, so just to be clear on that part of it. Again, for us, there's nothing really -- the way our events roll and the holidays roll into our calendar, there's nothing segment to be aware of.

Julie Kim -- Nomura Instinet -- Analyst

Okay, great. Thank you.

Operator

Ladies and gentlemen, we have reached the end of our question-and-answer session. I would now like to turn the call back over to Mary Dillon for closing remarks.

Mary Dillon -- Chief Executive Officer

Thank you. I just want to close by thanking our 37,000 associates. They delivered a strong quarter and the 2018 start is off very strongly. I have full confidence in our team's ability to execute our strategies and drive profitable growth in 2018 and beyond. I look forward to speaking with all of you soon. Thank you.

Operator

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

Duration: 62 minutes

Call participants:

Mary Dillon -- Chief Executive Officer

Scott Settersten -- Chief Financial Officer

Dave Kimbell -- Chief Merchandising and Marketing Officer

Laurel Lefebvre -- Vice President, Investor Relations

Rupesh Parikh -- Oppenheimer & Company -- Analyst

Matt Fassler -- Goldman Sachs -- Analyst

David Schick -- Consumer Edge Research -- Analyst

Michael Binetti -- Credit Suisse -- Analyst

Steven Forbes -- Guggenheim Securities -- Analyst

Joe Altobello -- Raymond James -- Analyst

Stephanie Wissink -- Jefferies -- Analyst

Oliver Chen -- Cowen & Company -- Analyst

Mike Baker -- Deutsche Bank -- Analyst

Mark Astrachan -- Stifel Nicolaus -- Analyst

Michael Goldsmith -- UBS Securities -- Analyst

Ike Boruchow -- Wells Fargo -- Analyst

Erinn Murphy -- Piper Jaffray -- Analyst

Simeon Gutman -- Morgan Stanley -- Analyst

Christopher Horvers -- J.P. Morgan -- Analyst

Julie Kim -- Nomura Instinet -- Analyst

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