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Ulta Beauty Inc (NASDAQ:ULTA)
Q2 2019 Earnings Call
Aug 29, 2019, 5:00 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Greetings, and welcome to the Ulta Beauty Second Quarter 2019 Earnings Results Conference Call. [Operator Instructions]

It is now my pleasure to introduce you to your host, Ms. Kiley Rawlins, Vice President, Investor Relations. Please proceed.

Kiley Rawlins -- Vice President, Investor Relations

Thanks, Ben. Good afternoon, everyone, and thank you for joining us today for Ulta Beauty Second Quarter Earnings Conference Call. Hosting today's call are Mary Dillon, Chief Executive Officer; and Scott Settersten, Chief Financial Officer; Dave Kimbell, President and Chief Merchandising and Marketing Officer is also with us today. This afternoon, we released our financial results for the second quarter of fiscal 2019. A copy of the press release is available in the Investor Relations section of our website at www.ulta.com.

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 caution you not to place undue reliance on these forward-looking statements, which speak only as of today, August 29, 2019. 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. Please note that in our comments today, we will reference non-GAAP earnings growth, adjusted for the impact of income tax benefits in the second quarter of 2019 and in the second quarter of fiscal 2018.

We'll begin this morning with -- or this afternoon with prepared remarks from Mary and Scott. Following our prepared comments, we will open the call for questions. To allow us to accommodate as many of you as possible during the hour scheduled for this call, we ask that you ask one question only during the Q&A session.

Now I will turn the call over to Mary. Mary?

Mary Dillon -- Chief Executive Officer

Thank you, Kiley, and good afternoon, everyone. The Ulta Beauty team delivered another quarter of solid top line performance, gross margin expansion and double-digit earnings growth. To recap our financial performance for the quarter, total sales grew 12% comp store sales increased 6.2% on top of 6.5% growth in the second quarter of last year. Gross margin expanded by 40 basis points and diluted earnings per share excluding the tax benefit increased 11.5%.

Looking forward, however, we've adjusted our expectations for the second half of 2019 to reflect the headwinds and volatility, we're currently seeing in the US cosmetics market, and we'll share more with you how we're thinking about the current sales environment. But let me reiterate, our differentiated model is winning in the marketplace and we continue to invest in building the long-term capabilities that will further extend our leadership position in the dynamic beauty industries.

Year-to-date, we've continue to expand our market share across most categories increased our brand awareness delivered double-digit growth and active loyalty members increased traffic and delivered double-digit growth in almost every key merchandise category. I will also add that our salon business is showing real comp strength as we're executing on our optimization strategies.

That said, the cosmetics category at Ulta, which is roughly 50% of our business and one of our highest margin categories has only delivered in the low single-digit growth year-to-date. Well outperforming the market, but below our expectations. So let me explain more. Ulta Beauty continues to drive meaningful market share growth in makeup across mass and prestige. But it's clear that cosmetics in the overall US market is challenged.

After several years of very strong performance, growth in the makeup category has been decelerating over the last two years for recently turned negative. Based on the latest track data the cosmetics category in the total US market has experienced mid single-digit declines through the first six months of 2019 and has been more volatile in recent weeks.

Notably, when we look at sales growth by brand, we see that most of the top brands across both mass and prestige are negative year-to-date. We had expected this trend to stabilize and improve as we move through 2019, but we now believe that the softness we've seen so far in 2019 will continue through the remainder of the year. We believe that the main issue driving the softer cycle and cosmetics is that the newness and innovation that have been the focus of most brands this year has just not driven the kind of incremental growth we've enjoyed for some period of time.

Over the past several years, we've seen strong growth in cosmetics driven by new rituals and application techniques like considering and brow styling and innovative new product formats like Liquid Lip, Palette and Minis. This innovation resulted a new makeup routines requiring new products, which drove strong incremental growth. The most recent cycle of innovation is just not driven those behaviors, resulting in a soft cycle for the cosmetics category in the US. As innovation and newness price the market has not driven the expected growth.

By contrast, as I mentioned earlier, we're seeing very strong growth in every other category, in the case of skincare, category and brand innovation is driving new rituals and incremental purchases thus driving strong comps, and we're continuing to drive market share gains in the category, but of course, skincare is a smaller part of the business.

We believe the industrywide challenges in the makeup category will continue in the near term and as a result we've adjusted our outlook for the rest of 2019 to reflect ongoing volatility in the category. Leveraging our guest insights, we are working very closely with all of our brand partners to ensure that the innovation pipeline pivot to more exciting incremental innovation. We are optimistic the cosmetics category in the US market will move back to growth, but we need more time to move through this innovation cycle.

In the meantime, our team is laser-focused on the exceptional execution and guest experience that we know our team delivered in store and online. We'll continue to build on our momentum and non-makeup categories, while we work to stabilize growth and makeup categories. To that end, we have a number of exciting new and exclusive product launches planned for the second half, which I'll discuss in more detail in a little bit.

Despite the near term headwinds, we remain confident that our differentiated and diverse business model, our commitment to our strategic investments and our highly engaged associates will continue to drive market share gains and deliver strong returns for our shareholders. Let me give you now an update on the progress we've made this year on our strategic imperatives.

Our first strategic imperative is to drive growth across beauty enthusiasts segments and we're making good progress, reflecting data for the February through July period Ulta Beauty now represents 24.5% of the proceeds Beauty market has tracked by NPD, an increase of 210 basis points from a year ago. We continue to expand our brick and mortar footprint. In the second quarter, we opened 17 net new stores, relocated four stores and remodeled eight stores compared to 19 net new stores, one relocation and 7 remodels in the second quarter of last year. Ending the quarter with 1,213 stores. New store productivity remains strong with first year sales trending ahead of plan and we remain on track to open 80 stores this year.

Now turning to our second imperative to deepen love and loyalty for the Ulta Beauty brand, our brand awareness continues to grow and our possibilities are beautiful campaign and inclusive positioning have been very well received and very effective as measured by our marketing analytics tools. Unaided awareness grew by 5 points to 56% compared to the same period a year ago and our aided awareness, increased to 91% from 90%.

Importantly, we continue to strengthen our connection with consumers across the spectrum, including the increasingly influential Gen Z segment where we've been recognized as a leader among beauty retailers. Guest also continue to respond well to the compelling combination of our loyalty, credit card and gift card programs resulting in double-digit growth in all three programs for the second quarter.

Our ultimate rewards loyalty program has grown to 33.2 million active members, an increase of about 13% [Phonetic] since the second quarter last year. We continue to see nice growth in the number of guests who achieve platinum and diamond status are most engaged guests as well as growth in overall sales per member. Our loyalty members account for more than 95% of sales and we're using insights about preference is to create more personalized recommendations, replenishment reminders and unique offers all to drive deeper engagement and increased spend per member.

We're making nice progress on this effort is a number of guests receiving these personalized recommendations and replenishment reminders continues to grow. We've also begun to use artificial intelligence in our efforts to drive promotional effectiveness. By leveraging data, we're identifying guests responsiveness to different types of offers and using these insights to help us determine the best offer to present each guests with a goal of building a larger basket and driving incremental sales.

Marketing events in the second quarter were anchored by omnichannel campaigns, including our Gorgeous Hair Event, our new Summer Splash campaign and our semi-annual Jumbo Love Event. We augmented these multi-week events with a number of new smaller events, including Mascara Bonanza and National Lipstick Day.

Now turning to our imperative to deliver a world-class beauty assortment. Our merchant team is doing a great job creating a highly differentiated omnichannel offering across all of our categories. Newness drove about 20% of our total comp this quarter driven primarily by new items in skincare and cosmetics. From a category standpoint, we saw strong sales growth this quarter in skincare, haircare and personal care appliances.

Skincare continues to be one of our strongest growth categories with prestige mass and suncare, all delivering double-digit comps this quarter. As I mentioned earlier, this category strength is being driven by strong innovation, supported by new ingredients like moisturizers with SPF and sunless tanners, and new skincare rituals like serums and masks.

Masks skincare delivered strong comps driven by growth from both new and core brands. We implemented our masks skincare reset in July and added several new brands for assortment such as a cure, a clean skincare line and a brand called naturally good for you, which includes both skincare and supplements in the regime.

We also launched the ordinary, a skincare collection founded to offer results driven products at an affordable price point. We initially launched ordinary and ulta.com and recently expanded the brands to 400 stores. Sales in suncare were also robust, driven by an expanded selection of self-tanning products and sun protection options.

In prestige skincare, newer brands like Kiehl's and TULA Life drove strong guest engagement, while more established brands like Dermalogica benefited from strong product newness. In addition, new exclusive emerging brands, including Awake, Fountain of Truth, and Cannuka all contributed to strong growth in the second quarter. In earlier this month, we launched a favorite Indie brands Sunday Riley in all stores and later this quarter will extend our exclusive partnership with Kylie Cosmetics, with the introduction of our full line of Kylie Skin also in all doors.

Haircare delivered another quarter of strong high-single digit comp growth, reflecting the success of our Gorgeous Hair and Jumbo Love Event and supported by the reflow we completed in the first quarter. Fragrance delivered solid mid single-digit growth this quarter driven primarily by Ulta Beauty exclusive, as well as newness from luxury brands YSL and Versace.

We have some exciting new exclusives coming in fragrance this quarter, including Thank U, Next, a new fragrances from Ariana Grande. Personal Care appliances delivered strong double-digit growth driven by strong demand for Dyson products and the Revlon One-Step Volumizer Hair Dryer as well as new One-Step product from Bed Head and Hot Tools.

Now as we discussed earlier, the cosmetics category overall at Ulta delivered low single-digit comp for the quarter reflecting double-digit growth in mass cosmetics and low single-digit growth in prestige cosmetics, including iconic brands. This performance was in spite of weak category trends in the US market as I mentioned before, especially in prestige. Due to the strength of our business model and ability to secure some important exclusives, we continue to drive significant market share gains in the categories.

Mass cosmetics continue to benefit from the reflow we completed earlier this year, which allocated additional space for exclusive or limited distribution brands. In addition, newness continues to drive strong growth in traffic, especially with our exclusive brick and mortar brands such as Morphe and Juvia's Place.

In addition, we continue to deliver newness and innovation through the Ulta Beauty collection. In the second quarter, we partnered with Frida Kahlo Corporation to launch an exclusive makeup line within the Ulta Beauty collection and guest response to the question has exceeded our expectations.

And earlier this month we debut the exclusive Girls United Collection created by six talented African American young women through a special mentoring initiative with ESSENCE magazine. Prestige cosmetics was mixed. We continue to see strong growth in our iconic Prestige brands, driven primarily by the expansion of Clinique and Lancome to additional stores.

In addition, prestige cosmetic sales benefited from strong growth from new brands such as Kylie Cosmetics and newness including the introduction of Tarte Big Ego Mascara, which launched personnel to Beauty and the expansion of a collection of vegan and cruelty-free lashes from multiple brands including Tarte in Velour. These gains were offset by soft performance in a number of other established brands in the portfolio.

Looking forward to the second half of the year, we have a number of new exclusive products and brand launches planned, which we believe will have strong appeal for our guests. In prestige, we have an exciting new exclusive brand launch plan this quarter. KKW Beauty by Kim Kardashian West is coming to Ulta Beauty, with more than 146 million Instagram followers, Kim is one of the strongest forces and pop culture and we are very excited to extend our partnership with her.

The new collection will launch with 67 SKUs and include products that are most iconic to Kim, including contour and highlight kits, new lift in versatile eye looks. And for holiday, we'll offer our guests two exclusive holiday kits available only at Ulta Beauty. We also had some exciting news to share in Mass Cosmetics. We just unveiled the launch of Florence by Mills, a collection created by Millie Bobby Brown, store of stranger things. Millie is an influential voice with in her generation is more than 27 million followers on Instagram. Exclusive to Ulta Beauty. Flores by Mills offers a fresh, fun approach to clean beauty with a universal range of both skincare and makeup products that will appeal to all guests especially Gen Z.

In addition, we have a number of new Morphe collaborations with key influencers in the pipeline for the second half. The first collaboration launched just this week with Jeffree Star, one of the most prominent social media influencers in beauty today, and offers guests the collection of makeup and accessories. As we've discussed on previous calls, emerging brands and digitally native brands are driving new growth within the beauty channel. At Ulta Beauty we have a strong track record of successfully working with digitally native and emerging beauty brands. And our footprint of more than 1,200 stores and more than 30 million loyalty members positions us very well to be a great partner to these brands is they evolve and expand the reach.

To support this effort, last year we created a new dedicated team within our merchandising organization to focus on identifying smaller or emerging brands across all beauty categories and working with them closely to ensure they're successful in a retail environment. Year-to-date, this team has launched more than 30 unique new brands.

The showcases brands and gives us the opportunity to discover explore in play with new emerging brands we debuted Sparked at Ulta Beauty at Beauty con earlier this month. Sparked at Ulta Beauty is a new platform designed to future curated ever evolving selection of emerging brands across all categories in select stores and on ulta.com.

While we're optimistic that is exciting makeup initiatives will enable us to continue to gain market share throughout the remainder of the year, we believe the US cosmetics category will continue to be soft in the second half driving further declines in several leading brands and pressuring total makeup results at Ulta.

Now moving onto our imperative to transform the in-store and beauty services experience, we've completed our services optimization program in all stores and we are very encouraged by the improving trends we're seeing across the board in staff recruitment and retention, average ticket and guest engagement. As a reminder this effort is both associate and guest facing.

To attract and retain top talent, we've implemented a more compelling compensation structure and a newly formed field based leadership team to support industry leading training and education program. For the guest we've simplified our service menu, introduced new services and made our pricing easier to understand. We continue to leverage our highly influential pro hair team, which is made up of industry-leading educators and platform Artis, which helps us to attract top talent. This talented in award winning team is creating excitement and raising awareness of Ulta Beauty brand within the beauty industry through participation in national and local events that highlight the artistry an opportunity that exists Ulta Beauty.

In addition to optimizing the services business, we're also integrating our services business with more of our marketing campaigns and larger merchandising strategies. In conjunction with a Gorgeous Hair Event, we launched a new Blowout program introducing five new looks created by the award winning Ulta Beauty protein. And we continue to leverage back bar takeovers to introduce new brands like living proof and ELEMIS to guests and to drive add-on purchases.

Now I'll turn to our fifth strategic imperative to revamp beauty digital engagement. During the second quarter, we successfully completed the rollout of buy online pickup in store to all stores. While still early guest response to this convenient omnichannel experience has exceeded our initial expectations, we know our omnichannel guests are our best guest. And we believe this capability will make it even easier for guests to seamlessly shop between our online store in our physical stores.

In conjunction with the launch of brokers, we also enhance our mobile site and app with improved product detail page, it has a cleaner look and feel, including better visibility to in-store inventory availability. We continue to leverage augmented reality in artificial intelligence to create compelling beauty experiences for our guests.

During the second quarter, we updated Glam Lab our virtual try-on experience to include live try-on for Android devices. We also began testing our skincare virtual beauty advisor online, which is powered by AI and AR, it provides guest easy ways to get skincare insight.

Lastly, I'd like to announce two partnerships in the digital space. First, we recently announced a new exclusive partnership with Samsung and Revieve to provide beauty enthusiasts with access to personalized skincare diagnostic information targeted product recommendations and the ability to quickly purchase products from ulta.com directly through Samsung's virtual assistant Bixby Vision.

And second, later this year will offer our guests the ability to use after pay on ulta.com. We know that some gas particularly younger ones are sensitive to accumulating personal debt. After pay allow shoppers who receive products immediately and pay for them in four instalments without taking out a traditional loan or paying upfront fees or interest. After pays, buy now, pay later option will offer guests more freedom and flexibility without the wait. Underpinning and fueling our strategic imperatives our ongoing efforts to deliver operational excellence and drive greater efficiencies. We continue to enhance our supply chain investments, including a recent end-to-end optimization of our store shipment categories, which both improved DC processing efficiency and reduce sorting time for product and stores. In addition, our store on-time delivery trend continue to improve this quarter, delivering 80 basis points of improvement over last year.

And finally, we continue to make progress toward our goal of two-day e-commerce shipping by 2021 with the successful conversion of our Romeoville distribution center to an e-commerce fast fulfillment center. The team completed the transition seamlessly and was able to leverage much of the existing infrastructure for the new operations. The facility began fulfilling guests orders in early August and is currently fulfilling about 10% of our total e-commerce volume.

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

Scott Settersten -- Chief Financial Officer, Treasurer and Assistant Secretary

Thank you, Mary, and good afternoon, everyone. I'll start with the income statement. Sales growth of 12% was driven by a 6.2% comp and strong new store productivity. Increased traffic drove the majority of our comp for the quarter with transaction growth of 5.4% and ticket growth of 0.8%. Although we no longer break out e-commerce growth, specifically I can share that ulta.com growth was toward the high end of our expectations of 20% to 30% growth driven by traffic.

Looking at trends through the quarter, we began to see more volatility in our sales trends in July, and pull the number of levers to drive traffic and deliver healthy top line growth. On the gross profit line margin of 36.4% improved 40 basis points year-over-year from 36%, driven by leverage of rent and occupancy expense and stronger merchandise margin, partially offset by investments in our services business.

Our supply chain operations were roughly flat as a percent of sales as leverage in our DC operations was offset by growth in e-commerce. To provide more color on our merchandise margin, we continue to benefit from efforts related to our efficiencies for growth or EFG program. This goodness was offset by increased promotional activity to drive traffic as well as ongoing mix headwinds.

SG&A rate of 23.6% deleverage by 90 basis points compared to the prior years rate of 22.7% reflecting planned deleveraging corporate overhead related to investments in growth initiatives, including our efforts around digital innovation, including omnichannel and personalization and our recently announced Canadian expansion. We also saw deleverage in store labor versus last year, primarily due to continued investments to support the guest experience.

Operating margin of 12.5% of sales was down 50 basis points. Given our investment agenda, we had planned for operating margin de-leverage for the quarter. The effective tax rate for the quarter decreased to 23.1% compared to 23.9% in the second quarter last year primarily due to an increase in federal income tax credits. Diluted GAAP earnings per share grew 12.2% to $2.76 compared to $2.46 reported for last year's second quarter. Adjusting for the $0.04 of tax benefit this year and the $0.02 tax benefit last year, EPS increased 11.5%.

Turning to the balance sheet and cash flow. Total inventory grew 7.9% and was flat on a per store basis. We continue to manage our inventory effectively investing in key growth areas, while reducing unproductive inventory to hold average inventory per store flat to last year, while delivering a 6.2% comp increase. Our in-stock position also remained strong through Q2 as we focused on investing inventory and our top sellers, new brand and product launches and key promotional events.

Capital expenditures were $79.3 million for the quarter, driven by our new store opening program, investments in IT systems and store remodels and relocation. We ended the quarter with $327.4 million in cash and short-term investments. We repurchased 791,000 shares at a cost of $270.9 million through our stock repurchase program, $517.3 million remained available on our $875 million authorization as of quarter end. We continue to expect to repurchase approximately $700 million of shares in fiscal 2019, but as always we have the flexibility to modify the cadence of repurchases in response to market conditions.

Turning now to guidance. As Mary indicated, we have updated our outlook for the remainder of the year to reflect our expectations for ongoing challenges in the makeup category. Before I get into specifics, I'd like to spend a moment, giving you a little color on the bridge between our initial 2019 guidance and our updated view. As we put together our fiscal 2019 plan, we assumed a strong mid-single digit comp, based on an expectation that we would see strong performance from makeup overall and an improving trend in prestige makeup, which would contribute to both sales and margin improvement with an acceleration in the second half of the year. These gains would be partially offset by necessary strategic investments to support healthy long-term growth.

Based on second quarter results and more recent trends in the US cosmetics market, it has become apparent to us that we will not see the improvement we had expected in prestige makeup and we will likely also see moderation in the mass makeup sales trend. As a result, we have lowered our sales and gross margin expectations for the second half of the year. We are adjusting controllable expenses were appropriate, but we'll continue to invest in initiatives that drive long-term growth such as digital innovation, our salon services strategy, expanding our omnichannel capabilities, IT security and infrastructure and initiatives to enhance the guest experience.

Specifically for fiscal 2019, we continue to expect to open approximately 80 new stores all our traditional 10,000 square foot prototype. We plan to remodel 12 stores and relocate 8 stores and execute 270 store refreshes or many remodels to enable the addition of new brands and improvements to overall fix stream. We anticipate driving top line growth between 9% and 12% with total company comparable sales planned in the 4% to 6% range, compared to previous guidance range of 6% to 7%.

We continue to expect e-commerce to grow in the 20% to 30% range contributing approximately 200 basis points to comparable sales. Although, we are no longer providing precise quarterly guidance, we expect comparable store sales growth in Q4 will be stronger than Q3 as we benefit from holiday newness within the assortment. We expect to deliver earnings per share in the range of $11.86 to $12.06 with approximately 60 basis points to 70 basis points of operating margin de-leverage. This compares to previous guidance of $12.83 to $13.03 and approximately 10 basis points to 20 basis points of operating leverage.

We continue to expect to deliver gross profit improvement for the year driven by merchandise margin expansion, rent and occupancy expense cost leverage and the benefits of our credit card program albeit lower than our previous expectation. These benefits will be offset by more SG&A deleverage than initially planned due to the lower sales expectation, which will increase deleverage of store labor and investments in growth initiatives and innovation.

Thinking about the flow of earnings in the second half. We are planning for EPS in the third quarter to be flat to lower as compared to the third quarter last year. While we continue to expect gross margin expansion in Q3, our lower comp expectations will result in more SG&A deleverage in the quarter.

For Q4, we are planning for EPS growth in the mid-single digit range, reflecting our higher expectations for Q4 sales. We plan to spend between $340 million and $350 million in capex compared to previous guidance of $380 million to $400 million. This includes capex of approximately $170 million for new stores remodels and merchandise fixtures $130 million for supply chain and IT, including new fest fulfillment centers and about $50 million for store maintenance and other.

Depreciation and amortization expense is planned to be approximately $300 million, compared to previous guidance of $315 million. We expect our tax rate for the year to be 23%, which does not include any estimate for the impact of share-based compensation. The fully diluted share count for the year is expected to be approximately $58 million and our plan assumed share repurchases in 2019 in the $700 million range.

And with that, I'll turn it back over to Mary.

Mary Dillon -- Chief Executive Officer

Thank you, Scott. Before we begin the Q&A session, I'd just like to take a step back to recap our perspective on the quarter, our current challenges and the strength of our differentiated business model. While the second quarter results were solid, as Scott said, we've updated our guidance reflects our best assessment of second half performance based on our expectations for the US makeup category.

We are doing our level best to both set realistic short-term expectations and ensure that we work with our brand partners to stabilize and then grow the important color cosmetics category. I am confident we can do that. Our unique business model representing all of the major categories of beauty, a range of price points and access to many exclusive and digitally native brands is enabling us to drive growth and market share gains in spite of headwinds in our largest category.

We've expanded our gross profit margin increase our brand awareness driven traffic growth, expanded our loyalty program and exceeded new store performance targets. We are relevant to a large and diverse set of beauty enthusiasts, and we're focused on attracting growing demographic groups like teens, millennials and Latinas, who all overindex in beauty.

We have a powerful and increasingly personalized loyalty program with strong guest engagement. We're also driving strong momentum in our salon business based on our actions to optimize the experience. And I'm proud that we have a team that continues to deliver operational excellence and exceptional guest experience with every day.

That said, we are not immune to macro cycles like what we're currently seeing in the makeup category, but I am optimistic and committed to ensure that will move through these near term headwinds and I believe we have the right strategy, the right business model, and the right team to continue to grow and win over the long term.

And now I will turn it over to our conference call host to moderate the Q&A session.

Questions and Answers:

Operator

[Operator Instructions] The first question comes from Steph Wissink, who is with Jefferies. Please go ahead, Steph.

Stephanie Wissink -- Jefferies -- Analyst

Thanks, good afternoon, everyone. Mary, I'll ask you some first and related questions for Dave. But if you could help us think about the comp guidance for the back half. What component is category versus your relative outperformance to the category, so asked another way, how much of that is purely macro or backdrop. And do you expect to kind of retain share and follow the backdrop or do you expect to see some of that share advantage released.

And my question for Dave is on the comments that you made on mass versus Prestige, I think you indicated mass cosmetics up double digits prestige up low-single digits. Anything in your data that would suggest the consumer is trading down from prestige into mass. Thank you.

Mary Dillon -- Chief Executive Officer

Yeah, Steph. Thank you. At the risk of reiterating, I will just say that, I think your questions spot on. We are very confident our business model is working and is going to continue to work we are outperforming the rest of the market. We believe we're going to continue to do so, because of the many assets that we have from a brand that's known and loved, our loyalty program, our omnichannel capabilities, digital capabilities, a lot of the exclusives that we have in our assortment. And the fact that we've got the ability to work across all categories really works to our advantage, right, because we've had very strong growth in all the categories right now except for makeup.

But, yeah, the makeup category is challenge -- we're winning, I'd say we hit the categories had a bit of a speed bump. And we're working with our brand partners big and small really to pivot this. And so to us as we look at the second half it's really about -- we've talked about this for several quarters that after years of very strong growth, cosmetics has been growing, but at a somewhat slower rate than it had been, but really I'd say trends deteriorated further late in the second quarter and even more recently and to this quarter. And so we would say as we look at this, we figure, OK, it's going to stay for a while until we get through the cycle. But I am confident that our ability to drive share gains will continue. I don't see anything on our business model that makes me feel otherwise.

And Dave, do you want to comment about the other question.

David Kimbell -- President and Chief Merchandising and Marketing Officer

Right. On mass cosmetics. So as both Mary and Scott said, our mass business did perform somewhat better than our prestige business. In both categories, we gained share and we think we outperformed the total industry significantly, which allowed us to continue to grow our business. In the mass side of the business, we probably had a bit more advancement in shifting our assortment away from brands -- broad brands and the brands that are a bit more limited and exclusive distribution at Ulta Beauty.

So our business has been stronger, but we believe what we see in the marketplace that the mass -- total US makeup -- mass makeup category is equally as challenged relative to prestige. So we don't believe it's a shift between prestige and mass, as much as an overall malaise driven by the innovation trends that Mary pointed out. We're confident that the innovation that we're bringing in both mass and prestige will allow us to continue to gain share, but the softness in the total cosmetic, both mass and prestige category will provide these headwinds that we've described.

Operator

The next question comes from Erinn Murphy, who is with Piper Jaffray. Please go ahead.

Erinn Murphy -- Piper Jaffray -- Analyst

Great. Thanks, good afternoon. I guess, just a follow-up to that question. If you think about the comp cadence of 4% to 6% now for the year. In One year into your Analyst Day, which was 5% to 7% long-term guide. I guess what gives you the confidence, or do you believe that you should be reaccelerating to 5% to 7% beyond this year, I guess, is that slowdown in cosmetics and what you can see to temporarily to the back half of this year. And then, I guess, Mary, you commented, or I guess Scott, both of you commented on a little bit more promotional activity in the back half of the quarter. What are you expecting for the holiday season from a promotional perspectives? Thank you.

Mary Dillon -- Chief Executive Officer

Okay. So I step back and say, I want to be really clear, we're really no less confident about the attractiveness of our business model, our growth potential. We do see the current dynamics is a speed bump. Certainly as a speedy speed bump, right. But we're confident cosmetics category will return -- we'll continue to return to growth. The timing is a little unpredictable. But there has been in the past cycles that affect different categories and makeup is very strong for many years and it's going through a tough cycle. But as we look at the demographic trends as we look at engagement and makeup as we look at the white space that we believe exists and I know our brand partners commitment to getting this back to growth, we feel that we still stand by that guidance. I think, we're not -- today we're not talking about a long-term outlook, now it's prudent for us to plan in the near term for this potentially lower growth environment and we're thinking about that, but we have not changed our optimistic views of the future.

On the promotional end, I mean, holiday is always a promote of highly coveted time for everybody to get traffic into their stores. So Scott talked about promotion, I'd say, the good news is we have a lot of levers and that we have and we use those levers at different times as everybody I think understands we've gone to much more targeted types of promotions over the years versus more broad-based and with our loyalty program being kind of the core of what we do, it's going to be -- I think a competitive second half, because everybody who is in beauty would be facing the same headwinds. So we feel we're well set up for holiday, obviously that's a key focus area for us, but we're going to continue to -- I guess, I'd say, drive traffic, make sure that we capture of guests into our loyalty program and that see that two competitors at a time that, that will be competitive. But at the same token, I think, again, we are pretty smart about how we use the levers and we have more efficient levers that ever.

Operator

The next question comes from Stephen Forbes, who is with Guggenheim Securities. Please go ahead, sir.

Steven Forbes -- Guggenheim Securities -- Analyst

Good morning. Maybe a follow-up on that previous question, right. Given that the comp revision is based really on the store level comp, right, for the e-commerce growth you're giving you reiterated that the 20% or 30%. Can you discuss sort of the mature store comp outlook for the back half and whether the recent performance impacts, whether it's desaturation target or unit growth outlook through 2021 that was provided during last year's Analyst Day?

Scott Settersten -- Chief Financial Officer, Treasurer and Assistant Secretary

We're happy overall with new store performance, I think we mentioned that in our prepared remarks. So we haven't seen anything in there that would give us any concern on the longer-term target of 1,500 to 1,700 stores. In a recent, over I would call the rolling 12-month period, we saw new stores performing well in the low- to mid single-digit kind of range -- again, vis-a-vis what we saw high single-digits in the years where we are delivering double-digit comps, so they have moderated somewhat. As we looked at Q2 in absolute terms, the comps in the older cohorts were lower, they were in the low -- very low single-digit range. As you would expect when you do the mass on the overall comp makeup.

Again, when we look at cosmetics -- color cosmetics overall and what were the dynamics we're seeing in the industry, they affect all stores equally, there is nothing in special that stands out with a new stores compared to some of the other stores in the fleet. So again, very happy overall, it doesn't change our outlook and the long-term our store build out here in the US.

Mary Dillon -- Chief Executive Officer

Anything I would just add that, I think, you might have incurred in your question about did it affect channels differently? And I'd say no, obviously e-commerce growing faster than stores, it has been for a while, but that channels equally affected by the headwinds.

Steven Forbes -- Guggenheim Securities -- Analyst

Thank you .

Operator

The next question comes from Simeon Gutman, who is with Morgan Stanley. Please go ahead.

Simeon Gutman -- Morgan Stanley -- Analyst

Thanks. Good afternoon, everyone. A little bit of a follow-up. Right. You have this medium to long-term outlook out there and mid to high-teen DPS growth. Obviously the operating deleverage in the back half would stand at the disconnect to that. I guess, if you look at 2020 which I realize we're not talking about yet is the de-leverage that you could see, let's say, if you do a 3% to 4% comp, it's going to -- it could look similar to what we're seeing in the back half of this year or is there more flexibility on the margin side such that gets you back to your outlook. And just within that, I know you've talked about the makeup market being soft and you need some times as I go through it, what is your going assumption on this? Mary, I don't know, if there is a conversations you're having with executives, who sell this product as well, but when do you think this recycle it in the market to get soft in the early part of last year even though you outperforming itself? Do we cycle at the beginning of the early part of 2020? Thanks.

Mary Dillon -- Chief Executive Officer

Yeah. Let me start with that one, Simeon. Yeah, I don't exactly have a crystal ball on this, because there's a lot of moving parts and different brands that participate. I can tell you everybody is focused on this North America makeup markets important for everybody and it needs to improve. I'd say it's going to take some time, because part of that what we think is driving it is innovation while good in exciting innovation -- good innovation hasn't really driven incrementality, I mentioned this in the script, some previous forms of innovation that would be like, oh, I'm going to contour. I need three products for that right. I'm going to do my brows now with two products. So what we're -- what we're focused on is pivoting to white space that will drive incremental and exciting type innovation and that doesn't happen overnight.

And frankly I'd say, it takes a while to assess incrementality, so it wasn't obvious probably until recently that some of that innovation, you have to go through a trial and repeat cycle to see is it going to be incremental. So categories pivot in certain ways. We're very focused on that with our brand partners. And I don't have exactly a timeframe, but I think it's going to take some time to work through, but I feel that by second half of 2020. At least, we should be in a better place. But again, I am not holding to that. I hope it sooner. But I think it does take some time to cycle through.

Scott Settersten -- Chief Financial Officer, Treasurer and Assistant Secretary

And those who know us well understand makeup, right, it's a huge part of our business and it's very high margin for us, so when there is disruption there, it creates a lot of ripple effects across the business. So we believe over the long term, there is still opportunity to expand operating margin, Simeon, through -- primarily through EFG initiatives that we've talked about before in the four work streams along with scale over the long term, it's just it's -- we think it's too early to reconsider modifying our long-term guidance outlook in any significant way here. We need a little time to lift things shake out a little bit. And of course, we're looking to manage our investments and expenses and everything here really closely, and assuming we're thinking about this actively assuming we're going to be in a lower growth environment here in the near term and adjust our priorities accordingly.

Simeon Gutman -- Morgan Stanley -- Analyst

Thanks.

Operator

The next question comes from Rupesh Parikh, who is with Oppenheimer Co. Please go ahead.

Rupesh Parikh -- Oppenheimer -- Analyst

Good afternoon. Thanks for taking my question. So first on the tariff side, we've seen some more mass companies talk about taking price. I was just curious, just given some of the malaise out there, I want to get your thoughts on what you thought the consumer acceptance or the price increases are? And then second, Scott, you mentioned that you expect Q3 comps to be lower than Q4. I would have expected potentially stronger comp. Thank you, through just given the easier comparison in Q3 versus Q4. I just wanted to get your thoughts on that. Thank you.

Scott Settersten -- Chief Financial Officer, Treasurer and Assistant Secretary

Yeah. So maybe we'll start with the tariff question. So again, at this point for us, we've talked about this over the last few quarters. It's kind of difficult to predict what the impact is going to be in beauty products overall, again, we're not seeing any significant step up in pricing negotiations or issues with any of our vendors. We expect to be able to manage our way through that and navigate that as best we can. And so, we're managing that as best we can through supplier relationships today and we would expect that to continue overall.

As far as the comp stack year-over-year, I know, we can look at two or three years and trends and what you would expect. That's not the environment we're in right now. I mean, the disruption we're seeing in the prestige and color makeup overall is a step change in the normal flow of the business year-to-year and that's really what's driving our outlook.

Rupesh Parikh -- Oppenheimer -- Analyst

Great. Thank you.

Operator

The next question comes from Beth Kite, who is with Citi. Please go ahead.

Beth Kite -- Citi Research -- Analyst

Hi, everyone. We have a question about your skincare exposure and given the pressure in color cosmetics especially prestige. If you've considered a bigger move into skin, more brands, more shelf space, more space in store, if you will. Have you entertaining those conversations to shift the skincare exposure in a greater way more quickly.

David Kimbell -- President and Chief Merchandising and Marketing Officer

Yeah, well, we are already experiencing strong growth in skincare, both on the mass and prestige side of the business. And we've made moves to continue to emphasize that part of the business through both the brands that we've been bringing in and partnering with strong innovation that Mary described earlier, and a further amplification within our -- both our store and our e-commerce and app business, so for sure we've been emphasizing and driving that part of the business as well as the other categories that have been driving growth hair and fragrance our personal care appliances, so absolutely emphasizing that.

Having said that, and we are always on the move -- on the effort to continue to try to optimize our assortment and look to lean into areas that are demonstrated in those growth. Having said that, even though makeup is going through this tougher cycle, we still are confident in the long-term growth prospects of this category. So we're not anticipating a dramatic shift away long-term from makeup, we'll continue to try to continue the strong share growth gains that we've had bring new brands and partner with our key brand partners to get those brands back on track, because the demographic trends and makeup are still a strong. Everything we're seeing around millennials and Gen Zs, Latinas, all the growth drivers, we're confident in. We're working through this innovation cycle that Mary described, but we believe we will come out of that. And so we'll continue to maintain a strong makeup business but absolutely emphasizing the growth categories like skin and others across our store.

Beth Kite -- Citi Research -- Analyst

And the volatility in July through now, with that primarily color or did that impact your other categories?

David Kimbell -- President and Chief Merchandising and Marketing Officer

Yeah, it was primarily color that we're seeing this -- as we've talked there has been a disruption in the makeup category a slowdown in the makeup category for a little while now. But in many measures and are tracking and a view of the category, there was more disruption, more recently over the last several weeks.

Beth Kite -- Citi Research -- Analyst

Wonderful. Thanks very much.

Operator

The next question comes from Christopher Horvers, who is with JP Morgan. Please go ahead.

Christopher Horvers -- JP Morgan -- Analyst

Thanks. Good evening. So a couple of follow ups. First in terms of the comps that you're implying for the third quarter. Are you basically assuming the current trend that you've seen sustained? Or are you expecting 21 days of beauty in September to improve the trend? And following up on the fourth quarter, you're lapping James Charles, you're lapping Kiley. So are you sizings the newness factor bigger this year? Or is there something else on the common terms of newness that hasn't been announced or are you assuming investment in merch margins to try to drive the comp overall. Thanks.

Mary Dillon -- Chief Executive Officer

Yeah, I'll start, and then I'll see if Dave wants to add anything. We're not going to get that granular. We're in the quarter right now, obviously, I'm just -- we're trying to do our best to sort of call it like we see it. And I'd say, it is a combination of our view of category trends and as we size newness and also all the things that we have in the fourth quarter just in terms of holiday promotion. So it's our -- it's our best call right now with the range around that. Okay?

Operator

The next question comes from Michael Binetti, who is with Credit Suisse. Please go ahead.

Michael Binetti -- Credit Suisse -- Analyst

Hey guys, thanks for taking my questions here. I was wondering maybe if you could just give us a little more color on the magnitude of the issues in July and in August, the magnitude of the guidance is quite heavy, and it seems like it's based on a fairly short period in time. And obviously, you saw a big thing -- you've described 2Q is less informative a seasonally about the underlying trend in your business, you still got big thing like 21 days of beauty. Mary, the body language very clear, all of the commentary you expect cosmetics to improve. I'm just trying to figure out why cosmetics will improve. You said the incrementality hasn't worked. What's driving the comp improvement in 4Q versus third quarter based on those comments, especially latter [Phonetic] obviously the bigger compare.

Mary Dillon -- Chief Executive Officer

Yes, I mean, I'd say the first part of your question is just that it has been is the category data that we have access to. It sounds like the more recent than what you would see has shown more recent deceleration I guess. So that's sort of part of the -- by the shift in more dramatic change. Again, we just try to call, kind of, we take multiple views of how we build up our volume forecast and so, our Q4 is a combination of all the things thinking about category trends not necessarily dramatically improving. But thinking about what we have coming and giving our best shot at both Q3, Q4 cadence of promotional events and launches.

Michael Binetti -- Credit Suisse -- Analyst

So I guess just follow that. I think you started first calling on slowing prestige cosmetic trends in mid-2017, you've done a really nice job of providing the oil business slower for almost two years now. I feel like -- I just want to ask you like, what do you think is happening in the industry, I felt I'm missing something on why lot of change lower so suddenly here recently.

Mary Dillon -- Chief Executive Officer

Well, if I have the answer to that, hopefully to fixed that already. I mean it's honestly I think it's a combination of factors. And you're right, I mean, right there -- our business model we're proud about the fact that we can flex across categories going to drive market share growth and carrying a lot of fantastic exclusive brands. But as we look at it, it's a combination we think it's just innovation not really, the cycle of innovation that we're in right now, it doesn't compared to, but we've seen a few years ago, and it's easy to say that now, it's hard to know it and prospectively that that's going to be the case right. So we think the combination of what our brand -- we've bet on what our brand partners bet on just wasn't driving that kind of incrementality that we've seen in the past. So that's at the highest level, probably the biggest factor.

Michael Binetti -- Credit Suisse -- Analyst

Okay. Thanks. Best of luck of with 21 days Beauty.

Mary Dillon -- Chief Executive Officer

Thank you.

Operator

Our next question comes from Mark Altschwager, who is with Baird. Please go ahead.

Mark Altschwager -- Robert W. Baird -- Analyst

Good afternoon. Thanks for taking my question. Could you walk us through just a little bit further the puts and takes on the updated EBIT margin guidance for the back half of the year. How much of the change in expectations is on merchandise margin versus greater fixed cost deleverage. Just any help on the gross margin versus SG&A cadence over the next couple of quarters would be great.

Scott Settersten -- Chief Financial Officer, Treasurer and Assistant Secretary

Yeah, I guess, we can talk directionally for the back half of the year. I'm not going to -- we're not going to get into specifics quarter-by-quarter. We're trying to move away from that, Mark. I appreciate the question. So I think, we stated in our comments that we still merchandise margin. Right. It -- we still expect to expand that. So that's the good news. Our EFG efforts are working, we're making progress on that. Unfortunately, it's going to be masked a little bit by the downward pressure we have in prestige right and the mix overall of the business.

So we're happy with margin expansion overall, blended up for the back half of the year is what we expect to see. SG&A is heavier, I mean, again, we pointed to these are necessary long-term investments for the health of the business that we're not going to back away from right now in some knee-jerk reaction. So again, SG&A deleverage is going to be heavier in the second half of the year than what we expected. I guess, I would say there, it's probably a little heavier weighted to the third quarter than it is fourth quarter, because in fourth quarter we're kind of shut down and we're all on all hands on deck for holiday.

So also I would say, third quarter maybe you're kind of at peak with fixed cost, while it's leveraging year-over-year there's less of that in the third quarter, because we're getting a fuller load of new store openings and things like that weighted toward the back half of the year this year. So that's probably about as much color as I want to give on specifically the quarter's themselves.

Mark Altschwager -- Robert W. Baird -- Analyst

That's helpful. Thank you, and best of luck.

Mary Dillon -- Chief Executive Officer

Thank you.

Operator

The next question comes from Michael Goldsmith, who is with UBS. Please go ahead, sir.

Michael Goldsmith -- UBS Securities -- Analyst

[Technical Issues] question. What are you assuming about the company's level of market outperformance in the cosmetics category in the back half of the year. And does that represent a change from what we've seen in the last couple of quarters. And given the market share gains achieved over the years that make it more difficult to pick up share in the category going forward.

Mary Dillon -- Chief Executive Officer

Yeah, I'd say that we are expecting continued similar share gains through the rest of the year is probably the easiest way to put it.

Michael Goldsmith -- UBS Securities -- Analyst

And then , going forward?

Mary Dillon -- Chief Executive Officer

I don't -- I wouldn't comment on that yet today, but still we see -- still see plenty of share for us to gain that is out there and other channels that we've been successfully with our business model attracting new guests and shares. So we see that playing out for while.

Michael Goldsmith -- UBS Securities -- Analyst

Thank you very much.

Operator

The next question comes from Ike Boruchow, who is with Wells Fargo. Please go ahead.

Ike Boruchow -- Wells Fargo -- Analyst

Hey, good afternoon, everyone. Mary, I understand there's a lot going on right now. And I do apologize to go back to Simeon's question. But less than a year ago, there was a multi-year plan that was laid out and it did call for 5% to 7% comps and it specifically called out for margin expansion in 2020. I understand that there is no crystal ball right now. But I guess what I'd ask is given what's -- given it sounds like this is going to take some time to work through and looking at the comps and deleverage you're guiding to in the back half, should we consider that plan stale at this point.

Mary Dillon -- Chief Executive Officer

I think, it's really too soon to say that. I mean, part of what we need to do is sort of work through this cycle. We've not put our plan for 2020 together yet, we still feel very confident about the business model and we can make choices about pacing of what we spend in terms of investments. We've been pretty aggressive it going up for a lot of investment this year that our multi-year important long-term investments for us.

And so, as a prudent planners, we would say, OK. We want to plan for it maybe a different comp cycle for part of the year. How do we then think about? How do we stay the investments that deliver the appropriate returns. So I think it is -- I think, Scott said it well, this is not a time to have a knee-jerk reaction about the long-term prospects of the business. I don't believe that. But we're also being prudent how we think about, how we do that kind of planning and stage investments.

Ike Boruchow -- Wells Fargo -- Analyst

Understood. Thank you.

Operator

The next question comes from Dana Telsey with Telsey Advisory Group. Please go ahead.

Dana Telsey -- Telsey Advisory Group -- Analyst

Hi, good afternoon, everyone. As you think about the go forward. How do you think of what type of comps that you need to leverage expenses, given the new trajectory of sales growth in category growth. And also, as you think about mass and prestige, has there been a difference in the cadence of mass and prestige in terms of how they are performing most recently. Thank you.

Scott Settersten -- Chief Financial Officer, Treasurer and Assistant Secretary

Yeah. So the first part of the question, I guess, I would say, to Mary, point you just made, the business has been very healthy for a long period of time. And we've been riding a wave, so to speak on makeup, makeup in general, right across both mass and prestige, which has allowed us the flexibility to be more aggressive on the investments. So there was a time before that phenomena. We're Ulta operated very effectively and very well performs -- produce some really great financial results on much lower comps. So we are no stranger to operating in a tougher lower growth kind of environment. And that's just the kinds of things that we're pivoting toward right now. So again, we don't have all the answers as we sit here today, but you can bet that we're actively managing with that thought in mind.

David Kimbell -- President and Chief Merchandising and Marketing Officer

Then on your second question about mass and prestige just to reiterate, we are seeing in the total US market weakness softness in both mass and prestige at Ulta Beauty specifically, we are gaining share in both categories due to the strategies and the brands that we brought in and the focus we've had in that category. But as I mentioned earlier, mass has performed better than prestige in the recent quarters as that business has been a bit stronger for us.

Dana Telsey -- Telsey Advisory Group -- Analyst

Thank you.

Operator

This concludes time allocated for questions on today's call. I would now like to turn the call back over to Mary Dillon for any closing comments.

Mary Dillon -- Chief Executive Officer

Yeah, I would just like to close by thanking our very hard working more than 44,000 associates for delivering another quarter of solid financial results and great guest experience every day, and we look forward to speaking with all of you again soon.

Operator

[Operator Closing Remarks]

Duration: 61 minutes

Call participants:

Kiley Rawlins -- Vice President, Investor Relations

Mary Dillon -- Chief Executive Officer

Scott Settersten -- Chief Financial Officer, Treasurer and Assistant Secretary

David Kimbell -- President and Chief Merchandising and Marketing Officer

Stephanie Wissink -- Jefferies -- Analyst

Erinn Murphy -- Piper Jaffray -- Analyst

Steven Forbes -- Guggenheim Securities -- Analyst

Simeon Gutman -- Morgan Stanley -- Analyst

Rupesh Parikh -- Oppenheimer -- Analyst

Beth Kite -- Citi Research -- Analyst

Christopher Horvers -- JP Morgan -- Analyst

Michael Binetti -- Credit Suisse -- Analyst

Mark Altschwager -- Robert W. Baird -- Analyst

Michael Goldsmith -- UBS Securities -- Analyst

Ike Boruchow -- Wells Fargo -- Analyst

Dana Telsey -- Telsey Advisory Group -- Analyst

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