CFOs In Motion "More than Skin Deep" with Scott Settersten, Ulta Beauty

Good morning, Andy. Nice to see you again as well, and I'm happy to be here today. Thank you.

Well, as you can imagine, we are very happy with the strong start to our fiscal 2022. So again, despite all the turmoils, disruptions, and uncertainties that we've all been dealing with, the beauty category once again has kind of demonstrated its resiliency, right? In spite of all those kinds of things. So again, we're in... I would also say that part of our performance, the over-performance both on operating and the financial end, is due to our good planning and execution, right? So again, all that is part and parcel of what we do here every day and what the finance function does to help support the business. I would say regarding the loyalty program, that's a very important ingredient to our secret sauce. As you probably saw, we have over 37.5 million active members in our Ultimate Rewards program, and they drive over 95% of our total sales. So again, very important part of the mix overall and something that our team spent a lot of time focusing on. The growth we saw some growth coming out of the COVID situation, right? People are back shopping and engaging, especially in our category. So I would say the growth that we saw in the first quarter, which was outsized, is largely due to people coming back into our physical stores, right? And engaging with our beauty-loving associates, where they get a chance to hear more about the benefits and the reasons why they should be part of the program.

Yeah, so what makes Ulta Beauty kind of unique is the wide range of our assortment, right? We go across price points, high to low. We carry all kinds of different products from mass to prestige. They're out there scanning the horizon around the world, seeing what's going on with consumers and beauty regimens. And so they think about runway shows, the entertainment industry, all the social media influencers, and of course our vendor partners, who do a lot of R&D and try to keep up with trends as well. They take all that information back, we huddle up with our vendor partners to figure out how we bring that to life and how we can bring it to market to satisfy consumers' appetites for those kinds of things. And then we try to bring it to life in our stores and online. So there's always something. That's a great thing about our category. There's always something: the seasons changing, the new products, supporting existing products that have been winners, and bringing in new products.

Yeah, so what you just described there is really the heart of our business, right? The assortment, making sure you have the products and services that consumers are looking for. So it really comes down to collaboration between the core teams that are working on these kinds of initiatives and objectives. As I just mentioned, the merchants are charged with going out and identifying newness to bring to our business, working with a lot of different third-party data points to try to determine what's going to be when they're dealing with our vendor partners. And then they get support. So here comes the first part of the collaboration with our merchandise planning and inventory teams, or MPNI teams. They work with the merchants to figure out how much of this can we sell, what kind of profit margins can we make, and how are we going to make the math work on that part of it. Then the MPNI team hooks up with the supply chain team to determine what the product flow is going to be: when's it going to be shipped, when's it going to be received, how is this going to flow through our network out to the stores, the allocations there, because not every store operates just like other stores, right? You kind of have a range of productivity there. And then how much do we keep for the digital channel? They work with the merchants, they work with MPNI, they work with supply chain to figure out what the cost, you might call it cost of ownership or cost to serve, it's described different ways, but we figure out what the profit equation is going to look like through each step there to make sure holistically we understand what this decision is going to mean for us. And of course, as we're adding new products to the assortment, we're also thinking about products that we're going to remove, because we've got a limited amount of space. Our objective is to try to make that space, whether it's in a store on a shelf or in our distribution centers on a shelf, as productive a space as we can possibly make it. So I'm proud to say our FP&A team is viewed as a real key partner in the business. It's very essential in the context of the overall enterprise.

Yeah, I would say a misconception by many is that online is some special pool of customers, you know what I mean? It's not really the case. The way we see it, an online customer is every customer, right? Our mindset as an omni-channel retailer, and I'm sure this is prevalent, is that every transaction, whether it's in the store or on a digital platform, is in some way influenced by our digital assets, right? People research, they do their due diligence, they look at tutorials, they try to get informed. Social media plays a big role. Maybe we send you a loyalty email, or they see a video somewhere on a TikTok platform or Instagram, and then they try to figure out where they're going to find that product and purchase that product. So it's an end-to-end process here, and we are focused on all the different steps in there. For example, our website or our app, as they're looking through Ulta, how do we make the navigation easier so that they can find the products quicker? How do we bring more information so that they can educate themselves about the products? So we might be adding things around ingredients, health-conscious kinds of things, or are these products animal tested or not? We might think about things like augmented reality, like virtual try-on, which is a very important part of our business and is in a lot of retail, but beauty especially. You can try to see color on your face, your lips, you can look at hair color, you can do a lot of things through augmented reality. We work on things like AI and think about ways we can serve up complementary products to people as they're shopping or getting ready to check out on our website or our app. There's a litany of things like payment options for people. You might have heard of things like buy now, pay later, which is a big trend now, especially with Gen Z shoppers. So there's a lot of different elements to how we think about getting closer to our online customers.

Yeah, the short answer is yes. The longer answer is the beauty category has always been very competitive. I've been in it now for over 15 years, and it's always been super hyper-competitive because it's dynamic, it's a growing category, and it's got a healthy margin profile, right? So we compete with mass and drug stores, we compete with department stores, we compete with big box discounters, of course all the specialty retailers, and then all the direct-to-consumer platforms that are out there as well. So yes, competition, we watch them all closely and keep close tabs on developments and what we should be thinking about as well in our business. There's always enhancements occurring there. But our focus is playing offense. We know our model works. We've been successful for a long period of time. We know how to connect with our consumer. We believe we have better customer insights than most all of our competitors do. And so we feel like we need to be aware, but we're not going to be distracted by what they're doing. We're going to focus on our own game. There's a proliferation of things going on in the marketplace right now to take friction out for the consumer, consumer-friendly kinds of things. Same-day shipping is not something that everyone needs or everybody wants, and it kind of depends on the category and what the items are. So again, we're just focused on making sure we're meeting expectations for our guests.

Yeah, so we're very excited about the Target relationship. The Ulta Beauty at Target, some might call it, is a curated assortment of our products, ranging different categories and price points. It's not an effort to replicate a full Ulta inside of a Target store. That's not what we're going after, and that's why we believe it's more innovative than similar kinds of concepts we've seen over time. So it's an opportunity for us to build awareness inside Target. They've got, I think, more than 30 million shoppers inside a Target front door every week in the United States. So it's a great opportunity for us to stay top of mind to our guests, the beauty shoppers who also shop at Target. There's no surprise there. People love Target stores, and it's an opportunity for us to have a beauty advisor to help guide the shopper inside the store, to get them linked up with our loyalty program, and to get them to connect with us in a full-line Ulta Beauty shopping experience at some point, right? So that's the virtuous loop we're looking to build. It's still really early. We're just maybe about 200 stores worth now, with more coming in the years to come. And we believe over the long term it's a great awareness-building activity and will lead to stronger sales for us over the long term.

Yeah, so we've seen a lot of other retailers dip their toes in and have built pretty significant businesses around this concept of media and marketing on behalf of vendor partners and others. So for us, this was something we announced last year at our analyst day. We just kicked it off here within the last couple of months. So it's a way for us to bring to bear the value of our first-party data. Again, over 37.5 million loyalty members that we have deep insight into: what they buy, what their habits are, what the trends are as they shop across all the categories in our store. We're in a very unique position. Nobody knows beauty like Ulta Beauty. It's all the categories. We kind of play the middleman. You've probably heard those old jokes about marketing: you know 50% is productive and the other 50% is kind of like a black hole, because it's hard to measure television advertising and some of the other deployments you use in a marketing campaign. So what we bring to the table is more measurable, more personalized, because we know who's shopping. And with the internet tracking and the wealth of cookies making it a lot more difficult now, that's one of the elements. The fact that we're doing away with a lot of that means we can serve up advertising. Think about little mini vignettes or videos, placement banner ad kinds of things on all kinds of platforms, third-party open platforms like Instagram and YouTube, as well as our own digital assets, our website, our app. So we can bring to bear the advertising marketing materials of the vendor. And then another virtuous part of the cycle is we can help direct the shopper back to Ulta properties to transact on those beauty products. So it's a win-win situation, and that's the way we always think about our business and doing business with our vendor partners.

Yeah, well, we're not immune. Like everybody else, I'm sure that's listening to this is grappling with the talent and people issues that have come about through the course of the COVID disaster, I guess I'll call it. So everybody is kind of reassessing their work status, how they think about health. We've had to deal with that just like everybody else. I would say our culture has really helped us weather the storm maybe better than others. Stretching way back now, the culture focus of our company has been right at the top of the list. Our engagement scores have always been upper quartile across a wide spectrum of businesses, even higher versus other retailers. So we've always felt really comfortable and good about our position there. The leadership of the company, people like them, they believe in the mission, what we're all about, what our mission of the company is, and how we go about taking care of our business, how we treat people. We're feeling pressure like everybody is in this environment, so we're managing our way through that. But just listening to our people, what's the most important thing to our associates right now? It's workplace flexibility and where I do my job. So we're trying to be really open-minded about how we manage our way through all that, making sure we can drive the business but also provide as much flexibility to our people as possible. Career development is still super important to people, whether they're physically next to you or not. How do I grow my career? They're thinking about the teams they work with, making sure they get recognition for all the good work that they're doing. So it's not all about the dollars and cents. It's still about the culture and the environment. We're looking for specific skill sets, like IT folks, PMO folks that can help us. We've got a lot of large-scale IT projects that are in process right now. All of that is leading to the future of retail and how we operate our business. I'd say generally speaking, the talent pool is good, it's deep. We're finding the people that we need to add to our business, but it's taken longer. No surprise, it's taken longer to recruit, cultivate, and onboard people. And of course, the cost is going up, like it is for everybody. So that's just another variable we have to deal with.

Yeah, I'll take answer D: all of the above. This is the question that all CFOs I know are grappling with these days. I talk to a lot of them. So everything is on the table. Price increases because the vendors' cost of making the products is going up, and so it just becomes a question of when and how much. So it's occupying a lot of mind space these days for me and many of my colleagues here. At Ulta Beauty specifically, retailers go close to the end of the month, so we're just getting ready to close out our second quarter this coming Saturday. We've reset our sales outlook for the second half of the year, and now we're working through the rest of the P&L variables. There'll be a lot of scenario analysis: what if this, what if that. There's a wide variation in outlooks on what's going to happen, like risk of recession, how impactful could it be, how long could it last. You look at the economists and the banks and what they're thinking could happen here in the second half of the year or early 2023. It's hard to know. There has been a trend here. You don't ignore the signs. There's been a spate of recent earnings downward adjustments from well-known retailers recently: Walmart, Target, Bath & Body Works, and others. So that's something we're seriously considering. The flow of information is important. We have a dashboard that tells us how our business is doing, how the consumer is reacting to things. Every day at 9 o'clock I know what the sales were the day before, what the selling margin was. So it's a comfort to have real-time information on how your business is reacting. The beauty category itself is resilient, as I mentioned. There's a replenishment element to it. People use up shampoos and sunscreen and things like that, they have to buy more. So there are things they need and things they don't necessarily need but they want. This comes back to the fashion, the runway, the newness, the season. So makeup, the new lip color, whatever it is coming. That's something unique that we have. We know what to do, we know what muscles to flex, and so we just need to be prepared to take action.

Yeah, so I talk to a lot of CFOs in a lot of different forums, and I don't think it's any secret to long-serving successful CFOs that the blocking and tackling, the accounting, the controllership, the treasury, the tax, the internal audit, the Sarbanes-Oxley, all those control kinds of things, that's table stakes. You're expected to be a subject matter expert and to deliver excellence on each one of those pieces every day, no questions asked. That's just getting a seat at the table. The value that a good CFO brings is finding a way to be part of the strategy and the value creation drivers of the business for the long term. Driving a successful growth strategy, which of course people are a big part of that, it's not just all the X's and O's of what has to be done necessarily, but how you pull your teams together. I like to describe myself as when I'm in the strategy meetings or talking about a new business endeavor or an M&A opportunity, I put the finance hat in my pocket and put the general manager's hat on my head. I partake and think about the business and help ideation as though I'm one of the functional leaders of the business, thinking about how we're going to drive growth and optimize the business overall. Then when the proper time comes, I put that hat away on the shelf and put my finance hat back on, because now I'm the expert and I'm going to help develop the algorithm: the sales, margin, and capital allocation implications from these decisions. The qualitative part of it, the general manager part, and the quantitative part of it, the CFO part, fit together nicely, and it's easy to explain to your associates, your board members, and most importantly to investors. So that's the recipe that's worked for me for a long time and made me a successful CFO here at Ulta Beauty.

Thank you, Andy. Appreciate it.