Ulta Magnificence (NASDAQ:ULTA)
Q3 2021 Earnings Name
Dec 02, 2021, 4:30 p.m. ET
Contents:
- Ready Remarks
- Questions and Solutions
- Name Contributors
Ready Remarks:
Operator
Good afternoon, and welcome to Ulta Magnificence’s convention name to debate outcomes for the third quarter of fiscal 2021. At the moment, all members are in a listen-only mode. A quick question-and-answer session will observe the formal presentation. We ask that you simply please restrict your self to 1 query after which reenter the queue for any further questions.
[Operator instructions] As a reminder, this convention is being recorded. It’s now my pleasure to introduce Ms. Kiley Rawlins, vp of investor relations. Ms.
Rawlins, please proceed.
Kiley Rawlins — Vice President of Investor Relations
Thanks, Laura. Good afternoon, everybody. Internet hosting our name in the present day are Dave Kimbell, chief govt officer; and Scott Settersten, chief monetary officer. Kecia Steelman, chief working officer, will be part of us for the Q&A.
This afternoon, we launched our monetary outcomes for the third quarter of fiscal 2021. A replica of the press launch is accessible within the Investor Relations part of our web site. Earlier than we start, I might wish to remind you of the corporate’s secure harbor language. The statements contained on this convention name, which aren’t historic information, could also be deemed to represent forward-looking statements inside the which means of the Personal Securities Litigation Reform Act of 1995.
Precise future outcomes could differ materially from these projected in such statements as a result of quite a lot of dangers and uncertainties, all of that are described within the firm’s filings with the SEC. We warning you to not place undue reliance on these forward-looking statements, which communicate solely as of in the present day, December 2, 2021. We have now no obligation to replace or revise our forward-looking statements, besides as required by regulation, and you shouldn’t count on us to take action. In in the present day’s feedback, we are going to focus on sure non-GAAP monetary measures, together with adjusted working earnings and adjusted diluted EPS for the third quarter of fiscal 2020.
A reconciliation of those measures to the corresponding GAAP measures could be present in our earnings launch, which is accessible within the Investor Relations part of our web site. We’ll start this afternoon with ready remarks from Dave and Scott. Following our ready feedback, we are going to open up the decision for questions. We respectfully request that you simply ask one query to permit us to have time to answer as lots of you as doable through the hours scheduled for this name.
As at all times, Mary Kate and I shall be obtainable for any follow-up questions after the decision. Now I might like to show the decision over to Dave. Dave?
Dave Kimbell — Chief Government Officer
Thanks, Kiley, and good afternoon, everybody. The Ulta Magnificence staff delivered excellent outcomes once more this quarter. For the third quarter, web gross sales elevated 28.6% to a document $2 billion. Working revenue elevated to 14.2% of gross sales, and diluted EPS elevated to $3.94 per share.
Along with producing these glorious monetary outcomes, we additionally delivered robust operational outcomes. We proceed to extend our market share in Status Magnificence primarily based on greenback gross sales for the 13 weeks ended October 30, 2021, in comparison with the identical interval final yr. We elevated the variety of members in our Final Rewards loyalty program by 13% to a document 35.9 million members and returned to pre-pandemic member penetration ranges. And we navigated world provide chain challenges and tight labor markets and remained well-positioned to satisfy visitor wants and ship a profitable vacation season.
This efficiency displays the energy and resiliency of the wonder class, the facility of Ulta Magnificence’s differentiated mannequin, and the impression of our profitable tradition and excellent staff. I need to categorical my honest appreciation to all of our Ulta Magnificence associates for his or her unimaginable efforts to serve our visitors and ship these glorious outcomes. I am impressed every single day by our associates’ ardour for magnificence and fervour for our visitors, and I’m honored to guide such an awesome firm of gifted associates who proceed to look after one another whereas driving our enterprise ahead. At our Analyst Day in October, we launched a brand new strategic framework, which is able to form our future and allow Ulta Magnificence to ship in opposition to longer-term monetary targets.
At the moment, I am going to reiterate a few of the data we mentioned about our strategic imperatives and share an replace on progress made within the third quarter, then I am going to share how we’re positioning Ulta Magnificence for vacation earlier than I flip it over to Scott to debate the financials. Beginning with our concentrate on driving breakthrough and disruptive development by way of an expanded definition of All Issues Magnificence. Our differentiated assortment is core to our success. And we proceed to innovate, evolve, and broaden our providing to excite the wonder fanatic.
Within the third quarter, all main classes delivered strong double-digit comp development in comparison with the third quarter of fiscal 2020, pushed by biking final yr’s disruption from COVID, product newness, and powerful efficiency from our strategic promotional occasions, together with 21 Days of Magnificence, Fall Haul, and our Attractive Hair Occasion. In comparison with the third quarter of fiscal 2019, perfume, bathtub, haircare, and skincare all delivered robust double-digit comp development. Whereas make-up was barely under 2019 ranges, we’re inspired that the development in Status Make-up improved from the second quarter, and development in mass cosmetics remained robust. Engagement with the class stays excessive with shoppers seeking to refresh their magnificence stash with new merchandise, and up to date tendencies give us confidence the make-up class will return to development in comparison with pre-pandemic ranges.
In comparison with final yr, eyes, face, and lip continued to ship robust development inside the make-up class. Engagement with false lashes and lash development serums, mixed with innovation like creamy eye shadow sticks, are driving continued development inside eye. Elevated curiosity in tinted moisturizers and blush are driving development inside face. And lip shade, lip gloss, and lip balm proceed to drive development inside lip.
Newness continues to excite and interact visitors. New manufacturers like Bobby Brown and Elaluz, mixed with new product launches from a variety of manufacturers, together with ColourPop, City Decay, Tarte and NYX drove good development within the quarter. As well as, this quarter, we expanded MAC into 200 further shops. Haircare delivered one other quarter of double-digit development pushed by robust visitor engagement with our strategic occasions, newness, and our Again Bar Takeover occasions.
In early October, we kicked off our fall Attractive Hair occasion, a semiannual occasion strategically centered on buying members who don’t store the haircare class or interact with our salon companies. Constructing on the success of our spring occasion, we proceed to streamline presents, focus our advertising occasions, and create related storytelling round hair targets, service enhancements, and vacation kits. We noticed good development from our core assortment and engagement with new manufacturers like KRISTIN ESS, Briogeo, and Verb. And product newness from manufacturers like Dyson, Residing Proof, Redken, and Curlsmith continued to resonate with visitors.
We proceed to broaden our assortment of status haircare manufacturers, and I am excited to share we are going to launch OLAPLEX, the No. 1 status hair model out there, in all Ulta Magnificence shops and on ulta.com in January. Our Again Bar Takeovers give our stylists the distinctive alternative to introduce new manufacturers and merchandise to visitors. And this quarter, salon takeovers by Bondi Increase, IGK, Verb, and KRISTIN ESS all drove good gross sales development throughout their respective takeovers.
Skincare delivered one other quarter of robust double-digit gross sales development as visitors proceed to spend money on self-care and preserve their skincare regimens. Much like final quarter, skincare routines, together with moisturizers, serums, and cleansers, drove class development. New manufacturers, together with Drunk Elephant; Contemporary; Good Molecules, which is unique to Ulta Magnificence and peach slices; in addition to new merchandise from Tula, Clinique, and The Peculiar drove strong visitor engagement. Lastly, our perfume and bathtub class continued to ship distinctive development.
Ariana Grande’s newest perfume, God is a Girl, which is unique to Ulta Magnificence; in addition to newness from Carolina Herrera; Coach; YSL, and Dior, drove robust development through the quarter. Occasions included in our back-to-school reward with buy and our month-to-month Perfume Crush program additionally drove robust engagement. Past perfume, the bathtub and physique class continues to drive strong development as moisturizers and scrubs stay on development. Along with delivering development from our core classes, we’re centered on driving development from key cross-functional platforms.
Beginning with Aware Magnificence, our cross-category initiative meant to assist visitors uncover and interact with manufacturers and merchandise which mirror their private values. By way of this program, we establish manufacturers throughout 5 key pillars: clear substances, cruelty-free, vegan, sustainable packaging, and constructive impression. Throughout the quarter, we licensed 19 new manufacturers, together with LAMIK Magnificence, WLDKAT, and Higher Not Youthful, bringing the overall variety of licensed acutely aware magnificence manufacturers to 275 on the finish of Q3. Throughout the third quarter, we expanded our certification to the SKU degree for clear substances and vegan and added in-store badging on the shelf for licensed manufacturers, in addition to new search filters on-line to assist visitors simply establish merchandise, which mirror what’s most vital to them.
Transferring now to our efforts to broaden our assortment of black-owned and BIPOC manufacturers. Throughout the third quarter, we added two new black-owned manufacturers, Sunday II Sunday, and Nude Sugar, and we’re on monitor to double the variety of black-owned manufacturers in our assortment this yr. As well as, I’m excited to share that we’ve got welcomed our first South Asian-owned make-up model to the Ulta Magnificence household, Reside Tinted. Based by Asian influencer Deepica Mutyala, Reside Tinted is a beauty model that celebrates multicultural magnificence.
The model can also be [Technical difficulty]
Questions & Solutions:
Operator
[Operator instructions]
Dave Kimbell — Chief Government Officer
Howdy, everybody. I feel we’re having — we had a — we have been disconnected. I feel we’re having some telephone community points. However hopefully, you possibly can hear me, and I’ll decide up, I feel, the place we bought minimize off.
So, if I repeat a little bit bit, I apologize, however we’ll dive proper again in. So, shifting now to our efforts to broaden our assortment of black-owned and BIPOC manufacturers. Throughout the third quarter, we added two new black-owned manufacturers, Sunday II Sunday, and Nude Sugar, and we’re on monitor to double the variety of black-owned manufacturers in our assortment this yr. As well as, I am excited to share we’ve got welcomed our first South Asian-owned make-up model to the Ulta Magnificence household, Reside Tinted.
Based by Asian influencer, Deepica Mutyala, Reside Tinted is a beauty model that celebrates multicultural magnificence. The model can also be part of our acutely aware magnificence platform licensed as clear, vegan, and cruelty-free. Based mostly on our proprietary analysis, we all know 65% of magnificence fanatics consider magnificence is considerably linked to wellness. Reflecting this shopper perception, within the second quarter, we launched the wellness store on-line and in 450 shops.
This cross-category platform presents self-care merchandise for the thoughts, physique, and spirit in an accessible, easy-to-navigate manner. Within the third quarter, we refreshed the wellness store assortment shifting from summer season options to whole physique care and hydration, which is very related throughout colder months, and launched new gadgets from HAIRtamin, Alloom, OSEA, and Josie Maran. Turning now to our efforts to evolve the visitor expertise by way of our personalised and linked omnichannel ecosystem, All in Your World. We all know the visitor journey is more and more blurring throughout bodily and digital channels, and we goal to ship a cohesive omnichannel technique to serve our visitors.
Throughout Q3, we enhanced our omnichannel technique in 4 methods. First, we launched Magnificence to Go, our promise that purchase on-line, decide up in retailer orders shall be picked up and able to go inside two hours or much less, giving our visitors quick, handy entry to the wonder they need most. We additionally proceed to check incentive methods to encourage visitor utilization. Throughout the third quarter, BOPIS orders elevated 28% in comparison with final yr, totaling 20% of e-commerce gross sales within the quarter, in comparison with 16% final yr.
Second, partnering with DoorDash, we launched same-day supply in Atlanta, Boston, Chicago, Los Angeles, Houston, and Boise, and we’re excited concerning the worth and comfort that may present visitors this vacation season. Third, in October, we launched two unique salon companies in all shops and relaunched pores and skin companies in choose shops. Beginning with salons. We have now partnered with OLAPLEX to supply visitors knowledgeable bond restore service, which reverses harm attributable to hair shade, chemical remedy, warmth and styling, and the setting.
And we’ve got partnered with Redken to introduce a brand new categorical root touch-up service that provides visitors 100% grey protection shade in solely 10 minutes. These new unique companies are bringing new visitors into our salon. We additionally relaunched pores and skin companies in 100 areas that includes a revamped menu with new companies to handle particular visitor issues, resembling hydration, anti-aging, and zits. Whereas it is nonetheless early, we’re happy with how visitors are partaking with these new choices.
Lastly, we launched Ulta Magnificence at Goal in 92 shops and on-line through the third quarter, and I’m happy to share we’ve got reached our fiscal yr objective of opening greater than 100 outlets. We’re enthusiastic about this revolutionary partnership and the way, along with Goal, we are going to change the way in which visitors expertise magnificence. Whereas it’s going to take time for us to know what function this new distribution level will play for our visitors, we’re extremely happy with the continued buyer pleasure and inspired to see Final Reward members linking their accounts with Goal Circle, in addition to new members signing up by way of the store. Transferring on to our efforts to broaden and deepen our presence throughout the visitor magnificence journey as the center of the wonder group.
We’re centered on find out how to greatest elevate shopper connection, supercharge, member acquisition, and drive visitor loyalty, love, and share of pockets. Within the third quarter, we proceed to raise our storytelling with related content material throughout channels to launch Ulta Magnificence at Goal and to help our strategic occasions. As well as, as college students return to school rooms after greater than a yr of digital studying, we noticed a chance to deepen our engagement with Gen Z audiences throughout channels with insight-driven campaigns throughout key back-to-school moments. We ended the third quarter with 35.9 million energetic members, 13% above final yr and 6% above 2019.
Whereas we proceed so as to add new members, member development this quarter was largely pushed by a reactivation of lapsed members and energetic member retention. After experiencing headwinds final yr as a result of disruption from the pandemic, we’ve got accelerated personalization to create stronger life cycle methods, construct baskets and maximize enterprise returns, and we’re very happy with the outcomes. We’re driving robust conversion of recent members in shops and on-line. We’re efficiently reengaging members who lapsed through the pandemic, and we’re driving stronger engagement from our present members.
Importantly, our member retention charges have recovered to pre-pandemic ranges, and spend per member is at an all-time excessive. Shifting now to our plans and expectations for vacation. Based mostly on our shopper insights, we anticipated many visitors would begin their vacation buying earlier this yr, and we proactively took steps to make sure we have been prepared with vacation units, stocking stuffers, and distinctive collaborations to assist visitors get a head begin on their gifting wants. If vacation 2020 was about much less, vacation 2021 is about extra, extra enjoyable, extra in real-life gatherings, extra gifting, and extra glamming.
All of our groups at Ulta Magnificence are prepared and excited to assist our visitors rejoice extra this yr. Like final yr, we kicked off the vacation season in early November with our Howdy Holidays marketing campaign, early Black Friday offers, and new loyalty presents. With genuine tales of connection and pleasure throughout video, digital, social, and print platforms to encourage and encourage magnificence fanatics to buy Ulta Magnificence, we’ll be in every single place our visitors are this vacation season. Our service provider groups have constructed an excellent vacation assortment with giftable enjoyable gadgets throughout classes and value factors.
With new manufacturers like Bobby Brown, Drunk Elephant, and Briogeo, expanded assortments from manufacturers like Laura Mercier, Florence, and Sample, and thrilling vacation choices from manufacturers like Dyson, Tarte, Ariana Grande, Actually, and our very personal Ulta Magnificence Assortment, we’ve got nice presents for everybody. To assist visitors discover our greatest vacation presents, we developed a singular digital expertise to permit for straightforward discovery of vacation presents on-line and in-store. When visitors go to ulta.com or scan the QR codes on a banner on the entrance of our retailer, an app click on will launch giving the visitor a chance to simply discover high presents by class. Our shops are at all times the middle of vacation at Ulta Magnificence.
As we mix our nice in-store expertise with our revolutionary omnichannel capabilities, we’ll meet each visitor wherever and nevertheless they need to store Ulta Magnificence. To assist visitors prepare for in real-life celebrations, we have expanded salon capability to 100% in all Ulta Magnificence salons and profit forehead bars besides the place restricted by state or native mandates, and we have relaunched pores and skin companies in choose shops. Lastly, our BOPIS, curbside, and same-day supply choices will present visitors with nice buying comfort this vacation season. Our groups are excited, engaged, and able to help our visitors from proactively managing stock circulate and anticipating provide chain challenges to emphasize testing our IT programs and digital platforms to efficiently accelerating our vacation hiring.
The vacation season is off to a powerful begin, and I’m assured we’re well-positioned to ship one other profitable vacation season at Ulta Magnificence. In closing, we’re excited concerning the energy we’re seeing in our enterprise. Our third quarter efficiency exceeded our preliminary expectations, and we’re inspired by the early vacation tendencies. The wonder class is recovering, and our groups are executing properly.
We’re investing and innovating to make sure Ulta Magnificence will lead the brand new magnificence panorama, and we’re assured our well-defined technique will allow us to seize extra market share and drive worthwhile development. And now I’ll flip the decision over to Scott for a dialogue of the monetary outcomes. Scott?
Scott Settersten — Chief Monetary Officer
Thanks, Dave, and good afternoon, everybody. At the moment, we reported stronger-than-expected third quarter outcomes, and I want to echo Dave’s feedback and categorical my appreciation to all our Ulta Magnificence associates for delivering one other excellent quarter. Beginning with the earnings assertion. Q3 gross sales elevated 28.6% pushed by double-digit development in comp gross sales and powerful new retailer efficiency.
Whole firm comp elevated 25.8% primarily pushed by robust transaction development in shops. Along with strong gross sales development from shops, e-commerce exceeded our expectations delivering modest development on high of final yr’s 90% development. Whole firm transactions for the quarter elevated 16.8%. Common ticket elevated 7.7%, primarily as a result of a rise in common promoting value, reflecting favorable class combine shifts and decrease promotional ranges.
Throughout the quarter, we opened seven new shops and closed one retailer. We additionally transformed three shops and relocated two shops. In comparison with the third quarter of fiscal 2019, whole gross sales elevated 19%, and comp gross sales elevated 14.3%. From a combination perspective, make-up was 45% of gross sales, in comparison with 47% final yr.
Haircare merchandise and styling instruments have been 21% of gross sales, in comparison with 20% final yr. Skincare was 16% of gross sales, flat with final yr. And the perfume and bathtub class elevated 200 foundation factors to 12% of gross sales. Q3 gross revenue margin elevated 450 foundation factors to 39.6% of gross sales, in comparison with 35.1% final yr.
The rise was primarily as a result of leverage of mounted prices, channel combine shifts, leverage of salon bills, and better margin — merchandise margin. Per what we skilled within the first half of this yr, robust top-line development and advantages from our occupancy price optimization efforts resulted in vital leverage of mounted prices. E-commerce gross sales penetration in Q3 was about 500 foundation factors decrease than final yr as we cycled final yr’s robust e-commerce development. As a proportion of gross sales, salon bills additionally leveraged, reflecting robust top-line gross sales and decrease prices from the elimination of the salon supervisor function.
As a reminder, we are going to anniversary this modification in This fall. The advance in merchandise margin was primarily the results of increased gross sales, decrease promotional exercise, and ongoing advantages from our class administration efforts. Evaluating this yr’s efficiency to the third quarter of fiscal 2019, gross margin improved by 250 foundation factors. Increased merchandise margin, mounted price leverage, and leverage of salon bills have been partially offset by adversarial channel combine.
As a proportion of gross sales, SG&A decreased to 25.2% and in comparison with 26.8% final yr. Robust top-line development drove leverage of company overhead, retailer bills, and retailer payroll and advantages. This leverage was partially offset by deleverage from advertising expense, primarily reflecting elevated spend on print promoting in comparison with the third quarter final yr. Final yr, we considerably lowered our spend on print materials in Q3 as a result of pandemic.
This yr, our cadence of print was extra normalized. And as Dave talked about earlier, we’re leveraging our CRM capabilities to optimize circulation and enhance the profitability of our print automobiles. In comparison with Q3 of fiscal 2019, SG&A as a proportion of gross sales was about 150 foundation factors favorable. As a proportion of gross sales, decrease retailer bills, retailer payroll and advantages, and company overhead have been partially offset by increased advertising expense.
Working margin was 14.2% of gross sales, in comparison with 6.5% of gross sales within the third quarter of fiscal 2020 on a GAAP foundation and eight% of gross sales on an adjusted foundation. Robust top-line development pushed primarily by shops, mixed with the impression of our ongoing price optimization efforts, together with promotional optimization, delivered robust working margin outcomes. The corporate’s tax fee decreased to 24.1%, in comparison with 25.1% within the third quarter final yr. The decrease efficient tax fee is primarily as a result of favorable provision to tax return changes pushed by federal employment tax credit in comparison with the third quarter of fiscal 2020.
Diluted GAAP earnings per share elevated to $3.94, in comparison with $1.32 final yr. Adjusted diluted earnings per share in Q3 of final yr was $1.64. Transferring on to the stability sheet and money circulate. We ended the quarter with $1.9 billion of stock, in comparison with $1.4 billion final yr.
Along with the impression of 40 further shops, the rise in stock displays our proactive efforts to mitigate vacation gross sales danger as a result of anticipated provide chain disruptions. The place applicable, our groups work intently with our model companions to prioritize receipts to make sure we’ve got satisfactory stock of core and seasonal product to help anticipated demand for the vacation season. Capital expenditures have been $51.1 million for the quarter, pushed by investments in new shops, remodels and relocations, provide chain, and IT programs. Depreciation was $65.2 million, in comparison with $72.4 million final yr, primarily reflecting the impression of final yr’s retailer impairments and retailer closures.
We ended the quarter with $605.1 million in money and money equivalents. Within the third quarter, we repurchased 341,000 shares at a price of $126.4 million. On the finish of the quarter, we had $759.8 million remaining below our present $1.6 billion repurchase authorization. We proceed to count on to repurchase roughly 850 million of shares in fiscal 2021, however as at all times, have the flexibleness to change the cadence of repurchases in response to market circumstances.
Turning now to our up to date outlook for 2021. We’re very happy with our year-to-date outcomes by way of Q3 and are inspired by the robust tendencies we have skilled to date within the fourth quarter. Nonetheless, we acknowledge we nonetheless have a number of vital gross sales weeks left within the vacation season, and the working setting continues to be dynamic. Regardless of these uncertainties, we’ve got elevated our monetary expectations for the yr.
We now count on web gross sales for the yr shall be between $8.5 billion and $8.6 billion with comp gross sales development forecasted within the 36% to 37% vary. This steering displays our expectation that fourth quarter comp development shall be between 15% and 20%. For the yr, we plan to open roughly 44 web new shops and transform or relocate 17 shops. We now count on working margin fee for fiscal 2021 shall be between 14.3% and 14.5% of gross sales.
We proceed to consider the most important driver of our working margin enlargement will come from gross margin, pushed by leverage of mounted prices, much less headwind from channel shift, enhancing merchandise margin, and leverage of salon prices. Based mostly on increased top-line development, we now count on to leverage SG&A greater than beforehand anticipated as in comparison with fiscal 2020. Based mostly on these assumptions, we now count on diluted earnings per share shall be between $16.70 and $17.10 per share, together with the impression of roughly $850 million in share repurchases. We now count on to spend between $200 million and $225 million in capex in fiscal 2021, together with roughly $100 million for brand spanking new shops, remodels, and merchandise fixtures, $80 million for provide chain and IT, and about $34 million for retailer upkeep and different.
As a reminder, our steering for fiscal 2021 assumes a constant federal tax fee and no materials will increase within the federal minimal wage. Earlier than we open the decision for questions, I might like to handle just a few follow-up questions we obtained from our October Analyst Day occasion. First, our longer-term monetary targets. In October, we shared targets for income and earnings development, which we’re assured we are able to ship by way of fiscal 2024 primarily based on the restricted visibility we’ve got within the dynamic working setting.
As a reminder, we’re concentrating on web gross sales development between 5% and seven% and diluted earnings-per-share development within the low double-digit vary on a compound annual development foundation utilizing fiscal 2019 as base by way of fiscal 2024. As well as, we’re concentrating on working revenue margins within the 13% to 14% vary over the following three years. Our working margin expectations mirror a balanced and disciplined strategy to strategic investments that may help our long-term development aspirations and ship robust shareholder returns. Concerning the timing of investments associated to Challenge SOAR, our multiyear effort to improve our enterprise useful resource planning or ERP platform.
We count on to take a position $160 million to $180 million in capital over the following three years, with a lot of the funding deliberate for fiscal 2022 and 2023. As a reminder, along with offering us with extra versatile and scalable working setting, this new platform will help future development and innovation. We count on to start to see operational advantages from this funding in fiscal 2023. Lastly, we’re nonetheless finalizing our funds for fiscal 2022 and plan to offer monetary steering according to our common cadence on our March earnings name.
Nonetheless, we wished to share some preliminary ideas to contemplate as you replace your monetary fashions. Comp gross sales development in fiscal 2021 is predicted to be considerably stronger than we initially deliberate, however we stay assured we are able to ship comp gross sales development in fiscal 2022 inside our longer-term focused vary of three% to five%. Whereas we count on fiscal 2021 working margin shall be modestly above our longer-term goal, we count on working margin in fiscal 2022 shall be inside our longer-term focused vary of 13% to 14%, reflecting a extra normalized tempo of top-line development and capital and operational funding. We proceed to focus on EPS development in fiscal 2022 regardless of the problem of biking this yr’s stimulus funds and reopening of the economic system however acknowledge the earnings development fee subsequent yr will possible be decrease than our longer-term goal.
And now I am going to flip the decision again over to our operator to reasonable the Q&A session.
Operator
At the moment, we’ll be conducting a question-and-answer session. [Operator instructions] We ask that you simply please restrict your self to 1 query after which reenter the queue for added questions. One second whereas we ballot for questions. Our first query comes from the road of Michael Lasser with UBS.
You could proceed along with your query.
Michael Lasser — UBS — Analyst
Yeah, good night. Thanks loads for taking my query. On the time that you simply supplied your longer-term steering, you have been anticipating to have a 13% working margin this yr. You are now on tempo to have the mid-14% working margin, and but you continue to count on your working margin to be inside your steering for subsequent yr.
So, will you be investing greater than you had initially deliberate for 2022? And as a part of that, when you do higher than the three% to five% comp gross sales enhance that you simply’re anticipating for subsequent yr, would you let that circulate to the underside line and have better-than-expected margins? Thanks.
Scott Settersten — Chief Monetary Officer
Yeah. So, to the primary a part of your query, Michael, what we’re speaking about in the present day is in step with how we framed it up again at our Analyst Day within the later a part of October. So, once more, over the long run, we’re very assured we are able to ship working margin within the 13 to 14 proportion vary. We, once more, reiterated in the present day, that is a perform of what we count on to be a extra reasonable top-line gross sales development setting subsequent yr, coupled with a extra normalized funding cycle for the corporate, and that is with folks price and all of the capital prices that associate with all these new nice strategic initiatives that we’ve got properly underway now.
So, as we take into consideration potential gross sales overperformance subsequent yr, which, once more, we’d hope to see that, we’d proceed to take what we at all times have as a really disciplined, pragmatic strategy to long-term funding to drive wholesome development within the enterprise balanced in opposition to short-term working outcomes. So, once more, simply ensuring we take a really balanced strategy to that as we’ve got prior to now, and you’ll count on that to proceed into the longer term.
Dave Kimbell — Chief Government Officer
And, Michael, I’d simply add to what Scott stated, simply to reiterate what we talked about at Analyst Day that we’re very optimistic concerning the path forward. That is mirrored in that long-term steering. We consider we’ll be rising sooner than the market. The initiatives, each in our core enterprise in the present day, in addition to new packages and initiatives that we’ll be including over subsequent yr and the years forward, give us a variety of confidence that we’ll be main the class and delivering worthwhile development over that time-frame.
And as we shared at Analyst Day, we see a variety of confidence in that path forward.
Michael Lasser — UBS — Analyst
Thanks, and have an awesome vacation.
Operator
Our subsequent query comes from the road of Lorraine Hutchinson with Financial institution of America. You could proceed along with your query.
Lorraine Hutchinson — Financial institution of America Merrill Lynch — Analyst
Thanks. Good afternoon. I wished to observe up on the feedback you made round cosmetics. Are you seeing any newness that you simply’re enthusiastic about? And what do you suppose would be the catalyst to maneuver the comp into constructive territory versus 2019?
Dave Kimbell — Chief Government Officer
Nice. Thanks, Lorraine. Yeah, make-up clearly is a crucial subject for us and one which we’re very centered on, and I might reiterate our confidence within the class. As I stated within the remarks, it isn’t performing on the degree that our different classes, skincare, haircare, bathtub, perfume, that are all delivering double-digit comp versus 2020.
It has not caught as much as that degree of development. However even with that, we really feel inspired by what we’re seeing. Our mass facet of the enterprise stays double-digit development versus 2019 and is performing properly. And our status enterprise improved within the quarter, and we noticed some actual pockets of development and success.
And I feel it is a mixture of issues, each presently driving the enterprise and as we glance ahead. We proceed to see robust innovation and development from quite a lot of manufacturers, manufacturers throughout the spectrum from Clinique and NARS and Lancôme to NYX and Maybelline. We’re increasing MAC into 200 further shops to have it in over 500 of our shops. We have launched new manufacturers like Bobby Brown, and we’re seeing newness from Laura Mercier, ColourPop, City Decay, Tarte.
And so, it’s — there is a strong pipeline, and it is hitting throughout all value factors. After I have a look at a few of the tendencies that we see out there, and we consider will drive the enterprise into subsequent yr. There’s quite a lot of issues that, once more, encourage us. We see actually a duality of appears to be like that is happening proper now, a mix — many shoppers seeking to a mix of each pure appears to be like and bolder appears to be like.
Appears, the bolder appears to be like that mirror type of this concept of particular person expression, daring colours with innovation, revolutionary formulation, shade enhance that vibrant impactful, significantly across the eye. And that mixture of individuals seeking to do each, pure and bolder colours, is basically constructive. We have talked about skinification for some time, bringing moisturizing advantages or light-weight concealers or different parts that mix these classes. There’s developed utility methods, together with what we type of see as type of subsequent technology of contouring that is been pushed by TikTok and different social media, which we predict is encouraging.
New product kinds, together with long-wear lip. We have been inclusive magnificence for some time, and that is persevering with to drive throughout all various kinds of pores and skin tones, once more, pushed by affect and TikTok. And mascara and lashes is one other area I’ve talked about that we’re seeing innovation and development. A mix of each utilizing extra — with a couple of product or having totally different mascaras for various occasions and totally different instances a day.
So quite a lot of issues which might be coming collectively which might be serving to enhance the class and provides us confidence as we glance ahead. So, as we have a look at each the development impression within the whole class and the pipeline that we’ve got, each of present manufacturers and new manufacturers on the horizon in 2022, we really feel assured within the path forward and are working every single day to drive that enterprise ahead.
Lorraine Hutchinson — Financial institution of America Merrill Lynch — Analyst
Thanks.
Operator
Our subsequent query comes from the road of Simeon Gutman with Morgan Stanley. You could proceed along with your query.
Simeon Gutman — Morgan Stanley — Analyst
Hello, everybody. Pleased holidays. Dave, I need to ask about OLAPLEX. Would you be keen to share with us the way it may stack up relative to a few of the prior massive launches? Perhaps Kylie.
I wrote down Clinique and Lancôme. You additionally thought-about stepping into professional hair shade. After which that is Half 3, however I assume you are not going to provide this product to Goal immediately, however curious how that works.
Dave Kimbell — Chief Government Officer
Effectively, yeah, I am not going to provide you actual, like, actual specifics of how anyone launch would match up with others, aside from to say we’re thrilled about our partnership with OLAPLEX. We’re already in partnership. We have now been for a number of weeks now with our salon service, and that is performing exceptionally properly, exceeding our expectations. Our visitors are thrilled by it.
And importantly, our stylists are thrilled by it. And so, that is gotten out of the gates actually robust. And as we transfer into January to have the ability to launch the product line in all shops, in on-line, a whole assortment of OLAPLEX. As I discussed within the remarks, and you already know it is the No.
1 status haircare model, and so we anticipate that it’ll have a huge impact on our hair enterprise and proceed to help and drive our salon enterprise. So, we’re enthusiastic about it, and we’re placing the distinctive capabilities of Ulta Magnificence behind the launch, an actual 360 advertising program, leveraging our nearly 36 million members and all of the advertising instruments and capabilities and partnership with only a improbable OLAPLEX staff. So, enthusiastic about that launch and searching ahead to taking the following step of that in January. After which so far as different — extending into Goal, we have a look at each model and each alternative, and nothing right here to particularly speak about because it pertains to OLAPLEX.
However Goal is — we’re enthusiastic about, and we’ll proceed to evolve that assortment over time.
Simeon Gutman — Morgan Stanley — Analyst
Thanks.
Operator
Our subsequent query comes from the road of Steve Forbes with Guggenheim Securities. You could proceed along with your query.
Matt Norton — Guggenheim Companions — Analyst
Hey, Matt Norton on for Steve Forbes right here. I wished to ask concerning the Goal partnership. We all know it is early however wished to ask when you guys have seen any categorical variations, any buyer demographic variations, spend for member frequency? Something of that nature can be useful.
Kecia Steelman — Chief Working Officer
Yeah, I am going to take that with one, Matt. That is Kecia. It is actually too early to touch upon the outcomes as we actually need to see just a few buy cycles to substantiate the function of this new addition, the way it performs for our visitors. We take into consideration buy cycle much like what we see with our members who actually sometimes store Ulta Magnificence three to 4 instances a yr.
So, it should take a little bit bit extra time as a result of we simply opened these shops initially of August. Long run, we do consider this partnership goes to actually allow us to broaden our loyalty members, enhance our engagement, finally enhance our spend per member. However backside line, our partnership brings collectively these two powerhouse retailers to actually reimagine status. We’re actually off to a powerful begin.
We’re excited to see what the vacation season brings, however we’ll be capable of replace you after just a few extra buying cycles right here.
Matt Norton — Guggenheim Companions — Analyst
All proper, thanks. Good luck with the vacation interval.
Operator
Our subsequent query comes from the road of Michael Binetti with Credit score Suisse. You could proceed along with your query.
Michael Binetti — Credit score Suisse — Analyst
Hey, guys. Thanks for taking our query right here. Scott, can we speak a little bit bit extra concerning the gross margin? You helped us loads with a few of the drivers there in merch margin, the mounted price leverage, salon leverage and I feel you stated a little bit little bit of an offset from the channel combine headwinds. However you gave some feedback on the merch margin as properly.
However as we consider the place you might be in the present day, are there parts there that you simply’re seeing within the gross margin this yr which might be — that assist you type a brand new baseline to develop off of going ahead? Or would you level us to a few of these parts that you simply suppose it’s good to give again? And I do know you have carried out a variety of work on issues like promotional ranges and merch margin. You simply advised us the revenues will develop, so perhaps there must be some mounted price leverage nonetheless subsequent yr. I am simply questioning, as we take your feedback and attempt to put them out to ’22 if there’s issues we should always take into consideration as offsets there as properly?
Scott Settersten — Chief Monetary Officer
Yeah. I do not suppose there’s something incrementally new, I suppose, I may share. It is actually a mix of all of the variables that we have been speaking about with traders and with the analyst for fairly a while. So, all of it type of will get again to our EFG efforts, proper? So, a variety of nice work has been carried out by our groups over the past couple of years throughout all kinds of price targets throughout our enterprise.
We talked about occupancy prices. We have been speaking about promotional effectiveness. We have been speaking about core end-to-end course of alternatives. We have been speaking about provide chain investments for the longer term.
So, there’s a variety of variables at play right here. We’re, I feel, producing excellent outcomes this yr below very tough circumstances. So, all this good work now’s beginning to bear fruit for us. So, once more, I’d say these are the constructing blocks that we begin with as we began interested by our longer-term plan.
After which as you heard us describe at Analyst Day, now we’re into 2.0, I suppose, I’d name it, with our steady enchancment initiatives, proper? And so, constructing extremely expert assets internally right here that may assist us get after a few of these harder-to-capture advantages. And naturally, a few of the new infrastructure investments that we talked about as properly at Analyst Day, particularly in Challenge SOAR, which is known as a multigenerational alternative for us to reimagine enterprise flows throughout the enterprise and enhance our processes and take a variety of inefficiencies out of the enterprise right here. However once more, a few of that takes time. So, as we’re interested by the following three years or so, EFG core advantages will proceed to ship good price optimization for us within the close to time period, after which CI with SOAR will drive longer-term advantages for us.
So, we nonetheless suppose there’s loads of alternative to maintain working margins in a really wholesome 13% to 14% vary right here over the long run.
Michael Binetti — Credit score Suisse — Analyst
Very encouraging. Thanks, Scott.
Operator
Our subsequent query comes from the road of Mark Astrachan with Stifel. You could proceed along with your query.
Mark Astrachan — Stifel Monetary Corp. — Analyst
Yeah. Thanks, and good afternoon, everybody. I suppose perhaps I may attempt to simply squeeze in a follow-up on Goal after which one other query. Perhaps when you may simply speak about any form of ideas on what shoppers are shopping for there relative to type of expectations, that might be useful.
After which only a greater query, the model homeowners appear to be reporting, what I suppose I’d name, type of stickier D2C gross sales on their very own web site relative actually to pre-pandemic ranges. It could clearly seem to be given your development, these are incremental shoppers to the class. So, I am curious the way you’re interested by coping with the companions as a provider but in addition the shoppers — or I imply, the suppliers — your suppliers, I ought to say, after which how they’re coping with their very own clients and the way type of these two issues interaction in your small business over time? Do you suppose that is incremental? Do you suppose that is doubtlessly one thing that you have to look ahead to going ahead? As a result of, clearly, as I stated, it hasn’t appeared to have an effect to date. Thanks.
Dave Kimbell — Chief Government Officer
Nice. Thanks, Mark. I am going to begin along with your second query after which Kecia can provide any extra shade on the Goal a part of that. However on DTC, that is not new, not new this yr.
That is been DTC. That is been constructing for some time, and so we actually have a look at that as one thing that we’re clearly monitoring and watching but in addition see as a improvement within the aggressive panorama that we are able to handle by way of. And actually, DTC, most of — most of the DTC manufacturers have discovered the significance of bodily retail, and plenty of of them have chosen to associate with Ulta Magnificence. So, begin DTC and are available into Ulta Magnificence.
Ulta Magnificence manufacturers, some bigger manufacturers type of constructing a DTC model presence, which we all know is going on. However we see — our mannequin has been very totally different. The visitor expertise, the mixture of in-store and on-line, our loyalty program, the breadth of merchandise throughout value factors, the depth inside manufacturers and segments and classes, the salon companies, every little thing that we provide. The aggressive differentiation that we’ve got actually separates us from our different retailers and from DTC.
And as I stated, many DTC are partnering with us, whether or not they’re longtime established manufacturers or newer manufacturers, and so we’re watching that panorama. However for us, it is like we predict with any aggressive evolution within the class, we play offense. We do what we do greatest. We alter and adapt, however we glance to drive our enterprise ahead in a extremely differentiated manner, and I feel that is what’s been driving our enterprise to date this yr.
Kecia, any extra shade you need to add on the Goal?
Kecia Steelman — Chief Working Officer
Yeah, completely. What we’re seeing is that they are buying the whole assortment. You must keep in mind, this was a extremely curated assortment of pure SKUs, best-selling gadgets, must-have minis. So, we’re actually happy that they’re buying the whole shop-in-shop, which is what the intention was.
It was not simply to assist them store one class however to provide a style of what Ulta Magnificence has to supply as an entire within the store. So, I might say backside line, they’re actually buying the whole assortment. We like what we’re seeing to date.
Mark Astrachan — Stifel Monetary Corp. — Analyst
Thanks.
Operator
Our subsequent query comes from the road of Omar Saad with Evercore. You could proceed along with your query.
Omar Saad — Evercore ISI — Analyst
Good afternoon. Thanks for taking my query. Nice quarter. Respect all the colour and particularly the type of preliminary have a look at what you suppose comps and gross sales may appear like in 2022.
I actually need to type of get a greater understanding of what underlies that confidence behind what you suppose is a plus 3% to five% type of long-term algorithm on high of what is clearly going to be a really massive quantity this yr. I feel traders count on a few of these franchise. They’ve carried out so properly this yr to provide again a few of these good points subsequent yr. However clearly, you guys do not see it that manner.
Would like to know if it is — whether or not it is reactivating present clients or new clients coming in or the tendencies round product innovation. Would like to get a greater sense of why you count on to develop on high of this nice development subsequent yr. Thanks.
Dave Kimbell — Chief Government Officer
Nice. Omar, thanks for the query. Sure, I might actually — I suppose I might reply that by wanting again at what we shared at Analyst Day and the great nature of our strategic strategy. There is no one factor that offers us confidence.
And sure, we’re having a really robust yr, recovering out of the challenges of 2020 and rising versus 2019. However not at all do we predict that is type of the top of the street. We really see that is us strengthening and main the class restoration. We predict the class itself goes to be wholesome magnificence class in 2022 and past.
And we predict our differentiated mannequin will proceed to guide that class, acquire share, and drive development for us. So, it’s the mixture of an distinctive differentiated assortment. No one has the gathering of merchandise that we’ve got, and we have introduced a variety of newness on this yr, a few of that hitting even late within the yr like OLAPLEX hitting in January that we’ll be driving. And we have a pipeline that I am enthusiastic about going into 2022, and we’ll be sharing that as time is suitable.
So, assortment at all times drives our enterprise. Our loyalty program recovered from 2020, frankly, sooner than we thought. And we predict that is an awesome signal that what we consider what is going on on in 2020 after we took a step again was not as a result of they did not like Ulta, simply the disruption of their lives, they usually’ve proven us that retention is excessive. We’re buying new members.
We’re bringing lapsed members again in, and we see many extra magnificence fanatics to seize — we see that development occurring throughout age teams. You realize, you have heard us speak about our energy with Gen Z as one instance, and we see a variety of alternative to proceed to achieve with our loyalty program. After which frankly, the distinctive mixture of digital and bodily. We consider visitors are displaying us demonstrating with their loyalty and their spend that they actually do favor what all the info says, they usually’re displaying us with their {dollars} they like to buy a mix of bodily and digital.
That is why our e-com really grew in Q3 after such robust development in 2020, whilst our shops present distinctive development versus 2020. So, that have and our continued innovation and evolution throughout each digital and bodily, we consider is the place the buyer goes, and we’re main in that as properly. After which all the opposite initiatives, our program with Goal, in fact, is huge, new packages like Ulta Magnificence UB Media. So, we predict we have a pipeline.
Development will not be what it’s this yr, and that is mirrored. However we will lead this class, and it should take — it will likely be a singular mixture of what makes us differentiated that offers us confidence.
Omar Saad — Evercore ISI — Analyst
Thanks, Dave. Pleased holidays.
Dave Kimbell — Chief Government Officer
Thanks, Omar.
Kiley Rawlins — Vice President of Investor Relations
We have now time for another query, please.
Operator
Our final query comes from the road of Rupesh Parikh with Oppenheimer. You could proceed along with your query.
Rupesh Parikh — Oppenheimer & Co. — Analyst
Good afternoon. Thanks for taking my query. So, Scott, I suppose I simply wished for This fall, simply dig into extra the way you’re interested by working margins. So, perhaps when you can simply speak extra concerning the places and takes on the gross margin and SG&A line.
Scott Settersten — Chief Monetary Officer
Certain. Thanks for the query. So, massive image, working margin versus 2020, it should be flattish within the fourth quarter. And versus 2019, we might see some deleverage in working margin.
Once more, each of these may have a mixture of gross margin enlargement and SG&A deleverage. So, gross margin goodness coming from all of the issues we have talked about this yr, mounted retailer price leverage, merchandise margin enhancements versus 2020. Channel combine is a profit for us versus final yr. Channel combine, extra of a headwind versus 2019.
So, gross margin leverage for each years. On the SG&A line, once more, deleverage for each years. 2020, not as vital as it’s versus 2019. Once more, 2020, in step with all of the issues we have been speaking about all yr with the addition of incentive compensation, I suppose I’d say, is extra vital within the fourth quarter than earlier within the yr.
After which after we examine it again to 2019, retailer labor and wages, not solely hours, however wage charges are up considerably versus 2019. Incentive comp, once more, is a much bigger impression versus 2019. When you keep in mind, 2019, we have been wanting our targets in 2021. It’s kind of of a distinct story after which advertising expense as properly.
Once more, extra funding versus 2019 after we have been type of battening down the hatches, I suppose I’d say, in a more durable setting. And this yr, we’re making the most of tailwinds and investing in market consciousness actions to, once more, seize extra market share over the long run. So, that is what I’d say a brief story. Once more, tremendous excited and pleased with the outcomes to date this yr by way of Q3 and really inspired and excited concerning the kickoff to the fourth quarter.
Operator
Women and gents, we’ve got reached the top of in the present day’s question-and-answer session. I want to flip this name again over to Mr. Dave Kimbell for closing remarks.
Dave Kimbell — Chief Government Officer
Nice. Effectively, thanks for becoming a member of us in the present day, and I need to thank all of our Ulta Magnificence associates throughout our shops, distribution facilities, and company workplaces who’re working onerous to make sure we ship an excellent visitor expertise this vacation season and who’re dedicated to taking excellent care of our visitors and one another each single day. As I stated prior to now, we’ve got the very best staff in retail, and I’m so proud to guide this nice staff. We hope you all have a secure and joyous vacation season, and we sit up for talking to all of you once more in March after we report our fourth quarter and full-year outcomes.
Have an awesome night.
Operator
[Operator signoff]
Period: 61 minutes
Name members:
Kiley Rawlins — Vice President of Investor Relations
Dave Kimbell — Chief Government Officer
Scott Settersten — Chief Monetary Officer
Michael Lasser — UBS — Analyst
Lorraine Hutchinson — Financial institution of America Merrill Lynch — Analyst
Simeon Gutman — Morgan Stanley — Analyst
Matt Norton — Guggenheim Companions — Analyst
Kecia Steelman — Chief Working Officer
Michael Binetti — Credit score Suisse — Analyst
Mark Astrachan — Stifel Monetary Corp. — Analyst
Omar Saad — Evercore ISI — Analyst
Rupesh Parikh — Oppenheimer & Co. — Analyst
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