Ulta Beauty Inc. (ULTA) Q2 2020 Earnings Call Transcript

Ulta Beauty Inc  (NASDAQ: ULTA) Q2 2020 earnings call dated Aug. 27, 2020

Corporate Participants:

Kiley Rawlins — Vice President, Investor Relations

Mary Dillon — Chief Executive Officer

Scott Settersten — Chief Financial Officer, Treasurer and Assistant Secretary

David Kimbell — President

Analysts:

Adrienne Yih — Barclays — Analyst

Lauren Frasch — Wells Fargo — Analyst

Steven Forbes — Guggenheim Securities — Analyst

Michael Binetti — Credit Suisse — Analyst

Paul Trussell — Deutsche Bank — Analyst

Simeon Gutman — Morgan Stanley — Analyst

Stephanie Wissink — Jefferies & Company, Inc. — Analyst

Presentation:

Operator

Greetings and welcome to the Ulta Beauty Second Quarter 2020 Earnings results Conference Call. [Operator Instructions] As a reminder this conference is being recorded. It is now my pleasure to introduce your host Ms. Kiley Rawlins, Vice President, Investor Relations. Please proceed.

Kiley Rawlins — Vice President, Investor Relations

Thank you Diego, Good afternoon and thank you for joining us today for our discussion of Ulta Beauty’s results for the second quarter of fiscal 2020. Hosting today’s call are Mary Dillon, Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Dave Kimbell, President, will join us for the Q&A session. 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 27, 2020. We have no obligation to update or revise our forward-looking statements, except as required by law, and you should not expect us to do so. In today’s comments we shall discuss certain non-GAAP financial measures including adjusted diluted EPS, which has been presented to reflect our view of our ongoing operations by adjusting for store impairment charges and cost associated with the permanent closures of 19 stores.

A reconciliation of these measures to the corresponding GAAP measures can be found in our earnings release, which is available on the investor relation section of our website at www.ulta.com. We’ll begin this afternoon with prepared remarks from Mary and Scott. Following our prepared comments, we’ll open the call up for questions. To allow us to accommodate as many questions as possible during the hour scheduled for this call, we ask that you please limit your time to one question and one follow up question. To ask a second question, we would ask that you re-queue. As always, the IR team will be available for any follow-up questions after the call.

Now, I’d like to turn the call over to Mary. Mary?

Mary Dillon — Chief Executive Officer

Thank you Kiley, and good afternoon everyone. Let’s start with an overview of where we are today. First I will say that since the beginning of the pandemic we’ve navigated through the crisis with our associates and guests at the center of every decision made. I’m really proud of how our teams have responded to this challenging period and I want to thank my leadership team and all of our Ulta Beauty associates especially our store and distribution center associates for their agility, creativity and commitment to serving our guests and taking care of each other during this unprecedented period. On our last earnings call we were in the early stages of our reopening process.

During the second quarter we reopened stores for retail, expanded curbside capabilities to nearly all stores and began with launching select services, all with a thoughtful consideration for the safety of our Associates and guests balanced with our desire to reopen quickly. By the end of June more than 90% of our stores were open for retail and by mid-July our reopening process was complete. Reflecting local regulations and guidance, the resumption of our service offerings has been on a more measured pace. Today, salon services are available in about 88% of stores and brow services are offered in about 85% of the fleet. We’ve not resumed skin or makeup services but we’re working closely with medical experts to ensure we have strong safety protocols in place when it is appropriate to resume these services.

In this new normal we’re operating Ulta Beauty stores with new Shop Safe standards, limited physical capacity to accommodate social distancing and reduced operating hours. To-date, we have reactivated approximately 17,000 of our furloughed associates who are able to return to work. We’re committed to maintaining a safe experience for associates and our guests. As different markets manage fluctuating COVID-19 cases, we will continue to monitor guidance from government and health authorities as well as local transmission levels to determine if we need to modify our shopping options or revert to closures in the near-term. Now, turning to our second quarter results; for the second quarter total net sales were $1.2 billion, comp sales declined 26.7% and GAAP diluted EPS was $0.14 per share.

Excluding the impact of impairment charges and costs associated with the previously announced store closures, adjusted diluted EPS was $0.73 per share. Comp sales improved significantly throughout the quarter from down 37% in early May as we began reopening stores to down only 10% in July after most of the stores have reopened. Sales trends have continued to improve with comps down in mid single-digit range for the first three weeks of August. We’re excited about the positive signals we’re seeing from guests. However, we believe it will take some time to fully return to pre-COVID levels and expect demand will continue to be suppressed for the rest of the year given the likely ongoing disruptions we’ll see as we continue to live with the realities of COVID-19 whether the continuation of working from home, managing the complexities of educating our children, the ongoing need for social distancing, mask wearing and need to avoid large gatherings or coping with near-term employment and economic uncertainties.

Longer term, we’re confident beauty will recover and thrive given the strong emotional connection consumers have with the category. We know beauty enthusiasts remain passionate about beauty and Ulta Beauty. We see it through the engagement in our social channels and while the connection with beauty has not diminished how consumers engage with the category is changing. Health and safety concerns have led to fewer physical shopping trips but higher average ticket and while we’ve seen greater adoption of online shopping, we’re really encouraged to see guests coming back to stores as well. From channel perspective, e-commerce achieved record growth in the quarter delivering sales growth in excess of 200%. Curbside pickup and buy online, pick up in store were very strong during the quarter totaling about 20% of total e-commerce orders as guests embraced this limited touch, beauty-to-go option.

Despite reducing advertising and promotional activity during the quarter we maintained our unaided awareness in the mid 50% range and increased our aided awareness to 94% and our focus on driving meaningful connection with our guests through relevant content and inspirational brand messaging through our digital and social channels is having an impact. Our brand health is very strong with improvements in considerations, connections, integrity and advocacy reflecting our response to the safety and social concerns of our guests. Building our brand’s affinity during this tumultuous time will continue to pay dividends over the long-term. Now, turning to our performance by category; during the second quarter we increase our market share across most major prestige beauty categories and we saw an improving trend in our share of mass beauty as we reopened stores.

Reflecting our paced reopening process, comp sales declined across all major categories for the full quarter. As stores reopened, sales trends improved with skincare, fragrance, bath and PCA delivering double-digit comp growth in July. The makeup category continues to be challenged due to shifts in consumer behavior and limited newness in innovation in the category. Even with these headwinds some subcategories of makeup performed better than others including lashes, brow and eye. Sales and services decreased for the quarter reflecting our measured reactivation of hair and brow services and limited capacity due to social distancing. As sales — as salons reopened we saw significant increases in average ticket, driven by pent up demand particularly for color and texture services.

Importantly, we’re seeing strong double-digit growth in rebooking rates as our stylists deliver a safe and enjoyable experience and proactively focus on scheduling future visits. The number of active members in our Ultamate Rewards loyalty program decreased by 4% compared to the second quarter of last year to 31.9 million members. As a reminder, active members are members who have shopped with us at least once in the last 12 months. During the quarter, we saw modest growth in our diamond and platinum membership levels. However, new member growth and retention rates were pressured due to store closures and lower levels of marketing and promotional activity. New member acquisition through our digital channels continued to expand at healthy rate and we continue to see previously in-store only members engage with us online with greater frequency.

Omni-channel members are our most engaged and most productive members historically spending three times more per year that store-only guests. So we-re pleased to see that omni-channel guests grew to 21% of our members in the second quarter, nearly double the penetration in the same quarter last year and online only members represented 7.5% of our members, 2.5 times the penetration last year. With our fleet open and trends improving we’re shifting our attention to strengthening the business in this new normal and expanding our market share in the second half of the year while also setting the foundation for profitable growth in 2021 and beyond. On the last earnings call we introduced five strategic priorities where we’re accelerating efforts to expand our market share gains and extend our competitive advantages.

I would like to give you an update on our progress in each of these areas. But first I’d like to share our perspective on racial equality, inclusion and diversity. As a priority and a value this is not new for us but certainly our focus has been sharpened and elevated by the recent awakening in our country to the forces of systemic racism and the important dialogue and actions that have resulted. At Ulta Beauty diversity and inclusion have always been core values, an important part of who we are. In the seven years I have been CEO we have worked hard to represent the wonderful diversity of our country and how we show up as a brand and as a retailer in everything we do from our marketing communications to our brand partnerships and our team. I’m proud that our board is 18% black and more than half are women.

Our executive team is 13% black and 50% women and our Ulta Beauty team overall includes 47% people of color and 92% of our associates are women. That said there is still much more to do. Today more than ever we’re working to accelerate our leadership in this space. We’re using our social channels to amplify black voices and beauty and we’re working to grow our roster of black owned brand. We recognize this is a journey but we’re firmly committed to creating an inclusive experience for our guests, building a diverse representative workforce and serving as an authentic leader of diversity and inclusion in corporate America. Let me now recap the progress we’re making on our five strategic priorities. Our first priority is to expand our omni-channel business to more deeply connect with guests across channels and unlock the potential of our combined physical and digital footprint.

This is not a new priority for us. We’ve been on this journey for several years and we’ve made progress. However, the pandemic has accelerated consumer engagement and desire for online and contactless shopping and we believe our e-commerce penetration will remain meaningfully higher than pre-COVID-19 levels. Our customer insights and member data show many of our members prefer to transact in store where they can discover, interact with products and other beauty enthusiasts, but we also know our members engage online to research, learn and discover new products. As the pandemic has accelerated the adoption of these digital channels, we’re expanding our investments in digital innovation with enhancements to the Ulta Beauty app and ulta.com to create more personalized and seamless shopping experiences.

We’ve also continued to enhance and expand our ability to provide members with personalized recommendations based on insights from our loyalty data. Today through the Ulta Beauty app and on ulta.com we provide members with unique recommendations across a variety of experiences including new products, product space and category preferences, reminders for replenishment, our hand-picked items all powered by our internal AI platform. We also recently launched app only offers and exclusives to drive member app engagement and we’ve introduced sponsored ads to allow our brand partners to influence specific product placements. We continue to drive innovation to make it easier for guests to shop with Ulta Beauty. In July we began rolling out our new service booking tool in the app and on ulta.com, which enables guests to easily book or reschedule salon, brow, and other service appointments.

More than 1,000 stores are actively using this new tool and the feedback from guests and stylists has been great. We’re also testing new notification processes to expedite the curbside pickup experience with the goal of having a more seamless digital experience in place for holiday. As we work to enhance the digital experience for guests we’ve launched a guest service chat bot on ulta.com for ease, convenience and speed in resolving basic guest questions and we launched a new guest service customer engagement platform that allows our call center team to seamlessly respond to guest needs across a variety of content channels and across internal platforms. We continue to invest in our fulfillment capacity to support a larger e-commerce business.

As discussed in the last earnings call we pulled forward the opening of our Jacksonville fast fulfillment center and we’re on track to be operational to support higher levels of e-commerce demand this holiday season. In addition, we’re expanding our ship-from-store program to 100 stores to increase shipping capacity and improve speed to guest while also leveraging store labor and inventory. Longer term, we’ll continue to evaluate infrastructure to determine how we can leverage our supply chain network and store footprint to support a growing omni-channel business. We’re actively reviewing our network to identify opportunities to improve product flow from brand to guest while enhancing inventory productivity and guest service levels.

Similarly, we’re looking at our store foot print through an omni-channel lens to ensure we’re strategically positioned to optimize share and profitability opportunities in every market. Moving on to our second strategic priority, we are re-imagining guest experience and discovery. We know guests still want the opportunity to test and play but we also recognize the increased importance of safety. As we think about supporting discovery in the new channel, we’re leveraging digital tools like GLAMlab, our virtual try on tool. Since the COVID-19 crisis began guest engagement with the tool has increased meaningfully with product use in the second quarter increasing more than 150% from the first quarter.

In addition, in the second quarter we expanded our virtual try on capabilities to include hair color, false lashes and the Benefit Brow Bar. While these are newer capabilities our guests are actively playing and engaging with these innovative tools. Longer-term we intent to support discovery trial and play by offering a combination of limited safe product testing with an expanded selection of single use samples and seamless digital innovation like GLAMlab and 3D printing. In addition, we’re re-tooling our approach to in-store education, events and services and reimagining our fixtures and visual merchandising with a focus on safety, flexibility, and cost effectiveness. We know human connection and the physical shopping experience are important to be beauty enthusiasts.

So we’re rethinking the whole store experience from BOPUS and curbside to the flow and feel of the store and the role of the associate as trusted guide. Our vision is to continue to be the most loved destination in Beauty by reimagining the end-to-end guest experience at Ulta Beauty, and we’ll share more about these efforts on future calls. Turning now to our third area of strategic focus to drive winning category strategies and engage into like Beauty enthusiasts with a curated, reverent and unique beauty assortment. Newness and product innovation drive beauty category growth and while we’ve successfully launched newness online this year many of our planned brand launches and expansions in stores had been necessarily delayed because of store closures.

With the reopening process complete, our store teams are working hard to deliver more exciting newness across all categories. Clean beauty continues to be a growing area of interest among our guests. Last month we announced the launch of Conscious Beauty at Ultra Beauty, an initiative intended to help guests find brands and products that reflect their personal values. Through this initiative we will certify brands across five key pillars, clean ingredients, cruelty free, vegan, sustainable packaging and positive impact. Our goal is to give guests access to more choices, guide them along their journey and celebrate the brands and products they’re aligned with this mission. Conscious Beauty at Ulta Beauty will launch this fall in all stores, online at ulta.com and on our app.

In conjunction with this launch we established sustainable packaging goals with a pledge to ensure 50% of all packaging sold will be made from recycled or bio-source materials or will be recyclable or refillable by 2025. As part of this effort, we’ll pilot a circular shopping experience with Loop, a reusable packaging pioneer in early ’21. COVID-19 has amplified many of the category trends we’ve experienced over the last year most notably the emergence of self care has fueled consumer interest in skincare and hair. We’re accelerating our focus in these areas to drive market share growth. In skincare, our merchant teams have made terrific progress in expanding our assortment and improving the profitability of this important growth category.

We continue to expand our brand portfolio across all price points including brands like Beekman 1802, L’Occitane, GLAMGLOW and expanding brands like The Ordinary, Urban Skin Rx, and e.l.f. skincare. In addition, we’re highlighting a number of new skincare brands from our spot platform including Kinship, UpCircle and Fifth & Root. To support these launches, we’re dedicating more space for skincare in prominent areas of sales floor and at ulta.com and next year we plan to implement more holistic changes to the layout in select new stores which allocates more prominence and easy to navigate space for skin, more intuitive adjacencies and space in front of the store for curated events. In addition to product newness, we’re investing in digital innovation to help our guests identify and address skincare concerns with the launch of new skin analysis tool in the Ulta Beauty app.

This new skin analysis tool uses augmented reality technology and AI to assess skincare needs and offer personalized recommendations in skincare tests. In hair, we’re expanding our focus in texture and color with introduction of brands like Arctic Fox, Kreyol Essence, and the expansion of brands like PATTERN and Curlsmith. To support these launches we’ve increased our storytelling through our marketing vehicles, elevated the visibility of our stylists via social media and re-launched our salon takeovers to increase visibility to key brands. Makeup remains our largest category and we remain confident in the long term opportunity. But changes in consumer behavior, a reduction in wearing occasions and events and a delay of new product innovation coming to market will likely continue to challenge growth in the category in the near term.

Makeup is still an important profitable category for us and we’re prioritizing newness in high growth areas including Laura Mercier, Pixi and the newly launched KVD Vegan Beauty while also working to improve the space productivity of prestige color and prestige skin categories through recent Planogram realignment. Moving onto our fourth strategic priority, we will continue to drive innovation in the Ultamate Rewards program in meaningful ways, personalizing experience across touch points and creating stronger connections with our members. We have a large differentiated loyalty program with strong member engagement. Recent store closures and disruptions will constrain member growth this year but we believe in long-term opportunity to expand our loyalty program.

To increase membership we’re focused on converting new members both online and in store and reengaging with members we haven’t seen in a while. As consumers shift increasingly to online shopping, we’re seeing more nonmembers engaging with us online. Since the pandemic began we’ve seen more than 2 million online transactions from nonmembers more than four times the number over the same period a year ago. To increase our conversion of these online guests we’re enhancing our communications on ulta.com because we can resend your email and we are proactively communicating and promoting the value of Ultamate Rewards with these guests. To reenergize our in-store efforts, we provided additional associate training during store closures and the stores that have reopened we’ve seen in-store member acquisition rates rebound at higher levels than pre-COVID.

With the reopening process complete, we’re actively implementing reengagement strategy starting with member appreciation month in August where we celebrated our members walking them back to Ulta Beauty with new bonus points offers, incentives for app downloads and exclusive app offers. In addition to communicating directly with our members, we’ve highlighted these offers across all of our digital channels including ulta.com to raise visibility and awareness of Ultamate Rewards Program. In addition, we’re using our customer insights and predicative tools to create relevant real-time anticipatory interactions across channels to reactivate and engage targeted membership segments and to drive greater loyalty. And finally, a fifth area of focus is to drive strategic holistic cost structure optimization.

As we’ve discussed previously, we’ve made progress through our efficiency for growth or EFG efforts to improve our merchandising effectiveness and enhance core processes across our real estate and supply chain operations. But we recognize the rapid growth of e-commerce and increasing external cost pressures combined with the need to build critical capabilities to support our growth strategies all require us to evolve our thinking about how we operate. So in addition to the near-term actions we’re taking to stabilize and recover the business at the same time we’re also looking at opportunities to optimize our cost structure. A few examples include store optimization. We have a strong profitable store fleet and as with any portfolio there’s always top and bottom performers.

Last month we announced our decision to permanently close 19 stores this year to strengthen our overall portfolio. In addition, we explored new store growth to manage operational risk versus this year. The role of physical retail and beauty remains crucial to the shopping experience and while we know the role of e-commerce will continue to grow, we also continue to believe we can ultimately operate between 1,500 to 1,700 stores in the U.S. As we plan growth beyond this year we will seek to balance the opportunity for lower rents with the opportunity to upgrade existing locations. Second example, promotional efficiency; we continue to refine and strengthen our promotional strategies. While we will continue to lean into strategic events to drive market share, we’re moderating or eliminating less profitable or less strategic promotion. For example, this summer we have eliminated our Jumbo Love Leader event replacing it with a more focused promotional event for hair care.

We limited the number of participating brands, reduced the average discount rate, and eliminated additional marketing coupons. These changes delivered significantly more profit despite negatively impacting the comp in the hair category, and our core business was stronger during and after the event. Another example, store labor model; we’re implementing changes to our store management structure. This fall we will eliminate the store manager and prestige manager roles and create a new single service manager role responsible for services, events in prestige retail. This change will create a stronger linkage between services and product and provide our guests with better customer service and expertise. It will also result in a more cost efficient store labor model.

Now, one additional comment about our labor model, in April we furloughed 33,000 associates and to-date we brought back about 17,000 associates. Given our reduced operating hours we know not all of our part-time associates will be able to work the shifts available given personal needs and availability. We also want to be realistic about capacity constraints, service limitations and the likelihood that demand will take time to recover. As such, not all of our furloughed associates will likely return to Ulta Beauty this year. These are a few examples that we’re taking to adjust our cost structure for the new environment. We are also looking at additional opportunities across the enterprise to optimize our cost structure while also building new capabilities to support our competitive advantage and our future growth.

So in closing, we believe the near-term environment will continue to be dynamic but I’m confident our team can successfully navigate the challenges. In longer term, I remain optimistic about the growth opportunity for the Beauty category and for Ulta Beauty. We have a strong and differentiated business model with diversity across categories and price points and outstanding service offerings. We’re actively evolving and investing to extend our brand leadership and I remain confident that Ulta Beauty will continue to innovate and lead, capture market share and drive profitable growth as we continue to be the most admired beauty retailer.

And now, I’ll turn the call over to Scott for a discussion of the financial results. Scott?

Questions and Answers:

 

Operator

Thank you. [Operator Instructions] Our first question comes from Adrienne Yih with Barclays. Please state your question.

Adrienne Yih — Barclays — Analyst

Good afternoon. Thank you for taking my question and nice to see the progress. Mary, I wanted to get back to the comment you made on newness is sort of coming through nontraditional brand but I want to go back to given that prestige brands are contending with contracting mall-based distribution channel are you seeing either broader SKU assortment from existing prestige brands? And is there an opportunity to expand beyond fragrance into some brands like Chanel or Dior? And then my follow-up for Scott just a clarification on the negative low-double-digit to negative mid-teen; if you’re running negative mid-single-digit now to beginning of the third quarter should we expect third quarter to be stronger than the fourth quarter with all the uncertainties or maybe the two of them similar in nature from a year-on-year standpoint? Thank you very much?

Mary Dillon — Chief Executive Officer

So Adrienne, thank you for your questions and maybe I’ll start with the second one first because yeah, so I think right directionally we’d say we’re expecting Q3 to be somewhat better than Q4. There is a lot of uncertainty as everybody knows but we have got resets and launches coming in Q3. I think holiday, it’s just something we’re all a little more cautious about given new ways that people are going to think about shopping and hours available, etc, so we’re thinking directionally that way.

Scott Settersten — Chief Financial Officer, Treasurer and Assistant Secretary

Yeah and as far as the consequences is concerned, I would just point maybe to looking at the promotional calendar, I know a lot of you guys track this stuff very closely so you can schedule out what types of things we did last year over the course of the third and fourth quarters. And with the background color being we’re trying to pull back on some of those things, right, we talked about in our comments. So overall directionally I would say the fourth quarter probably slightly weaker on balance just because of the volume of sales there and some of the promotional activity that historically have taken place in the fourth quarter overall.

Mary Dillon — Chief Executive Officer

And Dave would you take the first part of the question, thank you?

David Kimbell — President

Yeah, absolutely, as it relates to your question on assortment and evolution of that, for sure, we’re continuing to see disruption in the prestige marketplace and that’s something that we’ve seen for a while and a dynamic that we feel like we have been taken advantage of and continuing grow share across all categories in the prestige side of the business. And that comes from all different types of brands certainly, exclusive and new brands like Kiehl some of our established independent brands and brands like Tarte, and Urban Decay and Too Faced where we’ve launched exclusive innovation across those brands. And on the more prestige luxury side we have made specific advancements on that. You asked specifically about Chanel and yes, we have a strong fragrance business but we have rolled out in the Chanel Beaute line a small number of stores with expanded portfolio in the makeup side. So we see continued opportunity across all aspects of that business to capture more share, expand our assortment and meet our guest needs in multiple ways.

Operator

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

Lauren Frasch — Wells Fargo — Analyst

Hi everyone. This is Lauren Frasch on for Ike. Thanks for taking our question. Given the massive acceleration in e-commerce that we’ve seen in 2020, could you talk a bit about the current margin profile of e-com initiatives and any initiatives you might be taking on to improve that? And then as a follow-up, how does that new acceleration in online penetration play into your vision of longer term margins for the overall business? Thank you.

Scott Settersten — Chief Financial Officer, Treasurer and Assistant Secretary

Yeah, that’s a broad question, but let me first start out by saying I guess reiterating how proud we are of our teams, the e-com digital team, the distribution centers, our store associates and all the support people that work with them. I mean, it was a spectacular outcome to deliver a comp like that, 200% year-over-year expansion just really a great outcome overall with the thought being that’s the average for the quarter. At some point during the quarter it was higher than that, right, higher than 200%. So I’m very proud of the outcomes there. When we think about over time the e-commerce business, we haven’t been shy about sharing that the challenges we have with the rate. I mean, everybody is very aware of that overall.

So when we think about what we’re trying to balance is rate versus dollars and speed versus cost and we’ve talked to investors in recent years about the heavy investments like we have been in to support that part of our business and it’s really worked to our advantage now, right, in this time of crisis and change pivot point with consumers. So, very happy what we have been doing in recent years to support that business and obviously that’s going to be the trend for the future as well so we’ll continue to be focused there. When we think about the margin profile overall in the future again, our historical guide was that it was going to be 20 basis point to 40 basis point headwind. Obviously, that’s not what it is in this time and space. We’re happy with the sequential improvement we saw from the first quarter, right, and we expect that to continue to moderate sequentially as we go deeper into 2020.

And we’re thinking and working collectively on other levers we can pull to try to mitigate some of that headwind specifically in the e-commerce space so things like BOPIS we’ve been talking about and curbside now that we have that available to us and again those are higher ticket transactions typically and better margin profile overall. Our DCs are operating more efficiently now so that helps offset some of that headwind and then we’re thinking about other parts of the business, right? Mary pointed to cost optimization so it’s not just a e-commerce question is more of what else are we looking at overall for the enterprise to help optimize the overall margin profile of the business not just the e-com piece peace of it. So, the entire team is focused on that and we are doing a lot of work now framing up 2021 and how we deliver the best overall financial result there and start marching back to healthier operating margins.

Operator

Thank you. Our next question comes from Steven Forbes with Guggenheim Securities. Please state your question.

Steven Forbes — Guggenheim Securities — Analyst

Good evening. Mary, maybe a question for you, you mentioned in the prepared remarks about the doubling of the omni-channel penetration rate among the members. Curious if you could just discuss how the behavior of these new omni-channel members has compared right to the legacy group? Are they repeating faster, shopping more categories or that sort of thing like potential consolidating their spend, right, with Ulta just given the consolidation pieces. Would love to hear how you sort of think about that doubling this quarter?

Mary Dillon — Chief Executive Officer

Yeah, well, it’s too early to really kind of parse out the exact dynamics of their behavior, but we like where it’s heading. I mean, omni-channel guests, I said this earlier, I think you probably know this, but they’re our most engaged guests and they spend three times historically as much as somebody who’s shopping in store only. So, this is sort of a forced migration and more folks to get it into this and so while you can debate sort of the margin impacts of e-com we know the total value of this customer is quite significantly strong because most of our guests historically have started as store only and then started to shop online with us and as we saw their spend triple, they basically were keeping pretty similar what they were buying in store and just adding incrementally online and the categories tended to be similar.

So, we would expect a similar behavior except we’ve got a lot of folks now who started first online, right, and so and as we opened up our stores and saw people coming back, I mean certainly traffic isn’t where it was but we’re pleased with the pace of people coming back to stores, and I think it just kind of continues to support that premise that beauty enthusiasts like the idea of shopping both physically and digitally. They get good things out of both of those things, so I mentioned this also as we saw a lot of new people shopping with us who weren’t Rewards members, we also have the opportunity now that we have their e-mail to convert them to the loyalty program.

So, I think this is all good. I mean, the thing that swift increase that happened showed that A, we were in the right place from an e-commerce perspective. I mean, the e-commerce business didn’t just happen on its own. Our team was doing a great job of connecting with guests and social and digital channels to drive — make sure we’re driving awareness and staying top of mind at a time that there was a lot of things on people’s minds, right, so we pivoted out of what we would have done traditionally and really focus on understanding where people were in terms of self care and things like that. So, it was strategically I think a great pivot and we will continue to watch it closely, but we think it’s a good thing for our business.

Operator

Thank you. Our next question comes from Michael Binetti with Credit Suisse. Please state your question.

Michael Binetti — Credit Suisse — Analyst

Hey guys, thanks for taking our question. Nice job on the quarter. I guess, maybe I found it a little — I found the plan pull back on promotions in the back half somewhat counterintuitive. I think there’s obviously an unprecedented numbers of department stores that have been closing around you and it seems to me that that’s a really good opportunity for you guys to grab market share, you seem like [Indecipherable] for that share. I mean, would you be willing to walk away from a new customer opportunity if you do see a path to that customer as those doors start to close in the back half? And then go ahead, go ahead.

Mary Dillon — Chief Executive Officer

Oh, you were going to ask a two part question, okay. Let me just start with that one, maybe Dave you can add to it but I’d say, high level of course, we’re focused on driving market share gains and there’s share opportunities out there. Having said that, all we’re doing is say, let’s be as targeted and strategic as we can about how to do that. We are — through this entire pandemic, we’ve been gaining share in prestige beauty and while and so we know that we are competing well even with the somewhat less promotional kind of cadence than we would have had at that time. So, the idea is to still compete at the peak times at things like holiday, new strategic promotions that we know work really well for us and just be more efficient with how we do this. And certainly if we see opportunities to get more aggressive or need to, we will. I mean we’re not — we understand that there’s an opportunity to convert especially as we convert people into our loyalty programs and that becomes very sticky. So, I think it’s a good balanced way to think about this, but we’re obviously keeping a close eye on it. Is there anything you’d add to that Dave that I didn’t hit on?

David Kimbell — President

Just to reinforce yeah, this idea of just being much more strategic in our approach towards promotional optimization, but we are not all-in eliminating all promotions, in fact starting this Sunday will be 21 days of Beauty one of our biggest promotional most tragic events of the year and it’s a good example of a program — of an event that it is promotional but it has a strategic role in driving what we call mass migration, introducing our guests many times for the first time to a new prestige brand. So, focusing on activities like that, optimizing programs like our loyalty program, personalization efforts at more pinpoint and direct target — direct promotional activity specifically to people that we know respond to it will just allow us to be more efficient with that spend and ultimately be more effective in the marketplace.

Michael Binetti — Credit Suisse — Analyst

Got you. If I could ask you a follow up. I mean, how much to connect that to the progression of margins as you think multi-year. I think what I heard today was incremental, I heard more efficient promotions, more efficient labor models, you have Jacksonville coming back online so or coming online again, so e-com should be more efficient. I think you talked about negotiations, other key initiatives. What are the headwinds we should about going the offset some margins as we try and orient ourselves, I guess we’re looking at 2019 since we’re trying to forget about 2020 for some more reasons here?

Scott Settersten — Chief Financial Officer, Treasurer and Assistant Secretary

Yeah, so when we — I mean we’re are in the throes of it right now Michael, looking at 2021 operating plan and looking at new embedded cost headwinds to the business overall so some of the things we talked about historically around channel mix headwinds and store payroll headwinds and some new like PP&E cost implications and how long that might be with us, so there is a lot of ores in the water so to speak right now, the team is focused on it again, we’re focused on overall operating margins, trying to squeeze out the best overall financial results and we’re focused on double digit operating margins over the longer term, we still think that’s kind of the minimum threshold for this business, we got healthy product margins as part of the base of our operating model and there are still lots of levers for us to pull on and we’re just making decisions now, which ones we’re going to push and pull for the next year. So, we’ll have more to say on that as we get further along this year.

Operator

Thank you. Our next question comes from Paul Trussell with Deutsche Bank. Please state your question.

Paul Trussell — Deutsche Bank — Analyst

Good afternoon and good job in the quarter. Wanted to ask about stores, you mentioned that as stores reopened online still remained very strong up triple digits. How should we think about the productivity and the profitability of your store fleet and while your long term target remains intact, do you view the cadence of store openings on an annual basis, potentially any different going forward, both in the U.S. and your approach to opening in Canada.

Scott Settersten — Chief Financial Officer, Treasurer and Assistant Secretary

Oh, I guess I will start. So, just that the basic runway on the store build out program so we pulled back we moderated this year for obvious reasons right, so your in that 30 new store opening range for 2020 and as we stated in our remarks next year the way were looking at it now because again your working on leases years in advance right. Working with landlord partners, lining up the right kind of space and I can show you got the right co-tenancy mix there so these are down the road kind of decisions, so we feel good about at least 30 new stores for next year and hopefully maybe more depending on how some of the pandemic impacts other retailers and our centers across the US right now.

So, we still feel good again I think we’ve mentioned in the remarks that we’re looking at the optimal footprint right, so the fleet we have now versus the fleet we would want if we had a white sheet of paper to work it and then layering on top of that the omni-channel sales opportunity for us for the long term and just making sure we got the right number of stores with the right incremental digital sales offering as well. So, again looking at it today, we still feel like 1,500 to 1,700 is a good range. I mean, that’s definitely something we feel comfortable with, and that we just want to make sure that it’s optimal right, so we’re in the midst of that work now and we’ll have more to share on that later in the year.

Operator

Thank you. Our next question comes from Simeon Gutman with Morgan Stanley. Please state your question.

Simeon Gutman — Morgan Stanley — Analyst

Hi everyone, hope your good. My question and follow up and one is financial related. First, can you talk about the fixed cost per store, they sound like they’re going lower, are you able to quantify so we can understand, leverage or even deleverage going forward? And then related to something that was asked earlier, Scott, the 20 basis points to 40 basis points you mentioned in e-commerce or as penetration went up margins got hit, was that number inclusive of what was happening to the store-only business and that was the overall result for the business or was that a channel exclusive comment that as that mix to that channel increased that was the pure impact to the overall business? Hopefully that makes sense.

Scott Settersten — Chief Financial Officer, Treasurer and Assistant Secretary

Yeah, so we are thinking about the second part of your question Simeon, but as far as the first question there, so fixed cost overall is something that we have been focused on for a couple of years already. So when we talked about efficiencies for growth or EFG real estate is a core pillar in the work that we do there, so again thinking about the whole portfolio when we were dealing with landlords, not just individual stores, and looking further out into future around renewals and opportunities to reposition stores or renegotiate overall economics in those stores, so that’s been underway now for a period of time. And so we’ve got embedded process in the business and we are feeling really good about what we are doing. So COVID-19 just kind of put that on steroids here in the near-term.

So again you’ve seen other retailers talking about challenges they have had, so we are doing a lot of the same things behind the scenes. We feel like we’ve got a better process. We have got strong relationships. We are a retailer of choice for many landlords, the beauty category being a healthy one that add to the mix and we drive a lot of traffic for centers. So we feel like we are in a good position to make sure we get the best overall economic deals. That’s something that will be part of our long-term plan. We are getting benefits now and we will continue to scale that up over the long-term. As far as the 20 basis points to 40 basis points headwind in our historical guidance, I mean that’s again, that — the page has been turned on that here over the last call of three to five months.

And we’ve been reacting and leveraging and trying to optimize the overall impact there. I think I mentioned earlier DC throughput efficiencies are getting better as the business scales up you know two and three times. We are getting efficiencies out of the network overall. I mean there are headwinds. We you’ve seen the news reports here and some of the surcharges that are coming from some of the shipping operations here in the U.S., so that’s another bit of a wild card that we are balancing against, but it’s a little too early to really be able to quantify what the impact on that is. I would say in the big scheme of things that’s a smaller item compared to some of the other headwinds that we are dealing with now here in 2020, but again we’ve got a great team in supply chain that’s smart and thinking about all the long-term impacts of this over the long-term. And again when we put it into the mosaic that we are dealing with, whether it’s specific digital gross margin headwinds or other things in the business PPE costs we are kind of putting all the puzzle pieces together here to kind of trying to come up with the best overall operating margin answer that we can.

Simeon Gutman — Morgan Stanley — Analyst

Thank you.

Operator

Our next question comes from Stephanie Wissink with Jefferies. Please state your question.

Stephanie Wissink — Jefferies & Company, Inc. — Analyst

Thank you, good afternoon everyone. First part of the question is for Scott, you gave a complete detail for the back half on gross margin, I’m wondering if you’re willing to give us some direction on SG&A? In the quarter you had a few transitory elements, I’m just curious if you can help us on factors, I think retention credits you mentioned around $48 million, some of your store staff are still furloughed, maybe just help us think about the puts and takes as you think about first semester versus second? And then Mary and Dave related to that as on marketing, I think Mary you mentioned that your unaided awareness was stable despite pulling back pretty significantly on marketing. So, I’m wondering if that’s reshaping how you are thinking about marketing the Ulta brand if you’re seeing that you’re better known and that is selected today and you’ve been in the past if that changes how much you think you need to spend on brand marketing going forward. Thank you.

Mary Dillon — Chief Executive Officer

I’ll start with that because I’m sure I had marketing probably I wasn’t thrilled when I heard that [Indecipherable] so that’s a logical question. No, I would say that I think while Dave is closer to it than I am but the notion of being able to retain and maintain great aided awareness, unaided awareness and strong brand equity means just consistent kind of investments you have to make overtime, I guess I would say through the lens of things that like media, like advertising. So, we have pulled back maybe some pieces here and there because we really didn’t have the ability to need to create that kind of demand, but our marketing team has done an amazing job of just constantly looking at our return on investment and improving what we do every day to maximize the levers that we use. So, I think our marketing investments done around more efficient overtime and we will continue to do so, okay, Scott?

Scott Settersten — Chief Financial Officer, Treasurer and Assistant Secretary

So SG&A in the back half of the year, so you’re right. The CARES Act of $48 million was a onetime kind of thing for the second quarter and won’t recur in the back half of the year. But then we will have the PPE costs, the $35 million to $40 million in the back half that’s primarily SG&A cost, so a lot of it is store labor. When you think about metering people in and out of the stores and making sure we are guiding them to safe shopping practices and then you got cleaning of the stores and related supplies to all that, store payroll and benefits is the largest bucket in the SG&A line item. Directionally you’ve heard us talk about some of the changes we are making here.

Mary mentioned a few of those and so lower in the second half versus last year by some of those actions that were taken. Marketing lower in the second half versus last year, but not as low as it was in the first half, so we pulled some expenses out of the first half and we’re putting in the second half. We’ve got some great new advertising, like television advertising coming here, so we are really excited about. Overhead then will be the last bucket and there is going to be some growth versus last year because some of those investments we’ve made growth investments are still yet to be anniversaried when we will get through the full year.

Mary Dillon — Chief Executive Officer

So thank you. Thanks everybody for joining us today, we’re out of time. I just want to express my sincere appreciation to all of our Ulta Beauty Associates for their efforts as we continue to navigate well through this unprecedented environment. I am hoping you and your colleagues and your loved ones are safe and healthy and we look forward to speaking with all you again in December when we report our third quarter results. Thank you.

Operator

[Operator Closing Remarks]