Ulta Beauty Inc

NASDAQ:ULTA

Earnings Call Transcript 2019-Q4

[Operator]

Greetings and welcome to the Ulta Beauty Fourth Quarter 2019 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder, this conference is being recorded.

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

[Kiley Rawlins, VP, IR]

Thanks, Harold. Good afternoon. And thank you for joining us today for Ulta Beauty's fourth quarter and fiscal 2019 earnings conference call.

Hosting today's call are Mary Dillon, Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Dave Kimbell, President is also with us today.

This afternoon, we released our financial results for the fourth quarter and full year of fiscal 2019. A copy of the press release is available in the Investor Relations section of our website at www.ulta.com.

Before we begin, I'd like to remind you of the Company's safe Harbor language. The statements contained in this conference call, which are not historical facts may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual future results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the Company's filings with the SEC. We caution you not to place undue reliance on these forward-looking statements, which speak only as of today, March 12, 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.

Please note that in our comments today we will reference a number of non-GAAP metrics including free cash flow and earnings growth adjusted for the impact of income tax benefit in fiscal 2019 and fiscal 2018.

We'll begin this afternoon with prepared remarks from Mary and Scott. Following our prepared comments, we will open the call for questions. To allow us to accommodate as many questions as possible during the hour scheduled for this call, we've changed how we're going to manage the Q&A portion of the call. We've asked the operator to actively manage the queue and limit callers to one question during the Q&A session. To ask a second or follow-up question we ask that you requeue to allow us to accommodate as many questions as possible.

Now, I'll turn the call over to Mary. Mary?

[Mary Dillon, CEO]

Thank you, Kiley, and good afternoon, everyone.

Before we talk about our results, I want to address a topic that's on everyone's mind, the ongoing risk related to the spread of the coronavirus. Our first concern of course is the safety and wellbeing of our associates, guests, and brand partners, and we've taken a number of actions focused on prevention to keep people safe and healthy.

We've increased sanitation measures and cleaning frequency in all stores with extra focus on product testers and high traffic areas, and we've increased availability of hand sanitizers in high traffic areas including our cash wraps, makeup stations, and salon stations. We’ve posted signage in stores directing guests who want to try a product to find an associate who will sanitize testers on demand. In addition, we're implementing a no-touch approach when it comes to selling a system like shade matching.

We've temporarily suspended all makeup, skin, and brow services in stores. Based on feedback from experts, we will continue to offer hair services with an increased focus on maintaining the health and safety of our guests and associates. For our associates, we're encouraging them to stay home if they're not feeling well, and we're adjusting our policies to accommodate personal or family needs and ensuring that associates who face a quarantine are compensated during that time. We've also limited travel in the U.S. and restricted international travel, and we're limiting in-person meetings, especially for large groups. And as a further step, we've canceled our Annual General Managers Conference originally scheduled for April.

We're closely monitoring guidance from public health officials and government agencies to make sure we have the best information to keep our associates and guests safe and informed. We have a cross-functional team meeting daily to respond to and plan for any potential impacts this may have on our associates or operations, and we're working closely with our partners to manage any potential disruption to our supply chain. Given the highly uncertain nature of the situation, we are actively assessing various actions we can take to manage our business differently during the current environment.

Now, I'd like to turn back to our normal course of business before opening up to your questions, moving on to our results for 2019 and expectations for 2020.

Starting with the fourth quarter, the Ulta Beauty team delivered sales and earnings that were at the high end of our expectations. To recap our fourth quarter financial performance, total sales increased 8.5% and comp store sales increased 4% on top of a strong 9.4% comp last year. Gross margin for the quarter expanded by 10 basis points and diluted EPS increased 7.8%. These results were achieved despite ongoing challenges in the U.S. makeup category.

As we’ve discussed on previous earnings calls, the makeup category in the U.S. is experiencing a down cycle. The U.S. makeup category was negative again this quarter across both, prestige and mass measure channels. We knew the fourth quarter would be challenging, given both the category headwinds in makeup and the fact that we are lapping a very strong fourth quarter last year, but our enhanced omni-channel capabilities combined with our merchandise exclusive and cross-category marketing events helped us deliver a successful quarter.

Consumer shopping patterns continue to evolve with convenience, online options becoming more important during key shopping periods. Retailers who offer a great in-store experience as well as great online and omni-channel experiences will benefit from these shifts. With increased distribution center shipping capacity; buy online, pickup in-store options available at every store; and enhanced app and mobile platforms in place, including a new virtual waiting room to improve the guest experience on Black Friday, Ulta Beauty was well-positioned for shifting consumer preferences this holiday season and delivered strong double-digit growth in e-commerce sales.

We kicked off the holiday season in mid-November with Ulta Beauty Fest. With product demonstrations, influencer activations and merchandise giveaways, this new in-store event drove nice traffic to our stores and helped us comp last year's very successful launches of Kylie Cosmetics and the James Charles Palette by Morphe. Our new holiday campaign, Give, Gather, and Glow positions Ulta Beauty as the go-to destination for All Things Beauty and included improved promotions like Holiday Beauty Blitz and our cross-channel gift guide to inspire and help our guests with their holiday shopping.

In fact, holiday is a great time of year for Ulta Beauty because we participate in both gift-giving and as well what we call glamming, which is guests preparing for holiday parties and events. And with services optimization fully implemented in all stores, we saw good growth in our hair, skin, and lash services during the quarter. We delivered strong comp performance through key holiday periods, including Black Friday and Cyber Monday, and finished the holiday season well. Importantly, our teams did a great job resetting post-holiday and executing on our January events, Jumbo Love and Love Your Skin. And as a result, we saw a nice acceleration in sales and traffic trends post-Christmas.

Now, turning to our performance by category. We increased our market share across all major beauty categories. The skincare category delivered the strongest growth this quarter with prestige, mass, and sun care, all delivering double-digit comps. Fragrance and PCA, important gift categories and hair care all delivered high-single-digit comp growth this quarter.

As expected, our makeup category was down slightly again this quarter, driven by low-single-digit decline in Prestige Cosmetics. Growth from newer brands like Kylie Cosmetics, KKW Beauty, and Grande Cosmetics as well as growth from iconic prestige brands like Clinique, partially driven by the expansion of these brands to additional doors was offset by sales declines in many of our established prestige brands.

Mass cosmetics delivered a low-single-digit comp for the quarter on top of robust double-digit growth in the fourth quarter of last year. Strong sales of brands exclusive to Ulta including ColourPop, Florence, and Juvia's Place helped offset the impact of anniversarying the launch of the James Charles Palette last year.

Turning now to the full year. While fiscal 2019 was more challenging than we initially planned, I'm proud of how our teams reacted and adjusted to the unexpected headwinds in the U.S. makeup category and delivered solid results for our shareholders.

From a financial perspective, total sales increased 10% to $7.4 billion and comp store sales increased 5%. We expanded gross profit margin and delivered EPS growth of 11%.

Importantly, this year, we made good progress across each of our strategic imperatives, which position us to deliver industry-leading growth and long-term shareholder value. Some of the highlights of 2019, we opened up 86 new stores, remodeled 12 stores, relocated 8 and refreshed 240 stores. We increased our unaided brand awareness by 3 points from 53% to 56% with increases across every demographic group. We gained market share across all major beauty categories. We expanded membership and Ultamate Rewards by 8% to 34.3 million active members and increased our average spend per member to $206. We grew diamond and platinum membership by 10%, which outpaced overall portfolio growth and continued to retain these members at very high rates.

We increased the number of card holders in our ultimate rewards credit card program by 40%, thanks to outstanding execution from both our store and digital teams and engaging with our guests. We increased our penetration of omni-channel members. While the percentage of members who shop in store only remains in the low 80s, the percentage of members who shop online and in store increased to just over 12% of total members.

We expanded the distribution for our iconic prestige brands including Clinique, Lancôme, MAC and Estée Lauder to more doors. In total, we rolled out 973 expressions of these brands in 2019 in various in-store presentations.

We completed the rollout of services optimization in all stores. As a result, we significantly improved our retention of stylists and estheticians, and are seeing encouraging trends in guest retention and average ticket. We delivered strong double-digit growth in e-commerce sales on top of strong double-digit growth last year. We completed the rollout of buy online, pickup in store at all stores, refreshed our mobile app and launched Afterpay as a new payment option for online purchases.

We seamlessly transitioned our Romeoville distribution center into a fast fulfillment center and improved the productivity in our full service facilities, resulting in faster e-commerce order processing for our guests and more consistent on-time deliveries to our stores as well as better in-stocks during the holiday season. We began planning and building the capabilities to operate as a global beauty brand. And we continue to strengthen our culture and again achieved industry-leading associate engagement stores and accelerated our diversity and inclusion efforts across the Company, culminating a national recognition including Forbes Best Employers for Women and Best Employers for Diversity. We also raised more than $5 million to benefit life-changing breast cancer research at BCRF.

Now, 2019 was not without challenges, but by keeping our guests and our associates at the center of all of our decisions, staying focused on the longer term growth opportunities and also staying agile and flexible in the moment, our teams delivered solid results. As I describe now our priorities for 2020, I want to acknowledge that these plans were developed before the recent changes we've made to services and do not consider any prolonged disruption to demand resulting from coronavirus.

As I said earlier, we're actively assessing various actions we may take to react to the current environment, but the themes still hold and are important and to discuss. So, first, in 2020, we expect the makeup -- U.S. makeup category will continue to be challenged, and we built a plan that reflects these headwinds while also supporting opportunities for longer term growth.

Starting with our strategic imperative to drive growth across beauty enthusiast segments and strengthen Ulta Beauty brand, in 2019, we continued to evolve our guest messaging to reflect our brand purpose. We create a stronger, more immersive storytelling in all of our communications, and we launched key partnerships with NBCUniversal, Telemundo, ESSENCE and Allure to connect with key consumer segments.

We also continued to optimize our marketing mix and invested in channels that drive even stronger returns, including mass channels, multicultural media, digital, streaming and emerging channels like podcasts. Building on these successes, in 2020, we'll continue to elevate media partnerships that help us raise awareness and deepen our connection with key beauty enthusiast segments, and increase our focus on cost, category, storytelling and events that reflect how our guests engage with beauty.

Moving to our efforts to deepen love and loyalty with our members. In 2019, we added 2.5 million guests to our loyalty program and increased our average spend per member, driven by double-digit growth in our elite membership levels, credit card program and mix of omni-channel guests, as well as our personalization efforts.

With more than 34 million active members, we've built a differentiated loyalty program that engages guests and provides us with valuable customer insights. As the program matures and as new store growth flows, we know that absolute new member growth will continue to moderate.

In 2020, we'll focus our efforts to attract, educate, and engage new members, while also reaching out to members who haven't shopped with us in a while. We'll also sharpen our focus on increasing spend per member through more personalized experiences across categories and channels.

Turning now to our strategy to delight our guests with a one of a kind world-class beauty assortments, our focus in 2020 is at increasing our market share across all major beauty categories, especially of skincare, hair care and makeup. Skincare delivered double-digit comp growth and was our fastest growing category of 2019, and remains a meaningful growth opportunity for us.

In 2019, we added 47 new skincare brands to our assortment including The Ordinary, Sunday Riley, Urban Skin RX, and most recently belif skin care. We also increased selling space and stores and enhance our marketing communications to support this growing category. In 2020, we'll continue these efforts with a focus on further expanding the assortment across channels to highlight emerging brands and product innovation. And we’ll increase associate training and education in this category.

Hair care delivered high-single-digit comp growth in 2019, driven by newness and a focus on key categories like color and texture. Newness in 2019, including popular brands like IGK and OUAI, as well as exclusive brands like PATTERN by Tracee Ellis Ross and Curlsmith. In 2020, we'll continue to focus on growth areas like texture and color care, and we'll look for additional opportunities to gain share in prestige hair. We also plan to leverage our salons and experienced stylists with signature hair advance to highlight brands, educate guests and drive sales.

Makeup remains our largest category and delivered low-single-digit comp growth in 2019. While the category continues to face near-term sales headwinds, our research continues to show strong interest in makeup among Gen Z and millennial segments. Leveraging our proprietary research and loyalty members data, in 2020, we'll focus on key brands that are driving growth, look to add new brands that address assortment opportunities and continue to explore co-creation opportunities.

And finally, clean beauty continues to be a growing area of interest with our guests. Guests are engaging in a variety of areas within beauty including ingredients, animal testing and sustainable packaging.

While the demand for clean products is strong and growing, the landscape is challenging. Regulation, particularly related to chemicals doesn't provide the clarity that guests need or want in this space. Guests are seeking transparency and choice in the products that align to their personal values, but they need help navigating the complexities.

So, in 2020, we intend to provide our guests with a framework to help them evaluate products based on what's most important to them. Our goal is to give our guests access to more choices, guide them along their journey and celebrate the brands and products that are aligned with this mission. We'll share more about these efforts on future calls.

Now, moving on to beauty services. In 2019, we completed the rollout of services optimization to all stores and as a result delivered better trends in average ticket, guest retention, and satisfaction and product attachment. We also increased stylish retention and strengthen our recruitment of experienced stylists with established client book.

In 2020, we'll work to optimize these investments and to drive further improvements. To support these efforts, we'll introduce our new proprietary online booking and scheduling tool in all stores this spring. Available through the Ulta Beauty app, this tool will make it easier and more convenient for guests to schedule and manage their salon service appointments. And it will make it easier for our associates to manage our guest book.

Beyond our new booking tool, we've increased our focus on reinventing digital engagement. In 2019, we refreshed the Ulta Beauty app to incorporate more personalization, reinforce the value of our loyalty program and make it even easier to shop directly from the app. We also leveraged augmented reality capabilities to provide virtual try and experiences for our guests across multiple categories.

Building on these capabilities, in 2020, we'll invest to accelerate engagement with the app, with the goal of transforming the app of the Ulta Beauty personal shopping assistant, where guests can track and activate points, respond to app-only personalized offers, schedule services, check store availability, engage with BOPIS and plan with new looks and play with new looks, including lashes, brows, makeup, and hair.

Now, let me give you a quick update on our ongoing efforts to drive operational excellence and deliver efficiencies for growth. In 2019 we leveraged our size and scale to deliver cost savings, improved key merchandise planning processes and enhanced processes to support core operational disciplines across our real estate and supply chain operations. As a result, we delivered meaningful savings to fund investment.

In 2020, we'll build on these efforts and work to improve our operational execution through enhancing our merchandising effectiveness, optimizing our supply chain network, enhancing fulfillment capabilities and capturing additional efficiencies for growth. We'll also work to ensure we delivered expected returns from investments and process improvements we made in 2018 and 2019.

Finally, in 2020, we'll continue to invest to build our international capabilities, as we continue to believe this is an important long-term growth opportunity. As we discussed in previous calls, Canada will be our first step towards becoming a global beauty brand and will allow us to build experience and capabilities to expand successfully into other international markets. We intend to leverage U.S. best practices to preserve what has made Ulta Beauty successful, but will also enhance our assortment, systems and processes to ensure that we address the unique needs of our Canadian guests.

In 2019, we began the effort developing our strategies, plans and requirements. In 2020, we'll ready our systems and processes, and begin hiring and training new associates with the goal of offering an omni-channel experience for Canadian guests in 2021.

So, today we share with you our priorities for 2020. While we believe that U.S. makeup category will return to growth at some point, we believe it's prudent to build a plan for 2020 that assumes no improvements this year. We can certainly adjust if we start to see positive momentum in the category.

Before Scott discusses the financials in more detail, I want to talk about how we're thinking about the longer term growth opportunity for Ulta Beauty. In our Analysts Meeting in late 2018, we talked about growth targets for 2019 through 2021 of comp sales growth in the 5% to 7% range, modest operating margin expansion and earnings growth in the mid-to-high teens. Since we initially shared these expectations, the U.S. makeup category has experienced much slower sales trends than we initially expected. We remain very optimistic about our future. The beauty market is growing and the Ulta Beauty model is strong and winning share. And we remain confident that we will see a return to growth in the U.S. makeup category. Although, the exact timing of recovery is still uncertain. Without improvement in the U.S. makeup category, we believe we can deliver comp growth in the range of 3% to 4% and EPS growth in the high single digit range. And our expectations for 2020 after adjusting for incentive compensation and tax benefits in 2019 are in line with this view.

While we're confident that the U.S. makeup category will return to growth, it's unlikely that it will return to the elevated levels of growth seen during the most recent ups-cycles. However, with was more normalized growth in the U.S. makeup category, we think we can deliver mid-single-digit comp growth and low-double-digit EPS growth.

And with that, I'll turn it over to Scott to discuss our financial results and outlook for 2020 in more detail.

[Scott Settersten, CFO]

Thanks, Mary, and good afternoon, everyone.

I'll begin with an overview of our fourth quarter before turning to a summary of our results for 2019, and I'll close by sharing our outlook for 2020. Starting with the income statement. Q4 top-lines growth of 8.5% was driven by a 4% comp, strong new store productivity and robust growth and other income, primarily driven by continued growth of our credit card program. The total Company comp of 4% was composed of 2.2% average ticket growth and 1.8% transaction growth.

Our retail comp was down slightly as growth in average ticket was more than offset by a low single digit decline in transactions. Ulta.com growth was modestly above our expected range of 20% to 30% growth driven by traffic.

To provide some more color on our e-commerce performance, we were up against an easier comparison this quarter. You may recall that in the fourth quarter of 2018, we experienced a reverse channel shift given our guests’ avid interest to come to stores to see and experience, high profile launches from several digitally native brands. This year, the rollout of buy online, pickup in store and enhancements made to our app were also contributors to the e-commerce channels outperformance.

From a mix perspective, makeup was 48% of our sales, down 300 basis points from last year. The skincare, bath and fragrance category increased 200 basis points to 25% of sales. As a percent of sales, hair care products and styling tools were flat at 18%. The services category was also flat at about 4% of sales.

Gross profit margin of 35% increased 10 basis points from 34.9% a year-ago, primarily due to improvement in merchandise margins, driven by marketing and merchandising strategies, partially offset by investments in services and supply chain. We leveraged fixed store costs slightly. To provide more color on merchandise margin, the improvement year-over-year reflects ongoing benefits from our efficiencies for growth or EFG cost optimization program, which more than offset headwinds from channel and category mix.

While we made good progress this year in improving the profitability across many of our merchandise categories, particularly our prestige skincare category, the softness in prestige makeup, which is our largest category as well as the expanded distribution of our iconic brands, pressured merchandise margin in the quarter.

The impact of promotional activity during the quarter was slightly higher than last year. As we shared on our last earnings call, we expected to be more promotional in the quarter to offset the headwinds we were experiencing in the color cosmetics category and did indeed implement incremental promotions, many of which were in partnership with our brand partners.

I would remind you that we take a holistic approach to our promotional strategy and were able to pull back on other promotional levers during the quarter to minimize the overall impact of merchandise margin.

SG&A rate of 22.4% deleveraged 90 basis points from 21.5% last year. As anticipated, we experienced the most deleverage from planned investments in growth initiatives, and we saw deleverage of marketing expense as we invested in digital marketing campaigns and media spend to support the holiday season. We also experienced deleveraging store labor and benefits versus last year, primarily due to continued investments to support the guest experience as well as wage pressure as we adjust to rising minimum hourly wages. This was partially offset by lower incentive compensation expense reflecting our actual financial performance versus our internal targets, which were established at the beginning of the year.

Operating margin of 12.5% was down 70 basis points from 13.2% in the fourth quarter of 2018. Diluted GAAP earnings per share grew 7.8% to $3.89 per share, which included a $0.06 per share benefit, primarily due to an increase in federal income tax credits compared to $3.61 per share reported for last year's fourth quarter.

Before we move on, I'd like to take a moment to review our operating results for fiscal year 2019. Net sales increased 10.1%, driven by a about 5% comp on top of an 8.1% comp in fiscal 2018. For the year, e-commerce sales growth was near the high end of our expected range of 20% to 30% growth.

Operating profit for the year increased 5.5%. As Mary highlighted, our EFG efforts provided meaningful net savings in 2019. Operating profit margin also benefited from about 30 basis points of lower incentive stock and stock compensation expense this year, as our actual results were below our internal targets. These gains were more than offset by 110 basis points of pressure from strategic investments to drive longer term growth, including salon optimization, personalization, digital store of the future, and efforts to support EFG.

SG&A was also pressured by increases in payroll and benefits, primarily due to continued investments to support the guest experience as well as ongoing wage pressures.

Diluted GAAP earnings per share increased 11.1% to $12.15 per share which included $0.20 per share of benefit related to income tax accounting for share-based compensation and $0.10 per share related to federal income tax credits compared to $10.94 per share in fiscal 2018, which included a $0.09 per share benefit due to income tax accounting for share-based compensation.

Moving on to the balance sheet and cash flow. Total inventory grew 6.5%, driven by 80 net new stores. Inventory per store was approximately flat as we continue to gain efficiencies from enhanced merchandising and supply chain processes. Capital expenditures for the year were $298.5 million, for new, remodeled and relocated stores, investments in IT systems, store maintenance, merchandise fixtures and supply chain activities.

Free cash flow, defined as cash flow from operations less CapEx was $802.8 million for the year. We ended the quarter with $502.3 million in cash, cash equivalents and short-term investments. During the fourth quarter, we repurchased 681,000 shares for a cost of $174.1 million. For the full year, we repurchased 2.3 million shares for a cost of $681 million.

Turning now to guidance for 2020. Before I get into specifics, I'd like to provide an overview of how we are approaching this year. As Mary mentioned earlier, our outlook assumes that the U.S. makeup category remains challenged throughout the year. We're no less confident in our ability to gain share and believe we would be well-positioned when the U.S. makeup category returns to growth, but we lack visibility into the exact timing of a recovery. Given our expectations that top line growth will continue to be challenged, we are prioritizing our investments and slowing CapEx and SG&A growth, while continuing to invest in initiatives that will further differentiate Ulta Beauty and drive long-term growth.

Reflecting our confidence in the longer term growth opportunity, we intend to leverage our strong financial position to accelerate our share repurchase program this year. Our Board of Directors has approved a new share repurchase authorization of $1.6 billion, which replaces the prior authorization implemented in March 2019. Yesterday, we expanded our revolver to $1 billion and extended the term to 2025. We intend to use our strong free cash flow and some of the capacity of our expander revolver to repurchase around $1.3 billion worth of stock in fiscal 2020.

Now, specifically for 2020, we expect to open approximately 75 net new stores, remodel or relocate 15 stores and execute 42 store refreshes or many remodels to facilitate the addition of new brands and improvements to overall fixturing. We anticipate driving top-line growth in the 7% to 8% range with total Company comparable sales planned in the 3% to 4% range. Reflecting the quarterly cadence in 2019, we expect comps in the first half of the year will be near the low end of this range and comps from the second half of the year will be near the high end of the range.

We expect operating margin for the year will de-lever by approximately 70 basis points to 80 basis points. To give you a little bit more color on the expected puts and takes driving our operating margin expectation, overall, we expect modest gross margin expansion in 2020 with benefits from EFG and our credit card program offset by higher shrink. While shrink was flat in 2019, we started to see some adverse trends emerge. We expect other items in cost of goods including fixed cost, supply chain costs and salon will be mostly flat as a percent of sales for the year, given our comp expectations.

Also embedded in our operating margin guidance is an expectation that SG&A will delever, primarily due to investments to support long-term growth and the normalization of incentive comp. While we are investing at a lower pace in 2020 than we did in 2019, we expect that investments to support international expansion, personalization, digital store of the future and other IT capabilities, will result in about 60 basis points of SG&A headwind in 2020.

In addition, the normalization of incentive compensation expense will result in about 30 basis points of SG&A deleverage for the year. We estimate that depreciation and amortization expense will be between $310 million and $320 million, net interest expense is expected to be approximately $9 million, and we expect our tax rate for the year to be in the range of 24% to 24.5%, as we do not expect to repeat the benefit of federal income tax credits that we experienced in 2019.

These assumptions result in guidance for diluted earnings per share in the range of $12.55 to $12.75 per share, assuming weighted average diluted shares of approximately 54 million. We expect to repurchase about $1.3 billion of stock in 2020.

While we don't provide quarterly guidance, we expect the first half of the year will be more challenging than the second half. Specifically, we expect that EPS in the first half of the year will be lower than EPS in the first half of last year as we anniversary strong comp growth, strong gross margin expansion, and $0.21 in tax rate benefits from share-based compensation.

We expect CapEx to be in the range of $280 million to $300 million, including approximately $165 million for new stores, remodels and merchandise fixtures, $90 million for supply chain and IT, and about $35 million for store maintenance and others.

Finally, I would note again that our guidance for 2020 does not include assumptions for any impact related to coronavirus. The situation is dynamic and it's very difficult to predict or quantify the impact of any potential disruption to our supply chain, changes in consumer demand or any other actions that may become necessary as events unfold.

As Mary indicated, we are monitoring this evolving situation closely. We are assessing actions we can take to manage our business through this rapidly changing condition. And we will certainly adjust our plans if necessary.

And now, I'll turn the call back over to the operator to moderate the Q&A session.

[Operator]

Thank you. We will now be conducting a question-and answer-session. [Operator Instructions] Our first question comes from the line of Rupesh Parikh of Oppenheimer. Please proceed with your question.

[Rupesh Parikh, Oppenheimer]

Good afternoon. Thanks for taking my question. So, I guess, Mary, just going back to your comments on the coronavirus. I was just curious if you can just share any color in terms of what impact you're seeing right now in your stores? And if you're seeing any changes in the behavior, I guess in the past few days. Thank you.

[Mary Dillon, CEO]

Thank you, Rupesh. Thanks for asking that. I guess, I would start with just reiterating that our first priority is really focusing on the safety and health of our associates, our guests, our brand partners. You can imagine, as a leadership team, we're very focused on this being agile, 24/7 focus, really action oriented. So, I think obviously everybody in business will look at it that way.

And I'd say, if you break it apart from a supply chain perspective, we really haven't seen any material impact to our supply chain. Our teams have been working closely with our brand partners and our carrier partners really for weeks as necessary to pull forward some inventory of high velocity skews. So, right now, we feel pretty good about that; it’s possible that could get disrupted, but we feel good about that.

On the demand side, we started to see some impact on store traffic this week, but it really varies by market. On the flip side, our e-commerce business has continued to perform strongly. And I’d say that's true broadly really even including affected area. So, we're keeping a close eye on all of this. It's really too early to tell how it's going to play out, but so far that's our assessment of the situation.

[Operator]

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

[Simeon Gutman, Morgan Stanley]

It's somewhat of a modeling question. First, you mentioned on the makeup comps, you are not expecting an improvement. If we heard it right, I think you -- you actually ended the year positive even though the fourth quarter was negative. If I heard that right, what is the assumption for the full year for 2020? Is it a low-single-digit comp or is it the negative run rate from the fourth quarter? And then related to your point that you just said on e-commerce, Mary, doing well, what is your expectation for the mix of e-commerce? I get deliveries in 2020, and could that end up being low given what we're going to maybe see from consumer behavior over the next, I don’t know, weeks or months?

[Mary Dillon, CEO]

E-commerce deliveries do you say, or e-commerce demand? I'm sorry, just to clarify that Simeon.

[Simeon Gutman, Morgan Stanley]

If the delivery goes up, what happens to the gross margin?

[Mary Dillon, CEO]

Okay. So, do you want to start with the categories question, Dave, and then we'll come back…

[Dave Kimbell, President]

Sure. We'll start with makeup. And yes, to reiterate, one thing we remain confident over the long term of makeup and are optimistic about the role that that will continue to play over the long term. But as both, Scott and Mary mentioned, we are uncertain about when this turnaround will happen. So, specifically, to answer your question, yes, we did see a combined total growth in makeup. We're anticipating that to be roughly in line or maybe slightly below that flat to maybe slightly negative. So, consistent-ish with 2019 performance and not a dramatic change in results. But again, over time, as we look at both demographic change, innovation that we feel like there's opportunities down the road, we believe that the category will be -- return to health at some point.

[Mary Dillon, CEO]

On the e-commerce front, yes, we’re watching it closely. I mean, the good news is that we feel like the investments that we've been making to improve the overall experience for our guests from the app to the platform to the offerings as well as investing in our supply chain capabilities has put us in a good place as well as BOPIS. I mean, BOPIS was a good addition to the portfolio, the omni-channel tools last year. So, we'll watch it closely. Certainly, a shift up in that mix has some pressure on margin. But we'll -- obviously we're going to meet consumer demand where it is and make other adjustments in the business model as we need to.

[Operator]

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

[Oliver Chen, Cowen and Company]

Hi. Thank you. Mary, one of the strategies that's under -- unfolding here is social distancing in terms of the strategy to mitigate what’s unfolding. What are your thoughts on how your business is best prepared in that context and what are some levers you could pull regarding traffic and thinking about the interplay of physical traffic as well as potential for a recession, would love above your thoughts?

[Mary Dillon, CEO]

Well, again, the investments that we've been making in our digital platforms, our AR platforms are I think are smart that we have those capabilities, right? So, one of the things that we're encouraging guests to do is to get engaged with our app and use our GLAMlab to do a virtual try-on. It's really, I'd say pretty state-of-the-art and allows the guests to really explore a lot of different looks virtually and digitally, which is pretty cool.

In-store, and I talked about this a little bit earlier, we've taken some steps. I mean, certainly, our guests’ health and safety and that of our associates is a really -- is our top priority. We've been focused always on really cleanliness of stores, but what we've done is increased sort of some of the protocols there. We've also, as I mentioned, temporarily suspended services that are touching the face, makeup, skin, and brow services, and really, I guess doing more of a coaching, no touch kind of approach. We're starting that right now in terms of helping our guests. Having said that, hair services based on expert advice that we're getting, we're going to continue to do hair services and just continue to implement additional protections as needed.

So, I think that -- the other thing I would say is, extra attention is being placed on things like testers, in telling our guests, so if you want to use a tester -- if you want to see how something looks, go to GLAMlab virtual try-on or an associate can help you and we will sanitize that first. So, these things are fluid. We're exploring a number of options and we'll adjust as necessary. We see our guests wanting to shop in person for beauty and we want to accommodate them in every way that we can. But we'll stay fluid and pay close attention obviously, make adjustments if needed.

I guess, the other part is just -- when somebody signs off now, we can't say -- I can't ask them to clarify their second question. But you did ask Oliver about a potential recession and certainly I’ll just touch on that which is that we think as a category, right. We are in a good category to be in, and that beauty is in some ways essential, very essential in people's lives, replenishable, kind of an affordable indulgent. Our business model, while it could moderate like others during a recession, our category will we think perform better than others in retail as we've seen historically. And of course our model, we're able to flex based on consumer preferences.

So, having a broad range of price points and categories allows our guests to really have a lot of options, in terms of how they spend their money. We also have a strong margin profile that allows us to invest in driving traffic. And I’d say most importantly, we've got a strong team in place that knows how to be operationally financially disciplined. So, good communication and visibility in what's occurring, flexing to meet consumer demand, that's how we're going to lead through this.

[Operator]

Our next question comes from the line of Erinn Murphy of Piper Sandler. Please proceed with your question.

[Erinn Murphy, Piper Sandler]

My one question is around the loyalty program. I believe you said there are 34 members now -- 34 million members now in the program, which I think would be flat relative to the third quarter. So, as that program matures, how do you think about the ongoing potential for transaction growth, particularly, given that we did see it kind of tick down in this quarter? Just curious on that. Thank you.

[Mary Dillon, CEO]

I’ll let Dave take that one, Erinn. Thank you.

[Dave Kimbell, President]

Yes. So, I'll start with saying that we continue to be really excited about the power of our loyalty program. It did grow 8% for 2019 to 34 million, which we believe makes it one of the leading loyalty programs, certainly in our space in the country and a powerful tool for us to continue to drive our business.

You did highlight that in the fourth quarter, growth versus the third quarter was a little slower than some of the recent trends. We would look at that as both, as the program gets bigger, we did anticipate that it would moderate somewhat in growth but also, as we were lapping some of the strong traffic driver and new guests driver activity of some of the launches that we've talked about also made our overlap a little bit tougher as it relates to that. But we're optimistic about our opportunity to continue to reach beauty enthusiasts across the country and continue to grow that.

But having said that, you're right, that we also see an important growth opportunity over an extended period around spend per member and it's a big focus for us. Really everything that we're doing is focused on continuing to find new and engaging ways for our guests to participate in Ulta, whether it's the new brands we're bringing in, credit card program, innovation and loyalty, services. And then of course personalization is we believe one of the biggest opportunities ahead of us. And we've been investing heavily in that to make sure that we can continue to find ways to delight our guests. Mary and Scott both highlighted some of the things that we've been doing that we believe will drive personalization. Our app and innovation and refreshes of our app both in 2019 and more to come we think will try more personalized connection. Our integration of augmented reality or virtual reality with GLAMlab has continued to get better and we expand that across new formats like foundation and skin tone. We have skin quizzes and we continue to get better and better on product recommendations, new member engagement, replenishment reminders, all these things we think will contribute to the growth that we've -- continue the growth that we've seen on spend per member. So both sides of the occasion we're optimistic about, and we'll continue to drive that.

[Operator]

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

[Steph Wissink, Jefferies]

Thank you. Good afternoon, everyone. Scott, I have a question for you about the operating margin guidance. I believe, you have quantified about 60 basis points of the drag year-over-year from incremental investments. So, two-part question. One is, just what are you looking for to kind of justify those returns to maintain that level of incremental investment? And is it something related to market share disruption that you're watching for or that you think an opportunity exists to take incremental share in the near term? Thank you.

[Scott Settersten, CFO]

Yes. I would just say, we look at it in a very balanced and pragmatic kind of way. So, the things that we called out in our prepared remarks around the investments that we believe we need to continue to move ahead on, including the big international opportunity, again long-term sales and margin dollar driver for us over the long term. Personalization is something, again that we've been working on for some time, but continue to ramp up and see results now. I mean, these things are helping drive sales for us today and we think there's a lot more opportunities for that over the longer term. Salon optimization is another big one. Again we’re -- it's a bit of a headwind in the first half of 2020 until we anniversary some of the startup initial cost there, but we expect to get benefits out of that over the long term. So, I mean you could just -- these are all market share opportunity levers, and that's the way we're looking at it. And we think these are, again, the right things to do for investors for the long term.

[Operator]

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

[Joe Altobello, Raymond James]

Hey, guys. Good afternoon. I guess, first, the comp impact from the suspension of makeup, skin and brow services, I don't know if you guys quantified that, but that'd be helpful. And then maybe a quick one for Scott. The pace of share repurchases this year, is that going to be ratable throughout the year or is it more front-end loaded? Thanks.

[Mary Dillon, CEO]

Yes, I'll start. No, we have not quantified that yet. That was a today decision. But, I would say that certainly one of the things for sure are associates that would perform those services will be actively in stores also selling products and servicing guests. Right? So, we hope to keep our associates engaged. And we'll see how this plays out. We’ll quantify that at some point, but it's an early decision. So, we haven't done that yet.

[Scott Settersten, CFO]

And the repurchases, I think for modeling, you should just assume kind of a ratable kind of run rate throughout the year. Again, I'll remind folks that we were opportunistic last year when we saw disruption in the stock price and midway through the year. We took opportunities there where we thought it was appropriate. Again, in light of what's going on with the market right now, again, we would take a very pragmatic approach. This is something that's always top of mind with us, with our Board of Directors and something that we're in constant communication on. So, you can whatever expect us to be very measured in our approach here, right, and not put the Company at risk.

[Operator]

Our next question comes from the line of Paul Trussell of Deutsche Bank. Please proceed with your question.

[Paul Trussell, Deutsche Bank]

Good afternoon and good fourth quarter. I would want to just dig in to the puts and takes around gross margin, both in regards to the up 10 basis points in 4Q and the outlook. If you can just give a little bit more color on what you're seeing in terms of the promotional environment. You called out your shrink, and then obviously, the EFG contribution that we can expect moving forward. Thank you.

[Scott Settersten, CFO]

Yes. So, there's a lot to unpack there. So just going back to fourth quarter, give you a little bit more color on that. So, again, in our prepared remarks -- I mean, there's always a lot of different factors that go into the outcome of any particular quarter. So, the GM, gross margin expansion in the quarter, we're happy with the result. It was roughly in line with kind of what our expectations were. So, EFG was a big component of that. We've been talking about that consistently through 2019. So, that theme continued into 2020. There was definitely benefits captured there too a lot of hard work by a lot of our teams. And that's something -- that's a benefit that's going to produce good results for us in years to come as well.

The post-holiday we called out, the events in the hair and the Jumbo Love events were great, executed well both, in store and online, were beneficial to us. Promotion, while it was a bit higher than last year, as we expected, it was a little bit less than what we had forecasted when we were looking ahead to fourth quarter. Credit card continues to deliver great incremental benefits for us. And again, that's another lever that's going to be a multiyear contributor overall to gross margin expansion.

And so, those benefits were enough to offset the mix headwinds, the e-commerce channel shift that we've been talking about for many years now, and some of the shrink -- tougher shrink results that we had in the quarter. Again, shrink by and large was flattish to last year, which is the good news, but it was a little bit tougher than we were expecting. All right. And so, we're seeing trends there, not unlike many across the retail world. I mean, you've probably seen this referred to another places. And so, this is something -- again, we haven't spent a lot of time talking about with investors over time because the pendulum does swing back and forth a bit of -- a bit like whack-a-mole, I guess you could say.

Our teams are doing a great job managing shrink. We're focused on things that we can control around processes and tools. But, this is a trend that we think is going to be tougher in 2020 than we are expecting. It's probably going to mitigate some of the gross margin expansion that we were hoping for.

As we look ahead to next year, again, EFG help shrink a bit of a headwind. Salon optimization is going to be a bit of a headwind in the first half of the year, but will moderate in the second half and hopefully do better than we have planned. Fixed store costs, I would say flattish in 2020 compared to good leverage that we saw last year. Again, most of that is due to a lower comp expectation for the full year. Supply chain doing well overall. Mary mentioned our facilities are being optimized and producing better results than expected. A little bit of pressure in supply chain late in the year. The new FFC, we start ramping up activities there.

One thing I would call out on the gross margin line is BOPIS. So, again, we just rolled that out late in the second quarter. Really, we're just getting our hands wet with that, I guess you could say. So, there's a lot of learning that we captured during the fourth quarter. And so, I think that's an area where we could see some upside potentially to help maybe drive gross margin in 2020.

[Operator]

Our next question comes from the line of Ike Boruchow of Wells Fargo. Proceed with your question.

[Ike Boruchow, Wells Fargo]

Hey. Good afternoon, everyone. So, I guess my question going back to the corona impact on the business, maybe just at a higher level, for Mary or Scott. Can you maybe talk about what percent of your makeup transactions do you believe carry some kind of in-store trial component, and maybe combined with the service component of what you guys offer? And I guess where I'm going with that is I'm just trying to understand how important customer trial that in-store behavior is to the sales model?

[Mary Dillon, CEO]

Yes. I mean, it's a good question. I would say certainly services in total are much -- is a very small part of our business compared to what we sell at retail. Right? So, in general -- and most of that is hair services. So, the thing is that that -- in that part of the business we're going to continue as planned.

It's certainly the notion of being able to try things is an important aspect of how we serve up beauty. But it doesn't happen in every transaction, it really just doesn't. And also, we have the ability for our associates to still help our guests in multiple ways. Right? So, they can take a tester, sanitize it, put on somebody's hand to show them the color. We can use our Glam Street -- our GLAMlab app, which is really very realistic. And so, it's early stages, but we don't really think that's something that is going prevent people from making great transactions and decisions. We're going to do everything we can. We've got a skin match tool also on our app. So, we've got tools that we think will allow that kind of consumer behavior. But we'll -- as we look at this, we'll learn more, quantify more. But, I mean, there's no question it's the right decision to make right now in the short term. And your question's a good one about -- and this may not last for that long. We'll just have to see, but we'll do our level best to make the shopping experience online and in-store for our guests just as immersive as we can, if that makes sense. But, we feel like it's fine; it's going to be the right thing to do and guests would expect it.

[Operator]

Our next question comes from the line of Anthony Chukumba of Loop Capital Markets. Please proceed with your question.

[Anthony Chukumba, Loop Capital Markets]

Good evening and thanks for taking my question. So, I just had a real quick question on buy online pickup in store. If you can just give us just a little bit more color on that now that you've been doing it for a few quarters. Just particularly in terms of penetration or just any learnings that you've gotten from doing that? Thank you.

[Dave Kimbell, President]

Yes. I'll take that. We're just really thrilled with the performance. Probably first and foremost executionally our store teams picked up this new capability and delivered it with excellence and we're really excited about being able to offer this to our guests because our guests responded very favorably to it. As you know, we rolled that out to all stores in mid-year, last year, and we saw very strong adoption across the entire chain. Every store had transactions, of course, some more than others, but every store participated. Our guest was interested across small markets, big markets and everything in between. We're -- it's still -- despite the success we had over the end of the year last year, it's still relatively small part of our e-commerce business. And we're getting learnings. We're trying to understand the incrementality of BOPIS. We believe that it's there, but we still have some learning to really understand how -- longer term behavior. One thing we do know is the average ticket for our BOPIS disorders is somewhat lower than a full April regular e-commerce order, in part suggesting using that capability to avoid shipping costs to be able to pick up items with certainty that same day, so.

And last thing I'd say is we're seeing a nice attachment level -- attachment rate in store, meaning those that are coming to pick up their BOPIS orders, many of them are also picking up additional items, while they're in the store. So, overall pleased, but early. And we're looking forward to learning even more about ways to leverage this with our guests through 2020.

[Mary Dillon, CEO]

Thanks, Dave. I'd just like to wrap up by thanking our more than 44,000 associates. We're staying focused on delivering -- serving our guests and delivering really solid results in 2019. I am very excited about the future for Ulta Beauty. I believe our business model, our strategy, and our talented team will continue to drive success and create significant shareholder value. And we look forward to speaking with all of you again in May, when we report our first quarter results. Thank you.

[Operator]

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