Ulta Beauty, Inc.
Q3 2020 Earnings Call Transcript

Published: 3 Dec 2020

[Operator:]

Greetings. And welcome to the Ulta Beauty Third Quarter 2020 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. 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:]

Thank you, Shimauli. Good afternoon. And thank you for joining us today for our discussion of Ulta Beauty’s results for the third 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.

[Mary Dillon:]

Thank you, Kiley, and good afternoon, everyone. Today, we reported financial results that reflect the strength of the Ulta Beauty model and improving trends in consumer demand. I continue to be very proud of how well our teams are responding and navigating through this difficult period and I want to thank all of our Ulta Beauty associates for their continued agility, creativity and commitment to serving our guests and taking care of each other during this unprecedented period. For the third quarter, net sales were $1.6 billion and GAAP diluted EPS was $1.32 per share. Adjusted diluted EPS for the quarter was $1.64 per share. Building on the momentum we saw at the end of the second quarter third quarter comp store sales declined 8.9%. The mid single-digit comp declines we experienced in August continued through September, with October sales impacted by our decision not to repeat certain promotional activity from last year.

[Scott Settersten:]

Thanks, Mary, and good afternoon, everyone. We appreciate your support of Ulta Beauty and hope you and your loved ones are staying safe and healthy. I will reiterate Mary’s comments and thank all of our dedicated associates for their tireless efforts in safely serving our guests and keeping our operations running smoothly during this difficult time. I will begin with the income statement. Net sales for the quarter declined 7.8% and total company comp declined 8.9%. Given the challenges from the COVID-19 pandemic, we are very pleased with this performance, as topline results for the quarter were better than our internal expectations. Average ticket increased 7.6%, primarily driven by an increase in units per transaction, while transactions declined 15.4%. We experienced nice conversion in both channels, but continued to be impacted by softer traffic to stores. As expected, e-commerce growth slowed relative to the second quarter, but continued to deliver very strong growth versus last year. Our e-commerce operations delivered a comp increase of 90% for the quarter, as guests continue to take advantage of our omnichannel capabilities. Buy online, pickup in store was strong again this quarter, totaling about 16% of e-commerce sales, approximately double the penetration in the third quarter last year. From a mix perspective, makeup was 45% of sales, down 600 basis points from last year, skincare, bath and fragrance collectively increased 500 basis points to 26% of sales, haircare products and styling tools increased 300 basis points to 21% of sales, while the services category was down 200 basis points to about 4% of sales. As Mary indicated, our service business continued to be negatively impacted by COVID-related capacity constraints. Gross profit margin was 35.1%, a decline of about 200 basis points, compared to 37.1% a year ago. Similar to what we have seen since the onset of the pandemic, the largest driver of gross margin deleverage was fixed cost due to lower sales. I would note that the trend improved from what we experienced in the second quarter, due to the stronger sales trend. Channel shift was also a large contributor to gross margin deleverage again this quarter, albeit less than we experienced in the second quarter, as stores were open for the entire quarter. These headwinds were partially offset by an increase in merchandise margin, which was primarily driven by our lower promotional activity, as well as continuing benefits from our efficiencies for growth or EFG efforts. SG&A expenses decreased to $416.4 million, compared to $449.2 million in the third quarter of last year. The largest driver of the decrease was lower store payroll and benefits, as we reduced investments in labor to reflect lower demand. Store expenses were also lower as we adjusted and managed to softer traffic in stores. Marketing expense was also lower year-over-year, reflecting reduced spend on print, offset by higher investment in digital channels. These reductions more than offset a modest increase in corporate overhead and PPE and COVID-related expenses. The increase in corporate overhead primarily reflects higher compensation and benefit expense, partially offset by investments to support strategic growth initiatives made last year. As a reminder, in the third quarter of last year, incentive compensation expense decreased versus the prior year, reflecting financial performance that was below targeted levels, as well as a lower stock price. This quarter, we recorded a charge of $23.6 million for impairment, restructuring and other costs. As Mary mentioned earlier, we suspended our planned expansion to Canada, resulting in a $15.9 million charge related to long-lived asset impairments, lease termination costs and severance. Our teams continue to wind down this effort and we now expect to incur between $30 million to $40 million of Canada exit expenses in fiscal 2020. In the third quarter, we also recorded $5.7 million in severance associated with the elimination of the salon manager and prestige manager roles, and recorded $2 million of lease termination costs related to the previously announced permanent closure of 19 stores. Pre-opening expense was $4.2 million in the quarter, a decrease from $6.5 million a year ago. We resumed new store openings in early August and opened 17 stores in the third quarter, compared to 31 new stores a year ago. Interest expense related to the drawdown of our revolver totaled $1.4 million, compared to interest income of $900,000 a year ago. Diluted GAAP earnings per share was $1.32, compared with $2.25 reported for last year’s third quarter. Adjusted diluted earnings per share, excluding charges related to impairment, restructuring and other costs was $1.64, compared to $2.23 a year ago, which excludes stock compensation and other tax credits. Moving on to the balance sheet and cash flow. For the quarter, total inventory decreased 11% compared to the third quarter last year and inventory per store decreased 12.5% year-over-year, as we adjusted to recent demand trends and reduced holiday receipts. To maintain flexibility and manage inventory risk, we have reduced our exposure to limited edition holiday sets and are leaning more into core product. We ended the quarter with $560.9 million in cash and cash equivalents. At the beginning of the pandemic, we drew down $800 million on our $1 billion revolver and suspended our stock buyback program as precautionary measures to increase liquidity. Reflecting on our confidence that we have sufficient liquidity to support our operations and investment priorities, we repaid $800 million of borrowings that were outstanding under the facility on September 2nd. We remain confident in our ability to generate strong cash flow and we may resume our stock buyback program this quarter, depending on market and operating conditions. We currently have $1.58 billion remaining under our current repurchase authorization. Turning now to the rest of 2020. The overall operating environment remains uncertain and it continues to be difficult to forecast our business with precision. Therefore, we are not providing EPS guidance at this time. However, I want to provide some color on how we are thinking about the fourth quarter. We are encouraged by the sales results for November. However, the operating environment continues to be dynamic and it is difficult to predict how the effects of the pandemic, including any lockdowns or restrictions may impact consumer demand through the rest of the quarter. As such, we now expect our fourth quarter comps to be in the range of down 12% to 14%, slightly better than the expectation of mid-teen comp declines we shared on our last earnings call. Two call outs as you think about your models. As Mary shared, we have realigned our store management structure to create a more cost efficient store model. As a result of these changes, we will see a reduction of salon payroll and cost of goods sold, and an increase in-store payroll and SG&A relative to last year. Second, we expect to incur $15 million to $20 million of PPE and COVID-related expenses in the fourth quarter. Overall, we expect SG&A dollars in the fourth quarter will be similar to last year’s levels. We continue to adjust our capital spending plan. Our updated plan for 2020 is to invest between $150 million and $160 million in capital expenditures, including approximately $65 million for new stores, remodels and merchandise fixtures, $65 million for supply chain and IT, and about $25 million for store maintenance and other. We expect to open approximately 30 new stores and relocate five stores in 2020. We are still finalizing our plans for next year, but continue to expect to open at least 30 new stores in 2021. We remain confident in the long-term opportunity to continue to expand our store fleet. One final comment. We recognize that our long-term profitability potential is top of mind with investors and I want to take this opportunity to reiterate our confidence that Ulta Beauty is a double-digit margin business. However, given the uncertainty and lack of visibility as to when the operating environment will stabilize and recover from the pandemic, it is difficult to say with certainty when we will return to double-digit margins. To start, we have healthy product margins and our merchant teams continue to work to improve merchandise margins as we expand and enhance our assortment, through both negotiation efforts as well as EFG opportunities. As sales stabilize and return to growth, we will be able to leverage fixed costs. In addition to our ongoing EFG efforts, our real estate team is capturing significant benefits from lease renegotiation efforts, reflecting the market impacts of COVID-19 and these efforts will help us reduce occupancy costs over the longer term. Although, e-commerce will likely continue to be a headwind to overall EBIT margins, we are improving e-commerce profitability as we increase utilization of BOPIS, leverage size and scale with growth and get closer to our guests through the expansion of our supply chain network and we see additional opportunities to mitigate rate impacts in the future. As we discussed on our last earnings call, we continue to make progress on our journey to strengthen the effectiveness and profitability of our promotions and we are actively taking steps in the near-term to right-size our cost structure in the new operating environment. Longer term, we are also working to identify additional opportunities across the enterprise to optimize our cost structure, while also supporting investment to support growth capabilities. And now, I will turn the call back over to the Operator to moderate the Q&A session.

[Operator:]

Thank you. Our first question is from Erinn Murphy with Piper Sandler. Please proceed with your question.

[Erinn Murphy:]

Great. Thanks. Good afternoon. My question, Mary, is for you on the Target partnership. I was hoping you could talk a little bit more about the brand selection process and the inventory buying process between both Target, as well as Ulta? And then how do you intend to integrate the Ultamate Rewards Program at Target from a technology perspective? Thank you.

[Mary Dillon:]

Great. Thank you. Well, let me just start about the fact by reiterating, we are very, very excited about the partnership. We have got a strong business model and track record to start with and feel very confident about our long-term growth prospects, and of course, we are really thrilled to unlock even more excitement for guests and growth with our Target partnership. Just to recap, we are thrilled. It’s an amazing retailer. Brian Cornell is a fantastic CEO and they have got a fantastic team. These are two very strong retail brands that are loved by consumers and the concept of Ulta Beauty inside Target, nine out of 10 people loved it, complementary brand DNA and team DNA. And of course, I think, we both bring very different strengths to the equation from Ulta, it’s our beauty authority, our best-in-class understanding of the beauty category, and for Target, certainly, the scale of Target and the millions of that we will discover Ulta Beauty at Target is a huge benefit for us as well, as well as their omnichannel capabilities. As we think about bringing this forward, I think, our brand -- we are early in the process with our brand negotiations and discussions. So a lot of positive, a lot of enthusiasm, I think, as a category and for brands. It’s a great new platform for growth and for new customers, millions of new customers who discover brands and so we feel very optimistic about that. Target will own the inventory and that -- I think we have talked about that publicly. So that’s what we really own the brand relationships and that’s part of the partnership that we developed from the start. Early on in terms of integration of technology, but certainly a very important part of this is that our -- is that the customers that participate in the Ulta Beauty at Target will be able to earn -- will be able to sign up, if they are not currently members in Ultamate Rewards, if their Ultamate Rewards members earn loyalty points, as well as Target loyalty points and then for Ultamate Rewards, redeem those at Ulta Beauty. So we think that’s a critical part as we think about the way to really create a flywheel here that works -- creates the win, win, win, I’d say, for guests and for Ulta Beauty and for Target.

[Erinn Murphy:]

Great. That was very helpful. All the best.

[Mary Dillon:]

Thank you.

[Operator:]

Our next question is from Joe Altobello with Raymond James. Please proceed with your question.

[Joe Altobello:]

Thanks. Hey. Good afternoon. So first question, in terms of the experience that you guys had in October, you mentioned comps were down mid-singles in August, September and saw a little bit of a down draft in October given the fact that you guys didn’t repeat a promotion you did last year. Was that different from what you expected, and I am curious did it cause you guys to rethink your promotion strategy as we head into the holiday season? Thanks.

[Mary Dillon:]

Yeah. I would say, it’s not -- wasn’t a surprise. I mean, we made a very specific decision to pull back some level of promotion and adjust it without the promotion, of course, the comps are even stronger. So we think it’s an important step and just continuing to refine our promotion strategies to make them be as ultimately profitable as possible, but it’s not a pullback on our ability to be very competitive. So the holiday season, that we started early because we needed to get people to start early in November, right, given the capacity constraints and we have got a very robust program throughout the holiday season that we think is very competitive. And so far, as I said in the script, we feel good about the results that we are seeing. So I think it played out exactly as we had expected.

[Joe Altobello:]

And in terms of the guide for Q4, you mentioned the comp down 12% to 14%. It does sound like November was off to a fairly decent start. So maybe help us understand why you are assuming a pretty significant slowdown in December?

[Mary Dillon:]

Yeah. Well, stepping back, again, we are pleased with the momentum that we are seeing in the demand signals are strong and we did -- feel good about how we started in November. It’s a pretty simple answer to your question, we are in the middle of this unprecedented pandemic and as you know, we just reached peak levels of hospitalizations yesterday in the U.S. So it’s uncertain. Certainly, we know we are set up well. Our e-commerce business is performing extremely well. Our stores are doing a great job. But there’s uncertainty about what will happen, I guess, I’d say as we get closer to the holiday in terms of store traffic and that would be true for everybody. So we are just trying to meet the guests where they are, be pragmatic about this. Certainly, the news about the vaccine is positive, but there’s many difficult weeks ahead. So we feel good, but we are also being cautious about the uncertainty that’s going to we think play out in the next several weeks and few months.

[Joe Altobello:]

Understood. Okay. Thank you.

[Operator:]

Our next question is from Oliver Chen from Cowen. Please proceed with your question.

[Oliver Chen:]

Hi. Thank you. The e-commerce growth continues to be outstanding, but it decelerated from prior amazing quarters. So what are you seeing there in terms of category performance and what’s happened in different areas of growth in that business? I would also just love more details on Ultamate Rewards in that number count and how that may trend and what’s under your control in terms of keeping the member count at or above 31.7%? Thank you.

[Mary Dillon:]

Sure. Well, Oliver, that’s a three pronged question. That’s impressive. And I will -- maybe Dave and I will tag team a little bit. E-commerce traffic and comp, we -- we are very pleased with how that’s going. And in fact, expected it to moderate somewhat as we open up stores and that -- we like that. It’s -- obviously, as people are coming back to stores, historically, what we have seen. Omnichannel guests are our best guests, because they add the e-commerce purchase on top and really spend 3 times as much as somebody who would store only. So as we opened up stores, expected to see some moderation of e-commerce demand but it’s still up 90% last quarter. So we feel very good about that. In terms of, I think the second part of your question was about category performance on e-comm, which Dave will be happy to take and then we can just get into Ultamate Rewards at the end and the three pronged question.

[Dave Kimbell:]

Yeah. Oliver, category performance on e-comm really mirrors the total company performance that we highlighted in the script. So strength across skincare, haircare, bath, fragrance, exceptionally strong and continued challenges, although some bright spots in makeup. So nothing different about our e-commerce business versus our store from a category standpoint with real strength and growth coming outside of the makeup category, so we are pleased with that. As it relates to the -- our loyalty program, I will just start with saying, we are really remain incredibly proud of what we believe is one of the best loyalty programs in all of retail and even with some of the challenges we faced this year, we know our guests continue to love the program. They are highly engaged in that program. Our brand partners continued to find a lot of value through the access and the insights that they get by engaging in that program. Our elite guests, our diamond and platinum guests are still highly engaged. It is working at a very high level, and we are really glad that we -- we have always been glad to have it and we certainly have been happy to have that as part of our arsenal this year as we face this unprecedented times. But, yes, we did see a decline this year, primarily due to store closures. That hurts our new member conversion and it also impacts retention, because as you know, while our e-commerce business is growing and we have a significant increase in penetration of our member base at our e-commerce, it’s still a majority store-based user loyalty program and some of those guests, particularly the least engage the non-elite guests, we have seen a bit of a hit on retention with those lease tenured guests. Importantly, as I think Mary mentioned in the script, our retention with our most tenured guests, the platinum and diamond, remains very strong, and we are seeing a lot of strong performance in that. So, with nearly 32 million members, we are -- we feel like it’s still very strong and we are focused on reactivating guests, continuing to drive strong engagement with our engaged guests and those elite guests. But as a reminder, we do calculate loyalty -- the number of our loyalty program over rolling 12 months. And so as each month goes by, we are still lapping a pre-COVID period through this -- through the next several months. So, we are working hard to reengage our guests, but we are continuing to be lapping a period where we weren’t facing the challenges, particularly in our store fleet. So, we are anticipating some challenges with our less tenured guests for a little while, but focused on retaining them and seeing strength as we emerge out of this in 2021.

[Oliver Chen:]

Thank you. Congrats on target. Best regards.

[Mary Dillon:]

Thank you.

[Dave Kimbell:]

Thanks, Oliver.

[Operator:]

Our next question is from Rupesh Parikh from Oppenheimer. Please proceed with your question.

[Rupesh Parikh:]

Good afternoon. Thanks for taking my question. So I guess, Scott, just going back to some of the commentary that you provided for guidance for Q4. I was curious, if you can provide maybe the puts and takes for gross margins? And then related to that, I just want to get a sense of what you guys are seeing right now in the promotional environment during the holiday season?

[Scott Settersten:]

All right. Thanks, Rupesh. So first, I think with fourth quarter, it’s important to keep in mind what the sales guidance is. So again, we expect a softer topline in Q4 versus Q3. Again, that’s compared to last year’s trends, right? So that comes with inherent margin pressure, generally speaking. We anticipate gross margin to leverage in Q4 similar to Q3 levels, with many of the same drivers that we have seen through the last couple of quarters, primarily deleverage of fixed cost in the stores and across the supply chain, on lower sales volumes and then we are going to have some nice offsets with improving merchandise margins similar to what we saw in Q3. I guess as long as I am talking about margins, I will just pivot over to SG&A as well. Just as a reminder, we have made some comments in the call about the shift in the payroll, right, from related to the services manager going from cost of goods sold down to SG&A. So that’s something to keep in mind as you update your model. And just a little bit more color there, so we expect -- in SG&A we do expect more deleverage in Q4 versus Q3, with the pressure being from store payroll and benefits as we ramp up store labor again and make sure we deliver excellent guest experience during the holiday season and then some increasing store expenses primarily due to the COVID and PPE-related costs. Lastly there, I’d say on the advertising or marketing side, there was a shift. We talked about this earlier in the year. So marketing is going to be heavier in the fourth quarter as we go into holiday. We view that as opportunistic spend versus what we saw earlier in the year.

[Dave Kimbell:]

Then on your promotional question for the holidays. Of course, as we have talked about, before holiday is always a very promotional timeframe for every retailer. And we see it as not just competing against other beauty retailers, but really other categories as well as competing for the gift-giving occasions. So naturally, we see an increase in promotionality. We also, as Mary mentioned have -- we have pulled up our promotions and changed the cadence a bit and we are seeing that across the category as well as more effort to spread promotional activity around to give guests more opportunities to feel more comfortable shopping both in store and online to manage their gift-giving in personal occasions. Overall, we see it as competitive. We have seen some competitors be a bit more promotional. We have seen brands a bit more aggressive in some limits time offers in their DTC. I wouldn’t classify that as a dramatic or radical shift in promotionality, and as always, we are watching the market very closely. We have got great tools in place. We feel like the efforts we have implemented so far this holiday season, this quarter have been effective and we are confident in the promotional plans that we have both leading up through the rest of Christmas and then post-holiday as well. So we feel good about the position and certainly managing and monitoring it on a daily basis.

[Scott Settersten:]

And Rupesh, I just want to clarify, I did mean deleverage. So gross margin deleverage in Q4 versus Q3 same with SG&A.

[Rupesh Parikh:]

Okay. Great. Thank you and best of luck for the holidays.

[Dave Kimbell:]

Thanks.

[Operator:]

Our next question is from Simeon Siegel with BMO Capital Markets. Please proceed with your question.

[Simeon Siegel:]

Thanks. Hi, everyone. I hope you and your families had a nice and safe holiday weekend. Maybe a little higher level, Mary or Dave, I guess, pandemic might be a weird time to ask this, but how are you thinking about where you are in terms of the Target -- your Target customer share of wallet versus where you have told us historically? And then maybe any views you have on how the selling landscape might change post pandemic? So just thinking about potentially shrinking department stores, but growing online beauty, maybe DTC brands, big box, et cetera. Just any of the changes you are seeing there? And then, Scott, did you say what you expect to save from Canada next year? Thank you.

[Mary Dillon:]

Okay. Thank you. Another three pronged question. Starting with the broader environment, I would say, we are always in a strategic planning mode, right? Looking around the corners, thinking about the future, looking at what’s happening with consumer behavior, channel behavior, competitive behavior. There’s no question about that. The pandemic has accelerated many things that were on the horizon anyways, and certainly, increased e-commerce shopping, no surprise, disruption in some physical shopping, which is coming back and we think there’s a bit of a shakeout -- maybe accelerated shakeout in terms of who the winners and losers will be long-term in terms of retail format. So part of what we -- a big part of what we do is think about how can we meet guests in new ways and new channels, new formats to meet them where they are going to be. And that has been a strategy for us already, which is increasing our omnichannel capabilities, so whether it’s BOPIS, curbside, e-commerce, shipping capacity, digital tools. But we certainly -- that’s another great opportunity for us with the Target partnership is to really disrupt at a time that there is disruption happening and accelerate the opportunities for us to drive growth through accessing new customers in new omnichannel way. So DTC brand, certainly, there’s strength in that segment as well. We think overall, e-commerce will be bigger than it would have been it’s been pulled forward. I think we all know that. But we see that our customer in this category also still really wants the in-store shopping experience and so, that’s kind of exciting for us, as we are always thinking about what that store of the future and experience of the future would look like. And frankly, I am very happy that we had digital tools available like GLAMlab to immediately pivot to virtual try-on for makeup and now skincare in a way that is very helpful right now. So, I think we are well-positioned given the shifts. I don’t think the shifts aren’t done. I think we just have to assume that we have to continue to look around corners for new shifts and opportunities. Share of wallet, do you want to add that?

[Dave Kimbell:]

Yeah. I’d just say, certainly, it’s -- as you said in your question, a really disrupted time to try to measure consumer dynamics and so we are watching closely on, share of wallet. What we do know is we continue to gain share and we talked about this, I think, in previous calls and discussions, gaining share on the prestige side, we are across categories within prestige, makeup, skincare, haircare. We have seen that consistently. As we talked in previous calls, we lost -- we feel like we lost some share as our stores were shut earlier in the pandemic in the mass side. And our mass competitors remained open, which would imply a bit of a short-term hit on share of wallet. But we are seeing that business strengthen and performed really well in Q3 and so confident in that. So we are going to wait for the dust to fully settle on 2020 to really assess the impact of share of wallet. What we do know is we came into this pandemic with real momentum and strength across categories and price points, gaining share, gaining share of wallet, gaining customer growth. There’s been disruption. But we think our model, as Mary said, is quite strong. We think we are very well-positioned to accelerate out of this and continue the path of driving growth and share across all dimensions.

[Scott Settersten:]

And then, finally, on the Canada piece, we haven’t really quantified any element of the Canadian expansion plans here over the last couple of years we have been talking about this. So I -- suffice it to say, it’s a start-up investment like a lot of other things and there is typically some deleverage that comes along with that during the early phases. That wasn’t -- so we will avoid that next year, obviously, by not moving ahead with that. But back to Mary’s comments, that’s not the reason why we stepped away from that. I mean, it was just a question of, what were the highest priorities and where should we be focusing our efforts in light of all the disruption we are dealing with these days.

[Simeon Siegel:]

Great. Thanks so much guys and happy holiday season.

[Mary Dillon:]

Thank you.

[Dave Kimbell:]

Thanks Siegel.

[Kiley Rawlins:]

Operator, I think, we have time for one more question.

[Operator:]

Sure. And our last question would be from Mark Altschwager with Baird. Please proceed with your questions.

[Mark Altschwager:]

Hi. Great. Thanks for taking my questions. I guess, a two-pronged one related to stores. Maybe just first is, with respect to the store opening plans, you mentioned at least 30 next year, I mean, what are the factors you are considering today that would most impact the final plan for 2021 and is there a scenario where you could get back to something closer to the prior cadence? And then just second part just related to Target. From a store perspective, I mean, if that partnership is successful, does it change your view on the longer-term store Target for Ulta? Thanks.

[Scott Settersten:]

Yeah. So I guess maybe I will go to the last piece of that first. So, no, it doesn’t change our outlook really on that range that we have been talking about and reaffirming over the last few years. So, 1,500 to 1,700 stores in the U.S. We still feel comfortable that, that’s very doable range even with the new Target announcement here recently. So as you can well imagine, real estate being one of our core competencies. This has been on the front burner, just thinking about the impact to store growth in the future and how -- what changes this might drive us to. So we don’t see any big pendulum swing with respect to that. Although that’s something we will keep our eyes on, right, as we move down the pathway with the Target team. And so as far as next year, the cadence, so, yes, at least 30 stores, markets partly related to our ability to work with our landlord partners. I mean, you know a lot of these leases. We are working years in advance, right? So there are signed leases and commitments to move forward with certain projects. So again, we are re-looking at all of those, all the signed agreements that we have and all the others that are in the queue, just to make sure we are making good decisions and going on with the best of the best kind of locations that we feel very confident in. So it’s a thoughtful process, but we feel like we have got really great capabilities there analytically, and our real estate team is best-in-class. So we feel confident in the future.

[Mary Dillon:]

Yeah. I will just going to add one thing to Scott’s answer, which is, on top of it, the way that we thought about the Target partnership, I’d say, is really an amplifier to our business model. As Scott said, we believe we can still build out the number of stores that we have mapped out and this yet gives us yet another point of distribution, a way to reach millions of new guests with a trial and discovery version of Ulta Beauty, right, that we amplify back to the Ulta Beauty full business model as well and so as we map out the future of those locations plus our store locations working in partnership with Target to make this a win for everybody.

[Mark Altschwager:]

Thank you and happy holidays.

[Mary Dillon:]

Thank you.

[Operator:]

And we have reached the end of the question-and-answer session. I would now like to turn the call back over to Mary Dillon for closing remarks.

[Mary Dillon:]

Thank you for joining us today. I’d like to close by thanking all of the Ulta Beauty associates across our stores, distribution centers and offices with their truly relentless effort to navigate through this challenging environment, while also working hard to get our stores, website and DCs ready for the holiday season. We know this holiday season will be like no other, but our team is ready and excited to help our guests see the joy of the season. And we hope that you, your colleagues and your loved ones stay safe and healthy. Look forward to speaking to all of you again in March when we report our fourth quarter and full year results. Thank you.

[Operator:]

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