Ulta Salon Cosmetics & Fragrance Inc ULTA
Q4 2012 Earnings Call Transcript
Transcript Call Date 03/14/2013

Operator: Greetings, and welcome to the Ulta Beauty Fiscal Fourth Quarter and 2012 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 Laurel Lefebvre, Vice President Investor Relations. Thank you. You may now begin.

Laurel Lefebvre - VP, IR: Thank you. Good afternoon and thank you for joining us for Ulta's fourth quarter 2012 conference call. Hosting our call are Dennis Eck, Interim Chief Executive Officer and Scott Settersten, Chief Financial Officer. Also joining us our Alex Lelli, Senior Vice President, Growth & Development; Janet Taake, Senior Vice President, Merchandising; and Jeff Severts, Senior Vice President, Marketing.

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 may make reference during the call to the metrics free cash flow and non-GAAP to financial measure defined as cash provided by operating activities minus purchases of property and equipment.

With that, I'll turn the call over to Dennis.

Dennis K. Eck - Interim CEO: Thank you, Laurel. Good afternoon, everyone. I'm very pleased to have several members of our Senior Management here. Ulta has a strong and tenured leadership team. Scott, Alex, Janet and Jeff are among the key leaders driving Ulta's business forward. We will take you through the fourth quarter numbers. Ulta drove terrific results in the fourth quarter wrapping up another year of sales and earnings growth. We wish our expectations for continued excellent performance in 2013.

For those of you are not familiar with my background. I have been the non-Executive Chairman of the Board of Ulta for the past 10 years. I have worked closely with the management team over the last decade. I am honored to take on the role of Interim CEO. My primary focus is to maintain a high-quality business at Ulta. I will be working with other members of the Board to find the right CEO to lead Ulta in the years ahead. The search is underway. We are working with terrific minds and associates, top executive search firms to identify the best possible candidate to lead this Company. You saw our announcement about Scott Settersten's appointment to the CFO role today and I would like to congratulate him on his well-deserved promotion.

With that, I'll turn it over to Scott. Scott?

Scott Settersten - CFO: Thank you, Dennis. As you've seen in the results, we announced this afternoon, the Ulta team delivered another very strong quarter and year. Ulta remains a compelling growth story, which continues to build upon our successful five-point growth strategy.

To recap the Q4 headlines, we grew the top line 30%, including the benefit of an extra week in the quarter. Comparable store sales were 8% on top of 11.5% in Q4 of 2011. We were pleased with our sales in January, which benefited from our planned inventory investment. This allowed us to reduce stock outs and to come out of the holiday season in a healthy and stock position, while ending the year with inventory levels more in line with the rest of the year.

We increased operating margin 110 basis points from 12.6% in Q4 of last year to 13.7% this year. Earnings grew at 37% to $1 per share. These excellent results wrapped up a strong year in which we grew sales 25%, drove an 8.8% comp and delivered 41% earnings per share growth for the full year.

I'll go through the financial statements in more detail and talk to you about our plans for this year in a moment, but first I'd like to ask the team to provide some updates on our progress with Ulta's five point multiyear growth strategy. One, accelerating the store growth. Two, introducing new product, services and brands. Three, enhancing our loyalty program. Four, broadening our marketing reach. Five, increasing our digital focus including ulta.com.

First, I'd like to introduce Alex Lelli, our Senior Vice President of Growth and Development to talk about our store growth. Alex has more than 30 years' experience, in real estate development for big box retail and has been with Ulta since 2005.

His team is responsible for real estate analytics, site selection and all the elements of getting leases signed and fixtures, stores fixture and open. Over the course of the last eight years, Alex and his team have quadrupled our store count and the quality of the real estate and the new store productivity speak for themselves. Alex?

Alex Lelli - SVP, Growth & Development: Thanks Scott. Good afternoon everyone. Ulta is a compelling store expansion story, and my team has the expertise, creativity and proven track record to deliver 15% to 20% annual square footage growth as we build out our 1,200 store plan. 2012, was an outstanding year for us and here's why.

We increased square footage by 23%, opened 102 new stores, relocated three and remodeled 21 stores. That is a significant increase in activity compared to 2011. Focusing just on the fourth quarter, we opened 13 new stores and ended the year with 550 stores in 45 states. We continue to be very pleased with new store productivity driven by high quality sites, growing awareness of the Ulta brand and strong grand opening promotions.

Let's look ahead to 2013, we're in very good shape to execute our 125 store plan, the vast majority of the leases are already signed. The mix of stores in 2013 will look pretty similar to last year with about 75% in an existing shopping centers and the balance in new developments. About a third of the new stores will be in new markets and the rest will fill in existing markets again similar to last year.

We expect to open approximately 23 stores in the first quarter, 32 in the second quarter 55 stores in the third quarter and 15 stores in the fourth quarter of 2013. We plan to remodel 7 stores as our primary focus is on executing our accelerated new store rollout. The portfolio is in great shape 90% of the change is in our newest formats.

Looking ahead to the next several years we continue to see a high-quality pipeline of potential real estate sites. The dealmakers on my team all have at least 25 years of experience in retail real estate. Ulta is benefiting from their tenure and creativity to find ways to deliver the best sites in an environment where there is very little new shopping center development.

We are also enjoying the benefits of our solid network in the shopping center industry and strong relationships with landlords, shopping center owners and brokers since we are one of the few retailers to have such strong growth potential.

Our debt-free balance sheet and our ability to drive customer traffic to shopping centers makes us a tenant of choice. We are also benefiting from the repositioning now taking place in the retail industry with many retailers closing or downsizing stores.

However as we have always maintained we will not compromise our standards for quality sites just to deliver the quantity of stores in our plan.

I now like to introduce our Chief Merchant Janet Takke to discuss the second element of our growth strategy, introducing new products, services and brands. Janet has been with Ulta since 2008 and has more than 30 years of experience in retail merchandising.

Janet and her team have added 65 new brands to the Ulta portfolio in the past four years and 20 last year alone, fuelling a strong comp performance we've seen over the past few years. Janet?

Janet Taake - SVP, Merchandising: Thanks, Alex. Merchandising is the heart of the growth for Ulta. Introducing newness is a powerful took to continually surprise and delight our guests. Our business continues to grow faster than the beauty market overall, as we strengthened our assortment with new brands, new products and new services. We continue to curate the offering with trend-right products to make the guest experience compelling. With over 20,000 skews and 500 brands, we have unmatched breadth of assortments which continues to evolve almost daily.

In the fourth quarter, we gained share across all categories with particular strength in prestige cosmetics and skincare. We see strong trends in nail, foundation, both women's and men's skincare and high-tech tools like Clarisonic.

Celebrity tie ins with hair care brands, are boosting the growth of brands like Living Proof, with spokesperson Jennifer Aniston and Alterna with brand ambassador Katie Holmes. They will both be very prominent in our marketing. Looking ahead, the merchandising team continues to build a strong pipeline of new brands and new products to add to our assortment.

Starting with some great news, just this week, Ulta became the only retailer approved to sell OPI nail polish online and we launched the full OPI assortment on Ulta.com, including the new Euro Centrale collection of spring colors. Nail continues to be an important trend with personalization at the forefront supported by nail art tools and seasonal color trends.

Now let me touch on a few new prestige brands we're introducing. The St. Tropez's luxury bras and products, Lipstick Queen, a line of lipsticks with the cult following and Deborah Lippmann, prestige nail laquer which we will be rolling out to 200 stores in Q1.

In the skincare category we are delighted to launch Perricone MD a prestige brand known for its anti-aging formulations and clinical efficacy. Perricone is a great addition to the assortment as we continue to build a complete skincare offering. Newness and Fragrance continues to be strong with Coach Love, Jimmy Choo and Dolce & Gabbana The One Desire all launching in Q1.

Moving on to brand expansions we're excited to announce we're continuing the expansion of Clinique boutiques in 2013 on top of the 43 boutiques already opened at year-end. These additional boutiques will be fairly balanced between our new stores in 2013 and existing stores, while adding more Clinique boutiques creates some short term pressure on the P&L this provides excellent long-term benefit to Ulta and our guests.

We have also just rolled out our exclusive Ck One cosmetics brand from 180 stores to all locations. Benefit brand boutiques continue their strong performance. We now have Benefit Bra bars in 400 stores and we will be adding bra tenting to the service menu this year.

For a quick update on our services business Salon performance was very strong in the fourth quarter driven by cut and color. On the skincare side of the business we're seeing nice growth in Microdermabrasion services, as well as strong response to special promotions on our menu of 20 minute targeted skin treatments.

Turning to Q1, we're now launching the new 2013 Salon Collection with new cutting color and highlighting technique and we expect our Salon business to have another solid year of market share gains and growing awareness of our high quality Salon services.

As you can see the pipeline of Newness for 2013 strengthens our position as the beauty authority. To succeed in merchandising you need a strong partnership with marketing and I'm delighted to be partnering with Jeff Severts the newest member of the leadership team. Jeff joined Ulta last fall with 20 years of experience in multi-channel retail and consumer products marketing. Jeff most recently led the marketing efforts for Carphone Warehouse in the U.K., and he built the Geek Squad brand at Best Buy from a local phenomenon to a national brand. Jeff?

Jeffrey Severts - SVP, Marketing: Thank you, Janet. I've really enjoyed my first few months here. This company has a vibrant business model with so much natural strength. And as a marketer I see tremendous potential. The good news is that we are already doing the hardest part of marketing really well. We have over 11 million active loyalty program members who are shopping more frequently and spending more money with us. But the untapped opportunity is penetration. Tens of millions of women in our trading areas have yet to discover the Ulta brand. We know what it takes to win customer loyalty and we'll continue to leverage our proven methods. But now benefiting from our increasing scale, we can begin to invest in marketing in way that will allow us to reach those millions of potential customers. We expect those efforts to be mostly digital, and we look forward to providing you updates our progress in the quarters ahead.

Now, let me take a step back to recap our efforts on three initiatives during the fourth quarter and also give you a preview of our activities in Q1. In Q4, we continue to broaden our reach beyond our traditional strength in direct mail marketing. For the holiday season we opened many of our stores at midnight on Black Friday and built excitement with great deals and an integrated marketing campaign. Leading up to Christmas, we offered 11 days of daily holiday hot buys driving excitement in strong sales with great offers on prestige brands. We also continue to evolve our social media strategy with increased communications through Facebook, Pinterest and Twitter.

In January, we refreshed our popular skincare event; Rebranded Love Your Skin. This three-week promotion offer daily in-store events and gift-with-purchase to encourage customers to reassess their skincare regimens.

Turning to Q1, we kicked off the quarter with the spring beauty preview in partnership with the Allure Magazine, promoting the season's newness and highlighting tips and trends. In February, the Oxygen Reality Show 'The Face' debuted amid great fanfare. The winner of the contest will become the newest face of Ulta and we've been very pleased with the buzz about the program in social media and with the coverage we've received in national titles like In Style and Marie Claire.

This week we launched our semiannual 21 days of beauty promotion. We are backing this event with our most integrated campaign to-date featuring the largest digital marketing push in our history.

Turning to our loyalty program, we continue to build a member base to well over 11 million active members. We are testing and refining how we use our new CRM platform that we implemented in Q3. We've had some early success using customer behavioral data to deliver more compelling personalize office. As we use this platform more, we expect to find more efficient and effective ways to drive traffic.

As you know, we currently have two loyalty programs running in different parts the country. We are still assessing the results of last April's conversion in the central region. Once we have a full annual cycle of data, we plan to quickly decide on the size and timing of subsequent conversions. Our goal and our expectation is that we have one national loyalty program.

Moving on to e-commerce, in the fourth quarter; we enjoyed strong growth on ulta.com and delivered significant enhancements to the site's stability and speed. We were very pleased with our dramatic improvements in site performance on Cyber Monday Weekend despite record volume.

Looking ahead to Q1 and beyond, this is a very important year for ulta.com as we invest in a major site redesign as well as in people and supply chain capabilities to continue to accelerate our growth. In summary, Ulta has as a huge opportunity to reach new customers who've never discovered our brand, and to be even more compelling to our existing guests with personalized marketing.

I'll now hand it back over to Scott.

Scott Settersten - CFO: Thanks everyone. For the update on our five point growth program, and reminder of the significant runway that remains in each leg of our strategy. Turning back to the detailed P&L, net sales were $758.8 million, an increase of 30.3% compared to sales of $582.5 million, achieved in the fourth quarter of 2011. This included an extra week of sales, which came in a bit stronger than our previous estimate of $35 million.

Our 8% comp was fairly balanced between traffic in tickets during the quarter. On a two year basis, the comp was more consistent with our typical trend, with traffic being the primary driver. Gross profit margin increased 10 basis points to 34.2% from 34.1% in Q4 last year.

We continue to see leverage and fixed store costs on our strong comp and increasing leverage in our supply chain on efficiency improvements from our new Chambersburg distribution center. These gains were offset by weaker merchandise margins, which were primarily driven by our stronger focus on value, meaning we are taking greater advantage of our promotions and coupons.

SG&A expense, as a percentage of sales decreased 100 basis points to 20.3% compared to 21.3% in the fourth quarter last year, driven primarily by corporate overhead and marketing leverage.

Pre-opening expense for the quarter was $1.9 million compared to $1 million in Q4 of 2011 due to adding 13 new stores compared to seven stores last year.

Operating margin rate increased 110 basis points to 13.7% compared 12.6% a year ago with operating income up 41.7% to $103.8 million the tax rate was 37.8% compared to 36.7% in Q4 of last year. The difference in rate is due to timing with the year-over-year rate relatively flat.

Net income per diluted share rose 37% to $1 compared to $0.73 last year. This year's fourth quarter included about $0.05 of earnings per share from the extra week in the period. Excluding the benefit of the extra week earnings per share growth was approximately 30%.

Turning to the balance sheet regarding inventories; we are pleased with the improvements in our overall position and the quality of our inventory.

While the average per door at the end of Q4 is a bit higher than we originally planned. We expect the per door average to be below our comp growth by the end of Q1.

Inventories at the end of the fourth quarter were $361.1 million compared to $244.6 million at the end of Q4 last year. Total inventories increased 47.6% and average inventory per store increased 20.5% compared to the prior year.

Inventory balances were driven by the addition of 101 net new stores $6 million of incremental inventory-related to the 79 new prestige brand boutiques completed during the year. $20 million of planned strategic inventory investments, in core product categories to reduce stock outs and ensure strong-end stock levels coming out of the holiday season. A pull-forward of roughly $10 million in inventory, to better support timing changes in the early 2013 promotional calendar and $5 million due to the incremental new stores in the pre-open queue versus last year.

Capital expenditures were $44 million for the quarter and $189 million for the full year, driven by our new store program, remodels, and systems and supply chain investments. Depreciation and amortization was $23 million for the quarter and $88 million for the quarter. For the year, we generated over $50 million of free cash flow and paid a $63 million special cash dividend.

Turning to our outlook for 2013; first, I'd like to cover a change in our communication practices going forward. Consistent with our plans to become a more integrated business that focuses the entire organization on the guest and how she wants to shop, e-commerce sales will be included in the comp beginning in Q1. With e-commerce currently representing a low single digit percentage of our sales, this is not a material change from a financial perspective. That said, we have high expectations for growth in e-commerce this year. If we achieve our growth plans, e-commerce could have close to a point to the comp number. We will break out the impact of e-commerce sales each quarter for the first year.

In terms of our financial expectations for 2013, we plan to deliver another strong year. We expect to deliver comparable store sales growth in a range of 46% through the year, including e-commerce. We expect square footage growth of approximately 22%, and to achieve earnings per share growth consistent with our long-term financial model.

We have exceeded our growth expectations over the last couple of years, with the acceleration of our store rollout and iconic brand boutiques expanding faster than we anticipated all great things for the business. To prepare for the next stage of Ulta's growth we're increasing our investment in a number of areas that will support strong sustainable growth, while still delivering on our long-term earnings growth expectations.

As a result, we expect to achieve EPS growth at the low-end of our long-term range of 25% to 30% growth, compared to 2012 earnings per share adjusted for $0.05 of EPS attributed to the extra week in Q4. Earnings growth will be driven by continued operating margin expansion offset by approximately $0.13 of earnings per share in incremental investments to maintain the long-term health of our business. We will continue to invest in store growth, in more Prestige brand boutiques, in a more robust digital strategy and our supply chain existence capabilities and in customer service in our stores to support the rapid growth of our Prestige brands in our mix.

Let me give you a bit more on each of these areas of investment. In terms of our new store program with 25 more stores opening in 2013 compared to 2012 the impact of higher pre-opening expense year-over-year is about $0.02 to $0.03 of earnings per share. The impact of a large number of (immature) stores 100 opened in 2012 and 125 opening this year will also put pressure on the P&L resulting in $0.02 to $0.03 of deleverage.

Turning to our digital strategy Ulta has a huge growth opportunity in e-commerce in addition to the need to better integrate our store and online shopping experience. We plan to make a substantial investment in systems to enhance online and mobile capabilities through a complete site redesign, which encompasses improved search capabilities and expanded personalization functions. We'll also make investments in our people and marketing to support hyper-growth in our digital business. The goal is to improve the guest experience, grow sales and improve the integration into the stores. We estimate the impact on the P&L will be approximately $0.03.

Moving on to investments in supply chain. To ensure we are positioned to support our continued growth, we need to invest in several areas to maintain an efficient supply chain and continue to provide great guest store associate and e-commerce experiences. This year we will be expanding our e-commerce fulfillment capabilities into another of our existing distribution centers. We will also begin to plan for an additional DC to be added to the network in 2014. Included any additional facility will be an upgrade to our warehouse management system and warehouse control system. New warehouse systems will improve productivity within the supply chain functions and allow Ulta to introduce new multichannel capabilities, such as direct-from-store ordering. These capabilities combined with future POS software updates will significantly improve the customer experience across channels. These supply chain changes represent a multiyear investment and we expect the impact on 2013 earnings per share will be about $0.03.

Finally, we will invest in our in-store guest experience. We are planning to invest modestly in store apparel to ensure our guest experience is optimized and as we continue to offer more prestige products requiring more associate knowledge. We expect modest deleverage in store payroll which will impact the P&L by about $0.02.

Turning to capital allocation, we expect capital expenditures for the full year 2013 to be in a range of $225 million, about $36 million higher than on capital program in 2012 driven by 25 additional stores, expansion of our prestige brand boutiques as well as systems and supply chain investments.

Depreciation and amortization are expected to be approximately $105 million. We expect to generate strong free cash flow for the year and we'll continue to evaluate with our Board, the best use of any excess cash.

Turning now to the specific guidance for Q1. We are taking a conservative view of the sales environment which assumes the continuation of the consumer behavior we saw in Q4.

With that as a backdrop, let me give you our expectations for the first quarter and then circle back at the end to provide a little more insight into gross profit margin in SG&A. We expect to achieve sales in the range of $568 million to $577 million versus $474.1 million in Q1 of 2012. We expect comparable store sales increase in the range of 4% to 6% including e-commerce.

We plan to open 23 new stores versus 18 last year. We expect to achieve earnings per share in the range of $0.60 to $0.63 versus $0.54 in Q1 of 2012. This earnings guidance includes higher store opening expense and investments in systems and supply chain initiatives. It also includes cost associated with the additional Clinique boutiques.

As we continue to expand our prestige boutiques accelerated depreciation and other expenses to prepare to open the Clinique boutiques are expected to cost us about a $0.01 of earnings per share in Q1. Gross profit margin is expected to decline 140 basis points at the midpoint of the range. While we will uncharacteristically see gross margins decline in Q1, for the full-year, we expect healthy gross margin expansion. SG&A rate is expected to decrease 50 basis points versus last year's 23.4% rate. Operating margin is expected to decrease approximately 90 basis points at the midpoint of the range versus 12.1% last year. The tax rate is expected to be approximately 38.3%. We expect a fully diluted share count of approximately 65 million shares.

Going back to profit margin, there are number of margin challenges specific to Q1. A couple of the larger drivers for Q1 include, first product mix, we planned an Ulta private label gift with purchase offer early in Q1, which unfortunately got hung up in U.S. customs. We quickly substituted a replacement offer, which was successful at driving units, but hurt our margin rate in Q1 by roughly 40 basis points. Second, is the large number of immature stores in the base which will drive 30 basis points of deleverage in fixed store costs versus Q1 of last year.

Third, as you know, we transitioned the central region to our ultimate rewards loyalty program at the end of Q1, last year. Our guests loved the program, and over the long-term, ultimate rewards will be a gross margin driver.

However, compared to Q1 of last year, the central region change comparison will have a modest negative impact on margin. We are also assuming that customer behavior focusing on promotion and value will continue in the near term. I'll repeat, for the full year, we expect to see healthy gross profit margin expansion.

With respect to SG&A most all of the incremental 2013 investments we described earlier impact the SG&A line.

The $0.13 of incremental expense generally flows evenly throughout the year. While we expect SG&A as a percentage of net sales to improve in Q1. It will be roughly flat to 2012 for the full year. We have consistently communicated that we are targeting a mid-teens operating margin over the next several years and that the mix of leverage between gross profit and SG&A would fluctuate over time.

We made significant progress toward our operating margin goal in fiscal 2012 and expect to continue to expand operating margin in fiscal 2013. Just to reiterate our long-term view. We remain confident in delivering our long-term financial model based on 46% comp with 15% of 20% annual square footage growth yielding 25% to 30% earnings growth and targeting a mid-teens operating margin in the medium-term.

Now I'll turn the call back over to Dennis.

Dennis K. Eck - Interim CEO: Thank you Scott. I'm very comfortable with our outlook for 2013. Board of Directors and I worked closely with the entire Ulta team to (review) and approve the plans for 2013. There have been no changes to budgets as presented to the board at the end of last year, we expect continue to drag market share gains and robust earnings growth. This is balanced with the need to invest in the long-term growth of this company.

I'm very proud of Ulta's 2012 performance and thank each of our 16,000 associates for a compelling experience for our guests. We're managing our business for the long term. And we are making the right investments to set forth our vibrant growth story over many years to come.

With that operator please open up the call for questions.

Transcript Call Date 03/14/2013

Operator: Daniel Hofkin, William Blair.

Daniel Hofkin - William Blair: Just a couple of questions. First, the selling environment, you obviously finished up the fourth quarter a bit on an upswing. I'm just curious – I know you're not a monthly reporter, but baked into your guidance have you seen any choppiness recently similar to what some other retailers have talked about in the last month or so and how much has that informed your guidance? That's my first question.

Scott Settersten - CFO: Again, back to our prepared remarks. The choppiness that we saw in the fourth quarter and the increasing take on our promotions and coupons, we've seen that continue into the early stages of the first quarter. So, again, when we put our guidance estimates together, we consider all the elements of the current environment that we're experiencing. So, you can rest assured that all that is baked into our current thoughts.

Daniel Hofkin - William Blair: Is there anything baked-in in terms of your full year view for the potential comp benefit from the accelerated piece of store growth that really kicked in around middle of 2012?

Scott Settersten - CFO: Again, we take a very disciplined detailed look at the way those new stores are stacked up, again we discussed that in the past with many of you. So we are very clear and understand what the impact is and again that's baked into our full year view.

Daniel Hofkin - William Blair: I mean to some degree this does imply you're expecting some further deceleration excluding that?

Scott Settersten - CFO: Further deceleration in the comp?

Daniel Hofkin - William Blair: In the comp because to some degree wouldn't that benefit only show up in the second half of the year, the benefit from the accelerated store growth?

Scott Settersten - CFO: When you look at the comp for any particular quarter or for the full year, we're baking in a lot of different elements not just a new store ramp or how the model stacks up in future period. So, we have to take in to effect or into account what the customer is feeling and how we're seeing them react to our ads and our promotion and take the total picture into account and obviously that impacts the older stores as well, everything that's in the comp base not just the new stores rolling into it.

Daniel Hofkin - William Blair: Where have you seen the most I mean the more response to gift with purchase on Prestige offers is it in some of the mass brands in terms of greater off take of sharply price promoted product or where are you – is it some color on that?

Scott Settersten - CFO: We haven't seen any trade down for the customer again so the comp during the quarter was evenly split between traffic and average ticket that's a little bit unusual compared to our normal trend which is primarily traffic driven to the stores, driving the comp. We see the customer just – there was just a greater take they are really capitalizing on our promotions when they are out there they are taking great advantage of that, more so than they had in the fourth quarter or holiday seasons over the last couple of years.

Daniel Hofkin - William Blair: Competitively is there anything that you've seen change in that regard either e-commerce or other brick-and-mortar was?

Scott Settersten - CFO: We keep an eye on our competitors across the board and there is a lot of them out there and there are a lot of different categories. We haven't noticed any major changes in their competitive environment.

Operator: Neely Tamminga, Piper Jaffray.

Neely Tamminga - Piper Jaffray: I had some clarification questions for Janet, if I may. Janet, I think it is huge deal (that's going on) here with you guys getting the exclusive for (OPI on.com). I would love to hear some of your perspectives how OPI approached that with you and what it is about the nature of your relationship that you think allowed you to get that exclusivity. And then just some clarification on the number of doors how many doors are you planning for Perricone for this year. And then I don't think we actually heard the additional door count for the new Clinique doors in 2013 that will be helpful. And one final follow-up just on the merchandising side here would be pricing on salon. Are you rolling out any menu? Is your pricing in salon actually going to go higher?

Janet Taake - SVP, Merchandising: OPI we've had a very long relationship and a very solid relationship with OPI it goes back from the very beginning of Ulta and we were very pleased that we were able to launch exclusively and approved the OPI online and that was done with great partnership with George Schaeffer the starter and owner of OPI prior to Cody owning it. But we are very, very pleased and excited to have it online. Perricone is rolling to outdoors and that will be in the next several weeks you will see it in all of our doors we are very excited about that as well. Clinique, we did not mention how many doors we are expanding to in 2013. We are still finalizing that with Clinique and we are very, very pleased to continue the expansion and so we will have more information on that later on this year, but we have opened 6 already this quarter. So, we're expanding as we speak.

Neely Tamminga - Piper Jaffray: In terms of the foreign pricing, Janet?

Janet Taake - SVP, Merchandising: The foreign pricing, it's just really trends, what we're introducing right now is really more trend and color, but the pricing has not changed. Color and cut are really the heartbeat of the salon business.

Operator: Brian Tunick, JPMorgan.

Brian Tunick - JPMorgan: Yes, two questions. I guess maybe for Scott, just as you give your comp view for 2013 and as you just ended the year, anything you can share in regards to maybe comps by class of store for 2012. Just curious what's happening to the more mature stores and if that's having any influence on what people will view as a conservative comp guide? Then maybe Dennis could share his thoughts on the CEO search. Obviously, you have a lot of projects going on in 2013. So what's your thoughts on timing? How long it might take to have the CEO and maybe what the ideal candidate in your view would bring to the table?

Scott Settersten - CFO: Hey, Brian, I'll take the comp item, first. Again, looking back at Q4 and 2012 as a whole, we've reported an 8 comp for the fourth quarter and 8 for the full year. So, when you go back and look at the individual classes, they are contributing in a solid positive manner. I mean the new stores are doing very well at or above targets and some of the older stores are still contributing at a very solid level. Looking forward to Q1 again based on what the consumer environment, we fill and the choppiness we've seen Q4 into Q1, we just feel it's best to take a conservative view of what the future holds for us.

Dennis K. Eck - Interim CEO: Then I'll take on the CEO question. You saw in the announcement that we announced, we had selected a search firm. We have a spec that we're working against. There will be a step where they come in and have a conversation with SVPs of the businesses to get an understanding of the strength of the team that we have here, and as I become more involved with the (day to day) we've indicated earlier that we've got a great sense of confidence in the Ulta management and their ability to execute the plan as they brave them out, and that's increased since I've been here. So, we would like to move as quickly as possible, but that said, we're incredibly focused on getting the right person to come into Ulta because, we have so many good things going. We have plans that we're driving forward. We're really looking for someone who could come in and, as seemly as possible just lead us to the next iteration and next generation of Ulta, and that's our goal.

Operator: Matt Fassler, Goldman Sachs.

Matthew Fassler - Goldman Sachs: A couple of questions about growth. I guess, first of all to sum it up, what's the hurry in terms of accelerating to 22% unit growth? I know this decision was made recently. It seems like, it's straining the financial model to some degree, you don't have a direct competitor essentially chasing you, and this is really directed, Dennis to you and to the Board, as well as to the management team, so I know it's a group decision. So, given that the P&L or the trajectory of the P&L is feeling a bit of stress related to this growth at least relative to recent earnings growth rates. Why they need to go above 20% from the unit perspective.

Dennis K. Eck - Interim CEO: Well I think as the Board looks at ways that we can deploy the cash that we are generating from the business. We look at ability to open new stores with a really high degree of certainty that they are going to perform because our real estate group and our operations group have delivered that. So we see that as really a chance for us to continue to use our strong balance sheet to move quickly. And Alex might want to make a comment about the fact that there are lot of opportunities that are coming forward and we want to make sure that we are taking those opportunities so we get the right locations for the future.

Alex Lelli - SVP, Growth & Development: That's true, Dennis. We are finding that with the repositionings that's taking place with other retailers in terms of their downsizing and closing and some vacancies that have occurred over the course of the last couple of years. This is an opportunity to get into top notch real estate locations that are successful on a traditional basis and it's an opportunity to get in after the fact so to speak and get playing to the game that has existed on some of these intersections for several years. So it is an opportunity to move quickly right now when we have no particular competition of great note for the space that we are interested in.

Matthew Fassler - Goldman Sachs: Do you think you have more competition and do you worry about co-tenancy risk as you make these moves?

Laurel Lefebvre - VP, IR: We couldn't hear you very well can you repeat that.

Matthew Fassler - Goldman Sachs: Are you concerned about having more competition for this space a year or two out and are you concerned at all about co-tenancy given some of the retail or store closures that we are seeing from some of your peers and other sub-sectors?

Alex Lelli - SVP, Growth & Development: Well, there is downsizing taking place among some other bigger boxes that will provide some competition for the same size box that we're interested in, but our preferential treatments so to speak based on the attractiveness of our offering is giving us primary attention from the landlord. So, there could be competition in the future, but I think at this point in time, we're eliminating that by moving quickly into the spaces that become available.

Matthew Fassler - Goldman Sachs: Then just a quick follow-up; on the rhetoric of the investments, as you itemized, the allocation for investment dollars, therefore items like payroll and some other prestige build-outs all of which I think are sort of part of the ongoing plan of running the business day-to-day. So if you could just clarify in what way these are really extraordinary investments as opposed to sort of a cost to doing business on an ongoing basis?

Scott Settersten - CFO: Well, I guess to your point, Matt, your perspective on whether it's a normal cost of business or not, what we want to make sure that's clear to folks is that that's an incremental spend over what was reflected in our P&L last year. So on the case of historic payroll and trying to improve the guest experience, the $0.02 that we mentioned there were the 10 basis points deleverage, we'll see in the P&L, is incremental to last year and there is a good reason for it. It's trying to improve the in-store experience. E-commerce, we got a functional site today that we're able to transact business on, but we're a long way from best-in-class type of environment out there. So we need to go back in, we feel this is the point we finally need to redesign the site and get some of the other functionality things really resolved.

Operator: Erika Maschmeyer, Robert W. Baird.

Erika Maschmeyer - Robert W. Baird: Could you talk a bit about what you're looking for with the ultimate rewards program before rolling it out further is the margin hit what you're thinking about the most and is it possible that you could tweak the program before expanding that like any color there will be helpful?

Jeffrey Severts - SVP, Marketing: Thanks, Erika this is Jeff. So, as you know we have the luxury of having two great programs with the (old beauty club) in the half the country and ultimate rewards in the Central region. So, we have the luxury of taking our time and getting this decision right and that's why we're taking about a getting a full annual cycle of customer behavioral data before we determine the shape and the timing of the conversion. The other practical reason for getting that full annual cycle of data is that it will better allow us to forecast our business when we make that conversion because the shape of the customer's engagement in the program is a bit different. The old program pushes all the redemption into a couple of weeks within the quarter the new program trends to spread that redemption across the total quarter. So, having more time to watch how she engages with this program we think is going to let us make smarter decisions for the launch and help us better forecast our business.

Erika Maschmeyer - Robert W. Baird: Then for Janet kind of a follow-up to Neely's question I mean one of the fear that's out there that the management turnover could stall the expansion of adding Prestige brands how would you respond to that? Then could you walk us through the various relationship points that Ulta has with new brands and existing brands and kind of talk about where the relationship fly?

Janet Taake - SVP, Merchandising: I'll just tell you that our relationships with all of our vendors are very, very strong and we continue to improve everyday on looking at brands we want to bring in and reaching out to those vendors. Our relationships are very solid. My merchant team and I continue to work on that. I think that vendor community is very appreciative of our ethics and our straightforward partnership that we have in the marketplace and that we are a growth retailer and we continue to introduce newness to our stores and to our guest most importantly and they want to be a part of that. But we have very, very strong vendor relationships.

Erika Maschmeyer - Robert W. Baird: Scott, could you quickly clarify in the past you guys have provided some additional color on the breakout basis point lies between fixed door comps leverage on the supply chain and merchandise margins?

Scott Settersten - CFO: For what period are you referring to?

Erika Maschmeyer - Robert W. Baird: For Q4 and then if you could talk about how you expect that to play out that would be helpful as well?

Scott Settersten - CFO: Q4 2012 the margin improvement was mainly driven by fixed door cost leverage. I think I mentioned in the prepared remarks that merchandise margin was weaker during fourth quarter that kind of help us back from where we expect it to be for the quarter. As we look to next year, again Q1 kind of prevents a type of perfect storm as far as merchandise margin is concerned, so again we are facing some challenges there. We do expect that the drivers in Q1 will largely abate or will become more moderate as we go into Q2 through Q4. So we do expect merchandise margin, we do expect leverage there in the back half of the year.

Operator: Gary Balter, Credit Suisse.

Simeon Gutman - Credit Suisse: This is (Simeon Gutman) for Gary. Scott, first following up on gross margins on Q4 it was still little below trend. I think you mentioned the merchandise came in a little late. If you can share a little more color on that? And then the second part Scott, just to paraphrase what you said, if the investment spending, the incremental investment spending is spread evenly across the next year, then it's really a gross margin issue on the first quarter and that gross margin issue technically goes away and therefore that's what the acceleration in EBIT, and EPS growth is explained by?

Scott Settersten - CFO: Yeah, let me take the first one on Q4, again just to refresh everyone's memory Q4 historically has been our most challenging quarter to try to expand gross profit margin. Again, we compete with all other retailers out there for the gift giving space, the promotional environments are a lot more aggressive during Q4 than it the rest of the year and what we saw in 2014 during the holiday was it – just a bit more of a change than it has been in recent year. That's what drove some of the weakness in merchandise margin. As far as looking at 2013, yeah, again I'd reiterate the investments deals kind of grow smoothly throughout the course of the year and we do expect to see merchandise margin expansion after we get past Q1, we've generated positive operating margin expansion in 2012 and we expect to do that again in 2013.

Simeon Gutman - Credit Suisse: It's Gary, let me just sort of follow-up, because we've seen now a few companies not just you guys but others, that have said, we're increasing our investment spend and that's going to have an impact on earnings and how we think about that over the longer term because obviously you're always investing for the future, so why is this investment spend something that what we've said last year and what does it imply for future years like how should we go back to remodel?

Scott Settersten - CFO: I would say, if I look at the longer list, Gary, new stores the $0.05 or $0.06 in total that we're talking about, again it's something that has to be determined. We haven't decided on what the 2014 new store plan looks like. As far as e-com is concerned, I would say that our 2013 investment represents a fairly large portion of what we think we would need to put into that element of the business, here over the medium term. When it comes to supply chain, I would characterize that as kind of a down payment, the $0.03, we're talking about this year really relates to kind of the investigation process and trying to figure out exactly what it is we want to build. So, there will be more – that's primarily expensed this year, the capital will follow on top of that in the back half of 2013 into '14. So, we'll give you more color on that when we get closer to figuring out what that looks like.

Simeon Gutman - Credit Suisse: Just one more, back to gross margin – this is Simeon. Some of the Q1 headwinds, you mentioned the product mix with purchase, I mean the mix – gift with purchase that we can get and go away, the large number of immature stores, last year you had a big step up versus the prior year and I guess this year we're only going to see more. So why does that abate? Then to the rewards program impact, I take it that means you're not going to be putting more regions on the rewards programs as the year progresses?

Scott Settersten - CFO: Fixed store cost deleverage, you're correct, that's going to be a headwind for the majority of the year, it's a fairly large bucket in the first quarter, we wanted to just remind folks of that. The loyalty program I will say the customers love the program, we love the program, the cost is not necessarily going to be an inhibitor on whether we move forward with that or not. To Jeff's point, we just want to make sure we understand how the guest is going to react to this, over a full cycle so that we can predict with certainty what the future's going to bear.

Simeon Gutman - Credit Suisse: Then one final question for Janet if I could sneak it in if you look and you have done – the company's done a great job adding in brands and if you look at collectively all the brands that you carry. How much of the prestige market do you think those represent and that's not asking what Ulta share is but just more – of all the brands that you represent how much of the market are you looking at and then how much more is obviously left to go?

Janet Taake - SVP, Merchandising: That's a very broad market and if you are speaking just the prestige color is that what you are referring to.

Simeon Gutman - Credit Suisse: Yes.

Janet Taake - SVP, Merchandising: Its very there is more to come, we have grown the portfolio considerably over the last several years but there are many brands that we would still love to have in our home. So as I said before we continue to evaluate the productivity and look for new brands and have conversations on an ongoing basis but there is a large space still.

Operator: Evren Kopelman, Wells Fargo.

Evren Kopelman - Wells Fargo: Scott I think I heard you say in the fourth quarter, the comp the ticket traffic was more balanced, that's right, the ticket may be contributed four points. I was a little surprised to hear that, because of the higher optic on coupons you mentioned and the promotional environment in Q4 can you give us a little more color what drove that ticket?

Scott Settersten - CFO: You are right that is what I said, that the comp was driven equally by traffic and by tickets, in the fourth quarter we saw average selling price was up a little bit, units were flat so really that's what was driven the ticket side of it. again we've seen this vary quarter-to-quarter over the long-term Evren over the long-term we expect traffic to be the major driver of the comp and it does vary quarter-to-quarter depending exactly what we are promoting in our circulars and bank logs.

Evren Kopelman - Wells Fargo: Then on the store maturation, I guess model that you share, the five year, how the stores mature – would you expect any of that to change and now that you're opening a lot more stores?

Scott Settersten - CFO: Thinking back to the store modeling, I'm just putting it through my imagination here. I don't foresee any major changes in how those stores stack up. They are still – the model that we've posted is still the model that we're filing. The stores again the new stores are still performing very well. First year sales are at or above our targets. There's some minor variance in some of the CapEx numbers that we had in the model, but it doesn't have any material effect on what the overall payback is on a cash-on-cash basis over the model term.

Evren Kopelman - Wells Fargo: So the sales growth rates in a year, two or three, those will remain within the numbers that you've shared in the past, do you think then?

Scott Settersten - CFO: We're still – again, based on what we've seen through fiscal 2012, those numbers still hold up.

Evren Kopelman - Wells Fargo: Then lastly I wanted to ask on brands, big brands like the Lancome and Clinique; in the stores that you have them, what kind of impact should we expect on the traffic or the comp from the introduction of such large brands and kind of the boutiques in these stores? If you can give us any help in picturing what kind of list that has, that would be great.

Scott Settersten - CFO: Evren we're still really in the early stages of implementing or rolling out the Clinique boutiques. So while we feel comfortable and confident that it's going to help the total box, it's going to help the comp over the long-term. It's really going to add up significant impact at this point in time. Again, as we look at 2013, Janet mentioned that the advancement of that is going to be split between new stores and comp stores, fairly evenly, so again there won't be as large an impact on the comp. Some of that's going to be in the non-comp or new store bucket.

Operator: Unidentified Analyst, Sterne Agee.

Unidentified Analyst - Sterne Agee: Actually I have two quick questions. We've heard a lot of questions about how the new stores are kind of hitting the maturity curve profile and things like that. I'm actually curious more about the more mature stores, the stores that are six, seven, eight years old. Are you seeing any change there? Are those stores comping? I think you had mentioned over the last 12 months they were still comping low to mid-single digits. Just curious, any change with the more mature store footprint you have? Then the second question is, I think, you stated that you expect similar impact on the SG&A line from investments throughout the year in each quarter. But you're guiding a four to six comp and 50 bps of leverage in Q1 and also the four to six comp for the year, but implying deleverage for the remaining three quarters. So just can you kind of walk us through why the leverage had turned to deleverage on similar top line Q2 through Q4 versus Q1?

Scott Settersten - CFO: As far as the comp fleet is concerned, again through the end of 2012 we haven't seen any change in the way those old stores are maturing or producing, again still low single digits overall for some of the older stores. As far as the deleverage points go in 2013, again I think it's more of a timing thing on what we see when some of those – how those investments play against some of the other things we're doing in the business.

Operator: Joe Altobello, Oppenheimer.

Joseph Altobello - Oppenheimer: Two quick points of clarification, I guess. Scott, first, in terms of gross margin you mentioned obviously down pretty significantly in the first quarter and then up for the year. Are you guys assuming that the customer focus on value dissipates throughout the year or the other drivers you are talking about really going to offset that?

Scott Settersten - CFO: We are not assuming any change in consumer behavior it is some of the other things that I mentioned, the next item in the first quarter. There is some other smaller things again when you had a bunch of small numbers they kind of turn into something but we don't want to get into all the details of it. So, again it is merchandise margin, deleverage in the first quarter, but of course correcting as we get deeper into the year.

Joseph Altobello - Oppenheimer: And then secondly in terms of the investments you are making this year. Is it fair to characterize some of those as catch-up investments or is it just the fact that because of the timing of them they tend to be somewhat lumpy?

Scott Settersten - CFO: Each one has a slightly different story, Joe. The supply chain, when you look at that one specifically, for example, we opened up chambers for DC earlier this year. We are very happy with the productivity there. That decision was made two plus years ago. So, since that point in time a lot of things have changed. We've accelerated the store program, the dotcom business what kind breaking out at the (scenes) here in Romeoville. So, it seem like the proper time to do a little bit more white boarding and kind of figure out what the long-term answer is there. So, that's kind of what's driving that one. As far as e-commerce is concerned we've been making investments there to earlier points here. What we are looking at this year is a significant step up in that.

Joseph Altobello - Oppenheimer: Just one last one and I apologize this is a bit unfair for your guys but you talked about potential uses of cash. (indiscernible). Any thoughts to repurchases?

Scott Settersten - CFO: We ended the year with roughly $320 million of cash on the balance sheet. Not all of that is excess cash, right? We need some here to run the businesses by way of working capital. Management and the Board continuously assesses the best use of excess cash, always with an eye on what provides the best return for shareholders. So, rest assured that we are watching out to see what the best use is.

Dennis K. Eck - Interim CEO: We've had that conversation on an ongoing basis between the Board and the management.

Operator: David Wu, Telsey Advisory Group.

David Wu - Telsey Advisory Group: In terms of the retail expansion, obviously, you continue to open up many of your stores in power centers. I was wondering, if you are starting to shift perhaps more of your openings toward mall-based locations and what you think the opportunity there and isn't if the profitability dynamics are different from the power centers?

Dennis K. Eck - Interim CEO: We have already several mall stores in our portfolio and we expect to continue to add additional mall locations when it makes strategic and financial sense. We'll look at quality malls with high occupancies, solid but anchored tenants and good population density. Our preference, however, still remains with big box power centers, best of the breed co-tenants. The performance of our mall stores to-date has been very good and we continue to be very strategic and scrutinize those locations carefully to continue to maintain that excellent performance.

David Wu - Telsey Advisory Group: Would you say the four wall profitability is pretty similar as the power centers?

Dennis K. Eck - Interim CEO: Yes, in fact, in some cases we're seeing an improved profitability and I think a lot of that has to do with our heavy scrutiny of the site selection process, when we do go into malls.

David Wu - Telsey Advisory Group: In terms of marketing, can you perhaps talk about your ad spending plans for the year? And if you're planning to allocate the marketing mix differently from last year, I mean, it looks like you're doing a little bit more (indiscernible) and want to know whether you've seen some good self-traction with some of these new initiatives?

Jeffrey Severts - SVP, Marketing: This is Jeff. So, in terms of marketing, we're looking to build on what's been so successful for us, which at the heart is our direct mail marketing capability, and our loyalty programs and but as I mentioned in my prepared remarks, the real opportunity is around penetration. So, we're looking to add on top of what we do so well, marketing efforts oriented at reaching some these customers who just aren't terribly familiar with the brand or in some cases have never heard of us. So, that doesn't mean more spending per se. That opportunity has afforded us by the increased scale that we're enjoying here as we grow. So we keep what we've got, we refine it, but now we're able to layer on this group of efforts against trying to get new customers into this tremendous loyalty machine we have.

David Wu - Telsey Advisory Group: Then just lastly, just for clarification on the promotions, is what you say sort of the gross margin impact, how much of it is tied to sort of increase in the level or number of promotions in coupons versus last year, versus sort of consumers, just choosing to buy more discounted product. Is there a way to sort of parse that out?

Janet Taake - SVP, Merchandising: We didn't add any promotions in the quarter, but it would be that they're really enjoying the advantage of coupons and taking advantage of the promotions in the store, but we did not add any additional promotions, on top of last year's calendar.

David Wu - Telsey Advisory Group: And coupons as well.

Janet Taake - SVP, Merchandising: The coupons is part of our mailer.

Operator: Jason Gere, RBC Capital Markets.

Jack - RBC Capital Markets: This is (Jack) on for Jason. I was just wondering if you could clarify the in terms of your expense and the leases you've already signed, you were focused more on, more urban, versus suburban markets there?

Dennis K. Eck - Interim CEO: Our focus is more oriented towards suburban markets. And 75% of our sites are located in existing markets.

Operator: I'll now turn the floor back over to Scott Settersten for closing comments.

Scott Settersten - CFO: I'd like to say thank you all for your interest in Ulta and we look forward to speaking with you all soon.

Operator: Thank you this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.