Ulta Salon Cosmetics & Fragrances, Inc. ULTA
Q1 2013 Earnings Call Transcript
Transcript Call Date 06/11/2013

Operator: Greetings, and welcome to the Ulta Beauty First Quarter 2013 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 of Investor Relations. Thank you. You may now begin.

Laurel Lefebvre - VP, IR: Thank you for joining us for Ulta's first quarter 2013 conference call. Hosting our call are Dennis Eck, Interim Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Also joining us are 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 references during this call to the metrics free cash flow, a non-GAAP financial measure defined as cash provided by operating activities minus purchases of property and equipment.

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

Dennis K. Eck - Interim CEO: Thank you, Laurel. Good afternoon everyone. We are pleased to announce a strong first quarter with better than expected sales and margin performance. The team is executing our five point strategy very well and our outlook for continued market share gains is excellent. To update you on our CEO search, we are making good progress. We have been very happy with the high quality of candidates. As expected, there is a high level of interest in this opportunity. The Board of Directors is partnering with our search firm Herbert Mines. We are working through a comprehensive process to identify the best candidate. We hope to conclude our search in the near future.

With that I would turn over to Scott.

Scott Settersten - CFO and Assistant Secretary: Thanks, Dennis, 2013 is off to a good start with solid first quarter results. To recap the Q1 headlines, we grew the top line 22.9%. Comparable store sales increased 6.7% including the impact of our e-commerce business which had a very strong quarter with 70% top line growth. This compared to a 10.1% retail only comp in Q1 of 2012. Operating income increased 17.8% while operating margin declined 50 basis points to 11.6%. Earnings per share increased 20.4% to $0.65 per share.

I will walk you through our financials in more detail in a moment but first the team and I will update you on our progress with – of this five point multiyear growth strategy, which includes; one, accelerating store growth; two, introducing new products, brands and services; three, enhancing our loyalty program; four, broadening our marketing reach; and five, increasing our digital focus including e-commerce.

I'll start with the real estate discussion. In the first quarter, we opened 26 net new stores ending Q1 with 576 stores in 46 states, representing 24% square footage growth. We added our first store in South Dakota in Sioux Falls in Q1. New store productivity continues to be very good, driven by a high quality real estate, growing brand awareness, dedicated resources for our brand opening events, and marketing programs to help stores get off to a great start. We recently updated our store model to reflect the most current data for sales, capital, and inventory. New stores are starting out a bit stronger than they have historically at roughly $2.8 million per store in year one. They still ramp up to $4 million on average in year five and then are expected to continue to comp modestly thereafter. We spend about $1 million per store in capital and receive landlord allowances of $600,000 per store on average. Inventory net of payables has gone up slightly to about $0.5 million per store as a result of the increase in our mix of higher value prestige products.

Preopening expenses decreased as we've shortened the time it takes to get stores opened and gained some scale efficiencies. All in, the total new store investment is about $1 million. The payback period hasn't changed. It is still roughly two years. We continue to be very pleased with the performance of the portfolio and are already making good progress on next year's new store program with roughly 50 sites already approved.

Looking ahead to the rest of the year, we’re on track to execute our 125 new store plan. We expect to open 29 stores in Q2, 54 stores in Q3, and 16 stores in fourth quarter of 2013. We’re on track with our plan to remodel 7 stores, and we will end the year with less than 40 stores in older formats.

Well over 90% of the change is in our newest formats, which we refer to as Level 6 or 7.

Now, I will turn it over to Janet Taake, SVP of Merchandising to update you on new products, brands and services.

Janet Taake - SVP, Merchandising: Thanks, Scott. Newness continues to be the primary driver of our comp sales growth. In terms of categories, prestige cosmetics and skincare continued to grow at a rapid pace offset by softer performance in the more mature haircare tools category. To recap newness of note in the first quarter, we were pleased with the new brand launches of St. Tropez Self Bronzers Lipstick Queen and the addition of Deborah Lippmann prestige nail lacquer in 200 stores.

Perricone MD’s skincare line got off to a very strong start. We introduced HairMax, an FDA-cleared appliance for in-home treatment of hair loss for men and women, continuing to strengthen our offer in response to the trends in high-tech beauty tools and hair growth and hair thickening solutions.

In terms of brand expansions, we completed our rollout of our exclusive brand, Ck One color cosmetics to the entire chain. We also launched an exciting new product with an existing brand Urban Decay Oz the Great & Powerful Palettes, Clarisonic Limited Edition colors, and ultra-cheap styling tools and new patterns. We introduced Living Proof Good Hair Kits and Color Wow Root Cover Up, both exclusively available at Ulta.

For Mother’s Day, to highlight the fragrance category, including the new fragrances launched in Q1, we offered new and exclusive pastel totes as our gift with fragrance purchase. We also featured a customizable cosmetic bag with an Ulta brand product purchased.

On the services side, we continue to expand Benefit brow waxing services now in almost 400 stores, and after testing new brow tinting service in Q1 with strong results, we are now rolling it out to our Benefit Brow Bars.

To preview some of the newness in the current quarter, we’re launching Sarah McNamara skincare this week. Sarah McNamara is a beauty industry veteran who developed her breakthrough product, Miracle Skin Transformer, a few years ago and quickly developed a cult following. We are launching several brands of CC creams, or Color Corrector creams, in Q2 following on the heels of a hot trend, BB creams, or beauty balm creams that we've enjoyed over the past several quarters. We are also introducing a line of men's skin and body care products this quarter under the Ulta brand.

High tech beauty continues to be a strong trend. Tria, a laser hair removal device, is an FDA-cleared device for home use. We launched this new product in select stores and on Ulta.com in the second quarter. Nu Brilliance, a tool for microdermabrasion at home, Nuface and LightStim, new products for skin rejuvenation and wrinkle treatments were also launched this quarter.

Another trend is tools and products for healthier hair. We introduced Jose Eber and Rowenta professional quality haircare tool during the quarter. Jose is a celebrity hairstylist, whose collection of high-quality appliances improves hair health with infrared light technology. On the product side we introduced Redken’s line of Diamond Oil haircare products designed to improve hair strength and shine. We also launched Ojon’s Rare Blend Deep Conditioners and a line of damage reverse conditioning products.

To update you on Clinique and Lancome, we are very pleased with the performance of these boutiques and our partnership with these brands. We continue to expand our partnership with Clinique with eight new boutiques added during the first quarter ending Q1 with 51 boutiques, and we plan to continue to add boutiques throughout the year. We're also delighted to announce that we will open another 25 Lancome boutiques this fall, adding to the 80 boutiques we operate today. We ended last year with 79 Lancome boutiques and we just opened an Urban store on Walnut Street in Philadelphia, including a Lancome boutique. By the end of this year a significant percentage of the chain will have either a Clinique or Lancome boutique.

Turning to salon services, our salons performed very well in the first quarter driving strong sales growth through effective promotions like our cut, color, style package offer. Other contributors to our salon business's strong performance includes improved integration between the stores and salon teams, improved career development plans for our associates, leading to reduced turnover as well as excellent technical training on hair color and new hair trends.

In terms of new services, we have now fully rolled out microdermabrasion skin services in all our stores, and we will begin to market this service this month. After testing hair extension services earlier in the year, we launched this new service chain wide during Love Your Hair promotion in May. We are now testing eyelash services by our skin therapists in select stores. With encouraging early results as a result of great execution and broadening our service offering, we've seen good growth in our guest count as well as improvements in average ticket and customer retention. In sum, whether it's on the product or service side, we're very excited about the pipeline of newness this year and our ability to translate current trends and a curated assortment that is compelling to our guests.

Now I'll turn it over to Jeff Severts, SVP of Marketing to cover enhancing our loyalty programs, broadening our marketing reach, and increasing our digital focus.

Jeffrey Severts - SVP, Marketing: Thank you, Janet. I would you like to highlight some of our marketing activities during the first quarter and then preview some key second quarter events. I will also update you on our loyalty program and CRM platform and finally provide some color on the performance of our e-commerce business. Our most important promotion Q1 was our signature 21 Days of Beauty, an event that our guests anxiously await twice a year for the daily beauty steals and in-store events focused on prestige brands.

We have significantly increased our resources dedicated to positioning ourselves as a beauty and trend authority and this season's efforts featured an array of new marketing assets with a special emphasis on digital, including a display advertising campaign featuring rich media units and a social media campaign on Facebook, Twitter and Pinterest. A dedicated online landing page allowed customers to view that day's upcoming and upcoming beauty steals as well as a schedule of all our in-store events. The page also allowed customers to register to receive digital reminders throughout the event so that they won't miss any of their great steals. We further enhanced our traffic driving efforts by utilizing ultimate rewards bonus point promotions to targeted customers via our CRM platform.

Overall it was our most integrated campaign to-date and an exciting first step in our efforts to expand our marketing reach. On the public relations front, we were pleased with the brand impressions generated by our sponsorship of the reality show The Face. In late March the winner of this show's modeling contest was announced. Her name is Devyn. She will become the face of Ulta Beauty in our marketing campaigns for this fall and holiday season.

Looking ahead to the second quarter we got off to a strong start with our Love Your Hair event, We are supporting Love Your Hair with a digital marketing campaign, similar in size and scope to what we did for 21 Days of Beauty. For the first time ever, we have featured a celebrity on the cover of our direct mail magazine, Jennifer Aniston. Jennifer is the part owner and spokesmodel for the Living Proof brand, an important and fast growing vendor in our professional hair category.

Turning to our loyalty programs, last quarter, we updated you on the status of our points-based program, ULTAmate Rewards. We shared that we wanted to assess a full year of customer data post last year's April conversion before making the final decision on the shape and timing of the next stage. We have recently completed our analysis of those data. While we have always known that ULTAmate Rewards is strongly preferred by our customers, we can now say with confidence this program also drives higher customer frequency and sales per customer. Consequently, we are announcing today our plan to convert the remaining 50% of the country to ULTAmate Rewards in Q1 of 2014.

While we want to make this conversion as quickly as possible, we also want to be prudent about how much change we expose our employees and customers to during our most important season. With the supply chain project, website redesign and our aggressive store rollout plan already on the docket, we have decided that the smartest course for us is to wait until we're through the holiday period before we execute this final stage. This will support excellent execution of this complex process, which will involve significant planning and synchronization across systems, training, marketing and customer service.

One of the reasons we prefer the points program is that it allows for more effective use of our new CRM platform. Since implementing the CRM tool in late Q3 of last year, we've substantially ramped up our CRM activity. During the first quarter, we executed 25 e-mail campaigns targeted at specific customer segments, hoping to drive more traffic through more relevant and timely offers. Using a variety of approaches, including loyalty program bonus points, product discounts, and free gifts with purchase, we continue to refine our understanding of what works best.

In Q1, these campaigns posted strong incremental results over our mass e-mail efforts; exciting us, our customers and our vendors, who will now have a new means of growing their brands and gaining trial for their products.

Going forward, we will build on these successes and continue to expand our utilization of this platform. To that end, we have hired a new leader to further build out our customer analytics function. We've already made substantial progress in improving this capability and intend to be best-in-class at understanding our customers’ behaviors inside our channels and applying those insights across our business.

Turning to e-commerce, our online sales delivered better than expected topline growth in Q1, while improving margin rate. Growth was driven primarily through strong sales of prestige cosmetics and skincare and continued success with our beauty breaks and other online-only offers. Ulta.com had great success in acquiring new customers through this channel especially during our 21 days of beauty promotion.

To update you on the website redesign project, we are on track for delivery of the full site redesign by this fall. In Q1, we made some foundational improvements, including enhancements to our Rewards program customer account center and to the landing pages for Ulta’s iOS and Android mobile apps.

This quarter we will deploy a streamlined checkout process hoping to enhance our online conversion.

To further support our rapid growth in e-commerce, we continue to step up the team with new talent, and we’re expect to launch this summer additional fulfillment capabilities in our Chambersburg distribution center. Overall, I'm very pleased with the progress we've made in the past few months in marketing loyalty CRM and our digital strategy.

I'll now hand it back over to Scott.

Scott Settersten - CFO and Assistant Secretary: Thanks, Jeff. Turning to a more detailed discussion of our financial results. First quarter sales were $582.7 million, an increase of 22.9%, compared to sales of $474.1 million achieved in Q1 of 2012. Our 6.7% comp was fairly balanced between traffic and ticket during the quarter as a result of good discipline around promotional activity, and increase in mix of our higher ticket items as we added more prestige cosmetics and skincare to the assortment.

Our same-store sales increase reflects a 140 basis point of benefit from our e-ecommerce business, which grew 70% during the quarter. Gross profit margin decreased 100 basis points to 35% from 36% in Q1 of last year. The gross margin deleverage, most of which we outlined in our Q4 call, included a number of unusual items compared to the prior year period. Including inventory receipts flow and the conversion of our central region to our points-based loyalty program, both of which we have now anniversaried.

We also have the one-time negative impact from our private label gift-with-purchase issue and continue to see our customers’ increased focus on value. The gross margin decline was less than we had forecast due to slightly better fixed door cost leverage and stronger product margins as we managed promotional activity in a very discipline way.

SG&A expense as a percentage of sales decreased 60 basis points to 22.8%, compared to 23.4% in the first quarter of last year, driven by corporate overhead and advertising expense leverage. These gains were offset by deleverage in store labor, as we began to invest in higher service levels and labor to support our increased mix of prestige products, which require a higher level of guest service.

Preopening expense for the quarter was $3.2 million compared to $2.5 million in Q1 of 2012 due to adding 28 new stores compared to adding 18 new stores and relocating one store last year. Operating margin rate decreased 50 basis points to 11.6%, compared to 12.1% a year ago with operating income up 17.8% to $67.7 million. The tax rate was 38.2% compared to 39.3% in Q1 of 2012, primarily due to changes in our state tax liabilities. Net income per diluted share rose 20.4% to $0.65 compared to $0.54 last year.

Turning to the balance sheet, starting with inventory; inventories at the end of the first quarter were $442.1 million compared to $332.1 million at the end of Q1 of 2012. Total inventory increased 33.1% and average inventory per store increased 7.9% compared to the prior year. Growth in total inventory was driven by the addition of 109 net new stores opened in the past year and inventory related to the additional prestige brand boutiques. Our inventory is healthy with very low obsolescence risk.

When we gave guidance in March we said we expected inventory per door growth to be slightly less than comp growth. Inventory per store at the end of the quarter was actually up about a point higher than comp growth. The slightly higher per door inventory increase was primarily due to a shift in the opening schedule of six stores in 2Q, moving them earlier in 2Q, resulting in us bringing in the inventory at the end of Q1. For the second quarter we expect inventory per door to be somewhat higher due to investments in the Prestige brand boutiques and new brand launches that Janet mentioned. For the full year, we expect our inventory per store to grow in line with our comp growth.

Capital expenditures were $42 million for the quarter, driven by our new store program the addition of Prestige boutiques and systems and supply chain investments. Depreciation and amortization were $25 million for the quarter. After authorizing a share repurchase program in March for an aggregate amount of $150 million, we repurchased 500,500 shares of our stock at an average cost of $74.58 per share for a total of $37 million.

Before we discuss our guidance for Q2 and the year, I would like to mention a coming change to our disclosure practices. We have decided to discontinue announcing holiday sales and updating Q4 guidance in early January. This was a practice dating from our previous participation in the ICR Conference in mid-January when we are in our normal quiet period cycle.

Now turning to our outlook for the full year; we remain committed to delivering results for the full-year 2013 consistent with our long-term financial model. This model is based on 4% to 6% comps with 15% to 20% annual square footage growth yielding 25% to 30% earnings growth and targeting a mid-teens operating margin in the medium-term. We are maintaining our previous guidance for 2013. We expect to deliver comparable store sales growth in the range of 4% to 6% for the year, including e-commerce. We expect to grow square footage approximately 22% and we expect to achieve earnings per share growth at the low-end of our long-term range of 25% to 30%, adjusted for the 53rd week in 2012. We expect to spend about $225 million in CapEx, including approximately $125 million for new stores and $100 million for everything else including merchandize fixtures, remodels, initial investments in the new DC planned for 2014 and other systems and e-commerce capital needs.

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

Turning now to second quarter guidance, we expect to achieve sales in the range of $579 million to $589 million versus $481.7 million in Q2 of 2012. We expect comparable store sales to increase in the range of 4% to 6%, including the benefit from e-commerce sales. We plan to open 29 new stores versus 22 last year. We expect to achieve earnings per share in the range of $0.64 to $0.67 versus $0.54 in Q2 of 2012. Gross profit margin is expected to increase 40 basis points at the midpoint of the range. We expect healthy product margin expansion and modest supply chain leverage offset by the impact of costs associated with preparing for Lancome and Clinique boutiques, and modest deleverage of fixed store costs driven by our accelerated store growth.

SG&A rate is expected to increase 70 basis points at the midpoint of the range versus last year's 22% rate, driven by investments in store labor to improve the guest experience, in supply chain as we develop our blueprint for the future and in e-commerce as we accelerate growth in that business and prepare to deliver a better guest experience.

Operating margin is expected to decrease approximately 20 basis points at the midpoint of the range versus 11.9% last year. For the full year, we continue to expect to make meaningful progress towards our mid-teens operating margin target. The tax rate is expected to be approximately 38.3%, and we anticipate a fully diluted share count of approximately 64.7 million shares.

In summary, we plan to deliver a very strong growth in sales and earnings, while continuing to invest in the long-term health and sustainability of our business.

With that, operator, please open up the call for questions.

Transcript Call Date 06/11/2013

Operator: Gary Balter, Credit Suisse.

Simeon Gutman - Credit Suisse: It’s Simeon Gutman for Gary. Scott, in the last quarter we talked about gross margin and there was some promotions that the business was over time going to be weaned off of some degree. Can you give us some color on that? Did that begin in the first quarter and how did that progress as the year goes on?

Scott Settersten - CFO and Assistant Secretary: Just as a reminder for first quarter, we guided gross profit margin down roughly 140 basis points at the midpoint of the guidance range. So, comp store sales were a bit better, so we did get some leverage on fixed store costs, which helped overall. We also saw product mix towards prestige skincare and color cosmetics continued its strength, so that helped margin rate overall for the first quarter. E-commerce also helped us quite a bit with a tailwind, as that business continues to scale up. With respect to the promotional environment, the first quarter we kind of land head-to-head, things kind of shook out the way we expect them to. As we talked about that in the big scheme of things, our intention over the long term is to moderate some of the general coupon drop, so to speak, and to offset that with a bit more of the CRM initiative, to do more one-on-one, more sophisticated marketing with our customers. So that’s the trend. As Jeff mentioned, we’ve had some good successes there. We’ve been ramping up the efforts there. We’ve seen some good positive results, but again, we’re still in the very early stages of the CRM to one platform.

Simeon Gutman - Credit Suisse: Then one follow-up for Janet. She mentioned a couple of the categories of segment that’s strong or that are outperforming some of the other categories. Can we just drill a little bit more deeply into the two, I think, that you called out on the positive side? You mentioned a couple of brands. Then also, a follow-up on the – I think you said the appliance category was a little soft. There are some introductions that are upcoming. I don’t know if that’s something that you think will turn around the space or et cetera, if you can comment on that.

Janet Taake - SVP, Merchandising: First of all, the prestige side, what I mentioned, the prestige skin and color cosmetics were very strong for first quarter. I didn’t mention specific brands, and it continues to be strong for us. It has been for several quarters. As far as other categories that are gaining traction, we’re seeing a lot of health care or therapy in hare care and liquids, as well as in tools. High-tech tools, I mentioned before, have been a trending category for us, and a lot of it is high-ticket product. The HairMax we launched earlier in Q1 along with other tools that are coming in for Q2 that I mentioned, and a lot of hair removal, home hair removal techniques are also trending. So there's the hair therapy, there's hair tools, and then there is also the home care with hair removal that's also been trending.

Simeon Gutman - Credit Suisse: And then what about the appliance category? You saw couple products in the past couple weeks that looked pretty promising on the curling side that looked like they could revise some of the category. I don’t if there is expectations built into that.

Janet Taake - SVP, Merchandising: Yes, we have newness coming in. We usually don’t speak too far out, but we do have some new technology coming in. I mentioned from Jose Eber the infrared flat iron that's coming in, which is new technology for us and also a new brand, and there are some other products coming in that has to do that's associated with curl that we have not launched yet that will be coming in this quarter. There is some newness, but it is also a slower growing category.

Operator: Daniel Hofkin, William Blair.

Daniel Hofkin - William Blair: Just I guess following up on the topic of the CEO search for a second, if there's anything you can see at this point in terms of some of the characteristics that you're particularly looking for that you're trying to zero in on that would be my first question?

Dennis K. Eck - Interim CEO: We've been very focused on – we have a very strong team at ULTA. We think we're headed in a very good direction and what we're looking for is somebody that can take that and move it onto the next step. So we are being very, very thoughtful and careful about somebody that can do that and as I said in the last call we are going to take our time and do it right and that we will be back to you as quickly as we have something. But we are pleased with the progress.

Daniel Hofkin - William Blair: Then my other question relates to e-commerce. The 70% growth seems like that may be a step up from what you have been seeing, correct me if I am wrong on that, and if so what were some of the – was there any like particular one or two events that drove well above trend growth or was that a fairly steady growth trend during the quarter?

Scott Settersten - CFO and Assistant Secretary: Dan, the 70% growth rate that we saw in the first quarter, again while e-commerce is still a relatively small piece of the business I wouldn't model that in as kind of the go forward run rate. Historically it's been in that 30%-ish, 40%-ish kind of range, which I would say is still probably a good estimate for you to use. As far as category drivers on e-commerce, it's really we saw higher end skincare kinds of things and some of these tech tools that Janet mentioned, which lend themselves very well to kind of the digital e-commerce space. We were able to get it in stock and get it promoted and get it out there in the website in a real timely fashion. So more than anything else it was with the higher end kind of categories that were driving the growth.

Jeffrey Severts - SVP, Marketing: This is Jeff. I would just add to Scott's answer about later in the year expectations for e-commerce. Remember that we do have the site relaunch and that will be happening in the fall and quite naturally where that kind of relaunch we would expect to see some transitional bumpiness as the customer gets used to that new site.

Daniel Hofkin - William Blair: But fair to say that that was – that that type of growth you saw was kind of above your historical average pretty steadily. It wasn’t one or two key events that drove explosive growth or anything?

Scott Settersten - CFO and Assistant Secretary: No, it was the general trend across the quarter, and again, it was because of the introduction of some of these new products that just worked out extremely well.

Daniel Hofkin - William Blair: I guess lastly as it relates to what you mention about, in some of the styling tools, do you think that there is any competitive pricing things there, or is that primarily what you mentioned just kind of maturity of the category?

Janet Taake - SVP, Merchandising: We're always aware of and pay attention to the competition, but we also deliver what we feel is going to drive our guest to the store. So on both sides, we manage the styling tools appropriately.

Operator: Evren Kopelman, Wells Fargo.

Evren Kopelman - Wells Fargo: Can you give us a sense of Lancome and Clinique, maybe the impact they are having on the stores that have the boutiques? Is there a significant difference in comp or store traffic that you can speak to in those stores? What's kind of maybe the sell-through of those brands relative to your expectations?

Scott Settersten - CFO and Assistant Secretary: Evren, we're not really going to be able to get into the details with you on specific brands or categories. But we are very happy with the performance of the boutiques, both Lancome and Clinique. I think our partners, our vendor partners are happy with the performance as well, which I think is demonstrated by our continued expansion with them. It does drive additional traffic to the stores. It helps the box overall. It helps our guest experience in the stores and the offering that we have, so again I think we're happy on all fronts. We've been happy with the expansion and we look forward to more in the future.

Evren Kopelman - Wells Fargo: And then a follow-up on the stock buyback program, should we expect you to be more opportunistic or is this going to be more a regular use of the program possibly to offset the dilution from options? How do you think about the usage of the program?

Scott Settersten - CFO and Assistant Secretary: In the near term I guess the short answer we'd say opportunistic would be the short answer. Again, this is a responsibility that management and the Board takes very seriously. We've got $150 million authorization out there. It's kind of a judgment call on where we get into the market and what we do, but again it's a thoughtful process that we're in the continuous conversations on with the Board.

Dennis K. Eck - Interim CEO: And we're measuring that against the need for cash for the other things that we need to do continue to build and grow ULTA. We discuss this at nearly every Board meeting.

Operator: Ike Boruchow, Stern Agee.

Ike Boruchow - Stern Agee: I guess my question is going to be based on the merchandise margins. Scott, you talk about the gross margins in the quarter and how they came in. Is there any way you could break apart the gross margin that you saw in terms of merchandise margin and occupancy and buying deleverage in Q1?

Scott Settersten - CFO and Assistant Secretary: I'm not sure if we're going to be able to do that on the call. I mean, again, overall the mix was better in prestige. Skincare and color continued its strength during the quarter, so we continued to mix up a bit on that side of the business, which helped the rate. We did get slightly better fixed door cost leverage because the comp was stronger than we were expecting or what the midpoint of the guidance range called for. We did get supply chain. We're expecting that to deleverage slightly in the first quarter. That ended up being a little stronger than we are expecting because some of the inventory receipts during the quarter to support some of the initiatives with the new brands and the boutiques coming into the Q. So I don’t think we are going to be able to give you any breakdown than that at this stage.

Ike Boruchow - Stern Agee: I guess what I was going at is in Q2, you are guiding gross margins at the midpoint up 40 basis points. They were just down 100. I'm assuming that that has a pretty nice inflection in the merchandize margin and I was wondering, if you could comment there, give color? I know there were some one-time things in Q1 that impacted you but maybe what are you seeing going forward? What's your visibility into positive merchandize margins for the remainder of the year?

Scott Settersten - CFO and Assistant Secretary: Yes. I would preface that by saying again in the big picture we have kind of cycled through a lot of those headwinds in the first quarter that we saw, with primarily inventory receipts that also, a couple of the other items that we talked about here on the call. As we pivot and look ahead to second quarter, again a big driver of it is the promotional and merchandising strategies that we use. So again for second quarter we are looking at some different events that we expect to drive better rates for us overall. We expect to continue to see strength in the high-end Prestige skin and color categories, which will continue to drive rate as that continues to mix-up. We will also see some leverage in supply chain in second quarter, which we didn't really see in the first quarter. So those are the primary levers that we look at as we look ahead at Q2 with margin expansion.

Operator: Neely Tamminga, Piper Jaffray.

Neely Tamminga - Piper Jaffray: Scott, just a one quick clarification point and then just a bigger picture question on e-commerce. Clarification on the promos; so we definitely noticed as well in our own analysis that promo trends were actually down this year versus last year as you guys did more of this direct kind of segment to the email marketing. So are you expecting embedded in guidance for Q2 to be kind of a similar sort of year-over-year trend in Q1, or kind of matching that as the promos of Q2 last year?

Scott Settersten - CFO and Assistant Secretary: We expect Q2 year-over-year to be consistent, so, Q2 this year versus last year. When we talked about promotional events, we're talking about the direct mail pieces that we send to our customers and the newspaper inserts kinds of things. So those will be even up head-to-head year-over-year for Q2.

Jeffrey Severts - SVP, Marketing: This is Jeff. I was just going to add. Yes, we do – I mean anniversarying year-over-year the major events, you'll see no changes to that. What you will notice, I think what you noticed in the first quarter is us taking opportunities to nip away at the corners a bit and be more selective and targeted promotions.

Neely Tamminga - Piper Jaffray: Absolutely. We felt it was very well executed. Then my big picture question on e-commerce side is, if you think about e-commerce growth and expansion based on our observation, we notice companies really see kind of the lift in business overall when they either expand SKUs online or basically offer some amazing new customer service function like free shipping, free returns. Where are you guys on that spectrum, and how you're thinking about probably primarily SKU expansion online in availability relative to what you have in your stores? Then also any sort of latest thinking around frees shipping, free returns or something to that effect.

Janet Taake - SVP, Merchandising: On the SKU expansion, we will be expanding a brand that we may have in-house and add SKUs online that we don't carry in the brick-and-mortar side of the business. We're also looking at adding brands that we don't carry in brick-and-mortar and its continuing to evolve and we will continue to manage that and look at opportunity to expand beyond, once again what maybe in brick-and-mortar.

Dennis K. Eck - Interim CEO: Otherwise, we are not finding any major changes to the customer proposition. We feel like we have strong proposition already. We want our customers to buy from us online because they are buying from Ulta first and that the online channel is just their channel choice at that time. You won't – we are not planning on trying to grow online sales for online sales sake. We're trying to grow Ulta sales.

Scott Settersten - CFO and Assistant Secretary: I would just close that one out nearly by saying in the big picture this e-commerce business is a place where we are playing catch-up right now. So, when you talk about major new changes that, will drive guest engagement and have them shop at our site more often, a lot of that is to come. So, part of that's going to be with the web re-design that we have coming out in the fall. Integrating the points-based loyalty programs across platforms so it's seamless to our customers and expanding the assortment here that Janet spoke to across. So, that more closely resembles the in-store experience. So, that's all ahead of us, all good things to come in the future.

Operator: Brian Tunick, JPMorgan.

Brian Tunick - JPMorgan: Two questions. Really regarding I guess stores. First one is given the ongoing CEO search, we were wondering, what is the timing of your budget process, when you need to lock in how many new stores you are planning for 2014? Then the second one is really on the store maturity curve, I guess, Scott you updated. I guess when you guys think about the faster ramp that you're now seeing and you try to isolate whether or not it’s about the markets now you are in or the real estate locations or the brand awareness, sort of, what do you isolate as sort of being the reasons that the store maturity curve is what it is and when you think about the double-digit comps you put up the last three years compared to your guidance, what’s really changing? Is it mostly the mature stores, just trying to figure that out?

Scott Settersten - CFO and Assistant Secretary: Let me take the easy one first, which is kind of the budget process. I think we mentioned we are well on our way. The pipeline looks good for 2014. We’ve got 50 sites already approved, internally approved, and we’re still working on the leases and all the details. So, we feel we’re in very good position for 2014. We can lever that up and back. Our real estate guys are very seasoned. We can work to meet the number whatever it is again depending on the quality of the real estate. As long as the quality is there we can execute. As far as the new store ramp is concerned, again we updated our model here just recently. So, the stores are starting out a little bit stronger than they had – than what we had seen historically. So, again that first year step-up in the comp maybe is a little bit more moderate than some of you may have had in your model, so, again instead of high teens in second year because they start at a higher rate, so the second year comp might be closer to mid-teens kind of step-up. Again, what we are seeing when we look at the models and stack up the stores every quarter, we’re seeing that the store ramp is consistent over that five-year period was what we’ve seen historically. Broader picture or closing in on 600 stores across the U.S., we are kind of following the natural flow of the beauty industry overall. As we look back to 2012, I would say it's not double-digits the last three years, Brian. But it was very healthy, high-single-digit growth last year. When you pivot that against what we saw here in the first quarter, which again it’s a low 5% comp for the bricks and mortar part of the business. That is a change. When we look across the classes, we’re not seeing any significant changes by class or geographic area of the country. The stores in general, there is not a lot of variability between the stores outside of the normal ramp-up of new stores. So when you look back now at some of the older stores, the greater than five year old stores, last year when we had really high single digit comps, they were comping at healthy single digit kind of levels. This year those older stores are comping in the low single digit area. So, again, the good news is they’re not hurting the comp. While they might not – those older stores might not be helping drive higher comps, they are contributing very healthy store level earnings and cash flows for the company.

Operator: Matthew Fassler, Goldman Sachs.

Matthew Fassler - Goldman Sachs: One question, one follow-up, both sort of around the e-commerce retail interaction. First, thanks for the very detailed disclosure on the stores comp and the e-commerce comp. If you think about traffic and ticket, should we think about the 140 bps from e-commerce really driving that traffic number? Because I know you gave that for the base overall without differentiating between channel.

Scott Settersten - CFO and Assistant Secretary: The comp was 6.7% for the quarter roughly equal transaction drivers and ticket drivers. The ticket side of that was primarily units. Average selling price was basically flat year-over-year. When we break down the business and build up the comp, Matt, we break apart the e-commerce business, the salon business, and the retail business. So when we say it roughly equaled transactions or traffic and ticket, the same goes for the e-commerce business. So it's not – we don't just throw it all in the traffic side of the comp driver, so it's equally split.

Matthew Fassler - Goldman Sachs: Then secondly, given your loyalty program, you have obviously better visibility than most as to who your customers are. As you think about the big e-commerce spike that you saw, what's your sense about whether these are existing ULTA customers loyalty program members or not relative to people who are new to the brand and joining you through the e-commerce channel?

Scott Settersten - CFO and Assistant Secretary: Generally speaking, customers that use our e-commerce site by and large are aware of ULTA and are already part of the ULTA guest kind of profile and pool. That's the majority of the users. We have seen with some of these new product introductions here, especially recently in Q1 that it has been able to draw in more new customers. So as we look at it overall, we're happy to see that that it's a way for us to mine and draw in new customers.

Jeffrey Severts - SVP, Marketing: Yeah, I'll just build on that. Generally most of our online channel growth is coming from existing customers who are just getting another visit or more frequency out of them, which is fantastic for us. But this quarter was a bit peculiar. We had a couple of new products, SeroVital being one of them where it was a hot product where we were one of the few distributors around with the product and it brought a lot of new people into the franchise.

Operator: Joe Altobello, Oppenheimer.

Joseph Altobello - Oppenheimer: Just wanted to stay on e-commerce for a second. It looks like obviously the 140 basis points boost you got in terms of your comp growth in the quarter was a little bit better than you guys were looking forward, it definitely was better than we were looking for. So could you help us out in terms of the full year. I think in the past you have said that it will be less than 1 point to full year comps. Is that still your view at this point?

Scott Settersten - CFO and Assistant Secretary: Yes, exactly. For the full year we said – we are estimating it's roughly a 100 basis points to the comp for the full year. As Jeff mentioned, we started out of the gate here very strong in Q1 we expected to moderate a little bit. We've got this new site redesign that's going to rollout in early fall. We expect there to be some transition time period. So again for the full year rough and tough 100 basis points.

Joseph Altobello - Oppenheimer: Then in terms of gross margin obviously, the quarter there to was better than expected. On your last call I think you had mentioned that you guys did expect to see healthy 'gross margin expansion' for the year. Didn’t hear any commentary today at least on the full year gross margin outlook? Is that still your view that the gross margin will be up healthy this year and SG&A roughly flattish or have those components changed a bit?

Scott Settersten - CFO and Assistant Secretary: Joe. We are reconfirming our full year guidance. So, again, exactly as we described to many of you over the last couple of months. We do expect to see healthy gross margin expansion for the full year.

Joseph Altobello - Oppenheimer: I apologize, but if it's down a 140 and the fourth quarter I think you have said is going to be pretty promotional, so you probably shouldn't expect to see much in the way of gross margin expansion in the fourth quarter. It sounds like a lot of the gross margin expansion this year you are looking for is going to be in 3Q?

Scott Settersten - CFO and Assistant Secretary: I wouldn't say that's a fair statement. Typically fourth quarter is a more promotional time period. But again as we shift some of our marketing and merchandize strategies, the CRM initiative continues to gain speed and momentum and we are able to pull some levers back and forth in other parts of the promotional kind of basket. We feel confident that we will be able to do what we said.

Operator: David Wu, Telsey Advisory Group.

David Wu - Telsey Advisory Group: First, can you talk about the longer-term opportunity of the prestige business, including any plans to introduce additional large flagship brands into the mix as well as the longer term potential for a new brand boutique, especially as the prestige segment obviously is expected to continue to outperform over time, yet it still appears to be a relatively underpenetrated category for you?

Janet Taake - SVP, Merchandising: We will continue to evaluate new brands and new products in prestige, but more importantly across all categories of our business. It's important to look at the total business. Our box is very flexible, so we're very agile as an organization. So we can move pretty quickly within our stores if we needed to add boutiques or any type of presentation, that goes from mass to prestige. As we look at the total mix, we will introduce – we constantly have conversations with vendors once again across all categories and we will continually add and look for newness, and it will be an important part of our business. But overall, I don't see significant change from the total mix of the box year-over-year.

David Wu - Telsey Advisory Group: With the new brand boutiques that you've been opening in as well as introduction of more sort of higher end product and tools, have you noticed any changes at all to your customer demographics whether by age or income?

Jeffrey Severts - SVP, Marketing: David, no, this is Jeff. We have not seen any substantial shifts there, nothing that would show up in any of our tracking tools. So same customer generally in terms of what she looks like, how old she is, where she is from.

David Wu - Telsey Advisory Group: Then I thought it was interesting, you talked about unveiling some of the private-label men's product this quarter and I was wondering if you could perhaps talk about sort of the overall men's opportunity?

Janet Taake - SVP, Merchandising: We have a men's shop in our stores, and men's we carry fragrance, skincare, and some bath categories that we just launched with ULTA. We're very pleased with our business, but overall it's a really small percentage of the total business for ULTA.

David Wu - Telsey Advisory Group: Is this a category that you may focus on more over time?

Janet Taake - SVP, Merchandising: Once again, it's a small part of the business. But we'll always look for opportunities to grow the category. So, as I mentioned, we just launched ULTA, which is totally new and it doesn't compete with anything else within the category, and we will continue to evaluate in skincare. It's been a nice category for us.

David Wu - Telsey Advisory Group: Just lastly in terms of your store expansion strategy. I know obviously the focus here is still on opening stores in power centers, but can you perhaps elaborate more on the mall opportunity and if the sales and profitability dynamics are attractive enough to make it a viable alternative to the power centers?

Scott Settersten - CFO and Assistant Secretary: We do look at mall sites occasionally. Again, when we're looking at a 100 or 100 plus new store opportunities a year, there are certain geographic locations where the mall is the only place really to do business in a specific power geographic area. So, we do look at those from time-to-time. We do have a number of stores that are adjacent to malls, attached to malls, so we do look at every one of those opportunities that comes about. The stores that we do have open that are connected to malls do just as well as stores that sit on independent pads or are in power center lineups with other tenants. So, again, we look at them on an individual basis to make sure we're happy with the physical space, that the co-tenant mix is the right one for us, that we get the right kind of economic model overall, and that we feel good about the store. So, again, it's an opportunity and it's something that we take a look at it as need be.

Operator: Jill Caruthers, Johnson Rice & Company.

Jill Caruthers - Johnson Rice & Company: Is there any way you could quantify the number of Clinique boutiques you will rolling out this year?

Janet Taake - SVP, Merchandising: Not today. We will be able to update you on the next call.

Jill Caruthers - Johnson Rice & Company: Should we assume that it’s a more material number or there is just no real comment there?

Janet Taake - SVP, Merchandising: No comment.

Jill Caruthers - Johnson Rice & Company: I guess, just trying to see how – I feel like these brands pull in possible department store customer that isn’t fully aware of what Ulta had, how are you going about advertising needs, specifically these brands, Clinique and Lancome given they’re not store-wide across your base. Is there any advertising you are able to do at this point in time throughout this roll out?

Janet Taake - SVP, Merchandising: Yes. Actually, we have been marketing in our mailers to the zip codes in which our stores are located that have a Clinique or a Lancome or both, and we have been doing that for several years and we will continue as we continue to expand.

Operator: Mark Altschwager, Robert W. Baird.

Jacob - Robert W. Baird: This is (Jacob) in for Mark. After looking at the loyalty data over the past year, will the program be tweaked at all going forward versus the initial points-based model? I guess as a follow-up, do you expect the roll out to impact gross margin positively or negatively next year as you – as new customers enter the program?

Jeffrey Severts - SVP, Marketing: So, no material changes to the customer proposition on the program. It will be the same program that you see today. Some very minor modifications in the way we launch it on the basis of what we’ve learned in the first launch in the first 50% of the country, but nothing significant, and certainly nothing visible to the customer. Did you want to handle margin?

Scott Settersten - CFO and Assistant Secretary: As far as the margin or the financial impact of transitioning rest of the – the 50% of the country that’s not on points base today, I think I outlined again for a large number of folks over the last couple of months that there was some initial margin rate impact based on the new program, because people are more engaged. They spend more money, so they earn more points. So we have to reserve more and there is an impact on the margin rate. But over the long term, and we’re hoping next year that’s another element that plays into the early 2014 implementation over the first year period all that kind of moderates by and large. So we’ve learned some good lessons over the years with how this program works and what to expect. We feel very comfortable now and confident that we can forecast that appropriately.

Operator: Thank you. There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Scott Settersten - CFO and Assistant Secretary: Thank you all for your interest in Ulta, and we look forward to speaking with you all soon. Thank you.

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