ULTA

Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA)

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Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA)

F3Q08 Earnings Call

December 4, 2008 5:00 pmĀ ET

Executives

Allison C. Malkin - Senior Managing Director, Integrated Corporate Relations

Lyn P. Kirby - President and Chief Executive Officer

Gregg R. Bodnar - Chief Financial Officer

Analysts

Daniel Hofkin - William Blair

Neely Tamminga - Piper Jaffray

Liz Dunn - Thomas Weisel Partners

Joe Altobello - Oppenheimer & Co.

Brian Tunick - J.P. Morgan

Jason Gere - Wachovia Capital Markets, LLC

David Cumberland - Robert W. Baird & Co., Inc.

Presentation

Operator

Greetings, ladies and gentlemen, and thank you for holding. Welcome to the Ulta Salon, Cosmetics & Fragrance, Inc. third quarter 2008 results conference call. (Operator Instructions)

It is now my pleasure to introduce your host, Allison Malkin of ICR. Thank you. You may begin.

Allison C. Malkin

Thank you. Good afternoon. Before we get started I'd like to remind you of the company's safe harbor language, which I'm sure you're all familiar with.

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.

With respect to each reference we make on this call to adjusted net income per diluted share as a result of the October 2007 IPO, a reconciliation of net income per share on a GAAP basis to adjusted net income per share has been provided in Exhibit 4 of our earnings release, which is available on our website and has been filed with the SEC on Form 8-K.

And now I'd like to turn the call over to Ulta's President and CEO, Lyn Kirby.

Lyn P. Kirby

Thank you, Allison. Good afternoon, everyone. Thank you for joining us to discuss our third quarter fiscal 2008 results.

On the call with me today is our Chief Financial Officer, Gregg Bodnar. Following my opening remarks, Gregg will review our financial highlights and outlook and then I will provide closing comments my comments and turn the call over to the operator so that we can answer the questions you have for us today.

Let me start by saying in these unprecedented times we remain confident in our strategies and financial position, and we are pleased with our strong third quarter performance, although our performance was impacted by the sudden decline in the macro environment that occurred in October.

We are also pleased with the recent start to the holiday season and the strategies that are driving these results. And if consumers continue spend on their current trend, we would anticipate delivering fourth quarter comp sales in line with third quarter performance.

However, we recognize that the majority of the season remains in front of us, and the most volatile economy we have seen in decades. So, as a result of the change in the macro environment, we have reduced our full year outlook. And further, we believe it is prudent to provide fourth quarter guidance that represents a wider range of potential outcomes due to this volatility.

That said, our EPS guidance represents a solid increase over last year's fourth quarter, and our expectations for sales and earnings remain well ahead of many other retailers. Quite simply, given the uncertainty of consumer gift spending, we do not want to over promise.

As I mentioned, we are pleased with our third quarter results, which included double-digit growth in net sales and earnings and our 35th consecutive quarter of positive comp growth. Our comp store sales gain of 2% included double-digit growth from many of our prestige brands and was driven by positive customer count as we continue to drive for market share in this difficult economy.

While we are pleased with our overall comp sales gain in this environment, we do want to point that our total sales comp was negatively impacted by roughly 40 basis points due to store closures in the Houston market as a result of the hurricane. In addition, like most other retailers, we saw our business drop dramatically in the early October time frame during the height of the financial crisis.

The good news is that our business bounced back solidly after this period in response to modest incremental spend in advertising and margin. In addition, as we have discussed previously, we are an established retailer with a 310-store chain, so our comp store comparisons include the impact of transfer sales from new stores opened in existing markets. As you know, we build our real estate strategy with a balance of comp sales growth in new markets and operating margin improvement in existing markets.

So once again, our third quarter results demonstrate the strength of our business model even in a weak and turbulent economy.

Specific highlights of the quarter included net sales of $254.8 million, reflecting an increase of 22.4% from last year. Our third quarter sales volume was slightly below our total sales guidance range, which reflects the impact of a weak economy on our comp stores and also our new stores. As has been typical in fourth quarter, we expect stronger performance in our new stores when marketing is allocated heavily towards newspaper inserts that reach a broad audience and drive traffic into new stores. This strategy is already gaining traction in the early weeks of the fourth quarter, and overall, our 2008 new store program remains on track with our model.

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