ULTA

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

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

Q4 2008 Earnings Call Transcript

March 19, 2009 5:00 pm ET

Executives

Allison Malkin – IR, Integrated Corporate Relations

Lyn Kirby – President & CEO

Gregg Bodnar – CFO

Analysts

Neely Tamminga – Piper Jaffray

Joe Altobello – Oppenheimer

Evren Kopelman – JPMorgan Chase

Liz Dunn – Thomas Weisel

Erika Maschmeyer – Robert W. Baird

Anthony Lebiedzinski – Sidoti

Presentation

Operator

Greetings and welcome to the Ulta Salon, Cosmetics & Fragrance, Inc. Fourth Quarter and Fiscal 2008 Results Conference Call. At this time all participants are in a listen-only mode

A brief question-and-answer session will follow the formal presentation. (Operator instructions). As a reminder, this conference is being recorded.

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

Allison 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 Web site and has been filed with the SEC on Form 8-K.

In addition, during the call we may make reference to non-GAAP financial metrics, such as free cash flow. Free cash flow is defined as cash flow from operations less capital expenditures.

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

Lyn Kirby

Thank you, Allison. Good afternoon, everyone. Thank you for joining us to discuss our fourth quarter and fiscal year 2008 results. On the call with me today is our Chief Financial Officer, Gregg Bodnar. And following my opening remarks, Gregg will review our financial highlights and outlook and then I will provide closing comments and turn the call over to the operator so that we can answer the questions you have for us today.

In the fourth quarter, we delivered solid earnings of $0.21 per diluted share, and for the full year reported diluted earnings per share of $0.43, which was flat with prior year.

Our comp store sales for fiscal 2008 were flat for the year with increases in the first three quarters of fiscal 2008, offset by negative 5.5% comp in the fourth quarter as we navigated the tough economy and intense volatility in the final days leading up to the holidays.

Arguably, the fourth quarter included one of the most turbulent holiday periods in many decades, which caused an extraordinary level of promotional activity, especially in apparel.

As a result, we did give up some gift sales during the days just prior to Christmas. Quite simply, women chose the $250 cashmere sweater at 70% off (inaudible) fragrance, which was not discounted at $65.

Although we anticipated a difficult environment and appropriately invested margin, we chose not to participate in the promotional frenzy in the final days leading up to Christmas, choosing instead to achieve a balance of sales and earnings.

This is the right strategy. We maintain the integrity of our brand and value proposition and delivered solid earnings in the fourth quarter, and our inventory levels are quite healthy with no risk of seasonal obsolescence.

Most importantly, in January, our business demonstrated its resiliency returning to a 0.5% positive comp, despite store closings due to weather in the last two weeks of the month.

While the quarter was difficult, we advanced the priorities we set when we began the year and are pleased with our accomplishments.

The year included a significant milestone with fiscal 2008 net sales surpassing $1 billion. Our EPS of $0.43 was even with adjusted 2007 EPS despite the difficult retail environment.

We achieved our new store expansion goal opening 63 new stores, ending the year with 311 stores in 36 days with our 2008 class performing two models. And we successfully opened our second distribution centre on time and on budget.

As demonstrated in the fourth quarter, we have the flexibility to control many aspects of our business to deliver balance in our sales and earnings performance. We managed cost across our organization and remained nimble, quickly adjusting our plan to changes in trends.

Similar to late 2008, there is limited visibility into economic and consumer trends in the year ahead. As we begin fiscal 2009, you can be assured that we are managing all aspects of our business within our control. We are reading trends everyday and have developed specific set of alternative to adjust our business to a wider range of outcome to achieve free cash flow, maximize profitability and continue to gain market share in 2009.

Speaking to free cash flow, we have two broad strategies. First, our store expansion. We have appropriately scaled back our store expansion plan and currently plan to open approximately 35 stores in fiscal 2009, an 11% increase in annual square footage.

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