ULTA

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

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Ulta Salon, Cosmetics & Fragrance (ULTA)

Q1 2013 Earnings Call

June 11, 2013 5:00 pm ET

Executives

Laurel Lefebvre - Vice President of Investor Relations

Dennis K. Eck - Interim Chief Executive Officer and Director

Scott M. Settersten - Chief Financial Officer, Principal Accounting Officer and Assistant Secretary

Janet Taake - Senior Vice President of Merchandising

Jeffrey Severts - Senior Vice President of Marketing

Analysts

Simeon Gutman - Crédit Suisse AG, Research Division

Daniel Hofkin - William Blair & Company L.L.C., Research Division

Evren Dogan Kopelman - Wells Fargo Securities, LLC, Research Division

Irwin Bernard Boruchow - Sterne Agee & Leach Inc., Research Division

Neely J.N. Tamminga - Piper Jaffray Companies, Research Division

Brian J. Tunick - JP Morgan Chase & Co, Research Division

Matthew J. Fassler - Goldman Sachs Group Inc., Research Division

Joseph Altobello - Oppenheimer & Co. Inc., Research Division

David Wu - Telsey Advisory Group LLC

Jill R. Caruthers - Johnson Rice & Company, L.L.C., Research Division

Jacob Zitter - Robert W. Baird & Co. Incorporated, Research Division

Presentation

Operator

Greetings and welcome to Ulta Beauty's First Quarter 2013 Earnings Results Conference Call. [Operator Instructions] 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 begin.

Laurel Lefebvre

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 metric 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

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 5-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's a high level of interest in this opportunity. The Board of Directors is partnering with our search firm, Herbert Mines, where 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 M. Settersten

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'll walk you through our financials in more detail in a moment but first, the team and I will update you on our progress with Ulta's 5-point multi-year 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 and in Q1 with 576 doors 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 1. They still ramp up to $4 million on average in year 5 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 $500,000 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 gain some scale efficiencies. All in, the total new store investment is about $1 million. The payback period hasn't changed. It is still roughly 2 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 are 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'll end the year with less than 40 stores in older formats, well over 9% of the changes in our newest formats, which we refer to as level 6 or 7.

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