ULTA

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

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Ulta Salon Cosmetics & Fragrances, Inc. (ULTA)

Q2 2009 Earnings Call

September 3, 2009 5:00 pm ET

Executives

Allison Malkin – ICR, Inc.

Lyn P. Kirby – President, Chief Executive Officer & Director

Gregg R. Bodnar – Chief Financial Officer & Assistant Secretary

Analysts

Brian Tunick – JP Morgan

Neely Tamminga – Piper Jaffray

Lizabeth Dunn – Thomas Weisel Partners

Erika Maschmeyer – Robert W. Baird & Co., Inc.

Samantha Panella – Raymond James

Daniel Hofkin – William Blair & Co.

Jillian Caruthers – Johnson Rice & Company

[Henry Compellin] – Oppenheimer & Co.

[Anthony Lebosinski] – Sidoti & Company

Presentation

Operator

Welcome to the Ulta second quarter 2009 results conference call. At this time all participants are in a listen only mode. A brief question and answer question 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.

Allison Malkin

Before we get started I’d like to remind you of the company’s Safe Harbor language which I’m sure you are all familiar with. The statements that are 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 or 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 will make references during this call to the metric free cash flow, a non-GAAP financial measure. Free cash flow is defined as net cash provided by operating activities less purchases of property and equipment. A reconciliation of free cash flow to US GAAP equivalent has been provided in exhibit five of our earnings release which is also available on our website and has been filed with the SEC on Form 8K.

Now, I’d like to turn the call over to Ulta’s President and CEO Lyn Kirby.

Lyn P. Kirby

Thank you for joining us to discuss our second quarter fiscal 2009 results. On the call with me today is our Chief Financial Officer Gregg Bodnar. Following my opening remarks, Gregg will review our second quarter financial highlight and outlook. Then, I will provide some closing comments and turn the turn over to the operator so that we can answer the questions that you have for us today.

We are pleased to deliver second quarter sales and earnings that exceeded our expectations reflecting a sequential improvement in comp store sales and earnings performance as compared to the first quarter. For the second quarter net sales increased 9.8% to $273.5 million. Comp store sales declined 1.7% slightly exceeding our guidance and following a 3.7% increase last year. So, on a two year basis comp store sales are up 2%. Comp customer traffic increased 2.2% and earnings per diluted share increased to $0.10 as compared to $0.06 last year.

The economic environment stabilized somewhat in the second quarter and while our performance given the environment was good we are certainly not satisfied and we would expect to deliver strong results in a more robust economy. That said, we attribute our strength in this difficult consumer spending environment to the successful execution of the key strategies we outlined at the beginning of the year which included the development of exciting new customer propositions to entice consumers to make a trip to Ulta, the introduction of new brands and products, a reduction in expenses that will permanently impact our cost structure and cash flow management strategies including our planned reduction in stores.

During the quarter we successfully reached existing and new customers and drove a 2.2% increase in comp store traffic through exciting events such as our back to school hair care leader sale, the introduction of new brands including Benefit Cosmetics, CARGO Cosmetics, [CEDO] Hair Care and Dr. Perricone skin care. Products exclusive to Ulta such as the $15 Bare Minerals discovery kit. We also increased traffic by continuing to drive our fragrance business through gift with purchases such as our spa wrap at mother’s day and our cooler at father’s day and new introductions such as Ed Hardy’s Love & Luck, DKNY’s Fresh Blossom and for men fragrances such as Only The Brave which we introduced and performed very well at father’s day.

Finally, we continued to utilize our private label to offer compelling value propositions and to introduce new products such as Ulta’s Professional Nail Color and our Ulta 52 piece blockbuster with a $150 value for $17.99. As a result of these initiatives we drove a 2.2% increase in comp store traffic during the second quarter without making any incremental investments in marketing. However, as we saw in the first quarter, we experienced a great response to our marketing coupons which had a 30 basis point impact on gross profit margin versus last year.

We have appropriately planned our merchandise and strategies to offset the modest margin impact from increased coupon redemption during the third quarter and we believe we will deliver an increase in merchandising margin for the third quarter. Despite passive traffic, we experienced a 3.9% decline in average ticket as compared to the second quarter last year resulting in a 1.7% decline in comp store sales.

As I have said many times in the past, we have categories such as hair care and skin care that are consumable and therefore prompt repeat purchase and others such as higher priced styling tools, fragrance and salon services that are more discretionary and continue to be impacted by this economic down turn which in turn impacts average ticket. Although still negative we did experience a strengthening in our comp store sales performance versus the first quarter and this was driven entirely by our retail business.

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