ULTA

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

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Ulta Salon Cosmetics & Fragrances, Inc. (ULTA)

Q3 2009 Earnings Call

December 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

Lizabeth Dunn – Thomas Weisel Partners

Daniel Hofkin – William Blair & Co.

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

Randy Konik – Jefferies & Co.

Samantha Panella – Raymond James

[Evron Habbelman – Wells Fargo Securities]

Jillian Caruthers – Johnson Rice & Company

Analyst for Neely Tamminga – Piper Jaffray

Henry Kerpellen – Oppenheimer & Co.

Anthony Lebiedzinski – Sidoti & Company

Presentation

Operator

Welcome to the Ulta Salon Cosmetics & Fragrance third quarter fiscal 2009 results conference call. (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. Ms. Malkin you may begin.

Allison Malkin

Thank you. Good afternoon. Before we get started I would like to remind you of the company’s Safe Harbor language which I am 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 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 its US GAAP equivalent has been provided in exhibit five of our earnings release which is available on our website and has also been filed with the SEC on Form 8K.

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

Lyn Kirby

Thanks Allison. Thank you for joining us to discuss our third 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 third quarter financial results and fourth quarter 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 better than expected third quarter sales, earnings and free cash flow, building upon our positive momentum from the first half of the year. We attribute our strong third quarter performance to the continued successful execution of our core marketing and merchandising strategies and better than expected performance of our expense management and working capital reduction initiatives.

For the third quarter net sales increased 11.5% to $284 million. Comp store sales increased 1.5% exceeding our guidance and following a 2% increase last year, so on a two-year basis comp store sales are up 3.5%. Gross profit margin increased 70 basis points to 31.9% which included a 40 basis point increase in merchandise and marketing margins. We also exceeded our guidance with earnings per diluted share increasing to $0.14 as compared to $0.09 last year.

As we have previously communicated, we take a fresh look at each quarter and create a marketing strategy that is right for the environment. The rapid deterioration of the economic and consumer environment in third and fourth quarter last year caused us to react with additional marketing strategies with very little lead time. As this year has progressed we have become more experienced operating in and have been able to increasingly plan for this challenging economic environment which is demonstrated in our comp performance.

The marketing and merchandising calendar created for third quarter 2009 delivered a 1.3% increase in comp store traffic which follows a 6% increase in comp traffic in the third quarter 2008 and a 0.2% increase in average ticket which is the first positive growth in average ticket we have reported since third quarter last year. Importantly, this performance was delivered while increasing merchandising margins by 40 basis points and decreasing our marketing expense by 50 basis points versus last year. The improved third quarter marketing rate was achieved through efficiencies, not through a reduction in marketing events.

The merchandising and marketing programs in the third quarter included a very successful fragrance event early in the quarter that continued to drive momentum in the category. The strength of the fragrance event helped deliver positive fragrance category comp for the quarter which is a great result when compared to the rest of the industry. Our positive performance in the fragrance category is encouraging as fragrance is a key driver of holiday gift purchases.

We also experienced a significant improvement in our styling tools category. As you know, styling tools are a somewhat discretionary purchase and have been more affected by the tough economy. While comp trends continue to trail the prior year, the improvement we experienced during the quarter is encouraging for Holiday as styling tools are another example of a key gift giving category.

We optimized major new brand and new product introductions. We continue to be pleased with the early performance of Benefit Cosmetics and Philosophy Bath and Fragrance brand. The quarter also included our launch of Bare Escentuals new matte foundation and our first ever Bare gift-with-purchase offer developed exclusively with Ulta. Both of these new Bare Escentuals offers performed very well for us. The improved performance in fragrance and styling tools and the continued growth of Prestige [cart] and skin were key drivers of our average ticket growth during the quarter.

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