ULTA

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

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

Q4 2013 Results Earnings Conference Call

March 13, 2014, 05:00 PM ET

Executives

Laurel Lefebvre - VP, IR

Mary Dillon - CEO

Scott Settersten - CFO and Assistant Secretary

Janet Taake - Chief Merchandising Officer

David Kimbell - Chief Marketing Officer

Analysts

Aram Rubinson - Wolfe Research

Oliver Chen - Citigroup

Ike Boruchow - Sterne Agee

Gary Balter – Credit Suisse

Matthew Fassler - Goldman Sachs

Bilun Boyner - JPMorgan

Daniel Hofkin – William Blair & Company

Neely Tamminga - Piper Jaffray

Morey Marcus - Oppenheimer & Co.

Jason Gere - KeyBanc Capital Markets

Evren Kopelman - Wells Fargo Securities

Mark Altschwager - Robert W. Baird & Co.

Jill Nelson - Johnson Rice & Company

Dana Telsey – Telsey Advisory Group

Presentation

Operator

Greetings, and welcome to the Ulta Beauty Fourth Quarter 2013 Earnings Conference Call. (Operator Instructions). As a reminder this conference is being recorded.

I would now like to turn the conference over to your host, Laurel Lefebvre, Vice President Investor Relations. Thank you Ms. Lefebvre. You may begin.

Laurel Lefebvre

Thank you. Good afternoon and thank you for joining us for Ulta Beauty's Fourth Quarter 2013 Conference Call. Hosting our call are Mary Dillon, Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Also joining us are Janet Taake, Chief Merchandising Officer; and Dave Kimbell, Chief Marketing Officer.

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 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 make references during the 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.

We also refer to non-GAAP sales and earnings growth in 2013, adjusted for the 53rd week of fiscal 2012 and severance.

I'll now turn the call over to Mary.

Mary Dillon

Thank you, Laurel and good afternoon everyone. Ulta Beauty achieved excellent sales growth in the fourth quarter supported by continued momentum in our e-commerce business. We delivered solid EPS growth in keeping with our expectations that we would need to invest in margin dollars to drive market share gains during the promotional holiday season. We also made significant forward progress in each of our five key strategies.

To recap the headlines, we grew sales 14.4% or 23.3% adjusted for the extra week in the fourth quarter of 2012. We delivered a 9.2% total company comp on top of an 8.6% comp in the fourth quarter of 2012, both including the impact of online sales growth. Our e-commerce business performed very well driving 82.5% comp sales growth which contributed 260 basis points to the comp.

Similar to the rest of the year prestige cosmetics and skincare were the strongest categories while we continued to see weaker industry trends in the nail and fragrance category. We were encouraged to see improvement in the transaction trend with a sequential improvement compared to the third quarter. While still slightly negative for retail stores transactions increased about 1% including e-commerce despite difficult traffic trends in the retail environment overall.

Our comps continued to be mostly driven by ticket, about a third of increase coming from units per transaction and about two-thirds coming from average selling price. Earnings per share were up 9% to $1.09 or up 14.7% adjusted for the 53rd week last year. Scott will provide more details on our financial results for the quarter and on our guidance for 2014 in a couple of minutes but first I want to update you on the recent progress on the five components of our growth strategy; new store performance, new product services and brands, our loyalty program, marketing and ulta.com

Starting with real estate, we opened 11 stores during the fourth quarter to complete the most ambitious store opening program in our company’s history. We are very proud of our growth and development team’s execution in delivering this new store program as well as the hard work of the store operations, merchandising, supply chain and HR teams to get these stores staffed, merchandised and ready to serve our guests.

New store productivity continues to be strong. We are on track with our plans to open about a 100 stores in 2014 representing about approximately 15% square footage growth. This is a purposeful decision on our part as we said last quarter to moderate our pace of store growth. New stores continue to provide excellent returns and will continue to be an important part of our growth strategy.

We expect about 40% of these new stores to be a new market and about 60% are planned for filling in existing markets. We anticipate about one-third of the stores to be in new real estate and the remaining two-thirds are planned for existing shopping centers. We expect about 15% of the 2014 class of stores will be in enclosed malls adding to the 52 mall stores we have in the portfolio today. The rest will be in power centers or strip malls.

In terms of the pace of new store opening, we expect to open 19 in the first quarter, 19 in the second quarter, 43 in third quarter and 19 in the fourth quarter. We also plan to open two 5,000 square foot or small format stores during the second half of the year in smaller markets with fewer households than what's typically required to support a 10,000 square foot store. We are in the early stages of developing and testing this model but we are very encouraged by the potential to expand our store growth and delight more new guests with the great Ulta Beauty experience.

We also plan to remodel about 12 stores to our latest store format this year and re-flooring that cosmetics planograms in about 60 stores to replace some dated fixtures and to create a more vibrant and consistent shopping experience in that category. Today we have only 38 stores in older formats, about 5% of the fleet. We are very proud of our consistent and contemporary store portfolio.

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