ULTA

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

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

Q2 2011 Earnings Conference Call

September 8, 2011 5:00 PM ET

Executives

Allison Malkin – ICR, Inc.

Chuck Rubin – President and CEO

Gregg Bodnar – CFO

Analysts

Jill Caruthers – Johnson Rice & Company

Brian Tunick – JP Morgan Chase

Daniel Hofkin – William Blair & Company

Erika Maschmeyer – Robert W. Baird

Samantha Panella – Raymond James

Alex Fuhrman – Piper Jaffray

Evren Kopelman – Wells Fargo Securities

Jason Gere – RBC Capital Markets

Presentation

Operator

Greetings, and welcome to the Ulta Beauty Second Quarter 2011 Earnings 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)

It is now my pleasure to introduce your host, Allison Malkin of ICR. Thank you, Ms. Malkin, you may now 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'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. We will make references during this call to the metric free cash flow, a non-GAAP financial measure defined as cash provided by operating activities, less purchases of property and equipment.

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

Chuck Rubin

Thanks, Allison. Good afternoon, everyone. Thank you for joining us to discuss our fiscal 2011 second quarter 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 results and provide our outlook. I will then offer some closing comments and turn the call over to the operator so that we can answer the questions you have for us today.

We are very pleased to deliver better-than-expected second quarter sales and earnings, which continued our favorable momentum from the first quarter. Our results included strength across our key financial metrics. Specifically, we increased net sales by 22.6% to $394.6 million. We grew comparable store sales by 11.3% following a 10.8% comp gain in the second quarter last year.

Our comp increase was balanced across categories and continues to be led by increased customer traffic with modest increases in average ticket. We increased our gross margin by 170 basis points, which included a 90 basis point improvement in merchandise margin.

We grew operating income 78% with operating margin increasing by 320 basis points to 10.1% of sales, and we increased net income by 83% resulting in EPS of $0.38 surpassing our guidance of $0.31 to $0.33 per diluted share, and up 73% from the second quarter last year.

We believe our consistent performance results from our compelling store experience; expansive and sought after selection of brands, products and services; our knowledgeable and friendly associates; and our disciplined approach to managing our business.

During the second quarter, we successfully advanced our five key growth initiatives. Let me share just a couple of highlights with you. First, our store expansion continued favorably and included the opening of 21 new stores and 15 remodels. We continue to be pleased with our new store performance and remain on track to open approximately 61 new stores, representing a 16% increase in square footage growth. We're also very pleased with our remodel program, which completely updates our store to our latest prototype, and has generated an attractive payback. For 2011, we have now completed our 17 planned remodels.

Second, we continue to improve our guest offering as we launched new products within existing brands and added new brands. A few examples include the launch of They're Real Mascara by Benefit, which produced our highest weekly unit sales ever in mascara.

In addition, Philosophy continued its strong comp trend, which we were particularly pleased with given the anniversary of its introduction in Q2 last year. This performance was fueled by product innovation across the assortment, and the successful introduction of Philosophy's Mommy & Baby.

We were also pleased with the ongoing strength of Urban Decay and Tarte. Our growth in the nail category continued strongly as we capitalized on new trends in color and novelty, such as Shatter from OPI, which continued to be our top brand.

In men’s, we saw a positive response to our new men's shop, which we introduced in the quarter and encompasses our complete assortment of men’s products in one convenient and inviting setting.

Fragrance sales also saw robust growth driven by the introduction of several new scents including (inaudible), Gucci Guilty Pour Homme, and Justin Bieber Someday.

During the quarter, we set our new fragrance shop, which we believe elevates our offering giving fragrance stronger placement in showcasing our full assortment in an easiest to shop format. Here too we were pleased on our new shop's initial performance.

Professional hair care was another standout in the quarter. We saw positive performance from new brand launches, including Living Proof and AG, and also several long-standing brands such as Pureology.

In regards to our third strategy, we continued to utilize our loyalty database to better target our direct mail and e-mail outreach. In addition, we saw growth in our loyalty database and now have over 8.5 million active guests. We remain focused on advancing our loyalty efforts and expect to see continued long-term benefits resulting from this program.

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