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

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

Q3 2011 Earnings Conference Call

December 01, 2011 5:00 PM ET


Allison Malkin – ICR, Inc.

Chuck Rubin – President and CEO

Gregg Bodnar – CFO


Ike Boruchow – JPMorgan

Neely Tamminga – Piper Jaffray

Daniel Hofkin – William Blair & Company

Erika Maschmeyer – Robert W. Baird

Christina – Oppenheimer & Company

Jason Gere - RBC Capital Markets

Evren Kopelman - Wells Fargo Securities

Jill Caruthers - Johnson Rice & Company LLC

Elizabeth Howell - Raymond James

Shreya Jawalkar – Jefferies & Company



Greetings and welcome to the Ulta Beauty Third Quarter 2011 Earnings Results Conference Call. At this time, all participants are in a listen-only mode. A question-and-answer session 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. 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'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 metrics free cash flow, a non-GAAP financial measure defined as cash provided by operating activities, minus the 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 third quarter 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 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 continue our positive performance and deliver better than expected third quarter sales and earnings. Briefly touching on our results for the third quarter, net sales rose 21.8% to $413.1 million from $339.2 million last year.

Comparable store sales grew 9.6%. This is on top of last year's 12.2% for a two-year comp gain of 21.8%. Comparable store sales were driven by traffic growth, but also included an increase in average ticket.

Gross profit margin rose 100 basis points including 60 basis points of merchandise margin expansion. Strong sales growth, combined with expansion in gross profit margins and leverage in SG&A, led to an 82.1% increase in operating income, with operating margin up 350 basis points to 10.7% of net sales.

Net income increased by 88% and income per diluted share increased to $0.42 from $0.23 in the third quarter last year. Our strong performance resulted in us capturing additional market share during the quarter with our comp sales led by strong gains in prestige color and skin.

We introduced to all stores new brands including Laura Geller Cosmetics and Art of Shaving for men. In addition, we introduced new products from existing brands, including Urban Decay's anniversary palette, Book of Shadows 4, Tarte's True Blood, MIA 2 from Clarisonic and Sally Hansen Nail. We also saw a strong growth from brands recently introduced such as Philosophy. All of these product elements combined to fuel our sales growth.

Our new fragrance introductions also performed well. These included Coach Poppy Flowers, Jennifer Aniston, Estee Lauder Sensuous Nude and Taylor Swift Wonderstruck. We believe our strong third quarter fragrance sales bodes well for fourth quarter sales given the category's importance during the gift-giving season.

During the quarter, we successfully completed the introduction of Lancome to 29 stores across four markets and have been very pleased with the initial performance.

In store, we continue to focus on our customer service levels and are proud that our service scores are reaching new highs. We remain committed to providing the best environment and experience within the beauty industry for our guests.

The successful expansion of our store base continued with the opening of 28 new stores in Q3. We ended the quarter with 442 locations. Early in the fourth quarter, we completed our 2011 store program with the opening of seven additional new stores. This brought our new store openings to a total of 61 for the year, representing a 16% expansion in square footage. We continued to be pleased with the performance of our new stores which are performing above our expectations.

We are also pleased with our 2012 of new store pipeline and now expect to accelerate the pace of our new store openings next year to include square footage expansion at the upper end of the 15% to 20% long-term goal we have previously communicated.

Our site selection process continues to maintain the same rigor as you have come to expect from us. The expected acceleration in our 2012 square footage growth is the result of a very good flow of high quality existing retail locations. We are confident that these new 2012 store sites are of the same high quality as our sites over these past years.

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