Ulta Beauty Inc (ULTA) 2015 Q4 法說會逐字稿

Greetings, and welcome to the Ulta Beauty fourth quarter 2015 earnings results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to your host, Ms. Laurel Lefebvre.

Thank you, Laurel, you may begin.

Thank you.

Good afternoon, and thank you for joining us for Ulta Beauty's fourth quarter 2015 conference call Hosting our call are Mary Dillon, Chief Executive Officer, and Scott Settersten, Chief Financial Officer.

Also joining us is Dave Kimbell, Chief Merchandising and Marketing Officer.

Before we begin, I would like to remind you of the Company's Safe Harbor language.

The statements contained in this conference call which are not historical fact, 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 may make references during this 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.

During the Q&A session, we respectfully request that you please ask just one question, to allow us to have time to respond to you as many as possible, during the hour scheduled for this call.

I'll now turn it over to Mary.

Thanks, Laurel.

Good afternoon, and we have a lot to share with everyone today.

Our fourth quarter results capped an exceptional year.

We made significant progress against our strategic imperatives, while achieving outstanding sales and earnings growth.

We continue to benefit from the powerful combination of strong demand in the beauty category, and Ulta beauty's highly differentiated product and service offering.

This unique positioning is driving business results that transcend prevailing trends across the retail landscape.

To review the fourth quarter highlights, we grew the top line 21.1% and delivered 12.5% comps, on top of 11.1% comps in the fourth quarter of 2014, which was our toughest comp of the year.

Comp sales were driven primarily by traffic, yet ticket increased nicely as well.

The fourth quarter delivered the best two year comp since 2011, with a 23.6% two year stack.

Product newness, our loyalty program, great in-store execution and investments in marketing and store payroll hours are fueling this industry-leading growth, across both retail and online with the fastest category growth in cosmetics on both mass and prestige sides of the portfolio.

E-commerce top line growth and profitability were better than plan, driven by improved fulfillment capabilities and execution during the holiday season, and our salon business maintained its solid top line performance.

For the full year of 2015, we achieved an 11.8% comp, our best annual comp since 2010, with double-digit comps in each of the three businesses, store, salon, e-commerce.

Sales strength was driven primarily by traffic each quarter during the year, and the full year comp was comprised of a very healthy mix of 70% transaction growth, and 30% ticket growth.

Before updating you on the drivers of our fourth quarter results, I would like to take a few of the teams' accomplishments throughout FY15.

We drove top line growth of 21.1%, and earnings increased 25.2%, well above our expectations at the beginning of the year, reflecting robust market share gains and strong execution.

We brought significant newness and exclusivity to the merchandise assortment, and added 26 significant new brands during the year, demonstrating increased traction with our brand partners.

We accelerated growth in our ULTAmate rewards loyalty program membership, adding 3.2 million members to reach a total of 18.2 million active members by year-end.

We meaningfully increased brand awareness through our investments in television, radio, digital advertising and PR.

We achieved strong and increased guest satisfaction scores as measured by NPS.

We improved our supply chain operations in a few ways.

We invested in better processes and inventory to increase in-stock levels.

We drove efficiencies in our e-commerce fulfillment performance, and smoothly launched the Greenwood distribution center.

We also delivered against complex IT goals, with the implementation of a host of new tools across the enterprise, a new warehouse management system, our new merchandise forecasting and replenishment system, and a new product information tool, among others.

So for the past several quarters, we've been describing to the investment community our progress against our six go-to-market strategic imperatives.

But we rarely discuss externally, our foundational seventh strategic imperative, which is talent that drives a winning culture, guest-centric, values-based, high-performance.

I believe that the results we've just reported are the reflection of our attractive category, sound strategies, great execution, and also the progress we've made in building our Company's culture.

I am so proud to see proof that our commitment to putting the guest, and the associate at the center of our mindset is truly delivering marketplace results.

We're respecting the opinions of those who matter the most, the guest who gives us her hard-earned money, and the associate who really knows best how to optimize the guest experience, and our operations.

We're also leading through the lenses of functional expertise, enterprise-wide thinking and collaboration, which is required more than ever in this fast-chasing world of guest expectations.

We now have evidence that these efforts are having an impact, not just in business results, but also in our culture.

In fact, we saw significant year-over-year increases in the level of engagement of our associates, as measured by a third-party through our annual culture survey.

We are gratified to achieve global top quartile employee engagement scores among best-in-class companies.

Highly engaged employees are tightly correlated with high-performing companies.

Now let's turn back to our fourth quarter results.

In an effort to allow more time for Q&A, instead of going through each of our strategic imperatives, I'll call out some of the highlights driving our performance.

Our loyalty program is truly one of our most valuable assets.

Active membership grew 23% showing continued acceleration.

The growth in our loyalty program has been driven by two major things, the successful evolution of our marketing strategies to include awareness-driving [tactics], like television, radio and digital is driving brand awareness, and new guests to our stores.

In addition, our store associates have done a terrific job of making new guests aware of the ULTAmate rewards program, and then converting them in.

At the beginning of 2015, active member year-over-year growth was a bit less than 17%, and that growth rate increased each month throughout the year.

We're seeing excellent trends in retention rates, sales per member, frequency of purchase, and average ticket.

Reactivation of loyalty members who hadn't shopped in the past 12 months remains robust as well, another indicator of the benefits of the changes in our marketing model.

As we discussed at our Analyst Day in 2014, we're conducting ongoing marketing mix analyses, using a customized modeling tool that correlates sales results to in-market actions at the store and category level.

This work clearly demonstrates that we've successfully and profitably delivered on the promise of getting to a healthier mix of marketing strategies and tactics.

We're dedicating more resources to personalized offers through our loyalty program, and newer tactics including television, radio, expanded digital and PR.

These marketing campaigns are designed to position Ulta Beauty in a meaningful and differentiated way, with every piece of communication reinforcing our brand personality, and elevating our beauty authority.

This reallocation of resources increases the impact of marketing, and we believe it's one of several factors fueling the strength in our comp sales.

While we're reducing our spend on less productive tactics to be clear, we will always make sure that our guests see Ulta Beauty as providing a great value, in periodic promotions, loyalty offers, newness, and great experiences in-store and online are all part of that value equation.

These changes to our marketing strategy are also driving meaningful improvements in our brand awareness.

Our latest surveys show that aided awareness rose to 84%, versus 77% a year ago, and unaided brand awareness improved to 39% from 36%.

We believe this increase in awareness was driven in part by our national advertising campaign.

Stronger awareness of Ulta Beauty is helping us acquire new guests, and reactivating guests who hadn't shopped recently.

Now in terms of merchandising, we continue to gain share in all categories, with particular strength in mass and prestige cosmetics.

Urban Decay, IT Cosmetics, Nyx, Redken, Too Faced, Tarte, Clinique, Lancome, Benefit, and the ULTA Beauty Collection were among the best performing brands for the quarter.

We launched several new brands in our skincare area, including Julep and First Aid Beauty.

The pipeline of new brands for 2016 includes exclusive brands like Jessica Alba's Honest Beauty, and Fiona Stiles cosmetics, as well as the introduction of Buxom Color Cosmetics, and the expansion of [Clarins] in skincare and cosmetics.

We continue to focus on products that are only available at Ulta Beauty.

With the addition of many exclusive products within existing brands, including a new line of color cosmetics from Tarte, called Double Duty Beauty.

We're very excited to work with our brand partners to accelerate the rollout of Clinique, Lancome, and Benefit boutiques in hundreds of stores this year, that will make us even more of a beauty destination.

Our brand partners are finding increasing value in working with our CRM platform.

The number of brands participating in targeted CRM campaigns rose meaningfully last year.

We partnered with them to increase the number of targeted e-mail and direct mail campaigns, and to develop exclusive offers for platinum members.

All of these efforts drove incremental sales and margin dollars.

Our brand partners also love working with our data analytics team to drive trial of various products and categories.

We continue to put product samples in the hands of our guests in several smart ways, and we've tripled the number of samples obtained from our brand partners during 2015.

We're executing our sampling programs through online Beauty Bag, and targeted samples to surprise and delight our guests at point of sale in store.

We also have sample box programs in fragrance, professional hair care, prestige skincare, and mass hair care that have proven to be extremely popular.

And we doubled our sales of these multi-brand sample boxes during 2015.

For example, our sample box called Secrets to Gorgeous Skin offered during a recent skin event was a big hit, and we plan to offer many more of these sample boxes in 2016.

Turning to services.

The salon business comped 9.2%, with continued strength in cut and color.

Blowouts, hair treatments and makeup services were the highest growth categories.

We're delivering trend right training to our salon professional, and continue to integrate hair and makeup in our offering.

Our hand-picked artistic team works to develop hair cut, color and finishing techniques that are reflective of the season, then creates and delivers high impact training programs for all of the salon teams in our stores.

The trends curated by our team translate hair and makeup looks straight from the runway in partnership with our brand.

We recently launched spring and summer trends, including nine different hair and makeup looks, such as festival style hair and pearlescent glow makeup.

The Benefit brow bar continues its excellent performance with double-digit comp sales, and a continued expansion of brow services now in 712 stores.

To report on store growth, we opened 14 stores in the fourth quarter to complete our 2015 program of 100 net new stores, ending with 874.

New store productivity continues to be very strong, reflecting our growing brand awareness, dedicated resources to the grand opening activities, ongoing improvements to our portfolio of brands, and high quality real estate.

We are increasingly a tenant of choice as landlords appreciate our growth profile, our ability to drive traffic to shopping centers, and willingness of other retailers to follow in our footsteps to participate in the healthy traffic we draw.

Landlords also appreciate the quality of our store design, and the way our differentiated offering enhances the mix of retailers in their shopping centers.

We also continue to enhance the store portfolio through improvements to our new store format, as well as investments to elevate the existing stores.

For the 2016 class of stores, we'll be implementing a series of enhancements to our store format, that elevate both mass and prestige categories, give us a flexibility to respond to our growing access to brands, improve the signage and presentation of our ULTA Beauty Collection, and upgrade fixtures in key categories such as fragrance.

New stores will also put the excitement of our services offering more in the forefront, by placing the Benefit Brow Bar front and center.

We'll also fully remodel about a dozen stores this year, and touch hundreds of stores in the fleet with prestige boutique, and remodeled fixtures in key categories.

To update you on our e-commerce business.

Top line growth of 44.2% contributed 210 basis points to our total Company comp.

Significant improvements in fulfillment speed and customer satisfaction during holiday resulted in stronger than expected sales, and much better profitability compared to a year-ago.

We added Clinique to the Ulta.com assortment during the fourth quarter, so at this point e-commerce is virtually at parity with brick-and-mortar, in terms of our breadth of assortment.

We continue to launch some new brands online to test before rolling out to the stores, and offer some brands online only, such as an expanded assortment of [men's] products.

Moving on to supply chain.

We are clearly seeing the benefit of cross-functional collaboration and joint planning among our supply chain, e-commerce and IT teams, as well as store operations.

Our focus on continuous improvement in simplifying processes led to efficiencies across our network of four distribution centers.

During holiday, we achieved record network e-commerce throughput of 55,000 orders in one day, almost double our maximum volume last year.

Shipping lead times improved dramatically, with the percentage of orders shipped in three days or less at 92%, versus just 14% last year, significantly increasing guest satisfaction.

In-stock levels improved, despite achieving sales well over our holiday sales forecast.

The Greenwood DC successfully ramped up to serve 125 stores through the holiday season, and delivered 25,000 orders per day during peak holiday.

We remain very pleased with how the new DC is performing.

We continue ramping up to serve -- we will continue to ramp up and serve another 100-plus stores in Greenwood by the end of this year.

The new Dallas DC is on track to open this summer, and we continue to roll out new systems like SWIFT, our merchandise forecasting and replenishment tool, and we're also investing in space and assortment planning tools this year.

Now let me turn over to Scott to discuss the key drivers of our fourth quarter financial performance, and our outlook for the first quarter and full year of 2016.

Thanks, Mary.

Good afternoon, everyone.

I'll start with the income statement.

Top line growth was driven by a 12.5% comp, and a very strong new store productivity.

The marketing mix analysis that Mary mentioned showed that we were able to achieve this comp through a healthier mix of business drivers, including new brand launches and new products, more effective marketing including TV, radio, and digital, more efficient in-store labor, and continued benefits from new store maturation.

Increased sales of gift cards helped drive top line strength post-holiday.

During the fourth quarter, our comp continued to be a bit more weighted to transaction growth, with traffic about 70% of the comp, and average ticket representing about 30%.

For retail only, the 10.4% comp was composed of about 75% transaction growth, and 25% ticket growth.

Units per transaction were flat, but average basket rose 3% to just over $43.

E-commerce growth was driven roughly 75% by traffic, and 25% by ticket.

Now let's talk about the key drivers of the 120 basis points of gross profit improvement, which was quite a bit better than our initial plan.

The increase was partly driven by higher merchandise margins due to mix, as we delivered strong sales in many of our better margin categories and brands, including the ULTA Beauty Collections.

We also successfully continued our shift away from broad coupons and discounts, and toward more targeted and relevant offers to our guests, supported by our loyalty program and CRM.

In fact, we completely eliminated one of our usual discount offers at the end of the quarter, which helped our margin rate.

We leveraged store rent and occupancy expenses modestly on a double-digit comp.

And while our supply chain investments were still a drag on margins, they were less so than in the third quarter when we first opened the Greenwood, Indiana DC.

E-commerce fulfillment costs were also much more favorable this year.

You probably recall that during the holiday season of 2014, we were challenged with fulfilling orders during the spike in demand between Black Friday and Cyber Monday, and the higher than expected e-commerce fulfillment costs for holiday 2014 weighed on gross profit a year ago, creating an easier margin comparison in the fourth quarter.

The team did a much better job getting orders to customers in a timely fashion during the 2015 holiday season.

In addition to the successful launch of the Greenwood DC which provided additional capacity, we also increased the efficiency of our other distribution centers with process improvements throughout the year.

The e-commerce marketing team did a nice job smoothing out consumer demand during the holiday season, with promotional events planned before and after the Black Friday period, culminating in a much improved guest experience, and significant profit improvement.

The product mix for e-commerce continues to help as well, as we ramp up sales of high margin hair care products, which were added to the site last February.

Moving on to SG&A expense.

Deleverage of 100 basis points was driven primarily by planned investments in marketing and store payroll hours to support holiday season sales.

While marketing expense was flat for the year, it was back-half weighted with the introduction of new vehicles to drive brand awareness, including a national TV and radio campaigns.

We also invested in store labor hours and training to improve the guest experience, especially during the key selling weeks during the holiday.

Corporate overhead also deleveraged slightly, due to higher incentive compensation in concert with our better than expected earnings performance.

In terms of the balance sheet, inventories were up 16.1% on a per store basis, driven by investments in inventory to keep up with much better than expected top line growth, several new brand additions, and the continued expansion of Clinique and Lancome boutiques.

The team did a great job selling through holiday inventory, and making sure we start the new year with very clean inventory across all categories.

While we generally strive to keep inventory per door growth in line with comp growth, we had compelling business reasons to modestly exceed that benchmark, and are very happy with the quality of our inventory, and the resulting sales growth.

With the large number of prestige brand boutiques and new brands being added in 2016, we expect inventory per door growth to remain somewhat elevated for the rest of the year, although at a slightly lower level than Q4.

Capital expenditures were $67 million for the quarter, driven by 14 new store openings, investments in systems, store fixtures and supply chain.

CapEx for the full year was $299 million.

We ended the year with $476 million of cash and short-term investments.

The Company repurchased approximately 262,000 shares at a cost of $46 million during the fourth quarter, under our 10b5-1 plan.

For the full year, we repurchased just over 1 million shares for $167 million.

This reduction in our shares outstanding delivered about $0.03 of earnings per share growth for FY15.

Today we announced our 2016 guidance.

In light of our accelerated share repurchase plan and continued momentum in our comparable sales growth, our anticipated earnings per share growth rate is higher than what we expected, when we discussed our five year plan back in the fall of 2014.

We plan to add 100 net new stores, with all stores in the program in our traditional proto-typical store size.

We expect to open 11 stores in Q1, 21 in Q2, 44 in Q3, and 24 in Q4.

We plan to complete 12 major store remodels, and 2 relocations.

We expect to grow e-commerce about 40%.

Total Company comps are expected to be in the 8% to 10% range.

We anticipate earnings share growth of approximately 18% to 20%.

Operating margins are expected to be flattish, similar to what we achieved in 2015.

Gross profit margin will be pressured by our new Dallas DC coming online this summer, continued investments in core merchandising systems, and depreciation and write-offs related to accelerated boutique rollout, and store refresh program.

CapEx has been planned higher than our previous view, which was in the $300 million range.

We now anticipate CapEx of about $390 million.

This includes slightly higher CapEx per new store, with the latest enhancements that Mary mentioned, as well as a significant step-up in boutiques in our new store program.

We have also added about $80 million to the capital plan to refresh hundreds of our existing stores, which will include a major expansion of Clinique, Lancome, and Benefit boutiques, as well as a significant presentation upgrade for fragrance and Ulta Beauty Collection.

We believe these prestige boutiques drive increased productivity in our stores, and improve our positioning as a beauty destination.

We are delighted that our brand partners want to grow even faster with us.

In terms of share buybacks, our Board of Directors has authorized a new share repurchase program for $425 million which replaces the previous program.

As you saw in the press release, we announced an ASR for $200 million, and expect to continue our open market repurchases similar to what we did in 2015.

Turning now to guidance for the first quarter.

We anticipate sales to be in the range of $1.016 billion to $1.033 billion, compared to $868 million last year.

We expect comparable sales to increase in the range of 9% to 11% versus 11.4% last year.

Online sales growth is expected to be in the 40% range.

Pre-opening expense for the quarter is expected to be about $2.5 million.

Earnings per share are expected to be in the range of $1.25 to $1.30, versus $1.04 for Q1 of last year.

We anticipate a tax rate of 37.8%, and fully diluted share count of approximately 64 million.

I'll now turn the call over to our conference call host for the Q&A session.

Operator?

Thank you.

(Operator Instructions)

Our first question comes from the line of David Schick with Stifel.

Please state your question.

Hi, it's David Schick, and thanks for taking my question.

Congratulations on the quarter.

Just a quick question, or a basic question on salon, and then a quick question on gross margin.

On salon, you're lapping those incremental salon booking capabilities already, and then but the business has continued to grow quite nicely.

Can you talk about how you are able to grow that rapidly, despite that lap?

And then separately, any color on how much private label is benefiting gross margin would be helpful?

Thank you.

Sure.

I'll start on the salon question, Dave, thank you.

The salon business right now is -- we're pleased with the growth.

It's interesting, only -- it's really under 7% of our loyalty members are currently using the salon services.

So there's no reason for us to think that we can't just continue to grow that nicely, by getting -- driving more awareness of salon and more trial.

So the online booking tool is certainly one step in that direction, which is great.

But we anticipate that as we think about how we can continue to drive awareness and trial and rebooking in our salons, that we'll be able to continue to grow that for years to come.

As I mentioned in the script, we've got plenty of excellent offerings for our guest, whether it's new trends right off the runway on cut and color, even things that people can try just the first time, like a he blowout or a makeup service.

So there's plenty of growth that we believe we can drive ahead there.

In terms of the private label margin -- ?

Yes, let me jump in there, Dave.

So we don't break out specific categories or rate contributions by line, but obviously private label is a very high margin category for us.

It's something that's key to the mix overall for Ulta, and something that we use, right?

We use strategically to help drive the business overall, both on the top and bottom lines.

Thank you.

Our next question comes Kelly Halsor with Buckingham Research.

Please state your question.

Hi, guys.

Congrats on a great quarter.

Thanks for taking my question.

Just, I guess, given the momentum that you're seeing in the business here, how do we -- how should we think about some of the metrics that are implied in your longer term targets?

Does this give the potential, given the strength of the categories across the board, any thoughts on the potential upside to margins, et cetera, from here?

Thanks.

Thank you, Kelly.

First of all, we're thrilled with the results and the momentum of the business today for sure, and excited about that as we move forward.

I would I say this, we're very confident, and we remain confident in the mid teen operating margin target that we put out for our long-term guidance.

And that's going to be a combination of growing top line, driving efficiencies while still investing for the long-term health of the business.

Having said that, there's also plenty of questions ahead, as it relates to guest expectations, and a changing retail environment.

So we want to retain some flexibility, to continue to think about innovation in that area.

So we'll continually be refreshing our five year view.

At this point, we don't have any reason to think we'll change our five year financial guidance, though.

Okay.

Great.

Thanks.

Just if I could squeeze in one more here.

Could you just give any color -- ?

Great job, Kelly, squeezing in a second question (laughter).

It will be quick.

Just in terms of the categories, I mean, was the growth still largely driven by the strength of cosmetics, or are we seeing any strength in categories?

Yes, let me hand that -- turn this one to Dave.

Yes, Kelly.

Mary mentioned in the script, that cosmetics has certainly been very strong for us, both in prestige and the mass side.

But we're really excited that we're seeing growth across really the whole store.

The thing that makes us different is the unique combination of assortment, all things beauty, all in one place.

And we're seeing growth in hair for sure.

It's a huge foundational element for us, so all aspects of hair.

Fragrance, skincare, accessories, so we're getting growth in all categories, but it is being led by cosmetics at this time.

Okay, great.

Thanks, guys.

Our next question comes from Omar Saad with Evercore ISI.

Please state your question.

Thanks for taking my question.

Great quarter, great holiday quarter.

Was really intrigued by the 10% to 12% comp guidance for 2016.

I can't remember you guys giving comp guidance so high.

I'd love to hear maybe what are some of the factors that give you confidence this early in the year?

And obviously, the current trends are very strong, but what's causing kind of the sea change in your confidence to be able to deliver that level of comp, especially in a retail environment where there's so little traffic out there.

Is it the loyalty?

Is it the new marketing campaigns?

Is it something you're seeing in the store aging, the way older and new stores are behaving?

Would love any more details there?

Thanks.

Well, Omar, first, I'll say you're on the right track, and that it's a lot of things.

But let me tell you this, we're very excited about our comps, but we guided 8% to 10% for the year, just to be clear.

Okay?

So that's what we just communicated.

The -- but stepping back, we're pleased with that.

I would say that, as we're coming into this year, I guess, what I would say is, at the highest level, this is a business model that's working, and we're executing it really well.

And so, we feel confident about the momentum and that continuing.

It's a combination of a lot of factors coming together.

So if you'll indulge me, let me just spend a minute on this, which is first of all, it's great that we're in a great category, that is a growing category.

Right?

And so, that's important to start with, and there's expandable consumption of beauty products.

So these are everyday use, sometimes multiple times a day, driven by innovation.

There's plenty of innovation.

So we're in a growing business.

We at Ulta Beauty have a really, I think very clear bead on who our target guest is, and how to position ourselves against this guest.

So this beauty enthusiast is a large and growing segment.

Dave just mentioned, that we are positioned as all things beauty, all in one place, which is differentiated and relevant to that segment.

We have exceptional brand partnerships.

So it's about knowing who we're trying to target, but also offering her what she wants.

So exciting products, new and exclusive, and really working with our brand partners to continue to have the great assortment across category, price point, services.

I'd also add that smarter use of demand creation tools.

So our loyalty program is really the heart, I've talked about that.

We've got long-term awareness and equity building tools moving in the right direction.

The role of e-com and digital improved, especially in the guest service side of that as well.

So the demand creation tools are working well.

And then, I'd say just exceptional collaboration in our -- with our teams, and executing against complex things.

So it's about making sure that the in-store experience is exceptional.

And that takes a lot, whether it's payroll hours, or investing it in-stocks.

The distribution side of it, the focus on our Greenwood distribution center, the IT systems to support it.

And real estate is a core competency for us.

And we're quite good at selecting store locations, building them out, remodeling, and store productivity is even stronger than we expected it to be.

So I would say that truly is a notion of kind of a great market opportunity coming together, and being executed well.

And last thing I'd say, is that we also are less subject to some other factors as some of other retailers are.

So whether it's weather, maybe weak mall traffic, or fashion hits or misses, a few other things, we're less subject to that.

So you put all that together, it helps us feel very confident that we can transcend what seems to be overall retail trends, and deliver the kind of comps that we just everyone guided you to.

Thanks for the color, Mary.

Sure.

Our next question comes from Steph Wissink with Piper Jaffray.

Please state your question.

Good afternoon, everyone.

I'll add our congratulations as well.

Mary, just an observation.

It seems like you've moved from a position of you desiring bigger and better brands, to bigger and better brands desiring you.

So I'm wondering if you could talk a little about the 26 brands you added in 2015?

How important were those to the comp?

And also what are the plans for 2016, in terms of new brand additions?

I think you mentioned several hundred boutique build-outs, if you could give us a little more color on the specific number?

And then, any investments you're making in merchandising?

Thank you.

Steph, thank you for the question.

And I'd like to start with Dave, because he and his team are really the experts at all of this, all these things.

Go ahead, Dave.

Yes, that's great.

First, I'll start with new brands.

That has been something that we have been focused on for a long time.

We've added well over 100 new brands over the last five years.

And as you said, and as Mary mentioned, we had 26 new brands in 2015 alone.

And that included brands -- we brought Dior in late in the year, Skyn Iceland, Soap & Glory, First Aid Beauty, Revolution Makeup, Pacifica, Tony Moly, several others that were key across all categories, and all different mass and prestige and hair, and so we brought growth.

And we're really excited to be continuing to partner with our brands to leverage growth.

And we feel like we've got a great relationship that has been building and strengthening for many years, and we're excited about our ability to do that.

We've got -- Mary mentioned a couple, but as we look forward into 2016, we're as excited for the upcoming year, as we were in our results in 2015.

We've got some great brands already, that have already come out in the spring trend magazine, that you may have seen that came out.

We featured over 2,000 new items across new brands and existing brands just in that magazine alone.

Some key new brands that we're offering, Honest Beauty just launched.

Mary mentioned that, Jessica Alba's brand that is exclusive with us.

Fiona Stiles, also exclusive with us.

Fiona is a well-known makeup artist, and we're proud to be working with her.

Our existing brands continue to bring newness and excitement to us.

Mary mentioned Tarte with their Double Duty Beauty, and we're finding growth across all of our key brands, both big and small.

Continuing to expand and roll out brands like that we launched last year, BECCA, Clarins, Clinique and Lancome, which I'll touch of on in just a second.

And then, all of our big brands, our big partners across every part of our store, are great partners in finding new ways to grow, and we're excited to be working with them.

And brands like [Bare] and Too Faced and Philosophy and Urban Decay and Benefit and Chi, and Redken, and Matrix.

The list goes on, Nyx and Loreal.

So we're excited to be working on, with our brand partners, and we think we've got a rich pipeline to come.

On boutiques specifically, we did mention that we're continuing to expand.

I'd say boutiques are an important part of our growth plan, should be evident by this.

They're not the only part of our growth plan.

But we're really excited to be continuing to work.

We have four main boutique brands.

Bare has been our largest boutique brands, and they're essentially in every store.

We're continuing to roll out Benefit.

We have -- they were in roughly 700 stores at the end of last year.

And then, over the last several years, we've been partnering and expanding our relationship with Clinique and Lancome.

Each of them ended up with roughly 200 stores at the end of the year.

In total, across the ones that we're continuing to expand into existing doors and new doors, Benefit, Clinique and Lancome will be adding over 500 boutiques across those three brands in 2016.

So we're excited about all the brand innovation and brand expansion that will be coming this year.

That's terrific.

Thank you.

Our next question comes from Dana Telsey with Telsey Advisory Group.

Please state your question.

Our next question comes from Adrienne Yih with Wolfe Research.

Please state your question.

Good afternoon, and let me add my congratulations.

I was wondering if you can talk about the penetration in 2015 of the e-com business, and your private label, and then your exclusives?

It seems like there's a lot of growth opportunity in those three areas.

So if you could give us more color on that, that would be great?

Thanks.

Yes, private label in total, when we look at total private label, we include our ULTA Beauty Collection, and then some exclusive co-brands like our IT brushes with Ulta, and those represent approximately 6% of our sales in 2015.

Our e-commerce penetration ended at about 6% as well for 2015.

So those are -- and they both have been growing.

We're continuing to expand.

As the rest of our business grows on a penetration basis there, we're seeing incremental growth in each of those areas as well.

And was there a third?

The exclusives?

Exclusives.

Well, so I rolled in some exclusively, like co-branded like our It Cosmetics.

We look at a lot of exclusivity, and we don't really have a number that we look at with that.

But within nearly every brand, and certainly every major brand we have, we have exclusive products or lines.

Tarte Double Duty Beauty is one example that I've already talked about, and we have quite a few of those throughout the entire store.

Okay.

Great.

Thank you very much.

Best of luck.

Our next question comes from Simeon Siegel with Nomura Securities.

Please state your question.

Thanks.

Hey, guys, congrats on a really strong finish to the year.

So I guess, Mary or Dave, as you look at your shoppers that are converting to multi-channel, does that channel migration happen from store to web or vice-versa?

Are you seeing any change in where, how the customers discover you?

And then just quickly for Scott, how much did the Indiana DC weigh on gross margins this quarter?

And then, what's the right way to think about the ongoing impact from the DCs to margins?

Thanks.

I'll start with the cross channel.

Maybe Dave add, if there's anything I miss here.

But cross-channel shopping, is actually a pretty small percent of our shopper base today.

It's only about 6% of our guests or so.

And we love them because the cross-channel shopper is shopping more frequently, and spending more than a single channel shopper by far.

I would say that you can think about digital as the center of pretty much everything now.

Right?

So quite often, maybe somebody's discovering and researching online before they come into the store.

Whether they discover us online or in store first, I'm not sure if I can break that out, but I'd say probably mostly in-store.

Online tends to be very incremental to us as well.

Our guests love the experience of coming to the store.

The whole beauty enthusiast vibe is about trying things and increasingly experiencing services.

And then online, she's buying things that are kind of incremental to perhaps what she had even had time to discover.

We push out lots of emails -- not lots, but I mean, a appropriate number of emails to our guests, around new and exclusive and exciting products, and that tends to stimulate some online shopping as well.

So to your premise about, will that be a big area of growth for us in the future?

Absolutely.

Yes, as far as the new distribution center's concerned, again as Mary stated, we were very happy with the performance the team put in there, getting it off the ground successfully.

And you'll recall, the third quarter was really the first time we had it in service.

So it was less of a drag on gross profit margin in the fourth quarter, because the building was operating very effectively.

As we look towards 2016, again we'll have headwinds in the first half of the year, because of Greenwood being online.

Wasn't there last year.

It's still going to continue to scale up.

And then, in the second half of the year, we're going to -- we'll see more benefits there, as we lap Greenwood, but there we'll be taking online the new Dallas DC.

So you're going to have incremental headwinds there.

So as we look at next year, it's going to be a fairly challenging, I would say from a supply chain contribution perspective.

But we do expect to see merchandise margins continue to expand, so they will be a bit of a help there overall at the gross profit line.

Great.

Thanks a lot, guys.

Best of luck in the coming year.

Our next question comes from Mike Baker with Deutsche Bank.

Please state your question.

Hi.

Thanks.

I guess, I'll follow up for my one question, I'll follow up on the Clinique and Lancome rollout.

So about 700 stores now, I mean, that's up pretty substantially.

I think the last time I have numbers was 2013, where they were in about 100 each.

So it was clearly rolled out pretty quickly in 2014 and 2015, and likely a big comp driver.

But with it in now, what about let's see, about 80% of your stores, is the lift from that going to potentially slow over the next couple of years?

Let me clarify what I said earlier, kind of repeat that, the 700 number was specifically about Benefit.

So that's the Benefit boutiques at the end of last year.

Of course, you know with our Benefit, we have services, we do Benefit Brow Bar, that's in those stores.

But what I said about Clinique and Lancome is, you remember 100, that had grown by the end of last year to about 200 each.

(multiple speakers)

I see.

Okay.

(multiple speakers)

So that's where we are in those brands roughly -- roughly speaking.

And then the 500 boutique number is a combination of additions in new stores, and existing stores of Benefit, Clinique and Lancome.

We won't talk specifically about any one of them, but in total across those three brands, both in new stores and existing stores, we'll be adding about 500 boutiques.

Understood.

So all right, so since I got that completely wrong, let me ask one other question.

(laughter) You didn't -- my fault, I wrote down the wrong number.

You didn't talk about the small stores at all.

So can you just update us on how that's going?

Thanks.

Sure.

I appreciate your humility in admitting when you get something wrong.(laughter) Anyways, on the small stores I guess, I would just say stepping back, we have as you know, two small stores that we opened up in small markets, Vernal, Utah and Morganton, North Carolina.

Both are performing fine.

But most importantly, is we're learning a lot about operating a smaller footprint.

And as we look into the future -- a couple things I'd say, one is that we know that smaller markets, like those markets, there's plenty of them out there, and they offer another growth opportunity for us.

Having said that, we could do 10,000 square foot stores maybe even easier, because it's an even better representation of the full brand experience.

So kind of getting some more experience in small markets.

Those stores are doing well.

The other thing is that, as we look out in the future, we have not yet sized or put any kind of target out there on other opportunities like, say, urban stores, or maybe the downtown main street parts of say, suburbs across the country, where there's smaller parcels of real estate.

So as we continue to refresh our real estate view, and we're always doing that, if we decide to go after smaller stores, we'll have a lot better handle on what that looks like, in terms of how we think about using the space, the assortment, (inaudible) models, and the supply chain model.

So all good learnings.

And I think if, I've shown consistently, I'd kind of walk before we run.

So we're walking and learning, and it's going to provide benefits for us in the future.

Understood.

All right.

Thanks for the color.

Sure.

Our next question comes from Dana Telsey with Telsey Advisory Group.

Please state your question.

Thank you.

Good afternoon and congratulations.

Sorry about that before.

Thoughts on the mall stores.

How are you thinking about the mall and opening stores in malls?

And then also with the success of services, how are the margins on services, and is there opportunity there?

And just lastly, any thoughts on the time frame of the accelerated share repurchase?

Thank you.

Three questions in one.

I know.

(laughter)

Okay.

You have the mic, I guess, you've got to run with it.

So mall stores are a small percentage of what we do today, but we have a fair -- about 10% of our stores, and we are very selective about when we should open up in malls.

And we're very -- I think we understand that model well.

There's certainly markets where that's an excellent piece of real estate.

We have lot of learnings about, even where inside the mall, how to think about where we're positioned, who we're positioned by, where -- how the doors open, et cetera.

So we'll continue.

I don't ever expect, it will become any much bigger than it is.

But certainly, we do not reject that, if feel like it's going to give us the kind of return that we need.

So think about that as a small-ish, I guess, opportunity going forward, but part of the mix.

Okay, that's malls.

Number two?

Service margins.

Service margins.

What was it?

I'm sorry, go ahead.

(multiple speakers)

How do you think about margins on services and the opportunity?

Oh, okay.

Yes, I mean, I would say, we don't break out the margins specifically across the business, because of the labor involved, the margin on service is typically going to be lower than margin on retail products.

That guest though, who is coming to use services is going to be spending 2.5 times more than somebody whose not, so and buying a lots of retail products, coming frequently.

So in total, it's very incremental in terms of profitability to our business model.

[We're closed] out on ASR.

We're very happy to be able to announce that today.

Again, that would typically will begin, as soon as the open window for us occurs, which is early part of next week.

And that size, we would expect to be able to execute that over a course of 30, 45 days, roughly.

Thank you.

Our next question comes from Rupesh Parikh with Oppenheimer.

Please state your question.

Thanks for taking my question, and congrats on a really nice quarter.

So I just want to go back to your CapEx line.

We're seeing a lift this year in CapEx, and you guys called out some of the reasons with the boutique expansions and additional fixtures, et cetera.

I just wanted I guess ask, how do you think about the returns on investments related to these investments or fixtures, boutiques, and even some of the refreshes?

Well, we feel very confident that it's a good way to invest money.

We've had experience, again Mary mentioned, we crawl, walk, run.

I mean, that's the way we operate here.

So whether it's the new fragrance fixture that we referred to, we already have that installed in a number of stores.

We've monitored the results there, both from a sales and margin perspective, but also from a shrink perspective.

Right?

It's always a 360 degree view.

As far as the boutiques are concerned, again, we've had a long history there with a number of these brand partners.

And we've been able to measure incrementality and halo effect, and all those other things, when these are installed in our stores.

So we're very confident that they're going to produce excellent returns for investors over the long term.

Okay.

Thank you.

Our next question comes from Simeon Gutman with Morgan Stanley.

Please state your question.

Thanks.

Good afternoon.

Congratulations.

I'll have two, I'll make them very quick.

The first, Mary, you said that the five year guidance, all of that stays intact.

Thinking about investment, right, we had two big years of investment, this being the second one.

Is there any -- how should we think about, I guess, next year, the out year, 2017, should we see that taper off?

And second question, it's one of those quarters, Mary, I think it's fair to ask, what's not going right in the business?

What's not going right?

Finish with your question, Simeon.

Here's the thing, we're really focused on the future, and where the world is going in the next -- I mean, maybe I'll be as bold to say 5 or 10 years, but thinking about what the innovations and/or ways to think about the way the guest expectation is going to continue to evolve and change, about seamless retailing and shopping.

So it's not a problem.

It's a great opportunity for us.

Because if, and I talked about this in the script.

But I've got a team of people and their teams that think in a very integrated guest-centric way and store associate centric way.

So we're thinking a lot about, how do we think about, just continuing to be ahead of the curve as it relates to the competitive environment, and the shopping expectations in the future?

So and there's no one answer to that, I guess.

So it's not like it's -- anything is broken.

It's a matter of where do we point ourselves for the future, and I mean that honestly.

I think I'm very, very pleased at how many things are going well.

We're not complacent about that.

We push ourselves very hard.

We are really focused on always improving.

Yes, as far as the CapEx, and long-term guidance implications are concerned, Simeon, we're very happy with where we are today.

I mean, the business is performing very strong.

We're probably, we're a little bit ahead of where we thought we would be at this point in time.

The boutiques were in our five year guidance.

I mean, they were inherently built in there, but we are pulling them forward.

So there is an acceleration here.

We expect, again those investments, we demonstrated that they paid great dividends for investors over the long-term.

So the CapEx specifically for next year, you can expect it to stay elevated.

This boutique, this strategy we have in place with our brand partners, is a multi-year rollout.

So we're going to touch as many of our comp stores.

And again, that's what that $80 million is basically referring to as our existing store base, so try to touch as many of those over the next couple years as we can.

Yes, thanks.

Our next question comes from Matthew Fassler with Goldman Sachs.

Please state your question.

Thanks so much, and good afternoon.

My first question -- I'm going to ask a couple follow-ups on topics that have come up.

You talked about small stores.

You didn't explicitly address store capacity.

I think 1,200 is the number you've had out there in the past.

You'll be at 900 at some point in the second quarter, adding 100 stores per year, and the productivity looks terrific.

There's no signs of saturation whatsoever.

But based on all those numbers, any updated thinking on capacity, as we think about the five year outlook here?

Yes, thank you, Matt.

No, I'd reiterate what we've said, which is that and you just recapped it, 1,200 stores, full size, kind of prototypical.

We see a very clear sign of sight to that.

We've also said that, beyond that, the small market opportunity probably represents another couple hundred.

We're in the process of refreshing our real estate view, and we're going to start to take a more specific look at the opportunities beyond that, so urban, or downtown, suburban type pieces of real estate.

So I guess, I'd just say, stay tuned on that.

We'll continue to refresh that view.

But I feel very optimistic about our ability to continue to drive market share growth.

So whether it's in terms of square footage or on a comp basis, we have -- if you step way back, we have only 5% share of the spending of the beauty enthusiast today in the US.

And it's -- beauty is highly fragmented.

You can buy beauty products in thousands and thousands of places across the country.

But we know that we've hit a sweet spot, with a group that's actually frankly, really strong, and growing in terms of the beauty enthusiast segment.

So we're differentiated.

They like us.

So we're never going to get complacent about building out too much, but we certainly don't want to underestimate the possibility here.

So I feel good about the targets that we've communicated.

If that changes, certainly we'll refresh that, but we're continually looking at it.

And the other thing I'd say is that, reiterate, new store productivity very strong, cannibalization, very low, too low to even be material, and it's actually gotten less, which is great.

I'd like to mention that real estate opportunities, very strong out there for us.

And everything we just talked about, as it relates to driving brand awareness of Ulta, only helps every store that we open you now.

And we've got people who kind of know more about the brand than they did a couple years ago.

So I think all those factors are very positive for us.

Great.

If I could follow up briefly with Scott on gross margin.

You're coming off a massive increase, and just want to understand a couple of the moving pieces that's drive your gross margin outlook.

That D&A and write-off piece, is that significant, because that seems like it would ultimately be nonrecurring?

Also Dallas versus Greenwood, just in terms of relative impact?

And then finally, shouldn't mix as it did this quarter, help you overcome a lot of those factors?

Yes, I guess, the one thing I would say right off the bat is, we're batting 1,000 here.

I mean, we've got a pretty good run the last few quarters, and you can't always plan for everything to go perfectly every quarter.

So as we look out towards 2016, I mean, the combination of the DCs, we feel very confident now.

We executed very well in Greenwood.

We expect to do as good or better with Dallas coming online next year.

Again, I won't break out basis points of headwinds or tailwinds from each one of those, but directionally we feel very confident that these are going to deliver the kind of benefits that we expected upfront, and that we described back in our Investor Day presentations.

I mentioned merchandise margins a little earlier here.

Again, the core, the mix of the business is very strong in retail.

All these new brands that are coming in, we've got generally very strong terms with our vendors.

Pulling back on some of the broad discounting things, and doing things more direct and focused with our customers are only going to help drive merchandise margins higher in the future.

So net-net, we feel very confident that we're going to deliver at least flattish next year, and we're hoping that we're going to be able to do better, similar to what we did in 2015.

Thanks a lot.

Our next question comes from Oliver Chen with Cowen and Company.

Please state your question.

Hi, this is Courtney Wilson in for Oliver tonight.

Thanks for taking our question.

We were just wondering, of those 100 new stores expected to open next year, are they weighted towards new or existing markets?

And then also, we were just wondering what you're seeing going forward on the promotional front?

And if promotion -- the promotional cadence differs at all in the mass versus prestige categories?

Thanks.

Yes, let me start off with the mix.

So next year, basically new versus existing is consistent, kind of where we've been the last couple years.

It's about 70% existing, 30% new.

The one place we are seeing a bit of a change is in the types of centers.

So new centers versus existing centers, so the last couple years, it's been 80/20 existing, 70/30 existing.

Next year, we see it ticking down a little bit to 60% existing center versus 40% new.

So that's a great sign, to have new developments coming out of the ground.

Sure.

On the promotional front, we've talked about some of the gradual changes that we've made, in trying to rely less on broad couponing, and discounting to more targeted, and leveraging our loyalty program as a source of value for our guests.

And we're going to continue to do that.

We're not going to make any wild swings in 2016, but we'll continue down that path.

As far as mass and prestige there, each of those categories are very different in how they promote.

So we tend to have more promotions on the mass side, of course, prestige is not -- does not tend to be a promoted category.

Although starting on Sunday, Courtney is our 21 Days of Beauty event, Beauty's biggest event.

So it is one of the two times a year where you can get pretty consistent prestige promotion.

So that will be something we'll continue with focused events like that.

Thank you.

Congratulations.

Our final question comes from Daniel Hofkin with William Blair.

Please state your question.

Hi, can you hear me okay?

Yes, Dan.

All right.

I'll add my congrats once again.

Just a couple -- one clarification question, back to the gross margin in the quarter versus the year-over-year trend in earlier quarters.

Just it sounds like mix was generally kind of similarly strong.

But just given the gross margin along with comp was so much better than expected was there -- what would you call out as -- was it less promotion?

Was the mix better year-over-year than it was in earlier quarters?

What were, I guess, things there, was it the DC having ramped up?

And then, I have just one question about not 2016, but 2017?

Yes, I guess, the answer to the first part of the question, yes.

It was, again, it wasn't any one thing, Dan.

It was a total team effort in the fourth quarter, stores, e-commerce team, DCs, merchants, planning, everybody in the corporate support area, just really executed at a very, very high level.

The merchants picked the winners.

The store teams did a great job selling gift cards.

E-commerce mix was better than ever.

Things that we had been telling investors, we were going to improve on, the mix overall was good.

Just improved focus on giving the customer what she wants, right?

So pulling back and being more focused on some of the discounting tactics that we use.

And overall -- and the DCs, just -- and the work that our teams put in this year, to not only get Greenwood open, but to improve the existing buildings was just beyond what we expected.

So it was just really spectacular performance overall.

Great.

And then, as it relates to next year, and I think you have an extra selling week, like a lot of companies in 2017, if I'm not mistaken, a 53rd week.

But if you put that you aside, are you still thinking we might even see a little bit of acceleration in earnings growth next year, with some of the investment spending sort of normalizing or tailing off a little bit?

Yes, our 53rd week is actually the following year.

It's going to be 2017.

So just to make sure we're consistent there.

Yes, so for 2016 now, are you referencing accelerating?

(multiple speakers)

Sorry, I was asking about the year that you have not specifically guided to.

I was just thinking -- most of us model out a year.

And I think originally in your plan, you were thinking 2015 and 2016 were going to be flattish margin years, and then possibly starting to increase again beginning in 2017.

Is that still the way you're thinking about that?

Yes, that is.

It's consistent.

I think Mary mentioned earlier, we're not changing our long-term guidance.

We feel confident in the trajectory of the business.

We think there's a lot of benefits, coming out of these supply chain investments that we're making today.

So merchandise mix going up, supply chain efficiencies kicking in, in a meaningful way in 2017, we feel very confident that we're on target.

That's very helpful.

Thanks again.

Best of luck.

At this time, I would like to turn the call back over to CEO Mary Dillon for closing remarks.

I would like to just wrap up which thanking our 26,000 Ulta Beauty associates.

You delivered a fantastic year, and I look forward to continuing our terrific momentum throughout 2016, and thanks to all of you for your interest in Ulta Beauty.

This concludes today's conference.

Thank you for your participation.

You may disconnect your lines at this time.