Ulta Beauty Inc (ULTA) 2007 Q3 法說會逐字稿

Good morning ladies and gentlemen.

My name is Natasha and I will be your conference operator today.

At this time, I would like to welcome everyone to the Ulta Salon, Cosmetics & Fragrance third quarter fiscal 2007 results conference call.

(Operator Instructions) Thank you.

It is now my pleasure to turn the floor over to Allison Malkin of ICR.

Ma'am, you may begin.

Thank you and good morning.

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.

With respect to each reference we make on this call, to adjust (inaudible) net income per diluted share as a result of the IPO, a reconciliation of net income per share on a GAAP basis to adjusted net income per share has been provided in Exhibit 4 of our earnings release, which is available on our web site and has been filed with the SEC on form 8-K.

And now, I'd like to turn the call over to Ulta's President and CEO Lyn Kirby.

Thank you, Alison.

Good morning, everyone.

Thank you for joining us to discuss the company's third quarter fiscal 2007 results.

On the call with me today is our Chief Financial Officer Gregg Bodnar.

Following my opening remarks, Gregg will review our financial highlights and then I will provide closing comments and turn the call over to the operator so that we can answer the questions you have for us today.

We are pleased to speak with you today on our first quarterly conference call as a public company.

As I told many of you on the IPO road show, Ulta has been on an exciting journey.

For the past eight years we have been repositioning the brand, developing our infrastructure, developing our merchandising and marketing strategies while growing to 248 Ulta locations across the country to date.

As a result, today we are the category (inaudible) for beauty, yet we believe there is significant growth that lies ahead.

We want to thank you for your interest and believe years ahead will be equally rewarding.

The third quarter marks a successful period for our company, we delivered a 25.4% increase in sales.

We increased comp store sales by 6.7% and we grew net income by 16.3%.

The quarter also met with several noteworthy accomplishments.

Firstly, we completed a record number of store openings and remodels.

To this end, we opened 26 new stores during the quarter.

Our openings were well balanced with 10 stores opened in major metro markets, 10 opened in medium sized markets and six in smaller markets.

We added four new markets during the quarter, which included Alabama, Ohio, Tennessee and Massachusetts.

In addition, we completed seven full remodels in the third quarter, and at quarter end, operated 237 stores across 30 states.

We accomplished this despite incurring a very slight loss of budgeted weeks for certain stores due to some permit and developer issues in just a few locations.

Overall, though, I am absolutely delighted with the seamless ability of our team to open this record number of stores and remodels in the quarter, and furthermore, I am pleased with the results of our new stores.

Our 2007 class is performing in line with our new store model.

Next year our plans include a smoother new store opening curve on a larger number of openings for the year.

So, as a result we anticipate the number of openings we achieve this quarter to represent a peak quarterly opening level for next year.

So based on this quarter's record number of openings, we are very confident in delivering next year's store expansion program.

For the fourth quarter, we have already opened 11 of 12 new stores with one planned store for January, and looking to 2008, our pipeline is full, and 2009 is shaping up very nicely.

Our sales included strong comp store sales growth driven by both average tickets as well as solid gains in customer traffic, while our in-store experience continues to drive average tickets, our marketing continues to drive excitement and traffic through our stores.

Integral to our marketing strategy is our database containing six million loyalty club members representing a clear competitive advantage for our company.

During the quarter, we added additional marketing targeted to our best customers which has proved very successful in the quarter.

In addition, we worked with our brand partners to support this advertising investment.

We will continue to flex our marketing muscle going into the holiday season, focused on strategies to deliver incremental traffic to the stores.

In addition to our marketing, we continue to drive growth through our merchandising strategies.

The prestige category generated double digit comp growth in the quarter.

And in addition we have continued to flow fresh new products and brands into our store.

During the quarter we introduced new brands such as Dermologica, Juicy Couture, Nick Chavez and Jessica Simpson Hairdo.

As we discussed on the road show, a concern of Ulta is our Salon business.

We continue to be pleased with the ongoing development of our Salon strategies which are generating strong comp store sales growth.

This growth underscores our continued focus, dedication and commitment to this business as a core component of our competitive advantage.

Following quarter end, we did relaunch the Ulta.com site, it is a bit later than we would have liked.

The new Alta.com was unveiled on November 16th, and is achieving a very good response rate from customers.

As we begin fourth quarter, we are still working to optimize the customer experience on the new platform, yet we remain delighted by the improved features, functionality, efficiency and look of the site.

Although we are late, we have already experienced days where transactions are significantly greater than last year's peak volume days.

I certainly invite all of you to take a look.

And while it is unfortunate that we will not be able to harvest as much sales volume in this holiday season as we would have liked this -- sorry --for this year, we do expect to fully maximize this platform in 2008.

As we enter the fourth quarter, we realize that we are operating in a very difficult environment.

However, we believe we are well positioned.

Our inventory is in great shape, it is fresher than last year, it is in the right categories and brands.

Our stores look terrific, and we have a very loyal customer base on which to impact our high impact marketing.

All of this has us poised to maximize the holiday season.

We understand that the season may reach heightened promotional levels across all aspects of retail, and we are prepared for those.

We will be prudent in the way we invest to drive sales for the [gold award] maximizing profitability.

Nonetheless, we will flex our marketing muscle by offering exciting enticements such as our great bathrobes as part of the gift with purchase on fragrant gift sets.

And in addition, we have chosen to go deeper into our loyal customer lists with exciting marketing offers and have achieved a very favorable response from these vehicles early in the quarter.

Again, we believe our strategies are prudent and balanced and have us positioned to achieve our fourth quarter sales and earnings targets.

Coming out of the holiday season, we will continue our Prestige brand expansion in the month of January with the rollout to all doors of Stila cosmetics, which is currently being tested in 30 of our stores.

With that, I would like to turn the call over to Gregg to review our financial highlights in some more detail.

Thank you, Lyn.

As Lyn mentioned, strong sales growth and a 210 basis point increase in gross profit margin more than offset increased expenses and drove a 16.3% increase in third quarter net income.

Starting with the income statement and beginning with sales, for the third quarter, net sales increased 25.4% to $208.2 million from $166.1 million last year.

Sales growth was driven by 6.7% increase in comparable store sales which follows a 15.6% increase in comparable store sales last year on a realigned calendar basis.

Our comparable store sales were fueled by strong growth in customer transactions and a healthy increase in average ticket.

Non-comp store sales contributed $17.3 million to total sales, and total square footage increased by 27%.

As Lyn mentioned, we opened a few stores and relaunched the web site later in the quarter than we originally had planned.

This impacted growth, total sales growth by approximately 2% in the quarter with no impact to net income.

Importantly, all of our new stores scheduled for the holiday season are currently open, and our store expansion plans include one store opening at the end of the fiscal year in January.

Gross profit in third quarter was $68.1 million or 32.7% of net sales as compared to $50.7 million or 30.6% of net sales last year.

The 210-basis point increase in gross profit margin was primarily attributable to an increase in vendor advertising allowances offsetting increased advertising expense.

Also benefiting gross profit was a decrease in the amount of accelerated depreciation associated with store remodels as compared to last year when the remodel program was launched.

We do not expect these levels of improvement in gross margin to continue into the fourth quarter.

SG&A expenses were $55.6 million or 26.7% of net sales, compared to $40.8 million or 24.6% of net sales in the prior year.

The rise in SG&A expense is primarily due to an increase in advertising expense related to the shift in the marketing calendar given the 53rd week last year which resulted in one additional advertising mailer in the third quarter this year.

We also incurred an incremental $900,000 in stock compensation expense primarily related to certain stock option grants that were [traded] by the IPO.

Pre-opening expenses were $4.5 million or 2.2% of net sales compared to $2.9 million or 1.7% of net sales, reflecting 26 new stores opened during the quarter as compared to 11 opened in the prior year.

Pre-opening expenses were well controlled.

This was driven by extensive training in six session planning program which promotes new managers from within and we were able to gain meaningful marketing leverage as we opened a record number of stores in the quarter.

As a result, operating income increased 13.2% to $8 million or 3.8% of net sales from $7 million, or 4.2% of net sales in the prior year.

We were pleased to achieve this level of growth even after absorbing incremental costs associated with stock compensation and pre-opening expenses related to our expanded store opening program this quarter.

Interest expense totaled $1.3 million as compared to $1 million last year.

This reflects a $33.5 million increase in average debt levels as compared to last year, primarily driven by new store investments.

The effective tax rate for the quarter was 36.9%, as compared to 39.9% in the prior year.

The decline in the tax rate compared to last year reflects an adjustment to our effective tax rate -- state tax rate, but had no material effect on EPS.

The resulting net income was $4.2 million as compared to $3.6 million last year, representing an increase of 16.3%.

On an adjusted basis, excluding the impact of the company's preferred dividends in 2006 and 2007, income per diluted share for the third quarter of fiscal 2007 was $0.08 as compared to $0.07 in the prior year third quarter.

For the first nine months, net sales rose 23.5% to $602.8 million with comparable store sales increasing 7.4%.

This follows a 13.7% increase in comparable store sales, realigned for the 53rd week calendar shift last year.

Operating income was $22.8 million as compared to $23.8 million last year.

The decrease in operating income includes the impact of $2.8 million of warehouse management software implementation related costs, $1.9 million of incremental accelerated depreciation expense related to our store remodel program, and $3.8 million in additional pre-opening costs.

Adjusted income per diluted share, which excludes the effect if our preferred dividends in 2006 and 2007, was $0.20 as compared to $0.23 last year.

Merchandise inventories at the end of the quarter were $219.5 million, reflecting a $62.7 million increase compared to the third quarter last year.

Approximately $42.7 million of the increase resulted from the addition of 49 new stores open since the end of the third quarter last year.

In addition, approximately $15 million of the inventory increase relates to the calendar shift.

This calendar shift causes each quarter of fiscal 2007 to begin and end one week later than the comparable prior year quarter.

As a result, the third quarter in fiscal 2007 ended one week closer to Christmas, resulting in an additional $15 million of seasonal inventory as measured on an average per store basis.

Excluding the effects of the calendar shift, inventory at the end of the quarter on an average per store basis increased 3% compared to the prior year at quarter end.

We are very pleased with both the level and composition of our inventory as we enter the fourth quarter in a critical holiday season.

Regarding our outlook for the fourth quarter and full year, for the fourth quarter of fiscal 2007, we estimate net sales in the range of $304 million to $310 million, as compared to $267 million last year.

This assumes comparable store sales growth in the range of 46%, income per diluted share as forecasted in the range of $0.22 to $0.24 as compared to $0.19 last year reflecting a growth rate of 21% at the midpoint of the guidance range.

As a result, for the full year, we estimate net sales in the range of $907 million to $913 million, as compared to $755 million last year.

This assumes comparable store sales growth of 6.2% to 6.9%, income per diluted share in the range of $0.47 to $0.49 as compared to $0.45 last year.

Our fourth quarter earnings guidance assumes an effective tax rate of 40%, and 60 million shares outstanding.

For the full year, our earnings guidance assumes a tax rate of 39.8% and approximately 53.5 million shares outstanding.

We project capital expenditures for the full year which are funding new store opening and remodels of $115 million.

We plan to open a total of 53 stores and remodel 17 locations this year.

At year end we expect to operate 249 stores, increasing square footage by 28%.

So approximately 2.6 million square feet.

Our long-term growth targets on an annual basis include comparable store sales increase in the range of 3% to 5%, square footage expansion of 20% to 25% and net income growth of 25% to 30%.

And now I would like to turn the call back over to Lyn.

In summary, our priorities are focused on optimizing profitability and earnings during the holiday season.

We remain excited by our long-term potential, given the power of our compelling in-store experience, brands and categories, our marketing machine, and most importantly, the talent and motivation of our team.

This combination has us positioned for success in the fourth quarter and beyond in our efforts to expand Ulta to 1,000 U.S.

locations over the next 10 years.

With that, I would like to turn the call over to the operator to begin the q-and-a portion of the call.

Thank you.

(Operator Instructions) Your first question comes from Neely Tamminga of Piper Jaffray.

Good morning.

And, looks like a nice quarter there.

Just wanted to ask a little bit more, if you could walk us through some of the brand introductions for next year, kind of what's in test, what's going to be rolled out, about what quarter, that would be helpful.

I think.

You have the Stila thing and maybe some other items on deck, but just kind of how should we be thinking about the roll out of some of these new brands into next year?

And then I'll have a follow-up question.

Neely, we're not really getting into detail in -- on 2008 on the call.

We certainly have a continued roster of new brands that we will both test and roll.

As you may recall, our goal is to have one rolling and one testing in each six month time period.

We are on track to do that.

We do have a couple of other brands lined up for test next year while we're rolling Stila, but getting more specific than that would not be the right place to be while we're still working out the negotiations for brands that we're testing.

But rest assured we do have a full roster of exciting brands to roll with.

And Lyn, would these be, the one rolling and the one testing, are they comparable in terms of size, or, you know, is it going to be -- is it kind of testing a two footer while you're rolling out a four footer?

I'm trying to get a sense of order magnitude.

Sure.

No, the brands we are discussing and working with are of the size and magnitude of a Stila if that's helpful putting it into perspective for you, Neely.

Very much so, thank you.

And then just one follow-up question for me.

Gregg, the D&A, you might have given it on the call.

I'm not particularly sure.

I know you talked about the accelerated depreciation and amortization.

Can you give us what the D&A was at the end of Q3 and what you expect it to be at the end of this year?

Yes, for Q3, Neely, it was $9.5 million, and then for the full year, we expect to be approximately $40 million.

$40 million.

Yeah.

Thank you so much.

Good luck.

Thanks Neely.

Thank you.

Your next question comes from Brian Tunick from JP Morgan.

And good morning, Gregg.

I guess my two questions for Gregg, I guess.

First, maybe you can update us on your IT or DC plans for first quarter or first half, maybe just give us sort of the timetable, what we should be watching there.

And then secondly, Gregg, it seems like the Q4 sales are coming in a little different than we had thought, but the earnings are coming in exactly where we thought.

So maybe help us out there, what's happening on the sales line and where you're making it up in earnings.

Yes Brian.

We'll take that in three steps.

TC and IT and then Lyn will talk about Q4 sales, and I'll finish it with the earnings impact.

As it relates to the distribution centers, we talked to a lot of the folks we saw over the road show period.

The distribution center is a key focus for us.

We have already converted the technology side of it as you remember us talking about in the first half of 2007.

We are focused completely on the infrastructure side of the development.

We still remain very focused on launching that new distribution center at the end of the first quarter, and we are on track to do that.

As it relates to IT in the first half and first quarter of the year, other than bringing up the new distribution center, which does have some network costs and impact associated with it, we will primarily be focused on rolling out a point of sale upgrade, which I think we had mentioned before.

We had put that all together and then basically put it on the shelf for the fourth quarter to get through the holiday period, and then we'll be rolling it out into January, beginning of February.

As it relates to the fourth quarter sales, Brian, comp is coming in as we expected.

We're on track there.

The difference to what we had expected, as I had mentioned, the e-commerce site, a little later than what we had originally hoped for in terms of getting that launch up.

That's having about a $5 to $6 million impact on total sales volume, although as you would expect, not quite so much on earnings, but Gregg will touch on.

And a small shortfall in terms of our forecast on a small number of new stores as they go into the quarter.

We had forecast some of the stores above model.

So we are still very happy with the overall performance with the class of 2007, but there is a small -- a relatively small mess on a relatively small number of stores.

This is what we had forecast in the budget.

So Brian, new stores continue to -- performance remains on track with our model as it was with the third quarter, and then, as we were entering the third quarter and then looking towards the fourth quarter, we just took some prudent measures on the expenses, mostly in SG&A just to make sure that we were completely focused on delivering earnings when we saw a little bit of sales shortfall coming from the dot com site and the conversion on the dot com site wouldn't have been at the store four wall contribution anyway, but we pulled back expenses there just to make sure we could manage a no-impact conversion on earnings from that sales shortfall, and we've done the same thing in the retail and corporate office.

Just prudent expense management.

And if I could just follow up on those comments from Lyn, is there anything in specific that those couple of stores fell short of your, maybe aggressive plan, but, was it a region of the country?

Was it something that you could maybe point out that we should be thinking about as we go into '08?

No, not really.

More than anything else it represented us going a little early into some trade areas that are still ramping, and we thought that we could be a little bit further down the track in terms of the model, and we fully expect that they will get back on track as the trade areas continue to fill out.

So no, nothing significant.

Nothing geographic, Brian.

Some were just a reflection of that.

Okay.

Terrific.

Good luck for holiday.

Thanks very much.

Thank you.

Your next question comes from Lyn Walther from Wachovia.

Been a good quarter.

A couple questions.

Can you give us a little more color on your commentary for holiday.

Are you seeing something that is causing this?

Are you just being conservative?

And just to clarify, in your guidance, are you planning to be a little more promotional than last year given the environment?

The -- certainly we saw what I would describe as a rather choppy environment in the third quarter, and going into the fourth quarter, I think the choppiness has turned to just a little more volatility.

So as the economy and consumer confidence and, of course, just the calendar shift that causes the sales to come closer to the last week of Christmas, and than it does in a traditional holiday season.

So both of those factors are what certainly has us very prudently managing the expenses as Gregg described as well as a very detailed oversight on our merchandising and marketing.

The biggest shift that we have going on is not so much increased promotional activity so much as going deeper into our lists with our customer club members.

In third quarter, we focused more on getting additional trips out of our best customers.

In fourth quarter, we feel that the biggest incremental opportunity is getting some of our customers that come in less frequently to come in more frequently, and that's where we focused most of our marketing efforts.

Okay.

Thanks.

That's helpful.

And then, when you add a brand like Dermalogic or Stila, how much cannibalization is there, or do you see you're attracting a new customer?

Is there a way to measure what happens when you bring on a brand like this, and does it display something else, or is there room in a store to add it?

The big-picture perspective is it definitely adds to the store in totality, no question.

There's usually some modest cannibalization in the short term as customers tend to try the new brand, but we see the brand stabilize back at the end.

So the ones that are cannibalized, often we do see customers buying both of the brands.

The -- I think the overall picture, though, is very much that the more brands that we put into the store, the greater we are as a destination for beauty purchases for customers in totality, and so what we see is an expansion of total customer traffic, and I believe acquisition of new customers to the brand also as we add brands to the stable.

Okay.

Great.

Thanks.

Good luck for the holiday.

Thanks.

Thank you.

Your next question comes from Lauren Levitan of Cowen and Company.

Good morning.

Good morning.

Lyn, I was hoping you could talk a little bit on the comment you made regarding the challenging environment.

Does that have any implications on the product trends?

I know you called out double digit comps in Prestige and continued comp growth in Salon.

Maybe help us understand how that challenging environment is impacting the actual consumer behavior in the store, in terms of what they're buying, maybe size of basket, composition of basket?

Thank you.

As you know, Lauren, we're not going to comment on individual category performance.

So I'm going to try to answer your questions in some broad strokes without being too specific.

I think the -- what we are most closely watching is just overall traffic to the store as opposed to category mix and shift.

There is certainly a lot of competition for the customer share of wallet from all retailers, not just retailers in the beauty sector.

There is a lot of promotional activity going on.

So we are far more cognizant of that issue and being competitive in the total marketplace, than we are necessarily cognizant of individual shifts within the categories.

And we are not seeing any significant shift within that from what we would expect to see.

Maybe just a little, the only thing that I would even comment on, and I do believe this will come late, as the customer pattern shifts close to the holiday season, we tend to see fragrance come a little bit later.

We have watched this in other years, specifically when we go back and look at our trends seven years ago, same calendar as this year, we certainly saw fragrance come a little late, and we fully expect that it will come late.

That's helpful.

Gregg, you also called out that there was an extra mailer in Q3 given the calendar shift.

Can we assume that that comes out of Q4, and if so, what implications does that have on how we should be thinking about operating expenses in the fourth quarter?

Lauren, it actually comes out of -- all the way back to the beginning of the year.

It comes out of Q1.

So Q4, we're a comparable number to last year?

Q4, we're a comparable number to last year on a 13-week, 13-week basis.

But we're against 14 weeks.

So is it still the same number of 13 versus 14 weeks?

Yes.

Okay.

Thank you.

And good luck for holiday.

Thank you.

Your next question comes from Daniel Hofkin of William Blair.

A quick question regarding the adjusting for the vendor sponsorship and the impact on operating expenses.

If you could just maybe quantify a little bit more what those two line items might have looked like, excluding that transfer, and then, just within -- elaborating on the last response, within the mix, are you seeing sort of any shift?

I understand it's pretty much in line with your expectations, but any shift along sort of the good, better, best toward maybe some of the more opening or mass price points and brands in this more competitive environment, more sort of uncertain consumer environment?

Thank you.

We're not breaking down gross margin specifically, but what I would say is that the increase in vendor supported allowances related to advertising was pretty much a one for one offset in gross margin and SG&A.

Right.

And as we continue with our marketing efforts in fourth quarter -- and again, certainly more difficult counting in the back half years of the first half -- we will continue with that same strategy in fourth quarter of working with our vendor partners to supplement the increased marketing that we will do to, going deeper into our list.

And the reason that you wouldn't expect to see a similar kind of, if you will, trade-off between those items in the fourth quarter, a similar magnitude as the third quarter, is that just expected to be a smaller amount, or what's the dynamic there that you're looking for?

The bigger driver in the third quarter was the calendar shift as opposed to the incremental marketing.

So that calendar shift doesn't occur in the fourth quarter.

It is really to advertising vehicles compared to last year.

Okay.

Thank you.

And then, sorry.

With regard to the, just general comment on purchasing patterns, obviously not quantifying specific categories, but just generally good, better, best?

We're really not seeing a shift other than ones that we have specifically driven ourselves.

We have been very cognizant of wanting to make sure there were some traffic drivers in our marketing mix.

So we have put offers in that are stocking stuffers is an example we have going right now in the store.

If you were to go in there where you're able to buy five small stocking stuffer items for $10 and get a free Christmas bag to put it in.

So we have created offers like that to ensure the traffic coming into the store.

But other than that, where we have decided we're not seeing any significant shift or price point shift versus last year at this point.

That's helpful.

Thank you very much.

Thank you.

Once again, to pose a question, press star, then the number 1 on your telephone keypad at this time.

Your next question comes from [Hershel Ellison] of [Stratum] and Company, Inc.,.

If I were to pick up a newspaper and read a headline and it said something.

It said, boy was that really going to upset Ulta, what might that headline say?

One more time?

I'm sorry.

If I pick up a newspaper and read a headline and I say, boy that headline is really going to upset the people at Ulta, what might that headline say?

What's your big fear?

What's my big fear.

My big fear is that we get snowstorms on Christmas eve.

Okay.

There is no question that this Christmas, the last five days of this holiday season, as a reflection not of the economy, but purely the calendar shift, the business comes very late because we have that last weekend in here.

So that would be my biggest fear.

Thank you.

You're welcome.

Thank you.

Your next question comes from Linda McDonald of Manchester Management.

Could you review for me a little bit more -- I had a hard time following the line on the gross margin in the third quarter.

That was a nice improvement that you saw and what you're expecting for the fourth quarter gross margin year-over-year.

Yes.

There were two big drivers in gross margin in the third quarter.

One, as I mentioned, which was the more significant piece related to the incremental vendor funding of our advertising expense, which was primarily related to the shift in advertising in the third quarter from the first quarter, as compared to last year.

Okay?

Uh-huh.

And then the reason why we don't expect that to continue in the fourth quarter on an order of magnitude.

Because it was mostly driven by the calendar shift and now we're on a comparable calendar in terms of our advertising vehicles compared to the fourth quarter of last year.

We won't see the increase in gross margins because we won't have the increased advertising that's funded by the vendors.

Okay.

Is there any way for you to quantify what the gross margin would have been without that shift?

You know, we don't -- we don't break out vendor allowances separately and decompose our gross margin.

So I'm sorry.

We won't do that.

Okay.

Have you -- do you have any guidance for the fourth quarter for the gross margin?

Should we assume sort of a similar trend to the previous couple of quarters, which was flat to slightly down?

I would expect a similar trend to last year.

Okay.

And how about a little bit of guidance just on pre-opening cost per store as you said in this quarter, you got some really nice leverage for opening a lot of stores.

I think you said on the advertising front.

What's -- what's sort of a good number to look for pre-opening per store when you're opening about 10 to 15 stores?

You know, as we look to the fourth quarter, we've got 12 new stores to open.

Plus we have three remodels, so a total of 15 projects, and we would expect, for those 15 projects, that pre-opening costs would be about $3 million or about $200,000 per store on average.

Okay.

Great.

Thanks very much.

I appreciate it.

Thank you.

Your final question comes from Liz Dunn of Thomas Weisel Partners.

Good morning.

Good morning.

My first question is for Lyn.

You obviously have significant experience.

Can you talk about your perception of how this category, beauty, performs in a downturn in the business cycle versus something like apparel?

And then my second question relates to pre-opening expense.

It came in a little bit better than we expected, lower than we expected.

Could you discuss that, Gregg in, a bit more detail?

And will those benefits be ongoing?

In terms of the category versus apparel, we are subject to the whims of weather as it relates to traffic coming into our stores, so hence my Christmas eve comment.

But we are not subject to the whims of the weather gods as it relates to product purchasing patents.

So we have certainly been more resilient when we see weather like this.

In terms of the economy itself and the economic conditions, the category has always performed very well in a softer economy.

There's a logic for it in terms of a woman being prepared to forego some part of her purchasing patent, but not being willing to let go of her shampoo, because she does have to wash her hair.

She does have to go to work.

So she does need to wear lipstick.

I think the behavior is simply that this category is a necessity for her in many instances and not just a luxury purchase.

The experience to purchase is an indulgent luxury experience, and the category is (inaudible) luxury category.

So I think we will see some real resilience as we have historically in a soft economy.

And of course, the other big advantage in an economy like this for our category versus apparel, that we don't have the markdowns that apparel merchants have to deal with when there is a softness in economy or strange weather patterns.

Some of our -- a lot of our inventory is good basic inventory.

We see a lift in basic at this time of year, obviously, for example, in the fragrance category.

So there is no markdown there related to our basics.

If for some reason the traffic doesn't generate quite the way we expect, some of our seasonal purchasing does have return to vendor rights.

So we do have that opportunity in terms of managing or inventory.

And our promotional goods that we purchase for the holiday season, again, has a slightly longer life than I think you will see with apparel than apparel merchants have.

So we -- the category -- the buying patent, I think, is more resilient, and our markdown strategies are easier to manage than the apparel merchants.

Liz, on pre-opening costs, based on what you heard me just describe for the fourth quarter, we're going to end 2007 at about $175 per store, $175,000 average per store.

That is slightly below where we expected our model to be, and I would say, in quarters where we have a similar alignment where we have this level of volume, we will see some efficiencies.

So I do expect there's going to be some quarters in 2008 that will be slightly under that average of $200 per store.

And again, most of it driven by, as we get better at building the pipeline for new stores in the general management structure for those stores and our store base becomes larger, it gives us a better group of managers to be able to solicit into those new stores, which allows us to be much more planful in doing that.

Also allows for us to train them on a shorter time period, because they're existing store management.

And then on the advertising costs, to the extent that we can get some economies producing our unique grand opening one and grand opening two tabs for those stores, as we have more stores clustered into a particular quarter, we're going to still continue to see some efficiencies.

Thank you.

And congratulations.

Thank you.

Thanks very much, everybody and, again, thank you very much for joining us on our first earnings call as a public company.

I would like to take the opportunity to wish all of you a happy and healthy holiday and New Year, and we look forward to speaking with you again next year.

Thank you.

Bye.

Thank you.

This concludes today's conference call.

You may now disconnect.