Ulta Beauty Inc (ULTA) 2007 Q4 法說會逐字稿

Greetings, and welcome to the Ulta Salon Cosmetics & Fragrance, Inc.

fourth quarter and fiscal year 2007 results conference call.

At this time, all participants are in a listen-only mode.

A brief question-and-answer session will follow the formal presentation.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Allison Malkin of Integrated Corporate Relations.

Thank you, Ms.

Malkin, you may begin.

You may begin.

Thank you, and good afternoon.

Before we get started I'd 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 fact may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual future results might 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 adjusted 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 3 of our earnings release, which is also available on our website 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, Allison.

Good afternoon, everyone.

Thank you for joining us to discuss the Company's fourth quarter and fiscal 2007 results.

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

As you all know, this was an incredibly challenging retail quarter, with 2008 looking to be even more challenging given the state of the global economy and the general economic slow down.

We are seeing that virtually no segment of the economy is immune what from what is happening and even the strongest of retailers are being impacted, although the Federal reserve action yesterday hopefully will provide some momentum for consumer spending.

Despite this, our focused execution in merchandising, marketing and store operations, along with the resiliency of the beauty category, enabled us to deliver fourth quarter sales and earnings in line with our expectations.

I am very proud of the efforts of our associates who helped to generate our positive fourth quarter performance.

As some of you might have heard me say before, women get up in the morning, they shampoo and style their hair and they put on their make up.

This makes beauty products a repeat purchase that is more resilient than the fashion business.

However, this resiliency is most challenged in the holiday season when we compete with all retailers for all gift spending.

So, during the quarter, as we said we would, we flexed our marketing muscle and emphasized our value proposition, which we believe resulted in market share gains.

So very briefly touching on the numbers, for the fourth quarter, we delivered a 23.4% increase in sales on a comparable 13-week basis, we increased our comp store sales by 4.5% and we grew operating income by 47% to $23.9 million.

We were equally pleased with our annual results.

For the fiscal 2007 year, net sales rose 23.5% on a comparable 52-week basis to $912.1 million.

Comparable store sales rose 6.4% and operating income increased 16% to $46.7 million.

The fourth quarter marked our 32nd consecutive quarter of comparable store sales growth and was driven by increases in both customer traffic and average ticket.

At the beginning of the year we knew from the calendar that the distance between Thanksgiving and Christmas would result in an additional full shopping weekend, a once every seven year occurrence that, as you know, retailers describe as a late Christmas.

So we planned investment in a bigger and better holiday gift-with-purchase for the two weeks before Christmas that was favorably received and drove traffic into our stores.

In addition, at the beginning of fourth quarter when we realized the retail holiday season would be more challenging than expected, we made the decision to add a newspaper insert three days prior to Christmas to ensure Ulta's value message was top of mind for last-minute shoppers.

And finally, we expanded our mailing list to our customer club members inviting more customers to shop with us.

I am delighted with our comp sales performance of 4.5%, as it follows a 15.7% comp store sales gain last year.

Both this year's results and the two-year performance compares extremely favorably to other retailers.

In addition, as we had mentioned in our last conference call, we focused on achieving the appropriate balance between sales and margin and are pleased with the outcome.

Lastly, we were pleased with the improvement in operating income in the quarter, which reflects the solid increase in sales and leverage in SG&A.

Turning now to the full year, we also achieved several noteworthy accomplishments.

We completed a record number of new store openings and remodels during the year.

I continue to be pleased with the results of our new stores.

Our 2007 class delivered to our new store model.

We opened 53 new stores and the class was well-balanced, with 20 stores opened in major metro markets, 17 in medium-sized markets and 16 in smaller markets.

We entered 23 new markets and ended the year operating 249 stores in 31 states.

In addition, we completed 17 remodels during the year.

Now speaking of 2008, our plans include 63 new stores and eight remodels.

Based on a better-than-expected performance in our smaller market stores, we have modestly increased the proportion of openings for smaller market stores this year.

Despite the economic environment, we continue to be confident in our store opening schedule, all of our leases for 2008 have been signed, and 60% of the 2009 pipeline has been approved, which is a great place to be at this point.

As we finalize 2009 we continue to focus on careful selection of sites, aggressively negotiating terms and ensuring the commitments from co-tenants.

For the first quarter we have opened 12 new stores to date and we are pleased with their results.

Throughout the year we continue to drive growth through our merchandising strategies.

The prestige category generated double-digit comp growth and continues to drive average order.

In addition, we have continued to flow fresh new products into our stores.

During the year we introduced new brands, such as Dermalogica, Juicy Fragrance, Frederic Fekkai, Nick Chavez, and Brookstone giftables.

In addition, we launched two private label brands; one in professional make-up tools and the second in sun care.

For the first half of 2008 we are introducing Lorac, which is a strong prestige brand from QVC, and Stila, which was rolled out just prior to year end.

For fiscal 2008 we are on track with our goal of one new brand test and one launch every six months.

We will also continue to expand our private label category in first quarter with a hair care line and an additional line and expansion of the Ulta Professionals line.

I am 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.

Regarding our website, we launched our second-generation e-commerce site in the fourth quarter.

Ulta.com is meeting our expectations and we are pleased with the improved features, functionality, efficiency and look of the site.

We are now focused on maximizing Ulta.com and are currently testing a new marketing campaign to attract new customers.

In February we launched our first micro site on Ulta.com for Bare Essentials and have seen a positive response.

Going forward we will continue to build micro sites for other prestige brands.

As we begin fiscal 2008 we recognize that the environment remains challenging, yet we believe our strategies have us well positioned.

Currently we are focused on continuing our successful strategies of 2007.

To this end we plan to open 63 new stores, continue our track record of positive quarterly comp store sales growth, and continue to expand our prestige offerings.

In addition, our second distribution center is on track to open in April this year.

We also believe the environment will remain challenging for the remainder of the year.

We have planned our sales, expenses and earnings prudently and fully expect to deliver this year.

In summary, we expect fiscal 2008 to represent another year of significant accomplishments for Ulta.

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

Thanks, Lyn.

For the fourth quarter, double-digit sales growth and leverage in SG&A more than offset higher preopening expense and fueled a 41% increase in fourth quarter net income.

Now I'd like to review the income statement.

Beginning with sales, for the fourth quarter net sales increased 15.9% to $309.3 million from $267 million last year.

Excluding the 53rd week last year, net sales increased 23.4%.

Sales growth was driven by a 4.5% increase in comparable store sales, which follows a 15.7% comparable store sales gain last year, resulting in a two-year comparable store sales gain of 20.2% on a realigned calendar basis.

Our comparable store sales growth was fueled by higher average ticket driven by the expansion of our prestige category, as well as growth in consumer traffic in a very challenging holiday environment.

We attribute this increase in customer traffic to the success of our fourth quarter marketing strategy.

Noncomp sales during the quarter contributed $55 million to total sales and as Lyn mentioned, we opened 12 new stores in the fourth quarter, which included one opening at the end of January, which was in line with our plan.

Gross profit for the quarter was $97 million, or 31.4% of net sales, as compared to $84.3 million, or 31.6% of net sales last year.

Gross margin declined by 20 basis points due at a slight increase in distribution costs with our DC operating at capacity.

We had slightly higher promotional activity in January, which resulted in a slightly lower gross margin rate but drove favorable customer traffic.

As you know and as Lyn mentioned, we are opening a second distribution center in April this year, which we expect will be more efficient, to accommodate our shipping needs for holiday of 2008.

SG&A expenses were $70.4 million, or 22.8% of net sales, compared to $66.3 million, or 24.8% of net sales in the prior year.

Last year's fourth quarter included a $2.8 million one-time stock compensation charge.

Excluding this cost from last year, SG&A as a percentage of sales improved by 100 basis points, which was driven by our ability to leverage our cost structure on higher sales despite this increase in marketing expense to drive traffic in a very challenging holiday period.

Preopening expenses were $2.7 million, or .9% of net sales, compared to $1.8 million, or 0.7% of net sales, reflecting the opening of 12 new stores and three remodels during the quarter, as compared to nine new stores and no remodels in the fourth quarter last year.

As a result, operating income increased 47.1% to $23.9 million, or 7.7% of net sales, from $16.3 million, or 6.1% of net sales in the prior year.

Interest expense totaled $1.1 million as compared to $0.8 million last year.

This reflects a $26 million increase in average debt as compared to last year, driven primarily by new store investments.

The effective tax rate for the quarter was 40.5% as compared to 37.4% in the prior year.

The increase in the effective tax rate largely reflects a one-time reduction in the prior-year rate representing the recognition of state tax benefit of our net operating loss carry forwards.

The resulting net income was $13.6 million as compared to $9.7 million last year, representing an increase of 40.8%.

On an adjusted basis, excluding the impact of the Company's preferred dividends in 2006 and adjusting for the additional shares for the IPO in October 2007, income per diluted share for the fourth quarter of fiscal 2007 was $0.23 as compared to $0.16 for the fourth quarter last year.

For the full year net sales rose 20.8% to $912.1 million with comparable store sales increasing 6.4%.

This follows a 14.4% comparable store sales gain last year on a realigned calendar basis.

The two-year comparable store sales increase was 20.8%.

Excluding the impact of the 53rd week, net sales increased 23.5%.

Operating income for the full year was $46.7 million as compared to $40.1 million last year, which was driven primarily by the 20.8% increase in net sales.

The increase in operating income this year includes the effect of a $2.8 million cost associated with our warehouse management software implementation and $4.7 million of additional new store preopening costs on our expanded new store program.

Total square footage increased 28%.

On an adjusted basis, excluding the impact of our preferred dividend in 2006 and adjusting for the share count for the IPO, income per diluted share was $0.48 compared to $0.43 last year.

Merchandise inventories at the end of the quarter increased 36.3% to $176.1 million, compared to $129.2 million last year.

Of the $46.9 million total increase approximately $40.9 million came from the additional 53 new stores opened this year and $6 million for the 14 new stores that are planned to open in the first quarter of 2008.

On a per store basis average inventory increased approximately 3.6%, which is consistent with our expectations.

We are pleased with both the level and composition of our inventory as we begin the first quarter.

In line with plan, we opened a total of 53 new stores in fiscal 2007, ending the year with 249 stores.

Gross square footage increased 28% in fiscal 2007 to 2.6 million square feet from two million square feet at the end of the prior year.

Capital expenditures totaled $114 million and depreciation and amortization was $39.4 million in fiscal 2007.

Regarding our outlook, we are introducing guidance for the first quarter and full year fiscal 2008 that reflects our current business trends and the current retail and economic environment.

For the full year fiscal 2008 we estimate net sales in the range of $1.120 billion to $1.140 billion, as compared to $912.1 million last year, representing a growth rate of 24%, at the mid point of the range.

This assumes comp store sales growth of 3% to 5%.

Income per diluted share is forecasted in the range of $0.52 to $0.57 as compared to $0.48 in fiscal 2007.

This represents a net income growth rate from the high to low of this range of 25% to 38%.

For the first quarter of fiscal 2008 we estimate net sales in the range of $236 million to $241 million as compared to $194 million last year, reflecting a growth rate of 23%, at the mid point of the range.

This assumes comparable store sales growth in the range of 3% to 5%.

Income per diluted share is forecasted in the range of $0.06 to $0.08.

First quarter income per diluted share is being impacted by costs totaling $0.03 per share.

These costs include approximately $0.02 per share, or $2.3 million of additional preopening expenses, given an increase in new store activity in the first quarter and in the beginning of the second quarter, and $0.01 per share, or $1.1 million due to an adjusted marketing calendar resulting in one more marketing vehicle, which is expected to allow to us to more effectively drive customer traffic with an earlier Easter this year.

For the first quarter we plan to open approximately 14 stores.

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

For the year, our earnings guidance assumes an effective tax rate of approximately 40% and approximately 61 million shares outstanding.

In fiscal 2008 we plan to open 63 new stores and remodel another eight locations.

Gross square footage is projected to increase approximately 25% while CapEx are estimated at $115 million to $120 million and depreciation and amortization is estimated at approximately $52 million for the full year.

Our long-term annual growth rate targets are unchanged and include comparable store sales growth in the range of 3% to 5%, square footage growth in the range of 20% to 25%, and net income growth of 25% to 30%.

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

In closing, we believe we are well positioned for success in fiscal 2008 and beyond.

Our team is focused on delivering the year and maximizing our long-term potential of 1,000 U.S.

locations over the next ten years.

With that I would like to turn the call over to the operator to begin the Q&A portion of the call.

Thank you.

(CALLER INSTRUCTIONS) First question, Lauren Levitan with Cowen and Company.

Please proceed with your question.

Thanks, good afternoon.

Lyn and Gregg, I'm wondering if you can give us a little bit more color on some of the factors that you mentioned relative to the retail backdrop, maybe give us some sense of any differences you're seeing by region or even by class?

I mean you obviously have many younger stores rolling into the comp base that are helping to drive the comp, if you could give us some sense of how the older stores are performing?

And then I'm also wondering if you could give us some sense of what you're assuming about the type of promotional activity and level of promotional activity that will be required to drive the comp that you're factoring into your Q1 and '08 guidance.

Are you assuming that there'll be incremental marketing events and greater emphasis on value that could pressure margins and increase costs?

That would be helpful.

Thank you.

All righty, Lauren, let's see if we can break them down a little bit.

Let me take the first one, which is in terms of the regions of the country.

Again, we continue to see some slowness in California and Florida, as we did last year, but we are not seeing any other slow down outside of those trends that we already had in fourth quarter.

In terms of -- Gregg, do you want to answer the question on comp stores by age?

At the top end of the range, Lauren, when you get to some of the older stores like stores that are eight and nine years old, you will start to see those stores go into single digit to flat comps.

So anything older than eight years we're assuming in that 5% comp range that they're flat to slightly positive.

And then,, Lauren, the question on the amount of promotional activity, as Gregg mentioned, we did put one additional event into the first quarter time period.

It allowed to us move the calendar around to optimize the Easter timing this year.

And in terms of the rest of the year, again we are planning same promotional calendar as last year, but as we always say, one of our competencies and strengths is flexibility with this machine that we have and so we will flex it if we see a need to, but right at this point in time we are not planning additional activity for the remainder of the year.

And the impact of the additional event in first quarter is fully contemplated into both the guidance for the quarter on the sales and the margin line of the business.

That's helpful.

Lastly, with respect to the new stores, can you give us some update on their performance?

I know in the third quarter call you talked about some trends that you were seeing in new stores and I know you said you rejiggered the mix of where those new stores will be in '08, but could you give us some update on how those were performing in the fourth quarter and into the first?

Thank you.

Yes, the stores that were in the early trade areas and at the back end of third quarter emerged through the fourth quarter time period and are back on track with exactly where we would have expected them to be relative to the model.

The reason for it -- just a little bit of color -- as we went into fourth quarter time period our traditional marketing calendar and cadence during that time period calls for a much heavier newspaper insert scheduling, and the new stores responded extremely well to that level of marketing activity.

So it was not heavier than a prior year.

It's just the nature what have we do in fourth quarter.

And, Lauren, I'm sorry, the second part of your question, one more time?

If you could give us an update on how the new stores are performing?

It sounds like you've really given that already, so thanks very much and good luck.

Yes.

And Lauren, just to answer that question, yes, we're very happy with the openings this year.

We've opened 12 and they're right where we need them to be.

Great.

Thank you.

Thank you.

Our next question comes from Brian Tunick with JPMorgan Chase & Co.

Please proceed with your question.

Thanks so much.

This is Evren Kopelman calling for Brian.

I was wondering if you guys could talk about your store preopening expenses?

This number came in a little higher than what we were expecting for the first quarter, so how should we think about it for the rest of the year?

And then, in addition, Lyn, you talked about this business model being very resilient.

Could you guys maybe talk about how has this business done in the previous difficult economic times?

Thanks.

Let me take the first one.

For the first quarter we're projecting that preopening costs will be about $4 million.

That's on the basis of 14 stores.

The other most significant impact that you should be aware of is we have a little heavier opening schedule at the beginning of the second quarter, so some of those second quarter preopening costs are flowing into the first quarter, which is the reason why we would be guiding you to a $4 million preopening for the first quarter.

Okay, that makes sense.

And then on the second question, in terms of how we've done in economic downturns, if you go back and take a look at the history, we were certainly in solid mid to 6% comp numbers during the 2001, 2002 time period, which I think was probably the closest to the economic scenario we're in right now, and hence the 3% to 5%.

I think we think this economic environment is a little more challenging than that time period and that's reflected in the 3% to 5% versus what we did back in those other years.

Okay, that's helpful.

And you guys mentioned you just recently rolled out Stila.

How has that worked versus your expectations?

And any other new prestige brands that we should expect in '08?

The answer to the first one is Stila is absolutely meeting our expectations as is the second prestige brand that I also mentioned to you, Lorac.

It's very early days for that one; we're actually about to advertise that for the first time in about two weeks but we're also delighted with its performance even preadvertising, so we have those two brands.

And relative to what we have coming, again we remain on track with the formula that I speak to, which is at any point in time we'd like to have in any six-month time period one brand in test and one brand rolling, and we are on track with that formula for the back half of the year.

We are -- we don't want to comment on the brands that we have in test as much at their preference as ours; they don't want to upset their distribution networks.

But we are on track.

Great, thanks so much.

Good luck.

Thank you.

Thank you.

Our next question comes from Lyn Walther with Wachovia.

Please proceed with your question.

Hi, thanks, guys.

Following up on the last question, given the difficult environment, are you seeing any sort of trade down to maybe the masstige or any resistance to some of the higher price point items that you have?

No, we're not.

We're not seeing a mix shift in the business.

The biggest impact is -- versus a more robust economy is more on the customer traffic into the store.

If we were in a more robust economy we would see higher traffic.

Nonetheless, our traffic is positive versus prior year.

But the mix shift is not shifting.

We are not seeing that down trade.

And again I think it goes back to what we usually talk about, which is that the category itself seems to satisfy her need for affordable indulgence and she's not trading down her personal preference in this category.

She may trade-off the shoes and the handbag, but within the category she does not appear to be trading down.

Okay, that's helpful.

And your new store opening plans for 2008, what new markets are you entering, what percentage is backfill, and maybe just a little bit more on the single market stores that you're opening?

Gregg, do you --?

Lyn, on the single markets, as we've mentioned a couple of times, we are doing a slightly modest shift, heavier emphasis in the single markets.

It's about five stores incremental to what we did in the 2007 program.

We have about three new markets, which we don't disclose markets in front of opening them, but we have about three new markets in terms of states that we plan on opening in 2008.

And in the flow of openings by quarters, I mentioned 14 in the first quarter, and then as you look at the rest of the year one of the things that we talked about is we're trying to balance our opening schedule throughout the course of the year versus what we -- how the stores flowed in 2007.

So the fourth quarter, as an example, you'll only see a couple stores opening versus the 12 we opened in 2007 and in the second and third quarter I would expect the rest of the program, which would be about 48 stores, to be balanced between those two quarters.

That's our objective.

And if I could just add, first quarter we have opened one new market in first quarter, which is Alabama, and we are delighted with the performance of both stores in that market.

Okay, great.

And then just finally, can you just update us on current business?

I know Valentines Day is an important holiday for you in the fragrance business, just wondering how things progressed?

You know, we are mid quarter and so we're not giving too much information on the quarter itself other than to state that the guidance is certainly predicated on the trends that we are experiencing in this quarter to date.

But Valentine's Day specifically, Valentine's Day was actually a good performance.

The fragrance business showed some nice response during the Valentine's Day period compared to a little bit of the softness that we had seen during the holiday period.

And we saw some nice success with a very innovative GWP, gift with purchase.

Okay, great.

Thanks, good luck, guys.

Thank you.

Our next question comes from Neely Tamminga with Piper Jaffray.

Please proceed with your question.

Great.

I have a couple questions.

Just following up real quick on Lyn's question, I think in the spirit of transparency, since that you are this far through the quarter, are you guys tracking at the low end of your comp guidance and hoping that it lifts with respect to the upcoming holiday, spring beauty floor set, or are you tracking at the high end and you just want to build yourself a little bit of margin?

And then I just have a couple of follow ups.

Neely, we're not going to get that specific in terms of where the performance of the quarter is at relative to guidance.

But again I will repeat that the guidance is absolutely predicated on the current trends as they are performing.

Okay.

All right.

Neely, I would just say we believe this guidance is prudent and we believe this guidance is prudent given the visibility we have at this stage of the quarter.

Okay, excellent.

Okay.

So just a couple follow-up questions.

In terms of the preopening, I think historically, Gregg, over the last two years that we have the quarterly data Q2 preopening dollars do typically trend up relative to Q1.

So are you suggesting with some of the early, early Q2 openings that the dollars from Q1 to Q2 could actually be flat in terms of preopening?

No, here's the way it'll flow, Neely.

Q1 will be approximately $4 million, and then Q2 and Q3, as we've tried to balance the program, will be about comparable but slightly up, about 10% to 20% up from the first quarter.

And then in the fourth quarter we also will have some additional preopening costs, about $2 million, that primarily relate to -- as we rebalance the quarterly flow we have more stores in the first quarter of 2009, so we will incur some additional preopening costs associated with those in the fourth quarter of 2008.

So the guidance for the year is --?

It's about, about $16 million of total preopening costs, about $4 million of which occurs in the first quarter, and then we are estimating we will spend about $2 million in the fourth quarter, a large part of which is related to '09 -- early '09 stores.

Incremental to or $2 million even.

$2 million.

$2 million total.

$2 million total.

Okay.

That's really helpful, Gregg, actually.

Thanks.

In terms of -- Lyn, when you're talking about test of a store -- or just a test of a brand, is that historically limited to a single store test or is that more -- do you consider a test like a 30 door test?

It actually varies depending on the brand, but the tests have ranged anywhere from 30 doors, which was actually Stila.

We have had some brands that want a very limited test, down as low as one, but I'd say the norm is more like around six to ten, because it's not -- it's rarely a test of, are we rolling forward with the brand.

It is usually a test of, what are the operational aspects of the brand, let's make sure we've got the resource strategies right and let's make sure we understand the inventory mix on the brand.

Is there a generally good rule of thumb of when you guys are in test on a brand and then what time lapses before you start rolling it out to additional doors?

Historically, it has been test six and roll in the next six is what we have done up to this point in time.

Okay.

Okay.

Is that kind of what you're expecting for this year?

The brand, whatever you have in test right now, is that something you would expect to roll-out in the back half of this year?

Yes, we are certainly expecting at least one of the brands to be ready to roll out in the back half of the year.

Okay.

All right, that's really helpful.

Then maybe could you guys just comment on Bruce's departure?

What functions are going where and then more specifically, other than we're absorbing his functions, and maybe explaining how you're going to add another 24 hour to Gregg's day, because he's probably one of the busiest CFOs I know to begin with, so just wondering how this is all going to play out?

Sure, let me give you some [forward stroke], maybe not quite as specific, although we do have a very specific game plan, but I'll try and keep you at a broad enough level but enough to give you some color.

The first thing I probably should clarify is that -- just for anybody who does not understand how we have organized roles and responsibilities -- Bruce has never had responsibility for real estate or site selection during his tenure with the Company.

That has always reported in to me before Bruce joined the Company and during his time with the Company because it was such an integral part of our brand strategy.

And as you may recall, I was talking about on the road show we have a very seasoned Senior Vice President on that business who comes to us out of the Borders business.

So that piece of our responsibility will stay where it always was, which is reporting in to me.

Recruiting for new stores has always gone into our -- through our HR team, which has always reported in to me, and is also headed up by a very seasoned player who has been with the Company now for, I think, six years, and that will stay right where it is and stays reporting in to me.

The -- and the rest of the team we have in terms of the responsibilities that did report in to Bruce, which is around the distribution and the supply chain side of the business, is again a very experienced team.

They were in place before Bruce joined the Company.

They are still in place today and I have great confidence that we have the right team in the right place to continue with the strategies of the business.

I think if I could summarize, companies, as you know, Neely, are very dynamic and at this point in time Bruce was just not the right solution for us and was not the right structure for us at this point in time.

But I hope that clarifies enough.

There are other smaller pieces of responsibility that reported in to Bruce, but I suspect that most of your concern was around real estate and distribution, and distribution will report in to Gregg on a go-forward basis.

Okay, that does answer that question and thank you for taking the time to explain that.

It was certainly a little bit of a surprise so I certainly appreciate that.

And then just one more final question for Gregg here.

In terms of what you're seeing -- and you're saying average ticket and I guess -- or for Lyn, average ticket and traffic are both up.

I'm just wondering, within ticket is it because of prestige or are you also seeing an increase in UPTs?

Can you give us a little a sense of how that ticket looks?

The primary driver is definitely the prestige mix on the business, as that business continues to grow in double-digit comp numbers.

It is our fastest ramped business and you know we don't comment on categories specifically, but I think that particularly category, since it is such a growth platform I'm always comfortable continuing to give you a little color and flavor on that one.

The growth is not out of UPTs.

It is definitely just out of the average ticket price of that category.

And as we did say, we are putting positive traffic numbers on the table in fourth quarter, and quarter-to-date first quarter we still continue to put positive traffic numbers on the table as we continue to just, I always say flex, but do creative -- it's not just flexing that marketing machine, doing some very creative marketing events, both in store as well as in our print media.

Thank you so much, Lyn, and good luck to you guys.

Thanks very much, Neely.

Thank you.

Our next question, Liz Dunn with Thomas Weisel.

Please proceed with your question.

Thank you, good afternoon.

Just a little help on the model.

Are we still looking for gross margins flat to down slightly in 2008 and SG&A leverage?

And what share count should we be looking for?

And then I have a follow-up question on the brand test strategy.

Liz, for the full year, as we've previously mentioned, the cost of the new distribution center is going to put a little downward pressure on gross margin, along with our increased square footage puts a little bit of downward pressure on fixed cost leverage in the stores.

So we are expecting gross margin rates to be down slightly to last year.

And then SG&A leverage is the primary driver to improving operating margin from there, so we're expecting about 70 to 80 basis points of SG&A leverage at the top end of the guidance we described.

Okay, and the share count?

And the share count for the first quarter 60 million, for the full year 61 million.

Okay.

And my question related to the tests, how brands are you currently testing?

And help us understand how you decide what to roll, And then also, Neely was sort of focusing in on what would be the determinant of when to test in one store versus 30.

To the extent that there was a larger brand that you didn't have big concerns on distribution strategy for and you didn't have big concerns on whether or not it would resonate with your customers, what would be -- what exactly would you be testing for?

Okay, let me see if I can get them one at a time.

The one store versus 30 stores is -- it's primarily a reflection of what the brand would like to test with us and for them to get a sense of whether this is a good fit for them as well as for us, so one store test is more on the brand making sure it's a good fit for them, getting to know us.

The 30 store is a brand that has a comfort level that this is going to be a business fit that is right for them relative to the rest of their distribution channel, so this is probably the broad parameters of what causes to us make that decision.

So it is done very much in concert and partnership with the brand and what works for both them and for us.

In terms of the brands that we either have or expect to have in test in the first half of this year, I think it could be up to three that we will be able to test in first half of this year.

And I think the last question was, and what determines whether we're going to roll it or not roll it.

It is the most obvious, which is just to make sure that it does have the resonance with our customers and the acceptance with our customers as demonstrated by the sales numbers and -- as well as the brands' comfort that is a good time and fit for them relative to the rest of their distribution channel.

Is there anything to constrain you from rolling, let's say, three brands in a one six-month period or would that be overwhelming?

It's actually an excellent question.

We want to be very prudent in how many we would want to roll, and so we may pace that out, particularly in a back half year roll where we only have a quarter to roll, we certainly wouldn't want to be rolling a brand during the holiday season, and hence Stila, as an example, is why we held that until January.

We did not want to distract our store from delivering the total business as opposed to the more complex roll-out of an individual prestige brand during the holiday season.

So we -- we are not at the point of making that decision, but I would say to you I do not see us rolling three brands in the back half of this year.

We will pick and choose the ones that are the best fit for both the brand partner as well as well as us for the third quarter time period.

Okay, great.

And if I could just squeeze one more in on real estate.

Do you see any opportunities opening up on the real estate front because there are some more mature retailers that are starting to announce some closings?

Does that open up space in existing centers which wouldn't have (inaudible)?

We are seeing it at a fairly small level at this point in time, not a complete big bulk opportunity of real estate sites that come up, although I will tell you we do -- we have done some work and analysis in case that opportunity arises on some opportunities that we think may become available.

So we have done some homework already so that we would be good to go if the opportunity was to arise.

But there's nothing significant on the horizon right at this point in time for the 2009 or 2010 year and nothing that we see for the back end of this year right at this point in time.

But we certainly are watching.

Okay, great.

Thank you.

(OPERATOR INSTRUCTIONS) Our next question comes from Daniel Hofkin, William Blair.

Please proceed with your question.

Good afternoon.

Just wanted to follow up a little bit on the same-store sales, specifically average ticket.

How much -- I guess on the cost side, how much cost inflation are you seeing and to what degree are you able to pass that through such that that might also be benefiting the comp store sales on the increase in average selling price, aside from the benefit to average ticket that you're seeing from the greater mix of prestige?

That would be my first question.

And then with regard to gross margin as we progress through the year if you could just give a little bit of color as to how that might flow, particularly relative to the third quarter, where I believe you had a bit of a change in the marketing calendar and so the third quarter gross margin of '07 was higher with a partial offset on operating expenses.

How might that affect what you're expecting for '08 as a whole?

Dan, we'll take those in two pieces.

One, we haven't provided quarterly guidance for two, three and four specifically.

What I would continue to remind you is for the full year we expect gross margin rates to be down slightly.

For the first quarter we're expecting gross margin rates to be flat to just up slightly.

And then as we flow throughout the course of the year it's really more about the store opening schedule.

It drives the most significant fluctuations in gross margin rates.

And, Dan, on the first half of your question --

Yes, the first half of the question was just regarding the average ticket component of same-store sales.

Obviously, packaging and other cost pressures for many retailers selling consumer packaged goods, that has been accelerating.

To what degree are you able to pass on cost increases if you're seeing them and how much might that be lifting the reported same-store sales or the average ticket component of same-store sales?

Dan, the answer is none and none.

At least at this point through the first quarter numbers we are not seeing any increases from our major partners on the business, nor is there anything assumed in the 3% to 5% related to any price increases.

Okay, is there -- I guess with regard to your comp sales guidance for the quarter and the year -- and recognize fully that we're only halfway through the first quarter -- I guess, given the way that the comparisons flow, would you generally expect to be maybe closer to the higher end of that range later in the year and more middle to lower in the first two or three quarters?

We have assumed same economy through the quarter, Dan.

The one thing that does flow a little bit, we are -- we do have higher comps that we're jumping over in first quarter than fourth quarter, as you know from our numbers from last year, so that may cause some profile in the quarterly numbers.

But we are not assuming neither an increase nor a decrease in the economic environment for the back part, so it's more about our internal hurdles we're jumping over.

Right, and that was the basis of the question.

Okay, thank you.

Our next question comes from Gary Giblen with Goldsmith & Harris .

Please proceed with your

Yes, hi.

To the extent your sales were a little softer than you expected, was that more in products that lacked newness versus brands with a lot of new entries?

Would a Garden Botanika have done better than a Clinique because of the pace of new product introduction?

Gary, what time period are you referring to?

I'm talking about the fourth quarter, let's use the fourth quarter.

No, Gary, the fourth quarter -- again, relative to what we had originally expected despite the positive traffic versus prior year that we put on the table, just the overall challenging environment for fourth quarter, the competitiveness of -- as I had mentioned in the fourth quarter time period, we, of course, are competing in the market of all gift dollars as opposed to just personal care dollars in the other three quarters.

It was far more a reflection of a lower traffic number than what we would have hoped for in a different economy is what I would say to you.

But I do want to remind you nonetheless, positive versus prior year.

And there was no major shift between newness and existing business and response and performance to that, although I will say to you I'm always delighted to have newness in a difficult economy.

I think -- we always talk about the four "E's" in our business, and that "E" for entertainment, which is -- and new products is one aspect of that.

I'm always delighted to have some exciting newness to speak to customers about in a difficult economy.

Okay, very helpful.

Thank you.

Thank you.

There are no further questions in the queue at this time.

I'd like to turn it back over to management for any closing comments.

Thank you, again.

I look forward to speaking with you during our first quarter conference call in June, if not sooner, so thank you very much for your time this afternoon and your questions.

Ladies and gentlemen, this concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.