Ulta Beauty Inc (ULTA) 2008 Q2 法說會逐字稿

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

second quarter 2008 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.

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 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 adjusted net income per diluted share as a result of the October 2007 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 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 our second quarter fiscal 2008 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.

We are pleased with the second quarter performance that we are announcing today.

We delivered a 3.7% comp increase and earnings $0.01 above guidance.

We believe these results in a difficult economy reflect the ongoing strength of our business model to provide women with an approachable beauty store experience that combines great value while satisfying all her beauty needs.

Equally important, we continue to execute on our core strategy, flexing our unique marketing strategy to drive traffic, expanding our diversified portfolio of 500+ brands across the prestige and mass categories, executing balanced new store growth, and effectively operating our store base and support infrastructure.

The highlights for the quarter included net sales of $249.1 million, reflecting an increase of 24.3% from last year; a comparable store sales increase of [3.7%]; operating income growth of 46.2% from last year's levels; and adjusted income per diluted share of $0.06, which included incremental costs of $0.01 per share related to pre-opening expense.

This represents a 50% increase from last year's second quarter adjusted income per diluted share of $0.04.

While we are proud of our accomplishments this quarter, we would have expected stronger performance in a more robust economy.

However, the solid sales growth in spite of the economy continues to demonstrate that Ulta is increasingly becoming the preferred destination for beauty.

We are not dependent on any one brand for our growth, and have been successful by proactively monitoring trends and responding with the programs that maximize brands with strong performance to offset any brands with soft performance.

Our consistent results, which includes 34 consecutive quarters of positive comp sales growth, further validates the power of having a diversified offering with over 500 brands across Color, Skin, Fragrance, Fair, and Styling Tools and price points that fit any size wallet from Prestige to mass.

The 3.7% comp increase was driven equally by traffic and average transaction growth.

We achieved balanced sales with contributions from both new and existing brands, with Prestige color and skin care again leading the way and driving average ticket increases.

We have continued to leverage the appeal of our consumer experience, our new products, our value proposition, and use of our unique marketing strategy to deliver increases in customer traffic.

Our comp sales performance was achieved without additional investment in margin, advertising, or inventory.

Inventory was well managed during the quarter, resulting in a flat average store inventory level compared to last year, while delivering a 3.7% comp store sales increase.

We remain pleased with the performance of many of our longstanding brands as well as new brands, including PureOlogy and Lorac, which were introduced during the first quarter this year, and also a performance from new fragrances launched in the second quarter such as Burberry The Beat, Vera Wang Flower Princess, and Ed Hardy.

Regarding our store expansion, we opened a record number of second quarter stores, with 18 new stores and 5 remodels completed in the quarter.

We continue to be pleased with the performance of our new stores, which remain on track with our new store model.

Our openings were also well balanced.

Eight were in major metro markets, two in medium sized markets, and eight opened in smaller markets.

We entered ten new markets and ended the quarter with 283 stores in 34 states, including our first stores in Utah and Rhode Island.

Our store expansion is integral to our strategy, and, importantly, our new stores are delivering to our expectations, despite the difficult economy.

We remain on track to attain our goal of 63 new stores and eight remodels for the year.

Despite a difficult economy, we remain committed to our square footage growth given the strength of our new stores, our strong pipeline for new sites, and because this will continue to position us as an attractive alternative channel for new brands.

So far in the third quarter, we have opened an additional ten new stores and executed two remodels, including the opening of our first store in the state of Missouri.

We are pleased with the early trends on this group of stores.

Our new distribution center in Phoenix, Arizona continues to operate as expected.

We are currently distributing to 113 stores from this location.

Regarding e-commerce, we continue to enhance the consumer experience of our site.

During the quarter, we added 4,000 products and three new micro sites to the ulta.com site -- Murad, H2O Plus, and Lorac.

We believe we are well positioned to optimize this site during the holiday season.

As we begin the second half of the year, we believe the economy will continue to be challenging.

However, we expect the continued execution of our strategy will leave us well positioned to deliver our gross targets.

We believe the key drivers that drove our first half results will continue to deliver results in the second half of 2008.

Specifically, the introduction of new brands launched in the first half of the year, combined with our prospects to introduce additional new brands in the second half of the year, have us well positioned to deliver newness and excitement to our customers.

In that regard, we plan to launch the Napoleon Perdis Signature cosmetics brand chain wide before the end of third quarter.

For those of you not familiar with Napoleon, Napoleon is a Hollywood based makeup artist generating a lot of buzz in the beauty industry.

He will be the star of a new reality show called 'Get Your Face On' debuting on the TLC Network this fall, and we expect this brand to be an exciting addition to our Prestige portfolio.

While we do not normally comment on tests, we are delighted by the performance of Benefit, which we have been testing with a boutique strategy in a small number of doors.

We plan to roll out Benefit to our website in the third quarter and select additional doors in 2009.

In addition, we have exciting new fragrance launches such as Estee Lauder Sensuous, Ralph Lauren Notorious, Jessica Simpson Fancy, and Viva La Juicy.

We will continue the execution of our proven marketing strategy that has delivered solid increases in customer traffic in the first half of the year.

As we have discussed in the past, we have several proven elements of our marketing strategy to motivate both new customers and our existing 6 million Loyalty Club customers to come in, browse, and purchase.

We expect our solid execution in new and existing stores and in the support structure will help us manage cost and will provide continued SG&A leverage.

And finally, we continue to explore new opportunities in our efforts to expand our reach.

To this end, in October we will open an 18,000 square foot store on State Street in Chicago.

It is our first urban location and a vertical format on four levels.

We do not have plans for additional urban sites this year.

However, we are excited about the increased awareness that the State Street store will bring us, both with consumers and existing and potential brands.

With that, I would like to turn the call over to Gregg to review the financials in more detail.

Thanks, Lyn.

As Lyn mentioned, our second quarter results reflected solid double-digit sales growth and better than expected expense leverage, which enabled us to achieve earnings $0.01 above our guidance range.

Beginning with a review of the income statement, net sales increased 24.3% to $249.1 million from $200.4 million in the second quarter of last year.

Sales growth was driven by the addition of 72 new stores in operation versus a year ago and a 3.7% increase in comp store sales.

This gain in comp store sales was on top of a 6.5% increase last year, resulting in a two-year increase in comp store sales of 10.2%.

During the quarter, we opened 18 new stores and remodeled five locations, ending the quarter with 283 stores and expanding square footage by 34.6% from last year's second quarter.

Gross profit dollars in the second quarter increased 23.9% to $73.1 million from $59 million last year.

Gross profit margin remained unchanged at 29.4%, driven by expected deleverage and occupancy costs resulting from new store growth offset by a one-time benefit for merchandise purchased at favorable terms to fill the new DC.

Excluding this one-time benefit, our merchandising margin was flat to last year for the quarter.

We continue to be pleased with the operation of our second distribution center in Phoenix, Arizona, which opened in the first quarter this year.

As many of you are aware, we have staged the increase in stores served by this facility to ensure a smooth transition.

We are currently servicing 113 stores from this facility and expect to peak at approximately 120 stores before the fourth quarter this year.

SG&A expenses were $61.9 million, or 24.8% of net sales, compared to $51.2 million, or 25.5% of net sales, in the prior-year period.

The 70 basis point improvement in SG&A rate was primarily driven by our ability to leverage our corporate infrastructure on a growing store base.

We would expect to show similar improvement in SG&A as a percentage of sales during the second half of the year.

Pre-opening expenses were $4.1 million, or 1.6% of net sales, compared to $2.9 million, or 1.5% of net sales, last year, reflecting the opening of 18 new stores and five remodels during the quarter as compared to eight new stores and four remodels in the second quarter last year.

We continue to focus on improving the efficiency of pre-opening costs as we leverage the size of our store opening program this year.

Double-digit top line growth coupled with solid SG&A leverage led to a 46.2% increase in operating income to $7.2 million, or 2.9% of net sales, from $4.9 million, or 2.5% of net sales, in the prior year.

These results included incremental pre-opening expenses of $1.2 million driven by the larger new store program this year.

Interest expense decreased to $1 million from $1.2 million last year, reflecting lower interest rates from the same period last year.

The effective tax rate for the quarter was 40.4% compared to 41.5% in the prior-year period.

Net income for the quarter increased 67.2% to $3.7 million from $2.2 million last year.

On a GAAP basis, income per diluted share was $0.06 versus a loss per share of $0.23 in the second quarter last year.

On an adjusted basis, income per diluted share for the quarter was $0.06 compared to adjusted income per diluted share of $0.04 in the second quarter last year.

For the six-month period, net sales rose 23.8% to $488.4 million, with comp store sales increasing 3.8% on top of a 7.8% comp store sales gain last year.

Operating income was $15.3 million, or 3.1% of net sales, as compared to $14.8 million, or 3.8% of net sales, last year.

These operating results included the impact of $3.2 million of incremental pre-opening expenses on this expanded store opening program.

Adjusted income per diluted share for the six months was $0.13 inclusive of $0.01 of severance costs and compares to adjusted income per diluted share of $0.13 in the six months of last year.

Merchandise inventories at the end of the quarter increased 33% to $197 million compared to $148.6 million at the end of second quarter last year.

Average inventory per store was flat the last year by delivering a 3.7% comp store sales increase during the second quarter.

The $48.4 million increase in inventory was due to the addition of 72 new stores opened in the last 12 months.

We are pleased with both the level and composition of inventories as we enter the third quarter.

Capital expenditures for the quarter totaled $37.5 million.

On August 15, we increased the availability under our asset-based credit facility by executing the $50 million accordion feature, resulting in total borrowing capacity of $200 million.

As we've previously communicated, accessing the $50 million accordion feature was planned and is consistent with our long-term growth strategy.

We received this commitment from our existing bank group under the same terms and conditions as the existing stores.

This $200 million capacity, together with cash flow from our growing store base, provides us with the capital and liquidity to achieve our growth plans well into the future while maintaining a very strong balance sheet that is not highly leveraged.

Now, regarding our outlook.

We are introducing guidance for the third quarter and reiterating our full year fiscal 2008 earnings guidance based on current business trends in the retail and economic environment.

For the third quarter fiscal 2008, we expect net sales in the range of [$259 million to $263 million] (corrected by company after the call) compared to actual third quarter [fiscal 2000] sales of $208.2 million.

Comp store sales are expected to increase in the range of 3% to 5% compared to a 6.7% increase last year.

Income per diluted share on an adjusted basis is estimated in the range of $0.08 to $0.10 compared to actual third quarter fiscal 2007 adjusted income per diluted share of $0.08.

We plan to open 21 new stores and remodel two stores during the third quarter of fiscal 2008.

In the third quarter of fiscal 2007, we opened 26 new stores and remodeled seven.

This reduction in third quarter openings is a result of our planned increase in openings in both the first and second quarter as we continue to focus on a balanced quarterly new store opening program.

For the full year fiscal 2008, we estimate net sales in the range of $1.12 billion to $1.13 billion as compared to $912.1 million in fiscal 2007.

Comp store sales are expected to increase by 3% to 5%.

Income per diluted share is forecasted in the range of $0.52 to $0.57.

A full year guidance does not include $0.01 per share of severance costs for the previously announced management change in March of this year.

We remain on track to open 63 new stores and remodel eight stores in fiscal 2008.

Capital expenditures continue to be projected in the range of $115 million to $120 million.

As a reminder, our long-term annual growth targets, which are unchanged, include comp store sales increases in the range of 3% to 5%, square footage expansion in the range of 20% to 25%, and net income growth in the range of 25% to 30%.

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

Thanks, Gregg.

In summary, we are pleased with our second quarter and first half fiscal 2008 performance, despite a difficult economy.

We remain confident in our ability to continue our positive performance during the balance of the year.

We have a proven business model, and this, combined with our passion to deliver a great customer experience, has us poised to deliver our annual goals.

We are equally confident in attaining our long-term goal of reaching 1,000 stores.

With that, I would like to turn the call back over to the operator to begin the question-and-answer portion of the call.

Thank you.

We will now be conducting a question-and-answer session.

(Operator Instructions).

Our first question is from Mr.

Brian Tunick with JP Morgan.

Please proceed with your question.

Congrats.

Two for Gregg and then I guess one for Lyn here.

Maybe, Gregg, if you can give us a little more color here on what line items maybe gave you better than expected expense leverage.

And then maybe you could talk about comp performance at the mature stores, the remodels, the refreshes either in the quarter or for the first half of the year.

And then maybe, Lyn, talk a little about the Bare Escentuals sampling program and sort of what's happening with them versus what they told us last month about a slow-down in their business and if you can comment.

Sure, Brian, we'll take those about in that same order.

In terms of the better than expected expense leverage, as you can see, our SG&A rate went down 70 basis points.

That was primarily better management of corporate expenses on the sales volume we delivered for the quarter.

And then we also continued to achieve better than expected leverage in pre-opening expenses.

And a lot of this is coming from just our management of the training programs and the transition of new managers from existing stores and coming in from the new marketplace, so getting a little bit better conversion of existing managers into the new stores.

And then we also continued to better manage our balance sheet.

Inventory levels were flat with the prior year.

We also were successful in negotiating interest rates for our expanded credit facility that were unchanged from last year.

And that continues to give us better operating leverage in totality.

As far as comp performance in remodel stores, we continue to see mid single-digit comp performance, which is in line with our expectations.

And that's in the first 12 months of growth, and we've been seeing that over the last six to 12 months.

And then with respect to the very oldest stores, as we've typically characterized stores that are eight years or older, those stores continue to perform in the approximately flat comp performance range.

I think that got all of your questions, Brian?

Yes, yes, this round.

And then just for Lyn on the Bare.

Bare, as you know, we won't comment specifically on the performance of the individual brand, but relative to the strategies that you spoke to, Brian, we are right in the midst of the first phase of the sample strategy that Bare has launched nationwide.

We are distributing samples of Bare products as we speak right now, and we hope to see the response in terms of full size purchase in the weeks and next couple of months ahead in the back part of third quarter.

We do have two unique opportunities unique to Ulta that we are also developing and will be proposing to our consumers later in the quarter.

One is a unique trial kit for Ulta, which is a $15 trial kit on their products, and the other is a mineral veil kit for a $30 price point, which has a $60 value.

So, all of these efforts are geared towards continuing to increase brand awareness and trial of the brand amongst the many customers that we still have who have yet to try Bare Escentuals.

Okay, thanks.

I'll get back in the queue.

Thank you.

Our next question is from Ms.

Liz Dunn with Thomas Weisel Partners.

Please proceed with your question.

Hi, good afternoon.

Congratulations on a good quarter in a difficult environment.

Can you discuss any regional differences that you're seeing in trend and any differences in sort of types of stores, new markets versus sort of emerging markets?

I also wanted to know if you could give us any sense of how much traffic is up.

And then I know you don't provide specifics, but some color on category performance, Prestige versus mass, et cetera, what really was driving the comp.

Yes, let's take them one at a time, Liz.

First of all, in terms of the traffic, it is very balanced between average ticket and traffic.

So, the comp growth came from both of those areas.

And, Gregg, do you want to take the second question in terms of the real estate?

Yes, Liz, and in terms of new versus emerging markets, we haven't seen a significant difference between new versus emerging markets as we expect them to perform versus our model.

Certainly as we go into a new market, it has a little bit different [wrap], and that's built into our store model versus emerging market.

But, no, the new and emerging markets continue to perform to our expectation.

And then in terms of regional differences, as we've said in the past, we've seen a little bit of softness that's not material in Southern California and Florida, and we haven't seen any significant accretion or deterioration of that.

So, it would be safe to say that all regions are comping positively?

Yes.

And relative to new stores in those regions, we opened two stores in Florida in second quarter.

We had one in third quarter, and the performance in the second quarter stores was very good.

And we get to see -- little early yet for us to see the third quarter one.

Okay, and then just the category performance?

Category performance there is really no change, Liz, from what we have said.

We continue to see good growth from Prestige color and skin, so that continues.

The only very small change, and it's a very early trend yet, so nothing to take to the bank at this stage, but we are seeing a slight uptick in our fragrance business that we are pleased with.

It reflects both the newness in the category as well as some exciting merchandising that we have put into our program for our customers here at Ulta around different purchase activity.

So, that's the only slight uptick that we've seen at this point.

Okay, and then just on a follow-up to Brian's question on Bare.

I'm sorry if I missed it.

My phone was ringing just as you were answering, but when will you be getting the new Bare kit that I think Sephora was out advertising yesterday as being the only one in the country to have?

Our Bare kit comes in later in this quarter.

I don't have the exact date in front of me, but it is towards late October, Liz.

Okay, thank you.

Thank you.

Our next question is from Mr.

David Cumberland with Robert W.

Baird.

Please proceed with your question.

Thanks.

Good afternoon.

Lyn, you noted several fragrance additions in Q2 in the second half.

Is this a faster pace of new product launches for you in that category, and how important is newness in fragrance?

Newness in fragrance is always important.

It is not a highly brand loyal business, and it is a high impulse business, so it's always an important piece.

The rate of introduction is not faster than what we would normally do at this time of year.

The third quarter is a time of year where there are a significant number of new fragrances launched in preparation for moving into the holiday season, so at about the same rate.

But we are delighted with the performance.

We've had some very strong performance on some of those new brands in the early stages of this quarter that we're delighted with.

And then a couple of questions for Gregg on gross margin.

Did the ramp-up of the DC hurt your gross margin?

I think you had been expecting that.

And then the one-time benefit that you called out, had that been factored into your guidance?

The one-time benefit was planned and expected and it was included in our second quarter guidance.

As far as the DC performance, just one reminder.

Remember in the first half of last year we did the software conversion in our first DC to allow us the capabilities to open our second DC, and there was some incremental start-up costs most prevalent in the first quarter, but also flowing into the second quarter.

So, as we're opening up the second DC and incurring the start-up costs for that second DC, it's comping against the same time period where we had the software conversion costs.

So, the short answer to that, David, is very, very minor impact on gross margin, not material as it relates to the second DC.

And we did get some benefit for some deals that we got to fill that second DC.

What can you say about the impact of the DC in the second half?

It was about 5 basis points, David, in gross margin [drive], so it's not material.

And the outlook, though, for the impact of the DC in the second half will be similar to that or very small?

As we go into the second half of the year, we've already cycled that start-up cost from the software conversion in the first half of the year, so we won't have those comparisons in the second half of the year.

So in the second half of the year, expect probably about 20 basis points, 30 basis points a quarter because we're truly in an increase in fixed costs during that time period.

And then we're not operating that DC, obviously, at full capacity relative to the single DC we had last year.

Understood, thank you.

Thank you.

Our next question is from Ms.

Neely Tamminga with Piper Jaffray.

Please proceed with your question.

Great, thanks.

It's Erinn Murphy calling in for Neely, and congratulations on a solid job in the quarter.

Lyn, I just had a couple questions for you, one really with respect to the promotional calendar.

If you could just remind us what were some of the big or major events you had in the fall and holiday periods last year for just promotions and events.

And then I have a couple follow-up questions.

Boy, there are numerous events and I don't think I can get into any individual one.

I mean, in the second half of the year we would have approximately eight newspaper inserts and we would have about six to seven individual marketing events to our customer club members.

So, I don't think you want me to get into each and every one of those strategies, but as we speak to a broad picture strategic perspective for the back half of this year, we are not anticipating at this stage that we will do more coverage of any weeks than we had in the back half of last year or incremental events at this point in time.

Okay, so very consistent year-over-year.

Year-over-year we -- yes.

The cadence, of course, will vary dramatically as we respond to the economic trends in the marketplace.

The propositions will vary very dramatically as they did in both second quarter and first quarter to the prior year.

It is not a rote calendar that we roll out a rote set of consumer propositions for each of those events.

We really do create them as fresh and as exciting as we can versus prior year.

Okay, that's helpful.

And then I had a question with respect to your loyal customer versus the non-loyalty card customer.

I believe it's kind of the IPO you spoke to the loyalty customers spending about $37 average ticket versus the $25 non-loyalty customer.

Have you seen anything different in terms of just the basket size or the frequency at which each of those customers shop within your store?

No, nothing of note that causes any change relative to each other; although, in totality, there's no question that our traffic is down versus where we would be in a more robust economy, that we would certainly see more traffic in the store.

Having said that, our traffic, even in this economy, we are able to -- with the promotional calendars and the marketing and the newness that we just spoke to, we are able to still keep a positive traffic count, but, relative to each other, no significant difference in the past.

Okay, thank you.

And then the last question is just with respect to your private label business, is there anything you've noticed different in recent months in terms of just that flexing up as we've seen a little bit of a tighter pinch on the consumer's wallet or any opportunities that you're looking at for that side of your business as you go forward into the back half and into the beginning of next year?

We have in the first half of the year and will continue in the back half of the year to use that more aggressively than last year to provide a value proposition for our customers.

So, we have been doing that with great success and will continue to do that in the back half of the year.

We have also flexed our muscle a little to try to get some extra new product activity under the private label brand in the back half of the year versus what we had in the back half of last year.

So, it's something -- it's an area where obviously we can control our own destiny as opposed to being dependent on strategies from our brand partners.

So, we are certainly flexing that up in both of -- matters of both newness and value.

Okay, thank you very much and good luck.

Thank you.

(Operator Instructions).

Our next question is from Mr.

Daniel Hofkin with William Blair.

Please proceed with your question.

Good afternoon.

I apologize, this question may have been asked earlier.

I had a little trouble getting into the queue.

In terms of new store performance, could you characterize the timing of new stores year-on-year in the second quarter versus last year?

And then in the third quarter is the new -- given that your overall annual plan is clearly more front-end weighted, is that also the case in the third quarter and does that impact the -- kind of the implied new store productivity in the third quarter?

And then I just have a question on sales trend by sort of broad category.

Dan, as we look at the second quarter, the timing of new store opens were fairly balanced throughout the course of the quarter, maybe just slightly to the back half of the quarter as it relates to the second quarter.

And as we head into the third quarter, we mentioned we've opened 10 stores so far on a program of 21, so that would tell you that they're fairly well balanced in the third quarter this year as well.

But, Dan, as to reiterate just the broader perspective, of course, we did move more stores -- more store openings into second and first quarter versus third quarter, so that's why the third quarter store count will be down versus prior year in that effort to get balance across our program -- across our quarterly programs.

Sure, okay.

And then with regard to, I guess, broader category trend, you've commented generally that you haven't seen a material change, let's say, within the sales mix in terms of people trading down.

Has there -- I guess, one, the converse is historically if there was a faster pace potentially of trading up when the economy was stronger, has that pace moderated at all?

It's sort of the trade-up to Prestige brands.

Clearly, Prestige is still driving above-average comp.

Just a little color on the dynamic there would be helpful.

Dan, no, we have not seen an acceleration or deceleration of that trade-up.

The -- and I think that that's fairly evident in just the broad numbers that we gave you on our comp growth, that it's a fairly even split between average ticket and traffic.

So, we continue to see the same balance that's basically what we saw in first quarter as well.

So, we're really not seeing a shift at a micro level, and it's pretty self-evident from that bottom line performance and that balance between ticket and traffic.

Okay, thank you.

Thank you very much, Dan.

Thank you.

Our next question is from Mr.

Brian Tunick with JPMorgan.

Please proceed with your question.

Yes, so, Gregg, I guess two follow-ups maybe.

I guess number one, how many leases have you signed now for 2009?

And maybe just some color on what you're seeing from an occupancy cost there.

And do we still assume you guys need 3% to 5% comps to break even on occupancy leverage?

And then maybe just share a little color on what's happening on the salon side.

What typically do you see in this environment coming from the salon?

Thanks very much.

Sure, Brian, I'll take the first two and I'll let Lyn take the third one on the salon.

In terms of the program heading into next year, we have currently about 70% of the deals approved.

And roughly about half of those would have signed leases at this point, and the other ones would have letters of intent, so well into our pipeline for 2008.

In terms of -- or 2009.

In terms of the deals, some of those deals have been done certainly first half of this year and back half of last year because we're filling our pipeline, as you know, well out in advance.

And we are not seeing, Brian, significant improvements in terms with the developers.

We continue to negotiate very aggressively with them.

In some cases we are seeing slightly better terms, but not dramatically across the board.

And then in terms of the occupancy cost leverage, just as an example, if you look at this year with the square footage growth, we're going to have 25% this year.

I would expect for the full year that you're going to see about 50 basis points of occupancy cost deleverage, given the fact we've added in so many new stores this year.

And that's within that sort of 3% to 5% range.

So, as we head into 2009, as those stores start to come into the comp base, we would expect that occupancy leverage to flatten out a little bit to where next year would maybe be about 20 to 30 basis points on the same 3% to 5% comp range.

On the salon business, Brian, we continue to deliver solid comp performance there, and it very much reflects our focus on training, staffing, exciting marketing, and the qualities our guests experience.

So, we are happy with the performance of the salon business, particularly given this difficult economy.

All right, thanks and congrats.

Thanks, Brian.

Brian, thanks.

With that, I think that's the end of our question-and-answer period.

We don't have any more questions in the queue.

It was a pleasure to speak to you all today.

Gregg and I are available for follow-up questions, and we look forward to seeing some of you at some upcoming conferences that we have.

We do hope you can come visit our State Street store when it opens in mid-October, and we plan to post a video of that grand opening on our Investor Relations site for those of you who can't make it there in person.

Thank you, again, for your time today.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.