Ulta Beauty Inc (ULTA) 2009 Q1 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the first quarter and fiscal 2009 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, Miss Allison Malkin of ICR.

Thank you.

Miss Malkin, you may begin.

Thank you.

Good afternoon.

Before we get started, I would like to remind you of the Company's Safe Harbor language which I'm sure you're all familiar with.

The statements contained in this conference call which are not historical facts may be deemed to constitute forward-looking statements within the meaning of the private securities litigation reform act of 1995.

Actual future results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC.

We will make references during this call to the metrics free cash flow, a non-GAAP financial measure.

free cash flow is defined as net cash provided by operating activities less purchases of property and equipment.

A reconciliation of free cash flow to its US GAAP equivalent 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 8K.

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

Thanks, Allison.

Good afternoon, everyone.

Thank you for joining us to discuss our first quarter results for fiscal 2009.

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

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

We began the year solidly, delivering first quarter results above our expectations.

For the quarter, net sales totaled $268.8 million increasing 12.3% versus prior year.

Comparable store sales declined 2.3%, which was at the top end of our guidance, and follows a 3.9% increase last year.

On a two-year basis, comparable store sales are up 1.6%.

Customer traffic increased 2%.

And earnings per diluted share was $0.08 as compared to $0.07 last year.

Last year including $0.01 per share in severance costs.

The economic environment of the first quarter remained challenging, and while our performance, given the environment, was solid, we are certainly not satisfied and we would expect to deliver more robust results in a better economy.

However, there is a silver lining.

This economic environment has led us to focus on the development of strategies to make us stronger and more efficient in the short term; and because of the strength of these initiatives they will be incorporated into our long-term operating strategy, which will position us to improve our long-term profit potential.

Three short term responses that will have a long term impact include, firstly, the development of exciting new consumer propositions that will be used again even in a more robust economy; reduction of expenses that will have a permanent and positive impact on our cost structure; and management of our business more efficiently with less inventory driving improved working capital and free cash flow, which will be part of our operating structure going forward.

Turning to the short term and our first quarter performance, we are pleased with our ability to navigate this difficult economy.

Our success is being driven by our consistent ability to motivate consumers to make an Ulta shopping trip.

We accomplish this with our marketing, which reaches consumers at home, showcasing our exciting events, new products, values and rewards.

Unless motivated in these tough times, consumers are controlling impulse spending by staying at home.

Clearly, in this economy our marketing remains a key competitive advantage.

To drive customer motivation, we modestly invested in advertising and margin in first quarter with three goals in mind.

First, to expand market share; second, to maintain customer loyalty; and third, to drive new customer acquisition.

Our investment and motivation continues to provide customers with our unique experience around education and entertainment, and a well earned escape from the stresses of this difficult economy by providing great values.

As always, our entertainment begins at home with our unique and compelling direct-mail books to our loyalty members.

Our consumer propositions are uniquely developed to this economy to entice her into the store with events such as spring makeovers for Bare Essentials, Smash Box, Urban Decay, and Dermalogica; and great values such as buy two, get two free on key professional hair care brands; the introduction of new brands such Cosmedicine and Korres, and, of course, for pre-Mother's Day we enticed her to buy fragrance with the fabulous store tote gift with purchase.

We also effectively utilized the front cover of our Loyalty Club mailings to showcase more $3.50 off coupons, which resulted in more shopping trips from our Loyalty Club members.

Turning to new customer acquisition in our newspaper insert, we offered a hot value on cheap flat irons and presented a first-ever tutorial to teach our customers how to use a cheap flat iron to flip, twirl, and curl her hair.

We also leveraged newness on our front covers such as OPI's new South Beach Collection and launched new brands such as Oil of Olay Pro-X and L'Oreal's EverPure hair care products.

Of course, we also offered great values on our private label with buy two, get two free mix and match, and for national cosmetic brands, buy one eye shadow, get one mascara free.

In addition to these exciting value propositions, we also drove new customer acquisition from an additional newspaper insert during the quarter.

The combination of these strategies resulted in comp customer traffic of plus 2%.

However, in this environment consumers continue to spend less.

As I have said on other occasions, the beauty business is resilient but not impervious.

We have some categories that are consumable, and therefore prompt repeat purchase, and others that are more discretionary.

So, despite positive traffic we did experience a 4.3% decline in average ticket leading to a 2.3% decline in comparable store sales.

Importantly, however, we grew market share across all major product categories.

We believe our investment in advertising and margins in combination with exciting marketing and merchandising was the right strategy for the first quarter, and as we continue to drag footsteps to our doors we continue to build our customer base and build loyalty, which we believe will pay even larger dividends in the form of commitment to our brand when the economy improves.

Both our comp traffic and sales have been increasingly impacted by our Salon business as consumers defer salon services in this economy.

This trend, which we mentioned in fourth quarter, has continued to increasingly impact our topline performance.

We are, however, encouraged our test of two new salon services and a new salon strategy that we will introduce in the third quarter.

Although we believe a depressed economy provides an opportunity to grow both market share and loyalty, we continue to invest judiciously, appropriately balancing investment in the top line of the business versus optimizing the profitability.

Similarly, we continue to take a balanced approach to market share expansion through investment in new store growth and delivering free cash flow.

We have appropriately pulled back on 2009 new store growth in this economy, given the quality of availability sites.

However, we remain opportunistic as quality real estate becomes available, which we are beginning to see occur primarily in existing centers.

We fully expect to capitalize on this trend on our 2010 program.

As it relates to the [first] quarter, we opened nine stores, ending the period with 320 locations.

We remain pleased with our new store performance and continue to open 35 stores this year, expanding square footage by 11%.

We remain confident in our 1000 door opportunity long-term and expect to return to historical square footage growth as the real estate market improves.

Finally, throughout first quarter we continued to diligently manage those levers of the business that we can control in this environment, as evidenced in our EPS performance.

During the quarter, we made progress in our cost reduction targets towards achieving our annual savings goal of $15 million.

We achieved a 4.8% reduction in inventory per store and we generated $5.6 million of free cash flow in the quarter driven by improved working capital management and lower new store investment.

As we begin the second quarter, our comparable stores sales performance is consistent with our first quarter trend and at the top end of our comp guidance.

We will continue to focus on market share expansion, expense and working capital discipline to drive profitability, and free cash flow.

We are also excited about the introduction of Benefit Cosmetics, which will be rolled to all doors this weekend.

Benefit will launch in varying formats, from full boutiques in certain locations to end cap displays in others.

This new prestige brand is expected to drive more of our customers' current share of wallet as she now finds one more of her favorite brands in our stores.

In addition to Benefit, we are excited about new introductions in the second quarter that include Cargo cosmetics and Feto hair care.

Given the launch of Benefit in the second quarter, we do not intend to invest in incremental marketing as we did in the first quarter.

To ensure a successful launch of Benefit, we do, however, plan to invest our resources in training, fixtures, and advertising for the brand.

In total, advertising rate for second quarter is planned in line with second quarter last year.

Of course, we will continue to develop marketing plans that are unique, fresh, and relevant for the current environment.

As I mentioned, we were pleased with our Mother's Day event and that does straddle both the first quarter and second quarter.

The final week of Mother's Day does fall into the second quarter, and it met plan and delivered stronger trends in the marketplace, driven by second fragrance gift with purchase.

We offered a spa robe in the last week, and Donna Karan's new fragrance, Be Delicious Fresh Blossom, was an exciting new introduction.

We also saw strong performances from fragrances that were launched in the fall such as Ed Hardy, Viva La Juicy, and Dolce and Gabbana.

In regard to our store expansion we plan to open twelve stores in the second quarter, of which three are open to date and performing to our expectations.

We also expect to continue the positive momentum of Ulta.com.

While a relatively small part of our business overall, first quarter sales grew at a double digit rate and we expect this trend to continue throughout 2009.

We continue to expand our assortment and continue to improve the shopping experience with increased functionality and content on beauty brands and techniques.

Finally, we will maintain our stringent control of expenses, inventory, and capital investment to maximize cash flow and earnings performance this year.

And now I'd like to turn the call over to Gregg to review our financials in more detail.

Thanks, Lyn.

Our first quarter results reflected our emphasis on expense and working capital discipline combined with the success of our marketing and brand strategies in a tough environment.

The quarter included a double digit increase in sales and a comparable store sales decrease of 2.3% at the top end of our guidance range, following a 3.9% increase in the first quarter last year.

It also included a 2% increase in customer traffic, the initial success of our expense in inventory management strategies, the generation of positive free cash flow, and a 5% increase in net income adjusted to exclude severance costs in last year's first quarter.

The $15 million cost reduction program that we have implemented this year has led to a permanent cost savings within our supply chain, store, and operating expenses.

We are on track to deliver these cost savings and are pleased with our progress towards our target to reduce average store inventory by 5% to 7% by year end.

In fact, we were able to surpass our first quarter targets, which allowed us to deliver earnings above our guidance range.

This is assisting us to partially offset the impact of a slower consumer spending environment and provides us with greater ability to leverage sales and improve our overall rate of profitability as the environment improves.

Beginning with a review of the income statement, net sales increased 12.3% to $268.8 million from $239.3 million in the first quarter last year.

Sales growth was driven by the addition of 55 net new stores since the first quarter last year.

Comp store sales decreased 2.3%, which follows an increase of 3.9% last year, resulting in a two-year comp store sales gain of 1.6%.

Comparable store sales included a 2% increase in traffic, offset by a 4.3% decline in average ticket.

Our marketing strategies continue to drive customer traffic to our stores, resulting in market share gains.

However, consumers continue to purchase less per visit given the challenging environment.

During the quarter we opened nine new stores, ending the first quarter with 320 stores, and expanding square footage by 21% from last year's first quarter.

We are pleased with the early performance of our 2009 new stores.

Gross profit dollars in the first quarter increased 7.3% to $79.3 million from $73.9 million last year.

Gross profit margin decreased 140 basis points to 29.5%, which is primarily attributed to de-leverage in fixed store costs resulting from our expanded new store program.

We also invested 50 basis points of merchandise margin in the quarter to sharpen our value proposition in certain categories, and with our coupon response to drive in response to the difficult economic environment.

The margin investment was offset by improved leverage in our distribution and transportation network as we drove efficiencies in our expanded supply chain.

SG&A expenses were $69.2 million or 25.7% of net sales compared to $62.1 million or 25.9% of net sales in the prior year.

SG&A reflected a planned 70 basis point increase in advertising spending during the quarter.

It was part of our strategy as Lyn outlined earlier.

The incremental marketing investment verses last year was offset by improved leverage of our store expenses and corporate overhead during the quarter as our expense management strategies began to take hold.

As anticipated, preopening expenses totaled $1.2 million in the quarter which compares to preopening costs of $3.8 million in the first quarter of fiscal 2008.

The reduced preopening costs were in line with our expectations driven by our reduced store opening program.

Net income for the quarter increased to $4.9 million or $0.08 per diluted share from $4.3 million or $0.07 per diluted share last year.

Now turning to the balance sheet and cash flow results.

Merchandise inventories at the end of the quarter were $230.3 million compared to $212.6 million at the end of the first quarter last year.

Average inventory per store decreased 4.8% from the prior year quarter after adjusting last year's inventory for the initial incremental build related to the start-up of our Phoenix DC last year.

The $17.7 million increase in inventory was due to 55 net new stores opened over the last 12 months.

We are pleased with both the level and composition of inventories as we entered the second quarter.

Regarding debt.

During the quarter we were able to pay down roughly $5.5 million on our credit facility outstanding balance.

This was driven by our focus on aggressively managing our working capital levels, specifically in inventory and accounts receivable.

Outstanding borrowings as of May 2, 2009 were $100.6 million, and debt to equity ratio was a very modest 0.29 times.

As of quarter end, we had $93.5 million of availability on our credit facility.

As a reminder, our credit facility provides borrowing capacity of up to $200 million and is committed through May of 2011.

We believe this credit facility, together with our cash flow from our existing store base, provides us with the capital and liquidity to achieve our long-term growth plans well into the future while maintaining a very strong balance sheet that is not highly leveraged.

We achieved free cash flow of $5.6 million for the quarter and currently expect to generate at least $15 million of free cash flow this year.

Capital expenditures for the quarter were $12.3 million, and depreciation and amortization for the quarter was $15.4 million.

Now regarding our outlook.

We are pleased at this point to see signs of stabilization in our comparable store sales.

Consumers remain cautious and there continues to be limited visibility into consumer spending trends for the full year.

As such, we will continue to provide guidance on a quarterly basis as well as provide additional insight on elements of our business we can control.

With regard to new stores, we continue to plan to open approximately 35 new stores in 2009.

In this environment with no signs of improvement in 2009, we believe this program, which is first and foremost focused on the right real estate, achieves the right balance between delivering free cash flow and opening new stores in quality locations.

As we look forward, we will continue to be opportunistic with regard to new site selection.

Our focus is on high quality sites in existing centers, and we expect this economy to present us with great locations.

With the strengths of our balance sheet we remain well-positioned to capitalize on these opportunities in our fiscal 2010 store program.

We remain confident in our ability to attain 1000 store long-term potential.

Capital expenditures.

We continue to expect capital expenditures to be in the range of $72 million to $74 million representing a more than 30% decrease from 2008 levels.

Some of the areas that we expect to reduce our new store investment beyond our achievements in 2008 are inventory and construction costs.

These strategies are expected to reduce our average new store investment to roughly $1.3 million compared to $1.5 million historically.

Inventory reductions.

We are making progress on our initiatives as evidenced by the 4.8% reduction of average store inventory after adjusting for the Phoenix DC build last year.

We continue to expect inventory per store to decline by 5% to 7% by the end of the fiscal year, which reflects a permanent reduction in working capital needs for the business.

Expense management.

We continue to generate approximately $15 million in cost savings in 2009 across the business, including supply chain, store and other operating costs.

These costs represent permanent improvements in our long-term operating cost structure.

Free cash flow.

We believe our focus on these initiatives will result in our ability to deliver free cash flow in 2009 of at least $15 million, which is above our initial expectation of more than $10 million, driven by our improved working capital management in the first quarter.

This compares to a $35.7 million net cash outflow in fiscal 2008.

Shifting now to our second quarter outlook.

For the second quarter of fiscal 2009, we currently estimate net sales in the range of $264 million to $272 million compared to actual sales of $249.1 million last year.

This assumes comparable store sales decrease 2% to 5% compared to an increase of 3.7% in the second quarter of last year.

At this point we are five weeks into the quarter and our current comparable store sales trends are consistent with those achieved in the first quarter.

Income per diluted share for the second quarter of fiscal 2009 is estimated to be in the range of $0.03 to $0.05 which includes accelerated depreciation of approximately $0.01 per share.

This compares to income per diluted share for the second quarter of fiscal 2008 of $0.06.

Let me say in closing that the environment continues to be difficult and uncertain.

We have and will continue to take the necessary actions to control what we can control and continue to manage the business with the focus on driving earnings and generating free cash flow to reinforce our already strong balance sheet in liquidity position.

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

In summary, although in a better economy, our results have been and would be stronger.

Nonetheless, given the economic environment we are operating in, we are pleased with the results.

We are optimistic regarding our opportunities to drive market share gains, solid profitability, and free cash flow in 2009.

Longer term, we expect the strategies and programs we are implementing this year as well as the significant opportunities we see for expansion in our store base end brands to enable us to increase our long-term profit potential.

With our highly experienced team and proven strategy we expect to continue to navigate this tough economy while positioning Ulta for stronger performance when the economy improves and in our pursuit of our long-term 1000 store target.

Now I'd like to turn the call over to the operator to begin the question and answer portion of the call.

Thank you.

Ladies and gentlemen, we will now be conducting a question-and-answer session.

(Operator Instructions).

Our first question comes from the line of Neely Tamminga of Piper Jaffray.

You may proceed.

Good afternoon, and congratulations, you guys.

That was a nice lift to the original guidance.

Good work.

Just a question here for Lyn on Benefit, then a question for Gregg on average dollars sales.

For Benefit, how deep -- you're going to chain-wide I think, basically by the end of this weekend; just wondering in terms of how deep are you going to be in Benefit per location.

There are clearly some stores that have got the gondolas and others that are end-caps.

Just wondering how we should think about that and frame that up in terms of size and scope of this launch.

Then possibly, too, could you give us a sense when -- how does this frame up relative to maybe last year's heading into Father's Day.

I don't recall you guys doing a major brand launch right before the Father's Day traffic.

I'm just wondering how this might compare this year versus last year.

And related to that, Gregg, if you could talk about average dollar sales.

Is it mainly down currently because of UPTs or AURs.

Are people actually buying fewer items?

Is it more [message] or prestige?

If you could just recall what last year's comparisons on ADS are?

Thanks.

All right.

I think I wrote them all down.

Let me do them in slight different order to the way you asked.

Versus last year, you're absolutely right.

We have not had a brand launch as big as Benefit in second quarter last year, so it is a very exciting launch for us leading into Father's Day.

We do have -- if you've already received your book at home, Neely?

I have.

You will see that Father's Day was still appropriately focused on on the back cover.

So we have a very nice balance and an exciting program going into Father's Day.

In terms of the launch itself, in those stores where we have end-caps we have selected the most significant SKUs that will obviously deliver the majority of the sales for the brand.

But our goal and intention is certainly to roll all of those stores into expanded presentations, either in a full gondola or we have what we are calling a boutique or linear gondola in some stores, and we will do that over time as we begin to roll this brand out and as it begins to get some traction in the stores.

In terms of the average order, let me jump in a little and then Gregg can comment versus prior year.

The units are basically flat.

What we are seeing, and you heard us both reference this in our scripts, the biggest way the economy is playing through for us is we are able to drive all the reasons we took you through traffic, but nonetheless the customer has still got a slightly tighter wallet than she certainly had in a more robust economy.

And, so not surprisingly, where we are seeing the impact on our average order is in those categories that I would call the more discretionary categories.

You've heard me speak to fragrance, and our fragrance trends continue to hold where they were significantly better than the marketplace.

But nonetheless it is not an increase category growth.

The other category that for the first time we have begun to see just an impact, and I think it is from the economy, is the Styling Tools category.

And when you think about it again it is no big surprise, it is sort of the equivalent of our television.

You have to have skin care, you've got to have hair care because you run out of those.

But unless your styling tool is broken, you don't necessarily need a new one, versus in a robust economy, technology and innovation and new colors and designs drove replacement more than it is occurring in this environment.

So those two categories.

And then as we had mentioned Salon Service, which of course runs through our average order as well, continues to show some softness in this economic environment.

So that would be the category perspective on average ticket, and Gregg might want to add some other flavor.

Yes.

As Lyn mentioned, all the decline is in average retail price.

The units are flat year-on-year.

Thank you.

Our next question comes from the line of Brian Tunick with JPMorgan chase.

Your line is open and you may proceed.

Hi.

Congrats as well.

I guess the first question really is on the store growth.

You both said 1000 stores, 1000 stores, and we are just wondering, can this concept really be 1000 stores without the construction of new power, lifestyle centers?

And is there a view internally that there are existing centers that have lost tenants that you would consider if we don't see a return to the building of the new centers?

That's question one.

Let me take the first part for you, Brian.

The answer is absolutely.

The shift to existing centers is what we are anticipating in the short term.

So in the next couple of years we are already beginning to see movement that way and you heard both Gregg and I allude to our ability to be opportunistic here for the 2010 program, not 2009.

And we are definitely beginning to see an uptick and some very nice opportunities in existing centers.

I do believe at some point in the future, our 1000 door opportunity was never a two-year opportunity; it was over a multiple, seven or so years.

And I certainly think that we will see a continued -- renewal and new development at some point during those seven years.

But we are seeing very nice opportunities, as I say, in the existing, which will allow us to begin to accelerate our program for 2010.

We are not willing to commit right at this point in time whether we can get back to 20% growth rates, for example, that early.

We will have to wait and see as this rolls out.

But certainly we are expecting a resurgence in our growth rate in 2010.

Gregg, do you want to add to that question?

And Brian, remember the existing center -- it's always been a part of our overall real estate profile.

We're used to operating in them.

And, as we have been looking to real estate over the last couple of months, we have seen a lot more of those boxes just from a timing standpoint start to cycle in, where developers have them, they've split the tenancy in them, and we are seeing some nice deals on them.

It is also creating opportunities where if you go up the east coast, as an example -- where there wouldn't be as much ability of real estate and you'd have to wait over a longer period of time to get access to it.

It is creating some nice opportunities with the tenancy failures that we have seen so far.

So I think on the flip side it is going to allow us to get some penetration.

Some markets that would have taken longer.

One last thought for you, Brian.

I'm sorry.

We do have -- we already have 25 sites approved for the 2010, in our pipeline, so we are in very good shape for 2010.

Okay.

And just on the comps.

I still have a three-parter.

Were comps positive in the store ex- the salon?

Can you talk about comps from the mature stores?

And finally, are you seeing comp lift sales from the remodels.

I'm just trying to get a little more color on the comps.

Brian, ex- the salon comps were not positive.

Most of the impact from the remodels, as you remember, the biggest part of the remodel program in earnest really occurred in 2007.

We did remodel a handful of stores, about six or eight last year.

And most of that has worked its way through the system.

And then if you look at the older stores, they are running down 3 or 4 points more than the chain at this point.

Okay.

Terrific.

Very, very oldest stores.

Thank you.

Our next question comes from the line of Joe Altobello with Oppenheimer & Co.

Your line is open.

You may proceed.

Thanks.

Good afternoon, guys.

First question, I was curious in terms of the store concepts you guys have talked about, in particular going into maybe smaller stores.

Where does that stand?

Is that your plan of 2010 or is that further out?

Further out.

It is prototype that we continue to watch, but as we pulled back on the number of sites for this year we felt that the opportunities were really in the boxes, and size box that is our traditional prototype is 10,000.

So we keep it -- we will keep it in the pipeline as an opportunity further down the track.

Got it.

Secondly, how should we think about 2010 in terms of cash generation?

Obviously you guys have sort of dialed back the growth, the square footage growth, this year.

The inventory management is obviously impressive.

So you're seeing a better than expected cash flow generation this year.

It sounds like if we read you right, Lyn, that next year, assuming things get better, that you're back on that growth trajectory and we could see free cash flow turn back negative again next year, or do you think you guys have kind of turned a corner here?

Joe, I would say, one, there is still a lot of working capital opportunities as we continue to look forward in the business and take advantage of our growth.

It is really going to come down to what the size of the store program is next year.

So I would say that's going to be -- at the end of the day -- I know that's not an answer to your question, but that's going to be the biggest driver.

I think we have a good opportunity on a go-forward basis to generate cash flow, but it is going to be really predicated on the size of the program we can develop next year.

How are you prioritizing that?

Is cash flow important or is it more getting the right sites and getting growth?

As we look forward -- we built a strong balance sheet in this business to date.

It is going to get further strengthened by the free cash flow we generate this year.

We are a growth retailer and we are going to continue to focus on taking the right real estate and that's going to be our priority from a growth perspective.

But like most things with us, definitely quality first.

Got to be there.

We are not chasing an objective for the sake of an objective.

As we see it emerge, which we are beginning to see, and hence the reason for us mentioning.

But as with all things with us it is always a balanced approach.

The short and long balance, top and the bottom and certainly free cash flow and store growth balanced.

I think with the initiatives that you're seeing take place this year, Joe, and we have got some more initiatives as we look further into the future with some of the systems updates we are doing this year.

It is going to allow us to be a strong generator of cash flow.

The question is, is how much are we going to invest back into the store base?

But I think the majority of the cash flow investment is behind us in terms of increasing the credit facility.

Sure.

Okay.

And then lastly the accounts receivable number was down pretty significantly on a sequential basis.

Could you address that, Gregg?

Two things.

One, there is really two components of that.

The reimbursements that we get from our landlords as they participate in part of the investment in our site, and the other is just driven by some of the reimbursements that we get from our vendors for various parts of support of the business.

We have done several things on both of those initiatives really just to accelerate the collection of them.

Got it.

Okay.

Great.

Thank you.

Thank you.

Our next question comes from the line of Sam Panella with Raymond James & Associates.

Thank you.

Let me add my congratulations.

First question, Lyn, could you clarify.

I think you said during your prepared remarks that you expect revenues to grow in the double digits through 2009, or did I hear you incorrectly on that?

I hope you heard me incorrectly.

Okay.

I might have.

I'm sorry.

Okay.

And then secondly, any update on Ulta.com and what you are doing to drive that business.

Sam, I think that's probably where you heard the double digits on Ulta.com, not on the total business.

That probably clarifies that and, you prompted me as you asked the other question.

On Ulta.com the biggest opportunity for us is to -- I'll describe it philosophically -- we always talk about the four [E's] on the brick and mortar business and how we deliver on that and continue to evolve on that experience day in and day out.

The opportunities to do the same thing on eCommerce -- to bring more education, to bring more entertainment to that business, and to continue to learn to calibrate the marketing investment to drive the top line of the business.

Not obviously print investment, but electronic investment, and we continue to learn our way on that.

But I would say to you big picture we have spent the last year and a half or so getting a very good foundation in place for this business.

The functionality of the site and the look of the site.

And we look forward to a very nice runway and uptick on the business going forward with that foundation in place.

Okay.

One question for Gregg.

With respect to preopening expenses, how should we think about that for the second quarter and the remainder of the year?

I would still target for the full year about $7.2 million, $7.3 million and about $2.4 million to $2.5 million of that falling in the second quarter.

Great.

Thank you.

Thank you.

Our next question comes from the line of Daniel Hofkin with William Blair & Company.

Your line is open and you may proceed.

Good afternoon.

Very nice results.

Quick, I guess, couple questions.

On the comp sales during the quarter, I know you had talked on the fourth quarter call, comps had been tracking similarly down 2% quarter-to-date.

Were the trends in the balance of the quarter pretty consistent adjusting for I guess the Easter shift?

That would be one question.

And could you characterize the comp trend by merchandise category and geography?

Just any general color you can give on that.

Second question would be -- on the fourth quarter call you had, I think, provided sort of just a framework saying, for example, hypothetically if comps were to decline 2% for the full year you might expect to be able to deliver roughly unchanged EPS versus '08.

Is that consistent with your thinking right now, or might it be even a little bit stronger than that given the expense management and gross margin trend in the first quarter?

Thank you.

I'll take the first couple and then Gregg can.

On the Easter question, the trend in and trend out, Easter was not in the trend update that we had given on the last call.

It actually fell after that call for us, both prior year as well as this year.

So it actually didn't affect what we had said to you, and the trend basically at the beginning of the quarter was pretty much the same at the end because the Easter shift was contained within that.

As it relates to category performance, beyond what we have said here that's about as specific as we would get with you.

Our commitment has always been to give you some indication if there is a significant change in trend on a category, and hence I wanted to give you a heads up on the Styling Tools category.

But other than that, the rest of the business is basically trending as it has been prior to this quarter.

From a geography point of view, a slight update there is that certainly we continue to see Arizona trending where it was, but a couple of changes.

We are seeing -- not a surprise when you think of some of the news that has hit the market recently, we are seeing more softness in Michigan and I think that is not a surprise when you think about it.

And we are seeing a slight uptick in both Florida and southern Cal.

So modest changes, enough to mention to you, but fairly modest.

And with that let me turn it over to Gregg to answer the other part of your question.

Based on our first quarter performance and the traction we have gotten on the expense and inventory management side, I would expect that delivering that flat EPS for the year rather than the minus 2% comp, it could be slightly lower than that.

Thank you.

Our next question comes from the line of Liz Dunn with Thomas Weisel Partners.

Let me add my congratulations.

Could you help us think about the trajectory of new stores in existing centers versus new centers.

Do they open stronger or do they open about like a new cente?

Aand then I wanted to know if there was any quantification of the underperformance in the Salon business, and what are the strategies that you have underway to improve that business?

I will deal with the Salon first.

As you know, Liz, we don't break Salon out.

So really cannot quantify it for you.

But I will say to you we certainly -- although the economy is impacting the business, we will not rest with not turning that business around.

So we have, as you heard mentioned, we tested two great services for us.

And as we roll them out I will certainly inform you of what they are.

We are not ready to do that in that quarter.

We have still just got a little bit more learning to do, but hopefully next quarter we will be ready to talk about at least one of those.

And we will versus separate to the category expansion, I had alluded to the last call that we do have a new marketing strategy for that business.

That I think will be very exciting and we will be ready to roll that out to you also on the next call as it impacts third quarter.

And your other question was on new and existing stores.

Yes, they opened -- there is obviously some difference between all of our stores -- even within a new center and existing center, there is always some difference.

But overall, in totality, they open about the same.

Some different challenges, and we go to market slightly different in an existing center versus a new center.

But as Gregg said, we are very experienced with existing centers and -- but overall, on average, both groups deliver about the same.

Thank you.

Our next question comes from the line of Erika Maschmeyer with Robert W.

Baird.

You may proceed.

Good afternoon.

Great quarter.

Thank you.

Could you talk about the specific areas where you saw upside versus your guidance?

Operating expenses came in well below what we had expected.

Yes, a couple of specific areas.

One, we did a little bit better in the supply chain and some of the efficiencies and programs that we put in place there.

So transportation costs, DC operating costs, slightly lower.

Some of the initiatives that we put in the four walls of the store, operating store payroll and variable expenses, came in better than we thought.

We had a slight improvement, about $100,000 or so in preopening costs.

And then as we were able to drive a higher level of cash flow this quarter, our borrowing costs were lower than we anticipated.

Those are the main drivers.

Okay, great.

Then can you give any color on expected changes in SG&A and gross margin in Q2?

As we look forward -- and Lyn mentioned this earlier -- if you look forward to gross margin in the second quarter there are a couple of drivers.

One, we are expecting fixed store costs to show deleverage of about 180 to 190 basis points.

About 40 basis points of that being in the accelerated depreciation that I mentioned in my prepared remarks.

And then that would leave you with gross margin basically 180 basis points below last year.

We do expect to see a little bit of modest amount of investment in gross margin rate, merchandise margin, as customers continue to take advantage of the coupons and some of the promotional offers that are included in our mailings.

And then that will be offset by the continued improvement in our supply chain costs.

As it relates to SG&A, I would expect SG&A to be about 50 basis points lower, and most of that coming from our continued expense initiatives.

Great.

And then could you talk about your Salon performance relative to Q4?

Is it about the same as it had been?

It's a little softer.

It has been declining since Q4.

We did see a drop off during first quarter, and not surprising I think, when you look at the economic indicators in the marketplace and consumer confidence, we did see a decline throughout first quarter.

And this business tracked pretty much in tandem with that decline.

Thank you.

Our next question comes from the line of Jill Caruthers with Johnson Rice & Company.

You may proceed.

Thank you.

If you could talk more about the strategy of marketing headed into the second quarter.

You talked about it being kind of flat as the rate versus last year.

Just comparing that to the first quarter comments where you increased marketing spend in order to drive traffic, how do you feel you're going to combat that in the second quarter under a still kind of challenging, uncertain environment?

The biggest difference between the first and the second quarter in terms of the levers that we have to pull in the business is in fact the launch of Benefit.

We do think that Benefit will attract new customers to the store.

We do think it will provide some average ticket drive for us, and so with that major resource in the quarter, which we did not have a major resource like that in first quarter, we do not feel the need to do the additional newspaper insert that we did do in first quarter.

That was the biggest difference in incremental advertising spend.

And instead -- and from a margin point of view, not the need to invest margin to drive traffic, but rather we have invested in other areas around Benefit, for example, the training and fixtures for Benefit.

That's not to say we don't have really exciting propositions and exciting new products outside of Benefit, but as we did in first quarter, it is more the comparison, and the biggest difference between the first quarter and second quarter is that launch.

Okay.

And if you could talk about maybe the professional hair care product category.

Are you seeing a drop off in that in correlation to the Salon business?

That is one of your categories that really drives traffic and is one of your differentiating categories versus some of your competition.

As you know, Jill, we don't really comment on individual categories, but I will say to you broadstroke, it is not traveling in the same direction as service.

The distinction is not Salon in totality.

It really is the nature of a discretionary service in comparison to a consumable product that I use up and have to replace.

So it is not the category per se so much as discretion versus a repeat purchase product, and hence the very different trendlines on those two categories.

Okay.

This is the last question.

I know you commented last conference call the only trade down you saw was in the prestige mineral-based cosmetics.

Is there any change to that in the first quarter?

That continues to be a trade -- and it's not so much a trade down.

I would in fact remind you, it is more that in the mass category there has been an explosion of new product activity that hit the market in the back half of last year more than in the first part of the year.

And so it is the availability, and although it does result in a trade, it is more that there is availability in the segment that was not there before.

That is the most significant trade down.

And as you also heard me say a little bit in that PCA category as well, there is less being purchased, as I say, not being replaced just because there is something -- some new exciting technology as frequently as in the past.

And a little bit of trade down there as well to a slightly lower ticket styling tool.

Thank you.

(Operator Instructions).

Our next question comes from the line of Anthony Lebiedzinski with Sidoti & Company.

You had mentioned that so far quarter-to-date, same-store sales were down consistent with where they were in the first quarter.

Can you give us an idea how does the second quarter a year ago to date, just so we have a frame of reference as to compare the comp?

Anthony, we actually -- as you probably know, and I'll remind you, we are not a monthly reporter.

We actually don't break down the comps to that level of detail.

Okay.

And also, last year I was wondering if -- do you guys feel like your comp a year ago benefited from the tax rebate checks, if you have any ideas as to how much that was?

We do not believe we saw any impact of significance from that last year at all.

Okay.

And as far as the better free cash flow outlook that you have cited here, is this mostly because you are managing inventories better?

What's the primary reason that you're raising your free cash flow outlook?

Two areas.

One is inventory management, and as I alluded to some of the other elements of everyday working capital.

Okay.

Thank you.

Thanks.

Thank you.

Ladies and gentlemen, at this time there are no more questions in the queue.

I would now like to turn the floor over to management for any closing comments.

Thank you again, everybody, for joining us today.

We certainly look forward to speaking to you again on our second quarter call in September.

This does conclude today's teleconference.

Ladies and gentlemen, you may disconnect your lines at this time.

Thank you for your participation.

Have a wonderful evening.