Ulta Beauty Inc (ULTA) 2009 Q4 法說會逐字稿

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

fourth-quarter and fiscal 2009 earnings results conference call.

(Operator Instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Allison Malkin of ICR.

Thank you, Ms.

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 metric free cash flow, a non-GAAP financial measure.

Free cash flow is defined as net cash provided by operating activities, minus purchases of property and equipment.

A reconciliation of free cash flow to its U.S.

GAAP equivalent has been provided in Exhibit 5 of our earnings release, which is available on our website and has also been filed with the SEC on Form 8-K.

And now, I would 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 fourth-quarter and fiscal-year results.

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

Following my opening remarks, Gregg will review our fourth-quarter and full-year financial results in more detail and introduce our outlook for the first quarter of fiscal 2010.

Then I will provide some closing comments and turn the call over to the Operator so that we can answer the questions that you have for us today.

We are very pleased with our fourth-quarter performance.

Our favorable momentum continued to accelerate from the first three quarters of the year and resulted in better-than-expected sales, earnings, and free cash flow, representing a successful finish to a strong year at Ulta.

More specifically, for the fourth quarter net sales increased 16.1% to $396.4 million.

Comp-store sales increased 6.2%, exceeding the increased guidance we provided in January and following a comp decline of 5.5% last year.

This resulted in a positive two-year comp of 0.7% for the quarter.

Gross profit margin increased 170 basis points to 31.4%, which included a 60 basis-point increase in merchandise margin.

Marketing expense was leveraged by 90 basis points, including our first investment into TV advertising.

And net income increased 64.6% to $20.2 million, or $0.34 per diluted share, from $12.3 million, or $0.21 per diluted share, last year.

Let me share with you some insight from the drivers of our fourth-quarter topline performance.

Our comp-store sales increase was driven by a 7.6% increase in customer traffic.

As many of you have heard me say before, in this difficult economy we may not be able to get consumers to spend more, but with the right marketing and merchandising we have been able to increase the number of customers visiting our stores, which we did again very effectively during the quarter.

The 6.2% comp increase for the quarter reflects an excellent performance and was solidly ahead of the increased guidance we provided in the first week of January.

The comp performance was entirely driven by the growth in our retail business and was achieved simultaneously with a merchandise-margin improvement of 60 basis points in the quarter.

We did see some improvement in the salon trends during the quarter and are hopeful they will continue.

We are particularly pleased by the continuation of our holiday trend into January as it demonstrates the strong consumer response to our offerings and marketing post the gift-giving season.

January's performance was significantly ahead of our pre-holiday trend.

With experience operating in a tough economy during the first three quarters of 2009, we had better insight into which levers to pull in our business to generate a strong response from consumers.

Sales in the quarter were led by robust performances across a number of categories, including prestige color and skin, private-label, and mass color, skin, and hair.

We also continued to experience an improving trend in some of the more discretionary areas of our business such as hair styling tools and fragrance, both of which significantly outperformed the industry.

In addition to the strength of our existing business, we continue to be pleased with the new brands we introduced in 2009, including Benefit cosmetics, Philosophy bath and fragrance, and new fragrances such as Couture Couture by Juicy and Hearts & Daggers by Ed Hardy.

Our marketing program was highly successful in the quarter.

Our impressions were up while our spend was down 90 basis points from the fourth quarter last year.

As part of our cost-savings program, we identified efficiencies in the marketing area and reinvested some of those savings into our first-ever TV campaign.

Our TV advertising covered 150 stores, representing more than 40% of our overall store base.

Given the success of our TV advertising, we plan to increase the use of television marketing in fiscal 2010.

While the e-commerce channel represents a small part of our total Company sales, we continue to post significant sales increases in the fourth quarter.

We expanded our assortment and improved the site shopping experience with increased features and functionality, including customer reviews and ratings and an improved checkout process.

Finally, our store expansion program continued in the fourth quarter.

We opened three new stores and closed two existing locations.

We are pleased that even with a difficult economy, our new class in 2009 performed to our new store model.

Although we planned for 35 new stores in 2009, we were able to open two additional stores in the fourth quarter.

As a result, we opened a total of 37 new stores for the year, and including the closure of two existing locations, we ended the year with a total of 346 stores, increasing square footage by 12% from fiscal 2008.

As we concluded 2009, we were also very pleased with our annual results.

Our fiscal-year performance included a double-digit increase in net sales to $1.2 billion; positive comp-store sales of 1.4% and, on a two-year basis, comp-store sales rose 1.6%; a 30 basis-point increase in gross profit margin; a permanent reduction in expenses of $19 million; net income increased 55.8% to $39.4 million, or $0.66 per diluted share; and we delivered $104.7 million in free cash flow.

We were also very pleased with our game plan that focused on three key strategies that we implemented throughout the year.

As you may recall, our three strategies were, first, drive topline growth while simultaneously improving merchandise margin; second, deliver permanent cost reductions to improve operating margin; and third, generate free cash flow while continuing to invest prudently for our long-term growth.

As we turn the page to 2010, we intend to focus on the same winning formula.

Let me share a bit of color on each of these strategic elements and our game plan to evolve these strategies in 2010.

First, drive topline growth while continuing to improve merchandising margin.

We expect to deliver solid comp-sales growth throughout the course of 2010.

We expect our 2010 comp-store increases to be more balanced between traffic and ticket growth.

To drive traffic, we plan to continue to develop exciting and innovative consumer propositions in our mailers and newspaper inserts, expand our use of TV advertising, increase our marketing spend online to drive traffic to both our store and e-commerce channels, and continue to creatively build upon our five Es.

For example, in first quarter, our national advertising uniquely builds on education and entertainment with a crossover from national print to video online.

To drive average ticket, we plan to continue to expand our existing and new brands, evolve and expand our loyalty program, and continue to invest in upgrading our store base through remodels and relocations.

In addition to our marketing and merchandising strategies, we also plan to grow market share with our new store and remodel program.

We are very pleased with the quality and economics of the real estate deals in 2010.

Our fiscal 2010 new store program includes 46 new stores, up from 37 in 2009, and represents a 13% square footage growth.

In addition, we expect to further expand our market share as we relocate six existing stores and increase the number of remodels to 13 this year from six last year.

As you know, when we remodel or relocate a store, we build them just like a new store.

This investment in remodels and relocations gives us the opportunity to provide the full Ulta experience across our five Es to these 19 trade areas in addition to our 13% square footage expansion.

We also plan to build on the recent momentum in our salon business by continuing our Rodney Cutler spring and fall collection, as well as continuing to focus on stylist retention and productivity.

And finally, we expect to grow the top line of our business through continued growth in e-commerce through the addition of new brands, improved functionality, investment in tools for search engine optimization, and increased spending in online marketing.

Turning to our second strategy, to continue to deliver cost reductions to drive operating margin improvement.

During 2009, we permanently reduced our supply chain, marketing, and corporate overhead cost structure by a combined $19 million.

These efficiencies provide a permanent cost benefit for the Company.

We believe there are incremental efficiencies to be gained primarily in the supply chain and store operating costs in 2010, while continuing to provide the same great guest experience.

And our third strategy is to generate free cash flow while continuing to invest prudently for our long-term growth.

In 2009, we delivered $104.7 million of free cash flow while opening 37 new stores and continuing to invest in IT.

In 2010, we continue to expect to generate free cash flow even as we increase our growth in new stores and invest in support of our long-term expansion.

At the same time, we believe further opportunities exist to drive efficiencies in our supply chain.

We will also evaluate additional opportunities to reduce our initial new store investments.

As our guidance suggests, we are expecting our positive performance to continue in first quarter.

We have exciting consumer propositions planned for professional hair care, professional styling tools, and prestige cosmetics.

We will also anniversary our annual Easter basket value event, and for Mother's Day, we have planned compelling GWP offers against the fragrance category and will incorporate our TV strategy into our Mother's Day marketing.

We expect to achieve this topline growth while delivering a flat advertising rate and a modest improvement to merchandise margin.

In total, we are pleased to report excellent results in fiscal 2009 and to finish the year with strong momentum.

As our fourth-quarter guidance suggests, we expect our strengths to continue, and as we turn the page into 2010 we expect solid comp increases throughout the year.

The initiatives we implemented in 2009, including the permanent reduction in our cost structure, improved efficiencies in our supply chain, marketing and brand strategies that drove increased market share, and our continued store expansion, provide us with a solid foundation to continue our positive momentum into 2010.

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

Thanks, Lyn.

As Lyn mentioned, we are very pleased with our fourth-quarter performance.

Our better-than-expected fourth-quarter results were driven by strong merchandising and marketing strategies and our continued focus on our cost management initiatives, which resulted in strong sales and earnings ahead of the increased guidance we provided in early January.

Now, beginning with a review of the income statement, net sales increased 16.1% to $396.4 million, from $341.4 million in the fourth quarter last year.

Sales growth was driven by the addition of 35 net new stores since the fourth quarter last year and a 6.2% increase in comp-store sales.

This follows a decrease of 5.5% last year, resulting in a two-year comp-store sales gain of 0.7%.

Gross profit dollars in the fourth quarter increased 22.9% to $124.7 million, from $101.4 million last year.

Gross profit margin was 31.4%, an increase of 170 basis points over last year.

The gross margin expansion resulted from a 60 basis-point improvement in merchandise margins, primarily driven by our ability to better anticipate and plan the fourth-quarter marketing and merchandising strategy for this challenging economic environment.

Supply-chain operational efficiencies provided a 30 basis-point improvement for the quarter.

We also achieved a 60 basis points of leverage in fixed-store costs due to the stronger sales and comparatively lower square footage growth versus last year.

SG&A expenses were $90 million, or 22.7% of net sales, compared to $78.2 million, or 22.9% of net sales, last year.

SG&A as a percentage of sales improved by 20 basis points as compared to the prior-year period, driven by a 90 basis-point improvement in marketing, a 50 basis-point improvement in G&A before the impact of incentive compensation.

This was partially offset by a 120 basis-point increase in incentive compensation expense compared to the fourth quarter last year.

Pre-opening expenses totaled $600,000 in the quarter, which compares to $1.8 million in the fourth quarter of fiscal 2008.

The decrease in pre-opening expense was due to the planned production in our 2009 new store program.

Better-than-expected sales growth, margin expansion, and our expense-management initiatives, along with our planned, lower opening program, led to a 60% increase in operating income to $34.3 million, or 8.7% of net sales, from $21.4 million, or 6.3% of net sales, last year.

Interest expense decreased to $400,000 from $900,000 last year, primarily driven by lower borrowings.

Net income for the quarter increased 64.6% to $20.2 million, or $0.34 per diluted share, from $12.3 million, or $0.21 per diluted share, last year.

For the full year, net sales rose 12.7% to $1.22 billion, with comparable store sales increasing 1.4%.

This follows a 0.2% increase in comparable-store sales last year.

The two-year comparable-store sales increase was 1.6%.

Operating income increased 47.2% to $68.2 million, from $46.3 million last year.

Income per diluted share increased 53.5% to $0.66, from $0.43 in fiscal 2008.

Now turning to the balance sheet and cash flow results, merchandise inventories at the end of the quarter decreased 3.1% to $206.9 million, from $213.6 million at the end of the fourth quarter last year.

This decrease includes the impact of the addition of 35 net new stores versus a year ago.

The resulting overall decrease was primarily driven by the benefit of our inventory management initiatives.

As a result of these initiatives, we achieved a reduction in average inventory per store of 12.9% from the prior year.

These initiatives are primarily leveraging our supply-chain inventory and have no impact on the store in-stock position or consumer experience.

We remain comfortable with both the level and composition of our inventories as we begin fiscal 2010.

As of January 30, 2010, we had no outstanding borrowings on our credit facility.

Our credit facility provides the borrowing capacity of up to $200 million.

We are very pleased to report that we achieved free cash flow of $104.7 million for the year, which was driven both by the strategies that we identified at the beginning of the year, as well as those we developed by our team during the course of the year, and were the result of a disciplined cross-functional effort by the entire organization.

We believe the success of our cash flow strategies and the reduction realized in our new store initial investment leave us well positioned to continue to deliver free cash flow in the future.

Capital expenditures were $18.7 million for the quarter and $68.1 million for the year.

Depreciation and amortization was $15.4 million for the quarter and $62.2 million for the year.

We are pleased with the results of our three focus strategies and the sequential growth in comp-store sales and earnings throughout fiscal 2009.

As Lyn said, our plan for 2010 is to build on these successful strategies from 2009.

Regarding our outlook, for the first quarter of fiscal 2010, we currently estimate net sales in the range of $301 million to $307 million, compared to actual first-quarter 2009 net sales of $268.8 million.

This assumes a comp-store sales increase of 4% to 6% and the opening of two new stores, compared to a decrease of 2.3% in the first quarter of fiscal 2009 and the opening of nine new stores.

Income per diluted share for the first quarter of fiscal 2010 is estimated to be in the range of $0.14 to $0.16.

This compares to income per diluted share for the first quarter of fiscal 2009 of $0.08 and represents an increase of 87.5% at the midpoint of our range.

The midpoint of our EPS range reflects gross margin improvement of approximately 150 basis points and a flat SG&A rate.

The gross margin improvement is driven primarily by fixed-store leverage, merchandise-margin expansion, and continued supply-chain efficiencies.

Our SG&A rate includes incremental TV advertising as we continue to build on the successful strategy that we initiated during holiday 2009.

Now regarding qualitative elements for the fiscal 2010 year.

We plan to open approximately 46 new stores in 2010, representing a 13% increase in square-footage growth.

The approximate flow of store openings by quarter is two in the first quarter, 10 in the second quarter, 30 in the third quarter, and four in the fourth quarter.

We expect capital expenditures to be approximately $100 million, representing a 47% increase from fiscal 2009 levels.

This includes approximately 46 new stores, 13 remodels, six store relocations, as well as continuing to make the necessary investments in our technology infrastructure, including supply chain, loyalty, and e-commerce.

We expect depreciation and amortization to be approximately $68 million.

We also continue to identify specific initiatives to further reduce our average store and total DC inventory levels.

We expect a per-store inventory level decline of approximately 5% by the end of fiscal 2010.

We expect to generate approximately $5 million in additional permanent cost savings in 2010, primarily in the areas of supply chain and store-operating costs.

As Lyn stated earlier, we also expect to generate solid comparable-store sales increase growth throughout the year.

We also believe that with our ability to generate earnings growth and drive cost efficiencies and working capital improvements, we can generate free cash flow again in 2010.

In closing, we have demonstrated we can operate successfully in this economic environment.

We will continue to manage the business along our three key focus strategies to drive sales growth, earnings expansion, and deliver free cash flow.

We are confident in our strategies and believe we are well positioned to achieve our long-term growth targets.

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

Thanks, Gregg.

We are very pleased with our performance in 2009 and our ability to navigate a very challenging economy.

I would like to take this opportunity to thank the more than 10,000 Ulta associates.

In a challenging economy, the passion and dedication of our entire team helped to deliver our strong results.

With a very strong end to 2009, we have confidence as we look forward into first quarter and the remainder of 2010.

We plan to continue to focus on profitable market-share opportunities by driving both increased customer traffic and average ticket, by offering an expanded selection of products and brands, and by increasing the pace of our new-store openings.

In addition, we will continue to exercise prudent discipline with regard to the management of expenses and inventory, and driving free cash flow.

We expect fiscal 2010 to represent another year of strong growth for our Company and increased value for our shareholders.

As we look beyond 2010, we remain optimistic.

Our fundamental strategies, which have served us very well in this difficult economy, will position us for even stronger growth in a more stable economy in the years ahead.

And of course, we remain confident in our 1,000-store opportunity.

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

(Operator Instructions).

Neely Tamminga, Piper Jaffray & Co..

It's actually Maria Vizuete for Neely.

Thanks for taking my call and congratulations on a great quarter.

We're just wondering if you can talk about the potential in e-commerce.

What improvements are you guys looking to make there and how meaningful do you see this maybe in the near term and the long term?

And then, I have just one follow-up.

Okay.

E-commerce, as we have said, is actually today a relatively small part of our business, so it provides us with tremendous runway with very significant double-digit growth rates in the short term as well as in the long term, and of course the biggest opportunity is a little more in the long term as we ramp up in the short term.

In terms of what we're doing in 2010, we are investing monies and expanding the content of the site so that we can better deliver on the ease that we talk about in the brick-and-mortar business.

So we are investing to allow us to better represent education and entertainment, particularly, on the site, and we're also investing in the IT structure so that we can improve the functionality of the site around search engine optimization, as well as just the improved functionality of the checkout process.

Thank you.

And then, can I just ask on remodeled stores, is the plan still to add more brand boutiques for each of those stores?

And are we correct in thinking about three to four brand boutiques per store?

As I think you know, when we remodel a store we make it look just like our new stores, and so, yes, we're putting boutiques into those stores.

They open with a Bare boutique and a Benefit boutique.

Some of the stores will open with test boutiques for other brands.

But by and large, the core brands that we are opening with are Bare and Benefit.

Brian Tunick, JPMorgan.

Good afternoon and congrats.

I guess two for Gregg and maybe one for Lyn.

I guess, Gregg, first one, it seems like more companies now are getting comfortable that we are on stable ground again and they're willing to talk about the next year or so looking out.

So, just maybe your thinking on your operating margin targets.

I think a couple of years ago we thought this could be a high single-digit operating margin business.

So just curious your thoughts there, especially with your new permanent expense cuts.

And then, Gregg, the second one for you is on the real estate side.

I think you said you brought down your store payback period down to 2.5 years.

Does this change in 2010 as you open either new markets versus existing markets?

And then for Lyn, you mentioned a loyalty program as really being a key opportunity to drive comps, I think, going forward.

Can you talk about how many of the stores today have the new loyalty program?

I think it's point based, and what is the timing of that rollout?

And I can just repeat if that's too many questions.

Thanks, guys.

No worries, Brian.

As it relates to -- as the impact of our permanent cost reductions and our perspective in terms of long-term operating margin growth, what we have historically stated is 8% to 9%, four to five years out.

We're building off the 5.4% that we ended this year.

As we've accelerated with the cost reduction this year and given the stabilization in the current environment, I believe that we can probably get there a little faster, to that 8% to 9% from the four to five years that we previously stated.

As it relates to the real estate program, you are correct.

We took the new store investment from $1.6 million down to $1.1 million.

Stores are still roughly performing at the same topline and bottom line, although they've benefited from the permanent -- some of the permanent cost reductions so their four-wall profits are a little higher.

That's taken our payback down to 2.5 years from 3.5 years 18 months ago.

We're now investing $1.1 million to build a new store.

We have some opportunities during 2010 to take that down further.

You heard me talk about reducing average store inventories, and we have some further opportunities on the capital side without affecting the consumer experience to take that investment down below $1.1 million.

And with that and the continued performance in the topline of those stores, I would expect to get -- start moving closer to the two-year cash payback from the 2.5 years that last year's class was at.

In terms of impact from going into different markets, Brian, there really isn't a significant impact there.

It's more geographic and our program is pretty balanced geographically.

Terrific, and how about Lyn?

On the loyalty, about 15% of the current store base is in the points-based program.

This year, we have the capacity to expand it into roughly another 50 or so stores, the IT capacity to do that.

We haven't made a final decision on how many that we will roll it into this year.

It will take place towards the end of second quarter.

So stay tuned on that.

And as it relates to next year, we are investing this year, as Gregg touched on in his script, in the IT requirements to allow us to roll this across the whole chain by mid-next year.

Again, we haven't made the final decision on whether we will roll it completely at that point or whether we will roll it across a two-year time period, but certainly no longer than a two-year time period.

But we certainly see great consumer response to the tests that we have been running on the program, both in terms of their response to the flexibility of this program than our existing program because they can spend their points when they see fit and how they see fit, as opposed to our current program where it's a bit more regimented, and we like what we see on attrition rates and frequency coming from the program.

So it's a very exciting future for us to continue to enhance our engagement with our customer.

Daniel Hofkin, William Blair & Company.

My congratulations as well.

On the -- looking at sort of the flow of stores this year and recognizing it's obviously quite early at this point, what are you seeing in terms of just general real estate availability, either from pick-ups of existing vacant sites or potential new retail center development looking out a year from now, let's say?

And then, I guess a second question would be regarding brands.

You commented specifically Benefit continuing to perform well.

I'm wondering if you could shed some light on that, as well as any other brands such as Clinique that you might have in test.

Thank you very much.

Let me take the second one first.

On the brands, we do have some other brands that we are certainly in conversation with, but as you know, Dan, our practice is always not to talk about where those brands are at, either until we launch, and certainly if we're testing, we don't discuss it.

But I will say to you we have some -- we're in the midst of some exciting conversations, and stay tuned on that.

In terms of your questions on the new store program, we will continue in 2011 to certainly focus on existing centers.

We are not seeing new centers come out of the ground at this point, so 2011 will look like much like 2010 relative to that, and we also continue to believe that we will certainly see opportunity in single-store markets and we'll focus there.

Geographically, the Northeast and the West is geographically where we see some expansion opportunities.

So, it is very early in the 2011 program, as you identify.

The good news is that -- versus 2010 is you know as we all were handed the economic environment that we were at the beginning of last year as we were finalizing our -- as we were doing our 2010 program, we lost a few months at the beginning of that year to develop the program, so the 2010 program is pushed a little bit later than we have seen in 2009.

But 2011, we don't lose that time period, so the momentum we have coming out of the finalization of the 2010 program moves straight into 2011.

Okay.

And if I could just follow up, I guess, to that point, the new store productivity looked, at least on paper, particularly strong here in the fourth quarter and kind of implied in the first-quarter guidance.

I'm wondering is that -- are there some timing factors, just new store ramp-up period, or something else that might affect that flow?

Thank you.

Dan, it really follows the strong performance that we were getting in our comp stores during that time period, and as that performance was accelerating throughout the course of the third quarter and certainly into the fourth quarter.

As we mentioned in our January performance, as we've been very pleased with that as well.

There's no real impact from the timing of openings there.

They were open towards the end of the third quarter, and therefore they had full effect in the fourth quarter in terms of their productivity.

So it just continues to follow the strong comp performance that we are seeing in doors already open for a year.

Joe Altobello, Oppenheimer & Co..

Just want to go back to the new door openings you're looking at for 2010.

It looks like it's a slight acceleration from the 12% square footage growth you did in 2009.

What's the sort of mindset there?

If the commercial real estate market was better, would you want to be growing faster?

Or is this low teens rate a good steady-state number for you right now, given the fact that your store economics and comps are much improved from where we were, let's say, a year ago?

You know, Joe, the reality, and Lyn just mentioned this on the last question, is the reality we had a pause in our program as we were building 2010.

You can see an acceleration of the program in the back half of the year comparative to 2009.

If there was -- if we had more time to build the 2009 or 2010 program without that pause, we would've taken more real estate in 2010.

You are correct with the store economics.

I think we'll look back a couple of years from now and continue to believe that these are some of the most profitable classes of stores based on some of the work we've done on the store model.

From a financial standpoint, we've got a tremendous amount of liquidity and all the free cash flow and balance sheet strength that we need to grow real estate.

So, we will continue to attempt to build, based on the availability of real estate, on the 13% that we're opening this year as we head into 2011.

So there's no limitations, other than the quality of real estate that's available, and like Lyn just mentioned, we're getting an earlier head start because we didn't have that -- on the 2011 program because we didn't have that pause like we did in 2010.

And Joe, of course it's the reason why we also -- because we did have that pause, we did expand the remodel program and the relocation program to help continue to drive the sales productivity of the store base.

Okay, so putting the store availability situation aside, what is a good steady-state square footage growth number for you guys today?

You know, as we -- if we have continued to state in terms of our targeted long-term growth rates, we want to be in the 15% to 20% square footage growth on an annual basis.

That's our target.

Then just moving to the SG&A number, obviously saw some deleverage -- or actually some modest leverage in 2009.

As you fast-forward to 2010, it sounds like you'll be picking up on the marketing side, so that's going to be some deleveraging.

But I imagine you get some fixed-cost leverage off of that.

So how do those two sort of factors offset each other, if they do?

SG&A, obviously depending on what comp rate you put into your model for the full year, I would expect that we would be able to start to leverage SG&A probably in that 3% to 4% range, particularly given the fact that we've seen a lot of success off the new strategies, particularly as it relates to TV in marketing.

We will get some leverage in the nonmarketing areas and we will make some small investments in the marketing area, but still leave marketing spend flat on the full year.

It just won't give us as much leverage as it did in 2009 because we had such a significant impact in those cost savings.

Marketing rate, Joe.

Marketing dollars obviously are going up.

Then just one last one.

What is the typical payback period for a remodeled door?

Typically in a remodeled door, because the store's already ramped up, we would see it to be a little bit longer than the 2.5 years that I mentioned for a new store.

It's a little closer to three years.

Randy Konik, Jefferies & Company.

Three quick ones.

Just first, on the ticket, is it primarily more from lower promotionality out there versus -- or is it more mix related?

And then, the second one is on the gross margins.

If you think about the different buckets of occupancy leverage versus merchandise margins, can you just kind of give us a weighting of what you think would drive the margin there?

And then, lastly, in the press release you talked about driving positive free cash flow.

So you guys have been doing a good job on driving positive free cash flow, so do you have any kind of minimum goals or -- that you think the business can kind of generate on a positive free cash flow basis in the years ahead?

Thanks.

Let me take your first one on the promotional piece.

In fourth quarter, it is far more -- it's not actually about the promotion that's driving that.

It's actually there's two big gift-giving categories, fragrance and styling tools, which continue to be just down a little bit, aggressively ahead of marketplace.

But -- we were just slightly negative on those and that is biting a little bit of the average ticket in fourth quarter.

As you look to first quarter and the other quarters for 2010, you heard me say we are expecting a little bit more of a balance between average ticket and customer account growth this year.

And the average ticket growth, even though we expect fragrance and styling tools to stay on about the trend they are on, right now we are not projecting them going up, we continue to see very nice acceleration of our prestige color and skin care business.

And of course, that is high ticket and as we continue to add brands, that is driving some of the growth, as well as we continue to focus on growing the existing brands we have in those categories as well.

So that will give us some average ticket growth going forward this year, balanced in concert with traffic growth.

And then, Gregg, the --

And then, Randy, on the gross margin drivers for 2010, they're really threefold.

One, merchandise margin, some of which is driven by favorable mix shift.

Two, we will continue, as I mentioned earlier, to drive efficiencies in our supply chain, albeit not to the same level we did in 2009, but there's still some meaningful opportunities as we look into 2010.

So that will be a positive driver of gross margin.

And then, the last piece is the combination of two things.

One, it's in fixed-store expenses.

We have some efficiency opportunities in there, primarily in the areas of energy management, that we are implementing early this year.

And then, also, to leverage what we'll get from comp-store sales growth and fixed-store occupancy, as well as we'll get a slight benefit from the lower costs that we've negotiated for our new 2010 program.

Okay?

So, those are the three gross margin pieces.

As it relates to free cash flow, no minimum goals.

Obviously, we had some significant opportunities that we identified at the beginning of 2009 and then some additional ones that we executed to deliver that $105 million free cash flow.

There are no minimum thresholds that we have set for 2010.

We expect to deliver some meaningful cash flow in 2010, albeit it won't be to the same level as 2009 because several of those were one-time items and remember part of it was by pulling back the store program from 2008 to 2009.

So, no minimum levels for 2010.

But we do believe that we will continue to drive a meaningful level of cash flow.

And then, if -- just if I may, back on the gross margin, would you be able to just rank order the buckets which you think would be most impactful?

You know, merchandise margin versus supply chain versus the store part?

You know, roughly speaking, gross margin and fixed store are approximately equal, and then supply chain would be third.

Evren Kopelman, Wells Fargo Securities.

Congratulations.

So a couple of questions, first on the television for Mother's Day.

Do you plan to do that in more markets, targeting a larger number of stores, than the holiday when you did the 150 stores?

The answer is that we were hopeful that we would be able to do that, but only spend about the same amount of money in fourth quarter, but we're finding the expense is not that much lower around the Mother's Day period than the holiday season.

So, it will only be very modest.

We don't want to go too fast with this strategy, so it will be a modest expansion.

Is it -- are you going back to pretty much the same markets or are you almost testing other markets to see how TV impacts those stores?

A little of both.

Okay.

Then the second question is, one, if you could remind us kind of of your ticket opportunity.

I remember last year in the first half the ticket was down because you had the promotional and the higher ticket categories.

But are you -- so, first, could you remind us of the opportunity, but secondly, are you needing to promote less and less to drive the traffic?

If you can comment on that dynamic, that would be great.

In terms of the ticket growth, you are right.

We -- in first half of last year, we did spend money to drive traffic quite aggressively because we thought there was a big opportunity to take market share.

That concept that we couldn't get people to spend more, necessarily, but we could attract customers from our competitors, so we are jumping over a fairly big traffic base from last year.

And hence, the opportunity just innately from the numbers to drive average ticket a little bit more in first half of this year, but also, going back to the answer that I gave Randy or Dan, that the -- just the continued momentum we have in the prestige color and skin care categories, and the average ticket there will give us average ticket growth in the -- throughout the year.

Having said that, we are not walking away from traffic.

The traffic is certainly -- TV as an indication of the traffic, but we will continue to provide the appropriate value proposition in the other categories, whether it be private label or mass, and balance that in our mix to continue to make sure that we are offering value to our customers because we are still seeing that as an important consideration.

So, value stays.

We're not doing any less of that.

So that stays where it was.

Growth from the prestige categories, as I spoke to, and I think they are the key levers.

If I answered your question.

If I didn't, come back and ask again.

No, no, that's great.

And then, lastly, on the fixed-store leverage, I had a question, Gregg.

It's good to see that you're getting leverage on fixed-store expenses, and I believe in your Q1 guidance you said at the midpoint you expect leverage.

How should we think about that as you go throughout the year and you continue to open a larger number of new stores?

Do you expect to deleverage by kind of the third quarter, fourth quarter?

I don't expect any deleverage in any individual quarter, but as we go out throughout the course of the year, it to get closer to flat by the fourth quarter, but still providing leverage for the full year.

Sam Panella, Raymond James & Associates.

Let me add my congratulations.

Lyn, can you talk about, as a percentage of either the sales mix or merchandise mix, where do you stand between prestige, mass, and maybe also update us on your private-label and sort of where that's at in 2009 versus the previous year?

We never talk about that, Sam.

I apologize.

But we believe that's a really critical piece of our competitive advantage, and so we have never discussed those broad breakdowns.

We do sometimes talk about the trends if there is a significant shift, and you did hear me speak just a minute ago about certainly very strong growth out of the prestige segment.

So we will continue to see that grow at a faster rate than the rest of the business, so I feel comfortable saying that to you.

On the private-label business, we have made some comments on that.

The private-label business is about 5% or so of our total sales, although it's a bigger percentage of our unit penetration because we do use that as a lever to drive traffic in our business, and we will continue to use that as a lever in 2010.

We continue to also invest into the private-label business to expand our private-label offerings and we are working on some expanded sub-brands in private label that we will be able to launch probably late this year or early next year, and are also investing money to just upgrade our existing private-label brands right now so to continue to drive that growth this year.

Okay, and just two more questions, actually.

One for Gregg.

In terms of pre-opening costs, how should we be thinking about that in the first quarter and throughout the year?

And then, Lyn, in terms of the salon business, you mentioned you're seeing an improving trend.

Is that increase in traffic or are you seeing a higher ticket perhaps with some of the new services that you've added to the business?

Pre-opening, Sam, let me just make it easier to give it to you by quarter based on the way we describe the store flow.

For the first quarter, approximately $0.5 million.

For the second quarter, just under $3 million.

For the third quarter, just under $5 million.

Then for the fourth quarter, about $1 million.

On the salon business, we are obviously cycling our negative comps from last year.

This is when we began to see the business fall off.

So we have that as just part of the arithmetic of the numbers at the moment.

But we are seeing a pick-up in average ticket, not so much traffic but average ticket as we are seeing -- I don't think this will surprise you when I say this, we are beginning to see a return to color services at a higher rate than what we have been experiencing for the last year.

Color is the service in the salon business that is a little bit more discretionary than some other services.

You can always put a few extra weeks between your color services when you're tightening your belt, and we are beginning to see that coming back to higher frequency than where it had been.

So, driving ticket.

Erika Maschmeyer, Robert W.

Baird & Company, Inc..

Thanks and congratulations.

Could you talk at all -- did you see any differences by geography?

No.

You know, overall all boats rise with the tide, and the comps were significantly stronger across the board.

But within that, we still have some areas that are lagging out, so California and Arizona continue to lag the other areas, so there was not a significant shift in our, call it, geographic mix, yet everybody did better.

Excellent.

And then, the ticket that you saw in more distressed discretionary categories, the tools and fragrance, did that continue into January or was that more of a holiday phenomena?

No, we have -- that trend actually started pre the holiday season in both of those categories.

We started to see them not get back to positive comps in the third quarter, but certainly picking up closer to prior-year comps.

That basically stayed through the holiday season and it has stayed at about the same level during the post-holiday season.

Now, of course, as you've heard us say before, we pull those levers on the business ourselves, so we did focus on our styling tools category.

It led the front cover of one of our newspaper inserts.

So, we ensured that we continued to keep focus and momentum on that, and of course for Valentine's Day we did put a gift with purchase against the fragrance category.

So, one of the reasons I think we continue to outpace the industry is because we do pull the levers at an appropriate cadence against the categories.

Okay, and then on the real estate side, how long could you expand without seeing a pick-up in new developments?

That's a very good question.

Certainly during 2011, we have a very high level of confidence.

I think we could also through 2012 certainly see some continued expansion there because we have opportunity in single-store markets as well as the metro markets.

And we also have some opportunities that we are beginning to explore if there isn't new development out of the ground in mall locations, but never inside a mall.

To the extent to which we have a few of these locations, we do them if it's the best real estate in the trade area and we don't think that there are other power centers that will emerge, number one.

And secondly, when we do do them, they are on the perimeter of the mall, so you can pull right up just like you would in a power center and walk in our door without having to go inside the mall.

So, that -- we also have urban opportunities that we could begin to explore.

It's not what we're going after aggressively in 2011, but if we did continue to see nothing coming up out of the ground, that would give us some opportunities for 2012.

So I think we have some -- I'll call it end runs around -- if the real estate cycle stayed very depressed, we do have some end runs and opportunities that we could explore during 2012.

But during 2011, we are quite confident in the numbers that we have been speaking to today without the new development coming out of the ground.

That makes sense.

And then, just a quick follow-up on your boutique strategy.

Could you remind us of the number of stores you have today with one, two, three boutiques?

It's actually easier for me to answer it this way.

We have 215 stores with Bare boutiques.

We have about 140 or so stores with Benefit boutiques.

Sometimes those stores overlap, sometimes they don't.

And then this year, we will expand Bare into 65 more stores and we will expand Benefit into another 60 stores.

So, the mix of how many stores actually have two boutiques, I don't actually have that number off the top of my head, but it is probably order of magnitude the Benefit and Bare overlap fairly heavily.

So it's probably around 120, 130 probably have two boutiques in them, and only a handful of stores at the moment have three boutiques in them.

Probably less than 30 or so.

And that, as you heard me say earlier, is where we are experimenting with other brands or testing other brands and putting them into boutiques.

So it's a little bit more haphazard through the chain.

Thanks so much.

Good luck.

Jill Caruthers, Johnson Rice & Company.

Maybe just a follow-on on the last question.

Could you talk about the economics of the store that has a boutique versus one that does not?

The broad answer is that as -- any time we're able to add brands to our stores, we add them because they increase the productivity of the store, so it's fairly logical approach.

So when we add a boutique, we're adding a brand to the store and we do get improved square-foot productivity when we do that.

It is why our remodel program is a really good program for us, particularly as we convert all the stores to our current design and aesthetics it allows us to actually put some of these brands into the newer stores because it satisfies the environment that they are looking for to protect their brand equity.

Any way you can quantify the magnitude?

I suspect not.

I'm looking at Gregg to see if he -- unfortunately not.

We don't speak specifically about the delta on that strategy for a lot of competitive reasons.

Understood.

And I know you're rolling out -- you laid out how many boutiques you're rolling out in 2010, but I guess is there a point to where if a [sobrayan] wants to come in, what is the percentage of stores that can hold a boutique right now?

The -- any 10,000 square-foot store can hold -- actually, eventually they could hold up to seven boutiques.

We're planning for about five at this point in time, so any store that is 10,000 square foot big can do that.

Now some of our older stores, our level four store, which is a 10,000 square-foot store, so these are stores that are probably now about seven to 10 years old, they are big enough to do it, but we are catching them in the remodel programs as we go through.

We can occasionally drop in, and you've heard me talk about freestanding boutiques and then what we call the linear boutique, which is a great-looking customized boutique that is a little bigger than a regular gondola.

It is easy for us to drop some of those back into a 10,000 square-foot store that has not been remodeled.

But our preference is to do the freestanding boutiques and have five to seven of those in the store, and that requires us to do a more thorough remodel along the lines of the 13 that we're remodeling this year.

And where we do not have five brands ready to go into those stores, we are building them with the ability to expand easily and readily the number of freestanding boutiques as we get the brands coming on board and agreeing to more aggressive rollouts than just test rollouts.

Anthony Lebiedzinski, Sidoti & Company.

Thanks for taking the question here.

Just wondering, in the markets where you guys did TV advertising, what kind of incremental sales lift did you get in those stores?

We haven't quoted what we have done, but we actually got sales lift in two forms.

One is actually the immediate short term.

We did drive traffic into the stores during the actual TV period itself and the post-TV period.

We did get new customers during that time period, and so we are also getting a return -- as we look at the IRR on the ad strategy, we're also getting a return off new customers as we build in not a long lifetime but a couple of years of lifetime of sales from those customers.

And also, you closed a couple of stores, I assume at least maturity.

Just wondering if that's correct.

And also, do you have any plans to close stores in 2010?

We did close two stores in -- just in the normal course of business.

If we have an opportunity at lease end, as you stated, to upgrade our position or improve our position to better serve and capture market share in that trade area, we will do that.

In 2010, we will close approximately four stores for that very same reason and then relocate them elsewhere in the trade area.

It's not because of an economic reason.

It's not because of a profitability reason.

It is purely an opportunity to improve our sort of strategic positioning and customer availability, convenience, in that marketplace.

And then, you mentioned that you expect comp sales to be positive for the year.

Just wondering, when you look at the back half of the year, you will face some more difficult comparisons, so how should we think about comp sales' progression throughout the year?

Anthony, as you probably heard on our prepared remarks, we haven't given guidance for any quarters beyond the first quarter or for the full year.

But you are correct, that the comparisons are a little bit more challenging in the back half of the year, and that's where I'd probably encourage you to look a little bit more towards the two-year comps.

In addition to that, as Lyn stated earlier, we saw nice acceleration coming out of Q4, and in Q4, even though we're jumping over 6%, comp, it's still a relatively small two-year comp in the 2009 baseline.

And we, of course, will have the momentum of some of the new brands that we've been speaking to that are not anniversaried during that time period.

So, there is -- what Gregg spoke to, it is a low two-year comp, and these brands, as they anniversary through, gives us some extra tailwind.

So plenty of opportunities in the strategies to have a benefit to continue to grow comp-store sales throughout the course of the year and to be meaningful in the back half of the year.

There are no further questions at this time.

I'd like to turn the floor back over to management for closing comments.

Thanks, again, everybody for joining us today.

We look forward to speaking with you when we report first-quarter results in early June.

This concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.