Ulta Beauty Inc (ULTA) 2010 Q3 法說會逐字稿

Greetings, and welcome to the Ulta Salon Cosmetics & Fragrance, Inc., third-quarter 2010 earnings results conference call.

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

A question and answer session will follow the formal presentation.

(Operator Instructions).

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Allison Malkin of 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 are all familiar with.

These 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.

And now I would like to turn the call over to Ulta's President and CEO, Chuck Rubin.

Thanks Allison.

Good afternoon everyone.

Thank you for joining us to discuss our fiscal 2010 third-quarter results.

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

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

We are very pleased to report better than expected sales and earnings for the third quarter.

Our 12.2% positive comp is an improvement in both our one- and two-year comparable store sales trend compared to previous quarters.

We attribute our performance to the strength of our operating model, which includes compelling products, brands and services across price points, conveniently located stores, and an exciting and inviting shopping experience, all supported by our high-impact marketing.

Financially for the third quarter, total net sales increased 19.4% to $339 million.

Comp store sales increased 12.2% following a 1.5% increase in the third quarter last year, and exceeding our guidance.

So on a two-year basis, comp store sales were up 13.7%.

Gross profit margin increased 280 basis points to 35.1% and included a 90 basis point increase in merchandise margin, which is on top of a 40 basis point increase in merchandise margin last year.

Operating income rose 65.4% to $24.3 million or 7.2% of net sales, from 5.2% of net sales last year.

And earnings per diluted share increased 64% to $0.23, inclusive of a $0.02 per share compensation charge.

That compares to $0.14 in the third quarter last year.

And finally, our balance sheet remains strong.

At quarter end we had no debt, cash was up, and average inventory per store was slightly below the prior year.

Our 12.2% increase in comparable store sales was driven by an 11.5% increase in customer traffic, which follows a 1.3% increase in comp traffic last year.

Average ticket rose 0.7% on top of last year's 0.2% increase.

And we once again gained market share within the beauty industry.

The strong third-quarter performance resulted from the Ulta team's solid execution of our merchandising, marketing, e-commerce and store operating strategies.

Driving our performance were strong comparable store sales gains in prestige and mass skin care and cosmetics.

Fragrance, hair care, nail, and bath also experienced strong comp store sales growth.

We continued to add new brands and expand others.

During the third quarter we completed the rollout of philosophy skincare and introduced two new prestige brands, namely, Tarte, a natural prestige cosmetics line; and Bliss, a prestige skincare line.

These sought-after brands were not only highly desired by our existing customers, they also assisted us to expand our customer base and drive average ticket.

In fragrance we launched a number of new products including Gucci Guilty; Calvin Klein Beauty; Big Pony from Ralph Lauren; DKNY Pure; and Peace, Love and Juicy Couture.

Salon also continued its positive comp sales performance in the quarter, although at a lower level than the balance of the store.

Highlights in the salon included our color, keratin and skin treatment services.

We also saw good performance from our exclusive Rodney Cutler hairstyle collection.

Our e-commerce business continued to report significant double-digit increases over last year.

During the quarter we added new brands and new SKU's to Ulta.com; increased functionality with new guest focused enhancements such as product zoom; expanded our customer content, which includes information on color trends and skincare recommendations; and finally, improved our inventory management process for dot-com sales, which resulted in our best ever in-stock levels.

Combined, these drove increases in traffic and conversion to our site.

We continue to see Ulta.com as a great vehicle to not only generate additional e-commerce revenue and profit, but also to support our bricks and mortar store base.

In marketing, the third quarter began with a very successful back-to-school GWP, followed by our 21 days of beauty, prestige, skin and cosmetic celebration.

This first time event featured prestige brands and exclusive values, all focused on the newest trends and was successfully executed both in-store and online.

In October we held our second annual fundraiser for the Breast Cancer Research Foundation.

We brought this event to life through print, digital and social marketing efforts.

Branded as our Windows of Love event, Ulta, along with our customers, raised over $500,000 for this worthy foundation.

As part of the campaign we received thousands of letters from individuals who shared their personal experiences with us, which we proudly displayed across our six-plus miles of store windows as an encouragement to all those impacted by this disease.

Our plan is to annually support the Breast Cancer Research Foundation, a group founded by Evelyn Lauder, as an effective way to connect emotionally with our customers and support an important cause.

Finally, in the third quarter we opened a record high 30 new stores and remodeled 10 existing locations, ending the quarter with a total of 384 stores.

We're pleased with the performance of our new and remodeled stores, which continue to perform to our expectations.

For fiscal 2010 we have now completed our new store opening program, with 47 openings and a 13% expansion of square footage over fiscal 2009.

Based on our strong real estate pipeline, we expect to accelerate our store opening program next year, with plans to increase square footage by approximately 15% in 2011.

Turning to the fourth quarter, we feel very good about our merchandising, marketing and operational plans.

We expect good performance across the many new brands that we've added this year in prestige, color and skin care, including philosophy, Tarte and Bliss.

We believe our fragrance business will continue to build upon our success achieved in the third quarter.

We're well-positioned with both the classics and the newest fragrances, including the addition of Coach Signature, Legacy and Poppy during the fourth quarter.

We have a very strong value orientation, which includes exclusive, high-value blockbusters from Bare Escentuals, Smashbox and Benefit, along with our famous five for $5.00 and five for $10.00 stocking stuffers and some fabulous gift with purchases, including our candlestick holders and Luxury Robe, both gifts with a minimum fragrance purchase.

To drive traffic to our stores and website, we plan to continue to leverage our print advertising, slightly expand our television buy from a year ago, increase our e-mail communication, improve our Ulta.com shopping experience, and leverage our over 7 million loyalty program -- loyalty member program.

We also introduced an exciting new skincare event after Christmas, with exclusive products, great values and exciting in-store events.

Overall we're confident in our fourth-quarter plans and excited about opportunities to maximize all that the holiday season has to offer.

We recognize that during the weeks leading up to holiday, we compete not only in the beauty space but with other gift-giving categories, and without a doubt we expect the environment to remain highly promotional.

We believe we have an effective strategy in place to capitalize on the key differentiators and advantages of our business model, namely, our over 7 million member loyalty base, our traffic-driving -- traffic-generating marketing programs, a great customer offering with exciting brands and categories, and an inviting store experience in both our comp and new stores.

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

Thanks Chuck.

We are very pleased with our third-quarter results, which were driven by better than expected sales and margin performance.

During the quarter we delivered a 19.4% increase in total sales, a 12.2% increase in comp store sales, and a 280 basis point expansion in gross profit margin.

This performance delivered a 200 basis point increase in operating margin to 7.2% for the quarter.

We also delivered a 64% increase in third-quarter earnings per share, including the planned $0.02 per share nonrecurring compensation charge.

Excluding the charge, earnings per share increased 79% compared to last year.

Turning to a review of the income statement, third-quarter net sales increased 19.4% to $339.2 million, and comp store sales rose 12.2%, which exceeded our guidance of a 7% to 9% increase.

The 12.2% comp represents a two-year gain of 13.7% and an acceleration in our two-year comp trend compared to the first and second quarter, which were 8.5% and 9.1%, respectively.

As Chuck mentioned, our strong sales performance was broad-based and we believe resulted in market share expansion across our major categories, reflecting the increasing preference for our overall consumer proposition.

During the quarter we opened 30 new stores, remodeled 10, relocated 2 and closed 2 stores.

At quarter end we operated 384 stores, expanding square footage by 12% from last year's third quarter.

Gross profit dollars increased 29.7% to $118.9 million from $91.7 million last year.

Gross profit margin increased 280 basis points to 35.1%.

Our gross profit margin expansion was primarily driven by 130 basis points of increased leverage in fixed store costs due to our comp store sales increase, 90 basis points of improvement in merchandise margin, and 20 basis points of improvement from supply chain efficiencies.

SG&A expenses were $90.3 million or 26.6% of net sales, compared to $74.8 million or 26.3% of net sales last year.

Excluding the planned (technical difficulty) [nonrecurring] compensation charge, SG&A as a percentage of net sales declined by 10 basis points from the prior year.

Pre-opening expenses totaled $4.3 million in the quarter, which compares to $2.2 million in the third quarter last year, reflecting 30 new store openings during the quarter, versus 12 new store openings last year.

Our better-than-expected sales growth and margin expansion, combined with our continued prudent expense management, resulted in operating margin expansion of 200 basis points to 7.2%, from 5.2% last year.

Interest expense was $244,000 and represents fees associated with our credit facility, which we have not utilized this year.

The income tax rate for the third quarter was 40.9%, up 0.3% from last year, driven by nonrecurring compensation charges this year.

Net income for the quarter increased 67.9% to $14.2 million or $0.23 per diluted share, including a $0.02 nonrecurring comp charge.

This compares to $8.5 million or $0.14 per share last year.

Excluding nonrecurring comp charge, adjusted net income per diluted share was $0.25, representing an increase of 79% over last year.

Now turning to the balance sheet and cash flow, merchandise inventories at the end of the quarter were $301.6 million, compared to $274 million at the end of the third quarter last year.

Average inventory per store declined 1.3% from the prior year, reflecting the combined efforts of our continuing inventory management initiatives and in necessary investments to deliver a 12.2% comp store sales increase.

As we begin the fourth quarter, we're pleased with the composition and level of the inventory and believe we are well positioned to maximize the holiday shopping season.

Capital expenditures for the third quarter were $42.2 million.

And depreciation and amortization was $16.1 million.

Now regarding our fourth-quarter outlook.

We currently estimate net sales in the range of $447 million to $456 million, compared to actual fourth-quarter 2009 net sales of $396.4 million.

This assumes a comp store sales increase of 4% to 6%, representing a two-year increase of 10.2% to 12.2%.

We have opened five new stores in the fourth quarter, compared to three stores last year.

We have now completed all of our 2010 new store openings, resulting in 47 new stores for the year, representing a 13% increase in square footage.

We continue to be very pleased with the performance of our 2010 new stores.

Income per diluted share for the fourth quarter is estimated in the range of $0.39 to $0.41, including the $0.01 nonrecurring comp charge.

Excluding the charge, we expect fourth-quarter EPS in the range of $0.40 to $0.42.

This compares to actual income per diluted share of $0.34 in the fourth quarter of last year.

In addition, we expect gross profit margin to expand by approximately 50 basis points, at the midpoint of the guidance range, from last year's gross profit margin of 32%.

Gross profit margin expansion will continue to be driven by the fixed store leverage on our comp store sales growth, supply chain efficiencies, and merchandise margin improvement.

As I mentioned last quarter, we planned our new store opening program later this year, as compared to 2009, which shifted more of our new stores into Q3 and Q4, versus a more balanced opening cadence last year.

As a result, in the fourth quarter our new stores will not have as robust of a benefit from the development of a loyalty member base as stores opened earlier in the year.

Consequently, this will slow our fixed store leverage expansion as compared to prior quarters.

This expected impact is consistent with our new store model and our historical store performance.

As previously mentioned, we continue to be very pleased with the performance of our new stores.

We expect SG&A as a percentage of net sales to be approximately flat to last year's rate of 23.1%, including the previously announced $0.01 per share nonrecurring compensation charge.

Excluding the charge, we expect SG&A leverage of approximately 20 basis points compared to last year.

As a result of the aforementioned drivers, we expect to continue to expand our operating margin during the fourth quarter.

We expect pre-opening expenses to be approximately $0.6 million for the fourth quarter.

We continue to expect an increase in our effective tax rate as a result of the aforementioned compensation charge and currently anticipate a tax rate of approximately 41%, compared to 40.3% in the fourth quarter last year.

The incremental compensation charge and increase in our effective tax rate will not recur past fiscal 2010.

We expect our fully diluted share count to be approximately 61.6 million for the fourth quarter.

In addition, using the midpoint of our fourth-quarter guidance range, we expect the following for the full-year.

We will achieve total sales growth of 17%, a comp store sales increase of 9.3%, and diluted earnings per share growth of 62%.

We also expect capital expenditures of approximately $105 million, representing a 54% increase from fiscal 2009 levels.

This includes 47 new stores, 13 remodels, five relocations, as well as continuing to make the necessary investments in our technology infrastructure, including supply chain, loyalty, and e-commerce.

Depreciation and amortization will be approximately $65 million.

Average inventory per store will decline approximately 3% to 5% by the end of fiscal 2010.

In addition, we plan to deliver approximately $7 million and permanent operating expense efficiencies.

We believe that our ability to generate earnings growth and working capital improvements will result in a delivery of free cash flow again this year.

In summary, we will continue to manage the business to drive sales and earnings growth, expand operating margin, and deliver free cash flow.

We believe our results validate that we have been executing the right strategies to drive profitable market share growth.

We're also pleased with the new store pipeline we're developing for 2011.

We're continuing to target a 15% expansion in square footage and plan to deliver a more balanced opening program with less concentration in the third quarter.

In addition, we continue to expect to achieve our near-term goal of reaching an 8% to 9% operating margin over the next 15 months.

In fact, the midpoint of our fourth-quarter guidance range would result in a 2010 operating margin of approximately 7.8%.

We believe we are well-positioned to continue to deliver our strategies to expand operating margin to achieve our target of a low double-digit operating margin in three to four years.

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

Thanks Gregg.

In conclusion, I'm very pleased with our third-quarter results.

I believe our Ulta teams across the corporate office, distribution centers and stores did a great job delivering on our strategies.

Our powerful store proposition, our significant expansion opportunities in real estate, exciting new merchandising and marketing strategies, and the superior execution of our team have us poised to continue our momentum in the fourth quarter and long term.

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

Operator?

(Operator Instructions) Brian Tunick, JPMorgan.

Good afternoon and congrats everyone.

I guess one for Gregg and then one for Chuck.

Gregg, on the SG&A side for the third quarter, only getting 10 bps of leverage on that double-digit comp, can you maybe talk about what is happening there?

Is it the 28 new stores versus 12 last year?

Are there other expenses coming back into the business?

We would have thought you could have gotten some more leverage.

And then I guess for Chuck my question is, are you seeing the department stores or any of the mass chains doing anything different the last few quarters trying to position themselves better against you guys or Sephora?

Yes Brian, a couple of things embedded in third quarter SG&A, which is consistent with our guidance range -- came out exactly where we thought it would.

One, the charge, the nonrecurring compensation charge, is about 40 basis points of impact in the third quarter.

Two, the newness of those stores -- as I mentioned -- relates to fixed store expense -- in our prepared remarks -- also has an impact on SG&A as well.

So opening a significant number of stores in the third quarter this year compared to the third quarter last year, and the newness of those stores, also creates a little bit of a headwind on SG&A.

Brian, on the second part of the question, the department stores have been testing some of the open sell concept.

We don't know how that is doing exactly.

It is particularly gratifying to us that our business continues to be very strong and we continue to take share, even as department store business has improved overall.

Their overall numbers have improved -- and I'm not talking specifically beauty within the department store.

So I think that clearly there's a lot of competition out here and people are trying different things, but it is very rewarding to us that the strategies that have been put together and the execution of those continue to win over new customers and win more share with our existing customers.

So that old saying that competition is a good thing, is true.

We've been very pleased with how we've been doing, and we think we will continue to do well against our competition.

Terrific.

Thanks and good luck.

Neely Tamminga, Piper Jaffray.

Great, thanks, good afternoon.

I just wanted to ask a couple -- one question and one follow-up.

So the question here is really about just philosophy.

Chuck, you mentioned that you guys completed the rollout.

I'm just wondering, I can see how you've maybe completed the rollout in the stores, but would you expect to see some SKU expansion in the quarters ahead in this brand or other brands that you've recently rolled out, based on consumer demand?

And then I will just have a follow-up.

Sure.

philosophy -- I think, without going too far into it, I think there were some things in 2011 that you will see us expand into with philosophy, and not just true of philosophy but any brand has to continue to evolve their line, as we have to continue to evolve our offerings.

So the short answer is, yes, Neely.

And stay tuned specifically on philosophy for 2011.

Okay, great.

Thanks.

And then in terms of just a follow-up, unless I missed it, did I hear what the fabulous comp you guys reported, what the drivers where, the metrics, in terms of ticket and transaction?

Yes, it was mostly transactions.

It was --

11.5% in transactions.

The remainder, less than a point, was basket.

And Gregg, that's what you would expect for Q4 is to be primarily transactionally driven?

Yes.

Our strategy is focused mostly around that, as it has been all year.

Yep.

Okay, great.

Good luck you guys.

Thank you.

Thank you.

Evren Kopelman, Wells Fargo Securities.

Great, thanks.

Good afternoon everyone.

First question, you mentioned the expense efficiencies of $7 million.

Can you remind us -- is that higher -- did you say $5 million last quarter?

If that's the case, can you also talk about if that changes your leverage point comps to leverage SG&A?

You know, on the long-term basis -- let me take the last part of the question first.

On a long-term basis -- and this goes to Brian's question earlier -- we do not have any change in perspective from what we have said in the past in terms of what our long-term going into next year is in terms of comp leverage point, which is 2% to 3%.

That's been consistent.

The savings of $7 million is consistent with what we said last quarter.

It has not increased.

And you also see the performance for the quarter, we were up 3 points from the top end of our guidance range on comp performance, and consistent with the range on EPS we were also up $0.03 of EPS.

So the cost savings are consistent with what we expected, and the increase in EPS is consistent with our comp growth.

Okay.

And then second question is, as you think about operating margins going from high single digits to low double, how much of that will be in gross margin?

How much in SG&A?

You know, as we look out that over that three- to four-year time period, we're expecting about half of that gross margin -- and this is consistent -- of that operating margin expansion to come from gross profit drivers, and about half of it to come from SG&A.

The gross profit drivers are fairly consistent with what we have seen in the past.

We will continue to deliver leverage and efficiencies in our supply chain.

We will continue to get some leverage on our fixed store expenses, with a comp in the long-term range of 3% to 5%, and we believe there's some modest merchandise margin expansion over that time period.

SG&A leverage -- there are still some efficiencies in our overall four-wall store operating costs, and as a growth retailer with 15% to 20% square footage growth and mid single digit comps, we will leverage our G&A infrastructure going forward too.

Daniel Hofkin, William Blair & Company.

Good afternoon.

Just a question I guess first in terms of thinking about the overall comp sales outperformance, if you could maybe talk about if there's one or two particular parts of the store that saw more meaningful upside versus the remainder of the categories.

Also new versus existing customers, if one saw greater upside than the other.

And then I have a follow-up question.

Daniel, you know, I don't think we have historically -- and certainly I don't want to comment in detail about the departments, but as I said in my prepared comments, we saw growth pretty much across all categories, but it was particularly strong in skin care, as well as in cosmetics.

It was strong in the mass and particularly strong in Prestige.

We had a very good fragrance month in bath.

So up and down.

Obviously there were some variants between the different categories, but up and down.

Most categories, we saw good strength throughout.

Okay.

And in terms of new versus existing customers --

Yep.

You know, we continued to gain market share with our -- or share of wallet with our existing customers, and we did attract new ones as well.

So with close to -- with better than an 11% increase in transactions, both those categories of guests were actually fueling it.

So we were pleased on both sides.

Samantha Panella, Raymond James Financial.

Thank you.

Let me at my congratulations on the quarter.

What is driving the year over year improvement in merchandise margin?

And how sustainable is that?

You know, there were a couple of broad-based drivers there that have been consistent with what we have been doing in the prior quarters.

Just as a point of reference, remember that the comparisons on merchandise margin in the first three quarters were easier comparisons than the fourth quarter.

Remember last year as we worked throughout the doldrums of the economy, we got much more effective, both internally in working with our vendor partners in terms of driving the improvement in the business we saw last year as we went through the year on a better margin rate.

The drivers specifically come from a couple of areas.

One, we're continuing to be able to manage better the approach to promotional effectiveness and understanding the levers that work the most effective with our customer in driving them in, and you can see that result coming through in traffic.

Two, we continue to focus on driving some of the higher-margin categories, so there is a mix benefit that is coming along with that.

Just as we continue to grow, we just have continued opportunities of further executing sell-through and promotional activity and things like that better.

So in composition of the 50 basis points in the fourth quarter compared to the third quarter, there will be less merchandise margin improvement, but there will be some.

Okay, thank you.

And can you just remind us of the key differences in your new loyalty program and what percentage of your store base now has that program?

Yes, the new loyalty program is a points-based program.

Think of an airline club that you earn points, versus the -- the legacy program is a certificate one that, based on how much you buy, you actually get a certificate and use it for free products.

So it's -- and also the legacy program has certain windows you can cash in those certificates.

The points program is -- has an open window, if you will, that the guests can use to cash in those points in.

In terms of the percentage of the chain that is on the new program, it is just over 20%.

We've continued to add new stores into it, but sitting today -- and we're done now for the conversion for this year -- of just over 20% is on the new program.

Great, thanks and good luck.

Thank you.

Thank you.

Jason Gere, RBC Capital Markets.

Thanks guys.

Just two questions I guess, the first question just going back to the -- I guess the margin outlook, 8% to 9%, I'm just wondering how -- I know you're not really talking about 2011 yet, but certainly you're on the cusp of the low end of the range already.

Should we be thinking about next year, just the change in the sales dynamic between less comp, more new store really weighing down more on the operating margin so you're going to see more -- 40, 50 basis point type of improvement, so getting to the high end of that range really does take 15 months?

Or is this just a little bit more conservatism because there maybe are some more permanent expenses coming through?

I was just wondering if you can kind of shape that up a little bit for me.

Sure Jason.

The 15 months is looking forward towards the end of next year.

So we will be in that 8% to 9% range.

As I mentioned in my prepared remarks, we're at 7.8% as measured by using the midpoint of the fourth-quarter range.

And then as we head into next year, we have -- with steadily improving and increasing square footage growth, we will create some leverage in the business, and some of the initiatives that we've continued to use to drive operating margin on a low single digit to mid single digit comp store sales increase still have several phases left to go.

So supply chain, some of the merchandise margin expansion opportunities, some of the operating efficiencies that we have still in the four walls of the store, and I expect to continue to get on the overall sales growth, leverage in G&A.

So expect it to still be -- continue to be balanced, maybe a little bit more balanced towards SG&A next year.

Great.

Then just one other question, as you look to the new store for 2011, can you break down between where maybe you're filling in regions, you are leveraging existing markets, and maybe there are some new markets?

And any type of update on new construction that you're seeing out there in the US right now?

I think 2012 is when I think most of this was starting to really accelerate again.

I mean, hopefully the economy is going in the right correction.

But I was just wondering if you can give an update on the real estate side.

You know the reality is -- take the second part first.

The reality is we're starting to see a little bit of life -- and I underscore "a little bit of life" -- in new construction, but I still expect the majority of the 2011 program will be focused on us moving into existing centers.

So the good news is there we're seeing a little bit of life, but there's still more time before we get to 2012 and we're filling in the 2012 program.

As it relates to geographies in 2011, the only thing I can tell you until we finalize the program at this point is we're going to continue to be balanced between new and existing markets.

We will continue to leverage the strengths that we have seen in single store markets, and we've provided a little more emphasis in the last two years in those single store markets, and we continue to see nice opportunities there to go in with one store, capture the market, be done with it and move on.

Jason, I would just add that it has been articulated before that we believe there's a 1,000 store potential on our current footprint, so existing and new markets -- even existing markets have got tremendous buildout potential, in addition to those new markets.

So there's really no place in the United States that I look at that I think we have fully tapped the potential in that market.

So -- to Gregg's point -- we're balancing that as we go forward.

I think our real estate team is doing a very good job in a market that in the near term doesn't have a lot of new growth for shopping developments coming out of the ground in being creative in working with existing real estate, and I think they've done a nice job of bringing those sites to bear.

Keep in mind that throughout our real estate process we will not sacrifice quality for quantity.

So -- but we have been fortunate through good work to find that good balance of quality sites to hit that 15% growth for next year.

Randal Konik, at Jefferies & Company.

This is actually Jim Dennis.

I am a private shareholder.

Chuck, you've been onboard for one quarter, and you've done a good job so far.

Can you [provide] (technical difficulty)

Erika Maschmeyer, Robert W.

Baird.

Thanks.

And I will add my congratulations.

You mentioned efforts to slightly expand your TV buy.

Can you talk about that and give a little bit more detail on your plans for the holiday season?

Yes.

The TV buy is -- you know, this will be the third time that we have done TV.

The company did it last holiday.

They did some for Mother's Day, and now we are coming back around again.

We have expanded it to some additional markets, but I still consider it in test mode.

TV is -- has the potential to reach a lot of new guests, and we'll have a message this year that introduces Ulta to people that potentially don't know us as well as we would like, and certainly it has a value orientation for those guests who do know us and expect great products to be offered from our assortment.

So it will continue to be in a test mode.

One of the strategies we have talked about before is our opportunity to broaden our marketing reach.

We're very successful and have a great foundation using print, but I do think we can expand into some other realms, and TV is one of those that we will test into.

So that is the logic behind it for the fourth quarter.

For the balance of the quarter, as I mentioned before, we expect it to be a promotional quarter.

We're prepared for that.

We are really comfortable with our assortment in terms of the new brands that we have added, as well as the existing brands.

We think we have some great new products.

We have some great value.

We have some terrific gift with purchases.

So we are ready for a competitive environment but very pleased with how we're positioned.

And then just a follow-up on Ulta.com.

Could you just elaborate a little more on your efforts there to improve the shopping experience and you know, talk about some of the efforts that you have made to really drive that business?

Yes.

You know, Ulta.com serves two purposes.

There's obviously the first purpose of driving more revenue and profit through the dot-com site, but the second is to actually support brick and mortar.

And our opportunity is to integrate the brick and mortar in dot-com even more than we have historically.

So I'd remind you that it is coming off of a very small base, so we're seeing very large percentage growth, but it's still a small base.

What we've tried to do is improve the shopping experience, and I mentioned in my prepared comments about a content center.

It's a great place for a guest to go online and find out about the newest skin care products to deal with aging, for instance, or sensitive skin, or to go on and find out about color trends.

And whether they buy that online or they choose to come into the store and experience the great environment we have in the store, you know, we're pleased to obviously welcome that guest in either environment.

But that's the power of the dot-com.

It's not only the revenue, but it's how we can continue to market Ulta to our existing guests and to new guests and welcome them in either format.

(Operator Instructions) Henry Capellan, Oppenheimer & Co.

Hi, guys.

Thanks for taking my questions.

I just wanted to talk a little bit more about the gross margin expansion in the quarter.

It was certainly ahead of our expectation.

I wanted to get a sense for how sustainable that was in the fourth quarter and even perhaps into 2011.

How should we be thinking about that?

Well, as I mentioned in the outlook, at the midpoint of the guidance range we expect approximately 50 basis points of gross margin -- gross profit expansion in Q4.

The drivers are going to be similar to what they were in the third quarter.

It is going to be made up of merchandise margin, leverage on our fixed store base, and our continued supply chain efficiencies from the work the team has been doing over the last couple of years.

We are up against more difficult comparisons in the fourth quarter compared to last year, which as I mentioned, on the merchandise margin, 90 basis points in the third quarter.

We don't expect as much in the fourth quarter.

I think this is a more practical level of gross margin expansion for the fourth quarter, given the strategies we have this year.

As we head into next year, we continue to expect to deliver leverage in our supply chain, be a gross margin driver.

We continue to expect to have some opportunities from those three leverage points in merchandise margins I mentioned earlier to drive some merchandise margin expansion.

And I would expect we will get some leverage again at that long-term comp rate of 3 to 5 in our (technical difficulty)

Okay, great.

And then I just wanted to talk about the upcoming holiday -- well, the holiday season, and wanted to get a sense from you if there were any particular categories that even initially had shown signs of particular strength, and kind of what we can expect from those businesses.

Well Henry, I don't think we're going to get into details on a month by month performance.

So we're pleased with our performance so far.

I think we've seen generally a continuation of the types of trend lines that we had seen in the third quarter, but it is all reflected in the guidance that we gave.

So our strength in mass and prestige, our strength in cosmetics as well as skin care, our strength in the fragrance all have contributed to what we believe will be a solid fourth quarter for us.

To go into more detail at this point I don't think would be appropriate at this stage of the quarter.

Okay.

But are those the similar drivers typically during the holiday season?

Or -- because I think in the past you've talked about perhaps more kind of appliances -- not appliances but electrical products being perhaps more gift-able items.

I just wanted to (multiple speakers)

They are certainly a gift-able part of the business.

Fragrance, in terms of a percentage of our business, increases in the fourth quarter.

Bath sets increase.

Appliances, as you suggested, increase.

We think that the offering we have is very strong.

There are certainly changes in some of that space that are going on.

For instance, in the appliance area curls are making a big comeback, so there is some shifting in the flat iron business that is happening.

I think also as you look at some of the other businesses, as I mentioned in my prepared comments, we had a very good quarter in fragrance in the third quarter.

We've added the Coach fragrance lines for the fourth quarter.

So we think we're well-positioned for that.

Color continues to be very strong as we look to the fourth quarter, so those, the colors sets, the gift sets that we have.

So I think that -- feel very good about all the gift-able parts of our business but recognize we are one gifting option in a very broad array of apparel and electronics, etc., that come into play during this time of year.

Samantha Panella, Raymond James Financial.

Thanks again.

Gregg, just wanted to clarify one thing regarding the guidance since I know you have been restating your prior-year quarters with respect to cost of goods sold and SG&A.

So what are the comparisons against with respect to gross margin and SG&A as a percentage of sales for 4Q 2009, what should that -- for this year versus 4Q 2009.

I think you've got the 32% for gross margin.

Last year's gross margin percentage, we will have a small restatement, about 30 basis points between SG&A and gross margin, as we did in the third quarter.

Last year's fourth quarter restated gross margin percentage is 32%, and as a result of that, SG&A is 23.1%.

So those are the comparisons of up 50 in gross profit for the midpoint of the guidance range and a flat in SG&A with the charge.

Great.

Thank you again.

You are welcome.

There no further questions in the queue.

I would like to hand the call back over to management for closing comments.

Well, let me thank everyone for joining us today.

We wish everyone a terrific holiday season, and we look forward to speaking with you again in March when we report our fourth-quarter results.

Ladies and gentlemen, this does conclude today's teleconference.

Thank you for your participation.

You may disconnect your lines at this time.

And have a wonderful day.