Ulta Beauty Inc (ULTA) 2010 Q4 法說會逐字稿

Greetings, and welcome to the Ulta Salon, Cosmetics &Fragrance, Incorporated fourth quarter and fiscal 2010 earnings results.

(Operator Instructions).

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.

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.

Now I would like to turn the all over to Ulta's President and CEO, Chuck Rubin.

Thanks, Allison.

Good afternoon everyone.

Thank you for joining us to discuss our fiscal 2010 fourth quarter and full 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 and provide our first quarter outlook.

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

The fourth quarter marked an excellent finish to an outstanding year for our Company.

We reported sales and earnings that were ahead of the increased guidance we issued on January 6 reflecting the success of our merchandise marketing, e-commerce and store expansion strategies.

Without a doubt, our Q4 and full year results demonstrates that Ulta continues to be a key beauty destination as we consistently provide a terrific experience to our guests.

We expect to continue to capitalize in our leadership position in the year just beginning.

In total, the fourth quarter included strong topline growth with net sales rising 19.5% to $473.7 million with comparable store sales rising 10.4%.

This comp store sales gain is noteworthy as it follows a 6.2% increase in the fourth quarter last year.

Gross profit margin expanded 110 basis points to 33.1% which included a 40 basis point increase in merchandise margin following a 60 basis point increase in merchandise margin last year.

Operating income increased 43% to $49 million which included operating margin expanding 170 basis points to 10.3% of net sales from 8.6% last year.

In net income per diluted share improved 44% to $0.49 which was ahead of the increased guidance range of $0.43 to $0.44 we provided on January 6th.

Our 10.4% increase in comparable store sales included a 7.1% increase in customer transactions.

We also saw our strong gain in average ticket which was up 3.3% in the quarter.

Our achievement of sales and profits ahead of our January guidance was in part driven by our highly successful January skincare event during which we combined skincare products, services and in-store and online events to deliver a unique and exciting shopping experience.

For fourth quarter, our comp performance resulted from strong product performance, execution against our more integrated marketing strategies, our intensified focus on in-store service and continued benefits from new brand and product introductions.

During the quarter, we gained market share across all major categories with a particularly strong performance in Prestige color and skin, nail products and fragrance.

Our growth was also balanced across new and existing brands with particularly strong performances from Philosophy skincare, Tarte, Bliss, Stila, Urban Decay and OPI.

Fragrance also contributed to our comp growth with strong performance from our holiday launches of [Coach Signature], Legacy and Poppy along with our Q3 launches of DKNY Pure, Peace, Love and Juicy couture and Gucci Guilty.

In our service business, we saw exciting growth in skincare treatments and brows services.

Overall, our salon recorded positive comparable store sales services in the quarter, although their trend trailed the product part of our business.

Looking at our new stores, we were very pleased with their performance during the quarter fourth.

We opened five new stores and relocated one existing location.

In total, our 2010 store expansion included 47 new stores, 13 remodels of existing stores, and 5 relocations.

This brought square footage expansion to 13% for the year with our ending store count at 389.

Our e-commerce business continued to report robust growth in the quarter.

ulta.com is an important piece of our overall proposition to be our guests beauty destination by serving two roles.

One, to generate revenue on the website and two, build awareness for our brand which we believe will drive traffic to our stores.

A great example of this is ulta.com's beauty destination pages which provide beauty advice and insights into the latest trends.

Our marketing also continues to be a powerful tool for us.

During the fourth quarter we offered two compelling GWPs, our candle holders and bathrobes.

Both gifts with purchases were successful and drove traffic to our stores and website.

We moved more aggressively into digital marketing with incremental online advertising, additional emails, and a greater focus on social media, like Facebook, where we have significantly increased our following, although still at relatively low levels.

We also ran a targeted TV campaign before Christmas.

This effort focused both on building our brand and projecting a value image.

While TV is a small part of our marketing strategy, we were pleased with the performance.

Looking at the year as a whole, our business performed equally as strong.

In 2010, total sales increased 19% with comp store sales up 11% for the year.

Diluted earnings per share arose $1.16 up 76% over 2009 inclusive of $0.06 per diluted share of non-recurring compensation expense.

Excluding this non-recurring cost, annual earnings per share increased 85%.

Our balance sheet at year-end remained strong with cash of $111 million and no debt.

Average inventory per store at year-end was down 6.1% from the prior year as we continue to benefit from our inventory management strategies.

And finally in 2010, we delivered $79 million in free cash flow while still investing in our growth initiatives.

This strong 2010 operational and financial performance could not have been achieved without the superior execution and passion of our team.

I want to thank our close to 12,000 and growing team of Ulta Associates for their commitment to our guests.

As we begin fiscal 2011, I'm very pleased with our positioning.

We will continue to focus on our five key growth strategies.

We will also prudently manage expenses and inventory, and expect to continue to fund our growth with internally generated cash.

Let me speak to each of these five growth strategies for the current fiscal year.

First, we plan to accelerate the pace of store openings.

In fiscal 2011, we plan to open approximately 61 new stores, representing 16% square footage growth compared to 47 new stores or 13% square footage expansion in 2010.

This is in the 15% to 20% annual square footage growth range that we had previously communicated in our long-term plan to achieve 1,000 of our current format stores.

Second, we plan to continue to expand our guest offering.

This will include new products and new services, existing brand line extensions and the addition of new brands.

Third, we will continue to leverage our successful loyalty program which is now made up of close to 8 million active members.

Through improved customer segmentation and greater customization of our marketing vehicles, we believe we can better engage our customers on a one-to-one basis enabling us to capture increase share of wallet.

This is a long-term effort that we started in 2010 and will continue to develop in the years to come.

Fourth, we expect to leverage our current print marketing while expanding our reach into other marketing channels including digital, social media and email marketing.

In-store and online marketing events will also become more prevalent as we bring our product and service offering together to deliver the fun and exciting shopping experience our guests have come to expect from us.

And fifth, we will continue our increased focus on ulta.com.

Both as a way to increase e-commerce revenue, and also to communicate with our customers in an interactive, enjoyable way that reinforces the Ulta brand.

Specific initiatives include, expanding the online content to help customers learn more about the newest products and services, facilitating quicker lookups and making check out more efficient.

We'll also continue to enhance the image of our vendor partners through online brand boutiques and videos.

We believe all of these initiatives will benefit our e-commerce revenue and drive additional traffic to our brick and mortar stores.

Well that is our full year road map.

Let me give you a sense of a few initiatives that we believe will drive our first quarter growth.

First, exciting and innovative marketing events such as our 21 Days of Beauty which will begin next week.

This event brings our products and services across both our Prestige categories and Salon together.

For example, we not only have a great offering of Dermalogica products, but also providing our guests a fantastic Dermalogica service offering in all of our stores.

For our younger guests, we held our first prom event last week in conjunction with Teen Vogue magazine.

This event highlighted the new hair and makeup trends for teens as they prepare for the all important prom season.

And finally, our Salon Blowout event that we just completed combined a fast new hair service with some great care styling products.

Our second initiative for the first quarter is continuing our expansion of digital, social and email marketing, such as expanding our Facebook presence, where as I mentioned earlier, we've seen a significant increase in followers over the past quarter.

And third, new brand additions and line extensions, such as Bare Escentuals skincare, Benefits skincare, the relaunch of Ulta Bath, an expanded men's grooming section, the addition of Boots skincare and new fragrances including, Mark Jacobs Eau So Fresh and Michael Kors Palm Beach.

Combined, we have a strong merchandising and marketing program which as our guidance suggests we expect will lead to strong Q1 earnings performance.

Now to go into more detail on our Q4 performance and provide that specific Q1 guidance, let me turn the call over to Gregg.

Thanks, Chuck.

We are very pleased with our fourth quarter results which were driven by better than expected sales and margin performance, and exceeded the revised guidance we provided on January 6.

During the quarter we delivered a 19.5% increase in total sales to $473.7 million.

Comp stores sales increased 10.4% which was ahead of our increased guidance of 8% to 9%.

During the quarter we opened five new stores and completed one relocation.

At quarter end, we operated 389 stores representing square footage growth of 13% from last year's fourth quarter.

Gross profit dollars increased 23.7% to $156.7 million, from $126.6 million last year.

Gross profit margin increased 110 basis points to 33.1%.

The increase in gross profit margin was primarily driven by 60 basis points of increased leverage on fixed store costs due to our comp stores sales increase, 40 basis points of improvement in merchandise margin, and 20 basis points of improvement from supply chain efficiencies.

SG&A expenses were $107.2 million or 22.6% of net sales compared to $91.8 million or 23.1% of net sales last year.

Excluding the planned one-time compensation charge, our SG&A rate would have been 22.5%.

Pre-opening expenses totaled $523,000 in the quarter which compares to $615,000 in the fourth quarter last year.

This year, we opened 5 new stores during the quarter compared to three new stores opened last year, same quarter.

Our better than expected sales growth and margin expansion combined with our continued prudent expense management resulted in operating margin expansion of 170 basis points to 10.3% from last year's 8.6%.

Interest expense was $179,000 and represents fees associated with our credit facility which we did not utilize during 2010.

The income tax rate for the fourth quarter was 38.3% which compares to a tax rate of 40.2% last year and was below our expectation of a 41% tax rate.

The lower tax rate was driven by stock option exercises and certain state tax benefits which we largely expect to be one-time events.

Net income for the quarter increased 48.8% to $30.1 million compared to $20.2 million last year.

Income per diluted share was $0.49, inclusive of a $0.02 per share benefit from the lower tax rate which was partially offset by $0.01 per share in non-recurring compensation expense.

This compares to income per diluted share of $0.34 last year.

For the full year 2010, net sales rose 19% to $1.455 billion with comp stores sales increasing 11%.

This compares to a 1.4% increase in comp sales last year.

Income per diluted share increased 76% to $1.16 which includes $0.06 per share non-recurring compensation charge.

This compares to $0.66 last year.

Now turning to the balance sheet and cash flow.

Merchandise inventories at year-end were $218.5 million compared to $206.9 million at the end of fiscal 2009.

Average inventory per store declined 6.1% from the prior year, reflecting the combined efforts of our continuing inventory management initiatives and the necessary investments to deliver double-digit comp store sales increase.

We believe this performance also highlights our ability to effectively control inventory in a high skew business model with significant newness, a discipline we take very seriously.

As we enter fiscal 2011, we're pleased with the composition and level of inventory and believe we are well positioned to support the anticipated growth in our business.

Capital expenditures for the fourth quarter were $22.4 million, depreciation and amortization was $17.2 million.

We ended the year with a strong balance sheet and no debt and $111 million of cash.

While we continue to invest in our growth strategy, we generated free cash flow of $79 million.

Now regarding our first quarter outlook.

We currently estimate net sales in the range of $364 million to $370 million compared to actual first quarter 2010 net sales of $320.2 million.

This assumes a comp store sales increase of 5% to 7%.

We plan to open five new stores in the first quarter compared to two new stores in the first quarter last year.

Income per diluted share for the first quarter is estimated to be in the range of $0.29 to $0.31.

This compares to actual income per diluted share of $0.23 in the first quarter of last year, representing a growth rate of 30% at the midpoint of this range.

In addition, we expect gross profit margin to expand by approximately 125 basis points, at the midpoint of the guidance range compared to last year's gross profit margin of 32.6%.

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

We expect SG&A as a percentage of sales to decrease approximately 20 basis points, at the midpoint of our guidance range, compared to last year's SG&A rate of 22.5%.

As a result of the aforementioned drivers, we expect to deliver operating margin expansion during the first quarter compared to last year.

We also expect the following for the first quarter.

Pre-opening expenses to be approximately $1 million, an effective tax rate of 40% compared to 41.1% in the first quarter last year and a fully diluted share count of approximately $62.5 million.

Now looking forward to the full year 2011.

We expect to deliver strong results consistent with our long-term financial goals.

As a reminder, our business model has been built to generate 25% to 30% annual net income growth through the achievement of a modest 3% to 5% annual comp store sales gain, annual square footage growth of 15% to 20% and operating margin expansion as we progress towards our low double-digit operating margin target.

In 2011, we have a robust new store pipeline with expectations of opening approximately 61 new stores, delivering square footage growth of 16%.

We expect comparable store sales to approach the high end of our long-term annual growth target of 3% to 5%, and net income growth also towards the high end of our 25% to 30% annual goal.

To provide a true comparison, our net income growth expectation assumes the add back of the impact of the prior year's $0.06 per diluted share non-recurring compensation charge.

So, on a GAAP basis, our net income growth in 2011 is expected to surpass our annual long-term target.

In addition, our expectations for fiscal 2011 include the following.

A more balanced store opening program spread throughout the year, specifically our store opening plans by quarter I expect it to be as follows.

Five new stores in Q1, 17 new stores in Q2.

32 new stores in Q3 and seven in Q4.

The corresponding pre-opening expenses will be approximately $1 million in Q1, $4 million in Q2, and $4 million in Q3 and $1 million in Q4.

In addition, we plan to remodel approximately 17 existing locations.

We expect a full year tax rate of approximately 40% and full year diluted share count of approximately 63 million.

Capital expenditures in 2011 are expected to be approximately $130 million which is roughly $30 million higher than our capital expenditure program in 2010.

This increase is driven by an accelerated new store expansion program and in investments we will continue to make in technology and infrastructure to support our future store growth, including our plans to open our third distribution center in early 2012.

This approach is consistent with our intention to add infrastructure prudently as we execute our long-term growth strategy.

You may recall we opened our third distribution center very successfully on time and on budget, and we'll apply the same discipline, execution as we open our third location.

Depreciation and amortization will be approximately $77 million.

Average inventory per store is expected to decrease by approximately 3%.

In summary, we believe that the success we achieved in 2010 is a strong endorsement of our strategic initiatives delivering our commitment to be a beauty destination to our guests, as well as our ability to execute.

In 2011 we remained focused on driving sales and earnings growth and expanding operating margins to generate free cash flow.

We will continue to appropriately invest cash generated in our growth of our business, and will be evaluating strategies for the use of excess cash beyond our ready planned needs.

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

Thanks, Gregg.

In summary, as you've heard, 2010 has been a terrific year for Ulta.

We grew sales and profits, gained market share, attracted new guests, generated positive cash flow and maintained a strong balance sheet, all as a result of our team's commitment to our strategies and most importantly, our commitment to our guests.

That commitment continues for 2011.

As we begin this fiscal year, our first quarter is off to a strong start, and we believe our strategies and disciplined approach will continue to allow us to deliver another year of sales and profit growth and continued market share gains in the beauty category.

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

Operator?

Thank you.

(Operator Instructions).

Our first question comes from the line of Brian Tunick with JPMorgan Chase.

Please proceed with your question.

Hey, everyone, it's actually Ike calling for Brian.

Congratulations on a great quarter.

Hey, Ike.

Hi, Ike.

Hey, how you doing.

I guess two questions I had.

With the ramp in CapEx that we've seen in the past two years, now this year with footage growth going up from 13% to 16%.

Does that impact your leverage points on the occupancy line, and how should we think about that for 2011?

I then I guess Gregg, you've done a great job of taking out build out costs and the payback periods down over the past two years.

Do you see more opportunity in 2011 to take costs out even further?

Yes, Ike, on the first point on occupancy point leverage going from 13% to 16% will not have a significant impact on the leverage point for fixed store expenses.

As we've said on the last couple of calls that this rate of square footage growth, roughly over a 12-month time period because you get a few bumps along the way as you ebb and flow the number of stores that open, we continue to expect that we'll start to leverage fixed store expenses with this opening program in that 2% to 3% comp range, so comparable to 2010 going into 2011.

As it relates to the team's focus on improving the cash payback on the store model and permanently lowering the investment, we've made more progress in 2010 compared to where we were.

Historically, particularly for 2009, we spent $1.1 million in total for new store investment and we had approximately a two and a half year cash payback.

The program that we've just delivered for 2010 takes us down to a two-year cash payback and a $900,000, so below $1 million new store investment.

And we expect that those costs and the achievement continues to demonstrate that one, these costs are permanent, and two, albeit not as significant of impact as we did going from $1.6 million to $1.1 million, but the team still finds very creative ways to drive efficiency and store build-out.

And as some of you have seen, the actual customer experience continues to improve.

Great.

Good luck.

Thanks, Ike.

Thank you.

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

Please proceed with your question.

Hey, guys.

Good afternoon.

First question, I just want to go to the operating income outlook for a second.

Obviously, last quarter you mentioned that you expect to be at 8%, 9% by the end of 2011.

You're there all ready.

I imagine the comp growth, or the better than expected comp growth you saw last year was really the key driver of you getting there sooner than you anticipated.

Was there other things that you experienced last year that helped you to accelerate the operating margin expansion that you saw?

We have a very clear road map, Joe, as you know that we've reviewed both in terms of drivers of SG&A leverage that contribute to operating margin as well as gross profit increase that contribute to that operating margin.

The team continues to do a good job in all of those areas, continuing to focus on opportunities to improve merchandise margin.

You heard us talk a little bit about the achievements in Q4.

There certainly is a runway ahead in that area to continue to do some more work there.

As we continue to manage down, appropriately so, the cost of the new store fit-out, certainly that runs through gross profit as well.

The team has done a good job of managing occupancy costs as it relates to rent, certainly as it relates to the cost to fit-out a store that is reflected in depreciation.

At the end of the day, Joe, it is continuing to execute the plan that has been in place, and certainly getting a little bit faster benefit from a higher comp store sales growth.

Got it.

Just secondly, in terms of the traffic growth you guys have put up over the last few quarters it's been very impressive, and obviously you're gaining share.

Who do you think most of your share gains have come from or at least which channels are they coming from?

Joe, I'm not sure we have great insight on that.

We carry such a broad range of products that we have lots of competition out there, whether it's mass or department store.

When you look at the overall performance of other retailers, we continue to put out results that are better than that, so in term of where we're getting it specifically, I couldn't tell you in a detailed fashion.

Okay.

Great, thanks.

Thank you.

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

Please proceed with you're question.

Good afternoon.

Congratulations on that just outstanding year.

Thanks, Dan.

Thanks, Dan.

I guess just a question, and I know you don't like to talk about shorter term performance within the quarter, but it's interesting that the comps ex the holiday period appear to be even stronger and I guess interesting, you pointed out some of the particularly strong performing categories.

Outside of the holiday period to the degree that the mix is a little more basic, if you will.

What do you think drove the stronger comps even outside the holiday period, and then is that what you expect?

That trend to continuing here in the first quarter?

That would be my first question.

Second, the gross margin versus SG&A guidance in the first quarter.

I'm wondering at what point you think it shifts to be more similar between margin and SG&A?

Because this continued really strong growth that you're seeing in the gross margin line in particular?

Thank you.

Dan, I'll take the first part, and throw Gregg the second part.

The things that contributed to our January performance I commented in the prepared comments, were a combination of our products and services that we brought together to put a comprehensive offering together for our guests.

So skincare leveraged a range of products, we included our service part of the business, and we incorporated a variety of marketing components to communicate that to the guests.

So we leveraged our.com, we leveraged email, we leveraged Facebook, we leveraged, obviously, our print components.

So I think we've improved on how we're integrating our touch points and improved in integrating the offering that we have throughout the store to talk to the customer.

So I think that those issues as we look at 2011 continue to provide good opportunities for us.

I must say as you can see, we beat the guidance that we gave at the beginning of January.

That January turned out better than expected.

This integration that I'm talking about actually worked out better than we had thought.

So those components continue as we think about 2011.

and that's why, certainly in this first quarter, we're very pleased with the guidance we're able to put out.

And overall for our long-term, for the year and beyond, we think this integrated approach in leveraging all of our assets to truly be the destination for our guests' beauty desires and needs plays well to our future.

And Dan, on the balance between gross profit and SG&A, a little bit more obviously biased towards gross profit in the first quarter.

As we progress throughout the year, I would expect that to be a little bit more balanced.

And as we finish the year, I would expect that to be a little bit more balanced between gross profit and SG&A.

Certainly as we manage the business, as you've heard us say in the past, the store opening program, the timing of that has a little bit more of an influence on some of the elements of the SG&A, has a little bit more influence on, certainly, fixed store expenses.

Then we also as we always do, look to our business strategy and flex the things that we can with the focus on overall operating margin.

So there are going to be quarters where a little bit more can come from gross margin and other quarters where maybe a little bit more will come from SG&A as you're seeing in the first quarter.

But on total for the year, should be relatively balanced.

That is helpful.

Thanks very much.

Thanks, Dan.

Thank you.

Our next question comes from the line of Alex Berman with Piper Jaffray.

Please proceed with your question.

Great.

Thanks, guys.

Just wanted to talk a little bit about your loyalty program.

I think the last time we touched base you said about 22% of your stores that converted from the old certificate based system to the new points based system.

I was wondering if you could give us an update on where that is now and where you think you can get by the end of the year?

Are you seeing higher usage of the loyalty program in the stores that adopt the new system?

Alex, it's still about the same level of stores that are on the points program.

We have a number of things we're doing around the loyalty program which continues to be very successful, and in fact, both components of the program are successful, both the older legacy certificate program as well as the points.

In terms of what we think we can get to.

Overtime we do believe that the chain will convert into the points program.

What we're working on now is some platform issues, just to be sure that this thing can scale long-term for us and provide the different capabilities that we think we want out of the loyalty program because it does provide great benefit potential to the guests and obviously great benefit potential to us to understand the shopping patterns, and provides us an ability to actually promote to a customer in a different way.

So we're doing some upgrades on that platform and that's going to be our near-term focus, and the conversion of the chain to the points-based program will follow on to that platform upgrade.

In terms of the usage on each, again as I mentioned before, we're pleased with both.

The points program does have some advantages to the guests as well as to us, and that's why we do see long-term making that switch over.

Thanks, that's helpful.

Then just thinking about the data that you're able to collect from the loyalty program.

Is this something that you've been using a lot to coordinate with your marketing efforts?

Is that something we might see more of as we move forward?

Yes.

We collect a tremendous amount of very rich data.

So we know who our guest is, how often she shops, what she's buying.

It's very, very rich.

We have always used it to some extent on our marketing.

For instance, our direct mail pieces.

But this is an area that's not just true for Ulta, but many companies are looking to leverage the data that they have.

It sounds very easy to do.

It's actually in reality very challenging, very complex to do.

To be able to mind that data and convert it into practical uses, to actually target that guest better.

We made progress in 2010.

We will make more progress in 2011, but this is a long-term initiative that will reap benefits for us for years to come.

It's not simply a light switch to throw on and you capture everything and then you have to figure out how to beat that.

This actually has incremental benefits for the foreseeable future.

I would remind you that what's especially exciting from an Ulta standpoint is the size of our loyalty database.

We have close to eight million active members in that now which for a company our size is very, very large.

It's very attractive, so we're putting a lot of time and effort into this, and expect that we will continue do so not just in 2011, but over the next number of years.

Great.

Thanks a lot guys and good luck this year.

Thanks.

Thank you.

Our next question comes from the line of Samantha Panella with Raymond James.

Please proceed with your question.

Thanks.

Congratulations on a great quarter and a great year.

Thanks.

In terms of the Salon business and the positive comps you saw in the fourth quarter, what's driving this?

Is it the new services such as brows and skincare and are those services valuable at all of your locations?

Overall our Salon business was positive comp as we mentioned in our prepared comments.

It did trail the overall trend of the box, the product side of our business, but we do believe we are gaining share in this business since clearly our performance seems better than others that are out there.

There's lots of opportunity for improvement here.

We are pleased that we are expanding into -- we're testing a number of new services.

The skin services and brow services that we have are available virtually in all stores.

There's a couple of unique situations where it's not, and in some stores it's not able to be done on the sales floor because of state regulations, but generally it is an all store offering.

We have an opportunity to improve in our traffic counts in the Salon, and for 2011 we're clearly focused on that.

So the improved traffic count for the box as a whole that we commented on wasn't exactly true in the Salon.

Our Salon performance was not as good as that.

So we're encouraged by some of the things we're working on, but we have a good amount of runway to work down here.

Okay, great, thanks and good luck.

Thanks, Sam.

Thank you.

Our next question comes from the line of Evren Kopelman with Wells Fargo.

Please proceed with your question.

Thank you.

Two questions.

One is on the product introduction pipeline.

As you get into Q2 and your going to lap the introduction of Philosophy skincare into the all of the stores, can you give us a little bit more color on your plans to the extent that you can?

Secondly, a question for Gregg.

Your gross margin guidance for Q1, the 125 basis points, if I hear that right.

I'm comparing that to Q4 where you got a 110 basis points, although the comp was a ten and this would be a comp around six, right, the midpoint?

Why are you getting more gross margin leverage on a lower comp in Q1 relative to Q4?

Thanks.

On the first part of the question, we don't comment on brands and brand introductions as they go out.

But as you said, we did introduce Philosophy in the second quarter of last year.

We have a lot of exciting things coming from Philosophy as well as other brands, so as we look at the year as a whole, we obviously are going against some higher comps as the year unfolds.

But we're very excited about our offering, and the offering is made up of new products from existing brands, it's made up of line extensions from existing brands like Bare Escentuals skincare and Benefit skincare, it's made up of new programs that we have been able to put together from Philosophy as well as others that we're very excited about that present significant opportunities for us.

We've new services and we have new brands, so when you look at what's ahead for us, we're excited about the entire portfolio which expands much beyond just adding new brands.

That is clearly a component of our growth plans, but it is only one.

There's many other levers for us.

So as we look out, we are quite excited about some of the things that we'll be talking about with you in future calls.

So, Evren, on the gross margin transition from Q4 to Q1, certainly in Q4 we had, as you pointed out, a much higher count.

We only got 60 basis points.

I say only, but we got 60 basis points of leverage on fixed store expenses on that higher count.

But remember that has a pretty significant new store element to it for those stores that were just opened in the third quarter.

Remember we talked about that on the third quarter call.

Now coming into the first quarter, we're very pleased with their performance coming out of the fourth quarter, and therefore those stores are starting to mature, albeit very, very early because they've been open for 6-12 months, and as a result of that, we're getting better productivity out of them which is pretty consistent with where I would expect our model to behave.

Therefore, we'll get about comparable fixed store leverage in the first quarter on a smaller count.

In addition to that, we're expecting a little bit more merchandise margin improvement in the first quarter compared to the fourth quarter.

Great.

And so --

Just remember, Evren, as you go throughout the course of the year, so now play back a little bit of what I said to Dan earlier.

Now as you go out through the course of the year, you also heard me talk about the fact that we're going to open more stores in the second quarter than we did a year ago.

So now you're going to get a little bit of pressure, so don't expect that fixed store leverage to continue to grow, if you will.

Because now we're going to get some more younger stores into the pipeline earlier in the year in 2011 than we did in the prior year.

Still getting fixed store leverage, but not at the same levels.

Makes sense.

Thanks a lot.

Congratulations.

Thanks, Evren.

Thanks, Evren.

Thank you.

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

Baird.

Please proceed with your question.

Thanks and congratulations.

Thanks, Erika.

Thanks, Erika.

When you talk about your ulta.com efforts.

Could you give any sense of the magnitude of e-commerce -- of it's contribution to sales from just a pure revenue prospective.

I know it does more than that on the brand side.

Then on your new beauty destination page.

Have you been able to get any sense of the traffic levels to the new site and sales lift for the products that you have featured there?

Yes.

Erika, you know that we're not going to tell you the details about that.

But dot com continues to be a relatively small part of our revenue base.

It is growing at very fast clip, but it is off of a small base.

It has a long runway ahead of it in terms of the revenue that it can do.

In terms of the beauty destination pages, they are getting trafficked well.

We believe that our guests are liking them from the feedback that we're getting.

In terms of the specifics around lips and all, here again I wouldn't get into the details on that.

But suffice it to say that, as you just mentioned, it serves two purposes.

Ulta.com serves two purposes.

A lot of opportunity on upside on revenue and it's been growing quickly and will continue to grow quickly.

But the second part of it is it's an instrumental component of our way of communicating with our guests and that integrated approach of leveraging both brick and more mortar and dot com.

We've made good progress on it, but we'll continue to be working on that, and there will be continued progress made in integrating that even tighter than it is today.

Okay, thanks.

Question for Gregg.

Could you talk about the factors that are supporting your merchandise margin expansion in Q4 and going forward between leveraging your scale of vendors versus private brands or your improving allocation?

A couple of macro points there, Erika.

We are getting some benefit from mix.

If you think about the drivers that we've talked about consistently in terms of expanding operating margin and the gross profit role in that expansion of operating margin, merchandise margin plays a meaningful role in it and the drivers in that are mix.

So continuing to work and manage the business for what the guest wants, also benefits overall merchandise margin because some of those categories have a higher mix.

As we continue, and the team does a tremendous job as you see managing our inventory, there's certainly are opportunities to continue to grow our scale and leverage some of our landed costs, and also to just get more effective and increase the effectiveness and therefore the overall all-in margin on promotional activities.

The same drivers that we've been talking about in terms of managing the business,the same ones we believe are opportunities going forward.

Mix, all-in promotional margin, and just continue to be cleaner inventory off of what's very clean today, and leveraging our scale.

Just to add to that, Erika.

Just a call-out.

The merchant team, the inventory team, the store teams and the finance and analytical teams have done a very good job working to be sure that our inventory is clean.

As Gregg said, we're very happy with the level and the quality of our inventory right now.

It's a very high skew business, there's a lot of trend to it and we've done a very good job of managing through 2010 that inventory, and that's helped us avoid some costly markdowns.

And also Gregg referenced the promotional level of it.

We're getting -- through the fourth quarter we were very smart in how we managed our promotions.

They were done to protect the margin that was delivered after the sale and again, credit to the merchant and the marketing team on that.

Great, thanks so much.

I assume that shrink is very well managed as well?

Extraordinarily well.

Yes.

Almost immeasurable, Erika.

Great, thanks so much.

Thank you.

Our next question comes from the line of Jason Gere with RBC Capital Markets.

Please proceed with your question.

Hi, gentlemen.

This is Joe [Spack] in for Jason.

I appreciate some of the lessons you learned, I guess, from the skin event which really sounds like it helped maintain the good momentum you had from the holiday sales.

Did the timing of that -- that it fell right after the holiday sales helped -- or like can you very easily replicate some event similar to that later on or at a different point in the year?

First of all, the event was a comp to last year, so we think that we added a number of components to make it better for this year.

So it wasn't all incremental in terms of the actions that we put out there.

The skin event, it's a natural component post-Christmas.

It's a natural time of year retail for customers to be thinking about getting back into shape.

Sporting goods stores for instance do a lot of fitness business, fitness clubs have a lot of sign-ups.

So we thought it was appropriate to build upon what was done before and help our guests get their skin back into shape, if you will.

I think the important thing of this is that it reinforces that Ulta has a true authority position, a true destination position between products and services, and expertise in our own teams in the stores and the expertise that's on the website to create a fun event.

That's fun, that helps solve something that our guest is looking to solve, and that can translate from skin to other types of things throughout the year, and I think that I mentioned Dermalogica.

When you look at our 21 Days of Beauty that kicks off this Sunday, you will see components of that come to life again.

That's why integrating all the different levers that we have, the products, the services, the existing brands, the new brands, the marketing vehicles that we have, the in-store experience is something very powerful.

Keep in mind, the things that we sell for the most part because private brands are a small part of our business, you can you find what we sell in other venues.

We're the only ones who bring it all together under one roof and add into it an environment, and an excitement for the shopping experience.

The skincare event is just a very good example of where we were able to do that successfully, so we believe there are opportunities to continue that for 2011.

Okay.

And then just one housekeeping and then one more question.

I think CapEx for the year it came in maybe a little bit lighter than you initially thought.

Was there something going on there in terms of cost-related to the store?

Was something pushed out, or is that the reason why maybe 2011 looks a little higher than --

Nothing in particular other than what I mentioned earlier.

Part of that reduction from $1.1 millionin new store investment to $900,000 is the work that the team continues to do in lowering the capital costs to build a new store, so that's certainly part of it.

Okay.

And then finally, can you talk a little bit about maybe the sensitivity to gas prices on traffic?

I don't think there's anything to be concerned about now, but if gas moves higher.

How are you thinking about the consumer and traffic over the next year?

A couple of thoughts.

First of all, we've looked at this.

In going back and looking at the effective gas prices on our business, and it would suggest that there's not a meaningful impact on our sales.

With that said, I think we would be a bit naive if we looked at what's happening with gas that's either at or approaching $4 a gallon and who knows where it's going, having no impact on retail business.

We believe that we're fortunate because of our business model though.

We have a broad section of products and services that are both need-based, as well as want-based, so there's certain things that our guests have to have in addition to those things that she wants to have.

Also our stores are very conveniently located in power centers, and we have a lot of levers that we can pull to try to maintain our very good growth in traffic.

So we are very conscience of what's happening with fuel prices, concerned about it, but comfortable that both our business model as well as the levers that we have available to us have us well prepared.

Great, thank you.

Thank you.

(Operator Instructions).

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

Please proceed with your question.

Good afternoon.

Could you address the re-image, the new launch of the Ulta brand bath products?

I've seen it looks like it's hit the circular this week, or recently.

Are you having to liquidate any of the old look or product, and just a little bit more about that new launch?

Yes, Jill, the old product is pretty much cleared out, so all of that was -- we did a very good job of moving through that in the fourth quarter, so in fact most of that is all ready out.

There's no concern about it.

The remaining product having any type of impact on our first quarter performance.

The new product we're really excited about it.

It is just finishing off.

It launches, I want to get this right, I think it launches this Sunday formally, so the stores are setting the full range of it.

And we have expanded the offering, so there's a number of new flavors in it.

We believe we've dramatically improved the packaging on it.

And clearly, you see that this business from the competitors that we have that focus only on this business, it's been a very good business of late and we're excited about the launch.

There's more new launches within Ulta to come as the year progresses.

But if you get to our stores, it looks great and there's some new formulations that, as I say, we're excited about.

Appreciate it.

Thank you.

Thank you.

Ladies and gentlemen, at this time, I would like to turn the floor back to management for any closing comments.

Well, let me thank everyone for joining us today and we will look forward to speaking to you in June to discuss our first quarter results.

So until then, thanks very much.

Thank, you.

Ladies and gentlemen, this concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.