Ulta Beauty Inc (ULTA) 2011 Q1 法說會逐字稿

Greetings and welcome to Ulta Salon, Cosmetics & Fragrance first quarter 2011 earnings conference call.

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

A brief question and answer session will follow the formal presentation.

(Operator Instructions).

As a reminder this conference is being recorded.

It is now my pleasure to introduce your host, Ms.

Allison Malkin of ICR.

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, defined as cash provided by operating activities plus purchases of property and equipment.

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 2011 first quarter results.

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

Following my opening remarks, Gregg will review our first quarter financial results and provide our 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.

Clearly, we are very pleased with our strong Q1 financial performance, as more beauty customers chose Ulta due to our expansive offering, convenient and fun store environments, and welcoming associates who are well- trained to satisfy our guests' beauty needs and wants.

Our total sales, comparable store sales, and earnings performance exceeded our expectations.

A look at our first quarter performance shows strong topline growth.

Total net sales rose 20.6% to $386 million, and comparable store sales increased 11.1%,ahead of our guidance range of 5% to 7%.

This is a meaningful gain when considered that it follows a 10.8% increase in the first quarter last year.

Our comp store sales growth was led by increased traffic along with a modest increase in ticket.

Gross profit margin expanded 230 basis points to 34.9%, which included a 90 basis point increase in merchandise margin, following a 70 basis point increase in merchandise margin last year.

Leverage of SG&A in a 67% increase in operating income to $39.9 million, which included operating margin expansion of 280 basis points to 10.1% of net sales, up from 7.3% last year.

A 61% increase in net income per diluted share to $0.37, which was ahead of the guidance range of $0.29 to $0.31 that we provided on March 10.

And a strong balance sheet.

At quarter-end, cash and equivalents were $116.8 million, up over $100 million from the prior year, and inventory was down on a per-store basis.

We attribute our better than expected results, in part, to the continued strong execution of our core growth initiatives.

Let me update you on a few of these.

We made progress in our store expansion program as we opened five new stores during the quarter while remodeling two.

We also continue to improve our guest offering.

We saw strong growth across most product categories, particularly in prestige color and skincare.

Sales growth came from many of our longstanding brands in prestige skincare, Too Faced, LORAC, Stila, Tarte and Urban Decay, all were noteworthy.

In prestige skincare, Philosophy, Dermalogica, Clarisonic, and Bliss delivered strong results.

Our new brand additions to the offering were also strong.

Benefit skincare, Butter Nail Color, Boots Number Seven, the newly launched Ulta Brand Bath Products, and new fragrances like Coach Poppy, Marc Jacobs Daisy Eau So Fresh, and Givenchy Dance were just some of the newness that kept our product offering fresh and exciting while contributing to our financial performance.

In terms of trends that we capitalized on, the nail category was a standout performer.

Shatter from OPI was very strong.

The Katy Perry collection, introducing Shatter, was launched at Ulta and did exceptionally well.

Another trend during the quarter was curl.

We effectively highlighted our appliance offering, salon hair products, and salon professional services, to deliver the best in the hair curl trend.

In marketing, we continued to leverage our unique ability to divine products, services and in-store events to create an exciting experience for our guest.

This was very successfully brought to life during our 21 Days of Beauty event, where our prestige brands offered values, demonstrations and newness to our guests.

We also capitalized on the natural gift-giving times of Valentine's Day and Mother's Day, with successful fragrance gift-with-purchases.

We continued to utilize our loyalty database to expand our targeted marketing with more e-mail and more productive direct-mail campaigns.

And we were also pleased with our efforts in digital marketing, social media, and our test with radio to support our pre-Mother's Day sales.

For Ulta.com, we made good progress on both our objectives we have spoken of before.

Specifically, to drive eCommerce revenue and also bring the Ulta brand to life to support brick-and-mortar sales, as well.

Examples include expansion of our Beauty Destination sections to include new, fun content to inform and excite our guest.

We believe this drove our sales across both our online and brick-and-mortar channels.

Specifically driving incremental sales for our online channel, we were pleased with the introduction of our limited-time programs, such as lunch-hour specials, and plan to continue to utilize these types of programs in the future.

In stores, we continued to improve our guest service levels, which we believe led to higher guest conversion and drove additional sales.

We continue to simplify the operations of our stores, which we expect to allow us to redirect store labor to the selling floor and focus more fully on our guests.

We monitor our service scores by store, and are pleased with the progress we made in the quarter.

This long-term initiative will continue to reinforce the inviting, fun shopping environment that we have created at Ulta, a place where a guest can come learn about the newest products, test each of them, and do so in an unintimidating atmosphere with the best associates in the business available to help.

Turning to Salon, we achieved a positive comp in the quarter, yet Salon continued to perform below the rate of retail.

During the quarter, we expanded our salon marketing efforts in print, e-mail and digital, along with providing integrated product and service offerings.

We believe this contributed to Salon's positive traffic trend in the quarter.

We also continued our emphasis on stylist training, with a focus on assisting our stylists to build a larger base of loyal customers.

As we look to second quarter, we are pleased with our positioning and expect continued momentum in sales and earnings from the execution of our five key growth strategies.

In the second quarter, our plans include the opening of 19 new stores and 15 remodels of existing locations.

The second quarter will also see considerable newness in trends, brands and extensions of existing brands.

In salon hair care, we will launch Living Proof.

This line brings state-of-the-art science to hair care and will compliment our already strong offering.

We will create a men's grooming shop, which will include our existing offering along with new brands, like The Art of Shaving.

We believe this strategy will allow us to take advantage of the women in our store interested in making the man in her life look and feel better, and it makes Ulta a more compelling proposition to men shopping for grooming and beauty needs.

We will capitalize on the skincare trend with the launch of a new prestige mom and baby skincare line from California Baby, and expect to capitalize further on the nail trend with a brand extension from Sally Hanson, called Crackle.

In private label we will relaunch our Ulta cosmetics line, with all new packaging and formulations.

And finally, in Fragrance, our second quarter launches include Someday by Justin Bieber, which is sure to be a hit, as well as Channel Bleu, and Gucci Guilty Pour Homme.

Our strong marketing will continue as well, as we did in our January skincare event, in March 21 Days of Beauty Event.

In May, we launch our Love Your Hair promotion --we launched, rather, our Love Your Hair promotion, which combined industry-leading product offering with great services offered in our salon.

We successfully showed women the newest ways to pamper their straight, curly or wavy hair with innovative tools and products best suited for their hair type.

As the only national beauty retailer with a salon in every store, we are uniquely qualified to offer this type of integrated promotion.

Our e-mail, social marketing and online advertising will continue to grow as reinforcement to our print advertising.

And, finally, in Ulta.com, we will enhance our focus in driving eCommerce revenue, along with supporting the Ulta brand by launching our mobile-enabled site that will create a terrific new environment for our guests to shop on, but also to learn more about our products while they are shopping in our stores.

Additionally, we will continue to enhance our web capabilities, including a refill reminder that will deliver a better experience for our guests, while allowing us to capture more of the basic replenishment that exists in the beauty industry.

These merchandising, marketing and customer service initiatives are just some of the efforts which we expect to deliver positive second quarter comps of 6% to 8%, once again, ahead of our long-term goals.

Importantly, we expect to achieve this topline growth while expanding gross margin and leveraging expenses, leading to solid operating margin expansion in the second quarter.

Looking ahead to the year as a whole, our initiatives remain unchanged, and we are expecting a strong year.

Based on our better-than-expected performance in the first quarter and our positive second quarter outlook, we expect full-year comps to be above our long-term goal of 3% to 5% by up to 150 basis points to 200 basis points.

As a result, we expect 2011 net income to surpass the high end of our long-term target of 30%, and we expect to generate free cash flow for the year.

Now, to go into more detail on our Q1 performance and Q2 guidance, let me turn the call over to Gregg.

Thanks, Chuck.

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

During the quarter, we delivered a 20.6% increase in total sales to $386 million, ahead of our guidance of $364 million to $370 million.

Comp store sales increased 11.1%, which was also ahead of our guidance of 5% to 7%.

Our new 2010 and 2011 stores continue to exceed our expectations.

We are very pleased with performance of our new stores.

During the quarter, we opened five new stores, completed two remodels, and relocated one location.

At quarter end, we operated 394 stores, expanding square footage by 14% from last year's first quarter.

Gross profit dollars increased 29.1% to $134.9 million, from $104.5 million last year.

Gross profit margin increased 230 basis points to 34.9%.

The increase in gross profit margin was primarily driven by 90 basis points of improvement in merchandise margin, 130 basis points of increased leverage in fixed store expense due to our comp sale stores gains, and 20 basis points of improvement from supply chain efficiencies.

SG&A expenses were $94.6 million, or 24.5% of net sales, compared to $80.7 million, or 25.2% of net sales last year.

The 70 basis points of SG&A rate reduction was driven primarily by leverage on sales growth and continued prudent management of our cost structure.

Pre-opening expenses totalled $1.2 million in the quarter, which compares to $474,000 in the first quarter last year.

We opened five new stores during the quarter, compared to two new store openings last year.

Our better than expected sales growth, margin expansion, combined with our continued prudent expense management resulted in operating margin expansion of 280 basis points, to 10.1%, from 7.3% last year.

Interest expense was $173,000 and represents fees associated with our credit facility, which we did not utilize during the quarter.

The income tax rate for the first quarter was 40.1%, which compares to a tax rate of 41.2% in last year's first quarter, and was in line with our expectations.

The lower tax rate was driven by decrease in non-deductible compensation expense, compared to the first quarter last year.

Net income for the quarter increased 70.5% to $23.3 million, or $0.37 per diluted share.

This compares to net income of $13.7 million, or $0.23 per diluted share last year.

Now turning to the balance sheet and cash flows.

Merchandise inventories at end of the first quarter increased 12% to $255.5 million, compared to $228.1 million at the end of the first quarter last year.

The increase primarily reflects the addition of 47 net new stores, added over the past 12 months.

Average inventory per store declined 1.3% from the prior year, reflecting the combined efforts of inventory management initiatives, and the necessary investments to deliver an 11.1% comp store sales increase.

We continue to effectively manage both the composition and level of our inventory to deliver variety and newness to our customers in support of our growth initiatives.

Capital expenditures for the first quarter were $19.5 million.

Depreciation and amortization was $17.5 million.

Our balance sheet remains strong with no debt and $116.8 million of cash.

Now, I'd like to turn to our second quarter outlook.

We currently estimate net sales in the range of $378 million to $384 million, compared to actual second quarter 2010 net sales of $321.8 million.

This assumes a comp store sales increase of 6% to 8%.

We plan to open approximately 19 new stores in the second quarter, compared to 10 new stores last year in the second quarter.

Income per diluted share for the second quarter is estimated in the range of $0.31 to $0.33, which includes approximately $0.02 per diluted share impact from our expanded store opening program compared to last year.

This compares to actual net income per diluted share of $0.22 in the second quarter of last year, representing a growth rate of 45% at the midpoint of this range.

Income per diluted share in the second quarter of 2010 included $0.03 per share related to a non-recurring compensation charge.

In addition, we expect gross profit margin expansion of approximately 110 basis points at the midpoint of the guidance range from last year's gross profit margin of 32.3%.

As we have stated in the past, as we accelerate our new-store program through the remainder of the year, it will have an expected impact on gross profit margin.

Our gross profit margin will continue to increase, but not at the same rate as the first quarter.

This is a normal and expected impact due to the acceleration of our new-store program.

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

We expect SG&A as a percentage of net sales to decrease approximately 110 basis points at the midpoint of our guidance range, compared to last year's rate of 24.8%.

You may remember last year, our SG&A rate was negatively impacted by the non-recurring compensation charge.

As a result, we expect to deliver up to 200 basis points of operating margin expansion during the second quarter while accelerating our new store growth program.

We also expect for the second quarter to deliver the following.

Pre-opening expenses will be approximately $4 million, the effective tax rate will be approximately 40% compared to 40.7% in the second quarter last year, and fully diluted share count will be approximately 63 million.

Given our strong performance in the first quarter, and our outlook for the second quarter, we now expect our 2011 annual performance to exceed our long-term financial goals.

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

On our fourth quarter call in March, we discussed our expectations for 2011 performance to come in at the high end of our long-term goals for comparable store sales in net income growth.

You may recall from that discussion, we excluded the impact of the $0.06 per share non-recurring compensation charge in that assessment.

So on a GAAP basis, we had indicated that net income growth would surpass our long-term goals.

Given our performance during the first quarter and taking into consideration our expectations for the second quarter, we now believe we could exceed the high end of our 3% to 5% long-term target for comp store sales growth by 150 basis points to 200 basis points for the full year this year.

As a result, we also expect to exceed the high end of our long-term net income target for the full year.

As just mentioned, our net income growth expectation for 2011 assumes the add-back of the 2010 impact of $0.06 per diluted share non-recurring compensation charge.

In addition, our store expansion initiatives include the opening of approximately 61 new stores, delivering acceleration of square footage expansion to 16% this year.

In addition, we continue to expect the following for fiscal 2011.

Our store opening plans by quarter are expected to be approximately 19 in Q2, 28 in Q3, and nine in Q4.

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

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

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.

The increased investment reflects our store expansion program, as well as investments we will continue to make in technology and infrastructure to support future store growth.

This includes the addition of a third distribution center, which is scheduled to open in 2012.

We take a very disciplined approach to infrastructure investments and expect to open our third DC on time and within budget, as we did our second DC.

Depreciation and amortization for 2011 will be approximately $77 million.

Average inventory per store is expected to decrease by approximately 1% to 3% by year-end.

We believe our strong performance in first quarter reflects the continued solid execution of our strategic initiatives and our disciplined approach to growing our business.

We are pleased with the results of our efforts and remain focused on driving sales and earnings growth, generating free cash flow, and expanding operating margins solidly into the low double-digit range by 2012, 2013 time period, which is a year earlier than our previously stated goal.

As we continue to evaluate the use of our cash resources, our focus remains on appropriately investing in the growth of our business, both physical locations and our eCommerce channel, in order to maximize value for our shareholders.

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

Thanks, Gregg.

In summary, the first quarter represented a great start to the year as we grew sales and profits, gained market share, attracted new guests and maintained a strong balance sheet, all key priorities for us.

Our success is driven by the passion and commitment of everyone here at Ulta to provide the ultimate beauty experience for our guests.

With continued solid execution against our strategic initiatives, we are well-positioned to achieve our 2011 and longer-term goals of higher sales, higher profitability, and continued cash flow generation.

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

Operator?

Thank you.

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

(Operator Instructions).

Our first question is from the line of Daniel Hofkin with William Blair.

Please go ahead.

Good afternoon.

Can you hear me?

Just fine.

Just fine, Dan.

Great.

First of all, terrific results.

Just a couple questions.

First of all, given the strength in the comp sales performance, I would imagine it's pretty broad-based, both the newer stores as you talked about.

Any way to characterize the performance by age of store in some sort of buckets, if you will.

And then I have a follow-up question.

Dan, contribution, as we typically talk about this, is what we think of mature stores.

And the point there is, the older stores in our chain, the seven, eight-year-old plus stores, continue to significantly add to the comp growth.

And that should make sense to you based on where some of the growth is coming from that Chuck described.

Newness into the business, the marketing events.

So we're seeing good, strong comp-store growth out of our stable, mature base of the chain.

Great.

And then in the real estate topic, what -- any initial read on next year, either in terms of existing sites continuing to become available, vacant sites, and/or anything on the new retail center development front?

Yes, Dan, there's a little bit of new development going on out there.

The market hasn't recovered to where it was years ago.

We are finding good existing sites out there, and we feel very good about where our 2012 pipeline is.

So we've had to be creative, but we haven't sacrificed, by any means, our commitment to have quality above quantity.

But, we're feeling pretty good about where we are at this point in the year for 2012.

Okay.

Great.

One more quick one if I might.

I had heard that the, I think it is the Kinerase brand, had one of your competitors is no longer carrying it.

As I understand it, you guys are now the exclusive brick-and-mortar retailer.

Is that -- first of all, is that correct?

And if so, is that a one-off type of situation or is that representative of something you're seeing more broadly?

The answer is yes.

I don't know if I would comment on a whole lot more broadly than that, but we do still carry it.

Got it.

Okay.

Thanks very much, guys.

Thank you.

Our next question is from the line of Sam Panella with Raymond James.

Please go ahead.

Thanks, let me add my congratulations on a great quarter.

Can you talk about averaging a ticket?

It has been running about in the low single-digits now for the past five quarters.

Can you talk about the components driving that?

And then I have a follow-up question, as well.

It has been running up in the low single-digits Sam.

There's a couple of things that have been driving that, depending on which quarter we're talking about.

We have seen some slight uptick in average selling price in the most recent quarter.

That was the bigger driver of it.

If you think about some of the categories that are driving the business, it makes sense that some of those are higher average selling price categories.

Historically, the 1% to 2% increases that we've seen post the recession, some of it has been units in the basket and some of it has been average selling price.

Most recent quarter, average selling price.

Okay.

Great.

With respect to when we talked last in terms of the conference call on March 10, you're looking for comps running plus 5% to 7%.

Obviously you came in much stronger than that.

Just wondering if any of the events or new product introductions or extensions, did some of that take place in the second half of March and April?

Or any -- it sounds like the business probably accelerated in the back half of the quarter, so any commentary there?

Yes.

We sought the success out of most of the levers that we were pulling.

So in terms of the offering, the back half of the quarter is very strong.

The marketing events that we put together, again, leveraging the product, the services, the in-store events, also were very strong.

I don't think I can point to one component alone, but the beauty of our business model is that we have got a lot of things that have blended together to create a very unique offering.

And they continue to be very strong, and in fact, picked up some pace as the quarter went on.

Great.

Thanks, and good luck.

Thank you.

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

Please go ahead.

Thanks.

Good afternoon, guys.

Hello, Joe.

Hi, just a couple quick ones.

First, in terms of the online sale, how fast did ulta.com grow this quarter, year-over-year?

We don't break that out.

It continues to see very good growth.

But as we've talked about before, it is coming off of a small base.

So we're pleased with the growth that we've seen in terms of the eCommerce revenue, but there is great opportunity ahead to expand upon that.

But, again, I would stress that we're looking at it to serve two purposes.

One is the eCommerce revenue part, but the second is to support our multi-channel approach.

And increasingly today, online marketing is supporting brick-and-mortar sales.

So I mentioned that we've launched our mobile site, which allows shopping through your smartphone, for instance, but increasingly our guests are researching products when they're in a store through their smartphone.

So online has that other really critical purpose, and we're pleased with the improvements we're making there.

But on all fronts, we still have great opportunity ahead of us, both in terms of building the brand and supporting brick-and-mortar and supporting additional eCommerce sales.

Just roughly how big is that channel in term of sales today?

Is it still relatively low single-digits at this point?

Yes.

Okay.

Got it.

And then in terms of the traffic growth, this is probably a tough question to answer, but any sense of how much of that is coming from your loyalty base and an increased share of wallets of existing customers, and how much of that is coming from new customers that may be migrating from other retailers?

Yes, it's a tough question.

I should let Gregg answer the tough questions.

I like answering the easier ones.

We're making good progress on both, Joe.

We do actually track this rather closely.

I don't think we've talked much about this publicly, but we do believe we are continuing to gain share of wallet with our existing guests.

And we continue to attract a good number of new guests to Ulta, and specifically to our loyalty program.

So it's not only one of those segments.

And, Joe, we're seeing -- obviously we know how many loyalty customers we have.

We're seeing good growth in that loyalty customer base, and we also -- we don't do this anecdotally.

We do it as specifically as we can.

We can also track by major category, what is going on in the marketplace in a given quarter and compare that to our comp store sales growth.

So that is the basis for us, knowing whether or not we gain market share in total and across the individual categories.

And there is a pretty reasonable structure in the beauty category to be able to do that.

That gets to how much is new coming in, not quantified, but also where we think they're coming from.

And we have I think on the last call, I can't remember exactly when, we have said that our loyalty membership is sitting at over 8 million, and that's of active members.

And we define active as having purchased in the past 12 months.

So just evidence, again, of -- that that pool is growing very nicely.

We're doing -- we continue to improve upon how we're communicating with them, through both print, as well as digital communications, and we continue to gain more share of wallet with them.

Got it.

Just one last one.

I was actually looking through my notes, but couldn't find it.

Where is the third DC going to be located?

It will be up in the Northeast.

Okay.

Thank you.

Thanks, Joe.

Thank you.

Our next question is from the line of Brian Tunick from JPMorgan.

Hello, guys.

It's actually Ike calling in for Brian.

Congratulations on a great quarter.

I wanted to dig into the merchandise margin line a little bit.

Gregg, it accelerated from Q4's year-over-year gains.

I think it was 40 basis points in Q4 up to 90.

I guess in the current quarter -- in Q1 and then going forward, how should we think about that?

How much is coming from taking your foot off of the promotional pedal, so to speak, and inventory management?

And how much is coming from the change or a shift in mix, as customers trade up to some of the higher-margin products?

Three sources, as we talked about the last time.

Continued benefit from inventory management, some of which is the level of promotional activity, and some of that is just the sell-through of promotional goods, as well as mix.

So those are the three drivers.

We saw a little bit bigger impact compared to last year in the inventory management component of it.

The mix impact was about the same as it was fourth quarter of last year.

This was an exceptional performance in the quarter.

As I think I mentioned on the last call, we do expect to continue to deliver gross profit expansion driven by merchandise margin expansion.

Don't expect it to be at the same rate as the first quarter.

So, again, merchandise margin will be a driver for the rest of the year of gross profit expansion.

Don't expect it to be at the same rate as the first quarter.

Okay.

And sticking with the promotional cadence of the business going forward, are we basically back to normalized levels, so to speak, coming out of the economic downturn?

Or do you still see some more wood to chop?

I'm not sure what normalized means.

Our promotional cadence is essentially comparable to last year.

What we've -- but again, we have to be careful on how we define promotion.

From a price-discounting standpoint, it is comparable, maybe even a little bit less than it was last year.

What we have found greater success with is offering -- putting together an offering that leverages our product and our service in our in-store event capabilities, pulling that together.

So that will continue to increase, but the price discounting today is pretty stable.

And we expect that that will remain the case.

All right.

Congratulations on a great quarter, guys.

Thanks, Ike.

Thank you.

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

Please go ahead.

Okay.

Great.

Thanks.

Congratulations, guys on a great quarter.

The first question, thinking about the categories at stake here.

Can you maybe parcel out a little bit more between, what I would consider, more the high-end discretionary, what you're seeing on the appliance side?

I know you said Salon was positive, but Fragrance, as well.

Just thinking about where consumers are making those purchases, versus the more tradition, I would call staple, the skincare, the color, where you're doing exceptionally well.

Jason, I don't know if I would consider color and skincare basics, but we saw growth across most categories of product.

We saw it in prestige products; we saw it in mass; we saw it in fragrance; we saw it in skincare and color.

The appliance business is the toughest part of our business, and there is a changing dynamic that's going on there.

Part of that, a good part of that, actually, is being driven through a shift in trend.

And curl, curly hair, in curls, are emerging to be a bigger chunk of the mix than they used to be.

And the appliances for that sell at a lower retail than a flatiron, which you would use to straighten your hair.

So there is a market shift going on there.

Now, we are continuing to gain share in that business.

So although it didn't -- overall the sale comp wasn't up to everything else we had, we continued to gain share.

So there is an industry-wide issue there.

I wouldn't connect it to an economic environment.

I would connect it to a trend shift.

But the balance of our business, up and down price point and across category, was very, very consistent.

Okay.

And on that note, if you could talk about the private label business and how you're viewing that in terms of the growth that you've been seeing in the last few quarters?

How you're using that, obviously, to gain customers, too, in somewhat a weak economic environment.

I think private label or private brand, which today is mid-single-digit as a percentage of our revenue, is an opportunity for us.

There is a natural ceiling to how much business, I believe, we'll be able to do.

But I think we can expand upon it somewhat.

I think our team has done a very good job of updating the product, both the formulations, as well as the packaging, and you see that right now in some of our bath that we have already launched.

I said in the prepared comments as we get ready for our cosmetic relaunch in the second quarter.

So I think that the offering can continue to improve, and I think that as we go forward, there are opportunities for us to expand into more exclusive brands or semi-exclusive brands that we may share with one other go-to-market player.

And I would deem those as part of our private brand strategies.

So this is not like other businesses where private brand can grow to 20% or 30%.

It is nowhere near that.

But the mid-single-digit penetration that it is today can move up a couple of points, and I think we're making some good progress on that.

Okay.

And then a last question, if I may.

Gregg, I think you were talking about the operating margin target, and I think you said low double-digit.

Was that by the end of fiscal 2012?

I just wanted to see if you could put some color behind it, and how you're looking at that between gross margin and SG&A, as well.

Thanks.

We have previously said we stick to a solid low double-digit operating margin by 2013, 2014.

We now believe it is achievable that we can advance that one year to 2012, 2013.

In terms of the mix between gross profit and SG&A, relatively speaking, if you look at the last couple of years, it's been fairly balanced.

I expect that balance to be relatively consistent through the next couple of years.

May not be consistent quarter by quarter, as you have heard us talk about pulling leverage between gross profit and SG&A on an individual quarter, but over a 12-month or so time period, fairly balanced between the two.

Thank you.

Our next question is from Jill Caruthers with Johnson Rice.

Please go ahead.

If you could talk about the questions raised by the last person?

The Ulta brand relaunches -- seems you had good success with the bath products in the first quarter and you're looking to do the color this quarter.

Could you talk about the process you go through?

Do you change the pricing?

How are you doing working through the old inventory, and do you see a nice sales lift when you roll out that new product and put some marketing behind it?

Well, let's talk about the bath that we just did.

We only did segments of our bath.

The pricing is consistent.

The, there's a -- we look at it from a couple of ways.

One is the formulation.

In the bath that we relaunched, there is the new fragrances, or the new flavors, as we call them, that we launched.

So it is a much broader array of fragrance.

And they cross over different products.

So bath, moisturizing lotion, sprays, things like that.

And then the packaging itself also changed significantly.

So when you look at the offering that's in store and online today, it's great-looking packaging.

It is something that I think our guest is proud to have on her bathroom counter, and it's clearly more consistent with other brands that are out there.

And as you look at the makeup relaunch that we will do in the second quarter, I think the same thing will hold true there as well.

But the pricing stays relatively consistent.

Okay.

And then any customer sensitivity to higher gas prices, increased product costs?

It looks as though your comp performance doesn't show it, but what are you seeing out there?

Gregg has talked about this before, that the analytics would suggest that we're not significantly impacted by gas prices.

Intuitively, you would assume that our guest certainly is feeling some pinch when gas was, wherever it ended up, hovering in the mid-fours per gallon.

We have an advantage of store location, which plays to our benefit.

And we also have a much less, much smaller exposure to all the upstream costs when fuel prices go up.

We don't have a lot of products that are reliant upon that, as an example, that some other types of retailers experience.

Clearly, we've seen some impact on our supply chain cost, but I think our team has done a great job of managing that, as evidenced in our first quarter numbers that we put out.

So to say we're immune to it would not be appropriate.

To say that it has a much less impact on us than most any other retailer that you could think of would be appropriate.

And the impact that it has had, I think we've done a very good job, and expect to continue to do a good job of being able to manage that.

Jill, there is a couple structural components of our strategy, too, that help.

One, it is consumable category.

Two, we have a marketing strategy along with the newness that can get her excited about coming into the store for a very affordable purchase.

And it also can be an escape, too.

So I think those elements, as well, of our business model, that afforded us navigating through a difficult economy, also play well when you see a little bit of a pinch of consumable spending and gas prices.

Thank you.

I appreciate it.

(Operator Instructions).

Our next question is from the line of Jacob Zitter with Robert W.

Baird.

Please go ahead.

Hi, this is Jacob filling in for Erika Maschmeyer.

Could you talk a little bit about your loyalty program?

Specifically, are you any closer to rolling out the point-based program to more stores?

Jacob, no, we're sitting about where we were.

We continue to do some upgrades on the platform.

Pleased with how the points program is working, but I think we talked last time that we had some technology things that we were working on, which we're pleased again with that progress.

So, we'll keep you up to date as we continue to expand the points program.

Okay.

And I think you mentioned that you're getting better with the e-mail marketing, digital marketing.

Are you able to do more targeted marketing, based on customized shopping preferences, or is that still going to come with the platform upgrade?

No, I have talked a lot about this previously.

That is a long-term improvement opportunity, and there are incremental steps all along the way.

So, yes, we are doing, I believe, a much better job today than we were able to do before.

And in tailoring some of the messaging to a customer based on her behavior.

However, this is a long-term effort, and there will be progress made, the balance of this year, and into 2012 and 2013.

So, CRM efforts are much discussed, but there is lots of layers to that.

And it is one of the efforts I'm most excited about for our marketing team, but it is not a small effort, and it's not one that will only produce near-term benefits.

There are benefits as we continue to become more sophisticated for quite a period of time ahead of us.

Thank you, guys.

Thank you.

We have no further questions in queue at this time.

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

Okay.

Well I appreciate everyone joining us today.

We look forward to speaking to you again at -- in September, when we report our second quarter results.

So thanks again for joining us.

Thank you.

Ladies and gentlemen, this concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.