Ulta Beauty Inc (ULTA) 2012 Q3 法說會逐字稿

Greetings and welcome to the Ulta Beauty fiscal third quarter 2012 earnings results conference call.

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

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

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Laurel Lefebvre of Ulta Beauty.

Thank you, you may now begin.

Thank you.

Good afternoon and thank you for joining us for Ulta's third quarter 2012 conference call.

Hosting our call are Chuck Rubin, President and Chief Executive Officer, and Scott Settersten, Chief Financial Officer.

Before we begin I'd like to remind you of the Company's Safe Harbor language.

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 may make references during this call to the metric free cash flow, a non-GAAP financial measure defined as cash provided by operating activities minus purchase of property and equipment.

With that I'll turn the call over to Chuck.

Thanks Laurel.

Good afternoon everyone.

I'm pleased to announce very strong third quarter results.

Ulta continues to drive significant market share gains across all of our categories as we delivered 22.4% top line growth.

Same store sales increased 8.4% maintaining solid top line momentum lapping a 9.6% comp in Q3 2011, and a 12.2% comp in 2010.

We expanded gross margin and leveraged SG&A more than expected driving operating margin up 140 basis points from 10.7% in Q3 of last year to 12.1% this year.

Earnings grew 40% to $0.59 per share.

These excellent results position us to deliver sales and earnings performance for the full year well above our initial expectations.

At the beginning of the year we expected to see same store sales at or slightly above 5% and to achieve earnings per share growth of approximately 30%.

We now expect to achieve about 8% comp growth and about 40% earnings growth for 2012 assuming we achieve the midpoint of our Q4 guidance.

We delivered these numbers through our team's disciplined focus on the five components of our multi-year growth strategy -- accelerating store growth, introducing new products, services and brands, enhancing our loyalty program, broadening our marketing reach, and increasing our digital focus including Ulta.com.

Our consistent execution of these strategies continues to drive meaningful market share gains in the beauty industry across all of our major product categories.

I'd like to recap a couple of our accomplishments in each of these five areas during the third quarter and touch on what's ahead for the fourth quarter.

First, store growth.

In Q3 we opened 49 new stores, representing about 10% of our store base, which is a record number of new store openings for us and a tremendous accomplishment in a single quarter.

We ended Q3 with 537 stores in 45 states.

New store productivity continues to be very strong with the class of 2012 stores consistently outperforming their targets.

So we're very pleased with the quality of real estate we've added to the portfolio and proud of the Ulta team's execution in getting new stores opened.

We also completed 11 remodels during the third quarter and also are happy with their performance.

With about 90% of the chain opened or remodeled to our most recent store formats, we've done a nice job keeping the portfolio updated and the shopping environment and experience very consistent throughout the chain.

In the first month of the fourth quarter, we opened 13 additional stores, successfully completing our 2012 new store program.

With these, we will end the year with 550 stores for a 23% square footage increase for the year.

As we have said many times, our real estate expansion is predicated on finding great financially attractive sites.

Simply put, we will not sacrifice quality for quantity.

We do, however, have strong financial and operational capabilities that allow us to accelerate store growth if we believe the right opportunities exist.

Looking ahead to 2013, that opportunity does exist and we expect next year to be another year where we can exceed our long-term goal of 15% to 20% square footage growth.

More specifically, we are currently planning to open approximately 125 new stores in 2013 or about 22% square footage growth.

This program will look a lot like 2012 -- like the 2012 plan in terms of opening stores primarily located in suburban shopping centers, with roughly 80% of the stores in existing centers as opposed to new shopping center development.

We are confident that we have the resources and expertise to execute this aggressive new store program successfully without relaxing our high standards for the quality of the real estate, yet maintaining our high standards for store staffing and training.

Our second key growth strategy is adding new products, services and brands.

Newness has been and will remain a key driver of our growth.

We continue to see a strong pipeline of innovation in the beauty market.

We're also benefiting from the introduction of new brands, as well as new product lines within existing brands into our assortment.

In terms of brands, we launched in Q3 new skin care lines from Vichy and La Roche-Posay which rolled out to all stores and we expanded our exclusive CK One cosmetics line to 178 stores during the quarter.

We also launched Chroma Cosmetics from the Kardashians and the skin care brand Nip and Fab on the mass side of our offering.

To update you on the expansion of Clinique and Lancome boutiques which we've announced previously, our teams completed all of the 50 additional Lancome boutiques by the close of the third quarter, ending Q3 with a total of 79 Lancome doors.

We completed 29 additional Clinique boutiques, bringing the total to 42 doors at the end of Q3.

We just opened an additional Clinique boutique early in Q4 and have another five planned for early in the new fiscal year.

Execution by the team on all aspects of the implementation from fixturing to recruiting to training was exceptional, and we are very pleased to have the vast majority of these new boutiques ready to go before the holiday season.

We view these iconic brands as a great addition to our prestige skin care and cosmetics offering.

As with any new initiative, these boutiques will take time to ramp up and we expect that they will be long-term positive impacts on our guest experience.

During the third quarter trends in anti-aging, mascara, lipstick and foundations continued to be strong.

Several brands' foundation launches performed especially well, including bareMinerals Ready foundation, Urban Decay's Naked Skin and Stila's Stay All Day foundation.

The skin care category overall also saw good growth and our guests remain very interested in the high-tech beauty tools category for at home microdermabrasion, acne and wrinkle treatment and hair removal.

Clarisonic continued to outperform with new colors and special editions for men and acne treatment reaching new customer segments.

In terms of new brands for Q4, we will launch a new chemical and cruelty free line of body care products from the brand Nourish.

This certified organic brand expands our assortment of organic products that our guests are increasingly asking for.

We will also add some exclusive to Ulta products from existing brands we carry.

For example, Amp2, an instant volume texturizer from the brand Living Proof will be exclusively available at Ulta for several months.

Living Proof is currently in the limelight with the recent news that Jennifer Aniston became the spokesperson and face of the brand.

In the hair appliance category we are introducing an exclusive Ulta version of the GHD luxury flat iron, the number one selling flat iron in Europe, and a new assortment of Ulta G hair tools featuring exclusive holiday patterns.

In prestige cosmetics some of the new products we're excited about include the Vice eye shadow palette from Urban Decay and a special bareMinerals kit exclusive to Ulta which commemorates Ulta's 10 year partnership with bareMinerals.

In the nail category, OPI's latest nail polish collection, Sky Fall, recently launched and has been off to a strong start.

While these are all great additions to our assortment, a key focus in Q4 is obviously the holiday season.

Our stores are set for the holidays with a dominant in-store presentation with improved signage and holiday gifts featured throughout the stores and online.

This year we've made it even easier to find the perfect gift at Ulta with a terrific assortment of fragrances, gift sets and stocking stuffers, many of them exclusive to Ulta.

Give you a sense of fragrance.

Last year we talked -- last quarter rather, we talked about the impressive number of fragrance launches in Q3 including Mark Jacobs Dot and Coach Poppy Blossom, just to name a couple.

A strong assortment of new fragrances prepares us well for the upcoming holiday season when this category takes center stage for gift giving, supported of course by our compelling gift with purchase offers for fragrance.

This year we will offer two GWPs, running now is a fun, four piece martini pitcher and glassware set and starting shortly is our now famous luxury robe GWP.

We also have a great assortment of holiday gift sets from all of our prestige cosmetic brands across a wide range of price points.

In fact, we have over 120 holiday gift sets, many exclusive to Ulta, offering great fashion at great value.

A holiday tradition at Ulta, our private label blockbuster color cosmetic kits, branded this year, Beauty Gems are attractively packaged gift sets that offer great value and are expected to be some of our hottest selling items during the holidays.

We're also a great destination for stocking stuffers with our five for $5 and five for $10 mix and match offering, body shop giftables and Ulta holiday bath collection.

In summary, we're very pleased with both our holiday merchandise offering and inventory levels this year.

As you read in our press release, we made some strategic investments in core inventory to ensure a great guest experience throughout the holiday season and into the new year.

Scott will get into more detail on the financial impact of this investment in a moment.

Turning to our services business, salon sales were solid in the third quarter driven by customer acquisition and retention with compelling offers.

Our salon comps were below the overall comp, but very strong competitively.

Our fall winter trend collection which featured the newest looks in hair styles and color and showcased our salon associates' expertise has been very well received.

In Q4, the salon business will continue to drive performance with cut and color offers, promotions to drive awareness and trial like our free updo promotion, and special offers for our OPI gel nail service and mini facials.

We will continue to expand our microdermabrasion service and high quality hair extension service.

Both of these are available in about 200 stores today with plans for further roll-out into 2013.

Next let me update you on our third growth strategy, enhancing our loyalty program.

We currently boast 10.5 million active loyalty customers, up about 20% compared to a year ago.

Our loyalty programs continue to fuel our very successful direct marketing programs with the long-term goal of driving higher share of our guests' beauty spend.

Late in the third quarter we implemented the first phase of our new CRM solution.

This tool will help us mine the rich customer data in our loyalty member database and over time assist in the greater personalization of our marketing.

As I've said, this is a significant long-term opportunity for us which will deliver multi-year benefits as we build on our skills in personalizing our communications in an increasingly sophisticated way.

In the fourth quarter, we will begin to utilize this new CRM solution to better target our guests, including birthday e-mails and grand opening notifications and communications designed to incent our guests to achieve platinum status in our rewards program.

Moving on to our fourth growth strategy, broadening our marketing reach.

While we continue to grow our business through our highly effective direct marketing approach, at the same time we are expanding our marketing efforts to drive traffic and strengthen our positioning as a beauty and trend authority.

Third quarter highlights included our partnership with Allure magazine to create a special 13th issue exclusively for Ulta.

The publication was available only at our stores and was highly regarded in the industry for its high quality editorial content.

In September we promoted our 21 Days of Beauty event, focused on prestige brands in skin care and cosmetics.

We offered daily Beauty Steals to drive traffic and repeat visits, often featuring new or exclusive products and kits.

We offer our 21 Days of Beauty promotion twice a year and this most recent one has been our most successful event yet.

In October our teams went all out to support the Breast Cancer Research Foundation which is Ulta's focused charity.

The campaign included a month long sale of logoed products to raise funds for BCRF and salon events featuring free haircuts and free skin care treatments with a donation to the BCRF.

On the media and public relations side our team executed several high profile activities in Q3 to put the spotlight on the Ulta brand, including events around Fashion Week and our Donate with a Kiss campaign in support of the Breast Cancer Research Foundation.

In September Ulta Beauty was announced as the cosmetic sponsor of The Face, a new modeling competition reality TV series set to debut this February on the Oxygen Network.

The show features super model coaches Naomi Campbell and Karolina Kurkova.

The winner of the series will become the newest face of Ulta Beauty in ads and promotions during the fall and holiday seasons next year.

Looking ahead to the fourth quarter our marketing focus will shift to position Ulta as a destination for holiday shopping.

We'll communicate our assortment of great gifts offered at a wide range of price points as well as a focus on our fragrance offering and very popular gift with purchase programs I mentioned earlier.

On the PR side, we started out Q4 with a fun segment on Shark Tank, the ABC television series watched by more than 6 million viewers.

The show featured Nail Pack, an innovative portable nail product that one of the sharks invested in which is now sold at Ulta stores and online.

The fifth growth strategy is our digital focus including Ulta.com.

In Q3 we continued to see rapid growth in online sales as our promotions, including our successful limited time beauty breaks and improvements to our site's content continued to drive traffic and conversion.

A great example of our enhanced content are the videos hosted on the site in conjunction with our integrated fall beauty preview campaign which we did in partnership with Conde Nast.

How to tutorials from Allure, Glamour, Lucky, Self and Teen Vogue brought to life each of the featured looks or trends.

On the technology side we deployed our first Apple and Android mobile apps in October.

We also deployed new capabilities related to e-gift cards and enhanced our social media presence by enabling Pinterest.

We also focused on making sure the website is ready for the high volumes of orders we expect during the holiday season by improving overall page load times.

For Q4 we plan to improve our digital abilities to recommend relevant products to our guests and to continue to refine our e-mail targeting capability by leveraging our new CRM tool.

For Cyber Monday we more than doubled the amount of exclusive deals and drove our biggest ever Cyber Monday sales performance.

Our commitment to execute our digital strategy positions us to continuously improve the overall guest experience.

In summary, we continue to make significant strides in our five key growth initiatives with a lot of opportunity ahead for each one of them.

We believe this comprehensive and focused strategy combined with consistent execution will drive sustainable share gains and strong sales and profit growth in the quarters and years to come.

Before I turn the call over to our CFO, Scott Settersten, I'd like to touch on the topic of our CFO search.

We are extremely fortunate to have Scott, a seasoned finance executive with more than seven years of tenure with Ulta step into the CFO role.

I have complete confidence in Scott and his ability to lead the finance team and to be a great partner to me and the rest of the senior leadership team.

We have relaunched our CFO search, for which Scott is clearly a very strong candidate, but with the demands of the business during the holiday season, and the obvious challenges of recruiting at this time of year, frankly I don't expect a lot of activity before the new year.

Because of Scott's knowledge of the Company, expertise and leadership, we are highly confident we won't miss a beat during this time and with that, I'll ask Scott to get into more detailed discussion on our financial results.

Thanks, Chuck.

Good afternoon everyone.

Ulta's third quarter results were once again driven by strong top line growth, coupled with operating margin improvement.

Total sales increased 22% to $506 million, with strength across all categories.

Same store sales increased 8.4% on top of a 9.6% comp in Q3 of last year.

Traffic was the major driver of the comp, representing more than 90% with average ticket up slightly.

Gross profit dollars increased 24% to $185 million, with gross profit margin up 60 basis points to 36.7%.

Roughly half of the improvement was driven by better merchandise margins, with the remainder attributed to leveraged and fixed costs on our strong comp.

As planned, fixed store leverage was lower than what we achieved earlier in the year, due to the large number of stores we opened in the last two quarters, 22 in Q2 and 49 in Q3 this year, compared to 21 in Q2 and 28 in Q3 last year.

The Northeast DC continues to perform well.

We expect to see a slight benefit from our improved network during the fourth quarter and a more meaningful benefit to margins in 2013.

SG&A expenses increased to 16.8% to $118 million, down 120 basis points as a rate of sales to 23.3%.

We leveraged operating expenses on a strong comp and consistent cost disciplines.

Pre-opening expense increased in line with our accelerated store opening program at $6.3 million compared to $4 million last year as we opened a record 49 new stores, remodeled 11 stores and relocated 1 store in the third quarter, compared to 28 new stores, 1 relocation, and no remodels during the third quarter of 2011.

All in, operating margin improved by 140 basis points to 12.1% versus 10.7% in Q3 of last year as we continued to deliver strong operating execution and remained focused on cost management.

Our tax rate was 37.7% versus 39.2% in last year's third quarter.

The improvement in the rate was driven primarily by stock option exercises and was worth about $0.01 of earnings per share for the quarter.

We expect our tax rate to be approximately 38.6% for the full year.

Net income increased 42.5% to $38.2 million or $0.59 per diluted share versus $26.8 million or $0.42 per diluted share in last year's third quarter.

Now taking a look at the balance sheet.

Merchandise inventories at the end of the quarter were $462.8 million, compared to $354.9 million at the end of the third quarter last year, up roughly 30% in dollars and 7.3% on a per store basis.

The increase is primarily due to the 95 net new stores we opened in the past year, along with our normal holiday build.

The increase also reflects incremental inventory related to the 79 prestige brand boutiques which were added in Q3 as well as strategic inventory investment in core high turn SKUs to ensure we support strong in stock levels throughout the holiday season and into the new year.

We will make additional investments in inventory through the fourth quarter which we believe is a good use of cash and helps our business long term.

As a result of the additional inventory investment, you should expect to see our average inventory per store to increase year-over-year in the low double digits as of the end of Q4.

We would characterize this as a one time increase that equalizes the average inventory per store levels quarter-to-quarter.

I would also note that the basic items we are investing in do not add any obsolescence risk.

Looking ahead to 2013, we expect per store inventories to grow at a lower rate than our comp sales, absent any major new brand additions.

The additional inventory investments that we are making do not have a significant impact on our new store model.

Capital expenditures for the third quarter were $76.7 million compared to $45 million for the same period last year, mainly driven by our accelerated store opening program.

Depreciation and amortization for the quarter was $22.2 million.

Turning to our outlook for Q4.

It's still early in the holiday season and somewhat challenging to forecast the mood of the customer.

That said, we feel very good about our plan, the amount of newness we are offering our guests and our teams' execution.

We were very pleased with our Black Friday weekend and our Cyber Monday sales with both events achieving record sales performance.

So with all that as a backdrop, we estimate Q4 sales will be in the range of $742 million to $754 million, versus $582.5 million last year.

This includes the impact of the 53rd week this year, worth about $35 million in sales.

We anticipate that comp store sales will increase in the range of 5% to 7% on top of the 11.5% comp we achieved in Q4 last year.

Our guidance includes the disruption we experienced from Hurricane Sandy, which impacted almost 20% of the chain with many stores closed for multiple days.

As we do every year, we plan to announce our holiday sales on January 4, to provide you a view of our six week holiday selling season.

We expect our fourth quarter earnings per share to be in the range of $0.96 to $0.98, compared to EPS of $0.73 in Q4 of 2011.

Our expectations for Q4 include the positive impact of the extra week in the quarter, which we estimate will contribute approximately $0.04 of earnings per share.

Gross profit margin is expected to increase approximately 30 basis points at the midpoint of the guidance range, driven by improvement in merchandise margin and leverage of fixed store expenses.

SG&A rate is expected to decrease around 90 basis points at the midpoint of the range versus last year's rate of 21.3%.

Pre-opening expenses are expected to be approximately $2 million, up $1 million compared to last year's fourth quarter, driven by the acceleration of our new store program.

This increase in pre-opening expense will negatively impact operating margin by about 10 basis points in the quarter.

All in, operating margin is expected to increase approximately 100 basis points at the midpoint of the range.

We expect our tax rate to be approximately 38.6%, and we anticipate the fully diluted share count to be about 64.8 million.

To recap the full year, we expect to significantly outperform our original sales and earnings expectations.

Sales are expected to exceed $2.2 billion, more than 24% growth compared to 2011.

We are raising our guidance for earnings per share for the full year to a range of $2.64 to $2.66, representing approximately 40% growth.

This is well above our long-term goal and our expectations at the beginning of the year of achieving 30% EPS growth despite the roughly $0.07 negative impact from our accelerated new store program, the new DC, and the addition of prestige brand boutiques.

Total pre-opening expense for the year is expected to be $15 million, compared to $10 million in fiscal 2011, negatively impacting earnings per share this year by about $0.05 per share.

Capital expenditures for the full year 2012 are expected to be approximately $180 million, about $51 million higher than our capital expenditure program in 2011 driven by the acceleration of our new store program, store remodels and the expansion of prestige brand boutiques.

Depreciation and amortization are expected to be approximately $90 million.

We expect to generate strong free cash flow for the year and we'll continue to evaluate with our Board the best use of any excess cash.

To wrap up, Ulta is well positioned to drive robust sales and profit growth well into the future.

All the contributors to our success that we've been discussing with you have tremendous multi-year potential.

We're highly confident in our store build-out plans, the quality of our real estate and the sustainability of the maturation curve of our new stores.

We expect to continue to offer newness to our guests in terms of products, brands and services.

We have significant opportunities to drive benefits from our supply chain, from our marketing and CRM investments, and from increasing our digital capabilities.

We remain very confident in delivering our long-term financial model, based on 3% to 5% comps, 15% to 20% annual square footage growth, 25% to 30% earnings growth and targeting a mid-teens operating margin in the next few years.

With that, I'll turn the call back over to Chuck.

Thanks, Scott.

Before we start the Q&A session, I would like to thank our 15,000 associates for all they do to make Ulta a winning formula that is rapidly gaining market share in the beauty industry.

Our team always works hard but I'd like to recognize in particular all the efforts of our field teams and our corporate associates to prepare for and then to recover from the historic storm impacting the East Coast just a month ago.

And thank them for all they did to take care of each other, and to take care of our guests.

I'm always very proud of this team but never more so than when seeing their commitment and engagement to overcome this challenge.

Now, let's turn the call back to the operator to open it up for your questions.

Operator?

Thank you.

We'll now be conducting a question-and-answer session.

(Operator Instructions)

Brian Tunick, JPMorgan.

Thanks.

Congrats everyone for a great quarter.

I guess, Chuck, I know it's a late holiday this year and people might be a little behind the 8-ball, given what they've said about some November comps out there.

But just curious of your view of the overall promotional environment either from what you're seeing on the department store side or on the drugstore side.

And then the second question is, you talk about a 1,200 store target long-term.

You're obviously accelerating that here.

What's the thought between how much of that has to come from existing or reconfigured real estate versus when are we going to need to see new store development begin to ramp up.

Thanks very much.

Brian, let's take the second one first.

I think that clearly for the 1,200 stores there is going to be a need for new construction.

Obviously with our announcement today we feel really good about 2013 and most of those stores are existing real estate.

The pipeline into 2014, believe it or not, we've already approved some sites for that year, it's a little early to look at it at that point but there are some seeds of new development starting to show up and we do have high hopes that the real estate market does start to show some new development as you move into the out years.

But clearly to get to the 1,200 we will need some new development but we do think that will start to materialize.

In terms of your first question on the promotional environment, there does seem to be a wide range of activity in retail today and it goes beyond the beauty market.

Clearly, our performance this quarter continued to gain market share, so the customer continues to vote that they like what we do.

We're well positioned in our strategy for the fourth quarter between the breadth of our offering, everything from mass through prestige, from cosmetics to skin care to hair care, across price points, using our loyalty program.

We are well positioned to add value to the customer and we are seeing that she is shopping for value, as Scott mentioned in our prepared comments, our Black Friday weekend and Cyber Monday were terrific.

They were very big and -- but she was looking for value but we have a very sound offering to be able to cater to that, using some of the things we talked about in the script.

Fantastic.

Thanks so much.

Thanks, Brian.

Matthew Fassler, Goldman Sachs.

Thanks a lot and good afternoon, congratulations on your performance.

I want to talk for a moment about gross margin.

First of all, if you look at the fixed leverage that you generated it was the lower end of what you've typically been doing with a pretty good comp.

How much of that was absorbing issues like Chambersburg and the prestige investment and perhaps offsetting what would have been better natural leverage on occupancy given the comp that you put up?

Yes, Matt, the leverage that you're referring to I agree, it's a little bit unexpected.

But the drivers of that were additional labor that we pushed through the supply chain and other additional costs that were related to these inventory investments that we made during the third quarter.

And to the extent that that labor shows up in gross margin, would that happen kind of in the DC's?

Exactly, a little bit of deleverage in the DC's.

Again, as Scott mentioned earlier, don't forget, the number of stores that we've opened, we had a record number of stores in the third quarter.

So that had a little bit of a drag on us as well, on not being able to leverage as high in this fixed store expense.

Understood.

Scott, just to clarify, the gross margin expansion you talked about for Q4, I want to make sure I didn't mishear.

Was that 30 basis points?

That's right, 30 basis points at the midpoint of the range.

If you think about that relative to the trend in recent quarters, that would be a bit lower as well.

So can you talk about -- understanding that your guidance has proven conservative.

If you look at the components of the budget that take to it that level, how should we think about them?

We're thinking about the hurdles that's we're jumping over from last year.

You have to remember that the comp last year was significantly higher, was 11% plus for the quarter.

And a 12% plus during that very important six week holiday selling season.

As we look at it year-over-year we see that merchandise margin relatively flattish and a little bit of pressure on the fixed store leverage because of the large number of new stores that we just put in place over the last two quarters.

And does the extra week help that at all or is that kind of a non-event for --

It's really a non-event.

Got it.

Thank you so much, guys.

Hey, Matt, just I would add, keep in mind on the merchandise margin that in the last oh, roughly two years, we've added close to a couple of hundred basis points on the merchandise margin, and what we've said is long term there's opportunity both on SG&A as well as on the margin side of the equation.

They won't always be equal.

They'll vary between the two of them quarter-by-quarter.

But on the long term, we think that they do somewhat mirror themselves.

They'll be about equal in their contribution to our overall operating margin.

Understood.

Thank you.

Thanks, Matt.

Joseph Altobello, Oppenheimer.

Thanks.

Good afternoon, guys.

Just first quick housekeeping question.

You mentioned Sandy.

What was the impact on comps this quarter and what are you expecting to be the impact on comps in the fourth quarter?

The impact that we envision in the fourth quarter is included in the guidance that we gave, that 5% to 7%.

It's tough to be very specific about that, Joe, because you clearly have the impact of when stores were closed and we had close to 20% of the store base that was affected and closed from either a day or two to a number of days.

But then you have the aftereffect.

Once the store's back open, it still takes a little bit of a recovery time to get back into business and for those stores we weren't the first thing that people affected by Sandy were going out to purchase.

So to our best guess, from what we've seen thus far, we think that this is going to impact the quarter up to 100 basis points, 50 to 75, up to 100 basis points.

For the fourth quarter?

Yes.

Okay.

Okay.

And just switching gears to the real estate opportunity, you obviously, next year you're looking to do another 23% square footage growth.

What's driving that opportunity?

Is it just more real estate coming your way, more centers being built.

And then secondly, how are you guys handling that internally?

You added 100 or will add 100 doors or so this year, and 125 next year.

The numbers are getting pretty big, so are you guys adding people?

How are you adding capabilities to keep up with that opportunity?

Yes, we've added people.

Obviously you can't grow a retail chain without adding people to it.

We've added obviously the people in the stores, but we have more construction people, we have more store set people, we do have more inventory people.

I mean on the real estate side, Chuck, sorry.

Sorry?

On the real estate side, sorry about that.

On the real estate side, the team is a little bit larger but not extensively.

The real estate team can flex with some good flexibility because you do use other third parties to help find sites.

There's a broker community that we leverage extensively.

I've talked before that our real estate group is a very strong part of our Company, our real estate and construction teams and store set teams.

So we've got very, very strong capabilities on this and clearly as we've ramped up the store count, we've added additional people to help get that executed but the core team, the core leadership team of our store set teams, construction, the real estate teams, the deal makers, it's just a very strong core group of people.

To your question, the first part of your question, we said in our comments that about 80% of the chain -- 80% of the stores, rather, for 2013 are existing real estate so there are seeds of new development, but it's not a heavy influence into next year and I've talked about this publicly a number of times.

Our team's very creative in going out to find opportunities for stores.

We still have tremendous white space in the country for stores to go in and the fact that we have become much larger and more successful, we are a very attractive tenant for landlords.

You put all of that together and that is what has allowed us to find these opportunities and clearly as evidenced even by these results for the third quarter, these new stores are performing very well and it is part of our DNA that we will not pursue quantity above quality.

We just happen to be finding both right now.

Okay.

Great.

Thanks, guys.

Neely Tamminga, Piper Jaffray.

Good afternoon and congratulations you guys on a great quarter.

Thanks, Neely.

You bet.

I have one and-a-half questions I think here.

So going back to the real estate, composition of the markets, I absolutely get kind of the new center development versus existing center but can you give us a sense of when we look into that 2013 on the 125 stores, how many new markets will that represent or to existing markets to this year?

I don't know if we want to break into that just yet.

There's a fair number of new markets but it depends on how you define the market as well, Neely.

I used this example quite often.

You take San Francisco where we have, I don't know, 10, 12 stores, it's a market that can support significantly more than that.

As we put more stores in San Francisco and it's into the San Francisco general market, a new store is 10 miles away from an existing store.

Is that considered new, a new market or not?

So our point is that there's a lot of greenfield out there.

There are some of the stores for next year that are going into single market, single store or two store markets.

But a lot of them are in-filling into these bigger markets as a whole.

So it's kind of a broad-brushed approach that we've got here.

Okay.

And then your loyalty program, unless I missed it, did you actually say -- did you fully convert to the new program in all markets or are you still -- where are you in that process?

We still have half the chain on the new program and half the chain on the legacy program.

We had converted -- we converted a number of stores earlier this year and our goal is to get to the one program, the points based program.

We're pleased with how the transition's going but there are changes to the program.

We want to get through a full cycle of customer shopping patterns, so we understand all the components to it.

We're still half and half.

Would that be more like a spring revisit situation at this point?

We'll see.

Okay.

We still have another, I don't know, close to six months I guess to go before we anniversary the conversions.

So we're making good progress and we're pleased with the new program.

Honestly we're pleased with the old program.

It continues to fuel a lot of goodness for us.

We will get to the one program but we just haven't announced the timing exactly.

Great.

And I just -- I actually have one more on fragrance.

I think it's really interesting what you're saying about fragrance and the strength that you saw in Q3.

Has that historically been a really pretty good predictor for holiday and then maybe even carrying it further into Valentine's Day if you think about the key selling seasons for fragrance?

When did fragrance really -- remind us, when did fragrance really start to get lit up a little bit from a category perspective?

Well, fragrance is -- what happened in Q3 was there was a lot of newness, so we have a lot of new fragrances that have been introduced.

We'll see how it goes for fourth quarter.

We haven't really hit the main stride for the fragrance category yet.

That does tend to peak very quickly as you get close to the holiday but newness is important and between that and there's a lot of newness, there's a lot of core fragrances that we've had.

And our GWPs continue to be well received in this fragrance area.

So too soon to tell how the fourth quarter's going to shake out on that but we think our plan is really well laid out.

Thanks, Chuck and the team, and best wishes this holiday.

Thanks, Neely.

Daniel Hofkin, William Blair.

Good afternoon.

Another very nice quarter.

Thank you.

Just a couple questions I guess.

First, maybe you touched on this earlier but can you say anything about sort of the flow of store openings in 2013?

Obviously I would expect it to be somewhat smoother compared to this year but correct me if I'm wrong about that.

Obviously when we get to March Dan, we'll give you a better predictor of how the store roll-out schedule is going to work for next year.

I don't think you'd be too far off base if you use 2012 as kind of the proxy as far as store roll-out for 2013 at this stage.

Kind of gross it up proportionately you're saying basically?

Right.

That would be your best bet at this point in time.

Okay.

And then my next question is I guess in the near term you're seeing more contribution from the SG&A leverage.

You've had huge improvement in the last several years in gross margin.

If we look forward over the next two, three years and you guys still thinking in terms of a mid-teens operating margin, how do you see the contribution splitting up between gross and SG&A?

Again, as we've progressed, looked to the future, we're still working on achieving our mid-teen operating margin in the next few years, Dan, and again, it's going to be balanced between both gross profit and SG&A leverage.

So again, it's going to move in tandem over the quarters.

It's not necessarily going to be in perfect balance each quarter.

There's going to be a little lumpiness along the way.

But again, all in, that's where we're headed on target.

Okay, so would it be just all else equal fair to say that you'd expect because the DC will be further in the ramp-up next year, and I guess the rate of store growth is similar in terms of percentage, you'd expect potentially more gross margin improvement year-over-year in 2013 than in 2012?

We're not ready to get into that quite yet today, Dan.

We'll be prepared to give you a little bit more detail on that when we talk to you in March.

No problem.

All right, thanks very much, guys.

Best of luck.

Thanks, Dan.

Erika Maschmeyer, Robert W. Baird.

Thanks.

Congratulations.

Thanks Erika.

The ticket increase that you saw this quarter was slightly lower than it has been.

Any factors to call out there?

Missed the beginning.

The what increase.

I'm sorry, the increase in your ticket.

No, most of the increase has been driven off of traffic.

Last quarter was a little more balanced between ticket and traffic.

But we've said all along that long-term we think that traffic will be more the driver.

This quarter was generally in line, I think, with that mix.

We're very pleased.

We do think it's a much healthier and sustainable comp driver when most of that's coming out of traffic, not ticket.

I completely agree.

That all makes sense.

And then could you talk a little about your in-stock levels, maybe grade yourself there, kind of how are you thinking about that and what types of initiatives are you investing in to continue to improve in that area?

Erika, our number one goal is to provide our guests with the best in store experience that we can and obviously part of that is maintaining high in stock levels.

As we came out of a spectacular fourth quarter last year with the high comps that we had, we found that we had some in stock challenges, as we worked our way post holiday and into the January, February time frame.

We've also noticed over the years that some of our smaller vendors are having more of a challenge keeping up with our out-of-stocks, as our store base continues to grow.

So the investments that we're making are in core high velocity SKUs with no obsolescence risk.

We will remain highly disciplined and continue to prudently manage our inventory levels as we have in the past.

Again, this -- there might be a little upside to comps in the January, February time frame but this in our view is a long-term investment.

It's going to help the business in the long term.

Just to add to that, Erika, if you go back and look at our per store inventories, they generally have been relatively consistent quarter-by-quarter.

The end of fourth quarter this past year, we dipped down.

So the additional inventory that Scott talked about, this year we're expecting our per store inventory at the end of fourth quarter to be up low double-digit.

It is kind of a one-timer, just to get the per stores by quarter more comparable.

And to Scott's point, the additional inventory that we bought and anticipate continuing to buy, it's not really specific to holiday.

It's core.

And hence, we're not overly worried about obsolescence of this stock.

That makes sense.

Thanks so much.

Thanks, Erika.

Evren Kopelman, Wells Fargo.

Thank you.

Good afternoon, everyone.

I wanted to ask as you're opening more and more -- as you have been opening more and more new stores each year, have you seen any changes to the store maturity model that you've shared with us in the past?

You know, we're opening stronger than we had been before.

But there's still the maturity curve that we've talked about before.

So --

And the new stores class I would add, the new store class in 2012 is operating, delivering at above our expectations and again, I think we may have mentioned this previously.

Yes, the older stores and the new store comps are built in to our guidance.

The older stores are trending a bit above those post five year comps that are a part of our standard store model.

Oh, great.

Okay.

And then for next year thinking about the pre opening expenses with the higher number of new stores, is it fair if we just looked at about per store investment this year and extrapolate, or will there be further savings as you're opening more stores on the store investment?

I think I wouldn't anticipate a lot of additional savings per store.

The market continues to evolve and it's an interesting scenario.

Compared to a couple of years ago, there were far fewer suppliers, contractors, et cetera, so the supply of resources has tightened up a bit.

Therefore, some of the cost savings that we've gotten before, we're not going to lose, but I'm not sure that we'll see as much additional savings there.

So I think I would model it to be relatively consistent to this year.

Okay.

And then lastly, if I could ask on the balance sheet, with the growing cash balance, any further thoughts on use of cash after all your clearly store opening plans given the upcoming tax rate changes, or any thoughts on special dividends or stock buyback programs?

Thanks.

Hey, Evren.

We discuss the cash balance and the best uses of cash with our Board on a regular basis.

As you know, we paid a special dividend back in May of this year.

At this point in time we've determined collectively that the best use of cash is to continue to invest in our new store program.

That's what generates the best returns on that balance.

Operator?

Jason Gere, RBC Capital Markets.

Good afternoon.

Just I guess kind of a quick question, what do you estimate is the blended beauty growth category rate in the US?

I mean, I know your mass, your prestige, your salon but if you kind of had to aggregate that together, what type of category growth do you think you're seeing right now?

That's kind of the first question.

That we're seeing or the industry is seeing?

The industry, but to lead into the second question.

But, yes, what do you estimate the industry growth to be right now?

Firstly, I'll give you an answer but let me give you some disclaimer to it.

It's a pretty broad industry, everything from prestige to mass to hair care to appliances, et cetera.

So I'll give you that as the backdrop.

I think if you put all of that together, you're probably seeing low single digit kinds of increases.

Including everything together.

Okay.

Seems a little bit modest, but -- okay.

But I guess the question is, as you ramp up the square footage and as you get some of these new stores into kind of year two, year three, I mean, thinking about the comp and I respect the conservatism that you have with your long-term 3% to 5%, but when you look at the comp trends right now what's to say that it is ever going to go back to that 3% to 5%?

The CRM program, similar to what it did for Sally Beauty, was a strong contributor for their same store sales.

You've got some great new products in the stores.

So I guess can you just talk me out of that thinking?

Well, I think that when we talk about the 3% to 5%, we're trying to highlight that this is a profit generating, cash generating business with 3% to 5% comps.

That's the first point.

Secondly, our growth has been and will continue to lead the market.

We will continue to gain market share in the beauty industry.

The growth that we've seen, as to be expected, I think as in this quarter and last quarter we were lower than the previous quarters.

To expect double-digit kinds of comps endlessly, it would be probably an unwise conclusion.

So the 3% to 5% that we have in our long-term financial model is just that.

It's a long-term financial model to ensure that we continue to generate the kind of strong shareholder returns that we have been.

We work to exceed that, so obviously we have been doing that quite consistently for the past couple of years and we're going to continue to strive to do that as we go forward.

Okay.

That's a good answer.

And then I guess the other kind of longer term question is just on the margin target and can you just remind us how you bench marked -- you say the mid-teens, but which are some of the specialty retailers out there that you guys look at?

I think it's been said in the past, maybe not by you, you don't compare yourself to Sephora.

How do you kind of gauge what the real margin potential is in this business?

Well, that's a tough one to answer.

First of all, Sephora only carries prestige fragrance, cosmetics and skin care.

We're a much broader retailer.

There are other large big box operators out there that have terrific businesses and are mature and generate terrific returns.

Their business is different than ours.

I think what we've said before is that getting into the mid-teens is what we're working towards now.

If you go back a couple of years ago, we were in the single digits, and back then I'm not sure that anybody would have believed that we had the potential of getting to the mid-teens.

When we get there, our challenge will be to continue to grow that.

So I wouldn't suggest that's the ceiling on us.

I would suggest that's what we're striving for to get there in the next X period of time.

But I wouldn't compare it to necessarily to other retailers that we directly compete with.

Okay.

Great, Chuck.

Just the last -- I guess it's my half question.

Some of the I guess gift with purchases that you're doing this year, can you just remind us on who's funding some of that, the luxury robe I actually saw that with a purchase on fragrance.

Can you just put a little color around that?

Is that funded by you or is that -- can you -- I guess I'm a little bit curious, how much you kind of have to step into that promotion or is that kind of vendor funded for some degree?

Jason, we wouldn't get into that.

We run a multidimensional merchandising and marketing program and we work closely with our vendors to develop exclusive product, to provide input into the product that they're going to offer on a broad range.

We work with them on promotions.

I don't see any great value of getting into the details of any specific program.

I will reinforce to your point that the robe has -- goes into effect this weekend officially and we would invite everybody on the call to be sure to get to one of our stores or online and enjoy that as a gift with their fragrance purchase.

Is that velvet?

Terry cloth?

It is not velvet but for you maybe we can arrange it.

Okay.

I'll have to get my wife some fragrance anyhow.

Thanks a lot, guys.

Thank you.

Thanks.

Jill Caruthers, Johnson Rice.

Good afternoon.

Jill, we're not getting you a velvet robe either, so --

That's all right.

That's all right.

Quick question.

Just on the Black Friday approach, you mentioned that Black Friday and Cyber Monday were -- they beat the highest record that you've posted and any different approach that you did with door busters or type promotions that you'd want to call out year-over-year?

A couple of things.

One is the merchants did a great job of putting an offering together that was profitable, had a lot of exclusivity to it and was really well-targeted to our guests.

And then the stores did a terrific job of servicing.

So we also -- this year we did open a lot of our stores earlier than we did the year before to go along with what was happening in the center with our other retailers that we cohabitate with.

So when you put it all together, the offering, the marketing was quite effective and the experience in the store, it led to a really good Thanksgiving weekend.

Okay.

And then question on the Lancome and Clinique boutiques.

I know it's very early.

Just wondering, how are you informing the customer of those new boutiques that you've got in the store, given it's not store-wide so you can't really -- I don't think you can run it in a print circular, what have you.

Just kind of wondering how you're informing the customer at this point in time.

A number of ways, just to touch on a couple.

Clearly you can go onto our website and find it on store locater.

We're using digital communications and we are putting them into versioned editions of our print marketing.

And we've done other direct marketing that has been exclusive to Clinique around the stores that have carried it.

So it has been pretty multidimensional in terms of how we're getting the word out.

Okay.

And do you feel at this point that you're gaining some new customers from that or is it just too early?

We have -- we believe that we are and we believe that will continue, yes.

Okay.

Thanks so much.

Thank you.

At this time we have no further questions.

I'd like to turn the call back over to our speakers for any closing comments.

Let me just thank everyone for your interest in Ulta and joining us today, and wish everybody a happy holiday season.

And we will look forward to speaking with you soon, and hopefully seeing you in our stores or online even sooner.

Thanks so much.

Thank you.

This does conclude today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.