Ulta Beauty Inc (ULTA) 2013 Q4 法說會逐字稿

Greetings and welcome to the Ulta Beauty fourth-quarter 2013 earnings conference call.

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

A question and answer session will follow the formal presentation.

(Operator Instructions)

As a reminder this conference is being recorded.

I would like to turn the conference over to your host, Laurel Lefebvre, Vice President Investor Relations.

Thank you, Miss Lefebvre, you may begin.

Thank you.

Good afternoon and thank you for joining us for Ulta Beauty's fourth-quarter 2013 conference call.

Hosting our call are Mary Dillon, Chief Executive Officer, and Scott Settersten, Chief Financial Officer.

Also joining us are Janet Taake, Chief Merchandising Officer, and Dave Kimbell, Chief Marketing Officer.

Before we begin, I would 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 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 make references during this call to the metric free cash flow, a non-GAAP financial measure defined as cash provided by operating activities minus purchases of property and equipment.

We also refer to non-GAAP sales and earnings growth in 2013, adjusted for the 53rd week of FY12, and [summary].

Now I'll turn the call over to Mary.

Thank you, Laurel.

Good afternoon, everyone.

Ulta Beauty achieved excellent sales growth in the fourth quarter, supported by continued momentum in our e-commerce business.

We delivered solid EPS growth in keeping with our expectation that we would need to invest some margin dollars to drive market share gains during a promotional holiday season.

We also made significant forward progress in each of our five key strategies.

To recap the headlines.

We grew sales 14.4%, or 23.3%, adjusted for the extra week in the fourth quarter of 2012.

We delivered a 9.2% total Company comp on top of an 8.6% comp in the fourth quarter of 2012, both including the impact of online sales growth.

Our e-commerce business performed very well, driving 82.5% comp sales growth, which contributed 260 basis points to the comp.

Similar to the rest of the year, prestige cosmetics and skincare were the strongest categories, while we continued to see weaker industry trends in the nail and fragrance categories.

We were encouraged to see improvement in the transaction trend, with a sequential improvement compared to the third quarter.

While still slightly negative for retail stores, transactions increased about 1%, including e-commerce, despite difficult traffic trends in the retail environment overall.

Our costs continue to be mostly driven by tickets, about one-third of the increase coming from units per transaction, and about two-thirds coming from average selling price.

Earnings per share were up 9% to $1.09, or up 14.7% adjusted for the 53rd week last year.

Scott will provide more details and our financial results for the quarter and on our guidance for 2014 in a couple minutes.

But first I want to update you on recent progress on the five components of our growth strategy; new store performance, new products, services, and brands, our loyalty program, marketing, and Ulta.com.

Starting with real estate.

We opened 11 stores during the fourth-quarter to complete the most ambitious store opening program in our Company's history.

We're very proud of our growth and development team's execution in delivering this new store program, as well as the hard work of the store operations, merchandising, supply chain, and HR teams to get these stores staffed, merchandised, and ready to serve our guest.

New store productivity continues to be strong.

We're on track with our plans to open about 100 stores in 2014, representing about approximately 15% square footage growth.

This is a purposeful decision on our part, as we said last quarter, to moderate our pace of store growth.

New stores continue to provide excellent returns and will continue to be an important part of our growth strategy.

We expect about 40% of these new stores to be in new markets and about 60% are planned for filling in existing markets.

We anticipate about one-third of the stores to be in new real estate and the remaining two-thirds are planned for existing shopping centers.

We expect about 15% of the 2014 class of stores will be in enclosed malls, adding to the 52 mall stores we have in the portfolio today.

The rest will be in power centers or strip malls.

In terms of the pace of new store openings, we expect to open 19 in the first quarter, 19 in the second quarter, 43 in the third quarter, and 19 in the fourth.

We also plan to open two 5,000 square foot, or small-format stores, during the second half of the year in smaller markets with fewer households than what's typically required to support a 10,000 square-foot store.

We're in the early stages of developing and testing this model, but we're very encouraged by the potential to extend our store growth and delight more new guests with the great Ulta Beauty experience.

We also plan to remodel about 12 stores to our latest store format this year, and reflow the mass cosmetics planograms in about 60 stores to replace outdated fixtures and to create a more vibrant and consistent shopping experience in that category.

Today we have only 38 stores in older formats, about 5% of the fleet; we're very proud of our consistent and contemporary store portfolio.

Now turning now to merchandising.

I'm delighted to announce that Janet Taake was recently promoted to Chief Merchandising Officer.

Janet and her team have done a phenomenal job expanding our portfolio with new brands, products, and services over the past several years, and developing valuable partnerships with key vendors.

They've also worked in concert with our marketing, e-commerce, operations, and replenishment teams to make sure we launch new brands and products effectively.

The recent launch of Urban Decay's Naked 3 eyeshadow palette is a great example of this, where the merchants, CRM, e-commerce, supply chain, and store teams worked together with our vendor partner to ensure customers got excited about the new product and had a great experience buying it from Ulta.

Our merchant team delivered a solid fourth quarter with strong comp gains in prestige color and skincare, offset by softness in traditional gift-giving categories like fragrance, bath, and personal care appliances.

While industry weakness in fragrance and nail polish have been well-documented, there were several bright spots, including the successful launch of the fragrance Our Moment by One Direction, driven by an major 360-degree launch including prints, e-mail, social media, PR, and digital marketing.

We also saw strength in lower price-point items like rollerball fragrances, and we made improvements to our holiday gift with purchase program, which helped drive sales in the fragrance category, despite industry softness.

We were also pleased with our January performance, with prestige skincare taking center stage with our Love Your Skin event featuring daily in-store events.

From a trend standpoint, our lip category continues to be a standout and delivered excellent growth.

Skincare and anti-aging products remain high-growth categories as well, with new brands and products from Perricone, Meaningful Beauty, and Philosophy contributing to the category's strong performance.

Looking ahead, we're excited that IT Cosmetics and Mally launched last year in selected stories, will be rolling out to the entire chain later this quarter.

Our customers have enthusiastically embraced these brands in our stores and online.

Turning to services.

Our salon team delivered solid results in the fourth quarter to cap a great year where they contributed to the total Company comp by improving retention of salon associates and refining offers to drive trial and awareness.

In the fourth quarter, we rolled out eyelash application services at all stores.

The salon artistic team created a lot of excitement by representing Ulta at Fashion Week in New York in early February, where they created the model hairstyles for various designers' runway shows.

Looking forward, we expect to add new services at our salons this year and rollout guest enhancements like text confirmations for appointments and 24/7 online appointment booking.

We'll also feature salon services more prominently in our direct mail campaign to communicate to our customers that Ulta is a destination for trend-right hair, skin, and brow services.

Now moving onto an update on our loyally program and customer relationship platform.

We now have 13 million active loyalty members who have shopped with us within the past 12 months.

We recently converted all of our customers to the Ultimate Rewards program and the team executed a very smooth transition.

Having all of our customers on one program, which uses [points of] currency, will enable a more efficient use of our CRM platform for targeted offers.

We've been working with our CRM platform for just over a year now and we continued to test and fine-tune our offers, as well as work more closely with our vendors to develop compelling CRM campaigns.

As a result of our improved ability to segment and target customers, we have been able to grow our conversion rate and drive more sales per marketing contact, which in turn helped us deliver strong comp growth in the fourth quarter.

Now turning to marketing.

First I'd like to announce that Dave Kimbell has joined Ulta Beauty as our Chief Marketing Officer; both the marketing team and e-commerce team report to Dave.

Dave brings to Ulta his extensive experience in building consumer brands, including beauty products at Proctor and Gamble, and brands at Quaker Foods and Seventh Generation.

Dave was most recently CMO at US Cellular, where he oversaw a team responsible for advertising, digital and e-commerce, retail design, pricing, promotion, and consumer insights and analytics.

Dave created a seamless and integrated multichannel customer experience, which drove strong e-commerce growth.

Dave will lead our efforts to drive greater awareness and clarity about the Ulta brand, increase customer acquisition, and optimize the balance across promotional and brand building activities over time.

In addition, Dave will lead our omni-channel marketing and e-commerce efforts.

Now, turning to marketing highlights from the fourth quarter.

We were encouraged to stabilize the trend in transactions with our increased promotions to drive traffic and protect market share.

During the holiday season, we also expanded our Beauty Steals program with hot offers on social media and Ulta.com.

In January, our signature Love Your Skin event, supported with a fully integrated digital and print campaign, drove a strong finish to the quarter.

Looking ahead to the first quarter, we're excited about our continuing digital brand building efforts, our direct mail campaign featuring our spring trend report, and our highly anticipated 21 Days of Beauty promotion later this month with an amazing array of offers and events.

Now wrapping up with our fifth growth strategy, our e-commerce business.

The fourth quarter was very strong for Ulta.com, with particular strength in prestige cosmetics, skincare, and holiday promotional products.

We benefited from our improved e-commerce platform that was launched in the fall, as well as increased fulfillment capabilities with the expansion of our northeast distribution center, which began shipping e-commerce orders this fall.

With 83% comp growth for the quarter, Ulta.com exceeded our expectations.

While Black Friday and Cyber Monday were very successful, the team maintained strong momentum post holiday as well.

We're confident our e-commerce business will continue to deliver rapid growth in 2014, but will likely begin to moderate off a larger base, with topline growth expected in the 50% to 60% range.

So this wraps up my update on our five growth strategies.

Before I turn it over to Scott, I'd like to also give you a progress report on our strategy work and share my thoughts on our guidance for 2014.

Ulta is a great business.

I am very optimistic about our future.

We're well positioned in the marketplace and our core business model remains strong.

I want Ulta to be the most popular destination for beauty products, services, and experiences for women, when and however she wants to shop.

The long-range strategy we're developing will ensure that we deliver on this vision.

We'll chart a course that allows us to continue to deliver an exceptional guest experience, be a terrific place to work, and drive profitable growth for years to come.

We have a wonderful foundation to build on.

We operate in the large and growing beauty industry; we offer many popular and exclusive brands; we have a track record of performance that's one of the best in retail; we offer a differentiated guest experience that involves products, as well as services; we have excellent store economics; we also have a powerful and developing CRM capability; and of course a great leadership team and passionate associates.

That said, we cannot stand still.

We see a clear line of sight to continued growth in the near term, however, we also need to invest in the strategies that will drive growth for the long term.

Doing this now, while we're operating from a position of strength, will enable us to drive healthy, long-term performance for Ulta.

In our strategic planning work, we're taking the long view, projecting the consumer, category, and competitive environment well into the future, refreshing our vision in how Ulta needs to continue to evolve our business model, and developing a five-year growth plan.

Through this work, we'll create a playbook to anticipate and meet the guests' changing needs in a unique and differentiated fashion, and to deliver profitable growth for our investors.

Again, we're in a very exciting growth business with passionate guests and associates and terrific vendor partners; a great basis for our future.

Now, once we've completed this work in the fall, we'll share resulting vision, strategies, and five-year financial target.

This work has already given us some clear insights that have helped inform our view for the current year, with clarity around some of the investments I believe will drive future growth.

Two of our biggest opportunities focus on the customer, acquiring new guests and making sure we continue to deliver a relevant and differentiated guest experience.

As you are all well aware, retail is changing rapidly and customer expectations continue to rise and change as well.

We need to invest to test and learn the most effective ways to increase awareness of Ulta, to drive new customers to our stores and website, and to become less reliant on discounts over the long run.

We also need to build on the channel capabilities that customers expect us to have, and provide even better service in our stores.

With our tremendous growth in prestige cosmetics and skincare over the past few years, customers today have higher expectations for our product knowledge and service standards, and we need to respond to that.

We believe that these investments in 2014 will help us to prioritize the best strategies to drive comp growth, as well as margin improvement.

Our plan to deliver midteens earning growth in 2014 allows us the flexibility to make important investments today that we believe will set us up for future growth and success.

With that, I'll hand it over to Scott.

Thanks Mary.

Good afternoon, everyone.

We recorded total sales of $868.1 million, compared to $758.8 million last year, an increase of 14.4%.

Excluding the impact of approximately $55 million of sales in the 53rd week last year, sales growth on a 13 week to 13 week basis was 23.3%.

Comp store sales increased 9.2%.

The retail comp was 6.6%, and e-commerce growth of 83% added 260 basis points to the comp.

Salon contributed slightly to the overall comp.

I would like to remind you that this comp performance benefited by more than 200 basis points, due to comparisons to 2012 Superstorm Sandy negative impact and the timing effect of the extra week last year.

Recall our comp compared weeks 40 to 52 of last year to those same weeks this year, and excludes the 53rd week, which was an unusually large sales week for us.

The underlying comp excluding these factors was more like 7%.

Gross profit dollars increased 13.1% to $293.6 million, and gross profit margin declined 40 basis points to 33.8% from 34.2% in Q4 of last year, driven by strength in our prestige categories, offset by higher than expected promotional activity to drive sales.

SG&A expenses rose 15.4% to $177.6 million, up 20 basis points as a percentage of sales to 20.5%, due to planned investments in supply chain, e-commerce, and store labor, but a bit better than expected driven by strong expense controls.

For example, we were more efficient with marketing spend by distributing more offers digitally via e-mail and social media, rather than printing direct mail pieces.

Pre-opening expense was $1.8 million, compared to $1.9 million in Q4 of 2012, driven by 11 store openings during the quarter, compared to 13 new stores opened during Q4 of last year.

Operating margin decreased 60 basis points to 13.1%, versus 13.7% in Q4 of the prior year.

Net income increased 9.5% to $70.7 million or $1.09 per diluted share, versus $64.5 million or $1 per diluted share last year.

EPS grew 9% or 14.7%, excluding the approximately $0.05 attributed to the extra week in 2012.

Turning to the balance sheet.

Inventories were $457.9 million at the end of the quarter, compared to $361.1 million at the end of Q4 2012, up 3.3% on a per store basis.

This is consistent with our plans, where after making pertinent investments in inventory at the end of last year to improve in-stock levels, and continuing to invest in prestige boutiques, we expect that the inventory per door growth below comp growth by year end.

Capital expenditures were $49.1 million for the quarter, driven primarily by our new store opening program, and depreciation and amortization for the quarter were $28.7 million.

Capital expenditures for the full year were $226 million; roughly 60% of our capital spend was for new stores, remodels, and relocations.

The remaining 40% was for merchandise fixtures, including prestige boutiques, supply chain investments, primarily related to the e-commerce expansion at Chambersburg, as well as IT investments, including Ulta.com and maintenance CapEx.

We generated about $102 million of free cash flow for the year and ended the year with $419 million in cash.

Turning now to guidance for 2014.

We expect to open about 100 new stores this year, and we'll increase our remodel program to about 12 stores.

We anticipate comparable sales to increase in the 4% to 6% range.

This is expected to yield topline growth in the midteens range for the year.

P&L investments for the year include supply chain expenses to support the planned 2015 opening of a fourth [DC], marketing to convert 50% of the country to the Ultimate Rewards loyalty program, and investments in increased training for both store and salon associates to improve the customer experience.

In addition, as Mary mentioned, all of the strategy work we have done so far identifies significant opportunities to acquire new customers and drive a higher awareness of our brand.

We also need to create a better customer experience with more omni-channel capability and more knowledgeable associates.

We intend to allocate a pool of dollars to test and measure initiatives that we believe are critical to our long-term growth, as well as invest in some headcount to move these key initiatives forward.

These initiatives to support future growth are expected to impact EPS by about $0.10.

As a result, we expect that earnings per share will grow in the midteens percentage range this year, including those incremental initiatives representing $0.10 of earnings per share, and excluding any potential accretion from share repurchases.

As a reminder, we have an authorization in place with about $113 million remaining.

This outlook assumes the current economic and consumer environment remains stable in 2014.

If macroeconomic conditions improve, we expect to do better.

We expect to invest about $265 million in capital in 2014, with approximately $150 million earmarked for new stores, remodels, and relocations, $30 million for merchandise fixtures for existing stores, $50 million for IT systems including e-commerce, $50 million for supply chain, and about $20 million for maintenance CapEx.

Turning more specifically to the first quarter of 2014.

Going forward, we will provide quarterly guidance for sales, comps, and EPS, but will no longer break out our expectations for gross margins and SG&A.

We expect sales to increase in the range of $693 million to $704 million, versus $582.7 million last year.

We expect comparable sales to increase in the range of 5% to 7%.

Pre-opening expense is expected to come in around $2.5 million, with 19 stores planned to open in the first quarter.

We expect to achieve earnings per share in the range of $0.70 to $0.75, compared to $0.65 in Q1 of last year.

You may be expecting Q1 to be our strongest quarter relative to an easy gross margin comparison from Q1 of last year.

In fact, we will see certain expenses hit Q1 that will make it a tougher quarter relative to the rest of the year.

We will have costs related to the changes to the Senior Management team and consulting expenses related to our strategy project, with the significant portion of the work occurring in the first quarter.

We're also incurring incremental marketing expenses related to the conversion of our loyalty program.

At the same time, the first quarter represents the greatest headwind in terms of P&L deleverage, due to the large number of younger stores that are still left than fully productive.

Our tax rate is expected to be approximately 38.3%, and our fully diluted share count will be approximately 64.9 million, excluding any share repurchase activities.

With that, I'll turn the call over to our conference call host to begin the Q&A session.

Operator?

(Operator Instructions)

Aram Rubinson, Wolfe Research.

Thanks for taking my question.

Can you hear me okay?

We can.

Okay, great.

A question around -- well two things really, one is if you can help us -- tell us what you learned about your customer from fiddling with the promotional cadence in Q4?

Just wondering whether it's mass or whether it's prestige, what the customer's response was to changes in promotional strategy on either side of the store?

This is Mary.

Let me say a couple of things.

One is that we -- I guess I would say that there's probably a tale of two customers that we see overall in our business.

There's folks that are feeling, probably, pretty upbeat about their earnings and about the overall economic environment, tending to buy prestige.

We saw on our ticket, a pretty strong uptick in ticket.

So there are folks, certainly, that are less promotional and buying our higher-margin prestige items.

There's other folks I would say, the other part of our consumer base that are going to be more sensitive to promotions, more sensitive to the economic environment, and probably more attracted to promotions.

So those folks were -- as we ramped up our promotional cadence we think that was the right thing to do for that customer.

Overall for the quarter, we saw an improvement in traffic, but saw most of our results on comp was driven by ticket.

So as I look at that overall, and this was part of our test and learn, is we want to continue to dissect further what are the best drivers of incremental profitable growth as we use promotions more or less to drive results in any given period.

Thanks.

And to quickly follow up, can you tell us what that increase in ticket looked like in the fourth quarter?

And also what promotional environment is embedded in 2014 if you're expecting to be more or less the same as 2013?

Thank you.

Right now, I think we don't have any reason to think that 2014 will be different than 2013, so we're assuming something pretty similar to that.

In terms of the transaction versus ticket, again I would say really pleased that we saw a sequential improvement in transactions in the fourth quarter.

We were up about 1.2% in transactions and 8% in ticket for the total comp of 9.2%.

Transactions in retail store were slightly down in stores and they were offset by growth in salon and e-commerce.

Thanks so much, good luck in this quarter.

Thank you.

Thank you.

Oliver Chen, Citigroup.

Congratulations on an outstanding quarter and great finish to the year.

Regarding your guidance for first quarter in your comps.

February's been pretty rough on everybody, are you thinking that March and April could be better than February?

Are there thoughts around the dynamics you saw in February?

Also is e-com experiencing similar trends with respect to how the weather has impacted, or is there a dynamic there you could share with us?

That'd be great.

The guidance set that we're providing, the 5% comp guidance includes, as it always has in the past, everything we know right up to the last minute.

5% to 7%, excuse me, which includes the current consumer environment and what's going on the category.

To the part of a question about e-commerce, funny enough, when we saw some of the toughest weather days in January, we didn't really see a huge spike in e-commerce business, which kind of flew in the face of common sense from our vantage point.

So it seems like we have a good momentum there, we've made a lot of progress in our ability to merchandise that and expand the assortment online, we've made good progress on expanding our margin right there as well.

So we're very happy with the over-performance of that business.

Okay.

On the promotional strategies, what's your best strategy there in terms of things you should highlight or look to offset or mitigate or work through what seems to be a continuation of the promotional landscape?

I'll say a couple things.

One is that we continue to learn from everything that we do, and so finding, as we think about even promotion or a holiday for next year, we'll step back and look at what worked well and what didn't work as well and we'll continue to refine our strategies for that.

Understanding the shift in consumer shopping patterns to online, and seeing how that plays out in a holiday period, thinking about how they look at Ulta in terms of gift-giving versus buying for herself, those are all things that we're considered as we think about how to continue to refine.

But we certainly know that that's a quarter that we're going to continue to be aggressive to grow our market share, and so I would expect it to continue to be a promotional time.

The other thing I would say though is that one of the test and learn things that we're going to do right away is we are going to do deeper analytic work to quantify, overall, setting aside holiday, incremental sales and profit impact of all of our promotional initiatives, which will help us to get even more efficient and effective with that area of spending.

So that's going to be an important area for us as we look to the future in how we balance non-promotional traffic and volume with promotional.

Thank you, best regards.

Thank you.

Ike Boruchow, Sterne Agee.

Hi everyone, thanks for taking my question.

I guess for Mary, the comments that you made about the investments into the brand, is there anything you could tell us about studies that you've done that you can see where your unaided brand awareness is today versus some of your peers, and how you think that could change over time?

And I guess one quick one for Scott, on the comp guidance for the year, can you help us think about what's embedded in that in terms of ticket and traffic?

I'll start with, I'm not going to cite specific numbers, but certainly we understand where we are both in terms of aided and unaided awareness and I consider this to be a great opportunity for us.

We're not as high as we can be, and both in terms of awareness of Ulta, and I would say understanding the brand equity of Ulta, what is it that we represent, what is the experience about.

So both of those are areas that we know there's plenty of room to drive awareness, both of the store, what we offer in the store, the fact that we have the salon and services, all of that is going to be key areas for us as we test and learn this year.

Because to drive awareness -- so consumers are bombarded with lots of messages all the time, so we have to be very purposeful in what and how we try to drive awareness and new guests to Ulta.

Fortunately there's plenty ways to do that, and one of the ways that we're going to be testing and learning is around more sophisticated customer acquisition efforts for example, as well as more traditional tactics.

So there's, I think, some good opportunity there for us.

And Ike, I would say in the near term we don't see any drastic sea changes as far as the makeup of the comp is concerned, so in the near-term we still expect ticket to be the primary driver of the comp.

Although some of the initiatives, the growth initiatives that we talked to, we're going to be focused on, we need to try to drive increased traffic, through either brand awareness activities or other things that we can do within the store.

Great, thanks.

One quick follow up.

You guys are actually one of the rare retailers that hasn't used weather as an excuse for the quarter.

Is there anything you can mention about store closures or weather negatively impacting the comp for the quarter, what it could've been?

Or to get some color around that, I would assume it was at least slightly negative to your traffic and your comp?

We certainly weren't immune to the weather, I think we had about 400 store closure days.

Fortunately a lot of our transactions are replenishments, and items that perhaps our guests if she can't buy that day, will come back and buy another day.

So we didn't feel that -- could we have done somewhat better, perhaps.

But overall, we didn't see weather as having a big impact on our performance.

Thanks.

Good luck.

Thank you.

Gary Balter, Credit Suisse.

Thank you.

Mary, you wrote -- in the press release you made mention that you had 25 significant new brands that helped in the comps, can you talk about what some of the bigger brand additions were?

Yes, thank you, Gary.

It's actually one of the, I think, most exciting parts of our story is that our guests, they love to come and find new things at Ulta.

And Janet and her team have done a great job with that.

So I'm going to ask Janet to take that question.

Hi Gary.

Just quickly, some of the things that we launched last year, we launched Perricone around Mother's Day last year, which was a nice add to our skincare portfolio.

We added Meaningful Beauty in the third quarter last year, another skincare brand.

And Color, we launched it in about 50% of our doors last fall, and as Mary mentioned in her prepared remarks, we're taking it to all doors in this quarter.

We put Mally in a handful of doors, but we had Lipstick Queen, we had many -- there were several different brands throughout the entire store.

We also launched Jane in the mass arena, so we added brands across all of the businesses, including professional hair care.

We talk a lot about prestige, but we really added brands across all categories.

Those are some of the highlights.

Thank you.

And Scott, could you go into a bit more detail possibly on the product gross margin, and how we should think about what the impact was in fourth quarter?

And I know you said -- I think you already said you are not going to talk about the gross margin, but if you want to give us any thoughts about how we model it out for this year?

I guess I can reference, give you a little color on the fourth quarter.

So gross profit rate was down 40 basis points, and as we talked about it on our third-quarter call, we're always ready to invest within a margin rate to protect our market share gains.

And we did that.

We had to do it in the fourth quarter, we also how it shook out.

I would say that the 40 basis points, just to give you a little more specificity on that, it wasn't -- part of it was due to mix in the business overall, so e-commerce continues to grow at an accelerated pace and becomes a larger part of our overall growth profile.

While we have been very successful increasing the margin rate in that business as you look at it individually year over yea, it does put a bit of a bite on overall margin rate, because it does contribute at a somewhat lower rate than our bricks and mortar.

And going forward?

We would expect that phenomena to continue a little bit, although we will continue to focus on merchandising there and other marketing tactics in e-commerce to help drive a better margin rate in 2014, that's part of our plan.

Okay, thank you.

Matthew Fassler, Goldman Sachs.

Thanks a lot.

Good afternoon.

My first question relates to the loyalty program conversion, I guess it's great to hear about this happening with no hitches and no evident costs, given that I think the second stage of the conversion, the prior stage had been a bit more challenging.

Can you talk about what improved in your process as you converted the rest of the country to the current model of the loyalty program?

We've talked about this a number of times before explaining to people some of the hard lessons we learned on the first time around, Matt, that I am sure we've had these conversations with you as well.

So the team, we were just better prepared, we had a better communication strategy to our customer, we transitioned them out of the old certificate program into the points program in a more seamless manner.

So it was clear to them and it was communicated as a big step up for them, an improvement in the loyalty program overall.

So we're very happy, the team did a great job getting us through that in a very transparent way.

Let me just be clear on the margin rate, we talk about loyalty, and it is a bit of a headwind on our margin rate for next year, as we again, we've discussed this in the past, but in the long term, it drives incremental comp scale and incremental gross profit margin dollars.

Great.

And then my second question, Mary, a call or two ago you spoke about the changes that you're making in supply-chain -- that you had made in supply-chain and human resources; after the close today, another company, not a competitor, talked about hiring someone who had been your CIO, and just curious any other changes?

Any changes in the management team since the last conference call as I know you've been essentially organizing the team with your vision?

Right, absolutely, Matt, thank you.

First of all, as I mentioned, two changes are folks who are in the room here with us today.

So Janet Taake being promoted to Chief Merchandising Officer, and then the addition of Dave Kimbell as Chief Marketing Officer.

Yes, and right now a fellow named Steve Junk is our interim Chief Information Officer.

Steve's been at Ulta for many years and has great deep experience.

Our CIO went to another company and fortunately Steve was able to step in and play that role for us, and he's doing a fantastic job.

And over time we'll probably look to have somebody in that role long-term.

But right now Steve is running the shift for us and doing a great job.

Great, thank you so much.

Brian Tunick, JPMorgan Chase and Company.

Thanks for my question.

This is Bilun Boyner on for Brian today.

I first wanted to ask about supply-chain DC and the omni-channel investment that is still in your $0.10 incremental SG&A impact guidance.

Clearly they're ongoing investments, but where would you say we are in that process, are we towards the tail end of the trunk of those investments?

I guess by our math they impacted earnings last year by about $0.03 to $0.04, so do you think it is reasonable to expect a similar impact this year from those?

And they should start to minimize into next year?

Let me take that one.

The $0.03 that you referred to in 2013, the way we described it to folks was that was a down payment on a longer-term supply-chain project that we have that we talked to with investors quite a bit in 2013.

So that was consulting work to help us blueprint what the future supply-chain would look like.

Now we are shifting into actually constructing the supply-chain, and we are looking at a new -- a fourth building coming online in the middle of 2015.

So now we're moving into more of a CapEx phase of the project as we find a location, put up a building and get it staffed up and pre-opening ready to go in 2015.

So that'll be the first step on the longer range supply-chain reformulation let's call it, we are going to look and make some significant improvements in the way we do business, we expect that to drive significant efficiencies across the supply chain over the long-term, but it's going to be a multiyear project and it is going to include going back and looking at some of our existing facilities and perhaps doing some retrofit work there.

Okay, that's helpful.

And then my second question is on the salon and Ulta brand, clearly there are big differentiating factors here, can you help us better understand what your vision is for them and where you see the opportunities, how we should expect to see you really play them to your strength going forward and in 2014?

I'm sorry, did you say salon?

Yes.

And Ulta brands?

Yes.

Right now the services part of our business is not that big, but we consider it a really great strategic asset, in that for the long term having a place to go to get a great haircut and color, skin services, all those different kinds of services we can imagine adding will be something that really differentiates us.

And as well, our salon guest is our best guest.

She comes frequently and she purchases more than just the services, so that's a great part of our business as we're looking at our strategic planning, we'll consider options around how we think about that going forward.

With Ulta brand as well we've got a really nice brand of products, a very large brand of color and skincare and suncare, and we've relaunched many of those with new packaging, and we're going to be merchandising them even more effectively in 2014.

And we think that's a good basis off of which to grow as well.

Great, thank you.

Best of luck.

Thank you.

Daniel Hofkin, William Blair and Company.

Hi, good afternoon.

Nice job navigating a noisy environment with a healthy comp.

Just wanted to understand a little bit better, bridge the updated EPS growth guidance for 2014 with the prior guidance from December, so all of the $0.10 is incremental, correct?

Yes.

I would just state that really the change in our view from December is really centered around our belief that we have the opportunity to leverage off our position of strength right now, and invest in initiatives that we think are important to drive future -- best way to drive future, long-term, and profitable growth.

So that is all incremental and it's around the different areas that we described which is brand awareness, getting more new guests, improving the guest experience, as well as making sure that we source our Company with the talent and skills that we need to drive that long-term success.

And the $0.10 includes all of those items?

Yes.

Okay.

So if my math is right, that's about a 3 percentage point impact, let's say going from previously give or take around 20% expected growth to now about mid-teens is give or take 1 to 3 percentage points additional.

And I'm wondering if you could bridge that remaining gap a little bit, are you expecting a little more gross margin investment based on what you saw through the holiday period?

That kind of thing, just help tie that up?

No, what we said is that we would be around high-teen similar to 2013 and we are guiding to mid-teens right now.

Maybe I didn't catch that right before.

I had thought the previous thought was around 20% at the midpoint.

Okay.

Dan, we were trying to not give a single point estimate for the guidance, just say the next year was going to be very similar and not try to give very detailed guidance in that range.

So you're right, if it was exactly the same it would be there, but with more of a range and mid-teens, that 3 points is really the difference between our view then and today.

Okay, fair enough.

Thanks very much.

Neely Tamminga, Piper Jaffray.

Sure, Neely Tamminga from Piper Jaffray.

Was wondering if we could talk a little bit about mobile and get into a little bit more of the nitty-gritty, some of your specific initiatives for mobile in 2014.

You guys have made some great strides in your app over the last six months, and really starting to tie loyalty there.

And wondering how you are seeing your mobile shoppers, which are probably your more engaged shoppers, how are they using the app, and are they adopting into the technology and what more can you offer them in 2014?

Thanks.

Hi this is Dave Kimbell.

I'll take that one.

Mobile has been an increasing part of our business, and as part of our total e-commerce sales platform.

And it's now representing about a quarter of our total e-commerce sales, so it's a bigger part and growing very quickly.

The new app, as you said, has been a big improvement for us, and we're going to continue to find ways to drive that to market differently within the mobile space, to look for different offers and different times.

Of course, mobile does provide us with some unique opportunities to reach our consumer in very relevant places at relevant times.

We're looking at creating some in-store applications, expanding Wi-Fi in our stores, which will also allow her to use those services more seamlessly within our stores.

And continue to find ways to improve the effectiveness of the app across different platforms, including phone and tablet.

So we see that as a big platform.

We've been very successful, it's growing, but we also think we're just scratching the surface on fully maximizing the opportunity in that space.

Dave, could you actually be looking at implementing some iBeacons potentially in 2014?

I'm sorry, some what?

iBeacons.

That isn't necessarily in our pipeline, but we're going to look at everything that's available to us as we look at new ways to create that experience.

Mary talked about broader omni-channel, and of course mobile is a big part of that.

So as we look out, there's a robust pipeline of ideas that we have, both in this year and over the next three years to try to create a more seamless experience.

So we'll look at all of those things in trying to drive that, going forward.

Thank you.

Joseph Altobello, Oppenheimer.

Hi, this is Morey Marcus in for Joseph.

My first question has to -- I guess going back to incremental investments, going back to 2013 back in Q2 you discuss it was going to be around $0.13, what did it actually end up being?

It ended up being roughly $0.13.

Again, the pacing during the quarters has changed a little bit throughout the year as we've kind of toggled back and forth with some of these things.

You may recall we talked about supply chain, the $0.03 that was related to supply chain, we slowed down a little bit during the course of the year, so quarter to quarter it changed a bit.

Okay, great.

And then going back to the headwinds of the loyalty program for 2014, I know you said you really won't go into margin that much, but can you talk about, I guess, the timing of that impact, do you expect it to be evenly distributed throughout the year or like an [ordinance around] quarter?

No, it's evenly distributed throughout the year.

So the way the margin rate headwind comes in to mean, it's the way they earn the points, and the way they redeem points, so it's evenly spread throughout the course of the year.

And then by the time we cycle through a full year's cycle is where we expect it to be back at a breakeven from a pure dollar standpoint, so at that point is where the comp increases start to materialize and we start seeing better gross margin dollars.

Okay.

And then my last question, and I may have missed this.

Did the reduced reliance on price promotion have a significant impact on the quarter?

And also have you possibly rethought the strategy going forward?

No, we actually were more promotional in the fourth quarter than we had originally expected earlier in the year, and a bit more than we were expecting even when we gave guidance for the fourth quarter.

So with a tough holiday, we invested where we thought it was appropriate.

Okay, perfect.

Thank you for your time.

Jason Gere, KeyBanc.

Thanks.

Maybe I'll dovetail off of that last question.

So I know you're not giving specific guidance about the gross margin SG&A, but I wanted to talk a little bit about this past year gross margin little bit more promotional, flat year over year, the year before you had strong gross margin.

So as we think about the cost of doing business, do you think that the levels that we're seeing now will stay intact?

And then as we think about operating margin expansion over time, which I know you'll talk about in the fall, is this really going to be relying on the SG&A leverage, especially as we anniversary some of these higher investments that you need to make over this year, and I don't know if potentially next year as well.

So I was wondering if you can guide a little bit on that?

I would say directionally as we look in the first quarter this year, we would expect to see some merchandise margin expansion, so the whole notion of us trying to do a better job with zeroing in on offers with customers and trying to toggle back and forth there and try to pull back a bit on discounts to drive the business, we're still on that path.

We believe in that.

Last year we saw a good response to that, the early part of the year.

When we saw a bit of rough waters, we reacted to that in the fourth quarter.

So that's still part of our plan, we still expect to see some merchandise margin expansion in 2014.

So we should see gross margin then somewhere between what you achieved in 2012 and 2013?

I mean obviously not putting an exact number to it, but there will be gross margin expansion this year?

I wouldn't go quite that far.

Finish my thought here.

We are going to see merchandise margin expansion that's going to be offset by fixed store cost deleverage, especially the first half of 2014.

We've got 125 new stores coming in into the maturity curve here, it's still the very early days for those stores, so puts pressure on us, most noticeably on the first half of the year.

When we look out longer-term, it's not really a story of SG&A leverage, I mean we expect that to be part of operating margin expansion over the long-term.

But the key drivers are really prestige mix of the business, again it's a richer part, we expect that to add albeit, probably not at the same rate we've seen over the last couple of years.

We expect e-commerce, again better merchandising there and marketing tactics, we expect that to improve.

Rate, operating rates here in the future.

And supply-chain investments.

We're making a lot of significant investments there now, they're creating some headwinds for us over the near-term, but over the long-term, they are going to create a lot of efficiencies for us across the channel.

And I will add that back to the watch-and-learn theme here.

For the longer haul we know we can and will focus on how can we drive demand for Ulta in a way that is even more profitable over time.

So whether it's about new guests who discover us, more footsteps in the store, more targeted promotions of more of a balance on spending that drives awareness and new guests versus price discounts.

Those are the kinds of things -- that's all part of business, and that's also part of what we're going to investigate, test, and assess as we go forward and say how can we continue to get even more efficient in terms of how we create demand across the business.

Okay.

And just for clarification, of the $0.10, how much hits SG&A, how much is gross margin?

Is there any breakdown there?

The majority of it hits the SG&A line.

That's what I thought.

Okay.

And then the last question is housekeeping.

With fewer stores open this year, how should we think about the pre-opening expense for this year?

Can you guide at least on that for the full year?

I know you gave for the quarter but wondering if --

I think we provided the store count by quarter for the full year.

Yes.

I think you guys can probably do the math on what the average is.

Okay, fair enough.

Okay, thanks a lot, I appreciate it.

Evren Kopelman, Wells Fargo.

Thank you.

Good afternoon.

Two questions.

First on the Lancome and Clinique, do you plan to add any more of those boutiques this year, and what's the long-term thinking there on the expansion?

What have you seen in terms of the impact to the stores that they are in?

The second question is on the share repurchases, we've only seen you repurchase stock once on an opportunistic basis.

Should we expect a more regular program or expect you to continue to be opportunistic there?

Thank you.

I'll take the first question on Clinique and Lancome.

Just a reminder, we opened over 80 boutiques last year between Clinique and Lancome, so from a sales perspective we will get benefits, but those stores are still ramping in the stores that we opened them in.

Basically we wouldn't break out specific information beyond that.

What I would say is we're very pleased with the performance in all the boutiques that we have between Clinique and Lancome, and we are hopeful that we will be expanding both those brands in the future.

But today I have nothing to really announce or share with you at this time.

And as far as the repurchase activity is concerned, Management and the Board continue to review best uses of excess cash and return in value to shareholders.

We will continue to buy back shares opportunistically, and we will be maintaining our investment discipline and returns on that kind of thing.

We'll be framing up our long-term capital allocation and shareholder return methodology here, that's part and parcel of our strategy work that we are in right now.

And that, you can expect that we will be sharing details with you on that in the fall when we communicate the entire strategy.

Okay, thank you.

Mark Altschwager, Robert W Baird.

Good afternoon and congrats on a strong finish to the year.

I wanted to touch quickly on the trends with fulfillment.

Can you talk about where you are with in-stock rates in the stores, and how much opportunity is there to drive better conversion through the supply-chain investments and improvements in that area?

And similarly, can you talk about how you are going to balance the breadth and depth of SKUs as you test these smaller-format stores?

Those are all great questions.

Certainly our view on the supply-chain investment over time is to do several things for us, to build infrastructure that we need for growth, capabilities to meet guest expectations across channels, optimize our end-to-end efficiencies, certainly a piece of that is stronger allocation forecasting and replenishment capabilities.

So all of those are areas that we know and plan -- have a plan for in terms of how we continue to improve.

Our in-stock position we feel is good, we look at that obviously every day, every week.

There's some transition happening, as we start the year in terms of some planograms, new brands in, et cetera, and that creates a little bit of some transition.

But overall we were very pleased with our in-stock rate this year, our supply-chain team worked really hard against some pretty tough weather situations as we ended the year, and we came out feeling very good about our position.

Great, thanks.

And then the balancing of the breadth and depth with the smaller format.

Oh, yes.

Great question.

We're in the early stages of nailing that down and that's something that we'll obviously be working on as we finish our plans to open up the two small stores this year, small format stores.

The overall idea here -- there's certainly been some thinking on it already, but it's to bring an Ulta experience to our guest in a smaller way, in a smaller format way.

So obviously that's going to take some curating of the number of SKUs that we offer.

But we expect that it will continue to be the kind of experience where she has everything from prestige to mass brands, as she has a salon that she can use, so all that will be in the experience set and it's a matter of how do we curate from there.

Thank you.

Jill Nelson, Johnson Rice.

Good afternoon.

Just have a couple of quick clarification questions.

Did you mention in the fourth quarter that gift items were weak, or were you mainly talking about the fragrance, which is the main gift category for holiday?

Well I would say items that are typically gift-giving that we would see were softer in terms of the category, so fragrance, personal care appliances, et cetera.

That was, I think, a broader industry trend, not just an Ulta trend.

Okay.

And did you see any lift in certain categories when you did increase the promotion?

Just trying to see if you saw some nice correlation with traffic and when you did increase promotional activity?

Yes, I would say it was pretty much across the board.

Okay.

And then a question on inventory plans, how should we look at the inventory growth for the remainder of the year if you're looking to have it grow on a per-store basis below comp expectations?

Jill, we would expect it to -- 2014, as we continue on a trend and we see at the end of the year.

We expect our inventory per door to be well below comp store growth.

We believe we've got good practices, systems, and people in place to maintain the discipline there.

Again, during 2013 we were lapping some unusual items with some inventory investments that we saw that caused some variability early in the year, but we believe now we're back on track where we want to be.

All right.

And then last one, given some of the recent management changes, is there any other positions that remain open, or you're looking to add new folks to?

Thank you.

I'm really pleased with our management team, I think we're gelling really nicely, and right now I think we are in a good place.

Business is always changing, evolves, so you never say never, but we're good.

Thank you.

Dana Telsey, Telsey Advisory Group.

Good afternoon everyone.

Can you talk a little bit, any more color on the new store productivity levels, what you saw and how does it compare to the prior years?

And then lastly, what type of comp do you need to leverage expenses?

And it's very exciting about all the new brands in 2013, how many brands in 2014?

Thank you.

Hi, Dana.

As far as the new store productivity is concerned, we continue to be very pleased with productivity in these stores and the investment returns that it's generating for our shareholders.

If you adjust the comp, the 9.2% comp for e-commerce and Superstorm Sandy measurement, the calendar shift, the stores are generally in the same vicinity as they were back in the third quarter, and the way they were for most of 2013.

So the new store model is intact, new stores are comping just the way we expected years one through five, and some of the older stores of course are in the healthy low-single digit range.

So where we expected to be, and frankly with the environment that we are in right now, we're fairly happy with that performance.

We think we can do better on that, that's a focus in 2014 for us to try to figure out how to better drive comps in some of our more mature stores.

As far as new brands, as Mary mentioned, IT is rolling to all doors and Mally to all doors, and beyond that, I would really refrain from mentioning any new brands coming in.

But we're always working on new brands, new products, exclusive products for our guests to surprise and delight her, so there will be more coming down the pipeline.

Thank you.

Thank you.

There are no further questions at this time.

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

Thank you.

In closing I would like to thank all of our Ulta Beauty associates who worked very hard to drive excellent topline growth and deliver solid earnings growth in 2014, despite a very volatile consumer environment.

We opened 125 stores, dramatically improved our e-commerce business, and continued to enhance our merchandise assortment, loyalty program, and marketing capabilities, all while laying the groundwork for continued strong performance.

Thank you all for your interest in Ulta Beauty, and I look forward to speaking with all of you soon.

This concludes today's teleconference.

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Thank you for your participation.