Ulta Beauty Inc (ULTA) 2014 Q2 法說會逐字稿

Greetings, and welcome to the Ulta Beauty second quarter 2014 earnings results conference call.

(Operator Instructions)

As a reminder, this conference is being recorded.

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

Thank you.

You may begin.

Thank you.

Good afternoon, and thank you for joining us for Ulta Beauty's second quarter 2014 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 our 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 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.

During this call, we make reference to the metric, free cash flow, a non-GAAP financial measure defined as cash provided by operating activities, minus purchases of property and equipment.

I will now turn the call over to Mary.

Thank you, Laurel.

Good afternoon, everyone.

We are delighted to announce very strong second quarter results, and to share the outcome of our updated strategic plan and financial targets.

I will talk about our long-term vision, five year financial targets and strategic imperatives today, then following up with more detail at Analyst Day in Chicago next month.

First, a quick review of the second quarter headlines.

We grew the top line 22%, and drove the best comp we have achieved since the second quarter of 2012.

Total Company comparable sales were 9.6%, on top of an 8.4% comp in the second quarter of 2013, both including the impact of Ulta.com.

Strength in prestige and mass cosmetics, boosted by some very successful new products and brands, as well as rapid growth in e-commerce drove these exceptional results.

We were pleased to see transaction growth contribute more than ticket growth to our same-store sales.

Solid gross margin performance reflected strong sales of prestige and professional hair care categories, coupled with fewer discounts compared to a year ago.

Earnings per share grew 34%, with strong flow-through from better than expected sales, healthy product margins, and some benefit from the timing of marketing expenses.

Scott will discuss the second quarter in more detail, and the outlook for the rest of 2014 in just a few moments.

Now I would like to walk you through a review of our strategic planning process and our new five year financial targets.

As a reminder, we set out several months ago to refresh our strategic plan.

This process was led by me and my full senior team.

We formed a fact-based, guest-centric and total enterprise view of the guest experience that we want to deliver in the future, and determine what is required to do so.

We felt confident about the opportunity to continue to drive growth in guest satisfaction in the years ahead.

Our approach was to understand Ulta's current strength and opportunities, and then project guest needs, the potential competitive set, and the omni-channel landscape of the future.

We defined Ulta's path from the perspectives of brand positioning, guest experience, product and services portfolio, and store and e-commerce expansion plans.

We also projected the IT and supply chain requirements to achieve our strategy.

Then considered the financial impact of all those factors to establish a five year plan that delivers sustainable growth and strong shareholder returns.

To summarize the primary outcomes of this work, we have identified six strategic imperatives as the foundation of continued strong growth.

We have identified areas of focus and investment that give us confidence that we can maintain strong top and bottom line growth rates.

We developed a five year financial model to support the strategic framework.

And finally, we developed a capital allocation strategy.

We think about this strategic plan as evolutionary, not revolutionary.

At the outset, we recognize that our core business model is strong.

The original insight of our founders, that women want a shopping experience that reflects the entire range of her beauty purchases, is still very relevant today, almost 25 years after the first store opened.

So the core of what Ulta is all about is not changing.

This was about sharpening our view, and getting even more focused on delivering a relevant and differentiated business model that drives sustainable profitable growth.

In fact, we believe many of the key drivers of our past results still have plenty of runway, and will continue to deliver, namely new store growth, expansion of our prestige assortment, a strong compelling loyalty program, a clear guest target, a woman we refer to as the beauty enthusiast.

She represents about half of the spend in the beauty category.

She is highly engaged in newness and discovery, a highly differentiated offering with an unmatched breadth of assortment across categories, brands and services, and rapid e-commerce growth.

We also agreed on key opportunities we want to focus on to ensure long-term sustainable growth.

And those include increasing Ulta's brand awareness and acquiring more new customers, becoming less reliant on discounting over time in a careful and measured way, and developing the omni-channel capabilities our guests expect us to offer to keep pace with the marketplace.

Examples of these capabilities will include ordering in store and delivering to home, and checking availability of inventory online as well as others.

We establish our vision for the future of Ulta to be the unmatched beauty authority, by providing women a compelling, unique and on trend array of products and experiences.

We aspire to become the favorite beauty destination, the most loved and admired by our guests, associates, communities, partners, and investors.

Supporting this vision, we articulated six strategic imperatives that we believe will drive sustainable growth for Ulta.

One, acquire new guests and deepen loyalty with existing guests.

Two, differentiate by delivering a distinctive and personalized guest experience across all channels.

Three, offer relevant, innovative and often exclusive products that excite our guests.

Four, deliver exceptional services in three core areas, hair, skin health, and brows.

Five, grow stores and e-commerce to reach and serve more guests.

And six, invest in infrastructure to support our guest experience in growth and capture scale efficiencies.

At the upcoming Analyst Day, we plan to give you more color on each of these six strategic imperatives, and show you how we will bring the Ultra brand experience to life for our guests.

The main components of our new five year financial targets are as follows.

We expect to maintain comparable sales growth in the 5% to 7% range.

We plan to open approximately 100 stores per year.

For the next couple of years, these are expected to be almost entirely our 10,000 square foot prototype, pending findings from our upcoming small store test.

We anticipate that e-commerce will grow to represent about 10% of our sales.

This model is expected to deliver earnings per share growth in the low 20% range over the next five years, excluding the impact of the supply chain investments.

As you know we are making significant investments in systems and supply chain, including a multi-year supply chain transformation designed to improve our inventory productivity, in-stocks, and to free up labor in stores to be more customer-facing.

This supply chain work will also enable omni-channel capabilities to position us to keep up with changing consumer expectations in the years ahead.

This investment is expected to reduce our earnings per share growth rate by percentage points in the mid single-digits in 2015 and 2016, after which we anticipate EPS growth will return to the low 20% range.

And these targets exclude any benefit from share repurchases.

Despite these investments, operating margin is expected to remain stable for the next couple of years, before heading up towards our long-term mid teens targets.

These targeted range are not meant to represent specific guidance for 2015.

We will provide guidance for 2015 at the time we normally announce annual guidance, which will be on our March 2015 earnings call.

Now turning to our capital allocation strategy.

We recognize that we have more cash than we need on the balance sheet today, and this cash is expected to grow significantly over time as our business grows and our CapEx needs moderate.

We plan to maintain our strong balance sheet and maintain enough cash to invest in organic growth, as well as to keep some dry powder for potential acquisitions or partnerships in the future.

And we do plan to buyback shares going forward.

We expect to offset dilution, and beyond that, give ourselves the flexibility to buyback more aggressively based on market conditions.

Today we announced a new share repurchase authorization for $300 million, which replaces our existing program.

We announced our intention to implement a 10b5-1 plan to give us that flexibility.

I believe our plan represents a strong set of strategic imperatives and initiatives, and that our results will place Ulta in the top tier of high performing retailers.

We will continue to drive market share gains, and deliver strong sustainable sales and earnings growth, making our Company a very attractive investment.

I also know that we have the best associates in the industry, who love what they do and are excited to bring more beauty into the lives of our guests.

So let me turn it over now to Scott to cover the quarter, and updates to our 2014 guidance.

Thanks, Mary.

Good afternoon, everyone.

Second quarter sales were $734.2 million, compared to $601 million last year, an increase of 22.2%.

Comparable sales increased 9.6%.

The retail only comp was 8.3%, with the salon business comping slightly higher at 8.4%.

E-commerce growth of 54.9% added 130 basis points to the comp.

We were very pleased with the balance between transaction and ticket increases, with transactions up 5.8% and ticket up 3.8%.

The ticket increase was driven by a modest increase in units per transaction, but mostly by higher average selling price due to strength in prestige categories and less discounting overall.

Retail only comparable transactions increased 5%, a significant acceleration compared to the first quarter.

Since we are spending quite a bit of time on this call discussing the strategic plan and long-term financial targets, we thought we would share a condensed version of our usual discussion of our business drivers.

From a real estate perspective, we opened 19 stores during Q2, ending the quarter with 715 stores.

We also completed four remodels.

New store productivity remains strong, and we are also seeing solid comps in our more mature stores, as all classes of stores are benefiting from the momentum in new brand and product launches.

On the merchandising front, newness continues to be a major driver of our business.

After rolling out It Cosmetics and Mally to every store during the first quarter, these new brands were solid contributors to our growth.

We are also pleased with the success of our chain-wide expansion of Urban Decay, and excellent results in our Clinique, Lancome and Benefit boutiques.

Exciting new product launches during the quarter included an innovative liquid foundation from Bare Minerals, a highly anticipated eye liner to complement Benefits, best-selling They're Real mascara, as well as new fragrances like Armani [C] and Mark Jacobs Daisy Dream.

To update you on our loyalty program and CRM, we now have 14 million active members, and are very pleased with the performance of the markets that were converted to the Ultimate Rewards points-based program in February.

Having all customers on one platform allows us to communicate the benefits of the loyalty program more efficiently and deliver CRM campaigns across the entire loyalty customer base, compared to just half our customers before the conversion.

On the marketing side, second quarter highlights included our Love Your Hair event, which we enhanced with content, more focused on education and benefits versus just price promotions.

We also saw excellent results from our semi-annual event promoting jumbo sizes of hair care products at great prices.

Finally turning to Ulta.com, we continue to see strong performance from our e-commerce business.

In July, we released exciting new features and functionalities to the site, designed to enhance the discovery and browse experience, with the addition of rich editorial content.

New pages for Get Inspired, Beauty Consultation, and Share and Play focus on trends, new arrivals, best-kept secrets, advice and social content.

We added online booking capability for our salon appointments for all stores.

We also began to host live chats on Ulta.com featuring something of our vendor partners, like the founders of the brands Carol's Daughter and Tarte, which were very well-received by our guests.

Finally, we released our first iPad app in July, designed to provide our guests with a unique opportunity to browse, discover, and share our products.

Turning back to the P&L.

Gross profit dollars increased 22.3% to $259.3 million.

Gross profit margin was flat year-over-year at 35.3%, primarily driven by stronger than expected sales of prestige cosmetics and professional hair care products, as well as a modest rent and occupancy leverage on higher than expected same-store sales.

This was offset by slight deleverage in supply chain expense due to costs associated with the expansion of e-commerce fulfillment capabilities in our Chambersburg distribution center.

SG&A expenses rose 17.4% to $157.8 million, down 90 basis points as a percentage of sales at 21.5%, versus 22.4% last year primarily due to leverage on strong sales, as well as timing of marketing spend.

We also pushed some of the planned expenses related to test and learn initiatives later in the year.

About half of our earnings outperformance in the quarter was due to the impact of SG&A expenses moved later in the year.

Pre-opening expense was $3.6 million, compared to $4.8 million in Q2 of 2013, driven by 19 store openings during the quarter, compared to 33 new stores opened last year.

Operating margin increased 120 basis points to 13.3%, versus 12.1% in Q2 of last year.

Net income increased 35.4% to $60.8 million or $0.94 per diluted share, versus $44.9 million or $0.70 per diluted share last year.

Earnings per share grew 34.3%.

Turning to the balance sheet.

Inventories were $541.5 million at the end of the quarter, compared to $461.2 million at the end of Q2 2013, driven by 106 net new stores opened since August last year.

Inventories were flat on a per store basis, as our supply chain and store teams continue to keep inventory very clean.

Capital expenditures were $55 million for the quarter, driven primarily by our new store opening program, as well as supply chain and IT investments.

And depreciation and amortization for the quarter were $31.9 million.

We moved $100 million of the cash on our balance sheet to short-term investments with a maturity of less than 12 months, and as a result ended the quarter with $363 million in cash.

Our free cash flow year-to-date is about $39 million, and we are well on track to generate more than $100 million in free cash flow this year.

With a very strong first half of the year under our belt, we are raising our view of our full year performance.

We anticipate comparable sales to increase in the 7% to 8% range, and total sales to increase in the 20% range for the year.

We expect that earnings per share will be in the 20% range this year, excluding any impact related to share repurchase activity.

We expect to invest about $265 million in capital in 2014.

Turning now more specifically to the third quarter of 2014.

We expect sales to increase in the range of $724 million to $736 million, versus $618.8 million last year.

We expect comparable sales to increase in the range of 6% to 8%.

Pre-opening expense is expected to come in around $7.1 million, with 50 stores planned to open in the third quarter.

We expect to achieve earnings per share in the range of $0.79 to $0.84, compared to $0.70 in Q3 of last year.

Our tax rate is expected to be approximately 38.2%, and our fully diluted share count will be approximately 64.8 million excluding any potential share repurchase activity.

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

Operator?

Thank you.

(Operator Instructions)

Our first question is coming from the line of Mr. Brian Tunick with JPMorgan Chase.

Your line is now opened, you may proceed with your question.

Yes, thank you very much, and congratulations.

Two questions.

One maybe just more color on the SG&A timing shift, how that has changed and what we should be thinking there?

And then maybe on the, Mary, if you could talk about the 1,200 store target.

I know in the guidance you talk about around a 100 stores a year.

But just ahead of the Analyst day, I guess can you talk about sort of -- at least 1,200 stores in the big format, and small markets can add to that?

And does that change as you think about e-commerce becoming 10% of sales?

Just curious about what you think long-term about the 1,200 store target?

Sure, Brian.

Thank you, and let me start with the store question.

So as I said, we reiterated our target has been and continues to be at least 1,200 stores.

And that, we think about that, as really our current 10,000 square foot format in our suburban type market.

And we will talk more about this at Analyst Day, but one of the things we're learning about right now, is a small store format that we are opening up two of this year.

We are going to learn a lot about that.

So given how our stores are performing, we think that is a pretty good target, possibly a conservative target If we find the small format to be of interest, those would largely be incremental to our 10,000 square foot format.

We are starting those in some more rural markets, and in the future potentially urban markets.

That would be down the road.

New stores continue to be a great investment and they continue to perform.

And we think about, relative to our strategic plan, getting more stores is a great way for us to get more guests.

Beauty is a business that really is contingent on an experience that involves a physical experience.

And as we see our guest experience in the future, being able to really delight our guests, obviously stores and e-commerce can work really well together we think to deliver on that.

Our store expansion is always going to be contingent on finding high quality sites.

We have a very robust and rigorous process, but we continue to see plenty of excellent real estate opportunities in the years to come.

As far as the SG&A question is concerned, as we mentioned in our prepared remarks, roughly half of the beat for the quarter is SG&A related kind of expenses, so call it $0.05 roughly.

Half of that is marketing, the other half is test and learn.

So the test and learn program was delayed a little bit more than what we expected when we gave second quarter guidance.

So we thought it was better to wait until we had those projects properly scoped, and metrics aligned, so we knew how to measure success at the completion of the test period.

And on the advertising or marketing side, those were efficiencies that were identified by our marketing team that we, in the first half of the year or second quarter that we expect to redeploy in fourth quarter to drive more new customer acquisition kind of activities.

Very helpful.

See you in a couple weeks.

Thank you.

Thank you.

Our next question is coming from the line of Daniel Hofkin with William Blair & Co.

Your line is now open, you may proceed with your question.

Good afternoon, and I will add my congratulations.

Just wanted to, first with regard to the comp and obviously, a very strong performance, where are you seeing kind of the most upside across the age of stores?

Is it pretty balanced, or is it more newer comping stores, just that would be my first question?

Dan, I would say the general rule of thumb is when you have strong performance being driven by these new brand launches, and exciting new things that merchants are bringing into the business, it really -- rising tides lifts all boats in this business.

I know I have said that before to many of our investors.

I mean, it is just -- it's not a single class of store or vintage of stores, or older stores versus newer stores.

It really helps drive productivity in the whole fleet.

Okay, great.

And then with regard to the long-term financing, particularly impressive on the comp sales outlook.

Obviously some of that is the new plan includes e-commerce, whereas I think the old one three to five did not.

But could you comment on what are some of the things that -- what are some of the components of that?

Or what are the things that you expect to help drive a stronger underlying comp versus -- (Multiple Speakers)?

Sure.

Well, first of all, we're in a growing industry, right, especially the prestige side of beauty has been showing good growth and we participate heavily in that.

As we look at our guests, and look at her needs in the future we believe that there is more market share that we can gain with the beauty enthusiasts.

And that our insights about how to meet her needs continue to deepen every day.

So in that sense, we think there is plenty of opportunity for growth.

We also know that -- we have talked about this.

The majority from our current growth is coming from our current loyalty members which is great, and they love what Ulta has to offer.

But an area of opportunity for us, is a big part of our test and learn this summer or this fall now, is about how do we get new guests to become aware of, and retry perhaps Ulta.

So we think about it almost as a relaunch of the Ulta proposition.

And again, there is plenty of women in this consumer segment that we believe would be very attracted to our proposition.

So new guest acquisition, e-commerce growth as you have said, store growth -- all of those -- strategic imperatives are largely around driving, different ways to drive growth.

Great.

Best of luck.

See you soon.

Thank you.

Thank you.

Our next question is coming from the line of Aram Rubinson with Wolfe Research.

Your line is now opened, you may proceed with your question.

Thanks so much for taking the question.

Wanted to ask you a bit about your current capabilities.

We hear a lot about investments, a little bit last year, this year, and obviously for the next two.

Could you just give us a sense as to what you are capable of today, and what you would like to be capable of, whether it's warehouse management systems or merchandise systems or financial systems or distribution?

Just can you give us a little bit of the lay of the land of where you are now, with all of these capabilities?

And what you think you are missing and where you will be in those couple years, that you can do that you can't do now?

Yes, well, first of all, Aram, our business is obviously running pretty darn well today, right?

So we obviously have some core capabilities that we are using every day to execute the business.

What we have identified is a couple things.

One is a everybody knows retail is changing rapidly in terms of guest expectation, so the omnichannel aspect of our capability is one we need to invest in to grow.

We anticipate that the guests in the future is going to want a seamless experience, and one that we don't necessarily offer today.

It's not a big barrier to our growth, as I would say as you see the performance that we are having.

But we know that that's going to be something she is going to need, to have in the future.

So a more seamless ability to buy something, bring it back to the store, order it in the store, have it shipped at home, be able to know in advance what we have in inventory in our store.

So all those basic shopping and retail capabilities are part of what we will be investing in.

Also just as part of this investment is really just around growth, as we continue to go down this growth path, which is a strong growth path.

As we continue to drive our -- a number of stores, we need more capacity in the system, so that is part of the investment too, which are just pretty straightforward.

And also we just think overall end-to-end, we could have a more efficient system than we have today.

So whether it's how we receive our orders and work with our vendors, how our stores are stocked as the product comes into the stores, there is plenty -- and how we reforecast and replenish, we know there's ways we can be smoother I guess, faster, have less out of stocks, all those things that we know will just help our business be more -- a better experience for the guests, and drive efficiencies in the long run.

So if I can just drill down to that, just a little bit, so I mean, are we on an automated replenishment?

Do we have kind of store scheduling for labor?

I am just trying to figure out, do you have a space optimization program, do you have price optimization, or are all these things totally new?

Or are they -- I am just trying to understand whether you have these capabilities or not.

Yes, I don't know if we want to go through a specific laundry list of what's in and what's out, Aram.

But I will say what you describe predominantly, we don't operate in that kind of environment today.

So we have got good systems in our stores.

Over the last couple of years, we have made some investments in store laboring, and we are working on task management in the stores.

We are just about ready to finalize our rollout with a new POS system, which we think will be best-in-class, kind of check out experience for our guests, so again, early stages of that.

On the supply chain and the merchandise organization, I think you have heard and I think many of our long-term investors have heard us say, that we still do things kind of the hard way.

We muscle through a lot of things, that we know that there is better, more efficient ways to do that.

Whether it's forecast and replenishment which Mary mentioned, and helping our vendors help us forecast the business, and get it to our DCs more effectively, and getting it to our stores, right?

In the right kind of -- what I would say delivery mode, boxes, so it is shelf-ready, ready so that we can take time out of the back room, and get it into more guest-facing time.

I appreciate that color, thank you.

Thank you.

Our next question is coming from the line of Oliver Chen with Citigroup.

Your line is now open, you may proceed with your question.

Hello.

Congratulations on solid results.

Regarding the outlook for the gross margin, your inventories are under really good control at this point.

The gross margin comparison as we look at it is a little bit harder, than easier in the fourth quarter.

Is the expectation that you will be able to keep promotions under control versus last year, and how are you seeing promotional environment unfold as we approach holiday?

Okay.

Oliver, thank you.

The promotional environment, right, that we expect that as we get into the holiday, it will continue to be a competitive promotional holiday.

I don't think there's any reason to think that won't -- it is always going to be like that, right?

The overall sentiment right now, consumer sentiment is strong.

And I think we hear retailers feeling pretty optimistic about their inventory situation going into holiday, but nonetheless, we know that is a competitive time.

We are also seeing some success, and I, again, I would say we are walking before we run.

But we are, I think every day getting better at how we can use some of our tools, like our CRM capabilities to be more targeted with our offers, and drive value in ways that are less about price discounting.

So would we need to be more promotional than last year?

I doubt it.

Will it be a promotional holiday?

We would expect that.

But we feel, as you can see in our guidance, optimistic about the rest of the year.

And Oliver, I would just add as far as rate goes, again gross profit margin rate overall was flat year to year in quarter.

And you may recall, last quarterly call we mentioned loyalty program, right, is still going to be a headwind for us for the rest of the year.

There is still some product mix challenges that we have.

We did a good job this quarter overcoming some of that, and we have more of that planned for the rest of the year.

So we will do our -- do the best we can to make sure we keep that all in balance.

Okay.

And Mary on the product side, one of the strategic highlights is the focus on hair, skin care, skin health and brows.

Was that -- is that consistent with how you have been, or are there categories that you may de-emphasize as you focus on these three?

Yes -- (Multiple Speakers).

I am sorry, go ahead.

I was also curious on articulating your thoughts on your competitive advantage versus department stores?

Okay.

Sure.

Well, first of all, that strategic imperative actually was talking about services, and actually one of the earlier questions was about levers for growth.

And I should have mentioned, we do see that our services are absolutely one of the areas that strategically are important to us to your point, one of our points of differentiation.

And we believe an area that we could focus on to drive future growth.

Our salon guest, salon is a small part of our business today as you know, that is our best guest though.

She comes more frequently, spends more, and she loves the experience.

And the -- we kind of carved out three pillars that we think we excel in today and can excel in even more in the future.

And it is about the hair, basically cut and color, and hair services that involve trend like braids, things like that.

On the skin side, as you know we have a partnership of Dermalogica, and we have trained estheticians in our stores.

A small part of our business today, in terms of that service.

We know that could be -- it will be an area of growth.

And then, lastly brows, particularly through our partnership with Benefit and the brow bars.

So we look at those three pillars of service as areas that we will focus on and drive.

We are experimenting already today with how to drive more new guests in, to try our salon and come back.

And those often, not as much as I would like, but often have products attached to them.

So you can imagine that's a great flywheel for us.

So that's an area, and it really dovetails I guess, with your second question.

Which is part of the work we do with the strategic plan, is really just step back and say what is our competitive advantage today, and what would it be in the future?

And it's a competitive industry.

Everybody is interested in beauty.

It is a growth industry, but we have got advantages we think we can really push and accelerate.

And it is about this total guest experience, that we think will get even better as we allow our associates in store to have even more guest-facing time, as our -- perhaps our systems get more efficient in some of the ways that Scott described.

So in a Ulta, she will be able to get an experience that is very different and unique.

It is different than the Department Store, it is different than mass outlets, and different than other specialty stores.

And that, we plan that that will be kind of our core.

We differentiate, and we will lead with that.

Thank you.

Best regards.

Thank you.

Our next question is coming from the line of Gary Balter with Credit Suisse.

Mr. Balter, your line is now open.

You may proceed with your question.

It appears there is a connection issue with Mr. Balter's line.

We will move on to the next question, coming from the line of Matthew Fassler with Goldman Sachs.

Your line is now open, you may proceed with your question.

Thanks so much, and good afternoon.

My first question relates to capital.

Obviously, you talked about the SG&A impact of some of the investments you are going to make.

Can you talk about, as the store growth I guess flattens out whether the investments that you are making contemplate any kind of bump in CapEx?

And then also related to capital, you talked about buying back stock at least at the level you need to offset dilution.

What is the typical dilution you would see in a given year from an options issuance?

First, as far as the CapEx question is concerned, we are projecting 265 million for 2014.

Directionally, that might be at a slightly more elevated rate over the next couple years as we get through the supply chain cycle year [event].

But we expect it to moderate once we get past 2016 generally speaking.

And as far as dilution, or dilution is concerned, we would expect that to be roughly maybe 1 percentage point, Matt, you could estimate, is what the buyback dilutive offset would be.

Got it.

One other quick financial question, and then a strategic one.

As we think about the $0.05 or so you deferred from the second quarter to the remainder of the year, should we think about it as being roughly half and half Q3, Q4 based on the comments you made earlier?

Yes, I think that is a good approximation.

Great.

And finally, I know you will have an extensive strategic discussion in Chicago in a few weeks.

But very briefly on mobile, and you piqued my interest, and you talked about having the iPad app, which on the one hand, I guess you are not the first retailer.

And on the other hand, it speaks to the opportunity.

Can you talk about how you think your customer and your category deploys mobile differently than for other retail categories?

And what you think the potential is relative to the online business that you have been doing already?

Sure.

Well, obviously mobile is a growing part of our business as it is for everybody.

And we know that it is increasingly a way that our guests engage with our brand as well as others.

Probably one of the biggest opportunities for us with mobile is the ability for her to be learning about content, about brands and products and services, whether she's in our store or not in our store, or outside of our store, as well as for our associates.

A part of our technology plan is to allow them to have more access to mobile technology in the store, so that she can be an even bigger expert on every brand that we offer than she is today, frankly our associates.

It is hard to be able to do that all the time.

Having more access to mobile information helps get us in the same position that our guests are in.

Mobile transactions are continuing to grow as a percentage of our transactions, and we will expect that to continue to happen.

Got it.

Thank you so much.

Thank you.

Our next question is coming from the line of Ike Boruchow with Sterne, Agee.

Your line is now open, you may proceed with your question.

Hello, everyone.

Congrats on a great quarter.

Thanks for taking my question.

Mary, I wanted to know -- could we dive in a little bit on the new customer acquisition side, and things you have been doing and tests you have been doing regionally with some new marketing, your CRM capabilities?

And then to take that a step further, could you comment on the traffic increase you saw in the quarter, and maybe how much of that was new customer traffic, and how that compares to the prior couple quarters?

Well, really at the Analyst Day, we will have more color on the test and learn, and the experiments that we are doing.

There is a couple different things going on.

One is that we have an in market advertising test that just started in several markets to see, just at a general way can we drive new customer acquisitions through basically driving awareness through a more mass media and digital media kind of approach.

So that is a new-- that has just started, and we will know a lot more about that soon, and that is one way.

We know that basically top of mind awareness for Ulta is not as high as it can be.

And we believe that by driving that awareness and positioning the brand in the way that we know we represent which is this great place for a woman to discover and have fun with beauty, then we think there is upside there.

So we will learn more about that.

And certainly Dave Kimbell and his team are also using our CRM capability to run, I guess several small scale experiments right now, around how can we either get guests who aren't coming as often as we would like to see what could incent her to come more often.

Or using multiple forms of either -- social marketing to see if we can target new prospective guests to try Ulta.

So a lot of that is in process, and we feel optimistic that will be part of our growth strategy going forward.

Can you comment, are you already beginning to see some of the fruits of your labor on the new customer acquisition front?

Most of our sales are being driven by our current guests, and she is coming more often and spending more, which is great.

So it's really -- I say, early stages.

Now our e-commerce business is one of the ways that we are seeing new customer acquisition.

And that again, will be an area for growth for us as well.

Got it.

Best of luck.

Thank you.

Thank you.

Our next question is again coming from the line of Gary Balter.

Sir, your line is now open.

You may proceed with your question.

Thank you.

We will try it again this time.

First of all, congratulations.

Following up on Ike's question a little bit, Mary, when you first came and met with a lot of the sell-side people, one of your concerns was that Ulta isn't as well known as people like Sephora.

And you were trying to figure out how do we improve that.

Obviously, you have had great traffic drivers this quarter.

As you, without giving all the answers to the October 15 meeting, what is your perception now of Ulta?

Do you feel that you have made nice progress, in terms of a customer understanding who you are?

And have you closed the gap a lot, and changed your perception of it?

Okay.

Thank you, Gary.

I would characterize that less of a concern that I saw, and more of an opportunity, and I still see it today, because I think we are really in the early stages of driving that new customer acquisition.

So most of what we are doing right now are, we are refining the tactics that we have used previously, and I think getting even better at them.

But they are largely targeted at our current loyalty members, and that is largely where our growth is coming from which is great.

It says that our current guests love us, they are coming more often, and spending more, and we are getting growth in e-commerce.

And some of that is new guest, but we believe again why we are confident about the long-term targets we are providing, is there is still that opportunity.

So I would say really, Gary, I wouldn't feel -- I don't think it is very different today, in terms of the awareness and sharpness of the perception of Ulta.

But we have done the work to identify more insights about our current guests, prospective guests, and how to position and really drive awareness to the brand.

And we will know more as these tests run, so I don't want to over-promise.

We don't know yet what the response will be, but that work is still in process and we will know a lot soon.

Thank you.

Our next question is coming from the line of Neely Tamminga with Piper Jaffrey.

Your line is now open.

You may proceed with your question.

Great.

Good afternoon.

Just two quick questions, hyper-specific here.

On the new POS system, what are the key functionalities that are making you feel excited about launching this new POS system?

And number two, what sort of kind of key metrics or problems or KPI, however you want to look at it, on the e-commerce business are you looking to address over the next couple years?

I mean, is it really kind of about bounce rate, e-mail campaigns, is it about cart abandonment?

Like give us some sense of what you are going to improve on the e-commerce side too?

Thank you.

Okay.

Thank you.

The POS front, I would say, a couple key categories and benefits, one is speed of transaction, which we know there is always a little bit of a learning curve.

But our associates are the ones who are using it, love it, and they are seeing benefits of it.

So we know that will help speed the transaction, as well as going to give us the ability to have more information about our guest when she comes in.

So over time, we believe that that's going to help us to be even more personalized in terms of what we offer her.

And so, and also, one of the capabilities is going to be to be able to order in the store, and have it delivered to your home.

So we think about, for example, in our small store tests -- those are smaller stores, not going to carry every single SKU.

So the ability for our guest to be able to still have access to everything that we sell, will be a benefit as well.

So those are just a few of them.

Dave, do you want to comment on the e-com metrics?

Yes, absolutely.

As we look at e-commerce, first of all, we are really pleased with the results that we have had so far.

We are really just about a year into the relaunch of our site, and really happy with that.

And because we are still relatively new, and that there is a lot of foundational pieces that we are really still very much focused on.

Driving traffic, we continue to have success in getting new customers and potential customers to come to our site.

We saw traffic increase pretty significantly in the second quarter last year through this year, through sharper, more sophisticated customer acquisition efforts.

So we will continue to do that.

Our conversion rate, through optimization of our site experience, we really significantly improved it a year ago.

And we are continuing to fine-tune that experience, things through that the check-out process, the way the cart works.

We are making improvements through that site experience to make sure, as you mentioned limiting cart abandonment and maximizing conversion, and our AOB.

As we get, as we improve our merchandising approach, get learnings about what is working in the e-commerce environment, maximize the understanding of our best guest, and how she is experiencing both our brick-and-mortar retail and online, and personalize and customize our marketing to her, we think we are making progress on AOB through our merchandising, and we will continue to do that.

So a lot of it is really foundational, and we are going to continue to focus on those efforts going forward.

That's fantastic.

Thank you.

Best of luck.

Thank you.

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

Your line is now open, you may proceed with your question.

Thanks.

Good afternoon.

Two questions.

First is on the comp growth, the strong comp growth in the quarter.

Do you have a sense of how much that conversion of half the people to the new loyalty program in the first quarter, how much that is helping traffic this year as people are getting more e-mails about their points and things like that?

And the second question is on the e-commerce, can you discuss how you expect the product mix and the margin to evolve over -- that year long-term horizon?

Thanks.

As far as the comp drivers for the quarter, we -- I guess, I will tell you.

We are not going to be able to disaggregate the comp loyalty versus non or new versus old customer or existing customer.

We can say with certainty, that typically historically what we saw, when we implemented the loyalty programs is that it took awhile for the customers to come back.

The sales performance was a little weaker on conversion.

And then, we kind of cycle back through the course of like a full one year period, we kind of get the comp back.

This time, again, hopefully we learned some lessons on our last conversion cycle.

This time we have seen sales kind of maintain.

So we haven't seen any degradation or weakness in sales with those people that have been converted.

So that was a really great sign for us that the conversion has gone very well.

As far as product margin mix is concerned, I think we are talking about 2014, Evren.

We talked overall on margin rate, that we still had this loyalty headwind.

We will expect to have that for the remainder of 2014.

We are still seeing one of our more important categories, professional mail has been a bit weaker than what we are expecting this year.

So that is a head wind on our margin rate as well.

Again, the merchant team is working hard to mitigate that.

We saw some of that in the second quarter with better performance than we are expecting, and we will continue to do that in the back half of the year.

Thank you.

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

Your line is now open.

You may proceed with your question.

Thanks.

Good afternoon.

Just want to start with e-commerce target you talked about earlier, the 10% of sales.

How does that benchmark against some of your peers and what they are doing today for example?

And then secondly, in terms of the required investment to get there, are we talking a step function, or is it more incremental investment on the infrastructure side to allow for that 10% of sales from e-commerce?

Thanks.

Yes, I think competitively, we feel there is a wide range of our competitors, and we are actually probably not as much focused on, where our competitors are.

We think 10% is really both attainable and smart place for us to be.

Our focus within e-commerce, as we have talked before, is to make sure we are serving our customer where she needs to be -- where she wants to be served.

But also finding ways to get her to experience our full breadth of offerings, including our in-store products and services.

And we think 10% is the right guide path to get us -- target to get us to that.

As far as the investments?

Yes, we saw most of the step up in investments back in 2012 and 2013.

And I think we have talked about that, and called those numbers out.

That was really the step function I think, as you used that term.

Future investments are embedded in the supply chain numbers that we have given today, and built into the overall CapEx that we will talk about in more detail, as we get to the future.

So again, I wouldn't expect there to be any kind of an extraordinary step up in the investment called for that business.

Okay.

Thanks, Scott.

And then secondly, in terms of acquisitions, you referenced that earlier.

Are you talking more square footage acquisitions, or could you, in fact purchase brands or partner with companies on brands?

Yes, we haven't defined all that yet.

But generally speaking, I would say we would have more of an interest in things that we could, that would strengthen what we offer to our guests.

We think we are pretty darn good at what we do, but we know there Is opportunities out there to bring her news and innovation and exclusiveness.

So that would be more likely the area we would focus on, but we don't have anything planned right now.

Okay, thanks.

See you next month.

Thank you.

Our next question is coming from the line of Simeon Gutman with Morgan Stanley.

Your line is now open, you may proceed with your question.

Thanks, congratulations.

Stepping back a little bit with regard to investments, next couple of years they will be a little heavier.

When they go away, when they subside and earnings growth reaccelerates, does that reflect the cost of them just being lifted?

Or does it factor in that the business itself becomes more efficient?

So in other words, are you baking in anything, any benefits in those out years?

Yes.

There is definitely benefits from our supply chain investments, from some of the other -- what I would call just pure P&L kind of charges, like marketing, incremental marketing efforts.

Whether or not we tweak the store payroll model at all, which is yet to be determined, we are still testing that.

But anything that we would contemplate along those lines, we would fully expect to see top line comp benefits come out of those.

Okay.

And then switching gears to product, I think Mary mentioned expand prestige, which I think has been a focus for a long time.

Does the prestige mix just grow simply by the natural mix shift in the business?

You are adding brands, you are introducing new products, or does it contemplate some type of some space increase, or even reallocation over time?

Well, I would say, it is a little of both.

I mean, what we are seeing is that our guest is really responding to prestige brands right now.

Certainly not only that, but that certainly is a strong area of growth for us.

And some of the brands that we have launched, or new products that have been introduced in some of our brands have done quite well this year.

So, and in fact, we have expanded space for some of those brands.

So we imagine it will be a pipeline of new products and expansion of existing brands.

And what that mix exactly is going to be, will be determined as we look -- as we march forward over time.

Okay, thanks.

Good luck.

Thank you.

Thank you.

Our next question is coming from the line of Mark Altschswager with Robert W. Baird.

You may now proceed with your question, your line is now open.

Hello, good afternoon, and congrats on a great start to the year.

Just a couple quick follow-ups.

First on the gross margin side, and I think the comments in the Q, and you mentioned earlier that merchandise margin was about flat.

But I was hoping you could parse that out a bit, because it sounds like you benefited from both mix and fewer discounts.

So I am just trying to understand where you saw the offset there?

Yes, I am not going to be able to quantify everything for you, Mark.

But as I think I mentioned earlier here, we still have the loyalty conversion, is still going to be a headwind for us throughout the course of the year.

Product mix, again every quarter has a little bit different levers that we pull as a merchant team.

So we try to plan ahead, to make sure we have a good balance of ticket drivers and traffic drivers embedded in our marketing materials.

We have been able to offset some of the drag that we have seen from some deceleration of [pro mail].

We have been able to offset that luckily, with strength in the prestige line here over the first half of the year.

E-commerce, I know we have mentioned that in the past.

I mean, e-commerce rate is dilutive to us overall.

But that is a business that we're going to continue to compete in very well I believe.

And we will continue to expand merchandising opportunities there, as well which should help mitigate some of that over the long-term.

As well as continuing to scale up that business will help as well so.

Thank you.

And then, just following up on services.

As you look at the long range plan, where do you see services as optimal mix of overall sales, and how does that play into the longer range margin expectations?

Well, we haven't set a specific target yet for the size of services.

We know we are going to grow it.

We think that, as I said, we have data that shows that our guests who are participating in our services right now, are great guests.

Because they come on a frequent basis, they love the experience, and then she often buys other add-on products.

So while services in general are lower margins than our retail product, that guest is a very valuable guest to us.

And we will continue to look for ways to drive awareness, not just Ulta as a retailer, but Ulta as a beauty authority, with our service as a critical component of that.

And that is a very sticky part of the equation for us.

Thank you.

Our next question is coming from the line of John Kernan with Cowen.

Your line is now open, you may proceed with your question.

Good afternoon.

Congrats on a great quarter.

Just on the outlook, with ticket and traffic both trending in the right direction, why would comps decelerate a bit in the back half of the year?

And then, can you help us understand long term what your market share in beauty will look like in five years versus now, particularly in the prestige offering?

Thanks.

Well, it will be bigger.

(Laughter).

I am just kidding, but I mean, we definitely expect it, to grow our market share.

And that's part of our vision is that we are going to continue to really be a stronger player in this industry, and we will grow share.

In terms of the outlook for the year, listen, we are really pleased with our second quarter results.

And we have reflected that by raising guidance, from mid teens to about 20% sales and earnings growth.

Some of the upside that Scott talked about, it -- some of it was new product launches, which is great.

Some of it was expense timing shifts, which is fine.

We expect to see positive sale and share trends as we complete the year.

Okay, great.

Thank you.

Thank you.

Our next question is coming from the line of Dana Telsey with Telsey Advisory Group.

Your line is now open, you may proceed with your question.

Good afternoon, everyone, and congratulations.

Can you talk a little bit about -- as you think about the longer-term investments beyond supply chain over the next two years, how do you see operating margin being impacted?

Or is that when we should begin to see some leverage in the model?

Yes.

We expect operating margin to remain rather flattish over the next couple of years, which we think is an excellent result considering the amount of investments that we are going to be making in the next two years, especially in the areas of supply chain.

I alluded to earlier, maybe not as clearly as I should, but we believe there are significant efficiencies that are going to come out of the supply chain implementation, that are going to help drive top line and operating margin performance overall, once we get through the 2016 time frame.

At that point, we expect that our operating margin then will start -- we will start making significant progress towards our mid teens target, which we have talked about for some time.

And let me just add, that we have talked a lot about the investments that we are making this year, and what we are calling quote, test and learn.

And those are some experiments around hypotheses that we have, about how we can drive the business, investing in things like advertising, investing in things like more attention to salon, perhaps more guest-facing time in our stores.

The reason we are testing that is, we hold ourselves to a standard of getting return on that investment.

So as we look at those quote, investments, the reason that our five year plan leads to improving that operating margin, is that we will only choose the things to quote, invest in, that drive that kind of return that will help us -- that will allow us to deliver those results.

And if you think of the size of those investments over time, are they going to be bigger at the beginning of this time period, how do you think of the scale of them?

Yes, I mean directionally, they are more significant in the near-term, than they are.

So they moderate -- again once we get through 2015 -- 2015 and 2016 are the big step up years I would say, generally speaking.

And then they moderate once we get past 2016.

Thank you.

Thank you.

Our next question is coming from the line of Jill Nelson with Johnson Rice.

Your line is now open, you may proceed with your question.

Good afternoon.

You saw nice traffic gains, which exceeded ticket gains for the first time in quite a few quarters.

Could you talk about kind of that variance going forward, and how do you see ticket versus traffic playing out in your kind of long-term 5% to 7% comp growth?

Well, yes.

We are very pleased that we saw the strong growth in retail transactions that we did in the second quarter.

I would just say long-term, short-term, every quarter our goal is to have a good balance between transaction and ticket.

And we work together as a team to put plans in place that we believe will continue to do that.

So it's not a science, right?

So some quarters, it is going to play out a little differently.

Some of our new products like Urban Decay, Benefit, some of the new products in those lines, launch of IT, Mally, they were significant contributors, as well as a strong pro hair event, a leader event that Scott mentioned earlier.

And our marketing and merchandising teams continue to work together to create, I would say even more compelling communications every quarter.

So our goal here is to really just maintain a balance going forward.

Okay.

And then, could you talk about kind of the role of prestige boutiques going forward, kind of your thought process of how many boutiques you are looking at adding in the 100 new stores per year kind of plan?

And just their role in the long-term goals?

Thanks.

Sure.

Well we, our guests love the prestige boutiques.

We are very pleased with the business.

Janet Taake and her team work closely with our vendor partners on those opportunities, and we hope and expect to continue to grow those.

Thank you.

Thank you.

Our next question is coming from the line of Janet Kloppenburg with JJK Research.

Your line is now open, you may proceed with your question.

Hello, Mary, Scott.

I want to congratulate you on a great quarter.

I just had a couple of quick questions.

There has been some talk in the beauty industry over the last couple weeks, that the mass business, mass brands are being cannibalized by the prestige business.

And Estee Lauder and L'Oreal have both talked about that.

And I was wondering if you could talk about that change, and how it may affect your business going forward?

Or if you even agree with that, with that trend that is being witnessed by some of the big suppliers?

And also I was wondering on the e-com, being dilutive to margins, if we should expect it to be equally dilutive in FY15 and FY16?

Or if you will start to get some scale from that channel as we go forward?

Thank you.

Sure.

On the categories, I would say, if you step back and just think about our business model, our guest, what she needs and expects, she is always looking for a balance, the ability to go across the store and to buy different types of products at different price points that meet her needs.

So I can't comment on the trend that you are describing, that people are talking about.

What I would say, in our business, we are seeing a good balance there.

And so, we expect to continue to be able to drive that kind of balance within Ulta.

Second question?

As far as e-commerce and contribution might be considered or scalability of that business, I mean if we just carve that out as a standalone operating business, I think anyone would be happy to have it.

I mean, it generates a lot of operating income for the business.

We are improving our merchandise rates there, so gross margin, gross profit margin in general is improving, and we continue to see scale in that business.

So these growth rates do that kind of inherently, and we expect more of it in the future.

Thank you so much.

Ladies and gentlemen, and at this time I would like to turn the floor back over to Mary Dillon for any closing remarks.

In closing, I would like to thank all of our Ulta Beauty associates in our stores, and distribution centers, our headquarters.

They have all really worked hard to deliver excellent results this quarter, and they are working hard to implement the strategies that we have shared with you today, to continue to drive strong top and bottom line growth.

Go Team Ulta.

I also want to thank all of you for your interest in Ulta Beauty, and I look forward to speaking to you soon.

Thank you.

Thank you.

Ladies and gentlemen, at this time you may disconnect your lines.

This does conclude today's teleconference.

Have a wonderful day.