Ulta Beauty Inc (ULTA) 2014 Q4 法說會逐字稿

Greetings, ladies and gentlemen, and welcome to the Ulta Beauty fourth-quarter 2014 earnings 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.

Thank you, Laurel.

You may begin.

Thanks.

Good afternoon and thank you for joining us for Ulta Beauty's fourth-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'd like to remind you of the Company's Safe Harbor language.

The statements contained in this conference call which are not historical facts may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

Actual future results may differ materially from those projected in such statements, due to a number of risks and uncertainties, all of which are described in the Company's filings with the SEC.

We 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.

I will now turn the call over to Mary.

Thank you, Laurel.

Good afternoon, everyone.

Ulta wrapped up a very strong year of sales and profit growth, with excellent performance in the fourth quarter.

The whole Ulta team and I are very proud to celebrate this, as our first $1 billion sales quarter.

To review the numbers, sales grew 20.7%, and we delivered an 11.1% total Company comp, on top of a 9.2% comp in the fourth quarter of 2013.

Our best comp of the year was driven by our strongest traffic growth of the year, while average ticket also contributed nicely to the overall result.

The key drivers of our performance were continued strength in prestige and mass color cosmetics, a successful holiday selling season, execution of more effective marketing and CRM strategies, double-digit comps in our salon business, and 55% comp sales growth in e-commerce.

Earnings per share were up 24% to $1.35, compared to $1.09 last year.

Scott will cover the details of our financial results for the fourth quarter, as well as our guidance for fiscal 2015 in the current quarter in just a few moments, but first, I'd like to provide an update on our six strategic imperatives.

This is the long-term strategic framework we developed last year, designed to deliver continued market share gains and strong sustainable sales and earnings growth.

The first imperative is to acquire new guests and deepen loyalty with existing guests.

Our loyalty program and growing CRM capabilities continue to be highly effective tools to increase loyalty and grow our share of wallet with our members.

As of the end of the fourth quarter, our ULTAmate Rewards program has grown to reach 15 million active members.

Having all of our guests on a single platform for almost all of 2014 delivered significant benefits to us.

Customer reaction has been overwhelmingly positive.

Sales per loyalty member increased about 6% in 2014, driven by both higher purchase frequency, and higher spend per transaction.

We also saw a healthy increase in member retention last year.

And finally, we were successful in targeting less engaged segments of our loyalty customer base with specific offers to reengage those customers.

While we were delighted to acquire millions of new loyalty members last year, we believe there are a lot more beauty enthusiasts out there waiting to discover Ulta, so increasing brand awareness is a continued opportunity for us.

We were encouraged by the results of our TV advertising tests in select markets last fall, where we saw comps increase versus the control group, as well as an increase in new member sign-ups.

Message testing demonstrated that our campaign was relevant and memorable.

We also launched a national holiday radio campaign, which reached millions of prospective new guests and resulted in strong consumer recall.

We also heightened our focus on earned media, with outreach to long lead publications and beauty bloggers, to increase awareness of our holiday offerings.

As a result of these efforts, aided awareness of Ulta jumped up 7 points year over year.

Looking ahead, we expect to implement radio, TV and digital advertising campaigns, in conjunction with various promotional events throughout the year.

We plan to fund these brand awareness building activities by reducing Sunday newspaper inserts and other print vehicles, as well as through our ongoing efforts to reduce our reliance on broad price discounting in favor of more targeted marketing activities.

During the fourth quarter, we experimented with CRM offers focused on acquiring new customers in our salon business.

Fewer than 7% of our active loyalty members are salon customers, which provides us with a great opportunity to mine our loyalty customer base.

In fact, we were able to acquire thousands of new salon customers by testing various offers and marketing channels with targeted customer segments.

We believe our focus on new customer acquisition, in conjunction with an elevated presentation of our salon business in direct mail pieces and on our website, contributed to a significant increase in new salon guest count and an acceleration in our salon sales performance.

Our second strategic imperative is to differentiate by delivering a distinctive and personalized guest experience across all channels.

Investments in in-store technology provide solutions that help our store associates to be even more effective.

We have tested and are now rolling out to the entire chain a task management solution and an inventory management application, both delivered on mobile devices.

These tools are designed to optimize productivity and create efficiencies for our store associates, which importantly, will allow them to spend more time assisting our guests.

We are also leveraging in-store technology to support a more personalized guest experience, with our new clienteling app, which is currently being piloted in 30 stores.

The app will replace the paper-based consULTAtion process, and enable store associates to interact with guests on the floor in a number of ways that were previously only possible at point-of-sale.

Associates use the app to sign up guests for ULTAmate Rewards, can review point balances and past purchases, and create guest profiles with their preferences and interests in order to better recommend products.

We are also implementing the learnings from our recent payroll test-and-learn initiative to enhance the guest experience.

We continue to study the impact of adding additional labor hours to create more guest-facing time in various types of stores and different areas of the store, and we are planning to implement additional hours in another 60 stores this year.

We expect this additional labor expense to be self-funding through higher sales and conversion.

The third strategic imperative is offering relevant, innovative, and often exclusive products that excite our guests.

While we continue to see great customer response to our recent launches, like IT Cosmetics and our exclusive IT Brushes, there was strong news and innovation throughout the prestige cosmetics assortment.

During the fourth quarter, we partnered with Bare Minerals to ensure a successful launch of their new product, Complexion Rescue.

Urban Decay, Benefit, Anastasia, Tarte, and Too Faced were top-performing brands, featuring lots of newness, such as Anastasia's blockbuster Contouring Palette, and Urban Decay's Limited Edition Naked on the Run palette.

Clinique and Lancome brands were also very strong.

Following on the success of our Clinique and Lancome boutiques, we are continuing to partner with both of these great brands, and are rolling out additional boutiques throughout 2015.

We are also excited to expand the number of stores offering Clarins skincare products, after launching in a small number of stores and online in the third quarter.

Another standout was the mass cosmetics category.

Here we achieved growth well above the industry, and delivered double-digit comps.

Brands like NYX and the overall lip category drove the performance.

Now we also had a strong holiday selling season, where we increased focus on Ulta as a great gifting destination.

The categories of personal care appliances, fragrance and bath all performed very well.

In addition to a strong holiday product assortment and offers, we invested in customer-facing payroll and inventory on our most popular items, to enhance the guest experience.

Another highlight of our holiday season was a significant lift in sales of Ulta gift cards.

We created new designs, utilized more display locations, and boosted the presence of gift cards in direct mail, emails, our website, and social media.

This focus drove strong sales performance and redemptions contributed to our sales momentum post holiday.

Professional hair care also performed well in the quarter, driven by customer engagement with our semi-annual liter event, featuring compelling prices on jumbo sizes of professional hair care products.

In January, following the success of our newly branded Happy, Healthy Hair Starts at Ulta, we launched a new campaign for skin called Glowing, Gorgeous Skin Starts at Ulta.

Our goal was to distinguish Ulta as a skincare authority, by delivering a cohesive guest experience, and programming 21 days of daily events, featuring new products from our top skincare brands, including new high-tech tools featured on skin rejuvenation.

Next, our fourth strategic imperative, delivering exceptional services in three core areas: hair, skin health and brows.

Our salon business grew 20.9% and comped 11% for the quarter, contributing 10 basis points to the retail comp.

Our best categories were cut and color, blow outs, and makeup application services.

Our online appointment booking capability has been ramping nicely, since launching last summer.

We booked 53,000 appointments online in the fourth quarter, and 75% of those were new salon guests.

We leveraged our store-wide skin event in January to take advantage of the biggest month for skincare sales in the industry.

We highlighted Dermalogica skin services with special offers and gifts with purchase.

Our newest skin service, Dermalogica's Power Resurfacing Peel, has exceeded expectations since it launched.

To update you on our brow services offering, we finished the year with almost 600 Benefit Brow Boutiques.

Nearly 400 stores are now also performing brow tinting services.

These boutiques continued to perform extremely well with both products and services.

Turning to our fifth strategic imperative, growing stores and e-commerce to reach and serve more guests, let's start with stores.

We opened 10 stores during the quarter and closed one, ending the year with 774 stores, increasing total square footage by about 14% for the year.

New store productivity remains very strong, and the class of 2014 stores handily exceeded expectations.

We're very pleased with the two small stores we opened last fall, which are beating their sales plan and generating store level earnings higher than what we had modeled, to earn a strong return on investment.

We continue to evaluate performance and guest behavior to glean operational insight and to prepare for the scalability of this format.

We expect to open more small-store format stores over time, and in the meantime, we remain focused on opening 10,000 square foot stores.

Looking ahead to our real estate program for 2015, we are on track to open approximately 100 new stores this year, and are seeing plenty of availability of high quality real estate sites.

In terms of the pace of store openings this year, we will open about 20 in both the first and second quarters, about 45 in the third quarter, and about 15 in the fourth.

Approximately one-third of the 2015 program will be in new markets, and two-thirds in existing or fill-in markets.

Turning to e-commerce, Ulta.com's growth of 55.2% contributed 230 basis points to the total company comp.

E-commerce represented 4.6% of total Company sales in 2014, on our way to our goal of growing to 10% of our business over the next five years.

We believe Ulta.com's impressive growth was primarily the result of higher customer engagement, driven by more relevant content and offers.

This was evidenced by higher open, click, and conversion rates for our promotional emails, which drove sales productivity far above the increase in the number of emails we sent.

From a product perspective, the prestige cosmetics category remains very strong online.

We also drove excellent growth in professional hair care and mass cosmetics by adding new brands in pro hair, and elevating Ulta brand products on the website.

While the Ulta.com team had a great year in 2014, we're excited about the continued growth potential as we make strides in offering an even more compelling assortment online.

In early February, we launched key professional hair care brands on our website, including Redken, Pureology, and Matrix, previously only available in store.

And just last week, we began selling Lancome on our website, a significant step forward for our prestige assortment.

Moving on to our sixth strategic imperative, investing in infrastructure to support our guest experience and growth, and capture scale efficiencies.

Throughout our organization, planning and ensuring the successful execution of our supply chain transformation is a top priority.

The new distribution center in Greenwood, Indiana, is right on track to begin to fulfill demand in the third quarter of this year.

The building has all new systems, and a new operating model, and is designed to ramp up to provide capacity for more than 100 stores and significant e-commerce volume by next holiday season.

This will be very important going forward, as we know we can drive tremendous demand on Ulta.com during the Black Friday Cyber Monday weekend.

In December we stretched our ability to deliver a consistent guest experience, since our speed to fulfill orders was constrained by our supply chain capabilities during this very busy time of the year.

We expect to make significant progress on fulfillment speed next holiday season as we ramp up our Greenwood facility.

We also recently selected a location for our next distribution center in the Southwest.

This facility will be in the Dallas market, and we plan to open it in the second half of 2016.

That wraps up my update on our strategic imperatives.

Before I turn it over to Scott, I would like to announce some changes to our leadership team.

Janet Taake, Chief Merchandising Officer, has decided to retire after a phenomenal six-year career at Ulta Beauty.

During Janet's tenure, she oversaw a dramatic evolution of our merchandise offering.

She and her team added more than 100 major new brands to our assortment, developed our current store format, which significantly increased the presence of prestige brands in our mix, and brought tremendous discipline to the merchandise function.

Janet and her team have developed excellent relationships with our vendors and established Ulta in the marketplace as a collaborative, entrepreneurial, and highly ethical business partner.

We are all extremely grateful for Janet's many contributions to our success, and she will sorely be missed by me and the entire organization.

She has agreed to stay with us through May 1 to ensure a smooth transition.

This change gives us an opportunity to create an integrated merchandising and marketing team structure, by organizing these functions under one leader.

Dave Kimbell, previously Chief Marketing Officer, will now lead merchandising, in addition to his current responsibilities over marketing, CRM, loyalty, and e-commerce, in the newly-created role of Chief Merchandising and Marketing Officer.

Prior to joining Ulta, in his previous role at U.S. Cellular, Dave was responsible for all aspects of marketing and merchandising, including pricing, vendor negotiations, promotion, and inventory.

In addition, he spent several years on the vendor side of CPG at Procter & Gamble and PepsiCo, where he gained extensive experience in maximizing retailer and vendor partnerships.

I believe this new structure will bring many benefits that will help drive Ulta's continued growth with the seamless linking of product assortment, promotion, marketing communication, e-commerce and store design, the guest expense can become even more distinctive and powerful.

Now two of our most respected and experienced senior merchants, Tara Simon and Julie Tomasi have been promoted to Senior Vice President, both reporting to Dave.

Tara has been with Ulta for three years as Vice President of Merchandising, managing the prestige cosmetics category.

In addition to her new role, Tara's responsibilities will expand to include prestige skincare, fragrance and trend development.

Julie has been with Ulta for five years, most recently as Vice President of Merchandising, managing the professional hair care, professional nail, and personal care appliances categories.

In her new role, Julie's responsibilities will expand to include all of the mass merchandising categories, private label and pricing.

We are very fortunate to have these strong leaders on the team to take on increased responsibilities, and enable the creation of a structure that will further strengthen the organization and drive continued success for Ulta.

With that, I will hand it over to Scott.

Thanks, Mary.

Good afternoon, everyone.

Fourth-quarter sales were $1.048 billion compared to $868 million last year, an increase of 20.7%.

Comparable sales increased 11.1%.

The retail comp, including salon, was 8.8%.

The total Company comp was driven by a healthy combination of transaction and ticket, with transactions up 7.7% and ticket up 3.4%.

The ticket increase was driven by increases in average selling price, driven by strong sales of prestige categories and less discounting overall.

Retail-only comparable transactions were very strong, up 5.7%.

Gross profit dollars were up 19.1% to $349.7 million, and gross profit margin decreased 40 basis points to 33.4%, from 33.8% last year.

There were two primary drivers of this decline.

Increased costs associated with the ULTAmate Rewards loyalty program, and the impact of e-commerce margin.

We have previously discussed with you all of the great benefits associated with our loyalty program, and importantly, since early 2014, having all of our guests on the same loyalty platform.

But as expected, while it drives more sales and gross margin dollars, it is a bit more expensive on a rate basis, since guests are much more engaged in the program, and take advantage of the benefits to a higher degree than the previous certificate program.

We have now anniversaried the loyalty program conversion that took place in February of 2014, so we don't expect to experience this level of rate pressure going forward.

On the e-commerce side, the deleverage comes from Ulta.com's lower margins due to product mix, less efficient supply chain capabilities, and shipping costs.

Offsetting this mix impact were improved retail product margins, reflecting reduced reliance on price discounting, and modest leverage on rent expense.

SG&A expense increased 18.6% to $210.7 million, down 40 basis points as a percentage of sales to 20.1%, versus 20.5% last year.

The key drivers of this improvement were payroll and marketing leverage on stronger-than-expected sales, offset by investments in people to drive our strategic initiatives, as well as increased depreciation of IT systems.

Pre-opening expense was $1.6 million compared to $1.8 million last year, driven by 10 store openings during the quarter, compared to 11 new stores opening during Q4 2013.

Operating income increased 20.4% to $137.5 million.

Operating margin was flat to last year at 13.1%.

Interest income was $231,000, net of credit facility fees.

Our line of credit remains undrawn.

Our tax rate of 36.6% included about $0.02 of earnings per share benefit, related to a non-recurring deferred tax adjustment.

Net income increased 23.5% to $87.3 million, or $1.35 per diluted share, versus $70.7 million, or $1.09 per diluted share last year.

Excluding the non-recurring tax benefit, net income increased 21.6% to $86 million, and earnings per share increased 22%.

Turning to the balance sheet and cash flow, inventories were $581.2 million at the end of the quarter, compared to $457.9 million at the end of Q4 2013, up 10.7% on a per-store basis.

We have been fairly aggressive in investing in our highest velocity SKUs to keep up with the strong demand we are experiencing.

We are pleased with the quality of our inventory coming out of holiday, and thus far, we have not seen any material impact from the West Coast port issues.

We continue to stay close to our vendors to assess and mitigate any potential impact down the road.

Capital expenditures were $76.6 million for the quarter, driven by our new store opening program, supply chain investments and systems.

We spent $249 million in capital for the full year, slightly lower than planned.

About 45% of our 2014 capital spend was for new stores, remodels, and relocations.

About 15% was for merchandising, store maintenance and other capital.

The remaining 40% was for supply chain systems and e-commerce investments.

Depreciation and amortization for the fourth quarter were $35.7 million and $131.8 million for the full year.

We generated about $148 million of free cash flow for the year, and ended the year with $539 million of cash and short-term investments.

The Company repurchased approximately 235,000 shares at a cost of $30 million during the quarter, under our 10b5-1 plan, as part of our program to return cash to shareholders.

We spent about $40 million on share repurchases in 2014, since implementing our plan in September last year.

Effective March 17, our Board has approved an increased authorization for our current repurchase plan, adding $100 million to our existing $300 million share repurchase authorization put in place last year.

We expect to continue to offset dilution with our 10b5-1 plan and still have the flexibility to repurchase opportunistically beyond that.

Turning now to our guidance for 2015, in terms of our outlook for the full year, we expect to achieve results in line with our long-term guidance provided last fall, updated from the new 2014 baseline, reflecting our earnings upside in the back half of the year.

More specifically, we expect to open 100 stores in 2015 and remodel four stores; grow e-commerce sales in the 40% range; drive comparable sales in the 6% to 8% range; and deliver earnings per share growth in the range of 15% to 17%, from the $3.96 of adjusted EPS we delivered in 2014, which excludes the $0.02 non-recurring tax benefit in Q4.

This guidance includes planned supply chain and systems investments, and assumes we continue to repurchase shares to offset dilution.

We expect deleverage on the gross profit line, and modest leverage on the SG&A line, and operating margins are expected to remain about flat.

Our tax rate is expected to be approximately 38%.

We expect a bit more variability in our quarterly earnings performance, due to the timing of our supply chain investments, the addition of prestige boutiques, and the fact that we will be comping over some very successful product launches in the second and third quarters of 2014.

As a result, we expect stronger performance in the first and fourth quarters, and somewhat softer earnings performance in the second and third quarters.

We expect CapEx to be in the $300 million range, and to generate free cash flow similar to our 2014 performance.

In terms of specific guidance for Q1 2015, we expect sales to be in the range of $833 million to $847 million, compared to $713.8 million last year.

We anticipate achieving comparable sales increase in the range of 7% to 9%, versus 8.7% last year.

Again, we have our easiest comp comparisons in Q1, so we expect comps will moderate a bit after the first quarter, as we lap some of the terrific brand and product launches, like IT Cosmetics, IT Brushes and a new foundation from Bare Minerals that helped drive strong comps, starting in Q2 of last year.

We expect to open 20 stores in the first quarter, versus 21 stores opened in Q1 last year, so pre-opening expense is expected to be relatively flat.

Earnings per share are expected to be in the range of $0.88 to $0.93 versus $0.77 for Q1 of 2014.

We anticipate a tax rate of 38%, and a fully-diluted share count of approximately 64.4 million.

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

Operator?

(Operator Instructions) Oliver Chen, Cowen and Company.

Congratulations on a really spectacular conclusion to the year.

Regarding your comments on the opportunities ahead on the supply chain front, could you characterize to us where you are in terms of where you see the longer term going?

Specifically I was also curious about fulfillment, planning and allocation.

And also, related to your comment on e-commerce and supply chain capabilities, do you see the margin improving as your capabilities improve in this discipline?

I also had a question about awareness.

Okay.

Oliver, thank you.

Let me just start with the broad strokes on the supply chain.

As you know, it's a multi-year project, and I guess I would just say it really touches several aspects of the business, so overall goals are going to be building infrastructure to support the growth that we have planned, also to enhance capabilities that we know we need, to be a really relevant omnichannel retailer, as our customers want to shop, and then, of course, also drive efficiencies over time.

So really, this multi-year plan has several benefits that we're excited about.

Examples: increasing delivery frequency to help improve in-stock conditions, having the cartons arrive at the stores in an easier-to-stock-the-shelf kind of format, we call that store ready; even looking to see if we can be more efficient with our footprints and leverage inventory across our footprints to fulfill omnichannel orders.

Forecasting replenishment, yes, that's certainly part of it.

Down the road, as we have more store formats, like the small stores, ensuring that's easier to scale and to operate.

That's also part of it, and also that we continue to improve the processing time on our e-commerce business.

So all of those are aspects and benefits that are expected and built into the five-year plan relative to the supply chain investment.

E-commerce, yes, we do expect that that margin will improve as we get more efficient.

The two new distribution centers are really being built from the start with that in mind.

To really fulfill e-commerce as well as store orders as efficiently as possible, so -- as well as we continue to improve some of the mix of what we sell in e-comm.

Thank you, Mary.

And also on the awareness frontier, this has been a nice theme for your strategic plan, where would you contextualize customers as coming from, as you make these nice leaps?

And as you post game holiday, it was a really great execution, but if you had to think about it from a post-game perspective, are there any things that you would do slightly differently as you think about next year?

Thanks a lot.

Okay, well, we are constantly in the mode of continuous improvement, seriously.

So I think we're always looking at what worked well, what we could have done better, and honestly, we're very pleased with how the quarter turned out, but there's always areas that we can continue to improve.

Your question about where the customers are coming from, we know that we have an opportunity gap in our awareness relative to some of our competition, and that's opportunity for us.

And that's why we've been working to balance the mix of how we do our marketing to drive -- to have awareness-generating tactics, and that's proving to work for us.

If you step way back, we have, as you know, about -- just under a 3% share of the beauty market in the US, so our guest loves us, and she's loyal, and coming more often, but there's two sources.

One is beauty enthusiasts who perhaps have not been in an Ulta ever, or not been in an Ulta for a long time, or current guests that are maybe spending money across different retailers.

Hardly anybody spends everything all in one place for any one category, but as she is increasing giving us more of her share of wallet.

And our loyalty program is a key part of that.

It really provides a great incentive to spend your beauty dollar at Ulta because the points are valuable, and the more you spend, the more valuable they get for our guests.

So it's really current guests spending more with us, as well as new guests spending with us instead of other places.

Thank you.

Best regards.

Simeon Gutman, Morgan Stanley.

Congratulations.

I have one question for you, Mary.

And then I don't know if Janet is there, but if she is not, I will ask that of you as well.

She is here.

Yes, she is here.

Okay, great.

So first on the momentum in the business, very strong, and I'm guessing it's a combination of a lot of things.

I'm more curious about the marketing side?

How effective you're getting at customer targeting?

Are you able to track the pulse of people responding to your offers, and seeing a higher response rate, and able to track it on a real-time basis?

Yes, and you know what -- maybe -- Dave and Janet are both here, so perhaps we can tag-team that a little bit.

I'd say, the momentum on the business that we are seeing, it really cuts across a lot of dimensions, which is great.

And our job is to keep those levers all working.

But really, if you think about it, new product launches and new product news was a big part of the fourth quarter.

So Bare Escentuals, Urban Decay, IT, Benefit, Clinique, Lancome, all good examples.

Our loyalty program, all -- everybody on one program, actually even improving our in-store sign-up.

And then, yes, this notion of our improved marketing strategies and tactics, it's this combination of using different types of pieces of the mix, as well as really positioning ourselves, I guess, as more of a beauty authority.

So all of those combined, and I mentioned in the script, gift cards as well.

So we feel like a lot of different things were working for us in the quarter.

Would you like to add anything on that, Dave?

Yes, I think we made -- we continued to do a lot of the things that had worked for us historically, behind many of the print vehicles, our magazines work well in reaching our existing guests, but we also introduced and improved several of the tactics that we go to market with.

Mary mentioned in the script for the first time bringing radio into the mix, which we think was a really strong addition to our promotional activity over that key holiday season.

We also, to your question specifically about improving the effectiveness, there's a lot that we can read around our guests' responsiveness to our activities.

And one area in particular that I would highlight is the impact we're having with our email.

So as we get better information around our guests, we are able to more personalize the communication, the offers, the type of information, the frequency of the information that we are delivering to her.

And so we saw a dramatic increase in the effectiveness, which is measured by, essentially, sales per email in that fourth quarter.

So we feel like we are expanding as well as getting sharper in the types of things that we're doing.

Okay, and then for Janet, and congratulations on your retirement, I just want to -- you have this unique six year or so perspective at Ulta, in dealing with brands.

And so I wanted to ask you something all-encompassing of sort of what's changed in brand perception of Ulta then versus now, how they look at online versus, you mentioned you won Lancome.

Is that inevitable for prestige brands to allow Ulta to sell it?

Or do you think their own online ambitions will get in the way?

And then also, do you think there's much an appetite for them to look outside of Ulta to other specialty retailers, to sell them prestige product too?

That was more than one question.

(laughter)

But it was all for you.

Well thank you so much.

First of all, I think that what I would say about vendors, my team has great relationships with the vendors in the marketplace, across all categories we do business with, and we have had for some time, and I think that continues to grow.

Our vendor partners really enjoy our straightforward approach to how we run our business, and also that it truly is a win-win for them.

We hold our vendors accountable to our comp, and we look at our business that way every single day.

Yes, we're a fast-growth retailer, but I really think they appreciate that we want to win at a comp level, which is so important to us.

But we really partner with them to try to make that guest experience the best possible experience it can be.

And with that, I think that there are a lot of vendors that are interested in Ulta, based on the respect that we have in the marketplace, which I'm quite proud of.

As far as online, we've made a significant progress, as Mary had mentioned, this past year.

The largest gap, just to refresh your memory, was really in professional hair care, and we added 12 brands in 2014, and then three at the beginning of this year.

So we have closed a significant gap there, and we are very, very excited about Lancome coming online.

We are truly closing the gap down with very few that are not salable online at this particular point in time.

But I'm always hopeful that we'll get it to zero, for sure.

Okay.

Thank you.

Daniel Hofkin, William Blair.

I will add my congratulations on a fantastic quarter.

And just wanted to delve a little bit, if possible, into the gross margin, in terms of buckets.

And it sounds like -- is it fair to say that basically in terms of the directional changes, and even maybe the magnitude, that most of the aspects of the puts and takes were as good or better than expected, despite some of the mix shift, and the impact of loyalty in e-commerce?

Yes, I would say that's right on target, Dan.

There's always a few unplanned surprises that you managed against during the course of any quarter or year.

In the fourth quarter, Mary mentioned we had a few challenges in our e-commerce fulfillment side of the business, because again, as always, the demand always seems to exceed our expectations.

And so we had a few more, I would say, inefficiencies, labor inefficiencies there that we had to deal with, and some additional freight expense to make sure we try to meet guest expectations as best we could, so we reacted to that.

But really I would say that was probably the one, I'd say, on the negative side of the ledger.

On the positive side, everything seemed to work spectacularly in the stores.

Execution was good.

In-stocks were fantastic, and so we were very pleased with the overall performance on the retail side of the business.

And it sounded like you said that the less discounting, and certainly prestige being among the strongest general category.

So fair to infer that the general underlying product or merchandise margin trend continues to be kind of a key component there, it sounds like.

Is that fair to say?

Yes, let me repeat that.

The core retail product margins, so 90% plus of the business, they were better year-over-year and quarter-over-quarter, all right?

So the core of the business is very healthy, and we're just managing along in our e-commerce side of the business, and the loyalty thing is kind of a one-time hit, I would say.

And now that we are anniversaried, again, we wouldn't expect to see that kind of pressure on margin rate going forward.

And then in terms of the brands you have, can you just provide a quick update on where we are at this point with Lancome and Clinique?

I know you said you were planning to add some of each, and if there's any color you can shed on that here at the beginning of the year, that would be great, thanks.

Yes, as I mentioned in the script, Dan, we are planning to expand our boutiques with both of those brands.

I am not going to get into specifics, but we are excited.

We've got great partnership, great momentum on the brands, and we'll be rolling out to more stores.

Great, well, great job and best of luck.

Aram Rubinson, Wolfe Research.

I wanted to ask you a question about online.

It looks like you had, by our math, about a $55 million increase in e-commerce sales in 2014 over 2015.

It's like the equivalent of about 13 stores.

So I'm just kind of wondering, A, where that e-commerce shopper is coming from, can you give us something about geography, demographics?

And maybe does opening fewer stores almost feed that business in a way, because you're getting to satisfy that customer without putting up the bricks?

This is Dave.

No, I don't think it's associated with our store growth.

Obviously, we opened 100 stores last year.

Where that growth is coming from, where our best customer is coming from, is we're really getting incremental transactions from her.

What we see is our -- those guests, which is the majority of our online business, are coming in and buying both in-store and online.

So we get actually a little bit more than double the number of transactions from a guest that is actively buying online and in-store, versus a guest that is just buying in-store.

So really it's fundamental and a key part of our overall omnichannel effort is to be -- have the experience where and when she wants it.

And what we find is there is times where it's easier for her to buy what she's looking for.

She's attracted to something online, and she's at home and she wants to get it.

But we also know a big need for us is to get her into store, and she is doing both.

So we see that as really an incremental purchase and an incremental opportunity for us to drive growth, and not related to the store growth piece of it.

Thanks.

And if you had to just pick a number or guess at it, what comps are coming from existing customers versus new?

Just a ballpark.

Do you mean in the online space or are you talking --?

No, I was thinking more in the stores.

I'm just curious how many more new customers you seem to be bringing into the tent?

Well, we said we were attracting millions of new customers every year.

Retention remains really high, so we have good strong retention, but we continue to attract new customers.

I will say one of our opportunities going forward, it's the reason we're trying to build awareness, is to bring even more new guests going in.

But we have high retention, we have a high percentage of sales that come from our guests, and that's a key driver of our business, continuing to delight them and drive strong performance with that group.

All right.

And last thing, just a little bit of housekeeping.

In Q1, in the guidance, what kind of investments does that include?

And then I'll hang up.

It includes a litany of things.

Many of those things Mary described in her prepared remarks.

So there is new investments going in in stores, with task management system; we've got new mobile technology app systems going in stores with iPads to allow us to be more engaging with our guests in the stores.

Of course, the biggest investment is the Midwest DC, which is going to ramp up.

It's ready to open summer of 2015, so there is a fair amount of gross margin deleverage, that's where most of that expense flows through the P&L and it will ramp up.

It's there in first quarter, but the heaviest, it's mostly back-end loaded in 2015.

Third and fourth quarter is the heaviest expense.

Thank you.

It's great to see the hard work pay off.

Chris Horvers, JPMorgan Chase.

I wanted to follow up on the email personalization opportunity.

Can you talk about where you are from a segmentation process?

How finely can you group your customer base into -- and the different types of buckets that you are using?

Can you get down to it, say, I know these 10,000 people are Bare Mineral customers and so I'm going to send them an email and perhaps other buckets that you're using, and how personal will you be a year from now?

I will tell you what.

That is part of the secret sauce in some ways, that I want to be careful about how much we say, because it's really an important lever for us.

And I got to tell you, I think our team -- I know they are all over this, and we are very deep in our knowledge, our precision, our ability to target and use this to various effects.

But I wouldn't want to say more than that, because it's really an important tool for us.

But we are excited about it.

I think it's just going to continue to be a great lever for us.

So I guess maybe you could characterize it in terms of the classic baseball innings.

Where do you think you are versus, let's say, best in class in retail.

Not versus, let's say, online retailers, but best in class in retail?

Yes, I think we're probably still in the early innings, right?

It's, I think, a capability that -- we've had the loyalty program for a long time, but it's really like, now that we're at this one platform everybody, that just simplifies our life.

It makes it more powerful, and the team is really actively experimenting with lots of ways to leverage that.

So I think we're really in the early stages.

Okay, and then as a follow-up, you raised the share buyback program by $100 million, and let's say, we assume the stock is at [$160] tomorrow.

That is about 2.3 million, 2.4 million shares open to buy.

Can you talk about how many shares you need to be repurchased this year to offset share dilution?

And is the idea of raising the authorization so early, is that to allow increased flexibility to be more opportunistic?

Thanks.

Yes, we wanted to maintain maximum flexibility.

So again, the plan, the stated plan, our 10b5-1 plan, the focus is on offsetting dilution, which we said -- I don't know if I have the number of shares that it takes, but it's roughly 500,000, I think, was our early model.

500,000 shares a year roughly, which equates to about 1%, (inaudible) of earnings growth year over year.

Thanks very much.

Evren Kopelman, Wells Fargo.

Congratulations.

My question is for Scott on the guidance.

The first-quarter comp guidance is the 7% to 9%.

It's very strong, of course, nothing to complain about, but it's significantly below the 11% you just delivered.

Is that just conservatism built into guidance, or have you seen the business slow down in the Q1 so far?

Yes, as you know, we don't talk about current quarter performance, but we had weather just like everyone else did in February, right?

So we take everything into account that the current conditions reflect.

So we feel very confident, strong momentum coming out of fourth quarter.

We mentioned gift cards; there is carryover from that post-January.

There is good newness in the pipeline coming online.

There's good tailwinds coming from the new store classes that are starting to roll into the comp base.

So again, we try to look at all the facts and all the levers at our disposal and try to come up with the most prudent guidance that we can.

Thank you.

And then two housekeeping: One is the quarterly store opening cadence, is that going to be similar to 2014?

And then in your EPS growth guidance for the year, does that assume that $64.4 million that you guided for Q1, or does it assume more buybacks to lower the share count?

Yes, I think the store program, by and large, pretty much nears 2014.

[20, 20, 45, and 15].

Right, right, right, which I think is roughly about what we did last year.

So it's like-for-like, more or less, Evren.

And on the shares again, I think for the full year, [$64 million], you're going to build in roughly to 400,000 to 500,000 shares, right, of buybacks, which would equate to the dilution effect that we described.

Perfect.

Thank you.

Jason Gere, KeyBanc.

Just a couple of questions.

I guess the first, more clarification on the gross margin, I guess, deleverage this year.

Is that primarily because of the new DC in the second half of the year, because I know you talked about the loyalty card anniversarying.

So just wondering if there is anything else in there that we should be taking into consideration?

No, Jason, that's primarily it.

What we described, as part of our long-term guidance, that we expected to continue to deliver very strong earnings growth going forward, adjusted for the investments.

Primarily for the DCs, but there are other related investments, around core systems, around merchandising and other store things that we described in our remarks, that we feel we need to support strong, healthy earnings growth in the future.

Okay, and then longer term, I know just back in the fall you gave the long-term EPS guidance, I think it's low 20%.

And obviously that would imply, start to see a pickup in margins.

And this year, I think you're implying really flat margins, even though comps will be pretty nice.

So I was just wondering how you think about the long-term margin opportunity?

Who out there in specialty retail really you benchmark yourself to?

Because certainly at 12% operating margins, it seems to be you're under earning on that end, and recognizing that there are investments now that will probably go on for another year or so.

But really, where do you benchmark yourself to, and what could be that longer-term opportunity?

I'm not asking you to quantify, but just kind of how you look at it?

We still feel very confident with the guidance that we provided last fall, which we think is very realistic to get to a mid-teens operating margin, over the long term, over the five-year period.

Again in 2015 and 2016, operating margins are going to be flattish, because of some of the supply chain, DC, and other core system investments that we will be making.

But once we get past that, we expect it to be making significant progress towards that target, the mid-teens operating margin target, in 2017 and beyond.

So lots of goodness coming out of these investments, that's what we expect.

Unfortunately, we have to make the investments upfront, and you start seeing the benefits more in the outer years.

Okay, great.

That will be it for me, thanks.

Ike Boruchow, Sterne Agee.

Congrats on a great quarter.

Thanks for taking my question.

I guess, Scott, thanks for the help on the variability on how the year should play out.

Can you help us when you talk about Q2 and Q3 being tougher?

Is that more so on the gross profit and SG&A lines and on margins, or should we assume that also, because you mentioned some tough product launch compare, should we also assume that that's also an impact on the comps?

It's a mix of both.

Q2, if you line them up, the stack year-over-year, you'll see last year was a, what, a 30% EPS growth year-over-year.

So when you just start doing the math, you can see that it's a tougher comparison.

Part of it is being derived from the comp; the tough comp compares with some of these product launches, which were very strong last year.

And some of it is just a build on the deleveraging gross in supply chain costs that are going to affect the P&L.

So it's really a combination of the two.

Right, I mean, I asked because the strongest comp of the year was in Q4 this year, and so you're saying Q2 and Q3 are the toughest compare so that's what I was trying to clear up.

If it's just margin or if it's also comp?

No, it's a combination of the two.

Margin, I would say the margin piece is more of a Q3, Q4, and the sales is more of a Q2, Q3 kind of thing.

Got it, okay.

Thanks so much.

Joe Altobello, Raymond James.

Just a couple questions on some of the tests you guys did this quarter.

It sounds like the advertising test went fairly well with the comps above the control group.

Was that the same for the increased staffing in the 60 stores you tested this quarter?

Yes, the payroll testing model, we are really pleased with the learning.

Kecia Steelman, who is our Head of Store Operations has really dug deep and been all over this.

It's actually a little bit less of a clean test than an advertising test, in some ways, right?

The inputs are a little bit different, because it's about store by store, managing that payroll, hiring, getting the right people there, and managing that to an outcome that you want.

So what we saw, and that's why we feel confident that there are stores that we are going to go after this, and we're going to increase labor hours, because we believe it's going to pay for itself in terms of increased sales, frankly, by having more guest-facing time and more conversion.

But it's also something that, because it's subtle, it's a little trickier to manage.

We're going to walk before we run.

So it's not -- what we know is that over time, as we continue to play out the supply chain investment for our associates in the stores, it will get easier to have more guest-facing time, and that's exciting.

In the meantime, we want to see if we can accelerate that, but we're going to kind of take it step-by-step.

Okay, so any learnings early on from that test at all?

Just that it, particularly, when we executed really well, where we held the general manager accountable to a new sales target with those new increased hours, and where that store was able to hire the right person quickly and get the right people trained and in position, it was efficacious for us.

That's why we're confident to add more labor hours in a certain subset of stores, because we think managed right, it's going to be a good investment for us.

It's really about that overall guest experience, as well.

When a guest wants to interact with our associate, our associates want to be there to help them.

And so it really is a flywheel that helps the business, and we like where it's going.

Got it, okay.

And just moving on to the smaller format store test, it sounds like you guys are going slow there.

If it's successful, how many locations do you think you could have, in terms of that smaller format over time?

I think we have talked about up to about a couple hundred stores incremental to the 1,200 stores that we have already mapped out for our large format.

And we love how they're performing.

They're great stores, great teams, and the guests love them.

And it's really, I believe, in pacing.

Again, walk before you run, so it's a little tricky to operate a completely different store format, which it is, but we're really pleased with where it's going.

Okay, great, thank you.

Mark Altschwager, Robert W. Baird.

Let me offer my congratulations as well.

Just a quick follow-up on the small stores, I know it's early, but any metrics you can share on just the productivity you are seeing there, or average gross margins versus your typical store?

And then separately, what pieces need to be in place from a distribution standpoint in order to enable the scalability of that concept?

Yes, I'm not going to share a lot of the details on this, because it's really early and I want to protect some of that insight.

But I will just tell you that we set certain sales and productivity targets, and we're exceeding them.

So they would be the normal targets that we set for any store, so we feel good about that.

It's really about forecasting replenishment models that I think are going to be the key to getting us to a position to more easily run the store format.

So it's not that far off.

It's not like we're going to wait a super long time to do this, because we're excited about the prospect.

And I'll tell you what.

The guests in these small towns were very excited that we showed up, so it's a great opportunity for us.

Great.

And then just one more quick one, I think you're two quarters in with this new POS system.

Have you seen any benefits from that, and any metrics you can share on that front?

Thank you.

We don't really have any metrics we can share.

I would tell you that the rollout went very smooth.

This was one that was pretty high risk and we accelerated it, to make sure we could get it in before holiday, so things went very smooth, all things considered.

We did get some step-up in the technology, as far as cyber protection as part of that system, so we are very happy that we were able to accelerate the implementation of that.

Matthew Fassler, Goldman Sachs.

I want to start by talking about the loyalty program.

You spoke about the loyalty program having a diminishing impact on margins, as you have now cycled the move to a single platform.

Can you talk about the typical sales maturation curve that you have seen from customers after they have ramped onto that platform?

Is it a multi-year curve, is the big sales kick in year one?

Just how we should pick about the impact on sales of cycling that, as well?

Matt, historically, what we -- as you well know, we have been experimenting with this model for quite some time.

So historically, as we rolled it out to new markets, we saw a sales hit in year one as people kind of got comfortable with the program, and we saw that moderate over the course of the year.

So the going-in assumption was like a one-year cycle time to get back to what I would call an equilibrium with the guests.

This rollout, the conversion that we did with the 50% of the country in 2014, we didn't see that.

We saw sales actually accelerate from our expectations and, of course that equated to more points being earned and more of a margin headwind, because of that, because people are more engaged, and it's easier to understand.

And if you think about what year two has typically looked like, and whether you think it will be any different for this round?

Yes, we haven't really seen that.

Again, it's a different scale now.

We've got the whole country on this program, and I can just tell you from the inside, we are very excited about what this program provides to the Company, and the opportunities that we're going to have to drive more engagement, more focused offers to our guests, by using our CRM tool.

And, again, we are in the very early stages of this.

And then one other question, you've dealt with this I think a number of different ways so far this afternoon.

If you think about the acceleration that you saw in the online business in the quarter where you have the highest volume so that acceleration is that much more meaningful, would you tie that in directly to CRM efforts and customer acquisition?

And I guess you're seeing customer acquisition disproportionately commence online, or is it evenly distributed, or proportionally distributed across channels?

Yes, a couple things.

First we are seeing an over-index of new customer acquisition online, although it's still the minority of our customer -- new customer acquisition.

The things that are driving our growth from an e-commerce, it's absolutely a combination of a number of key factors.

It is a great portfolio of products, first and foremost.

They are really attracted to -- the same things they are attracted to in store, they are attracted to online.

And we had great success behind many of the launches and the products that Mary touched on.

We also, as Janet described, added several new products throughout the course of the fourth quarter, and even into this year.

We have been successful at driving traffic to our site, so our customer acquisition and traffic driving activity has really been exceeding our expectation.

And then once they get there, some of the changes we've made within the site, experience to convert them, have been working.

And then, I would say the other activities for within loyalty, to your point, around email and other communication, even our magazines and really every touch point that we have, encourages her or reminds her to come online, just as much as it does remind her to come in store.

So all that seems to be working.

Thanks so much, guys.

Steph Wissink, Piper Jaffray.

All the best wishes to you, Janet, really a remarkable finish to your Ulta career.

Thank you.

My question is actually for you, specifically.

Just to give us a status update on the percentage of SKUs in the mix now that crossover between stores and e-commerce?

And then a big follow-up question to the panel.

Just if you think about the influence of content, and I think, Mary, you mentioned this in your prepared remarks, whether it's your own content or content that's created by your vendors, how important is that, do you think, to building your competitive advantage in the marketplace?

Yes, I will start with the content.

And absolutely, we are very focused on that.

And this is a category industry that is so driven by trend and content, new discoveries, so we're building content, we are working with our vendor partners to acquire more content, and you will see more of that to come from us for sure.

As far as online SKUs, basically now, with the additions that we made in professional hair care and Lancome, we are well within a very high range of what we have in the store.

We have over 20,000 SKUs in the store, so it would be comparable online.

As I mentioned before, it's a handful of brands that are in store that are truly not online for sale today.

So we have made significant progress in 2014.

Great.

Best of luck to you all.

In closing, I would like to thank our 22,000 dedicated associates for a really terrific 2014, and their tireless efforts to differentiate Ulta Beauty and to continue our strong momentum into 2015 and beyond.

And thanks to all of you for your interest in our Company.

I look forward to speaking with you all again soon.

Thank you.

Thank you.

Ladies and gentlemen, this concludes today's teleconference.

You may disconnect your lines at this time.

Thank you for your participation.