Greetings and welcome to the Ulta Beauty's First Quarter Fiscal 2012 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Ms. Laurel Lefebvre, President of Investor Relations for Ulta. Thank you. You may begin.

Thank you. Good afternoon, and thank you for joining us for Ulta's first quarter 2012 conference call. Hosting our call are Chuck Rubin, President and Chief Executive Officer; and Gregg Bodnar, Chief Financial Officer. Before we get started, 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 will make references during this call to the metrics free cash flow, a non-GAAP financial measure defined as cash provided by operating activities minus purchases of the property and equipment. With that, I will turn the call over to Chuck.

Thanks, Laura. Good afternoon, everyone. I'm very pleased to announce that 2012 is off to an excellent start. Following our strong performance in 2011, the momentum continued in the first quarter with better-than-expected sales and earnings growth. Just to recap the headlines, we grew with the top line 23% and drove same-store sales of 10.1% on top of double-digit comps in Q1 in the 2 previous years' first quarters. We achieved 200 basis points of operating margin improvement driven by our double-digit comp and our team's consistent and disciplined execution of margin expansion strategies translating it to 46% EPS growth for the quarter. We delivered this profit growth while investing in the business with the addition of 18 new stores, moving our improved loyalty program to 50% of the stores and opening a new distribution center to enhance our supply chain capabilities. All of these investments position us to continue to gain market share over the long term. We are driving our business forward by executing on our 5-point growth strategy of accelerating store growth: introducing to our guests new products, services and brands; enhancing our loyalty program; broadening our marketing reach; and increasing our focus on ulta.com. These strategies delivered results in the first quarter and we believe will continue to fuel our growth into Q2 and beyond. Let me spend a few minutes detailing the progress we've made on each component of our growth strategy. First, we are accelerating our store expansion and are on track to open about 100 new stores this year, representing 22% square footage growth. With the 18 new stores we will open during the quarter, we ended Q1 with 467 stores in 44 states. We've been very pleased with our real estate strategy and the productivity of our new stores and have just…

Thanks, Chuck. Our first quarter results were driven by better-than-expected sales and margin performance. We delivered a 22.8% increase in total sales, with strength across all categories, reflecting continued market share gains. Same-store sales increased 10.1% on top of an 11.1% comp in Q1 of last year. Consistent with previous quarters, the comp came primarily from traffic, up 8%, with a 2% increase in average ticket. Gross profit dollars increased 27% to $171 million, with gross profit margin up 110 basis points to 36%, driven by continued improvement in merchandise margin and leverage in PIK store costs on a strong comp. SG&A expenses increased 17% to $111 million, down 110 basis points as a rate of sales to 23.4%. This improvement was driven by leverage from strong comps and execution of our margin expansion strategies. Preopening expense was up $1.3 million to $2.5 million as a result of our accelerated store opening program, with 18 new stores compared to 5 in Q1 2011, negatively impacting EPS in Q1 this year by about $0.01. Operating margin improved by 200 basis points to 12.1% versus 10.1% last year, driven by our team's relentless focus on disciplined execution and delivery of our margin expansion strategies. Interest expense was immaterial, primarily representing fees associated with our credit facility, which remains unused. Our tax rate was 39.3% versus 40.1% last year. The slightly lower tax rate was driven by a decrease in nondeductible stock option expense. Net income increased 49.7% to $34.9 million or $0.54 per diluted share versus $23.3 million or $0.37 per diluted share in last year's first quarter. Now turning to the balance sheet and cash flow, merchandise inventories at the end of the quarter were $332.1 million compared to $255.5 million at the end of the first quarter last year, up…

Thanks, Gregg. In closing, I'd like to thank all of our associates for making Ulta a compelling shopping environment for our guests. It's a result of their hard work that we gained market share, delivered excellent financial performance and further positioned Ulta as a true beauty destination. With that, I'd like to turn the call over to the operator so we can open up for questions. Operator?

[Operator Instructions] Our first question comes from the line of Ike Boruchow with JPMorgan.

I'm calling in for Brian today. Chuck, I guess this one's for you. When you look at the business, it's been really very consistent with the comps and the double-digit range for a little over 2 years now, I think. I think last year, you benefited a lot because you were on trend with the nail products and nail services which were hot. Is there anything new out there today that you're seeing that's really trendy and are you going after that? Just trying to see what's driving that comp right now.

Well, I mentioned some of the things in the first quarter, antiaging products, B.B. creams, mascara, lips were all big trends. We think that, that continues and we're excited about the back half of the year. There's a lot of new product launches in the third quarter that's still coming in into the fourth quarter. So it's a combination, Ike, of the new products from existing brands that we've talked about, some of the new services that we've put in. In our Salon business, comps have continued to improve. They're running very well. And then it's the new brand introductions. So all of those things are -- continue to be very good. One thing I mentioned in my prepared comments that I should call out, these at-home tools by Clarisonic, the hair removal, the acne treatment that I talked about that's coming, it's a small part of our business, but they're high ticket and we're selling a good number of units and it's having a nice impact to overall sales dollars. So that's also a trend that we start to see emerging stronger in the first quarter.

Okay, great. And then one more follow-up. On the store rollout, you mentioned you're taking it from 1,000 to 1,200 domestically. You said that does not include international markets. I guess on a high level, Chuck, could you talk about what potential down the road, several years from how opportunities there could be in international markets? I mean, does your format really work in other countries? And then I guess, so then there on the store base. When we look out to 2013, should we be thinking about 100 stores as kind of the run rate? Or is 20%, 22% growth kind of the run rate for the business going forward?

Let me answer the second one first. What we've said is that our business model's built on a 3% to 5% comp, 15% to 20% square footage growth. So we're pleased with how 2013 is setting up right now, but it's still early for that. So we'll update you as the year progresses. But our long-term guidance is that 15% to 20% growth this year. This year being 2012, we are growing at 22%, so obviously higher. If we can find the sites that are very attractive, and I stressed in my comments that we're looking for quality not quantity, if we can find those sites, we have the balance sheet to be able to do it. We have the capability to do it. And most importantly, there's the customer demand to do it. So we will pursue it as we see appropriate. And we're encouraged by what we're seeing, but it's still early for 2013. So just remember our 15% to 20% long-term guidance. As far as the international, yes, I think that there is an opportunity for Ulta's model overseas. But I would stress that when you look at the 3 big buckets of opportunity, those being U.S. stores, the second being U.S. digital and the third being international, clearly, that third bucket of international is the lowest of the 3. And it's the longest term. So we have significant growth opportunities for a number of years ahead of us to get to that 1,200 store count. There's the potential of a smaller store format. And clearly, while our digital business is growing quickly, it is on a small base. So that U.S. business, digital and physical, is really what our focus is for the near to midterm time frame.

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

I just -- maybe one thing I wanted to ask. If I look at the new store economics model that you guys have provided periodically, and clearly, the cost side of it in recent years has certainly improved as has the nothing but total sales volume, if you will. I guess one question would be, just based on the math and if you look at the percentage of stores that are in different age groups, it would seem like you would likely be exceeding your plan right now, kind of across various age buckets, that you would be exceeding that model. Is that fair to say? And the reason I say that is if you just sort of use the numbers in the model in terms of year 1 or year 2 comp sales growth, you're left with very high comps in years 4 or year 5 and beyond, and I'm just curious what your thoughts are on that?

Dan, the way to think about that is stores that are 5 years and older are performing meaningfully above what you would expect kind of over the long-term or the normal, if you will. Those stores in our model, 6, 7, 8 years out, we expect to produce more like low-single digits. The fact of the matter is all of the strategies that Chuck referred to that have been driving our business have a meaningful impact on mature stores. So and you could argue have one of the largest impacts on mature stores, because a big part of that is reaching out to our loyal customer base, where the largest quantity is, is in a mature store 5 years or older. So back to the macro on the store model. Yes, the cost will become down. We're still building them for $900,000. The productivity of sales per square foot is getting slightly better as we improve company operating margins, not all of it, but a significant part of that contributes to the single-store returns because a big part of that affects the 4-wall contribution of a store. So the store model keeps getting better.

Okay, I appreciate it. That's a helpful color. And then I guess one follow-up would be if you can share anything about your expectation at this point for the incremental Lancome boutiques in terms of looking out a year? Or sort of what your expectation -- do you expect that to show up materially in the aggregated comp sales number now that you'd be at a larger number of stores with those boutique?

Dan, we added the 29 doors last fall with Lancome, so we're very pleased to be adding these 50. We've commented before that we're pleased with our performance with the iconic brands. These 50 will get up starting in the third quarter. It will -- we expect to have them all done as the heat of the holiday season is upon us. I think the impact for this year is minor, it's negligible. I think that as you look out into future years, we believe that it's a nice addition to our offering. It will be in 79 doors once these 50 open. We'll see what happens from there but we're very pleased, as is Lancome, with the level of sales and the type of guests that we're introducing to Lancome that's good for both us as well as the brand.

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

Following on the last question, the incremental $10 million of CapEx you're devoting to expansion of boutiques and whatnot, could you talk about, is that just supporting Lancome or is it supporting existing Prestige or potential upcoming new Prestige brands?

It's a little bit of all. So obviously, opening the 50 boutiques for Lancome is costing us capital and some OpEx to get those open. But as I said in my comments, in a select number of additional doors, we are making some investments into the Prestige arena, which will accommodate our ability to expand future boutiques. So that all is included in the $10 million that Gregg called out.

Okay. And then just a follow-on the increased long term store potential domestically. The incremental 200 stores that you found through further evaluation, is that focused on particular regions or is it basically broad-based?

It's broad-based in the contiguous U.S., the 48 states.

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

Just a couple of quick questions. I guess first, in terms of the new counters to Lancome, what brand or brands are they going to be displacing first? And then secondly, what are the price points of these products relative to department stores?

The price points relative to department stores are the same. This isn't so much a price-based business. This is experience- and service-based business. So the retail prices, everyone prices it as they see fit, but typically, our prices are consistent to what you would find at a department store. But our service model, we believe, is for our guests a better one. As far as displacement, I think we've talked before that our store, the average store size is about 10,000 square feet and it's a pretty flexible store format so we can move things around. So we go through an ongoing review of product and brand performance, and there were always things being added and things being removed. So I wouldn't call it specific brands that are going out, but I would say that the addition of Lancome into these 50 doors is a bit of the same process that we go through on an ongoing basis of refining the productivity and continuing to add new brands and new products and eliminating things that aren't performing. It's that process, maybe a little bit on steroids, but it's an ongoing effort that we'll follow to get the space for these 50 boutiques.

Got it, okay. And in terms of the new DC in Chambersburg, you guys have mentioned that it's supposed to weigh a little bit on gross margin this year and I would imagine be some of it beneficial next year. Could you quantify maybe how much that that's going to reduce gross margin this year and maybe how much it will help on 2013?

We said for the full year, it'll have a slight negative impact, so about 10 basis points. And then for next year, I would expect that negative 10 basis points could be 20, 30 basis points positive depending on how fast we can get it ramped up headed into next year. Typically, a DC in its first 12 months is where it gets its biggest productivity gains, but that's kind of where its maturing cycle is. So it takes 12 plus months to get to the productivity of an existing DC. Certainly, we put some equipment in this distribution center just to kind of better the operations versus our current distribution center. So overall, I'd expect its productivity to meet and surpass the other DCs.

So by next year, you'll be back to reducing inventory on a per door basis, I would imagine?

Not on inventory, Joe. This is operating costs. So this is driving margin improvement.

Right, but I would imagine this would also help on the inventory side as well?

No, not necessarily. You do wind up with a little bit of a benefit because you have a distribution center that's closer to stores. It reduces a little bit on lead time, but it's not material.

Just add to that, Joe. Right now, if you look at the overall numbers that we put out, our inventory increased on a per-store basis by about 9% versus our 10% comps. So they were relatively close. If that's what you're talking about reducing, I think you'll see the gap between inventory per store growth and comp to be larger. If you take that 9% though and remove the Northeast DC impact, the per-store inventory was up about 4%. So I think that's where Gregg was going, that if you extract that Northeast DC part, that's how you should really consider that inventory per store will move in line with sales comps.

So walk that forward, Joe, in my prepared remarks, I said that when you pull out the Northeast DC by the end of first quarter inventory, the effect of that proceeding it to start shipping stores, we were up 4% on a 10% comp. As we work that DC into our network and rebalance inventories across the 3 DCs, adding stores into that Chambersburg facility, taking them out of other DCs, we'll continue to rebalance that inventory across the chain. But it still does take some incremental inventory as we add stores in our supply chain. When you go to next year, our philosophy will remain consistent. We need to make sure that we're providing a superior experience for guests, appropriate in-stocks, presentations, et cetera. So I expect that our inventory on a per-store basis will continue to be below our comp growth. But I don't expect it to decline. You certainly will get a little bit of an abnormal comparison in the first quarter next year because you'll be cycling against the 9.6 for the new DC this year.

Our next question is from the line of Jason Gere with RBC Capital Markets.

Just I guess the first question, thinking about the trends, the comp sales over the quarter, when you look at February, March, April, I know we've heard some retailers saying that, "Hey, some of the strong trends we saw in February, March kind of reversed a little bit in April." So I guess I was wondering if you could provide the cadence of maybe the quarter and then maybe how March kind of shaped up? And then I have a follow-up question.

Jason, for a lot of reasons, we don't report comps on a monthly basis. So we don't get into the cadence during the course of the quarter. And as for a ride, we've never done that. We move to marketing calendar around from time to time. So there can be impacts that are driven by as we optimize the marketing events and the marketing calendar. So we don't get into intra-quarter comp flow.

Is there -- I mean, could you just maybe qualitatively say, is there anything in the March -- I mean, sorry, in the May period that would give you any reason to pause the strong trends you're seeing, that there's anything out there macro-wise? I guess I'm saying it doesn't sound it, but I guess that's just something that obviously everybody's kind of fearing right now with just the U.S. economy, too?

You mentioned May. May is in our second quarter. And that would be incorporated into the guidance that we gave. So I would remind everyone that firstly, this is a pretty resilient business model. We have a lot of levers that we can pull. We have a broad range of prices, a broad range of product categories. We feel very good about the things that we can control. Obviously, we live in a broader economic environment and we understand some of the things that are going on in the world in general. To the best of our ability, that's all incorporated into our guidance that we gave in the second quarter. So we wouldn't break it down into what we're seeing thus far that's reflected already in the guidance we gave.

Okay. Okay, fair enough. And then I guess just the other thing. Gregg, I'm not sure if you talked about the timing of the remodels, the 21 over this year. So we didn't see any in the first quarter. What's the flow of that through the course of the year? I'm sure you said it, I apologize.

No, I didn't. 10 in Q2 and 11 in Q3.

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

I'm calling in for Erika Maschmeyer. First, could you just quickly break out the components of gross margin expansion in the quarter?

Sure. We were up 110 basis points, and about 80 basis points of that's coming from merchandise margin and the rest coming from fixed door expenses.

Okay, great. And then just a follow-up on the Prestige initiative. These stores, these are the ones that have already been remodeled but maybe not to the latest level 7 format?

There's a cross-section of stores. I would tell you that out of our store base at the end of first quarter, about 85% of those stores are either a level 6 or a level 7 are two -- we consider those our current format. That roughly 85% of the mix being in level 6 or level 7 compares to about 75% a year ago. So between the combination of new stores and the remodels that we've done, we're making very good progress. Lancome and these other Prestige investments that we're making, they will not go into anything older than a level 6 store. So they'll all be in a 6 or a 7. So essentially, they're going into our current format.

Okay, great. And then just lastly, it sounds like the Salon business is picking up steam. Did the comps sequentially improve there? And do you think maybe services like the OPI nail gel is lifting other parts of the Salon business?

Yes, I think that -- a few things. The newness in the Salon, the OPI nail gel, the introduction with Redken of this Chromatics hair service, a lot of programs of training and some greater marketing that we've done in the salon, I think all of them have contributed to some of the improved performance. Clearly, in general, this is a tough business in the industry as a whole. As when you look at other public companies as they release their results, we're very pleased with our performance, and it's been an improving part of our business over the past few quarters.

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

I wanted to ask if you're seeing any changes, demographic changes in your new additions maybe to your loyalty program for age-wise or ethnicity-wise?

No. We run a pretty broad demographic customer base. And we go from teens to 60s. Obviously, the sweet spot is in the 30s, but both quantitatively and qualitatively, you really do see a broad cross-section of people. It's not a typical spiky kind of bell curve. When you stand in our store and you watch, you typically see women shopping in groups. It's either a mother and a daughter or 2 friends shopping. So pretty broad, widely distributed in terms of age. Certainly, the ethnicity represents the market that we do business in. Our average income customer tends to be upper income. Our average income is in the $70,000 range, a little bit above. So that -- and that really continues to be the case with the new customers as we open new stores, as well as expand our loyalty database.

Great. And then on when we look at the store maturity, what it used to be historically, as your brand awareness continues to increase, are you seeing maybe a faster store maturity pace? And lastly, with the accelerating new store openings, how is the rent environment that you're seeing?

Evren, on the store maturity, as the brand grows in awareness, I think there is much more opportunity in front of us even with 467 stores, 1,200 target for the U.S. There's much more opportunity to drive comps all the way through the maturity curve by increasing brand awareness. So I think more of that opportunity is in front of us than we're realizing today. As far as rents go, it's been pretty even. We have a concept that the customer seeks and the developer community seeks. We have a strong balance sheet that ensures that the developer's actually going to see execution in the leases and get payment. So I think it provides a good balance for our dealmakers to negotiate in this environment.

Our final question comes from the line of Randy Konik with Jefferies.

This is Amanda Sigouin on for Randy. Just a question around the new 1,200 store target, your in-depth analysis around that, just curious, has it opened up kind of new markets for stores or if it's more going to be you see that you can cluster stores more in certain markets?

I think both. As our -- the cost of getting these stores opened has improved as we've continued to add more data to our loyalty file, as we've continued to learn more about refining the market size that we can operate a store in. All of those have demonstrated that there are markets that potentially a couple of years ago, the company thought were too small to support in Ulta but we believe now they can, or we can congregate them into a market a bit tighter that had been thought of at one point. So this analysis, we spend a little bit of time just giving you some sense of the depth of that analysis. A lot of work and thought has gone into it, and we're very encouraged that the 1,200 number is out there. We're also very confident that it can be realized over time.

And keep in mind, that's also based on the data that we have and based on the actual performance in those examples that Chuck cited.

Great. And then just a follow-up on the E-Commerce business. I'm trying to get a sense of kind of how longer-term that could fit in as well? I know it's fairly small today. I guess, how do you -- are you doing anything different to drive traffic to your website? And kind of in the next 3 to 5 years, how big do you think it could overall as a part of your business?

Well, it can be a lot bigger. I would remind you of the following. One, it is growing very quickly but it is a small base. I also would remind you that it serves 2 purposes. Our digital effort serves 2 purposes. One is clearly, there is more e-commerce revenue to be done. And that number should be significantly higher than what we have today in terms of our revenue. But the second is to reinforce Ulta as a brand to our customer and bring to life our brand to that customer and augment what we do in stores. So the buzz terms out there are multichannel or omni-channel.The reality is, in our business, which is a very emotional experiential category, digital complements what we do in our stores and what we do -- what we can do through our e-commerce effort. What we need to do digitally is bring that experience to life for our customer, whether that's shopping, actually enabling her to spend money or whether it's providing a community for her to talk to and learn from, whether it's providing trend information, provide that physically in our stores but virtually through our digital efforts as well. And that's the second purpose of our e-commerce effort of our, I should call it ulta.com effort. So one is a revenue increase, which should be significant, and the second is to bring the Ulta brand to life to the customer, where and how she wants to engage with us.

We have no further questions at this time.

Okay. Well, let me thank everybody for your interest in Ulta and joining us on the call today. And we will look forward to speaking with you at the end of next quarter in September. Thanks so much.

Thank you. Ladies and gentlemen, this does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.