Greetings and welcome to Ulta Beauty's First Quarter 2013 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Laurel Lefebvre, Vice President, Investor Relations. Thank you. You may begin.

Thank you for joining us for Ulta's first quarter 2013 conference call. Hosting our call are Dennis Eck, interim Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Also joining us are Janet Taake, Senior Vice President, Merchandising; and Jeff Severts, Senior Vice President, Marketing. Before we begin, I'd like to remind you of the company's safe harbor language. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC. We may make references during this call to the metric free cash flow, a non-GAAP financial measure defined as cash provided by operating activities minus purchases of property and equipment. With that, I'll turn it -- the call over to Dennis.

Thank you, Laurel. Good afternoon, everyone. We are pleased to announce a strong first quarter with better-than-expected sales and margin performance. The team is executing our 5-point strategy very well and our outlook for continued market share gains is excellent. To update you on our CEO search, we are making good progress. We have been very happy with the high quality of candidates. As expected, there's a high level of interest in this opportunity. The Board of Directors is partnering with our search firm, Herbert Mines, where we are working through a comprehensive process to identify the best candidate. We hope to conclude our search in the near future. With that, I would turn over to Scott.

Thanks, Dennis. 2013 is off to a good start with solid first quarter results. To recap the Q1 headlines, we grew the top line 22.9%. Comparable store sales increased 6.7%, including the impact of our E-Commerce business, which had a very strong quarter with 70% top-line growth. This compared to a 10.1% retail only comp in Q1 of 2012. Operating income increased 17.8%, while operating margin declined 50 basis points to 11.6%. Earnings per share increased 20.4% to $0.65 per share. I'll walk you through our financials in more detail in a moment but first, the team and I will update you on our progress with Ulta's 5-point multi-year growth strategy, which includes: one, accelerating store growth; two, introducing new products, brands and services; three, enhancing our loyalty program; four, broadening our marketing reach; and five, increasing our digital focus including e-commerce. I'll start with the real estate discussion. In the first quarter, we opened 26 net new stores and in Q1 with 576 doors in 46 states, representing 24% square footage growth. We added our first store in South Dakota in Sioux Falls in Q1. New store productivity continues to be very good, driven by a high-quality real estate, growing brand awareness, dedicated resources for our brand opening events and marketing programs to help stores get off to a great start. We recently updated our store model to reflect the most current data for sales, capital and inventory. New stores are starting out a bit stronger than they have historically at roughly $2.8 million per store in year 1. They still ramp up to $4 million on average in year 5 and then are expected to continue to comp modestly thereafter. We spend about $1 million per store in capital and receive landlord allowances of $600,000 per store on average. Inventory, net of payables, has gone up slightly to about $500,000 per store. As a result of the increase in our mix of higher value Prestige products. Preopening expenses decreased as we've shortened the time it takes to get stores opened and gain some scale efficiencies. All in, the total new store investment is about $1 million. The payback period hasn't changed. It is still roughly 2 years. We continue to be very pleased with the performance of the portfolio and are already making good progress on next year's new store program with roughly 50 sites already approved. Looking ahead to the rest of the year, we are on track to execute our 125 new store plan. We expect to open 29 stores in Q2, 54 stores in Q3 and 16 stores in fourth quarter of 2013. We're on track with our plan to remodel 7 stores and we'll end the year with less than 40 stores in older formats, well over 9% of the changes in our newest formats, which we refer to as level 6 or 7. Now, I'll turn it over to Janet Taake, SVP of Merchandising to update you on new products, brands and services.

Thanks, Scott. Newness continues to be the primary driver of our comp sales growth. In terms of categories, Prestige Cosmetics and Skincare continue to grow at a rapid pace offset by softer performance in the more mature hair care tools category. To recap newness of note in the first quarter, we were pleased with the new brand launches of St. Tropez self bronzers, Lipstick Queen and the addition of Deborah Lippmann prestige nail lacquer in 200 stores. Perricone MD skin care line got off to a very strong start, we introduced HairMax, an FDA clear appliance for in-home treatment of hair loss for men and women, continuing to strengthen our offer in response to the trend and high-tech beauty tools in hair growth and hair-thickening solutions. In terms of brand expansions, we completed our rollout of our exclusive brands CK One color cosmetics to the entire chain. We also launched some exciting new products within existing brands Urban Decay Oz, the great and powerful palettes; Clarisonic, limited-edition colors and Ultra CHI styling tools and new patterns. We introduced Living Proof good hair kits and Color Wow root cover-up, both exclusively available at Ulta. For Mother's Day, to highlight the fragrance category including the new fragrances launched in Q1, we offered new and exclusive pastel totes as our gift with fragrance purchase. We also featured a customizable cosmetic bag with an Ulta brand product purchase. On the services side, we continue to expand benefit brow waxing services now in almost 400 stores and after testing new brow tinting service in Q1 with strong results, we are now rolling it out to our Benefit Brow Bars. To preview some of the newness in the current quarter, we're launching Sarah McNamara skincare this week. Sarah McNamara is a beauty industry veteran who developed…

Thank you, Janet. I'd like to highlight some of our marketing activities during the first quarter. And then preview some key second quarter events. I'll also update you on our loyalty program and CRM platform and, finally, provide some color on the performance of our E-Commerce business. Our most important promotion in Q1 was the signature 21 Days of Beauty, an event that our guest anxiously await twice a year for the daily beauty steals and in-store events focused on Prestige brands. We have significantly increased our resources dedicated to positioning ourselves as a beauty and trend authority and this season's efforts featured an array of new marketing assets with a special emphasis on digital, including a display advertising campaign featuring rich media units and a social media content and Facebook, Twitter and Pinterest. A dedicated online landing page allowed customers to view that day's upcoming and upcoming beauty steals as well as the schedule of all our in-store events. The page also allowed customers to register to receive digital reminders throughout the event, so that they won't miss any of their favorite steals. We further enhanced our traffic driving efforts by utilizing Ultimate Rewards bonus point promotions to targeted customers via our CRM platform. Overall, it was our most integrated campaign to date and an exciting first step in our efforts to expand our marketing reach. On the public relations front, we were pleased with the brand impressions generated by our sponsorship of the reality show The Face. In late March, the winner of the show's modeling contest was announced. Her name is Devyn. She will become The Face of Ulta beauty in our marketing campaigns for this fall and holiday season. Looking ahead to the second quarter, we got off to a strong start with our Love Your…

Thanks, Jeff. Turning to a more detailed discussion of our financial results, first quarter sales were $582.7 million, an increase of 22.9% compared to sales of $474.1 million achieved in Q1 of 2012. Our 6.7% comp was fairly balanced between traffic and ticket during the quarter, as a result of good discipline around promotional activity, an increase in mix of our higher ticket items as we added more Prestige cosmetics and skincare to the assortment. Our same-store sales increase reflects 140 basis points of benefit from our E-Commerce business, which grew 70% during the quarter. Gross profit margin decreased 100 basis points to 35% from 36% in Q1 of last year. The gross margin leverage, most of which we outlined in our Q4 call, included a number of unusual items compared to the prior-year period, including inventory receipts flow and the conversion of our central region to our points-based loyalty program, both of which we have now anniversaried. We also had the onetime negative impact from our private label Gift-With-Purchase issue and continue to see our customers' increased focus on value. The gross margin decline was less than we had forecast due to a slightly better fixed store cost leverage and stronger product margins as we manage promotional activity in a very disciplined way. SG&A expense as a percentage of sales decreased 60 basis points to 22.8% compared to 23.4% in the first quarter of last year, driven by corporate overhead and advertising expense leverage. These gains were offset by deleverage in store labor as we began to invest in higher service levels and labor to support our increased mix of Prestige products, which require a higher level of guest service. Preopening expense for the quarter was $3.2 million compared to $2.5 million in Q1 of 2012, due to adding…

[Operator Instructions] Our first question comes from the line of Gary Balter with Crédit Suisse.

It's Simeon Gutman for Gary. Gary's right next to me give, I was just -- he's driving, that was his shut out. Scott, last quarter we talked about gross margin and there was some promotional, I guess, spending but there was some promotion that the business is, over time, going to be weaned off of it to some degree. Can you give us some color on that? Did that begin in the first quarter and then how did that progress as the year goes on?

Just as a reminder. For first quarter, we guided gross profit margin down roughly 140 basis points at the midpoint of the guidance range. So comp store sales were a bit better, so we did get some leverage on fixed store cost, which helped, overall. We also saw product mix towards Prestige skin care and color cosmetics continued its strength, so that helped margin rate overall for the first quarter. E-commerce also helped us quite a bit. It was a tailwind as that business continues to scale up. With respect to the promotional environment, the first quarter, we kind of ran head-to-head. Things kind of shook out the way we expected them to. As we talked about that in the big, big scheme of things, our intention, over the long-term, is to moderate some of the general coupon drop, so to speak, and so offset that with a bit more of the CRM initiative, to do more one-on-one, more sophisticated marketing with our customers. So that's the trend. As Jeff mentioned, we've had some good successes there. We've been ramping up the efforts there. We've seen some good, positive results. But again, we're still in the very early stages of the CRM tool and platform.

And then one follow-up for Janet. She mentioned a couple of the categories per segment that's strong or that are outperforming some of the other categories. Can we just drill a little bit more deeply into the 2, I think, that you called out on the positive side, and you mentioned a couple brands. And then also a follow-up on the, I think, you said the appliance category was a little soft. There are some introductions that are upcoming. I don't know if that's something you think will turn around the space or et cetera. If you can comment on that?

Well first of all, the Prestige side, when I mentioned the Prestige skin and color cosmetics were very strong for first quarter, I didn't mention specific brands and it continues to be strong for us. It has been for several quarters. As far as other categories that are gaining traction, we're seeing a lot of healthcare or therapy and hair care. And its in liquids as well as some tools. High-tech tools, I mentioned before, have been a trending category for us and it's -- a lot of it is high ticket products. The HairMax we launched earlier in Q1 along with other tools that are coming in from Q2 that I mentioned, and a lot of hair removal -- home hair removal techniques are also trending. So there's the hair therapy, there's hair tools and then there's also the home-care with hair removal that's also been trending.

What about the appliance category? I mean you sold a couple of products in the past couple of weeks that looked pretty promising on the curling side that looked like that could revise some of the category. I don't if expectations built into that?

Yes, we have newness coming in. We usually don't speak too far out, but we do have some new technology coming in. I mentioned from Jose Eber, the infrared flatiron that's coming in which is new technology for us and also a new brand. And there's some other product coming in that has to do that's associated with curl that we have not launched yet that will be coming in this quarter. There is some newness. It is also a slower-growing category.

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

Just I guess following up on the topic of the CEO search for a second, if there's anything you can say at this point in terms of some of the characteristics that you're particularly looking for, that you're trying to zero in on? That would be my first question.

Yes, we've been very focused on -- we have a very strong team at Ulta. We think we're headed in a very good direction and what we're looking for is somebody that can take that and move it on to the next step. So we're being very, very thoughtful and careful about somebody that can do that. And as I said in the last call, we're going to take our time and do it right and that we'll be back to you as quickly as we have something. But we're pleased with the progress.

And then my other question relates to e-commerce. The 70% growth, seems like that may be a step up from what you had been seeing, correct me if I'm wrong on that. And if so, what were some of -- was there any like particular 1 or 2 events that drove well above trend growth or was that a fairly steady growth trend during the quarter?

Hey, Dan, the 70% growth rate that we saw in the first quarter, again, while e-commerce is still a relatively small piece of the business, I wouldn't model that in as kind of the go-forward run rate. Historically, it's been in that 30-ish, 40-ish kind of range, which I would say is still probably a good estimate for you to use. As far as category drivers on e-commerce, it's really -- we saw higher ends, skin care kinds of things and some of these tech tools that Janet mentioned which lend themselves very well to the kind of digital e-commerce space. We were able to get it in stock and get it promoted and get it out there in the website in a real timely fashion. So more than anything else, it was the higher-end categories that were driving the growth.

Sorry, this is Jeff. I'd just add to Scott's answer about later in the year expectations for e-commerce. Remember that we do have the site relaunch only happening in the fall and quite naturally, with that kind of relaunch, we would expect to see some transitional bumping as the customer gets used to that new site.

But fair to say that, that was -- that the type of growth you saw, even -- was kind of above your historical average pretty steadily? It wasn't 1 or 2 key events that drove explosive growth or anything?

No. It was the general trend across the quarter. And again, it was because of the introduction to some of these new products that just worked out extremely well.

Okay. And I guess, lastly, as it relates to what you mentioned about some of the styling tools, do you think that there's any competitive pricing things there? Or is that primarily what you mentioned just kind of maturity of the category?

We're always aware and pay attention to the competition but we also deliver what we feel is going to drive our guest to the store. So on both sides, we manage the styling tools appropriately.

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

Can you give us a sense of Lancôme and Clinique, maybe the impact they're having on the stores that have the boutiques? Is there a significant difference in comp or store traffic that you can speak to in those stores? And what's kind of the maybe the sell-through of those brands relative to expectations?

Evren, we're not really going to be able to get into the details with you on specific brands or categories, but we are very happy with the performance of the boutiques, both Lancôme and Clinique. I think our partners, our vendor partners, are happy with the performance as well, which I think is demonstrated by our continued expansion with them. It does drive additional traffic to the stores. It helps the box overall. It helps our guest experience in the stores and the offering that we have. So again, I think we're happy in all fronts, we've been happy with the expansion and we look forward to more in the future.

And then a follow-up on the stock buyback program. Should we expect you to be more opportunistic or is this going to be more regular use of the program, possibly to offset the dilution from options? How do you think about the usage of the program?

In the near-term, I guess the short answer we'd say, opportunistic, would be the answer, the short answer, again. This is a responsibility that management and the board takes very seriously. We've got $150 million authorization out there. It's kind of a judgment call on where get into the market and what we do. But again, it's a thoughtful process that we're in continuous conversations on with the Board.

And we're measuring that against the need for cash for the other things that we need to do to continue to build and grow Ulta. So we discuss this at nearly every board meeting.

Our next question comes from the line of Ike Boruchow with Sterne Agee.

I guess my question is going to be based on the merchandise margins. Scott, you talked about the gross margins in the quarter and how they came in. Is there any way you could break apart the gross margin that you saw in terms of merchandise margin and occupancy and buying deleverage in Q1?

I'm not sure if we're going to be able to do that on the call. Should we? I mean, again, overall the mix was better, Prestige skin care and color continued its strength during the quarter, so we continue to mix up a bit on that side of the business, which helped the rate. We did get slightly better fixed store cost leverage because the comp was stronger than we are expecting or what the midpoint of the guidance range called for. We did get supply chain. We were expecting that to deleverage slightly in the first quarter. That ended up being a little stronger than we were expecting because of some of the inventory receipts during the quarter to support some of the initiatives with the new brands and the boutiques coming into the Q. So I don't think we're going to be able to give you any more breakdown than that at this stage.

I guess what I was going at is in Q2, your guiding gross margins at the midpoint up 40 basis points. They were just down 100. I'm assuming that, that has a pretty nice inflection in the merchandise margin and I was wondering if you could comment there, give color. I know there was one-time things in Q1 that impacted you, but maybe what are you seeing going forward? What's your visibility into positive merchandise margins for the remainder of the year?

I would preface that by saying, again, in the big picture, we've kind of cycled through a lot of those headwinds in the first quarter that we saw with, primarily, inventory receipts but also a couple of the other items that we talked about here on the call. As we pivot and look ahead to second quarter, again, a big driver of it is the promotional and merchandising strategies that we use. So again, for second quarter, we're looking at some different events that we expect to drive better rates for us overall. We expect to continue to see strength in the high-end Prestige skin and color categories, which will continue to drive rate, as that continues to mix up. We'll also see some leverage in supply chain in the second quarter, which we didn't really see in the first quarter. So those are the primary levers that we look at as we look ahead to Q2 with margin expansion.

Our next question comes from the line of Neely Tamminga with Piper Jaffray.

Scott, I have just one quick clarification point and just a bigger picture question on e-commerce. Clarification on the promos. So we definitely noticed as well in our own analysis that the promo trends were actually down this year versus last year as you guys have more of this direct kind of segmented e-mail marketing. So are you expecting embedded in guidance for Q2 to be kind of a similar sort of year-over-year trend in Q1 or kind of matching that with the promos of Q2 last year?

We expect Q2, year-over-year, to be consistent, so Q2 this year versus last year. When we talk about promotional events, we're talking about the direct mail pieces that we send our customers and the newspaper inserts kinds of things. So those will be even up head-to-head year-over-year for Q2.

Sorry, this is Jeff. I was just going to add, yes, we do, I mean, anniversarying, year-over-year, the major events. You'll see no changes to that. What you will notice, I think, what you noticed in first quarter is us taking opportunities to nip away at the corners a bit and be more selective and targeted in our promotions.

Absolutely. We thought it was very well executed. And then my big picture question on the e-commerce side is if you think about e-commerce growth and expansion, based on our observation, we noticed companies really see kind of that lift in business overall when they're either expand SKUs online or basically offer some amazing new customer service function like free shipping, free returns. Where are you guys on that spectrum and how you're thinking about probably primarily SKU expansion online and availability relative to what you have in your stores? And then also any sort of latest thinking around free shipping, free returns or something to that effect?

On the SKU expansion, we will be expanding a brand that we may have in-house and add SKUs online that we don't carry in the brick-and-mortar side of the business. We're also looking at adding brands that we don't carry in brick and mortar. And it's continuing to evolve and we will continue to manage that and look at opportunities to expand beyond, once again, what may be in brick and mortar.

Otherwise, we are not planning any major changes to the customer proposition. We feel like we have strong proposition already. We want our customers to buy from us online because they're buying from Ulta, first, and that the online channel is just their channel of choice at that time. You won't -- we are not planning on trying to grow online sales for online sales' sake. We're trying to grow Ulta sales.

I would just close that one out, Neely, by saying in the big picture, this E-commerce business is a place where we're playing catch-up right now. So when you talk about major new changes that will drive guest engagement and have them shop our site more often, a lot of that is to come. So part of that's going to be with the web redesign that we have coming out in the fall, integrating the points-based loyalty programs across platforms, so it's seamless to our customers, and expanding the assortment here that Janet spoke to across, so that more closely resembles the in-store experience. So that's all ahead of us. All good things to come in the future.

Our next question comes from the line of Brian Tunick with JPMorgan.

Two questions really regarding, I guess, stores. First one is given the ongoing CEO search, we were wondering what is the timing of your budget process when you need to lock-in how many new stores you're planning for 2014? And then the second one is really on the store maturity curve, I guess, Scott, you updated and, I guess, when you guys think about the faster ramp that you're now seeing and you try to isolate whether or not it's about the markets now you're in or the real estate locations or the brand awareness, sort of what do you isolate as sort of being the reasons that the store maturity curve is what it is? And when you think about the double-digit comps you put up the last 3 years compared to your guidance, what's really changing? Is it mostly the mature stores? Just trying to figure that out.

Well let me take the easy one first, which is kind of the budget process, all right? I mean can -- I think we mentioned we're well on our way. The pipeline looks good for 2014. We've got 50 sites already approved, internally approved. We're still working on the leases and all the details. So we feel we're in very good position for 2014 and we can lever that up and back. Our real estate guys are very seasoned. We can work to meet the number, whatever it is, again, depending on the quality of the real estate. As long as the quality is there, we can execute. As far as the new store ramp is concerned, again, we updated our model here just recently. So the stores are starting out a little bit stronger than they had, than what we had seen historically. So again, that first year step up in the comp, maybe is a little bit more moderated -- moderate than some of you may have had in your models. So again, instead of high teens in second year, because they start at a higher rate, so the second year might be closer to midteens kind of step up, all right? Again, what we're seeing when we look at the models and stack up the stores every quarter, we're seeing that the store ramp is consistent over that 5-year period with what we've seen historically. Broader picture, we're closing in on 600 stores across the U.S. We're kind of following the natural flow of the beauty industry, overall. As we look back to 2012, I would say it's not double-digits the last 3 years, Brian. But it was very healthy, high single-digit growth last year and when you pivot that against what we saw here in the first quarter, which, you know, again it's a low 5% comp for the bricks and mortar part of the business. That is a change. When we look across the classes, we're not seeing any significant changes by class or geographic area of the country. The stores in general, there's not a lot of variability between the stores outside of the normal ramp up of new stores. So when you look back now at some of the older stores, like the greater than 5-year-old stores, last year when he had really high single-digit comps, they were comping at healthy single-digit kind of levels. This year, those older stores are comping in the low single-digit kind of area. So again, the good news is they're not hurting the comp, all right? And while they might not -- those older stores might not be helping drive a higher comp, they are contributing very healthy store-level earnings and cash flows for the company.

Our next question comes from the line of Matt Fassler with Goldman Sachs.

One question, one follow-up, both sort of around the e-commerce, retail interaction. First, thanks for the very detailed disclosure on the store's comp and the e-commerce comp. If you think about traffic and ticket, should we think about that 140 bps from e-commerce really driving that traffic number? Because I know you gave that for the base, overall, without differentiating between channel.

Look, again, the comp was 6.7% for the quarter, roughly equal transaction drivers and ticket drivers, the ticket side of that was primarily units, all right? Average selling price was basically flat year-over-year. When we break down the business and built up a comp map, we break apart the E-Commerce business, the salon business and the retail business. And when we say it's roughly equal transactions or traffic and ticket, the same goes for the E-Commerce business. So it's not -- we don't just throw it all in the traffic side of the comp driver. So it's [indiscernible] .

Got it. That's helpful. And then secondly, given your loyalty program, you have, obviously, a better visibility than most who your customers are. As you think about the big e-commerce spike that you saw, what's your sense about whether these are existing Ulta customers, loyalty program members or not, relative to people who are new to the brand and joining you through the e-commerce channel?

Generally speaking, customers that use our e-commerce site, by and large, are aware of Ulta and are already part of the Ulta guest kind of profile in pool, all right? That's the majority of the users. We have seen, with some of these new product introductions here, especially recently Q1, that it has been able to draw in more new customers. So as we look at it overall, we're happy to see that, that it's a way for us to mine and draw in new customers.

Yes. I would just build on that. Generally, most of our online channel growth is coming from existing customers, and we're just getting another visit or more frequency out of them, which is fantastic for us. But this quarter was a bit peculiar. We had a couple of new products, SeroVital being one of the them, where it was a hot product where we -- we're one of the few distributors around the product and it brought a lot of new people into the franchise.

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

Just wanted to stay on e-commerce for a second. Looks like, obviously, the 140 basis points boost you got in terms of comp growth in the quarter from that was a little bit better than you guys were looking for. It definitely was better than we were looking for. So could you help us out in terms of the full year, I think in the past you've said that it will be less than a point to full-year comps. Is that still your view at this point?

Yes, exactly. For the full year, we're estimating it's roughly 100 basis points to the comp for the full year. As Jeff mentioned, we started out at the gate here very strong in Q1. We expected to moderate a little bit. We've got this new site redesign that's going to roll out in early fall. We expect there to be some transition time period there. So again, for the full year, rough and tough, 100 basis points.

Okay, got it. And then in terms of gross margin, obviously, the quarter there too was better-than-expected. On your last call, I think you had mentioned that you guys did expect to see "healthy" gross margin expansion for the year. Didn't hear any commentary today, at least, on the full-year gross margin outlook. Is that still your view that, that gross margin will be up healthy this year and SG&A roughly flattish or have those components changed a bit?

Joe, we're reconfirming our full-year guidance. So again, exactly as we described to many of you over the last couple of months, we do expect to see healthy gross margin expansion for the full year.

Okay and I apologize, but if it's down 100 and up 40 [ph], and the fourth quarter, I think, you've said is going to be pretty promotional, so you probably shouldn't expect to see much in the way of gross margin expansion in the fourth quarter. It sounds like a lot of the gross margin expansion this year you're looking for is going to be in 3Q.

I wouldn't say that's a fair statement. Typically, fourth quarter is a more promotional time period but again, as we shift some of our marketing and merchandise strategy, the CRM initiative continues to gain speed of momentum, and we're able to pull some levers back and forth in other parts of the promotional kind of basket, we feel confident that we'll be able to do what we said.

Our next question comes from the line of David Wu with Telsey Advisory Group.

First, can you talk about the longer-term opportunity of the Prestige business, including any plans to introduce additional large flagship brands into the mix, as well as a longer term potential for a new brand boutique, especially as Prestige segment obviously is expected to continue to outperform over time, yet it still appears to be relatively under-penetrated category for you?

We will continue to evaluate new brands and new products in Prestige but, more importantly, across all categories of our business, it's important to look at the total business. Our box is very flexible so we can -- and we're very agile as an organization, so we can move pretty quickly within our stores if we needed to add boutiques or any type of presentation that goes from mass to Prestige. As we look at the total mix, we will introduce, we can constantly have conversations with vendors and we will, once again, across all categories, and we will continually add and look for newness and it will be an important part of our business. But overall, I don't see a significant change from the total mix of the box year-over-year.

Great. And with the new brand boutiques that you've been opening and -- as well as introduction of more sort of higher-end product and tools, have you noticed any changes at all, to your customer demographics, whether age or by income?

David, no. This is Jeff. We have not seen any substantial shifts there. Nothing that would show up in any of our tracking tools. So same customer, generally, in terms of what she looks like, how old she is, where she's from.

Great. And then I thought it was interesting, you talked about ongoing [ph] some of the private label men's product this quarter. And I was wondering if you could perhaps talk about sort of the overall men's opportunity?

We have a men's shop in our stores and men's, we carry fragrance, skincare and some bath categories that we just launched with Ulta. We're very pleased with our business but, overall, it's a really small percentage of the total business for Ulta.

Got it. And is this a category that you may focus on more over time?

Once again, it's a small part of the business, but we will always look for opportunities to grow categories at two other category. So as I mentioned, we just launched Ulta, which is totally new and it doesn't compete with anything else within the category and we will continue to evaluate men's skincare. It's been a nice category for us.

Excellent. And just lastly, in terms of your store expansion strategy, I know obviously that the focus here is still on opening stores in power centers but can you perhaps elaborate more on the mall opportunity and if the sales and profitability dynamics are attractive enough to make it a viable alternative to the power centers?

We do look at mall sites occasionally. Again, when we're looking at 100 or 100-plus new store opportunities a year. There are certain geographic locations where the mall is the only place really to do business in a specific town or geographic area. So we do look at those from time to time. We do have a number of stores that are adjacent to malls, attached to malls. So we do look at every one of those opportunities that comes about. The stores that we do have opened that are connected to malls do just as well as stores that sit on independent pads or are in power center lineups with other tenants. So again, we look at them on an individual basis to make sure we're happy with the physical space, that the co-tenant mix is the right one for us, that we get the right kind of economic model overall and that we feel good about the store. So again, it's an opportunity and it's something that we take a look at as need be.

Our next question comes from the line of Jill Caruthers with Johnson Rice & Company.

Is there any way you could quantify the number of Clinique boutiques you'll be rolling out this year?

Thank you for asking that question. Not today. We will be able to update you on the next call.

Okay. Should we assume that it's a more material number or there's just no real comment there?

No comment.

Okay. And I guess just trying to see how -- I feel like these brands pull in, possibly, a department store customer that isn't fully aware of what Ulta has. How are you going about advertising these -- specifically these brands, Clinique and Lancôme, given they're not storewide across your base? Is there any advertising you're able to do at this point in time throughout this rollout?

Yes. Actually, we've been marketing in our mailers to the zip codes in which our stores are located that have a Clinique or a Lancôme or both and we've been doing that for several years and we will continue as we continue to expand.

Our next question comes from the line of Mark Altschwager with Robert W. Baird.

This is Jacob in for Mark. If you're looking at the loyalty data over the past year, will the program be tweaked at all going forward versus the initial points-based model? And then I guess as a follow-up, do you expect the rollout to impact gross margin positively or negatively next year as new customers enter the program?

Thanks, Jacob. So no material changes to the customer proposition on the program, it will be the same program that you see today. Some very minor modifications in the way we launch it, on the basis of what we have learned in the first launch in the first 50% of the country. But nothing significant and certainly nothing visible to the customer. Did you want to handle margin?

Yes. As far as margin or the financial impact of transitioning the rest of the 50% of the country that's not on points-based today, I think I've outlined, again, for a large number of folks over the last couple of months that there was some initial margin rate impact based on the new program, because people are more engaged. They spend more money, so they earn more points. So we have to reserve more and there is an impact on the margin rate. But over the long-term, and we're hoping next year, that's another element that plays into the early 2014 implementation, that over the first year period, all that kind of moderates by and large. So we've learned some good lessons over the years with how this program works and what they expect, and we feel very comfortable now and confident that we can forecast that appropriately.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Thank you all for your interest in Ulta and we look forward to speaking with you all soon. Thank you.

Thank you. This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.