Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

Ulta Salon, Cosmetics & Fragrance, Inc. (NASDAQ:ULTA)

Q3 2012 Results Earnings Call

November 29, 2012 5:00 pm ET

Executives

Laurel Lefebvre – Vice President, IR

Chuck Rubin - President and CEO

Scott Settersten - Chief Financial Officer

Analysts

Brian Tunick - JPMorgan

Matthew Fassler - Goldman Sachs

Joseph Altobello - Oppenheimer

Neely Tamminga - Piper Jaffray

Daniel Hofkin - William Blair

Erika Maschmeyer - Robert W. Baird

Evren Kopelman - Wells Fargo

Jason Gere - RBC Capital Markets

Jill Caruthers - Johnson Rice

Operator

Greetings and welcome to the Ulta Beauty fiscal third quarter 2012 earnings results conference call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation. (Operator Instructions) As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, Laurel Lefebvre of Ulta Beauty. Thank you. You may now begin.

Laurel Lefebvre

Thank you. Good afternoon and thank you for joining us for Ulta’s third quarter 2012 conference call. Hosting our call are Chuck Rubin, President and Chief Executive Officer and Scott Settersten, Chief Financial Officer.

Before we begin, I would like to remind you of the company’s Safe Harbor language. The statements contained in this conference call, which are not historical facts, may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual 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 over to Chuck.

Chuck Rubin

Thanks Laurel. Good afternoon, everyone. I’m pleased to announce very strong third quarter results. Ulta continues to drive significant market share gains across all of our categories as we delivered 22.4% top line growth.

Same-store sales increased 8.4% maintaining solid top line momentum [wrapping] a 9.6% comp in Q3 2011 and a 12.2% comp in 2010. We expanded gross margin and leveraged SG&A more than expected driving operating margin up 140 basis points from 10.7% in Q3 of last year to 12.1% this year.

Earnings grew 40% to $0.59 per share. These excellent results position us to deliver sales and earnings performance for the full year well above our initial expectations. At the beginning of the year, we expected to see same-store sales at or slightly above 5% and to achieve earnings per share growth of approximately 30%. We now expect to achieve about 8% comp growth and about 40% earnings growth for 2012 assuming we achieve the midpoint of our Q4 guidance.

We delivered these numbers through our team’s disciplined focus on the five components of our multi-year growth strategy accelerating store growth, introducing new product, services and brands, enhancing our loyalty program, broadening our marketing reach and increasing our digital focus including ulta.com.

Our consistent execution of these strategies continues to drive meaningful market share gains in the beauty industry across all of our major product categories. I would like to recap a couple of our accomplishments in each of these five areas during the third quarter and touch on what to head for the fourth quarter.

First, store growth; in Q3, we opened 49 new stores representing about 10% of our store base, which is a record number of new store openings for us in a tremendous accomplishment in a single quarter. We ended Q3 with 537 stores in 45 states. New store productivity continues to be very strong with the class of 2012 stores consistently outperforming their targets.

So we're very pleased with the quality of real estate we added to the portfolio and proud of the Ulta team’s execution in getting new stores open. We also completed 11 remodels during the third quarter and also are happy with their performance, with about 90% of the chain opened or remodeled to our most recent store formats, we've done a nice job keeping the portfolio updated in the shopping environment and experience very consistent throughout the chain.

In the first month of the fourth quarter, we opened 13 additional stores successfully completing our 2012 new store program. With these, we will end the year with 550 stores for 23% square footage increase for the year.

As we've said many times, our real estate expansion is predicated on finding great financially attractive sites. Simply put, we will not sacrifice quality for quantity. We do however have strong financial and operational capabilities that allow us to accelerate store growth if we believe the right opportunities exist.

Looking ahead to 2013, that opportunity does exist and we expect next year to be another year where we can exceed our long-term goal of 15% to 20% square footage growth.

Most specifically, we're currently planning to open approximately 125 new stores in 2013 or about 22% square footage growth. This program will look a lot like 2012 or 2012 plan in terms of opening stores primarily located in suburban shopping centers with roughly 80% of the stores in existing centers as opposed to new shopping center development. We are confident that we have the resources and expertise to execute this aggressive new store program successfully without relaxing our high standards for the quality of the real estate, yet maintaining our high standards for store staffing and training.

Our second key growth strategy is adding new products, services and brands. Newness has been and will remain a key driver of our growth. We continue to see a strong pipeline of innovation in the beauty market. We are also benefitting from the introduction of new brands as well as new product lines within existing brands into our assortment.

In terms of brands, we launched in Q3 new skincare lines from Vichy and La Roche Posay which rolled out to all stores and we expanded our exclusive CK One cosmetics line to 178 stores during the quarter. We also launched Chroma cosmetics from the Kardashians in the skincare brand Nip & Fab on the mask side of our offering.

To update you on the expansion of Clinique and Lancome boutiques which we have announced previously, our teams completed all of the 50 additional Lancome boutiques by the close of the third quarter ending Q3 with a total of 79 Lancome doors.

We completed 29 additional Clinique boutiques bringing the total to 42 doors at the end of Q3. We just opened an additional Clinique boutique early in Q4 and have and have another five planned for early in the new fiscal year.

Execution by the team on all aspects of the implementation from texturing to recruiting to training was exceptional and we are very pleased to have the vast majority of these new boutiques ready to go before the holiday season. We view these iconic brands as a great addition to our prestige skincare and cosmetics offering. As with any of new initiative these boutiques will take time to ramp up and we expect that they will be long-term positive impacts on our guest experience.

During the third quarter, trends in anti-aging, mascara, lipstick and foundations continue to be strong. Several brands foundation launch has performed especially well including bareMinerals READY foundation, Urban Decay’s Naked Skin and Stila Stay All Day Foundation. The skincare category overall also saw a good growth and our guests remained very interested in the high-tech beauty tools category for at home microdermabrasion, acne and wrinkle treatment and hair removal.

Clarisonic continue to outperform with new colors and special additions for men and acne treatment reaching new customers segments. In terms of new brands for Q4, we will launch a new chemical and [clotty] free line of body care products when the brand Nourish. This certified organic brand expands our assortment of organic products that our guests are increasingly asking for. We will also add some exclusive Ulta products from existing brands we carry, for example Amp2, an instant volume texturizer from the brand Living Proof will be exclusively available at Ulta for several months.

Living Proof is currently in the limelight with the recent news that Jennifer Aniston became the spokesperson and face of the brand. In the hair appliance category, we are introducing an exclusive Ulta version of the GHD luxury flat iron; the number one selling flat iron in Europe and the new assortment of Ulta G here tools is doing exclusive holiday patterns.

In prestige cosmetics some of the new products were exited about include the Vice eye shadow palette from Urban Decay in a special bareMinerals kit exclusive to Ulta which commemorates Ultas 10 year partnership with bareMinerals. In the nail category, OPIs latest nail polish collection, [Skyfall] recently launched and has been opt to a strong start…

9-13

14-18

…slightly. Gross profit dollars increased 24% to $185 million with gross profit margin up 60 basis points to 36.7%. Roughly half of the improvement was driven by better merchandise margins with the remainder attributed to leverage in fixed costs on our strong comp.

As planned, fixed or leverage was lower than what we achieved earlier in the year due to the large number of stores we opened in the last two quarters. 22 in Q2 and 49 in Q3 this year compared to 21 in Q2 and 28 in Q3 last year. The Northeast DC continues to perform well. We expect to see a slight benefit from our improved network during the fourth quarter in a more meaningful benefit to margins in 2013.

SG&A expenses increased to 16.8% to $118 million, down 120 basis points as a rate of sales to 23.3%. We leveraged operating expenses on a strong comp and consistent cross disciplines. Preopening expense increased in line with our accelerated store opening program at $6.3 million compared to $4 million last year as we opened a record 49 new stores, remodeled 11 stores and relocated one store in the third quarter compared to 28 new stores, one relocation and no remodels during the third quarter of 2011.

All in, operating margin improved by 140 basis points to 12.1% versus 10.7% in Q3 of last year as we continue to deliver strong operating execution and remain focused on cost management. Our tax rate was 37.7% versus 39.2% in last year’s third quarter. The improvement in the rate was driven primarily by stock option exercises and was worth about a penny of earnings per share for the quarter. We expect our tax rate to be approximately 38.6% for the full year.

Net income increased 42.5% to $38.2 million or $0.59 per diluted shares versus $26.8 million or $0.42 per diluted share in last year’s third quarter.

Now taking a look at the balance sheet, merchandise inventories at the end of the quarter were $462.8 million compared to $354.9 million at the end of the third quarter last year, up roughly 30% in dialers and 7.3% on a per store basis. The increase is primarily due to the 95 net new stores we opened in the past year along with our normal holiday build. The increase also reflects incremental inventory related to the 79 prestige brand boutiques which were added in Q3 as well as strategic inventory investment in core high turn skews to ensure we support strong stock levels throughout the holiday season and into the New Year.

We will make additional investments in inventory through the fourth quarter which we believe is a good use of cash and helps our business long-term. As a result of the additional inventory investment, you should expect to see our average inventory per store to increase year-over-year in the low double digits as of the end of Q4. We would characterize this as a one-time increase that equalizes the average inventory per store levels quarter-to-quarter.

I would also note that the basic items we are investing in do not add any obsolescence risk. Looking ahead to 2013, we expect per store inventories to grow at a lower rate than our comp sales absent any major new brand additions. The additional inventory investments that we are making do not have a significant impact on our new store model.

Capital expenditure for the third quarter were $76.7 million compared to $45 million for the same period last year, mainly driven by our accelerated store opening program. Depreciation and amortization for the quarter was $22.2 million.

Turning to our outlook for Q4, it’s still early in the holiday season and somewhat challenging to forecast the mood of the customer. That said, we feel very good about our plan, the amount of newness we're offering our guests and our team’s execution. We were very pleased with our Black Friday weekend and our Cyber Monday sales, with both events achieving record sales performance.

So with all that as a back drop, we estimate Q4 sales will be in the range of $742 million to $754 million, versus $582.5 million last year. This includes the impact of the 53rd week this year worth about $35 million in sales.

We anticipate that comp store sales will increase in the range of 5% to 7%, on top of the 11.5% comp we achieved in Q4 of last year. Our guidance includes the disruption we experienced from Hurricane Sandy, which impacted almost 20% of the chain with many stores closed for multiple days.

As we do every year, we plan to announce our holiday sales on January 4, to provide you a view of our six week holiday selling season. We expect our fourth quarter earnings per share to be in the range of $0.96 to $0.98 compared to EPS of $0.73 in Q4 of 2011.

Our expectations for Q4 include the positive impact of the extra week in the quarter, which we estimate will contribute approximately $0.04 of earnings per share. Gross profit margin is expected to increase approximately 30 basis points at the midpoint of the guidance range, driven by improvement in merchandise margin and leverage of fixed door expenses.

SG&A rate is expected to decrease around 90 basis points at the midpoint of the range versus the last year’s rate of 21.3%. Preopening expenses are expected to be approximately $2 million up $1 million compared to last year’s fourth quarter driven by the acceleration of our new store program. This increase in preopening expense will negatively impact operating margin by about 10 basis points in the quarter.

All in, operating margin is expected to increase approximately 100 basis points at the midpoint of the range. We expect our tax rate to be approximately 38.6% and we anticipate the fully diluted share count to be about $64.8 million. To recap the full year, we expect to significantly outperform our original sales and earnings expectations.

Sales are expected to exceed $2.2 billion more than 24% growth compared to 2011. We are raising our guidance for earnings per share for the full year to a range of $2.64 to $2.66 representing approximately 40% growth. This is well above our long-term goal and our expectations at the beginning of the year of achieving 30% EPS growth despite the roughly $0.07 negative impact from our accelerated new store program, the new [DC] and the addition of prestige brand boutiques.

Total preopening expense for the year is expected to be $15 million compared to $10 million in fiscal 2011, negatively impacting earnings per share this year by about $0.05 per share.

Capital expenditures for the full year 2012 are expected to be approximately $180 million about $51 million higher than our capital expenditure program in 2011 driven by the acceleration of our new store program, store remodels and the expansion of prestige brand boutiques.

Depreciation and amortization are expected to be approximately $90 million. We expect to generate strong free cash flow for the year and we will continue to evaluate with our board the best use of any access cash.

To wrap up, Ulta is well positioned to drive robust sales and profit growth well into the future. All the contributors to our success that we have been discussing with you have tremendous multi-year potential.

We are highly confident in our store build out plans, the quality of our real estate and the sustainability of the maturation curve of our new stores. We expect to continue to offer newness to our guests in terms of products, brands and services. We have significant opportunities to drive benefits from our supply chain, from our marketing and CRM investments and from increasing our digital capabilities.

We remained very confident in delivering our long-term financial model based on 3% to 5% comps, 15% to 20% annual square footage growth, 25% to 30% earnings growth and targeting a mid-teens operating margin in the next few years.

With that, I will turn the call back over to Chuck.

Chuck Rubin

Thanks, Scott. Before we start the Q&A session, I would like to thank our 15,000 associates for all they do to make Ulta a winning formula that is rapidly gaining market share in the beauty industry. Our team always works hard but I would like to recognize in particular all the efforts of our field teams and our corporate associates to prepare for and then to recover from historic storm impacting the East Coast just a month ago.

We thank them for all they did to take care of each other, take care of our guests. I am always very proud of this team but never more so than one seeing that commitment and Engagement to over come this challenge. Now let's turn the call back to the operator to open up for your questions. Operator?

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from Brian Tunick from JPMorgan.

Brian Tunick - JPMorgan

Thanks, congrats everyone for a great quarter. I guess, Chuck I know it's a late holiday this year and people might be a little behind the eight ball given what they have said about to November comps out there but just curious of your view of the overall promotional environment, either from what you're seeing on the department store side or on the drug store side?

And then the second question is you talked about a 1200 store target long term, you're obviously accelerating that here but what's the thought between how much of that has to come from existing or reconfigured real estate versus when are we going to need to see new store development begin to ramp up. Thanks very much.

Chuck Rubin

Hey Brian, let's take the second one first. I think that clearly for the 1200 stores there is going to be a need for new construction. Obviously with our announcement today we feel really good about 2013 and most of those stores are existing real estate. You know the pipeline into 2014 believe it or not we've already approved some sites for that year. It's a little early to look at it at that point but there are some seeds of new development starting to show up and we do have high hopes that the real estate market does start to show some new development as you move into the out years. But clearly to get to the 1200 we will need some new development but we do think that that will start to materialize.

In terms of your first question on the promotional environment there does seem to be a wide range of activity, in retail today and it goes beyond the beauty market. You know clearly our performance this quarter continued to gain market share, so the customer continues to vote that they like what we do.

We're well positioned in our strategy for the fourth quarter between the breadth of our offering everything from mass to prestige, from cosmetic to skin care to hair care across price points using our loyalty program we are well positioned to add value to the customer and we are seeing that she is shopping for value as Scott mentioned in our prepared comments our Black Friday weekend and Cyber Monday were terrific. They were very big and but she was looking for value but we have a very sound offering to be able to cater to that using some of the things we talked about in the script.

Brian Tunick - JPMorgan

Fantastic, thanks so much.

Chuck Rubin

Thanks, Brian.

Operator

Thank you. Our next question comes from Matthew Fassler from Goldman Sachs.

Matthew Fassler - Goldman Sachs

Thanks a lot, and good afternoon, congratulations on your performance.

Chuck Rubin

Hey, Matt.

Matthew Fassler - Goldman Sachs

I want to talk for a moment about gross margin. First of all if you look at the fixed leverage that you've generated it was on the lower end of what you typically have been doing with a pretty good comps, so how much of that was absorbing issues like Chambersburg and the [Prestige] investment and perhaps offsetting what would have been better natural leverage on occupancy given the comp that you put up?

Scott Settersten

Yeah, Matt the leverage that you're referring to I agree it's a little bit unexpected but the drivers that were additional labor that we push through the supply chain and other additional costs that were related to these inventory investments that we made during the third quarter.

Matthew Fassler - Goldman Sachs

And to the extent that labor shows up in gross margin, would that happen kind of in the DCs.

Scott Settersten

Exactly. A little bit deleverage in the DCs.

Chuck Rubin

And again as Scott mentioned earlier, don't forget the number of stores that we've opened, we had a record number of stores in the third quarter. So that had a little bit of a drag on us as well on not being able to leverage as high in this fixed store expense.

Matthew Fassler - Goldman Sachs

Understood, and then Scott, just to clarify, the gross margin expansion you talked about for Q4, I want to make (inaudible) was that 30 basis points?

Scott Settersten

That's right. 30 basis points at the midpoint of the range.

Matthew Fassler - Goldman Sachs

So, if you think about that relative to the trend in recent quarters, that would be a bit lower as well. So can you talk about, understanding your guidance is from time to time proven conservative, if you look at the components of the budget to take you to that level, how should we think about?

Scott Settersten

Well, we're thinking about, the hurdles that we're jumping over from last year, you have to remember that the comp last year was significantly higher. It was 11 plus percent for the quarter and a 12% plus during that very important six-week holiday selling season. So as we look at it year-over-year, we see that merchandize margin relatively flattish and a little bit of pressure on the fixed store leverage because of the large number of new stores that we just put in place over the last two quarters.

Matthew Fassler - Goldman Sachs

And does the extra week helped that at all or is that kind of a non-event for?

Scott Settersten

It's really a non-event.

Matthew Fassler - Goldman Sachs

Got it. Thank you so much guys.

Chuck Rubin

Hey, Matt, I would just add, keep in mind on the merchandize margin that in the last, roughly two years, we've added close to a couple of 100 basis points on the merchandize margin and what we've said is long-term, there's opportunity both on SG&A as well as on the margin side of the equation they won't always be equal they'll vary between the two of them quarter-by-quarter but on the long-term we think that they do somewhat mirror themselves, they'll be about equal in their contribution or overall operating margin.

Matthew Fassler - Goldman Sachs

Understood. Thank you.

Chuck Rubin

Thanks, Matt.

Operator

Thank you. Our next question comes from the line of Joseph Altobello from Oppenheimer.

Joseph Altobello - Oppenheimer

Thanks, good afternoon guys. Just first quick housekeeping question you mentioned Sandy what was the impact on comps this quarter and what are you expecting to be the impact on comps in the fourth quarter?

Chuck Rubin

The impact that we envisioned in the fourth quarter was included in the guidance that we gave at five to seven. It's tough to be very specific about that Joe because you clearly have the impact of when stores were closed and we had close to 20% of the store base that was affected and closed, but from either a day or two to a number of days but then you have the after effect once the stores back open it still takes a little bit of a recovery time to get back in the business and for those stores we weren't the first thing that people affected by Sandy were going out to purchase. So to our best guess from what we have seen thus far we think that this is going to impact the quarter up to a 100 basis points 50 to 75 up to 100 basis points.

Joseph Altobello - Oppenheimer

This for the fourth quarter.

Chuck Rubin

Yes.

Joseph Altobello - Oppenheimer

Okay. And then just switching gears to the real estate opportunity obviously next year you're looking to do another 23% square footage growth what's driving that opportunity is it just more real estate coming your way, more centers being built and then secondly how are you guys handling that internally, because you added 100 doors or so this year and 125 next year and the numbers are getting pretty big, so are you guys adding - adding people or how you're adding capabilities to keep up with that opportunity?

Chuck Rubin

Yes, we've added people obviously, you can't grow a retail chain without adding people to it. We've added obviously the people in the stores but we have more construction people, we have more store set people, we do have more inventory people.

Joseph Altobello - Oppenheimer

On the real estate side, Chuck, sorry.

Chuck Rubin

Sorry?

Joseph Altobello - Oppenheimer

On the real estate side, sorry about that?

Chuck Rubin

On the real estate side, the team is the little bit larger but not extensively the real estate team can flex with some good flexibility because you do use other third parties to help find sites, there's a broker community that we leverage extensively. I've talked before that our real estate group is a very strong part of our company, our real estate and construction teams and store set teams. So we've got very, very strong capabilities on this and clearly as we've ramped the store count, we've have added additional people to help get that executed, but the core team, the core leadership team of our store set teams, construction the real estate teams, the deal makers it's just a very strong core group of people.

To your question, the first part of your question, I think we said in our comments that about 80% of the chain, 80% of the stores rather for 2013 our existing real estate. So there are seeds of new development but its not a heavy influence into next year and talked about this publicly a number of times, our team is very creative in going out and find opportunities for stores, we still have tremendous wide space in the country for stores to go in. And the fact that we have become much larger and more successful, we are very attractive tenant for landlords, so you put all of that together and that's what has allowed us to find these opportunities and clearly as evidenced even by these results for the third quarter, these new stores are performing very well and it is part of our DNA that we will not pursue quantity above quality, we just happen to be finding both right now.

Operator

Thank you. Our next question comes from Neely Tamminga from Piper Jaffray.

Neely Tamminga - Piper Jaffray

I have one and a half questions I think here. So just going back to the real estate composition of the market, I mean, I absolutely got kind of the new center development versus existing center but can you give us a sense of when we look into that 2013 on a 125 stores how many new markets will that represents through existing markets through this year?

Chuck Rubin

I don't know if we want to break into that just yet. There's a fair number of new markets, but it depends on how you define the market as well Neely. So I have used this example quite often. You know you take San Francisco where we have I don't know 10 to 12 stores; it’s a market that can support significantly more than that. So as we put more stores in San Francisco and its, into the San Francisco general market and new store is 10 miles away from an existing store, that's considered a new market or not.

So our point is that there's a lot of green field out there. There are some of the stores for next year that are going into single market, single store or two store markets but a lot of them are infilling into these bigger markets as a whole. So it’s kind of a broad-brush approach that we've got here.

Neely Tamminga - Piper Jaffray

And then, do your loyalty program unless I missed it, did you actually say, did you fully convert to the new program on all markets or are you still, where are you in that process?

Chuck Rubin

Yeah, we still have half the team on the new program and half the team on the legacy program. We had converted a number of stores earlier this year and our goal is to get to the one program, the points based program. We are pleased with how the transition is going but there are changes to the program but we want to get through a full cycle of customer shopping patterns so we understand all the components to it. But we still happen to have.

Neely Tamminga - Piper Jaffray

Would that be more of like a spring revisit sort of situation at this point?

Chuck Rubin

We will see. You know we still have another I don't know close to six months I guess to go before we anniversary the conversion. So we are making good progress and we are pleased with the new program, honestly we are pleased with the old program and it continues to feel a lot of goodness for us. We will get to the one program but we just haven't announced the timing exactly.

Neely Tamminga - Piper Jaffray

Great and I just, I actually have one more on fragrance. I think its really interesting what you are seeing about fragrance and the strength that you saw in Q3, is that historically been a really pretty good predictor for holiday and then maybe even carrying it further into Valentine’s Day if you think about kind of the key selling seasons for fragrance. When did fragrance really remind us, when did fragrance really start to get lit up a little bit from a category perspective?

Chuck Rubin

Well, fragrance is, what happened in Q3 was there was a lot of newness. So we have a lot of new fragrances that have been introduced. We will see how it goes for the fourth quarter. We haven't really hit the main stride for the fragrance category yet that does tend to peak very quickly as you get close to the holiday but newness is important and between that and there's a lot of newness. There is a lot of core fragrances that we've had and our GWPs continue to be briefly well received in this fragrance area. So too soon to tell how the fourth quarter is going to shake out on that but we think our plan is really well laid out.

Operator

Thank you. Our next question comes from Daniel Hofkin from William Blair.

Daniel Hofkin - William Blair

Just couple of questions, I guess, first, maybe you touched on this earlier but can you say anything about sort of the flow of store openings in 2013, obviously I would expect it to be somewhat smoother compared to this year but correct me if I am wrong about that?

Scott Settersten

Obviously, when we get to March, Dan, we will give you a better predictor of how this store roll out schedules is going to work for next year. I don't think it to be too far off [pace], if you use 2012 as kind of the proxy as far as store roll out for 2013 at this stage.

Daniel Hofkin - William Blair

And just sort of can I gross it up proportionately, you are saying basically?

Scott Settersten

Right, that would be the best bet at this point.

Daniel Hofkin - William Blair

Okay, and then my next question is, with the, I guess in the near-term, you know, you're seeing more contribution from the SG&A leverage. You had huge improvement in the last several years in gross margin. If you look forward over the next two, three years and still, I know you guys still thinking in terms of a mid-teens operating margin. How do you see the contribution splitting up between gross and SG&A?

Scott Settersten

Again, as we progress, look to the future, we're still working on achieving our mid-teen operating margin in the next few years, Dan, and again it’s going to be balanced between both gross profit and SG&A leverage. So again, it's going to move in tandem over the quarters. It’s not necessarily going to be in perfect balance each quarter. There is going to be a little lumpiness along the way but again all in that where we are headed on target.

Daniel Hofkin - William Blair

Okay, so I mean, it would be just all well equal fair to say that you would expect because the DC would be further in the ramp up next year and I guess the rate of star growth is similar in terms of percentage you would expect potentially more gross margin improvement year-over-year in 2013 than in 2012?

Scott Settersten

We are not ready to get into that quite yet today at the end; we will be prepared to give you a little bit more detail on that when we talk to you in March.

Operator

Thank you. Our next question comes from Erika Maschmeyer from Robert W. Baird.

Erika Maschmeyer - Robert W. Baird

The ticket increase that you saw this quarter was slightly lower than it has been any factors to call out there?

Chuck Rubin

I missed the beginning, the what increase?

Erika Maschmeyer - Robert W. Baird

The increase in your ticket?

Chuck Rubin

Most of the increase has been driven off of traffic, last quarter was a little more balanced between and traffic but we have said all along that long-term we think the traffic will be more the driver. In this quarter it was generally in line I think with that mix. We are very pleased, we do think it’s much a healthier and sustainable comp driver when most of that’s coming out of traffic not ticket.

Erika Maschmeyer - Robert W. Baird

No, I completely agree that makes sense. And then can you talk a little bit about your in stock levels or may be grade yourself there how are you thinking about that and what types of initiatives are you investing in to continue to improve in that area?

Scott Settersten

Erika, our number one goal is to provide our guest with the best in-store experience that we can and obviously part of that is maintaining high end stock levels. As we came out of a spectacular fourth quarter last year with the high comps that we had, we found that we had some in stock challenges as we worked our way post holiday and into the January, February timeframe. We have also noticed over the years that some of our smaller vendors are having more of a challenge keeping up with a lot of stocks as our store based continuous to grow.

So the investments that we are making are core high velocity SKUs with no obsolescence risk. We will remain highly disciplined and continue to prudently manage our inventory levels as we have in the past. Again, there might be a little upside to comps in the January, February timeframe but this in our view is a long-term investment, its going to help the business in the long-term.

Chuck Rubin

Just add to that, if you go back and look at our per store inventories, in generally it have been relatively consistent quarter-by-quarter just the end of fourth quarter this past year, we dipped down. So the additional inventory that Scott talked about this year we are expecting our per store inventory at the end of fourth quarter to be a low double digit.

It is kind of the one-timer just to get the per stores by quarter more comparable and to Scott’s point, you know, the additional inventory that we have bought and anticipate continuing to buy, its not really specific to holiday, its core and hence we are not overly worried about obsolescence of this stock.

Operator

Thank you. Our next question comes from Evren Kopelman from Wells Fargo.

Evren Kopelman - Wells Fargo

I wanted to ask as you are opening more and more, as you have been opening more and more new stores each year. Have you seen any changes to the store maturity model that you have shared with us in the past?

Chuck Rubin

We are opening stronger than we have been before. So, but there is still the maturity curve that we have talked about before, so…

Scott Settersten

And the new store class I would add, the new store class in 2012 is operating delivering that above our expectations. And again I think we may have mentioned this previously, yes the older stores and the new store comps are built in to our guidance. The older stores are turning a bit above those post five year comps that are part of our standard store model.

Evren Kopelman - Wells Fargo

Oh, great, okay. And then for next year thinking about the preopening expenses with higher number of new stores is it fair if we just looked at about per store investment this year and extrapolate or will there be further savings as you're opening more stores on the store investment.

Chuck Rubin

I think I wouldn't anticipate a lot of additional savings per store. The market continues to evolve and you know its an interesting scenario compared to a couple of years ago there were far fewer suppliers, contractors et cetera. So the supply of resources has tightened up a bit. Therefore some of the cost savings that we've gotten before we're not going to lose but I'm not sure that we'll see as much additional savings there but so I think I would model it to be relatively consistent to this year.

Evren Kopelman - Wells Fargo

Okay and then lastly if I can ask on the balance sheet with the growing cash balance any further thoughts on use of cash after all your clearly store opening plans given upcoming tax rate changes any thoughts on special dividends or stock buyback program. Thanks.

Scott Settersten

Hey, Evren. We discuss the cash balance and the best uses of cash with the board on a regular basis. As you know we paid a special dividend back in May of this year. At this point in time we've determined collectively that the best use of cash is to continue to invest in our new store program. That's what generates the best returns on that balance.

Operator

Thank you. Our next question comes from Jason Gere from RBC Capital Markets.

Jason Gere - RBC Capital Markets

Just I guess a quick question what do you estimate is the blended beauty growth category rate in the US, I mean I know your mass, your prestige, your salon but if you had to aggregate that together what type of category growth do you think you're seeing right now, that's the first question.

Chuck Rubin

That we're seeing or the industry is seeing?

Jason Gere - RBC Capital Markets

Not the industry but it will lead into the second question but I mean yeah, where do you estimate the industry growth to be right now?

Chuck Rubin

Personally. I'll give you an answer but let me give you some disclaimer to it. You know it's a pretty broad industry from everything from prestige to mass to hair care to appliances et cetera. with up so I'll give you that as the backdrop. I think if you put all of that together you are probably seeing low single digit kinds of increases.

Jason Gere - RBC Capital Markets

For including everything together, okay. Seems a little bit modest but okay. I guess the question is as you ramp up the square footage and as you get some of these new stores into year two or year three I mean, thinking about the comp and I respect the conservatism that you have with your long term three to five but when you look at the comp trends right now you know what's to say that it is ever going to go back to that three to five I mean the CRM program similar to what it did for similar to what it did for Sally Beauty was a solid contributor for their same store sales. You got some great new products in the stores. So I guess can you just talk me out of thinking?

Chuck Rubin

Well, I think that when we talk about the three to five, we're trying to highlight that this is a profit generating, cash generating business with three to five comps. That's the first point. Secondly, you know our growth has been and will continue to lead the market. We will continue to gain market share in the beauty industry.

The growth that we've seen, as to be expected, I think as in this quarter and last quarter, we were lower than the previous quarters, to expect double-digit kinds of comps endlessly, it would be probably an unwise conclusion. So the three to five that we have in our long-term financial model is just that. It's a long-term financial model to ensure that we continue to generate the kind of strong shareholder returns that we've been. We work to exceed that. So obviously we have been doing that quite consistently for the past couple of years and we're going to continue to strive to do that as we go forward.

Jason Gere - RBC Capital Markets

Okay, that's a good answer. Then, I guess the other kind of longer-term question is just on the margin target, can you just remind us how you benchmark. You said the mid-teens but with just some of the specialty retailers out there that you guys look at. I know that I think it's been said in the past, maybe not by you that you don't compare yourself to Sephora, but how do you kind of gauge what the real margin potential is in this business?

Chuck Rubin

Well, that's a tough one to answer, no first of all Sephora only carries prestige, fragrance, cosmetics and skin care we are a much broader retailer. There are other large big box operators out there that have terrific businesses and are mature and generate terrific returns, their business is different than ours. I think what we've said before is that getting into the mid teens is what we are working towards now, if you go back a couple of years ago we were in the single-digits and back then I am not sure that anybody would have believed that we have the potential of getting to the mid teens when we get there our challenge will be continue to grow that.

So I wouldn't suggest that's the ceiling on us, I would suggest that's where we are striving for to get there in the next x period of time, but they are I wouldn't compare it to necessarily to other retailers that we directly compete with.

Jason Gere - RBC Capital Markets

Okay, great and then just the last I guess it's my half question, some of the gift for purchases that you're doing this year can you just remind us on who's funding some of that so that the luxury role by actually saw that with the purchase on fragrance can you just put a little color on that is that funded by you or is that can you I am just a little bit curious like how much you have to step into that promotion or is that vendor funded for some degree?

Chuck Rubin

No, Jason, we wouldn't get into that. We run a multi dimensional merchandizing and marketing program and we work closely with our vendors to develop exclusive product to provide import into the product that they're going to offer on a broad range we work with them on promotions, I don't see any great value of getting into the details of any specific program. I will reinforce to your point that the robe has - goes into effect this weekend officially and we would invite everybody on the call to be sure and get to one of our stores are online and enjoy that as a gift with the fragrance purchase.

Jason Gere - RBC Capital Markets

Is that Velvet? [Cherry Qua]

Chuck Rubin

It is not velvet but for you maybe we can arrange.

Jason Gere - RBC Capital Markets

All right, I have to get my wife some fragrance, anyhow thanks a lot guys.

Chuck Rubin

Thank you.

Operator

Thank you. Our next question comes from Jill Caruthers from Johnson Rice.

Chuck Rubin

Hey, Jill.

Jill Caruthers - Johnson Rice

Hi.

Chuck Rubin

Jill, we're not getting you a velvet robe, either so.

Jill Caruthers - Johnson Rice

That's all right, quick question just on the black Friday approaching, you mentioned that black Friday and Cyber Monday were they be highest record that you've posted and any different approach that you did with doorbusters or type promotions that you'd want to call out year-over-year?

Chuck Rubin

Couple of things one is the merchants did great job of putting an offering together that was profitable had a lot of exclusivity to it and it was really well targeted to our guest and then the stores did a terrific job of servicing. So we also, this year we did open a lot of our stores earlier than we did the year before to go along with what was happening in the center with other retailers that we cohabitate with. So when you put it all together the offering the marketing was quite effective and the experience in the store, it lead to a really good Thanksgiving weekend.

Jill Caruthers - Johnson Rice

Okay, and then question on the [Linkhome] and Clinique boutiques, I know it's very early, just wondering how are you informing the customer as those new boutiques just got in the store given its not store given it's not store wide so you can't really, I don't think you can run it in a print circular or what have you, so just kind of wondering how you're informing the customer at this point in time.

Chuck Rubin

A number of ways just touch on a couple clearly you can go out to our website and find it on a store locator. We're using digital communications and we are putting them into versioned additions of our print marketing. So and we've done other direct marketing that has been exclusive to Clinique around the stores that have carried it so it has been you know pretty multi dimensional in terms of how we're getting the word out.

Jill Caruthers - Johnson Rice

Okay, and do you feel at this point that you're gaining some new customers from that or is it just too early?

Chuck Rubin

We have, we believe that we are and we believe that we'll continue, yes.

Jill Caruthers - Johnson Rice

Okay. Thanks so much.

Operator

Thank you. At this time we have no further questions. I would like to turn the call back over to our speakers for any closing comments.

Chuck Rubin

Well, let me just thank everyone for your interest in Ulta and joining us today and wish everybody a happy holiday season and we will look forward to speaking with you soon and hopefully seeing you when our stores are online even sooner. Thanks so much.

Operator

Thank you. This does conclude today's teleconference. You may disconnect your lines at this time. Thank you for your participation.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: Ulta Salon, Cosmetics & Fragrance's CEO Discusses Q3 2012 Results - Earnings Call Transcript

Check out Seeking Alpha’s new Earnings Center »

This Transcript
All Transcripts