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Executives

Laurel Lefebvre – Vice President, Investor Relations

Chuck Rubin – President and Chief Executive Officer

Gregg R. Bodnar – Chief Financial Officer

Analysts

Neely Tamminga – Piper Jaffray, Inc.

Daniel Hofkin – William Blair & Co. LLC

Matthew Fassler – Goldman Sachs & Co.

Brian Tunick –JPMorgan Securities LLC

Erika Maschmeyer – Robert W. Baird & Co., Inc.

Joseph Altobello – Oppenheimer & Co.

Jill Caruthers – Johnson Rice & Company LLC

Evren Kopelman – Wells Fargo Advisors LLC

Jason Gere – RBC Capital Markets

Ulta Salon, Cosmetics & Fragrance, Inc. (ULTA) F2Q 2012 Earnings Call September 6, 2012 5:00 PM ET

Operator

Greetings and welcome to the Ulta Salon, Cosmetics & Fragrance, Inc. Fiscal Second 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, Vice President, Investor Relations. Thank you. You may now begin.

Laurel Lefebvre

Thank you. Good afternoon and thank you for joining us for Ulta’s second quarter 2012 conference call. Hosting our call are Chuck Rubin, President and Chief Executive Officer and Gregg Bodnar, Chief Financial Officer. Also joining us today is Bruce Hartman, who becomes our CFO tomorrow.

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 that we delivered better than expected results for the second quarter. To recap the numbers, strong momentum continued on the top line with 22% sales growth. Same-store sales increased 9.3% on top of double digit comps in Q2 in both 2011 and in 2010. We expanded gross margin and leveraged SG&A, resulting in 180 basis points of operating margin improvement and earnings grew 42% to $0.54 per share.

We delivered these numbers by continuing to focus on the five components of our multiyear growth strategy, accelerating store growth, introducing new products, services, and brands, enhancing our loyalty program, broadening our marketing reach, and increasing our digital focus with Ulta.com.

As done in the past number of quarters successful execution of these strategies in Q2 allowed us to once again gain market share in the beauty industry across all of our categories. I’d like to update you in each of the five elements of the strategy in terms of what we accomplished in the second quarter and what’s on deck for Q3.

First, store growth, our plans to add approximately 100 new stores in gross square footage 22% this year are on track with 22 new stores opened in the second quarter. We ended Q2 with 489 stores in 45 states.

Our new stores continue to perform very well and we’ve been very happy with our new store productivity. New stores are contributing sales above plan partly because we are seeing good efficiencies in our construction process allowing stores to open slightly earlier than anticipated, but mostly because sales out of the gate are better than planned and better than previous years’ new stores.

While we’ve ramped up new store openings this year, we also completed nine remodels during the second quarter and are very pleased with their performance as well. We also completed work in about 400 stores to update and reflow our planograms in the prestige cosmetics and skincare areas of the store to improve the shopping experience and make room for the expansion of high-performing existing prestige brands along with the future addition of new prestige brands.

Looking ahead, Q3 is a very active quarter on the real estate front with 52 new store openings, 11 remodels and all the work that we’re doing to set the stores for the prestige boutique expansions, which I will detail in a moment. This compares to 28 new stores in the third quarter of 2011.

As we shared with you last quarter, our updated analysis for the U.S. store build out potential for our current format increased from 1,000 to 1,200 stores and we’re very pleased with our pipeline of high quality sites for next year’s real estate program.

Our second key growth strategy is adding new products, services and brands. As I’ve discussed before, newness is a key driver to our sales growth and we have done a terrific job capitalizing on trends in introducing new brands and new product lines within existing brands into our portfolio.

Let me give you a quick sense. In the second quarter, we saw strong trends in anti-aging, mascara, lipstick and foundations. BB Creams remained very strong with a steady stream of new introductions from multiple lenders from mass to prestige. We featured multiple branded BB Creams on one of our trend in CAPS, which bolstered customer interest in trial in this new product.

Mascara was a big trend with strong sales from bestsellers like They’re real! from Benefit Cosmetics. We also saw continued growth in the do-it-yourself at-home tools category. Clarisonic, Tanda and Remington and GO SMiLE have all introduced innovative items in the high-tech beauty and grooming arena, which address skincare, acne treatment, hair removal and teeth whitening. Men’s skincare and grooming continue to be a big trend in the beauty industry and our men’s shop that we launched a year ago performed very well.

In the personal client area, we saw growth in specialty tools like Deep Wavers, which support the current trend of curly hair. In the nail category trends in nail art, glitter, and magnetic polishers helped fill the void in the wake of last year’s shatter nail boom.

In the second quarter, we launched the Juice Beauty brand, which consists of organic skincare and makeup. Our guests have reacted very well to this new brand, given its organic nature in clinically validated results.

Looking ahead to what’s coming in the third quarter, the newness pipeline is strong. Building on the many fragrance introduction so far this year, we are planning for even more with a significant wave of new fragrances being introduced in the third quarter.

Q3 2012 will be an exciting quarter for the sheer number of new fragrances in the amount of buzz around many of the names, such as Lady Gaga Fame. We’re pleased with our trends in our fragrance business and volume of important launches is encouraging for the holiday season.

In foundation, Tarte, Pure, and Stila are all launching new foundations this fall. Also Urban Decay, which has been so successful with its naked and smoked eye shadow palettes made its first foray into the foundation category with the naked skin launch in August. And finally, bareMinerals READY foundation just launched and is expected to be the biggest foundation launch of the year.

In terms of new brands for Q3, skincare lines from Beauche and La Roche-Posay rolled out to all stores in August and we are expanding our exclusive CK One cosmetic line from 50 stores launched in the first quarter to 178 stores in Q3.

We also continue to make progress with our iconic prestige brands. As we announced last quarter, we are in the process of adding Lancome to 50 additional stores this fall, bringing the total number of stores offering Lancome to 79. The implementation is going well and we’re on schedule to have these new boutiques complete before the holiday season.

We’re also very pleased to announce that we will be adding Clinique boutiques to an additional 35 stores. This, along with our existing 13 Clinique stores will bring our total Clinique presentation to 48 stores. 30 of these new boutiques will be open by the holiday season this year and the remaining five will open in Q1 next year.

We are very pleased with our current Lancome and Clinique business and expect these boutiques to be outstanding additions for the long-term. We know our guests will be very excited to experience these terrific brands that complement our already strong prestige skincare and cosmetic offering. Now, as with any new initiative, these boutiques will take some time to ramp and we do not expect them to have a significant impact on our results in the back half of this year.

Now, I’d like to spend a moment on our services business. Salon had a very strong quarter in the second quarter. We drove solid improvement in guest retention and saw good results from several compelling promotions, which combined our authority of both product and service to deliver a true beauty solution to our guests. Events included our Love Your Hair promotion that had in-store events and great values for our guests and our Frizz-Free Friday events.

Turning to Q3, our Salon team has developed and launched a fall winter trend collection featuring the newest looks and hairstyles and color. The collection highlights the expertise of our Salon teams. Ulta is the only national salon to offer this type of program, which supported with extensive stylist training and in-store events.

Next, let me update you on our third growth strategy, which is enhancing our loyalty program. We recently reached the milestone of 10 million active loyalty customers. This program continues to fuel our very successful direct marketing efforts.

At the end of the first quarter, we converted our central region to our points-based program, so we currently have about a half of our loyalty customers on our legacy certificate-based program and about half on our points-based program. While it’s only been a few months since the central region’s conversion into the points-based program initial customer feedback is good.

To enhance our loyalty program for our guests, we introduced an online reward center to help customers understand and self-manage the benefits of our loyalty program. We also improved our POS capabilities to enhance our cashiers’ ability to interact in a more personalized basis with our guests and provide a better shopping experience. We are confident that our loyalty program will drive a higher share of wallet over the long-term.

In the third quarter, we intend to continue to leverage the benefits of our loyalty program with member-only promotions and to our members advanced notice of new trends and new events. We also will begin the implementation of a new CRM platform, which will expand our capabilities in harvesting the rich behavioral data that our 10 million member file contains.

As I have stated before, this is a long-term very attractive opportunity for Ulta to personalize our communications and offers to our guests based on their individual shopping tendencies.

Moving on to our fourth growth strategy, which is broadening our marketing reach. To drive traffic and to support our positioning as a beauty and trend authority, we are focusing on two areas: the first, executing compelling events in our stores and online; and secondly, expanding our use of various forms of media.

Q2 highlights on the events side included our Mother’s and Father’s Day purchase offers driven by the abundance of new fragrances. Our two week Love Your Hair event in June was very successful as was our Frizz-Free Friday that I mention, a promotion that occurred in July in partnership with the brand Living Proof to offer guests a free blowout and the opportunity to learn more about smoothing products and styling tools.

We continue to believe that Ulta’s product, service and salon offering uniquely positions us as a true authority for our guests whether they are looking for a beauty solution, want to learn something new or just want to enjoy themselves for the afternoon. Our in-store and online events reinforce this Ulta strength and we’ve expanded our team that works with our stores and our vendor partners to ensure that these events continue to be exciting for our guests and effective for Ulta.

On the media side, during Q2, we continue to expand our efforts to communicate with guests via Facebook and other social media. We are improving and increasing our email communications and creating more effective direct mail pieces that are driving higher trial and awareness overall.

Previewing our marketing highlights for the third quarter, in August, we partnered with Allure Magazine to create a 13th issue exclusively for Ulta. This insider’s guide to beauty and style was available in-store and mailed to Allure subscribers with a mini version available on Facebook. Tied-in with this guide, we launched in-store and digitally a Fall Beauty Preview in August featuring five beauty trends presented by Allure, Glamour, Lucky, SELF and Teen Vogue with how-to videos, a curated product guide and how to get the look at Ulta and tie-ins to sweepstakes, social media and a red carpet trend event in LA.

Also in August with the marketing activities leading up to the highly anticipated launch of Lady Gaga Fame on August 22. Fame is the first ever black Eau de Parfum, which turns clear once airborne. Posts on Facebook, Twitter, Instagram and Pinterest were part of the strategy to make Fame one of our most successful launches in fragrance becoming our number one seller when it debut.

Now, at September, is our 21 Days of Beauty celebration focused on prestige brands. This event, bigger and better than ever, features daily events and promotions from the hottest brands in our trademarked Beauty Steals.

In October, our focus turns to breast cancer awareness with our trademarked Donate with a Kiss event. Everyone at Ulta really supports this event as it benefits the Breast Cancer Research Foundation or the BCRF, our premier charitable partnership. The campaign includes a month long sale of logo products specifically intended to raise funds for BSRF.

We also will repeat our hugely successful Salon Cut-A-Thon on October 14 where our salon stylists give free haircuts with a donation to the BCRF. Our campaigns these past couple of years have been thoroughly embraced by our guests and our associates, and I’m proud to say these efforts have resulted in numerous scientific researches and projects being funded to find a cure for this disease.

On the media side, in Q3, we will see an increase in activity and content in social media associated with the Fashion Week, our Fall Beauty Preview and our 21 Days of Beauty events. We will also enable the products on Ulta.com to be tagged to Pinterest for the first time. Finally, we will continue to improve the effectiveness of our print marketing through better targeting of offers and guests.

The fifth growth strategy is our digital focus, particularly Ulta.com. In Q2, we maintained strong growth in traffic and sales compared to last year, but again, we know there is far more to be captured. In Q3, we will complete numerous back-end enhancements to improve the guest shopping experience, make our site even faster and expand our delivery capability for the holiday season.

On the sales and marketing side, our trademarked limited time Beauty Steals will continue. Our product offering and editorial content will expand and we will increase our digital outreach. We are also planning to deploy our first Apple and Android apps in October.

So, as you can see, we have made great progress in our five key growth initiatives with even more excitement coming to each of them. We believe our comprehensive strategy and strong execution will fuel additional market share gains for the remainder of 2012, and in the years to come, regardless of the economic environment that lies ahead. Obviously, we are aware of the uncertain climate and the pressures on the consumer today that as you’ve seen our performance in Q2 was strong and we remain very confident in our business model, guest offering, and guest experience.

Now, let me turn it over to Gregg for a detailed discussion on our financials.

Gregg R. Bodnar

Thanks, Chuck. Ulta’s second quarter results were once again driven by strong sales growth and margin improvement. Total sales grew 22.1% with strengths across all categories. Same-store sales increased 9.3%, on top of an 11.3% comp in Q2 of last year. Traffic remained the dominant driver of the comp, representing about 6 points of the 9.3% comp. Our average ticket grew about 3% compared to last year. We are very pleased to continue to deliver strong traffic growth, particularly as we were comping over an 11% traffic increase in Q2 of last year.

Gross profit dollars increased 24.8% to $168 million, with gross profit margin up 80 basis points to 34.8%. This improvement was driven by 70 basis points of leverage in fixed store costs on our strong comp and an increase of 30 basis points in merchandise margin, as we continue to benefit from our merchandising and marketing strategies. These gains as planned were partially offset by about 30 basis points of supply chain investment with the start-up of our new Northeast distribution center.

SG&A expenses increased 16.8% to $106 million down 100 basis points as a rate of sales to 22%. We leveraged our operating expenses on a strong comp and consistent execution of our margin expansion strategies.

Preopening expense was up slightly at $4.1 million compared to $3.8 million last year, as we opened 22 new stores, remodeled nine stores and relocated one store in the second quarter compared to 21 new stores and 15 remodels during the second quarter of 2011. All in, operating margin improved by 180 basis points to 11.9% versus 10.1% in Q2 of last year as we continue to execute well and maintain our disciplined investment and cost management strategies.

Our tax rate was 39% versus 39.5% last year. The modest improvement in the tax rate was due to a decrease in nondeductible compensation expense. Net income increased 46.4% to $35 million or $0.54 per diluted share versus $23.9 million or $0.38 per diluted share in last year’s second quarter.

Now taking a look at the balance sheet, merchandise inventories at the end of the quarter were $316.7 million compared to $258.8 million at the end of the second quarter last year, up 3.9% on a per store basis. As planned this still includes a small amount of additional inventory investment to startup the Northeast Distribution center. The increase in average inventory per store was well below our 9.3% comp store sales increase as we continued our very disciplined approach to inventory management.

The Northeast DC is performing very well and remains on track to deliver planned productivity benefits and drive significant reductions in transportation costs. We expect to start to see the benefits from our improved network in Q4 and we expect the new DC to have a more meaningful benefit to margins in 2013 and beyond.

Capital expenditures for the second quarter were $46.5 million compared to $33.1 million for the same period last year, mostly driven by our accelerated store opening program. Depreciation and amortization for the quarter was $21.6 million.

Now, turning to an outlook for the third quarter; we currently estimate sales in the range of $494 million to $503 million versus $413.1 million last year. We anticipate the comp store sales were increased in the range of 6% to 8% on top of the 9.6% comp in the third quarter of last year.

We expect earnings per share will be in the range of $0.54 to $0.56, including a $0.04 negative impact primarily due to the acceleration of our new store program, as well as a modest impact from the Northeast DC and the Lancome and Clinique boutiques. This compares to EPS of $0.42 in Q3 of 2011.

Gross profit margin is expected to increase approximately 60 basis points at the midpoint of the range, driven by improvement in merchandise margin and leverage of fixed store expenses.

As expected, this increase is slightly less than what we achieved in Q2, as we will open 52 new stores during the quarter versus 28 last year. As previously discussed, this will create some temporary pressure on our ability to achieve meaningful leverage on fixed store expenses. Again, this is consistent with our store model and past performance.

SG&A rate is expected to decrease around 70 basis points at the mid-point of the range versus last year’s 24.5%.

Preopening expenses are expected to be approximately $7 million, up $3 million compared to last year’s third quarter, driven by the acceleration of our new store program. The increase in preopening expense will negatively impact operating margin by about 40 basis points in the quarter.

Including the impact of these long-term investments, operating margin is expected to increase approximately 90 basis points at the mid-point of the range. We expect our tax rate to remain at approximately 39%, and we anticipate the fully diluted share count to be about $64.6 million.

Looking ahead to the full year 2012, given our performance in the first half of the year, we expect to deliver strong results well ahead of our long-term financial goals. We expect to achieve comp store sales growth of approximately 8%, about 300 basis points above the high-end of our long-term goal of 3% to 5%.

Recall that fiscal 2012 is a 53-week year for us, with the extra week included in the fourth quarter. We expect the 53rd week to represent approximately $35 million in sales. As a reminder, Q4 same-store sales are calculated based on comparable 14-week period in the prior year.

We expect to deliver earnings per share for the full year in the range of $2.58 to $2.60, representing growth well above our long-term goals. This includes the negative impact of our accelerated new store program, the new DC in the addition of new prestige brand boutiques.

The full year negative impact of these factors is estimated to be approximately $0.07 to $0.08 per share of additional operating expense. Partially offsetting these impacts is the benefit of the 53rd week operating results, which we expect to be approximately $0.03 per share.

We are on track to open 100 new stores and to complete 21 remodels this year. Total preopening expense for this year is expected to be about $15.5 million compared to $10 million in fiscal 2011, negatively impacting earnings per share this year by about $0.05 per share.

We are very pleased with the performance of our new stores both this year and last year and continue to drive improving returns from our new store model. As stores continue to open up above plan, this validates the attractiveness of accelerating our store growth and reinforces the attractive multiyear returns for shareholders that our new store investments provide.

Capital expenditures in 2012 are expected to be approximately $180 million, which is about $51 million higher than our capital expenditure program in 2011. This increase is driven by the acceleration of our store expansion program, store remodels and about $10 million of incremental capital investment for the expansion of prestige brand boutiques.

Depreciation and amortization are expected to be approximately $90 million. We expect to generate strong free cash flow again this year and will continue to evaluate the best use of any excess cash position. We are encouraged as we look to the back half of this year and the years ahead as we think about how much growth runway lies ahead driven by our strategies and financial disciplines.

Multiple drivers are in place for continued momentum in our business from the maturation cycle of our new stores to the growing benefits of our supply chain investments from the pipeline of new products, brands, and services to the investment in our CRM and digital capabilities. We are very well positioned to continue to deliver strong sales and earnings growth.

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

Chuck Rubin

Thanks Gregg. Before we begin the Q&A, a comment about our CFO transition. Today is a very bittersweet one as it is Gregg’s last as CFO. I’d like to express my deep gratitude to Gregg for his tremendous contributions to Ulta over the past six years. Gregg’s been a great partner to me and has developed a very strong team here at Ulta, from finance to supply chain to the IT organization, which have all been instrumental in the execution of our strategy.

This team’s hallmark is its analytical approach to growing and improving the business. Gregg and his team [Audio Dip] that Gregg is stepping down I am very pleased to welcome Bruce Hartman to the Ulta team. As you saw in our announcement a [Audio Dip] that Bruce will take the helm as Chief Financial Officer as of tomorrow.

Bruce has an excellent track record of driving growth and profit improvement throughout his career and has valuable and relevant experience as a CFO for a specialty retailer with a national and international footprint as well as real estate and consumer product companies.

The entire management team met Bruce during the interview process and while we will miss Gregg greatly, we know Bruce will build upon our success to-date and help Ulta achieve even greater things. We’re also very pleased that Gregg will remain with the company through the transition and will partner with Bruce to ensure a smooth handoff.

Gregg, so many thanks to you and Bruce welcome to the team. Bruce?

Bruce L. Hartman

Thanks, Chuck and Gregg. I’m delighted to be part of this team and part of this vibrant industry. I spent a lot of time with the entire leadership team throughout this process and conducted a lot of research on the company and the industry. I can’t think of another retailer that has as much opportunity ahead as Ulta does. I’m looking forward to getting to know all of you in the coming weeks and months and working with you in the years ahead.

Gregg?

Gregg R. Bodnar

Welcome, Bruce, and thank you, Chuck. I will certainly miss my partnership with Chuck and working with the entire leadership team. I step down as CFO extremely confident in the strength of the business model and proud to know that business is in the capable hands of a great team even stronger now with the addition of Bruce.

Bruce and I will work closely together in the coming weeks to ensure a seamless transition. I would add that it has been a pleasure working with all of you and I look forward to watching with great pride and satisfaction as Ulta’s incredible growth and success story continues to unfold in the coming years.

Chuck?

Chuck Rubin

Thanks, Gregg. Finally, I’d like to finish by thanking our 15,000 passionate associates for making Ulta the place where our guests are increasingly choosing to shop. Our team’s hard work and commitment to great service of the foundation for our steady market share gains and our strong financial performance.

With that, let me turn the call back to the operator to open up for questions. Operator?

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator instructions) Our first question comes from the line of Neely Tamminga from Piper Jaffray.

Neely Tamminga – Piper Jaffray, Inc.

Hi, good afternoon. Congratulations for you guys on another fantastic performance and I want to welcome Bruce and really truly thank Gregg for all of his partnership and contribution, he’s been absolute (inaudible). So my question here is one at a very high level on Clinique and then I do want to ask a little bit more about Ulta.com, if I may.

First on Clinique, you guys have had the privilege of testing this for a little while within your organization and you said you have 13 stores, just wondering as you look forward to 30, 35 boutiques, will there be some meaningful changes to the size, scope and skew, density of where you’ve been on the test and where you’re headed, some contextualization around that would be really helpful?

And then on Ulta.com, I was just wondering, Chuck, if you could talk a little bit about maybe the dynamics of Dotcom business and beauty, how big can this be if you’re willing to talk about that or just give us some sense of how big it is now and where you think you can guys can take that particular growth initiative? That would be helpful. Thank you.

Chuck Rubin

Sure, Neely and thanks for your comments. I’ll talk about Clinique first. We’re pleased with our business that we’ve seen with them. We’re pleased with the addition of these stores. In terms of the size and the scope, I don’t want to go into too much detail on that because we are still in the process of getting these things put into our stores, but I would expect that they’re going to look and feel similar to what we’ve done thus far. We highlight boutiques through the store as a whole, we’ve got other brands that are highlighted as well and we think that our guests really appreciates the ability to find some of those key brands in easy-to-shop kind of environment. So, expect it to look similar to what we’ve done thus far.

As far as Ulta.com, no, we’re not going to go into a lot more detail in terms of its current size, what we have said is it’s small, it’s too small. The way we think about this is along the digital front, and I’ve talked about this in a number of forms before. Digital has two parts of its – two responsibilities, if you will. One is clearly to conduct more commerce and that’s where Ulta.com can deliver through e-commerce.

But the second that digital has to do is support the brand as a whole and whether that’s through allowing commerce to be conducted or whether that’s communicating something about our products or our services or our locations of stores, the guests today as you know, wants to interact with the retailer in the way that she wants to interact, whether it’s going into a store or going online. So, we need to have our digital assets continue to expand and that will manifest itself in significantly higher Ulta.com sales, but it’ll continue to support the brick-and-mortar as well.

The advantage that we have in our business, as you know is this is an experiential business. We have that unique advantage of product and services and service in an environment that really is unique in the retail marketplace. So, we think brick-and-mortar, we’re big believers in brick-and-mortar unlike some other types of retail, but we know digital is a key component that will only grow in importance for us to reinforce Ulta as a whole.

Neely Tamminga – Piper Jaffray, Inc.

Thank you. Best of luck.

Operator

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

Daniel Hofkin – William Blair & Co. LLC

Good afternoon. I will echo Neely’s comments across-the-board, just a great quarter and Gregg terrific to work with you all this time and Bruce looking forward to working with you going forward. Just regarding a little follow-up on Clinique, if you could maybe, if you can at this point, share with us a little bit about kind of the genesis of how you kind of got over to the next level with them, if you can describe that at all and any learnings in the first year from Lancome that you think might be brought to bear and then I have a follow-up question?

Chuck Rubin

Yeah, Dan, it’s Chuck, let me get to the follow-up pretty quickly. Because we are not going to get into details about each step of our relationship with Clinique. What I can tell you is that it’s the same thing that I have said before. Our relationship with Clinique as our relationship with all of our brands and we carry close to 500 brands throughout the store, is really good. We’re fast-growing retailer. We have a great relationship with our guests, our brands know that. They thing that we are executing well, they support our strategy. And that’s true of Clinique, as well as Lancome, as well as every other brand that we do business with.

So we are very pleased to be adding Clinique in these additional stores. We have gone out and specified the number of stores, just so you all don’t get carried away to start to see these things showing up in stores; as I said in my prepared comments, we think that Clinique and Lancome and Bare Escentuals and Benefit cosmetics and Urban Decay and Tarte, they blend together to really create a very powerful offering in the market and when you throw in our services and then our service in the store as a whole that is the core of what our business model is all about and that’s why we feel so bullish about the long-term growth potential for this company. So, really happy to be adding the stores with Clinique, but it’s just one part of the equation.

Daniel Hofkin – William Blair & Co. LLC

Okay, great. And then I guess my follow-up on the gross margin in the quarter, were there any aspects that were different then you thought going in obviously the sales coming in higher than you expected would tend to benefit the margin. Were there any things within the components that you described that were different one way or other?

Gregg R. Bodnar

No nothing significant Dan. I mean we we’re very pleased to be able to add 80 basis points of gross profit improvement, 180 basis points of operating margin expansion particularly when you think about this time last year what we were stepping over. We added over 300 basis points of operating margin expansion in the second quarter of last year, about half of that coming from gross profit and half of that coming from SG&A. Now, overall very pleased with the performance.

Daniel Hofkin – William Blair & Co. LLC

All right. Well, terrific job again Gregg, not a bad way to signoff.

Gregg R. Bodnar

Thanks, Dan.

Chuck Rubin

Thanks, Dan.

Operator

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

Matthew Fassler – Goldman Sachs & Co.

Thanks a lot. Good afternoon and congratulations as well. My question is related to prestige. You’re now going to have, it sounds like close to the same number of Clinique and Lancome stores up and running, I guess some more Lancome still, but are you finding that these programs are being launched in identical stores unless that you have real concentration of prestige in a number of stores and markets, or they spread throughout the chain and whether it would suggest kind of broader acceptance by the consumer?

Chuck Rubin

Matt, welcome to the group. The stores for Lancome and Clinique, we haven’t released which stores those are because we’re still in the process of putting them in, and we just from a competitive standpoint think that we should hold off on that. There is, Lancome in the first 29 doors rolled out into those doors on a market based approach. And I think for the most part with the additional stores that we’re adding in Clinique and Lancome you’ll see that occur as well. It provides some additional efficiencies from an advertising standpoint and a staffing standpoint.

So, it’s not completely conglobated into a handful of market, but for the most part it is. And again, I would reinforce that as really happy as we are to be adding these stores with both Lancome and Clinique, it is one part of our overall prestige offering and our growth over these past, especially our accelerated growth over these past couple of years has been fuel by the breath of our existing prestige offering whether that’s in cosmetics or and in skincare.

Matthew Fassler – Goldman Sachs & Co.

And if I can please follow-up, the investments that you’re making and the build-out that you’ve made at this point, the build-out of prestige boutiques, the 400 or so stores, do those stores now have the capacity to absorb brands like this of this magnitude with no incremental or little incremental investment?

Chuck Rubin

Well, the 400 stores that we did some work in were not heavy capital-intensive projects. We added fix during of our existing fix during tied, we expanded some space, it provided more flexibility to us. There is – we are committed still to this, to not being bigger than our 10,000 square foot box. We do have great flexibility in that store format for adding brands. Clearly, depending upon the significance of the boutique that we build in the future that could cost more money versus other efforts that we put forth in expanding some secondary brands that cost less.

So, there’s no real one answer that fits all scenarios. But, the important thing is, I think from our view point very important, is our store is very flexible and to be adding these boutiques doesn’t require heavy capital investments to reconfigure the store, as you might find in other store formats. So, while the boutique may cost money, the store doesn’t need a pull we do.

Matthew Fassler – Goldman Sachs & Co.

Thank you so much.

Chuck Rubin

Thanks, Matt.

Operator

Thank you. Our next question comes from Brian Tunick from JPMorgan.

Brian Tunick –JPMorgan Securities LLC

Thanks. So just to repeat what I said last quarter, we’re going to miss you Gregg and also welcome to board, Bruce.

Gregg R. Bodnar

Thanks, Brian.

Brian Tunick –JPMorgan Securities LLC

So, I guess, I know you guys don’t comment on any intra-quarter trends, but there seem to be some worries out there regarding the category in May and especially June. So, just wondering if at all your quarter was choppy or if there was just market share up for grabs and if you saw some competitors doing anything from a promotional standpoint? That’s the first question.

The second one, I guess is on your stores. Just trying to understand, maybe how your more mature stores or more mature class of stores are comping versus the chain average and do you see upside to that 20% four-wall margin I think you’ve said before that your more matures peak at? Then, finally, also should we be thinking about next year at an absolute number of stores like 100 again next year or more growth rate somewhere 18%, 20%?

Chuck Rubin

Brian, you’re getting the money’s worth with three questions now. I’ll take may be the first and the third, and I’ll let Gregg talk to the second one.

Brian Tunick –JPMorgan Securities LLC

Okay.

Chuck Rubin

On the first part we are not going to comment on the intra-quarter trends. What I’ll tell you as we’ve said before, you know one of the beautiful aspects of our business model is we have mass products, we have prestige products, we have hair care, all different price points, all different categories of product, all different brands. So we have a lot of levers that we can pull. And clearly, in this past quarter, we pulled lots of those levers as we do every quarter. So we’re very pleased with how we did, we know we gained real significant market share across the board.

As far as competitors, yeah, I mean there are a lot of competitors out there; we are not a vertical retailer, we carry things that other people carry. So we compete with a lot of different players and some of them are doing quite interesting things. But whether it’s mass to prestige or specialty or online, there’s a lot of players out there that clearly are trying to gain in this business, but we have defined a very good strategy. We’ve executed it incredibly well throughout the organization and that’s what’s allowed us to stay ahead of other players.

As far as your third question on new stores, what we’ve said long-term is that our goal is to grow our square footage at 15% to 20%. This year we will end up growing faster than that because of the opportunities that were available. And as you’ve seen, we’ve said repeatedly that we are after quality above quantity and clearly with our new store performance you can see that we’ve been able to get both.

I would expect next year that long-term of 15% to 20% will be along those lines and unless we find some opportunities that are very attractive and I do expect that we’ll give you more color on this on our next earnings call. But we are very, very pleased with both the quality and quantity that we are seeing for 2013’s new stores.

Gregg R. Bodnar

And Brian just the older stores I kind of characterize those as six, seven year old stores that are kind of off to new store model that we ran up to five years. We’re very pleased with the performance of those. They are trending with the 9% to 10% comp that we’ve been running. They are certainly trending above that model that we have out there.

So, very pleased with that performance and shouldn’t be any surprise because you think about a lot of the strategies that we’re talking about that are driving the business. It not only benefit the performance of a new store, but they have the greatest benefit in the performance to some of those older stores because we’re growing the loyalty club customer base. We’re adding assortment, newness, we’re using the loyalty program, we’re developing a CRM strategy, all of those things benefit those stores, quite frankly there are some that older vintage because they have the most mature customer club base and that’s the heart or part of our strategy certainly from a communication standpoint.

As far as long-term four-wall in our operating margin, we believe that there is longer term runway in operating margin expansion as a company. We said in the next couple years that we’ll get to that mid-teen operating margin. We’re obviously making good progress moving towards that this year. I think continuing to demonstrate credibility. We’re less than half way build out.

As we continue to drive the productivity of those old boxes, the older boxes five, six, seven year old stores, I expect there’s more runway there, and I think that’s also evidenced by the fact that you see as we’re accelerating our square footage, we are bringing all of these younger stores into the store base that our overall company sales productivity is continuing to move up.

Brian Tunick –JPMorgan Securities LLC

Fantastic. Thanks very much and guys good luck for the back half.

Gregg R. Bodnar

Thanks, Brian.

Chuck Rubin

Thanks, Brian.

Operator

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

Erika Maschmeyer – Robert W. Baird & Co., Inc.

Thanks. And I have to occlude the sentiments as well, Gregg, you will truly be missed and I look forward to working with your Bruce. On the loyalty program you are not talking about 10 million club members, fairly recently you talked about 9 million, it seems like the growth there accelerated, is the new program you think the biggest factor there or some of what you’re doing in the marketing side or improved POS, I guess any sense there and kind of the rate you expect to see that accelerate, expand going forward?

And then, could you talk a little bit about the benefits you’re seeing from the new loyalty program, are we really – are we seeing the benefits from that currently or I know you mentioned as a longer term driver, do you expect it to be more of a back half in 2013 and after type of benefit? Then just a quick follow-up on ticket, the contribution from ticket accelerated a little bit from last quarter and I guess anything to call out there, the size, mix? Thanks.

Chuck Rubin

Okay, Erika. We’ll take each one of those. So everyone is getting three questions I guess today.

Erika Maschmeyer – Robert W. Baird & Co., Inc.

Sorry. The first two are really sort of together.

Chuck Rubin

Okay. I think you were on maternity leave last call, so you get a bonus question.

Erika Maschmeyer – Robert W. Baird & Co., Inc.

Good. Yeah.

Gregg R. Bodnar

Which you already have in by the way.

Chuck Rubin

Yeah. By the way I hope the baby is doing well. So, loyalty, our membership is accelerating because our business is accelerating, we’re seeing more people come through, I don’t think necessarily connected to the loyalty conversion in the central part of the country for us, but we’re seeing more footsteps as we continue to have better comp business and we continue to grow our new stores that is more footsteps coming through.

We are very pleased with that, it will continue to grow. We haven’t talked about that goal for next year, but clearly, we have high expectations of what this number will get to. I would remind everybody because every retailer puts a different parameter on it. Our 10 million members are 12 month active customers, so they’ve shopped with the past 12 months, which is a very rich file.

The benefits of the loyalty program are very attractive. The conversion, we’re encouraged by customer feedback, but that’s going to – the converted part of the country is going to take a little bit of time to materialize in terms of customer shopping behavior. But the longer term component for the loyalty program throughout the company, which is ultimately to get to one program, which will make it more efficient for us to market, but the advantage for the guest is very real. They have advance notice of our events, they have promotions – advance notice of the promotions, there really is an incentive for her to continue to shop with us, that’s the incentive for her.

For us, we capture all of our shopping data, what she is buying, when she is buying, where she is buying it and for us to be able to mine that data, which as I’ve talked about before is not the easiest thing in the world to do, but it is a very rich opportunity and we’re making very good progress on it, but it’s a long-term opportunity for us. That’ the really significant benefit for us and we’ve seen benefits on our mining of the data thus far, we’ll continue to see it accelerate in 2013 and then it’ll continue on for years to come. That’s one of the reasons that we went down this path on the on the CRM solution that we’re starting the implementation on in the third quarter.

Gregg R. Bodnar

And on the ticket front Erika, it was driven by the average selling price and units per transaction, a little bit more bias towards average selling price. As I said in the prepared remarks, we were stepping over a virtually non-existent growth in average ticket last year versus the double-digit growth that we saw in traffic. So, it’s our strategies continuing to work little bit easier comparison on the ticket growth side, little tougher comparison on the traffic side, yet, still really, really strong growth on the traffic side this quarter.

Erika Maschmeyer – Robert W. Baird & Co., Inc.

That makes sense. Thanks so much.

Chuck Rubin

Thanks, Erika.

Operator

Thank you. Our next question comes from Joe Altobello from Oppenheimer.

Joseph Altobello – Oppenheimer & Co.

Hi, guys, good afternoon. Just to stay on that ticket question, just so I understand, it’s not as if consumers are moving from one higher-priced point category to another, it’s that they are moving up in terms of price points within categories, is that fair to say?

Chuck Rubin

Our strategy has continued to be as we talk about this is driving prestige, color, skin, certainly all the categories of business but those are our primary focus. The average selling price is a little bit higher. There are multiple dynamics in this business as we drive customers in to the store, and sometimes it will benefit average selling price a little bit and depending on some of the marketing and merchandising promotions during that quarter, it could also benefit units Joe. So it’s a function of all the strategies so we are driving the business. It’s not a sea shift in the way the customer is shopping?

Joseph Altobello – Oppenheimer & Co.

Okay. Just on that point again, it sounds like you guys have not seen any major change in the way your consumers are shopping over the last three to six months or so?

Chuck Rubin

No. We are continuing to drive very healthy growth in traffic into our stores, very health overall comp performance, the new stores are performing extraordinarily well, very pleased on both fronts.

Joseph Altobello – Oppenheimer & Co.

Okay. And just lastly in terms of the strategy you mentioned Gregg, I mean, when you guys first went public one of the more attractive aspects of the story was the whole master class sort of offering, master prestige across the board. It sounds like over the last six to 12 months or so maybe before that that the strategy has shifted or started to shift a little bit more towards prestige and I imagine part of that is due to a response on your part to the prestige consumer being a little more, a little bit stronger than the mass consumer. Is that a fair assessment and is that where the strategy is going little bit more up market?

Chuck Rubin

I don’t think I’d put it that way, Joe. The foundation of our strategy is to carry mass through prestige along with professional products. The mix of that has shifted more towards prestige over time, but we’re very proud of our mass business. It’s a very healthy part of our business. As we’ve talked about before, most of our mass business tends to be at the upper end of the mass range, so it’s not the very low entry point that many other retailers play out.

So we tend to spend more time talking about the prestige part of our business, but that’s to the investment community. Internally, we spend a lot of time; we do a lot of work on the mass side too. And the long term part of our business is very much grounded and continuing to offer a mass, a prestige, a salon service and a salon product component to our business that is the unique secret sauce of what Ulta is that distinguishes us along with our service experience that’s what distinguishes us in the market and there is no plan to shift away from that.

Gregg R. Bodnar

Just remember, Joe, we know the way she shops. What Chuck described is exactly the way the consumer shop. She shops across price points. She shops across categories high to low.

Chuck Rubin

And again, the reason that we’re so bullish about this business long-term is that we have those levers to pull and we can react in terms of space allocation and a very flexible store model. We can change our advertising. We can change our offering because we do offer that full breadth of the beauty market.

Joseph Altobello – Oppenheimer & Co.

Okay. Thant’s very helpful. Thank you and Gregg my best wishes to you as well and Bruce welcome. Thank you.

Gregg R. Bodnar

Thanks, Joe.

Operator

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

Jill Caruthers – Johnson Rice & Company LLC

All right. Good afternoon. Congratulations no a good quarter. Just a question on the boutiques as you future expand this initiative, could you provide any details around the incremental list that these boutiques at the stores, whether it’s on sales or profitability front?

Chuck Rubin

No, Jill, we won’t go into that. What I can tell you is that obviously for third quarter, our guidance reflects all that we see not just from these boutiques, but throughout our business. I did call out that like anything else in our business whether it’s a new store, whether it’s a new brand of product that we offer, whether it’s even a new product within a brand, there is traditionally a ramp time to that and we expect that here as well.

Obviously, we’re pleased, when we add a new brand to a store whether it’s an iconic brand or whether it’s any other brand there is an anticipation that it will be accretive to the store and beneficial to that guest experience within the store. And clearly, with the things that we talked about today whether it was Clinique, whether it was Lancome, whether it was Juice Beauty, whether it’s Beauche or La Roche-Posay, we expect those things to be accretive to the store and be better performers than anything we may have to reduce from the store.

Jill Caruthers – Johnson Rice & Company LLC

Okay. And then just last question, you talked about the salon business, could you maybe talk about some of the other services that you provide and you kind of expanding your Brow Bars and the new gel manicures, if you could just touch on those, I’d appreciate it. Thank you.

Chuck Rubin

As far as the opening, we just touched on few of them. Obviously, pretty much anything to do with hair cut, color, perms, straightening, we do all of that. We do offer gel nail service in all of our stores now, it is kind of a modified manicure. We have facial skin treatments, mini-facials in all of our stores. We have been testing microdermabrasion in a handful of stores and pleased with the initial results on that.

So, the service part of our business is very critical to our overall experience that we’re trying to create. I mentioned in my prepared comments that our guests come in to solve, is it for a solution or to find something new or just to enjoy themselves for the afternoon and our service part of the business is part of that enjoyment and part of that experience that we want to provide.

We’ll continue to test new things in the salon as well as we have in the past year. We don’t talk all – we don’t talk about them all on this call because some of them are small and some of them quite honestly like any test, we’ll try it and may not work, but the things that we’ve called out here, we feel good about and we think they complement the overall experience both service and product at Ulta.

Jill Caruthers – Johnson Rice & Company LLC

Thank you.

Operator

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

Evren Kopelman – Wells Fargo Advisors LLC

Thanks. Good afternoon. I wanted to ask about, given the acceleration in the store growth this year, do you going to have more source entering the comp base next year, how significant of a benefit can that be to the overall comp assuming the younger stores comp better than the chain average?

Chuck Rubin

Evren, I wouldn’t specifically quantify that. Obviously, it is going to provide some benefit because we do have a younger group stores, but also keep in mind that as you think about this year headed into next year, some of the stores that we opened this year particularly, in the first half of the year will fall into the comp base. The 52 stores that we’re opening in the third quarter this year obviously, will start to fall into the comp base in the third quarter next year. The biggest benefit is going to come in the back half of the year, next year.

Evren Kopelman – Wells Fargo Advisors LLC

Okay. And then, two more, if I can. One of them is the new product innovation has been pretty vibrant in the industry. As we began to lap some of the strong growth numbers, do you think the pace of growth can be maintain, are you seeing more new products innovations coming in the pipeline? And then lastly, any update on your plans for the smaller 5,000 square foot format? Thanks.

Gregg R. Bodnar

And Evren, just before Chuck answers, one other point, you have keep in mind too, which is built into our store model. Keep in mind that every program, annual program, we are always opening stores in new markets and in existing markets as well. And to a large degree, a lot of the any of the cannibalization, which we have a great deal of precision around, occurs in the existing markets, and it tends to also be in some of those older stores, stores that are five or six years old, and that’s the other reason, why we’re also very pleased with the performance we’re seeing in some of those older stores as I mentioned in Brian’s question earlier.

Chuck Rubin

And just to answer your other questions on smaller stores, no, we have nothing to add on that. Clearly, with the amount of stores that we’re opening right now and the boutiques, our focus has been on our 10,000 square foot format. So as we, at the appropriate time in the future, we’ll talk more about that. But there is nothing to report on that right now.

As far as the new products, it’s a big offering that we have. We have 20,000 plus products in a store and closed to that online. There are always trends and when you look at an individual classification of product sometimes comping against that trend may be difficult. So we have – this past quarter, we went against shatter nail polish from last year, which was huge. So, the increases we saw in some of nail this year were conservative. But given the breadth of what we offer in skincare, in hair care, in color cosmetics and services is always something new and it’s how we blend all that out.

So you can see even though we went against shatter nail polish last year, a big trend, we still delivered a 9.3% comp in the second quarter because we have this other newness. As far as newness going forward, what we see out there, I mentioned some of it in my prepared comments about what’s coming for the third quarter. What we see tangibly in the next quarter or two looks exciting and what we’ve seen or discussed with vendors for 2013 also sounds exciting. So, I don’t think there is a shortage of new product in the pipeline.

Operator

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

Jason Gere – RBC Capital Markets

Okay. Thanks and I’m glad to be the last to say, hey, Gregg, best of luck with everything and Bruce welcome aboard. Most of the questions have been answered, but I guess one thing I was going to ask you were talking about in the fourth quarter that there’s an extra week and I think you tried to quantify the sales of $35 million. Can you just walk me through like how does that impact the comp versus I guess what would be kind of new store sales. Maybe can you just provide a little color and what does that come out to on an EPS basis that extra week, is that like $0.05, I’m not sure if you mentioned that?

Gregg R. Bodnar

So in our prepared remarks we did mention out, I’ll pick the last piece of that question first, its $0.03 per share. It’s about $35 million in extra sales volume and simply what you do, a normal fourth quarter has 13 weeks in it. This year our fourth quarter is going to have 14 weeks in it. When you add that extra week on the end you will pick up an extra comparable week for the prior year and you will set that on in the denominator. So you’re still going to have 14 weeks over 14 weeks. It will have no impact on the comp other than the comp in that specific week.

Jason Gere – RBC Capital Markets

Okay, great. Thanks and best of luck again.

Gregg R. Bodnar

Thanks.

Operator

Thank you. I’ll now turn the floor back over to Chuck Rubin for closing comments.

Chuck Rubin

Okay. Thank you operator and thanks everyone for participating on the call. We will look forward to speaking with you on our next earnings call if not before then. So thanks again very much.

Operator

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

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