Bare Escentuals Q3 2007 Earnings Call Transcript

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Bare Escentuals, Inc. (BARE) Q3 2007 Earnings Call October 31, 2007 4:30 PM ET

Executives

Andrew Greenebaum - IR

Leslie Blodgett - CEO

Myles McCormick - CFO and COO

Analysts

Bill Chappell - SunTrust Robinson

Lori Scherwin - Goldman Sachs

Neely Tamminga - Piper Jaffray

Joe Altobello - CIBC WorldMarkets

April Scee - Banc of AmericaSecurities

Lyn Walther - Wachovia

Operator

Good day, and welcome to the BareEscentuals' Third Quarter Fiscal 2007 Conference Call. Today's call is beingrecorded. For opening remarks and introductions, I would now like to turn thecall over to Mr. Andrew Greenebaum of Integrated Corporate Relations. Please goahead.

Andrew Greenebaum

Welcome to Bare Escentuals' thirdquarter fiscal 2007 conference call. On the call today from the company are LeslieBlodgett, Chief Executive Officer, and Myles McCormick, Chief Financial Officerand Chief Operating Officer.

By now everyone should have hadaccess to the third quarter fiscal 2007 earnings release, which went out todayat approximately 4:00 p.m. Eastern time. If you have not received your release,it is available on the Investor Relations portion of Bare Escentuals website atwww.bareescentuals.com by clicking on the 'About Bare Escentuals' tab. This callis being webcast and a replay will be available on the company's website forthree months.

Before we begin, we would like toremind everyone that the prepared remarks contain forward-looking statementsand management may make additional forward-looking statements in response toyour questions. These statements do not guarantee future performance andtherefore undue reliance should not be placed on them.

We refer all of you to the riskfactors contained in Bare Escentuals' most recent Form 10-K for the year endedDecember 31, 2006, and Form 10-Q for the quarter ended July 1, 2007, for moredetailed discussions of the factors that could cause actual results to differmaterially from those projected in any forward-looking statements. BareEscentuals assumes no obligation to revise any forward-looking projections thatmay be made in today's release or call.

And with that I'd like to turnthe call over to Leslie Blodgett.

Leslie Blodgett

Thank you, Andrew. Good afternooneveryone and thanks for joining us today. The format of today's call willinclude my brief business overview and highlights of the quarter. Then Myleswill give you additional detail on our operating and financial results as wellas our preliminary guidance for 2008 before we open the call for yourquestions.

Bare Escentuals completed its IPOa little over a year ago and we thought that this would be an appropriate timeto essence our progress and articulate our plans for the future. I am delightedto say that it's been an incredibly exciting and high growth year. Keyaccomplishments since our IPO includes the following; Expanded our points ofdistributions 48% with new premium, wholesale and retail channels domesticallyincluding Nordstrom, Macy's and Sephora inside JCPenney. Enhanced our product assortmentwith new offerings in the face, eye, lip and skincare categories include in our100% all natural lipsticks and our primetime preservative-free makeup primer.We continue to develop strong customer relationships through direct interactionwith our passionate users, and solid execution with our partners such as QVC, Sephoraand Ulta.

And made significant progress onbuilding the business and infrastructure to support our future growth includingthe acquisition of our UK distributor, opening a new distribution facility andkey hired such Karen Barner and Jim Taschetta. At the same time we deliveredstrong financial results.

Our third quarter sales were up29% to 126.6 million and net income worth of 131% to 20.5 million. Our thirdquarter performance reflects our continued progress and meeting the growingconsumer demand for our products worldwide. We're extremely proud of ouraccomplishments, but our next phase of growth has been top of mind for us.

Over the past several months, wehave deepened our understanding of brand awareness, brand loyalty and shoppingpreferences for both users and non-users of Bare Escentuals, through our ongoingconsumer research.

At the same time, we've beenworking internally to develop our long-term domestic distribution strategy, andwe reached out to outside advisors to validate our approach. This was ourextremely helpful exercise that resulted in much more detailed and specificview of the considerable growth opportunities for Bare Escentuals goingforward.

With respect to the consumerresearch, let me touch on a few of the key highlights. First, our consumers arefiercely loyal to the BE brand, which reinforces the feedback that I receivedfrom our passionate BE's community. In fact, over 93% of women who use ourproducts are not likely to consider switching brands over the next 12 months.We're pleased at this high degree of loyalty has remained very consistent as werapidly expanded our consumer base.

Second, Bare Escentuals hasstrong brand awareness. Approximately 70% of cosmetic users are aware of BareEscentuals, which validates the approach that we've taken in building brandawareness and product education through various media and retail channels. Thisalso highlights an important opportunity as our brand awareness among consumerscontinues to exceed our trial rate. We therefore see a significant opportunityto expand distribution and thus reach a large population of women that don’thave ready access to BE.

So what are the implications forour business going forward? One take away, is that we need to stay focused onour core messaging and product education in order to continue to generateawareness and educate consumers about Bare Escentuals and the benefits ofmineral makeup. The great news is that our research confirms that our addressablemarket opportunity remains substantial.

Of the 85% of cosmetic users whohave yet to try in mineral makeup roughly 60% of them indicate that they areeither somewhat likely or extremely likely to try it over the next 12 months.And the brand they indicated they're mostly likely to try is bareMinerals.

The second takeaway is that weneed to continue to expand our point of presence in order to make our productsmore accessible for trial. When we asked women's who aren't using BareEscentuals, how they first became introduced to their current foundation brand?And number one response was that they saw it in a store.

Expanding our physicaldistribution with our strategic retail partners is an important tool to drive awarenessof our brand. It complements and enhances our use of media. By growing ourpoints of distribution we reach women who have yet to try mineral makeup.

Ultimately this will be the keyto closing the gap between consumer's awareness of our products and their abilityto experience it first-hand, which leads us to our domestic distributionstrategy. As of the end of the third quarter we had a presence in 515 points ofdistribution domestically.

We know from both our customerresearch as well as competitive benchmarking of other prestigious brands thatour potential far exceeds them. While our thoughts on the right number ofdistribution points will surely continue to evolve. Based on evaluating anumber of scenarios as well as input from our retail partners, we believe thatwe can grow our existing domestic points of distribution by 3 to 4 times. Howwill we get there? Given the significant opportunity in front of us we willcontinue to take a measured methodical approach to ensure that we do the right thingsfor the brand and our customers. Of utmost importance is providing a consistentbrand message, offering the best customer service, staying connected to ourcustomers and avoiding over proliferation.

The success of our multi-channelapproach demonstrates that there are numerous ways to effectively address thisopportunity and while we will dynamically evaluate the best approach as we moveforward. Today we are prioritizing our domestic growth in the following threeareas; first growing our boutiques. Given the value to our brands and based onthe strong economics of our boutiques, we currently believe that we can have upto 400 locations in the U.S.compared to 45 today. We are devoting significant resources to take advantageof this substantial growth opportunity, including the hiring of the Presidentof Retail.

Secondly, growing with ourpremium wholesale partners. We have strong relationship to support and alter andfirmly believe in their respective approaches to expanding distribution forprestige cosmetics. We would expect that both will continue to open doors add arebuff at historical rate.

And finally, expanding intodepartment stores. Through our consumer research we know that many consumersincluding a large percentage of those who don't current use our products shopin department stores. As such we believe this channel will be largelycomplimentary to our existing businesses as we grow.

We are excited about furtherexpanding into this channel, but we want to make sure we are doing it in a rightway for our customers. For that reason we will initially focus our efforts onrolling out Nordstrom in a measured way and we will continue to evaluate still-inopportunities such as with Macy's on a market-by-market basis and in contextwith our boutique expansion.

Additionally, we expect to expandwith the Sephora inside JCPenney concept based on our overall growth plan. Inaddition to enhancing our longer term vision for points of distribution in the U.S. we haveused this evaluation to craft a near-term action plan for growth in these threeareas in 2008. Myles will take you through the details in the second half ofthe call.

With respect to our internationalbusiness, our focus in the near-term continues to be on the following keymarkets. Japan, UK, Germany,and France.While we are taking a market-by-market approach in each country we look to replicateour media first strategy wherever possible.

2007 has really been aboutgaining a two fold on this key markets and our goal in 2008 will be to buildupon our earlier successes. As we continue to expand domestically andinternationally we have recognized the increasing importance of how we present tocommunicate the Bare Escentuals brand.

To help us in that regard we werethrilled to announce two weeks ago that Jim Taschetta has joined as ChiefMarketing Officer. Jim has over 20 years of marketing experience building worldclass brands at Visa, Coca-Cola and Procter & Gamble. Jim's strong globalbranding background will service well as we work to enhance the awareness andunderstanding of the Bare Escentuals brand worldwide. In this regard we expectthat our use of non-traditional media marketing and distribution will continueto be an important tool to driving brand awareness.

QVC continues to be a verystrategic challenge for us. In addition to building broad brand awareness QVChas a great format in which to introduce new product. On our September show forexample, we launched our new RareMinerals blemish therapy acme product whichwas extremely well received and quickly sold out. This is the positive sign ifwe look to grow our skincare business over the long-term and we'll continue toutilize QVC as the launching pad for new products as we built this business.

Our in commercial business hasalso been an important driver of overall brand awareness in addition to being aprofitable customer acquisition channel. We believe that our strong results atretail reflects the educational and brand-building benefits of the incommercial, and that will continue to be strategically important as brick andmortar retail drive our next phase of growth.

This year, however, we've hadsome challenges with our in commercial. We've launched a new show in May thatdid not perform to our expectations. We have since tested various reedits of theprogram, including our recent version in September that included new footage.But our efforts have not yielded improved results. After a full evaluation, we haverecognized that this show (departed) made us successful in the past. The incommercial has always been about telling a focused story about bareMinerals foundationto women with skin issues.

This time we are trying to appealfor a much broader audience, and spending too much time telling the story of BareEscentuals brand and not enough time communicating what makes our foundation sounique and so effective. Now, we very clearly know how to move forward. I amalso really excited to have Karen and now Jim on board to lend their growth perspectives,their energy to evolving the show.

While Karen and her team willcontinue to work on optimizing the performance of the current show, we areputting our resources behind the development of a new show focused on our core bareMineralsmessage from beginning to end. We expect this show to launch in the secondquarter of next year.

In summary, we are extremelyexcited about the long-term opportunities for the Bare Escentualsbrand. As much as we are proud of our accomplishments to-date, we recognizethat there is a huge audience of women we've yet to touch. We believe that now,more than ever on media-driven approach in conjunction with the expanded pointsof distribution is the best way to reach these women, and convert them to loyalBare Escentuals users.

With that I'dlike to turn the call over to Myles, who will discuss our third quarterfinancial results in more detail as well as guidance for 2008.

Myles McCormick

Thanks Leslie. Overall we arevery pleased with our financial performance in the quarter. We posted strongtop-line growth in the third quarter and we continue to build the marketing,sales and distribution infrastructure to position us for continued growth. Netsales for the third quarter were $126.6 million up 29% from $97.9 million inthe same period last year. Our wholesale segment which is combined comprised ofsales to QVC, premium wholesale customers, spas and salons and internationaldistributors continued to account for the majority of sale at approximately 59%and our retail segment which include infomercials and boutiques representsapproximately 41% of sales.

As a reminder our directInternational sales was down for retails from our UK business are reflected inthe respective distribution channels and are no longer broken out separately.Sales within our wholesale segment increased 51% to $75.3 million from the sameperiod last year due to continued growth in our premium wholesale and spotchannels.

Sales within our retail segmentwhich are comprised of sales from our boutiques and infomercial business increased7% a $51.3 million from the same period last year. Strong growth in ourboutiques more than offset at 12% decline in our infomercial business versusthe prior year which is roughly inline with our expectations.

But we didn't see improvedperformance from our infomercials, our results have stabilized in the veryconsistent voyage. Elastically as of the end of the third quarter we haddistribution at 515 locations up 48% from 349 the same time last year. Locationsat the end of the third quarter include 224 Ulta doors, 175 Sephora doors, 45boutiques, 45 Sephora inside JCPenney doors, 15 Nordstrom doors, and 10 Macy'sdoors. We expect to end 2007 with roughly 550 doors domestically, whichrepresents an increase of 45% versus a 376 doors at the end of 2006.

Moving on to gross margins forthe third quarter. Gross margins declined 71.6% versus 72.5% from the prioryear due to a shift in mix between our wholesale and retail segments.

On a sequential basis grossmargins increased 190 basis points from the second quarter. Within thewholesale segment, our gross margins improved in the quarter by approximately130 basis points to 65.4% from 64.1% in the prior year, driven by the mix ofchannels and customers within the segment.

Gross margins for our retail segmentdeclined in the quarter by 60 basis points to 80.7% from 81.3% in the prioryear largely due to higher non-product cost of goods. SG&A for the thirdquarter increased 38% to $47.5 million or 37.6% of sales from $34.5 million or35.2% of sales in the prior year.

The increase in SG&Acontinues to reflect our investments into our operating infrastructure toeffectively meet significant growth opportunities in front of us. In addition,SG&A reported includes the infrastructure expense related to our UK business.

Operating income for the thirdquarter of fiscal 2007, inclusive of stock compensation, depreciation andamortization expense, increased to $39.3 million from $34.6 million for theprior year period

Net income for the third quarterincreased 131% to $20.5 million from $8.9 million at the third quarter of 2006,due to lowered interest expense following ongoing debt reductions. For the ninemonth ended September 30, 2007, net income increased 80% to $61.1 million from$33.9 million at the same period last year.

Diluted earnings per share forthe third quarter were $0.22 on approximately 93.2 million shares outstanding,an increase of $0.10 from $0.12 per share on approximately 73.3 million sharesoutstanding last year. On a nine-month basis, diluted earnings per share were$0.66 in 2007 compared to $0.47 in 2006.

Now turning to the balance sheethighlights, cash at the end of the quarter was $26.3 million versus $7.5million in the prior year. Inventory at the end of the quarter increased 8% to$62.6 million from $57.8 million last year despite a 29% increase in newboutique sales as we were successful in driving inventory managementimprovements.

Accounts receivable at the end ofthe quarter increased 24% to $34.8 million from $28 million last year,reflecting the growth in our premium wholesale business. Capital expendituresin the quarter were $8.3 million related to the build out of new boutiques, ourcorporate office expansion and ongoing IT investments.

For the year, we now expect CapExto be roughly $22 million. And total debt at the end of the quarter was $280million, down from $708 million at the end of third quarter of 2006. During thequarter, we utilized excess cash to pay down $20 million of debt.

Now, I'd like to move on toguidance for the fiscal of 2007 and 2008. For 2007 we are reaffirming ourpreviously issued guidance of $0.89 to $0.94 per diluted share on sales 27% to30%. For 2008 as Leslie mentioned our growth will be primarily driven byexecuting our domestic distribution strategy, further developing ourInternational presence to achieve markets and continuing to build the necessaryinfrastructure to take advantage from the long run potential of the business.

Specifically in regards todistribution expansion, we are taking a measured approach to ensure that we aregetting right things for the brand and our customers over the long-term. Assuch we expect to open approximately 35 company owned boutiques, a combinedtotal of approximately 100 Sephora and Ulta doors and a combined total ofapproximately 60 department store doors which includes roughly 40 Nordstrom andMacy's doors.

In total this will result inroughly 35% growth in domestic points of presence, these 750 locations by theend of 2008. We expect that this door growth will be weighted towards thesecond half of the year. While we believe we have many opportunities to improveour infomercial business in 2008 and an effort to be conservative we areplanning our infomercial business at $26 million to $29 million quarterly runrate effectively on par with current productivity levels and media spend.

With respect to our Internationalbusiness, we believe that we have tremendous opportunity in Japan, UK,Germany and France.2008 will be another year of investment as we continue to develop brandawareness, test distribution and build infrastructure in this key markets. Giveour long range view of our International opportunity we are been careful topace our initiatives and investments accordingly. In line of this, we expect tosee international sales growth for 2008 modestly above the domestic average.

In summary, we currently expectfiscal 2008 sales growth to be in line with our long-term revenue growth targetbetween 20% and 25%. We also expect earnings growth to grow in line with ourlong-term earnings growth rate of approximately 25% and find earnings per sharein the range of $1.13 to $1.18 per diluted share.

That concludes my comments, backto you Leslie.

Leslie Blodgett

Thanks Myles. In conclusion weare pleased with the progress we have made in our first year as a publiccompany and I would like to personally thank our employees, customers, andstock holders for helping us make it happen.

We are very excited about theopportunities in front of us, both domestically and to internationally andbelieve we are just at the early stage of growing Bare Escentuals brand. Withthat I would like to turn the call back to the operator and open it up forquestions.

Question-and-Answer Session

Operator

(Operator Instructions). And ourfirst question comes from Bill Chappell with SunTrust Robinson.

Bill Chappell - SunTrust Robinson

Hi, good afternoon.

Myles McCormick

Hi.

Bill Chappell - SunTrust Robinson

I guess I am just trying to makesense of…you have pretty…certainly some positive kind of distribution gainexpected over the next year, and I think you have said you have 58% more pointof distribution at the end of this year versus the start. I am just trying tounderstand how that matches into 25% or 20%-25% top line growth next year?

Myles McCormick

Great question. Its actually 48%this year, and next year I think it has much more to do with the timing and howthese doors will sequence in. There is, as we said, we have moved the back halfway, and so we are not going to get a full year potential out of that, kind ofthat expansion. Ultimately, and certainly that will build up into momentum inthe years.

Bill Chappell - SunTrust Robinson

Well, I guess on the same linesas I looked at your EPS guidance, as you leverage some of these infrastructurecosts and I guess also see some debt pay down, do you see operating marginsactually being down year-over-year, going into next year or flat or how shouldwe look at that?

Myles McCormick

It should be some moderatingleverage into next year for operating margins.

Bill Chappell - SunTrust Robinson

So, there should be someimprovement?

Myles McCormick

Yeah, I think depending on whatwe saw, on the range of 20%-25% on the top line, somewhat determines the degreeof operating margin leverage into next year, but certainly we look for someleverage. We'll certainly being very mindful of not to be “penny-wise, poundfoolish at” this time in our growth cycle, and again continue to be veryfocused on building the right amount of infrastructure to take advantage of thebusiness opportunities long around. So, needless to say we are certainly veryfocused about getting and harvesting out some of the investments we made thisyear. We still have a little bit more to do.

Bill Chappell - SunTrust Robinson

And one last question -- is thereanyway you can give us little more color in term of decision to focus more onNordstrom's versus Macy's. And do you expect to eventually cover all theNordstrom stores?

Myles McCormick

We are building out in a measuredway. The approach with the focus on Nordstrom frankly in the near-term allowsus to prioritize the higher productivity centers first. And then fill in thesecondary markets with the partner stores like Macy's down the road. But againwe'll be looking at doing both from this year, coming up here it just allows usto put a little bit more focus on this higher productivity centers.

Bill Chappell - SunTrust Robinson

So, Macy's is not off the table,it's just not as high a priority right now.

Myles McCormick

That’s right. In terms of how weneed to align these things up and allocate resource if nothing got me right.

Bill Chappell - SunTrust Robinson

Okay, great thanks.

Operator

Moving now, we will hear from LoriScherwin with Goldman Sachs.

Lori Scherwin - Goldman Sachs

Hi thanks.

Myles McCormick

Hi Lori.

Lori Scherwin - Goldman Sachs

It sounds like you are addressingthe awareness opportunity just by increasing the number of physicaldistribution points and even pretty consistent that that going to be your goal.I am just wondering as you move more into bricks and mortars, if it started outthe need for, or if you think you are going to need, more marketing on mediaspending going forward. It has happened in the past than niche brands having aswell but curious as how you think that could evolve overtime, and if maybe Jimhas any early thoughts given his new role?

Leslie Blodgett

Well, our infomercial has alwaysbeen strategically important to us and it's always been there to educate andincrease brand awareness. So the way our model works is that we show that 30million or however much we spend the same amount over year and it will drivepeople into our retail locations. So, that's a way we look at our business,that's the work trust and it's working. So we don't see changing any nor in thenear future.

Myles McCormick

Yeah, I think given the researchwe have been able to pull together over the past six months really reinforcesthat to us, and now there is to continue to be a third, as cosmetic user abouthalf of it. So again, large opportunity there and certainly as Leslie pointedout, a significant opportunity there, and those who have heard about us buthave yet to try the product -- and we believe the largest obstacle in the waythere is reach and that's really our focus.

Lori Scherwin - Goldman Sachs

And so kind of taking you backoff of the Bill's questions wouldn't this trend to be an investment where youcould see some margin expansion next year, just to holding the line confidentnot increasing any additional areas of spend?

Myles McCormick

Yeah, I think for sure we aregoing to see some -- we'll definitely see some leverage off of the media line,cause of the growing distribution platform and I think that sort of can be atheme sort of long-term here. Is there a potential, I think there definitely isa potential, particularly as we look at, getting more successful in thesechannels of distribution.

As we think about our planning,however, as I said before. We want to be real prudent about how we areinvesting and keep a very long range approach here, so that we are not being penny-wisepound foolish for the sake of, I am trying to get margin expansion before youreally should be doing that.

Lori Scherwin - Goldman Sachs

Okay, great. And then just on infomercials,any thoughts on when and if you are still planning on doing the RareMineralsinfomercial?

Leslie Blodgett

RareMinerals are still a focusfor us and we just launched, blemish therapy did really well. We have other newproducts coming out next year, but as we look at our infomercial business.

The next show, which really whatwe are putting all of our resources behind, and that's where you're going tosee the focus, you'll see RareMinerals in retail with the launches coming out,but let's just, focus and get the great show more on the (BM6).

Lori Scherwin - Goldman Sachs

So, is the Rare infomercial beingshelved permanently or just until you get a handle on the makeup one?

Leslie Blodgett

It's definitely not being shelvedpermanently. It is definitely something that we're working on here, but wewon't be launching it for a while.

Lori Scherwin - Goldman Sachs

Okay. And just lastly on thequarter, Myles, we've talked about this, the granularity on the US versusinternational sales is getting a little hazy, because everything's lumped in.QVC and spas look like they had a really good quarter. I am just wondering, howmuch of that was US versus international?

Myles McCormick

Yeah. Good question. I mean it'sa bit like Q2. In fact, the numbers are roughly the same in the absolutes thereabout 4 million coming in from the QVC business that we acquired. A very smallamount of that's coming in from the QVC perspective.

In fact, we just had a greatquarter from QVC this time around, I mean Leslie and the introduction of theblemish therapy product, and frankly across all of the shares that we have inthe quarter were really strong.

So we're certainly very happy tosee that. Also, last quarter we had about an 8% contribution from our totalinternational business, its about the same for this quarter, which is up aboutdouble from the previous year about 4.5%.

Lori Scherwin - Goldman Sachs

Okay. Thanks.

Myles McCormick

Yeah.

Operator

Moving on we'll hear from NeelyTamminga with Piper Jaffray.

Neely Tamminga - Piper Jaffray

Great. Good afternoon. Just acouple of questions here. Myles, your inventory management looks very good, I'mjust wondering do you have enough inventory to drive those sales, I mean canyou walk us through a little bit about what's going on there and why wewouldn't be seeing more of an improvement in gross margin maybe going forward?And I have a couple questions.

Myles McCormick

Yeah. I think that's a smartquestion. And it is the way we look out there, so we have made some debt lastyear and really building up our inventory position to create our level offlexibility for all the new initiatives we had. So it was a bit of aninvestment period for us last year. So we're running up against thosecomparisons, and we feel that, but since (1) it’s a comparison issue, and (2)as we sort of go forward, we feel like we have been able to really get a handleon the demand side of the equation, which has allowed us to really determinethe inventory a bit faster. With that, in addition to, being able to expand ouractual production to reduce some of the lead times there has been able to, giveus a bit more security to turn the inventory just a bit faster?

Now that all being said, we'restill churned as a company the inventory pretty slowly -- roughly two and halftimes a year. So we actually still think there are some opportunities here forsome improvement. In total, I think we feel pretty good about where we are, tobe able to meet the demands of the business.

Neely Tamminga - Piper Jaffray

Okay. And then switching gears alittle bit to Sephora, just a couple of points here. Just wondering…you gavethe 100 Sephora/Ulta doors for next year that seems incredibly conservativeconsidering what Ulta is seeing for next year, as well as the 20 Sephora Francestores that'll be opening and as well as the U.S. I am just wondering how muchof the International domestic is included in that line item?

Myles McCormick

Yeah, keeping in mind that thatwas a comment regarding domestic distribution, Neely. So Sephora Internationalis out of it. In regards to both Sephora and Ulta door plans, I think thereality is we don’t have perfect visibility into their plans. I think this isour sort of our estimates of what we believe, but we believe at a minimum theywould be out. So I think to your point, we are better than that grade, but forthe purpose of our planning I think we feel pretty comfortable of these models.

Neely Tamminga - Piper Jaffray

And just two more questions onSephora. The Sephora International, thusfar your pin source outside of France,how are you going to be incorporating that into strategy? Is that on duck fornext year in terms of doubling up the sales force there -- could that happennext year?

Myles McCormick

Outside of France?

Neely Tamminga - Piper Jaffray

Yeah.

Myles McCormick

We are continuing to put ourfocus in France.We still have lot of work to do there to really educate the customers onmineral cosmetic there. Its not only a new brand in France but its also a new category.So there continues to be a lot of work to be doing there and now, that beingsaid the business is doing well and we are very pleased with that. Ourobjective there is to get that right first before we dilute our focus to someof the other markets. Fully acknowledges some great opportunities out there andI think at in the appropriate time we'll be dealing with those.

Neely Tamminga - Piper Jaffray

And just one last question onSephora, here, U.S.Clearly you guys have amazing presence. I personally have been asked by severalof your clients and investors, for Leslie cut out and so, sort of, stillnonetheless, but clearly you have a very strong presence for Sephora that'shere. And just wondering, if you could give us any insight as to how thequarter actually starting off for heading into holiday?

Myles McCormick

Well, let me…without, sort of,talking too much about that – or let me turn it over to Leslie because I thinkwell, certainly we are blown away with strategies in October.

Leslie Blodgett

Well, I just have to say thatyeah, this is the first time that Sephora has actually given an animation to abrand and we were thrilled and honored to be able to be put in that position.And really nice, really excited, lots of good things coming out of Sephora andUlta as well, so we had a lot of focus there too. So, now you wanted to add tothat Myles?

Myles McCormick

Well, as you said its certainly agreat occasion and to kick off the holiday season with the core message, itcouldn't have really happened in a better way. So, we are very happy aboutthat.

Neely Tamminga - Piper Jaffray

Thanks. Good luck for you guys.

Leslie Blodgett

Thanks.

Operator

Our next question comes from JoeAltobello with CIBC World Markets.

Joe Altobello - CIBC World Markets

Thanks. Good afternoon guys.

Myles McCormick

Hey Joe.

Joe Altobello - CIBC World Markets

First question, in terms of thedoor role out of the next two years, have you guys looked into sort of how thisis going to happen like for example, could you guys have a boutique, have aSephora and Nordstrom in the same mall or is that too much customer overlap atthis point?

Myles McCormick

No, I mean, there are definitelyopportunities for that, really have to do with the relative size of the center,the potential of the center and door shopping area. We have few instances ofthat where it actually worked out very well. We just got sort of uplift in allthis market that we have that. But in small markets also like in Portland, Washington Square,we have got actually four points of distribution there. There are circumstanceswhere it does work. Now, of course, we have cannibalization in those areas, butits manageable. But the point in markets like that, where there is a lot ofpotential, we can maximize the penetration of brand and still make it sort ofsense for us.

That's not necessarily the caseeverywhere and it does…decision making does change quite a bit onmarket-by-market basis. In fact, on a center-by-center basis and some of thetop tier large regional A centers that can happen, and some of the smallermarket centers where, we maybe only have a couple of plans for distribution,which is why as we look at sort of the Treasury markets--those B markets, we reallyconsider those things an opportunity in fill-ins, and that’s why in Leslie'scomment, she had pointed out that we have to look at these in context with howwe are laying out boutiques, because again in some markets, we want to be verymindful of the fact that we don’t want to over saturate the point, if theycan't manage it. But we are pretty confident there are a significant number ofmarkets that handle this.

Joe Altobello - CIBC World Markets

Okay. And so, in terms of the1,500 to 2,000 doors you're talking about in the U.S., the vast majority will be Sephora/Ulta,I imagine?

Myles McCormick

There is the significantpercentage of after tax flow, again we sort of have a initial indication ofwhat we think we can do ultimately in boutiques, and then we'll follow that upwith additional opportunities within department stores to sort of round out theentire portfolio. Now, keeping in mind that a boutique does, from a valueperspective for us, from an EBITDA line, three to four times better than any otherdistributional or even bit more than that given the ultimate ability that theboutiques from a revenue perspective. So, while the points of distribution area bit more on the specialty or a third party side, the equivalency in terms ofthe boutique is at roughly a third.

Joe Altobello - CIBC World Markets

Okay. And what's the timing ongetting to those 1,500 to 2,000, doors is that sort of a ten year plan.

Myles McCormick

That’s certainly a long rangeplan, and we haven’t really put a specific timeline in place for that. Our viewis to continue to build momentum and skills internally, to comfortably execute.And every year, as we've shown from 2007 and to our plans to 2008, we foundability to build upon that.

Joe Altobello - CIBC World Markets

Okay. And the department storedoors that you are rolling out into next year are they accretive or dilutive toyour operating margins?

Myles McCormick

The department store doors shouldbe ultimately neutral to operating margins.

Joe Altobello - CIBC World Markets

Okay. At least initially couldway on more little bit?

Myles McCormick

Yeah there is certainly, when youare talking about the first few months when you have pre-open next stuffs likethat but firstly you have operation and that’s when we get smart.

Joe Altobello - CIBC World Markets

Okay. And then lastly on the QVCside, how many TSVs did you have this quarter?

Myles McCormick

None.

Joe Altobello - CIBC World Markets

None. And none last year as wellright?

Myles McCormick

That's correct.

Joe Altobello - CIBC World Markets

Okay. Great Thanks.

Operator

And our next question comes fromApril Scee with Banc of America Securities.

April Scee - Banc of AmericaSecurities

Yeah, thanks. Just first, a quickclarification. On the 60 department store doors that you are talking about,does that include Sephora inside JCPenney or does that exclude that?

Myles McCormick

Its does include, as we sort ofpointed out, there is 40 Nordstrom and Macy's and the balance is really comingfrom Sephora inside JCPenney.

April Scee - Banc of AmericaSecurities

And does that imply that youwouldn't be opening with all of the Sephora doors? I think they had indicatedthat they are going to be doing 50 per year, if I am mistaken?

Myles McCormick

I think the story gets back tonot having perfect visibility into our growth plan. So to the extent that weknow we have doors that we are going to be opening those. At this point yeahthere is bit of a visibility issue for us. So…

April Scee - Banc of AmericaSecurities

But they are going 50 all opensit.

Myles McCormick

That's exactly right.

April Scee - Banc of AmericaSecurities

Okay. And then, just anotherclarification. I must have missed this,but is the second half guidance on Infomercial, is that still for down 10 orwould we expect that it would be down 12 like it was this quarter?

Myles McCormick

Yeah, we think there is some riskin that, but we believe the performance will be well within our guidedquarterly range for next year.

April Scee - Banc of AmericaSecurities

Okay. And just a real quick oneon new store economics…is it possible for you to lay out for us what the neweconomics are, on both the boutique business and department stores?

Myles McCormick

On the boutique side, itcontinues to be very consistent, from what we previously said. So roughlythinking about a $1.2 million the first year, we've done a bit better thanthat, getting the payback on a cash-on-cash basis in last mid-year on roughly a$350,000 investment. The department store…well, we are thinking about make itbit more conservatively that the business model is around $600,000 to $700,000on the first year basis at retail.

April Scee - Banc of AmericaSecurities

Okay. And the investment that youneed to make behind this?

Myles McCormick

Very small, roughly anywherebetween $30,000-$25, 000.

April Scee - Banc of AmericaSecurities

Okay. And then just the format ofthe doors. I know before you've been talking about doing these as store within-stores. Is this still the thought, and any updated thought on margins nowyou've done a longer test in the department store doors?

Myles McCormick

Yeah. It is a bit differentbetween Nordstrom and Macy's, I mean Nordstrom, you don't get quite same amountof square footage; and Macy's, in terms of the ultimate build out, but again,very consistent. No change in the relative business models there. And inregards to the margin structure, we still feel that its not over our wholesalebusinesses is, that they are going to be very comparable.

April Scee - Banc of AmericaSecurities

Okay. Thank you.

Operator

And the last question comes fromLyn Walther with Wachovia.

Lyn Walther - Wachovia

Hi, thanks. A couple of questionshere. The infomercial guidance you gave for next year looks like you areassuming it's going to get somewhat worse. What gives you the confidence, Ithink you said $26 million, $28 million a quarter…what gives you confidencethat that's the right number--how are you thinking about that business for nextyear?

Myles McCormick

Again, we certainly are taking aconservative view next year. And frankly, you're missing a bit of the fronthalf of the year in terms of comparison of where the business was trending inthe first half. The next year number sort of take a full year at the currentrun rate. Albeit, we're being a bit more conservative with the overall range tocompensate for expense a bit more risk in the business. Where we are continuingto be very optimistic about the opportunities there frankly for all the reasonsthat Leslie, has laid out in regards to the clarity and the challenges with theexisting infomercial, one. Two, ultimately we are again, very pleased to seethe market opportunity in front of us still so significant, and having theability to get refocused on the core messaging there, we believe that there iscontinuing to be tremendous opportunities in front of us, Leslie want to add that.

Lyn Walther - Wachovia

Okay. And then when talking aboutthe new marketing officer, can you just talk a little bit on his focus, I know,you've traditionally not done the traditional type of marketing approach. Ithink someone touched on it earlier, is that something that you are looking ator where his focus going to be?

Leslie Blodgett

Well we have a way of doing businessit’s not traditional. We use our media to really bring the brand awareness andeducate. So we will be taking our core messaging and he's going to help us takethe message and apply it globally. And that's really just drive it down to,what do we spend, what are we about and make it very consistent worldwide.

Lyn Walther - Wachovia

Okay. And then just finally canyou update us on some of your category extensions, you mentioned

RareMinerals, the Prime Timelipstick, how is that launch is going, are you happy with that and little bitabout that?

Leslie Blodgett

Yeah, really happy. What’s niceis we’ve been able to launch products that are really part of our DNA, thenatural story, really great performance at retail, love the idea ofpre-launching on QVC to get really the exciting really going, and we have somenice launches planned for 2008. So no, we're really happy.

Lyn Walther - Wachovia

Okay. Thanks good luck.

Myles McCormick

Thanks.

Operator

And that does conclude thequestion and answer session. I'll turn it back over to you Leslie Blodgett forany closing remarks.

Leslie Blodgett

Okay. Well thank you so much foryour participation today and I really encourage all of you to tune into our QVCToday Special Value. Next Saturday November 10th where we are going to bepresenting our great holiday bareGold collection. So thanks so much.

Operator

Once again this does concludetoday's call. Thank you for joining us and have a great day.

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