CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:10.29BPriceasofEventDate:159.0
©2014TheStreet,Inc.Al l R ightsReserved Page1of21
UltaSalonCosmetics&Frag(ULTA)EarningsReport:Q22015ConferenceCallTranscriptThefollowingUltaSalonCosmetics&FragconferencecalltookplaceonAugust31,2015,08:00AMET.Thisisatranscriptofthatearningscall:
CompanyPart icipants
LaurelLefebvre;ULTASalon,CosmeticsandFragrance;VP-IRScottSettersten;ULTASalon,CosmeticsandFragrance;CFODaveKimbell;ULTASalon,Cosmetics,Fragrance;ChiefMerchandisingMaryDillon;ULTASalon,CosmeticsandFragrance;CEO
OtherPart icipants
StephanieWissink;PiperJaffrayandCo.;AnalystOliverChen;CowenandCompany;AnalystDanielHofkin;WilliamBlairandCompany;AnalystSimeonSiegel;NomuraSecuritiesIntl(America);AnalystEricaEiler;OppenheimerandCompany;AnalystSimeonGutman;MorganStanley;AnalystMattMcGinley;EvercoreISI;AnalystChristopherHorvers;JPMorgan;AnalystJoeAltobello;RaymondJamesandAssociates;AnalystKellyHalsor;BuckinghamResearch;AnalystMarkAltschwager;RobertW.BairdandCompany;AnalystDanaTelsey;TelseyAdvisoryGroup;AnalystMikeBaker;DeutscheBank;AnalystAramRubinson;WolfeResearch;Analyst
MANAGEMENTDISCUSSIONSECTION
Operator :
GreetingsandwelcometotheULTABeautysecond-quarter2015earningsconferencecall.
(OperatorInstructions)
Asareminder,thisconferenceisbeingrecorded.
Iwouldnowliketoturntheconferenceovertoyourhost,Ms.LaurelLefebvre.Thankyou,youmaybegin.
LaurelLefebvre (VP-IR):
Thankyou.GoodafternoonandthankyouforjoiningusforULTABeautysecond-quarter2015conferencecall.HostingourcallareMaryDillon,ChiefExecutiveOfficerandScottSettersten,ChiefFinancialOfficer.AlsojoiningusisDaveKimbell,ChiefMerchandisingandMarketingOfficer.
BeforewebeginIwouldliketoremindyouofthesecompaniesSafeHarborlanguage.Thestatementscontainedinthisconferencecall,whicharenothistoricalfacts,maybedeemedtoconstituteforwardlookingstatementswithinthemeaningofthePrivateSecuritiesLitigationReformActof1995.
CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:10.29BPriceasofEventDate:159.0
©2014TheStreet,Inc.Al l R ightsReserved Page2of21
Actualfutureresultsmaydiffermateriallyfromthoseprojectedinsuchstatementsduetoanumberofrisksanduncertainties,allofwhicharedescribedintheCompany'sfilingswiththeSEC.Wemaymakereferencesduringthiscalltothemetricfreecashflow,anon-GAAPfinancialmeasure,definedascashprovidedbyoperatingactivitiesminuspurchasesofpropertyandequipment.
DuringtheQ&Asession,wekindlyrequestthatyouaskjustonequestiontoallowustohavetimetorespondtoallofyouduringthehourscheduledforthiscall.I'llnowturnitovertoMary.
MaryDillon (CEO):
Thankyou,Laurel.Goodafternoon,everyone.
I'mpleasedtoreportexcellentsecond-quarterresultsforULTABeautywithstrongsalesmomentumandbetter-than-expectedearningsgrowth.Torecaptheheadlinessalesgrew19.4%andweachieveda10.1%totalCompanycompontopofa9.6%compinthesecondquarterof2014.
Transactiongrowthaccountedforabouttwothirdsofourcompwithaverageticketgrowthcontributingaboutathird.Wecontinuetogainmarketshareacrossallofourcategorieswithbothprestigeandmasscolorcosmeticsachievingthestrongestgrowth.
Eachofourbusinessescontributedhealthycompsales:an8.8%compinretail,a10.1%compinsalon,and43.4%growthine-commerce.Earningspershareincreased22%toa$1.15,comparedto$0.94inthesecondquarteroflastyear.
Scottwillsharethedetailsofoursecond-quarterresultsinafewminutes,butfirstI'dliketoprovideourquarterlybusinessupdatethroughthelensofoursixstrategicimperatives,theframeworkwe'reusingtodrivesustainablesalesandearningsgrowthandlong-termshareholdervalue.
Thefirstimperativeistoacquirenewguestsanddeepenloyaltywithexistingguests.OurloyaltyteamisdrivinggreatperformancethroughthecriticalULTAmateRewardsplatform,whichdriveswellover80%ofoursales.Wenowhave16.1millionactivemembers,up18%overtheprior12-monthperiod.
Ourstoreassociatesaredoingafantasticjobconvertinggueststoloyaltymembers,andtheyachieveasignificantincreaseinconversion,leadingtoanaccelerationinnewmembergrowth.Memberretentionrateincreasedandwecontinuetoseehigherfrequencyofpurchases,higheraverageticketandhigheraveragesalespermember.
AspartofoureffortsincreaseawarenessofandclarityabouttheULTABeautybrand,we'vere-launchedourbrandcommunicationsacrossalltouchpointstocreateanintegratedmessageandconsistentvisuallookandfeelthatpositionsULTABeautyasdeliveringthefunsideofbeauty.WebelievethisworksharpensanddifferentiatesULTABeautyinthemarketplaceandshapesourbrandequitythroughacoordinatedapproachacrossallofourmarketingvehicles,includingadvertising,emails,ULTAmateRewardsmaterials,websiteandmobileapps,digitalads,storesignage,socialmediaandcustomermagazines.
Basedonoursuccessful2014testmarketcompourplanistoincludenationaltelevisionadvertisingtosupportourupcoming21DaysofBeautynextmonth,aswellasagainfortheimportantholidayseason.ThisnationaltelevisionadvertisingcampaignmarksafirstinULTABeauty'shistory,animportantsteptowardsdrivingastrongandsustainablebrandposition,whileincreasingawarenessamongbeautyenthusiastsanddrivingnewguestacquisition.
Thesecondstrategicimperativeistodifferentiatebydeliveringadistinctiveandpersonalizedguestexperienceacrossallchannels.Wecontinuetomakeprogressherewithin-storetechnology,associatetrainingandevolvingthelabormodeltoincreaseguestfacingtime.We'vealsohadsomenicewaysof
CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:10.29BPriceasofEventDate:159.0
©2014TheStreet,Inc.Al l R ightsReserved Page3of21
enhancingpersonalizationthroughourmarketingtools.
Letmegiveyouafewexamples.Aswecontinuetoimproveourabilitytopersonalizeouremailsandmakethemmorerelevanttoourguests,weareseeingverypositiveresults.Byleveraginginsightsaboutcustomerpreferencesandbehaviors,weareabletotailorourcommunicationstobemoretargetedandmoremotivatingtoourguests.Duringthesecondquarter,salesperemaildeliveredincreasedsignificantlyyearoveryearasaresultofthisapproach.
Welaunchedpersonalizeddisplayadinthesecondquartertobettertargetadsthatarerelevanttocustomerattributesandshoppingbehavior,movingawayfrompredominantlystaticadformatstowardsmoredynamicadformats.Inaddition,weareleveragingofflineandonlinecustomerinsightstomakeouronlineadvertisingmoreeffective.
NowturningtoULTAmateRewardsloyaltyprogram,wecontinuetorewardourbestguestswithadifferentiatedexperience,drivingincreasedengagementandsatisfaction.Inthesecondquarter,ourPlatinummembers,ourguesttospendmorethan$400withULTABeautyduringtheyear,receivedmanyperksincludingPlatinum-onlybeautysteals,Platinumbonuspointsoffers,earlyaccesstonewproducts,aPlatinumsocialcontest,freeshippingoffersandtargetedsurpriseanddelightgifts.
Nowmovingtothethirdstrategicimperative,whichistoofferrelevant,innovativeandoftenexclusiveproductsthatexciteourguests.NewsandinnovationwasstronginthesecondquarterandPrestigeColorCosmeticsremainedourbestcompincategory.Salesgrowthwasdrivenbynewnessacrosstheboard,includinginnovativefoundationsfromTooFacedandSmashbox,UrbanDecay'smattelipsticksintheexcitedNakedSmokyPalette,aswellascontinuedrapidgrowthinItCosmeticsandItBrushesforULTA.
Thecontouringtrendisstillgoingstrongandthenewertransferstrobing,orhighlighting,drovecompsincontouringkitsandhighlighterswithnewnessfromAnastasia,Lorac,LauraGellerandTarteamongthebestperformers.WecontinuetorolloutClinique,LancomeandBenefitboutiquesandallthesebrandsexecutedverystrongproductlaunches,suchasBenefit'sRollerLashmascara,Clinique'sPoplipcolorandprimer,andLancome'sCushioncompactfoundation.
Inaddition,weareplanningonexpandingourLancomepresencebylaunchingfiveoftheirbestsellingitemsintoeverystore,notjustthosewithLancomeboutiques,startingnextweek.Thisfullchainexpansionisafurtherdemonstrationthatourbusinessmodelissuccessfullydrivingincrementalgrowthforkeybrandpartners.
Masscosmeticscontinuestogrowaswell.Performingwellaboveindustrygrowthrates.Mix,MaybellineandL'Orealweregrowthstandouts,drivenbynewnessandinnovation.WealsointroducedtwopopularindiebrandsfromtheUK,MakeupRevolutionandCatreseintoourmasscosmeticassortmentsonULTA.comandinalimitednumberofstores.
Themasscategorywasalsohelpedbysolidgrowthinprivatelabel.WeresettheULTABeautycollectioninmorethan300storesattheendofthequarterwithenhancedpresentation,aswellasnewformulations.Thewellpresentationisupdatedwithcolorshelfstripsandtestertilegraphics,makingiteasiertoshop,aswellasmoreefficientforourassociatestostockthefixtures.WealsointroducedaFreshseriesofULTABeautykits,offeringgreatvalueandproductsthatleveragecurrenttrends,includingcontouring,primersandbrows.
Thehaircarecategorywasalsoabigfocusforusinthesecondquarter.WekickedoffthequarterwithourLoveYourHaireventinMayfeaturingdailyBeautySteals,in-storeeventsandlivechats.Julywasheadlinedbyourleadereventfeaturinggreatfieldsonjumbosizesofhaircareproductsacrossallcategoriesandbrands.
CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:10.29BPriceasofEventDate:159.0
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WealsoexecutedanextensivereflowofourProHairplanogramattheendofthefirstquarter,whichrefreshesourassortmentandintroduceclearsolutionsbasedsignagetoimprovetheguestexperience.Webelievethishelpsussetthestageforthemostsuccessfulleadereventinourhistory.
Ourmerchantsinventoryandstoreoperationsteamsworkedcloselytogethertoensurestrongexecutionandin-stoplevelsthroughouttheevent.AndthisdrovesignificantaccelerationinthegrowthofcorebrandslikeRedken.Thisisagreatexampleofhowwecanoptimizegrowthonexistingbrandsthroughacombinationofguestinsights,brandpartneringandstronginternalcollaboration.
Othersecondquarterbrandlaunchesincludedseveralfragranceintroductions,SanziahaircareappliancesandPacificaskincareproducts.
Nextourfourthstrategicimperative,whichistodeliverexceptionalservicesinthreecoreareashair,skinhealthandbrows.Oursalonbusinesscontinuedtogrownicelyachievingtotalsalesgrowthof19.7%andcompgrowthof10.1%,aswecontinuetoimproveourofferingsandsharpenermessagestoourguests.
Capitalcategorieswerehaircutsandcolor,blowoutsandmakeupservices.Ourcompwasdrivenbyabouttwothirdsguestcountgrowthandaboutathirdbyaverageticket.
ParticularstrengthinnewguestacquisitionwasdrivenbyonlinebookingandCRMcampaignswithtargetedoffersforfirst-timeguests.Wecontinuetotracknewguestsbyofferingserviceslikeblowoutsandquickskinservices.Promotionsincludedofferstogettheperfectblowout,specialeventsfeaturingLivingProof'sPerfectHairDayproducts,and25%offour20-minuteDermalogicamicrosomeskintreatmentsforfirst-timesalonguests,allverysuccessful.
Butduringthesecondquarterwealsotrainedallofoursalonassociatesonthenewfallandwintertrends,whichweredevelopedinpartnershipwithRedkenandrenownedstylistRodneyCutlerinsupportofhighqualitytrainingmaterials,whichintegratenewstylesforhaircutsandcolorswithmakeuptrendsfortheveryfirsttime.Thisincludedproductrecommendationsandtechnicalinstructionstohowtogetthevariousstyles.
AndI'msureyoumightbewinterwithsomeofthosemightbe,soacoupleofexamples:tortoiseshellhairwithasuedeeyeandaroseblondelookwithapetroleye.Nowtheseenhancedtrainingsessionswereverywellreceivedbysalonassociates.Wearenowpresentingtheselooksandtrendsinourintegratedmarketingplansacrossallassociateandguesttouchpoints.
Turningtoourfifthstrategicimperativetogrowstoresande-commercetoreachandservemoreguests,weopened20storesduringthequarterandendingthesecondquarterwith817stores.Newstoreproductivitycontinuestobeverystrongfortheclassof2015newstores,whicharecomfortablyexceedingtheirsalesplan.Weremainontracktoopenapproximately100netnewstoresthisyearwithplanstoopen44storesandinthethirdquarterandabout15inthefourth.
Therealestatepipelinefor2016looksverygoodaswellandwe'vealreadyapprovedasignificantnumberofsitesfornextyear'sstoregrowthplan.Thetwo5,000squarefootruralstores,whichweopenedlastfall,continuetoperformverywell.Weareencouragedbytheresultsandwearestillgaininginsightsonoperatingasmallerboxefficiently.Weintendtoopenmoreofthesesmallstoreswhenwehavethesystemsinplacetomakethisformatmorescalable.
Meanwhilewe'veopenedseveralstoresinsmallerthanaveragemarketswithour10,000squarefootformatthatareexceedingexpectations,likeournewstoreinPikeville,Kentucky.Soweareveryconfidentthatruralmarketsrepresentasignificantandincrementalopportunityforourstoreopeningprogram.Insightsfromoperatingsmallerformatstoreswillalsobenefitusaswelookaheadtourbanandothermarketopportunities.
CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:10.29BPriceasofEventDate:159.0
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Onthee-commercesideULTA.comcontinuesitsrapidgrowth,withsalesup43.4%contributing120basispointsofthetotalCompanycompof10.1%.TheULTA.comandloyaltyteamscontinuetoseeexcellentresultsfromimplementingmoretargeted,digitalmarketingstrategiestodrivetraffictothesiteandguestinsighttodrivetrialoffersandincrementalpurchases.
SamplingisakeydriverofgrowthonULTA.com.Alongwithourbrandpartners,we'vehadstrongsuccesswithoursignatureonlineoffers,suchasourmonthlybeautybagswithdeluxeeyesamplesandlimitedtimeBeautyStealsthatdriveawarenessandtrial.OurbeautyenthusiastguestslovetheseoffersandbrandpartnersalsoenjoyedworkingwithusthroughourCRMplatformtogettheirsamplestotherighttargetedsegmentsofourcustomerbase.Wecontinuetoscoreotherareastodrivetrialanddiscoveryaswell.
Thewebsitehasbeenrebrandedtoincorporatethenewelementsofthebrandpersonalityandcolorpaletteandguestshaverespondedverypositivelytothesechangestotheonlineexperience.Wealsocontinuetobenefitfromnewbrandsthatwe'veaddedtoourwebsiteincludingLancome,Redken,Matrix,PureologyandIt'sA10.
Andfinally,wehavemuchtoreportonoursixthstrategicimperativetoinvestininfrastructuretosupportourguestexperienceandgrowthandcapturescaleefficiencies.WecelebratedthegrandopeningofourGreenwood,IndianadistributioncenteronAugust3.
Westartedthefirstsmallnumberofstoresande-commerceorders.Welaunchedwithsixstoresandwearenowgraduallyrampingupthefacility,whichisoperatingonacompletelydifferentmodelfromourexistingDCs,andincludesallnewsystemsandmaterialhandlingequipment.
Whileit'sstillearly,wearedelightedthattheDCisofftoasmoothstart,theculminationoftwoyearsofhardworkandcollaborationacrosssupplychain,IT,storesandthee-commerceteams.ThisDCwillultimatelyramptoservice400storesand45,000e-commerceorderswhenitreachesitsfullcapacityoverthenextfewyears.
Inadditiontoamoreefficientoperatingmodelwithinthedistributioncenters,ourstoreswillreceivefewer,fullerandmorestablecartons,shipmentswillfeaturegreatercategorization,whichmakesiteasierforourstoreassociatestogetproductfromcartontoshelf,freeinguplaborhoursforcustomer-facingactivitiesratherthantasking.
Sowe'realsoimplementinganumberofcoremerchandisingsystemsandtoolstodriveproductivityaspartoftheoverallsupplychaininitiative.Forexample,thisfallwe'lllaunchaproductinformationmanagementsystemthatintegratesvendorinformationintoULTABeautysystemsandalignsproductinformationacrossallchannelstoimprovedatagovernance.Wealsoplantorolloutavendorscorecardtocollaboratewithourbrandpartnerstodriveimprovementsinperformance,suchasimprovedinboundleadtimeconsistency,leadingtobetterin-stocklevelsandanimprovedguestexperience.
We'llalsostarttorolloutourdemandforecastingandinventoryoptimizationtool,whichprovidesforecastingreplenishmentmodelstoimprovesupplychaincapabilities.Thistoolwillhelpusdrivehighersalesandlessclearanceandimprovevendorfillrates,aswellasleadtobetterin-storepresentationandhigherinstocklevels.Weplantolaunchonecategorythisfall,thenrolloutthesystemtoallcategoriesnextyear.
AndfinallyweareontracktoopenupourfifthdistributioncenterinDallasnextsummerandallthemerchandisingsystemsandtoolsthatwe'reintheprocessofimplementingwillworktogethertosupportourgrowthplansandimprovetheguestandassociateexperience.Intheaggregate,thesenewdistributioncenters,projectsandsystemsareexpectedtodrivesignificantlong-termefficienciestooptimizeoursupplychainforproductsourcetoguestsandhelpusdeliverthefinancialresultswe've
CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:10.29BPriceasofEventDate:159.0
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committedtoinourfive-yearplan.
Thatwrapsupmyupdateonthestrategicimperative,sonowIwillhanditovertoScott
Scott Settersten (CFO):
Thanks,Mary.Goodafternoon,everyone.
Second-quartersaleswere$877millioncomparedto$734millionlastyear,anincreaseof19.4%.Comparablesalesincreased10.1%.Theretailcompwas8.8%,thesalononlycompwas10.1%ande-commercegrowthwas43.4%.
ThetotalCompanycompwasdrivenprimarilybytrafficstrength,withtransactionsup7%andticketup3.1%.Similartothetrendwe'veseenforthepastfewquarters,ticketwasdrivenbyhigheraveragesellingpriceasaresultofstrongsalesandprestigecategoriesandlessrelianceonbroaddiscounting.
Retailonlycomparabletransactionswereveryhealthy,up6.3%,evenstrongerthanwhatweachievedinthefirstquarter.E-commercegrowthwasdrivenprimarilybytraffic,butaverageticketalsoincreased.
Grossprofitdollarswereup18.2%to$306.5million,butgrossprofitmarginde-leveraged40basispointsto34.9%from35.3%lastyear.Grossprofitsbenefitedfromimprovementinproductmarginsduetohighermixofprestigeproducts,offeringamorecompleteassortmentonULTA.comandlessdiscountingoverall.Thesebenefits,however,wereoffsetbyplannedsupplychaininvestments,includingthestartupofournewdistributioncenterinGreenwood,Indiana.
SG&Aexpenseincreased16.6%to$183.9million,down50basispointsasapercentageofsalesto21%versus21.5%lastyear.Thekeydriverofthisimprovementwasmarketingexpenseleverage,partlyduetostronger-than-expectedsales,butalsoasaresultofconcentratingmoreofourmarketingexpenselaterintheyear.
Westillplantokeepmarketingasapercentageofsalesflatforthefullyear,sincewewillberampingupourmarketingspendinthesecondhalftodrivebrandawarenessthroughnationaltelevisionandradiocampaign.
Pre-openingexpensewas$4.1millioncomparedto$3.6millionlastyear,drivenby20storeopenings,onerelocationandtworemodelsduringthequarter,comparedto19newstoresopenedandfourremodelscompletedduringQ22014.
Operatingincomeincreased20.9%to$118.5million.Operatingmarginwasup20basispointsversuslastyearto13.5%.Ourtaxratewas37.5%versus38.1%lastyear,drivenprimarilybytheimpactofaccountingforequitycompensationtransactions.Netincomeincreased22%to$74.2million,or$1.15perdilutedshareversus$60.8million,or$0.94perdilutedsharelastyear.
Turningtothebalancesheetandcashflow,inventorieswere$705.7millionattheendofthequarter,comparedto$541.5millionattheendofQ22014,up14%onaperstorebasis.ExcludingtheinvestmentininventorytostockthenewDCinGreenwood,inventoryperdoorwasup10.9%,roughlyinlinewithourcompgrowth.Thisincreasewasrelatedtomaintainingstrongin-stocklevelsforfastestturningSKUstosupportourrapidsalesgrowth,theadditionofnewbrandsandtherolloutofCliniqueandLancomeboutiques.
Capitalexpenditureswere$80.6millionforthequarterdrivenbyournewstoreopeningprogram,merchandisefixturesandsupplychainandsystemsinvestments.Weareontracktospendabout$300millioninCapExthisyear.
CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:10.29BPriceasofEventDate:159.0
©2014TheStreet,Inc.Al l R ightsReserved Page7of21
Depreciationandamortizationforthesecondquarterwere$39millionandareexpectedtobeabout$170millionforthefullyear.WeendedQ2with$475millionofcashandshort-terminvestments.TheCompanyrepurchasedapproximately291,000sharesatacostof$46millionduringthequarterunderour10b5-1plan,aspartofourprogramtoreturncashtoshareholders.Asoftheendofquarter,$286millionremainedavailableunderthe$400millionsharerepurchaseprogram.Weexpecttocontinuetooffsetdilutionwithour10b5-1planandstillhavetheflexibilitytorepurchaseopportunisticallybeyondthat.
Turningnowtoguidancefor2015,intermsofouroutlookforthefullyear,basedonourstrongperformanceinthefirsthalf,weareraisingoursalesandearningsexpectationsfortheyear.Weexpecttoopenapproximately100storesin2015andremodelfourstores.Weplantogrowe-commercesalesinthe40%range.Weexpecttodrivecomparablesalesinthe8%to10%range.Weexpecttodeliverearnings-per-sharegrowthinthehighteensfromthe$3.96ofadjustedEPSwedeliveredin2014,whichexcludesthe$0.02nonrecurringtaxbenefitinQ4oflastyear.
Thisguidanceincludesplannedsupplychainandsystemsinvestments,andassumeswecontinuetorepurchasesharestooffsetdilution.WeexpecttodeleverageonthegrossprofitlineandmodestleverageontheSG&Alineandoperatingmarginisexpectedtobeaboutflat.Asareminder,muchoftheinvestmentrelatedtooursupplychainprojectwillhitgrossprofit,includinghigherdepreciationexpense,whichyou'llreallybegintoseeinthethirdquarter.
Weexpectourtaxratetobeapproximately38%.Weexpecttospendcapitalona$300millionrangeandtogeneratefreecashflowsimilartolastyear'sperformance.
Weareverypleasedtoraiseourannualcompguidanceandearningsoutlook,todeliverhighteensearningsgrowthwhilemakingsignificantinvestmentsinthebusinesstodrivesustainable,long-termmarketsharegainsinshareholdervalue.
Movingontospecificguidanceforthethirdquarter,weexpectsalestobeintherangeof$869millionto$883million,comparedto$745.7millionlastyear.Weanticipateachievingcomparablesalesintherangeof8%to10%versus9.5%lastyear.Weexpecttoopen44storesinthethirdquarterversus50storesopenedinQ3lastyear.
Sopre-openingexpenseexpectedtobedownslightly.Earnings-per-shareexpectedtobeintherangeof$1to$1.05versus$0.91forQ3lastyear.Weanticipateataxrateof36.9%andafullydilutedsharecountofapproximately64.2million.
Andwiththat,I'llturnthecallovertoourconferencecallhosttobegintheQ&Asession.Operator?
QUESTIONS&ANSWERS
Operator :
(OperatorInstructions)
StephanieWissink,PiperJaffray
StephanieWissink(Analyst-PiperJaffrayandCo.):
Thankyou.Goodafternoon,everyone.
Afewquestionforyou.Mary,ifyoucouldjuststartwithsomeofthenewbrandinitiatives.We'veseensomeoftherolloutsin-storeaswellassomeofyourdigitalcommunication.Canyoutalkaboutsomesuccessesthereandhowyou'rethinkingaboutstrategicallydeployingacrosssomenewinitiativesforthe
CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:10.29BPriceasofEventDate:159.0
©2014TheStreet,Inc.Al l R ightsReserved Page8of21
backhalf?
AndthenjustaquestionontheDC.Canyouremindus,oncethatDCisfullyupandfullyrunningwhatthetotalstorecapacitywillbeofyourexistinginfrastructureandwhenyoumayneedtoinvestagaintosupportthenextrolloutofsomeofthesmallerformatstores.
Thankyou.
MaryDillon (CEO):
Well,letmejustsaythatthenewnessthatyouaskedabout,Ithinkit'sreally--weconstantlyknowthatourguestsareinterestedinnewsandinnovation,andasImentionedthereareseveralthingsthatwerequitesuccessfulinthequarter.SobrandslikeBenefitandUrbanDecaywiththeSmokyPalette,brandslikeAnastasia,acrossallcategoriesRedkenFrizzDismiss,Mixisahotbrand,sotherewasreallyalotofnewness,aswellasexistingbrandnewness,newbrandsandjustcorebrandgrowth.
Andhowthatworksintermsofourplatforms,intermsofmarketing,isthatisreallywherewebringitalltogether.It'sjustmakingsurethatourguestsgettounderstandwhatwehavethat'snewandexciting.Ithinkourmarketingtacticsarebreakingthroughtheherdinevenbetterwaysallthetime.Sothat'sgoingtobeacorepartofwhatwedo,andIthinkwe'regettingbetteratitallthetime,moreefficientandmoreeffective.
Intermsofdistributioncenters,thisnewDCwillservethe400stores,45,000e-commerceorders,weareplanninganotherdistributioncenterthat'sindevelopmentandconstructionrightnowinDallas.Itwillopennextyear,andthatwillbesufficientforthecapacitythatweneedforsomeperiodoftime.We'llcontinuetoevaluatethat.
Whetherit'ssmallorlargestores,wewouldanticipatethattobecoveredinthenetworkthatwe'redefining,butcertainlythat'sfluidaswecontinuetogrowandlookouttothefuture,we'llcontinuetoevolvethatstrategyandourneeds.
StephanieWissink(Analyst-PiperJaffrayandCo.):
Thankyou.Bestofluck.
MaryDillon (CEO):
Thankyou
Operator :
O liverChen,CowenandCompany
OliverChen (Analyst-CowenandCompany):
Congratulationsonreallyspectaculargrowthhere.Regardingtheholidayplansandinventoryoptimization,whichcategoriesaremostripeforthatprocessandwillthatimpactholiday?Someretailersarepotentially,indifferentcategories,arepotentiallyoverinventoriedinthemarketplace,sohowshouldwethinkaboutthemaincatalystforyouandholidayatlarge,andwhatmightbemostdifferentonayear-over-yearbasis?
MaryDillon (CEO):
Wellthankyou,O liver.I'dsaybroadlyspeakingholidaysseasonwe'vebeenfocusedonformonths.Weareexcitedaboutit,it'sclearlysomethingthatisimportanttousandtoourguests,aswell.IguesswhatI
CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:10.29BPriceasofEventDate:159.0
©2014TheStreet,Inc.Al l R ightsReserved Page9of21
wouldsayisthatwejusttrytobeclearaboutmakingsurethatwe'vegotadequateinventoryforwhatweexpecttobeourtopvolumeitems,andwethinkwe'reingoodpositiontodothat.
SoIwouldsaythatwelookatthatasacorepartofhowwedobusiness.Givenourgrowthtrendsand,Ithink,ourabilitytoreallyunderstandwhat'sgoingtomove,wedon'thavebigconcernsaboutthingsthatdon'tworkduringholiday.Ithinkhistoricallywe'veabletomanagethatreallywellandhavealowamountofproductsthatdon'tworkwell,soIthinkwe'regoodshapethere.Isthereanythingyouwouldadd?
DaveKimbell(ChiefMerchandising):
Iwouldjustaddthatwedon'treallyhaveanyconcernsaboutourinventoryposition.Again,verylittleinthewayofseasonalityandwhatwecarryinourstores.Ithinkweprobablyhaveoneofthebest-in-classinretailasfarastheabilitytoworkthroughdiscontinuedproductorclearancethingsandpartneringwithourbrandsvendorstodothatinthemostprofitablewaypossible.
OliverChen (Analyst-CowenandCompany):
Okay.Justaquickfollow-uponthemobilefront.Whereareyouintheaimsofinnovationthere,andwhatarethenextchaptersforustolookforwardtoasthiscustomerseemsreallyengagedonthemobilefrontier,aswell?
MaryDillon (CEO):
I'lltakeletDavetakethat.
DaveKimbell(ChiefMerchandising):
That'sgreat,O liver.Mobile,obviously,iscontinuingtogrowforusandit'sincreasinginthewayconsumerswanttoengagewithbrandandshop.Forusinthesecondquarter,about60%ofourtrafficcamethroughonourmobileapplications,mobilewebsiteandabout25%ofoursales.
We'rewellpastearlyinningsontheimpactthatit'shavinginthemarketplaceandwe'recontinuingtooptimizetheexperienceinourtotaldigitalfootprint,ofwhichmobileisacriticalone.Whereweareimprovingourappprettysignificantlyandtryingtomakethatshoppingexperienceeasieronceshe'sonourmobilewebsite,allthechangesthatwe'remakingaroundtryingtoincreaseconversionandincreaseaverageorder,thatweredoingbothonthedesktopserviceaswellasmobilearehavinganimpact.
Sowe'retryingtosharpenhowtheoffersthatwe'rehighlighting,maybewecanpersonalizeemailsanddrivehertothemobilewebsite.Soalotthatweredoing,anditwillcontinuetoincrease,it'sclearlythewaythatshewantstoshopandit'sabigareaoffocusforusgoingforward
OliverChen (Analyst-CowenandCompany):
Thankyou.Bestregards.
Operator :
DanielHofkinWilliamBlair
DanielHofkin (Analyst-WilliamBlairandCompany):
Goodafternoon,I'llechotheterrificresults.
Justalittlemorecolor,ifIcould,inageneraltrendwithinretailandomni-channelretailers,obviously,e-commercesalesandsometimescomingattheexpensesofthein-storebusiness,clearlythatdoesnot
CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
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seemtobehappeningwithyouguysseeing,actually,anuptick.
Justcuriouswhatyoufeellike--youtalkedaboutmarketingarethereanycouplethingsthatyoufeellikeareincrementallyresonatingevenalittlebitmorewiththeconsumer?Andthen,lastly,Ijusteditorialize,I'massumingthattheDonaldTrumplookisnotoneofthefallandwinterlooksthatyouguysareconsidering.
MaryDillon (CEO):
Wetookthatoneoffthetable.Funny.
Onthee-commerceomni-channel,letmestartbroadlyandthenmaybeI'llaskDavetoaddsomespecifics.ButIthinkacouplethings,oneisthatwe'reclearthatforus,twothings,oneisthatthemulti-channelshopperisourbestshopper.She'sdrivingalot.It'sreallyprettyincrementalbusinessforusandthecoreinsightisthattheexperiencetogoshopforbeautyisonethatlargelywomenwanttohavehappeninthephysicalbricksandmortarspace.Andwe'retryingtomakethatstoreexperiencesoinvitingwiththerightproductsandtherightlevelofserviceacrosstheboardandwethinkthat'sworkingforusandisverysustainable.
Shelikestocomeandexploreandtotryandspendtimethere.Withservicesaswell,obviouslythat'ssomethingyoucan'tgetdoneonline.Soforus,weseethatasthecorepartofourBusiness.E-commerceisworkinginawaythat'skindofneatbecauseit'sprettyincremental.Sotheshoppersthatwehavethatareshoppingbothonlineandinstorearebyfarourbestshoppers.
There,forexample,maybecomingninetimesayearversusstoreonly,whichislikefourtimesayearandthat'sonlyasmallpercentageofourgueststhatareactuallydoingthat,sowelikethat.Wethinkgrowthine-commerce,obviously,isgoingtobeincrementalandprofitableforusandfitswiththeconsumerinsightinthemodelthatwe'rebuilding.
DaveKimbell(ChiefMerchandising):
Yes.I'lljustaddtothat.Certainlywelookatatotalomni-channelcustomersastheonewearemostfocusedoncontinuingtogrow,andsomostofthemarketingeffortsthatwe'redoingaredrivingbothonlineandin-storeactivities.So,Marymentionedsomeoftheadvertisingprogramsinthesecondquarterafairamountofradioadvertising,enhanceddigitaladvertising,bothofwhichthroughouranalysisdrivesbothin-storeandonlineactivities.
Certainlywithinthedigitalspaceitself,oursocialmediaactivityisincreasedquiteabit.OurPRismuchstronger,we'redoingmorewithsocialinfluencestodrivegreaterengagementandthenasweroll,asMarymentioned,tothethirdquarter,beyondintoothertacticsthatwehistoricallyhaven'tused,likeTV.
Wethinkallofthosewillcontributetodriveintegrateamoreloyalguest.Sheisveryattractedtoourloyaltyprogramandthatbehaviorthengetshershoppinginbothchannels,andthat'sthewaythatwewanttocontinuetodrive,andwe'vehadsomesuccesstothatsofar
DanielHofkin (Analyst-WilliamBlairandCompany):
That'sgreat,thanks.Bestofluck
Operator :
SimeonSiegel,NomuraSecuritiesInternational(America).
SimeonSiegel(Analyst-NomuraSecuritiesIntl(America)):
CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
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Thanks,goodafternoonandcongratulations.
SorryifImissedit.Withinthetrafficincreasecanyousharethebreakdownbetweennewcustomersversusincreasedfrequencyofexistingshoppers.Andthenmaybecanyoutalkaboutwhereyou'restillsourcingthosecustomersfrom?Andthenjust,Scott,givingthemovingpieces,canyouhelpwiththemagnitudeofthegrossmarginimpactsofthenextseveralquarters?Thanks.
Scott Settersten (CFO):
Yes.IguessI'llstart.Wedon'treallybreakoutnewcustomersversusexisting.Imeanwebifurcatethetopandwetalkedaboutthefactthatthemajorityofthecomp,twothirdsofitwastransactionortrafficbased,withtheremainderbeingaverageticket.Andthatwasprimarilydrivenbyaveragesellingprice.Sounitswererelativelyflatyear-over-year;moreprestigeagain,lesspromotion,whichisdrivingthebasketincreaseoverall.
DaveKimbell(ChiefMerchandising):
I'dsayweareexcited,reallypleasedwithournewtraffic,ournewguestacquisitionrate.Mary,inhercomments,mentionedourmembershipgrewto16millionguests,soabout18%.Andthatwasdrivenbyhealthyincreasesinnewguests,aswellasstrongretention,increaseinretentionofexistingguests.Sowefeellikewe'reattractingnewandkeepingevenmoreofourexistingguestsengagedinourproposition.
Scott Settersten (CFO):
AndalittlecolorspecifictoQ2asfarasmargingoes.We'reveryhappytoseecoreproductmarginsinourretailbusiness,whichagainismorethan90%ofourtotalsales,continuedtoexpand.PrestigeMixhelpedlesspromotionoverallhelped.
Wedidhavealittlebitofheadwinds.Wedidn'thaveasmuchoffixedorleverageinthesecondquarteraswhatwesawearlierintheyearorwhatwesawintheyearagoperiod.Wealsohadalitanyofothersmalleritemsthataffectedthequarter.Againwenormallydon'tgetintothislevelofdetail,butsalon,forexample,wementionedinthescript,Marydid,aboutsometrainingforoursalonassociatesforthefalltrendlook.Wepulledforwardsomeexpensesthere.Sothatwasabitmoreofaheadwindthanwhatweexpected.AndwealsohadthestartupoftheDC,whichnegativelyaffectedgrossprofitinthequarter.
SimeonSiegel(Analyst-NomuraSecuritiesIntl(America)):
Great,thanksalot.Bestofluckfortherestoftheyear
Scott Settersten (CFO):
Thankyou
Operator :
RupeshParikhOppenheimer
EricaEiler (Analyst-OppenheimerandCompany):
Goodafternoon,thisisEricaEileronforRupesh.Congratulationsonthereally,anothernicequarter.
SoIjustwanttogetbacktoe-commercehere.Imeanitsoundslikeyou'veclearlydonealottoenhancethecustomerexperienceonline.Iwashoping,maybe,youcouldtalkalittlebitmoreaboutwhatyou'reseeingfromconsumerpurchasesonline.Specifically,maybe,whatthatthemassPrestigemixofproducts
CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
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lookslikeonlineversusinstores.
Andthenalsojustwonderingifperhapsconsumersarebuyingmorestaple-likeproducts,maybetheirfoundations,orgo-tomascarasversusmaybeshadedgoodsorskincareproductsthatconsumersmaywanttoexperimentwithinstores.Thatwouldbegreat.Thanks.
DaveKimbell(ChiefMerchandising):
Yes.Greatquestions.
Again,weareverypleasedwithouroveralle-commercesuccess,andweseealotofrunwaygoingforward.Specificallyonsomethequestions,wedon'treallybreakdownbetweencategories,butwhatIwould--butyourquestionaboutmassversusPrestige,whatIwouldsayisthatakeypartofourtotalproposition,e-commerceanywhere,inourbrick-and-mortar,e-commercestores,isallthingsbeautyallinoneplace.
Thebreadthofassortment,thebreadthofpricepoints,thebreadthofcategories,thatcertainlyiswhatdrivesourbusinessanddifferentiatesus,andweseethatwithinthee-commercespace.
SolargelyI'dsaytheassortmentandtheengagementthatwehaveinourbrick-and-mortarstoresislargelyreflectedone-commerce.Thereweresomecategoriesine-commercethatwetalkedaboutinthepastthatwedidn'thaveasfullofassortment,butthatmuchofthatgaphasbeenclosed,largelyinourprofessionalhaircare.Soweseethatreallyreflectingwhatweseeinthein-storeenvironment.
Asfarasstaplesversustryingnewthings,I'dsayit'sabitofboth.Wecertainlydon'tseeonlystaplereplenishmenttypeitemsbeingboughtonline.Thatishappening,butwhatwefind,particularlywiththosegueststhatwetalkedaboutthatareomni-channelguests,thatarereallyourbestguests,she'sshoppingmorefrequentlyintotalacrossbothretailstoresandoure-commercesite.
Andshe'sbuyingitemsthat,yes,shecan--maybearereplenishment,butshe'salsoindulginginthingsthatshehasn'ttried,thatarenewitems.Shewantstogetitfirst.Shewantedtogoonlinerightwhennewoffersareupandavailable.
Soshe'sdoingabitofbothandthat'sabsolutelythetypesofthingsthatwe'reencouraging.We'llfindit,makeiteasierforhergoingforwardtoreplenishthosefavoriteitems,butalsocontinuetohighlightnewsandexclusiveandfirst-to-marketitemsthatgethereexcitedwhentheycomeout.
MaryDillon (CEO):
I'lljustadd,andImentionedthisinthescript,ourCRMcapabilitygivesustheabilitytoexperimentalotwithhowtogetmorepersonalizedandmorecustomizedonwhatweemailtowhomandreallyallowhertotrythingswhetherit'sBeautyBreaksoremailsthatintroducehertonewproducts.Soit'sreallyanicewayforourgueststolearnaboutnewproductsandtrynewcategoriesthattheywouldn'thavebefore.
EricaEiler (Analyst-OppenheimerandCompany):
Great,that'sreallyhelpful,thanksforthecolor.
Operator :
SimeonGutman,MorganStanley
SimeonGutman (Analyst-MorganStanley):
Thanks,niceresults.Marymentionedevolvinglabormodelinyourpreparedremarks,canyouupdateus
CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
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onyourthoughtsthere?Ithinkatanalystdayyousuggestedyoumightexperimentinsomeareasinthelabormodel.Andthenconnectedtoit,yourbeingverysuccessfulwithCRMandmarketing,curiousinplaceswhereyou'retestingincreasedlaborifyou'reseeingabenefitaboveandbeyondsomeofthesuccessyou'reseeingwithCRMandtargeting.
MaryDillon (CEO):
Thankyou,Simeon.
Juststeppingback.Onlyjustkindofbigpicturewise,IguesswhatIwouldsay,isthataswethinkaboutitKeciaSteelman,who'sourheadofstoreoperationsandherleadershipteam,we'vegotaveryexperiencedsetofstoreoperatorsandwe'rereallyfocusedoncontinuousimprovementinexcellenceandoperationsandguestservicekindofacrosstheboard.
Sowhilethepayrolltestiskindofapieceofit,justtogiveyouabroaderperspectivewe'rereallykindofthinkingabouthowdoyou,buttheguestsandtheassociatesservicingtheguestsinthecenterofeverythingwedoandreallyaholisticapproachtoimprovementswhetherit'speople,processesortools.
Sothat'severythingfromidentifyingtherighttalent,traininganddevelopment,storeprocesses,bestuseoflaborhours,sincewecantalkedaboutthere,alltojustreallyimprovethatguestexperience.Sothepayrolltestisjustapartofit.We'relearningthings,we'veextendedittoanother60stores,we'vegotsomespecificlearnings.Somethingsthatwe'retryingthatworkdifferently.
Idon'twanttogivemorespecificonitthanthatbecausewerestilllearning,butcertainlywearemeasuringimpactonsalesandunitspertransactionandwhatnot.It'sacombinationofartandscience,itwillbecoretojustwhatwedoallthetime.Sothere'snobiga-hainonespecificthingcomingoutofit,butthinkaboutit,it'sjustapieceofabroaderfocusonhowtogetbettereverydayatwhatwedointhestoretoserveourguests.
SimeonGutman (Analyst-MorganStanley):
Okaythankyou
Operator :
MattMcGinley,EvercoreISI
MattMcGinley(Analyst-EvercoreISI):
Thanksfortakingmyquestion.Myfirstoneisontheinventory.Whenwelookatthat30%inventorygrowthyouhad,Ithinkyousaid16%ofthatwasrelatedtogettingaDCinstock,andIassumesomeofthatwouldbesafetystock.SoIwonderwhatofthat16%howmuchisin-stockversussafetystock,anddoesthatnormalizeovertheyear?OrdowereallyneedtogetpasttheDCthatopensin2016toseethosegrowthratesdrop?
Andthesecondoneisonadvertising.Withthetestingyouweredoinglastyear,Iknowyou'rehappywiththosetestandyouexpressedhowgoodtheywereinthetestmarketstratagem,somyquestionis,asyoudidn'tdoasmuchadvertisinginthesecondquarter,didthosemarketswhereyoudidthetestsincontinuetooutperformtherestoftheCompanyortheCompanyaverage?
MaryDillon (CEO):
Yes.I'llstartwiththat.Iwouldn'twanttocommentaboutallthespecificlearnings.Clearlywefeelgoodaboutwhatwe'velearnedit'sbeen--we'vebeenmodifyingourmarketingmixforsomeperiodoftimeunderDave'sleadershipandhisteam.SowhatI'mexcitedaboutisthatourmarketingisgettingmore
CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
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efficientandeffectiveeverydayandthat'sreallycriticalforusinthelongterm,todriveshort-termresultsandtocreatealong-termstrongbrandandbrandequity.
Sothat--I'dsayinthelastquarterseeingweaddedradioadvertising,wedidalotofPR,wedidalotofdigital.Wealsocontinuedtacticsthatwe'vealwaysdoneliketabsandmagazines.Allofthosearegettingmoreeffectiveandefficientwithlessrelianceondiscounting.
Inadditionnow,asImentioned,reallystartingnextmonthwe'regoingtolayerinnationaltelevisionadvertising.Welearnedfromin-storeteststhatthatwasgoingtobeeffectiveforus,sowe'regoingtoaddthattothemix.
SoIfeelconfidentinsayingwegotalotofgoodlearningsoutofthetestandnowwe'removingforward,implementingallthoselearningsaswego.But,youknow,it'sagainartandscience,there'sneveractuallyoneanswerandit'sneveranyonestoppingpoint,right?We'llcontinuetoevolveaswego.
Scott Settersten (CFO):
Withrespecttotheinventory,itwasroughly$20millionattheendofthequarter,whichI'dsayisallsafetystockbecauseweweren'tservicinganystoresoutofthatDCatthatpointintime.Right.Westartedsubsequenttoquarterend.SoIwouldsayweexpectthattobekindofthehighwatermarkonaperdoorbasisforFY15.
WeexpecttoseesomemoderationnowthesecondhalfoftheyearandshouldstayroughlyinthatzoneaswecyclethroughnextyearwithanotherDCstackedontop.Sooncewegetthrough2016,againwiththefallofthesystemsweareputtinginplace,theDCforecastandreplenishment,otherfloorplanningtools,weexpectallofthosetohelpcontributetoimprovedinventoryflowsandimprovedturns.
MattMcGinley(Analyst-EvercoreISI):
Okay,thankyou.
Operator :
ChrisHorvers,JPMorgan
ChristopherHorvers (Analyst-JPMorgan):
Thanks.Goodevening.
Sowantedtofollow-uponthegrossmarginquestion.HowsignificantwastheDCstartupcostsandthe50bpsandwouldyouconsideritonetime?Andthenonarelatednote,canyouprovidesomecoloronthemagnitudeofthemarketingshiftoutof2Qandwhetherthosedollarsspreadroughlyequallyinthebackhalf.
Scott Settersten (CFO):
Yes,Iguesswithrespecttothegrossmargin,I'mnotgoingtoquantifythebasispointshere.WetriedtosteerawayfromspecificP&Llineguidance.Butit'sgoingtobemuchmoresignificantinthethirdquarterthanitwasinthesecondquarter.Okay?
Sojustdirectionally.Secondquarter,alotofpayrollcost,right?We'vegotrentexpenserunningthroughtheP&Lbecausewe'reinstartupmode.Butthedepreciationdoesn'treallystartandthat'sreallygoingtobethesignificantincrementalcostrunningthroughthegrossprofitlinestartinginthethirdquarter.Allright.Foralltheinvestmentsand,again,wecalledthatoutinourinvestorcommunications,right?It'supwardsof$60million,soitisasignificantstepupfromwhatwe'vedonehistorically.
CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
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Marketing,alongthesamelines,wearenottryingtogettoospecificonwhatdollarsmovedwhere,butit'ssignificant.Wesawsomeofthefirstquarterwecalledthatout.Wesawmoreinthesecondquarter.And,again,it'saresultofusbeingsmarterduringthequarter.
We'reseeingsalestrends,andifweseeanopportunitytopullback,wewilldothat,andwe'llkeepthedrypowderforwhentheducksareflyingsotospeak.So,fourthquarterthere'salotofshopping,alotofnewguestscomingintoalotofnewstoresthatwereopenedduringthecourseoftheyear,andwe'regoingtodeploythemarketingwherewethinkitmakesthemostsense.
ChristopherHorvers (Analyst-JPMorgan):
Andjustgoingbacktothegrossmarginquestion.So,understood,thedepreciationstepsup,butyoudon'tnecessarilyhavetheotheritemssittinginthere,likethesalontraining,whichwouldpressuregrossmargin.WhatI'mtryingtounderstandis,couldgrossmargininthebackhalfbedowninsimilarmagnitudeasitwasinthesecondquarter?
Scott Settersten (CFO):
Idon'tthinkIwanttogettothatlevelofdetail.Again,Iwouldjustsaythough,there'salwayseveryquarterisstandalone.There'sinsandthere'soutsandthesalonwementionedthistimebecausethatwasabitofanunusualitem.E-commercewasstrong,right?Thatleaderevent,that'sanotherone-off.
Itwasstrongerthanwethoughtitwasgoingtobeonline,whichwasgreat.Therewereincrementalsales,butwehadadditionalfreightcosts.It'sheavierproduct,itcostsalittlebitmoretoship.Wedon'tthinkit'sproductivetogetintoreconcilingthebasispointseveryquarter.
TheonethingIwouldpointoutisifyou'relookingatnextyear,wegotanewdistributioncentercomingonlinenextyear,right?Wherewe'regoingtohavealotofthesestartupcostsandthesame.SoIwouldn'texpectedtocreatethesamealevelofheadwinds,justbecauseyou'relappingabigeventlikethatthisyear,butitwillbeadditionalheadwindnextyear.
ChristopherHorvers (Analyst-JPMorgan):
Thanksverymuch.
Operator :
JoeAltobello,RaymondJames
JoeAltobello (Analyst-RaymondJamesandAssociates):
Thanks.Hi,guys,goodafternoon.
Firstquestion,Ijustwanttogobacktotheinventorylineforasecond.Ithink,Scott,youmentionedearlier,obviously,thatthat'sgoingtoremainabitelevatedherewiththenewDCcomingonline.Whendoyouexpecttheyear-over-yearincreaseinimprovedinventoriestomigratebacktobasicallysame-storesalesgrowth?Isthatnextyear?
Scott Settersten (CFO):
Well,I'dsaywe'regoingtobeintheneighborhoodthisyear,Imeanlookatthecompthatwereposting.It'san11comp,soyou'relookingatxthat20millionofstartupinventory,I'dcallit.We'reatthecomplevel,soit'snot--Iwouldn'tviewtheinventoryasbeingoutofcontrolinanyway,shapeorform.Imeanwefeelverycomfortablewiththeinventorythatwehave,againthere'slittleseasonalorfashionriskintheinventory.
CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
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Imeantobefrank,wespendmostofourtimetryingtofigureouthowtostayaheadofthetrend.Usuallywe'rechasinginventory.Soweare,withthecashandthebalancesheetstrengthwehave,we'renotgoingtobeshyaboutmakingsomebetsgoingintothefourthquarteronhotproducts.SoIwouldsay,generallyspeaking,there'snothingtoseehere,right?We'reverycomfortablewithourinventoryposition.
JoeAltobello (Analyst-RaymondJamesandAssociates):
Okay,that'sgoodtohear.Andthen,secondly,intermsofyourdecisiontogointonationalTVadvertisingforthefirsttime,whynow?Isthissomethingthatyouviewasanaturalextensionofyourmarketingstrategy,orwasthissomethingthatwasdebatedinternallyorwasthisjustanobviousmoveonyourpart?Thanks.
MaryDillon (CEO):
Youknowit'sreallybeenpartofourthinkingallalong.It'sreallyapartofourfive-yearplan.Thefirststrategicimperativethatwedescribedisdrivingnewguestacquisitionandmoresalesfromourcurrentguests.Weknowthatwehaveagapinawarenessofourbrandrelativetoourcompetitors,whetherit'saidedorunaided.
Andthattelevisionadvertisingisoneofthetools,onethefastesttools,todriveawarenessandwe'vebeentwoyearsintoitnow.Soit'swasn'tlikewe'rejustgoingtojumpanddothatovernight.Wecarefullydevelopedbrandpositioning,creative;testedit,testedthemediaplan.SoIfeelconfidentthetimeisright.
AlsoIwouldsay,weallknowit'saverycompetitivemarketplace.It'salwaysbeen,itprobablyalwayswillbe.Sostrikingwhiletheiron'shot.We'reinapositiontobuildalong-termsustainablebusinessmodelhere,andwethinkthisisakeypartofit,istoreallykeeppressingaheadwiththemarketingtoolstodrivebothshort-termandlong-termresults.Andwefeelit'srighttimetodoit.We'rereadytodoit.
JoeAltobello (Analyst-RaymondJamesandAssociates):
Great,thankyouverymuch
Operator :
KellyHalsor,BuckinghamResearch
KellyHalsor (Analyst-BuckinghamResearch):
Hi,thankyoufortakingmyquestionandcongratulationsonanothergreatquarter.IwaswonderingifyoucouldtalkalittlebitmoreaboutthisPrestigeskincarecategory.It'sbeenafewquarterssinceyouhavecalleditoutasatopperformingcategory.
Sowhatareyouseeingintermsoftrendsandnewnessofproductsandbrandsbeyondtherolloutofthebrandedboutiques?Arethereanyopportunitiestoaddnewbrands,especiallyinlightofsomeofthewellknownbrandsrecentlyannouncingplanstogetintothespecialtymulti-channelinabiggerway?
Andthensecondly,couldyouprovideanymorecoloraroundthecadenceoftheDCandthestorerampup?Howmanystoresdoyouneedtogettostarttoseesomeleverageoncostsassociatedwiththatfacilityandjustanytimingaroundthatwouldbehelpfulaswell.Thanks.
DaveKimbell(ChiefMerchandising):
I'llstartwithPrestigeskincare.Prestigeskincare,asyou'reprobablyaware,isnot--it'sbeenalittle
CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
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slowerthanhistoricaloverthelastfewyears.Ithasgonedownasacategory,althoughweseeitasacriticalcentralcategorytoouroverallproposition,andwe'reexcitedaboutthepotential.Ithinkit'samixofgreatpartnersthatwehaveinplacetoday;someofourbiggest,strongestbrandslikePhilosophy,Dermalogica,Clarisonic.
Dermalogicawithourpartnershipwithskinservicesisakeystrategicplatformforustocontinuetoengageourguestsandnotonlyhaveherengagedinproducts,buthaveherengageinservices.Soweseethoselargestbrandscontinuetogrowandprovideopportunity,bothtodayandsomeoftheinnovation,apipelinethatweknowthatthey'regoingtotrygoingforward.
Thereareadditionalbrandsinourboxthatarerelativelynewornewer,orupandcoming.SoabrandlikeJuiceBeautyisanicebrandthatwe'reexcitedaboutandisperformingquitewell.Thereare,toyourquestion,therearecertainlyadditionalbrandsthatwedon'tcarrytoday.I'mnotgoingtotalkaboutanyofthem,butspecifically,butcertainlyourbrandsthatwe'recontinuingtoexplore.Wehaveafullteamdedicatedtoexploring,figuringoutwhichoneswouldmakemostsenseinourpropositionandinourboxgoingforward.
Sowe'llcontinueaddinnovationintheskincarecategory.Weseeitasamix.You'rerightthatthere'sbeenafairamountof,Iguess,consolidation.We're(inaudible)isplayingabiggerroleinPrestigeskincare.Wethinkthat'sprobablyonlygoodtogetgreateremphasisonacategory,somenewresourcesandwethinkitwilldrivegrowthgoingforward
Scott Settersten (CFO):
And,Kelly,theshortanswerontheleveragequestiononfixedcost,iswewouldexpectweexpecttoseebenefitsfromtheGreenwoodfacility.Weexpecttoseesomebenefitsnextyear.Ofcourse,thosewillbemaskedsomewhatbyaddinganothernewDCintheDallasarea.Meaningfully,2017,Ithink,iswhereyouwouldwebeabletoseemorepresenceofleverageontheP&Loverall.
Operator :
MarkAltschwager,RobertW.Baird
MarkAltschwager (Analyst-RobertW.BairdandCompany):
Goodafternoonandgreatquarter.
Kindofabiggerpicturequestionand,Mary,we'veseengrowthinpopularityofthesebeautysubscriptionservices,Ithinkoneofyourcompetitorsactuallyhasrecentlyannouncedalaunchinthatarea.Canyoujustgiveusyourthoughtsonthemeritsofthatmodel?IsitsomethingULTAloyaltyguestsareaskingfor?SomethingyoucouldseeULTAdoingintheforeseeablefuture?And,maybe,anycommentonwhereyourcapabilitieslietheregiventhenewDCinvestments?
Thankyou.
DaveKimbell(ChiefMerchandising):
Yes,I'lltakethat,Mark.
Weseetherealbenefitofthatwholespaceasfundamentallydrivingtrialanddiscoveryofproductsforourguestsandthat'ssomethingthatwe'vebeenfocusedonforawhile.Wedoalotinthatspace,wedonotcurrentlyofferaexactsubscription-basedmodel,similartosomeoftheotheronesthatareoutthere.Andwe'llexploreallouroptionsgoingforward,althoughIwouldsaywhatwe'rereallyfocusedonfindingwhatwethinkareprobablyevenbetterwaystodrivethatdiscoveryandtrial.
CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
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Youknowwedoalotwithourgueststoprovideproducts.Wedoprogramsthroughoure-commerceplatform,BeautyBreaks,whichareweeklylimitedtimeoffersthatgivehalfpricesandsamplesassociatedwithit.WehaveBeautyBagsthatareextremelypopular,thatgivepremiumsizesamplestoourguests.
Andwefeelthey'remoretargetedandmorerelevant,weoftenpartnerthosewithbuy-insoncertainproducts,soourcustomersaremoreengagedinit,theyareexpectingtheseproductstocomealongwithit.Sotheirusage,wethink,isreallygood.
Wearealsoexperimentinginanothervarietyofdifferentways,againtrialanddiscovery.Forexample,recentlywehadprogram,withaverypopularYouTubebloggercreatedasamplebagwithherfavoriteitemsthatwasexclusivelymadeavailabletoherfollowerswithabuy-inonourwebsite.
Sowethinkitnotonlydrovebusiness,itdroveengagement,itsampledproductsanddiscovery.Sothewholespacearoundtrialanddiscoveryisonethatwethinkwe'reveryactivein.We'vereachedhundredsofthousandsofguestswiththosekindofprograms.We'llcontinuetodrivethatkindofprogramgoingforwardbecauseitexcitesourguests.Wegetthemengagedinmoreandmoreofourproductsgoingforward.
MarkAltschwager (Analyst-RobertW.BairdandCompany):
Thanks,Dave,andbestofluck
Operator :
DanaTelsey,TelseyAdvisoryGroup
DanaT elsey(Analyst-TelseyAdvisoryGroup):
Goodafternoon,everyone,andcongratulationsontheterrificresults.
Asyouthinkaboutthenewgueststhatarecomingin,whethergoingtothesalonoreveninthestorewithPrestige,doyouthinkthesesalonguests,howmanyofthemarecomingfromloyaltyprograms,howmanyofthemarecomingfromthemarketingeffortsthatyou'reputtingintoplaceandwhatdoesthismeanforconversionintoloyaltymembersgoingforward?
Thankyou.
MaryDillon (CEO):
I'mgladyouaskedthatbecauseit'sanexcitingareaforusintermsoffuturegrowthbecausereallyasmallpercentofourloyaltygueststodayareusingthesalon.Wearedoingalot.I'dsayit'scomingfromalotofthings.Oneiswe'veofferedanewonlinebookingservicethatweknowisdrivinglargelyincrementalnewguests,thousandsoftheminfact.Andthenalsoourmarketingprogramsrightnowaregettingmoreandmorefocusedonintegratingmakeupandhairandtrendsandthey'reveryexciting.
Ithinkwe'reactuallybringingtoourstoreassociatesthiskindoftrendtrainingthatwetalkedabout,bringingittolifeinsidethestore.AndcertainlyeverygetthatcomesintoanULTAstorewhoseapotentialnewloyaltymember,ourassociatesin-storearedoinggreatjobofconvertingthemintotheloyaltyprogram,becausetheyunderstandthatthat'simportantforthebusiness.Soallthoseitemswillworktogether,wethink,andwillcontinuetobeakeypartofourgrowthstory.
DanaT elsey(Analyst-TelseyAdvisoryGroup):
Thankyou.
CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:10.29BPriceasofEventDate:159.0
©2014TheStreet,Inc.Al l R ightsReserved Page19of21
Operator :
MikeBaker,DeutscheBank
Mike,didyouhaveaquestion?
MikeBaker (Analyst-DeutscheBank):
Hi,sorryaboutthat.Ididtheoldmutething.
Youtalkedaboutinpreparedremarksametricofsalesperemailsentout,whichisaninterestingmetric.Canyougiveusmorecoloronthat?Howlonghaveyoumeasuredthat?Hasthegrowthacceleratedatall,orwhatdoesthatlooklikeinthepast?Thanks.
Scott Settersten (CFO):
Wewon'tgetrealspecificnumbersonit,butitissomethingthatwe'vemeasuredforawhileandweareseeingreally,reallyhealthygrowth.Andthatgrowthineffectivenessofouremailcampaignsisreallyfundamentallycomingfrom,I'dsay,twoplaces.Oneisbettertargeting,soweareunderstandingourconsumers'desires,wethink,alittlebitbetter,andpersonalizingtheemailstothem.
Andthentheoffers,theitemsandthecreativethatsurroundsthemwethinkisbetteraswell.Sotheemailsthemselvesarebetter,betteritems,betteroffers,betterprogramsthatarepersonalizedinmuchsharperways,andthosethingshavereallyworkedwell.Sowearesendingoutmoreemails,butwe'regettingmuchmoreeffectiveandefficientindoingitandwethinkitwillbeabiggrowthdriverforusgoingforward.
MikeBaker (Analyst-DeutscheBank):
Okay,thanks,thatmakessense.IfIcanaskoneother.Justonthesupplychain,Iassumewe'restillinlineforthathitthisyeartobe5percentagepointsrelativetoyourearningsgrowthanddoesthatpeak?Itseemslikethat'sgoingtopeakprobablyaroundthethirdquarter.Isthatright?
Scott Settersten (CFO):
That'scorrect,yougotthat.Yes.Thirdquarterwhenwefliptheswitchatthebeginningofthethirdquarter,andthat'swhenitwas,right,justdoingastoreortwoandnowwe'retorampitup,anditwillgetmoreefficientovertime.Andaswegetintothefourthquarter,it'sgoingtoservice130,140stores.Soatthatpointitwillbemoreproductiveandbecontributingmoreorlessdragoverall,IguessIshouldsay.
MikeBaker (Analyst-DeutscheBank):
Understood.Thanksverymuch.Appreciateit.
Operator :
AramRubinson,WolfeResearch
AramRubinson (Analyst-WolfeResearch):
Hello,thanksfortakingmyquestion.Itlookslikewe'reinovertimehere.
Alotofretailshavestruggledwithtryingtoreducepromotionsandstillholdsales.Youareoneofthefewwhereyou'veactuallypulledbackonpromotionandsaleshaveheldoraccelerated.Iknowyou'restillusingprettybluntinstrumentswhenitcomestoCRMandcustomerknowledge.
CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:10.29BPriceasofEventDate:159.0
©2014TheStreet,Inc.Al l R ightsReserved Page20of21
I'mjustwonderingistherepotentiallyanotherroundofthatasyoulookatkindoftheresponsethatyourcustomershavehadtoit?Doyouthinkthatifwe,oryou,decidedtopullthatleveragainyoumightbeabletogoanotherround,perhapsabitmoresurgical,butalmostrepeatthatsameexercise?
MaryDillon (CEO):
YouknowIwouldsaythatIdon'tknowthatIenvisionanotherbigchangehere.Thisisagradualprocess,thatwe'vebeenworkingonreallyforsomeperiodoftime,whichisthekindofthecarefulexperimentation,testingandlearning,tryingthingsdifferentlyandchangingsuchthatourmarketingmixnow--Iwouldn'tsayit'sbluntinstrumentssomuchanymore.Imean,Iunderstandyourquestion,butIthinkwenowhaveareallyrobustarrayoftoolsthataregettingbetterandbetterasitrelatestoeffectivenessandefficiency.
SoIwouldjustconsiderthisacorepartofhowwe'regoingtoalwaysdoourBusiness,whichisconstantlylookforhowcanwebedrivinglong-termbrandequity,whichisreallyimportantifyouunderstandwhatULTAisandthey'reawareofus.Theyunderstandthatweareallthingsbeauty,allinoneplace.Andthenlotsofsurgicaltoolstodrivetheshort-term,day-to-dayresultsthatweneed.Soit'sanongoingpieceofhowwe'regoingtodothebusiness,Daveandhisteamarealloverit.Andthat'showwelookatit.
AramRubinson (Analyst-WolfeResearch):
Letmeaskyouanotherway,ifyouweretolookatyourlevelofpromotiontodayversusthebrandequityyouthinkULTAdeservesorwarrants,dothinkthosetwoareinbalancenoworaretheystillalittleoutofbalance?Andwhichway?
MaryDillon (CEO):
Well,we'rereallyjuststartingthenationaltelevisionadvertising,asyouknow.Sothat'sanotherkindofshiftinthebalanceofthemix.Ienvisionthatwe'llbeabletoholdourA-dashratioprettyconsistentovertimewiththemixbeinggettingmoreinbalance,butI'dsayit'sgettingtheregradually.Itisnotwildlyoutofbalance.Ithinkwe'removingintoaplacethatwillbeprettysustainableforthelongterm.
AramRubinson (Analyst-WolfeResearch):
Thanks.GoodluckwiththenewDC.
MaryDillon (CEO):
Thankyou.
Operator :
Ms.Dillon,itappearstherearenofurtherquestionsatthistime.Wouldyouliketomakeanyclosingremarks?
MaryDillon (CEO):
Yes.Inclosing,I'djustliketosayI'mveryproudoftheexcellentresultsthattheassociatesacrossULTABeautyaredeliveringwhilemakingsignificantprogressonallofourinitiatives,marketing,merchandising,supplychain.IwanttothankyouforyourinterestinULTABeautyandwelookfortospeakingwithyouagainsoon.Thankyou.
Operator :
Thisconcludestoday'steleconference.
CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail
EventDescription:Q22015EarningsCallMarketCapasofEventDate:10.29BPriceasofEventDate:159.0
©2014TheStreet,Inc.Al l R ightsReserved Page21of21
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