At this time Iwould like to welcome everyone to the ULTA Salon, Cosmetics& Fragrance, Inc. third quarter fiscal 2007 results conference call.(Operator Instructions) Itis now my pleasure to turn thefloor over to Allison Malkin of ICR. You may begin.

Thank you and good morning. Before we get started I’d like to remind you ofthe company’s Safe Harborlanguage, which I’m sure you’re all familiar with. The statements contained inthis conference call which are not historical facts may be deemed to constituteforward-looking statements within the meaning of the Private SecuritiesLitigation Reform Act of 1995. Actual future results may differ materially fromthose projected in such statements, due to a number of risks and uncertainties,all of which are described in the company’s filings with the SEC. With respectto each reference we make on this call, to adjusted net income per dilutedshare as a result of the IPO, a reconciliation of net income per share on aGAAP basis to adjusted net income per share has been provided in Exhibit 4 ofour earnings release which is available on our website and has been filed withthe SEC on Form 8-K. I’d like to turn the call over to ULTA’s President andCEO, Lyn Kirby.

Thank you Allison, good morning everyone. Thank you for joining us todiscuss the company’s third quarter fiscal 2007 results. On the call with metoday is our Chief Financial Officer, Gregg Bodnar. Following my opening remarksGregg will review our financial highlights and then I will provide closingcomments and turn the call over to the operator so that we can answer thequestions you have for us today. We are pleased tospeak with you today on our first quarterly conference call of thepublic company. As I told many of you on theroad show, UTLA hasbeen on an excitingjourney. For the pasteight years we have been repositioning thebrand, developing our infrastructure, developing our merchandising andmarketing strategies, while growing to 248 ULTAlocations across thecountry today. As aresult, today we are thecategory leader for beauty that we believe there is significant growth that liesahead. We want to thank you for your interest and believe theyears ahead will beequally rewarding. The third quarter marked a successful period for our company. We delivered a25.4% increase in sales. We increased comp store sales by 6.7% and we grew netincome by 16.3%. The quarter also met with several noteworthy. Firstly, wecompleted a record number of store openings and remodels. To this end, weopened 26 new stores during the quarter. Our openings were well balanced with10 stores opened in major metro markets, 10 opened in medium sized markets, and6 in smaller markets. We added four new markets during the quarter withincluded Alabama, Ohio,Tennessee and Massachusetts.In addition, we complete seven full remodels in the third quarter and atquarter-end, operated 237 stores across 30 states. We accomplished this despite incurring a very slight loss of budgeted weeksfor certain stores due to some permit developer issues in just a few locations.Overall though I am absolutely delighted with seamless ability of our team toopen this…

Thank you Lyn. As Lyn mentioned strong sales growth and a 210 basis pointincrease in gross profit margin more than offset increased expenses and drove a16.3% increase in third quarter net income. Starting with the income statement and beginning with sales, for the thirdquarter net sales increased 25.4% to $208.2 million from $166.1 million lastyear. Sales growth was driven by a 6.7% increase in comparable store saleswhich follows a 15.6% increase in comparable store sales last year on arealigned calendar basis. Our comparable store sales were fueled by stronggrowth in customer transactions and a healthy increase in average ticket.Non-comp store sales contributed $17.3 million to total sales and total squarefootage increased by 27%. As Lyn has mentioned, we opened a few stores and re launched the websitelater in the quarter than we originally had planned. This impacted total salesgrowth by approximately 2% in the quarter with no impact to net income. Importantlyall of our new stores scheduled for the holiday season are currently open andour store expansion plans include one store opening at the end of the fiscalyear in January. Gross profit in the third quarter was $68.1 million or 32.7% of net sales ascompared to $50.7 million or 30.6% of net sales last year. The 210 basis pointincrease in gross profit margin was primarily attributable to an increase invendor advertising allowances offsetting increased advertising expense. Alsobenefiting gross profit was a decrease in the amount of accelerateddepreciation associated with store remodels, as compared to last year when theremodel program was launched. We do not expect these levels of improvement ingross margins to continue into the fourth quarter. SG&A expenses were $55.6 million or 26.7% of net sales compared to $40.8million or 24.6% of net sales inthe prior year. Therise in SG&Aexpense is primarily due to anincrease inadvertising expense related to…

In summary, our priorities are focused on optimizing profitability andearnings during the holiday season. We remain excited by our long-termpotential given the power of our compelling in-store experience, brands andcategories, our marketing machine and most importantly the talent andmotivation of our team. This combination has us positioned for success in thefourth quarter and beyond in our efforts to expand ULTA to 1,000 U.S.locations over the next 10 years. With that I would like to turn the call overto the Operator to begin the Q&A portion of our call.

Your first question comes from Neely Tamminga – Piper Jaffray. Neely Tamminga – Piper Jaffray: Good morning and it looks like a nice quarter there. I just wanted to ask alittle bit more, if you could walk us through some of the brand introductionsfor next year, kind of what’s in test, what’s going to be rolled out, aboutwhat quarter. That would be helpful I think -- and you’ve got the Stila thingand maybe some other items on deck, but just kind of how should we be thinkingabout the rollout of some of these new brands into next year. Then I will havea follow-up question.

Neely, we’re not really getting into detail on 2008 on the call. Wecertainly have a continued roster of new brands that we will both test androll. As you may recall our goal is to have one rolling and one testing in eachsix month time period. We are on track to do that. We do have a couple of otherbrands lined up for test next year while we’re rolling Stila. But getting morespecific than that would not be the right place to be while we’re still workingout the negotiations for the brands that we’re testing. But rest assured we dohave a full roster of exciting brands to roll with. Neely Tamminga – Piper Jaffray: Lyn, would these be, the one rolling and the one testing, are theycomparable in terms of size you know, or is it kind of testing a two-footerwhile you’re rolling out a four-footer. I’m just trying to get a sense of themagnitude.

Sure, no the brands that we are discussing and working with are of the sizeand magnitude of the Stila, if that’s helpful for a perspective for you Neely. Neely Tamminga – Piper Jaffray: Very much so thank you and then just one follow-up question for me, Gregg,the D&A you might have given it on the call, I’m not particularly sure, Iknow you talked about the accelerated depreciation and amortization, can yougive us what D&A was at the end of Q3 and what you expect it to be at theend of this year?

Yes, for Q3 Neely it was $9.5 million and then for the full year we expectit to be approximately $40 million. Neely Tamminga – Piper Jaffray: Thank you so much. Good luck.

Thanks Neely.

Your next question comes from the line of Brian Atonic – J.P. Morgan. Brian Atonic – J.P. Morgan: Good morning Gregg. I guess my two questions for Gregg are first maybe youcan update us on your IT or DC plans for first quarter or first half, maybejust give us sort of the time table, what we should be watching there. And thensecondly Gregg, it seems like the Q4 sales are coming in a little differentthan we had thought, but the earnings are coming in exactly where we thought.So just maybe help us out there, what’s happening on the sales line and whereyou’re making it up in earnings?

Yeah Brian, we’ll take that in three steps, DC and IT and then Lyn will talkabout Q4 sales and then I’ll finish it with the earnings impact. As it relatesto distribution centers, we talked to a lot of folks that we saw over the road showperiod. The distribution center is a key focus for us; we’ve already convertedthe technology side of it, as you may remember us talking about in the firsthalf of 2007. We are focused completely on the infrastructure side of thedevelopment. We still remain very focused on launching that new distributioncenter at the end of the first quarter and we are on track to do that. As it relates to IT in the first half and first quarter of the year, otherthan bringing up the new distribution center which does have some network costsand impact associated with it, we’ll primarily be focused on rolling out apoint-of-sale upgrade, which I think we’ve mentioned before. We’ve put that alltogether and then basically put it on the shelf for the fourth quarter to getthrough the holiday period and then we’ll be rolling it out into Januarybeginning of February.

As it relates to thebrand, comp is coming inas we expected. We’re on track there. Thedifference to what we had expected, as I had mentioned theecommerce site; alittle later than what we had originally hoped for interms of getting that launch up. That’s having about a$5 million to $6 million impact on total sales volume, although as you wouldexpect, not quite somuch on earnings, but Gregg will touch on that. And asmall shortfall interms of our forecast on asmall number of new stores as they go into thequarter. We had forecast some of thestores above model sowe are still veryhappy with the overallperformance of the classof 2007, but that is on arelatively small number of stores versus what we had forecast inthe budget.

So Brian, newstores performance continue to remain on track with our model as itwas in thethird quarter and then as we were entering thethird quarter, and then looking towards thefourth quarter, we just took some prudent measures on expenses, mostly inSG&A. Just to make sure that we were completely focused on deliveringearnings when we saw alittle bit of sales shortfall coming from thedot com site and theconversion on the dotcom site wouldn’t have been thestore contribution in anyway. But we pulled back expenses there just to make sure that we could manage ano-impact conversion on earnings from that sales shortfall. We’ve done thesame thing in theretail and corporate office, just prudent expense management. Brian Atonic – J.P. Morgan: And if I could just follow-up on those comments from Lyn, is there anythingin specific that those couple of stores fell short of your maybe aggressiveplan but was it a region of the country? Was it something that you could maybepoint out that we should be thinking about as we go into ’08?

No, not really, more than anything else it represented us going a littleearly into some trade areas that are still ramping and we thought that we couldbe a little bit further down the track in terms of the model. We fully expectthat they will get back on track as the trade areas continue to fill out. So,no nothing significant, nothing geographic, Brian, some were just a reflectionof that. Brian Atonic – J.P. Morgan: Okay, terrific, good luck for holiday.

Thanks very much.

Your next question comes from theline of Lynn Walther – Wachovia. Lynn Walther – Wachovia: A couple of questions, can you give us a little bit more color on yourcommentary for holiday? Are you seeing something that is causing for you – justbeing conservative and just to clarify, in your guidance, are you planning tobe a little bit more promotional than last year given the environment?

Certainly we saw the, what I would describe as a rather choppy environmentin third quarter, and going into fourth quarter I think the choppiness hasturned to just a little bit more volatility. Both the economy and consumerconfidence and of course just the calendar shift that causes the sales to comecloser to the last week of Christmas then it does in a traditional holidayseason. So both of those factors are what certainly have us very prudentlymanaging the expenses as Gregg described, as well as a very detailed oversighton our merchandising and marketing. The biggest shift that we have going on isnot so much increased promotional activities, so much as going deeper into our listwith our customer club members. In third quarter we focused more on gettingadditional trips out of our best customers. In fourth quarter we feel that thebiggest incremental opportunity is getting some of our customers that come inless frequently to come in more frequently and that’s where we’ve focused mostof our marketing efforts. Lynn Walther – Wachovia: Okay thanks, that’s helpful. When you add abrand like Dermalogica or Stila, how much cannibalization is there or doyou see you’reattracting a newcustomer, is there away to measure what happens when you bring out abrand like this? And does itdisplay something else or is there room inthe store to add it?

The bigpicture perspective is itdefinitely adds to thestore totality no question. There’s usually some modest cannibalization inthe short-term ascustomers tend to try thenew brand but we see thebrand stabilize back atthe end, theones that are cannibalized;often we do seecustomers buying from both of thebrands. I think theoverall picture though is very that themore brands that we put into thestore, the greater we areas a destination forbeauty purchases for customers and totality and sowhat we see is anexpansion of total customer traffic and I believe acquisition of new customersto the brand ULTAas we add brands to thestable. Lynn Walther – Wachovia: Okay, great thanks. Good luck for holiday.

Thanks.

Your next question comes from the line of Lauren Levitan – Cowen &Company. Lauren Levitan – Cowen & Company: Morning, Lyn I was hoping you could talk a little bit on the comment youmade regarding the challenging environment. Does that have any implications onproduct trends? I know you called out double digit comps and Prestige andcontinued comp growth in salon, so maybe help us understand how thatchallenging environment is impacting the actual consumer behavior in the storein terms of what they’re buying, maybe size of basket, composition of basket,thank you.

As you know Lauren, we’re not going to comment on individual categoryperformance so I’m going to try to answer your question in some broad strokeswithout being too specific. I think what we are most closely watching is justoverall traffic to the store as opposed to category mix and shift. There iscertainly a lot of competition for the customer share of wallet from allretailers, not just retailers in the beauty sector. There is a lot ofpromotional activity going on. So we’re far more cognizant of that issue andbeing competitive in the total marketplace, then we are necessarily cognizantof individual shifts within the categories. We are not seeing any significantshift within that from what we would expect to see. Maybe just a little, theonly thing that I would even comment on, and I do believe this will come late,as the customer patterns shift close to the holiday season we tend to see fragrancecome a little bit later. We have watched this in other years. Specifically whenwe go back and look at our trend seven years ago, same calendar as this year,we certainly saw fragrance come a little late and we fully expect that it willcome late. Lauren Levitan – Cowen & Company: That’s helpful. Gregg you also called out that there was an extra mailer inQ3 given the calendar shift, can we assume that that comes out of Q4 and if so,what implications does that have on how we should be thinking about operatingexpenses in the fourth quarter.

Laurie, it actually comes out of all the way back to the beginning of theyear. It comes out at Q1. Lauren Levitan – Cowen & Company: So Q4, we’re a comparable number to last year?

Q4 we’re a comparable number to last year on a 13-week basis. Lauren Levitan – Cowen & Company: But we’re against 14 weeks, so it is still the same number, 13 versus 14weeks?

Yes. Lauren Levitan – Cowen & Company: Okay, thank you and good luck for holiday.

Your next question comes from theline of Daniel Hofkin – William Blair. Daniel Hofkin – William Blair: Quick question regarding the adjusting for the vendor sponsorship and theimpact on operating expenses, if you could just maybe quantify a little bitmore what those two line items might have looked like excluding that transferand then just elaborating on the last response, within in the mix, are youseeing any shift, I understand it’s pretty much in line with your expectations,but any shift along the good, better, best toward maybe some of the moreopening or mass price points and brands in this more competitive environment,more uncertain consumer environment, thank you.

We’re not breaking down gross margins specifically, but what I would say isthat the increase in vendor-supported allowances related to advertising was prettymuch a one-for-one offset between gross margin and SG&A. Daniel Hofkin – William Blair: Right.

And as we continue with our marketing efforts in fourth quarter and again,certainly more difficult with counting the back half year and the first half,we will continue with that same strategy in fourth quarter of working with ourvendor partners to supplement the increased marketing that we will do goingdeeper into our list. Daniel Hofkin – William Blair: And the reason that you wouldn’t expect to see a similar kind of, if youwill, trade-off between those items in the fourth quarter as similar magnitudeas the third quarter, is that just expected to be a smaller amount, or what’sthe dynamic there that you’re looking for?

The bigger driver in the third quarter was the calendar shift as opposed tothe incremental marketing. So that calendar shift doesn’t occur in the fourthquarter. It’s really to advertising vehicles compared to last year. Daniel Hofkin – William Blair: Okay, thank you. Sorry, with regard to the just general comment onpurchasing patterns, obviously not quantifying specific categories, but justgenerally good, better, best.

We’re really not seeing a shift other than ones that we have specificallydriven ourselves. We have been very cognizant of wanting to make sure thatthere were traffic drivers in our marketing mix, so we have put offers in thatare stocking stuffers as an example we have going right now. In the store, ifyou were to go in there, where you’re able to buy five small stocking stufferitems for $10 and get a free Christmas bag to put it in. So we have createdoffers like that to ensure the traffic coming into the store but other thanthat, where we have decided, we’re not seeing any significant shift or pricepoint shift versus last year at this point. Daniel Hofkin – William Blair: That’s helpful, thank you very much.

Your next question comes from the line of [Herschel Ellison – Strivel &Company Inc.] [Herschel Ellison – Strivel &Company Inc.]: If I were to pick up a newspaper and read a headline and it said something, said“boy is that really gonna upset ULTA” what might that headline say? Lyn Kirby One more time, I’m sorry I… [Herschel Ellison – Strivel &Company Inc.]: If I pick up a newspaper, and I read a headline and I said, “Boy thatheadline’s really going to upset the people at ULTA.” What might that headlinesay? What’s your big fear?

My big fear is that we get snow storms on Christmas Eve. There is noquestion that this Christmas, the last five days of this holiday season as areflection, not of the economy but purely the calendar shift, the businesscomes very late because we had that last weekend in here. But that would be mybiggest fear. [Herschel Ellison – Strivel &Company Inc.]: Thank you.

You’re welcomed.

Your next question comes from the line of Linda McDonald – ManchesterManagement. Linda McDonald – Manchester Management: I had a hard time following the line on the gross margin in the thirdquarter, that was a nice improvement that you saw and what you’re expecting forthe fourth quarter gross margin year over year.

Yeah, there were two big drivers in gross margin in the third quarter. Oneas I mentioned which was the more significant piece related to the incrementalvendor funding of our advertising expense, which was primarily related to theshift in advertising in the third quarter from the first quarter as compared tolast year. And then the reason why we don’t expect that to continue in thefourth quarter or the magnitude, because it was mostly driven by this calendarshift and now we’re on a comparable calendar in terms of our advertisingvehicles compared to the fourth quarter of last year. So we won’t see increasein gross margin because we won’t have the incremental advertising that’s fundedby the vendors. Linda McDonald – Manchester Management: Okay, is there any way for you to quantify what the gross margin would havebeen without that shift?

You know we don’t break out vendor allowances separately and decompose ourgross margin, so I’m sorry, we won’t do that. Linda McDonald – Manchester Management: Okay. Do you have any guidance for the fourth quarter for the gross margin,should we assume sort of a similar trend to the previous couple of quarterswhich was flat, just slightly down?

I would expect a similar trend to last year. Linda McDonald – Manchester Management: Okay, and how about a little bit of guidance just on pre-opening costs perstore, as you said in this quarter you got some really nice leverage foropening a lot of stores, I think you said on the advertising front, what’s sortof a good number to look for for pre-opening per store when you’re openingabout 10 to 15 stores?

As we look to the fourth quarter, we’ve got 12 new stores to open plus wehave three remodels, so total of 15 projects and we would expect for those 15projects that pre-opening costs would be about $3 million or about $200,000 perstore on average. Linda McDonald – Manchester Management: Okay great, thanks very much, I appreciate it.

Your final question comes from the line of Liz Dunn – Thomas WeiselPartners. Liz Dunn – Thomas Weisel Partners: Morning, my first question is for Lyn. You obviously have significantexperience, can you talk about your perception of how this category beauty,performs in a downturn in the business cycle versus something like apparel.Then my second question relates to pre-opening expense, it came in a little bitbetter than we expected, lower than we expected. Could you discuss that Greggin a bit more detail and will those benefits be ongoing?

In terms of the category versus apparel, we are subject to the whims ofweather is it relates to traffic coming into our stores, so hence my ChristmasEve comment, but we are not subject to the whims of the weather gods as itrelates to product purchasing patterns. So we have certainly been moreresilient when we see weather like this. In terms of the economy itself, theeconomic conditions, the category has always performed very well in a softereconomy. There’s a logic for it in terms of a woman being prepared to forego somepart of her purchasing patterns, but not being willing to let go of her shampoobecause she does have to wash her hair. She does have to go to work so she doesneed to wear lipstick. I think the behavior is simply that this category is anecessity for her in many instances and not just a luxury purchase. Theexperience to purchase is an indulgent luxury experience, but the category is obviouslynot a luxury category. So I think we will see some real resilience as we havehistorically in a soft economy. And of course the other big advantage in an economy like this for ourcategory versus apparel that we don’t have the markdowns that apparel merchantshave to deal with when there is the softness in the economy or strange weatherpatterns. A lot of our inventory is good, basic inventory. We see a lift inbasic at this time of year, obviously for example in the fragrance category, sothere is no markdown there related to our basic. If for some reason the trafficdoesn’t generate quite the way we expect, some of our seasonal purchasing doeshave return-to-vendor rights so we do have that opportunity in terms ofmanaging our inventory and our promotional goods that we purchase for theholiday season, again, has a slightly longer life than I think you will seewith apparel, that apparel merchants have. So the category, the buying patternI think is more resilient and our markdown strategies are easier to manage thanthe apparel merchants.

Liz, on pre-opening costs based on what you heard me just describe for thefourth quarter, we’re going to end 2007 at about $175,000 average per store.That is slightly below where we expected our model to be. I would say inquarters where we have a similar alignment, where we have this level of volume,we will see some efficiency so I do expect there’s going to be some quarters in2008 that will be slightly under that average of $200,000 per store. Again,most of it driven by, as we get better at building the pipeline for new storesand the general management structure for those stores and our store basebecomes larger, it gives us a better group of managers to be able to float theminto those new stores, which allows us to be much more planful in doing that.Also it allows us to train them on a shorter time period because they’reexisting store management. And then on the advertizing costs, to the extentthat we can get some economies producing our unique grand opening one and grandopening two tabs for those stores, as we have more stores clustered into a particularquarter, we’re going to still continue to see some efficiency. Liz Dunn – Thomas Weisel Partners: Thank you and congratulations.

Thank you.

Thanks very much everybody and again thank you very much for joining us onour first earnings call as a public company. I would like to take theopportunity to wish all of you a happy and healthy holiday and new year and welook forward to speaking with you next year. Thank you.