Greetings and welcome to the Ulta Salon, Cosmetics & Fragrance, Inc. Fourth Quarter and Fiscal 2008 Results Conference Call. At this time all participants are in a listen-only mode A brief question-and-answer session will follow the formal presentation. (Operator instructions). As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Allison Malkin of ICR. Thank you. You may begin.

Thank you. Good afternoon. Before we get started, I'd like to remind you of the company's Safe Harbor language, which I'm sure you're all familiar with. The statements contained in this conference call, which are not historical facts may be deemed to constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Actual future results may differ materially from those projected in such statements due to a number of risks and uncertainties, all of which are described in the company's filings with the SEC. With respect to each reference we make on this call to adjusted net income per diluted share as a result of the October 2007 IPO, a reconciliation of net income per share on a GAAP basis to adjusted net income per share has been provided in Exhibit 4 of our earnings release, which is available on our Web site and has been filed with the SEC on Form 8-K. In addition, during the call we may make reference to non-GAAP financial metrics, such as free cash flow. Free cash flow is defined as cash flow from operations less capital expenditures. And now, I would like to turn the call over to Ulta's President and CEO, Lyn Kirby.

Thank you, Allison. Good afternoon, everyone. Thank you for joining us to discuss our fourth quarter and fiscal year 2008 results. On the call with me today is our Chief Financial Officer, Gregg Bodnar. And following my opening remarks, Gregg will review our financial highlights and outlook and then I will provide closing comments and turn the call over to the operator so that we can answer the questions you have for us today. In the fourth quarter, we delivered solid earnings of $0.21 per diluted share, and for the full year reported diluted earnings per share of $0.43, which was flat with prior year. Our comp store sales for fiscal 2008 were flat for the year with increases in the first three quarters of fiscal 2008, offset by negative 5.5% comp in the fourth quarter as we navigated the tough economy and intense volatility in the final days leading up to the holidays. Arguably, the fourth quarter included one of the most turbulent holiday periods in many decades, which caused an extraordinary level of promotional activity, especially in apparel. As a result, we did give up some gift sales during the days just prior to Christmas. Quite simply, women chose the $250 cashmere sweater at 70% off (inaudible) fragrance, which was not discounted at $65. Although we anticipated a difficult environment and appropriately invested margin, we chose not to participate in the promotional frenzy in the final days leading up to Christmas, choosing instead to achieve a balance of sales and earnings. This is the right strategy. We maintain the integrity of our brand and value proposition and delivered solid earnings in the fourth quarter, and our inventory levels are quite healthy with no risk of seasonal obsolescence. Most importantly, in January, our business demonstrated its resiliency returning to…

Thanks, Lyn. In this difficult environment, we continue to focus on executing our core business strategies by controlling and reducing as appropriate, new store expansion, inventory levels, operating expenses and capital expenditures. These actions delivered diluted earnings per share of $0.21 in the quarter. Beginning with the review of the income statement, net sales increased 10.4% to $341.4 million from $309.3 million in the fourth quarter last year. Sales growth was driven by the addition of 62 net new stores in operation versus a year ago. Comp store sales decreased 5.5%, which follows an increase of 4.5% last year, resulting in a two year comp store sales decline of 1%. The comp store sales decrease was driven by a 3.5% decline in traffic primarily related to the last 10 days leading up to Christmas. During the quarter, we opened seven new stores ending the fourth quarter with 311 stores and expanding square footage by 25% from last year's fourth quarter. Our 2008 new store class continues to perform at our model despite the difficult economic environment. Gross profit dollars in the fourth quarter increased 4.5% to $101.4 million from $97 million last year. Gross profit margin decreased a 170 basis points to 29.7%, primarily driven by 130 basis points of deleverage in fixed store costs, resulting from our expanded new store program and lower comp store sales. In addition, 90 basis points of gross margin investment was used to drive traffic in response to the anticipated difficult economic environment and competitive landscape during the quarter. These decreases were partially offset by improved leverage and transportation cost due to efficiencies achieved and the addition of our new distribution center. SG&A expenses were $78.2 million or 22.9% of sales, compared to $70.4 million or 22.8% of net sales in the prior year.…

We believe we've identified the right strategies to maximize profitability and cash flow in the expected challenging year. We continue to open stores. We continue to add new brands. We have a loyal customer base that is growing each day, highly dedicated team and initiatives in place across all of our businesses to drive sales and so continue to expand our market share. We will remain nimble and adjust to the environment real time to ensure that we continue to balance our sales and earnings to advance our goals in 2009 and expect the strategies we are implementing this year to enable us to become even stronger, more efficient and better positioned to growth as the economy stabilizes and improves. And now, I'd like to turn the call over to the operator to conduct the Q&A portion of the call.

Thank you. (Operator instructions). First question is from the line of Neely Tamminga. Please go ahead with your question. Neely Tamminga – Piper Jaffray: Good afternoon and thanks for the help. I know it’s tough to figure out how to guide this year. Just a couple of questions. In terms of the gross margin trends for the year, and if not for the year, maybe for the quarter, considering you got the shift of prestige to mass, just wondering, in general, how you're looking for your gross margins to kind of play out at least for the Q1, if not, under that down two comp scenario? And then, I just have a follow-up question on some marketing strategy.

Hi, Neely. I'll take both of those first two questions. As it relates to the first quarter, I would expect gross margin rate mostly driven by the continued deleverage, our fixed store expenses to be down about 150 basis points. And again, the most significant driver there is the fixed store expenses. When you look out to the full year, that comes down slightly and we expect in the full year under that theoretical minus 2 comp that I gave you with flat earnings, gross margins to be down about 90 basis points, more than that is related to the fixed store expenses, as for the full year we'll get some of the benefit from the cost savings that are related to the supply chain in gross margin. Neely Tamminga – Piper Jaffray: Okay. That's very helpful, Gregg. And this is for, Lyn, if you could talk a little bit about the marketing strategy. I guess there's kind of two ways to go about it and maybe the third option is to do both. You can either increase your circulation in mailers or kind of amp up the compelling offer in tandem maybe with your vendors or on your own on the couponing side. Just wondering, how you guys are viewing that for '09 given this environment? Are you kind of more fixated on driving that traffic or is it about kind of improving that conversion?

We are, Neely, definitely focused on traffic in this environment. We do believe that we want to maintain that loyalty and the connection with our customer base even during this tough time so that they will be there for us when we return to a more normalized economy. The way we're doing it is not through expanded advertising expense and expanded circulation. We actually are planning our advertising expense slightly lower to sales for the full year versus last year, not because we're reducing circ but we're expecting some cost reduction in our negotiation. We are currently planning basically same marketing as last year. Now, you know we'll stay flexible on that as we respond real time to trends that we see, up and down, as the case may be. So advertising is whole. We are certainly continuing to offer value to our customers and that is primarily in concert with our brand partners. We are not investing more margins than fourth quarter, but we certainly will be investing in key offers to provide value to the customers. The most significant impact on our margin is – this is what we have been doing in terms of a change from fourth quarter is actually that we're seeing our customers redeem more coupons than what they have in the past. So our coupon redemption rate is up. I think when you reflect on that, it's not really a big surprise in this economy, but it's not actually a planned strategy to offer more value than we have in the past. But we certainly will offer value. Neely Tamminga – Piper Jaffray: Great. Thanks. Just one real quick housekeeping question. Gregg, did I miss it? Did you say what you expect D&A would be in '09?

I hadn't said that yet, but it will be approximately $60 million to $61 million. Neely Tamminga – Piper Jaffray: Great. Thank you.

The next question is from Joe Altobello with Oppenheimer. Please go ahead with your question. Joe Altobello – Oppenheimer: Thanks. Good afternoon guys. First question is just a point of clarification on the guidance for the first quarter. The comp range is down 2% to 5%, I think you said that through the first half of the quarter roughly you're down 2%. So isn't the low end of that range unrealistic?

Joe, here's what I would say to you. As you've kind of heard through the theme is – as Lyn and I have been talking about. The volatility and the changes that we're seeing in the economic environment have been very difficult to predict. So we have set a comp range that includes the first six weeks of the quarter that we believe is realistic, given the fact that we cannot anticipate what the potential impact from any other shifts in the economy could be for the remainder of the quarter. Joe Altobello – Oppenheimer: Okay. But are you seeing anything that would lead you to believe that we should expect a significant deceleration in comps in the back half of the quarter or that's just you being somewhat conservative at this point?

No, the point that we're making is, as you can see in changes that we've seen in the economy recently, that they're very difficult to predict. So we're not anticipating any change. But we're not ruling it out given the fact that we don't have great forward optics into the rest of the quarter. So there isn't something that we see today that necessarily tells us that the current trends will decline significantly, but we cannot anticipate with this lack of visibility, what may come in the coming weeks. Joe Altobello – Oppenheimer: Okay. And then in terms of trade down, in which categories, and I apologize if you mentioned this already. But which categories are you seeing the most trade down pressure?

Actually we're not seeing it across the board, Joe. There's just one particular category where we are seeing it and it tends to be in the mineral cosmetic category. But other than that, we are not seeing any significant shift. Joe Altobello – Oppenheimer: Got it. Okay. And then lastly, in terms of the $15 million of cost savings, just to be clear, that is going to be all realized in '09, it's not a run rate or anything like that. Its $15 million realized this year.

That's $15 million realized versus what the current cost structure in the business is. And obviously, there's some costs that will come into the business as we add those new stores. But it's just specifically – that cost is specifically related to the new stores. So its $15 million cost reduction from what our current structure is, all realized in 2009. Joe Altobello – Oppenheimer: Got it. Okay. Great. Thank you.

Your next question is from Brian Tunick with JPMorgan Chase. Please go ahead with your questions. Evren Kopelman – JPMorgan Chase: Thanks. Hi. Evren Kopelman for Brian. The first question is, we were somewhat surprised by the degree of the square footage growth pull back, especially in light of the better rents and construction that you've talked about that you're seeing. Can you talk a little bit more about the thought process behind that I guess versus the free cash flow consideration? And also would you consider accelerating footage growth if the environment changes throughout the year? Do you have the flexibility to pull in some of the 2010 openings possibly into '09?

Let me take those one at a time, Evren. Specifically, it relates to the approximately 35 new stores in 2009, our thought process was to balance the quality of real estate, with our objective of being free cash flow positive this year. We have been seeing some reductions in deal structure, specifically, rents and improved landlord allowances. We do not believe that they fully reflect the reality and the potential of what we could see in the short-term in this environment. So said slightly differently, I think the deals that we're not doing this year could potentially get cheaper in the short-term. So I think that's a forward opportunity for us. And then, as it relates to where 2009 could end up, at this particular stage, the store count could move up or down a couple of stores. But for the most part, given the timeline that it takes to build store and get it open, in 2009, we don't anticipate that number to change significantly, because we're too far into the year to pull any significant stores forward from first quarter of 2010. Evren Kopelman – JPMorgan Chase: Okay. And can you also update us on your remodel program, how many store remodels you plan to do in '09?

We'll do eight remodels this year. That gives us the opportunity to work into our store plans the new brands that I spoke to earlier benefit particularly as well as Kouros and Cosmedicine. Evren Kopelman – JPMorgan Chase: Great. And then finally, can you touch on the competitive landscape? Do you see increased competition maybe ticket pressure, any new entrance?

I just missed the very last piece, any ticket pressure or – Evren Kopelman – JPMorgan Chase: Or in general updates on any changes in the competitive landscape?

Actually no, there really is nothing significant that has taken place. It is from a pure beauty landscape. It is as competitive as it was in the back half of last year. So, we're not seeing anything significant there. A little bit more activity online, but nothing that is significant in the retail environment. In terms of the broader retail environment, as you know, during the fourth quarter where we were competing up against extremely heavily discounted apparel, we have certainly seen that competitive environment lessen somewhat, which of course is why you see the comp trend on such a strong rebound from the minus 5.5 during the fourth quarter into the positive numbers in January and slightly lesser in February. Evren Kopelman – JPMorgan Chase: Alright. Thank you very much.

The next question is from Liz Dunn with Thomas Weisel. Please go ahead with your question. Liz Dunn – Thomas Weisel: Hi. Let me say congratulations on managing through this tough environment while I know somebody is going to give me a hard time for this. But you guys sound like you've been doing this for years, you really don't sound like a newer public company. So, congrats on that. I guess my first question relates to cash flow. What would the cash flow be if your comp trend was down 5 – what would the free cash flow be for 2009 if the comp was negative 5 for the full year?

The impact – here's the way I would say this, Liz. We have specific contingency plans that we have built for this business at different stages of comp performance for the year. We've got lots of levers to pull from a free cash flow perspective. A change from the theoretical minus to down to minus 5, I still believe that we can generate free cash flow. Liz Dunn – Thomas Weisel: Okay. What is the outlook for debt for the year? Will you need to draw on your facility as you move through the year to fund seasonal working capital needs?

We will, we historically always have. We will above the debt levels that we ended the fourth quarter at, okay? As we go into the year, our peak, as you know, starts to increase at the end of the third quarter, then comes back down precipitously in the fourth quarter as we get post-holiday cash receipts in. Last year, we still had even at our peak debt level about $50 million of availability in our credit facility. The majority of that free cash flow will come up until the end of that third quarter, so, therefore, this year what I expect our peak debt to be below that 150 million by at least 10 million. Liz Dunn – Thomas Weisel: Okay. And then on the 15 million in savings, is there any – I'm assuming this is 15 million in savings. I know you said on your 2008 expense structure, but it is sort of 50 million in savings versus plan. Is there any guidance you can give us as to how much SG&A will be up year-over-year?

On the – again on that theoretical reference point that I gave you on the minus 2 to flat earnings, I would expect the SG&A will be up just slightly, maybe 10 basis points. Liz Dunn – Thomas Weisel: Okay. And then finally just want a point of clarification. When you talk about your average ticket, that's the average basket, right? So I guess, just a little bit of confusion about the average ticket being down, but you're saying there is no trade down. Is it that people are buying the same things but just less units in the basket? Is that what's going on?

Yes, that's it exactly, Liz. But we're not seeing prestige customers trade down to mass with the exception as I say, there was only one shift worth noting which was in the mineral category. So we're not seeing it trading down, but we are seeing customers buy less across the board. So that's exactly what is happening. Liz Dunn – Thomas Weisel: That's interesting. In the mineral you're seeing people trade down from prestige to mass within the category.

Yes. To the extent to which we’re seeing any trade down and that’s the most significant change that we’ve seen from prior year trends. Liz Dunn – Thomas Weisel: Okay, thanks. And once again congratulations on just handling. This is really an unprecedented environment.

Thank you for the positive feedback, Liz.

The next question is from Erika Maschmeyer with Robert W. Baird. Please state your question. Erika Maschmeyer – Robert W. Baird: Hi, good evening and great job in a really tough environment. Question on your deviation from guidance of $0.18 and $0.19, where were you surprised on the positive side?

One of the things we did, Erika, is we came out of that holiday period. We were very aggressive in looking at all of the variable cost structure in our business, and the $0.02 of incremental earnings above the top end of that $0.18 to $0.19 range, came primarily from us quickly responding in pulling back on some store and corporate operating expenses. It was purely more aggressive expense management as we were wrapping up the year. Erika Maschmeyer – Robert W. Baird: Good job and quick movement there. And then could you give some guidance on pre-opening expense for '09?

Yes, for the full year I would expect it to be between 7.5 million and 8 million, and then for the first quarter I would expect it to be about 1.2 million to 1.3 million. Erika Maschmeyer – Robert W. Baird: Great. Thanks so much. Good luck.

Thanks, Erica.

(Operator instructions). The next question is from Anthony Lebiedzinski with Sidoti. Please go ahead with your question. Anthony Lebiedzinski – Sidoti: Good afternoon. I was hoping that you guys give us a little bit of a, I guess guidance about the timing of new store openings by quarter. Is that something you can provide us with?

Sure. Sure. Absolutely. For – as I mentioned for the first quarter, we're going to open eight, for the second quarter approximately 10, and then the remainder will come through the second half of the year predominantly in the third quarter. Anthony Lebiedzinski – Sidoti: Okay. Do you plan to do any store closings?

We have potentially one store that we're evaluating, that could be a potential relocation or the relocation may not open until 2010. Anthony Lebiedzinski – Sidoti: Got you. And as far as your cash flow comments over here, are you expecting that the higher cash from operations to be mostly because of the inventory reductions, or is there anything else that you're expecting?

The first – Anthony, the first biggest driver there is the reduction in capital expenditures from year-to-year on the lower store base. And then incrementally to that you'll have some benefit from the reduced working capital from the inventory reduction in our existing store base. But, remember, as we add new stores into 2009, we're obviously going to be required to put inventory in those stores. So the single biggest driver is the CapEx reduction on the lower store base. Anthony Lebiedzinski – Sidoti: Okay. Also wondering, if you guys comment on what you're seeing in your salon businesses, can you give us a sense there, whether your same store sales in your salons were they worse than company average or better, and also anything quarter to date, what are you seeing there?

As I mentioned, Anthony, we have certainly seen a drop off since the holiday period, with the frequency of visits from our customers so that is the most significant change. We're not going to provide too much detail on the specific category. As you know, we don't provide very much information, but we had made a commitment that if there is a significant shift in any category, that would give you some idea. So it has – it has dropped off and it is definitely impacting the comp numbers and it is more negative than the retail business. Anthony Lebiedzinski – Sidoti: Okay. Alright. Thank you.

Thanks.

Next question is follow-up from Joe Altobello with Oppenheimer. Please go ahead with your question. Joe Altobello – Oppenheimer: Thanks, Gregg. I just want to go back to the pre-opening costs that you mentioned that 1.2 million to 1.3 million for the quarter. It looks like you opened 7 doors last quarter and spent a $1.8 million. So why you are opening more doors yet spending $0.5 million less?

As you may remember that pre-opening costs flows over about a 13 week period. And as I mentioned, this early in the quarter, we have opened 6 stores of the 8 stores. So one of the reasons why, the first quarter is below our normal first store average is because some of those costs flowed into the fourth quarter of last year, and those stores opened early into the first half of the quarter this year. Joe Altobello – Oppenheimer: Got it. Okay. Perfect. Okay. Thank you.

There are no further questions in queue. I'd like to turn the call back over to management for closing remarks.

Let me just close by thanking all of the Ulta employees throughout the United States this year for their outstanding commitment and hard work. It has been a difficult year and the dedication has been fantastic. To everybody else on call, thank you for joining us today and we certainly look forward to speaking to you when we report first quarter results in June. Thank you.

This concludes the teleconference. You may disconnect your lines. Thank you for your participation.