Greetings, and welcome to the Ulta Beauty Second Quarter 2011 Earnings 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) It is now my pleasure to introduce your host, Allison Malkin of ICR. Thank you, Ms. Malkin, you may now begin.

Thank you. Good afternoon. Before we get started, I would 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. We will make references during this call to the metric free cash flow, a non-GAAP financial measure defined as cash provided by operating activities, less purchases of property and equipment. Now, I would like to turn the call over to Ulta’s President and CEO, Chuck Rubin.

Thanks, Allison. Good afternoon, everyone. Thank you for joining us to discuss our fiscal 2011 second quarter results. On the call with me today is our Chief Financial Officer, Gregg Bodnar. Following my opening remarks, Gregg will review our second quarter financial results and provide our outlook. I will then offer some closing comments and turn the call over to the operator so that we can answer the questions you have for us today. We are very pleased to deliver better-than-expected second quarter sales and earnings, which continued our favorable momentum from the first quarter. Our results included strength across our key financial metrics. Specifically, we increased net sales by 22.6% to $394.6 million. We grew comparable store sales by 11.3% following a 10.8% comp gain in the second quarter last year. Our comp increase was balanced across categories and continues to be led by increased customer traffic with modest increases in average ticket. We increased our gross margin by 170 basis points, which included a 90 basis point improvement in merchandise margin. We grew operating income 78% with operating margin increasing by 320 basis points to 10.1% of sales, and we increased net income by 83% resulting in EPS of $0.38 surpassing our guidance of $0.31 to $0.33 per diluted share, and up 73% from the second quarter last year. We believe our consistent performance results from our compelling store experience; expansive and sought after selection of brands, products and services; our knowledgeable and friendly associates; and our disciplined approach to managing our business. During the second quarter, we successfully advanced our five key growth initiatives. Let me share just a couple of highlights with you. First, our store expansion continued favorably and included the opening of 21 new stores and 15 remodels. We continue to be pleased with…

Thanks, Chuck. We are very pleased with our second quarter results, which exceeded our guidance and were driven by better than expected sales and margin performance and expense management. During the quarter, we delivered a 22.6% increase in total sales, to $395 million, ahead of our guidance of $378 million to $384 million. Comp store sales increased 11.3%, which was also ahead of our guidance range of 6% to 8%. We remain very pleased with the performance of our new stores, which continue to exceed our expectations. During the quarter, we opened 21 new stores and completed 15 remodels. We have now completed our remodel program for the year, which included a total of 17 locations. At quarter end, we operated 415 stores, expanding square footage by 18% from last year's second quarter. Gross profit dollars increased 29.2% to $134.3 million from $104 million last year. Gross profit margin increased 170 basis points to 34%. The increase in gross profit margin was primarily driven by 90 basis points of improvement in merchandise margin, 60 basis points of increased leverage in fixed store cost due to our comp store sales increase, and 20 basis points of improvement from supply-chain efficiencies. SG&A expenses were $90.8 million, or 23% of net sales, compared to $79.9 million or 24.8% of net sales last year. The 180 basis points of SG&A reduction was driven by leverage on sales growth and continued prudent management of our cost structure. SG&A leverage was approximately 100 basis points excluding the non-recurring compensation charge in last year’s second quarter. Pre-opening expenses totaled $3.8 million in the quarter, which compares to $1.8 million in the second quarter last year. We opened 21 new stores and remodeled 15 existing locations during the quarter. This compares to 10 new store openings, 1 relocation…

Thanks, Gregg. In summary, we are pleased to deliver another outstanding quarter and remain optimistic as we begin the second half of the year. Our strategies are driving strong results. We have a focused and passionate team, and we believe we are well-positioned to continue our favorable sales and earnings momentum in 2011 and longer term. With that, let me turn the call over to the operator to begin the Q&A portion of the call. Operator?

Thank you. (Operator instructions) Our first question comes from Jill Caruthers from Johnson Rice & Company. Jill Caruthers - Johnson Rice & Company: The tests you are doing on the Lancome cosmetics, it looks it started to kind of reaching some of those stores in the past week or two. If you could talk about, I know, you have been in ongoing conversations with these companies, kind of what initiated this test, what do you feel like they were open to being on the shelves at Ulta?

Jill, you were going in and out a bit. I think the question is what was behind Lancome getting started with us. We've talked before that our business model is built on having a broad offering, and that the iconic brands are great additions to that, but that our long-term financial expectations could be achieved without them. With that said, we have maintained ongoing dialog with Lancome, and I think that the time was right in our business, and they were impressed with the other brands that we had in our offering, as well as what our stores are like and the customer base that we have. So, we're excited to have that as part of our offering in those 29 stores, it’s actually 28 right now with a new store opening next month, that will be the 29th store, but we are very pleased to have them as part of that offering. Jill Caruthers - Johnson Rice & Company: And any insight into kind of the timing of the test or when a potential fuller rollout might be or…

No, we're pleased with where we are right now and as things develop, we’ll keep you apprised. Jill Caruthers - Johnson Rice & Company: Okay. I appreciate it, and then, just last question, more of a longer term picture type question on your store prototype. As you are adding new brands, you build out brand boutiques in the men’s and store type shop. Do you feel like the box currently is big enough or do you feel like you might see some significant change in the mix as in, per se let's say, decreased mass product or what not?

No, I think the box is big enough. I think the gentlemen who heads up our store design has done a wonderful job of building a very flexible box, and we're able to add boutiques, we're able to size them in different ways, and we've made a number of enhancements to what many of you may have heard us refer to as our level 7 prototype. So, I don’t see the box, which is about 10,000 feet, getting bigger. I do see us being able to make the box more productive as new brands come in or new statements or new services come in over the long term. Jill Caruthers - Johnson Rice & Company: Thank you.

Thank you. Our next question comes from Brian Tunick from JP Morgan Chase.

Thanks. Good afternoon everyone, and congrats.

Hi, Brian.

I have a couple of questions, really going to stay on that real estate side. First, if you maybe guys could talk about how many leases you’ve already signed for next year? Give us some idea of new sort of versus existing centers. I know there's been a lot of talk about lack of, I guess, strip center development. So maybe, what’s been happening in your comps and maybe even different classes or co-tenancies? And then, finally, maybe Gregg, it sounds like you’ve taken a year out of the payback of the new stores. Are you still seeing that sort of 17%, 18% four wall [ph] margin for each store at maturity, or has something changed there?

Brian, I’ll take the first few, and then let Gregg pick up on it. We wouldn’t get into details on exact status of the leases, but as we said in the prepared comments, we feel very good about where we are for next year on our pipeline, and we’ve said before that it would be in that 15% to 20% range. So, you can do the math. We feel very good about that. As far as new and existing, as we’ve talked before and as you would expect, a higher chunk of those new stores are coming out of existing real estate that has been repurposed somehow, and that’s just a state of the general marketplace. There are some seeds out there. It’s too early to call it a real resurgence, but there are a couple of seeds of new development that could be out there in the next few years, but for the near-term, defining near-term as at least 2012, there'll be a higher chunk of existing stores that get redone into an Ulta. As far as comps across the classes, here again, we wouldn’t break that out, but we’re pleased with our portfolio across the board, both in age of store, as well as the geography of the store. We saw strength across the country in our market. So, it wasn’t one market or one class of store that carried that strong comp in Q2.

And Brian, on the store model itself, you’re correct. We have taken the payback down to two years. It was up over 3.5 years several years ago, as you may remember. In terms of four wall contribution, it’s certainly – as we've continued to drive operating margin, it has continued to improve as well, because that operating margin not only benefits the new store model but it benefits the existing store. So, they’re performing a little bit better than that 17%, 18% of maturity.

All right. Terrific, great. Thanks very much and good luck.

Thanks Brian.

Thanks Brian.

Thank you. Our next question comes from Daniel Hofkin from William Blair & Company. Daniel Hofkin - William Blair & Company: Good afternoon. Great job once again.

Thank you, Dan. Daniel Hofkin - William Blair & Company: Question, I guess, follow up on the Lancome, which seems very encouraging. I guess I’d be interested in your thoughts regarding either – and I know you probably don’t want to give much detail on further rollout at this time, but does this affect, maybe positively, implications for other brands of similar stature over time? And then, I guess regarding this test, I guess what – maybe if you could share some insight on what kind of drove the specific markets for these tests?

Look Dan, we’re very pleased to have Lancome in, and the reason that we’ve announced it here is that as it was done now, it was found by an analyst and we didn’t want all of you to get ahead of yourselves on this. It is in 29 stores, in 28 today and 29th coming in a couple of weeks. We're very happy because we think it’s good for our guest, and I think it opens up some new guests for Lancome. We know that we continue to take market share and that we continue to perform better in our growth trajectory than a department store does. So, I think Lancome and Ulta are both very pleased with where we are and we will see where it goes from there. Getting into any more detail on that, it just wouldn’t be appropriate at this point. As far as the markets, we wanted to have some density of those markets, so that we could advertise and we could put the power of Ulta behind this brand introduction. We have a very effective marketing machine and that will go to work, as it broke this past Sunday, which was our first ad on our mailer that just began this past Sunday. We will put that marketing machine behind Lancome. Daniel Hofkin - William Blair & Company: That is great, and then I guess thinking about – one thing I would ask, would you mind, I think you provided this earlier and the audio was going in and out on my end of it. Therefore, would you mind just giving the gross margin and SG&A guidance for the third quarter, just sort of the overall range you expect?

On gross margin for the third quarter, the midpoint plus 50 basis points, and SG&A, at the midpoint plus 170. Daniel Hofkin - William Blair & Company: In that plus 170, that is relative to last year's GAAP number?

Correct, correct. Off of the 26.6 last year. Daniel Hofkin - William Blair & Company: Okay. That is great. Again, best of luck in the second half.

Thanks Dan.

Thanks Dan.

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

Thanks and congratulations.

Thank you, Erika.

Could you give a little bit more detail on the Conde Nast partnership? What led to that? What you're most excited about on the timing?

Yes. The power of Conde Nast in the portfolio of titles that they have and their iconic nature in fashion and beauty was really attractive to us. In return, where we stand in the beauty industry and the breadth of what we offer and the strength of our relationship with our guests was very attractive to them. So, we've been talking with them obviously for a little bit, and the relationship has just been kicked off, if you will, this past weekend with our mailer. I think it has a lot of places that it can go, but what you've seen thus far this week, is we will use their titles, we will use their editorial content on our websites and in store. And as I mentioned in my prepared comments, we’re going to be able to leverage our digital assets. Conde Nast has a subscriber base, I believe somewhere over $50 million, which is very attractive for us to work with them on, and ultimately the magazine offer that we are introducing now with the $21 for an annual subscription to both Allure and Glamour is just a terrific deal for our guests. So, we are excited about this partnership. We hope that it lasts a long time and we think that we have a clear path of what we hope to achieve in the near-term, and we think over the long-term, it could lead to some very interesting places.

Great, and then, your royalty rollout is obviously really exciting. When do you expect to be able to complete that, what are the risks that you are looking at, and are you going to take a break for the holidays to avoid potential disruption or is that not a concern?

Yes. No, let me clarify that, because I don’t want there to be any confusion about this. We are not moving any more stores today from one program to the other. What we have had to do which we are completing in the third quarter is to get the technology platform in place to allow that transition to occur. So, the technology platform we will be in place with this year, we will not convert any new stores for the balance of this year as we do throughout the company. As you get ready for holiday, we essentially stop any new IT enhancements, which you can well respect. The transition of stores will start to happen at some point in 2012. There is still work to be done on this. So I do not want anybody to think that we will be converting quickly in the early part of 2012 to one program that is not the case. But this technology component, which was necessary to accommodate that transition is nearing its completion, that’s why I wanted to call it out in the comments, because we have been running on two programs for a while, and I know you’ve asked – this group has asked many times, at some point, aren’t we go to move to one. We’re finally getting closer to the point of starting that transition to one.

Got it. That is helpful. And then just quickly, timing and potential margin impact from new DC, I know that you expect to get it on time and within budget, but are there certain quarters where you might see a bit more of an SG&A or margin impact than others?

You know, we’re doing some work to develop now that we’ve got the lease signed, to develop and fit out the inside of the building, start training folks, bringing staff onboard et cetera. So that’s the activity for 2011. Back half of the year impact is, for Q3 and Q4 it’s about a penny in total between the two quarters. For next year, certainly as we ramp that DC up in the first half of the year, start bringing product in and then start shipping to stores as you can appreciate, it will have a drag on gross margin. As we get to the back half of the year, and we get the productivity up in that distribution center and then start to leverage the transportation network capabilities, it will be close to our vendors, it will be closer to our larger group of our stores, we’ll start to get some of the transportation network impact. If you look at it over the course of a 12-month time period, I would expect it to be plus or minus 10 basis points neutral to gross margin over the course of the year.

Fantastic. Thanks. Best of luck.

Thank you.

Thanks Erika.

Thank you. Our next question comes from Sam Panella from Raymond James.

Hi, thanks. And let me add my congratulations as well.

Thanks Sam.

Obviously, the comp trends came in better than expected and a lot of that having to do with the traffic. Do you think as you were rolling out some of the new items that's driving the traffic, or just going back to how the business was doing when we talked last time in early June to how it came in at the end, sort of what trends you are seeing? And then also with ticket being flattish, are you seeing any sort of trade down or mix shift in your business?

Sam, you know the trends of what we saw in the quarter was that newness continues to be really important and newness is new brands, it’s new products within brands, it’s new trends, it’s new ways of merchandizing in the stores. So in my comments, I talked about the new men’s shop, which we’re very pleased with and the new fragrance shop, which we’re very pleased with, and all the new products, and the new ways we have tried to harness the different pieces of our marketing approach. So it’s difficult to pick one piece out and say that was the magic sauce, but instead I think, it’s how we collectively put these things together to present newness to our guest. So that’s what is really been the driving force behind our business and we think that will continue as we go forward. In the second part of your question was what again?

With respect to ticket being flattish in the quarter, are you seeing any sort of trade down or mix shift in your business relative to last year?

No, really not. So, you know, it was up slightly, but we’re very pleased that the bulk of our comp was driven off of increased traffic. But, no, we’re not really seeing a slow down or a step down, I should say, in what she’s buying today.

And then sort a one-off question. I guess, any significance to the name change in your press release referring to yourselves as Ulta Beauty versus the full Ulta Cologne and Cosmetics?

It's a subtle thing that my General Counsel finally allowed me to do. Our customer doesn’t think of us as Ulta Salon, Cosmetics & Fragrance, it’s rather a mouthful, and as we – we need to continue to increase our branding and make Ulta Beauty a stronger brand in itself, and you will see us do that in a variety of touch points and Ulta Fragrance, Cosmetics, & Salon just is not a brand friendly kind of name. So Ulta Beauty is what the customer sees in the front of our store, and it should be what they see in all of our touch points including our financial releases.

Great. Thanks guys and good luck.

Thanks.

Thank you. Our next question comes from Alex Fuhrman from Piper Jaffray.

Great. Thanks guys. I was just wondering if you could give us an update on what percentage of the current store base now is in your level seven prototype and then maybe how can we think about remodels next year? I know you talked about 15% to 20% square footage growth, but how many remodels for that newest prototype could we see next year? And then given that I mean you have come out with a lot of new innovative prototypes over the years. Should we be thinking about a type eight prototype anytime soon?

You know, Alex, we’ve got just under 80 stores that are below the level six, level seven prototype. So think of that as the current sort of modern store design. Certainly differences between six and sevens, but they are much more subtle in the boutique presentation. As far as remodels go, we finished 17 this year as we stated in our prepared remarks. We are focused on continuing to move as fast as possible towards one store prototype and getting it – the rest of the stores to that current sort of level seven design. So, we do plan to slightly accelerate, the plan is yet to be finalized, our remodel program going into next year as we accelerated it from 2010 to 2011.

Great. That is helpful, thanks. And then just real quick, I think, you alluded to it in response to Aaron's [ph] question about the loyalty program earlier, but how many of your stores are currently as of this moment in time on the new points-based program as opposed to the older rewards certificate program?

The points-based program is in about 20% of the chain.

Great. Thanks guys. Good luck.

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

Thanks. Good afternoon guys.

Hi, Evren.

Hi, Evren.

Can you tell us about the merchandise margin improvements a little bit more, what drove it in terms of maybe how much (inaudible) any part of it or lower promotions year-over-year? And also when you think about (inaudible) and retained by your 15% operating margin goals, you said, we're going to get there half through gross margin, half through SG&A, but the recent strong performance in gross margin, does that change that at all?

The merchandise margin improvement continues to be driven by the factors we've talked about in the past. Certainly, there's a slight mix benefit. As we continue to manage the inventory, it continues to be cleaner, albeit there's not a lot of clearance in our inventory. It still continues to be a slight opportunity for our merchants to turn that inventory faster and get better sell through, and that also is a driver in terms of selling through better on promotional inventory too. So, better realized margins in all those cases drive our overall merchandise margin, and as we just continue to leverage our overall growth. So, those are the sort of three or four drivers in merchandise margin. As it relates to our long-term operating goal, I did mention that we expect we'll achieve a 10% operating margin this year. We've stated in the past. You may remember, last quarter, we moved that goal up that we would get to a solid double-digit operating margin in the 2012, 2013 time period. So, we're well on our way towards that. As you look forward beyond that, towards that mid-teen operating margin, that sort of 15% mid-teen operating margin goal, we do continue to expect that there'll be a relatively equal contribution between gross profit and SG&A, slightly more coming from SG&A just from the natural leverage that’s going to come from our business as we accelerate our store program. And certainly, we've talked about in the past, each one of those area is going from 10% to 15%. There are specific strategies that we have accomplished multiple phases of and have delivered the improvement we have seen over the last couple of years and we have multiple phases to go, and that’s why it gives us confidence that we can get to that mid-teen operating margin.

Thank you. (Operator instructions) Our next question comes from Jason Gere from RBC Capital Markets.

Good afternoon.

Hi, Jason.

Hi, Jason.

Just I guess following up on the SG&A question, obviously, I understand the natural leverage. You talked about some of the prudent cost savings that you were seeing, and just with the magnitude of the SG&A leverage that we saw in this quarter, can you talk about some of the – I don’t know if these are corporate-wide programs that you have in place or initiatives, but how much of this, some of the overhead reductions can you take out over the next few years as you aim towards that 15% operating margin? How much will come from the overhead as opposed to kind of the SG&A leverage that comes through?

You know, we've talked about that there is multiple programs that are going to drive gross profit expansion and SG&A. Certainly we have a very flexible store model. We continue as those stores drive their productivity to leverage the four wall operating costs within those stores. So, it’s not cost reductions. It’s a very disciplined approach to how we ramp stores up as they grow through their maturity curve. So that’s sort of point number one. We’ve always demonstrated that point in the past that we’ve always made the point real clear that those long-term goals are built off of 3% to 5% comp, and we start to leverage SG&A at a low single-digit comp, okay. That’s in the four walls of the store, that's in our corporate. It’s just part of that very disciplined approach that we take to managing our business. We get leverage off of advertising, because as we fill in markets, that drives advertising leverage and it also drives G&A leverage, and it also drives four wall store leverage as well. So, they are very specific programs, like we've talked about in the past, Jason. It’s a disciplined approach to managing the business. Those further technology tools that we have put in, in the past that we’re leveraging, and further technology tools that we'll put in the future, like more detailed labor scheduling, more detailed time and attendance tracking, more detailed task management. That answer your question, Jason?

No, it does. And then, just a follow-up on an earlier question, and I think there was a part of the question that I’m not sure if I heard the answer, and that might have been done on purpose, but when you talked about Lancome test and maybe how you think about with some of the other prestige players out there, I know you’ve done some tests with Estee Lauder, I’m just wondering if you can kind of maybe refresh our memory, how some of those efforts are going. Can you really – how that the dialog is going with them, and now that they see Lancome testing through, are you more optimistic that you can convince Estee Lauder that Ulta is the shop, the place for high-end prestige in kind of ensuing that relationship?

Jason, I did omit the comment purposely earlier. Our focus is convincing our guest that Ulta is the place for her to shop and putting a portfolio of brands together that we think are appropriate for her. At some point, I hope that we can add additional brands that we don’t carry today. It could be some that you just mentioned, it could be others as well. There’s other brands out there that certainly we would like to add to our portfolio. Right now, we are focused on the offering that we put forth. Clearly, our results suggest that we’re doing a good job of putting that offering together. In the addition, in those 29 stores of Lancome, we’re really thrilled about, but again, I would remind everybody that we have a very healthy business without these other iconic brands, and it will be a healthy business over the long-term as well. So, we continue to pursue lots of newness, both brands as well as products as well as services. So, that’s the foundation of our success since I’ve been here, and that will be, I believe, the foundation as we go forward.

Great, and congratulations on great numbers.

Thanks Jason.

Thank you. At this time, we have no further questions. I’d like to turn the call back over to Chuck Rubin for closing comments.

Okay, let me thank everybody for joining us on this call and we look forward to speaking with you again when we report third quarter results in early December.

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