Greetings, and welcome to the Ulta Salon, Cosmetics & Fragrance, Inc. Fourth Quarter 2011 Earnings Results Conference Call. [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. Ms. Malkin, you may 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 metrics free cash flow, a non-GAAP financial measure, defined as cash provided by operating activities minus purchases of property and equipment. Now, I would like to turn the call over to Ulta's President and CEO, Carl Rubin.

Thanks, Allison. Good afternoon, everyone. Thank you for joining us to discuss our fiscal 2011 fourth quarter and full year results. On the call with me today is our Chief Financial Officer, Gregg Bodnar. Following my opening remarks, Gregg will review in more detail our fourth quarter and full year 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. The fourth quarter concluded another outstanding year of growth at Ulta. We surpassed the sales and earnings guidance we provided in our holiday release in January and delivered our second consecutive year of double-digit comp store growth, while growing our operating margin and net income at a rate far faster than our sales growth. Our consistent strong performance validates the success of our customer offering, the motivation of our marketing and the power of our operating model. I am proud of all that we have accomplished in fiscal 2011, and equally confident in our ability to continue our favorable performance in 2012 and beyond. Briefly touching on the highlights of our fourth quarter results, net sales rose 23% to $582.5 million from $473.7 million last year. Comp store sales increased 11.5% following a comp increase of 10.4% last year for a 2-year comp gain of 21.9%. Comp growth was mostly driven by traffic increases with average selling price rising slightly. Gross profit margin rose 100 basis points, inclusive of a 40 basis point expansion in merchandise margin. Strong sales growth, combined with expansion in gross profit margin and leverage in SG&A, led to a 49.5% increase in operating income with operating margin of 230 basis points to 12.6% of net sales. Net income increased by 53.8% and…

Thanks, Chuck. We are very pleased with our fourth quarter results, which were driven by better-than-expected sales and margin performance. During the quarter we delivered a 23% increase in total sales, an 11.5% increase in comp store sales, 100 basis points expansion in gross profit margin and leveraged SG&A by 130 basis points. This performance delivered a 230-basis point increase in operating margin to 12.6% for the quarter. We also delivered a 49% increase in fourth quarter earnings-per-share. Turning to our review of the income statement, fourth quarter net sales increased 23% to $582.5 million, comp store sales rose by 11.5%, representing a 2-year increase of 21.9%, consistent with the trends that we saw through the course of 2011. As Chuck mentioned, our strong sales performance was broad-based and we believe resulted in market share expansion, reflecting the increase... [Audio Gap] quarter, we opened 7 new stores and at quarter end, we operated 449 stores, expanding square footage by 16% from last year's fourth quarter. Gross profit dollars increased 26.7% to $198.5 million from $156.7 million last year. Gross profit margin increased 100 basis points to 34.1%. Our gross profit margin expansion was primarily driven by 70 basis points of increased leverage and fixed store costs due to our comp store sales increase and 40 basis points of improvement in merchandise margin. SG&A expenses were $124.2 million or 21.3% of net sales compared to $107.2 million or 22.6% of net sales last year. The leverage in SG&A expenses is primarily attributable to comparable store sales growth and our cost management discipline. Fourth Quarter fiscal 2010 included a nonrecurring compensation charge which impacted SG&A by 20 basis points. Preopening expenses totaled $1 million in the quarter, which compares to $500,000 in the fourth quarter last year, reflecting 7 new store openings…

Thanks, Gregg. 2011 was another remarkable year for Ulta as we posted higher sales and profits along with strong cash flow. By providing our guests with the product and services they seek in an exciting and fun shopping environment, we gained market share and new guests and further solidified our position as a key beauty destination. I want to thank everyone at Ulta for their hard work and dedication and I look forward to another year of sales and profit growth in 2012. Finally, you likely saw our press release announcing that we will begin a search for a new CFO as part of a CFO succession plan. This results from Gregg needing to relocate to Michigan to address a family health issue. In the meantime, I am pleased that Gregg will continue in his current role as well as assist in the hiring and transitioning of his responsibilities to his successor later this year. Gregg has been a terrific partner of mine and contributed greatly to Ulta's growth. While I regret his decision, I respect his desire to put his family needs first. I am confident in the team he has built and know they have the proven abilities to continue Ulta's strong performance. Before we open the call to questions, I know Gregg would like to make a few comments as well. Gregg?

Thanks, Chuck. While I know I'm making the right decision for my family, this is a very difficult choice for me. I have enjoyed my time with Ulta and I am proud of what we have accomplished and even more excited about the company's future opportunities. Chuck, the management team and the Board of Directors have an exciting vision and all the talent required to continue the company's success well into the future. I am pleased to continue on in my current responsibilities and assist with the hiring and transition of a new CFO to provide a seamless and orderly succession.

And with that, I'd like to turn the call back over to the operator to open the call and we'll take your questions. Operator?

[Operator Instructions] Our first question comes from the line of Brian Tunick with JPMorgan Chase.

So I guess 2 questions here. I guess, first one, Chuck, sort of bigger picture, thinking about market share, right, either by door or by vendor, sort of how do you think about it or where is the share coming from? And is that changing as you've changed your marketing from, I guess, what used to be mainly newspaper circulars and sort of how you're thinking about that or customer acquisition? And then maybe some discussion around the comp drivers going forward. Do you think it's more important for new brands or is it the newness within the brands that you think give you the most confidence?

To your questions, though, on the market share, we're gaining share across the board. So we're getting it in our prestige area, in our mass area, in our, what we call, personal care appliances. So it's coming from a variety of places. I can't identify which specific retailer it is, but I know that we are growing across our business base faster than the industry as a whole. In terms of your second question, it's newness that is the real motivator here. And newness can be defined in different ways. It can be a new brand that we're adding in, as I mentioned some of the new brands we're adding into the first quarter and some of the brands that we've added in the past couple of years, they continue to mature. In some ways almost like a new store matures. It's still, you have the new brand in one quarter and you still see growth even a year later as it continues to mature. But new brands is only a part of it. New products within brands, new trends, new services, I think that's what is -- what we've done so good, with putting into our offering and communicating through our marketing to our guests is the newness. And she comes in and discovers the things that she relies upon us for day in and day out, and has for years, but she's also finding the new product or the new services or the new brand when she comes in and even the new marketing events that we've added into it. So I wouldn't isolate it just to brands. I would tell you that the word new is really the motivator that we're seeing accelerate our business.

And just that final question on what kind of customer acquisition thought process, as you've shifted now from marketing, from mostly being a newspaper insert, to obviously moving more towards digital and radio. So are you bringing in a new customer or is it different view?

Well, print is still a good part of our marketing mix and we're getting significantly better at our abilities in direct marketing as a result of our loyalty program. So the content that the merchants are putting out there is improving the targeting of our marketing, that the marketing group is putting out there is improving and experience in store is improving. As far as attracting a new customer, I believe that our sales performance is driven by taking -- grabbing additional share within existing customers. So she's spending more of what she spends in the beauty space with us, although still, only a fraction, which is encouraging, because we know we can still capture more sales from our existing customer base. But we also are adding new customers. Clearly, when we open a new store, we expand our base, but we're adding new customers in comp markets as well. So Brian, this is, as I said, it was a fabulous year in 2011 and we saw good performance from new and existing customers across the board throughout the year.

Our next question comes from the line of Neely Tamminga with Piper Jaffray.

So the question here on stores, you have 100 here in the pipeline for -- on the opening side. Just wondering if you're doing something a little bit differently on the prototype? Obviously, level 7 is the most recent prototype that you guys have out there, but will they still be anchored with the usual, Benefit, Philosophy, Bare, or do you start making room for the Lancome in that? Just wondering how that looks in terms of the roll out. And then Chuck, a little bit of a clarification question on the loyalty program. So as you open up those new stores, will they automatically be adopted into the loyalty program, the new one? Or do you have to wait till that market gets rolled out?

Yes. Let me take the second one first, Neely. The conversion of the stores is a geographic conversion. It is not based on the store age. So existing stores in the market that we are -- in the market that we're converting, as well as new stores that we opened in those markets, will start up on the new program. As far as the first point, we are still working in a level 7. We have made a number of enhancements to it and we continue to, both in the visual appearance of the store as well as the space allocation and the allocation of space to different brands and different categories. I think what you'll see us continue to do in stores is similar to what we've done in the rest of our business. We had a very good base. We just continued to evolve that, listen very closely to what our guest tells us, what products, what brands, what categories are out there that she's interested in and we continue to evolve. So as an example, you will see later in the first quarter the end-caps of our fixtures throughout the store will become much more exciting than they have been before. They'll be much more statement oriented, either around a new product or a new trend or something that we want to do a better job of highlighting than we have historically. So while we still consider it a level 7, sometimes I refer to it as a level 7 on steroids. We have made a number of improvements to that. So that's what we'll continue to -- we're putting all of that into the new stores we're opening this year, but we're also going back to the existing 7s and doing the same thing.

And then just one quick follow-up on the manicure service that's being rolled out. Do you have to do anything differently with the store payroll or labor-management? Or is that just a plug-and-play with the salon services?

It's kind of a plug-and-play. There is some downtime for our stylists. It's a service provided by our stylists that are in-store now. They have some downtime between guests. They also have downtime even when working with a guest. If they're waiting for treatment to -- while they complete the service, they have a little downtime with that same guest. So that's what exacting about it, Neely, this is an incremental service. It's not taking away from anything we offer today and it can help fill into some time gaps that we have in the salon.

Our next question comes from the line of Daniel Hofkin with William Blair & Company.

Just a quick question regarding traffic and ticket expectations. Obviously, in 2011, including the fourth quarter, I gather traffic was the vast majority. Do you expect a similar kind of relative dynamic or might that mix change a little bit going forward? That's my first question.

Yes, Dan, we don't break that out in detail. But clearly, we do expect traffic to be the motivating factor in our comps this year, as it has been over the foreseeable past.

And in terms of just number of visits or conversion rate as well, is it some features but mostly number of visits that's driving the transaction?

Yes, I don't know how much detail we want to get into that other than what we've provided in the past. What I can tell you is traffic has been the driving force in our sales, and with the growth of our loyalty file, what we know is she is shopping with us more often and she is spending more money in total. On each of her visits, she may spend a little bit less, but because she's coming in more frequently, the aggregate of her spend with us is increasing. So I would expect that we would see that as we go forward. The loyalty program -- both of the loyalty programs are very good, solid, attractive programs. We obviously believe the points program is better and hence, the reason for the conversion. So we have high hopes of this loyalty program continuing to -- continue to drive our business as we go forward.

And then as it relates to, let's say, incremental sales and what you're seeing right now or what you expect for drop-through rate to the margin line, the operating margin, kind of what's a good rule of thumb that we could think about at this point?

Probably, the easiest way to translate that, Dan, is if you look at a point of comp based on our guidance range. So a point of comp translates to about $0.01 of earnings.

That being at the quarterly -- I'm sorry, that's on a quarterly basis, correct?

Yes. Correct.

So fairly similar even kind of outside of the range, I would assume?

Correct.

Talking about just like second, third, fourth quarter?

Yes.

Yes. I guess last question, if I could. On the 53rd week, so that's obviously included in the guidance. I was a little bit surprised because I thought it might be a higher margin week, but is that -- are there things that affect the margin in that single week? I know it's such a small number overall year?

No. It's a normal week for us. We go through the sort of exhaustive exercise of making sure, which I think a lot of retailers do but maybe not all of them, the exhaustive exercise of making sure that, that week has all of the incremental costs associated with it, which is the proper way to do it. So it has all the variable costs, it has all the fixed costs. So it is a more normal operating margin week in the month of February.

Our next question comes from the line of Erika Maschmeyer with Robert W. Baird.

I guess have you set a date for how long you'd be willing to stay around? And then on the search, are you looking internally or externally or both?

I'll take the first one. I'm going to be around till we find the right successor, period. I have an incredible passion for this company, passion about what we've delivered in the past, the passion for the opportunities that are in front of us, which I think have never been stronger. We're going to take the time that it takes and I have the flexibility to make sure that I'm around until we find that right successor.

As far as the search is concerned, obviously we are just beginning that and we will consider all candidates, internal as well as external.

And then on the loyalty program rollout, any plans outside of the 130 in Q1? Do you expect all stores by year-end? And then could you talk a little bit strategically on the promotional front? I know you've been working to move away from pure discounting and I guess kind of where -- is there any kind of examples of where you've had success in and how the new loyalty program can help you move that goal up forward further?

Well, we haven't laid out publicly the full conversion schedule, so we're going to take the 130 stores, and as I mentioned of the script, that will have half of the chain on the program by the very end of the first quarter, it's actually the last week of the quarter. There are natural points to convert this over because we have to consider the old program and the redemption windows that we have for that. So we'll talk more about the rest of the company as we proceed into the year. As far as the benefit of converting to the one program, it does provide us a lot more flexibility to adjust our promotional format because today, it is difficult with 2 programs to be able to offer a lot of loyalty-based incentives nationally in lieu of price discounts. So what we have done is altered some of our promotional mix. We clearly have offered our coupons. We will continue to do that. But as we move more and more to the points-based program, you'll see us utilize additional points as incentives to our guests. But ultimately, you've also seen, as 2011 went on, and it'll continue in 2012, that newness is highlighted more and more in our advertising as well. Price is not the ultimate driver in our business. It is a factor, but unlike other types of businesses, it's not the leading factor. It goes back to, I think what Brian was asking about earlier, it goes back to the newness. So you've seen some examples of that and when you go through our ad pieces, whether they are print or digital, you'll see as we go through 2012, us highlighting the newness, whether it's fun, fashion, function around that newness, you'll see us highlight that more in our advertising.

Our next question comes from the line of Sam Panella with Raymond James.

I apologize if I missed this, did you break what the traffic and ticket increases were in the fourth quarter?

We said mostly traffic. Slight increase on ticket.

And in terms of your acceleration of your store growth, can you talk about the opportunities that you're taking advantage of? Obviously this is a further acceleration from what we discussed in the last call. And just wondering, given your store economics are much stronger now than they were, say, 3, 4 years ago, is this something up maybe new real estate opportunities for you?

I'll take the first part and I'll throw the second to Gregg. The real estate team has been really creative, really aggressive in finding opportunities. There's obviously not a lot of new construction that's happening, but there is real estate that has been out there, whether it's been other retailers who have freed up their full real estate foundation or just others who are looking to scale down on some space. So for instance, in the first, it's Borders, we have taken some sites from them. We have taken some excess space from Best Buy. But I want to give the real estate team a call out for the outstanding work that they've done. They also have been very creative in working with existing centers and existing landlords to try to put together small stores and try to merge them together to get our 10,000 square foot box. So it's a very different way, you have to approach real estate today for new stores than it was a few years ago, when a few years ago, you could almost sit and wait for developers to call you. And today, you have to be very proactive, very creative. And I think our real estate team has done a great job as evidenced by the 100 sites. It's also important to note that we're very pleased with the 100 sites that we've been able to get for this year. We have not sacrificed quality whatsoever. I think we've talked about this. Both Gregg and I have talked about this repeatably. We will not pursue quantity in lieu of the quality. But that's what makes 2012 so exciting, we've been able to find both of them and we're very excited about what's ahead.

And we do have an incredibly rigorous real estate evaluation process as well as the talent in our team that knows the right sites to pick. I think one additional point there, too, is the larger we get, the more attractive and more visible we get with developers, kind of, across the country. So the dealmakers have been incredibly creative and the receptivity of developers to rearrange boxes, et cetera, to accommodate our needs has been equally as attractive. As it relates to the payback, you're right. Overtime, we have accelerated the cash payback in the model. We have reduced the opening cost as well as improved the operating margin. So what's really exciting about this opportunity to accelerate the new store program, even though a lot of it does come in to the back half of the year, is there will be a pretty significant 2013, 2014 benefit, cause these stores pay back pretty quickly and they get a nice lift when they start to roll into the comp base. They generate additional incremental free cash flow and earnings. So it'll be a nice complement to 2013 and 2014 and certainly beyond that.

Our next question comes from the line of Jill Caruthers with Johnson Rice.

A question on the comment you all made earlier knowing that only a small percentage of the customer's beauty care spend is at Ulta. Maybe, I know it's a generic comment, but maybe could you talk about where you feel the missing parts are that Ulta isn't grabbing?

Well, I'm not sure it's any particular product category that we're not grabbing, but no one in retail gets 100% of anyone's spend in their respective category. So we believe, given the strength of our model, the breadth of our offering, from mass to prestige to salon products to the salon services and how we've improved upon that, we think we're giving our guests that much more reason to be able to spend her purchase with us, spend her money with us. So it's not any particular place that I think we're weak on, I think it's just somewhat a convenience issue because she maybe shopping elsewhere and pick something up. But it speaks to the opportunity that we have because of the breadth of what we offer, unlike other players in our space who are much more limited in the scope -- in the breadth of their offering and the scope of their offering, we can satisfy most things that a woman wants in a beauty store. So that's why we believe we do have that upside potential to grab more share of an individual's beauty spend.

Jill, I think the other way. In addition to that, to think about it, too, is this loyalty program, the flexibility that comes with this and the attractiveness that she has in using this program, I think will drive higher share wallet and higher loyalty. In addition to that, it also leads to the capabilities that we're continuing to develop on the digital side so we can be more personal and more top of mind to her. So the more frequently, at an appropriate level, that we can personalize messaging to her in what's a very impersonal world today, that's going to leave us higher share of mind and leave us with higher share of wallet, I believe, because we know that the other things we're doing, she's significantly enthusiastic about, as demonstrated by the kind of traffic and loyalty growth that we're getting today. So I think there's multiple levers as we continue to build out these strategies that are going to continue to help us drive higher share wallet in the customers where we already have higher share wallet and a bigger opportunity for those as you kind of move down the ladder from there. So that's kind of the way I would think about, in addition to what Chuck said, where the opportunity continues to come forward. And then as we become larger, again, that voice as a national retailer becomes much more prevalent as well.

Just a quick follow-on question on the real estate. Kind of what are you seeing out there on the rental rate forecast out there?

Pretty consistent with what we've seen in the past. No upward pressure, no significant downward pressure. Again, the way we think about it is we know with -- as odd as this may sound, with incredible precision, based on -- we have this large loyalty club customer base and a very sophisticated analytical model to identify what the potential sales volume is and how that will grow over time for a particular trade area and what the size and shape of the trade area is. So we know exactly what we're going to pay and what we won't pay to deliver a very profitable store as we have been delivering. And then obviously, our dealmakers have incredible experience as to what market there is as well. So it leaves us a very strong negotiating position and a lot of precision in terms of what the right rental structure is to deliver the economics.

Our next question comes from the line of Joseph Altobello with Oppenheimer.

This is actually Christina in for Joe. I was just wondering if you could give an update on the Lancome and Clinique tests, how many doors you're in now?

We're in the same number of doors that we have been in. We're very pleased with the performance of both brands. And before you ask your next question, we have nothing to announce about an expansion, but we are very pleased of how both of them are doing.

Have you seen a comp lift from either one of the brands or you're not going to comment on that?

We're very pleased with how we're doing with the brand. We think it augments the offering as a whole. We're pleased with how the store, overall, is performing, those stores that have had Lancome and Clinique added to them. So up and down, our guest has responded very well. It has not been cannibalizing other parts of our offering.

Our next question comes from the line of Evren Kopelman with Wells Fargo.

This is actually Connie in for Evren. My question is, I know you touched on kind of your real estate selection process, but given the ramp up in new store openings, do you really -- do you have any color into how maybe some of the newer markets have been performing relative to some of your mature markets? Have you seen any signs of cannibalization between your stores?

As we always have for many, many years when we build out a new store annual program, we balance our openings intentionally so between new markets and existing markets. And in some cases, in those existing markets, it will create some cannibalization and in other cases it won't. At the same time, you obviously get incremental operating margin leverage by all the natural efficiencies, as you know, that go along with that. All of that's built-in to our historical performance. We've been doing that sort of forever and all of that's built-in to our store model as well.

I'd also remind you that when you have less than half of your potential store build-out that's up and running, cannibalization will be a factor in some cases, but we have a lot of runway open, a lot of white space for us to satisfy guest demand by opening a store in those markets.

There are no further questions at this time. I would like to turn the floor back over to management for closing comments.

Let me thank everyone for joining us today, and Gregg and I will look forward to speaking to you to discuss our first quarter results in June. Thanks again.

This concludes today's teleconference. You may disconnect your lines at this time and thank you for your participation.