Greetings, and welcome to the Ulta Beauty Second Quarter 2013 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Laurel Lefebvre, Vice President, Investor Relations. Thank you. You may begin.

Thank you. Good afternoon, and thank you for joining us for Ulta Beauty's Second Quarter 2013 Conference Call. Hosting our call are Mary Dillon, Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Also joining us today are Janet Taake, Senior Vice President of Merchandising; and Jeff Severts, Senior Vice President of Marketing. Before we begin, I'd like to remind you of the company's Safe Harbor language. 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 may make references during this call to the metric free cash flow, a non-GAAP financial measure defined as cash provided by operating activities minus purchases of property and equipment. With that, I'll turn the call over to Mary.

Thank you, Laurel. Good afternoon, everyone. I'm delighted to be hosting my first earnings conference call as the CEO of Ulta Beauty. The team delivered an excellent second quarter with strong sales and margin performance. Our second quarter performance highlights many of the reasons I decided to join Ulta. We operate in an industry that's growing and important to our guests. Ulta has a differentiated format that resonates with customers. We have a solid long-term growth strategy and a strong team that's executing that strategy very well. Leading that team for much of the second quarter was our interim CEO, Dennis Eck, and I would like to thank Dennis for his leadership and dedication to the success of Ulta Beauty over the past few months, and the other board members for their support as well. Now to recap the Q2 headlines. We grew the top line 24.8%. Comparable store sales increased 8.4%, including the impact of our e-commerce business, which continued its rapid growth with a 72% top line increase. Operating income increased 26.8% and operating margin improved 20 basis points to 12.1%. Earnings per share increased 29.6% to $0.70 per share. The team will provide more details on the results and the drivers for the quarter. Before that, I'd like to make a couple of comments on my perspective on the business after my first 2 months on the job. Ulta has enjoyed tremendous success for the past several years, executing a well-defined strategy. And that includes accelerating store growth, introducing new products, services and brands, enhancing our loyalty program, broadening our marketing reach and increasing our digital focus, including ulta.com. I don't plan to make any radical changes to this strategy, but rather I plan to expand and build upon this solid foundation. In my first couple of…

Thanks, Mary. The merchandising team has a lure of steady stream of compelling new products and brands for our guests in the first half of the year and are even more excited about the newness we're launching in the back half. Ulta gained share in all categories during the quarter. Our strength on the top line was again driven by prestige cosmetics and skincare. To recap the highlights of the second quarter, we launched Sarah McNamara skincare, Ulta men's skincare and Mally Beauty cosmetics developed by a celebrity makeup artist, Mally Roncal. Many of our premium brands launched new products, including Stay Flawless 15-hour Primer from Benefit, Limited Edition spring colors from Clarisonic, Diamond Oil from Redken and Moxie Lipstick from bareMinerals. Benefit has quite a few new product launches this year and we're also making good progress on the services front. We have about 360 Benefit Brow Bars in Ulta stores as of the end of Q2 and plan to have more than 400 by year end, making Ulta the largest Benefit Brow provider in America. We continue to roll out brow tinting in the Benefit Brow Bars and expect to have 100 stores offering this additional service by the end of 2013. To update you on Clinique and Lancôme, we ended the second quarter with 90 Clinique boutiques and expect to have 100 boutiques by year end. We added another 5 Lancôme boutiques during the quarter, with 20 more planned for this fall, for a total of 105 Lancôme boutiques by year end. Both Ulta and our prestige brand partners are very pleased with the results of these boutiques, and our guests are delighted to find these brands in our store. Looking ahead to the third quarter, we have a tremendous amount of newness in the assortments. A…

Thank you, Janet. I'm going to start by highlighting our key promotional activities during the second quarter. I will then update you on our loyalty program and CRM platform, and then finally wrap up with an update of our e-commerce business. The largest marketing promotion of the second quarter was our signature Love Your Hair event. This year, we expanded it to a 3-week duration and executed a fully integrated marketing campaign, with a strong focus on digital tactics. The campaign generated millions of impressions and thousands of sweepstakes entries while driving traffic to the stores. At the end of the quarter, in late July, we launched our first digital brand-building campaign called Beauty LOLs. As we've discussed in prior calls, we have a big opportunity to grow Ulta through increased brand awareness. With Beauty LOLs, we are using digital and social media tactics to invite women across America to submit their own stories about the humorous beauty mishaps they've experienced. To date, we've received thousands of submissions in the form of stories, pictures and videos, and we directly or indirectly reached a significant number of potential new customers. While we're working to bring new customers into the top of our marketing funnel with campaigns like Beauty LOLs, we continue to drive today's performance with our bottom-of-the-funnel initiatives. Our loyalty program member count has now passed 12 million, an increase of about 19% year-over-year. Member sales continue to grow as a percentage of the total, and our retention rate continues to improve. Consistent with last quarter's announcement, we expect to convert the remaining 50% of the country still on our legacy certificate program to ULTAmate Rewards, our newer points-based program in Q1 of 2014. This conversion will allow us to more effectively communicate the benefits of being a loyalty program…

Thanks, Jeff. Good afternoon, everyone. I'll recap our real estate program and review our financials. Our growth and development team continues to execute the plan very well, identifying high-quality sites and opening new stores on time and on budget. In Q2, we opened 33 new stores, ending the quarter with 609 stores in 46 states, representing 25% square footage growth. New store productivity remains strong, driven by the quality of our new locations, increasing brand awareness, a more compelling assortment of products and services and great execution of our grand openings and marketing programs, to get our stores off to a strong start. For the back half of the year, we're on track to execute the balance of our 125-store plan. We expect to open 53 stores in Q3 and 13 stores in the fourth quarter this year. We're also on track to complete the 7 remodels in our plan and expect to end the year with just 38 stores in older formats. Looking ahead to next year, we have already approved 90 sites for our 2014 program. While we have not yet settled on a firm number of openings for next year, we expect to have more remodels in our plan than we did this year when much of our focus was on new stores. This year's 125-store program is at the upper end of the range of what we feel that we can comfortably execute from a store staffing and operational execution perspective. And as a result, on a base of 675 stores by year end, we'd expect the absolute square footage growth next year to be more aligned with our long-term guidance of 15% to 20%. Now turning to a detailed discussion of our financials. Second quarter sales were $601 million, an increase of 24.8% compared to…

[Operator Instructions] Our first question comes from the line of Gary Balter with Credit Suisse.

First of all, Mary, welcome to the company and it's -- looking forward to meeting you. You talked -- I was going to ask you about what you found in your first few months, but you did a really good job of walking us through that. But one of the comments you talked about opportunities in supply chain and omni-channel. Could you go into a bit more detail about what the opportunities are or what you see as kind of the weaknesses now and what are you going to them [ph]?

Sure, absolutely. I'll start with omni-channel and then, Scott, maybe you can jump in on supply chain. We'll do that second. I would just say, obviously, omni-channel is something that's important to everybody in retail right now and for -- I think the way would look at it, it's about being where the guest wants to learn, wants to explore and of course, where they want to shop. It's about making it easy for the customer, as well as really being in the conversation. In social media, they're discovering brands. So I know the omni-channel through many different lenses. And I would say that, for us, we will always have what I would say is our very unique asset, which is our store base, which has the combination of product and service, and it's a great part of our model. But also being everywhere else our guest wants to shop is important as well. I'd say the investments that we're making this year, and Jeff talked about some of these in his section, are a great step forward as it relates to e-commerce. So being easier to shop in terms of web, tablet and mobile. We're pleased with what that is going to do for our business and our guest experience as well. We also have several other projects in flight from a systems perspective to help to continue to enhance the guest experience. So whether it's selling capabilities in-store, it were [ph] discovery, as well as associate selling tools. So all of those are either in process or I think we've made good progress on already. And lastly, I would just add that certainly as we think about our longer-term supply chain solution, we're thinking through the evolving guest expectations and how we economically meet those.

And I'll pick up on the supply chain. Again, we're in the midst really of a significant project of designing what the future state supply chain looks like for Ulta. I think our honest assessment is we're probably a little bit behind as far as supply chain processes and best-in-class things are concerned. We've slowed down the project here just a little bit in recent months and that's what you'll see some of the flip in expense going from Q2 to Q3, that's really one of the primary drivers. As you know, Gary, these are big decisions with far-ranging financial and operational impacts on a business over a long period of time. And so we're carefully looking at what we can do to expand current capacity and also taking into consideration what we think guest expectations are going to be in the future. So we're still a little away from the finish line, but as we -- those particulars are finalized, we'll be sharing more details with you.

That's great. Just one follow-up and I'll get off. But you have Clinique and Lancôme in less than 100 stores, I would say 90, approximately of the 609 that you have. Is there a material difference in the results you get from those stores versus the other ones, driven by having these 2 brands in there?

We'll have -- actually by the end of this year, there'll be roughly 200 between both brands, so roughly 100 of each. And we do see that those brands, there's a halo effect on each of the stores that we place those brands in service and it drives customer traffic to the stores. We've seen that demonstrated.

Could you quantify that or you won't?

No, we won't be able to break that out for you, Gary.

Our next question comes from the line of Ike Boruchow with Sterne Agee.

So I guess I'll focus on the top line right now. There's clearly a lot of volatility in the retail space today month-to-month. Is there any way you guys could provide any color of the cadence of how the quarter played out maybe what you've been seeing quarter-to-date from your customers? And then if there's any changes that you're seeing between traffic and ticket?

You know, Ike, we see the same stories in the financial press and in the general press at large, the same kind of things that you guys see on a day-to-day basis. It seems like there's a divergence in customer reaction and shopping behaviors, and it depends what kind of retail category you're in. We're not going to be able to comment really about what the cadence was within a quarter or what the current kind of business environment is for us. But the guidance that we provided includes our best observations of what current business trends are and all the macroeconomic kind of impacts that we look at as we get ready to discuss that with our board and come up with our final guidance for the quarter.

And Scott, let me just add one piece, which is one of the things that I think is great about our business model, is that we have a pretty diverse customer base. And I think through our merchant marketing and CRM strategies the ability to walk across those different customer bases. So we have some folks that are more value-oriented, some people who are about discovering newness and less concerned about value. So I think that sets us up well, really, in any economic environment.

Okay, great. Then Scott, just a quick follow-up on inventory. I think you did a helpful job explaining away some of the growth that you have at the end of the quarter. Can you maybe help us think about how inventories plan to end the year? And then just kind of how you plan -- how you see the business kind of normalizing as we get into next year from a growth rate or inventory per square foot basis?

What I tried to do in the prepared remarks is just try to remind everybody of the significant changes in the business over the course of the last year. So we've added a lot of prestige boutiques, which are -- represent significant inventory investments. The new brands that Janet and her team have been able to bring aboard here again are skewing more towards the prestige side of the store. They are higher-priced points kind of items, they're in high demand. So we're making investments to try to stay ahead of the demand curve and try to service our customers as best we can. We would see that continuing in the future. That's part of our strategy. By year end, we would expect again year-over-year comparisons that the comp -- that the inventory growth will be in line with the comp growth for the full year. And we would expect that to be the trend as we look out to the future.

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

Just wanted to follow up a little bit on traffic. If I heard correctly, I think you said within the product business, that 7.1 comp was about 80% average ticket. Was that correct?

That's correct.

So if the traffic was in that, let's say, 1% to 2% range, I guess can you discuss a little bit what some of the factors maybe that caused that to ebb and flow a little bit. I think in the first quarter, as I recall, it was more of an even split between the 2. That's my first question.

Yes. We've seen the composition of the comp transition over the last 3 or 4 quarters from being one that was basically driven by transaction growth to now more recently being more of an average ticket growth kind of situation. Part of that, we would attribute to kind of the macro environment. So you've seen other retailers talk about traffic being down in centers across the U.S. I mean, you've seen that reflected in a lot of the comp numbers that have been announced during the last 4, 6 weeks. We see that in our business, we're not immune to that. I mean, we're in the centers, right up next door to all those other high-quality, big-box retailers. So we have seen nonmember traffic down year-over-year. The good news for Ulta is we've got a great loyalty program. We've seen that be very effectively implemented. We see our loyalty program members actually shopping more often with us. And we -- to top that off, we've got nonmembers and members actually buying higher-ticket items and driving their basket higher. So that's really worked in our benefit here in Q2.

Okay. So it sounds like you would attribute most, if not all of it, to sort of just the overall backdrop as opposed to kind of changes within your specific business?

That's correct.

Okay. And then as it relates to, I think just following up on Gary's question on brand penetration, is there -- can you talk about kind of what you're thinking, at this point obviously, not putting hard numbers on it, but do you foresee a situation where the 2 kind of -- Lancôme and Clinique could be in a significantly larger percentage of the store base over time? Is there a subset of the stores where it wouldn't make sense for any number of reasons? I'd just be interested in your thoughts on that.

This is Janet, and thanks for the question. We are just opening up more boutiques this year. So with the 100 in Clinique and 105 in Lancôme. We're very pleased with the partnership we have with the brands, and we're hopeful that we'll add more boutiques in the future. But at this point, I don't have a definitive answer for that.

Okay. And then I guess if I could sneak in one last one as it relates to store growth. And obviously, I think last quarter, you had said you've had about 50 in place and now, 90 for next year. Is that -- is my memory correct on that?

Yes, that's rough -- that's correct, Dan. You're on target there. We...

Okay. Do you think from the standpoint of your longer term, your most recent longer-term target of 1,200 stores, how are you thinking about that itself and your thoughts also on the smaller format opportunity?

Well, the 1,200 stores, I think as we've discussed consistently in the past, is a realistic target that we're all here focused on. So that's 1,200 of the 10,000 square foot boxes that we do so well today. I think we've also talked a bit about the 125-store number kind in absolute terms, that's kind of a mix of new stores and remodels. It's kind of at the upper end of the range where we feel like we can execute that at a very high level. So again, as you look out to next year and beyond, that's kind of the absolute number that would fit into your model as you're looking at percentage growth kind of estimates. The small store opportunity is one that the team here is focused on internally. Again, we've got a couple of small stores sprinkled throughout the chain right now. But the team is focused on really delivering the Ulta experience in a smaller store format, whether that be in an urban kind of setting or more of small town rural kind of setting. So that's something that we're focused on currently and we'll probably have a couple of test stores to roll out next year.

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

Mary, I wanted to ask you, what is your impression of Ulta's brand awareness, given the kind of the size of the business and the store chain and your thoughts on potential improvements there? And then secondly, your view about the marketing spend, both kind of the dollars that are being spent, do you think -- is that appropriate and also the content of it, the different areas of spend?

Sure, okay. Well, thank you, Evren, for your questions. I'd say a couple of things. One is that I think that our current brand awareness is a great opportunity actually for Ulta because it's not very high. In some ways [ph], I mean, if we're doing great, it means that we're in a great industry that's growing, we've got a very successful business model that's working really well and I think this team has really built, as you can see, a very successful business, and we're focused on the right strategies. That said, I think we do have the potential to really drive even more growth in the future as we think about the fact that there's millions of prospective customers who really haven't discovered Ulta yet. And so we'll figure out carefully over time how to get there. But I think driving more top-of-mind awareness and more customers to Ulta and driving more emotional connection are all opportunities for us. Women, we know, love to discover new beauty products and services and especially in a really helpful setting with great value and certainly, that's very much what we have to offer. So as I look at our current strategies, I'm really pleased to see that we're experimenting and evolving. I don't think anybody would ever swing a pendulum dramatically on a business without some risks. So instead, I think what we're doing is right, which is we're testing and learning. Jeff and his team are -- the CRM improvements are, in terms of our ability to target and segment and vary our offers, are very interesting to me. Our e-commerce business is growing strongly, as you've seen, which is terrific as well. But certainly, we see that there's opportunities to continue to think about how do we shift the mix over time and drive more awareness driving tactics, which drives you to the business. So we'll continue to evolve that.

And then secondly, Scott, I wanted to ask you about e-commerce profitability. Where are we today and where can that get to? And if -- what kind of time line, if you could talk about that, relative to maybe the corporate average or the store side?

Evren, I would say e-commerce, I think it's probably generally common knowledge that e-commerce businesses generally do not contribute at the same rate as an installed bricks-and-mortars base of business, the environment that we operate here at Ulta. So it contributes at a lower rate currently, but it is scaling up quite nicely. And as we continue to scale that businesses up, we expect that to significantly improve over time. So that's part of our long-range plan.

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

Just a couple of questions here, if I may. Jeff, for you, what size and scale do you think Clinique needs to be, if you're not already doing it already in terms of targeting either versions on the print circulars or the targeted e-marketing. I'm just wondering how much of the Clinique success that you guys have had just because of some bolt-on sort of traffic versus how much you guys have actually been alerting area shoppers as to whether or not Clinique is actually in your store. Could you talk a little bit about that and then I have a follow-up.

Sure, Neely. We actually do both already. So we version the mailers for Clinique and Lancôme already for the geographies where there's enough density of stores in those areas or actually, where customers live within a short enough distance of one of the boutiques. And then email, of course, gives us even more options for being very precise in our targeting to her and letting her know what the benefits of those boutiques are for her. So we do both already.

Okay, that's awesome. And then, Mary, a question for you. As you think about the digital strategy for Ulta, I think at one point, we were counting up actually the SKUs online versus what is actually carried in the store and there was -- if memory serves, was a pretty big delta between the 2 there. Is that one of the key gating factors kind of expanding some of this digital strategy, getting the customer-facing side, the website re-platforming done, et cetera, but then also just getting the SKUs kind of available online? Is there something precluding the company from being able to kind of scale up on that?

Yes, I'll make a comment and then I'll ask somebody else in the team to add to that. I would say that it's both. I mean, first and foremost, I'm really excited about the redesign that we'll be launching and, I mean, it really will improve the overall guest experience and shopability and discoverability on the site. So that's a good starting point. In terms of having more products online, of course, we're always going to look to expand that. So I'll ask you guys to -- Jeff, you want to take [indiscernible] .

Yes, I won't add much to that. I mean, we have a pretty high penetration of what you can find in the stores already online. They're just a couple of categories where we're not where we'd like to be, and pro hair is probably the biggest. And Janet's team is always working very hard to get us up where we are on the stores online. So we're making great progress there.

Great. And just a follow-up here for Janet then. Janet, it's great to see IT Cosmetics come into the store. I think it's a great brand and completely spot on with your customers. I was just thinking about it, though, is this kind of the first brand you've had maybe in a while or ever where the distribution was initially digital? And is this the first retail introduction? I'm just trying to get a sense of -- sizing up kind of what that opportunity might be for IT Cosmetics for you guys.

Sure. Neely, it's not the first time, but it's been many, many years. I think I would go back in history on there because it was on DirecTV prior to really launching with us, but it's been a long time. So to have a brand that's direct and then coming in brick-and-mortar, it's been a new experience since I've been here and I can't really speak to -- too much about it because we are just in the midst of launching IT Cosmetics, but we're very thrilled with the partnership, and we have great expectations of what the brand will do, most importantly for our guests and the experience in the store with our guests.

Our next question comes from the line of Oliver Chen with Citigroup.

Regarding the performance of the salons comping better this quarter, what was the rationale there? And is that an opportunity in the back half? Also, related to your merchandise margin guidance in 100 basis points on the gross margin, what's the driver behind your view of better merchandise margins this third quarter?

On the salon side of the business, it was average ticket, as I mentioned, drove increase. But a lot of it is going back to the retention of the stylist. And with the retention of the stylist increasing, goes back to the loyal guests coming back to that stylist. The heart and soul of the salon is truly the cut and color, which drives the majority of the business. So all of those things have been working and we foresee that the salon will continue to be a solid business.

Oliver, as far as gross profit improvement in the third quarter being driven in large part by improvements in merchandise margin. It's really kind of a continuation of the discussion we started earlier this year. It's a combination of factors. It's the business continuing to mix up more towards the prestige side of the box, which again is higher price points and less promotion and less discounting going on there. And also on our side, being more disciplined and smarter around the promotional kind of environment. So again, whether it's the CRM tool, we can be more targeted with our promotions to customers or the analytics team that supports all that, which is helping us get smarter on how we do those kinds of things. So that those are really the primary drivers.

And Mary, as you engage in the journey to make the brand potentially more emotional, how should we think about the financial impact there and the timing? And what do you foresee how that will impact the business or the brand portfolio or traffic?

I like that question, how to quantify emotion. I'm going to figure that one out. I think it's a journey. It's really just about continuing to refine how we think about positioning Ulta and making sure that all of our communications add up and the guest experience adds up to an ideal guest experience. I don't think we have a problem there. I think we have an opportunity to continue to have folks just discover us and hence, have a deeper relationship, rely on us as, really, their beauty expert. So that will play out in many different ways I think, but it won't be something that happens overnight. It's something you have to earn over time. And as I mentioned earlier, I would just say it's the totality of everything we do. We're not going to swing a pendulum and all of a sudden, start doing things really differently in terms of stopping all of our promotions and doing only advertising or something. You really have to work your way to that to really find the balance in the mix. And again, I think the team has done a nice job already of -- with the loyalty program that's really working well, with CRM analytics that are helping us refine this. So I would think about it is as a journey over time that I think just is an opportunity for us.

Our next question comes from the line of Brian Tunick with JPMorgan Chase.

I guess one question for Scott and then one for Mary maybe. So on Scott, on the $0.13 of incremental investments this year, can you maybe talk about some of the pieces that could continue into next year? Or are there potentially new initiatives as you continue to move towards that 1,200 store opportunity? So just curious of the $0.13, maybe what are some things that we should expect? And maybe Mary, if you look ahead to the planning around holiday this year, just curious as you reflect on and you look at the results of holiday last year and you see the current tough traffic environment out there, what gives you the comfort to guide essentially a 5% to 7% comp for the holiday, and if there are any tweaks to the plans that you're making now?

I guess I'll go first. I'll take the investments. Again, the $0.13 were split roughly evenly between labor investment in the stores to support prestige growth, supply chain, e-commerce investments to drive growth there, and then of course, the new store program. So another one, Brian, on the new store program, I think -- we would think that's going to moderate a little bit again as you look at 2014. So the absolute number of stores is not going to grow beyond the 125. So on a percentage basis, that should help or moderate a little bit as we look forward. E-commerce, I would say again, we're going to continue to make investments there. It probably won't be at the same level, generally speaking, because we wouldn't expect to have a new website redesign next year. So we'll continue to invest in the team there and some of that analytical stuff we have to do. But infrastructure-wise, it shouldn't be as big a bite of the apple next year. Supply chain, I mentioned we slowed that project down just a little bit, so the expense is kind of flowing towards the back half of 2013. We would expect to have a final determination here sometime in the fourth quarter on what the plan is going to be. So that will go -- that will transition from being kind of an expense item to more of a capital item as we transition into 2014. Again, we'll be able to size that up for you a little bit more once we have our final answer there. Store labor, again, we deleveraged that store labor this year significantly, either try to improve the guest experience in the store and to support the prestige side of the business, which continues to grow at a very high rate. With Mary entering the business here and us kind of taking a fresh look at the strategy and how Ulta is going to evolve here over time, I think that one might be a little bit more TBD'd as I look into 2014. Again, I wouldn't expect it to be a significant change from where we are '13 versus '12, but there could be some investments that we look at there. It just depends.

And then on holiday, I'll just make a couple of comments and I'll ask Janet to add to this. But certainly, we're very focused on our holiday readiness. I feel very confident. I know that across the merchant teams, the store operations teams, marketing, supply chain, that everybody is really focused on making sure that we have strong holiday season. And I have confidence that the team has put together a really good plan. So would you like to add some color to that?

Sure. And we are very focused on gift-giving categories across all areas of the store. And we feel that we have both value as well as some exclusive items, as well as some of the things that we do traditionally every year that other people may not do to really incent some of the categories for holiday, but we feel very good about our holiday assortment coming in this year.

Our next question comes from the line of Matthew Fassler with Goldman Sachs.

I want to focus for a moment on a couple of other angles on the online business. First of all, you spoke about online being a factor in driving traffic. If you could just speak about the composition of the typical online transaction and what about it drives the ticket higher? And then also if you could tell us within online what you've seen essentially in terms of traffic conversion at ticket?

So Matt, this is Jeff. I may have to have you repeat the second question or catch it from somebody here. I'm not sure I got that. But on the first question of how is that a factor in driving higher ticket, we have, as long as I've been here anyway, seen a higher ticket in the online channel than in the retail channel. So as that becomes a stronger portion of the total mix, it's just carrying the average for the enterprise up. Does that answer your question or did I miss that?

No, that's good. And the second one, I guess the question was to the extent that in aggregate, your comp growth shifted from being traffic-driven to ticket-driven, if you think about what -- if you think about the big surge that you've seen in online, is that more a function of online transaction growth or online ticket growth within the online channel?

I see. So within the online channel, the mix has been heavily traffic versus ticket so that's been predominantly traffic-driven.

And a follow-up, if I could. You spoke about tougher compares in online for the -- as you cycle the second half of last year, when it sounds like you started to make real headway. I believe you only started giving us online contribution with this level of specificity in the first quarter of 2013. So any sense you could give us as to how the momentum of your online business changed or evolved as you moved through 2012?

I would be able to tell you, Matt, if you looked, I think we provide some of these details in our Q as well, which got filed today. So year-to-date last year, I think it contributed 40 basis points of comp and this year, it's at 130 to 140 basis points of comp. So that's kind of the relative spread year-over-year.

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

This is Christina [ph] in for Joe. Most of my questions have been answered at this point, but I just wanted to follow up on, it sounds like you're saying that your customers aren't as focused on value as they were maybe in the last few quarters. And I was wondering if you could talk about that a little bit more and if you're continuing to see that in this quarter?

Yes, we talked a little bit about in the first quarter call. We started seeing this trend continue as we exited the holiday period and kind of got through some of the rough seas we saw early in the first quarter, that we saw this divergence in our customer profile, much like the rest of America has seen it. There's a certain portion of our customers, our core customers, that are pursuing value and that are very focused on whatever coupon or promotional event that we're running at the time. And then there's a good portion of our customers that the sense is that price is really no object. They're pursuing whatever the hottest new gadget is or the hope in the bottle or hope in the technology or whatever it might be. So the good news for us is we serve a wide continuum of customers and a lot of different products available in our stores. So that plays to our strength.

Great. And then just one last one about gross margin, what your expectations are for the full year?

We would expect -- I think when we talked about quarter-to-quarter, we would expect to see the continuation of improvement in our merchandise margin as we get deeper into the year. That will be the major driver in third quarter. Again, if you look at it historically, that moderates somewhat as you get into the fourth quarter because of the promotional environment and the competitive environment in the fourth quarter. So that would be the driver for the rest of the year by and large.

Our next question comes from the line of David Wu with Telsey Advisory Group.

First, you mentioned that the major comp driver was the higher ticket, and I was wondering, how much of the ticket increase was driven by less promotions on the mass products versus the mix shift toward prestige? And do you expect ticket to remain the main driver of the comp through the back half of the year?

Well, that's what we're seeing as the most recent kind of reality in the marketplace in our stores. So we would expect the trend to continue absent any other significant change in the macro environment. The ticket, when we talk about the ticket, most of it was average selling price. That was the majority of the ticket increase. So units were up slightly. So again, it's subject to assessment and analysis on our side. But we tend to think that our customers are making choices too, just like people are choosing autos and homes and home improvement versus other discretionary kinds of things. When they get into our stores, they're choosing a higher price point prestige kind of product and offsetting that with not buying another category. So that's what we're seeing as kind of the current business trend right now. We really don't foresee any significant changes there in the near term.

Great. And you mentioned already approving the 90 sites for next year, and I was wondering, how much of it will be in new markets versus backfilling existing ones?

Well, we always take a very balanced view towards our real estate strategy, so that's been our profile since day one here at Ulta, and so that we would expect that to continue. So it's always a balanced approach with single-store markets, major metro areas and backfilling markets as we look at our real estate. And we're always cognizant of the sales transfer or cannibalization impact on those stores and making sure that we're making really good decisions.

Great. And as you expand into some of the smaller markets, are you looking into opening smaller-format stores, so below sort of your average 10,000 square foot store sized in order to maximize your productivity? And as you continue to do that, do you think it could potentially change sort of the new store economics?

As far as the economic model is concerned, that's a little far out right now. I guess we're not -- the thought process isn't that far down the path on that one. That would be something, again when you're talking smaller footprint, we're looking at different potential sizes so 5,000 square feet up to 7,500 square feet. And just trying to think about what worked best inside each one of those footprints. And of course, that would be different if we're doing that in an urban setting versus some kind of rural setting. So we do believe that small store is a good side opportunity for us in the long term, and it's something that we hope to see again in some limited test cases in 2014.

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

Touching on the strength of the salons, you mentioned a trial you're going to run with customers to get them to the salon. I was wondering, is the bulk of your salon customers under the loyalty program now? I'd assume they're pretty loyal and good customer for you to have?

Yes, our salon customers, service customers, are our best customers. They visit our stores more often than an average loyalty person does. So we recognize the value in those folks, and we're looking strategies and tactics to try to drive more engagement and try to get more people to try the salon at Ulta. So I think Janet mentioned that we're going to have a CRM initiative to try to touch our loyalty members and try to get them engaged and get them to experience the salon. And we figure, once we get them to try that, there's a good chance that they're going to continue with us. And that's a great add for us as far as value is concerned in the long term.

Okay. And then have you ever quantified of your total sales the percentage that is tied to your loyalty program?

No. We've consistently said it's greater than 50% of our sales. And I think that's all we're going to share at this time. I just -- we're all kind of laughing and smiling here. It's something that we think in the future that we might want to provide a little bit more granularity and color on. So maybe stay tuned in 2014 for that.

All right. And then just one last question. Given you've talked about some shifting of the expenses, is there any way you can quantify of the $0.13 of investments you're making this year, how many -- how much of that $0.13 has already occurred in the first half, just asking, given you mentioned a shift from second to third quarter, some investments.

Yes, Jill. Sorry, I don't really have that kind of detail handy with me. Generally speaking, the e-commerce stuff will be, by and large, behind us by the time we get to the end of September. Supply chain has kind of pushed back into the second half of the year. We thought that would be more evenly balanced quarter-to-quarter. The store labor, as well we did some experimentation with that and testing early in the year, and now that's really picking up steam in the back half of the year. So it's a little tough to give you any more quantitative answer than that.

Our next question comes from the line of Mark Altschwager with Robert W. Baird.

Just a follow-up on the store growth. Can you just talk about what learnings you've had as you've ramped to that 125 pace? And then moving forward as that pace slows, would you expect to see more operating leverage, given the system from a training perspective, is going to be less stressed?

We consider the real estate program and what we do with processes around new store to really be a core strength of Ulta. I mean, the teams that we have, the experience that we have doing this and the way we've been able to accelerate that store growth plan over the last couple of years has really been outstanding. And the new stores again, congratulations to the team. The sites we've identified, those stores are producing excellent results, right on target with where we want to be and that's great for Ulta. As far as the future is concerned, we would expect again the 125 to kind of be the absolute top end so percentage-wise, yes, that's going to help on the leverage when you consider fixed store costs and what that -- impact that has on the P&L. So we would expect to see some benefit there next year.

Great. And then maybe to push for one more on the loyalty program. As the new loyalty program has built momentum, any metrics you can share with us just on the customer behavior on the coupons versus the new point system, timing of purchases, frequency, basket size? Any metrics you have kind of comparing the new program with the old?

Mark, this is Jeff. We generally are pretty tight-lipped on details about the loyalty program. We view it as central to what we do and proprietary in many ways, so we probably can't reveal what you'd hope to hear today.

We would say, though, that it's clear that those customers are more engaged than the folks that are in the certificate program, that they prefer that over the alternative and that we see those folks more often, they're more engaged with the program and it's going to be a big win for all of us when we move everyone onto that program next year.

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

Great. Thank you. Just to wrap up, I'd like to first thank our 19,000 Ulta Beauty associates, whose hard work delivered excellent results this quarter. In my short time as CEO, I've seen that our associates truly love what they do and they're currently passionate about Ulta and our guests. I've really developed great confidence in the team's ability to deliver another strong year of growth in sales and earnings, while making wise investments to set up the business for long-term performance. Thanks to all of you for your interest in Ulta Beauty and I look forward to meeting you in person in the coming months.

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