Greetings, and welcome to the ULTA Beauty First Quarter 2014 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now turn the conference over to 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 First Quarter 2014 Conference Call. Hosting our call are Mary Dillon, Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Also joining us are Janet Taake, Chief Merchandising Officer; and Dave Kimbell, Chief Marketing Officer. 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 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. I'll now turn the call over to Mary.

Thank you, Laurel. Good afternoon, everyone. I'm pleased to report a strong start to the year, with better-than-expected sales and earnings growth in the first quarter. The team's accomplishments included driving continued momentum in our online business, successfully rolling out new brands, completing a smooth conversion of our loyalty program onto one platform and closely managing inventories. In addition, transactions at comp retail stores turned positive, reversing the slight decline in the second half of 2013. We're also making excellent progress with our strategic planning work, and we're on track to deliver our long-term vision and 5-year financial targets, which we plan to announce on our second quarter earnings call in September and follow up with an Analyst Day in October. As I said last quarter, the strategy work is designed to refresh our vision and chart a course for an evolution of our business model and to create a playbook for sustainable, profitable growth. To recap the numbers for the first quarter, we grew sales 22.5% and delivered an 8.7% total company comp on top of a 6.7% comp in the first quarter of 2013, both including the impact of online sales growth. Our e-commerce business performed very well, driving 72.3% comparable sales growth. Similar to the past several quarters, Prestige Cosmetics and skincare were the strongest categories. We were pleased to see transactions turn positive at retail, with a healthier balance between transactions and average ticket driving the strong comp in the quarter. Earnings per share were up 18.5% to $0.77 versus $0.65 last year, driven primarily by better-than-expected sales and some planned expenses shifted later in the year. Scott will cover the detailed financial results for the first quarter and our guidance for the second quarter in fiscal 2014 in a moment. But before that, I'd like…

Thanks, Mary. Good afternoon, everyone. First quarter sales were $713.8 million compared to $582.7 million last year, an increase of 22.5%. Comparable sales increased 8.7%. The retail comp, which includes salon, was 6.8%, and e-commerce growth of 72.3% added 190 basis points to the comp. The transaction and ticket contributions to the total company comp were more balanced, with transactions up 2.5% and ticket up 6.2%. The ticket increase was driven by roughly 20% units and 80% average selling price as our business continues to mix up to more prestige categories, which are generally at higher price points. We were very pleased to see that retail-only comparable transactions increased 120 basis points, almost a 2-point sequential improvement from Q4. Gross profit dollars increased 20.6% to $246 million. As we expected, gross profit margin declined 50 basis points to 34.5% from 35% in Q1 of last year. While retail project -- product margins were strong, the overall product margin rate was down about 40 basis points, driven by a number of factors including a higher mix of ulta.com sales, some product mix shifts within prestige and the impact from converting the remaining 50% of the country to the ULTAmate Rewards program, which delivers more gross margin dollars but at a slightly lower rate. For the full year, we anticipate product margins will be slightly higher than last year, based on some of the newness in the category mix we're planning for the rest of the year. As a reminder, the ulta.com impact to our margin rate is primarily due to sales mix. As most of you know, we do not currently sell the full assortment of our professional hair care products online. So having a lower mix of that higher-margin product online does dilute our e-commerce rate somewhat compared to bricks…

[Operator Instructions] Our first question comes from the line of Neely Tamminga with Piper Jaffray.

This is Kayla Berg on for Neely Tamminga. Just wondering, digging deeper into your e-commerce sales, can you guys tell based on your loyalty data how your customer is choosing e-commerce versus a store visit? Said another way, within your loyalty base, how much is she using the site to buy products versus going into the store? And with that example, what does her purchasing behavior look like online versus in-store, again looking at your loyalty customer base, maybe looking at average transaction size and dollars or units? And how does that look differently online versus in-store?

Yes, this is Dave Kimbell. We absolutely see a lot of cross purchase activity within our membership database, between the website and our stores. I don't think we're prepared to share specific details around some of the specific questions that you have, but it is -- as our e-commerce capability has grown over the last 18 months and become a bigger part of our business, one of the things that we're particularly excited about is our ability to reach her where and when she wants to shop with us. So importantly, our members are finding that to be very -- a very convenient way for them to shop. So they're visiting both stores and e-commerce, and that's certainly something that we're encouraging as we continue to leverage e-commerce as a way to drive customers back into our stores.

Our next question comes from the line of Aram Rubinson with Wolfe Research.

Two things. First of all, on the new store productivity, I know historically you've talked about 70% or in that range. Our calculation for this quarter was around 74%. And to get to your guidance for second quarter, I think I needed at least 75%. So the question is, what are you doing differently there? And is it a function of also opening fewer stores that maybe we can cherry pick just the best, and if that's sustainable? And then I have a follow-up.

No, Aram. I wouldn't say there's anything specific that we're doing any differently to drive new store productivity. I think we're just seeing a natural maturation of the stores we've put in place over the last 2 years. Notably, we observed that first quarter this year, the stores coming out of the gate, the 21 new stores in the first quarter, were just exceptionally strong. So nothing special that we're doing, other than our normal great day-to-day activities to support new store openings.

Okay. Because sometimes, when you choose fewer stores, you get a better hit rate, I guess, is kind of what I was trying to get at. That's not what you're seeing just yet, you're saying?

No, we're not seeing any of that.

And then my second question is, in the 10-Q, it says our long-term strategy is to drive -- operating profit is expected to increase as a result of our ability to expand merchandise margin and leverage our fixed costs with comparable store sales increases and operating efficiencies, offset by incremental investments in people, et cetera. Wondering if that word, "offset," is kind of to be read fully offset or partially offset?

I would -- my response to that would be partially offset. And I think we've shared that with many, many investors that we've talked to over the course of the last year. We still believe that a mid-teens operating margin target is a reasonable one for ULTA and one we feel capable of achieving over the longer term. Again, we've got some investments that we're making in the near term, notably in supply chain, e-commerce, cycling our hypergrowth new store program here over the course of the last couple of years. We feel like once we get through that, we're going to see benefits coming from those investments. And we're also going to see continued mix up in the prestige part of our business, which we think will drive improved operating margins over the long term.

And comps of 8.7% don't hurt either.

Our next question comes from the line of Gary Balter with Credit Suisse.

Two questions. One is, you mentioned that -- obviously, traffic went up. How much of that do you tie in with the rollout of the loyalty program, the ULTAmate Rewards, to all the customers? And what does that imply for future quarters?

Gary, it's Mary. Thank you. I'd say there were several factors that we believe drove the transactions, and we're encouraged to see that improvement. Over the long term, we're going to want to continue to have that kind of balance. But it's really a combination of things. It's probably hard to parse out just one thing. But certainly, rolling out the loyalty program is part of it. But we also have had some great newness in brands that we talked about, like IT and Mally; space expansion; more compelling marketing and merchandising, I'd say, overall in our materials, in-store and online. So really, a combination of those things altogether, we believe, is what drove that to happen.

And, Mary, just following up, you mentioned, when you're talking about the really strong results in e-commerce, that you had a new release of the platform or some upgrade. Where are you in the e-commerce rollout of your platform? And what do we expect in the future?

Sure. I'll ask Dave to take that.

Yes, yes. Absolutely. We're continuing to expand our capabilities. So as you're probably aware, last year, late last year, we launched our new site that has been performing very well and is one of the drivers of our success. And we continue to add new capabilities. I think a couple of things that Mary referred to earlier: brand stores with a new capability in partnership with some of the key brands; we have a new feature around Ask Ulta, where customers can engage with us and ask specific questions around products or beauty tips; and then we continued to expand our capabilities. We've got, as Mary mentioned, our inventory availability online, both on our site and then within Google, which is -- we found to be a great convenience for our customers in Q1. We've had about 0.25 million views of inventory on our site, and that's important not only to connect with our customers today but to set ourselves up for future omnichannel capabilities. We've built in some live chat capabilities, we've redesigned our loyalty and guest services. So there’s a variety of things as we continue to build our web and digital experience that we think will be critical to continue the strong growth that we've had in that space.

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

Regarding your comments on the evolution of gross margin, what is going to drive the category mix positive impact there? And also, the breakout, getting the 20% unit growth was impressive. Was that a trend that will continue? And could you just give us color on what's working on the unit growth side?

Oliver, thank you. First of all on the gross profit margin, let me just start at a high level. As Scott described, there's a few different items that drove some margin deleverage in the quarter, and some of those headwinds will continue for the year. But we do expect to see modest improvement for the full year. And really, it's a couple of things, one is a newness that we have in the pipeline and also as we continue to evolve our promotional strategy and pull back on some discounts carefully, we think that those 2 things alone will help us.

And on the unit front, do you expect the momentum and kind of breakout to continue at this rate between AUR versus units?

Yes. You know what? I think we're trying to really drive a healthy balance of all that over time. So some of the test-and-learn programs that we're doing this year are really trying to see how we can lever that sales equation even further. So we're looking at it across the board. So part of this is obviously, first and foremost, getting new guests to Ulta and then having our current guests come more often, shop more often. So whether she's buying more units per transaction or higher-priced items in her basket, all of those are, frankly, good levers for us to explore, that we think are all going to be part of our future growth.

And, Mary, on the customer acquisition front, what would you prioritize as the top catalyst for the continued momentum in terms of realizing the opportunity there? And we’re looking forward to the Investor Day, if you could just give us a few thoughts on the nature of what we may expect to hear about, that'd be great.

Well, I can't preview Investor Day, but what I can tell you is that -- and consistently, we've said that, and we know from a data perspective, that awareness of Ulta just as a retailer is lower than really it can be. So it starts with just getting more guests at our -- in our sort of sweet spot of our target to become aware of Ulta and then to become aware of what we're about. So part -- really this -- the long-term work that we're doing is really about how do we -- I guess you can almost call it relaunch the brand to people who maybe have not been in an Ulta for a long time or maybe never been in an Ulta or don't really what we're like right now versus what we were, perhaps, a long time ago. So we think there's a lot of opportunity there, and it starts with awareness, clarity of what we stand for, and then it's about continuing to do what we do really well, which is offer her a differentiated experience in the store, most importantly, with an array of great products and services that she can only get at Ulta. So it's really all those things together. So I can't prioritize only one, because they're all, I think, exciting opportunities for us.

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

This is Bilun Boyner filling in for Brian. We wanted to ask about your product introductions for the rest of the year. Are there any product launches or emerging trends you're really excited about for the rest of the year? And do you have any updates to your Clinique and Lancôme shop and shopper allotments?

Thank you for asking a question. As far as future -- any new products or rollouts, we would not share at this point in time. Of course, we always are focused on newness, whether it be product exclusives or new brands, but I would not be specific. And back to Clinique and Lancôme, we opened a significant amount of doors last year, I think I mentioned on our last call, and we're very pleased with that business. And we continue to monitor. But it's like a new store. It ramps over time. So we're partnering with our vendors to make sure that we maximize the business together. And I really don't have any other updates other than that, that we are very pleased with both businesses. And as far as the trends, some of the trends continue. Lips has been very strong. We see that continuing this year and as we move forward into fall. Also, anti-aging continues to be strong for us. And we're also seeing complexion or face being very strong as Q1 ended. And I think it’ll continue.

And can you update us on the store maturity term? I know you mentioned new stores exceed expectations, but I wanted to see if there’s a change in your comp assumptions by store age, particularly given the product mix is somewhat changing and e-commerce is now a growing part of the business?

Yes. There hasn't been any change in the core model and what we see the performance of those new stores compared to what we share in our standard kind of investor deck. So no, new stores still very productive, in line with our expectations. And the stores that are beyond 5 years old, again, in a healthy comp environment, they're additive to the comp. They're all comping in very healthy low- to mid-single digit range.

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

I have 2 questions, the first relates to gross margin. You made some comments about the mix within prestige and the notion that the prestige products that you sold more of in Q1 might be a little lower margin than some of the prestige products, perhaps, that you sold in the past and that you expect to sell going forward. Any color as to the drivers of that trend and what changes you expect to see that will make prestige more of a pure positive to the gross margin rate?

Matt, what I would say is that prestige is a pretty big category, right? So there's a lot of different brands that we have that are in the price that we call Prestige, and some of them have -- they have different margins. All of them are good, strong margin and good, high price points, right? But within that, there are certain brands that are somewhat higher or lower. So it's really just about that. It's a little bit of a shift within that. As we look at our pipeline for the rest of the year and what we expect in terms of newness, we believe that will moderate and shift to positive.

So you have visibility to launches and such that make you feel that way?

Yes.

Great. And then my second question, I believe at the outset of the year you spoke about $0.10 of investment, most of it in SG&A and the initiatives that you've spoken about in the past and again today. Scott, if you haven't done so, and I may have missed it, could you quantify how much of that $0.10 you booked in Q1? And to the extent that you said some investments were deferred to later in the year, how much of what you originally expected to spend in Q1 did you push out to later in 2014?

Yes. It was virtually 0 in Q1, to answer the question directly. And it's all back-half loaded to 2014, I would say. Directionally, it’s heaviest in Q3. That's where we're really going to be able to get some actions in place. And then it'll continue on into the fourth quarter.

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

Just a couple of follow-up questions. One, if I could ask the Clinique and Lancôme question slightly differently. Would you -- at this point, do you feel like, over time, there’s still a meaningful opportunity to add one or both of those brands or others on that stature to the -- a meaningful part of the chain that don't already have them?

This is Janet. So thank you for the question. We're pleased with the business. As I said, there's opportunity. We're hopeful that we'll continue to expand both brands, and there's opportunity for others. So that's -- and at this point, as I mentioned, that's -- I have no further update.

Okay. And then just a follow-up on the thoughts around the promotional cadence. It sounds -- you didn't call it out in the first quarter, so is it fair to say it was not a meaningful difference year-over-year in the first quarter?

Well, you know what? Part of -- we actually slightly pulled back on our promotions versus a year ago. I wouldn't say it's so significant that it's super meaningful yet, but it’s a trend that we are encouraged by because strategically, we think it's important. And one of the things -- I believe that it's just a sort of, "walk before you run," and something like this, right. So value is important to our guests, and we need to make sure that we offer value. But we have done some things to sort of modify our mix and our offer strategy. Dave talked about our CRM platform. We're leveraging that to deliver more relevant offers. We're expanding our digital reach to drive awareness. And yes, I would say that we're balancing the value equation with offers that are more relevant, more personalized, perhaps even a more emotional connection, you might say, to our guests. So we are making some changes there that are having an improvement in terms of our promotion level. It's going to be difficult for analysts, I think, to track that going forward. Because as we get more segmented and more personalized, it won't be as obvious to everybody what we're doing, because we won't be doing the same offers to everybody. But we're encouraged by that. And again, that's an important part of how we think about the long term for the business.

Okay. So I mean, basically, it's -- you're also clearly aiming at more effective and higher payback on the promotions that you run? So that seems to be part of it too?

Yes.

And then just thinking about as the year progresses, the reason I asked the question is obviously, second half of last year, and there were some unique external dynamics that worked at all retailers or grappling with, but what -- I guess at this stage, is there something about the second half, this coming second half, that you'd expect to allow you to be maybe less promotional than you were in the second half of last year, or at least similar year-over-year based on maybe the new -- the fully rolled ULTAmate Rewards program or other -- a more targeted promotion that kind of helps that?

Right. Well, I feel good about where we are, and I feel good -- I really believe that every day, we're raising our game as it relates to our ability to be more fine-tuned with our promotions and, as you said, use that to drive more incremental, profitable sales. That's the ultimate game here. So really, as I look at our full year, it's still early in the year. And we are -- we feel it's prudent to hold where we are until we get deeper into the year. To your point, we don't really know what holiday holds. But I do think that I feel good about where we are and that we are going to continue to raise our game. If our sales momentum continues and if our upcoming newness performs better-than-expected, we could see some upside.

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

A quick clarification. Scott, did I hear correctly that even x the e-com business, that your traffic levels were positive for Q1? I think 1% you said?

Yes, that's correct. 1.2%, actually, right. So it's a 200 basis points improvement from what we saw in the fourth quarter.

Right. Okay. So I guess my question is I think, most retailers saw a sequential deceleration, or a lot of retailers saw sequential deceleration in their traffic trends. Is there anything you can point to in terms of what you guys did to improve your own traffic levels from Q4?

Yes, I wouldn't say there's any one particular thing, as Mary mentioned. The way we've seen it and measured it, it looks like it's a combination of things, right. So it's some of the great new products we introduced in the first quarter, whether it's expanding Urban Decay or IT Cosmetics and adding to what we offer in the box, continuing to improve our marketing and merchandising inside the stores. We expect to -- we expect that the back half of the year will have some easier compares. So we would expect the transaction trend being positive to continue through the rest of the year.

Okay, great. And then just one more on the gross margin line. So it looks like the comps came in a couple of points above your guidance, but the gross margin looked a little weaker to us. I think you clarified this, but I just want to double check. It sounds like your like-for-like retail margins were just like you planned them, and this was just a function of sales came from different channels and different products, and that -- and because of that, the profitability was less. Is that a fair assessment of the gross margin for Q1?

Yes, that's fair. I mean, again, the retail product margins, as we define, which is 90% of the business, I mean, we are very healthy. Mary mentioned a slight pullback on some of the promotional level there, so it helped us be able to maintain margin rate on that. But it's just some of the other mix items that we saw during the first quarter. And again, we see a number of those things being able to either mitigate or moderate as we get further into the year.

To that point, can you give us just some color on Q2? I know you gave us the comp and the sales and EPS, but in terms of how you expect gross margin to play out for the second quarter?

Yes. Sorry, Ike, we're not getting into that level of detail on guidance any longer. So we kind of stopped doing that when we kicked off 2014. So...

But you'd expect those headwinds to dissipate is what you're saying on the gross margin line?

Well, I -- directionally, the loyalty headwind is going to be with us for the rest of the year. E-commerce, we would expect that to moderate because we're going to continue to expand our assortment there, and the business continues to scale. So we would expect some moderation there. And then on the product mix, again, directionally, we expect that to improve as we get deeper into the year because we do have some nice newness in the Q, which is going to be rate accretive to us in the back half. So...

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

First question is can you compare/contrast the environment that you saw in the first quarter, compared to the fourth quarter, if you needed to be more or less promotional, if others around you, either in the beauty category or other product categories you compete with, if you could share some thoughts on that, that would be great?

Well, certainly, the fourth quarter of last year was really promotional as we saw across all retail, right. So in gift-giving categories that we might compete with -- we compete with everybody at the time of the year, right, so even with -- outside of beauty, we also had a very promotional quarter. This year, I would say that within beauty, I would say it's not necessarily less promotional. And this is a very competitive environment, as you know, and everybody's fighting for share. We've gotten, I think, better every day as it relates to how we do our promotions and how we target them and use them to get our guests to come in and buy more often and buy it with less discount. So I think -- certainly, I would say the broader promotional environment, less intense, but within beauty, pretty, pretty competitive.

Okay. Another question is, have you seen any changes in your -- the kind of the pace of new customer additions compared to prior years? And how do you anticipate that to change going forward?

Well, let me say one thing, which is the big part of this test-and-learn that we’ve referenced. And we'll be running some of these awareness and new guest acquisition tests as we get further into the year. The whole goal of that is to drive new guest acquisition, but do it in different ways, right. So right now, we've got a great 13 million-plus people in our loyalty program, and that's a strong program. It's driving the majority of our sales, which is great. We think there's opportunity to have a lot more people as loyalty members to ULTA in the future, right? And so to do that, you have to actually make sure that you're communicating in effective and efficient ways to get people's attention and to get them aware of Ulta, right. So that's why we're doing those tests, is to see, is there an opportunity for us, which we believe there is, to drive new guest acquisition through a range of tactics from traditional media to social media, in search optimization. So there's plenty of ways for us to do that. And we think that's going to be the big learning for us this summer and into the fall, that we can then leverage as we look forward.

Great. And so I guess one last one is on the mature stores, kind of the older stores, how was the -- maybe you could share some color on how those stores performed relative to the rest of the chain?

Yes. Again, our new store model is intact. New stores are performing as expected. And again, it's a healthy comp increase year-over-year. And as we would expect, those older stores are contributing to the comp increases. So we're seeing healthy, low digit into the mid-digit kind of comp year-over-year in some of those more mature stores. So very happy with the productivity of those stores right now.

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

Can you elaborate more on the 2 5,000-square-foot stores that you're planning to test in the smaller markets? And any color around the expected 4-wall profitability in merchandising differences versus the full-sized stores?

Right. David, well, first of all, I have to keep it at a pretty high level because we're still in the planning phases, and we haven't really publicly communicated a lot about this yet. But I'll say -- we're all very excited about the opportunity. It's really an opportunity to go into -- right now, I'd say, just consider them smaller markets, similar -- sort of, in some ways, to where we operate today, but just smaller markets with less dense populations. The stores will be 5,000-square-foot stores. We think about it as really bringing the Ulta experience into a market where, frankly, we think, our women targets are going to be very excited, our women -- future guests are going to be very excited about having an Ulta experience. So it'll be curated down certainly. We -- less space. But we'll have a salon in every store. We'll have a mix of products similar to what we have today in every store. It gives us an opportunity to experiment a little bit with fixtures and lighting and things like that, but most importantly will be for us to learn about the economics. We feel like we're very confident the economics will be strong and good, but we need to learn that. We also need to learn about labor model and service model. So more to come on that.

And are those locations also based in power centers?

Yes, I don't know if I want to disclose where they are exactly yet. But yes, similar real estate strategy to today.

Got it. And obviously, maybe too early to tell, but what do you think the smaller-format store potential could be over time?

Yes, too early to tell would be a good way. I mean, it's really something -- we've modeled it certainly as not -- we see that it looks like it'll be quite accretive, I guess, I'd say. We see it as an incremental opportunity to our real estate strategy and overall business strategy. So part of what we're defining in our 5-year plan is -- through these tests is what is that potential.

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

Just want to go back to something that you mentioned earlier, Scott, about the sort of directional cadence of gross margin this year, maybe even next year. If I understand you correctly, it sounds like this year, you're looking for a little bit of gross margin expansion, but most of that’s going to be offset by the investments you're making on the SG&A side. As you look ahead to '15, I would imagine the headwinds that dissipate later this year eventually go away effectively. So you're going to get better gross margin expansion next year, and then the $0.10 of mostly SG&A investments that happens this year probably dissipates as well. So would you guys expect to see even greater gross margin expansion next year, given what you're investing this year?

Yes, Joe. I don't think I'm prepared to go all the way out there with you on that line of questioning. But I would clarify on the gross profit line. We did mention product margins. So retail product margins we expect to be slightly up year-over-year for full 2014. But that's going to be offset somewhat by some of the investment headwinds that will go through that line, most notably fixed or product deleverage for the full year. So gross profit may be slightly up for the year, but in the flat to slightly up kind of area, I would say. And that $0.10 worth of SG&A, you're right. That's where it goes. That's where the test-and-learn is. It's hard to say right now how that's going to play out. We want to see what the results are and then take actions from there on what we want to invest in, in the future or what path we'd like to follow. So...

Okay. I thought I'd give it a shot. That's all. But in terms of the evolution of the promotion strategy, obviously it sounds like you're easing up there a little bit. And I know one quarter is a very small sample size because a lot of how that plays out will have to do with what your competition is doing, et cetera. So are you guys worried at all that your core customer base has become accustomed to promotion and, as you ease up on that lever, that they may look to go elsewhere? Or is that not a concern at this point?

Well, that's exactly why we're I would say walk before you run in this kind of thing. And so far, I think it looks very encouraging. Again, value is part of the question that guests have come to expect from Ulta. It's really across a lot of different dimensions, gift with purchases, free samples, beauty steals, and then of course our loyalty program. And then there's discounts like coupons and postcards. So as we're pulling those apart and we're doing some analytical work to pull it apart, as well as just experimentation, I really very much believe, and the early data would suggest, that we are not -- we don't have guests that are overly reliant. There may be a segment that is like that. That's probably true for every business. But for the most part, we are confident that as we understand her better and we personalize offers to her more, and we bring in the things that she is excited about trying and buying, that there is a lot of runway there.

Our next question comes from the line of John Kernan with Cowen and Company.

Scott, I think in your prepared remarks, you talked about if the environment remains stable, you'd expect to put -- do a little bit better than your outlook for the year. Does that imply you need to keep doing 9% comps? Or is there some type of line item you think you have good visibility into that could drive perhaps some upside to the current outlook?

No. We're just -- we're looking -- the glass is half full, right. We're looking at business. We're just coming out of a great first quarter where our guidance, especially in the comp line, was a little ahead of our full year guidance targets. And again, we're doing the same with the second quarter because sales are strong. We're seeing good strength in some of the newness that we're introducing to our guests. So we just want people to realize that if things continue on the plane that we're on today, we would expect to see some upside as we go through the year.

Okay, that's helpful. And then just can you -- ticket has obviously been a big driver of the comp. Can you remind us what inning you think you're in, in terms of that continuing to be a comp driver as the prestige becomes a bigger part of the mix?

We would expect -- again, big picture, we are focused on trying to have a nice, healthy balance between ticket and traffic driving our business. So we see -- ticket, recently over the last 3 or 4 quarters, has been a heavier contributor to the comp. We're starting to see now transactions, right, where traffic -- we're trying to get back and balance here, and we would expect that phenomena to occur as we get through the rest of 2014. We think we're on track to have more normalized and a better balance between the 2 comprising our total.

Right. And the only thing I would add is it's not only about shifting more of the mix to prestige. It's also about more units per transaction for our guests. We have a lot of items in the store, plenty of opportunities for her to pick up more in her basket every time she shops. So we think we can drive that balance over time.

Our next question comes from the line of Jason Gere with KeyBanc.

I guess, just noticing the balance sheet and all the cash that you're -- you're sitting on $7 a share. So can maybe you update us just on the thinking in terms of the uses of cash at this point? Is this something maybe you'll talk more at the Analyst Day? But clearly, with no debt and -- you have a very attractive enterprise value to EBITDA, I was just wondering first off if you can just maybe give a little color on how you can put that cash to work?

Yes, Jason. We discuss uses of cash and capital allocation with our board on a regular basis. Right now, our current -- our best thinking is the best investment is to continue to drive organic growth in the business. So we're investing in new stores, we're expanding our supply chain capabilities and driving our e-commerce growth as best we can, so we're assessing capital allocation as part of the long-term strategy work that we're doing as a group. We will be able to give you more color on our plans for the future and long term when we meet with you in the fall.

Okay. No, that's good. And then just a second question. As e-commerce gets a little bit better -- and forgive me if you did talk about this earlier -- can you talk about what the average, I guess, purchase size was online versus in the store? And the reason why I'm asking is just -- when I think about the customer coming into the store, usually, they have -- they know what they're looking for, but there's always those impulse items, too. When you're online, sometimes you don't have the time for the impulse items. So just wondering, as you see this shift move, how do you get that customer who's shopping online to kind of buy more than what they're just looking for?

Yes. Absolutely, it's a big opportunity for us. I'd say you're right in general, that the e-com has -- there's opportunity for us to continue to grow that. I think we're pleased with, really, all measures within our e-commerce business right now: traffic, conversion and average order. But as we get smarter with our cadence of promotion and communication on the web, we think we'll have opportunity to continue to drive that. And so much of that will be driven by our deeper understanding of our customers and targeting message and communication through some of the new capabilities I talked about within our website. So yes, we do have opportunity to continue to grow average order in our e-commerce. We've made progress on that over the last several quarters as we've launched our new site and continue to see opportunity there.

Do you -- I mean, can you quantify the difference between average order online versus average order of a loyalty card member versus a non-loyalty card member? Just something that you can provide, just to give a little color so we can see what the potential opportunity may be?

Yes, I don't -- not on the loyalty side of things. But generally speaking, a bricks and mortar transaction is, round numbers, call it, $35 a ring normally. And e-commerce is north of $50, and a lot of that is the free shipping offers and things like that, which generally tend to drive up average order value.

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

Sorry to add another gross margin question, but just trying to understand first quarter decline on the merchandise margin line. Given last quarter -- I'm sorry, last year, in the first quarter, you were hit by kind of a onetime event with the Gift with Purchase issue. And so just trying to compare that to how you performed this first quarter and then just in contrast of the improvement you're expecting for the remainder of the year.

Yes. A new quarter, a new set of challenges, right, and opportunities to manage. So I was hoping I would never have to talk about one quarter last year, the GWP thing again, but thanks. Thanks for reminding me, Jill. I would just reiterate what I said previously, which is the core retail product margins that we see in the business, which again is 90% plus of our business, is in really good shape. And part of it is our ability to kind of slightly back off on promotional level, as well as continue to improve the mix of the overall box, with adding additional prestige kinds of brands and items to our mix overall. So that's a great thing for the business. I did mention that loyalty, we -- there's a bit of a rate hit that we take on that, and I would expect that to continue for the rest of the year. And again, that's a long-term -- good for Ulta. Loyalty is one of our best, biggest, most important assets that we have. E-commerce, we've talked about that for the last year or so. I mean, that's the nature of that business. We continue to build the assortment out there. We'll continue to do that throughout 2014, and we expect the rate to improve there in the long term, with better assortment and more scale to that business to help cover some of the investment spending we had to do. And then lastly, the product mix, the shifts we saw in prestige, we expect that to moderate as we get deeper into the year. And again, I'd just say again, we've got some nice things in the Q. I'm looking at Janet, my merchant partner here. We've got some great things in the Q for the back half of the year that we expect to help margin rates.

All right, appreciate it. And just a last question. Inventory per store was down this quarter. Kind of how are you looking at that metric for the remainder of the year?

Yes, we -- that's another thing we've kind of grappled with for the last year or so. I mean, we've made some important investments in inventory, both to help general in-stock levels in the stores. And then with the boutiques, we've made some significant inventory investments as well. Those have been good for the business, good, long-term investments for us. We've kind of cycled all that now, and so we feel like we're in a really good position. And we expect the per-door inventory increases to be well below the comp increases for the year.

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

You touched on the mix shift going on within prestige, but could you update us on the performance of mass versus prestige, and whether you're seeing any evidence of broadening the strength across price points?

We haven't seen any shift really in the total box shop, so to speak. So we still – customers, she's coming into shop prestige. That's what's drawing her into the store. But we also know, when she checks out, there's still mass items in her basket. She's cross shopping the store, and that's really one of the secrets to Ulta's success, is we can capture both parts of her shopping trip.

Great. And then could you just talk a little bit about the store experience? And you've been investing a lot in training. What metrics are you looking at to gauge whether the investments are translating into a better, more differentiated experience?

Right. Well, we're early on in the test-and-learn on those. So we're doing a couple of things. One is just increasing moderately our overall base level of training for our associates. But really, as we look at the test-and-learn, it's really about how -- learning about if we were to ramp it up even further and frankly have more guest spacing time, even more knowledge to our associates, maybe through technology. And we -- the key measures, of course, will be, does that drive incremental, profitable growth? So we have to measure that over some period of time. But we're pretty confident that while our guest does not want to be -- she sometimes doesn't want some help and other times she does, we believe we know the right way to do that. But we believe that for many of our guests with more knowledge, more recommendations from our associates, she may increase the units per transaction, and we'll measure that closely and make sure that, that kind of investment would work over time. Having said that, a lot of our supply chain investments will also, we hope over time, allow our associates to have more customer-facing time. So without incremental investments, we believe that's also going to be one of the ways that we can drive growth.

We have no further questions at this time. I would like to turn the floor back over to Mary Dillon for closing remarks.

In closing, I'd like to thank all of our ULTA beauty associates who delivered a great quarter while working to refine our strategy to drive sustainable, long-term growth. And thanks to all of you for your interest in ULTA Beauty. I look forward to speaking with you soon.

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