Greetings, ladies and gentlemen, and welcome to the ULTA Beauty First Quarter 2015 Earnings Results Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Laurel Lefebvre. Thank you. You may begin.

Thank you. Good afternoon, and thank you for joining us for ULTA Beauty's First Quarter 2015 Conference Call. Hosting our call are Mary Dillon, Chief Executive Officer; and Scott Settersten, Chief Financial Officer. Also joining us is Dave Kimbell, Chief Merchandising and 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 delighted to report that 2015 is off to an excellent start at ULTA Beauty with better-than-expected sales and profit growth in the first quarter. To review the headlines, sales grew 21.6%, and we delivered an 11.4% total company comp on top of an 8.7% comp in the first quarter of 2014. We continued to see strong momentum in transaction growth with average ticket growth also contributing to the overall comp. These results were driven by continued market share gains across all categories with particular strength in both prestige and mass color cosmetics. With our best retail comp in 12 quarters, we were also pleased to deliver a 10.3% comp in our salon business and 49.8% growth in e-commerce. We continue to benefit from more targeted marketing through our loyalty and CRM programs. We've also been successful in our effort to drive effectiveness and gain efficiencies in traditional marketing programs enabling us to reinvest in advertising to drive higher brand awareness and long-term growth. Earnings per share increased 35% to $1.04, compared to $0.77 in the first quarter of last year. Scott will talk in more detail later about our first quarter financial results and raised outlook in just a moment. But first, I'd like to provide an update on our business through the lens of our 6 strategic imperatives. As a reminder, we developed this long-term strategic framework last fall to guide our path to continue to deliver market share gains and long-term sales and earnings growth. The first imperative is to acquire new guests and deepen loyalty with existing guests. To update you on our loyalty program, membership in our ULTAmate Rewards program has now reached 15.5 million active members, a healthy increase resulting from an increased retention rate and strong growth…

Thanks, Mary. Good afternoon, everyone. First quarter sales were $868 million compared to $714 million last year, an increase of 21.6%. Comparable sales increased 11.4%. The retail comp was 9.7%. The salon-only comp was 10.3%, and e-commerce growth was 49.8%. The total company comp was driven primarily by traffic strength with transactions up 7.2% and ticket up 4.2%. Similar to recent trends, the ticket increase was driven by a higher average selling price resulting from strong sales in prestige categories and less discounting overall. Retail-only comparable transactions were very healthy, up 6%, and e-commerce growth was driven by both increased traffic and conversion. Gross profit dollars were up 23.3% to $303.2 million, and gross profit margin leveraged 40 basis points to 34.9% from 34.5% last year. Gross profit benefited from strong retail margins resulting from a strong mix of prestige products, lapping the loyalty program conversion that took place in February of 2014 and modest leverage on fixed store costs. ULTA.com's margin rate improved year-over-year due in part to an improved product mix with many more brands of professional haircare products that we offer in-store now available on our website. SG&A expense increased 18.5% to $192.5 million, down 60 basis points as a percentage of sales to 22.2% versus 22.8% last year. The key drivers of this improvement were marketing and store payroll leverage on better-than-expected sales as well as the shift in timing of marketing expense. As Mary mentioned, we are capturing efficiencies in marketing spend that we plan to redeploy later in the year to drive greater brand awareness. We anticipate marketing expense as a percentage of sales will be flat for the full year compared to 2014. Preopening expense was $3.1 million compared to $2.6 million last year driven by 24 store openings and one relocation during…

[Operator Instructions] Our first question comes from the line of Ike Boruchow with Sterne Agee.

I guess, Mary, you've talked pretty extensively about new-customer acquisition and conversion since you joined the company, and it does really look like your strategies are bearing fruit given the traffic numbers you just put up again. But are there any metrics you can maybe share with us on the quarter that could better illustrate the improvements you're seeing, maybe nonloyalty sales or traffic versus loyalty, or conversion rates of new customers into loyalty? Anything like that would be very helpful.

Yes. Well, thank you. We're actually very pleased to see the progress. And as we've said in our 5-year plan that we saw lots of opportunity for us to drive growth for ULTA over time by acquiring new guests and having more loyalty from our existing guests. And that is exactly how it's playing out. In terms of specifics, Dave Kimbell is here as well. Would you like to add a couple points to Ike's question.

Sure. There's a lot of things that we think are driving the improvement in traffic and which is obviously contributing to our overall growth, and we look at a few main things. One, we're really happy with the continued advancements in our overall assortment adding a lot of new products, exclusive products, and most if not all of our biggest, most important brand partners are bringing great news that it's driving excitement and wealth among our members. Our loyalty program, Mary mentioned, we grew that over 17%, which is an increasing rate versus last year to 15.5 million. And that was a very important part of our overall growth. And that -- a couple of things we think drove that. We did do, we think, a better job getting nonmembers into the store. But importantly, we converted them in-store into members at a higher rate than in the past. But also contributing to that was an increase in retention. I don't think we shared specifics around retention rates in the past, but we're very pleased with what we're seeing around retention overall. And then the other kind of components of traffic overall. Our marketing, we believe, is improving, and its efficiency and effectiveness in driving traffic into store, both the traditional vehicles that we've had as well as adding new vehicles like radio. And then finally, the services component. We've seen strong growth across all elements of services, which naturally drives traffic on the hair side and then importantly as well, a lot of growth in Brows with our partnership with Benefit. So across the board, a lot of things driving new guests and traffic into our stores.

Our next question comes from the line of Simeon Gutman with Morgan Stanley.

I don't know if it was mentioned, store performance across age cohorts, and I think the comp number probably speaks for itself. And then connected to that, if you look at the store base in terms of stores in penetrated markets versus stores in new markets, is there anything unexpected in the way that you would've predicted how that performance would look?

Hey, Simeon, overall, when we look at the stack -- the age door stack, I mean, as you alluded to there, when you're producing comps this strong, those older vintage stores are definitely a huge contributor both on the comp line and, even more importantly, on the earnings line, right. Those are very efficient stores for us. And as we look through the stack this quarter, again, those older stores, we say roughly 2005 and older stores are very healthy low to mid-single comps. So they're additive to the comp overall. When we look at -- when we look across geographic regions, we look new stores, old stores, we haven't seen any kind of variability there. I mean, all the stores are generally about the same. When you look at that new-store model, you'd be surprised at how close it is when you look at the overall chain and how strong the performance is in almost every one of the stores.

Okay, and my follow-up, Scott, you mentioned the DC and being somewhat conservative given where the process is. Can you just shed some light on where exactly you are, anything that's surprising you with, I guess, the weeks now leading up until that DC gets opened?

Yes, let me take that. Actually, we're very pleased with the progress and very confident with the team that we have in place, the approach that we're taking. As I had mentioned earlier, we're going to be doing inbound shipments starting next month, and everything is on track. We feel confident about our readiness. But we are taking a somewhat prudent approach because, as Scott said, it's a complex new building for us that's larger, double the size of our other DCs and new systems. But we've got contingency plans in place if things aren't perfectly running. But we feel very confident with how it's proceeding so far. So everything's on track.

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

Just a little bit of a follow-up on the -- kind of the performance. Are you seeing any change in sort of the cadence of new product coming out of the vendors or, let's say, the broader beauty space? Or would you attribute, sounds like obviously, quite a number of your initiatives are really gaining traction. Just curious how you would -- whether you would attribute anything to, let's say, a better product flow? That's my first question. And then I have a quick follow-up.

Yes, I think Dave answered it well. It's really, I'd say, a combination of factors. We feel very good about the brands that we offer, the new products that we've launched. This -- the beauty industry is healthy, vibrant, and there's lots of innovation and new product launches either within existing brands or new brands. But really, for us, the results are a combination of not just what we offer but everything we're bringing to market in terms of how we're creating demand in differentiating the ULTA proposition and using our tools to efficiently and effectively drive awareness and drive traffic. So I think it's really all those things together that we feel are helping to drive our growth.

So I guess, fair to say it's not that there's necessarily been acceleration on the broader industry growth rate or even within certain categories. It's more kind of what's going on in your stores and on your website and how you're conveying it.

Yes. I mean, I think everybody knows that the general trends in beauty are positive. So prestige is doing pretty well, high-single-digit growth, and mass is up as well. The industry is healthy and growing. But it's really -- we're, I think, benefiting from the fact that we are this all things beauty all in one place. So what we have is a proposition that nobody else offers. And so it also insulates us if there's any segments that aren't performing as well. But again, I'd say it's a combination of what we're experiencing what others are in beauty, but we're gaining share across every category because I think the results show that we have something differentiated that's appealing to our guests.

That's great. And then just a quick follow-up on the marketing. So it sounds like it's not a delay in planned spend. It's that you're seeing greater efficiency that kind of, let's say, freed up some spending in the quarter and allows you to redeploy it later. Is that a fair way to characterize it?

Directionally, Dan. There's a couple things that play here. Part of it is what I call a deferral, right, of a spend. Some that we had planned earlier in the year. So some of that moved back in the year. Some of it is efficiencies that we're capturing that were unplanned that we captured during the first quarter. We were able to toggle back a little bit, and we're saving that as dry powder for later in the year as well for some broader brand building kind of things. So there's a couple elements at work.

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

There are a lot of competitors taking aim at the beauty space, whether it's the drugstores, some of the department stores, et cetera. The only one that seems to be pulling back in terms of space allocation at the margin is yourself, i.e., taking the space growth down from over 20% to about 14%. So my question is 2 things. Number one, do you think that's actually benefited your comps by pulling back on the space such that maybe your brand had a certain amount of growth ahead and now it's just kind of being split amongst fewer stores and, therefore, adding to comps? And then second, do you think it's also helping in terms of focus? So by refocusing the organization, do you think that's slowing the pace of growth, in hindsight, has actually helped the comp?

So we're talking about store growth, right. First of all, thank you for the question. Yes, the rate of store growth that we laid out in our plan, we think, is aggressive and appropriate for our stores, 100 stores a year over the next 5 years. And yes, we had a year with 125 and that, as we said, was kind of a peak year. And 100 a year is very manageable for us and we think still quite aggressive in the marketplace. So we are all systems full steam ahead as it relates to our getting to scale and growing our proposition, and we certainly know that this is a competitive industry. It's been for a long time, and it will continue to be. But again, I would say that our pace of growth, we think, is appropriate, and our market share gains -- and our comp gains, I think, really demonstrate that what we're offering as a proposition is differentiated and appealing in the industry.

And so would you say that it's true or not true that by throttling back on the pace of growth, you've refocused the company on comp growth, and therefore, that in turn has been a benefit to comps by throttling back the new-store growth rate?

You might give me credit for that. I like it. But honestly, I would -- the way I'd say that is I wouldn't really consider it so much a throttle back because 100 stores a year is still pretty aggressive growth rate, albeit less than 125. Having said that, you're absolutely right that what I'm doing with focusing myself and my team down is doing 2 things at once, which is growing our store presence as well as making sure that we tend to same-store growth at every single store that we have and driving growth, whether it's an older store and, certainly, newer stores, our expectation, given that really frankly, small share that we have in the marketplace today is that we ought to be able to drive growth across all of our fleet, and that's why we've been investing in learning about how do we evolve our marketing mix, such that it's not just marketing to existing guests but really attracting new guests. And that's part of what's allowed us to be able to do both new store growth as well as comp growth.

And since I'll qualify that as a clarification, my follow-up would be, it seems from looking at your purchases of inventory going into this first quarter that you've been leaning into inventory pretty hard. You're still leaning into inventory it looks like from our calculations going into the second quarter. But my question is, can you give us an example like a realized example of say, hey, 21 Days of Beauty, we've kind of done this and carried it differently this year than last year, so we can kind of crystallize that thought?

Yes. I don't think there's any one specific category or SKU or anything I would talk to. I mean, again, Aram, we've talked a bit about systems, right, and how we're kind of lagging behind. So a lot of our inventory buys and trying to talk with our vendors to try to get better flow to our network is really manual. And it's more of a hatchet approach than a scalpel. And that's really what the systems investments are going to allow us to progress to at some point here in the near future. So we're just really trying to go along on the hottest A&B [ph] SKUs that we have because we know there's no risk there, right. We're going to sell those regardless. So that's a part of the inventory growth you're seeing. You're also seeing we have to buy ahead on the boutiques, right. And again, it takes a while for those to get up into scale within the store so we're heavier there. We've got additional safety stocks. We're putting in a brand-new DC, again, that's twice the size of any existing facility. So it's going to take a while for that to work its way out. Again, if I look at the full year, I would expect the inventory per door to be below the comp, comfortably below the comp by the time we cycle through to the end of the year.

Our next question comes from the line of Rupesh Parikh with Oppenheimer and Co.

I had a question just on e-commerce. So we're seeing again strong performance in your e-commerce business. Are you seeing anything different from a consumer behavior perspective versus some of your recent quarters?

No. I wouldn't say anything different. I think we're really pleased with how we continue to evolve our e-commerce proposition. There are a lot of things we think that have contributed to that growth. We've made investments in improving the site experience through either different ways of communicating trends and merchandising our products and content, beauty destination, other social media tactics, a lot of investments in there to try to drive engagement. Our new items are perhaps a key driver. If there was one shift, as we've added and particularly in our professional hairline, we added some significant new variance in the first quarter, and those are already starting to change the mix a little bit. So we've probably attracted some new guests there that we haven't had in the past. But I think overall, it's around [ph] to continue to optimize our traffic through stronger acquisition and converting them to a stronger site performance, and that's continuing into the first quarter.

And then maybe just follow-up again, on e-commerce. We hear a lot about brick-and-mortar returns just becoming more aggressive in-store. Are you guys seeing anything different or anything -- any significant changes on the e-commerce front from some of your competitors?

Anything different than what they're doing as far as...

Yes, or anything that they can change in the competitive landscape online?

It is like the entire industry, right, beauty's a pretty competitive space. There's a lot going on within that space. I think what we're focused on is continuing to evolve and make sure that we're delivering the comprehensive omni-channel experience. What Mary mentioned a few of the things, a few of the key initiatives that we have that touch our guests both in-store and online, and there's -- a lot that we're doing. I think fulfillment is the key component of it, speed and fulfillment. And that's a big focus for us. Our DC and supply chain investments will allow us to get even better than that -- better at that. We're investing -- we're partnering with Google on some programs in a few markets, in 5 markets across the country for same-day delivery. So there's a lot of competition, but there's a lot that we're doing to try to evolve our proposition to make sure that it remains quite strong and attractive to our guests.

Our next question comes from the line of Simeon Siegel with Nomura Securities.

So just a follow-up on that. If you look at e-commerce strength, are you finding the growth driven more by omni-channel customers? Or is that online-only shoppers? And then, can you talk about the opportunity or the progress in converting the loyalty members into online shoppers?

Yes. Definitely, the growth is with our omni-channel guests. By far, those guests are significantly higher than online-only guests. So what we're finding is as we grow our in-store member profile, we're successfully converting them to online, which is exactly what we want to do. We want to serve her wherever she wants to be served and get her buying online then coming back in store. So that's a big part of that overall profile. And we're ultimately very pleased with the profile of that guest, how frequently she's coming back, the retention online, and we'll continue to drive those tactics to have her shop in both channels and use our services as well.

Okay, thanks. And then just what is the average ticket online versus stores at this point?

Rough numbers, it's 40 -- low 40s in-store and low 60s online.

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

First question, I guess, is a housekeeping one for Scott. Could you quantify how much marketing was deferred out of the first quarter? And how much you contributed to the upside on the bottom line? And maybe where those dollars are going to be going to in the second half, specifically? Is it going to be broad-based across your advertising? Or is one particular mode going to get most of that?

Yes, Joe. I'm not going to quantify what the savings benefit was in the first quarter. I guess I would just point -- I would say that most of it is going to shift to the back half of the year. And again, we haven't made specific decisions on when we're going to deploy that. It kind of depends on how the business is performing, what we see competitors doing and what we think is most appropriate for the long term. So we had planned going into this year to do some investing for the long term, right. The more brand awareness things. So that is in the plan. And we've got some dry powder now that we identified in the first quarter that we're going to add, right, to the arsenal, potentially, if we think there's a need to use it.

Okay, got you. And then secondly, in terms of the drag that you guys had anticipated this year and next year from supply chain and systems investment. I think, and correct me if I'm wrong, it was about 500 basis points in both years, and it sounds like you're going to be accelerating some of that spending into this year. So how do we think about that cadence for this year and next? Is it more like 700 basis point drag this year on EPS growth and maybe 300 next year?

Yes. I'm not going to be able to get into that level of detail with you, Joe. But I will tell you that we, the management team and the board, spends a lot of time talking about our guidance policies, how much and how often. And we've been talking to investors that the quarters are going to be more variable, more lumpy as we get into some of these investments with our supply chain in other parts of the business. So I'm not going to get into this kind of detail every quarter, but seeing this as kind of the first time and we're coming up, right. We're 1 quarter out here on the supply chain being turned on. Let me give you a little bit more color on the back half of the year. So if you look at EPS consensus for third and fourth quarter, I would say you take it out roughly equal weight out of both quarters from an EPS perspective. I'd say in the third quarter, if you're looking at it more from a P&L line item, you take 80% of it out of the gross profit line and 20% out of the SG&A line. And then for the fourth quarter, you'd allocate equal weight between gross profit and SG&A.

Okay, great. One last one if I could. In terms of the gross margin upside. The comp number, obviously, was pretty eye-popping, but the other upside to drive the gross margin, you had a similar comp last quarter when gross margin was down. But it seemed like the one differentiating factor this quarter was you did anniversary the loyalty conversion from last year. Was that a big driver? Or was there something else that was driving that?

No. I mean, there was again -- there was kind of a mix of elements that benefited us during the quarter. So loyalty, right, wasn't as much of a drag as it was 1 year ago. It was roughly 20 basis points last year. We had e-commerce, margin expansion. We had the professional haircare assortment we added in the first quarter. That helped the mix overall. But we also continued to see healthy expansion in the core retail merchandise margins as well. So all good news from the core of the business. Unfortunately, when you look in the back half of the year, some of that's going to be covered up, right, with some of the deleverage we're going to see from some of our supply chain investments. But we're very happy with how the business is performing overall.

Our next question comes from the line of Kelly Halsor with Buckingham Research Group.

Could we dig in a little further around the retail comp growth in the quarter, which was really impressive? There are a number of moving parts there. So could you just parse out for us a little further what the key drivers were, particularly around the impact of new stores entering the comp base? And if you could help us quantify that impact for the overall comp growth? And also, just how you view the product introductions versus your company-specific initiatives and anymore color around the opportunity from a brand or product perspective that gives you confidence that you can continue to deliver a solid comp growth as you lap brand introductions from last year?

Yes, let me start with the overall comps. So again, 7.2% transactions and more than 4% on the ticket side of things. So when you -- from the new-store perspective or the chain itself, I mean, we're getting a lot of benefit from new stores, right. And that's part of the reason when we updated our long-term financial targets for the Street last fall, we pointed to that, right. I mean, we expect to get a nice benefit from all those new stores, 100, 125, 100 a year now, falling into that comp waterfall. So there's a significant amount of the comp goodness that's coming from the very strong performance of our new stores overall.

Yes, so let me just add a couple of other points, which is that our guidance assumes strong level of newness and innovation throughout the year. We increased the strength of the guidance on comp for the rest of the year. In the first quarter, we had some pretty big things to jump over in terms of launches a year ago on IT Cosmetics and IT Brushes. So we're now anniversary-ing those. So we'll be jumping over those, I should say, throughout the rest of the year. So that's just something to keep in mind. As I look forward though in terms of opportunity, first of all, we're always trying for a balance of traffic and ticket. And so we think we're precluding that we can do that. And we -- I feel very optimistic as we look at joint business planning with our vendor partners about their pipeline of news and innovation as well as our own ability to continue to tweak our demand creation capabilities and get more effective and efficient as it relates to how we use -- deploy our marketing spend. So I think the same formula will continue to hold. We think these are strong comps that we're guiding to and feel good about them and optimistic and we believe we'll continue to deliver.

Okay, great. Thank you for the color there. And Mary, just secondly, there has been a lot of buzz around the contouring trend, which you called out in your remarks. And I believe it has been around as a category for a while. But it seems you've seen steam [ph] over the spring. Have you seen that interest in the category kind of tick up this quarter? And has there been any additional investments in the category by your major brands? And then just lastly, if so, what inning do you think we are in with this trend? Thanks.

The contouring inning question. That's a great question. Contouring is a technique that's been around for ages, really. It's just gotten very popular recently, I think, through the combination of certain celebrities who are famous for it as well as social media. We have certain brands that were big in contouring a while ago. It started -- probably began the trend like Anastasia. But other -- many other new product launches, including our own ULTA Beauty contour palette, that's done quite well. So I don't know. I think we're still in the early innings of contouring, but great thing about beauty is there's just lots of exciting cyclical trends. So Brow is big and is going to continue to be big. We think lip is big. So these things will just continue to cycle in and out. And our job is to really just be on top of it and work with our vendor partners to make sure we're bringing exciting products across all price points, frankly, to our guests, which is something that uniquely is done at ULTA.

Our next question comes from the line of Christopher Horvers with JPMorgan Chase.

So wanted to follow-up on the DC question. So there's a new DC alleviating in-stock issue in the stores and a capacity issue online, such that you think you're actually missing sales, or does the benefit show up from the perspective that it alleviates an operational cost issue from manual processes and higher safety stocks? So just -- really just trying to understand what benefit and how's it show -- how it shows up, particularly as you get into the fourth quarter where the e-commerce business is substantial?

Right. Well, let me just start by saying that our supply chain transformation is really a multiyear approach. It's not just a one-shot thing. So we're opening up the distribution center Indianapolis -- this, in the third quarter. But we plan to do another one next year. The whole goal overall is for us to do a few things which -- and you've hit on some of them, which is continuing to build infrastructure to support our growth have enhanced capabilities and drive efficiencies. So it should really -- we should begin -- we will begin, I shouldn't say should. We will begin to see benefits even this year as it relates to e-commerce in-stocks in stores, but it will be a multiyear benefit to us. And so part of that's going to be increased frequency of delivery to stores, which we're always focused on in-stocks, but we know we can always improve, and that'll help us there. There's other aspects of these new distribution centers that will help our stores in terms of their labor efficiency. For example, store-ready, cartonization, so easier to stock the shelves. Certainly being able to assort in segments better, so that as we have different store formats or seem to even do more customize or localize assortments, we can do that, as well as certainly e-commerce processing time, which is the goal. So all of those are macro goals that will play out over the next several years.

So as you think about last year, is there a number where you could say, well, our in-stocks in the stores last year were on average x in the fourth quarter, and we felt like we left some amount of sales on the table and, similarly, on the e-commerce side?

Yes, there's not one algorithm, I guess. I mean, we feel naturally that's something that we struggled with in-stocks generally speaking. But it's not just around the DCs. I mean, it's these other systems that we're referring to. We need all of them to kind of work in unison to help us solve some of the in-stock challenges that we just -- that are just embedded in our processes today because a lot of the stuff is manual, right. So we need the DCs there to do -- to help the throughput on the network, right. But we also need forecasting replenishment to help our vendors, manufacture the product in time so we get it in time, right, and help them with their lead times. And then we need some of the floor and space-planning tools to help us get the stores set up right and be able to measure productivity of the inventory. So we need all those things kind of to work together, and that's why it's kind of a multiyear thing. And it's not just about the buildings themselves. So again, once we get all this in place, it's going to take us a little while to get there. But we expect to see big benefits from improved inventory, in-stocks and productivity and working capital improvements and making the stores look more productive by getting them shelf-ready product and all that kind of stuff to make to, again, improve the guest experience across the spectrum, whether it's in the store or the online experience.

And the costs and benefits of everything we just described are built into the 5-year financial targets that we communicated last fall.

Our next question comes from the line of Matt McGinley with Evercore ISI.

My first question is on the e-comm impact on the gross margin. I know that based on shipping and fulfillment costs, the e-comm has historically been dilutive to gross margin, but with the growth that you're seeing in that part of the business, are we getting to the point now where it's either less of a drag or it's going to be margin neutral? Or is that still pretty far off in the future where that would be kind of comparable from a margin standpoint?

Yes. I would say it's less of a headwind, right. So we saw margin expansion in e-commerce business in the first quarter, which we've been telling investors we expect to see that over time as we improve the assortment online, and we did that, demonstrated that with some of the professional haircare things and Lancôme being added online in the first quarter. So that's come to fruition. I mean, there is a structural cost element to that business with the free shipping and some of the infrastructure things that we have to do here in the near term. That would make it very difficult to see it kind of be -- produce margins that are on par with the retail business, which again, our model is so much more mature in that part of the business, right. So again, it's something that we look at critically and analyze on a regular basis. In fact, we work to try to improve, but I doubt that it would ever get to the point that it would be on par.

My second question is a balance sheet question as it relates to the accrued liabilities. In your accrued liabilities, I think you have about gift cards which I think you guys -- that did pretty well in the fourth quarter and then growth in your loyalty rewards. So my question is how much of that $10 million decline in the accrued liability came from gift cards versus the growth in loyalty? And if it was a substantial decline in gift cards, how much did that impact the comp in the quarter?

Yes. I'm not sure what comparison you're making on the balance sheet exactly -- if you're looking at year end balances or if you're looking at the prior year balance?

Yes, so year end. You're -- from year end to now, you're down about $10 million.

Yes, I'd say the majority of that is really the incentive comp accrual. So at year end, you got a full provision in there for a year where you overperformed to initial expectations and now in the first quarter, you're kind -- right, you're just building that reserve for the full year. So to your question, the loyalty reserve is higher year-over-year as are the gift card liabilities.

And then did the gift cards actually help the comp very much in the quarter? Or did it not?

Yes, I mean, it's -- relatively speaking, it's not a huge part of that, the retail of the total comp. But it is beneficial. I mean, we've seen gift card sales up 20% plus year-over-year the first quarter. So it's stronger than the house. And normally, I think most people understand that when those guests come back to shop, they're usually buying more full-priced products, and they're spending more than the value of the gift card they have in their hand. So it's a great story.

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

My first question relates to your clienteling effort. If you could go into a bit more detail about what you've seen and what you've learned? It seems like a fairly unique effort for a business with a fairly high frequency of customer visits. So how additive is it -- what are some of the puts and takes that you've taken from your test of this effort?

Yes, this one, Matt, I would say, we're in the early stages of. And we've tested in 30 stores. We've now rolled out to about 30 more. And it -- our associates are very excited about this as they love to serve our guests. And they love any opportunity they can to make it easier to interact and to know her -- the guest sales history or interests or loyalty points. So we saw -- we're getting positive response from our store associates and our guests. But it's pretty early right now to give you the result. But I'm pretty confident that's what we're going to roll out to the chain. Anything we can do to make it easier for our associates to serve our guests is something that we know can be very productive for us.

Got it. And then secondly, on gross margin. This was, I think, essentially your second-best gross margin showing in 3 years, and I realize that you deferred some of the investment that you thought about later in the year. And you had good things to say about the promotional client that -- which was also different from what we're hearing from other sectors of retailing. So can you talk about the seasonality of promotions? Are promotions really now just a fourth quarter concern, and also, as you move deeper into prestige, does that shield you more from promotional pressure, and then finally, with that in mind, what kind of promotional backdrop are you contemplating in the margin guidance that you give us for the rest of the year?

Let me start with the fact that we always need to understand that we need to provide a great value to our guests. And so in a competitive industry, promotion is always going to be part of it. It certainly, as you know, it's more intense at times of holiday. But we step back and look at how we create a great just value equation for the ULTA guests. And I'd like to think we're getting better every day using our tools to get more efficient and effective by being more personalized and more targeted and less broadscaled in this kind of discount. So first and foremost, as she comes to ULTA, she loves the fact that she can buy product and brands across multiple price points and categories, which is great. And then if she is part of the loyalty program, which is most of our guests right now, she's able to earn points as she uses this currency, essentially, whenever she consolidates more of her purchases at ULTA. And that's a great value. So that wouldn't be necessarily seen as a "discounted" promotion. But it -- to our guests, it certainly behaves that way. And so we think that mosaic of things that drive awareness and brand clarity and demand, as well as discounts that are given to her the way that's very targeted and personalized are going to be part of our equation going forward. Now during more intense holiday periods, certainly like Mother's Day or holiday, that ramps up a bit, and I don't think that'll change necessarily. But we're just trying to break through the clutter by creating more of an emotional connection, being more targeted and personalized, seeing ULTA as a great gift destination and now competing on every front in every single category. And in your question about prestige, I would say the same holds. I mean, for us, the way that we are great value to our guests is that she can use her loyalty points across all categories, and that is something that she values.

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

Mary, you talked about putting greater emphasis, greater focus on exclusive products. But what does the mix of exclusive look like today? How do you see that evolving, and maybe just talk about the puts and takes here as you look to bring more of the prestige brands in-house?

Do you want to take that, Dave?

Sure. Yes. The truly exclusive brands are still a relatively small part of our overall business. But the way I guess we think about it is a steady stream of new brands, some of which are exclusive, a great example of that, Mary has mentioned a couple of times, it is our IT Brush line that launched last year. And it continues to be a strong driver for us but also finding other brands that might not be fully exclusive but are -- give us a unique proposition and assortment, Meaningful Beauty is an example of that. Mally cosmetics, other brands that aren't totally exclusive but have limited distribution. We're doing that really across the entire assortment, which is I think one of the reasons we're seeing some success right now. Another example is the Big brand. It isn't new from us, but it isn't sold everywhere. It's mix, and we're seeing nice growth through that. While not exclusive, we're doing a lot of great partnership with them in bringing their brand to life in unique ways in our stores. We're doing that across the portfolio. From mass to Prestige, haircare. Haircare is another example. Take our -- one of our largest brands, Redken, obviously not unique to us but -- and how we did some replanning, reflowing in the first quarter in how we're merchandising that in-store and seeing some nice benefit from it. So for us, it is definitely a mix of bringing new exclusive brands, which we have a track record, and we'll continue to do, and we feel confident in our pipeline of those going forward but also partnering with big established brands across all different categories. And then finally, our ULTA brand is an important part of our overall mix. We're seeing nice growth of that. We launched remaining heavy here into trends. We launched an eyeshadow palette this quarter that performed very well. So we'll see that play a role in our mix going forward into the future as well.

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

Actually, all of my questions have been answered. So I'll just pass on to the next caller.

Our next question comes the line of Steph Wissink with Piper Jaffray.

Scott, most of my questions have been asked as well but just 2 quick housekeeping. Scott, I think in your prepared remarks, you mentioned Lancôme and Clinique boutique filling out in the back half. Could you just give us an update on the number of stores that will have those boutiques -- how many stores will have both boutique service [ph] of one or the other? And then also, Mary, I think you've given us some great color on prestige versus mass. But I'm just wondering if you'd be willing to give us some mix of brands between those 2 and the mix of revenues just to give us some sense of how they're relating to one another?

Hey, Steph. We're trying to move away from getting too specific with the number of boutiques. We don't really think it's all that helpful to folks. I mean, the fact of the matter is, it's the total offering and assortment that we have in our store that's driving the comp. It's not one brand over another. It's everything working in unison inside the 4 walls. So again, we don't want to get too detailed about the number and in what quarters and what time periods they roll in.

And just to comment on this. We talked about that we had shifted mix up a bit to prestige in the past couple years. Ultimately, for us, the magic is really in maintaining a really robust mix of different categories, brands and price points at ULTA because our guests really value that. She sees it as a savvy move to able to come in and get an exciting product maybe from ULTA Beauty mix or other mass brands as well as mix that in with prestige exciting products that she can get as well. So for us, we don't break out the mix, and also I would just say that we expect that mix to be a mix and continue to be that over time. And that's part of our proposition of all things beauty all in one place.

Thanks. That's helpful. Maybe just a follow up then on the boutique side. So with the boutiques rolling out to the back half, how is the economics or how are the economics of those determined with the partner? Is it similar to the other service boutiques that you have? Or is it slightly different on a merchandising strategy?

No. I wouldn't say there's any significant difference. I'm looking at Dave across the table here. I mean, we work very closely as partners in determining, looking at the analysis, making sure that ROIs make sense and determining what locations would work best for the deployment of those boutiques. So it's agreed to in a combination and a partnership between us and the brands.

Ladies and gentlemen, at this time, I would like to turn the floor back to Mary Dillon for closing comments.

Great. Thank you. I would just like to thank our ULTA Beauty associates for all the great work they've done to start -- deliver a really fantastic start to this year, and thanks to all of you for your interest in ULTA Beauty, and we look forward to talking to you again soon. Thank you.

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