Ulta Earnings Call Insights: New Service and Product Launches, Mature Stores

On Tuesday, Ulta Salon Cosmetics & Fragrances, Inc. (NASDAQ:ULTA) reported its first quarter earnings and discussed the following topics in its earnings conference call. Take a look.

New Service and Product Launches:

Ike Boruchow, Jr. – JPMorgan: I’m calling in for Brian today. Congrats on a great quarter. Chuck, I guess this one is for you, you know, when you look at the business it’s been really very consistent with the comps in the double-digit range for a little over two years now, I think. I think, last year you benefited a lot because you are on trend with the mail products and mail services, which were hot. Is there anything new out there today that you are seeing that’s really trendy and you are going after that, just trying to see what’s driving that comp right now.

A Closer Look: Ulta Earnings Cheat Sheet>>

Chuck Rubin – President and CEO: Well, I mentioned some of the things in the first quarter. Anti-aging products, BB Creams, Mascara, lips for all big trends, we think that continues and we are excited about the back half of the year. There is a lot of new product launches in the third quarter. That’s still coming into the fourth quarter. So, it’s a combination of the new products from existing brands that we have talked about, some of the new services that we’ve put in. Our salon business comps have continued to improve, they’re running very well and then it’s the new brand introduction. So, all of those things continue to be to be very good. One thing I mentioned in my prepared comments that I should call out is at home tools like Clarisonic, the hair removal, the acne treatment that I talked about, that’s coming. It is a small part of our business, but they’re high ticket and we are selling a good number of units and it’s having a nice impact to overall sales dollars. So that’s also a trend that we started to see emerging stronger in the first quarter.

Ike Boruchow, Jr. – JPMorgan: One more follow-up on the store rollout, you mentioned you’ve taken it from 1,000 to 1,200 domestically. You said it does not include international markets. I guess on a high-level, Chuck, could you talk about what potential down the road several years from now opportunities there could be in international markets? I mean, does your format really work in other countries? Then I guess to that on the store base when we will look out to 2013, should we be thinking about 100 stores as kind of the run rate or is 20%, 22% growth kind of the run rate for the business going forward?

Chuck Rubin – President and CEO: Let me answer the second one first. What we have said is that our business model is built on our 3% to 5% comp, 15% to 20% square footage growth. So, we are pleased with how 2013 is setting up right now, but it’s still early for that. So we’ll update you as the year progresses, but our long-term guidance is that 15% to 20% growth. This year we are – this year being 2012 we are growing at 22%, so obviously higher. If we can find the sites that are very attractive, and I stressed in my comments that we are looking for quality, not quantity, if we can find those sites, we have the balance sheet to be able to do it, we have the capability to do it, and most importantly, there’s the customer demand to do it. So, we will pursue it as we see appropriate. We are encouraged by what we are seeing, but it’s still early for 2013. So, just remember our 15% to 20% long-term guidance. As far as the international, yeah, I think that there is an opportunity for Ulta’s model overseas, but I would stress that, when you look at the three big buckets of opportunity, those being U.S. stores, the second being U.S. digital, and the third being international, clearly that third bucket of international is the lowest of the three and it’s the longest term. So, we have significant growth opportunities for a number of years ahead of us to get to that 1,200 store count. There’s the potential of a smaller store format, and clearly while our digital business is growing quickly, it is on a small base. So, that U.S. business, digital and physical, is really what our focus is for the near to mid-term timeframe.

Mature Stores:

Daniel Hofkin – William Blair & Company: A terrific job all around, just maybe one thing I wanted ask, if I look at the new store economics model that you guys have provided periodically, clearly the cost side of it in recent years has certainly improved as has the total sales volume if you will. I guess one question would be, just based on the math and if you looked at the percentage of stores that are in different age groups, it would seem like you would likely be exceeding your plan right now across various age buckets, though you would be exceeding that model. Is that fair to say? The reason I say that is, if you just sort of used the numbers in the model in terms of year one or year two comp sales growth, you are left with very high comps in years four or year five and beyond, and I’m just curious what your thoughts are on that?

Gregg R. Bodnar – CFO: Dan, the way to think about that is, stores that are five years and older are performing meaningfully above what you would expect kind over the long-term or the normal if you will. Those stores in our model, six, seven, eight years out we expect to produce more or like low single-digits. The fact of the matter is all of the strategies that Chuck referred to that have been driving our business have a meaningful impact on mature stores, and you could argue and have one of the largest impacts on mature stores, because a big part of that is reaching out to our loyal customer base where the largest quantity is, is in a mature store, five years older. So, back to the macro and the store model, yes the costs have to down. We’re still building them for 900,000. The productivity of sales per square foot is getting slightly better as we improve company operating margins, not all of it, but a significant part of that contributes to the single store returns, because a big part of that affects the four-wall contribution of a store. So, the store model keeps getting better.

Daniel Hofkin – William Blair & Company: Then I guess, one follow-up would be, if you can share anything about your expectation at this point for the incremental Lancome boutiques in terms of looking every year sort of what’s your expectation – do you expect that to show up materially in the aggregated comp sales number, not that you would be at a larger number of stores with those boutiques?

Chuck Rubin – President and CEO: Dan, we added the 29 doors last fall with Lancome. So we’re very pleased to be adding these 50. We’ve commented before that we’re pleased with our performance with the iconic brands. These 50 will get up starting in the third quarter. It will – we expect to have them all done as the heat of the holiday season is upon us. I think the impact for this year is minor, it’s negligible. I think that as you look out into future years, we believe that it is a nice addition to our offering. It will in 79 doors once these 50 open. We’ll see what happens from there, but we are very pleased as is Lancome with the level of sales and the type of guests that we are introducing to Lancome, that’s good for both us as well as the brand.