Ulta Salon Cosmetics & Fragrances Earnings Call Nuggets: Gross Profit Margin and CEO Search

Ulta Salon Cosmetics & Fragrances (NASDAQ:ULTA) recently reported its first quarter earnings and discussed the following topics in its earnings conference call.

Gross Profit Margin

Simeon Gutman – Credit Suisse: It’s Simeon Gutman for Gary. Scott, in the last quarter we talked about gross margin and there was some promotions that the business was over time going to be weaned off of some degree. Can you give us some color on that? Did that begin in the first quarter and how did that progress as the year goes on?

Scott Settersten – CFO and Assistant Secretary: Just as a reminder for first quarter, we guided gross profit margin down roughly 140 basis points at the midpoint of the guidance range. So, comp store sales were a bit better, so we did get some leverage on fixed store costs, which helped overall. We also saw product mix towards prestige skincare and color cosmetics continued its strength, so that helped margin rate overall for the first quarter. E-commerce also helped us quite a bit with a tailwind, as that business continues to scale up. With respect to the promotional environment, the first quarter we kind of land head-to-head, things kind of shook out the way we expect them to. As we talked about that in the big scheme of things, our intention over the long term is to moderate some of the general coupon drop, so to speak, and to offset that with a bit more of the CRM initiative, to do more one-on-one, more sophisticated marketing with our customers. So that’s the trend. As Jeff mentioned, we’ve had some good successes there. We’ve been ramping up the efforts there. We’ve seen some good positive results, but again, we’re still in the very early stages of the CRM to one platform.

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Simeon Gutman – Credit Suisse: Then one follow-up for Janet. She mentioned a couple of the categories of segment that’s strong or that are outperforming some of the other categories. Can we just drill a little bit more deeply into the two, I think, that you called out on the positive side? You mentioned a couple of brands. Then also, a follow-up on the – I think you said the appliance category was a little soft. There are some introductions that are upcoming. I don’t know if that’s something that you think will turn around the space or et cetera, if you can comment on that…

Janet Taake – SVP, Merchandising: First of all, the prestige side, what I mentioned, the prestige skin and color cosmetics were very strong for first quarter. I didn’t mention specific brands, and it continues to be strong for us. It has been for several quarters. As far as other categories that are gaining traction, we’re seeing a lot of health care or therapy in hare care and liquids, as well as in tools. High-tech tools, I mentioned before, have been a trending category for us, and a lot of it is high-ticket product. The HairMax we launched earlier in Q1 along with other tools that are coming in for Q2 that I mentioned, and a lot of hair removal, home hair removal techniques are also trending. So there’s the hair therapy, there’s hair tools, and then there is also the home care with hair removal that’s also been trending.

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Simeon Gutman – Credit Suisse: And then what about the appliance category? You saw couple products in the past couple weeks that looked pretty promising on the curling side that looked like they could revise some of the category. I don’t if there is expectations built into that.

Janet Taake – SVP, Merchandising: Yes, we have newness coming in. We usually don’t speak too far out, but we do have some new technology coming in. I mentioned from Jose Eber the infrared flat iron that’s coming in, which is new technology for us and also a new brand, and there are some other products coming in that has to do that’s associated with curl that we have not launched yet that will be coming in this quarter. There is some newness, but it is also a slower growing category.

CEO Search

Daniel Hofkin – William Blair: Just I guess following up on the topic of the CEO search for a second, if there’s anything you can see at this point in terms of some of the characteristics that you’re particularly looking for that you’re trying to zero in on that would be my first question?

Dennis K. Eck – Interim CEO: We’ve been very focused on – we have a very strong team at ULTA. We think we’re headed in a very good direction and what we’re looking for is somebody that can take that and move it onto the next step. So we are being very, very thoughtful and careful about somebody that can do that and as I said in the last call we are going to take our time and do it right and that we will be back to you as quickly as we have something. But we are pleased with the progress.

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Daniel Hofkin – William Blair: Then my other question relates to e-commerce. The 70% growth seems like that may be a step up from what you have been seeing, correct me if I am wrong on that, and if so what were some of the – was there any like particular one or two events that drove well above trend growth or was that a fairly steady growth trend during the quarter?

Scott Settersten – CFO and Assistant Secretary: Dan, the 70% growth rate that we saw in the first quarter, again while e-commerce is still a relatively small piece of the business I wouldn’t model that in as kind of the go forward run rate. Historically it’s been in that 30%-ish, 40%-ish kind of range, which I would say is still probably a good estimate for you to use. As far as category drivers on e-commerce, it’s really we saw higher end skincare kinds of things and some of these tech tools that Janet mentioned, which lend themselves very well to kind of the digital e-commerce space. We were able to get it in stock and get it promoted and get it out there in the website in a real timely fashion. So more than anything else it was with the higher end kind of categories that were driving the growth…

Jeffrey Severts – SVP, Marketing: This is Jeff. I would just add to Scott’s answer about later in the year expectations for e-commerce. Remember that we do have the site relaunch and that will be happening in the fall and quite naturally where that kind of relaunch we would expect to see some transitional bumpiness as the customer gets used to that new site.

Daniel Hofkin – William Blair: But fair to say that that was – that that type of growth you saw was kind of above your historical average pretty steadily. It wasn’t one or two key events that drove explosive growth or anything?

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Scott Settersten – CFO and Assistant Secretary: No, it was the general trend across the quarter, and again, it was because of the introduction of some of these new products that just worked out extremely well.

Daniel Hofkin – William Blair: I guess lastly as it relates to what you mention about, in some of the styling tools, do you think that there is any competitive pricing things there, or is that primarily what you mentioned just kind of maturity of the category?

Janet Taake – SVP, Merchandising: We’re always aware of and pay attention to the competition, but we also deliver what we feel is going to drive our guest to the store. So on both sides, we manage the styling tools appropriately.

A Closer Look: Ulta Salon Cosmetics & Fragrances Earnings Cheat Sheet>>