Ulta Salon Cosmetics & Fragrances Earnings Call Nuggets: Holiday Guidance and Gross Margin

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

Holiday Guidance

Brian Tunick – JP Morgan: Chuck, I know it’s a late holiday this year and people might be a little behind the eight ball, given what they’ve said about some November comps out there, but just curious of your view of the overall promotional environment, either from what you’re seeing on the department store side or on the drugstore side? Then the second question is, you talked about a 1,200 store target long-term, obviously, accelerating that here, but what’s the thought between how much of that has to come from existing or reconfigured real estate versus when are we going to need to see new store development begin to ramp up?

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Chuck Rubin – President and CEO: Let’s take the second one first. I think that clearly for the 1,200 stores, there is going to be a need for new construction. Obviously, with our announcement today, we feel really good about 2013 and most of the stores are our existing real estate. The pipeline into 2014, believe it or not, we’ve already approved some sites for that year. It’s a little early to look at it at that point, but there are some seeds of new development starting to show up and we do have high hopes that the real estate market does start to show some new development as you move into the out years, but clearly to get to the 1200 we will need some new development but we do think that that will start to materialize. In terms of your first question on the promotional environment, there does seem to be a wide range of activity in retail today and it goes beyond the beauty market. Clearly, our performance this quarter continued to gain market share so the customer continues to vote that they like what we do. We are well positioned in our strategy for the fourth quarter between the breadth of our offering everything from mass to prestige, from cosmetics to skincare to hair care, across price points using our loyalty program we are well-positioned to add value to the customer and we are seeing that she is shopping for value. As Scott mentioned in our prepared comments, our Black Friday weekend and Cyber Monday were terrific. They were very big, but she was looking for value. But we have a very sound offering to be able to cater to that using some of the things we talked about in script.

Gross Margin

Matthew Fassler – Goldman Sachs: I wanted to talk for a moment about gross margin. First of all, if you look at the fixed leverage that you generated it was on the lower end of what you typically been doing with the pretty good comps. So, how much of that was absorbing issues like Chambersburg and the prestige investment and perhaps offsetting what would have been better natural leverage on occupancy given the comp that you put up?

Scott Settersten – CFO: Yeah. Matt, the leverage that you’re referring to, I agree it’s a little bit unexpected, but the drivers of that were additional labor that we pushed through the supply chain and other additional costs that were related to these inventory investments that we made during the third quarter.

Matthew Fassler – Goldman Sachs: To the extent that that labor shows up in gross margin would that happen kind of in the DCs?

Scott Settersten – CFO: Exactly, a little bit of deleverage in the DCs.

Chuck Rubin – President and CEO: Again, as Scott mentioned earlier, don’t forget the number of stores that we’ve opened, we had a record number of stores in the third quarter, so that had a little bit of a drag on us as well, on not being able to leverage as high in this fixed store expense.

Matthew Fassler – Goldman Sachs: Understood and then Scott, just to clarify, the gross margin expansion you talked about for Q4, I want to make sure I didn’t mishear, was that 30 basis points?

Scott Settersten – CFO: That’s right, 30 basis points at the midpoint of the range.

Matthew Fassler – Goldman Sachs: So, if you think about that relative to the trend in recent quarters that would be a bit lower as well. So, can you talk about – understanding that your guidance is (indiscernible) conservative, if you look at the components of the budget to take it to that level, how should we think about them?

Scott Settersten – CFO: Well, we’re thinking about the hurdles that we’re jumping over from last year. You have to remember that the comp last year was significantly higher. It was 11% plus for the quarter and a 12% plus during that very important six-week holiday selling season. So, as we look at it year-over-year, we see that merchandise margin relatively flattish, a little bit of pressure on the fixed store leverage because of the large number of new stores that we just put in place over the last two quarters.

Matthew Fassler – Goldman Sachs: Does the extra week helped that at all or is that the kind of non-event?

Scott Settersten – CFO: It’s really a non-event.

Chuck Rubin – President and CEO: Matt just I would add, keep in mind on the merchandise margin that in the last roughly two years, we’ve added closed to a couple of hundred basis points on the merchandise margin and what we’ve said is, long-term there is opportunity both on SG&A, as well as on the margin side of the equation, they won’t always be equal, they’ll vary between the two of them quarter-by-quarter, but on the long-term, we think that they do somewhat mirror themselves. They’ll be about equal in their contribution to our overall operating margin.

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