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Edited Transcript of ULTA earnings conference call or presentation 1-Dec-16 10:00pm GMT

BOLINGBROOK Dec 2, 2016 (Thomson StreetEvents) -- Edited Transcript of Ulta Salon Cosmetics and Fragrance Inc earnings conference call or presentation Thursday, December 1, 2016 at 10:00:00pm GMT

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Corporate Participants

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Ulta Salon, Cosmetics & Fragrance, Inc. - CEO

Ulta Salon, Cosmetics & Fragrance, Inc. - CFO

Ulta Salon, Cosmetics & Fragrance, Inc. - Chief Merchandising & Marketing Officer

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* Dan Stroller

* Mike Baker

Raymond James & Associates, Inc. - Analyst

Oppenheimer & Co. - Analyst

Sterne, Agee & Leach, Inc. - Analyst

Robert W. Baird & Company, Inc. - Analyst

JPMorgan - Analyst

Piper Jaffray & Co. - Analyst

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Operator [1]

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Greetings and welcome to the Ulta Beauty third-quarter 2016 earnings results conference call.

As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Laura Lefebvre. Thank you Ms. Lefebvre, you may begin.

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Thank you. Good afternoon and thank you for joining us for Ulta Beauty third-quarter 2016 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 companies 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 companies filings with the SEC.

During the Q & A session, we respectfully request that you please ask one question only to allow us to have time to respond to as many of you as possible during the hour scheduled for this call. I'll now turn it over to Mary.

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Mary Dillon, Ulta Salon, Cosmetics & Fragrance, Inc. - CEO [3]

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Thank you, Laurel. Good afternoon. Ulta Beauty's top line momentum accelerated in the third quarter, driving record sales and earnings performance. The team continues to execute exceptionally well against our key strategies. Highlights of the quarter include success in acquiring new brands, strength in overall newness, increases in awareness of the Ulta Beauty brand, continued excellent results from our loyalty program, improving performance of our supply chain system and robust growth in our eCommerce business.

In the third quarter we grew the top line 24.2% and delivered 16.7% comp sales on top of the 12.8% comp in the third quarter of last year. This is the best comp performance on both the one and two year basis in our history as a public Company, driven by healthy traffic and ticket growth. We achieved the strongest quarterly comps of the year in all three channels, eCommerce growth was well above plan, and the retail and salon businesses also delivered their best top line growth of the year.

In terms of categories, cosmetics, both mass and prestige, continued to lead our growth with new brands and new items from existing brands contributing to better than expected performance. Strength on the top line was broad based, as we gained market share across all major categories.

Earnings per share rose to $1.40, representing 26% growth, significantly better performance than what we anticipated going into the quarter when our initial outlook called for 13% to 17% earnings per share growth. This upside in EPS was due to better than expected top line growth and our continued success with loyalty and CRM efforts.

I'd now like to highlight some of the key drivers of our third quarter performance in the context of our strategic imperatives. Starting with our loyalty program. We grew rolling 12 month active membership by 28% to reach 21.7 million active members as our store teams continued to drive excellent conversion at check out.

Similar to the trends we've seen all year, the loyalty program metrics including retention rates, sales per member, frequency of purchase and average member ticket all continued to be very strong. We continued to prioritize more personalized CRM offers for our loyalty members, versus broad discounts and promotions. And its evolution in our marketing strategy continues to benefit margin rates and allows us to invest in other parts of the marketing mix such as television, radio and digital advertising, which continue to drive awareness and clarity about our brands.

Our ultimate rewards credit card program continues to be well received since its launch in August. We're seeing strong guest engagement both in-store and online. Our team carried out extensive associate training and planning ahead of the launch, resulting in seamless execution of the program. Credit card sign ups are exceeding expectations. Some of the compelling promotions we're offering for new card holders are driving higher average baskets and units per transaction as guests take advantage of one-time offers.

Turning to our marketing and brand awareness activities, our third quarter marketing plan features signature promotions, like 21 Days of Beauty in September, our Gorgeous Hair event in October, and a series of activities focused on raising funds for the Breast Cancer Research Foundation. We returned as the official partner to the Ellen Degeneres show, putting BCRF and Ulta Beauty on a national stage to millions of viewers each week to raise awareness and funds. Our store teams raised nearly $3 million during this year's Gorgeous Way To Give campaign and our salon stylists were proud to perform more than 50,000 beauty services at our Cut For a Cause event in support of our BCRF fund-raising program.

From an advertising perspective, during the Fall we ran national TV and radio ads to support our 21 Days of Beauty and Gorgeous Hair promotions. The creative is new and built on the inaugural campaign from last year. We continue to also see significant growth in our social platforms, especially Instagram and Snapchat. We recently surpassed 2.6 million fans on Instagram and held our first ever Snapchat takeover with YouTube influencer Jenny Fox. We had Wende Zomnir as the Founder and Chief Creative Officer of Urban Decay take over our Snapchat and Instagram channels, yielding millions of impressions. And we also announced a partnership with E!News, with the launch of freeSTYLE, a weekly Facebook live show. The program includes fan interactions, discussions and reviews of the best and most relevant people, products and trends that matter to the 9.5 million highly engaged, E!News Facebook fans.

Now on the merchandising front, new brands and new products within existing brands drove better than expected sales growth with strength across all categories. Similar to what we've experienced all year long, makeup brands like Urban Decay, IT Cosmetics, NYX, Anastasia, Too Faced, Tarte, Clinique, Lancome, Benefit, Real Techniques and Ardell delivered the highest growth rates in the quarter.

Our own Ulta Beauty collection was also a top performer. We restaged the brand with new packaging, branding and innovation and about 600 stores now feature an enhanced wall presentation, with improved signage and elevated fixtures. And in mass skin care, Tony Moly and Boots Number 7 were stand outs and our pro hair business accelerated with newness from Devacurl and Living Proof contributing to strong comps in this category. Living Proof also partnered with our services business for a one day salon takeover event to introduce salon guests to this brand.

And we discussed many of the new brands we're adding to our assortment at our analyst day a few weeks ago, so let me recap a few of the highlights. During the third quarter we launched Estee Lauder skin care and cosmetics in 30 stores and online, we launched Shiseido, Origins and Proactiv, greatly enhancing our skin care offering. We added Elle to our online assortment, we introduced the innovative Dyson hair dryer in 200 stores and online. We've also completed almost all of the 500 plus Clinique, Lancome and Benefit boutiques planned for the year. In addition, we added a best of Clinique end cap in all stores that don't have a full Clinique boutique.

Now turning to our services business. Salon sales grew 16.7% and comped 10.3%, with strength in color, hair treatments and makeup services. Our services business is increasingly using CRM campaigns to drive awareness, encourage trial of our service offerings. We rolled out our improved online booking experience to all stores during the quarter to make it even easier for our guests to make an appointment in our salons.

We continue to focus on elevating our in-house artistic team and curating design trends exclusive to Ulta Beauty. Our Fall and holiday trends include a look we call Sombre, which is a new softer in way to achieve an ombre look and a new color we call Ronze, highlights that bring together beautiful shades of copper and auburn. The artistic team participated in several designer runway shows at fashion week, driving awareness of Ulta Beauty's hair authority and inspiring the entire salon team across the chain. And our Benefit Brow boutiques continued their excellent performance with brow services now available in more than 800 stores and the successful launch of a wide range of new brow products in more shades. We're now testing online booking for brow services to make it easier for our guests to make an appointment in our Benefit Brow bars.

Turning to store growth. We opened 42 stores in the third quarter, on our way to executing our 2016 program of 100 net new stores, ending the quarter with 949 stores. Our growth and development team has completed almost all of the 500 plus prestige brand boutiques we planned for this year, including new stores and remodels, along with updates to the Ulta Beauty collection in fragrance and nail fixtures.

New store productivity remains very strong with the class of 2016 stores performing well above budget and far above sales hurdles established to meet our internal rate of return threshold. We've already approved all of the 100 stores planned for our 2017 program, including a new store on Michigan Avenue in Chicago.

As you heard at our analyst day, we completed our in depth analysis of the real estate opportunity in the US and announced a new long term target to rollout between 1400 to 1700 stores, with opportunities to further penetrate existing suburban markets, expand our penetration in small markets, and begin to develop urban markets. At the same time we updated our new store maturation ramp based on current trends and hired new store productivity, upgrading year one sales from $2.8 million to $3.1 million and revising upward our year five sales estimate to $4.5 million from $4 million. We're confident that our stores will continue to produce very attractive returns.

Turning to our eCommerce business, Ulta.com sales grew 59.1%, on top of 66.3% growth last year, contributing 240 basis points to our total Company comp. The strong revenue growth was driven entirely by increased transactions. We continue to evolve and upgrade the guest experience while improving site performance. We made enhancements to our mobile app, including a product detail page redesign to better display product options and information, integration of our recently launched content platform called The Mix, and the addition of our new salon appointment booking tool.

We launched a [try on] feature called GLAM LAB last month to allow guests to allow guests to virtually test products and shades within our iPhone and Android app by uploading a selfie or choosing a model with a similar completion. Our technology partner for this platform is a company known for best-in-class realism and accuracy of color matching.

Finally to update you on supply chain performance and investments, we are very pleased and proud with how smoothly our team has executed on a very complex set of initiatives and system rollouts in addition to opening two new DCs in the past year and a half. Our Greenwood DC is now serving 227 stores and fulfilling 44% of our eCommerce orders. Our newest distribution center in Dallas is ramping on schedule and currently fulfilling 130 stores and 30% of total eCommerce orders.

On the systems side, we're starting to see benefits from the core merchandise systems we recently implemented. SWIFT, our new forecasting replenishment tool, continues to ramp up and help us optimize inventory. Our store level in stocks are improving and more of our inventory is in our stores, versus in our DCs, improving the guest experience. We now have all of the tools in place to help us make better, more data based assortment and inventory decisions. So that wraps up my third quarter review.

Looking ahead to holiday, we're expecting healthy traffic and strong sales growth as a result of our integrated merchandising and marketing plans. From a product standpoint, we're excited to offer an array of newness and exclusivity in our holiday assortment across all categories and brands.

To share a few highlights, we'll feature an assortment of Clinique and Lancome products in every store for holiday, we just launched NARS, featuring three hero products, their famous blush, bronzer and a multi-purpose stick, The Multiple. These are available online and feature on a etagere in every store in time for holiday, with a more expansive assortment offered online later this month and then launched in select stores next year.

Our merchants have done a great job partnering with their brands to offer exclusive products across many brands and categories, a wide variety of holiday themed kits and stocking stuffers and mens grooming and fragrance kits. This year we upgraded our fragrance gift with purchase program, complementing the exciting newness in our holiday fragrance assortment. And we've also launched an elevated Ulta Beauty collection of our traditional blockbuster kits that have already shown strong consumer response.

And to support our compelling merchandise offerings, we rolled out our holiday advertising campaign, Joy to the Girl, which is integrated from a design and messaging perspective across all touch points, from in store signage, to new TV and radio spots running now, to print and even the packaging of our Ulta beauty collection holiday assortment. Our campaign encourages our guests to see us as a great gift giving destination as well as a place to get glammed up for holiday events with a visit to our salon. The Get Gifts and Get Glam theme is featured in our television and radio spots, through inspirational content on our social media platforms and on The Mix on our website.

Key to executing our holiday plan, our store operations, eCommerce supply chain and systems teams have all done an excellent job preparing for the busy holiday season and their efforts have already paid off with the successful Black Friday, Cyber Monday weekend, both in stores and online. All areas are staffed up and ready to delight our guests during the big weeks ahead, so now I'll hand it over to Scott to discuss our third quarter financials and our outlook for the fourth quarter.

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Thanks, Mary. Good afternoon, everyone. I'll start with the income statement.

Net sales for the quarter increased 24.2% to $1.13 billion, driven by 16.7% comparable sales and continued strong performance of new stores. The total Company comp was composed of 11.1% transaction growth and 5.6% average ticket growth. The retail comp of 14.6% was comprised of 9.6% traffic and 5% ticket. Ticket growth was driven about a third by units per transaction and about two-thirds by average selling price. The salon business comped 10.3% and similar to the recent trend, was driven by ticket growth. The combined retail comp and salon comp yielded a total store comp of 14.3%.

Gross profit increased 90 basis points. The improvement was the result of product margin expansion and leverage as store rent and occupancy expenses on strong comps, offset by planned supply chain investments.

Turning to SG&A expense. We deleveraged by 80 basis points, driven by investments in growth initiatives, including store payroll to support our boutique strategy and a differentiated guest experience. And deleverage of corporate overhead costs, in part due to an impairment charge related to the closure of a store in Louisiana due to the August flooding. This was partially offset by modest leverage in marketing.

The tax rate was 37.4%, consistent with the first half of the year. Last year's Q3 tax rate of 36% reflected the benefit of some tax trueups.

Moving to the balance sheet. Inventories increased 16.5% on a per store basis, which is slightly below the comp rate. Similar to the recent trend, we continued to invest in inventory to support sales growth, gain access to new brands and expand the presence of prestige boutiques in our stores. Also, our new distribution centers in Greenwood and Dallas are ramping and performing well, but are still far from being fully optimized.

Capital expenditures were $131.6 million for the quarter, driven by new store openings, fixtures related to the continued rollout of boutiques, as well as investments in systems. We ended the quarter with $243 million in cash and short-term investments.

In terms of share buybacks, we continued to repurchase shares in the open market as part of our 10b5-1 plan. During the third quarter, we repurchased about 179,000 shares of our stock at a cost of just over $44 million. Year-to-date, including the accelerated share repurchase program, and activity under our 10b5-1 plan, we repurchased approximately 1,450,000 shares at an average price of about $205 per share. Share repurchases under our current authorization are expected to contribute about two points of EPS growth for the year. At the end of the third quarter, we had approximately $148 million remaining available under the $425 million share repurchase program announced in March 2016.

Turning now to guidance for the fourth quarter. We anticipate sales to be in a range of $1.516 to $1.541 billion versus $1.268 billion last year. We expect comparable sales to increase in the range of 12% to 14% versus 12.5% last year. ECommerce sales are expected to grow in the 40% range.

We plan to open about 25 stores in the fourth quarter, versus 14 last year, so pre-opening expense will be higher. Earnings per share are expected to be in a range of $2.08 to $2.13, versus $1.69 last year with modest leverage on both the gross profit and SG&A lines. The tax rate is expected to be 37.5% and our fully diluted share count is estimated at $63 million.

At our analyst day event in October, we raised our guidance for the full year of 2016, expecting comparable sales to grow approximately 12% to 14%, including the impact of the eCommerce business. And EPS to increase in the mid-20% range. Now, with the upside to third quarter earnings, we expect full year comparable sales to grow 13% to 15% and earnings growth to be in the high-20% range. Operating margin is expected to be up modestly for the year.

CapEx is on track to reach approximately $390 million, driven by slightly higher CapEx per new store and also includes about $80 million for boutique expansion, with 500-plus store touches for Clinique, Lancome and Benefit boutiques as well as fragrance fixtures and Ulta Beauty collection [updates]. Now, I'll turn the call over to our Conference Call host to...


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