Ulta Salon Cosmetics & Frag (ULTA) Earnings Report: Q2 2015...

CompanyName:UltaSalonCosmetics&FragrancesIncCompanyTicker:ULT ASector:ServicesIndustry:SpecialtyRetail

EventDescription:Q22015EarningsCallMarketCapasofEventDate:10.29BPriceasofEventDate:159.0

UltaSalonCosmetics&Frag(ULTA)EarningsReport:Q22015ConferenceCallTranscriptThefollowingUltaSalonCosmetics&FragconferencecalltookplaceonAugust31,2015,08:00AMET.Thisisatranscriptofthatearningscall:

CompanyPart icipants

LaurelLefebvre;ULTASalon,CosmeticsandFragrance;VP-IRScottSettersten;ULTASalon,CosmeticsandFragrance;CFODaveKimbell;ULTASalon,Cosmetics,Fragrance;ChiefMerchandisingMaryDillon;ULTASalon,CosmeticsandFragrance;CEO

OtherPart icipants

StephanieWissink;PiperJaffrayandCo.;AnalystOliverChen;CowenandCompany;AnalystDanielHofkin;WilliamBlairandCompany;AnalystSimeonSiegel;NomuraSecuritiesIntl(America);AnalystEricaEiler;OppenheimerandCompany;AnalystSimeonGutman;MorganStanley;AnalystMattMcGinley;EvercoreISI;AnalystChristopherHorvers;JPMorgan;AnalystJoeAltobello;RaymondJamesandAssociates;AnalystKellyHalsor;BuckinghamResearch;AnalystMarkAltschwager;RobertW.BairdandCompany;AnalystDanaTelsey;TelseyAdvisoryGroup;AnalystMikeBaker;DeutscheBank;AnalystAramRubinson;WolfeResearch;Analyst

MANAGEMENTDISCUSSIONSECTION

Operator :

GreetingsandwelcometotheULTABeautysecond-quarter2015earningsconferencecall.

(OperatorInstructions)

Asareminder,thisconferenceisbeingrecorded.

Iwouldnowliketoturntheconferenceovertoyourhost,Ms.LaurelLefebvre.Thankyou,youmaybegin.

LaurelLefebvre (VP-IR):

Thankyou.GoodafternoonandthankyouforjoiningusforULTABeautysecond-quarter2015conferencecall.HostingourcallareMaryDillon,ChiefExecutiveOfficerandScottSettersten,ChiefFinancialOfficer.AlsojoiningusisDaveKimbell,ChiefMerchandisingandMarketingOfficer.

BeforewebeginIwouldliketoremindyouofthesecompaniesSafeHarborlanguage.Thestatementscontainedinthisconferencecall,whicharenothistoricalfacts,maybedeemedtoconstituteforwardlookingstatementswithinthemeaningofthePrivateSecuritiesLitigationReformActof1995.

Actualfutureresultsmaydiffermateriallyfromthoseprojectedinsuchstatementsduetoanumberofrisksanduncertainties,allofwhicharedescribedintheCompany'sfilingswiththeSEC.Wemaymakereferencesduringthiscalltothemetricfreecashflow,anon-GAAPfinancialmeasure,definedascashprovidedbyoperatingactivitiesminuspurchasesofpropertyandequipment.

DuringtheQ&Asession,wekindlyrequestthatyouaskjustonequestiontoallowustohavetimetorespondtoallofyouduringthehourscheduledforthiscall.I'llnowturnitovertoMary.

MaryDillon (CEO):

Thankyou,Laurel.Goodafternoon,everyone.

I'mpleasedtoreportexcellentsecond-quarterresultsforULTABeautywithstrongsalesmomentumandbetter-than-expectedearningsgrowth.Torecaptheheadlinessalesgrew19.4%andweachieveda10.1%totalCompanycompontopofa9.6%compinthesecondquarterof2014.

Transactiongrowthaccountedforabouttwothirdsofourcompwithaverageticketgrowthcontributingaboutathird.Wecontinuetogainmarketshareacrossallofourcategorieswithbothprestigeandmasscolorcosmeticsachievingthestrongestgrowth.

Eachofourbusinessescontributedhealthycompsales:an8.8%compinretail,a10.1%compinsalon,and43.4%growthine-commerce.Earningspershareincreased22%toa$1.15,comparedto$0.94inthesecondquarteroflastyear.

Scottwillsharethedetailsofoursecond-quarterresultsinafewminutes,butfirstI'dliketoprovideourquarterlybusinessupdatethroughthelensofoursixstrategicimperatives,theframeworkwe'reusingtodrivesustainablesalesandearningsgrowthandlong-termshareholdervalue.

Thefirstimperativeistoacquirenewguestsanddeepenloyaltywithexistingguests.OurloyaltyteamisdrivinggreatperformancethroughthecriticalULTAmateRewardsplatform,whichdriveswellover80%ofoursales.Wenowhave16.1millionactivemembers,up18%overtheprior12-monthperiod.

Ourstoreassociatesaredoingafantasticjobconvertinggueststoloyaltymembers,andtheyachieveasignificantincreaseinconversion,leadingtoanaccelerationinnewmembergrowth.Memberretentionrateincreasedandwecontinuetoseehigherfrequencyofpurchases,higheraverageticketandhigheraveragesalespermember.

AspartofoureffortsincreaseawarenessofandclarityabouttheULTABeautybrand,we'vere-launchedourbrandcommunicationsacrossalltouchpointstocreateanintegratedmessageandconsistentvisuallookandfeelthatpositionsULTABeautyasdeliveringthefunsideofbeauty.WebelievethisworksharpensanddifferentiatesULTABeautyinthemarketplaceandshapesourbrandequitythroughacoordinatedapproachacrossallofourmarketingvehicles,includingadvertising,emails,ULTAmateRewardsmaterials,websiteandmobileapps,digitalads,storesignage,socialmediaandcustomermagazines.

Basedonoursuccessful2014testmarketcompourplanistoincludenationaltelevisionadvertisingtosupportourupcoming21DaysofBeautynextmonth,aswellasagainfortheimportantholidayseason.ThisnationaltelevisionadvertisingcampaignmarksafirstinULTABeauty'shistory,animportantsteptowardsdrivingastrongandsustainablebrandposition,whileincreasingawarenessamongbeautyenthusiastsanddrivingnewguestacquisition.

Thesecondstrategicimperativeistodifferentiatebydeliveringadistinctiveandpersonalizedguestexperienceacrossallchannels.Wecontinuetomakeprogressherewithin-storetechnology,associatetrainingandevolvingthelabormodeltoincreaseguestfacingtime.We'vealsohadsomenicewaysof

enhancingpersonalizationthroughourmarketingtools.

Letmegiveyouafewexamples.Aswecontinuetoimproveourabilitytopersonalizeouremailsandmakethemmorerelevanttoourguests,weareseeingverypositiveresults.Byleveraginginsightsaboutcustomerpreferencesandbehaviors,weareabletotailorourcommunicationstobemoretargetedandmoremotivatingtoourguests.Duringthesecondquarter,salesperemaildeliveredincreasedsignificantlyyearoveryearasaresultofthisapproach.

Welaunchedpersonalizeddisplayadinthesecondquartertobettertargetadsthatarerelevanttocustomerattributesandshoppingbehavior,movingawayfrompredominantlystaticadformatstowardsmoredynamicadformats.Inaddition,weareleveragingofflineandonlinecustomerinsightstomakeouronlineadvertisingmoreeffective.

NowturningtoULTAmateRewardsloyaltyprogram,wecontinuetorewardourbestguestswithadifferentiatedexperience,drivingincreasedengagementandsatisfaction.Inthesecondquarter,ourPlatinummembers,ourguesttospendmorethan$400withULTABeautyduringtheyear,receivedmanyperksincludingPlatinum-onlybeautysteals,Platinumbonuspointsoffers,earlyaccesstonewproducts,aPlatinumsocialcontest,freeshippingoffersandtargetedsurpriseanddelightgifts.

Nowmovingtothethirdstrategicimperative,whichistoofferrelevant,innovativeandoftenexclusiveproductsthatexciteourguests.NewsandinnovationwasstronginthesecondquarterandPrestigeColorCosmeticsremainedourbestcompincategory.Salesgrowthwasdrivenbynewnessacrosstheboard,includinginnovativefoundationsfromTooFacedandSmashbox,UrbanDecay'smattelipsticksintheexcitedNakedSmokyPalette,aswellascontinuedrapidgrowthinItCosmeticsandItBrushesforULTA.

Thecontouringtrendisstillgoingstrongandthenewertransferstrobing,orhighlighting,drovecompsincontouringkitsandhighlighterswithnewnessfromAnastasia,Lorac,LauraGellerandTarteamongthebestperformers.WecontinuetorolloutClinique,LancomeandBenefitboutiquesandallthesebrandsexecutedverystrongproductlaunches,suchasBenefit'sRollerLashmascara,Clinique'sPoplipcolorandprimer,andLancome'sCushioncompactfoundation.

Inaddition,weareplanningonexpandingourLancomepresencebylaunchingfiveoftheirbestsellingitemsintoeverystore,notjustthosewithLancomeboutiques,startingnextweek.Thisfullchainexpansionisafurtherdemonstrationthatourbusinessmodelissuccessfullydrivingincrementalgrowthforkeybrandpartners.

Masscosmeticscontinuestogrowaswell.Performingwellaboveindustrygrowthrates.Mix,MaybellineandL'Orealweregrowthstandouts,drivenbynewnessandinnovation.WealsointroducedtwopopularindiebrandsfromtheUK,MakeupRevolutionandCatreseintoourmasscosmeticassortmentsonULTA.comandinalimitednumberofstores.

Themasscategorywasalsohelpedbysolidgrowthinprivatelabel.WeresettheULTABeautycollectioninmorethan300storesattheendofthequarterwithenhancedpresentation,aswellasnewformulations.Thewellpresentationisupdatedwithcolorshelfstripsandtestertilegraphics,makingiteasiertoshop,aswellasmoreefficientforourassociatestostockthefixtures.WealsointroducedaFreshseriesofULTABeautykits,offeringgreatvalueandproductsthatleveragecurrenttrends,includingcontouring,primersandbrows.

Thehaircarecategorywasalsoabigfocusforusinthesecondquarter.WekickedoffthequarterwithourLoveYourHaireventinMayfeaturingdailyBeautySteals,in-storeeventsandlivechats.Julywasheadlinedbyourleadereventfeaturinggreatfieldsonjumbosizesofhaircareproductsacrossallcategoriesandbrands.

WealsoexecutedanextensivereflowofourProHairplanogramattheendofthefirstquarter,whichrefreshesourassortmentandintroduceclearsolutionsbasedsignagetoimprovetheguestexperience.Webelievethishelpsussetthestageforthemostsuccessfulleadereventinourhistory.

Ourmerchantsinventoryandstoreoperationsteamsworkedcloselytogethertoensurestrongexecutionandin-stoplevelsthroughouttheevent.AndthisdrovesignificantaccelerationinthegrowthofcorebrandslikeRedken.Thisisagreatexampleofhowwecanoptimizegrowthonexistingbrandsthroughacombinationofguestinsights,brandpartneringandstronginternalcollaboration.

Othersecondquarterbrandlaunchesincludedseveralfragranceintroductions,SanziahaircareappliancesandPacificaskincareproducts.

Nextourfourthstrategicimperative,whichistodeliverexceptionalservicesinthreecoreareashair,skinhealthandbrows.Oursalonbusinesscontinuedtogrownicelyachievingtotalsalesgrowthof19.7%andcompgrowthof10.1%,aswecontinuetoimproveourofferingsandsharpenermessagestoourguests.

Capitalcategorieswerehaircutsandcolor,blowoutsandmakeupservices.Ourcompwasdrivenbyabouttwothirdsguestcountgrowthandaboutathirdbyaverageticket.

ParticularstrengthinnewguestacquisitionwasdrivenbyonlinebookingandCRMcampaignswithtargetedoffersforfirst-timeguests.Wecontinuetotracknewguestsbyofferingserviceslikeblowoutsandquickskinservices.Promotionsincludedofferstogettheperfectblowout,specialeventsfeaturingLivingProof'sPerfectHairDayproducts,and25%offour20-minuteDermalogicamicrosomeskintreatmentsforfirst-timesalonguests,allverysuccessful.

Butduringthesecondquarterwealsotrainedallofoursalonassociatesonthenewfallandwintertrends,whichweredevelopedinpartnershipwithRedkenandrenownedstylistRodneyCutlerinsupportofhighqualitytrainingmaterials,whichintegratenewstylesforhaircutsandcolorswithmakeuptrendsfortheveryfirsttime.Thisincludedproductrecommendationsandtechnicalinstructionstohowtogetthevariousstyles.

AndI'msureyoumightbewinterwithsomeofthosemightbe,soacoupleofexamples:tortoiseshellhairwithasuedeeyeandaroseblondelookwithapetroleye.Nowtheseenhancedtrainingsessionswereverywellreceivedbysalonassociates.Wearenowpresentingtheselooksandtrendsinourintegratedmarketingplansacrossallassociateandguesttouchpoints.

Turningtoourfifthstrategicimperativetogrowstoresande-commercetoreachandservemoreguests,weopened20storesduringthequarterandendingthesecondquarterwith817stores.Newstoreproductivitycontinuestobeverystrongfortheclassof2015newstores,whicharecomfortablyexceedingtheirsalesplan.Weremainontracktoopenapproximately100netnewstoresthisyearwithplanstoopen44storesandinthethirdquarterandabout15inthefourth.

Therealestatepipelinefor2016looksverygoodaswellandwe'vealreadyapprovedasignificantnumberofsitesfornextyear'sstoregrowthplan.Thetwo5,000squarefootruralstores,whichweopenedlastfall,continuetoperformverywell.Weareencouragedbytheresultsandwearestillgaininginsightsonoperatingasmallerboxefficiently.Weintendtoopenmoreofthesesmallstoreswhenwehavethesystemsinplacetomakethisformatmorescalable.

Meanwhilewe'veopenedseveralstoresinsmallerthanaveragemarketswithour10,000squarefootformatthatareexceedingexpectations,likeournewstoreinPikeville,Kentucky.Soweareveryconfidentthatruralmarketsrepresentasignificantandincrementalopportunityforourstoreopeningprogram.Insightsfromoperatingsmallerformatstoreswillalsobenefitusaswelookaheadtourbanandothermarketopportunities.

Onthee-commercesideULTA.comcontinuesitsrapidgrowth,withsalesup43.4%contributing120basispointsofthetotalCompanycompof10.1%.TheULTA.comandloyaltyteamscontinuetoseeexcellentresultsfromimplementingmoretargeted,digitalmarketingstrategiestodrivetraffictothesiteandguestinsighttodrivetrialoffersandincrementalpurchases.

SamplingisakeydriverofgrowthonULTA.com.Alongwithourbrandpartners,we'vehadstrongsuccesswithoursignatureonlineoffers,suchasourmonthlybeautybagswithdeluxeeyesamplesandlimitedtimeBeautyStealsthatdriveawarenessandtrial.OurbeautyenthusiastguestslovetheseoffersandbrandpartnersalsoenjoyedworkingwithusthroughourCRMplatformtogettheirsamplestotherighttargetedsegmentsofourcustomerbase.Wecontinuetoscoreotherareastodrivetrialanddiscoveryaswell.

Thewebsitehasbeenrebrandedtoincorporatethenewelementsofthebrandpersonalityandcolorpaletteandguestshaverespondedverypositivelytothesechangestotheonlineexperience.Wealsocontinuetobenefitfromnewbrandsthatwe'veaddedtoourwebsiteincludingLancome,Redken,Matrix,PureologyandIt'sA10.

Andfinally,wehavemuchtoreportonoursixthstrategicimperativetoinvestininfrastructuretosupportourguestexperienceandgrowthandcapturescaleefficiencies.WecelebratedthegrandopeningofourGreenwood,IndianadistributioncenteronAugust3.

Westartedthefirstsmallnumberofstoresande-commerceorders.Welaunchedwithsixstoresandwearenowgraduallyrampingupthefacility,whichisoperatingonacompletelydifferentmodelfromourexistingDCs,andincludesallnewsystemsandmaterialhandlingequipment.

Whileit'sstillearly,wearedelightedthattheDCisofftoasmoothstart,theculminationoftwoyearsofhardworkandcollaborationacrosssupplychain,IT,storesandthee-commerceteams.ThisDCwillultimatelyramptoservice400storesand45,000e-commerceorderswhenitreachesitsfullcapacityoverthenextfewyears.

Inadditiontoamoreefficientoperatingmodelwithinthedistributioncenters,ourstoreswillreceivefewer,fullerandmorestablecartons,shipmentswillfeaturegreatercategorization,whichmakesiteasierforourstoreassociatestogetproductfromcartontoshelf,freeinguplaborhoursforcustomer-facingactivitiesratherthantasking.

Sowe'realsoimplementinganumberofcoremerchandisingsystemsandtoolstodriveproductivityaspartoftheoverallsupplychaininitiative.Forexample,thisfallwe'lllaunchaproductinformationmanagementsystemthatintegratesvendorinformationintoULTABeautysystemsandalignsproductinformationacrossallchannelstoimprovedatagovernance.Wealsoplantorolloutavendorscorecardtocollaboratewithourbrandpartnerstodriveimprovementsinperformance,suchasimprovedinboundleadtimeconsistency,leadingtobetterin-stocklevelsandanimprovedguestexperience.

We'llalsostarttorolloutourdemandforecastingandinventoryoptimizationtool,whichprovidesforecastingreplenishmentmodelstoimprovesupplychaincapabilities.Thistoolwillhelpusdrivehighersalesandlessclearanceandimprovevendorfillrates,aswellasleadtobetterin-storepresentationandhigherinstocklevels.Weplantolaunchonecategorythisfall,thenrolloutthesystemtoallcategoriesnextyear.

AndfinallyweareontracktoopenupourfifthdistributioncenterinDallasnextsummerandallthemerchandisingsystemsandtoolsthatwe'reintheprocessofimplementingwillworktogethertosupportourgrowthplansandimprovetheguestandassociateexperience.Intheaggregate,thesenewdistributioncenters,projectsandsystemsareexpectedtodrivesignificantlong-termefficienciestooptimizeoursupplychainforproductsourcetoguestsandhelpusdeliverthefinancialresultswe've

committedtoinourfive-yearplan.

Thatwrapsupmyupdateonthestrategicimperative,sonowIwillhanditovertoScott

Scott Settersten (CFO):

Thanks,Mary.Goodafternoon,everyone.

Second-quartersaleswere$877millioncomparedto$734millionlastyear,anincreaseof19.4%.Comparablesalesincreased10.1%.Theretailcompwas8.8%,thesalononlycompwas10.1%ande-commercegrowthwas43.4%.

ThetotalCompanycompwasdrivenprimarilybytrafficstrength,withtransactionsup7%andticketup3.1%.Similartothetrendwe'veseenforthepastfewquarters,ticketwasdrivenbyhigheraveragesellingpriceasaresultofstrongsalesandprestigecategoriesandlessrelianceonbroaddiscounting.

Retailonlycomparabletransactionswereveryhealthy,up6.3%,evenstrongerthanwhatweachievedinthefirstquarter.E-commercegrowthwasdrivenprimarilybytraffic,butaverageticketalsoincreased.

Grossprofitdollarswereup18.2%to$306.5million,butgrossprofitmarginde-leveraged40basispointsto34.9%from35.3%lastyear.Grossprofitsbenefitedfromimprovementinproductmarginsduetohighermixofprestigeproducts,offeringamorecompleteassortmentonULTA.comandlessdiscountingoverall.Thesebenefits,however,wereoffsetbyplannedsupplychaininvestments,includingthestartupofournewdistributioncenterinGreenwood,Indiana.

SG&Aexpenseincreased16.6%to$183.9million,down50basispointsasapercentageofsalesto21%versus21.5%lastyear.Thekeydriverofthisimprovementwasmarketingexpenseleverage,partlyduetostronger-than-expectedsales,butalsoasaresultofconcentratingmoreofourmarketingexpenselaterintheyear.

Westillplantokeepmarketingasapercentageofsalesflatforthefullyear,sincewewillberampingupourmarketingspendinthesecondhalftodrivebrandawarenessthroughnationaltelevisionandradiocampaign.

Pre-openingexpensewas$4.1millioncomparedto$3.6millionlastyear,drivenby20storeopenings,onerelocationandtworemodelsduringthequarter,comparedto19newstoresopenedandfourremodelscompletedduringQ22014.

Operatingincomeincreased20.9%to$118.5million.Operatingmarginwasup20basispointsversuslastyearto13.5%.Ourtaxratewas37.5%versus38.1%lastyear,drivenprimarilybytheimpactofaccountingforequitycompensationtransactions.Netincomeincreased22%to$74.2million,or$1.15perdilutedshareversus$60.8million,or$0.94perdilutedsharelastyear.

Turningtothebalancesheetandcashflow,inventorieswere$705.7millionattheendofthequarter,comparedto$541.5millionattheendofQ22014,up14%onaperstorebasis.ExcludingtheinvestmentininventorytostockthenewDCinGreenwood,inventoryperdoorwasup10.9%,roughlyinlinewithourcompgrowth.Thisincreasewasrelatedtomaintainingstrongin-stocklevelsforfastestturningSKUstosupportourrapidsalesgrowth,theadditionofnewbrandsandtherolloutofCliniqueandLancomeboutiques.

Capitalexpenditureswere$80.6millionforthequarterdrivenbyournewstoreopeningprogram,merchandisefixturesandsupplychainandsystemsinvestments.Weareontracktospendabout$300millioninCapExthisyear.

Depreciationandamortizationforthesecondquarterwere$39millionandareexpectedtobeabout$170millionforthefullyear.WeendedQ2with$475millionofcashandshort-terminvestments.TheCompanyrepurchasedapproximately291,000sharesatacostof$46millionduringthequarterunderour10b5-1plan,aspartofourprogramtoreturncashtoshareholders.Asoftheendofquarter,$286millionremainedavailableunderthe$400millionsharerepurchaseprogram.Weexpecttocontinuetooffsetdilutionwithour10b5-1planandstillhavetheflexibilitytorepurchaseopportunisticallybeyondthat.

Turningnowtoguidancefor2015,intermsofouroutlookforthefullyear,basedonourstrongperformanceinthefirsthalf,weareraisingoursalesandearningsexpectationsfortheyear.Weexpecttoopenapproximately100storesin2015andremodelfourstores.Weplantogrowe-commercesalesinthe40%range.Weexpecttodrivecomparablesalesinthe8%to10%range.Weexpecttodeliverearnings-per-sharegrowthinthehighteensfromthe$3.96ofadjustedEPSwedeliveredin2014,whichexcludesthe$0.02nonrecurringtaxbenefitinQ4oflastyear.

Thisguidanceincludesplannedsupplychainandsystemsinvestments,andassumeswecontinuetorepurchasesharestooffsetdilution.WeexpecttodeleverageonthegrossprofitlineandmodestleverageontheSG&Alineandoperatingmarginisexpectedtobeaboutflat.Asareminder,muchoftheinvestmentrelatedtooursupplychainprojectwillhitgrossprofit,includinghigherdepreciationexpense,whichyou'llreallybegintoseeinthethirdquarter.

Weexpectourtaxratetobeapproximately38%.Weexpecttospendcapitalona$300millionrangeandtogeneratefreecashflowsimilartolastyear'sperformance.

Weareverypleasedtoraiseourannualcompguidanceandearningsoutlook,todeliverhighteensearningsgrowthwhilemakingsignificantinvestmentsinthebusinesstodrivesustainable,long-termmarketsharegainsinshareholdervalue.

Movingontospecificguidanceforthethirdquarter,weexpectsalestobeintherangeof$869millionto$883million,comparedto$745.7millionlastyear.Weanticipateachievingcomparablesalesintherangeof8%to10%versus9.5%lastyear.Weexpecttoopen44storesinthethirdquarterversus50storesopenedinQ3lastyear.

Sopre-openingexpenseexpectedtobedownslightly.Earnings-per-shareexpectedtobeintherangeof$1to$1.05versus$0.91forQ3lastyear.Weanticipateataxrateof36.9%andafullydilutedsharecountofapproximately64.2million.

Andwiththat,I'llturnthecallovertoourconferencecallhosttobegintheQ&Asession.Operator?

QUESTIONS&ANSWERS

Operator :

(OperatorInstructions)

StephanieWissink,PiperJaffray

StephanieWissink(Analyst-PiperJaffrayandCo.):

Thankyou.Goodafternoon,everyone.

Afewquestionforyou.Mary,ifyoucouldjuststartwithsomeofthenewbrandinitiatives.We'veseensomeoftherolloutsin-storeaswellassomeofyourdigitalcommunication.Canyoutalkaboutsomesuccessesthereandhowyou'rethinkingaboutstrategicallydeployingacrosssomenewinitiativesforthe

backhalf?

AndthenjustaquestionontheDC.Canyouremindus,oncethatDCisfullyupandfullyrunningwhatthetotalstorecapacitywillbeofyourexistinginfrastructureandwhenyoumayneedtoinvestagaintosupportthenextrolloutofsomeofthesmallerformatstores.

Thankyou.

MaryDillon (CEO):

Well,letmejustsaythatthenewnessthatyouaskedabout,Ithinkit'sreally--weconstantlyknowthatourguestsareinterestedinnewsandinnovation,andasImentionedthereareseveralthingsthatwerequitesuccessfulinthequarter.SobrandslikeBenefitandUrbanDecaywiththeSmokyPalette,brandslikeAnastasia,acrossallcategoriesRedkenFrizzDismiss,Mixisahotbrand,sotherewasreallyalotofnewness,aswellasexistingbrandnewness,newbrandsandjustcorebrandgrowth.

Andhowthatworksintermsofourplatforms,intermsofmarketing,isthatisreallywherewebringitalltogether.It'sjustmakingsurethatourguestsgettounderstandwhatwehavethat'snewandexciting.Ithinkourmarketingtacticsarebreakingthroughtheherdinevenbetterwaysallthetime.Sothat'sgoingtobeacorepartofwhatwedo,andIthinkwe'regettingbetteratitallthetime,moreefficientandmoreeffective.

Intermsofdistributioncenters,thisnewDCwillservethe400stores,45,000e-commerceorders,weareplanninganotherdistributioncenterthat'sindevelopmentandconstructionrightnowinDallas.Itwillopennextyear,andthatwillbesufficientforthecapacitythatweneedforsomeperiodoftime.We'llcontinuetoevaluatethat.

Whetherit'ssmallorlargestores,wewouldanticipatethattobecoveredinthenetworkthatwe'redefining,butcertainlythat'sfluidaswecontinuetogrowandlookouttothefuture,we'llcontinuetoevolvethatstrategyandourneeds.

StephanieWissink(Analyst-PiperJaffrayandCo.):

Thankyou.Bestofluck.

MaryDillon (CEO):

Thankyou

Operator :

O liverChen,CowenandCompany

OliverChen (Analyst-CowenandCompany):

Congratulationsonreallyspectaculargrowthhere.Regardingtheholidayplansandinventoryoptimization,whichcategoriesaremostripeforthatprocessandwillthatimpactholiday?Someretailersarepotentially,indifferentcategories,arepotentiallyoverinventoriedinthemarketplace,sohowshouldwethinkaboutthemaincatalystforyouandholidayatlarge,andwhatmightbemostdifferentonayear-over-yearbasis?

MaryDillon (CEO):

Wellthankyou,O liver.I'dsaybroadlyspeakingholidaysseasonwe'vebeenfocusedonformonths.Weareexcitedaboutit,it'sclearlysomethingthatisimportanttousandtoourguests,aswell.IguesswhatI

wouldsayisthatwejusttrytobeclearaboutmakingsurethatwe'vegotadequateinventoryforwhatweexpecttobeourtopvolumeitems,andwethinkwe'reingoodpositiontodothat.

SoIwouldsaythatwelookatthatasacorepartofhowwedobusiness.Givenourgrowthtrendsand,Ithink,ourabilitytoreallyunderstandwhat'sgoingtomove,wedon'thavebigconcernsaboutthingsthatdon'tworkduringholiday.Ithinkhistoricallywe'veabletomanagethatreallywellandhavealowamountofproductsthatdon'tworkwell,soIthinkwe'regoodshapethere.Isthereanythingyouwouldadd?

DaveKimbell(ChiefMerchandising):

Iwouldjustaddthatwedon'treallyhaveanyconcernsaboutourinventoryposition.Again,verylittleinthewayofseasonalityandwhatwecarryinourstores.Ithinkweprobablyhaveoneofthebest-in-classinretailasfarastheabilitytoworkthroughdiscontinuedproductorclearancethingsandpartneringwithourbrandsvendorstodothatinthemostprofitablewaypossible.

Okay.Justaquickfollow-uponthemobilefront.Whereareyouintheaimsofinnovationthere,andwhatarethenextchaptersforustolookforwardtoasthiscustomerseemsreallyengagedonthemobilefrontier,aswell?

MaryDillon (CEO):

I'lltakeletDavetakethat.

That'sgreat,O liver.Mobile,obviously,iscontinuingtogrowforusandit'sincreasinginthewayconsumerswanttoengagewithbrandandshop.Forusinthesecondquarter,about60%ofourtrafficcamethroughonourmobileapplications,mobilewebsiteandabout25%ofoursales.

We'rewellpastearlyinningsontheimpactthatit'shavinginthemarketplaceandwe'recontinuingtooptimizetheexperienceinourtotaldigitalfootprint,ofwhichmobileisacriticalone.Whereweareimprovingourappprettysignificantlyandtryingtomakethatshoppingexperienceeasieronceshe'sonourmobilewebsite,allthechangesthatwe'remakingaroundtryingtoincreaseconversionandincreaseaverageorder,thatweredoingbothonthedesktopserviceaswellasmobilearehavinganimpact.

Sowe'retryingtosharpenhowtheoffersthatwe'rehighlighting,maybewecanpersonalizeemailsanddrivehertothemobilewebsite.Soalotthatweredoing,anditwillcontinuetoincrease,it'sclearlythewaythatshewantstoshopandit'sabigareaoffocusforusgoingforward

Thankyou.Bestregards.

Operator :

DanielHofkinWilliamBlair

DanielHofkin (Analyst-WilliamBlairandCompany):

Goodafternoon,I'llechotheterrificresults.

Justalittlemorecolor,ifIcould,inageneraltrendwithinretailandomni-channelretailers,obviously,e-commercesalesandsometimescomingattheexpensesofthein-storebusiness,clearlythatdoesnot

seemtobehappeningwithyouguysseeing,actually,anuptick.

Justcuriouswhatyoufeellike--youtalkedaboutmarketingarethereanycouplethingsthatyoufeellikeareincrementallyresonatingevenalittlebitmorewiththeconsumer?Andthen,lastly,Ijusteditorialize,I'massumingthattheDonaldTrumplookisnotoneofthefallandwinterlooksthatyouguysareconsidering.

MaryDillon (CEO):

Wetookthatoneoffthetable.Funny.

Onthee-commerceomni-channel,letmestartbroadlyandthenmaybeI'llaskDavetoaddsomespecifics.ButIthinkacouplethings,oneisthatwe'reclearthatforus,twothings,oneisthatthemulti-channelshopperisourbestshopper.She'sdrivingalot.It'sreallyprettyincrementalbusinessforusandthecoreinsightisthattheexperiencetogoshopforbeautyisonethatlargelywomenwanttohavehappeninthephysicalbricksandmortarspace.Andwe'retryingtomakethatstoreexperiencesoinvitingwiththerightproductsandtherightlevelofserviceacrosstheboardandwethinkthat'sworkingforusandisverysustainable.

Shelikestocomeandexploreandtotryandspendtimethere.Withservicesaswell,obviouslythat'ssomethingyoucan'tgetdoneonline.Soforus,weseethatasthecorepartofourBusiness.E-commerceisworkinginawaythat'skindofneatbecauseit'sprettyincremental.Sotheshoppersthatwehavethatareshoppingbothonlineandinstorearebyfarourbestshoppers.

There,forexample,maybecomingninetimesayearversusstoreonly,whichislikefourtimesayearandthat'sonlyasmallpercentageofourgueststhatareactuallydoingthat,sowelikethat.Wethinkgrowthine-commerce,obviously,isgoingtobeincrementalandprofitableforusandfitswiththeconsumerinsightinthemodelthatwe'rebuilding.

Yes.I'lljustaddtothat.Certainlywelookatatotalomni-channelcustomersastheonewearemostfocusedoncontinuingtogrow,andsomostofthemarketingeffortsthatwe'redoingaredrivingbothonlineandin-storeactivities.So,Marymentionedsomeoftheadvertisingprogramsinthesecondquarterafairamountofradioadvertising,enhanceddigitaladvertising,bothofwhichthroughouranalysisdrivesbothin-storeandonlineactivities.

Certainlywithinthedigitalspaceitself,oursocialmediaactivityisincreasedquiteabit.OurPRismuchstronger,we'redoingmorewithsocialinfluencestodrivegreaterengagementandthenasweroll,asMarymentioned,tothethirdquarter,beyondintoothertacticsthatwehistoricallyhaven'tused,likeTV.

Wethinkallofthosewillcontributetodriveintegrateamoreloyalguest.Sheisveryattractedtoourloyaltyprogramandthatbehaviorthengetshershoppinginbothchannels,andthat'sthewaythatwewanttocontinuetodrive,andwe'vehadsomesuccesstothatsofar

DanielHofkin (Analyst-WilliamBlairandCompany):

That'sgreat,thanks.Bestofluck

Operator :

SimeonSiegel,NomuraSecuritiesInternational(America).

SimeonSiegel(Analyst-NomuraSecuritiesIntl(America)):

Thanks,goodafternoonandcongratulations.

SorryifImissedit.Withinthetrafficincreasecanyousharethebreakdownbetweennewcustomersversusincreasedfrequencyofexistingshoppers.Andthenmaybecanyoutalkaboutwhereyou'restillsourcingthosecustomersfrom?Andthenjust,Scott,givingthemovingpieces,canyouhelpwiththemagnitudeofthegrossmarginimpactsofthenextseveralquarters?Thanks.

Yes.IguessI'llstart.Wedon'treallybreakoutnewcustomersversusexisting.Imeanwebifurcatethetopandwetalkedaboutthefactthatthemajorityofthecomp,twothirdsofitwastransactionortrafficbased,withtheremainderbeingaverageticket.Andthatwasprimarilydrivenbyaveragesellingprice.Sounitswererelativelyflatyear-over-year;moreprestigeagain,lesspromotion,whichisdrivingthebasketincreaseoverall.

I'dsayweareexcited,reallypleasedwithournewtraffic,ournewguestacquisitionrate.Mary,inhercomments,mentionedourmembershipgrewto16millionguests,soabout18%.Andthatwasdrivenbyhealthyincreasesinnewguests,aswellasstrongretention,increaseinretentionofexistingguests.Sowefeellikewe'reattractingnewandkeepingevenmoreofourexistingguestsengagedinourproposition.

AndalittlecolorspecifictoQ2asfarasmargingoes.We'reveryhappytoseecoreproductmarginsinourretailbusiness,whichagainismorethan90%ofourtotalsales,continuedtoexpand.PrestigeMixhelpedlesspromotionoverallhelped.

Wedidhavealittlebitofheadwinds.Wedidn'thaveasmuchoffixedorleverageinthesecondquarteraswhatwesawearlierintheyearorwhatwesawintheyearagoperiod.Wealsohadalitanyofothersmalleritemsthataffectedthequarter.Againwenormallydon'tgetintothislevelofdetail,butsalon,forexample,wementionedinthescript,Marydid,aboutsometrainingforoursalonassociatesforthefalltrendlook.Wepulledforwardsomeexpensesthere.Sothatwasabitmoreofaheadwindthanwhatweexpected.AndwealsohadthestartupoftheDC,whichnegativelyaffectedgrossprofitinthequarter.

SimeonSiegel(Analyst-NomuraSecuritiesIntl(America)):

Great,thanksalot.Bestofluckfortherestoftheyear

Thankyou

Operator :

RupeshParikhOppenheimer

EricaEiler (Analyst-OppenheimerandCompany):

Goodafternoon,thisisEricaEileronforRupesh.Congratulationsonthereally,anothernicequarter.

SoIjustwanttogetbacktoe-commercehere.Imeanitsoundslikeyou'veclearlydonealottoenhancethecustomerexperienceonline.Iwashoping,maybe,youcouldtalkalittlebitmoreaboutwhatyou'reseeingfromconsumerpurchasesonline.Specifically,maybe,whatthatthemassPrestigemixofproducts

lookslikeonlineversusinstores.

Andthenalsojustwonderingifperhapsconsumersarebuyingmorestaple-likeproducts,maybetheirfoundations,orgo-tomascarasversusmaybeshadedgoodsorskincareproductsthatconsumersmaywanttoexperimentwithinstores.Thatwouldbegreat.Thanks.

Yes.Greatquestions.

Again,weareverypleasedwithouroveralle-commercesuccess,andweseealotofrunwaygoingforward.Specificallyonsomethequestions,wedon'treallybreakdownbetweencategories,butwhatIwould--butyourquestionaboutmassversusPrestige,whatIwouldsayisthatakeypartofourtotalproposition,e-commerceanywhere,inourbrick-and-mortar,e-commercestores,isallthingsbeautyallinoneplace.

Thebreadthofassortment,thebreadthofpricepoints,thebreadthofcategories,thatcertainlyiswhatdrivesourbusinessanddifferentiatesus,andweseethatwithinthee-commercespace.

SolargelyI'dsaytheassortmentandtheengagementthatwehaveinourbrick-and-mortarstoresislargelyreflectedone-commerce.Thereweresomecategoriesine-commercethatwetalkedaboutinthepastthatwedidn'thaveasfullofassortment,butthatmuchofthatgaphasbeenclosed,largelyinourprofessionalhaircare.Soweseethatreallyreflectingwhatweseeinthein-storeenvironment.

Asfarasstaplesversustryingnewthings,I'dsayit'sabitofboth.Wecertainlydon'tseeonlystaplereplenishmenttypeitemsbeingboughtonline.Thatishappening,butwhatwefind,particularlywiththosegueststhatwetalkedaboutthatareomni-channelguests,thatarereallyourbestguests,she'sshoppingmorefrequentlyintotalacrossbothretailstoresandoure-commercesite.

Andshe'sbuyingitemsthat,yes,shecan--maybearereplenishment,butshe'salsoindulginginthingsthatshehasn'ttried,thatarenewitems.Shewantstogetitfirst.Shewantedtogoonlinerightwhennewoffersareupandavailable.

Soshe'sdoingabitofbothandthat'sabsolutelythetypesofthingsthatwe'reencouraging.We'llfindit,makeiteasierforhergoingforwardtoreplenishthosefavoriteitems,butalsocontinuetohighlightnewsandexclusiveandfirst-to-marketitemsthatgethereexcitedwhentheycomeout.

MaryDillon (CEO):

I'lljustadd,andImentionedthisinthescript,ourCRMcapabilitygivesustheabilitytoexperimentalotwithhowtogetmorepersonalizedandmorecustomizedonwhatweemailtowhomandreallyallowhertotrythingswhetherit'sBeautyBreaksoremailsthatintroducehertonewproducts.Soit'sreallyanicewayforourgueststolearnaboutnewproductsandtrynewcategoriesthattheywouldn'thavebefore.

EricaEiler (Analyst-OppenheimerandCompany):

Great,that'sreallyhelpful,thanksforthecolor.

Operator :

SimeonGutman,MorganStanley

SimeonGutman (Analyst-MorganStanley):

Thanks,niceresults.Marymentionedevolvinglabormodelinyourpreparedremarks,canyouupdateus

onyourthoughtsthere?Ithinkatanalystdayyousuggestedyoumightexperimentinsomeareasinthelabormodel.Andthenconnectedtoit,yourbeingverysuccessfulwithCRMandmarketing,curiousinplaceswhereyou'retestingincreasedlaborifyou'reseeingabenefitaboveandbeyondsomeofthesuccessyou'reseeingwithCRMandtargeting.

MaryDillon (CEO):

Thankyou,Simeon.

Juststeppingback.Onlyjustkindofbigpicturewise,IguesswhatIwouldsay,isthataswethinkaboutitKeciaSteelman,who'sourheadofstoreoperationsandherleadershipteam,we'vegotaveryexperiencedsetofstoreoperatorsandwe'rereallyfocusedoncontinuousimprovementinexcellenceandoperationsandguestservicekindofacrosstheboard.

Sowhilethepayrolltestiskindofapieceofit,justtogiveyouabroaderperspectivewe'rereallykindofthinkingabouthowdoyou,buttheguestsandtheassociatesservicingtheguestsinthecenterofeverythingwedoandreallyaholisticapproachtoimprovementswhetherit'speople,processesortools.

Sothat'severythingfromidentifyingtherighttalent,traininganddevelopment,storeprocesses,bestuseoflaborhours,sincewecantalkedaboutthere,alltojustreallyimprovethatguestexperience.Sothepayrolltestisjustapartofit.We'relearningthings,we'veextendedittoanother60stores,we'vegotsomespecificlearnings.Somethingsthatwe'retryingthatworkdifferently.

Idon'twanttogivemorespecificonitthanthatbecausewerestilllearning,butcertainlywearemeasuringimpactonsalesandunitspertransactionandwhatnot.It'sacombinationofartandscience,itwillbecoretojustwhatwedoallthetime.Sothere'snobiga-hainonespecificthingcomingoutofit,butthinkaboutit,it'sjustapieceofabroaderfocusonhowtogetbettereverydayatwhatwedointhestoretoserveourguests.

SimeonGutman (Analyst-MorganStanley):

Okaythankyou

Operator :

MattMcGinley,EvercoreISI

MattMcGinley(Analyst-EvercoreISI):

Thanksfortakingmyquestion.Myfirstoneisontheinventory.Whenwelookatthat30%inventorygrowthyouhad,Ithinkyousaid16%ofthatwasrelatedtogettingaDCinstock,andIassumesomeofthatwouldbesafetystock.SoIwonderwhatofthat16%howmuchisin-stockversussafetystock,anddoesthatnormalizeovertheyear?OrdowereallyneedtogetpasttheDCthatopensin2016toseethosegrowthratesdrop?

Andthesecondoneisonadvertising.Withthetestingyouweredoinglastyear,Iknowyou'rehappywiththosetestandyouexpressedhowgoodtheywereinthetestmarketstratagem,somyquestionis,asyoudidn'tdoasmuchadvertisinginthesecondquarter,didthosemarketswhereyoudidthetestsincontinuetooutperformtherestoftheCompanyortheCompanyaverage?

MaryDillon (CEO):

Yes.I'llstartwiththat.Iwouldn'twanttocommentaboutallthespecificlearnings.Clearlywefeelgoodaboutwhatwe'velearnedit'sbeen--we'vebeenmodifyingourmarketingmixforsomeperiodoftimeunderDave'sleadershipandhisteam.SowhatI'mexcitedaboutisthatourmarketingisgettingmore

efficientandeffectiveeverydayandthat'sreallycriticalforusinthelongterm,todriveshort-termresultsandtocreatealong-termstrongbrandandbrandequity.

Sothat--I'dsayinthelastquarterseeingweaddedradioadvertising,wedidalotofPR,wedidalotofdigital.Wealsocontinuedtacticsthatwe'vealwaysdoneliketabsandmagazines.Allofthosearegettingmoreeffectiveandefficientwithlessrelianceondiscounting.

Inadditionnow,asImentioned,reallystartingnextmonthwe'regoingtolayerinnationaltelevisionadvertising.Welearnedfromin-storeteststhatthatwasgoingtobeeffectiveforus,sowe'regoingtoaddthattothemix.

SoIfeelconfidentinsayingwegotalotofgoodlearningsoutofthetestandnowwe'removingforward,implementingallthoselearningsaswego.But,youknow,it'sagainartandscience,there'sneveractuallyoneanswerandit'sneveranyonestoppingpoint,right?We'llcontinuetoevolveaswego.

Withrespecttotheinventory,itwasroughly$20millionattheendofthequarter,whichI'dsayisallsafetystockbecauseweweren'tservicinganystoresoutofthatDCatthatpointintime.Right.Westartedsubsequenttoquarterend.SoIwouldsayweexpectthattobekindofthehighwatermarkonaperdoorbasisforFY15.

WeexpecttoseesomemoderationnowthesecondhalfoftheyearandshouldstayroughlyinthatzoneaswecyclethroughnextyearwithanotherDCstackedontop.Sooncewegetthrough2016,againwiththefallofthesystemsweareputtinginplace,theDCforecastandreplenishment,otherfloorplanningtools,weexpectallofthosetohelpcontributetoimprovedinventoryflowsandimprovedturns.

MattMcGinley(Analyst-EvercoreISI):

Okay,thankyou.

Operator :

ChrisHorvers,JPMorgan

ChristopherHorvers (Analyst-JPMorgan):

Thanks.Goodevening.

Sowantedtofollow-uponthegrossmarginquestion.HowsignificantwastheDCstartupcostsandthe50bpsandwouldyouconsideritonetime?Andthenonarelatednote,canyouprovidesomecoloronthemagnitudeofthemarketingshiftoutof2Qandwhetherthosedollarsspreadroughlyequallyinthebackhalf.

Yes,Iguesswithrespecttothegrossmargin,I'mnotgoingtoquantifythebasispointshere.WetriedtosteerawayfromspecificP&Llineguidance.Butit'sgoingtobemuchmoresignificantinthethirdquarterthanitwasinthesecondquarter.Okay?

Sojustdirectionally.Secondquarter,alotofpayrollcost,right?We'vegotrentexpenserunningthroughtheP&Lbecausewe'reinstartupmode.Butthedepreciationdoesn'treallystartandthat'sreallygoingtobethesignificantincrementalcostrunningthroughthegrossprofitlinestartinginthethirdquarter.Allright.Foralltheinvestmentsand,again,wecalledthatoutinourinvestorcommunications,right?It'supwardsof$60million,soitisasignificantstepupfromwhatwe'vedonehistorically.

Marketing,alongthesamelines,wearenottryingtogettoospecificonwhatdollarsmovedwhere,butit'ssignificant.Wesawsomeofthefirstquarterwecalledthatout.Wesawmoreinthesecondquarter.And,again,it'saresultofusbeingsmarterduringthequarter.

We'reseeingsalestrends,andifweseeanopportunitytopullback,wewilldothat,andwe'llkeepthedrypowderforwhentheducksareflyingsotospeak.So,fourthquarterthere'salotofshopping,alotofnewguestscomingintoalotofnewstoresthatwereopenedduringthecourseoftheyear,andwe'regoingtodeploythemarketingwherewethinkitmakesthemostsense.

Andjustgoingbacktothegrossmarginquestion.So,understood,thedepreciationstepsup,butyoudon'tnecessarilyhavetheotheritemssittinginthere,likethesalontraining,whichwouldpressuregrossmargin.WhatI'mtryingtounderstandis,couldgrossmargininthebackhalfbedowninsimilarmagnitudeasitwasinthesecondquarter?

Idon'tthinkIwanttogettothatlevelofdetail.Again,Iwouldjustsaythough,there'salwayseveryquarterisstandalone.There'sinsandthere'soutsandthesalonwementionedthistimebecausethatwasabitofanunusualitem.E-commercewasstrong,right?Thatleaderevent,that'sanotherone-off.

Itwasstrongerthanwethoughtitwasgoingtobeonline,whichwasgreat.Therewereincrementalsales,butwehadadditionalfreightcosts.It'sheavierproduct,itcostsalittlebitmoretoship.Wedon'tthinkit'sproductivetogetintoreconcilingthebasispointseveryquarter.

TheonethingIwouldpointoutisifyou'relookingatnextyear,wegotanewdistributioncentercomingonlinenextyear,right?Wherewe'regoingtohavealotofthesestartupcostsandthesame.SoIwouldn'texpectedtocreatethesamealevelofheadwinds,justbecauseyou'relappingabigeventlikethatthisyear,butitwillbeadditionalheadwindnextyear.

Thanksverymuch.

Operator :

JoeAltobello,RaymondJames

JoeAltobello (Analyst-RaymondJamesandAssociates):

Thanks.Hi,guys,goodafternoon.

Firstquestion,Ijustwanttogobacktotheinventorylineforasecond.Ithink,Scott,youmentionedearlier,obviously,thatthat'sgoingtoremainabitelevatedherewiththenewDCcomingonline.Whendoyouexpecttheyear-over-yearincreaseinimprovedinventoriestomigratebacktobasicallysame-storesalesgrowth?Isthatnextyear?

Well,I'dsaywe'regoingtobeintheneighborhoodthisyear,Imeanlookatthecompthatwereposting.It'san11comp,soyou'relookingatxthat20millionofstartupinventory,I'dcallit.We'reatthecomplevel,soit'snot--Iwouldn'tviewtheinventoryasbeingoutofcontrolinanyway,shapeorform.Imeanwefeelverycomfortablewiththeinventorythatwehave,againthere'slittleseasonalorfashionriskintheinventory.

Imeantobefrank,wespendmostofourtimetryingtofigureouthowtostayaheadofthetrend.Usuallywe'rechasinginventory.Soweare,withthecashandthebalancesheetstrengthwehave,we'renotgoingtobeshyaboutmakingsomebetsgoingintothefourthquarteronhotproducts.SoIwouldsay,generallyspeaking,there'snothingtoseehere,right?We'reverycomfortablewithourinventoryposition.

Okay,that'sgoodtohear.Andthen,secondly,intermsofyourdecisiontogointonationalTVadvertisingforthefirsttime,whynow?Isthissomethingthatyouviewasanaturalextensionofyourmarketingstrategy,orwasthissomethingthatwasdebatedinternallyorwasthisjustanobviousmoveonyourpart?Thanks.

MaryDillon (CEO):

Youknowit'sreallybeenpartofourthinkingallalong.It'sreallyapartofourfive-yearplan.Thefirststrategicimperativethatwedescribedisdrivingnewguestacquisitionandmoresalesfromourcurrentguests.Weknowthatwehaveagapinawarenessofourbrandrelativetoourcompetitors,whetherit'saidedorunaided.

Andthattelevisionadvertisingisoneofthetools,onethefastesttools,todriveawarenessandwe'vebeentwoyearsintoitnow.Soit'swasn'tlikewe'rejustgoingtojumpanddothatovernight.Wecarefullydevelopedbrandpositioning,creative;testedit,testedthemediaplan.SoIfeelconfidentthetimeisright.

AlsoIwouldsay,weallknowit'saverycompetitivemarketplace.It'salwaysbeen,itprobablyalwayswillbe.Sostrikingwhiletheiron'shot.We'reinapositiontobuildalong-termsustainablebusinessmodelhere,andwethinkthisisakeypartofit,istoreallykeeppressingaheadwiththemarketingtoolstodrivebothshort-termandlong-termresults.Andwefeelit'srighttimetodoit.We'rereadytodoit.

Great,thankyouverymuch

Operator :

KellyHalsor,BuckinghamResearch

KellyHalsor (Analyst-BuckinghamResearch):

Hi,thankyoufortakingmyquestionandcongratulationsonanothergreatquarter.IwaswonderingifyoucouldtalkalittlebitmoreaboutthisPrestigeskincarecategory.It'sbeenafewquarterssinceyouhavecalleditoutasatopperformingcategory.

Sowhatareyouseeingintermsoftrendsandnewnessofproductsandbrandsbeyondtherolloutofthebrandedboutiques?Arethereanyopportunitiestoaddnewbrands,especiallyinlightofsomeofthewellknownbrandsrecentlyannouncingplanstogetintothespecialtymulti-channelinabiggerway?

Andthensecondly,couldyouprovideanymorecoloraroundthecadenceoftheDCandthestorerampup?Howmanystoresdoyouneedtogettostarttoseesomeleverageoncostsassociatedwiththatfacilityandjustanytimingaroundthatwouldbehelpfulaswell.Thanks.

I'llstartwithPrestigeskincare.Prestigeskincare,asyou'reprobablyaware,isnot--it'sbeenalittle

slowerthanhistoricaloverthelastfewyears.Ithasgonedownasacategory,althoughweseeitasacriticalcentralcategorytoouroverallproposition,andwe'reexcitedaboutthepotential.Ithinkit'samixofgreatpartnersthatwehaveinplacetoday;someofourbiggest,strongestbrandslikePhilosophy,Dermalogica,Clarisonic.

Dermalogicawithourpartnershipwithskinservicesisakeystrategicplatformforustocontinuetoengageourguestsandnotonlyhaveherengagedinproducts,buthaveherengageinservices.Soweseethoselargestbrandscontinuetogrowandprovideopportunity,bothtodayandsomeoftheinnovation,apipelinethatweknowthatthey'regoingtotrygoingforward.

Thereareadditionalbrandsinourboxthatarerelativelynewornewer,orupandcoming.SoabrandlikeJuiceBeautyisanicebrandthatwe'reexcitedaboutandisperformingquitewell.Thereare,toyourquestion,therearecertainlyadditionalbrandsthatwedon'tcarrytoday.I'mnotgoingtotalkaboutanyofthem,butspecifically,butcertainlyourbrandsthatwe'recontinuingtoexplore.Wehaveafullteamdedicatedtoexploring,figuringoutwhichoneswouldmakemostsenseinourpropositionandinourboxgoingforward.

Sowe'llcontinueaddinnovationintheskincarecategory.Weseeitasamix.You'rerightthatthere'sbeenafairamountof,Iguess,consolidation.We're(inaudible)isplayingabiggerroleinPrestigeskincare.Wethinkthat'sprobablyonlygoodtogetgreateremphasisonacategory,somenewresourcesandwethinkitwilldrivegrowthgoingforward

And,Kelly,theshortanswerontheleveragequestiononfixedcost,iswewouldexpectweexpecttoseebenefitsfromtheGreenwoodfacility.Weexpecttoseesomebenefitsnextyear.Ofcourse,thosewillbemaskedsomewhatbyaddinganothernewDCintheDallasarea.Meaningfully,2017,Ithink,iswhereyouwouldwebeabletoseemorepresenceofleverageontheP&Loverall.

Operator :

MarkAltschwager,RobertW.Baird

MarkAltschwager (Analyst-RobertW.BairdandCompany):

Goodafternoonandgreatquarter.

Kindofabiggerpicturequestionand,Mary,we'veseengrowthinpopularityofthesebeautysubscriptionservices,Ithinkoneofyourcompetitorsactuallyhasrecentlyannouncedalaunchinthatarea.Canyoujustgiveusyourthoughtsonthemeritsofthatmodel?IsitsomethingULTAloyaltyguestsareaskingfor?SomethingyoucouldseeULTAdoingintheforeseeablefuture?And,maybe,anycommentonwhereyourcapabilitieslietheregiventhenewDCinvestments?

Thankyou.

Yes,I'lltakethat,Mark.

Weseetherealbenefitofthatwholespaceasfundamentallydrivingtrialanddiscoveryofproductsforourguestsandthat'ssomethingthatwe'vebeenfocusedonforawhile.Wedoalotinthatspace,wedonotcurrentlyofferaexactsubscription-basedmodel,similartosomeoftheotheronesthatareoutthere.Andwe'llexploreallouroptionsgoingforward,althoughIwouldsaywhatwe'rereallyfocusedonfindingwhatwethinkareprobablyevenbetterwaystodrivethatdiscoveryandtrial.

Youknowwedoalotwithourgueststoprovideproducts.Wedoprogramsthroughoure-commerceplatform,BeautyBreaks,whichareweeklylimitedtimeoffersthatgivehalfpricesandsamplesassociatedwithit.WehaveBeautyBagsthatareextremelypopular,thatgivepremiumsizesamplestoourguests.

Andwefeelthey'remoretargetedandmorerelevant,weoftenpartnerthosewithbuy-insoncertainproducts,soourcustomersaremoreengagedinit,theyareexpectingtheseproductstocomealongwithit.Sotheirusage,wethink,isreallygood.

Wearealsoexperimentinginanothervarietyofdifferentways,againtrialanddiscovery.Forexample,recentlywehadprogram,withaverypopularYouTubebloggercreatedasamplebagwithherfavoriteitemsthatwasexclusivelymadeavailabletoherfollowerswithabuy-inonourwebsite.

Sowethinkitnotonlydrovebusiness,itdroveengagement,itsampledproductsanddiscovery.Sothewholespacearoundtrialanddiscoveryisonethatwethinkwe'reveryactivein.We'vereachedhundredsofthousandsofguestswiththosekindofprograms.We'llcontinuetodrivethatkindofprogramgoingforwardbecauseitexcitesourguests.Wegetthemengagedinmoreandmoreofourproductsgoingforward.

MarkAltschwager (Analyst-RobertW.BairdandCompany):

Thanks,Dave,andbestofluck

Operator :

DanaTelsey,TelseyAdvisoryGroup

DanaT elsey(Analyst-TelseyAdvisoryGroup):

Goodafternoon,everyone,andcongratulationsontheterrificresults.

Asyouthinkaboutthenewgueststhatarecomingin,whethergoingtothesalonoreveninthestorewithPrestige,doyouthinkthesesalonguests,howmanyofthemarecomingfromloyaltyprograms,howmanyofthemarecomingfromthemarketingeffortsthatyou'reputtingintoplaceandwhatdoesthismeanforconversionintoloyaltymembersgoingforward?

Thankyou.

MaryDillon (CEO):

I'mgladyouaskedthatbecauseit'sanexcitingareaforusintermsoffuturegrowthbecausereallyasmallpercentofourloyaltygueststodayareusingthesalon.Wearedoingalot.I'dsayit'scomingfromalotofthings.Oneiswe'veofferedanewonlinebookingservicethatweknowisdrivinglargelyincrementalnewguests,thousandsoftheminfact.Andthenalsoourmarketingprogramsrightnowaregettingmoreandmorefocusedonintegratingmakeupandhairandtrendsandthey'reveryexciting.

Ithinkwe'reactuallybringingtoourstoreassociatesthiskindoftrendtrainingthatwetalkedabout,bringingittolifeinsidethestore.AndcertainlyeverygetthatcomesintoanULTAstorewhoseapotentialnewloyaltymember,ourassociatesin-storearedoinggreatjobofconvertingthemintotheloyaltyprogram,becausetheyunderstandthatthat'simportantforthebusiness.Soallthoseitemswillworktogether,wethink,andwillcontinuetobeakeypartofourgrowthstory.

DanaT elsey(Analyst-TelseyAdvisoryGroup):

Thankyou.

Operator :

MikeBaker,DeutscheBank

Mike,didyouhaveaquestion?

MikeBaker (Analyst-DeutscheBank):

Hi,sorryaboutthat.Ididtheoldmutething.

Youtalkedaboutinpreparedremarksametricofsalesperemailsentout,whichisaninterestingmetric.Canyougiveusmorecoloronthat?Howlonghaveyoumeasuredthat?Hasthegrowthacceleratedatall,orwhatdoesthatlooklikeinthepast?Thanks.

Wewon'tgetrealspecificnumbersonit,butitissomethingthatwe'vemeasuredforawhileandweareseeingreally,reallyhealthygrowth.Andthatgrowthineffectivenessofouremailcampaignsisreallyfundamentallycomingfrom,I'dsay,twoplaces.Oneisbettertargeting,soweareunderstandingourconsumers'desires,wethink,alittlebitbetter,andpersonalizingtheemailstothem.

Andthentheoffers,theitemsandthecreativethatsurroundsthemwethinkisbetteraswell.Sotheemailsthemselvesarebetter,betteritems,betteroffers,betterprogramsthatarepersonalizedinmuchsharperways,andthosethingshavereallyworkedwell.Sowearesendingoutmoreemails,butwe'regettingmuchmoreeffectiveandefficientindoingitandwethinkitwillbeabiggrowthdriverforusgoingforward.

Okay,thanks,thatmakessense.IfIcanaskoneother.Justonthesupplychain,Iassumewe'restillinlineforthathitthisyeartobe5percentagepointsrelativetoyourearningsgrowthanddoesthatpeak?Itseemslikethat'sgoingtopeakprobablyaroundthethirdquarter.Isthatright?

That'scorrect,yougotthat.Yes.Thirdquarterwhenwefliptheswitchatthebeginningofthethirdquarter,andthat'swhenitwas,right,justdoingastoreortwoandnowwe'retorampitup,anditwillgetmoreefficientovertime.Andaswegetintothefourthquarter,it'sgoingtoservice130,140stores.Soatthatpointitwillbemoreproductiveandbecontributingmoreorlessdragoverall,IguessIshouldsay.

Understood.Thanksverymuch.Appreciateit.

Operator :

AramRubinson,WolfeResearch

AramRubinson (Analyst-WolfeResearch):

Hello,thanksfortakingmyquestion.Itlookslikewe'reinovertimehere.

Alotofretailshavestruggledwithtryingtoreducepromotionsandstillholdsales.Youareoneofthefewwhereyou'veactuallypulledbackonpromotionandsaleshaveheldoraccelerated.Iknowyou'restillusingprettybluntinstrumentswhenitcomestoCRMandcustomerknowledge.

I'mjustwonderingistherepotentiallyanotherroundofthatasyoulookatkindoftheresponsethatyourcustomershavehadtoit?Doyouthinkthatifwe,oryou,decidedtopullthatleveragainyoumightbeabletogoanotherround,perhapsabitmoresurgical,butalmostrepeatthatsameexercise?

MaryDillon (CEO):

YouknowIwouldsaythatIdon'tknowthatIenvisionanotherbigchangehere.Thisisagradualprocess,thatwe'vebeenworkingonreallyforsomeperiodoftime,whichisthekindofthecarefulexperimentation,testingandlearning,tryingthingsdifferentlyandchangingsuchthatourmarketingmixnow--Iwouldn'tsayit'sbluntinstrumentssomuchanymore.Imean,Iunderstandyourquestion,butIthinkwenowhaveareallyrobustarrayoftoolsthataregettingbetterandbetterasitrelatestoeffectivenessandefficiency.

SoIwouldjustconsiderthisacorepartofhowwe'regoingtoalwaysdoourBusiness,whichisconstantlylookforhowcanwebedrivinglong-termbrandequity,whichisreallyimportantifyouunderstandwhatULTAisandthey'reawareofus.Theyunderstandthatweareallthingsbeauty,allinoneplace.Andthenlotsofsurgicaltoolstodrivetheshort-term,day-to-dayresultsthatweneed.Soit'sanongoingpieceofhowwe'regoingtodothebusiness,Daveandhisteamarealloverit.Andthat'showwelookatit.

Letmeaskyouanotherway,ifyouweretolookatyourlevelofpromotiontodayversusthebrandequityyouthinkULTAdeservesorwarrants,dothinkthosetwoareinbalancenoworaretheystillalittleoutofbalance?Andwhichway?

MaryDillon (CEO):

Well,we'rereallyjuststartingthenationaltelevisionadvertising,asyouknow.Sothat'sanotherkindofshiftinthebalanceofthemix.Ienvisionthatwe'llbeabletoholdourA-dashratioprettyconsistentovertimewiththemixbeinggettingmoreinbalance,butI'dsayit'sgettingtheregradually.Itisnotwildlyoutofbalance.Ithinkwe'removingintoaplacethatwillbeprettysustainableforthelongterm.

Thanks.GoodluckwiththenewDC.

MaryDillon (CEO):

Thankyou.

Operator :

Ms.Dillon,itappearstherearenofurtherquestionsatthistime.Wouldyouliketomakeanyclosingremarks?

MaryDillon (CEO):

Yes.Inclosing,I'djustliketosayI'mveryproudoftheexcellentresultsthattheassociatesacrossULTABeautyaredeliveringwhilemakingsignificantprogressonallofourinitiatives,marketing,merchandising,supplychain.IwanttothankyouforyourinterestinULTABeautyandwelookfortospeakingwithyouagainsoon.Thankyou.

Operator :

Thisconcludestoday'steleconference.

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