Ulta Beauty, Inc.
Q4 2016 Earnings Call Transcript

Published: 10 Mar 2017

[Operator:]

Greetings and welcome to the Ulta Beauty Fourth Quarter 2016 Earnings Results Conference Call. At this time all participants are in a listen-only-mode. A brief question-and-answer session will follow the formal presentation. [Operator Instructions] As a reminder this conference is being recorded. I would now like to turn the conference over to your host Laurel Lefebvre. Please go ahead.

[Laurel Lefebvre:]

Thank you good afternoon and thanks for joining us for Ulta Beauty's fourth quarter 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 company’s 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 company’s 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 as many of you as possible during the hour scheduled for this call. I'll now turn it over to Mary.

[Mary Dillon:]

Thank you, Laurel. Good afternoon everyone the Ulta Beauty team delivered very strong fourth quarter results capping an exceptional year of sales and earnings growth. While investing to drive market share gains and create substantial long-term shareholder value. Let me start with the quick review of the headwinds for the fourth quarter. We grew the top-line 24.6% and delivered 16.6% comps on top of 12.5% comps in the fourth quarter of 2015 driven by strong traffic and ticket growth. Multiple factors strength across our product offerings, our best-in-class loyalty programs, great in store execution, investing in marketing and labor and steadily improving supply chain capabilities all work together to driver seller growth across both our retail and online business. E-commerce growth exceeded our plan driven by strong traffic and outstanding fulfillment execution during the holiday. Our services continue to gain share as we grow our business with existing guest and acquire new ones, significantly outpacing industry growth. In contrast with above plan sales growth, earnings per share growth of 32.5% also exceeded our expectations. Before I guide with the detailed review of the fourth quarter, I would like to highlight some of our key accomplishments for the full year. In fiscal 2016 we drove top-line growth of 23.7% and earnings growth of 30.9% well above our expectations at the beginning of the year achieving robust market share gains, solid execution and strong flow through on better than expected sales. We achieved a 15.8% comps with 13.4% comps in-stores and 56.2% growth in e-commerce with healthy traffic and tick growth each quarter during the year. Underlying this financial performance with a many significant accomplishments we achieved as we executed against our six strategic imperatives. We opened 100 net new stores and continue to deliver very healthy new store productivity. We completed more than 500 prestige brand expansions across new and existing stores and also executed update to the Ulta Beauty collection, fragrance area and nail fixtures. We added 69 new brands to our portfolio, reflecting the fact that Ulta Beauty is a great place for our brand partners to grow. We grew active membership in our loyalty program by 5.2 million members to 23.4 million active members, an increase of 28%. We increased our aided brand awareness to 86% as we continue to drive marketing effectiveness and efficiency. We launched our - successfully launched our Ulta Beauty credit card program. We continue to improve our supply chain capabilities, successfully opening a new DC in Dallas and further ramping the Greenwood DC we opened in 2015. Finally, we also seamlessly implemented several new core merchandising systems, which will improve our capabilities across merchandise planning and forecasting, as well as stage planning allocation, driving higher in stock as we continue to grow. I am so proud of this team and the traffic year we delivered. I’d now like to go into a little bit more detail on some of the key drivers specific to our fourth quarter performance. Starting with our first strategic imperative which is acquire new guests and deepen loyalty of existing guests. We increased asset membership in our ultimate rewards loyalty program by 1.7 million members during the quarter, driven by compelling marketing communication and excellence conversion in-store. We continue to see strength in retention rates, sales per member, frequency of purchase and average members’ ticket. Our loyalty program allows us to execute compelling serum campaigns, which drove incremental sales and margin. We also more than doubled our share play campaign delighting our guest with free gift who are driving additional sales. Our ultimate rewards credit card program exceeded expectations, driven by above planned new account sign up and higher average sales for cardholder. We also experience very strong gift card sales contributing to our sales momentum after the holidays. This spring we plan to launch Ulta Beauty gift cards in major grocery chains across the country, which will allow us to reach thousands of locations with the new point of presence for the brand. Our team successfully executed on three key events during the fourth quarter. Holiday, our hair care jumbo size promotion and our signature love your skin event. For the holiday season, we launched new creative for our television and radio ads, centered on our Joy To The Girl campaign, which was integrated across all touch points. We increased our TV, digital video and cinema ads and dramatically increased impressions with content partnerships with POPSUGAR, Refinery 29, Café Media and E-news Freestyle. We also made a big impact with social media with our Joy It Forward integration, delighting our connoisseurs [ph] and ultimately reward members with custom beauty boxes. Post-holiday we refined our long standing and very popular hair care event featuring bitter and jumbo size product to drive sales and margin improvements with the fresh approach that sharpen the appeal and impacted of the event. We also adjusted the cadence of the marketing and added radio advertising. These are other modifications let to be most successful leader event in our history, with strong growth across our largest brands both in-store and online. Our business was very strong in January as well anchored by our successful Love Your Skin event, which drove growth in both mass and prestige skin care. We focused our communications and merchandising to help our guest truly understand the benefits and features of the brands and products within the skin care arena, which can sometimes be overwhelming to navigate in light of the complexity of the category. De-mystifying skincare was a key theme throughout our marketing massaging, as we highlighted regimens for various skincare type it help guest discover our bestselling product. On the merchandizing front we continue to see trends similar to the preceding quarters during the year, with prestige cosmetics leading the way, but with strength across all major categories and newness contributing significantly to our performance. Urban Decay, IT Cosmetics, NYX, Too Faced, Tarte, Anastasia, Clinique, Lancôme, [indiscernible] Ardell, Real Techniques and the Ulta Beauty collection were notable among the best performing brands for the quarter with all brands providing terrific newness for the holiday season. While cosmetics were the biggest comp driver in the quarter, we gained market share across all major categories, skincare both mass and prestige accelerated this quarter with strength in mass continuing interest in Korean beauty trends and the recent addition of three major new brands Proactiv and Shiseido and Origins contributing strong growth as they ramp up in the assortment. The power of social media influencers are driving particular strength in prestige skincare brands like Mario Badescu and Peter Thomas Roth. Our own Ulta Beauty collection performed very well in the quarter, benefiting from upgrades to in-store presentation, formulations and packaging all rolled out earlier in the year and from new product positions in popular holiday kit. Looking ahead we are excited to announce today a new partnership with the Estee Lauder Companies. We'll be launching their MAC brand online in early May and will begin to rollout MAC to stores starting in June and continuing throughout the year. We plan to reach more than 100 stores in 2017 including the majority of new stores opening in the second half of the year. MAC is the number one prestige makeup brand in the U.S. and one of the strongest brands in America. MAC has along their one of our guest more reflected brands in its addition to our assortment helped us reach and better serve audiences that are important to us including Teams, Millennial and diverse customers. The highlight is strong positioning as a makeup artistry brand we plan to offer MAC makeup services at all stores in which we rollout the brand. The service components of the MAC offering is yet another example of how we're able to enhance and differentiate the shopping experience and drive traffic to our stores. Turning to the services business, salon sales increased 15.2% and comps 8.8% with strength in hair color and makeup services. Color services got a boost from the launch of Redken pH-Bonder a color additive that better protects the integrity of the hair during color services. In skin, MICROZONE services were a standout as the targeted promotion drove new guest acquisition. We continue to evolve our marketing strategy by utilizing our CRM and loyalty programs to simplify offers to attract new guests to the salon, while still driving great value and great experience. In addition to continuing their participation in New York Fashion Week, the Ulta Beauty our testing team recently styled the hair of the dancers performing at the Super Ball Half Time show with Lady Gaga, garnering significant exposure on social media and continuing to raise our profile as a hair authority. Our Benefit Brow boutiques continue their strong performance with brow services now available in about 850 stores. Benefit Brow bars complemented their services business with product newness, including exciting product launches in the lip and eye shadow categories. Now turning to store growth, our growth and development team wrapped up a very busy year opening 25 stores in the fourth quarter to end the year with 974 stores. New store productivity remains very strong. We've recruited all the real estate sites for our 2017 store program including a handful of stores that are not in our typical suburban locations in which we'll require more capital and higher rents. These include our new store in Michigan Avenue in Chicago opened this summer, our first store in Manhattan planned for the fall and the store in the Mall of America in Minnesota. Moving to our e-commerce business. Ulta.com sales grew 63.4% on top of 44.2% growth last year, contributing 380 basis points to our total company comps. This revenue growth was driven almost entirely by increased transactions. While total traffic growth was up almost 63% mobile traffic rose more than 90%, driven by growth in digital marketing paid channels including search, affiliates, display and Facebook. Ulta.com's product mix continues to mirror that of our stores with strong interest in newness and trials demonstrated by the ongoing success of our online only Beauty Break and Beauty Fads, that give our guests compelling sampling opportunities. So this was the first year that our hand supply chain capabilities allowed us to confidently go through the holiday season without travelling demand on this site, enabling sales growth well above planned. The profitability of our e-commerce business improved as a result of our more efficient fulfillment capabilities as well as the more effective promotional strategy. Finally, I’d like to update you on our supply chain operations and investments. Our supply chain team performed very well during the quarter and the team did a great job keeping up with the higher than expected demand both in-stores and online to keep in-stock levels high throughout the quarter and in particular during the holiday selling period. The Greenwood, Indiana distribution center ramped up to serve 230 stores through the holiday season and delivered 45,000 e-commerce orders per day during the peak. Our newer Dallas building ramped to 130 stores and 25,000 e-commerce orders per day at peak. Shipping lead times continue to improve with 88% of orders shipping within 48 hours, it was an 83% improvement compared to 2015 performance. We expect to ramp the Greenwood DC to serve both the 300 stores and the Dallas DC to serve a little over 200 stores by the end of 2017. We recently signed a lease for our West Coast distribution center in Fresno California, which we plan to open in the summer of 2018. This sixth DC will be a copy of the Dallas facility and is designed to substantially improve delivery times to the West Coast. From a systems perspective, our new forecasting replenishment system SWIFT performed as plan during the holiday period, as a result we saw higher in-stock and increased productivity of our inventory in the fourth quarter. We also successfully implemented our new floor planning and assortment optimization tool allowing for a more analytical rigor around our assortment decision. And finally we continue to invest in foundational capabilities like our product information management system, newly deployed to all of our suppliers. This capability streamlines the catcher of our active product information directly from our brand partners. We are making good progress and we will continue to leverage these investments to improve operational performance and the guest experience. This wraps up my review of the quarter. In sum our excellent fourth quarter results represented a strong finish to our best year yet. Our performance puts us in a unique position in the beauty industry and within the broader retail landscape to take advantage of the many opportunities before us to invest to drive the business for the long-term. And now I’ll turn it over to Scott, to discuss the drivers of our fourth quarter result and our outlook for the first quarter and all of 2017.

[Scott Settersten:]

Thank you, Mary. Good afternoon, everyone. Starting with the income statement. Net sales for the quarter increased 24.6% to $1.58 billion, driven by 16.6% comparable sales and excellent new store productivity. The total company comp was composed of 10.9% transaction growth and 5.7% average ticket growth. The retail comp of 13% was driven by 8% traffic and 5% ticket. Ticket growth was driven primarily by average selling price. The units per transaction were also up, in line with the UPT performance for the year. The salon business comped 8.8%, driven primarily by ticket growth, but also included some encouraging signs of traffic growth. The retail and salon comp combined produced a total store comp of 12.8%. Operating margin increased 80 basis points, driven by a strong SG&A leverage. Since the components of the P&L are quite different this quarter compared to the rest of 2016, let me give you some color on the moving parts. Gross profit decreased by 10 basis points, but on a two year basis, gross profit increased 110 basis points. While we leverage six store cost on strong sales, product margins were down slightly for two primary reasons. First and most importantly, we cycled over the elimination of a 20% our postcard promotion in Q4 of last year, resulting in similar year-over-year promotional levels versus the last several quarters when we were also able to opportunistically eliminate similar 20% of postcard promotion. Second, channel and product mix put modest pressure on margin rate. While our e-commerce business continues to improve its overall profitability, with more efficient fulfillment capabilities ulta.com's lower gross margins had a more significant impact on the total company margin rate during the quarter. As our e-commerce channel represented a larger percentage of the business in Q4 at 10% of the mix versus 7% for the full year. On the product mix side, growth and prestige and mass cosmetics outpaced the higher margin hair care category. And while many other prestige brands we've added recently drive sales and margin dollars, it tends to dilute margin rate. Finally, we continued to see planned deleverage and distribution cost and supply chain investments are still weighing on gross profit as our new DCs and newly implemented systems continue to ramp-up. Moving on to SG&A expense, we improved by 110 basis points, driven by leverage of advertising expense and corporate overhead on strong top-line performance. Offset slightly by investments in store labor related to prestige brand expansions and providing higher staffing levels and stores, particularly during the holiday. In terms of the balance sheet, inventories increased 11.2% on a per store basis, well below the comp rate, driven by careful inventory management and better than expected sales. Capital expenditures were $93 million for the quarter, driven by our new store opening program, systems and fixtures for prestige brand expansion. CapEx for the full year was $374 million and some of the capital projects planned for the year slipped into 2017. We ended the quarter with $415 million in cash and short-term investments. In terms of share buybacks we continue to repurchase shares in the open market as part of our 10b5-1 plan. During the fourth quarter we repurchased approximately 190,000 shares of our stock at a cost of $47.3 million. For the full year including the accelerated share repurchase program and activity under our 10b5-1 plan, we repurchased 1.6 million shares for $344 million at an average price of about $210 per share. Share repurchases contributed about three percentage points of EPS growth for the year. As of January 28, 2017 approximately 101 million remain available under the 425 million share repurchase program announced in March of 2016. Turning now to guidance for fiscal 2017 and the first quarter. As Mary mentioned, we are in a unique situation among retailers with our current opportunity for growth and market share gain. From this position of strength, we plan fiscal 2017 to allow us to deliver on our long range planned goal of delivering EPS growth in the low 20s percentage range, while investing in new brand, store labor, infrastructure and exciting new real estate opportunities. While continuing to grow our brand awareness and invest more aggressively in digital. I’d like to share with you a few data points and assumptions that influenced our 2017 plan. First, sales for both the fourth quarter and the full year 2016 came in much stronger than we expected. So we are starting from a much larger base than we anticipated. We also delivered much more in margin expansion in 2016 than expected, about 60 basis point, versus our initial expectations of flat margins, due to significant sales upside to our plan, which we are not counting, aren’t repeating to the same degree in 2017. Second, we plan to rollout more Clinique and Lancôme expansions than in our original plan. As well as other brands across the portfolio including launching MAC. This will put additional pressure on the P&L in terms of product margin rates and the startup cost of building out these brands. But these brand additions are expected to deliver incremental sales and margin dollars. Third, we will need to continue to invest in our supply chain and systems to be competitive from an omni-channel perspective. For example we still need to play catch-up with some basic omni-capabilities like buy online and pick-up in-store. And finally as Mary described we will open a handful of non-prototypical stores like Manhattan with much higher rent than average this next year. This is a prudent approach to testing some different types of real estate, but it will nonetheless pressure the P&L. All that said, our 2017 guidance is still and keeping with our long range plan announced at our Analyst Day in October. Our plan allows us to invest in the business to improve the guest experience, drive market share gains and deliver healthy growth and sustainable long-term shareholder value. We plan to open approximately 100 stores all 10,000 square foot boxes. For your models we expect to open 15 stores in Q1, 25 in Q2, 40 in Q3 and 20 stores in Q4. In terms of the mix of market sizes roughly 60% will open in large and medium sized markets and 40% in small and single store markets. Mostly in power centers and community centers with about 10 in mall including the Mall of America. And five or so in urban street locations like Manhattan, Michigan Avenue in Chicago and Santa Monaca California. About 20% will be located in new Ulta Beauty markets and 80% will be fill-in in existing market. Roughly 40% are planned in new shopping center developments versus 60% in existing centers. We plan to complete about 13 major remodels during the year we expect to grow our e-commerce business of approximately 40%, total company comps are expected to be in the 8% to 10% range. We anticipate earnings per share growth in the low 20s percentage range including the impact of the 53rd week and assuming approximately $300 million in share buyback. Operating margin as we expected to increase modestly in 2017 in the 20 to 30 basis point range, with margin expansion building in 2018 and 2019 to reach our goal of 15% by the end of 2019. I’ve highlighted some of the major margin headwinds, but we also have many margin expansion opportunities ahead. Including continued benefits from our CRM and loyalty program, supply chain efficiencies, procurement savings and new store productivity gains. As you model out the quarters keep in mind the impact of the 53rd week in Q4 it’s included in our low 20s EPS guidance. And while it’s too early to forecast exact numbers we anticipate that the extra week equates roughly to $100 million in sales or $14 million in pre-tax earnings or approximately 2% of annual earnings growth. Turning to CapEx, in light of the additional opportunities we've evaluated we expect capital spend to be higher than our previous guidance in the range of $460 million, which is in line with 2016 CapEx as a percentage of sales. Compared to our initial plan we expect to spend more capital for stores in the non-prototypical locations like Manhattan and we are planning for higher fixture CapEx with the continued rollout of prestige brands as our access to great brands accelerated. About $80 million has been allocated for prestige brand upgrade with about 700 expansions of Clinique and Lancôme benefit and now MAC. Further significant investments include the Fresno distribution center, and a series of customer facing technology investments necessary to remain competitive. On the share repurchase front, our Board of Directors recently approved a new share repurchase authorization for $425 million to replace the prior authorization, which will be cancelled. Our guidance for 2017 assumes about $300 million in share repurchase and our new authorization allows us flexibility to do more opportunistically. Our tax rate is expected to be in line with 2016, but keep in mind the new accounting rules effective in 2017 will change how companies record the tax effects of employee stock option exercise. The tax benefit moves from the balance sheet to the P&L resulting the pontifical for increased quarter-to-quarter volatility in our EPS results. We don’t expect the full year tax rate to be materially impacted. As a point of reference if we had adapted this accounting update in 2016 our effective tax rate would have been about a point or so lower. Now moving on to specific guidance for the first quarter, we anticipate sales to be in the range of $1.244 billion to $1.265 billion versus $1.074 billion last year. We expect comparable sales to increase in the range of 9% to 11% versus 15.2% last year. E-commerce sales are expected to grow in the 14% range. We plan to open approximately 15 new stores in the first quarter versus the 13 last year, so pre-opening is expected to be modestly higher. Earnings per share are expected to be in the range of $1.75 to $1.80 versus $1.45 last year. With modest leverage on both the gross profit and SG&A line and with overall operating margin expected to increase slightly. The tax rate is expected to be 37% and our fully diluted share count is estimated at $62.5 million. Now, I will turn it over to our conference call host to moderate the Q&A session.

[Operator:]

Thank you. At this time we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from Omar Saad with Evercore. Please proceed.

[Omar Saad:]

Hi, yes congratulations great quarter, great finish to the year. I know it’s just the beginning of the year, I wanted to just kind of have you talk about how you think about the long-term comp guidance you gave at the Investor Day in the fall? And the initial kind of comp guidance for the year and how we should think about the fact that you’re expecting 2017 comp rate to be in that 8% to 10% range versus the 7% to 9% longer term guidance you gave? And kind of what gives you confidence that this year will kind of be above that longer term trend that you expect? Thanks.

[Mary Dillon:]

Great. Thank you, Omar. We tried to be prudent I guess and really reasonable with the guidance that we give on every dimension. We see obviously the core that we’re in; we’ve guided the 9%-11% for the quarter. We feel confident about the strength and what’s happening in the business our ability to understand the dynamics and the levers that we have to continue to drive the results in a healthy long-term way. So I would just say that really there is no change to the long-term guidance we always said that it would be stronger in the beginning and sort of moderate a bit out in the out years. So the 7% to 9% is the longer term and as we guided 8% to 10% for this year we feel just it’s very much in our line of side and feel very confident about being able to deliver that.

[Omar Saad:]

Thanks good luck.

[Mary Dillon:]

Thank you.

[Operator:]

Thank you. Our next question comes from Stephanie Wissink with Piper Jaffray. Please proceed.

[Stephanie Wissink:]

Thanks, good afternoon everyone and I add my congratulations as well. Mary could you talk a little bit about the brand boutique just give us a sense of the current number across the four or five brands. And then of course with the addition of MAC in that roll out how should we think about the staging and the phasing of the roll out of those brand boutiques? And if you could just remind us what the productivity is of those prestige boutiques on a relative basis to your overall store average? Thank you.

[Mary Dillon:]

Yeah I will talk about these in sort of just overall terms. First of all let me reiterate we’re thrilled about the launch of MAC, we’re thrilled about the progress we’re making across the box in terms of brands and newness and innovation. There’s a hundreds of boutiques that with brand expansions that will happen this year. We talked about that in the script I'm not going to break that out in specific deal or the productivity. What I would say again we’ve referenced it so that upfront there are some investments in terms of getting a brand up and going and these fixtures are a little bit more expensive, but they drive incremental sales and profit. And also in the long-term excellent for a brand in terms of really reinforcing Ulta Beauty as a great destination for all things beauty. So we feel very good about that current status.

[Stephanie Wissink:]

Thank you.

[Operator:]

Thank you our next question comes from Kelly Halsor with Buckingham Research Group. Please proceed.

[Kelly Halsor:]

Hi, everyone thank you for taking in my question and congrats on great quarter and the front year. My first or my question is really around the margin expectations and I appreciate about the color you gave, if could you just dig in a little bit more on the puts and takes as you look at gross margin versus SG&A. Should we expect the same sort of dynamics to play out as we did in 4Q given that you have fully lapsed the pulling of the coupons from last year so not really expecting much product margin expansion from here. And then on the SG&A line could you kind of quantify the dollar amount that you spend last year around the boutiques and how that plays out in ‘17 is it going to be more or is it the same amount, any color on that would be great? Thanks.

[Scott Settersten:]

Sure, thanks Kelly. So as far as the gross profit questions is concerned, I’d say looking ahead I think that’s what your pivot point is or as I look ahead to 2017 I’d say gross profit largely in line with what we saw in the fourth quarter. So to your point, we are now lapping what I would call the low hanging fruit of the postcard elimination that we saw in the fourth quarter of 2015 and then carrying through the first three quarters of 2016. I will again for investors, we opportunistically took advantage of that, there is still we believe plenty of opportunity to continue to tweak our promotional and discount tactics and strategies as we look out over the long-term and with benefits of that. We’re still not counting on that being a major driver of our mid-teens operating margin target here over the next couple of years. Again as a reminder most of the benefits we see there will come from fixed store cost leverage and capturing benefits from our supply chain investments. So still very confident in our long range target there. As far as the SG&A is concerned, we really don’t get into the details of the boutiques and how much they cost and exactly the productivity, but rest assured you see the results of that in our comp results, right. I mean that’s part and parcel of what we doing continue to invest in the store environment, which again is our important investment. It’s one of the reasons we are able to drive such healthy traffic gains to our stores right continue to invest in that to keep it fresh and exciting and fun for our guest. So we believe these are great investments for now and for long into the future.

[Kelly Halsor:]

Great, thank you.

[Operator:]

Thank you. Our next question comes from Jason Gere with KeyBanc Capital Markets. Please proceed.

[Jason Gere:]

Okay, thanks. I guess I got a question that I get from a lot of investors and then basically more of the male investors. So bear with me on this question. Can you just talk about the beauty enthusiasts and I know that they are really the ones who are driving a lot of excitement in some of these new startup brands. So as it means to drive sales, so can you talk about the sustainability of the beauty enthusiast? So I guess the question I am going to ask is really about the advertising that you are putting in-store, the support you give. So really it feels like a lot of some of these brands that you are carrying are getting a lot of just word of mouth traction YouTube, support et cetera. So can you maybe educate the male audience out there about, beauty enthusiasts and your confidence that these enthusiasts can really continue to drive a lot of the excitement that’s going on in some of your key categories?

[Mary Dillon:]

We would be very enthusiastic to teach more about the enthusiasm. But honestly I’ll ask Dave Kimbell to add, I just want to stay that’s actually one of the core reasons and one of the core foundations that why we feel very confident about our long-term prospects is our understanding of the segment, the size of the segment and the momentum. So I let Dave take it from here.

[Dave Kimbell:]

Yes, we have spent a lot of time really trying to understand her behavior in our beauty enthusiast I think we shared at the Analyst Day, just some information about her, she makes up about 57% of total women in the marketplace, which drives a disproportionate amount of the revenue in the category. So to your point is critical that we continue to find way to connect with her, we are very optimistic about her long-term engagement in the category, in fact every indicator we have is shows that she is just getting more engage and that’s largely due to the relatively new tools that she has at her disposal through social media and the YouTube and the ability to learn more to share more to be more engaged in makeup and hair trends and skin trends. So she is not demographically defined we see that across all ages, from teen agers through millennials all the way up from an age from an ethnicity standpoint, it’s not demographically defined, but it is a mindset that keeps her positively engaged. And so many of things that we have been doing over the last two years or so to pretty significantly change our marketing mix. I have been very purposeful in order to reach in new and compelling ways. A lot of the tools we used in the past, we found awareness effected in meeting here today. So our advertising even some of the broad scale advertising like TV and radio we think sets the stage and then we are building much more communication through social media, our own applications on our own website to provide content and engagement tools, influencers in the marketplace that are driving much more change in how consumers behave. And then even tools like our Glam Lab that we launched on our approximately, which is a way for her engage in beauty virtually engage in beauty in a way that she couldn’t before. So we’re focused on meeting her needs, as I said very optimistic about her continued engagement. And it’s really center of everything that we are doing in building our business for future.

[Jason Gere:]

Okay. I appreciate. And then Scott, can you just - did you say with the preopening spends was going to be for the year just so we have that?

[Scott Settersten:]

Yes, as a percentage of total sales roughly flat with 2016.

[Jason Gere:]

Okay, great. Thanks a lot guys.

[Operator:]

And your next question comes from Dana Telsey with Telsey Advisory Group. Please proceed.

[Dana Telsey:]

Good afternoon everyone and congratulations on the terrific results. As you think about MAC and this is so exciting that it’s coming in the stores what could it contribute in sales and how does the margin compared to the rest of the product categories? And then with online, the margin progression of online, where does it go and when does it balance out with stores? And just lastly, what kind of comps should you need to leverage expenses going forward? Thank you.

[Mary Dillon:]

Thank you Dana, the three point question. We show you enthusiasm about the launch MAC and we’re not going to specific about, we’re just getting started right so starting online and we’re going to launch it to a little over 100 stores this year. And it’s really important brand products to have and we’re confident it’s going add to the mix very nicely and our guess will be very excited about it. Your second question was…

[Dana Telsey:]

Online.

[Mary Dillon:]

Online, you mean the margin, right. So, I will do this we’re very focused on improving the profitability of online business as we’ve talked about today. The big part of our supply chain investment is around fulfilling the online orders in a way that better for our gust in terms of speed and also more efficient in terms of cost. But we expect this to improve, but we expect that the four walls margins are always going to be higher than the online margin. On the flip side, so the margins getting stronger, but the great thing is it’s a very incremental business to us, right. So, we study this closely, we look at very closely at consumer at our guest trends and the guest who’re shopping online only this is a small number of people it’s really about guest who are shopping in-store and online and that guests who is involved across both channels is really driving 2.5 times more sales really, it’s not somebody who is just buying in-store. So, even if that margin is I think in some ways inherently going to be somewhat lower than bricks and mortar, it’s a very incremental business to us. Feeds very much into the dynamic that Dave was describing about how the beauty enthusiasts shop.

[Dana Telsey:]

Thank you.

[Operator:]

Thank you. Your next question comes from Simeon Gutman with Morgan Stanley. Please proceed.

[Simeon Gutman:]

Thanks and congratulations all. Back to the question - well let me phrase it this way thinking about the 200 basis points of margin expansion over the next few years, is the cost component of these continued roll out of new brands is that factored in? And I guess as part of it would you say it’s fair that new brands rolling into your top-line - benefit your top-line as well but maybe you haven’t built the full ramp of a brand like a MAC into that longer-term outlook?

[Mary Dillon:]

Yes, we certainly are doing the best we can thinking about the cost of rollout of brands and I’d say that’s inherently assumed. We feel confident about the ability; we’re maintaining the goal of reaching that 15 margin target by the end of 2019. And - but being really I think very smart and prudent about how we get there balancing short and long-term and since Scott talked about it well there now we adapt to new investment long-term in this business and we are definitely going to do that. Because we know we’ve got - we need to have the right brands, the right in-store experience and the capabilities to support that. So, whether or not that top-line could be stronger with some of these brand launches, I don’t know we try to be really as prudent as we can with our guidance. But we’d like to see how it goes before we call it higher that we think we need to.

[Scott Settersten:]

And I would just add to that, assuming things again we are giving guidance here early in the year, there is a long way to go in 2017. But even if we only achieve to what we are guiding to today, by the end of 2017 we’ll be half way to our goal of close to 15% by the end of 2019. So there still plenty of room left for us and the long time and again we always weigh these decisions very carefully versus dollars. And we think today these investments and these choices are the best for our investors for the long-term.

[Simeon Gutman:]

Thanks.

[Operator:]

Thank you. Our next question comes from Oliver Chen with Cowen and Company. Please proceed.

[Courtney Willson:]

Hi, this is Courtney Willson in for Oliver today. Thanks for taking our question. We just had a question regarding your expansion into urban location. You mentioned more capital, higher rents, will you be merchandising these stores much differently on the product side in terms of the balance of mass versus prestige? And do you have any plans to adjust their service offerings at all to cater towards the urban customer or your traditional suburban customer? Thank you.

[Dave Kimbell:]

Yes Courtney, this is Dave, I'll take that. Overall, no we think our model works in all types of location urban, suburban. So we're merchandising these locations pretty consistently with how we're doing in all of our stores and there may be some fine-tune changes that we’ll make. And we're certainly looking at making sure that these stores are efficient and effective, but we don't see a big mix. I mean big part of what Ulta stands for is all time beauty all in one place, having the proper category mix being able to have mass and prestige and hair care. And so we're going to make sure that it's reflected in that location. As far as services, we think that's a big part of our mix too, so we anticipate very strong service businesses in those high traffic locations and we're preparing for that but we're not radically changing the store design and the amount of space allocated towards that.

[Operator:]

Thank you. Our next question comes from Ike Boruchow with Wells Fargo. Please proceed.

[Ike Boruchow:]

Hi, everyone, congrats on a great quarter, thanks for taking my question. I guess, Marry this might be for you, just looking at the loyalty membership growth, the growth rate I think is accelerated the last couple of years, I think now it's like 29% at the end of this year, can you just talked to some other things that you've done the last 18 months or 24 months that helped you accelerate that growth? And then kind of what's baked into your plan for this year, in terms of new membership add? And I'm just kind of curious if there is a way to talk about how loyalty is maybe been benefiting the comp and if that does start to normalize, how should we think about a more sustainable comp growth rate? Just tying comp and loyalty together would be great?

[Mary Dillon:]

Yes, so let me take some of that, maybe I'll start, Dave you want to add. I will say this is a bit of a secret sauce, so I'm not going to get very specific about lot of it, because we're really proud about how the royalty program is working. And as you know the loyalty members are driving the majority of our sales. So obviously that’s part and parcel of the comp growth I mean that’s kind of the way to think of it. Comp is driven by a lot of components, but the sales are coming from our loyalty members. We've done a few things, one is obviously we just converted a couple of years ago to one loyalty program we’ve simplified it we make it - I think our communication about how the program works, how we communicate with that guest, and how we convert new member, potential members in-store are all kind of components of what we've done that’s making work well. And I'll let Dave to add more color, but I would just add also what's exciting to me is I am not going to drive that rate of growth of new members forever right, because we’re kind of early the program. But we still really only have 20% of the beauty enthusiasts as we define them, shopping it also in the U.S. There is plenty of more loyalty perspective members out there. And also even the postcard earner program, we certainly don't have 100% of their share of beauty spend and they're not even buying every category that we offer today. So we see these as all levers to continue to pull at the top-line - at the top level to help drive to continue to support the kind of comp growth that we are guiding. And maybe Dave just add a couple of more points about what was done with the program.

[Dave Kimbell:]

Yes absolutely as Mary said the combination and simplification into one program a couple of years ago really has allowed us to accelerate our growth in that space, but a few things the marketing has they have in one program has allowed us to just be sharper and clear about marketing that on a national scale, which we couldn’t do before. So we've been able to leverage that in all of our vehicles reaching all of our guests. We have a significantly increased our in-store execution, our store associates are better understand the program, they participate in the program and they've done a great job educating our perspective members and converting perspective members into that program. And then we really have to make sure that just the value is there, it is fundamental to our overall business and we want to make sure that we're continuing to meet her needs. There is three core things that we deliver to her she finds value first in the points program and we've got a number of levels and elements to that. But she finds that valuable the ease of accumulating points and the simplicity of redeeming those points. She get the second piece is she got a lot of content from us and this beauty enthusiasts that I described is open and interested in the content that we give her whether it's our mag or email or other activity that we have to reach them out. And then we try to delight her throughout the year with special products birthday, birthday gifts, anniversary gifts, sample programs. So those things keep our engage and the execution we have through marketing and in-store and our merchandizing partners have allowed us to drive that growth and we're going to keep focused on doing that in the future.

[Ike Boruchow:]

Okay, thank you.

[Operator:]

Thank you. Our next question comes from Rupesh Parikh with Oppenheimer. Please proceed.

[Rupesh Parikh:]

Congrats on a great quarter and thanks for taking my questions. So I also wanted to ask about your urban locations and maybe even the Manhattan location. I just want to get a sense of whether you guys expect similar returns for the urban unit. And then secondly when you enter new market such as I guess in this case Manhattan, do you also typically see a meaningful lift on the e-commerce side of your business?

[Mary Dillon:]

Yeah let me start with that one. So to Manhattan specifically and I guess the other urban sites that we're going forward with this year by and large we expect the same kind of financial results. I would say Manhattan is a special case, I mean so back to Dave's earlier point about we're putting our standard prototype store in there right it’s 10,000 square feet and that’s an expensive proposition on anywhere on the Island. We went to a place where we felt most comfortable kind of a neighborhood feel there with a lot of traffic; I know we got to do subway station right here in our front door. So we're trying to make smart decision as far as the location is concerned that would be a case where we would take something less than our internal hurdle rate, which is way north of 20% right in most of our stores that we open perform way in excess of our internal hurdle rate. And in case of Manhattan we're still expecting to recoup investment returns well above our cost to capital that’s there that would be another measure that would be significantly lower than 20%. So we feel very comfortable that this is a wise decision and it's going to produce great returns for us.

[Dave Kimbell:]

And then the question about e-commerce business, when we open a new store and we do see that not only driving growth in that store, but driving our e-commerce business. We see it in all types of market small markets and we would anticipate that to be the case in Manhattan. We do have a strong awareness and we surround Manhattan so it's not like we're unknown in that area, but obviously this would be the first time we're serving them directly and we'd anticipate our e-commerce business to benefit from that as well.

[Rupesh Parikh:]

Okay, great. Thank you.

[Operator:]

Next question Chris Horvers with JPMorgan. Please proceed.

[Chris Horvers:]

Thanks, good evening. Like the peel apart the $80 million increase in CapEx it seems like the number of Clinique and Lancôme upgrades were - are in line with what you previously planned at the Analyst Day or I'm guessing that they weren’t given that to happen in October. So is the $80 million is that MAC counters in the stores and are you buying some of the real estate in markets like New York and Chicago to perhaps you could layout the size of the buckets of the incremental CapEx year-over-year?

[Scott Settersten:]

Yeah this one is one that I could understand it could get a little murky for people who are just looking at the numbers at the top level. So I would say the short - the easy way to think about the $80 million is, it’s just incremental store fleet investment. So when we gave the guidance earlier in the year about CapEx maybe being kind of flattish in '17 compared to '16. We didn't have line of sight clear on MAC at that point or how many stores that might go into and things like that. Since that guidance we’ve the increased the number of Lancôme and Clinique and benefit boutiques versus our prior thought process. Layer math on top of that you layer in a bit of inflation in a new store plus open a new store. So most of it is primarily boutiques in those new stores, which is again it's great news for investors because it's a lot more cost efficient for us to put those boutiques in new stores versus go back and remodeling stores, disrupting guest activity and it's a lot more expensive to do that. So it's kind of combination of those things but by and large the $80 million is going into the store fleet, which again our most productive asset and a reason why Ulta is a stand out as far as driving traffic.

[Mary Dillon:]

Yeah and there is no purchasing of MAC real estate or anything like that. You asked that question at the end just to clear now this just investment in our store.

[Chris Horvers:]

Understood. So as a follow-up the CapEx should also drive extra depreciation expense, which was not in what you've previously guiding in terms of margin expansion and getting to the mid-teens. So following up on a prior question that tried to address this, what the offset in the margin line that allows you to stick to your existing long-term algorithm are you embedding more sales is there margin benefit that you are seeing now that you are previously didn’t expect when you laid that out? Thank you.

[Mary Dillon:]

No I mean we again, we are giving guide - there is a range of outcomes right, that’s you are looking at a continuum. And so we feel comfortable that between having flexibility on the upside to do better with promotion tactics I mentioned earlier other benefits coming out of supply chain investment maybe quicker than we had originally sought. And just other stronger retail trends that drive a lot of leverage on fixed store cost so a combination of those things. And as we look at the range we feel very comfortable that we can stick to our target.

[Chris Horvers:]

Thank you.

[Operator:]

Thank you. Our next question comes from Joe Altobello with Raymond James. Please proceed.

[Unidentified Analyst:]

[indiscernible] on for Joe. I was just wondering if you could talk about the promotional environment as we were taking market share from.

[Mary Dillon:]

The promotional environment was that we’re too early taking. I guess the best way to think about it is that we compete across a lot of dimensions. So I mean we compete with I like to say 70,000 places in any given day that you can buy beauty, because we offer all the product categories and price points. So department stores are certainly one source, but we also compete with mass with drug, online retailers. So it’s really kind of across the board. Promotional environment I guess for us, what I feel good about it, that we the quarter that we had with consistent levels of promotion a year ago I think is a really good way think about the underlying health of our business and that we have - we’re always going to make sure that we are providing a great value to our guest. And so there is always going to be some levels of coupons or promotions in-store, but certainly our loyalty programs allow us to get that much more focused and targeted and we have been doing that over the last few years. So I feel like we have got good control of our levers, so we got levers that we use as we need them and more importantly we’re really just in an environment where beauty is certainly the growing category it’s very active there is a lot of players nobody is doing exactly what we do. So we really try to just play our offence and that’s why we are talking about really continuing to investment in the long-term of our business because obviously beauty enthusiast is holding with their dollars. We are not complacent, we are not perfect, so we know we just have to stand top of our game.

[Operator:]

Thank you. Our next question comes from Mark Astrachan with Stifel. Please proceed.

[Mark Astrachan:]

Yeah thanks and good afternoon everyone. Wanted to ask about the percent stores with at least one prestige boutique if you could - if you not answer it directly just give some direction sort of how that increasing overtime? And commentary about more expansions for Clinique and Lancôme that you mentioned on the call that relative to the 100 more boutique that you announced at the October investor meeting? And just sort of broadly given growth and assuming increasing focus on prestige brands relative to mass, any thoughts about how you see the sales split overtime between mass and prestige within the stores?

[Dave Kimbell:]

Yeah so I would start by saying we don’t - as we’ve said before we don’t give specific numbers on that, but I’d say increasingly most of our stores certainly more than half have at least one boutique in them. And as we continue to grow I think if you look at the history, what we’ve talked about we said at the beginning of last year that we started the year, started 2016 with approximately 200 of each Clinique and Lancôme and 700 of benefit and then we added about 500 boutiques last year and this year as we said another 700. So, increasingly we will be reaching pretty much the whole fleet it’s with at least one over time and we think that’s important to continue to elevate the experience in investing our stores as Scott has said. As far as the mix between prestige and mass, we are really focused on making sure the entire store is growing certainly prestige has been leading, but our mass business across cosmetics for sure, but also skin care and bath is also been contributing in a very strong way to our overall business. And that’s really important because that’s ultimately what our guest comes us for is that mix. So as much as we talk about and we spend a lot of time today talking about prestige, our boutique investments, we have been equally as focused on building all parts of our store. We are investing in our hair care business, adding a lot of new brands there; we’re as I said building our mass side. So the balance overall is important. We don’t see a real dramatic shift. It might gradually continue to grow within prestige, but we were focused on keeping that balance for the long-term.

[Mark Astrachan:]

Great, thank you.

[Operator:]

Next question Simeon Siegel with Nomura. Please proceed.

[Simeon Siegel:]

Thanks good afternoon guys and congrats on the year. Scott, just maybe to follow-up on a few of the others. Just I guess what do you expect depreciation to be this year and then any update to what you’d expect CapEx to like beyond 2017? And then maybe from Mary or Dave, I don’t if I missed it, but where is the private label penetration at this point, do you see any big difference between stores and online and I don’t know if you think about it like this but is there a sealing level that you wouldn’t want to surpass? Thanks.

[Scott Settersten:]

Yeah, so as far as D&A and CapEx is concerned, I think D&A we said 215, 250 sorry for 2017 is the estimate. In CapEx Simeon it’s hard for me to sit here today and think about how we could do any more, right how could we take on any more with the capacity that we have. So respect the CapEx I have learned now never say never, but it’s hard to imagine that the number could get larger than what we’re looking out for 2017. It’s a large undertaking but again a lot of it is going into the store fleet and we think there is great payback there and a great prospects for our investors over the long-term. One other thing, I would say about CapEx, so again, getting back to that $18 million year-over-year. There is a lot other things going on behind the scenes I guess both sides just the MAC and Clinique and Lancôme boutiques there is things like Estée Lauder, we introduce it last year going much larger with it this year across the fleet, 250 comp stores and additional 100 new stores, there is things like that. Remember when we go into the stores and we do these boutique drop in we’re also taking opportunity to refresh the store right on a pretty large scale. So we are going in with new nail fixtures, fragrance fixtures, updating the Ulta Beauty collection where it makes sense. So there is a lot of activity going on in the store, just to keep it fresh, when she comes back it’s like a new shopping experience right and we just want to continue to do that. So that’s the CapEx expectation.

[Mary Dillon:]

And then the Ulta Beauty collection. I think we break it out, it’s between 3%, 4% of the business similar online in-store, which is true for most of our, but actually I am really proud about our little Ulta Beauty collection growth rate. I mean Dave talked about this the mass side of our business is very important to our guest and our private label brand we’ve really, really double down in making that a stronger brand that we had. And I am proud of it. So part of the investments in-store had to do with making sure that we’re using fixtures and showcasing that brand and to best possible light. We have invested in - we have redone the packaging, we are really bringing newness to that that line much more rapidly and it’s doing very, very well. So I don’t if there is a cap certainly I like it, it’s a great margin and our guest will response our guest is wonderful the constrained would be we are not going to be too big in anything. I mean we want this to be a mosaic brands that our guest want and love. Having said that we know it’s going to be bigger will be bigger and we have a fair amount of space dedicate and we can make that space even more productive overtime and we will. So we’re proud about what’s happening with Ulta Beauty collection.

[Simeon Siegel:]

Great. Thanks and best of luck.

[Mary Dillon:]

Thank you.

[Operator:]

Next question comes from Matt Fassler with Goldman Sachs. Please proceed.

[Katie Price:]

Thanks very much this is Katie Price on for Matt. Just taking a look at the SG&A cadence that you guys have had over the last year, obviously the growth per store was elevated reflecting the investments that you have made. In the fourth quarter that growth rate came back down pretty sharply, but as we think about how the investments that you’re going to continue doing over the next year will flow through, should we expect that growth rate to reaccelerate once again or kind of given the base of investments that were made last year that that growth rate would remain below prior year levels?

[Scott Settersten:]

Yeah, I guess, I would say again, a quarter when we look at individual quarter, every quarter has a special set of challenges and opportunities. And really over the last couple of years there has been a lot of investments. So I think we saw last during in the fourth quarter we deleverage the SG&A line. I think for the year we were kind of flattish, but the fourth quarter included some consulting expense we were thinking about our Analyst Day and refreshing the five year plan, we were the business was strong. So we pulled forward some of our supply chain expense and try to get at head start on things, we also had some people decisions that we made to get more footsteps on the ground to make sure we could ramp up some of these investments little bit quicker. So again we’re lapping that in 2016 and you saw fourth quarter this year, we saw the fruits of our labor so to speak in a lot of different ways we got a lot of leverage this year because we got an early start on a lot of those things. So I think we mentioned as we look at 2017 now SG&A slight leverage I would say for the full year. So there is still a number of things that we need to work on people wise and tool wise and we're just thinking what being pragmatic and doing what we think is good for the business for the long-term.

[Katie Price:]

Okay, thank you very much.

[Operator:]

I would like to turn the floor back over to Mary Dillon for closing comments.

[Mary Dillon:]

Thank you. I just want to reiterate we're really proud about the year that we had in 2016. And I really like to thank our 32,000 associates for delivering that year and all their efforts to continue to drive our success in 2017 and beyond. I appreciate your interest in Ulta Beauty and look forward to speaking with everybody soon. Take care.

[Operator:]

This concludes today's teleconference. You may disconnect your lines at this time.