Ulta Beauty, Inc.
Q3 2015 Earnings Call Transcript

Published: 4 Dec 2015

[Operator:]

Greetings and welcome to the ULTA Beauty Third Quarter 2015 Earnings Results Conference Call. At this time all participants are in a listen-only mode. A question-and-answer session will follow the formal presentation. [Operators Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Miss. Laurel Lefebvre. Thank you. You may begin.

[Laurel Lefebvre:]

Thank you. Good afternoon and thank you for joining us for ULTA Beauty's Third Quarter 2015 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 would 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. We may make references during this call to the metric free cash flow, a non-GAAP financial measure defined as cash provided by operating activities, minus purchases of property and equipment. During the Q&A session, we will specially request that you please ask just one question to allow us to have time to respond to all of you during the hour scheduled for this call. I'll now turn it over to Mary.

[Mary Dillon:]

Thank you, Laurel. Good afternoon, everyone. ULTA Beauty delivered excellent results in the third quarter. Strong traffic and healthy new store productivity drove the top line leading to better than expected earnings growth. Sales rose 22.1% and we achieved a 12.8% total company comp on top of a 9.5% comp in the third quarter of 2014. This was our best retail comp since 2011 and the best total company comps in our history as a public company. We gained market share across all of our categories, with both Prestige and Mass Color Cosmetics achieving outstanding growth. Earnings per share increased 22% to $1.11 compared to $0.91 in the third quarter of last year. Scott will take you through details of our third quarter financials in a few minutes, but first I’ll provide a business update through the lens of our six strategic imperatives, which is our template for long-term shareholder value creation. The first imperative is to acquire new guests and deepen loyalty with existing guests. Our ultimate rewards loyalty program continues to be a significant contributor to our business results. We now have 17 million active members, up almost 20% versus a year ago, a significant acceleration compared to the 16% growth we achieved last year. Our store associates are doing a fantastic job converting new customers to the programs and we’ve improved all the loyalty program communication touch points in conjunction with our brand relaunch last quarter, including loyalty cards , brochures and web content. All key loyalty program metrics including retention rate, sales per member, frequency of purchase and average member ticket are trending well above last year’s numbers. We also saw a big jump in the reactivation of members who hadn’t shopped at ULTA Beauty recently, about 56% higher year-over-year likely helped by our increased digital marketing and national advertising. We believe our efforts to increase brand awareness through advertising are also contributing to the acceleration in new loyalty member acquisition. As a reminder, ULTA Beauty’s brand awareness while still lower than our peers has increased over the past year and we still have an opportunity to improve both the aided and unaided awareness of our brand. On September 7, we debuted television and radio ads on national cable and broadcast networks and also air aired these commercials during [new fall] episodes of several primetime shows. One of the ads focus on our 21 days of Beauty event during which we saw double digit traffic increases and the other ads were focused on ULTA Beauty’s unique all things Beauty, all in one place positioning. We are currently running another flight of TV and Radio during the holiday season with new creative, both the new brand ads and one focus on ULTA Beauty as a great gift giving destination. We also used social media and public relation activities to grow awareness about our support of the breast cancer research foundation, an important cause that we’ve been closely involved with for many years. This year we introduced new elements to deepen the emotional connection for our guests to the cause , which includes sharing the story of a breast cancer survivor in a new video called Tracy’s First Haircut that was launched over 3.8 million times, and we launched a fund raising challenge on social media #ultapinkover in partnership with actress Tiffani Thiessen. We also returned as the official partner to the Ellen DeGeneres show for her Breast Cancer Awareness month activities, which were BCRF and ULTA Beauty on the national stage for millions of viewers each week to raise awareness and funds. Throughout this activity we expanded our reach in educating and raising funds for the important work of BCRF. The second strategic imperative is to differentiate by delivering a distinctive and personalized guest experience across all channels. Our CRM and consumer insight capabilities continue to grow leading to more effective, personalized and targeted communication. Our CRM platform enables more targeted offer so that we can continue to reduce our reliance on coupons and discounts to drive sales. Our data shows that more targeted email offers lead to higher open rates and significant increases in online sales per e-mail sent. We also continue to use both our CRM platform and our website as a important component of our multi faceted sampling program. In addition to our positive duty breaks and monthly sample Beauty Bags, we are also working as brand partners to deliver product samples based on customers’ past purchase history and propensity to buy certain products. We can track subsequent purchases, get guest feedback and share data with our brand partners. We are on track to distribute more than 4 million personalized samples this year, primarily through targeted e-mails, and also through targeted point of sale messages and direct mail. Now turning to the in-store experience. Over the past few quarters we’ve implemented several initiatives to enhance service levels. Our payroll optimization tests are ongoing as we experience with allocating incremental stacking hours to support higher sales goals. In the current quarter, we are deploying insights from previous test to invest in customer facing hours to deliver a great guest experience during the holiday season with this increased traffic in our stores. We continue to see benefits from recently rolled out programs that increase productivity, including our past management tool, a new store block tool to help district managers and other field leaders consistently measure and reinforce store operations and service and Kronos Mobility which improves store management’s ability to appropriately stock the stores while increasing guest facing time. We also continue to reinforce product announcements and guest service training through our learning management system. And finally we continue to elevate our guest experience to improve execution of our in-store event strategy for both brand partner and store generated events. The third strategic imperative is to offer relevant, innovative and often exclusive products that excite our guests. The Beauty business is driven by news and innovation and our merchants are doing a terrific job creating an assortment that’s clearly resonating with our guests. We gain share across the board with color cosmetics growing well above the house on both the mass and prestige side of the portfolio. In the Prestige cosmetics categories, brands like Urban Decay, IT Cosmetics, Tarte and Too Faced are leading our growth with plenty of newness. Urban Decay’s Naked Smoky Palette was the biggest sales item of the quarter. Too Faced was a standout with the successful launch of Born This Way foundation. Ongoing interest in contouring and strobing is driving strength in palette from Anastasia, Lorac, Becca and many others. Exclusive to ULTA eye shade of palettes like Too Faced Vegas Nay start-up palette and the Lorac Mega PRO Palette were big hits on social media and with our guests. We continue to roll out Clinique and Lancôme boutiques as well as Benefit brow bars. All three brands contributed significantly to our comp growth. After introducing an assortment of five Lancôme mascara SKUs to all stores during the quarter, we are excited to add another great prestige cosmetics brand in a large number of doors just this week. Two of Dior iconic Dior Show mascaras were introduced in nearly 600 stores. On the mass side assortment, we are at the popular Soap & Glory luxury bathline during the quarter which is off to a great start. Mix, owned by L'Oréal is simply on fire, and we offer a dominant assortment of more than 900 mix skews. Their suede lip launch was a big hit in the third quarter. Masks are also a trending category and we’ve added a great assortment of masks from Korean brands like Tony [Indiscernible]. And lastly, the ULTA Beauty collection continues to perform very well, benefitting from the teams work to offer higher quality, on trend products as well as the updated in-store presentation we have rolled out at the end of the second quarter in more than 300 stores. Our professional hair care department exceeded expectations as well, driven by newness and continued benefits from the extensive work we completed during the second quarter to a previous assortment, signage and overall presentation of the category. Innovation from Redken, Living Proof, Pureology and Diva Curl drove double digit comps in those key brands. We also saw great results selling the rebranding of our gorgeous hair event in October within hairs content, contours, sampling and events in the salon. The fragrance category strengthened in the third quarter as well with new launches including GucciBamboo, Jimmy Choo Illicit, Kate Spade's Walk on Air, Mark Jacobs Decadence and Estée Lauder 'Modern Muse Le Rouge' contributing to renewed interest in fragrance. We also added Christian Dior fragrance to ultra.com during the quarter as we continue to enhance our online offering. Looking ahead to the fourth quarter we are excited about our assorted in growing number of exclusive product offerings, Bare Mineral Enchanted Beauty, Tarte's Tartlet in Bloom, Benefits Party Hopping kits and Nyx Holiday kits, Clarisonic limited edition holiday sets, these are just a few of the holiday kits that are exclusive to ULTA Beauty. In our minds, so the exclusivity of our assortment is really twofold. On the product side, we have a great private label offering with our ULTA Beauty collection, exclusive brands like in IT Cosmetics and IT Brushes for ULTA, the broadest assortment around from limited distribution brands like Mix and Urban Decay and an array of kits sold only at ULTA across many of our brand partners. Equally important ULTA Beauty is the only retailer that brings its broad portfolio of brands, categories and price points together in one place to delight the Beauty enthusiasts combining it with a compelling loyalty program and a high quality services. So how we bring it all together is what sets us apart and what’s driving our consistent market share gains. Next is our four strategic imperative which is to deliver exceptional services in three core areas

[Scott Settersten:]

Thanks, Mary. Good afternoon, everyone. Third quarter sales were $911 million compared with $746 million last year, an increase of 22.1%. Comparable sales increased 12.8%. Both the retail comp and the salon-only comp was 10.9% and ecommerce growth was 56.3%. The total company comp this quarter was mostly traffic driven with transactions growth of 10.6% and ticket growth of 2.2%. Retail-only comparable transactions were very strong, up 9.5%, the highest growth so far this year. Retail-only ticket growth of 1.4% was evenly split between the units per transaction in average selling price. E-commerce growth was driven almost entirely by traffic with average ticket increasing in the lower single digits. Gross profit dollars were up 19.1% to $335.6 million, but gross profit margin deleveraged 90 basis points to 36.9% from 37.8% last year. This decline was primarily driven by planned supply chain investments including the distribution center in Greenwood Indiana when it opened in early August. Product and channel mix also weighed on gross profit in the quarter, as we saw a very strong growth in areas like mass cosmetics and e-commerce which carry lower margins. SG&A expense increased 20.8% to $218.8 million, down 30 basis points as a percentage of sales to 24% versus 24.3% last year. This improvement was driven by lower variable compensation expense and modest leverage on store labor and other store expenses. These gains were somewhat offset by planned investments in marketing. Note that we are on track to keep marketing as a percentage of sales flat for the full year, with marketing de-leverage in the back half of the year balancing the leverage we saw in the first half. The higher marketing spend in the second half is related to investments to grow our brand awareness to national advertising campaign Mary mentioned which includes television and radio. Pre-opening expense was $6.1 million compared to $6.6 million last year, due to 45 stores opened during the quarter compared to 50 new stores opened in Q3 2014. Operating income increased 17.7% to $110.8 million. Operating margin was 12.2% down 40 basis points versus last year. Our tax rate was 36% versus 37.3% last year, primarily due to changes in state income taxes. Net income increased 20.2% to $71.1 million or $1.11 per diluted share versus $59.1 million or $0.91 per diluted share last year. Turning to the balance sheet and cash flow, inventories were $884.4 million at the end of the quarter compared to $709.7 million at the end of Q3 2014, up 10.9% on a per-store basis below our comp rate. In addition to the inventory in the new DC, we continue to invest in inventory to improve in-stock levels for our fastest turning items to support our rapid sales growth as well as investing in new brands and the continued roll out of rollout of Clinique and Lancôme boutiques. Capital expenditures were $94.7 million for the quarter, driven by our new store opening program, supply chain and system investments and merchandise fixtures. We are on track to spend about $300 million in CapEx this year. Depreciation and amortization for the third quarter were $ 42million, and are expected to be about $165 million for the full year. We ended Q3 with $360 million of cash and short-term investments. The company repurchased approximately 288,000 shares at a cost of $48 million during the quarter under our 10b5-1 plan. As of the end of the quarter $239 million remained available under the $400 million share repurchase authorization. Since we began our current buyback program in October of last year, we have repurchased more than 1 million shares for $161 million. The reduction in our diluted share count versus last year added just under a penny of earnings per share for the third quarter. Turning now to guidance for the fourth quarter. We anticipate sales to be in the range of $1.212 billion to $1.233 billion compared to $1.048 billion last year. We expect comparable sales to increase in the range of 8% to 10% versus 11.1% last year, our toughest comparison of the year. We have planned for our online sales growth to moderate this quarter. We have purposely smoothed out some of the e-commerce promotional activity during the early part of the holiday season to better match demand with our fulfillment capacity to deliver an improved guest experience. We expect to open about 14 stores in the fourth quarter; this compares to 10 stores open in Q4 last year, so pre-opening expense is expected to be up slightly. Earnings per share are expected to be in a range of $1.48 to $1.53 versus $1.35 for Q4 of 2014 which included a $0.02 benefit of non-recurring tax. We anticipated tax rate of 37% and a fully diluted share count of approximately $64 million. As a result of our better than expected performance in the third quarter and continued momentum in the early stages of the fourth quarter, we are raising our sales and earnings expectations for the full year. We now expect to deliver earnings per share growth in the low 20s percentage range compared to the $3.96 of adjusted EPS we delivered in 2014. We expect to deliver double digit comparable sales in the 10%, 12% range for the full year and topline growth in the low 20s percentage range. I'll now turn the call over to the conference call host to begin the Q&A session. Operator?

[Operator:]

[Operator Instructions] The first question comes from Christopher Horvers with JPMorgan. Please state your question.

[Christopher Horvers:]

Thanks, good evening everybody. Can you talk about the promotional environment and what you are seeing from a department store channel in the Beauty space and whether that had any impact on merch margins during the quarter and in a similar vein as you think about the outlook for the fourth quarter is there any anticipation of promotional pressure coming from that channel?

[Mary Dillon:]

Well thank you Chris. Let me just start by saying, you know I guess there’s always promotion in retail in this time of the year in particular. Well, if you step back and look at our business and our business results we feel that you are kind of operating in a different way the most of the retailers right now and we feel pretty proud of that. So our trends are kind of transcending some of the dynamics like weather and mall traffic or other things. And certainly for promotional perspective, we’ve been actually able to drive healthy comp sales growth with actually pulling back in terms of broad discounting. Now having said that, we are really focused on using our loyalty program, our CRM facilities you know the whole tool kit of products and in store experience to drive this great guest experience. So, you know I'm not diminishing the fact that we're certainly in a promotional environment. We understand that plan, we feel that our business is really well set up to perform really well at holiday because you are positioning ourselves as a great gift giving destination and the formula is working well for us.

[Christopher Horvers:]

Understood. And then just as one quick follow up, Scott well do you think is there any component in the gross margin that you would consider as a onetime expense related to the new distribution center? Thanks.

[Scott Settersten:]

Yes, well we’ve been clearly stating throughout the year that third quarter was going to be probably the most significant headwinds with respect to the supply chain investments specifically around the distribution center there in Greenwood, Indiana. So that's the biggest one time I guess one time that’s a tough term to use, but that was the biggest single factor as far as the deleverage was concerned in the third quarter and again that what we expect that to moderate now as we march into the fourth quarter. So I think the biggest challenge for the year in the gross profit line is kind of behind us.

[Christopher Horvers:]

Thanks very much.

[Operator:]

Our next question comes from Matthew Fassler from Goldman Sachs. Please state your question.

[Matthew Fassler:]

Thanks a lot. Good afternoon. I'll ask kind of two-part here conjunctional related. First of all, Mary, your initial insights on the economics of the marketing spend, I know, this is a very big quarter for your marketing campaign and some of the broadcast advertising against some of initial thoughts on responsible. And then conjunctional related -- the mass business is sounds like gain share within the mix that something we haven't heard a lot of before. How do you relate that to the marketing effort potentially capturing new customers or to other things that are transpiring in the marketplace? Thanks so much.

[Mary Dillon:]

Okay. I love the way everybody's getting two questions in. That's very tricky. We'll try to get as many as we can. And Matt anyway, I guess also a couple things and maybe I'll ask Dave to add more to it as well. But initial feeling about of our marketing mix revolution I'm thrilled to that too. I mean, this has been journey that I think we've been on as you know for the past couple of years. How we can we evolve our demand creation and smartly in the way that's going to just drive healthy long-term growth in the business. And I couldn't be more pleased, I think the team has just fantastic. We've done a lot of fermentation. We've been careful about it does not point pendulum too dramatically. But now we're in our position to have this really whole kind of marketing mix and we're just really getting started I guess. And so that's a key part of we think one of the key growth leverage for us going forward in terms of our ability to continue get new guest and drive more market share gains with existing guest. And then on the mass side of the house, again, I state to add more but I'm thrilled of that too, because the whole brand promise ULTA is I don't mean to sound commercial here, but all things beauty all one place, is a very meaningful idea to our guest to be able get categories in price points in brands, and we're really working at that is something that's differentiated and ownable to the long-term. And as a result all the categories have to be important to us and have to perform and they are. Maybe you just want to add.

[David Kimbell:]

Yes. Yes, absolutely. On the market spend we just started TV advertising in September, so it's probably a little early for us to fully judge the impact of the return on it. But we are really encouraged. We've seen as both Mary and Scott talked about increase in traffic. We've seen a healthy increase and a key metric for us which is membership signups and that was up 20% for the quarter as well. And so we continue to watch it. But so far we're feeling very good about it. And as I think we've talked before, currently, we have another cycle of television currently on air, supporting our holiday efforts. So, its s tactic that will continue to drive, but it’s also part of a much broader marketing mix. We think about TV, video, but heavy digital, really digital in many ways being the center of our marketing efforts in really connecting and driving awareness in and engagement with our guest, so we're really dialed that up as well, more PR, social media those kind of things. So that will be a big part of our ongoing marketing campaigns. And briefly on the mass side, as Mary said, we're continue to drive growth, really that growth has come at the same we've been growing the prestige side as equally as well. So the growth is happening in all part of our box and we want that to continue.

[Matthew Fassler:]

Thank you.

[Operator:]

Our next question comes from Daniel Hofkin with William Blair. Please state your question.

[Daniel Hofkin:]

Good afternoon. It's obviously a terrific results. Before I ask my question, Scott, I have seen that you have been named top margin company CFO by FEI, Financial Executives International recently, so, my congrats on that?

[Mary Dillon:]

So that's nice to raise that. Thank you for that.

[Scott Settersten:]

I appreciate that. Thank you.

[Mary Dillon:]

You get two questions.

[Daniel Hofkin:]

Yes. It will be one question two-part. It's really actually just a little clarification what finance already and then one thing about small sale performance. You talked about impact events, obviously early to access, but aren't there are a couple of things either in terms of your online business or particular categories that you think may have seen an outsized benefit from the ad so far. And then, as it's relates to margin you indicated the mix was a factor on top of the supply chain stuff. But if you were to look at it on the same mix pieces kind of within categories, could you just -- merchandise margins would they have been up, flat or down kind of within kind of on the same mix basis. And then my last question is the quick update on smaller store performance? Thanks.

[David Kimbell:]

Yes. Just briefly on the advertising, really we're seeing healthy performance across all aspects. Scott, Mary talked about e-commerce Salon and of course our core retail business. Categories are strong. So, we really see that supporting our total store not any individual part of it and so far that is definitely working for us.

[Scott Settersten:]

Yes. And as far as the margin question is concern, again distribution center drag was the biggest driver that de-leverage year-over-year. And as we mentioned in the prepared remarks, I mean, the mass, the spike up in the mass comp kind of surprised us a bit. So net-net year-over-year merch margins were better, I mean, by in large on the reduced promotion cadence that we had this year versus last year, but the mass comp surprised us a little bit versus our forecasting in case I would say. So again, a great thing overall for the business and we're willing to take that part of the businesses to the bottom line as well, even if it has a little bit lower margin.

[Mary Dillon:]

And on small store, we're really pleased with the performance of the two stores that we're operating. And really what we're doing is learning about two kinds of things at once drive, which is one is about operating ultimate footprints and then continuing to learn about a smaller market opportunity, both of those were promising to us. I guess this is way I would say. So we already have several successful 10,000 square foot stores in small market. So small markets not that new to us, but we see that as continue to be a future opportunity. And I guess you can just continue to see us experiment with different footprint sizes that will give us more growth opportunity. So, whether it’s a smaller store in urban or suburban streetscape, we're looking at all those things. But those two stores ended up themselves are performing fine and given us some good insights.

[Daniel Hofkin:]

Very helpful. Best of luck in the fourth quarter.

[Mary Dillon:]

Thank you.

[Operator:]

Our next question comes from Aram Rubinson with Wolfe Research. Please state your question.

[Aram Rubinson:]

Hello, congratulations on another great set of results. Question I guess I'll leave to one, just to focus on the distribution center, I suppose in Greenwood. When you guys think about – before you opened it you probably were worried about certain factors weather it’s a cost to build it, operate it, timeliness, et cetera. Just give us a sense as to what's you've learned so far and whether or not you'll be folding in those kinds of learnings to other DC nodes and how its maybe changed your future thoughts of what that network is going to look like?

[Mary Dillon:]

Thank you, Aram. I guess I can answer that at a pretty high level. First, I would just say, is actually we are really proud of our entire supply chain and DC team members right now, because they work really hard doing a things at once, right. So, the new distribution center were pleased with how that's going so far. All the DCs are busy with holiday and e-commerce fulfillment and they're really improving that year-over-year, so really great. And I guess the main thing I would say is that, we're absolutely planning to take all earnings that's in process right now that we're taking from – getting Greenwood up and running to apply to the next distribution center. And we got in fact the team from the future distribution center working in Greenwood over holiday right now to both helps as well as to help gain insights in terms of how we can apply all those learnings, every things from across the board. So at a high level I would say we're pleased with how it’s going, still improvement to be made for sure, but we're very focused on making sure that we do – make it even easier I guess the next time.

[Scott Settersten:]

Yes. I guess I would just add again, we have a five-year road map, right for supply chain and merch systems kind of rebuild. And that we've got a couple of existing centers out there, right, so we're keeping in a back for our mind how the guest experience. How it's going to evolve over the long time. And we're going toggle best back and forth to make the best decisions over the long-term.

[Aram Rubinson:]

Thanks, great. Well, congrats again and have a great holiday.

[Mary Dillon:]

Thank you, you too.

[Operator:]

Our next question comes from Simeon Siegel with Nomura Securities. Please state your question.

[Simeon Siegel:]

Thanks. Good afternoon guys and congrats on the quarter. So, I don't know if this is redundant I guess Mary to your point you were just making. Can you talk about how those learnings that Greenwood will help Dallas. I mean, I presume that goes quickly and maybe less expensive, so any color on the right way to think about related expenses there Scott? And then just given the other initiatives can you give help with total SG&A dollar growth for the fourth quarter of next year? Thanks.

[Scott Settersten:]

Yes. I guess as far as Greenwood is concern, again just to echo what Mary has already said here a couple – we are tickled pink without how the team has executed down there, got the building open, we're off the ground, we’re serving stores, we hitting e-commerce, throughput targets there on a daily basis now, which just gives us a lot more confidence and what we're going to be undertaking Dallas next year. Again, the learnings that we're generating everyday there, the ability to apply that quicker, so I mean, to your point we're working to our 2016 plan as we speak and thinking about how quickly we can ramp up Greenwood now right to add more capacity there to make to gain more efficiencies and cost savings and then how could we get out of the gate quicker in Dallas next year. So all that’s kind of a working process and we'll be able to share more details with you on that in March when we give guidance for next year.

[Simeon Siegel:]

Thanks. And then, Scott, do you just know what percent your SG&A is variable versus fixed offhand?

[Scott Settersten:]

No. We don't get into that level of details, I mean, I'm sorry. When I look at kind of the aggregate for the fourth quarter, I think by in large everyone in the right zip code, I guess when I look margin SG&A kind of split out, I think most people maybe are little conservative on the margin line. I think margins for the fourth quarter, the gross profit margin will be closer to flattish compared to last year and so you can work the math that would be offset on the SG&A line.

[Simeon Siegel:]

Great. Thanks. Best of luck for the rest of holiday, guys.

[Scott Settersten:]

Thank you.

[Mary Dillon:]

Thank you. Operator Our next question comes from Simeon Gutman with Morgan Stanley. Please state your question.

[Simeon Gutman:]

Thanks. And nice results and what luck with all these Simeons following each other.

[Mary Dillon:]

We got it.

[Simeon Gutman:]

Yes. So two parts with one in one question, can you just comment on the transaction growth, I think you said in the certain parts of the business whether it’s a same customer or you just tell us maybe the split between the growths coming from new customer versus the same. And second question on related, thinking about the services in your store and particular the Salon capacity utilization, I'm assuming it’s not a 100, I'm sure the industry is not 100 either in that business, but what's reason or what are the industry norm, where are you relative to it, any contacts around that?

[David Kimbell:]

Yes. I'll start with the transaction growth. We're really again pleased with what we're seeing. And it’s coming, I think really from a variety of place. Certainly as our member base grows, we're growing members and they are coming more frequently over time, so that's a very strong source of us and will continue to be a focus for us. Our ability to connect with our members through our loyalty program access to her in traditional vehicles like that we use like print, but also email and digital and social has increased our connection with us and that's definitely getting her in store more often. We've also – Mary mentioned that we've had an increase in success and ability in attracting or reengaging guests that that had fallen off of our active member list and we define active members that something that shop with us in last month. So going back in time in members that haven't been as active and we've been successful through our efforts to bring them back into the store. So that's helping with traffic as well. And then we're also really proud of the fact that we are adding new members at an increasing growth rate. So coming across the board and we think that will be – that's our really strong part of the success that we had.

[Mary Dillon:]

And on the services question, I can tell you exact answer to the capacity question. I can tell you that. We see this is a great opportunity for business going forward. That's why it’s one of the strategic comparatives and we're actively and I think aggressively growing the business. We know that when somebody is using for example our salon, any of our services, they're going to be coming more often, spending more their great guest and today only 107% [ph] of our loyalty members are using the salon for sample. So, we know there's plenty of upside there across our three of the services that we provide and we'll continue to be looking how hard is up with that.

[Simeon Gutman:]

Thanks.

[Operator:]

Our next question comes from Rupesh Parikh with Oppenheimer. Please state your question.

[Erica Eiler:]

Good afternoon. This is Erica Eiler on for Rupesh. Congrats on a really nice quarter. So, I wanted to switch gear to the holiday selling season. It sounds like you have some exciting exclusive kits going on. I guess, I'm just curious, how do you store your position this holiday season versus prior years. And then maybe you can talk a little bit about Black Friday, how that perform versus your expectations, whether any significant differences versus last year. And then maybe just color on what you saw online versus in-store, that would be helpful? Thanks.

[Mary Dillon:]

So, let me take Black Friday part to the extent that I comment that and Dave maybe you can take the part how we setup for holiday, okay. So, obviously I can't comment specific trends in the quarter, the guidance that we've been provide incorporate and we've seen to-date, usually I will say though that I'm really pleased with the execution that we've seen in stock levels, staffing in stores, the offers themselves probably one of the most significant things is our e-commerce service levels, your strong improvement which really focus on that year-over-year to improvement, fulfillment, capabilities and delivery speed and just for a moment, I actually do just want call out, but this is an really good example of where I think it’s kind of I guess every CEO would says this, but I think pretty unique at ULTA which is people are working together in truly collective way against a broader kind of purpose. So, even just improving e-commerce fulfillment takes a big cross functional up. There were very focus on how our teams can continue to improve and collaborate and communicate and get better every day. So that all sets up well for the future.

[David Kimbell:]

Again, as far as overall kind of holiday execution we're obviously right in the middle of it and are really feeling great about our preparation and the way we try to bring our brand to market so far this holiday and feel lot of confidence throughout the rest of this holiday. We have a totally new approach towards our marketing efforts. I mentioned earlier that includes mass media really for the first, our stores, we think look better than ever for really integrated. We think very strong holiday look that then has been infused in all of our marketing tactic online and social, digital, magazines every touch point has a really consistent coherent look that we've really excited about. Our products we think are stronger than ever across all categories, certainly prestige, cosmetics had some very strong item, holiday items, Mary mentioned a few of those from key brands like benefit and Earn it [ph] and Tarte. Just this week we launch our Gwen Stefani Palette with Urban Decay, so there's a lot of newness coming out. Mix and the mass side, have some great new holiday offers that we think really exciting and the ULTA brand itself as always has very strong holiday and we think those are better than ever. And hair care is strong for us as well. And finally our fragrance business is – this is the biggest time of the year for fragrance and we have a lot of newness plus variety of brand offer such as robe, some of the biggest things we do throughout the year in that category. So, across the board we're feeling really good about our execution and we'll be watching our results carefully.

[Erica Eiler:]

Great. Thanks for all the color.

[Operator:]

Our next question comes from Mark Altschwager with Robert Baird. Please state your question.

[Mark Altschwager:]

Good afternoon everybody and congrats on a very solid quarter. I know, you don't want to talk about 2016 guidance, but maybe bigger picture in the context of the multi-year plan, that plan calls for annual comps in the 5% to 7% range, obviously you've well exceeded that this year so far in comparisons get tougher but now that you're year end and you've seen the results of some of these marketing and merchandise initiatives, does that maybe change your thinking at all regarding what the base level comp is that this business is capable over the planning horizon?

[Scott Settersten:]

Well, I guess, I'll take a shot at that. We're still – we got to close out 2015, right. We’re still a long way for being complete I guess I would say, get through to the holiday season here. We're feeling great about the business. The underlying trends are very strong. We feel like we have a lot of levers. We're in control of those, right, lot of new merchandise, newness coming through the business, the loyalty programs doing better than what we expected. We've got some of these brand awareness things out they are really kicking in, but we still have to see the result to some of that, right, we're still in a very early stages. So, the long term guidance we gave last year was 5% to 7% higher in the earlier years, little bit more moderate in the out years. We're going to kind of stay consistent with our practice. We're going to give guidance on 2016 next March, early next March and we'll be able to share more details with you and how we see 2016 roll it out and maybe a little bit about the longer term at that point.

[Mark Altschwager:]

Thank you and best of luck over holiday.

[Scott Settersten:]

Thank you.

[Operator:]

Our next question comes from Brian Tunick of Royal Bank of Canada. Please state your question.

[Unidentified Analyst:]

Thanks for taking the question. This is [Indiscernible] for Brian. First I guess, we want to ask you if there were particular differences in prestige and mass trends in Q3. And now from higher I guess newness on pricing perspective, do you see any differences in industry trends between these two. I guess, my very quick second question is on uses of cash. It looks like the case balance is still being nicely, so could you maybe remind us how you're thinking about use of cash?

[David Kimbell:]

I didn't -- first part, the difference between prestige and mass…

[Scott Settersten:]

Trends in the industry are we seeing any differences in trends on what's going on pricing, I guess trends in industry.

[David Kimbell:]

I mean certainly, yes, in the broader industry we watch and as it has been for a little while prestige has been growing and the industry in total as we look at probably the same reports that you do, that's been growing faster than mass. But we're again – what we're really focused on is driving that total, all things beauty all in one place. You know as Mary has mentioned, what's really working well for us right now is driving greater awareness, getting her into our store more frequently, but they getting her to experience the whole store and that’s all categories and once she gets in, she might come in for a mass, she might come in for prestige or hair or fragrance, but then we work hard through our CRM capabilities to get her introduced, engaged in all categories. So, again, we're seeing growth across the entire stores and that something that we'll continue to drive and that's what really what we're focused on despite what happened in outside of the store.

[Scott Settersten:]

And as far as capital allocation is concerned, I guess I would say we're very excited to be able to invest the way we are in our business and still be able to return significant cash to shareholders most recently through repurchases, but you know over the course of the last three years we’ve returned roughly $260 million to shareholders through special dividend and share repurchases, so again I think that demonstrates management and the board’s focus on making sure we do what's right for shareholders over the long term and again we'll right size that or change tactics, specs of circumstance of change.

[Unidentified Analyst:]

Thanks very much.

[Operator:]

Our next question comes from Ike Boruchow with Wells Fargo. Please state your question.

[Ike Boruchow:]

Hi, everyone. Thanks for taking my question and congrats as well. I guess Mary when you look at the prestige portion of your business, it seems like the fragrance side of the industry has been a little weaker over the last 12 months. I guess, I would think that fragrance will be a larger piece of your business during the holiday given its more of a giftable item. So I guess, how has that been trending for you and how do you think about the prestige fragrance part of your business for holiday within your plan?

[Mary Dillon:]

Yes. I mean, it is definitely a bigger part of the business of holiday and we do a lot with our gift we purchase and our guests love that. Our fragrance trends were strong in the last quarter. As you know it’s a bit of up and down category I guess I say in terms of it’s a little bit more trend driven. We think that prestige side is obviously a really strong part of the category that's tend to be a little more consistent I guess, that what I would say. But important category for us is again is part of the overall brand promise we just try to pick our spots and make sure that we got the right portfolio for our guest and for our business.

[Ike Boruchow:]

Got it. Thank you.

[Mary Dillon:]

Thank you.

[Operator:]

Our next question comes from Oliver Chen with Cowen & Co. Please state your question.

[Oliver Chen:]

Thank you. Congratulations to the team. We just had a question regarding out of stocks, it sounds like there's a lot of nice opportunity ahead. Which parts of the store would you say have the best low hanging fruit in terms of improving the other stock levels? And then just taking a step back, your traffic has been so impressive, is there any way for you to prioritize the various aspects that have really been helping you buck with the trend and gain share?

[Scott Settersten:]

Let me take out of stock question here first of all. Again, all of the supply chain things we're doing in the merchandize systems that were making significantly investments in today are going to help us with in stock position over the long term, both making sure we have the right product, right store on the right shelf across the chain and just make us more efficient throughout the network from the vendor dock all the way to the shelf in the store. So, there's many different elements I guess I would say levers along the way, part of that is the swift tool that Mary described earlier today, the distribution centers play a big part on that, but there's also space planning tools and other master data things that we're doing, so it’s like a continuing, it’s a large, broad section of things that we're putting in place to help within stocks overall. You know, there's no, I wouldn't say there's any one specific category or brand or anything like that we're focused on, it’s just the store overall. So, the easiest thing I would point to AMB item, right, so the fastest, most high velocity skews where today we can't really work up accurate forecast to share with our vendors that would be one thing that we're going to move in the future that's going to help us to stay better in stock. So there is no, I wouldn't point any one item, there's a number of items that we're going to implement to help us with that and its going to help across the network.

[Mary Dillon:]

Now on the traffic question, first of all, we'd say, we're proud that our traffic trends are transcending, what's really happening every tail end are successively driving a lot of healthy traffic to the stores. It’s really not – there's not exact science to this though I will tell you and that's probably a little of what you want to hear, but the good news is it does really, it looks like a lot of things coming together, so more relevant product portfolio, royalty program, this broader marketing mix that includes things that you can help – are helping the drive awareness in new guest acquisition, CRM, online and in-store experience, so it’s kind of like all them together is really what we think it’s magic that working for us. And we think that we're confident we'll be able to continue to – some of those levers we think many of them have multiyear runway.

[Oliver Chen:]

Great. Thank you. Happy holidays.

[Mary Dillon:]

Thank you.

[Operator:]

Our next question comes from Joe Altobello with Raymond James. Please state your question.

[Joe Altobello:]

Hey, guys, good afternoon and thanks for squeezing me in here. Two quick ones, I guess first on the traffic obviously it sticks out as you guys alluded to relative to other retailers, this season. And the national TV advertising, I think you said started September 7, did you guys see a pickup in traffic post that advertising launch , or was it really pretty stable and steady throughout the quarter, number one. And number two, quick one for you Scott, the tax rate you said 37% for the fourth quarter, is that a great rate to use next year, because there was between 37% and 38%, it’s about $0.10 what matters? Thanks.

[David Kimbell:]

Yes. On the specifics around the TV and the traffic, again, one thing I'd start with is, really TV is a big kind of visible one, but it’s very much as a holistic integrated marketing campaign across multiple vehicles, but I will say the TV was time to launch with our 21 days of beauty event in September and we did see very strong traffic at a very nice healthy increase in traffic during that event, but it wasn't just that event as evidence by the traffic throughout the quarter we feel like – we feel really positive about how that traffic sustains throughout the quarter. So yes, strong when we came on, but continued strength.

[Scott Settersten:]

And as far as the tax rate is concerned, I guess, I split the way we sort of speak. I’ve used 37.50 for next year, it’s kind of a best estimate at this stage.

[Joe Altobello:]

Okay. Thank you.

[Operator:]

We have time for one question. Our final question comes from Jason Gere with KeyBanc Capital Markets. Please state your question.

[Jason Gere:]

Okay. Thanks and [Indiscernible]. I guess a question more on shipping and I was just wondering from the e-commerce, and I understand in the end it just up and running right now, but can you talk about how competitive your shipping is versus maybe some of the other competition out there. And on that note, do you have in all your stores the option for in-store pickup, so I was just wondering if people don't want to wait three days or if it’s one to two days have you seen in store pickup that might actually contribute to the comp that you saw here that once people come into pick up, then they start browsing and doing a little bit more shopping, so really the question kind of around shipping and how that kind of plays out?

[David Kimbell:]

Yes. First of all, no, we do not currently offer in store pick up by online pickup in store. We are in the midst of long term omni channel roadmap and that’s something that we'll consider, but that's not currently something that's offered today. As it relates to our shipping in total, yes, Greenwood is important part of it. Improvements we've made in our existing DCs have led to what we think is a very competitive shipping window timeframe where we did as we’ve talked before, we weren’t as pleased with some of the customer service that we had last holiday and so we've worked very hard including opening in to DC but working with our supply chain partners, IT partners to make sure that our service level. So we feel it’s very competitive and we know it’s ever evolving landscape and we'll continue to make improvements but we're happy with how we're going to be servicing our guests this holiday season.

[Jason Gere:]

Okay. Great. Thank you.

[Operator:]

I would now like to turn the call back over to Mary Dillon for closing remarks.

[Mary Dillon:]

Thank you. I'd like to first thank our associates for achieving these great results. And we continue to make great progress in our strategic imperatives and taking care of our guests, especially during this very busy holiday season. And I want to thank all of you for interest in ULTA Beauty. We look forward speaking again with you soon. Thank you.

[Operator:]

This concludes today's conference. Thank you for your participation. You may disconnect your lines at this time.