Ulta Beauty, Inc.
Q4 2015 Earnings Call Transcript

Published: 11 Mar 2016

[Operator:]

Greetings and welcome to the Ulta Beauty Fourth 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. As a reminder, this conference is being recorded. I would now like to turn the conference over to your host, Ms. Laurel Lefebvre. Thank you, Laurel. You may begin.

[Laurel Lefebvre:]

Thank you. Good afternoon and thank you for joining us for Ulta Beauty's fourth 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 fact 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 respectfully request that you please ask just one question to allow us to have time to respond to as many of you as possible during the hour scheduled for this call. I will now turn it over to Mary.

[Mary N. Dillon:]

Thanks, Laurel, good afternoon and we have a lot to share with everyone today. Our fourth quarter results capped an exceptional year. We made significant progress against our strategic imperatives, while achieving outstanding sales and earnings growth. We continue to benefit from the powerful combination of strong demand in the beauty category and Ulta Beauty's highly differentiated products and service offering. This unique positioning is driving business results that transcend prevailing trends across the retail landscape. To review the fourth quarter highlights, we grew the top line 21.1% and delivered 12.5% comps on top of 11.1% comps in the fourth quarter of 2014, which was our toughest comp of the year. Comp sales were driven primarily by traffic, yet ticket increased nicely as well. The fourth quarter delivered the best two-year comp since 2011 with a 23.6% two-year stack. Product newness, our loyalty program, great in-store execution, and investments in marketing and store payroll hours are fueling this industry leading growth across both retail and online, with the fastest category growth in cosmetics on both mass and prestige sides of the portfolio. E-commerce top line growth and profitability were better than plan, driven by improved fulfillment capabilities and execution during the holiday season. And our salon business maintained its solid top line performance. For the full year of 2015, we achieved 11.8% comp, our best annual comp since 2010, with double-digit comps in each of the three businesses

[Scott M. Settersten:]

Thanks, Mary. Good afternoon, everyone. I'll start with the income statement. Topline growth was driven by a 12.5% comp and a very strong new store productivity. The marketing mix analysis that Mary mentioned, show that we were able to achieve this comp through a healthier mix of business drivers including new brand launches and new products, more effective marketing, including TV, radio and digital, more efficient in-store labor and continued benefits from new store maturation. Increased sales of gift cards helped drive topline strength post-holiday. During the fourth quarter, our comp continued to be a bit more weighted to transaction growth, with traffic about 70% of the comps and average ticket representing about 30%. For retail-only the 10.4% comp was composed of about 75% transaction growth and 25% ticket growth. Units per transaction were flat, but average basket rose 3% to just over $43. E-commerce growth was driven roughly 75% by traffic and 25% by ticket. Now, let's talk about the key drivers of the 120 basis points of gross profit improvement, which was quite a bit better than our initial plan. The increase was partly driven by higher merchandise margins due to mix as we delivered strong sales in many of our better margin categories and brands, including the Ulta Beauty Collection. We also successfully continued our shift away from broad coupons and discounts and towards more targeted and relevant offers to our guests, supported by our loyalty program and CRM. In fact, we completely eliminated one of our usual discount offers at the end of the quarter, which helped our margin rate. We leveraged store rent and occupancy expenses modestly on a double-digit comp. And while our supply chain investments were still a drag on margins, they were less so than in the third quarter, when we first opened the Greenwood, Indiana DC. E-commerce fulfillment costs were also much more favorable this year. You probably recall that during the holiday season of 2014, we were challenged with fulfilling orders during the spike in demand between Black Friday and Cyber Monday, and the higher than expected e-commerce fulfillment costs for holiday 2014 weighed on gross profit a year ago, creating an easier margin comparison in the fourth quarter. The team did a much better job getting orders to customers in a timely fashion during the 2015 holiday season. In addition to the successful launch of the Greenwood DC, which provided additional capacity, we also increased the efficiency of our other distribution centers with process improvements throughout the year. The e-commerce marketing team did a nice job smoothing out consumer demand during the holiday season with promotional events planned before and after the Black Friday period, culminating in a much improved guest experience and significant profit improvement. The product mix for e-commerce continues to help as well, as we ramp up sales of high margin hair care products which were added to the site last February. Moving on to SG&A expense. Deleverage of 100 basis points was driven primarily by planned investments and marketing and store payroll hours to support holiday season sales. While marketing expense was flat for the year, it was back half-weighted with the introduction of new vehicles to drive brand awareness, including the national TV and radio campaigns. We also invested in store labor hours and training to improve the guest experience, especially during the key selling weeks during the holiday. Corporate overhead also deleveraged slightly due to higher incentive compensation in concert with our better than expected earnings performance. In terms of the balance sheet, inventories were up 16.1% on a per store basis, driven by investments in inventory to keep up with much better than expected topline growth, several new brand additions, and the continued expansion of Clinique and Lancôme boutiques. The team did a great job selling through holiday inventory and making sure we start the new year with very clean inventory across all categories. While we generally strive to keep inventory per door growth in line with comp growth, we had compelling business reasons to modestly exceed that benchmark, and are very happy with the quality of our inventory, and the resulting sales growth. With the large number of prestige brand boutiques and new brands being added in 2016, we expect inventory per door growth to remain somewhat elevated for the rest of the year, although at a slightly lower level than Q4. Capital expenditures were $67 million for the quarter driven by 14 new store openings, investments in systems, store fixtures and supply chain. CapEx for the full-year was $299 million. We ended the year with $476 million of cash and short-term investments. The company repurchased approximately 262,000 shares at a cost of $46 million during the fourth quarter under our 10b5-1 plan. For the full-year, we've repurchased just over 1 million shares for $167 million. This reduction in our shares outstanding delivered about $0.03 of earnings per share growth for fiscal 2015. Today, we announced our 2016 guidance. In light of our accelerated share repurchase plan and continued momentum in our comparable sales growth, our anticipated earnings per share growth rate is higher than what we expected when we discussed our five-year plan back in the fall of 2014. We plan to add 100 net new stores with all stores in the program in our traditional prototypical store size. We expect to open 11 stores in Q1, 21 stores in Q2, 44 stores in Q3, and 24 stores in Q4. We plan to complete 12 major store remodels and two relocations. We expect to grow e-commerce above 40%. Total company comps are expected to be in the 8% to 10% range. We anticipate earnings per share growth of approximately 18% to 20%. Operating margins are expected to be flattish, similar to what we achieved in 2015. Gross profit margin will be pressured by our new Dallas DC coming online this summer, continued investments in core merchandising systems, and depreciation and write-offs related to our accelerate boutique rollout and store refresh program. CapEx has been planned higher than our previous view, which was in the $300 million range. We now anticipate CapEx of about $390 million. This includes slightly higher CapEx per new store with the latest enhancements that Mary mentioned as well as a significant step up in boutiques in our new store program. We have also added about $80 million to the capital plan to refresh hundreds of our existing stores, which will include a major expansion of Clinique, Lancôme and Benefit boutiques, as well as a significant presentation upgrade for fragrance and the Ulta Beauty Collection. We believe these prestige boutiques drive increased productivity in our stores and improve our positioning as a beauty destination. We are delighted that our brand partners want to grow even faster with us. In terms of share buybacks, our Board of Directors has authorized a new share repurchase program for $425 million, which replaces the previous program. As you saw in the press release, we announced an ASR for $200 million and expect to continue our open market repurchases, similar to what we did in 2015. Turning now to guidance for the first quarter. We anticipate sales to be in the range of $1.016 billion to $1.033 billion compared to $868 million last year. We expect comparable sales to increase in the range of 9% to 11% versus 11.4% last year. Online sales growth is expected to be in the 40% range. Pre-opening expense for the quarter is expected to be about $2.5 million, earnings per share are expected to be in the range of $1.25 to $1.30 versus $1.04 for Q1 of last year. We anticipate a tax rate of 37.8% and fully diluted share count of approximately 64 million. I'll now turn the call over to our conference call host for the Q&A session. Operator?

[Operator:]

Thank you. Our first question comes from the line of David Schick with Stifel. Please state your question.

[David Schick:]

Hi. It's David Schick and thanks for taking my question. Congratulations on the quarter. Just a quick question or a basic question on salon, and then a quick question on gross margin. On salon, you're lapping those incremental salon booking capabilities already, and then – but the business is continuing to grow quite nicely. Can you talk about how you're able to grow that rapidly despite that lap? And then, separately, any color on how much private label is benefiting gross margin, would be helpful. Thank you.

[Mary N. Dillon:]

Sure. I'll start on the salon question, Dave, thank you. The salon business right now is – we're pleased with the growth. It's interesting only – it's really under 7% of our loyalty members are currently using the salon services. So, there is no reason for us to think that we can't just continue to grow that nicely by getting – driving more awareness of salon and more trial. So the online booking tool is certainly one step in that direction, which is great. But we anticipate that as we think about how we can continue to drive awareness and trial and rebooking in our salons, that we'll be able to continue to grow that for years to come. As I mentioned in the script, we've got plenty of excellent offerings for our guests whether it's new trends right off the runway on cut and color, even things that people can try just for the first time like a blowout or a make-up service. So there's plenty of growth that we believe we can drive ahead there. In terms of the private label margins...

[Scott M. Settersten:]

Yeah. Let me jump in there, Dave.

[Mary N. Dillon:]

Yes. Go ahead.

[Scott M. Settersten:]

So we don't breakout specific categories or rate contributions by line, but obviously private label is a very high margin category for us. It's something that's key to the mix overall for Ulta and something that we use, right? We use – strategically to help drive the business overall both on the top and bottom lines.

[David Schick:]

Thank you.

[Operator:]

Our next question comes from Kelly Halsor with Buckingham Research. Please state your question.

[Kelly L. Halsor:]

Hi, guys. Congrats on a great quarter. Thanks for taking my questions. I guess given the momentum that you are seeing in the business here, how do we – how should we think about some of the metrics that are implied in your longer-term targets? Is this – given the potential, given the strength of the categories across the board, any thoughts on the potential upside to margins, et cetera from here? Thanks.

[Mary N. Dillon:]

Thank you, Kelly. Yeah. First of all, we're thrilled with the results and the momentum in the business today for sure and excited about that as we move forward. I would say this, we're very confident and we remain confident in the mid-teen operating margin target that we put out for our long-term guidance. And that's going to be a combination of growing topline, driving efficiencies, also investing for the long-term health of the business. Having said that, there is also plenty of questions ahead as it relates to guest expectations in a changing retail environment. So we want to retain some flexibility to continue to think about innovation in that area. So we'll continually be refreshing our five-year view. At this point, we don't have any reason to think we'll change our five-year financial guidance though.

[Kelly L. Halsor:]

Okay, great. Thanks. And just if I could squeeze in one more here. Could you just give any color...

[Mary N. Dillon:]

Nice job, Kelly, squeezing in a second question.

[Kelly L. Halsor:]

It'll be quick. Just in terms of the categories, I mean was the growth still largely driven by the strength of cosmetics? Are we seeing any strength in the categories...

[Mary N. Dillon:]

Yeah, let me turn this one to Dave.

[David C. Kimbell:]

Yeah. Kelly, Mary mentioned in the script that cosmetics has certainly been very strong for us both in the prestige and the mass side, but we're really excited that we're seeing growth across really the whole store. The thing that makes us different is the unique combination of assortment, All Things Beauty, All in One Place, and we're seeing growth in hair for sure, it's a huge foundational element for us. So all aspects of hair, fragrance, skincare, accessories, so we're getting growth in all categories, but it is being led by cosmetics.

[Kelly L. Halsor:]

Okay, great. Thanks, guys.

[Operator:]

Our next question comes from Omar Saad with Evercore ISI. Please state your question.

[Omar Saad:]

Thanks for talking my question. Great quarter, great holiday quarter. I was really intrigued by the 10% to 12% comp guidance for 2016. I can't remember you guys giving comp guidance so high. And I'd love to hear maybe what are some of the factors that give you confidence this early in the year, and obviously the current trends are very strong but what's causing kind of the sea change in your confidence to be able to deliver that level of comp, especially in a retail environment where there is so little traffic out there? Is it the loyalty? Is it the new marketing campaigns? Is it something you're seeing in the store aging, the way older and new stores are behaving? I would love any more details there. Thanks

[Mary N. Dillon:]

Well, Omar, first I'll say you're on the right track and that it's a lot of things. But let me tell you this, we're very excited about our comps, but we guided 8% to 10% for the year, just to be clear, okay? So that's what we just communicated. But stepping back – we're pleased with that, I would say that, as we're coming into this year, I guess, what I would say is that, at the highest level, this is a business model that's working and we're executing it really well. And so we feel confident about the momentum and that continuing. It's a combination of a lot of factors coming together. So if you'll indulge me, let me just spend a minute on this, which is, first of all, it's great that we're in a great category that is a growing category, right? And so that's important to start with. And there is expandable consumption of beauty products. So these are everyday use, sometimes multiple times a day driven by innovation, there's plenty of innovation. So we're in a growing business, we at Ulta Beauty have a really, I think, very clear bead on who our target guest is and how to position ourselves against this guest. So this beauty enthusiast is a large and growing segment. Dave just mentioned it, we are positioned as All Things Beauty, All in One Place, which is differentiated and relevant to that segment. We have exceptional brand partnerships, so it's about knowing who we're trying to target, but also offering her what she wants, so exciting products, new and exclusive. Really working with our brand partners to continue to have the great assortment of cross-category price point services, I'd also add that smarter use of demand creation tools. So our loyalty program is really the heart, I talked about that. We've got long-term awareness in equity building tools moving in the right direction, the role of e-com and digital improved especially on the guest service side of that as well. So the demand creation tools are working well. And then I'd say just exceptional collaboration in our – with our teams and executing against complex things. So it's about making sure that the in-store experience is exceptional and that takes a lot, whether it's payroll hours or investing it in stock; the distribution side of it, the focus that our Greenwood Distribution Center, the IT systems to support it. And real estate is a core competency for us and we're quite good at selecting store locations, building them out, remodeling, and store productivity is even stronger than we expected it to be. So I would say that truly is a notion of kind of a great market opportunity coming together and being executed well. And last thing I'd say is that we also are less subject to some other factors that some of the retailers are, so whether it weather, maybe weak mall traffic, or fashion hits or misses, a few other things, we're less subject to that. So you pull that together it helps. I feel very confident that we can transcend what seems to be overall retail trend and deliver the kind of comps that we just guided with you.

[Omar Saad:]

Thanks for the color, Mary.

[Mary N. Dillon:]

Sure.

[Operator:]

Our next question comes from Steph Wissink with Piper Jaffray. Please state your question.

[Stephanie Schiller Wissink:]

Good afternoon, everyone. I'll add our congratulations as well. Mary just an observation, it seems like you've moved from a position of you desiring bigger and better brands to bigger and better brands desiring you. So I'm wondering if you can talk a little bit about the 26 brands you added in 2015. How important were those to the comp? And also what are the plans for 2016 in terms of new brand additions? I think you mentioned several hundred boutiques, (35

[Mary N. Dillon:]

Steph, thank you for the question. And I'd like to turn it over to Dave, because he and his team are really the experts at all of these things. Go ahead, Dave.

[David C. Kimbell:]

Yeah. That's great. First, I'll start with new brands. That has been something that we have been focused on for a long time. We've added well over 100 new brands over the last five years. And as you said, and as Mary mentioned, we have 26 new brands in 2015 alone and that included brands, we brought Dior in late in the year, Skyn Iceland, Soap & Glory, First Aid Beauty, Revolution Makeup (sic) [Makeup Revolution] (36

[Stephanie Schiller Wissink:]

That's terrific. Thank you.

[Operator:]

Our next question comes from Dana Telsey with Telsey Advisory Group. Please state your question. Our next question comes from Adrienne Yih with Wolfe Research. Please state your question.

[Adrienne Yih-Tennant:]

Good afternoon and let me add my congratulations. I was wondering if you can talk about the penetration in 2015 of the e-com business and your private label, and then your exclusives. It seems like there's a lot of growth opportunity in those three areas. So if you could give us a little more color on that that will be great. Thanks.

[David C. Kimbell:]

Yeah. Private label in total; when we look at total private label we include our Ulta Beauty Collection and then some exclusive co-brands like our IT Brushes With ULTA (sic) [IT Brushes For ULTA] (40

[Adrienne Yih-Tennant:]

The exclusives.

[David C. Kimbell:]

Exclusives. Well, so I rolled in some exclusively like co-branded like our It Cosmetics. We look at a lot of exclusivity and we don't really have a number that we look at with that, but within nearly every brand and certainly every major brand that we have, we have exclusive products or lines, Tarte Double Duty Beauty is one example that I've already talked about and we have quite a few of those throughout the entire store.

[Adrienne Yih-Tennant:]

Okay, great. Thank you very much. Best of luck.

[Operator:]

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

[Simeon A. Siegel:]

Thanks. Hey, guys. Congrats on a really strong finish to the year. So, I guess, Mary or Dave, as you look at your shoppers that are converting to multichannel, does that channel migration happen from store to web or vice versa? Are you seeing any change in where how the customers discover you? And then just quickly for Scott, how much did the Indiana DC weigh on gross margins this quarter and then what's the right way to think about the ongoing impacts from the DC is to margins? Thanks.

[Mary N. Dillon:]

I'll start with the cross-channel, maybe Dave add, if there is anything I miss here. But cross-channel shopping is actually a pretty small percent of our shopper base today, it's only about 6% of our guests or so. And we love them, because the cross-channel shopper is shopping more frequently and spending more than a single channel shopper by far. I would say that – you can think about digital as the center of pretty much everything now, right? So quite often maybe somebody is discovering and researching online before they come into the store, whether they discover us online or in-store, first, I'm not sure if I can break that up, but I'd say probably mostly in-store. Online tends to be very incremental to us as well. Our guests love the experience of coming to the store, the whole beauty enthusiasts' vibe is about trying things and increasingly experiencing services, and then online she find things that are kind of incremental to perhaps what she even had time to discover. We push out lots of emails, not lots, appropriate number of emails to our guests around new and exclusive and exciting products and that has stimulated some online shopping as well. So to your premise about, will that be a big area of growth for us in the future? Absolutely.

[David C. Kimbell:]

And as far as the new distribution center is concerned, again as Mary stated, we're very happy with the performance the team put in there, getting it off the ground successfully. And you recall that third quarter was really the first time we had it in service. So it was less of a drag on gross profit margin in the fourth quarter, because the building was operating very effectively. And as we look towards 2016, again we will have headwinds in the first half of the year because of Greenwood being online, wasn't there last year, it's still going to continue to scale up. And in the second half of the year we're going to start – we'll see more benefits there as we lap Greenwood, but then we'll be taking online the new Dallas DC. So you're going to have incremental headwinds there. So as we look ahead next year, it's going to be fairly challenging, I would say, from a supply chain contribution perspective, but we do expect to see merchandise margins continue to expand, so there'll be a bit of a help there overall at the gross profit line.

[Simeon A. Siegel:]

Great. Thanks a lot guys. Best of luck in the coming year.

[Operator:]

Our next question comes from Mike Baker with Deutsche Bank. Please state your question.

[Mike Baker:]

Hi. Thanks. I guess I'll follow-up from my one question, I'll follow-up on the Clinique and Lancôme rollout. So about 700 stores now. I mean, that's up pretty substantially. I think the last time I have numbers was 2013 where they were in about a 100 each. So it's clearly rolled out pretty quickly in 2014 and 2015 and likely a big comp driver, but with it in now what about – let's say, about 80% of your stores should – is the lift from that going to potentially slow over the next couple of years?

[David C. Kimbell:]

Let me clarify what I said earlier, kind of repeat that. The 700 stores number was specifically about Benefit. So, that's the Benefit boutiques at the end of last year. Of course, you know, with our Benefit, we have services. We do Benefit Brow Bar that's in those stores. What I've said about Clinique and Lancôme is, you remember, 100 stores that had grown by the end of last year to about 200 stores each. And...

[Mike Baker:]

Okay. I said – okay.

[Scott M. Settersten:]

And then – so that's where we are on those brands, roughly speaking. And then, the 500 boutique number is a combination of additions in new stores and existing stores of Benefit, Clinique and Lancôme. We won't kind of talk specifically about any one of them, but in total, across those three brands, in both new stores and existing stores, we'll be adding about 500 boutiques.

[Mike Baker:]

Understood. Right. Yeah. So, since I got that completely wrong, let me ask one another question. You didn't – my fault, I wrote down the wrong number. You didn't talk about the small stores at all. So can you just update us on how that's going? Thanks.

[Mary N. Dillon:]

Sure. I appreciate you humiliated many when you get something wrong. Anyways, on the small stores, I guess, I would just say stepping back, we have, as you know, two small stores that we opened up in small markets of Vernal, Utah and Morganton, North Carolina, both are performing fine. The most important thing is we're learning a lot about operating a smaller footprint and as we look into the future, a couple of things, I would say. One is that we know that smaller markets, like those markets, there is plenty of them out there and they offer another growth opportunity for us. Having said that, we could do 10,000 square foot stores, maybe even easier, because it's even better representation of the full brand experience. So, we're kind of getting similar experience in small markets. Those stores are doing well. You'll also see – the other thing is that, as we look out in the future, we've not yet sized or put any kind of target out there on other opportunities like, say, urban stores or maybe the downtown – main street parts of, say, suburbs across the country where there smaller parcels of real estate. So, as we continue to refresh our real estate view in – we're always doing that – if we decide to go after smaller stores, we'll have a lot better handle on what that looks like in terms of how we think about season (47

[Mike Baker:]

Understood. All right. Thanks for the color.

[Mary N. Dillon:]

Sure.

[Operator:]

Our next question comes from Dana Telsey with Telsey Advisory group. Please state your question.

[Dana L. Telsey:]

Thank you. Good afternoon and congratulations. Sorry about that before. Thoughts on the mall stores, how you're thinking about the mall and opening stores in malls? And then, also, with the success of services, how are the margins on services? And is there opportunity there? And just lastly, any thoughts on the timeframe of the accelerated share repurchase? Thank you.

[Mary N. Dillon:]

Three questions in one.

[Dana L. Telsey:]

I know.

[Mary N. Dillon:]

Okay. We have a mic and (48

[Dana L. Telsey:]

Service margins.

[Mary N. Dillon:]

Service margins. What was – I'm sorry. Go ahead.

[Dana L. Telsey:]

Is that – how do you think about margins on services and the opportunity?

[Scott M. Settersten:]

Yeah.

[Mary N. Dillon:]

Oh. Okay. Yeah, I mean, I would say we don't break out the margins specifically across the business, because of the labor involved, the margin on service is typically going to be lower than margin on retail products. That guest though who's coming to use services is going to be spending 2.5 times more than somebody who is not, so – and buying a lot of retail products, coming frequently. So, in total, it's very incremental in terms of profitability to our business model.

[Dana L. Telsey:]

Okay.

[Scott M. Settersten:]

And to close out on the ASR, we're very happy to be able to announce that today. Again that would typically will begin as soon as the open window for us occurs, which is early part of next week. In that sizing, we would expect to be able to execute that over a course of 30 days, 45 days, roughly.

[Dana L. Telsey:]

Okay. Thank you.

[Operator:]

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

[Rupesh Parikh:]

Thanks for taking my question and congrats on a really nice quarter. So, I just wanted to go back to your CapEx spend. We're seeing a lift this year in CapEx and you guys called out some of the reasons with the boutique expansions and additional fixtures, et cetera. I just want to I guess ask how do you think about the returns on investments related to these investments or fixtures, boutiques and even some of the refreshes?

[Scott M. Settersten:]

Well, we feel very confident that it's a good way to invest money. We've had experience – again, Mary mentioned, we crawl, walk, run. I mean that's way we operate here. So, whether it's the new fragrance fixture that we referred to, we already have that installed in a number of stores. We've monitored the results there, both from a sales and margin perspective, but also from a shrink perspective, right, it's always a 360 degree view. As far as the boutiques are concerned, again, we've had a long history there with a number of these brand partners and we've been able to measure incrementality and halo effect and all those other things, when these are installed in our stores. So, we're very confident that they're going to produce excellent returns for investors over the long-term.

[Rupesh Parikh:]

Okay. Thank you.

[Operator:]

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

[Simeon Ari Gutman:]

Thanks. Good afternoon. Congratulations. Just two, I'll make them very quick. The first, Mary, you said that the five-year guidance is all about saving tax (51

[Mary N. Dillon:]

What's not going right? Interesting question, Simeon. Here is the thing, we're really focused on the future, and where the world is going in the next, I mean, maybe I'll be so bold to say five years or 10 years. But thinking about what are the innovations and/or ways to think about the way that – way to think guest expectation is going to continue to evolve the change about seamless retailing and shopping. So, it's not a problem, it's a great opportunity for us, because if – and I talked about this in the script, but I've got a team of people and their teams that think in a very integrated guest-centric way and store associate-centric way. So, we're thinking a lot about how do we think about just continuing to be ahead of the curve as it relates to the competitive environment in the shopping expectations of the future. So – and there is no one answer to that, I guess. So, it's not like it's anything is broken, it's a matter of where do we point ourselves to the future. And I mean that honestly. I think that – I'm very, very pleased at how many things are going well. We're not complacent about that. We push ourselves very hard. We are really focused on always improving.

[Scott M. Settersten:]

As far as the CapEx and long-term guidance implications are concerned, Simeon, I mean, we're very happy with where we are today. I mean the business is performing very strong. We're probably – we're a little bit ahead of where we thought we would be at this point in time. The boutiques were in our five-year guidance, I mean they were inherently built in there, but we are pulling them forward. So, there is an acceleration here. We expect – again those investments, we've demonstrated that they pay great dividends for investors over the long term. So, the CapEx, specifically for next year, you can expect it to stay elevated. This boutique – the strategy we have in place with our brand partners is a multi-year rollout. So, we're going to touch as many of our comp stores. And again, that's what that $80 million is basically referring to is our existing store base. So, try to touch as many of those over the next couple years as we can.

[Simeon Ari Gutman:]

Okay. Thanks.

[Operator:]

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

[Matthew J. Fassler:]

Thanks so much, and good afternoon. My first question – I'm going to ask a couple of follow-ups on topics that have come up. You talked about small stores, you didn't explicitly address store capacity. I think 1,200 stores is the number that you've had out there in the past. You will be at 900 stores at some point in the second quarter, adding 100 stores per year and the productivity looks terrific. There's no signs of saturation whatsoever, based on all those numbers. Any updated thinking on capacity as we think about the size of your outlook here?

[Mary N. Dillon:]

Yeah. Thank you, Matt. No, I'd reiterate what we said, which is that and you just recapped it, 1,200 stores full size, kind of prototypical, we see a very clear line of sight to that. We've also said that, beyond that, the small market opportunity probably represents another couple hundred stores. We are in the process of refreshing our real estate view and we're going to start to take a more specific look at the opportunities beyond that, so urban or downtown, suburban type pieces of real estate. So, I guess, I'd just say stay tuned on that. We'll continue to refresh that view. But I feel very optimistic about our ability to continue to drive market share growth. So whether it's in terms of square footage or at a comp basis, we have – if you step way back, we have only 5% share of the spending of the beauty enthusiasts today in the U.S. and it's – beauty is highly fragmented, you can buy beauty products in thousands and thousands of places across the country, so we know that we've hit a sweet spot with the group that's actually, frankly, really, strong and growing in terms of the beauty enthusiast segment. So, we're differentiated. They like us. So we're never going to get complacent about building out too much, but we certainly don't want to underestimate the other possibility here. So, I feel good about the targets that we've communicated. If that changes, certainly, we'll refresh that, but we're continuing looking at – the other thing I'd say is that – reiterate, new store productivity very strong, cannibalization very low, too low to even be material and it's actually gotten less, which is great. And I'd like to mention that the real estate opportunities, very strong out there for us. And everything we just talked about as it relates to driving brand awareness of Ulta only helps. Every store that we open now, we've got people who kind of know more about the brand than they did a couple of years ago. So, I think all those factors are very positive for us.

[Matthew J. Fassler:]

Great. And if I could follow up briefly with Scott on gross margin, you're coming off a massive increase. And I just want to understand a couple of the moving pieces that drive your gross margin outlook, that D&A and write-off piece is that significant, because it just seems like that would ultimately be non-recurring? Also, Dallas versus Greenwood, just in terms of relative impact? And then finally, shouldn't mix, as it did this quarter, help you overcome a lot of those factors?

[Scott M. Settersten:]

Yeah. I guess that the one thing I would say right off the bat is we're batting 1.000 here, right? I mean we've had a pretty good run in the last few quarters and you can't always plan for everything to go perfectly every quarter. So, as we look out towards 2016, I mean the combination of the DCs, we feel very confident now. We executed very well in Greenwood. We expect to do as good or better with Dallas coming online next year. Again, I won't break out basis points of headwinds or tailwinds from each one of those, but directionally, we feel very confident that these are going to deliver the kind of benefits that we expected upfront and that we described back in our Investor Day presentations. I'd mentioned merchandise margins a little earlier here. Again, the core – the mix of the business is very strong in retail. All these new brands that are coming in were – we've got generally a very strong terms with our vendors, pulling back on some of the broad discounting things and doing things more directly focused with our customers that are only going to help drive merchandise margins higher in the future. So, net-net, we feel very confident that we're going to deliver, at least, flattish next year and we're hoping that we're going to be able to do better, similar to what we did in 2015.

[Matthew J. Fassler:]

Thanks a lot.

[Operator:]

Our next question comes from Oliver Chen with Cowen and Company. Please state your question.

[Courtney Willson:]

Hi. This is Courtney Willson in for Oliver tonight. Thanks for taking our question. We're just wondering, of those 100 new stores expected to open next year, are they weighted towards new or existing markets. And then also, we're just wondering what you're seeing going forward on the promotional front and if the promotional cadence differs at all in the mass versus prestige categories. Thanks.

[Scott M. Settersten:]

Yeah. Let me start off with the mix. So, next year, basically new versus existing is getting consistent with kind of where we've been in the last couple of years. It's about 70% existing, 30% new. The one place we are seeing a bit of a change is in the types of centers. So, new centers versus existing centers, so it's still – the last couple of years, it's been 80/20 existing, 70/30 existing. Next year, we see a kind of ticking down a little bit to 60% existing center, versus 40% new. So, that's a great sign. We have new developments coming out of the ground.

[David C. Kimbell:]

Sure. And on the promotional front, we've talked about some of the gradual changes that we've made and trying to rely less on broad couponing and discounting to more targeted, and leveraging our loyalty program as a source of value for our guests. And we're going to continue to do that. We're not going to make any wild swings in 2016, but we will continue down that path. As far as mass and prestige there, each of those categories are very different in how they promote. But – so we tend to have more promotions on the mass side, of course. Prestige is not – that's not tend to be a promoted category. Although, starting on Sunday, Courtney, is our 21 Days of Beauty event, beauty's biggest event. So, it is one of the two times a year, where you can get pretty consistent prestige promotion. So that will be something we'll continue, focused events like that.

[Courtney Willson:]

Thank you. Congratulations.

[Operator:]

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

[Daniel H. Hofkin:]

Hi. Can you hear me okay?

[Mary N. Dillon:]

Yes, Dan.

[Daniel H. Hofkin:]

All right. I'll add my congrats once again. Just a couple – one clarification question back to the gross margin in the quarter versus the year-over-year trend in earlier quarters. Just, it sounds like mix was generally kind of similarly strong. But just given the gross margin, along with comp, was so much better than expected, was there – what would you call out as – was it less promotion? Was it – was the mix better year-over-year than it was in earlier quarters? What were the, I guess, things there? Was it the DC having ramped up? And then, I have just one question about not 2016 but 2017.

[Scott M. Settersten:]

Yeah. I guess, the answer to the first part of your question, yes. I mean, it was – again, it wasn't any one thing, Dan, it was a total team effort in the fourth quarter. Stores, e-commerce team, DCs, merchants, planning, everybody in the corporate support area just really executed at a very, very high level. The merchants picked the winners, the store teams did a great job selling gift cards, e-commerce mix was better than ever, things that we have been telling investors, we're going to improve on, the mix overall was good. Just the improved focus on giving the customer what she wants, right, so, pulling back and being more focused on some of the discounting tactics that we used. And overall – and the DCs just – and the work that our teams put in this year, it's not only to get Greenwood open, but to improve the existing buildings was just beyond what we expected. So, it was just really spectacular performance, overall.

[Daniel H. Hofkin:]

Great. And then, as it relates to next year and, I think, you have an extra selling week like a lot of companies in 2017, if I'm not mistaken, a 53rd week. But if you put that aside, are you still thinking that we might even see a little bit of acceleration in earnings growth next year with some of the investments spending, sort of, normalizing or tailing off a little bit?

[Scott M. Settersten:]

Yeah. Our 53rd week is actually the following year. It's going to be 2017. So, just to make sure...

[Daniel H. Hofkin:]

Right.

[Scott M. Settersten:]

...the system there. Yeah. So for, 2016, now are you referencing acceleration or...

[Daniel H. Hofkin:]

Sorry, I was asking about the year that you have not specifically guided to. I was just thinking most of us model out the year. And I think originally in your plan, you were thinking 2015 and 2016 were going to be flattish margin years and then possibly you starting to increase again beginning in 2017, is that still the way you're thinking about that?

[Scott M. Settersten:]

Yeah, that is. It's consistent. I think Mary mentioned earlier, we're not changing our long-term guidance. We feel confident in the trajectory of the business. We think there is a lot of benefits coming out of these supply chain investments that we're making today. So, merchandise mix going up, supply chain efficiency is kicking in in a meaningful way in 2017. We feel very confident that we're on target.

[Daniel H. Hofkin:]

It's very helpful. Thanks again. Best of luck.

[Operator:]

At this time, I would like to turn the call back over to CEO, Mary Dillon, for closing remarks.

[Mary N. Dillon:]

I would like to just wrap up by thanking our 26,000 Ulta Beauty associates, who delivered a fantastic year and look forward to continuing our terrific momentum throughout 2016. And thanks to all of you for your interest in Ulta Beauty.

[Operator:]

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