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Article by DailyStocks_admin    (07-25-08 06:45 AM)

The Daily Magic Formula Stock for 07/25/2008 is Bare Escentuals Inc. According to the Magic Formula Investing Web Site, the ebit yield is 10% and the EBIT ROIC is >100 %.

Dailystocks.com only deals with facts, not biased journalism. What is a better way than to go to the SEC Filings? It's not exciting reading, but it makes you money. We cut and paste the important information from SEC filings for you to get started on your research on a specific company.


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BUSINESS OVERVIEW

Overview

Bare Escentuals is one of the fastest growing prestige beauty companies in the U.S. and a leader by sales and consumer awareness in mineral-based cosmetics. We develop, market and sell cosmetics, skin care, and body care products under our bareMinerals , bareVitamins, RareMinerals , i.d. and namesake Bare Escentuals brands, and professional skin care products under our md formulations brand. We believe our bareMinerals cosmetics, particularly our core foundation products, offer a highly differentiated, healthy and lightweight alternative to conventional liquid- or cream-based cosmetics while providing light to maximum coverage for all skin types. As such, we believe our foundation products have broad appeal to women of all ages including women who did not previously wear foundation before using bareMinerals. We utilize a distinctive marketing strategy and a multi-channel distribution model consisting of infomercials, home shopping television, specialty beauty retailers, company-owned boutiques, spas and salons and online shopping. This model has enabled us to increase our brand awareness, consumer loyalty and market share and achieve favorable operating margins. Bare Escentuals was the top-selling cosmetics brand company-wide at leading specialty beauty retailers Sephora and Ulta during 2005, 2006 and 2007. From 2003 through 2007, we increased net sales approximately 52.4% on a compound annual basis, and during the fiscal year ended December 30, 2007, our operating income was 33.1% of net sales.

Our bareMinerals -branded products include our core foundation products and a variety of eye, lip and complexion products such as blushes, all-over-face colors, liner shadows, eyeshadows and lip colors. Our bareMinerals products are made primarily from finely milled minerals and do not contain any of the chemical additives commonly found in liquid, cream and pressed cosmetics, such as preservatives, oil, fragrances, talc, waxes, binders and other potential skin irritants. We design our products to provide women with the look and feel of "bare" skin while effectively concealing skin imperfections such as blemishes, rosacea and acne that can be exacerbated by traditional cosmetics. We believe that bareMinerals appeals to women who prefer a more natural look relative to traditional foundation or simply prefer products with a natural formulation. In addition to our bareMinerals products, we offer a broad range of other cosmetics and accessories, including finishing powders, facial-prep products, lipsticks, lip-glosses, lip liners, mascaras, application tools and brushes under our i.d., bareVitamins and Bare Escentuals brand names. Additionally, we sell a mineral-based skin care line utilizing patent-pending mineral extraction technology under our RareMinerals brand. We also offer a wide range of professional skin care products under the md formulations brand and body care products under our Bare Escentuals brand.

A core element of our success is our distinctive marketing strategy and multi-channel distribution model. We focus on educating consumers about the unique benefits of our products, developing intimate relationships with those consumers, and capitalizing on our multi-channel distribution strategy to effectively reach and engage those consumers. We believe educational media such as infomercials and home shopping television are particularly effective at informing consumers about the innovative product formulation, application technique and resulting benefits of our bareMinerals cosmetics. We also believe that our company-owned boutiques enhance the authenticity of our brand and provide a personal environment in which we offer our broadest product assortment and provide one-on-one consumer consultations and product demonstrations. At the same time, our physical presence at specialty beauty retailers such as Sephora and Ulta have helped to further strengthen our brand image and provide additional points of contact to educate consumers about our products. Moreover, this model allows us to:


acquire new consumers and maintain premium brand positioning without the large expenditures on print-based advertising and marketing common in our industry;


provide consumers the ability to select the most convenient channel in which to purchase our products;


develop intimate consumer relationships that foster brand loyalty and encourage repeat purchases;


build a base of recurring revenues as a substantial percentage of new consumers participate in our product continuity programs through which products initially purchased are automatically replenished; and


drive traffic across our sales channels.

As of December 30, 2007, our domestic points of distribution included direct-response television such as our infomercials and home shopping television, approximately 508 retail locations consisting of specialty beauty retailers Sephora and Ulta as well as department stores Nordstrom, Macy's and Sephora inside JC Penney, and 51 open company-owned boutiques. Our products are also sold in approximately 1,200 spa and salon locations and online at www.bareescentuals.com , www.bareminerals.com and www.mdformulations.com . We also sell products internationally in the United Kingdom, Japan, France, and Germany as well as in smaller international markets via distributors.

Company History

The Bare Escentuals brand dates back to the opening of our first boutique in 1976. The Company was originally incorporated in Delaware on March 9, 2004 under the name STB Beauty, Inc. On February 24, 2006, the Company changed its name to Bare Escentuals, Inc. The Company was incorporated in order to acquire through its wholly owned subsidiary, STB Beauty Acquisition, Inc., 100% of the outstanding capital stock of MD Beauty, Inc. in a merger and recapitalization transaction (the "June 2004 Recapitalization"). Contemporaneous with the June 2004 Recapitalization, on June 10, 2004, STB Beauty Acquisition, Inc. was merged with and into MD Beauty, with MD Beauty being the surviving corporation operating as a wholly owned subsidiary of the Company.

In June 2004, we completed the June 2004 recapitalization, in which affiliates of Berkshire Partners LLC, a Boston-based private investment firm, JH Partners, LLC, a San Francisco-based private equity firm, and members of our management acquired a majority controlling interest in our company. In the transaction, we incurred approximately $100.0 million of new indebtedness, raised approximately $87.5 million of new equity financing and used $169.6 million to repurchase outstanding shares of capital stock and fully vested options. Stockholders who controlled a majority voting interest in our predecessor prior to the June 2004 recapitalization retained shared control of our outstanding capital stock immediately following the recapitalization.

In February 2005, we incurred approximately $224.5 million of new indebtedness, repaid a total of $92.6 million of existing debt and paid a special dividend to stockholders of $122.4 million. In October 2005, we incurred approximately $187.5 million of new indebtedness and paid a special dividend to stockholders of $183.5 million. In June 2006, we incurred approximately $331.6 million of new indebtedness and paid a special dividend to stockholders of $340.4 million. We refer to these transactions as our February 2005 recapitalization, October 2005 recapitalization and June 2006 recapitalization, respectively.

We completed our initial public offering of common stock on October 4, 2006, in which we raised net proceeds of $373.8 million. We used these proceeds to repay outstanding indebtedness and to buy out the management agreements with Berkshire Partners LLC and JH Partners, LLC.

On April 3, 2007, we completed our acquisition of U.K.-based Cosmeceuticals Limited ("Cosmeceuticals"), which distributes Bare Escentuals' bareMinerals , md formulations and MD Forte brands primarily to spas and salons and QVC U.K. The acquired entity has been renamed Bare Escentuals UK Ltd. The Company's primary reason for the acquisition was to reacquire its distribution rights and to expand its market share. The consideration for the purchase was cash of $23.1 million, comprised of $22.4 million in cash consideration and $0.7 million of transaction costs. The Company's consolidated financial statements include the operating results of the business acquired from the date of acquisition.

Our Market

We operate within the large and steadily growing worldwide cosmetics and toiletries industry. The cosmetics and toiletries industry includes color cosmetics, skin care, body care and hand care products. According to Euromonitor, a market research firm, the cosmetics and toiletries worldwide and within the U.S. represented over $269.6 billion and $50.2 billion, respectively, in retail sales in 2006. Five of the largest countries by retail sales in the cosmetics and toiletries industry, according to Euromonitor, are the U.S., Japan, Brazil, France and Germany with 2006 retail sales of $50.2 billion, $29.8 billion, $18.2 billion, $14.1 billion and $13.6 billion, respectively. Within the cosmetics and toiletries market, we compete primarily in the color cosmetics and skin care segments. Color cosmetics and skin care products constituted 93.8% and 6.2%, respectively, of our net sales for the year ended December 30, 2007.

U.S. Color Cosmetics and Skin Care Market

Color Cosmetics Market: The U.S. color cosmetics market, which includes facial makeup, eye makeup, lip products and nail products, is estimated by Euromonitor to have had retail sales of $8.6 billion in 2006. The market for facial makeup is the largest segment of the U.S. cosmetics market, with estimated retail sales of $3.1 billion in 2006, according to Euromonitor. In addition, the markets for eye makeup, lip products, and nail products are estimated to have had retail sales of $2.7 billion, $2.2 billion, and $0.6 billion, respectively, in 2006.

Skin Care Market: U.S. retail sales of skin care, which include facial care, body care and hand care products, were an estimated $7.8 billion in 2006, according to Euromonitor. The facial care market, the largest segment of the skin care market, was estimated at $5.9 billion in 2006 with approximately 89% of sales in this segment derived from facial moisturizers, anti-aging products, and cleansers.

International Color Cosmetics and Skin Care Market

Color Cosmetics Market: The international color cosmetics market is estimated by Euromonitor to have had retail sales of $35.7 billion in 2006. The market for facial makeup is the largest segment of the international cosmetics market, with estimated sales of $13.0 billion in 2006, according to Euromonitor. In addition, Euromonitor estimates that the markets for eye makeup, lip products, and nail products had retail sales of $9.4 billion, $9.9 billion, and $3.3 billion, respectively, in 2006.

Skin Care Market: International retail sales of skin care products were an estimated $60.1 billion in 2006, according to Euromonitor. Euromonitor estimates that the international facial care market, the largest segment of the skin care market, had retail sales of $47.3 billion in 2006.

Brands and Products

Cosmetics Brands

bareMinerals. Our bareMinerals -branded products include our core foundation products and a wide variety of eye, cheek, and face products such as blushes, all-over-face colors, liner shadows, eyeshadows and glimmers. All of our bareMinerals -branded products are made primarily from finely milled minerals and do not contain any of the chemical additives commonly found in liquid, cream and pressed cosmetics, such as preservatives, oil, fragrances, talc, waxes, binders and other potential skin irritants. We believe the efficacy of our products, as well as their positioning as a healthy and natural alternative to conventional cosmetics, appeals to a broad range of women who prefer a more natural look and feel, have skin conditions such as allergies, rosacea or acne that can be exacerbated by traditional cosmetics, or simply prefer products with a natural formulation.

i.d. cosmetics, bareVitamins, Bare Escentuals. Our i.d., bareVitamins and Bare Escentuals branded cosmetics and products include a broad assortment of fashionable color cosmetics and accessories including finishing powders, prep-products, lipsticks, lip glosses, lip liners, mascaras, and application tools and brushes.

Our cosmetics products inclusive of the bareMinerals, Bare Escentuals, bareVitamins and i.d. brands comprised approximately 93.8% and 92.9% of our net sales for the years ended December 30, 2007 and December 31, 2006, respectively. Our bareMinerals foundation comprised approximately 46.0% and 47.6% of our net sales for the years ended December 30, 2007 and December 31, 2006, respectively.

Skin Care Brands

RareMinerals. RareMinerals represents an innovative extension of our mineral-based expertise into the skin care category and offers women a natural, mineral-based alternative to traditional skin care products. Based on a patent-pending mineral extraction technology, RareMinerals delivers concentrated organic macro and micro minerals to the skin to reduce the appearance of imperfections and increase skin firmness and hydration. The RareMinerals line currently includes nighttime skin treatment, facial cleanser and acne treatment products.

md formulations. Our md formulations brand provides a complete professional skin care solution addressing the anti-aging market. Products in the retail line include cleansers, corrective treatments, antioxidant moisturizers and sun protectors. The brand also offers a complete line of professional-use-only products for use by aestheticians, such as glycolic peels, to complement the consumer retail line.

Merchandising and Product Packaging

Our product formulations and branding are consistent across our distribution channels. However, we tailor product offerings to our distribution channels by creating unique and differentiated "kits" or assortments of products which help us to:


introduce new consumers to our brand;


create specialized offerings for our channel partners;


merchandise products according to channel demographics;


increase the average consumer purchase;


generate and renew excitement among our consumers; and


reinforce our brand.

For example, our introductory complexion kit, which we market across all distribution channels, includes an assortment of our core products, including two different shades of bareMinerals foundation, Mineral Veil, Warmth, an application brush, a full coverage brush, a maximum coverage concealer brush and an instructional video. We also offer promotional kits which are typically "themed" to address specific end uses, targeted consumer segments or seasonal offerings. In addition, we produce limited quantities of many of our kits, which helps to generate excitement among consumers due to product scarcity.

Distribution Channels

We believe that a core element of our success is our distinctive multi-channel distribution model consisting of infomercials, home shopping television, premium wholesale, company-owned boutiques, spas and salons and online shopping. We believe that this distribution model, through which each channel reinforces the others, provides:


greater brand awareness across channels;


cost-effective consumer acquisition and education;


premium brand positioning without the large expenditures on print-based advertising and marketing common in our industry; and


improved convenience for consumers.

We use infomercials and home shopping television to develop brand awareness and educate consumers on product differentiation, proper application and resulting benefits. We believe this increased brand awareness drives consumers to shop in our company-owned boutiques and other retail distribution points where we are able to sell a broader assortment of our products and can interact with consumers on a one-on-one basis. In turn, we believe that our physical presence at specialty beauty retailers Sephora and Ulta further enhances our brand image and validates the premium positioning of our products.

Premium Wholesale

The premium wholesale channel accounted for 32.1% of our net sales for the year ended December 30, 2007. Our premium wholesale channel enables us to provide additional points of contact to educate consumers about our products, expand our traditional retail location penetration with limited capital investment, and further strengthen our brand image. As with our own boutiques, this channel allows us to target a consumer who may be less inclined to shop at home and provides an inviting venue to experience the products personally and discuss product features with experienced sales personnel. We have increased our sales within the premium wholesale channel by introducing our products into Ulta in 1997 and Sephora in 2004. Bare Escentuals was the top-selling cosmetics brand company-wide at Sephora and Ulta in 2005, 2006 and 2007. In addition, we have also expanded into select Nordstrom and Macy's locations as well as with Sephora inside JCPenney. As of December 30, 2007, our products were distributed in a total of approximately 508 domestic premium wholesale locations in addition to approximately 200 Sephora France stores.

Bare Escentuals Boutiques

Our company-owned boutiques accounted for 16.8% of our net sales for the year ended December 30, 2007. We opened our first retail boutique in 1976 which offered a broad assortment of our bath, body, and cosmetics products under the Bare Escentuals brand. We believe that our company-owned boutiques reinforce our brand image, generate strong sales productivity and can be readily adapted to different location requirements. Our boutiques typically offer our broadest assortment of Bare Escentuals products, including our bareMinerals and i.d. cosmetics, our RareMinerals products and md formulations products. We believe that our boutiques enhance our ability to build strong consumer relationships and promote additional product use as we provide personal demonstrations and product consultations.

At retail boutiques open for the twelve months ended December 30, 2007, our average annual net sales during that period was approximately $1,900 per square foot. Based on the strong performance and limited geographic penetration of our boutiques to date, we believe that the opportunity exists to expand the number of boutiques that we operate. We opened seven boutiques in 2006 and eighteen boutiques in 2007, and we expect to open approximately thirty-five new boutiques in 2008. In addition, we intend to continue to refine our boutique operations including store design and product merchandising in order to maximize store financial performance.

In addition to our partner websites such as www.sephora.com, www.ulta.com, www.nordstrom.com and www.qvc.com , we also sell products directly through our existing websites, www.bareminerals.com for sales of infomercial products, www.bareescentuals.com for sales of our bareMinerals and RareMinerals products and www.mdformulations.com for sales of professional skin care products. In addition to allowing consumers to purchase a broad range of our products, our websites also educate consumers as to the benefits as well as proper usage and application techniques for each product offered.

Infomercials

Our infomercial sales accounted for 24.7% of our net sales for the year ended December 30, 2007. Our infomercials, broadcast in 28-minute "long-form" programs and 60- to 120-second "short-form" programs, create broad brand awareness, communicate the unique properties of mineral-based cosmetics and educate the consumer regarding proper application techniques. Since we first launched our long-form infomercial in 2002, this channel has served as one of our primary marketing mediums as well as a profitable sales and consumer acquisition channel. Our infomercials reach a large and diverse array of consumers through airings on cable and network television. Our long-form infomercial program regularly appears on cable networks such as TV Guide Channel, The Food Network, TLC, Lifetime Television Networks, Court TV, CNBC, Travel and Women's Entertainment (WE) and many other smaller cable stations and local networks.

We work primarily with one independent media agency to develop a media strategy and acquire desired time slots. We seek to achieve maximum media effectiveness through, among other techniques, regular performance evaluations of long-form and short-form programs, ongoing development of new infomercial content, management of local and national media mix and review of television station performance.

In addition to creating brand and category awareness and driving traffic through our other sales channels, our infomercials also serve as a direct-to-consumer retail sales channel. The channel generates two types of direct sales: "front-end" or initial purchases generated through phone or website orders in response to our aired media, and "back-end" continuity repurchases that replenish the initial cosmetics shipment.

Home Shopping Television

Home shopping television accounted for 11.8% of our net sales for the year ended December 30, 2007. We believe that home shopping television is a strong consumer acquisition channel that also educates the consumer. Since 1997, we have marketed and sold our bareMinerals cosmetics line along with other Bare Escentuals products on-air at QVC, through QVC's website at www.qvc.com and in a QVC-produced Bare Escentuals -specific catalog. We also have an international home shopping television presence and currently appear on QVC in Japan, the UK, and Germany.

QVC Agreement. In December 1998, we entered into an agreement with QVC, Inc., under which we granted to QVC the exclusive right to promote, advertise, market, sell and distribute our products in all distribution channels in the United States other than our company-owned boutiques and prestige retail channels. For purposes of the QVC agreement, prestige retail channels means traditional department stores and specialty stores, specialty boutiques and beauty salons but excludes all other retail channels of distribution, including discount stores, drug stores, warehouse stores, superstores and retail outlet stores. In September 2006, we entered into an amendment to our agreement with QVC that gives us the right to enter into additional distribution channels. Under the amendment, we may promote, advertise, market and sell our products on our websites, and through advertising, catalogs, direct mail promotions and telephone numbers listed in our websites, catalogs and direct mail promotions, so long as we pay QVC a specified royalty on net sales of our products in these channels, which we refer to as Company Direct Marketing Media. Internet sales in the United States of products offered in the same configuration as on our infomercials bear a lower royalty rate than other net sales pursuant to Company Direct Marketing Media. The amendment also states that we may sell our products through the catalogs, direct mail promotions and websites of our prestige retail customers, again subject to payment of a specified royalty on these catalog, direct mail and website sales, which we refer to as Prestige Retail Direct Marketing Media. Our agreement prohibits us from selling products through retail channels not considered "prestige," such as discount stores, warehouse stores and superstores and their associated websites. Under the amended agreement, we also have the right to promote and sell our products through infomercials, so long as we give QVC thirty days to match any bona fide third-party offer for infomercial rights in the United States.

If we develop a new product line that is not competitive with any of the products being offered by QVC, then QVC has the right of first refusal to promote the new product line on the same terms and conditions as our other products under this agreement. Under the agreement, we may maintain a list of consumers who purchase products in our boutiques, by means of Company Direct Marketing Media and infomercials. We have agreed that during the term of the agreement we will not promote, advertise, market or sell products to consumers on this list other than through our boutiques, Company Direct Marketing Media or infomercials and related telephone numbers and websites, nor rent, sell or otherwise make use of this list in a manner not expressly permitted by the agreement.

Under the agreement, QVC issues an order for product that it holds on consignment and then issues us a report that shows all sales to its customers. The agreement had an initial term of one year and provides for automatic renewal for successive one-year periods unless either party notifies the other at least thirty days prior to the end of any term and QVC's net sales of our products are less than a minimum amount, subject to QVC's right to cure by paying us additional amounts to make up shortfalls. The agreement was automatically renewed in September 2007. Since the first year of the QVC agreement, QVC's net sales of our products have been substantially in excess of the minimum amounts. In addition, either party may terminate the agreement upon the other party's material breach, subject to notice and an opportunity to cure. If we terminate the agreement upon QVC's material breach, then QVC may continue to sell our products on a non-exclusive basis for 36 months.

We are required to make our spokesperson available for at least eight appearances on QVC each year. Leslie Blodgett, our Chief Executive Officer, currently serves as our spokesperson for QVC, but we and QVC may mutually agree to replace Ms. Blodgett as our spokesperson.

Additionally, we have granted QVC the exclusive right to promote, advertise, market and sell our products in Japan, Germany and the United Kingdom, subject to our rights to promote, advertise, market and sell our products in the same distribution channels available to us in the United States. We may terminate QVC's exclusive rights in Japan, Germany or the United Kingdom if our on-air minutes on QVC in any such country for a given calendar year falls below a specified minimum number of minutes for such country. We are required to pay QVC specified royalties on net sales pursuant to Company Direct Marketing Media in Japan, Germany and the United Kingdom other than internet sales of products offered in the same configuration as on our infomercials on which we are not required to pay a royalty. We are not required to pay a royalty on net sales in Japan, Germany or the United Kingdom pursuant to Prestige Retail Direct Marketing Media, and QVC does not have a right of first refusal with respect to infomercials in these markets.

CEO BACKGROUND

Bradley M. Bloom has served as a member of our board of directors since June 2004. Mr. Bloom is a Managing Director of Berkshire Partners LLC, which he co-founded in 1986. He is a director of Carter's, Inc., a public company, and is or has been a director of several of Berkshire Partners LLC's private consumer and retailing companies including the private companies Citizens of Humanity, LLC, Acosta, Inc., Gordon Brothers Group, Sterling, Inc., America's Best Contacts and Eyeglasses, L.P., and Miami Cruiseline Services Holdings I.B.V.

Lea Anne S. Ottinger has served as a member of our board of directors since June 2004. Ms. Ottinger is a principal of LMR Advisors and has served as a strategic business consultant, with a focus on mergers and acquisitions, since 1998. Ms. Ottinger owned and operated several of The Body Shop cosmetic stores between 1990 and 1998. Ms. Ottinger currently serves on the board of directors of Savers, Inc., a private company.

Leslie A. Blodgett has served as Chief Executive Officer and a member of our board of directors and that of our predecessor since 1995. From 1995 until May 2006, Ms. Blodgett also served as President. Prior to joining Bare Escentuals, Ms. Blodgett held various positions at Neutrogena, a dermatology division of Johnson & Johnson, a manufacturer of health care products, Procter & Gamble, Inc., a manufacturer and distributor of household products, and Max Factor, a cosmetics division of Procter & Gamble.

Karen M. Rose has served as a member of our board of directors since May 2006. Ms. Rose has been a business consultant since October 2003. Ms. Rose was Group Vice President and Chief Financial Officer of The Clorox Company from December 1997 until her retirement in October 2003. Prior to that, Ms. Rose held various management positions including Director of Finance, Household Products Company and Vice President and Treasurer since joining Clorox in 1978.

Ross M. Jones has served as chairman of our board of directors since July 2004 and has served as a member of our board of directors since June 2004. Mr. Jones is a Managing Director of Berkshire Partners LLC, a private equity investment partnership which he joined in 1993. Mr. Jones became a Managing Director of Berkshire Partners LLC in 2000 and is or has been a director of several of Berkshire Partners LLC's consumer, retailing, manufacturing, and business services companies including Carter's, Inc., a public company, and the private companies N.E.W. Customer Service Companies, Inc., Waterworks, Inc., AVW-TelAv Inc., Sterling Collision Centers, Inc., and Thomas Built Buses, Inc.

Glen T. Senk has served as a member of our board of directors since November 2004. Mr. Senk has served as a director of Urban Outfitters, Inc., a public company, since 2004 and of Tory Burch, Inc., a private company, since 2006. Mr. Senk joined Urban Outfitters, Inc. as President of Anthropologie, Inc., in 1994; he was named Executive Vice President of the Company in 2002 and Chief Executive Officer of the Company in 2007.

Kristina M. Leslie has served as a member of our board of directors since November 2007. Ms. Leslie served as Chief Financial Officer of DreamWorks Animation SKG, Inc. from October 2004 through February 2007. Previously, she had served as the Chief Financial Officer at DreamWorks SKG from the fall of 2003 and oversaw the corporate finance and strategic planning functions since joining DreamWorks SKG in June 1996.

MANAGEMENT DISCUSSION FROM LATEST 10K

Executive Overview

Founded in 1976, Bare Escentuals is one of the fastest growing prestige beauty companies in the U.S. and a leader by sales and consumer awareness in mineral-based cosmetics. We develop, market and sell branded cosmetics and skin care products under our bareMinerals, bareVitamins, i.d., RareMinerals and namesake Bare Escentuals brands, and professional skin care products under our md formulations brand.

We utilize a distinctive marketing strategy and a multi-channel distribution model consisting of infomercials; home shopping television on QVC; premium wholesale, including Sephora, Ulta and department stores; company-owned boutiques; spas and salons and online shopping. We believe that this strategy provides convenience to our consumers and allows us to reach the broadest possible spectrum of consumers.

Our business is comprised of two strategic business units constituting reportable segments that we manage separately based on fundamental differences in their operations:


Our retail segment, which is characterized by sales directly to end users, includes our infomercials, which include sales through our website www.bareminerals.com , and company-owned boutiques, which include sales through our websites www.bareescentuals.com and www.mdformulations.com . We believe that our infomercial business helps us to build brand awareness, communicate the benefits of our core products and establish a base of recurring revenue because a substantial percentage of new consumers participate in our continuity program. Our company-owned boutiques enhance our ability to build strong consumer relationships and promote additional product use through personal demonstrations and product consultations.


Our wholesale segment, which is characterized by sales to resellers, includes premium wholesale; home shopping television; spas and salons; and international. Our sales through home shopping television help us to build brand awareness, educate consumers through live product demonstrations and develop close connections with our consumers. We also sell to retailers that we believe feature our products in settings that support and reinforce our brand image and provide a premium in-store experience. Similarly, our spa and salon customers provide an informative and treatment-focused environment in which aestheticians and spa professionals can communicate the benefits of our core products. Finally, we sell our products in a number of major international markets including the UK, Japan, France and Germany as well as into smaller countries through a network of third-party distributors.

We manage our business segments to maximize sales growth and market share. We believe that our multi-channel distribution strategy maximizes convenience for our consumers, reinforces brand awareness, increases consumer retention rates, and drives corporate cash flow and profitability. Further, we believe that the broad diversification within our segments provides us with expanded opportunities for growth and reduces our dependence on any single distribution channel. Within individual distribution channels, particularly those in our wholesale segment, financial results are often affected by the timing of shipments as well as the impact of key promotional events.

Basis of Presentation

We recognize revenue in accordance with the requirements of Staff Accounting Bulletin No. 104 Revenue Recognition , and other applicable revenue recognition guidance and interpretations. The Company records revenue when all four of the following criteria are met: (i) persuasive evidence that an arrangement exists; (ii) delivery of the products and/or services has occurred; (iii) the selling price is fixed or determinable; and (iv) collectibility is reasonably assured. Revenue is recognized when merchandise is shipped from a warehouse to wholesale customers, infomercial customers and online shopping customers or when purchased by consumers at company-owned boutiques, each net of estimated returns (except in the case of our consignment sales). For our consignment sales, we recognize sales, net of estimated returns, upon shipment from our consignment partners to their customers. We recognize postage and handling charges we bill to customers as revenue upon shipment of the related merchandise.

Our cost of goods sold consists of the costs associated with the sourcing of our products, including the cost of the product and associated manufacturing costs, inbound freight charges, royalties and internal transfer costs. Additionally, cost of goods sold includes postage and handling costs incurred upon shipment of merchandise. Our gross profit is dependent upon a variety of factors, including changes in the relative sales mix between our business segments, changes in the mix of products sold and fluctuations in material costs. Our gross margins differ significantly between product lines and our business segments, with sales in our retail segment generally yielding higher gross margins than our wholesale segment. These factors may cause gross profit and margins to fluctuate from quarter to quarter. We anticipate that our cost of goods sold will increase in absolute dollars as we increase our total sales but will remain generally consistent with historical periods on an annual basis as a percentage of net sales depending on the mix of sales among our distribution channels.

Selling, general and administrative expenses include infomercial production and media costs, advertising costs, rent and other store operating costs and corporate costs such as management salaries, information technology, professional fees, finance and accounting personnel, human resources personnel and other administrative functions. Selling, general, and administrative expenses also include all of our distribution center and fulfillment costs, including all warehousing costs associated with our third-party fulfillment provider and receiving and inspection costs that we do not include in cost of goods sold, which are comprised primarily of headcount related costs at our own distribution centers and at our third-party fulfillment provider. Receiving and inspection costs and warehousing costs are excluded from our gross margins and, therefore, our gross margins may not be comparable to those of other companies that choose to include certain of these costs in cost of goods sold. We are unable to provide an estimate of these costs but we believe these costs are not material. Fluctuations in selling, general and administrative expenses result primarily from changes in media and advertising expenditures; changes in fulfillment costs, which increase proportionately with net sales, particularly infomercial sales; changes in store operating costs, which are affected by the number of stores opened in a period; and changes in corporate costs such as for headcount and infrastructure to support our operations. We anticipate that our selling, general and administrative expenses will increase in absolute dollars as we expect to continue to invest in our corporate infrastructure and incur increased expenses to support sales growth.

Depreciation and amortization includes charges for the depreciation of property and equipment and the amortization of intangible assets. We anticipate that our depreciation and amortization expense will increase in absolute dollars as we continue to open new boutiques, invest in information systems and amortize intangible assets in connection with our recent acquisition. We record our depreciation and amortization as a separate line item in our statement of operations because all such expense relates to selling, general and administrative costs.

Stock-based compensation includes charges incurred in recognition of compensation expense associated with grants of stock options and stock purchases. On January 3, 2005 we adopted the fair value recognition and measurement provisions of SFAS No. 123(R), Share-Based Payment (SFAS 123(R)). SFAS 123(R) is applicable to stock-based awards exchanged for employee services and in certain circumstances for board service by our nonemployee directors. Pursuant to SFAS 123(R), stock-based compensation cost is measured at the grant date, based on the fair value of the award and is recognized as an expense over the requisite service period. We elected to adopt the modified-prospective-tran sition method, as provided by SFAS 123(R). Accordingly, prior period amounts have not been restated. Under this transitional method, we are required to record compensation expense for all awards granted after the date of adoption using grant-date fair value estimated in accordance with the provisions of SFAS 123(R) and for the unvested portion of previously granted awards as of January 3, 2005 using the grant-date fair value estimated in accordance with the provisions of SFAS 123. We anticipate that our stock-based compensation expense will increase in absolute dollars as we continue to grant additional options in the future. We record our stock-based compensation on a separate operating expense line item in our statement of operations due to the fact that, to date, all of our stock-based awards have been made to employees whose salaries are classified as selling, general and administrative costs. As of December 30, 2007, we had options to purchase 4,714,936 shares of our common stock outstanding with a weighted average exercise price of $4.56 per share, 752,236 shares of which were exercisable at December 30, 2007.

Interest expense includes interest costs associated with our credit facilities and the amortization of deferred financing costs associated with these credit facilities. We anticipate that our interest expense in the future will decrease in absolute terms and as a percentage of net sales as we continue to make scheduled payments of our outstanding indebtedness.

Provision for income taxes depends on the statutory tax rates in the countries where we sell our products. Historically, we have only been subject to taxation in the United States because we have either sold to consumers in the United States or sold to distributors in the United States who resold our products here and abroad. However, as a result of our acquisition of U.K.-based Cosmeceuticals in the second fiscal quarter of 2007, we began to sell our products directly to consumers located outside of the United States, and we became subject to taxation based on the foreign statutory rates in the countries where those sales took place. Our effective tax rate could fluctuate accordingly. For fiscal 2008, we anticipate that our effective tax rate will be approximately 40% of our income before provision for income taxes.

Our fiscal year-end is the Sunday closest to December 31 based on a 52/53-week year. Each fiscal year consists of four 13-week quarters, with an extra week added onto the fourth quarter every five or six years. The fiscal years ended January 1, 2006, December 31, 2006 and December 30, 2007, each contained 52 weeks.

Results of Operations

Year ended December 30, 2007 compared to the year ended December 31, 2006

Sales, net

Net sales for the year ended December 30, 2007 increased 29.5% to $511.0 million from $394.5 million in the year ended December 31, 2006, an increase of $116.5 million. This increase was primarily attributable to continued growth in sales of our bareMinerals line of cosmetics, as we continued to broaden our distribution throughout our sales channels both domestically and abroad. The increase in our net sales was realized within both our retail and wholesale segments.

Retail. Net retail sales increased 14.5% to $211.8 million in the year ended December 30, 2007 from $185.1 million in the year ended December 31, 2006. Net sales from boutiques increased 52.9% to $85.6 million in the year ended December 30, 2007 from $56.0 million in the year ended December 31, 2006 due to a net increase of eighteen boutiques open as of December 30, 2007 compared to December 31, 2006, growth of our online business, and improved productivity at our existing locations. As of December 30, 2007 and December 31, 2006, we had 51 and 33 open company-owned boutiques, respectively. Offset against this was a decrease of 2.2% in net sales from infomercials to $126.2 million in the year ended December 30, 2007 from $129.0 million in the year ended December 31, 2006, due to a decline in the performance of our new infomercial compared to our prior infomercial.

Wholesale. Net wholesale sales increased 42.8% to $299.2 million in the year ended December 30, 2007 from $209.5 million in the year ended December 31, 2006. Net sales in our premium wholesale channel increased 49.2% to $163.8 million in the year ended December 30, 2007 from $109.8 million in the year ended December 31, 2006, resulting from strong consumer demand and expansion into additional retail locations at Ulta, Sephora and department stores. Net sales to our home shopping television customer, grew by 21.7% to $60.6 million in the year ended December 30, 2007 from $49.8 million in the year ended December 31, 2006 as a result of improved product performance and the inclusion of home shopping television sales in 2007 to the UK and Germany. Net sales to spas and salons increased 70.9% to $57.0 million in the year ended December 30, 2007 from $33.4 million in the year ended December 31, 2006 largely due to the continued growth in sales of our core bareMinerals cosmetics line and the inclusion of sales to spas and salons in the UK. Net sales to our international distributors grew by 7.1% to $17.7 million in the year ended December 30, 2007 from $16.6 million in the year ended December 31, 2006, primarily as a result of the increased penetration of our bareMinerals cosmetics line into this distribution channel partially, offset by the elimination of distributor sales to the UK following our acquisition of that business in the second fiscal quarter.

Gross profit

Gross profit increased 28.8% to $363.4 million in the year ended December 30, 2007 from $282.1 million in the year ended December 31, 2006. Our retail segment gross profit increased 14.4% to $168.9 million in the year ended December 30, 2007 from $147.7 million in the year ended December 31, 2006, driven by growth in our boutiques sales channels. Our wholesale segment gross profit increased 44.8% to $194.6 million in the year ended December 30, 2007 from $134.4 million in the year ended December 31, 2006, due to increases in sales across all wholesale distribution channels.

Gross margin decreased approximately 0.4% to 71.1% from 71.5% in the year ended December 30, 2007. This overall decrease in the year ended December 30, 2007 is primarily due to wholesale sales comprising a larger percentage of total net sales compared to the year ended December 31, 2006, which have lower gross margins than retail segment sales. In the retail segment, gross margin remained relatively consistent at 79.7% in the year ended December 30, 2007 compared to 79.8% in the year ended December 31, 2006. Within the wholesale segment, gross margin increased to 65.0% in the year ended December 30, 2007 from 64.2% in the year ended December 31, 2006, primarily as a result of a change in sales mix between channels and customers.

Selling, general and administrative expenses

Selling, general and administrative expenses increased 33.1% to $180.3 million in the year ended December 30, 2007 from $135.5 million in the year ended December 31, 2006. The increase was primarily due to expense associated with a significant increase in investment in our corporate infrastructure of $23.3 million, including increased headcount costs, headquarters facilities costs, distribution center costs, costs associated with complying with the regulations applicable to a public company and other corporate costs, corporate costs and infrastructure costs relating to our UK acquisition, as well as increased expenses to support sales growth, including $9.2 million in increased store operating costs, $4.2 million in payroll and other personnel expenses, $3.6 million in increased media spending and $1.2 million in increased professional fees. As a percentage of net sales, selling, general and administrative expenses increased 1.0% to 35.3% from 34.3%, primarily due to corporate expenses increasing at a greater rate than net sales.

Depreciation and amortization

Depreciation and amortization expenses increased 212.7% to $7.3 million in the year ended December 30, 2007 from $2.3 million in the year ended December 31, 2006. This increase was primarily attributable to higher depreciation expense as a result of an increase in depreciable assets as we continue to increase the number of company-owned boutiques and invest in our corporate infrastructure and $2.2 million of amortization of intangible assets from our UK acquisition.

Stock-based compensation

Stock-based compensation expense increased 27.9% to $6.8 million in the year ended December 30, 2007 from $5.3 million in the year ended December 31, 2006. This increase resulted primarily from the granting of additional stock options.

Restructuring charges

In the year ended December 31, 2006, we discontinued the use of one of our office floors located at our former corporate facility and recorded a restructuring charge of $0.1 million.

Operating income

Operating income increased 21.8% to $169.0 million in the year ended December 30, 2007 from $138.8 million in the year ended December 31, 2006. This increase was largely due to increases in operating income in both our retail and wholesale segments, reflecting sales growth in both of these segments, partially offset by an increased operating loss in our corporate segment.

Our retail segment operating income increased 10.8% to $73.3 million in the year ended December 30, 2007 from $66.1 million in the year ended December 31, 2006, which was largely driven by sales growth in our boutiques sales channel. Our increased sales in the retail segment contributed to an increase in gross profit of $21.2 million, which was partially offset by an increase in operating expenses of $14.1 million. The increase in operating expenses was largely due to increased store operating costs of $9.2 million as a result of an increase in the number of boutiques open as of December 30, 2007 and $3.6 million in increased media spending.

Our wholesale segment operating income increased 41.2% to $177.3 million in the year ended December 30, 2007 from $125.6 million in the year ended December 31, 2006 due to increased sales across all wholesale sales channels. Our increased sales in the wholesale segment contributed to an increase in gross profit of $60.2 million, partially offset by an increase in operating expenses of $8.4 million.

Our corporate segment operating loss increased 54.2% to $81.6 million in the year ended December 30, 2007 from $52.9 million in the year ended December 31, 2006. This increase was largely due to the increase in the corporate segment selling, general and administrative expense of $23.3 million, an increase in depreciation and amortization of $5.0 million and an increase in stock-based compensation of $1.5 million. The increase in corporate selling, general and administrative expense was as a result of the increase in the investment in our corporate infrastructure to support sales growth and additional expenses associated with being a public company.

Interest expense

Interest expense decreased 52.0% to $23.6 million in the year ended December 30, 2007 from $49.2 million in the year ended December 31, 2006. The decrease was attributable to decreased debt balances in the year ended December 30, 2007, primarily associated with repayment of outstanding indebtedness, including repayments from the proceeds of our initial public offering completed on October 4, 2006.

Debt extinguishment costs

Debt extinguishment costs decreased to zero in the year ended December 30, 2007 from $5.9 million in the year ended December 31, 2006. The charge for the year ended December 31, 2006 related to our June 2006 recapitalization and included $0.9 million related to the write-off of deferred financing fees and $2.5 million of fees paid directly to the lender under the new debt that were expensed as debt extinguishment costs. Additionally, the charge also included $2.5 million related to the write-off of our unamortized debt issuance costs from the repayment in full of our subordinated notes and second-lien term loans and a portion of our first-lien term loans with the net proceeds from our initial public offering.

Interest income

Interest income increased to $1.7 million in the year ended December 30, 2007 from $1.2 million in the year ended December 31, 2006. The increase was primarily due to an increase in interest rates on our cash balances and higher average cash balances compared with the year ended December 31, 2006.

Provision for income taxes

The provision for income taxes was $59.0 million, or 40.1% of income before provision for income taxes, in the year ended December 30, 2007 compared to $34.7 million, or 40.9% of income before provision for income taxes, in the year ended December 31, 2006. The increase resulted from higher income before provision for income taxes offset by a lower effective rate in the year ended December 30, 2007 compared to the year ended December 31, 2006. The decrease in the effective rate is mainly due to the elimination of the non-deductible interest as a result of our repayment in full of our aggregate principal amount outstanding of $125.0 million of our 15.0% subordinated notes on October 4, 2006.

CONF CALL

Andrew Greenebaum - ICR, Inc.

Welcome to Bare Escentuals first quarter of fiscal 2008 conference call. On the call today from the company are Leslie Blodgett, Chief Executive Officer; Myles McCormick, Chief Operating Officer and Chief Financial Officer.

By now, everyone should have had access to the first quarter of fiscal 2008 earnings release, went out today at approximately 4:00 pm Eastern Time. If you have not received your release, it is available on the Investor Relations portion of Bare Escentuals Website at www.bareescentuals.com, by clicking on the "about Bare Escentuals" tab. The call is being webcast and the replay will be available on the company's website for one month.

Before we begin, we would like to remind everyone that the prepared remarks contain forward-looking statements, management may make additional forward-looking statements in response to your questions. These statements do not guarantee future performance therefore, undue reliance should not be placed on them.

We refer all of you to the risk factors contained in Bare Escentuals most recent Form 10-K for the year-ended December 31, 2007 for more detailed discussions of those factors that could cause actual results to differ materially those projected in any forward-looking statements. Bare Escentuals assumes no obligation to revise or update any forward-looking statements may be made in today's release or call.

With that, I would like to turn the call over to Leslie Blodgett.

Leslie Blodgett - Chief Executive Officer

Thank you. We are very pleased with our first quarter results, which we believe reflects the strength of our brands and our ability to driver result in a challenging consumer environment.

Our net sales for the quarter of 2008 increased 21% to over $140 million due to the continued growth of our brand, particularly within our premium wholesale business and Bare Escentuals boutiques.

Our net income for the first quarter rose 26%, over the first quarter last year to approximately $26 million. We are very pleased with these results as we continue to increase our market share and acquire new customer significantly outpacing the trends in the broader cosmetics market. Myles will provide additional details regarding sales and earnings comparison in his comment in a few moment.

But let me first provide a few updates as to recent initiatives that we have been focused on. First of all, we are happy to report back on the excellent health of the bareMinerals brand and the continued excitement within our customer community. We just returned from our second annual BE bus tour where we covered over 2000 miles visiting 5 cities along the East Coast including stops at three Bear Escentuals boutiques. The QBC studios in West Chestier Pennsylvania, two national artist events as well as surprise visit to spas and saloons along the way.

Over the course of 9 days we spoke to thousands of loyal customers. Many of whom shared there stories about how bareMinerals has changed the way they feel about their skin. We also got to meet many women who had recently been introduced to the brand either from a friend relative or co-worker. I am always amazed that for as many women as we've touched there are so many that were still converting to bareMinerals. Their enthusiasm for the product continues to inspire us and keeps us focused on reaching all of those women we've yet touch.

While we continue to build our brands in the States, we are also making significant strides internationally. We continue to get solid traction in our existing international channels as evidenced by the fact that for the first time our international business represented 10% of total sales in the quarter. At the same we are exploring a number of new globe expansion opportunities.

For example we recently launched our first department store test in UK at Selfridges on Oxford Street in London, which has the largest beauty department in the world. We are thrilled to have received terrific placement within their store located in one of the world's busiest shopping streets. Though it's still early, the launch has been very well received and I personally want to thank all of our employees' partners and customers who contributed to our fantastic (inaudible).

We are on track to open roughly 10 department store doors in the UK by the end of the year and look forward to keeping you updated regarding our progress. We also expect to enter two additional international markets Spain and Canada by the end of 2008. In Spain, we will roll out a limited assortment of our core product in all four Spain doors in the fourth quarter and subsequently we look to test in other international markets with Sephora in 2009.

In Canada, we expect to test on the shopping channel Canada's leading home shopping channel by year end. We will also be testing a limited number of beauty boutiques in Canada with Shoppers Drug Mart the leading Canadian specialty cosmetic retailer. At the same time we continued to investigate physical distribution opportunities in key markets such as Japan and Germany with the expectation of testing retail locations in those countries 2009.

We are also in the process of opening a representative office in Shanghai to support sourcing and evaluate retail distribution in China. We believe that these initiatives will position us for continued long-term growth in our international business.

Another key focus during the quarter was the production of the latest version of our bearMinerals infomercial that Karen Barner and her team have been working non-stop scripting shooting and editing the show. As we've discussed previously for this new show, we have focused on getting back to the core element in messaging that have served us well in prior versions of the infomercial.

We are on track for the infomercial to begin testing in mid May and given time for testing and final editing, we would expect a full rollout by the end of the quarter. We are also looking to more expectably leverage the more than 3 million in media exposure that we put behind the infomercial across retail distribution with the launch of our new getting started kit.

For the first time that branding and packing of the getting started kits will be consistent across channels such that the introductory kit shown on the infomercial can form some of brand perspective to the versions that will appear into four Ulta department stores and our boutiques. The new kits will begin appearing at retailers at the end of the third quarter.

Finally we wanted to provide an update with respect to our efforts and grow our skin care franchise through the expansion of our bareMinerals line of mineral skin care products. bareMinerals represents a natural extension of our leadership in the mineral based cosmetic market place. Its groundbreaking line was launched in 2006 with our skin revival night time treatment and mineral based night time treatment we recently expanded with two new break through skews.

Renew and reveal facial cleanser and blemish therapy which represent mineral based alternatives to traditional skin care products. We launched both products first on QVC utilizing our ability to educate and generate excitement through that channel and followed up with a roll out to domestic wholesale and retail channels. We are very pleased with RareMinerals performance to date and are on track to double the business this year. We look forward to selectively expand the line and ramp up our RareMinerals marketing efforts in '09 including the development of our RareMinerals infomercial.

Now I would like to turn the call to Myles.

Myles McCormick - Chief Operating Officer and Chief Financial Officer

Thanks, Leslie. I'll begin with a detailed review of the results for the first quarter and review our guidance for fiscal 2008. As Leslie mentioned, we're very pleased with our first quarter results which were ahead of our expectations.

Net sales for the first quarter increased 21% to 140.4 million from 115.6 million in same period last year. At quarter end our business mix between wholesales, which is comprised of sale to QVC, premium wholesale customers, spas and salons and international distributors and retail which include infomercials and boutiques remained consistent with the prior quarter at approximately 60% and approximately 40% of the sales respectively.

In our wholesales segment sales increased 31% to 83.9 million due largely to continued growth in our premium wholesales and spa channels. In our retail segment sales increased 10% to 56.4 million, strong growth in our boutiques more than offset and 10% declined in our infomercial business versus the prior year. And as Leslie mentioned we are on track to rollout the new infomercial version by the end of second quarter.

At the end of the first quarter we had distribution in 616 locations domestically in addition to 220 locations in Sephora France. Domestic location at end of the first quarter included 260 Ulta doors, 193 Sephora doors, 83 boutiques, 71 Sephora inside JCPenney doors, 25 Nordstrom doors, and 14 Macy's doors.

Moving onto gross margins, for the first quarter gross margins increased to 72.5% compared to 71.1% in the prior year. Our wholesale gross margin improved by approximately 250 basis point to 67.4% from 64.9% in the prior year due to favorable shifts in the mix between product channels and customers.

Specifically in the quarter we benefited from a larger percent of [open stock] sales relative to kit sales and a shift towards our premium wholesale and spa businesses. Gross margins for our retail segment also improved to 80.1% from 78.8% in the prior year due to our mix shift towards our boutiques, which generate higher margin in our infomercials sales.

SG&A was 50.5 million or approximately 36% of sales up from 39.2 million or approximately 34% of sales in the same period last year as we continue to invest in the sales, marketing, distribution infrastructure that will support or long-term growth.

Net income for the quarter increased 26% to 25.8 million from 20.4 million in the first quarter of fiscal 2007. Diluted earnings per share for the first quarter increased to $0.28 or approximately 93.3 million shares outstanding compared to $0.22 or approximately 92.6 million shares outstanding in the same period last year.

Now, turning to the balance sheet highlights, cash at the end of the quarter was 37.7 million compare to 39.2 million in the prior year. Inventory at the end of the quarter was 69.6 million up 17% from 59.3 million in the prior year reflecting the expansion in both our point distribution and overall sales volume.

Accounts receivable at the end of the quarter was 37.8 million and roughly 13% from the fourth quarter. Capital expenditures in the quarter were 5.5 million for boutique and department store build outs, ongoing IT and corporate investments. Total debt at the end of quarter was 251 million, down from 325 million at the end of the first quarter 2007 and to 265 million at end of 2007, as we continue to use excess cash to pay down debt.

Last quarter, we discussed some of our products were appearing in unauthorized sales channels, which is Cosco and Target stores. During the quarter we received additional information regarding the nature and extend of this unauthorized sales. As a result we now believe we have high degree of certainty regarding the source of that diverted product, few ongoing legal proceedings, there is little we can discuss other than to say we believe the product was sold to a distributor destined for international markets before being diverted back to unauthorized channels in the US. It's important to note that we have ceased business for that distributor in the third quarter of 2007.

Now I would like to move on to guidance for 2008. While we got up to (inaudible) we continue to believe that its appropriate in this environment to be conservative in terms of our guidance. We are closing monitoring the broader cosmetics market along with mall traffic trends. That being said we along with our partners remain steadfast in our approach to continue to invest in marketing and expand our points of distribution. This environment has also allowed us to be opportunistic in our boutique expansion as we had successfully identified and signed an additional 5 boutique locations for 2008 bringing our total new boutique doors to 40 for the year.

With respect to our partner locations domestically, we are on track for the new door openings we have previously discussed while JCPenny almost doubled the number of Sephora inside JCPenny doors, they expect to have by the end of the year.

As you heard Leslie commentary we continue to execute on all fronts and are very pleased with the strength of our brand as evidenced by our strong performance in the first quarter. We remained very confident in our long-term strategy and continue to expect fiscal 2008 sales growth of 20 to 25% and earnings per share to be in the range of (inaudible). To know in order to fully leverage our marketing initiatives we had pushed the launch of our getting started kits from the second quarter to the third quarter at both of our boutiques and our retail workers.

While there is no P&L impact for the year in total this timing shift will result in transfer of sales and earnings out of Q2 and into Q3. Finally we expect CapEx to be approximately 27 million reflecting 40 new boutiques for the year and additional infrastructure to support our retail and wholesale growth plans.

That concludes my comments. Back top you Leslie.

Leslie Blodgett - Chief Financial Officer

Thanks Myles. Before we turn to Q&A. I really want to thank our loyal customers as well as our brand partner's Sephora and Ulta along with their teams in the field for all of their support. I would like to end with a quote from a customer that I received just this morning. Julie from New York wrote "your products have affected me deeply on a personal emotional level. They have also created within me a desire to try to share them with as many people as I can". To me this comment reinforces our purpose as a company and reminds us that our brand is so much more than just our products.

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