Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☒ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the Quarterly Period Ended August 3, 2019
or
☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from _____________ to _____________
Commission File Number: 001-33764
ULTA BEAUTY, INC.
(Exact name of Registrant as specified in its charter)
incorporation or organization)
Identification No.)
Delaware
(State or other jurisdiction of incorporation or organization)
38-4022268
(I.R.S. Employer Identification No.)
1000 Remington Blvd., Suite 120
Bolingbrook, Illinois
(Address of principal executive offices)
60440
(Zip code)
Registrant’s telephone number, including area code: (630) 410-4800
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $0.01 per share
ULTA
The NASDAQ Global Select Market
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large Accelerated Filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of August 26, 2019 was 58,848,950 shares.
TABLE OF CONTENTS
Part I - Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets
3
Consolidated Statements of Income
4
Consolidated Statements of Cash Flows
5
Consolidated Statements of Stockholders’ Equity
6
Notes to Consolidated Financial Statements
7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
16
Item 3. Quantitative and Qualitative Disclosures about Market Risk
25
Item 4. Controls and Procedures
26
Part II - Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
27
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
28
SIGNATURES
29
2
Item 1.Financial Statements
Ulta Beauty, Inc.
August 3,
February 2,
August 4,
(In thousands, except per share data)
2019
2018
Assets
(Unaudited)
Current assets:
Cash and cash equivalents
$
177,398
409,251
237,107
Short-term investments
150,000
—
149,000
Receivables, net
107,263
136,168
103,666
Merchandise inventories, net
1,315,999
1,214,329
1,219,685
Prepaid expenses and other current assets
131,171
138,116
103,618
Prepaid income taxes
38,769
16,997
17,082
Total current assets
1,920,600
1,914,861
1,830,158
Property and equipment, net
1,219,948
1,226,029
1,212,978
Operating lease assets
1,499,556
Goodwill
10,870
Other intangible assets, net
3,854
4,317
Deferred compensation plan assets
24,665
20,511
19,585
Other long-term assets
30,882
14,584
10,628
Total assets
4,710,375
3,191,172
3,073,349
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
450,117
404,016
409,849
Accrued liabilities
224,202
220,666
202,999
Deferred revenue
182,354
199,054
145,907
Current operating lease liabilities
208,261
Total current liabilities
1,064,934
823,736
758,755
Non-current operating lease liabilities
1,683,743
Deferred rent
434,980
422,455
Deferred income taxes
86,598
83,864
49,700
Other long-term liabilities
35,649
28,374
29,961
Total liabilities
2,870,924
1,370,954
1,260,871
Commitments and contingencies (Note 7)
Stockholders' equity:
Common stock, $0.01 par value, 400,000 shares authorized; 58,485, 59,232, and 60,518 shares issued; 57,810, 58,584, and 59,872 share outstanding; at August 3, 2019 (unaudited), February 2, 2019, and August 4, 2018 (unaudited), respectively
585
592
605
Treasury stock-common, at cost
(34,180)
(24,908)
(24,413)
Additional paid-in capital
794,368
738,671
720,535
Retained earnings
1,078,678
1,105,863
1,115,751
Total stockholders’ equity
1,839,451
1,820,218
1,812,478
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
13 Weeks Ended
26 Weeks Ended
Net sales
1,666,607
1,488,221
3,409,636
3,031,888
Cost of sales
1,060,708
952,760
2,158,890
1,935,714
Gross profit
605,899
535,461
1,250,746
1,096,174
Selling, general and administrative expenses
392,843
337,142
795,976
682,766
Pre-opening expenses
5,038
4,504
9,212
9,751
Operating income
208,018
193,815
445,558
403,657
Interest income, net
(1,671)
(1,143)
(3,717)
(2,468)
Income before income taxes
209,689
194,958
449,275
406,125
Income tax expense
48,431
46,635
95,796
93,406
Net income
161,258
148,323
353,479
312,719
Net income per common share:
Basic
2.77
2.47
6.05
5.18
Diluted
2.76
2.46
6.02
5.16
Weighted average common shares outstanding:
58,171
60,070
58,401
60,340
58,446
60,375
58,718
60,630
(In thousands)
Operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
144,951
137,815
Non-cash lease expense
152,134
2,734
612
Stock-based compensation expense
12,766
13,172
Loss on disposal of property and equipment
3,215
499
Change in operating assets and liabilities:
Receivables
11,437
(3,947)
Merchandise inventories
(101,670)
(123,261)
(18,315)
(4,952)
Income taxes
(21,772)
(29,694)
46,101
84,091
(2,629)
(6,572)
(16,700)
(6,577)
Operating lease liabilities
(138,557)
14,539
Other assets and liabilities
20,162
(441)
Net cash provided by operating activities
447,336
388,003
Investing activities
Purchases of short-term investments
(245,000)
(558,163)
Proceeds from short-term investments
95,000
529,163
Purchases of property and equipment
(151,213)
(141,691)
Purchases of equity investments
(33,339)
Net cash used in investing activities
(334,552)
(170,691)
Financing activities
Repurchase of common shares
(378,300)
(260,452)
Stock options exercised
42,935
8,448
Purchase of treasury shares
(9,272)
(5,646)
Net cash used in financing activities
(344,637)
(257,650)
Net decrease in cash and cash equivalents
(231,853)
(40,338)
Cash and cash equivalents at beginning of period
277,445
Cash and cash equivalents at end of period
Supplemental cash flow information
Cash paid for income taxes (net of refunds)
97,024
121,914
Non-cash investing activities:
Change in property and equipment included in accrued liabilities
7,625
19,453
Treasury -
Common Stock
Additional
Total
Issued
Treasury
Paid-In
Retained
Stockholders'
Shares
Amount
Capital
Earnings
Equity
Balance – February 3, 2018
61,441
614
(619)
(18,767)
698,917
1,093,453
1,774,217
164,396
Stock-based compensation
6,170
Adoption of accounting standards - ASC 606
(29,980)
Stock options exercised and other awards
176
6,510
6,512
(23)
(4,831)
(6)
(133,045)
(133,051)
Balance – May 5, 2018
60,998
610
(642)
(23,598)
711,597
1,094,824
1,783,433
7,002
32
1,936
(4)
(815)
(512)
(5)
(127,396)
(127,401)
Balance – August 4, 2018
60,518
(646)
Balance – February 2, 2019
59,232
(648)
192,221
6,030
Adoption of accounting standards - ASC 842
(2,375)
348
42,052
42,056
(27)
(9,183)
(318)
(3)
(107,396)
(107,399)
Balance – May 4, 2019
59,262
593
(675)
(34,091)
786,753
1,188,313
1,941,568
6,736
15
879
(89)
(792)
(8)
(270,893)
(270,901)
Balance – August 3, 2019
58,485
(In thousands, except per share and store count data) (Unaudited)
1.Business and basis of presentation
On January 29, 2017, Ulta Salon, Cosmetics & Fragrance, Inc. implemented a holding company reorganization. Pursuant to the reorganization, Ulta Beauty, Inc., which was incorporated as a Delaware corporation in December 2016, became the successor to Ulta Salon, Cosmetics & Fragrance, Inc., the former publicly-traded company and now a wholly owned subsidiary of Ulta Beauty, Inc. As used in these notes and throughout this Quarterly Report on Form 10-Q, all references to “we,” “us,” “our,” “Ulta Beauty,” or the “Company” refer to Ulta Beauty, Inc. and its consolidated subsidiaries.
The Company was originally founded in 1990 to operate specialty retail stores selling cosmetics, fragrance, haircare and skincare products, and related accessories and services. The stores also feature full-service salons. As of August 3, 2019, the Company operated 1,213 stores across 50 states, as shown in the table below.
Number of
Location
stores
Alabama
21
Montana
Alaska
Nebraska
Arizona
Nevada
Arkansas
10
New Hampshire
California
157
New Jersey
36
Colorado
New Mexico
Connecticut
New York
48
North Carolina
Florida
83
North Dakota
Georgia
Ohio
42
Hawaii
Oklahoma
20
Idaho
9
Oregon
14
Illinois
55
Pennsylvania
43
Indiana
23
Rhode Island
Iowa
South Carolina
Kansas
12
South Dakota
Kentucky
Tennessee
Louisiana
18
Texas
110
Maine
Utah
Maryland
24
Vermont
1
Massachusetts
19
Virginia
Michigan
47
Washington
34
Minnesota
17
West Virginia
Mississippi
Wisconsin
Missouri
Wyoming
1,213
The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and the U.S. Securities and Exchange Commission’s Article 10, Regulation S-X. These financial statements were prepared on a consolidated basis to include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts, transactions, and unrealized profit were eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, which are of a normal
recurring nature, necessary to fairly state the financial position and results of operations and cash flows for the interim periods presented.
The Company’s business is subject to seasonal fluctuation. Significant portions of the Company’s net sales and net income are realized during the fourth quarter of the fiscal year due to the holiday selling season. The results for the 13 and 26 weeks ended August 3, 2019 are not necessarily indicative of the results to be expected for the fiscal year ending February 1, 2020, or for any other future interim period or for any future year.
These interim consolidated financial statements and the related notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended February 2, 2019. All amounts are stated in thousands, with the exception of per share amounts and number of stores.
2.Summary of significant accounting policies
Information regarding the Company’s significant accounting policies is contained in Note 2, “Summary of significant accounting policies,” to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended February 2, 2019. Presented below and in the following notes is supplemental information that should be read in conjunction with “Notes to Consolidated Financial Statements” in the Annual Report.
Fiscal quarter
The Company’s quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31, and January 31. The Company’s second quarter in fiscal 2019 and 2018 ended on August 3, 2019 and August 4, 2018, respectively.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Recent accounting pronouncements not yet adopted
Intangibles – Goodwill and Other-Internal-Use Software
In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-15, Intangibles – Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which clarifies and aligns the accounting for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019 and should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted. The adoption of ASU 2018-15 is not expected to have a material impact on the Company’s consolidated financial position, results of operations, or cash flows.
Recently adopted accounting pronouncements
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in ASU 2016-02 and subsequently issued amendments requires lessees to capitalize virtually all leases with terms of more than twelve months on the balance sheet as a right-of-use asset and recognize an associated lease liability. The right-of-use asset represents the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics, leases are classified as financing or operating leases and their classification impacts the recognition of expense in the income statement. Entities are allowed to apply the modified retrospective approach (1) retrospectively to
8
each comparative period presented or (2) retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment.
The Company adopted the new standard on February 3, 2019 using the modified retrospective approach by recognizing and measuring leases without revising comparative period information or disclosures. The Company elected the transition package of three practical expedients permitted within the standard, which among other things, allows for the carryforward of historical lease classifications. In addition, the Company elected to apply the practical expedient that allows for the combination of lease and non-lease components for all asset classes. The Company made an accounting policy election to keep leases with terms of twelve months or less off the balance sheet and recognize those lease payments on a straight-line basis over the lease term.
The adoption of ASU 2016-02, resulted in the recording of operating lease assets and liabilities of $1,460,866 and $1,839,970 within the consolidated balance sheet, respectively, as of February 3, 2019. As part of the adoption, the Company recorded an adjustment to retained earnings of $2,375. The standard did not materially impact the Company’s consolidated results of operations and had no impact on cash flows. See Note 6, “Leases,” for further details.
The impact to the Company’s opening consolidated balance sheet as of February 3, 2019 was as follows:
As Reported
Effect of Adopting
Balance at
February 2, 2019
ASC 842
February 3, 2019
(17,468)
118,700
(25,260)
112,856
(16,983)
1,209,046
1,460,866
(1,460)
219,206
210,721
(434,980)
1,629,249
1,103,488
3.Acquisitions
The Company continues to make investments to evolve the customer experience, with a strong emphasis on integrating technology across the business. To support these efforts, the Company paid $13,606 to acquire two technology companies in fiscal 2018.
On September 10, 2018, the Company acquired QM Scientific, an artificial intelligence technology company. The acquisition is not material to the Company’s consolidated financial statements.
On October 29, 2018, the Company acquired GlamST, an augmented reality technology company. The acquisition is not material to the Company’s consolidated financial statements.
4.Revenue
The Company’s net sales include retail stores and e-commerce merchandise sales as well as salon services and other revenue. Other revenue sources include the private label credit card and co-branded credit card programs, as well as deferred revenue related to the loyalty program and gift card breakage.
Disaggregated revenue
The following table sets forth the approximate percentage of net sales by primary category:
(Percentage of net sales)
August 3, 2019
August 4, 2018
Cosmetics
47%
49%
50%
51%
Skincare, Bath & Fragrance
22%
20%
21%
Haircare Products & Styling Tools
19%
Services
6%
Other (nail products, accessories, and other)
4%
100%
Deferred revenue primarily represents contract liabilities for the Company’s obligation to transfer additional goods or services to a guest for which the Company has received consideration, such as unredeemed Ultamate Rewards loyalty points and unredeemed Ulta Beauty gift cards. In addition, the Company recognizes breakage on gift cards proportionately as redemption occurs.
The following table provides a summary of the changes included in deferred revenue:
Beginning balance
173,921
130,591
193,585
110,103
Adoption of ASC 606
38,773
Additions to contract liabilities (1)
64,863
89,001
135,167
174,835
Deductions to contract liabilities (2)
(66,831)
(88,976)
(156,799)
(193,095)
Ending balance
171,953
130,616
5.Goodwill and other intangible assets
Goodwill, which represents the excess of cost over the fair value of net assets acquired, amounted to $10,870 at August 3, 2019 and February 2, 2019, respectively. The Company did not have any goodwill as of August 4, 2018. No additional goodwill was recognized during the 13 and 26 weeks ended August 3, 2019, respectively. The Company reviews the recoverability of goodwill annually during the fourth quarter or more frequently if an event occurs or circumstances change that would indicate that impairment may exist.
Other intangible assets with finite useful lives are amortized over their useful lives. The Company reviews the recoverability of long-lived assets whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable.
6.Leases
The Company determines whether an arrangement is or contains a lease at contract inception. The Company leases retail stores, distribution centers, and corporate offices under non-cancellable operating leases with various expiration dates through 2032. Leases generally have an initial lease term of 10 years and include renewal options under substantially the same terms and conditions as the original leases. Leases do not contain any material residual value guarantees or material restrictive covenants.
The lease classification evaluation begins at the lease commencement date. The lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option would result in an economic penalty. All retail store, distribution center, and corporate office leases are classified as operating leases. The Company does not have any finance leases.
Total rent payable is recorded during the lease term, including rent escalations in which the amount of future rent is fixed on the straight-line basis over the term of the lease (including the rent holiday period beginning upon control of the premises, and any fixed payments stated in the lease). For leases with an initial term greater than 12 months, a related lease liability is recorded on the balance sheet at the present value of future payments discounted at the estimated fully collateralized incremental borrowing rate (discount rate) corresponding with the lease term. In addition, a right-of-use asset is recorded as the initial amount of the lease liability, plus any lease payments made to the lessor before or at the lease commencement date and any initial direct costs incurred, less any tenant improvement allowance incentives received. Tenant incentives are amortized through the right-of-use asset as reduction of rent expense over the lease term. The difference between the minimum rents paid and the straight-line rent (deferred rent) is reflected within the associated right-of-use asset. Operating lease expense is recognized on a straight-line basis over the lease term.
Certain leases contain provisions that require additional rent payments based upon sales volume (“variable lease cost”). Contingent rent is accrued each period as the liabilities are incurred, in addition to the straight-line rent expense. This results in some variability in lease expense as a percentage of revenues over the term of the lease in stores where contingent rent is paid.
Leases with an initial term of 12 months or less (“short-term leases”) are not recorded on the balance sheet. Short-term lease expense is recognized on a straight-line basis over the lease term.
The Company subleases certain real estate to third parties for stores with excess square footage space.
The Company does not separate lease and non-lease components (e.g., common area maintenance).
As the interest rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate corresponding with the lease term. As there are no outstanding borrowings under the Company’s credit facility, this rate is estimated based on prevailing market conditions, comparable company and credit analysis, and judgment. The incremental borrowing rate is reassessed if there is a change to the lease term or if a modification occurs and it is not accounted for as a separate contract.
11
The following table presents supplemental balance sheet information, the weighted-average remaining lease term, and discount rate for operating leases as of August 3, 2019:
Classification on the Balance Sheet
Right-of-use assets
Current lease liabilities
Non-current lease liabilities
Total lease liabilities
1,892,004
Weighted-average remaining lease term
7.2 years
Weighted-average discount rate
4.1%
Lease cost
The following table presents the components of lease cost for operating leases:
Classification on the Statement of Income
Operating lease cost
Cost of sales (1)
71,579
142,921
Variable lease cost
(1,524)
(3,324)
Short-term lease cost
73
138
Sublease income
(149)
(290)
Total lease cost
69,979
139,445
(1) The majority of operating lease cost relates to retail stores and distribution centers and is classified within cost of sales. Operating lease cost for corporate offices is classified within selling, general and administrative expenses. Operating lease cost from the control date through store opening date is classified within pre-opening expenses.
Other information
The following table presents supplemental disclosures of cash flow information related to operating leases:
Cash paid for operating lease liabilities (1)
165,882
Operating lease assets obtained in exchange for operating lease liabilities (non-cash)
190,824
Maturity of lease liabilities
The following table presents maturities of operating lease liabilities as of August 3, 2019:
Fiscal year
2019 (1)
113,470
2020
339,422
2021
326,124
2022
307,605
2023
271,830
2024 and thereafter
846,558
Total lease payments
2,205,009
Less: Imputed interest
(313,005)
Present value of operating lease liabilities
Operating lease payments exclude $219,045 of legally binding minimum lease payments for leases signed but not yet commenced.
7.Commitments and contingencies
The Company is involved in various legal proceedings that are incidental to the conduct of the business including both class action and single plaintiff litigation. In the opinion of management, the amount of any liability with respect to these proceedings, either individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
8.Notes payable
On August 23, 2017, the Company entered into a Second Amended and Restated Loan Agreement (the Loan Agreement) with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and a Lender thereunder, Wells Fargo Bank, National Association and JPMorgan Chase Bank, N.A., as Lead Arrangers and Bookrunners, JPMorgan Chase Bank, N.A., as Syndication Agent and a Lender, PNC Bank, National Association, as Documentation Agent and a Lender, and the other lenders party thereto. The Loan Agreement matures on August 23, 2022, provides maximum revolving loans equal to the lesser of $400,000 or a percentage of eligible owned inventory (which borrowing base may, at the election of the Company and satisfaction of certain conditions, include a percentage of eligible owned receivables and qualified cash), contains a $20,000 subfacility for letters of credit and allows the Company to increase the revolving facility by an additional $50,000, subject to the consent by each lender and other conditions. The Loan Agreement contains a requirement to maintain a fixed charge coverage ratio of not less than 1.0 to 1.0 during such periods when availability under the Loan Agreement falls below a specified threshold. Substantially all of the Company’s assets are pledged as collateral for outstanding borrowings under the Loan Agreement. Outstanding borrowings bear interest at either a base rate or the London Interbank Offered Rate plus 1.25%, and the unused line fee is 0.20% per annum.
As of August 3, 2019, February 2, 2019 and August 4, 2018, the Company had no borrowings outstanding under the credit facility and the Company was in compliance with all terms and covenants of the Loan Agreement.
13
9.Fair value measurements
The carrying value of cash and cash equivalents, short-term investments, accounts receivable, and accounts payable approximates their estimated fair values due to the short maturities of these instruments.
Fair value is measured using inputs from the three levels of the fair value hierarchy, which are described as follows:
As of August 3, 2019, February 2, 2019 and August 4, 2018, the Company held financial liabilities included in other long-term liabilities on the consolidated balance sheets of $26,848, $19,615, and $20,419, respectively, related to its non-qualified deferred compensation plan. The liabilities have been categorized as Level 2 as they are based on third-party reported values, which are based primarily on quoted market prices of underlying assets of the funds within the plan.
10.Investments
The Company’s short-term investments as of August 3, 2019 and August 4, 2018 consist of $150,000 and $149,000, respectively, in certificates of deposit. The Company did not have any short-term investments as of February 2, 2019. Short-term investments are carried at cost, which approximates fair value and are recorded in the consolidated balance sheets in short-term investments.
The Company’s investments in renewable energy projects are accounted for under the equity method of accounting. The balance of these investments is included in other long-term assets in the consolidated balance sheet. The Company contributed capital of $33,339 and received distributions including $17,370 of investment tax credits during the 26 weeks ended August 3, 2019.
11.Stock-based compensation
The Company measures stock-based compensation expense on the grant date, based on the fair value of the award, and recognizes the expense on a straight-line basis over the requisite service period for awards expected to vest. The Company estimated the grant date fair value of stock options using a Black-Scholes valuation model using the following weighted-average assumptions for the periods indicated:
Volatility rate
31.0%
29.0%
Average risk-free interest rate
2.3%
2.4%
Average expected life (in years)
3.5
3.4
Dividend yield
None
The Company granted 97 and 163 stock options during the 26 weeks ended August 3, 2019 and August 4, 2018, respectively. The stock-based compensation expense charged against operating income for stock options was $2,199 and $2,215 for the 13 weeks ended August 3, 2019 and August 4, 2018, respectively. The stock-based compensation expense charged against operating income for stock options was $4,319 and $4,423 for the 26 weeks ended August 3, 2019 and August 4, 2018, respectively. The weighted-average grant date fair value of these stock options was $89.91 and $50.10 for the 26 weeks ended August 3, 2019 and August 4, 2018, respectively. At August 3, 2019, there was approximately $20,473 of unrecognized stock-based compensation expense related to unvested stock options.
The Company issued 47 and 92 restricted stock units during the 26 weeks ended August 3, 2019 and August 4, 2018, respectively. The stock-based compensation expense charged against operating income for restricted stock units was
$3,422 and $3,290 for the 13 weeks ended August 3, 2019 and August 4, 2018, respectively. The stock-based compensation expense charged against operating income for restricted stock units was $6,243 and $5,795 for the 26 weeks ended August 3, 2019 and August 4, 2018, respectively. At August 3, 2019, there was approximately $27,170 of unrecognized stock-based compensation expense related to restricted stock units.
The Company issued 21 and 33 performance-based restricted stock units during the 26 weeks ended August 3, 2019 and August 4, 2018, respectively. The stock-based compensation expense charged against operating income for performance-based restricted stock units was $1,390 and $1,722 for the 13 weeks ended August 3, 2019 and August 4, 2018, respectively. The stock-based compensation expense charged against operating income for performance-based restricted stock units was $3,101 and $3,179 for the 26 weeks ended August 3, 2019 and August 4, 2018, respectively. At August 3, 2019, there was approximately $12,745 of unrecognized stock-based compensation expense related to performance-based restricted stock units.
12.Income taxes
Income tax expense reflects the federal statutory tax rate and the weighted average state statutory tax rate for the states in which the Company operates stores. Income tax expense of $48,431 for the 13 weeks ended August 3, 2019 represents an effective tax rate of 23.1%, compared to $46,635 of tax expense representing an effective tax rate of 23.9% for the 13 weeks ended August 4, 2018. The lower effective tax rate is primarily due to an increase in federal income tax credits.
Income tax expense of $95,796 for the 26 weeks ended August 3, 2019 represents an effective tax rate of 21.3%, compared to $93,406 of tax expense representing an effective tax rate of 23.0% for the 26 weeks ended August 4, 2018. The lower effective tax rate is primarily due to income tax accounting for share-based compensation.
13.Net income per common share
The following is a reconciliation of net income and the number of shares of common stock used in the computation of net income per basic and diluted share:
Numerator for diluted net income per share – net income
Denominator for basic net income per share – weighted-average common shares
Dilutive effect of stock options and non-vested stock
275
305
317
290
Denominator for diluted net income per share
The denominator for diluted net income per common share for the 13 weeks ended August 3, 2019 and August 4, 2018 excludes 101 and 285 employee stock options and restricted stock units, respectively, due to their anti-dilutive effects. The denominator for diluted net income per common share for the 26 weeks ended August 3, 2019 and August 4, 2018 excludes 164 and 378 employee stock options and restricted stock units, respectively, due to their anti-dilutive effects. Outstanding performance-based restricted stock units are included in the computation of dilutive shares only to the extent that the underlying performance conditions are satisfied prior to the end of the reporting period or would be considered satisfied if the end of the reporting period were the end of the related contingency period and the results would be dilutive under the treasury stock method.
14.Share repurchase program
On March 9, 2017, the Company announced that the Board of Directors authorized a share repurchase program (the 2017 Share Repurchase Program) pursuant to which the Company could repurchase up to $425,000 of the Company’s common stock. The 2017 Share Repurchase Program authorization revoked the previously authorized but unused amount of $79,863 from the earlier share repurchase program. The 2017 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.
On March 15, 2018, the Company announced that the Board of Directors authorized a share repurchase program (the 2018 Share Repurchase Program) pursuant to which the Company could repurchase up to $625,000 of the Company’s common stock. The 2018 Share Repurchase Program authorization revoked the previously authorized but unused amount of $41,317 from the 2017 Share Repurchase Program. The 2018 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.
On March 14, 2019, the Company announced that the Board of Directors authorized a new share repurchase program (the 2019 Share Repurchase Program) pursuant to which the Company may repurchase up to $875,000 of the Company’s common stock. The 2019 Share Repurchase Program authorization revoked the previously authorized but unused amount of $25,435 from the 2018 Share Repurchase Program. The 2019 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time.
During the 26 weeks ended August 3, 2019, the Company purchased 1,110 shares of common stock for $378,301. During the 26 weeks ended August 4, 2018, the Company purchased 1,131 shares of common stock for $260,452.
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our financial statements and related notes included elsewhere in this quarterly report. This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, and the safe harbor provisions of the Private Securities Litigation Reform Act of 1995, which reflect our current views with respect to, among other things, future events and financial performance. You can identify these forward-looking statements by the use of forward-looking words such as “outlook,” “believes,” “expects,” “plans,” “estimates,” “targets,” “strategies,” or other comparable words. Any forward-looking statements contained in this Form 10-Q are based upon our historical performance and on current plans, estimates, and expectations. The inclusion of this forward-looking information should not be regarded as a representation by us or any other person that the future plans, estimates, targets, strategies, or expectations contemplated by us will be achieved. Such forward-looking statements are subject to various risks and uncertainties, which include, without limitation:
Except to the extent required by the federal securities laws, we undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.
References in the following discussion to “we,” “us,” “our,” “Ulta Beauty,” the “Company,” and similar references mean Ulta Beauty, Inc. and its consolidated subsidiaries, unless otherwise expressly stated or the context otherwise requires.
Overview
We were founded in 1990 as a beauty retailer at a time when prestige, mass, and salon products were sold through distinct channels – department stores for prestige products, drug stores and mass merchandisers for mass products, and salons and authorized retail outlets for professional hair care products. We developed a unique specialty retail concept that offers a broad range of brands and price points, a compelling value proposition, and a convenient and welcoming shopping environment. We define our target consumer as a beauty enthusiast, a consumer who is passionate about the beauty category and has high expectations for the shopping experience. We believe our strategy provides us with the competitive advantages that have contributed to our financial performance.
We are the largest beauty retailer in the United States and the premier beauty destination for cosmetics, fragrance, skin care products, hair care products, and salon services. We provide unmatched product breadth, value, and convenience in a distinctive specialty retail environment. Key aspects of our business include: our ability to offer our guests a unique combination of more than 25,000 beauty products from across the categories of prestige and mass cosmetics, fragrance, haircare, skincare, bath and body products, and salon styling tools, as well as a full-service salon in every store featuring hair, skin, and brow services; our focus on delivering a compelling value proposition to our guests across all of our product categories; and convenience, as our stores are predominantly located in convenient, high-traffic locations such as power centers.
The continued growth of our business and any future increases in net sales, net income, and cash flows is dependent on our ability to execute our strategic imperatives: 1) drive growth across beauty enthusiast consumer groups, 2) deepen Ulta Beauty love and loyalty, 3) deliver a one of a kind, world class beauty assortment, 4) lead the in-store and beauty services experience transformation, 5) reinvent beauty digital engagement, 6) deliver operational excellence and drive efficiencies, and 7) invest in talent that drives a winning culture. We believe that the expanding U.S. beauty products and salon services industry, the shift in distribution channel of prestige beauty products from department stores to specialty retail stores, coupled with Ulta Beauty’s competitive strengths, position us to capture additional market share in the industry.
Comparable sales is a key metric that is monitored closely within the retail industry. Our comparable sales have fluctuated in the past, and we expect them to continue to fluctuate in the future. A variety of factors affect our comparable sales, including general U.S. economic conditions, changes in merchandise strategy or mix, and timing and effectiveness of our marketing activities, among others.
Over the long term, our growth strategy is to increase total net sales through increases in our comparable sales, opening new stores, and increasing omnichannel capabilities. Operating profit is expected to increase as a result of our ability to expand merchandise margin and leverage our fixed store costs with comparable sales increases and operating efficiencies offset by incremental investments in people, systems, and supply chain required to support a 1,500 to 1,700 store chain in the U.S. with successful e-commerce and competitive omnichannel capabilities.
Current business trends
Our research indicates that Ulta Beauty continues to drive meaningful market share across all categories. However, our research also suggests that the cosmetics category in the overall U.S. market has experienced mid-single digit declines through the first six months of 2019. Beauty cycles are impacted by demographics and innovation. While demographic
trends continue to be favorable, we believe a lack of incremental innovation has resulted in a challenging cycle for the cosmetics category, as innovation brought to the market has not resulted in incremental product purchases. Despite the overall market decline in the cosmetics category, we remain confident that our differentiated and diverse business model, our commitment to strategic investments, and our highly engaged associates will continue to drive market share gains.
Basis of presentation
The Company has one reportable segment, which includes retail stores, salon services, and e-commerce.
We recognize merchandise revenue at the point of sale in our retail stores. E-commerce merchandise sales are recognized based upon shipment of merchandise to the guest based on meeting the transfer of control criteria. Retail store and e-commerce sales are recorded net of estimated returns. Shipping and handling are treated as costs to fulfill the contract, and as a result, any fees received from guests are included in the transaction price allocated to the performance obligation of providing goods with a corresponding amount accrued within cost of sales for amounts paid to applicable carriers. We provide refunds for merchandise returns within 60 days from the original purchase date. State sales taxes are presented on a net basis as we consider our self a pass-through conduit for collecting and remitting state sales tax. Salon service revenue is recognized at the time the service is provided to the guest. Gift card sales revenue is deferred until the guest redeems the gift card. Company coupons and other incentives are recorded as a reduction of net sales. Other revenue sources include the private label credit card and co-branded credit card programs, as well as deferred revenue related to the loyalty program and gift card breakage.
Comparable sales reflect sales for stores beginning on the first day of the 14th month of operation. Therefore, a store is included in our comparable store base on the first day of the period after one year of operations plus the initial one month grand opening period. Non-comparable store sales include sales from new stores that have not yet completed their 13th month of operation and stores that were closed for part or all of the period in either year as a result of remodel activity. Remodeled stores are included in comparable sales unless the store was closed for a portion of the current or prior period. Comparable sales include retail sales, salon services, and e-commerce. There may be variations in the way in which some of our competitors and other retailers calculate comparable or same store sales.
Measuring comparable sales allows us to evaluate the performance of our store base as well as several other aspects of our overall strategy. Several factors could positively or negatively impact our comparable sales results:
Cost of sales includes:
Our cost of sales may be negatively impacted as we open an increasing number of stores. Changes in our merchandise mix may also have an impact on cost of sales. This presentation of items included in cost of sales may not be comparable to the way in which our competitors or other retailers compute their cost of sales.
Selling, general and administrative expenses include:
This presentation of items in selling, general and administrative expenses may not be comparable to the way in which our competitors or other retailers compute their selling, general and administrative expenses.
Pre-opening expenses include non-capital expenditures during the period prior to store opening for new, remodeled, and relocated stores including rent during the construction period for new and relocated stores, store set-up labor, management and employee training, and grand opening advertising.
Interest income, net includes both interest income and expense. Interest income represents interest from cash equivalents and short-term investments with maturities of twelve months or less from the date of purchase. Interest expense includes interest costs and facility fees associated with our credit facility, which is structured as an asset-based lending instrument. Our credit facility interest is based on a variable interest rate structure which can result in increased cost in periods of rising interest rates.
Income tax expense reflects the federal statutory tax rate and the weighted average state statutory tax rate for the states in which we operate stores.
Results of operations
Our quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31, and January 31. The Company’s second quarter in fiscal 2019 and 2018 ended on August 3, 2019 and August 4, 2018, respectively. Our quarterly results of operations have varied in the past and are likely to do so again in the future. As such, we believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of our future performance.
The following table presents the components of our consolidated results of operations for the periods indicated:
(Dollars in thousands)
Other operating data:
Number of stores end of period
1,124
Comparable sales increase
6.2%
6.5%
6.6%
7.3%
100.0%
63.6%
64.0%
63.3%
63.8%
36.4%
36.0%
36.7%
36.2%
23.6%
22.7%
23.3%
22.5%
0.3%
12.5%
13.0%
13.1%
13.3%
0.1%
12.6%
13.2%
13.4%
2.9%
3.1%
2.8%
9.7%
10.0%
10.4%
10.3%
Comparison of 13 weeks ended August 3, 2019 to 13 weeks ended August 4, 2018
Net sales increased $178.4 million or 12.0%, to $1,666.6 million for the 13 weeks ended August 3, 2019, compared to $1,488.2 million for the 13 weeks ended August 4, 2018. Comparable stores contributed $90.3 million of the total net sales increase and non-comparable stores contributed $82.8 million of the total net sales increase. Other revenue increased $5.3 million compared to the second quarter of 2018.
The total comparable sales increase of 6.2% included a 5.4% increase in transactions and a 0.8% increase in average ticket. We attribute the increase in comparable sales to our successful marketing and merchandising strategies.
Gross profit increased $70.4 million or 13.2%, to $605.9 million for the 13 weeks ended August 3, 2019, compared to $535.5 million for the 13 weeks ended August 4, 2018. Gross profit as a percentage of net sales increased 40 basis points to 36.4% for the 13 weeks ended August 3, 2019, compared to 36.0% for the 13 weeks ended August 4, 2018. The increase in gross profit margin was primarily due to improvement in merchandise margins driven by our marketing and merchandising strategies and leverage in fixed store costs attributed to the impact of higher sales volume, partially offset by investments in our salon services.
Selling, general and administrative (SG&A) expenses increased $55.7 million or 16.5%, to $392.8 million for the 13 weeks ended August 3, 2019, compared to $337.1 million for the 13 weeks ended August 4, 2018. SG&A expenses as a percentage of net sales increased 90 basis points to 23.6% for the 13 weeks ended August 3, 2019, compared to 22.7% for the 13 weeks ended August 4, 2018. The increase is primarily due to deleverage in corporate overhead related to investments in growth initiatives and store labor.
Pre-opening expenses increased $0.5 million to $5.0 million for the 13 weeks ended August 3, 2019, compared to $4.5 million for the 13 weeks ended August 4, 2018. During the 13 weeks ended August 3, 2019, we opened 20 new stores, remodeled eight stores, and relocated four stores, compared to the 13 weeks ended August 4, 2018, when we opened 19 new stores, remodeled seven stores, and relocated one store.
Interest income, net was $1.7 million for the 13 weeks ended August 3, 2019 compared to $1.1 million for the 13 weeks ended August 4, 2018. Interest income results from cash equivalents and short-term investments with maturities of twelve months or less from the date of purchase. Interest expense represents interest on borrowings and fees related to the credit facility. We did not have any outstanding borrowings on our credit facility as of August 3, 2019 and August 4, 2018.
Income tax expense of $48.4 million for the 13 weeks ended August 3, 2019 represents an effective tax rate of 23.1%, compared to $46.6 million of tax expense representing an effective tax rate of 23.9% for the 13 weeks ended August 4, 2018. The lower effective tax rate is primarily due to an increase in federal income tax credits.
Net income increased $12.9 million or 8.7%, to $161.3 million for the 13 weeks ended August 3, 2019, compared to $148.3 million for the 13 weeks ended August 4, 2018. The increase in net income is primarily related to the $70.4 million increase in gross profit partially offset by a $55.7 million increase in SG&A expenses.
Comparison of 26 weeks ended August 3, 2019 to 26 weeks ended August 4, 2018
Net sales increased $377.7 million or 12.5%, to $3,409.6 million for the 26 weeks ended August 3, 2019, compared to $3,031.9 million for the 26 weeks ended August 4, 2018. Comparable stores contributed $196.6 million of the total net sales increase and non-comparable stores contributed $172.6 million of the total net sales increase. Other revenue increased $8.5 million compared to the second quarter of 2018.
The total comparable sales increase of 6.6% included a 4.8% increase in transactions and a 1.8% increase in average ticket. We attribute the increase in comparable sales to our successful marketing and merchandising strategies.
Gross profit increased $154.6 million or 14.1%, to $1,250.7 million for the 26 weeks ended August 3, 2019, compared to $1,096.2 million for the 26 weeks ended August 4, 2018. Gross profit as a percentage of net sales increased 50 basis points to 36.7% for the 26 weeks ended August 3, 2019, compared to 36.2% for the 26 weeks ended August 4, 2018. The increase in gross profit margin was primarily due to improvement in merchandise margins driven by our marketing and merchandising strategies and leverage in fixed store costs attributed to the impact of higher sales volume, partially offset by investments in our salon services and supply chain operations.
SG&A expenses increased $113.2 million or 16.6%, to $796.0 million for the 26 weeks ended August 3, 2019, compared to $682.8 million for the 26 weeks ended August 4, 2018. SG&A expenses as a percentage of net sales increased 80 basis points to 23.3% for the 26 weeks ended August 3, 2019, compared to 22.5% for the 26 weeks ended August 4, 2018. The increase is primarily due to deleverage in corporate overhead related to investments in growth initiatives and store labor, partially offset by improvement in variable store and marketing expense attributed to cost efficiencies and higher sales volume.
Pre-opening expenses decreased $0.5 million to $9.2 million for the 26 weeks ended August 3, 2019, compared to $9.8 million for the 26 weeks ended August 4, 2018. During the 26 weeks ended August 3, 2019, we opened 42 new stores and remodeled nine stores, and relocated four stores, compared to the 26 weeks ended August 4, 2018, when we opened 53 new stores, remodeled nine stores, and relocated one store.
Interest income, net was $3.7 million for the 26 weeks ended August 3, 2019 compared to $2.5 million for the 26 weeks ended August 4, 2018. Interest income results from cash equivalents and short-term investments with maturities of twelve months or less from the date of purchase. Interest expense represents interest on borrowings and fees related to the credit facility. We did not have any outstanding borrowings on our credit facility as of August 3, 2019 and August 4, 2018.
Income tax expense of $95.8 million for the 26 weeks ended August 3, 2019 represents an effective tax rate of 21.3%, compared to $93.4 million of tax expense representing an effective tax rate of 23.0% for the 26 weeks ended August 4, 2018. The lower effective tax rate is primarily due to income tax accounting for share-based compensation.
Net income increased $40.8 million or 13.0%, to $353.5 million for the 26 weeks ended August 3, 2019, compared to $312.7 million for the 26 weeks ended August 4, 2018. The increase in net income is primarily related to the $154.6 million increase in gross profit partially offset by a $113.2 million increase in SG&A expenses.
22
Liquidity and capital resources
Our primary cash needs are for rent, capital expenditures for new, remodeled, relocated, and refreshed stores (prestige boutiques and related in-store merchandising upgrades), increased merchandise inventories related to store expansion and new brand additions, in-store boutiques (sets of custom-designed fixtures configured to prominently display certain prestige brands within our stores), supply chain improvements, share repurchases, and continued improvement in our information technology systems.
Our primary sources of liquidity are cash and cash equivalents, short-term investments, cash flows from operations, including changes in working capital, and borrowings under our credit facility. The most significant components of our working capital are merchandise inventories and cash and cash equivalents reduced by related accounts payable and accrued expenses.
Our working capital needs are greatest from August through November each year as a result of our inventory build-up during this period for the approaching holiday season. This is also the time of year when we are at maximum investment levels in our new store class and may not have collected all of the landlord allowances due to us as part of our lease agreements. Based on past performance and current expectations, we believe that cash and cash equivalents, short-term investments, cash generated from operations, and borrowings under the credit facility will satisfy the Company’s working capital needs, capital expenditure needs, commitments, and other liquidity requirements through at least the next twelve months.
The following table presents a summary of our cash flows for the periods indicated:
Operating activities consist of net income adjusted for certain non-cash items, including depreciation and amortization, non-cash lease expense, deferred income taxes, stock-based compensation expense, realized gains or losses on disposal of property and equipment, and the effect of working capital changes. The increase over the prior year is mainly due to increase in net income, merchandise inventories, other assets and liabilities, and the timing of receivables, partially offset by the timing of accounts payable.
Merchandise inventories, net were $1,316.0 million at August 3, 2019, compared to $1,219.7 million at August 4, 2018, representing an increase of $96.3 million or 7.9%. Average inventory per store was flat compared to prior year. The increase in inventory is primarily due to the addition of 89 net new stores opened since August 4, 2018.
We have historically used cash primarily for new, remodeled, relocated, and refreshed stores, supply chain investments, short-term investments, and investments in information technology systems. Investment activities for capital expenditures were $151.2 million during the 26 weeks ended August 3, 2019, compared to $141.7 million during the 26 weeks ended August 4, 2018. As of August 3, 2019, we had $150.0 million of short-term investments, which consist of certificates of deposit with maturities of twelve months or less from the date of purchase. During the 26 weeks ended August 3, 2019, we have contributed $33.3 million to equity method investments.
Financing activities in fiscal 2019 and 2018 consist principally of share repurchases and capital stock transactions. Purchases of treasury shares represent the fair value of common shares repurchased from plan participants in connection with shares withheld to satisfy minimum statutory tax obligations upon the vesting of restricted stock.
We had no borrowings outstanding under our credit facility as of August 3, 2019, February 2, 2019 and August 4, 2018. The zero outstanding borrowings position is due to a combination of factors including strong sales growth, overall performance of management initiatives including expense control, as well as inventory and other working capital reductions. We may require borrowings under the facility from time to time in future periods to support our new store program, share repurchases, and seasonal inventory needs.
Share repurchase plan
On March 9, 2017, we announced that the Board of Directors authorized a share repurchase program (the 2017 Share Repurchase Program) pursuant to which the Company could repurchase up to $425.0 million of the Company’s common stock. The 2017 Share Repurchase Program authorization revoked the previously authorized but unused amount of $79.9 million from the earlier share repurchase program. The 2017 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.
On March 15, 2018, we announced that the Board of Directors authorized a share repurchase program (the 2018 Share Repurchase Program) pursuant to which the Company could repurchase up to $625.0 million of the Company’s common stock. The 2018 Share Repurchase Program authorization revoked the previously authorized but unused amount of $41.3 million from the 2017 Share Repurchase Program. The 2018 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.
On March 14, 2019, we announced that the Board of Directors authorized a new share repurchase program (the 2019 Share Repurchase Program) pursuant to which the Company may repurchase up to $875.0 million of the Company’s common stock. The 2019 Share Repurchase Program authorization revoked the previously authorized but unused amount of $25.4 million from the 2018 Share Repurchase Program. The 2019 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time.
During the 26 weeks ended August 3, 2019, we purchased 1,110,034 shares of common stock for $378.3 million. During the 26 weeks ended August 4, 2018, we purchased 1,130,694 shares of common stock for $260.5 million.
Credit facility
On August 23, 2017, we entered into a Second Amended and Restated Loan Agreement (the Loan Agreement) with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and a Lender thereunder, Wells Fargo Bank, National Association and JPMorgan Chase Bank, N.A., as Lead Arrangers and Bookrunners, JPMorgan Chase Bank, N.A., as Syndication Agent and a Lender, PNC Bank, National Association, as Documentation Agent and a Lender, and the other lenders party thereto. The Loan Agreement matures on August 23, 2022, provides maximum revolving loans equal to the lesser of $400.0 million or a percentage of eligible owned inventory (which borrowing base may, at the election of the Company and satisfaction of certain conditions, include a percentage of eligible owned receivables and qualified cash), contains a $20.0 million subfacility for letters of credit and allows the Company to increase the revolving facility by an additional $50.0 million, subject to the consent by each lender and other conditions. The Loan Agreement contains a requirement to maintain a fixed charge coverage ratio of not less than 1.0 to 1.0 during such periods when availability under the Loan Agreement falls below a specified threshold. Substantially all of the Company’s assets are pledged as collateral for outstanding borrowings under the Loan Agreement. Outstanding borrowings bear interest at either a base rate or the London Interbank Offered Rate plus 1.25%, and the unused line fee is 0.20% per annum.
As of August 3, 2019, February 2, 2019 and August 4, 2018, we had no borrowings outstanding under the credit facility and the Company was in compliance with all terms and covenants of the Loan Agreement.
Seasonality
Our business is subject to seasonal fluctuation. Significant portions of our net sales and profits are realized during the fourth quarter of the fiscal year due to the holiday selling season. To a lesser extent, our business is also affected by Mother’s Day, and Valentine’s Day. Any decrease in sales during these higher sales volume periods could have an adverse effect on our business, financial condition, or operating results for the entire fiscal year. Our quarterly results of operations have varied in the past and are likely to do so again in the future. As such, we believe that period-to-period comparisons of our results of operations should not be relied upon as an indication of our future performance.
Off-balance sheet arrangements
As of August 3, 2019, we have not entered into any “off-balance sheet” arrangements, as that term is described by the SEC. We do, however, have off-balance sheet purchase obligations incurred in the ordinary course of business.
Contractual obligations
Our contractual obligations consist of operating lease obligations, purchase obligations, and our revolving line of credit. No material changes outside the ordinary course of business have occurred in our contractual obligations during the 26 weeks ended August 3, 2019.
Critical accounting policies and estimates
Management’s discussion and analysis of financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these consolidated financial statements required the use of estimates and judgments that affect the reported amounts of our assets, liabilities, revenues, and expenses. Management bases estimates on historical experience and other assumptions it believes to be reasonable under the circumstances and evaluates these estimates on an on-going basis. Actual results may differ from these estimates. Other than adoption of the new lease accounting standard as discussed in Note 6 to our consolidated financial statements, “Leases,” there have been no significant changes to the critical accounting policies and estimates included in our Annual Report on Form 10-K for the fiscal year ended February 2, 2019.
See Note 2 to our consolidated financial statements, “Summary of significant accounting policies – Recent accounting pronouncements not yet adopted.”
See Note 2 to our consolidated financial statements, “Summary of significant accounting policies – Recently adopted accounting pronouncements.”
Item 3.Quantitative and Qualitative Disclosures About Market Risk
Market risk represents the risk of loss that may impact our financial position due to adverse changes in financial market prices and rates. Our market risk exposure is primarily the result of fluctuations in interest rates. We do not hold or issue financial instruments for trading purposes.
Interest rate risk
We are exposed to interest rate risks primarily through borrowings under our credit facility. Interest on our borrowings is based upon variable rates. We did not have any outstanding borrowings on our credit facility as of August 3, 2019 and August 4, 2018.
Item 4.Controls and Procedures
Evaluation of disclosure controls and procedures over financial reporting
We have established disclosure controls and procedures to ensure that material information relating to the Company is made known to the officers who certify our financial reports and to the members of our senior management and Board of Directors.
Based on management’s evaluation as of August 3, 2019, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, are effective to ensure that the information required to be disclosed by us in our reports that we file or submit under the Securities Exchange Act of 1934, as amended, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in internal control over financial reporting
There were no changes to our internal controls over financial reporting during the 13 weeks ended August 3, 2019 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Item 1.Legal Proceedings
See Note 7 to our consolidated financial statements, “Commitments and contingencies,” for information on legal proceedings.
Item 1A.Risk Factors
In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended February 2, 2019, which could materially affect our business, financial condition, financial results, or future performance. There have been no material changes from the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended February 2, 2019.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth repurchases of our common stock during the second quarter of 2019:
Period
Total number
of shares
purchased (1)
Averageprice paidper share
Total numberof sharespurchased aspart of publiclyannouncedplans orprograms (2)
Approximatedollar value ofshares that may yetto be purchasedunder plans or programs(in thousands) (2)
May 5, 2019 to June 1, 2019
236,124
334.94
709,142
June 2, 2019 to June 29, 2019
321,479
345.12
321,362
598,232
June 30, 2019 to August 3, 2019
234,259
345.57
234,117
517,328
13 weeks ended August 3, 2019
791,862
342.22
791,603
Item 3.Defaults Upon Senior Securities
Item 4.Mine Safety Disclosures
Item 5.Other Information
Item 6.Exhibits
The exhibits listed in the Exhibit Index below are filed as part of this Quarterly Report on Form 10-Q.
EXHIBIT INDEX
Incorporated by Reference
ExhibitNumber
Description of document
Filed Herewith
Form
File
Number
Filing Date
3.1
Certificate of Incorporation of Ulta Beauty, Inc.
8-K
001-33764
1/30/2017
3.2
Certificate of Designations of Series A Junior Participating Preferred Stock of Ulta Beauty, Inc.
3.3
Bylaws of Ulta Beauty, Inc., as amended through June 5, 2019
6/10/2019
31.1
Certification of the Chief Executive Officer pursuant to Rules 13a14(a) and 15d14(a) of the Securities Exchange Act of 1934, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002
X
31.2
Certification of the Chief Financial Officer pursuant to Rules 13a14(a) and 15d14(a) of the Securities Exchange Act of 1934, as adopted pursuant to section 302 of the Sarbanes-Oxley Act of 2002
Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS
Inline XBRL Instance
101.SCH
Inline XBRL Taxonomy Extension Schema
101.CAL
Inline XBRL Taxonomy Extension Calculation
101.LAB
Inline XBRL Taxonomy Extension Labels
101.PRE
Inline XBRL Taxonomy Extension Presentation
101.DEF
Inline XBRL Taxonomy Extension Definition
104
Cover page Interactive Data File (formatted as Inline XBRL with applicable taxonomy extension information contained in Exhibits 101).
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on August 29, 2019 on its behalf by the undersigned, thereunto duly authorized.
By:
/s/ Mary N. Dillon
Mary N. DillonChief Executive Officer and Director
/s/ Scott M. Settersten
Scott M. SetterstenChief Financial Officer, Treasurer and Assistant Secretary