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 May 4, 2024
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 the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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 May 24, 2024 was 47,716,365 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
14
Item 3. Quantitative and Qualitative Disclosures about Market Risk
22
Item 4. Controls and Procedures
Part II - Other Information
23
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
Item 4. Mine Safety Disclosures
Item 5. Other Information
24
Item 6. Exhibits
SIGNATURES
25
2
Item 1.Financial Statements
Ulta Beauty, Inc.
May 4,
February 3,
April 29,
(In thousands, except per share data)
2024
2023
Assets
(Unaudited)
Current assets:
Cash and cash equivalents
$
524,596
766,594
636,449
Receivables, net
203,463
207,939
190,282
Merchandise inventories, net
1,906,040
1,742,136
1,751,235
Prepaid expenses and other current assets
126,529
115,598
108,014
Prepaid income taxes
—
4,251
Total current assets
2,760,628
2,836,518
2,685,980
Property and equipment, net
1,195,658
1,182,335
1,019,978
Operating lease assets
1,561,767
1,574,530
1,559,560
Goodwill
10,870
Other intangible assets, net
434
510
1,015
Deferred compensation plan assets
45,718
43,516
37,002
Other long-term assets
56,864
58,732
61,314
Total assets
5,631,939
5,707,011
5,375,719
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
463,777
544,001
621,272
Accrued liabilities
332,692
382,468
308,583
Deferred revenue
398,729
436,591
357,217
Current operating lease liabilities
284,815
283,821
288,133
Accrued income taxes
92,711
11,310
58,695
Total current liabilities
1,572,724
1,658,191
1,633,900
Non-current operating lease liabilities
1,607,953
1,627,271
1,610,256
Deferred income taxes
89,556
85,921
57,490
Other long-term liabilities
60,963
56,300
56,005
Total liabilities
3,331,196
3,427,683
3,357,651
Commitments and contingencies (Note 6)
Stockholders' equity:
Common stock, $0.01 par value, 400,000 shares authorized; 48,688, 49,123, and 50,729 shares issued; 47,845, 48,324, and 49,932 shares outstanding; at May 4, 2024 (unaudited), February 3, 2024, and April 29, 2023 (unaudited), respectively
487
491
507
Treasury stock-common, at cost
(106,315)
(83,032)
(82,129)
Additional paid-in capital
1,091,822
1,075,104
1,040,378
Retained earnings
1,314,749
1,286,765
1,059,312
Total stockholders’ equity
2,300,743
2,279,328
2,018,068
Total liabilities and stockholders’ equity
See accompanying notes to consolidated financial statements.
13 Weeks Ended
Net sales
2,725,848
2,634,263
Cost of sales
1,656,068
1,579,406
Gross profit
1,069,780
1,054,857
Selling, general and administrative expenses
665,913
612,129
Pre-opening expenses
2,919
658
Operating income
400,948
442,070
Interest income, net
(6,900)
(7,348)
Income before income taxes
407,848
449,418
Income tax expense
94,735
102,367
Net income
313,113
347,051
Net income per common share:
Basic
6.51
6.92
Diluted
6.47
6.88
Weighted average common shares outstanding:
48,125
50,153
48,381
50,469
(In thousands)
Operating activities
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization
64,739
57,949
Non-cash lease expense
77,938
75,478
3,635
2,144
Stock-based compensation expense
10,082
9,721
Loss on disposal of property and equipment
2,975
1,451
Change in operating assets and liabilities:
Receivables
4,476
9,140
Merchandise inventories
(163,904)
(147,784)
(10,931)
22,232
Income taxes
85,652
97,003
(74,069)
62,257
(43,846)
(98,515)
(37,862)
(37,460)
Operating lease liabilities
(83,500)
(78,562)
Other assets and liabilities
10,842
(17,204)
Net cash provided by operating activities
159,340
304,901
Investing activities
Capital expenditures
(91,024)
(109,766)
Other investments
(2,563)
(314)
Net cash used in investing activities
(93,587)
(110,080)
Financing activities
Repurchase of common shares
(289,431)
(283,517)
Stock options exercised
8,913
8,927
Purchase of treasury shares
(23,283)
(21,659)
Debt issuance costs
(3,950)
Net cash used in financing activities
(307,751)
(296,249)
Net decrease in cash and cash equivalents
(241,998)
(101,428)
Cash and cash equivalents at beginning of period
737,877
Cash and cash equivalents at end of period
Supplemental information
Income taxes paid, net of refunds
5,057
2,818
Non-cash capital expenditures
51,695
29,634
Treasury -
Common Stock
Additional
Total
Issued
Treasury
Paid-In
Retained
Stockholders'
Shares
Amount
Capital
Earnings
Equity
Balance – January 28, 2023
51,120
511
(756)
(60,470)
1,023,997
995,773
1,959,811
Stock-based compensation
Stock options exercised and other awards
150
1
8,926
(41)
Repurchase of common shares, including excise tax
(541)
(5)
(2,266)
(283,512)
(285,783)
Balance – April 29, 2023
50,729
(797)
Balance – February 3, 2024
49,123
(799)
153
8,911
(44)
(588)
(6)
(2,275)
(285,129)
(287,410)
Balance – May 4, 2024
48,688
(843)
(In thousands, except per share and store count data) (Unaudited)
1.Business and basis of presentation
Ulta Beauty, Inc. was founded in 1990 to operate specialty retail stores selling cosmetics, fragrance, haircare and skincare products, and related accessories and services. Nearly every store features a full-service salon. 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.
As of May 4, 2024, the Company operated 1,395 stores across 50 states, as shown in the table below.
Number of
Location
stores
Alabama
Montana
Alaska
Nebraska
Arizona
35
Nevada
16
Arkansas
11
New Hampshire
8
California
172
New Jersey
45
Colorado
27
New Mexico
Connecticut
19
New York
56
North Carolina
Florida
99
North Dakota
Georgia
43
Ohio
46
Hawaii
Oklahoma
Idaho
10
Oregon
Illinois
55
Pennsylvania
Indiana
26
Rhode Island
Iowa
South Carolina
Kansas
13
South Dakota
Kentucky
Tennessee
32
Louisiana
18
Texas
131
Maine
Utah
15
Maryland
28
Vermont
Massachusetts
Virginia
Michigan
49
Washington
37
Minnesota
20
West Virginia
Mississippi
12
Wisconsin
21
Missouri
Wyoming
1,395
The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles 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 unaudited 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, with significant portions of net sales and net income being realized during the fourth quarter of the fiscal year due to the holiday selling season. The results for the 13 weeks ended May 4, 2024 are not necessarily indicative of the results to be expected for the fiscal year ending February 1, 2025, or for any other future interim period or for any future year.
These unaudited 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 3, 2024. 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 significant accounting policies is contained in Note 2, “Summary of significant accounting policies,” to the consolidated financial statements in the Annual Report on Form 10-K for the year ended February 3, 2024. 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 first quarter in fiscal 2024 and 2023 ended on May 4, 2024 and April 29, 2023, respectively.
Use of estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the accounting period. Actual results could differ from those estimates. The Company considers its accounting policies relating to inventory valuations, vendor allowances, impairment of long-lived tangible and right-of-use assets, loyalty program and income taxes to be the most significant accounting policies that involve management estimates and judgments. Significant changes, if any, in those estimates and assumptions resulting from continuing changes in the economic environment will be reflected in the consolidated financial statements in future periods.
Reclassifications
Certain prior year amounts have been reclassified to conform to the current year presentation.
Recent accounting pronouncements not yet adopted
Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures
In November 2023, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosure. The guidance updates reportable segment disclosure requirements, primarily through requiring enhanced disclosures about significant segment expenses and information used to assess segment performance. The ASU is effective for fiscal years beginning after December 15, 2023, with early adoption permitted. The Company is currently evaluating the impact of adopting ASU 2023-07 on related disclosures.
Income Taxes (Topic 740): Improvements to Income Tax Disclosures
In December 2023, the FASB issued ASU 2023-09, Income Taxes (Topic 740): Improvements to Income Tax Disclosures. The guidance includes amendments requiring enhanced income tax disclosures, primarily related to standardization and disaggregation of rate reconciliation categories and income taxes paid by jurisdiction. The guidance is effective for fiscal years beginning after December 15, 2024 and should be applied either prospectively or retrospectively. Early adoption is permitted. The Company is currently evaluating the impact of adopting this ASU on related disclosures.
SEC Climate-Related Disclosures
In March 2024, the SEC adopted rules intended to enhance and standardize climate-related disclosures in registration statements and annual reports. The new rules will require disclosure of material climate-related risks, including disclosure of Board of Directors' oversight and risk management activities, the material impacts of these risks to us and the quantification of material impacts to us as a result of severe weather events and other natural conditions. The rules also require disclosure of material greenhouse gas emissions and any material climate-related targets and goals. The new rules will be effective for annual reporting periods beginning in fiscal year 2025, except for the greenhouse gas emissions disclosures which will be effective for annual reporting periods beginning in fiscal year 2026. The Company is currently evaluating the impact of these new rules.
3.RevenueNet sales include retail stores and e-commerce merchandise sales as well as salon services and other revenue. Other revenue includes the private label and co-branded credit card programs, royalties derived from the partnership with Target Corporation, and 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)
Cosmetics
42%
44%
Skincare
23%
22%
Haircare
19%
Fragrance
10%
9%
Services
4%
Other
2%
100%
Certain sales departments were reclassified between categories in the prior year to conform to current year presentation, including moving the bath category from Fragrance to Skincare.
Deferred revenue primarily represents contract liabilities for the obligation to transfer additional goods or services to a guest for which the Company has received consideration, such as unredeemed Ulta Beauty Rewards loyalty points and unredeemed Ulta Beauty gift cards. In addition, breakage on gift cards is recognized proportionately as redemption occurs.
9
The following table provides a summary of the changes included in deferred revenue during the 13 weeks ended May 4, 2024 and April 29, 2023:
Beginning balance
428,788
388,583
Additions to contract liabilities (1)
133,495
124,024
Deductions to contract liabilities (2)
(170,837)
(162,484)
Ending balance
391,446
350,123
Other amounts included in deferred revenue were $7,283 and $7,094 at May 4, 2024 and April 29, 2023, respectively.
4.Goodwill and other intangible assets
Goodwill, which represents the excess of cost over the fair value of net assets acquired, was $10,870 at May 4, 2024, February 3, 2024, and April 29, 2023. No additional goodwill was recognized during the 13 weeks ended May 4, 2024. The recoverability of goodwill is reviewed annually during the fourth quarter or more frequently if an event occurs or circumstances change that would indicate that impairment may exist. Other definite-lived intangible assets are amortized over their useful lives. The recoverability of intangible assets is reviewed whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable.
5.Leases
The Company leases retail stores, distribution centers, fast fulfillment centers, market fulfillment centers, corporate offices, and certain equipment under non-cancelable operating leases with various expiration dates through 2036. All leases are classified as operating leases and generally have initial lease terms of 10 years and, when determined applicable, 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.
Lease cost
The majority of operating lease cost relates to retail stores, distribution centers, fast fulfillment centers, and market fulfillment 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.
The following table presents a summary of operating lease costs:
Operating lease cost
88,155
85,128
Other information
The following table presents supplemental disclosures of cash flow information related to operating leases:
Cash paid for operating lease liabilities (1)
101,646
98,055
Operating lease assets obtained in exchange for operating lease liabilities (non-cash)
65,176
73,775
6.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.
7.Debt
On March 13, 2024, the Company entered into Amendment No. 3 to the Second Amended and Restated Loan Agreement (as so amended, 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 March 13, 2029, provides maximum revolving loans equal to the lesser of $800,000 or a percentage of eligible owned inventory and eligible owned receivables (which borrowing base may, at the election of the Company and satisfaction of certain conditions, include a percentage of qualified cash), contains a $50,000 subfacility for letters of credit and allows the Company to increase the revolving facility by an additional $200,000, 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 the Company’s election, at either a base rate plus a margin of 0.5% to 1.0% or the Term Secured Overnight Financing Rate plus a margin of 1.5% to 2.0%, and a credit spread adjustment of 0.10%, with such margins based on the Company’s borrowing availability, and the unused line fee is 0.25% to 0.375% per annum.
As of May 4, 2024, February 3, 2024, and April 29, 2023, there were no borrowings outstanding under the credit facility.
As of May 4, 2024, the Company was in compliance with all terms and covenants of the Loan Agreement.
8.Fair value measurements
The carrying value of cash and cash equivalents, 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 May 4, 2024, February 3, 2024, and April 29, 2023, there were liabilities related to the non-qualified deferred compensation plan included in other long-term liabilities on the consolidated balance sheets of $47,849, $42,653, and $40,374, respectively. The liabilities are 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.
9.Stock-based compensation
Stock-based compensation expense is measured on the grant date based on the fair value of the award. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period for awards expected to vest. The estimated grant date fair value of stock options was determined using a Black-Scholes valuation model using the following weighted-average assumptions for the periods indicated:
Volatility rate
33.0%
45.0%
Average risk-free interest rate
4.4%
3.8%
Average expected life (in years)
3.5
3.4
Dividend yield
The expected volatility is based on the historical volatility of the Company’s common stock. The risk-free interest rate is based on the United States Treasury yield curve in effect on the date of grant for the respective expected life of the option. The expected life represents the time the options granted are expected to be outstanding. The expected life of options granted is derived from historical data on Ulta Beauty stock option exercises. Forfeitures of stock options are estimated at the grant date based on historical rates of stock option activity and reduce the stock-based compensation expense recognized. The Company does not currently pay a regular dividend.
The Company granted 56 and 41 stock options during the 13 weeks ended May 4, 2024 and April 29, 2023, respectively. Stock-based compensation expense for stock options was $1,680 and $1,470 for the 13 weeks ended May 4, 2024 and April 29, 2023, respectively. The weighted-average grant date fair value of these stock options was $157.66 and $200.67 for the 13 weeks ended May 4, 2024 and April 29, 2023, respectively. At May 4, 2024, there was approximately $16,803 of unrecognized stock-based compensation expense related to unvested stock options.
There were 44 and 38 restricted stock units issued during the 13 weeks ended May 4, 2024 and April 29, 2023, respectively. Stock-based compensation expense for restricted stock units was $4,388 and $4,359 for the 13 weeks ended May 4, 2024 and April 29, 2023, respectively. At May 4, 2024, there was approximately $43,539 of unrecognized stock-based compensation expense related to restricted stock units.
There were 71 and 32 performance-based restricted stock units issued during the 13 weeks ended May 4, 2024 and April 29, 2023. Stock-based compensation expense for performance-based restricted stock units was $4,014 and $3,892 for the 13 weeks ended May 4, 2024 and April 29, 2023, respectively. At May 4, 2024, there was approximately $34,998 of unrecognized stock-based compensation expense related to performance-based restricted stock units.
10.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 $94,735 for the 13 weeks ended May 4, 2024 represents an effective tax rate of 23.2%, compared to $102,367 of income tax expense representing an effective tax rate of 22.8% for the 13 weeks ended April 29, 2023. The higher effective tax rate is primarily due to a reduced benefit from income tax accounting for stock-based compensation.
On August 16, 2022, the Inflation Reduction Act of 2022 was enacted into law, which, among other things, introduced a 15% corporate alternative minimum tax on book income of certain large corporations and created a 1% excise tax on net share repurchases. The corporate alternative minimum tax is effective beginning in fiscal 2024 and did not have a
material impact on the consolidated financial statements for the 13 weeks ended May 4, 2024. The excise tax applies to share repurchases made after December 31, 2022.
11.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 common share:
Numerator:
Denominator:
Weighted-average common shares – Basic
Dilutive effect of stock options and non-vested stock
256
316
Weighted-average common shares – Diluted
The denominator for diluted net income per common share for the 13 weeks ended May 4, 2024 and April 29, 2023 excludes 150 and 79 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.
12.Share repurchase program
In March 2022, the Board of Directors authorized a share repurchase program (the 2022 Share Repurchase Program) pursuant to which the Company could repurchase up to $2,000,000 of the Company’s common stock. The 2022 Share Repurchase Program authorization revoked the previously authorized but unused amounts from the earlier share repurchase program. The 2022 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.
In March 2024, the Board of Directors authorized a new share repurchase program (the 2024 Share Repurchase Program) pursuant to which the Company may repurchase up to $2,000,000 of the Company’s common stock. The 2024 Share Repurchase Program authorization revoked the previously authorized but unused amounts from the 2022 Share Repurchase Program. The 2024 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time.
A summary of common stock repurchase activity is presented in the following table:
Shares repurchased
588
541
Total cost of shares repurchased, including excise tax
287,410
285,783
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, select beauty services, 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, uses beauty for self-expression, experimentation, and self-investment, 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.
Today, we are the largest specialty beauty retailer in the United States and the premier beauty destination for cosmetics, fragrance, skin care products, hair care products, and salon services. Key aspects of our business include: a differentiated assortment of approximately 25,000 beauty products across a variety of categories and price points as well as a variety of beauty services, including salon services, in more than 1,350 stores predominantly located in convenient, high-traffic locations; engaging digital experiences delivered through our website, Ulta.com, and our mobile applications; our best-in-class loyalty program that enables members to earn points for every dollar spent on products and beauty services and provides us with deep, proprietary customer insights; and our ability to cultivate human connection with warm and welcoming guest experiences across all of our channels.
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 priorities: 1) drive breakthrough and disruptive growth through an expanded definition of All Things Beauty; 2) evolve the omnichannel experience through connected physical and digital ecosystems, All In Your World; 3) expand and deepen our presence across the beauty journey, positioning Ulta Beauty at the Heart of the Beauty Community; 4) drive operational excellence and optimization; 5) protect and cultivate our world-class culture and talent; and 6) expand our environmental and social impact. We believe the attractive and growing U.S. beauty products and salon services industry, the expanding definition of beauty and the role that omnichannel capabilities play in consumers’ lives, 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 growing our comparable sales, expanding omnichannel capabilities, and opening new stores. Long-term operating profit is expected to increase as a result of our efforts to optimize our real estate portfolio, expand merchandise margin, and leverage our fixed store costs with comparable sales increases and operating efficiencies, partially offset by incremental investments in people, guest experiences, 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 Trends
Industry trends
Our research indicates that Ulta Beauty has captured meaningful market share across all categories over the last several years. The overall beauty market expanded in 2023 and into the first quarter of 2024, supported by healthy consumer engagement with the beauty 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 over the long term.
Although we do not believe inflation had a material impact on our sales during the first quarter of fiscal 2024, continued pressure from inflation or other evolving macroeconomic conditions could have an adverse impact on consumer spending and could lead to a recession. Furthermore, inflationary pressures, as well as other macroeconomic trends, could negatively impact our ability to maintain current levels of gross margin and selling, general and administrative expenses as a percentage of net sales if the selling prices of our products do not increase with higher costs. In addition, inflation could cause the interest rates on any future debt to remain at an elevated level or increase.
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 sales are recognized upon shipment or guest pickup of the merchandise 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 not a separate performance obligation. Accordingly, we recognize revenue for our single performance obligation related to online sales at the time control of the merchandise passes to the customer, which is at the time of shipment or guest pickup. 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 includes the private label and co-branded credit card programs, royalties derived from the partnership with Target Corporation, and 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. 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. In fiscal years with 53 weeks, the 53rd week of comparable sales is included in the calculation. In the year following a 53-week year, the prior year period is shifted by one week to compare similar calendar weeks. 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 new stores. Changes in our merchandise or channel 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 represents interest from cash equivalents, which include highly liquid investments such as money market funds and certificates of deposit with an original maturity of three 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 or elevated 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 first quarter in fiscal 2024 and 2023 ended on May 4, 2024 and April 29, 2023, 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.
17
The following tables present the components of our consolidated results of operations for the periods indicated:
(Dollars in thousands)
Other operating data:
Number of stores end of period
1,359
Comparable sales
1.6%
9.3%
100.0%
60.8%
60.0%
39.2%
40.0%
24.4%
23.2%
0.1%
0.0%
14.7%
16.8%
(0.3%)
15.0%
17.1%
3.5%
3.9%
11.5%
13.2%
Comparison of 13 weeks ended May 4, 2024 to 13 weeks ended April 29, 2023
Net sales increased $91.6 million or 3.5%, to $2.7 billion for the 13 weeks ended May 4, 2024, compared to $2.6 billion for the 13 weeks ended April 29, 2023. The net sales increase was primarily due to increased comparable sales, new store contribution, and an increase of $9.1 million in other revenue. The total comparable sales increase of 1.6% was driven by a 1.3% increase in transactions and a 0.3% increase in average ticket.
Gross profit increased $14.9 million or 1.4%, to $1.07 billion for the 13 weeks ended May 4, 2024, compared to $1.05 billion for the 13 weeks ended April 29, 2023. Gross profit as a percentage of net sales decreased to 39.2% for the 13 weeks ended May 4, 2024, compared to 40.0% for the 13 weeks ended April 29, 2023. The decrease in gross profit margin was primarily due to lower merchandise margins and higher inventory shrink, partially offset by growth in other revenue.
Selling, general and administrative (SG&A) expenses increased $53.8 million or 8.8%, to $665.9 million for the 13 weeks ended May 4, 2024, compared to $612.1 million for the 13 weeks ended April 29, 2023. SG&A expenses as a percentage of net sales increased to 24.4% for the 13 weeks ended May 4, 2024, compared to 23.2% for the 13 weeks ended April 29, 2023, primarily due to higher corporate overhead for strategic investments, higher store payroll and benefits, and higher store expenses.
Pre-opening expenses were $2.9 million for the 13 weeks ended May 4, 2024 compared to $0.7 million for the 13 weeks ended April 29, 2023.
Interest income, net was $6.9 million for the 13 weeks ended May 4, 2024 compared to $7.3 million for the 13 weeks ended April 29, 2023. We did not have any outstanding borrowings on the credit facility as of May 4, 2024, February 3, 2024, and April 29, 2023.
Income tax expense of $94.7 million for the 13 weeks ended May 4, 2024 represents an effective tax rate of 23.2%, compared to $102.4 million of income tax expense representing an effective tax rate of 22.8% for the 13 weeks ended April 29, 2023. The higher income tax rate is primarily due to a reduced benefit from income tax accounting for stock-based compensation.
Net income was $313.1 million for the 13 weeks ended May 4, 2024, compared to $347.1 million for the 13 weeks ended April 29, 2023. The decrease in net income is primarily related to the $53.8 million increase in SG&A expenses and the $0.4 million decrease in interest income, net, partially offset by the $14.9 million increase in gross profit and the $7.6 million decrease in income tax expense.
Liquidity and capital resources
Our primary sources of liquidity are cash and cash equivalents, cash flows from operations, and borrowings under our credit facility. The most significant components of our working capital are merchandise inventories, cash and cash equivalents, and receivables, reduced by accounts payable, deferred revenue, and accrued liabilities. As of May 4, 2024, February 3, 2024, and April 29, 2023, we had cash and cash equivalents of $524.6 million, $766.6 million, and $636.4 million, respectively.
Our primary cash needs are for rent, capital expenditures for new, remodeled, and relocated stores, increased merchandise inventories related to store expansion and new brand additions, supply chain improvements, share repurchases, and continued investment in our information technology systems.
Our most significant ongoing short-term cash requirements relate primarily to funding operations (including expenditures for lease expenses, inventory, labor, distribution, advertising and marketing, and tax liabilities) as well as periodic spend for capital expenditures, investments, and share repurchases. 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.
Long-term cash requirements primarily relate to funding lease expenses and other purchase commitments.
We generally fund short-term and long-term cash requirements with cash from operating activities. We believe our primary sources of liquidity will satisfy our cash requirements over both the short term (the next twelve months) and long term.
Cash flows
We believe our ability to generate substantial cash from operating activities and readily secure financing at competitive rates are key strengths that give us significant flexibility to meet our short and long-term financial commitments.
The following table presents a summary of our cash flows:
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 decrease in net cash provided by operating activities in the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023 was mainly due to the timing of accounts payable, accrued liabilities, accrued income taxes, and prepaid expenses and other current assets, the decrease in net income, and a larger increase in merchandise inventories in the first quarter of fiscal 2024, partially offset by the net decrease in other assets and liabilities.
The decrease in net income was primarily due to an increase in SG&A expenses and a decrease in interest income, partially offset by an increase in gross profit resulting from higher sales and a decrease in income taxes.Merchandise inventories, net were $1.9 billion at May 4, 2024, compared to $1.8 billion at April 29, 2023, representing an increase of $154.8 million or 8.8%. The increase in total inventory is primarily due to the following:
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. Investing activities for capital expenditures were $91.0 million during the 13 weeks ended May 4, 2024 compared to $109.8 million during the 13 weeks ended April 29, 2023.
During the 13 weeks ended May 4, 2024, we opened 12 new stores, closed two stores, and relocated one store, compared to the 13 weeks ended April 29, 2023, when we opened five new stores, closed one store, remodeled two stores, and relocated one store.
The decrease in net cash used in investing activities in the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023 was primarily due to lower capital expenditures for information technology systems and supply chain investments, partially offset by higher capital expenditures for merchandising fixtures, compared to the first quarter of fiscal 2023.
Our future investments will depend primarily on the number of new, remodeled, and relocated stores, information technology systems investments, and supply chain investments that we undertake and the timing of these expenditures.
Based on past performance and current expectations, we believe our sources of liquidity will be sufficient to fund future capital expenditures.
Financing activities include share repurchases, borrowing and repayment of our revolving credit facility, 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.
The increase in net cash used in financing activities in the first quarter of fiscal 2024 compared to the first quarter of fiscal 2023 was primarily due to an increase in share repurchases.
We had no borrowings outstanding under the credit facility as of May 4, 2024, February 3, 2024, and April 29, 2023. The zero outstanding borrowings position is due to a combination of factors including sales demand, overall performance of management initiatives including expense control, and inventory and other working capital reductions. We may require borrowings under the facility from time to time in future periods for unexpected business disruptions, to support our new store program, seasonal inventory needs, or share repurchases.
Share repurchase program
In March 2022, the Board of Directors authorized a share repurchase program (the 2022 Share Repurchase Program) pursuant to which the Company could repurchase up to $2.0 billion of the Company’s common stock. The 2022 Share Repurchase Program authorization revoked the previously authorized but unused amounts from the earlier share repurchase program. The 2022 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.
In March 2024, the Board of Directors authorized a new share repurchase program (the 2024 Share Repurchase Program) pursuant to which the Company may repurchase up to $2.0 billion of the Company’s common stock. The 2024 Share Repurchase Program authorization revokes the previously authorized but unused amounts from the 2022 Share Repurchase Program. The 2024 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time.
A summary of common stock repurchase activity is presented in the following table:
(Dollars in millions)
588,004
541,108
287.4
285.8
Credit facility
On March 13, 2024, we entered into Amendment No. 3 to the Second Amended and Restated Loan Agreement (as so amended, 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 March 13, 2029, provides maximum revolving loans equal to the lesser of $800.0 million or a percentage of eligible owned inventory and eligible owned receivables (which borrowing base may, at the election of the Company and satisfaction of certain conditions, include a percentage of qualified cash), contains a $50.0 million subfacility for letters of credit and allows the Company to increase the revolving facility by an additional $200.0 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 the Company’s election, at either a base rate plus a margin of 0.5% to 1.0% or the Term Secured Overnight Financing Rate plus a margin of 1.5% to 2.0%, and a credit spread adjustment of 0.10%, with such margins based on the Company’s borrowing availability, and the unused line fee is 0.25% to 0.375% per annum.
As of May 4, 2024, February 3, 2024, and April 29, 2023 we had no borrowings outstanding under the credit facility.
As of May 4, 2024, we were 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.
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. 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 3, 2024.
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 continually monitor this risk and may develop strategies to manage it. 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 the credit facility as of May 4, 2024, February 3, 2024, and April 29, 2023.
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 May 4, 2024, 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 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 May 4, 2024 that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Item 1.Legal Proceedings
See Note 6 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 3, 2024, 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 3, 2024.
Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
The following table sets forth repurchases of our common stock during the first quarter of 2024:
Period
Total numberof shares purchased (1)
Averageprice paidper share
Total numberof sharespurchased aspart of publiclyannouncedplans orprograms
Approximatedollar value ofshares that may yetbe purchasedunder plans or programs(in thousands) (2)
February 4, 2024 to March 2, 2024
79,161
537.86
57,777
March 3, 2024 to March 30, 2024
197,316
533.98
154,269
1,943,440
March 31, 2024 to May 4, 2024
355,055
458.38
354,574
1,782,494
13 weeks ended May 4, 2024
631,532
491.97
(1)
There were 588,004 shares repurchased as part of our publicly announced share repurchase program during the 13 weeks ended May 4, 2024 and there were 43,528 shares transferred from employees in satisfaction of minimum statutory tax withholding obligations upon the vesting of restricted stock during the period.
(2)
In March 2024, we announced the 2024 Share Repurchase Program pursuant to which the Company may repurchase up to $2.0 billion of the Company’s common stock. The 2024 Share Repurchase Program revoked the previously authorized but unused amounts from the 2022 Share Repurchase Program. As of May 4, 2024, $1.8 billion remained available under the 2024 Share Repurchase Program.
Item 3.Defaults Upon Senior Securities
None
Item 4.Mine Safety Disclosures
Item 5.Other Information
During the 13 weeks ended May 4, 2024, no director or Section 16 officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408 of Regulation S-K.
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., as amended through June 1, 2023
8-K
001-33764
6/07/2023
3.2
Bylaws of Ulta Beauty, Inc., as amended through June 1, 2023
3.3
31.1
Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(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 13a-14(a) and 15d-14(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 May 30, 2024 on its behalf by the undersigned, thereunto duly authorized.
By:
/s/ David C. Kimbell
David C. KimbellChief Executive Officer and Director
/s/ Paula M. Oyibo
Paula M. OyiboChief Financial Officer and Treasurer