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EX-32 - EX-32 - Ulta Beauty, Inc.ulta-20171028xex32.htm
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EX-31.1 - EX-31.1 - Ulta Beauty, Inc.ulta-20171028ex311b7e423.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10‑Q

[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the Quarterly Period Ended October 28, 2017

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

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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 ☐ (Do not check if a smaller reporting company)      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 November 27, 2017 was 60,992,388 shares.

 

 

 


 

 

ULTA BEAUTY, INC.

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 Statement 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 

23

 

 

Item 4.    Controls and Procedures 

23

 

 

Part II - Other Information 

24

 

 

Item 1.    Legal Proceedings 

24

 

 

Item 1A. Risk Factors 

24

 

 

Item 2.    Unregistered Sales of Equity Securities and Use of Proceeds 

24

 

 

Item 3.    Defaults Upon Senior Securities 

24

 

 

Item 4.    Mine Safety Disclosures 

24

 

 

Item 5.    Other Information 

25

 

 

Item 6.    Exhibits 

25

 

 

SIGNATURES 

26

 

 

 

 

 

 

2


 

Part I - Financial Information

Item 1.Financial Statements

Ulta Beauty, Inc.

Consolidated Balance Sheets

 

 

 

 

 

 

 

 

 

 

 

 

October 28,

 

January 28,

 

October 29,

(In thousands, except per share data)

    

2017

    

2017

    

2016

Assets

 

 

(Unaudited)

 

 

 

 

 

(Unaudited)

Current assets:

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

46,787

 

$

385,010

 

$

133,108

Short-term investments

 

 

60,000

 

 

30,000

 

 

110,000

Receivables, net

 

 

82,934

 

 

88,631

 

 

65,708

Merchandise inventories, net

 

 

1,349,714

 

 

943,975

 

 

1,137,023

Prepaid expenses and other current assets

 

 

101,403

 

 

88,621

 

 

85,611

Prepaid income taxes

 

 

5,450

 

 

 —

 

 

7,015

Total current assets

 

 

1,646,288

 

 

1,536,237

 

 

1,538,465

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

1,172,682

 

 

1,004,358

 

 

1,001,938

Deferred compensation plan and other assets

 

 

15,903

 

 

11,283

 

 

10,798

Total assets

 

$

2,834,873

 

$

2,551,878

 

$

2,551,201

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders’ equity

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

Accounts payable

 

$

447,293

 

$

259,518

 

$

425,071

Accrued liabilities

 

 

266,435

R

 

260,854

 

 

229,569

Accrued income taxes

 

 

984

 

 

8,971

 

 

 —

Total current liabilities

 

 

714,712

 

 

529,343

 

 

654,640

 

 

 

 

 

 

 

 

 

 

Deferred rent

 

 

400,477

 

 

366,191

 

 

361,667

Deferred income taxes

 

 

78,647

 

 

86,498

 

 

62,669

Other long-term liabilities

 

 

24,986

 

 

19,628

 

 

20,141

Total liabilities

 

 

1,218,822

 

 

1,001,660

 

 

1,099,117

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (Note 3)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

 

Common stock, $0.01 par value, 400,000 shares authorized; 61,693,  62,733 and 62,920 shares issued; 61,074,  62,129 and 62,316 shares outstanding; at October 28, 2017 (unaudited), January 28, 2017 and October 29, 2016 (unaudited), respectively

 

 

617

 

 

627

 

 

629

Treasury stock-common, at cost

 

 

(18,732)

 

 

(14,524)

 

 

(14,427)

Additional paid-in capital

 

 

691,075

 

 

658,330

 

 

653,036

Retained earnings

 

 

943,091

 

 

905,785

 

 

812,846

Total stockholders’ equity

 

 

1,616,051

 

 

1,550,218

 

 

1,452,084

Total liabilities and stockholders’ equity

 

$

2,834,873

 

$

2,551,878

 

$

2,551,201

 

See accompanying notes to consolidated financial statements.

 

3


 

Ulta Beauty, Inc.

Consolidated Statements of Income

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

October 28,

 

October 29,

 

October 28,

 

October 29,

(In thousands, except per share data)

    

2017

 

2016

 

2017

 

2016

Net sales

 

$

1,342,181

 

$

1,131,232

 

$

3,946,914

 

$

3,274,163

Cost of sales

 

 

849,053

 

 

704,179

 

 

2,508,452

 

 

2,071,842

Gross profit

 

 

493,128

 

 

427,053

 

 

1,438,462

 

 

1,202,321

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

320,729

 

 

280,464

 

 

887,601

 

 

757,568

Pre-opening expenses

 

 

9,732

 

 

6,928

 

 

19,989

 

 

14,159

Operating income

 

 

162,667

 

 

139,661

 

 

530,872

 

 

430,594

Interest income, net

 

 

(316)

 

 

(211)

 

 

(1,209)

 

 

(774)

Income before income taxes

 

 

162,983

 

 

139,872

 

 

532,081

 

 

431,368

Income tax expense

 

 

58,338

 

 

52,310

 

 

185,020

 

 

161,826

Net income

 

$

104,645

 

$

87,562

 

$

347,061

 

$

269,542

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.71

 

$

1.40

 

$

5.62

 

$

4.30

Diluted

 

$

1.70

 

$

1.40

 

$

5.58

 

$

4.28

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

61,299

 

 

62,371

 

 

61,778

 

 

62,625

Diluted

 

 

61,630

 

 

62,692

 

 

62,198

 

 

62,932

 

 

See accompanying notes to consolidated financial statements.

 

4


 

Ulta Beauty, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

 

 

 

 

 

 

39 Weeks Ended

 

 

 

October 28,

 

October 29,

 

(In thousands)

    

2017

    

2016

 

Operating activities

 

 

 

 

 

 

 

Net income

 

$

347,061

 

$

269,542

 

Adjustments to reconcile net income to net cash provided by operating activities:

    

 

 

 

 

 

 

Depreciation and amortization

 

 

187,710

 

 

151,014

 

Deferred income taxes

 

 

(7,851)

 

 

3,142

 

Non-cash stock compensation charges

 

 

17,898

 

 

14,203

 

Excess tax benefits from stock-based compensation

 

 

 —

 

 

(9,001)

 

Loss on disposal of property and equipment

 

 

5,707

 

 

6,822

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

Receivables

 

 

5,697

 

 

(716)

 

Merchandise inventories

 

 

(405,739)

 

 

(375,230)

 

Prepaid expenses and other current assets

 

 

(12,782)

 

 

(13,063)

 

Income taxes

 

 

(13,437)

 

 

(10,716)

 

Accounts payable

 

 

187,775

 

 

228,897

 

Accrued liabilities

 

 

(18,721)

 

 

11,247

 

Deferred rent

 

 

34,286

 

 

39,878

 

Other assets and liabilities

 

 

1,489

 

 

6,999

 

Net cash provided by operating activities

 

 

329,093

 

 

323,018

 

 

 

 

 

 

 

 

 

Investing activities

 

 

 

 

 

 

 

Purchases of short-term investments

 

 

(240,000)

 

 

(60,000)

 

Proceeds from short-term investments

 

 

210,000

 

 

80,000

 

Purchases of property and equipment

 

 

(337,639)

 

 

(281,203)

 

Net cash used in investing activities

 

 

(367,639)

 

 

(261,203)

 

 

 

 

 

 

 

 

 

Financing activities

 

 

 

 

 

 

 

Repurchase of common shares

 

 

(309,767)

 

 

(296,994)

 

Stock options exercised

 

 

14,849

 

 

16,188

 

Purchase of treasury shares

 

 

(4,208)

 

 

(2,742)

 

Excess tax benefits from stock-based compensation

 

 

 —

 

 

9,001

 

Debt issuance costs

 

 

(551)

 

 

 —

 

Net cash used in financing activities

 

 

(299,677)

 

 

(274,547)

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(338,223)

 

 

(212,732)

 

Cash and cash equivalents at beginning of period

 

 

385,010

 

 

345,840

 

Cash and cash equivalents at end of period

 

$

46,787

 

$

133,108

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

Cash paid for income taxes (net of refunds)

    

$

205,863

 

$

168,471

 

Non-cash investing activities:

 

 

 

 

 

 

 

Change in property and equipment included in accrued liabilities

 

$

24,302

 

$

30,971

 

 

See accompanying notes to consolidated financial statements.

5


 

Ulta Beauty, Inc.

Consolidated Statement of Stockholders’ Equity

(Unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury -

 

 

 

 

 

 

 

 

 

Common Stock

 

Common Stock

 

Additional

 

 

 

Total

 

 

Issued

 

 

 

Treasury 

 

 

 

Paid-In 

 

Retained

 

Stockholders'

(In thousands)

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Earnings

    

Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance – January 28, 2017

 

62,733

 

$

627

 

(604)

 

$

(14,524)

 

$

658,330

 

$

905,785

 

$

1,550,218

Stock options exercised and other awards

 

198

 

 

 2

 

 –

 

 

 –

 

 

14,847

 

 

 –

 

 

14,849

Purchase of treasury shares

 

 –

 

 

 –

 

(15)

 

 

(4,208)

 

 

 –

 

 

 –

 

 

(4,208)

Net income

 

 –

 

 

 –

 

 –

 

 

 –

 

 

 –

 

 

347,061

 

 

347,061

Stock compensation charge

 

 –

 

 

 –

 

 –

 

 

 –

 

 

17,898

 

 

 –

 

 

17,898

Repurchase of common shares

 

(1,238)

 

 

(12)

 

 –

 

 

 –

 

 

 –

 

 

(309,755)

 

 

(309,767)

Balance – October 28, 2017

 

61,693

 

$

617

 

(619)

 

$

(18,732)

 

$

691,075

 

$

943,091

 

$

1,616,051

 

See accompanying notes to consolidated financial statements.

 

6


 

Ulta Beauty, Inc.

Notes to Consolidated Financial Statements

(Unaudited)

1.Business and basis of presentation

On January 29, 2017, Ulta Salon, Cosmetics & Fragrance, Inc. implemented a holding company reorganization pursuant to which 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 October 28, 2017, the Company operated 1,058 stores in 48 states and the District of Columbia, as shown in the table below.

 

 

 

 

 

 

 

 

 

Number of

 

 

 

Number of

Location

    

stores

    

Location

    

stores

Alabama

 

17

 

Montana

 

6

Alaska

 

3

 

Nebraska

 

5

Arizona

 

25

 

Nevada

 

14

Arkansas

 

9

 

New Hampshire

 

7

California

 

134

 

New Jersey

 

27

Colorado

 

24

 

New Mexico

 

6

Connecticut

 

13

 

New York

 

40

Delaware

 

3

 

North Carolina

 

28

District of Columbia

 

1

 

North Dakota

 

3

Florida

 

71

 

Ohio

 

40

Georgia

 

33

 

Oklahoma

 

18

Idaho

 

8

 

Oregon

 

12

Illinois

 

52

 

Pennsylvania

 

40

Indiana

 

21

 

Rhode Island

 

3

Iowa

 

9

 

South Carolina

 

15

Kansas

 

11

 

South Dakota

 

2

Kentucky

 

11

 

Tennessee

 

20

Louisiana

 

16

 

Texas

 

97

Maine

 

3

 

Utah

 

13

Maryland

 

18

 

Virginia

 

25

Massachusetts

 

15

 

Washington

 

25

Michigan

 

44

 

West Virginia

 

6

Minnesota

 

15

 

Wisconsin

 

20

Mississippi

 

9

 

Wyoming

 

2

Missouri

 

19

 

Total

 

1,058

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 consolidated 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.

7


 

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 39 weeks ended October 28, 2017 are not necessarily indicative of the results to be expected for the fiscal year ending February 3, 2018, 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 January 28, 2017. 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 January 28, 2017. 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 third quarter in fiscal 2017 and 2016 ended on October 28, 2017 and October 29, 2016, respectively.

Share-based compensation

The Company measures share-based compensation cost on the grant date, based on the fair value of the award, and recognizes the expense on a straight-line method 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:

 

 

 

 

 

 

 

    

39 Weeks Ended

 

 

 

October 28,

 

October 29,

 

 

    

2017

    

2016

 

Volatility rate

 

30.9%

 

35.0%

 

Average risk-free interest rate

 

1.6%

 

1.2%

 

Average expected life (in years)

 

3.5

 

3.5

 

Dividend yield

 

None

 

None

 

The Company granted 106 and 109 stock options during the 39 weeks ended October 28, 2017 and October 29, 2016, respectively.  The compensation cost that has been charged against operating income for stock option grants was $2,212 and $1,983 for the 13 weeks ended October 28, 2017 and October 29, 2016, respectively.  The compensation cost that has been charged against operating income for stock option grants was $6,589 and $5,965 for the 39 weeks ended October 28, 2017 and October 29, 2016, respectively.  The weighted-average grant date fair value of these options was $69.61 and $52.95 for the 39 weeks ended October 28, 2017 and October 29, 2016, respectively.  At October 28, 2017, there was approximately $20,562 of unrecognized compensation expense related to unvested stock options.

The Company issued 45 and 52 restricted stock units during the 39 weeks ended October 28, 2017 and October 29, 2016, respectively.  The compensation cost that has been charged against operating income for restricted stock units was $2,419 and $1,890 for the 13 weeks ended October 28, 2017 and October 29, 2016, respectively.  The compensation cost that has been charged against operating income for restricted stock units was $6,872 and $5,335 for the 39 weeks ended October 28, 2017 and October 29, 2016, respectively.  At October 28, 2017, there was approximately $16,199 of unrecognized compensation expense related to restricted stock units.

The Company issued 21 and 24 performance-based restricted stock units during the 39 weeks ended October 28, 2017 and October 29, 2016, respectively.  The compensation cost that has been charged against operating income for performance-based restricted stock units was $1,618 and $1,468 for the 13 weeks ended October 28, 2017 and October 29, 2016, respectively. The compensation cost that has been charged against operating income for performance-

8


 

based restricted stock units was $4,437 and $2,903 for the 39 weeks ended October 28, 2017 and October 29, 2016, respectively.  At October 28, 2017, there was approximately $9,708 of unrecognized compensation expense related to performance-based restricted stock units.

Recent accounting pronouncements not yet adopted

Revenue Recognition from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014‑09, Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification Topic 606 (ASU 2014‑09). The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that the Company will recognize revenue when the transfer of promised goods or services to customers occurs in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015‑14, Revenue from Contracts with Customers (Topic 606), which delayed the effective date of ASU 2014‑09 by one year. With the deferral, the revenue recognition standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods, with early adoption permitted. In March 2016, the FASB issued ASU 2016‑08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (ASU 2016‑08), which further clarifies how to implement revenue recognition guidance related to determining whether an entity is a principal or an agent in a revenue transaction. In April 2016, the FASB issued ASU 2016‑10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (ASU 2016‑10), which further clarifies the aspects of (a) identifying performance obligations and (b) the licensing implementation guidance. The effective date and transition requirements for ASU 2016‑08 and ASU 2016‑10 are the same as the effective date and transition requirements of ASU 2014‑09. These standards allow for either full retrospective or modified retrospective adoption.

The Company will adopt the new guidance in fiscal 2018 using the modified retrospective method. The Company’s project team has reached conclusions on key accounting policies based on the assessment of the effects of the standard. ASU 2014‑09 will impact the recognition timing or classification of revenues and expenses for the loyalty program (by using the deferred revenue method instead of the incremental cost method), private label credit card and co-branded credit card programs, gift card breakage (by including breakage within net sales instead of selling, general and administrative expenses under the proportional model), and sales refund reserve (by grossing up the balance sheet to record a refund obligation and right of return asset instead of recognizing revenue net of returns). 

The adoption of ASU 2014-09 will not have a material impact on the Company’s consolidated financial position, results of operations or cash flows. Upon adoption, the Company will recognize the cumulative effect of adopting this guidance as an adjustment to the opening balance of retained earnings. Prior periods will not be retrospectively adjusted. In addition, the Company does not expect significant changes to its internal control over financial reporting due to the adoption.

Leases

In February 2016, the FASB issued ASU 2016‑02, Leases (Topic 842). This standard will change the way all leases of one year or more are treated. Under this guidance, lessees will be required to capitalize virtually all leases on the balance sheet as a right-of-use asset and recognize an associated financing lease liability or capital 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 leases or operating leases. Financing lease liabilities, those that contain provisions similar to capitalized leases, are amortized like capital leases under current GAAP as amortization expense and interest expense in the statement of operations. Operating lease liabilities are amortized on a straight-line basis over the life of the lease as lease expense in the statement of operations. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, and have the option to use certain relief. ASU 2016‑02 is effective for public companies for annual reporting periods beginning after December 15, 2018, including interim reporting periods. Early adoption is permitted.

After further evaluation, the Company will adopt the new standard in fiscal 2019. The Company’s ability to adopt depends on system readiness, including software procured from third-party providers, and completing an analysis of

9


 

information necessary to quantify the  financial statement impact. The Company formed a project team to review the current accounting policies and practices and assess the effect of the standard on the consolidated financial statements. The team completed a preliminary assessment of the potential impact of adopting ASU 2016‑02 on the consolidated financial statements. The adoption of ASU 2016‑02 will have a material impact on the Company’s consolidated financial position, but the Company is not able to quantify the difference at this time. The Company does not believe adoption of this standard will have a material impact on the Company’s consolidated results of operations or cash flows.

Liabilities – Extinguishments of Liabilities

In March 2016, the FASB issued ASU 2016‑04, Liabilities – Extinguishments of Liabilities (Subtopic 405‑20): Recognition of Breakage for Certain Prepaid Stored – Value Products. This update entitles a company to derecognize amounts related to expected breakage to the extent that it is probable a significant reversal of the recognized breakage amount will not subsequently occur. ASU 2016‑04 should be applied either using a modified retrospective transition method or retrospectively. ASU 2016‑04 is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted. The adoption of ASU 2016‑04 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

Statement of Cash Flows

In August 2016, the FASB issued ASU 2016‑15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). ASU 2016‑15 provides classification guidance on certain cash receipts and cash payments, including, but not limited to, debt prepayment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of bank-owned life insurance policies and distributions received from equity method investees. The adoption of ASU 2016‑15 requires a retrospective transition method applied to each period presented. ASU 2016‑15 is effective for annual periods and interim periods beginning after December 15, 2017, and early adoption is permitted. The adoption of ASU 2016‑15 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

In November 2016, the FASB issued ASU 2016‑18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the Emerging Issues Task Force), which amends ASU Topic 230. ASU 2016‑18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer be required to present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. Entities will also have to disclose the nature of their restricted cash and restricted cash equivalent balances. ASU 2016‑18 is effective for fiscal years beginning after December 15, 2017 and interim periods within those years, and early adoption is permitted. Entities are required to apply the guidance retrospectively. The adoption of ASU 2016‑18 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.

Compensation – Stock Compensation: Scope of Modification Accounting

In May 2017, the FASB issued ASU 2017‑09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting, which provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. ASU 2017‑09 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and early adoption is permitted. The adoption of ASU 2017‑09 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

Compensation – Stock Compensation

In March 2016, the FASB issued ASU 2016‑09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This guidance changed how companies account for certain aspects of share-based payments to employees. Companies have to recognize all income tax effects of awards in the income

10


 

statement when the awards vest or are settled, and additional paid-in capital pools were eliminated. The guidance on employer’s accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and for forfeitures changed, and two practical expedients for non-public entities were added. ASU 2016‑09 was effective for annual and interim reporting periods beginning after December 15, 2016.

The Company adopted the new guidance prospectively in the first quarter of fiscal 2017. The adoption resulted in a decrease in the provision for income taxes of $781 and $9,921 for the 13 weeks and 39 weeks ended October 28, 2017, respectively, due to the recognition of excess tax benefits for options exercised and the vesting of equity awards. The extent of excess tax benefits or deficiencies is subject to variation in the Company’s stock price and timing/extent of restricted stock units vesting and employee stock option exercises. Additionally, the consolidated statements of cash flows now present such tax benefits or deficiencies as an operating activity on a prospective basis. Based on the adoption methodology applied, the statement of cash flows classification of prior periods has not been adjusted. As allowed under the new guidance, the Company did not change its accounting principles relative to elements of this standard and continued its existing practice of estimating the number of awards that will be forfeited. 

3.Commitments and contingencies

Leases – The Company leases retail stores, distribution and office facilities and certain equipment. Original non-cancelable lease terms range from three to ten years, and store leases generally contain renewal options for additional years. Total rent expense under operating leases was $60,687 and $51,580 for the 13 weeks ended October 28, 2017 and October 29, 2016, respectively. Total rent expense under operating leases was $175,282 and $150,424 for the 39 weeks ended October 28, 2017 and October 29, 2016, respectively.

General litigation – The Company is involved in various legal proceedings that are incidental to the conduct of the business. 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.

4.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 will 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 October 28, 2017, January 28, 2017 and October 29, 2016, 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.

5.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:

·

Level 1 – observable inputs such as quoted prices for identical instruments in active markets.

11


 

·

Level 2 – inputs other than quoted prices in active markets that are observable either directly or indirectly through corroboration with observable market data.

·

Level 3 – unobservable inputs in which there is little or no market data, which would require the Company to develop its own assumptions.

 

As of October 28, 2017,  January 28, 2017 and October 29, 2016, the Company held financial liabilities of $16,143, $10,474 and $10,955, 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.

6.Investments

The Company’s short-term investments as of October 28, 2017, January 28, 2017 and October 29, 2016 consist of $60,000, $30,000 and $110,000, respectively, in certificates of deposit. These short-term investments are carried at cost, which approximates fair value and are recorded in the Consolidated Balance Sheets in Short-term investments. The contractual maturity of the Company’s investments was less than twelve months at October 28, 2017.

7.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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

October 28,

 

October 29,

 

October 28,

 

October 29,

(In thousands, except per share data)

    

2017

    

2016

    

2017

    

2016

Numerator for diluted net income per share – net income

    

$

104,645

 

$

87,562

 

$

347,061

 

$

269,542

Denominator for basic net income per share – weighted-average common shares

 

 

61,299

 

 

62,371

 

 

61,778

 

 

62,625

Dilutive effect of stock options and non-vested stock

 

 

331

 

 

321

 

 

420

 

 

307

Denominator for diluted net income per share

 

 

61,630

 

 

62,692

 

 

62,198

 

 

62,932

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income per common share:

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.71

 

$

1.40

 

$

5.62

 

$

4.30

Diluted

 

$

1.70

 

$

1.40

 

$

5.58

 

$

4.28

The denominator for diluted net income per common share for the 13 weeks ended October 28, 2017 and October 29, 2016 excludes 259 and 21 employee stock options, respectively, due to their anti-dilutive effects. The denominator for diluted net income per common share for the 39 weeks ended October 28, 2017 and October 29, 2016 excludes 172 and 184 employee stock options, 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.

8.Share repurchase program

On March 10, 2016, the Company announced that the Board of Directors authorized a share repurchase program (the 2016 Share Repurchase Program) pursuant to which the Company may repurchase up to $425,000 of the Company’s common stock. The 2016 Share Repurchase Program authorization revoked the previously authorized, but unused amounts of $172,386 from the earlier share repurchase program. The 2016 Share Repurchase Program did not have an expiration date, but provided for suspension or discontinuation at any time.

As part of the 2016 Share Repurchase Program, the Company entered into an Accelerated Share Repurchase (ASR) agreement with Goldman, Sachs & Co. to repurchase $200,000 of the Company’s common stock. Under the ASR agreement, the Company paid $200,000 to Goldman, Sachs & Co. and received an initial delivery of 852 shares in the

12


 

first quarter of 2016, which were retired and represented 80% of the total shares the Company expected to receive based on the market price at the time of the initial delivery. In May 2016, the ASR settled and an additional 153 shares were delivered to the Company and retired. The final number of shares delivered upon settlement was determined with reference to the average price of the Company’s common stock over the term of the agreement. The transaction was accounted for as an equity transaction. The par value of shares received was recorded as a reduction to common stock with the remainder recorded as a reduction to additional paid-in capital and retained earnings. Upon receipt of the shares, there was an immediate reduction in the weighted average common shares calculation for basic and diluted earnings per share.

On March 9, 2017, the Company announced that the Board of Directors authorized a new share repurchase program (the 2017 Share Repurchase Program) pursuant to which the Company may repurchase up to $425,000 of the Company’s common stock. The 2017 Share Repurchase Program authorization revokes the previously authorized but unused amount of $79,863 from the 2016 Share Repurchase Program. The 2017 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time.

During the 39 weeks ended October 28, 2017, the Company purchased 1,238 shares of common stock for $309,767. During the 39 weeks ended October 29, 2016, excluding the shares repurchased under the ASR, the Company purchased 445 shares of common stock for $96,994.

 

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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:

·

the impact of weakness in the economy;

·

changes in the overall level of consumer spending;

·

the possibility that we may be unable to compete effectively in our highly competitive markets;

·

the possibility that cybersecurity breaches and other disruptions could compromise our information or result in the unauthorized disclosure of confidential information;

·

weather conditions that could negatively impact sales;

·

our ability to gauge beauty trends and react to changing consumer preferences in a timely manner;

·

our ability to attract and retain key executive personnel;

·

the possibility that the capacity of our distribution and order fulfillment infrastructure and the performance of our newly opened and to be opened distribution centers may not be adequate to support our recent growth and expected future growth plans;

·

our ability to sustain our growth plans and successfully implement our long-range strategic and financial plan;

·

the possibility that our continued opening of new stores could strain our resources and have a material adverse effect on our business and financial performance;

·

the possibility of material disruptions to our information systems;

·

changes in the wholesale cost of our products;

·

the possibility that new store openings and existing locations may be impacted by developer or co-tenant issues;

·

customer acceptance of our rewards program and technological and marketing initiatives;

·

our ability to successfully execute our common stock repurchase program or implement future common stock repurchase programs; and

·

other risk factors detailed in our public filings with the Securities and Exchange Commission (the SEC), including risk factors contained in Item 1A, “Risk Factors” of our Annual Report on Form 10‑K for the year ended January 28, 2017, as such may be amended or supplemented in our subsequently filed Quarterly Reports on Form 10‑Q (including this report).

 

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 All Things Beauty. All in One Place.TM, a compelling value proposition and a convenient and welcoming shopping environment. We believe our strategy provides us with the competitive advantages that have contributed to our financial performance.

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On January 29, 2017, we implemented a holding company reorganization pursuant to which 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.

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 focus on providing affordable indulgence to our guests by combining unmatched product breadth, value and convenience with a distinctive specialty retail environment and experience. Key aspects of our business include: our ability to offer our guests a unique combination of more than 20,000 beauty products 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) acquire new guests and deepen loyalty with existing guests, 2) differentiate by delivering a distinctive and personalized guest experience across all channels, 3) offer relevant, innovative and often exclusive products that excite our guests, 4) deliver exceptional services in three core areas: hair, skin health and brows, 5) grow stores and e-commerce to reach and serve more guests, 6) invest in infrastructure to support our guest experience and growth, and capture scale efficiencies and 7) attract and retain talent that drives a winning culture. We believe that the expanding U.S. beauty products and salon services industry, and the shift in distribution channel of prestige beauty products from department stores to specialty retail stores, coupled with Ulta Beauty’s competitive strengths, positions 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, by opening new stores and by increasing sales in our e-commerce channel. Operating profit is expected to increase as a result of our ability to leverage our fixed store costs and supply chain investments.

Basis of presentation

We have determined the operating segments on the same basis that we use to internally evaluate performance. We have combined our three operating segments:  retail stores, salon services and e-commerce, into one reportable segment because they have a similar class of consumers, economic characteristics, nature of products and distribution methods.

Net sales include retail store and e-commerce merchandise sales as well as salon service revenue. We recognize merchandise revenue at the point of sale in our retail stores. E-commerce sales are recognized based on delivery of merchandise to the guest. Retail store and e-commerce sales are recorded net of estimated returns. Salon service revenue is recognized at the time the service is provided. 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.

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 the Company’s e-commerce business. There may be variations in the way in which some of our competitors and other retailers calculate comparable or same store sales.

15


 

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:

·

the general national, regional and local economic conditions and corresponding impact on customer spending levels;

·

the introduction of new products or brands;

·

the location of new stores in existing store markets;

·

competition;

·

our ability to respond on a timely basis to changes in consumer preferences;

·

the effectiveness of our various marketing activities; and

·

the number of new stores opened and the impact on the average age of all of our comparable stores.

 

Cost of sales includes:

·

the cost of merchandise sold (retail store and e-commerce), including substantially all vendor allowances, which are treated as a reduction of merchandise costs;

·

warehousing and distribution costs including labor and related benefits, freight, rent, depreciation and amortization, real estate taxes, utilities and insurance;

·

shipping and handling costs;

·

store occupancy costs including rent, depreciation and amortization, real estate taxes, utilities, repairs and maintenance, insurance, licenses and cleaning expenses;

·

salon payroll and benefits;

·

customer loyalty program expense; and

·

shrink and inventory valuation reserves.

 

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 cost of sales.

Selling, general and administrative expenses include:

·

payroll, bonus and benefit costs for retail and corporate employees;

·

advertising and marketing costs;

·

credit card program incentives;

·

occupancy costs related to our corporate office facilities;

·

stock-based compensation expense;

·

depreciation and amortization for all assets, except those related to our retail and warehouse operations, which are included in cost of sales; and

·

legal, finance, information systems and other corporate overhead costs.

 

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 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 unused 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.

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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 third quarter in fiscal 2017 and 2016 ended on October 28, 2017 and October 29, 2016, 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:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 28,

 

October 29,

 

October 28,

 

October 29,

 

(Dollars in thousands)

    

2017

    

2016

    

2017

    

2016

 

Net sales

 

$

1,342,181

 

$

1,131,232

 

$

3,946,914

 

$

3,274,163

 

Cost of sales

 

 

849,053

 

 

704,179

 

 

2,508,452

 

 

2,071,842

 

Gross profit

 

 

493,128

 

 

427,053

 

 

1,438,462

 

 

1,202,321

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

 

320,729

 

 

280,464

 

 

887,601

 

 

757,568

 

Pre-opening expenses

 

 

9,732

 

 

6,928

 

 

19,989

 

 

14,159

 

Operating income

 

 

162,667

 

 

139,661

 

 

530,872

 

 

430,594

 

Interest income, net

 

 

(316)

 

 

(211)

 

 

(1,209)

 

 

(774)

 

Income before income taxes

 

 

162,983

 

 

139,872

 

 

532,081

 

 

431,368

 

Income tax expense

 

 

58,338

 

 

52,310

 

 

185,020

 

 

161,826

 

Net income

 

$

104,645

 

$

87,562

 

$

347,061

 

$

269,542

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other operating data:

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of stores end of period

 

 

1,058

 

 

949

 

 

1,058

 

 

949

 

Comparable sales increase:

 

 

 

 

 

 

 

 

 

 

 

 

 

Retail and salon comparable sales

 

 

6.6%

 

 

14.3%

 

 

8.6%

 

 

13.6%

 

E-commerce comparable sales

 

 

62.9%

 

 

59.1%

 

 

68.2%

 

 

50.8%

 

Total comparable sales increase

 

 

10.3%

 

 

16.7%

 

 

12.1%

 

 

15.4%

 

 

 

17


 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13 Weeks Ended

 

39 Weeks Ended

 

 

 

October 28,

 

October 29,

 

October 28,

 

October 29,

 

(Percentage of net sales)

    

2017

    

2016