ULTA BEAUTY, INC. 
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 Annual Report on Form 10-K.
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 estimate that female beauty enthusiasts represent approximately 60% of shoppers and 75% of spend in theU.S. beauty category. We believe our strategy provides us with the competitive advantages that have contributed to our financial performance. Today, we are the largest beauty retailer inthe 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 more than 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 1,300 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, solidifyingUlta 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 that the attractive and growingU.S. beauty products and salon services industry, the expanding definition of beauty and role that omnichannel capabilities play in consumers' lives, coupled withUlta 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 generalU.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, systems, and supply chain required to support a 1,500 to 1,700 store chain in theU.S. with successful e-commerce and competitive omnichannel capabilities.
Current Trends
Impact of COVID-19
As previously discussed, our results of operations for fiscal 2020 were significantly impacted by the effects of the COVID-19 pandemic. During fiscal 2021, we continued to closely monitor the impact of COVID-19 on all facets
of
our
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business. As we navigated the impact of the pandemic, we proactively took steps to optimize our cost structure, while also investing in new capabilities to support future growth.
During fiscal 2021, we experienced an increase in sales driven primarily by the favorable impact from stronger consumer confidence, government stimulus payments, and the easing of COVID-19 restrictions. While operations during fiscal 2021 did not appear to be as negatively impacted, the continuing COVID-19 pandemic could have additional negative impacts in the future. The extent of the impact of the pandemic on our business and financial results will depend on future developments, including, but not limited to, the potential temporary reclosing of certain stores, the potential temporary restrictions on certain store operating hours and/or in-store capacity, the duration of potential future quarantines, shelter-in-place and other travel restrictions within theU.S. and other affected countries, supply chain disruptions, increased freight costs and higher wholesale costs, the continued duration of the pandemic and any variants of the virus, the duration, timing and severity of the impact on consumer spending, the timing and effectiveness of vaccine distribution, vaccination rates, and how quickly and to what extent normal economic and operating conditions can resume.
Industry trends
Our research indicates thatUlta Beauty has captured meaningful market share across all categories over the last several years. However, the COVID-19 pandemic and its various impacts have changed consumer behavior and consumption of beauty products due to the closures of offices, retail stores and other businesses and the significant decline in travel, entertainment and social gatherings. The overall beauty market declined in 2020 but stabilized in 2021, as consumers began to recover from the impacts of COVID-19. 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.
Impact of inflation and changing prices
Although we do not believe that inflation has had a material impact on our financial position or results of operations to date, a high rate of inflation in the future may have an adverse effect on 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 these increased costs. In addition, inflation could materially increase the interest rates on any future debt. 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 sources
include the private label and co-branded credit card programs and royalties
derived from the partnership with Target, as well as deferred revenue related to
the loyalty program and gift card breakage.
Comparable sales reflect sales for stores beginning on the first day of the
14th month of operation. Therefore, a store is included in our comparable store
base on the first day of the period after one year of operations plus the
initial one-month grand opening period. Non-comparable store sales include sales
from new stores that have not yet completed their 13th month of operation and
stores that were closed for part or all of the period in either year. Remodeled
stores are included in comparable sales unless the store was closed for a
portion of the current or prior period. Comparable sales
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include retail sales and salon services (including stores temporarily closed due to COVID-19), and e-commerce. There may be variations in the way in which some of our competitors and other retailers calculate comparable or same store sales. Measuring comparable sales allows us to evaluate the performance of our store base as well as several other aspects of our overall strategy. Several factors could positively or negatively impact our comparable sales results:
? 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 merchandising and 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, including substantially all vendor allowances,
which are treated as a reduction of merchandise costs;
? distribution costs including labor and related benefits, freight, rent,
depreciation and amortization, real estate taxes, utilities, and insurance;
? shipping and handling costs;
? retail stores occupancy costs including rent, depreciation and amortization,
real estate taxes, utilities, repairs and maintenance, insurance, and licenses;
? salon services payroll and benefits; and
? shrink and inventory valuation reserves.
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:
? payroll, bonus, and benefit costs for retail store and corporate employees;
? advertising and marketing costs;
? occupancy costs related to our corporate office facilities;
? stock-based compensation expense;
depreciation and amortization for all assets, except those related to our
? retail stores and distribution 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
their selling, general and administrative expenses.
Impairment, restructuring and other costs include long-lived asset impairment
charges, restructuring costs associated with store closings, costs associated
with the suspension of our Canadian expansion, and employee related severance
costs.
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.
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Interest expense, net includes both interest expense and income. Interest expense includes interest costs and facility fees associated with our credit facility, which is structured as an asset-based lending instrument. Our credit facility interest is based on a variable interest rate structure which can result in increased cost in periods of rising interest rates. Interest income represents interest from cash equivalents and short-term investments with maturities of twelve months or less from the date of purchase.
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 fiscal years are the 52- or 53-week periods ending on the Saturday closest toJanuary 31 . The Company's fiscal years endedJanuary 29, 2022 (fiscal 2021),January 30, 2021 (fiscal 2020), andFebruary 1, 2020 (fiscal 2019) were all 52-week years. As ofJanuary 29, 2022 , we operated 1,308 stores across 50 states. The following tables present the components of our consolidated results of operations for
the
periods indicated:
Fiscal year ended
January 29, January 30, February 1,
(Dollars in thousands) 2022 2021 2020
Net sales $ 8,630,889 $ 6,151,953 $ 7,398,068
Cost of sales 5,262,335 4,202,794 4,717,004
Gross profit 3,368,554 1,949,159 2,681,064
Selling, general and administrative expenses 2,061,545 1,583,017 1,760,716 Impairment, restructuring and other costs
- 114,322 -
Pre-opening expenses 9,517 15,000 19,254
Operating income 1,297,492 236,820 901,094
Interest expense (income), net 1,663 5,735 (5,056)
Income before income taxes 1,295,829 231,085 906,150
Income tax expense 309,992 55,250 200,205
Net income $ 985,837 $ 175,835 $ 705,945
Other operating data:
Number of stores end of year 1,308 1,264 1254
Comparable sales 37.9% (17.9)% 5.0%
Fiscal year ended
January 29, January 30, February 1,
(Percentage of net sales) 2022 2021 2020
Net sales 100.0% 100.0% 100.0%
Cost of sales 61.0% 68.3% 63.8%
Gross profit 39.0% 31.7% 36.2%
Selling, general and administrative expenses 23.9% 25.7% 23.8% Impairment, restructuring and other costs 0.0%
1.9% 0.0% Pre-opening expenses 0.1% 0.2% 0.3% Operating income 15.0% 3.9% 12.1%
Interest expense (income), net 0.0%
0.1% (0.1)%
Income before income taxes 15.0% 3.8% 12.2%
Income tax expense 3.6% 0.9% 2.7%
Net income 11.4% 2.9% 9.5%
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Fiscal year 2021 versus fiscal year 2020
Net sales
Net sales increased$2.5 billion , or 40.3%, to$8.6 billion in fiscal 2021 compared to$6.2 billion in fiscal 2020. The net sales increase was primarily due to the favorable impact from stronger consumer confidence, government stimulus payments, and the easing of COVID-19 restrictions, and an increase of$15.1 million in other revenue. The total comparable sales increase of 37.9% in fiscal 2021, compared to a decrease of 17.9% in fiscal 2020, was driven by a 30.0% increase in transactions and a 6.0% increase in average ticket.
Gross profit
Gross profit increased$1.4 billion , or 72.8%, to$3.4 billion in fiscal 2021, compared to$1.9 billion in fiscal 2020. Gross profit as a percentage of net sales increased 730 basis points to 39.0% in fiscal 2021 compared to 31.7% in fiscal 2020. The increase in gross profit margin was primarily due to:
? 300 basis points leverage of fixed costs attributed to the impact of higher
sales;
? 190 basis points of improvements in merchandise margins driven by lower
promotional activity and cost optimization efforts;
? 140 basis points of leverage due to favorable channel mix shifts; and
? 100 basis points of leverage in salon expenses attributed to the impact of
higher sales.
Selling, general and administrative expenses
Selling, general and administrative (SG&A) expenses increased$0.5 billion , or 30.2%, to$2.1 billion in fiscal 2021 compared to$1.6 billion in fiscal 2020. As a percentage of net sales, SG&A expenses decreased 180 basis points to 23.9% in fiscal 2021 compared to 25.7% in fiscal 2020. The leverage in SG&A expenses was primarily due to: ? 180 basis points of leverage of corporate overhead due to higher sales;
? 90 basis points of leverage of store payroll and benefits due to higher sales;
and
? 50 basis points of leverage of store expenses due to higher sales; partially
offset by
? 80 basis points of deleverage due to less employee retention credits received
under the Coronavirus Aid, Relief and Economic Security Act (CARES Act); and
? 60 basis points of deleverage due to higher incentive compensation.
Impairment, restructuring and other costs
There were no impairment, restructuring and other costs recognized in fiscal 2021 compared to$114.3 million for fiscal 2020, which consisted of$41.9 million due to the impairment of tangible long-lived assets and operating lease assets associated with certain retail stores,$29.1 million related to the suspension of the planned expansion toCanada ,$27.5 million related to the permanent closure of 19 stores, and$15.8 million of severance charges.
Pre-opening expenses
Pre-opening expenses decreased$5.5 million , or 36.6%, to$9.5 million in fiscal 2021 compared to$15.0 million in fiscal 2020 due to current year real estate activity and stores expected to open in the first quarter of fiscal 2022 compared to the first quarter of fiscal 2021.
Interest expense, net
Interest expense, net was$1.7 million in fiscal 2021 compared to$5.7 million of interest expense, net in fiscal 2020. Interest expense represents interest on borrowings and fees related to the credit facility. Interest income results from short-term investments. We did not have any outstanding borrowings on our credit facility as ofJanuary 29, 2022 andJanuary 30, 2021 . 35 Table of Contents Income tax expense
Income tax expense of$310.0 million in fiscal 2021 represents an effective tax rate of 23.9%, compared to fiscal 2020 income tax expense of$55.3 million and an effective tax rate of 23.9%. The higher income tax expense is primarily due to higher operating income compared to fiscal 2020.
Net income
Net income increased$810.0 million to$985.8 million in fiscal 2021 compared to$175.8 million in fiscal 2020. The increase in net income was primarily due to a$1.4 billion increase in gross profit and a$114.3 million decrease in impairment, restructuring and other costs, partially offset by a$0.5 billion increase in SG&A expenses and$254.7 million increase in income taxes.
Fiscal year 2020 versus fiscal year 2019
Net sales
Net sales decreased$1.2 billion , or 16.8%, to$6.2 billion in fiscal 2020 compared to$7.4 billion in fiscal 2019. The net sales decrease was driven by the negative impacts of the COVID-19 pandemic, including the temporary closing of our brick-and-mortar retail stores, social distancing and quarantines, reduction of operating hours, and limitations on in-store capacity, and a decrease of$6.6 million in other revenue. Total comparable sales in fiscal 2020 decreased 17.9% compared to an increase of 5.0% in fiscal 2019. During fiscal 2020, transactions declined 24.5% and average ticket increased 8.8%.
Gross profit
Gross profit decreased$0.7 billion , or 27.3%, to$1.9 billion in fiscal 2020, compared to$2.7 billion in fiscal 2019. Gross profit as a percentage of net sales decreased 450 basis points to 31.7% in fiscal 2020 compared to 36.2% in fiscal 2019. The decrease in gross profit margin was primarily due to:
? 220 basis points of deleverage due to channel mix shifts;
220 basis points deleverage of fixed costs and 90 basis points of deleverage in
? salon services, both attributed to the impact of lower sales; partially offset
by
? 80 basis points of leverage driven by lower promotional activity and cost
optimization efforts.
Selling, general and administrative expenses
SG&A expenses decreased$0.2 billion , or 10.1%, to$1.6 billion in fiscal 2020 compared to$1.8 billion in fiscal 2019. As a percentage of net sales, SG&A expenses increased 190 basis points to 25.7% in fiscal 2020 compared to 23.8% in fiscal 2019. The deleverage in SG&A expenses was primarily due to:
? 170 basis points of deleverage primarily due to higher corporate overhead;
80 basis points of deleverage of store payroll and benefits and variable store
? expenses due to the impact of lower sales and personal protective equipment and
COVID-related expenses; and
? 30 basis points of deleverage of marketing expenses attributed to the impact of
lower sales volume; partially offset by
? 90 basis points of leverage related to the employee retention credits made
available under the CARES Act.
Impairment, restructuring and other costs
Impairment, restructuring and other costs were$114.3 million for fiscal 2020, which consisted of$41.9 million due to the impairment of tangible long-lived assets and operating lease assets associated with certain retail stores,$29.1 million related to the suspension of the planned expansion toCanada ,$27.5 million related to the permanent closure of 19 stores, 36
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and
Pre-opening expenses
Pre-opening expenses decreased$4.3 million , or 22.1%, to$15.0 million in fiscal 2020 compared to$19.3 million in fiscal 2019 due to current year real estate activity and stores expected to open in the first quarter of fiscal 2021. During fiscal 2020, we opened 30 new stores and relocated five stores. During fiscal 2019, we opened 86 new stores, remodeled 12 stores, and relocated eight stores.
Interest expense (income), net
Interest expense, net was$5.7 million in fiscal 2020 compared to$5.1 million of interest income, net in fiscal 2019. Interest expense represents interest on borrowings and fees related to the credit facility. Interest income results from short-term investments. We did not have any outstanding borrowings on our credit facility as ofJanuary 30, 2021 andFebruary 1, 2020 .
Income tax expense
Income tax expense of$55.3 million in fiscal 2020 represents an effective tax rate of 23.9%, compared to fiscal 2019 income tax expense of$200.2 million and an effective tax rate of 22.1%. The higher effective tax rate is primarily due to less investment tax credits received and tax expense from the income tax accounting for stock-based compensation compared to a benefit in fiscal 2019.
Net income
Net income decreased$530.1 million , or 75.1%, to$175.8 million in fiscal 2020 compared to$705.9 million in fiscal 2019. The decrease in net income was primarily due to a$731.9 million decrease in gross profit and a$114.3 million increase in impairment, restructuring and other costs, partially offset by a$177.6 million decrease in SG&A expenses and$145.0 million decrease in income taxes.
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 and cash and cash equivalents reduced by accounts payable, accrued expenses and deferred revenue. 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 improvement 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 as a result of inventory build-up during this period for the 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.
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The following table summarizes contractual cash requirements as of
Less Than 1 to 3 3 to 5 More than 5
(In thousands) Total 1 Year Years Years Years
Operating lease obligations (1) $ 2,130,097 $ 332,651 $ 681,117 $ 554,022 $ 562,307
Purchase obligations 51,056 33,615 15,485 1,956 -
Total (2) $ 2,181,153 $ 366,266 $ 696,602 $ 555,978 $ 562,307 These amounts are for our undiscounted lease obligations recorded in our
consolidated balance sheets as operating lease liabilities. Also included are
(1) legally binding minimum lease payments for leases signed but not yet
commenced of $73.6 million , which are excluded from operating lease
liabilities shown on our consolidated balance sheets.
The unrecognized tax benefit of $3.4 million as of January 29, 2022 is(2) excluded due to uncertainty regarding the realization and timing of the
related future cash flows, if any.
Purchase obligations reflect legally binding agreements entered into by the
Company to purchase goods or services. The amount of purchase obligations
relates to commitments for products and services and other goods and service
contracts entered into as of
Cash flows
We believe our ability to generate substantial cash from operating activities
and readily secure financing at competitive rates are key strengths that give us
significant flexibility to meet our short and long-term financial commitments.
The following table presents a summary of our cash flows during the last three
years:
Fiscal year ended
January 29, January 30, February 1,
(In thousands) 2022 2021 2020Net cash provided by operating activities$ 1,059,265 $ 810,355 $ 1,101,293 Net cash used in investing activities (176,484) (48,751) (471,480) Net cash used in financing activities (1,497,216) (107,934) (646,739) Operating activities Operating activities consist of net income adjusted for certain non-cash items, including depreciation and amortization, non-cash lease expense, long-lived asset impairment charges, deferred income taxes, stock-based compensation expense, realized gains or losses on disposal of property and equipment, and the effect of working capital changes. The increase in net cash provided by operating activities in fiscal 2021 is mainly due to the increase in net income and deferred revenue, partially offset by higher merchandise inventories, higher cash outflow from higher income taxes, and lower long-lived asset impairment charges compared to fiscal 2020.
The increase in net income was primarily due to an increase in gross profit resulting from higher sales and a decrease in impairment, restructuring and other costs, partially offset by an increase in SG&A expenses and income taxes.
Merchandise inventories, net were$1.5 billion atJanuary 29, 2022 , compared to$1.2 billion atJanuary 30, 2021 , representing an increase of$331.0 million or 28.3%. The increase in total inventory was primarily driven by the addition of 44 net new stores opened sinceJanuary 30, 2021 , inventory to support new brand launches, and the acceleration of inventory receipts to support expected demand and mitigate anticipated global supply chain disruptions.
The decrease in net cash provided by operating activities in fiscal 2020 relative to fiscal 2019 was primarily due to the decrease in net income, merchandise inventories, and the timing of accounts payable due to the COVID-19 pandemic.
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Investing activities
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.
The increase in net cash used in investing activities in fiscal 2021 relative to fiscal 2020 was primarily due to less proceeds of short-term investments and more capital expenditures compared to fiscal 2020. The decrease in net cash used in investing activities in fiscal 2020 relative to fiscal 2019 was primarily due to less capital expenditures due to actions we took to preserve liquidity as we navigated through the COVID-19 pandemic and an increase in proceeds of short-term investments offset by less purchases of short-term investments.
Capital expenditures
The following table presents a summary of our store activities during the last
three years:
Fiscal year ended
January 29, January 30, February 1,
2022 2021 2020
Stores opened 48 30 86
Stores remodeled 9 - 12
Stores relocated 7 5 8
Stores refreshed - - 240
During fiscal 2021, the average investment required to open a new Ulta Beauty
store was approximately $1.4 million , which includes capital investment net of
landlord contributions, pre-opening expenses, and initial inventory net of
payables.
Capital expenditures during the last three years by major category are as
follows:
Budget
Fiscal Fiscal Fiscal Fiscal
(In millions) 2022 2021 2020 2019
New, Remodeled, and Relocated Stores
30 16 14 29
Information Technology Systems 150 37 36
54
Supply Chain 70 23 13 17
Store Maintenance and Other 55 23 33 58
Total $ 425 $ 172 $ 152 $ 299
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. We expect
fiscal 2022 capital expenditures will be $425 million , and will be used to fund
our new, remodeled, and relocated stores and strategic priorities, including
investments in information technology systems and supply chain optimization.
Financing activities
Financing activities primarily 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.
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The increase in net cash used in financing activities in fiscal 2021 relative to fiscal 2020 was primarily due to an increase in share repurchases offset by an increase in stock option exercises, and no activity under our revolving credit facility during fiscal 2021. The decrease in net cash used in financing activities in fiscal 2020 relative to fiscal 2019 was primarily due to borrowing and repayment under our revolving credit facility and the suspension of the share repurchase program in order to strengthen our liquidity and preserve cash while navigating the COVID-19 pandemic. We had no borrowings outstanding under the credit facility at the end of fiscal 2021, 2020, and 2019. 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
InMarch 2019 , the Board of Directors authorized a share repurchase program (the 2019 Share Repurchase Program) pursuant to which the Company could repurchase up to$875.0 million of the Company's common stock. The 2019 Share Repurchase Program authorization revoked the previously authorized but unused amount of$25.4 million from the earlier share repurchase program. The 2019 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time. InMarch 2020 , the Board of Directors authorized a share repurchase program (the 2020 Share Repurchase Program) pursuant to which the Company could repurchase up to$1.6 billion of the Company's common stock. The 2020 Share Repurchase Program authorization revoked the previously authorized but unused amount of$177.8 million from the 2019 Share Repurchase Program. The 2020 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time. A summary of common stock repurchase activity is presented in the following table: Fiscal year ended January 29, January 30, February 1, (Dollars in millions) 2022 2021 2020 Shares repurchased 4,249,632 474,794 2,320,896
Total cost of shares repurchased
OnMarch 7, 2022 , the Board of Directors authorized a new share repurchase program (the 2022 Share Repurchase Program) pursuant to which the Company may repurchase up to$2.0 billion of the Company's common stock. The 2022 Share Repurchase Program authorization revokes the previously authorized but unused amounts from the 2020 Share Repurchase Program. The 2022 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time. Credit facility OnMarch 11, 2020 , we entered into Amendment No. 1 to the Second Amended and Restated Loan Agreement (as so amended, the Loan Agreement) withWells Fargo Bank, National Association , as Administrative Agent, Collateral Agent and a Lender thereunder;Wells Fargo Bank, National Association andJPMorgan 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 onMarch 11, 2025 , provides maximum revolving loans equal to the lesser of$1.0 billion 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$100.0 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 40 Table of Contents 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% to 0.125% or the London Interbank Offered Rate plus a margin of 1.125% to 1.250%, with such margins based on the Company's borrowing availability, and the unused line fee is 0.20% per annum. As ofJanuary 29, 2022 andJanuary 30, 2021 , we had no borrowings outstanding under the credit facility and 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 byMother's Day andValentine'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 withU.S. generally accepted accounting principles. The preparation of these 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. A discussion of our more significant estimates follows. Management has discussed the development, selection, and disclosure of these estimates and assumptions with the Audit Committee of the Board of Directors.
Inventory valuation
Merchandise inventories are carried at the lower of cost or market (net
realizable value). Cost is determined using the moving average cost method and
includes costs incurred to purchase and distribute goods as well as related
vendor allowances including co-op advertising, markdowns, and volume discounts.
We record valuation adjustments to our inventories if the cost of a specific
product on hand exceeds the amount we expect to realize from the ultimate sale
or disposal of the inventory. These estimates are based on management's judgment
regarding future demand, age of inventory, and analysis of historical
experience. If actual demand or market conditions are different than those
projected by management, future merchandise margin rates may be unfavorably or
favorably affected by adjustments to these estimates.
Inventories are adjusted for the results of periodic physical inventory counts
at each of our locations. We record a shrink reserve representing management's
estimate of inventory losses by location that have occurred since the date of
the last physical count. This estimate is based on management's analysis of
historical results and operating trends.
We do not believe that there is a reasonable likelihood that there will be a
material change in the future estimates or assumptions we use to calculate our
inventory reserves. Adjustments to earnings resulting from revisions to
management's estimates of the inventory reserves have been insignificant during
fiscal 2021, 2020, and 2019. An increase or decrease in the lower of cost or
market (net realizable value) reserve of 10% would not have a material impact on
our operating income for fiscal 2021. An increase or decrease in the shrink rate
included in the shrink reserve calculation of 10% would not have a material
impact on our operating income for fiscal 2021.
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Vendor allowances
The majority of cash consideration received from a vendor is considered to be a reduction of the cost of the related products and is reflected in cost of sales in our consolidated statements of income as the related products are sold unless it is in exchange for an asset or service or a reimbursement of a specific, incremental, identifiable cost incurred by the Company in selling the vendors' products. We estimate the amount recorded as a reduction of inventory at the end of each period based on a detailed analysis of inventory turns and management's analysis of the facts and circumstances of the various contractual agreements with vendors. We record cash consideration expected to be received from vendors in receivables. We do not believe there is a reasonable likelihood there will be a material change in the future estimates or assumptions we use to calculate our reduction of inventory. An increase or decrease in inventory turns of five basis points would not have a material impact on our operating income for fiscal 2021.
Impairment of long-lived tangible assets
We review long-lived tangible assets whenever events or circumstances indicate these assets might not be recoverable. Assets are primarily reviewed at the store level, which is the lowest level for which cash flows can be identified. Significant estimates are used in determining future operating results of each store over its remaining lease term. An impairment loss would be recorded if the carrying amount of the long-lived asset exceeds its fair value. We do not believe that there is a reasonable likelihood that there will be a material change in the future estimates or assumptions we use to calculate our impairment charges. During fiscal 2020, we recognized$72.5 million of impairment of long-lived tangible and right-of-use assets which consisted of$41.9 million due to impairment analysis which indicated that the carrying values of certain long-lived assets exceeded their respective fair values,$19.6 million related to the suspension of the planned expansion toCanada , and$11.0 million related to the permanent closure of 19 stores. No significant impairment charges were recognized in fiscal 2021 or fiscal 2019.
Loyalty program
We maintain a customer loyalty program, Ultamate Rewards, which allows members to earn points based on purchases of merchandise or services. Points earned are valid for at least one year. The loyalty program represents a material right to the customer and points may be redeemed on future products and services. Revenue from the loyalty program is recognized when the members redeem points or points expire. We defer revenue related to points earned that have not yet been redeemed. The amount of deferred revenue includes estimates for the standalone selling price of points earned by members and the percentage of points expected to be redeemed. The expected redemption percentage is based on historical redemption patterns and considers current information or trends. The estimated redemption rate is evaluated each reporting period. We do not believe that there is a reasonable likelihood there will be a material change in the future estimates or assumptions used to calculate the estimated redemption rate. Adjustments to earnings resulting from revisions to management's estimates of the redemption rates have been insignificant during fiscal 2021, 2020, and 2019. An increase or decrease in the estimated redemption rate of 5% would not have a material impact on our operating income in fiscal 2021.
Income taxes
We are subject to income taxes inthe United States . Judgment is required in determining our provision for income taxes and income tax assets and liabilities, including evaluating uncertainties in the application of accounting principles and complex tax laws. We recognize deferred income taxes for the estimated future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are anticipated to be recovered or settled. The effect on deferred taxes of a change in income tax rates is recognized in the consolidated statements of income in the period of enactment. A valuation allowance is recorded to reduce the carrying amounts of deferred tax assets to the amount expected to be realized unless it is more-likely-than-not that such assets will be realized in full. The estimated tax benefit of an uncertain tax position is 42
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recorded in our consolidated financial statements only after determining a more-likely-than-not probability that the uncertain tax position will withstand challenge, if any, from applicable taxing authorities.
Judgment is required in assessing the future tax consequences of events that have been recognized on our consolidated financial statements or tax returns. Variations in the actual outcome of these future tax consequences could materially impact our consolidated financial statements.
Recently adopted accounting pronouncements
See Note 2 to our consolidated financial statements, "Summary of significant accounting policies - Recently adopted accounting pronouncements."
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