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 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 negative impacts the coronavirus (COVID-19) has had, and will continue to
? have, on our business, financial condition, profitability, cash flows and
supply chain, as well as consumer spending (including future uncertain
impacts);
? epidemics, pandemics like COVID-19 or natural disasters that have and could
continue to negatively impact sales;
? changes in the overall level of consumer spending and volatility in the
economy, including as a result of the COVID-19 pandemic;
? a decline in operating results that has and may continue to lead to asset
impairment and store closures charges;
? our ability to sustain our growth plans and successfully implement our
long-range strategic and financial plan;
? our ability to gauge beauty trends and react to changing consumer preferences
in a timely manner;
? the possibility that we may be unable to compete effectively in our highly
competitive markets;
? our ability to execute our Efficiencies for Growth cost optimization program;
the possibility that cybersecurity breaches and other disruptions could
? compromise our information or result in the unauthorized disclosure of
confidential information;
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? the possibility of material disruptions to our information systems;
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;
? 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;
? our ability to attract and retain key executive personnel;
? 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
"Risk Factors" of our Annual Report on Form 10-K for the year ended
? 2020, as such were amended and supplemented in Part II, Item 1A, "Risk Factors"
of our Quarterly Report on Form 10-Q for the fiscal quarter ended
and which may be further 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," "
Overview
We were founded in 1990 as a beauty retailer at a time when prestige, mass, and
salon products were sold through distinct channels - department stores for
prestige products; drug stores and mass merchandisers for mass products; and
salons and authorized retail outlets for professional hair care products. We
developed a unique specialty retail concept that offers a broad range of brands
and price points, a compelling value proposition, and a convenient and welcoming
shopping environment. We define our target consumer as a beauty enthusiast, a
consumer
We are the largest beauty retailer in
The continued growth of our business and any future increases in net sales, net
income, and cash flows is dependent on our ability to execute our strategic
imperatives: 1) drive growth across beauty enthusiast consumer groups, 2) deepen
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
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Over the long term, our growth strategy is to increase total net sales through
increases in our comparable sales, opening new stores, and increasing
omnichannel capabilities. Long term operating profit is expected to increase as
a result of our ability to expand merchandise margin and leverage our fixed
store costs with comparable sales increases and operating efficiencies offset by
incremental investments in people, systems, and supply chain required to support
a 1,500 to 1,700 store chain in the
COVID-19 Response
We have been and continue to closely monitor the impact of the COVID-19 outbreak on all facets of our business. We have taken decisive actions to protect the safety of our associates and guests and to manage the business through the fluid and challenging environment resulting from the COVID-19 pandemic.
In late 2019, COVID-19 was detected in
In response to government recommendations and for the health and safety of our
associates and guests, on
Our results of operations for the 13 and 26 weeks ended
As we navigate these unprecedented circumstances, we continue to focus on our
financial flexibility, including drawing down
? limited new hires and delayed merit increases for all corporate, store, and
salon associates;
? reduced marketing, travel and controllable expenses;
? moderated the pace of investments to build international capabilities;
? aligned inventory receipts with current sales trends;
? prioritized payment obligations;
? reduced new store openings, relocations and remodel projects; and
? suspended our stock repurchase program.
To help support our associates through this crisis, we expanded the criteria for
our Associate Relief Program to include those
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We also provided support for those
While sales are expected to be challenged as events continue to change, we are
unable to accurately predict the impact that COVID-19 will have on our results
of operations due to uncertainties including, but not limited to, the potential
temporary reclosing of certain of our stores, the duration of quarantines,
shelter-in-place and other travel restrictions within the
Industry trends
Our research indicates that
Basis of presentation
The Company has one reportable segment, which includes retail stores, salon services, and e-commerce.
We recognize merchandise revenue at the point of sale in our retail stores. E-commerce merchandise sales are recognized based upon shipment of merchandise to the guest based on meeting the transfer of control criteria. Retail store and e-commerce sales are recorded net of estimated returns. Shipping and handling are treated as costs to fulfill the contract and 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. We provide refunds for merchandise returns within 60 days from the original purchase date; however, due to store closures during the quarter, we extended our return policy to 180 days. State sales taxes are presented on a net basis as we consider our self a pass-through conduit for collecting and remitting state sales tax. Salon service revenue is recognized at the time the service is provided to the guest. Gift card sales revenue is deferred until the guest redeems the gift card. Company coupons and other incentives are recorded as a reduction of net sales. Other revenue sources include the private label credit card and co-branded credit card programs, as well as deferred revenue related to the loyalty program and gift card breakage.
Comparable sales reflect sales for stores beginning on the first day of the 14th month of operation. Therefore, a store is included in our comparable store base on the first day of the period after one year of operations plus the initial one-month grand opening period. Non-comparable store sales include sales from new stores that have not yet completed their 13th month of operation and stores that were closed for part or all of the period in either year. Remodeled stores are included in comparable sales unless the store was closed for a portion of the current or prior period. Comparable sales include retail sales 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;
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? 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, licenses, and
cleaning expenses;
? 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 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 stores 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 charges, store closures and other costs include long-lived fixed asset and operating lease asset impairment charges and other costs associated with store closings, including severance.
Pre-opening expenses include non-capital expenditures during the period prior to store opening for new, remodeled, and relocated stores including rent from the control date through store opening date for new and relocated stores, store set-up labor, management and employee training, and grand opening advertising.
Interest expense (income), net includes both interest income and expense. 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.
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Results of operations
Our quarterly periods are the 13 weeks ending on the Saturday closest to
The following table presents the components of our consolidated results of operations for the periods indicated:
13 Weeks Ended 26 Weeks Ended
August 1, August 3, August 1, August 3,
(Dollars in thousands) 2020 2019 2020 2019
Net sales $ 1,228,009 $ 1,666,607 $ 2,401,219 $ 3,409,636
Cost of sales 899,002 1,060,708 1,768,607 2,158,890
Gross profit 329,007 605,899 632,612 1,250,746
Selling, general and administrative
expenses 271,587 392,843 652,499 795,976
Impairment charges, store closures and
other costs 40,758 - 60,300 -
Pre-opening expenses 3,907 5,038 8,542 9,212
Operating income (loss) 12,755 208,018 (88,729) 445,558
Interest expense (income), net 2,617 (1,671) 3,889 (3,717)
Income (loss) before income taxes 10,138 209,689 (92,618) 449,275
Income tax expense (benefit) 2,086 48,431 (22,161) 95,796
Net income (loss) $ 8,052 $ 161,258 $ (70,457) $ 353,479
Other operating data:
Number of stores end of period 1,264 1,213 1,264 1,213
Comparable sales increase (decrease) (26.7%) 6.2% (31.1%) 6.6%
13 Weeks Ended 26 Weeks Ended
August 1, August 3, August 1, August 3,
(Percentage of net sales) 2020 2019 2020 2019
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales 73.2% 63.6% 73.7% 63.3%
Gross profit 26.8% 36.4% 26.3% 36.7%
Selling, general and administrative
expenses 22.1% 23.6% 27.2% 23.3%
Impairment charges, store closures and
other costs 3.3% 0.0% 2.5% 0.0%
Pre-opening expenses 0.3% 0.3% 0.3% 0.3%
Operating income (loss) 1.1% 12.5% (3.7%) 13.1%
Interest expense (income), net (0.2%) 0.1% (0.1%) 0.1%
Income (loss) before income taxes 0.9% 12.6% (3.8%) 13.2%
Income tax expense (benefit) 0.2% 2.9% (0.9%) 2.8%
Net income (loss) 0.7% 9.7% (2.9%) 10.4%
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Comparison of 13 weeks ended
Net sales
Net sales decreased
Gross profit
Gross profit decreased
Selling, general and administrative expenses
Selling, general and administrative (SG&A) expenses decreased
Impairment charges, store closures and other costs
We recognized
Additionally, for the 13 weeks ended
Pre-opening expenses
Pre-opening expenses decreased
Interest expense (income), net
Interest expense, net was
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or less from the date of purchase. As of
Income tax expense (benefit)
Income tax expense of
Net income
Net income was
Comparison of 26 weeks ended
Net sales
Net sales decreased
Gross profit
Gross profit decreased
Selling, general and administrative expenses
SG&A expenses decreased
Impairment charges, store closures and other costs
We recognized
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Additionally, for the 26 weeks ended
Pre-opening expenses
Pre-opening expenses decreased
Interest expense (income), net
Interest expense, net was
Income tax expense (benefit)
Income tax benefit of
Net income (loss)
Net loss was
Liquidity and capital resources
Our primary cash needs are for rent, capital expenditures for new, remodeled, relocated, and refreshed stores (prestige boutiques and related in-store merchandising upgrades), increased merchandise inventories related to store expansion and new brand additions, in-store boutiques (sets of custom-designed fixtures configured to prominently display certain prestige brands within our stores), supply chain improvements, share repurchases, and continued improvement in our information technology systems.
Our primary sources of liquidity are cash and cash equivalents, short-term
investments, cash flows from operations, including changes in working capital,
and borrowings under our credit facility. As of
The most significant components of our working capital are merchandise inventories and cash and cash equivalents reduced by related accounts payable and accrued expenses. Our working capital needs are greatest from August through November each year as a result of our inventory build-up during this period for the approaching holiday season. This is also the time of year when we are at maximum investment levels in our new store class and may not have collected all of the landlord allowances due to us as part of our lease agreements. Based on past performance and current expectations, we believe that cash and cash equivalents, short-term investments, cash generated from operations, and borrowings under the credit facility will satisfy the Company's working capital needs, capital expenditure needs, commitments, and other liquidity requirements through at least the next twelve months.
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The following table presents a summary of our cash flows for the periods
indicated:
26 Weeks Ended
August 1, August 3,
(In thousands) 2020 2019
Net cash provided by operating activities $ 15,989 $ 447,336
Net cash provided by (used in) investing activities 26,304 (334,552)
Net cash provided by (used in) financing activities 722,670 (344,637)
Effect of exchange rate changes on cash and cash equivalents 30 -
Net increase (decrease) in cash and cash equivalents $ 764,993 $ (231,853) Operating activities
Operating activities consist of net income (loss) adjusted for certain non-cash items, including depreciation and amortization, non-cash lease expense, impairment charges, store closures and other costs, deferred income taxes, stock-based compensation expense, realized gains or losses on disposal of property and equipment, and the effect of working capital changes. The decrease over the prior period is mainly due to the decrease in net income and the timing of accounts payable, partially offset by increase in disposals of property and equipment and impairment charges, store closures and other costs. The decrease in net income was primarily due to a decrease in gross profit resulting from lower sales as a result of the COVID-19 pandemic and an increase in impairment charges, partially offset by a decrease in SG&A expenses and income taxes.
Merchandise inventories, net were
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. Investment activities for capital
expenditures were
Our future investments will depend primarily on the number of new, remodeled,
and relocated stores, information technology systems, and supply chain
investments we undertake and the timing of these expenditures. In light of the
pandemic, we have reduced our capital expenditure plan for fiscal 2020, and now
anticipate capital expenditures will be between
Financing activities
Financing activities consist principally of borrowings on our revolving credit
facility, share repurchases, and capital stock transactions. Purchases of
treasury shares represent the fair value of common shares repurchased from plan
participants in connection with shares withheld to satisfy minimum statutory tax
obligations upon the vesting of restricted stock. As of
Share repurchase plan
On
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On
On
A summary of the Company's common stock repurchase activity is presented in the
following table:
26 Weeks Ended
(Dollars in millions) August 1, 2020 August 3, 2019
Shares repurchased 326,970 1,110,034Total cost of shares repurchased $ 73.0 $ 378.3
Credit facility
On
As of
Seasonality
Our business is subject to seasonal fluctuation. Significant portions of our net
sales and profits are realized during the fourth quarter of the fiscal year due
to the holiday selling season. To a lesser extent, our business is also affected
by
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Off-balance sheet arrangements
As of
Contractual obligations
Our contractual obligations consist of operating lease obligations, purchase
obligations, and our revolving line of credit. During the 26 weeks ended
Critical accounting policies and estimates
Management's discussion and analysis of financial condition and results of
operations is based upon our consolidated financial statements, which have been
prepared in accordance with
Recent accounting pronouncements not yet adopted
See Note 2 to our consolidated financial statements, "Summary of significant accounting policies - Recent accounting pronouncements not yet adopted."
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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