UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the Quarterly Period Ended November 2, 2019

☐ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from _____________ to _____________

Commission File Number: 001-33764

ULTA BEAUTY, INC.

(Exact name of Registrant as specified in its charter)

incorporation or organization)

Identification No.)

Delaware

(State or other jurisdiction of
incorporation or organization)

38-4022268

(I.R.S. Employer
Identification No.)

1000 Remington Blvd., Suite 120

Bolingbrook, Illinois

(Address of principal executive offices)

60440

(Zip code)

Registrant’s telephone number, including area code: (630) 410-4800

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $0.01 per share	ULTA	The NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large Accelerated Filer ☒ Accelerated filer ☐ Non-accelerated filer ☐ Smaller reporting company ☐ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

The number of shares of the registrant’s common stock, par value $0.01 per share, outstanding as of December 2, 2019 was 57,161,342 shares.

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Part I - Financial Information

Item 1.Financial Statements

Ulta Beauty, Inc.

Consolidated Balance Sheets


	November 2,		February 2,		November 3,
(In thousands, except per share data)	2019		2019		2018
Assets		(Unaudited)				(Unaudited)
Current assets:
Cash and cash equivalents	$	208,843	$	409,251	$	296,944
Receivables, net		112,888		136,168		102,353
Merchandise inventories, net		1,616,920		1,214,329		1,484,565
Prepaid expenses and other current assets		118,343		138,116		119,817
Prepaid income taxes		40,474		16,997		22,294
Total current assets		2,097,468		1,914,861		2,025,973

Property and equipment, net		1,233,412		1,226,029		1,257,775
Operating lease assets		1,529,524		—		—
Goodwill		10,870		10,870		9,084
Other intangible assets, net		3,622		4,317		6,985
Deferred compensation plan assets		26,269		20,511		21,397
Other long-term assets		27,683		14,584		11,477
Total assets	$	4,928,848	$	3,191,172	$	3,332,691

Liabilities and stockholders’ equity
Current liabilities:
Accounts payable	$	594,993	$	404,016	$	574,480
Accrued liabilities		249,112		220,666		255,156
Deferred revenue		190,188		199,054		154,447
Current operating lease liabilities		222,627		—		—
Total current liabilities		1,256,920		823,736		984,083

Non-current operating lease liabilities		1,706,806		—		—
Deferred rent		—		434,980		432,052
Deferred income taxes		83,856		83,864		50,045
Other long-term liabilities		34,110		28,374		30,775
Total liabilities		3,081,692		1,370,954		1,496,955

Commitments and contingencies (Note 7)

Stockholders' equity:
Common stock, $0.01 par value, 400,000 shares authorized; 57,959, 59,232, and 60,108 shares issued; 57,283, 58,584, and 59,461 shares outstanding; at November 2, 2019 (unaudited), February 2, 2019, and November 3, 2018 (unaudited), respectively		580		592		601
Treasury stock-common, at cost		(34,272)		(24,908)		(24,706)
Additional paid-in capital		800,986		738,671		731,890
Retained earnings		1,079,862		1,105,863		1,127,951
Total stockholders’ equity		1,847,156		1,820,218		1,835,736
Total liabilities and stockholders’ equity	$	4,928,848	$	3,191,172	$	3,332,691

See accompanying notes to consolidated financial statements.

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Ulta Beauty, Inc.

Consolidated Statements of Income

(Unaudited)


	13 Weeks Ended				39 Weeks Ended
	November 2,		November 3,		November 2,		November 3,
(In thousands, except per share data)	2019		2018		2019		2018
Net sales	$	1,682,514	$	1,560,011	$	5,092,150	$	4,591,899
Cost of sales		1,059,081		987,733		3,217,971		2,923,447
Gross profit		623,433		572,278		1,874,179		1,668,452

Selling, general and administrative expenses		449,198		395,453		1,245,174		1,078,219
Pre-opening expenses		6,455		7,612		15,667		17,363
Operating income		167,780		169,213		613,338		572,870
Interest income, net		(900)		(1,318)		(4,617)		(3,786)
Income before income taxes		168,680		170,531		617,955		576,656
Income tax expense		38,933		39,365		134,729		132,771
Net income	$	129,747	$	131,166	$	483,226	$	443,885

Net income per common share:
Basic	$	2.25	$	2.20	$	8.31	$	7.38
Diluted	$	2.25	$	2.18	$	8.27	$	7.35

Weighted average common shares outstanding:
Basic		57,568		59,724		58,123		60,135
Diluted		57,763		60,062		58,396		60,432

See accompanying notes to consolidated financial statements.

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Ulta Beauty, Inc.

Consolidated Statements of Cash Flows

(Unaudited)


	39 Weeks Ended
	November 2,		November 3,
(In thousands)	2019		2018
Operating activities
Net income	$	483,226	$	443,885
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		219,207		207,652
Non-cash lease expense		219,220		—
Deferred income taxes		(8)		(408)
Stock-based compensation expense		19,108		20,308
Loss on disposal of property and equipment		4,821		1,339
Change in operating assets and liabilities:
Receivables		5,812		(2,594)
Merchandise inventories		(402,591)		(388,141)
Prepaid expenses and other current assets		(5,487)		(19,603)
Income taxes		(23,477)		(34,906)
Accounts payable		190,977		248,719
Accrued liabilities		23,109		42,151
Deferred revenue		(8,866)		1,963
Operating lease liabilities		(198,181)		—
Deferred rent		—		24,136
Other assets and liabilities		30,636		(2,287)
Net cash provided by operating activities		557,506		542,214

Investing activities
Purchases of short-term investments		(245,000)		(386,193)
Proceeds from short-term investments		245,000		506,193
Purchases of property and equipment		(241,136)		(256,415)
Acquisitions, net of cash acquired		—		(13,606)
Purchases of equity investments		(43,757)		—
Net cash used in investing activities		(284,893)		(150,021)

Financing activities
Repurchase of common shares		(506,868)		(379,423)
Stock options exercised		43,211		12,668
Purchase of treasury shares		(9,364)		(5,939)
Net cash used in financing activities		(473,021)		(372,694)

Net increase (decrease) in cash and cash equivalents		(200,408)		19,499
Cash and cash equivalents at beginning of period		409,251		277,445
Cash and cash equivalents at end of period	$	208,843	$	296,944

Supplemental cash flow information
Cash paid for income taxes (net of refunds)	$	126,719	$	168,087
Non-cash investing activities:
Change in property and equipment included in accrued liabilities	$	6,797	$	21,611

See accompanying notes to consolidated financial statements.

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Ulta Beauty, Inc.

Consolidated Statements 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 – February 2, 2019	59,232	$	592	(648)	$	(24,908)	$	738,671	$	1,105,863	$	1,820,218
Net income	—		—	—		—		—		192,221		192,221
Stock-based compensation	—		—	—		—		6,030		—		6,030
Adoption of accounting standards - ASC 842	—		—	—		—		—		(2,375)		(2,375)
Stock options exercised and other awards	348		4	—		—		42,052		—		42,056
Purchase of treasury shares	—		—	(27)		(9,183)		—		—		(9,183)
Repurchase of common shares	(318)		(3)	—		—		—		(107,396)		(107,399)
Balance – May 4, 2019	59,262	$	593	(675)	$	(34,091)	$	786,753	$	1,188,313	$	1,941,568
Net income	—		—	—		—		—		161,258		161,258
Stock-based compensation	—		—	—		—		6,736		—		6,736
Stock options exercised and other awards	15		—	—		—		879		—		879
Purchase of treasury shares	—		—	—		(89)		—		—		(89)
Repurchase of common shares	(792)		(8)	—		—		—		(270,893)		(270,901)
Balance – August 3, 2019	58,485	$	585	(675)	$	(34,180)	$	794,368	$	1,078,678	$	1,839,451
Net income	—		—	—		—		—		129,747		129,747
Stock-based compensation	—		—	—		—		6,342		—		6,342
Stock options exercised and other awards	4		—	—		—		276		—		276
Purchase of treasury shares	—		—	(1)		(92)		—		—		(92)
Repurchase of common shares	(530)		(5)	—		—		—		(128,563)		(128,568)
Balance – November 2, 2019	57,959	$	580	(676)	$	(34,272)	$	800,986	$	1,079,862	$	1,847,156

See accompanying notes to consolidated financial statements.

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Ulta Beauty, Inc.

Consolidated Statements 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 – February 3, 2018	61,441	$	614	(619)	$	(18,767)	$	698,917	$	1,093,453	$	1,774,217
Net income	—		—	—		—		—		164,396		164,396
Stock-based compensation	—		—	—		—		6,170		—		6,170
Adoption of accounting standards - ASC 606	—		—	—		—		—		(29,980)		(29,980)
Stock options exercised and other awards	176		2	—		—		6,510		—		6,512
Purchase of treasury shares	—		—	(23)		(4,831)		—		—		(4,831)
Repurchase of common shares	(619)		(6)	—		—		—		(133,045)		(133,051)
Balance – May 5, 2018	60,998	$	610	(642)	$	(23,598)	$	711,597	$	1,094,824	$	1,783,433
Net income	—		—	—		—		—		148,323		148,323
Stock-based compensation	—		—	—		—		7,002		—		7,002
Stock options exercised and other awards	32		—	—		—		1,936		—		1,936
Purchase of treasury shares	—		—	(4)		(815)		—		—		(815)
Repurchase of common shares	(512)		(5)	—		—		—		(127,396)		(127,401)
Balance – August 4, 2018	60,518	$	605	(646)	$	(24,413)	$	720,535	$	1,115,751	$	1,812,478
Net income	—		—	—		—		—		131,166		131,166
Stock-based compensation	—		—	—		—		7,136		—		7,136
Stock options exercised and other awards	41		1	—		—		4,219		—		4,220
Purchase of treasury shares	—		—	(1)		(293)		—		—		(293)
Repurchase of common shares	(451)		(5)	—		—		—		(118,966)		(118,971)
Balance – November 3, 2018	60,108	$	601	(647)	$	(24,706)	$	731,890	$	1,127,951	$	1,835,736

See accompanying notes to consolidated financial statements.

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Ulta Beauty, Inc.

Notes to Consolidated Financial Statements

(In thousands, except per share and store count data) (Unaudited)

1.Business and basis of presentation

On January 29, 2017, Ulta Salon, Cosmetics & Fragrance, Inc. implemented a holding company reorganization. Pursuant to the reorganization, Ulta Beauty, Inc., which was incorporated as a Delaware corporation in December 2016, became the successor to Ulta Salon, Cosmetics & Fragrance, Inc., the former publicly-traded company and now a wholly owned subsidiary of Ulta Beauty, Inc. As used in these notes and throughout this Quarterly Report on Form 10-Q, all references to “we,” “us,” “our,” “Ulta Beauty,” or the “Company” refer to Ulta Beauty, Inc. and its consolidated subsidiaries.

The Company was originally founded in 1990 to operate specialty retail stores selling cosmetics, fragrance, haircare and skincare products, and related accessories and services. The stores also feature full-service salons. As of November 2, 2019, the Company operated 1,241 stores across 50 states, as shown in the table below.


	Number of		Number of
Location	stores	Location	stores
Alabama	21	Montana	6
Alaska	3	Nebraska	5
Arizona	28	Nevada	15
Arkansas	10	New Hampshire	7
California	159	New Jersey	38
Colorado	26	New Mexico	7
Connecticut	16	New York	50
Delaware	3	North Carolina	34
Florida	84	North Dakota	3
Georgia	38	Ohio	43
Hawaii	4	Oklahoma	20
Idaho	9	Oregon	14
Illinois	55	Pennsylvania	45
Indiana	24	Rhode Island	3
Iowa	10	South Carolina	20
Kansas	13	South Dakota	2
Kentucky	14	Tennessee	26
Louisiana	18	Texas	112
Maine	3	Utah	14
Maryland	25	Vermont	1
Massachusetts	21	Virginia	29
Michigan	49	Washington	36
Minnesota	17	West Virginia	7
Mississippi	9	Wisconsin	20
Missouri	23	Wyoming	2
		Total	1,241

The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and the U.S. Securities and Exchange Commission’s Article 10, Regulation S-X. These financial statements were prepared on a consolidated basis to include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts, transactions, and unrealized profit were eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, which are of a normal

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each comparative period presented or (2) retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment.

The Company adopted the new standard on February 3, 2019 using the modified retrospective approach by recognizing and measuring leases without revising comparative period information or disclosures. The Company elected the transition package of three practical expedients permitted within the standard, which among other things, allows for the carryforward of historical lease classifications. In addition, the Company elected to apply the practical expedient that allows for the combination of lease and non-lease components for all asset classes. The Company made an accounting policy election to keep leases with terms of twelve months or less off the balance sheet and recognize those lease payments on a straight-line basis over the lease term.

The adoption of ASU 2016-02 resulted in the recording of operating lease assets and liabilities of $1,460,866 and $1,839,970 within the consolidated balance sheet, respectively, as of February 3, 2019. As part of the adoption, the Company recorded an adjustment to retained earnings of $2,375. The standard did not materially impact the Company’s consolidated results of operations and had no impact on cash flows. See Note 6, “Leases,” for further details.

The impact to the Company’s opening consolidated balance sheet as of February 3, 2019 was as follows:


	As Reported		Effect of Adopting		Balance at
(In thousands)	February 2, 2019		ASC 842		February 3, 2019
Assets					(Unaudited)
Receivables, net	$	136,168	$	(17,468)	$	118,700
Prepaid expenses and other current assets		138,116		(25,260)		112,856
Property and equipment, net		1,226,029		(16,983)		1,209,046
Operating lease assets		—		1,460,866		1,460,866
Liabilities and stockholders’ equity
Accrued liabilities		220,666		(1,460)		219,206
Current operating lease liabilities		—		210,721		210,721
Deferred rent		434,980		(434,980)		—
Non-current operating lease liabilities		—		1,629,249		1,629,249
Retained earnings		1,105,863		(2,375)		1,103,488

3.Acquisitions

The Company continues to make investments to evolve the customer experience, with a strong emphasis on integrating technology across the business. To support these efforts, the Company paid $13,606 to acquire two technology companies in fiscal 2018.

On September 10, 2018, the Company acquired QM Scientific, an artificial intelligence technology company. The acquisition was not material to the Company’s consolidated financial statements.

On October 29, 2018, the Company acquired GlamST, an augmented reality technology company. The acquisition was not material to the Company’s consolidated financial statements.

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4.Revenue

The Company’s net sales include retail stores and e-commerce merchandise sales as well as salon services and other revenue. Other revenue sources include the private label credit card and co-branded credit card programs, as well as deferred revenue related to the loyalty program and gift card breakage.

Disaggregated revenue

The following table sets forth the approximate percentage of net sales by primary category:


	13 Weeks Ended		39 Weeks Ended
(Percentage of net sales)	November 2, 2019	November 3, 2018	November 2, 2019	November 3, 2018
Cosmetics	51%	53%	50%	52%
Skincare, Bath & Fragrance	21%	19%	21%	20%
Haircare Products & Styling Tools	18%	19%	19%	19%
Services	6%	6%	6%	6%
Other (nail products, accessories, and other)	4%	3%	4%	3%
	100%	100%	100%	100%

Deferred revenue

Deferred revenue primarily represents contract liabilities for the Company’s obligation to transfer additional goods or services to a guest for which the Company has received consideration, such as unredeemed Ultamate Rewards loyalty points and unredeemed Ulta Beauty gift cards. In addition, the Company recognizes breakage on gift cards proportionately as redemption occurs.

The following table provides a summary of the changes included in deferred revenue:


Part I - Financial Information

Item 1. Financial Statements
Consolidated Balance Sheets		3
Consolidated Statements of Income		4
Consolidated Statements of Cash Flows		5
Consolidated Statements of Stockholders’ Equity		6
Notes to Consolidated Financial Statements		8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17

Item 3. Quantitative and Qualitative Disclosures about Market Risk		26

Item 4. Controls and Procedures		27

Part II - Other Information		27

Item 1. Legal Proceedings		27

Item 1A. Risk Factors		27

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		27

Item 3. Defaults Upon Senior Securities		28

Item 4. Mine Safety Disclosures		28

Item 5. Other Information		28

Item 6. Exhibits		29

SIGNATURES		30