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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

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

For the Quarterly Period Ended November 2, 2019

or

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

For the transition period from _____________ to _____________

Commission File Number: 001-33764

ULTA BEAUTY, INC.

(Exact name of Registrant as specified in its charter)


incorporation or organization)


Identification No.)

Delaware

(State or other jurisdiction of
incorporation or organization)

38-4022268

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

1000 Remington Blvd., Suite 120

Bolingbrook, Illinois

(Address of principal executive offices)

60440

(Zip code)

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

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

Title of each class

Trading Symbol

Name of each exchange on which registered

Common Stock, par value $0.01 per share

ULTA

The NASDAQ Global Select Market

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See 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.

Table of Contents

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 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

2

Table of Contents

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.

3

Table of Contents

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.

4

Table of Contents

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.

5

Table of Contents

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.

6

Table of Contents

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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recurring nature, necessary to fairly state the financial position and results of operations and cash flows for the interim periods presented.

The Company’s business is subject to seasonal fluctuation. 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 November 2, 2019 are not necessarily indicative of the results to be expected for the fiscal year ending February 1, 2020, 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 February 2, 2019. 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 February 2, 2019. 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 2019 and 2018 ended on November 2, 2019 and November 3, 2018, respectively.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

Recent accounting pronouncements not yet adopted

Intangibles – Goodwill and Other-Internal-Use Software

In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-15, Intangibles – Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which clarifies and aligns the accounting for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019 and should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted. The adoption of ASU 2018-15 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

Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in ASU 2016-02 and subsequently issued amendments requires lessees to capitalize virtually all leases with terms of more than twelve months on the balance sheet as a right-of-use asset and recognize an associated 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 or operating leases and their classification impacts the recognition of expense in the income statement. Entities are allowed to apply the modified retrospective approach (1) retrospectively to

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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: