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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 August 1, 2020

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 August 24, 2020 was 56,323,104 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 Operations

4

Consolidated Statements of Comprehensive Income (Loss)

5

Consolidated Statements of Cash Flows

6

Consolidated Statements of Stockholders’ Equity

7

Notes to Consolidated Financial Statements

9

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

18

Item 3.    Quantitative and Qualitative Disclosures about Market Risk

29

Item 4.    Controls and Procedures

30

Part II - Other Information

30

Item 1.    Legal Proceedings

30

Item 1A. Risk Factors

30

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

30

Item 3.    Defaults Upon Senior Securities

31

Item 4.    Mine Safety Disclosures

31

Item 5.    Other Information

31

Item 6.    Exhibits

32

SIGNATURES

33

2

Table of Contents

Part I - Financial Information

Item 1.Financial Statements

Ulta Beauty, Inc.

Consolidated Balance Sheets

August 1,

February 1,

August 3,

(In thousands, except per share data)

    

2020

    

2020

    

2019

Assets

(Unaudited)

(Unaudited)

Current assets:

Cash and cash equivalents

$

1,157,318

$

392,325

$

177,398

Short-term investments

110,000

150,000

Receivables, net

127,992

139,337

107,263

Merchandise inventories, net

1,368,543

1,293,701

1,315,999

Prepaid expenses and other current assets

102,713

103,567

131,171

Prepaid income taxes

42,622

16,387

38,769

Total current assets

2,799,188

2,055,317

1,920,600

Property and equipment, net

1,077,825

1,205,524

1,219,948

Operating lease assets

1,548,239

1,537,565

1,499,556

Goodwill

10,870

10,870

10,870

Other intangible assets, net

2,927

3,391

3,854

Deferred compensation plan assets

28,789

27,849

24,665

Other long-term assets

29,283

23,356

30,882

Total assets

$

5,497,121

$

4,863,872

$

4,710,375

Liabilities and stockholders’ equity

Current liabilities:

Accounts payable

$

398,011

$

414,009

$

450,117

Accrued liabilities

201,754

246,088

224,202

Deferred revenue

216,545

237,535

182,354

Current operating lease liabilities

245,019

239,629

208,261

Total current liabilities

1,061,329

1,137,261

1,064,934

Non-current operating lease liabilities

1,718,549

1,698,718

1,683,743

Long-term debt

800,000

Deferred income taxes

94,272

89,367

86,598

Other long-term liabilities

52,178

36,432

35,649

Total liabilities

3,726,328

2,961,778

2,870,924

Commitments and contingencies (Note 7)

Stockholders' equity:

Common stock, $0.01 par value, 400,000 shares authorized; 57,014, 57,285 and 58,485 shares issued; 56,323, 56,609 and 57,810 shares outstanding; at August 1, 2020 (unaudited), February 1, 2020, and August 3, 2019 (unaudited), respectively

570

573

585

Treasury stock-common, at cost

(37,513)

(34,448)

(34,180)

Additional paid-in capital

822,664

807,492

794,368

Retained earnings

985,042

1,128,477

1,078,678

Accumulated other comprehensive income

30

Total stockholders’ equity

1,770,793

1,902,094

1,839,451

Total liabilities and stockholders’ equity

$

5,497,121

$

4,863,872

$

4,710,375

See accompanying notes to consolidated financial statements.

3

Table of Contents

Ulta Beauty, Inc.

Consolidated Statements of Operations

(Unaudited)

13 Weeks Ended

26 Weeks Ended

August 1,

August 3,

August 1,

August 3,

(In thousands, except per share data)

    

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

Net income (loss) per common share:

Basic

$

0.14

$

2.77

$

(1.25)

$

6.05

Diluted

$

0.14

$

2.76

$

(1.25)

$

6.02

Weighted average common shares outstanding:

Basic

56,318

58,171

56,369

58,401

Diluted

56,497

58,446

56,369

58,718

See accompanying notes to consolidated financial statements.

4

Table of Contents

Ulta Beauty, Inc.

Consolidated Statements of Comprehensive Income (Loss)

(Unaudited)

13 Weeks Ended

26 Weeks Ended

August 1,

August 3,

August 1,

August 3,

(In thousands)

    

2020

    

2019

    

2020

    

2019

Net income (loss)

    

$

8,052

$

161,258

$

(70,457)

$

353,479

Other comprehensive income:

Foreign currency translation adjustments

105

30

Comprehensive income (loss)

$

8,157

$

161,258

$

(70,427)

$

353,479

See accompanying notes to consolidated financial statements.

5

Table of Contents

Ulta Beauty, Inc.

Consolidated Statements of Cash Flows

(Unaudited)

26 Weeks Ended

August 1,

August 3,

(In thousands)

    

2020

    

2019

Operating activities

Net income (loss)

$

(70,457)

$

353,479

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

    

Depreciation and amortization

154,029

144,951

Non-cash lease expense

132,808

152,134

Impairment charges, store closures and other costs

59,997

Deferred income taxes

4,905

2,734

Stock-based compensation expense

14,595

12,766

Loss on disposal of property and equipment

2,273

3,215

Change in operating assets and liabilities:

Receivables

11,345

11,437

Merchandise inventories

(74,842)

(101,670)

Prepaid expenses and other current assets

854

(18,315)

Income taxes

(26,235)

(21,772)

Accounts payable

(18,486)

46,101

Accrued liabilities

(32,901)

(2,629)

Deferred revenue

(20,990)

(16,700)

Operating lease liabilities

(137,383)

(138,557)

Other assets and liabilities

16,477

20,162

Net cash provided by operating activities

15,989

447,336

Investing activities

Purchases of short-term investments

(245,000)

Proceeds from short-term investments

110,000

95,000

Capital expenditures

(77,090)

(151,213)

Acquisitions, net of cash acquired

(1,220)

Purchases of equity investments

(5,386)

(33,339)

Net cash provided by (used in) investing activities

26,304

(334,552)

Financing activities

Proceeds from long-term debt

800,000

Repurchase of common shares

(72,981)

(378,300)

Stock options exercised

577

42,935

Purchase of treasury shares

(3,065)

(9,272)

Debt issuance costs

(1,861)

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)

Cash and cash equivalents at beginning of period

392,325

409,251

Cash and cash equivalents at end of period

$

1,157,318

$

177,398

Supplemental information

Cash paid for interest

$

3,132

$

Income taxes paid, net of refunds

    

2,287

97,024

Non-cash capital expenditures

19,176

43,269

See accompanying notes to consolidated financial statements.

6

Table of Contents

Ulta Beauty, Inc.

Consolidated Statements of Stockholders’ Equity

(Unaudited)

Treasury -

Accumulated

Common Stock

Common Stock

Additional

Other

Total

Issued

Treasury

Paid-In

Retained

Comprehensive

Stockholders'

(In thousands)

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Earnings

    

Income (Loss)

    

Equity

Balance – February 1, 2020

57,285

$

573

(676)

$

(34,448)

$

807,492

$

1,128,477

$

$

1,902,094

Net loss

(78,509)

(78,509)

Stock-based compensation

6,182

6,182

Foreign currency translation adjustments

(75)

(75)

Stock options exercised and other awards

45

250

250

Purchase of treasury shares

(15)

(3,002)

(3,002)

Repurchase of common shares

(327)

(3)

(72,978)

(72,981)

Balance – May 2, 2020

57,003

$

570

(691)

$

(37,450)

$

813,924

$

976,990

$

(75)

$

1,753,959

Net income

8,052

8,052

Stock-based compensation

8,413

8,413

Foreign currency translation adjustments

105

105

Stock options exercised and other awards

11

327

327

Purchase of treasury shares

(63)

(63)

Balance – August 1, 2020

57,014

$

570

(691)

$

(37,513)

$

822,664

$

985,042

$

30

$

1,770,793

See accompanying notes to consolidated financial statements.

7

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

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 August 1, 2020, the Company operated 1,264 stores across 50 states, as shown in the table below.

Number of

Number of

Location

    

stores

    

Location

    

stores

Alabama

22

Montana

6

Alaska

3

Nebraska

5

Arizona

30

Nevada

15

Arkansas

10

New Hampshire

7

California

160

New Jersey

39

Colorado

26

New Mexico

7

Connecticut

17

New York

51

Delaware

3

North Carolina

34

Florida

86

North Dakota

3

Georgia

38

Ohio

43

Hawaii

4

Oklahoma

21

Idaho

9

Oregon

17

Illinois

55

Pennsylvania

45

Indiana

24

Rhode Island

3

Iowa

10

South Carolina

20

Kansas

13

South Dakota

3

Kentucky

15

Tennessee

26

Louisiana

19

Texas

115

Maine

3

Utah

14

Maryland

25

Vermont

1

Massachusetts

21

Virginia

29

Michigan

49

Washington

36

Minnesota

18

West Virginia

7

Mississippi

10

Wisconsin

20

Missouri

24

Wyoming

3

Total

1,264

The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles 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 operating results for the 13 and 26 weeks ended August 1, 2020 may not be indicative of the results that may be expected for the fiscal year ending January 30, 2021 because of the novel coronavirus (COVID-19) pandemic. As a result of the pandemic, the Company modified a number of its business practices, in part due to legislation, executive orders and guidance from government entities and healthcare authorities (including the temporary closing of businesses deemed “non-essential,” shelter in place orders, social distancing and quarantines). The COVID-19 pandemic has had, and will continue to have, a negative impact on the Company’s business, financial condition, profitability, cash flows and supply chain, although the full extent is uncertain. As the pandemic continues to evolve, the extent of the impact on the Company’s business, financial condition, profitability, cash flows and supply chain will depend on future developments, including, but not limited to, the duration and extent of any temporary closing of certain of our stores, the duration of quarantines, shelter-in-place and other travel restrictions within the U.S. and other affected countries, the duration and spread of the pandemic (including any relapses), its severity, the actions to contain the virus and/or treat its impact, the duration, timing and severity of the impact on consumer spending (including the recession resulting from the pandemic), and how quickly and to what extent normal economic and operating conditions can resume, all of which are highly uncertain and cannot be predicted.

In addition, the Company’s business is subject to seasonal fluctuation, with significant portions of the Company’s net sales and net income being realized during the fourth quarter of the fiscal year due to the holiday selling season. As a result, the results for the 13 and 26 weeks ended August 1, 2020 are not necessarily indicative of the results to be expected for the fiscal year ending January 30, 2021, 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 1, 2020. 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 1, 2020. 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 second quarter in fiscal 2020 and 2019 ended on August 1, 2020 and August 3, 2019, respectively.

Use of estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the accounting period. The Company considers its accounting policies relating to inventory valuations, vendor allowances, impairment of long-lived tangible and operating lease assets, loyalty program and income taxes to be the most significant accounting policies that involve management estimates and judgments. The COVID-19 pandemic has created and may continue to create significant uncertainty in macroeconomic conditions, which may cause further business disruptions and adversely impact the Company’s results of operations. While the full impact of the COVID-19 pandemic is unknown and cannot be reasonably estimated, the Company has made accounting estimates based on the facts and circumstances available as of the reporting date. Actual amounts could differ from these estimates, and such differences could be material.

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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. During the 13 and 26 weeks ended August 1, 2020, the Company increased inventory reserves $16,523 and $17,745, respectively, to adjust for slow turning and discontinued makeup SKUs and permanently closed stores.

CARES Act

On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (CARES) Act was enacted. The CARES Act, among other things, includes provisions relating to refundable payroll tax, deferment of employer side social security payments, net operating loss carryback periods, alternative minimum tax credit refunds, modifications to the net interest deduction limitations and technical corrections to tax depreciation methods for qualified improvement property.  The most significant relief measures which the Company qualifies for are the employee retention credit, tax deferral, and technical corrections to tax depreciation.

The Company recognizes government grants for which there is a reasonable assurance of compliance with grant conditions and receipt of credits. We believe there is a reasonable assurance that the Company will comply with the relevant conditions of the employee retention credit provision of the CARES Act, and that we will receive the credits for which we have applied. We will continue to assess our treatment of the CARES Act to the extent additional guidance and regulations are issued, the further applicability of the CARES Act to the Company, and the potential impacts on our business.

Employee retention credit (ERC) and payroll tax deferral. The ERC allows for a refundable tax credit against certain employment taxes equal to 50% of the first ten thousand dollars in qualified wages paid to each employee commencing on March 13, 2020 and through January 1, 2021. To be eligible, the Company must (i) have had operations fully or partially suspended because of a shut-down order from a governmental authority related to COVID-19, or (ii) have had gross receipts decline by more than 50% in a calendar quarter when compared to the same quarter in 2019. Qualified wages are limited to wages paid to employees who were not providing services due to the COVID-19 pandemic. During the 13 and 26 weeks ended August 1, 2020, the Company recognized $48,181 related to the CARES Act ERC as a reduction of the associated costs within selling, general and administrative expenses on the Company’s consolidated statements of operations and within accounts receivable, net on the Company's consolidated balance sheets. 

Additionally, the CARES Act contains provisions for deferral of the employer portion of social security taxes incurred through the end of calendar 2020. As of August 1, 2020, the Company has deferred $18,709 in social security tax payments, of which 50% are required to be remitted by December 2021 and the remaining 50% by December 2022. The deferred amounts are recorded as a liability within other long-term liabilities on the Company’s consolidated balance sheets.

Technical corrections to tax depreciation. The CARES Act also includes a technical correction of tax depreciation methods for qualified improvement property, which changes 39-year property to 15-year property eligible for 100% tax bonus depreciation. This provision of the CARES Act resulted in a cash tax refund of $4,600 relating to property and equipment, from filing an amended federal income tax return, as of August 1, 2020. Furthermore, the Company expects the changes to qualified impairment property depreciation to result in reductions to estimated income tax payments for fiscal 2020.

Recent accounting pronouncements not yet adopted

Taxes – Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. In December 2019, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2019-12, Income Taxes – Simplifying the Accounting for Income Taxes. The guidance removes certain exceptions for recognizing deferred taxes for equity

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method investments, performing intraperiod allocation, and calculating income taxes in interim periods. The ASU also adds guidance to reduce complexity in certain areas, including recognizing deferred taxes for goodwill and allocating taxes to members of a consolidated group, among others. This guidance is effective for interim and annual reporting periods beginning after December 15, 2020. Early adoption of the standard is permitted, including adoption in interim or annual periods for which financial statements have not yet been issued. The transition requirements are dependent upon each amendment within this update and will be applied either prospectively or retrospectively. The adoption of ASU 2019-12 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

Intangibles – Goodwill and Other-Internal-Use Software. In August 2018, the FASB issued 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 Company adopted the new guidance prospectively as of February 2, 2020, and its adoption did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows. 

3.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 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  

26 Weeks Ended

(Percentage of net sales)

August 1, 2020

August 3, 2019

August 1, 2020

August 3, 2019

Cosmetics

43%

47%

46%

50%

Skincare, bath, and fragrance

28%

22%

26%

21%

Haircare products and styling tools

21%

21%

20%

19%

Services

3%

6%

4%

6%

Other (nail products, accessories, and other)

5%

4%

4%

4%

100%

100%

100%

100%

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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:

13 Weeks Ended

26 Weeks Ended  

August 1, 2020

August 3, 2019

August 1, 2020

August 3, 2019

Beginning balance

$

206,653

$

173,921

$

230,011

$

193,585

Additions to contract liabilities (1)

50,448

64,863

92,672

135,167

Deductions to contract liabilities (2)

(49,355)

(66,831)

(114,937)

(156,799)

Ending balance

$

207,746

$

171,953

$

207,746

$

171,953

(1)Loyalty points and gift cards issued in the current period but not redeemed or expired.
(2)Revenue recognized in the current period related to the beginning liability.

Other amounts included in deferred revenue were $8,799 and $10,401 at August 1, 2020 and August 3, 2019, respectively.

4.Impairment charges, store closures and other costs

Impairment of long-lived tangible assets. The asset group is defined as the lowest level for which identifiable cash flows are available and largely independent of the cash flows of other groups of assets. The asset group identified is at the store level and includes both property and equipment and operating lease assets.

Significant estimates are used in determining future cash flows of each store over its remaining lease term including our expectations of future projected cash flows including revenues, operating expenses, and market conditions. An impairment loss is recorded if the carrying amount of the long-lived asset exceeds its fair value.

The Company evaluates long-lived assets for indicators of impairment quarterly or when events or changes in circumstances indicate that their carrying amounts may not be recoverable. As a result of the COVID-19 pandemic, the Company experienced lower than projected revenues and identified indicators of impairment for certain stores. The Company performed undiscounted cash flow analyses over the long-lived assets associated with those stores. Based on these undiscounted cash flow analyses, the Company determined that certain long-lived assets had carrying values that exceeded their estimated undiscounted cash flows. Asset groups are written down only to the extent that their carrying value is lower than their respective fair value. Fair values of the asset group are determined by discounting the cash flows at a rate that approximates the cost of capital of a market participant. Management’s forecast of future cash flows is based on the income approach. The fair value of individual operating lease assets is determined using estimated market rent assessments.

The Company’s analysis indicated that the carrying values of certain long-lived assets exceeded their respective fair values. As a result, the Company recognized an impairment charge of $20,886 and $40,428 for the 13 and 26 weeks ended August 1, 2020, respectively. Additional impairments were recorded in the second quarter as a result of continued business disruption and certain macroeconomic factors associated with the COVID-19 pandemic. These charges are recorded in impairment charges, store closures and other costs in the consolidated statements of operations. These impairment charges were primarily driven by lower than projected revenues, lower market rate assessments, and the effect of temporary store closures as a result of the COVID-19 pandemic.

The determination of estimated market rent used in the fair value estimate of the Company’s operating lease assets included within the respective store asset group requires significant management judgment. Changes in these estimates

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could have a significant impact on whether long-lived store assets should be further evaluated for impairment and could have a significant impact on the resulting impairment charge.

Store closures and other costs. During the second quarter of fiscal 2020, the Company announced that after evaluating its store portfolio, it would permanently close 19 stores in the third quarter of fiscal 2020. Accordingly, for the 13 and 26 weeks ended August 1, 2020, the Company recognized $19,569 of long-lived asset and right-of-use asset impairment charges and $303 in related severance charges in impairment charges, store closures and other costs in the consolidated statements of operations. The impairment charges reduced the carrying value of the lease asset to its estimated fair value. Fair value was estimated using an income-approach based on management's forecast of future cash flows expected to be derived from the property based on current sublease market rent. There were no related asset impairment charges for the 13 or 26 weeks ended August 3, 2019.

The significant estimates, all of which are considered Level 3 inputs, used in the fair value methodology include: the Company’s expectations for future operations and projected cash flows, including revenues, operating expenses, and market conditions.

5.Goodwill and other intangible assets

Goodwill, which represents the excess of cost over the fair value of net assets acquired, amounted to $10,870 at August 1, 2020, February 1, 2020, and August 3, 2019. No additional goodwill was recognized during the 13 and 26 weeks ended August 1, 2020. The Company reviews the recoverability of goodwill annually during the fourth quarter or more frequently if an event occurs or circumstances change that would indicate that impairment may exist.

Other intangible assets with finite useful lives are amortized over their useful lives. The Company reviews the recoverability of long-lived assets whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable.

As a result of the COVID-19 pandemic and decline in the macroeconomic environment, the Company performed an interim impairment analysis as of August 1, 2020, which indicated that no impairment existed for goodwill or other intangible assets.

6.Leases

The Company leases retail stores, distribution and fast fulfillment centers, corporate offices, and certain equipment under non-cancellable operating leases with various expiration dates through 2033. Leases generally have an initial lease term of 10 years and include renewal options under substantially the same terms and conditions as the original leases. Leases do not contain any material residual value guarantees or material restrictive covenants.

All retail store, distribution and fast fulfillment center, and corporate office leases are classified as operating leases. The Company does not have any finance leases.

Lease cost

The majority of operating lease cost relates to retail stores and distribution and fast fulfillment centers and is classified within cost of sales. Operating lease cost for corporate offices is classified within selling, general and administrative expenses. Operating lease cost from the control date through store opening date is classified within pre-opening expenses. Operating lease cost was $75,699 and $71,579 for the 13 weeks ended August 1, 2020 and August 3, 2019, respectively. Operating lease cost was $153,232 and $142,921 for the 26 weeks ended August 1, 2020 and August 3, 2019, respectively.