Annual report pursuant to Section 13 and 15(d)

Stock-based compensation

v3.23.1
Stock-based compensation
12 Months Ended
Jan. 28, 2023
Stock-based compensation  
Stock-based compensation

16.  Stock-based compensation

The Company’s equity incentive plan was adopted in order to attract and retain personnel for positions of substantial authority and to provide additional incentive to employees and directors to promote the success of the business.

The Amended and Restated 2011 Incentive Award Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights, performance awards, dividend equivalent rights, stock payments, deferred stock, and cash-based awards to employees, consultants, and directors. Unless provided otherwise by the administrator of the plan, options vest over four years at the rate of 25% per year from the date of grant and must be exercised within ten years. Options are granted with the exercise price equal to the fair value of the underlying stock on the date of grant. As of January 28, 2023, the plan reserves for the issuance upon grant or exercise of awards up to 2,425 shares of common stock.

The following table presents information related to stock-based compensation:

Fiscal year ended

January 28,

January 29,

January 30,

(In thousands)

    

2023

    

2022

    

2021

Stock options

$

7,250

$

11,245

$

10,757

Restricted stock units

18,483

19,286

16,608

Performance-based restricted stock units

17,311

16,728

218

Total stock-based compensation expense

$

43,044

$

47,259

$

27,583

Cash received from stock option exercises

$

46,011

$

40,386

$

12,229

Income tax benefit

$

3,829

$

7,088

$

750

Stock options

Stock-based compensation expense is measured on the grant date based on the fair value of the award. Stock-based compensation expense is recognized on a straight-line basis over the requisite service period for awards expected to vest. The estimated grant date fair value of stock options was determined using a Black-Scholes valuation model using the following weighted-average assumptions for the periods indicated:

Fiscal year ended

January 28,

January 29,

January 30,

2023

    

2022

    

2021

Volatility rate

49.0%

46.9%

43.0%

Average risk-free interest rate

2.4%

0.4%

0.3%

Average expected life (in years)

3.4

 

3.9

 

3.4

Dividend yield

 

 

The expected volatility is based on the historical volatility of the Company’s common stock. The risk-free interest rate is based on the United States Treasury yield curve in effect on the date of grant for the respective expected life of the option. The expected life represents the time the options granted are expected to be outstanding. The expected life of options granted is derived from historical data on Ulta Beauty stock option exercises. Forfeitures of stock options are estimated at the grant date based on historical rates of stock option activity and reduce the stock-based compensation expense recognized. The Company does not currently pay a regular dividend.

The following table presents information related to common stock options:

Fiscal year ended

January 28,

January 29,

January 30,

(In thousands, except weighted-average grant date fair value)

    

2023

    

2022

    

2021

Weighted-average grant date fair value

$

149.14

$

109.84

$

54.40

Fair value of options vested

9,525

10,417

9,741

Intrinsic value of options exercised

42,489

39,489

11,304

At January 28, 2023, there was approximately $10,203 of unrecognized stock-based compensation expense related to unvested stock options. The unrecognized stock-based compensation expense is expected to be recognized over a weighted-average period of approximately one and a half years.

A summary of stock option activity is presented in the following table (shares in thousands):

Fiscal 2022

Fiscal 2021

Fiscal 2020

Weighted-

Weighted-

Weighted-

    

Number of

average

Number of

average

Number of

average

    

options

    

exercise price

    

options

    

exercise price

    

options

    

exercise price

Beginning of year

498

$

232.85

671

$

208.47

539

$

212.58

Granted

47

395.81

61

306.96

248

174.45

Exercised

(207)

222.19

(224)

180.05

(90)

135.70

Forfeited/Expired

(14)

311.40

(10)

225.24

(26)

219.47

End of year

324

$

260.34

498

$

232.85

671

$

208.47

Exercisable at end of year

118

$

261.57

179

$

248.11

236

$

209.03

Vested and Expected to vest

309

$

260.37

474

$

233.28

639

$

208.49

The following table presents information related to stock options outstanding and stock options exercisable at January 28, 2023 based on ranges of exercise prices (shares in thousands):

Options outstanding

Options exercisable

Weighted-

Weighted-

average

average

remaining

remaining

contractual

Weighted-

contractual

Weighted-

Number of

life

average

Number of

life

average

Range of Exercise Prices

    

options

    

(years)

    

exercise price

    

options

    

(years)

    

exercise price

$74.91 – $153.87

5

1

$

103.96

5

1

$

103.96

$153.88 – $174.45

132

7

174.45

24

6

174.45

$174.46 – $204.27

25

5

203.53

25

5

203.53

$204.28 – $306.59

64

7

301.49

23

6

292.48

$306.60 – $365.13

51

4

348.85

39

3

348.77

$365.14 – $395.84

47

9

395.81

2

395.84

$74.91 – $395.84

324

7

$

260.34

118

5

$

261.57

The aggregate intrinsic value of outstanding and exercisable stock options as of January 28, 2023 was $79,588 and $28,728, respectively. The last reported sale price of the Company’s common stock on the NASDAQ Global Select Market on January 28, 2023 was $505.67 per share.

Restricted stock units

Restricted stock units (RSUs) are granted to certain employees and directors. Employee grants generally cliff vest after three years and director grants cliff vest after one year. The grant date fair value of RSUs is based on the closing market price of shares of the Company’s common stock on the date of grant. RSUs are expensed on a straight-line basis over the requisite service period. Forfeitures of RSUs are estimated at the grant date based on historical rates of stock award activity and reduce the stock-based compensation expense recognized. At January 28, 2023, unrecognized stock-based compensation expense related to RSUs was $24,215. The unrecognized stock-based compensation expense is expected to be recognized over a weighted-average period of approximately one year.

A summary of RSU activity is presented in the following table (shares in thousands):

Fiscal 2022

Fiscal 2021

Fiscal 2020

    

Weighted-

Weighted-

Weighted-

Number of

average grant

Number of

average grant

Number of

average grant

    

units

    

date fair value

    

units

    

date fair value

    

units

    

date fair value

Beginning of year

221

    

$

236.95

253

    

$

210.46

159

    

$

259.21

Granted

61

399.43

61

312.42

163

179.72

Vested

(46)

312.70

(76)

209.88

(38)

276.51

Forfeited

(15)

262.94

(17)

233.94

(31)

218.40

End of year

221

$

264.08

221

$

236.95

253

$

210.46

Expected to vest

205

$

264.08

205

$

236.95

234

$

210.46

Performance-based restricted stock units

Performance-based restricted stock units (PBSs) are granted to certain employees. PBSs granted prior to 2021 cliff vest after three years based upon achievement of pre-established net sales and earnings before tax goals at the end of the second year of the term. The grant date fair value of these PBSs is based on the closing market price of shares of the Company’s common stock on the date of grant. PBSs granted in 2021 cliff vest after three years based upon achievement of pre-established net sales and earnings before tax goals for each of the first two years. The performance is then subject to a three year total shareholder return modifier. The grant date fair value of the 2022 and 2021 PBSs are measured using a Monte Carlo simulation.

PBSs are expensed on a straight-line basis over the requisite service period, based on the probability of achieving the performance goal, with changes in expectations recognized as an adjustment to earnings in the period of the change. If the performance goal is not met, no stock-based compensation expense is recognized and any previously recognized stock-based compensation expense is reversed. Forfeitures of PBSs are estimated at the grant date based on historical rates of stock award activity and reduce the stock-based compensation expense recognized. At January 28, 2023, unrecognized stock-based compensation expense related to PBSs was $25,689. The unrecognized stock-based compensation expense is expected to be recognized over a weighted-average period of approximately one and a half years.

A summary of PBS activity is presented in the following table (shares in thousands):

Fiscal 2022

Fiscal 2021

Fiscal 2020

Weighted-

Weighted-

Weighted-

Number of

average

Number of

average

Number of

average

units

    

grant date

    

units

    

grant date

    

units

    

grant date

Beginning of year

54

$

314.30

37

$

271.88

62

$

267.60

Granted

37

395.83

74

326.99

Change in performance award payout

(1)

378.79

(7)

348.73

(5)

204.27

Vested

(11)

345.53

(47)

295.49

(14)

281.53

Forfeited

(3)

332.94

(3)

319.71

(6)

263.38

End of year

76

$

347.89

54

$

314.30

37

$

271.88

Expected to vest

70

$

347.89

50

$

314.30

35

$

271.88

The number of PBSs granted is based on achieving the targeted performance goals as defined in the PBS agreements. As of January 28, 2023, the maximum number of units that could vest under the provisions of the agreements was 145.

Awards with market conditions are classified as liability awards and the fair value is determined using a Monte Carlo simulation. Market-based restricted stock units totaling 28 shares were granted to the former Chief Executive Officer in fiscal 2018 and settled during fiscal 2021. Compensation expense for liability awards was $7,671 and $879 in fiscal 2021 and fiscal 2020, respectively. There was no compensation expense for liability awards in fiscal 2022.