Ulta Beauty, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended November 3, 2018, compared with periods ended October 28, 2017. Although the request metadata says 2017 Q3, the filing itself is for fiscal 2018 Q3.
Business context and performance
Ulta Beauty operated 1,163 stores across 50 states at period-end, versus 1,058 a year earlier. Its business includes beauty-product retail, e-commerce, and in-store salon services. Results are seasonal, with a significant portion of sales and earnings typically generated in the fourth quarter.
| Metric | Q3 2018 | Q3 2017 | First 39 weeks 2018 | First 39 weeks 2017 |
|---|---|---|---|---|
| Net sales | $1,560.0 million | $1,342.2 million | $4,591.9 million | $3,946.9 million |
| Gross profit | $572.3 million | $493.1 million | $1,668.5 million | $1,438.5 million |
| Operating income | $169.2 million | $162.7 million | $572.9 million | $530.9 million |
| Net income | $131.2 million | $104.6 million | $443.9 million | $347.1 million |
| Diluted EPS | $2.18 | $1.70 | $7.35 | $5.58 |
Revenue, margins, and operating trends
- Q3 sales rose 16.2%; comparable sales increased 7.8%, comprising 5.3% transaction growth and 2.5% higher average ticket. Store and salon comparable sales rose 4.4%, while e-commerce comparable sales rose 42.5%.
- For the first 39 weeks, sales grew 16.3% and comparable sales rose 7.5%; e-commerce comparable sales increased 42.9%. E-commerce represented 11% of Q3 sales, up from 9% a year earlier.
- Q3 gross margin was 36.7%, unchanged year over year; first-39-week gross margin was 36.3%, down 0.1 percentage point. Management cited category and channel mix and investments in salon services and supply chain, partly offset by fixed-store-cost leverage and revenue-recognition effects.
- Q3 SG&A rose 23.3% to $395.5 million, and increased to 25.3% of sales from 23.9%. For the first 39 weeks, SG&A rose 21.5% to $1,078.2 million and reached 23.5% of sales from 22.5%. Management cited store-labor and marketing investments and revenue-recognition effects, partly offset by corporate-overhead leverage.
- Q3 operating margin declined to 10.8% from 12.1%, while net margin increased to 8.4% from 7.8%. The lower effective tax rate—23.1% versus 35.8% in Q3 and 23.0% versus 34.8% year to date, primarily due to tax reform—contributed to net-income growth.
Cash flow, liquidity, and capital
- Operating cash flow for the first 39 weeks was $542.2 million, versus $329.1 million a year earlier. Investing cash outflow was $150.0 million versus $367.6 million; financing cash outflow was $372.7 million versus $299.7 million. Cash increased $19.5 million during the period.
- At November 3, 2018, cash and cash equivalents were $296.9 million; there were no short-term investments. Merchandise inventory was $1,484.6 million, up 10.0% from the prior-year comparable date, primarily reflecting 105 net new stores and the Fresno distribution center. Average inventory per store was flat year over year.
- The company had no borrowings under its revolving credit facility and reported compliance with its covenants. The facility provides for up to $400 million, subject to a borrowing base, and matures August 23, 2022. Management said available cash, operating cash flow, and the facility should meet liquidity needs for at least the next 12 months.
- Capital expenditures were $256.4 million in the first 39 weeks, versus $337.6 million a year earlier. The company spent $13.6 million to acquire two technology companies and repurchased approximately 1.58 million shares for $379.4 million. About $282.8 million remained under the $625 million repurchase authorization at quarter-end.
Outlook, changes, and risks
- The filing provides no specific numerical earnings or sales guidance. Management’s stated long-term strategy includes comparable-sales growth, new stores, e-commerce, operational efficiencies, and investment in people, systems, and supply chain; it described a long-term goal of a 1,500-to-1,700-store chain.
- Management cautioned that interim results are not necessarily indicative of full-year results, particularly given holiday-season strength and working-capital needs. The company opened 95 stores in the first 39 weeks.
- Ulta adopted the new revenue standard in fiscal 2018 using the modified retrospective method, recording a $30.0 million after-tax reduction to opening retained earnings, primarily related to loyalty rewards. Management said adoption did not materially affect reported financial position, results, or cash flows, and expected no material ongoing net-income impact.
- The company expected lease accounting adoption in fiscal 2019 to materially increase reported assets and liabilities because of approximately 1,200 leased locations; it could not yet quantify the impact and did not expect a material effect on operating results or cash flows.
- Risks highlighted include consumer-spending and competitive pressures, changing beauty trends, cybersecurity and information-system disruptions, distribution and fulfillment capacity, execution of growth and cost-efficiency plans, product-cost changes, and risks to store openings. Management reported no material change to previously disclosed risk factors. Routine litigation was not expected to have a material adverse effect.
Important facts for investors to verify
- Whether comparable-sales growth and rapid e-commerce growth continue, and how channel and category mix affect gross margin.
- Whether higher SG&A as a percentage of sales reflects investments that generate returns or persistent expense deleverage.
- Holiday-period inventory, working-capital requirements, and operating cash conversion.
- The financial and operating impact of lease-standard adoption and the company’s expansion and supply-chain investments.
- Remaining repurchase authorization, cash deployment, and continued access to the asset-based credit facility.