Ulta Beauty (then Ulta Salon, Cosmetics & Fragrance, Inc.) — Form 10-Q
Reporting period: Second quarter and first 26 weeks of fiscal 2012, ended July 28, 2012, compared with periods ended July 30, 2011. The request metadata says 2011 Q2, but the filing itself reports fiscal 2012 Q2. Unaudited financial figures are in millions of dollars unless otherwise noted.
Business context and performance
Ulta operated 489 stores in 45 states at quarter-end, versus 415 a year earlier. It sells beauty products and salon services through stores and e-commerce. Management cites store growth, comparable-store sales, broader offerings, digital expansion, and operating-margin improvement as key elements of its growth strategy.
Key financial metrics
| Metric | 13 weeks ended July 28, 2012 | Year-over-year change | 26 weeks ended July 28, 2012 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $481.7 | +22.1% | $955.8 | +22.4% |
| Gross profit | $167.6 | +24.8% | $338.5 | +25.8% |
| Operating income | $57.5 | +44.9% | $114.9 | +46.0% |
| Net income | $35.0 | +46.4% | $69.9 | +48.0% |
| Diluted EPS | $0.54 | vs. $0.38 | $1.09 | vs. $0.75 |
| Comparable-store sales | +9.3% | vs. +11.3% | +9.7% | vs. +11.2% |
Margins: Gross margin rose 80 basis points to 34.8% in Q2 and 90 basis points to 35.4% for the half. Operating margin increased to 11.9% from 10.1% in Q2 and to 12.0% from 10.1% for the half. Net margin was 7.3% for both current periods, versus 6.1% and 6.0%, respectively.
Sales drivers: Q2 comparable-store sales growth reflected traffic up 5.5% and average ticket up 3.8%; first-half growth reflected traffic up 7.8% and average ticket up 1.9%. Salon sales increased 20.6% in Q2 and 20.2% for the half.
Cash flow and liquidity: First-half operating cash flow was $36.2, down from $60.9; capital expenditures were $71.3, up from $52.7. Cash declined $56.3 to $197.4, including the $62.5 special dividend paid during the half. Inventory was $316.7 at July 28, 2012, versus $258.8 a year earlier. The company reported no credit-facility borrowings at period-end. Its revolving facility provides up to the lesser of $200 million or a borrowing-base amount, matures in October 2016, and is secured by substantially all assets. Management said cash, operating cash flow, and facility availability should meet needs for at least the next 12 months.
Debt and capital allocation: Interest expense was minimal and reflected unused facility fees. The company paid a one-time $1.00-per-share dividend totaling $62.5 during the period; no future dividend commitment was stated.
Changes, outlook, and risks
- Sales and earnings grew strongly, while comparable-store growth moderated from the prior-year period. Management said recent high-single-digit to low-double-digit comparable-store gains were not expected to continue. Its long-term annual net-income growth target was 25%–30%, based on comparable-store sales growth of 3%–5%; this is a target, not near-term guidance.
- Margin improvement reflected merchandise-margin gains and fixed-cost leverage. Q2 gross margin also faced 30 basis points of supply-chain deleverage associated with the new Chambersburg, Pennsylvania distribution center. SG&A declined as a share of sales despite higher absolute expense.
- The company opened 40 stores in the first half, compared with 26 a year earlier, and spent more on capital expenditures. Management identified execution of expansion, inventory needs, and distribution capacity as important to continued growth.
- Management cited uncertain economic conditions and risks including weaker consumer spending, competition, product-cost changes, store-opening or co-tenant issues, capacity constraints, information-system disruption, and weather. It warned that interim results are seasonal and not necessarily indicative of the full year; significant sales and income typically occur in Q4.
- A proposed California employee class action alleges labor-law violations involving meal periods, rest breaks, wages, overtime, and premium pay. Ulta denies the allegations and is defending the case; management did not expect liabilities from legal proceedings to be material.
- After quarter-end, on September 5, 2012, Ulta amended its credit agreement to provide greater flexibility for certain corporate actions, including acquisitions, subsidiary formation, and stock repurchases, subject to conditions. The amendment did not change facility amounts, rates, or maturity.
Important facts for investors to verify
- Whether sales growth, traffic, and comparable-store momentum persist as management expects comps to moderate.
- Whether new-store expansion and the Chambersburg distribution center support growth without eroding margins or straining cash flow.
- How inventory, capital spending, and seasonal working-capital needs affect liquidity through the holiday period.
- The terms and restrictions of the amended credit agreement, and the company’s capacity to maintain borrowing availability if needed.
- Developments and potential exposure in the California employment lawsuit, and any future capital returns after the special dividend.