Business context and reporting period
Ulta Beauty, Inc. (then named Ulta Salon, Cosmetics & Fragrance, Inc.) filed this Form 10-Q for the 13 and 26 weeks ended August 2, 2014, compared with periods ended August 3, 2013. The request metadata says “2013 Q2,” but the filing covers fiscal 2014 Q2. Ulta operated 715 stores in 47 states and sold beauty products, salon services and e-commerce merchandise. Results are seasonal, with significant sales and income typically occurring in the holiday quarter.
Financial performance and liquidity
| Metric | 13 weeks ended Aug. 2, 2014 | 13 weeks ended Aug. 3, 2013 | 26 weeks ended Aug. 2, 2014 | 26 weeks ended Aug. 3, 2013 |
|---|---|---|---|---|
| Net sales | $734.2 million | $601.0 million | $1,448.0 million | $1,183.7 million |
| Gross profit / margin | $259.3 million / 35.3% | $212.1 million / 35.3% | $505.3 million / 34.9% | $416.0 million / 35.1% |
| Operating income / margin | $98.0 million / 13.3% | $72.9 million / 12.1% | $178.9 million / 12.4% | $140.6 million / 11.9% |
| Net income | $60.8 million | $44.9 million | $110.7 million | $86.7 million |
| Diluted EPS | $0.94 | $0.70 | $1.71 | $1.35 |
- Second-quarter comparable sales rose 9.6% (retail and salon 8.3%; e-commerce 54.9%), supported by 5.8% higher traffic and 3.8% higher average ticket. First-half comparable sales increased 9.2%.
- Operating cash flow for the first half was $133.2 million, versus $84.5 million a year earlier. Investing cash outflow was $194.2 million, including $94.1 million of property and equipment purchases and $100.1 million of short-term investments. Cash declined $56.4 million to $363.1 million.
- At August 2, 2014, short-term investments were $100.1 million, inventory $541.5 million, total assets $1.780 billion, and total liabilities $653.8 million. The company had no credit-facility borrowings and reported compliance with its covenants.
- The asset-based revolving facility has a maximum of the lesser of $200 million or a borrowing-base amount, with a $10 million letter-of-credit subfacility; maturity was extended to December 2018. Substantially all assets are pledged for facility borrowings.
Changes, outlook and risks
- Quarterly sales grew 22.2% and net income 35.4% year over year; first-half sales grew 22.3% and net income 27.7%. Store count increased from 609 to 715 year over year.
- Quarterly gross margin was unchanged. For the first half, gross margin fell 20 basis points, attributed primarily to merchandise and channel mix and conversion of remaining loyalty members to the ULTAmate rewards program. SG&A declined as a share of sales in both comparisons, reflecting sales leverage and cost efficiencies.
- Management gave no specific numerical earnings or sales guidance. It said cash, operating cash generation and available facility borrowings should meet working-capital, capital-spending and other liquidity needs for at least 12 months. Its strategy emphasizes comparable-sales growth, store and e-commerce expansion, customer loyalty, services and infrastructure investment; the long-term plan targets a 1,200-store chain.
- Management cautioned that interim results are not necessarily indicative of the full year and highlighted risks including consumer spending, competition, execution of growth plans, strain on distribution and information systems, and ability to attract key personnel. Seasonal inventory needs are greatest from August through November.
- A California putative employee class action alleges labor-law violations involving meal periods, breaks, wages and overtime. Ulta denies the allegations, is defending the case, and recorded no accrual because loss was not considered probable or reasonably estimable. Management said resolution was not expected to materially affect financial position or liquidity, though a significant liability could affect results in a particular period.
- After quarter-end, on September 11, 2014, the board authorized a new $300 million share-repurchase program, replacing the unused $112.7 million authorization under the prior program. No open-market repurchases occurred in the first half of fiscal 2014.
- The company was evaluating the impact and adoption method for the new revenue-recognition standard, effective beginning fiscal 2017. Management reported disclosure controls as effective and no material change in internal controls during the period.
Important facts for investors to verify
- Confirm the intended period: this filing is for fiscal 2014 Q2, not 2013 Q2.
- Assess whether strong comparable and e-commerce growth can continue and whether the 715-to-1,200-store expansion can be supported profitably.
- Monitor merchandise/channel mix, loyalty-program costs, and supply-chain investment for effects on gross margin and cash generation.
- Review inventory growth, seasonal working-capital demands, capital spending and the company’s use of the new repurchase authorization.
- Track developments in the California employment litigation and any subsequent change in the company’s loss assessment.