Ulta Beauty, Inc. — Form 10-K summary
Period note: The request identifies “2010 Q4,” but this filing reports fiscal 2011, the 52 weeks ended January 28, 2012. Comparisons below are to fiscal 2010, ended January 29, 2011. The registrant’s legal name in the filing is Ulta Salon, Cosmetics & Fragrance, Inc.
Business context
Ulta operated 449 stores in 43 states and positioned itself as a one-stop beauty retailer offering prestige, mass-market and salon products, salon services, and e-commerce. Fiscal 2011 growth included 61 store openings, 17 remodels and two relocations; one store closed. Management described long-term expansion potential of more than 1,000 U.S. stores and a target new-store growth rate of 15%–20%.
Financial results
| Metric | Fiscal 2011 | Fiscal 2010 | Change or context |
|---|---|---|---|
| Net sales | $1,776.2 million | $1,454.8 million | Up 22.1% |
| Comparable-store sales | Up 10.9% | Up 11.0% | Fiscal 2011 increase primarily reflected 10.1% higher store traffic |
| Gross profit / margin | $616.8 million / 34.7% | $484.1 million / 33.3% | Margin up 140 basis points |
| SG&A | $410.7 million / 23.1% of sales | $358.1 million / 24.6% | Expense up 14.7%; sales leverage reduced its rate |
| Operating income / margin | $196.2 million / 11.0% | $118.9 million / 8.2% | Improved from prior year |
| Net income | $120.3 million | $71.0 million | Up 69.3% |
| Diluted EPS | $1.90 | $1.16 | Up from prior year |
| Operating cash flow | $220.9 million | $176.5 million | Increased $44.3 million |
| Capital expenditures | $128.6 million | $97.1 million | Higher store expansion spending |
Gross-margin improvement reflected 80 basis points of fixed-store-cost leverage and 70 basis points of merchandise-margin improvement, partly from promotional pricing and a shift toward higher-margin categories. SG&A leverage reflected efficiencies and higher sales. The effective tax rate was 38.5%, versus 39.9%.
Liquidity, debt and commitments
- Cash and equivalents were $253.7 million at year-end, up from $111.2 million; working capital was $415.4 million, up from $241.0 million.
- No credit-facility borrowings were outstanding at year-end. The revolving facility provides up to $200 million, subject to eligible-inventory availability, matures in October 2016, and is secured by substantially all company assets. Borrowings bear interest at prime or LIBOR plus 1.50%; the facility also has covenants and a minimum-availability requirement.
- Operating-lease obligations totaled $935.9 million, including $123.9 million due within one year. Fiscal 2011 rent expense was $94.2 million.
- Operating cash flow less capital expenditures was approximately $92.3 million in fiscal 2011, calculated from the reported amounts.
Outlook, commentary and notable items
- Management said the 10.9% fiscal 2011 comparable-store-sales increase was not expected to continue; its long-term annual comparable-store-sales target was 3%–5%. The filing does not provide a specific fiscal 2012 earnings or sales forecast.
- Plans emphasized store expansion, broader products and services, loyalty and digital marketing, and operating-margin improvement. A third distribution center in Chambersburg, Pennsylvania, was expected to open in fiscal 2012.
- On March 8, 2012, the board declared a $1.00-per-share special dividend, approximately $62 million in total, payable May 15, 2012. This was a post-year-end event.
- The CFO planned to step down after a successor is identified, citing a family health issue and relocation; he expected to assist with the transition.
- A California employment class-action settlement became final in January 2012; the company said the amount was not material. A separate California employment class action was filed in March 2012; the company denied the allegations and intended to defend the case.
- Principal risks include economic weakness and discretionary-spending changes, intense competition, dependence on vendors (the top ten represented about 53% of sales), store-expansion execution, distribution and information-system capacity, weather and seasonality, product and regulatory matters, and lease commitments. The business is seasonally strongest in the fourth quarter.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective as of year-end.
Important facts for investors to verify
- Whether comparable-store sales and margins remain sustainable relative to management’s 3%–5% long-term comparable-store-sales target.
- New-store returns, construction and opening costs, and the timing and execution of the planned distribution-center opening.
- Cash needs for growth and the special dividend, given substantial lease obligations and the secured, covenant-bearing credit facility.
- Progress on CFO succession and any developments in the pending employment litigation.
- Vendor concentration, inventory levels and margin exposure to changing consumer demand, promotional activity and product costs.