Ulta Salon, Cosmetics & Fragrance, Inc. — Form 10-Q Summary
Reporting period: The filing covers the 13 and 39 weeks ended October 27, 2012, compared with the periods ended October 29, 2011. This differs from the “2011 Q3” period in the request metadata. The company operated 537 stores in 45 states at quarter-end, versus 442 a year earlier.
Financial performance
| Metric | Q3 2012 | Q3 2011 | First 39 weeks 2012 | First 39 weeks 2011 |
|---|---|---|---|---|
| Net sales | $505.6 million | $413.1 million | $1,461.4 million | $1,193.6 million |
| Gross profit / margin | $185.5 million / 36.7% | $149.2 million / 36.1% | $524.0 million / 35.9% | $418.4 million / 35.1% |
| Operating income / margin | $61.3 million / 12.1% | $44.2 million / 10.7% | $176.2 million / 12.1% | $122.9 million / 10.3% |
| Net income | $38.2 million | $26.8 million | $108.0 million | $74.0 million |
| Diluted EPS | $0.59 | $0.42 | $1.68 | $1.17 |
| Comparable-store sales growth | 8.4% | 9.6% | 9.3% | 10.7% |
Q3 sales rose 22.4%, driven by $59.5 million of non-comparable-store growth and $33.0 million of comparable-store growth. Comparable-store sales reflected traffic growth of 7.9% and average-ticket growth of 0.5%. For the first 39 weeks, comparable-store sales rose 9.3%, with traffic up 6.4% and average ticket up 2.9%. Salon-service sales were $29.3 million in Q3 and $86.5 million year to date.
Q3 gross margin improved 60 basis points, reflecting merchandise-margin improvement and fixed-cost leverage. SG&A was 23.3% of sales, down from 24.5%; operating margin increased 140 basis points. For the first 39 weeks, gross margin increased 80 basis points and SG&A as a share of sales declined 110 basis points. Pre-opening expense increased to $6.3 million in Q3 and $12.9 million year to date, alongside accelerated store openings.
Cash, liquidity and capital
- Cash and cash equivalents were $191.7 million at October 27, 2012, down from $253.7 million at January 28, 2012. The company reported no outstanding credit-facility borrowings.
- For the first 39 weeks, operating cash flow was $77.5 million, investing cash flow was negative $144.0 million (capital expenditures), and financing cash flow was positive $4.6 million. Cash declined $62.0 million.
- Inventory was $462.8 million, up from $354.9 million at October 29, 2011, reflecting store growth, the new distribution center and holiday inventory build. Accounts payable was $185.2 million.
- The credit facility provides revolving loans up to the lesser of $200 million or a borrowing-base limit, with a $10 million letter-of-credit subfacility; maturity is October 2016. The company said cash, operating cash flow and available borrowings should cover liquidity needs for at least 12 months.
- The company paid a special cash dividend of $1.00 per share, totaling $62.5 million, on May 15, 2012. Capital expenditures increased from $97.7 million in the prior-year period to $144.0 million.
Changes, outlook and risks
- Net sales and net income grew 22.4% and 42.5%, respectively, in Q3; year-to-date growth was 22.4% and 46.0%. Comparable-store growth remained strong but moderated from the prior-year rates.
- Management said it does not expect recent high-single-digit to low-double-digit comparable-store sales increases to continue. Its long-term annual net-income growth target is 25%–30%, based on comparable-store sales growth of 3%–5%; this is a target, not a quarter-specific forecast.
- Management cited uneven economic conditions and risks including weaker consumer spending, competition, product-cost changes, execution and resource demands from store expansion, distribution capacity, information-system disruptions, weather, and store-site or co-tenant issues. Results are seasonal, with significant sales and income typically occurring in the fourth quarter.
- A putative California employment class action alleges labor-law violations concerning meal periods, rest breaks, wages and overtime. Ulta denies the allegations and is defending the case; management stated that liabilities from proceedings were not expected to be material.
- The company opened 89 stores, relocated 3 and remodeled 20 in the first 39 weeks. It reported no material changes to previously disclosed risk factors, no material changes to internal controls, and effective disclosure controls.
Important facts for investors to verify
- Confirm that the intended filing is the quarter ended October 27, 2012, rather than a 2011 third-quarter filing.
- Assess whether slowing comparable-store growth and management’s expectation that recent elevated growth will not persist affect future sales and earnings.
- Track holiday inventory, working-capital needs and cash generation against the substantial year-over-year increase in inventory and capital spending.
- Review store-opening returns and whether expansion, distribution capacity and operating costs remain manageable.
- Monitor the California employment litigation and any developments in the credit facility, dividends or liquidity position.