Business context and reporting period
Ulta Salon, Cosmetics & Fragrance, Inc. operated 442 beauty and salon stores in 42 states as of October 29, 2011. The filing covers the third quarter and first nine months of fiscal 2011, compared with the corresponding 2010 periods. The request metadata says “2010 Q3,” but the filing itself is for the quarter ended October 29, 2011.
Amounts below are in millions of dollars unless otherwise noted. Interim results are unaudited; the company notes that results are seasonal, with significant sales and income typically occurring in the fourth quarter.
Financial performance and position
| Metric | Third quarter 2011 | Third quarter 2010 | Nine months 2011 | Nine months 2010 |
|---|---|---|---|---|
| Net sales | $413.1 | $339.2 | $1,193.6 | $981.2 |
| Gross profit | $149.2 | $118.9 | $418.4 | $327.4 |
| Gross margin | 36.1% | 35.1% | 35.1% | 33.4% |
| Operating income | $44.2 | $24.3 | $122.9 | $69.9 |
| Operating margin | 10.7% | 7.2% | 10.3% | 7.1% |
| Net income | $26.8 | $14.2 | $74.0 | $40.9 |
| Diluted EPS | $0.42 | $0.23 | $1.17 | $0.67 |
| Comparable-store sales growth | 9.6% | 12.2% | 10.7% | 11.3% |
Third-quarter sales increased 21.8% year over year; net income increased 88.5%. For the nine months, sales increased 21.7% and net income increased 80.7%. Third-quarter comparable sales reflected traffic growth of 6.6% and average-ticket growth of 3.0%; nine-month growth reflected traffic up 9.0% and average ticket up 1.7%.
Cash flow, nine months: Operating cash flow was $77.5 million, investing cash outflow was $97.7 million (capital expenditures), and financing cash inflow was $39.7 million. Cash increased $19.5 million to $130.7 million. Capital expenditures were higher than the prior-year $74.8 million, primarily due to store openings and their timing.
Balance sheet at October 29, 2011: Cash was $130.7 million, inventory $354.9 million, total current assets $556.3 million, and total current liabilities $215.2 million. Total assets were $930.1 million and stockholders’ equity $524.4 million. The company reported no credit-facility borrowings. Inventory was up $53.3 million versus October 30, 2010, mainly reflecting 58 net new stores opened since then and earlier holiday inventory receipts.
Material changes and management commentary
- Gross margin improved 100 basis points in the quarter and 170 basis points year to date. Management attributed the gains mainly to merchandise-margin improvement and leverage in fixed store costs.
- SG&A rose in dollars but declined as a share of sales: 24.5% versus 26.6% in the quarter and 24.0% versus 25.6% year to date. Management cited expense leverage from sales and store growth.
- The company opened 28 stores in the quarter; year to date it opened 54, relocated two, and remodeled 17. Store count increased from 384 a year earlier to 442.
- Management’s long-term annual net-income growth target was 25%–30%, based on comparable-store sales growth of 3%–5%. It said the low-double-digit comparable-sales increases seen since early fiscal 2010 were not expected to continue.
- Management expects cash on hand, operating cash generation, and potential credit-facility borrowings to cover working-capital, capital-expenditure, and other liquidity needs for at least 12 months.
Debt, risks, contingencies, and unusual items
- An amended revolving credit facility extends to October 2016, with availability of up to the lesser of $200 million or a borrowing-base amount, plus a $10 million letter-of-credit subfacility. An additional $50 million may be available subject to lender consent and conditions. Borrowings are secured by substantially all company assets; the facility requires minimum excess borrowing availability.
- The California employment class-action matter was subject to an agreed-in-principle settlement for claims involving salon hair designers, subject to documentation and court approval. The proposed amount was described as not material; the company denied the allegations. Management said other legal proceedings were not expected to result in material liability.
- Operating leases are the principal off-balance-sheet arrangements. No non-cancelable purchase commitments were reported. The filing says there were no material changes outside the ordinary course in contractual obligations.
- Cash flow from income taxes benefited by $28.3 million, which the company attributed to accelerated bonus depreciation and tax deductions associated with stock-option activity. Financing cash flow included $18.1 million of excess tax benefits from stock-based compensation.
- Risks highlighted include economic weakness and consumer-spending changes, competition, product-cost changes, execution and resource demands from store growth, distribution and fulfillment capacity, information-system disruptions, and adverse weather. Management reported no material changes to previously disclosed risk factors.
- Management concluded disclosure controls were effective as of October 29, 2011, and reported no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- Confirm the intended reporting period: the supplied filing is for fiscal 2011 Q3, not 2010 Q3.
- Track whether comparable-store growth moderates toward management’s long-term 3%–5% assumption and whether traffic and ticket trends persist.
- Assess inventory growth, holiday-season sell-through, and the cash demands of continued store expansion and elevated capital spending.
- Review the full credit agreement for borrowing-base availability, minimum availability requirements, collateral, and lender-consent conditions.
- Monitor court approval and final terms of the California settlement, along with any developments in other legal proceedings.
- Consider the impact of seasonal fourth-quarter sales, consumer-spending risks, and the tax-related cash-flow benefits when evaluating full-year performance.