Ulta Beauty, Inc. — Form 10-Q summary
Period clarification: Although the request metadata says “2019 Q3,” this filing reports the quarter ended October 31, 2020, and compares it with the quarter ended November 2, 2019. The 39-week year-to-date period is also compared with the prior-year 39 weeks.
Business context and reporting period
Ulta Beauty operates specialty beauty stores, salons, and e-commerce as one reportable segment. It had 1,262 stores in 50 states at October 31, 2020. The quarter and year-to-date results were significantly affected by COVID-19, including store closures and operating restrictions earlier in the year.
Key financial metrics
| Metric | 13 weeks ended Oct. 31, 2020 | 39 weeks ended Oct. 31, 2020 |
|---|---|---|
| Net sales | $1.552 billion; down 7.8% year over year | $3.953 billion; down 22.4% |
| Comparable sales | Down 8.9%, versus +3.2% | Down 23.8%, versus +5.4% |
| Gross profit / margin | $545.5 million / 35.1%, versus 37.1% | $1.178 billion / 29.8%, versus 36.8% |
| Operating income / margin | $101.3 million / 6.5%, versus $167.8 million / 10.0% | $12.5 million / 0.3%, versus $613.3 million / 12.0% |
| Net income | $74.8 million, versus $129.7 million | $4.3 million, versus $483.2 million |
| Diluted EPS | $1.32, versus $2.25 | $0.08, versus $8.27 |
Quarterly transactions fell 15.4%, while average ticket rose 7.6%. Year-to-date transactions fell 30.1% and average ticket rose 9.0%. Lower sales and channel mix changes weighed on gross margin; lower promotional activity partly offset the pressure. SG&A declined in dollars but rose as a share of sales year to date, to 27.1% from 24.5%.
For the 39 weeks, operating cash flow was $259.0 million, compared with $557.5 million. Capital expenditures were $116.7 million, versus $241.1 million. Cash and cash equivalents were $560.9 million at quarter-end; current assets were $2.245 billion and current liabilities $1.230 billion. Inventory was $1.439 billion, down 11.0% from a year earlier.
The company had no revolving-credit borrowings at October 31, 2020. It drew $800 million in March and repaid it in full on September 2. The facility matures in 2025 and provides revolving loans up to the lesser of $1.0 billion or the borrowing base. Operating lease liabilities totaled approximately $1.914 billion, including current and non-current amounts.
Material changes and unusual items
- COVID-19 drove store closures beginning March 19, 2020; phased reopening was completed by July 20. By October 31, salon and brow services had resumed in almost all stores.
- Year-to-date impairment, restructuring, and other costs were $83.9 million, including long-lived asset impairment, costs related to 19 store closures, suspension of the Canadian expansion, and severance.
- Ulta suspended its planned Canadian expansion in September and estimated total pre-tax costs of $30 million to $40 million, most expected in fiscal 2020.
- The company recognized $50.6 million year to date from the CARES Act employee retention credit as a reduction of SG&A. It also deferred $34.1 million of employer Social Security taxes, payable in 2021 and 2022.
- The share-repurchase program was suspended in April to preserve liquidity. The company repurchased $73.0 million of shares in the 39-week period, but none under the program during the third quarter.
Outlook, risks, and contingencies
Management said the pandemic was expected to continue negatively affecting business, profitability, cash flows, and the supply chain, but stated the full impact could not be predicted. The filing provides no specific sales or earnings guidance. Management expected fiscal 2020 capital expenditures of $150 million to $160 million and said share repurchases might resume in the fourth quarter. It believed available cash, operating cash flows, and the credit facility would meet liquidity needs for at least 12 months.
Key uncertainties include renewed store closures or capacity limits, consumer spending, the pace of operating recovery, and potential further asset impairment. Results are seasonal, with significant sales and income typically generated in the holiday quarter. Management said pending legal matters were not expected to have a material adverse effect; the filing identifies no material change to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the intended reporting period: this is the 2020 third-quarter filing, not a 2019 third-quarter filing.
- Track comparable sales, transactions, average ticket, and margins as pandemic-related restrictions and services availability change.
- Monitor further impairment or restructuring charges, including remaining costs from store closures and the Canadian expansion suspension.
- Check the timing and cash effects of deferred payroll taxes, capital spending, and any resumption of share repurchases.
- Review holiday-quarter performance and subsequent disclosures for updated outlook, liquidity, and COVID-19 impacts.