Ulta Beauty, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 and 26 weeks ended August 1, 2020, not 2019 Q2 as stated in the request metadata. Comparatives are the periods ended August 3, 2019. Unless noted, figures below are in U.S. dollars.
Business context and reporting period
Ulta Beauty operates beauty retail stores, e-commerce and salons. It had 1,264 stores across 50 states at August 1, 2020. The reporting period was significantly affected by COVID-19: stores were temporarily closed beginning March 19, then reopened in phases, with the reopening process completed July 20. Salon services were available in about 88% of stores at quarter-end.
Financial performance
| Metric | 13 weeks ended Aug. 1, 2020 | 13 weeks ended Aug. 3, 2019 | 26 weeks ended Aug. 1, 2020 | 26 weeks ended Aug. 3, 2019 |
|---|---|---|---|---|
| Net sales | $1,228.0 million | $1,666.6 million | $2,401.2 million | $3,409.6 million |
| Comparable sales | −26.7% | +6.2% | −31.1% | +6.6% |
| Gross profit / margin | $329.0 million / 26.8% | $605.9 million / 36.4% | $632.6 million / 26.3% | $1,250.7 million / 36.7% |
| Operating income (loss) | $12.8 million | $208.0 million | $(88.7) million | $445.6 million |
| Net income (loss) | $8.1 million | $161.3 million | $(70.5) million | $353.5 million |
| Diluted EPS | $0.14 | $2.76 | $(1.25) | $6.02 |
| Operating cash flow | Not presented by quarter | $16.0 million | $447.3 million |
For the second quarter, transactions fell 36.2% while average ticket rose 14.9%. For the first half, transactions fell 37.4% and average ticket rose 10.1%. The company attributed lower gross margin mainly to fixed-cost and salon-expense deleverage, channel mix, and higher inventory reserves; lower promotional activity partly offset these pressures.
Liquidity, debt and capital allocation
- Cash and cash equivalents were $1,157.3 million at August 1, 2020, compared with $392.3 million at February 1, 2020 and $177.4 million at August 3, 2019. Short-term investments were nil at August 1, 2020.
- The company had $800.0 million outstanding under its revolving credit facility, versus no borrowings at either comparison date. The facility matures March 11, 2025; the company reported covenant compliance. Substantially all assets are pledged as collateral.
- Cash provided by operations was $16.0 million; investing activities provided $26.3 million, including $110.0 million of short-term investment proceeds; and financing activities provided $722.7 million, principally from the $800.0 million credit-facility borrowing.
- Capital expenditures were $77.1 million for the first half. The company reduced its fiscal 2020 capital expenditure plan and expected spending of $180–$200 million.
- The share repurchase program was suspended April 2, 2020 to preserve liquidity. First-half repurchases totaled $73.0 million, primarily before the suspension.
Material changes, outlook and risks
- COVID-19 drove the sales decline, lower profitability and cash generation. The company stated that the pandemic’s duration, consumer-spending effects, potential store closures and supply-chain impacts remained uncertain, and that results for the period may not indicate full-year performance.
- The company recorded $60.3 million of impairment, store-closure and other costs in the first half, including charges related to 19 stores planned for permanent closure in the third quarter. It also increased inventory reserves by $17.7 million in the first half.
- CARES Act employee retention credits of $48.2 million reduced SG&A expense. The company deferred $18.7 million of employer Social Security taxes and reported a $4.6 million cash tax refund related to qualified improvement property depreciation.
- Management said it could not accurately predict the pandemic’s effect on results and provided no specific sales or earnings guidance in the supplied filing text. It believed available cash, operating cash flows and credit-facility borrowing capacity would meet liquidity needs for at least the next 12 months.
- Other cited risks include consumer spending and economic volatility, competition and changing beauty preferences, potential further impairment or store closures, and execution of growth, cost-efficiency, technology and supply-chain plans. Legal proceedings were described as incidental, with no expected material adverse effect.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers Q2 2020, not Q2 2019.
- Track comparable sales, transaction trends, salon-service availability and any renewed store restrictions as pandemic conditions evolve.
- Assess whether gross margins and operating cash flow recover as sales and store operations normalize.
- Monitor credit-facility borrowings, covenant availability, cash levels and the timing of deferred payroll taxes.
- Review assumptions behind store impairment charges, the planned 19 closures and the revised capital-expenditure plan.