Business context and reporting period
Ulta Salon, Cosmetics & Fragrance, Inc. (Ulta Beauty) filed this Form 10-Q for the 13- and 39-week periods ended October 31, 2015; comparatives are the periods ended November 1, 2014. This is fiscal 2015 third quarter, notwithstanding the request metadata’s “2014 Q3” label. The retailer operated 860 stores in 48 states and offered beauty products, salon services and e-commerce. Results are seasonal, with significant sales and income typically generated in the fourth-quarter holiday season.
Financial performance
| Metric | 13 weeks ended Oct. 31, 2015 | Change year over year | 39 weeks ended Oct. 31, 2015 | Change year over year |
|---|---|---|---|---|
| Net sales | $910.7 million | +22.1% | $2,655.8 million | +21.1% |
| Gross profit / margin | $335.6 million / 36.9% | +19.1%; margin down 90 bps | $945.3 million / 35.6% | +20.1%; margin down 30 bps |
| Operating income / margin | $110.8 million / 12.2% | +17.7%; margin down 40 bps | $336.8 million / 12.7% | +23.4%; margin up 30 bps |
| Net income | $71.1 million | +20.2% | $212.2 million | +24.9% |
| Diluted EPS | $1.11 | vs. $0.91 | $3.30 | vs. $2.63 |
| Comparable sales | +12.8% | vs. +9.5% | +11.4% | vs. +9.3% |
Quarterly comparable sales included 10.9% growth in retail and salon and 56.3% in e-commerce; transactions rose 10.6% and average ticket 2.2%. E-commerce sales were $46.2 million for the quarter and $126.3 million year to date. Salon-service sales were $51.7 million and $154.7 million, respectively.
Quarterly SG&A was $218.8 million (24.0% of sales, down from 24.3%); year-to-date SG&A was $595.2 million (22.4%, down from 22.9%). The effective tax rate was 36.0% for the quarter and 37.2% year to date, below the respective prior-period rates of 37.3% and 37.9%.
Cash flow, liquidity and debt
- For the 39 weeks, operating cash flow was $149.0 million, compared with $146.2 million a year earlier. Capital expenditures were $231.9 million, versus $172.5 million, primarily reflecting investment in IT, merchandise fixtures and supply chain initiatives.
- Cash and cash equivalents were $209.6 million at October 31, 2015; short-term investments were $150.2 million. Current assets were $1,388.2 million and current liabilities were $458.0 million.
- Cash declined $179.6 million from the beginning of the fiscal year. Inventory increased to $884.4 million from $709.7 million a year earlier, reflecting store growth, sales and brand additions, and the new distribution center.
- Ulta had no borrowings under its revolving credit facility and reported compliance with its covenants. The facility provides revolving loans up to the lesser of $200 million or an inventory-based limit, with maturity extended to December 2018; substantially all assets secure borrowings.
- The company repurchased $121.3 million of stock year to date, including 772,076 shares at an average $157.05. $238.8 million remained available under the $400 million authorization at quarter-end.
Material changes, outlook and risks
- Sales growth reflected comparable-store gains and non-comparable stores. Ulta opened 45 stores in the quarter and 89 year to date; it attributed comparable-sales growth to marketing and merchandising strategies.
- Gross margin pressure was primarily attributed to supply-chain deleverage from the new Greenwood, Indiana distribution center. For the 39-week period, this was partly offset by leverage in fixed store costs. Management cited higher sales volume and cost efficiencies as factors supporting SG&A leverage.
- Management stated that cash, short-term investments, operating cash flow and available credit should meet working-capital, capital-expenditure and other liquidity requirements for at least the next 12 months. The filing gives no numerical earnings or sales guidance. Management’s longer-term priorities include comparable-sales growth, new stores, e-commerce, infrastructure and operating efficiencies.
- Risks highlighted include consumer-spending weakness, competition, execution of store and e-commerce expansion, distribution and fulfillment capacity, information-system disruptions, weather, product costs and retaining key personnel. Management noted that seasonal results and interim performance may not indicate full-year results.
- California employment class-action matters include Moore, Paez and Quinby, which Ulta disputes and is defending; the filing says potential liabilities for these matters were not probable and could not be reasonably estimated. Moore class certification was granted and appealed. A separate pay-card case, Galvez, had a proposed $1.75 million settlement subject to court approval. Management said litigation could affect results in a particular period if a significant liability arises.
- The company was evaluating the impact and adoption method for the new revenue-recognition standard, effective for it beginning fiscal 2018 with early adoption permitted in fiscal 2017, and evaluating a cloud-computing accounting standard.
Important facts for investors to verify
- Whether strong comparable-sales and e-commerce growth continues, and how much growth comes from new stores versus existing operations.
- Whether distribution-center and supply-chain costs ease and gross margin stabilizes as expansion continues.
- Inventory levels, seasonal working-capital needs, capital spending and the pace of store openings.
- Cash use and share repurchases, including remaining authorization and the effect on liquidity.
- Developments, court approvals and potential financial exposure in the disclosed employment litigation.