Ulta Beauty, Inc. — Form 10-Q Summary
Reporting-period note: The request identifies “2014 Q2,” but the filing is for the 13 and 26 weeks ended August 1, 2015, with comparison to the periods ended August 2, 2014. The registrant’s legal name in the filing is Ulta Salon, Cosmetics & Fragrance, Inc.
Business context and reporting period
Ulta operates specialty beauty retail stores, e-commerce, and full-service salons. At August 1, 2015, it operated 817 stores in 48 states, versus 715 a year earlier. Results are seasonal, with a significant share of sales and net income typically generated in the holiday-season fourth quarter. The interim results are not necessarily indicative of full-year performance.
Key financial metrics
Amounts below are in millions of dollars except per-share data, percentages, and store counts. Fiscal Q2 refers to the 13 weeks ended August 1, 2015; first-half refers to the 26 weeks ended that date.
| Metric | Fiscal Q2 2015 | Fiscal Q2 2014 | First half 2015 | First half 2014 |
|---|---|---|---|---|
| Net sales | $877.0 | $734.2 | $1,745.1 | $1,448.0 |
| Gross profit / margin | $306.5 / 34.9% | $259.3 / 35.3% | $609.7 / 34.9% | $505.3 / 34.9% |
| Operating income / margin | $118.5 / 13.5% | $98.0 / 13.3% | $226.0 / 13.0% | $178.9 / 12.4% |
| Net income | $74.2 | $60.8 | $141.1 | $110.7 |
| Diluted EPS | $1.15 | $0.94 | $2.19 | $1.71 |
| Total comparable-sales increase | 10.1% | 9.6% | 10.8% | 9.2% |
Q2 net sales increased 19.4%, operating income 20.9%, and net income 22.0% year over year. First-half net sales increased 20.5%, operating income 26.4%, and net income 27.4%. E-commerce sales grew 43.4% in Q2 and 46.8% in the first half; first-half salon service sales were $102.9 million, up 20.1%. Q2 comparable sales reflected 7.0% higher transactions and 3.1% higher average ticket.
Q2 gross margin declined 40 basis points, primarily from supply-chain deleverage associated with the new Greenwood, Indiana distribution center, partly offset by improved merchandise margins. First-half gross margin was flat year over year. SG&A was 21.0% of sales in Q2 and 21.6% in the first half, down 50 basis points in each comparison, with management citing cost efficiencies and higher sales volume. Effective tax rates were 37.5% for Q2 and 37.7% for the first half, lower than the comparable prior-year rates.
First-half operating cash flow was $125.7 million, versus $133.2 million a year earlier. Capital expenditures were $137.2 million, versus $94.1 million; net cash used in investing was $137.2 million. Cash and cash equivalents were $325.2 million at August 1, 2015, and short-term investments were $150.2 million. Merchandise inventory was $705.7 million, up $164.2 million from a year earlier; average inventory per store increased 14%. The filing attributes the increase to store growth, sales and new brand/boutique inventory, and the new distribution center.
Total assets were $2.116 billion and stockholders’ equity was $1.344 billion at August 1, 2015. The company had no credit-facility borrowings and reported compliance with its covenants. Its asset-based revolving facility had a stated maximum of the lesser of $200 million or a borrowing-base amount, with maturity extended to December 2018; substantially all assets secure borrowings. The company reported no off-balance-sheet arrangements.
Material changes and capital allocation
- Ulta opened 44 new stores in the first half, compared with 40 in the prior-year period; it had 102 more stores year over year.
- Capital spending rose, reflecting IT and supply-chain investment, fixtures, and more store openings. Management cited the Greenwood distribution center as a source of current supply-chain deleverage.
- First-half share repurchases totaled $73.8 million for approximately 483,649 shares at an average $152.48 per share. The board’s repurchase authorization was increased by $100 million in March 2015; the filing states $286.3 million remained available at August 1.
- Cash and cash equivalents declined $63.9 million from the fiscal-year start, while inventories and property and equipment increased.
Outlook, risks, contingencies, and unusual items
- No specific numerical earnings or sales guidance is provided. Management expects cash on hand, operating cash flow, and potential credit-facility borrowings to meet working-capital, capital-spending, commitment, and other liquidity needs for at least the next 12 months. The company may borrow for store growth and seasonal inventory needs.
- Management’s longer-term strategy focuses on guest acquisition and loyalty, differentiated omnichannel experience, product innovation, salon services, store and e-commerce growth, and infrastructure investment. It expects operating-profit growth from comparable-sales-driven fixed-cost leverage and efficiencies, offset by investments in people, systems, and supply chain.
- Disclosed risks include consumer-spending and economic conditions, competition, merchandise costs and consumer preferences, execution of store and e-commerce growth, distribution and fulfillment capacity, information-system disruptions, weather, and retaining key executives. Management said there were no material changes to the risk factors in its fiscal 2014 Form 10-K.
- Three California putative employment class actions were disclosed: Moore and Paez concern alleged meal/rest breaks, wages, overtime, and exit inspections; Galvez was proceeding on pay-card-related claims, with mediation scheduled for September 2, 2015. Ulta denies the allegations and is defending the cases. No accrual was recorded for Moore or Paez because loss was not considered probable or reasonably estimable; management said a significant resolution could affect results in a particular period.
- The filing describes the business as subject to seasonal fluctuation. It also notes new revenue-recognition guidance, deferred to fiscal 2018 with early adoption permitted in fiscal 2017, and states the company was evaluating its impact.
Important facts for investors to verify
- Confirm the intended period: the filing is Q2 fiscal 2015, not Q2 2014.
- Track whether strong comparable-sales and e-commerce growth continues, and whether store expansion sustains sales and profit growth.
- Monitor inventory growth, operating cash conversion, and the return on elevated capital expenditures and distribution-center investment.
- Assess the balance between share repurchases, growth investment, and seasonal liquidity needs; verify remaining authorization and any subsequent repurchases.
- Follow the California employment cases and any subsequent developments, including whether any potential liability becomes estimable or material.