Ulta Beauty, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 and 39 weeks ended November 2, 2013, and compares with periods ended October 27, 2012. This does not match the request metadata of “2012 Q3.” The company was then named Ulta Salon, Cosmetics & Fragrance, Inc.
Business context and reporting period
Ulta operated 664 beauty retail stores in 46 states as of November 2, 2013, offering prestige and mass beauty products, salon products, and salon services, alongside e-commerce. Results are seasonal, with significant sales and income generally occurring in the holiday fourth quarter; interim results may not indicate full-year performance.
Financial performance and liquidity
Amounts below are in millions of dollars except per-share figures and percentages.
| Metric | 13 weeks ended Nov. 2, 2013 | Comparable 2012 period | 39 weeks ended Nov. 2, 2013 | Comparable 2012 period |
|---|---|---|---|---|
| Net sales | $618.8 | $505.6 | $1,802.5 | $1,461.4 |
| Gross profit / margin | $231.7 / 37.4% | $185.5 / 36.7% | $647.7 / 35.9% | $524.0 / 35.9% |
| Operating income / margin | $72.9 / 11.8% | $61.3 / 12.1% | $213.5 / 11.8% | $176.2 / 12.1% |
| Net income / margin | $45.4 / 7.3% | $38.2 / 7.5% | $132.2 / 7.3% | $108.0 / 7.4% |
| Diluted EPS | $0.70 | $0.59 | $2.05 | $1.68 |
- Third-quarter sales rose 22.4% and net income rose 19.1%. Comparable sales increased 6.8%; retail and salon comps rose 5.1%, while e-commerce comps rose 74.4%. E-commerce contributed about 170 basis points to total comps. Average ticket increased 9.5%, offset by a 2.7% traffic decline.
- For the first 39 weeks, sales rose 23.3% and net income rose 22.4%. Comparable sales increased 7.3%, including 5.9% retail and salon growth and 72.2% e-commerce growth.
- Quarterly gross margin improved 70 basis points, primarily from a 60-basis-point increase in merchandise margin. SG&A rose to 24.5% of sales from 23.3%, reflecting marketing, store-labor and corporate-overhead costs. Year-to-date SG&A was 23.2% of sales versus 22.9%.
- Operating cash flow was $100.1 million for the 39 weeks, versus $77.5 million a year earlier. Capital expenditures were $177.0 million versus $144.0 million; cash declined $79.6 million to $240.9 million.
- Cash and cash equivalents were $240.9 million at November 2, 2013. Current assets were $941.3 million and current liabilities $287.6 million. The company had no credit-facility borrowings and reported compliance with its covenants. Its revolving facility provides up to the lesser of $200 million or a borrowing-base amount and matures in October 2016.
- Inventory was $582.3 million, up $119.5 million from October 27, 2012, primarily reflecting new stores, new and extended brands, holiday inventory and prestige boutiques. The company cited seasonal inventory needs from August through November.
- Ulta repurchased 500,500 shares for $37.3 million during the 39-week period, at an average $74.58 per share. The $150 million authorization had $112.7 million remaining at November 2, 2013.
Changes, outlook, risks and contingencies
- Store count increased to 664 from 537 a year earlier. Ulta opened 55 stores in the quarter and 116 during the first 39 weeks.
- Management said third-quarter traffic turned slightly negative amid a challenging economy and a strategy to reduce reliance on discounts. It was adjusting promotions for weaker consumer confidence and an expected highly promotional holiday season.
- Management reduced expected fourth-quarter and full-year 2013 earnings growth and expected earnings growth in the “low 20% range” for the current year. The filing does not provide a specific full-year earnings target. Ulta was evaluating its long-range financial and strategic plan and expected to update long-term targets during 2014.
- Management expected cash on hand, operating cash flow and potential credit-facility borrowings to meet working-capital, capital-expenditure and other liquidity needs for at least 12 months. Planned investment needs included new and remodeled stores, inventory, supply chain and information technology.
- A putative California employment class action alleges labor-law violations involving meal and rest breaks, wages, overtime and premium pay. Ulta denies the allegations and is opposing class certification. No accrual was recorded because the potential loss was not considered probable or reasonably estimable; management said the ultimate resolution was not expected to materially affect financial position or liquidity, though a significant liability could materially affect results in a particular period.
- Other cited risks include consumer spending and economic weakness, competition, product costs, execution and resource demands of store growth, distribution and fulfillment capacity, information-system disruption, weather, and ability to execute strategic plans. The filing reported no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers fiscal 2013’s third quarter, not 2012’s.
- Track traffic and comparable-sales trends, particularly the gap between e-commerce growth and store traffic, and the effects of holiday promotions on margins.
- Assess whether elevated inventory and capital spending convert into sales and cash flow while Ulta continues rapid store expansion.
- Monitor SG&A leverage, operating margin and the company’s updated long-range targets, which were not yet disclosed in this filing.
- Follow the California employment litigation and any change in the company’s assessment of potential loss.