Ulta Beauty, Inc. (Ulta Salon, Cosmetics & Fragrance, Inc.) — Form 10-Q Summary
Reporting period: First quarter of fiscal 2013, the 13 weeks ended May 4, 2013; comparison is the 13 weeks ended April 28, 2012. The request metadata labels the period 2012 Q1, but the filing reports 2013 Q1. Financial statement amounts below are in U.S. dollars; figures are rounded to millions unless stated otherwise.
Business context and results
Ulta operated 576 beauty retail stores in 46 states at quarter-end, versus 467 stores a year earlier. Its business combines prestige and mass beauty products, salon products and services, and e-commerce. Management notes that sales and earnings are seasonal, with significant portions generally realized in the holiday-season fourth quarter.
- Net sales: $582.7 million, up 22.9% from $474.1 million. Growth included $77.4 million from non-comparable stores and $31.2 million from comparable stores. Salon-service sales rose 23.9% to $35.3 million; e-commerce sales rose 69.7% to $17.0 million.
- Comparable sales: Up 6.7% overall, including 5.3% growth at retail and salon stores and 69.7% e-commerce growth. The increase reflected 3.5% higher traffic and 3.2% higher average ticket. E-commerce was included in the comparable-sales calculation beginning this quarter.
- Gross profit and margin: $203.9 million, up 19.3%; gross margin declined to 35.0% from 36.0%. Management attributed the decline chiefly to merchandise-margin deleverage associated with marketing and merchandising strategies, inventory-receipt timing, and higher fixed store costs.
- Operating income: $67.7 million, up 17.8%; operating margin was 11.6%, versus 12.1%. SG&A increased 19.9% to $133.0 million but declined as a share of sales to 22.8% from 23.4%. Pre-opening expense was $3.2 million, versus $2.5 million; Ulta opened 28 stores, compared with 18 new stores and one relocation in the prior-year quarter.
- Net income and EPS: Net income was $41.8 million, up 20.0% from $34.9 million. Diluted EPS rose to $0.65 from $0.54; net margin was 7.2%, versus 7.4%. The effective tax rate decreased to 38.2% from 39.3%, which management attributed primarily to a lower state rate and additional credits.
- Cash flow: Operating cash flow was $42.8 million, compared with $12.5 million. Capital expenditures were $42.0 million, versus $24.8 million, primarily reflecting more store openings. Financing used $28.1 million, including $37.3 million of share repurchases. Cash declined $27.3 million during the quarter to $293.2 million.
Financial position, liquidity and capital allocation
- At May 4, 2013, cash was $293.2 million, inventory $442.1 million, total assets $1.332 billion, and current liabilities $248.1 million. Inventory was $110.0 million higher than a year earlier; average inventory per store increased 7.9%, reflecting store growth and inventory for newly added prestige-brand boutiques.
- Ulta had no borrowings outstanding under its revolving credit facility and reported compliance with its terms and covenants. The facility matures in October 2016 and provides revolving loans up to the lesser of $200 million or a borrowing-base limit, plus a $10 million letter-of-credit subfacility. Substantially all assets secure borrowings. The company said cash, operating cash flow, and potential facility borrowings should meet needs for at least the next 12 months.
- The Board authorized a share repurchase program of up to $150 million on March 18, 2013. Ulta repurchased 500,500 shares for $37.3 million at an average $74.58 per share in the quarter; $112.7 million remained authorized.
- Operating leases are a significant commitment; quarterly rent expense was $32.0 million, up from $26.1 million. The filing identifies operating leases and letters of credit as off-balance-sheet arrangements and reports no non-cancelable purchase commitments at quarter-end.
Outlook, risks and contingencies
- Management stated a long-term annual net-income growth target of 25%–30%, based on comparable-sales growth of 4%–6%, including e-commerce beginning in 2013. This is a long-term target, not specific quarterly or full-year guidance. The filing cautions that quarterly results are not necessarily indicative of full-year results.
- Management’s growth priorities include opening stores, introducing products, services and brands, enhancing the loyalty program and marketing reach, expanding digital capabilities, and improving operating margin. It expects margin opportunities from merchandise-margin expansion, supply-chain leverage, comparable-sales growth, and operating efficiencies.
- Disclosed risks include weak consumer spending and economic uncertainty, competition, product-cost changes, execution and resource demands from store expansion, distribution and fulfillment capacity, information-system disruptions, weather, and retaining key executives. Management reported no material changes to the risk factors in its latest annual report.
- A putative California employment class action alleges violations of labor laws concerning meal periods, rest breaks, wages, overtime and premium pay. Ulta denies the allegations and is vigorously defending the case; management said liabilities from this and other incidental proceedings are not expected to be material.
- Management reported effective disclosure controls and no materially affecting changes in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether comparable-sales growth and the long-term earnings-growth target remain achievable, especially given the slower retail-and-salon comp rate and the change to include e-commerce in comps.
- Whether gross-margin pressure persists and whether sales growth can continue to outpace operating costs and store-opening investment.
- Inventory growth, inventory per store, and working-capital needs as the store base expands and seasonal inventory builds.
- Capital spending, new-store economics, cash generation, and the pace and remaining authorization of share repurchases.
- Developments in the California employment lawsuit, lease commitments, and any future use or covenant constraints of the secured credit facility.