Ulta Beauty, Inc. — Form 10-Q Summary
Period note: The supplied filing is for the 13 weeks ended May 4, 2019 (first quarter of fiscal 2019), compared with the 13 weeks ended May 5, 2018. This does not match the request metadata’s “2018 Q1.”
Business context and reporting period
Ulta Beauty operates specialty beauty stores, salons, and e-commerce. At May 4, 2019, it operated 1,196 stores in 50 states, versus 1,107 a year earlier. The company reported one segment. Its business is seasonal, with significant sales and income generally occurring in the fourth quarter.
Financial performance and liquidity
| Metric | Q1 FY2019 | Q1 FY2018 | Change |
|---|---|---|---|
| Net sales | $1,743.0 million | $1,543.7 million | +12.9% |
| Comparable sales | +7.0% | +8.1% | Growth moderated |
| Gross profit / margin | $644.8 million / 37.0% | $560.7 million / 36.3% | Margin +70 bps |
| Operating income / margin | $237.5 million / 13.6% | $209.8 million / 13.6% | Income +13.2%; margin flat |
| Net income | $192.2 million | $164.4 million | +16.9% |
| Diluted EPS | $3.26 | $2.70 | +20.7% |
| Operating cash flow | $271.7 million | $277.3 million | Down $5.6 million |
| Capital expenditures | $71.8 million | $74.3 million | Down $2.4 million |
Comparable sales growth comprised a 4.3% increase in transactions and a 2.7% increase in average ticket. Management attributed sales gains to marketing and merchandising. Gross-margin improvement reflected merchandise margin gains and fixed-cost leverage, partly offset by salon and supply-chain investments. SG&A rose 16.6% and increased to 23.1% of sales from 22.4%, reflecting corporate growth investments and store labor, partly offset by efficiencies and sales leverage.
Cash and cash equivalents were $326.8 million and short-term investments were $195.0 million at May 4, 2019. Current assets were $2,019.3 million and current liabilities $1,045.6 million. Cash decreased $82.4 million during the quarter; investing activities used $279.6 million, including $195.0 million for short-term investments, and financing activities used $74.5 million, principally for share repurchases. Merchandise inventory was $1,250.0 million, up 10.0% year over year.
The company had no borrowings under its revolving credit facility and reported compliance with its covenants. The facility provides up to $400 million, subject to a borrowing base. Following adoption of lease accounting, the balance sheet included $1,865.8 million of operating lease liabilities and $1,479.1 million of lease assets. These lease liabilities are not borrowings under the credit facility.
Material changes, outlook, and risks
- Ulta adopted ASC 842 on February 3, 2019, recording operating lease assets and liabilities and a $2.4 million reduction to retained earnings. Comparative-period balance sheets were not restated; the company said adoption did not materially affect results of operations or cash flows.
- The company repurchased 318,431 shares for $107.4 million in the quarter. A new $875 million repurchase authorization was announced in March 2019; $788.2 million remained available at May 4, 2019.
- Management stated that cash, investments, operating cash flows, and potential facility borrowings should meet working-capital, capital-expenditure, commitment, and other liquidity needs for at least 12 months. It gave no specific quarterly or full-year financial guidance in the supplied filing. Its longer-term strategy targets a U.S. chain of 1,500 to 1,700 stores.
- Risks highlighted include consumer-spending and competitive pressures; execution of growth, cost-efficiency, distribution, and omnichannel plans; changing beauty trends and product costs; cybersecurity and information-system disruptions; and seasonal sales exposure. Management said there were no material changes to the risk factors in its latest annual report.
- The company is involved in ordinary-course legal proceedings, including class actions and individual claims; management did not expect them, individually or in aggregate, to materially adversely affect financial position, results, or cash flows. No material changes to contractual obligations outside the ordinary course were reported.
Important facts for investors to verify
- Confirm the intended reporting period: this filing covers Q1 FY2019, not Q1 2018.
- Track whether comparable-sales growth and gross-margin gains persist, and whether SG&A growth continues to pressure expense leverage.
- Assess cash generation against store, supply-chain, technology, and inventory investment needs, including seasonal working-capital requirements.
- Review the scale and duration of lease commitments, the company’s lease-accounting presentation, and any future use of its credit facility.
- Monitor share repurchases, remaining authorization, and their effects on cash and shares outstanding.