Ulta Beauty, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for fiscal first-quarter 2018, the 13 weeks ended May 5, 2018, compared with the 13 weeks ended April 29, 2017. It is not a 2017 Q1 filing.
Business context
Ulta Beauty operates specialty beauty retail stores, e-commerce and full-service salons. It had 1,107 stores in 48 states and the District of Columbia at quarter-end, versus 990 a year earlier. The company notes that sales and earnings are seasonal, with significant portions typically realized in the fourth quarter.
Financial performance
| Metric | Q1 2018 | Q1 2017 | Change or context |
|---|---|---|---|
| Net sales | $1,543.7 million | $1,314.9 million | Up 17.4% |
| Comparable sales | Up 8.1% | Up 14.3% | Transactions up 5.1%; average ticket up 3.0% |
| Gross profit / margin | $560.7 million / 36.3% | $476.0 million / 36.2% | Margin up 10 basis points |
| Operating income / margin | $209.8 million / 13.6% | $188.4 million / 14.3% | Income up 11.4%; margin down 70 basis points |
| Net income | $164.4 million | $128.2 million | Up 28.2% |
| Diluted EPS | $2.70 | $2.05 | Up 31.7% |
| Operating cash flow | $277.3 million | $175.7 million | Up $101.5 million |
| Capital expenditures | $74.3 million | $76.8 million | Cash purchases of property and equipment |
E-commerce sales increased 48.0% to $154.4 million; salon services sales increased 10.1% to $75.7 million. Retail-store and salon comparable sales rose 4.7%. Management attributed sales growth to comparable-store growth, new stores and other revenue, and cited marketing and merchandising strategies.
Liquidity, debt and capital allocation
At May 5, 2018, cash and cash equivalents were $231.9 million and short-term investments were $237.2 million, consisting of certificates of deposit with maturities under 12 months. Cash declined $45.6 million during the quarter. Investing cash outflow was $191.5 million, including investment purchases; financing cash outflow was $131.4 million, principally reflecting share repurchases.
The company had no borrowings outstanding under its asset-based revolving credit facility and reported compliance with its covenants. The facility provides for loans up to the lesser of $400 million or the borrowing base, matures August 23, 2022, and is secured by substantially all company assets. Management said available cash, investments, operating cash flows and potential facility borrowings were expected to meet liquidity needs for at least 12 months.
Ulta repurchased 618,551 shares for $133.1 million during the quarter. A new $625 million authorization was announced in March 2018; $529.2 million remained available at May 5, 2018.
Material changes and unusual items
- Effective February 4, 2018, the company adopted ASC 606 using the modified retrospective method. Adoption reduced opening retained earnings by $30.0 million, primarily due to the loyalty program accounting change; the company reported no material effect on quarterly results or cash flows and expected an immaterial ongoing net-income effect.
- Management said the new revenue accounting presentation increased gross margin by about 50 basis points and SG&A deleverage by about 70 basis points, affecting year-over-year margin comparisons.
- The effective tax rate fell to 22.1% from 32.1%, primarily due to tax reform. Income tax expense declined to $46.8 million from $60.5 million.
- SG&A rose 21.9% to $345.6 million and increased to 22.4% of sales from 21.6%, reflecting revenue-accounting presentation and store-labor investment. Gross margin improvement was partly offset by category and channel mix, salon and supply-chain investment.
- Inventory was $1,136.8 million, up 8.4% from a year earlier, primarily reflecting 117 net new stores; average inventory per store decreased 3.0%.
Outlook, risks and contingencies
No specific quarterly or full-year financial guidance is provided in the supplied filing text. Management describes a long-term growth strategy targeting a chain of 1,400 to 1,700 stores, with growth also dependent on comparable sales and e-commerce. It expects operating-profit growth to depend on merchandise-margin expansion, comparable-sales leverage and efficiencies, balanced against investments in people, systems and supply chain.
The company expects to adopt the new lease standard in fiscal 2019 and anticipates a material impact on its consolidated financial position, but said it could not yet quantify that impact; it did not expect a material effect on results of operations or cash flows. Risks cited include consumer spending and competition, changing beauty trends, cybersecurity and information-system disruptions, distribution capacity, cost changes, store-opening issues, natural disasters and execution of growth and repurchase plans. Management said ordinary-course legal proceedings were not expected to have a material adverse effect. No material changes to previously disclosed risk factors were reported.
Most important facts for investors to verify
- Confirm comparable-sales trends and the sustainability of rapid e-commerce growth, given the slowdown in total comparable-sales growth versus the prior-year quarter.
- Assess operating-margin pressure from SG&A growth and investments, separating underlying performance from ASC 606 presentation effects.
- Track cash generation, inventory needs and the pace of store and supply-chain investment alongside substantial share repurchases.
- Monitor the remaining repurchase authorization and the effect of buybacks on share count and liquidity.
- Follow the quantified balance-sheet impact and implementation progress for lease accounting adoption in fiscal 2019.
- Consider seasonality: the filing cautions that first-quarter results are not necessarily indicative of the full fiscal year.