Ulta Beauty (Ulta Salon, Cosmetics & Fragrance, Inc.) — Form 10-Q Summary
Reporting period: First quarter of fiscal 2014, the 13 weeks ended May 3, 2014; comparative period ended May 4, 2013. The supplied metadata labels the period “2013 Q1,” but the filing identifies this as fiscal 2014 Q1. Financial amounts below are in U.S. dollars; millions are used unless otherwise stated.
Business context
Ulta operated 696 stores in 46 states at quarter-end, versus 576 stores a year earlier. It sells prestige and mass beauty products and salon services through stores and e-commerce. Management’s growth strategy includes expanding toward approximately 1,200 stores, broadening products and services, developing loyalty and marketing, and growing digital business.
Financial performance and liquidity
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Net sales | $713.8 million | $582.7 million | +22.5% |
| Gross profit | $246.0 million | $203.9 million | +20.6% |
| Gross margin | 34.5% | 35.0% | -50 basis points |
| Operating income | $80.9 million | $67.7 million | +19.5% |
| Operating margin | 11.3% | 11.6% | -30 basis points |
| Net income | $50.0 million | $41.8 million | +19.4% |
| Diluted EPS | $0.77 | $0.65 | +18.5% |
| Cash from operations | $73.7 million | $42.8 million | +$30.9 million |
| Capital expenditures | $39.1 million | $42.0 million | -$2.9 million |
- Comparable sales rose 8.7%, including 6.8% growth in retail and salon and 72.3% e-commerce growth. E-commerce contributed approximately 190 basis points to comparable sales. Traffic increased 2.5% and average ticket 6.2%.
- Salon service sales increased 20.4% to $42.6 million. E-commerce sales increased 72.3% to $29.4 million.
- Cost of sales increased to 65.5% of sales from 65.0%. Management attributed lower gross margin mainly to 40 basis points of merchandise-margin deleverage from mix and loyalty-program conversion, plus 10 basis points of fixed-store-cost deleverage from new stores.
- SG&A increased 22.1% to $162.4 million, remaining 22.8% of sales. Management cited planned investments in marketing, supply chain, e-commerce and store labor. Pre-opening expense declined to $2.6 million from $3.2 million; 21 stores opened versus 28.
- Effective income tax rate was 38.4%, versus 38.2%, with the increase attributed primarily to lower federal Work Opportunity Tax Credits and higher officer compensation subject to Section 162(m).
- Cash and cash equivalents were $456.7 million at May 3, 2014, versus $293.2 million a year earlier. Cash increased $37.2 million during the quarter. Merchandise inventory was $531.4 million, up $89.3 million year over year, largely reflecting 120 net store additions; average inventory per store declined 50 basis points.
- No borrowings were outstanding under the revolving credit facility. The facility provides for loans up to the lesser of $200 million or a borrowing-base amount and matures in December 2018; substantially all company assets are pledged as collateral. The company reported compliance with facility terms and covenants.
- Current assets were $1,090.5 million and current liabilities $302.4 million at May 3, 2014. Total liabilities were $639.5 million and stockholders’ equity $1,059.8 million.
Changes, outlook and risks
- Sales growth reflected $49.9 million from comparable stores and $81.2 million from non-comparable stores. Store count increased by 120 year over year.
- Operating cash flow improved from the prior-year quarter; working capital included a $73.5 million inventory cash outflow, partly offset by cash inflows from receivables, income taxes and accounts payable.
- Management said cash on hand, operating cash flow and available credit were expected to cover working-capital, capital-expenditure and other needs for at least the next 12 months. Seasonal cash needs are greatest from August through November as inventory is built for the holiday season.
- Management was evaluating its long-range strategic and financial plan and expected to share long-term growth plans and financial targets in fall 2014. The filing provides no specific near-term earnings or sales guidance.
- Key stated risks include consumer-spending weakness, competition, product-cost changes, execution and resource demands of store expansion, distribution and fulfillment capacity, information-system disruptions, weather, and retaining key executives. Management cautioned that quarterly results are seasonal and not necessarily indicative of full-year performance; a substantial share of annual sales and income is typically earned in Q4.
- A California employment class-action matter alleges meal/rest break and wage violations. Ulta denies the allegations and is defending the case; class certification was pending. No accrual was recorded because loss was not considered probable or reasonably estimable. Management could not estimate a maximum loss and said a significant resolution could adversely affect a particular period, while not expecting a material adverse effect on financial position or liquidity.
- The $150 million share-repurchase authorization remained in place, with $112.7 million available. No program repurchases occurred during the quarter; 12,888 shares were withheld from employees for tax obligations.
Important facts to verify
- Confirm the fiscal-period label: the filing covers Q1 FY2014 ended May 3, 2014, despite the supplied metadata’s “2013 Q1.”
- Track whether strong comparable and e-commerce sales growth persists and how new-store growth affects margins and inventory.
- Assess the causes and durability of the 50-basis-point gross-margin decline and the returns on increased marketing, supply-chain and digital investments.
- Monitor holiday-season inventory and liquidity needs, capital spending, and continued availability under the asset-based credit facility.
- Follow the California class-action certification decision and any change in the company’s loss assessment or disclosures.
- Check whether management’s planned fall 2014 long-term targets were subsequently issued and how they compare with the approximately 1,200-store ambition.