Ulta Beauty, Inc. — Form 10-K Summary
Reporting-period note: The filing is for fiscal 2013, the 52-week year ended February 1, 2014, with comparisons to fiscal 2012, which was a 53-week year ended February 2, 2013. It is not a 2012 Q4 filing; the requested period metadata does not match the filing.
Business context
Ulta operated 675 beauty stores in 46 states, combining prestige, mass and salon products with salon services and e-commerce. Its growth strategy centers on store expansion, product and service additions, loyalty and marketing, and digital and omnichannel development. The company reported one operating segment.
Financial performance and liquidity
| Metric | Fiscal 2013 | Fiscal 2012 |
|---|---|---|
| Net sales | $2,670.6 million | $2,220.3 million |
| Gross profit / margin | $941.2 million / 35.2% | $783.7 million / 35.3% |
| Operating income / margin | $327.6 million / 12.3% | $280.0 million / 12.6% |
| Net income | $202.8 million | $172.5 million |
| Diluted EPS | $3.15 | $2.68 |
| Operating cash flow | $327.7 million | $239.0 million |
| Capital expenditures | $226.0 million | $188.6 million |
- Sales rose 20.3% and net income rose 17.6%. Comparable sales increased 7.9%, comprising 6.1% growth in retail and salon and 76.6% growth in e-commerce. E-commerce sales were $95.8 million, up 73.9%.
- Gross margin fell 10 basis points; merchandise-margin deleverage was partly offset by supply-chain and fixed-store-cost leverage. SG&A rose 22.0% and increased 30 basis points as a share of sales, reflecting planned investment in supply chain, e-commerce and store labor.
- Cash and cash equivalents were $419.5 million; working capital was $735.9 million. The company had no borrowings outstanding under its revolving credit facility and reported compliance with its covenants. Total stockholders’ equity was $1,003.1 million.
- Operating cash flow less capital expenditures was approximately $101.7 million. Inventory increased 26.8% to $457.9 million, mainly reflecting new stores, brand additions and boutiques.
- Operating lease obligations totaled $1.408 billion, including $184.8 million due within one year. These are substantial contractual commitments, not reported funded debt.
Material changes and unusual items
- Ulta opened 127 stores, closed two and ended the year with 675 locations; it also remodeled seven stores and relocated four. Fiscal 2012 had 102 store openings.
- Fiscal 2012 included an extra week, which generated approximately $55 million in sales and limits direct year-over-year comparison.
- Ulta repurchased 500,500 shares for $37.3 million during fiscal 2013; $112.7 million remained available under its $150 million authorization at year-end. No repurchases were made in the fourth quarter.
- The company paid a $62.5 million special dividend in fiscal 2012; no dividend was declared for fiscal 2013.
- Mary Dillon became CEO effective July 2013. Management was reviewing its long-range strategic and financial plan.
Outlook, commentary and risks
- No specific fiscal 2014 sales or earnings guidance was provided. Management expected to present long-term growth plans and financial targets in fall 2014.
- For fiscal 2014, Ulta expected approximately $265 million of capital expenditures, about 100 new stores and 12 remodels. A multi-year supply-chain program included a fourth distribution center expected to open in 2015.
- Management said cash on hand, operating cash flow and available credit should meet working-capital, capital-expenditure and other liquidity needs for at least the next 12 months. It expected to self-fund planned capital expenditures.
- Key risks include execution and cost of rapid store expansion, distribution and systems capacity, e-commerce and cybersecurity disruptions, competition and changing beauty trends, vendor concentration (top ten vendors represented about 51% of sales), discretionary consumer spending, and construction, labor and product-compliance costs.
- A California employment class action alleged wage-and-hour violations. Ulta denied the allegations, was defending the case, and recorded no accrual because loss was not considered probable and reasonably estimable. Management said resolution could nevertheless materially affect results in a particular period.
- The financial statements received an unqualified audit opinion, and the auditor also gave an unqualified opinion on internal control over financial reporting.
Most important facts for investors to verify
- Whether comparable-sales growth and store productivity can hold up as the store base expands; note the reported 7.9% comparable-sales rate includes e-commerce and fiscal 2012 had an extra week.
- Whether gross-margin pressure and SG&A deleverage persist as Ulta funds growth and supply-chain investments.
- Delivery, cost and capacity milestones for the planned distribution-center and omnichannel program, alongside the $265 million fiscal 2014 capital-spending plan.
- Inventory growth and returns on new-store investment, as well as the scale and terms of long-term lease obligations.
- Developments in the California employment litigation, the stock-repurchase program, and management’s forthcoming long-term financial targets.