Ulta Beauty, Inc. (then Ulta Salon, Cosmetics & Fragrance, Inc.) — Form 10-Q
Reporting period: The filing covers the 13 weeks and six months ended July 30, 2011, compared with periods ended July 31, 2010. The request metadata says “2010 Q2,” but the filing itself is for fiscal 2011 Q2. Amounts below are in millions of dollars unless noted.
Business context and reporting period
Ulta operated 415 stores in 42 states at quarter-end, offering beauty products and salon services. Its business is seasonal, with significant sales and income typically generated in the fiscal fourth quarter holiday season. The company reports its retail, salon and e-commerce activities as one segment.
Financial performance
| Metric | Q2 FY2011 | Q2 FY2010 | Six months FY2011 | Six months FY2010 |
|---|---|---|---|---|
| Net sales | $394.6 | $321.8 | $780.6 | $642.0 |
| Gross profit | $134.3 | $104.0 | $269.2 | $208.5 |
| Operating income | $39.7 | $22.3 | $78.7 | $45.6 |
| Net income | $23.9 | $13.1 | $47.2 | $26.7 |
| Diluted EPS | $0.38 | $0.22 | $0.75 | $0.44 |
- Q2 sales rose 22.6%; comparable-store sales increased 11.3%, driven by 11.0% higher traffic and 0.3% higher average ticket. For the first half, sales increased 21.6% and comparable-store sales rose 11.2%.
- Gross margin expanded to 34.0% in Q2 from 32.3%, and to 34.5% for the first half from 32.5%. Management attributed the improvement primarily to stronger merchandise margins and leverage on fixed store costs.
- Q2 SG&A increased 13.6% to $90.8 million but declined to 23.0% of sales from 24.8%. Pre-opening expense rose to $3.8 million from $1.8 million as store openings and remodels increased.
- Q2 net income increased 83.0%; first-half net income rose 76.6%. Effective tax rates were 39.5% for Q2 and 39.8% for the first half, below the comparable prior-year rates.
- First-half operating cash flow was $60.9 million, versus $40.1 million. Capital expenditures were $52.7 million, versus $32.6 million; cash increased $31.4 million to $142.5 million from fiscal year-end.
- At July 30, cash was $142.5 million, inventory $258.8 million, current assets $464.3 million and current liabilities $155.6 million. Total liabilities were $337.8 million and stockholders’ equity was $478.0 million.
Material changes versus the prior comparable period
- Stores increased to 415 from 356 a year earlier. In the first half, Ulta opened 26 stores, relocated one and remodeled 17.
- Comparable-store sales growth remained strong but eased to 11.2% for the first half from 11.3% in Q2; management cautioned that the recent low-double-digit growth was not expected to continue.
- Inventory was $258.8 million, up $34.5 million from July 2010, primarily reflecting 59 net additional stores; average inventory per store decreased 1.1%.
- First-half investing cash use increased, reflecting more new-store openings and a shift in opening schedules. Financing cash inflows included $13.1 million from stock-plan issuances and $10.0 million in excess tax benefits.
Outlook, risks and contingencies
- Management’s long-term annual net-income growth target was 25%–30%, based on comparable-store sales increases of 3%–5%; it did not provide a specific near-term earnings forecast in the supplied filing text.
- Management expected cash on hand, operating cash flow and credit-facility availability to meet working-capital, capital-spending and other liquidity needs for at least 12 months. Seasonal inventory needs are greatest from August through November.
- No borrowings were outstanding on the $200 million asset-based credit facility at July 30, 2011. The facility runs through May 31, 2013 and requires tangible net worth of at least $200 million; reported tangible net worth was $478.0 million. Substantially all assets secure borrowings.
- Management cited uncertain economic conditions and consumer spending, competition, merchandise costs, execution of store expansion, distribution and fulfillment capacity, information-system disruptions, and weather as risks. It noted the U.S. credit downgrade and market volatility in August 2011.
- A California employment class action settlement covering salon hair designers was agreed in principle, subject to final documentation and court approval; the proposed amount was described as not material. Ulta denied the allegations. Other proceedings were not expected by management to be material.
- Management reported disclosure controls as effective and no material change in internal control over financial reporting. It stated there were no material changes to previously disclosed risk factors.
Important facts for investors to verify
- Confirm the period: this is fiscal Q2 2011, ended July 30, 2011, not Q2 2010.
- Assess whether unusually strong comparable-store growth and margin expansion can persist, given management’s warning that low-double-digit comparable growth is not expected to continue.
- Track store-opening costs, capital expenditures, inventory growth and seasonal borrowing needs as expansion continues.
- Review the credit facility’s borrowing-base availability, collateral and tangible-net-worth covenant, especially ahead of the holiday inventory build.
- Monitor final court approval and terms of the California settlement, and the effect of changing economic conditions on consumer demand.