Ulta Beauty, Inc. — Form 10-Q Summary
Business context and reporting period
Ulta Beauty operates beauty retail stores, salons and e-commerce, with 1,264 stores across 50 states at May 2, 2020. This filing covers the 13 weeks ended May 2, 2020 (fiscal 2020 first quarter), compared with the 13 weeks ended May 4, 2019. Results were severely affected by COVID-19 and are not necessarily indicative of full-year performance.
Financial performance and liquidity
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Net sales | $1,173.2 million | $1,743.0 million |
| Comparable sales | -35.3% | +7.0% |
| Gross profit / margin | $303.6 million / 25.9% | $644.8 million / 37.0% |
| Operating income (loss) / margin | -$101.5 million / -8.7% | $237.5 million / 13.6% |
| Net income (loss) | -$78.5 million; diluted EPS -$1.39 | $192.2 million; diluted EPS $3.26 |
| Operating cash flow | -$24.3 million | $271.7 million |
| Capital expenditures | $41.5 million | $71.8 million |
Sales declined 32.7% year over year. Comparable sales reflected a 38.6% decrease in transactions, partly offset by a 3.3% increase in average ticket. Gross margin fell 11.1 percentage points, primarily from fixed-cost and salon-expense deleverage and channel mix shifts; lower promotional activity partly offset the decline. SG&A fell 5.5% in dollars but rose to 32.5% of sales from 23.1% as lower sales reduced expense leverage. The company recorded $19.5 million of impairment charges, primarily on store and lease assets.
Cash and cash equivalents were $1,043.5 million, with $110.0 million in short-term investments, at May 2, 2020. The company drew $800 million on its $1.0 billion revolving credit facility in March; outstanding debt bore a 1.94% weighted-average rate. It reported compliance with facility covenants. Current liabilities were $1,096.2 million; operating lease liabilities totaled $1,988.7 million, including current and non-current amounts. Management stated available cash, investments, operating cash flow and credit availability were expected to meet liquidity needs for at least 12 months.
Material changes, outlook and risks
- All U.S. stores were temporarily closed beginning March 19. E-commerce continued; curbside pickup began in select locations. As of May 28, 333 stores were open to guests and 840 offered curbside pickup, with reopening phased according to local conditions and safety protocols.
- Management reported strong comparable sales before COVID-19’s impact in mid-March, followed by sharp declines from store closures and reduced traffic and demand. The pandemic’s duration, effects on consumer spending, store operations and supply chain remained uncertain.
- To preserve liquidity, Ulta reduced spending and planned capital investment, furloughed many store and salon associates, curtailed hiring and marketing, reduced planned store projects, and suspended share repurchases on April 2. Fiscal 2020 capital expenditures were expected to be $200–$210 million. The filing provides no earnings or sales guidance.
- The company recognized $19.5 million in impairment charges based on estimates of store cash flows and market rents; changes in these assumptions could lead to further impairment. Goodwill and other intangible assets were not impaired in the interim review.
- Other disclosed risks include economic and consumer-spending uncertainty, supply-chain disruption, competition, changing beauty trends, and operating and cybersecurity risks. Management said existing legal proceedings were not expected to have a material adverse effect. Disclosure controls were deemed effective, with no material change in internal control reported.
Important facts for investors to verify
- Whether store reopenings, customer traffic and comparable sales recover, and how online and curbside demand develop.
- Cash generation, inventory levels and working-capital needs while sales remain volatile.
- Credit-facility availability, covenant headroom, interest costs and the use of borrowed funds.
- Whether store impairment estimates require additional charges, and the company’s substantial lease obligations.
- Execution of the reduced $200–$210 million capital expenditure plan and timing of any resumption of share repurchases.