Ulta Beauty, Inc. (then Ulta Salon, Cosmetics & Fragrance, Inc.) — Form 10-Q
Reporting period: The filing covers the 13 weeks ended April 30, 2011 (fiscal 2011 first quarter), compared primarily with the 13 weeks ended May 1, 2010. The request metadata says “2010 Q1,” but the filing itself reports fiscal 2011 Q1. Ulta operated 394 stores in 40 states at quarter-end.
Financial performance
- Revenue: Net sales were $386.0 million, up 20.6% year over year. Comparable-store sales rose 11.1%, reflecting traffic growth of 9.5% and average-ticket growth of 1.6%. The company attributed sales growth to $34.4 million from comparable stores and $31.4 million from 47 net new stores. Salon services revenue increased 10.2% to $23.8 million.
- Profit and margins: Gross profit rose 29.1% to $134.9 million; gross margin expanded 230 basis points to 34.9%. Operating income increased to $39.1 million from $23.3 million, with operating margin of 10.1% versus 7.3%. Net income grew 70.5% to $23.3 million; diluted EPS was $0.37 versus $0.23. SG&A was $94.6 million, or 24.5% of sales, down from 25.2%; pre-opening expenses increased to $1.2 million. Effective tax rate was 40.1%, compared with 41.2%.
- Cash flow and investment: Operating cash flow was $4.4 million, down from $9.8 million, mainly amid inventory and accrued-liability changes. Capital expenditures were $19.5 million versus $7.7 million, primarily reflecting store openings and timing. Cash increased $5.6 million to $116.8 million; financing cash flow of $20.7 million included stock-plan proceeds and excess tax benefits.
- Liquidity and debt: The company had no credit-facility borrowings at April 30, 2011. Its facility provided up to $200 million through May 31, 2013, subject to eligible-inventory limits, and included a $200 million tangible-net-worth covenant; reported tangible net worth was $449.4 million. Total current assets were $433.7 million and current liabilities $148.0 million. The company said cash from operations and facility availability should meet needs for at least 12 months.
- Balance sheet and working capital: Total assets were $765.8 million. Inventory was $255.5 million, up $27.4 million from a year earlier, largely due to store growth; average inventory per store decreased 1.3%. Deferred rent liabilities were $139.4 million, up $25.3 million year over year, primarily reflecting new stores.
Material changes and management commentary
- Revenue growth reflected strong comparable-store performance and expansion: 47 net additional stores were operating versus the prior-year quarter. The quarter included five new openings, one relocation and two remodels.
- Gross-margin improvement was attributed to 130 basis points of fixed-store-cost leverage and 90 basis points of merchandise-margin improvement. SG&A leverage was attributed to stronger sales and cost efficiencies.
- Management said the low-double-digit comparable-sales gains seen since fiscal 2010 Q1 were not expected to continue. Its long-term annual net-income growth target was 25%–30%, based on comparable-store sales growth of 3%–5%; this is a target, not specific quarter or full-year guidance.
- Management described the economic recovery as sluggish and warned that weaker consumer spending, product-cost increases, competition, store expansion execution, distribution capacity, information-system disruptions and weather could adversely affect results. Results are seasonal, with significant sales and income typically in the holiday quarter; Q1 results may not indicate full-year performance.
Risks, contingencies and unusual items
- A California employment class-action matter was subject to an agreement in principle to settle claims for non-exempt salon hair designers, pending documentation and court approval. The proposed amount was described as not material; other putative-class claims were to be dismissed without prejudice. Management said other routine proceedings were not expected to be material.
- Operating lease obligations were the company’s stated off-balance-sheet arrangements. No non-cancelable purchase commitments were reported. Substantially all assets were pledged as collateral for facility borrowings.
- Cash flow included an $8.7 million excess tax benefit from stock-based compensation, reported as a financing inflow, and a $15.2 million cash-flow benefit from income taxes, attributed to tax deductions including accelerated depreciation and stock-option-related items.
- Management reported disclosure controls as effective and no material changes in internal control over financial reporting during the quarter. No material changes to previously disclosed risk factors were reported.
Important facts for investors to verify
- Confirm the fiscal-period labeling: the filing is for the quarter ended April 30, 2011, notwithstanding the request’s “2010 Q1” metadata.
- Assess the sustainability of 11.1% comparable-store growth and the stated 3%–5% long-term comparable-sales assumption behind the income-growth target.
- Review the drivers and quality of cash generation, including inventory investment, tax-related cash-flow benefits and stock-compensation tax benefits.
- Monitor capital spending, store-opening returns, inventory levels, seasonal borrowing needs and compliance with the credit-facility covenant.
- Check final court approval and settlement terms for the California salon-employee litigation.