Ulta Beauty, Inc. — Form 10-Q Summary
Period clarification: The supplied filing is for the 13 and 39 weeks ended November 2, 2019 (fiscal 2019 third quarter), not 2018 Q3 as stated in the request metadata. Comparisons are with the corresponding 2018 periods. Dollar amounts below are in millions unless otherwise noted.
Business context and reporting period
Ulta Beauty operated 1,241 stores across 50 states at quarter-end, versus 1,163 a year earlier. Its single reportable segment includes retail stores, salon services, and e-commerce. Sales are seasonal, with a significant share of annual sales and profit typically generated in the fourth quarter holiday season.
Financial performance and liquidity
| Metric | 13 weeks ended Nov. 2, 2019 | Year-over-year change | 39 weeks ended Nov. 2, 2019 | Year-over-year change |
|---|---|---|---|---|
| Net sales | $1,682.5 | +7.9% | $5,092.2 | +10.9% |
| Comparable sales | +3.2% | vs. +7.8% | +5.4% | vs. +7.5% |
| Gross profit | $623.4 | +8.9% | $1,874.2 | +12.3% |
| Gross margin | 37.1% | +40 bps | 36.8% | +50 bps |
| Operating income | $167.8 | -$1.4 | $613.3 | +$40.5 |
| Operating margin | 10.0% | vs. 10.8% | 12.0% | vs. 12.5% |
| Net income | $129.7 | -$1.4 | $483.2 | +8.9% |
| Diluted EPS | $2.25 | vs. $2.18 | $8.27 | vs. $7.35 |
Quarterly net income declined despite higher sales and gross profit, as SG&A rose 13.6% to $449.2 million and increased from 25.3% to 26.7% of sales. For the 39-week period, SG&A rose 15.5% to $1,245.2 million, reaching 24.5% of sales versus 23.5%. Management attributed the expense pressure mainly to corporate overhead investments in growth initiatives and store labor.
Cash flow and balance sheet: Operating cash flow for 39 weeks was $557.5 million, versus $542.2 million. Capital expenditures were $241.1 million. Investing cash outflow was $284.9 million and financing cash outflow was $473.0 million, including $506.9 million of share repurchases. Cash declined by $200.4 million from fiscal year-end to $208.8 million. Inventory was $1,616.9 million, up 8.9% year over year; average inventory per store increased 2.1%.
Ulta had no borrowings under its revolving credit facility and reported compliance with its covenants. The facility provides revolving capacity up to the lesser of $400 million or the borrowing base. Current assets were $2,097.5 million and current liabilities were $1,256.9 million. The company reported $1,929.4 million of operating lease liabilities; these are lease obligations, not outstanding credit-facility borrowings.
Material changes versus the prior comparable period
- Third-quarter comparable-sales growth slowed to 3.2% from 7.8%; transactions rose 2.3% and average ticket rose 0.9% in the quarter.
- For the first 39 weeks, comparable-sales growth was 5.4%, versus 7.5% a year earlier; transactions increased 4.0% and average ticket 1.4%.
- Gross margin improved, supported by merchandise margin and fixed-cost leverage, but higher SG&A reduced operating and net income margins in the quarter.
- The company adopted ASC 842 lease accounting in February 2019, recognizing operating lease assets and liabilities. Comparative prior-year balance sheets were not recast.
- Share repurchases totaled $506.9 million for the 39 weeks, compared with $379.4 million in the prior-year period.
Outlook, management commentary, risks, and unusual items
- No specific full-year revenue or earnings guidance is provided in the supplied filing. Management said available cash, operating cash flow, and the credit facility are expected to cover working capital, capital expenditures, commitments, and other liquidity needs for at least 12 months.
- Management described the U.S. cosmetics market as challenging, citing mid-single-digit category declines through the first nine months of 2019 and limited incremental product innovation. It said the company continued to gain market share across categories.
- Long-term priorities include comparable-sales growth, new-store expansion, omnichannel capabilities, and operating efficiencies. The company described a long-term ambition to support a 1,500–1,700-store U.S. chain; this is not presented as near-term guidance.
- Risks highlighted include consumer spending and competition, execution of growth and cost-efficiency plans, distribution and fulfillment capacity, cybersecurity and information-system disruption, changing beauty trends, product costs, store development issues, and natural disasters. The company reported no material changes to previously disclosed risk factors.
- Management said pending legal proceedings are not expected to have a material adverse effect. The filing also disclosed $186.6 million of legally binding minimum lease payments for leases signed but not yet commenced.
- Effective tax rate was 23.1% for the quarter and 21.8% year to date, with the year-to-date decline attributed primarily to share-based compensation tax accounting and federal tax credits.
Most important facts for investors to verify
- Confirm the period: this is fiscal 2019 Q3, ended November 2, 2019, rather than 2018 Q3.
- Track whether comparable-sales growth stabilizes after slowing substantially from the prior-year quarter, particularly amid weakness in the cosmetics category.
- Assess whether SG&A growth and growth-related investments can be offset by sales growth and operating leverage.
- Monitor holiday-season inventory, cash generation, and liquidity; the filing notes that fourth-quarter results are seasonally significant.
- Evaluate the effects of continued buybacks on cash balances and share count, alongside planned capital investment and lease commitments.