Business context and reporting period
Ulta Beauty, Inc. (then reporting as Ulta Salon, Cosmetics & Fragrance, Inc.) filed this Form 10-K for fiscal 2012, ended February 2, 2013. The filing is annual, not a report for 2011 Q4; fiscal 2012 comprised 53 weeks versus 52 weeks in fiscal 2011. Management said the extra week contributed approximately $40 million of sales.
Ulta operated 550 stores in 45 states and offered prestige, mass and salon beauty products, salon services and e-commerce through one reportable segment.
Financial performance and position
| Metric | Fiscal 2012 | Fiscal 2011 |
|---|---|---|
| Net sales | $2,220.3 million | $1,776.2 million |
| Gross profit / margin | $783.7 million / 35.3% | $616.8 million / 34.7% |
| Operating income / margin | $280.0 million / 12.6% | $196.2 million / 11.0% |
| Net income | $172.5 million | $120.3 million |
| Diluted EPS | $2.68 | $1.90 |
| Comparable-store sales growth | 8.8% | 10.9% |
| Operating cash flow | $239.0 million | $220.9 million |
| Capital expenditures | $188.6 million | $128.6 million |
| Cash at year-end | $320.5 million | $253.7 million |
| Working capital | $568.3 million | $415.4 million |
| Total debt | None outstanding | None outstanding |
Sales increased 25.0% year over year, reflecting 101 net new stores, comparable-store growth and the additional fiscal week. Comparable-store sales rose primarily on higher traffic, which increased 6.5%. Salon service revenue was $121.4 million, up 23.2%. Net cash provided by operations less capital expenditures was approximately $50.4 million.
Gross margin improved 60 basis points, with management attributing gains to fixed-store-cost leverage and improved merchandise margins. SG&A rose 19.0% in dollars but declined 110 basis points as a share of sales, to 22.0%. Pre-opening expense increased to $14.8 million as expansion accelerated. Effective tax rate was 38.3%, versus 38.5%.
Inventory increased to $361.1 million from $244.6 million; management cited new stores, added prestige boutiques and efforts to improve in-stock levels. The $200 million asset-based revolving facility matured in October 2016; no borrowings were outstanding, and the company reported covenant compliance. Operating lease obligations totaled $1.209 billion, including $155.5 million due within one year.
Material changes versus the prior comparable period
- Net income increased 43.5% and diluted EPS rose from $1.90 to $2.68.
- Comparable-store growth moderated to 8.8% from 10.9%, while management said store traffic remained the main driver.
- The store base expanded from 449 to 550; the company opened 102 stores, remodeled 21 and relocated 3.
- Capital expenditures increased by about $60 million, reflecting the larger store-opening program and other investment.
- The company paid a one-time $1.00-per-share special dividend, totaling $62.5 million.
Outlook, management commentary, risks and unusual items
Management’s long-term targets included annual comparable-store sales growth of 4% to 6% and store growth of 15% to 20%, with potential to reach approximately 1,200 U.S. stores. Management cautioned that fiscal 2012’s 8.8% comparable-store increase was not expected to continue. It planned to include e-commerce sales in comparable-store reporting beginning in fiscal 2013 and cited margin improvement through merchandise-margin expansion, supply-chain leverage and expense control. The filing does not provide a specific fiscal 2013 earnings or revenue forecast.
After year-end, CEO Carl Rubin resigned; board chair Dennis Eck became interim CEO while the company searched for a permanent replacement. Scott Settersten was appointed permanent CFO in March 2013. The board also authorized a discretionary share-repurchase program of up to $150 million; the filing does not establish that the full amount would be repurchased.
Principal risks include weaker consumer spending, intense competition, execution and returns from rapid store expansion, distribution and information-system capacity or outages, vendor concentration and supply constraints, and sensitivity to seasonal selling periods. The top ten vendors accounted for approximately 53% of sales. A California putative employment class action alleged wage, overtime, meal-period and rest-break violations; Ulta denied the allegations and was defending the case. Management said liabilities from legal proceedings were not expected to be material.
The auditors issued unqualified opinions on the financial statements and internal control over financial reporting. Management also reported effective disclosure controls and internal controls as of year-end.
Important facts for investors to verify
- Separate underlying sales and earnings trends from the effect of the 53rd week and the substantial contribution from non-comparable new stores.
- Track comparable-store sales, traffic, inventory growth and merchandise margin as the company absorbs its accelerated expansion.
- Assess whether store openings can sustain targeted returns alongside higher capital spending and $1.209 billion of operating lease commitments.
- Monitor CEO succession, execution of the repurchase authorization and any future dividend decisions.
- Review subsequent filings for developments in the California employment litigation, vendor concentration, and capacity of distribution and information systems.