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1. | Business and basis of presentation |
Ulta Salon, Cosmetics & Fragrance, Inc. was incorporated in the state of Delaware on January 9, 1990, to operate specialty retail stores selling cosmetics, fragrance, haircare and skincare products and related accessories and services. The stores also feature full-service salons. As of April 30, 2016, the Company operated 886 stores in 48 states and the District of Columbia, as shown in the table below. As used in these notes and throughout this Quarterly Report on Form 10-Q, all references to “we,” “us,” “our,” “Ulta,” “Ulta Beauty” or the “Company” refer to Ulta Salon, Cosmetics & Fragrance, Inc. and its consolidated subsidiaries.
Location |
Number of stores |
Location |
Number of stores |
|||||||
Alabama |
14 | Montana | 5 | |||||||
Alaska |
3 | Nebraska | 3 | |||||||
Arizona |
25 | Nevada | 11 | |||||||
Arkansas |
6 | New Hampshire | 6 | |||||||
California |
105 | New Jersey | 23 | |||||||
Colorado |
18 | New Mexico | 4 | |||||||
Connecticut |
10 | New York | 32 | |||||||
Delaware |
3 | North Carolina | 25 | |||||||
District of Columbia |
1 | North Dakota | 2 | |||||||
Florida |
62 | Ohio | 34 | |||||||
Georgia |
27 | Oklahoma | 12 | |||||||
Idaho |
6 | Oregon | 11 | |||||||
Illinois |
46 | Pennsylvania | 32 | |||||||
Indiana |
16 | Rhode Island | 2 | |||||||
Iowa |
8 | South Carolina | 15 | |||||||
Kansas |
7 | South Dakota | 2 | |||||||
Kentucky |
10 | Tennessee | 16 | |||||||
Louisiana |
16 | Texas | 85 | |||||||
Maine |
3 | Utah | 11 | |||||||
Maryland |
15 | Virginia | 24 | |||||||
Massachusetts |
13 | Washington | 20 | |||||||
Michigan |
39 | West Virginia | 6 | |||||||
Minnesota |
12 | Wisconsin | 16 | |||||||
Mississippi |
7 | Wyoming | 1 | |||||||
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Missouri |
16 | Total | 886 |
The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and the U.S. Securities and Exchange Commission’s Article 10, Regulation S-X. These consolidated financial statements were prepared on a consolidated basis to include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts, transactions and unrealized profit were eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary to fairly state the financial position and results of operations and cash flows for the interim periods presented.
The Company’s business is subject to seasonal fluctuation. Significant portions of the Company’s net sales and net income are realized during the fourth quarter of the fiscal year due to the holiday selling season. The results for the 13 weeks ended April 30, 2016 are not necessarily indicative of the results to be expected for the fiscal year ending January 28, 2017, or for any other future interim period or for any future year.
These interim consolidated financial statements and the related notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended January 30, 2016. All amounts are stated in thousands, with the exception of per share amounts and number of stores.
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2. | Summary of significant accounting policies |
Information regarding the Company’s significant accounting policies is contained in Note 2, “Summary of significant accounting policies,” to the financial statements in the Company’s Annual Report on Form 10-K for the year ended January 30, 2016. Presented below and in the following notes is supplemental information that should be read in conjunction with “Notes to Financial Statements” in the Annual Report.
Fiscal quarter
The Company’s quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31, and January 31. The Company’s first quarters in fiscal 2016 and 2015 ended on April 30, 2016 and May 2, 2015, respectively.
Share-based compensation
The Company measures share-based compensation cost on the grant date, based on the fair value of the award, and recognizes the expense on a straight-line method over the requisite service period for awards expected to vest. The Company estimated the grant date fair value of stock options using a Black-Scholes valuation model using the following weighted-average assumptions for the periods indicated:
13 Weeks Ended | ||||
April 30, 2016 | May 2, 2015 | |||
Volatility rate |
35.0% | 38.0% | ||
Average risk-free interest rate |
1.2% | 1.1% | ||
Average expected life (in years) |
3.5 | 3.6 | ||
Dividend yield |
None | None |
The Company granted 105 and 87 stock options during the 13 weeks ended April 30, 2016 and May 2, 2015, respectively. The compensation cost that has been charged against operating income for stock option grants was $1,983 and $2,031 for the 13 weeks ended April 30, 2016 and May 2, 2015, respectively. The weighted-average grant date fair value of these options was $52.55 and $44.84, respectively. At April 30, 2016, there was approximately $26,208 of unrecognized compensation expense related to unvested stock options.
The Company issued 41 and 42 restricted stock units during the 13 weeks ended April 30, 2016 and May 2, 2015, respectively. The compensation cost that has been charged against operating income for restricted stock units was $1,561 and $1,211 for the 13 weeks ended April 30, 2016 and May 2, 2015, respectively. At April 30, 2016, there was approximately $15,354 of unrecognized compensation expense related to restricted stock units.
The Company issued 24 and 21 performance-based restricted stock units during the 13 weeks ended April 30, 2016 and May 2, 2015, respectively. The compensation cost that has been charged against operating income for performance-based restricted stock units was $478 and $100 for the 13 weeks ended April 30, 2016 and May 2, 2015, respectively. At April 30, 2016, there was approximately $8,082 of unrecognized compensation expense related to performance-based restricted stock units.
Recent accounting pronouncements not yet adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification Topic 606 (ASC 606). The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that we will recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers (Topic 606), which delayed the effective date of ASU 2014-09 by one year. With the deferral, the revenue recognition standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods with early adoption permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods. This standard allows for either full retrospective or modified retrospective adoption. The Company is currently evaluating the application method and the impact of this new standard on its consolidated financial position, results of operations and cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases, Accounting Standards Codification Topic 842. This standard will change the way all leases of one year or more are treated. Under this guidance, lessees will be required to capitalize virtually all leases on the balance sheet as a right-of-use asset and an associated financing lease liability or capital lease liability. The right-of-use asset represents the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics, leases are classified as financing leases or operating leases. Financing lease liabilities, those that contain provisions similar to capitalized leases, are amortized like capital leases under current accounting, as amortization expense and interest expense in the statement of operations. Operating lease liabilities are amortized on a straight-line basis over the life of the lease as lease expense in the statement of operations. ASU 2016-02 is effective for public companies for annual reporting periods beginning after December 15, 2018, including interim reporting periods. The Company is currently evaluating the impact of this new standard on its consolidated financial position, results of operations and cash flows.
In March 2016, the FASB issued ASU 2016-04, Liabilities - Extinguishments of Liabilities (Subtopic 405-20) - Recognition of Breakage for Certain Prepaid Stored - Value Products. This update entitles a company to derecognize amounts related to expected breakage to the extent that it is probable a significant reversal of the recognized breakage amount will not subsequently occur. ASU 2016-04 is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial position, results of operations and cash flows.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers Topic 606 (Principal versus Agent Considerations). This update clarifies how to implement revenue recognition guidance related to determining whether an entity is a principal or an agent in a revenue transaction. The guidance requires an entity to determine whether the nature of its promise is to provide goods or services to its customer (the entity is a principal) or to arrange for goods or services to be provided to the customer by the other parties (the entity is an agent). This determination is based upon whether the entity controls the goods or the services before it is transferred to the customer. An entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The effective date and transition requirements are the same as the effective date and transition requirements in ASC 606.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). This guidance will change how companies account for certain aspects of share-based payments to employees. Companies will have to recognize all income tax effects of awards in the income statement when the awards vest or are settled, and additional paid-in capital pools will be eliminated. The guidance on employer’s accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and for forfeitures is changing, and two practical expedients for non-public entities have been added. ASU 2016-09 is effective for annual and interim reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial position, results of operations and cash flows.
In April 2016, the FASB issued ASU 2016-10, an amendment to ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. Additionally, this guidance expands related disclosure requirements. The amendment addressed the potential for diversity in practice at initial application. The effective date and transition requirements are the same as the effective date and transition requirements in ASC 606.
Recently adopted accounting pronouncements
In June 2014, the FASB issued ASU 2014-12, Compensation – Stock Compensation, Accounting Standards Codification Topic 718. This update clarifies the accounting for share-based awards with performance targets. ASU 2014-12 is effective for public companies for annual reporting periods beginning after December 15, 2015, including interim reporting periods. As permitted, the Company adopted this standard, prospectively, in its first quarter ended April 30, 2016 and its adoption had no impact on its consolidated financial position, results of operations and cash flows.
In April 2015, the FASB issued ASU 2015-05, Customers’ Accounting for Fees Paid in a Cloud Computing Arrangement. This standard provides guidance to determine whether a cloud-based computing arrangement includes a software license. If a cloud-based computing arrangement includes a software license, the customer must account for the software element of the arrangement consistent with the acquisition of other software licenses. Otherwise, the customer must account for the arrangement as a service contract. As permitted, the Company adopted this standard, prospectively, in its first quarter ended April 30, 2016 and its adoption had no impact on its consolidated financial position, results of operations and cash flows.
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3. | Commitments and contingencies |
Leases – The Company leases retail stores, distribution and office facilities, and certain equipment. Original non-cancelable lease terms range from three to ten years, and store leases generally contain renewal options for additional years. A number of the Company’s store leases provide for contingent rental payments based upon sales. Contingent rent amounts were insignificant in the 13 weeks ended April 30, 2016 and May 2, 2015. Total rent expense under operating leases was $49,159 and $44,558 for 13 weeks ended April 30, 2016 and May 2, 2015, respectively.
General litigation – The Company is involved in various legal proceedings that are incidental to the conduct of our business, including four putative employment class action lawsuits in California. In the opinion of management, the amount of any liability with respect to these proceedings, either individually or in the aggregate, will not have a material adverse effect on the Company’s results of operations, consolidated financial position or liquidity.
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4. | Notes payable |
In 2011, the Company entered into an Amended and Restated Loan and Security Agreement with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and a Lender thereunder, Wells Fargo Capital Finance LLC as a Lender, J.P. Morgan Securities LLC as a Lender, JP Morgan Chase Bank, N.A. as a Lender and PNC Bank, National Association, as a Lender, which has been amended multiple times since 2011 (as amended, the Loan Agreement). The Loan Agreement currently matures in December 2018, provides maximum revolving loans equal to the lesser of $200,000 or a percentage of eligible owned inventory, contains a $10,000 subfacility for letters of credit and allows the Company to increase the revolving facility by an additional $50,000, subject to consent by each lender and other conditions. The Loan Agreement contains a requirement to maintain a minimum amount of excess borrowing availability at all times. Substantially all of the Company’s assets are pledged as collateral for outstanding borrowings under the facility. Outstanding borrowings will bear interest at the prime rate or London Interbank Offered Rate plus 1.50% and the unused line fee is 0.20%.
As of April 30, 2016, January 30, 2016 and May 2, 2015, the Company had no borrowings outstanding under the credit facility and the Company was in compliance with all terms and covenants of the agreement.
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5. | Investments |
The Company’s short-term investments as of April 30, 2016, January 30, 2016 and May 2, 2015 consist of $130,000, $130,000 and $150,209, respectively, in certificates of deposit. These short-term investments are carried at cost, which approximates fair value and are recorded in the Consolidated Balance Sheets in Short-term investments. The contractual maturity of the Company’s investments was less than twelve months at April 30, 2016.
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6. | Fair Value Measurements |
The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximates their estimated fair values due to the short maturities of these instruments.
Fair value is measured using inputs from the three levels of the fair value hierarchy, which are described as follows:
• | Level 1 – observable inputs such as quoted prices for identical instruments in active markets. |
• | Level 2 – inputs other than quoted prices in active markets that are observable either directly or indirectly through corroboration with observable market data. |
• | Level 3 – unobservable inputs in which there is little or no market data, which would require the Company to develop its own assumptions. |
As of April 30, 2016, January 30, 2016 and May 2, 2015, the Company held financial liabilities of $10,191, $7,491 and $8,269, respectively, related to its non-qualified deferred compensation plan. The liabilities have been categorized as Level 2 as they are based on third-party reported net asset values, which are based primarily on quoted market prices of underlying assets of the funds within the plan.
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Fiscal quarter
The Company’s quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31, and January 31. The Company’s first quarters in fiscal 2016 and 2015 ended on April 30, 2016 and May 2, 2015, respectively.
Share-based compensation
The Company measures share-based compensation cost on the grant date, based on the fair value of the award, and recognizes the expense on a straight-line method over the requisite service period for awards expected to vest. The Company estimated the grant date fair value of stock options using a Black-Scholes valuation model using the following weighted-average assumptions for the periods indicated:
13 Weeks Ended | ||||
April 30, 2016 | May 2, 2015 | |||
Volatility rate |
35.0% | 38.0% | ||
Average risk-free interest rate |
1.2% | 1.1% | ||
Average expected life (in years) |
3.5 | 3.6 | ||
Dividend yield |
None | None |
The Company granted 105 and 87 stock options during the 13 weeks ended April 30, 2016 and May 2, 2015, respectively. The compensation cost that has been charged against operating income for stock option grants was $1,983 and $2,031 for the 13 weeks ended April 30, 2016 and May 2, 2015, respectively. The weighted-average grant date fair value of these options was $52.55 and $44.84, respectively. At April 30, 2016, there was approximately $26,208 of unrecognized compensation expense related to unvested stock options.
The Company issued 41 and 42 restricted stock units during the 13 weeks ended April 30, 2016 and May 2, 2015, respectively. The compensation cost that has been charged against operating income for restricted stock units was $1,561 and $1,211 for the 13 weeks ended April 30, 2016 and May 2, 2015, respectively. At April 30, 2016, there was approximately $15,354 of unrecognized compensation expense related to restricted stock units.
The Company issued 24 and 21 performance-based restricted stock units during the 13 weeks ended April 30, 2016 and May 2, 2015, respectively. The compensation cost that has been charged against operating income for performance-based restricted stock units was $478 and $100 for the 13 weeks ended April 30, 2016 and May 2, 2015, respectively. At April 30, 2016, there was approximately $8,082 of unrecognized compensation expense related to performance-based restricted stock units.
Recent accounting pronouncements not yet adopted
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification Topic 606 (ASC 606). The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that we will recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers (Topic 606), which delayed the effective date of ASU 2014-09 by one year. With the deferral, the revenue recognition standard is effective for annual reporting periods beginning after December 15, 2017, including interim reporting periods with early adoption permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods. This standard allows for either full retrospective or modified retrospective adoption. The Company is currently evaluating the application method and the impact of this new standard on its consolidated financial position, results of operations and cash flows.
In February 2016, the FASB issued ASU 2016-02, Leases, Accounting Standards Codification Topic 842. This standard will change the way all leases of one year or more are treated. Under this guidance, lessees will be required to capitalize virtually all leases on the balance sheet as a right-of-use asset and an associated financing lease liability or capital lease liability. The right-of-use asset represents the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics, leases are classified as financing leases or operating leases. Financing lease liabilities, those that contain provisions similar to capitalized leases, are amortized like capital leases under current accounting, as amortization expense and interest expense in the statement of operations. Operating lease liabilities are amortized on a straight-line basis over the life of the lease as lease expense in the statement of operations. ASU 2016-02 is effective for public companies for annual reporting periods beginning after December 15, 2018, including interim reporting periods. The Company is currently evaluating the impact of this new standard on its consolidated financial position, results of operations and cash flows.
In March 2016, the FASB issued ASU 2016-04, Liabilities - Extinguishments of Liabilities (Subtopic 405-20) - Recognition of Breakage for Certain Prepaid Stored - Value Products. This update entitles a company to derecognize amounts related to expected breakage to the extent that it is probable a significant reversal of the recognized breakage amount will not subsequently occur. ASU 2016-04 is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial position, results of operations and cash flows.
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers Topic 606 (Principal versus Agent Considerations). This update clarifies how to implement revenue recognition guidance related to determining whether an entity is a principal or an agent in a revenue transaction. The guidance requires an entity to determine whether the nature of its promise is to provide goods or services to its customer (the entity is a principal) or to arrange for goods or services to be provided to the customer by the other parties (the entity is an agent). This determination is based upon whether the entity controls the goods or the services before it is transferred to the customer. An entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The effective date and transition requirements are the same as the effective date and transition requirements in ASC 606.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (Topic 718). This guidance will change how companies account for certain aspects of share-based payments to employees. Companies will have to recognize all income tax effects of awards in the income statement when the awards vest or are settled, and additional paid-in capital pools will be eliminated. The guidance on employer’s accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and for forfeitures is changing, and two practical expedients for non-public entities have been added. ASU 2016-09 is effective for annual and interim reporting periods beginning after December 15, 2016, and early adoption is permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial position, results of operations and cash flows.
In April 2016, the FASB issued ASU 2016-10, an amendment to ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This guidance provides a comprehensive new revenue recognition model that requires a company to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. Additionally, this guidance expands related disclosure requirements. The amendment addressed the potential for diversity in practice at initial application. The effective date and transition requirements are the same as the effective date and transition requirements in ASC 606.
Recently adopted accounting pronouncements
In June 2014, the FASB issued ASU 2014-12, Compensation – Stock Compensation, Accounting Standards Codification Topic 718. This update clarifies the accounting for share-based awards with performance targets. ASU 2014-12 is effective for public companies for annual reporting periods beginning after December 15, 2015, including interim reporting periods. As permitted, the Company adopted this standard, prospectively, in its first quarter ended April 30, 2016 and its adoption had no impact on its consolidated financial position, results of operations and cash flows.
In April 2015, the FASB issued ASU 2015-05, Customers’ Accounting for Fees Paid in a Cloud Computing Arrangement. This standard provides guidance to determine whether a cloud-based computing arrangement includes a software license. If a cloud-based computing arrangement includes a software license, the customer must account for the software element of the arrangement consistent with the acquisition of other software licenses. Otherwise, the customer must account for the arrangement as a service contract. As permitted, the Company adopted this standard, prospectively, in its first quarter ended April 30, 2016 and its adoption had no impact on its consolidated financial position, results of operations and cash flows.
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As of April 30, 2016, the Company operated 886 stores in 48 states and the District of Columbia, as shown in the table below. As used in these notes and throughout this Quarterly Report on Form 10-Q, all references to “we,” “us,” “our,” “Ulta,” “Ulta Beauty” or the “Company” refer to Ulta Salon, Cosmetics & Fragrance, Inc. and its consolidated subsidiaries.
Location |
Number of stores |
Location |
Number of stores |
|||||||
Alabama |
14 | Montana | 5 | |||||||
Alaska |
3 | Nebraska | 3 | |||||||
Arizona |
25 | Nevada | 11 | |||||||
Arkansas |
6 | New Hampshire | 6 | |||||||
California |
105 | New Jersey | 23 | |||||||
Colorado |
18 | New Mexico | 4 | |||||||
Connecticut |
10 | New York | 32 | |||||||
Delaware |
3 | North Carolina | 25 | |||||||
District of Columbia |
1 | North Dakota | 2 | |||||||
Florida |
62 | Ohio | 34 | |||||||
Georgia |
27 | Oklahoma | 12 | |||||||
Idaho |
6 | Oregon | 11 | |||||||
Illinois |
46 | Pennsylvania | 32 | |||||||
Indiana |
16 | Rhode Island | 2 | |||||||
Iowa |
8 | South Carolina | 15 | |||||||
Kansas |
7 | South Dakota | 2 | |||||||
Kentucky |
10 | Tennessee | 16 | |||||||
Louisiana |
16 | Texas | 85 | |||||||
Maine |
3 | Utah | 11 | |||||||
Maryland |
15 | Virginia | 24 | |||||||
Massachusetts |
13 | Washington | 20 | |||||||
Michigan |
39 | West Virginia | 6 | |||||||
Minnesota |
12 | Wisconsin | 16 | |||||||
Mississippi |
7 | Wyoming | 1 | |||||||
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Missouri |
16 | Total | 886 |
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The Company estimated the grant date fair value of stock options using a Black-Scholes valuation model using the following weighted-average assumptions for the periods indicated:
13 Weeks Ended | ||||
April 30, 2016 | May 2, 2015 | |||
Volatility rate |
35.0% | 38.0% | ||
Average risk-free interest rate |
1.2% | 1.1% | ||
Average expected life (in years) |
3.5 | 3.6 | ||
Dividend yield |
None | None |
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