ULTA BEAUTY, INC., 10-K filed on 3/30/2016
Annual Report
Document and Entity Information (USD $)
12 Months Ended
Jan. 30, 2016
Mar. 24, 2016
Jul. 31, 2015
Document And Entity Information [Abstract]
 
 
 
Document Type
10-K 
 
 
Amendment Flag
false 
 
 
Document Period End Date
Jan. 30, 2016 
 
 
Document Fiscal Year Focus
2015 
 
 
Document Fiscal Period Focus
FY 
 
 
Trading Symbol
ULTA 
 
 
Entity Registrant Name
Ulta Salon, Cosmetics & Fragrance, Inc. 
 
 
Entity Central Index Key
0001403568 
 
 
Current Fiscal Year End Date
--01-30 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Common Stock, Shares Outstanding
 
62,618,206 
 
Entity Public Float
 
 
$ 9,282,171,000 
Consolidated Balance Sheets (USD $)
In Thousands, unless otherwise specified
Jan. 30, 2016
Jan. 31, 2015
Current assets:
 
 
Cash and cash equivalents
$ 345,840 
$ 389,149 
Short-term investments
130,000 
150,209 
Receivables, net
64,992 
52,440 
Merchandise inventories, net
761,793 
581,229 
Prepaid expenses and other current assets
72,548 
66,548 
Deferred income taxes
 
20,780 
Total current assets
1,375,173 
1,260,355 
Property and equipment, net
847,600 
717,159 
Deferred compensation plan assets
8,145 
5,656 
Total assets
2,230,918 
1,983,170 
Current liabilities:
 
 
Accounts payable
196,174 
190,778 
Accrued liabilities
187,351 
149,412 
Accrued income taxes
12,702 
19,404 
Total current liabilities
396,227 
359,594 
Deferred rent
321,789 
294,127 
Deferred income taxes
59,527 
74,498 
Other long-term liabilities
10,489 
7,442 
Total liabilities
788,032 
735,661 
Commitments and contingencies (note 4)
   
   
Stockholders' equity:
 
 
Common stock, $.01 par value, 400,000 shares authorized; 64,131 and 64,762 shares issued; 63,540 and 64,184 shares outstanding; at January 30, 2016, and January 31, 2015, respectively
641 
647 
Treasury stock-common, at cost
(11,685)
(9,713)
Additional paid-in capital
621,715 
576,982 
Retained earnings
832,215 
679,593 
Total stockholders' equity
1,442,886 
1,247,509 
Total liabilities and stockholders' equity
$ 2,230,918 
$ 1,983,170 
Consolidated Balance Sheets (Parenthetical) (USD $)
Jan. 30, 2016
Jan. 31, 2015
Statement of Financial Position [Abstract]
 
 
Common stock, par value
$ 0.01 
$ 0.01 
Common stock, shares authorized
400,000,000 
400,000,000 
Common stock, shares issued
64,131,000 
64,762,000 
Common stock, shares outstanding
63,540,000 
64,184,000 
Consolidated Statements of Income (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 12 Months Ended
Jan. 30, 2016
Oct. 31, 2015
Aug. 1, 2015
May 2, 2015
Jan. 31, 2015
Nov. 1, 2014
Aug. 2, 2014
May 3, 2014
Jan. 30, 2016
Jan. 31, 2015
Feb. 1, 2014
Income Statement [Abstract]
 
 
 
 
 
 
 
 
 
 
 
Net sales
$ 1,268,295 
$ 910,700 
$ 876,999 
$ 868,122 
$ 1,047,641 
$ 745,722 
$ 734,236 
$ 713,770 
$ 3,924,116 
$ 3,241,369 
$ 2,670,573 
Cost of sales
829,259 
575,062 
570,524 
564,938 
697,904 
463,967 
474,894 
467,817 
2,539,783 
2,104,582 
1,729,325 
Gross profit
439,036 
335,638 
306,475 
303,184 
349,737 
281,755 
259,342 
245,953 
1,384,333 
1,136,787 
941,248 
Selling, general and administrative expenses
268,169 
218,763 
183,937 
192,485 
210,702 
181,093 
157,768 
162,443 
863,354 
712,006 
596,390 
Pre-opening expenses
1,381 
6,106 
4,078 
3,117 
1,568 
6,574 
3,595 
2,629 
14,682 
14,366 
17,270 
Operating income
169,486 
110,769 
118,460 
107,582 
137,467 
94,088 
97,979 
80,881 
506,297 
410,415 
327,588 
Interest income, net
(273)
(283)
(276)
(311)
(231)
(254)
(209)
(200)
(1,143)
(894)
(118)
Income before income taxes
169,759 
111,052 
118,736 
107,893 
137,698 
94,342 
98,188 
81,081 
507,440 
411,309 
327,706 
Income tax expense
61,936 
39,982 
44,567 
40,947 
50,434 
35,218 
37,394 
31,128 
187,432 
154,174 
124,857 
Net income
$ 107,823 
$ 71,070 
$ 74,169 
$ 66,946 
$ 87,264 
$ 59,124 
$ 60,794 
$ 49,953 
$ 320,008 
$ 257,135 
$ 202,849 
Net income per common share:
 
 
 
 
 
 
 
 
 
 
 
Basic
$ 1.69 
$ 1.11 
$ 1.16 
$ 1.04 
$ 1.36 
$ 0.92 
$ 0.94 
$ 0.78 
$ 5.00 
$ 4.00 
$ 3.17 
Diluted
$ 1.69 
$ 1.11 
$ 1.15 
$ 1.04 
$ 1.35 
$ 0.91 
$ 0.94 
$ 0.77 
$ 4.98 
$ 3.98 
$ 3.15 
Weighted average common shares outstanding:
 
 
 
 
 
 
 
 
 
 
 
Basic
 
 
 
 
 
 
 
 
63,949 
64,335 
63,992 
Diluted
 
 
 
 
 
 
 
 
64,275 
64,651 
64,461 
Consolidated Statements of Cash Flows (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Jan. 30, 2016
Jan. 31, 2015
Feb. 1, 2014
Operating activities
 
 
 
Net income
$ 320,008 
$ 257,135 
$ 202,849 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
165,049 
131,764 
106,283 
Deferred income taxes
5,809 
9,246 
3,868 
Non-cash stock compensation charges
15,594 
14,923 
16,003 
Excess tax benefits from stock-based compensation
(9,497)
(3,229)
(13,378)
Loss on disposal of property and equipment
3,690 
4,468 
3,902 
Change in operating assets and liabilities:
 
 
 
Receivables
(12,552)
(5,391)
(5,534)
Merchandise inventories
(180,564)
(123,296)
(96,808)
Prepaid expenses and other current assets
(6,000)
(10,555)
(5,541)
Income taxes
2,795 
7,284 
18,673 
Accounts payable
5,396 
42,496 
29,396 
Accrued liabilities
37,926 
37,644 
14,215 
Deferred rent
27,662 
32,497 
53,627 
Other assets and liabilities
558 
1,606 
170 
Net cash provided by operating activities
375,874 
396,592 
327,725 
Investing activities
 
 
 
Purchases of short-term investments
(130,000)
(200,209)
 
Proceeds from short-term investments
150,209 
50,000 
 
Purchases of property and equipment
(299,167)
(249,067)
(226,024)
Net cash used in investing activities
(278,958)
(399,276)
(226,024)
Financing activities
 
 
 
Repurchase of common shares
(167,396)
(39,923)
(37,337)
Stock options exercised
19,646 
10,639 
21,890 
Excess tax benefits from stock-based compensation
9,497 
3,229 
13,378 
Purchase of treasury shares
(1,972)
(1,588)
(631)
Net cash used in financing activities
(140,225)
(27,643)
(2,700)
Net (decrease) increase in cash and cash equivalents
(43,309)
(30,327)
99,001 
Cash and cash equivalents at beginning of year
389,149 
419,476 
320,475 
Cash and cash equivalents at end of year
345,840 
389,149 
419,476 
Supplemental cash flow information
 
 
 
Cash paid for income taxes (net of refunds)
179,248 
137,180 
101,598 
Noncash investing activities:
 
 
 
Change in property and equipment included in accrued liabilities
$ 13 
$ 8,588 
$ (3,161)
Consolidated Statements of Stockholders' Equity (USD $)
In Thousands
Total
Common Stock [Member]
Treasury - Common Stock [Member]
Additional Paid-In Capital [Member]
Retained Earnings [Member]
Balance at Feb. 02, 2013
$ 786,942 
$ 645 
$ (7,494)
$ 496,930 
$ 296,861 
Balance, Shares at Feb. 02, 2013
 
 
(556)
 
 
Balance, Shares at Feb. 02, 2013
 
64,565 
 
 
 
Stock options exercised and other awards
21,890 
 
21,883 
 
Stock options exercised and other awards, Shares
 
729 
 
 
 
Purchase of treasury shares
(631)
 
(631)
 
 
Purchase of treasury shares, Shares
 
 
(6)
 
 
Net income
202,849 
 
 
 
202,849 
Excess tax benefits from stock-based compensation
13,378 
 
 
13,378 
 
Stock compensation charge
16,003 
 
 
16,003 
 
Repurchase of common shares
(37,337)
(5)
 
 
(37,332)
Repurchase of common shares, Shares
 
(501)
 
 
 
Balance at Feb. 01, 2014
1,003,094 
647 
(8,125)
548,194 
462,378 
Balance, Shares at Feb. 01, 2014
 
 
(562)
 
 
Balance, Shares at Feb. 01, 2014
 
64,793 
 
 
 
Stock options exercised and other awards
10,639 
 
10,636 
 
Stock options exercised and other awards, Shares
 
290 
 
 
 
Purchase of treasury shares
(1,588)
 
(1,588)
 
 
Purchase of treasury shares, Shares
 
 
(16)
 
 
Net income
257,135 
 
 
 
257,135 
Excess tax benefits from stock-based compensation
3,229 
 
 
3,229 
 
Stock compensation charge
14,923 
 
 
14,923 
 
Repurchase of common shares
(39,923)
(3)
 
 
(39,920)
Repurchase of common shares, Shares
 
(321)
 
 
 
Balance at Jan. 31, 2015
1,247,509 
647 
(9,713)
576,982 
679,593 
Balance, Shares at Jan. 31, 2015
 
 
(578)
 
 
Balance, Shares at Jan. 31, 2015
 
64,762 
 
 
 
Stock options exercised and other awards
19,646 
 
19,642 
 
Stock options exercised and other awards, Shares
 
403 
 
 
 
Purchase of treasury shares
(1,972)
 
(1,972)
 
 
Purchase of treasury shares, Shares
 
 
(13)
 
 
Net income
320,008 
 
 
 
320,008 
Excess tax benefits from stock-based compensation
9,497 
 
 
9,497 
 
Stock compensation charge
15,594 
 
 
15,594 
 
Repurchase of common shares
(167,396)
(10)
 
 
(167,386)
Repurchase of common shares, Shares
 
(1,034)
 
 
 
Balance at Jan. 30, 2016
$ 1,442,886 
$ 641 
$ (11,685)
$ 621,715 
$ 832,215 
Balance, Shares at Jan. 30, 2016
 
 
(591)
 
 
Balance, Shares at Jan. 30, 2016
 
64,131 
 
 
 
Business and basis of presentation
Business and basis of presentation

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 January 30, 2016, the Company operated 874 stores in 48 states. As used in these notes and throughout this Annual Report on Form 10-K, all references to “we,” “us,” “our,” “Ulta,” “Ulta Beauty” or the “Company,” refer to Ulta Salon, Cosmetics & Fragrance, Inc. and its consolidated subsidiary, Ulta Inc. All amounts are stated in thousands, with the exception of per share amounts and number of stores.

The Company has determined its operating segments on the same basis that it uses to internally evaluate performance. The Company has combined its three operating segments, retail stores, salon services and e-commerce, into one reportable segment because they have a similar class of consumer, economic characteristics, nature of products and distribution methods.

Summary of significant accounting policies
Summary of significant accounting policies

2.    Summary of significant accounting policies

Fiscal year

The Company’s fiscal year is the 52 or 53 weeks ending on the Saturday closest to January 31. The Company’s fiscal years ended January 30, 2016 (fiscal 2015), January 31, 2015 (fiscal 2014) and February 1, 2014 (fiscal 2013) were 52 week years.

Consolidation

The Company’s consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts, transactions and unrealized profit were eliminated in consolidation.

Use of estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the accounting period. Actual results could differ from those estimates.

Cash and cash equivalents

Cash and cash equivalents include cash on hand and highly liquid investments with maturities of three months or less from the date of purchase. Cash equivalents include amounts due from third-party credit card receivables because such amounts generally convert to cash within one to three days with little or no default risk.

Short-term investments

The Company determines the balance sheet classification of its investments at the time of purchase and evaluates the classification at each balance sheet date. Money market funds, certificates of deposit and time deposits with maturities of greater than three months but no more than twelve months are carried at cost, which approximates fair value and are recorded in the Consolidated Balance Sheets in Short-term investments (see Note 9, “Investments”).

Receivables

Receivables consist principally of amounts receivable from vendors and landlord construction allowances earned but not yet received. These receivables are computed based on provisions of the vendor and lease agreements in place and the Company’s completed performance. The Company’s vendors are primarily U.S.-based producers of consumer products and real estate developers and landlords. The Company does not require collateral on its receivables and does not accrue interest. Credit risk with respect to receivables is limited due to the diversity of vendors and landlords comprising the Company’s vendor base. The Company performs ongoing credit evaluations of its vendors and evaluates the collectability of its receivables based on the length of time the receivable is past due and historical experience. The receivable for vendor allowances was $46,932 and $39,629 as of January 30, 2016 and January 31, 2015, respectively and the receivable for landlord allowances was $10,250 and $8,357 as of January 30, 2016 and January 31, 2015, respectively. The allowance for doubtful receivables totaled $1,112 and $1,346 as of January 30, 2016 and January 31, 2015, respectively.

Merchandise inventories

Merchandise inventories are stated at the lower of cost or market. Cost is determined using the weighted-average cost method and includes costs incurred to purchase and distribute goods. Inventory cost also includes vendor allowances related to co-op advertising, markdowns, and volume discounts. The Company maintains reserves for lower of cost or market and shrinkage.

Fair value of financial instruments

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. The Company had no outstanding debt as of January 30, 2016 and January 31, 2015.

Property and equipment

The Company’s property and equipment are stated at cost net of accumulated depreciation and amortization. Maintenance and repairs are charged to operating expense as incurred. The Company’s assets are depreciated or amortized using the straight-line method, over the shorter of their estimated useful lives or the expected lease term as follows:

 

Equipment and fixtures

     3 to 10 years   

Leasehold improvements

     10 years   

Electronic equipment and software

     3 to 5 years   

The Company capitalizes costs incurred during the application development stage in developing or purchasing internal use software. These costs are amortized over the estimated useful life of the software.

The Company periodically evaluates whether changes have occurred that would require revision of the remaining useful life of equipment and leasehold improvements or render them not recoverable. If such circumstances arise, the Company uses an estimate of the undiscounted sum of expected future operating cash flows during their holding period to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows are less than the carrying amount of the assets, the resulting impairment charges to be recorded are calculated based on the excess of the carrying value of the assets over the fair value of such assets, with the fair value determined based on an estimate of discounted future cash flows. No significant impairments charges have been recognized in fiscal 2015, 2014 or 2013.

Customer loyalty program

In early fiscal 2014, we completed the conversion of all our loyalty members to Ultamate Rewards, a points-based program. Ultamate Rewards enables customers to earn points based on their purchases. Points earned by members are valid for at least one year and may be redeemed on any product we sell. Prior to this conversion, we ran both Ultamate Rewards and our prior program, The Club at Ulta. The Club at Ulta was a certificate program offering customers reward certificates for free beauty products based on the level of purchases. The Company accrues the cost of anticipated redemptions related to these programs at the time of the initial purchase based on historical experience. The accrued liability related to these loyalty programs at January 30, 2016 and January 31, 2015 was $20,026 and $15,032 respectively. The cost of these programs, which was $54,464, $42,096 and $27,588 in fiscal 2015, 2014 and 2013, respectively, is included in cost of sales in the statements of income.

 

Deferred rent

Many of the Company’s operating leases contain predetermined fixed increases of the minimum rental rate during the lease. For these leases, the Company recognizes the related rental expense on a straight-line basis over the expected lease term and records the difference between the amounts charged to expense and the rent paid as deferred rent. The lease term commences on the earlier of the date when the Company becomes legally obligated for rent payments or the date the Company takes possession of the leased space.

As part of many lease agreements, the Company receives construction allowances from landlords for tenant improvements. These leasehold improvements made by the Company are capitalized and amortized over the shorter of the lease term or 10 years. The construction allowances are recorded as deferred rent and amortized on a straight-line basis over the lease term as a reduction of rent expense.

Revenue recognition

Net sales include merchandise sales, salon service revenue and e-commerce revenue. Revenue from merchandise sales at stores is recognized at the time of sale, net of estimated returns. The Company provides refunds for product returns within 60 days from the original purchase date. Salon revenue is recognized when services are rendered. Salon service revenue amounted to $209,249, $175,533 and $145,815 for fiscal 2015, 2014 and 2013, respectively. Company coupons and other incentives are recorded as a reduction of net sales. State sales taxes are presented on a net basis as the Company considers itself a pass-through conduit for collecting and remitting state sales tax. E-commerce sales are recorded based on delivery of merchandise to the customer. E-commerce revenue amounted to $221,077, $149,857 and $95,809 for fiscal 2015, 2014 and 2013, respectively.

The Company’s gift card sales are deferred and recognized in net sales when the gift card is redeemed for product or services. The Company’s gift cards do not expire and do not include service fees that decrease customer balances. The Company has maintained Company-specific, historical data related to its large pool of similar gift card transactions sold and redeemed over a significant time frame. The Company recognizes gift card breakage to the extent there is no requirement for remitting balances to governmental agencies under unclaimed property laws. Gift card breakage is recognized over the same performance period, and in the same proportion, that the Company’s data has demonstrated that gift cards are redeemed. Gift card breakage was $3,728 and $2,720 at January 30, 2016 and January 31, 2015, respectively, and is recorded as a decrease in selling, general and administrative expense in the statements of income. Deferred gift card revenue was $31,830 and $22,681 at January 30, 2016 and January 31, 2015, respectively, and is included in accrued liabilities – accrued customer liabilities (Note 5).

Vendor allowances

The Company receives allowances from vendors in the normal course of business including advertising and markdown allowances, purchase volume discounts and rebates, and reimbursement for defective merchandise, and certain selling and display expenses. Substantially all vendor allowances are recorded as a reduction of the vendor’s product cost and are recognized in cost of sales as the product is sold.

Advertising

Advertising expense consists principally of paper, print and distribution costs related to the Company’s advertising circulars, as well as television, radio and digital advertising. The Company expenses the production and distribution costs related to its advertising circulars in the period the related promotional event occurs. Total advertising costs, exclusive of incentives from vendors and start-up advertising expense, amounted to $187,158, $157,847 and $140,774 for fiscal 2015, 2014 and 2013, respectively. Advertising expense as a percentage of sales was 4.8%, 4.9% and 5.3% for fiscal 2015, 2014 and 2013, respectively. Prepaid advertising costs included in prepaid expenses and other current assets were $6,413 and $8,899 as of January 30, 2016 and January 31, 2015, respectively.

Pre-opening expenses

Non-capital expenditures incurred prior to the grand opening of a new, remodeled or relocated store are charged against earnings as incurred.

 

Cost of sales

Cost of sales includes the cost of merchandise sold including a majority of vendor allowances, which are treated as a reduction of merchandise costs; warehousing and distribution costs including labor and related benefits, freight, rent, depreciation and amortization, real estate taxes, utilities, and insurance; shipping and handling costs; store occupancy costs including rent, depreciation and amortization, real estate taxes, utilities, repairs and maintenance, insurance, licenses, and cleaning expenses; salon payroll and benefits; customer loyalty program expense; and shrink and inventory valuation reserves.

Selling, general and administrative expenses

Selling, general and administrative expenses includes payroll, bonus, and benefit costs for retail and corporate employees; advertising and marketing costs; occupancy costs related to our corporate office facilities; public company expense including Sarbanes-Oxley Act of 2002 compliance expenses; stock-based compensation expense; depreciation and amortization for all assets except those related to our retail and warehouse operations, which are included in cost of sales; and legal, finance, information systems and other corporate overhead costs.

Income taxes

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. The amounts reported were derived using the enacted tax rates in effect for the year the differences are expected to reverse.

Income tax benefits related to uncertain tax positions are recognized only when it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. Penalties and interest related to unrecognized tax positions are recorded in income tax expense.

Share-based compensation

Share-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized on a straight-line method over the requisite service period for awards expected to vest. The Company recorded stock compensation expense of $15,594, $14,923 and $16,003 for fiscal 2015, 2014 and 2013, respectively (see Note 10, “Share-based awards”).

Insurance expense

The Company has insurance programs with third party insurers for employee health, workers compensation and general liability, among others, to limit the Company’s liability exposure. The insurance programs are premium based and include retentions, deductibles and stop loss coverage. Current stop loss coverage per claim is $200 for employee health claims, $100 for general liability claims and $250 for workers compensation claims. The Company makes collateral and premium payments during the plan year and accrues expenses in the event additional premium is due from the Company based on actual claim results.

Net income per common share

Basic net income per common share is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share includes dilutive common stock equivalents, using the treasury stock method (see Note 11, “Net income per common share”).

Recent accounting pronouncements not yet adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification Topic 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 June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation, Accounting Standards Codification Topic 718. This update clarifies the accounting for share-based awards with performance targets. The standard will take effect for public companies for annual reporting periods beginning after December 15, 2015, including interim reporting periods. The Company will not be affected by this guidance as the Company currently accounts for these awards in a manner consistent with the new guidance.

In April 2015, the FASB issued ASU No. 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. The standard will take effect for public companies for annual reporting periods beginning after December 15, 2015, including interim reporting periods. Early adoption is permitted. The Company does not believe that the adoption of this ASU will have a material impact on its consolidated financial position, results of operations and cash flows.

In February 2016, the FASB issued ASU No. 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. The standard will take effect 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.

Recently adopted accounting pronouncements

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. The new standard requires that all deferred tax assets and liabilities, and any related valuation allowance, be reported as non-current in a classified balance sheet instead of separating deferred taxes and related valuation allowances into current and non-current amounts. The standard will take effect for public companies for annual reporting periods beginning after December 15, 2016, including interim reporting periods. As permitted, the Company adopted this standard, prospectively, in the fourth quarter of its fiscal year ended January 30, 2016. As a result of the adoption at January 30, 2016, current deferred income tax assets were classified as non-current liabilities on the Company’s consolidated balance sheet at January 30, 2016. The adoption of this standard did not have any other impact on our consolidated financial position, results of operations and cash flows.

 

Property and equipment
Property and equipment

3.    Property and equipment

Property and equipment consists of the following:

 

(In thousands)

   January 30,
2016
     January 31,
2015
 

Equipment and fixtures

   $ 556,499       $ 447,782   

Leasehold improvements

     515,712         431,999   

Electronic equipment and software

     353,940         272,937   

Construction-in-progress

     75,804         90,531   
  

 

 

    

 

 

 
     1,501,955         1,243,249   

Less accumulated depreciation and amortization

     (654,355      (526,090
  

 

 

    

 

 

 

Property and equipment, net

   $ 847,600       $ 717,159   
  

 

 

    

 

 

 

The Company had no capitalized interest for fiscal 2015 and 2014 as a result of not utilizing the credit facility during the year.

 

Commitments and contingencies
Commitments and contingencies

4.    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 rentals based upon sales. Contingent rent amounts were insignificant in fiscal 2015, 2014 and 2013. Total rent expense under operating leases was $181,487, $159,245 and $138,086 for fiscal 2015, 2014 and 2013, respectively. Future minimum lease payments under operating leases as of January 30, 2016, are as follows:

 

Fiscal year

   Operating
Leases
(in thousands)
 

2016

   $ 238,837   

2017

     240,654   

2018

     225,187   

2019

     209,867   

2020

     196,952   

2021 and thereafter

     647,636   
  

 

 

 

Total minimum lease payments

   $ 1,759,133   
  

 

 

 

Included in the operating lease schedule above is $176,749 of minimum lease payments for stores that are expected to open in fiscal 2016.

Contractual obligations — As of January 30, 2016, the Company had obligations of $4,908 related to commitments made to a third party for products and services for a future distribution center for which a lease has been signed. Payments under these commitments were $28,044 and $38,212 for fiscal 2015 and 2014, respectively. In addition, the Company has entered into various non-cancelable advertising and other goods and service contracts. These agreements expire over one year and the obligations under these agreements were $22,005 as of January 30, 2016.

General litigation — The Company is the defendant in four putative employment class action lawsuits that allege that the Company violated various provisions of California’s labor laws. All four of these lawsuits seek to recover damages and penalties as a result of these alleged practices. The Company has agreed to settle one of the suits for $1,750 (a significant portion of which will be allocated to attorneys’ fees for plaintiff’s counsel). The settlement, which is fully reserved for, remains subject to final court approval; preliminary approval was granted on March 11, 2016. Under the terms of the settlement, the Company admits no liability and the parties fully and finally release all claims. The Company denies the plaintiff’s allegations in the other three suits and is vigorously defending these matters.

 

The Company is also involved in various legal proceedings that are incidental to the conduct of our business. In the opinion of management, the amount of any liability with respect to these proceedings, either individually or in the aggregate, will not be material.

Accrued liabilities
Accrued liabilities

5.    Accrued liabilities

Accrued liabilities consist of the following:

 

(In thousands)

   January 30,
2016
     January 31,
2015
 

Accrued vendor liabilities (including accrued property and equipment costs)

   $ 27,894       $ 24,705   

Accrued customer liabilities

     54,496         39,593   

Accrued payroll, bonus and employee benefits

     61,068         50,931   

Accrued taxes, other

     20,486         17,824   

Other accrued liabilities

     23,407         16,359   
  

 

 

    

 

 

 

Accrued liabilities

   $ 187,351       $ 149,412   
  

 

 

    

 

 

Income taxes
Income taxes

6. Income taxes

The provision for income taxes consists of the following:

 

(In thousands)

   Fiscal
2015
     Fiscal
2014
     Fiscal
2013
 

Current:

        

Federal

   $ 163,048       $ 128,159       $ 105,731   

State

     18,694         16,909         15,310   
  

 

 

    

 

 

    

 

 

 

Total current

     181,742         145,068         121,041   

Deferred:

        

Federal

     6,981         8,392         3,891   

State

     (1,291      714         (75
  

 

 

    

 

 

    

 

 

 

Total deferred

     5,690         9,106         3,816   
  

 

 

    

 

 

    

 

 

 

Provision for income taxes

   $ 187,432       $ 154,174       $ 124,857   
  

 

 

    

 

 

    

 

 

 

A reconciliation of the federal statutory rate to the Company’s effective tax rate is as follows:

 

      Fiscal
2015
    Fiscal
2014
    Fiscal
2013
 

Federal statutory rate

     35.0     35.0     35.0

State effective rate, net of federal tax benefit

     2.2     2.8     3.0

Other

     (0.3 %)      (0.3 %)      0.1
  

 

 

   

 

 

   

 

 

 

Effective tax rate

     36.9     37.5     38.1
  

 

 

   

 

 

   

 

 

 

 

Significant components of the Company’s deferred tax assets and liabilities are as follows:

 

(In thousands)

   January 30,
2016
     January 31,
2015
 

Deferred tax assets:

     

Reserves not currently deductible

   $ 27,734       $ 22,380   

Employee benefits

     10,594         8,782   

Credit carryforwards

     441         338   

Accrued liabilities

     10,704         8,231   

Inventory valuation

     257         617   
  

 

 

    

 

 

 

Total deferred tax assets

     49,730         40,348   

Deferred tax liabilities:

     

Property and equipment

     48,898         44,882   

Deferred rent obligation

     49,548         38,409   

Prepaid expenses

     10,811         10,775   
  

 

 

    

 

 

 

Total deferred tax liabilities

     109,257         94,066   
  

 

 

    

 

 

 

Net deferred tax liability

   $ (59,527    $ (53,718
  

 

 

    

 

 

 

The Company adopted ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, prospectively, in the fourth quarter of fiscal 2015. As a result of the adoption at January 30, 2016, current deferred income tax assets were classified as non-current liabilities on the Company’s consolidated balance sheet.

At January 30, 2016 and January 31, 2015, the Company had $441 and $338, respectively, credit carryforwards for state income tax purposes.

The Company accounts for uncertainty in income taxes in accordance with the ASC rules for income taxes. The reserve for uncertain tax positions was $2,262 and $1,414 at January 30, 2016 and January 31, 2015, respectively. The balance is the Company’s best estimate of the potential liability for uncertain tax positions. A reconciliation of the Company’s unrecognized tax benefits, excluding interest and penalties, is as follows:

 

(In thousands)

   January 30,
2016
     January 31,
2015
 

Balance at beginning of the period

   $ 1,414       $ 795   

Increase due to a current year position

     900         670   

Decrease due to a prior period position

     (52      (51
  

 

 

    

 

 

 

Balance at the end of the period

   $ 2,262       $ 1,414   
  

 

 

    

 

 

 

The Company acknowledges that the amount of unrecognized tax benefits may change in the next twelve months. However, it does not expect the change to have a significant impact on its consolidated financial statements. Income tax-related interest and penalties were insignificant for fiscal 2015 and 2014.

The Company files tax returns in the U.S. Federal and State jurisdictions. The Company is no longer subject to U.S. Federal examinations by the Internal Revenue Services for years before 2012 and is no longer subject to examinations by State authorities before 2011.

Notes payable
Notes payable

7.    Notes payable

On October 19, 2011, the Company entered into an Amended and Restated Loan and Security Agreement (the Loan 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. The Loan Agreement amended and restated the Loan and Security Agreement, dated as of August 31, 2010, by and among the Company and the lenders. The Loan Agreement extended the maturity of the Company’s credit facility to October 2016, 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.

On September 5, 2012, the Company entered into Amendment No. 1 to the Loan Agreement (the First Amendment) with the lender group. The First Amendment updated certain administrative terms and conditions and provides the Company greater flexibility to take certain corporate actions. There were no changes to the revolving loan amounts available, interest rates, covenants or maturity date under terms of the Loan Agreement.

On December 6, 2013, the Company entered into Amendment No. 2 to the Loan Agreement (the Second Amendment) with the lender group. The Second Amendment further extended the maturity of the facility to December 2018. 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 January 30, 2016 and January 31, 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.

Fair value measurements
Fair value measurements

8.    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:

a. Level 1 — observable inputs such as quoted prices for identical instruments in active markets.

b. Level 2 — inputs other than quoted prices in active markets that are observable either directly or indirectly through corroboration with observable market data.

c. 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 January 30, 2016 and January 31, 2015, the Company held financial liabilities of $7,491 and $5,574, 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.

Investments
Investments

9.    Investments

The Company’s short-term investments as of January 30, 2016 and January 31, 2015, consist of $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 January 30, 2016.

 

Share-based awards
Share-based awards

10.    Share-based awards

Equity incentive plans

The Company has had a number of equity incentive plans over the years. The plans were adopted in order to attract and retain the best available personnel for positions of substantial authority and to provide additional incentive to employees, directors, and consultants to promote the success of the Company’s business. Incentive compensation was awarded under the Amended and Restated Restricted Stock Option Plan until April 2002 and under the 2002 Equity Incentive Plan through July 2007, at which time the 2007 Incentive Award Plan was adopted. All of the plans generally provided for the grant of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights, and other types of awards to employees, consultants and directors. Unless provided otherwise by the administrator of the plan, options vested over four years at the rate of 25% per year from the date of grant and most must be exercised within ten years. Options were granted with the exercise price equal to the fair value of the underlying stock on the date of grant.

2011 Incentive award plan

In June 2011, the Company adopted the 2011 Incentive Award Plan (the 2011 Plan). The 2011 Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights, performance awards, dividend equivalent rights, stock payments, deferred stock and cash-based awards to employees, consultants, and directors. Following its adoption, awards are only being made under the 2011 Plan, and no further awards will be made under any prior plan. As of January 30, 2016, the 2011 Plan reserves for the issuance upon grant or exercise of awards up to 4,096 shares of the Company’s common stock.

The Company recorded stock compensation expense of $15,594, $14,923 and $16,003 for fiscal 2015, 2014 and 2013, respectively. Cash received from option exercises under all share-based payment arrangements for fiscal 2015, 2014 and 2013 was $19,646, $10,639 and $21,890, respectively. The total income tax benefit recognized in the income statement for equity compensation arrangements was $5,354, $3,526 and $4,812 for fiscal 2015, 2014 and 2013, respectively. The actual tax benefit realized for the tax deductions from option exercise and restricted stock vesting of the share-based payment arrangements totaled $14,970, $6,892 and $18,169, respectively, for fiscal 2015, 2014 and 2013.

Employee stock options

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:

 

     Fiscal
2015
   Fiscal
2014
   Fiscal
2013

Volatility rate

   37.9%    40.7%    49.2%

Average risk-free interest rate

   1.6%    1.4%    0.9%

Average expected life (in years)

   4.9    3.8    4.4

Dividend yield

   None    None    None

The expected volatility is based on the historical volatility of the Company’s common stock. The risk free interest rate is based on the United States Treasury yield curve in effect on the date of grant for the respective expected life of the option. The expected life represents the time the options granted are expected to be outstanding. The expected life of options granted is derived from historical data on Ulta Beauty stock option exercises. Forfeitures of options are estimated at the grant date based on historical rates of the Company’s stock option activity and reduce the compensation expense recognized. The Company does not currently pay a regular dividend.

The Company granted 294 stock options during fiscal 2015. The compensation cost that has been charged against income for stock option grants was $7,899, $9,078, and $10,214 for fiscal 2015, 2014, and 2013, respectively. The weighted-average grant date fair value of options granted in fiscal 2015, 2014 and 2013 was $56.44, $32.38 and $34.31, respectively. The total fair value of stock options issued that vested during fiscal 2015, 2014 and 2013 was $8,236, $8,799 and $10,544, respectively. At January 30, 2016, there was approximately $23,032 of unrecognized compensation expense related to unvested stock options. The unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately three years. The total intrinsic value of options exercised was $36,610, $15,032 and $49,404 in fiscal 2015, 2014 and 2013, respectively.

 

A summary of the status of the Company’s stock option activity is presented in the following table (shares in thousands):

 

     Fiscal 2015      Fiscal 2014      Fiscal 2013  
     Number of
options
    Weighted-
average
exercise price
     Number of
options
    Weighted-
average
exercise price
     Number of
options
    Weighted-
average
exercise price
 

Common stock options outstanding

              

Beginning of year

     1,073      $ 72.12         1,090      $ 56.94         1,807      $ 41.60   

Granted

     294        160.01         371        99.40         302        84.50   

Exercised

     (356     55.20         (238     44.79         (705     31.07   

Forfeited

     (72     91.74         (150     72.57         (314     53.15   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

End of year

     939      $ 104.58         1,073      $ 72.12         1,090      $ 56.94   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Exercisable at end of year

     316      $ 61.44         440      $ 43.98         363      $ 34.37   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Vested and Expected to vest

     890      $ 103.36         1,028      $ 71.28         1,046      $ 56.47   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

The following table presents information related to options outstanding and options exercisable at January 30, 2016, under the Company’s stock option plans based on ranges of exercise prices (shares in thousands):

 

     Options outstanding      Options exercisable  

Options outstanding

   Number of
options
     Weighted-
average
remaining
contractual life
(years)
     Weighted-
average
exercise price
     Number
of options
     Weighted-
average
remaining
contractual life
(years)
     Weighted-
average
exercise price
 

$1.11 - 15.81

     64         3       $ 13.28         64         3       $ 13.28   

22.86 - 37.85

     55         5         27.49         55         5         27.49   

47.19 - 69.96

     72         5         66.64         72         5         66.64   

74.91 - 89.79

     94         7         80.73         28         7         80.90   

91.12 - 99.66

     295         8         97.63         75         8         97.46   

101.35 - 165.27

     359         9         152.14         22         8         119.38   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

End of year

     939         8       $ 104.58         316         6       $ 61.44   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The aggregate intrinsic value of outstanding and exercisable options as of January 30, 2016 was $71,947 and $37,819, respectively. The last reported sale price of our common stock on the NASDAQ Global Select Market on January 30, 2016 was $181.17 per share.

Restricted stock units

The Company issues restricted stock units to certain employees and its Board of Directors. Employee grants will generally cliff vest after three years and director grants will cliff vest within one year. The grant date fair value of restricted stock units is based on the closing market price of shares of the Company’s common stock on the date of grant. Restricted stock units are expensed straight-line over the requisite service period. The compensation expense recorded in fiscal 2015, 2014 and 2013 was $6,040, $5,845 and $5,789, respectively. Forfeitures of restricted stock units are estimated at the grant date based on historical rates of the Company’s stock award activity and reduce the compensation expense recognized. At January 30, 2016, unrecognized compensation cost related to restricted stock awards was $9,445. The unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately two years.

 

A summary of the status of the Company’s restricted stock units activity is presented in the following table (shares in thousands):

 

     Fiscal 2015      Fiscal 2014      Fiscal 2013  
     Number
of units
    Weighted-
average
grant date
fair value
     Number
of units
    Weighted-
average
grant date
fair value
     Number
of units
    Weighted-
average
grant date
fair value
 

Restricted stock units outstanding

              

Beginning of year

     151      $ 91.74         162      $ 87.54         62      $ 81.81   

Granted

     60        154.77         71        97.73         141        86.07   

Vested

     (47     102.36         (52     91.91         (25     81.41   

Forfeited

     (20     96.11         (30     82.91         (16     75.39   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

End of year

     144      $ 116.42         151      $ 91.74         162      $ 87.54   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Expected to vest

     132      $ 116.42         140      $ 91.74         152      $ 87.54   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Performance-based restricted stock units

The Company began granting performance-based restricted stock units in fiscal 2015 to certain employees. These awards will cliff vest after three years based upon achievement of pre-established goals at the end of the second year of the term. Consistent with restricted stock units, the grant date fair value of performance-based restricted stock units is based on the closing market price of shares of the Company’s common stock on the date of grant. Performance-based units are expensed on a straight-line basis over the requisite service period, based on the probability of achieving the performance goal, with changes in expectations recognized as an adjustment to earnings in the period of the change. If the performance goal is not met, no compensation cost is recognized and any previously recognized compensation cost is reversed. The compensation expense recorded in fiscal 2015 was $1,655. Forfeitures of performance-based restricted stock awards are estimated at the grant date based on historical rates of the Company’s stock award activity and reduce the compensation expense recognized. At January 30, 2016, unrecognized compensation cost related to performance-based restricted stock units was $2,239. The unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately two years.

A summary of the status of the Company’s performance-based restricted stock unit activity is presented in the following table (shares in thousands):

 

     Fiscal 2015  
     Number
of units
     Weighted-
average
grant date
fair value
 

Performance-based restricted stock units outstanding

     

Beginning of year

           $   

Granted

     22         151.20   

Vested

               

Forfeited

     (2      151.20   
  

 

 

    

 

 

 

End of year

     20       $ 151.20   
  

 

 

    

 

 

 

Expected to vest

     19       $ 151.20   
  

 

 

    

 

 

 

The number of performance-based units presented is based on achieving the targeted performance goals as defined in the performance-based unit agreements. As of January 30, 2016, the maximum number of units that could vest under the provisions of the agreements was 40.

Net income per common share
Net income per common share

11.    Net income per common share

The following is a reconciliation of net income and the number of shares of common stock used in the computation of net income per basic and diluted share:

 

     Fiscal year ended  

(In thousands, except per share data)

   January 30,
2016
     January 31,
2015
     February 1,
2014
 

Numerator for diluted net income per share — net income

   $ 320,008       $ 257,135       $ 202,849   

Denominator for basic net income per share — weighted-average common shares

     63,949         64,335         63,992   

Dilutive effect of stock options and non-vested stock

     326         316         469   
  

 

 

    

 

 

    

 

 

 

Denominator for diluted net income per share

     64,275         64,651         64,461   

Net income per common share:

        

Basic

   $ 5.00       $ 4.00       $ 3.17   

Diluted

   $ 4.98       $ 3.98       $ 3.15   

The denominator for diluted net income per common share for fiscal years 2015, 2014 and 2013 exclude 370, 686 and 658 employee options, respectively, due to their anti-dilutive effects. As of January 30, 2016, outstanding performance-based restricted stock units were excluded from the computation of diluted shares because the number of shares ultimately issued is contingent on the achievement of certain performance targets of the Company and the performance period is not yet complete.

Employee benefit plans
Employee benefit plans

12.    Employee benefit plans

The Company provides a 401(k) retirement plan covering all employees who qualify as to age and length of service. The plan is funded through employee contributions and a Company match. In fiscal 2015, 2014 and 2013, the Company match was 100% of the first 3.0% of eligible compensation. As of January 30, 2016 and January 31, 2015, the liability for the Company match was $5,031 and $4,104, respectively.

The Company also has a non-qualified deferred compensation plan for highly compensated employees whose contributions are limited under qualified defined contribution plans. The plan is funded through employee contributions and, beginning in 2014, a Company match. In fiscal 2015 and 2014, the Company match was 100% of the first 3.0% of salary. For fiscal year 2015 and 2014, the liability for the Company match was $554 and $465, respectively. Amounts contributed and deferred under the plan are credited or charged with the performance of investment options offered under the plan as elected by the participants. In the event of bankruptcy, the assets of this plan are available to satisfy the claims of general creditors. The liability for compensation deferred under the Company’s plan included in other long-term liabilities was $7,491 and $5,574 as of January 30, 2016 and January 31, 2015, respectively. The Company manages the risk of changes in the fair value of the liability for deferred compensation by electing to match its liability under the plan with investment vehicles that offset a substantial portion of its exposure. The cash value of the investment vehicles included in deferred compensation plan assets was $8,145 and $5,656 as of January 30, 2016 and January 31, 2015, respectively. Total expense recorded under this plan is included in selling, general and administrative expenses and was insignificant during fiscal 2015 and 2014.

Valuation and qualifying accounts
Valuation and qualifying accounts

13.    Valuation and qualifying accounts

 

Description

   Balance at
beginning
of period
    Charged to
costs and
expenses
     Deductions     Balance at
end of
period
 
     (In thousands)  

Fiscal 2015

         

Allowance for doubtful accounts

   $ 1,346      $ 2,063       $ (2,297 )(a)    $ 1,112   

Shrink reserve

     11,598        29,894         (26,233     15,259   

Inventory — lower of cost or market reserve

     5,253        3,323         (3,573     5,003   

Insurance:

         

Workers Comp / General Liability Prepaid Asset

     (1,789 )(b)      5,935         (6,072     (1,926

Employee Health Care Accrued Liability

     2,435        55,423         (53,671     4,187   

Fiscal 2014

         

Allowance for doubtful accounts

   $ 915      $ 874       $ (443 )(a)    $ 1,346   

Shrink reserve

     9,358        22,374         (20,134     11,598   

Inventory — lower of cost or market reserve

     4,861        4,368         (3,976     5,253   

Insurance:

         

Workers Comp / General Liability Prepaid Asset

     (1,817 )(b)      6,899         (6,871     (1,789

Employee Health Care Accrued Liability

     2,606        41,335         (41,506     2,435   

Fiscal 2013

         

Allowance for doubtful accounts

   $ 973      $ 300       $ (358 )(a)    $ 915   

Shrink reserve

     4,020        16,298         (10,960     9,358   

Inventory — lower of cost or market reserve

     2,364        4,522         (2,025     4,861   

Insurance:

         

Workers Comp / General Liability Prepaid Asset

     (2,400 )(b)      7,060         (6,477     (1,817

Employee Health Care Accrued Liability

     2,232        34,422         (34,048     2,606   

 

 

(a) Represents write-off of uncollectible accounts

 

(b) Represents prepaid insurance
Selected quarterly financial data (unaudited)
Selected quarterly financial data (unaudited)

14.    Selected quarterly financial data (unaudited)

The following tables set forth the Company’s unaudited quarterly results of operations for each of the quarters in fiscal 2015 and fiscal 2014. The Company’s quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31 and January 31.

 

     2015  
     First     Second     Third     Fourth  
(In thousands, except per share data)                         

Net sales

   $ 868,122      $ 876,999      $ 910,700      $ 1,268,295   

Cost of sales

     564,938        570,524        575,062        829,259   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     303,184        306,475        335,638        439,036   

Selling, general and administrative expenses

     192,485        183,937        218,763        268,169   

Pre-opening expenses

     3,117        4,078        6,106        1,381   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     107,582        118,460        110,769        169,486   

Interest income, net

     (311     (276     (283     (273
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     107,893        118,736        111,052        169,759   

Income tax expense

     40,947        44,567        39,982        61,936   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 66,946      $ 74,169      $ 71,070      $ 107,823   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

        

Basic

   $ 1.04      $ 1.16      $ 1.11      $ 1.69   

Diluted

   $ 1.04      $ 1.15      $ 1.11      $ 1.69   

 

     2014  
     First     Second     Third     Fourth  
(In thousands, except per share data)                         

Net sales

   $ 713,770      $ 734,236      $ 745,722      $ 1,047,641   

Cost of sales

     467,817        474,894        463,967        697,904   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     245,953        259,342        281,755        349,737   

Selling, general and administrative expenses

     162,443        157,768        181,093        210,702   

Pre-opening expenses

     2,629        3,595        6,574        1,568   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     80,881        97,979        94,088        137,467   

Interest income, net

     (200     (209     (254     (231
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     81,081        98,188        94,342        137,698   

Income tax expense

     31,128        37,394        35,218        50,434   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 49,953      $ 60,794      $ 59,124      $ 87,264   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

        

Basic

   $ 0.78      $ 0.94      $ 0.92      $ 1.36   

Diluted

   $ 0.77      $ 0.94      $ 0.91      $ 1.35   

The sum of the quarterly net income per common share may not equal the annual total due to quarterly changes in the weighted average shares and share equivalents outstanding.

Stock repurchase program
Stock repurchase program

15.    Stock repurchase program

On March 18, 2013, the Company announced that our Board of Directors had authorized a share repurchase program (the 2013 Share Repurchase Program) pursuant to which the Company could repurchase up to $150,000 of the Company’s common stock. Repurchases pursuant to the terms of the 2013 Share Repurchase Program were made from time to time in the open market, in privately negotiated transactions or otherwise, at prices the Company deemed appropriate and subject to market conditions, applicable law and other factors deemed relevant in the Company’s sole discretion. The 2013 Share Repurchase Program did not have an expiration date, but provided for suspension or discontinuation at any time.

On September 11, 2014, the Company announced that our Board of Directors authorized a new share repurchase program (the 2014 Share Repurchase Program) pursuant to which the Company could repurchase up to $300,000 of the Company’s common stock. The 2014 Share Repurchase Program authorization revoked the previously authorized but unused amount of $112,664 from the 2013 Share Repurchase Program. The 2014 Share Repurchase Program did not have an expiration date and could be suspended or discontinued at any time. On March 12, 2015, the Company announced that our Board of Directors authorized an increase of $100,000 to the 2014 Share Repurchase Program effective March 17, 2015.

During fiscal year 2013, we purchased 501 shares of common stock for $37,337 at an average price of $74.58 from the 2013 Share Repurchase Program. During fiscal 2014, we purchased 321 shares of common stock for $39,923 at an average price of $124.31 from the 2014 Share Repurchase Program. During fiscal 2015, we purchased 1,034 shares of common stock for $167,396 at an average price of $161.81 from the 2014 Share Repurchase Program.

Subsequent event
Subsequent event

16.    Subsequent event

On March 10, 2016, the Company announced that the Board of Directors authorized a new share repurchase program (the 2016 Share Repurchase Program) pursuant to which the Company may repurchase up to $425,000 of the Company’s common stock. The 2016 Share Repurchase Program authorization revokes the previously authorized but unused amounts from the 2014 Share Repurchase Program. The 2016 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time. As part of the 2016 Share Repurchase Program, the Company entered into an Accelerated Share Repurchase (ASR) agreement with Goldman, Sachs & Co. to repurchase $200,000 of the Company’s common stock. Under the ASR agreement, the Company paid $200,000 to Goldman, Sachs & Co. and received an initial delivery of 852 shares in the first quarter of 2016, which represents 80% of the total shares the Company expects to receive based on the market price at the time of the initial delivery. The final number of shares delivered upon settlement of the agreement will be determined with reference to the average price of the Company’s common stock over the term of the ASR agreement.

Summary of significant accounting policies (Policies)

Fiscal year

The Company’s fiscal year is the 52 or 53 weeks ending on the Saturday closest to January 31. The Company’s fiscal years ended January 30, 2016 (fiscal 2015), January 31, 2015 (fiscal 2014) and February 1, 2014 (fiscal 2013) were 52 week years.

Consolidation

The Company’s consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts, transactions and unrealized profit were eliminated in consolidation.

 

Use of estimates

The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the accounting period. Actual results could differ from those estimates.

Cash and cash equivalents

Cash and cash equivalents include cash on hand and highly liquid investments with maturities of three months or less from the date of purchase. Cash equivalents include amounts due from third-party credit card receivables because such amounts generally convert to cash within one to three days with little or no default risk.

Short-term investments

The Company determines the balance sheet classification of its investments at the time of purchase and evaluates the classification at each balance sheet date. Money market funds, certificates of deposit and time deposits with maturities of greater than three months but no more than twelve months are carried at cost, which approximates fair value and are recorded in the Consolidated Balance Sheets in Short-term investments (see Note 9, “Investments”).

 

Receivables

Receivables consist principally of amounts receivable from vendors and landlord construction allowances earned but not yet received. These receivables are computed based on provisions of the vendor and lease agreements in place and the Company’s completed performance. The Company’s vendors are primarily U.S.-based producers of consumer products and real estate developers and landlords. The Company does not require collateral on its receivables and does not accrue interest. Credit risk with respect to receivables is limited due to the diversity of vendors and landlords comprising the Company’s vendor base. The Company performs ongoing credit evaluations of its vendors and evaluates the collectability of its receivables based on the length of time the receivable is past due and historical experience. The receivable for vendor allowances was $46,932 and $39,629 as of January 30, 2016 and January 31, 2015, respectively and the receivable for landlord allowances was $10,250 and $8,357 as of January 30, 2016 and January 31, 2015, respectively. The allowance for doubtful receivables totaled $1,112 and $1,346 as of January 30, 2016 and January 31, 2015, respectively.

Merchandise inventories

Merchandise inventories are stated at the lower of cost or market. Cost is determined using the weighted-average cost method and includes costs incurred to purchase and distribute goods. Inventory cost also includes vendor allowances related to co-op advertising, markdowns, and volume discounts. The Company maintains reserves for lower of cost or market and shrinkage.

Fair value of financial instruments

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. The Company had no outstanding debt as of January 30, 2016 and January 31, 2015.

Property and equipment

The Company’s property and equipment are stated at cost net of accumulated depreciation and amortization. Maintenance and repairs are charged to operating expense as incurred. The Company’s assets are depreciated or amortized using the straight-line method, over the shorter of their estimated useful lives or the expected lease term as follows:

 

Equipment and fixtures

     3 to 10 years   

Leasehold improvements

     10 years   

Electronic equipment and software

     3 to 5 years   

The Company capitalizes costs incurred during the application development stage in developing or purchasing internal use software. These costs are amortized over the estimated useful life of the software.

The Company periodically evaluates whether changes have occurred that would require revision of the remaining useful life of equipment and leasehold improvements or render them not recoverable. If such circumstances arise, the Company uses an estimate of the undiscounted sum of expected future operating cash flows during their holding period to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows are less than the carrying amount of the assets, the resulting impairment charges to be recorded are calculated based on the excess of the carrying value of the assets over the fair value of such assets, with the fair value determined based on an estimate of discounted future cash flows. No significant impairments charges have been recognized in fiscal 2015, 2014 or 2013.

Customer loyalty program

In early fiscal 2014, we completed the conversion of all our loyalty members to Ultamate Rewards, a points-based program. Ultamate Rewards enables customers to earn points based on their purchases. Points earned by members are valid for at least one year and may be redeemed on any product we sell. Prior to this conversion, we ran both Ultamate Rewards and our prior program, The Club at Ulta. The Club at Ulta was a certificate program offering customers reward certificates for free beauty products based on the level of purchases. The Company accrues the cost of anticipated redemptions related to these programs at the time of the initial purchase based on historical experience. The accrued liability related to these loyalty programs at January 30, 2016 and January 31, 2015 was $20,026 and $15,032 respectively. The cost of these programs, which was $54,464, $42,096 and $27,588 in fiscal 2015, 2014 and 2013, respectively, is included in cost of sales in the statements of income.

Deferred rent

Many of the Company’s operating leases contain predetermined fixed increases of the minimum rental rate during the lease. For these leases, the Company recognizes the related rental expense on a straight-line basis over the expected lease term and records the difference between the amounts charged to expense and the rent paid as deferred rent. The lease term commences on the earlier of the date when the Company becomes legally obligated for rent payments or the date the Company takes possession of the leased space.

As part of many lease agreements, the Company receives construction allowances from landlords for tenant improvements. These leasehold improvements made by the Company are capitalized and amortized over the shorter of the lease term or 10 years. The construction allowances are recorded as deferred rent and amortized on a straight-line basis over the lease term as a reduction of rent expense.

Revenue recognition

Net sales include merchandise sales, salon service revenue and e-commerce revenue. Revenue from merchandise sales at stores is recognized at the time of sale, net of estimated returns. The Company provides refunds for product returns within 60 days from the original purchase date. Salon revenue is recognized when services are rendered. Salon service revenue amounted to $209,249, $175,533 and $145,815 for fiscal 2015, 2014 and 2013, respectively. Company coupons and other incentives are recorded as a reduction of net sales. State sales taxes are presented on a net basis as the Company considers itself a pass-through conduit for collecting and remitting state sales tax. E-commerce sales are recorded based on delivery of merchandise to the customer. E-commerce revenue amounted to $221,077, $149,857 and $95,809 for fiscal 2015, 2014 and 2013, respectively.

The Company’s gift card sales are deferred and recognized in net sales when the gift card is redeemed for product or services. The Company’s gift cards do not expire and do not include service fees that decrease customer balances. The Company has maintained Company-specific, historical data related to its large pool of similar gift card transactions sold and redeemed over a significant time frame. The Company recognizes gift card breakage to the extent there is no requirement for remitting balances to governmental agencies under unclaimed property laws. Gift card breakage is recognized over the same performance period, and in the same proportion, that the Company’s data has demonstrated that gift cards are redeemed. Gift card breakage was $3,728 and $2,720 at January 30, 2016 and January 31, 2015, respectively, and is recorded as a decrease in selling, general and administrative expense in the statements of income. Deferred gift card revenue was $31,830 and $22,681 at January 30, 2016 and January 31, 2015, respectively, and is included in accrued liabilities – accrued customer liabilities (Note 5).

Vendor allowances

The Company receives allowances from vendors in the normal course of business including advertising and markdown allowances, purchase volume discounts and rebates, and reimbursement for defective merchandise, and certain selling and display expenses. Substantially all vendor allowances are recorded as a reduction of the vendor’s product cost and are recognized in cost of sales as the product is sold.

Advertising

Advertising expense consists principally of paper, print and distribution costs related to the Company’s advertising circulars, as well as television, radio and digital advertising. The Company expenses the production and distribution costs related to its advertising circulars in the period the related promotional event occurs. Total advertising costs, exclusive of incentives from vendors and start-up advertising expense, amounted to $187,158, $157,847 and $140,774 for fiscal 2015, 2014 and 2013, respectively. Advertising expense as a percentage of sales was 4.8%, 4.9% and 5.3% for fiscal 2015, 2014 and 2013, respectively. Prepaid advertising costs included in prepaid expenses and other current assets were $6,413 and $8,899 as of January 30, 2016 and January 31, 2015, respectively.

Pre-opening expenses

Non-capital expenditures incurred prior to the grand opening of a new, remodeled or relocated store are charged against earnings as incurred.

Cost of sales

Cost of sales includes the cost of merchandise sold including a majority of vendor allowances, which are treated as a reduction of merchandise costs; warehousing and distribution costs including labor and related benefits, freight, rent, depreciation and amortization, real estate taxes, utilities, and insurance; shipping and handling costs; store occupancy costs including rent, depreciation and amortization, real estate taxes, utilities, repairs and maintenance, insurance, licenses, and cleaning expenses; salon payroll and benefits; customer loyalty program expense; and shrink and inventory valuation reserves.

Selling, general and administrative expenses

Selling, general and administrative expenses includes payroll, bonus, and benefit costs for retail and corporate employees; advertising and marketing costs; occupancy costs related to our corporate office facilities; public company expense including Sarbanes-Oxley Act of 2002 compliance expenses; stock-based compensation expense; depreciation and amortization for all assets except those related to our retail and warehouse operations, which are included in cost of sales; and legal, finance, information systems and other corporate overhead costs.

Income taxes

Deferred income taxes reflect the net tax effect of temporary differences between the carrying amounts of assets and liabilities used for financial reporting purposes and the amounts used for income tax purposes. The amounts reported were derived using the enacted tax rates in effect for the year the differences are expected to reverse.

Income tax benefits related to uncertain tax positions are recognized only when it is more likely than not that the tax position will be sustained on examination by the taxing authorities. The determination is based on the technical merits of the position and presumes that each uncertain tax position will be examined by the relevant taxing authority that has full knowledge of all relevant information. Penalties and interest related to unrecognized tax positions are recorded in income tax expense.

Share-based compensation

Share-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized on a straight-line method over the requisite service period for awards expected to vest. The Company recorded stock compensation expense of $15,594, $14,923 and $16,003 for fiscal 2015, 2014 and 2013, respectively (see Note 10, “Share-based awards”).

Insurance expense

The Company has insurance programs with third party insurers for employee health, workers compensation and general liability, among others, to limit the Company’s liability exposure. The insurance programs are premium based and include retentions, deductibles and stop loss coverage. Current stop loss coverage per claim is $200 for employee health claims, $100 for general liability claims and $250 for workers compensation claims. The Company makes collateral and premium payments during the plan year and accrues expenses in the event additional premium is due from the Company based on actual claim results.

Net income per common share

Basic net income per common share is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per share includes dilutive common stock equivalents, using the treasury stock method (see Note 11, “Net income per common share”).

Recent accounting pronouncements not yet adopted

In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification Topic 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 June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation, Accounting Standards Codification Topic 718. This update clarifies the accounting for share-based awards with performance targets. The standard will take effect for public companies for annual reporting periods beginning after December 15, 2015, including interim reporting periods. The Company will not be affected by this guidance as the Company currently accounts for these awards in a manner consistent with the new guidance.

In April 2015, the FASB issued ASU No. 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. The standard will take effect for public companies for annual reporting periods beginning after December 15, 2015, including interim reporting periods. Early adoption is permitted. The Company does not believe that the adoption of this ASU will have a material impact on its consolidated financial position, results of operations and cash flows.

In February 2016, the FASB issued ASU No. 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. The standard will take effect 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.

Recently adopted accounting pronouncements

In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. The new standard requires that all deferred tax assets and liabilities, and any related valuation allowance, be reported as non-current in a classified balance sheet instead of separating deferred taxes and related valuation allowances into current and non-current amounts. The standard will take effect for public companies for annual reporting periods beginning after December 15, 2016, including interim reporting periods. As permitted, the Company adopted this standard, prospectively, in the fourth quarter of its fiscal year ended January 30, 2016. As a result of the adoption at January 30, 2016, current deferred income tax assets were classified as non-current liabilities on the Company’s consolidated balance sheet at January 30, 2016. The adoption of this standard did not have any other impact on our consolidated financial position, results of operations and cash flows.

Summary of significant accounting policies (Tables)
Summary of Estimated Useful Lives or Expected Lease Term

The Company’s assets are depreciated or amortized using the straight-line method, over the shorter of their estimated useful lives or the expected lease term as follows:

 

Equipment and fixtures

     3 to 10 years   

Leasehold improvements

     10 years   

Electronic equipment and software

     3 to 5 years   
Property and equipment (Tables)
Components of Property and Equipment

Property and equipment consists of the following:

 

(In thousands)

   January 30,
2016
     January 31,
2015
 

Equipment and fixtures

   $ 556,499       $ 447,782   

Leasehold improvements

     515,712         431,999   

Electronic equipment and software

     353,940         272,937   

Construction-in-progress

     75,804         90,531   
  

 

 

    

 

 

 
     1,501,955         1,243,249   

Less accumulated depreciation and amortization

     (654,355      (526,090
  

 

 

    

 

 

 

Property and equipment, net

   $ 847,600       $ 717,159   
  

 

 

    

 

 

Commitments and contingencies (Tables)
Schedule of Future Minimum Lease Payments Under Operating Leases
Future minimum lease payments under operating leases as of January 30, 2016, are as follows:

 

Fiscal year

   Operating
Leases
(in thousands)
 

2016

   $ 238,837   

2017

     240,654   

2018

     225,187   

2019

     209,867   

2020

     196,952   

2021 and thereafter

     647,636   
  

 

 

 

Total minimum lease payments

   $ 1,759,133   
  

 

 

Accrued liabilities (Tables)
Schedule of Accrued Liabilities

Accrued liabilities consist of the following:

 

(In thousands)

   January 30,
2016
     January 31,
2015
 

Accrued vendor liabilities (including accrued property and equipment costs)

   $ 27,894       $ 24,705   

Accrued customer liabilities

     54,496         39,593   

Accrued payroll, bonus and employee benefits

     61,068         50,931   

Accrued taxes, other

     20,486         17,824   

Other accrued liabilities

     23,407         16,359   
  

 

 

    

 

 

 

Accrued liabilities

   $ 187,351       $ 149,412   
  

 

 

    

 

 

 

Income taxes (Tables)

The provision for income taxes consists of the following:

 

(In thousands)

   Fiscal
2015
     Fiscal
2014
     Fiscal
2013
 

Current:

        

Federal

   $ 163,048       $ 128,159       $ 105,731   

State

     18,694         16,909         15,310   
  

 

 

    

 

 

    

 

 

 

Total current

     181,742         145,068         121,041   

Deferred:

        

Federal

     6,981         8,392         3,891   

State

     (1,291      714         (75
  

 

 

    

 

 

    

 

 

 

Total deferred

     5,690         9,106         3,816   
  

 

 

    

 

 

    

 

 

 

Provision for income taxes

   $ 187,432       $ 154,174       $ 124,857   
  

 

 

    

 

 

    

 

 

A reconciliation of the federal statutory rate to the Company’s effective tax rate is as follows:

 

      Fiscal
2015
    Fiscal
2014
    Fiscal
2013
 

Federal statutory rate

     35.0     35.0     35.0

State effective rate, net of federal tax benefit

     2.2     2.8     3.0

Other

     (0.3 %)      (0.3 %)      0.1
  

 

 

   

 

 

   

 

 

 

Effective tax rate

     36.9     37.5     38.1
  

 

 

   

 

 

   

 

 

 

Significant components of the Company’s deferred tax assets and liabilities are as follows:

 

(In thousands)

   January 30,
2016
     January 31,
2015
 

Deferred tax assets:

     

Reserves not currently deductible

   $ 27,734       $ 22,380   

Employee benefits

     10,594         8,782   

Credit carryforwards

     441         338   

Accrued liabilities

     10,704         8,231   

Inventory valuation

     257         617   
  

 

 

    

 

 

 

Total deferred tax assets

     49,730         40,348   

Deferred tax liabilities:

     

Property and equipment

     48,898         44,882   

Deferred rent obligation

     49,548         38,409   

Prepaid expenses

     10,811         10,775   
  

 

 

    

 

 

 

Total deferred tax liabilities

     109,257         94,066   
  

 

 

    

 

 

 

Net deferred tax liability

   $ (59,527    $ (53,718
  

 

 

    

 

 

A reconciliation of the Company’s unrecognized tax benefits, excluding interest and penalties, is as follows:

 

(In thousands)

   January 30,
2016
     January 31,
2015
 

Balance at beginning of the period

   $ 1,414       $ 795   

Increase due to a current year position

     900         670   

Decrease due to a prior period position

     (52      (51
  

 

 

    

 

 

 

Balance at the end of the period

   $ 2,262       $ 1,414   
  

 

 

    

 

 

Share-based awards (Tables)

The Company estimated the grant date fair value of stock options using a Black-Scholes valuation model using the following weighted-average assumptions:

 

     Fiscal
2015
   Fiscal
2014
   Fiscal
2013

Volatility rate

   37.9%    40.7%    49.2%

Average risk-free interest rate

   1.6%    1.4%    0.9%

Average expected life (in years)

   4.9    3.8    4.4

Dividend yield

   None    None    None

The following table presents information related to options outstanding and options exercisable at January 30, 2016, under the Company’s stock option plans based on ranges of exercise prices (shares in thousands):

 

     Options outstanding      Options exercisable  

Options outstanding

   Number of
options
     Weighted-
average
remaining
contractual life
(years)
     Weighted-
average
exercise price
     Number
of options
     Weighted-
average
remaining
contractual life
(years)
     Weighted-
average
exercise price
 

$1.11 - 15.81

     64         3       $ 13.28         64         3       $ 13.28   

22.86 - 37.85

     55         5         27.49         55         5         27.49   

47.19 - 69.96

     72         5         66.64         72         5         66.64   

74.91 - 89.79

     94         7         80.73         28         7         80.90   

91.12 - 99.66

     295         8         97.63         75         8         97.46   

101.35 - 165.27

     359         9         152.14         22         8         119.38   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

End of year

     939         8       $ 104.58         316         6       $ 61.44   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

A summary of the status of the Company’s stock option activity is presented in the following table (shares in thousands):

 

     Fiscal 2015      Fiscal 2014      Fiscal 2013  
     Number of
options
    Weighted-
average
exercise price
     Number of
options
    Weighted-
average
exercise price
     Number of
options
    Weighted-
average
exercise price
 

Common stock options outstanding

              

Beginning of year

     1,073      $ 72.12         1,090      $ 56.94         1,807      $ 41.60   

Granted

     294        160.01         371        99.40         302        84.50   

Exercised

     (356     55.20         (238     44.79         (705     31.07   

Forfeited

     (72     91.74         (150     72.57         (314     53.15   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

End of year

     939      $ 104.58         1,073      $ 72.12         1,090      $ 56.94   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Exercisable at end of year

     316      $ 61.44         440      $ 43.98         363      $ 34.37   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Vested and Expected to vest

     890      $ 103.36         1,028      $ 71.28         1,046      $ 56.47   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

A summary of the status of the Company’s restricted stock units activity is presented in the following table (shares in thousands):

 

     Fiscal 2015      Fiscal 2014      Fiscal 2013  
     Number
of units
    Weighted-
average
grant date
fair value
     Number
of units
    Weighted-
average
grant date
fair value
     Number
of units
    Weighted-
average
grant date
fair value
 

Restricted stock units outstanding

              

Beginning of year

     151      $ 91.74         162      $ 87.54         62      $ 81.81   

Granted

     60        154.77         71        97.73         141        86.07   

Vested

     (47     102.36         (52     91.91         (25     81.41   

Forfeited

     (20     96.11         (30     82.91         (16     75.39   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

End of year

     144      $ 116.42         151      $ 91.74         162      $ 87.54   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Expected to vest

     132      $ 116.42         140      $ 91.74         152      $ 87.54   
  

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

A summary of the status of the Company’s performance-based restricted stock unit activity is presented in the following table (shares in thousands):

 

     Fiscal 2015  
     Number
of units
     Weighted-
average
grant date
fair value
 

Performance-based restricted stock units outstanding

     

Beginning of year

           $   

Granted

     22         151.20   

Vested

               

Forfeited

     (2      151.20   
  

 

 

    

 

 

 

End of year

     20       $ 151.20   
  

 

 

    

 

 

 

Expected to vest

     19       $ 151.20   
  

 

 

    

 

 

Net income per common share (Tables)
Net Income Per Basic and Diluted Share

The following is a reconciliation of net income and the number of shares of common stock used in the computation of net income per basic and diluted share:

 

     Fiscal year ended  

(In thousands, except per share data)

   January 30,
2016
     January 31,
2015
     February 1,
2014
 

Numerator for diluted net income per share — net income

   $ 320,008       $ 257,135       $ 202,849   

Denominator for basic net income per share — weighted-average common shares

     63,949         64,335         63,992   

Dilutive effect of stock options and non-vested stock

     326         316         469   
  

 

 

    

 

 

    

 

 

 

Denominator for diluted net income per share

     64,275         64,651         64,461   

Net income per common share:

        

Basic

   $ 5.00       $ 4.00       $ 3.17   

Diluted

   $ 4.98       $ 3.98       $ 3.15   
Valuation and qualifying accounts (Tables)
Valuation and Qualifying Accounts

Description

   Balance at
beginning
of period
    Charged to
costs and
expenses
     Deductions     Balance at
end of
period
 
     (In thousands)  

Fiscal 2015

         

Allowance for doubtful accounts

   $ 1,346      $ 2,063       $ (2,297 )(a)    $ 1,112   

Shrink reserve

     11,598        29,894         (26,233     15,259   

Inventory — lower of cost or market reserve

     5,253        3,323         (3,573     5,003   

Insurance:

         

Workers Comp / General Liability Prepaid Asset

     (1,789 )(b)      5,935         (6,072     (1,926

Employee Health Care Accrued Liability

     2,435        55,423         (53,671     4,187   

Fiscal 2014

         

Allowance for doubtful accounts

   $ 915      $ 874       $ (443 )(a)    $ 1,346   

Shrink reserve

     9,358        22,374         (20,134     11,598   

Inventory — lower of cost or market reserve

     4,861        4,368         (3,976     5,253   

Insurance:

         

Workers Comp / General Liability Prepaid Asset

     (1,817 )(b)      6,899         (6,871     (1,789

Employee Health Care Accrued Liability

     2,606        41,335         (41,506     2,435   

Fiscal 2013

         

Allowance for doubtful accounts

   $ 973      $ 300       $ (358 )(a)    $ 915   

Shrink reserve

     4,020        16,298         (10,960     9,358   

Inventory — lower of cost or market reserve

     2,364        4,522         (2,025     4,861   

Insurance:

         

Workers Comp / General Liability Prepaid Asset

     (2,400 )(b)      7,060         (6,477     (1,817

Employee Health Care Accrued Liability

     2,232        34,422         (34,048     2,606   

 

 

(a) Represents write-off of uncollectible accounts

 

(b) Represents prepaid insurance
Selected quarterly financial data (unaudited) (Tables)
Quarterly Financial Information

The following tables set forth the Company’s unaudited quarterly results of operations for each of the quarters in fiscal 2015 and fiscal 2014. The Company’s quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31 and January 31.

 

     2015  
     First     Second     Third     Fourth  
(In thousands, except per share data)                         

Net sales

   $ 868,122      $ 876,999      $ 910,700      $ 1,268,295   

Cost of sales

     564,938        570,524        575,062        829,259   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     303,184        306,475        335,638        439,036   

Selling, general and administrative expenses

     192,485        183,937        218,763        268,169   

Pre-opening expenses

     3,117        4,078        6,106        1,381   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     107,582        118,460        110,769        169,486   

Interest income, net

     (311     (276     (283     (273
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     107,893        118,736        111,052        169,759   

Income tax expense

     40,947        44,567        39,982        61,936   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 66,946      $ 74,169      $ 71,070      $ 107,823   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

        

Basic

   $ 1.04      $ 1.16      $ 1.11      $ 1.69   

Diluted

   $ 1.04      $ 1.15      $ 1.11      $ 1.69   

 

     2014  
     First     Second     Third     Fourth  
(In thousands, except per share data)                         

Net sales

   $ 713,770      $ 734,236      $ 745,722      $ 1,047,641   

Cost of sales

     467,817        474,894        463,967        697,904   
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     245,953        259,342        281,755        349,737   

Selling, general and administrative expenses

     162,443        157,768        181,093        210,702   

Pre-opening expenses

     2,629        3,595        6,574        1,568   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income

     80,881        97,979        94,088        137,467   

Interest income, net

     (200     (209     (254     (231
  

 

 

   

 

 

   

 

 

   

 

 

 

Income before income taxes

     81,081        98,188        94,342        137,698   

Income tax expense

     31,128        37,394        35,218        50,434   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 49,953      $ 60,794      $ 59,124      $ 87,264   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income per common share:

        

Basic

   $ 0.78      $ 0.94      $ 0.92      $ 1.36   

Diluted

   $ 0.77      $ 0.94      $ 0.91      $ 1.35   
Business and Basis of Presentation - Additional Information (Detail)
12 Months Ended
Jan. 30, 2016
Segment
Store
State
Organization, Consolidation and Presentation of Financial Statements [Abstract]
 
Number of stores
874 
Number of states in which entity operates
48 
Number of operating segments
Number of reportable segments
Summary of Significant Accounting Policies - Additional Information (Detail) (USD $)
12 Months Ended
Jan. 30, 2016
Jan. 31, 2015
Feb. 1, 2014
Organization Consolidation and Presentation of Financial Statements [Line Items]
 
 
 
Allowance for doubtful receivable
$ 1,112,000 
$ 1,346,000 
 
Outstanding debt
 
Impairment charges
Accrued liability loyalty programs
20,026,000 
15,032,000 
 
Cost of loyalty programs
54,464,000 
42,096,000 
27,588,000 
Duration of refund for sales return
60 days 
 
 
Deferred gift card revenue
31,830,000 
22,681,000 
 
Gift card breakage
3,728,000 
2,720,000 
 
Total advertising costs
187,158,000 
157,847,000 
140,774,000 
Prepaid advertising costs
6,413,000 
8,899,000 
 
Stock compensation expense
15,594,000 
14,923,000 
16,003,000 
Stop loss coverage of employee health claims
200,000 
 
 
Stop loss coverage of general liability claims
100,000 
 
 
Stop loss coverage of workers compensation claims
250,000 
 
 
Sales [Member]
 
 
 
Organization Consolidation and Presentation of Financial Statements [Line Items]
 
 
 
Percentage of advertisement expense to sales
4.80% 
4.90% 
5.30% 
Leasehold Improvements [Member]
 
 
 
Organization Consolidation and Presentation of Financial Statements [Line Items]
 
 
 
Estimated useful lives or the expected lease term
10 years 
 
 
Salon Service [Member]
 
 
 
Organization Consolidation and Presentation of Financial Statements [Line Items]
 
 
 
Revenue from Salon service
209,249,000 
175,533,000 
145,815,000 
E-commerce [Member]
 
 
 
Organization Consolidation and Presentation of Financial Statements [Line Items]
 
 
 
Revenue from E-Commerce
221,077,000 
149,857,000 
95,809,000 
Vendor Allowances [Member]
 
 
 
Organization Consolidation and Presentation of Financial Statements [Line Items]
 
 
 
Allowances receivable
46,932,000 
39,629,000 
 
Landlord Allowances [Member]
 
 
 
Organization Consolidation and Presentation of Financial Statements [Line Items]
 
 
 
Allowances receivable
$ 10,250,000 
$ 8,357,000 
 
Summary of Significant Accounting Policies - Summary of Estimated Useful Lives or Expected Lease Term (Detail)
12 Months Ended
Jan. 30, 2016
Equipment and Fixtures [Member] |
Minimum [Member]
 
Property, Plant and Equipment [Line Items]
 
Estimated useful lives or the expected lease term
3 years 
Equipment and Fixtures [Member] |
Maximum [Member]
 
Property, Plant and Equipment [Line Items]
 
Estimated useful lives or the expected lease term
10 years 
Leasehold Improvements [Member]
 
Property, Plant and Equipment [Line Items]
 
Estimated useful lives or the expected lease term
10 years 
Leasehold Improvements [Member] |
Average [Member]
 
Property, Plant and Equipment [Line Items]
 
Estimated useful lives or the expected lease term
10 years 
Electronic Equipment and Software [Member] |
Minimum [Member]
 
Property, Plant and Equipment [Line Items]
 
Estimated useful lives or the expected lease term
3 years 
Electronic Equipment and Software [Member] |
Maximum [Member]
 
Property, Plant and Equipment [Line Items]
 
Estimated useful lives or the expected lease term
5 years 
Property and Equipment - Components of Property and Equipment (Detail) (USD $)
In Thousands, unless otherwise specified
Jan. 30, 2016
Jan. 31, 2015
Property, Plant and Equipment [Line Items]
 
 
Property plant and equipment, gross
$ 1,501,955 
$ 1,243,249 
Less accumulated depreciation and amortization
(654,355)
(526,090)
Property and equipment, net
847,600 
717,159 
Equipment and Fixtures [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Property plant and equipment, gross
556,499 
447,782 
Leasehold Improvements [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Property plant and equipment, gross
515,712 
431,999 
Electronic Equipment and Software [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Property plant and equipment, gross
353,940 
272,937 
Construction-in-progress [Member]
 
 
Property, Plant and Equipment [Line Items]
 
 
Property plant and equipment, gross
$ 75,804 
$ 90,531 
Property and Equipment - Additional Information (Detail) (USD $)
12 Months Ended
Jan. 30, 2016
Jan. 31, 2015
Property, Plant and Equipment [Abstract]
 
 
Capitalized interest
$ 0 
$ 0 
Commitments and Contingencies - Additional Information (Detail) (USD $)
In Thousands, unless otherwise specified
12 Months Ended
Jan. 30, 2016
Lawsuits
Jan. 31, 2015
Feb. 1, 2014
Long-term Purchase Commitment [Line Items]
 
 
 
Total rent expense under operating leases
$ 181,487 
$ 159,245 
$ 138,086 
Suit settlement amount
1,750 
 
 
Putative employment class action lawsuits
 
 
Multi-Year Supply Chain [Member]
 
 
 
Long-term Purchase Commitment [Line Items]
 
 
 
Contractual obligations related to commitments
4,908 
 
 
Payments under commitments
28,044 
38,212 
 
Retail Stores [Member]
 
 
 
Long-term Purchase Commitment [Line Items]
 
 
 
Minimum lease payments for stores to be opened in next fiscal year
176,749 
 
 
Minimum [Member]
 
 
 
Long-term Purchase Commitment [Line Items]
 
 
 
Non-cancelable operating lease terms
3 years 
 
 
Maximum [Member]
 
 
 
Long-term Purchase Commitment [Line Items]
 
 
 
Non-cancelable operating lease terms
10 years 
 
 
Non Cancelable Advertising Other Goods And Service Contracts [Member]
 
 
 
Long-term Purchase Commitment [Line Items]
 
 
 
Contractual obligations related to commitments
$ 22,005 
 
 
Contractual obligation agreements expiry period
1 year 
 
 
Commitments and Contingencies - Schedule of Future Minimum Lease Payments Under Operating Leases (Detail) (USD $)
In Thousands, unless otherwise specified
Jan. 30, 2016
Operating Leases, Future Minimum Payments Due, Fiscal Year Maturity [Abstract]
 
2016
$ 238,837 
2017
240,654 
2018
225,187 
2019
209,867 
2020
196,952 
2021 and thereafter
647,636 
Total minimum lease payments
$ 1,759,133 
Accrued Liabilities - Schedule of Accrued Liabilities (Detail) (USD $)
In Thousands, unless otherwise specified
Jan. 30, 2016
Jan. 31, 2015
Schedule Of Accrued Liabilities [Abstract]
 
 
Accrued vendor liabilities (including accrued property and equipment costs)
$ 27,894 
$ 24,705 
Accrued customer liabilities
54,496 
39,593 
Accrued payroll, bonus and employee benefits
61,068 
50,931 
Accrued taxes, other
20,486 
17,824 
Other accrued liabilities
23,407 
16,359 
Accrued liabilities
$ 187,351 
$ 149,412 
Income Taxes - Schedule of Provision for Income Taxes (Detail) (USD $)
In Thousands, unless otherwise specified
3 Months Ended 12 Months Ended
Jan. 30, 2016
Oct. 31, 2015
Aug. 1, 2015
May 2, 2015
Jan. 31, 2015
Nov. 1, 2014
Aug. 2, 2014
May 3, 2014
Jan. 30, 2016
Jan. 31, 2015
Feb. 1, 2014
Current:
 
 
 
 
 
 
 
 
 
 
 
Federal
 
 
 
 
 
 
 
 
$ 163,048 
$ 128,159 
$ 105,731 
State
 
 
 
 
 
 
 
 
18,694 
16,909 
15,310 
Total current
 
 
 
 
 
 
 
 
181,742 
145,068 
121,041 
Deferred:
 
 
 
 
 
 
 
 
 
 
 
Federal
 
 
 
 
 
 
 
 
6,981 
8,392 
3,891 
State
 
 
 
 
 
 
 
 
(1,291)
714 
(75)
Total deferred
 
 
 
 
 
 
 
 
5,690 
9,106 
3,816 
Provision for income taxes
$ 61,936 
$ 39,982 
$ 44,567 
$ 40,947 
$ 50,434 
$ 35,218 
$ 37,394 
$ 31,128 
$ 187,432 
$ 154,174 
$ 124,857 
Income Taxes - Schedule of Reconciliation of Federal Statutory Rate to Effective Tax Rate (Detail)
12 Months Ended
Jan. 30, 2016
Jan. 31, 2015
Feb. 1, 2014
Effective Income Tax Rate Reconciliation, Percent [Abstract]
 
 
 
Federal statutory rate
35.00% 
35.00% 
35.00% 
State effective rate, net of federal tax benefit
2.20% 
2.80% 
3.00% 
Other
(0.30%)
(0.30%)
0.10% 
Effective tax rate
36.90% 
37.50% 
38.10% 
Income Taxes - Components of Deferred Tax Assets and Liabilities (Detail) (USD $)
In Thousands, unless otherwise specified
Jan. 30, 2016
Jan. 31, 2015
Deferred tax assets:
 
 
Reserves not currently deductible
$ 27,734 
$ 22,380 
Employee benefits
10,594 
8,782 
Credit carryforwards
441 
338 
Accrued liabilities
10,704 
8,231 
Inventory valuation
257 
617 
Total deferred tax asset