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1. | Business and basis of presentation |
On January 29, 2017, Ulta Salon, Cosmetics & Fragrance, Inc. implemented a holding company reorganization pursuant to which Ulta Beauty, Inc., which was incorporated as a Delaware corporation in December 2016, became the successor to Ulta Salon, Cosmetics & Fragrance, Inc., the former publicly traded company and now a wholly owned subsidiary of Ulta Beauty, Inc. As used in these notes and throughout this Quarterly Report on Form 10-Q, all references to “we,” “us,” “our,” “Ulta Beauty” or the “Company” refer to Ulta Beauty, Inc. and its consolidated subsidiaries.
The Company was originally founded in 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 July 29, 2017, the Company operated 1,010 stores in 48 states and the District of Columbia, as shown in the table below.
Location |
Number of stores |
Location |
Number of stores |
|||||||
Alabama |
17 |
Montana |
5 | |||||||
Alaska |
3 |
Nebraska |
5 | |||||||
Arizona |
25 |
Nevada |
14 | |||||||
Arkansas |
7 |
New Hampshire |
7 | |||||||
California |
128 |
New Jersey |
26 | |||||||
Colorado |
21 |
New Mexico |
6 | |||||||
Connecticut |
13 |
New York |
36 | |||||||
Delaware |
3 |
North Carolina |
28 | |||||||
District of Columbia |
1 |
North Dakota |
3 | |||||||
Florida |
68 |
Ohio |
39 | |||||||
Georgia |
32 |
Oklahoma |
16 | |||||||
Idaho |
7 |
Oregon |
11 | |||||||
Illinois |
49 |
Pennsylvania |
37 | |||||||
Indiana |
19 |
Rhode Island |
3 | |||||||
Iowa |
8 |
South Carolina |
15 | |||||||
Kansas |
9 |
South Dakota |
2 | |||||||
Kentucky |
10 |
Tennessee |
19 | |||||||
Louisiana |
16 |
Texas |
97 | |||||||
Maine |
3 |
Utah |
12 | |||||||
Maryland |
18 |
Virginia |
25 | |||||||
Massachusetts |
15 |
Washington |
24 | |||||||
Michigan |
43 |
West Virginia |
6 | |||||||
Minnesota |
13 |
Wisconsin |
18 | |||||||
Mississippi |
9 |
Wyoming |
2 | |||||||
Missouri |
17 |
Total |
1,010 |
The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and the U.S. Securities and Exchange Commission’s Article 10, Regulation S-X. These consolidated financial statements were prepared on a consolidated basis to include the accounts of the Company and its wholly owned subsidiaries. All significant intercompany accounts, transactions and unrealized profit were eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary to fairly state the financial position and results of operations and cash flows for the interim periods presented.
The Company’s business is subject to seasonal fluctuation. Significant portions of the Company’s net sales and net income are realized during the fourth quarter of the fiscal year due to the holiday selling season. The results for the 13 and 26 weeks ended July 29, 2017 are not necessarily indicative of the results to be expected for the fiscal year ending February 3, 2018, or for any other future interim period or for any future year.
These interim consolidated financial statements and the related notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended January 28, 2017. All amounts are stated in thousands, with the exception of per share amounts and number of stores.
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2. | Summary of significant accounting policies |
Information regarding the Company’s significant accounting policies is contained in Note 2, “Summary of significant accounting policies,” to the consolidated financial statements in the Company’s Annual Report on Form 10-K for the year ended January 28, 2017. Presented below and in the following notes is supplemental information that should be read in conjunction with “Notes to Consolidated Financial Statements” in the Annual Report.
Fiscal quarter
The Company’s quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31, and January 31. The Company’s second quarter in fiscal 2017 and 2016 ended on July 29, 2017 and July 30, 2016, respectively.
Share-based compensation
The Company measures share-based compensation cost on the grant date, based on the fair value of the award, and recognizes the expense on a straight-line method over the requisite service period for awards expected to vest. The Company estimated the grant date fair value of stock options using a Black-Scholes valuation model using the following weighted-average assumptions for the periods indicated:
26 Weeks Ended | ||||||||
July 29, 2017 |
July 30, 2016 |
|||||||
Volatility rate |
31.0 | % | 35.0 | % | ||||
Average risk-free interest rate |
1.6 | % | 1.2 | % | ||||
Average expected life (in years) |
3.5 | 3.5 | ||||||
Dividend yield |
None | None |
The Company granted 103 and 107 stock options during the 26 weeks ended July 29, 2017 and July 30, 2016, respectively. The compensation cost that has been charged against operating income for stock option grants was $2,235 and $1,999 for the 13 weeks ended July 29, 2017 and July 30, 2016, respectively. The compensation cost that has been charged against operating income for stock option grants was $4,377 and $3,982 for the 26 weeks ended July 29, 2017 and July 30, 2016, respectively. The weighted-average grant date fair value of these options was $70.12 and $52.72 for the 26 weeks ended July 29, 2017 and July 30, 2016, respectively. At July 29, 2017, there was approximately $22,633 of unrecognized compensation expense related to unvested stock options.
The Company issued 42 and 50 restricted stock units during 26 weeks ended July 29, 2017 and July 30, 2016, respectively. The compensation cost that has been charged against operating income for restricted stock units was $2,354 and $1,884 for the 13 weeks ended July 29, 2017 and July 30, 2016, respectively. The compensation cost that has been charged against operating income for restricted stock units was $4,453 and $3,445 for the 26 weeks ended July 29, 2017 and July 30, 2016, respectively. At July 29, 2017, there was approximately $17,224 of unrecognized compensation expense related to restricted stock units.
The Company issued 21 and 24 performance-based restricted stock units during the 26 weeks ended July 29, 2017 and July 30, 2016, respectively. The compensation cost that has been charged against operating income for performance-based restricted stock units was $1,569 and $957 for the 13 weeks ended July 29, 2017 and July 30, 2016, respectively. The compensation cost that has been charged against operating income for performance-based restricted stock units was $2,819 and $1,435 for the 26 weeks ended July 29, 2017 and July 30, 2016, respectively. At July 29, 2017, there was approximately $11,617 of unrecognized compensation expense related to performance-based restricted stock units.
Recent accounting pronouncements not yet adopted
Revenue Recognition from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification Topic 606 (ASU 2014-09). 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 the Company will recognize revenue when the transfer of promised goods or services to customers occurs in an amount that reflects the consideration to which the Company expects 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. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (ASU 2016-08), which further clarifies how to implement revenue recognition guidance related to determining whether an entity is a principal or an agent in a revenue transaction. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (ASU 2016-10), which further clarifies the aspects of (a) identifying performance obligations and (b) the licensing implementation guidance. The effective date and transition requirements for ASU 2016-08 and ASU 2016-10 are the same as the effective date and transition requirements of ASU 2014-09. These standards allow for either full retrospective or modified retrospective adoption.
The Company is currently evaluating the overall impact that ASU 2014-09 and its related amendments will have on the consolidated financial statements. The Company will adopt the new guidance in fiscal 2018, and anticipates using the modified retrospective method. The Company’s project team is in the process of finalizing the revised accounting policies based on the assessment of the effect of the standard. ASU 2014-09 will impact the recognition timing or classification of revenues and expenses for the sales refund reserve (by grossing up the balance sheet to record a refund obligation and right of return asset instead of recognizing revenue net of returns), gift card breakage (by including breakage within net sales instead of selling, general and administrative expenses under the proportional model), and loyalty program accounting (by using the deferred revenue method instead of the incremental cost method), however, the Company does not expect a significant impact to pretax income upon adoption. In addition, the Company continues to evaluate changes to business processes and controls to support recognition and disclosure under the new standard.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (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 recognize 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 GAAP 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. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, and have the option to use certain relief. ASU 2016-02 is effective for public companies for annual reporting periods beginning after December 15, 2018, including interim reporting periods. Early adoption is permitted.
The Company is evaluating whether to early adopt the new standard in fiscal 2018. The Company’s ability to early adopt depends on system readiness, including software procured from third-party providers, and completing an analysis of information necessary to restate prior period consolidated financial statements. The Company formed a project team to review the current accounting policies and practices and assess the effect of the standard on the consolidated financial statements. The team has completed a preliminary assessment of the potential impact of adopting ASU 2016-02 on the consolidated financial statements. The adoption of ASU 2016-02 will have a material impact on the Company’s consolidated financial position, however the Company does not believe adoption of this standard will have a material impact on the Company’s consolidated results of operations or cash flows.
Liabilities – Extinguishments of Liabilities
In March 2016, the FASB issued ASU 2016-04, Liabilities – Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored – Value Products. This update entitles a company to derecognize amounts related to expected breakage to the extent that it is probable a significant reversal of the recognized breakage amount will not subsequently occur. ASU 2016-04 should be applied either using a modified retrospective transition method or retrospectively. ASU 2016-04 is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted. The adoption of ASU 2016-04 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). ASU 2016-15 provides classification guidance on certain cash receipts and cash payments, including, but not limited to, debt prepayment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of bank-owned life insurance policies and distributions received from equity method investees. The adoption of ASU 2016-15 requires a retrospective transition method applied to each period presented. ASU 2016-15 is effective for annual periods and interim periods beginning after December 15, 2017, and early adoption is permitted. The adoption of ASU 2016-15 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the Emerging Issues Task Force), which amends ASU Topic 230. ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer be required to present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. Entities will also have to disclose the nature of their restricted cash and restricted cash equivalent balances. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and interim periods within those years, and early adoption is permitted. Entities are required to apply the guidance retrospectively. The adoption of ASU 2016-18 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Compensation – Stock Compensation: Scope of Modification Accounting
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, which provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and early adoption is permitted. The adoption of ASU 2017-09 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Recently adopted accounting pronouncements
Compensation – Stock Compensation
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This guidance changed how companies account for certain aspects of share-based payments to employees. Companies have to recognize all income tax effects of awards in the income statement when the awards vest or are settled, and additional paid-in capital pools were eliminated. The guidance on employer’s accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and for forfeitures changed, and two practical expedients for non-public entities were added. ASU 2016-09 was effective for annual and interim reporting periods beginning after December 15, 2016.
The Company adopted the new guidance prospectively in the first quarter of fiscal 2017. The adoption resulted in a decrease in the provision for income taxes of $1,406 and $9,139 for the 13 weeks and 26 weeks ended July 29, 2017, respectively, due to the recognition of excess tax benefits for options exercised and the vesting of equity awards. The extent of excess tax benefits or deficiencies is subject to variation in the Company’s stock price and timing/extent of restricted stock units vesting and employee stock option exercises. Additionally, the consolidated statements of cash flows now present such tax benefits or deficiencies as an operating activity on a prospective basis. Based on the adoption methodology applied, the statement of cash flows classification of prior periods has not been adjusted. As allowed under the new guidance, the Company did not change its accounting principles relative to elements of this standard and continued its existing practice of estimating the number of awards that will be forfeited.
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3. | Commitments and contingencies |
Leases – The Company leases retail stores, distribution and office facilities and certain equipment. Original non-cancelable lease terms range from three to ten years, and store leases generally contain renewal options for additional years. Total rent expense under operating leases was $57,812 and $49,685 for the 13 weeks ended July 29, 2017 and July 30, 2016, respectively. Total rent expense under operating leases was $114,595 and $98,844 for the 26 weeks ended July 29, 2017 and July 30, 2016, respectively.
General litigation – The Company is involved in various legal proceedings that are incidental to the conduct of the business. In the opinion of management, the amount of any liability with respect to these proceedings, either individually or in the aggregate, will not have a material adverse effect on the Company’s consolidated financial position, results of operations or cash flows.
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4. | Notes payable |
In 2011, the Company entered into an Amended and Restated Loan and Security Agreement with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and a Lender thereunder, Wells Fargo Capital Finance LLC as a Lender, J.P. Morgan Securities LLC as a Lender, JP Morgan Chase Bank, N.A. as a Lender and PNC Bank, National Association, as a Lender, which has been amended multiple times since 2011 (as amended, the Loan Agreement). The Loan Agreement currently matures in December 2018, provides maximum revolving loans equal to the lesser of $200,000 or a percentage of eligible owned inventory, contains a $10,000 subfacility for letters of credit and allows the Company to increase the revolving facility by an additional $50,000, subject to consent by each lender and other conditions. The Loan Agreement contains a requirement to maintain a minimum amount of excess borrowing availability at all times. Substantially all of the Company’s assets are pledged as collateral for outstanding borrowings under the facility. Outstanding borrowings will bear interest at the prime rate or London Interbank Offered Rate plus 1.50%, and the unused line fee is 0.20%.
As of July 29, 2017, January 28, 2017 and July 30, 2016, the Company had no borrowings outstanding under the credit facility and the Company was in compliance with all terms and covenants of the Loan Agreement.
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5. | Fair value measurements |
The carrying value of cash and cash equivalents, accounts receivable and accounts payable approximates their estimated fair values due to the short maturities of these instruments.
Fair value is measured using inputs from the three levels of the fair value hierarchy, which are described as follows:
• | Level 1 – observable inputs such as quoted prices for identical instruments in active markets. |
• | Level 2 – inputs other than quoted prices in active markets that are observable either directly or indirectly through corroboration with observable market data. |
• | Level 3 – unobservable inputs in which there is little or no market data, which would require the Company to develop its own assumptions. |
As of July 29, 2017, January 28, 2017 and July 30, 2016, the Company held financial liabilities of $14,303, $10,474 and $10,206, 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 values which are based primarily on quoted market prices of underlying assets of the funds within the plan.
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6. | Investments |
The Company’s short-term investments as of July 29, 2017, January 28, 2017 and July 30, 2016 consist of $180,000, $30,000 and $110,000, 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 July 29, 2017.
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9. | Subsequent event |
On August 23, 2017, the Company entered into a Second Amended and Restated Loan Agreement (the Loan Amendment) with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and a Lender thereunder, Wells Fargo Bank, National Association and JPMorgan Chase Bank, N.A., as Lead Arrangers and Bookrunners, JPMorgan Chase Bank, N.A., as Syndication Agent and a Lender, PNC Bank, National Association, as Documentation Agent and a Lender, and the other Lenders party thereto. The Loan Amendment amended and restated the Loan Agreement. The Loan Amendment extends the maturity of the facility to August 23, 2022, provides maximum revolving loans equal to the lesser of $400,000 or a percentage of eligible owned inventory (which borrowing base may, at the election of the Company and satisfaction of certain conditions, include a percentage of eligible owned accounts and qualified cash), contains a $20,000 subfacility for letters of credit and allows the Company to increase the revolving facility by an additional $50,000, subject to the consent by each lender and other conditions. The Loan Amendment contains a requirement to maintain a fixed charge coverage ratio of not less than 1.0 to 1.0 during such periods when availability under the Loan Amendment falls below a specified threshold. Substantially all of the Company’s assets are pledged as collateral for outstanding borrowings under the Loan Amendment. Outstanding borrowings will bear interest at either a base rate or the London Interbank Offered Rate plus 1.25%, and the unused line fee is 0.20% per annum.
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Fiscal quarter
The Company’s quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31, and January 31. The Company’s second quarter in fiscal 2017 and 2016 ended on July 29, 2017 and July 30, 2016, respectively.
Share-based compensation
The Company measures share-based compensation cost on the grant date, based on the fair value of the award, and recognizes the expense on a straight-line method over the requisite service period for awards expected to vest. The Company estimated the grant date fair value of stock options using a Black-Scholes valuation model using the following weighted-average assumptions for the periods indicated:
26 Weeks Ended | ||||||||
July 29, 2017 |
July 30, 2016 |
|||||||
Volatility rate |
31.0 | % | 35.0 | % | ||||
Average risk-free interest rate |
1.6 | % | 1.2 | % | ||||
Average expected life (in years) |
3.5 | 3.5 | ||||||
Dividend yield |
None | None |
The Company granted 103 and 107 stock options during the 26 weeks ended July 29, 2017 and July 30, 2016, respectively. The compensation cost that has been charged against operating income for stock option grants was $2,235 and $1,999 for the 13 weeks ended July 29, 2017 and July 30, 2016, respectively. The compensation cost that has been charged against operating income for stock option grants was $4,377 and $3,982 for the 26 weeks ended July 29, 2017 and July 30, 2016, respectively. The weighted-average grant date fair value of these options was $70.12 and $52.72 for the 26 weeks ended July 29, 2017 and July 30, 2016, respectively. At July 29, 2017, there was approximately $22,633 of unrecognized compensation expense related to unvested stock options.
The Company issued 42 and 50 restricted stock units during 26 weeks ended July 29, 2017 and July 30, 2016, respectively. The compensation cost that has been charged against operating income for restricted stock units was $2,354 and $1,884 for the 13 weeks ended July 29, 2017 and July 30, 2016, respectively. The compensation cost that has been charged against operating income for restricted stock units was $4,453 and $3,445 for the 26 weeks ended July 29, 2017 and July 30, 2016, respectively. At July 29, 2017, there was approximately $17,224 of unrecognized compensation expense related to restricted stock units.
The Company issued 21 and 24 performance-based restricted stock units during the 26 weeks ended July 29, 2017 and July 30, 2016, respectively. The compensation cost that has been charged against operating income for performance-based restricted stock units was $1,569 and $957 for the 13 weeks ended July 29, 2017 and July 30, 2016, respectively. The compensation cost that has been charged against operating income for performance-based restricted stock units was $2,819 and $1,435 for the 26 weeks ended July 29, 2017 and July 30, 2016, respectively. At July 29, 2017, there was approximately $11,617 of unrecognized compensation expense related to performance-based restricted stock units.
Recent accounting pronouncements not yet adopted
Revenue Recognition from Contracts with Customers
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification Topic 606 (ASU 2014-09). 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 the Company will recognize revenue when the transfer of promised goods or services to customers occurs in an amount that reflects the consideration to which the Company expects 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. In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (ASU 2016-08), which further clarifies how to implement revenue recognition guidance related to determining whether an entity is a principal or an agent in a revenue transaction. In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing (ASU 2016-10), which further clarifies the aspects of (a) identifying performance obligations and (b) the licensing implementation guidance. The effective date and transition requirements for ASU 2016-08 and ASU 2016-10 are the same as the effective date and transition requirements of ASU 2014-09. These standards allow for either full retrospective or modified retrospective adoption.
The Company is currently evaluating the overall impact that ASU 2014-09 and its related amendments will have on the consolidated financial statements. The Company will adopt the new guidance in fiscal 2018, and anticipates using the modified retrospective method. The Company’s project team is in the process of finalizing the revised accounting policies based on the assessment of the effect of the standard. ASU 2014-09 will impact the recognition timing or classification of revenues and expenses for the sales refund reserve (by grossing up the balance sheet to record a refund obligation and right of return asset instead of recognizing revenue net of returns), gift card breakage (by including breakage within net sales instead of selling, general and administrative expenses under the proportional model), and loyalty program accounting (by using the deferred revenue method instead of the incremental cost method), however, the Company does not expect a significant impact to pretax income upon adoption. In addition, the Company continues to evaluate changes to business processes and controls to support recognition and disclosure under the new standard.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (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 recognize 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 GAAP 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. Entities are required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements, and have the option to use certain relief. ASU 2016-02 is effective for public companies for annual reporting periods beginning after December 15, 2018, including interim reporting periods. Early adoption is permitted.
The Company is evaluating whether to early adopt the new standard in fiscal 2018. The Company’s ability to early adopt depends on system readiness, including software procured from third-party providers, and completing an analysis of information necessary to restate prior period consolidated financial statements. The Company formed a project team to review the current accounting policies and practices and assess the effect of the standard on the consolidated financial statements. The team has completed a preliminary assessment of the potential impact of adopting ASU 2016-02 on the consolidated financial statements. The adoption of ASU 2016-02 will have a material impact on the Company’s consolidated financial position, however the Company does not believe adoption of this standard will have a material impact on the Company’s consolidated results of operations or cash flows.
Liabilities – Extinguishments of Liabilities
In March 2016, the FASB issued ASU 2016-04, Liabilities – Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored – Value Products. This update entitles a company to derecognize amounts related to expected breakage to the extent that it is probable a significant reversal of the recognized breakage amount will not subsequently occur. ASU 2016-04 should be applied either using a modified retrospective transition method or retrospectively. ASU 2016-04 is effective for annual and interim periods beginning after December 15, 2017, and early adoption is permitted. The adoption of ASU 2016-04 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Statement of Cash Flows
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force). ASU 2016-15 provides classification guidance on certain cash receipts and cash payments, including, but not limited to, debt prepayment costs, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of bank-owned life insurance policies and distributions received from equity method investees. The adoption of ASU 2016-15 requires a retrospective transition method applied to each period presented. ASU 2016-15 is effective for annual periods and interim periods beginning after December 15, 2017, and early adoption is permitted. The adoption of ASU 2016-15 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (a consensus of the Emerging Issues Task Force), which amends ASU Topic 230. ASU 2016-18 requires entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. As a result, entities will no longer be required to present transfers between cash and cash equivalents and restricted cash and restricted cash equivalents in the statement of cash flows. When cash, cash equivalents, restricted cash and restricted cash equivalents are presented in more than one line item on the balance sheet, the new guidance requires a reconciliation of the totals in the statement of cash flows to the related captions in the balance sheet. Entities will also have to disclose the nature of their restricted cash and restricted cash equivalent balances. ASU 2016-18 is effective for fiscal years beginning after December 15, 2017 and interim periods within those years, and early adoption is permitted. Entities are required to apply the guidance retrospectively. The adoption of ASU 2016-18 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Compensation – Stock Compensation: Scope of Modification Accounting
In May 2017, the FASB issued ASU 2017-09, Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting, which provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the changes are considered non-substantive. ASU 2017-09 is effective for fiscal years beginning after December 15, 2017 and interim periods within those fiscal years, and early adoption is permitted. The adoption of ASU 2017-09 is not expected to have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
Recently adopted accounting pronouncements
Compensation – Stock Compensation
In March 2016, the FASB issued ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. This guidance changed how companies account for certain aspects of share-based payments to employees. Companies have to recognize all income tax effects of awards in the income statement when the awards vest or are settled, and additional paid-in capital pools were eliminated. The guidance on employer’s accounting for an employee’s use of shares to satisfy the employer’s statutory income tax withholding obligation and for forfeitures changed, and two practical expedients for non-public entities were added. ASU 2016-09 was effective for annual and interim reporting periods beginning after December 15, 2016.
The Company adopted the new guidance prospectively in the first quarter of fiscal 2017. The adoption resulted in a decrease in the provision for income taxes of $1,406 and $9,139 for the 13 weeks and 26 weeks ended July 29, 2017, respectively, due to the recognition of excess tax benefits for options exercised and the vesting of equity awards. The extent of excess tax benefits or deficiencies is subject to variation in the Company’s stock price and timing/extent of restricted stock units vesting and employee stock option exercises. Additionally, the consolidated statements of cash flows now present such tax benefits or deficiencies as an operating activity on a prospective basis. Based on the adoption methodology applied, the statement of cash flows classification of prior periods has not been adjusted. As allowed under the new guidance, the Company did not change its accounting principles relative to elements of this standard and continued its existing practice of estimating the number of awards that will be forfeited.
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As of July 29, 2017, the Company operated 1,010 stores in 48 states and the District of Columbia, as shown in the table below.
Location |
Number of stores |
Location |
Number of stores |
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Alabama |
17 |
Montana |
5 | |||||||
Alaska |
3 |
Nebraska |
5 | |||||||
Arizona |
25 |
Nevada |
14 | |||||||
Arkansas |
7 |
New Hampshire |
7 | |||||||
California |
128 |
New Jersey |
26 | |||||||
Colorado |
21 |
New Mexico |
6 | |||||||
Connecticut |
13 |
New York |
36 | |||||||
Delaware |
3 |
North Carolina |
28 | |||||||
District of Columbia |
1 |
North Dakota |
3 | |||||||
Florida |
68 |
Ohio |
39 | |||||||
Georgia |
32 |
Oklahoma |
16 | |||||||
Idaho |
7 |
Oregon |
11 | |||||||
Illinois |
49 |
Pennsylvania |
37 | |||||||
Indiana |
19 |
Rhode Island |
3 | |||||||
Iowa |
8 |
South Carolina |
15 | |||||||
Kansas |
9 |
South Dakota |
2 | |||||||
Kentucky |
10 |
Tennessee |
19 | |||||||
Louisiana |
16 |
Texas |
97 | |||||||
Maine |
3 |
Utah |
12 | |||||||
Maryland |
18 |
Virginia |
25 | |||||||
Massachusetts |
15 |
Washington |
24 | |||||||
Michigan |
43 |
West Virginia |
6 | |||||||
Minnesota |
13 |
Wisconsin |
18 | |||||||
Mississippi |
9 |
Wyoming |
2 | |||||||
Missouri |
17 |
Total |
1,010 |
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The Company estimated the grant date fair value of stock options using a Black-Scholes valuation model using the following weighted-average assumptions for the periods indicated:
26 Weeks Ended | ||||||||
July 29, 2017 |
July 30, 2016 |
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Volatility rate |
31.0 | % | 35.0 | % | ||||
Average risk-free interest rate |
1.6 | % | 1.2 | % | ||||
Average expected life (in years) |
3.5 | 3.5 | ||||||
Dividend yield |
None | None |
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