ULTA BEAUTY, INC., 10-Q filed on 12/5/2019
Quarterly Report
v3.19.3
Document and Entity Information - shares
9 Months Ended
Nov. 02, 2019
Dec. 02, 2019
Document And Entity Information    
Entity Registrant Name Ulta Beauty, Inc.  
Document Quarterly Report true  
Document Transition Report false  
Entity Central Index Key 0001403568  
Document Type 10-Q  
Document Period End Date Nov. 02, 2019  
Amendment Flag false  
Current Fiscal Year End Date --02-01  
Entity File Number 001-33764  
Entity Incorporation, State or Country Code DE  
Entity Tax Identification Number 38-4022268  
Entity Address, Address Line One 1000 Remington Blvd.  
Entity Address, Address Line Two Suite 120  
Entity Address, City or Town Bolingbrook  
Entity Address, State or Province IL  
Entity Address, Postal Zip Code 60440  
City Area Code 630  
Local Phone Number 410-4800  
Title of 12(b) Security Common Stock  
Trading Symbol ULTA  
Security Exchange Name NASDAQ  
Entity Interactive Data Current Yes  
Entity Current Reporting Status Yes  
Entity Filer Category Large Accelerated Filer  
Entity Common Stock, Shares Outstanding   57,161,342
Entity Small Business false  
Entity Emerging Growth Company false  
Entity Shell Company false  
Document Fiscal Year Focus 2019  
Document Fiscal Period Focus Q3  
Trading Symbol ULTA  
v3.19.3
Consolidated Balance Sheets - USD ($)
$ in Thousands
Nov. 02, 2019
Feb. 02, 2019
Nov. 03, 2018
Current assets:      
Cash and cash equivalents $ 208,843 $ 409,251 $ 296,944
Short-term investments 0 0 0
Receivables, net 112,888 136,168 102,353
Merchandise inventories, net 1,616,920 1,214,329 1,484,565
Prepaid expenses and other current assets 118,343 138,116 119,817
Prepaid income taxes 40,474 16,997 22,294
Total current assets 2,097,468 1,914,861 2,025,973
Property and equipment, net 1,233,412 1,226,029 1,257,775
Operating lease assets 1,529,524    
Goodwill 10,870 10,870 9,084
Other intangible assets, net 3,622 4,317 6,985
Deferred compensation plan assets 26,269 20,511 21,397
Other long-term assets 27,683 14,584 11,477
Total assets 4,928,848 3,191,172 3,332,691
Current liabilities:      
Accounts payable 594,993 404,016 574,480
Accrued liabilities 249,112 220,666 255,156
Deferred revenue 190,188 199,054 154,447
Current operating lease liabilities 222,627    
Total current liabilities 1,256,920 823,736 984,083
Non-current operating lease liabilities 1,706,806    
Deferred rent   434,980 432,052
Deferred income taxes 83,856 83,864 50,045
Other long-term liabilities 34,110 28,374 30,775
Total liabilities 3,081,692 1,370,954 1,496,955
Commitments and contingencies (Note 7)
Stockholders' equity:      
Common stock, $0.01 par value, 400,000 shares authorized; 57,959, 59,232, and 60,108 shares issued; 57,283, 58,584, and 59,461 shares outstanding; at November 2, 2019 (unaudited), February 2, 2019, and November 3, 2018 (unaudited), respectively 580 592 601
Treasury stock-common, at cost (34,272) (24,908) (24,706)
Additional paid-in capital 800,986 738,671 731,890
Retained earnings 1,079,862 1,105,863 1,127,951
Total stockholders' equity 1,847,156 1,820,218 1,835,736
Total liabilities and stockholders' equity $ 4,928,848 $ 3,191,172 $ 3,332,691
v3.19.3
Consolidated Balance Sheets (Parenthetical) - $ / shares
shares in Thousands
Nov. 02, 2019
Feb. 02, 2019
Nov. 03, 2018
Consolidated Balance Sheets      
Common stock, par value $ 0.01 $ 0.01 $ 0.01
Common stock, shares authorized 400,000 400,000 400,000
Common stock, shares issued 57,959 59,232 60,108
Common stock, shares outstanding 57,283 58,584 59,461
v3.19.3
Consolidated Statements of Income - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 9 Months Ended
Nov. 02, 2019
Nov. 03, 2018
Nov. 02, 2019
Nov. 03, 2018
Consolidated Statements of Income        
Net sales $ 1,682,514 $ 1,560,011 $ 5,092,150 $ 4,591,899
Cost of sales 1,059,081 987,733 3,217,971 2,923,447
Gross profit 623,433 572,278 1,874,179 1,668,452
Selling, general and administrative expenses 449,198 395,453 1,245,174 1,078,219
Pre-opening expenses 6,455 7,612 15,667 17,363
Operating income 167,780 169,213 613,338 572,870
Interest income, net (900) (1,318) (4,617) (3,786)
Income before income taxes 168,680 170,531 617,955 576,656
Income tax expense 38,933 39,365 134,729 132,771
Net income $ 129,747 $ 131,166 $ 483,226 $ 443,885
Net income per common share:        
Basic $ 2.25 $ 2.20 $ 8.31 $ 7.38
Diluted $ 2.25 $ 2.18 $ 8.27 $ 7.35
Weighted average common shares outstanding:        
Basic 57,568 59,724 58,123 60,135
Diluted 57,763 60,062 58,396 60,432
v3.19.3
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
9 Months Ended
Nov. 02, 2019
Nov. 03, 2018
Operating activities    
Net income $ 483,226 $ 443,885
Adjustments to reconcile net income to net cash provided by operating activities:    
Depreciation and amortization 219,207 207,652
Non-cash lease expense 219,220  
Deferred income taxes (8) (408)
Stock-based compensation expense 19,108 20,308
Loss on disposal of property and equipment 4,821 1,339
Change in operating assets and liabilities    
Receivables 5,812 (2,594)
Merchandise inventories (402,591) (388,141)
Prepaid expenses and other current assets (5,487) (19,603)
Income taxes (23,477) (34,906)
Accounts payable 190,977 248,719
Accrued liabilities 23,109 42,151
Deferred revenue (8,866) 1,963
Operating lease liabilities (198,181)  
Deferred rent   24,136
Other assets and liabilities 30,636 (2,287)
Net cash provided by operating activities 557,506 542,214
Investing activities    
Purchases of short-term investments (245,000) (386,193)
Proceeds from short-term investments 245,000 506,193
Purchases of property and equipment (241,136) (256,415)
Acquisitions, net of cash acquired   (13,606)
Purchases of equity investments (43,757)  
Net cash used in investing activities (284,893) (150,021)
Financing activities    
Repurchase of common shares (506,868) (379,423)
Stock options exercised 43,211 12,668
Purchase of treasury shares (9,364) (5,939)
Net cash used in financing activities (473,021) (372,694)
Net increase (decrease) in cash and cash equivalents (200,408) 19,499
Cash and cash equivalents at beginning of period 409,251 277,445
Cash and cash equivalents at end of period 208,843 296,944
Supplemental cash flow information    
Cash paid for income taxes (net of refunds) 126,719 168,087
Non-cash investing activities:    
Change in property and equipment included in accrued liabilities $ 6,797 $ 21,611
v3.19.3
Consolidated Statements of Stockholders' Equity - USD ($)
shares in Thousands, $ in Thousands
Common Stock
Treasury - Common Stock
Additional Paid-In Capital
Retained Earnings
Total
Balance at Feb. 03, 2018 $ 614 $ (18,767) $ 698,917 $ 1,093,453 $ 1,774,217
Balance (in shares) at Feb. 03, 2018 61,441 (619)      
Net income       164,396 164,396
Stock-based compensation     6,170   6,170
Adoption of accounting standards | ASU 2014-09, Revenue from Contracts with Customers (Topic 606)       (29,980) (29,980)
Stock options exercised and other awards $ 2   6,510   6,512
Stock options exercised and other awards (in shares) 176        
Purchase of treasury shares   $ (4,831)     (4,831)
Purchase of treasury shares (in shares)   (23)      
Repurchase of common shares $ (6)     (133,045) (133,051)
Repurchase of common shares (in shares) (619)        
Balance at May. 05, 2018 $ 610 $ (23,598) 711,597 1,094,824 1,783,433
Balance (in shares) at May. 05, 2018 60,998 (642)      
Balance at Feb. 03, 2018 $ 614 $ (18,767) 698,917 1,093,453 1,774,217
Balance (in shares) at Feb. 03, 2018 61,441 (619)      
Net income         443,885
Balance at Nov. 03, 2018 $ 601 $ (24,706) 731,890 1,127,951 $ 1,835,736
Balance (in shares) at Nov. 03, 2018 60,108 (647)     59,461
Balance at May. 05, 2018 $ 610 $ (23,598) 711,597 1,094,824 $ 1,783,433
Balance (in shares) at May. 05, 2018 60,998 (642)      
Net income       148,323 148,323
Stock-based compensation     7,002   7,002
Stock options exercised and other awards     1,936   1,936
Stock options exercised and other awards (in shares) 32        
Purchase of treasury shares   $ (815)     (815)
Purchase of treasury shares (in shares)   (4)      
Repurchase of common shares $ (5)     (127,396) (127,401)
Repurchase of common shares (in shares) (512)        
Balance at Aug. 04, 2018 $ 605 $ (24,413) 720,535 1,115,751 1,812,478
Balance (in shares) at Aug. 04, 2018 60,518 (646)      
Net income       131,166 131,166
Stock-based compensation     7,136   7,136
Stock options exercised and other awards $ 1   4,219   4,220
Stock options exercised and other awards (in shares) 41        
Purchase of treasury shares   $ (293)     (293)
Purchase of treasury shares (in shares)   (1)      
Repurchase of common shares $ (5)     (118,966) (118,971)
Repurchase of common shares (in shares) (451)        
Balance at Nov. 03, 2018 $ 601 $ (24,706) 731,890 1,127,951 $ 1,835,736
Balance (in shares) at Nov. 03, 2018 60,108 (647)     59,461
Balance at Feb. 02, 2019 $ 592 $ (24,908) 738,671 1,105,863 $ 1,820,218
Balance (in shares) at Feb. 02, 2019 59,232 (648)     58,584
Net income       192,221 $ 192,221
Stock-based compensation     6,030   6,030
Adoption of accounting standards | ASU 2016-02, Leases (Topic 842)       (2,375) (2,375)
Stock options exercised and other awards $ 4   42,052   42,056
Stock options exercised and other awards (in shares) 348        
Purchase of treasury shares   $ (9,183)     (9,183)
Purchase of treasury shares (in shares)   (27)      
Repurchase of common shares $ (3)     (107,396) (107,399)
Repurchase of common shares (in shares) (318)        
Balance at May. 04, 2019 $ 593 $ (34,091) 786,753 1,188,313 1,941,568
Balance (in shares) at May. 04, 2019 59,262 (675)      
Balance at Feb. 02, 2019 $ 592 $ (24,908) 738,671 1,105,863 $ 1,820,218
Balance (in shares) at Feb. 02, 2019 59,232 (648)     58,584
Net income         $ 483,226
Balance at Nov. 02, 2019 $ 580 $ (34,272) 800,986 1,079,862 $ 1,847,156
Balance (in shares) at Nov. 02, 2019 57,959 (676)     57,283
Balance at May. 04, 2019 $ 593 $ (34,091) 786,753 1,188,313 $ 1,941,568
Balance (in shares) at May. 04, 2019 59,262 (675)      
Net income       161,258 161,258
Stock-based compensation     6,736   6,736
Stock options exercised and other awards     879   879
Stock options exercised and other awards (in shares) 15        
Purchase of treasury shares   $ (89)     (89)
Repurchase of common shares $ (8)     (270,893) (270,901)
Repurchase of common shares (in shares) (792)        
Balance at Aug. 03, 2019 $ 585 $ (34,180) 794,368 1,078,678 1,839,451
Balance (in shares) at Aug. 03, 2019 58,485 (675)      
Net income       129,747 129,747
Stock-based compensation     6,342   6,342
Stock options exercised and other awards     276   276
Stock options exercised and other awards (in shares) 4        
Purchase of treasury shares   $ (92)     (92)
Purchase of treasury shares (in shares)   (1)      
Repurchase of common shares $ (5)     (128,563) (128,568)
Repurchase of common shares (in shares) (530)        
Balance at Nov. 02, 2019 $ 580 $ (34,272) $ 800,986 $ 1,079,862 $ 1,847,156
Balance (in shares) at Nov. 02, 2019 57,959 (676)     57,283
v3.19.3
Business and basis of presentation
9 Months Ended
Nov. 02, 2019
Business and basis of presentation  
Business and basis of presentation

1.Business and basis of presentation

On January 29, 2017, Ulta Salon, Cosmetics & Fragrance, Inc. implemented a holding company reorganization. Pursuant to the reorganization, 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 November 2, 2019, the Company operated 1,241 stores across 50 states, as shown in the table below.

Number of

Number of

Location

    

stores

    

Location

    

stores

Alabama

21

Montana

6

Alaska

3

Nebraska

5

Arizona

28

Nevada

15

Arkansas

10

New Hampshire

7

California

159

New Jersey

38

Colorado

26

New Mexico

7

Connecticut

16

New York

50

Delaware

3

North Carolina

34

Florida

84

North Dakota

3

Georgia

38

Ohio

43

Hawaii

4

Oklahoma

20

Idaho

9

Oregon

14

Illinois

55

Pennsylvania

45

Indiana

24

Rhode Island

3

Iowa

10

South Carolina

20

Kansas

13

South Dakota

2

Kentucky

14

Tennessee

26

Louisiana

18

Texas

112

Maine

3

Utah

14

Maryland

25

Vermont

1

Massachusetts

21

Virginia

29

Michigan

49

Washington

36

Minnesota

17

West Virginia

7

Mississippi

9

Wisconsin

20

Missouri

23

Wyoming

2

Total

1,241

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 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 39 weeks ended November 2, 2019 are not necessarily indicative of the results to be expected for the fiscal year ending February 1, 2020, 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 February 2, 2019. All amounts are stated in thousands, with the exception of per share amounts and number of stores.

v3.19.3
Summary of significant accounting policies
9 Months Ended
Nov. 02, 2019
Summary of significant accounting policies  
Summary of significant accounting policies

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 February 2, 2019. 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 third quarter in fiscal 2019 and 2018 ended on November 2, 2019 and November 3, 2018, respectively.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

Recent accounting pronouncements not yet adopted

Intangibles – Goodwill and Other-Internal-Use Software

In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-15, Intangibles – Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which clarifies and aligns the accounting for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019 and should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted. The adoption of ASU 2018-15 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

Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in ASU 2016-02 and subsequently issued amendments requires lessees to capitalize virtually all leases with terms of more than twelve months on the balance sheet as a right-of-use asset and recognize an associated 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 or operating leases and their classification impacts the recognition of expense in the income statement. Entities are allowed to apply the modified retrospective approach (1) retrospectively to

each comparative period presented or (2) retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment.

The Company adopted the new standard on February 3, 2019 using the modified retrospective approach by recognizing and measuring leases without revising comparative period information or disclosures. The Company elected the transition package of three practical expedients permitted within the standard, which among other things, allows for the carryforward of historical lease classifications. In addition, the Company elected to apply the practical expedient that allows for the combination of lease and non-lease components for all asset classes. The Company made an accounting policy election to keep leases with terms of twelve months or less off the balance sheet and recognize those lease payments on a straight-line basis over the lease term.

The adoption of ASU 2016-02 resulted in the recording of operating lease assets and liabilities of $1,460,866 and $1,839,970 within the consolidated balance sheet, respectively, as of February 3, 2019. As part of the adoption, the Company recorded an adjustment to retained earnings of $2,375. The standard did not materially impact the Company’s consolidated results of operations and had no impact on cash flows. See Note 6, “Leases,” for further details.

The impact to the Company’s opening consolidated balance sheet as of February 3, 2019 was as follows:

As Reported

Effect of Adopting

Balance at

(In thousands)

    

February 2, 2019

    

ASC 842

    

February 3, 2019

Assets

(Unaudited)

Receivables, net

$

136,168

$

(17,468)

$

118,700

Prepaid expenses and other current assets

138,116

(25,260)

112,856

Property and equipment, net

1,226,029

(16,983)

1,209,046

Operating lease assets

1,460,866

1,460,866

Liabilities and stockholders’ equity

Accrued liabilities

220,666

(1,460)

219,206

Current operating lease liabilities

210,721

210,721

Deferred rent

434,980

(434,980)

Non-current operating lease liabilities

1,629,249

1,629,249

Retained earnings

1,105,863

(2,375)

1,103,488

v3.19.3
Acquisitions
9 Months Ended
Nov. 02, 2019
Acquisitions  
Acquisitions

3.Acquisitions

The Company continues to make investments to evolve the customer experience, with a strong emphasis on integrating technology across the business. To support these efforts, the Company paid $13,606 to acquire two technology companies in fiscal 2018.

On September 10, 2018, the Company acquired QM Scientific, an artificial intelligence technology company. The acquisition was not material to the Company’s consolidated financial statements.

On October 29, 2018, the Company acquired GlamST, an augmented reality technology company. The acquisition was not material to the Company’s consolidated financial statements.

v3.19.3
Revenue
9 Months Ended
Nov. 02, 2019
Revenue  
Revenue

4.Revenue

The Company’s net sales include retail stores and e-commerce merchandise sales as well as salon services and other revenue. Other revenue sources include the private label credit card and co-branded credit card programs, as well as deferred revenue related to the loyalty program and gift card breakage.

Disaggregated revenue

The following table sets forth the approximate percentage of net sales by primary category:

13 Weeks Ended  

39 Weeks Ended    

(Percentage of net sales)

November 2, 2019

November 3, 2018

November 2, 2019

November 3, 2018

Cosmetics

51%

53%

50%

52%

Skincare, Bath & Fragrance

21%

19%

21%

20%

Haircare Products & Styling Tools

18%

19%

19%

19%

Services

6%

6%

6%

6%

Other (nail products, accessories, and other)

4%

3%

4%

3%

100%

100%

100%

100%

Deferred revenue

Deferred revenue primarily represents contract liabilities for the Company’s obligation to transfer additional goods or services to a guest for which the Company has received consideration, such as unredeemed Ultamate Rewards loyalty points and unredeemed Ulta Beauty gift cards. In addition, the Company recognizes breakage on gift cards proportionately as redemption occurs.

The following table provides a summary of the changes included in deferred revenue:

13 Weeks Ended

39 Weeks Ended

November 2, 2019

November 3, 2018

November 2, 2019

November 3, 2018

Beginning balance

$

171,953

$

130,616

$

193,585

$

110,103

Adoption of ASC 606

38,773

Additions to contract liabilities (1)

66,167

55,032

145,728

78,339

Deductions to contract liabilities (2)

(62,816)

(50,052)

(164,009)

(91,619)

Ending balance

$

175,304

$

135,596

$

175,304

$

135,596

(1)Loyalty points and gift cards issued in the current period but not redeemed or expired.
(2)Revenue recognized in the current period related to the beginning liability.
v3.19.3
Goodwill and Other Intangible Assets
9 Months Ended
Nov. 02, 2019
Goodwill and Other Intangible Assets  
Goodwill and Other Intangible Assets

5.Goodwill and other intangible assets

Goodwill, which represents the excess of cost over the fair value of net assets acquired, amounted to $10,870 at November 2, 2019 and February 2, 2019 and $9,084 at November 3, 2018. No additional goodwill was recognized during the 13 and 39 weeks ended November 2, 2019. The Company reviews the recoverability of goodwill annually during the fourth quarter or more frequently if an event occurs or circumstances change that would indicate that impairment may exist.

Other intangible assets with finite useful lives are amortized over their useful lives. The Company reviews the recoverability of long-lived assets whenever events or changes in circumstances indicate the carrying amount of such assets may not be recoverable.

v3.19.3
Leases
9 Months Ended
Nov. 02, 2019
Leases  
Leases

6.Leases

The Company determines whether an arrangement is or contains a lease at contract inception. The Company leases retail stores, distribution centers, and corporate offices under non-cancellable operating leases with various expiration dates through 2032. Leases generally have an initial lease term of 10 years and include renewal options under substantially the same terms and conditions as the original leases. Leases do not contain any material residual value guarantees or material restrictive covenants.

The lease classification evaluation begins at the lease commencement date. The lease term used in the evaluation includes the non-cancellable period for which the Company has the right to use the underlying asset, together with renewal option periods when the exercise of the renewal option is reasonably certain and failure to exercise such option would result in an economic penalty. All retail store, distribution center, and corporate office leases are classified as operating leases. The Company does not have any finance leases.

Total rent payable is recorded during the lease term, including rent escalations in which the amount of future rent is fixed on the straight-line basis over the term of the lease (including the rent holiday period beginning upon control of the premises and any fixed payments stated in the lease). For leases with an initial term greater than 12 months, a related lease liability is recorded on the balance sheet at the present value of future payments discounted at the estimated fully collateralized incremental borrowing rate (discount rate) corresponding with the lease term. In addition, a right-of-use asset is recorded as the initial amount of the lease liability, plus any lease payments made to the lessor before or at the lease commencement date and any initial direct costs incurred, less any tenant improvement allowance incentives received. Tenant incentives are amortized through the right-of-use asset as reduction of rent expense over the lease term. The difference between the minimum rents paid and the straight-line rent (deferred rent) is reflected within the associated right-of-use asset. Operating lease expense is recognized on a straight-line basis over the lease term. 

Certain leases contain provisions that require additional rent payments based upon sales volume (“variable lease cost”). Contingent rent is accrued each period as the liabilities are incurred, in addition to the straight-line rent expense. This results in some variability in lease expense as a percentage of revenues over the term of the lease in stores where contingent rent is paid.

Leases with an initial term of 12 months or less (“short-term leases”) are not recorded on the balance sheet. Short-term lease expense is recognized on a straight-line basis over the lease term.

The Company subleases certain real estate to third parties for stores with excess square footage space.

The Company does not separate lease and non-lease components (e.g., common area maintenance).

As the interest rate implicit in the lease is not readily determinable, the Company uses its incremental borrowing rate corresponding with the lease term. As there are no outstanding borrowings under the Company’s credit facility, this rate is estimated based on prevailing market conditions, comparable company and credit analysis, and judgment. The incremental borrowing rate is reassessed if there is a change to the lease term or if a modification occurs and it is not accounted for as a separate contract.

The following table presents supplemental balance sheet information, the weighted-average remaining lease term, and discount rate for operating leases as of November 2, 2019:

(In thousands)

Classification on the Balance Sheet

    

November 2, 2019

Right-of-use assets

Operating lease assets

$

1,529,524

Current lease liabilities

Current operating lease liabilities

$

222,627

Non-current lease liabilities

Non-current operating lease liabilities

1,706,806

Total lease liabilities

$

1,929,433

Weighted-average remaining lease term

    

6.8 years

Weighted-average discount rate

4.1%

Lease cost

The following table presents the components of lease cost for operating leases:

13 Weeks Ended

39 Weeks Ended

(In thousands)

    

Classification on the Statement of Income

    

November 2, 2019

    

November 2, 2019

Operating lease cost

Cost of sales (1)

$

72,467

$

215,388

Variable lease cost

Cost of sales

(1,834)

(5,158)

Short-term lease cost

Selling, general and administrative expenses

109

247

Sublease income

Net sales

(135)

(425)

Total lease cost

$

70,607

$

210,052

(1) The majority of operating lease cost relates to retail stores and distribution centers and is classified within cost of sales. Operating lease cost for corporate offices is classified within selling, general and administrative expenses. Operating lease cost from the control date through store opening date is classified within pre-opening expenses.

Other information

The following table presents supplemental disclosures of cash flow information related to operating leases:

    

39 Weeks Ended

(In thousands)

    

November 2, 2019

Cash paid for operating lease liabilities (1)

$

251,468

Operating lease assets obtained in exchange for operating lease liabilities (non-cash)

$

287,645

(1)Excludes $57,160 related to cash received for tenant incentives.

Maturity of lease liabilities

The following table presents maturities of operating lease liabilities as of November 2, 2019:

Fiscal year

    

(In thousands)

2019 (1)

$

35,555

2020

348,826

2021

337,449

2022

319,252

2023

283,484

2024 and thereafter

919,024

Total lease payments

$

2,243,590

Less: Imputed interest

(314,157)

Present value of operating lease liabilities

$

1,929,433

(1)Excluding the 39 weeks ended November 2, 2019 and net of tenant incentives.

Operating lease payments exclude $186,632 of legally binding minimum lease payments for leases signed but not yet commenced.

v3.19.3
Commitments and contingencies
9 Months Ended
Nov. 02, 2019
Commitments and contingencies  
Commitments and contingencies

7.Commitments and contingencies

The Company is involved in various legal proceedings that are incidental to the conduct of the business including both class action and single plaintiff litigation. 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.

v3.19.3
Notes payable
9 Months Ended
Nov. 02, 2019
Notes payable  
Notes payable

8.Notes payable

On August 23, 2017, the Company entered into a Second Amended and Restated Loan Agreement (the Loan Agreement) 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 Agreement matures on 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 receivables 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 Agreement 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 Agreement falls below a specified threshold. Substantially all of the Company’s assets are pledged as collateral for outstanding borrowings under the Loan Agreement. Outstanding borrowings 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.

As of November 2, 2019, February 2, 2019, and November 3, 2018, 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.

v3.19.3
Fair value measurements
9 Months Ended
Nov. 02, 2019
Fair value measurements  
Fair value measurements

9.Fair value measurements

The carrying value of cash and cash equivalents, short-term investments, 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 November 2, 2019, February 2, 2019 and November 3, 2018, the Company held financial liabilities included in other long-term liabilities on the consolidated balance sheets of $27,417, $19,615, and $22,128, 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.

v3.19.3
Investments
9 Months Ended
Nov. 02, 2019
Investments  
Investments

10. Investments

Short-term investments typically consist of certificates of deposit and are carried at cost, which approximates fair value and are recorded in the consolidated balance sheets in short-term investments. As of November 2, 2019, February 2, 2019, and November 3, 2018, the Company did not have any short-term investments.

The Company’s investments in renewable energy projects are accounted for under the equity method of accounting.  The balance of these investments is included in other long-term assets on the consolidated balance sheet. The Company contributed capital of $43,757 and received distributions including $31,554 of investment tax credits during the 39 weeks ended November 2, 2019.

v3.19.3
Stock-based compensation
9 Months Ended
Nov. 02, 2019
Stock-based compensation  
Stock-based compensation

11.Stock-based compensation

The Company measures stock-based compensation expense on the grant date, based on the fair value of the award, and recognizes the expense on a straight-line basis 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:

    

39 Weeks Ended

November 2,

November 3,

    

2019

    

2018

Volatility rate

 

31.0%

29.0%

Average risk-free interest rate

 

2.3%

2.4%

Average expected life (in years)

 

3.5

 

3.4

Dividend yield

 

None

 

None

The Company granted 97 and 163 stock options during the 39 weeks ended November 2, 2019 and November 3, 2018, respectively. The stock-based compensation expense charged against operating income for stock options was $2,204 and $2,134 for the 13 weeks ended November 2, 2019 and November 3, 2018, respectively. The stock-based compensation expense charged against operating income for stock options was $6,523 and $6,557 for the 39 weeks ended November 2, 2019 and November 3, 2018, respectively. The weighted-average grant date fair value of these stock options was $89.91 and $50.10 for the 39 weeks ended November 2, 2019 and November 3, 2018, respectively. At November 2, 2019, there was approximately $18,105 of unrecognized stock-based compensation expense related to unvested stock options.

The Company issued 52 and 95 restricted stock units during the 39 weeks ended November 2, 2019 and November 3, 2018, respectively. The stock-based compensation expense charged against operating income for restricted stock units was $3,429 and $3,449 for the 13 weeks ended November 2, 2019 and November 3, 2018, respectively. The stock-based compensation expense charged against operating income for restricted stock units was $9,672 and $9,244 for the 39 weeks ended November 2, 2019 and November 3, 2018, respectively. At November 2, 2019, there was approximately $24,383 of unrecognized stock-based compensation expense related to restricted stock units.

The Company issued 21 and 33 performance-based restricted stock units during the 39 weeks ended November 2, 2019 and November 3, 2018, respectively. The stock-based compensation benefit included in operating income for performance-based restricted stock units was $122 for the 13 weeks ended November 2, 2019. The stock-based compensation expense charged against operating income for performance-based restricted stock units was $1,904 for the 13 weeks ended November 3, 2018. The stock-based compensation expense charged against operating income for performance-based restricted stock units was $2,979 and $5,083 for the 39 weeks ended November 2, 2019 and November 3, 2018, respectively. At November 2, 2019, there was approximately $7,793 of unrecognized stock-based compensation expense related to performance-based restricted stock units.

v3.19.3
Income Taxes
9 Months Ended
Nov. 02, 2019
Income Taxes  
Income Taxes

12.Income taxes

Income tax expense reflects the federal statutory tax rate and the weighted average state statutory tax rate for the states in which the Company operates stores. Income tax expense of $38,933 for the 13 weeks ended November 2, 2019 represents an effective tax rate of 23.1%, compared to $39,365 of tax expense representing an effective tax rate of 23.1% for the 13 weeks ended November 3, 2018.

Income tax expense of $134,729 for the 39 weeks ended November 2, 2019 represents an effective tax rate of 21.8%, compared to $132,771 of tax expense representing an effective tax rate of 23.0% for the 39 weeks ended November 3, 2018. The lower effective tax rate is primarily due to income tax accounting for share-based compensation and federal income tax credits.

v3.19.3
Net income per common share
9 Months Ended
Nov. 02, 2019
Net income per common share  
Net income per common share

13.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:

13 Weeks Ended

39 Weeks Ended

November 2,

November 3,

November 2,

November 3,

(In thousands, except per share data)

    

2019

    

2018

    

2019

    

2018

Numerator for diluted net income per share – net income

    

$

129,747

$

131,166

$

483,226

$

443,885

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

57,568

59,724

58,123

60,135

Dilutive effect of stock options and non-vested stock

195

338

273

297

Denominator for diluted net income per share

57,763

60,062

58,396

60,432

Net income per common share:

Basic

$

2.25

$

2.20

$

8.31

$

7.38

Diluted

$

2.25

$

2.18

$

8.27

$

7.35

The denominator for diluted net income per common share for the 13 weeks ended November 2, 2019 and November 3, 2018 excludes 219 and 106 employee stock options and restricted stock units, respectively, due to their anti-dilutive effects. The denominator for diluted net income per common share for the 39 weeks ended November 2, 2019 and November 3, 2018 excludes 217 and 298 employee stock options and restricted stock units, respectively, due to their anti-dilutive effects. Outstanding performance-based restricted stock units are included in the computation of dilutive shares only to the extent that the underlying performance conditions are satisfied prior to the end

of the reporting period or would be considered satisfied if the end of the reporting period were the end of the related contingency period and the results would be dilutive under the treasury stock method.

v3.19.3
Share repurchase program
9 Months Ended
Nov. 02, 2019
Share repurchase program  
Share repurchase program

14.Share repurchase program

On March 9, 2017, the Company announced that the Board of Directors authorized a share repurchase program (the 2017 Share Repurchase Program) pursuant to which the Company could repurchase up to $425,000 of the Company’s common stock. The 2017 Share Repurchase Program authorization revoked the previously authorized but unused amount of $79,863 from the earlier share repurchase program. The 2017 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.

On March 15, 2018, the Company announced that the Board of Directors authorized a share repurchase program (the 2018 Share Repurchase Program) pursuant to which the Company could repurchase up to $625,000 of the Company’s common stock. The 2018 Share Repurchase Program authorization revoked the previously authorized but unused amount of $41,317 from the 2017 Share Repurchase Program. The 2018 Share Repurchase Program did not have an expiration date but provided for suspension or discontinuation at any time.

On March 14, 2019, the Company announced that the Board of Directors authorized a new share repurchase program (the 2019 Share Repurchase Program) pursuant to which the Company may repurchase up to $875,000 of the Company’s common stock. The 2019 Share Repurchase Program authorization revoked the previously authorized but unused amount of $25,435 from the 2018 Share Repurchase Program. The 2019 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time.

During the 39 weeks ended November 2, 2019, the Company purchased 1,639 shares of common stock for $506,868. During the 39 weeks ended November 3, 2018, the Company purchased 1,582 shares of common stock for $379,423.

v3.19.3
Summary of significant accounting policies (Policies)
9 Months Ended
Nov. 02, 2019
Summary of significant accounting policies  
Fiscal quarter

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 third quarter in fiscal 2019 and 2018 ended on November 2, 2019 and November 3, 2018, respectively.

Reclassifications

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

Recent accounting pronouncements not yet adopted and Recently adopted accounting pronouncements

Recent accounting pronouncements not yet adopted

Intangibles – Goodwill and Other-Internal-Use Software

In August 2018, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2018-15, Intangibles – Goodwill and Other-Internal-Use Software (Subtopic 350-40): Customers Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract, which clarifies and aligns the accounting for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019 and should be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. Early adoption is permitted. The adoption of ASU 2018-15 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

Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). The guidance in ASU 2016-02 and subsequently issued amendments requires lessees to capitalize virtually all leases with terms of more than twelve months on the balance sheet as a right-of-use asset and recognize an associated 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 or operating leases and their classification impacts the recognition of expense in the income statement. Entities are allowed to apply the modified retrospective approach (1) retrospectively to

each comparative period presented or (2) retrospectively at the beginning of the period of adoption through a cumulative-effect adjustment.

The Company adopted the new standard on February 3, 2019 using the modified retrospective approach by recognizing and measuring leases without revising comparative period information or disclosures. The Company elected the transition package of three practical expedients permitted within the standard, which among other things, allows for the carryforward of historical lease classifications. In addition, the Company elected to apply the practical expedient that allows for the combination of lease and non-lease components for all asset classes. The Company made an accounting policy election to keep leases with terms of twelve months or less off the balance sheet and recognize those lease payments on a straight-line basis over the lease term.

The adoption of ASU 2016-02 resulted in the recording of operating lease assets and liabilities of $1,460,866 and $1,839,970 within the consolidated balance sheet, respectively, as of February 3, 2019. As part of the adoption, the Company recorded an adjustment to retained earnings of $2,375. The standard did not materially impact the Company’s consolidated results of operations and had no impact on cash flows. See Note 6, “Leases,” for further details.

The impact to the Company’s opening consolidated balance sheet as of February 3, 2019 was as follows:

As Reported

Effect of Adopting

Balance at

(In thousands)

    

February 2, 2019

    

ASC 842

    

February 3, 2019

Assets

(Unaudited)

Receivables, net

$

136,168

$

(17,468)

$

118,700

Prepaid expenses and other current assets

138,116

(25,260)

112,856

Property and equipment, net

1,226,029

(16,983)

1,209,046

Operating lease assets

1,460,866

1,460,866

Liabilities and stockholders’ equity

Accrued liabilities

220,666

(1,460)

219,206

Current operating lease liabilities

210,721

210,721

Deferred rent

434,980

(434,980)

Non-current operating lease liabilities

1,629,249

1,629,249

Retained earnings

1,105,863

(2,375)

1,103,488

v3.19.3
Business and basis of presentation (Tables)
9 Months Ended
Nov. 02, 2019
Business and basis of presentation  
Schedule of stores operated by geographic area

Number of

Number of

Location

    

stores

    

Location

    

stores

Alabama

21

Montana

6

Alaska

3

Nebraska

5

Arizona

28

Nevada

15

Arkansas

10

New Hampshire

7

California

159

New Jersey

38

Colorado

26

New Mexico

7

Connecticut

16

New York

50

Delaware

3

North Carolina

34

Florida

84

North Dakota

3

Georgia

38

Ohio

43

Hawaii

4

Oklahoma

20

Idaho

9

Oregon

14

Illinois

55

Pennsylvania

45

Indiana

24

Rhode Island

3

Iowa

10

South Carolina

20

Kansas

13

South Dakota

2

Kentucky

14

Tennessee

26

Louisiana

18

Texas

112

Maine

3

Utah

14

Maryland

25

Vermont

1

Massachusetts

21

Virginia

29

Michigan

49

Washington

36

Minnesota

17

West Virginia

7

Mississippi

9

Wisconsin

20

Missouri

23

Wyoming

2

Total

1,241

v3.19.3
Summary of significant accounting policies (Tables)
9 Months Ended
Nov. 02, 2019
Summary of significant accounting policies  
Schedule of the impact to the Company's opening consolidated balance sheet

The impact to the Company’s opening consolidated balance sheet as of February 3, 2019 was as follows:

As Reported

Effect of Adopting

Balance at

(In thousands)

    

February 2, 2019

    

ASC 842

    

February 3, 2019

Assets

(Unaudited)

Receivables, net

$

136,168

$

(17,468)

$

118,700

Prepaid expenses and other current assets

138,116

(25,260)

112,856

Property and equipment, net

1,226,029

(16,983)

1,209,046

Operating lease assets

1,460,866

1,460,866

Liabilities and stockholders’ equity

Accrued liabilities

220,666

(1,460)

219,206

Current operating lease liabilities

210,721

210,721

Deferred rent

434,980

(434,980)

Non-current operating lease liabilities

1,629,249

1,629,249

Retained earnings

1,105,863

(2,375)

1,103,488

v3.19.3
Revenue (Tables)
9 Months Ended
Nov. 02, 2019
Revenue  
Schedule of approximate percentage of net sales by primary category

The following table sets forth the approximate percentage of net sales by primary category:

13 Weeks Ended  

39 Weeks Ended    

(Percentage of net sales)

November 2, 2019

November 3, 2018

November 2, 2019

November 3, 2018

Cosmetics

51%

53%

50%

52%

Skincare, Bath & Fragrance

21%

19%

21%

20%

Haircare Products & Styling Tools

18%

19%

19%

19%

Services

6%

6%

6%

6%

Other (nail products, accessories, and other)

4%

3%

4%

3%

100%

100%

100%

100%

Summary of changes in deferred revenue

13 Weeks Ended

39 Weeks Ended

November 2, 2019

November 3, 2018

November 2, 2019

November 3, 2018

Beginning balance

$

171,953

$

130,616

$

193,585

$

110,103

Adoption of ASC 606

38,773

Additions to contract liabilities (1)

66,167

55,032

145,728

78,339

Deductions to contract liabilities (2)

(62,816)

(50,052)

(164,009)

(91,619)

Ending balance

$

175,304

$

135,596

$

175,304

$

135,596

v3.19.3
Leases (Tables)
9 Months Ended
Nov. 02, 2019
Leases  
Schedule of weighted-average remaining lease term and discount rate for operating leases

The following table presents supplemental balance sheet information, the weighted-average remaining lease term, and discount rate for operating leases as of November 2, 2019:

(In thousands)

Classification on the Balance Sheet

    

November 2, 2019

Right-of-use assets

Operating lease assets

$

1,529,524

Current lease liabilities

Current operating lease liabilities

$

222,627

Non-current lease liabilities

Non-current operating lease liabilities

1,706,806

Total lease liabilities

$

1,929,433

Weighted-average remaining lease term

    

6.8 years

Weighted-average discount rate

4.1%

Summary of information related to lease costs for operating leases

The following table presents the components of lease cost for operating leases:

13 Weeks Ended

39 Weeks Ended

(In thousands)

    

Classification on the Statement of Income

    

November 2, 2019

    

November 2, 2019

Operating lease cost

Cost of sales (1)

$

72,467

$

215,388

Variable lease cost

Cost of sales

(1,834)

(5,158)

Short-term lease cost

Selling, general and administrative expenses

109

247

Sublease income

Net sales

(135)

(425)

Total lease cost

$

70,607

$

210,052

(1) The majority of operating lease cost relates to retail stores and distribution centers and is classified within cost of sales. Operating lease cost for corporate offices is classified within selling, general and administrative expenses. Operating lease cost from the control date through store opening date is classified within pre-opening expenses.

Schedule of cash flow information and non-cash activity related to operating leases

The following table presents supplemental disclosures of cash flow information related to operating leases:

    

39 Weeks Ended

(In thousands)

    

November 2, 2019

Cash paid for operating lease liabilities (1)

$

251,468

Operating lease assets obtained in exchange for operating lease liabilities (non-cash)

$

287,645

(1)Excludes $57,160 related to cash received for tenant incentives.

Schedule of maturities of non-cancellable operating lease liabilities

The following table presents maturities of operating lease liabilities as of November 2, 2019:

Fiscal year

    

(In thousands)

2019 (1)

$

35,555

2020

348,826

2021

337,449

2022

319,252

2023

283,484

2024 and thereafter

919,024

Total lease payments

$

2,243,590

Less: Imputed interest

(314,157)

Present value of operating lease liabilities

$

1,929,433

(1)Excluding the 39 weeks ended November 2, 2019 and net of tenant incentives.

Operating lease payments exclude $186,632 of legally binding minimum lease payments for leases signed but not yet commenced.

v3.19.3
Stock-based compensation (Tables)
9 Months Ended
Nov. 02, 2019
Stock-based compensation  
Schedule of weighted average assumptions to determine grant date fair value of employee stock options

    

39 Weeks Ended

November 2,

November 3,

    

2019

    

2018

Volatility rate

 

31.0%

29.0%

Average risk-free interest rate

 

2.3%

2.4%

Average expected life (in years)

 

3.5

 

3.4

Dividend yield

 

None

 

None

v3.19.3
Net income per common share (Tables)
9 Months Ended
Nov. 02, 2019
Net income per common share  
Schedule of reconciliation of net income and number of shares of common stock used in computation of net income per basic and diluted share

13 Weeks Ended

39 Weeks Ended

November 2,

November 3,

November 2,

November 3,

(In thousands, except per share data)

    

2019

    

2018

    

2019

    

2018

Numerator for diluted net income per share – net income

    

$

129,747

$

131,166

$

483,226

$

443,885

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

57,568