ULTA BEAUTY, INC., 10-K filed on 4/2/2019
Annual Report
v3.19.1
Document and Entity Information - USD ($)
12 Months Ended
Feb. 02, 2019
Mar. 28, 2019
Aug. 03, 2018
Document And Entity Information      
Entity Registrant Name Ulta Beauty, Inc.    
Entity Central Index Key 0001403568    
Document Type 10-K    
Document Period End Date Feb. 02, 2019    
Amendment Flag false    
Current Fiscal Year End Date --02-02    
Entity Well-known Seasoned Issuer Yes    
Entity Voluntary Filers No    
Entity Current Reporting Status Yes    
Entity Filer Category Large Accelerated Filer    
Entity Public Float     $ 10,735,950,000
Entity Common Stock, Shares Outstanding   58,803,744  
Entity Small Business false    
Entity Emerging Growth Company false    
Entity Shell Company false    
Document Fiscal Year Focus 2018    
Document Fiscal Period Focus FY    
Trading Symbol ULTA    
v3.19.1
Consolidated Balance Sheets - USD ($)
$ in Thousands
Feb. 02, 2019
Feb. 03, 2018
Current assets:    
Cash and cash equivalents $ 409,251 $ 277,445
Short-term investments   120,000
Receivables, net 136,168 99,719
Merchandise inventories, net 1,214,329 1,096,424
Prepaid expenses and other current assets 138,116 98,666
Prepaid income taxes 16,997 1,489
Total current assets 1,914,861 1,693,743
Property and equipment, net 1,226,029 1,189,453
Goodwill 10,870  
Other intangible assets, net 4,317  
Deferred compensation plan assets 20,511 16,827
Other long-term assets 14,584 8,664
Total assets 3,191,172 2,908,687
Current liabilities:    
Accounts payable 404,016 325,758
Accrued liabilities 220,666 189,171
Deferred revenue 199,054 113,136
Accrued income taxes   14,101
Total current liabilities 823,736 642,166
Deferred rent 434,980 407,916
Deferred income taxes 83,864 59,403
Other long-term liabilities 28,374 24,985
Total liabilities 1,370,954 1,134,470
Commitments and contingencies (Note 8)
Stockholders' equity:    
Common stock, $0.01 par value, 400,000 shares authorized; 59,232 and 61,441 shares issued; 58,584 and 60,822 shares outstanding; at February 2, 2019 and February 3, 2018, respectively 592 614
Treasury stock-common, at cost (24,908) (18,767)
Additional paid-in capital 738,671 698,917
Retained earnings 1,105,863 1,093,453
Total stockholders' equity 1,820,218 1,774,217
Total liabilities and stockholders' equity $ 3,191,172 $ 2,908,687
v3.19.1
Consolidated Balance Sheets (Parenthetical) - $ / shares
shares in Thousands
Feb. 02, 2019
Feb. 03, 2018
Consolidated Balance Sheets    
Common stock, par value $ 0.01 $ 0.01
Common stock, shares authorized 400,000 400,000
Common stock, shares issued 59,232 61,441
Common stock, shares outstanding 58,584 60,822
v3.19.1
Consolidated Statements of Income - USD ($)
shares in Thousands, $ in Thousands
3 Months Ended 12 Months Ended
Feb. 03, 2018
Feb. 02, 2019
Nov. 03, 2018
Aug. 04, 2018
May 05, 2018
Feb. 03, 2018
Oct. 28, 2017
Jul. 29, 2017
Apr. 29, 2017
Feb. 02, 2019
Feb. 03, 2018
Jan. 28, 2017
Consolidated Statements of Income                        
Net sales $ 108,756 $ 2,124,716 $ 1,560,011 $ 1,488,221 $ 1,543,667 $ 1,937,592 $ 1,342,181 $ 1,289,854 $ 1,314,879 $ 6,716,615 $ 5,884,506 $ 4,854,737
Cost of sales   1,383,857 987,733 952,760 982,954 1,279,245 849,053 820,528 838,871 4,307,304 3,787,697 3,107,508
Gross profit   740,859 572,278 535,461 560,713 658,347 493,128 469,326 476,008 2,409,311 2,096,809 1,747,229
Selling, general and administrative expenses   457,245 395,453 337,142 345,624 399,631 320,729 283,427 283,445 1,535,464 1,287,232 1,073,834
Pre-opening expenses   2,404 7,612 4,504 5,247 4,297 9,732 6,099 4,158 19,767 24,286 18,571
Operating income   281,210 169,213 193,815 209,842 254,419 162,667 179,800 188,405 854,080 785,291 654,824
Interest income, net   (1,275) (1,318) (1,143) (1,325) (359) (316) (555) (338) (5,061) (1,568) (890)
Income before income taxes   282,485 170,531 194,958 211,167 254,778 162,983 180,355 188,743 859,141 786,859 655,714
Income tax expense   67,811 39,365 46,635 46,771 46,605 58,338 66,162 60,520 200,582 231,625 245,954
Net income   $ 214,674 $ 131,166 $ 148,323 $ 164,396 $ 208,173 $ 104,645 $ 114,193 $ 128,223 $ 658,559 $ 555,234 $ 409,760
Net income per common share:                        
Basic   $ 3.64 $ 2.20 $ 2.47 $ 2.71 $ 3.42 $ 1.71 $ 1.84 $ 2.06 $ 11.00 $ 9.02 $ 6.55
Diluted   $ 3.61 $ 2.18 $ 2.46 $ 2.70 $ 3.40 $ 1.70 $ 1.83 $ 2.05 $ 10.94 $ 8.96 $ 6.52
Weighted average common shares outstanding:                        
Basic                   59,864 61,556 62,519
Diluted                   60,181 61,975 62,851
v3.19.1
Consolidated Statements of Cash Flows - USD ($)
$ in Thousands
12 Months Ended
Feb. 02, 2019
Feb. 03, 2018
Jan. 28, 2017
Operating activities      
Net income $ 658,559 $ 555,234 $ 409,760
Adjustments to reconcile net income to net cash provided by operating activities:      
Depreciation and amortization 279,472 252,713 210,295
Deferred income taxes 34,080 (27,095) 26,971
Non-cash stock compensation charges 26,636 24,399 19,340
Excess tax benefits from stock-based compensation     (9,053)
Loss on disposal of property and equipment 2,885 7,518 9,140
Change in operating assets and liabilities, net of acquisitions:      
Receivables (36,387) (11,088) (23,639)
Merchandise inventories (122,019) (152,449) (182,182)
Prepaid expenses and other current assets (39,450) (10,045) (16,073)
Income taxes (29,609) 3,641 5,322
Accounts payable 78,256 66,240 63,344
Accrued liabilities and deferred revenue 79,949 36,891 71,057
Deferred rent 27,064 41,725 44,402
Other assets and liabilities (3,309) (8,318) 5,701
Net cash provided by operating activities 956,127 779,366 634,385
Investing activities      
Purchases of short-term investments (386,193) (330,000) (90,000)
Proceeds from short-term investments 506,193 240,000 190,000
Purchases of property and equipment (319,400) (440,714) (373,447)
Acquisitions, net of cash acquired (13,606)    
Purchases of equity investments (2,101)    
Net cash used in investing activities (215,107) (530,714) (273,447)
Financing activities      
Repurchase of common shares (616,194) (367,581) (344,275)
Stock options exercised 13,121 16,190 16,293
Purchase of treasury shares (6,141) (4,243) (2,839)
Excess tax benefits from stock-based compensation     9,053
Debt issuance costs   (583)  
Net cash used in financing activities (609,214) (356,217) (321,768)
Net increase (decrease) in cash and cash equivalents 131,806 (107,565) 39,170
Cash and cash equivalents at beginning of period 277,445 385,010 345,840
Cash and cash equivalents at end of period 409,251 277,445 385,010
Supplemental cash flow information      
Cash paid for income taxes (net of refunds) 195,869 254,619 212,514
Non-cash investing activities:      
Change in property and equipment included in accrued liabilities $ 11 $ 4,562 $ 2,446
v3.19.1
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 Jan. 30, 2016 $ 641 $ (11,685) $ 621,715 $ 832,215 $ 1,442,886
Balance (in shares) at Jan. 30, 2016 64,131 (591)      
Net income       409,760 409,760
Stock compensation charge     19,340   19,340
Stock options exercised and other awards $ 2   16,291   16,293
Stock options exercised and other awards (in shares) 241        
Excess tax benefits from stock-based compensation     9,053   9,053
Purchase of treasury shares   $ (2,839)     (2,839)
Purchase of treasury shares (in shares)   (13)      
Repurchase of common shares $ (16)   (8,069) (336,190) (344,275)
Repurchase of common shares (in shares) (1,639)        
Balance at Jan. 28, 2017 $ 627 $ (14,524) 658,330 905,785 1,550,218
Balance (in shares) at Jan. 28, 2017 62,733 (604)      
Net income       555,234 555,234
Stock compensation charge     24,399   24,399
Stock options exercised and other awards $ 2   16,188   16,190
Stock options exercised and other awards (in shares) 212        
Purchase of treasury shares   $ (4,243)     (4,243)
Purchase of treasury shares (in shares)   (15)      
Repurchase of common shares $ (15)     (367,566) $ (367,581)
Repurchase of common shares (in shares) (1,504)       (1,504)
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)     60,822
Net income       658,559 $ 658,559
Stock compensation charge     26,636   26,636
Adoption of accounting standards (Note 4)       (29,980) (29,980)
Stock options exercised and other awards $ 3   13,118   13,121
Stock options exercised and other awards (in shares) 255        
Purchase of treasury shares   $ (6,141)     (6,141)
Purchase of treasury shares (in shares)   (29)      
Repurchase of common shares $ (25)     (616,169) $ (616,194)
Repurchase of common shares (in shares) (2,464)       (2,464)
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
v3.19.1
Business and basis of presentation
12 Months Ended
Feb. 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. As used in these notes and throughout this Annual Report on Form 10‑K, all references to “we,” “us,” “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 February 2, 2019, the Company operated 1,174 stores across 50 states. All amounts are stated in thousands, with the exception of per share amounts and number of stores.

The Company has one reportable segment, which includes retail stores, salon services, and e-commerce. 

 

v3.19.1
Summary of significant accounting policies
12 Months Ended
Feb. 02, 2019
Summary of significant accounting policies  
Summary of significant accounting policies

2.   Summary of significant accounting policies

Fiscal year

The Company’s fiscal year is the 52 or 53 weeks ending on the Saturday closest to January 31. The Company’s fiscal years ended February 2, 2019 (fiscal 2018),  February 3, 2018 (fiscal 2017), and January 28, 2017 (fiscal 2016) were 52,  53, and 52-week years, respectively. 

Consolidation

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

Use of estimates

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

Reclassifications

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

Cash and cash equivalents

Cash and cash equivalents include cash on hand and highly liquid investments with original maturities of three months or less from the date of purchase. Cash equivalents also include amounts due from third-party financial institutions for credit card and debit card transactions. These receivables typically settle in five days or less with little or no default risk. Amounts from third-party financial institutions for credit card and debit card transactions were $57,698 and $60,773 as of February 2, 2019 and February 3, 2018, respectively.

Short-term investments

The Company determines the balance sheet classification of its investments at the time of purchase and evaluates the classification at each balance sheet date. Money market funds, certificates of deposit, and time deposits with maturities of greater than three months but no more than twelve months are carried at cost, which approximates fair value and are recorded in the consolidated balance sheets in short-term investments (see Note 13, “Investments”).

Receivables

Receivables consist principally of amounts due from vendors and landlord construction allowances earned but not yet received. These receivables are computed based on provisions of the vendor and lease agreements in place and the Company’s completed performance. The Company does not require collateral on its receivables and does not accrue interest. Credit risk with respect to receivables is limited due to the diversity of vendors and landlords comprising the Company’s vendor base. The Company performs ongoing credit evaluations of its vendors and evaluates the collectability of its receivables based on the length of time the receivable is past due and historical experience.

The receivable for vendor allowances was $97,885 and $78,238 as of February 2, 2019 and February 3, 2018, respectively. The receivable for landlord allowances was $19,746 and $12,729 as of February 2, 2019 and February 3, 2018, respectively. The allowance for doubtful receivables was $651 and $1,371 as of February 2, 2019 and February 3, 2018, respectively.

Merchandise inventories

Merchandise inventories are stated at the lower of cost or market. Cost is determined using the weighted-average cost method and includes costs incurred to purchase and distribute goods. Inventory cost also includes vendor allowances related to co-op advertising, markdowns, and volume discounts. The Company maintains an inventory reserve for lower of cost or market and shrink. The inventory reserve was $36,640 and $24,804 as of February 2, 2019 and February 3, 2018, respectively.

Fair value of financial instruments

The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximates their estimated fair values due to the short maturities of these instruments. The Company had no outstanding debt as of February 2, 2019 and February 3, 2018.

Property and equipment

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

 

 

Equipment and fixtures

3 to 10 years

Leasehold improvements

10 years

Electronic equipment and software

3 to 5 years

 

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

The Company periodically evaluates whether changes have occurred that would require revision of the remaining useful life of equipment and leasehold improvements or render them not recoverable. If such circumstances arise, the Company uses an estimate of the undiscounted sum of expected future operating cash flows during their holding period to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows are less than the carrying amount of the assets, the resulting impairment charges to be recorded are calculated based on the excess of the carrying value of the assets over the fair value of such assets. No significant impairment charges were recognized in fiscal 2018, fiscal 2017, or fiscal 2016. Impairment charges are included in selling, general and administrative (SG&A) expenses in the consolidated statements of income.

Goodwill

Goodwill represents the excess of cost over the fair value of net assets acquired. 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 (see Note 6, “Goodwill”).

 

Other intangible assets

 

Other definite-lived intangible assets 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 (see Note 7, “Other intangible assets”).

Loyalty program

The Company maintains a loyalty program, Ultamate Rewards, which allows members to earn points based on purchases of merchandise or services. Points earned are valid for at least one year. The loyalty program represents a material right to the customer and points may be redeemed on future products and services. The relative standalone selling price of points earned by members is included in deferred revenue on the consolidated balance sheets based on the percentage of points expected to be redeemed. The expected redemption percentage is based on historical redemption patterns and considers current information or trends.

When a guest redeems points or the points expire, the Company recognizes revenue in net sales on the consolidated statements of income.

Prior to fiscal 2018, loyalty program revenue was recorded using the incremental cost method within cost of sales on the consolidated statements of income.

Credit cards

The Company has agreements (the Agreements) with third parties to provide guests with private label credit cards and/or co-branded credit cards (collectively, the Credit Cards). The private label credit card can be used at any store location and online, and the co-branded credit card can be used anywhere the co-branded card is accepted. A third-party financing company is the sole owner of the accounts and underwrites the credit issued under the Credit Card programs. The Company’s performance obligation is to maintain the Ultamate Rewards loyalty program as only guests enrolled in the loyalty program can apply for the Credit Cards. Loyalty members earn points through purchases at Ulta Beauty and anywhere the co-branded credit card is accepted.

The third parties reimburse the Company for certain credit card program costs such as advertising and loyalty points, which help promote the credit card program. The Company recognizes revenue when collectability is reasonably assured, under the assumption the amounts are not constrained and it is probable that a significant revenue reversal will not occur in future periods, which is generally the time at which the actual usage of the Credit Cards or specified transaction occurs.

The Company accounts for the amounts associated with the Agreements as a single contract with the sole commercial objective to maintain the Credit Card programs. As a result, all amounts associated with the Agreements are recognized within net sales on the consolidated statements of income.

Other administrative costs related to the Credit Card programs, including payroll, marketing expenses, and other direct costs, are included in SG&A expenses on the consolidated statements of income.

Deferred rent

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

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

Gift card program

The Company records a contract liability for gift card sales which will be redeemed in the future within deferred revenue on the consolidated balance sheets and recognized in net sales when the gift card is redeemed for product or services. The Company’s gift cards do not expire and do not include service fees that decrease guest balances. The Company has maintained historical data related to gift card transactions sold and redeemed over a significant time frame. The Company recognizes gift card breakage (amounts not expected to be redeemed) to the extent there is no requirement for remitting balances to governmental agencies under unclaimed property laws. Estimated gift card breakage revenue is recognized over time in proportion to actual gift card redemptions. Gift card breakage revenue was $12,446,  $7,783, and $5,335 in fiscal 2018, 2017, and 2016, respectively.

Revenue recognition

Revenue is recognized when control of the promised goods or services is transferred to the guest, in an amount that reflects the consideration the Company expects to be entitled to in exchange for those goods or services.

The Company determines revenue recognition through the following steps:

·

Identification of the contract, or contracts, with a guest;

·

Identification of the performance obligations in the contract;

·

Determination of the transaction price;

·

Allocation of the transaction price to the performance obligations in the contract; and

·

Recognition of revenue when, or as, a performance obligation is satisfied.

 

The Company’s net sales include retail stores and e-commerce merchandise sales as well as salon services and other revenue.

Revenue from merchandise sales at retail stores is recognized at the point of sale, net of estimated returns. Revenue from e-commerce merchandise sales is recognized upon shipment of the merchandise to the guest based on meeting the transfer of control criteria, net of estimated returns. E-commerce revenue amounted to $752,224,  $568,736, and $345,342 in fiscal 2018, 2017, and 2016, respectively. Shipping and handling are treated as costs to fulfill the contract, and as a result, any fees received from guests are included in the transaction price allocated to the performance obligation of providing goods with a corresponding amount accrued within cost of sales for amounts paid to applicable carriers. The Company provides refunds for merchandise returns within 60 days from the original purchase date. State sales taxes are presented on a net basis as the Company considers itself a pass-through conduit for collecting and remitting state sales tax. Company coupons and other incentives are recorded as a reduction of net sales. 

Salon services revenue is recognized at the time the service is provided to the guest. Salon service revenue was $300,863,  $277,361, and $241,105 in fiscal 2018, 2017 and 2016, respectively.

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.

Vendor allowances

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

Advertising

Advertising expense consists principally of print, digital and social media, and television and radio advertising. The Company expenses the costs related to its advertising in the period the related promotional event occurs. Total advertising costs, exclusive of incentives from vendors and start-up advertising expense, amounted to $294,489,  $259,423, and $212,714 in fiscal 2018,  2017 and 2016, respectively. Advertising expense as a percentage of sales was 4.4% in fiscal 2018,  2017 and 2016. Prepaid advertising costs included in prepaid expenses and other current assets on the consolidated balance sheets were $9,384 and $12,811 as of February 2, 2019 and February 3, 2018, respectively.

Pre-opening expenses

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

Cost of sales

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

Selling, general and administrative expenses

SG&A expenses includes payroll, bonus, and benefit costs for retail and corporate employees; advertising and marketing costs; occupancy costs related to our corporate office facilities; stock-based compensation expense; depreciation and amortization for all assets, except those related to our retail store and distribution operations, which are included in cost of sales; and legal, finance, information systems, and other corporate overhead costs.

Income taxes

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

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

Share-based compensation

Share-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized on a straight-line basis over the requisite service period for awards expected to vest. The Company recorded stock compensation expense of $27,489,  $24,399, and $19,340 in fiscal 2018,  2017, and 2016, respectively (see Note 14, “Share-based awards”).

Insurance expense

The Company has insurance programs with third party insurers for employee health, workers compensation, and general liability, among others, to limit the Company’s liability exposure. The insurance programs are premium based and include retentions, deductibles, and stop loss coverage. Current stop loss coverage per claim is $350 for employee health claims, $100 for general liability claims, and $250 for workers compensation claims. The Company makes collateral and premium payments during the plan year and accrues expenses in the event additional premium is due from the Company based on actual claim results. In fiscal 2018, the Company created UB Insurance, Inc., an Arizona-based wholly owned captive insurance subsidiary of the Company, which charges the operating subsidiaries of the Company premiums to insure certain liability exposures. Pursuant to Arizona insurance regulations, UB Insurance, Inc. maintains certain levels of cash and cash equivalents related to its liability exposures.

Net income per common share

Basic net income per common share is computed by dividing income available to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted net income per common share includes dilutive common stock equivalents, using the treasury stock method (see Note 15, “Net income per common share”).

Recent accounting pronouncements not yet adopted

Leases

In February 2016, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (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. ASU 2016‑02 is effective for public companies for interim and annual reporting periods beginning after December 15, 2018.

 

The Company will adopt the new standard on February 3, 2019 using the modified retrospective approach.  Therefore, upon adoption, the Company will recognize and measure leases without revising comparative period information or disclosures.

 

The Company formed a cross-functional project team to assess the impact of the standard on the consolidated financial statements, which included updating the lease software and identifying changes to processes and controls. The Company plans to implement the transition package of three practical expedients permitted within the standard, which among other things, allows for the carryforward of historical lease classifications. The Company will make an accounting policy election to keep leases with terms of twelve months or less off the balance sheet and result in recognizing those lease payments on a straight-line basis over the lease term.

 

As a result of adopting ASU 201602, the Company estimates it will record lease liabilities of approximately $1,900,000 with a corresponding amount for the right-of-use assets, which will also be adjusted by reclassifications of existing assets and liabilities primarily related to deferred rent. The adoption of this new standard is not expected to have a material impact on the Company’s consolidated results of operations or cash flows.

 

Intangibles – Goodwill and Other-Internal-Use Software

 

In August 2018, the FASB issued 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

Revenue Recognition from Contracts with Customers

 

In May 2014, the FASB issued ASU 2014‑09, Revenue from Contracts with Customers (ASU 2014‑09), issued as a new Topic, Accounting Standards Codification (ASC) Topic 606, Revenue from Contracts with Customers (ASC 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition (ASC 605). The guidance in ASU 2014-09 and subsequently issued amendments outlines a comprehensive model for all entities to use in accounting for revenue arising from contracts with customers as well as required disclosures. Under the new standard, recognition of revenue occurs when a customer obtains control of promised goods or services in an amount that reflects the consideration, which the entity expects to receive in exchange for those goods or services. The new standard requires additional disclosure of the nature, amount, timing, and uncertainty of revenue and cash flows arising from contracts with customers including significant judgments and changes in judgments.

The Company adopted the new revenue standard effective February 4, 2018 using the modified retrospective transition method applied to all contracts with the cumulative effect recorded to the opening balance of retained earnings as of the date of adoption. The comparative information has not been restated and continues to be reported under accounting standards in effect for those periods. The adoption of the new revenue standard did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows. The Company expects the impact of the adoption of the new revenue standard will be immaterial to net income on an ongoing basis. See Note 4, “Revenue”, for further details.

Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment

 

In January 2017, the FASB issued ASU 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment, which simplifies how all entities assess goodwill for impairment by eliminating Step 2 from the goodwill impairment test. As amended, the goodwill impairment test will consist of one step comparing the fair value of a reporting unit with its carrying amount. An entity should recognize a goodwill impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, except that the loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. This guidance is effective for interim and annual reporting periods beginning after December 15, 2019 and should be applied prospectively. Early adoption is permitted. The Company early adopted the new guidance, prospectively, in the fourth quarter of fiscal 2018, and its adoption had no material impact on the Company’s consolidated financial position, results of operation, or cash flows.

 

v3.19.1
Acquisitions
12 Months Ended
Feb. 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 is not material to the Company’s consolidated financial statements.

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

v3.19.1
Revenue
12 Months Ended
Feb. 02, 2019
Revenue  
Revenue

4.   Revenue

Revenue from Contracts with Customers

 

On February 4, 2018, the Company adopted ASC 606 using the modified retrospective method applied to all contracts as of the date of adoption. The cumulative effect of initially applying the new revenue standard was recorded as an adjustment to the opening balance of retained earnings within the consolidated balance sheets. Under ASC 606, changes were made to the recognition timing or classification of revenues and expenses for the following:

 

 

 

Description

Policy under ASC 605

Policy under ASC 606

Credit card
program

Recognized amounts earned under the private label credit card and co-branded credit card programs as a reduction of cost of sales and selling, general and administrative expenses.

Recognize amounts earned under private label credit card and co-branded credit card programs within net sales.

Loyalty program

Recognized revenue under the incremental cost method at the time of purchase by the guest (when points were earned). Recorded a liability for the cost associated with the future performance obligation to the guest.

Recognize revenue under the deferred revenue method by deferring the recognition of the portion of revenue related to the earning of loyalty points to a future period when the guest redeems the points or the points expire.

Gift card breakage

Recognized gift card breakage (amounts not expected to be redeemed) within selling, general and administrative expenses.

Recognize gift card breakage in net sales proportionately as other gift card balances are redeemed. 

Sales refund
reserve

Recognized a sales refund reserve as a net liability within accrued liabilities.

Recognize a sales refund reserve on a gross basis as a liability within accrued liabilities and a right of return asset within prepaid expense and other current assets.

E-commerce
revenue

Recognized revenue based on delivery of merchandise to the guest.

Recognize revenue upon shipment of merchandise to the guest based on meeting the transfer of control criteria.

Upon the adoption of ASC 606, the Company recognized the cumulative effect of $29,980, net of tax, as a reduction to the opening balance of retained earnings as of February 4, 2018. The cumulative effect of adoption is primarily related to the change in accounting for the loyalty program. The comparative information has not been restated and continues to be reported under accounting standards in effect for those periods. The adoption of the new revenue standard did not have a material impact on the Company’s consolidated financial position, results of operations, or cash flows. The Company expects the impact of the adoption of the new revenue standard will be immaterial to net income on an ongoing basis.

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 amount of net sales attributable to retail stores, e-commerce, salon services, and other:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal year ended

 

 

February 2,

 

February 3,

 

January 28,

(Dollars in thousands)

 

2019

 

2018

 

2017

Retail stores

 

$

5,614,624

 

84%

 

$

5,038,409

 

85%

 

$

4,268,290

 

88%

E-commerce

 

 

752,224

 

11%

 

 

568,736

 

10%

 

 

345,342

 

7%

Salon services

 

 

300,863

 

4%

 

 

277,361

 

5%

 

 

241,105

 

5%

Other

 

 

48,904

 

1%

 

 

 -

 

0%

 

 

 -

 

0%

Total

 

$

6,716,615

 

100%

 

$

5,884,506

 

100%

 

$

4,854,737

 

100%

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

 

 

 

 

 

 

 

 

 

Fiscal year ended

 

    

February 2,

   

February 3,

    

January 28,

 

 

2019

 

2018

 

2017

Cosmetics

 

51%

 

51%

 

51%

Skincare, Bath & Fragrance

 

21%

 

21%

 

20%

Haircare Products & Styling Tools

 

19%

 

19%

 

20%

Salon Services

 

4%

 

5%

 

5%

Other (nail products, accessories, and other)

 

5%

 

4%

 

4%

 

 

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 during fiscal 2018:

 

 

 

 

 

 

Fiscal year ended

 

 

February 2, 2019

Beginning balance

 

$

110,103

Adoption of ASC 606

 

 

38,773

Additions to contract liabilities (1)

 

 

140,638

Deductions to contract liabilities (2)

 

 

(95,929)

Ending balance

 

$

193,585


(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.

v3.19.1
Property and equipment
12 Months Ended
Feb. 02, 2019
Property and equipment  
Property and equipment

5.   Property and equipment

Property and equipment consists of the following:

 

 

 

 

 

 

 

 

 

February 2,

 

February 3,

(In thousands)

    

2019

    

2018

Equipment and fixtures

 

$

994,668

 

$

834,931

Leasehold improvements

 

 

785,276

 

 

705,943

Electronic equipment and software

 

 

544,618

 

 

485,368

Construction-in-progress

 

 

50,574

 

 

122,419

 

 

 

2,375,136

 

 

2,148,661

Less: accumulated depreciation and amortization

 

 

(1,149,107)

 

 

(959,208)

Property and equipment, net

 

$

1,226,029

 

$

1,189,453

 

v3.19.1
Goodwill
12 Months Ended
Feb. 02, 2019
Goodwill  
Goodwill

6.  Goodwill

The changes in the carrying amounts of goodwill during the fiscal years 2018 and 2017 are as follows:

 

 

 

 

(In thousands)

 

 

Balance as of February 3, 2018

 

$

 -

Acquisitions

 

 

10,870

Balance as of February 2, 2019

 

$

10,870

 

 

The Company did not have a goodwill balance prior to fiscal 2018.

v3.19.1
Other intangible assets
12 Months Ended
Feb. 02, 2019
Other intangible assets  
Other intangible assets

7.   Other intangible assets

 

Other intangible assets subject to amortization consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

February 2, 2019

 

 

Weighted-average

 

Gross

 

 

 

 

 

 

remaining useful life in

 

carrying

 

Accumulated

 

 

(In thousands)

    

years

    

value

    

amortization

    

Net

Developed technology

 

4.7

 

$

4,631

 

$

(314)

 

$

4,317

 

The Company did not have any other intangible assets prior to fiscal 2018.

 

Amortization expense related to intangible assets was $314,  $0, and $0 in fiscal 2018, fiscal 2017, and fiscal 2016, respectively.

 

Estimated amortization expense related to intangible assets at February 2, 2019, for the next five years and thereafter is as follows:

 

 

 

 

 

 

 

 

 

 

 

Estimated

 

 

 

 

amortization

 

 

 

 

expense

Fiscal year

    

 

      

(In thousands)

2019

 

 

 

$

926

2020

 

 

 

 

926

2021

 

 

 

 

926

2022

 

 

 

 

926

2023

 

 

 

 

613

2024 and thereafter

 

 

 

 

 –

 

 

 

 

$

4,317

 

v3.19.1
Commitments and contingencies
12 Months Ended
Feb. 02, 2019
Commitments and contingencies  
Commitments and contingencies

 

8.   Commitments and contingencies

Leases – The Company leases retail stores, distribution centers, corporate offices, and certain equipment under operating leases with various expiration dates through 2032. Store leases generally have initial lease terms of 10 years and include renewal options under substantially the same terms and conditions as the original leases. Total rent expense under operating leases was $262,275,  $241,559, and $202,942 in fiscal 2018,  2017 and 2016, respectively. As of February 2, 2019, future minimum lease payments under operating leases for the non-cancellable period are as follows:

 

 

 

 

 

 

Operating

 

 

Leases

Fiscal year

    

(In thousands)

2019

 

$

334,508

2020

 

 

334,238

2021

 

 

318,041

2022

 

 

294,412

2023

 

 

250,876

2024 and thereafter

 

 

753,337

Total minimum lease payments

 

$

2,285,412

 

Included in the operating lease schedule above is $219,897 of minimum lease payments for stores that are expected to open in future periods.

Contractual obligations – As of February 2, 2019, the Company had obligations of $11,175 related to commitments made to a third party for products and services for a new fast fulfillment center opening in fiscal 2020. Payments under this commitment were $1,792 in fiscal 2018. In addition, the Company has entered into various non-cancelable advertising and other goods and service contracts. A majority of these agreements expire over one year and the obligations under these agreements were $18,033 as of February 2, 2019.

General litigation – 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.

v3.19.1
Accrued liabilities
12 Months Ended
Feb. 02, 2019
Accrued liabilities  
Accrued liabilities

9.   Accrued liabilities

Accrued liabilities consist of the following:

 

 

 

 

 

 

 

 

 

February 2,

 

February 3,

(In thousands)

    

2019

    

2018

Accrued payroll, bonus, and employee benefits

 

$

96,020

 

$

82,593

Accrued taxes

 

 

32,085

 

 

28,306

Other accrued liabilities

 

 

92,561

 

 

78,272

Accrued liabilities

 

$

220,666

 

$

189,171

 

v3.19.1
Income Taxes
12 Months Ended
Feb. 02, 2019
Income Taxes  
Income Taxes

10.   Income taxes

The provision for income taxes consists of the following:

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal

 

Fiscal

 

Fiscal

(In thousands)

    

2018

    

2017

    

2016

Current:

 

 

  

 

 

  

 

 

  

Federal

 

$

137,255

 

$

230,006

 

$

194,199

State

 

 

29,247

 

 

28,714

 

 

24,835

Total current

 

 

166,502

 

 

258,720

 

 

219,034

Deferred:

 

 

  

 

 

  

 

 

  

Federal

 

 

29,374

 

 

(26,256)

 

 

24,480

State

 

 

4,706

 

 

(839)

 

 

2,440

Total deferred

 

 

34,080

 

 

(27,095)

 

 

26,920

Provision for income taxes

 

$

200,582

 

$

231,625

 

$

245,954

 

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

 

 

 

 

 

 

 

 

 

 

 

    

Fiscal

 

Fiscal

 

Fiscal

 

    

2018

    

2017

    

2016

Federal statutory rate

 

21.0

%  

 

33.7

%  

 

35.0

%  

State effective rate, net of federal tax benefit

 

3.1

%  

 

2.4

%  

 

2.8

%  

Re-measurement of deferred tax liabilities

 

0.0

%  

 

(4.9)

%  

 

0.0

%  

Excess deduction of stock compensation

 

(0.6)

%  

 

(1.2)

%  

 

0.0

%  

Other

 

(0.2)

%  

 

(0.6)

%  

 

(0.3)

%  

Effective tax rate

 

23.3

%  

 

29.4

%  

 

37.5

%  

 

At February 3, 2018, the Company recorded a provisional tax expense related to the impacts of the Tax Cuts and Jobs Act (Tax Reform). The SEC issued guidance on December 22, 2017 under Staff Accounting Bulletin No. 118 (“SAB 118”) which allowed recording a provisional tax expense using a measurement period, not to exceed more than one year from the enactment date. The Company’s accounting for the impacts of the Tax Reform is complete and the Company has not recorded any material adjustments to the provisional amounts under SAB 118.

 

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

 

 

 

 

 

 

 

 

    

February 2,

 

February 3,

(In thousands)

    

2019

    

2018

Deferred tax assets:

 

 

  

 

 

  

Reserves not currently deductible

 

$

30,669

 

$

23,789

Employee benefits

 

 

18,491

 

 

15,273

Credit carryforwards

 

 

237

 

 

343

Accrued liabilities

 

 

34,391

 

 

14,625

Inventory valuation

 

 

4,107

 

 

847

NOL carryforwards

 

 

413

 

 

 —

Total deferred tax assets

 

 

88,308

 

 

54,877

Deferred tax liabilities:

 

 

  

 

 

  

Property and equipment

 

 

69,265

 

 

54,210

Deferred rent obligation

 

 

60,525

 

 

49,518

Prepaid expenses

 

 

39,915

 

 

10,552

Intangibles

 

 

1,018

 

 

 —

Receivables not currently includable

 

 

1,449

 

 

 —

Total deferred tax liabilities

 

 

172,172

 

 

114,280

Net deferred tax liability

 

$

(83,864)

 

$

(59,403)

 

At February 2, 2019, the Company had $237 of credit carryforwards for state income tax purposes that expire between 2023 and 2028. The Company also had $1,114 of federal and $1,136 of state net operating loss (NOL) carryforwards that expire by 2035 and $368 of federal and $345 of state NOL carryforwards that do not expire.

The Company accounts for uncertainty in income taxes in accordance with the ASC 740-10 rules for income taxes. The reserve for uncertain tax positions was $3,844 and $3,565 at February 2, 2019 and February 3, 2018, respectively. The balance is the Company’s best estimate of the potential liability for uncertain tax positions. A reconciliation of the Company’s unrecognized tax benefits, excluding interest and penalties, is as follows:

 

 

 

 

 

 

 

 

    

February 2,

 

February 3,

(In thousands)

    

2019

    

2018

Balance at beginning of the period

 

$

3,565

 

$

3,305

Increase due to a prior year tax position

 

 

1,008

 

 

1,064

Decrease due to a prior period position

 

 

(729)

 

 

(804)

Balance at the end of the period

 

$

3,844

 

$

3,565

 

The Company acknowledges that the amount of unrecognized tax benefits may change in the next twelve months. However, it does not expect the change to have a significant impact on its consolidated financial statements. Income tax-related interest and penalties were insignificant for fiscal 2018 and 2017.

The Company files tax returns in the U.S. federal and state jurisdictions. The Company is no longer subject to U.S. federal examinations by the Internal Revenue Service for years before 2017 and is no longer subject to examinations by state authorities before 2014.

v3.19.1
Notes payable
12 Months Ended
Feb. 02, 2019
Notes payable  
Notes payable

11.   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 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.

As of February 2, 2019 and February 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.

v3.19.1
Fair value measurements
12 Months Ended
Feb. 02, 2019
Fair value measurements  
Fair value measurements

12.   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 February 2, 2019 and February 3, 2018, the Company held financial liabilities included in other long-term liabilities on the consolidated balance sheets of $19,615 and $15,942, 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.

v3.19.1
Investments
12 Months Ended
Feb. 02, 2019
Investments  
Investments

13.   Investments

The Company did not have any short-term investments as of February 2, 2019. The Company’s short-term investments as of February 3, 2018 consisted of $120,000 in certificates of deposit. Short-term investments are carried at cost, which approximates fair value and are recorded in the consolidated balance sheets in short-term investments.

v3.19.1
Share-based awards
12 Months Ended
Feb. 02, 2019
Share-based awards  
Share-based awards

14.  Share-based awards

Equity incentive plans

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

Amended and restated 2011 incentive award plan

In June 2016, the Company adopted the Amended and Restated 2011 Incentive Award Plan (the 2011 Plan). The 2011 Plan provides for the grant of incentive stock options, non-qualified stock options, restricted stock, restricted stock units, stock appreciation rights, performance awards, dividend equivalent rights, stock payments, deferred stock, and cash-based awards to employees, consultants, and directors. Following its original adoption in June 2011, awards are only being made under the 2011 Plan, and no further awards will be made under any prior plan. As of February 2, 2019, the 2011 Plan reserves for the issuance upon grant or exercise of awards up to 3,336 shares of the Company’s common stock.

The following table presents information related to the Company’s 2011 Incentive award plan:

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal

 

Fiscal

 

Fiscal

2011 Incentive award plan (in thousands)

    

2018

    

2017

    

2016

Compensation expense

 

 

 

 

 

 

 

 

 

Common stock options

 

$

8,590

 

$

8,993

 

$

7,983

Restricted stock units

 

 

12,077

 

 

9,507

 

 

7,295

Performance-based restricted stock units

 

 

6,822

 

 

5,899

 

 

4,062

Total stock compensation expense

 

$

27,489

 

$

24,399

 

$

19,340

 

 

 

 

 

 

 

 

 

 

Cash received from stock option exercises

 

$

13,121

 

$

16,190

 

$

16,293

Income tax benefit

 

$

6,135

 

$

10,024

 

$

6,764

Tax benefit realized

 

$

6,135

 

$

10,024

 

$

15,868

 

Common stock options

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

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

 

Fiscal

    

Fiscal

    

Fiscal

 

    

 

2018

    

2017

    

2016

Volatility rate

 

 

29.0%

 

30.9%

 

35.0%

Average risk-free interest rate

 

 

2.4%

 

1.6%

 

1.2%

Average expected life (in years)

 

 

3.4

 

3.5

 

3.5

Dividend yield

 

 

None

 

None

 

None

 

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

The following table presents information related to the Company’s common stock options:

 

 

 

 

 

 

 

 

 

 

 

Common stock options

 

Fiscal

 

Fiscal

 

Fiscal

(in thousands, except weighted-average grant date fair value)

    

2018

    

2017

    

2016

Weighted-average grant date fair value

 

$

50.10

 

$

69.61

 

$

53.02

Fair value of options vested

 

$

10,042

 

$

5,656

 

$

5,932

Intrinsic value of options exercised

 

$

25,902

 

$

29,449

 

$

27,468

 

At February 2, 2019, there was approximately $17,311 of unrecognized compensation expense related to unvested stock options. The unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately two and a half years.

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2018

 

Fiscal 2017

 

Fiscal 2016

 

 

 

 

 

Weighted-

 

 

 

 

Weighted-

 

 

 

 

Weighted-

 

    

Number of

 

 

average

 

Number of

 

 

average

 

Number of

 

 

average

 

    

options

    

 

exercise price

    

options

    

 

exercise price

    

options

    

 

exercise price

Common stock options outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beginning of year

 

766

 

$

147.76

 

830

 

$

120.78

 

939

 

$

104.58

Granted

 

163

 

 

204.27

 

106

 

 

279.76

 

110

 

 

193.64

Exercised

 

(166)

 

 

78.81

 

(166)

 

 

97.44

 

(194)

 

 

83.88

Forfeited

 

(8)

 

 

260.83

 

(4)

 

 

120.71

 

(25)

 

 

118.97

End of year

 

755

 

$

174.34

 

766

 

$

147.76

 

830

 

$

120.78

Exercisable at end of year

 

296

 

$

134.27

 

261

 

$

81.72

 

280

 

$

69.69

Vested and Expected to vest

 

718

 

$

173.02

 

725

 

$

145.86

 

786

 

$

119.32

 

The following table presents information related to options outstanding and options exercisable at February 2, 2019, under the Company’s stock option plans based on ranges of exercise prices (shares in thousands):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Options outstanding

 

Options exercisable

 

 

 

 

Weighted-

 

 

 

 

 

 

Weighted-

 

 

 

 

 

 

 

average

 

 

 

 

 

 

average

 

 

 

 

 

 

 

remaining

 

 

Weighted-

 

 

 

remaining

 

 

Weighted-

 

 

Number of

 

contractual life

 

 

average

 

Number of

 

contractual life

 

 

average

Range of Exercise Prices

    

options

    

(years)

    

 

exercise price

    

options

    

(years)

    

 

exercise price

$22.86 – $57.42

 

43

 

2

 

$

41.06

 

43

 

2

 

$

41.06

$69.96 – $96.81

 

47

 

4

 

 

83.71

 

47

 

4

 

 

83.71

$97.89 – $125.23

 

60

 

5

 

 

104.53

 

60

 

5

 

 

104.53

$127.15 – $164.06

 

245

 

7

 

 

161.56

 

76

 

7

 

 

159.15

$164.61 – $204.27

 

255

 

8

 

 

199.24

 

43

 

7

 

 

190.22

$210.72 – $281.53

 

105

 

8

 

 

278.47

 

27

 

8

 

 

277.84

$22.86 – $281.53

 

755

 

7

 

$

174.34

 

296

 

5

 

$

134.27

 

The aggregate intrinsic value of outstanding and exercisable options as of February 2, 2019 was $88,307 and $46,503, respectively. The last reported sale price of our common stock on the NASDAQ Global Select Market on February 2, 2019 was $291.36 per share.

Restricted stock units

The Company issues restricted stock units to certain employees and its Board of Directors. Employee grants will generally cliff vest after three years and director grants will cliff vest within one year. The grant date fair value of restricted stock units is based on the closing market price of shares of the Company’s common stock on the date of grant. Restricted stock units are expensed on a straight-line basis over the requisite service period. Forfeitures of restricted stock units are estimated at the grant date based on historical rates of the Company’s stock award activity and reduce the compensation expense recognized. At February 2, 2019, unrecognized compensation cost related to restricted stock units was $19,370. The unrecognized compensation expense is expected to be recognized over a weighted-average period of approximately one and a half years.

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fiscal 2018

 

Fiscal 2017

 

Fiscal 2016

 

    

 

 

Weighted-

 

 

 

Weighted-

 

 

 

Weighted-

 

 

Number of

 

average grant