1.    Business and basis of presentation

Ulta Salon, Cosmetics & Fragrance, Inc. (Company or Ulta) was incorporated in the state of Delaware on January 9, 1990, to operate specialty retail stores selling cosmetics, fragrance, haircare and skincare products, and related accessories and services. The stores also feature full-service salons. As of January 28, 2012, the Company operated 449 stores in 43 states. All amounts are stated in thousands, with the exception of per share amounts and number of stores.

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

2.    Summary of significant accounting policies

Fiscal year

The Company’s fiscal year is the 52 or 53 weeks ending on the Saturday closest to January 31. The Company’s fiscal years ended January 28, 2012 (fiscal 2011), January 29, 2011 (fiscal 2010) and January 30, 2010 (fiscal 2009) were 52 week years.

Use of estimates

The preparation of 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 financial statements and the reported amounts of revenues and expenses during the accounting period. Actual results could differ from those estimates.

Cash and cash equivalents

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

Receivables

Receivables consist principally of amounts receivable from vendors related to allowances earned but not yet received. These receivables are computed based on provisions of the vendor agreements in place and the Company’s completed performance. The Company’s vendors are primarily U.S.-based producers of consumer products. 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 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 allowance for receivables totaled $556 and $257 as of January 28, 2012 and January 29, 2011, respectively.

Merchandise inventories

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

 

Fair value of financial instruments

The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximates their estimated fair values due to the short maturities of these instruments. The Company had no outstanding debt as of January 28, 2012 and January 29, 2011.

Derivative financial instruments

The Company had an interest rate swap that expired on January 31, 2010. This derivative financial instrument was designated and qualified as a cash flow hedge. Accordingly, the effective portion of the gain or loss on the derivative instrument was reported as a component of accumulated other comprehensive income (loss) and reclassified into interest expense in the same period or periods during which the hedged transaction affects earnings. The remaining gain or loss, the ineffective portion, on the derivative instrument, if other than inconsequential, was recognized in interest expense during the period of change. This derivative, which was immaterial, was recorded in the January 30, 2010 balance sheet at fair value.

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 obtaining internal use software. These costs are amortized over the estimated useful life of the software.

The Company periodically evaluates whether changes have occurred that would require revision of the remaining useful life of equipment and leasehold improvements or render them not recoverable. If such circumstances arise, the Company uses an estimate of the undiscounted sum of expected future operating cash flows during their holding period to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows are less than the carrying amount of the assets, the resulting impairment charges to be recorded are calculated based on the excess of the carrying value of the assets over the fair value of such assets, with the fair value determined based on an estimate of discounted future cash flows.

Customer loyalty program

The Company maintains two customer loyalty programs. The Company’s national certificate program provides reward point certificates for free beauty products. Customers earn purchase-based reward points and redeem the related reward certificate during specific promotional periods during the year. The Company is also rolling out its ULTAmate Rewards program in which customers earn purchase-based points on an annual basis which can be redeemed at any time. The Company accrues the cost of anticipated redemptions related to these programs at the time of the initial purchase based on historical experience. The accrued liability related to both of the loyalty programs at January 28, 2012 and January 29, 2011 was $6,207 and $4,883, respectively. The cost of these programs, which was $17,200, $12,942 and $10,015 in fiscal 2011, 2010 and 2009, respectively, is included in cost of sales in the statements of income.

Deferred rent

Many of the Company’s operating leases contain predetermined fixed increases of the minimum rental rate during the lease. For these leases, the Company recognizes the related rental expense on a straight-line basis over the expected lease term, including cancelable option periods where failure to exercise such options would result in an economic penalty, and records the difference between the amounts charged to expense and the rent paid as deferred rent. The lease term commences on the earlier of the date when the Company becomes legally obligated for rent payments or the date the Company takes possession of the leased space.

 

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

Revenue recognition

Net sales include merchandise sales and salon service revenue. Revenue from merchandise sales at stores is recognized at the time of sale, net of estimated returns. The Company provides refunds for product returns within 60 days from the original purchase date. Salon revenue is recognized when services are rendered. Salon service revenue amounted to $98,479, $86,484 and $76,627 for fiscal 2011, 2010 and 2009, respectively. Company coupons and other incentives are recorded as a reduction of net sales. State sales taxes are presented on a net basis as the Company considers itself a pass-through conduit for collecting and remitting state sales tax. E-commerce sales are recorded at the time of shipment.

The Company’s gift card sales are deferred and recognized in net sales when the gift card is redeemed for product or services. The Company’s gift cards do not expire and do not include service fees that decrease customer balances. The Company has maintained Company-specific, historical data related to its large pool of similar gift card transactions sold and redeemed over a significant time frame. During fiscal 2010, there was a change in facts and circumstances which resulted in the Company recognizing approximately $2.0 million of gift card breakage income which related primarily to gift cards sold in prior years. The Company recognizes gift card breakage to the extent there is no requirement for remitting balances to governmental agencies under unclaimed property laws. Gift card breakage is recognized over the same performance period, and in the same proportion, that the Company’s data has demonstrated that gift cards are redeemed. Gift card breakage is recorded as a decrease in selling, general and administrative expense in the statements of income. Deferred gift card revenue was $10,573 and $7,591 at January 28, 2012 and January 29, 2011, respectively, and is included in accrued liabilities – accrued customer liabilities (Note 5).

Vendor allowances

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

Advertising

Advertising expense consists principally of paper, print, and distribution costs related to the Company’s advertising circulars. The Company expenses the production and distribution costs related to its advertising circulars in the period the related promotional event occurs. Total advertising costs, exclusive of incentives from vendors and start-up advertising expense, amounted to $99,446, $84,796 and $76,811 for fiscal 2011, 2010 and 2009, respectively. Prepaid advertising costs included in prepaid expenses and other current assets were $4,721 and $3,804 as of January 28, 2012 and January 29, 2011, respectively.

Pre-opening expenses

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

Cost of sales

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

 

Selling, general and administrative expenses

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

Income taxes

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

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

Share-based compensation

The Company accounts for share-based compensation in accordance with the Accounting Standards Codification ^TM (ASC) rules for stock compensation. Share-based compensation cost is measured at grant date, based on the fair value of the award, and is recognized on a straight-line method over the requisite service period for awards expected to vest. The Company recorded stock compensation expense of $11,605, $11,155 and $5,949 for fiscal 2011, 2010 and 2009, respectively (see Note 10, “Share-based awards”).

Insurance expense

The Company has insurance programs with third party insurers for employee health, workers compensation and general liability, among others, to limit the Company’s liability exposure. The insurance programs are premium based and include retentions, deductibles and stop loss coverage. Current stop loss coverage is $150 for employee health claims, $100 for general liability claims and $250 for workers compensation claims. The Company makes collateral and premium payments during the plan year and accrues expenses in the event additional premium is due from the Company based on actual claim results.

Net income per common share

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

 

3.    Property and equipment

Property and equipment consist of the following:

 

 

		January 28, 2012				January 29, 2011
Equipment and fixtures		$	256,479			$	223,663
Leasehold improvements			256,487				233,997
Electronic equipment and software			126,790				105,808
Construction-in-progress			33,598				16,331
			673,354				579,799
Less accumulated depreciation and amortization			(296,369	)			(253,700	)
Property and equipment, net		$	376,985			$	326,099

The Company had no capitalized interest for fiscal 2011 and 2010 as a result of not utilizing the credit facility during the year.

4.    Commitments and contingencies

Leases — The Company leases retail stores, distribution and office facilities, and certain equipment. Original non-cancelable lease terms range from three to ten years, and store leases generally contain renewal options for additional years. A number of the Company’s store leases provide for contingent rentals based upon sales. Contingent rent amounts were insignificant in fiscal 2011, 2010 and 2009. Total rent expense under operating leases was $94,175, $82,365 and $73,228 for fiscal 2011, 2010 and 2009, respectively. Future minimum lease payments under operating leases as of January 28, 2012, are as follows:

 

 

		Operating
Fiscal year		Leases
2012		$	123,945
2013			128,415
2014			123,821
2015			115,413
2016			106,138
2017 and thereafter			338,177
Total minimum lease payments		$	935,909

Included in the operating lease schedule above is $132,028 of minimum lease payments for stores that will open in fiscal 2012. Also included in the schedule above is the Chambersburg, Pennsylvania distribution center which is expected to open in fiscal 2012.

General litigation — In May 2010, a putative employment class action lawsuit was filed against the Company and certain unnamed defendants in state court in California. The plaintiff and members of the proposed class are alleged to be (or have been) non-exempt hourly employees. The suit alleges that Ulta violated various provisions of the California labor laws and failed to provide plaintiff and members of the proposed class with full meal periods, paid rest breaks, certain wages, overtime compensation and premium pay. The suit seeks to recover damages and penalties as a result of these alleged practices. On June 21, 2010, the Company filed its answer to the lawsuit. On January 12, 2011, the Company and plaintiffs engaged in a voluntary mediation. Although the Company continues to deny plaintiffs’ allegations, in the interest of putting certain of the claims behind it, the Company agreed in principle to settle all claims of the putative class consisting of non-exempt hourly hair designers in the salon department within the California retail stores. The settlement, which is not an admission of liability, is subject to final documentation and Court approval. Counsel for the plaintiffs has agreed to dismiss without prejudice the claims of all other putative class members. The proposed settlement was approved and became final in January 2012. The settlement amount was not material.

 

On March 2, 2012, a putative employment class action lawsuit was filed against us and certain unnamed defendants in state court in Los Angeles County, California. The plaintiff and members of the proposed class are alleged to be (or to have been) non-exempt hourly employees. The suit alleges that Ulta violated various provisions of the California labor laws and failed to provide plaintiff and members of the proposed class with full meal periods, paid rest breaks, certain wages, overtime compensation and premium pay. The suit seeks to recover damages and penalties as a result of these alleged practices. The Company denies plaintiff’s allegations and intends to vigorously defend the matter.

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

5.    Accrued liabilities

Accrued liabilities consist of the following:

 

 

		January 28, 2012				January 29, 2011
Accrued vendor liabilities (including accrued property and equipment costs)		$	10,868			$	12,994
Accrued customer liabilities			17,978				16,543
Accrued payroll, bonus and employee benefits			24,449				25,221
Accrued taxes, other			7,619				8,843
Other accrued liabilities			13,497				12,663
Accrued liabilities		$	74,411			$	76,264

6.    Income taxes

The provision for income taxes consists of the following:

 

 

		Fiscal 2011				Fiscal 2010				Fiscal 2009
Current:
Federal		$	53,495			$	32,288			$	20,296
State			11,022				7,070				2,744
Total current			64,517				39,358				23,040
Deferred:
Federal			10,796				8,076				3,237
State			31				(335	)			318
Total deferred			10,827				7,741				3,555
Provision for income taxes		$	75,344			$	47,099			$	26,595

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

 

 

		Fiscal 2011				Fiscal 2010				Fiscal 2009
Federal statutory rate			35.0	%			35.0	%			35.0	%
State effective rate, net of federal tax benefit			3.7	%			3.7	%			3.0	%
Other			(0.2	%)			1.2	%			2.3	%
Effective tax rate			38.5	%			39.9	%			40.3	%

 

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

 

 

		January 28, 2012				January 29, 2011
Deferred tax assets:
Reserves not currently deductible		$	13,207			$	10,433
Employee benefits			4,970				5,327
Net operating loss carryforwards			179				334
Accrued liabilities			3,499				3,202
Inventory valuation			1,570				311
Total deferred tax assets			23,425				19,607
Deferred tax liabilities:
Property and equipment			32,414				23,321
Deferred rent obligation			16,572				12,050
Prepaid expenses			6,370				5,340
Total deferred tax liabilities			55,356				40,711
Net deferred tax liability		$	(31,931	)		$	(21,104	)

At January 28, 2012, the Company had net operating loss carryforwards (NOLs) for federal income tax purposes of approximately $513, which expire between 2012 and 2014. Based on Internal Revenue Code Section 382 relating to changes in ownership of the Company, utilization of the federal NOLs is subject to an annual limitation of $440 for federal NOLs created prior to April 1, 1997.

The Company accounts for uncertainty in income taxes in accordance with the ASC rules for income taxes. The reserve for uncertain tax positions was $930 at January 29, 2011. There was no reserve for uncertain tax positions at January 28, 2012. The balance is the Company’s best estimate of the potential liability for uncertain tax positions. The decrease in the liability for income taxes associated with uncertain tax positions relates to a change in prior period position during fiscal 2011. A reconciliation of the Company’s unrecognized tax benefits, excluding interest and penalties, is as follows:

 

 

		January 28, 2012				January 29, 2011
Balance at beginning of the period		$	862			$	5,110
Decrease in a change to a prior period position			(862	)			—
Decrease attributable to audit settlements during the current period			—				(4,248	)
Balance at the end of the period		$	—			$	862

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 financial statements. Income tax-related interest and penalties were insignificant for fiscal 2011, 2010 and 2009.

The Company files tax returns in the U.S. Federal and State jurisdictions. The Company is no longer subject to U.S. Federal examinations by the Internal Revenue Services for the years before 2009 and, this applies to examinations by the State authorities before 2007.

7.    Notes payable

On August 31, 2010, the Company terminated its credit facility with Bank of America and entered into a new credit facility pursuant to a Loan and Security Agreement with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and a Lender thereunder, JPMorgan Chase Bank, N.A. as a Lender, and PNC Bank, National Association, as a Lender.

 

On October 19, 2011, the Company entered into an Amended and Restated Loan and Security Agreement (the Loan Agreement) with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and a Lender thereunder, Wells Fargo Capital Finance LLC as a Lender, J.P. Morgan Securities LLC as a Lender, JP Morgan Chase Bank, N.A. as a Lender and PNC Bank, National Association, as a Lender. The Loan Agreement amended and restated the Loan and Security Agreement, dated as of August 31, 2010, by and among the lenders. The Loan Agreement extends the maturity of the Company’s credit facility to October 2016, provides maximum revolving loans equal to the lesser of $200,000 or a percentage of eligible owned inventory, contains a $10,000 subfacility for letters of credit and allows the Company to increase the revolving facility by an additional $50,000, subject to consent by each lender and other conditions. The Loan Agreement contains a requirement to maintain a minimum amount of excess borrowing availability at all times. Substantially all of the Company’s assets are pledged as collateral for outstanding borrowings under the facility. Outstanding borrowings will bear interest at the prime rate or Libor plus 1.50% and the unused line fee is 0.225%. As of January 28, 2012 and January 29, 2011, the Company had no borrowings outstanding under the new credit facility.

8.    Financial instruments

The Company is exposed to certain risks relating to its ongoing business operations. The primary risk managed by using derivative instruments is interest rate risk. Interest rate swaps are entered into to manage interest rate risk associated with the Company’s variable-rate borrowings. The Company accounts for derivative financial instruments in accordance with the ASC rules for derivatives and hedging activities.

On February 1, 2009, the Company adopted the ASC disclosure requirements for derivatives and hedging activities. The adoption had no impact on amounts recognized in the Company’s financial statements. The new rules are intended to help investors better understand how derivative instruments and hedging activities affect an entity’s financial position, financial performance and cash flows through enhanced disclosure requirements. The enhanced disclosures primarily surround disclosing the objectives and strategies for using derivative instruments by their underlying risk as well as a tabular format of the fair values of the derivative instruments and their gains and losses.

The Company had an interest rate swap agreement with a notional amount of $25 million which was designated as a cash flow hedge. The agreement expired on January 31, 2010. The interest rate swap was recorded at fair value in fiscal 2009 and changes in market value related to the effective portion of the cash flow hedge were recorded as unrecognized gains or losses in the accumulated other comprehensive income (loss) section of the stockholders’ equity in the balance sheets.

The Company did not utilize its credit facility during fiscal 2011 or 2010.

9.    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.

On February 3, 2008, the Company adopted the ASC rules for fair value measurements and disclosures. The adoption had no impact on the Company’s financial statements. The new rules established a three-tier hierarchy for fair value measurements, which prioritizes the inputs used in measuring fair value as follows:

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

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

c. Level 3 — unobservable inputs in which there is little or no market data, which would require the Company to develop its own assumptions.

As of January 28, 2012, the Company held financial liabilities of $1,855 related to its non-qualified deferred compensation plan. The liabilities have been categorized as Level 2 as they are based on third-party reported net asset values which are based primarily on quoted market prices of underlying assets of the funds within the plan.

 

10.    Share-based awards

Equity Incentive Plans

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

2011 Incentive Award Plan

In June 2011, the Company adopted the 2011 Incentive Award Plan (the 2011 Plan). The 2011 Plan provides for the grant of incentive stock options, nonqualified stock options, restricted stock, restricted stock units, stock appreciation rights, performance awards, dividend equivalent rights, stock payments, deferred stock and cash-based awards to employees, consultants, and directors. Following its adoption, awards are only being made under the 2011 Plan, and no further awards will be made under any prior plan. The 2011 Plan reserves for the issuance upon grant or exercise of awards up to 4,750 shares of the Company’s common stock plus 746 shares that were not issued under prior plans.

The Company measures share-based compensation cost on the grant date, based on the fair value of the award, and recognizes the expense on a straight-line method over the requisite service period for awards expected to vest. The Company estimated the grant date fair value of stock options using a Black-Scholes valuation model using the following weighted-average assumptions:

 

 

		Fiscal 2011				Fiscal 2010				Fiscal 2009
Volatility rate			54.0	%			56.9	%			60.6	%
Average risk-free interest rate			1.5	%			2.2	%			2.5	%
Average expected life (in years)			6.3				5.6				5.3
Dividend yield			None				None				None

The expected volatility is based on the historical volatility of a peer group of publicly-traded companies. 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. We have limited historical data related to exercise behavior since our initial public offering on October 30, 2007. As a result, the Company has elected to generally use the shortcut approach to determine the expected life in accordance with the SEC Staff Accounting Bulletin on share-based payments. The Company does not currently pay a regular dividend.

The Company granted 621 stock options during fiscal 2011. The compensation cost that has been charged against income was $9,731, $9,918, and $5,949 for fiscal 2011, 2010, and 2009, respectively. The weighted-average grant date fair value of options granted in fiscal 2011, 2010 and 2009 was $34.81, $13.58 and $6.64, respectively. At January 28, 2012, there was approximately $32,156 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 years.

The total intrinsic value of options exercised was $86,030, $42,118 and $4,783 in fiscal 2011, 2010 and 2009, respectively.

 

Restricted stock awards

During fiscal 2010, the Company granted restricted common shares to its newly appointed President and Chief Executive Officer. Restricted shares cannot be sold or otherwise transferred during the vesting period. The award cliff vested on December 29, 2011. The award was expensed on a straight-line basis over the 20 month vesting period. During fiscal 2011 the Company issued restricted stock to certain employees and its board of directors. Employee grants will vest over four years at the rate of 25% per year from the date of grant and director grants will generally cliff vest within one year. The compensation expense recorded in fiscal 2011 and 2010 was $1,874 and $1,237, respectively. At January 28, 2012 and January 29, 2011, unrecognized compensation cost related to restricted stock awards was $935 and $1,543, respectively.

A summary of the status of the Company’s stock option activity is presented in the following tables:

 

 

		Fiscal 2011								Fiscal 2010								Fiscal 2009
		Shares				Weighted- Average Exercise Price				Shares				Weighted- Average Exercise Price				Shares				Weighted- Average Exercise Price
Common Stock Options Outstanding
Beginning of year			5,036			$	16.55				5,791			$	11.18				5,300			$	10.27
Granted			621				66.58				1,521				26.12				977				12.44
Exercised			(1,936	)			14.28				(2,033	)			8.41				(429	)			2.86
Canceled			(162	)			17.75				(243	)			16.73				(57	)			10.46
End of year			3,559			$	26.46				5,036			$	16.55				5,791			$	11.18
Exercisable at end of year			1,437				14.27				2,272			$	12.38				2,971			$	8.99
Restricted Stock Outstanding
Beginning of year			128			$	24.29				—			$	—
Granted			15				63.38				128				24.29
Vested			(71	)			23.62				—				—
Repuchased			(50	)			23.52				—				—
End of year			22			$	55.72				128			$	24.29

The Company completed an initial public offering during fiscal 2007 which resulted in compensation expense related to performance based grants of $425 and $637 in fiscal 2010 and 2009, respectively. There was no compensation expense related to performance based grants in 2011. No performance-based options were granted during fiscal 2011, 2010 and 2009.

Cash received from option exercises under all share-based payment arrangements for fiscal 2011, 2010 and 2009 was $27,639, $17,100 and $1,228, respectively. The total income tax benefit recognized in the income statement for the share-based compensation arrangements was $3,545, $3,300 and $1,464 for fiscal 2011, 2010 and 2009, respectively. The actual tax benefit realized for the tax deductions from option exercise and restricted stock vesting of the share-based payment arrangements totaled $29,439, $13,373 and $630, respectively, for fiscal 2011, 2010 and 2009.

 

The following table presents information related to options outstanding and options exercisable at January 28, 2012, under the Company’s stock option plans based on ranges of exercise prices:

 

 

		Options outstanding												Options exercisable
Options outstanding		Number of options				Weighted- average remaining contractual life (years)				Weighted- average exercise price				Number of options				Weighted- average remaining contractual life (years)				Weighted- average exercise price
$   0.02 - 0.17			6				1			$	.17				6				1			$	.17
0.18 - 1.11			16				3				1.11				16				3				1.11
1.12 - 2.62			138				3				2.49				138				3				2.49
2.63 - 4.12			67				4				3.72				67				4				3.72
4.13 - 9.18			111				6				7.93				73				5				8.79
9.19 - 15.81			1,292				7				13.51				777				7				13.76
15.82 - 37.85			1,308				9				25.89				360				9				23.78
37.86 - 69.96			621				10				66.58				—				—				—
End of year			3,559				8			$	26.46				1,437				7			$	14.27

The aggregate intrinsic value of outstanding and exercisable options as of January 28, 2012 was $180,995 and $90,599, respectively. The last reported sale price of our common stock on the NASDAQ Global Select Market on January 28, 2012 was $77.31 per share.

11.     Net income per common share

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

 

 

		Fiscal year ended
		January 28, 2012				January 29, 2011				January 30, 2010
Numerator for diluted net income per share — net income		$	120,264			$	71,030			$	39,356
Denominator for basic net income per share — weighted-average common shares			61,259				58,959				57,915
Dilutive effect of stock options and non-vested stock			2,075				2,329				1,322
Denominator for diluted net income per share			63,334				61,288				59,237
Net income per common share:
Basic		$	1.96			$	1.20			$	0.68
Diluted		$	1.90			$	1.16			$	0.66

The denominator for diluted net income per common share for fiscal years 2011, 2010 and 2009 exclude 621, 1,263 and 3,809 employee options, respectively, due to their anti-dilutive effects.

12.    Employee benefit plans

The Company provides a 401(k) retirement plan covering all employees who qualify as to age and length of service. The plan is funded through employee contributions and a Company match. In fiscal 2011 and 2010, the Company match was 100% of the first 2.5% and 2%, respectively, of eligible compensation. In fiscal 2009, the Company match was between 40% and 50% of the first 3% of eligible compensation. For fiscal years 2011, 2010 and 2009, the Company match was $2,146, $1,106 and $600, respectively.

On January 1, 2009, the Company established a non-qualified deferred compensation plan for highly compensated employees whose contributions are limited under qualified defined contribution plans. Amounts contributed and deferred under the plan are credited or charged with the performance of investment options offered under the plan as elected by the participants. In the event of bankruptcy, the assets of this plan are available to satisfy the claims of general creditors. The liability for compensation deferred under the Company’s plan included in accrued liabilities was $1,855 and $1,233 as of January 28, 2012 and January 29, 2011, respectively. Total expense recorded under this plan is included in selling, general and administrative expenses and was insignificant during fiscal 2011 and 2010. The Company manages the risk of changes in the fair value of the liability for deferred compensation by electing to match its liability under the plan with investment vehicles that offset a substantial portion of its exposure. The cash value of the investment vehicles included in prepaid expense and other current assets was $1,968 and $1,232 as of January 28, 2012 and January 29, 2011, respectively.

13.    Valuation and qualifying accounts

 

 

Description		Balance at beginning of period				Charged to costs and expenses				Deductions				Balance at end of period
Fiscal 2011
Allowance for doubtful accounts		$	257			$	607			$	(308	)(a)		$	556
Shrink reserve			2,300				5,535				(5,390	)			2,445
Inventory — lower of cost or market reserve			3,316				870				(2,116	)			2,070
Insurance:
Workers Comp / General Liability Prepaid Assset			(970	)(b)			4,495				(5,609	)			(2,084	)
Employee Health Care Accrued Liability			1,608				21,036				(20,715	)			1,929
Fiscal 2010
Allowance for doubtful accounts		$	489			$	189			$	(421	)(a)		$	257
Shrink reserve			1,869				5,191				(4,760	)			2,300
Inventory — lower of cost or market reserve			4,014				881				(1,579	)			3,316
Insurance:
Workers Comp / General Liability Prepaid Assset			(1,181	)(b)			4,320				(4,109	)			(970	)
Employee Health Care Accrued Liability			1,579				17,601				(17,572	)			1,608
Fiscal 2009
Allowance for doubtful accounts		$	296			$	432			$	(239	)(a)		$	489
Shrink reserve			2,005				4,590				(4,726	)			1,869
Inventory — lower of cost or market reserve			2,364				2,481				(831	)			4,014
Insurance:
Workers Comp / General Liability Prepaid Assset			(369	)(b)			2,720				(3,532	)			(1,181	)
Employee Health Care Accrued Liability			1,803				16,710				(16,934	)			1,579

 

 

 

(a)	Represents writeoff of uncollectible accounts.

 

(b)	Represents prepaid insurance

 

14.     Selected quarterly financial data (unaudited)

The following tables set forth the Company’s unaudited quarterly results of operations for each of the quarters in fiscal 2011 and fiscal 2010. The Company uses a 13 week fiscal quarter ending on the last Saturday of the quarter.

 

 

		2011																2010
		First				Second				Third				Fourth				First				Second				Third				Fourth
Net sales		$	386,006			$	394,567			$	413,067			$	582,511			$	320,196			$	321,804			$	339,179			$	473,659
Cost of sales			251,101				260,280				263,884				384,046				215,661				217,846				220,273				316,973
Gross profit			134,905				134,287				149,183				198,465				104,535				103,958				118,906				156,686
Selling, general and administrative expenses			94,615				90,811				100,997				124,235				80,729				79,909				90,309				107,159
Pre-opening expenses			1,230				3,816				3,958				983				474				1,793				4,305				523
Operating income			39,060				39,660				44,228				73,247				23,332				22,256				24,292				49,004
Interest expense			173				147				176				91				118				214				244				179
Income before income taxes			38,887				39,513				44,052				73,156				23,214				22,042				24,048				48,825
Income tax expense			15,591				15,608				17,284				26,861				9,553				8,980				9,845				18,721
Net income		$	23,296			$	23,905			$	26,768			$	46,295			$	13,661			$	13,062			$	14,203			$	30,104
Net income per common share:
Basic		$	0.38			$	0.39			$	0.44			$	0.75			$	0.23			$	0.22			$	0.24			$	0.50
Diluted		$	0.37			$	0.38			$	0.42			$	0.73			$	0.23			$	0.22			$	0.23			$	0.49

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