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1. | Business and basis of presentation |
Ulta Salon, Cosmetics & Fragrance, Inc. was incorporated in the state of Delaware on January 9, 1990, to operate specialty retail stores selling cosmetics, fragrance, haircare and skincare products and related accessories and services. The stores also feature full-service salons. As of October 31, 2015, the Company operated 860 stores in 48 states, as shown in the table below. As used in these notes and throughout this Quarterly Report on Form 10-Q, all references to “we,” “us,” “our,” “Ulta,” “Ulta Beauty,” or “the Company” refer to Ulta Salon, Cosmetics & Fragrance, Inc. and its consolidated subsidiary, Ulta Inc.
State |
Number of |
State |
Number of |
|||
Alabama |
13 | Montana | 5 | |||
Alaska |
3 | Nebraska | 3 | |||
Arizona |
24 | Nevada | 11 | |||
Arkansas |
6 | New Hampshire | 6 | |||
California |
101 | New Jersey | 22 | |||
Colorado |
18 | New Mexico | 4 | |||
Connecticut |
10 | New York | 31 | |||
Delaware |
2 | North Carolina | 25 | |||
Florida |
59 | North Dakota | 2 | |||
Georgia |
27 | Ohio | 33 | |||
Idaho |
6 | Oklahoma | 10 | |||
Illinois |
46 | Oregon | 11 | |||
Indiana |
16 | Pennsylvania | 32 | |||
Iowa |
8 | Rhode Island | 2 | |||
Kansas |
7 | South Carolina | 15 | |||
Kentucky |
10 | South Dakota | 2 | |||
Louisiana |
16 | Tennessee | 15 | |||
Maine |
3 | Texas | 82 | |||
Maryland |
14 | Utah | 11 | |||
Massachusetts |
13 | Virginia | 23 | |||
Michigan |
38 | Washington | 19 | |||
Minnesota |
12 | West Virginia | 5 | |||
Mississippi |
6 | Wisconsin | 16 | |||
Missouri |
16 | Wyoming | 1 | |||
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Total | 860 |
The accompanying unaudited consolidated financial statements and related notes have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim financial information and with the instructions to Form 10-Q and the U.S. Securities and Exchange Commission’s Article 10, Regulation S-X. These consolidated financial statements were prepared on a consolidated basis to include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts, transactions and unrealized profit were eliminated in consolidation. In the opinion of management, the accompanying consolidated financial statements reflect all adjustments, which are of a normal recurring nature, necessary to fairly state the financial position and results of operations and cash flows for the interim periods presented.
The Company’s business is subject to seasonal fluctuation. Significant portions of the Company’s net sales and net income are realized during the fourth quarter of the fiscal year due to the holiday selling season. The results for the 13 and 39 weeks ended October 31, 2015 are not necessarily indicative of the results to be expected for the fiscal year ending January 30, 2016, or for any other future interim period or for any future year.
These interim consolidated financial statements and the related notes should be read in conjunction with the consolidated financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended January 31, 2015. All amounts are stated in thousands, with the exception of per share amounts and number of stores.
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2. | Summary of significant accounting policies |
Information regarding the Company’s significant accounting policies is contained in Note 2, “Summary of significant accounting policies,” to the financial statements in the Company’s Annual Report on Form 10-K for the year ended January 31, 2015. Presented below and in the following notes is supplemental information that should be read in conjunction with “Notes to Financial Statements” in the Annual Report.
Fiscal quarter
The Company’s quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31, and January 31. The Company’s third quarters in fiscal 2015 and 2014 ended on October 31, 2015 and November 1, 2014, respectively.
Share-based compensation
The Company measures share-based compensation cost on the grant date, based on the fair value of the award, and recognizes the expense on a straight-line method over the requisite service period for awards expected to vest. The Company estimated the grant date fair value of stock options using a Black-Scholes valuation model using the following weighted-average assumptions for the periods indicated:
39 Weeks Ended | ||||
October 31, 2015 | November 1, 2014 | |||
Volatility rate |
38.6% | 40.8% | ||
Average risk-free interest rate |
1.6% | 1.4% | ||
Average expected life (in years) |
5.0 | 3.8 | ||
Dividend yield |
None | None |
The Company granted 295 and 362 stock options during the 39 weeks ended October 31, 2015 and November 1, 2014, respectively. The compensation cost that has been charged against operating income was $1,743 and $2,386 for the 13 weeks ended October 31, 2015 and November 1, 2014, respectively. The compensation cost that has been charged against operating income was $5,682 and $6,990 for the 39 weeks ended October 31, 2015 and November 1, 2014, respectively. The weighted-average grant date fair value of these options was $57.40 and $32.22, respectively. At October 31, 2015, there was approximately $25,543 of unrecognized compensation expense related to unvested stock options.
The Company issued 77 and 70 restricted stock awards during the 39 weeks ended October 31, 2015 and November 1, 2014, respectively. The compensation cost that has been charged against operating income was $1,805 and $1,447 for the 13 weeks ended October 31, 2015 and November 1, 2014, respectively. The compensation cost that has been charged against operating income was $5,444 and $4,446 for the 39 weeks ended October 31, 2015 and November 1, 2014, respectively. At October 31, 2015, there was approximately $12,880 of unrecognized compensation expense related to restricted stock awards.
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that the Company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers (Topic 606), which delayed the effective date of ASU 2014-09 by one year. With the deferral, the revenue recognition standard is effective beginning in fiscal year 2018 with early adoption permitted beginning in fiscal 2017. The standard allows for either full retrospective or modified retrospective adoption. The Company is currently evaluating the application method and the impact of this new standard on its consolidated financial position, results of operations and cash flows.
In April 2015, the FASB issued Accounting Standards Update No. 2015-05, Customers’ Accounting for Fees Paid in a Cloud Computing Arrangement. This standard provides guidance to determine whether a cloud-based computing arrangement includes a software license. If a cloud-based computing arrangement includes a software license, the customer must account for the software element of the arrangement consistent with the acquisition of other software licenses. Otherwise, the customer must account for the arrangement as a service contract. The standard will take effect for public companies for annual reporting periods beginning after December 15, 2015, including interim reporting periods. Early adoption is permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial position, results of operations and cash flows.
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3. | Commitments and contingencies |
Leases – The Company leases retail stores, distribution and office facilities and certain equipment. Original non-cancelable lease terms range from three to ten years and leases generally contain renewal options for additional years. A number of the Company’s store leases provide for contingent rental payments based upon sales. Contingent rent amounts were insignificant in the 13 and 39 weeks ended October 31, 2015 and November 1, 2014. Total rent expense under operating leases was $46,550 and $40,840 for the 13 weeks ended October 31, 2015 and November 1, 2014, respectively. Total rent expense under operating leases was $134,851 and $118,319 for the 39 weeks ended October 31, 2015 and November 1, 2014, respectively.
General litigation – On March 2, 2012, a putative employment class action lawsuit (Moore v. Ulta) was filed against us and certain unnamed defendants in state court in Los Angeles County, California, and was removed to the United States District Court for the Central District of California on April 12, 2012. On August 8, 2013, the plaintiff asked the court to certify the proposed class; the court issued an order certifying the class on November 16, 2015. Ulta filed an appeal of the court’s certification order on November 30, 2015. 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 California’s 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, all related to exit inspections of employees. The suit seeks to recover damages and penalties as a result of these alleged practices. The Company denies plaintiff’s allegations and is vigorously defending the matter.
The Company has not recorded any accruals for this matter because the Company’s potential liability for the matter is not probable and cannot be reasonably estimated based on currently available information and early stage of the pending litigation. Although the maximum amount of liability that may ultimately result from this matter cannot be predicted with certainty, management expects that this matter, when ultimately resolved, will not have a material adverse effect on the Company’s consolidated financial position or liquidity. It is possible, however, that the ultimate resolution of this matter could have a material adverse effect on the Company’s results of operations in a particular quarter or year if such resolution results in a significant liability for the Company.
On December 4, 2013, a putative employment class action lawsuit (Galvez v. Ulta) was filed against us in the Superior Court of California, Santa Clara County and was removed to the United States District Court for the Northern District of California on January 8, 2014. It seeks class action certification for claims involving payment of wages using an ATM card (“pay card” related claims); as well as claims related to allegedly failing to provide accurate and complete wage statements; allegedly failing to pay all minimum and overtime wages; and allegedly failing to pay meal and rest break premiums due to exit inspections of employees (exit inspection related claims). On August 29, 2014, the court stayed the exit inspection portion of the litigation, thus the case is proceeding only with respect to the pay card-related claims. The suit alleges that Ulta was required by law to obtain employee consent to use pay cards for purposes of supplemental and final pay and that pay statements issued in conjunction with pay cards did not comply with California’s Labor Code. The suit seeks to recover damages and penalties as a result of these alleged practices. The parties have agreed to settle the suit for $1,750, a significant portion of which will be allocated to attorneys’ fees for plaintiff’s counsel. Under the terms of the settlement, Ulta admits no liability and the parties fully and finally release all claims. The settlement agreement is subject to court approval, which we expect will be granted in 2016.
On May 19, 2015, a putative employment class action lawsuit (Paez v. Ulta) was filed against us in the Superior Court of California, San Bernardino County, and was removed to the U.S. District Court for the Central District of California on June 24, 2015. As with the Moore class action noted above, it also alleges that Ulta violated various provisions of California’s 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, all related to exit inspections of employees. The suit seeks to recover damages and penalties as a result of these alleged practices. The Company denies plaintiff’s allegations and is vigorously defending the matter.
The Company has not recorded any accruals for this matter because the Company’s potential liability for the matter is not probable and cannot be reasonably estimated based on currently available information and the early stage of the pending litigation. Although the maximum amount of liability that may ultimately result from this matter cannot be predicted with certainty, management expects that this matter, when ultimately resolved, will not have a material adverse effect on the Company’s consolidated financial position or liquidity. It is possible, however, that the ultimate resolution of this matter could have a material adverse effect on the Company’s results of operations in a particular quarter or year if such resolution results in a significant liability for the Company.
On September 9, 2015, a putative employment class action lawsuit (Quinby et al. v. Ulta) was filed against us in the U.S. District Court for the Northern District of California. The plaintiffs and proposed class members are salaried General Managers who worked for Ulta in California. The suit alleges that the General Managers should have been treated as hourly-paid employees, paid overtime and provided with meal and rest breaks under California’s labor laws. The suit seeks to recover damages and penalties as a result of these alleged practices. The Company denies plaintiffs’ allegations and is vigorously defending the matter.
The Company has not recorded any accruals for this matter because the Company’s potential liability for the matter is not probable and cannot be reasonably estimated based on currently available information and the early stage of the pending litigation. Although the maximum amount of liability that may ultimately result from this matter cannot be predicted with certainty, management expects that this matter, when ultimately resolved, will not have a material adverse effect on the Company’s consolidated financial position or liquidity. It is possible, however, that the ultimate resolution of this matter could have a material adverse effect on the Company’s results of operations in a particular quarter or year if such resolution results in a significant liability for the Company.
The Company is also involved in various legal proceedings that are incidental to the conduct of its 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.
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4. | Notes payable |
On October 19, 2011, the Company entered into an Amended and Restated Loan and Security Agreement (the Loan Agreement) with Wells Fargo Bank, National Association, as Administrative Agent, Collateral Agent and a Lender thereunder, Wells Fargo Capital Finance LLC as a Lender, J.P. Morgan Securities LLC as a Lender, JP Morgan Chase Bank, N.A. as a Lender and PNC Bank, National Association, as a Lender. The Loan Agreement amended and restated the Loan and Security Agreement, dated as of August 31, 2010, by and among the lenders. The Loan Agreement extended the maturity of the Company’s credit facility to October 2016, provides maximum revolving loans equal to the lesser of $200,000 or a percentage of eligible owned inventory, contains a $10,000 sub-facility for letters of credit and allows the Company to increase the revolving facility by an additional $50,000, subject to consent by each lender and other conditions. The Loan Agreement contains a requirement to maintain a minimum amount of excess borrowing availability at all times.
On September 5, 2012, the Company entered into Amendment No. 1 to Amended and Restated Loan and Security Agreement (the First Amendment) with the lender group. The First Amendment updated certain administrative terms and conditions and provides the Company greater flexibility to take certain corporate actions. There were no changes to the revolving loan amounts available, interest rates, covenants or maturity date under terms of the Loan Agreement.
On December 6, 2013, the Company entered into Amendment No. 2 to the Amended and Restated Loan and Security Agreement (the Second Amendment) with the lender group. The Second Amendment extended the maturity of the facility to December 2018. Substantially all of the Company’s assets are pledged as collateral for outstanding borrowings under the facility. Outstanding borrowings will bear interest at the prime rate or LIBOR plus 1.50% and the unused line fee is 0.20%.
As of October 31, 2015, January 31, 2015 and November 1, 2014, the Company had no borrowings outstanding under the credit facility and the Company was in compliance with all terms and covenants of the agreement.
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5. | Investments |
The Company’s short-term investments as of October 31, 2015 consist of $150,209 in certificates of deposit. These short-term investments are carried at cost, which approximates fair value and are recorded in the Consolidated Balance Sheets in Short-term investments. The contractual maturity of the Company’s investments was less than twelve months at October 31, 2015.
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6. | 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 October 31, 2015, January 31, 2015 and November 1, 2014, the Company held financial liabilities of $7,858, $5,574 and $5,121, respectively, related to its non-qualified deferred compensation plan. The liabilities have been categorized as Level 2 as they are based on third-party reported net asset values, which are based primarily on quoted market prices of underlying assets of the funds within the plan.
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Fiscal quarter
The Company’s quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31, and January 31. The Company’s third quarters in fiscal 2015 and 2014 ended on October 31, 2015 and November 1, 2014, respectively.
Share-based compensation
The Company measures share-based compensation cost on the grant date, based on the fair value of the award, and recognizes the expense on a straight-line method over the requisite service period for awards expected to vest. The Company estimated the grant date fair value of stock options using a Black-Scholes valuation model using the following weighted-average assumptions for the periods indicated:
39 Weeks Ended | ||||
October 31, 2015 | November 1, 2014 | |||
Volatility rate |
38.6% | 40.8% | ||
Average risk-free interest rate |
1.6% | 1.4% | ||
Average expected life (in years) |
5.0 | 3.8 | ||
Dividend yield |
None | None |
The Company granted 295 and 362 stock options during the 39 weeks ended October 31, 2015 and November 1, 2014, respectively. The compensation cost that has been charged against operating income was $1,743 and $2,386 for the 13 weeks ended October 31, 2015 and November 1, 2014, respectively. The compensation cost that has been charged against operating income was $5,682 and $6,990 for the 39 weeks ended October 31, 2015 and November 1, 2014, respectively. The weighted-average grant date fair value of these options was $57.40 and $32.22, respectively. At October 31, 2015, there was approximately $25,543 of unrecognized compensation expense related to unvested stock options.
The Company issued 77 and 70 restricted stock awards during the 39 weeks ended October 31, 2015 and November 1, 2014, respectively. The compensation cost that has been charged against operating income was $1,805 and $1,447 for the 13 weeks ended October 31, 2015 and November 1, 2014, respectively. The compensation cost that has been charged against operating income was $5,444 and $4,446 for the 39 weeks ended October 31, 2015 and November 1, 2014, respectively. At October 31, 2015, there was approximately $12,880 of unrecognized compensation expense related to restricted stock awards.
Recent accounting pronouncements
In May 2014, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers, issued as a new Topic, Accounting Standards Codification Topic 606. The new revenue recognition standard provides a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that the Company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the Company expects to be entitled in exchange for those goods or services. In August 2015, the FASB issued ASU 2015-14 Revenue from Contracts with Customers (Topic 606), which delayed the effective date of ASU 2014-09 by one year. With the deferral, the revenue recognition standard is effective beginning in fiscal year 2018 with early adoption permitted beginning in fiscal 2017. The standard allows for either full retrospective or modified retrospective adoption. The Company is currently evaluating the application method and the impact of this new standard on its consolidated financial position, results of operations and cash flows.
In April 2015, the FASB issued Accounting Standards Update No. 2015-05, Customers’ Accounting for Fees Paid in a Cloud Computing Arrangement. This standard provides guidance to determine whether a cloud-based computing arrangement includes a software license. If a cloud-based computing arrangement includes a software license, the customer must account for the software element of the arrangement consistent with the acquisition of other software licenses. Otherwise, the customer must account for the arrangement as a service contract. The standard will take effect for public companies for annual reporting periods beginning after December 15, 2015, including interim reporting periods. Early adoption is permitted. The Company is currently evaluating the impact of this new standard on its consolidated financial position, results of operations and cash flows.
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As of October 31, 2015, the Company operated 860 stores in 48 states, as shown in the table below. As used in these notes and throughout this Quarterly Report on Form 10-Q, all references to “we,” “us,” “our,” “Ulta,” “Ulta Beauty,” or “the Company” refer to Ulta Salon, Cosmetics & Fragrance, Inc. and its consolidated subsidiary, Ulta Inc.
State |
Number of |
State |
Number of |
|||
Alabama |
13 | Montana | 5 | |||
Alaska |
3 | Nebraska | 3 | |||
Arizona |
24 | Nevada | 11 | |||
Arkansas |
6 | New Hampshire | 6 | |||
California |
101 | New Jersey | 22 | |||
Colorado |
18 | New Mexico | 4 | |||
Connecticut |
10 | New York | 31 | |||
Delaware |
2 | North Carolina | 25 | |||
Florida |
59 | North Dakota | 2 | |||
Georgia |
27 | Ohio | 33 | |||
Idaho |
6 | Oklahoma | 10 | |||
Illinois |
46 | Oregon | 11 | |||
Indiana |
16 | Pennsylvania | 32 | |||
Iowa |
8 | Rhode Island | 2 | |||
Kansas |
7 | South Carolina | 15 | |||
Kentucky |
10 | South Dakota | 2 | |||
Louisiana |
16 | Tennessee | 15 | |||
Maine |
3 | Texas | 82 | |||
Maryland |
14 | Utah | 11 | |||
Massachusetts |
13 | Virginia | 23 | |||
Michigan |
38 | Washington | 19 | |||
Minnesota |
12 | West Virginia | 5 | |||
Mississippi |
6 | Wisconsin | 16 | |||
Missouri |
16 | Wyoming | 1 | |||
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Total | 860 |
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The Company estimated the grant date fair value of stock options using a Black-Scholes valuation model using the following weighted-average assumptions for the periods indicated:
39 Weeks Ended | ||||
October 31, 2015 | November 1, 2014 | |||
Volatility rate |
38.6% | 40.8% | ||
Average risk-free interest rate |
1.6% | 1.4% | ||
Average expected life (in years) |
5.0 | 3.8 | ||
Dividend yield |
None | None |
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