ULTA BEAUTY, INC., 10-Q filed on 6/7/2011
Quarterly Report
Document and Entity Information (USD $)
3 Months Ended
Apr. 30, 2011
May 31, 2011
Jul. 31, 2010
Document and Entity Information [Abstract]
 
 
 
Entity Registrant Name
Ulta Salon, Cosmetics & Fragrance, Inc. 
 
 
Entity Central Index Key
0001403568 
 
 
Document Type
10-Q 
 
 
Document Period End Date
Apr. 30, 2011 
 
 
Amendment Flag
FALSE 
 
 
Document Fiscal Year Focus
2011 
 
 
Document Fiscal Period Focus
Q1 
 
 
Current Fiscal Year End Date
--01-28 
 
 
Entity Well-known Seasoned Issuer
Yes 
 
 
Entity Voluntary Filers
No 
 
 
Entity Current Reporting Status
Yes 
 
 
Entity Filer Category
Large Accelerated Filer 
 
 
Entity Public Float
 
 
$ 1,120,326,000 
Entity Common Stock, Shares Outstanding
 
61,197,344 
 
Balance Sheets (USD $)
In Thousands
3 Months Ended
Apr. 30, 2011
3 Months Ended
May 1, 2010
12 Months Ended
Jan. 29, 2011
Current assets:
 
 
 
Cash and cash equivalents
$ 116,811 
$ 8,670 
$ 111,185 
Receivables, net
15,634 
8,051 
22,292 
Merchandise inventories, net
255,547 
228,082 
218,516 
Prepaid expenses and other current assets
32,513 
29,134 
32,790 
Prepaid income taxes
4,233 
10,684 
Deferred income taxes
8,922 
8,060 
8,922 
Total current assets
433,660 
281,997 
404,389 
Property and equipment, net
332,147 
285,766 
326,099 
Total assets
765,807 
567,763 
730,488 
Current liabilities:
 
 
 
Accounts payable
81,510 
60,693 
87,093 
Accrued liabilities
66,488 
54,789 
76,264 
Accrued income taxes
6,740 
Total current liabilities
147,998 
122,222 
163,357 
Deferred rent
139,359 
114,051 
134,572 
Deferred income taxes
29,084 
20,952 
30,026 
Total liabilities
316,441 
257,225 
327,955 
Commitments and contingencies (note 3)
 
 
 
Stockholders' equity:
 
 
 
Common stock, $.01 par value, 400,000 shares authorized; 61,577, 60,707 and 59,095 shares issued; 61,072, 60,202 and 58,590 shares outstanding; at April 30, 2011 (unaudited), January 29, 2011 and May 1, 2010 (unaudited), respectively
616 
591 
606 
Treasury stock-common, at cost
(4,179)
(4,179)
(4,179)
Additional paid-in capital
363,103 
304,965 
339,576 
Retained earnings
89,826 
9,161 
66,530 
Total stockholders' equity
449,366 
310,538 
402,533 
Total liabilities and stockholders' equity
$ 765,807 
$ 567,763 
$ 730,488 
Balance Sheets (Parenthetical) (USD $)
In Thousands, except Per Share data
Apr. 30, 2011
Jan. 29, 2011
May 1, 2010
Stockholders' equity:
 
 
 
Common Stock, Par Value
$ 0.01 
$ 0.01 
$ 0.01 
Common Stock, Shares Authorized
400,000 
400,000 
400,000 
Common Stock, Shares Issued
61,577 
60,707 
59,095 
Common Stock, Shares Outstanding
61,072 
60,202 
58,590 
Statements of Income (Unaudited) (USD $)
In Thousands, except Per Share data
3 Months Ended
Apr. 30, 2011
3 Months Ended
May 1, 2010
Statements of Income [Abstract]
 
 
Net sales
$ 386,006 
$ 320,196 
Cost of sales
251,101 
215,661 
Gross profit
134,905 
104,535 
Selling, general and administrative expenses
94,615 
80,729 
Pre-opening expenses
1,230 
474 
Operating income
39,060 
23,332 
Interest expense
173 
118 
Income before income taxes
38,887 
23,214 
Income tax expense
15,591 
9,553 
Net income
$ 23,296 
$ 13,661 
Net income per common share:
 
 
Basic
$ 0.38 
$ 0.23 
Diluted
$ 0.37 
$ 0.23 
Weighted average common shares outstanding:
 
 
Basic
60,554 
58,306 
Diluted
62,758 
60,276 
Statements of Cash Flows (Unaudited) (USD $)
In Thousands
3 Months Ended
Apr. 30, 2011
3 Months Ended
May 1, 2010
Operating activities
 
 
Net income
$ 23,296 
$ 13,661 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
17,510 
15,918 
Deferred income taxes
(942)
 
Non-cash stock compensation charges
2,808 
1,735 
Excess tax benefits from stock-based compensation
(8,736)
(724)
Loss on disposal of property and equipment
477 
197 
Change in operating assets and liabilities:
 
 
Receivables
6,658 
5,426 
Merchandise inventories
(37,031)
(21,134)
Prepaid expenses and other assets
277 
1,138 
Income taxes
15,187 
(3,317)
Accounts payable
(5,583)
4,306 
Accrued liabilities
(14,271)
(7,722)
Deferred rent
4,787 
333 
Net cash provided by operating activities
4,437 
9,817 
Investing activities
 
 
Purchases of property and equipment
(19,540)
(7,698)
Net cash used in investing activities
(19,540)
(7,698)
Financing activities
 
 
Proceeds from issuance of common stock under stock plans
11,993 
1,810 
Excess tax benefits from stock-based compensation
8,736 
724 
Net Cash provided by financing activities
20,729 
2,534 
Cash and Cash Equivalents, Period Increase (Decrease), Total
5,626 
4,653 
Cash and cash equivalents at beginning of period
111,185 
4,017 
Cash and cash equivalents at end of period
116,811 
8,670 
Supplemental cash flow information
 
 
Cash paid for income taxes
1,346 
12,870 
Noncash investing and financing activities:
 
 
Change in property and equipment included in accrued liabilities
$ 4,495 
$ 3,322 
Statement of Stockholders' Equity (Unaudited) (USD $)
In Thousands
Total
Common Stock
Treasury - Common Stock
Additional Paid-in Capital
Retained Earnings
Beginning Balance at Jan. 29, 2011
$ 402,533 
$ 606 
$ (4,179)
$ 339,576 
$ 66,530 
Beginning Balance, Shares at Jan. 29, 2011
 
60,707 
(505)
 
 
Common stock options exercised
11,993 
10 
 
11,983 
 
Common stock options exercised, Shares
 
870 
 
 
 
Net income for the three months ended April 30, 2011
23,296 
 
 
 
23,296 
Excess tax benefits from stock-based compensation
8,736 
 
 
8,736 
 
Stock compensation charge
2,808 
 
 
2,808 
 
Ending Balance at Apr. 30, 2011
$ 449,366 
$ 616 
$ (4,179)
$ 363,103 
$ 89,826 
Ending Balance, Shares at Apr. 30, 2011
 
61,577 
(505)
 
 
Business and Basis of Presentation
Business and basis of presentation
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 April 30, 2011, the Company operated 394 stores in 40 states, as shown in the table below:
     
State   Number of stores
 
Alabama
  7
Arizona
  23
Arkansas
  3
California
  33
Colorado
  11
Connecticut
  3
Delaware
  1
Florida
  29
Georgia
  18
Illinois
  34
Indiana
  8
Iowa
  4
Kansas
  1
Kentucky
  3
Louisiana
  3
Maine
  2
Maryland
  6
Massachusetts
  5
Michigan
  11
Minnesota
  9
Mississippi
  3
Missouri
  3
Nebraska
  2
Nevada
  6
New Jersey
  12
New Mexico
  1
New York
  13
North Carolina
  13
Ohio
  11
Oklahoma
  7
Oregon
  4
Pennsylvania
  17
Rhode Island
  1
South Carolina
  6
Tennessee
  5
Texas
  52
Utah
  3
Virginia
  11
Washington
  6
Wisconsin
  4
 
 
Total
  394
The accompanying unaudited 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. In the opinion of management, the accompanying 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 three months ended April 30, 2011 are not necessarily indicative of the results to be expected for the fiscal year ending January 28, 2012, or for any other future interim period or for any future year.
These interim financial statements and the related notes should be read in conjunction with the financial statements and notes included in the Company’s Annual Report on Form 10-K for the year ended January 29, 2011. All amounts are stated in thousands, with the exception of per share amounts and number of stores.
Summary of Significant Accounting Policies
Summary of significant accounting policies
2. Summary of significant accounting policies
Information regarding the Company’s significant accounting policies is contained in Note 2, “Summary of significant accounting policies,” to the financial statements in the Company’s Annual Report on Form 10-K for the year ended January 29, 2011. Presented below in this and 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 first quarters in fiscal 2011 and 2010 ended on April 30, 2011 and May 1, 2010, 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 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 assumptions for the periods indicated:
                 
    Three months ended
    April 30, 2011   May 1, 2010
Volatility rate
    54.4 %     55.0 %
Average risk-free interest rate
    2.8 %     3.1 %
Average expected life (in years)
    6.3       6.3  
Dividend yield
  None     None  
The Company granted 45 and 109 stock options during the three months ended April 30, 2011 and May 1, 2010, respectively. The weighted-average grant date fair value of these options was $26.11 and $12.68, respectively.
The Company recorded stock compensation expense of $2,808 and $1,735 for the three months ended April 30, 2011 and May 1, 2010, respectively. At April 30, 2011, there was approximately $21,279 of unrecognized compensation expense related to unvested options and restricted stock.
Commitments and Contingencies
Commitments and contingencies
3. Commitments and contingencies
Leases The Company leases 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 the three months ended April 30, 2011 and May 1, 2010. Total rent expense under operating leases was $21,857 and $19,459 for the three months ended April 30, 2011 and May 1, 2010, respectively.
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 amount is not material.
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.
Notes Payable
Notes payable
4. Notes payable
The Company’s credit facility is 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. The facility provides maximum credit of $200,000 through May 31, 2013 and is available for working capital and general corporate purposes. The facility provides maximum borrowings equal to the lesser of $200,000 or a percentage of eligible owned inventory, and contains a $10,000 subfacility for letters of credit. The new credit facility agreement contains a restrictive financial covenant requiring the Company to maintain tangible net worth of not less than $200,000. The Company’s tangible net worth was $449,366 at April 30, 2011. 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 2.00% and the unused line fee is 0.25%.
As of April 30, 2011 and January 29, 2011, the Company had no borrowings outstanding under the credit facility.
Fair Value Measurements
Fair Value Measurements
5. Fair Value Measurements
The carrying value of cash and cash equivalents, accounts receivable, and accounts payable approximates their estimated fair values due to the short maturities of these instruments.
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:
    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 April 30, 2011, the Company held financial liabilities of $1,826 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.
Net Income Per Common Share
Net income per common share
6. 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:
                 
    Three months ended
    April 30,   May 1,
    2011   2010
     
 
               
Net income
  $ 23,296     $ 13,661  
 
               
Denominator for basic net income per share — weighted-average common shares
    60,554       58,306  
Dilutive effect of stock options and non-vested stock
    2,204       1,970  
     
Denominator for diluted net income per share
    62,758       60,276  
 
               
Net income per common share:
               
Basic
  $ 0.38     $ 0.23  
Diluted
  $ 0.37     $ 0.23  
The denominators for diluted net income per common share for the three months ended April 30, 2011 and May 1, 2010 exclude 189 and 803 employee stock options, respectively, due to their anti-dilutive effects.
Summary of Significant Accounting policies (Tables)
Fair value of stock option using a Black Scholes valuation model
                 
    Three months ended
    April 30, 2011   May 1, 2010
Volatility rate
    54.4 %     55.0 %
Average risk-free interest rate
    2.8 %     3.1 %
Average expected life (in years)
    6.3       6.3  
Dividend yield
  None     None  
Net Income Per Common Share (Tables)
Net income per basic and diluted share
                 
    Three months ended
    April 30,   May 1,
    2011   2010
     
 
               
Net income
  $ 23,296     $ 13,661  
 
               
Denominator for basic net income per share — weighted-average common shares
    60,554       58,306  
Dilutive effect of stock options and non-vested stock
    2,204       1,970  
     
Denominator for diluted net income per share
    62,758       60,276  
 
               
Net income per common share:
               
Basic
  $ 0.38     $ 0.23  
Diluted
  $ 0.37     $ 0.23  
Summary of Significant Accounting Policies (Details) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended
Apr. 30, 2011
3 Months Ended
May 1, 2010
Fair value of stock option using a Black-Scholes valuation model
 
 
Volatility rate
54.40% 
55.00% 
Average risk-free interest rate
2.80% 
3.10% 
Average expected life (in years)
6.3 
6.3 
Dividend yield
0.00% 
0.00% 
Summary of Significant Accounting Policies (Textuals) [Abstract]
 
 
Number of shares granted in stock option
45 
109 
Weighted average fair value of stock option
$ 26.11 
$ 12.68 
Stock compensation expenses
$ 2,808 
$ 1,735 
Unrecognized compensation expense related to unvested options and restricted stock
$ 21,279 
 
Commitments and Contingencies (Details) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Apr. 30, 2011
3 Months Ended
May 1, 2010
Commitments and contingencies (Textuals) [Abstract]
 
 
Non-cancelable operating lease terms, minimum
 
Non-cancelable operating lease terms, maximum
10 
 
Total rent expense under operating leases
$ 21,857 
$ 19,459 
Notes Payable (Details) (USD $)
In Thousands, unless otherwise specified
3 Months Ended
Apr. 30, 2011
Notes Payable (Additional) (Textuals) [Abstract]
 
Letters of credit subfacility, maximum borrowing capacity
$ 200,000 
Notes Payable (Textuals) [Abstract]
 
Line of credit facility, maximum borrowing capacity
200,000 
Line of credit expiration date
May 31, 2013 
Credit facility restrictivee financial covenant
Company to maintain tangible net worth of not less than $200,000 
Taniglble net worth
449,366 
Interest rate on outstanding borrowing under facility
Prime rate or Libor plus 2.00% 
Percentage of unused Line of Credit Facility Fee
0.25% 
Maximum borrrowing under facility
lesser of $200,000 or a percentage of eligible owned inventory 
Standby Letters of Credit [Member]
 
Notes Payable (Additional) (Textuals) [Abstract]
 
Letters of credit subfacility, maximum borrowing capacity
10,000 
Notes Payable (Textuals) [Abstract]
 
Line of credit facility, maximum borrowing capacity
$ 10,000 
Fair Value Measurements (Details) (Fair Value, Inputs, Level 2 [Member], USD $)
In Thousands
Apr. 30, 2011
Fair Value, Inputs, Level 2 [Member]
 
Fair Value Measurements (Textuals) [Abstract]
 
Financial liabilities related to non-qualified deferred compensation plan
$ 1,826 
Net Income Per Common Share (Details) (USD $)
In Thousands, except Per Share data
3 Months Ended
Apr. 30, 2011
3 Months Ended
May 1, 2010
Net income per common share reconciliation
 
 
Net income
$ 23,296 
$ 13,661 
Denominator for basic net income per share - weighted-average common shares
60,554 
58,306 
Dilutive effect of stock options and non-vested stock
2,204 
1,970 
Denominator for diluted net income per share
62,758 
60,276 
Net income per common share:
 
 
Basic
$ 0.38 
$ 0.23 
Diluted
$ 0.37 
$ 0.23 
Net income per common share (Textuals) [Abstract]
 
 
Antidilutive stock option excluded from computation of net income per common share
189 
803