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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 October 27, 2012, the Company operated 537 stores in 45 states, as shown in the table below:
State |
Number of stores |
State |
Number of stores |
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Alabama |
10 | Montana | 1 | |||||
Arizona |
23 | Nebraska | 3 | |||||
Arkansas |
4 | Nevada | 6 | |||||
California |
53 | New Hampshire | 1 | |||||
Colorado |
12 | New Jersey | 14 | |||||
Connecticut |
4 | New Mexico | 1 | |||||
Delaware |
1 | New York | 18 | |||||
Florida |
38 | North Carolina | 17 | |||||
Georgia |
21 | North Dakota | 1 | |||||
Idaho |
3 | Ohio | 18 | |||||
Illinois |
38 | Oklahoma | 8 | |||||
Indiana |
10 | Oregon | 6 | |||||
Iowa |
6 | Pennsylvania | 20 | |||||
Kansas |
3 | Rhode Island | 1 | |||||
Kentucky |
6 | South Carolina | 10 | |||||
Louisiana |
8 | Tennessee | 8 | |||||
Maine |
2 | Texas | 65 | |||||
Maryland |
9 | Utah | 6 | |||||
Massachusetts |
7 | Virginia | 12 | |||||
Michigan |
23 | Washington | 9 | |||||
Minnesota |
11 | West Virginia | 1 | |||||
Mississippi |
4 | Wisconsin | 7 | |||||
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Missouri |
8 | Total | 537 |
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 13 and 39 weeks ended October 27, 2012 are not necessarily indicative of the results to be expected for the fiscal year ending February 2, 2013, 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 fiscal year ended January 28, 2012. 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 fiscal year ended January 28, 2012. 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 third quarters in fiscal 2012 and 2011 ended on October 27, 2012 and October 29, 2011, 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:
39 Weeks Ended | ||||
October 27, 2012 | October 29, 2011 | |||
Volatility rate |
53.4% | 54.0% | ||
Average risk-free interest rate |
1.2% | 1.5% | ||
Average expected life (in years) |
6.3 | 6.3 | ||
Dividend yield |
None | None |
The Company granted 213 and 595 stock options during the 39 weeks ended October 27, 2012 and October 29, 2011, respectively. The weighted-average grant date fair value of these options was $45.84 and $34.74, respectively.
The Company recorded stock compensation expense of $3,375 and $3,027 for the 13 weeks ended October 27, 2012 and October 29, 2011, respectively. The Company recorded stock compensation expense of $9,721 and $8,223 for the 39 weeks ended October 27, 2012 and October 29, 2011, respectively. At October 27, 2012, there was approximately $32,340 of unrecognized compensation expense related to unvested options and restricted stock.
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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 13 and 39 weeks ended October 27, 2012 and October 29, 2011. Total rent expense under operating leases was $29,708 and $24,713 for the 13 weeks ended October 27, 2012 and October 29, 2011, respectively. Total rent expense under operating leases was $83,415 and $69,697 for the 39 weeks ended October 27, 2012 and October 29, 2011, respectively.
General litigation – 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. On April 12, 2012, the Company removed the case to the United States District Court for the Central District of 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 is vigorously defending the matter.
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 Company and 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 credit facility. Outstanding borrowings will bear interest at the prime rate or Libor plus 1.50% and the unused line fee is 0.225%.
On September 5, 2012, the Company entered into Amendment No. 1 to Amended and Restated Loan and Security Agreement (the Amendment) with the lender group. The Amendment updates 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.
As of October 27, 2012, January 28, 2012 and October 29, 2011, the Company had no borrowings outstanding under its credit facility.
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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.
The Company has adopted the Accounting Standards Codification (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:
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Level 1 – observable inputs such as quoted prices for identical instruments in active markets. |
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Level 2 – inputs other than quoted prices in active markets that are observable either directly or indirectly through corroboration with observable market data. |
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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 27, 2012, the Company held financial liabilities of $2,727 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 2012 and 2011 ended on October 27, 2012 and October 29, 2011, respectively.
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.
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As of October 27, 2012, the Company operated 537 stores in 45 states, as shown in the table below:
State |
Number of stores |
State |
Number of stores |
|||||
Alabama |
10 | Montana | 1 | |||||
Arizona |
23 | Nebraska | 3 | |||||
Arkansas |
4 | Nevada | 6 | |||||
California |
53 | New Hampshire | 1 | |||||
Colorado |
12 | New Jersey | 14 | |||||
Connecticut |
4 | New Mexico | 1 | |||||
Delaware |
1 | New York | 18 | |||||
Florida |
38 | North Carolina | 17 | |||||
Georgia |
21 | North Dakota | 1 | |||||
Idaho |
3 | Ohio | 18 | |||||
Illinois |
38 | Oklahoma | 8 | |||||
Indiana |
10 | Oregon | 6 | |||||
Iowa |
6 | Pennsylvania | 20 | |||||
Kansas |
3 | Rhode Island | 1 | |||||
Kentucky |
6 | South Carolina | 10 | |||||
Louisiana |
8 | Tennessee | 8 | |||||
Maine |
2 | Texas | 65 | |||||
Maryland |
9 | Utah | 6 | |||||
Massachusetts |
7 | Virginia | 12 | |||||
Michigan |
23 | Washington | 9 | |||||
Minnesota |
11 | West Virginia | 1 | |||||
Mississippi |
4 | Wisconsin | 7 | |||||
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Missouri |
8 | Total | 537 |
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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:
39 Weeks Ended | ||||
October 27, 2012 | October 29, 2011 | |||
Volatility rate |
53.4% | 54.0% | ||
Average risk-free interest rate |
1.2% | 1.5% | ||
Average expected life (in years) |
6.3 | 6.3 | ||
Dividend yield |
None | None |
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