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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 January 30, 2016, the Company operated 874 stores in 48 states. As used in these notes and throughout this Annual Report on Form 10-K, 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. 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.
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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 30, 2016 (fiscal 2015), January 31, 2015 (fiscal 2014) and February 1, 2014 (fiscal 2013) were 52 week years.
Consolidation
The Company’s consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts, transactions and unrealized profit were eliminated in consolidation.
Use of estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the accounting period. Actual results could differ from those estimates.
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.
Short-term investments
The Company determines the balance sheet classification of its investments at the time of purchase and evaluates the classification at each balance sheet date. Money market funds, certificates of deposit and time deposits with maturities of greater than three months but no more than twelve months are carried at cost, which approximates fair value and are recorded in the Consolidated Balance Sheets in Short-term investments (see Note 9, “Investments”).
Receivables
Receivables consist principally of amounts receivable from vendors and landlord construction allowances earned but not yet received. These receivables are computed based on provisions of the vendor and lease agreements in place and the Company’s completed performance. The Company’s vendors are primarily U.S.-based producers of consumer products and real estate developers and landlords. The Company does not require collateral on its receivables and does not accrue interest. Credit risk with respect to receivables is limited due to the diversity of vendors and landlords comprising the Company’s vendor base. The Company performs ongoing credit evaluations of its vendors and evaluates the collectability of its receivables based on the length of time the receivable is past due and historical experience. The receivable for vendor allowances was $46,932 and $39,629 as of January 30, 2016 and January 31, 2015, respectively and the receivable for landlord allowances was $10,250 and $8,357 as of January 30, 2016 and January 31, 2015, respectively. The allowance for doubtful receivables totaled $1,112 and $1,346 as of January 30, 2016 and January 31, 2015, 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 30, 2016 and January 31, 2015.
Property and equipment
The Company’s property and equipment are stated at cost net of accumulated depreciation and amortization. Maintenance and repairs are charged to operating expense as incurred. The Company’s assets are depreciated or amortized using the straight-line method, over the shorter of their estimated useful lives or the expected lease term as follows:
Equipment and fixtures |
3 to 10 years | |||
Leasehold improvements |
10 years | |||
Electronic equipment and software |
3 to 5 years |
The Company capitalizes costs incurred during the application development stage in developing or purchasing internal use software. These costs are amortized over the estimated useful life of the software.
The Company periodically evaluates whether changes have occurred that would require revision of the remaining useful life of equipment and leasehold improvements or render them not recoverable. If such circumstances arise, the Company uses an estimate of the undiscounted sum of expected future operating cash flows during their holding period to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows are less than the carrying amount of the assets, the resulting impairment charges to be recorded are calculated based on the excess of the carrying value of the assets over the fair value of such assets, with the fair value determined based on an estimate of discounted future cash flows. No significant impairments charges have been recognized in fiscal 2015, 2014 or 2013.
Customer loyalty program
In early fiscal 2014, we completed the conversion of all our loyalty members to Ultamate Rewards, a points-based program. Ultamate Rewards enables customers to earn points based on their purchases. Points earned by members are valid for at least one year and may be redeemed on any product we sell. Prior to this conversion, we ran both Ultamate Rewards and our prior program, The Club at Ulta. The Club at Ulta was a certificate program offering customers reward certificates for free beauty products based on the level of purchases. 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 these loyalty programs at January 30, 2016 and January 31, 2015 was $20,026 and $15,032 respectively. The cost of these programs, which was $54,464, $42,096 and $27,588 in fiscal 2015, 2014 and 2013, 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 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 the lease term or 10 years. The construction allowances are recorded as deferred rent and amortized on a straight-line basis over the lease term as a reduction of rent expense.
Revenue recognition
Net sales include merchandise sales, salon service revenue and e-commerce 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 $209,249, $175,533 and $145,815 for fiscal 2015, 2014 and 2013, 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 based on delivery of merchandise to the customer. E-commerce revenue amounted to $221,077, $149,857 and $95,809 for fiscal 2015, 2014 and 2013, respectively.
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. 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 was $3,728 and $2,720 at January 30, 2016 and January 31, 2015, respectively, and is recorded as a decrease in selling, general and administrative expense in the statements of income. Deferred gift card revenue was $31,830 and $22,681 at January 30, 2016 and January 31, 2015, 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, as well as television, radio and digital advertising. 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 $187,158, $157,847 and $140,774 for fiscal 2015, 2014 and 2013, respectively. Advertising expense as a percentage of sales was 4.8%, 4.9% and 5.3% for fiscal 2015, 2014 and 2013, respectively. Prepaid advertising costs included in prepaid expenses and other current assets were $6,413 and $8,899 as of January 30, 2016 and January 31, 2015, 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 a majority of 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 Act of 2002 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. 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
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 $15,594, $14,923 and $16,003 for fiscal 2015, 2014 and 2013, 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 per claim is $200 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”).
Recent accounting pronouncements not yet adopted
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 we will recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect 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 for annual reporting periods beginning after December 15, 2017, including interim reporting periods with early adoption permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods. This 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 June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation, Accounting Standards Codification Topic 718. This update clarifies the accounting for share-based awards with performance targets. The standard will take effect for public companies for annual reporting periods beginning after December 15, 2015, including interim reporting periods. The Company will not be affected by this guidance as the Company currently accounts for these awards in a manner consistent with the new guidance.
In April 2015, the FASB issued ASU 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 does not believe that the adoption of this ASU will have a material impact on its consolidated financial position, results of operations and cash flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases, Accounting Standards Codification Topic 842. This standard will change the way all leases of one year or more are treated. Under this guidance, lessees will be required to capitalize virtually all leases on the balance sheet as a right-of-use asset and an associated financing lease liability or capital lease liability. The right-of-use asset represents the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics, leases are classified as financing leases or operating leases. Financing lease liabilities, those that contain provisions similar to capitalized leases, are amortized like capital leases under current accounting, as amortization expense and interest expense in the statement of operations. Operating lease liabilities are amortized on a straight-line basis over the life of the lease as lease expense in the statement of operations. The standard will take effect for public companies for annual reporting periods beginning after December 15, 2018, including interim reporting periods. The Company is currently evaluating the impact of this new standard on its consolidated financial position, results of operations and cash flows.
Recently adopted accounting pronouncements
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. The new standard requires that all deferred tax assets and liabilities, and any related valuation allowance, be reported as non-current in a classified balance sheet instead of separating deferred taxes and related valuation allowances into current and non-current amounts. The standard will take effect for public companies for annual reporting periods beginning after December 15, 2016, including interim reporting periods. As permitted, the Company adopted this standard, prospectively, in the fourth quarter of its fiscal year ended January 30, 2016. As a result of the adoption at January 30, 2016, current deferred income tax assets were classified as non-current liabilities on the Company’s consolidated balance sheet at January 30, 2016. The adoption of this standard did not have any other impact on our consolidated financial position, results of operations and cash flows.
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3. Property and equipment
Property and equipment consists of the following:
(In thousands) |
January 30, 2016 |
January 31, 2015 |
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Equipment and fixtures |
$ | 556,499 | $ | 447,782 | ||||
Leasehold improvements |
515,712 | 431,999 | ||||||
Electronic equipment and software |
353,940 | 272,937 | ||||||
Construction-in-progress |
75,804 | 90,531 | ||||||
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1,501,955 | 1,243,249 | |||||||
Less accumulated depreciation and amortization |
(654,355 | ) | (526,090 | ) | ||||
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Property and equipment, net |
$ | 847,600 | $ | 717,159 | ||||
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The Company had no capitalized interest for fiscal 2015 and 2014 as a result of not utilizing the credit facility during the year.
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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 2015, 2014 and 2013. Total rent expense under operating leases was $181,487, $159,245 and $138,086 for fiscal 2015, 2014 and 2013, respectively. Future minimum lease payments under operating leases as of January 30, 2016, are as follows:
Fiscal year |
Operating Leases (in thousands) |
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2016 |
$ | 238,837 | ||
2017 |
240,654 | |||
2018 |
225,187 | |||
2019 |
209,867 | |||
2020 |
196,952 | |||
2021 and thereafter |
647,636 | |||
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Total minimum lease payments |
$ | 1,759,133 | ||
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Included in the operating lease schedule above is $176,749 of minimum lease payments for stores that are expected to open in fiscal 2016.
Contractual obligations — As of January 30, 2016, the Company had obligations of $4,908 related to commitments made to a third party for products and services for a future distribution center for which a lease has been signed. Payments under these commitments were $28,044 and $38,212 for fiscal 2015 and 2014, respectively. In addition, the Company has entered into various non-cancelable advertising and other goods and service contracts. These agreements expire over one year and the obligations under these agreements were $22,005 as of January 30, 2016.
General litigation — The Company is the defendant in four putative employment class action lawsuits that allege that the Company violated various provisions of California’s labor laws. All four of these lawsuits seek to recover damages and penalties as a result of these alleged practices. The Company has agreed to settle one of the suits for $1,750 (a significant portion of which will be allocated to attorneys’ fees for plaintiff’s counsel). The settlement, which is fully reserved for, remains subject to final court approval; preliminary approval was granted on March 11, 2016. Under the terms of the settlement, the Company admits no liability and the parties fully and finally release all claims. The Company denies the plaintiff’s allegations in the other three suits and is vigorously defending these matters.
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.
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5. Accrued liabilities
Accrued liabilities consist of the following:
(In thousands) |
January 30, 2016 |
January 31, 2015 |
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Accrued vendor liabilities (including accrued property and equipment costs) |
$ | 27,894 | $ | 24,705 | ||||
Accrued customer liabilities |
54,496 | 39,593 | ||||||
Accrued payroll, bonus and employee benefits |
61,068 | 50,931 | ||||||
Accrued taxes, other |
20,486 | 17,824 | ||||||
Other accrued liabilities |
23,407 | 16,359 | ||||||
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Accrued liabilities |
$ | 187,351 | $ | 149,412 | ||||
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6. Income taxes
The provision for income taxes consists of the following:
(In thousands) |
Fiscal 2015 |
Fiscal 2014 |
Fiscal 2013 |
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Current: |
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Federal |
$ | 163,048 | $ | 128,159 | $ | 105,731 | ||||||
State |
18,694 | 16,909 | 15,310 | |||||||||
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Total current |
181,742 | 145,068 | 121,041 | |||||||||
Deferred: |
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Federal |
6,981 | 8,392 | 3,891 | |||||||||
State |
(1,291 | ) | 714 | (75 | ) | |||||||
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Total deferred |
5,690 | 9,106 | 3,816 | |||||||||
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Provision for income taxes |
$ | 187,432 | $ | 154,174 | $ | 124,857 | ||||||
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A reconciliation of the federal statutory rate to the Company’s effective tax rate is as follows:
Fiscal 2015 |
Fiscal 2014 |
Fiscal 2013 |
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Federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State effective rate, net of federal tax benefit |
2.2 | % | 2.8 | % | 3.0 | % | ||||||
Other |
(0.3 | %) | (0.3 | %) | 0.1 | % | ||||||
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Effective tax rate |
36.9 | % | 37.5 | % | 38.1 | % | ||||||
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Significant components of the Company’s deferred tax assets and liabilities are as follows:
(In thousands) |
January 30, 2016 |
January 31, 2015 |
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Deferred tax assets: |
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Reserves not currently deductible |
$ | 27,734 | $ | 22,380 | ||||
Employee benefits |
10,594 | 8,782 | ||||||
Credit carryforwards |
441 | 338 | ||||||
Accrued liabilities |
10,704 | 8,231 | ||||||
Inventory valuation |
257 | 617 | ||||||
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Total deferred tax assets |
49,730 | 40,348 | ||||||
Deferred tax liabilities: |
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Property and equipment |
48,898 | 44,882 | ||||||
Deferred rent obligation |
49,548 | 38,409 | ||||||
Prepaid expenses |
10,811 | 10,775 | ||||||
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Total deferred tax liabilities |
109,257 | 94,066 | ||||||
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Net deferred tax liability |
$ | (59,527 | ) | $ | (53,718 | ) | ||
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The Company adopted ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes, prospectively, in the fourth quarter of fiscal 2015. As a result of the adoption at January 30, 2016, current deferred income tax assets were classified as non-current liabilities on the Company’s consolidated balance sheet.
At January 30, 2016 and January 31, 2015, the Company had $441 and $338, respectively, credit carryforwards for state income tax purposes.
The Company accounts for uncertainty in income taxes in accordance with the ASC rules for income taxes. The reserve for uncertain tax positions was $2,262 and $1,414 at January 30, 2016 and January 31, 2015, respectively. The balance is the Company’s best estimate of the potential liability for uncertain tax positions. A reconciliation of the Company’s unrecognized tax benefits, excluding interest and penalties, is as follows:
(In thousands) |
January 30, 2016 |
January 31, 2015 |
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Balance at beginning of the period |
$ | 1,414 | $ | 795 | ||||
Increase due to a current year position |
900 | 670 | ||||||
Decrease due to a prior period position |
(52 | ) | (51 | ) | ||||
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Balance at the end of the period |
$ | 2,262 | $ | 1,414 | ||||
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The Company acknowledges that the amount of unrecognized tax benefits may change in the next twelve months. However, it does not expect the change to have a significant impact on its consolidated financial statements. Income tax-related interest and penalties were insignificant for fiscal 2015 and 2014.
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 years before 2012 and is no longer subject to examinations by State authorities before 2011.
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7. 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 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 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.
On September 5, 2012, the Company entered into Amendment No. 1 to the Loan 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 Loan Agreement (the Second Amendment) with the lender group. The Second Amendment further 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 London Interbank Offered Rate plus 1.50% and the unused line fee is 0.20%.
As of January 30, 2016 and January 31, 2015, 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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8. 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:
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 30, 2016 and January 31, 2015, the Company held financial liabilities of $7,491 and $5,574, 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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9. Investments
The Company’s short-term investments as of January 30, 2016 and January 31, 2015, consist of $130,000 and $150,209, respectively, 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 January 30, 2016.
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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 2015, 2014 and 2013, the Company match was 100% of the first 3.0% of eligible compensation. As of January 30, 2016 and January 31, 2015, the liability for the Company match was $5,031 and $4,104, respectively.
The Company also has a non-qualified deferred compensation plan for highly compensated employees whose contributions are limited under qualified defined contribution plans. The plan is funded through employee contributions and, beginning in 2014, a Company match. In fiscal 2015 and 2014, the Company match was 100% of the first 3.0% of salary. For fiscal year 2015 and 2014, the liability for the Company match was $554 and $465, respectively. 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 other long-term liabilities was $7,491 and $5,574 as of January 30, 2016 and January 31, 2015, respectively. 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 deferred compensation plan assets was $8,145 and $5,656 as of January 30, 2016 and January 31, 2015, respectively. Total expense recorded under this plan is included in selling, general and administrative expenses and was insignificant during fiscal 2015 and 2014.
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13. Valuation and qualifying accounts
Description |
Balance at beginning of period |
Charged to costs and expenses |
Deductions | Balance at end of period |
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(In thousands) | ||||||||||||||||
Fiscal 2015 |
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Allowance for doubtful accounts |
$ | 1,346 | $ | 2,063 | $ | (2,297 | )(a) | $ | 1,112 | |||||||
Shrink reserve |
11,598 | 29,894 | (26,233 | ) | 15,259 | |||||||||||
Inventory — lower of cost or market reserve |
5,253 | 3,323 | (3,573 | ) | 5,003 | |||||||||||
Insurance: |
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Workers Comp / General Liability Prepaid Asset |
(1,789 | )(b) | 5,935 | (6,072 | ) | (1,926 | ) | |||||||||
Employee Health Care Accrued Liability |
2,435 | 55,423 | (53,671 | ) | 4,187 | |||||||||||
Fiscal 2014 |
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Allowance for doubtful accounts |
$ | 915 | $ | 874 | $ | (443 | )(a) | $ | 1,346 | |||||||
Shrink reserve |
9,358 | 22,374 | (20,134 | ) | 11,598 | |||||||||||
Inventory — lower of cost or market reserve |
4,861 | 4,368 | (3,976 | ) | 5,253 | |||||||||||
Insurance: |
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Workers Comp / General Liability Prepaid Asset |
(1,817 | )(b) | 6,899 | (6,871 | ) | (1,789 | ) | |||||||||
Employee Health Care Accrued Liability |
2,606 | 41,335 | (41,506 | ) | 2,435 | |||||||||||
Fiscal 2013 |
||||||||||||||||
Allowance for doubtful accounts |
$ | 973 | $ | 300 | $ | (358 | )(a) | $ | 915 | |||||||
Shrink reserve |
4,020 | 16,298 | (10,960 | ) | 9,358 | |||||||||||
Inventory — lower of cost or market reserve |
2,364 | 4,522 | (2,025 | ) | 4,861 | |||||||||||
Insurance: |
||||||||||||||||
Workers Comp / General Liability Prepaid Asset |
(2,400 | )(b) | 7,060 | (6,477 | ) | (1,817 | ) | |||||||||
Employee Health Care Accrued Liability |
2,232 | 34,422 | (34,048 | ) | 2,606 |
(a) | Represents write-off 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 2015 and fiscal 2014. The Company’s quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31 and January 31.
2015 | ||||||||||||||||
First | Second | Third | Fourth | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Net sales |
$ | 868,122 | $ | 876,999 | $ | 910,700 | $ | 1,268,295 | ||||||||
Cost of sales |
564,938 | 570,524 | 575,062 | 829,259 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
303,184 | 306,475 | 335,638 | 439,036 | ||||||||||||
Selling, general and administrative expenses |
192,485 | 183,937 | 218,763 | 268,169 | ||||||||||||
Pre-opening expenses |
3,117 | 4,078 | 6,106 | 1,381 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income |
107,582 | 118,460 | 110,769 | 169,486 | ||||||||||||
Interest income, net |
(311 | ) | (276 | ) | (283 | ) | (273 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
107,893 | 118,736 | 111,052 | 169,759 | ||||||||||||
Income tax expense |
40,947 | 44,567 | 39,982 | 61,936 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 66,946 | $ | 74,169 | $ | 71,070 | $ | 107,823 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income per common share: |
||||||||||||||||
Basic |
$ | 1.04 | $ | 1.16 | $ | 1.11 | $ | 1.69 | ||||||||
Diluted |
$ | 1.04 | $ | 1.15 | $ | 1.11 | $ | 1.69 |
2014 | ||||||||||||||||
First | Second | Third | Fourth | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Net sales |
$ | 713,770 | $ | 734,236 | $ | 745,722 | $ | 1,047,641 | ||||||||
Cost of sales |
467,817 | 474,894 | 463,967 | 697,904 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross profit |
245,953 | 259,342 | 281,755 | 349,737 | ||||||||||||
Selling, general and administrative expenses |
162,443 | 157,768 | 181,093 | 210,702 | ||||||||||||
Pre-opening expenses |
2,629 | 3,595 | 6,574 | 1,568 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Operating income |
80,881 | 97,979 | 94,088 | 137,467 | ||||||||||||
Interest income, net |
(200 | ) | (209 | ) | (254 | ) | (231 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Income before income taxes |
81,081 | 98,188 | 94,342 | 137,698 | ||||||||||||
Income tax expense |
31,128 | 37,394 | 35,218 | 50,434 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 49,953 | $ | 60,794 | $ | 59,124 | $ | 87,264 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income per common share: |
||||||||||||||||
Basic |
$ | 0.78 | $ | 0.94 | $ | 0.92 | $ | 1.36 | ||||||||
Diluted |
$ | 0.77 | $ | 0.94 | $ | 0.91 | $ | 1.35 |
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.
|
15. Stock repurchase program
On March 18, 2013, the Company announced that our Board of Directors had authorized a share repurchase program (the 2013 Share Repurchase Program) pursuant to which the Company could repurchase up to $150,000 of the Company’s common stock. Repurchases pursuant to the terms of the 2013 Share Repurchase Program were made from time to time in the open market, in privately negotiated transactions or otherwise, at prices the Company deemed appropriate and subject to market conditions, applicable law and other factors deemed relevant in the Company’s sole discretion. The 2013 Share Repurchase Program did not have an expiration date, but provided for suspension or discontinuation at any time.
On September 11, 2014, the Company announced that our Board of Directors authorized a new share repurchase program (the 2014 Share Repurchase Program) pursuant to which the Company could repurchase up to $300,000 of the Company’s common stock. The 2014 Share Repurchase Program authorization revoked the previously authorized but unused amount of $112,664 from the 2013 Share Repurchase Program. The 2014 Share Repurchase Program did not have an expiration date and could be suspended or discontinued at any time. On March 12, 2015, the Company announced that our Board of Directors authorized an increase of $100,000 to the 2014 Share Repurchase Program effective March 17, 2015.
During fiscal year 2013, we purchased 501 shares of common stock for $37,337 at an average price of $74.58 from the 2013 Share Repurchase Program. During fiscal 2014, we purchased 321 shares of common stock for $39,923 at an average price of $124.31 from the 2014 Share Repurchase Program. During fiscal 2015, we purchased 1,034 shares of common stock for $167,396 at an average price of $161.81 from the 2014 Share Repurchase Program.
|
16. Subsequent event
On March 10, 2016, the Company announced that the Board of Directors authorized a new share repurchase program (the 2016 Share Repurchase Program) pursuant to which the Company may repurchase up to $425,000 of the Company’s common stock. The 2016 Share Repurchase Program authorization revokes the previously authorized but unused amounts from the 2014 Share Repurchase Program. The 2016 Share Repurchase Program does not have an expiration date and may be suspended or discontinued at any time. As part of the 2016 Share Repurchase Program, the Company entered into an Accelerated Share Repurchase (ASR) agreement with Goldman, Sachs & Co. to repurchase $200,000 of the Company’s common stock. Under the ASR agreement, the Company paid $200,000 to Goldman, Sachs & Co. and received an initial delivery of 852 shares in the first quarter of 2016, which represents 80% of the total shares the Company expects to receive based on the market price at the time of the initial delivery. The final number of shares delivered upon settlement of the agreement will be determined with reference to the average price of the Company’s common stock over the term of the ASR agreement.
|
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 30, 2016 (fiscal 2015), January 31, 2015 (fiscal 2014) and February 1, 2014 (fiscal 2013) were 52 week years.
Consolidation
The Company’s consolidated financial statements include the accounts of the Company and its wholly owned subsidiary. All significant intercompany accounts, transactions and unrealized profit were eliminated in consolidation.
Use of estimates
The preparation of consolidated financial statements in conformity with U.S. generally accepted accounting principles (GAAP) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the accounting period. Actual results could differ from those estimates.
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.
Short-term investments
The Company determines the balance sheet classification of its investments at the time of purchase and evaluates the classification at each balance sheet date. Money market funds, certificates of deposit and time deposits with maturities of greater than three months but no more than twelve months are carried at cost, which approximates fair value and are recorded in the Consolidated Balance Sheets in Short-term investments (see Note 9, “Investments”).
Receivables
Receivables consist principally of amounts receivable from vendors and landlord construction allowances earned but not yet received. These receivables are computed based on provisions of the vendor and lease agreements in place and the Company’s completed performance. The Company’s vendors are primarily U.S.-based producers of consumer products and real estate developers and landlords. The Company does not require collateral on its receivables and does not accrue interest. Credit risk with respect to receivables is limited due to the diversity of vendors and landlords comprising the Company’s vendor base. The Company performs ongoing credit evaluations of its vendors and evaluates the collectability of its receivables based on the length of time the receivable is past due and historical experience. The receivable for vendor allowances was $46,932 and $39,629 as of January 30, 2016 and January 31, 2015, respectively and the receivable for landlord allowances was $10,250 and $8,357 as of January 30, 2016 and January 31, 2015, respectively. The allowance for doubtful receivables totaled $1,112 and $1,346 as of January 30, 2016 and January 31, 2015, 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 30, 2016 and January 31, 2015.
Property and equipment
The Company’s property and equipment are stated at cost net of accumulated depreciation and amortization. Maintenance and repairs are charged to operating expense as incurred. The Company’s assets are depreciated or amortized using the straight-line method, over the shorter of their estimated useful lives or the expected lease term as follows:
Equipment and fixtures |
3 to 10 years | |||
Leasehold improvements |
10 years | |||
Electronic equipment and software |
3 to 5 years |
The Company capitalizes costs incurred during the application development stage in developing or purchasing internal use software. These costs are amortized over the estimated useful life of the software.
The Company periodically evaluates whether changes have occurred that would require revision of the remaining useful life of equipment and leasehold improvements or render them not recoverable. If such circumstances arise, the Company uses an estimate of the undiscounted sum of expected future operating cash flows during their holding period to determine whether the long-lived assets are impaired. If the aggregate undiscounted cash flows are less than the carrying amount of the assets, the resulting impairment charges to be recorded are calculated based on the excess of the carrying value of the assets over the fair value of such assets, with the fair value determined based on an estimate of discounted future cash flows. No significant impairments charges have been recognized in fiscal 2015, 2014 or 2013.
Customer loyalty program
In early fiscal 2014, we completed the conversion of all our loyalty members to Ultamate Rewards, a points-based program. Ultamate Rewards enables customers to earn points based on their purchases. Points earned by members are valid for at least one year and may be redeemed on any product we sell. Prior to this conversion, we ran both Ultamate Rewards and our prior program, The Club at Ulta. The Club at Ulta was a certificate program offering customers reward certificates for free beauty products based on the level of purchases. 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 these loyalty programs at January 30, 2016 and January 31, 2015 was $20,026 and $15,032 respectively. The cost of these programs, which was $54,464, $42,096 and $27,588 in fiscal 2015, 2014 and 2013, 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 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 the lease term or 10 years. The construction allowances are recorded as deferred rent and amortized on a straight-line basis over the lease term as a reduction of rent expense.
Revenue recognition
Net sales include merchandise sales, salon service revenue and e-commerce 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 $209,249, $175,533 and $145,815 for fiscal 2015, 2014 and 2013, 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 based on delivery of merchandise to the customer. E-commerce revenue amounted to $221,077, $149,857 and $95,809 for fiscal 2015, 2014 and 2013, respectively.
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. 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 was $3,728 and $2,720 at January 30, 2016 and January 31, 2015, respectively, and is recorded as a decrease in selling, general and administrative expense in the statements of income. Deferred gift card revenue was $31,830 and $22,681 at January 30, 2016 and January 31, 2015, 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, as well as television, radio and digital advertising. 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 $187,158, $157,847 and $140,774 for fiscal 2015, 2014 and 2013, respectively. Advertising expense as a percentage of sales was 4.8%, 4.9% and 5.3% for fiscal 2015, 2014 and 2013, respectively. Prepaid advertising costs included in prepaid expenses and other current assets were $6,413 and $8,899 as of January 30, 2016 and January 31, 2015, 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 a majority of 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 Act of 2002 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. 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
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 $15,594, $14,923 and $16,003 for fiscal 2015, 2014 and 2013, 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 per claim is $200 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”).
Recent accounting pronouncements not yet adopted
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 we will recognize revenue when we transfer promised goods or services to customers in an amount that reflects the consideration to which we expect 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 for annual reporting periods beginning after December 15, 2017, including interim reporting periods with early adoption permitted for annual reporting periods beginning after December 15, 2016, including interim reporting periods. This 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 June 2014, the FASB issued ASU No. 2014-12, Compensation – Stock Compensation, Accounting Standards Codification Topic 718. This update clarifies the accounting for share-based awards with performance targets. The standard will take effect for public companies for annual reporting periods beginning after December 15, 2015, including interim reporting periods. The Company will not be affected by this guidance as the Company currently accounts for these awards in a manner consistent with the new guidance.
In April 2015, the FASB issued ASU 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 does not believe that the adoption of this ASU will have a material impact on its consolidated financial position, results of operations and cash flows.
In February 2016, the FASB issued ASU No. 2016-02, Leases, Accounting Standards Codification Topic 842. This standard will change the way all leases of one year or more are treated. Under this guidance, lessees will be required to capitalize virtually all leases on the balance sheet as a right-of-use asset and an associated financing lease liability or capital lease liability. The right-of-use asset represents the lessee’s right to use, or control the use of, a specified asset for the specified lease term. The lease liability represents the lessee’s obligation to make lease payments arising from the lease, measured on a discounted basis. Based on certain characteristics, leases are classified as financing leases or operating leases. Financing lease liabilities, those that contain provisions similar to capitalized leases, are amortized like capital leases under current accounting, as amortization expense and interest expense in the statement of operations. Operating lease liabilities are amortized on a straight-line basis over the life of the lease as lease expense in the statement of operations. The standard will take effect for public companies for annual reporting periods beginning after December 15, 2018, including interim reporting periods. The Company is currently evaluating the impact of this new standard on its consolidated financial position, results of operations and cash flows.
Recently adopted accounting pronouncements
In November 2015, the FASB issued ASU No. 2015-17, Balance Sheet Classification of Deferred Taxes. The new standard requires that all deferred tax assets and liabilities, and any related valuation allowance, be reported as non-current in a classified balance sheet instead of separating deferred taxes and related valuation allowances into current and non-current amounts. The standard will take effect for public companies for annual reporting periods beginning after December 15, 2016, including interim reporting periods. As permitted, the Company adopted this standard, prospectively, in the fourth quarter of its fiscal year ended January 30, 2016. As a result of the adoption at January 30, 2016, current deferred income tax assets were classified as non-current liabilities on the Company’s consolidated balance sheet at January 30, 2016. The adoption of this standard did not have any other impact on our consolidated financial position, results of operations and cash flows.
|
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 |
|
Property and equipment consists of the following:
(In thousands) |
January 30, 2016 |
January 31, 2015 |
||||||
Equipment and fixtures |
$ | 556,499 | $ | 447,782 | ||||
Leasehold improvements |
515,712 | 431,999 | ||||||
Electronic equipment and software |
353,940 | 272,937 | ||||||
Construction-in-progress |
75,804 | 90,531 | ||||||
|
|
|
|
|||||
1,501,955 | 1,243,249 | |||||||
Less accumulated depreciation and amortization |
(654,355 | ) | (526,090 | ) | ||||
|
|
|
|
|||||
Property and equipment, net |
$ | 847,600 | $ | 717,159 | ||||
|
|
|
|
|
Fiscal year |
Operating Leases (in thousands) |
|||
2016 |
$ | 238,837 | ||
2017 |
240,654 | |||
2018 |
225,187 | |||
2019 |
209,867 | |||
2020 |
196,952 | |||
2021 and thereafter |
647,636 | |||
|
|
|||
Total minimum lease payments |
$ | 1,759,133 | ||
|
|
|
Accrued liabilities consist of the following:
(In thousands) |
January 30, 2016 |
January 31, 2015 |
||||||
Accrued vendor liabilities (including accrued property and equipment costs) |
$ | 27,894 | $ | 24,705 | ||||
Accrued customer liabilities |
54,496 | 39,593 | ||||||
Accrued payroll, bonus and employee benefits |
61,068 | 50,931 | ||||||
Accrued taxes, other |
20,486 | 17,824 | ||||||
Other accrued liabilities |
23,407 | 16,359 | ||||||
|
|
|
|
|||||
Accrued liabilities |
$ | 187,351 | $ | 149,412 | ||||
|
|
|
|
|
The provision for income taxes consists of the following:
(In thousands) |
Fiscal 2015 |
Fiscal 2014 |
Fiscal 2013 |
|||||||||
Current: |
||||||||||||
Federal |
$ | 163,048 | $ | 128,159 | $ | 105,731 | ||||||
State |
18,694 | 16,909 | 15,310 | |||||||||
|
|
|
|
|
|
|||||||
Total current |
181,742 | 145,068 | 121,041 | |||||||||
Deferred: |
||||||||||||
Federal |
6,981 | 8,392 | 3,891 | |||||||||
State |
(1,291 | ) | 714 | (75 | ) | |||||||
|
|
|
|
|
|
|||||||
Total deferred |
5,690 | 9,106 | 3,816 | |||||||||
|
|
|
|
|
|
|||||||
Provision for income taxes |
$ | 187,432 | $ | 154,174 | $ | 124,857 | ||||||
|
|
|
|
|
|
A reconciliation of the federal statutory rate to the Company’s effective tax rate is as follows:
Fiscal 2015 |
Fiscal 2014 |
Fiscal 2013 |
||||||||||
Federal statutory rate |
35.0 | % | 35.0 | % | 35.0 | % | ||||||
State effective rate, net of federal tax benefit |
2.2 | % | 2.8 | % | 3.0 | % | ||||||
Other |
(0.3 | %) | (0.3 | %) | 0.1 | % | ||||||
|
|
|
|
|
|
|||||||
Effective tax rate |
36.9 | % | 37.5 | % | 38.1 | % | ||||||
|
|
|
|
|
|
Significant components of the Company’s deferred tax assets and liabilities are as follows:
(In thousands) |
January 30, 2016 |
January 31, 2015 |
||||||
Deferred tax assets: |
||||||||
Reserves not currently deductible |
$ | 27,734 | $ | 22,380 | ||||
Employee benefits |
10,594 | 8,782 | ||||||
Credit carryforwards |
441 | 338 | ||||||
Accrued liabilities |
10,704 | 8,231 | ||||||
Inventory valuation |
257 | 617 | ||||||
|
|
|
|
|||||
Total deferred tax assets |
49,730 | 40,348 | ||||||
Deferred tax liabilities: |
||||||||
Property and equipment |
48,898 | 44,882 | ||||||
Deferred rent obligation |
49,548 | 38,409 | ||||||
Prepaid expenses |
10,811 | 10,775 | ||||||
|
|
|
|
|||||
Total deferred tax liabilities |
109,257 | 94,066 | ||||||
|
|
|
|
|||||
Net deferred tax liability |
$ | (59,527 | ) | $ | (53,718 | ) | ||
|
|
|
|
A reconciliation of the Company’s unrecognized tax benefits, excluding interest and penalties, is as follows:
(In thousands) |
January 30, 2016 |
January 31, 2015 |
||||||
Balance at beginning of the period |
$ | 1,414 | $ | 795 | ||||
Increase due to a current year position |
900 | 670 | ||||||
Decrease due to a prior period position |
(52 | ) | (51 | ) | ||||
|
|
|
|
|||||
Balance at the end of the period |
$ | 2,262 | $ | 1,414 | ||||
|
|
|
|
|
Description |
Balance at beginning of period |
Charged to costs and expenses |
Deductions | Balance at end of period |
||||||||||||
(In thousands) | ||||||||||||||||
Fiscal 2015 |
||||||||||||||||
Allowance for doubtful accounts |
$ | 1,346 | $ | 2,063 | $ | (2,297 | )(a) | $ | 1,112 | |||||||
Shrink reserve |
11,598 | 29,894 | (26,233 | ) | 15,259 | |||||||||||
Inventory — lower of cost or market reserve |
5,253 | 3,323 | (3,573 | ) | 5,003 | |||||||||||
Insurance: |
||||||||||||||||
Workers Comp / General Liability Prepaid Asset |
(1,789 | )(b) | 5,935 | (6,072 | ) | (1,926 | ) | |||||||||
Employee Health Care Accrued Liability |
2,435 | 55,423 | (53,671 | ) | 4,187 | |||||||||||
Fiscal 2014 |
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Allowance for doubtful accounts |
$ | 915 | $ | 874 | $ | (443 | )(a) | $ | 1,346 | |||||||
Shrink reserve |
9,358 | 22,374 | (20,134 | ) | 11,598 | |||||||||||
Inventory — lower of cost or market reserve |
4,861 | 4,368 | (3,976 | ) | 5,253 | |||||||||||
Insurance: |
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Workers Comp / General Liability Prepaid Asset |
(1,817 | )(b) | 6,899 | (6,871 | ) | (1,789 | ) | |||||||||
Employee Health Care Accrued Liability |
2,606 | 41,335 | (41,506 | ) | 2,435 | |||||||||||
Fiscal 2013 |
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Allowance for doubtful accounts |
$ | 973 | $ | 300 | $ | (358 | )(a) | $ | 915 | |||||||
Shrink reserve |
4,020 | 16,298 | (10,960 | ) | 9,358 | |||||||||||
Inventory — lower of cost or market reserve |
2,364 | 4,522 | (2,025 | ) | 4,861 | |||||||||||
Insurance: |
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Workers Comp / General Liability Prepaid Asset |
(2,400 | )(b) | 7,060 | (6,477 | ) | (1,817 | ) | |||||||||
Employee Health Care Accrued Liability |
2,232 | 34,422 | (34,048 | ) | 2,606 |
(a) | Represents write-off of uncollectible accounts |
(b) | Represents prepaid insurance |
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The following tables set forth the Company’s unaudited quarterly results of operations for each of the quarters in fiscal 2015 and fiscal 2014. The Company’s quarterly periods are the 13 weeks ending on the Saturday closest to April 30, July 31, October 31 and January 31.
2015 | ||||||||||||||||
First | Second | Third | Fourth | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Net sales |
$ | 868,122 | $ | 876,999 | $ | 910,700 | $ | 1,268,295 | ||||||||
Cost of sales |
564,938 | 570,524 | 575,062 | 829,259 | ||||||||||||
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Gross profit |
303,184 | 306,475 | 335,638 | 439,036 | ||||||||||||
Selling, general and administrative expenses |
192,485 | 183,937 | 218,763 | 268,169 | ||||||||||||
Pre-opening expenses |
3,117 | 4,078 | 6,106 | 1,381 | ||||||||||||
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Operating income |
107,582 | 118,460 | 110,769 | 169,486 | ||||||||||||
Interest income, net |
(311 | ) | (276 | ) | (283 | ) | (273 | ) | ||||||||
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Income before income taxes |
107,893 | 118,736 | 111,052 | 169,759 | ||||||||||||
Income tax expense |
40,947 | 44,567 | 39,982 | 61,936 | ||||||||||||
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Net income |
$ | 66,946 | $ | 74,169 | $ | 71,070 | $ | 107,823 | ||||||||
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Net income per common share: |
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Basic |
$ | 1.04 | $ | 1.16 | $ | 1.11 | $ | 1.69 | ||||||||
Diluted |
$ | 1.04 | $ | 1.15 | $ | 1.11 | $ | 1.69 |
2014 | ||||||||||||||||
First | Second | Third | Fourth | |||||||||||||
(In thousands, except per share data) | ||||||||||||||||
Net sales |
$ | 713,770 | $ | 734,236 | $ | 745,722 | $ | 1,047,641 | ||||||||
Cost of sales |
467,817 | 474,894 | 463,967 | 697,904 | ||||||||||||
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Gross profit |
245,953 | 259,342 | 281,755 | 349,737 | ||||||||||||
Selling, general and administrative expenses |
162,443 | 157,768 | 181,093 | 210,702 | ||||||||||||
Pre-opening expenses |
2,629 | 3,595 | 6,574 | 1,568 | ||||||||||||
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Operating income |
80,881 | 97,979 | 94,088 | 137,467 | ||||||||||||
Interest income, net |
(200 | ) | (209 | ) | (254 | ) | (231 | ) | ||||||||
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Income before income taxes |
81,081 | 98,188 | 94,342 | 137,698 | ||||||||||||
Income tax expense |
31,128 | 37,394 | 35,218 | 50,434 | ||||||||||||
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Net income |
$ | 49,953 | $ | 60,794 | $ | 59,124 | $ | 87,264 | ||||||||
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Net income per common share: |
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Basic |
$ | 0.78 | $ | 0.94 | $ | 0.92 | $ | 1.36 | ||||||||
Diluted |
$ | 0.77 | $ | 0.94 | $ | 0.91 | $ | 1.35 |
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